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    Southeast Asia
     Oct 25, '13

Myanmar's not so special economic zones
By David Baulk

This is the final article in a two-part series, Myanmar's False Frontier. Part 1: Economic reform as flawed ideology

The Framework for Economic and Social Reforms (FESR) announced by Myanmar President Thein Sein earlier this year detailed reforms aimed at fostering the country's transition to a "modern, developed and democratic nation by 2030". Its strategy outlines a series of economic and social measures aimed at

achieving macro-economic stability, permissible levels of inflation, and strong industrial growth.

Authored in conjunction with several International Financial Institutions (IFIs), the FESR is testament to the government's desire to reengage with the international community after decades of isolation on terms which attract much needed foreign direct investment (FDI). An important mechanism towards this end has been the promotion of Special Economic Zones (SEZs).

Yet little attention has been paid to the social consequences of building SEZs, or their potential impact on Myanmar's domestic private sector. The performance of the Thilawa SEZ, which has generated much discussion in recent months both from investors and the communities affected by its implementation, serves already as a cautionary tale.

The establishment of SEZs as a key instrument in the FESR's strategy to achieve industrial and economic growth is premised upon two contentions: firstly, that SEZs can help overcome the technological, financial and market barriers that have stymied the growth of Myanmar's private sector; and secondly, that they will create jobs to help shift the economy away from its now dominant agricultural base. These arguments find support both among skeptical academics and IFI representatives.

As noted by Yu Ching Wong of the IMF, "Focusing on first establishing special economic (zones) allows the government to tap the know-how of foreign investors...who very well understand, from their experiences elsewhere, the various elements needed to make a (competitive) business environment (eg, infrastructure, tax regime, financing, labor, technology, management skills). The success of one or two (SEZs) would generate positive demonstrative effects in improving the overall investment climate in Myanmar."

Cognizant of the haste with which both investor commitment and infrastructural development would have to proceed following the announcement of plans to build the largest industrial complex in Southeast Asia - the Dawei SEZ - in 2008, the Dawei SEZ Law was passed to incentivize foreign investment. Despite this commitment by the government, however, the project has struggled to get off the ground. The withdrawal of a major investor - Max Myanmar, one of the country's largest "crony" companies - due to the slow pace of building progress, the reluctance of other investors to provide start-up capital, and reportage of the social cleavages caused among the dispossessed have bedeviled the project since its inception.

Although these issues were evident prior to the FESR's promulgation, the document makes no reference to how they might be addressed either in Dawei or Thilawa. The government's priorities clearly lay with the promotion of investment over "inclusive growth and poverty reduction" - one of the stated aims of the FESR.

The Thilawa SEZ covers an area of approximately 2,400 hectares around the Thilawa port, about 20 kilometers southeast of central Yangon - the country's former capital and current commercial and financial center. The aims of the Thilawa project are to use the incentives of the SEZ law to attract FDI in light industries, promote export diversification by positioning Myanmar as a "strategic location for low-cost production…within the region", and create jobs. With operations scheduled to begin in early 2015, the zone will focus on labor-intensive industries aimed at promoting national-level industrialization.

The effects of the project thus far, however, have been sobering. The largely positive feedback forthcoming from IFIs has been dampened by the deluge of reports citing land grabbing, displacement, unpaid compensation, and a surge in land prices around both Dawei and Thilawa. Quantifying the amount of land confiscated around Thilawa in recent years is problematic owing to Myanmar's paucity of statistical data and poor record keeping. The history of land confiscation in the area is also complex.

As initial plans to develop the SEZ floundered, land confiscated was not immediately taken over and put to use by the previous military-led government. Indeed, much of the land was again cultivated, despite a number of farmers having received nominal compensation and in some cases farmland - a process which exacerbated confusion surrounding questions of ownership. This precarious cultivation continued until plans to restart the construction of Thilawa were announced in 2011 and new reports of confiscation proliferated following the land reform measures of 2012.

Vacant concept
Peruvian economist Hernando de Soto's concept that land titling and secure property rights are "essential for inclusive growth" is not only a leitmotif of the FESR, but also an argument firmly rooted in the prescriptions of IFIs regarding how best to aid poverty reduction.

Prior to March 2012, a commercial land market did not exist in Myanmar. The institution of legal frameworks to allow the purchase of land-use titles followed the passage of the Farmland Law (FL) and the Vacant, Fallow and Virgin Lands Management Law (VFVLML). These laws represent a crucial commitment from the central government to institute a more hospitable climate both for domestic business and the international community. Under the FL and VFVLML, state representatives are empowered to grant titles to private entities for land recognized as "vacant".

When examining the impact of land reform promulgated by the FESR, the term "vacant" applies to the vast majority of land cultivated by farmers who lack the capital to purchase titles and are used to farm itinerantly in accordance with their customary systems - a point worth considering in light of the government's much lauded recent commitment to return seized farmlands to those with "ownership certificates". These supposed "squatters" run the risk of monetary penalties, arrest and imprisonment if they refuse to vacate the land.

One of the greatest potential risks for those displaced is that they have limited means of legal redress, leaving few options beyond acquiescence to "accumulation by dispossession" under the government's aegis. It has been argued that although the land reform propounded by the FESR is superficially positive in terms of enhancing farmers' land rights, it falls well short of providing full and enforceable protection against arbitrary and forced displacement or land confiscation.

In the case of Thilawa, attempts to compensate those displaced are complicated not only by the history of land confiscation in the area, but also by investor speculation in the country's new land markets. This speculation has fueled a five-fold increase in land prices around Thilawa, translating into higher demands of monetary compensation from those displaced.

Such demands have been met with limited sympathy by the government, however, with officials still offering compensation based on crop harvest rates rather than the market price of land. The forced eviction and imprisonment of numerous farmers, coupled with reports of farmers being coerced into signing compensation agreements, has led to further accusations that the government's concern lies primarily with safeguarding conditions for investment, rather than the livelihoods of the area's inhabitants.

Although the Thilawa SEZ aims to provide residence for an estimated 130,000 workers when completed in the year 2040, it is clear that this provides little recompense for those displaced in the immediate term. The immediacy of these issues is exacerbated by the diminished ability of residents to buy new tracts of land near Thilawa as anticipation of increased foreign investment expedites the rise in land prices.

The passage of land reform measures have done much to complicate the pursuit of basic livelihoods by long-time residents, whilst benefiting a coterie of private investors. The burden of land market speculation fueled by the FESR's strategy falls disproportionately on those with the most limited means of safeguarding their livelihoods. The academic assertion that "land is often more valuable to the global market than the people on it" is regrettably apposite here. The argument that the Thilawa SEZ is doing more to complicate rather than realize "inclusive growth and poverty reduction" is buttressed by assessing prospects for job creation in the area.

To enable people to work in the Thilawa SEZ when jobs are finally created, U Set Aung - the Deputy Minister for National Planning and Economic Development and chairman of the Thilawa SEZ Management Committee - has committed to compensating those displaced by land confiscation not only in pecuniary terms, but also by providing resettlement packages and skills training. The construction of the Thilawa zone itself, of course, provides a demand for unskilled labor, but given the stated objective of the zone to be initially operational by 2015 these construction jobs are at best temporary.

For those unable to find work and residence in the zone in the short-term, the location of their resettlement plays an important role not only in their future prospects, but also their day-to-day existence. Although the need for a robust and well-functioning industrial base for economic growth is indisputable, the FESR clearly states that the percentage of Myanmar's workforce engaged in small-scale agriculture must be atrophied to increase industry's share of GDP.

Speculative bubble
In this regard, the FESR's lack of sufficient commitment to the development of skills training programs for the displaced is cause for concern. The firmest commitment made thus far is that Thilawa will create 200,000 jobs by the time the project is entirely completed in 2040. In the intervening years, it is difficult to see how the "satellite industries" so crucial for SME sector development and job creation will flourish in the wake of the speculative bubble that has engulfed the Thilawa project and the non-existent duties on imported materials for foreign investors operating in SEZs.

The concentration of Myanmar's workforce in low-skill, low-productivity sectors is an issue that will require sustained government investment if those deprived of a means of livelihood are to re-skill and begin the process of adaptation to Myanmar's increasingly marketized economy. In the absence of this, former farmers, rural landless workers, and those engaged in the country's huge informal economy will struggle to move beyond the deregulated, unskilled, cheap labor upon which investment in Thilawa is premised. While this might go some way towards achieving the FESR's ambitious growth targets, it is less clear whether "poverty reduction" or "inclusive growth" will be achieved in any meaningful sense. However, this is certainly less likely without robust support mechanisms instituted by the government to help facilitate the process of adjustment.

Another leitmotif of the FESR is the government's intent to reduce "transaction costs" to "encourage (domestic private businesses) to move out of the informal economy." It is argued that this will make possible "the development of supporting industries integrated into the supply chain" of the "international brand companies which will become the core of Thilawa SEZ".

It is beyond the scope of this article to assess the potential for Myanmar's SMEs to integrate successfully into global supply chains - although prospects are undoubtedly diminished by the ability of lead firms in the SEZs to import materials tax-free. The above points to the influence of de Sotian ideas in the FESR's wider objective to significantly reduce the "administrative controls" of government. The FESR's contention is that government roll-back will galvanize the latent entrepreneurship of SMEs and promote input-output linkages.

The FESR's aim to create "one-stop centers for business start-ups" represents a step forward in the relaxation of the government's stringent control over domestic enterprise. Likewise, the land reforms mentioned earlier can be viewed as a first-step - albeit a limited and imperfect one - to instituting an effective and inclusive land titling system. However, a degree of government intervention is also required to cultivate the growth of SMEs at this early stage of Myanmar's market transition. There is evidence to suggest that one of the direct results of marketizing land at such a rapid pace has been to increase its price to beyond what many SMEs can afford. Their ability to move out of the informal economy is curtailed not only by this, but by the opacity of the informal rules and regulations which continue to characterize the country's political economy.

The much needed relaxation of the regime's Panoptic approach to governance should not be conflated with the wholesale roll-back of government intervention in the economy. Substituting an oppressive state machinery for a rapacious business community can not - despite the protestations of IFIs and investors - lead to a more equitable future for the majority of Myanmar's people.

The creation of input-output linkages with SMEs by lead firms in SEZs, the institution of regulatory frameworks to combat the venality which characterizes the country's public and private sectors, and the safeguarding of long-neglected worker rights are all contingent upon active intervention by the government. Without this, it is difficult to envisage how at the micro level a project like Thilawa can generate sustainable jobs for Myanmar's workforce, and at the macro level how the FESR can deliver on its promise of "inclusive growth and poverty reduction" in any meaningful sense.

David Baulk is a candidate for the Masters of Science in Globalization and Development degree at the University of London's School of Oriental and African Studies. The following is an excerpt from a dissertation focused on Myanmar's social and economic reforms.

(Copyright 2013 David Baulk)

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