Myanmar’s moment?

Indeed, after years of absence, foreign governments are rushing to reopen their embassies in the country. Moreover, multilateral organisations and former ministers from around the world are flocking to help the authorities make progress on their ambitious agenda, from expanding electricity provision to building their own governing capacity. Investors, too, are actively exploring opportunities.

This focus is not surprising. After years of economic isolation and anemic growth, Myanmar is one of Asia’s last largely untapped markets. Now that the country is opening up, investors are clearly hoping to establish sources of structural advantage that could last for many years.

But can investing in Myanmar live up to today’s soaring expectations? There are undoubtedly major uncertainties and risks. Investors are rightly nervous about how political reform will evolve; whether the government can maintain the fragile peace between ethnic groups; and how regulation and ownership rights will develop. Moreover, it is difficult to quantify the economy’s potential, given the paucity of reliable data; even basic indicators like population size and historical economic growth are shrouded in uncertainty.

There is little doubt that Myanmar begins its development journey from a shockingly weak starting point, as a new report from the McKinsey Global Institute (MGI) demonstrates. Indeed, Myanmar was virtually untouched by the global economy’s spectacular growth during the twentieth century. While global per capita GDP quadrupled around the world, Myanmar’s was virtually flat.

Moreover, productivity is low. A worker in Myanmar added only $1,500 of economic value, on average, in 2010 – around 30 per cent of the average of eight Asian peers. Myanmar’s GDP is now only around 0.2 per cent of Asia’s, equivalent to the size of cities such as Bristol, Delhi, or Seville.

Myanmar needs a step-change in productivity growth. If Myanmar were to boost annual labor-productivity growth from an estimated 2.7 per cent to around 7 per cent, 8 per cent annual GDP growth would be possible. This could quadruple the size of the economy by 2030, with annual output rising to more than $200 billion, from $45 billion in 2010.

But it is virtually inconceivable that Myanmar could achieve such acceleration in growth without large volumes of inward investment. The MGI research estimates that $170 billion — as well as the transfer of capabilities and knowledge that typically accompany such investment — is needed between now and 2030.

Thus far, much of the interest among investors has been focused on Myanmar’s energy and mining sectors — no surprise, given the country’s large reserves of oil and gas, its 90 per cent share of global jade production, and its strong position in ruby and sapphire mining. But Myanmar cannot rely on energy and mining alone. It needs growth that is balanced across sectors, providing diverse opportunities for inward investors.

Five sectors – energy and mining, agriculture, manufacturing, tourism, and infrastructure – could account for more than 90 per cent of Myanmar’s total growth and employment potential. Of these, manufacturing, which could take advantage of many companies’ desire to relocate from China and other Asian economies where wages are rising, is by far the most important.

Myanmar faces monumental development challenges that embrace virtually every aspect of the economy. But that implies the broadest possible range of opportunities for companies and investors as well. They should proceed with caution, but with the expectation of tapping into a potentially lucrative new market.

Martin N. Baily, Chairman of the US President’s Council of Economic Advisers under Bill Clinton, is Bernard L. Schwartz Chair in Economic Policy Development at the Brookings Institution. Richard Dobbs is a director of the McKinsey Global Institute