Myanmar (a.k.a. Burma) has approved a new foreign investment bill, part of a raft of reforms to open the country’s economy after decades of near economic isolation. The final version is not yet public but is expected to have dropped earlier proposals requiring foreign investors to provide at least 35% of start-up capital in joint ventures with local partners, or limiting foreign ownership of a joint venture to 50%.
Foreign investors and lawmakers are both optimistic about the country’s economic potential– the biggest of the “big four” auditors, KPMG, announced yesterday that it was opening a new office in Myanmar (paywall). But the nation slated by some as Asia’s next economic frontier (video) could see its growth limited if the country doesn’t rein in government corruption like bribery, kickbacks and ties to organized crime. In 2012, Myanmar ranked second to last for economic freedom in Asia and seventh from last out of 179 countries ranked worldwide, according to a survey by the Heritage Foundation. “In the absence of institutional reforms, corruption is rampant and continues to be a serious barrier to sustained economic development,” the report says.
There are many reasons to be dubious about the potential growth of Myanmar, which is home to untapped oil and gas reserves as well as timber, minerals and precious metals. Quartz has reported on several of the problems foreign investors could encounter, but government corruption could thwart long-term growth. “It is more the rule than the exception that you get corruption at some point in Southeast Asia,” says Roberto Herrera-Lim, director of Asia for the political risk research firm Eurasia Group. “The challenge for Burma is to avoid that path… The big question is when the amount of money coming in really surges will they have the… ability to avoid the same mistakes?”
Here is what you need to know about corruption in Myanmar:
Myanmar was one of six countries in the Association of Southeast Asian Nations (ASEAN) that ranked near the bottom of Transparency International’s Corruption Perceptions index for 2011. According to that list, Myanmar was the world’s third most corrupt country behind Somalia and North Korea. Rule by the military junta ended in 2011 and the closed nature of the military years has made governance and corruption problems hard to independently verify, but analysts say long-standing ties exist between the ruling elites and organized crime like human and drug trafficking or illegal logging. Despite eradication efforts by the government, the amount of land used to cultivate opium has been growing for six years straight, according to a UN report released on Oct. 31. After Afghanistan, Myanmar is the second-largest opium grower in the world and produces about 10% of the world’s heroin.
Myanmar’s cheerleaders often compare it to Vietnam or Cambodia, which made the move from international isolation to become major regional manufacturing hubs. But rife corruption in both of those countries will ultimately limit growth, Herrera-Lim says. Officials in Myanmar, including those with connections to the former military regime, seem to realize they need to at least look credible to stay in power. As a result, members of parliament have called for clearer penalties for taking bribes in an anti-corruption bill based on a similar law in Singapore, which is considered to have the least corrupt government in the region.
Myanmar needs a better image after its violent crackdown on protests in 2007. It also needs new alliances to balance its longstanding reliance on China, Myanmar’s main ally throughout years of US and European nations sanctions. Myanmar’s officials have grown wary of Beijing’s growing influence on domestic politics. Some Burmese also complain of an exploitative trade relationship with China. The United States, the European Union and Australia only recently lifted most of their sanctions on Myanmar; a poor effort at rooting out corruption could mean those sanctions are reinstated.
Analysts expect aid and advice to flow in from multilateral financial organizations like the World Bank or the Asian Development Bank and countries like the US or Japan, a major donor in the region. That could mean more scrutiny and possibly better accountability on the government’s part. The US Treasury Department sent its deputy secretary, Neal Wolin, to Yangon and Naypyidaw (the administrative capital) last week to advise officials on improving revenue transparency and fighting financial crime.
An expectant public
Parts of Myanmar’s population of 54.5 million are growing bolder and more demanding. Public protests are becoming increasingly common with residents marching against Chinese investment and the confiscation of land for development. ”People are really expecting more. [The government] has crossed the point of no return. Right now, if they roll back liberalization, they’re going to get a very strong reaction from the people,” says Herrera-Lim.
Myanmar’s government has also not addressed growing tension between Buddhists and Muslims in the western Rakhine state. Violence erupts too frequently. Most recently at least 89 have been killed and 32,000 made homeless as thousands of homes were burned in a recent outbreak of clashes starting Oct. 21. The government denies accusations of abuses by its security forces in the state but has rejected inquiries by the United Nations to investigate the situation.
On the bright side, foreign investment could help lessen corruption, says Marc Mealy, vice-president at the US-ASEAN Business Council. He notes that US companies investing in Myanmar must comply with the Foreign Corrupt Practices Act, which, Mealy says, “will bring better practices and raise the standards for how business is done there.”
Before the bill’s approval, President Thein Sein had said he was sure foreign investors would find the law “really worth waiting for.” Potential investors have been anticipating the law since September and now wait to see if it will include details like how many Burmese nationals foreign firms must employ, or whether big investment projects will still require going to Naypyidaw in person for approval. It might be worth waiting a little longer to see if Myanmar’s economic opening will translate into more transparent and less corrupt governance.