Integrating into the Global Value Chains1
Myanmar is not well integrated into the global value chains (GVCs), and is still the least open economy in ASEAN. Further integration into GVCs will allow Myanmar to reap the gains from its geographical proximity to the world’s growth engines, and benefit from the demographic dividend and competitive wages. The integration into GVCs will also help Myanmar achieve inclusive growth and reduce poverty.
1. International trade has become increasingly dominated by global value chains (GVCs). Thanks to improved logistics and technology, production across borders has been broken into components. Countries can specialize in the production of specific parts and components, rather than entire final goods. This allows them focus on the stage at which they have comparative advantages, and gradually move up the value chain and diversify exports.
2. Integration into GVCs can help Myanmar catch up and achieve inclusive growth. Myanmar’s economy is undergoing a profound transformation with the ongoing economic liberalization. However, the country has not been well integrated into GVCs, and is still the least open economy in ASEAN. Further integration into the global value chains will allow Myanmar to reap the gains from its geographical proximity to the world’s growth engines (China, India, and rest of ASEAN), and benefit from the demographic dividend and competitive wages thanks to its young and literate labor force. The integration will also help Myanmar achieve inclusive growth, if the benefits from trade are shared among a broader populace through job creation and structural transformation.
Contribution to Global Growth by Region, 2017
Sources: IMF World Economic Outlook; and IMF staff estimates.
Note: Regional categories based on IMF classification.
3. The paper is organized as follows. Section A starts with the role of GVC participation for convergence and the role of FDI, then section B examines where Myanmar stands in GVCs. After that we look at the experience from Cambodia and Vietnam regarding their participation in GVCs and FDI (Section C). Section D discusses how to further integrate Myanmar into GVCs, and section E presents the case for deepening regional integration. Section F concludes the paper with a summary of policy implications.
B. GVC Participation and the Role of FDI
4. GVC participation is conducive to convergence and productivity growth. The early stages of GVC participation typically involve labor intensive low-value-added activities. Upon reaching higher levels of development, there is the possibility to specialize in higher value-added tasks. Experiences from developing countries show that when entering global production networks, they usually play a role in lower value-added activities. But with access to investment, knowledge and technology, over time these countries gain from positive spillovers in productivity growth and skills upgrading, and move up to higher value-added activities. GVC participation facilitates the convergence of low income countries towards the global economic frontier (OECD 2013).
5. FDI is a major driver of GVC participation, playing an important role in the creation of global production networks. OECD (2013) identifies FDI as a key enabler for low-income countries to link into global value chains, which supports growth and technological upgrading. Empirical data has showed a strong correlation between FDI and GVC participation in developing countries. The presence of foreign firms can help countries move into higher-value production, enhance human capital, and support technology diffusion.
GVC Participation vs. Inward Stock Devepoling Countries–Logs
C. Where Myanmar Stands in Global Value Chains
6. The initial phase of reform in Myanmar saw strong economic expansion in comparison with regional reform efforts, supported by an early surge in FDI. Since 2011, when Myanmar introduced a series of political and economic reforms, the country has grown rapidly at 7.57 percent per year, which is among the fastest growth rates in the region.
Growth Index, Years from Reform Commencement
Sources: World Economic Outlook database; and IMF staff calculations.
7. Myanmar is gaining market share in global trade, albeit from a low base. With the economic liberalization at the beginning of this decade, trade volumes soared by an average of near 30 percent per year in 2010/11–2013/11, and continued recording double-digit growth in 2013/14–2014/15. The exports composition has evolved with manufactured products comprising the largest portion of exports in 2016/17, accounting for one third of total exports. In particular, the garments industry has developed rapidly and become a significant export sector. The government has looked to boost value-added exports by formulating a five-year strategy, targeting a threefold expansion in value-exports by 2021/22. On the import side, manufactured goods, including machinery and transport equipment, has accounted for the bulk of imports.
Myanmar: Trade Market Share
Source: IMF’s Direction of Trade database.
Myanmar: Goods Exports
Sources: Authorities’ data; and IMF staff calculations.
Sources: WITS; and IMF staff calculation.
8. Myanmar’s growth takeoff has been largely reliant on FDI. Since 2011, Myanmar has seen a large amount of FDI flowing into the country. China has been the biggest FDI contributor, providing US$18.0 billion to the country since 2005, following by Singapore and Hong Kong SAR. FDI were largely directed into oil and gas as well as manufacturing sectors.2 The oil and gas sector has received the most FDI, amounting to US$22.4 billion as of early 2017. The new Investment Law3, together with the new Companies Act, is expected to provide a boost for foreign investment in Myanmar.
FDI Inflow, Years from Reform Commencement
Sources: World Economic Outlook database; and IMF staff calculations.
9. Special Economic Zones (SEZs) in Myanmar has played an important role in jumpstarting manufacturing activity. Many countries including China, Bangladesh, Cambodia, and Vietnam have a similar approach to attract FDIs. In January 2014, Myanmar’s Parliament passed the Special Economic Zone Law that provides a legal framework for the SEZs. Several SEZs have been initiated or proposed: Thilawa SEZ, Dawei SEZ, Kyauk Phyu SEZ, and Sittwe SEZ. In Thilawa SEZ, as of late 2016, over 70 companies across 14 countries have contracted with total investment of more than US$ 700 million. Almost half of investors are from Japan. The SEZ has hosted industries both for export and for domestic markets. The Dawei SEZ (with expected total costs of US$10 billion) was initiated in 2008, but was postponed in 2013 due to financing constraint. It is expected to be resumed in 2018 with the assistance of international development partners.
Share of Approved Foreign Investment by Sector
Sources: Country authority; IMF staff calculations.
D. Experiences from Cambodia and Vietnam4
10. The frontiers of global production networks have been continuously pushed out into developing countries, including Cambodia and Vietnam. These two countries have grown rapidly as buyers and sellers in global trade, and extensive margins of their exports and imports have been significantly increased in recent years. In these two countries, foreign value-added in exports grew substantially since mid-1990s, with very high FVA in non-commodity sectors such as electronics, apparel and footwear, and machinery and equipment. These goods lend themselves to supply chain trade as their assembly process can be broken into a series of components.
Cambodia: Trade Market Share
Source: IMF’s Direction of Trade database.
Vietnam: Trade Market Share
Source: IMF’s Direction of Trade database.
11. Vietnam and Cambodia are increasingly integrated with Chinese supply chains. Their trade links with China have grown rapidly, and China has become an important supplier of goods to Cambodia and Vietnam. In Cambodia, fabric and other textile materials accounted for about 60 percent of imports from China. In Vietnam, imports from China are predominantly investment goods (machinery, equipment, and steel) and intermediate inputs (electronic components and fabric). As China moves up the value chain, its low-end, labor intensive exports have started to taper off. Preliminary findings show that low-income Asia has been among the main beneficiaries of China’s exit from low-end exports (IMF, 2015a).
12. FDI has played a crucial role in Cambodia and Vietnam. In Cambodia, the garment industry with the contribution of nearly one-tenth of GDP, is the major recipient of FDI inflows, accounting for a quarter of the total FDI stock (UNCTAD 2013). This FDI-driven sector has become a major source of employment and income, generating more than 70 percent of export revenues, and 27 percent of manufacturing employment. In Vietnam, FDI at times approached 10 percent of GDP and foreign companies account for close to 70 percent of exports, mostly in electronics manufacturing and apparel (IMF 2015a). FDI has played a central role in transforming Vietnam from exporting mainly commodities to exporting a diversified set of products.
Inward FDI Flows
Source: IMF’s World Economic Outlook database.
E. Myanmar’s Further Integration into GVCs Based on Cross-Country Lessons
13. Myanmar has not been well integrated into GVCs. Although trade is growing, Myanmar is not yet as open as it neighbors. The country’s trade openness ratio, at 37 of GDP as of 2017, is much lower than that of most other Asian low-income countries. Exports are highly concentrated within a small set of products, and also in terms of trading partners.
Depth of Integration into Global Value Chains
Source: IMF staff calculations.
Trade Openness, 2017
Sources: IMF staff estimates.
14. Labor cost is low in Myanmar, but infrastructure and other costs of doing business factors are crucial. Compared with other Asian countries that are ageing fast (IMF 2017a), Myanmar still enjoys demographic dividend. It has a significantly large youth population: the median age is 27 and about 55 percent are under the age of 30. Despite the low expenditure on education, Myanmar has a fairly literate labor force: the 2014 consensus reported nearly 90 percent of those aged 15 and over could read and write (higher than 73 percent to 80 percent in regional peers). The wage survey conducted by the Japan External Trade Organization (JETRO) shows that Myanmar still has wage competitiveness over Vietnam and Cambodia, and other garment producing countries (chart). Although low wages were indeed found to be correlated with rising market share in labor-intensive goods, it alone would not allow Myanmar to take full advantage of new trade opportunities. Infrastructure and institution factors are vital. Cross-country panel regressions show that openness, infrastructure, education, and governance, all contribute positively toward export market share at all levels of technology sophistication (IMF 2015).5
Manufacturing: Wage Comparison in CLMV
Source: JETRO Survey.
Manufacturing: Wage Comparison with Neighboring Countries
Source: JETRO Survey.
15. Improving infrastructure, particularly for transport and electricity, should be a priority in Myanmar. Myanmar still lags in infrastructure. It is ranked low in the overall logistics performance index by the World Bank and urgently needs infrastructure development, especially in the areas of transport and electricity generation. A McKinsey report in 2013 estimated that Myanmar would need US$320 billion to build basic infrastructure and the infrastructure sector would grow from US$10.5 billion in 2010 to US$48.8 billion in 2030 (McKinsey 2013).
ASEAN Economies: Infrastructure Quality Index, 2016–17
Sources World Economic Forum;and IMF staff estimates.
16. Open and competitive business climate will help Myanmar maximize gains and spread benefits of economic reform. The World Bank’s Doing Business Ranking places Myanmar at 167 out of 189 countries. Myanmar ranks behind its regional peers in the ease of enforcing contract, getting credit and trading across borders. Indeed, the country performs poorly in most areas in the life cycle of a business. Other business surveys also suggest that weak domestic supply chains and poor access to electricity, transport services and affordable financing and corruption are the major impediments to investment. Stable and transparent business conditions, based on political and social stability and sound legal and institutional frameworks, are particularly important for Myanmar and will contribute to its greater GVC participation.
Doing Business Indicators, 2018
Source: World Bank Group, Doing Business 2018.
17. Human capital must be developed. This is a priority that will eventually position Myanmar to move upstream in GVCs. Despite recent increases, government spending on health and education remains low compared with other low-income countries (IMF 2018). Increases in investment in these sectors with corresponding improvement in technical and vocational skills would help strengthen Myanmar’s competitiveness. The low access to education will also limit participation in the digital economy and industries/services of the future.
Primary School Enrollment
Sources: World Bank’s World Development Indicators; and IMF staff calculations.
F. Regional Integration and Myanmar’s GVC Participation
18. Regional integration will facilitate Myanmar’s participation in regional and global value chains. Asia is the main growth engine of the world, contributing a majority of the global growth. “Factory Asia”, with its strong participation in global production, is the most dynamic area in the global value chains (IMF 2015). Myanmar, spanning a vital geographic area, has a unique position of gaining from geographical proximity with China, India, and other fast-growing ASEAN countries. Indeed, those countries that Myanmar shares borders with, account for one fifth of global economic size and two fifths of global population. Further integration with regional economies would help Myanmar play a more active role in the worldwide production network.
19. The connectivity-oriented BRI is poised to reshape GVCs. China launched the BRI in 2013, and the number of countries now engaged in the BRI has reached nearly 70. The BRI will increase the flows of goods, capital and human skills, with focus areas including infrastructure development and trade facilitation, financial connectivity and integration, policy coordination, joint research, and people-to-people exchange. Cumulative investment is expected to reach $1 trillion within a decade.
20. Myanmar’s participation in the BRI will facilitate its integration into GVCs. Myanmar has advantages of bridging China’s southwestern gate with the Indian Ocean on the overland trajectory, and of locating on the main point for trade transitions on the marine route. The BRI offers Myanmar new opportunities to address infrastructure needs, strengthen regional economic and financial connectivity, and support diversification and employment. Current projects include the US$2.45 billion oil and gas pipeline (the first phase was completed and went into operation in April 2017), which links PetroChina’s Kunming refinery with the Bay of Bengal; a US$7.2 billion deep-sea port of Kyauk Pyu (under negotiation); and a US$2.3 billion Industrial zone (the development began in early 2016).
BRI and Regional Interconnectivity
21. Myanmar is India’s gateway to southeast Asia and ASEAN. India is the fifth largest trading partner and the tenth largest investor of Myanmar.6 These two neighboring countries share a long land border well as a maritime boundary in the Bay of Bengal. Indeed, Myanmar provides landlocked northeast India with an outlet to the sea. The two countries are seeking to enhance road, sea and air connectivity, including direct shipping lines, direct air connectivity, and new border trade points to bolster trade across the land border. The US$ 120 Million Sittwe port was financed by India, and the feasibility studies to establish the Sittwe SEZ are under preparation.
22. Regional integration between the CMLV and other ASEAN countries has proceeded at a fast pace in the last decade. The ASEAN Economic Community (AEC) has facilitated integration among ASEAN countries. A recent ASEAN 2025 blueprint further promoted a dynamic integration process in the next decade from various perspectives, including trade, investment, and migration. The CLMV has played an increasingly significant role in intra-regional trade and trade outside the region. In 2014, the CLMV accounted for 10.4 percent of total intra-ASEAN trade, an increase from 7.6 percent in 2007. For extra-ASEAN trade, the CLMV accounted for 15.2 percent in 2014, up from just 8.0 percent in 2007. Myanmar’s efforts to implement its commitments under the AEC initiative will greatly facilitate its integration into regional production networks and global supply chains.
23. Economic links between Thailand and Myanmar has been stepped up. Thailand’s exports and imports market share in CLMV countries increased rapidly. Thailand has been playing an increasingly active role in promoting investment integration with the CLMV, with more than 10 percent of outward FDI destined to these countries. Thailand is developing its Eastern Economic Corridor (EEC) into a leading regional economic zone. A major focus of the EEC is to improve existing connectivity, including creating sea routes from Thailand’s eastern seaboard to Myanmar’s Dawei deep-sea port project. Myanmar is also building an SEZ surrounding the Dawei port, which is expected to generate up to 65,000 new jobs on completion.
Thailand Outward FDI
Sources: IMF’s Coordinated Direct Investment Survey; and IMF staff calculations.
24. Myanmar needs to integrate itself further in the global value chains. With the new government’s export-promoting strategy and ASEAN countries’ regional integration initiatives, Myanmar’s participation in GVCs could support diversification and employment.
25. Integration into global value chains can be engines of inclusiveness and poverty reduction. Diversification into manufacturing, market-oriented agriculture and trade in services would help deduce over-reliance on natural-resource industries that often offer few employment but provoke social tensions. However, key policy and structural reforms will be required to share benefts from trade among a broader populace. Improving rural access to finance (including trade finance) and providing support to local economic activities would help leveraging trade to underpin inclusive growth and porverty reduction. Improvement in infrastructure can amplify the positive impact on inclusive growth (World Bank 2016; IMF, 2017b).
26. However, fiscal risks need to be closely monitored. To capitalize on the opportunities from further regional integration and connectivity, infrastructure projects should be well designed and managed with fiscal risksfully recognized.
ChhorH.DobbsR.FraserT.NguyenD.ShakN. andStreiffL.2013 “Myanmar’s Moment: Unique Opportunities Major Challenges” McKinsey Global Institute.
International Monetary Fund2015a “China and the CLMV: Integration Evolution and Implications” Washington.
International Monetary Fund2015bRegional Economic Outlook, Asia and Pacific, April 2015: Stabilizing and Outperforming Other RegionsWorld Economic and Financial Surveys Chapter 2 (Washington).
International Monetary Fund2017aRegional Economic Outlook, Asia and Pacific, April 2017: Preparing for Choppy SeasWorld Economic and Financial Surveys Chapter 2 (Washington).
International Monetary Fund2017b “Macroeconomic and Distributional Implications of Financial Reforms in Myanmar” in Myanmar Selected Issues IMF Staff Country Report No. 17/31 (Washington).
International Monetary Fund2018 “Myanmar—Poverty Dynamics and Sustainable Development Goals” in Myanmar Selected Issues forthcoming (Washington).
Organisation for Economic Co-operation and Development (OECD)2013 “Mapping Global Value Chains” Trade Policy Paper No. 159 (Paris: OECD)
Prepared by Yiqun Wu.
With declining gas prices over the past few years, both export earnings from gas exports and FDI inflows into the sector have been slowing down.
The new law combined and replaced the overlapping foreign investment and Myanmar citizen’s investment laws, and simplified the investment process.
This section is based on IMF (2015a).
For Vietnam, a growing skilled yet inexpensive labor force, strong infrastructure, and liberalized trade helped attract FDI despite relatively low scores on competitiveness measures.
Bilateral trade grew to US$ 2.18 billion in 2016/17. Approved investment from India reached US$ 740.64 million as of mid-2017, mostly in the oil and gas sector.