Download In which industries to invest? Aligning market and development incentives in Myanmar

In which industries to invest?
Aligning market and development
incentives in Myanmar
MPDD Seminar Series
Bangkok, 31 October 2012
Steven Ayres and Clovis Freire
Macroeconomic Policy and Development Division (MPDD)
Economic and Social Commission for Asia and the Pacific (ESCAP)
Main Messages
ƒ Diversification towards more productive
economic activities will best facilitate
inclusive development in Myanmar
ƒ Given market incentives, it will require
strategic interventions, including targeted
FDI
ƒ Method to indentify economic activities to
target
1
Content
ƒ I. Introduction
ƒ II. The opening up of the economy
ƒ III. Inclusive development, structural
transformation and the role of FDI
ƒ IV. Theoretical framework
ƒ V. Methodology & Data
ƒ VI. Identifying opportunities for FDI
ƒ VII. Conclusions
I. Introduction
ƒ Identifying investment opportunities in industries that will
best facilitate inclusive growth and the achievement of
development goals
- the focus is not the broader issues of trade and
investment in the new macroeconomic framework.
(for a comprehensive review of this, see Anukoonwattaka & Mikic, 2012)
ƒ Development and market incentives must be considered
in planning strategies
ƒ New industries should be the focus of such investments
2
II. The opening up of the economy
Cause for optimism in Myanmar....
ƒ Years of isolation, both political and economic, have inhibited
Myanmar’s development.
ƒ Yet the current era of political and economic reforms offers new
opportunities
– FDI legislative reform could be instrumental in creating
new economic activities
ƒ Chance to exploit a number of strengths in this transition phase,
despite a number of potential challenges
Strengths
Challenges
- Demography
- Geography
- Natural Resources
- Fiscal Deficits
- High inflation
- Macroeconomic
management challenges
III. Inclusive development, structural transformation &
the role of FDI
ƒ Opportunity to follow in neighbours’ growth and
development footsteps
ƒ Growth of an inclusive nature is key
ƒ A transformation in the structure of the economy
may help facilitate this.
- Myanmar has made no progress in this respect, agriculture
accounting for 35% of GDP in 1965, and 36% in 2010.
ƒ ESCAP (2012) stresses the need for the movement
towards more productive industries and services
3
ƒ Slow structural transformation is exacerbated
by reduced private investment incentives.
What role can FDI play?
ƒ The benefits of FDI can be felt in many ways:
-
incomes and employment, capital formation and market access,
market structure, technology and skills, fiscal revenues, political,
social and cultural issues, etc. (UNCTAD, 1999)
- Yet there are also certain caveats:
-
Crowding out of domestic investment
Creation of macroeconomic instability
Investment in protected industries
ƒ It is both the quantity and quality of FDI that is
of concern. But what constitutes quality FDI?
ƒ Myanmar requires a carefully implemented
strategy.
- targeted FDI can serve as an integral part of such a strategy.
- this can be done by maximising the advantages specific to
Myanmar, and ensuring that investment facilitates structural
change that will be conducive to development goals.
4
IV. Theoretical framework
Based on evolutionary growth models (Silverberg and Vespagen, 2005) & Economic
complexity (Hidalgo and Hausmann, 2009)
ƒ Economy as a set
of different
economic activities
ƒ Each producing a
single product (x)
with different:
• productivity (q)
• employment (e)
• output (y)
Productive
capacities
products
x1
x2
x3
productivity
q1
< q2
< q3
e1
+ e2 +
ƒ Each product
requires a specific
employment
combination of
“productive
output
capacities” to be
produced
y1 +
y2 +
xn
<
qn
e3
+
en
= L
y3
+
yn
= Y
…
e0 = unemployed
Constant labour
productivity of each
economic activity:
ƒ qj = (yj /ej)
ƒ Function of the unique
productive capacities
used in the production
Changing Average
productivity of the
economy as a
whole:
Productive
capacities
products
x1
x2
x3
productivity
q1
< q2
< q3
employment
ƒ q = ∑(ej/L) qj
ƒ changes with shifts in
output
employment and rate of
growth by economic
activity
ƒ changes with creative
destruction
e1
+ e2 +
y1 +
y2 +
xn
<
qn
e3
+
en
= L
y3
+
yn
= Y
…
e0 = unemployed
5
Economy evolves by (a) shifting employment and changing
rate of growth by economic activity
Productive
capacities
products
x1
x2
x3
productivity
q1
< q2
< q3
employment
e1
+ e2 +
output
y1 +
y2 +
xn
<
qn
e3
+
en
= L
y3
+
yn
= Y
…
e0 = unemployed
Economy evolves by (b) adding/removing productive capacities
and/or links of the network of productive capacities
Productive
capacities
products
x1
x2
x3
productivity
q1
< q2
< q3
employment
e1
+ e2 +
output
y1 +
y2 +
xn
Xn+1
<
qn
< qn+1
e3
+
en
+
= eLn+1 = L
y3
+
yn
+
= yYn+1 = Y
…
e0 = unemployed
6
Inclusive economic development
ƒ Growth of total output
(Yt+1 > Yt)
ƒ Reduction of inequality by
increasing employment in
more productive sectors
Growth
with
productive
jobs
ƒ Increase in total
productivity of the economy
(qt+1 > qt)
Two ways to move employment
into more productive activities
1)
2)
Demand must be increased
in existing economic
activities that are more
productive which, in turn,
increases output and
associated employment in
that activity;
Creation of new and more
productive economic
activities, which would
increase the opportunity for
more productive jobs.
Productive
capacities
products
x1
x2
x3
productivity
q1
< q2
< q3
employment
e1
+ e2 +
output
y1 +
y2 +
xn
<
qn
e3
+
en
= L
y3
+
yn
= Y
…
e0 = unemployed
Productive
capacities
products
x1
x2
x3
productivity
q1
< q2
< q3
employment
e1
+ e2 +
output
y1
+
y2 +
xn
Xn+1
<
qn
< qn+1
e3
+
en
en+1 = L
=+ L
y3
+
yn
yn+1 = Y
=+ Y
…
e0 = unemployed
7
ƒ But big reliance on investment in existing
industries pose risks for inclusive development
• High global demand for primary products is more
likely to create incentives for increasing resources on
lower-productivity activities (ESCAP, 2012);
• If demand-side dynamics lead to the desirable
outcome of higher output and employment in more
productive activities, such outcome in the longer-term
may have the perverse effect of perpetuating social
injustices and the old power dynamics within the
society (Acemoglu and Robinson, 2012) .
ƒ Therefore, the creation of new more
productive economic activities present a
more successful approach to fostering
inclusive development
How diversification would come
about?
ƒ Emulation vs Innovation
• Emulation: new to the
country
• Innovation: new to the
world
ƒ Path dependency
Productive
capacities
products
x1
x2
x3
xn
Xn+1
productivity
q1
< q2
< q3
< qn
< qn+1
e1
+ e2 +
e3
+ en
=L
=+ en+1
L
y3
+ yn
=+ yn+1
Y =Y
• New activities tend to
exploit the productive employment
output
capacities that were
previously developed for
other activities
y1 + y2 +
…
e0 = unemployed
8
How to facilitate the emergence of new productive
capacities that would allow emulation of more
productive activities?
Economic institutions
Specific rules of the game: set incentives
and constraints for acquisition and
combination of productive capacities
ƒ Inclusive economic
institutions (Acemoglu and
Robinson, 2012)
• Foster economic activity
• Economic opportunities
for a broad crosssection of society
• Should address
Information externalities
(Rodrik, 2004)
ƒ Address coordination
externalities (Rodrik, 2004)
Demand
External Demand
• Infrastructure
• Human capital
• Coordinate investment
Laissez-faire vs strategic approach
ƒ If economic institutions create an environment that foster
economic activity, what is the probability (P) of more
productive activities to emerge given the existing
productive capacities and market incentives?
ƒ Considering D(x) as
the expected demand
for x:
ƒ P=D(B)/D(A+B)
ƒ P > 50% => laissezfaire
ƒ P < 50% => strategic
approach
Existing products
in the world
Potential new
products
Existing
products in
the country
Higher
productivity
B
A
9
From theory to practice
ƒ Which economic activities are more likely to
emerge given the existing productive capacities
in the economy?
• The Product Space (Hidalgo, Klinger, Barabási,
Hausmann, 2007)
ƒ Which of those are associated with higher
productivity?
• Method of reflections (Hidalgo and Hausmann, 2009)
ƒ What is the probability of those more productive
activities emerge given the market incentives?
• Export opportunity (ESCAP, 2012)
Product Space
ƒ Hidalgo, Klinger,
Barabási, Hausmann
(2007). The Product
Space Conditions the
Development of Nations
ƒ Network in which
products are nodes
connected to each other if
they are usually part of
the same product mix
ƒ proximity between
products A and B (ΦAB)
ƒ ΦAB = ΦBA =
min(P(A|B), P(B|A))
Source: Hidalgo, C.A., and others (2007)
10
Method of reflections
Hidalgo and
Hausmann
(2009). The
building
blocks of
economic
complexity.
Source: Hidalgo and Hausmann (2009)
Method of reflections
ƒ Hidalgo, César A., and Ricardo Hausmann (2009). The building
blocks of economic complexity. PNAS, vol.106, No. 26, pp. 1057010575.
ƒ The method is defined as the recursive set of observables:
⎧1
M cp = ⎨
⎩0
K c , 0 = ∑ M cp
if RCA cp ≥ treshold
otherwise.
K c,N =
p
K p , 0 = ∑ M cp
c
K p,N =
1
K c,0
∑M
1
K p,0
∑M
cp
K p , N −1
p
cp
K c , N −1
c
11
Product complexity
Measure of how ubiquitous the product is and the level of
diversification of the countries that produce it
0
2
4
6
8
Maldives
6
4
2
0
8
6
4
ESCAP (2012):
Rich countries
export products
with a wide range
of complexity
Japan
2
Percent
8
Bangladesh
0
Abdon and others
(2010): Major
exporters of more
complex products
are high-income
countries and major
exporters of less
complex products
are low-income
countries
-4
-2
0
2
Product complexity (global average=0, sd=1)
Source: Author based on data from the United Nations Commodity Trade Statistics Database (COMTRADE).
Product complexity by industry
8
2
0
0
2
4
Percent
6
4
Percent
6
8
10
12
10
12
10
8
Percent
6
4
2
0
Crude materials, inedible, except fuels
12
Beverages and tobacco
Food and live animals
Chemicals and related products
10
0
2
4
Percent
6
8
10
8
Percent
6
4
2
0
0
2
4
Percent
6
8
10
12
-4
-3
-2
-1
0
1
2
3
4
How common is the product-mix (Number of countries that export the product)
Animal and vegetable oils, fats and waxes
12
-4
-3
-2
-1
0
1
2
3
4
How common is the product-mix (Number of countries that export the product)
Mineral fuels, lubricants and related materials
12
-4
-3
-2
-1
0
1
2
3
4
How common is the product-mix (Number of countries that export the product)
Miscellaneous manufactured articles
-4
-3
-2
-1
0
1
2
3
4
How common is the product-mix (Number of countries that export the product)
10
0
2
4
Percent
6
8
10
8
Percent
6
4
2
0
0
2
4
Percent
6
8
10
12
-4
-3
-2
-1
0
1
2
3
4
How common is the product-mix (Number of countries that export the product)
Machinery and transport equipment
12
-4
-3
-2
-1
0
1
2
3
4
How common is the product-mix (Number of countries that export the product)
Manufactured goods classified chiefly by materials
12
-4
-3
-2
-1
0
1
2
3
4
How common is the product-mix (Number of countries that export the product)
-4
-3
-2
-1
0
1
2
3
4
How common is the product-mix (Number of countries that export the product)
-4
-3
-2
-1
0
1
2
3
4
How common is the product-mix (Number of countries that export the product)
Source: Freire, 2012.
12
Export Opportunities
ƒ Based on ESCAP (2012)
ƒ Captures expected demand for potential
new products
ƒ Overlap indicator designed to measure the
degree to which potential new products of
one country match the expanding markets
of another
∑ Gisdt 0,t1 × M 2010
where
t 0 ,t 1
=
isd
G
i
midt1 midt 0
−
M t1 M t 0
if Φij>80% for some product j in the country’s existing product mix and
midt1
midt 0
>
M t1 M t 0
, and zero otherwise.
V. Methodology & Data
ƒ Identify the products that are more
complex and that are nearby in the product
space to the existing product-mix of the
countries
• Calculate product complexity using Method of
reflections
• Map the structure of the product space
• Analyze price incentives (export)
13
ƒ Trade data
disaggregated at
6-digit level of HS
2002
ƒ Products are also
differentiated
based on their
unit value
ƒ 43,293 products
in 2010
Source: Author based on data from COMTRADE.
code = 6-digit (HS) + 1digit (quantity unit code) + 1 digit (unit value range)
VI. Identifying opportunities for FDI
Myanmar
Myanmar
below $1 Million
$1-$100 Million
above $100 Million
-3
-3
Complexity of potential new product
-2
-1
Complexity of potential new product
-2
-1
0
0
Export opportunities of potential new products
-3
-2
-1
Complexity of existing product
Number of existing
products
1 724
0
Number of potential
new products for
emulation
2 604
-3
-2
-1
Complexity of existing product
0
Percentage of potential
Percentage of export
new products with
opportunities with above
above country's
country's average
average complexity
complexity
64%
25%
14
New industries to target for FDI based on export
opportunities
(Share of potential opportunities in percentage)
Myanmar
2 4
4
4
5
38
6
8
9
11
9
Inorganic chemicals, precious metal compound, isotopes
Paper & paperboard, articles of pulp, paper and board
Miscellaneous chemical products
Organic chemicals
Articles of iron or steel
Iron and steel
Electrical, electronic equipment
Plastics and articles thereof
Optical, photo, technical, medical, etc apparatus
Machinery & mech appliance etc
Sum of others with smaller shares
Example of export opportunities of
potential new products by HS sector
(HS) Description, price range
(020714) Cuts & edible offal of species Gallus domesticus, frozen, $1-3
(040130) Milk & cream, not concentrated/sweetened, fat content by wt. >6%, $1-3
(040310) Yogurt, $1-4
(040610) Fresh (unripened/uncured) cheese, incl. whey cheese, & curd, $0-3
(040610) Fresh (unripened/uncured) cheese, incl. whey cheese, & curd, $3-7
(040630) Processed cheese, not grated/powdered, $3-7
(060390) Cut flowers & flower buds of a kind suit. for bouquets/ornamental purps., d ..., $4-13
(070490) Cabbages, kohlrabi, kale & sim. edible brassicas (excl. cauliflowers, heade ..., $0-1
(070610) Carrots & turnips, fresh/chilled, $0-1
(080232) Walnuts, shelled, $5-10
(080510) Oranges, fresh/dried, $0-1
(080620) Grapes, dried, $1-3
(080920) Cherries, fresh, $1-7
(080940) Plums & sloes, fresh, $0-2
(081190) Fruit & nuts, n.e.s., uncooked/cooked by steaming/boiling in water, frozen, ..., $1-3
(100620) Husked (brown) rice, $0-2
(110812) Maize (corn) starch, $0-1
(110813) Potato starch, $0-1
(150790) Soya bean oil, other than crude, & fractions thereof , whether or not ref. ..., $1-2
(150990) Olive oil (excl. crude & virgin) & fractions thereof , whether or not ref. ..., $2-6
(151219) Sunflower seed/safflower oil, other than crude, & fractions thereof , wheth ..., $1-2
(151790) Edible mixts./preps. of animal/veg. fats/oils/fractions of diff. fats/oils ..., $0-1
(151790) Edible mixts./preps. of animal/veg. fats/oils/fractions of diff. fats/oils ..., $1-4
(151800) Animal/veg. fats & oils & fractions thereof , boiled/oxidised/dehydrated/su ..., $0-0
(160232) Prepared/presvd. preps. of fowls of the genus Gallus domesticus (excl. homo ..., $0-2
(160232) Prepared/presvd. preps. of fowls of the genus Gallus domesticus (excl. homo ..., $2-6
…
Export
opportunity
(US$ Million)
238.7
11.8
22.6
36.4
51.6
27.3
9.6
6.8
11.5
10.7
59.4
24.4
18.9
7.6
16.2
36.5
9.3
7.4
40.8
5.4
63.1
23.7
62.9
48.4
27.5
89.3
top1
top2
HK 57.2 CN 45.5
SE 1.5
RU 1.3
NL 3.1
SK 2.8
GB 11.7 IT 5.2
JP 9.1
FR 8.2
BE 3.6
GB 3.1
DE 4.5
FR 2.3
RU 1.6
NL .8
RU 5.1
TH .7
TR 1.8
KR 1.8
RU 9.6
JP 6.8
GB 3.4
NL 3.4
HK 5.3
CA 2.4
NL 2.2
RU 1.4
US 5.5
NL 1.9
GB 7.3
NL 4.9
GB 1.8
NL 1.4
NL 2.1
DE .9
BE 4.2
DE 3.2
RU 1.6
DE .8
BE 10
GB 6.8
CL 6.8
PL 1.5
FR 9.5
UA 8.9
PH 8.2
AF 5.6
DE 12
HK 6.8
GB 20.4 NL 17.1
top3
RU 23.1
PL 1
IT 1.8
BE 4.5
IT 5.4
SA 2.8
BE .5
CA .5
PL .4
DE 1
HK 6.5
DE 2.9
RU 2
CN 1.1
BE 1.3
KR 3.9
MY .7
KR .6
CA 3
IN .5
FR 6.2
CZ 1.1
US 7.8
MX 4
MX 2.1
JP 12.7
top4
top5
JP 21.9 UA 17.9
CN .9
KR .7
AT 1.4 US 1.1
PL 2
CZ 1.4
RU 2.9 NL 2.6
UA 1.4 LB 1.3
IE .4
PL .2
LT .5
FR .4
MY .4
BE .4
ES .9
IL .8
UA 5.3 NL 4.8
CA 2.3 AU 1.9
CN 1.9 US 1.8
BR .8
HK .3
AT .9
FR .8
IT 2.8 FR 2.3
MX .6
ET .5
BE .5
TH .3
CO 2.3 MX 2.2
VE .5
MA .2
ZW 5.3 NL 3.1
KE 1
DE 1
CA 4
NL 3.2
ES 3.6 AT 3.5
CO 1.6 CL .5
FR 3.9 DK 3.2
Full list of export opportunities of over $1Million has 848 products
15
VII. Conclusions
ƒ Creation of and investment on new economic activities
would present a more successful approach to fostering
inclusive development in Myanmar
• It will create new job opportunities and will push upwards the
productivity of the whole economy
ƒ But the process of economic diversification is pathdependent and not all new industries will deliver the
desirable social benefits
ƒ Diversification would require the strategic identification of
potential new industries that would create productive
jobs and would provide attractive investment possibilities
ƒ Also important, these potential new industries should be
the ones that are likely to emerge from the existing
productive capacities in the economy.
VII. Conclusions
ƒ List of potential products could serve as a
public good
• Reduces the cost of discovery of potential
successful new economic activities
• Guide the government in identifying factors
that could facilitate or prevent the process of
discovery of these new economic activities by
the business sector
16
Thank you
Steven Ayres ([email protected])
Clovis Freire ([email protected])
17