1

In which industries to invest? Aligning market and development

incentives in Myanmar

MPDD Seminar SeriesBangkok, 31 October 2012

Steven Ayres and Clovis FreireMacroeconomic Policy and Development Division (MPDD)

Economic and Social Commission for Asia and the Pacific (ESCAP)

Main Messages

Diversification towards more productive economic activities will best facilitate inclusive development in MyanmarGiven market incentives, it will require strategic interventions, including targeted FDIMethod to indentify economic activities to target

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Content

I. IntroductionII. The opening up of the economyIII. Inclusive development, structural transformation and the role of FDIIV. Theoretical frameworkV. Methodology & DataVI. Identifying opportunities for FDIVII. Conclusions

I. Introduction

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)

Development and market incentives must be considered in planning strategies

New industries should be the focus of such investments

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II. The opening up of the economy

Cause for optimism in Myanmar....Years of isolation, both political and economic, have inhibited Myanmar’s development.Yet the current era of political and economic reforms offers newopportunities

– FDI legislative reform could be instrumental in creating new economic activities Chance to exploit a number of strengths in this transition phase, despite a number of potential challenges

- Fiscal Deficits- High inflation- Macroeconomicmanagement challenges

- Demography- Geography- Natural Resources

ChallengesStrengths

III. Inclusive development, structural transformation & the role of FDI

Opportunity to follow in neighbours’ growth anddevelopment footsteps

Growth of an inclusive nature is key

A transformation in the structure of the economymay help facilitate this.

- Myanmar has made no progress in this respect, agricultureaccounting for 35% of GDP in 1965, and 36% in 2010.

ESCAP (2012) stresses the need for the movementtowards more productive industries and services

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Slow structural transformation is exacerbatedby reduced private investment incentives.

What role can FDI play?

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

It is both the quantity and quality of FDI that is of concern. But what constitutes quality FDI?

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.

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IV. Theoretical framework Based on evolutionary growth models (Silverberg and Vespagen, 2005) & Economic

complexity (Hidalgo and Hausmann, 2009)

Economy as a set of different economic activities

Each producing a single product (x) with different:• productivity (q)• employment (e)• output (y)

Each product requires a specific combination of “productive capacities” to be produced

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

Constant labourproductivity of each economic activity:qj = (yj /ej)Function of the unique productive capacities used in the production

Changing Average productivity of the economy as a whole:q = ∑(ej/L) qjchanges with shifts in employment and rate of growth by economic activitychanges with creative destruction

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

6

Economy evolves by (a) shifting employment and changing rate of growth by economic activity

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

Economy evolves by (b) adding/removing productive capacities and/or links of the network of productive capacities

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

Xn+1

< qn+1

+ en+1 = L

+ yn+1 = Y

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Inclusive economic development

Growth of total output (Yt+1 > Yt)

Reduction of inequality by increasing employment in more productive sectors

Increase in total productivity of the economy (qt+1 > qt)

Growth with

productive jobs

Two ways to move employment into more productive activities

1) Demand must be increased in existing economic activities that are more productive which, in turn, increases output and associated employment in that activity;

2) Creation of new and more productive economic activities, which would increase the opportunity for more productive jobs.

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

Xn+1

< qn+1

+ en+1 = L

+ yn+1 = Y

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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) .

Therefore, the creation of new more productive economic activities present a more successful approach to fostering inclusive development

How diversification would come about?

Emulation vs Innovation• Emulation: new to the

country• Innovation: new to the

worldPath dependency• New activities tend to

exploit the productive capacities that were previously developed for other activities

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

q1

x1

q2

x2

q3

x3

qn

xn

…

e1 e2 e3 en

e0 = unemployed

< < <

y1 y2 y3 yn

+ + +

+ + + = Y

= L

Productive capacities

products

productivity

employment

output

Xn+1

< qn+1

+ en+1 = L

+ yn+1 = Y

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How to facilitate the emergence of new productive capacities that would allow emulation of more

productive activities?

Inclusive economic institutions (Acemoglu and Robinson, 2012)• Foster economic activity• Economic opportunities

for a broad cross-section of society

• Should address Information externalities (Rodrik, 2004)

Address coordination externalities (Rodrik, 2004)• Infrastructure• Human capital• Coordinate investment

Economic institutionsSpecific rules of the game: set incentives

and constraints for acquisition and combination of productive capacities

External Demand

Demand

Laissez-faire vs strategic approach

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?

Higher productivity

Potential new products

Existing products in the world

Existing products in the country

A

B

Considering D(x) as the expected demand for x:P=D(B)/D(A+B) P > 50% => laissez-faireP < 50% => strategic approach

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From theory to practice

Which economic activities are more likely to emerge given the existing productive capacities in the economy?• The Product Space (Hidalgo, Klinger, Barabási,

Hausmann, 2007)Which of those are associated with higher productivity?• Method of reflections (Hidalgo and Hausmann, 2009)

What is the probability of those more productive activities emerge given the market incentives?• Export opportunity (ESCAP, 2012)

Product Space

Hidalgo, Klinger, Barabási, Hausmann (2007). The Product Space Conditions the Development of NationsNetwork in which products are nodes connected to each other if they are usually part of the same product mixproximity between products A and B (ΦAB)ΦAB = ΦBA = min(P(A|B), P(B|A))

Source: Hidalgo, C.A., and others (2007)

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Method of reflectionsHidalgo and Hausmann (2009). The building blocks of economic complexity.

Source: Hidalgo and Hausmann (2009)

Method of reflectionsHidalgo, César A., and Ricardo Hausmann (2009). The building blocks of economic complexity. PNAS, vol.106, No. 26, pp. 10570-10575. The method is defined as the recursive set of observables:

∑ −=p

Npcpc

Nc KMK

K 1,0,

,1

∑ −=c

Nccpp

Np KMK

K 1,0,

,1

∑=p

cpc MK 0,

∑=c

cpp MK 0,

⎩⎨⎧ ≥

=therwise. 0

tCA if 1 cp

o

resholdRMcp

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Product complexity Measure of how ubiquitous the product is and the level of

diversification of the countries that produce it

02

46

80

24

68

02

46

8

-4 -2 0 2

Maldives

Bangladesh

Japan

Per

cent

Product complexity (global average=0, sd=1)

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

ESCAP (2012): Rich countries export products with a wide range of complexity

Source: Author based on data from the United Nations Commodity Trade Statistics Database (COMTRADE).

Product complexity by industry

02

46

810

12Pe

rcen

t

-4 -3 -2 -1 0 1 2 3 4How common is the product-mix (Number of countries that export the product)

Food and live animals

02

46

810

12Pe

rcen

t

-4 -3 -2 -1 0 1 2 3 4How common is the product-mix (Number of countries that export the product)

Beverages and tobacco

02

46

810

12Pe

rcen

t

-4 -3 -2 -1 0 1 2 3 4How common is the product-mix (Number of countries that export the product)

Crude materials, inedible, except fuels

02

46

810

12Pe

rcen

t

-4 -3 -2 -1 0 1 2 3 4How common is the product-mix (Number of countries that export the product)

Mineral fuels, lubricants and related materials

02

46

810

12Pe

rcen

t

-4 -3 -2 -1 0 1 2 3 4How common is the product-mix (Number of countries that export the product)

Animal and vegetable oils, fats and waxes

02

46

810

12Pe

rcen

t

-4 -3 -2 -1 0 1 2 3 4How common is the product-mix (Number of countries that export the product)

Chemicals and related products

02

46

810

12Pe

rcen

t

-4 -3 -2 -1 0 1 2 3 4How common is the product-mix (Number of countries that export the product)

Manufactured goods classified chiefly by materials

02

46

810

12Pe

rcen

t

-4 -3 -2 -1 0 1 2 3 4How common is the product-mix (Number of countries that export the product)

Machinery and transport equipment

02

46

810

12Pe

rcen

t

-4 -3 -2 -1 0 1 2 3 4How common is the product-mix (Number of countries that export the product)

Miscellaneous manufactured articles

Source: Freire, 2012.

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Export Opportunities Based on ESCAP (2012)Captures expected demand for potential new productsOverlap indicator designed to measure the degree to which potential new products of one country match the expanding markets of another

20101,0 MGi

ttisd ×∑ 1,0 tt

isdG 0

0

1

1

t

tid

t

tid

Mm

Mm

−

0

0

1

1

t

tid

t

tid

Mm

Mm

>

where =

if Φij>80% for some product j in the country’s existing product mix and

, and zero otherwise.

V. Methodology & Data

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)

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Trade data disaggregated at 6-digit level of HS 2002Products are also differentiated based on their unit value 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)

-3-2

-10

Com

plex

ity o

f pot

entia

l new

pro

duct

-3 -2 -1 0Complexity of existing product

below $1 Million$1-$100 Millionabove $100 Million

Export opportunities of potential new productsMyanmar

VI. Identifying opportunities for FDI

Percentage of potential

new products with above country's

average complexity

Percentage of export opportunities with above

country's average complexity

1 724 2 604 64% 25%

Number of existing products

Number of potential new products for

emulation

-3-2

-10

Com

plex

ity o

f pot

entia

l new

pro

duct

-3 -2 -1 0Complexity of existing product

Myanmar

15

New industries to target for FDI based on export opportunities

(Share of potential opportunities in percentage)

2 44

45

6

8

9

911

38

Inorganic chemicals, precious metal compound, isotopes Paper & paperboard, articles of pulp, paper and boardMiscellaneous chemical products Organic chemicals

Articles of iron or steel Iron and steelElectrical, electronic equipment Plastics and articles thereof

Optical, photo, technical, medical, etc apparatus Machinery & mech appliance etc

Sum of others with smaller shares

Myanmar

Example of export opportunities of potential new products by HS sector

(HS) Description, price range

Export opportunity

(US$ Million) top1 top2 top3 top4 top5(020714) Cuts & edible offal of species Gallus domesticus, frozen, $1-3 238.7 HK 57.2 CN 45.5 RU 23.1 JP 21.9 UA 17.9(040130) Milk & cream, not concentrated/sweetened, fat content by wt. >6%, $1-3 11.8 SE 1.5 RU 1.3 PL 1 CN .9 KR .7(040310) Yogurt, $1-4 22.6 NL 3.1 SK 2.8 IT 1.8 AT 1.4 US 1.1(040610) Fresh (unripened/uncured) cheese, incl. whey cheese, & curd, $0-3 36.4 GB 11.7 IT 5.2 BE 4.5 PL 2 CZ 1.4(040610) Fresh (unripened/uncured) cheese, incl. whey cheese, & curd, $3-7 51.6 JP 9.1 FR 8.2 IT 5.4 RU 2.9 NL 2.6(040630) Processed cheese, not grated/powdered, $3-7 27.3 BE 3.6 GB 3.1 SA 2.8 UA 1.4 LB 1.3(060390) Cut flowers & flower buds of a kind suit. for bouquets/ornamental purps., d ..., $4-13 9.6 DE 4.5 FR 2.3 BE .5 IE .4 PL .2(070490) Cabbages, kohlrabi, kale & sim. edible brassicas (excl. cauliflowers, heade ..., $0-1 6.8 RU 1.6 NL .8 CA .5 LT .5 FR .4(070610) Carrots & turnips, fresh/chilled, $0-1 11.5 RU 5.1 TH .7 PL .4 MY .4 BE .4(080232) Walnuts, shelled, $5-10 10.7 TR 1.8 KR 1.8 DE 1 ES .9 IL .8(080510) Oranges, fresh/dried, $0-1 59.4 RU 9.6 JP 6.8 HK 6.5 UA 5.3 NL 4.8(080620) Grapes, dried, $1-3 24.4 GB 3.4 NL 3.4 DE 2.9 CA 2.3 AU 1.9(080920) Cherries, fresh, $1-7 18.9 HK 5.3 CA 2.4 RU 2 CN 1.9 US 1.8(080940) Plums & sloes, fresh, $0-2 7.6 NL 2.2 RU 1.4 CN 1.1 BR .8 HK .3(081190) Fruit & nuts, n.e.s., uncooked/cooked by steaming/boiling in water, frozen, ..., $1-3 16.2 US 5.5 NL 1.9 BE 1.3 AT .9 FR .8(100620) Husked (brown) rice, $0-2 36.5 GB 7.3 NL 4.9 KR 3.9 IT 2.8 FR 2.3(110812) Maize (corn) starch, $0-1 9.3 GB 1.8 NL 1.4 MY .7 MX .6 ET .5(110813) Potato starch, $0-1 7.4 NL 2.1 DE .9 KR .6 BE .5 TH .3(150790) Soya bean oil, other than crude, & fractions thereof , whether or not ref. ..., $1-2 40.8 BE 4.2 DE 3.2 CA 3 CO 2.3 MX 2.2(150990) Olive oil (excl. crude & virgin) & fractions thereof , whether or not ref. ..., $2-6 5.4 RU 1.6 DE .8 IN .5 VE .5 MA .2(151219) Sunflower seed/safflower oil, other than crude, & fractions thereof , wheth ..., $1-2 63.1 BE 10 GB 6.8 FR 6.2 ZW 5.3 NL 3.1(151790) Edible mixts./preps. of animal/veg. fats/oils/fractions of diff. fats/oils ..., $0-1 23.7 CL 6.8 PL 1.5 CZ 1.1 KE 1 DE 1(151790) Edible mixts./preps. of animal/veg. fats/oils/fractions of diff. fats/oils ..., $1-4 62.9 FR 9.5 UA 8.9 US 7.8 CA 4 NL 3.2(151800) Animal/veg. fats & oils & fractions thereof , boiled/oxidised/dehydrated/su ..., $0-0 48.4 PH 8.2 AF 5.6 MX 4 ES 3.6 AT 3.5(160232) Prepared/presvd. preps. of fowls of the genus Gallus domesticus (excl. homo ..., $0-2 27.5 DE 12 HK 6.8 MX 2.1 CO 1.6 CL .5(160232) Prepared/presvd. preps. of fowls of the genus Gallus domesticus (excl. homo ..., $2-6 89.3 GB 20.4 NL 17.1 JP 12.7 FR 3.9 DK 3.2

…

Full list of export opportunities of over $1Million has 848 products

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VII. Conclusions

Creation of and investment on new economic activitieswould 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 But the process of economic diversification is path-dependent and not all new industries will deliver the desirable social benefits Diversification would require the strategic identification of potential new industries that would create productive jobs and would provide attractive investment possibilities 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

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

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Thank you

Steven Ayres (steven.j.ayres@gmail.com) Clovis Freire (freire@un.org)