Why Foreign Investors in Burma Should Proceed with Caution

Annie Castellani

 

These days, Burma is everywhere. Stories about this Southeast Asian nation – ruled by a military junta for nearly five decades – are now a routine headline in the international media. World leaders, opportunistic investors, human rights and environmental activists, and inquisitive travelers all want a piece of this formerly closed-off country. For some people, resource rich Burma embodies the promise of immense, untapped fortunes; for others, it may represent a nation on the verge of capitalist exploitation. Regardless of the particular vantage point, the precarious nature of Burma’s political situation and institutional capabilities cautions foreigners looking to join the gold rush to proceed slowly and thoughtfully through this eastern frontier of democratic transition.

 

The sudden spotlight on Burma commenced over two years ago with democratic and economic reforms. In November 2010, Burma held its first elections in 20 years, and the government released pro-democracy leader Aung San Suu Kyi from house arrest. In 2012, Aung San Suu Kyi won a seat in parliament and became the chairperson of the opposition National League for Democracy party. Foreign governments have taken notice of these reforms and eased sanctions on Burma.

 

Notably, the Burmese government is now focused on pushing reforms that will attract greater foreign investment. In November 2012, President Thein Sein approved a foreign investment law that allows foreign investors to own 100 percent of their ventures in non-restricted sectors, to take advantage of five-year tax breaks and to lease land for 50 years with the prospect of 20 years in renewals. Last month, Burma’s parliament passed regulations permitting foreign investors to own up to 80 percent of ventures in any of 11 restricted sectors, including natural resources, agriculture, manufacturing, and industries affecting public health.

 

Investors, like foreign governments, are responding. This month, a consortium backed by George Soros, as well as one comprised of the first- and second-largest telecom giants worldwide, China Mobile and British Vodaphone, announced plans to bid on one of two telecom licenses being offered by the Burmese government. This offering constitutes the first major public contract for foreigners outside the natural resources sector. With these licenses, the government hopes to raise the percentage of the population that uses mobile phones from approximately 6 percent to 80 percent in three years.

 

 

Such a move may significantly improve living and working conditions of the Burmese people. Yet, this coming June, the government also plans to accept bids from foreign investors seeking exploration rights to approximately 30 regional offshore blocks containing natural gas and oil. If examples of offshore foreign investment in places like Indonesia are any predictor of success, this decision presents a potential recipe for disaster for the local population, landscape, and global reputation of winning investors.

 

The impact of this momentum remains uncertain. Proponents of quick entry emphasize the advantages of opening up a formerly isolated society -- cross-cultural exchanges, a rise in democratic institutions, and developments that will lift Burma’s citizens out of poverty. Yet, while an influx of foreigners might provide an initial boost to the economy, a huge question mark hovers over the longterm consequences of sudden and extensive foreign investment in Burma.

 

Investors and businesses looking to capitalize on recent reforms and gain a foothold in Burma might therefore consider some practical reasons for treading cautiously through this space. Specifically, the potential for igniting human rights abuses and entanglement in ethic conflict, in addition to pervasive corruption, unsound legal frameworks, and a lack of skilled workers, counsel against leading the charge of internationals trending towards Burma.

 

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Compliance with international human rights standards constitutes one of the most pressing obstacles for foreign investors. Due to its wealth of natural resources – including teak, oil, natural gas, rubies, pearls, sapphire, and jade – Burma faces great exploitation risks. In the rush to beat out competitors for control over such lucrative, relatively untapped resources, some companies may be tempted to neglect the rights of local workers, communities, and the environment.

 

Countless instances of astonishing violations by multinational companies litter the globe, particularly in extractive industries, an area in which natural resource-rich Burma holds great potential. The failure of companies engaged in mining Indonesia’s inland and offshore tin deposits to adequately protect local workers from being buried alive, as reported by Cam Simpson last August in Bloomberg Businessweek, provides but one example.

 

Notably, forced labor, particularly by the hands of the Burmese military, is an increasingly common practice in Burma. In March, a European Member of Parliament expressed concerns over this practice. He told reporters that European businesses must “apply strict corporate social responsibility measures to their operations in Burma,” including a “high level of transparency and reporting” to “encourage best practice amongst investors.”

 

Failure to apply such measures may drastically impact local communities. In mid-March, a report from a commission led by Aung San Suu Kyi gave the green light for the continuation of a controversial copper mine, which is the product of a pre-democratic reform agreement between Chinese and Burmese companies. The report acknowledges the mine’s failure to meet environmental standards, to provide local jobs, and to adequately compensate villagers who lost land through the development of the mine. Yet, Aung San Suu Kyi told villagers after the release of the report that the commission had to allow the mine to operate to ensure that Burma attracts foreign investment. The report contains suggestions to remedy these issues, but it fails to suggest a remedy for more than 100 protestors who were severely burned when police used phosphorous-containing smoke bombs against them to break up a protest last year. This incident spurred more protests. 

 

Fortunately, some foreign companies may have financial incentives to address such concerns, as failure to do so can damage their brands or give an edge to responsible competitors. The growing global corporate social responsibility movement – driven by socially conscious consumers, widespread reporting of violations, international conferences, and even major campaigns by some businesses – is an increasingly persuasive justification for foreign investors to incorporate these concerns into their business plans before diving into unfamiliar territory. Bad press and protests arising from exploitation of local communities may also encourage multinationals to act responsibly to prevent spoiling future opportunities for additional foreign investors.

 

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The strong likelihood of entanglement in ethnic conflicts presents a second obstacle to investment in Burma. Hundreds have died in the western Rakhine State (also known as Arakan) since violence broke out last year between majority Buddhists and minority Muslim Rohingya. More than 100,000 stateless Rohingya are displaced, while causalities continue in the northern Kachin State, where approximately 70,000 people are displaced. Although the Burmese government has tried to assure prospective investors that they will sign new ceasefire agreements with ethnic Kachin independence fighters, earlier this month the government canceled ceasefire talks just days before the mutually agreed-upon date. And according to Human Rights Watch, an additional 400,000 Burmese are displaced due to a decades-long conflict in the east, contributing to a total of more than 550,000 internally displaced people in Burma.

 

A foreign presence in these conflict-ridden areas may complicate the situation for Burmese, as well as for multinationals seeking to make an easy profit. For instance, the construction path for China’s Sino-Myanmar natural gas pipeline, scheduled to operate in June, snakes through the Kachin State, where government forces and the Kachin Independent Army continue to exchange fire and leave small arms, artillery, and ammunition. At least one foreign oil and gas security consultant has recently expressed concern that placement of a pipeline here is highly dangerous because stray bullets could easily cause an explosion. Additionally, foreigners doing business in conflict hotspots may face accusations of contributing to the conflict by oppressing the local population or failing to proactively assist the government. 

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Aside from these security and human rights risks, Burma’s institutions may be unequipped to handle a major influx of foreign capital. Burma still struggles with rampant corruption, locally referred to as “tea money.” The country also suffers from widespread bribery, trafficking in arms and drugs, tax evasion, and money laundering. The Myanmar Investment Commission has the power to enforce pre-existing but rarely implemented laws regarding these illegal practices. Yet, as one Anglo-Burmese lawyer told The Economist last year, the Myanmar Investment Commission – an entity comprised of members chosen by the government and operating with little oversight – may make arbitrary or corrupt decisions on murky financial rules. Although the Burmese government  recently made attempts to clean out elements of corruption in government, the effect of such efforts remains to be seen.

 

The same Anglo-Burmese lawyer told The Economist that Burmese have little confidence in the ability of the judiciary to resolve disputes. The country lacks well-trained lawyers, and Burma has not acceded to international arbitration agreements. There were signs of progress in March of this year, when the parliament approved of a plan for the government to apply for membership to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Pursuant to the Convention, local courts would be required to respect arbitration agreements between parties and to enforce foreign arbitration awards. However, Burma’s membership is still pending. The government must also find a way to deal with or renegotiate old contracts that it entered into with international investors during the military junta. An unsound legal structure may complicate resolution of commercial disputes.

 

A final, more immediate consideration is the small pool of technologically skilled local workers. In a country where less than 5 percent of the population uses the Internet, lack of skilled labor could be detrimental to Burmese workers, who may be managed by foreign bosses hired by foreign companies eager to get started. Such a structure might leave little room for upward mobility.

 

Despite these glaring institutional and societal concerns, investment in Burma today seems unstoppable. Perhaps with an understanding of the obstacles facing the nation, however, those seeking to benefit from this gold rush will implement sustainable solutions to the humanitarian and ethical issues implicated, particularly when they would seem to impact the bottom line as well.  

 

Author Bio:

Annie Castellani is a contributing writer at Highbrow Magazine.

 

Photos: eguidetravel, State Department, Whitehouse.gov, Ohnwinhtut (Wikipedia Commons, Creative Commons).

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