How Protectionism Can Save Myanmar

YANGON, Myanmar -- Walk through the aisles of City Mart in downtown Yangon's FMI Centre and you will find a selection of products that any supermarket in Hong Kong or Singapore would be proud of. The shelves are packed with imported global brands -- from Cadbury to Coca Cola, Nestlé to Nissin. Not what you might expect in a country that until recently was off limits to most multinationals due to economic sanctions imposed by the West.

The view from the top floor inside one of downtown Yangon's few high-rise office towers

Nestlé, taking advantage of Myanmar's "opening up," recently committed $50 million to the country's food and beverage industry over the next six years. With similar announcements an almost daily occurrence, the Burmese government should consider what measures can be taken to ensure local business is able to compete with foreign firms and isn't left in the dust. In short, these investments should come with some strings attached. The government should be able to consider such measures without coming under fire from western interests whose own countries have many policies in place that favor domestic industry, usually at the expense of competitors in developing economies.

The easing of sanctions on Myanmar in 2012 has led to trade liberalization which is being lauded at every turn by foreign leaders and CEOs who view the Burmese population of roughly 50 million, the vast majority of whom are yet to enter the consuming classes, as a potential gold mine. But there is a darker side to this trend -- Myanmar's agricultural producers now face the same threat to their livelihoods as millions of farmers and domestic businesses throughout the developing world.

The selection of milk products available at City Mart is indicative of this threat; the shelves are dominated by imports from neighboring Thailand and Malaysia and as far afield as Australia, New Zealand and U.S. locally produced fresh milk and yogurt make up just a tiny fraction of the goods on offer.

yangon market
The local milk and dairy products on offer at outdoor markets in Yangon

Milk production in Myanmar more than doubled in the decade leading up to 2011, and domestic consumption of dairy products is steadily increasing. Despite the rise in production, the yield per cow remains significantly lower than in more developed economies and maintaining the quality of fresh milk along the supply chain is a major challenge. There are no national quality standards in place for raw milk, and the bacteria counts in milk at local collection centers is alarmingly high which is why a large portion of raw Burmese milk is processed into condensed milk, a staple at the country's ubiquitous tea shops. Even if quality can be improved through training and the application of appropriate technology and processes, a lack of rural transport and electricity infrastructure makes it almost impossible to store and transport milk at the low temperature required to prevent spoilage.

raw milk
Buyers use crude techniques to test the protein content of raw milk delivered by smallholder farmers

These factors undermine the domestic dairy industry's ability to compete with underpriced and often heavily subsidized imports. OECD member states collectively provided over $50 billion in direct subsidies for animal products and feed in 2012. New Zealand, which scrapped most farm subsidies in the mid-1980s, is an exception to this rule but even Kiwi dairy farmers and processors enjoy the benefits of underpriced inputs such as water and fossil fuels and are able to externalize the cost of environmental pollution. Many in New Zealand, home to the world's largest dairy exporter, Fonterra, are today questioning whether dairy farming is the prime cause of increased pollution in the country's waterways. This is not to mention the externalities arising from the industry due to its greenhouse gas emissions.

Recent and reliable statistics are hard to come by in Myanmar but some estimate that food imports increased 40 percent per annum between 2005 and 2011, and since sanctions were lifted that figure is likely to have increased. Domestic dairy producers are not the only ones feeling the squeeze.

Burmese poultry farmers and processors are deeply concerned about the impact on their livelihoods of foreign firms leveraging economies of scale and, you guessed it, subsidies, to import chicken wholesale for as little as one twentieth the current retail market prices. The chair of the Mandalay Region Poultry and Egg Production and Trading Association, U Kyaw Htin, told The Myanmar Times: "We can't rely only on trading for our country, we need manufacturing. Our country can't manufacture cars or airplanes, but we can do poultry very well and improve it step-by-step." Htin is one of many Burmese who, in contrast to the mantra of trade liberalization, believes the government needs to do more to support domestic industries as it struggles to compete against more developed foreign firms with easy access to financing and which enjoy subsidies provided by their own states.

Htin is not the only one who thinks the government should do more to foster the development and competitiveness of local agribusinesses. There is a growing view, particularly among Asia's developing economies, that the liberalization of trade in the agricultural sector is threatening food security, undermining the fight to alleviate poverty and having a negative impact on the livelihoods of rural farming communities. Nowhere is this view more strongly held than in India where successive governments have blocked a number of the WTOs proposed agricultural trade agreements on the grounds that they unfairly favor heavily subsidized western interests and would threaten the ability of hundreds of millions of Indian farmers to earn a living.

dairy farmers
Small business owners like these dairy farmers north of Yangon will struggle to compete with foreign competition

So what can be done to support Myanmar's dairy industry and its agricultural sector at large, which today employs over half the workforce and in 2012 accounted for over one third of GDP? If solutions are left to the "invisible hand," the market will continue to be flooded with cheap, underpriced imports and local players will not have the opportunity to compete on a level playing field. It is the role of the state to set the rules of the game played by the private sector and there are many measures the Burmese government could take -- some of which are already underway.

Firstly the government should provide more incentives for domestic small and medium-sized businesses to invest in appropriate technology and encourage local banks to provide access to the capital required to do so by allowing them to lend against cash flow, livestock and produce as collateral. Enhancing property rights for farmers will also go some way towards achieving this as it will provide the collateral needed for loans and the sense of security required for farmers to consider making investments in their future.

Secondly, public investments in urbanization, touted by many as the fast train to prosperity, should not be made at the expense of rural development. Myanmar needs to make significant investments in its rural transport and energy infrastructure if domestic players are to compete with foreign firms.

If investments are to be made in rural infrastructure, the money has to come from somewhere. Having cleared about 60 percent of its total sovereign debt, the government should come up with smart ways to offset the cost of these investments rather than rack up new debt or rely on fickle development aid with strings attached.

They could, for example, mandate that foreign firms that want to establish operations in-country or import products must contribute to a rural development fund. Would it be unfair to ask foreign firms trying to capture a portion of Myanmar's sizable market to pay a small premium? To put things into context, in 2013 the Burmese government's total tax revenues of around $16 billion were approximately equal to the operating cash flow of Nestlé.

It is all too easy for businesspeople and politicians from western economies to criticize developing countries for taking measures to protect domestic economic interests, but critics in glass houses should not throw stones. Most western nations, including the two great bastions of free trade the U.S. and U.K., adopted extremely protectionist policies during earlier stages of development. Today western governments lead the pack when it comes to protectionism by collectively offering many hundreds of billions of dollars in subsidies to enable local industry to better compete at home and abroad.

American public and private sector leaders in particular should contemplate the words of the 25th president, William McKinley, who, in 1892 when the U.S. was still one of the most protectionist countries in the world, said: "Under free trade the trader is the master and the producer the slave. Protection is but the law of nature, the law of self-preservation, of self-development, of securing the highest and best destiny of the race of man."

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