DON'T BLAME US FOR BURMA'S WIMPY MANUFACTURING

UNCLAS SECTION 01 OF 02 RANGOON 000004

SIPDIS

SENSITIVE

STATE FOR EAP/BCLTV, EB
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OASIA JEFF NEIL
USPACOM FOR FPA

E.O. 12958: N/A
TAGS: EIND ECON PGOV BM
SUBJECT: DON'T BLAME US FOR BURMA'S WIMPY MANUFACTURING
SECTOR

REF: RANGOON 1425 AND PREVIOUS


1. (SBU) Summary: Though U.S. sanctions have hurt some
Burmese manufacturers, these punitive measures are not
primarily to blame for the sector's perilous situation. An
array of systemic problems, chronic mismanagement by the
government, and periodic external shocks, have made Burma a
wasteland for efficient and productive industry. Even if
sanctions were lifted tomorrow, we think the manufacturing
base here, including the garment sector, would still face a
very long and difficult road to competitiveness. End summary.

Sanctions: Piling On


2. (SBU) Those who would blame new U.S. economic sanctions
entirely for the demise of the country's manufacturing, and
particularly garment, sector don't have the whole story.
Though the U.S.'s ban on Burmese imports removed the garment
industry's most important market and clipped the wings of
some other manufacturers providing components for products
ultimately destined for the U.S. market, this ban was really
just an extra layer of punishment on a manufacturing sector
that's been sanctioned by its own government for years.


3. (U) Even before the latest U.S. sanctions, the garment
industry and most other manufacturers were in pretty poor
shape. According to the GOB's own statistics, manufacturing
made up only 9 percent of the economy in FY 2002-03. This 9
percent is dominated by bloated state-owned enterprises
(SOEs) producing sub-par goods for the domestic market in
factories with Soviet-sounding names like the "No. 1 Jute
Processing Factory." Manufacturing is centered in several
large blocks of farm land rezoned for industry, established
around Rangoon and Mandalay to take advantage of large pools
of cheap labor. Other factories, especially of the
state-owned variety, have been built in various spots in the
Burmese countryside for more political than economic reasons.
The ruling SPDC junta's Senior General Than Shwe's small
hometown of Kyaukse is packed to the rafters with
government-constructed cement, brick, and tractor factories.

Foreign Investment: The Siren's Song


4. (U) Despite the government's lofty rhetoric about
welcoming foreign investment to help reform these SOEs,
little investment has come into these factories, and only a
few joint ventures (usually with the military's Myanmar
Economic Holdings, Ltd.) remain to manufacture clothing,
automobile engines, motorbikes, etc. The government claims
US$1.6 billion in "approved" FDI in the manufacturing sector
since 1988. However we suspect far less actually came into
the country. The vast majority of foreign investment, both
independent and JV, in the manufacturing sector is in the
export-oriented portion of the garment industry, a portion
basically abandoned by the government, to take advantage of
Burma's extraordinarily low wages -- even by regional
standards. Another source of investment for Burma's
manufacturing sector has been coming via concessional loans
and tied aid, mostly from China and India. These millions of
dollars have flowed in to establish factories producing items
such as sewing machines, agricultural machines, wire, and
bicycles.


5. (SBU) Those foolish enough to be enticed into the country
by cheap wages, or those few domestic entrepreneurs that
attempt to run factories at an international standard, have
been buffeted by a multitude of pre-existing and systemic
problems that add so much to the bottom line, that initial
wage advantages are eroded.

-- First is a chronically unreliable power supply and the
high cost of imported diesel fuel. One electronics component
factory we visited pours 45 percent of operating expenses
into fuel and power generation.

-- Second, no access to new capital and poor financial
services. Foreign investment is almost nil. Burma has no
functioning capital markets and private banks, the major
source for manufacturers' borrowing, have been unable to lend
or do inter-bank transfers since the start of a banking
crisis in February 2003. Insurance is also insufficient,
with manufacturers complaining there is none available for
products or inputs being delivered to/from the port.

-- Third, poor infrastructure. Dismal roads and disorganized
trucking make transportation difficult and expensive.
Telecommunications infrastructure is in terrible condition,
and the Internet is expensive and censored.
-- Fourth, the double whammy of virtually no domestically
produced inputs and very tight import restrictions. This
makes "just-in-time" delivery impossible as it requires most
factories to warehouse spare parts and several months of
imported inputs.

-- Fifth, a poorly educated workforce that requires extensive
training and constant oversight. This extends to domestic
entrepreneurs, who are seldom knowledgeable about
international business practices and often lack vision that
extends beyond turning a quick buck.

-- Finally, because the domestic Burmese market is so
sluggish, and kyat revenues essentially worthless except to
pay local wages, manufacturers must focus on the export
market. Unfortunately, the government imposes a 10 percent
export tax and requires a license for all exports.

Government Folly


6. (SBU) Most sad economic stories here can be traced to the
government's incompetence and/or negligence. The
manufacturing sector is no exception. Export taxes, import
restrictions, a dysfunctional energy policy, and difficulties
repatriating foreign currency profits, are just a few
government-erected barriers to manufacturing. Such behavior
extends to the "vision thing" as well. Though the government
wisely extends some benefits to export-oriented manufacturers
working on consignment, such as garment makers, it has
refused to seek out and establish an appropriate niche for
Burma's industrial products. Thoughtful Burmese economists
and entrepreneurs argue that Burma's industrial policy should
focus on developing the "supporting industries" that Thailand
is outgrowing. However, the government, insistent that Burma
is already a developed, modern nation, pours time and
treasure into developing an IT sector and an automobile
industry.

Comment: Look Beyond Sanctions


7. (SBU) A quick review of the country's manufacturing
sector, the alleged epicenter of the new economic sanctions,
shows that there is more to the country's suffering
manufacturing base and high unemployment than meets a glib
eye. In picking through the carnage of Burma's economy the
challenge will be to assess how much of the damage was caused
by the U.S. sanctions, and how much by long-standing economic
mismanagement or some exogenous factor. Our initial review
indicates the blame lies far more with the latter two reasons
than with the first. Two comments by businesspeople impacted
by sanctions sum up this preliminary conclusion: "these
sanctions are like leprosy on a cancer patient," and "how can
your sanctions hurt us? We've been sanctioning ourselves for
40 years."
McMullen