US embassy cable - 04RANGOON4

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, Economy 
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