Those who are trained in economics will be familiar with the idea that GDP growth is made up of labor force growth and productivity growth. GDP is what is value-added by economic agents. Take for example, if you have 5 people in a room and they can manually sew and produce 100 shirts. If you pull in 3 more workers, you have that more output and that additional output is the GDP growth number that you see mentioned in newspapers and analyst reports. Hence, labor force growth is the first component of GDP growth and is easy to understand. The other component of GDP growth is what is called productivity growth and this is what economists spend a lot of time to understand and explain. Put simply, productivity growth comes from “better ways of doing things”. If that original example of the 5 workers in the room were given sewing machines, then instead of producing 100 shirts, they would be able to produce 150 shirts. In fact, the workers can also be organized in different ways for more efficient production. Say, if one worker were to sew the sleeves, and another worker to sew the other parts of the shirt, this too can add to more production and ultimately GDP growth.
How is this relevant to the current phase of Myanmar’s development? Well, in terms of labor force growth, there is a huge pool of unemployed who can be pulled into the labor force. In other words, this is what government officials and ministries are talking about. You attract more investments, you create more jobs and more capital and equipment being used, then that adds to GDP growth.
In frontier economies which newly open up, there is however a surge of productivity growth that comes simply with “new ways of doing things”. For example, when Vietnam opened up, two or three decades ago, I remember the hotel receptionist became more efficient in checking in staff, or the waitress in taking orders as they learnt how to service customers better. The communications became better, they learnt a little English and so forth. Just from these new ways of doings things, work was done in a more efficient manner, boosting productivity. The same thing happened in China 30-40 years ago and this is what is happening in Myanmar now. This component of productivity growth actually is the first big impact on frontier economies before the new jobs from investment kicks in.
Everyone who has been here in Yangon the last two years has had a front row seat in witnessing this how better services and attitudinal changes have been transformed. In economic terms, this definitely adds to productivity and GDP growth.
It is this first phase of productivity growth that is cascading into the economic numbers that are being reported. According to the IMF, Myanmar’s GDP growth will hover around 7% p.a., the budget deficit for 2013-2014 could reach 5%, and inflation 6-7%. These numbers suggest that the economic conditions are relatively benign. However, these numbers could well be deceptive. There is a real danger that Myanmar’s economic conditions are not as robust as the numbers suggest simply because this phase of productivity growth from the initial opening up of an economy may not be sustained. It is easy to understand that the phase of productivity growth with better ways of doing things is most powerful at the start, and peters away relatively quickly.
Once productivity from this first pulse peaks out, and if no investments come in, then it will immediately be reflected in lower GDP growth and higher inflation numbers (there is a direct relationship between productivity growth and inflation in economic logic). The picture can turn quite abruptly.
The first phase of productivity growth must be sustained by a continuous inflow of capital and investments from the reforms and liberalization that has taken place. Up till now, the outlook is not good as the pace of investments have been disappointing. As everyone knows, high property prices and the poor state of banking facilities are holding the whole economy at ransom. Hopefully the authorities will have the conviction and will to address these areas early enough before the productivity tide turns.