Wednesday, April 6, 2011

Can Burma's New Government Deliver Economic Growth?

By NAING KO KO Friday, April 1, 2011

Shortly before handing over power to a new hybrid military-civilian government, Burma's ruling junta released its budget for the fiscal year that begins today. Now that the country has ended more than 22 years of direct military rule (albeit with a government whose cabinet consists almost entirely of ex-generals), many are wondering what this transition will mean for one of the world's least-developed economies.

Will it, for instance, launch a period of double-digit growth in both the medium- and longer-term, such as we have seen in other parts of the region? And will it allow Burma to rejoin with the international economic and political system?

Unfortunately, strong growth is unlikely to occur unless the public sector is able to play a greater role in the market mechanism and citizens are given the freedom to participate in the decision-making process. Burma has stagnated economically because its economic, political and legal systems have experienced zero innovation for decades. The chances of Burma joining the mainstream global economic order are slim, as it remains heavily dependent upon its agricultural sector.

Although the Burmese junta has produced a budget for 2011-12 and installed a new regime, it has done nothing to strengthen market-friendly economic institutions. The rule of law remains extraordinarily weak, the free flow of merchandise, people and services is still hindered by arbitrary regulations, and there is no effective foreign exchange system, making Burma an unappealing destination for foreign direct investment.

The regime is not alone in its short-sightedness. During the 2010 election campaign period, only two out of 37 parties—the All Mon Regional Democracy Party and the National Unity Party—declared their economic and international trade policy. Surprisingly, none of those 37 parties have officially declared their policies particularly on economic growth, international trade, or fiscal and monetary policy. No political party advocated an urgent need for private-sector development, small and medium enterprises, and free and fair market competition. Thus, lacking economic ideas and policies from its politicians, Burma won’t achieve economic growth in the short or medium terms even if a new political regime is established.

Burma’ economic growth has stagnated at around 2.5 percent, despite slightly higher growth in some sectors—particularly exports of gas, timber and fishery products to Thailand, China and India in the 2009-10 fiscal year. The government relies heavily on primary goods exports to neighboring economies for revenue. Moreover, recent privatization schemes have merely reinforced cronyism, rather than acting as a structural adjustment program. On top of that, excessive spending on non-productive activities—such as the construction of tunnels with North Korean assistance, the building of a new capital, and other expenditures aimed at cementing the military's hold on power—underpin a huge budget deficit and fiscal imbalance.

With respect to its monetary policy, Burma has multiple exchange rate systems which don't fit into the international trade and economic order. Burma badly needs a sound monetary policy and needs to adjust an official exchange rate regime. The Central Bank of Myanmar must stop printing paper money in order to control the 34 percent rate of inflation and increase the value of the currency, the kyat. Empirically, Burma’s multiple exchange rates—the “normal exchange rate,” “market rate,” “hotel rate,” “custom rate,” and “foreign exchange certificates”—have created a market distortion that is inefficient and unproductive.

Although Burma’s official exchange rate is pegged at between 5 and 6 kyat to the US dollar, the real exchange rate fluctuated between 985 and 1,110 kyat to the dollar in 2010, according to The Irrawaddy's research department. Of the various rates in use, the market rate fluctuated the most. In early 2011, this widely used rate moved between 800 and 900 kyat to the dollar. The new regime urgently needs to overhaul its monetary policy and develop financial innovation in order to gain foreign investment and economic growth.

With regard to international trade, Burma has a relatively less restrictive trade regime and is a member of Asean Free Trade Area and World Trade Organization. According to the World Bank's 2009-10 World Trade Indicators report, Burma ranked 121st out of 148 countries on the General Agreement on Trade and Services Commitment Index regarding the extent of its commitment to trade liberalization in services. Its international trade relies heavily on border trade with neighboring countries, and its major export products—gas, gems and forest and fishery outputs—are not environmentally sustainable and not competitive in the longer term.

Thailand purchases 40 percent of Burmese exports, while China, India and other members of the Association of Southeast Asian Nations buy most of the rest.

In stark contrast to Thailand and other Southeast Asian countries, Burma's tourism industry makes a negligible contribution to the country's economy, due mostly to changing visa regulations, monitoring of tourists and a multiple exchange-rate regime.

With regard to technology, research and knowledge creation, Burma is apparently an intellectually impoverished economy. The quality of education and research is not in good shape. It cannot produce talented human resources for a competitive labor market. According to the United Nations Development Program's Human Development Index (HDI) report released in November 2010, Burma ranked 132 out of 169 countries and spent just 0.6 percent of GDP on the education sector and 0.2 percent on health care. Burma’ HDI ranking is even lower than that of Cambodia, Laos and Vietnam.

In summary, the prolonged existence of a command economy has not favored Burma's economic growth and well-being. Underdeveloped private sector participation discourages robust economic activities and growth. The utter lack of policy development from politicians and the absence of know-how technology and knowledge management mean that Burma will definitely not achieve double-digit growth in the medium term, particularly in 2011-12, although the export of primary raw materials to energy-hungry neighboring economies will remain strong. Burma's economic growth will only emerge after the country has a truly democratic government capable of addressing the weaknesses in the current system and with the political will to implement major reforms.

Naing Ko Ko is a graduate student studying political economy in New Zealand.

Source: Irrawaddy Online

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