Think Again

Think Again: Burma’s Economy

Think Again: Burma’s Economy

"Burma is the next Asian Tiger."

Don’t bet on it. The economies of the Asian Tigers don’t look anything like Burma’s, which is driven by primary industries such as natural gas, agriculture, timber, jade, and minerals. Together these industries made up over 80 percent of exports last year. They also dominate foreign investment: oil, gas and mining alone comprised almost 90 percent of FDI over the last half decade. Burma’s rapprochement with the West has brought even more interest in these sectors. The new government signed deals for 10 oil and gas blocks earlier this year and is offering 23 more. They’re also awarding mining concessions and land for plantations. While there’s also some interest in telecoms and banking, it’s the extractive industries that are Burma’s main draw for potential investors.

The Asian Tigers, by contrast, were mostly resource-poor and relied on export-oriented manufacturing to develop. Their foreign direct investment (FDI) was mostly in manufacturing, not resources. They also developed in a much different international environment, one with far fewer competitive exporting countries. They sold their wares mostly to the high-consuming countries of the West, the same countries that are now grappling with the lingering effects of the global financial crisis.

Unfortunately for Burma, countries that have relied on primary product exports tend to grow more slowly than countries like the Asian tigers due to unequal investment in other parts of the economy, a concept known as Dutch Disease. Burma already suffers from this illness, and it will continue to hamper the country’s development in the years ahead. The export of natural resources helped drive up the value of the country’s currency, the kyat, from over 1400 to the U.S. dollar in 2007 to less than 700 in 2011 – a major obstacle for any reform effort. The continued overvaluation of the kyat — along with high transaction costs, poor infrastructure, and a competitive international environment — will all make it difficult for Burma to develop the manufacturing sector it needs to emulate the Tigers.

"Burma needs foreign investment and it needs it now."

It’s complicated. The foreign investment that Burma will receive most of is the kind it needs the least: resource investment. This type of investment tends to create little direct employment. Its major benefit is the income it generates for the government. But the government of Burma, like so many others, isn’t good at turning resource revenues into productive investments.

Despite this, the prevailing attitude in the capital seems to be that "foreign investment equals development." That’s just not true. Different types of foreign investment have drastically different effects on the economy. Investment that transfers technology and brings know-how can be beneficial, but resource investment can be dangerous because it creates revenue by selling non-renewable assets. Why sell these assets so quickly if the government does not yet have the capacity to invest all the proceeds in productive ways? Burma’s recent steps toward acceptance of the Extractive Industries Transparency Initiative (EITI), which would help fight corruption by providing for open public accounting of resource revenues, could help but transparency and sovereign wealth funds are no substitute for a balanced economy. Burma would actually be better off without a massive rush of primary sector investment.

"Burma’s problem is that it lacks capital."

Yes, but… the fundamental problem isn’t a lack of capital, but an economy that is inefficient at putting it to productive uses. The massive boom in property prices in Yangon and Mandalay over the past few years shows that Burma’s elites have significant financial resources. An acre of land in either downtown easily goes for over $1 million, even higher than in Bangkok. While other factors have contributed to the rise, one of the major culprits is the lack of alternative investments. Banks aren’t trusted and moving money overseas is difficult. So people store their wealth in fixed assets like property, gold, and gems.

At the same time, there is a dire lack of credit in the countryside. Those who don’t have collateral must rely on informal loans with interest of 10 percent per month. The state agricultural bank lends farmers barely a third of what they need to cultivate their land. Private banks are prohibited from lending to farmers at all — one of many needless restrictions inherited from socialist days past. The result is a system in which capital can’t get to the rural sector, and more money will not fix this core problem.

"Sanctions were the cause of Burma’s economic problems."

Not if you look closely. Sanctions did affect Burma’s economy, but they were not the biggest problem faced by the private sector. Talk to businesspeople in Yangon and Mandalay and they’ll tell you that the biggest challenges they’ve dealt with over the years were electricity supply, political instability, and corruption, all factors well within the government’s control. Sanctions were the next biggest obstacle because of the additional costs imposed by the U.S. financial services ban and the loss of the large American export market. Many other factors, including poor infrastructure, arbitrary decision-making, and the lack of an impartial judiciary also made business in Burma costly. For most companies, sanctions were a modest part of the challenges of doing business.

Sanctions were originally conceived as a response to human rights problems in Burma, but now they’ve outlived their usefulness. The biggest and best-connected companies, which sanctions are supposed to target, have the financial resources and international connections to circumvent them. Those without these resources — the small and medium enterprises (SMEs) that are so vital for Burma’s development — bear the brunt of sanctions. Sanctions weren’t the major cause of Burma’s economic problems, but keeping them will not help address human rights concerns and will hinder reforms and development.

"Old ways of doing business are quickly changing."

Unfortunately, no. While Burma’s political structure has changed, the politics of the economy remains much the same. The International Crisis Group (ICG) argued in a July report that "the system of monopolies and access to licenses, permits and contracts is being dismantled," but the evidence suggests more nuanced changes. Though ministries are professionalizing and opening to outsiders, navigating bureaucracy and accessing decision makers still depends intensely on personal connections. For example, foreigners investing in mining must now partner with one of 38 companies on a government approved list. The same applies for oil and gas, though the list is reportedly around 60. While some listed companies have expertise, others are simply beneficiaries of a needless intrusion into the decisions of private companies. Getting on those lists, and doing successful business in general, is still very much about who you know.

Recently privatized state-owned enterprises are mostly falling into the hands of the urban elite in Yangon, Mandalay, and Naypyidaw, people who have the connections and capital. Since the country lacks a strong taxation regime, Burma’s people won’t even enjoy much additional tax revenue from the newly privatized companies. Contrary to the stated goal of promoting the country’s development, many of the reforms are in fact enabling the "oligarch-ization" of Burma. The old ways of doing business will influence Burma’s economic trajectory for decades, much as they have elsewhere in Asia.

"Dramatic reforms are happening, and more are inevitable."

Not as much as you might think.Naypyidaw has taken some important steps to liberalize the economy, such as exchange rate reforms and loosening import regulations. But on the whole, it’s the political reforms that have been more dramatic. New legislation on the economy has left much to be desired.

The battle over the economy is not between "hardliners" and "reformers." Very few people in Burma, even those that benefited from the previous system, look back on the past with nostalgia. Instead, the conflict is over the shape of the new economic order. On one side are businesses that would benefit from opening up to international markets, and consumers who have long been limited to overpriced and substandard goods. On the other are those who built their businesses under the previous economic order, and who could lose them if the country opens up too much or too quickly. The battle isn’t over whether to reform but how to do it and who will benefit.

The debate over a new foreign investment law, which was passed earlier this month by parliament but appears unlikely to be approved by President Thein Sein, shows the contending forces at work. As part of the government’s bid to attract foreign investment quickly and in large amounts, preliminary drafts of the law contained numerous concessions. As debate progressed, local businesses pushed back. They demanded numerous restrictions, including a $5 million minimum for investors, restrictions on "low technology industries," and a limit of 49 percent ownership for many foreign partners in joint ventures. The final version of the law represented a hard-fought compromise that met with little approval from foreign investors.

Missing from the agenda are some of the most urgently needed economic reforms, especially in agriculture, where 70 percent of Burma’s people work. Two of the most prominent agricultural reforms, both relating to land, have been widely criticized for facilitating corporate land grabs and creating politicized land management committees. This legislation has done to little help Burma’s average farmers.

"Reforms will help reduce poverty and bring broad-based economic development."

Wrong. That the current economic reform program will bring broad-based development is the greatest myth of them all. The reforms to date are a mixed bag, with positive ones such as currency liberalization mixed with poorly designed moves like the new land laws. Reforms of limited benefit for broad-based development, such as the new laws on foreign direct investment or Special Economic Zones (SEZ), are crowding out debate on more important issues.

Burma’s leaders have yet to adequately address the most pressing concern for the countryside, which is that most farmers, in this overwhelmingly rural country, can’t make money farming. The cost of inputs has risen with inflation while prices have dropped due to an appreciating exchange rate. The result is widespread indebtedness. The public goods needed to improve productivity and farm gate prices, such as good roads, ports, irrigation, and communication, are lacking. Instead of fixing the core problems, the government is allowing elites to set the agenda. Contract farming is on the rise, which allows companies with privileged access to lend credit and inputs to farmers, who have no recourse to any alternatives. The fact that some agricultural businesses reap big profits while farmer’s lose money vividly illustrates the distortions that affect Burma’s economy.

Fixing the problems of the rural economy requires a long-term strategy to increase worker productivity, build a viable manufacturing sector, and direct resource revenues into productive investments (especially infrastructure). This should not entail offering foreign investors myriad tax breaks, which will only starve the government of revenue. Broad-based development will come only by understanding and addressing the problems that affect Burma’s masses. There’s still a very long way to go.