Economic Reform in Myanmar: The Long Road Ahead

February 6th, 2013 by Sean Turnell

Myanmar farmers collect paddy seedlings from flooded fields to replant in Ayeyawaddy Division, outside Yangon, in August 2012. (Ye Aung Thu/AFP/Getty Images)

The political and economic reforms initiated in Myanmar over the last year or so have attracted much favorable attention. Turning around international sentiment and policy toward a country that until now existed in both selfimposed and enforced exile, Myanmar's reform program has given unexpected hope for better times ahead. Whether such hope can be made manifest in more tangible ways, especially for the vast majority of Myanmar's citizens who live in rural areas, and/or the millions who comprise the country's many ethnic minorities, remains a crucial question. Securing an affirmative answer to this will depend upon many things, but not least on the continuing reform of Myanmar's economy. The record of economic reforms actually implemented in Myanmar is a mixed one so far, and one that is rather less stellar than some breathless reporting would suggest. Certainly, at the broad, macroeconomic level there has been much progress. The decision of President Thein Sein to float Myanmar's currency, the kyat, in April 2012 was a most worthy one, and the first real sign of serious reform intent. Injecting a substantial degree of transparency into the foreign exchange earnings of Myanmar's state-owned enterprises whose revenues were hitherto hidden and expropriated through the application of the old and wildly over-valued fixed peg to the U.S. dollar was also a decision that confronted powerful vested interests. Other reform measures, if less heroic than the exchange rate change but valuable all the same, have included the liberalization of some export and import taxes, selected minor freedoms granted to the banking sector, a soon to be implemented opening up of the telecommunications sector, the promulgation of a new microfinance law, as well as a boost to spending on health and education (albeit from a very low base). A new foreign investment law was passed

in November 2012. However, the process leading up to new law brought to the fore powerful protectionist sentiment, much of it expressed by "cronies" who have long dominated lucrative sectors of Myanmar's economy. As a consequence, the final version of this law was not as liberal as it could have been, and recalcitrant elements were revealed whose adverse influence is not yet banished. Putting a capstone on these broad policy measures was the signing (in December 2012) of amemorandum of understanding between Myanmar's government and the IMF on Economic and Financial Policies for the year ahead. These agreed policies, which include commitments to further exchange rate reform, the "capping" of Myanmar's budget deficit to around 5% of GDP, measures to improve taxation revenues and public financial management, as well as efforts to clear international debt arrears, are aimed at improving the country's macroeconomic stability. All are subject to IMF staff monitoring according to various structural benchmarks. Despite these advances at the level of macroeconomic management, conditions on the ground in Myanmar, especially for that vast majority of people who live outside the metropolitan precincts of Rangoon and Naypyitaw, remain dire. Discussions with farmers and others in rural Myanmar almost invariably center upon the refrain that economic conditions are desperate the worst ever experienced. Dire poverty has long been the lot of Myanmar's farmers of course, but I am struck by the swelling tide of testimonies of cultivators unable to make a living, of rising indebtedness, of increasing landlessness, and of broad despair. What is both poignant and frustrating this time around is that some of this is a function of poor exchange rate management. As noted above, the decision to effectively float the kyat was a good one for Myanmar's public finances, but the mechanism for determining the exact level of the currency is flawed, and designates a currency rate that is far too high (by about 40% taking into account Myanmar's relatively high inflation rates). This makes the country's goods (commodities produced by farmers and fishers, manufactures by small-scale factories and artisans) uncompetitive in both world and local markets, while driving down kyat incomes to boot. There are a number of other factors that explain the stark gap between policy pronouncements and the economic "lived experiences" of Myanmar's people, both in the countryside and elsewhere. In this context, one could highlight the problems of policy implementation and of a rigid bureaucracy frozen in fear of innovation and change one that awaits orders from above in the time-honored ways. Likewise, we could also focus on some of the surprising omissions from the reform checklist, including some obvious measures the so-called "low-hanging fruit" that could have a material impact. Again the most egregious missing elements here are in agriculture, where farmers continue to be without production rights (deciding for themselves when, how, and what to produce), there is a lack of investment in functioning infrastructure of the most basic kind (rural roads for instance), and a lack of availability of affordable credit. Investing in all of these areas will be expensive, but not insurmountably so, and not outside the funds made available by scaling back expenditure in unproductive areas, including the military. Of course, one final set of explanations would locate the continuing dire poverty of Myanmar's people, and the lack of any "reform dividend" on the country's incomplete political reform. Most obviously this is the case with the ongoing conflicts in Myanmar's ethnic nationality areas, but especially in Rakhine and Kachin states. In these areas economic fundamentals are missing in their rawest sense. Economists often talk of the importance of property rights. In a situation in which the most fundamental of property rights the right to the security of the person is proscribed, then economic growth and development will assuredly be conspicuous by its absence. The reforms undertaken in Myanmar in recent times have surprised and gratified many. Not unexpectedly, these reforms are as yet incomplete. Pushing on with reform is the announced objective of Myanmar's new government, and the technical solutions are in reach. Willing the process forward, more completely and more expansively, is the job at hand.

http://asiasociety.org/blog/asia/economic-reform-myanmar-long-road-ahead