Four Decades of Isolation Have Taken Their Toll on Burma’s Battered Economy

Asia Sentinel | April 16, 2012   ...

Don’t imagine that restoration of Burma to normalcy and a degree of prosperity will be quick. Even under the most favorable local and external circumstances, it will take years to make up for four decades of decline and to rebuild the stock of human and physical capital that once made it the most prosperous, best-educated country in mainland South and Southeast Asia.

'The lack of skilled people in the relevant ministries means reform will not happen overnight.' 

Democracy icon Aung San Suu Kyi has a hold on British policies and is still using sanctions as a political lever — at the expense of the interests of the many who see economic opening up as essential to raise living standards and reduce Burma’s dependence on China. Admired though she is for standing up to the military, she exhibits scant interest in livelihood and economic policy issues.

Nonetheless, Suu Kyi or not, the expectation of a removal of sanctions and a new flood of foreign investment has led to a surge in land prices in the smarter parts of Rangoon — though not, it seems, more generally. How quickly new investment actually arrives depends on many factors, with the speed of ending sanctions and Burma’s policies on foreign direct investment being only two of them. Much infrastructure investment — power in particular — is needed before even labor-intensive industries such as garments can be expanded for world markets.

It is also unclear how many advantages will continue to accrue to the key local conglomerates that have thrived on a mixture of skill, corruption and proximity to the military. Foreign companies entering Burma will likely need their connections to do business in a country where the system would not have worked at all but for institutionalized corruption.

Things are gradually becoming more transparent and the conglomerates may realize that though their influence should diminish as reform proceeds, they need foreign capital and skills if they are to become big businesses by regional standards. At present they are big fish in a very small pond, a country of 60 million of whom only about 13 percent have access to electricity and 3 percent have mobile phones.

The government now has competent local economic advisers as well as outside help. But the statistical base is abysmal and bureaucratic interests in sustaining a web of rules and regulations, many of which defy common sense, will mean that reform will be slower than the government, business or people want.

The primitive condition of the local financial system is also an obstacle — though progress is being made. There are now 18 private banks, several of which are now allowed to do foreign exchange transactions. However, branch networks are minimal, talent thinly spread and banks subject to severe and unusual capital-to-deposits ratio as well as controls on interest rates.

The International Monetary Fund is providing reform assistance but there is much to be done. Credit is growing very rapidly — informally reckoned at 80 to 100 percent annually. The base is very low, with total credit even now estimated at only 30 percent of gross domestic product and private credit only one-third of that. But the rate of increase may be cause for concern by those who remember China and Vietnam at similar early stages of liberalization.

Much has been made of Burma’s gas export potential and there is plenty of foreign interest as new blocks become available. But the nation’s hydrocarbon resources are not huge relative to the population and many consider that the multiplier effects would have been much greater had more of the gas been used to electrify the country rather than selling it to foreigners — and providing a stream of dollars to the well-connected.

The big issues for the future should start as they did in China and Vietnam, with agriculture and low-tech industries such as garments, both of which can thrive with little capital but sensible policies. The potential of agriculture is at least as great as it is in Thailand, and wage levels for the unskilled are roughly the same as Bangladesh. Tourism too has a bright future — but for now there are insufficient hotels and flights.

The United States has promised to ease financial sanctions but the details are not yet known. US sanctions come under several headings and are a complex mix of executive orders and laws that can only be removed by Congress — not easy at the best of times, let alone in an election year.

The financial sanctions will probably be gone soon. They are especially important because they complicate all settlement issues, not just ones involving the United States. Investment sanctions will also likely go soon but trade and sanctions on lending by financial institutions such as World Bank and Asian Development Bank will probably remain until Congress can be prevailed upon to remove them.

European Union sanctions may mostly be removed sooner — a decision is expected this month. But the British in particular are said to be dragging their feet because of Suu Kyi’s obstinacy.

The April 1 announcement that Burma would unify its exchange rate and begin a managed free float is an obvious step toward a normal economic system, but it was rather less than it seems. Hitherto the official exchange rate of six kyats to the dollar was roughly 1/15th the rate prevailing in the informal market, which in turn was one of several actual rates depending on the nature of the trade. The new rate began trading at a daily central bank auction at 820 kyats to the US dollar and has moved only marginally.

However, most actual deals are done elsewhere in any case. The first object of a new central rate was to find a realistic benchmark — 827 — for the government’s budget. It thus delivers a big rise in kyat income from oil and gas exports but also an increase in the costs of the many industries that had been enjoying one unrealistic rate or another for imports. State-owned enterprises and military-backed companies are assumed to be the losers but a lack of transparency makes it impossible to tell winners from losers in any detail.

For the majority of import and export deals outside the oil and gas sector, the new quoted market rate for the kyat is a welcome sign, intended as a steadier version of the old gray market rate, which had been very volatile.

Under this, any importer must match his or her currency requirement with an exporter. Hence, in reality different rates continue to prevail — though probably within 5 percent of so of the official market rate. This rate is established by a daily process at the central bank netting off demand and supply among a few institutions. The central bank can intervene to smooth changes or to accumulate reserves if there is a surplus of dollars.

There is no shortage of dollars in the system, which explains the strengthening of the kyat in recent years. Balancing imports and exports leaves little room for absorbing capital inflows, which have been significant, mainly for the oil and gas industry and Chinese investment in infrastructure to serve China. It is also possible that unrecorded inflows from remittances and illegal trade in gems, drugs, etc. more than outweigh unofficial imports across the China and Thailand borders, and the bags of dollars brought in to speculate on land and other commodities.

So strong had the currency become that last year the government relaxed car imports specifically to weaken the kyat. It was an effective move but also demonstrated the absurdity of the trade licensing system. Many more badly needed imports are in short supply.

Reforming the system is on the government’s agenda but the lack of skilled people in the relevant ministries, as well as vested interests in a system that provides innumerable opportunities for graft at every level, means it will not happen overnight.

Asia Sentinel

http://www.thejakartaglobe.com/opinion/four-decades-of-isolation-have-taken-their-toll-on-burmas-battered-economy/511511