Why Burma Shouldn’t Listen to the IMF

If Burma's leaders really want to revive their economy, they can start by giving a cold shoulder to the Washington Consensus.

BY RICK ROWDEN | MARCH 27, 2012   ...

Burma is at a crossroads. While the country's dramatic (and fragile) political opening is receiving plenty of attention, its leaders are also confronting some stark decisions about their economic future. After decades of economic isolation, the economy of Burma (also known as Myanmar) is badly in need of reforms than can better promote development. The choices that Burma's government makes in the coming months could well determine what the country will look like 30 years from now: an industrialized South Korea or a resource-cursed Nigeria.

According to current academic and policy debates, a developing country can integrate into the world economy in one of two basic ways: rapidly, under the free trade/free markets principles of the Washington Consensus policies favored by the World Bank and the International Monetary Fund (IMF), or more gradually, based on an approach that initially provides domestic industries with trade protection, subsidy support, and technological support until they are mature enough to compete with global companies. Like Burma's partners in the ASEAN free trade agreement, the World Bank and IMF will likely be urging Burma to opt for the rapid integration approach. 

Coinciding with its political opening, Burma's leadership has taken steps to deepen the pool of foreign investors in the economy beyond the traditional influence of neighbors China and Thailand. It has also invited the policy advice of western donor agencies such as the IMF and the World Bank and welcomed a range of views on future development policies, from advocates of the Washington Consensus to long-time critics of that approach, such as Nobel laureate Joseph Stiglitz. It remains to be seen which path Burma will follow.

The IMF has already sent several delegations to the country and is assisting the government in unifying its complex system of multiple exchange rates for the currency, the kyat, as a necessary first step to other reforms. No one will argue with that. But there are other areas where the advice of the Bank and the Fund on important fiscal, monetary, financial, trade and investment policies deserves critical scrutiny. The wrong decisions could hinder the country's efforts to industrialize successfully.

Regarding monetary policy, the IMF is likely to advocate for an independent central bank with an inflation-targeting regime. Despite new thinking in monetary policy about the usefulness of capital controls or mandating central banks to adopt a broader array of policy goals such as employment and growth, an IMF program for Burma is likely to advocate its standard inflation-targeting model, committing the Burmese central bank only to achieving low inflation by raising interest rates, even at the cost of reduced public investment in development and putting affordable credit out of the reach of domestic companies.

On financial policy, the IMF and World Bank are likely to suggest that Burma's companies rely on private international banks rather than public development banks, an approach that could also contribute to keeping affordable commercial credit out of the reach of many local companies.

On financial policy, the IMF and World Bank are likely to suggest that Burma's companies rely on private international banks rather than public development banks, an approach that could also contribute to keeping affordable commercial credit out of the reach of many local companies.

Although Burma has recently made efforts to increase social spending, critics of the IMF's brand of fiscal restraint caution that it could prevent Burma from making the big, long-term capital investments that are needed to build up the underlying transportation, health, and education infrastructure upon which future productivity depends. For example, the 2008 Spence Commission on Growth and Development warned that the IMF tends to see public investment as a short-term stabilization issue, and has failed to grasp its long-term growth consequences. If low-income countries are stuck in a low-level equilibrium, then putting constraints on their infrastructure spending may ensure they never take off."

On trade policy, the IMF and World Bank will echo Burma's ASEAN partners and advise it to lower its trade protection rapidly, even before its new and small industries are strong enough to compete in international markets, thus threatening to block its future industrial development. And the apostles of the Washington Consensus are also likely to advise Burma to focus on its present (static) comparative advantage in natural resources extraction rather than adopting a strong industrial policy to develop its future (dynamic) comparative advantages in manufacturing and services.

By contrast, other critics of the Washington Consensus model, such as the United Nations Conference on Trade and Development (UNCTAD), encourage developing countries to increase public investment and build strong developmental states with institutions capable of executing effective industrial policies. Opponents of industrial policy are correct in pointing to some very unsuccessful previous efforts in developing countries. But they are often selective in their criticisms, ignoring successful cases, and do not account for why industrial policies worked so well in the U.S., Europe, and East Asia but failed so badly in Africa and elsewhere. UNCTAD argues that history says more about how industrial policies should be implemented -- not if they should be implemented.

Stiglitz cautions other developing countries: "Don't do as the U.S. says, do as the U.S. did." By this he means that rather than following the Washington Consensus advice for rapid global integration, developing countries should do what the rich countries did: develop domestic industries first, then open up gradually later on.

One problem facing Burma's leadership is that much of this history of what the rich countries did during their own early decades of economic transformation into manufacturing and services is no longer taught in most university economics departments. History shows that, although each case is unique, all countries that have industrialized successfully have usually done so first behind high levels of trade protection and subsidy support -- often for decades at a time -- and only liberalized their trade once their firms were able to be competitive in overseas markets, not before. Britain, the United States, Europe, Japan, Singapore, Hong Kong, South Korea, Taiwan, and China assigned a strong role to the state with temporary trade protection, public development banks or central bank policies that provided long-term, cheap commercial credit and extensive public technology policies to advance R&D and innovation -- almost precisely the opposite of the Washington Consensus advice of today.

Critics warn that how carefully Burma decides on the timing, pacing, and sequencing of opening its domestic industries to the global economy will be of vital importance. Many are worried that economies such as those of Burma, Cambodia, and Laos are not truly ready to join others in the ASEAN free trade agreement by the date (2015) to which they have committed.

At the moment, most foreign direct investment (FDI) coming into Burma is focused on the extractive industries of oil, gas, and hydropower. There is also interest in developing ports on the country's Indian Ocean coast that could connect with India and serve as alternative routes for Chinese shipping, which today must go through Southeast Asia's U.S.-patrolled Malacca Strait. But rather than simply throwing the doors open to any and all kinds of FDI, Burma's challenge is to use an industrial policy to help attract the types of FDI into its manufacturing and services sectors that will train the Burmese workforce in skills and technology. This is precisely what Burma needs if it is to move up the next rungs of the development ladder. Burma also needs FDI that will provide business for other small manufacturing and services firms in the domestic economy, something less likely to occur in "special" economic zones already being planned. While the IMF and World Bank often refer to the "private sector" in the abstract, Burma needs to think more explicitly about how the needs and interests of its own small and medium-sized enterprises (SMEs) are different from those of foreign investors, and take steps to support them accordingly.

Of course, those making the case for building a strong developmental state in the current national context of Burma face a serious challenge. Many feel that the government has already helped a handful of large and well-connected companies too much, and that this has not benefited many smaller companies. So it is understandable that, on the face of it, arguing that the state should continue to provide such strong support for domestic companies may seem inappropriate. But if Burma wishes to pursue an industrialization-based development model like the one used by some of its East Asian neighbors, its leaders should carefully consider what roles the state will need to play in enabling SMEs to grow into larger and more competitive firms, and take steps to preserve its policy space. Critics warn that the ability of the state to provide this support with trade protection, subsidized credit, and technology is likely to be greatly undermined if Burma adopts the Washington Consensus approach.

Which direction Burma's government will choose remains unclear. One hopes that its leaders will take the time to carefully consider integration into the global economy on their own terms and not be rushed into taking important decisions because of commercial pressure from others. South Korea or Nigeria? The choice is up to Burma.

http://www.foreignpolicy.com/articles/2012/03/27/why_burma_shouldn_t_listen_to_the_imf?page=full