Myanmar's precarious opening

By Kim Jolliffe, May 24, 2012 ....

CHIANG MAI - With Myanmar's pariah status now a thing of the past, the world's leading multilateral lenders look set to move in. While foreign assistance will be crucial to the emergence of a functioning economy after decades of military mismanagement, investment alone will not be the answer and opening too quickly poses numerous risks to the country's highly underdeveloped economy.
The World Bank recently opened an office in Yangon, stating on the occasion that it has "re-engaged" with the country. The Asia Development Bank (ADB) followed suit by confirming that it is considering a phased resumption of lending and is close to beginning capacity development and institutional support. Myanmar's government currently owes around US$500 million in unpaid loans to the ADB dating back to the 1980s.

"ADB envisions its re-engagement with Myanmar to proceed in three overlapping phases," said an ADB representative. In line with phase one, "ADB staff are on frequent missions to Myanmar and in the field doing assessments in coordination with other development partners. The sectors and areas [focused on] include transport, energy, and agriculture."

The bank expects soon to launch phase two, which will include "comprehensive sector assessments" the provision of "capacity and institutional support" and "project preparation". Phase three will be contingent on previous phases and include a "resumption of lending operations, subject to satisfactory progress in the country's engagement with the international community and clearing of its [arrears]."

Maung Maung Lay, vice president of the Union of Myanmar Federation of Chambers of Commerce and Industry, a local trade group, believes the ADB and other multilateral lenders have plenty to offer the country. "We welcome all developmental partners, holding no stigma or prejudice ... as long as it can be meaningful and productive ... If the lending conditions are favorable and non-binding we should welcome them, wherever the source."

According to sources close to President Thein Sein's economic advisory office, government coffers are not sufficient to sustain recently launched economic reforms. With foreign exchange reserves estimated at around $8 billion, or a paltry $130 per capita, his government has prioritized re-engagement with multilateral lenders and other international donors to help undertake extensive infrastructure and capacity development programs.

At the same time, the risks associated with developing countries liberalizing their economies too much, too fast are well documented, both in Asia and across the globe. Certain African country experience shows that restructuring government spending to repay international debts can exacerbate already widespread poverty.

So what is best path forward for Myanmar's underdeveloped and mismanaged economy? Ever since a bloody crackdown on pro-democracy protests in 1988, Myanmar's international reputation has been in tatters. The lack of legal protections for foreign investments, corruption levels among the worst in the world, and a poorly managed fiscal policy framework all conspired against offers of multilateral lending assistance.

Recent reforms have been designed and coordinated specifically to restore multilateral lender confidence in the country's new direction. The most publicized changes so far have been in the political arena, marked by the release of thousands of political prisoners, allowances for opposition icon Aung San Suu Kyi and her political party to enter parliament, and efforts to resolve ongoing ethnic conflicts.

These were all central demands of the United States and European Union, which have respectively eased and suspended their long-held economic sanctions in response. The US and EU essentially hold the keys to big multilateral lenders, including the World Bank and International Monetary Fund, and to a lesser degree the ADB. The EU's suspension of sanctions in April rolled back a ban on providing developmental assistance to Myanmar, including through international financial institutions. The US also passed a waiver that gives its support to the resumption of multilateral lending.

The ADB said that many factors will influence its decision to resume lending. "In order to successfully promote economic growth while maintaining macroeconomic stability, Myanmar must improve its business climate to increase investments." The ADB also emphasized the need to "raise productivity and enhance competitiveness, guard against inflationary pressures, promote balanced public spending, and maintain a conservative debt strategy."

It's a long list of demands aimed essentially at making Myanmar safe for multinational corporations. New foreign investment-related laws have recently been implemented and anti-corruption and labor rights legislation is being drafted. In April, Thein Sein's government took steps to bring its previously over-valued fixed currency, the kyat, in line with black market rates. Notably, the distorted dual rate system was a major concern of potential foreign investors.

While such moves have been lauded, there is still a long way to go before the prerequisites for full re-engagement with multilateral lenders are completely met.

"To gain trust, we will have to restructure and amend our monetary and fiscal policies as well as the laws pertaining to them. To do so, we are now seeking advice from the [multilateral lenders] and the government seems to be listening," said Maung Maung Lay. "[Due to economic sanctions] we have been only able to import from neighboring countries. They are taking advantage by dumping in Myanmar - the quality of all commodities is very low. Also, employees of course wish to work with the Western companies because of the benefits and the salaries."

Desperate needs
Better inputs and higher pay are two of many advantages Western companies are expected to bring to Myanmar's laggard economy. On a macro-level, the country is in desperate need of infrastructure, including modern roadways and reliable power sources, multi-billion dollar investments which will depend on deep-pocketed foreign investors and multilateral lenders.

The majority of investment in Myanmar since the 1980s has come from countries motivated primarily by strategic interests, including natural resource acquisition. In many cases such investment has been facilitated by export-import loans, meaning that the capital has often been deployed to contract services particular to individual projects rather than Myanmar's larger development needs.

Furthermore, particularly in the case of projects led by China, skills and technology transfer have been almost non-existent, while peripheral contracts ranging from road construction to entertainment venues for Chinese workers have been given to military strongmen and their associates who have guaranteed Chinese companies' security in often restive ethnic areas.

According to Adam Simpson, author of a recent paper about the ADB's progress in Myanmar for the Lee Kuan Yew School of Public Policy, "Compared with the open plunder of Myanmar's resources by the military elite, their cronies and transnational corporations from China and other neighboring countries, the ADB offers a level of participation and transparency that could be extremely beneficial to a more sustainable approach to development, both socially and environmentally."

Simpson, however, also warns that the risks of engagement with the likes of the ADB and World Bank are many, especially if the country opens up too fast to the orthodox neo-liberal free market policies often encouraged by multilateral lenders.

"Both the government and [international financial institutions] should ensure that they are open to non-market approaches to development," he said. "Such that, for example, appropriate subsidies are continued during the transition of Myanmar's political economy to ensure that the neoliberal 'shock therapy' applied to Eastern European countries is avoided and that the welfare of the poorest of Myanmar's communities is improved."

The "shock therapy" Simpson notes, is widely cited as one of the major risks that developing countries face when engaging with multilateral lenders. If countries are encouraged to liberalize their economies too fast, the argument goes, they become overly vulnerable to exploitation by multinational corporations, without any guarantees that their development needs will be met or economic growth will be inclusive.

There are early warning signs this could happen in Myanmar. The government and local private sector are already overwhelmed with visits from potential development partners, and it is clear that both lack the capacity to manage the inrush.

"Most of us were caught by surprise," said Maung Maung Lay. "We have no capacity to digest things. In particular, we are lacking human capital. The influx has overwhelmed us ... It could be at least five years for us to be ready."

Poverty is widespread in Myanmar, owing considerably to protracted neglect of civilian needs due to decades of high military spending and a poorly managed economy. While the World Bank and ADB assert that poverty reduction is their main aim - indeed the tagline of the World Bank is "Working for a World Free of Poverty" - their loans and programs have been widely criticized for exacerbating such issues, especially in Africa.

One main criticism is the priority the World Bank and International Monetary Fund have historically placed on requiring developing countries to repay debts incurred by previous governments at the expense of developing crucial sectors such as health and education. Both sectors have been chronically neglected in military-run Myanmar.

In other cases, the World Bank has pressured for the privatization of those same sectors, often before the population can afford the higher prices of private services. An Oxfam report published in 2009 noted that "over half the health-care provision in Africa comes from the private sector" and that the World Bank played a "significant role" in the failure of state health services through "enforced public sector spending cuts and wide scale restructuring." The report concluded that the higher priced private services were of an equally low standard as previous state services.

More than investment
Jared Bissinger, a former economics tutor from Macquarie University who now lives in Yangon and works as a consultant for Vriens and Partners while completing his PhD thesis on the country's business environment, argues that more investment is a small part of what is needed for meaningful economic reform in Myanmar.

"A lot of people in the government are putting a lot of emphasis on getting foreign investment now. But it was never the lack of FDI [foreign doirect investment] that was the problem and it's not going to be the solution now," argues Bissinger. "One of the most important problems is that the country's economy is just very bad at directing savings and wealth into productive uses. There are lots of technical and legislative barriers that prevent people's wealth from being put to productive use, from being invested into the economy."

Indeed, there are myriad indicators that there is plenty of money in the country that is being hoarded rather than mobilized. This was apparent last year when tariffs were reduced on automobiles, suddenly making them more affordable to a wider section of the population. Within months thousands of new cars were on the streets, despite price tags of US$20,000 and higher. A recent rapid rise in property prices indicates more of those stashed funds are being converted from cash to other asset classes.

At a macro-level, too, the country has billions of dollars worth of realized and potential earnings from natural resource sales, revenues which were poorly managed, pilfered, and disproportionately spent on the military by the outgoing regime.

"I think that domestic investment is much more important," said Bissinger. "Not for the country's GDP [gross domestic prdouct], of course, but for encouraging development. I think that is much more important in the long-term than getting a few foreign investors into the country."

Still, the policy and legislative changes needed to bring Myanmar's economy out of isolation and more firmly into the global economic order will require various forms of capacity building. It is a process that will inevitably cost millions of dollars in consultancy fees and associated costs, and will simultaneously open the country to a potential new form of foreign exploitation.

Western official sources in Yangon confirm that some pro bono support will be granted by EU member states and others, but acknowledge that much of the capacity building will come from costly multilateral lenders. With the chances of regression back to totalitarian rule fading, Myanmar's economy seems certain to enter a new era of both openness and vulnerability.

We can only hope "they are here to help us and they wish to alleviate our problems and come in good faith," said Maung Maung Lay.

Kim Jolliffe is a research and analysis consultant focusing on politics, security and humanitarian issues in Myanmar.

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