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Economy

Myanmar's democracy dividend begins with an economic re-boot

The stunning victory of Myanmar's National League for Democracy in the country's Nov. 8 election was, above all, an expression of the people's desire for freedom.

     Inspired by the NLD's message of "change," it also reflected a yearning to rise above the wretched poverty that today is the lot of most of Myanmar's citizens.

     The outgoing administration of President Thein Sein made some progress on tackling this bleak economic reality. After a tentative start in early 2011, a series of economic reforms rolled out from early 2012. Among key changes, Myanmar's currency, the kyat, was nominally floated -- ending a badly distorted exchange rate regime; a new foreign investment law was passed; banks gained new freedoms (prompting the appearance of ATMs, debit and credit cards, and similar accoutrements); import tariffs and quotas were lowered; the central bank was given greater autonomy; and foreign banks and telecommunications operators were allowed in.

     Politically, too, the country opened up, while a freer press ensured the government's shortcomings were covered in detail.

     And yet, the fundamentals of Myanmar's economy, the structural levers of economic power, remained largely untouched. Accordingly, and as the government matured, the reform momentum slowed to a virtual halt -- and even began to reverse on some fronts. Discouraged by a fall in the kyat, the government once again resorted to its interventionist instincts in foreign exchange markets -- launching a concerted campaign against "dollarization" of the economy and imposing restrictions on companies' foreign exchange dealings. As a result, dollars grew scarce.

     The list of areas barred to foreign investment increased, while modifications to existing investment laws to harmonize the treatment of foreign and local investors were quietly shelved. Of the varied sectoral freedoms extended, many were accrued by Myanmar's infamous "cronies," whose skills as entrepreneurs were usually and narrowly confined to an ability to extract concessions and permissions -- in markets otherwise still tightly bound in a licensing regime as ubiquitous as it was suffocating.

     Foreign banks came in as allowed, initially limited to nine. But they were so hemmed in by restrictions they could really only lend to other foreigners. Banks now had ATMs and credit cards, but they could not charge the interest rates they needed to, could not make long-term loans or loans without collateral, could not lend to farmers, and were not even allowed to decide their opening hours. Most banks in Myanmar remained little more than elaborate pawn shops. As polices took shape in recent years, a banking facade was created just as, in many other ways, a reform facade was draped over the economy as a whole.

Awkward inheritance

The new NLD-led government will thus inherit responsibility for an economy only partially reformed, and in a very poor state. Structurally little altered under the government of Thein Sein (the resource extraction, energy and agricultural sectors continue to dominate output and growth), Myanmar has dysfunctional policy-making institutions, degraded and missing infrastructure, energy shortages, insecure property rights, a distrusted currency and rudimentary financial instruments, a poorly-educated and equipped workforce, and ethnic and religious conflict -- which means that the country does not yet have a single unified economy.

     The macro-economy is also facing heavy weather. Myanmar has large budget and current account deficits, high inflation (predicted by some economists to be 13% by year's end), and an increasingly volatile exchange rate.

     The budget deficit is a function of both spending and revenue problems, the former a consequence of bloated military spending, the latter of poor tax collection capabilities and of largely unprofitable state-owned enterprises which, combined, yield roughly the same magnitude as total taxes. In addition, such income sources still seem to have difficulty finding their way into government coffers.

     Given all these problems, the task of financing Myanmar's budget deficit continues to fall to the central bank -- thus stripping it along the way of the notional independence it is meant to enjoy.

     It is no exaggeration, then, to say that Myanmar's new government faces a steep and rocky path to true reform.

     Against that, possibly no government anywhere, at any time, will come into office with such a powerful mandate for change, nor with such committed and enthusiastic supporters. The downside of this is soaring expectations among the public and countless interest sectors for fast and dramatic improvements. The upside is a wellspring of goodwill and political capital that could help an NLD-led government "absorb the losses," to use a banking analogy, from disappointed hopes.

     In its goal to deliver change to Myanmar's economy, the NLD is shaping its policies in a range of areas, for rapid implementation after it takes the reins of government by the end of March.

     On the macroeconomic front the NLD's approach emphasizes fiscal prudence, comprising restraint on the spending side and, with respect to revenues, improved taxation and state enterprise reform. These in place, coupled with reforms to Myanmar's nascent treasury bond and bill markets (to allow competitive yields to drive sales) should thus finally add de facto to the de jure independence of the central bank. Still on the financial side, the NLD has drawn up some significant liberalization measures to allow for sustainable microfinance institutions (constrained up to now by restrictions imposed at the behest of local banks worried about competition), and for the banks themselves, to be the genuine capital-aggregating and allocating intermediaries that Myanmar needs them to be.

Agriculture a priority

Agriculture will be a major priority of NLD economic policy. Neglected when it has not been deprived by state and military exactions, farmers in Myanmar routinely have had little freedom in deciding for themselves what, how and when to produce. They lack access to markets, and even face barriers in selling their produce outside of the states and regions to which they belong. They lack access to affordable credit, which means that any surplus they do make is effectively transferred into the hands of moneylenders charging 10-20% interest per month. Meanwhile, much agricultural land has been seized in recent, as well as earlier years by the military, related parties, and even foreign companies granted "special" (that is, extra-legal) privileges.

     The NLD has committed to extending production freedoms to farmers, initiating the creation of a viable formal rural credit system, and combining with local and international partners to finance and build the critical infrastructure needed to connect farmers to markets. The promotion of land reform and compensating justice is likewise central to the NLD's efforts to deliver land security; so, too, are the productivity-enhancing benefits that flow from the certainty allowed to rural investment.

     Admittedly, an NLD-led government in Myanmar has some aces in hand that were unavailable to previous governments, especially in terms of favorably disposed international partners. On the private sector side, this can be seen in the very significant volumes of foreign direct investment (much of it from Western countries) that has been sitting on the sidelines awaiting the result of the elections, and the subsequent political settlement.

International support

Should all go smoothly through inauguration day next year, there is likely to be a significant volume of FDI, much of it channelled in close consultation with Myanmar's government and institutions, and with a large employment "footprint" -- in keeping with the NLD's emphasis on job creation. Likewise for international assistance: Much in the way of support from the International Monetary Fund, the World Bank, and the Asian Development Bank has been allocated already to Myanmar. But much more from governments and agencies that have been nervous about home reactions to exposures in Myanmar can be counted on, too.

    With such support, and with greater budget allocations from an NLD-led government, the task of enhancing Myanmar's human capital can finally begin. Spending more on health services and education, and improving the methodologies and technologies of their delivery, is at the policy heart and soul of the NLD, and dear to its keenest supporters.

     Myanmar is nearer to the changes it needs than at any point since it gained independence from Britain in 1948. Back then, as now, the transition generated skyhigh expectations. So too, did people's hopes soar in the 1990 election when the NLD won a crushing victory at the polls -- only to see it annulled by the junta. This time, the chance must not be snatched away. Nor must impatience attend what will inevitably be a messy redemption. Instead of a road to nowhere, the former pariah nation and its autarkic economy might just be turning the corner toward home.

Sean Turnell

Sean Turnell, associate professor of economics at Macquarie University, is an economic advisor to Aung San Suu Kyi, leader of the National League for Democracy. He is author of Fiery Dragons (2008, NIAS Press) about Myanmar's financial system. These are his personal views.

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