Signs that Burma’s economy is opening aren’t just good news for Western firms hoping to make some money – democracy in the country could depend on it.
Nearly a year since his government took office in Burma last March, President Thein Sein’s program of political reforms continues to surprise and win over critics. In January alone, the government concluded a ceasefire with the Karen National Union, one of the country’s main ethnic insurgent groups, released a second batch of political prisoners, and agreed to the full normalization of relations with the United States. In a press conference in Bangkok ahead of his visit to Burma, U.S. Senator John McCain even let slip the regime’s preferred “Myanmar” rather than “Burma” – a subtle signal of just how far things have shifted.
Amid the optimism about this “Burmese Spring,” investors have turned their eyes towards the potential of the Burmese economy – Southeast Asia’s slumbering giant. As others in these pages have noted, interest is gathering in this untapped market of 50 million, stunted for decades by colossal mismanagement and Soviet-style central planning. Recent visits by U.S. Secretary of State Hillary Clinton and British Foreign Secretary William Hague have raised the prospect that economic sanctions banning Western trade with Burma will soon be scaled back or removed. In the meantime, Asian investors are already making moves into the market, and a Japanese business delegation led by Economy, Trade and Industry Minister Yukio Edano traveled to the country this month.
The country offers massive potential in just about every imaginable sector, from banking, telecommunications, and power generation to agriculture, natural resources, and construction. Douglas Clayton, founder and CEO of Leopard Capital, which operates in emerging markets, wrote recently that “an epic economic catch up marathon seems set to start, and could morph into a sprint if Burma creates the right investment framework.”
Of course, there’s still a long way to go before that framework is firmly in place. As many have pointed out, the country still lacks the foreign investment rules and predictable governing apparatus necessary to attract investors. The banking system is in disarray – most of the country’s overwhelmingly rural population lacks any access to credit – and the local currency, the kyat, is still set artificially at a value more than a hundred times higher than that available on the black market. Import restrictions mean that buying a car – even a battered 1980s Toyota – can still cost tens of thousands of dollars.
Ultimately, however, the health of the Burmese economy should be of interest not just to investors and economists; it could also have a crucial bearing on the country’s political reforms and the long-term sustainability of the “Burmese Spring.” Historically, economic hardship and political unrest have been closely linked in Burma: in September 1987, the government’s decision to demonetize 25-, 35- and 75-kyat notes wiped out the savings of thousands, providing ready kindling for the following year’s seismic anti-government protests. The “Saffron Revolution” of 2007 was similarly sparked, at least in part, by hikes in the price of gas and diesel fuel.
Assuming the government can negotiate the thickets of currency reform and other basic structural changes, the longer-term economic challenges are thorny. Much of the country’s economic dysfunction is a result of the massive fiscal distortions created by the Burmese military, an institutional behemoth that consumes just under a quarter of the national budget, according to official figures. David Scott Mathieson, a Burma researcher for Human Rights Watch, says that while the current political changes have so far been more or less frictionless, few people are willing to discuss this “ultimate reform.”
Military personnel, according to some, are still embedded throughout the country’s governing apparatus.“In the most fundamental way, the state bureaucracy has been thoroughly militarized, that is, run by military officers and ex-officers,” says Maung Zarni, a visiting fellow in the Department of International Development at the London School of Economics. “Honest, capable technocrats and bureaucrats don’t survive in this militarized system of governance.”
Decadesof military rule also mean there are relatively few officials with the necessary education and experience to manage such a complex transition. “It’s a mindset problem. These are people who are used to taking orders, used to being part of a command economy,” Turnell says.
And not all mindsets will necessarily be amenable to change. Just as the military continues to consume large portions of the state exchequer, it also retains a strong grip on much of the private economy. The key event here – and a mostly unheralded one – took place in the lead-up to the November 2010 election, when the Burmese government presided over the largest sell-off of state assets in the country’s history. This privatization drive, according to the New York Times, included factories, port facilities, government buildings and a stake in the national airline. One sale by the state Privatization Committee listed 176 assets, many of them historic colonial-era buildings in central Rangoon that were left empty when the government shifted north to the new capital Naypyidaw in 2005.
While privatization of the moribund state-run economy was certainly a necessary step towards reform, most of the lucrative assets went to a small clique of “cronies” – rich tycoons with strong personal or family connections to the old military ruling establishment. One Rangoon-based journalist, who spoke on condition of anonymity, said that while the Privatization Commission announced the asset sales publicly, “nobody knows” if they were open to public bidding. Maung Wuntha, editor of the outspoken People’s Age Journal, says that the elite had monopolized the economy since the privatizations, kicking back profits to “shareholders” in government. “New entrepreneurs should be encouraged, and they should be treated equally with the cronies,” he says.
The resulting situation – political reforms blossoming alongside the concentration of wealth in a few well-connected hands – bears some resemblance to Russia in the early 1990s. At that time, Moscow’s unregulated sell-off of state assets spawned a class of powerful “oligarchs” who derailed its own halting steps towards democracy. Turnell says he feared that these military cronies, who grew wealthy through preferential access within a restricted system, could “push back” against any future reforms, economic or political, which threaten their interests. “Liberal reforms that will try to inject competition into markets at some point [are] probably going to confront these vested interests,” he says.
On the other hand, one positive aspect of Burma’s desperate economic situation is that small changes could have big pay-offs. Indeed, basic reforms such as the floating of the kyat, the removal of rationing and import restrictions and land tenure reform could all be of great and immediate benefit to ordinary Burmese. Turnell says these would be “quite integral” to the success of the political opening. “The economic dimension could really reinforce any sort of political reform, could become a real force for creating momentum in that,” he says.
A prosperous economic environment could also facilitate moves towards a solution of one of Burma’s most intractable challenges – a perpetual war with ethnic insurgents. Thant Myint-U, the author of Where China Meets India: Burma and the New Crossroads of Asia,says a backdrop of economic growth could facilitate the settlement of long-standing disputes with the Karen and Kachin. “That’s an environment that’s much more conductive to people making the kinds of political concessions they’ll have to make on both sides,” he says.
However the economic reforms unfold, political analysts should pay close attention. With democracy icon Aung San Suu Kyi and her National League for Democracy hoping to sweep parliamentary by-elections on April 1, the immediate attention will likely be on political developments. But as Burma’s spring of reform continues, we shouldn’t only be asking about its impact on the economic climate, but also the reverse: whether the inertia of a moribund economy could drag Burma back towards dictatorship.
“The economy is burdened by half a century of bad policy,” Thant Myint-U says. “Undoing that, and knowing how to sequence the major structural reforms that will need to take place, won’t be easy.”
Photo Credit: Flickr / Magical World