Myanmar’s economy confronts tough policy challenges

Author: Lex Rieffel, Brookings Institution

The global policy community has focused on the political challenges facing the government of President Thein Sein in Myanmar and paid little attention to the economic challenges.

 

Yet without economic improvements at the grass roots, political progress may founder. Urgent policy challenges confront almost every aspect of the Myanmar economy. Here are the top 10 issues.

The single biggest source of Myanmar government revenue is hard currency earnings from exporting natural gas. A widely held view is that a large portion of these earnings is siphoned off into the pockets of powerful people. The credibility of the Thein Sein administration will depend greatly on how quickly it moves to show that the earnings from natural resource exports are being used for social development purposes. In an encouraging sign, President Thein Sein recently went on record to support Myanmar’s participation in the Extractive Industries Transparency Initiative.

The single most important economic policy measure adopted by the Thein Sein administration so far was abandoning the grossly overvalued official exchange rate and moving to a managed float on 1 April 2012. The April move is just one of many steps required to achieve the ultimate goal of complying with Article VIII of the IMF Articles of Agreement (removal of all restrictions on the purchase and sale of foreign exchange for the export and import of goods and services). Myanmar will need to proceed expeditiously because it is scheduled to host the Southeast Asian Games in 2013 and the East Asia Summit in 2014.

Seventy per cent of Myanmar’s population lives in rural areas where livelihoods depend primarily on agriculture. Boosting productivity to ASEAN-average levels will require improving land ownership, crop credit, floor prices, extension services, infrastructure and related areas. From its first day, the Thein Sein administration stressed the importance of the agricultural sector, but 15 months later there is still little to show for these efforts.

Land ownership and control is a crucial issue also in connection with urbanisation, infrastructure and other projects. Two land laws were considered in the legislative session that ended in early May, but both drafts have been criticised for potentially contributing to land alienation. The current session of the legislature is expected to revise these laws, but the odds seem stacked against a result that provides assured tenure to smallholders and fair compensation when land is acquired for public purposes.

Myanmar suffers from a ‘resource curse’ as severe as any other country. It has been most visible in connection with natural gas and timber exports. Mining projects are causing considerable damage to the environment and to people’s livelihoods. Jadeite mining in particular seems to be out of control. Foreign investor interest in Myanmar’s mining sector is intense, which suggests that the problem is likely to get worse.

The Than Shwe government systematically exploited Myanmar’s natural resources for sale to neighbouring countries, but the Thein Sein administration has taken small steps to shift the output mix in favour of domestic consumption. With foreign exchange reserves above a comfortable level, the benefits of exporting power seem low relative to the benefits of providing a reliable supply to domestic households and industry.

A sound banking system is essential for building a competitive economy and raising standards of living. Public trust in the system is low because of three demonetisations within memory and a serious banking crisis in 2003. Fortunately, most financial sanctions imposed by Western countries have been suspended or removed recently. Myanmar’s private and state-owned banks are working overtime to modernise, but they are constrained by existing regulations issued by the Central Bank of Myanmar, which is not up to ASEAN standards.

Myanmar remains unconnected to its five neighbouring countries by a single railroad or highway. Construction is now underway on highway connections to India, China and Thailand, and could begin soon on railroad links to China and Thailand. One of the best opportunities for Myanmar to leapfrog the development of its economy is in the communications sector, where telephone and internet penetration are among the lowest in the world. In an apparent breakthrough in mid-July, the government announced that it will invite foreign companies to form joint ventures with the state-owned telephone and internet companies.

In its early months the Thein Sein administration made clear its commitment to enacting a new Foreign Investment Law. A draft was submitted to the legislature toward the end of 2011, but the first session of the legislature in 2012 ended without a consensus text. Though passing the new law appears to be a top priority for the second session that began in July, considerable uncertainty surrounds substantive and procedural aspects of this law. The uncertainty is symptomatic of two challenges faced by the current administration: transparency and decision making. In another breakthrough, on 9 July the government media began publishing the texts of all draft laws being discussed in the legislature.

Conceivably, the biggest problem facing the Thein Sein administration today is the tidal wave of visitors. The worst impact is on senior policy officials, who are spending considerable parts of every work day meeting with visitors, leaving insufficient time to make good policy decisions and even less time for effective policy implementation. A donor conference was held last May in Mandalay. One of the results cited in press reports was an ‘historic commitment’ to respect the guidelines that emerged from the 2011 High-Level Forum on Aid Effectiveness in Busan, South Korea. Translating this commitment into reality will not be easy.

Lex Rieffel is a Nonresident Senior Fellow at the Brookings Institution, Washington, DC.

This is an abridged version of a paper co-authored with Khin Maung Nyo and presented at the ‘Myanmar in Reform 2012’ symposium, organised by the Faculty of Social Sciences of the University of Hong Kong and the Center for Myanmar Studies of Yunnan University, held on 18–20 June 2012.

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