Myanmar has made a good start to economic reform

Author: Sean Turnell, Macquarie University

Myanmar’s President Thein Sein embarked on a global roadshow in the beginning of 2013.

His welcome in Europe, Australia and New Zealand illustrates the dramatic change in global perceptions with respect to Myanmar over the last two years. The reforms set in train by Thein Sein’s administration are not assured of success. Still, there is no doubt the reforms have garnered significant attention and raised domestic and international hopes.

On the political side Thein Sein’s reforms have been of mixed success. For the country’s ethnic Burmese majority and the residents of major cities their impact has been mostly positive. Political prisoners have been released, Daw Aung San Suu Kyi and the National League for Democracy (NLD) have taken their seats in parliament (which is otherwise stacked by the victors of the greatly flawed elections of 2010), and there are significantly greater freedoms (albeit imperfectly and inconsistently applied) of the press, movement and association. On the other hand, the government continues to adhere to Myanmar’s 2008 Constitution, which guarantees the military a quarter of seats in the parliament and disallows Aung San Suu Kyi from assuming the Presidency, the military hovers over the country’s political affairs, cronies still dominate the economy and, above all, ethnic conflicts threaten the country’s stability (especially in Kachin and Rakhine States).

Myanmar has been slower to enact economic reforms, but the pace seems to have picked up recently. Two reforms in particular stand out as representing both the possibilities and problems facing the reformers.

First, in April last year the central bank decided to float Myanmar’s currency, the kyat. This was an important move. Under Myanmar’s old exchange rate system, the otherwise moribund official exchange rate — which greatly exaggerated the worth of the kyat, and correspondingly undervalued foreign currencies — was used by the military regime to disguise and then expropriate the country’s earnings from the sale of natural resources. The move to a managed float removes this sleight-of-hand and more or less requires realistic reporting of such earnings. The hope is that a vigilant parliament and press might ensure the government’s newly-audited resource wealth is spent in socially and economically useful ways.

Of course, there are still shortfalls in the process. Myanmar promised to sign up to the Extractive Industries Transparency Initiative (EITI) in order to make the original contracted foreign exchange earnings more open, but has not yet followed through. Similarly, the spending side of the equation remains a problem. Budget numbers revealed in early March show military spending continues to dwarf spending on health, education and critical infrastructure, and remains far in excess of what Myanmar can afford if it is to enjoy transformative growth and development.

The second major reform, especially for international observers, is the new Foreign Investment Law passed in November 2012. The negotiations over this law set off a great struggle between ‘reformers’ and ‘recalcitrants’. The recalcitrants had a range of motives, but not least they represented the interests of Myanmar’s crony class, who until now have carved up significant sectors of Myanmar’s economy among themselves. In the end the reformers won out, but not completely. Elements of the government allied with Aung San Suu Kyi and the NLD and shaped the new Foreign Investment Law into a more liberal form than it otherwise might have taken. But the law is still a compromise of uncertain efficacy.

Beyond these major economic reforms, Myanmar has implemented a mix of less significant but positive liberalising measures, including reductions in trade duties and licensing, minor freedoms granted to banks to allow them to embrace modern technologies, some tax reform, some improvements to infrastructure, and some progress towards the establishment of special economic zones. But there has been little change in the agriculture sector.

Indeed, although rural areas are home to 75 per cent of Myanmar’s population and account for nearly half its GDP, if anything conditions in rural Myanmar have become worse in recent times. Two new land laws introduced in late 2011 have made the land tenure of farmers more insecure than ever, while continued government direction of ‘what, how and when’ to produce denies Myanmar’s farmers the ‘production rights’ that elsewhere in Asia have led to great advances. Rural infrastructure and agricultural credit arrangements remain greatly degraded, and together these failings have led to the dramatic underperformance of a sector that should be a world-beater.

Domestic economic and political reforms in Myanmar have allowed some accommodating moves from the international community. Sanctions have been lifted, the so-called Paris club countries have forgiven much of Myanmar’s debt, and IMF, World Bank and Asian Development Bank are returning to the country to offer both advice and credit.

In the year ahead a number of economic reforms seem imminent. There will be legislation granting independence to the central bank, a new financial sector law that should improve the functioning of Myanmar’s banks, and the Parliament seems set to allow international dispute resolution procedures such as the New York Convention to be used. These mechanisms bypass Myanmar’s dysfunctional courts, and may give assurance to potential foreign investors.

While some easy and potentially fruitful reforms, such as to the agriculture sector, still seem destined to remain untouched, countries and investors should acknowledge the changes that have taken place so far, even as they urge greater reforms for the future.

Sean Turnell is Associate Professor in Economics at Macquarie University, Sydney.