Myanmar: making the next Asian miracle

Author: Anders Engvall, Stockholm School of Economics

Myanmar’s reforms are lifting the economic outlook for one of Asia’s economic laggards as indicators show prospects for an economic boom.

For decades, Myanmar was the regional basket case as irrational policies, isolationism and domestic conflict wrought havoc on the economy and society. At independence in 1948, the outlook seemed bright. The country had one of the best education systems in the region, it was integrated with world markets through the port of Rangoon, and possessed ample natural resources and a sufficiently well-functioning administrative system. All of these advantages were spoiled during decades of authoritarian rule. Resources degenerated over decades of stagnation — particularly through declining quality of education and infrastructure — leading to falling productivity.

An employee works in a factory in an industrial zone in Yangon on 13 February 2014. (Photo: AAP)

Economic reforms in Myanmar were actually initiated before the country’s political reforms. And while many of the early economic initiatives primarily served to enrich cronies through fire sales of state assets, there were also important policy shifts. Even before the 2010 elections, macroeconomic policies had improved. A key indicator of improved management is the stabilisation of inflation below 10 per cent since 2008–09. This is a marked achievement in a country where spells of rapid price increases used to be the norm.

Infrastructure developments during military rule largely served strategic purposes, and wasteful investments expanding railways to remote upland areas have given no sustained economic return. But there were improvements in physical infrastructure developments in the decade before 2010 as focus was shifted to improving the main north–south corridor and links to markets in neighbouring countries.

Administrative barriers to both domestic and international trade remain, but abolition of the restrictive trade regime and unification of the exchange rate in 2012 have produced impressive export growth. Resource-based commodities, primarily natural gas and minerals, are leading Myanmar’s trade growth. The country’s location between the expanding economies of China, India and mainland Southeast Asia not only provide opportunities for transit trade but are also advantageous for supplying these resource-hungry markets with commodities.

The rural economy is going through a rapid transformation as exports of rice, beans and other agricultural commodities expand. Rice exports more than doubled in 2013, primarily fuelled by cross-border trade with China, and are set for more rapid growth this year. Rural development is not only benefiting from new opportunities in agricultural exporting, which had been prohibited for decades, but also from important policy shifts giving farmers freedom to decide which crops to grow. Rural credit remains scarce but expansion of state credit to farmers at favourable rates has increased. Land law reforms may provide additional relief as farmland will be eligible as collateral, opening up for increased private credit to the agricultural sector.

It will be essential that policymakers focus on spreading the benefits of growth across the population. Inclusive growth, alleviating widespread poverty and improved welfare, will build support for economic reforms and may also lay the foundations for solving the country’s long-running domestic conflicts.

Essential investments in healthcare and education will only be possible if the government is willing to commit a substantial share of its revenues from exports of gas, oil and minerals to the social sector. This would be a dramatic change from the past, when income from extractive industries was used to fund the bloated armed forces, the construction of the new capital, Nay Pyi Daw, and other projects of limited social benefit.

Remaining weaknesses in macroeconomic management are also a threat to long-term developments. Sustained inflows of foreign investment, export revenue and foreign aid risk making the overvaluation of the kyat permanent, and should be managed carefully. A short decline in the currency value in the second half of 2013 provided important relief to exporters. But there is no indication that the authorities will continue to bring down the strong currency, due to fears of a return to the hyperinflation that was common in the past. The currency rate continues to constrain the development of manufacturing, and, while this obstacle remains in place, efforts to set up industrial zones will be futile given Myanmar’s cost disadvantages compared to the main East Asian production bases.

Still, the reforms to date have led to a convergence of growth rates in Myanmar to the East Asian average. If remaining weaknesses are addressed, there is scope for further acceleration and that would turn Myanmar into the latest Asian economic miracle.

Anders Engvall is a research fellow at the Stockholm School of Economics.

This article appeared in the most recent edition of the East Asia Forum Quarterly,‘On the edge in Asia’.

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