Can the NLD reform Myanmar’s economy?

Author: Lex Rieffel, Brookings Institution

Aung San Suu Kyi and her government will take office in early April 2016. But the Myanmar people’s expectations of what Suu Kyi’s government can accomplish in its five-year term are unrealistically high.

Aung San Suu Kyi delivers a speech during the Peace Conference at the Myanmar Convention Center in Naypyitaw, Myanmar, 12 January 2016. (Photo: AAP).

The National League for Democracy’s (NLD) economic goals pre-election were sketchy. Economists close to the NLD have said the agriculture sector will be a major priority. Sound macroeconomic policies, especially ‘fiscal discipline’, will be another. This means avoiding unsustainable budget deficits and inflation.

But there are two big storm clouds hanging over the economic policy landscape: the peace process and state capacity. Without meeting these threats with some degree of success Suu Kyi’s government will almost certainly not achieve its economic goals, even if these goals are far more modest than what the people of Myanmar and the international community are hoping for. It is also possible that pressure from foreign diplomats, aid officials, international NGOs, and foreign investors will make it harder to make peace and build a functional bureaucracy.

The peace process is primarily a political issue, but it also has key economic ramifications. Extraction of natural resources in the borderlands of Myanmar inhabited by ethnic minorities funds the armed groups still engaged in an almost 60-year fight to preserve their ethnic identities. The battle waged by the Myanmar armed forces is no longer purely about stopping a takeover of the government by communists and other forces. Instead the army seeks control of the same resources. It is a state of civil war fueled by the ‘resource curse’.

Another economic dimension of the peace process is the irreconcilable views on economic development projects in the ethnic states. Ethnic minority populations are justifiably concerned that investments in infrastructure, special economic zones and other such projects in their homelands will become beachheads for expanding the domination of the Bamar ethnic majority.

Anybody who believes that achieving peace in Myanmar will be easier than achieving peace in Afghanistan, Iraq or Syria may be in for a rude awakening. A recent study, for example, explained how well-intentioned efforts to combat the drug trade in Myanmar have stimulated other illicit economic activities, such as timber smuggling and wildlife trafficking. The route to peace may require a moderately hands-off policy on the drug business, but that would be condemned by many foreign partners.

State capacity may turn out to be the Achilles heel of the incoming NLD-led government. It is easy for foreigners to fly into Myanmar, have a pleasant conversation in English with a government minister and leave believing that what was agreed will be done. It didn’t work in the Thein Sein government for the past five years and the odds are poor that it will improve much in the government led by Suu Kyi.

The foreign community in Myanmar has only been making the situation worse by providing more aid to strengthen civil society — the opposition — rather than improving the existing bureaucracy. The inauguration of Suu Kyi’s government will surely trigger another tsunami of well-meaning foreigners intent on making a difference. Their biggest impact, however, may be to divert the attention of senior officials from the boring but crucial business of implementing sensible policies.

This situation makes for an interesting comparison with Suharto-era Indonesia. When General Suharto consolidated power in 1967, the Indonesian government had little to no ability to formulate and implement economic policies. The Myanmar government today may be slightly better, but that’s still a long way from the functionality required to achieve the economic aspirations of its population in the next five years.

General Suharto lifted his country from low-income to middle-income status in just 20 years. He delegated economic policy to a team of technocrats, the well-labeled ‘Berkeley Mafia’. He also presided with an iron fist over an authoritarian political system that included a rubber-stamp parliament.

In the last 10 years of his rule Suharto lost the legitimacy that made him the envy of many authoritarian rulers as his regime moved towards kleptocracy. People power forced him out in 1998 and Indonesia’s acclaimed ‘transition to democratic rule’ began. But from an economic perspective Indonesian democracy has a sub-par track record. The elected parliament has been the biggest obstacle to much-needed economic reforms, such as reducing energy subsidies, because of pressure from vested interests and catering to populist sentiment.

In Myanmar, the answers to several pressing questions will determine the success of the NLD in implementing its economic goals. Will Suu Kyi’s government be able to find and empower a strong team of technocrats to manage the economy? Will Myanmar’s newly elected members of parliament act in the national interest instead of their own and those of their wealthy supporters? And will the foreign community give Myanmar’s ministers and director generals the time and encouragement to make on tough issues?

Sadly, global experience over the past 20 years is not encouraging. Odds are that the NLD’s economic goals will not be met because the means — the institutions of the state — are not up to the job.

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

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