Real economic change in post-election Burma is about as likely as a herd of white elephants, say experts

Burma’s current military rulers will continue to run the economy for their own benefit even after the country comes under a more civilian form of government following this year’s election in November.

A child plays while his parents take a nap beside their roadside vegetable stall in Rangoon.

Although the current financial year will show improvements, these will be “driven mainly by investment in projects in the energy and petroleum industries, particularly by Chinese firms,” concludes the latest assessment of Burma by the Economist Intelligence Unit (EIU).

“Excluding these sectors, however, the domestic economy will remain sluggish,” according to the EIU report. “The government’s revenue base remains small, and it will continue to spend heavily on large projects that benefit the military regime.”

The EIU report, published in August, reaches similar conclusions to other economists and researchers who have been analyzing Burma in the months leading up to the election.

A recent study by the United States Institute for Peace (USIP), a Washington-based think tank funded by the US Congress, said that natural gas exports to Thailand continue to be the main source of income for Burma’s economy, yet “the junta has devised ingenious mechanisms to siphon these funds but has spent relatively little on improving the quality of life for most Burmese.”

“Using a system of multiple exchange rates, the junta deprives the government coffers of hundreds of millions of dollars each year,” said the USIP report. “Unsurprisingly, the resultant large fiscal deficits have been financed by printing money, which has led to persistently high inflation.”

The most somber assessment of all, by Australian economist Sean Turnell, suggests that in spite of growing gas exports, the standard of living in Burma is actually declining.

“Increasing net exports account for just over half of average GDP over the last five years,” said Turnell, an economics professor at Macquarie University in Sydney.

“Remove net exports from the equation and the domestic economy has been growing at a rate that falls short of that of population growth, implying that per capita GDP in Burma has been declining in recent years,” said Turnell. “At around US $435 per capita, GDP in Burma ranks amongst the lowest in the world and by some margin the lowest in Southeast Asia.”

Revenue from gas exports has peaked for the short term and will not expand further until 2013, when gas from the Shwe offshore field in the Bay of Bengal is expected to begin flowing to China.

With agriculture still accounting for nearly half of the country’s GDP, it was ripe for development using revenue from the gas, but the junta has starved the sector of funding, analysts agree.

“Burma has the potential to be Asia’s premier rice bowl once again, but only if rice production is modernized, marketing is liberalized, land tenure issues are resolved and agricultural credit constraints are eased,” said the USIP study, written by Raymond Gilpin, a USIP associate vice president, and Lex Rieffel of the Brookings Institution, also based in Washington.

Instead, rural financial arrangements “are in greater disarray than is the financial sector more broadly,” said Turnell in his report, “Burma’s Macro-economy at the Cusp of the 2010 Elections.”

“Formal credit is almost impossible to obtain by all but the largest and most connected cultivators, and usually only the subsidiaries of prominent conglomerates, meaning that small-scale moneylenders are the sole recourse of most. Moneylender interest rates, however, are high—10 to 15 percent per month being typical, even with collateral—and at levels that disallow returns to farmers that are little above that necessary for mere subsistence,” according to the report. 

“As a consequence, many cultivators no longer employ productivity-enhancing inputs such as fertilizer, while similarly adopting planting and harvesting methods that likewise minimize costs even as they diminish output.”

To get Burma’s huge farming community back on its feet and in a condition to pursue export markets—especially for rice—would cost between $400 million and $1 billion, according to Turnell and several other assessors, including the United Nations Development Program and the Harvard Kennedy School.

Although these are hefty sums, they represent less than six months of Burma’s gas export earnings, said Turnell.

The EIU concurs on agriculture, saying the sector “will continue to struggle to grow rapidly because of a lack of investment and poor access to important inputs and equipment.”

In the wider economy, the outlook is also “fairly bleak,” said the EIU.

“Consumer spending is constrained by low average incomes and a lack of confidence, owing to price instability and the weak free-market exchange rate,” said the EIU report, adding that “a strong rise in consumer spending is not expected while average household incomes remain so low.”

Burma’s economy is likely to accelerate in the 2010-11 financial year, but mainly due to investment in energy projects, especially by Chinese investors.

Excluding these sectors, the domestic economy will “remain sluggish,” the EIU said. “Manufacturing will continue to be troubled, reflecting the lack of access to inputs and capital for investment, while weak external demand will compound the difficulties facing export-orientated manufacturing firms.”

Rising levels of unchecked Chinese immigrant labor coupled with China’s yuan currency taking over in northern states bordering China are dangerous elements of Burma’s black economy, said the USIP study, which estimates that more than 1 million Chinese are now living in the country.

“These developments could undermine macroeconomic stability,” said the report.

The USIP puts forward a 10-point plan for a post-election government to try to get Burma’s economy back on its feet.

A South Asia specialist at the independent Institute of International Affairs in London, Marie Lall, is slightly more upbeat about Burma’s prospects after the election.

“I don’t think we’ll see much change economically in the first year or possibly even the first couple of years after the election, but I do believe that once the power structures start to change and the states and divisions start to have a little more autonomy, there will also be economic change on the ground,” she told The Irrawaddy.

“I suspect this will be visible first in the ethnic minority states if the ethnic minority parties come to power locally.”

Lall, who wrote a paper for the Institute—also known as Chatham House—late last year, added: “I think cross border trade with India and China will continue to increase and will continue to be liberalized, possibly at a faster rate after the election.”

She said the relationship between the central authority and the leaderships of the ethnic populations after the election will be key to an improvement in the country’s political and economic condition.

“Western governments need to re-examine their stance towards Burma, especially in light of the 2010 elections, intended to create a civilian administration and parliamentary system, while perpetuating military control. An understanding of the ethnic conflicts, the political significance of the cease-fires and the economic and political seesawing between ethnic minority groups and the army is essential to understand Burma’s political future,” she wrote in her paper, “Ethnic Conflict and the 2010 Elections in Burma.”

But the EIU foresees a risk of new instability in the wake of the election, both within the military leadership and in the wider population.

It says an expected post-election reshuffle of positions, including appointments to the new posts of president and vice president, “could prove destabilizing.”

“Perhaps the biggest threat to the junta’s long-term grip on power is internal strife,” according to the report.

“Underlying pressures, not least those stemming from economic hardship, could build and eventually prompt sporadic shows of public defiance,” said the EIU. “The junta’s efforts to exert full control over the border regions, which are populated and controlled by numerous ethnic minority groups, could also result in fresh crises.”

It is unlikely that the election will bring real change to the balance of power in Burma, concludes the EIU study, and therefore military manipulation and internal conflict will continue to blight economic development.

Burma’s Empty Rice Bowl

The Irrawaddy delta, Burma’s primary rice-growing region, is potentially the center of any major rice-exporting revival, but it is still languishing after the devastation of Cyclone Nargis in 2008.

Farmers plant rice seedlings in a paddy field on the outskirts of Rangoon. (Photo: Reuters)

“The termination of the TCG is just the latest in a long line of actions taken by the Burmese regime to restrict and control foreign access and assistance to Nargis-affected areas,” Turnell said.

“Two years after Nargis, the situation of most people in affected areas remains precarious. This is especially the case with respect to failures in the recreation of livelihoods,” he said.

He attributed this failure in large part to the junta’s “sustained harassment, including imprisonment, of local people and organizations” involved in the relief effort.

The failure to revive the economy and well-being of the Nargis-afflicted areas is illustrated by the parsimonious help given by the junta, Turnell said.

In 2008-09, he has calculated, Burma’s regime spent US $85 million on post-Nargis reconstruction—just one-seventh of the funds spent by the regime on its new fighter planes, and a mere two weeks’ worth of the foreign exchange revenue from Burma’s gas exports.

Ten Ways to Better Economic Health

The United States Institute for Peace think tank offers 10 suggestions to a post-election government in Burma to improve the country’s floundering economy:

1. Boost the agriculture sector: There is no better way to increase employment and raise the standard of living. A sustainable credit system and removing obstacles to exports is critical.

2. Socialize the benefits of extractive industries: Lack of transparency means Burma is earning below-market prices for its gas, timber and other exports. The government’s share of earnings is not flowing to services that make the economy broadly more productive and competitive. An excessive share is being diverted to powerful individuals and groups affiliated with the junta.

3. Devise pro-growth fiscal decentralization: Generous revenue sharing with regions and states can contribute significantly to national reconciliation as well as improve government services at both the central and local levels.

4. Privatize sensibly: Although de-monopolization could yield significant benefits by making the economy more competitive over time, the stifling political economy could undermine effectiveness in the near term by rewarding military actors.

5. Carefully target and condition foreign aid and investment: Without a defensive strategy for dealing with an outpouring of interest from aid donors and private investors, it will be difficult for the government to adopt coherent policies for sustainable economic growth.

6. Address critical infrastructure bottlenecks: The most critical need appears to be reliable electric power in cities and towns, followed by access to the global communications network, i.e., mobile telephones and the Internet. Other needs include highways to Thailand, China, Bangladesh and India, ports to reduce shipping costs, farm-to-market roads and facilities that encourage tourism.

7. Improve macroeconomic management: Improving statistics, especially completing a credible census (the last one was in the 1930s), is a critical step. It will be hard to achieve a flourishing democracy without disciplined fiscal and monetary policies. Strengthening the institutional capacity of the central bank is necessary to achieve the high rate of private-sector savings required to boost domestic investment.

8. Properly fund the armed forces: Adequate funding is essential to discourage individual units from engaging in economic activities that misuse resources. If the size of the army can be reduced as part of national reconciliation, a substantial commitment of budget resources may be required to facilitate a partial demobilization.

9. Fix the financial system: No part of the financial system is working close to international standards. The payment system is rudimentary. Commercial banking is severely repressed. Rural credit has largely collapsed. An interbank market and a domestic capital market are lacking.

10. Gradually open to trade and investment: Pressures to abruptly open up the economy could be strong, and being too responsive to these pressures could produce a political backlash. Special efforts may be required to ensure that Chinese investments do not trigger social unrest.

Burma’s Primary Markets

Thailand continues to be Burma’s leading market overall, mainly due to its import of gas from the offshore Yadana and Yetagun fields. But China is now the primary source for goods imported by Burma. China is likely to begin dominating both Burma’s export and import trade from 2013, when gas is scheduled to flow from the Shwe offshore field via a 1,100-kilometer pipeline to China’s Yunnan Province.