Who's to blame for Burma's economic misery

Posted By Min Zin Tuesday, January 31, 2012 - 10:44 AM

Last week the International Monetary Fund (IMF) released a statement saying that Burma has a chance to become "the next economic frontier in Asia." But the IMF went on to note that the country can realize its potential only "if it can turn its rich natural resources, young labor force, and proximity to some of the most dynamic economies in the world" to its advantage.

In a word, it's up to the government.

Contrary to what you might think from the headlines, it's not western sanctions that are causing Burma's economic woes. It's government policy. The Burmese government's Industry Minister, attending the World Economic Forum in Davos last week, admitted as much when he respondedto a journalist who asked whether the country has done enough to get U.S. sanctions lifted: "We have a lot of things to reform and lots of things have to change: laws, regulations and institutions, not only in the political sector but also in the economic sectors. But sanctions are up to them."

In 2004, the well-known U.S. economist Jeffrey Sachs wrote that sanctions against Burma had "systematically weakened the economy by limiting trade, investment and foreign aid." It's an argument that many critics of sanctions have made.

The media love to use terms like "pariah," "isolated," and "closed" whenever they describe Burma and the effects of sanctions on the country.

If the term "pariah" denotes a country that utterly disregards international norms and behavior, and correspondingly meets with unrelenting censure from the international community, then that's a pretty good fit for Burma. But when the word is used in a way that's supposed to characterize the country's overall economic position (invariably in combination with words like "closed" and "isolated"), then it doesn't describe the situation at all.

According to the Economist Intelligence Unit, in 2010 Burma's exports and imports stood at $8.7 billion and $4.9 billion respectively. That's higher than the data for some of the comparable members of the Association of Southeast Asia Nations (ASEAN), such as Cambodia and Laos. Meanwhile, many experts caution that the official figures for Burma's exports fall far short of the real numbers because they don't cover the value of timber, gems, narcotics, rice, and other products smuggled to neighboring countries.

As far as foreign direct investment (FDI) is concerned, Burma reached a record high in 2010-11 of almost $20 billion. That's more than the figure in the same year for Southeast Asia's latest investment darling, Vietnam.

These facts suggest that Burma's exposure to trade and FDI is higher today than ever before, and even higher than that of some comparable ASEAN countries. In this light it becomes extremely hard to argue that sanctions have deprived Burma of FDI and trade, much less that Burma is "isolated" or "closed." (This also offers an eloquent commentary on how ineffective the sanctions regime has actually been.)

Of course, sanctions do have negative effects on the economy (for instance, job losses in garment industry after the 2003 sanctions imposed by the U.S.), and there are many spillovers to other sectors, ranging from education to the growth of civil society. But the government cannot use sanctions as an excuse for its mismanagement and kleptocratic corruption.

Given this extent of economic involvement with the outside world, Burma should boast a good growth rate and corresponding improvements in the lives of its citizens. But the socioeconomic indicators tell a different story. For instance, since 1988 Burma's GDP has grown at an annual average rate of 2.9 percent, the lowest in the Greater Mekong Subregion. The 2010 UNDP Human Development Index ranked Burma 132 out of 169 countries. The country is the lowest in Southeast Asia (Laos and Cambodia ranked 122 and 124 respectively). What's wrong with this picture?

The problems are twofold. First, the regime has tailored trade liberalization policy to benefit the natural resource extraction sector. The FDI that has come into the country has also focused on natural resource extraction and hydropower. Agriculture and manufacturing received a mere one percent of FDI because of the many problems that plague these sectors, including poor infrastructure, unfavorable exchange rates, electricity shortages, the lack of skilled workers, and so on and so forth. Since the natural resource extraction sector is capital intensive, most of the benefits go to those who own the capital. And that means the military conglomerates, whichcontrol almost all the capital in a society that is starved of private capital. As result, the distribution of income is highly uneven. The military takes the biggest share and most of the population never sees any benefit.

Second, the regime does not re-invest that revenue in education, health care, or necessary infrastructure. Instead, for example, it has plowed money into building the wasteful new capital Naypyidaw at a cost of about 1 to 2 percent of GDP, according to the IMF. By the government's own official statistics, it allocated 23.6 percent ($2 billion) of the 2011 budget to military spending, while the country spends a mere 1.3 percent on health ($110 million) and 4.13 percent ($349 million) on education. Some experts estimate that actual military spending amounts to as much as 60 percent of the overall budget. No wonder the country is mired in poverty.

The IMF's statement calls on the Burmese government to use revenues from natural resources "to build human capital and infrastructure." The Fund describes these as the "key priorities to alleviate poverty and reduce bottlenecks to industrialization."

Burma's third session of Parliament, which opened last Thursday in Naypyidaw, is now set to discuss the budget for the 2012/2013 fiscal year. This will be a litmus test for the new pseudo-civilian government. We will soon see whether it is willing to "redefine national spending priorities and bring fiscal transparency," as the IMF suggests, or whether, instead, everything stays the way it's been until now.