Economic reform as flawed ideology

This is the first article in a two-part series.

Commentary on the scope and limits of Myanmar's recent reforms has already become trite. Those familiar with the endemic corruption and impropriety in the country's governmental and business practices have been quick to celebrate the relaxation of economic strictures, and the unexpected welcome Naypyidaw has given to new mechanisms of accountability. Hope for an end to the human-rights abuses and economic mismanagement, which has characterized the country's political economy for decades, is palpable.

The reengagement of International Financial Institutions (IFIs - including the International Monetary Fund (IMF), World Bank, and ADB, the Asian Development Bank) in these reforms has lent weight to arguments that President Thein Sein's quasi-civilian government has turned a corner. Optimists put stock in the government's contention that with a robust framework for macro and micro economic and social reforms, Myanmar can become a modern, developed and democratic nation by 2030. However, both the ideological underpinnings of this reform process - led by IFIs and embraced wholesale by Naypyidaw - and the consequences for the majority of Myanmar's population have been little discussed.

A cursory look at Myanmar's ranking in the United Nations Development Program's (UNDP) Human Development Indicators table, and its underachievement in realizing the UN's 2015 Millennium Development Goals, evidences how the gross mismanagement of the political economy has come at huge cost to the country's ethnically diverse people. Understanding where best to begin the reform process, an enormous task in Myanmar's case, is in many ways as challenging as formulating a strategy to deliver the much vaunted targets of macro-economic stability and low levels of inflation.

The most thorough commitment to these goals is the government's Framework for Economic and Social Reforms (FESR) - a document co-authored with the IMF following their Country Report of March 2012, and from which the Naypyidaw Accord for Effective Development Cooperation was formulated. The FESR is billed as a "roadmap" to "guide the country to succeed not only in her transitional reforms but also set sound foundations for medium and longer-term development transformation". Crucially, this strategy is anchored in the notion that by first achieving these targets, "inclusive growth and poverty reduction" can be realized subsequently.

Given the dire state of Myanmar's economy prior to the reengagement of IFIs, it is not surprising that the scope of reforms amounts to an overhaul of the country's economic and social infrastructure. Both the breadth and content of the reforms are paralleled in many ways by the Structural Adjustment Policies of the 1980s and 1990s pursued by IFIs across the developing world.

The liberalization of the country's foreign exchange regime under the supervision of the Central Bank of Myanmar, the rapid liberalization of import and custom duties, the privatization of many stated-owned economic enterprises and the proposed implementation of a value-added tax (VAT) are just some of the measures aimed at realizing economic stability and growth.

Despite the approbation of IFIs and the international community for the reform package, little attention has been given to how the prescriptions of the FESR will translate in the context of Myanmar's political economy, and whether they will indeed contribute to the goal of "inclusive growth and poverty reduction". The FESR's focus on the accumulation of foreign exchange reserves and the autonomy of the central bank are two notable examples of the gap that exists between proponents of ideology and Myanmar's political economic reality.

The arguments for accumulating foreign reserves are well-rehearsed. In an increasingly deregulated global environment, foreign exchange committed into emerging economies can supplement domestic savings and help galvanize domestic investment concomitantly. Furthermore, reengagement with international markets generates a precautionary demand for reserves from developing countries - an approach known as "self-protection". These reserves - it is argued - position countries better to withstand the vicissitudes of global financial markets; reduce the costs of foreign borrowing; and result in less exposure to short-term debt.

Given the scope of economic and social reform that is being instituted in Myanmar, however, the lack of discussion regarding this particular aspect of the FESR is worth noting. Evidently, the arguments of those prescribing increased levels of "self-protection" are only fortified by the FESR's strategy of export-led growth and liberalized import markets, despite recognition that "the accumulation of foreign exchange reserves is rarely sufficient for governments and central banks to prevail over speculative attacks". The absence of debate regarding the costs of such accumulation certainly lends weight to the contention that key aspects of the FESR are heavily influenced by the ideological bent of certain IFIs.

The substantial "carry costs" produced by the low-yielding assets into which these reserves are invested are not the only costs of foreign reserve accumulation. The growth foregone: by putting export surpluses into United States treasuries rather than investment and imports" can not reliably be quantified. It is clear, however, that this sum could otherwise be used to stimulate the domestic economy, through investment in the small- and medium-enterprise sector or skills training, for example. It is also clear that the absence of discussion regarding the rapid increase in Myanmar's Reserve Fund indicates how certain economic convictions of IFI's remain as articles of faith in the international community, irrespective of their effect upon "inclusive growth and poverty reduction".

Questionable independence
The nature of the FESR's reform package has also been illumined by the emphasis placed on ensuring the independence of the Central Bank of Myanmar (CBM). The de jure independence of a country's central bank has become a key signal of credibility to the international financial and business community, taken as demonstrative of its freedom from political interference in achieving price stability and targeting inflation.

Central bank independence can also provide greater leverage for creditors over government policy - an important factor for those international investors who previously suffered from the government's demonetization of the kyat in 1987. Leaving aside such theoretical issues, however, some difficult questions remain with regard to the prospects for genuine central bank independence in Myanmar.

Though the passing of the Central Bank Law earlier this year marked the legal separation of the CBM from the Ministry of Finance and Revenue, the realization of genuine CBM independence is deeply problematic. Thein Sein's recent reappointment of former CBM Chairman Kyaw Kyaw Maung - who presided over a huge increase in money-printing to fund government expenditure and levels of inflation that seldom dropped below 25% between 2000-07 - is clearly cause for concern.

Given the close relationship between the executive and the CBM, it is worth questioning whether genuine CBM independence is as important as the appearance of independence created to appeal to foreign investors. Cognizant that "the support of foreign capital ... is critical because it creates policy credibility rather than simply reveals it", one might ask whether the Central Bank Law has been enacted to satisfy the international business community without fundamentally altering the firmly rooted power dynamics that have limited "inclusive growth and poverty reduction" in Myanmar.

Although the policies outlined above have ignited much debate in universities and policy-making circles through the years, a robust broadside against these aspects of Myanmar's FESR has been lacking. This can be attributed to many factors, not least the seeming morass of venality and human-rights abuses from which the country is struggling to free itself. Much of the international community - uncertain of where to suggest starting on a process of socio-economic transformation that will take decades to realize - has deferred to the counsel of IFIs to "get the fundamentals right" and provide a more secure institutional and economic foundation upon which to build.

This deference has given IFIs, Naypyidaw, and vested business interests greater space to prioritize the stimulation of foreign direct investment (FDI)-led private sector growth over social development. A key element of this has been the promotion of Special Economic Zones (SEZs). The "[pursuit of] an active policy of encouraging the diversification of export products...[ensuring] that incoming FDI will help domestic industries to overcome technological, financial and market barriers" is one of the pillars on which the FESR is built.

There are currently three large-scale SEZs underway in Dawei, Kyaukphyu, and the Thilawa zone south of Yangon, with seven more planned to help realize the FESR's ambitious growth targets. Given Myanmar's low-levels of economic development, the theoretical utility of SEZs is clear: zones can foster "a business environment...more liberal from a policy perspective and more effective from an administrative perspective than that of the national territory."

The case for focusing on SEZs as a vehicle for developing industry is lent weight by the fact that prevailing "transaction costs" - or, costs of doing business - offset the savings made in labor costs by foreign firms located in Myanmar. By cultivating a more propitious business environment, it should be possible to "attract foreign capital and technology used for labor-intensive, export oriented production activity... (generating) employment and foreign exchange that by extension would stimulate economic growth."

From the perspective of investors, SEZs are attractive on a number of accounts, not least their removal of almost all vestiges of state-intervention, the limits they place on labor organizations, and the fact that they enable the use of abundant - and hence relatively cheap - unskilled labor. The experiences of Myanmar's regional neighbors in this regard have been used to corroborate the argument that SEZs represent a sensible first step on Myanmar's path of industrial growth.

Too fast, too soon
Many of the reforms proposed by the FESR would be familiar to scholars of Vietnam's Doi Moi program, which began in the late 1980s. The roll-out of an extensive land titling program (Land Law, 1993), the drive for rapid development of the private sector (Enterprise Law, 2000), and the Common Investment Law (2005) were some of the most important in the drive for internal and external liberalization from a centrally planned economy, and the growth of industry's share of gross domestic product (GDP). Central to this was the country's wide-ranging SEZ (or Export Processing Zone) program.

Despite the much-lauded Vietnamese SEZ program's contribution to a vast increase in FDI and export growth, it has done little for job creation among the domestic workforce. It is also noted as an important element in the growth in income inequality throughout the country, especially in ethnic minority regions distanced from growth centers - a point of particular relevance to Myanmar's socially, economically and geographically ostracized ethnic communities.

A cursory look at Cambodia's SEZ development program provides a noteworthy contrast with what IFIs have deemed Vietnam's "success". The dearth of backward linkages created in the domestic economy, lack of technological or knowledge transfer, and the stimulation of conflict over land confiscation resulting from poorly instituted safeguards do little to recommend the adoption of SEZ programs to realize "inclusive growth and poverty reduction".

This all said, it is considered apposite to question the FESR's commitments to ensuring "timely implementation of the ASEAN Economic Community (AEC) initiatives", and to becoming "fully connected to the various Greater Mekong Subregion (GMS) transport corridors". Pledging to realize these goals leaves little scope for discussion of alternative industrial growth strategies with the country's largest investors.

Senior World Bank economist Kwima Nthara has recently noted the dangers faced by Myanmar's domestic private sector in the face of the rapid liberalization required to meet the ASEAN Free Trade Agreement in 2015. To suggest that Myanmar's entire private sector can be galvanized by the institution of SEZs alongside numerous free trade agreements alone shows little cognizance of its emaciated condition following decades of systematic neglect under military rule.

The importance of building a well-functioning private sector to Myanmar's future economic performance is not disputed. However, while it is feasible that a coterie of well-connected private enterprises within Myanmar might benefit from the implementation of SEZs - most notably the Thilawa SEZ - it is demonstrably not the case that the majority of the country's unskilled workforce will see much in the way of socio-economic improvement as a result, either through job creation or an improvement in state welfare provision.

Clearly, the notional benefits of SEZs are compelling in Myanmar's context. An under-funded and deeply corrupt government machinery and judicial apparatus can not begin to implement an equitable nationwide industrial transformation. It has been contended that limiting Myanmar's industrial growth to specific zones in the early stages is a decent second best option in the circumstances. Yet, this overlooks the scope for malfeasance and venality that SEZs can only but foster in a country whose recent political and economic history is replete with examples of human-rights abuses and misappropriation of funding at every level of government and business interaction.

The institution of deregulated zones of "untrammeled market freedoms for powerful corporate interests" can not realize the FESR's stated aim of "inclusive growth and poverty reduction". Only by instituting well-functioning regulatory frameworks can the development of SMEs begin, and - in the wider ASEAN context - regional developmentalism be realized.

As noted by academic Robert Wade, the potential for SEZ-led regional developmentalism lies in its capacity to develop the internal economies of individual less-developed countries; primarily, dense input-output linkages between sectors. It is unclear how trans-national corporations' (TNCs) access to the manifold incentives outlined in Myanmar's Special Economic Zone Law can help to achieve this.

The wider development of Myanmar's domestic economy will be underpinned by the growth of linkages between the sectors in which SMEs dominate. Ensuring that these linkages are fostered in a regulatory and institutional environment which is supportive of domestic enterprise is vital to achieving a more equitable future for the vast majority of Myanmar's people. The FESR's strategy of attracting foreign capital through SEZ-led private sector growth falls far short of taking meaningful steps in this direction.

David Baulk is a candidate for the Masters of Science in Globalization and Development degree at the University of London's School of Oriental and African Studies. This article is an excerpt from his dissertation focused on Myanmar's social and economic reforms.

(Copyright 2013 David Baulk) 

source: Asia Times
http://www.atimes.com/atimes/Southeast_Asia/SEA-01-241013.html