MyANMAR’S EcONOMIc POlIcy PRIORItIES

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Myanmar’sEconomic PolicyPrioritiesVikram NehruASIA NOVEMBER 2012

Myanmar’sEconomic PolicyPrioritiesVikram NehruAsia November 2012

2012 Carnegie Endowment for International Peace. All rights reserved.The Carnegie Endowment does not take institutional positions on public policyissues; the views represented here are the author’s own and do not necessarilyreflect the views of the Endowment, its staff, or its trustees.No part of this publication may be reproduced or transmitted in any form or byany means without permission in writing from the Carnegie Endowment. Pleasedirect inquiries to:Carnegie Endowment for International PeacePublications Department1779 Massachusetts Avenue, NWWashington, D.C. 20036Tel. 1 202-483-7600Fax: 1 202-483-1840www.CarnegieEndowment.orgThis publication can be downloaded at no costat www.CarnegieEndowment.org/pubs.CP 167

ContentsSummary1The Challenge3Lessons for a Latecomer4Myanmar’s Policy Priorities7Conclusion16Notes17About the Author19Carnegie Endowment for International Peace20

CHINA0200 Miles0300 KilometersBHUTANINDIAin iDhakaKunmingMandalayChaukSittweS a lween R.MYANMARChittagongTaunggyiNaypyidaw(ADMIN. CAPITAL)PyayBay myineTHAILANDMouthsof theIrrawaddy(INDIA)MerguiArchipelagoIALUCIDITY INFORMATION DESIGN, IslandsDaweiGulf ofThailand

SummaryMyanmar’s leaders are pressing ahead with ambitious political change.But support for that process can evaporate quickly unless there is materialimprovement in ordinary people’s living standards. Carefully sequenced economic reforms are now a priority to generate broad-based growth in employment, incomes, and output. Over time, the economy will enter a virtuouscircle of reform and growth, and Myanmar’s future will become decidedlymore promising.Lessons From Asia’s Successful Globalizers Increased trade integration with world markets is essential to spurproductivity growth in agriculture and manufacturing.Adopting policies that “best fit” country circumstances is moreeffective than borrowing “best practice” approaches from abroad.Structural change from agriculture to labor-intensive manufacturingholds the promise of contributing significantly to sustained GDPgrowth and employment generation.Macroeconomic stability, with prudent public finances and a stablefinancial sector, is essential for sustainable, rapid growth.Geography strongly influences development—and here Myanmar haslittle to worry about. Its location is ideal, as it borders China, India,Southeast Asia, and the Bay of Bengal.Myanmar’s Economic Policy PrioritiesOpen the economy to international trade and foreign investment. Thegovernment should lower barriers to trade by eliminating import licensing andconverting import bans and quantitative restrictions into low or zero tariffs.Promote competition in domestic markets. To encourage the Burmeseto start private businesses, investment licenses should be eliminated exceptin industries producing armaments, toxic products, and similar potentiallyharmful materials. The government should engage in open, regular, and candid communication with the private sector to help identify policy and publicinvestment priorities.1

Maintain macroeconomic stability with sound public finances and wellcapitalized and prudently managed banks. Generating additional government revenue is necessary, while public expenditures must focus on high-priority investments in energy, roads, health, and education. Banks should begiven the freedom to make lending decisions on a commercial basis, but at thesame time the state must ensure bank balance sheets are sound and portfoliorisks are kept within strict limits.Manage natural resource development cautiously. Natural resourcesshould be developed in a way that supports long-term sustainable growth.

The ChallengeEvents have moved rapidly in Myanmar. In the space of less than a year, thepolitical landscape of the country has been transformed from a system whollydominated by the military to one moving toward democracy. Concerns aboutthe durability of some of the changes have given way to growing optimismabout the future. Political prisoners have been released. By-elections wereconducted fairly and peacefully and were swept by the opposition NationalLeague for Democracy. The country’s press has been granted new freedoms,and unions are being allowed to engage in collective bargaining. Rights topeaceful assembly and expression are exercised within limits. And the country’s parliament, no longer the rubber stamp it once was, is flexing its muscles.On the economic front, too, important reforms are being introduced. Mostprominent among these are the gradual reunification of the market and officialexchange rates, the introduction of a daily foreign exchange auction, and theapproval of a new foreign investment law. Two new agricultural laws have alsobeen passed with important implications for land rights and land use, the government is thinking about privatizing some state enterprises, and a new draftlaw is being considered to give the central bank greater autonomy to designand implement monetary policy. In addition, the recently approved budgetincorporates significant increases for health and education. As important, thepresident has appointed key economists and reform-minded ministers to helpdesign and implement further reforms.Myanmar’s new economic and political reforms have drawn considerablesupport from the international community. The International Monetary Fundis once again actively engaged in providing macroeconomic advice. The WorldBank and the Asian Development Bank are conducting economic assessmentsof the country’s most pressing needs and preparing to clear Myanmar’s arrearsso it can borrow again for development projects. The World Bank recentlyapproved an 80 million pre-arrears clearance grant for community development projects and announced that a further 165 million will be madeavailable in loans following arrears clearance. Meanwhile, the United NationsDevelopment Program is gearing up to expand its program significantly,focusing on governance, rule of law, institutional strengthening, and capacitybuilding at national and local government levels. Bilateral support is also pouring in. The Paris Club, made up of financial officials from the United States,Germany, Japan, and other advanced economies, has agreed on a coordinatedapproach to bilateral arrears clearance. Independently, Japan is expanding itsassistance rapidly, Europe has suspended its trade and investment sanctions3

4 Myanmar’s Economic Policy Prioritiesand announced 100 million in development aid, and the United States hasselectively eased restrictions on U.S. businesses investing and conductingfinancial transactions in Myanmar. It has also suspended its import ban onMyanmar’s products following Daw Aung San Suu Kyi’s recent plea to theU.S. Congress. Thailand is actively promoting the construction of a port atDawei together with supporting infrastructure, and India is already constructing a port in Sittwe.Individuals and businesses have also been beating apath to Myanmar’s door. Prominent politicians, noteddevelopment economists, nongovernmental organizaMyanmar’s untapped potential represents tions, and global multinationals are visiting the cities ofone of the few unexplored frontiers in Yangon and Naypyidaw in droves. Myanmar’s untappedAsia’s rapidly expanding economy. potential represents one of the few unexplored frontiersin Asia’s rapidly expanding economy—and it is hardly surprising that this has fired the imagination and goodwill ofthe entire international development community.All these sources—international financial institutions, bilateral aid donors,nongovernmental organizations, academics, think tanks—have also been plying Myanmar with advice on what needs to be done. Indeed, advice is arguablythe only input in Myanmar’s development that is not in short supply.The challenge facing Myanmar’s policymakers is not to decide what needsto be done, but what needs to be done first—and how.Lessons for Myanmar can be garnered from the experience of countriesthat have recently liberalized their trade and investment policies and integrated with the world economy. Those experiences can inform immediate policy priorities for Myanmar’s policymakers and point to the instruments at thegovernment’s disposal while demonstrating what the government should notdo. It becomes immediately obvious that even when every effort is made towhittle down the number of priorities to a select few, the agenda remains verylarge. Policymakers must find a way to leverage government policies throughmarkets and prices as well as through the participation of local governments,communities, businesses, households, and individuals.Lessons for a LatecomerIn one respect, Myanmar’s late emergence from autarkic policies and itsdelayed integration with the rest of the world is fortunate. Many other countries in Asia and elsewhere have recently traversed the same path, so Myanmardoes not have to reinvent the wheel. China, for example, began its journeytoward integrating with the world economy in 1978. Similar policy inflection points occurred in Indonesia (1968), Vietnam (1986), India (1992), Laos(1989), Cambodia (1999), and Timor-Leste (2002). Examples outside Asiainclude Eastern Europe (1989) and Mauritius (2005), among others. While

Vikram Nehru 5there are many lessons one could potentially draw from these examples, a fewhave emerged as the building blocks for sustained economic growth and areof particular importance to Myanmar.Perhaps the most important of these is that a few key (“higher order”)policies help trigger growth. Among Asia’s recent globalizers, these have usually been policies that encourage competition through international trade andinvestment and lower entry barriers for domestic and foreign investors. Oncegrowth accelerates, savings tend to rise and international and domestic competition help ensure those savings are used efficiently. Higher growth therefore leads to higher savings, which, in turn, lead to higher growth—a virtuouscircle that needs reinforcement by government policy.1In addition, countries with limited government and administrative capacity have benefited from keeping policies and incentives simple and straightforward. Policies should work through markets and pricesrather than through administrative regulations and government bureaucracies. Even if some policies are “optimal” from a theoretical perspective, the emphasis should Myanmar must adopt policies that “best fit”be on what is practical given the country’s circumstances its circumstances, rather than apply “bestand whether there is sufficient implementation capacity. practice” policies from advanced countriesAt this stage of its development, Myanmar must adopt with a much higher per capita income levelpolicies that “best fit” its circumstances, rather thanand stronger administrative capabilities.apply “best practice” policies from advanced countrieswith a much higher per capita income level and strongeradministrative capabilities.Prior experience has also shown that at each stage of the economic reformprocess the focus must be eliminating—or at least relaxing—binding constraints that hamper growth and employment. Binding constraints usuallyappear in the form of high relative prices or of shadow prices prevailing inthe informal or black market in cases where governments restrict or controlmarkets. In Myanmar’s case, the high black market price for foreign currencies made it clear that foreign exchange was a binding constraint. Fortunately,the country’s new foreign exchange auction system has largely corrected this,although some remaining restrictions still need reform.Similarly, transportation in Myanmar could be another binding constraintbecause of the high cost of moving goods and people. Yet another could beenergy because the government’s price controls on electricity have inhibitedgrowth in power generation and transmission, leading to power shortages androlling brownouts, and users are willing to pay a relatively high price for reliable energy supplies. Government permits for trade or investment could alsobe binding constraints because they tend to be acquired using either influenceor bribes (or both), as could be access to finance, especially for small borrowers who live and work outside of Yangon.

6 Myanmar’s Economic Policy PrioritiesOf course, as one binding constraint is relaxed, the economy grows untilanother constraint becomes binding. This means that policy reforms andadjustments should be a never-ending pursuit of governments. It also underlines that no two economic reform programs can ever be alike for the simplereason that no two economies are ever alike.As the experience of Asia’s recent globalizers has demonstrated, macroeconomic stability is also key to growth, and governments should prepare foreconomic shocks. Integration with the world economy inevitably increasesexposure to sudden changes in the external economic environment—a downturn in export prices, an increase in the price of capital, supply contraction ofkey inputs, an economic crisis in key markets, and so on. Protective policiesinclude building “shock absorbers” by accumulating external reserves, diversifying export markets and products, and strengthening balance sheets of banksand state enterprises. At the same time, it is important to shrink the size of“shock amplifiers” by, for instance, reducing budget and balance of paymentsdeficits and lowering external and public debt burdens.A common feature among successful globalizing countries has been the pivotal role of manufacturing, an unusual sector because it displays unconditionalconvergence globally.2 As long as economies remain open to international tradeand investment, the productivity gap in manufacturing between advancedand developing countries shrinks with time irrespective of initial conditions.Moreover, the least-developed countries seem to catch up at the fastest rate—the lower the productivity level of firms in relation to those at the technologyfrontier, the faster their productivity growth is likely to be.3 Similarly, exportunit values of manufactures also show unconditional convergence.4Of course, Asia’s new globalizers initially nurtured a healthy agriculturalsector that provided the foundation for successfully developing manufacturing, which then became a powerful driver of growth. While a healthy agricultural sector is necessary, the shift from low-productivity agriculture tohigher-productivity manufacturing is critical to the growth process over thelonger term. Manufacturing also needs to reach a critical size before it canbecome an engine of growth that drives the entire economy. The challenge ofpolicy is then one of supporting and stimulating structural change from agriculture that leads to a critical mass in manufacturing so that convergence inmanufacturing productivity drives growth in output andultimately per capita incomes. Employment generation isAt Myanmar’s stage of development, another reason to emphasize manufacturing. The pace ofmanufacturing growth and its pattern are both importantit is labor-intensive manufacturing thatfor creating jobs.holds the best chance of contributingAt Myanmar’s stage of development, it is labor-intensignificantly to GDP growth and sive manufacturing that holds the best chance of conemployment generation. tributing significantly to GDP growth and employmentgeneration. But Myanmar’s dependence on commodities

Vikram Nehruand resource-based industries will make it difficult to promote labor-intensivemanufacturing. The exchange rate, for example, strengthened by earningsfrom natural resource exports, tends to make manufacturing internationallyuncompetitive. Similarly, policies—or other restrictive measures—that prevent firms from entering manufacturing can smother the growth process.Finally, many of these countries’ experiences have demonstrated that geography and location play an important role in shaping development outcomes.The economies of mainland Southeast Asia, including the low-income countries(Laos, Cambodia, and Vietnam), for example, have taken advantage of theirproximity to China by intensifying their trade and investment links with theChinese economy. Moreover, new networks of rail and highway infrastructureon the Southeast Asian mainland and southern China will cut transport costs,support more intensive trade, knit these economies closer together, and enhanceintegration, efficiency, and the international competitiveness of the region.Myanmar, fortunately, is blessed on this score. Located strategicallybetween India and Southeast Asia on the one hand and between China andthe Bay of Bengal on the other, Myanmar not only borders three importantgrowth poles, but its economic structure is also complementary to its neighbors, which will help amplify the gains from trade. China considers Myanmarof strategic importance in part because of its access to the Bay of Bengal.Similarly, Myanmar is the land bridge between India and East Asia, makingit a geographically strategic element in India’s “Look East” policy. Myanmarhas to make its role pivotal to the continued growth and prosperity of thesegiant neighbors.Myanmar’s Policy PrioritiesMyanmar policymakers can take a leaf from the book of its neighbors andfocus on a few critical policies needed to kickstart growth and trigger thesame virtuous circle of growth-savings-growth that Asia’s successful globalizers have enjoyed. Myanmar’s location is already ideal. Now it must leveragethat location by opening up to trade, maintaining economic stability, adopting“best fit” not “best practice” policies, and supporting manufacturing. Theseare the lessons from successfully developing Asian countries that can serveMyanmar well.The government’s first and foremost priority will be to encourage trade anddomestic competition. This will stimulate savings and increase the level andefficiency of investment. The best way to do this is not only to remove as manyimpediments to trade and private investment as possible (without jeopardizingother objectives such as environmental protection) but also to facilitate tradeand investment by constantly devising new ways to reduce the cost of businessregulations, such as the time it takes to clear goods through customs, start abusiness, get a construction permit, or register property. 7

8 Myanmar’s Economic Policy PrioritiesMyanmar should also take steps to shore up its macroeconomic stability toprotect itself from shocks that could derail the development process. In linewith the experience of Asia’s recent successful globalizers, doing so requiresacting on many fronts—maintaining sound public finances and avoiding themonetization of fiscal deficits, focusing public expenditures on the highest priority programs and projects that deliver essential services, ensuring a prudentlymanaged financial system, and building “shock absorbers.” A further key tothat stability is the careful management of Myanmar’s vast natural resources.Opening Up International TradeBarriers to trade must be reduced or done away with in order to encourageinvestment and economic growth. Import bans and quantitative restrictionsshould be converted into tariffs, and tariffs should then be lowered to theextent possible.At this stage of Myanmar’s development, imports of equipment and intermediate goods are critical to encouraging private investment, upgradingtechnology, expanding capacity, and stimulating growth. Indeed, the socialreturns for investment in equipment are usually very high.5 It follows that suchimports should attract low or even zero tariffs. Indeed, there is little reason tohave a high tariff on any imported product, even luxuries (expensive cars, jewelry

Higher growth there-fore leads to higher savings, which, in turn, lead to higher growth—a virtuous circle that needs reinforcement by government policy.1 In addition, countries with limited government and administrative capac-ity have benefited from keeping policies and incentives simpl

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