[Date Prev][Date Next][Thread Prev][Thread Next][Date Index ][Thread Index ]


If you make use of this information, please inform the author
(call or fax (331)40 27 95 63; Email: 100663.1145@xxxxxxxxxxxxxx)
[For technical reasons, text in bold and italics in the original
has been placed in upper case]
                            MISCARRIED REFORMS.
A Memo on the Economic Situation in the Union of Myanmar in early
1994 with Special Attention to Kachinland and Shan State 
                            by Stefan Collignon
After years of isolation, Burma has recently made some tentative
steps towards economic opening and liberalization of the rigidly
state-controlled economy. Press reports have described the
results of these measures as a "mini-boom" and the present
government actively encourages foreign investment. Having been
able to visit areas in the north of the country which have
previously been closed to foreigners for over 30 years, I will 
report in the following memo some of the casual evidence which we
could observe. I will also try to asses the solidity of the
changes, given the limitations of reliable data and statistical
material. Finally I will draw some conclusions for the peace
process with the ethnic minorities. My reflections are based on
observations and discussions during my trip with a European
delegation of Burma friends to Rangoon, Mandalay, Myitkyina and
Lashio at the turn of 1993/94 following an invitation by the
Kachin Baptist Church. Some of the explanations which I tried to
find for my observations are highly speculative and would require
greater in-depth studies to be substantiated. Nevertheless, I
present them here as food for thought. Warning: some readers may
feel distressed reading anything apparently positive coming from
1. For foreign visitors arriving in Burma, a clear break with the
Ne Win era is noticeable. Economic life in Rangoon, Mandalay and
other towns has changed significantly since 1990, when I last
visited the country. Cities (or at least parts of them) appear
clean and better maintained; street markations and building
facades are newly painted. In Rangoon a new foot promenade has
been constructed along the Inya lake. Japanese cars are abundant
and cause traffic jams. New buildings have appeared in all
cities, some of modern high-tech style (e.g. the International
Trade Centre[1]). An enormous new market/department store is
being built in Rangoon. In Myitkyina and Lashio new buildings and
modern hotels are also appearing. Even small towns like Hsipaw in
Shan State give the impression of relative prosperity. One 
explanation for these developments often voiced to us states that
rich people are no longer afraid to show their wealth - as under
Ne Win's socialism. Nevertheless, the low level of confidence in
the SLORC-government[2], high inflation, sometimes unintelligible
economic policies and an excessively overvalued official exchange
rate still discourage people to save and invest in productive
businesses. This has led to excessive consumption and increasing
demand for precious jewels, gold and real estate. Thus,
curiously, official statistics showing the construction industry
with the largest growth rates of the whole economy (up 270
percent from output worth Kyat 2,730 million in 1988/9 to 10,079
million in 91/2) reflect a more general crisis. 
2. However, as soon as one leaves the cities, the apparent
economic situation is different. Despite official figures
indicating large amounts of spending on infrastructure (roads,
bridges, industrial and office buildings) rural infrastructure is
very poor. Although it seems that roads between Rangoon and
Mandalay have improved, the road to Lashio (within Shan State)
and all roads in Kachinland are in a desperate condition. Outside
Myitkyina, all roads, including the British built highway to
Bhamo, are at best dusty and stony passages, inaccessible during
the rainy season. Due to the ceasefire between the Burmese Army
and the Kachin Independence Organization (KIO), the Bhamo road
has now been opened for the first time in 16 years but, as we
witnessed, many repairs are needed, especially of bridges which
were blown up during the civil war. It has been pointed out to me
that the SLORC-government has sometimes built new roads as a
propaganda trick for TV, instead of repairing old ones. This is
obviously a waste of very scarce resources.
Several reports have affirmed that public works are often done by
prisoners. For example The Nation (19/2/94) reports 10,000-30,000
villagers have been conscripted to labour without pay on the 160
km rail line from Ye in Mon State to Tavoy in Tenasserim
Division. We have seen some evidence of a group of chained
prisoners working on the new building of the Myitkyina market,
but road repairs seemed to be done (as far as we could see) by
soldiers and in Shan State by so-called road crews which live
like gypsies on 25 Kyat per day following the changing work
opportunities. Between Lashio and the China border, road beggars
are sitting besides the road asking for money after having
repaired holes in the street. Rail roads also seem to have
deteriorated seriously. In 1993 the train from Mandalay to
Myitkyina was derailed 52 times (the people call it the "frog
train") and the Rangoon-Mandalay train is often delayed because
of technical problems; 
3. In fact, despite the visual improvements in the towns and
cities, sustained economic development is still not taking place.
Government statistics and a UNDP report show that the short-lived
resumption of growth after the 1988 uprising is already
faltering: GNP per capita at constant producer prices has fallen
since 1985/6 from 1358 Kyat to 1149 Kyat in 1991/2, a reduction
of 15.4%. At the official exchange rate this represents annual
per capita income of approximately US$ 200, but at the unofficial
rate only US$ 10. These very low figures reflect, of course,
the fact that large parts of the population live still outside
the monetary economy.
In any case, Burma must be counted as one of the poorest
countries in the world. The World Bank ranks Myanmar as the 41st
poorest country without indicating GNP data. The UNDP Human
Development Index gives a real GDP per capita of US$ 595,
country in the "low human development"-group (index 0.385) on
position 111 out of 160 countries. However, even this index seems
overstated to me, for evidence in the rural areas of northern
Burma does not coincide with the high literacy and educational
values which prevent the index from falling. Life expectancy
seems to be in line with all developing countries, but the
percentage of population with access to health services, safe
water and sanitation is only half of this standard. The UNDP
Human Development Report shows 16.7% of the total population
This situation is also responsible for the increasing number of
economic refugees into neighbouring countries. 200,000 Burmese
are estimated to work illegally in Thailand. According to Asia
Watch, 20,000 Burmese women were forced into prostitution in
Thailand alone during the last two years, but many more are
working in Burma. According to a UNDP country report, real growth
rates of output and the position of foreign exchange reserves
were as follows: 
GROWTH RATES  1986/7  1987/8  1988/9  1989/90  1990/1  1991/2
Real GDP      -1.1    -4.0    -11.4    3.7      2.7     1.3
Agriculture    0.4    -6.4    -13.2    5.1      2.0     0.1
Manufacture   -7.9    -5.0    -15.9   11.3      0.1    -0.4
Export               -33.2    30.4    29.8      7.7     4.7
Mio $ Forex-
reserves     $33.1   $27.2   $77.4   $263.4    $312.8  $137
According to a recent Time (28/2/94) article, the economy has
grown 10.8% in the fiscal year 1992/3. This would indicate an
important turn-around in the economy, if confirmed. One will have
to await detailed figures to analyze this development better.
The historical figures above allow a better understanding of some
recent political events. It would appear from this that the
demonetization in 1987 threw the country into a deep economic
crisis and caused a severe loss of foreign exchange reserves.
After the monetary debasement, currency in circulation rose from
8,086.4 million Kyat to 37,098.8 million kyat in 1991, a 4.6-fold
increase, representing an average annual increase of 90%[3]. The
economic upheaval in 1987 led to the 1988 uprising in the cities
and the subsequent installation of the SLORC.
According to some observers, the new economic policies of the
SLORC were introduced "with haste and incompetence" (Nord Sud
Export, No 172/173, 10/07/89). Private enterprise was partially
re-admitted, government regulations were loosened or abolished,
and the domestic rice trade has been gradually liberalized. In
1989 one of the most generous and liberal investment codes for
foreigners ever seen in a developing country allowed 100% capital
ownership by foreigners and gave remarkable tax breaks. However,
these potentially far reaching measures have sofar failed to
produce the desired results. This is not surprising, as we know
from many other countries that concrete business support measures
will only work in the right macroeconomic framework. This
requires the stabilization of the economic disequilibria
(reduction of inflation and budget deficits) and the security of
law as a guarantee of the general incentive system.  
Manufacturing and exports - both primarily urban activities -
seem to have reacted most sensitively to the new policies, but
quickly faded out and remained unsustainable when the
insufficient macroeconomic reforms proved to be a major
development block. Interestingly, little change has affected the
state sector in the economy which has maintained its share in the
economy (22.6% in 1988/89 to 22.9 in 1991/2); instead, it seems
the cooperative sector has been absorbed by the private sector
and is now on the way of disappearing (down from 5.3% to 2,7%).
In terms of political economy, there are many indications that
the SLORC has attempted to pacify the political situation after
potential for unrest was greatest. But if there are signs of
economic improvement, they seem to have taken place partly
because of slightly better growth, partly at the expense of rural
This involved a strategic shift over the previous "Burmese Way to
Socialism" which had achieved a remarkable degree of equality
between rural and urban living conditions: the UNDP indicator for
rural-urban disparity in access to water, sanitation and child
nutrition services (67%, 87%, 93% respectively[5]) is
significantly higher than for other low human development
countries and above the aggregated values for LDCs and All
Developing Countries. 
4. Today 75 percent of the country's population live in rural
areas. According to official statistics for the Union of Myanmar,
output in the AGRICULTURAL SECTOR has been more or less stagnant
since 1988 and is some 12-17% below its 1985/6 level. This is in
marked difference to other southeast Asian countries, like
Vietnam, where economic reforms have dramatically increased
production. Vietnam even became one of the world's largest rice
exporters. The difference is that in Burma, rice exports are
still a state monopoly which does not respond to world market
prices, keeping the domestic rice consumer price a quarter to a
third below the world market level. 
PADDY CROPS have increased from 630.9 million baskets in 88/89 to
669.4 million in 90/91, but were back to 632.5 million baskets 
in 1992. The high yield variety paddy output has reached its
historic maximum  in 1981/2 with 610 million baskets and has
since fallen continuously to reach 481.7 million baskets in
1987/8 and 420.2 million baskets in 1991/2. PADDY YIELDS and sown
acreage have both fallen: For the high yielding variety, sown
acreage was 10.3 million acres in 1981/2, down to 7.2 in 87/8 and
has increased from 488 baskets to 663, output was disappointing.
The negative performance of rice production may also be due to
the significantly reduced use of chemical fertilizers (down from
184 thousand to 146 thousand metric tons). Yield per acre was
62.3 baskets in 81/2, peaked at 66.8 baskets in 1987/8 and was
down to 64.1 baskets in 1991/2. 
Rice/paddy AVAILABILITY for domestic use has been reduced in
1991/2 because of a more than 65% increase in export quantities
(presumably related to a fall in foreign exchange reserves in the
same year).While exports amounted to 255.3 thousand tons in
1989/90, they fell to 198.5 thousand tons the year after and
increased to 328.6 thousand tons in 1991/2. Apparently they fell
back to 250 thousand tons last year. A recent Thai Development
Research Institut study comes to the conclusion that given the
right price incentives Burma could export more than 2 million
tons of rice (presently total production is 1.3 million tons). In
the past, several reports have mentioned widespread smuggling of
rice outside the country, giving this as a cause of shortages.
Talking to rice traders, I did find some evidence for speculative
hoarding IN SPECIFIC SITUATIONS but I found no confirmation of
systematic smuggling in Kachin or Shan State. Farmers and traders
indicated to me that they sell wherever the price is best -
sometinmes in Burma, sometimes in China - transport being an
important factor in the decision. 
Official reports blame bad weather for this dissatisfying
performance, but closer inspection of statistics reveals that
reduced output is mainly due to lower input. Although the TOTAL
LAND AREA under cultivation has slightly increased from 23.9
million acres in 87/8 to 25.0 million in 1991/2, it is still
below the levels of 1983-86. The irrigated area has decreased
from 2,516 to 2,492 thousand acres. New irrigation projects are
minimal. Other factors also come into play. The number of
TRACTORS owned by the Agricultural Mechanization Department (AMD)
has decreased from 7,312 to 6,205 and in Cooperatives from 3,773
to 189 from 1988/9 to 91/2. This reflects partly the
"privatization" of agriculture where the cooperative sector was
reduced by 2/3, boosting the private sector from 91.7% to 96.9%
of total output. Not surprisingly, the average field hour per
AMD-tractor has nearly doubled: from 341 to 600 hours.
Unfortunately no data exist about the private sector and who took
over the tractors from the cooperative sector. 
5. Other than by the official explanations of late monsoon and
floods, these developments may be explained by the following
hypothesis: Taking into account that these changes are marginal,
it may be reasonable to assume that the CONSEQUENCES OF THE CIVIL
WAR with internal displacements and migration have had an impact
on land utilisation at the margin. In Kachinland alone there
exist 60 000 displaced people from 174 villages in 6 out of 18
townships. In Shan State we have been given a list of 12 Kachin
Baptist Church communities in which 8300 people and 2000
households are in a homeless situation - out of 33 local churches
and 8000 households. Unfortunately we lack data for other
minorities, but some figures indicate that nearly half of the
population in northern Shan State has been affected by
dislocations. On the western border, 191 000 refugees fled to
Bangladesh in early 1991. All in all, 1 million displaced people
or 2.5% of the population seems a conservative estimate. The
political insecurity with forced army recruitment and the civil
war must have had the effect that parts of the population gave up
agricultural production and this has undoubtedly had multiplier
effects on other economic activities. 
Between 1988/89 and 91/2 the number of peasant families in the
whole country grew by 1.8% (from 4319.1 to 4397.6 thousand), but
the area under cultivation increased by only 1.2 %, while
productivity (yields per acre) simultaneously fell. Thus living
conditions in the rural areas have deteriorated. We have seen
evidence of this situation in Kachinland and Shan State. Life in
the villages is at subsistence level. In areas affected by the
civil war, a marked gender disequilibrium in favour of women is
noticeable. Men frequently left their villages in order to join
the KIO or other armed opposition movements which seem to
represent the general aspirations of the local people and in
order to escape the Burmese army's porter recruitment drives.
This put a strain on the labour supply in the villages; often
fields are not exploited to their full potential. One could
expect that a successful peace settlement with all ethnic
minorities and a subsequent political solution to the
constitutional and democracy issues could provide the framework
for a rapid turnaround of the rural standards of living,
particularly in Kachinland which has good natural conditions.
A further explanation of lower yields is related to fertilizer
use. It is likely that farmers were so squeezed by the
urbanization development that they could not  afford buying the
necessary chemical inputs. This argument hinges on a discussion
of relative prices and inflation. 
6. Statistics on inflation in Burma are highly unreliable, as
often several prices for one product exist. OFFICIAL prices are
administrated and the goods are sometimes only available in
special stores to which a government/army pass gives access. This
is a relic from the past which has not yet disappeared. Then
there is the FREE MARKET which has increasingly replaced the
former "black market". Here normally imported goods are found at
prices reflecting the "unofficial exchange rate". The dual price
structure between state-controlled and private enterprises also
makes it difficult to asses the true picture. Finally, the BLACK
MARKET still exists for a number of products where trade is
illegal but often tolerated. Petrol for cars is an example. Trade
in these goods is widespread, but subject to risks and
uncertainty related to their illegality. Not paying the
appropriate bribe to the local policeman or army officer can have
unpleasant consequences.
While official national income data indicate an average rate of
inflation (GDP-deflator) of 40-45% p.a., some diplomats in
Rangoon estimate the truer rate closer to 60%. The French Trade
Commission in Rangoon[5] calculated consumer price inflation of
30.8% from October 1982 to 83 for the capital, after 33% and 36.4
in the two previous years. However, their index includes a large
number of controlled prices with zero variation; it therefore
does not fully reflect the effects of repressed inflation. To
broaden the view, I have also found estimates of the SLORC-
official Rangoon consumer price index, the IMF index and an UNDP
estimate (without source). It has to be taken into account that
these figures are all based on the official economy and do not
properly represent free or black market prices. I therefore have
also calculated myself a monetary index, based on money supply
(the "printing" of bank notes) and national income statistics.
The time series are not always perfectly correlated, presumably
due to different accounting periods. To the degree that official
statistics overestimate real growth, the monetary index
underestimates inflation. Nevertheless, under the given
circumstances I consider it, together with the IMF index, as a
reasonably reliable indicator which broadly confirms the data by
the French Trade Commission. I have also found time series for
prices as well as an index for the cost of rice, this being an
essential staple good for the urban and rural population alike. 
Inflation appears to have roughly tripled in the five years from
1986-91 and doubled in the three years after the SLORC took over.
The official statistics also show that the highest retail price
for Emata rice in Rangoon has fallen from 336 Kyat/Basket to K
223 in 1990 and K 286 in 1991, while lowest wholesale producer
prices have increased from 131 (1989) to 142 (1990) and 165
Kyat/basket in 1991. According to further information obtained
during our visit from different market participants (farmers and
traders), the rice price has doubled again in the 12 months of
                      INFLATION IN BURMA 
                      (Index 1986 = 100)
    General price level                Rice (emata quality)
Year  IMF     UNDP  Gov't[6]  Mon-[7]  producer   retail  UNDP[8]
                              etary    Kyat       Kyat
1986  100.0  100.0  100.0     100.0                       100.0
1987  124.8  103.7            106.6                       100.0
1988  144.8  126.5            129.3    100-125*           219.5  
1989  184.2  155.0  167.5     161.7    131.52     336.00  292.6
1990  216.7  191.7  197.6     255.0    142.40     223.36  341.4
1991  286.6  233.7  267.2     298.6    165.90     286.40  261.9
1992  349.4  318.0                     300.00*            366.0  
1993  455.3                            650.00*
* based on personal interviews
These figures contain some interesting information. The rice
price was fixed during the Ne Win era and doubled after its
partial liberalization in 1988. After the SLORC took over power,
the rice price appears to have been artificially repressed
in the cities, keeping the consumer price index unrealistically
low. Other essential prices were also kept down for the urban
population: Fresh fish rose twice as fast for wholesalers (152%)
as for retailers (86%) and for dried fish 105% and 59%
respectively. That these prices in Rangoon did not reflect
general price levels is revealed by comparing them with other
unrestricted articles: for tea, producer prices increased from
47.82 Kyat/viss to 57.04 Kyat over 1989-91, while retail prices
rose from 61.99 to 137.63 Kyat/viss. Betel nut rose by 291% at
wholesale source, but by 394% at the retail level. Unfortunately
statistics about rural areas and small towns are not available.
The picture emerging through these data is REPRESSED INFLATION IN
THE CITIES. This matches with the picture of a pro-urban bias of
general policies. 
7. However, repressed inflation has to find an outlet somewhere.
The normal channels are shortages, black marketeering and a
depreciation of the exchange rate - all of which we find in
Burma. To give two examples:  
* Petrol is still a restricted commodity, with official supply
very short of demand. There exists a quasi-open black market
which is essentially supplied by the army. Its prices fluctuate
frequently and amply, with the highest peak in spring during the
Water Festival. This makes transport in such a vast country
fortuitous. A rice trader buys a bag of rice at 800-1000 kyat and
sells it at 1300. Out of this margin, transport of sometimes
considerable distances (e.g. Mandalay to Myitkyina) has to be
paid. Not surprisingly, supply in the north is unreliable.
Similar difficulties apply to other products.
* some imported goods, presumably from the border trade, are
available fairly freely in markets and shops at prices
corresponding to the unofficial exchange rate. For example, a can
of Coca-Cola, imported from Singapore, costs 45-50 Kyat in
Myitkyina, i.e. less than 1/2 US-dollar at the unofficial rate.
However, for the local population, the prices of imported
necessities, such as medicine, rise with the black market
depreciation of the Kyat. This makes them often inaccessible for
the rural population whose money income largely depends on the
controlled price for rice. Nevertheless, people I spoke to seem
to be satisfied that medicine is now generally available. 
This logic must also have had some impact on the use of
fertilizer in agriculture. Domestic procurement has fallen from
159.1 thousand tons in 1988/9 to 131.6 thousand tons in 1991/2,
while simultaneously imports have more than doubled (from
23.7 to 48.1 thousand tons), increasing the imported procurement
share from 13 to 27 percent. But interestingly, total
distribution of fertilizer fell from 184.1 thousand tons to 146.3
representing only 81% of the available supply.  
A further indication of economic difficulties in agriculture is
the disimbursement of agricultural loans by Myanma Agricultural
and Rural Development Bank:
Year               1988/9   1989/90   1990/91   1991/92
Loans (mio Kyat)   1308.8   1616.0    1524.4    1550.0   
The volume of loans increased by 18.4% over four years, or 4.5%
p.a.. However in the meantime, general living cost more than
doubled, so that agricultural loans in real terms nearly fell by
8. We may conclude that between 1988 and 1992, the SLORC made
great efforts to improve economic conditions for the urban
population by a mix of some economic liberalization and price
controls, but this had counter-productive effects in rural areas
where agricultural output stagnated or fell. Unfortunately, I
have no recent data to judge if these trends have continued.
However, the information collected on rice trade and related
prices indicates that in 1992 the rice price was allowed to
increase much more rapidly than previously. This can be
interpreted as a readjustment of economic policies, for the
increasing rice price would have raised incomes for rural
populations. Alternatively, the 4-fold increase in two years
could represent a shift into hyperinflation. Given the general
climate in the country, the feedback from people we met and
remarks from diplomats in Rangoon or the analyzed price indices,
I do not see signs of rapid hyperinflation, although the already
high inflation may be somewhat accelerating. I am therefore
RURAL INTERESTS IN 1992, possibly after the removal of Gen. Saw
Maung. The recent drive to end the civil war goes in the same
direction. The doubling of rice prices should then be viewed as
an attempt to rebalance the rural/urban terms of trade, once the
first signs of urban prosperity had appeared. The lower tax levy
on rice producers also supports such interpretations; while
during Ne Win's times rice "quotas" could be as high as 80%,
they seem now to have come down to 7 bags per acre or roughly
10-15% of production. 
However, if such a swing in income distribution does indeed
manifest itself, it could cause considerable hardships for
workers in the cities. According to a UNDP study, salaries of
government and State enterprises have not been raised between
1989 and 1993. This has led to widespread moonlighting all over 
the country, supported by the black market economy. Even well
educated doctors and teachers are dropping out of their
professions, as they find it impossible to feed a family on
their salaries (1250 Kyat per month). In the private sector,
wages have increased, but only just to compensate inflation. In
1990, an unskilled manual worker could earn in Rangoon 25 Kyat a
day; today his equivalent wage is 50 Kyat. For skilled labour in
the same workshop, wages go up to 70 Kyat and 125 Kyat for a
foreman. I am told that other comparable workshops pay less, at
the price of very high staff turnover. REAL WAGES IN DOLLAR TERMS
at the unofficial rate have remained astonishingly stable during
the period at exactly $ 0.416 per day. In this respect I can not
follow the UNDP report which cites rising labour costs as a
source of inflation. But I do agree that an acceleration of
inflation could cause a lot of dissatisfaction in the cities.
Maybe this is why some of the more "proletarian" quarters are
being shifted into well policed "new towns".  
A particular situation exists in Kachinland where female workers
in jade mines earn 300 Kyat and male 500 Kyat per day. These pay
levels are far above ordinary  wages; apparently a large number
of workers are employed in Hpakan jade mines, but the total
figures cited to us (1 million) seem too unrealistic to be
believable. Some individual jade traders claim to employ up to 
10,000 workers.
9. If the causes of inflation are not found in excessive labour
costs, the instability of prices must result from inappropriate
monetary and fiscal policies. Clearly, too much money is
"printed". UNDP recommend that money creation should under
present circumstances be reduced to a growth rate of 10% per
year, while it is now around 40%. However, it is important to
understand that the underlying cause of the excessive money
supply is a massive budget deficit.  
According to government statistics, the consolidated budget
deficit (state administrative organizations, state economic
enterprises and Yangon city development committee) has been
substantial with close to 10% of GDP. Interestingly, the
explosion of the deficit since 1989 is primarily due to the
sector State Administrative Organizations. This presumably
includes the army which has at least doubled its force, spent
money on arms and ammunition etc. The deficit in State Economic
Enterprises has remained stable in nominal terms, if not falling,
i.e. it was reduced in real terms. 
Such deficits are not necessarily detrimental for economic
development as Malaysia has demonstrated. The question is, how
they are financed (see World Bank, The East Asian Miracle,
Washington 1993). If they are funded by high financial savings
and rapid economic growth related to low initial debt ratios,
they can be maintained without destabilizing the economy. Yet,
none of these conditions is fulfilled in Burma. In fact a
substantial part (between 1/2 to 4/5) of the deficit is covered
simply by printing money. Foreign aid and borrowing which used to
be substantial up to 1988 (about 1/3 of the deficit) has
literally dried up in the aftermath of the suppression of
democracy. Thus, the international condemnations of the SLORC's
human rights record have had a sensitive effect.  
Monetary financing ("printing money") filled the immediate gap.
Under Ne Win's socialism the domestic banking system played
literally no role in providing finance to the government. After
the establishment of the Myanmar Investment and Commercial
Bank in 1989, new bank laws in 1990 and new rules and procedures
in 1991, the banking system started to take greater prominence in
financing the public deficit (in 1991/2 nearly 40%).This is
potentially a step in the right direction.
Year Deficit Money Foreign Deficit Money  Infla      Foreign
    (M Kyat) creat aid &   (per    crea   -tion      aid/Defi     
             -ion  loans   cent)   -tion  finance    -cit 
      (1)     (2)   (3)    (4)     (5)  (6)=(2)/(1)  (7)=(3)/(1)
1988  6314    4031  1922   9.1%    5.8%    63.8%        31.5%
1989  8019    6740  1088   6.9%    5.8%    84.1%        13.6%
1990 11204    8653   940   7.9%    6.1%    77.2%         8.4%
1991 17815    9589   972   10.7%   5.7%    53.8%         5.5%
Thus the dire public finances and the irresponsible way of
financing them are an essential element for explaining the
disastrous state of the Burmese economy. To the degree that an
end of the civil war would lead to a reduction of military
expenditure, the peace process could contribute to a reduction of
the fiscal deficit and inflation. But such necessary adjustment
will only take place if responsible policies are pursued. The
social needs and high expectations AFTER peace may put this into
question again. The solution can only be to find an acceptable
POLITICAL settlement; Burma is too poor to buy its way out of its
10. There are two indicators to judge the soundness of monetary
policies: interest rates and exchange rates.
The INTEREST RATE is the most important variable to mobilize
economic and financial resources for investment and development.
Asset owners put their money where they obtain the most
attractive rate of return. They will not hold domestic assets
unless returns are sufficiently attractive compared with those
abroad. Thus, to be attractive, interest or profit rates must not
only equal those abroad, but they must also take into account the
risk of losing out by a depreciation of the exchange rate or
other potentially adverse developments. Given the poor
credibility of the  SLORC government, its sometimes irrational
and unintelligible policies and the arbitrary human rights
violations, holding assets in Burma is a high gamble which needs
to be compensated by very high returns. If there existed
efficient financial markets in the country, this situation would
be reflected in very high real interest rates (i.e interest rates
obtained for investment after deducting the rate of inflation).
But there are not only no properly developed financial markets,
AND FOREIGN SAVINGS. According to the IMF, deposit interest rates
have been raised in 1990 from 1.5% to 9%. Yet, given the rate of
inflation of 20-50%, savers were at the end of the year poorer
than at the beginning. Hardly an incentive to save or invest. 
The 315-page government report on the Myanma economy does not
mention interest rates at all. In paragraph 344 it states: "In
order to achieve the above objectives [mobilizing foreign and
domestic resources for economic activities as well as for
administrative and social purposes], financial programmes were
laid down for the effective mobilization and utilization of
domestic and foreign financial resources. ... As such, monetary
and fiscal reforms are being initiated to be in line with the
economic system." This gobbledygook can only mean that the
government sets targets for financial income which are then
allocated to specific tasks. In my conversations I have had some
indications that this is in fact the way things are run. Thus at
different levels (regions, towns, tax and customs offices, etc)
the "administration" (mainly the army) has to raise income by all
means. Alternatively, they can cut expenditure by forced labour.
If targets are not met, the commander or responsible person loses
problem of drug traffic is so intractable, particularly in a poor
region as Shan State. In order to raise the required revenue,
"one closes one's eyes" to all kinds of undesirable activities.
This "system" may not be alien to traditional Asian societies and
to the earlier "Burmese Way to Socialism". But it is INCOMPATIBLE
ORIENTED ECONOMY. All that has changed, and this is a small, but
very small progress, is that QUANTITY-PRODUCTION QUOTAS are
replaced by MONETARY TARGETS. But as long as investment and
capital is not allocated in response to interest rates, one can
not really speak of a monetary economy in Burma. 
Given these circumstances, the only attractive opportunity for
foreign investment are projects of VERY HIGH SHORT-TERM
PROFITABILITY, normally linked to the exploitation of natural
resource rents (forests, oil etc). The absence of a properly
functioning monetary economy creates the CONQUISTADOR-economy.
It is important that this is taken into account by ethnic, and
particularly by Kachin leaders, when planning for the future of
their people. The natural wealth of their land does not guarantee 
development. To the contrary, it may lead to wasteful RENT-
SEEKING activities (i.e. obtaining licences, privileges etc,
often by active or passive corruption) and fierce competition for
political power and influence, rather than productive investment
and innovation.
11. The EXCHANGE RATE is the essential variable by which a
country gets integrated into the world economy. It determines the
competitiveness of a country's industry and influences people's
decisions in which form they wish to hold their wealth. 
>From an international point of view, the quality of the local
currency is very poor: The black market rate for one  dollar is
presently (Jan. 1994) 120 Kyat against the official rate of 6.5
Kyat. In August 1990 it was 66 Kyat per dollar and the official
rate 5.6 Kyat. Thus the unofficial rate has doubled in three
years and the black market premium has increased from 12 times to
18.5 times the official rate. The implicit depreciation of the
unofficial exchange rate seems not to have fully compensated for
domestic inflation. All this is a clear sign that monetary
conditions are deteriorating. However, the change of Kyat against
Foreign Exchange Certificates (FEC) seems to be closer to an
"unofficial" than a "black" market: Money changers operate within
the main banking hall of the Foreign Trade Bank, offering Kyat
against FECs at the unofficial rate. The atmosphere resembles
more to a Stock Exchange than a bank. 
The effects of a disastrously overvalued official exchange rate
are reflected in the foreign trade position. Exports shrank,
according to World Bank statistics, by an average -2.1% during
1965-80 and by -10.1% in 1980-90. Imports fell during the same
periods -4.4% and -14.5% respectively. All this despite an 
improvement of the terms of trade from 106 in 1985 to 127 in
12. The level of imports into Burma is clearly constrained by the
level of exports. Additional finance through FOREIGN BORROWING
was used before 1988. Between 1975 and 1985, the total identified
external debt of Burma grew 13.5 times, from US-$ 281 million to
$ 3 813 million. By the mid 1980s, the debt/GDP ratio was around
45%, but because of the low export volumes the debt/export-ratio
stood already by 846%. This meant that 55.4% of export earnings
were used to service debt (pay interest and reimburse principal).
Burma was already in a debt crisis before the SLORC's days.
However, the situation has worsened since. Bilateral and most
multilateral aid has been withdrawn. Nevertheless, the SLORC must
have received credit from other (private?) sources (China,
Japan?), for external debt is now estimated at US$ 7,500 million
with $ 1,000 million unpaid interest. Who would be willing to
finance Burma's imports under these conditions?
However, the irrelevance of official trade statistics is evident
to the eye: while the markets in all towns are primarily filled
with imported goods from China and other Asian countries, the
official import/GDP ratio has varied between 4.5% and 2.7%
between 1988-91; the export ratio is even lower between 2.0-2.8%.
For comparison, the openness ratios (exports and non-factor
services to GDP) for China have risen during 1965 to 1990 from 4
to 18%, in Indonesia from 5 to 26%, in Thailand from 16% to 38%
and in Malaysia even from 42% to 79%.[9] Thus even by
conservative estimates, it is likely that the unofficial but
booming border trade is about 2-4 times larger than the
officially recorded transactions. This may explain the interest
by all parties concerned to finish with the Civil War.
Asia is Myanmar's main trading partner, officially and
unofficially: 69.4% of 1990/1 official imports and 94.1% of
official exports (of which 37% are forest products) are traded
with Asia, according to government statistics. Southeast Asian
countries (Thailand, Singapore Malaysia) are most important as 
export destinations (40.8%), while China is the single most
important import supplier (22.1%), followed by Japan (16.5%) and
the three Southeast Asian countries (27%). It has sometimes been
suggested by representatives of the Burmese opposition and their
support groups that the West (Europe and the USA) should impose
trade sanctions on Burma. Foreign trade statistics clearly bear
this option out. In this respect, Burma is different from South
Africa which had a fairly sophisticated and sensitive economy
where sanctions could be effective, Burma's undeveloped economy
would hardly be affected.
The excessively overvalued official exchange rate renders not
only Burmese manufactured exports utterly uncompetitive, but it
also prevents the development of a domestic market for Burmese
made goods. During Ne Win's times, supply of medicine used to be
a chronical problem. We  have found many private drugstores
which have all the requested medicine on stock, although at high,
dollar-based prices. In the Lashio market I had a chance to
compare buckets, bowls and bins of identical dimensions and
usefulness; one was made in plastic and imported from China, the
other made in metal from Mandalay. The imported bucket costs 400
kyat, the Burmese made 1200 Kyat. Not surprisingly, the
shopkeeper sells mainly Chinese goods. Similarly, unbeatable
prices can be found for bicycles and many other goods. One may
speculate why such household items are swamping domestic markets
in Burma. Simple exchange rate considerations may not be enough,
as India, Thailand or other Southeast Asian economies do not seem
to be able to compete on equal footing with China. One hypothesis
worth exploring could be that the Burmese government entered an
agreement with China to pay for the very significant arms
supplies [10] by re-orienting their trade sources. 
Unfortunately, in Burma local production is not even at black
market rates necessarily competitive. This at first unexpected
observation must be explained by the growing weight of border
trade where this rate is applicable. It would therefore indicate
that the invisible border trade yields substantial surpluses.
This is supported by manifold stories which circulate about
individuals with significant foreign asset holdings. Given the
nature of some of the transactions this is not surprising. In
Kachin State this seems primarily to relate to precious stones.
More important is the drug trade in Shan State. The French
Observatoire Geopolitique de la Drogue estimates that drug
revenue from 2,800 tons of Opium (producing 200 tons Heroin)
would yield an illegal income between US $ 2-8 billion, which
compares with official foreign exchange reserves of $ 200-300
million and a GDP of $ 1.460 billion at the inofficial exchange
rate and $26.953 billion at the official rate. Thus clearly, drug
money is a major obstacle to the development of the country, as
it prevents industry from becoming competitive. 
Proper exchange rate management would have to keep the exchange
rate stable at a competitive level. Exports which have been
stagnating (unless administratively fixed like rice in 1990/1)
would then start to grow; the resultant foreign exchange
earnings would slowly make the currency more freely convertible. 
A further problem with the high overvaluation of the Kyat lies in
the incentive to export capital (instead of goods and services)
and in the deterrence for foreign capital to come in: because
everybody knows that the present exchange rate is too high, a
future devaluation is a certainty. Month by the month, high rates
of inflation keep distorting the exchange rate even more. Foreign
investors would then lose a significant part of their capital;
domestic wealth owners will try to protect themselves by bringing
as much money out of the country as possible.  
SLORC representatives seem to believe that any adjustments must
be made slowly. Presumably the dramatic effects of the 1987 money
fiddle is still considered as a warning. Yet, the SLORC's
credibility of making effective reforms is not very high.
Therefore, reforms of the economic system would be much more
easily accepted if they came from a new government. This could be
a negotiating point for peace negotiations between the KIO and
other minorities and the SLORC. For international investors,
however, the crucial step for gaining confidence would only be
the liberation of Aung San Suu Kyi and durable political
stability based on a broad consensus in the population. In no way
could it be justified that governments would resume aid or
encourage private industry under the present circumstances.
12. This analysis poses important questions for the future peace
process with the ethnic minorities. Assuming until proof to the
contrary that the SLORC's peace offer is genuine the new policies
will have to contribute to improved living standards of the
people, in particular in the border areas. This, however, can
only happen when the economy is stabilized and inflation reduced
to a low level. This is a necessary, but not sufficient condition
for economic development. Economic growth also requires that
investors feel safe about the political and social environment.
ALSO REQUIRED. At present, property rights are a protection
"against one's neighbour", but not against government
interference. We have witnessed several stories reporting
arbitrary land seizures and other expropriations by the SLORC.
Under those circumstances, a significant acceleration of
investment and growth is not very likely.
Yet, besides the human rights issue, even strictly economic
reforms and stabilization poses important political problems.
Unless they are solved FOR GOOD, political instability will
always wreck economic progress in the end.  
The crucial issue for the minorities is, of course, the
distribution of wealth over the territory of the Union. In terms
of public finance, this means: who decides on taxation and the
appropriation of revenue for the government? Who is responsible
for its allocation. If a federal state  la India came out of the
constitutional process, as our SLORC contacts indicated, a
mechanism for raising and reallocating revenue from the Union
Government to the State Governments is required. Here, a
famous rule from the American independence movement says "no
taxation without representation". Furthermore, many valuable
natural resources (precious stones, metals, forests etc) are in
contested minority territory. Unless there is a clear settlement
of property rights in the constitution, giving protection against
arbitrary expropriations, it will be impossible to use this
wealth for the development of the country (as opposed to the 
enrichment of a few individuals). It is important that at the
Union level the Government understands and respects the role of
individual rights, just as the minorities must give up the idea
that they are owners of those resources by the nature of their
ethnic birth or communal belonging. A genuine market economy
would require that access to these resources is  free for all and
allocated by prices reflecting relative scarcities.
Once this question of fiscal redistribution is solved, one should
also prevent the possibility of irresponsible financing of public
deficits. In recent years, an increasing number of countries have
made formal commitments to low inflation by establishing fiscal
policy rules (balanced budget laws) and making institutional
arrangements. One of the most effective measure has been proven
to be a Central Bank which is independent of (i.e. not taking
orders from) the Government, committed to maintain price 
stability and not allowed "to print money". The government will
then have to finance its expenditure through taxation or domestic
and foreign borrowing. Under a federal constitution, the Central
Bank should also resemble some kind of "Federal Reserve System",
whereby the Central Bank has a federal branch in each State which
is responsible for the surveillance and development of a local
banking structure. This is of particular relevance in Kachinland
where the exploitation of natural resources is likely to lead to
the accumulation of substantial assets and in Shan State where
border trade is going to require efficient banking and payment
structures. Thus an independent federal Central Bank system would
help to develop efficient financial markets which are the best
guide to a sound economic environment, leading to growth and
rapid development. Southeast Asia is a telling example. 
14. Our analysis comes to the conclusion that the process of
economic transformation from a State-controlled economy to a
market oriented system has hardly begun in Burma. We have seen
some changes in daily life, but they follow much more the OLD
LOGIC than a market economy. These changes do, however, provide
some opportunities for "business" - in fact for so-called RENT-
SEEKING activities by a small and soon corrupted elite. It would
be tragic if the KIO and other ethnic organisations with their
disciplined and well-intended leaders would fall into this
trap. We have been told and seen some evidence that the United Wa
State Army and the Shan State Army have essentially transformed
themselves into ordinary businesses without any political claims.
The SLORC has granted them the freedom to trade (including gems
in Myitkyina (!) and arms which we saw on a truck outside Lashio)
and did not seem too unhappy to have settled so cheaply.
In my view, a more promising strategy would be to aim
simultaneously at the transformation of the economy in the whole
country and at developing Kachinland and other ethic territories
But this poses the fundamental problem of Burma's future. At
present, its economy has more in common with African countries
than with the fast developing countries of south east Asia. While
the latter have achieved fast growth over a long time period by
an open market system which allows competitive investment, the
rent-seeking regimes in Africa and Burma prevent high rates of
accumulation and innovation. Rather than having markets allocate
capital and investment where it produces the most efficient
results, the mode of regulation is here characterized by an
administered economy and redistributive mechanisms which are
based on the State (Army) and the adherence to (ethnic)
communities. The emergence of a middle-class  la Thailand is a
distant dream. In this context, the supposed "wealth" of Burma,
i.e. its natural resources, is actually poison for development:
it helps to enrich a small class of people who appropriate the
rent-income from the exploitation of these resources, but it
contributes nothing and may even prevent the development of
productive industrial activities. In these circumstances, foreign
aid by governments to Burma would have a similar effect as it has
in Africa: it will prevent the emergence of a competitive
exchange rate and will keep the country in eternal dependency
from foreign donors.[11] 
A way out of this dilemma is difficult. An appropriate exchange
rate regime is a necessary, but not sufficient first step.
Ultimately full liberalization of the economy, with freedom of
movement for goods, capital and labour, security of rights -
including human rights - and free access to markets and capital
and a stable currency under a legitimate government would be
required to create the right environment for the Burmese economy
to take off. But this, of course, puts into question the very
nature of the present regime. 
In the context of the peace talks, the minorities should seek
some guarantees for the constitutional rights of individuals and
private property. They would have to address the institutional
problems of taxes and the prioritizing of spending, as well as
the status of the Central Bank. The KIO and other ethnic groups
would further have to insist on reforms stabilizing the economy
and restraining inflation. A proper exchange rate regime would be
the single most convincing act that economic conditions are
changing indeed. 
15. Without such fundamental changes, there is little hope that
Kachinland or other ethnic territories could find the way out of
their poverty stricken underdevelopment. The existence, and even
exploitation of natural resources are of little help: whoever
could make some money out of them would be a fool to leave it
in the country or invest it under the present circumstances. But
once reforms have been implemented and political stability with
respect of human rights is established, there is a good chance
that money will come from outside to support the Kachin people or
the country as a whole. 
The same applies to FOREIGN AID AND INVESTMENT. It is neither
rational nor morally justified to resume foreign aid and loans or
to support private investment by credit guarantees under the
present conditions in Burma. For government aid, the decisive
criterion should be the liberation of Aung San Suu Kyi and
substantive democratic reform; for private investment the
stabilization of the economy and a realistic exchange rate regime
is a necessary pre-condition. 
As for humanitarian aid, the situation is different. As long as
NGOs can control the aid process without interference by dealing
directly with their local counterparts, aid can be allocated
efficiently. Such projects would have the benefit of not only
giving relief to the people immediately concerned, but also to
set up examples of training and education which would later on
benefit the country.
Once the general framework has been established, ethnic leaders
could focus on developing their own region. Immediate attention
must be given to improving the infrastructure (transport,
communication, energy and electricity supply) without which local
industry and development is impossible. The first signs of 
foreign investment in Burma are clearly localized around Rangoon
and Mandalay and spill-over effects into the north and northeast
are minimal. One option worth considering might be the creation
of a SUBREGIONAL ECONOMIC ZONE with China. Experiences from
other parts of Asia[12] show that this can help to develop the
necessary infrastructure with private capital.
The Union of Myanmar, Ministry of Planning and Finance: Review of
the Financial, Economic and Social Conditions for 1992/93; Yangon
IMF, International Financial Statistics; May 1993
World Bank, The East Asian Miracle. Economic Growth and Public
Policy; Washington 1993 
Bergsten, C. F. and M. Noland (ed.), Pacific Dynamism and the
International Economic System; IIE, Washington 1993
[1] Singapore-built for US $ 9 million; it has a 300 seat
convention hall and is fitted out with all the most modern
communication equipment. 
[2] SLORC stands for State Law and Order Restoration Council,
the military junta which took power in 1988.
[3] Not surprisingly the velocity of currency circulation
exploded from a previously stable long term trend. The
income/currency-ratio rose from 4 to  8 in 1987 and then
slowly came down to its long term value in the early 1990s. This
means that people in Burma wish to hold approximately 25% of
their income in cash balances.
[4] A value of 100% indicates equality between rural and urban
[5] Ambassade de France en Birmanie, Poste d'Expansion
Economique: Evolution du cout de la vie en 1993: Rangoun, Octobre
[6] Official consumer price index for Yangon.
[7] Inflation is rate of growth of currency plus money velocity
minus real growth.
[8] Rice retail price in Rangoon, February of each year.
[9] See Bergsten, F. and Noland, M (ed.), Pacific Dynamism and
the International Economic System; IIE, Washington D.C. 1993, p.
[10] According to The Nation in Bangkok (29/1/94), China has
supplied since 1990 some 100 T-63 and T-69 tanks, 150 armoured
personnel carriers, 30 107mm battery rocket launchers, about
1,000 five-ton trucks as well as some 122mm howitzers and 130mm
field guns. The air force has taken delivery of 24 F-7
interceptors and 12 more are promised. 10 Hainan-class fast
attack patrol boats were delivered to the navy and a naval base
at Hainggyi Island in the Irrawady River has just been completed.
China has also helped to set up a long-range radar station in
Cocos Islands, just 30 km away from India's Andaman Islands naval
[11] However, this argument does not apply to NGOs who bring
humanitarian emergency aid to Burma. Their foreign exchange
impact is negligible and the relief supplies cannot be
appropriated by corrupt officials as long as NGOs keep control
over their operation - which should be a precondition for aid in
any case. 
[12] See Bergsten and Noland, 1993.
January 20, 1994