A superb, must-read article on ODA

[carol@xxxxxxx]

Japan Times, Monday, March 16, 1998

USE ODA 'CARROT' TO REFORM MYANMAR
Guest Forum
By Zaw Oo

	The self-reliant economic system that has been so stable in the past is now
shaken as a result of exposure to external shocks and trade fluctuations.
The only reasonable response is a retreat to the old autarky and shielding
the economy from neocolonial capitalists.  This a simplified version of the
ideology of the generals who run Myanmar.
	In these circumstances, how can the recent resumption of Japanese Official
Development Aid to Myanmar be effective?  Clearly, the move is premature.
More likely, the ODA will be unproductive and will permit the generals to
escape the consequences of their foolish economic policies.
	Although Japan provided no bilateral assistance to Myanmar in the last 10
years, Japanese ODA before 1988 could give us clues how such aid facilitates
the development process.  In the "lost decade" of the 1980s, Myanmar was
among the top 10 ODA recipients.  Myanmar received more than Indonesia and
almost the same as Thailand.  Despite this flow of aid from Japan, the
country's economy collapsed in 1987, which led to popular uprisings in 1988
and the violent suppression that followed.
	There are several lessons in the failures of the last decade.  These
include the profound importance of a macroeconomic policy framework in
determining the return on individual projects; the orientation of
development policies; and the need for effective administration of aid
programs.  Without these features, results will be miserable, regardless of
the "soundness" of the ODA projects designed and formulated by the Japanese.
	The lack of incentives and misguided economic policy decisions limited the
use of aid as a "transfer of resources" to fix constraints on growth and
foreign exchange.  Worse still, the country became highly indebted to Japan
since the loan component of the aid was much larger than the grant component
(the average ratio was 3:1.)
	Has Myanmar changed enough to qualify for Japanese ODA?  The first test of
macroeconomic policy framework would indicate that the country still has a
long way to go before it can put aid to productive use.  Unchecked
government spending has led to a chain reaction of fiscal crises, a soaring
inflation rate and an extreme current account imbalance.  Since 1988, the
government's expenditures mushroomed and the fiscal deficit reached nearly 8
percent of GDP last year.
	Myanmar missed a golden opportunity to benefit from market openings
introduced in 1988.  Ten years of a slow but steady flow of external private
capital and income generated from the sale of natural resources and oil
exploration could have been used to restructure the economy and put it on a
sustainable growth path.  But foreign direct investment ended up in
unproductive investments such as real estate and tourism.  But since the
inflow of external funds temporarily eased the pain, old habits are recycled
and the government reallocated resources according to political priorities.
It was another example of "moral hazard" that kept the generals from making
essential reforms.
        In open economies, weak markets suffer more from external shocks.
With its bad policy regime, Myanmar is being hit hard by the "Asian flu."
First, the Asian firms who provide 70 percent of FDI in Myanmar have either
reduced or indefinitely postponed their commitments.
	Second, there has been a sharp drop in demand for the 50 percent of Burmese
exports that used to sell in Asian markets.  Third, the pressures on the
weak Burmese currency have been felt speculative attacks brought about a
nearly 100 percent depreciation at the height of the Asian flu.  Given these
inflationary pressures and dwindling foreign exchange reserves, the kyat is
more vulnerable to contagion effects.
	The government is trying to reverse these negative trends.  However, the
policy tools the government is using to remedy the economic ills are not
economic ones.  The government sends agents to foreign exchange counters and
arrests traders who make transactions outside the official range set by the
government.  The trade licenses that the regime created to profit from
rent-seeking activities have been temporarily suspended.  Military troops
are sent to stop the border trade.
	The decision to expand the army to a force of half a million men is
worrying.  The generals focused on building the army and funneled most of
the budgetary resources to a parallel program of modernization and force
expansion.
	Rising through the ranks of military is the primary avenue to attain
wealth, status, and power.
	Under the new policy, the share of military spending in the state budget
has peaked at 42 percent in 1993 and never really diminished after that.
This pattern of military spending alone should disqualify the regime from
any aid since Japan's ODA charter outlined principles that focus on "trends
in recipient countries' military expenditures, their development and
production of mass destruction weapons and missiles, their export and import
of arms, etc."
	Japan has huge influence in Myanmar and it can certainly use aid to shape
developments.  Instead of focusing on project financing, Japan should look
more into fostering a "policy dialogue," and try to introduce effective and
timely reforms in Myanmar.
	The big unfinished task is political.  Japan should try to use the "aid"
carrot to influence the process of democratization in Myanmar.  The ODA
charter already gives a strong mandate to efforts to promote
"democratization and the introduction of a market-oriented economy, and the
situation regarding the securing of basic human rights and freedoms in the
recipient country." Japan should try to rescue Myanmar democracy, not the
generals.

* * *
Zaw Oo is a graduate of the School of International and Public Affairs,
Columbia University.  He is currently coordinator of the Research Group for
the Economic Development of Burma based in New York.