8/9)WORLD_BANK:POLICIES FOR SUSTAIN

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/* Posted 19 Apr 11:00am 1998 by drunoo@xxxxxxxxxxxx(Dr U Ne Oo) in
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/* -------------" Policies for Economic Reform 8/9 "------------ */

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MYANMAR: POLICIES FOR SUSTAINING ECONOMIC REFORM (8/9)

WORLD BANK Report No. 14062-BA, October 16, 1995.

REFORMING THE SE SECTOR

44. A REFORM STRATEGY. An effective SE reform strategy in Myanmar
would require actions in the following areas:(I) macroeconomic and
sectoral policy reform; (ii) clarification of the role and
objectives of the SE sector, which would enable a classification of
enterprises into those that would be retained by the state in the
medium term, and those that could be divested immediately; (iii)
measures to privatize management or ownership of SEs, including
actions with regard to labor retrenchment; (iv) steps for
restructuring those SEs that are to be retained, including ways of
improving their operational and financial performance; and, (v)
actions aimed at supporting the development of strong domestic
private enterprises.

45. MACROECONOMIC AND SECTORAL POLICY REFORM. If the reform of SEs
to succeed, the adjustment of the exchange rate and interest rates
to realistic levels, and price liberalization must be among the
highest priorities. Macroeconomic reforms would allow the true
picture regarding the financial and economic viability of
enterprises to emerge. Similarly, until the prices at which SEs can
purchase inputs and sell their outputs are liberalized, it is
difficult to determine their economic viability. The other risk with
attempting to divest SEs in such a controlled policy environment is
that it may be necessary to offer offsetting subsidies and other
fiscal benefits as sweetners to attract potential buyers. the
fiscal and distortionary effects of such incentives would reduce the
gains from SE reform, and reform will be slow and costly. In
contrast, there is no better way to encourage confidence among
foreign investors than by eliminating overvaluation and enhancing
convertibility of the Kyat.

46. CLARIFYING THE ROLE OF SEs. With the Myanma economy now based on
markets rather than on state ownership, the role and the objectives
of SEs has changed. This new role needs to be spelt out, and will
determine, in large part, the extent to which divestiture is
necessary, how restructuring of enterprises should proceed , and how
fast privatization would need to proceed. While this report cannot
detain the precise role that SEs would play in a market-oriented
Myanma economy, there would be few areas of such an economy in which
the presence of SEs would be essential. The only exceptions of any
magnitude would be sectors characterized by large and lumpy capital
investments and scale economies, such as electricity generation and
distribution, and water supply and sewerage. In the rest of the
industrial and service sector (as in the rest of the economy), the
private sector (domestic and foreign) is quite capable of serving
consumers more effectively and at lower cost than has been the
experience with SEs. the government would devote its resources to
supplying efficiently infrastructural services and public goods
(such as education and health services), and to controlling
monopolistic practices and ensuring compliance with environmental
and social laws. Once the role of SEs in the economy is clarified,
all existing enterprises should be classified according to whether
or not they would be retained by the government in the medium term.

47. PRIVATIZATION. An important lesson from other reforming
economies is that the main goal of privatization efforts should be
to maximize economic efficiency rather than the pursuit of other
goals such as maximizing revenues from selling SEs, developing
capital markets or broadening stack ownership among particular
groups in the population. The main reason to emphasize large-scale
privatization is that there growing evidence from market-oriented
and transition economies that ownership matters for productivity.
this case is strengthened by the failure of most attempts to improve
the performance of the SE sector through sector-wide restructuring
programs. Reducing state ownership is also likely to be the only
effective way of "leveling the playing field" between SEs and
private-sector firms.  Nevertheless, given the limited absorptive
capacity and undeveloped capital markets in Myanmar, a successful
privatization strategy should begin with small and relatively simple
enterprises, whose viability is usually easy to determine. Not too
much effort should go into the precise valuation of the assets of
these small and medium SEs to be privatized in the initial phases. A
combination of privatization techniques is also likely to be
required to fit the range of enterprises. Liquidation of non-viable
SEs will be needed as well and should undertaken early in this
process. therefore, it is essential that an exit policy be
formulated that allow liquidation of enterprises through bankruptcy
proceedings. For medium-sized enterprises not included inthe first
phase of privatization, an useful interim measure would be to lease
their facilities to private enterpreneurs. However, steps are
necessary to allow for labor retrenchment so that the private
lessons are free to make their own wage and employment decisions.

48. RESTRUCTURING SEs. For enterprises that are to be retained by
the government in the medium-term, such as those involved in
petroleum and gas exploration, electric power generation and
distribution, and commercial banking, it is essential that the
policy and institutional framework be revamped. Decision making
within these SEs must be decentralized by granting their managers
real autonomy in financial and operational matters. An important
first step would be to separate their financial accounts from the
State Fund Account. Subject to the implementation of a sustainable
regulatory framework to prevent the exercise of monopoly power,
managers should be free to choose their output mix; sales prices,
input sources, and wage and employment levels. One way to grant such
autonomy is to introduce management contracts that specify explicit
performance targets, as in China. the financial independence of SEs,
and their incentives to focus on profits, could be enhanced by
implementing a profit tax that allows enterprises to retain a part of
their profits. However, along with greater autonomy, enterprises
must also be held accountable for their performance. this would
require the imposition of a hard budget constraint, which in the
Myanmar context would require eliminating the implicit and explicit
subsidies currently enjoyed by SEs on imports, credit and energy
inputs. To ensure that SEs cannot escape hard budget constraints by
defaulting on payments to other enterprises or on loans, it is
essential also that bankruptcy be made a credible threat by
implementing the necessary laws.

49. PRIVATE SECTOR DEVELOPMENT. The recent reform experience of
transition economies shows that rapid private sector development can
ease the employment and output losses that are typically associated
with the initial stage of SE reforms, Removing burdensome
restrictions and regulations on private sector operations can yield
especially quick dividends. POlicy makers in Myanmar should consider
changing their approach to private sector development. More
sustained action is required to remove the regulatory barriers to
the establishment and operation of private firms. Clarifying urban
land ownership and use rights, and improving the access of private
firms to public services and infrastructure would be important steps
in this direction. It is also necessary for a change in philosophy
on the government's part. It should be recognized that with a shift
to a market economy, the role of the government is not to control
the pattern of economic activity but rather to support
private-sector initiative and ensure that the "rules of the game"
are followed. Hence, efforts should be made to develop institutions
and mechanisms to support the private sector with information and
infrastructure. Finally, dialogue and consultation with the private
sector need to be enhanced in order to build the necessary consensus
regarding reforms.

(9/9) F. CONCLUSION

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