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Burma: The Case for Democracy and E



Country Report
FDL-AP QUARTERLY Spring 1998

Burma: The Case for Democracy and Economic Reform

by Zaw Oo

The current headlines on Asian economic problems rarely include Burma. Even
one of the top generals running the Burmese junta senselessly asserted that
the "Asian flu" has not reached his country. The remark missed the point.
For one reason, the Burmese economy is small and could influence none beyond
her borders. On the other, the economic woes in Burma are more homemade than
exogenous. Still, the general's optimism that Burma does not suffer from
capital flight --the main culprit in the fall of the Asian dominoes-- is
under challenge. Consider the non-existence of equity market in Burma, the
talk about sudden reversal of capital flow is irrelevant. What is relevant
is the contagion effect from the sickened Asia that would exacerbate the
already stagnated economy.

Long before the Asian crisis, Burma has already experienced a silent
emergency. Take an example of rice production. Being the backbone of the
country's economy, accounting for 50% of the GDP and 65% of the total labor
force, the rice economy has completely lost efficiency. The sector has lost
both optimal structure of relative prices and consequently, productivity has
reduced given a poor supply response. The main reason is lack of market
incentives. The prices of agricultural goods have been strictly controlled
under the urban-bias policy of the regime whose stability depends upon
acquiescence of urban constituents. Through a monopolistic mechanism of
'marketing board' and export controls, the government took in huge revenue
by buying rice at a very cheap procurement price from farmers and sold it in
the world market. This implicit tax was not returned in the form of greater
investment in the rice sector; it was instead used to finance the
government's political projects including an ambitious defense planning for
an army of half a million.

The proponents of the"Asian Model" may contend that the negative effects of
such micro distorted economies could be offset by adopting a government
strategy of allocating resources toward areas with high social rates of
return. The myth of authoritarian advantage theory says that 'strong'
states, less dependent on electoral cycles, have greater capacities to
implement policies. However, the key underlying assumption here is the
implementation of right 'policies' under the right 'fundamentals'. The
military regimes in Burma have gone wrong on both policies and fundamentals,
the result being where the Burmese economy stands today: impeded, restricted
and under the duress of special interests.

The Mounting Fiscal Crisis
								
Fiscal crises, associated with soaring inflation rates and extreme current
account imbalances, are recurrent features of the military regimes in Burma.
The economy has long suffered from a chronic budget deficit since the State
Law and Order Restoration Council came to power in 1988. To a great extent,
the expanded size and growth of the public sector has accounted for these
deficits. The government's expenditures mushroomed and fiscal deficit
reached nearly 8% of GDP after ten years of SLORC rule that started with a
near balanced budget.

The government also lost the useful tool of external public financing for
its budget deficits after the donors decided to terminate ODA following the
political suppressions in 1988. Since then use of domestic financing led to
large infusion of money. The result was not only the heightened inflation
that inflicts the population but also the weakening of the kyat that has
caused balance of payments to soar. The government's die-hard adherence to
the unrealistic fixed exchange rate made economic matters worse, hurting the
country's potential exporters further, shrinking the revenue base and
aggravating the resource gap. Under such a highly inflationary environment,
one would not be surprised to learn that Burma scores the lowest among the
Southeast Asians in terms of investment rate (12%)-indicating dim prospects
for a sustainable growth path.

In fact, when SLORC came to power in 1988, the opening of the country to
foreign investment was adopted as a way to regain government control of the
fiscal accounts and the economy. The windfall of income generated from the
sale of rich natural resources and a number of signatory rights from oil
exploration enabled the regime to defer essential economic liberalization.
Foreign capital bred a 'new class' exclusively tied to the top generals,
which drained substantial amounts of newly found wealth into unproductive
investments such a real estate. The inflow of external resources stabilized
temporarily internal disequilibria and the government reallocated resources
according to their political priorities. Old habits were recycled. It was
this reliance on foreign capital in financing the domestic resource gap that
made the regime highly vulnerable to the "Asian flu."

The Impact of the Asian Financial Crisis

The impact of the Asian financial crisis has already taken a big toll in
Burma. First, the Asian firms who constitute 70% of foreign direct
investment in Burma have either reduced or indefinitely postponed putting
their money into Burmese operations and projects in the wake of the credit
crunch at their home fronts. Those trying to heavily divest are being met
with heavy retaliation by the Burmese military generals under the pretext
that this kind of immediate flight of capital would be damaging for the
regime and seriously hamper future foreign investment. Secondly, over half
of Burmese exports go to Asia and many imports as well come from that part
of the world. Cash-strapped Asians are very reluctant to buy anything but
the most essential exports from Burma while at the same time they are
attempting to dump their exports as part of their global strategy to
export-push themselves out of the financial crisis. Surely, Burma will lace
even tougher competition from her neighbors in selling its low-quality
agricultural produce. Moreover, the contagious pressures on the weak Burmese
currency were already felt last year as speculative attacks brought nearly
150% depreciation at the height of the Asian crisis. Finally, for the
short-run, Burma's hope for benefitting from the spillovers from ASEAN
dynamism are now dashed since every Asian country has its own priorities for
survival let alone attending to the problems of its weaker partners.

In economics, crises often come in series. Unfortunately, the forces of
nature do not seem to have aligned with Burma recently. The massive floods
last year caused severe damage to the country's agriculture. For instance,
the government can export only 20,000 tons of rice this year (the 1995
amount was 1 million). This will reduce government income from exports and
make for a balance of payments crisis. This has already prompted the
speculative attacks on the kyat, which has been substantially weakened by
regional effects.

The Authoritarian Disadvantage
As things come to such a dire pass, the government attempts to reverse the
negative trends. However, the policy tools the government is trying to use
to remedy the economic ills are indeed counter-productive in nature. The
government regularly sends agents to the foreign exchange counters and
arrests any traders who make transactions outside the range the government
has set for them. The trade licenses that the regime has created in the
first place to profit from rent-seeking activities have been temporarily
suspended. The military troops are sent to seal off the border to stop
border trade. Given the total halt in external trade, the exchange rate
recovered marginally during the last two weeks. The government then hailed
their action by claiming that they have effectively constrained the demand
and tamed consumption. The unthinkable has happened, turning Burma back to
autarky! Surely, one must question the absurdity of such response.

These policies may sound so irrational to outsiders, however, for the
generals, such actions are deemed necessary. How do irrational behaviors
become rational in Burma? The answer is the political economy of the
authoritarian disadvantage. In this model, generals are bound by interests
and can take only selective measures that can serve these interests. The
fundamental interest of course is to maintain their staying power. It is
possible that they may think that they alone can fulfill the development
goals of the state and so the usurpation of power is imperative but
justified. In any case, the means to attain this end is a strategy, of what
development economists term the 'predatory' state, of self-seeking
extraction of the maximum continuing flow of resources for the maintenance
of power and rewarding the supporters of the regime. The moral here is not
the economic growth but regime stability and the government will use every
resource to this end.

In terms of political economy, the under-performance of the Burmese military
regime can be explained from a number of insights. First, the sale of the
country's rich natural resources conferred monopoly rents to the business
groups and cronies while giving quick revenue for the state. In these
resource-based investments, the foreign firms are forced to make joint
ventures with either state enterprises or the companies set up by the
regime's associates. The typical Dutch disease phenomenon led the regime to
neglect and postpone the essential reforms. Second, in order to stabilize
the urban food prices and to sustain revenue from the government rice export
monopoly, the government continued to squeeze the rice sector. To keep the
anxious urban population appeased, price controls were maintained. To some
observers, the rice price is in one of the most important factors in
monitoring the political risks in Burma. Third, it allowed the steady rise
of luxury imports to satisfy the tastes of nouveau fiche who also benefitted
from the rents of import licensing. The overvalued exchange rate was
defended partly for reasons of keeping social order while it rewarded
certain business agents tied to the state. Forth, spending on political
monuments and propaganda was required due to the regimes lack of legitimacy.
Resource allocation increasingly was based on political prerogatives instead
of social needs. Currently still symbolic not substantive development is
favored. In their scheme, for instance, school constructions are preferred
to teachers training. Sport festivals are organized for the youth while
continuing the closure of Universities continues. Electrical power is
distributed to Visit-Myanmar-Year type promotions and not manufacturing
industries.

Militarization Exacerbates the Problems

Among many new vested interests created, a more worrisome decision of the
regime is to expand the army to a half million person force. The decision
came at the wake of defunct socialist machine when the government lost
almost all structural controls. At the height of the 1988 uprisings, the
socialist party mergers resigned, some defected to the opposition while many
party cadres denounced the 'guardian-cum-captains' of the Titanic. It was so
damaging to the generals and prompted them to fall back upon the 'structure'
they always trusted.
Not bothered to nurture the army party again, the generals focused on
building the army. The regime then funneled most of the budgetary resources
to military outlays. Despite the fiscal constraints, the Burmese army went
on a parallel program of modernization and
forced expansion at the same time. While the army was expanding vertically,
senior army officers were given higher positions in the state as the primary
avenue to attain wealth, status, and power. Thus, the bureaucracy has been
further drained of state revenue with less efficiency and more corruption.
Meanwhile, the share of military spending in the state budget kept running
high at the expense of shrinking shares in education and health. By 1993,
the share of military spending in the state budget has reached the peak
level of 42% and never really diminished after that.

The damage this military expansion and other politically motivated
expenditures did to reform became very clear at the end of the decade of
military rule. On paper, the decline of economy was concealed by the steady
pattern of growth. In actuality, The country's social indicators have
dangerously declined over the years revealing the ugly face of military
rule. The use of an inflationary tax and the concomitant decline in social
expenditures led to the rising level of poverty across the population. The
rate of malnutrition, under-five mortality, school drop-outs, and maternal
mortality have jumped up. Inequality is clearly visible in the city where
cronies live in villas and drive Mercedes while the rest forcibly relocate
to shanty towns with poor infrastructures and crowed public transports.

Democracy and Economic Reforms

Because of the triumph of political consideration over economic calculus,
the regime has still not given any hard answers to the deep economic
problems. Instead, the generals are preoccupied with keeping control of a
shrinking productive base while being evasive on the tasks of serious
reforms on major restructuring. With the bureaucratic expansion going on at
full speed, the government is heading quickly to a point of implosion. The
ten-year old history of fiscal collapse and violent changes could repeat again.

At this point, what is relevant is whether the extension of foreign aid or
removing the US veto on multinational loans might alleviate the Burmese
crisis. The answer is no. Since the encroachment of political prerogatives
upon the economic decision making is so high, for any economic reform
programs to be sustainable and successful, the political structures
accounting for statism, nepotism, and stop-and-go policy cycles must be
changed first. In other words, economic reforms require transition to
democracy. At this juncture, a strong case can be made that the national
tasks of economic renewal are more likely to succeed under a democratic
political framework. Here are three propositions in the support of a dual
reform process,
democratization and liberalization, as prerequisites for economic renewal in
Burma.

First, for any austerity measures to produce effective results, the
government needs to control expenditures and improve revenue. Here,
democratization can help stabilization because only a democratic regime,
independent of cronyism, can effectively remove the political structures
that encourage economic burdens of unproductive spending, price distortion,
and political entitlements.

Second, the implementation of economic reforms must gain the credibility and
trust that only a democratic regime can provide. Economic reforms and
stabilization measures produce a social cost and only a regime with the full
confidence of its citizens can sustain the process. The military regime,
deficient of political capital, cannot afford to give "bitter medicine" to
an already apprehensive population. Only democratic reform can do the job.
On the external front, the reform needs a comprehensive stabilization
package, including multilateral and bilateral aids, to cushion the
adjustment process. Currently this assistance is being postponed given the
lack of credibility of reforms under the present regime. A democratic regime
can restore such credibility and facilitate quick resumption of aid programs
essential for sustainable economic reform.

Last but not least, mobilizing domestic and foreign private capital is a
critical component of economic recovery. Sustaining private capital flows
and creating a climate favorable to investment requires establishing a rule
of law, transparency in public administration, and on top of all, political
stability. The latest Asian debacle and the decline of foreign investment in
Burma underlie the importance of responsible and responsive governance. The
political stability needed to promote economic growth and achieve optimal
social infrastructure must be established under the rule of law by a
government according to the wishes and needs of the people. 

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 Economy Development of Burma in New York.


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