This relatively favourable situation had ended by the mid 1950s. As the Burmese army advanced, the Karen were cut off from revenue, first in the Irrawaddy and Sittang deltas and subsequently in the adjoining hills. In November 1953, for example, the Burmese army captured the mines at Mawchi — a significant source of revenue to the Karen at that time. Following the coup d' état of March 1962 which brought General Ne Win to power, the advance of the tatmadaw into hitherto KNU-controlled areas continued, and by the 1970s Karen forces were largely confined to the Thai-Burmese border. As the territory controlled by the KNU contracted so to do the range of opportunities available to Karen leaders for earning a livelihood.

An illicit border trade in natural resources and consumer goods partly concealed the growing financial plight of the Kawthoolei State. This trade linking Burma and Thailand via KNU-controlled areas developed during the 1960s and 1970s as a response to the catastrophic economic policies of Ne Win's Burmese Way to Socialism, which drove much of the Burmese economy underground. Teak, cattle, rice, rubber, gems and even archaeological artifacts were transported from Burma to Thailand while televisions, videos, cosmetics and other consumer goods were dispatched in the other direction. The KNU served as an intermediary in this trade, imposing a five per cent tax on all goods passing through Kawthoolei.

For many years, the KNU thus had easy access to funds with which to buy military equipment. However, there were evident dangers associated with dependency on the border trade. The adoption of a pro-market economic policy in Rangoon could undermine the trade. A change in policy by the Thai authorities — for example, as a result of a desire for closer links with Burma — would also jeopardize the KNU-controlled trade. Finally, the development of alternative trade routes — notably along the Burma-Chinese border — might result in a drying up of the trade through KNU territories.

To the misfortune of the Karen State, since 1988 all three of these possibilities have become realities. It is in the context of such uncertainty that the importance of the forests as a source of revenue to the KNU becomes apparent. Of the revenue available to the Kawthoolei State, forest revenue (mainly derived from teak extraction) was one of the important sources over which it had some control. Another, tin mining, was significant in the 1970s but collapsed with the price of tin in the early 1980s. Not surprisingly, therefore, the forest sector assumed growing political and economic importance to the KNU from the 1960s.

The importance of the forests was reflected in the growing power of the Forestry Ministry. From only a handful of foresters in the 1950s and early 1960s, the ministry had become a key part of the Karen state by the 1980s. In 1994, there were 463 forest officials at work in Kawthoolei's forest districts, with additional staff at Mannerplaw. Field officials were responsible for reforestation and wildlife protection, but their main task was to monitor teak extraction. Just under two- thirds of the 5,000 teak logs annually extracted in the early 1990s came from Pazpu district.