Sean Turnell

(Burma Economic Watch and Macquarie University)

[email protected]

15 January 2002

In August 2000 a speech by Brigadier General Zaw Tun, Deputy Minister for National Planning and Economic Development in Burma's military regime, was circulated on various mailing lists on the internet. The speech (online on this website at  http://www.ibiblio.org/obl/docs/zaw_tun%2007-07-2000.htm ), which had been delivered a month earlier at a seminar on Burma's economy at the Institute of Economics in Rangoon, demonstrated, in the words BurmaNet, 'a frankness and grasp of economics not generally displayed by a ranking member of the regime'.

The purpose of this note is to re-examine Zaw Tun's speech in the light of recent economic developments, and against what might be considered a consensual view of sound economics for a country such as Burma. Finding that Zaw Tun's grasp of economics is rather less than first appears, the note concludes that Burma's economy is also in a far worse state than he suggests. Turning this around, moreover, will not come from mere tinkering with economic policy in the ways he indicates, but will require the profound reconstruction of the country's political economy.

The note is organised according to the same categories that were employed in Zaw Tun's original speech. They were:

1. Growth and GDP
2. Investment
3. Trade Policy
4. Taxation
5. Currency
6. Interest Rates
7. Open Discussion

1. Growth and GDP

Zaw Tun begins by acknowledging that the 'growth' in Burma's GDP has been greatly exaggerated. Highlighting official growth figures of 5.8% for 1998/99 and an astonishing 10.9% for 1999/00, he admits that the 'real' rate is probably half this. Of course, the fiction of Burma's economic statistics is not news to anyone with an interest in the country, and Zaw Tun essentially lets the regime off the hook by suggesting the exaggeration is a function of problems in statistical collection, rather than any dishonesty on the part of the regime. The Asian Development Bank (ADB), normally reticent to comment unfavourably on member countries statistical practices, labels Burma's economic data as of 'variable quality' in its latest economic report on the country (ADB 2001, p.1).

Towards the end of his speech, Zaw Tun lets slip that Divisional Commanders falsify GDP numbers according to requirement - 'some thought that their promotion would be assessed on GDP figures'. Of course, the fact that it is military officers who undertake such a task is instructive in itself.

One of the statistical 'problems' Zaw Tun refers to is the use of the 'production' method only in the calculation of GDP. As he rightly notes, it is accepted practice to calculate GDP using three methods - by aggregating the value of production, by aggregating incomes of the factors of production, and by aggregating expenditure. Since one person's expenditure is another persons income, which in turn brings forward the same amount of production, all three methods should arrive at the same figure (understandably with some [relatively minor] statistical discrepancy). That Burma can calculate its GDP only via the production method creates not only doubt about the accuracy of the data arrived at - it's also indicative of broader problems. For example, the fact that GDP cannot be calculated by the aggregation of incomes is revealing - of unrecorded and illegal incomes, of fears of arbitrary property seizure, of a tax system that is barely functioning and in which tax avoidance is rampant, of corruption amongst government officials and the military, of kick-backs in government spending….and so on. Burma's statistical problems in short, are but a window into much deeper troubles.

Zaw Tun goes on to outline various factors which, he says, are 'vital' to Burma's future growth. Much of his commentary here is fatuous, but he includes items such as achieving the full potential of Burma's physical and human resources, promoting the development of Burma's regions, reclaiming wetlands and fallow land into cultivatable acreage - and what seems to be simply a hope for favourable weather. As noted - it's mostly obvious stuff, but no more realistic for that. The output gains from bringing into cultivation more acreages, for example, the source of much growth in the past - will be held back by what is already a 'lack of key inputs such as fertiliser and quality seeds, as well as by limited irrigation facilities, poor logistics and transport and poor marketing' (Economist Intelligence Unit [EIU] 2001, p.10). Regional development is critical - but this presupposes a political settlement that is not even hinted at by Zaw Tun here. Of course, one also wonders how the full potential of human resources can be achieved in Burma, under a regime too frightened to fully open the county's universities. The deprivation in Burma's human capital stock, and the low priority that improving it receives from the present regime, can be adjudged from the following table:

*(Source: UNDP Human Development Report 2000)

Zaw Tun ends this section by making the desperate observation that '[a]ccording to the nature of economics, the economy must recover after a period of downward trend…'.

It is one of Burma's tragedies that its economy has been in a period of 'downward trend' for forty years.

2) Investment

Zaw Tun observes that the investment situation in Burma is 'unsatisfactory'. It would be difficult not to agree. According to the ADB (2001, p.1) domestic investment has stagnated at around 13% of GDP for a decade. The EIU (2001, p.27) confirms a further recent slowdown, noting that capital imports (closely correlated with domestic investment) slumped 32.4% in 2000/01.

According to the ADB (2001, p.2) only 6% of spending by state enterprises (which in turn absorb over 75% of public spending) goes towards investment.

The outlook for foreign direct investment (FDI) is likewise bleak. For the first 11 months of 2000/01, FDI totalled a modest $US146.8m, up on the previous two years but a long way short of the $US 2.9 billion (approved but not dispersed!) in 1998/99 (EIU 2001, p.20). Given the slowdown in the global economy, but especially in Asia, no pick-up in FDI is likely on account of external factors. Internally, everything tells against it. Though Zaw Tun spoke little about it, inadequate infrastructure in transportation, communication, energy and human skills is a severe constraint against significant FDI. Zaw Tun does acknowledge another constraint against meaningful FDI when he notes that most foreign investors seek joint ventures with the military-owned Myanmar Economics Holdings because (in his words) 'they enjoy more advantages'. Such advantages are called 'rent-seeking' in the parlance of economists, and monopoly exploitation more broadly.

According to the ADB (2001, p.6), foreign investment in Burma continues to be hampered by restrictive government practices; 'Myanmar's investment exclusion list is still quite extensive, and approval procedures are cumbersome and lack transparency. Once established, foreign enterprises then have to cope with a variety of discriminatory practices including the payment of higher charges for utilities'.

In this section Zaw Tun speaks about the establishment of stock and share markets in Burma. Such markets have been discussed in Burma for some time, but are yet to emerge. Zaw Tun seems to suggest the reason for this relates to the country's currency problems, and the likelihood that 'capital market speculations' could bring upon Burma the kind of currency crises he alleges they brought upon the rest of Asia in 1997. More likely is the fact that it would be a brave investor indeed, who would trust their fate in a stockmarket of a country with barely even the pretence of the rule of law.

Zaw Tun recommends (somewhat outside the topic) that tourists to Burma should not be forced to exchange their currencies into the regime's Foreign Exchange Certificates (FECs). His reasoning is that 'they may end up spending more than those amounts' [ie, the minimum $US 300 that presently must be exchanged]. Somewhat bizarrely, given the nature of the regime he serves, he adds in this context that 'human beings by nature abhor anything forced against them'.

3) Trade Policy

Zaw Tun opens this section with the declaration that 'there is no consistency in [our] trade policy. The Trade Minister, together with entrepreneurs close to him, selects the commodities that would be opened to the market and after some time they close it down again. The other people suffer as prices fluctuate depending on the whim of the leaders'.

It would be hard to imagine a more eloquent description of the confused and nepotistic world of Burma's trade relations.

Burma had a current account deficit of $US 293 million in the first 11 months of 2000, the latest in a long line of dismal trade results (EIU 2001, p.12). There seems little room for optimism on this front in the wake of the global slowdown, the low prices of Burma's exports (mostly agricultural commodities, minerals, gas and textiles), a tourist industry operating far below potential (and subject to consumer boycotts) and falling remittences from overseas workers (as labour market conditions in the region deteriorate and countries [especially Thailand] crackdown on illegal workers). Burma's current account would be in even worse shape were it not for the fact that the poor state of its economy limits the ability of its citizens to buy imports.

Since 1998 a whole host of arbitrary restrictions have come and gone on key imports, along the lines Zaw Tun complains about. Exports of certain key commodities have also been banned at various times, usually in an effort to limit domestic shortages and resultant price rises.

Somewhat surprisingly, Burma is a member of the World Trade Organisation (WTO), inheriting a membership that was granted to the country when it was a democracy in the late 1940s (via its inclusion in the WTO's predecessor, the General Agreement on Tariffs and Trade [GATT]). Burma currently pays no heed whatsoever to WTO procedures, and would not secure membership through its behaviour today. Zaw Tun rightly complains of this in his speech - telling us that he reported to his 'superiors' the need for Burma to submit its tariff rates to the WTO. He notes plaintively that the authorities have 'done nothing to prepare for reforms or change'.

In this section of his speech, Zaw Tun implicitly recommends a free market economy for most goods in Burma. Suggesting perhaps that his conversion is less than complete, however, he also obscurely refers to 'certain key elements' being in place so as to 'control the economy'.

4) Taxation

Burma's fiscal position is dire, with deficits of around 5-6% of GDP being recorded for about a decade. As Zaw Tun notes, these deficits have largely been financed via the simple expedient of printing more money. As he puts it:

The necessary revenue to run the government is not there and there are no back-up or reserve funds. Although we are aware that we are heading for inflation, we continue…

According to the ADB (2001, p.2) the rate of growth of the money supply has averaged around 28% over the last five years. Not surprisingly, inflation (based on official, and understated, estimates) has averaged at over 27% over the same period.

Burma's tax system, chaotic, and with many exemptions and distortions, generates one of the world's lowest levels of tax revenue (relative to GDP). Yet Burma's public spending needs are great - not least in basic health and education where the country's developmental needs are not being met. Most of Burma's public spending, however, goes towards the military and to propping up loss-making state-owned enterprises.

5) Currency

Perhaps the most obvious sign to outsiders of Burma's distorted economy are its multiple exchange rate regimes. As is well known, three rates prevail for Burma's currency, the kyat. Firstly, there is an official exchange rate, under which the exchange rate is set at the absurdly high and unrealistic level of 6 kyat/$US1. As shall be examined below, few in Burma have access to this rate. According to the ADB (2001, p.3) the maintenance of this rate 'confers ever larger subsidies on entities that import at the official exchange rate, imposes stiffer taxes on those that export at the official exchange rate, and provides fertile ground for rent seeking'. Secondly, there is a 'customs exchange rate', 200 kyat/$US1 - a rate at which customs duties are calculated. Finally, there is the market exchange rate, currently at around 800 kyat/$US1 (and subject to volatile, mostly downward, movements). The expanding role of the private sector in Burma, and the declining confidence in the kyat, has meant that this rate has become something of a bell-weather indicator for the state of the nation's political economy.

Of course, the FEC system constitutes something in the way of a fourth exchange rate regime. Fixed at parity to the $US when they were created in 1993, FECs now trade at a varying discount to their $US face value. Confidence in the FEC system has been under strain in recent times, not least because the amount of FECs on issue are now more than twice the foreign exchange reserves that are meant to back them.

The chaos in Burma's exchange arrangements has had a contagion effect on the internal circulation of the kyat, and it is not unusual for the US dollar to be used in everyday transactions (ADB 2001, p.3).

Zaw Tun acknowledges the problems of Burma's exchange rate regime, and in his speech even admonishes the regime for not floating the kyat some years before its recent precipitous decline.

Little positive action can be expected on the exchange rate front any time soon. The regime has made it clear that it will not adjust the official exchange rate without external assistance. In any case, very powerful vested interests (who have access to the official rate to import goods for private use or lucrative re-sale) will vigorously oppose any change. Of course, Burma's under-performing state-owned enterprises, which are able to import at the official rate, would find their inefficiencies even further exposed.

It remains then that low foreign exchange reserves, political instability, slowing global growth and high inflation, will continue to drive down the value of the market-determined kyat for the foreseeable future. Only fundamental political change, which would see the country take its place in the community of nations (and deliver to it both aid and investment) will bring about any appreciable improvement in Burma's exchange rate arrangements.

6) Interest Rates

Though 'Bank Interest Rates' is the heading of this section of Zaw Tun's speech, he spends no time talking about them.

Indeed, there is nothing positive (literally) to say about interest rates in Burma. Deposit rates paid by Burma's banks are currently capped at 9.5%, lending rates by the banks at 15% and the yield on treasury bonds is currently set at 9%. Even accepting the official (under)estimates of inflation, everyone in this scenario (bar borrowers, the largest of which is the government) is losing money in real terms. In fact, Burma's financial system is scarcely functioning outside of perhaps its primary role - of being a money-laundering industry for the country's gargantuan drug trade (for more on Burma's financial sector, see my paper, Banking in Burma: New Frontiers or a Barren Wasteland, also available on this website at http://www.ibiblio.org/obl/docs/burmabanking.htm )

7) Open Discussion

At some point in the seminar, Zaw Tun apparently took questions from the audience. A number of issues were reportedly raised, most of which (bravely) were concerned with various malpractices of the regime and its acolytes:

• One questioner took up the issue of how to ensure investor protection in the courts when disputes arose between them and government ministries. Unfortunately no answer was recorded from Zaw Tun. No doubt it was a difficult question for him - striking at the heart of issues such as judicial independence, the rule of law, the use of legal (and extra-legal) powers by the well-connected, and the general corruption of the state.
  
• A related question concerned access to electricity by those with a connection to the military - and the commercial advantages this gave them. As is well known, Burma's energy sector, especially electricity generation, is in disarray and electricity 'blackouts' are a daily occurrence throughout the country, even in the capital and in commercial centres.
  
• A question was raised regarding Burma's preparations for its commitments to free trade under AFTA (the ASEAN Free Trade Agreement).

Zaw Tun's answer to this was blunt and to the point. He told the questioner that no preparations had been made yet, and that Burma was 'bound to suffer because it will not be in a position to produce any goods'. A more complete admission of the economic failure of the regime would be difficult to find! In the same answer, Zaw Tun stated that Burma's GDP was a mere $US 1 billion - a figure vastly at odds with official estimates, but consistent with the very worst estimates of the regime's critics.

• In response to an unreported question, Zaw Tun offered an insight into the workings of the regime - and why it fails as an economic manager. Telling the audience that when he was in the army he 'could discuss things openly when he met with the Secretary General', he said he was now afraid to do so for fear of losing his salary. The situation was such that 'the higher up generals know nothing about what is happening'. Zaw Tun excuses them too much. Out of touch Burma's generals are likely to be, but the 'Munich excuse' hardly qualifies as such any more.

Conclusion

As noted at the start of this note, Zaw Tun's speech in July 2000 was a more bold and honest affair than one reasonably expects from a member of Burma's ruling military regime. Throughout the speech Zaw Tun identified many of Burma's most chronic problems, and even at times did not shy away from apportioning blame to the regime itself. Apart from what seems to be a vague (and unsteady) preference for market solutions in certain areas, however, he presents little in the way of real solutions to Burma's chronic economic problems.

In his landmark book, The Wealth and Poverty of Nations, David Landes, the eminent professor of economics and history at Harvard University, identified what he believed history taught were the fundamental requirements for economic prosperity. These were to;

1. secure rights of private property to encourage saving and investment.
2. secure rights of personal liberty…against both the abuses of tyranny and…crime and corruption.
3. enforce rights of contract.
4. provide stable government…governed by publicly known rules.
5. provide responsive government.
6. provide honest government…with no rents to favour and position.
7. provide moderate, efficient, ungreedy government…to hold taxes down and reduce the government's claim on the social surplus.

It is sad to observe that, under the present military regime, Burma enjoys almost none of these attributes.

Asian Development Bank 2001, Economic Update: Myanmar, November 2001 http://www.adb.org/Documents/Economic_Updates/MYA/in259_01.pdf

Economist Intelligence Unit 2001, EIU Country Report, Myanmar (Burma), August 2001.

Landes, D. 1998, The Wealth and Poverty of Nations, W.W. Norton, New York.

United Nations Development Programme 2000, Human Development Report 2000 http://www.undp.org/hdr2000/english/HDR2000.html

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