Some Talking Points Regarding Economics and the ‘Independent Report’ for the EC

Some Talking Points Regarding Economics, and the ‘Independent Report’ for the EC

[Preliminary Draft]

Burma Economic Watch

March 2005

In the following, we review certain economic aspects of Supporting Burma/Myanmar’s National Reconciliation Process: Challenges and Opportunities, a self-labelled ‘Independent Report’ prepared for the European Commission by Professor Robert Taylor and Mr Morten Pedersen. We largely confine our comments to economic considerations, but within this sphere we find that the Report has numerous and severe limitations. Due largely to a scarcity of time, our comments are to a certain extent preliminary, and will be developed further in a subsequent issue of BEW that will address this and other recent reports on Burma’s economy. Feel free to use the following in ways you find useful, though for academic purposes we regard this ‘review’ as very much a ‘working draft’ at present. Of course, we welcome comments. We can be contacted, as always, at [email protected] Website http://www.econ.mq.edu.au/BurmaEconomicWatch

Overview

Supporting Burma/Myanmar’s National Reconciliation Process: Challenges and Opportunities (hereafter, the Report) suffers from a fallacy familiar from many such documents prepared by international NGOs and like-minded parties – to wit, the fallacy that a country’s economic development is significantly determined by external actors. If the history of economic development tells us anything, it is that development comes as a consequence of many interlinked factors, but almost all pertain to the institutions of a country’s domestic political economy. The international community plays a role, but it is invariably one that simply facilitates strategies arrived at (consciously or unconsciously) by domestic political-economy actors.

Undue stress on the role of external parties in economic development disproportionately elevates the role of international NGOs, multilateral agencies, and the policies of foreign governments. In the context of policy advocacy for development, such undue elevation is unfortunate. Attention is drawn to grievances which, legitimately held or otherwise, distract from the real attributes that determine prosperity. These attributes include: secure property rights (including of the person) – which encourages saving, investment, innovation, entrepreneurship; a stable and responsive government – not necessarily democratic, but a government that acts according to rules rather than individual caprice, and which addresses at least the primary concerns of the populace; relatively honest government – the market is the venue for trading favours, rather than the state and its agencies; limited government – keeping the state’s claim on the nation’s surplus to merely that required to fulfil its ‘reasonable’ functions, and allowing individuals to create wealth; the primacy of rationality and reason in national decision-making – changing which side of the road to drive on, or the basis of a country’s currency on a whim is not conducive to growth; and so on.

Reports such as the one under consideration here, however, tend to ignore important issues such as the above, in favour of attacking obvious external policies – such as sanctions – over which the authors feel they have some handle (intellectual and otherwise). Blaming the ‘West’ is easy, lazy, and lets Burma’s governments off the hook. Burma’s problems manifestly did not and do not come from the sanctions that a limited number of countries impose upon it. Nor do Burma’s economic problems stem from a lack of international support, or attention from NGOs and development agencies. Overwhelmingly, Burma’s economic problems are home-grown, but they require fundamental political reform to solve. Many participants in the Burma ‘debate’ are impatient of hearing this. It is much easier, more fashionable and no doubt more personally rewarding, to find fault in the actions of the West. Let us be clear: Burma is a development disaster because its political leadership has, either through sins of commission or omission, determined it such.

The Report suffers from a number of other maladies, some of which are touched upon below. From these, as well as from the issues raised above, one is left with the impression that the authors of the Report are unaware of much in the way of recent research on economic development. There has been something of a ‘sea-change’ in recent years on the limits of aid and external assistance in promoting economic development, with the result that there is now broad consensus that if appropriate institutions and policies are not in place, aid is but wasted money. Worse, it can actually help keep in place the ill-performing institutions and actors that cause impoverishment in the first place.

Some Comments in Detail

The below is but a sample of some of the problems of the Report which, we understand, is about to be put before the EC. Characteristic of such documents, the Report is sufficiently vague as to be quite challenging to critique. Its (many) assertions are made mostly without any attempt to ground them in fact or even disputable data. As such, critically assessing them is not straightforward. Nevertheless, some of the following comes to mind as one reads through it. As will be apparent, the list is selective and, given time constraints, not as yet fully formed. Notwithstanding:

On page 11 and elsewhere (such as page 2 of the Executive Summary) the authors note the problems of Burma’s economic ‘growth’ data. Burma’s ‘data problems’ are not primarily technical of course, but political. Simply, the Burmese government does not want informed discussion of its performance. It might reasonably be asked how, under such a regime of enforced ignorance, the policy debate elsewhere called for (page 22 for instance) can possibly proceed. The authors seem to ignore the implications of this (acknowledged) problem – indeed, they are content to use the same ill-formed data when it suits them, and ignore it when it does not.

Page 12. Typical of the debate regarding Burma’s ‘failing’ textile industries, the Report ignores the impact of the ending of the Multi-Fibre Agreement (which has seen China grab the global ‘market share’ of a number of countries around the world) in favour of an ‘explanation’ that puts the blame on sanctions. The latter have certainly not helped Burma’s textile industries, but the overcrowded US market suggested strict limitation to their expansion in any case. There is no definitive data, but much in the way of anecdotal and informal accounts tell of an industry fast contracting before the imposition of the latest round of US sanctions. Burmese garment factories are low cost, but they are low productivity too and, as such, easy pickings for newly ‘quota free’ Chinese producers. Of course certain ‘infrastructure’ problems in Burma (not least in chaotically varying electricity supplies), have hardly assisted matters.

More generally, and throughout their Report, the authors like to play things both ways on the sanctions question. At various points in the Report we are told of the devastating effects of sanctions on Burma; in other places we are assured that sanctions are all so ineffectual in any case.

Representative of this dualism (page 3): ‘The current policies of the West, directed at isolating and undermining the government, have in reality isolated and undermined the social and economic institutions which the country requires if it is to become a viable democracy’. And, yet (page 6): ‘there is little prospect that either the UN Security Council or Burma/Myanmar’s neighbours and main trading partners [sic] will take decisive action or, indeed, that more pressure would achieve its objectives’. The emphasis on trading partners draws attention to the Report’s contrariness.

At the bottom of page 12 are listed a host of issues that have caused recent distress in Burma’s agricultural sector. The principal cause of this distress is identified – ‘the authorities suddenly banned the export of rice’. This caused, the Report tells us, ‘a collapse in farm-gate prices to below production costs’, with the result that production collapsed and many farmers lost their land. This is a nice illustration – but just one – of the point made at the outset of this review; of the impact of a capricious, arbitrary policy change made with seemingly little or no consultation and no accountability. The (various) changes in rice-procurement policies in Burma in recent times have had nothing to do with sanctions or the international community, but everything to do with a government for whom consultation and accountability are alien concepts. The problems of arbitrary policy-making in Burmese agriculture is unwittingly highlighted over the page (p.13), when the Report notes the lack of food security in Burma. The lines of causation, however, are not drawn.

Page 15: The Report outlines a series of issues it lists as ‘Structural Weaknesses’ in Burma’s economy. As shall be noted, the analysis of particular problems in this section is flawed – but more generally, most of the highlighted problems are purely domestic in origin, and their solution is likewise only attainable within Burma’s borders and by its people. Some specific quibbles: Weak state finances are noted, most assuredly a purely domestic problem that stems from the state’s military spending (directly a function of its perceived lack of legitimacy), poor tax collection (ditto), and loss making state enterprises that the government is too frightened to privatise (they need the source of patronage). There then appears a surprising statement, ‘the deficit has been reduced in recent years’. It is unclear how the Report arrives at this conclusion. The money supply data published by the IMF suggests Burma’s deficits are getting bigger each year. Another statement in the same paragraph writes of Burma’s foreign exchange reserves, and the fact that they provide for ‘only a few months of imports’. This is a hoary old concern that is revealing – float the currency and allow the private sector to freely export and import, and such ‘import cover’ is unnecessary. ‘Import cover’ is a category of concern to countries for which the government is the primary exporter and importer, or for countries in which foreign exchange must be ‘rationed’ to maintain an unrealistic exchange rate.

Then follow some admitted problems of the banking system. Once more, however, all the troubles here are created by Burma’s government, the solutions for which are entirely in its hands. ‘Negative real interest rates’ for instance, just one cause of Burma’s low savings (the flip side of capital formation), can be removed at the stroke of a pen: just get rid of the ceilings on the interest rates Burma’s banks pay, and charge, on their deposits and loans. ‘Financial repression’ is thus removed, and resources are allocated according to the economic viability of the projects they fund. The authors of the Report are fond of (mis)citing the example of Asia’s ‘tiger’ economies. It seems to have escaped them that the success of these countries was preceded by rapid savings and capital accumulation that occurred in their domestic financial systems. As it stands, Burma’s financial system (laid low by the government’s mishandling of the recent banking crisis), is not competent to do the same in Burma. Political and economic uncertainty, weak law and contract enforcement, political interference, cronyism and corruption, poor quality bureaucracy – are just some of the (home-grown) institutional features that hamper the proper functioning of a financial system in Burma.

Yet, Burma possesses (nominal) laws that provide for good banking and financial arrangements. The country has also been host to numerous delegations (from the Development Bank of Japan most recently) concerned with propagating financial ‘best practices’. Certain officials in the Central Bank of Myanmar are skilled and attuned to what is required. Ignorance of what can and should be done in this sector of the economy, in other words, is not absent in Burma. Political will to make the necessary changes, however, certainly is.

In this same paragraph there is also another of those curious statements that litter the Report: the ‘Central Bank is…unable to impose fiscal discipline…’. Whilst it is probably true to say that central banks all over the world would like to have their hands on the levers of fiscal policy, we cannot think of a single one that actually enjoys this power! The paragraph goes on to note the lack of agricultural finance in Burma. Well, such institutional arrangements can be created (in Burma efforts have commenced countless times – beginning at the turn of last century). What is required is a certain will to economic and legal reform that would, just for instance, extend legality to microfinance operations throughout the country (such operations are ‘extra-legal’ at present), and allow cultivators to pledge land as collateral (not possible in Burma).

Finally, on the bottom of page 15, the Report bemoans the paucity of manufacturing in Burma. Correctly, it points the finger at ‘weak management’ and ‘a lack of incentives’. Both of these are chronic in Burma, and both are directly a function of the country’s political system – at the top of which is a military and bureaucracy that insists on excessively ‘micro-managing’ every facet of enterprise decision making.

On page 16 more of Burma’s economic problems are highlighted: agricultural concentration, a declining natural resource base, the multiple exchange rate regime, chronic high inflation, and weak education and health systems. Except for the latter issues (and these just at the margins), how are sanctions or international interlocutors involved in any way? All of these problems are, again, symptoms of the profound malaise at the centre of Burma’s political economy, a malaise that directly extends from its rule by an unelected, ill-educated, and antediluvian-minded cadre of military officers.

On page 19 one of the central fallacies of the Report is apparent, in a section devoted to the success of some of Burma’s neighbours. In this context, but quite incorrectly, the Report says that ‘not insignificant amounts of assistance, has had the effect of tying [sic] governments and economies into an international web of transactions which in itself creates standards and expectations while demonstrating the positive consequences for both regimes and their populations of rational economic planning and implementation’. This is simply not so. These countries actively engaged in the international economy since they could see their prosperity from precisely such an engagement. International ‘assistance’ had nothing to do with motivating it. Indeed, if anything, the (forced) involvement of various Asian countries with the ‘international financial institutions’ at various times actually tempered their embrace of global trade, finance and norms. Countries like the Asian ‘tigers’ came to a conclusion as to the benefits of export promotion within their own domestic political spheres, and acted accordingly. We cannot think of a single instance in the region in which such engagement was ‘forced’ or even significantly facilitated by international agencies.

On page 19 we are told that the ‘models’ of South Africa and Eastern Europe are ‘misleading’. Why, we are not told. Another empty assertion, since the contrary case is rather too damaging to the Report’s cause. Much is made in the Burma debate of the inappropriateness of the South Africa (sanctions) experience for Burma. Less, however, is made for the example provided by Eastern Europe. A wide-ranging, fairly robust field experiment one might think, embracing many countries, and many cultures, at varying stages of economic development.

At the bottom of page 18, the virtues of Burma joining ASEAN is trumpeted by the Report. Alas, it is another opportunity through which to see the myopia of the document as to what real international engagement is (ie, genuine trade in goods, services, people), vis-à-vis the ‘form’ they seem to favour (lots of NGOs, self-important interlocutors, forms over substance). Precisely what has ASEAN achieved for Burma – precisely what has Burma achieved for ASEAN? The current controversy over Burma’s ‘chairing’ of the group in 2006 might give pause for sober reflection.

On page 20 we have once more the phenomenon of the Report pinning blame for Burma’s situation on all but who should bear it. The ‘rigidity of Western governments’ is the cry, which somehow caused Burma’s government to ‘backtrack’ on the reforms the authors suggest had already begun to achieve some success. These reforms worked, but the government of Burma decided to reverse them seemingly to spite Western governments. Is this a government with the best interests of Burma at heart, whose removal should not be front and centre to any meaningful effort at reform? The bottom of the page continues in similar vein - indeed, it ups the ante to suggest that ‘fifteen years of potential change has…been lost’ and that the West is responsible for it.

Of course, underlying this central motif of the Report is a seeming conviction that the SPDC and its predecessors view themselves as ‘caretakers’ – shepherds, if you like, guiding the country to democracy after the achievement of which they will presumably simply ‘wither away’. Alas, the West keeps interfering in this task, and the work of the caretakers remains undone. After four decades of military rule, the first two and a half decades for which a ‘sanction’ was nary to be seen, is this really a believable scenario?

What does the Report think is the raison d’etre of a military coup, and a military’s subsequent rule of a country? On page 21 we are told that ‘sanctions…have increased the sense of threat within the government, thus directly contributing to the increased allocation of scarce resources for defence and other security matters’. So what was 1962 all about then? By its very nature, a military government devotes more resources to the military than a civilian government would.

Also on page 21 is a rather shocking statement that is neither supported by local evidence nor that which exists historically or elsewhere:

‘…it is questionable whether a civilian government would have the capacity to deal with the immense structural obstacles to peace and development, even with international support’.

It takes a while for the full implications of this to sink in. So military governments are the answer to such obstacles? I wonder if the authors can name, anywhere, a military regime that has made anything like a success of economic development?

On page 22 is a statement scarcely less deplorable. It attacks the NLD which, it says, has ‘totally failed to engage the government on socio-economic policy issues or develop a coherent policy position themselves’. The chutzpah of this is astonishing of course – precisely when, in a decade of harassment and imprisonment (or worse), most members of the NLD could turn their attention to the sophistries of fiscal and tariff policy is left unclear. The authors of the Report might also like to reflect upon the ‘conditions’ required by Burma’s Government regarding participation in their on again/off again ‘constitutional convention’. These conditions preclude participation of politically engaged individuals and groups, unless of course, such individuals are members of the armed forces (for whom participation is automatic on nomination). In short, participation in decision making in Burma is not in the hands of individuals or groups outside of the ruling clique to decide (see also the reference to Zaw Tun below).

But the Report’s criticism of the NLD in this context also happens to be quite wrong in any case. For not withstanding the odds, the ‘opposition’ and groups affiliated with it, have indeed produced economic blueprints for Burma that offer the country something much more likely to succeed than the current ‘strategy’ of the regime (can anyone articulate the current regime’s strategy we wonder?). Most obviously in this context was the report of the Research Group for Economic Development in Burma (Khin Maung Kyi, et.al. 1998), ‘Economic Development of Burma: A Vision and a Strategy’. This splendid document is sadly ignored by many concerned with Burma, including the authors of the Report considered here.

Of course, an irony of the above is that the Report’s criticism might be a valid one if the central allegation of NLD tardiness was true, and if Burma was a democratic country. In such a context a loyal opposition could indeed be expected to come up with all sorts of alternative policies, ready for implementation should power come their way.

The Report’s willingness to implicitly entertain on-going military rule in Burma is somewhat odd given statements such as this on page 22: ‘There is no doubt that the military is hostile to economic and administrative reforms that would directly weaken its hold on power, and less than enthusiastic about community development and other programmes that contravene their notions of development’. This statement also rather undercuts the supposition of the Report noted earlier – that the motivation of Burma’s successive military rulers is to prepare the country for democracy.

Later on page 22, the Report’s extraordinary optimism – unclouded by decades of experience to the contrary – as to the developmental role that can be played by the ‘international aid community’ is once more on display. The latter (whoever they are exactly) have, according to the Report, ‘a range of strategies and tools available that have proven [sic] effective in other countries with arguably less government commitment to development and certainly less potential for long-term progress’. We are not sure whether we would like to know of a government ‘less committed’ than Burma’s to economic development. On the other hand, we would love to know the ‘proven’ development tools that can be employed successfully in the absence of host-government commitment. So might the World Bank, et al.

And yet – on this same page there is also some evidence that the Report’s ardour for the international aid community is not without caveats. ‘It is no wonder…that the current leadership is generally suspicious of the activities of aid agencies when the rhetoric and conditionalities of major donors are so blatantly partisan and show little concern for the overall development needs of the country’. Of course, exactly why ‘conditionality’ is partisan, especially if (as hinted) it may insist on a plurality of views, is not explained. The Nobel Prize-winning economist Amartya Sen is but one of many economists who have posited links between various democratic norms and superior economic performance. True partisanship might be the exclusion of a factor that was declared off-limits, despite its efficacy.

· Though this is not economics – we cannot resist ‘sticking an oar in’ to the Report’s comments on page 23 as to the nature of democracy, how it cannot but be part of a long and gradual process, etc. Were Germany’s experiences up to the end of WW2 -- including the brief interlude of Weimar (which surely flatters Burma’s oft-criticised democracy period by comparison) -- suggestive of a country that post-war would become a paragon of democracy? Japan, countries in the former Soviet Union, Timor, Brazil, South Africa, Chile…how much tradition of democracy did they (do they) have?

· On page 25 the over-confidence in what the international aid ‘community’ can achieve is once more on show, including, apparently, an ‘ability…to promote broad-based development…’. When and where?

· Bottom page 25, top of page 26, we are told of the need to employ ‘aid officials with relevant knowledge and experience on the ground in Burma’. These would be ‘non-partisan’ types of course?

· On page 26 we come finally to the Report’s recommendations of how and where the EC can mend its ways and offer practical help.

· This help should be given, we are told, to a ‘new broom’ of young officers that have emerged and who are ‘increasingly aware of the serious difficulties and challenges facing the nation and, with the right encouragement and support, might well return to the path of reform’. The Report’s faith in the military as economic managers and reformers is remarkable, but it is a faith with little empirical support if we look at military regimes around the world.

· More on ‘jobs for the boys’. On page 26 the Report recommends a comprehensive study of Burma’s economy be undertaken by ‘independent, local economists…’ The last person who attempted to offer independent economic advice in Burma was Brigadier Zaw Tun in 2002. Sacked and arrested, he has not been heard of since. Burma has produced some of the world’s leading economists (in this respect the country punches far above its weight). They live mostly (almost exclusively) outside the country – according to the Report, they need not apply.

· On page 26, and passim, the Report’s lack of acquaintance with basic macroeconomic concepts is apparent. Burma does NOT need any external assistance to remove the absurd disparity between its official and unofficial exchange rates. All they need is to announce that the kyat will, from now on, be floating – and behold, the deed is done. No resources are required, the need for reserves for the exchange rate (noted earlier) is no more.

· On page 27 a range of reforms in agriculture are discussed. Once more, most of the items here require simple liberalisation of no-longer-functioning controls. External assistance is neither necessary nor desirable. There is an enormous literature devoted to this question within the field of economic development, none is cited, and presumably little has been read.

· On page 28 the need for various agricultural distribution systems (for inputs, output, credit, and so on) is discussed. Once more there is an enormous literature on this, and there are even some interesting programs operating in, or proposed for, Burma (the former have many flaws that extend from the inability to establish genuinely ‘independent’ institutions in rural Burma at present). Neither intellectual frameworks that cover such issues, nor details of living programs in Burma feature in the Report.