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Analysis: Myanmar shows little sign of economic miracle
Tue, Jan 24 20:13 PM EST

By a Reuters Staff Reporter

YANGON (Reuters) - Business is booming at the Golden Sea employment agency in downtown Yangon, but that doesn't mean Myanmar's long-stagnant economy is improving. Quite the opposite.

"Malaysia, Singapore, Thailand," said manager Kyaw Thura, listing the countries where he helps the young men crowding his one-room office find jobs as laborers and cooks. "If there were opportunities in Myanmar, they would stay here."

Hopes of concrete economic reforms are running high among foreign business people now pouring into Myanmar, which has fanned optimism by pledging democratic reform, freeing political prisoners and setting the stage for an April by-election.

U.S. Secretary of State Hillary Clinton made a landmark visit to the country, formerly known as Burma, two months ago and multilateral lenders such as the Asian Development Bank have taken preliminary steps toward resuming activities there.

Few argue against Myanmar's potential.

As big as France and Britain combined, the resource-rich country sits strategically between India, China and Southeast Asia with ports on the Indian Ocean and Andaman Sea, all of which have made it a coveted energy-security asset for Beijing's western provinces.

Bordering five countries, Myanmar offers multiple avenues of Asian engagement as U.S. President Barack Obama shifts focus from the wars in Iraq and Afghanistan toward economic growth and security in the Asia-Pacific region.

But as tourists and investors knock on its door, the number of Burmese flowing in the opposite direction suggests that ordinary people don't expect the end of half a century of isolation to improve the economy anytime soon.

The barriers to progress are formidable: U.S. sanctions, an incoherent exchange rate regime, woeful infrastructure, weak investment laws, a crippled banking system, decades of mismanagement and a shortage of skilled Burmese.

While the European Union on Monday started unwinding sanctions, punitive U.S. measures continue to cut deep into Myanmar's economy, among Asia's most prosperous before a 1962 military coup ushered in a disastrous "Burmese Way to Socialism" that brought sweeping nationalization and global isolation.

U.S. sanctions could begin to come down if Myanmar's by-elections scheduled for April 1, contested by opposition leader Aung San Suu Kyi, are fair and open, U.S. Senator John McCain told reporters last week in Hanoi.

U.S. sanctions, imposed in response to years of human rights abuses and steadily tightened since 1988, preclude U.S. aid and rule out financial help from International Financial Institutions (IFIs) such as the World Bank, in which the United States is a big shareholder and has veto rights.

That prevents those agencies from training government staff for long-overdue work such as drawing up a national budget or writing environmental regulations.

The World Bank and Asian Development Bank ceased operations in the country in the mid-1980s and are still owed arrears, which have to be repaid before they can come back. And even when they return, their aid will require the government to respect governance standards that have eluded its leaders for decades, including budget transparency.

CURRENCY CONUNDRUM

"There's so much to be done," said Luc de Waegh, head of West Indochina, a Myanmar-focused consultancy.

"You need to rebuild the country, the roads, the infrastructure, the education system, and all this cannot be done with private money."

One of Asia's richest countries early in the 20th century, Myanmar is now one of the world's poorest after half a century of often-brutal rule by military rulers. A third of its estimated 60 million people live on less than a dollar a day.

The International Monetary Fund estimates Myanmar's gross domestic product at just over $50 billion. In contrast, neighboring Thailand, with a population of about 67 million, has GDP of $348 billion.

Among its biggest problems: a currency regime that deters investment and abets kleptocracy.

Officially, one U.S. dollar buys a little over six Myanmar kyats. Unofficially, it's more like 750 kyats.

The unofficial rate, used in most transactions, has jumped from more than 1,000 per dollar in 2009 as foreign money has flowed into the timber, energy and gem sectors. That has hurt a swathe of Burmese, from farmers and manufacturers to traders and employees of foreign firms paid in dollars.

A team of IMF advisers came in November to look at reforming the currency and unifying the rates. A two-week follow-up mission ends on Wednesday.

Myanmar is one of only 17 countries that still have dual exchange rates, and even the IMF has only three experts in the delicate task of unifying them.

The official rate is used for government revenue and for imports by some state-owned enterprises. As a result, state revenue is grossly underestimated and some critics say it is likely vast sums of that money was kept off the books and quietly smuggled out of the country into offshore banks held by cronies of the former junta.

They may also have repatriated the funds to snap up state assets that were sold off during an extremely opaque privatization boom that took place just over a year before the army's transfer of power to the civilian government.

In addition, many state firms effectively enjoy a hidden subsidy and could fail if they were forced to adopt a market rate. A wave of bankruptcies and resultant job losses could bring a backlash against much-needed reforms.

One solution might be to replace implicit subsidies with more transparent, official subsidies, said Jean-Pierre Verbiest, a former country director for the Asian Development Bank in Thailand and now an economic consultant at the Asian Development Bank Institute.

"The exchange rate, the budget, monetary policy, financial sector development -- they are all linked, and these are typically areas where IFIs can contribute and put policies in place," he said.

That is not going to happen until the West drops sanctions.

U.S. sanctions on Myanmar include visa bans on certain officials and business associates, restrictions on financial services, bans on Burmese imports, a ban on new investment and constraints on assistance to the country.

GETTING THE POOR ONSIDE

Another urgent problem is the need for reforms in the agricultural sector, which employs two-thirds of the population and suffers from low productivity and a lack of credit.

"Even on good assumptions, there will be a mess because it's very difficult to handle big changes especially in a country which is very rich but at the same time very poor," said Verbiest, meaning rich in resources and potential but also in terms of state revenue, if properly accounted for.

"So there are going to be people who will benefit much more than others," he added.

Quick reforms in agriculture could help alleviate poverty in the countryside and win support for the reform process. They could include providing credit to farmers who have to rely on money-lenders charging crippling interest rates plus investment in village infrastructure such as roads to markets, said a veteran Myanmar aid worker who asked not to be identified.

"Villagers are still driving ox carts and taking all day to go nine miles. Isolation breeds poverty," she said.

The country also badly needs better education and training.

"There's a real vacuum in capacity," the aid worker said, noting there were thousands of Burmese engineers in Singapore but engineering talent was hard to find inside Myanmar.

The brain drain has hurt the public sector, too: Myanmar lacks the technocrats that helped Indonesia, for example, move from a military dictatorship to a thriving democracy.

Much of the country's intellectual talent fled in 1988, mostly to Europe and the United States, after the army brutally crushed a student-led revolt. The government has so far made no official move to encourage them to return.

"We need 30-somethings who have MBAs and analytical skills. You're not going to find that in the generals, even if there's political will," the aid worker said.

"People have had beaten into them not to take the initiative, not to be creative, not to be innovative. In that respect I think IFIs can help. Training needs to happen on a massive scale."

(Editing by Andrew R.C. Marshall, Jason Szep and Mark Bendeich)


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