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There is an idea that Burma’s economy will be invigorated and the Burmese made rich by the simple lifting of state control over large swathes of the economy but just as Aung San Suu Kyi voiced concerns at the World Economic Forum in Bangkok recently so too is the long term efficacy of such a policy questioned by economists.
Questions that remain: who will the changes benefit most and do they truly represent democratic economic development?
“We do not want investment to mean greater inequality. And we do not want investment to mean greater privileges for those already privileged,” Suu Kyi warned the forum on her first trip outside Burma in 24 years.
“A little bit of healthy scepticism is in order,” she added.
However, US business information company Dun & Bradstreet note in their May 2012 report on investing in Burma that, “a new foreign investment law has been drafted that will allow foreigners to own up to 100% equity in Myanmar-based firms as well as partner with local companies in joint ventures. The new law is set to provide reassurances against nationalisation and that earnings will be allowed to be repatriated freely.”
In January, the International Monetary Fund (IMF) prescribed “replicating the success of FDI [foreign direct investment] in the energy sector in other sectors [which] would contribute significantly to private sector development, help diversify the economy, and open up new export opportunities.”
“Modernising Myanmar’s economy will be a process of removing impediments to growth by enhancing the business and investment climate, modernising the financial sector, and further liberalising trade and foreign direct investment.”
The history of economic transition however suggests that for sustained economic growth, actions such as this and the simple removal of state involvement will far from suffice.
As Cambridge University economist Ha-Joon Chang tells DVB, “the view that you can somehow have a private sector that can grow out of nowhere and become world class companies is quite misleading, but if you want to become a serious competitor in industries that require a large capital investment and so on, you will have to accept that the government has to play a key role.”
He has noted that virtually all rich nations achieved their over all wealth through protectionism, tariffs and direct government involvement in business. Regional examples include capitalist bastion Singapore, where 85% of housing is provided by the state, all land is owned by the state and 20% of total economic activity is conducted by state owned enterprises.
Another such example is South Korea, whose ‘Chaebol’ conglomerates, such as Daewoo, now explore for oil, gas and timber in Burma. As Ha-Joon Chang tells DVB: “The Chaebols are basically, in the beginning, a creation of the state. Of course they were lead by entrepreneurs, but without government protecting them from foreign competition, by trade protection or regulation of FDI, without government providing cheap finance from state owned banks, (well actually in South Korea between 1961 and 83 all the banks were owned by the government) so without these things they could not have grown in the way they have grown.”
Ha-Joon Chang quotes the 18th President of the United States, Ulyses Grant in his book ’23 Things They don’t Tell You About Capitalism’, who prophetically said in the mid 19th century that “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.” This was at a time when the United Kingdom was pushing free trade on the fledgling United States.
Now at the WEF, industrialised nations are offering similar prescriptions.
“You’ll have to avoid transforming it into a fortress, you have to let it open to the rest of the world… in terms of trade and in terms of investments,” said Gerard Mestrallet, chairman of the French electricity utility GDF SUEZ, which is owned by the French state.
Today in Burma, the roll back of state involvement is taking place across multiple economic sectors. According to the IMF, “the authorities are planning further privatization.”“Naturally these moves seek to empower Burma’s current business elite”
“To increase transparency and improve valuations,” the report states, “they plan to move to open tenders in FY2012/13, but expect slower privatisation as most of the profitable SEEs have already been privatised.”
The idea being, that once the most profitable enterprises have been ‘sold off’, open tendering will begin. For Ha-Joon Chang, “its a game that has been played in many countries; they make a song and dance about the efficiency of public sector enterprise, for example, and then they say we have to sell this and they give it to a buyer who gives them a kick back or they give it to their friends.”
One notable example of this ‘closed tender’ process was in shipping, where the country’s only shipping line Myanma Five star line was ‘sold’ by the military government to the Union of Myanmar Economic Holdings Limited (UMEHL), a company which is also owned by the military. This process began in 2010 before many of the reforms were unrolled or any talk of open tendering or transparency took place.
Naturally these moves seek to empower Burma’s current business elite, as a small clique take over the services and industries with the most lucrative potential.
“I am sure there will be people [in Burma] who will now be rubbing their hands at the thought of privatising the state owned railway company or water company and getting a huge kick back,” says Ha-Joon Chang.
Using a phrase coined by American writer Gore Vidal, he says that, “neo-liberal capitalism has turned into socialism for the rich,” and competitive, ruthless capitalism for the poor.
Meanwhile also at the WEF, French-US telecom conglomerate Alacatel Lucent Bell said they would like to have a greater presence in the country. The company allegedly worked with the Burmese government on monitoring of people’s telecommunications for a number of years.
It’s Asia Pacific chair, Rajeev Singh-Morales told Reuters that, “Alcatel-Lucent is observing and watching the developments in Myanmar with a lot of interest.” Stating his belief that opening the sector would bring down prices.
Ha-Joon Chang draws the comparison of Mexico, where, “this guy Carlos Slim was a relatively minor business man in the 1980s. He was given basically the majority of the state owned telecommunications company Telemex by his friend Mr Salinas [then President], so now he is the richest guy in the world.”
Indeed NLD leader Aung San Suu Kyi corroborated this fear at the WEF saying, “we may find the benefits go to one particular group or one particular person even.” In Mexico, despite a commitment to ‘open markets’, Telemex has 90% of Mexican landline connections. This move was done in concert with, amongst others Alcatel Lucent Bell, who supplied Telemex with the technology.
Yet private ownership of vital utilities is exactly what the IMF is calling for in their 7 May annual report on Burma: “the onus of stimulating productive investment is now on structural policies to reduce barriers for private sector development.”
Local business cronies such as Htoo Trading and Asia World will continue to evolve to work as local contractors or service providers with a freer climate to export extractive commodities and provide services, invigorated by western investment and partnerships, with the likes of Alcatel. Here it will be business that benefits from the tiny wages brought on by an excess of labour, (Rangoon wages are ranked as the lowest in Asia for a major city, Suu Kyi called this a “time bomb”) and the eased restrictions which are coming into force.
The IMF admits that such western investment however could cause, “a sustained appreciation of the currency [that] could further erode external competitiveness and constrain household incomes.”
This has been seen previously in Burma, as the IMF note: “the parallel market exchange rate of the kyat has appreciated by 23 percent in nominal effective terms and about 29 percent in real effective terms since end-FY2009/10, driven by large inflows into the economy, which cannot find an outlet due to exchange restrictions on current international payments and transfers.”
DVB recently spoke to Dean Baker, co-director of the Washington based Center for Economics and Policy Research who believes the unrestrained nature of reforms is worryingly inevitable: “major corporations will want Burma to immediately open their markets and they will be urging the US and other governments to press such openings on Burma. Their concern is obviously short-term profit. They are not thinking of the best path through which Burma can develop.”
Corporations will be looking for low wages, irrespective of such constraints on household income, as they bear no impact on profitability.
The IMF prescriptions would likely see a growth in exports of raw commodities – especially the expansion in exports of lucrative, unsustainable commodities such as raw jade and gems, gas & oil and timber. This something that the IMF appears to welcome, as they advised in January: “replicating the success of FDI in the energy sector in other sectors would contribute significantly to private sector development.”
The latest report from the Economist Intelligence Unit (EIU) concludes that the most likely outcome — with an estimation of a 60% probability — will be that, “reforms are limited, aimed only at securing international legitimacy and lessening China’s influence”… “Economic growth is still relatively fast, but its full potential is not reached.”
“In the end no one will come and develop you and build your country for you,” says Ha-Joon Chang, “so you will have to find a way to accumulate your own capabilities, and think about the implications of your policies for FDI, education and training when devising a strategy.”
“This requires a leadership committed to economic development and increasing general welfare as opposed to the wealth of the ruling elite,” the Cambridge University economist states, “but with the current alternative leadership of Ms. Aung San Suu Kyi, I think that group at least appears to be committed to do things so lets hope they keep that up, but of course there is the danger that some people might try to use this opening up to line their own pockets”.
An alternative approach might be inviting FDI only in specific sectors or even limiting the exports of certain raw commodities. While this might knock GDP growth rate off in the short term, the economy would reap greater long-term benefits. The processing of its own jade, and other domestic industry with government guidance, however would help to start the slow work of developing competitive industry and sustained evenly distributed wealth.
This would in the long run outweigh what is the most likely prescribed destiny for the Burmese economy.