Will Myanmar Embrace Market Reforms?
Tags Global EconomyWorld History
The economic growth in Myanmar is now among the highest in Asia, and it's come a long way since the 1960’s when it was considered one of the world’s most impoverished countries. It’s instructive to understand how this change took place, what some of the current economic metrics indicate, and current pressures being placed on Myanmar from the outside.
For starters, the general history of Myanmar (also known as Burma, and the reason for the two names is interesting in itself) is long and fascinating. More recently, Myanmar was conquered by Great Britain (it was actually a part of British India, which was responsible for much of the administration) in 1855, and became relatively affluent in this part of the world, primarily due to the trade of rice and oil.
However, even before British rule, Myanmar was already relatively well off due to its strategic location along important trade routes. Myanmar is located between India and China — Indian influence is still present, even today, and was resented, along with British control — and this trading activity helped offset a country based on self-sufficient agriculture and centralized control via a king.
Britain ruled Myanmar until independence in 1948, when a series of nationalization and central planning efforts created a welfare state. The results were disastrous. Rice exports fell by two-thirds in the 1950’s, along with a 96% decline in mineral exports. In order to maintain central planning efforts, the government resorted to printing money, and runaway prices resulted from this inflation of the money supply.
As with many government failures, what the government does to "fix" the problems can be much worse, and this is exactly what happened in Myanmar. In 1962, the Burmese Way to Socialism was launched, and lasted until the late 1980’s, when military rule resulted. Among its features, nationalism and isolation were predominant, ownership of property was nationalized, and price control boards were established. Private capital was not allowed to construct new factories, and the oil industry (largely foreign owned) was curtailed. Rice production and exports declined further. Freedom of expression was limited, including the distribution of foreign newspapers, and all privately-owned newspapers were banned, along with anything deemed “false propaganda news”. Not surprisingly, the black market soon encompassed about 80% of all economic activity within Myanmar during this period.
The period of military rule, beginning in 1988, slowly began to reverse some of the worst parts of the Burmese Way to Socialism, including modest expansion of the private sector (although the private sector was always intertwined with the government in some way). The use of a dual exchange rate system for the single currency, the use of which during this time in Myanmar became prominent, is of interest. Dual exchange rates, with one fixed official rate, and a second, market-driven rate (and perhaps others as well?), make public sector transactions difficult, but allow for more local control of the economy, including inflation. Indeed, a chief complaint of the IMF working in Myanmar is that their economic models don’t hold up well here. However, in 2012-2013, Myanmar embarked on a program to end the use of multiple exchange rates.
The last 5 years in Myanmar has witnessed considerable change. Foreign investment laws have been altered, and a large influx of capital followed, including work on a new deep-sea port to enhance trade. In addition, non-citizens are no longer required to have a local partner to open a business, and can legally lease land.
When I was in Myanmar last year, I was able to easily convert US dollars to Myanmar kyats at a rate that was published inside the facility, as long as I provided US bills that met certain standards. The Myanmar economy is largely cash based, but some hotels and businesses now accept major credit cards. The number of bank accounts is low, but growing. Everywhere I went (mostly in and around Yangon), there was considerable activity — signs of the investment influx, but also, people running small businesses, and many types of commercial activities were apparent.
As part of my trip there, I visited factories big and small, including a small one that had large stores of raw materials, but little in the way of production. I was told that this was because the owners were determining what to manufacture based on market conditions, and that work would begin soon — a nice example of listening to consumers and the market versus just hoping that demand would magically materialize someday.
The government of Myanmar has one of the lowest tax takes in the world, causing some concern that public services are lacking. And yet, the private sector is filling in the gaps by necessity. Indeed, while only spending 1.2% of the state budget on education, Myanmar still manages to achieve a 90% literacy rate, even with a largely agrarian population spread out over the country.
The future of Myanmar appears to be growing brighter, but not all signs are promising. For example, a World Bank report has highlighted rapid increases in food prices resulting from an expanding money supply:
This report is also littered with recommendations for expanding or stabilizing the public sector, including bond auctions that will “protect public spending that is critical for long-term growth.” In addition, the report criticizes a lack of inclusiveness in lending, with most loans going to people in certain networks, and those most able to pay them back. Traditionally, banks loans in Myanmar required ample collateral, such as buildings and land, but now, the central bank was relaxing requirements by considering non-collateral lending. These easy-money policies may mean that the recent 20% drop in housing prices (a sign of a healthy, functioning market) over the past 3 years within the Yangon area could be a thing of the past.
Going forward, will Myanmar focus on trade, low taxation, and reliance on private services? Or will outside influences force an enhanced public sector spending, inflation of the money supply, decisions made by blindly following economic models, and an easy credit situation? Time will tell, but once the choice is made, the eventual results will already be known.