On a balmy Thursday morning in mid-September earlier this year, eight-seven prisoners of conscience took their first steps of freedom since being imprisoned in Mandalay Prison, some for nearly thirty years. U Nyan Win, a spokesperson for the main opposition party the National League for Democracy (NLD) said, “It’s a good sign […] there shouldn’t be political prisoners in our country because we are now becoming a democratic state.” International rights groups have accused President Thein Sein’s government of using political prisoners as a bargaining tool, noting that the prisoners were released just before President Sein’s trip to the United Nations in New York. Yet one cannot help but see this gesture as mirroring Burma’s recent move towards economic glasnost.
After World War II, Burma was one of the region’s richest nations. In fact, it was the world’s latest exporter of rice until the early 1960s. Following General Ne Win’s coup d’état in 1962, however, the government of Burma came under the direct control of the military and remained so for the better part of the last fifty years. It was during this time that Burma became one of the world’s most impoverished countries owing entirely to the military junta government’s economic mismanagement. Harebrained schemes such as the ‘Burmese Way to Socialism’ and Soviet-style planning left the economy severely crippled and without a dynamic private sector. As a result in 2009 Burma’s GDP stood at less than Cambodia. Yet the future looks bright, and not without good reason. Since the constitutional referendum in 2008 and the general elections in 2010, the military backed government has, to the surprise of the international community, embarked on a series of reforms towards democracy and a liberalized economy.
Burma now has an unprecedented window of opportunity to kick-start its development and to raise the standard of living of its people. On paper it has all the ingredients required to create another Asian economic miracle. Blessed with plentiful natural reserves of timber, oil and natural gas, and metals like tin and tungsten, Burma has already begun wooing billions in foreign investment. Historically, since as far back as 100BC, Burma was the main trade route between the rich kingdoms of India and China. Providence, it would seem, is once again smiling upon the Burmese as India and China emerge as among the fastest growing and most resource-starved economies in the With a population of nearly 60 million, twenty-eight percent of whom are below the age of fifteen, and nearly seventy percent of who are between fifteen and sixty-four, Burma has a large base of low-cost workers that could make it a manufacturing powerhouse similar to other Asian tigers. Moreover, given this burgeoning demographic dividend and the much-needed jobs it could create, Burma could also see a spurt in domestic demand, which would potentially drive consumption. Consumer markets at the moment remain virtually untapped indicating huge potential. Indeed, telecom companies are already scrambling to penetrate this market, where a mere 1.24 percent of the population owns a mobile phone. Only North Korea has a lower penetration rate in this industry.
Given its unique location and abundant natural resources, Burma, it would seem, is poised to be the next growth miracle of the 21st century. But this is only half the story. In its quest to realize this potential, Burma faces a series of critical challenges, not least of which is its tumultuous past and volatile history with investors.
The Other Side of the Story
Identifying countries with economic potential has always been easier than predicting which ones will actually go on to realize that potential. And it is no different with Burma. For the past fifty years, Burma has remained a question of whatif? While its neighbors like Indonesia, Thailand, and Singapore joined the ranks of Asia’s powerhouses, Burma lagged behind, spurned by the international community and brought to ruin by its own intransigency to reform. The recent thawing of the military and the nascent political reform has put Burma back on the path to achieving a real economic revival. Still though, there is much work to be done.
Long-term economic growth depends on a country maintaining macroeconomic stability. Investors, producers and suppliers all need reliable and accurate price data if they are to engage in economic activity. But this is precisely where Burma’s greatest challenge today lies. The task is two-fold: to maintain stable prices that don’t affect other sectors of the economy and to do so in a credible manner. The main barrier to the first task is the imbalanced growth of economy in the short term. Although the booming growth of the oil and gas sector could potentially transform the economy over the long run, it also leads to an appreciationof the real exchange rate, which makes other exports uncompetitive. Indeed, the Burmese kyat, which was earlier pegged to the dollar, saw a substantial increase in value from 1400 per dollar in 2007, to less than 700 per dollar in 2011. This makes Burmese goods more expensive in the international market, which affects the growth of the manufacturing, services and agriculture sectors, which employ a majority of the population.
The main impediment to the second task is the lack of credible institutions in Burma. In early 2012 the central bank moved to a more market-driven ‘managed float’ exchange rate. In a managed float system the exchange rate is determined by how much buyers in the market are willing to pay, but the central bank still ‘manages’ that rate by actively intervening in currency markets to maintain price stability. Following this shift the kyat has seen a depreciation of more than seven percent this year – a good early sign for the central bank’s credibility. Nevertheless, Burma still faces rampant inflation and price uncertainty with consumer prices rising by an average of over twenty percent a year between 2005 and 2010, according to the Asian Development Bank. Unless the bank can reign in this price increase, it will lack the credibility required to woo investors and maintain a stable economy in the future.
Harnessing Burma’s young population while maintaining social cohesion is another major challenge that the country is already facing and will continue to do so in the future. Ensuring that liberalization doesn’t result in public disenchantment with reforms means helping millions find jobs. But current national income accounts and data from the Asian Development Bank (ADB) suggest that the country has an investment rate of 14% of GDP, among the lowest for low-income economies in the region. In addition, of the 36 foreign investment projects approved from 2005 to 2010, 27 were in the oil and gas sector, which doesn’t create much local employment.
This situation calls for a delicate balance. Approving big investments in natural resources brings in much needed revenue for the government, but at the same time this increased revenue is of little value if it isn’t invested in future growth. And while a weak investment climate, an underdeveloped financial sector, and international sanctions help explain the low investment rate in the past, if the government wants to realize this demographic dividend, without risking the political reforms it has put in motion, greater investments are needed in education, health and social services in the future.
Finally, to fully realize its potential Burma must also focus on structurally transforming its economy. According to national income accounts agriculture and services each account for about 40% of GDP whereas industry accounts for less than 20%. Revealingly, however, nearly 70% of the labor force is employed in agriculture, with only 7% employed in industry and the remaining in services. Digging further into the data, one finds that youth unemployment between the ages of fifteen and twenty-four is at an
unheard of 47% (according to the World Bank). This rampant unmet demand for jobs could potentially derail the Burmese economy and have disastrous consequences for political reform. In order to avoid such a fate, Burma must work towards building up its transport, telecom and power networks, as well as modernizing its financial markets in order to support manufacturing and services growth. To cut poverty rates and to raise the standard of living, it’s imperative that the government focuses on broadening the economic base beyond agriculture to manufacturing and services.
The Road Ahead
Historically, the Asian tigers were mostly resource-poor and relied on export-oriented manufacturing to drive their economies. China, Japan and South Korea are the prime examples of this phenomenon. In contrast, countries that have relied primarily on resource exports (think Russia) have grown more slowly, and have often underinvested in other parts of the economy making them vulnerable to global price volatilities. Yet, this does not necessarily mean that Burma’s economic renaissance is doomed even before it has begun.
So far the transformation that the country has undergone has been breathtaking. President Sein has even gone so far as to say that he would accept opposition leader and Nobel laureate Aung San Suu Kyi as the leader of the country if the people vote for her in the next general election in 2015. Moreover, this intent to reform has not gone unnoticed by the international community. Earlier this year the EU agreed to grant Burma access to European markets without any punitive tariffs and duties. And more recently the US government also stated its intent to ease import bans on Burma albeit on a sector-by-sector basis. All these signs point in the same direction. If the reforms stay on track and the international community continues to embrace Burma’s new avatar, the Asian Development Bank (ADB) projects that its economy could triple in size by 2030 and has the potential to grow at 7-8% per annum in the intervening years.
Without a doubt, Burma faces significant challenges before it can realize this potential and provide inclusive growth for its people. Corruption at the political level, a lack of transparency, and a lack of strong and efficientregulations are just some of the economic challenges it faces. Beyond just economic reform, however, there also remains the question of further political reform, including the establishment of a truly independent judiciary and institutions that respect the rule of law. But if the last two years are any indication of things to come, then we might just be witnessing the ascent of a new Asian tiger.