A legacy of mismanagement: the state of Burma's economy

by Mungpi
Friday, 03 July 2009 21:11

Chiang Mai (Mizzima) – With decades of economic mismanagement under military rule, and presently exacerbated by the global economic crisis, Burma’s economy is facing serious threats to the extent that some experts are predicting an impending food shortage in parts of the country. Meanwhile, the generals who have ruled the country since 1988 say Burma’s economy continues to grow annually.

To analyze Burma’s economic crisis, its causes and possible solutions, Mizzima's Assistant Editor caught up with Sean Turnell, an Associate Professor in the Economics Department of Macquarie University in Sydney, Australia. He is a member of Burma Economic Watch, which has for years produced research papers on Burma’s economy, as well as author of a recent in-depth publication on the history of Burma's financial institutions.


Mizzima: Speaking of a rural credit system in Burma, what sort of system is currently in place in Burma?

Sean Turnell: Burma's rural credit system has almost totally collapsed. It's actually in a terrible state. The government has long had a policy of having just one monopoly provider of rural credit in the form of the Myanmar Agricultural Development Bank, or MADB, and the MADB is in a bad way at the moment. It's been decapitalizing over the last few years as it has made losses and the government has taken a lot of its capital for its own purposes. So, the MADB is in a bad position. It's very much limited in the amount in can lend, in both its capacity and in terms of some very strange regulations the government imposes on it. Most of the problems of rural finance in Burma are institutional. They're very policy driven. And we see it very much in the form of the MADB and its problems.

Mizzima: What then needs to happen to again make the rural credit system operational?

Sean Turnell: There's a lot they could do. But probably the most significant thing they could do is instead of wasting all that gas revenue at the moment, why not channel that into the rural financial system – recapitalize the MADB and perhaps come up with some new institutions which could combine the insights of microfinance plus the branch network of a big, state agricultural lender. Many countries around the world have done similar sorts of things. At the moment, of course, the regime is not particularly willing to do any of that.

The absence of rural credit in Burma and what is almost the disappearance of cash in the rural economy has very profound implications, both in the short and long term. In the short term you've got farmers who aren't able to get access to credit and thus not using fertilizer, not making repairs and not engaging in ways that could make their farm practices more productive. So that means that production is lower. In the short to medium term, then, we can expect the output of food to be lower than what it would otherwise be. And this, of course, raises the specter of food insecurity and so on. In the long term there are several serious effects such as land degradation. Of all the things that farmers need to do anywhere in the world to keep their farms up to international best practices, none of that is taking place in Burma. There's no real investment for the future in terms of increasing productivity. Whether we look at the short, medium or long run, this is a profoundly important issue that is really holding Burma back and will continue to do so into the future.

Mizzima: If the money's not going to infrastructure development and rural credit systems, where is it going? How much is being spent on military hardware?

Sean Turnell: Well, the military expenditure of the regime of course is extreme. Roughly fifty percent of government expenditure is on the military in various dimensions. Gas revenue is mostly kept offshore, kept in bank accounts in foreign currency, in order for the regime to do things like buy military hardware. Also to invest, to some extent, in building things in Naypyitaw and other projects like that. But certainly it's not being used in very productive ways and I think that probably the way in which it's being most used by the regime – we don't know precisely what the numbers would be – but it would seem that most of it is ending up in the form of military equipment in some way.

Mizzima: Again, turning back to the political aspect, do you think economic reforms are possible without reform to the political system or, at least in the short-term, without real change within the regime?

Sean Turnell: No. I think economic reform in Burma will require dramatic political change because if we look at the problems with Burma's economy, most of the problems stem from the fact that there is no rule of law or property rights. The sound financial and other institutions you need for a prosperous economy are simply not there. And the fact they are not there is a direct extension of the nature of the government itself. I don't see any hope for profound economic reform coming till there is at least some degree of political reform.

Mizzima: As we have seen time and time again, the junta has blamed Western sanctions for any economic degradation to Burma's economy. Do you think sanctions are actually to blame for much of the damage to the Burmese economy?

Sean Turnell: Not at all. Burma's poverty is overwhelmingly a result of the regime and its policies as well as the lack of the sound institutions I mentioned earlier. The fact is they spend so much money on the military instead of on the various ways they could make Burma more productive. Those are the real issues. In a sense what they do when they focus on sanctions in that way is divert tension over what the real issue is. It's also interesting to reflect that the true sanctioner on Burma in any case is not really the Western countries who are imposing the sanctions directly, but in fact it's the government itself by their creating an economic environment in which no one would be willing to invest. That's the real problem. That's the real problem in terms of foreigners investing in and trading with Burma. Of course, it's also a real barrier to Burmese themselves in conducting productive activity.

Mizzima: Officially the Burmese currency, the kyat, trades at six to the U.S. dollar. However, in practice the real rate of exchange is closer to 1,100 kyat to the dollar. Can you explain to us any significance to this gross disparity?

Sean Turnell: Burma's dual exchange rate has a number of effects on the Burmese economy. Firstly, it's an interesting symbol just of, again, the bizarre economic policy making and the absence of an economy that's functioning in the way we'd expect. A nearly two-hundred times difference creates a degree of uncertainty and sends a signal I think to the international economy and international investors that Burma's economy is not functioning in ways we might expect and want. Also, of course, it raises the specter of corruption. For instance, if one was able to access currency at the official rate of six to one, then you could make incredible profits by then selling to the market at 1,100 to the dollar. So, there's an obvious inflation incentive there. But above all, it distorts the economy, focuses the mind of people away from productive activity and instead into ways of trying to make their way through the system and through this labyrinth of strange laws and strange outcomes.