Commodity Prices, Cronyism Threaten Burma's Economy: UN

By Simon Roughneen 10 May 2012

BANGKOK—Burma’s economic prospects could be undermined by volatile commodity prices, according to the United Nations, which says that reliance on the now-lucrative oil and gas sectors could hinder fiscal modernization.

Western companies appear eager to tap into Burma’s natural resources as US and EU sanctions are relaxed or suspended in the wake of a succession of recent reforms such as the freeing of political prisoners and the holding of free and fair by-elections on April 1.

But although the United Nations Economic and Social Commission for Asia-Pacific (UN-ESCAP) predicts 6.2 percent economic growth for Burma in 2012, the region remains vulnerable to fluctuating prices of commodities such as oil and the ongoing debt crisis in Europe.

Demand for primary resources from large “emerging” economies such as China and India has pushed oil and gas prices upwards. This means extra revenues for the Burmese government and, given the recent ending of the country’s dual exchange rate system, possibly a more transparent disclosure of the nation’s energy earnings.

But in an April research note on Burma’s economy, the US-based Carnegie Endowment for International Peace warned that “it is critical that these net earnings are transferred to the budget and used for social and infrastructure development, especially in regions with ethnic minorities.”

Otherwise, Burma could fall victim to the so-called “resource curse” with “commodity boom countries falling back in terms of overall modernization and diversification of their economies,” according to UN-ESCAP.

To counter this, Burma needs a stronger non-resource sector and “investments in education, health, rural development and infrastructure,” says UN-ESCAP. Around 75 percent of the Burmese population does not have access to electricity, despite the country’s huge oil, gas and hydropower resources.

Other prospective threats to Burma’s economy include increased inflation on the back of an investment surge, and an increase of speculative capital flowing in and out of the country. Inflation in Burma could hit 6.2 percent (the same as the projected growth rate) during 2012, warns UN-ESCAP, hitting the millions of Burmese who live on US $1-2 a day.

Nonetheless, the lifting of sanctions and apparent emergence of a more business-friendly administration represents “a tremendous opportunity for Myanmar,” said Noeleen Heyzer, United Nations Under-Secretary General and Executive Secretary of UN-ESCAP.

However, she cautioned that Burma’s re-emergence into the global economy is at a very early stage and that concerns regarding nepotism and cronyism remain. “There needs to be support for new small and medium enterprises so that growth is not driven by monopolies and families,” she said, speaking at the launch the 2012 Economic and Social Survey of Asia and the Pacific in Bangkok on Thursday.

Despite a 26 percent increase in tourist numbers and the drafting of a new foreign investment law, Burma’s economy “still suffers from restrictive measures, such as licensing, which pose barriers to manufacturing and agriculture.”

The recent relaxation of some US sanctions and the one-year suspension of EU restrictions will also free-up donor countries to expand aid programs in Burma. “There will be an inflow of development aid but I predict that private sector investment will be a driver of growth,” cautioned Noeleen Heyzer.

Rapid aid inflows have a poor track record in Asia, according to the Asia Foundation. “When international assistance scales up rapidly in a place unaccustomed and unprepared for large-scale aid, problems are likely to follow,” it said in a note published on Wednesday titled How Can International Assistance to Burma Avoid Mistakes of the Past?

“In post-tsunami Aceh and Sri Lanka, and post-transition Timor-Leste, large-scale aid often created perverse incentives that led to poor program quality and wasted resources.”

In Burma’s case, political and economic transition could be undermined if donors neglect the country’s ethnic minority borderlands, where on-off fighting has taken place in some regions since the late 1940s.

While the longest-standing ethnic militia, the Karen National Union, has signed a ceasefire with the Naypyidaw administration, fighting continues in Burma’s far north between government troops and the Kachin Independence Organisation.

Kachin NGOs complain that donors and aid agencies are neglecting the more than 70,000 civilians left homeless by the fighting, and the Asia Foundation writes that “neglecting the remote conflict areas could lead to a renewed cycle of armed resistance and military suppression, putting the whole transition at risk.”