Debating the Economy

By Simon Lewis 3 September 2014

YANGON — Myanmar must enlist the country’s top tycoons and financial backing from Beijing if it wants to achieve much-needed infrastructure growth.

It might sound like a recipe for political suicide in modern Myanmar—where “the cronies” are a popular target of criticism and China is a major source of nationalist angst—but that is the prescription set out by a researcher at Singapore’s Institute of Southeast Asian Studies (ISEAS).

In his July paper, “Myanmar: Between Economic Miracle and Myth,” ISEAS visiting fellow Stuart Paul Larkin sets out an alternative to what he calls “the donor lovefest and the new economic narrative.” He says that while foreign donors have been showering the government with money and barely solicited advice, a huge trade deficit has arisen (US$2.6 billion in 2013-14, according to official figures), mostly as the result of a “consumer imports boom.”

“In so far as the donor agencies cannot resist furthering the economic interests of their paymasters they are playing the game rather well,” Mr. Larkin writes, arguing that rapid economic liberalization will allow multinationals from rich countries to extract natural resources and sell goods to Myanmar consumers with minimal local gains.

Meanwhile, he argues, developing export-led industries that would create much-needed jobs has been hampered by Western countries’ emphasis on good governance and competitive tendering (without much concomitant investment), which makes the necessary infrastructure projects “difficult to get off the ground.”

The infrastructure challenge in Myanmar is massive. McKinsey Global Institute predicted last year that $320 billion of infrastructure investment would be needed between 2010 and 2030 to maintain economic growth of 8 percent per year. And it is indeed unclear who will stump up the cash, as illustrated by the current struggle to fund a much-needed new airport for Yangon.

Poor Priorities

Larkin criticized the World Bank’s International Finance Corporation for its approach in the country, which includes investments in real estate projects like a high-end hotel being built by tycoon Serge Pun.

“Real estate, especially at the high end, produces a very limited development dividend compared to infrastructure,” Mr. Larkin writes, suggesting that the arrival of China’s highly capitalized banks to the financing arena could make the IFC feel “the chill winds of competition.”

But since President U Thein Sein suspended the Myitsone hydropower dam project in 2011 amid public opposition, investment from China has all but dried up, and other projects have felt the wrath of public sentiment against the country’s giant neighbor.

To some extent, this has been balanced by the growing presence of Japan, which has stepped in as the major foreign financer of infrastructure, notably with the Thilawa Special Economic Zone project, in which garment producers are already waiting to set up factories.

But Mr. Larkin calls for the Myanmar-China relationship to be revived, with China hopefully taking a “portfolio approach to financing infrastructure in Myanmar.” Chinese banks could underwrite loans or invest, he suggests, as an alternative to the shady deals conducted by government officials that marked previous China-backed projects.

At the same time, says Mr. Larkin, local family-owned conglomerates should be invited to “take the lead” in identifying which infrastructure projects are feasible and then be “empower[ed]with concessions.”

“After all, they are headed up by the nation’s most talented entrepreneurs,” he writes, adding that cronyism is “a political failure and not a failure in entrepreneurship.”

Mr. Larkin points out that not everyone who prospered under the old regime will continue to do so in a more open economy.

“I prefer the term ‘tycoon’ to ‘crony’, Larkin told The Irrawaddy by email. “Myanmar’s power holders will require somewhat different qualities from their tycoons than in the past for this externally financed infrastructure endeavor and not all the tycoons will manage to upgrade themselves…” he said.

“I do not think the Myanmar tycoon-Beijing nexus need be ‘politically toxic’ provided it yields broad-based benefits that are explained to the general population in advance.”

Kyat Depreciation

But the political flack for any Myanmar government planning to adopt Mr. Larkin’s approach would not end there.

Mr. Larkin also recommends that the government depreciate the kyat in order to incentivize industries like the garment sector, where he sees current levels of investment as too low to create the export-led growth that has successfully pulled other Asian nations out of poverty.

He calls for the currency to be devalued “early even if the measure will be unpopular in the short term,” dismissing the significance of the “inflationary surge” that would follow as fuel and electricity prices go up.

Andrea Smurra, an economist with the Myanmar Program of the London-based International Growth Centre (IGC), countered that depreciation would make it more expensive to import those things needed to upgrade infrastructure and bring in the technological improvements needed to increase rice exports, and could actually be detrimental to the garment sector as well.

“This industry [garments] currently imports everything, from thread to sewing machines,” said Mr. Smurra.

“Depreciation will make all these inputs more expensive and, by generating inflation, will eventually push the government to increase nominal minimum wages, nullifying the impact of the depreciation policy on this industry.”

Mr. Smurra also argued that inflation could trigger social unrest, pointing to the large-scale street demonstrations that have taken place each time a fractional increase in the already highly subsidized price of electricity has been proposed.

“The government does not have the fiscal resources to absorb the impact of depreciation and people will perceive their welfare as being sacrificed on the altar of the elite’s profit,” said Mr. Smurra.

“People are waiting for the famous ‘transition dividend,’ and inflation will erode all the gains accrued over the last few years. No political leader will support such a policy, and no political leader should do so.”

None of this, to Mr. Larkin’s mind, is good enough reason not to do what is economically necessary.

He characterized the concerns about the possible political fallout of his proposed policies as a question of leadership, arguing that difficult and unpopular decisions would have to be made.

“[T]he country’s politicians must rise above the temptation to pander to the prejudices of an undereducated population who are now empowered through the ballot box,” he told The Irrawaddy.

“Populism is a very real threat to Myanmar’s polity. Third rate democracies … are often worse than authoritarian regimes.”

This article was first published in the September 2014 print issue of The Irrawaddy magazine.