Economy

The Irrawaddy Business Roundup (Oct. 10, 2015)

By Simon Lewis 10 October 2015

Has Burma’s ‘Social Spending’ Surpassed Military Expenditure?

With the country going to the polls in less than a month, it seems an opportune time to assess the progress that President Thein Sein’s nominally civilian government has made in reversing one of the more damaging longstanding policies of Burma’s rulers.

Successive military leaders focused large amounts of the national budget toward the armed forces, at the expense of education and health spending.

When Thein Sein took the reins in early 2011, social spending was among the lowest in the world, even as government coffers were already filling with new revenue from offshore gas fields. The results: Foreign investors regularly complain that education levels among the workforce are a major obstacle to modernizing the economy, and those who can afford it—especially the families of government officials—still fly to foreign cities for health care.

Education spending was just 0.6 percent of gross domestic product in 2012, and health spending was just 0.2 percent, according to the Asian Development Bank. The true scale of military expenditure, officially estimated somewhere around 4 percent of GDP, is hard to know, given the opacity of departmental spending and the military’s numerous companies that control large segments of the economy.

The World Bank this week published its “Myanmar Economic Monitor” for 2015, which included the news that the economy may grow less than expected next year, depending on how serious the impacts of this year’s flooding turn out to be on agricultural production.

The detail of the Bank’s report had some praise for the government in addressing what it diplomatically calls “gaps in public service delivery.” The government has begun to “rebalance” its spending, thanks to improved tax collection, it said. Government revenue amounted to 11 percent of GDP in 2014, compared with just 6 percent in 2009.

According to the report, total spending on “social services” has increased from 10 to 33 percent of government spending between 2009 and 2014.

But the Bank went further, claiming that a major milestone had been reached in government spending in the 2015-16 budget, which it refers to as the Union Budget Law (UBL).

“Social services for the first time constitutes the largest share of the UBL (3.9 percent of GDP compared to 3.77 percent for defense)….” it said. “Whilst defense spending remains high compared to other countries, it continues to trend down both as a share of GDP and as a share of the budget.”

This apparent turnaround would give the incumbent government an opportunity to boast its reformist credentials to the electorate. It would also be a helpful factoid for those wanting to dismiss claims that Thein Sein’s administration, packed with former military officials, has not dented the primacy of the military in government policy.

But Sean Turnell, an economist at Macquarie University in Sydney and an economic advisor Burma’s opposition, accused the World Bank of using figures that distort the true picture.

“Health and education spending is falling as a proportion of GDP, and together continue to track well-below spending on the military,” he said in a Facebook post in response to the World Bank’s update. “This distorted relativity has long been a pathology in Burma, is highly unusual, and is not ‘called out’ enough.

“There is, in my view, no better indicator of a government’s priorities.”

He explained that the World Bank was “lumping in” other spending, including pensions for government staff, within its “social spending” category, along with education and health spending. Additionally, plenty of “off-book” military spending is ignored in the Bank’s report, Turnell argued.

“This new metric is without utility in my view, and only serves to blind us to the realities in Burma,” Turnell said.

Work to Begin on Renewed ‘Ledo Road’

Kachin State Chief Minister La John Ngan Hsai has reportedly said that work will begin this month on a new Chinese-backed version of the “Ledo Road” that played a major role in World War Two in Burma.

The road connected the border town of Ledo, in northeast India’s Assam, with the Kachin State capital of Myitkyina, and was intended to allow goods to be transported from British India to nationalist China, avoiding the areas of Burma then under Japanese control. It was also known as the Stilwell Road, after the American general who oversaw its construction in the early 1940s.

Chinese state-owned newswire Xinhua reported last week comments by the state minister saying that Chinese regional authorities were cooperating on a new highway along the route.

“As part of Kachin’s development efforts, the project will be constructed in two phases under a build-operate-transfer system with Baoshan regional authorities and local companies,” La John Ngan Hsa was quoted saying.

“For the first three years, the project will cover construction of the road section between [Myitkyina] and [Tanai], while for the second three-year phase will be the section between [Tanai] and [Pansaung], he disclosed.

“Coordination is also being made with Dehong regional authorities [in China’s Yunnan Province] for the building of another section between Lwejie and Momauk, he added.”

While the original road was constructed in wartime, the Xinhua report did not mention the ongoing conflict in Kachin State, where clashes continue to erupt between the Burmese government and the Kachin Independence Army.

Vietnamese Bank Claims to Be Next Burma Entrant

Officials from Vietnam’s BIDV have claimed the bank is next in line to receive approval to enter Burma’s nascent market for foreign banks, according to Reuters.

BIDV said it had been assured by President Thein Sein that it would be allowed to offer banking services in the country next year, the newswire reported. The bank failed to win one of nine licenses handed to overseas banks this year that allow them to offer a limited range of services to customers in Burma.

“In a statement, it said Myanmar President Thein Sein had on Tuesday told BIDV’s chairman ‘the government will give priority to BIDV’,” Reuters said.

Australia’s ANZ Banking Group, Bangkok Bank and the Industrial and Commercial Bank of China, as well as a clutch of Japanese banks, are among the nine banks that have already opened branches in Rangoon.

Burma Considering ‘Safeguards’ to Stop Price Dumping

Amid concerns among small- and medium-sized enterprises (SMEs) that increased economic integration will have negative impacts, an advisor to the Commerce Ministry has said legislation will be enacted to prevent foreign companies dumping low-cost goods in the country, according to state media.

Dumping occurs when overseas companies offload goods at below their market price. While not strictly illegal under international trade rules, it can cripple local industries, which may struggle to compete with larger competitors overseas.

The Global New Light of Myanmar reported comments from the adviser, Maung Aung, saying the law was needed before the Asean Economic Community (AEC) begins to come into force. The AEC officially begins next year but is expected to be implemented more slowly following concerns that the region is not ready for the envisioned single market.

“During his presentation, the adviser said that levels of imports continue to increase following the country’s economic reforms combined with trade relaxation and the implementation of the AEC,” he said.

“He highlighted the importance of laws that allow small and medium-sized enterprises to call on the government for imposing anti-dumping and countervailing duties and safeguard measures.”

Philippines Power Company ‘Scouting for Ventures’ in Burma

The Philippines’ second-largest electricity producer is eyeing a new venture in Burma, according to a Bloomberg report this week.

Aboitiz Power Corp. is looking to expand in the Southeast Asian region as domestic projects begin to look less attractive, the report said, quoting a financial analyst.

The company is involved in hydroelectric and geothermal energy projects, as well as “non-renewable power plants” across its home country, according to its website. Aboitiz Power is planning to have built a portfolio of projects producing a total of 4,000 megawatts in the Philippines by 2020, the Bloomberg report said.

Chief Executive Officer Erramon Aboitiz told Bloomberg that the company was set to “scout for ventures” in Burma, as well as in Vietnam. The company has already entered agreements to develop power projects in Indonesia.

“We want to stay close to home,” he was quoted saying. Indonesia, Vietnam and Burma are “the countries that pose the best opportunity for us. We’ve chosen ASEAN because we can add value in these places,” the CEO said, adding that Aboitiz Power may invest $500 million in regional projects in the next five years.

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