"Myanmar: The Politics of Economic Reform", crisisgroup

Myanmar: The Politics of Economic Reform

Asia Report N°231 27 Jul 2012

Executive Summary

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Myanmar has embarked on an ambitious program of sweeping reforms to end its isolation and integrate its economy with the global system. Closely entwined with its dramatic political transition, the end of longstanding Western sanctions is supporting this reconfiguration. If the reforms are done well, many across the country stand to benefit, but those who profited most from the old regime’s restrictions and privileges will lose access to windfall profits and guaranteed monopolies. The crony businessmen, military and party elite will still do well but will need to play by new rules, meet domestic and foreign competition and even pay taxes. Perhaps recognising the opportunities a more vibrant economy in a fast-growing region will bring for all, there is no major pushback to these changes, rather attempts to adapt to the new economy. The challenges and risks are numerous for a government with little experience juggling the many changes required, but it cannot resist the pent-up political pressure for change it has already unleashed.

If done with reasonable equity and some care, there could be many winners from these economic reforms. Any successful reform package must ensure that the bulk of the population recognises it is better off as a result. That means including quick-impact measures that produce a tangible effect on their lives, such as improved access to electricity, land law reform, better public transport, cheaper telecom­munications and lower informal fees of the kind that block access to health and education services. The three main losers would be the business cronies of the last regime, the military and politicians linked to the establishment Union Solidarity and Development Party (USDP). The system of monopolies and access to licenses, permits and contracts is being dismantled. The two massive military holding companies must now pay tax. The USDP and those around it have been sidelined, losing political and economic power.

Despite this reversal of circumstances for key pillars of the old regime, there is no major effort to derail the reforms. There is a strong sense in all quarters that the political winds have changed, and dramatic economic reform is inevitable. Those who benefited most from an advantageous position under the last government also realise they are well placed to profit from a revitalised and growing economy. The military is aware that its sprawling business interests, if not competitive, may become a drain on its budget rather than a supplement to it. With support for opening up the economy building across the country, previously favoured businessmen and rich politicians appear to recognise that the political risks of challenging economic reform could outweigh the likely benefits. With limited options, the cronies are trying to distance themselves from their murky past and rebrand themselves as valuable contributors to the new economy. Along the way, they hope not to draw too much scrutiny about how they acquired their personal wealth and the capital that will now give them a head start.

In recent months, the resignation of Vice President Tin Aung Myint Oo, which has been one of the most significant political events of the new administration so far, has had an economic impact. Widely regarded as a patron of the old business elite and an obstacle to key reforms, his departure may facilitate easier decision-making and smooth the way for President Thein Sein to push ahead with his economic agenda.

The economic reform process will not necessarily be without friction, and success is not guaranteed. The enormity of the task threatens to overwhelm the government’s limited policymaking capacity. Decision-making is ad hoc, not yet based on a carefully-devised master plan. It will be a challenge to maintain a balance between the speed of the reforms and their effectiveness, as decades of isolation have created a political urgency that will be hard to resist. Despite the best-laid plans, changes in one policy area often create a quick or unintended need for adjustments in another. There is limited ability in the bureaucracy to deal with the workload of regulations and management that each policy and new law will create.

Myanmar’s political transition and economic reconstruction are intimately entwined. Achieving either depends on achieving both. The ethnic peace processes are also closely bound up with the political economies of those border regions. As ceasefires are being secured, there will be new pressure to produce a peace dividend in these remote but resource-rich regions. It is hard to imagine a successful political transition unless the government can ensure macroeconomic stability and sustained improvement in the lives of ordinary people, just as it is hard to imagine successful economic reform without political stability and a continued shift away from the authoritarian past. Unanticipated economic shocks, social unrest or political uncertainty in the lead-up to the next general elections in 2015 all represent potential risks to the process. But with the potential benefits of reform after decades of isolation so huge, Myanmar should not be hesitant. It sits in the middle of a vibrant region and in integrating with it has the opportunity to catch-up to its neighbours, as well as learn from their successes and failures.

Jakarta/Brussels, 27 July 2012