Myanmar needs urgent reforms as economy's in the woods

MYANMAR'S economy is still in the woods: The Aung San Suu Kyi-led government has delayed a long-awaited reform to allow foreign companies to purchase stakes of up to 35 per cent in local companies as business confidence has plummeted drastically, while jungle-style "ceasefire capitalism" flourishes in insurgency affected areas.

To top it all, there are fresh worries among investors that new international sanctions are on the way because of the treatment of the ethnic Rohingyas, in addition to the aid already being withheld by some foreign countries.

The good news is that two insurgent groups have agreed to sign the so-called National Ceasefire Agreement (NCA) in January this year after meeting Ms Suu Kyi and military commanders. Out of Myanmar's 21 rebel groups, eight have signed on, and at least 11 have not joined the NCA, an accord negotiated by the previous semi-civilian administration. The ceasefire agreement is intended to steer the insurgents towards peaceful political dialogue that is expected to grant them a measure of autonomy.

The news of the postponement of corporate reform, which became public in December last year, disappointed cash-starved local businesses amid plunging business confidence among entrepreneurs due to unclear economic policy, which was revealed in a survey just a month earlier.

The halt in fighting in some of the insurgency-hit states of Myanmar has allowed a nexus to develop between local governments and businesses in an atmosphere described as "ceasefire capitalism".

The scholar Lee Jones demonstrates in the article The Political Economy of Myanmar's Transition that the emergence of a politico-business oligarchy - consisting of army commanders, state officials, religious figures, and local and foreign investors within insurgency-affected borderlands - is unlikely to be dismantled by the reform process.

The author argues that throughout the Cold War, heavily armed insurgents controlled almost all of Myanmar's lengthy borders with China and Thailand, the two neighbouring countries that financed their military operations through smuggling and opium-trafficking.

Lee Jones explains that "increasingly rapacious frontier capitalism" emerged in the exploitation of timber, precious metals and stones, gas, oil and hydropower - financed largely by foreign investors.

The monopolisation of these resources by local and regional army commanders as well as foreign (and some domestic) investors has generated growing popular resentment among minority populations who are suffering land grab, forced displacement and landlessness.

'WHITENING' TAX

The author explains that the previous military-led regime's strategy of co-opting the leaders of the borderlands resulted in a policy that encouraged insurgent commanders and leading drug barons to invest their earnings from smuggling in central Myanmar, after paying a 25 per cent "whitening" tax to legitimise the black money.

In exchange for his role in mediating several ceasefires, drug baron Lo Hsing Han was allowed to use his substantial wealth to start up AsiaWorld, which became Myanmar's largest conglomerate.

The drug lord Khun Sa also became a "national entrepreneur" as part of his "surrender" to the government in 1996. Even the private banking system was dominated by Sino-Burmese "tycoons" closely linked to rebel groups, whose wealth came from drug smuggling.

In the late 1990s, one analyst commented that "the current Myanmar business directory of the Union of Myanmar Chamber of Commerce and Industry reads like a who's who in the drug trade". The regime facilitated their rehabilitation and enrichment as well as exemption from prosecution in exchange for their loyalty.

Other studies have shown that through the 1990s, the impoverished government grew dependent on the drug lords' wealth because of the international sanctions. As a result of the interdependence, the wealth of the criminals and the criminals themselves are a part of Myanmar's modern economy.

Against this background, the existing policy paralysis in Yangon caused the country's short-term business confidence to plunge sharply to 49 per cent in 2017 from 73 per cent in the previous year, according to a survey by consultancy Roland Berger and the Union of Myanmar Federation of Chambers of Commerce and Industry.

The survey of about 500 local and international business owners in Myanmar blamed the fall in confidence on the "lack of a clear economic policy and plan".

Besides, the survey showed that companies face other challenges that remain unaddressed, such as a lack of trained staff, an unpredictable law-making system, and selective enforcement of laws.

Many businessmen believe that the law must be amended to allow foreigners to purchase a stake of up to 35 per cent in local companies, as it would give local businesses access to much-needed funds and permit mergers and acquisitions in sectors from banking to property that urgently require a dose of cash.

The postponement of the much-anticipated reform comes as Ms Suu Kyi is facing criticism that she has neglected economic development. The pace of growth of both foreign investment and gross domestic product has slowed since her National League for Democracy took office in 2015.

Notwithstanding the slowdown, the World Bank lists Myanmar as one of the fastest growing economies in East Asia. In 2016-17, GDP growth eased to 5.9 per cent due to the impact of severe flooding in 2015, as the pace of recovery in agriculture was blocked by longstanding problems in the farms.

The World Bank notes that among the Asean countries, Myanmar has the lowest life expectancy and the second-highest rate of infant and child mortality.

It is alarming that out of every 100 children, six die before their first birthday and seven before their fifth. Some 29 per cent of children under five are moderately stunted and eight per cent are severely stunted. The school dropout rate is high especially in villages.

RECOVERY PROJECTION

Economic growth is projected to recover to 6.4 per cent in 2017-18, after taking into consideration the worsening security in Rakhine State, the scene of large-scale massacres of Rohingyas. The World Bank worries that the crisis could negatively affect investment flows already hurt by investor perceptions of slowing reforms.

However, GDP growth in the medium-term growth is projected to average 7.1 per cent annually, driven on the expectation of economic reforms, public consumption and private investment.

The government in Myanmar should carry out urgent reforms in order to shed the tag of an economy fuelled partially by "ceasefire capitalism".