Friday, August 7, 2009

Burma Isn’t Broke

The drawn-out show trial of democracy icon Aung San Suu Kyi has once again focused attention on Burma and sparked discussion on how to engage the regime. U.S.
Secretary of State Hillary Clinton recently suggested development aid as a carrot to coax the generals to talk. But contrary to popular belief, the junta isn’t as poor as it claims to be.

Burma has emerged as a major regional supplier of natural gas in Asia-Pacific. At present, most of this gas is sold to Thailand, but new fields will shortly provide for vast sales to China. Rising gas prices and increasing demand have caused the value of Burma’s gas exports to soar, driving a projected balance-of-payments surplus for this fiscal year of around $2.5 billion. Burma’s international reserves will rise to over $5 billion-worth by the end of the year.

These revenues make next to no impact on the country’s official fiscal accounts, however. The reason is simple: Burma’s U.S. dollar gas earnings are recorded in the government’s published accounts at the local currency’s “official” exchange rate of around six kyat to a dollar. This rate overvalues the currency by nearly 200 times its market value and undervalues the local-currency value of Burma’s gas earnings by an equivalent amount. Recorded at the official rate, Burma’s gas earnings translate into less than 1% of budget receipts. By contrast, if the same gas earnings are recorded at the market exchange rate, their contribution would more than double total state receipts, and largely eliminate Burma’s fiscal deficit.

The motivation for this sleight of hand is probably to “quarantine” Burma’s foreign exchange earnings from the country’s public accounts, thereby making them available to the regime and its cronies. This accounting is facilitated by Burma’s state-owned Foreign Trade Bank and some willing offshore banks.

Flush with these funds, Burma’s military rulers have embarked upon a spending binge of epic proportions, including indulging themselves in the creation of a new administrative capital named Naypyidaw, or “abode of kings.” They are also buying nuclear technologies of uncertain use from Russia and possibly from North Korea.

This kind of behavior is par for the course in Burma. The military junta took power in a 1962 coup and has consistently expropriated the country’s output while dismantling its basic market institutions. There are no effective property rights in Burma, and the rule of law is weak. Macroeconomic policy making is capricious, unpredictable and ill-informed. The regime spends greatly in excess of its revenue and resorts to the printing presses to finance its spending, creating inflation. Most of Burma’s prominent corporations are owned by the military, and the country is judged by Transparency International as the second most corrupt in the world.

Burma’s fall from grace has been incredible to watch. The country was once one of the richest in Southeast Asia and the world’s largest rice exporter. Today, Burma can barely feed itself. In 1950, the per capita of GDP of Burma and its neighbor, Thailand, were virtually identical. Today, Thailand’s GDP is seven times that of its former peer, despite very similar religious, cultural and physical endowments.

The people of Burma are poor, but the regime that oppresses them is not. Changing this equation is the true key to economic development in Burma, and the outcome to which the efforts of the rest of the world should be directed.

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