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Zaw Oo: ‘Difficult road to economic reform’

Zaw Oo is a longtime commentator on Burma and is Director of Community Development and Civic Empowerment Program at Chiang Mai University, Thailand. He is also a founder of Vahu Development Institute, a research and training organisation dedicated to Burma. Previously he was a member of the All Burma Students’ Democratic Front (ABSDF).

He recently attended the government’s economic forum in Naypyidaw.

JA: How significant was the recent economic forum that you attended in Naypyidaw?

ZO: It was very significant. The title itself was called the National Level Workshop on Economic Reform for National Development, so it was spot on. And also, as you know, Aung San Suu Kyi was also at the forum which made it a very exciting time for all of us. I saw her listening to discussions and sitting down with government ministers in the coffee break to follow up on the workshop’s agenda for reform.

So I think there was a very symbolic significance to the forum but for me as a researcher the workshop itself was very interesting and I have never heard anything as substantial from several government officials discussing openly and offering a number of thoughts about how the economy can be reformed.

JA: In the short term, what can Thein Sein’s government do about the ongoing currency crisis?

ZO: I think in the background of the forum the appreciation of the kyat, the domestic currency, as well as renewed conflicts, overshadowed our discussions. As you know, there were several leading groups of people who also attended the forum including political parties and leading business groups, and all are concerned about the situation with the kyat appreciation and how that has affected their constituencies. It is worsening poverty trends in the country and as a result the kyat problem was a big part of enthusiasm for these groups to participate.

A discussion led by Dr U Myint, the president’s chief economic advisor, set the tone of the rest of discussions. He actually provided a kind of a macroeconomic framework, and how the currency regime can be reformed. And then the private sector came up with a kind of wish list that they want the government to reform in order to create a business-friendly macro-economic environment. Not all the ministers responded in the typical monolithic tone that you have been hearing for the previous past 20 years – it was a much more refreshing and diverse array voices from within the cabinet on how to do it.

I think the government has now taken a number of significant steps on the positions which the previous government had maintained for a long time, like an export tax. They have already lifted it, albeit slowly, from 10 percent to seven percent, and now they got rid of the whole thing.

The second thing they have done is interest rates – the government maintained [interest rates] at a very high level, to the point of monetary suppression. They never changed it [interest rate], to the detriment of the private sector … and now they have agreed to reduce the interest rate so that it can promote the fluidity of the market. So I think these are a few essential but significant steps that have been taken within a period of two weeks.

JA: What will reducing the interest rate do for the currency?

ZO: What will happen is that the illiquidity tightening the market will be corrected. This was one of the causes of the appreciation because a lot of kyat are being deposited in the banks and also in the hands of the government. So there is very little kyat available outside the market. I think what the government intends to do is to reduce the interest rates so there will be outflows from the banks and the government [to the market] … for improved liquidity in the market.

This then will be able to affect the private markets and that should affect the exchange rate. So I think these are the changes the new government has recommended. The government is taking these steps very cautiously…but nevertheless I think we have to watch them carefully. In essence, the crisis originated in the private sector … the government could have not intervened; however, they now have come out and tried to correct it.

The essential thing is that the past ideology has been abandoned – the current government has clearly departed in a significant step forward on the essential reforms [and] has clearly recognised the important role played by the private sector. For the last two decades, it was the state that they thought was the key – for the state to control the market and the population. Now I think they have clearly recognised that the combination of the state and the private sector is essential and it has committed to help.

JA: It appeared U Myint was almost warning against liberalising the economy in too quick a fashion in view of the economic problems happening in the west?

ZO: It is exactly that liberalisation that has to shift the role of the government from owning, managing and controlling to more effective regulation. Then the pace can be gradual. The problem is Myanmar [Burma] is not following through with this essential role of regulation and even then it doesn’t have the capacity to regulate. The government instead is owning assets, running the production and engaging itself in the market and really ruining the entire economy. State-owned enterprises, state economic enterprises – they are all running the show.

I think this is where the government really needs to reduce most of its ownership and control and as the actual player in the market and let the private sector do this. Currently they are managing and running the productive assets, which is what the private sector is supposed to be doing. I think we have seen at the workshop on the part of the government to admit this.

There was a famous comment … a little bombshell happened at the forum when the Minister for Industry 1 and 2, U Soe Thein, stood up and said that under his leadership he would try to reduce the share of state-owned enterprises to zero.

In a nutshell this explains the crux of the economic decline in a way – many of these state-owned enterprises are not really doing anything and they are not really running efficiently and a lot of them are losing quite badly.

Part of the problem of the government is they have to support all these losing enterprises, which in a way undermines the government’s budget. So the solution is quite obvious but it is not the time to shore up these loosing enterprises, it is up to the private sector to move in and let the government move out of the business of owning and operating it, to more leading it. That kind of vision is quite a significant declaration from the government – we have never heard it before. The leaders of the private sector I have spoken to are quite excited and elated with that kind of commitment.

On the other hand, the road to reform is also paved with a lot of challenges on the part of the government to move away from the role of principal agent of the market into a role of outsider in regulating the market. We have also talked about a lot of actual reform plans.

JA: On government spending, how is this government running at a deficit and would you agree with someone like Sean Turnell who described the government deficit as an artificial deficit?

ZO: We also heard about this issue, quite interestingly coming out of the offices from the ministry, and they have acknowledged them but add that there is a lot of distortion in GDP calculations and budget allocations in various sectors.

A lot of things we’re seeing on the book are not necessarily the real picture of what’s going on in Myanmar [Burma], so I think that’s how we see a lot of idiosyncratic phenomena. Even with this kyat appreciation, we found more problems elsewhere in the countries that are facing currency depreciation, but now we are deep into this crisis of currency appreciation.

So I think that these kind of idiosyncrasies happen in Myanmar [Burma]. But fortunately those who are responsible, like the ministry of planning and the ministry of finance, have acknowledged these problems, but the magnitude of the problem is quite severe.

For instance, the government has been using old methods of economic analyses of the socialist era. So, for example, we learned that one of the methods that the government used was the calculation of GDP – it has not been updated since 1965.

I think that was one of the challenges we are facing now because in the socialist era we were isolated and then unfortunately in the last 20 years, somehow, we’ve not integrated into international standards and good practices which the IMF and the World Bank have been promoting and that we never benefited from it, and so some of these bureaucrats and technocrats are supposed to be updating the system.

They’re not able to do so – they’re forced to reuse old taxes and old methods and this is essentially also contributing to this very distorted way of assessing the economy. So, a large part of the problem lies with basic statistics.

But the reason for maintaining an unrealistic exchange rate has to do with a more serious situation where many ministries and many officials became quite dependent on the artificial exchange rate, and many connected businessmen took the lion’s share of profit from this kind of distortion. And then there’s whole range of interest groups that wanted to maintain this kind of distortion because in a way they are benefiting from it, but I think the current currency crisis in a way exposed that very fundamental flaw in the system. By the way we also talked a lot about cronies at the workshop. You would be very surprised to learn that they spoke openly about the cronies – crony capitalism – and corruption in this forum.

A lot of businesses are forced to be connected to the government sector. So if you’re talking about how the business sector has grown in Myanmar [Burma], there is the state sector that has played a leading role, meaning there is no private business operations that are free of any connection with government. But some connection has a positive contribution to society, whilst some connections just allow more money to be made for those connected people. So in a way the currency crisis exposed these cleavages [in the private sector] – in a way this currency appreciation has benefited those who just profited from the import sectors and construction industry who just took the lion’s share of profits from government projects.

Those who lost from the current dynamics are those businessmen who are active in the export sector, albeit with some support from the government, but in a way they are also trying to link up with all the downstream suppliers and producers who also benefited from that kind of export-oriented operations; they are negatively affected by kyat appreciation. These groups are now making the loudest voice to correct a very unfair system.

They are obviously the majority, and so that’s why I feel very encouraged about the way it [the reform agenda] came out from the forum and also from the current crisis.

JA: There’s only one entity that consumes 26 percent of GDP and that’s the military

ZO: One thing I have learned from the forum is that we have to be careful about the statistics, because a lot of the underlying methods of calculating the exchange rate are not done uniformly and then its very misleading.

For example like if you follow what Sean has suggested to use a unified exchange rate you try to unify the entire economic sector, you will see a true picture [of the economy] and then you will see that government expenditure will be much larger.

So we will see a different picture, but I think generally that for the time being the government is quite committed to pick up what the situation has afforded us. But some of their spending on health and education suffers a lot from the underlying distortion over economic statistics as you know. The crux of the problem is lack of transparency, and no one knows what kind of methods are being calculated at the different ministries when they try to project their budget allocation, their spending, and also the revenue trends. That’s why we need expert hands like the IMF so we can come up with much better information about how we cure this problem.

JA: But do you think its sustainable for the Burmese state to spend so much on the military?

ZO: If you have to correct the method of valuing the exchange rate you’d see a lot of other productive sectors’ contribution underestimated, and then all sorts of budgetary allocation can be improved, particularly on health and education. Then I think some of fiscal limitations will definitely be lifted … but I hope for the best.

JA: But with Thein Sein, this is an issue of a guy who claims to be elected and he’s telling people that he’s committed to healthcare

ZO: Yeah, it worries me. If the government does ignore some of these concerns and recommendations, they lose a golden opportunity. Economic reforms are good for the government, for the people, and for all the stakeholders affected by the weak economy.

JA: In the future do you think you’ll be able to take the Vahu group back inside Burma?

Zo: We are very committed to contributing to the betterment of the country. That’s was our original mission but it is also to contribute to peaceful change in Myanmar [Burma].

Now with the roadmap put forward by very well-meaning people like Dr. U Myint, the people of Myanmar [Burma] will benefit. As I have also described, the country will be integrated into ASEAN. At the same time they are competing with, for example, Vietnam. Vietnam has already become successful in overcoming the biggest challenges like integrating and developing its economy because of a comprehensive reform agenda that’s a huge part of their decision. They’ve never hesitated to reform the economy.

JA: Do you fear that your academic work may be censored if you return to Burma?

ZO: With the interviews and comments that I have made within the private media inside the country, I was very very encouraged to find out all my comments were not censored. We will have to try to take confidence in sustaining this trend for the future and that all our contributions can be fruitful.

JA: When do you expect you will be able to move your work back?

ZO: Its not necessary that we have to move in physically and we are quite happy to contribute and help others who do the critical jobs on the frontline. We don’t need any position or reward and we would be happy if we can just contribute our knowledge and expertise.

JA: What do you think should happen with the sanctions on the country?

ZO: The sanctions imposed on Myanmar [Burma] have to be updated with changing international practices and trends because that really affects our country. If you look at the present sanctions debate all over the international community, there are a lot of movements who recommend these types of improvements and refinements. Unfortunately our sanctions movement on Myanmar [Burma] has never really updated to these trends. It has kept the same old sanctions since they were put in 1990s it has never really reviewed them seriously. There are a wide range of sanctions’ instruments on the table and the review should really affect what kind of contribution is made by these instruments; whether they are effective or not and whether they are counterproductive, and how it can be improved.

So in many ways stakes are high for outside and inside the country and many factors need to be considered.

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