Myanmar’s Economic Future: South Korea Or Nigeria?

Via The Myanmar Times, a look at Myanmar’s economic future:

AS Myanmar embarks on an unprecedented opening up of its economy to Western investors and multilateral and bilateral donor agencies, the country stands at a crossroads in terms of its future economic policy choices and national economic development trajectory. Such choices may well set Myanmar on a path that determines whether 30 years from now it looks more like an industrialised South Korea or a resource-cursed Nigeria.

As the International Monetary Fund, World Bank, and a legion of Western bilateral donor agencies prepares to enter Myanmar with technical assistance, policy advice and perhaps financial aid, they will bring a development model based on the laissez-faire principles of free trade and free market theories. This approach will call on Myanmar to lower its trade protection before its smaller industries are competitive in international markets, potentially blocking its future industrial development. It will suggest that Myanmar not use public development banks but instead rely on private and international banks, which will likely leave affordable commercial credit out of reach for many companies. And it will advise Myanmar not to adopt a strong industrial policy to develop its manufacturing and services sectors over time, but instead stay focused only on its comparative advantages in natural resources extraction.

Myanmar should reject this approach.

Not only has this free trade/free markets approach stifled industrialisation efforts in many developing countries over the past few decades, it is important for decision-makers in Myanmar to understand that this model is not at all how the rich countries themselves industrialised successfully. In fact, the United Kingdom, United States, Europe, Japan, Asia’s Four Tigers (Singapore, Hong Kong, South Korea and Taiwan) and even China all gave the state a very strong role in supporting the development of their domestic industries over many decades, opening up only after they were competitive in international markets.

This support included temporary trade protection, public development banks or central bank policies that provided long-term/low-interest commercial credit, and extensive public technology policies to advance research and development (R&D) and innovation – the near total opposite of the advice the IMF and World Bank will bring to Myanmar.

Although Myanmar has made recent efforts to scale-up social spending and is considering expanding assistance for small-scale farmers, the IMF’s brand of fiscal conservativism could prevent it from making the big, up-front, long-term capital investments that are needed to build up the underlying transportation, health and education infrastructure upon which future productivity depends (public investment as a percent of GDP). Despite important new thinking in monetary policy about a broader set of tools that could be used by central banks to promote economic development, the IMF’s narrow approach to inflation-targeting, which leads to higher interest rates, will likely contribute to keeping commercial credit out of the reach of many domestic companies.

But Myanmar can avoid making the mistakes of others. It should heed the advice given by Professor Joseph Stiglitz, who cautioned other developing countries: “Don’t do as the US says, do as the US did.” By this he means rather than following the Washington Consensus approach to free trade and free markets, developing countries should instead do what the rich countries did. One of the crises in the field of economics over the past 30 years is that it has moved increasingly into mathematics and abstract theory and has all but lost any history of the actual economic policies used. This history of what the rich countries each did during their own early decades of economic transformation into manufacturing and services is today no longer taught in many university economics departments. And yet, knowing this history is crucial.

It is especially important to get two of the best books written on this history translated into the Myanmar language as soon as possible so that policy makers and others in Myanmar can move beyond the abstract rhetorical debates and simply know what the rich countries did and when they did it. The first, Kicking Away the Ladder: Development Strategy in Historical Prespective (2002), is by a South Korean economist, Ha-Joon Chang, who teaches at Cambridge University in the UK. The second is called How Rich Countries Got Rich and Why Poor Countries Stay Poor (2007) by Erik Reinert, a Norwegian historian of economic policy based in Oslo.

History shows that, although each case is unique, almost all countries that have industrialised successfully have done so first behind high levels of trade protection and subsidy support – often for decades at a time – and only liberalised their trade once their firms were able to be competitive in overseas markets. Careful timing, pacing and sequencing of opening Myanmar’s industries to the global economy will be vital.

These are things that the rich countries figured out for themselves and their own industries hundreds of years ago. Myanmar must also know these lessons of historical best practices and reject the free trade/free markets approach that will inevitably be suggested by Western donors. Myanmar should explore a wider range of viable alternatives for more successful economic development, including policies to target higher employment and public investment, and enhance its domestic productive capacities.

It should also seek to build a strong developmental state with institutions capable of executing effective industrial policies. Critics are correct in pointing to some very unsuccessful instances of industrial policy in developing countries. But they are often selective in their criticisms, ignore successful cases and do not account for why industrial policies worked so well in the US, Europe and East Asia but failed so badly in Africa and elsewhere. Some earlier efforts at industrial policies failed because they were used inappropriately, with poor sequencing, and were driven by political considerations and corruption rather than economic analyses or strict efficiency grounds. In Latin America, the industrial policies were often kept in place too long, and were too inwardly focused on small domestic markets, neglecting the need to develop international competitiveness. In contrast, the political economies of East Asian countries included institutions that tended to enforce stricter rules for which industries got subsidies and trade protection that were cut off when they failed to meet performance targets. They also adopted a more outward orientation in their industrialisation strategies. Yet, crucially, this history says more about how industrial policies should be implemented – not if they should be implemented.

Civil society organisations (CSOs) in Myanmar should also be concerned about the future success of industrialisation. Building the future domestic tax base is inextricably linked to adequately financing the social sectors goals they support, such as greater public spending on health, education, women, small farmers and the environment. Although Western donors will encourage CSO participation in the Poverty Reduction Strategy Paper process of consultations, it will also be necessary for citizens groups in Myanmar to ensure the country adopts a serious long-term industrialisation strategy that can adequately finance its future social spending. Because donors will expect CSOs to stick narrowly to their poverty reduction mandates, it will be incumbent upon CSOs to take the initiative and ensure they get publicly involved in this much broader discussion about economic development strategies. They will need to make this discussion happen.

Western donors will talk about “poverty reduction” and “economic growth” and while these are of course important, Myanmar must keep its eye on the different and broader question of economic transformation into manufacturing and services over time, and the steps it must take today to make this happen. The donors will talk about the “private sector” in the abstract as though the needs and interests of the domestic private sector are the same as those of foreign investors. But this type of rhetoric is not helpful because right now Myanmar needs to think more explicitly about how the needs and interests of its own domestic small and medium-sized enterprises (SMEs) are different from those of foreign investors, and take steps to support them accordingly.

Most foreign direct investment (FDI) coming into Myanmar now and in the short term is focused on the extractive industries, but Myanmar needs to also attract FDI in manufacturing and services of the kind that can improve the skills and technological capability of its current workforce, lifting the country a few rungs higher on the development ladder. It needs FDI that also provides many positive forward and backward linkages for other smaller domestic manufacturing and services firms in the economy, something less likely to occur in “special” economic zones. Simply throwing the doors open to any and all kinds of FDI would be to miss this important point.

Of course, making the case for building a strong developmental state in the current national context of Myanmar is a hard case to make. Under the current context, many feel as though the government has already helped a handful of large and well-connected companies too much, and that this has not benefited the many smaller companies. So it is understandable that on the face of it, arguing for maintaining the ability of the state to provide such strong support for domestic companies may seem inappropriate. But current inequalities among companies only reflect how Myanmar may look today. It is important for Myanmar to consider how important it will be in 10, 20 or 30 years to have a strong state capable of enabling many of today’s SMEs to grow up over time into larger and more competitive firms. But the ability of the state to provide this support over time with trade protection, subsidised credit and technology, and other supports is likely to be greatly undermined if Myanmar adopts the free trade/free markets approach to development strategy.

Myanmar should take its time to consider how best to slowly manage its integration into the global economy on its own terms, and not be rushed into taking important decisions unnecessarily quickly because of the commercial pressures of others.

If Myanmar is prevented from building a strong developmental state capable of executing an effective industrial policy because of IMF and World Bank advice, it may ensure that its manufacturing and services sectors never take off, leaving it looking more like Nigeria than the South Korea that it can one day become.

This entry was posted on Saturday, March 31st, 2012 at 5:20 am and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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