Myanmar – Stark Choices Ahead for a New Democracy

Friday, September 21, 2012 - 12:58

As Nobel Laureate Aung San Suu Kyi makes a historic visit to the United States after decades spent under house arrest, residents of Myanmar and well wishers abroad will be focused on the political reforms that Myanmar is undergoing as it moves from a military dictatorship to a democracy.

Economic issues – questions of development, jobs, poverty and social services – are also being hotly debated in Myanmar. As the debates continue, residents of Myanmar would do well to remember the histories of other countries that have tried – and sometimes failed – to develop.

Nigeria in the 1960s faced a choice between trying to industrialise and relying on its relatively huge oil wealth. Though the history is complex, it ultimately chose the second option.

The result is plain to see: Nigeria ranks 156 out of 187 countries according to the UNDP’s Human Development Index and is one of the most unequal countries in the world, with gains from natural resource wealth going largely to an elite few.

Nigeria’s story of a failed development model is so well known that it has become the poster child for something called “the resource curse” or the idea that communities and countries actually suffer due to their own resource wealth.

I had the opportunity to speak to a number of CSOs and academics when I visited Myanmar last month. I heard a lot about political reforms, the ongoing peace process, and the floods which had devastated parts of Myanmar’s dry zone and Irrawaddy delta. These are all vitally important issues and I wouldn’t want to sound dismissive of them; but one thing was missing: the importance of an industrial strategy.

To illustrate, let’s consider the following scenario:

Imagine you’re the newly elected Minister for Development of a country that has been shunned by the global community for decades. The country’s in pretty bad shape after decades of war and conflict. Poverty rates are high, literacy rates are low.  But as the country is opening up, a few individuals and companies are beginning to reap huge profits, especially from the vast mineral resources.

Your job is to come up with a development strategy that will improve the standard of living for the majority (preferably all) of the country’s people. Fortunately, as a newly open country, you have lots of advisers. Unfortunately, these advisors don’t seem to agree on anything at all.

One set of advisors argues for maximising the country’s “comparative advantage”. When (delicately) asked what that means, it seems that they want you to plan to exploit the fact that the country has a lot of land for farming and a lot of mineral wealth to build up an economy. You agree that these are things that the country can export now, but you’re not entirely sure if these should be the exports forever. Countries like the U.S. (where your daughter goes to university) have a lot of resources, but they export other things, not just resources.

Another set of advisors seems to be taking the opposite tack. The country should focus on export, this group also claims, but it should think through its export strategy in terms of “manufacturing value added”, another term that doesn’t mean much to you.

When you ask, they explain it like this: “If you export a raw commodity, for example crude oil, you may get $100 per barrel. But if you refine that oil to make diesel or petrol, you’ll get much more than that, say $150 per barrel. The difference – $50 - is the manufacturing value added.”

Right, you say, but the other advisors were arguing that we can’t compete on the global markets for those things, because we don’t have the comparative advantage. “Comparative advantage can change over time,” another advisor responds. “You should think through the steps Myanmar needs to take to export goods with higher and higher comparative advantage. We call this ‘dynamic’ comparative advantage as opposed to ‘static’ comparative advantage.”

To go back to real world examples

Nigeria can be seen as an example of a country that followed the first of these models. Using the static comparative advantage it had, it exported oil. Japan is an example of a country that tried to change its comparative advantage. Instead of relying on silk exports, it propped up its domestic car industry, even when it failed. If Japan had relied on the theory of static comparative advantage, there’s no way it would be exporting luxury vehicles today.

This is the stark choice that Myanmar must make – to design and follow a development path that will transform the economy from one based on export of resources towards one based on industrial exports, or to rely on the export of commodities forever.

To its credit, Myanmar is beginning to think about ways to add value to its agricultural exports – things like polishing rice or canning fish. These are positive steps, if only small ones.

But many of the institutions responsible for the “non-development” we see in Nigeria are opening up shop in Myanmar. The IMF and the World Bank have already started consultations with the government and Myanmar has been a member of the WTO since 1995. These are institutions that lobby hard for “free trade” even before a country has the capacity to compete globally. They also discourage investment in industry (through the kind of budget austerity measures that are currently failing in Europe), and the selling off of State Owned Enterprises.

In a more rational world, these policies would be ridiculed after decades of failure, but unfortunately orthodox economists still consider these to be the only viable course of action for developing countries.

If this discussion seems overly technical or not related to poverty, it’s due to the success of the modern propaganda system. Any sort of government intervention in the market is derided by the right as anti-capitalist and defended by the left often only in terms of the social safety net – a necessary role of governments, but far from a full description of the relationship between government and the economy.

Economists like Ha-Joon Chang have shown how every developed country created a partnership between domestic companies and the State – indeed it is that partnership which is often the key to development. But only when these countries have developed and are home to companies that can compete globally do we begin to hear the political classes’ demand for free trade.

The road ahead for Myanmar is a long and difficult one, but the country’s rulers – and all of us – would do well to remember these important lessons.