Myanmar’s economic reforms, which began just three years ago, already seem to be yielding growth dividends. The International Monetary Fund (IMF) estimates that gross domestic product grew 8.3 percent in 2013/14 and projects it will grow 8.5 percent a year for the next two years. These growth rates, if reached, would make Myanmar the fastest growing economy in Asia—a remarkable turnaround for an economy that had been virtually stagnant for decades under military rule. Rapid growth will be critical to reducing Myanmar’s poverty rate—estimated at 25.6 percent in 2010 by the United Nations Development Programme (UNDP) and at 37.5 percent by the World Bank (on the basis of the same underlying data).1
Maintaining rapid growth and poverty reduction will require continued progress on policy reforms. The priorities for economic reforms in Myanmar have been well articulated in the government’s Framework for Economic and Social Reform (FESR) that was presented to the international donor community in early 2013.2 The framework highlighted ten priorities in the government’s economic strategy: fiscal and tax reforms, infrastructure, private sector development, monetary and financial sector reforms, liberalization of trade and investment, health and education, food security and agricultural growth, governance and transparency, mobile phones and internet access, and effective and efficient government.
The experience of other developing countries shows, however, that identifying “what” needs to be done is a far easier task than figuring out “how” it should be done. The political economy of reforms makes transformative change challenging in any country and requires strong leadership to overcome vested interests, balance competing objectives, and ensure appropriate sequencing of policy change.
Myanmar’s difficult political and economic history over the last six decades and its unfortunate legacy of weak social trust and even weaker institutions present particularly complex reform challenges for its policymakers. Data and information are scarce, and in-country experts who can understand, analyze, and act upon information are scarcer. What is more, although FESR’s policy priorities may seem obvious, the choices available to policymakers are not straightforward. Study the potential trade-offs and political economy challenges related to any of these priorities, then factor in the weight of history, distrust and weak institutions, and it becomes apparent that Myanmar’s economic reform challenges are going to be particularly complex.
For example, consider how Myanmar can, with its strong vested interests and weak institutions:
- Encourage rice exports and ensure food security;
- Pursue military and fiscal reforms simultaneously;
- Liberalize trade and investment while ensuring inclusive growth;
- Pursue natural resource development, while ensuring environmental and social safeguards;
- Encourage public-private partnerships in infrastructure development, while managing fiscal risks;
- 6. Devolve responsibility for public expenditures to local governments, while improving national government effectiveness;
- Encourage agglomeration economies by concentrating infrastructure development, while accelerating the development of ethnic states as a crucial complement to the peace process; and
- Encourage the formation of trade unions, while maintaining international competitiveness.
This presentation cannot possibly examine the entire range of political economy issues confronting Myanmar. Instead, it will address the first on the list above—developing rice exports while ensuring food security—as a way to illustrate that there are policy solutions to these complex challenges, but they require careful thought and even more careful implementation. Moreover, while Myanmar can learn from the experiences of its successful East Asian neighbors, its policy reforms must be conditioned on its own circumstances, history, institutions, politics, and culture.
The implications for the international community are clear. It must recognize that the Myanmar government and its people have an important stake in continuing reforms, but implementation will remain slow, in part because of the complexity of the undertaking. The international community should resist “maximalist advocacy”—seeking speed and comprehensiveness—due to its high risk of failure, the consequences of which would fall squarely on those living in Myanmar. Evidence shows that slow but steady reforms driven by pragmatic, not ideological, considerations tend to be more successful, provided that leaders agree on a clear vision of where they want to take their country. The international community’s role is to be supportive and patient and to let Myanmar figure out not just the “what” but also the “how.”
Past Policies, Unfortunate Results
At one time, Myanmar was considered the rice bowl of Asia. The British colonial government made rice production a priority in the late 19th Century, and investment in the Irrawaddy Delta for rice cultivation was among the largest single colonial investments in development anywhere in the world.3 Pre-Second World War (1936-40) paddy production exceeded seven million tons, and the country exported over three million tons of rice each year.4 Today, 75 years later, Myanmar’s rice exports have shrunk to around 1.3 million tons, of which half is illegal cross-border trade with China, Thailand, and Bangladesh.5 Myanmar has been displaced in world markets by Asia’s big three rice exporters: Thailand, Vietnam, and India (see Figure 1).
Over the last six decades, and up to as recently as two years ago, Myanmar’s food security strategy focused on making sure that rice—considered a strategic crop—was available at affordable prices. The motivation behind this strategy was understandable. Myanmar’s urban residents are important consumers of rice from both economic and political perspectives and, as important, Myanmar has a large rural population of landless poor (estimated at 30 percent of the total rural population) for whom access to affordable rice is critical to their survival.6
To pursue this strategy, Myanmar controlled exports of rice through export licenses, and required farmers to sell their rice at low prices to Myanmar rice millers. The low price of rice benefited consumers, but, unfortunately, it also penalized farmers by significantly reducing their incentives to produce. To ensure that these lower incentives did not affect rice production, farmers were allocated production quotas. Those whose land was classified as “rice producing” were required to grow rice and sell the crop to millers at state-determined prices. Rice farmers had preferential access to agricultural credit and enjoyed lower land taxes compared to those who produced other crops, such as beans and the grain legumes known as pulses. The milling industry was also considered “strategic,” so foreign direct investment in milling was prohibited. In addition, with high import barriers, domestic millers had no access to new milling machines or advanced milling technologies.
The consequences of these policies were predictable. Rice production largely stagnated; rice prices became highly volatile in the domestic market (more so than in international markets); and domestic stocks of rice fell to very low levels.
Myanmar’s agricultural sector data, including on rice production and rice stocks, are unreliable. For the purposes of this paper, therefore, data are taken from the United Nations Food and Agricultural Organization (FAOSTAT), which shows that rice production has stagnated at below 18 million tons for the last five years. Rice stocks at the end of 2011/12 were 0.4 million tons or roughly four percent of Myanmar’s total annual consumption of about 10 million tons.
The standard rule of thumb of stocks-to-consumption in most countries is around 15 percent; when stocks fall below that level, prices tend to become volatile, which is, indeed, what appears to have happened in Myanmar.7 Formal recorded exports of rice have reached 0.6 million tons, most of it low quality and destined for Africa; roughly an equal amount is exported “informally” to China across Myanmar’s porous land borders to the north and west.
The stark contrast between the performance of rice farmers and those cultivating beans and pulses is instructive. Since beans and pulses were not considered “strategic,” Myanmar liberalized their production and sales in 1988. As a result, production increased twelve-fold in the following two decades, even as rice production stagnated (see Figure 2). Ironically, because pulses and beans were considered less strategic than rice, they are, today, the second largest recorded export earner in the country, after oil and gas. The contrasting performance between rice and pulses production is all the more striking since farmers growing pulses probably faced tougher credit and infrastructure constraints than their rice-growing peers
In short, Myanmar’s unfortunate history of rice production reached the worst of all possible worlds—stagnant production, low stocks, volatile prices, low exports, and food insecurity. Clearly, a better strategy was needed.
Small Steps toward Reform
Fortunately, policies have improved over the last two years. Farmers are no longer forced to produce rice, but this does not seem to have significantly changed the pattern of land use. As important, export licenses—though still required on a consignment-by-consignment basis—are issued relatively quickly and easily. But many key elements of the policy remain the same. Most important, foreign direct investment in rice milling is still prohibited on the grounds that milling is a strategic industry and falls outside the ambit of Myanmar’s new FDI law.
The overall impact of the policy regime in the last couple of years on the performance of the rice sector is difficult to assess, given the scarcity of recent data. Broadly, though, notwithstanding the few reforms in the agricultural sector, not much has changed.
Recent analysis shows that domestic rice prices among different local markets within Myanmar are weakly integrated, suggesting that local markets are beginning to function internally, although they are constrained by weak infrastructure and a dearth of price and market information.8 More important, the lack of correlation between domestic and international prices reflects market imperfections and informal export barriers that continue to impede the transmission of price signals to farmers.
One can speculate as to the causes of this lack of integration: risk-averse rice traders who continue to offer low prices to farmers, due to uncertainty about future government policies; an indicative export price set every week at the border for rice exports, as a means of levying a two percent advance income tax applied to all exports; and probably informal monopsony power applied by the Myanmar Rice Federation—a conglomeration of trader and miller associations led by one of Myanmar’s top businessmen.
A Case for Bold Action
As a developing country, Myanmar’s focus on domestic food security is understandable. Indeed, all Southeast Asian countries have such a focus, and with varying degrees of success, some have developed vibrant agricultural sectors.
Myanmar does not have to look much further than Cambodia to find an example from which it can draw valuable lessons for its own strategy. Cambodia is emerging from a history of conflict and has a GDP per capita that is similar to Myanmar’s, but its record of recent agricultural growth has been impressive and well worth studying.
When Cambodia liberalized its agricultural sector in 2004, especially for exports, few would have predicted the impact on production and export performance. Between 2004 and 2012, agricultural production grew by an average of 8.7 percent a year—among the highest growth rates in the world. Paddy output grew, on average, nine percent a year (doubling output in the eight years between 2004 and 2012), maize 20 percent, cassava 51 percent, and sugarcane 21 percent.9
What did Cambodia do to achieve this impressive agricultural performance? It essentially liberalized agricultural markets and agricultural trade and encouraged FDI in rice milling. Indeed, just between 2009 and 2013, Cambodia’s rice-milling capacity increased sevenfold.10 The incremental investment in rice milling came from the private sector and at least a third was through joint ventures with foreign investors. In a period of eight years, from a base of virtually no rice or paddy exports, Cambodia’s milled rice exports jumped to 0.5 million tons, and the milled rice equivalent of paddy exports climbed to 1.5 million tons, for a total export volume of two million tons.
Most important, Cambodia’s accelerated agricultural production led to a decline in the poverty rate. In the space of four years (2007–2011), it went from 50 percent to 21 percent, and 60 percent of this decline was the result of increased productivity in the rice sector alone. Cambodia’s experience demonstrates agriculture’s powerful response to market signals; the price of rice in Cambodia is now closely integrated with its neighbors, Thailand and Vietnam.11 It also demonstrates the powerful impact of agricultural growth on poverty reduction. Cambodia has improved its food security not by depressing food prices but by transmitting market prices to its farmers. The resulting increase in incomes of farmers as well as landless laborers provides the exemplary lesson that increasing agricultural productivity and real incomes is a more powerful means of delivering food security than suppressing prices artificially for the benefit of consumers.
What the Cambodia example does not show are other avenues that Myanmar could take to complement policies for boosting rice production, land and labor productivity, and agricultural incomes. These could include mechanisms to ensure that the poor have access to food during unexpected shortages—such as through cash transfers and food-for-work schemes, neither of which suppresses incentives for producing food.
In addition, the international community should consider ways to insure Myanmar against unexpected rice production shortfalls, through financial insurance arrangements, such as the World Bank’s deferred drawdown option.12 Such an instrument has never been tried to ensure food security, but there is no reason why it cannot be.
The example of Cambodia indicates clearly that the challenge in Myanmar is not what to do, but how to do it. It is imperative that Myanmar supports incentives for rice production—in the short term by eliminating export licenses and weekly indicative prices as well as liberalizing FDI in rice milling, and in the long term by building rural infrastructure (roads and irrigation), delivering better extension services, and providing good market information.
The Political Component
To implement such an agenda, Myanmar has to overcome several political economy obstacles. The first is the distrust of the market and the desire to promote food security through measures that restrict exports. Such distrust runs deep in the veins of Myanmar’s leadership, in part because there has been little experience with functioning markets for over two generations. Shifting from government-led to market-led development requires a change in mindset that can only come with time and first-hand experience of the benefits that such policies can bring.
The second is overcoming vested interests of the powerful rice-milling group, which prevents foreign direct investment in rice milling. The FDI law was an important milestone in improving the investment climate for foreign investors, but its implementation leaves a lot to be desired. The responsible organization, the Myanmar Investment Commission, does not see itself as a facilitator for foreign investment, but rather as a protector of Myanmar’s commercial and business interests. Its protective and interventionist instincts are unlikely to evaporate soon, and will take time to change and adjust.
The third political economy challenge is the recalibration of the role of the monopsonistic Myanmar Rice Federation. Placing power over rice exports in the hands of one organization (in particular, a confederation of business associations) potentially leads to conflicts of interest, high economic rents, reduced prices to farmers, lower production levels, lower farm incomes, and lower wages for landless laborers.
There is no reason why there cannot be multiple channels for rice exports that compete with one another in the prices they pay farmers (or millers) and in the quality control and shipping services they offer. Insisting on a single export outlet is akin to imposing an export tax that penalizes producers, except that in Myanmar’s case it transfers the rent not to the state but to rice traders and millers who are members of the federation. Recalibrating the role of the Myanmar Rice Federation and introducing a market-based, competitive export structure will face considerable opposition from powerful vested interests and will take time and determined political leadership to implement well.
Finally, there remains the issue of food security while all these reforms are being implemented. Installing market-friendly solutions—such as privately-owned storage facilities, market information systems, conditional cash transfer arrangements and insurance arrangements with multilateral development banks—will all take time and require reforms in other areas (notably in fiscal and financial systems and skills development).
The bottom line is that, while there may be a way forward in increasing rice production and ensuring food security, the complexity of the task should not be underestimated. It will require the concentrated effort of a government whose attention and scarce capacity will also be drawn to dozens of other equally, if not more, important challenges—political-, economic- and security-related.
The international community, in the meantime, has to walk the fine line of being supportive and patient, giving the benefit of the doubt to Myanmar, while at the same time being objective about Myanmar’s reform direction. The international community must acknowledge that the development trajectories of economies rarely, if ever, follow the orderly progress depicted in plans. Economic reforms are messy because they have to account for myriad considerations, including responding to unexpected and unpredictable shocks and changes in economic conditions. This is what makes development so challenging.
1 World Bank, Myanmar: Ending Poverty and Boosting Shared Prosperity in a Time of Transition, A Systematic Country Diagnostic, no. 93050-MM (Washington: World Bank, 2014), 21.
2 Government of Myanmar, “Framework for Social and Economic Reforms: Policy Priorities for 2012-15 towards the Long-Term Goals of the National Comprehensive Development Plan,” presented to the First Myanmar Development Cooperation Forum, January 14, 2013.
3 The British colonial administration invested in roads, railroads, canals, embankments, and river transportation. Some of this was financed using a newly-introduced land revenue system similar to the ones introduced in colonial India, while removal of the prevailing export ban on rice raised farmgate prices, encouraging production. See Michael Adas, The Burma Delta: Economic Development and Social Change on an Asian Rice Frontier, 1852-1941 (Madison: University of Wisconsin Press, 1974), 31-37.
4 Mya Than, “Agriculture in Myanmar: What Has Happened to Asia’s Rice Bowl?” Southeast Asian Affairs (1990), 240-254.
5 Estimates of Myanmar’s smuggled rice exports vary enormously and should be treated with caution.
6 World Bank (2014), op. cit.
7 It is important to note that Myanmar’s official figures tell an altogether different story for rice. According to the numbers prepared by the Ministry of Agriculture and Irrigation (MOAI), paddy production increased 40 percent over the last fifteen years (from 22.59 million tons average in 2000/01–2004/05 to 31.50 million tons in 2011/12) and the stock-to-consumption ratio was around 60 percent. But most independent observers do not place much reliance on these numbers and prefer to use the numbers of the USDA or the UN Food and Agriculture Organization (which are largely consistent). See Sergiy Zorya, Myanmar: Rice Price Volatility and Poverty Reduction, (Washington: World Bank, 2014), 23. According to the USDA, rice production averaged 18.03 million tons between 2000/01 and 2004/05, and was 17.93 million tons in 2011/12—the last year for which data are available.
8 Ibid., 19.
9 Paavo Eliste and Sergiy Zorya, Cambodian Agriculture in Transition: Opportunities and Risks (Washington: World Bank, 2015), xii.
10 World Bank, “Cambodia Rice Sector Monitoring Note 2013,” Technical Assistance Note (2013), vii.
11 Zorya, op. cit., 57.
12 A Deferred Drawdown Option (DDO) is a contingent credit line that allows the borrower to meet its financing requirements rapidly, following a shortfall in resources due to adverse economic events, such as a downturn in economic growth or unfavorable changes in commodity prices or terms of trade. It does not disburse unless a market threshold is passed. In the case of Myanmar rice, the threshold could be a pre-approved level for the domestic price of rice, provided there are assurances that the market price is a genuine reflection of supply and demand uncontaminated by government intervention or uncompetitive market behaviors.