Tuesday, December 04, 2007

Estimating Post-Crisis Economic Fallout in Burma, 2007 by Kyi May Kaung (Ph.D.)

Painting (detail) Rowing to Freedom with Sugar Palm Fans -- painting copyright Kyi May Kaung


The recent crisis in Burma that started in August with the Burmese government raising fuel prices from 100 to 500% happened at a time when world fuel prices were $72 per barrel. At the end of November, light sweet crude was at $99 per barrel and seemed likely to rise further. But the U.S. Federal Reserve Bank's interest rate cuts and a sufficient supply of oil, resulted in a slight price fall this past week.

Any assessment of the economic fallout of the crisis in Burma will have to include these international economic factors as well as systemic factors built into the command economy that the SPDC favors.

An assessment is doubly difficult as it has to be based on figures for isolated years; estimates picked from different publications at different times, that don’t form a continuous time series. So my analysis will be for the most part quite conjectural, but it will give a picture of what to expect in Burma in this international context where the United States is probably in for a recession due to the home mortgage debt crisis, while China is playing an increasing role in the world economy and is not expected to have any dampening of its 10-11% p.a. growth rates. (See The Economist, How fit is the Panda?” Sept. 29th, 2007, pp. 75-77.)

Burma’s other main neighbor on the west, India, is also increasingly a major player on the world economic stage, with an average of 8% growth in the last 3 years (CIA Factbook) and 9.4 % growth in 2006-2007. It just happens that Burma is geographically spliced between the two fastest growing economies in the world, and if physical closeness alone could do the job, it should be in good economic shape itself, but as everyone knows, it isn’t. It’s also resource rich, including rich in fairly well educated workers (who would be better educated if it were an open society), yet its economic prospects are always dismal.

I’d like to argue that all this is due to the military government’s command economy that has been in place more or less unchanged since 1962. Add onto this the ongoing economic and social disruption of the last 3 months, and we see a system that has been failing on its own, even without sanctions, which are more targeted and effective this time around.

I will try to beef up these impressions with what scattered statistics I can find. Probably the most reliable are from the CIA Factbook on line.

Since at least 2004, leading Burmese economists have been gently casting doubt on the performance of the Burmese economy, saying metaphorically to the effect that -- if it’s such a new model car, how can it drive so fast on such poor roads? This points to an anonymous technocrat’s realization that infrastructure and the design of the economic system are largely responsible for how fast (or slow) a growth rate can be achieved. The CIA Factbook updated Nov. 1, that I accessed on Nov. 15th, gives a 2006 estimate for Burma of 3 % per annum growth rate. As the UN Special Envoy for Burma has been talking of poverty alleviation in Burma and “trying to find out its causes” it seems relevant here that a year 2000 estimate in the CIA Factbook mentions that fully a quarter or 25% of the Burmese population is below the poverty line. The inflation rate for consumer prices (2006 estimate) is 20% per annum.

F. William Engdahl (a pseudonym?) in an article “The Geopolitical Stakes of the ‘Saffron Revolution’” Oct 17, 2007, http://samsara.tuditi.del.si/2007/11/18 accessed on Nov 19, says:

. . . few will argue that the present military dictatorship of the reclusive General Than Shwe is right up there when it comes to world class tyrannies. It’s also a fact that Myanmar enjoys (sic) one of the world’s lowest living standards. Partly as a result of the ill-conceived 100% to 500% price hikes in gasoline and other fuels in August, inflation, the nominal trigger for the mass protests led by saffron robed monks, is unofficially estimated to have risen by 35% (that is, since August?) Ironically the demand to establish “market” energy prices came from the IMF and World Bank.

The UN estimates that the population of some 50 million inhabitants spend up to 70% of their monthly income on food alone. The recent fuel price hike makes matters unbearable for tens of millions.

This points to the fact that prices may have risen “up to 35%” since August alone. Before the August to October crisis, there were reports that people could not afford to go to work because of the high transport costs due to high petrol prices. During the demonstrations themselves, some dissident websites overseas reported that over the long run, demonstrators would have difficulties in coming out onto the streets daily as they were “struggling with their livelihoods on a day to day basis.”

Looking at petroleum oil imports alone, CIA Factbook states that Burma imports 19, 180 barrels a day (2004 estimate.) At $100 per barrel, Burma would be paying $19m a day just for its fuel oil imports. Foreign experts as yet have been unable to ascertain if the army pays the central government for its fuel needs. The answer is “probably not” and as the central government and the army “tatmadaw” are increasingly becoming one and the same thing, we can only expect accelerated inflation rates post-clampdown since Oct. 2007. It is highly likely that the fuel price increases will be financed by budget deficits and more printing of paper money.

The United States has instituted stronger and more targeted sanctions against Burma which are of a financial nature, and already there are reports that Bagan Air has closed down flights specifically citing sanctions and high fuel prices as the reasons. It is also widely rumored that the targeted financial sanctions by the U.S.A. on top SPDC officials and connected businessmen has caused Singapore banks, where the junta does most of its banking and shopping, to close down the accounts of certain individuals and to return cash to the former account holders. This was said to have been transported in suitcases to Rangoon, subject to a 10% surcharge levied by the Burmese government, but we could not confirm this.

Several experts that I spoke to who did not wish to be named, said that the Burmese balance of payments and the government budget figures are in Burmese kyats, at the official exchange rate of about 7 kyats to the US dollar, while the black market or real exchange rate was about 1300 kyats to the dollar in September. They said that beyond the exchange rate, it was highly likely that the regime top brass “skims off the top” from Burma’s export earnings before the figures are entered in the official statistics. This leakage is un-estimated, but shows itself in the high spending life styles of the top junta officials.

Looking at the trade figures, total Burmese exports are $5,321 billion f.o.b. in 2006 and consist of natural gas, wood and wood products, pulses, beans, fish, rice, jade and other gems. But this official figure does not include the timber, gems, narcotics, rice and other products transported overland illegally (smuggled) to Thailand, China, India and Bangladesh. Since the “old original” Gen. Ne Win staged his coup in 1962, the military government which has ruled Burma under different names, has caused these illegal cross border trade flows to flourish due to the mass nationalizations on private enterprises immediately after 1962, the on-going inefficiency of the State Economic Enterprises, and the economic irrationality of the centrally controlled command economy. After 1988, at about the same time that the People’s Republic of China stopped financing the CPB (Communist Party Burma), the cross border trade with China was also legalized but obviously many contraband goods were not included in the official statistics. It is common knowledge that the hardwood resources of Northern Burma have been largely exploited and depleted and there are jade buying depots in Yunnan close to the Burma border.

Burma’s imports were estimated at $2.284 billion f.o.b. in 2006. CIA Factbook states that “import figures are grossly underestimated due to the value of consumer goods, diesel fuel and other products smuggled in from Thailand, China, Malaysia and India.

Burma’s main export partners and direction of exports are as follows:

Thailand 49%

India 12.8%

China 5.3%

Japan 5.2%

Exports to Thailand consist mainly of natural gas.

Burma’s buys (imports) most from the following countries:

China 34.6%

Thailand 21.8%

Singapore 16.2%

Malaysia 4.7%

S. Korea 4.3%

The United States’ trade with Burma according to the U.S. Census

(accessed 11-15-2007) is

Zero imports from Burma

Exports to Burma US $7.5 billion.

In mid-November, Burma recently held another gem auction. It has been holding these emporiums increasingly frequently in an obvious attempt to raise revenues. Irrawaddy magazine reports that though many buyers came to the current emporium, and a lot of jade tonnage was sold, revenue figures were not given as they “are lower than usual this time.” Sean Turnell of Macquarie University, Sydney, has pointed out that gems are easy to hide. Burmese jade is mostly sold to Chinese customers while rubies and sapphires are cut and set into jewelry in Bangkok. In the case of rubies they are “baked” to enhance color. As the main market for Burmese gems are in Asia, it is uncertain how large an impact the gems embargo will make on Burma’s earnings from gems, which in a normal year are estimated at $300m. a year.

The SPDC typically tries to raise revenues through greater exploitation of resources and people, rather than trying to decrease spending. It could be argued that in some sense “it cannot decrease spending” as it needs to pay off its crony capitalists and top army personnel in order to buy the political support it so badly needs.

In foreign investments, an Associated Press article published on Nov 26th


states that foreign investment in Burma’s oil and gas sector reached $470m in 2006-07, accounting for more than 60% of total investment, according to recently released government statistics. Of this, $240.68m was from the U.K. and $160m from Singapore and Russia and S. Korea also had large investments in this sector. These figures show that Burma is fast becoming a country dependent on and dominated by foreign investors (corporations) in spite of the policies of the junta which are often seen as “isolationist.”

Not just the United States but Canada also tightened sanctions. But as total trade between Canada and Burma sank to $9 m. last year, the sanctions are seen as largely symbolic. (VOA news, 14 Nov. 2007). Australia likewise has a slight trade relationship with Burma, which will also be influenced by sanctions. According to the Australian government’s figures, Australian exports to Burma ranked 77th and fell 19.9% in 2006-07. Imports from Burma ranked 73rd in importance to Australia and rose 47.7% in 2006-07. Australia mainly exports wheat to Burma and imports mainly fish and shellfish (crustaceans) from Burma. According to official Australian trade figures, compiled from IMF etc., this is Burma’s trade picture.

Burma’s principal export destination, 2006 were –

1. Thailand 49.0%

2. India 12.8%

3. China 5.3%

4. Australia 0.4%

Burma’s principal import sources were:

1. China 34.6%

2. Thailand 21.8%

3. Singapore 16.2%

4. Australia 0.7%

So Australia’s sanctions on Burma are also largely symbolic and will hurt Burma more than Australia itself notices.

Besides these trade effects, the fuel price increases, the demonstrations themselves and the on-going clampdown are likely to have a dampening effect on the Burmese economy. The Economic Intelligence Unit, which estimates average consumer price inflation will be 39.5% in 2008, while real GDP growth will be 2.5%, has presented the most succinct prognosis for Burma. This was accessed from the Internet on Nov 15:

Myanmar – Economic Intelligence Unit – The Economist.

OVERVIEW: Following its brutal suppression of peaceful protestors, including Buddhist monks, in September, the State Peace and Development Council (SPDC, the ruling junta) still maintains a firm grip on power. Given that public resentment towards the junta has reached new heights, there could be a renewed effort to oust the regime in the near future, but any such attempt is likely again to be violently suppressed. The US remains strongly critical of the Burmese regime, and will keep sanctions in place, as will the EU. Although China and Myanmar’s fellow members of the Association of South-East Asian Nations (ASEAN) have expressed some criticisms of the military’s repressive actions, these countries are unlikely to impose any punishment. Economic policymaking will continue to be erratic. The energy sector will remain fairly buoyant, but the outlook for the rest of the economy is poor. High inflation will put downward pressure on the free-market exchange rate. Gas exports will put the current account in surplus.

In conclusion, as the economic fallout of the recent crisis in Burma is continuing on top of structural or systemic factors which have been in place since 1962 and 1988, and on top of the generals’ own tendencies toward erratic and dysfunctional economic behavior, overall the outlook is quite bleak. But the energy sector and the physical closeness of a super charged Chinese economy and a rapidly growing Indian one will have some mitigating effect on it all.

Copyright Kyi May Kaung.