Beyond Cease Fires: Building a Real and Prosperous Nation

Ruling

Party

Military

Democratic

Opposition

States

March 2014 Thomas Vallely, David Dapice, Debbie Aung Din Taylor

GDP Per Capita (PPP), in real $ for selected Asian Economies Over 32 Years

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1980 1990 2000 2012

South Korea

Malaysia

Thailand

China

Indonesia

Vietnam

North Korea

Myanmar

This series takes the IMF estimates of GDP per capita in 2012 as starting point and then uses real per capita growth of GDP from national income accounts to estimate real PPP GDP per capita in the earlier years of 1980, 1990, and 2000. However, if reliable GDP growth is not available, real per capita electricity change is used with an assumed elasticity of 2.0. This only applies at low levels of per capita GDP. North Korea GDP is for 2011 and is a CIA estimate. Myanmar’s rate is based on electricity.

US$

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Thailand Vietnam Indonesia Bangladesh Myanmar

21 Years of Growth - Change in kWh per capita, 1990-2011

Source: World Bank On-line Data Base, consumption of electricity per capita in kWh per capita

Electricity Use in kWh per Capita, 1980-2011, Myanmar and Bangladesh

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1980 1990 2000 2011

Myanmar

Bangladesh

(In 2012/13, the reported production for Myanmar is 183 kWh pc if population is 60 million. Consumption is normally 15% lower, or about 155 kWh pc.)

Sources: GDP from ADB and IMF; Electricity, Imports and Exports from Official Myanmar data from the Central Statistical Organization, Myanmar Ministry of National Planning and Economic Development, online at https://www.mnped.gov.mm

Reported GDP Growth vs. Official Growth in Electricity and Trade from 2011/12 to 2012/13

Reported GDP

4.40%

-1.70%

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GDP (ADB) Electricity Exports in $ Imports in $

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Why Nations Fail – Elites Politics Decides How Rich the Nation Gets

Acemoglu and Robinson make a good case that the degree of prosperity of a nation is a political choice made through elite politics. The choice to be prosperous is always hard—it means developing the political will to create pluralism, building inclusive institutions, embracing Creative Destruction and industrialization. Very poor countries do the opposite: they practice political absolutism, create extractive institutions, embrace the Iron Law of Oligarchy and block efficient industrialization. In essence, countries choose their level of income and social equality

Why is Choosing Prosperity Always Difficult?

Extractive economic and exclusive political systems create poverty. Inclusive political systems that spread opportunity generate wealth. Changing from a closed to open system is hard because elites resist reform. This is worse when natural resources are an important source of wealth. Each system reinforces itself over time. In general, there is more momentum for oligarchy than pluralism “Developmental Authoritarianism” can work if the system invests heavily in physical and human capital and is open to competition. This often involves heavy reliance on manufactured exports. Otherwise, it is likely to fail, as it has in Myanmar.

South East Asia: The Importance of Resource-based Industries

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Value-added of Mining and Quarrying (% of GDP), 2011

Source: ADB for Myanmar and National Statistical Offices for other countries.

¾ Official statistics puts the value of Myanmar’s mining sector at a very low level. ¾ The resource-rich economy of Myanmar:

• GDP estimate (2011, IMF): US$51.9 bn • Gas: US$ 3.3 bn • Jade (estimated): US$ 8.8 bn

Official Statistics *

Actual **

*Official exports of minerals for 2011 include official gas and 80% of “other. No other mineral exports were specified. ** Actual exports include official gas exports and authors’ estimates of jade at emporium values.

Existing Structure of Jade Business

Note: Value is estimated using the 2011 market exchange rate of 800 K/$.

Proposed Sharing Structure of Jade

The Six Dimensions of Governance

1.Voice and Accountability The extent to which citizens are able to participate in selecting their government, freedom of expression and of association, free media

2.Political Stability and Absence of Violence/Terrorism

The likelihood that the government will be destabilized or overthrown by unconstitutional means

3.Governance Effectiveness The quality of public services, the quality of the civil service and the degree of its independence from political pressure, the quality of policy formulation and implementation, the credibility of the government’s commitment to such policies

4. Regulatory quality The ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development

5. Rule of Law The extent to which agents have confidence in and abide by the rules of society, including quality of contract enforcement, property rights, the police, the courts, and the likelihood of crime and violence

6. Control of Corruption The extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as capture of the state by elites and private interests

Sum of World Bank Governance Indicators:Myanmar is the lowest in Asia

Since 1996, the World Bank has rated most nations on six dimensions of governance: voice and accountability; stability and absence of violence; quality of regulation; governmental capacity; rule of law and control of corruption. A maximum summary score would be 600.

http://info.worldbank.org/governance/wgi/mc_countries.asp

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Governance Score in 2012

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Score = 189 - Rank

"Doing Business" Indicators in 2014 for Selected Countries

Source: World Bank “Doing Business” indicators, 2014

Elite groups enlarge into broad coalitions

State Effectiveness

Deregulation for competitiveness

Rule of Law/Parliament, protection of minority rights, citizenship

Property rights, land policy

Health, education and safety net

Elite groups narrow

Many skilled workers leave

Disunity and lack of popular support

State driven poverty and religious strife

Political and economic power merge, inequality

High cost economy that cannot compete

tŚLJ�EĂƚŝŽŶƐ�&Ăŝů��Žƌ�^ƵĐĐĞĞĚ Acemoglu and Robinson Paradigm

ABSOLUTISM

PLURALISM

Critical Junctures

Extractive Economic and Political Institutions

Inclusive Economic and Political Institutions

If special interests predominate, there is a gravitational pull toward slow growth,

inequality and repression

If broad coalitions mediate tensions, parliament and independent courts control special interests,

and opportunity and dynamism grow

DIRECTIONAL STATE POWER

Myanmar’s Critical Juncture is Complicated because Democracy is the Engine, which is Rare

• Most fast-growing Asian economies had fairly authoritarian regimes to start and some switched to democracies after building up a middle class. However, many slow growing or failed economies also had authoritarian regimes, and Myanmar is one.

• The Acemoglu-Robinson (A-R) argument works well for middle income countries needing to sustain growth that have “outgrown” the authoritarian regimes that got them started. It also may work for poorer nations that have found authoritarian regimes to be failures.

• Because of Myanmar’s specific historical experiences, we believe that the A-R paradigm applies to their current situation.

• The path to liberal democracy and progress requires a deep understanding and consideration of history and culture. Even so, using democracy to achieve progress in Myanmar will be difficult. Many Asia democracies do not work well (e.g. India, Cambodia).

2014 – Choosing Survival

• Among the Lowest GDP per capita, Governance and Human Development in Asia – Now Behind Bangladesh and Cambodia

• Very Low and Concentrated Growth Aggravates Ethnic and Religious Tensions

• Huge Natural Resource Revenues go to Military & Private Use

• This is a Threat to National Unity and Even Survival

• “If…the obstacles prove insurmountable, [it] can be only a matter of time and, after a period of anarchy more or less prolonged, our descendents may find Burma a province of China.” Professor J.S. Furnivall, 1931, in An Introduction to the Political Economy of Burma

Conditions for Peace and Nation Building

1. Limited regional autonomy with fairly elected state governors.

2. Resource sharing of revenues, so the local government had some revenue to govern.

3. An agreement on the size, placement and composition and functions of the military. The army must accept a new role for a united and successful nation.

4. An agreement on who would make determinations on land ownership and how to settle disputed past land takings.

5. A rule of law that would constrain ethnic gangs, violence against minorities, and limit arbitrary military power. It would include the selection of national leaders by fair elections and settle citizenship issues for minorities.

These conditions would require constitutional changes.

New Federalism for

Nation Building

Land law and process of unwinding seizures based on

1. History

2. Productivity

3. Political influence of owners

4. Land taxes with deductibles

5. Small plot experiments for compensation alternative

1. Calculate rents = sales - costs

2. Factor in extra environmental costs

3. Split net profits among owners, state and central governments

1. Elections for governors

2. Vibrant political parties; no restriction on entry

3. Public finance system – provide for state revenues and resource sharing

4. Infrastructure and integration investments

5. Semi-autonomous regions; plebiscite with differentiated revenue sharing

1. Election monitoring

2. Armed forces integration and real police force

3. Social safety net, including adult literacy

4. Transportation costs – lower them so states connect to national economy

5. Elimination of impunity for civil rights violations

LAND NATIONAL RESOURCES

DEMOCRATIC GOVERNANCE SECURITY

Distractions from a Democratic Federalist Coalition

• There is a myth that Buddhism is under threat from Muslims.

• Neither high birth rates nor migration had raised the share of Muslims in Burma from 1881 (4.5%) to 1983 (3.9%). If higher now, it is due to low education and economic factors.

• While local Muslims are not a danger, international attention from Muslim nations and movements could become one. Myanmar does NOT want to become like Nigeria or Pakistan!

• Hatred and extremist populist movements like “969” will distract people from real problems of poverty and extraction

• Those born in Myanmar should be allowed to live in Myanmar

• Religious hatred is a threat to a democratic coalition

Elite Politics in Myanmar

After political agreement, a strategy for growth and shared prosperity is needed to support and legitimize the political agreement.

This should include elements of the following:

• Macroeconomics stability – low inflation, competitive exchange rate and manageable public debt. These will allow 8-10% annual growth and keep income distribution from becoming too unequal.

• A system of public finance where all revenues and spending go through a Ministry of Finance (or regional equivalent) and are approved by a legislature. This will help direct resource rents to productive uses and prevent “hidden” wealth accumulation.

• A policy towards past wealth accumulation which allows some amounts to be retained but may try to recover other very large holdings. This would include land holdings above some level. This is perhaps the hardest issue and should be negotiated. Large holdings that are productive should be left alone, but if unused or being held speculatively, they should be taxed or taken back. For financial wealth, being able to buy Manchester United is too much.

• A policy to prevent emerging monopolies in services while lowering trade barriers to prevent monopolies in traded goods. Monopolies in services like transport or trade can kill regional growth and create a “high cost economy” that slows job creation.

• A rule of law to ensure safety for investors and prevent pollution by businesses that endanger public health and welfare. Myanmar has to become a better place to invest outside of jade, gems or gas. Better quality investors will not mind reasonable laws on pollution.

Thank You

“We must all hang together or most assuredly we shall all hang separately.”

Ben Franklin, 1776, at signing of Declaration of Independence