A policy of pillage (FEER 8.8.91)

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/* posted 15 Jan 6:00am 1997 by drunoo@xxxxxxxxxxxx in igc:reg.burma */
/* ---------------" A policy of pillage (8/8/91)"-------------------- */

FAR EASTERN ECONOMIC REVIEW, 8 AUGUST 1991.
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A POLICY OF PILLAGE
Burmese junta retreats from business liberalisation
By Jonathan Friedland in Rangoon and Bertil Lintner in Bangkok

At the "Singapore" Department Store, up a narrow flight of stairs at the
corner of Rangoon's Bogyoke Aung San and Pansodan streets, an array of
electronic goods, refrigerators and machine tools is on sale. Businessmen,
students and monks stare contentedly at a wide screen with a karaoke
version of You Light Up My Life playing. Others browse among the rarities
on sale, too poor to buy.

The prices at this Rangoon outlet of SKS marketing are marked in US
dollars, but until late May the two-year-old store also displayed prices at
a kyat equivalent, though the calculation bore no relation to the official
convension rate. That policy of dural pricing changed almost overnight
after the most powerful man on Burma's three-year-old State Law and Order
Restoration Council (SLORC), Maj.-Gen. Khin Nyunt, made a speech
reminiscent of the Ne Win era, a 26-year period when RAngoon pursued its
disastorously xenophobic "Burmese Ways to Socialism".

"Instead of cooperating in the interest of the nationa, they only import
goods that have good markets," Khin Nyunt said of teh foreign investors who
took up the SLORC's offer to join the supposed free-market revival of
Burma's economy, "and many of the people involved now immense greed to make
instant wealth."

The widely feared intelligence chief went on to implore entrepreneurs to
try "to avoid being labelled as notorious profiteers and capitalists" when
his rambling speech characterised them as just that.

After the speech, the kyat prices were quickly removed at the SKS, Toshiba
and Daewoo stores, which had calculated the US dollar-exchange rate at
Kyats 55. This was far less than the black market rate of Kyats 75-80, but
it was far above the official fantasy of Kyats 6.4 to the US dollar.

Other moves by the government also indicate Burma's open-door policies are
under reconsideration. A string of articles and cartoons in the official
Working People's Daily have attacked the profit motive, and a Singaporean
palm oil trader was arrested in Jue on profiteering cahrges. Also, Burma's
Chamber of Commerce and Industry, which was to elect its own new officers,
had a cabal of former military men appointed to its board.

Even more telling was a series of restrictions on how businessmen can spend
their foreign exchange, which was mooted in July. Exporters will be allowed
to allocate only 90% of their profit towards imports, and they will be
forced to spend 20% of that amount on items stipulated by the government.
Guidelines are also expected to confine certain types of exporters to
specific imports.

The result of these changes has been to "damage businessmen's confidence
that they had a system they understood," an observer says. Adds an Asian
diplomat: "Local merchants are now very confused and frightened."

Because of their traditional prominence in the still-powerful Ne Win's
pantheon of official demons, foreign entrepreneurs have good reason to be
cautious. Most were kicked out of the country unceremoniously between 1962
and 1964 along with thousands of Indians and Chinese businessmen who made
up the backbone of Burma's economy.

Under Ne Win, the state took control of production and distribution in the
industrial sector, and of teh import and export of commodities. Banks and
industry were nationalised, and private enterpreise was forbidden. Soon,
industry and commerce were in disarray, with the production of everything
from oil to pharmaceuticals declining. Rangoon, once one of the most modern
cities in Asia and a banking and trading centre, began degenerating to its
present shabby, torpid state.

In the mid-1950s, Thailand and South Korea had roughly the same population,
and all had per-capita incomes well below US$100 a year. By 1989,
Thailand's per-capita income was US$1,220 compared with the official
Burmese figure of US$200; South Korea's was 20 times larger.

In 1987, the UN designated Burma a least-developed country, placing it in
the same ignominious category as El Salvador and Ethiopia. Four decades
earlier, Burma was one of Asia's few countries to export both rice and oil.

The economic situation facing the SLORC when it took over was grim:
foreign-exchange reserves stood at a paltry US$12 million, US$5 billion of
debt amounted to nearly 70% of GNP and the debt-service ratio amounted to
58-90%, depending on the analysis. Making matters worse, the brutal
crackdown on demonstrators that preceded the SLORC coup had resulted in a
cut-off in international aid.

Virtually broke and with no where to turn, the SLORC invited foreign
businessmen back to Burma. A new foreign-investment law, replete with tax
breaks, guarantees against nationalisation and the right to remit hard
currency, was promulgated in November 1988. Burmese functionaries hit the
road led by Brig.-Gen. David Abel, the minister of planning, finance and
trade, who appeared in Singapore, South Korea and other friendly countries
to drum up business.

According to information supplied by a Western embassy, 40 foreign
companies have invested US$661 million in Burma in the past three years.
Roughly two thirds of this amount has been invested by 10 oil companies,
ranging from Idemitsu of Japan to Unocal of the US while much of the
remainder has gone into other forms of resource extraction, particularly
forestry products and fisheries.

Investment in manufacturing and tourism has been modest, reflecting a
widespread view that the safest and biggest money to be made is in trading
and resource extraction. Burma has no banking system to speak of, another
disincentive to long-term investment, though the SLORC has promulgated a
new central bank law that opens the door to the possibility that private
banks could be established.

Diplomats say the SLORC's capriciousness has encouraged just the kind of
mentality disparaged by Khin Nyunt. Businessmen have become expert at
invoicing ploys and at manipulating Burma's exchange-rate regiem to squeeze
every cent of profit from transactions. The prictice is widespread at
joint-venture companies staffed on teh Burmese side by former military men
with little commercial experience.

The concentration on trading and on immediate resource extraction also
reflects fears that popular resentment could result in a challenge to
military rule. Unlike the 1988 uprising, which was brutally crushed, a
later one could conceivably dissolve the military's grip on policy. Such a
change might not work to the advantage of those investors who provided
hefty sums to the government in the form of signature bonuses, surety bonds
and kickbacks.

Burma's foreign-exchange reserves rose quickly afte rthe open-door policy
was announced, reaching an official peak of US$850-900 million.

Nonetheless, most analysts concur that the dominant impact of the open-door
policy has been the mortgaging of the future of this resource-rich country
for a quick buck. Deforestation is proceeding at an alarming pace,
particularly in the rebel-contested north. Observers in China's Yunnan
province says that between 80 and 100 timber trucks from Burma cross the
Chinese border each night, a far greater number thn those crossing into
Thailand on behalf of Thai companies that have secured the lion's share of
officially acknowledged timber concessions.

The pace of deforestation has quickened because of contracts with Thai
logging concerns -- many of which have close ties  to the Thai military --
and because of arrangements made by the SLORC with the gragmented rebel
groups that used to have a solid grip on the northern third of the country.
In exchange for regularising insurgent trade, the SLORC has secured peace
agreements. It is most probably taking a cut in the earning,too.

Officially admitted non-oil investment is confined largely to companies
from Singapore, South Korea and Thailand, the governments of which have
provided diplomatic support to the SLORC. Thai companies are primarily
engaged in logging, fishing, and gem and tin mining. Shortly after the
SLORC took over, the Chatichai Choonhavan government banned logging in
Thailand.

Singapore companies in Burma operate department stores, engage in light
manufacturing such as metal fabrication and the making of wooden doors, and
provide oil and shipping services. Tradewinds, a subsidiary of
state-controlled Singapore International Airlines, also flies to Rangoon.

South Korean companies have opened two garment-assembly joint ventures,
while Daewoo Electornics has established a US$10 million joint venture with
state owned Myanmar Heavy Industries to produce televisions, stereos and
refrigerators. Daewoo also commands its own showroom in a government-owned
Rangoon department store. A modest amount of Hongkong investment has made
its way to Burma, particularly in the hotels sector.

Eleven Japanese trading companies, which were allowed by Ne Win to maintain
a presence in RAngoon in 1965, are also operating. The most prominent of
these are Nissho Iwai, Mitsui & Co., Mitsubishi Corp., Kinsho Mataichi and
Marubeni Copr. They are mainly engaged in teh purchase of teak wood, of
which Burma is the world's dominant supplier.

A smattering of US, European and Japanese investments are in Burma as well,
though diplomats say most companies from these countries are steering clear
because of government policies at home that discourage dealings with Burma.
Some multiantional companies, such as PepsiCo of the US in beverages and
Schlumberger of France in oil services, have a presence.

Unofficial investment activity,  which is almost exclusively in trading,
appears the sole domain of Chinese traders who enter Burma from Yunnan
province virtually unchecked to sell a wide range of goods. Yunnaese and
ethnic chinese from the Burmese border district of Kokang, which until 1989
was under communist rebel control, dominate the wholesale business in dry
goods, beverages and low-cost durables in the northern city of Mandalay.

New above-board investment has tailed off almost compleltly since May 1990,
when the SLORC ignored the outcome of a national election that saw the
opposition National League for Democracy capture 80% of the seats in teh
National Assembly. "It became clear that the reform programme was not
moving along a coherent track," a bank economist points out, "but on a
ad-hoc basis. When the government needs a boost to its reserves, the let
out a few more extractive concessions."

This approach has not only proved environmentally disastrous, it has failed
to improve short-term economic performance. This may underlie the SLORC'S
revanchist attitudes towards free-market reform. Despite taking steps to
decontrol agriculture, encourage foreign investment and legalise border
trade, and reform a host of laws regarding tourism and banking, life is
every bit as hard for most Burmese as it was during Ne Win's socialist era.

Inflation especially worries the SLORC because of its potential to
re-ignite widespread social unrest. The most serious challenge to the
government have come during the periods of rampant inflation and when the
demonetised the currency, as it did in 1964, 1985 and 1987.

Diplomats say average price increase in the first five months of this year
were about 60%, while real wage levels deteriorated. Instead of developing
rational monetary and fiscal policies, the SLORC sticks to what it knows
best: giving orders and having them carried out at bayonet-point.

In recent months, the SLORC has been sending loudspeaker trucks to markets
and threatening traders with stiff punishment if they do not comply with an
irrational but officially sanctioned price regime. One result is the
disappearance of expensive food such as chicken and pork from markets.
These items are available only under the table to known customers.

The military blames inflation on the surge of goods into Burma that fulled
GDP growth of a little more than 5% in 1990. Burma's record trade deficit
of US$570 million last year is expected to grow 40% this year. In addition,
industrial capacity utilisation hit a low of 10-15% 1990 largely because of
poor management and lack of fuel but also because goods from China, India
and Thailand are undercutting Burmese products.

The growth of the Burmese economy since the SLORC came to power has been
driven by construction and logging. This includes government spending on
roads, and on new towns such as Hlaing Thayar near Rangoon, where nearly
100,000 people were forcibly located after the 1988 uprising. Construction
growth of 34% in the same period largely explain how Burma managed to
achieve last year's GDP expansion.

Analysts say that while inflation will be spurred by rises in import
prices, it is also a result of the government's myopic willingness to print
huge amounts of its debased currency to fund a budget deficit
conservatively estimate at 13.7% of GDP. The money supply was cut by 70% to
Kyats 7 billion after the overnight 1987 demonetisation. It is now
estimated at a record Kyat 40 billion.

Government spending appears almost solely military-related. Official
statistics from the Ministry of Planning and Finance put defence
expenditure at 32% of Burma's budget for the fiscal year ended on 31 March,
but independent analysts put total-defence related spending at closer to 50
percent of Kyats 12 billion total. This factors in spending by the Ministry
of HOme and Religious Affairs, which controls the National Intelligence
Bureau, as well as a percentage of spending by state-owned industry, the
INformation Ministry, the government pension fund and the Health Ministry,
which provides medical services to the army.

The SLORC is also using much of its foreign exchange for military purposes.
The lowest estiamtes for its arms purchases is US$500-600 million. Some
analyst believe existing and future arms-purchase commitments primarily to
China to be as high as US$1.2-1.4 billion. It is not known how these arms
are being paid for.

Budgetary constraints are acute because of Burma's status as an
international pariah. Since the 1988 crackdown on the democracy movement,
almost all foreign aid to Burma has been cut off. This has hit the SLORC
hard since nearly 90% of Burma's total US$5 billion foreign debt was
extended on concessional terms by donors.

Burma receives no credit from the IMF, the World Bank or the Asian
Development Bank (ADB), and US and EC aid programmes have been suspended.
Japan, which has traditionally been Burma's biggest donor, now provides
only enough funds to keep its projects operating. South Korea is keen to
start an assistance programme, according to diplomats, but it is being
restrained by Japan and the US.

The upshot of the aid cut-off has been a sharp curtailment in government
spending on social services. The handful of aid workers left in Burma
report anecdotal evidence of increase in malnutrition and in infant
mortality. Despite modest increase in govenrment spending on education,
they report a decline in the number of children completing elementary
education. Many families cannot afford uniforms, books or tutorial fees.

"There is a silent emergency here," an observer says. "There are few
dollars being spent on water, health and sanitation."

Alongside the aid cut has come a reduction in advice proferred by
international institutions. Forign banks and UN agencies say the SLORC has
been unresponsibe to their suggestions ahd the military has been having
difficulty recruting competent technocrats to run the economy.

"There are very few people in the government with any experience at all
with merket economics," a multilateral bank economist says. "They simply do
not have the capacity to manage a workable economic programme."

Many of Burma's civil-service elite have been arrested, killed or have gone
into exile. Burma's cabinet members are military men with little formal
education, and most carry several portfolios. For instance, SLORC chairman
Saw Maung has only five years of basic education and serves as head of
state, minister of defence and minister of foreign affairs. Of teh 18 SLORC
members, 10 have had only primary, middle or high school education. Of the
remaining eight, only four have completed college or have an equivalent
level of education.

Nor is there much other talent to draw on. Regional commanders, who
generally are not well educated, are seldom eager to take responsible
positions in Rangoon. They are making too much money from up-country
commerce. Officers are frequently offered money, services, gems and other
gifts for turning a blind eye to, or facilitating, narcotics and other
contraband trade.

The lack of experienced policymakers and refusal to take external advice
has meant that the SLORC has steered clear of what many economists say is
the main obatacle preventing a turnaround in Burma's distorted economy: its
overvalued exchange rate. Brig.Gen. Abel, considered one of the few cabinet
members of any sophistication, argues that Burma would have little to gain
by devaluing the dyat since almost all exports are raw materials. Forestry
products alone accounted for 32% of the official tally in 1990.

A recent ADB report disagrees. It says that exchange-rate reform is
necessary to counteract declining production and exports, the large losses
taken by Burma's inefficient state enterprises, the erosion of teh tax base
and the growing inflationary pressures. Reform would also help to draw in
more foreign investors, the ADB says.

The SLORC has taken tentative steps to address exchange-rate distortions.
It has allowed China border trade to be conducted at a kyat-to-yuan
exchange rate that works out to about Kyats 55 to the US dollar. Certain
foreign companies and embassies have also been allowed a rate that works
out to a similar exchange rate. Then there is teh ubiquitous tourist trade
in 555 cigarettes and Johnnie Walker Black Label, which allows travellers
to Burma to fund one to two weeks of spending.
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