JAPAN TIMES ARTICLE ON ODA

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THE JAPAN TIMES, MONDAY, MARCH 16, 1998: USE ODA "CARROT" TO REFORM BURMA
BY ZAW OO

The self-reliant economic system that has been so stable in the past is now 
shaken as a result of exposure to external shocks and trade fluctuations. 
The only reasonable response is a retreat to the old autarky and shielding 
the economy from neocolonial capitalists. This is a simplified version of 
the ideology of the generals who run Burma.

In these circumstances, how can the recent resumption of Japanese Official 
Development Aid to Burma be effective? Clearly, the move is premature. 
 More likely, the ODA would be unproductive and it will permit the generals 
to escape the consequences of their foolish economic policies.

Although Japan gave no bilateral assistance to Burma in the last ten years, 
Japanese ODA before 1988 could give us some clues about how such aid 
facilitates the development process.  In the "lost decade" of eighties, 
Burma is always in the top ten ODA recipients.  Burma received a total of 
US$ 1.42 billion from 1980 to 1988.  On per capital basis, Burma received 
more than Indonesia and almost the same as Thailand.  Despite this flow of 
aid from Japan, the country's economy collapsed in 1987, which led to 
popular uprisings in 1988 and the violent suppression that followed.

There are several lessons learned from the failures of the last decade. 
 These include the profound importance of macroeconomic policy framework in 
determining the return on individual projects; and the orientation of 
development policies; and the need for effective administration of aid 
programs.  Without these features, the results will be miserable, 
regardless of the "soundness" of ODA projects designed and formulated by 
the Japanese.

The lack of incentives and the misguided economic policy decisions limited 
the use of aid as a "transfer of resources" to fix constraints on growth 
and foreign exchange. Worse still, the country became highly indebted to 
Japan since the loan component of the aid was much larger than the grant 
component (an average of 3:1 ratio).

Has Burma changed enough to qualify for Japanese ODA? The first test of 
macroeconomic policy framework would indicate that Burma has still a long 
way to go before it can put aid to productive use. Unchecked government 
spending has led to a chain reaction of fiscal crises, a soaring inflation 
rate and an extreme current account imbalance. Since 1988, the government's 
expenditures mushroomed and fiscal deficit reached nearly 8% of GDP last 
year.

Burma missed a golden opportunity to benefit from the market openings 
introduced in 1988.  Ten years of slow but steady flow of external private 
capital and income generated from the sale of rich natural resources and  
 oil explorations could have been used to restructure put it on a 
sustainable growth path. But foreign direct investment ended up in 
unproductive and unsustainable investments such as real estate and tourism. 
Since the inflow of external funds temporarily eased the pain, the old 
habits are recycled and the government has reallocated resources according 
to political priorities. It was another example of "moral hazards" that 
kept the generals from making essential reforms.

In open economies, weak markets suffer more from external shocks.  With its 
bad policy regime, Burma is being hit hard by the "Asian flu." First, the 
Asian firms which provide  70% of FDI in Burma have either reduced or 
indefinitely postponed their commitments.   Second, there has been a sharp 
drop in demand for over fifty percent of Burmese export that used to sell 
in Asian markets. Third, the pressures on weak Burmese currency have been 
felt speculative attacks brought about a nearly 100% depreciation at the 
height of Asian flu. Given these inflationary pressures and dwindling 
foreign exchange reserves, the kyat is more vulnerable to contagion 
effects.

The government is trying to reverse the negative trends.   However, the 
policy tools the government is using to remedy the economic ills are not 
economic ones. The government sent agents to the foreign exchange counters 
and arrests traders who make transactions outside the band set by the 
government.  The trade licenses that the regime created for rent-seeking 
activities have been temporarily suspended.  Military troops are sent to 
stop the border trade.

The decision to expand the army to half a million men is worrying. The 
generals focused on building the army and funneled most of the budgetary 
resources to a parallel program of modernization and force expansion. 
Rising through the ranks of the military is the primary avenue to attain 
wealth, status, and power. Under this policy, the share of military 
spending in the state budget has reached the peak level of 42% in 1993 and 
never really has diminished after that.   This pattern of military spending 
alone should disqualify the regime from receiving any aid since the Japan's 
ODA charter outlined principles that focus on "trends in recipient 
countries' military expenditures, their development and production of mass 
destruction weapons and missiles, their export and import of arms, etc."

Japan has huge influence in Burma and it can certainly use aid to shape the 
developments.  Instead of focusing on project financing, Japan should look 
more into fostering a "policy dialogue," and to introduce effective and 
timely reforms in Burma. The big unfinished task is political. Japan should 
try to use 'aid' carrot to influence the process of democratization in 
Burma. The ODA charter already gives a strong mandate to efforts to promote 
"democratization and introduction of a market-oriented economy, and the 
situation regarding the securing of basic human rights and freedoms in the 
recipient country."  Japan should try to rescue Burmese democracy, not the 
generals.

Zaw Oo is currently co-ordinator of the Research Group for the Economic 
Development of Burma based in New York.
Note: The Japan Times uses Myanmar instead of Burma.