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4/9)WORLD_BANK:POLICIES FOR SUSTAIN



/* Posted 15 Apr 11:00am 1998 by drunoo@xxxxxxxxxxxx(Dr U Ne Oo) in
maykha-l */
/* -------------" Policies for Economic Reform 4/9 "------------ */

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MYANMAR: POLICIES FOR SUSTAINING ECONOMIC REFORM (4/9)

WORLD BANK Report No. 14062-BA, October 16, 1995.

THE INCENTIVE STRUCTURE

20. To achieve its goals, the reform program has attempted to alter
the structure of incentives in the Myanma economy. The need for
greater integration with the world economy through trade and
investment links is explicitly acknowledged, with the main impetus
for growth coming from exports rather than from import substitution.
Hence, private exporters are now allowed to retain foreign exchange
earnings from exports, while fiscal incentives are offered to
foreign investors and to activities that generate foreign exchange.
The importance of encouraging agricultural production, particularly
paddy, has also been noted by eliminating the forced procurement of
crops at below-market prices and government control over cropping
decisions. Finally, the stringent restrictions on private sector
participation in economic activity have been reduced, and a range of
fiscal incentives extended to domestic private businesses. Despite
the many legislative measures that have been implemented, however,
the earlier biases have not yet been redressed in all areas, and the
picture that emerges is one of patchy reform rather than of
coordinated systemic change.

21. THE EXCHANGE RATE SYSTEM. The overvaluation of the official
exchange rate has continued to erode the profitability of exports.
Adjusting for Myanmar's higher inflation relative to its regional
trading partners, the profitability of exporting at the official
rate has fallen to less than a seventh of its 1985 level. To address
this deterioration, private exporters are allowed to retain all the
foreign exchange from exports, and to maintain foreign
exchange-denominated deposits. Hence, all private-sector external
trade is now conducted through the parallel market in foreign
exchange. By expanding the scope of this market, it is hoped that
the profitability of export production would be enhanced. However,
estimates of the RER using the parallel rate shows that export
profitability (vis-a-vis Myanmar's regional trading partners) has
still declined to less than half its level a decade ago. The efforts
to improve export profitability by expanding the scope of the
parallel market are also problematic because they exclude the
external transactions of the public sector, including SEs. Moreover,
it raises transactions costs and risks for private exporters who
must deal with a multiplicity of parallel-market exchange rates in
an unofficial and unregulated market.

22. OTHER BARRIERS TO EXPORTS. The economic reforms have eliminated
restrictions on private sector exports, with paddy, rice, teak, most
minerals and pearls being the main exceptions. The most serious
restraint is the continued ban on paddy and rice exports. This
policy not only constitutes a continued bias against paddy farmers
(see next para.); it also discriminates against the export product
with the greatest potential. A recent export tax of 5% imposed on
private and joint-venture exporters is another policy that worsens
the anti-export bias. The segmentation of the foreign exchange
market also remains a serious problem because private firms,
including potential exporters, can import inputs only if they
generate their own foreign exchange earnings or can find another
private exporter. This system, with its attendant risks and
transactions costs, restr5icts the access of potential exporters to
imported inputs. And the costs of imports are raised even further by
the requirement that all private-sector imports include a specified
proportion of officially-designated priority goods. Finally,.
despite recent efforts at improving customs procedures, the quality
of the infrastructure needed for external trade, including cargo
handling, ports and warehousing facilities is poor while procedures
are still cumbersome and private exporters receive little government
support. Trade finance is also impossible to obtain due to the
segmentation of the foreign exchange market.

23. IMPLICIT TAXATION OF PADDY PRODUCTION. Since paddy is dominant
in the agricultural sector, changes in the incentives for paddy
production largely determine the sectoral incentives. While the
liberalization of agricultural pricing and marketing in 1987-88
raised prices to paddy farmers, their implicit taxation through the
structure of output and input prices, and export restrictions
continues. The main policies by which these implicit taxes are
levied are the paddy procurement system and the ban on private
sector paddy exports. About 11% of paddy production is procured by
the government at below-market prices, thereby reducing farmgate
prices by about 8%. However, paddy farmers are taxed even more
because of the ban on private-sector exports of paddy and rice.
Since the international price of rice is higher than domestic
prices, this government monopoly means that the price received by
paddy farmers is about a third lower than if they could export
freely.

24. These implicit taxes mean that paddy farmers suffer large losses
in income, which were more than double Myanmar;s total tax
collections in FY95. These distortions imply even larger medium-term
losses because they discourage farmers from expanding output. The
estimates presented in Chapter 2 point to increased yields per acre
of about 10% and higher farm output (in value terms) of over 35% if
the export ban were eliminated. A common justification for such
implicit taxes is that many paddy farmers receive implicit subsidies
on their fertilizer use. However, even taking account of these
subsidies, paddy farmers' returns/acre would increase by 50 to
100% ( even without taking account of the yield increase) if crop
procurement and the export ban were eliminated in tandem with
removal of the fertilizer subsidy.

25. LAND TENURE AND CROPPING CHOICE. Despite the reforms, the
government still exercises substantial control over the choices of
farmers, especially on land designated for paddy, through their
access to credit, irrigation, and fertilizer. Meanwhile, continued
subsidies and other distortions (such as the exchange rate) mean
that private-sector involvement in provision of inputs has not
grown. Therefore, shortages of these inputs continue to constrain
production. The ambiguity of land tenure also constrains
agricultural productivity. The inability to trade or lease paddyland
means that much of the cultivated land may not be operated
efficiently or is left fallow. And unclear use rights to land mean
that farmers have little incentive to undertake investments such as
erosion control, which yield returns only over the long term.

26. PRIVATE-SECTOR ACCESS TO CREDIT. The availability of credit to
domestic private businesses has improved since 1990 with the
enactment of the Financial Institutions law. The private sector's
share in total domestic credit has now risen to about 14%, still far
lower than its share of GDP or manufacturing value added. Moreover,
continued large fiscal deficits mean that the credit demands of the
public sector still crowd out private sector access. As the private
sector grows, and its credit needs expand, its demands cannot be met
unless the fiscal deficit can be controlled. Moreover, SEs are still
treated differently from private businesses in that they are
financed directly from the government budget. Those with operating
deficits receive interest-free credit, which provides them a
significant subsidy, and further impairs the ability of private
businesses to compete effectively with them.

27. ACCESS TO INFRASTRUCTURE AND PUBLIC SERVICES. Apart from the
inadequacies of Myanmar's physical infrastructure, private
businesses have only limited access to these facilities and services
compared to SEs and government departments. It appears to take
private entrepreneurs considerably longer than SEs to obtain power,
water and telephone connections, or to have goods cleared through
the port and stored in warehouses. Apart from the advantages of
incumbency enjoyed by SEs, the lack of formal interaction between
representatives of the domestic private sector (such as the Myanma
Chamber of Commerce) and key policymakers is a contributing factor.
And, the fuzziness of land ownership and use rights even in urban
areas makes it difficult for private firms to acquire land and get
access to public services. These relative advantages enjoyed by SEs
in their access to infrastructure and public services can be seen
also in the preference that foreign investors have shown to enter
into partnerships with SEs rather than with domestic private firms.
As of March 1995, less than 30% of FDI inflows that took the form of
joint ventures was with the domestic private sector [7].

28. ACCESS TO IMPORTS. Private businesses import inputs and
machinery at the parallel market rate, while SEs do so at the
official rate. In this sense, SEs get their imports at
heavily-subsidized prices. But, given the extreme shortages of
foreign exchange in the Myanma economy, the access of all businesses
to imported inputs is impaired. The import requests of SEs are
tightly controlled by the Ministry of Finance. However, those SEs
that do receive permission to import raw materials and
intermediates, obviously receive large scarcity rents on their
imports. These subsidies to SEs also reduce the price incentives for
expanded private participation in legitimate businesses. SEs, which
use cost-plus pricing, set their prices at levels at which domestic
manufacturing is unprofitable. Hence, private businesses are
encouraged to concentrate in the trading and services sectors or to
engage in unregistered (and small-scale) manufacturing.

Footnotes:
[7] This share excludes joint ventures with quasi-official entities
such as Myanma Economic Holdings and Yangon City Development
Committee.

(5/9) STATE ENTERPRISE REFORM

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