5/9)WORLD_BANK:POLICIES FOR SUSTAIN

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/* Posted 16 Apr 11:00am 1998 by drunoo@xxxxxxxxxxxx(Dr U Ne Oo) in
maykha-l */
/* -------------" Policies for Economic Reform 5/9 "------------ */

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MYANMAR: POLICIES FOR SUSTAINING ECONOMIC REFORM (5/9)

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

STATE ENTERPRISE REFORM

29. Since state ownership was among the main tenets of the "Burmese
way to socialism", the SE sector played a central role in Myanmar's
development strategy until the Government's economic reforms were
initiated in the late-1980s. Its significance was greatest in
sectors such as manufacturing, mining, communications,
infrastructure, financial services, and trade, which were considered
to be most critical to the emergence of a modern, industralized
economy. Given this starting point, the GOM has recognized the need
to implement reforms aimed at rationalizing the role of SEs in the
economy.

30. These reforms since 1989 have involved actions in several areas.
A system of dual pricing has been adopted for outputs, which allows
SEs to make sales at free-market prices once their procurement
targets (of government sales at controlled prices) are met. For most
crops used as industrial raw materials, official prices are now
higher than that offered by private traders. SEs have been granted
limited autonomy in decisions regarding contract and consignment
production and marketing and distribution. Another focus of the
reform efforts has been to transfer ownership and management of SEs
to the private sector, foreign and domestic. While there has been
little privatization, progress in expanding private-sector
involvement has occurred through the establishment of new joint
ventures(JVs) and production-sharing arrangement between SEs and
private investors, and through leasing the facilities of SEs to
private entrepreneurs. Most collaborations involve SEs with foreign
investors from the United States and several East Asian countries,
notably Singapore, Thailand, and Hong Kong. The bulk of these have
been in oil and gas extraction, hotels and tourism, fisheries, and
garments. Foreign investors have contributed capital, foreign
exchange, management skills and access to new technology, while the
SEs have offered access to natural resources, prime locations, and
infrastructural advantages. The leasing of SE facilities has been
the usual form of collaboration with local entrepreneurs, especially
in the industrial sector. A high-level Privatization Commission was
created earlier this year to oversee the detailed design and
implementation of a privatization program. Of the 51 small
establishments that were designated as initial candidates for
privatization, 6 have been privatized using a tendering process.

31. While these reforms are noteworthy because they recognize the
seriousness of the problems facing SEs, they do not go far enough in
addressing the underlying policy distortions that constrain SE
performance. For example, the impact of pricing and marketing reform
has been limited because a large part of production is still
subject to government procurement or inter-enterprise transfers,
whose prices are still controlled. And, the complex pattern of
cross-subsidies that arises from the dual pricing system and the
overvalued exchange rate mean that the financial profitability of
enterprises does not accurately reflect their economic viability.
Similarly, the changes designed to enhance the autonomy of SEs do
not go far enough, and in some respects, have actually had the
opposite effect. Even where SEs have been granted greater
flexibility, decisions are still centralized within the parent
Ministries. And the allocation of investment funds and foreign
exchange is actually more centralized than before 1989. The lack of
progress in reforming the investment allocation system and exchange
rate mechanism along with the maintenance of the procurement system
means that SE managers still cannot be held accountable for the
performance of their enterprises. So, the reforms have not changed
SE behavior towards greater fiscal responsibility. The approach
taken to privatization also has serious problems. It is not based on
a clear delineation of the future role of the private and public
sectors. It risks diluting the full benefits of privatization
because it is difficult for potential foreign investors to form a
clear sense of which enterprises will be sold, and which enterprises
would be retained within the public sector.

32. In strengthening the program for SE reform in Myanmar, it is
useful to look at the experiences of other transition economies. One
important lesson is that successful programs combine changes in
macroeconomic and pricing policies with targeted reforms.
Macroeconomic and pricing reforms are necessary preconditions
because they alter the environment in which SEs operate. All
transition economies have implemented price liberalization and
macroeconomic stabilization, although the pace of those efforts has
ranged from rapid in Vietnam and the Czech Republic to gradual in
China. Targeted reforms, such as privatization and restructuring,
must also be based on a clear definition of the role and objectives
of the SE sector. Hence, in all transition countries, except China,
there has been rapid growth in the private sector, and even in
China, it has translated into an expansion of the non-state sector,
owned and controlled by local governments. Finally, all these reform
programs have emphasized financial accountability. They have
attempted, with varying success, to impose financial accountability.
They have attempted, with varying success, to impose financial
discipline (hard budget constraints) on the remaining SEs by cutting
subsidies and liquidating loss-making enterprises.

(6/9) D. REFORM AGENDA

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