Myanmar's bid to join regional groups

Myanmar's bid to join regional groups

Myanmar needs to do more if it hopes to gain membership in other regional groupings.

By Ahmed M. Khalid

REGIONAL integration is advancing rapidly in Asia as a result of both market forces and government policies. The successful experience of some of the Southeast Asian countries of cooperation in ASEAN has further enhanced the prospects for closer regional cooperation. Myanmar too is eager to be part of regional networks. In July 1997, Myanmar was admitted as a member of ASEAN.

It is evident that the relatively more developed member countries of AFTA/APEC are at a different stage of development in terms of economic growth, trade, financial liberalization, technological progress and labor-market conditions including manpower skills, wage rates, and so on, as compared with the emerging economies.

There is, thus, a place and role for every actor within the framework of the regional grouping to gain benefits and to make an effective contribution. Movement towards economic liberalization is, therefore, essential to gain membership in such regional groupings. Economic reforms initiated in Myanmar in 1988 have produced mixed results. At the early stage of these reforms, the economy experienced a sharp decline of 11.4 percent in GDP accompanied by high inflation of 32.5 percent, money supply growth of 31.3 percent and a fiscal deficit of 5.7 percent of GDP.

The recovery started in 1992 and continued in later years with moderate real GDP growth of around 6 percent. Though fiscal deficits are on the decline, because of limited availability of external resources and an inefficient system of taxation, financing through central bank borrowing remains the only source.

Hence, money supply growth and inflation have remained at over 20 percent on average. The gap between the official and black market exchange rate is extremely high with the official exchange rate at around six kyat and the black market rate at over 300 kyat per US dollar at the end of 1997.

The process of macroeconomic management involves reforms in various sectors of the economy. The financial sector plays a critical role in the process of economic growth but financial sector reforms may not be successful without fiscal reforms. At the same time, the market mechanism has to be enforced to determine the pricing system including commodity prices, interest rates and exchange rates. Thus in the process of transformation from command to market economy, it is natural that policy makers, regulators, bankers, economists and business communities try to find the dynamic balance fostered by the monetary, financial and fiscal reforms.

One of the major failures of Myanmar's reform process is the domestic pricing structure. The economy still has a dual-price structure that creates other distortions such as inflation, subsidies, rationing system and dual exchange rates. Liberalization of the price structure would require market forces to determine the prices independent of any political and/or social pressures. If financial markets are well developed and individuals have undiscriminated credit facilities, there will be no need for subsidies to purchase inputs. The farmers would be able to borrow, purchase inputs at the market rate, sell their produce at the market rate, pay back their loans and could still make some profit. Such a policy will increase productivity (by removing artificial shortages), eliminate the need for rationing and will establish a unified price system in the country.

The capacity to export and willingness to import would determine the demand for and supply of foreign exchange, and eventually, the exchange rate for a country. In a reforming economy where limited resources are available to the industrial sector, these exports are heavily dependent on imports of raw materials.

Thus, a policy to open the economy for imports and reduce tariffs would increase the production capacity of the economy and stabilize the exchange rates.

In other words, outward oriented policies to promote exports combined with policies to attract foreign investment and imports of capital and technology are essential for exchange rate stabilization. Such policies would reduce and eventually eliminate the gap between official and black market exchange rate.

Public confidence, transparency and sustainability of policies determine the credibility of the regime not only for foreign investors but domestic investors as well.

Unfortunately, Myanmar has a long way to go in gaining such confidence and establishing credibility. This should be the priority, as any reform package would be meaningless and ineffective without public support and confidence. Such confidence will help to boost the domestic investment and saving, inflow of foreign capital and operations of banking and other financial institutions.

Regular policy evaluation is important and helps to decide whether to continue or modify the existing policies. Such policy evaluation requires sufficient data, at least, on the main macroeconomic variables. Developing countries, in general, face the problem of data inadequacy. Data availability on basic economic and social indicators is even more serious problem in the case of Myanmar. Statistical services should be improved both in volume and frequency.

Myanmar's economic reforms still face enormous challenges and problems. Distortions such as supply bottlenecks, monopolistic pricing, inefficient capital structure, and overvalued exchange ate still prevail in the economy and there is a need to further improve the system by reducing these distortions.

Furthermore, the resource mobilization and regulatory environments have to be improved for an efficient system.

Although, Myanmar has joined ASEAN as a member, formal entry to other prestigious economic forums such as APEC will depend on future economic performance and sustainability of economic growth. Policy makers have to formulate and implement the right mix of policies to speed up the reform process and maintain it to achieve target levels of growth. The prospects for Myanmar would be promising if there is a continued focus on the reform process.

Dr. Ahmed M. Khalid is a Lecturer with the Department of Economics and Statistics, National University of Singapore.