Wednesday, October 12, 2011

On the Winding Road to Reform, Burma Can Look to Its Neighbors for Inspiration

The economic potential of Burma has never really been in doubt given its historical importance in the economy of Southeast Asia. The fundamental underlying question has been how to realize this potential so that economic growth, social cohesion and border security remain mutually reinforcing and sustainable over several decades into the future.

This is not a simple question. It is therefore hardly surprising that there are no simple answers to Burma’s development problems.

But Burma is not the only country in Asia to face complicated policy problems. Many of its neighbors have had to grapple with many development issues familiar to Burma authorities.

Even the most noted success stories of the developing world today — South Korea, India, China and now perhaps Indonesia, to name the most obvious — spent years searching and experimenting with alternative development trajectories and institutions. Ultimately, they were able to find the right balance between state- and market-determined national standards.

Even in these “miracle” countries, the development journey has been far from linear. South Korea moved from being a military-controlled political system to a multiparty democracy, and from a very low per-capita income based on a rural economy to an economic powerhouse on the back of sustained investment in skills and technology.

For decades after its independence, India was derided for its “license raj” and its “Hindu rate of growth.” But in the 1990s it decided to shed state interventionism for private enterprise and global competition. Today, Indian firms have gone global, rapidly penetrating western markets and reaching out to Asian neighbors in search of new markets and familiar economic terrain.

China’s development has been nothing short of staggering. Its sustained double-digit growth over nearly two-and-a-half decades, the incredible pace of its poverty reduction, the dynamism of its second-tier cities, the sheer enormity of its manufacturing industry and the penetration of international financial markets with Chinese investment and international currency transactions has impressed and shocked everyone.

Yet even China’s story is just three decades old. China, like so many economies in developing Asia, spent the first 40 years of independence meandering between one form of social and political experiment and another.

Land reform, commune-based production, backyard steel plants, the Cultural Revolution and large-scale disruption of the government machinery are easily forgotten among the impressive statistics of Chinese currency reserves, manufacturing exports and its fast-improving network of roads and airports.

Indonesia shares with Burma a history of Japanese-trained national armies as well as a history of a dual-functioning militaries that sought to contribute not only to external defense but to nation building at home. It has also had a checkered development history.

The first decades following its declaration of independence in 1945 were spent in highly divisive democratic politics: torn between the army and civilians, between Islam and Pancasila and between communism and capitalist free markets.

The next three decades were directed at the creation of a state in which business and politics were integrally intertwined such that a regional financial crisis in 1997 and 1998 caused its implosion and a second attempt at democracy. Today, Indonesia’s economic growth is rising and stable, it is an attractive destination of foreign investment and it enjoys a position in the G-20.

Many other countries in developing Asia have similar experiences of institutional experimentation, civil wars, ethnic strife, economic failures, bold but disastrous social experiments, disadvantageous external alliances and natural disasters.

Most of these — from India to Vietnam, from South Korea to China, from Thailand to Indonesia — have been able to take stock of their own development history, examine new political options and economic opportunities and through continuous reform and institutional development have now joined the ranks of the “miracle economies” of Asia.

Intra-Asian trade is thriving, capital and people are more mobile across countries within developing Asia, and new rules of the game are increasingly being forged not in faraway London, Frankfurt or New York but in Hong Kong, Singapore, Seoul and Mumbai.

These developments, in its own economic neighborhood, are of marked significance to Burma. The end of the Cold War on the one hand and the rise of Asia on the other has changed the external environment for Burma’s development beyond recognition.

The above factors, taken together with lessons of historical transformation in many other countries in transition, point to the fact that Burma is not too late in attempting a major structural transformation. Like other Asian countries, Burma’s future will be written not by external advice but by its own government and people.

Systemic change in Burma may well take longer than we think. Large-scale reforms are never really instantaneous, and they hardly ever follow a set path. Indeed the much publicized debate of the 1980s over gradual and big bang approaches to economic reform was won not by voucher-privatizing Russia but a “gradualist” China.

There is something else. We now realize that we know relatively little about what drives economic growth and sustained development.

The Asian economic crisis and the 2008 global financial meltdown have shaken the confidence of those who, only a few years earlier, had advocated a small state, open markets and a prudent fiscal policy as the keys to high economic growth in almost all developing countries.

Professional opinion has continued to shift from a high moral ground of lasting prosperity founded on multiparty democracy and individual enterprise to less certain hunches of what works best in different historical and institutional contexts, to working out what constitutes the binding constraints that a given economy faces and trying to remove them piecemeal rather than through an all-embracing, large-scale reform.

The picture gets more complicated if we take the impact of globalization into account. Engagement, not autarky, is the new watchword on globalization.

All this has unmistakably altered the context and the international economic environment in which economic policy needs to be designed and implemented.

But for Burma, the above changes of professional opinion, developing country experience and the impact of globalization might well prove to be beneficial and to make the normalization of its economic ties with international institutions easier than ever.

Compared to the polarized development climate of the 1970s and 1980s, modern thinking pays much greater attention to history, transition costs, institutional capacity, and the role of the state. The question of why socialist Vietnam has grown so much faster than democratic, more skilled Philippines is the kind of puzzle over which today’s policy makers might ponder; quite different from the Cold War days in which the tendency was to dismiss such variations as mere accidents or flukes.

For Burma, in the throes of rethinking its own development policy for the future, it is just such puzzles and the variety of development histories within Asia and other relevant countries that provide the menu of options and the domain of smart policies that might actually work.

It is time for the carrot-and-stick approach to Burma’s development policy by the advanced West to be replaced by humility and patience.

By Satish Mishra managing director at Strategic Asia Indonesia, a Jakarta-based consultancy promoting cooperation among Asian nations.

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