The development challenge in the contemporary context

1. The development challenge in the contemporary context

2. Objective • Not to prescribe for Myanmar, but to speculate, as on a outsider, on the possibilities open and the directions to be avoided by a country that is Mynamar-like. • Perception likely to be different, because Myanmar’s case is special and complex for three reasons: • Transition from authoritarianism to democracy • Centralisation of decision making in the name of absent planning • Isolationism both chosen and imposed • This could influence perceptions and preclude certain alternatives. But the idea is not to return to a past, but to think afresh for the future.

3. Market failure • Any strategy for development is inherently also a strategy to ensure that a certain part of investment and current expenditure are allocated to particular activities and to projects of a specific design. • Where such a prior plan does not exist the market has an obvious role. • But there may be many areas where the market may not deliver (market failure) or deliver with debilitating collateral damage (pollution, for example). • A typical example of market failure is investment in sectors with substantial economy-wide externalities, like infrastructure for example. Here state intervention to achieve policy objectives, or ‘planned intervention’ would be needed.

4. The demand side • Any strategy of this kind with some targets, however loosely defined, presumes that the required investments and expenditures (especially public investment) can be ensured. • It also requires ensuring that as supply increases in the priority areas, demand would also rise to match that increase. Otherwise the investment would be wasteful.

5. The export led angle • The latter problem can be redefined to say that what is needed is to match supply to available and projected demand rather than the other way round. Export-led strategies are of that kind. • They amount to strengthening supply capacities to match the opportunities arising from changing world demand.

6. The global context • Even if this is considered the way to go, this is not the appropriate moment. • Sluggish global demand makes export led growth difficult in the current conjuncture. 2015 marks the fourth consecutive year in which growth in world merchandise trade stayed below 3.0% on an annual basis. Growth in the volume of world trade is expected to remain sluggish in 2016 at 2.8%, unchanged from the 2.8% increase registered in 2015. Risks to this forecast are mostly on the downside, including a sharper than expected slowing of the Chinese economy, worsening financial market volatility, and exposure of countries with large foreign debts to sharp exchange rate movements. • Export is important—but not as an engine of growth, but as a necessary means to obtaining the imports needed to support domestic investment and consumption.

7. Myanmar’s advantage • Fortunately for Myanmar, it is better endowed on this front than other countries. • Even if we leave out timber, still, agricultural products, garments, precious and semi-precious minerals, gas, and tourism (all if developed further) provide a pretty diversified basket of goods and services to meet the potential demands for foreign exchange in the near future.

8. Domestic market led • Thus, what is required is a strategy that focuses on growth based on the domestic market facilitated by the ability to earn reasonable amounts of foreign exchange. • The principal requirements for this are a growing home or domestic market and infrastructure to ensure that growth and benefit from it.

9. Agriculture’s role • With 70 per cent of the population dependent on rural activities, especially agriculture, ensuring increases in agricultural incomes that are reasonably well distributed through a combination of land reforms that provide land to the tiller or, at the least secure tenurial conditions, and crucial productivity enhancing investments are central. • May need to be supported by the government serving as the “employer of last resort” • Excessive land alienation and concentration or an emphasis on reliance on agribusiness could be counterproductive.

10. Infrastructure • The other requirement for sustaining home market-based growth is investment in infrastructure, physical and social, not just in irrigation, drainage and flood control, but in roads, transportation, power generation and distribution, human capital, etc. • Further to ensure that trade to earn foreign exchange and sustain investment can be sustained, investment is required on cross-border transportation facilities such as ports and airports.

11. Governemnt role • Experience has made clear that the domestic private sector can only marginally contribute here and the foreign sector would focus on areas where benefits are high or government concessions substantial. So government investment is unavoidable. • The belief that infrastructure development would be funded by private international capital or that financial liberalisation would lead to developments such a robust market for long term bonds is neither logical nor supported by the evidence.

12. Resourcce mobilisation • This leads up to the third prerequisite for a home-market based growth strategy: domestic resource mobilisation. The tax-GDP ratio (as seen from the available data) in Myanmar is woefully inadequate, and excessively based on indirect taxation. Indirect taxation is (by definition) inflationary and continued excess dependence on that would be retrogressive and restrict market growth. • Every effort to focus on taxing non-essentials and luxuries and possibly an incremental expenditure tax is necessary, but finally progressive direct taxation is a must and provisions of tax holidays and exemptions in the name of encouraging the private sector should be abjured.

13. Interim measures • This could take time. In the interim there is no need to abjure deficit financing, since such financing will be excessively inflationary only if there are supply side constraints that cannot be relaxed with the available foreign exchange. Expenditure which injects demand while simultaneously relaxing supply constraints is the answer. Difficult but doable, for a proactive government. • Foreign aid can make a difference. But only a small part of aid is in the form of grants, rest are loans. It is of course better to borrow in local currency than foreign exchange. “Aid” in the form of debt helpful only to ease foreign exchange constraints in the short run.

14. From whom to borrow • It is also necessary to emphasise that dropping monetisation of the deficit in the name of independence for the central bank and monetary policy is not a must. The behaviour of the Federal Reserve during the 2008-09 crisis is prrof. • In prinicple, monetisation need not be more inflationary than open market borrowing. On the other hand, interest rates in the private market may worsen the budgetary constraint. • Further, if policy includes capital account liberalisation, independence is a myth.

15. The honest mainstream • “The crisis has shaken the foundations of the deceptively comfortable central banking world. Pre-crisis, the quintessential task of central banks was seen as quite straightforward: keep inflation within a tight range through control of a short-term interest rate, and everything else will take care of itself. Everything was simple, tidy and cosy. Post-crisis, many certainties have gone. Price stability has proven no guarantee against major financial and macroeconomic instability. Central banks have found themselves reaching well beyond interest-rate policy, aggressively deploying their balance sheet in a variety of “unconventional” monetary policies. As a result, the line between monetary and fiscal policy has become blurred precisely at a time when public sector debts are ballooning and sovereign risk is rising again. And many increasingly question the very ability of central banks to maintain inflation within acceptable ranges, notably to avoid deflation.” (Borio, Claudio (2011), “Central banking post-crisis: What compass for uncharted waters?”, BIS Working Paper No 353.

16. Financial sector and liberalisation • Finally, there is need to use the financial sector, especially banks and insurance companies as instruments of development finance, and set up specialized development finance institutions to mobilise and/or channel resources for long term investment. • The idea that a liberalised financial system would generate an “efficient market” that would mobilise the maximum resources and allocate them to the highest yielding projects are based on assumption cannot hold in practice.