Brookings: Experts - Lex Rieffel

Banking Has to Become Boring Again

Lex Rieffel — Mon, 29 Apr 2013 17:39:00 -0400

Editor's Note: Lex Rieffel responds to John Dizard's opinion piece, "Tobin tax will only benefit shady fixers,” in a Letter to the Editor.

Sir, John Dizard makes the classic argument against the European financial transaction tax (Tobin tax) due to go into effect at the beginning of 2014, cleverly linking it to the fresh warning from the Institute of International Finance about the “Balkanisation” of the global economy (“Tobin tax will reinforce position of banks it seeks to challenge”, April 20). But Mr Dizard focuses on the short-term impact and misses the larger context.

While US banks are likely to benefit in the short term, past experience suggests that their eager financial engineers and clever lawyers will invent a new set of instruments that in due course trigger another financial crisis.

The point is that ordinary citizens around the world will not be able to sleep soundly until banking once again becomes boring. Given the choice between Balkanisation and more taxpayer-funded bailouts, isn’t Balkanisation the more rational option?

The argument that financial sector freedom is necessary for economic growth rests on an assumption that gross domestic product growth is the solution for all problems. Surely we have seen enough in the past few decades to question this assumption.

If the solution instead is smart investment, both by the public sector and the private sector, then bankers are among the last we would want deciding which investments to finance.

Banks are backward-looking intermediaries, inclined to invest in the last good idea. That is actually a more useful function than the alternative, which is rushing like lemmings over a cliff.

Authors

Lex Rieffel

Publication: Financial Times

Image Source: © Fabrizio Bensch / Reuters

Myanmar on the Move: An Overview of Recent Developments

Lex Rieffel — Thu, 28 Mar 2013 12:49:00 -0400

INTRODUCTION

You might call it a reverse coup. In March 2011, former general Thein Sein was sworn in as the president of Myanmar’s first elected government in almost 50 years. His inaugural address astonished experts both inside and outside the country by sketching out a vision of democratic rule and economic management that represented a 180-degree turn from the preceding decades of military rule.

President Thein Sein further confounded sceptics and critics by actually taking concrete steps toward achieving this vision. The two most dramatic steps in 2011 were initiating a dialogue in August with opposition leader Aung San Suu Kyi that led to her election to a seat in the legislature six months later, and suspending construction in September of a dam at the head of the Ayeyarwady River designed to supply electricity to Yunnan Province in China.

The most dramatic steps in 2012 are not as easy to select, but the one most likely to top the list of any economist is abandoning (on 1 April) the country’s grossly overvalued official exchange rate and adopting a marketbased exchange rate system. These policy reforms and many others produced a tsunami of foreign visitors to initiate aid programs and reap the early fruits of an improved investment climate.

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Authors

Lex Rieffel

Image Source: © Soe Zeya Tun / Reuters

Are Aid Donors Repeating Mistakes in Myanmar?

Lex Rieffel and James Fox — Sat, 16 Mar 2013 14:51:00 -0400

The transition in Myanmar that began two years ago — from a military to a quasi-civilian government — is the largest and most encouraging turnaround in the developing world in years.

Much credit goes to President Thein Sein and opposition leader Aung San Suu Kyi for deciding to collaborate in seeking to overcome three huge obstacles to progress in this impoverished and tragedy-prone country: ending the civil war that has been waged since independence, providing a policy and institutional framework that will enable the standard of living to rise rapidly, and exploiting the country’s abundant natural resources in a manner that benefits the whole population.

Responding to the unanticipated and remarkable changes taking place, the World Bank, USAID, and more than 100 other official aid agencies and international non-governmental organizations (NGOs) have flocked to Myanmar to help make the transition a success.

The rush of aid donors to Myanmar is not entirely positive. In the past twenty years, other countries have been “smothered by love.” So far, Myanmar’s aid donors have acknowledged these problems in the past and have committed themselves to adhere to the principles laid out in 2005 in the Paris Declaration on Aid Effectiveness, as well as the updates in Accra (2008) and Busan (2011).

The Myanmar government has also taken note of the problems elsewhere. At an all-donor meeting in January 2013, it got the donors to agree to a set of ground rules to enhance aid effectiveness.

Despite tho se encouraging steps, the makeup of the aid community is likely to produce behavior inconsistent with the Paris principles — thus further complicating Myanmar’s effort to escape its legacy of conflict and stagnation. Donor assistance to Myanmar can do more harm than good in at least four ways:

Senior government officials spend many hours every day meeting with delegations from donor countries, not just their aid agencies but also their parliaments, corporations, international NGOs, media, etc. This stream of visitors is diverting key officials in Myanmar from crucial work on policy formulation and implementation.
Each donor mission is under pressure to “make a difference,” to show its headquarters that it can bring about major improvements that will justify continued funding. USAID is no exception. It has signaled its intention to allocate millions of dollars for its own agriculture sector projects. By contrast, USAID has only committed $600,000 to the multi-donor LIFT Fund, which is a much less burdensome way of delivering aid.
Pressure to accelerate disbursement of project funds is ever-present, making success in this administrative function a major factor in staff promotions. Consequently, building capacity in host-country institutions usually takes a back seat to “moving the money.”
Competition among donors leads to a pattern of non-transparency as each donor seeks to position itself favorably particular sectors or regions. The pattern is reinforced by host country ministries that engage in “donor shopping” to get the most money for the least change.

In our assessment of foreign aid to Myanmar, we have pointed to three steps donors can take to make their aid more effective:

Slow down and do more joint operations. To ensure that senior officials are not overwhelmed by visitors, some host countries have adopted formal limits on the number of aid delegations they will receive. It would be better for Myanmar’s donors to act first to control the flow, including an effort to undertake more joint operations. It would be reasonable for donors to commit at least 30 percent of their funding to these types of operations.
Provide scholarships for foreign study. It will take years for Myanmar to raise the standard of education in its universities to the Association of Southeast Asian Nations (ASEAN) norm, let alone to the prominence it had in Asia when it gained its independence in 1948. To build the expertise Myanmar requires in the short term to meet its development objectives, the only solution is education abroad on a massive scale. One advantage of allocating aid resources to scholarships is that it has the least potential for doing harm.
Be more innovative. A number of techniques for making aid more effective have been proposed since the Paris Declaration was adopted. One of these is “cash on delivery aid.” This technique has the advantage of reinforcing good management within government ministries, minimizing the administrative burden of aid, and ensuring that every dollar of aid goes to support successful projects. None of Myanmar’s donors appear to be using approaches of this kind.

Authors

Lex Rieffel
James Fox

Publication: GlobalPost

Image Source: © Damir Sagolj / Reuters

Too Much, Too Soon? The Dilemma of Foreign Aid to Myanmar/Burma

Lex Rieffel and James W. Fox — Fri, 15 Mar 2013 14:09:00 -0400

INTRODUCTION

At the end of March 2011, Myanmar began an ambitious political transition led by newly elected President Thein Sein. Bold moves in his first year included opening a dialogue with opposition leader Aung San Suu Kyi, suspending construction of the Chinese-funded Myitsone Dam, and abandoning a grossly overvalued exchange rate in favor of a marketdetermined rate. These moves unleashed a swarm of visitors seeking to support the transition and “make a difference”: prime ministers, foreign ministers, heads of donor agencies and international NGOs, chief executives of multinational corporations, and many others.

The question posed in this report is whether the outpouring of foreign aid to Myanmar expected in the medium term (three to five years) will be more of a blessing than a curse. The question may seem unfriendly or ideological on the surface, but merits being taken seriously because of the experience of a handful of countries over the past 10 to 15 years that have suffered from large and rapid build-up of foreign aid.

As posed, however, the question is too stark. A gentler version is: what steps can be taken by aid donors and the Government of Myanmar to enhance the effectiveness of aid programs and projects, and mitigate possible adverse consequences?

Our report begins with a brief discussion of the dilemma of foreign aid to Myanmar: how it can be harmful despite the best intentions of the donors. We then present the policy implications of our findings, for the Government of Myanmar and for the donor community. The next two parts of the report describe the Government of Myanmar’s national planning process and the steps it is taking to manage foreign aid. We then assess donor performance against the principles of the Paris Declaration and the Busan Partnership. The last two parts describe donor activity in general terms and then individually for Myanmar’s major development partners.

We have included four appendices with different audiences in mind. Appendix A describes the historical, political, and economic context for readers who are not familiar with this background. Appendix B elaborates on the standards of aid effectiveness contained in the Paris Declaration and Busan Partnership. Appendix C highlights lessons learned from other countries that have been challenged by strong donor interest. Appendix D recounts newly independent Burma’s first experience with national development planning, featuring the work of the American economist Robert R. Nathan, and calls attention to a comparable Japansupported effort launched in 2001.

We should be clear about the limitations of our report on foreign aid for Myanmar. In particular, our knowledge of Myanmar is limited. Altogether we have spent less than six months inside the country over the past 45 years and we do not speak any of the local languages. Moreover, with our 50-year perspectives on economic development, we know that the world’s leading experts are still unsure how to explain China’s phenomenal progress or Argentina’s lack of progress. These experts are even more unsure about how to adapt lessons from global experience to a country like Myanmar that is undertaking a sweeping reform effort with a legacy of complex internal conflicts and poverty-inducing governance.p>

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Authors

Lex Rieffel
James W. Fox

Publication: Nathan Associates Inc.

An Early Assessment of Foreign Aid to Myanmar

Thu, 14 Mar 2013 15:30:00 -0400

Event Information

March 14, 2013
3:30 PM - 5:00 PM EDT

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

In the past two years, Myanmar has undergone a remarkable transformation: an unanticipated shift from military to quasi-civilian governance, the election of opposition leader Aung San Suu Kyi to the legislature, steps toward peace with ethnic minorities, and economic reforms designed to alleviate poverty. These developments prompted Western countries to suspend or lift wide-ranging political and economic sanctions, which were responses to the regime’s suppression of the democratic opposition and dismal human rights record after 1988. As sanctions were withdrawn, aid agencies and international NGOs rushed to Myanmar to support the Thein Sein government’s reform agenda. The interest in Myanmar among the donor community and the level of aid activity are extremely high, leading some observers to question whether Myanmar is receiving too much attention from the foreign aid community.

On March 14, Global Economy and Development at Brookings hosted a discussion on foreign aid to the new government of Myanmar. Brookings Nonresident Senior Fellow Lex Rieffel and former USAID Senior Economist James W. Fox presented their new report, “Too Much, Too Soon? The Dilemma of Foreign Aid to Myanmar/Burma,” which was published by Nathan Associates. Discussion about the report and broader issues followed the presentation and included: Joseph Yun, acting assistant secretary of State for East Asian and Pacific Affairs, and David Steinberg, distinguished professor in the School of Foreign Service at Georgetown University. Alex Shakow, former USAID assistant administrator for policy and program coordination and former executive secretary of the IMF-World Bank Development Committee, moderated the discussion.

Japan's Big Chance to Contribute

Lex Rieffel — Tue, 05 Mar 2013 10:46:00 -0500

Editor's Note: This piece was originally published in the Financial Times in response to an article titled Bankers Fear Chinese Push to Head ADB, which discusses the departure of Haruhiko Kuroda from the Asian Development Bank.

Sir, The Japanese government has signalled its desire to replace Haruhiko Kuroda as the President of the Asian Development Bank with another Japanese financial figure, thereby maintaining its hold on this position since the bank was established.

If it succeeds in mobilising global support for its candidate, Japan will miss an opportunity to contribute materially both to reform of the international financial system and to regional co-operation in Asia.

The Japanese lock on this position is no more tenable in today’s world than the US lock on the presidency of the World Bank and the European lock on the top job at the International Monetary Fund. The political capital Japan will have to expend to get its candidate selected is unlikely to make the effort pay off.

The best move to advance systemic reform and Asian co-operation is to encourage China to put forward an outstanding candidate and then help to get this candidate approved by the other members. A Chinese president will not be able to “control” the ADB any more than Japanese presidents in the past have been able to. Furthermore, moves of this kind can help China become a more responsible stakeholder in the Asian region and the international financial system.

Authors

Lex Rieffel

Publication: Financial Times

Myanmar: Making the Reforms Count

Tue, 26 Feb 2013 10:00:00 -0500

Event Information

February 26, 2013
10:00 AM - 11:30 AM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue, N.W.
Washington, DC 20036

Myanmar is rapidly emerging from half a century of isolation. Over the last two years, the government has made great strides in political and economic reforms and in improving its diplomatic relationship with the international community. Despite these changes, Myanmar faces many challenges in sustaining the momentum of reform and transformation. In addition, the international community has not developed a strategy for working together to assist the country's progress.

On February 26, Global Economy and Development at Brookings and the International Monetary Fund (IMF) hosted a discussion on the shifting landscape and new challenges in Myanmar as well as the IMF and international community’s role in addressing these. Panelists included: Priscilla Clapp, former U.S. mission chief to Myanmar; Brookings Nonresident Senior Fellow Lex Rieffel; Anoop Singh, director of the Asia and Pacific Department at the International Monetary Fund; and Frances Zwenig, president of the US-ASEAN Business Council Institute, Inc. Vikram Nehru, senior associate in the Asia Program and Bakrie Chair in Southeast Asian Studies at the Carnegie Endowment for International Peace, moderated the discussion.

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Myanmar: Making the Reforms Count

Governance, Rule of Law and Natural Resources in Indonesia and Lessons for Burma’s Transformation

Thu, 07 Feb 2013 10:00:00 -0500

Event Information

February 7, 2013
10:00 AM - 11:30 AM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

An authoritarian state merely a decade ago, Indonesia is now an open, pluralist democracy characterized by consistently high levels of economic growth, a growing middle class and booming foreign investment. Not only is Indonesia geostrategically important in the development of U.S. policy toward Asia, it is also a model for the coexistence of Islam and democracy and a key player in efforts to tackle global deforestation, biodiversity loss and climate change.

On February 7, Brookings hosted a discussion on Indonesia’s natural resources management in the context of the country’s political, economic and rule of law reform efforts, as well as its battle against terrorist groups. The panel also drew lessons for Burma’s political and economic transformation and its management of natural resources.

Brookings Senior Fellow Vanda Felbab-Brown provided insights from her recent fieldwork in Indonesia on illicit economies and organized crime; School of Advanced International Studies Associate Director William M. Wise analyzed the rise of terrorist activity in Indonesia; and Brookings Nonresident Senior Fellow Lex Rieffel discussed how Burma can learn from Indonesia’s economic reforms and management of foreign aid and foreign investment. Senior Fellow Richard Bush, director of the Center for Northeast Asian Policy Studies, provided introductory remarks and moderated the discussion.

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Governance, Rule of Law and Natural Resources in Indonesia and Lessons for Burma’s Transformation

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Transcript (.pdf)

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20130207_indonesia_burma_transcript

Obama in Burma

Lex Rieffel and Yun Sun — Fri, 16 Nov 2012 13:44:00 -0500

Barack Obama will be the first sitting U.S. President to visit Burma/Myanmar since the country gained its independence in 1948. The visit has important implications for U.S. foreign policy toward China and for U.S. foreign assistance to countries in transition from authoritarian to democratic rule.

If anyone had said a year ago to the best foreign policy analysts in China that President Obama would be visiting Myanmar in November 2012, the reaction would have been total disbelief. The same reaction would have come from most Asian experts. Myanmar’s president, Thein Sein, in a near-miraculous collaboration with opposition leader Aung San Suu Kyi, has made the impossible into a reality.

For China, Obama’s imminent Southeast Asia visit is a signal that the “rebalancing toward Asia” strategy that was a hallmark of Obama’s first term will remain a top priority in his second. The countries Obama will visit—Thailand, Myanmar and Cambodia—are considered by Beijing to be “China-friendly” neighbors. Yingluck’s government has rejuvenated Thailand’s relations with Beijing after a period of turmoil. China was Myanmar’s “best friend” during the two decades Myanmar was ruled by General Than Shwe. Cambodia saved China from a major diplomatic embarrassment when it ardently defended China’s position on the South China Sea issue at the ASEAN foreign ministers’ meeting this past July. Regardless of what Washington claims to be its peaceful aims, Obama’s visit to these three countries as his first post-election foreign trip will inevitably fuel anxiety that America’s rebalancing toward Asia is at least partially, if not completely, about curtailing China’s regional influence.

Among the three countries, Obama’s visit to Myanmar will be the one watched most intently by China due to three distinct concerns. One is the evolution of U.S. policy toward Myanmar, especially how rapidly the U.S. moves to eliminate sanctions, ramp up aid to strengthen democratic institutions, and promote foreign direct investment by American companies. A second is any threat to the completion in 2013 of the dual gas and oil pipelines across Myanmar from the Indian Ocean to Yunnan Province in China. A third is the unresolved fate of the Myitsone dam, a large hydroelectric power dam that is under construction on the Irawaddy River in Myanmar. One of President Thein Sein’s early moves was to suspend construction of this Chinese financed and built project designed to export electricity to China. Pressure from the United States might persuade Thein Sein’s government—supported by Aung San Suu Kyi’s opposition party—to terminate not only this project but other hydroelectric dams that China wants Myanmar to build in order to supply China with the energy it needs to fuel its rapidly growing economy. Since President Thein Sein’s inauguration in March 2011, Myanmar has jumped from a pro-China tilt to an ostensibly non-aligned position vis-à-vis the world’s super powers. Any further movement by Myanmar away from China and toward the United States during Obama’s visit will ring alarm bells in Beijing with potentially serious consequences for U.S.-China relations.

The Obama visit to Southeast Asia does, however, complicate the policy challenge of keeping U.S.-China relations on an even keel as China’s economic and political power rises and the global role of the United States remains constrained by domestic problems.

This is not to say, of course, that the United States should prioritize China’s feelings over its own policy objectives in Myanmar. The Obama visit to Southeast Asia does, however, complicate the policy challenge of keeping U.S.-China relations on an even keel as China’s economic and political power rises and the global role of the United States remains constrained by domestic problems.

If President Obama could step beyond his “bubble” and beyond the main streets during his visit to Myanmar next Monday, he would find himself in neighborhoods much like those he ran through while growing up in Jakarta in the 1970s. In some ways, the democratic transition underway in Myanmar today represents a bigger leap than the transitions in East Europe and the former Soviet Union 20 years ago or the transitions in the Middle East that began two years ago. It certainly represents a much bigger leap than the democratic transition that began in Indonesia in 1998.

How the United States can best support Myanmar’s transition is no simple matter and its track record in supporting other transitions is mixed at best. In Indonesia, for example, millions of U.S. tax dollars have been spent since 1998 to strengthen Indonesia legislature and build a first class judicial system. Yet today Indonesia’s legislature is arguably the single biggest obstacle to progress in the country and its judicial system appears to be more corrupt than it was in 1998. Now Congress more than the Obama administration seems eager to allocate millions of U.S. tax dollars to fix Myanmar’s legislative and judicial systems, with the same kinds of assistance used in Indonesia.

Another example is the peace process in Myanmar, the country’s existential challenge. Norway has rushed in to be the lead donor in helping Thein Sein’s government end the insurgencies of a dozen ethnic minorities that started within days of the nation’s independence and have never been resolved. Despite its admirable expertise and its best intentions, some of Norway’s early moves have been ham-handed. Now the United States with a rather dubious record of peace building is starting to weigh in.

The main challenge for the United States in designing a sensible foreign aid program for Myanmar, however, is simply how to “do no harm” at a moment when Myanmar is drowning in offers of foreign aid. The best and brightest in every aid agency in the world are flocking to Myanmar determined to make a difference. With no experience in managing such a range of donors, including international NGOs, and an understandable reluctance to say no to visitors offering aid, senior officials in the Myanmar government are being diverted from the crucial tasks of making and implementing policies. In short, there is a risk that Obama’s visit will raise expectations that the Myanmar government will be unable to meet, which could contribute to some big bumps in the road ahead for the country.

Authors

Image Source: © Stringer . / Reuters

Myanmar’s Aung San Suu Kyi Visits the United States: What Next?

Lex Rieffel — Mon, 17 Sep 2012 12:15:00 -0400

Aung San Suu Kyi’s visit to the United States, beginning September 16, raises a host of interesting issues for U.S. foreign policy. Three in particular are: U.S. relations with China and the other Asian countries, the role of sanctions in promoting democracy and respect for human rights, and how to use foreign aid and foreign investment to advance U.S. interests.

Over the next two weeks, Aung San Suu Kyi will be received royally in in cities across the USA, including New York, Indiana, and California. During three days in Washington, her main appearances will be at the U.S. Institute of Peace on the 18th, the Capitol Rotunda to receive the Congressional Gold Medal on the 19th, and back to the Capitol on the 20th to receive an award from the National Endowment for Democracy.

One particularly delicate aspect of her visit is its impact on an overlapping visit by President Thein Sein who is coming at the end of September to address the U.N. General Assembly. He deserves considerable credit for his bold and forward-looking leadership over the past 18 months, but nothing can be done to prevent his trip being overshadowed by Suu Kyi’s visit. One can only hope that he will be received well enough so that his remarkable collaboration with Suu Kyi will actually be strengthened.

China was Myanmar’s best friend during the 23 years of military rule following the uprising in 1988 that catapulted Aung San Suu Kyi to worldwide fame as an icon of democracy. However, China seems not to have been prepared for the sharp course change since President Thein Sein took office in March 2011, and it has understandable concerns about seeing another thriving democracy on its borders. The U.S. State Department has worked hard to show that the United States wants China to continue having friendly relations with Myanmar, and now it will have to work harder to make this point. But this looks like a manageable issue. Myanmar’s other nine partners in the ASEAN community are generally pleased to see its transition to democracy, but mostly want its economy modernize rapidly.

Analysts and experts are divided over the utility of sanctions in the case of Myanmar and the implications for other governments committing gross human rights violations. Those who advocated tighter U.S. sanctions on Myanmar are convinced that these explain Myanmar’s sharp turn toward democracy. Those who supported the Obama administration’s policy of “principled engagement” (replacing the Bush administration’s hard line policy) are convinced that engagement helped or that the turn can be amply explained by internal factors unrelated to the sanctions. Aung San Suu Kyi’s visit is more likely to muddy the waters on this debate than to shed any light on it.

Responding to the favorable turn of events in Myamar last year, multilateral and bilateral donors, international NGOs and foreign investors are descending on the country in droves. It may not be an exaggeration to say that Myanmar is being smothered with love. The government is being overwhelmed with conflicting advice. Policy decisions essential to economic progress are being delayed by the chaos. Good decisions made are not being implemented effectively because of the limited capacity of the bureaucracy. It remains to be seen whether U.S. assistance will be part of the problem or part of the solution. Getting it right will not be easy because of the American tendency to “do it our way”.

Aung San Suu Kyi’s visit, scheduled during a recess in Myanmar’s House of Representatives where she was recently seated, comes at an awkward time for the United States. Although there is deep bipartisan support for her efforts to bring democracy to Myanmar, the visit could become politicized in the heat of our presidential election campaign. Another risk is that the adulation she will receive during her visit could make it harder for her to make the political compromises in Myanmar that will be required to keep the democratic transition on track.

Above all, Americans should listen carefully to what Aung San Suu Kyi says during her visit. Her suffering at the hands of a repressive regime has been great and her leadership of the fledgling democracy movement has been exceptional. She has ready access to leaders around the world, and she could become a force for resolving conflicts well beyond the borders of Myanmar.

Authors

Lex Rieffel

Image Source: © Damir Sagolj / Reuters

The Myanmar Economy: Tough Choices

Lex Rieffel — Thu, 06 Sep 2012 13:40:00 -0400

OVERVIEW

In its first 63 years as an independent nation, Myanmar (Burma) went from being Southeast Asia’s brightest hope (in 1948) to its biggest embarrassment, through three distinct periods of uninspired or misguided governance.

From 1948 to 1958, the country was a parliamentary democracy based on a U.K.-inspired constitution. From 1962 to 1988, the country was ruled by General Ne Win, who followed a socialist path featuring nationalization, isolation and repression.

From 1992 to 2011, the country was ruled by General Than Shwe, who restored a market-based economy, strengthened the balance of payments by exporting natural gas to Thailand and moved the country along a seven-step roadmap to a “discipline-flourishing democracy.” At the same time, he kept Aung San Suu Kyi under house arrest, drew global condemnation and sanctions from Western nations for gross human rights abuses and continued to wage war against the country’s ethnic minorities.

Pursuant to the 2008 constitution, approved in a national referendum that fell far short of global standards, the country’s first multiparty election in more than two generations was held in November 2010. Although this election was neither free nor fair, it produced a new government on March 30, 2011. Led by President Thein Sein, this government has ended many of the repressive policies of the past and has started to pursue broad-based and sustainable economic growth.

On the political front, the Thein Sein government initiated a dialogue with Aung San Suu Kyi that enabled her party, the National League for Democracy (NLD), to win 43 of the 45 seats filled in the by-elections held on April 1, 2012, including a seat for Aung San Suu Kyi in the lower chamber of the national legislature. The government has released hundreds of political prisoners, granted a high degree of press freedom, taken steps to find a peaceful resolution to the conflict with ethnic minorities and improved relations with other countries to the point where most sanctions have been dropped or suspended.

On the economic front, the Thein Sein government has abandoned the official exchange rate of the kyat fixed at 8.5057 to the SDR since 1977 in favor of a floating market rate. It is taking steps to build a sound banking system, has reduced some of the heavy transaction costs impeding international trade and has suspended construction of the Myitsone Dam in Kachin State because of its potentially adverse environmental and social impacts.

The pace of the ongoing transition to a democratic political system and market-based economy in the first year of President Thein Sein’s five-year term has been breathtaking. The current level of engagement with Myanmar by the diplomatic community, official aid agencies, international NGOs and private investors is already phenomenal and seems far from peaking.

Based on the country’s economic trends of the past year, Myanmar may achieve Vietnam’s current level of development in less than 10 years. My judgment, however, is that Thein Sein’s administration will not be able to maintain this pace. Until now, the administration has been harvesting low-hanging fruit.

Based on the country’s economic trends of the past year, Myanmar may achieve Vietnam’s current level of development in less than 10 years. My judgment, however, is that Thein Sein’s administration will not be able to maintain this pace. Until now, the administration has been harvesting low-hanging fruit. Rapid political, social and economic progress in the years ahead will depend on successfully resolving a large number of challenging policy issues. The aim in this paper is to highlight the main economic issues facing the administration.

Readers should not look for policy recommendations. Thein Sein’s government is being swamped with recommendations from outsiders, and I prefer not to add to the deluge. Instead, I aim to encourage a public debate within Myanmar that will lead to better policy choices and economic outcomes and to help observers outside Myanmar get a better understanding of the issues and options.

Another caveat is that many economists treat policy options in black and white terms: They are only right or wrong. In contrast, the approach taken here assumes that better outcomes can be achieved when policymakers and policytakers understand that every economic policy option has pros and cons, produces winners and losers, and yields unintended consequences. Instead of examining two or three issues in great detail, this paper examines 21 policy issues more broadly. But policy options are inherently complex: Alongside and within each of the 21 issues are a myriad of other fateful choices that are not addressed.

In addition, only a host of good policy measures working in tandem can create 5-6 percent sustainable economic growth for the Myanmar economy. Thus, if 50 good measures are required, as many as 35 or 40 may have to be implemented successfully before a “tipping point” is reached and impacts become mutually reinforcing.

While this paper focuses on policy issues, it is important not to overlook the huge impact the policymaking process has on the choices that are made. Throughout the first year of President Thein Sein’s administration, process has both enabled and hindered progress. On the positive side, the process has helped the government understand the central importance of the exchange rate and to move with impressive speed on this front. Also, a labor law has been passed that could help avoid labor problems as the economy becomes more industrialized. And no really bad decisions stand out in other economic policy areas. On the negative side, weaknesses in the policymaking process have delayed the adoption of measures in the agriculture sector to raise farmer incomes, an essential step in a country where 70 percent of the population is rural. Furthermore, natural resource extraction continues at an unsustainable and even counterproductive rate. For the most part, policy decisions are being made largely in a non-transparent, top-down, discretionary manner as was the practice in previous governments.

To its credit, the Thein Sein government has sponsored and supported a series of workshops and conferences on a wide range of economic issues. These events, which are strongly favored by the donor community, have been helpful in raising public awareness of the issues and moving toward a social consensus on how to approach them. There is some risk, however, that key decision makers are spending too much time in these public discussions. Recent “needs assessments” and “scoping missions” being undertaken by most donors individually are another distraction from the crucial functions of policy analysis, policy presentation and policy implementation.

Another positive step in identifying strong economic policy options was the Thein Sein administration’s creation of the Myanmar Development Resource Institute (MDRI) and its three separate centers: the Center for Economic and Social Development, the Center for Strategic and International Studies and the Center for Legal Affairs. The MDRI serves as an independent source of policy analysis for the government. The Institute is also expected to play an important role in informing the public about policy issues and in training policymakers and policy analysts.

In May 2012, President Thein also announced the formation of a National Economic and Social Advisory Council, which includes union-level and region-level ministers and prominent personalities from the private sector. Indicative of much of the confusion in Myanmar today, however, as of mid-August, no clear description of the mandate of the council or its membership was available in the English language. There is anecdotal evidence that this council will play an important role in reaching a broad social consensus on contentious issues, especially those related to foreign aid and foreign investment.

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Lex Rieffel

Image Source: Damir Sagolj / Reuters

Myanmar’s Economy Confronts Tough Policy Challenges

Lex Rieffel — Tue, 31 Jul 2012 00:00:00 -0400

The global policy community has focused on the political challenges facing the government of President Thein Sein in Myanmar and paid little attention to the economic challenges.

Yet without economic improvements at the grass roots, political progress may founder. Urgent policy challenges confront almost every aspect of the Myanmar economy. Here are the top 10 issues.

The single biggest source of Myanmar government revenue is hard currency earnings from exporting natural gas. A widely held view is that a large portion of these earnings is siphoned off into the pockets of powerful people. The credibility of the Thein Sein administration will depend greatly on how quickly it moves to show that the earnings from natural resource exports are being used for social development purposes. In an encouraging sign, President Thein Sein recently went on record to support Myanmar’s participation in the Extractive Industries Transparency Initiative.

Read the full article on East Asia Forum »

Authors

Lex Rieffel

Publication: East Asia Forum

Image Source: Soe Zeya Tun / Reuters

Spring in Myanmar Leads to a Growing Democracy

Lex Rieffel — Wed, 07 Mar 2012 16:37:00 -0500

One of the most uplifting news stories of 2011 was “the Arab Spring”, but it diverted attention from an equally surprising democratic flowering in Myanmar.

A year later, approaching the spring of 2012, the transitions out of authoritarian rule in Egypt, Libya, Syria and other Middle Eastern countries are looking uncertain. Instead of the easy transitions to democratic rule anticipated by many in America and the West, we are seeing violence and anti-democratic religious fervor. By contrast, democratic rule seems to be advancing by leaps and bounds in Myanmar, and with little violence. Aung San Suu Kyi, the globally admired icon of democracy, is expected to win a seat in the legislature through the by-election to be held on April 1—barely 18 months after being released from more than seven unbroken years of house arrest.

Three differences between Myanmar and the Arab Spring countries help in understanding why—a year into their respective transitions—the prospects for success in Myanmar appear greater. First, the transition to democratic rule in Myanmar was orchestrated by its long-time military rulers instead of being triggered by mass uprisings. Second, Myanmar is located in the middle of the high-growth Asian region. Third, there is a remarkable absence of rancor and revenge in Myanmar. For example, when former Prime Minister Khin Nyunt was freed in January 2012 after eight years under house arrest, he was quoted in the press saying that he bore no grudge against those who took away his freedom.

Myanmar’s political and economic progress in the past year contrasts sharply with its historical legacy of decline, from the East Asian country with the brightest prospects at the end of World War II to one of the lowest ranking countries in the world today by most socio-economic indicators. Inept governance in the presence of longstanding ethnic divisions was at the root of this decline:

Burma became independent from Britain in 1948, six months after the assassination of General Aung San—the father of Aung San Suu Kyi—who led the fight for independence.
A succession of democratically elected governments failed to generate sustainable economic growth or resolve ethnic tensions. General Ne Win staged a coup in 1962, nationalized the economy, drove out the foreigners, and closed the borders.
Aung San Suu Kyi, married and living in England, returned to Burma in early 1988 to visit her ill mother. A few weeks into her visit, a popular uprising forced Ne Win to resign. The new military junta renamed the country Myanmar and held a multi-party election in 1990. Inexplicably, they allowed the party led by Daw Suu Kyi—the National League for Democracy—to win by a landslide. The junta promptly disavowed the results.
General Than Shwe emerged as the unchallenged leader of Myanmar in 1992, ruling whimsically and ruthlessly. He restored the market economy, but was unable to end the ethnic conflicts. The United States and other western nations progressively tightened political and economic sanctions.
In 2004, Than Shwe adopted a “Seven-Step Roadmap to a Discipline-Flourishing Democracy”. One key step was a rigged referendum in May 2008 to approve a new constitution. Another was the multiparty election in November 2010 that produced the present government led by President Thein Sein. But the economy continued to under perform.

After his inauguration, President Thein Sein launched a surprising series of initiatives designed to escape Myanmar’s legacy of conflict and poverty and normalize relations with the West. This outcome begs the question of who deserves the credit.

Supporters of the western sanctions are claiming credit for squeezing the country to a point where it could only save itself by becoming democratic. If the transition in Myanmar had begun after the latest tightening of sanctions in 2008, this claim might be credible but it began four years earlier.

An equally dubious claim is being made by Myanmar’s partners in the Association of Southeast Asian Nations (ASEAN) and by its other Asian neighbors, notably Japan, Korea, and India. They assert that their policies of “engagement” made the transition possible, but their engagement was more rhetorical than substantive.

A more compelling explanation lies in the spectacular economic progress Asian countries have made over the past 30-40 years. After seeing their country fall behind its neighbors when pursuing various unsuccessful development strategies, Myanmar’s military elite seems to have decided to embark on the same path to prosperity that these neighbors took. In effect, President Thein Sein—a former army general—decided in 2011 to make the kind of policy leap that Deng Xiaoping took in China in 1979.

Now the challenge for the United States is to avoid derailing the transition in Myanmar. One mistake could be smothering Myanmar in kindness. Already Myanmar is experiencing the leading edge of what looks like a tidal wave of aid. In these circumstances, it would be especially unwise for the United States to act on its impulse to ignore what Myanmar wants and deliver what the U.S. decides it needs. A smarter approach would be to respond carefully to specific requests from the government of Myanmar and work collaboratively with Myanmar’s Asian neighbors.

Already a victim of unintended consequences several times over, we cannot let the 50-plus million citizens of Myanmar experience another “winter” by overwhelming policy makers and attacking powerful vested interests too quickly.

Authors

Lex Rieffel

New World Bank President? Another Tough Choice for Obama

Lex Rieffel — Tue, 20 Sep 2011 09:33:00 -0400

Robert Zoellick’s five-year term as president of the World Bank ends next year on June 30. Selecting someone to replace him will be one of the biggest global governance issues in 2012.

The U.S. position on this issue is key, because every president of the World Bank since it was established in 1945 has been an American. This practice is half of a deal made when the International Monetary Fund (IMF) and World Bank were founded -- the other half called for every leader of the IMF to be a European.

As rising powers like Brazil, China, India, and other emerging market countries have advanced economically, they have challenged this leadership deal with increasing fervor. We are now at a point where substantial amounts of political capital must be spent to ensure that American and European candidates continue to monopolize these positions, and each successful replacement engenders more resentment in the rest of the world.

The force of this issue was seen earlier this summer when the managing director of the IMF, Dominque Strauss-Kahn, resigned in response to a sex scandal. The Europeans immediately waged a full court press to have French Finance Minister Christine Lagarde appointed as his successor. Most development assistance experts in the economically advanced countries joined with the governments of emerging market countries in favor of appointing a non-European. A highly qualified candidate from Mexico, Agustin Carstens, was formally nominated, but the vote in the Executive Board of the IMF was overwhelmingly in favor of Lagarde. This occurred, in large part, because the 27 member countries of the European Union hold 28 percent of the votes, but also because the emerging market countries failed to rally behind Carstens -- seemingly for narrow political reasons.

Following long-established practice, President Obama will be expected either to endorse Robert Zoellick for a second five-year term or nominate a replacement. Unless the emerging market countries can quickly unite behind a single candidate, Obama’s choice is likely to prevail, but at a cost in two forms. First, respect for the United States as a “responsible stakeholder” in the global system will diminish (borrowing the phrase coined by Zoellick for China several years ago). Second, political and financial support for the World Bank from other countries will slacken, which will make the Bank less effective in meeting the global challenges of poverty, conflict, and climate change.

Zoellick has a decent record as president of the World Bank, especially in repairing the damage done by his predecessor, Paul Wolfowitz, who was forced to resign as a result of several missteps including his relationship with a female member of the Bank’s staff. Nevertheless, if President Obama were in a strong political position, he certainly would not propose Zoellick for a second term, as Zoellick was nominated for the World Bank presidency in 2007 by George W. Bush after being a key operative in three Republic administrations.

Now Obama is in a lose-lose-lose position. He might use the reappointment of Zoellick as a bargaining chip with the Republicans in Congress, but it would cost him support in the Democratic Party. He could nominate a Democrat with political experience comparable to Zoellick’s, but he would pay some price from Republicans whose support he needs in Congress. He would probably be viciously attacked by partisans in both parties, if he opts for an open selection process that culminates in the appointment of the first non-American president of the World Bank—even though this outcome is arguably in the long-term interest of the United States.

One way of avoiding this trilemma is a one-year extension of Zoellick’s presidency. This option might be well received by the international community, would prefer not to see this position become part of an American game of political football. If Zoellick were to decline the offer, one of the three managing directors of the World Bank might become the acting president. They are Sri Mulyani Indrawati from Indonesia, Mahmoud Moheildin from Egypt, and Caroline Anstey from the United Kingdom.

If Americans on both sides of the political spectrum pulled together to maintain the leadership position of the United States in global affairs, they would see the benefits that could be gained by having Barack Obama take the bold step of throwing open the position of World Bank president to candidates of all nationalities. He could then nominate an outstanding American—a Republican even—who might be more widely supported than the non-Americans who may be nominated.

Let’s hope that Obama does not feel forced to use the World Bank presidency as a bargaining chip with the Congress. It would be the worst possible outcome for the United States in the long run. As is so often the case, the best outcome seems to be politically infeasible. Second best, in this case, would be an open process with an American nominee who prevails in the absence of an emerging market nominee able to command broad support among the other 186 member countries.

Authors

Lex Rieffel

The United States Should Wish Bon Voyage to the World Bank

Lex Rieffel — Fri, 16 Sep 2011 11:34:00 -0400

The global rise in prosperity and personal freedoms over the past 65 years has been an immense human achievement despite a string of horrible regional conflicts and pockets of terrible suffering.

Three pillars of the economic architecture created after World War II were instrumental in this record of success: the International Monetary Fund, the World Bank and the General Agreement on Tariffs and Trade (or GATT, which evolved into the World Trade Organization, or WTO). All three have been criticized for decades by one political group or another, and they remain controversial — but it cannot be true that the world would be better off today if they had never been established.

Moreover, the latest “Four Horsemen of the Apocalypse” — climate change, food security, infectious disease and urban youth unemployment — are rapidly approaching. It is hard to believe that the seven billion people living in 200 nations on earth today will be successful in holding them off without strong global institutions like the IMF, the World Bank and the WTO.

But are these institutions ready to meet the challenge? The answer from most analysts is “No,” and since the global financial crisis erupted in 2007, the calls for reform have escalated sharply.

Most of the proposed reforms focus on governance, especially reducing the dominant position of the United States and the European Union and giving the rising powers such as Brazil, China and India more of a stake in these institutions. However, there is one other way of strengthening these institutions that is rarely mentioned and merits consideration.

While the WTO is based in Geneva, Switzerland, both the IMF and the World Bank are headquartered in Washington, D.C. The time has come to move at least one of them out of the United States.

There are three compelling reasons for doing so:

Co-location in Washington has contributed to the almost universal perception that there is no significant difference between the IMF and the World Bank. They work so closely together and have so many overlapping activities that they look like conjoined twins. Their missions, however, are fundamentally different. Separation could make each one more effective.

The world is no longer U.S.-centric. As we iterate toward better forms of global governance — such as the shift from G7 summits to G20 summits — broad international support for the IMF and World Bank will depend on changing the widespread belief that they are instruments of U.S. policy. Moving one of them out of the United States would be a powerful symbolic step toward a global governance system that has broader legitimacy.

Until recently, Washington offered lifestyle advantages (such as access to high-quality education) that few other countries could match for attracting an international staff with the peerless expertise these institutions require. Now there are dozens of cities outside the United States offering comparable attractions. Moreover, high-speed Internet and other essential technologies are equally available in these cities.

Of course there are strong arguments for keeping both the IMF and World Bank in Washington, but to simplify the discussion, and assuming for the moment a general agreement to separate them, which of the two institutions should be moved — and to where?

Moving the World Bank makes much more sense than moving the IMF. In particular, the World Bank has no mandate to carry out operations in the United States. In contrast, the most important function of the IMF — which shockingly few people understand — is to assess the economic policies of the countries that play the largest roles in the international monetary and financial systems. As long as the United States has the world’s biggest economy and its deepest financial markets, it makes sense for the IMF to be based in the United States.

Because the World Bank’s operations are overwhelmingly in developing countries, a case can be made for moving the World Bank to Africa, Asia or Latin America. However, putting the World Bank headquarters in one of these regions would not sit well with the two others.

Europe, in contrast, offers numerous advantages. In particular, the European time zone has proven to be the best location for organizations that operate globally. Only there does the business day overlap with normal working hours in the rest of the world. Furthermore, support for the World Bank is broader and deeper in Europe than in the United States.

On the other hand, moving the World Bank to Istanbul in Turkey — the most obvious bridge between the West and the rest — has considerable appeal. So does Johor in Malaysia, a bridge away from Singapore.

If rated by a global panel of experts, however, Spain has two cities — Barcelona and Madrid — that look as though they would score higher than any others in Europe or elsewhere. One big advantage is that the World Bank’s Latin American members would gain a Hispanic host in exchange for losing one that is much closer. The other big advantage is that neither of these cities is currently hosting a major multilateral organization, unlike obvious alternatives like Paris and Rome.

The biggest obstacle to moving the World Bank out of Washington is the veto power that only the United States wields. While extremists exist in both political parties who, for different reasons, would like to see the Bank closed down, Republican and Democratic leaders in Congress can be counted on to attack vigorously the idea of moving it. Furthermore, the White House would be hard-pressed to justify expending any political capital on this issue with a dicey general election only 14 months away.

Although re-locating the World Bank is a political non-starter in the near term, none of the arguments for keeping the World Bank in Washington is compelling. So it is not too early to examine these arguments and begin a scholarly debate.

First, many supporters fear that the U.S. Congress will cut World Bank funding sharply if it leaves Washington. While such a reaction would be contrary to long-term U.S. interests, it is easy to imagine this result given the country’s current political mood. However, the United States has constrained funding increases for the Bank for more than a decade, and it is entirely possible for Europe and countries like China and Brazil to offset any reductions in U.S. funding.

Second, a move out of Washington could lead to a loss of control over the operations of the World Bank by the United States. However, a substantial reduction in U.S. influence in the years ahead is inevitable, regardless of where the Bank is headquartered. The odds are strong that the emerging-market countries will gain influence as their share of global economic output grows and as the U.S. share of the global population — already less than 5% — shrinks further.

Third, the World Bank’s departure from Washington would have a negative impact on the regional economy, including more unemployment. There is no way to avoid this impact, which would extend well beyond the Bank’s employees to a large number of well-paid contractors. But because the Bank occupies prime real estate in the heart of our nation’s capital, it should be easy to sell the Bank’s buildings. Moreover, putting these properties back in the private sector would boost local tax revenues since the World Bank — like foreign embassies — is exempt from taxes.

Fourth, the costs of moving the World Bank to Europe would be great. While it is true that the costs would be substantial, some of the biggest costs associated with similar moves in the past (like the construction of new buildings) have been underwritten by the host country, anticipating the large economic benefits over many years from gaining an employer of thousands of people. Furthermore, the Bank is already in the process of decentralizing staff to its regional offices, and the residual costs could be mitigated by stretching out the move over five or more years.

Fifth, easier and more important steps can be taken to strengthen the World Bank, such as ending the practice of always having an American president and instead appointing an outstanding individual from the developing world. Yes, steps of this kind can and should proceed without delay, and opening a debate on the pros and cons of separating the World Bank from the IMF need not slow them down.

Realistically, only the United States can initiate a serious debate about moving the World Bank to Spain or some other location. No other country would be foolish enough at this moment to challenge the United States on an issue that could offend national pride.

Launched at the right moment, however, a U.S. initiative could pay rich dividends. In particular, by enhancing the Bank’s legitimacy, it would help to make the World Bank more effective in meeting the global challenges that are likely to become more difficult in the years to come.

Above all, a U.S. initiative to consider moving the World Bank out of Washington is the kind of knock-your-socks-off gesture required to convince the world that the United States is looking beyond its short-term self-interests and sees the long-term benefits of making our global institutions look and feel more global.

Authors

Lex Rieffel

Publication: The Globalist

An International Financial System Adrift and Imperiled

Lex Rieffel — Fri, 12 Aug 2011 13:36:00 -0400

"None of the mature democracies in the world have come close to a sovereign default in the Bretton Woods era." —From Restructuring Sovereign Debt: The Case for Ad Hoc Machinery (Brookings Institution Press, 2003)

What was true then is not true now, and the world is worse off because of it.

In the primer on sovereign debt restructuring that I wrote eight years ago, I gave three reasons for why mature democracies had become immune to default: they had deep domestic capital markets (allowing them to sell bonds denominated in their own currency to foreigners); they had political systems that facilitate smooth transitions from one government to another; and they had an abiding nation-wide commitment to macroeconomic stability.

The first two reasons remain valid, but two elements of the essential commitment to macroeconomic stability have been lost since the Global Financial Crisis in 2007-08: monetary discipline and fiscal discipline. Monetary discipline assures households and businesses that their savings and investments will not be wiped out by inflation. Fiscal discipline avoids a debt build-up that will become burdensome to future generations. The mature democracies in Europe, the United States, and Japan have largely succeeded in suppressing inflation, but they have allowed their public sector debt to balloon to unsustainable levels.

Clearly, they knew better. When the European Union started down the path toward monetary union in 1992, the member countries committed to keeping their annual budget deficits below 3 percent of GDP and their stock of public sector debt below 60 percent of GDP. If the mature democracies had respected these limits, they would not be in the fiscal pickle they are today.

There is no simple explanation for why the mature democracies went off the fiscal rails. In some countries, aging populations could be the main cause. In others, extreme polarization of political opinion seems to have eroded the necessary social consensus. Perhaps the war on terrorism threw the whole global economy off-kilter. Or maybe the core problem was an international monetary system that allowed emerging market countries to maintain undervalued currencies. This undervaluation, combined with sharply lower barriers to international trade and investment, may have led to shrinking employment in the manufacturing sectors of the mature democracies, which could not be offset fast enough by new jobs in the service sectors.

Regardless of the causes, it looks as though it will take years -- if not a generation -- for the mature democracies to achieve and sustain the budget surpluses required to bring public sector debt back to comfortable levels.

Still, this dismal outlook might not be the worst consequence of the debt crises in the U.S. and Europe. A greater concern could be that the world is just a small step away from not having a “risk-free” financial asset, leaving global markets adrift like a sailboat in the ocean that lost its keel.

Arguably, the health of the international financial system depends on the quality of its single most important product, the U.S. Treasury bond. While understanding that all financial assets have some risk, for decades market participants have viewed U.S. Treasury bonds as being “risk free” because no other financial asset appeared less likely to experience a default. All other bonds are issued in primary markets and traded in secondary markets at a premium (the “spread”) to U.S. Treasury bonds, which reflects the market’s perception of their greater risk of default.

If markets instead believe that the risk of default on U.S. bonds will rise and fall with the political and economic winds of the day—as it does with corporate bonds or emerging market bonds—then the impact will be debilitating for households and businesses around the world. In particular, both domestic and international investment will be depressed and as a result trade will languish and fewer jobs will be created. The loss of global GDP could be in hundreds of billions of dollars every year until fiscal discipline is restored in the mature economies.

Can rising powers like China and India provide an alternative risk-free asset? No they cannot. They may score well on their commitment to macroeconomic stability, but it is likely to take more than one generation for them to have deep capital markets and smooth political successions comparable to what the mature democracies have today.

It is impossible to put a value on preserving the role of U.S. Treasury bonds as the world’s benchmark risk-free asset — or their close rival Euro bonds. If the political leaders in the United States and Europe cannot do a better job of restoring confidence in their sovereign debt, then our children and grandchildren will suffer the consequences.

Authors

Lex Rieffel

Is This a Meaningful Milestone for Myanmar/Burma?

Lex Rieffel — Tue, 05 Apr 2011 10:58:00 -0400

Myanmar has a new government as of March 30. But the people who insist on calling the country Burma—the name given by its British colonial rulers—also insist that nothing has changed.

With so many more urgent matters to attend to, at home as well as overseas, it is worth asking why Americans care about what the country is called or whether General Than Shwe—who has ruled the country since 1992—is less in control of the country today than a month ago.

The simple answer to why Americans care about this long-suffering country of 50 million people is Aung San Suu Kyi—one of the most recognizable and admired personalities on the world stage today. In 1990, the generals who preceded Than Shwe made an astonishing mistake: they allowed the party led by Aung San Suu Kyi to win a national election by a landslide. Then they compounded the mistake by disavowing the results of the election and keeping Daw (the standard honorific in the Burmese language for an older woman) Suu Kyi under house arrest for most of the past 20 years.

Even worse, although Than Shwe sensibly abandoned the socialist economy of his predecessors and started opening the economy to international trade and investment; military units under his command committed human rights violations from one end of the country to the other; he presided over the destruction of a once fine education system; he neglected the public health care system; and he brought the agriculture sector to the verge of crisis. Today Myanmar is one of the poorest, unhealthiest, most miserably governed countries in the world.

However, every story has two sides. By comparison with Egypt’s Mubarak and Libya’s Qaddafi, Than Shwe seems to be managing the process of succession rather well. Back in 2003, he approved a seven-step roadmap to a “discipline-flourishing democracy.” Remarkably, the first six steps were carried out in sequence and the last step is now the task of the new civilian government (admittedly dominated by retired generals). The Constitution of 2008—drafted by a National Convention with no effective civil society input and approved in a blatantly rigged referendum—nevertheless introduced two remarkable changes. First, in addition to a bicameral national legislature, it created assemblies for seven regions (for areas with ethnic Burman majorities) and seven states (for areas dominated by ethnic minorities). Second, it enabled winning candidates from opposition parties to be seated in all of the national and sub-national chambers.

When the “new government” was sworn in on March 31, Than Shwe was no longer the commander-in-chief of the armed forces and no longer in uniform. He announced that henceforth he should be addressed as U (the standard honorific in the Burmese language for an older man) Than Shwe. So far, it looks like a pretty smooth transition to a new generation of leaders.

Than Shwe was also so successful in developing the country’s offshore gas fields that the country’s foreign reserves have soared from almost nothing a decade ago to a comfortable level today equivalent to more than seven months of imports. And parallel oil and gas pipelines are now under construction across the heart of the country—from an Indian Ocean port to China’s Yunnan Province—that are expected to more than double the government’s hard-currency export earnings.

There is much more to both sides of the story, but the bottom line is that Americans care about Burma because Aung San Suu has been denied the victory her party won in 1990 and because she and more than two thousand political prisoners, and indeed most of the rest of the population, have suffered horribly under Than Shwe’s whimsical and tyrannical approach to governance.

And now we are witnessing a mind-numbing debate between the proponents of tightening sanctions on the new government of Myanmar and proponents of taking steps to normalize relations with it (as long as it avoids committing new crimes against humanity).

The unvarnished reality, however, is that it does not matter whether the United States imposes more sanctions or pursues more engagement. The United States is too far away and Myanmar is considered too inconsequential in the current global context.

Sitting in the heart of Southeast Asia, strategically between China and India, Myanmar’s future will be shaped by its relations with these rising powers and with its partners in the 10-nation ASEAN Community. And the United States has some long-term interests in Asia that will not be sacrificed in a vain attempt to export democracy to Burma and make Aung San Suu Kyi the country’s leader.

The best strategy the United States could adopt to alleviate the suffering of the people of Myanmar may well be to align itself with the Asian countries—neighbors and partners—that have the most to gain from seeing Myanmar follow the path toward prosperity and democracy that they have followed so successfully.

Authors

Lex Rieffel

Europe’s Fast Track into the Third World

Lex Rieffel — Wed, 08 Dec 2010 11:29:00 -0500

The sovereign debt crisis in Europe has sparked a heated debate about how to finance rescue packages without creating incentives for fiscal misbehavior by EU member governments and how to place some of the bailout burden on private investors who buy the sovereign bonds of countries running unsustainable budget deficits.

While the debate on financing rescue packages seems to be moving in a sensible direction, however, the debate on “bailing in” bond investors could lead to a deeply damaging result.

Starting with the rescue operation for Greece in May, and more recently for the bailout of Ireland, the EU has created a funding mechanism—the European Financial Stability Facility—in a form that has worked well in resolving sovereign debt crises in emerging market countries for 30 years. The EFSF is a pool of official funding with disbursements linked to policy reforms (conditionality) negotiated with the International Monetary Fund and the stricken country’s EU partners. The debate here revolves around the size of the pool, allocating country contributions, and embedding the mechanism in the EU treaty. A workable solution seems well within reach.

The issue with bond investors is reminiscent of the debate a decade ago about “private sector involvement” in emerging market debt crises, such as Argentina’s massive default at the end of 2001. Private investors—not just banks and institutional investors but also many “innocent” households—had been purchasing emerging market bonds because of their high yields. The yields were high because the risks of default were elevated. Thus, when some of these countries defaulted, it made sense for the bondholders to take a “haircut” in the form of a reduction of principal or interest. An important precedent here was the Brady Plan that resolved the 1980s debt crisis by negotiating write-downs on the excessive commercial bank lending that had contributed materially to the defaults.

The problem with using this “bail-in” approach in the EU context is that it would in effect transform the advanced democracies of Europe into Third World countries.

The mess in Europe is not the fault of bond investors. They simply believed the claims of the Eurozone governments that a workable monetary union had been created. The responsibility to make it work lay with the participating governments, not the private investors. The problem arose because the governments let down the investors, not because the investors sabotaged the governments.

Otmar Issing, the distinguished former member of the European Central Bank’s executive board, is one of the leading proponents of haircuts for the investors in bonds of European countries that need to be bailed out of a financial crisis. In a Financial Times op-ed last week, Mr. Issing advocated creating a debt restructuring mechanism—targeting private bond investors in particular—as part of the EU’s new crisis resolution arrangement.

Creating a mechanism to impose haircuts on bondholders is tantamount to saying that the monetary union has failed. It cannot be reconciled with the vision of a sustainable monetary union.

The EU made a terrible mistake. It allowed its own fiscal rules to be breached by too many countries without convincing corrective measures. Now the EU has only two real choices. It can pay the price for affirming the original vision of a zone offering a virtually risk free sovereign bond benchmark for its capital market—because of the firm commitment of its members to maintain sound macropolicies. Or it can abandon the vision in an orderly manner by pushing overly-indebted members out of the Eurozone.

Trying to muddle through this is likely to lead to the breakup of the Eurozone by default, leaving potentially deep and long-lasting scars extending beyond Europe and into the international financial system.

Authors

Lex Rieffel