ECONOMICREFORM

Feature Service
September 17, 2012

Center for International Private Enterprise

How to Sustain Burmas Path Towards Democracy: The Need for Institutional Reform
John Morrell Asia Program Officer Center for International Private Enterprise

Article at a glance
Burmas transition to democracy will prove unsustainable without substantive changes to the countrys political, administrative, and economic institutions. Economic growth must be widespread and economic opportunities arise for more than the well-connected few if democracy is to succeed in Burma. The Burmese government and its partners in the international development community must prioritize the development of durable, reliable and politically independent institutions.

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Center for International Private Enterprise

Center for International Private Enterprise

How to Sustain Burmas Path Towards Democracy

In his speech at the July United States- Association of Southeast Asian Nations (ASEAN) Business Forum in Siem Reap, Cambodia, Burma President U Thein Sein explained that Burma has embarked on a democratic path and is moving toward a new democratic era.1 He went on to outline the reform efforts his country is presently undertaking, efforts that give reason for optimism following Aprils dramatic electoral victories of Aung San Suu Kyi and the National League for Democracy. In addition to promises of regular and free elections, increased media freedom, and constructive engagement with leaders of ethnic minorities, President Thein Sein announced plans to transform [Burmas] centralized economy into a market-oriented economy.2 At this same event, U.S. Secretary of State Hillary Clinton said that President Thein Sein is a leader who has moved his country such a long distance in such a short period of time. Recent events and statements from the countrys leaders do indeed give reason for optimism that Burma will continue these efforts to introduce democratic governance and genuine economic freedom. However, Burmas transition to democracy will prove unsustainable without substantive changes to the countrys political, administrative, and economic institutions.

A market economy is a competitive economic system in which the rules are the same for all participants, and in which the rules are equally applicable to and enforced on all participants. These rules or institutions of markets provide confidence to market participants and reduce the costs of completing transactions. Reliable market institutions make possible the emergence of economic activities beyond short-term, personto-person transactions toward longer-term, largerscale and sustainable exchanges. This economic evolution engenders greater specialization, economies of scale, and innovation. In a truly free market economy, a competitive private sector injects dynamism into political discourse and both encourages and rewards entrepreneurship, which, in turn, fosters a political culture of citizen activism and leadership societal characteristics conducive to democratic consolidation. Moreover, the economic opportunities that arise from free markets support the growth of a countrys merchant class and the expansion of a countrys demand for all types of labor, thereby reinforcing democratic reforms by providing higher living standards.

Institutional constraints in Burma

Efforts to substantively reform the Burmese economy face myriad challenges and entrenched obstacles. The business sector in Burma is hindered by poor infrastructure and distribution networks, widespread corruption and shortages of capital. The weakness of the private sector relative to stateowned enterprises (SOEs) and state-supported enterprises in Burma is also among the paramount obstacles to the development of genuinely free and competitive markets in the country. The central government directly controls many key economic sectors, including mining and power, and state-owned firms dominate other sectors such as transport, manufacturing and trade particularly of commodities. The military controls extensive business interests as well, in sectors including

The role of institutions in democratic and economic development

Institutions are the humanly-devised constraints in which all political, social and economic interaction takes place.3 These institutions include formal laws and regulations, administrative bodies with legal authority, civil sector organizations that protect and advocate for their constituents interests, as well as cultural norms and other unwritten rules. In other words, a countrys institutions constitute the rules of the game that govern and influence the decisions made by individuals, businesses and governments.

How to Sustain Burmas Path Towards Democracy

Center for International Private Enterprise

gems and logging, through military-backed (and often military-owned) holding companies such as Union of Myanmar Economic Holdings, Myanmar Economic Corporation, and the Htoo Trading Company. The new government does intend to launch a privatization program, but the results of similar programs undertaken by the previous government were, at best, modest. If future privatization efforts are not implemented with utmost transparency and genuine competition, state holdings will simply be transferred to wellconnected insiders. To its credit, the government has taken some important steps to promote private investment and to attract foreign capital. These steps include reforms to the countrys byzantine exchangerate system, the complexity and distortedness of which not only gave rise to an enormous informal currency market but also provided hidden subsidies to SOEs. The drafting of foreign investment laws are also underway and capital controls are expected to be relaxed. Financial service firms and commercial banks from other ASEAN nations, such as Cambodias ACLEDA Bank, are looking to aggressively expand into Burma. This would fill an enormous void as Burma has a very limited banking system that is largely inaccessible for much of the country. Moving forward, a successful and sustainable transition in Burma requires that economic growth be widespread and that economic opportunities arise for more than the well-connected few. Additionally, commercial successes must be experienced across all of Burmas ethnic groups if the country is to prevent a re-eruption of anti-Chinese public sentiment along the lines of the 1967 riots, which were partly fueled by economic grievances. However, numerous key institutions that are necessary for the realization of this goal are either weak or completely missing in Burma today. If these institutions, which are fundamental for the development of a market economy, are not substantively reformed and strengthened in Burma,

A successful and sustainable transition in Burma requires that economic growth be widespread and that economic opportunities arise for more than the wellconnected few.

its economic and democratic transition will prove unsustainable.

Key market institutions4

Property rights Secure private property rights, and the legal mechanisms to uphold these rights, are a core institution of any free-market democratic system. Not only do private property rights incentivize property owners to invest and improve their assets, they help protect the civil liberties and personal security of individual property owners.5 In a genuinely democratic society, the government does not possess unchecked control of all economic resources and citizens are protected against property expropriation without due process. As countries transition away from centralized, command-and-control economic policies, market forces often drive up the value of real estate and other forms of property. If private property rights are not protected and enforced by law, corrupt officials and their crony business partners will be presented with tremendous rent-seeking opportunities. For in emerging markets across the globe, increases in property values are often accompanied by a rise in illegal seizures of private property. With an influx of private investment, what was once farm land of limited commercial value becomes a potential location for a factory or an export processing zone. Corrupt officials seize the land, providing negligible (if any) compensation to the legal property owner, and then re-sell that land to investors at an

Center for International Private Enterprise

How to Sustain Burmas Path Towards Democracy

enormous profit, much of which winds up in the pockets of the officials that seized it. As reported by The Irrawaddy and other media outlets, along with international observers and human rights advocates, such cases of these land-grabs are becoming increasingly common in Burma. Farmers and their families are being forcibly moved for major projects, such as the oil and gas pipelines being built through the country from the Bay of Bengal to the Chinese border, and for smaller industrial projects by firms with long crony links to the military.6 To counter this alarming development, legislation must be in place to ensure that such violations of private property rights and other forms of economic predation are unambiguously illegal. Citizens must also be made aware of their legal rights and the legal recourses available to them when their rights are violated. For when legal protection is out of reach for the majority of the population and when rules are enforced arbitrarily, abuse thrives and democracy cannot flourish.7 Business associations Business associations, including chambers of commerce and trade associations, represent an important segment of society and are crucial for encouraging inclusive economic growth, development and prosperity. Associations also play a key role in defending the rights of independent private businesses, especially in corrupt societies, and can bolster the ability of private enterprises to grow, develop, and create jobs. Through voluntary associations, the private sector can voice the legitimate needs of businesses while engaging in an open, transparent policy reform process. 8 Building the capacity of such civil sector institutions will be necessary if independent entrepreneurs are to be able to establish, operate and grow viable private enterprises in industries across the Burmese economy.

If this progress is to prove sustainable, the Burmese government and its partners in the international development community must prioritize the development of durable, reliable and politically independent institutions.

Secure contracts Reliable contracts facilitate exchanges and investments on a national scale, even between strangers. The assurance that contracts will be honored forms a basis for a wider circle of trust in economic transactions. Laws and courts guarantee the sanctity of contracts. Reliable and fair commercial arbitration mechanisms incentivize private investment as investors and entrepreneurs have greater predictability and stability. At present, Burma has no independent mechanism for commercial arbitration. In a country with a legacy of nationalizing foreignowned property, such institutions must be in place if Burma is to attract international investment to manufacturing, construction and service provision. Moreover, entrepreneurs and private investors, be they Burmese or foreign, must be able to protect themselves against unfair and often illegal practices of state-owned and/or military-backed competitors. Freedom of entry and exit Free markets are competitive and open to new entrants. Government does not restrict entry through excessive regulation or official monopolies, nor are private producers allowed to stifle competition. Barriers to entry are removed, anti-trust laws enforced and preferential treatment eliminated. Bankruptcy laws place limits on entrepreneurs liability and grant protection to creditors.

How to Sustain Burmas Path Towards Democracy

Center for International Private Enterprise

Developing a modern and comprehensive commercial legal code and regulatory structure is necessary if Burma is to attract private investment in non-extractive industries and encourage independent grassroots economic activity. Freedom of information In a market economy, government is transparent about policies and does not restrict the flow of economic information. Businesses, the media, civil society organizations, and citizens have access to economic information as well as knowledge of policies, rights, and regulations. Burmas new government has made substantial progress on this front by taking important steps towards relaxing regulations on media and telecommunications. In his aforementioned speech, President Thein Sein committed to enacting a media law for media freedom and transparency in the near future. A major test of the new government will be whether or not it allows private businesses and independent entrepreneurs to demand transparency of the finances and operations of state-owned and military-backed enterprises. Rule of law All of the above market institutions are backed by the rule of law. In a democratic society based on political and economic freedom, laws must be enforced consistently and fairly, and citizens, entrepreneurs, and property owners must have equal protection under the law. In Burma, the judiciary has been nominally outside of military control since civilian courts were fully reinstated in 1992. But most judges still have military backgrounds. A March 2012 United Nations report on human rights in Burma noted that the country lacks an independent, impartial and effective judiciary.9 Another test of the new governments commitment to reform is whether it will support the development of a professional and independent judiciary. Because government promises of legal due

process and toleration of public dissent are only as good as the underlying judicial system entrusted to uphold the rule of law. Unfortunately, the present constitutional structure will greatly encumber efforts to build a such a judiciary in Burma. For while the 2008 constitution requires the President to submit his nominees for judgeships to Parliament for approval, the constitution also states that Parliament shall have no right to refuse the person nominated by the President for the appointment of Chief Justice and Judges to the Supreme Court10 and there are no specific constitutional mechanisms to prevent political interference.

Strengthening democracy in Burma through institutional reform

Institutional reforms are about getting incentives right. Individuals everywhere respond to benefits and costs in their environment, and a countrys institutions drive these expected costs and benefits. In the words of Nobel Laureate Douglass North, institutions determine payoffs.11 Citizens and entrepreneurs must be given good reasons to participate in markets and democratic processes, reasons that make sense to their personal well-being. When strong democratic and market incentives prevail, the cumulative energy of individuals can be channeled to advance national development.12 In a free-market economy, firms and entrepreneurs are incentivized by competition and market forces to innovate, employ skilled labor and become more efficient. Likewise, in a democratic society, public dialogue and political conditions provide public officials with clear incentives to improve service quality and government performance. Both free-market economic systems and democratic political systems require the institutions outlined above to function properly, fairly and predictably. These institutions bolster the maturation and consolidation of democratic practices and principles in a society such as free competition, free movement, free association, free choice and free speech.

Center for International Private Enterprise

How to Sustain Burmas Path Towards Democracy

The actions of Burmas new government to reintroduce democratic practices in a country nearly a half-century removed from its last democratic government have been remarkable. In addition to the encouraging reforms mentioned above, the national budget was publicly debated for the first time in Burma during the most recent session of Parliament. Significant legislative reforms undertaken by the government include the adoption of the Labor Organizations Law and the Peaceful Demonstration and Gathering Law, as well as the amendment to the Political Party Registration Law. There are other encouraging laws currently under preparation, including a revised Prisons Act, a media law and a social security law, among others. President Thein Sein is working with MPs affiliated with the National League for Democracy to fight corruption by requiring all government officials to publicly declare their assets. So while some debate persists as to the actual extent of Burmas commitment to democratic reform, U.S. President Barack Obamas May 2012 statement13 that President Thein Sein, Aung San Suu Kyi and the people of Burma have made significant progress along the path to democracy is inarguable. If this progress is to endure beyond the term of any particular political leader, and if this progress is to prove sustainable, the Burmese government and its partners in the international development community must prioritize the development of durable, reliable and politically independent institutions. Without these institutional reforms that fundamentally change the economic and political operating environment in Burma, no amount of foreign aid or technical assistance will have a lasting impact. As Larry Diamond explained in a July interview, Burmas transition is still very much in an early stage. Nevertheless, he went on to note that while this democratic transition is only incipient at best, it is exciting that the process has begun. 14

Endnotes
Statement of U Thein Sein, President of the Republic of the Union of Myanmar, delivered at the US-ASEAN Business Forum, 13 July 2012, Siem Reap, Cambodia 2 Ibid 3 North, Douglass. Institutions. Journal of Economic Perspectives, volume 5, issue 1, 1991 4 For more on this, see The CIPE Guide to Governance Reform, published by the Center for International Private Enterprise (www.cipe.org) 5 Sullivan, John D. et al, The Importance of Property Rights to Development. SAIS Review vol. XXVII no. 2, 2007 6 Boot, William. The Irrawaddy. 15 May 2012 7 Nadgrodkiewicz, Anna. Property Rights, Development, and Democratic Transitions: The Path Ahead. Center for International Private Enterprise, April 2012 8 For more on this, see Impact on Reform: Business Associations. Center for International Private Enterprise (www.cipe.org) 9 Progress Report of the Special Rapporteur on the Situation of Human Rights in Myanmar, United Nations Human Rights Council, Nineteenth Session, 7 March 2012 10 Section 299.c.ii of the Constitution of the Republic of the Union of Myanmar, 2008 11 North, Douglas. Institutional Change: A Framework of Analysis. 12 The CIPE Guide to Governance Reform 13 17 May 2012, The White House, Office of the Press Secretary 14 Democracy Digest, 24 July 2012
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John Morrell, CIPE Asia Program Officer, manages CIPEs entire portfolio of projects in East and Southeast Asia. He has a decade of experience with development projects on issues including anticorruption, governance, microfinance, emerging market risk analysis, and urbanization. He has produced several studies on topics related to corruption and public-sector governance and conducted internal fraud investigations of multinational corporations. Morrell also founded a nonprofit organization supporting orphans in the Philippines. He has a Bachelors Degree in Economics from the University of Virginia, a Masters Degree in Public Policy from Georgetown University, and was a Graduate Fellow in International Management at Oxford University. The Center for International Private Enterprise (CIPE) grants permission to reprint, translate, and/or

How to Sustain Burmas Path Towards Democracy

Center for International Private Enterprise

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