Academic journal article Journal of Southeast Asian Economies

Myanmar's Economic Institutions in Transition

Academic journal article Journal of Southeast Asian Economies

Myanmar's Economic Institutions in Transition

Article excerpt

I. Introduction

Since Myanmar's transition began in 2011, one of the key elements of the economic reform agenda has been building a more efficient and competitive business environment. A good business environment, of which institutions are a key part, is essential for developing the private sector. Myanmar's new government has reformed a number of formal regulatory institutions, including the foreign exchange regime, the Central Bank, the Foreign Investment Law (FIL) and trade licensing.

These changes have raised expectations about the depth and breadth of reforms in the country, and their potential to spur economic development. Yet changes in the day-to-day realities of doing business have been only modest because many formal institutions from previous regimes remain, as do the informal economic institutions.

This paper examines two questions: Flow were Myanmar's economic institutions shaped by the socialist and military regimes; and how do these institutions--both formal and informal --affect the present-day business environment?

Centralization and control were key aspects of military and socialist economic governance. Arbitrary or reactionary policy-making was common, often due to unforeseen economic challenges or previous policy missteps. Under the socialist regime, the formal regulatory institutions that facilitated market-based transactions were largely destroyed, leaving interactions dependent on networks and characterized by a lack of clear processes and information. These characteristics are evident in the path-dependent institutions that govern Myanmar's economic transactions today. They underlie many of the inefficiencies in the market and raise transaction costs. They force businesses to rely on imperfect substitutes for government institutions and regulations, such as informal mediation mechanisms. They change the barriers to entry and cost and benefits of different businesses. This distorts the distribution of economic activities, deincentivizes investment and encourages clustering in sectors with low risk and low barriers to entry. These economic distortions cannot be addressed without changes in both formal and informal institutions.

This paper explores these issues in the next five sections. Section II reviews the economics literature to show that institutions play a key role in development. Section III looks at the changes in formal and informal economic institutions during the socialist and military regimes, and how the business environment evolved during their rule. This section uses historical sources to show that control, arbitrary governance and lack of process were defining features of economic policy during the socialist and junta eras. Section IV explores economic reforms during the Thein Sein government and their effect on the business environment. Section V looks at the way economic controls, arbitrary governance and the lack of process affects businesses in present-day Myanmar. This section draws on in-person interviews with local and foreign business owners and managers, as well as consultants in Myanmar. (1) These testimonies align closely with the predictions of the academic literature. The last section looks at some of the consequences of these institutional principles on the private sector.

II. Economic Institutions in Theory

In recent decades, the economics of institutions has become increasingly central to the analysis of developing economies, especially after the perceived failure of neoliberal-inspired policy reforms in post-Soviet countries. This school of thought is often referred to as "New Institutional Economics" (NIE), and argues that institutions matter for economic performance and are susceptible to analysis by the tools of economics (Matthews 1986, p. 903). NIE "extends economic theory by incorporating ideas and ideologies into the analysis, modelling the political process as a critical factor in the performance of economies, as the source of the diverse performance of economies, and as the explanation for 'inefficient' markets" (Harriss, Hunter and Lewis 2003, p. …

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