Myanmar's Long Road to National Reconciliation (22 page)

It is when we stop to consider the nature of money that the importance of property rights becomes apparent. Once valued because it was a commodity of intrinsic worth (gold and silver, for instance), modern money is merely a socially-constructed “promise to pay”. In its most recognizable form — that is, as embodied in a nation’s currency — this promise is made by the state.

Currency is at the peak of the money hierarchy in terms of its widespread acceptability, but it is, of course, only a component — and in modern economies with a proper functioning financial system, an increasingly small component — of what we regard as “money”. The major component of money in modern financial systems is that created by financial institutions — claims against them (in the recognizable forms of deposits, credit cards, and so on) that are transferable and, as such, widely accepted for payment.

Burma has failed to establish credible money at every level of this hierarchy. The currency, which has been weakened by chronic inflation, a collapsing exchange rate, and successive “de-monetizations” (four in total — two in 1964, and then in 1985 and 1987), functions as a low-value medium of exchange, but scarcely as a store of value and unreliably as a unit of account.
³²
In purchasing power, one
kyat
today is unlikely to be worth one
kyat
tomorrow. Money in its other forms, as the liabilities of Burma’s financial institutions, has all the problems of its currency of denomination, but — as the 2003 crisis reveals — with that extra uncertainty that the standing of these institutions themselves may be dubious.

The failure to create reliable money in Burma is important for a host of reasons, many of which have been discussed above. But more than anything else, the failure to create reliable money in Burma means the country is greatly inhibited in its ability to generate internal sources of financial capital. Much angst is exercised amongst Burma watchers that
the country is without much in the way of foreign investment or external aid. Yet such avenues are
not
the most important sources of national capital accumulation. From the United Kingdom as “first-mover” in the industrial revolution to the Asian “tigers”, internal capital accumulation through the creation of claims against a country’s own financial institutions have been the dominant pool from which capital is financed.
³³
The mechanism by which this pool is formed is the simple “money creation” process much beloved by students of elementary macroeconomics, but seemingly forgotten thereafter. This process describes the way that banks take in deposits, lend them out again, take in new deposits from the recipients of the spending created by the loans, in turn lending these out again — and thus on and on. Deposits beget lending, lending begets deposits; bank-created money of the sort described above is created and, with it comes greater production, greater consumption, and a growing economy. Of course, the story has added complexities — prudential reserves siphon off portions of new deposits, lending depends on the supply of credit-worthy borrowers, and other institutional barriers limit infinite money creation. Nevertheless, the core of the story, that banks create money (claims upon them), holds true. The fact that Burma’s government allowed the formation of private banks from 1992 (under
The Financial Institutions of Myanmar Law, 1990)
demonstrates that the regime at least partially understood this point.

As Collignon notes,
³⁴
the recognition that domestic financial systems create money in this way discredits the idea that the principal problem facing countries such as Burma is that of a “financing gap” which must be filled by external borrowing or aid. Instead, such a gap can be “filled” by a country’s own financial system — so long as it is able to function in the ways indicated. In terms of a role for government then, a principal objective should be ensuring that the right institutions are in place to allow this to happen. This is not to say that a country such as Burma is not in need of foreign investment, nor that foreign investment could not play a positive role in the country’s economic development. There are certain goods and services, certain types of expertise, that can only be sourced offshore and secured through financial resources beyond the domestic financial system to create. Nevertheless, it is true that the means through which Burma can realize its potential, as implied by its substantial physical endowments, are largely in its own hands.

In his major work,
The Wealth and Poverty of Nations,
which concerns what history demonstrates are the primary determinates of the wealth of nations, the eminent economic historian David Landes lists seven “institutions” that are essential for the state to guarantee. The state must:

•   secure rights of private property, the better to encourage saving and investment;

•   secure rights of personal liberty; that is, secure them against the abuses of both tyranny and private disorder (crime and corruption);

•   enforce rights of contract, explicit and implicit;

•   provide stable government — not necessarily democratic government, but government that is itself governed by publicly-known rules (a government of laws rather than men);

•   provide responsive government, one that will hear complaint and make redress;

•   provide honest government, such that economic actors are not moved to seek advantage and privilege inside or outside the marketplace;

•   provide moderate, efficient, un-greedy government. The effect should be to hold taxes down, to reduce the government’s claim on the social surplus, and to avoid privilege.
³⁵

It is a sobering fact that in 2004 Burma’s economy exhibits scarcely
any
of the institutional attributes above. The monetary crisis that enveloped Burma throughout 2003 and 2004 had a number of causes explicable in terms of poor policy and other phenomena of the country’s immediate circumstances but, as this chapter has attempted to argue, its causes were inextricably bound up with institutional failures that have been apparent for many decades. Principal amongst these institutional malfunctions has been the failure of governments in Burma to establish a reliable monetary system. Money, as a construction of the state and of the banking system, is that set of transferable financial claims that allows the creation, aggregation, and efficient allocation of a country’s capital. As a “claim’, money only has value to the extent that people have trust that it is ultimately redeemable in real goods and services. In Burma, such trust has been seriously undermined. To restore trust in Burma’s financial institutions, and in its economic institutions more generally, remains the country’s most important challenge.

¹
   For a first-hand account of the corruption and distorted incentives inherent in the collection of official statistics in Burma, see Alison Vicary, “The state’s incentive structure in Burma’s sugar sector and inflated official data: A case study of the industry in Pegu Division”,
Burma Economic Watch,
No. 2 (2004), pp. 15–28.

²
   D. Dapice,
Current Economic Conditions in Myanmar and Options for Sustainable Growth,
Global Development and Environment Institute Working Paper 03-04 (Medford, MA: Global Development and Environment Institute, Tufts University, 2003), p. 14.

³
   Sisyphus was the mythical King of Corinth condemned by Zeus and the other Olympian gods to spend eternity pushing a large stone up a hill, only to have it roll back to the bottom again just before his objective was achieved.

⁴
   W. Bradford,
“Fiant fruges?
Burma’s
sui generis
Growth Experience”,
Burma Economic Watch,
No. 2 (2004), pp. 6–14.

⁵
   Such an
external
critique of Burma’s claimed economic growth is beyond the scope of this chapter. For a recent effort aimed squarely at this end, see Bradford,
“Fiant fruges?
Burma’s
sui generis
Growth Experience”.

⁶
   Asian Development Bank,
Asian Economic Monitor 2004
(Manila: Asian Development Bank, 2004).

⁷
   Dapice,
Current Economic Conditions in Myanmar,
pp. 14–15.

⁸
   Calculated from data in Asian Development Bank,
Asian Development Outlook 2004
(Manila: Asian Development Bank, 2004).

⁹
   For a detailed account of Burma’s 2003 banking crisis, see S.R. Turnell, “Myanmar’s Banking Crisis”,
ASEAN Economic Bulletin,
Vol. 20, No. 3 (December 2003), pp. 272–82. Ponzi schemes pay extremely high returns to their members out of the capital of
new
members. They must ultimately fail when the supply of new members dries up.

¹⁰
   That is, these schemes were not authorized under the
Financial Institutions of Myanmar Law 1990,
the law under which banks and other financial institutions are authorized in Burma.

¹¹
   International Monetary Fund (IMF),
International Financial Statistics,
various issues (Washington, D.C.: International Monetary Fund, 2004).

¹²
   The largest and third-largest of Burma’s private banks, the Asia Wealth Bank and Myanmar Mayflower Bank respectively, were particularly hard hit and seem likely never to re-open. Both banks have subsequently been named as (narcotics) money-laundering institutions by the United States Treasury, and their operations subject to an enquiry set up by the Burmese Government. For more details, see S.R. Turnell, “Burma Bank Update’,
Burma Economic Watch,
No. 1, 2004, pp. 19–29. Since the 2003 crisis, the Kambawza and Myawaddy
Banks have emerged as the dominant players in Burma’s private banking system. Eliminating malfunctioning and unsuitable banks is difficult in any jurisdiction, and although wholesale collapse is hardly an optimal way of going about “weeding out” institutions, it may be that the collapse of the Asia Wealth and Mayflower Banks is not all bad news for Burma.

¹³
   Instructive in this context is the way in which the monetary authorities in China seem to enjoy a high degree of latitude in openly criticizing the performance of the country’s state-owned banks and other financial institutions.

¹⁴
   There was, for instance, great confusion in the press coverage of Burma’s 2003 banking crisis, including amongst media outside the country. Within Burma there was only one press conference held by the Central Bank of Myanmar during the whole of the crisis period (on 11 February 2003). See Turnell, “Myanmar’s Banking Crisis”, p. 275.

¹⁵
   J.A. Schumpeter,
The Theory of Economic Development: An Inquiry into Profit, Capital, Credit, Interest and the Business Cycle
(Cambridge, Mass.: Harvard University Press, 1934), p. 106.

¹⁶
   IMF,
International Financial Statistics.

¹⁷
   G. Hoggarth, P. Jackson, and E. Nier, “Banking Crises and the Design of Safety Nets”,
Journal of Banking and Finance,
Vol. 29 (2005), pp. 143–59; E.J. Frydl and M. Quintyn,
The Benefits and Costs of Intervening in Banking Crises,
IMF Working Paper 00/147 (Washington D.C.: International Monetary Fund, 2000); D.G. Mayes, “Who Pays for Bank Insolvency in Transition and Emerging Economies?”,
Journal of Banking and Finance,
Vol. 29 (2005), pp. 161–81.

¹⁸
   In their global survey of banking crises from 1977 to 2002, Hoggarth and his colleagues estimated a median output loss from a systemic banking crisis of 2.4 per cent of GDP. They calculated such losses, as we have here, as the deviation in the rate of GDP growth over the crisis period from its pre-crisis ten-year trend. Their survey included the 1997 Asian financial crisis, as well as others across a myriad of other countries and regions. See Hoggarth, Jackson and Nier, “Banking crises and the design of safety nets’, p. 153.

¹⁹
   Turnell, “Myanmar’s banking crisis”, p. 276.

²⁰
   We cannot say that the remainder — 95 billion
kyat
— is unrecoverable, since the data collection from which our analysis of the CBM’s actions are drawn includes items unrelated to any “rescue package”. See IMF,
International Financial Statistics.

²¹
   In recent years, exports of clothing and textiles from Burma (to Europe and the United States primarily) have been growing strongly. This will be hindered, and probably reversed, by the effects upon the global market in clothing and textiles of the ending of the Multi-Fibre Agreement (MFA) from 1 January 2005. Under the MFA, countries were allocated clothing and textile export
“quotas” in the largest consumer markets. These quotas have hitherto protected manufacturers such as Burma from efficient large-scale producers in China and elsewhere. It is widely expected that, freed from quota ceilings, producers in China will quickly erode the share of more marginal producers such as Burma. As such, Burma’s external position is likely to come under further pressure in the near term. For an introduction to the MFA and the significance of its ending, see the website of the World Trade Organization and, in particular,
http://www.wto.org/english/tratop_e/texti_e/texintro_e.htm
. Accessed 25 July 2005.