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ECONOMICREFORMFeature Service

Center for International Private Enterprise

How to Sustain Burmas Path Towards Democracy:The Need for Institutional Reform

Article at a glance

Burmastransitiontodemocracywillproveunsustainablewithoutsubstantivechangestothecountryspolitical,administrative,andeconomicinstitutions.

Economicgrowthmustbewidespreadandeconomicopportunitiesariseformorethanthewell-connectedfewifdemocracyistosucceedinBurma.

TheBurmesegovernmentanditspartnersintheinternationaldevelopmentcommunitymustprioritizethedevelopmentofdurable,reliableandpoliticallyindependent

institutions.

September 17, 2012

John MorrellAsia Program Officer

Center for International Private Enterprise

To comment on this article, visit the CIPE Development Blog: www.cipe.org/blog

Center for International Private Enterprise1155 15th Street, NW | Suite 700 |Washington, DC 20005ph: (202) 721-9200 |fax: (202) 721-9250 | www.cipe.org | [email protected]

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In his speech at the July United States-Association of Southeast AsianNations (ASEAN)BusinessForuminSiemReap,Cambodia,BurmaPresidentUTheinSeinexplainedthatBurmahasembarked on a democratic path and is movingtoward a new democratic era.1 He went on tooutlinethereformeffortshiscountryispresentlyundertaking,effortsthatgivereasonforoptimismfollowing Aprils dramatic electoral victories ofAung San Suu Kyi and the National League forDemocracy.

In addition to promises of regular andfree elections, increased media freedom, andconstructive engagement with leaders of ethnicminorities,PresidentTheinSeinannouncedplanstotransform[Burmas]centralizedeconomyinto

amarket-orientedeconomy.2

Atthissameevent,U.S. Secretaryof StateHillary Clinton said thatPresidentTheinSeinisaleaderwhohasmovedhiscountrysuchalongdistanceinsuchashortperiodoftime.

Recent events and statements from thecountrys leaders do indeed give reason foroptimism that Burma will continue these effortsto introducedemocratic governance and genuineeconomic freedom. However, Burmas transition

to democracy will prove unsustainable withoutsubstantive changes to the countrys political,administrative,andeconomicinstitutions.

The role of institutions in democratic

and economic development

Institutions are the humanly-devisedconstraints in which all polit ical, social andeconomic interaction takes place.3 These

institutions include formal laws and regulations,administrative bodies with legal authority, civilsector organizations that protect and advocatefortheirconstituentsinterests,aswellasculturalnormsandotherunwrittenrules.Inotherwords,a countrys institutions constitute the rules ofthegamethatgovernandinfluencethedecisionsmadebyindividuals,businessesandgovernments.

Amarket economy is a competitive economicsystem in which the rules are the same for allparticipants, and in which the rules are equallyapplicable to and enforced on all participants.Theserulesorinstitutionsofmarketsprovideconfidencetomarketparticipantsandreducethecostsof completing transactions. Reliablemarketinstitutions make possible the emergence ofeconomic activities beyond short-term, person-to-persontransactionstowardlonger-term,larger-scale and sustainable exchanges. This economicevolution engenders greater specialization,economiesofscale,andinnovation.

Inatrulyfreemarketeconomy,acompetitiveprivate sector injects dynamism into politicaldiscourse and both encourages and rewards

entrepreneurship, which, in turn, fostersa political culture of citizen activism andleadership societal characteristics conducive todemocraticconsolidation.Moreover,theeconomicopportunitiesthatarisefromfreemarketssupportthegrowthofacountrysmerchantclassandtheexpansion of a countrys demand for all types oflabor, thereby reinforcing democratic reforms byprovidinghigherlivingstandards.

Institutional constraints in Burma

Efforts to substantively reform the Burmeseeconomy face myriad challenges and entrenchedobstacles.ThebusinesssectorinBurmaishinderedbypoorinfrastructureanddistributionnetworks,widespread corruption and shortages of capital.Theweaknessoftheprivatesectorrelativetostate-owned enterprises (SOEs) and state-supportedenterprisesinBurmaisalsoamongtheparamountobstaclestothedevelopmentofgenuinelyfreeandcompetitivemarketsinthecountry.

Thecentralgovernmentdirectlycontrolsmanykeyeconomicsectors,includingminingandpower,andstate-ownedfirmsdominateothersectorssuchastransport,manufacturingandtradeparticularlyof commodities. The military controls extensivebusiness interests as well, in sectors including

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gems and logging, through military-backed (andoftenmilitary-owned)holdingcompaniessuchasUnionofMyanmarEconomicHoldings,MyanmarEconomic Corporation, and the Htoo TradingCompany. The new government does intend tolaunch a privatization program, but the resultsof similar programs undertaken by the previousgovernment were, at best, modest. If futureprivatization efforts are not implemented withutmost transparency and genuine competition,state holdingswill simply be transferred towell-connectedinsiders.

To its credit, thegovernmenthas taken someimportant steps to promote private investmentandtoattractforeigncapital.Thesestepsincludereforms to the countrys byzantine exchange-

rate system, the complexity and distortedness ofwhichnotonlygaveriseto anenormous informalcurrencymarketbutalsoprovidedhiddensubsidiesto SOEs. The drafting of foreign investmentlaws are also underway and capital controls areexpectedtoberelaxed.Financialservicefirmsandcommercial banks from other ASEAN nations,suchasCambodiasACLEDABank,arelookingtoaggressivelyexpandintoBurma.ThiswouldfillanenormousvoidasBurmahasaverylimitedbankingsystemthatislargelyinaccessibleformuchofthe

country.

Moving forward, a successful and sustainabletransitioninBurmarequiresthateconomicgrowthbewidespreadandthateconomicopportunitiesariseformorethanthewell-connectedfew.Additionally,commercial successesmust be experienced acrossall ofBurmas ethnic groups if the country is toprevent a re-eruption of anti-Chinese publicsentimentalongthelinesofthe1967riots,whichwerepartlyfueledbyeconomicgrievances.

However, numerous key institutions that arenecessaryfortherealizationofthisgoalareeitherweak or completely missing in Burma today. Ifthese institutions, which are fundamental forthe development of a market economy, are notsubstantivelyreformedandstrengthenedinBurma,

itseconomicanddemocratictransitionwillproveunsustainable.

Key market institutions4

Property rights

Secure private property rights, and the legalmechanisms to uphold these rights, are a coreinstitutionofanyfree-marketdemocraticsystem.Not only do private property rights incentivizepropertyownerstoinvestandimprovetheirassets,they help protect the civil liberties and personalsecurity of individual property owners.5 In agenuinelydemocraticsociety,thegovernmentdoesnot possess unchecked control of all economic

resourcesandcitizensareprotectedagainstpropertyexpropriationwithoutdueprocess.

As countries transition away from centralized,command-and-control economic policies, marketforcesoftendriveupthevalueofrealestateandotherformsofproperty.Ifprivatepropertyrightsarenotprotectedandenforcedbylaw,corruptofficialsandtheircronybusinesspartnerswillbepresentedwith tremendous rent-seeking opportunities. Forinemergingmarketsacrossthe globe,increasesin

propertyvaluesareoftenaccompaniedbyariseinillegalseizuresofprivateproperty.Withan influxof private investment, what was once farm landof limited commercial value becomes a potentiallocationforafactoryoranexportprocessingzone.Corruptofficialsseizetheland,providingnegligible(ifany)compensationtothelegalpropertyowner,and then re-sell that land to investors at an

A successful and sustainabletransition in Burma requires thateconomic growth be widespreadand that economic opportunities

arise for more than the well-connected few.

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enormousprofit,muchofwhichwindsupinthepocketsoftheofficialsthatseizedit.

As reported by The Irrawaddy and othermedia outlets, alongwith international observersand human rights advocates, such cases of theseland-grabs are becoming increasingly commonin Burma. Farmers and their families are beingforciblymovedformajorprojects,suchastheoilandgaspipelinesbeingbuiltthroughthecountryfromtheBayofBengaltotheChineseborder,andforsmallerindustrialprojectsbyfirmswithlongcronylinkstothemilitary.6

To counter this alarming development,legislation must be in place to ensure that suchviolations of private property rights and other

forms of economic predation are unambiguouslyillegal.Citizensmustalsobemadeawareoftheirlegal rights and the legal recourses available tothemwhentheirrightsareviolated.Forwhenlegalprotectionisoutofreachforthemajorityofthepopulationandwhenrulesareenforcedarbitrarily,abusethrivesanddemocracycannotflourish.7

Business associations

Business associations, including chambers

of commerce and trade associations, representan important segment of society and are crucialfor encouraging inclusive economic growth,developmentandprosperity.Associationsalsoplayakeyroleindefendingtherightsofindependentprivate businesses, especially in corrupt societies,andcanbolstertheabilityofprivateenterprisestogrow,develop,andcreatejobs.Throughvoluntaryassociations, the private sector can voice thelegitimateneedsofbusinesseswhileengaginginanopen,transparentpolicyreformprocess.8

Building the capacity of such civil sectorinstitutions will be necessary if independententrepreneurs are to be able to establish, operateand grow viable private enterprises in industriesacrosstheBurmeseeconomy.

Secure contracts

Reliable contracts facilitate exchanges andinvestments on a national scale, even between

strangers. The assurance that contracts will behonored forms a basis for a wider circle of trustin economic transactions. Laws and courtsguarantee the sanctity of contracts. Reliable andfaircommercialarbitrationmechanismsincentivizeprivateinvestmentasinvestorsandentrepreneurshavegreaterpredictabilityandstability.

At present, Burma has no independentmechanism for commercial arbitration. In acountry with a legacy of nationalizing foreign-

ownedproperty,suchinstitutionsmustbeinplaceifBurmaistoattractinternationalinvestmenttomanufacturing,constructionandserviceprovision.Moreover, entrepreneursand private investors, betheyBurmeseor foreign,mustbe able toprotectthemselvesagainstunfairandoftenillegalpracticesofstate-ownedand/ormilitary-backedcompetitors.

Freedom of entry and exit

Free markets are competitive and open to

new entrants. Government does not restrictentry through excessive regulation or officialmonopolies,norareprivateproducersallowedtostiflecompetition.Barrierstoentryareremoved,anti-trustlawsenforcedandpreferentialtreatmentel iminated. Bankruptcy laws place limits onentrepreneurs liability and grant protection tocreditors.

If this progress is to provesustainable, the Burmesegovernment and its partners inthe international developmentcommunity must prioritize

the development of durable,reliable and politicallyindependent institutions.

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Developing a modern and comprehensivecommerciallegalcodeandregulatorystructureisnecessaryifBurmaistoattractprivateinvestmentin non-extractive industries and encourageindependentgrassrootseconomicactivity.

Freedom of information

Inamarketeconomy,governmentistransparentabout policies and does not restrict the flow ofeconomicinformation.Businesses,themedia,civilsociety organizations, and citizens have access toeconomic information as well as knowledge ofpolicies,rights,andregulations.

Burmasnewgovernmenthasmadesubstantialprogress on this front by taking important stepstowards relaxing regulations on media andtelecommunications.Inhisaforementionedspeech,President Thein Sein committed to enacting amedialawformediafreedomandtransparencyinthenearfuture.Amajortestofthenewgovernmentwillbewhether or notit allows privatebusinessesand independent entrepreneurs to demandtransparency of the finances and operations ofstate-ownedandmilitary-backedenterprises.

Rule of law

All of theabovemarket institutionsarebackedbytheruleoflaw.Inademocraticsocietybasedon political and economic freedom, laws mustbe enforced consistently and fairly, and citizens,entrepreneurs,andpropertyownersmusthaveequalprotectionunderthelaw.InBurma,the judiciaryhas been nominally outside of military controlsinceciviliancourtswerefullyreinstatedin1992.But most judges still have military backgrounds.AMarch 2012 United Nations report on human

rightsinBurmanotedthatthecountrylacksanindependent,impartialandeffectivejudiciary.9

Another test of the new governmentscommitmenttoreformiswhetheritwillsupportthedevelopmentofaprofessionalandindependentjudiciary.Becausegovernmentpromisesoflegaldue

processandtolerationofpublicdissentareonlyasgoodastheunderlyingjudicialsystementrustedtoupholdtheruleoflaw.Unfortunately,thepresentconstitutional structure will greatly encumbereffortstobuildasuchajudiciaryinBurma.Forwhilethe2008constitutionrequiresthePresidenttosubmithisnomineesforjudgeshipstoParliamentfor approval, the constitution also states thatParliamentshallhavenorighttorefusethepersonnominatedbythePresidentfortheappointmentofChiefJusticeandJudgestotheSupremeCourt10andtherearenospecificconstitutionalmechanismstopreventpoliticalinterference.

Strengthening democracy in Burma

through institutional reform

Institutional reforms are about gettingincentives right. Individuals everywhere respondtobenefitsandcostsintheirenvironment,andacountrysinstitutionsdrivetheseexpectedcostsandbenefits.InthewordsofNobelLaureateDouglassNorth,institutionsdeterminepayoffs.11Citizensandentrepreneursmustbegivengoodreasonstoparticipate inmarkets and democratic processes,reasonsthatmakesensetotheirpersonalwell-being.When strong democratic and market incentives

prevail, the cumulative energy of individuals canbechanneledtoadvancenationaldevelopment.12

In a free-market economy, firms andentrepreneursareincentivizedbycompetitionandmarketforcestoinnovate,employskilledlaborandbecomemoreefficient.Likewise,inademocraticsociety, public dialogue and political conditionsprovide public officials with clear incentivesto improve service quality and governmentperformance. Both free-market economic systems

and democratic political systems require theinstitutions outlined above to function properly,fairly and predictably. These institutions bolsterthe maturation and consolidation of democraticpractices and principles in a society such as freecompetition,freemovement,freeassociation,freechoiceandfreespeech.

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TheactionsofBurmasnewgovernmenttore-introducedemocraticpracticesinacountrynearlya half-century removed from its last democraticgovernment have been remarkable. In additiontotheencouragingreformsmentionedabove,thenationalbudgetwaspubliclydebatedforthefirsttime in Burma during the most recent sessionof Parliament. Significant legislative reformsundertakenbythegovernmentincludetheadoptionoftheLaborOrganizationsLawandthePeacefulDemonstrationandGatheringLaw,aswellastheamendmenttothePoliticalPartyRegistrationLaw.Thereareotherencouraginglawscurrentlyunderpreparation, including a revised Prisons Act, amedialawandasocialsecuritylaw,amongothers.PresidentTheinSeinisworkingwithMPsaffiliatedwith theNational League forDemocracy to fight

corruptionbyrequiringallgovernmentofficialstopubliclydeclaretheirassets.

Sowhilesomedebatepersistsastotheactualextent of Burmas commitment to democraticreform,U.S.PresidentBarackObamasMay2012statement13 that President Thein Sein, AungSanSuuKyiandthepeopleofBurmahavemadesignificantprogressalongthepathtodemocracyisinarguable.

Ifthisprogressistoendurebeyondthetermofanyparticularpolitical leader,and ifthisprogressis to prove sustainable, theBurmese governmentanditspartnersintheinternationaldevelopmentcommunity must prioritize the developmentof durable, reliable and politically independentinstitutions. Without these institutional reformsthat fundamentally change the economic andpolitical operating environment in Burma, noamountofforeignaidortechnicalassistancewillhavealastingimpact.AsLarryDiamondexplainedinaJulyinterview,Burmastransitionisstillverymuchinanearlystage.Nevertheless,hewentonto note that while this democratic transition isonlyincipientatbest,itisexcitingthattheprocesshasbegun.14

Endnotes

1StatementofUTheinSein,PresidentoftheRepublicoftheUnionofMyanmar,deliveredattheUS-ASEANBusinessForum,13July2012,SiemReap,Cambodia

2Ibid3North,Douglass.Institutions.J ournal of Economic

Perspectives,volume5,issue1,19914Formoreonthis,seeThe CIPE Guide to Governance

Reform,publishedbytheCenterforInternationalPrivateEnterprise(www.cipe.org)

5Sullivan,JohnD.etal,TheImportanceofPropertyRightstoDevelopment. SAIS Reviewvol.XXVIIno.2,2007

6Boot,William.The Irrawaddy.15May20127Nadgrodkiewicz,Anna.Property Rights, Development,

and Democratic Transitions: The Path Ahead.CenterforInternationalPrivateEnterprise,April2012

8Formoreonthis,see Impact on Reform: BusinessAssociations.CenterforInternationalPrivateEnterprise(www.cipe.org)

9ProgressReportoftheSpecialRapporteurontheSituationofHumanRightsinMyanmar,UnitedNationsHumanRightsCouncil,NineteenthSession,7March2012

10Section299.c.iioftheConstitution of the Republic of theUnion of Myanmar,2008

11North,Douglas.InstitutionalChange:AFrameworkofAnalysis.

12The CIPE Guide to Governance Reform1317May2012,TheWhiteHouse,OfficeofthePressSecretary

14Democracy Digest,24July2012

_____________________________________________________________________________

John Morrell, CIPE Asia Program Officer,manages CIPEs entire portfolio of projects in Eastand Southeast Asia. He has a decade of experiencewith development projects on issues including anti-corruption, governance, microfinance, emergingmarket risk analysis, and urbanization. He hasproduced several studies on topics related to corruptionand public-sector governance and conducted internalfraud investigations of multinational corporations.

Morrell also founded a nonprofit organizationsupporting orphans in the Philippines. He has aBachelors Degree in Economics from the Universityof Virginia, a Masters Degree in Public Policy fromGeorgetown University, and was a Graduate Fellowin International Management at Oxford University.

The Center for International Private Enterprise(CIPE) grants permission to reprint, translate, and/or

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publish original articles from its EconomicReformFeatureServiceprovided that (1) proper attributionis given to the original author and to CIPE and (2)CIPE is notified where the article is placed and a copyis provided to CIPEs Washington office.

TheEconomicReformFeatureService is CIPEsonline and electronic article distribution service. Itprovides in-depth articles designed for a network ofpolicymakers, business leaders, civic reformers, scholars,and others interested in the issues relating to economicreform and its connection to democratic development.Articles are e-mailed and posted online twice a month.If you would like to subscribe free of charge, pleasejoin the CIPE network by entering your e-mail atwww.cipe.org. CIPE welcomes articles submitted byreaders. Most articles run between 3-7 pages (1,000-

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The Center for International Private Enterprise(CIPE) strengthens democracy around the globethrough private enterprise and market-orientedreform. CIPE is one of the four core institutes of theNational Endowment for Democracy and an affiliateof the U.S. Chamber of Commerce. Since 1983, CIPEhas worked with business leaders, policymakers, andjournalists to build the civic institutions vital to ademocratic society. CIPEs key program areas includeanti-corruption, advocacy, business associations,corporate governance, democratic governance, access toinformation, the informal sector and property rights,and women and youth.

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