What Can Myanmar Learn From Vietnam?

Sunday, March 25, 2012

By: Adam McCarty (Chief Economist of Mekong Economics)

Vietnam: Two decades of development lessons for Myanmar.
There are striking parallels between the economy of Vietnam in the 1990s and that of Myanmar today. Of course there are also many many differences, but the similarities suggest that there may be lessons for Myanmar to learn as it opens its economy to the world, particularly given that Vietnam has averaged 7-8% annual GDP growth for the past two decades. What economic reform should Myanmar be focusing on in 2012 and during the immediate post-embargo period?
The “starting point” of both countries has similarities. In 1992, Vietnam implemented its first systematic measurement of living standards and reported a poverty rate of nearly one-in-two Vietnamese. A similar survey in Myanmar in 2005 reported one-in-three in poverty. Vietnam twenty years ago was less developed and poorer than Myanmar today, yet both “start” as poor countries with great potential – notably a young, large and literate population – with that potential not being fully realised for both external (embargo) and internal reasons (protectionist policies, weak legal system and property rights, etc.).
Even policy changes show similarities. In 1989 Vietnam unified its official and black market exchange rates, just as Myanmar did a few months ago. The American-led trade and investment embargo against Vietnam dragged on until 1993 (one year after a new Constitution in Vietnam), but hopefully, given the present pace of positive changes, we might see the embargo against Myanmar lifted this year. In Vietnam, a series of important policy reforms were taken well before the embargo was lifted. These included:

1. Return of land to individual farm households on permanent use-right basis (1988).

2. Stabilisation of the macro-economy, notably inflation (1989)

3. Removing barriers stopping households from conducting businesses (1990 Law on Private Enterprises)

4. Trade and foreign investment liberalisation (the 1987 Law on FDI had no real impact until the exchange rate unification)

The above four reform areas are, I argue, the foundation for success in the Vietnamese post-embargo period. All were built upon over later years, such as the 1993 amended Land Law that made agricultural land-use rights transferable and useable as collateral, and the 2000 Enterprise Law.
I choose the above four reforms because opening up to world trade and investment (and ODA) is the only path for a country to get rich. Macroeconomic stability is a prerequisite for following that path (e.g. instability and high inflation cause low FDI). Yet if you want equitable development – where more than an elite benefit – that rapid growth must be built on supporting households. Most importantly, that means giving households private ownership of their assets, a legal framework that protects that ownership, and a minimum of regulations and taxes on their ability to do business. In other words, encourage households to invest, make profits and keep them.
Myanmar has much work to match the policy reforms of Vietnam over the past two decades. Vietnam did not wait for the embargo to be lifted before making bold policy reforms and nor should Myanmar. This raises questions about the appropriate sequencing of reforms: it is easy to make lists of all the changes needed, but in what order should they – and can they - be tackled?
“Reform”, moreover, is not just a matter of issuing (and removing) Laws and regulations, but also of building the institutions that make such paper meaningful: a Central Bank; Auditor General; Government Inspectorate; Commercial and Arbitration Courts; Judiciary; Professional Associations; Research Institutes and Universities; and many more.
Another “lesson” from Vietnam is that “reform” is a continuous process of issuing, reviewing and amending (and removing) policies – and one that requires much effort and Government capacity. In the 1980s, the Vietnamese Government structure was top-heavy and cumbersome. Many small matters could only be decided at the highest levels. That was fine when not much was changing (e.g. few foreign investors), but during the 1990s it was clearly a bottleneck to progress and since them a process of decentralistion and administrative reform has tried to keep pace with the demands of a modern and competitive market economy. The Government of Myanmar will face the same challenge – the faster it can decentralise authority across the board, the faster it can benefit its own people.
Vietnam has made mistakes as well: there are negative lessons to learn. Establishing state-owned product-specific monopoly corporations was a very different approach to Japan and South Korea, where private Corporations were encouraged to compete against each other for export markets. Vietnam has also not handed over macro-economic policy management to technical experts (e.g. a truly independent central bank), so great confusion persists about appropriate policy instruments and targets. Further, Vietnam has been slow to liberalise and make competitive its financial sector. Yet these negatives are outweighed by the positives that enabled Vietnam to achieve middle-income country status in 2011 with a reported poverty rate of 12% (2009).
In subsequent articles in this series I will choose particular aspects of the Vietnamese reform experience, explain them, and relate them to contemporary Myanmar. I have chosen topics of importance, but also of relevance to donor organisations, who will be planning many new “interventions” (projects) with the Government of Myanmar this year. Topics I have chosen include: microfinance; integrated rural development; promoting private sector development; and trade liberalisation. Myanmar has a broad and comprehensive policy reform agenda ahead of it, yet it is neither alone nor unique. The experience of other countries, like Vietnam, can give guidance – both good and bad.

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