Final Research Paper

Myanmar’s New Exchange Rate Policy:

Rational Calculations on Economic Reforms

Subject: Politics and Governments of Southeast Asian Countries

Lecturer(s):

Poppy S. Winanti MPP, MA., P.hD

Drs. Riza Noer Affani MA

Randy Wirasta S.IP, M. Sc

Author:

Dimas Fauzi 10/299695/SP/24197

DEPARTMENT OF INTERNATIONAL RELATIONS

FACULTY OF SOCIAL AND POLITICAL SCIENCES

UNIVERSITAS GADJAH MADA

2013

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Contents:

Contents ……………………………………………………………………….1

Abstract ……………………………………………………………………….2

Introduction …………………………………………………………………..3 – 4

Internal Factors …………………………………………………………..5 – 8

External Factors …………………………………………………………..8 – 11

Analysis ………………………………………………………….11 – 17

Conclusion ………………………………………………………..........18

Appendix ……………………………………………………………..19

References ………………………………………………………..20 – 21

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Myanmar’s New Exchange Rate Policy:

Rational Calculations on Economic Reforms

Abstract

Since 2008, Myanmar has committed itself to reforming its country. As

western countries insist to put sanctions towards Myanmar –both, politically and

economically—, the economy of this country becomes stagnant. This situation will be

likely to remain until the government reforms the country to be a democratic one. And

as part of reform agenda, economic policies need to be remedied to be more open for

outside world. The reform happens when a few months a go, the government passed a

new exchange rate policy. Under this policy, the government floats its Kyat against

foreign currency. Prior to it, Myanmar was implementing the so-called “multiple

exchange rate system” that allowed Kyat to have two exchange rates: fixed and

floating. Normally, multiple exchange rate system is used to boost economic growth.

But, in Myanmar, this system had given a big opportunity for few crony businessmen

and military elites to monopolize currency market. It is because the ones who could

use fixed rate are these crony businessmen and military elites. This situation has given

rise to currency black market in Myanmar. In maintaining this momentum –reforms—

the government finally revised multiple exchange rate system to a single exchange

rate system, it is the floating rate. I, thus, argue that this new policy is shaped by two

major changes happen within and outside the country, such as inflation, economic

slowdown, black market activities and foreign pressures. Based on rational

calculations done by current government –especially Thein Shin and its reform

supporters—, Myanmar decided to modify its exchange rate system as part of new

investment law. In deciding this policy, Myanmar government follow four phase:

introduction, design, choice and review (Simon, 1977).

Keywords: exchange rate policy, Myanmar economic reforms, fixed and floating

exchange rate, rational decision, western sanctions.

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Myanmar’s New Exchange Rate Policy:

Rational Calculations on Economic Reforms

A. INTRODUCTION

Prior to the reform, Myanmar was implementing multiple exchange rate

system which allowed Kyat to have two rates: fixed and floating. Fixed rate is called

as the official rate otherwise the floating is called as unofficial rate.1 Official rate is

used to pay transactions related to foreign trade and other important businesses which

are mostly dominated by military. Besides, unofficial rate is determined by currency

market performance which reflects the supply and demand of the Kyat against other

currencies. Interestingly, official rate can only be used by military and a few crony

businessmen and thus restricted for ordinary people. Civilians can only use floating

rate which is unstable and weaker. These circumstances have given rise to currency

black market and other chaotic economic situations in Myanmar, such as inflation and

economic slowdown. Furthermore, military regime and human rights violations have

made western states put sanctions on Myanmar. As the result, Myanmar suffers from

economic stagnation for decades. The so-called “second wave of reforms” which is

introduced by President Thein Sein has become a new spirit for Myanmar to shift its

regime to the democratic one. As the first civilian president gains power after long

decades of junta regime, President Thein Sein commits to reforming Myanmar by a

means of developing economy. Unifying the currency exchange rate system becomes

its first step towards economic reform in Myanmar since new investment law is still in

progress to pass the legislature.

This research paper will assess the calculations done by Myanmar government

based on internal and external factors that influence decision making process.

Systematically, this paper will present three factors for each category –internal and

external— as my basic information for analyzing this issue. In this paper, I will

answer the research question “Why does the government of Myanmar pass new

exchange rate policy?” In order to answer this question, I will use two concepts to

analyze the issue of new exchange rate policy. This aims at giving a logical approach

especially about the government’s motives and calculations over economic policy.

1 Further reading can be found on IMF Working Paper No. WP/08/199 ‘Efficiency Costs of Myanmar’s Multiple Exchange Rate Regime’ authorized by M. Hori & Y. C. Wong.

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1. Conceptual Framework: Internal and External Factors, Rational Decision

In order to answer the proposed research question above, two concepts will be

used as the main frameworks. First, concept of internal and external factors explains

that some events happen inside and outside a country can influence decision making

process. Internal factors refer to domestic situations of a country, such as economic

policy, inflations, unemployment, political stability, etc. These factors could turn to

the pressure for the government to settle domestic situations through policies, for

example. Besides, external factors refer to external circumstances that influence

decision making process in a country. Some examples of external factors are foreign

sanctions, foreign debt, engagements in some regional organizations, etc.

This paper will use rational decision-making concept introduced by Herbert A.

Simon (1977). Basically, this concept is aimed to assess economic decision made an

actor, especially in management scope. But, in this paper, I will use this concept to

assess the motives held by Myanmar government that make it change its currency

exchange policy. Simon argues that there are four phases an actor must follow in

order to make a decision rationally: intelligence, design, choice and review.2 This

concept also supports rational choice model which explains about the certainty of a

decision. According to rational choice model, an actor must have calculated the costs

and benefits of a particular decision. This makes every decision made by an actor

certain. In case of Myanmar’s new exchange rate policy, the Myanmar government

follows these four phases.

2. Hypothesis

By combining the above concepts, I argue that the government of Myanmar

has calculated the costs and benefits they will receive if new exchange rate policy is

passed. Myanmar government, thus, follows the four-phase of rational decision

making: intelligence, design, choice and review (Simon, 1977). Furthermore, the

existence of internal and external factors becomes the main considerations for the

government to pass new exchange rate policy in Myanmar. Thus, Myanmar’s new

exchange rate policy is the right decision made by the government because from the

analysis, this policy has least risks yet having optimum gains.

2 Further readings related to Simon’s concept in rational decision-making can be found on his book titled ‘Models of Discovery’ and also Jean-Charles Pomerol & Frederic Adam paper titled ‘Practical Decision Making – from the Legacy of Herbert Simon to Decision Support Systems’.

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B. INTERNAL FACTORS

1. The on-going reforms: gaining the momentum

“Second wave of reforms” has been initiated by President Thein Sein since he

took the office in 2011. Prior to his leadership, initial reforms have been introduced

by Junta. For instance, in 2008 a new constitution supporting the democratic process

by giving military 25% of total seats in parliament has passed the legislature. This

new constitution, thus, gives a wider chance for civilian to win the remaining 75% of

parliamentary seats in the election. In 2010, two important events happened in

Myanmar: National League for Democracy (NLD) won the general election defeating

State Peace Development Council (SPDC) and the following week latter Aung San

Suu Kyi –the leader of opposition— has been freed from house arrest. After 2010

election and President Thein Sein took office in 2011, reform in Myanmar is getting

intense. The demand for economic reforms is also paramount as political reform is in

its way to succeed. As the first civilian leader after coup, President Thein Sein

supports the reform efforts, including economic reform. Economic reform, however,

is a different case with the political one, but they correlate each other.3 Once

Myanmar government reforms its politics, economic reform will follow since the

people will become more demanding after democratization. Commitment of

government to conducting reforms in Myanmar

Since 2010, Myanmar has gained its reform momentum, it, thus, needs to be

maintained. As part of reform agendas, economic reform is as crucial as political

reform. It is because Myanmar has been long experiencing economic instability and

even stagnation. Initial reforms conducted by the government have given rise to

further reforms in a wider aspect. Nonetheless, these reforms initiatives are facing

many obstacles. For instance, the existence of military domination in many aspects –

including political and economic sectors— is hampering the reform processes because

it will be difficult for them to give up their privileges. Recently, military still

dominates the politic and economy of Myanmar. Many political elites are still the

member of military. One of them is Tin Aung Myint Oo who holds the role of Vice-

President until his dismissal in 2012. His existence, thus, hampers the democratization

in Myanmar since he has a tendency to maintain military regime rather than shifting

to democratic government. These situations, thus, contribute to the uncertainty of the

3 Crisis Group International Asia Report N 231, ‘Myanmar: The Politics of Economic Reform’, 2012, p. 4.

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on-going reforms in Myanmar. But, as civilian is starting to be able to take part in the

decision making processes, democratization will be achievable in the future. “Second

wave of reforms”, then, becomes the momentum for Myanmar to implement reforms

in all aspects, including economic sectors.

2. Misleading economy: black market, military domination, privatization

As Myanmar has become an isolated country since junta took control of the

government, the economy of this country becomes stagnant and experiencing

declination over time. After junta took control of the government through coup, the

orientation of Myanmar is inward-looking which is related to socialist ideals. The

socialist practices are still implemented until now, even after junta announced that

they will implement market-oriented economy when they conducted another coup in

1988. Prior to the implementation of single exchange rate in 2012, Myanmar had long

implemented a multiple exchange rate system. This situation occurred when the

government used fixed exchange rate as the official rate and floating rate as the

unofficial rate.4 Under this policy, Kyat is overvalued towards dollars in official rate;

it is approximately 6 Kyat per dollar. Besides, in unofficial rate, 1 USD is valued

about 850 Kyat. The margins between official and unofficial rates lead to deceit

actions and thus contributing to economic instability and even uncertainty inside the

country.

Furthermore, military also privatized many –and even most— enterprises in

1989 and making a new state-controlled economy regime.5 Due to military

domination, official exchange rate is limited for those who have access to the

government, such as military and crony businessmen. By utilizing their privileges

over economic activities, military and crony businessmen monopolize currency

market and even other major economic activities, such as international trade.

Monopoly over official rate gives barriers to enterprises other than state-owned

enterprises to develop and to expand their businesses. This situation gives Myanmar

some consequences, such as unemployment, difficulties to export, slow economic

growth, and poverty.6 Moreover, currency exchange rate system in Myanmar also

gives birth to illicit economic activities, such as currency black market. In order to 4 Unofficial rate is the result of currency black market that depends on market performance. 5 About 300 enterprises were privatized by Military (junta). Bertelsmann Stiftung, BTI 2012 — Myanmar Country Report, 2012, p. 15. 6 See, for instance, D. O. Dapice, T. J. Vallely, B. Wilkinson, M. McPherson&M. J. Montesano, The Myanmar Exchange Rate: A Barrier to National Strength, Ash Center Harvard Kenedy School&Institute of Southeast Asian Studies, 2011, p. 3.

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conduct trading with other countries, enterprises with no access to the official rate will

exchange the currency in black market. As a result, this practice affects the

competitiveness of the products sold using unofficial rate compared to products sold

using official rate. It implies that, in an open competition, state-owned enterprises will

win the market rather than non-state-owned enterprises that do not have any access to

the stronger official rate.

3. Economic situations: inflation, GDP growth, trading

Myanmar is one of the poorest countries in the world with a total GDP of

USD82.68 billion (ranked 78th), GDP growth of 5.5%, GDP per capita of USD 1.300,

and inflation rate of 5%.7 Based on UNDP’s Human Development Index (HDI), in

2011 Myanmar was ranked 149th out of 187 countries and was the lowest among other

Southeast Asian countries. Since junta took control of the government, Myanmar has

been suffering from economic stagnation, due to complicated bureaucracy in

Myanmar, including its exchange rate system. Military who holds many privileges

misuses and even monopolizes the market. They use official rate to import foreign

products and then sell it with a higher price as if they used unofficial rate. They aim to

benefit more from the margins between official rate and unofficial rate which are

about more than 900 Kyat. This practice can happen in Myanmar because the military

owns the Union of Myanmar Economic Holding Limited (UMEHL) in 1990 and the

Myanmar Economic Corporation (MEC) in 1993.8 Both enterprises are the biggest in

Myanmar and reserving the rights to export and import goods to and from abroad by

using official rate. As the result, inflation is unavoidable in Myanmar as long as this

practice is still conducted.

This is very interesting to know that in 1988 coup, junta declared that

Myanmar would implement the so-called “open door policy”.9 This should imply that

after 1988, Myanmar became a market-oriented country. Yet practically speaking,

socialist ideals are still implemented by junta and even becoming more intense, thus

making Myanmar come back to the old form of socialist governance. As a result,

7 All those numbers are from 2011 fiscal year. Central Intelligence Agency, the World Factbook (online), 2012, <https://www.cia.gov/library/publications/the-world-factbook/geos/bm.html>, accessed January 7, 2013. 8 Z. Linn, ‘Burma and the International Development Aid and FDI’, Asian Tribune (online), Juni 2, 2012, <http://www.asiantribune.com/news/2012/06/01/burma-and-international-development-aid-and-fdi>, accessed January 8, 2013. 9 M. Than, ‘ASEAN, Indo-China and Myanmar: Towards Economic Co-operation?’, ASEAN Economic Bulletin, vol. 8, no. 2, 1991, p. 180.

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Myanmar is excluded from international community, particularly by western

countries. Western sanctions have made Myanmar unable to benefit from economic

activities with western countries. But, not all countries are imposing such sanctions

over Myanmar. In fact, many neighboring countries still have trade relations with and

even invested capitals in Myanmar while westerns are resisting. This makes Myanmar

still have access to international trade, though limited to a few countries.

Nevertheless, trading in Myanmar is still dominated and even monopolized by state-

owned enterprises. This forces private enterprises to find a way of conducting trade.

Then, Black market becomes their solution to sell their products. Many of trade flows

(export and import) in Myanmar have not been recorded by the government. It is

estimated that more than 50%-85% of total trade in Myanmar is conducted in black

market.10 Thus, there is no exact record of Myanmar’s trade since the official record

provided by the government only measures trading conducted by the government and

government-owned enterprises.11 These conditions make economic development in

Myanmar become instable and vulnerable for decades.

C. EXTERNAL FACTORS

1. Foreign Sanctions

Myanmar has long experienced foreign sanctions since 1988 coup. The

sanctions come from US, Canada, Europe, Australia, and some other western

countries. As stated before, in case of sanctions, countries imposing sanctions towards

Myanmar are only western countries and its allies. Besides, Myanmar’s neighboring

countries and some other countries do not impose such sanctions towards Myanmar.

The sanctions itself are the result of (universal) value violations done by the

government, such as government repressions over civilians, military coup, and

socialist-style economy. The urgency to end up authoritarian rule in Myanmar leads

foreign countries –particularly westerns— to pressure the government to democratize.

By giving sanctions, foreign states expect that Myanmar cannot develop its country

and suffer from stagnation. The sanctions, somehow, succeed to pressure the

government because Myanmar’s economy has been declining over decades,

particularly prior to its membership in ASEAN.

10 M. Thein, Economic Development of Myanmar, Institute of Southeast Asian Studies, Singapore, 2004, p. 80. 11 See appendix 1.1 for Myanmar’s economic figures and appendix 1.2 for Myanmar’s official trade.

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For instance, US have been imposing economic sanctions since 1990 through

President’s Executive Order (EO) due to government oppression towards civilians,

thus abusing people’s rights. Since then, US suspended relations with Myanmar until

President certifies that Myanmar meets the condition in which human rights are

granted and narcotic are countered (Section 138) (P.L. 101-382).12 In 2010, US

Secretary of State Hilary Clinton visited Myanmar after junta freed some political

prisoners and also Aung San Suu Kyi. And one of the most remarkable reforms in

Myanmar was the successfulness of 2011 by-election where Aung San Suu Kyi and

its party National League for Democracy (NLD) won the election. For western

countries, Myanmar has shown a remarkable progress towards reforms. Thus, western

countries start to ease their sanctions towards Myanmar as Myanmar is accomplishing

some of its goals to reform.

2. Foreign Assistance and Cooperation

Economic instability experienced by Myanmar for a long period of time has

been hampering its development. In this situation, Myanmar people are the ones who

suffer the most, otherwise military as well as few businessmen enjoy their privileges.

Domestic situation that hampers most of Myanmar people becomes the concern for

international community. In order to help Myanmar out of economic instability and

particularly to lead Myanmar in shifting to democracy, international community gives

assistance to Myanmar through aids. Since its independence, Myanmar has been a

recipient of some international aids. These aids are reciprocal, thus requiring

Myanmar to do what the donors want as returns. In this case, Myanmar is urged to

implement such open-economy by implementing democracy. This is because most of

the donors are western countries that adopt liberal views. By assisting Myanmar with

aids, the donors would receive benefits. For instance, the donor countries will get

access to Myanmar’s market since Myanmar will liberalize its market as a return for

the aids and assistance.

Myanmar has been receiving aids as well as assistance from IMF, ADB,

World Bank, etc. Under the leadership of President U Thein Sein, Myanmar is

committed to making use of foreign assistance as well as government revenues from

trading to develop social welfare, thus making the people benefit from Myanmar’s

12 See M. F. Martin, US Sanctions on Burma, US Congressional Research Service, 2012.

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economic activities.13 Nonetheless, Myanmar also involves in some international

organizations, such as WTO, ILO, IAEA, WIPO, ASEAN, etc. Its involvements in

international organizations require Myanmar with commitments to implementing

provisions in these organizations. For instance, in WTO, Myanmar would have to

liberalize its market in order to fully integrate with international market. This means

that Myanmar would also have to adjust its domestic policies to meet the requirements

as well as Myanmar’s commitment in WTO. Most of these organizational

engagements will require Myanmar to open its country and even inspiring it to

conduct democratic governance. Particularly, Myanmar will require to reform its

economic policies to meet WTO provisions as well as other requirements from other

organizations and also donors.

3. Regional Pressures: ASEAN

Myanmar is located on the Southeast Asian region. As a regional actor,

ASEAN is willing to involve Myanmar into regional integration processes. Myanmar

has become the member of ASEAN since 1997. Its membership in ASEAN requires

strong commitment to implementing reforms agenda because ASEAN is trying to

pursue a regional integration by planting democratic ideals to all of its members. As

part of its commitment, in 2003 Myanmar declared its roadmap to democracy. This

roadmap consists of seven steps that will be implemented by Myanmar. Moreover,

Myanmar also has to comply with other regulations and provision in ASEAN,

including liberalizing its market by eliminating trade barriers such as tariff reduction

and quota restriction.14 Yet, the existence of multiple exchange rate system and black

market activities in Myanmar might hamper the implementation of market liberation

efforts. Myanmar is, thus, obliged to review its policy related to currency exchange

mechanism.

As a regional organization, ASEAN has a goal to build peace and democracy

in Southeast Asia. Part of its efforts to achieve the goal, ASEAN was trying to

embrace Myanmar to be integrated. In Southeast Asian region, Myanmar is one of the

countries where democracy did not exist for decades due to military control over

government. For ASEAN, integrating the entire region into a single entity becomes its

13 Z. Linn, ‘Burma and the International Development Aid and FDI’, accessed January 8, 2013. 14 Tariff reduction scheme and other provisions are regulated in ASEAN Common Effective Preferential Tariff scheme (CEPT) which has first been implemented since 1998. See, for instance, T. Aye, D. Schmahmann & J. Finch, ‘Integration of Myanmar’s Legal System into ASEAN’, Singapore Journal of International & Comapative Law, vol. 2, 1998.

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priority and ASEAN tends to conduct soft approach towards its members as well as

potential members. Prior to 1997, Myanmar was becoming the concern of ASEAN

because the government repressed its civilians and abusing their rights. To respond to

this situation, ASEAN neither leaved Myanmar alone nor put sanctions towards her.

Yet, ASEAN tended to encourage Myanmar to be involved in ASEAN directly

through membership. It explains the reason of why Myanmar is still able to conduct

foreign trade when western sanctions are imposed. It is because ASEAN did not

impose sanctions as its counterparts do towards Myanmar. Besides, since its

involvement in ASEAN, Myanmar has been attending thousands of meetings with

other ASEAN members. Analysts say that Myanmar’s involvement in ASEAN has

open its “eyes” to outside world in which other ASEAN members are living with and

benefiting from the interactions with international community. Thus, it can simply

explain that ASEAN helps Myanmar shift from authoritarian and isolated country to

be a democratic country which is in line with ASEAN ideals to pursue peace through

democracy.

D. ANALYSIS: RATIONAL CALCULATIONS OVER ECONOMIC

REFORMS

To analyze the decision taken by the (quasi-civilian) government of Myanmar,

I will use the concept of rational decision which firstly introduced by Hebert A.

Simon in 1977. In rational decision concept, an actor has calculated and analyzed

some possible alternatives before selecting a particular choice.15 Basically, Simon

argues that there are 4 phases an actor must follow in taking any decision for his/her

company.16 These 4 phases are intelligence, design, choice and review (Simon, 1977).

1. Intelligence

Based on Simon’s concept of rational decision, intelligence refers to the

efforts done by decision maker to find the occasions for making the decisions.17 By

looking to the internal and external factors above, we can see that currently, Myanmar

15 A. Oliveira, ‘A Discussion of Rational and Psychological Decision-Making Theories and Models: The Search for a Cultural-Ethical Decision-Making Model’, Electronic Journal of Business Ethics and Organization Studies, vol. 12, no. 2, 2007, p. 12. 16 This concept aims at analyzing manager decision over his/her company. Yet, it is possible to analyze government’s decision or policy by arguing that a state is similar to company which is also well-structured. 17 S.M. Turpin, M.a Marais, Decision Making:Theory and Practice, ORiON, vol. 20, no. 2, 2004, p.144.

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has gained its momentum. The on-going reform happen in Myanmar is leading it to

prove international community that Myanmar is really committed to reforming its

country. And Myanmar has also shown it through concrete actions and policies that

support reform processes and democratization. Nevertheless, each of these actions is a

result of pressures which are coming from inside and outside the country. On the one

hand, Myanmar’s commitment to implementing reform agendas. As quasi-civilian

government took the office since 2011 –President Thein Sein and NLD in

parliament— Myanmar has a new spirit to reform. President Thein Sein has shown its

supports over democratizations and reforms in Myanmar through some measures. For

instance, he released hundreds of political prisoners. Besides, by winning the by-

election last 2011, NLD which is led by Aung San Suu Kyi becomes the biggest

opposition in the parliament. This implies that military no longer holds absolute

power in parliament since every decision will be reviewed thoroughly by NLD before

passing it.

Moreover, the misleading economy (socialist style economy) has made

Myanmar suffer from economic stagnation for decades. Experience tells Myanmar

that socialist economy and authoritarian regime have made Myanmar fall behind its

neighboring countries in ASEAN, both politically and economically. Multiple

exchange rate system imposed by the junta resulted many chaotic situations in

Myanmar, thus leading to economic declination. Black market practices, for instance,

become very popular in Myanmar because it helps people with no access to official

rate to conduct international trading. Yet, it also gives a bad effect to the economy,

because Myanmar has lost its national income from trading since black market

transactions are never reported to the government, whereas it is accounted to

contribute about 50%-85% of overall trade. Military who formerly retained the whole

access to the politics and economies of Myanmar begins to give up their privileges to

the civilian. It is the occasion where civilians really have a power to influence

decision making in Myanmar for the first time after junta ruled Myanmar for decades.

On the other hand, in international level –external factors— Myanmar finds

out that being isolated has limited its development efforts. Since western countries

imposed sanctions towards Myanmar, Myanmar started being excluded from

international community, particularly in the terms of bilateral relations. This situation

makes Myanmar lose some of its odds on the beneficial relations with western

countries. Moreover, Myanmar’s engagements in some international organizations

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have also contributed to the reform process. It is because in some organizations, such

as ASEAN and WTO, Myanmar is required to open its country from international

community through democracy and market liberalization. These engagements become

the responsibility for Myanmar. When Myanmar meets the requirements to liberalize

and democratize its country, it will get the trust from international community and

approved to the international market system. IMF, ADB and World bank are the

international organizations which have a big influence in Myanmar after ASEAN.

These three organizations give assistance to Myanmar to conduct the economic

reform. Their contributions through aids, loans, grants and advisory have made

Myanmar welcome reform scenarios and assistance from them. It is also a result of

new government initiatives –led by President Thein Sein and NLD— to support

reform processes. These circumstances happen inside and outside Myanmar have

pressure the government to really implement reforms.

2. Design

In this phase, the decision maker designs some possible choices and analyzes

the costs and benefits of every choice. Based on this analysis, the actor will have

reasons to choose a particular choice. According to the explanations above, I argue

that the government of Myanmar basically has three possible choices: 1) to maintain

economic policy by maintaining multiple currency exchange rate system, 2) to reform

economic policy by suspending military privileges over official rate thus maintaining

fixed rate and letting floating rate to dismiss and 3) to reform economic policy by

uniting the currency exchange into a managed floating rate system.

1) Maintaining multiple exchange rate system

The first choice the government of Myanmar might have is to maintain the old

system of currency policy (multiple exchange rate system). This choice occurs

because the military still rules Myanmar in many aspects. Their existence could

possibly revive the socialist ideals which were long implemented in Myanmar. In the

other words, the military could possibly have a willingness to rule Myanmar and

enjoy the privileges again–post-power syndrome— thus resisting giving up their

positions. This means that, military will dominate and monopolize the official rate. As

a result, Myanmar’s trade will fail to improve as international community will resist

buying products from Myanmar and even resuming the sanctions towards Myanmar.

Shortly, if this choice is chosen, Myanmar will be excluded from international

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community. If this happened to Myanmar and Myanmar maintained this system, it

would not benefit anything and even make the economy decline for other decades.

2) Suspending military privileges and maintaining fixed exchange rate

system

The second choice is to suspend military privileges over official rate yet

maintaining fixed rate system. This choice means that Myanmar will possibly dismiss

the multiple exchange rate system by suspending military access to official rate so all

Myanmar people can use the official rate to conduct international trade. This choice

can dismiss black market activities in the country automatically since people will have

the access to exchange its currency using (stronger) official rate. Besides, this choice

also can improve flow of trade throughout Myanmar and reducing the inflation. It is

because imported goods will be valued rationally based on official rate and military

can no longer hike the price instead of using unofficial rate. Yet, on the other hand,

this choice will lead Myanmar to have deficit payments. As I have explained in

previous chapter, under the official (fixed) rate, Kyat is overvalued towards dollar.

This made Kyat become a strong currency –1 USD = 6 Kyat— whereas under the

unofficial (floating) rate Kyat is valued hundreds times of that of official rate –1 USD

= 850 Kyat—. So the thing is when Myanmar overvalued its Kyat towards foreign

currency by using official (fixed) rate, it would adverse Myanmar’s balance of

payment and spark resistance from foreign country. If Kyat is overvalued by using

official (fixed) rate, the inflow of imported goods will be bigger than outflow of

exported goods from Myanmar. It will end up with the collapse of domestic

enterprises due to their inability to sell the products outside the country. The logic is

Myanmar people will tend to buy imported goods with a relatively better quality but

the price is cheaper rather than domestic goods. In open market, the demands for

Myanmar’s products will not be high because the consumers abroad have to pay more

to get a lower quality of Myanmar’s products. Thus, this choice would probably spark

the resistance from foreign country particularly when the demand for Kyat is

increasing and also resistance from Myanmar people itself when they cannot sell their

products abroad (low demands of Kyat and Myanmar’s goods).

3) Reform economic policy by uniting currency exchange system into

managed floating rate

The last choice is to reform the economic policy by uniting the currency

system to be a managed floating rate. This choice starts from the urgency to end up

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military domination over official rate but at the same time encouraging the people to

conduct international trade in a fair way. When we see the internal and external

factors, there is actually a core problem faced by Myanmar that hampers its

development, it is military domination. Military domination over domestic politics

and economies has led to military monopolization over many aspects, particularly in

economic sectors. In case of Myanmar, currency exchange rate system is as very

important to determine most of Myanmar’s GDP in which trade becomes the vital

point. But, as economic sectors are dominated by military, Myanmar has to suffer

from economic declination. In order to reform its country, Myanmar firstly needs to

end up military privileges and giving a wider chance to civilian to conduct economic

activities. Shifting currency exchange system from multiple to be single will likely

contribute to the development of Myanmar. Floating rate then becomes the solution to

get Myanmar out of economic declination. By implementing floating rate system, the

rate of Kyat will depend on market performance, the rate may be approximately 1

USD = 850 Kyat much higher than the fixed rate. Yet, this weak Kyat will positively

contribute to the trade surplus since foreign consumers can buy Myanmar’s products

in a cheaper price. This system will also make foreign products cost much expensive

for the importers than before –when using fixed rate—. Otherwise, for the consumers,

there will no significant difference in price since the old practice of trading which was

dominated by military was also using floating rate instead of fixed rate to sell

imported goods inside the country. Furthermore, I argue that international community

will welcome this policy when it comes to effect. The reason is because this system

will end up military domination over economy that the international community

wants. Also, this system will eliminate black market activities since all Myanmar

people are granted to be able to exchange their currency without any restrictions. By

the assistance and guidance of international community, such as IMF, World Bank

and ADB the implementation of this policy will be well managed thus succeeding to

develop Myanmar’s economy. Lastly, this policy could prove that Myanmar is

committed to reforming it country and ready to open its “door” to foreign countries.

3. Choice

After making some choices, the government of Myanmar then steps to the

third phase, it is choice. In this phase, the government of Myanmar chooses one

particular policy that has the lowest risk to avoid and highest opportunity to get.

Based on the designs above, the government of Myanmar finally chose the third

15

option; it is to reform the economic policy by uniting currency exchange system. For

Myanmar government, it is better to choose the third choice because this choice will

be effective to be implemented. Firstly, Myanmar will get assistance from three

international donor institutions: International Monetary Fund (IMF), Asian

Development Bank (ADB) and World Bank. By following their assistance, Myanmar

will learn how to benefit from and to conduct this exchange rate system. Secondly,

Myanmar will likely benefit from international trade surplus because the demands for

Myanmar products will increase as Kyat holds a lower rate than before. Thirdly, in

order to eliminate black market activities, Myanmar establishes two banks that will

handle currency exchange. This measure will legitimize people who exchange their

currency in bank. Fourthly, this policy will also boost investments in Myanmar since

new exchange rate policy is part of new investment law that is still in process to pas

the legislature. The new exchange rate system will make the investors sure that there

will be no monopoly practices over currency rate, thus more certain.

Nevertheless, this policy is not free from risks. Due to its low national

capability, international trade using floating rate might endanger Myanmar. Currently,

the economy of Myanmar depends on traditional sector especially agriculture which is

accounted for 55% of the total GDP while service sector is 33%. Besides,

manufacture and industry sectors are lagging behind and only accounted for 7% and

10% respectively.18 The point is, when Myanmar cannot fulfill its necessity for

manufactured products such as vehicles and electronic utilities, they have to import it

from abroad. But, the exchange rate imposed by the government is floating rate which

is weaker against dollar. So, it requires more Kyat to buy dollar and thus burdening

Myanmar’s balance of payment. To avoid this risk, Myanmar should increase its

domestic capacity to be able to export more products abroad so the surplus from

exports could cover the deficit in imports. Based on this logic, Myanmar should also

try to benefit from the possibility of transfer of technology from imported substitutive

goods. By increasing Myanmar’s capability to develop its own production base for

substitutive goods while improving the efficiency of its productivity of primary

goods, the economy and human resources in Myanmar will develop decades later.

18 See appendix 1.3

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4. Review

The last phase is review which refers to the assessment of the choice. After

being implemented on April 1, 2012, Myanmar’s new exchange rate policy has shown

its contribution towards many aspects in Myanmar. First, this policy has proven

international community that Myanmar is really committed itself to reforming its

country. International community welcomes Myanmar’s decision to unite currency

exchange. Sanctions towards Myanmar start to be eased one after another. For

instance, According to the press release from Council of the European Union,

European Union has officially suspended its sanctions towards Myanmar and

welcome trade relations with Myanmar with exception or arms trade for a year.

United States, Australia, Norway, and other countries are also easing the sanctions

towards Myanmar. Second, Myanmar’s new exchange rate policy does not make Kyat

to be over devaluated. Otherwise, Kyat becomes stable even in the floating system.

According to Myanmar’s Central Bank, the exchange rate for USD against Kyat is

fluctuating in a relatively small margins about 800 to 830 Kyat.19 Third, After the

implementation of this policy, Myanmar begins to experience a faster flow of foreign

trade and investment. The data that show the increasing numbers of foreign trade,

however, has not been available yet. But, currently some international corporations

are starting to open its business in Myanmar, for instance, Coca Cola Company has

been entering Myanmar and selling their products to the Myanmar people. Besides,

according to Asian Development Bank (ADB) the economic growth of Myanmar is

expected to grow by 6.5% in 2013.20 Fourth, I the scope of foreign cooperation and

aids, Myanmar have been experiencing increasing numbers of foreign aids. In the end

of 2012, World Bank has been embarked its credit and grant to Myanmar accounted

for USD 245 million under an 18-month work plan.21

19 See, for instance, S. Thein, The New Light of Myanmar: Towards a sound financial system: Regime Change, 2012, p. 7. 20 Mizzimanews, Burma’s Predicted Growth Rate Increased: ADB (online), 2012, <http://www.mizzima.com/business/8162-burmas-predicted-growth-rate-increased-adb.html>, accessed January 9, 2013. 21 South China Morning Post, World Bank Grants US $ 245m in aid for Myanmar (online), November 2, 2012, <http://www.scmp.com/news/asia/article/1074559/world-bank-grants-us245m-aid-myanmar>, accessed January 9, 2013.

17

D. CONCLUSION

Myanmar has long been experiencing military regime since 1988 coup. Since

then, Myanmar did not experience remarkable economic growth due to internal and

external factors. For example the on-going reforms, inflations, multiple exchange rate

system, black market activities, and foreign sanctions. These factors have contributed

to the stagnation and even declination of Myanmar’s economy. In Myanmar, currency

exchange rate has become one of the main factors that hampers the development

efforts. Military domination over official rate and other economic and political

privileges have made military become the main actor in driving development in

Myanmar. After President Thein Sein took the office in 2011 and NLD won the by-

election in the year, the wave of reforms become more intense. Foreign sanctions also

begin to ease due to initial reforms done by the quasi-military government. Finally, in

April 2012, Myanmar legislature passed Myanmar’s New Exchange Rate Policy

shifting the old exchange system. Under this system, Myanmar floats its Kyat against

foreign currency. This policy is actually the result of rational calculations done by the

government. By using the concept of Rational Decision (Simon, 1977), I conclude

that Myanmar’s new exchange rate policy is the right decision passed by the

government. It is because this policy is the most beneficial and less-risky to be

implemented by Myanmar. Even though there is a little risk that might occur after

implementation of this policy, but until now, Myanmar does not experience any

negative effect from this policy. Otherwise, Myanmar even experiences many benefits

after this policy is implemented.

18

Appendix:

Appendix 1.1 for Myanmar’s economic figures Source: Bertelsmann Stiftung’s Transformation Index (BTI) 2012

Appendix 1.2 Myanmar’s official trade. Source: J. Alamgir, ‘Myanmar's Foreign Trade and its Political Consequences’, Asian

Survey, vol. 48, no. 6, 2008, p. 980.

Appendix 1.3 GDP Composition of Myanmar Source: Global Edge, U.S. Commercial Service

19

References:

Papers, Journals and Literatures:

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20

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<https://www.cia.gov/library/publications/the-world-

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