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
0
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.
6
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.
8
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.
9
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.
10
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
12
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
13
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
14
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
16
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:
1. Alamgir, J., ‘Myanmar's Foreign Trade and its Political Consequences’,
Asian Survey, vol. 48, no. 6, 2008.
2. Aye, T., Schmahmann, D. & Finch, J., ‘Integration of Myanmar’s Legal
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M. J., The Myanmar Exchange Rate: A Barrier to National Strength, Ash
Center Harvard Kenedy School&Institute of Southeast Asian Studies, 2011
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Regime Change, 2012
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20
21
Online Articles:
1. Central Intelligence Agency, the World Factbook (online), 2012,
<https://www.cia.gov/library/publications/the-world-
factbook/geos/bm.html>, accessed January 7, 2013.
2. Linn, Z., ‘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.
3. 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.
4. 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.
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