Burma is at a crossroads. While the country's dramatic (and fragile) political opening is receiving plenty of attention, its leaders are also confronting some stark decisions about their economic future. After decades of economic isolation, the economy of Burma (also known as Myanmar) is badly in need of reforms than can better promote development. The choices that Burma's government makes in the coming months could well determine what the country will look like 30 years from now: an industrialized South Korea or a resource-cursed Nigeria.
According to current academic and policy debates, a developing country can integrate into the world economy in one of two basic ways: rapidly, under the free trade/free markets principles of the Washington Consensus policies favored by the World Bank and the International Monetary Fund (IMF), or more gradually, based on an approach that initially provides domestic industries with trade protection, subsidy support, and technological support until they are mature enough to compete with global companies. Like Burma's partners in the ASEAN free trade agreement, the World Bank and IMF will likely be urging Burma to opt for the rapid integration approach.
Coinciding with its political opening, Burma's leadership has taken steps to deepen the pool of foreign investors in the economy beyond the traditional influence of neighbors China and Thailand. It has also invited the policy advice of western donor agencies such as the IMF and the World Bank and welcomed a range of views on future development policies, from advocates of the Washington Consensus to long-time critics of that approach, such as Nobel laureate Joseph Stiglitz. It remains to be seen which path Burma will follow.
The IMF has already sent several delegations to the country and is assisting the government in unifying its complex system of multiple exchange rates for the currency, the kyat, as a necessary first step to other reforms. No one will argue with that. But there are other areas where the advice of the Bank and the Fund on important fiscal, monetary, financial, trade and investment policies deserves critical scrutiny. The wrong decisions could hinder the country's efforts to industrialize successfully.
Regarding monetary policy, the IMF is likely to advocate for an independent central bank with an inflation-targeting regime. Despite new thinking in monetary policy about the usefulness of capital controls or mandating central banks to adopt a broader array of policy goals such as employment and growth, an IMF program for Burma is likely to advocate its standard inflation-targeting model, committing the Burmese central bank only to achieving low inflation by raising interest rates, even at the cost of reduced public investment in development and putting affordable credit out of the reach of domestic companies.
On financial policy, the IMF and World Bank are likely to suggest that Burma's companies rely on private international banks rather than public development banks, an approach that could also contribute to keeping affordable commercial credit out of the reach of many local companies.