Democracy Lab

Why Burma Shouldn't Listen to the IMF

If Burma's leaders really want to revive their economy, they can start by giving a cold shoulder to the Washington Consensus.

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.

Although Burma has recently made efforts to increase social spending, critics of the IMF's brand of fiscal restraint caution that it could prevent Burma from making the big, long-term capital investments that are needed to build up the underlying transportation, health, and education infrastructure upon which future productivity depends. For example, the 2008 Spence Commission on Growth and Development warned that the IMF tends to see public investment as a short-term stabilization issue, and has failed to grasp its long-term growth consequences. If low-income countries are stuck in a low-level equilibrium, then putting constraints on their infrastructure spending may ensure they never take off."

On trade policy, the IMF and World Bank will echo Burma's ASEAN partners and advise it to lower its trade protection rapidly, even before its new and small industries are strong enough to compete in international markets, thus threatening to block its future industrial development. And the apostles of the Washington Consensus are also likely to advise Burma to focus on its present (static) comparative advantage in natural resources extraction rather than adopting a strong industrial policy to develop its future (dynamic) comparative advantages in manufacturing and services.

By contrast, other critics of the Washington Consensus model, such as the United Nations Conference on Trade and Development (UNCTAD), encourage developing countries to increase public investment and build strong developmental states with institutions capable of executing effective industrial policies. Opponents of industrial policy are correct in pointing to some very unsuccessful previous efforts in developing countries. But they are often selective in their criticisms, ignoring successful cases, and do not account for why industrial policies worked so well in the U.S., Europe, and East Asia but failed so badly in Africa and elsewhere. UNCTAD argues that history says more about how industrial policies should be implemented -- not if they should be implemented.

Stiglitz cautions other developing countries: "Don't do as the U.S. says, do as the U.S. did." By this he means that rather than following the Washington Consensus advice for rapid global integration, developing countries should do what the rich countries did: develop domestic industries first, then open up gradually later on.

One problem facing Burma's leadership is that much of this history of what the rich countries did during their own early decades of economic transformation into manufacturing and services is no longer taught in most university economics departments. History shows that, although each case is unique, all countries that have industrialized successfully have usually done so first behind high levels of trade protection and subsidy support -- often for decades at a time -- and only liberalized their trade once their firms were able to be competitive in overseas markets, not before. Britain, the United States, Europe, Japan, Singapore, Hong Kong, South Korea, Taiwan, and China assigned a strong role to the state with temporary trade protection, public development banks or central bank policies that provided long-term, cheap commercial credit and extensive public technology policies to advance R&D and innovation -- almost precisely the opposite of the Washington Consensus advice of today.

Critics warn that how carefully Burma decides on the timing, pacing, and sequencing of opening its domestic industries to the global economy will be of vital importance. Many are worried that economies such as those of Burma, Cambodia, and Laos are not truly ready to join others in the ASEAN free trade agreement by the date (2015) to which they have committed.

At the moment, most foreign direct investment (FDI) coming into Burma is focused on the extractive industries of oil, gas, and hydropower. There is also interest in developing ports on the country's Indian Ocean coast that could connect with India and serve as alternative routes for Chinese shipping, which today must go through Southeast Asia's U.S.-patrolled Malacca Strait. But rather than simply throwing the doors open to any and all kinds of FDI, Burma's challenge is to use an industrial policy to help attract the types of FDI into its manufacturing and services sectors that will train the Burmese workforce in skills and technology. This is precisely what Burma needs if it is to move up the next rungs of the development ladder. Burma also needs FDI that will provide business for other small manufacturing and services firms in the domestic economy, something less likely to occur in "special" economic zones already being planned. While the IMF and World Bank often refer to the "private sector" in the abstract, Burma needs to think more explicitly about how the needs and interests of its own small and medium-sized enterprises (SMEs) are different from those of foreign investors, and take steps to support them accordingly.

Of course, those making the case for building a strong developmental state in the current national context of Burma face a serious challenge. Many feel that the government has already helped a handful of large and well-connected companies too much, and that this has not benefited many smaller companies. So it is understandable that, on the face of it, arguing that the state should continue to provide such strong support for domestic companies may seem inappropriate. But if Burma wishes to pursue an industrialization-based development model like the one used by some of its East Asian neighbors, its leaders should carefully consider what roles the state will need to play in enabling SMEs to grow into larger and more competitive firms, and take steps to preserve its policy space. Critics warn that the ability of the state to provide this support with trade protection, subsidized credit, and technology is likely to be greatly undermined if Burma adopts the Washington Consensus approach.

Which direction Burma's government will choose remains unclear. One hopes that its leaders will take the time to carefully consider integration into the global economy on their own terms and not be rushed into taking important decisions because of commercial pressure from others. South Korea or Nigeria? The choice is up to Burma.

SOE THAN WIN / AFP / Getty Images

Argument

Blurred Lines

If this administration won't tackle the vexing problems of America's vast intelligence gathering apparatus, we're all in danger.

When he was at the helm of the Central Intelligence Agency, Michael Hayden was fond of comparing the laws that limit agency operations to the white sidelines of a football field. CIA agents should operate so close to legal boundaries, he remarked, that they get "chalk on their cleats."

Unfortunately, those chalk lines today are too faint for either intelligence officers or the public to see. Although Congress instituted intelligence reform in 2004, and a hallmark of President Barack Obama's first term has been his aggressive approach to fighting terrorism, there has never been a real debate in Congress or in the public square about the intersection of our values and our requirements for gathering intelligence.

The result is a hodgepodge of internally inconsistent policies, an outsized role for the courts in interpreting and, in some cases, striking down those policies, and huge gaps in what the public knows and has been told. Recent questions raised about the nature of the New York Police Department's surveillance of mosques are but one example.

In the absence of clear legal policies, those expected to implement them either become risk averse or feel enabled to commit abuses. Abu Ghraib and the more recent Quran burnings in Kabul are unfortunate cases in point. (While the awful Quran episode may have had more to do with cultural insensitivity than intelligence gathering, have we really learned nothing in ten years in Afghanistan?)

One of the biggest reasons for this lack of progress is Congress's ongoing and exquisite dysfunction. The toxic paradigm of finger-pointing instead of bipartisan problem-solving has created almost total legislative gridlock. What passes for serious debate occurs within a tiny bandwidth, leaving scant chance to raise the tough issues -- let alone resolve them during this heated election year.

Discussion of these issues must be high on the agenda for the next president, no matter who he (gender seems the only given at this point) may be. America's leaders have an obligation -- indeed, a very heavy burden -- to tackle them.

Here are four that should get top priority:

1. The prison at Guantánamo Bay.

The Guantánamo Bay prison, where people were initially placed in wire cages resembling large chicken coops, has evolved into a state-of-the-art facility -- at a cost of $150 million per year. It's ironic that much of the inmate hierarchy and command structure developed when barbed wire cages permitted free communication -- and that none of the subsequent "improvements" has been able to disrupt that.

Although President Obama signed Executive Order 13492 to close the prison within his first year in office, the issue proved to be much tougher than he and his team anticipated. Files on individual inmates were incomplete and in many cases the "evidence tree" could not be rebuilt and was therefore inadmissible in federal court.

The House and Senate also stymied the president's original intent by blocking transfer of any of the 171 remaining prisoners to the United States for civilian trials. Congress first spooked itself and then launched a politically expedient campaign to scare the American people by invoking visions of grisly terrorist killers wandering around their neighborhoods. It's the Willie Horton ad campaign all over again.

This ironically bipartisan misbehavior leaves military justice as the only way to clear the backlog of prisoners. Yet military courts have secured only a handful of convictions since 9/11. In contrast, more than 400 terrorists have been convicted in Article III federal courts and are now serving long -- sometimes life -- sentences in federal supermax prisons.

Still, the tough questions remain on hold. For Gitmo's so-called "Final 50" detainees, where there is inadequate evidence to charge and try them but real concerns about the danger of releasing them -- even to other countries willing to accept them -- is the answer to let them go free? And, if not, does "preventive detention" square with the Constitution and American values? Should the Geneva Conventions -- which specify procedures for capture and imprisonment of enemy combatants -- be updated?

2. The blurred line between domestic and foreign intelligence.

After 9/11, the law enforcement community -- from state and local police to federal agencies and even a few private security contractors -- understandably sought to expand their capabilities to thwart terror attacks. A few police departments in this country began to operate far outside traditional jurisdictional borders, even sending officers to the Middle East.

It is true that state and local police -- our cops on the beat -- are more likely to identify and disrupt the next terror plot than a bureaucrat in Washington. And there have been many successes, including the plot uncovered in 2005 to target synagogues and military recruiting offices in my former congressional district in California. But there needs to be a clear framework for law enforcement to work within, and that conversation needs to take place now.

While few disagree on the need for such a discussion, the tortured history of the Violent Radicalization and Homegrown Terrorism Prevention Act -- legislation aimed at better understanding the "tipping point" between using constitutionally protected violent language and committing an illegal violent act -- illustrates interesting obstacles still in place. That act passed the House twice -- nearly unanimously each time. It was deliberately narrow in scope and would have done nothing more than create a nonpartisan commission to study radicalization and homegrown terrorism and then report to Congress. But certain privacy and civil liberties groups (many of which had been in the room when the bill was being drafted) attacked the act and those who voted for it, arguing it was a slippery slope and killing the bill before it ever came to a vote in the Senate. And so the legislative branch proceeds, without tools.

3. Kill switch hype.

Several high-profile events over the past few years -- from the infiltration of the Pentagon's $300 billion Joint Strike Fighter program to the Stuxnet worm that cut through Iran's industrial controls system -- highlight the complex threat of cyberattacks to governments. But the recent hacking of companies like Google and five major energy firms reveals how easy it can be to attack the private sector as well.

Many underestimate the role of the private sector in our nation's cybersecurity. In fact, it is the private sector that controls most of the infrastructure in this country. That's why we need to get industry and government in the same room to agree on meaningful protective measures and overcome big challenges such as the protection of proprietary data and uniformity to avoid competitive disadvantage.

Like so many other issues, cybersecurity has become too politicized. As a result, we still lack consensus about how much authority the government needs in the case of a cyber emergency. Outside groups have scared everyone with the idea of a "kill switch," which would allow the president, in extreme circumstances, to shut down the entire Internet.

"Kill switch" hype prevents more serious debate about cybersecurity. Congress and the White House have ducked some of the toughest issues, which means that the Internet, the electrical grid, and the aircraft control networks are all vulnerable -- and so is an under-informed public.

4. Targeted killings of Americans.

Targeted killing has been one of the most controversial components of President Obama's war on terror. Drone strikes in Pakistan, Yemen, and elsewhere have more than quintupled under his presidency. The use of such drones is a key piece of our counterterrorism strategy, but, as on the domestic side, its purposes must be transparent and publically debated.

Attorney General Eric Holder lifted some of the fog over this particular matter and provided a legal justification consistent with American laws and values in a speech at Northwestern University last week. Though he declined to address specific cases, Holder offered a detailed rationale for killing U.S. citizens abroad that includes an imminent threat to the United States, the danger of the person in question escaping, or the inability to capture that person alive.

Select members of Congress have most likely seen the complete legal justification, and the CIA took a positive step by pushing to make the reasoning public. Congress and the American people deserve to -- need to -- understand the legal rationale behind these strikes and to debate their appropriateness.

Our failure to address and one day solve these truly complex issues has consequences, and they are very serious. Kicking the can down the road means that our adversaries can exploit us and claim that we "disappear" people and ignore the rule of law. They can frame us as hypocrites and continue to use Gitmo and Abu Ghraib as recruiting tools for the next generation of terrorists.

We have to win the argument with this next generation, and the only way to do that is to live our values, face the tough issues, and build public support around our best answers. It's time for the United States to lead by example and make our chalk lines bright enough for everyone to see. 

John Moore/Getty Images