_ by Sean- Turnell

[Sean Turnell is Professor of Economics at Macquarie University in Sydney, Australia.]

SYDNEY – Burma, once the richest country in Southeast Asia, today is mired in deep poverty. Its economy ruined by nearly 50 years of economic mismanagement under military rule, the only international rankings that it tops are those for most corrupt nation, world’s worst health system, and lowest spending on education – “accolades” that are sadly indicative of its people’s suffering.

And yet, over the last few years Burma has also emerged as a significant producer of energy in Southeast Asia. Thanks to large fields of recoverable natural gas located offshore, Burma now earns substantial foreign exchange revenues.

At present, most of these revenues ($1-1.5 billion per year, depending on price fluctuations) come from Thailand. Gas from Burma, piped onshore from the Gulf of Martaban, generates around 20% of Bangkok’s electricity supply.

If all goes well, new gas fields recently discovered in the Bay of Bengal will provide even more gas for China’s Yunnan Province. To get the gas into Yunnan, a much longer pipeline – running the length of Burma – must be built. The project will be as difficult as it will be controversial. But, with no environmental or labor standards to contend with, few doubt that the pipeline will proceed.

So, given its newfound energy riches, one might expect Burma’s public finances to be rather flush, with surpluses aplenty to spend on health, education and much else that the country so desperately needs. Alas, almost none of Burma’s gas revenues actually feed into its budget, owing to a rather ingenious device employed by the Burmese junta.

The device is simple. Like many countries ruled by authoritarian regimes, Burma has a dual exchange rate system. The official exchange rate pegs Burma’s currency, the kyat , at a rate of six to one against the US dollar. The informal or black market exchange rate determines the value of the kyat according to supply and demand in the marketplace.

Trading kyat in the black market is formally illegal (and Burma’s regime loves rounding up foreign exchange dealers from time to time), but it is the only way that people unconnected to the regime can ever hope to come across foreign currency. According to the informal exchange rate, the kyat’s worth is currently about 1,000 to one against the dollar.

Given this dual exchange rate system, hiding Burma’s gas earnings becomes easy. By recording earnings at the official exchange rate, they are worth nearly 200 times below what they should be.

Thus, Burma’s gas earnings of around $1.2 billion for 2006-07 are rendered into a mere 7.2 billion kyat in the country’s public accounts – less than 1% of the regime’s official public spending. Recorded at the market exchange rate, however, these earnings translate into 1.2 trillion kyat – an amount large enough to eliminate Burma’s budget deficit, as well as the destructively inflationary money printing that is the regime’s preferred method of public finance.

So where do Burma’s generals hide all the money they keep away from the state’s budget? No one but the generals knows for sure. An inspection of the vaults of the country’s Foreign Trade Bank might be a good place to start, however, as well as those of some accommodatingly unscrupulous banks offshore.

Whatever the precise location of Burma’s riches, these hoards enable the junta to spend at its whim. A nuclear reactor, a new capital city, military pay increases – all of these and more have been on the menu of late. The one group that almost certainly will not benefit from any of the largesse are the Burmese people themselves, who are entitled to it and for whom it would mean an end to lives of poverty and want.

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Copyright: Project Syndicate, 2008.
www.project-syndicate.org