Why Burma has huge potential

Not many people followed the elections in Burma at the end of last year, even though they were the first for 21 years. The result was a foregone conclusion.

Some of the country's long-time military rulers may have taken off their uniforms, but the army remains firmly in charge: the new constitution reserves a quarter of the seats for it directly; and their proxy party won four-fifths of contested seats, in part because most of the opposition boycotted the polls.

You have to be very optimistic to see things getting substantially better for the long-suffering population any time soon. Yet there are some tentative signs of change. It's even possible that in a few years we could be looking at a very different country.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The military is still in charge

First, it's important to appreciate fully that the elections and the new parliament are just window-dressing. Power remains with the key figures in the military junta, headed by Than Shwe, who has been at the top of the group since 1992.

Following the elections, he officially resigned as head of state. He handed over the top job to Thein Sein, another army leader who had resigned in 2010 to run for election as a civilian. But nobody doubts that Than Shwe still exercises considerable power behind the scenes.

That's the way it will stay. A bit more dissent and discussion may be allowed, but key junta figures will still fill the top jobs and others will remain powerful despite their 'retirement'. The question is whether any of them will now be pulling in a different direction.

And that's what makes the recent developments over the Myitsone dam very interesting. This is a huge hydroelectric dam project on the Irrawaddy river in the north of the country. It's being built by China - Burma's closest ally - which was going to buy all the electricity generated.

It was also highly controversial, both for environmental reasons and because it would force thousands of residents - mostly from minority tribes - off their land. But the junta has never much cared about concerns like that before.

So it was an enormous surprise last month when Thein Sein announced that the project will be suspended while he is in office (supposedly at least until 2015). The reason given - the project is "contrary to the will of the people" - was even more surprising.

At the same time, the government has also been reaching out to opposition politicians. It's suggested that overseas Burmese citizens would be welcome to return home to help the country. It has also released some of the roughly 2,000 prisoners held for political offences (although releases happen intermittently anyway).

Change has nothing to do with democracy

So why might the armed forces show signs of change? They have imposed military rule since 1988 and supported a one-party state since 1962. They overturned a previous election in 1990 when their representatives failed to win. While they have long talked of a roadmap to democracy, nobody believes it. Why was another trip to the ballot box so important?

It's not because key figures have suddenly become convinced democrats. Rather, if it's typical of this kind of scenario, there are probably two factors involved.

Firstly, some top figures have been in power for a long time. They and their cronies will have accumulated a considerable amount of wealth and control over much of the economy. If you're smart, you start thinking about how you can hold on to that and to your influence as you begin to hand over to your successors.

Second, authoritarian governments aren't monolithic. It's a mistake to think of even very brutal ruling elites like a gang of Bond villains, gathered around a huge table growling: "Who can we oppress today"?

For some at the top, control trumps all; for others, economic issues play a part. The former are happy to be all-powerful in poor and isolated countries. The latter want to head a wealthier one with a better international status.

And in Burma, we're seeing both of these come together. Hardliners such as Than Shwe have probably given a little ground to protect themselves and their families and cronies better. Reformists such as Thein Sein are getting the opportunity to try their hand at changing the system.

However, that's reformists in an economic, not a democratic sense. We're simply talking about whether business-minded pragmatists get some sway against more ideological or security-driven leaders. It's the same pattern we've seen in countries such as China, with the struggle between Deng Xiaoping and the Maoists in 1978 setting the country on a new course.

In the short term, this is usually driven by self-interest. Burma has seen a mass privatisation of state assets to military figures and business supporters in both camps. There is nothing about democracy or honesty or cleaning up the system here.

But democracy does not have to precede development. Indeed, it usually doesn't. The experience of other developing countries suggests that comes when the country has become wealthier, a middle class has formed and the interests of the leaders, the security forces and other key players have changed. At that point, it makes more sense to allow change than resist it. And that's Burma's best hope.

Burma will do well when the generals give up

This doesn't mean that change is a certainty in Burma. There have been other attempts at reform in the past, notably when Khin Nyunt was prime minister in 2003-2004. He apparently fell out with Than Shwe, the hardliners pushed backed, he "resigned for health reasons" and was then convicted of corruption.

Thein Sein could go the same way if he fails to keep enough support (ie convince key allies that they will get richer under his plans). Getting the West to lift sanctions against Burma could be a major victory, hence the friendlier image he's trying to show over Myitsone and elsewhere. (Suspending - but not cancelling - the dam is a shrewd move now, while the option to resume it could also be a future negotiating tool with China.)

If he fails, Burma may have to wait for another reformist to get the top job. But if he holds on and does what he's promising, things could improve quickly at least economically.

Some people tend to lump Burma in with countries such as North Korea as international pariahs. But there is little comparison between the two, either in the extent of repression or the way the country runs. This is a loosely market-based economy, albeit a highly corrupt and unequal one with many sectors controlled by the military.

However, it is extremely poor and underdeveloped. It has a GDP per capita of US$1,250 (at purchasing power parity, which adjusts for the different costs of goods and services between countries). And that 's very unequally distributed.

By comparison, even extremely poor Bangladesh has a PPP GDP per capita of US$1,600. Nearby Vietnam, which is what Burma could aspire to become within a decade or so, is at around US$3,100.

The ingredients for growth are all there

But it has many of the ingredients for rapid development. The population is young, meaning a surplus of labour for low-cost manufacturing the traditional first step for a developing economy. Education standards are relatively good for its level of development; literacy rates are around 90%.

The population is around 60 million, meaning that this has the scope to be a significant-sized economy. And abundant natural resources could provide a valuable boost for the economy, if they are not squandered or stolen as they have been so far.

Geographically, Burma is well placed. It's on existing global trade routes, which would help develop an export-manufacturing sector. And more developed neighbouring countries such as China and Thailand are an obvious source of foreign investment, even if Westerners hang back for a long time.

Indeed, this is already happening. Foreign direct investment allegedly rose to US$20bn in the past year from US$300m the year before - yes that's billion and million respectively.

I say allegedly, because government statistics probably aren't that trustworthy. But there is little doubt that money is flooding into the country, because of the problems it's caused. The public exchange rate - as opposed to the official one the government uses - has soared, and many agricultural exports are now reportedly too expensive to be competitive.

Unfortunately, most of the investment so far is going into natural resources and power projects, which will have limited benefits for the country. The government will need to make reforms to attract money into sectors such as manufacturing and tourism.

It's those kind of steps that will show whether reform is a serious possibility. It doesn't make sense to get too optimistic - there are reports that a power struggle is already going on in government - but there is a chance of real change.

The most important thing is that this improves the lives of its citizens. But obviously, reforms could also present the same kind of investment story that we seen in many other Asian economies over the last few decades. The elections may be a sham, but Burma is certainly worth watching.