Burmese daze

Myanmar is preparing for an investment rush, but it is still far from ready. New draft laws on foreign capital suggest it may follow the success of Vietnam and Cambodia, both of which have achieved rapid growth despite weak government. But Myanmar's economy is horribly distorted, and it may take years to iron out the creases.

Alongside proposals for more direct foreign investment and tax breaks, the Myanmar government has proposed a unified foreign exchange rate of about 820 kyat to the dollar, versus an official rate of 6.4, according to plans seen by Reuters. Even by frontier market standards, that gap is huge. Venezuela, for example, has a ratio of 2 to 1 between official and free-market bolivars.

Myanmar's local enterprises will therefore have input and output prices that are wildly off kilter. Some will be using the black-market rate, others the official one. Exposed to unified exchange rates, many will simply go bust. In Bulgaria, local manufacturer Balkancar held 12 per cent of the world forklift truck market before prices were normalised from 1991, only for sales to collapse as the company became hopelessly uneconomic.

Wonky economic data create another challenge. Even though Myanmar's economy is state-dominated, government spending is officially only 8 per cent of official gross domestic product (GDP).

Meanwhile, foreign direct investment is officially 17 per cent of GDP, greater than in more open Vietnam. Even the population is uncertain: the World Bank believes it is still under 50 million; the Heritage Foundation says over 60 million.

Economies can get by without accurate statistics. However, if prices are very distorted, as in the former Soviet Union, much destruction has to happen before creative forces can take over. The likes of Ukraine suffered downturns that lasted more than a decade. Unemployment shot up before growth resumed.

Myanmar could weather these shocks with time, if its ruling regime is prepared to avoid too much meddling and withstand the initial discomfort. Post-Soviet experience suggests that economic 'shock therapy', like that experienced by Poland, can be more effective than slower reform. But even then, foreign investors in search of a quick profit should beware: it will take years for Myanmar to get its economy straight.