Myanmar's Economic Institutions in Transition

Author(s): Jared Bissinger

Source: Journal of Southeast Asian Economies , August 2014, Vol. 31, No. 2, Country
Focus on "Integrating Myanmar into the Global Economy" (August 2014), pp. 241-255
Published by: ISEAS - Yusof Ishak Institute

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Journal of Southeast Asian Economies Vol. 31, No. 2 (2014), pp. 241-55 ISSN 2339-5095 print / ISSN 2339-5206 electronic

DOI: 10.1355/ae31-2f

Myanmar's Economic Institutions

in Transition

Jared Bissinger

Improving the business environment has been a major aim of Myanmar 's reforms. However ;
the formal and informal economic institutions that govern exchange and shape the business
environment changed significantly under a half-century of socialist and military government.
The socialist leadership eliminated many market- supporting institutions made unnecessary
because economic activity was to be state planned. Under this framework , personal exchange
became dominant and control of economic life widespread . The military government revived
market exchange , but many institutions from the socialist era remained and continue to
constrain private business today. Thus , the strict economic controls , arbitrary policy-making
and lack of processes that affect businesses in present-day Myanmar have direct institutional
links with former regimes. They distort the structure of the economy , incentivile clustering in
particular sectors and promote the use of networks and personal exchange. As other countries
have shown , successful reform is a long process requiring more than changes in the formal
institutions of regulation.

Keywords: Business environment, Myanmar, New Institutional Economics, economic development,

Burma.

I. Introduction These changes have raised expectations about the

depth and breadth of reforms in the country, and
Since Myanmar's transition began in 2011, one
their potential to spur economic development.
of the key elements of the economic reform Yet changes in the day-to-day realities of doing
agenda has been building a more efficient and
business have been only modest because many
competitive business environment. A good formal institutions from previous regimes remain,
business environment, of which institutions areas do the informal economic institutions.
a key part, is essential for developing the private This paper examines two questions: How
sector. Myanmar's new government has reformedwere a Myanmar's economic institutions shaped
by the socialist and military regimes; and how
number of formal regulatory institutions, including
do these institutions - both formal and informal
the foreign exchange regime, the Central Bank, the
Foreign Investment Law (FIL) and trade licensing.
- affect the present-day business environment?

Journal of Southeast Asian Economies 241 Vol. 31, No. 2, August 2014

© 2014 JSEAE

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Centralization and control were key aspects of II. Economic Institutions in Theory
military and socialist economic governance.
In recent decades, the economics of institutions
Arbitrary or reactionary policy-making was
has become increasingly central to the analysis
common, often due to unforeseen economic
of developing economies, especially after the
challenges or previous policy missteps. Under the
perceived failure of neoliberal-inspired policy
socialist regime, the formal regulatory institutions
that facilitated market-based transactions were reforms in post-Soviet countries. This school of
thought is often referred to as "New Institutional
largely destroyed, leaving interactions dependent
Economics" (NIE), and argues that institutions
on networks and characterized by a lack of clear
processes and information. These characteristics matter for economic performance and are
susceptible to analysis by the tools of economics
are evident in the path-dependent institutions that
govern Myanmar 's economic transactions today. (Matthews 1986, p. 903). NIE "extends economic
They underlie many of the inefficiencies in the theory by incorporating ideas and ideologies into
market and raise transaction costs. They force the analysis, modelling the political process as a
businesses to rely on imperfect substitutes for critical factor in the performance of economies,
government institutions and regulations, such asas the source of the diverse performance of
informal mediation mechanisms. They change the economies, and as the explanation for 'inefficient'
markets" (Harriss, Hunter and Lewis 2003, p. 19).
barriers to entry and cost and benefits of different
businesses. This distorts the distribution of Though definitions vary, NIE scholar Douglass
North
economic activities, deincentivizes investment and defines institutions as "a set of rules,
encourages clustering in sectors with low riskcompliance
and procedures, and moral and ethical
behavioural norms designed to constrain the
low barriers to entry. These economic distortions
behaviour of individuals in the interests of
cannot be addressed without changes in both
formal and informal institutions. maximizing the wealth or utility of principals"
This paper explores these issues in the next (North 1990, pp. 201-202). According to North,
five sections. Section II reviews the economics institutions are designed to structure human
exchange, including economic exchange, and
literature to show that institutions play a key role
as such are often referred to as the "rules of the
in development. Section III looks at the changes
in formal and informal economic institutions game" (ibid.). Institutions can include formal
constraints (rules, regulations, laws), informal
during the socialist and military regimes, and
constraints (norms, conventions, codes of conduct)
how the business environment evolved during
their rule. This section uses historical sources to and their enforcement characteristics (North 1994,
show that control, arbitrary governance and lackp. 360). Formal economic institutions include the
of process were defining features of economicexecutive, legislative, judicial and bureaucratic
policy during the socialist and junta eras. Section functions of government, which play a key role in
IV explores economic reforms during the Thein
defining and enforcing property rights and contract
Sein government and their effect on the businesslaw (Williamson 2000, p. 598).
environment. Section V looks at the way economic One of the key concepts within NIE is that
controls, arbitrary governance and the lack oftransactions have costs, in contrast to classical
process affects businesses in present-day Myanmar.economics which assumes they are costless. This
This section draws on in-person interviews with was first posited by Ronald Coase in the 1937
local and foreign business owners and managers, study "The Nature of the Firm", in which he argued
as well as consultants in Myanmar.1 Thesethat firms exist because fulfilling all transactions
testimonies align closely with the predictions of through the market incurs costs (Coase 1937,
the academic literature. The last section looks at p. 392). These costs include learning about market
some of the consequences of these institutional
prices, finding a supplier or client, negotiating
principles on the private- sector. contracts, and monitoring and enforcing the

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agreement (ibid., p. 393). The costs of acquiring specific factors shaping the opportunities and
and understanding information about transactions is incentives for firms to invest productively, create
the key to transaction cost economics (North 1990, jobs and expand" (World Bank 2004, p. 20).
p. 27). The consequences of this insight are twofold. Investment climate analyses often look at formal
First, since transactions are no longer costless, the government institutions, regulation, infrastructure,
cost of doing business for a firm equals production financial systems, and macroeconomic conditions.
costs plus transaction costs. If transaction costs are Geography, market size and consumer preferences,
high, they can change firm behaviour by deterring or any other factors that influence the costs, risks
them from engaging in economic activity. Second, and barriers to competition in an economy, can also
when transactions are costly, economic institutions be included in more comprehensive assessments
arise to serve as a constraint on economic actors, of the investment climate (World Bank 2005,
increasing predictability and reducing uncertainty p. 20). The institutions of NIE are relevant for
in economic exchange (Harriss, Hunter and Lewis many aspects of the investment climate, both
2003, p. 18). directly and indirectly.
A large body of quantitative literature
has developed to examine the links between III. Historical Context of Economic
institutional quality and economic performance,
Institutions in Burma/Myanmar
with most finding a significant positive relationship.
Various papers have argued that growth is linked NIE posits that institutions are closely linked with
to institutions that: protect against appropriation economic performance, a proposition supported by
risk (Acemoglu, Johnson and Robinson 2005); an examination of Burma/Myanmar 's institutional
limit the power of government (Glaeser 2004); history and economic performance. Just over a
"reward production and exchange rather than half-century ago, Burma's economy underwent a
expropriation and redistribution" (Grief 2005); dramatic shift from a state-led market economy
and maintain "the rule of law, free markets, to state-dominated socialism.2 The new economic
small government consumption, and high human ideology was outlined in the Burmese Way to
capital" (Barro 1996). With the link between Socialism, brought in by General Ne Win and the
institutions and growth largely established, NIE Revolutionary Council (RC), who overthrew the
has turned to the question of how institutions parliamentary government in a coup in 1962. The
develop, especially those that promote growth RC was openly hostile to business, banning new
and economic development. North argues that private enterprise in 1963 (Turnell 2009, p. 226).
the history of institutions matters greatly because It nationalized much of the existing private sector,
"the present and the future are connected to the including agricultural and industrial production,
distribution, transportation, communications,
past by the continuity of a society's institutions"
wholesale and retail stores as well as banking,
(North 1990, p. vii). He notes that this is especially
relevant in socialist economies, where the private education, and many other services (Tin
"underlying institutional framework is the source2006, p. 13). Private imports were prohibited in
1963 and exports in 1964 (ibid., 2006, p. 138).
of their current poor performance" (ibid., p. 110).
Institutions are path-dependent, with constraints on
The government also introduced a prohibitive tax
of 99 per cent on net income over 300,000 kyats
actors in the present-day deriving from institutions
of the past. (ibid.). The rise of socialism in Burma amounted
The insights of NIE have influenced to a wholesale emasculation of private enterprise.
development economists not just in academia, but The Burmese Way to Socialism led to the
degradation or overhaul of most of the formal
also in practice. NIE has contributed significantly
to the impetus for policy work on improving government
the institutions that facilitated market
investment climate (or business environment).
activity. Khin Maung Kyi notes that the
The investment climate is the "set of location government's abandonment of the market system

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resulted in the end of "the institutions serving the social and administrative matters" (World Bank
functioning of the market system, such as the laws 1972, p. 3). The Ministry of National Planning took
of property and of contract, the legal system of a lead role in economic planning, and ministries
courts and lawyers, and the monetary and banking were delegated with specific areas of economic
institutions that provided the financial framework oversight, such as industry, mining and forestry. In
of the market system" (Khin et al. 2000, p. 189). 1972, there was an administrative reorganization
These institutions were no longer necessary for "designed to enable the top echelons to exercise
a socialist economy, in which the government complete control over public administration" and
organized economic activity. In theory, the private ensure that "no initiative nor responsibility was
sector did not exist in most areas and therefore did taken by the executing departments" (World Bank
not need regulation. The new formal economic 1972, p. 3). The formal socialist economy was to
institutions dramatically changed the "rules of the be controlled through a centralised, military-like
game" for private business. It increased incentivesadministration.
for smuggling and the ability to access government Yet by the mid-1980s, socialism had led to
resources and information, while decreasing the economic stagnation. Two and a half decades of
returns for long-term investment, especially in socialist rule had worn down an economy that
productive enterprises. struggled to meet the basic needs of Burma's
Instead of formal constraints, informal and socialpeople. Economic hardships were a major catalyst
institutions served as the primary constraint on theof the protests of 1988. Ne Win resigned in 1988
behaviour of private sector businesses. This wasand a military junta came to power, which did
evidenced in the importance of personal economic away with the largely discredited socialist system
exchange, as opposed to impersonal exchange that and legalized the role of markets in the economy.
is facilitated by formal market institutions such as Though markets were now legal, the economic
courts. Contracts with government and the ability controls that were characteristic of the socialist
to successfully smuggle goods into the countryera remained - unsurprising in a post-socialist
were linked to personal connections. Economic country (World Bank 1995, p. 79). According
incentives for businesses rewarded connections to Tin Maung Maung Than, the state played "a
(Kyaw 2002, p. 92). For example, small factory controlling role in the managed transition towards
owners without good connections "had to rely on a more outward-looking market orientation"
through state-owned enterprises and a raft of
hmaung-kho ( illegal goods ) markets to get the raw
materials needed for their factories, (while) well-
economic controls (Tin 2006, p. xvi). The controls
were especially focussed on strategic areas of
connected factory owners could buy an excess
the economy. Cumbersome and unnecessary
of raw materials at government corporations"
government regulations were commonplace.
for far more favourable prices (Kyaw 2002,
According to the International Monetary Fund
p. 89). These disparities were self-reinforcing,
because big businesses could spend more money (IMF), Myanmar 's continued failure to realize its
to recruit patrons in government to help them considerable economic potential was the result of
secure resources and information, while small and
its poor policy record, specifically its interventionist
economic policies (IMF 1999, p. 6).
medium businesses struggled to access government
officials and resources (ibid., p. 91). The formal government institutions of the
With the state charged with organizingsocialist era, which were designed to control and
most economic activity in Burma, the socialist
administer, were ill-equipped for the needs of the
government built its capacity to control the
market economy. Khin Maung Kyi noted that "the
institutional basis of a market economy, which the
economy. At the system's core was the hierarchical
Central Security and Administrative Committee parliamentary government had tried to build up,
(CSAC), under the Minister of Home Affairs, had been destroyed by a quarter century of misrule
under the socialist government" and the new
which "plays a coordinating role in economic,

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military regime did nothing to rebuild them (Khin near the bottom. Transparency International's
2000, p. 190). The sad state of Myanmar's market Corruption Perceptions Index found Myanmar to
institutions resulted in cronyism and arbitrary be among the five most corrupt countries in the
governance of the private sector. Entrepreneurs world in 2010 and 2011, in league with North
faced "complexity and apparent instability of rules Korea, Somalia and Afghanistan. Unsurprisingly,
and procedures" (Tin 2006, p. 392). This was foreign investors had little interest in Myanmar.
partly because the legal framework governing the By the mid-2000s there was virtually no foreign
economy, much of which was enacted during the direct investment (FDI) in Myanmar outside of
socialist era, was outdated and not designed for a the extractive sectors (Bissinger 2012, p. 23).
market economy. Since the military regime lacked Most FDI was from China, and targeted natural
the capacity to formulate and implement new resource exports (ibid.). ASEAN business people
policies, the macroeconomic environment became were well aware of the challenges of investing in
dominated by "arbitrary, often contradictory and Myanmar. A 2010 report from Singapore notes
ill-informed" policy-making (Turnell 2006, p. 110). that "the climate for trade with and investment in
The result was that authorities could "exercise Myanmar is poor. Companies report that results
are 'mixed' at best and 'disappointing' at worst"
control at their will" by citing restrictive measures,
for example trade laws, from the previous regime
(Singapore Institute of International Affairs 2010,
p. 4). Former Singaporean Minister for Foreign
to coerce or intimidate entrepreneurs (Khin 2000,
p. 186). The rules of the economic game became
Affairs George Yeo, said that "generally speaking,
our
more arbitrary, increasing risk and uncertainty businessmen are not doing well in Myanmar
for
economic actors. and many regret having invested there" (ibid.).
Though the private sector was no longerA half century of erosion in Myanmar's formal
criminalized, the business environment remainedmarket-supporting institutions had left the country
challenging. Among the most important constraints in desperate need of reform.
facing the private sector in 1990s were a shortage
of electricity, infrastructure deficiencies, financial
IV. Recent Economic Reforms
barriers (lack of capital and foreign exchange),
production barriers (lack of spares and raw Since taking power in 2011, the government of
materials), low technology levels, inadequate
Thein Sein has instituted numerous economic
machinery and the lack of a skilled workforcereforms, most of which have had a positive impact
(Tin 2006, p. 387). Political connections remained on Myanmar's business environment. Reforms have
important. Kyaw Yin Hlaing argued that "goodmostly targeted formal government institutions,
connections under the SLORC/SPDC regimewith the goal of eliminating inefficiencies, reducing
proved to be a crucial factor that decided thered tape and improving incentives for private sector
fortune of businessmen (Kyaw 2002, p. 97)." Smallbusinesses. One important reform was the 2012
private enterprises did spring up under the new move to a managed floating exchange rate and the
market system, carving out niches and "satisfyingelimination of the overvalued, official exchange
the needs of consumers" in Myanmar (Khin 2000,rate (IMF 2013a, p. 7). This removed the ability of
p. 67). However, they were often limited to the state-owned enterprises (SOEs) to import inputs at
production of low cost, low quality manufacturesartificially low prices, which distorted competition
(ibid.). between private businesses and SOEs. Budgetary
By the end of the State Peace and Development reforms also squeezed SOEs by requiring them to
Council (SPDC) era, Myanmar was regarded self-finance some of their costs rather than draw
as one of the world's most corrupt, opaque and on budget allocations (ibid.).
challenging countries in which to do business. The government extended international banking
Many international rankings did not even assess licences to a range of private banks, allowing
Myanmar. Those that did found it to be at or them to offer international banking services

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including wire transfers and letters of credit (World Bank 2013; Burma News International
for trade (Yin 2013). This unwound the former 2011; People's Daily Online 2011).
monopoly of state banks on international and These reforms created widespread optimism
trade-related banking. Myanmar 's government about the economy, and combined with the removal
passed a new foreign exchange management law, or suspension of most foreign sanctions, are driving
which lifted restrictions on transfers and other improved economic performance. According to
payments abroad (IMF 2013a, p. 7 and Yin 2013). the IMF, GDP growth is increasing and expected
It has also removed other barriers to international to hit 7.5 per cent this year (IMF 2014). Growth
transactions and trade, including the "export- is concentrated in services and manufacturing.
first policy", which required that all imports be Reforms have also brought renewed interest from
paid for with proceeds from exports (IMF 2013a, foreign investors. In the later years of SPDC rule,
p. 7). Lastly, a new Central Bank Law was Myanmar approved record amounts of foreign
passed in 2013, giving the Central Bank greater investment, including nearly US$20 billion in
independence from the Ministry of Finance and FY2010-11.3 However, this investment was almost
more flexibility in overseeing the kyat and theexclusively from China, and almost completely
financial sector. in extractive sectors. Since the new government
The government also removed barriers in the came to power, Myanmar has granted significantly
trading system. As well as the aforementioned more FDI approvals for projects across a much
improvements in international payments, import wider range of sectors, as evidenced in Table 1.
and export licensing requirements were removed Notably, sectors such as manufacturing and hotels
in March 2013 for 166 imported goods and 152 and tourism, which had not received FDI in years,
exported goods (VDB Loi 2013). In January 2014, attracted a significant number of investments.
the government permitted businesses to import In FY2012-13 and FY2013-14, manufacturing
goods from all fifteen categories of registeredaccounted for 83 per cent and 79 per cent of the
products, removing restrictions that limited total number of approved investment projects
companies to only seven of fifteen categories. (Central Statistical Organization 2014). These
Businesses that wanted to import goods from changes proved an important shift in investor
more than the seven possible categories previously sentiment about Myanmar. Actual investment,
had to register a new, separate corporate entity which represents inflows from previously approved
(Interview 203, 2014). projects, was the highest in Myanmar 's history,
In 2012, the government passed a revised FIL to though much of this is linked with resource
attract additional FDI. The law and associated rules projects first approved by the SPDC.
and regulations include enhanced tax incentives, Despite the reforms and the strong international
new arbitration mechanisms, greater clarity on theresponse they have elicited, Myanmar remains a
structure of investment partnerships and detailed challenging place to do business. The World Bank's
lists of restricted sectors (Government of Myanmar 2014 Doing Business report, one of the respected
2012). Nay Pyi Taw also passed a revised Citizens and comprehensive comparisons of country-level
Investment Law, which extended the benefits of investment climates, ranked Myanmar 182nd out
the FIL to local investors. Myanmar reformed of 189 countries (World Bank 2013, p. 212). In
the tax system by abolishing the withholding taxits first year in the report, Myanmar was ranked
on imports, simplifying the commercial tax on as the world's most difficult country in which to
domestic sales, requiring public sector employees start a company. It found that doing so required
to pay income tax, and steepening the progressivity11 procedures, 72 days, and cost 176.7 per cent
of the income tax (Yin 2013). The government alsoof the country's GNI per capita of US$835 (ibid.).
reduced corporate income tax rates for companies,Myanmar was also the second most difficult
eliminated the profit tax and reduced export taxes,country in which to enforce a contract. On average,
including some on agricultural commodities
this required 45 procedures, 1,160 days and cost

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 TABLE 1

Approved and Actual Foreign Investment to Myanmar

Number of Approved Approved Investment Actual Investment

Investments (US$ million) (US$ million)
2009-10 8 302 963
2010-11 25 19,997 2,249
2011-12 13 4,644 2,057
2012-13 94 1,419 2,880*
2013-14 94** 3,209** 3,516***

Note: * - estimated; ** - April to January o

Source: Approved Investment: Central Statisti
Permitted Enterprises by Sector," available at <h
Central Statistical Organization, Statistical Year
IMF (2013 b).

over 50 per cent of the claim (ibid.). Transparency
International's 2013 Corruption Perceptions Index
ranked Myanmar 157 out of 177 countries, putting
it among the most highly corrupt countries in the
world (Transparency International 2013). Vriens
and Partners' Asia Pacific Investment Climate
Index for 2013 ranked Myanmar nineteenth of
twenty countries assessed, up one position from
the prior year (Vriens and Partners 2013, p. 6).
One of the major challenges for business is the
risk of public pressure and political instability
leading to direct or indirect expropriation. Two
recent high-profile examples - the renegotiation
of the Letpadaung copper mine and the suspension
of the Myitsone Dam - have highlighted these
risks for foreign investors. In the former case,
the government renegotiated its contract with JV
partners Union of Myanmar Economic Holdings
Limited and Wanbao Mining just two years after
the Chinese company committed nearly US$1
billion to increase the mine's output by 150 per
cent. The new contract reduced Wanbao Mining's
share from 49 per cent to 30 per cent of profits
(Win and Soe 2013). In the later, Nay Pyi Taw
suspended the Chinese-backed, US$3.6 billion
dam in Kachin State after widespread protests.
According to the dam's backer, the China Power
Investment Corporation, more than 60 per cent of
the funds, or over US$2.16 billion, had already
been paid to Myanmar (Power Insider 2013). Both
cases illustrate the weak contractual enforcement
and property rights institutions in Myanmar, and
have dampened interest among foreign investors
in natural resource extraction.
Political instability is one of the major challenges,
and was cited in a 2012 survey as one of the most
important in Myanmar's business environment.
The survey, of 153 businesses from Yangon and
Mandalay, found that electricity was the greatest
obstacle to doing business in Myanmar, as noted
in Table 2.4 It was followed by political instability,
corruption, foreign sanctions and skills of the
workforce (Bissinger 2014). As of early 2014, no
large-scale business environment assessment had
been completed, though the World Bank, Japan
International Cooperation Agency, and OECD/
UNESCAP were all in the process of conducting
firm-level surveys. These assessments will gather
valuable new data, which will be essential for better
understanding Myanmar's business environment
and could shed light on rising new challenges such
as the escalating prices of urban land and rents.

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 TABLE 2

Most Cited Challenges to Doing Business in Myanmar

Question: "To what degree do each of the following present an obstacle to the current operation of t
firm, ?"
n No Minor Moderate Major Very Severe Mean
Obstacle Obstacle Obstacle Obstacle Obstacle Score
(Score: 0) (Score: 1) (Score: 2) (Score: 3) (Score: 4)
Electricity 150 27 28 24 21 50 2.26
Political Instability 151 48 26 17 30 30 1.79
Corruption 152 51 27 23 16 35 1.72
Foreign Sanctions 148 58 17 24 15 34 1.66
Skills Workforce 150 61 18 17 27 27 1.61

Source: Fieldwork conducted by author, April-Ju

V. The Residual Effects of Socialist and the collateral. Loans are limited to a maximum
Military Junta Economic Governance term of one year, and interest rates are capped at
13 per cent. Banks do not offer short-term trade
Reforms to some of Myanmar 's formal economic
financing or other short-term credit products.
institutions have helped improve the country's
The limited term and high interest rates of loans
business environment. Yet for many firms, the
dissuade long-term investment and result in less
day-to-day experiences of doing business are
job creation and lower per capita incomes.
little changed because path-dependent formal and
Control over business licensing and permissions
informal institutions still constrain businesses in
are also strong, and help create economic rents by
the same way they did under previous regimes.
Informal institutions are far more difficult to
limiting legal access to economic opportunities.
Myanmar has a complex and multi-tiered regime
measure and reform than formal ones, and
for business operating licences, which are issued
their influence will continue to shape economic
by a range of authorities. They vary dramatically
exchange in Myanmar for decades.
in cost, availability, and time to obtain (Bissinger
and Linn 2014, p. 17). Licences for small shops
VI Economic Controls through Formal and restaurants - local business that are not
Regulatory Institutions
generally lucrative - are granted quickly by
Significant formal controls over business, oftenmunicipal authorities. More lucrative sectors, such
through regulatory institutions, are among the as hotels, tourism, manufacturing, forestry and
most important constraints on economic activity mining, obtain licences from relevant ministries in
in Myanmar. The financial sector is an excellentNay Pyi Taw. This requires more time and money.
Businesses that want to incorporate apply to the
example and illustrates the detrimental effect they
can have on the wider economy. There are a wide Ministry of National Planning and Economic
Development (MNPED). Some businesses must
range of regulations that limit access to credit. For
example, all loans must be secured by collateral, obtain more than one type of licence.
generally land with buildings, though some banks Foreign companies apply for a company operat-
have started accepting other types of collateral, ing licence with the MNPED. Interviewees noted
such as gold. Loan-to-value ratios are low - onlythat the cost and time required to get an operating
licence from MNPED varied from four to nine
about 30^4-0 per cent of the forced sales value of

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months, with total costs ranging from US$3,000 to
US$15,000 including the costs of licensing fees,
accountants fees, and other associated logistical
and personnel costs (multiple interviews, 2014).
One interviewee described the process as follows:
They hired both a law firm and accounting firm
who pulled together paperwork, which was time-
consuming but not overwhelming. They applied
to the Directorate of Investment and Company
Administration, and also obtained a non-objection
letter from the Ministry of Commerce, which can
be a point of contention. The process took four
to five months, and cost US$5,000 in associated
fees plus another US$10,000 to US$15,000 in
staff costs to complete the process (Interview 202,
2014).
The barriers to obtaining a licence can vary
for many reasons. Formal barriers for Myanmar-
owned businesses include opaque and cumbersome
regulations, but often it is the informal barriers,
especially in lucrative sectors, that are important.
One Myanmar entrepreneur noted that he had
been waiting five years for the licence to operate
a large industrial business, yet still had not
received the licence despite having already
obtained the land and capital for the project
(Interview 014, 2013). Other businesses noted
that sometimes government could hasten the
process of obtaining a licence. For example, one
business person noted that they were working on a
transaction dealing with government land. As the the hierarchical structure has resulted in a public
government was also a party in the transaction,
it gave them a strong incentive to get behind the
project and push it forward, making it "a lot easier decisions.
to push through" (Interview 204, 2014). Both
indicated the dependence on personal exchange
was important.
Businesses must also obtain permissions for cons-
truction and other premises-related renovations.
These permissions come from local "development
affairs" organizations, the agencies playing the
role of the municipal council. They are needed for
minor changes and can take a significant amount
of time to obtain. A Yangon-based business person
said that it took their company "four months to get
permission for a very simple project" that involved
the renovation of a few buildings and construction
of a small new dwelling (Interview 207, 2014). The
local Myanmar foreman was "continually pushed
around, put off, etc." and the whole process "took
a lot of trouble" (ibid.). Another entrepreneur noted
that he had to obtain Yangon City Development
Committee (YCDC) permission to put up a sign
on the building. Regulations about the size and
type of signage did not guide the process. Instead,
case-by-case approvals were needed (Interview
209, 2014).
V2 A Stifling Civil Service
Control of the private sector is often exerted through
the civil service, where hierarchy and appearance
guide government-business interactions. The
deference of authority and elders is often attributed
to Myanmar's strong Buddhist heritage. However,
Khin Maung Kyi argues that it is also the result
of the socialist and military governments in which
decision-making "followed that of the military
system, the officers at one level unwilling to take
any responsibility and preferring instead to push
decisions to the next higher level" (Khin 2000,
p. 190). One interviewee, who has been doing
business in the country for over a decade, noted
that "civil servants get trapped in this mindset
that you can't challenge anything or change it or
else there will be consequences and retribution
(Interview 203, 2014)." The institutionalization of
administration in which lower level staff are often
unwilling or incapable of making even small
Consequently, mundane and unimportant
decisions, which are elsewhere made by lower
level civil servants, are elevated to the highest
levels of Myanmar's civil service. This delays
decision-making and distracts senior administrators
from more important tasks. For example, one
interviewee noted that they were interested in a
factory that the government was privatizing. In
order to tour the factory that was for sale, the
potential foreign buyers needed permission from
the Minister (Interview 204, 2014). The same
interviewee noted the challenges with hierarchy
in licensing: "there's no authority given to junior

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staff to issue licences, so for a licence as simple of paperwork through customs. That's because
as a garment factory, you need to lobby the MIC the individual departments in customs don't work
(Myanmar Investment Commission) for approval with each other very well (Interview 203, 2014).
- the chairman of the MIC shouldn't be involved
(Interview 204, 2014)."5
V.3 Arbitrary Governance
Another challenge of dealing with the civil service
is the frequent turnover among staff in ministries. The arbitrary announcement of new policies and
Staff turnover in the civil service has deep roots unexpected and inconsistent implementation of
in the socialist and military eras, when increasingexisting policies is a major challenge for business.
personalization of power over government It increases uncertainty, thereby reducing the
departments led to a deinstitutionalization of their incentives for businesses to make long-term
operations. Bureaucratic staffing was determined investments. Some policy changes can lead to
less by merit, and more as a way to reward loyalty. large losses for a business, which invested with
Given the hierarchical nature of the civil service, a certain set of expectations that arbitrary policy
relationship-building with senior officials is key to changes undermine. One example is the changes
the success of many larger projects. If these officials in the licensing system for import companies.
are transferred, the business may have to start the According to one interviewee, importers were
process over again. There is also inconsistency previously required to specify on their licence
between the way that different officials implementseven categories of goods (out of fifteen) that
rules and policies. One business person specificallythey could import. In the 2000s, the government
noted that this was a legacy of the military culturechanged the policy to allow companies to import
where you need to protect and build your power goods from all fifteen categories. In 2010-11
base. These inconsistencies create problems with they changed it back to the seven categories on
lower level staff, and build fear that, if you do notthe licence, then in early 2014 changed it back to
do something correctly, you can get into trouble fifteen categories. After the change in 2010-11,
(Interview 203, 2014). the interviewee applied for a second company
Like governments in the rest of the world, licence - at substantial cost in time and money
Myanmar also struggles with coordination - to continue importing products they had been
between different parts of government, or even previously (Interview 203, 2014).
between departments of the same ministry. This Changes in the car import licences regime
results partly from the size of the bureaucracy and are another example.7 These licences were
the primitive communication and information- among the first that Myanmar 's government
sharing technologies available. However, moving liberalized, and they have subsequently adjusted
information between government departments is the policy numerous times. However, the abrupt
essential for businesses to get things done, and changes hurt Myanmar 's existing automobile
can therefore be vulnerable to rent-seeking. One manufacturers, which were small-scale assemblers
business owner told the following anecdote to of mostly imported parts using labour-intensive
illustrate the point: methods. One interviewee who was formerly in
this business "got bitten by (the) change in the
In 2013, the Ministry of Information went to
automobile licensing policy" (Interview 015,
customs and there was a memo. The next day there
2013). Automobile imports were liberalized while
were no civilians, no agents, no one in Customs
he was producing cars financed through loans.
House. Four days later there was an embargo
on Yangon International Airport because all the He had "no idea the import policy was going to
imported products were stockpiled at the airport.6 change. He was building 10 cars and had to lower
So the airlines went to Nay Pyi Taw to lobby the the price and sell cars at a loss" (ibid.). The abrupt
government. The agents had been banned, but change gave the business owner no time to prepare
they are the ones who helped facilitate the flow or adapt, and caused a large loss to the business.

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V.4 Lack of Processes and Clear Procedures information so they need to ask a DG [Director
General] or minister" (Interview 202, 2014).
The lack of clear and efficient processes and the
The lack of clear processes helps government
public availability of information about these officials seek rents through corruption. One
processes are major problems for business. They interviewee noted that the lack of clarity about
increase transaction costs, such as the time and licensing "leads to lots of leeway and arbitrary
money spent gathering information, completing implementation and therefore corruption"
paperwork and meeting with government officials. (Interview 202, 2014). Another noted that tax
Often businesses have to contact the ministry. One officers wanted bribes, so they left tax filing open
so businesses could not renew their business licence
interviewee said "when there is no process, then
you just do an ad hoc approach, but the Minister (Interview 208, 2014). He said, "they won't assess
tax - they'll keep it (the tax filing) open until
is the only one who knows how to do it so you
you pay them off' (Interview 208, 2014). Another
really need to meet with him" (Interview 202,
interviewee noted that there was no policy about
2014). Another interviewee noted the difficulties,
which U.S. dollar to Myanmar kyat exchange
stating that "there are things that you have to do
rate to use for tax purposes. Tax laws and codes
that aren't in the paperwork... What goes on here, were applied but "as soon as there is room for
you have to figure out for yourself. Things have interpretation, that's where the negotiation starts"
to be worked out through people and contacts" (Interview 202, 2014).
(Interview 203, 2014). When clear processes and guidelines exist,
Businesses often deal with the lack of clearproblems often arise in implementation. For
example, Myanmar has published commercial
processes by outsourcing to agents or professionals.
One company noted that when it came to the and income tax rates and policies for both. In
tax
process, they have no idea how to do anything, businesses say their tax is determined
practice,
based on their size and how long they have been
and simply outsource everything to an accountant
in business, not profit (Interview 205, 2014).
(Interview 208, 2014). However, even local
As the business owner said, they "just rate you
professionals with years of experience are often
according to the size of the business but they don't
unclear on processes. One foreign business owneruse the tax schedules" (Interview 205, 2014).
said they hired a local accounting firm to help Similarly, development affairs organizations have
them with their taxes but this "experienced" local
two types of renovation permits, one for major
firm sometimes "appeared to be walking in the
renovations and one for minor renovations. The
dark" (Interview 202, 2014). latter is easier to get and does not need significant
Licensing is also characterized by uncertainpaperwork. However, one business owner said
processes. One business noted that the licensing that they just got a minor renovation permit to
process is "completely opaque. They are alwaysdo a big renovation because "there's no chart
telling you next week, next month, etc. No one or description of what is a small renovation and
what is a big renovation" (Interview 208, 2014).
really explains the process but apparently you send
All that was needed was a small payment for
in the application and it goes to one ministry that's
the minor renovation permit with the informal
related to what you do and then to a bunch of
permission to conduct a larger renovation.
other ministries for 'comments'" (Interview 208,
Another businessman noted that, when submitting
2014). At this latter stage ministries can object to
papers for a transaction, government officials
the licence during the comments phase, sometimesoften do not know what is required: "rather than
for vague reasons, requiring the business to restart
being rational and logical and reasonable about
the licensing process. Another business echoedwhat they (government officials) need to ask for
that sentiment, stating "there's no clarity about and what they don't, they just ask for everything"
the process of obtaining a licence. There's no (Interview 203, 2014).

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 Sometimes processes are circumvented by as transaction costs derived from acquiring
officials that lack proper accountability, incentives information and the primacy of sub-optimal
or capacity to implement them properly. One informal institutions, businesses in Myanmar also
business person noted a good example of incur the cost of rents extracted by the state, a
this in the process of importing wheat. The subject of equal importance but beyond the scope
business imports wheat under an HS Code (an of this paper.
internationally accepted coding system for traded Another key economic institution - property
goods) that does not require a licence and is not rights - is unpredictable in Myanmar,
subject to a duty. However, when it arrives at the discouraging businesses from making long-term
port, the customs officers assign a different HS investments. Reducing risk can be costly - one
code to the wheat which requires a licence and business, which rents their premises, could only
attracts a duty. This creates a contradiction, a get a long-term lease (ten years) by paying three
problem in the system which the customs officers years upfront, a significant burden for small
create in order to extract bribes (Interview 203, businesses. Normally commercial businesses
2014). have short-term leases, and as the business owner
noted, "if you can't plan for the long term, it
makes you less likely to invest in the place and fix
VI. Conclusion
everything up" (Interview 209, 2014). Arbitrary
Economic institutions in Myanmar influence the policy-making similarly increases the risk of long-
transaction costs faced by businesses. This has terma investments. If investors are not confident
significant effect on the sectoral distributionthat
of their contractual rights are protected from
both direct and indirect expropriation, they will
businesses and affects the economic activity they
choose to undertake. Coase noted: "If the costs demand a risk premium.
of making an exchange are greater than the gainsAnecdotal evidence suggests that some
which that exchange would bring, that exchange institutions have begun to change. One Yangon-
would not take place and the greater production based consultant noted that they "used to have
that would flow from specialization would not more dealings with the President's office but
now they have delegated more towards the line
be realized. In this way transaction costs affect
not only contractual arrangements but also what ministries" (Interview 202, 2014). Government
ministries are more open to receiving foreign
goods and services are produced." (Coase 1991,
p. 716). Dealing with government in Myanmar is delegations. Arranging meetings with government
is also becoming easier, though it remains a
replete with transaction costs, which influence the
decisions of businesses. As one firm said, "in terms
"strenuous and time-intensive process" that needs
dedicated staff, time and resources (ibid.). Changes
of construction and transportation, you're dealing
in formal regulatory institutions have already
with government a lot and it's a nightmare so we
reduced some transaction costs, for example by
focus on trading" (Interview 203, 2014). This
consequence is misallocated capital and labour
easing restrictions on obtaining foreign exchange
and subpar economic performance. or converting currency. Numerous export-oriented
Increased transaction costs that result from lackfirms in garments and other sectors in Yangon are
of processes cost businesses time and money. expanding and exporting greater volumes to new
Businesses must gather information on howdestinations,
to with fewer restrictions than in years
deal with government, yet because processes past.8 Myanmar 's economic prospects depend
greatly on the continued reform of regulatory
often change these costs are incurred repeatedly.
Networks are used to gather information which institutions and slow changes to informal
is not publicly available, yet the dependence institutions, such as hierarchies and control that
on personal networks serves to exclude some have been shaped over fifty years of socialist and
businesses and restrain competition. As well military rule.

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NOTES

1. Interviews were conducted from November 2013 to January 2014. Excerpts from some interviews come f
previous research project with Myanmar Development Resource Institute - Center for Economic and Soci
Development and The Asia Foundation. The author acknowledges the support given by these institutions du
the fieldwork that has also contributed to this article.
2. The name "Burma" is used to refer to the country in the historical narrative for all dates up to the official
change of name to "Myanmar" in 1988. After the official change of name, the name "Myanmar" is used
exclusively.
3. The Myanmar Investment Commission (MIC) approves foreign investment projects of businesses that invest
under the Foreign Investment Law. The figures released by Myanmar's government on an annual basis are for
the total number of projects approved by the MIC and the total dollar value of these approvals. Actual investment
represents inflows from previously approved investments.
4. The survey was conducted as part of the author's PhD research. Interviewees were selected at random from
the membership list of UMFCCI, and completed an in-person survey that covered business characteristics, firm
perceptions of the business environment, labour, capital, finance and firm performance. Note that while electricity
is a major constraint, the survey took place during the hot season in Myanmar, at a time when electricity supplies
were at a low point and protests were widespread. The increased attention on this issue during the survey period
may have influenced perceptions at the time of surveying.
5. Strictly speaking, businesses do not "lobby" MIC, but instead receive approval of investment applications.
6. In this instance, the embargo meant that no further shipments were allowed into the airport because facilities
were full.
7. Another good example is the recent forceful implementation of Myanmar 's strict restrictions on alcohol
importation. Local retailer CityMart was reported to have had 80,000 bottles of wine confiscated.
8. These assertions are not backed by systematic data, and are meant only to show that some businesses have
benefitted from reforms. They are sourced from personal discussions with manufacturers in garment and furniture
production sectors.

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