Myanmar: Cross-Cutting Governance Challenges Since its nascent transition to democratic rule 2010, Myanmar has embarked on economic reforms, and the resolution of multiple longstanding civil conflicts. These transitions coincide with a resource-led economic boom. The paper assesses the current status and performance of governance institutions in comparison to ASEAN and selected other countries. Specifically, the paper discusses outstanding problem areas related to economic governance, particularly in the legal system, the business regulatory framework, and in bureaucratic capacity. It also touches on Myanmar’s initiation into the Extractive Industries Transparency Initiative (EITI) process to strengthen Myanmar’s ongoing reform effort. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to approximately two-thirds of the world’s poor: 1.6 billion people who live on less than $2 MyAnMAr: Cross-CuttinG a day, with 733 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. GovernAnCe ChAllenGes Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Cullen Hendrix and Marcus Noland no. 428 adb economics march 2015 working paper series AsiAn Development BAnk 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines ASIAN DEVELOPMENT BANK www.adb.org ADB Economics Working Paper Series Myanmar: Cross-Cutting Governance Challenges Cullen Hendrix and Marcus Noland Cullen Hendrix ([email protected]) is Assistant Professor of Korbel School of International Studies, No. 428 | 2015 University of Denver and Nonresident Senior Fellow at the Peterson Institute for International Economics. Marcus Noland ([email protected]) is Executive Vice President and Director of Studies of Peterson Institute for International Economics and Senior Fellow at the East-West Center. This was a background paper for the Asian Development Bank (ADB) Myanmar Country Diagnostics Study. We would like to thank Kevin Stahler for diligent and conscientious research assistance, and participants in the ADB workshops, particularly Jean- Pierre Verbiest for helpful comments on an earlier draft. We also thank Cyn-Young Park and Winfried Wicklein for their thorough review and comments on the paper. ASIAN DEVELOPMENT BANK Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org © 2015 by Asian Development Bank March 2015 ISSN 2313-6537 (Print), 2313-6545 (e-ISSN) Publication Stock No. WPS157145-2 The views expressed in this paper are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. Note: In this publication, “$” refers to US dollars. The ADB Economics Working Paper Series is a forum for stimulating discussion and eliciting feedback on ongoing and recently completed research and policy studies undertaken by the Asian Development Bank (ADB) staff, consultants, or resource persons. The series deals with key economic and development problems, particularly those facing the Asia and Pacific region; as well as conceptual, analytical, or methodological issues relating to project/program economic analysis, and statistical data and measurement. The series aims to enhance the knowledge on Asia’s development and policy challenges; strengthen analytical rigor and quality of ADB’s country partnership strategies, and its subregional and country operations; and improve the quality and availability of statistical data and development indicators for monitoring development effectiveness. The ADB Economics Working Paper Series is a quick-disseminating, informal publication whose titles could subsequently be revised for publication as articles in professional journals or chapters in books. The series is maintained by the Economic Research and Regional Cooperation Department. CONTENTS TABLES AND FIGURES iv ABSTRACT v I. INTRODUCTION 1 II. CROSS-NATIONAL INDICATORS OF GOVERNANCE 2 III. ONGOING ECONOMIC GOVERNANCE REFORMS 9 A. Property Rights and Factor Markets 10 B. Corporate Governance 13 C. Bureaucratic Capacity 14 IV. ENGAGING CIVIL SOCIETY AND THE PEACE PROCESS 18 A. Civil Society 18 B. Peace Process 19 V. EXTERNAL POLICY ANCHORS AND THE EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE 21 A. Resource Development Context 21 B. The Extractive Industries Transparency Initiative 23 VI. CONCLUSIONS 26 REFERENCES 29 TABLES AND FIGURES TABLES 1 Overall Governance Indicators 4 2 Legal System Indicators 6 3 Transparency and Corruption Indicators 7 FIGURES 1 The Most Problematic Factors for Doing Business in Myanmar 3 2 Freedom House Freedom in the World Compared, 2002–2013 5 3 Heritage Foundation Economic Freedom Index Compared, 2000–2014 5 4 Transparency International Corruption Perceptions Compared, 2008–2013 8 5 Larger Cabinets, Weaker Bureaucratic Effectiveness 16 ABSTRACT Since 2010, Myanmar has been in the midst of a multifaceted transition, involving economic reforms, the resolution of multiple long-standing civil conflicts, and a nascent transition to democratic rule. These transitions are coinciding with a resource-led economic boom. The paper assesses the current status of governance institutions, as well as their performance, in comparison to the Association of Southeast Asian Nations (ASEAN) and selected other countries. Specifically, the paper discusses outstanding problem areas related to economic governance, particularly in the legal system, the business regulatory framework, and in bureaucratic capacity as well as the potential use of external policy anchors, particularly in the Extractive Industries Transparency Initiative (EITI) process, to strengthen Myanmar’s ongoing reform effort. Keywords: Myanmar, governance, economic reform, peace process, property rights, resource curse JEL Classification: D72, D73, N45, P28 I. INTRODUCTION Good governance, or efficient and transparent conduct of public affairs and management of public resources, is more fundamental to economic development than any specific policy intervention. Good governance can be thought of as the creation of an environment in which beneficial policy can be formulated and implemented in a socially inclusive manner. Governance is an inherently multifaceted concept that encompasses both formal rules and norms governing the conduct of public affairs. Broadly speaking, it can be broken into three basic baskets: the legal and regulatory framework, bureaucratic and administrative capacity, and government transparency/engagement with civil society. Without good governance, countries fail to unlock the full potential of their human and natural capital. For society to make productive investments in human and physical capital, it needs assurances that these investments will not be expropriated—directly or indirectly--and that contracts will be enforced by independent, nonpartisan courts, even when it is not in the short-term interest of the government for them to do so.1 Moreover, these assurances are particularly valuable for courting investment from firms in Organisation for Economic Co-operation and Development (OECD) countries and investment in the nonresource sector, whose development will be crucial for balancing Myanmar’s export profile and providing employment opportunities. For markets to truly flourish, the government must be able to efficiently provide market-sustaining public goods, in the form of transparent market regulation, infrastructure, and enforcement of contracts. For these benefits to be widely shared and promote social inclusion, policies should be crafted in collaboration and consultation with civil society groups. Since 2010, Myanmar has been in the midst of a multifaceted transition, involving economic reforms, the resolution of multiple long-standing civil conflicts, and a nascent transition to democratic rule. These transitions are co-occurring with a resource-led economic boom, and all the blessings and challenges such booms entail. These transformations are occurring in parallel, and outcomes of each transition are dependent on the outcomes of the others. These transitions provide a unique opportunity to engage in broad governance reform and develop the institutions necessary for a growing economy. The remainder of this paper proceeds as follows. Section II assesses the current status of governance institutions, as well as their performance, in comparison to the Association of Southeast Asian Nations (ASEAN) and selected other countries. Section III discusses outstanding problem areas related to economic governance, particularly in the legal system, the business regulatory framework, and bureaucratic capacity, and provides specific policy recommendations for