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“The new policy of ‘pragmatic engagement’ features 

more engagement while 

maintaining economic and 

political sanctions. Responsible economic stewardship 

lies at the heart of this approach. Further elaboration 

of the new U.S. policy could 

help galvanize international 

support for the adoption of 

a much-needed and long 

overdue reform agenda by the 

next government of Burma.”

March 30, 2010 

Can Economic Reform Open a Peaceful 

Path to Ending Burma’s Isolation?

Summary

•	 After decades of domestic conflict, military rule and authoritarian governance, Burma’s 

economy could provide a viable entry point for effective international assistance to promote 

peace. Doing so would require a detailed understanding of the country’s complex and evolving political economy.

•	 The lingering income and distributional effects of the 2008 Cyclone Nargis, anticipated 

changes associated with the new constitution and the 2010 elections and the Obama administration’s decision to devote more attention to Burma suggest that the time is ripe for the 

creative application of economic mechanisms to promote and sustain peace. 

•	 Looming challenges could derail Burma’s prospects for economic and political stability. These 

challenges include irrational macroeconomic policies, failing to ensure all citizens enjoy 

benefits accrued from natural resources, endemic corruption, a flourishing illicit economy, a 

dysfunctional financial system and critical infrastructure bottlenecks. Failure to address these 

problems would frustrate peacebuilding efforts.

•	 A conflict sensitive economic strategy for Burma would focus on effective capacity-building, 

sustained policy reform, progressive steps to reduce corruption, fiscal empowerment of 

subnational authorities and prudent natural resource management. Success in these areas 

requires unwavering political will for sensibly sequenced policy improvements by domestic 

actors and finely targeted support from Burma’s international partners.

Background

Burma’s civil war—unresolved since the country gained its independence in 1948 and now the 

world’s oldest—is rooted in ethnic differences and an abundance of natural resources.1 Sixty years 

of misguided policies have moved the country from being the Southeast Asian country with the 

brightest economic prospects at the end of World War II to ranking among the lowest in the world 

by almost all socioeconomic indicators.

A period of dysfunctional parliamentary democracy was followed by General Ne Win’s deliberate 

move to inward-looking socialism starting in 1962. In the wake of a popular uprising in 1988, Ne 

Win was pushed aside and a new military junta began to experiment with market reforms and 

a more democratic political order. After national elections in 1990 were won by the anti-military 

National League for Democracy led by Aung San Suu Kyi, the junta repudiated the results of the 

Lex Rieffel and

Raymond Gilpin

E-mail: rgilpin@usip.org

Phone: 202.429.4724

peaceBrieF14
© USIP 2010 • All rights reserved.

election and has ruled with an iron fist since then. Aung San Suu Kyi, awarded the Nobel Peace 

Prize in 1991, has been under house arrest most of this time. 

The military junta has used economic policies and instruments to entrench their authority 

and ensure the collecting of ‘rents’ from both legal and illegal activity. In the 1990s, the junta 

allowed insurgent groups to acquire ‘franchises’ in the opium trade as an exit strategy from violent 

conflict via a series of ceasefire agreements.2 These arrangements bought a tenuous peace but 

facilitated the doubling of opium production between 1986 and 1996 and added production of 

amphetamines. De facto ‘joint extraction’ arrangements benefited junta leaders who had a stake 

in the trade. Most economic reform efforts had the effect of reinforcing the junta’s control over the 

economy. The tax amnesty of 1990 apparently facilitated money laundering by drug lords, while 

the introduction of foreign exchange certificates in 1993 helped those involved in the drug trade 

repatriate ill-gotten, offshore wealth.3 In addition, in spite of international isolation, the start of 

natural gas exports in 2000 further boosted the domestic economy and strengthened the grip of 

the junta on both the economy and domestic politics.

Essentially, the Burmese economy has been hijacked by the junta. Military commanders 

underpin rampant corruption at every level and preside over institutionalized rent extraction 

mechanisms. Opacity has been their main cover.

Three Potential Game-Changers

The first one is Cyclone Nargis, which struck Burma in May 2008. The cyclone devastated a large 

portion of the country’s rice-growing delta region. An estimated 85,000 lives were lost and over 

50,000 are deemed missing. By destroying a significant proportion of the country’s livestock and 

half the fishing fleet, and flooding a million acres of rice paddies, the cyclone created a humanitarian disaster in rural Burma, which was already suffering from the junta’s misguided policies. The 

junta’s inability to manage the crisis forced it reluctantly to accept an unprecedented regional relief 

and recovery effort led by the Association of Southeast Nations (ASEAN). Serious questions were 

raised about the ability of the junta to provide for the people of Burma. The humanitarian intervention opened the door for some regional involvement in the country’s economic and social affairs 

– a hitherto unprecedented development. This paved the way for the United Nations Economic 

and Social Commission for Asia and the Pacific (ESCAP) to organize an open forum on the country’s 

economic prospects in Naypyidaw, the country’s new capital, in December 2009. This forum has 

been interpreted by some Burma watchers as a sign of interest in further openness by the junta.

The second potential game-changer is the elections planned for 2010. In a carefully managed 

referendum in 2008, a new constitution was adopted that affirms the dominant role of the military 

but also establishes the framework for a multiparty political system with checks and balances, and 

respect for most basic human rights. In mid-March 2010, the junta issued five electoral laws that 

will govern the national and regional elections. 

The civilianized government expected to emerge from the elections will be under great pressure from both internal and external sources to implement policy changes required to bring the 

country out of the economic cellar and closer to the norms of its ASEAN partners. Even though 

most observers do not expect the elections to be anywhere near perfect, the new constitution and 

2010 elections could represent the first tentative steps towards a dismantling of Burma’s oppressive political economy.

The third potential game-changer is the junta’s reaction to the recent change in U.S. policy. In 

February 2009, U.S. Secretary of State Hillary Rodham Clinton acknowledged that neither sanctions 

by Western countries nor constructive engagement by Burma’s neighbors had changed the junta’s 

Can Economic Reform Open a Peaceful Path to Ending 

Burma’s Isolation? page 2 • PB 14 • March 30, 2010
© USIP 2010 • All rights reserved.

behavior.4 In September, she announced the results of a review of U.S.-Burma policy with a view 

towards an eventual normalization of relations if the junta takes steps to abandon its repressive 

policies, achieve national reconciliation and promote peace. 

The new policy of “pragmatic engagement” features more engagement while maintaining 

economic and political sanctions. Responsible economic stewardship lies at the heart of this 

approach. Further elaboration of the new U.S. policy could help galvanize international support 

for the adoption of a much-needed and long overdue reform agenda by the next government 

of Burma. 

Gas, Narcotics and China’s Growing Presence

Natural gas piped to Thailand from the Gulf of Martaban is Burma’s major export earner, accounting for $2 billion or more annually. A larger pipeline from the Gulf of Arakan to China’s Yunnan 

Province now under construction will significantly increase earnings. Exports of timber, jade and 

other precious stones are also substantial. The junta has devised ‘ingenious’ mechanisms to siphon 

these funds but has spent relatively little on improving the quality of life for most Burmese.5 Using 

a system of multiple exchange rates, the junta deprives the government coffers of hundreds of 

millions of dollars each year. Unsurprisingly, the resultant large fiscal deficits have been financed 

by printing money, which has led to persistently high inflation. 

Agriculture accounts for almost half of Burma’s gross domestic product (GDP). In spite of the 

high percentage of the population in agriculture, productivity is very low.6 Burma has the potential 

to be Asia’s premier rice bowl once again; but only if rice production is modernized, marketing 

is liberalized, land tenure issues are resolved and agricultural credit constraints are eased.7 Lack 

of economic opportunity and political repression has created an exodus of more ambitious and 

better educated citizens, totaling an estimated 3 million over past 20 years. 

Narcotics (heroin, methamphetamine) were estimated to be largest export earner in late-1990s 

before gas exports to Thailand kicked in. Opium production has declined substantially in recent 

years, but sizeable hard currency earnings from methamphetamine flow into the gray/black 

economy are in amounts large enough to have an impact on government policies through the 

power of interested parties. 

Another gray/black economy issue is the growing Chinese presence, with the Chinese renminbi 

circulating as the main currency in parts of Burma bordering on China and with more than one 

million illegal immigrants believed to have settled into northern regions and states in the recent 

years. These developments reinforce issues created by Burma’s multiple currencies and could 

undermine macroeconomic stability.

Ten Challenges for the Post-Election Government

1. Boost the agriculture sector. There is no better way to increase employment and raise the standard of living. Small improvements can yield large benefits. Critical parts are restoring sustainable 

credit system and removing obstacles to exports (to raise farmgate prices).

2. Socialize the benefits of extractive industries. Lack of transparency means that Burma is earning 

below-market prices for its gas, timber, and other exports. The government’s share of earnings is 

not flowing to services (including infrastructure) that make the economy broadly more productive 

and competitive. An excessive share is being diverted to powerful individuals and groups affiliated 

with the junta.

Can Economic Reform Open a Peaceful Path to Ending 

Burma’s Isolation? page 3 • PB 14 • March 30, 2010
© USIP 2010 • All rights reserved.

3. Devise pro-growth fiscal decentralization. Generous revenue sharing with regions and states 

can contribute importantly to national reconciliation as well as improving government services at 

both the central and local levels.

4. Privatize sensibly. Although de-monopolization could yield significant benefits by making the 

economy more competitive over time, the stifling political economy could undermine effectiveness in the near term by rewarding military actors. Privatization should be sensitive to the Burma’s 

political economy. 

5. Carefully target and condition foreign aid and investment. Without a defensive strategy for 

dealing with an outpouring of interest from aid donors and private investors, it will be difficult for 

the government to adopt coherent, mutually reinforcing policies for sustainable economic growth.

6. Address critical infrastructure bottlenecks. The most critical need appears to be reliable electric 

power in cities and towns. Next most critical could be access to the global communications 

network, i.e., mobile telephones and the Internet. Other needs include highways to Thailand, 

China, Bangladesh, and India, ports to reduce shipping costs, farm-to-market roads, and facilities 

that encourage tourism.

7. Improve macroeconomic management. Improving statistics, especially completing a credible 

census (the last one was in the 1930s), is a critical step in this area. It will be hard to achieve a 

“disciplined flourishing democracy” without a disciplined fiscal policy and a disciplined monetary 

policy. Strengthening the institutional capacity of the central bank is necessary to achieve the high 

rate of private sector savings required to boost domestic investment.

8. Properly fund the armed forces. Adequate funding is essential to discourage individual units 

from engaging in economic activities that misallocate or misuse resources. If the size of the army 

can be reduced as part of national reconciliation, a substantial commitment of budget resources 

may be required to facilitate a partial de-mobilization.

9. Fix the financial system. No part of the financial system is working close to international 

standards. The payment system is rudimentary. Commercial banking is severely repressed. Rural 

credit has largely collapsed. Well-managed microcredit programs are constrained by the absence 

of a statutory framework. An interbank market and a domestic capital market are lacking.

10. Open gradually to trade and investment. Pressures to open abruptly could be strong, and 

being too responsive to these pressures could produce a political backlash. Special efforts may be 

required to ensure that Chinese investments do not trigger social unrest.

Recommendations for Engagement

Engagement by the international community with the new Burmese government could contribute to national reconciliation and economic progress by taking into account the following 

recommendations:

•	 Go slow. Avoid overwhelming the new government in its first weeks and months with visitors seeking special deals and offering conflicting advice.

•	 Focus on capacity-building. The policymaking and policy implementation capacity of the 

central government is rudimentary. Vast amounts of money will be wasted, and troublesome social problems will be created if foreign aid and investment leads capacity-building 

instead of following it.

•	 Follow regional institutions. Let ASEAN, ESCAP and the Asian Development Bank lead the 

capacity-building effort, drawing more on Asian talent and models than on Western ones. 

This approach probably offers the best hope for defusing the nationalist and xenophobic 

Can Economic Reform Open a Peaceful Path to Ending 

Burma’s Isolation? page 4 • PB 14 • March 30, 2010
© USIP 2010 • All rights reserved.

United States 

Institute of Peace

1200 17th Street NW

Washington, DC 20036

202.457.1700

www.usip.org

About This Brief

This USIPeace Brief reflects discussions at the full-day workshop 

captioned “Burma’s Economy 

on the Eve of Elections,” jointly 

organized by USIP’s Center for 

Sustainable Economies and the 

U.S.-ASEAN Business Council 

on March 4, 2010. Details of this 

event are available on the USIP 

Web site; conclusions and recommendations will be published as a 

USIP Special Report in April 2010. 

This Peace Brief was written by Lex 

Rieffel, a non-resident senior fellow 

at the Brookings Institution, and 

Raymond Gilpin, associate vice 

president for USIP’s Sustainable 

Economies Center. The authors’ 

views do not necessarily represent 

the positions of the organizations 

with which they are affiliated.

USIP provides the analysis, training and 

tools that prevent and end conflicts, 

promotes stability and professionalizes 

the field of peacebuilding.

For media inquiries, contact the office 

of Public Affairs and Communications, 

202.429.4725

sentiments that are deeply rooted among the military officers who will continue to govern 

the country in the period ahead.

•	 Understand the political economy. Post-conflict reconstruction has floundered in other 

parts of the world because aid agencies and other external players seeking to help have 

ignored or discounted the power of individuals and groups with a vested interest in the status quo. It may be possible, however, to work with these individuals and groups to advance 

broad social objectives and enlarge the space for new high-value entrepreneurial activity.

•	 Encourage wise management of natural resources. Burma’s natural resources, like those 

in other poorly governed nations, are being over-exploited. The new government is likely to 

face intense pressure to produce more natural gas, for example. A short-term moratorium 

on new investment in the gas sector would give the new government time to revise relevant regulations, strengthen key institutions and maximize resource flows to government 

coffers. A strong case can be made for a similar moratorium on hydropower projects.

Endnotes

1. In this report, Burma/Myanmar will be referred to as Burma.

2. Bertil Lintner. Drugs and Economic Growth: Ethnicity and Exports, in Robert I. Rotberg, ed. “Burma: 

Prospects for a Democratic Future.” (Brookings Institution Press,1998).

3. Richard Snyder. “Does Lootable Wealth Breed Disorder? A Political Economy of Extraction.” in 

Comparative Political Studies, 2006, Vol. 39, No. 8, 943-968.

4. “Warnings Greet Latest Obama Overtures: Plan to Engage Myanmar Brings Calls For U.S. to 

Champion Rights, Democracy.” The Wall Street Journal, September 25, 2009. Accessed 3/18.2009: 

http://online.wsj.com/article/SB125375647720536353.html .

5. Sean Turnell, “The Rape of Burma: Where did the wealth go?” The Japan Times, May 2, 2008.

6. Statement on the ‘Post-Nargis Recovery and Preparedness Plan’ on February 27, 2009. Burma 

Economic Watch. Accessed 19 March 2010: http://www.econ.mq.edu.au/Econ_docs/bew/BEWStatementPONREPP.pdf 

7. David Dapice. “Assessment of the Myanmar Agricultural Economy,” paper prepared for International Development Enterprises, Harvard University, 2009. 

Can Economic Reform Open a Peaceful Path to Ending 

Burma’s Isolation? page 5 • PB 14 • March 30, 2010