Myanmar Country Report 2010

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Country Report

December 2010

Myanmar

Political Risk Services 1-Nov-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Global PRS Risk Index. Ranked in ascending order of risk.

PRS Risk Index 1-Nov-2010 • PRI-1

11/10 09 08 07 06 GLOBAL AVERAGES 72 72 73 73 73 1. Canada 92 95 96 96 96 1. Hong Kong 92 91 91 92 90 3. Singapore 89 89 90 90 90 3. Sweden 89 89 90 91 91 5. Austria 88 88 88 87 87 5. Netherlands 88 87 89 89 89 5. Taiwan 88 83 84 85 84 8. Australia 87 86 86 87 86 8. Finland 87 87 87 87 87 8. Norway 87 88 88 87 86 8. United Arab Emirates 87 88 90 90 90 12. Oman 86 86 87 87 86 12. Slovakia 86 83 84 81 81 12. Switzerland 86 86 85 87 86 15. Botswana 83 83 85 85 85 15. Chile 83 83 82 83 84 15. Czech Republic 83 83 84 84 86 15. Japan 83 83 83 85 84 15. Trinidad & Tobago 83 83 84 84 84 20. Belgium 82 82 85 86 85 20. Bulgaria 82 83 84 84 84 20. New Zealand 82 83 83 81 80 23. Germany 81 80 81 81 82 23. Uruguay 81 77 77 77 78 25. Ireland 80 80 80 84 82 25. Kuwait 80 79 79 80 80 25. United Kingdom 80 80 86 89 89 28. Denmark 79 79 79 82 82 28. Malaysia 79 78 79 80 79 28. Saudi Arabia 79 76 79 78 78 31. Israel 78 78 76 75 70 31. Poland 78 80 82 80 83 31. United States 78 76 78 79 79 34. France 77 77 79 81 80 34. Panama 77 74 70 73 73 34. Portugal 77 77 79 81 80 37. Brazil 75 76 76 77 76 38. Costa Rica 74 74 76 73 70 38. Gabon 74 77 77 76 75 38. Italy 74 77 77 78 78 38. Mexico 74 74 77 81 81 38. Romania 74 74 75 75 76 38. Spain 74 76 79 79 79 44. Azerbaijan 73 74 74 73 73 44. Cameroon 73 73 73 73 69 44. Hungary 73 77 76 80 79 47. Congo 72 72 70 71 75 47. Greece 72 73 78 80 80 47. Nicaragua 72 69 67 66 67

11/10 09 08 07 06 47. Peru 72 68 69 67 67 47. South Korea 72 73 73 73 73 47. Tunisia 72 72 74 75 74 53. Paraguay 71 71 69 67 68 53. South Africa 71 72 74 77 77 53. Zambia 71 70 72 72 71 56. China 70 70 70 70 68 56. Dominican Republic 70 69 72 72 75 56. El Salvador 70 70 69 71 71 56. Guatemala 70 70 73 73 72 56. Indonesia 70 67 69 69 70 56. Jamaica 70 68 70 71 71 56. Kenya 70 66 67 67 68 56. Morocco 70 70 72 73 74 64. Honduras 69 67 69 69 72 64. Papua New Guinea 69 69 69 69 72 64. Suriname 69 73 70 67 66 64. Thailand 69 69 69 70 73 68. Algeria 68 69 71 73 74 68. Angola 68 68 65 67 69 68. India 68 70 66 66 64 68. Libya 68 69 70 68 68 72. Colombia 67 64 65 66 67 72. Egypt 67 67 67 64 61 72. Ghana 67 67 69 70 73 72. Guyana 67 65 66 65 62 72. Philippines 67 66 66 66 64 72. Vietnam 67 69 71 68 66 78. Bolivia 66 66 64 62 61 78. Sri Lanka 66 65 64 65 65 80. Kazakhstan 65 63 68 68 68 80. Turkey 65 66 68 70 67 82. Côte d'Ivoire 64 61 58 58 58 82. Russia 64 64 67 68 68 84. Haiti 63 62 58 62 60 85. Sudan 62 63 66 66 66 85. Syria 62 60 63 63 59 87. Argentina 60 58 63 64 65 87. Bangladesh 60 59 57 54 58 87. Ukraine 60 62 67 68 66 90. Iraq 58 56 52 48 51 91. Nigeria 57 58 58 58 58 92. Congo DR 56 54 60 61 61 93. Guinea 55 52 51 51 53 94. Ecuador 53 51 55 55 62 94. Pakistan 53 56 55 53 55 96. Iran 50 51 54 54 54 97. Cuba 49 49 51 49 52 98. Venezuela 48 46 51 51 50 99. Zimbabwe 46 47 47 49 49 100. Myanmar 43 43 45 47 44

Political Risk Services 1-Nov-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Regional PRS Risk Index. Ranked, within region, in ascending order of risk.

PRI-2 • 1-Nov-2010 PRS Risk Index

11/10 09 08 07 06 GLOBAL AVERAGES 72 72 73 73 73

N. & Cent. America Avg. 72 71 72 73 73 Canada 92 95 96 96 96 Trinidad & Tobago 83 83 84 84 84 United States 78 76 78 79 79 Panama 77 74 70 73 73 Costa Rica 74 74 76 73 70 Mexico 74 74 77 81 81 Nicaragua 72 69 67 66 67 Dominican Republic 70 69 72 72 75 El Salvador 70 70 69 71 71 Guatemala 70 70 73 73 72 Jamaica 70 68 70 71 71 Honduras 69 67 69 69 72 Haiti 63 62 58 62 60 Cuba 49 49 51 49 52

South America Avg. 68 67 67 67 67 Chile 83 83 82 83 84 Uruguay 81 77 77 77 78 Brazil 75 76 76 77 76 Peru 72 68 69 67 67 Paraguay 71 71 69 67 68 Suriname 69 73 70 67 66 Colombia 67 64 65 66 67 Guyana 67 65 66 65 62 Bolivia 66 66 64 62 61 Argentina 60 58 63 64 65 Ecuador 53 51 55 55 62 Venezuela 48 46 51 51 50

West Europe Avg. 80 81 82 83 83 Sweden 89 89 90 91 91 Austria 88 88 88 87 87 Netherlands 88 87 89 89 89 Finland 87 87 87 87 87 Norway 87 88 88 87 86 Switzerland 86 86 85 87 86 Belgium 82 82 85 86 85 Germany 81 80 81 81 82 Ireland 80 80 80 84 82 United Kingdom 80 80 86 89 89 Denmark 79 79 79 82 82 France 77 77 79 81 80 Portugal 77 77 79 81 80 Italy 74 77 77 78 78 Spain 74 76 79 79 79 Greece 72 73 78 80 80 Turkey 65 66 68 70 67

Cent. & South Asia Avg. 64 65 64 63 64 Azerbaijan 73 74 74 73 73 India 68 70 66 66 64 Sri Lanka 66 65 64 65 65 Kazakhstan 65 63 68 68 68 Bangladesh 60 59 57 54 58 Pakistan 53 56 55 53 55

11/10 09 08 07 06 East Europe Avg. 75 76 77 78 78 Slovakia 86 83 84 81 81 Czech Republic 83 83 84 84 86 Bulgaria 82 83 84 84 84 Poland 78 80 82 80 83 Romania 74 74 75 75 76 Hungary 73 77 76 80 79 Russia 64 64 67 68 68 Ukraine 60 62 67 68 66

MidEast/N. Africa Avg. 71 71 72 71 71 United Arab Emirates 87 88 90 90 90 Oman 86 86 87 87 86 Kuwait 80 79 79 80 80 Saudi Arabia 79 76 79 78 78 Israel 78 78 76 75 70 Tunisia 72 72 74 75 74 Morocco 70 70 72 73 74 Algeria 68 69 71 73 74 Libya 68 69 70 68 68 Egypt 67 67 67 64 61 Syria 62 60 63 63 59 Iraq 58 56 52 48 51 Iran 50 51 54 54 54

Sub-Saharan Africa Avg. 66 66 66 67 67 Botswana 83 83 85 85 85 Gabon 74 77 77 76 75 Cameroon 73 73 73 73 69 Congo 72 72 70 71 75 South Africa 71 72 74 77 77 Zambia 71 70 72 72 71 Kenya 70 66 67 67 68 Angola 68 68 65 67 69 Ghana 67 67 69 70 73 Côte d'Ivoire 64 61 58 58 58 Sudan 62 63 66 66 66 Nigeria 57 58 58 58 58 Congo DR 56 54 60 61 61 Guinea 55 52 51 51 53 Zimbabwe 46 47 47 49 49

East Asia/Pacific Avg. 75 75 75 75 75 Hong Kong 92 91 91 92 90 Singapore 89 89 90 90 90 Taiwan 88 83 84 85 84 Australia 87 86 86 87 86 Japan 83 83 83 85 84 New Zealand 82 83 83 81 80 Malaysia 79 78 79 80 79 South Korea 72 73 73 73 73 China 70 70 70 70 68 Indonesia 70 67 69 69 70 Papua New Guinea 69 69 69 69 72 Thailand 69 69 69 70 73 Philippines 67 66 66 66 64 Vietnam 67 69 71 68 66 Myanmar 43 43 45 47 44

© 2010, The PRS Group, Inc. ISSN: 1097-4873

Myanmar Table of Contents

Page PRS Risk Index…………………………………………………………………………………………………… PRI-1 Country Forecast Map..................................................................................................................................................................... 2 Highlights .......................................................................................................................................................... 3 Current Data...................................................................................................................................................... 5 Comment & Analysis ..................................................................................................................................... 11 Forecast Scenarios Most Likely Five-Year Regime Scenario: Military-Civilian (45% Probability)............................... 17 Second Most Likely Five-Year Regime Scenario: Hard-line SPDC (40% Probability) .................. 24

Third Most Likely Five-Year Regime Scenario: Divided SPDC (15% Probability)........................ 26 Forecast Summary.................................................................................................................................. 29 Political Framework Players To Watch................................................................................................................................... .31 Political Players....................................................................................................................................... 32 Country Conditions Climate for Investment & Trade Overview ................................................................................................................................................... 1 Tariff and Non-tariff Barriers ................................................................................................................. 4 Policies ....................................................................................................................................................... 4 Legal Framework...................................................................................................................................... 5 Corruption and other Bureaucratic Obstacles ...................................................................................... 7 International Agreements........................................................................................................................ 7 Labor Conditions...................................................................................................................................... 8 Background Geography................................................................................................................................................. 9 Recent History .......................................................................................................................................... 9 Social Conditions.................................................................................................................................... 12 Government & Political Conditions..................................................................................................... 13 Foreign Relations.................................................................................................................................... 14

Page 2 Map

Political Risk Services Myanmar Country ForecastReproduction without written permission of The PRS Group is strictly prohibited.

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India

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Laos

Thailand

Cambodia

Vietnam

Bangladesh

Political Risk Services 15-Dec-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Highlights 15-Dec-2010 • Page 3

Myanmar Country Forecast

Highlights

MOST LIKELY REGIMES AND THEIR PROBABILITIES 18-Month: *Military-Civilian 60% (50%) Five-Year: *Military-Civilian 45%

FORECASTS OF RISK TO INTERNATIONAL BUSINESS

Turmoil Financial Transfer

Direct Investment

Export Market

18-Month: Moderate (High) D+ (D) C+ (C) C- (D+) Five-Year: Very High D D+ D ( ) Indicates change in rating. * Indicates forecast of a new regime.

KEY ECONOMIC FORECASTS

Years Real GDP Growth %

Inflation %

Current Account ($bn)

2005-2009(AVG) 3.9 18.5 0.70 2010(F) 3.1 9.0 0.18 2011-2015(F) 3.8 13.4 0.20

At a Crossroads

Key Points To Watch…

The country’s first election since 1990 took place on November 7, and the military-backed USDP won nearly 80% of the vote and large majorities in both chambers of the new bicameral legislature. Non-elected seats in both chambers are reserved for members of the military, who will be appointed by Gen. Than Shwe, the chairman of the SPDC, a military junta that has ruled the country since 1988 and will remain the power behind the throne as Myanmar embarks down the road of “guided democracy”…

The SPDC is wagering that the appearance of democracy alone will be sufficient to shake off Myanmar’s pariah status. Many international organizations and most western governments dismissed the process as a farce, but several countries in the region, most notably India, appear to be prepared to play the junta’s game…

But it is too early to tell whether the political maneuver will work. The main opposition NLD has been split by a disagreement over electoral strategy, but the group’s iconic leader, Aung San Suu Kyi, who was released from house

Political Risk Services Myanmar Country Forecast 15-Dec-2010 Reproduction without written permission of The PRS Group is strictly prohibited.

Page 4 • 15-Dec-2010 Highlights

arrest shortly after the elections, has resumed her effort to generate both domestic and international pressure for more substantive political reforms…

At the same time, while the elections fell short of meeting any standard of democracy, they may result in a qualitative shift of power from an older generation of uniformed generals to a younger group of officers who, for the sake of appearance, were required to shed their uniforms to stand for office…

How things proceed will depend to a large degree on how far Suu Kyi is prepared to force the issue, and how much dissent the generals are willing to tolerate in the interest of ensuring a stable generational transfer of power. A hard-line response to a threat to domestic order cannot be taken for granted, particularly if responsibility for deciding how to respond to the threat were left to the new breed of leaders that will inhabit the government headed by Prime Minister Thein Sein…

Political Obstacles Will Hamper Economic Performance

Military leaders recognize that more foreign investment is needed for economic development, political considerations, particularly the military’s perception that outside influences pose a threat to its control, will limit the potential for a reduction of impediments to foreign investment…

That said, Myanmar will try to live up to its trade obligations as a member of ASEAN, and supported by Vietnam, it will lobby within ASEAN for permission to take a more gradual approach in easing its trade restrictions, hoping to exploit its nominal reform process in order to obtain a relaxation of the pressures for economic and political change…

International sanctions will remain in place and will continue to bite hard for the foreseeable future. Economic performance will remain well below potential unless and until international pressure eases, which will require some progress toward the relaxation of political restrictions…

On balance, real GDP growth is forecast to average less than 4% per year through 2015. Despite weak domestic demand, loose monetary policies and the volatility of the currency in the parallel market will create persistent upward pressure on prices, pushing the annual inflation rate into double-digits on average over the forecast period.

Economic Forecasts for the Three Alternative Regimes

Military-Civilian Hard-line SPDC Divided SPDC Growth

(%) Inflation

(%) CACC ($bn)

Growth (%)

Inflation (%)

CACC ($bn)

Growth (%)

Inflation (%)

CACC ($bn)

2010 3.1 9.0 0.18 3.0 9.4 0.20 2.7 10.0 0.22 2011-2015 3.8 13.4 0.20 1.4 22.0 -0.13 2.2 19.0 0.30


Current Data 1-Dec-2010 • Page 5

Political Fact Sheet

CAPITAL:

Naypyidaw

CONSTITUTION: 1974 (suspended)

ADMINISTRATIVE SUBDIVISIONS: 7 states and 7 divisions

POPULATION: 2009: 50.02 million

AREA: 678,576 sq. km.

OFFICIAL LANGUAGE: Myanmar

STATUS OF PRESS: completely controlled

SECTORS OF GOVERNMENT PARTICIPATION:

The government owns and operates all major sectors of the economy except agriculture, which is strictly controlled.

CURRENCY EXCHANGE SYSTEM: pegged to the SDR

EXCHANGE RATE: 11/22/2010 $1=6.61 kyats

ELECTIONS: Three-fourths of House of Representatives members are elected for a maximum five-year term; last election, November 7, 2010. Three-fourths of House of Nationalities members are elected for a five-year term; last election, November 7, 2010.

HEAD OF STATE: Chairman, State Peace and Development Council (SPDC), Than Shwe (1992) HEAD OF GOVERNMENT: Prime Minister Thein Sein (2007) OFFICIALS: Maung Aye, Vice Chairman, SPDC Tin Aung Myint Oo, Secretary 1, SPDC Htay Oo, Agriculture & Irrigation Tin Naing Thein, Commerce Thein Zaw, Communications, Posts & Telegraphs Khin Maung Myint, Construction Than Shwe, Defense Lun Thi, Energy Hla Tun, Finance & Revenue Nyan Win, Foreign Affairs Maung Oo, Home Affairs Aung Thaung, Industry Kyaw Hsan, Information Aung Kyi, Labor Ohn Myint, Mines Soe Tha, National Planning & Economic

Development Myint Maung, Religious Affairs Thein Swe, Transport LEGISLATURE: The State Peace and Development Council (SPDC) controls the government. A new constitution approved in a referendum held in May 2008 provides for the establishment of a bicameral Parliament, consisting of a 224-member House of Nationalities, in which 56 seats will be filled by military appointment, and a 440-member House of Representatives, in which military representatives will hold 110 seats. The first elections under the new constitution were held on November 7, 2010.

MyanmarDatabank

Reproduction without written permission ofThe PRS Group is strictly prohibited.Political Risk Services

1-Dec-2010

2000-2004 Average

2005-2009 Average 2000 2001 2002 2003 2004

Domestic Economic IndicatorsGDP (Nominal, $bn) 9.33 11.73 10.55 8.28 9.14 9.61 9.08Per Capita GDP ($) 197 238 226 176 193 202 189Real GDP Growth Rate (%) 10.8 3.9 13.7 11.3 12.0 13.9 3.0Inflation Rate (%) 23.5 18.5 -1.7 21.1 57.1 36.6 4.5Capital Investment ($bn) 0.99 1.13 1.08 0.85 0.96 1.06 0.98Capital Investment/GDP (%) 10.6 9.8 10.2 10.3 10.5 11.0 10.8Budget Revenues ($bn) 0.40 0.55 0.58 0.33 0.35 0.39 0.36Budget Revenues/GDP (%) 4.3 4.7 5.5 4.0 3.8 4.1 4.0Budget Expenditures ($bn) 0.57 0.96 0.95 0.36 0.44 0.55 0.55Budget Expenditures/GDP (%) 6.0 8.1 9.0 4.4 4.8 5.7 6.1Budget Balance ($bn) -0.17 -0.41 -0.37 -0.03 -0.09 -0.16 -0.19Budget Balance/GDP (%) -1.7 -3.4 -3.5 -0.4 -1.0 -1.7 -2.1Money Supply (M1, $bn) 2.99 4.10 1.99 2.22 3.57 4.18 3.00Change in Real Wages (%) 0.9 0.1 0.9 1.0 0.8 0.9 0.8Unemployment Rate (%) 15.2 16.0 15.2 15.0 15.2 15.3 15.3

International Economic IndicatorsForeign Direct Investment ($bn) 0.22 0.55 0.26 0.21 0.15 0.25 0.21Forex Reserves ($bn) 0.46 2.15 0.22 0.40 0.47 0.55 0.67Gross Reserves (ex gold, $bn) 0.46 2.14 0.22 0.40 0.47 0.55 0.67Gold Reserves ($bn) 0.01 0.01 0.01 0.01 0.01 0.01 0.01Gross reserves (inc gold, $bn) 0.47 2.15 0.23 0.41 0.48 0.56 0.68Total Foreign Debt ($bn) 24.18 31.61 14.50 25.62 26.29 26.93 27.56Total Foreign Debt/GDP (%) 263.6 272.7 137.4 309.4 287.6 280.2 303.5Debt Service ($bn) 0.48 0.66 0.37 0.58 0.48 0.47 0.51Debt Service/XGS (%) 15.7 11.6 15.0 18.0 15.6 15.0 15.1Current Account ($bn) -0.03 0.70 -0.21 -0.15 0.10 -0.02 0.11Current Account/GDP (%) -0.3 6.0 -2.0 -1.8 1.1 -0.2 1.2Current Account/XGS (%) -1.5 11.8 -8.5 -4.7 3.2 -0.6 3.3Exports ($bn) 2.45 5.61 1.66 2.52 2.42 2.71 2.93Imports ($bn) 2.11 3.14 2.17 2.44 2.02 1.91 2.00Trade Balance ($bn) 0.34 2.47 -0.51 0.08 0.40 0.80 0.93Exports of Services ($bn ) 0.36 0.29 0.48 0.41 0.43 0.25 0.25Income, credit ($bn) 0.04 0.11 0.04 0.04 0.04 0.03 0.04Transfers, credit ($bn) 0.20 0.17 0.29 0.25 0.19 0.12 0.16Exports G&S ($bn) 3.05 6.17 2.47 3.22 3.08 3.11 3.38Liabilities ($bn) 0.51 0.63 0.34 0.53 0.54 0.56 0.57Net Reserves ($bn) -0.04 1.52 -0.11 -0.12 -0.06 0.00 0.11Liquidity (months import cover) -0.2 5.0 -0.6 -0.6 -0.4 0.0 0.7Currency Exchange Rate 581.599 1122.212 241.965 428.559 615.455 802.978 819.040Currency Change (%) -31.1 -7.0 -2.2 -77.1 -43.6 -30.5 -2.0

Social IndicatorsPopulation (million) 47.35 49.16 46.70 47.03 47.36 47.68 48.00Population Growth (%) 0.7 0.8 0.7 0.7 0.7 0.7 0.7Infant Deaths/1000 73 57 76 74 74 72 70Persons under Age 15 (%) 31 27 36 30 30 30 29Urban Population (%) 27 30 26 27 27 27 28Urban Growth (%) 2.2 2.9 0.7 4.6 0.7 0.7 4.4Literacy % pop. 83 88 83 83 83 83 83Agricultural Work Force (%) 66 70 65 65 65 65 70Industry-Commerce Work Force (%) 11 7 14 14 10 10 7Services Work Force (%) 23 23 21 21 25 25 23Unionized Work Force (%) 0 0 0 0 0 0 0Energy - total consumption (1015 Btu) 0.17 0.25 0.16 0.15 0.17 0.18 0.20Energy - consumption/head (109 Btu) 0.01 0.01 0.01 0.01 0.01 0.01 0.01

Note: fiscal year beginning April 1

Current Data 1-Dec-2010 ~ Page 6-7

MyanmarDatabank

Reproduction without written permission ofThe PRS Group is strictly prohibited.Political Risk Services

1-Dec-2010

2000-2004 Average

2005-2009 Average

Domestic Economic IndicatorsGDP (Nominal, $bn) 9.33 11.73Per Capita GDP ($) 197 238Real GDP Growth Rate (%) 10.8 3.9Inflation Rate (%) 23.5 18.5Capital Investment ($bn) 0.99 1.13Capital Investment/GDP (%) 10.6 9.8Budget Revenues ($bn) 0.40 0.55Budget Revenues/GDP (%) 4.3 4.7Budget Expenditures ($bn) 0.57 0.96Budget Expenditures/GDP (%) 6.0 8.1Budget Balance ($bn) -0.17 -0.41Budget Balance/GDP (%) -1.7 -3.4Money Supply (M1, $bn) 2.99 4.10Change in Real Wages (%) 0.9 0.1Unemployment Rate (%) 15.2 16.0

International Economic IndicatorsForeign Direct Investment ($bn) 0.22 0.55Forex Reserves ($bn) 0.46 2.15Gross Reserves (ex gold, $bn) 0.46 2.14Gold Reserves ($bn) 0.01 0.01Gross reserves (inc gold, $bn) 0.47 2.15Total Foreign Debt ($bn) 24.18 31.61Total Foreign Debt/GDP (%) 263.6 272.7Debt Service ($bn) 0.48 0.66Debt Service/XGS (%) 15.7 11.6Current Account ($bn) -0.03 0.70Current Account/GDP (%) -0.3 6.0Current Account/XGS (%) -1.5 11.8Exports ($bn) 2.45 5.61Imports ($bn) 2.11 3.14Trade Balance ($bn) 0.34 2.47Exports of Services ($bn ) 0.36 0.29Income, credit ($bn) 0.04 0.11Transfers, credit ($bn) 0.20 0.17Exports G&S ($bn) 3.05 6.17Liabilities ($bn) 0.51 0.63Net Reserves ($bn) -0.04 1.52Liquidity (months import cover) -0.2 5.0Currency Exchange Rate 581.599 1122.212Currency Change (%) -31.1 -7.0

Social IndicatorsPopulation (million) 47.35 49.16Population Growth (%) 0.7 0.8Infant Deaths/1000 73 57Persons under Age 15 (%) 31 27Urban Population (%) 27 30Urban Growth (%) 2.2 2.9Literacy % pop. 83 88Agricultural Work Force (%) 66 70Industry-Commerce Work Force (%) 11 7Services Work Force (%) 23 23Unionized Work Force (%) 0 0Energy - total consumption (1015 Btu) 0.17 0.25Energy - consumption/head (109 Btu) 0.01 0.01

2005 2006 2007 2008 2009

8.87 11.43 12.21 12.46 13.69183 235 249 251 2745.0 7.0 5.5 0.2 2.09.4 20.0 35.0 26.8 1.5

1.05 1.09 1.20 1.10 1.2311.8 9.5 9.8 8.8 9.00.37 0.48 0.59 0.63 0.684.2 4.2 4.8 5.1 5.0

0.53 0.97 1.07 1.07 1.166.0 8.5 8.8 8.6 8.5

-0.16 -0.49 -0.48 -0.44 -0.48-1.8 -4.3 -3.9 -3.5 -3.53.65 4.00 4.23 4.40 4.240.5 0.3 0.0 -0.3 0.0

16.0 16.0 16.0 16.0 16.1

0.24 0.28 0.50 0.98 0.760.77 1.24 1.78 3.50 3.460.77 1.24 1.78 3.50 3.400.01 0.01 0.01 0.01 0.010.78 1.25 1.79 3.51 3.41

28.72 29.91 31.02 33.19 35.22323.8 261.7 254.1 266.4 257.30.72 0.79 0.95 0.41 0.4516.7 15.5 13.9 5.4 6.40.59 0.80 1.00 0.45 0.656.7 7.0 8.2 3.6 4.7

13.7 15.7 14.6 5.9 9.33.79 4.55 6.28 6.99 6.421.76 2.34 3.27 4.31 4.012.03 2.21 3.01 2.68 2.410.26 0.28 0.30 0.32 0.280.06 0.10 0.12 0.14 0.120.20 0.16 0.15 0.17 0.174.31 5.09 6.85 7.62 6.990.60 0.58 0.60 0.65 0.700.18 0.67 1.19 2.86 2.711.2 3.4 4.4 8.0 8.1

843.062 1200.000 1300.000 1200.000 1068.000-2.9 -42.3 -8.3 7.7 11.0

48.35 48.72 49.13 49.56 50.020.7 0.8 0.8 0.9 0.970 64 51 51 4929 27 26 26 2529 29 31 31 314.3 0.8 7.8 0.9 0.983 85 90 90 9070 70 70 70 707 7 7 7 7

23 23 23 23 230 0 0 0 0

0.25 0.23 0.25 0.26 0.260.01 0.01 0.01 0.01 0.01

Note: fiscal year beginning April 1

Current Data 1-Dec-2010 ~ Page 6-7


1-Dec-2010 Comparison: Myanmar

Page 8 • 1-Dec-2010 Current Data

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Regional Real GDP Growth (2009): East Asia/Pacific

-8 -6 -4 -2 0 2 4 6 8 10

Japan

Hong Kong

Thailand

Taiwan

Malaysia

Singapore

New Zealand

South Korea

Philippines

Australia

Myanmar

Papua New Guinea

Indonesia

Vietnam

China

(percent)

Regional Inflation Rates (2009): East Asia/Pacific

-2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Japan

Thailand

Taiwan

China

Malaysia

Singapore

Hong Kong

Myanmar

Australia

New Zealand

South Korea

Philippines

Papua New Guinea

Indonesia

Vietnam

(percent)


1-Dec-2010 Comparison: Myanmar

Current Data 1-Dec-2010 • Page 9

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Regional Current Account/GDP (2009): East Asia/Pacific

-10.0 -5.0 0.0 5.0 10.0 15.0 20.0

Vietnam

Papua New Guinea

Australia

New Zealand

Indonesia

Japan

Myanmar

South Korea

Philippines

China

Thailand

Hong Kong

Taiwan

Malaysia

Singapore

(percent)

Economic Performance ProfileCountry's Ranking Relative to All Countries

Covered by Political Risk Services2005-2009

238

3.9

18.5

16.0

9.8

-3.4

6.0

11.6

-7.0

BEST 25% NEXT 25% NEXT 25%

GDP Per Capita ($)

Real GDP Growth (%)

Inflation (%)

Unemployment (%)

Capital Investment (% of GDP)

Budget Balance (% of GDP)

Current Account (% of GDP)

Debt Service Ratio

Currency Change (%)

WORST 25%


Page 10 • 1-Dec-2010 Current Data

Social Indicators as of 2009

Primary Energy

Energy Consumption (1015 Btu): 0.26

Per Capita Consumption (109 Btu): 0.01

Population

Annual Growth 0.9%

Infant Deaths per 1,000 49

Persons Under Age 15 25%

Urban Population 31%

Urban Growth 0.9%

Literacy 90%

Work Force Distribution

Agriculture 70%

Industry-Commerce 7%

Services 23%

Unions 0%

Ethnic Groups

Bamar (68%), Shan (9%), Karen (7%), Rakhine (4%), Chinese (3%), other (9%)

Languages

Myanmar, minority ethnic languages

Religions

Buddhist (89%), Muslim (4%), Baptist (3%), Roman Catholic (1%), animist beliefs (1%), other (2%)


Comment & Analysis 15-Dec-2010 • Page 11

Myanmar

Country Forecast Comment & Analysis

Political Reforms Lack Substance

The country’s first election since 1990 took place on November 7, and to the surprise of no one, the military-backed Union Solidarity and Development Party (USDP) won going away, winning nearly 80% of the vote and large majorities in both chambers of the new bicameral legislature. The USDP won 259 of the 330 contested seats in the 440-member House of Representatives, and 129 of the 168 seats up for election in the 224-member House of Nationalities. Non-elected seats in both chambers are reserved for members of the military, who will be appointed by Gen. Than Shwe, the chairman of the State Peace and Development Council (SPDC), the military junta that has ruled the country since 1988 and will remain the power behind the throne as Myanmar follows the carefully crafted “roadmap to democracy.” The National League for Democracy (NLD), which has formed the main opposition to the junta and was headed for victory in the 1990 election before military leaders intervened and nullified the results, was outlawed when it refused to register for the elections to protest the continued detention of party leader Aung San Suu Kyi. The NLD called on its supporters to boycott the November vote, on the grounds that participation would grant legitimacy to the process, and, by extension, to the new government. However, some senior members of the party opted to contest the elections under the banner of the National Democratic Force (NDF), arguing that opponents of the military regime could not afford to squander their only opportunity to ensure at least some semblance of true opposition within the new legislative bodies. In the event, the NDF won just 12 seats in the lower chamber and four seats in the House of Nationalities, and the opposition is greatly fragmented. The Rakhine Nationalities Development Party (RNDP) and the Shan Nationalities Democratic Party (SNDP), which finished second in the upper and lower house elections, respectively, both represent narrow ethnic interests, while the National Unity Party (NUP), the third largest party in both houses, was the NLD’s junta-sponsored opponent in the 1990 elections, and its opposition to the SPDC (which is debatable, at best) stems largely from resentment over its marginalization by the junta in the two decades since the last election.


Page 12 • 15-Dec-2010 Comment & Analysis

Of course, the opposition never really stood a chance. Under electoral rules, no one convicted of a crime was eligible to stand for office (or even to vote), a restriction that automatically disqualified a large section of the NLD’s leadership. Members of the opposition who cleared that bar were required to pay a $500 fee (or about the average annual income) to register as a candidate, and then faced harassment from authorities and tight restrictions on public speech and published materials. As for the elections themselves, no international election monitors were invited to observe the exercise, and media coverage of the voting was limited to local reporters who were pre-screened by military officials. Not surprisingly, the opposition parties (including the NUP) alleged that the elections were tainted by rampant fraud, and, just as predictably (and justifiably), many international organizations and most western governments dismissed the process as a farce. Indeed, although taking the form of an election, the process was actually (and rather transparently) a stage-managed event designed to create the appearance of democracy with none of the substance. In many respects, the SPDC did not even make a serious effort to disguise what it was doing. A ban on active duty military officers filling any of the elected seats was intended to give weight to the pretense that power was being transferred to a civilian government. However, given that the USPD is the creation of more than two-dozen generals who only turned in their uniforms in April 2010, there was never any question but that the “civilians” actually wielding power in the new government would be little more than a junior varsity squad of the SPDC. Indeed, Thein Sein, who will be prime minister when the government was installed, held that same post in the SPDC-led regime. The elections are the culmination of a long-term strategy aimed at shaking off Myanmar’s pariah status. The junta has periodically taken steps, including the release of political prisoners, aimed at testing just how little ground the regime must surrender in order to win the cooperation of the domestic opposition and an easing of international pressure. The SPDC is wagering that the appearance of democracy alone will be sufficient to achieve its objective. Predictably (and justifiably), many international organizations and most western governments dismissed the elections as a farce. However, several countries in the region, most notably India, appear to be prepared to play the junta’s game. Pressure for Real Democracy Will Persist

But it is too early to tell whether the political maneuver will work. Although the NLD split over electoral strategy, the group’s iconic leader, Aung San Suu Kyi, who was released from house arrest shortly after the elections, has resumed her effort to generate



both domestic and international pressure for more substantive political reforms. At the same time, while the elections fell short of meeting any standard of democracy, they may well result in a qualitative shift of power from an older generation of uniformed generals to a younger group of officers who, for the sake of appearance, were required to shed their uniforms to stand for office. How things proceed will depend to a large degree on how far Suu Kyi is prepared to force the issue of democratic reform, and how much dissent the generals are willing to tolerate in the interest of ensuring a stable generational transfer of power. Than Shwe has long been reported to be quite ill, and is rumored to have remained at the helm out of fear that his departure could trigger a destabilizing power struggle within the SPDC. There is still the potential for a battle for supremacy within the SPDC, especially if Than Shwe should die without formally anointing a successor, but the sidelining of the reputedly reform-minded Gen. Khin Nyunt back in 2004 all but ensures that the control of the military will remain firmly in the hands of hard-liners. Even so, a hard-line response to a threat to domestic order cannot be taken for granted. The elections were reportedly preceded by a rapid sell-off of state assets at bargain prices, which could be indicative of an attempt by the top generals to line their pockets in anticipation of their departure to the political sidelines. Thus, it is possible that responsibility for deciding how to best to respond to the threat posed by pro-democracy activists and a post-election escalation of armed conflict with guerrilla groups fighting on behalf of various ethnic minority communities might be handed to the new breed of (now former) military leaders who will inhabit the government headed by Prime Minister-elect Thein Sein. Ethnic Tensions to Rise in Post-election Period

Myanmar is home to about two dozen minority groups, many of whom live in isolated and mountainous enclaves along the border with Thailand, China, India, and Bangladesh. Ethnic minorities account for about 40% of the country’s population of 55 million, but the largest of the groups—the Karen, the Shan, the Kachin, the Wa, the Chin, the Mon, and the Rohingya—have little in common except a desire for autonomy or independence that fueled armed conflict between rebel groups and the central government dating back to the 1940s. Since 1989, the SPDC has secured tenuous truces with 17 minority rebel groups, while six others, including the Karen National Union (KNU) and Shan State Army-South (SSA-S), have remained at war with the government. The truces have held largely because of the threat of harsh government retaliation and promises of additional development in minority-dominated areas. However, sanctions have limited the government’s ability to



follow through with the promised carrots, and recent developments indicate that at least some of armed groups are prepared to test the government’s ability to carry out a multi-front crackdown. Ahead of the 2010 elections, the junta began to apply pressure on the so-called “cease-fire groups” to proceed toward fuller integration into the political and social mainstream. The SPDC presented three options to the guerrilla forces—surrender their arms, reconstitute their forces into a border guard under the command of Myanmar’s military, or transform their organizations into political parties and participate in the 2010 elections. The United Wa State Party (UWSA), the largest and best-equipped of the ethnic rebel forces, rejected all three options, announcing that it preferred to continue, at least temporarily, under the terms of the cease-fire agreement, citing the junta’s failure to give serious consideration to its demands for greater autonomy and democracy. Presumably, the UWSA gave its response only after receiving the blessing of China, which is the SPDC’s strongest supporter in the international arena, but is also the chief source of arms for the ethnic armies. Nearly all of the other cease-fire groups—including the Kachin Independence Army (KIA), the second largest rebel force—followed the USWA’s lead, prompting the junta to ban the Kachin and the Wa from registering parties. Other minority ethnic groups boycotted the elections, and the UWSA refused to permit polling to take place within the territory under its control. In the weeks leading up to the elections, both the UWSA and the KIA were reported to be stepping up both recruitment and training, apparently in anticipation of a government offensive aimed at convincing the rebel groups that they will face eradication if they refuse to join the Border Guard Force (BGF). To date, only two of the cease-fire groups have agreed to join the BGF, the Democratic Karen Buddhist Army (DKBA) and the National Democratic Army-Kachin. However, the DKBA has split over the issue, and opponents of integration into the BGF forced the issue by launching an attack on the town of Myawaddy, near the border with Thailand. Some 20,000 refugees have fled the area into Thailand, and fighting continues around the Three Pagodas Pass. The prospect of an escalation of guerrilla warfare that could produce a flood of refugees has alarmed Myanmar’s neighbors, especially China, which made no secret of its displeasure over the flight of 30,000 refugees into its territory following a crackdown against one of the smaller non-compliant rebel groups in April 2009. China’s priorities are ensuring that unrest in Myanmar does not lead to stability in its own territory and protecting its investments and access to resources in Myanmar. As such, China can be expected to apply pressure on both sides to show restraint and reach a negotiated



settlement of their conflicts. However, the Chinese government does not wield the authority necessary to stifle conflict entirely. Myanmar’s military leaders do not trust the government in Beijing, which they view as a rival for influence over disaffected minorities, and the influence of the Chinese varies among ethnic groups, some of which view officials in Beijing with suspicion. The recent escalation of unrest in Myawaddy highlights the potential for domestic conflict to generate tensions with neighboring countries, particularly with Thailand. If offensives against Karen separatists spill over the border and result in Thai casualties, a serious military exchange can be expected. Open conflict with such a major regional power could further undermine the country’s international support and weaken its control over the domestic opposition. A dispute over territory in the Bay of Bengal that holds significant oil and gas potential creates a risk of the periodic flaring of tensions with Bangladesh, as well. Foreign Investment May Increase

Post-election, foreign investment appears set to increase. The country’s main foreign investors, Thailand, China, and other ASEAN economies have not condemned the election, and appear ready to jockey for investment opportunities in the country’s rich natural resources. China praised the election as “a transition to an elected government,” and India is eager to expand its investment presence, in part to balance Chinese influence. The country will shrug off western criticism while accepting investment by western companies prepared to deal with the government. According to government figures, foreign investment exploded to $16 billion in the second quarter of 2010. The lion’s share is destined for Daewoo International’s Shwe offshore gas field and China National Petroleum Corporation’s oil and gas pipelines transporting production from the project across the country to China. Shortly before the November 2010 elections, the government announced plans to establish a Special Economic Zone in Dawei, the centerpiece of which is to be a deepwater port. Power plants, refineries, and steel mills are also planned. Italian-Thai Development reportedly signed a deal with the Burmese Port Authority worth $13.2 billion to develop the project. Moderate Growth in Near Term, Inflation to Rise

In general, the political transition is not expected to have much of an immediate impact in the economic arena, as western sanctions are expected to remain in place and no significant business-friendly shifts in policy are anticipated. Such economic growth as does occur will be fueled by a handful of large energy and infrastructure projects. Weak growth of output and low prices will limit the contribution of gas production to growth in the near term, and restrictions on bank lending will hamper investment and



productivity in the agriculture sector and dampen business activity in the commercial capital, Yangon. Real GDP growth will accelerate to 3.1% in 2010, and is forecast to reach 4% in 2011, as investment picks up. Gas output will not increase significantly until later in the five-year forecast period, when new production is expected to come on line, and while the pace of economic expansion could rise to 5%, real GDP growth is forecast to average just 3.8% per year through 2015. The central bank’s policy of increasing the money supply to finance the government deficit will produce high inflation. Consumer price increases will be held to 9% in 2010, as very low household incomes and a lack of consumer access to credit constrains private spending. However, inflation will push above 10% over the medium term, the result of loose fiscal and monetary policies, currency volatility, and the effect of a moderately improved economic situation on private demand. The impact of sanctions on the external balances has been mitigated by higher commodity prices and import restrictions imposed by the government since 2002. A large increase in investment-related imports will contribute to a significant narrowing of the trade surplus in 2010 and 2011 that, in combination with wider deficits in the services and income balances, will shrink the current account surplus, and may even produce a deficit. An increase in gas exports later in the forecast period will have a beneficial impact on the external balances, resulting in average current account surpluses of $200 million per year through 2015.


Forecast Scenarios 15-Dec-2010 • Page 17

Myanmar

Country Forecast Forecast Scenarios

SUMMARY OF 18-MONTH FORECAST

REGIMES & PROBABILITIES

Military-Civilian 60%

Hard-line SPDC 30%

Divided SPDC 10%

SUMMARY OF FIVE-YEAR FORECAST


Military-Civilian 45%

Hard-line SPDC 40%

Divided SPDC 15%

Most Likely Regime Scenario 18-Month Forecast Period: Military-Civilian (60% Probability) Five-Year Forecast Period: Military-Civilian (45% Probability) The country’s first election since 1990 took place on November 7, 2010, and to the surprise of no one, the military-backed Union Solidarity and Development Party (USDP) won nearly 80% of the vote and large majorities in both chambers of the new bicameral legislature. Under the constitution approved in May 2008, fully 25% of the seats in both the 440-member House of Representatives and the 224-member House of Nationalities are reserved for military officers who will be appointed by Gen. Than Shwe, the chairman of the State Peace and Development Council (SPDC), the military junta that has ruled the country since 1988. As the country’s de facto president, Than Shwe (or a successor) will also be empowered to declare a state of emergency if “national solidarity” is threatened, a constitutional provision that ensures the SPDC will continue to play a central role in steering the country down the road of “guided democracy.” The elections are the culmination of a long-term strategy aimed at shaking off Myanmar’s pariah status. The junta has periodically taken steps, including the release of political prisoners, aimed at testing just how little ground the regime must surrender in order to win the cooperation of the domestic opposition and an easing of international pressure. The SPDC is wagering that the appearance of democracy alone will be sufficient to

Military-Civilian

Growth (%)

Inflation (%)

CACC ($bn)

2010 3.1 9.0 0.18 2011-2015 3.8 13.4 0.20


Page 18 • 15-Dec-2010 Forecast Scenarios

achieve its objective. Predictably (and justifiably), many international organizations and most western governments dismissed the elections as a farce. However, several countries in the region, most notably India, appear to be prepared to play the junta’s game. But it is too early to tell whether the political maneuver will work. The main opposition National League for Democracy (NLD) suffered a split caused by a disagreement over electoral strategy, but the group’s iconic leader, Aung San Suu Kyi, who was released from house arrest shortly after the elections, has resumed her effort to generate both domestic and international pressure for more substantive political reforms. At the same time, while the elections fell short of meeting any standard of democracy, they may well result in a qualitative shift of power from an older generation of uniformed generals to a younger group of officers who, for the sake of appearance, were required to shed their uniforms to stand for office. How things proceed will depend to a large degree on how far Suu Kyi is prepared to force the issue of democratic reform, and how much dissent the generals are willing to tolerate in the interest of ensuring a stable generational transfer of power. Than Shwe has long been reported to be quite ill, and is rumored to have remained at the helm out of fear that his departure could trigger a destabilizing power struggle within the SPDC. There is still the potential for a battle for supremacy within the SPDC, especially if Than Shwe should die without formally anointing a successor, but the sidelining of the reputedly reform-minded Gen. Khin Nyunt back in 2004 all but ensures that the control of the military will remain firmly in the hands of hard-liners. Even so, a hard-line response to a threat to domestic order cannot be taken for granted. The elections were reportedly preceded by a rapid sell-off of state assets at bargain prices, which could be indicative of an attempt by the top generals to line their pockets in anticipation of their departure to the political sidelines. Thus, it is possible that responsibility for deciding how to best to respond to the threat posed by pro-democracy activists and a post-election escalation of armed conflict with guerrilla groups fighting on behalf of various ethnic minority communities might be handed to the new breed of (now former) military leaders who will inhabit the government headed by Prime Minister-elect Thein Sein. In any case, the combined pressure of heightened domestic tensions and international sanctions cannot be withstood indefinitely. If the sham democracy envisioned by the SPDC is not sufficient to relieve the pressure, the generals and their erstwhile colleagues in Thein Sein’s government may be willing to consider deeper reforms that result in something more akin to the genuine democracy desired by the NLD. However, it is at least as likely that a threat to serious threat to stability will prompt a suspension of the



new legislature and the reassertion of direct military control. Consequently, the odds that even the pretense of democratic rule will be maintained for the entire five-year forecast period are less than even. Political Considerations a Barrier to Improved Climate for Investment

Military leaders recognize that increased foreign investment is essential to the country’s economic development. New foreign investment has declined since peaking in the mid-1990s, despite substantial interest in the country’s oil and gas resources, largely owing to the moral and legal disincentives to cooperation with the military regime. Other member states of the Association of Southeast Asian Nations (ASEAN) account for most of the foreign investment in Myanmar, but China is expanding its presence in the country, a factor that along with a growing appetite for energy has stimulated strong interest among investors in India. Foreign investment will undoubtedly increase in the aftermath of the elections, which China, India, and the ASEAN countries have generally praised as a step forward, signaling their intention to grab investment opportunities in the natural resources sector. According to government figures, foreign investment exploded to $16 billion in the second quarter of 2010, most of it destined for Daewoo International’s Shwe offshore gas field and pipelines being built by China National Petroleum Corporation to transport production from the Shwe project across the country to China. However, western countries will steer clear of Myanmar as long as sanctions remain in place, and investment policies will continue to be shaped by purely political considerations as long as the SPDC retains a central political role. The hard-liners within the SPDC are keenly aware of the potential for an expanded foreign (especially western) presence in the economy to facilitate the spread of ideas that pose a threat to political stability, a consideration that will incline the regime to favor investment from countries that are willing to overlook Myanmar’s shortcomings in the area of human rights and to implement policies aimed at promoting domestic investment. In the latter regard, the privatization campaign that preceded the recent elections was reminiscent of the process that led to the rise of oligarchs in Russia in the 1990s, pointing to the distinct possibility that natural resource development and privatization will entrench powerful interests rather than promote change. Reflecting the regime’s fear of foreign influence, the barriers to foreign investment have been set fairly high. Although 100% foreign ownership is permitted in approved sectors, foreign companies must obtain a permit to trade (essentially a business license) from the Ministry of National Planning and Economic Development’s Directorate of Investment



and Companies Administration (DICA). However, DICA has been barred from issuing new permits since 2002. Some effort is being made to address the inadequate state of the infrastructure, which poses a significant de facto barrier to investment. Shortly before the November 2010 elections, the government announced plans to establish a Special Economic Zone in Dawei, the centerpiece of which will be a deepwater port. Power plants, refineries, and steel mills are also planned. Italian-Thai Development has reportedly signed a deal worth $13.2 billion to develop the project. The improved performance of the export sector has eased pressure on foreign exchange reserves, but the still fragile state of the domestic financial system, which stood on the brink of collapse as recently as 2003, dims the prospects for any significant easing of currency restrictions as long as international sanctions remain in place. No Easing of Import Restrictions

Despite the junta’s suspicions of the outside world, Myanmar will try to live up to its trade obligations as a member of ASEAN. In addition to economic benefits, membership provides political advantages, allowing the country to remain engaged with its neighbors and limiting the isolation created by international sanctions imposed by the US, the EU, and other industrialized democracies. Supported by Vietnam, Myanmar will lobby within ASEAN for permission to take a more gradual approach in easing its trade restrictions, hoping to exploit its nominal reform process in order to obtain a relaxation of the pressures for economic and political change. Foreign exchange reserves nearly doubled to $3.5 billion on the back of a surge in gas prices in 2008, and, despite declining slightly in 2009 as gas prices fell, still amount to about 10 months of import cover. Nevertheless, there is little chance that the government will even slightly ease restrictions on non-essential imports (currently only 20% of all imports) in the absence of a sustained macroeconomic stability, which is all but ruled out as long as international sanctions are maintained. The impediments posed by high nominal tariff rates are increased by the unrealistic exchange rates used to assess the value of imports. Although the other members of ASEAN will apply pressure for the elimination of this practice, the fragile state of the banking sector will make the government leery of making any revisions to exchange regulations that might be expected to facilitate the flow of imports to the country. Friction and Flashpoints

It is likely that the post-election period will be troubled by a rise in incidents of civil strife and an escalation of armed conflict with ethnic guerrilla groups, and the country may



well be entering a period of chronic heightened political tensions in which the threat of a violent eruption of discontent, and a brutal crackdown, will be high. While some members of the opposition have chosen to cooperate with the government, many have not. Suu Kyi will remain an icon of dissent, both domestically and internationally. The military’s comprehensive intelligence and surveillance system will allow the government to crush most dissent at its onset in Yangon and other key areas. The military will deal with any demonstrations harshly, even after the installation of a nominally civilian government. Foreign firms are at risk from the effects of the social and economic disruptions. Especially vulnerable are businesses engaged in petroleum and other mineral extractive operations, which may be directly targeted by opponents of the government. Myanmar is home to about two dozen minority groups, many of whom live in isolated and mountainous enclaves along the border with Thailand, China, India, and Bangladesh. Ethnic minorities account for about 40% of the country’s population of 55 million, but the largest of the groups—the Karen, the Shan, the Kachin, the Wa, the Chin, the Mon, and the Rohingya—have little in common except a desire for autonomy or independence that fueled armed conflict between rebel groups and the central government dating back to the 1940s. Since 1989, the SPDC has secured tenuous truces with 17 minority rebel groups, while six others, including the Karen National Union (KNU) and Shan State Army-South (SSA-S), have remained at war with the government. The truces have held largely because of the threat of harsh government retaliation and promises of additional development in minority-dominated areas. However, sanctions have limited the government’s ability to follow through with the promised carrots, and recent developments indicate that at least some of armed groups are prepared to test the government’s ability to carry out a multi-front crackdown. Ahead of the 2010 elections, the junta began to apply pressure on the so-called “cease-fire groups” to proceed toward fuller integration into the political and social mainstream. The SPDC presented three options to the guerrilla forces—surrender their arms, reconstitute their forces into a border guard under the command of Myanmar’s military, or transform their organizations into political parties and participate in the 2010 elections. The United Wa State Party (UWSA), the largest and best-equipped of the ethnic rebel forces, rejected all three options, announcing that it preferred to continue, at least temporarily, under the terms of the cease-fire agreement, citing the junta’s failure to give serious consideration to its demands for greater autonomy and democracy.



Presumably, the UWSA gave its response only after receiving the blessing of China, which is the SPDC’s strongest supporter in the international arena, but is also the chief source of arms for the ethnic armies. Nearly all of the other cease-fire groups—including the Kachin Independence Army (KIA), the second largest rebel force—followed the USWA’s lead, prompting the junta to ban the Kachin and the Wa from registering parties. Other minority ethnic groups boycotted the elections, and the UWSA refused to permit polling to take place within the territory under its control. In the weeks leading up to the elections, both the UWSA and the KIA were reported to be stepping up both recruitment and training, apparently in anticipation of a government offensive aimed at convincing the rebel groups that they will face eradication if they refuse to join the Border Guard Force (BGF). To date, only two of the cease-fire groups have agreed to join the BGF, the Democratic Karen Buddhist Army (DKBA) and the National Democratic Army-Kachin. However, the DKBA has split over the issue, and opponents of integration into the BGF forced the issue by launching an attack on the town of Myawaddy, near the border with Thailand. Some 20,000 refugees have fled the area into Thailand, and fighting continues around the Three Pagodas Pass. The prospect of an escalation of guerrilla warfare that could produce a flood of refugees has alarmed Myanmar’s neighbors, especially China, which made no secret of its displeasure over the flight of 30,000 refugees into its territory following a crackdown against one of the smaller non-compliant rebel groups in April 2009. China’s priorities are ensuring that unrest in Myanmar does not lead to stability in its own territory and protecting its investments and access to resources in Myanmar. As such, China can be expected to apply pressure on both sides to show restraint and reach a negotiated settlement of their conflicts. However, the Chinese government does not wield the authority necessary to stifle conflict entirely. Myanmar’s military leaders do not trust the government in Beijing, which they view as a rival for influence over disaffected minorities, and the influence of the Chinese varies among ethnic groups, some of which view officials in Beijing with suspicion. The recent escalation of unrest in Myawaddy highlights the potential for domestic conflict to generate tensions with neighboring countries, particularly with Thailand. If offensives against Karen separatists spill over the border and result in Thai casualties, a serious military exchange can be expected. Open conflict with such a major regional power could further undermine the country’s international support and weaken its control over the domestic opposition. A dispute over territory in the Bay of Bengal that



holds significant oil and gas potential creates a risk of the periodic flaring of tensions with Bangladesh, as well. Weakness of Non-energy Sectors Will Hamper Economic Performance

The international sanctions imposed on Myanmar are undoubtedly holding economic development well below potential, although by exactly how much is difficult to determine. The credibility of Myanmar’s official economic data is a subject of serious doubt, and analysis of the country’s economic performance and socioeconomic conditions is distorted by the huge discrepancy between the official and market exchange rates for the kyat. In general, the political transition is not expected to have much of an immediate impact in the economic arena, as western sanctions are expected to remain in place and no significant business-friendly shifts in policy are anticipated. Such economic growth as does occur will be fueled by a handful of large energy and infrastructure projects. Weak growth of output and low prices will limit the contribution of gas production to growth in the near term, and restrictions on bank lending will hamper investment and productivity in the agriculture sector and dampen business activity in the commercial capital, Yangon. Real GDP growth will accelerate to 3.1% in 2010, and is forecast to reach 4% in 2011, as investment picks up. Gas output will not increase significantly until later in the five-year forecast period, when new production is expected to come on line, and while the pace of economic expansion could rise to 5%, real GDP growth is forecast to average just 3.8% per year through 2015. The central bank’s policy of increasing the money supply to finance the government deficit will produce high inflation. Consumer price increases will be held to 9% in 2010, as very low household incomes and a lack of consumer access to credit constrains private spending. However, inflation will push above 10% over the medium term, the result of loose fiscal and monetary policies, currency volatility, and the effect of a moderately improved economic situation on private demand. The impact of sanctions on the external balances has been mitigated by higher commodity prices and import restrictions imposed by the government since 2002. A large increase in investment-related imports will contribute to a significant narrowing of the trade surplus in 2010 and 2011 that, in combination with wider deficits in the services and income balances, will shrink the current account surplus, and may even produce a deficit. An increase in gas exports later in the forecast period will have a beneficial impact on the



external balances, resulting in average current account surpluses of $200 million per year through 2015. Second Most Likely Regime Scenario 18-Month Forecast Period: Hard-line SPDC (30% Probability) Five-Year Forecast Period: Hard-line SPDC (40% Probability) The elevation of Shwe Mann to the third-ranking position in the SPDC behind Than Shwe and Maung Aye confirmed suspicions that the sacking of Khin Nyunt in 2004 reflected the consolidation of hard-line control within the SPDC. Although Than Shwe has hinted that he plans to depart the scene following the elections in November 2010, it appears that the military hierarchy will continue to be dominated by a faction that opposes meaningful political reform and will play an active role in shaping the policies of the USDP government. On that basis, the likely response to serious political instability or a dangerous escalation of fighting with armed minority rebel groups would be a tightening of political controls, and quite possibly the abandonment of the experiment with “guided democracy.” The international response to a tightening of military control and violent reprisals against political opponents would leave the government even more dependent on its own resources. In such an event, the junta could revert to unalloyed isolationism and an abandonment of all pretenses of civilian influence in political affairs. Harsh measures would probably be taken against Suu Kyi, the NLD, and other elements of the political opposition. Suu Kyi might even be deported. Such a regime would try to maintain existing international relationships that have proved beneficial, such as those with China, the ASEAN countries, and other neighboring states. However, the sharp increase in repression accompanying this regime’s accession of power would make relations with the ASEAN states more difficult. While ASEAN has a policy of non-interference in the affairs of its members, the outcast status of Myanmar has already created awkward diplomatic situations for other members. The EU, for example, has frequently refused to meet with ASEAN representatives for trade talks as long as Myanmar is represented on the negotiating team. A hard-line regime would be more likely to use the expanded Myanmar armed forces to pursue separatist guerrillas across national borders, escalating tensions with Thailand to the breaking point. This would

Hard-line SPDC

Growth (%)

Inflation (%)

CACC ($bn)

2010 3.0 9.4 0.20 2011-2015 1.4 22.0 -0.13



spell the end of efforts by some ASEAN leaders to reconcile the differences between the SPDC and the international community. Foreign Investment Draining Away

In response to the likely intensification of international sanctions, the government would abandon many efforts to attract more foreign investment. The heightened sense of insecurity could lead to retaliation against firms from countries against whose governments the regime held particular resentment. Restrictions on currency and profit repatriation would remain in place, and might be tightened further as international sanctions put added pressure on hard currency reserves. Investment would decline even more sharply, affecting even investments from ASEAN countries and in the oil and gas sector. Only Vital Trade

The tightening of foreign trade sanctions could lead to a halt of all but the most vital foreign trade. Criticism from ASEAN members and efforts to abandon the organization’s policy of non-interference in domestic affairs would probably drive the government from the organization. Relations with China would probably continue to be close and trade between the countries would increase. In order to avoid a dangerous dependence on the Chinese, the government would seek to develop closer economic, political, and military relations with India. Import and export controls would remain in place and even more non-essential goods would be excluded from importation. More Turmoil, More Repression

Quelling social disturbances would be at the top of the hard-liners’ agenda. Turmoil would initially escalate, as opposition supporters took to the streets to protest the military’s actions, but swift military reprisals would prevent a prolonged period of substantial unrest. The comprehensive intelligence and surveillance network would enable the government to head off most demonstrations before they had a chance to get off the ground by using preemptive strikes against opposition leaders. Under hard-line command, the military would act as brutally as necessary to bolster its regime, ruling out any serious compromise with the NLD and showing little concern over international criticism and retaliation. The government would launch an intensified campaign against ethnic rebels, who would most likely have abandoned cease-fire agreements in the face of social upheaval and the government’s failure to live up to its promises for more development in minority areas. This regime would show even more benign neglect toward the organized drug producers and smuggling gangs operating in the country. Their actions would increase the chances



of more confrontation with its neighbors, especially Thailand. Over the long run, the growing wealth and strength of these groups, especially the USWA, would contribute to instability and might eventually pose a threat to the military regime. Economic Decline

Except for some investment from ASEAN countries, most investors would abandon the country, and even key investment opportunities, such as the development of natural gas projects, would lag. Economic growth would stall, and military spending would take an even larger portion of the national budget, leaving few financial resources for infrastructure and social spending, and little capital available for private-sector development. The economy would enter recession as investment dried up and production languished, and real GDP growth would average just 1.4% per year over the five-year forecast period ending in 2015. Increasing deficits and shortages caused by sanctions and declining domestic production would fuel a steep increase in inflation. Inflation would average 22% annually over the five-year forecast period. The current account surplus would narrow sharply and fall into deficit as investment declined and economic activity slackened, but weak economic activity would contribute to decreased demand for imports that would help to contain the size of the deficit, which would average $130 million per year through 2015. The few remaining sources of foreign loans for Myanmar would disappear. The government would have little choice but to default on its debt, as a shortage of foreign exchange would render it unable to meet its repayment obligations. Debt service payments to foreign lenders, especially from industrialized democracies, would have a low priority. Third Most Likely Regime Scenario 18-Month Forecast Period: Divided SPDC (10% Probability) Five-Year Forecast Period: Divided SPDC (15% Probability) An eruption of social unrest might give rise to a revived factional battle between the currently dominant hard-line faction of the SPDC and a more pragmatic faction that might be willing to make minor concessions to democracy advocates, including a

Divided SPDC

Growth (%)

Inflation (%)

CACC ($bn)

2010 2.7 10.0 0.22 2011-2015 2.2 19.0 0.30



substantive role for elected civilians in shaping policy, as a means of restoring order. However, there is just as good a chance that a struggle for power within the junta could result in the delay of elections and a prolonged period of policy uncertainty accompanied by a persistent threat of dangerous political instability.

Liberalization Only as Needed

Few substantive moves in the direction of economic liberalization would be made in the near term. Given the military’s extreme fear of foreign influences, aid from international financial institutions, which would undoubtedly be tied to requirements for deeper political and economic reform, would only be accepted if absolutely necessary. More desirable from the military’s point of view would be bilateral assistance, probably from other Asian sources, such as China, that would impose few if any requirements for specific reform measures.

Some Trade Improvement for a Time

Even if relatively reform-minded military leaders regained their former influence, the government would hesitate to implement a more open trade regime. Myanmar would seek special consideration from ASEAN with regard to reducing trade restrictions. Some easing of import restrictions might be undertaken as international pressure diminished. Over the medium term, divisions within the junta would provide little room for a significant deviation from the status quo with regard to policy. In any case, any liberalization that did occur would be too gradual and limited in scope to have much of an impact on economic conditions.

Most Sources of Turmoil Would Persist

Some elements of the opposition would reject any cooperation with the military government that fell short of a full implementation of democracy. However, the reappearance of a government faction that favors limited reforms might bring some restraint to the military’s response to peaceful demonstrations, a factor that could embolden protesters. The government might tolerate this, but only up to a point. Ethnic minority and insurgent groups would probably take a wait-and-see approach as the power struggle within the junta unfolded, looking for evidence of substantive political reform or additional development aid for minority areas. However, any such developments would most likely not be satisfactory, and the insurgencies would probably resume. In addition, conflicts stemming from the drug trade would also continue.

Little Benefit to Economy

Domestic economic conditions might improve somewhat in the short run if the SPDC introduced even modest political reforms. However, the maintenance of fairly tight



restrictions on foreign investment and trade would preclude any substantial economic gains over the forecast period. Real GDP growth would remain well below potential, averaging just 2.2% annually through 2015. Foreign investors would remain unenthusiastic about investing in Myanmar, except perhaps in projects related to the oil and gas sector. Excessive government spending, especially on the over-inflated defense budget, would make inflation difficult to control, and the rate would average about 19% per year over the five-year forecast period. The current account surplus would average $300 million per year through 2015, as a drop-off in investment flows contributed to slower growth of imports.



Forecast Summary

SUMMARY OF 18-MONTH FORECAST


*Military-Civilian 60%

Hard-line SPDC 30%

Divided SPDC 10%

RISK FACTORS CURRENT

Turmoil Moderate Same MORE SLIGHTLY MORE

Investment

Equity High SLIGHTLY LESS Same Same

Operations Very High SLIGHTLY LESS Same Same

Taxation Moderate Same MORE SLIGHTLY MORE

Repatriation High Same SLIGHTLY MORE SLIGHTLY MORE

Exchange High Same SLIGHTLY MORE SLIGHTLY MORE

Trade

Tariffs High Same Same Same

Other Barriers Very High SLIGHTLY LESS Same Same

Payment Delays High Same SLIGHTLY MORE SLIGHTLY MORE

Economic Policy

Expansion Very High Same SLIGHTLY MORE SLIGHTLY MORE

Labor Costs Low Same Same Same

Foreign Debt High Same SLIGHTLY MORE SLIGHTLY MORE

SUMMARY OF FIVE-YEAR FORECAST


*Military-Civilian 45%

Hard-line SPDC 40%

Divided SPDC 15%

RISK FACTORS BASE

Turmoil High SLIGHTLY LESS MUCH MORE MORE

Restrictions

Investment High SLIGHTLY LESS SLIGHTLY MORE SLIGHTLY MORE

Trade High Same SLIGHTLY MORE SLIGHTLY MORE

Economic Problems

Domestic Very High SLIGHTLY LESS MORE SLIGHTLY MORE

International High Same MORE Same

* When present, indicates forecast of a new regime



MyanmarReal GDP Growth Under Alternative Regimes

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2005 2006 2007 2008 2009e 2010f 2011-2015f

(per

cen

t)

Military-Civilian Hard-line SPDC Divided SPDC

MyanmarInflation Under Alternative Regimes

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009e 2010f 2011-2015f

(per

cen

t)


MyanmarCurrent Account Under Alternative Regimes

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2005 2006 2007 2008 2009e 2010f 2011-2015f

($bi

llion

s)



Political Framework 15-Dec-2010 • Page 31

Myanmar Country Forecast Political Framework

Players To Watch

Than Shwe: The SPDC chairman has generally been seen as acting in the role of referee between moderate and hard-line forces within the regime, but his age and questionable health status suggest that he is rapidly approaching retirement, and he has tipped the balance decisively in favor of the hard-liners in an apparent bid to limit the potential for a divisive post-succession power struggle. However, as long as he remains on the scene, the government can be expected to maintain at least the pretense of commitment to limited democratic governance… Union Solidarity and Development Party: A party founded by more than two-dozen generals who shed their uniforms to stand for office at the November 2010 elections, the USDP received the full backing of the ruling junta, and won an overwhelming majority of elected seats in both chambers of the legislature. The presence of the incumbent prime minister, Thein Sein, at the head of the USDP confirms long-held suspicions that those who will hold power within the new political structure are for all intents and purposes nothing more than the next generation of junta leadership in civilian costume… Thein Sein: The founding leader of the USDP will serve as prime minister in the newly elected government, the same position he has held in the SPDC-led regime since 2007. The continued presence of Than Shwe in the near term, and the potential for Than Shwe’s departure to trigger a power struggle among those at the top of the military hierarchy, create the potential for significant limits on Thein Sein’s actual exercise of power… Aung San Suu Kyi: A Nobel laureate and the leader of the opposition NLD, Suu Kyi has become an international symbol of both the country’s yearning for real democracy and the military regime’s disregard for human rights. The NLD suffered a split ahead of the recent elections, which were boycotted by Suu Kyi’s faction, but she was released from house arrest shortly after the elections and she will exploit the generals’ desire to maintain the pretense of democracy to push for deeper political reform… Regional Neighbors: Myanmar’s Asian neighbors, particularly China and its fellow members within ASEAN, are an important bulwark against the country’s international isolation, but also a potentially influential source of pressure for change within the country. The junta’s lack of seriousness regarding political reform and its indifference to regional concerns over drug trafficking could eventually test the patience of its neighbors, particularly if an escalation of domestic unrest contributes to cross-border conflict…

…more on these and other Players in the Political Players section


Page 32 • 15-Dec-2010 Political Framework

Political Players Ethnic Minorities

The importance of the ethnic minorities stems from their role as the NLD’s base of support in rural areas and their potential to increase turmoil through armed insurrection. The largest ethnic minorities, the Shan and the Karen, are estimated to constitute 16% of the population. Several other minority groups—including the Wa, Lahu, Mon, and Rakhine—together make up an additional one-third of the population. For the most part, minorities reside in the seven ethnic minority states of Shan, Mon, Arakan, Karen, Kayah, Kachin, and Chin, which are for the most part located in border areas, where economic development lags and where the local population is most vulnerable to the military’s arbitrary and brutal rule. In many cases, minorities are denied the full rights of citizenship, and they are excluded from careers in the government or military services. Extreme nationalists among the Bamar (the country’s dominant ethnic group) generally feel that the ethnic minorities are inferior both culturally and socially. The extremely nationalistic military leadership generally holds the same view. The military hierarchy consists entirely of ethnic Bamar, who have excluded members of minority groups from assuming positions of power. The ethnic differences that separate these groups from the majority Bamar population also tend to separate them from each other. While the government has occasionally had to deal with a seemingly overwhelming number of insurgent organizations, these groups are often small and generally not coordinated in their actions, so the military has been able to deal with them on a piecemeal basis. At times, various ethnic groups have fought each other with at least as much ferocity as they fight the government, which has not been averse to stirring up trouble among and between them. “Buddhist monks,” looking more like soldiers or policemen in disguise, helped to incite Buddhist mobs to attack Muslims in Arakan state in February 2001. The ethnic minorities also have a political presence through a variety of parties and front organizations that generally support the mainstream political opposition and its leader, Suu Kyi. Despite their general support of the NLD, most ethnic militias and insurgents had signed cease-fire agreements by 2001. The NLD has used the disaffection of ethnic minorities as a tool for building support, trying also to garner support by advocating policies that are opposed by the military government but beneficial to minority interests. In 1998, the NLD invited ethnic minorities to send representatives to its “parliament,” which planned to challenge the government’s nullification of the 1990 elections.



The government had earlier invited minority groups to participate in the National Convention to draft a new basic law and even permitted debate on the issue of minority autonomy. Nevertheless, ethnic leaders criticized the process as not satisfying their concerns, and the government has done little to fulfill its pledges of economic assistance to border areas, instead directing investment funds to Yangon. Since 1998, economic difficulties have limited the government’s ability to carry out its promises. Insurgent Groups

Since independence, the government has confronted guerrilla armies claiming to represent the interests of virtually every minority group. In general, these groups have sought greater regional autonomy. Not all of the insurgents have been seeking more rights for ethnic minorities, however. Various factions of the Communist Party of Burma (CPB) conducted a lengthy insurgent campaign in the 1950s. Nationalist groups have periodically emerged in opposition to the military regime of the day. More recently, guerillas representing pro-democracy student groups have taken up arms against the government. Following the 1988 emergence of the regime headed by the State Law and Order Restoration Committee (SLORC, the SPDC’s precursor), the military intensified its campaigns against the various guerrilla factions, facilitated by a major military build-up in troop strength and arms purchases. Since the early 1990s, the government has succeeded in reaching cease-fire agreements with all but one of the major guerrilla groups, the Karen National Union (KNU). The KNU’s forces were decimated by military offensives carried out in 1997 and 1998, and the group has since been capable of waging only low-level guerrilla war against the SPDC regime. In December 2003, the KNU initiated tentative peace talks with the government. However, following the replacement of Prime Minister Khin Nyunt with the less moderate Soe Win in late 2004, the military launched a fresh offensive against the KNU. Drugs have become such an important source of revenue for some insurgent groups that continuing disputes with the government probably stem as much from their desire to protect this business as from any desire to achieve political goals. Many insurgent groups operate in the Golden Triangle border area, which has been a major source of opium and heroin in Southeast Asia for many years. More recently, these operations have added the equally lucrative business of manufacturing and distributing stimulants, which is a major source of concern in Thailand. Most of the methamphetamine in Thailand is smuggled into the country from Myanmar, and traffic volume estimates range anywhere from 70 million to 600 million tablets a year. On a single day in late March 2002, for example, Thai troops killed 13 drug-traffickers and seized 1.6 million tablets.



Among the insurgent groups reportedly engaged in drug smuggling or production are the Eastern Shan State Army, Kachin Defense Army, and the Shan United Army, but by far the most prominent is the UWSA. Formerly an ethnically based insurgent group, the UWSA reached an accommodation with the Myanmar government in 1989. Under the terms of this agreement, the central government was to leave the UWSA alone in exchange for an end to guerilla warfare against the government and for their assistance in defeating other insurgent groups operating in their area. The UWSA has since turned to drugs as a major business enterprise, including a “drug production city” near the Thai border, featuring hotels, casinos, and its own electrical power supply. The insurgent group routinely disarms government troops before they enter the UWSA-controlled area and have, at times, penetrated into and even briefly held Thai territory before being driven back into Myanmar. The UWSA is a capable military force, and their drug production and smuggling operations threaten to undermine Thai-Myanmar relations. Furthermore, the huge cash flow of the drug trade has enabled them to move into legitimate businesses in Yangon, such as banking. Although some groups have been brought under control by force, the government has typically pursued a policy of negotiated settlements with individual groups, promising limited autonomy and development assistance in return for a cessation of operations against government forces. Nonetheless, the government has also generally allowed insurgents to keep their weapons under these cease-fire agreements, and that could come back to haunt them. Smaller groups continue to engage in armed struggle with government forces in the state of Shan. Attacks on insurgent forces in Shan state spill over the border into Thailand and have provoked clashes with Thai units, threatening relations between the two countries. In June 2002, the Myanmar military, working with the UWSA, launched an offensive against the Shan State Army-South (SSA-S) to recapture a base in the Golden Triangle region on the border with Thailand. The battle caused severe strains in Myanmar’s relationship with Thailand, which was already tense owing to accusations that Thailand had given tacit support to the SSA-S and other small, armed breakaway factions operating on the Thai-Myanmar border. A subsequent upsurge in fighting between the SSA-S and the UWSA, which was alleged to be serving as a proxy for the military, resulted in a renewed escalation of tensions with Thailand, which looked unfavorably upon the removal of Prime Minister Khin Nyunt, who reportedly enjoyed an especially close relationship with Thaksin Shinawatra, who was Thailand’s prime minister at the time. As plans for elections moved forward, the junta began to apply pressure on the armed ethnic groups to proceed toward fuller integration into the political and social



mainstream, but most of the so-called “cease-fire groups” refused to comply. The SPDC gave the cease-fire groups three options—surrender their arms, reconstitute their forces as a border guard under the command of Myanmar’s military, or transform their organizations into political parties and participate in the 2010 elections. In May 2009, the UWSA rejected all three options, announcing that it preferred to continue, at least temporarily, under the terms of the cease-fire agreement, citing the junta’s failure to give serious consideration to its demands for greater autonomy and democracy. It is assumed that the UWSA gave its response only after receiving the blessing of China, which is the SPDC’s strongest supporter in the international arena, but is also the chief source of arms for the ethnic armies Maung Aye (Vice Chairman, SPDC)

Maung Aye, who is also deputy commander-in-chief of the Defense Services and army commander-in-chief, is the most prominent member of the regime’s hard-line faction, and is among the top candidates, along with Gen. Shwe Mann, to succeed Than Shwe as leader of the junta or any “democratic” regime established under a new constitution. Maung Aye has taken over many of the day-to-day responsibilities of government from the ailing Than Shwe, but questions regarding his broader political support and his lack of international experience dim his prospects for formally rising to the top spot, and it remains to be seen whether he might allow himself to be passed over without a fight. His chief sources of support are army regulars, regional commanders, and the commanders of the army’s principal combat force, the light infantry divisions. The dismantling of the intelligence apparatus previously headed by Khin Nyunt has eliminated a base within the government from which other potential rivals for power might emerge. Considered to be blunt and forceful in his approach, Maung Aye is reportedly suspicious of overly close ties with China, but seven new cooperation agreements enhanced these ties in December 2001. In 1999, Maung Aye became head of the Trade Policy Council, an organization with the authority to override all ministries on business and trade matters, greatly increasing his influence on economic matters and funding. He may well be the source of the new requirement that foreign trading companies work with a domestic partner to operate in Myanmar. Maung Aye also developed a relationship with India, especially its military, leading to the purchase of military equipment. For the most part, Maung Aye’s differences with SPDC moderates are tactical. He has favored a far more aggressive approach to dealing with Suu Kyi and the NLD, brushing aside concerns about international criticism. He takes a more traditional military view on matters such as guerrilla activities among ethnic minorities and prefers force rather than negotiation to deal with internal unrest. He is also reputedly opposed to membership in



ASEAN, ostensibly owing to concern of interference by the regional body in Myanmar’s internal affairs. Military

While not espousing a particular political ideology, other than perhaps extreme Bamar nationalism, the military has so insinuated itself into social, economic, and political fabric of the country that Myanmar has acquired the attributes of an ideologically based totalitarian state. The principal program of the military’s leaders is one of maintaining the unity of the state, the army, and society. The military has created for itself a privileged place, effectively insulating itself from the rest of Myanmar’s society and creating its own culture—including a health care system that is superior to its civilian counterpart, a separate educational system, subsidized housing for personnel, and a network of military stores that either are unavailable to civilians or prohibitively expensive. The military has repressed most of the usual organizations of civil society and replaced them with its own mass organizations. For example, Union Solidarity and Development Association (USDA) may have as many as 11 million members since membership is mandatory for government employees. The USDA—which has been transformed into the USDP—is used to denounce the NLD and counter its public demonstrations and rallies. The few civil organizations that are allowed to operate must do so within strict parameters. Military surveillance is pervasive. An extensive network of informants operates at every level of society, and most overseas expatriate communities have been heavily infiltrated. Military intelligence conducts electronic surveillance of communications by phone and the Internet. In addition, draconian laws regulate who can own and use communicating devices such as fax machines and modems. The military establishment does not belong to regional defense or military pacts, but has begun expanding military contacts with neighboring countries, including close links with China and relationships with India, Singapore, and Pakistan. These relationships provide a way to overcome the arms embargoes imposed by industrialized democracies and help to reduce outside support for Myanmar’s various insurgent groups. In addition to its reputed involvement in the underground economy of drugs, the military is heavily involved in the overt economy, and both active and retired military personnel manage its extensive economic interests. Its involvement is mostly handled by two major enterprises, the Myanmar Economic Holdings Corporation, Ltd. (MEH) and the Myanmar Economic Corporation (MEC), both controlled by the Defense Ministry.



The military underwent a major build-up through most of the 1990s. The number of army troops, estimated at 186,000 in the mid-1980s, has now reached about 450,000, and further increases plan to bring the number to 500,000, making the size of Myanmar’s military force second only to Vietnam in Southeast Asia. There are an additional 85,000 troops in police and government controlled militia units. Myanmar’s defense budget comprises over 40% of the national budget and accounts for at least 14% of the country’s GNP. Approximately 20% of Myanmar’s imports are defense-related. The armed forces have made weapons purchases of about $1 billion–$3 billion from China and other smaller purchases from Israel, India, and Singapore. While this has not generally been sophisticated weaponry, having the arms has greatly increased the combat capability of the armed forces, as demonstrated by its greater success in combating insurgent groups since 1990. They were previously outgunned because insurgent groups could buy weapons on the black market in Thailand. The large build-up in troop strength may also be an attempt to ensure domestic tranquility through overwhelming force. Although improvements and a pay increase of 400% for the lowest ranks may have helped with morale, the military still suffers significant problems in this regard. Morale problems even at the Defense Services Academy (DSA) led to its closure, at least temporarily in June 2002, and protests at the Military Technology College (MTC) in Maymyo led to the expulsion of about 40% of the student body, prison sentences for others, and death sentences for a few. The disturbances at both schools reportedly stemmed from the poor quality of the food and a new mandate reducing the rank that cadets would receive upon graduation. The larger army has meant greater costs for a government that is already struggling with a poor economy. Even with conscription, the military has had a hard time recruiting, and in spite of its build-up, training has suffered. Many units, especially in the border regions must procure their own food supplies—by growing their own rice or, in many cases, stealing it from local villages—to fend off starvation. Part of the problem is the logistical system, which is inadequate to keep troops supplied in the field, especially in remote areas. This inadequacy has reportedly also led to the use of forced or slave labor to build roads and camps, and to move supplies to front line units. The poor state of Myanmar’s infrastructure complicates the logistics problem. Some officers and soldiers have reportedly been arrested for their association with the political opposition. Political movements could gain a foothold in the expanded army, enhancing prospects for a coup or large-scale mutinies.



National League for Democracy (NLD)

The NLD formed one week after the SLORC assumed control of the government in 1988. Despite the fact that the party’s leader, Suu Kyi, had been in detention since 1989, the NLD won 81% of the contested seats in the 1990 elections, and its success prompted the junta to annul the results. The military regime’s repressive tactics and the lack of progress toward achieving the NLD’s goals have weakened the party’s strength. Many NLD members elected in 1990 have died, retired, fled the country, or been taken into custody. Many others have openly resigned from the party and renounced its platform. However, in most cases, this has reflected extreme pressure from the military government, and wide global recognition of the NLD’s political legitimacy ensures that any credible attempt by the SPDC to appease international critics must include a significant role for the party. The NLD was outlawed when it refused to register for the 2010 elections to protest the continued detention of party leader Aung San Suu Kyi. The NLD called on its supporters to boycott the November vote, on the grounds that participation would grant legitimacy to the process, and, by extension, to the new government. However, some senior members of the party opted to contest the elections under the banner of the National Democratic Force (NDF), arguing that opponents of the military regime could not afford to squander their only opportunity to ensure at least some semblance of true opposition within the new legislative bodies. Regional Commanders

Even prior to government reshuffles in August 2003 and September–October 2004, the SPDC and the military had undergone substantial reorganizations. The SPDC formerly comprised 19 members, but the failure to fill the slots left vacant by the death of Secretary 2 Tin Oo in early 2001 and the dismissal of Secretary 3 Win Myint in November 2001, and the sacking of Khin Nyunt in 2004, made it more difficult to determine who is included in the inner circle of power, and the position of each member in the hierarchy. Top members of the SPDC include Chairman Than Shwe, army commander Maung Aye, and the chiefs of the air force and the navy. The other 12 positions in the SPDC are held by regional military commanders. Until November 2001, they exercised a great deal of autonomy in their actions and generally had a free hand to operate in their areas as they saw fit. In November 2002, however, 10 of the regional commanders were promoted to the rank of lieutenant general, reassigned to the Defense Ministry in the capital city, and apparently lost considerable power in the process. Only two of the regional commanders kept their positions. Then, as part of the fallout from the alleged coup-plotting by former dictator Ne Win’s family, the commander-in-chief of the air force, the Coastal Region



commander, and the commander of the drug-ridden Golden Triangle Region were all removed from their posts. Regional commanders have had wide authority over military, police, intelligence, and security functions within their own regions. They must approve business contracts, resource extraction and property development, markets, and road and bridge construction. Many of them have gotten rich from their positions, which also give them military and political power. The military’s abandonment of the rotation system for commanders assisted regional commanders in acquiring this power, since they have often remained in the same posts for many years, building individual power bases, at least until the recent changes. Among these officers is the next group of Myanmar’s senior military leaders, and the regime appears to have now promoted younger officers to these regional commands in order to train them for future needs. Generally, the regional commanders have been loyal to army Commander-in-Chief Gen. Maung Aye, but the recent reorganization has raised questions about loyalty to top leaders. The new breed of leaders, which includes Prime Minister Thein Sein, will fill prominent roles in the newly elected “civilian” government, and their backing could be key to determining who will fill the top spots in the military going forward. Regional Neighbors

Myanmar’s Asian neighbors, particularly the members of the Association of Southeast Asian Nations (ASEAN), represent the most influential source of pressure for change within the country. The suspension of support from the IMF and other international financial institutions limits the international financial community’s leverage over the formulation of economic policies in Myanmar, and while the US, the EU, and other industrialized democracies have generally taken a hard-line approach toward the junta, imposing sanctions on the regime and otherwise trying to discourage their own nationals from doing business in the country, such measures have largely failed to encourage a relaxation of political controls. For the most part, ASEAN has taken the approach of constructive engagement, in accordance with the bloc’s principle of non-interference in the internal affairs of member states. However, some members, notably Philippines and Malaysia, have voiced concerns that Myanmar’s international isolation is unnecessarily hindering ASEAN’s global integration efforts. Although Myanmar was pressured to forego its turn chairing the bloc in 2007, ASEAN has otherwise failed to apply heavy pressure on the military regime. ASEAN is in the process of drafting a new organizational charter that is expected to make specific mention of democracy and human rights, and possibly the abandonment



of the principle of non-interference. But it remains an open question how much pressure Myanmar might face within ASEAN, which includes such democracy-averse nations as Brunei, Laos, Vietnam, and, somewhat less blatantly, Singapore, among its members. The military government has skillfully played some regional powers against each other. One SPDC faction favors closer relations with China, and has encouraged Chinese investment and major purchases of arms, while a competing faction prefers to bolster ties to India, instead. As a result, both China and India have competed with one another for favor, to the benefit of the junta’s general control and ability to withstand pressure from other foreign quarters. State Peace and Developmental Council (SPDC)

The SPDC originated as the State Law and Order Restoration Council (SLORC), the name adopted by the group of senior military officers who seized power under the leadership of Chief of Staff Gen. Saw Maung in September 1988, following the failure of two civilian Burma Socialist Program Party (BSPP) governments to contain widespread unrest generated by severe rice shortages. Believing that it had terrorized the electorate sufficiently to ensure its continued control, SLORC permitted the holding of elections in 1990. However, when it became clear that Suu Kyi’s NLD had won the elections, the junta annulled the results, claiming that a new constitution was required before civilian governance could be restored. International criticism of rampant corruption within the military regime prompted sweeping changes at the top levels of the SLORC hierarchy, which were accompanied by the adoption of the junta’s current name. Until 2004, power within the SPDC was pretty evenly balanced between hard-liners who opposed relinquishing control and a more moderate faction, headed by Khin Nyunt, which maintained a position more amendable to the introduction of limited democratic reforms “at some future date.” Khin Nyunt played a central role in the promotion of the National Convention, a body established to draft a new constitution in advance of promised elections. The National Convention met for the first time in eight years in 2004, following Khin Nyunt’s unveiling of a “road map” for the democratic transition. Although that plan met with general approval in international quarters, the refusal of the NLD to participate as long as Suu Kyi remained in detention contributed to a high level of skepticism, which was only reinforced when Khin Nyunt and the moderates were sidelined in an apparent bid to forestall a damaging power struggle between would-be successors to SPDC Chairman Than Shwe. Despite the ouster of Khin Nyunt and the purge of his top allies within the SPDC’s moderate faction, the transition process has continued, but the ascendance of the hard-line faction sent a clear signal that, to the extent that political reforms are pursued, they



will be implemented slowly, and are unlikely to produce a system of government that can justifiably be described as even moderately democratic. Aung San Suu Kyi

A Nobel laureate and the leader of the opposition NLD, Suu Kyi has become an international symbol of both the country’s yearning for real democracy and the military regime’s disregard for human rights. The NLD suffered a split ahead of the recent elections, which were boycotted by Suu Kyi’s faction, but she was released from house arrest shortly after the elections and she will exploit the generals’ desire to maintain the pretense of democracy to push for deeper political reform. Since annulling the NLD’s victory at the 1990 elections, the SPDC has attempted to sideline Suu Kyi and destroy her party, with only mixed success. In May 2003, slightly more than one year after she won her release from an extended period of house arrest, Suu Kyi was detained once again. Both the US and the EU made clear that any improvement in relations hinged upon the release of Suu Kyi and the participation of her party in any process to introduce democratic reforms. That was more than the SPDC was willing to concede, as was made clear in June 2009, when Suu Kyi was convicted of violating the terms of her house arrest by allowing an uninvited American intruder who swam across a small lake to her home to reside with her for two days, and received an 18-month extension of her sentence. Suu Kyi, born on June 19, 1945, in Yangon, is the daughter of assassinated Gen. Aung San, founder of modern Myanmar. She attended Delhi University, India and St. Hugh’s College, Oxford. Suu Kyi was assistant secretary for the Advisory Committee on Administrative and Budgetary Questions, UN Secretariat, New York (1969–1971), and was the resident officer of the Ministry of Foreign Affairs, Bhutan (1972). She was married to a British academic, who died in 1999, and has two sons, who were stripped of their Myanmar passports by the military regime and live in the UK. After living overseas for 28 years, Suu Kyi returned to Myanmar in 1988 to assist her ill mother. She was drawn into politics by student protests, culminating in a nationwide uprising that demanded a democracy. After a subsequent military crackdown killed thousands and the SLORC re-established military control, Suu Kyi helped to found the NLD, serving as the party’s general secretary. Although detained under house arrest (1989–1995), she led the party to victory in the 1990 elections. After nullifying those results, the SLORC introduced a law in 1991 that forced the NLD to expel Suu Kyi and other party leaders facing state charges.



Suu Kyi attracted international attention and has won several awards—including the Sakharov Prize (1990), Human Rights Prize (1991), the Nobel Peace Prize (1991), and the Simón Bolívar Prize (1992). In 1990, the government responded to calls from UN Secretary-General Javier Perez de Cuellar for Suu Kyi’s release from house arrest by offering to allow her to join her husband, a British academic, and her children in the UK. However, fearing that she would not be allowed to re-enter Myanmar, she declined the offer. In 1999, she again declined the government’s offer to allow her to travel to her dying husband’s bedside, assuming that she would never be able to return. After first extending the period of her detention by retroactively changing the law, the government officially lifted her house arrest in 1995, but placed heavy restrictions on her movements and prohibited her from reassuming her post in the NLD by a law that requires permission from the electoral commission for a change in leadership. She then attempted trips by rail and by car, but encountered authorities blocking her path, even uncoupling her rail carriage from the rest of the train. During two of her attempted car trips in 1998 she sat in her car protesting police barricades for as long as 13 days, giving up eventually because of dehydration. In August 2000, Suu Kyi tried to travel by car to an NLD meeting in Kungyangon, but faced a police barricade trying to force her group to return to Yangon; a standoff ensued, lasting for a week, until riot police ended it, driving Suu Kyi back to virtual house arrest and her colleagues to house arrest or jail. Again in September 2000, she tried to travel by rail to Mandalay with several NLD colleagues. After she and her party were prevented from boarding the train, Suu Kyi was returned to her home, and the others were arrested and detained. In May 2002, the regime released Suu Kyi from house arrest following extended and secret talks. These face-to-face talks between junta leaders and the woman it has harassed, ostracized, and bullied for years stemmed directly from the efforts of UN Special Envoy Razali Ismail, as well as the threat of more rigorous international sanctions. After being freed, Suu Kyi persisted in the same activities that had led to her previous detention, traveling throughout the country to test the limits of her freedom and build her base of popular support. Than Shwe (Chairman, SPDC)

Than Shwe, born in 1933, is the ultimate political authority by virtue of his control of the chairmanship of the SPDC. He is also the minister of defense, and until handing the position to Khin Nyunt in August 2003, was prime minister. Than Shwe has generally been seen as acting in the role of referee between moderate and hard-line forces within the regime, but his age and questionable health status suggest that he is rapidly approaching retirement, and he has tipped the balance decisively in favor of the hard-liners in an apparent bid to limit the potential for a divisive post-succession power struggle.



That said, Than Shwe has on several occasions in the past shown a decided moderate streak, and as long as he remains on the scene, the government can be expected to maintain at least the pretense of commitment to limited democratic governance. He has openly admitted that a day will come when it would be inappropriate for the SPDC to retain its political monopoly, and is a driving force behind the creation of both the National Convention charged with drafting a new constitution and the USDP. Than Shwe began his military career in 1953 and served mostly in psychological warfare posts. He rose rapidly in rank and became a brigadier general and regional commander in 1983; vice chief of staff in 1985; lieutenant general in 1987; and general in 1990. He was among the 21 members of the SLORC when it was formed in 1988, and gained influence as a result of his close alliance with the SLORC chairman, Gen. Saw Maung. Than Shwe replaced Saw Maung in April 1992, after the SLORC leader unexpectedly announced his retirement, citing health reasons. Thein Sein (Prime Minister)

The founding leader of the USDP will serve as prime minister in the newly elected government, the same position he has held in the SPDC-led regime since 2007. The continued presence of Than Shwe in the near term, and the potential for Than Shwe’s departure to trigger a power struggle among those at the top of the military hierarchy, create the potential for significant limits on Thein Sein’s actual exercise of power. Thein Sein was born on April 20, 1945. He was first named as prime minister on an acting basis in April 2007, as an interim replacement for the ailing Gen. Soe Win, who was rumored to be suffering from leukemia. As he held the rank of lieutenant-general at the time, Thein Sein was widely seen as a mere placeholder. However, he was appointed to the post on a permanent basis following Soe Win’s death in October of that year, and was promoted to the rank of general, also becoming first secretary of the SPDC. Union Solidarity and Development Party (USDP)

The USDP was founded by more than two-dozen generals, including Thein Sein, the first secretary of the SPDC. The new party, which received the full backing of the ruling junta, won nearly 80% of the vote at the elections held on November 7, 2010, securing 259 of the 330 contested seats in the 440-member House of Representatives, and 129 of the 168 seats up for election in the 224-member House of Nationalities. The presence of Thein Sein at the head of the incoming ruling party confirms long-held suspicions that those holding power within the new political structure are in fact the next generation of junta leadership in civilian costume.



The party has been a source of controversy since its founding in early June 2010, owing to claims by the opposition that it was established illegally. The 2008 constitution forbids uniformed officers and/or government officials from the military regime from contesting elections (fully one-quarter of the seats in both legislative chambers have been reserved for appointed military personnel). Although the founders of the USDP reportedly shed their uniforms back in April, Thein Sein and others have continued to hold posts within the SPDC regime. Despite what appears to be an obvious violation of both the letter and the spirit of the constitution, the head of the Union Electoral Commission (who was appointed by SPDC Chairman Than Shwe) ruled that the party was a legal entity.

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Climate for Investment & Trade 1-Apr-2010 • Page 1

Myanmar Country Conditions

Climate for Investment & Trade Overview Preface

U.S. Investment Subject to Sanctions. On May 20, 1997, by Executive Order 13047, the President imposed economic sanctions prohibiting new investment by U.S. persons or entities in Burma (Myanmar), based on the determination that the Government of Burma had committed large-scale repression of the country’s democratic opposition. The Cohen-Feinstein Amendment to the Foreign Operations Act of 1997 forms the legal basis for the investment ban. Every six months, the U.S. government reviews the sanctions policy. Since imposing the investment ban, the U.S. Government has found no measurable progress toward political liberalization in Burma and the sanctions have been renewed at each six month interval.

Prior to the imposition of the investment ban, many prominent U.S. investors had already withdrawn from Burma due to a hostile investment climate and disappointing returns. An active anti-Burma consumer movement in the United States and Europe also put investors’ corporate image at risk. Current U.S. federal sanctions ban new investment, but allow companies invested in Burma prior to May 20, 1997 to maintain their investments. Very few companies have elected to do so.

In 2003, the President signed into law the Burmese Freedom and Democracy Act (BFDA), and issued an accompanying executive order barring the import of most Burmese products into the United States. The 2003 sanctions also prohibited U.S. persons from providing financial services to Burma, and seized the assets of certain Burmese entities. The 1997 and 2003 economic sanctions are in addition to a number of other sanctions the United States imposed against Burma in 1988, following the military’s crackdown against civilian democracy activists and 1990, when the military nullified the results of democratic parliamentary elections. The United States opposes the provision of international financial institution assistance to Burma, prohibits military sales, denies bilateral economic aid and commercial assistance programs, bans the issuance of U.S. visas to members of the military and senior government officials, and, since 1990, has downgraded our representation in Rangoon from Ambassador to Charge d’Affaires. In addition, the United States continues to engage in vigorous diplomatic efforts to promote political and human rights reforms in Burma. U.S. law allows U.S. firms to export to Burma, with some exceptions.

Openness to Foreign Investment. To attract more foreign investment, the Burmese government enacted the Foreign Investment Law (FIL) on November 30, 1988. The priorities for foreign investment, according to the FIL, are promotion and expansion of exports; exploitation of natural resources that require heavy investment; acquisition of high technology; support for production and services requiring large amount of capital; expansion of employment opportunities; development of facilities that would reduce energy consumption; and regional development.

According to the State-Owned Economic Enterprises Law, enacted in March 1989, state-owned enterprises have the sole right to carry out such economic activities as extraction of teak and sale of the same in the country and abroad; cultivation and conservation of forest plantations, with the exception of village-owned firewood plantations cultivated by the villagers for their personal use; exploration, extraction, sale, and production of petroleum and natural gas; exploration, extraction, and export of pearls, jade and precious

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stones; breeding and production of fish and prawns in fisheries which have been reserved for research by the government; postal and telecommunications services; air transport and railway transport services; banking and insurance services; broadcasting and television services; exploration, extraction, and exports of metals; electricity generating services, other than those permitted by law to private and cooperative electricity generating services; and, manufacturing of products relating to security and defense. The Myanmar Investment Commission (MIC), “in the interest of the State”, can make exceptions to this law. The MIC has granted some exceptions in the areas of banking (for domestic investors only), mining, petroleum and natural gas extraction, and air services. As with all major political and economic decisions, this discretion lies solely with the Cabinet and senior generals of the ruling junta.

According to the FIL, the MIC must review all potential investment, both foreign and domestic. Due to accusations of corruption within the MIC, the ruling State Peace and Development Council (SPDC) sharply reduced the MIC’s influence in 1999. Potential investors must still work through the MIC, but it has lost most of its decision-making authority. Interested foreign investors still submit proposals through the MIC, which obtains the final approval from either the Cabinet (which is chaired by Prime Minister Lt. General Soe Win, although the PM must also obtain clearance from SPDC Chairman Senior General Than Shwe) or the Trade Policy Council (TPC, chaired by the SPDC Deputy Chairman Vice Senior General Maung Aye). The Cabinet and the TPC have the same membership, so authorities choose the decision-making body on a case-by-case basis. Although the MIC has no power to protect foreign companies, there is no evidence that the MIC overtly discriminates against foreign investors. Bureaucratic red tape, arbitrary regulation changes and endemic government corruption, however, continue to pose serious obstacles for all potential investors.

Once the government grants permission to invest, a foreign company must get a “Permit to Trade” – essentially a business license – from the Ministry of National Planning and Economic Development’s Directorate of Investment and Companies Administration (DICA). Since February 2002, the government no longer allows DICA to issue new permits or renew existing ones for foreign firms. This decision has halted most new foreign investment and has disrupted the business of many foreign investors, forcing the closure of several foreign manufacturing firms. Since 2002, some foreign investors have attempted to do business by operating as local firms under the cover of Burmese partners, but some have faced legal action and difficulties in divesting.

Once a company has the “Permit to Trade”, it may, in theory, use the permit to get resident visa status, to lease cars and real estate, and to obtain new import and export licenses from the Ministry of Commerce. The government has had a de facto policy in place since the end of 2001 to only issue import licenses to those firms that are export earners. Companies without export earnings must purchase “export dollars” from another firm at an inflated exchange rate in order to apply for an import license. Some companies fraudulently transfer money between the accounts of export revenue earners to facilitate this process. Companies can also now use account transfers from Burmese seamen and other Burmese workers in foreign countries for exports. Since the government taxes these overseas remittances at a rate of 10%, many overseas workers remit their money home through informal networks. As of August 20, 2005, the high-level Trade Policy Council gives final approval for all import and export licenses.

In February 2002, a reversal of the government’s “open door economy” policy came from a verbal directive outlawing the issuance of new “Permits to Trade” and renewal of existing permits for any trading firms owned by foreigners (or owned by both foreigners and Burmese). The government allegedly took this measure to promote local trading firms, but it has served only to further distort the local marketplace. The authorities have not published any official notice of this directive but they generally enforce it, including against foreigners who have tried to evade the directive by listing their company under the name of a Burmese colleague or friend.



The FIL allows FDI in a wholly foreign-owned venture or a joint venture with a Burmese partner (either private or state-owned). Sole proprietorships and partnerships are equally acceptable. The FIL requires that at least 35% of equity capital in all JVs and partnerships be foreign-owned. The minimum foreign investment required in practice, though not specified in the law, is $500,000 for manufacturing investments, and $300,000 for services in cash or in kind. These minimum amounts include cash-on-hand requirements in foreign currency (calculated at the official rate of exchange of roughly 6 kyat = US$1, which is roughly 0.47% of the market exchange rate).

In June 2006, the Ministry of Finance and Revenue issued a notification for levying tax on profits gained by transferring assets of the companies conducting business in oil and gas sector as following rates:

Profit Tax rate (a) up to US$100 million 40% (b) Between US$100 and $150 million 45% (c) Over US$150 million 50%

The Burmese armed forces are involved in many commercial activities via the Union of Myanmar Economic Holdings, Ltd. (UMEHL) and the Myanmar Economic Corporation (MEC). To set up a joint venture, foreign firms have reported that an affiliation with UMEHL or MEC proves useful to help them receive the proper business permits. Nonetheless, entering into business with UMEHL or MEC does not guarantee success for foreign partners. Some investors report that their Burmese military partners are parasitic, make unreasonable demands, provide no cost-sharing, and sometimes muscle out the foreign investor after an investment becomes profitable.

In November 2005, the government moved Burma’s administrative capital to the newly-constructed town of Nay Pyi Taw, located in a remote valley about 240 miles north of Rangoon. The long-term impact of this move on investment is unknown, but all official transactions, including import/export licenses, must be approved in Nay Pyi Taw, so conducting business has become more time consuming and expensive.

Transparency of the Regulatory System

Burma lacks regulatory and legal transparency. All existing regulations, including those covering foreign investment, import-export procedures, licensing, and foreign exchange, are subject to change with no advance or written notice at the whim of the regime’s ruling generals. The country’s decision-makers appear strongly influenced by their desire to support state-owned enterprises and meet the needs of the military-controlled Myanmar Economic Corporation and Myanmar Economic Holdings, Ltd., as well as wealthy cronies. Even omens and fortune-tellers can play a role in their decisions. The government regularly issues new regulations with no advance notice and no opportunity for review or comment by domestic or foreign market participants. The GOB rarely publishes its new regulations and regulatory changes, preferring to communicate new rules verbally to interested parties and often refusing to follow up in writing. The government occasionally publishes selected new regulations and laws in the government-owned daily newspaper, “The New Light of Myanmar,” as well as in “The Burma Gazette.” Burma’s written health, environmental, tax, and labor laws do not impose a major burden on investment. However, the unpredictable nature of the regulatory and legal situation – and irregular enforcement of existing laws – makes investment in Burma extremely challenging without good -- and well-connected -- local legal advice.

Foreign/Free Trade Zones/Ports

The government has set aside 19 “industrial zones,” large tracts of land surrounding Rangoon, Mandalay, and other major cities. These areas are, however, merely zoned for industrial use. They do not come with



any special services or investment incentives. The GOB has developed a draft industrial zone law, expected to be approved in 2007. There are no free trade zones in Burma.

Tariff and Non-tariff Barriers Despite laws promulgated in the 1990s to encourage foreign trade and investment, many cumbersome restrictions remain, including difficult-to-obtain and restrictive permits required for all imports and exports, and most other business activities. Frequent, arbitrary, unannounced, and unwritten policy changes make business very unpredictable. License issuing procedures are not transparent, and provide multiple opportunities for graft. Importers and exporters say it is extremely difficult to obtain necessary business permits without paying for them “unofficially.” The national government’s ongoing move to a new administrative capital in Nay Pyi Taw, 230 miles north of Rangoon, has added further delays and expense to the approvals process.

The government has imposed a series of restrictive and ill-conceived trade policies that aid crony companies, protect moribund state-owned enterprises, and capture scarce foreign exchange through import substitution. Legitimate commerce suffers and, in the face of increasing restrictions and a slow business climate, many foreign firms have closed their doors. Smuggling and black market trading continue to flourish, especially in the border areas. Many urban retailers stock imported items explicitly on the prohibited imports list, including “luxury” items, though the supply of such items is erratic.

The official exchange rate, which overvalues the currency by more than 20,000%, is a key impediment to foreign trade and investment. Burma also lacks an active private financial sector and an independent central bank. Poor infrastructure is a major obstacle to distribution of goods and services. The high cost and irregular supply of fuel, and serious electricity shortages add expense and unpredictability to any manufacturing operation in Burma. The government does not offer any financial support to private exporters, and charges a 10% export tax (8% commercial tax plus 2% income tax). Private companies do not enjoy the same advantages as well-connected government and military organizations, particularly with regard to use of the official exchange rate.

Policies Conversion and Transfer

According to the Foreign Investment Law (FIL), investors in Burma have a guarantee that they can repatriate profits after paying taxes. The law also provides that, upon expiry of the term of the contract, the investor can receive the amount to which he or she is entitled in the foreign currency in which the investment was made. Due to the current shortage of foreign exchange in Burma, however, it is not easy for foreign investors to legally transfer their net profits abroad. The Foreign Exchange Management Department of the Central Bank of Myanmar must give permission for all transfers abroad of foreign currency.

Likewise, Burma’s multiple exchange rates make conversion and repatriation of foreign exchange very complex, and ripe for corruption. The official rate of approx. 6 kyat to the dollar is grossly overvalued. The government also issues Foreign Exchange Certificates (FEC) at a fixed rate of 1 FEC=450 kyat via licensed exchange counters, but that rate is still significantly overvalued. Companies generally unload their kyat earnings as quickly as possible. The government requires foreign companies to use dollars or FEC to pay rental charges and utility and telephone bills (charged at a rate that is often ten times higher than what local firms are charged). The government allows foreign firms to deposit dollars in a state bank for later withdrawal as FEC by the company’s employees.



In Burma, only three state banks - the Myanma Foreign Trade Bank (MFTB), the Myanma Investment and Commercial Bank (MICB) and the Myanma Economic Bank (MEB) – are legally permitted to handle foreign exchange transactions. In practice, the MFTB and MICB handle most of these transactions. The MFTB primarily handles foreign currency transactions for government organizations, businesses, and private individuals, while the MICB primarily serves companies and joint ventures. MEB handles foreign currency transactions in the border trade regions.

U.S. government restrictions imposed in 2003 on the provision of financial services to Burma by U.S. banks severely disrupted the legal foreign trading system, which had long been primarily dollar-denominated. U.S. banks no longer offer any trade facilitation or correspondent banking services, making the use of letters of credit denominated in U.S. dollars problematic. Some traders and government banks have shifted to euros. As of July 29, 2003, the U.S. Government also froze the correspondent accounts of MEB, MFTB, and MICB in the United States, along with all other GOB assets and property.

Private banks held a large share of domestic banking activity until February 2003, when a major banking crisis severely reduced the holdings of the private banking sector. The GOB never permitted these banks to deal in foreign exchange. In 2004, the government allowed some smaller private banks to resume operations, but the sector remains tightly restricted. There is no indication that, if the private banking system is revitalized, the GOB would give private banks the right to deal in foreign currency.

Performance Requirements

Officially, companies covered under the Foreign Investment Law (FIL) are entitled to a tax holiday for a period of three consecutive years. Under the FIL the Myanmar Investment Commission (MIC) can extend this tax holiday. At the MIC’s discretion, investors are also eligible for a number of other incentives including: accelerated depreciation of capital assets, a waiver of customs duties and taxes on imported machinery and spare parts during the period of construction, or a waiver of duties on imported raw materials during the first three years of commercial production. Although the MIC issues the permission, it is the TPC and the Cabinet that makes final decisions on these incentives and extensions. There are no official performance requirements for new foreign investors in Burma, but the government does require investors to purchase local machinery and insurance (fire, marine, and personal liability). Unofficially, before approving an investment the government often requires companies to commit to a certain level of exports. The government then requires compliance reports every three months, with evidence of export results or an explanation why goals were not met. There is no evidence that the GOB has taken any action against firms that do not meet their initial export targets. There is no requirement that foreign investors buy or hire from local sources. Technology transfer is not generally a pre-requisite for investment.

Any enterprise operating under the FIL or the Myanmar Companies Act must pay income tax at a 30% tax rate. Withholding tax on royalties and interest is 15% for resident foreigners and 20% for non-resident foreigners. Tax collection in Burma is, in practice, extremely lax, but foreign investors are an easy target for cash-strapped tax authorities. The Burmese fiscal year ends March 31; tax returns are due by June 30.

Legal Framework Expropriation and Compensation

The Burmese Foreign Investment Law (FIL) provides a guarantee against nationalization during the “permitted period” of investment. However, the GOB has forced a number of foreign firms in various sectors to leave the country because it has not honored the terms and conditions of investment agreements. In the late 1990s, two large Japanese firms voluntarily left Burma after they found they were not able to operate according to earlier investment agreements. Additionally, there have been several cases where the



government seized the assets of foreign and local investors without compensation when the particular investment turned out to be very profitable.

Previously, the GOB forced out a Swiss cement importer and distributor ostensibly because the company was not “operating according to its permit.” According to most accounts, however, the government evicted the company because the Swiss company could sell better quality, cheaper cement than its government-owned competitors. In another case in 1999, the government confiscated a large brewery that an expatriate businesswoman had made profitable and turned it over to the Ministry of Industry (1) to run. The local courts proved unhelpful in resolving the case, and the investor never received any compensation from the government.

Dispute Settlement

Private and foreign companies are at a major disadvantage in disputes with Burmese governmental and quasi-governmental organizations. Foreign investors generally prefer to use the 1944 Arbitration Act, which allows for international arbitration. The Burmese government usually tries to stipulate local arbitration in all contracts it signs with foreign investors. Since the military regime closely controls the entire legal system in Burma, and courts are not independent to make free and fair decisions, local arbitration is not reliable. Companies facing adverse administrative decisions have no recourse. Burma is not a member of the International Center for the Settlement of Investment Disputes, nor is it a party to the New York Convention.

The Attorney General’s Office and the Supreme Court, ostensibly controls the legal system in Burma, but neither body is independent of the ruling regime. Burmese criminal and civil laws are modeled on British law introduced during Burma’s colonial period, which ended in 1948. Every Township, State, and Division has its own law officers and judges. The regional commanders and military authorities at the township, state and divisional level, however, have supreme de facto authority over judicial decisions at the local and state/division level.

There is no bankruptcy law in Burma.

Foreign companies have the right to bring cases to and defend themselves in local courts. As the military regime controls all the courts tightly, foreign investors with conflicts with the local government and those whose business has been expropriated, have little luck getting compensation.

Right to Ownership and Establishment

By law, foreigners may not own land in Burma, and may only rent property on a short-term basis, frequently for terms less than one year.

A private entity can establish, buy, sell, and own a business only with the review and approval of the MIC (and, by proxy, the top regime leadership).

Protection of Property Rights

Burma does not have adequate IPR protection. Patent, trademark, and copyright laws and regulations are all deficient in regulation and enforcement. After Burma joined ASEAN in 1997, it agreed to modernize its intellectual property laws in accordance with the ASEAN Framework Agreement on Intellectual Property Cooperation. An IPR law, first drafted in 1994, still awaits government approval and implementation. A Committee for IPR Implementation, established in July 2004, has worked toward approval of a new law,



with assistance from the World Intellectual Property Organization. The WTO has delayed required implementation of the TRIPS Agreement for Least Developed Nations until 2013.

The Government of Burma introduced a Patents and Design Law in 1946, but never brought it into force. Thus, the registration of patents and designs in Burma is still governed by the Indian Patents and Designs Act of 1911, enacted under British colonial rule.

The piracy of music CDs, video CDs, CD-ROMS, DVDs, books, software, and product designs is evident nationwide, especially in border regions and in the two major urban centers of Mandalay and Rangoon. Given the small number of local customers, poor state of the economy, and lack of infrastructure (e.g., unreliable electricity for manufacturing), piracy does not have a significant adverse impact on U.S. products. However, most consumers of IT products in Burma, both in the private sector and in government, use pirated software.

Burma has no trademark law, although trademark registration is possible. Some firms place caution notices in local newspapers to declare ownership of their trademarks. After publication, the owners can take criminal and/or civil action against trademark infringers. Title to a trademark depends on use of the trademark in connection with goods sold in Burma. The British colonial government published a Copyright Act in 1914, but has never instituted a means to register copyrights. Thus, there is no legal protection in Burma for foreign copyrights.

Most real estate transactions in Burma require cash. Regular bank loans are difficult to obtain and are not available directly to foreigners.

Corruption and other Bureaucratic Obstacles Corruption is endemic in Burma. Economists and businesspeople consider corruption the most serious barrier to investment and commerce in Burma. Because of a complex and capricious regulatory environment and extremely low government salaries, rent-seeking activities are ubiquitous. Very little can be accomplished, from the smallest transactions to the largest, without paying “tea money.” As inflation increases and investment declines, this problem appears to be worsening.

Since 1948, corruption is officially a crime that can carry a jail term. However, the ruling generals apply the anti-corruption statute only when they want to take action against a rival or an official who has become an embarrassment – most notably in October 2004, when the SPDC arrested then-Prime Minister General Khin Nyunt and many of his colleagues and family members for corruption. In 2006, authorities arrested over 300 Customs officials, charging them with corruption. Most citizens view corruption as a normal practice and requirement for survival. The major areas where investors run into corruption are: when seeking investment permission, in the taxation process, when applying for import and export licenses, and when negotiating land and real estate leases.

International Agreements Trade Agreements. As a member of ASEAN, Burma is part of the ASEAN Free Trade Area (AFTA). As one of ASEAN’s least developed members, Burma has until 2015 to comply with required tariff reductions. Burma will also participate in an agreement between ASEAN and China to begin reducing tariffs by 2010. Burma had committed to start its reduction plan in 2006, but had not changed its rates by December 2006. Burma is a member of the WTO and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). BIMSTEC is negotiating its own free trade area, and has set a goal of February 2007 for a formal agreement. Burma has border trade agreements with China, India, Bangladesh, Thailand,



and Laos. The GOB has signed a number of Memoranda of Understanding to expand bilateral trade with those countries.

Bilateral Investment Agreements and Regional Cooperation. Burma has signed several bilateral investment agreements, also known as “Protection and Promotion of Investment” agreements, with the Philippines, China, Lao PDR and Vietnam. These agreements have had little impact on enhancing incoming investment from other countries in the region. Investment treaty discussions are underway with Thailand and Singapore.

OPIC and Other Investment Insurance Programs. Due to U.S. law, OPIC programs are not available for Burma. Burma is not a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

Labor Conditions In 1989, the United States withdrew Burma’s eligibility for benefits under the Generalized System of Preferences (GSP), due to the absence of internationally recognized worker rights. Independent labor unions are illegal in Burma. Workers are not allowed to organize, negotiate, or in any other legal way exercise control over their working conditions. In some instances workers have gained minor benefits through direct work actions, especially for wage increases at private enterprises following a significant pay increase for civil servants in April 2006.

Although government regulations set a minimum employment age, wage rate, and maximum work hours, managers do not uniformly observe these regulations, especially those in the private sector. The government uses forced labor in its construction and commercial enterprises and for porterage and military building. These labor practices are inconsistent with Burma’s obligations under ILO Conventions 29 and 87. The ILO imposed sanctions against Burma in 2000 and has critically reviewed the forced labor situation in Burma at subsequent ILO Conferences and Governing Body meetings. In 2006, the ILO Governing Board raised the possibility of bringing Burma to the International Court of Justice for its refusal to address forced labor. The United States strongly supports ILO action against Burma.

Burma’s labor costs are very low, even when compared to most of its Southeast Asian neighbors. Burmese over the age of 40, particularly those over 65 years of age, are generally well-educated, but the lack of investment in education by the military regime and the repeated closing of Burmese universities over the past 18 years have taken a toll on the country’s young. Most in the 15-39 year old demographic group lack technical skills and English proficiency. Many older educated Burmese studied English in mission schools during the British colonial and early independence period. The military nationalized schools in 1964 and discouraged the teaching of English in favor of Burmese.

The government does not publish any unemployment figures. Anecdotal evidence and recent divestment by many foreign companies indicate a very high level of unemployment and underemployment in formal, non-agricultural sectors. The minimum wage is 500 kyat (roughly $0.4) per day. An average worker in Burma earns about 500-1000 kyat (roughly $0.4 to $0.8) per day.

Sources: BURMA COUNTRY COMMERCIAL GUIDE FY 2007, US & FOREIGN COMMERCIAL SERVICE AND US DEPARTMENT OF STATE; PRS Data files.

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Background 1-Apr-2010 • Page 9

Myanmar Country Conditions

Background Geography Myanmar is the largest nation on mainland Southeast Asia and lies along the eastern coast of the Bay of Bengal. Thailand and Laos border the country to the southeast, China to the northeast, and Bangladesh and India to the northwest. The central region of Myanmar consists of lowlands, ringed by steep, often rugged highlands. The country’s fertile farmlands contribute to its role as a major rice exporter. Myanmar contains potentially valuable oil, natural gas, and coal reserves, forests of teak and other hardwoods, and some marble, limestone, and precious stones. Its substantial mineral reserves include tin, antimony, zinc, tungsten, copper, and lead.

Most of Myamar is in the tropic zone. The southwestern monsoon season runs from June to September, and in the northeast from December to April. Summers are typically cloudy, rainy, hot, and humid, but winters offer lower humidity, milder temperatures, and less rainfall. In January, Yangon averages temperatures ranging from 19ºC to a high of 33ºC and has less than one day of significant precipitation. In July, average low and high temperatures are 26ºC and 29ºC, and significant precipitation occurs during 27 days.

Recent History September 20, 2000: Suu Kyi was blocked from boarding a train to travel to the northern city of Mandalay with several NLD colleagues and was returned to her home, while the others were arrested and detained.

October 2000: Suu Kyi began secret talks with the government.

February 2001: The army clashed with Shan rebels at the Thai border, and Myanmar agreed not to build a controversial dam over the Naf River on their common border.

August 2001: The SPDC freed senior NLD leaders U Aung Shwe and U Tin U, but kept Suu Kyi under house arrest.

September 2001: Khin Nyunt visited Thailand and pledged to eliminate the problem of the drug trade in the Golden Triangle by 2005 by initiating a crop substitution plan.

December 2001: Thailand closed a camp that housed Myanmar dissidents, who had used it as a base for hostage-taking incidents since 1999.

November 2001: The International Labor Organization investigated the status of reforms related to forced labor and expressed “profound concern” over the limited number and nature of the government’s reforms. Meanwhile, SPDC leaders removed two top military leaders, forced five ministers to retire, and celebrated the capture of a white elephant (naming it Yaza Gaha Thiri Pissaya Gaza Yaza), a symbol of future “peace, stability and prosperity,” protection from “hazards and dangers” and provider of harvest bounty.

January 2002: The government announced that Russia would supply the reactor for a planned nuclear research facility and train the local staff.


Page 10 • 1-Apr-2010 Background

May 16, 2002: Suu Kyi, leader of the NLD, was released from 19 months of house arrest, reportedly without restriction on either her movements or political activity, and she immediately began to test her freedoms.

May 2002: Hundreds of villagers fled to Thailand as government and UWSA forces launched a major assault on positions held by the SSA and Karen National Union (KNU) just across the border from Thailand’s Chiang Mai province.

September 26, 2002: Family members of former leader Ne Win—Aye Zaw Win, 54, married to his daughter Sandar Win and their three sons: Aye Ne Win, 25, Kyaw Ne Win, 23, and Zwe Ne Win, 21—were found guilty of plotting a coup and sentenced to death.

December 2002: Ne Win died.

May 2003: The US extended its ban on US direct investment into Myanmar for another year. Suu Kyi was once again detained—or, according to the authorities, placed in “protective custody”—following a clash between supporters of the NLD and SPDC backers in the northern town of Yaway Oo.

June 2003: Following Myanmar’s refusal to release Suu Kyi, Japan, Myanmar’s largest aid donor, announced the suspension of all aid payments.

July 2003: US imposed fresh sanctions against Myanmar, including a ban on imports, a ban on financial transactions, and the extension of existing barriers to entry into the US by members of the regime. After intense international pressure, the junta released more than 90 NLD supporters who had been arrested during the crackdown that followed Suu Kyi’s detention in late May, and subsequently, the junta permitted Suu Kyi to meet with officials from the International Committee of the Red Cross, who reported that she was “in good health and high spirits.”

August 2003: SPDC carried out a government reshuffle that introduced a new prime minister, Gen. Khin Nyunt, and brought changes in five other ministerial posts; Khin Nyunt announced that the National Convention—a constitutional review body adjourned in March 1996—would be reconvened as part of a seven-step “roadmap” for the establishment of democratic governance in Myanmar.

September 2003: After she underwent surgery at a Rangoon hospital, Suu Kyi was again detained in her home, effectively placed under house arrest.

November 2003: The government released five senior NLD members at the behest of UN officials.

May 17, 2004: The SPDC reconvened the National Convention (NC), which had been suspended in 1996; however, the regime’s key political opponent, the NLD, boycotted the constitutional convention.

September 18, 2004: Foreign Minister Win Aung and his deputy, Khin Maung Win, Agriculture Minister Nyunt Tin, and Transport Minister Hla Myint Swe were permitted to “retire,” with no official explanation.

October 8, 2004: Due to continued detention of NLD’s leader Aung San Suu Kyi, the EU imposed sanctions, including a ban on dealing with businesses linked to the military dictatorship; an expansion of the visa ban to include any military officers above the rank of brigadier-general; and a declaration that EU members would vote against extending any loans to Myanmar from international financial institutions.



October 19, 2004: The architect of the map to democracy, Prime Minister Khin Nyunt, who was widely recognized as the head of the moderate faction within the SPDC, was “permitted to retire,” after which he was placed under house arrest amid allegations of corruption.

October 22, 2004: The National Intelligence Bureau (NIB), which Khin Nyunt had continued to head while prime minister, was abolished, and senior NIB officials, as well as several of Khin Nyunt’s relatives, were placed under investigation.

November 2004: The SPDC released some 9,248 prisoners who has been “wrongly charged” by the NIB, among the released some 30 were political prisoners.

February 2005: The National Convention responsible for drawing up a “democratic” constitution resumed work despite the absence of NLD representatives, boycotting because Suu Kyi remained under house arrest.

May 2005: In the most recent example of the deteriorating internal security situation in Myanmar, 11 people were killed and a further 162 injured when three bombs exploded in Yangon.

July 2005: The government passed up its chance to take over the rotating chairmanship of the Association of Southeast Asian Nations (ASEAN) after the US and the EU had threatened to boycott ASEAN meetings if Myanmar were allowed to assume the organization’s chair while Suu Kyi was still being detained.

August 2005: The SPDC formed a 13-member special committee to “stabilize” the government, replacing a host of regional commanders and security bureau chiefs, as well as, Education Minister U Than Aung.

November 2005: The government announced that the capital was being moved from the port city of Yangon to the remote village of Pyinmana situated in the mountains; preparatory construction had been taking place for about three years before the announcement.

May 2006: Calling its action a needed response to increased guerrilla attacks since 2005, the government launched its largest offensive in nearly 10 years against the KNU, a rebel group fighting for autonomy for nearly six decades.

December 23, 2006: The UN adopted a resolution expressing “grave concern” over persistent human rights violations in Myanmar, particularly those involving violence against minority groups.

July 2007: The government opened what interim Prime Minister Thein Sein promised would be the final stage of drafting a new constitution, a process that began in 1993.

September 2007: The military government closed the National Convention and declared the end of constitutional talks. Buddhist monks held anti-government demonstrations in the streets of Rangoon.

October 2007: The monks ended their protests amid a military crackdown on their demonstrations.

May 2, 2008: A devastating cyclone hit low-lying areas of the country, killing as many as 150,000 people.

October 2008: When Myanmar deployed four ships to the Bay of Bengal to explore for oil and gas, relations with Bangladesh became strained because of their ongoing territorial/maritime dispute in this area.



January 2009: Although Myanmar denied that the group even existed, Thailand expelled members of the Muslim Rohingya minority who appeared off its coast, and hundreds of Rohingyas were later rescued, near Indonesia, from their boats.

May 2009: An American, who thought he would be helping her, was jailed after swimming across the lake to the home of Aung San Suu Kyi, and she was charged with violating the terms of her house arrest.

August 2009: Aung San Suu Kyi was convicted of violating the conditions of her house arrest when an American citizen, who was uninvited, swam to her home and hid there for two days in May.

October 2009: Aung San Suu Kyi began having talks with military leaders and was allowed to meet Western diplomats.

Social Conditions Ethnic Divisions. A varied ethnic composition is the product of a long history of migration and the absence of well-defined borders before the British colonial period. Roughly two-thirds of the population belongs to the Bamar ethnic group, which is overly represented in both the army and the government. The largest minority groups are ethnic Shan (9% of the population), located largely in the eastern plateau region, and Karen (7% of the population), located in the south and east. National independence was granted only after Aung San had secured the consent of ethnic minorities to join the union. Although minority rights were outlined in the 1947 Panlong Agreement, violent ethnic conflict has troubled the country since independence. Ethnic guerrillas fight largely for greater regional autonomy and more influence in the national government, but some have sought full independence. Since 1988, the government has concluded truces with most armed ethnic groups and has conducted concerted military campaigns against the others. Offensives since 1994 against ethnic Karen and Mon guerrillas, as well as against Rohingya Muslims, have prompted a massive flight of refugees, mostly into Thailand but also into Bangladesh. The Karen have denounced the government for driving out ethnic minorities that had caused no problems.

Regional and Class Divisions. Military officers and a small group of SPDC officials have consumed most of the benefits of economic growth. The uneven regional distribution of economic progress deepens disparities between them and the rest of the population. Expansion has been greatest in Yangon, the northern state of Shan, and near the administrative capital of Pyinmana (about 320 km north of Yangon). Growth has been negligible in such peripheral regions as Mon, reflecting the diversion of trade from the Thai border to the port of Yangon and the Chinese border as a result of trade liberalization measures undertaken in the early 1990s. The partial liberalization of agricultural production and marketing in the late 1980s and early 1990s boosted real disposable farm income, but over the same period, the income of most urban residents, including government employees, declined in real terms, leading many to supplement their income by demanding bribes and engaging in other forms of corruption.

Education. The education system has deteriorated significantly since the onset of military rule in 1962. Funding for public education has declined markedly. Low wages and a mandatory program of political indoctrination have led to a shortage of competent teachers. In border areas, government supervision to enforce restrictions against teaching in local languages has also impeded education. Enrollment is 91% in primary education, but falls below 35% as primary school ends and to 5% in secondary schools. Government-imposed official and informal fees deter attendance in the more impoverished rural areas.

Health. Myanmar’s health system is among the world’s worst, and healthy life expectancy averages less than 52 years. About 20% of the population has no access to safe drinking water or acceptable sanitation.



Government spending for health care amounts to about 2.3% of GDP. Although each village has access to community health centers and larger regional hospitals, medicine is frequently in short supply. In many areas, malaria, plague, and tuberculosis are common. HIV infection is a serious problem, and the infant mortality rate, 49 deaths per 1,000 live births in 2009 remains one of the world’s highest. Cease-fire agreements with the ethnic Wa and Kokang permit the cultivation and trade of opium, fostering heroin addiction. Amputation injuries are commonly linked land mines installed during years of regional conflict.

The following sections are extracts from the publication: Background Note: Burma, January 2010 Published by Bureau of East Asian & Pacific Affairs, US Department of State

Government & Political Conditions The Union of Burma is ruled by a military regime called the “State Peace and Development Council” (SPDC). The SPDC changed the name of the country to “Myanmar,” but some members of the democratic opposition and other political activists do not recognize the name change and continue to use the name “Burma.” Out of support for the democratic opposition, the U.S. Government likewise uses “Burma.”

Burma consists of 14 states and divisions. Administrative control is exercised from the central government through a system of subordinate executive bodies and regional military commanders. Power is centralized within the SPDC, which maintains strict authoritarian rule over the people of Burma through intimidation by a pervasive security apparatus, a military-led system of economic patronage, strict censorship, repression of individual rights, and suppression of ethnic minority groups. The prime minister is appointed directly by the SPDC.

The military regime has a contentious relationship with Burma’s ethnic groups, many of which fought for greater autonomy or secession for their regions after the country’s independence. In 1948, only Rangoon itself was under the control of national government authorities. Subsequent military campaigns brought more and more of the nation under central government control. Since 1989, the regime has entered into a series of ceasefire agreements with insurgent groups, though a few armed groups remain in active opposition. In 2009, the regime began pressuring ceasefire groups to join a Border Guard Force--an integrated unit of Burma Army and ceasefire group soldiers, with Burma Army soldiers occupying the key positions. In June 2009 the Burma Army and its proxy, the Democratic Karen Buddhist Army, launched an attack against the Karen National Union. In August 2009 the Burma Army launched an offensive against the Kokang during which thousands of people fled to China and a weapons and narcotics processing facility was destroyed.

The SPDC continues its harsh rule and systematic human rights abuses, and insists that any future political transition take place on its terms. Parliamentary elections are scheduled for 2010 but no date has been specified. Under the new constitution, the civilian president will not be the commander in chief of the armed forces. Additionally, the military will be guaranteed at least 25% of seats in parliament and will have the power to suspend civil liberties and legislative authority whenever it deems necessary in the interest of national security.

In November 2005, the ruling regime unexpectedly relocated the capital city from Rangoon to Nay Pyi Taw, further isolating the government from the public and international community. Nay Pyi Taw is a sparsely populated district located approximately midway between Rangoon and Mandalay. Most government workers and ministries moved to Nay Pyi Taw over the following six months, and rapid development of



the new administrative capital, including construction of a massive parliament building, continues. Foreign diplomatic missions are still located in Rangoon.

Foreign Relations During the Cold War, Burmese foreign policy was based on principles of neutrality, often tending toward xenophobia. Since 1988, however, Burma has expanded its regional ties. It now is a member of the Association of Southeast Asian Nations (ASEAN), Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation (BIMSTEC), and several other regional organizations and initiatives. Burma joined ASEAN in 1997, and has participated in that regional forum, hosting a number of seminars, conferences, and ministerial meetings. Burma also is a member of the World Trade Organization. Burma’s lack of progress on human rights and democracy has frayed some international ties, and in July 2005, Burma passed up its scheduled 2006 ASEAN chairmanship.

Although Burmese-Thai relations are generally cooperative, they have been tainted by a long history of border conflicts and sporadic hostilities over narcotics trafficking and insurgents operating along the Burmese-Thai border. Nonetheless, official and unofficial economic ties remain strong. In addition to the approximately 150,000 Burmese refugees it hosts, the Thai Government issues temporary work permits to another one million Burmese who live outside the refugee camps in Thailand. Despite their often-contentious histories, Burma has grown closer to both China and India in recent years. China quickly is becoming Burma’s most important partner, offering debt relief, economic development grants, and soft loans used for the construction of infrastructure and light industry. China also is purportedly Burma’s major supplier of arms and munitions. Burma’s commercial and military ties with India are growing as well. India is a primary destination for exports of Burmese beans, pulses, and timber.

The UN has made several efforts to address international concerns over human rights in Burma. The UN Secretary General’s first Special Envoy to Burma, Tan Sri Razali Ismail, resigned his position in December 2005 due to the regime’s lack of cooperation. Subsequently, Secretary General Ban Ki-Moon named former UN Undersecretary General for Political Affairs Ibrahim Gambari as his Special Advisor for Burma. Special Advisor Gambari made eight trips to Burma. At the end of 2009, Special Advisor Gambari was named the Secretary General’s Special Envoy to Sudan. As of January 2010, his replacement had not yet been named.

In January 2007, the United States and the U.K. sponsored a UN Security Council resolution on Burma that was ultimately vetoed by both Russia and China. The UN Security Council adopted by consensus a Presidential Statement on October 11, 2007, deploring the September 2007 crackdown and calling for the release of all political prisoners and the creation of the necessary conditions for a genuine dialogue. The UN Security Council issued a press statement on the crackdown on November 14, 2007. In November 2007, UN Special Rapporteur on the Situation of Human Rights in Myanmar Paulo Sergio Pinheiro was allowed to visit the country for the first time since 2003. His report detailing the Burmese authorities’ September crackdown on demonstrations by monks and democracy activists and the severe reprisals was released on December 11, 2007. Tomas Ojea Quintana replaced Pinheiro on May 1, 2008. On May 2, 2008, the Security Council issued a second Presidential Statement calling for the Burmese regime to conduct the referendum on its draft constitution in a free and fair manner. In the wake of Cyclone Nargis, UN Secretary-General Ban Ki Moon visited Burma in May 2008 and called on the regime to grant greater access for international aid to cyclone-affected areas of the country. On May 22, 2009 the Security Council released a press statement expressing concern over the trial of Aung San Suu Kyi and reiterating its call for dialogue. On August 13, 2009, the Security Council released another press statement expressing its serious concern over her conviction and sentencing and the political impact of those events. In July 2009 the UN Secretary General



again visited Burma but was not permitted to meet with Aung San Suu Kyi. In a speech to the diplomatic community, he noted the regime’s “missed opportunity.”

Most Western foreign aid diminished in the wake of the regime’s suppression of the democracy movement in 1988. The UN Development Programme’s 2009 Human Development Report indicates that official development assistance totaled $242.8 million in 2007, roughly $4 per capita (compared with $68 per person in Laos and $46 per person in Cambodia). Burma receives grants of technical assistance (mostly from Asia), limited humanitarian aid and debt relief from Japan and China, and concessional loans from China and India. In the wake of Cyclone Nargis, the international community has provided more than $343 million to Burma in response to the UN appeal for humanitarian relief. The United States has provided $83 million to date in assistance for Cyclone Nargis recovery efforts.

Burma became a member of the International Monetary Fund (IMF) and World Bank in 1952, the International Financial Corporation (IFC) in 1956, the International Development Association (IDA) in 1962, and the Asian Development Bank (ADB) in 1973. Since July 1987, the World Bank has not made any loans to Burma. Since 1998 Burma has been in non-accrual status with the Bank. The IMF performs its mandated annual Article IV consultations, but there are no IMF assistance programs. Burma is involved in the ADB’s Program of Economic Cooperation in the Greater Mekong Sub-region. As such, it participates in regional meetings and workshops supported by the ADB, although it has not received loans or grants since 1986. Bilateral technical assistance ended in 1988. Burma has not serviced its ADB loans since January 1998. Burma’s total foreign debt now stands at over $7 billion. The debt total to Japan alone is reportedly $4.7 billion.

U.S.-BURMESE RELATIONS. The political relationship between the United States and Burma worsened after the 1988 military coup and violent suppression of pro-democracy demonstrations. Subsequent regime repression, including the brutal crackdown on peaceful protestors in September 2007, further strained the relationship.

The United States has imposed broad sanctions against Burma under several different authorities. In 2003, President George W. Bush imposed new sanctions against Burma pursuant to the Burmese Freedom and Democracy Act (BFDA) and Executive Order 13310, including a ban on imports of products of Burma, a ban on the export of financial services to Burma, and an asset freeze against the SPDC and three designated Burmese foreign trade financial institutions. Congress has renewed the BFDA annually, most recently in July 2009. On October 18, 2007, President Bush issued a new Executive Order (E.O. 13348) that expanded sanctions to include asset freezes against designated individuals responsible for human rights abuses and public corruption, as well as designated individuals and entities which provide material or financial support to designated individuals or the Burmese military government. On April 30, 2008 President Bush issued Executive Order 13464, which further expanded sanctions to permit asset freezes against designated Burmese entities. Currently, approximately 110 individuals and entities have been designated for asset freezes under these authorities. In July 2008, Congress enacted the Tom Lantos Block Burmese JADE (Junta’s Anti-Democratic Efforts) Act of 2008. The JADE Act expands the categories of individuals and entities subject to asset freezes and travel restrictions, and also bans the importation into the United States of Burmese rubies and jadeite, regardless of whether the rubies or jade were substantially transformed (cut, polished, or set into jewelry) in a third country.

In addition, since May 1997, the U.S. Government has prohibited new investment in Burma by U.S. individuals or entities. A number of U.S. companies exited the Burma market even prior to the imposition of sanctions due to a worsening business climate and mounting criticism from human rights groups, consumers, and shareholders. The United States has also imposed countermeasures on Burma due to its



inadequate measures to eliminate money laundering. In addition, visa restrictions against Burma have been in place under Presidential Proclamation 6925 pursuant to Section 212(f) of the Immigration and Nationality Act, the BFDA, the JADE Act, and other authorities for many years.

Due to its particularly severe violations of religious freedom, the United States has designated Burma a Country of Particular Concern (CPC) under the International Religious Freedom Act. Burma is designated a Tier 3 Country in the Trafficking in Persons Report for its use of forced labor. Burma has been found to have “failed demonstrably” in the 2009 Majors’ List. These designations subject Burma to additional sanctions.

In February 2009 Secretary of State Hillary Clinton announced that the administration would begin a comprehensive review of U.S. Burma policy. In September 2009, the administration announced the conclusion to that policy review. The review reaffirmed the United States’ strategic goals in Burma: that the United States supports a unified, peaceful, prosperous, and democratic Burma that respects the human rights of its citizens. The review also concluded that, in addition to the tools the United States has long applied to achieve its goals in Burma of sanctions and support for the democratic opposition, it would augment those tools with the addition of expanded humanitarian assistance and direct, senior-level dialogue with Burmese authorities.

The first senior-level meeting between the United States and Burma under the administration’s new policy took place in September 2009. In November 2009, East Asian and Pacific Affairs Assistant Secretary Kurt Campbell traveled to Burma for meetings with government officials, leaders of the democratic opposition including Aung San Suu Kyi, and ethnic minority leaders.

In August 2009 U.S. Senator Jim Webb (D-Virginia) became the first member of Congress to visit Burma in 10 years.

The United States downgraded its level of representation in Burma from Ambassador to Chargé d’Affaires after the government’s crackdown on the democratic opposition in 1988 and its failure to honor the results of the 1990 parliamentary election.

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Myanmar Country Report 2010