Briefing Note: Priority Agricultural Sector Policy Issues in Myanmar

Briefing Note: Priority Agricultural Sector Policy Issues in Myanmar

Myanmar is still primarily an agricultural society, with more than half of its gross domestic product (GDP) originating from agriculture. About two-thirds of the country’s labor force works in the agricultural sector. Since the average Myanmar household spends more than 70 percent of its income on food, there is no doubt that the food and agricultural economy is the key to both economic growth and improved welfare for the country’s foreseeable future.

Myanmar is similar to its Asian neighbors such asCambodia. Laos and Vietnam, in the following ways:

• Low level of development
• Most of its population lives and works in rural areas and is engaged in agriculture
• Most of its agricultural production comes from small farm units of 5 acres or less
• Like its neighbors, Myanmaralso has had a stated goal of becoming a “modern, developed nation.”
• Pervasive role of the State in the economy
• Recent history of conflict

This briefing paper explores:

1. The important role to be played by the food and agricultural sector in helping Myanmar become a “modern, developed nation”,
2. The lessons learned from its neighbors, and
3. Priority agriculture sector policies forMyanmar’s future growth.

1. The Important Role of the Small farm/Agricultural sector inDriving Economic Growth and Poverty Reduction

Over the past two decades, the experience of rapidly modernizing Asian countries shows a common and distinct path: theeconomies of countries such as Vietnam, Thailand and Indonesiawere transformed AFTER focusing on successful transformation of their agricultural sectors. These Asian countries were able to gain momentum and drive overall economic growth by generating employment, income, domestic savings, foreign exchange and food security through their respective agriculture sectors.

What drove the governments in India, Indonesia, Vietnam and China to get agriculture moving? Initially, it was a deep political concern for food security; these governments felt pressure by increasing hunger and famine-like conditions, which threatened the integrity of the state. For example, in 1980, Vietnamese economists, disturbed by the extreme poverty and hunger they witnessed around them, began to raise questions in economic journals about the viability of the Soviet economic model for Vietnam. (Ljunggren 1993.) Political stability became an important priority for the regime in Vietnam. An important objective of their entire reform process was to strengthen the credibility of the Communist Party and State as legitimate forces of change. To do so, Vietnam’s government needed to have credible results.

The governments of Vietnam and Thailand and other countries in Asia did not view “modernization” as a single goal to be achieved. Instead, modernization was seen as a means toward the goal of creating economic growth with equity. The ultimate goal for these countries was increased incomes per capita and greater welfare of the entire population.

The starting point for many of these Asian economies was to raise incomes in rural areas and to allow farmers, merchants and rural entrepreneurs to save and invest from their profits. By raising incomes, savings and investments in the rural areas, the rural economies of these countries were able to take off and grow in the following key areas: 1) increased productivity in output of farm commodities, 2) increased incomes and purchasing power by members of farm households and 3) a newly emergent non farm rural economy based on services and small-scale industrial activities.

Strong, rapid growth in rural incomes helped many Asian countries prepare for future industrial transformation and a healthy urban economy focused on labor-intensive industrial exports. This growth in rural incomes was relatively strong and stable when compared with any growth in urban incomes (due to the large number of farm households involved). In such countries, an agriculture-driven growth strategy directed a greater share of income to the poor and was the essential first step in breaking the cycle of poverty.

2. General Lessons Learned from Myanmar’s neighbors

The countries of Vietnam, Thailand, and Indonesia all sharedkey, common elements that worked in getting their agriculture sectorsgoing on their path to economic growth. These elements are as follows:

• Macroeconomic Reforms

A supportive macroeconomic environment was essential for the success of an agriculture-led growth strategy. Low inflation, a functioning banking systemwith positive interest rates and a relatively stable, competitive foreign exchange rate were all necessary for the rural economies of Myanmar’s neighbors to create jobs, raise productivity and generate resources. Vietnamin 1989, unified its official and free-market exchange rates, lifted its interest rate ceilings and stabilized domestic inflation – all this served as a foundation for rapid economic growth to take off.

• Stable and Competitive Market Environment

Myanmar’s neighbors had to choose between two fundamental ways to coordinate their national economic activities, including in agriculture: either through bureaucratic (hierarchical commands) or through the use of market forces. In choosing to move towards market economies, Myanmar’s neighbors took on the responsibility of regulating the competitive environment by making it easy for new entrepreneurs to enter and not letting established entrepreneurs to control the market. Three basic elements of a market system – 1) making goods available on the market, 2) freeing up and getting prices right, and 3) enabling competition - were established quickly.

The experience in Asiahas shown that farmers respond vigorously to market forces such as price incentives and new technology, but only when the marketing system is reasonably competitive and efficient. (Otherwise, farmers focus on their own household food security and local self-sufficiency.) Farmers will also respond vigorously to any uncertainty or risk associated with farming by lowering their farm investments, especially investments that take years to show a return. Governments in Vietnam, Thailand, Indonesia and Laos have reduced such uncertainty and risks to farmers by helping stabilize commodity markets, making consistent rules about marketing, and creating greater access to border or foreign trade for agricultural produce.

Vietnam made great progress in opening its rural economy to competitive, private trade. The effects were quite visible: fertilizer and other agricultural inputswere more available in markets, and farmers had greater choices and opportunities to market their produce. These changes greatly affected agricultural production and rice production in particular. Once a chronic rice importer, Vietnambegan exporting huge quantities of rice. In 1989 and 1990, it exported approximately 1.5 million tons per year (Get updated figures). Today, Vietnam remains one of the world’s top rice exporters. The surge in rice exports can partly be attributed to the willingness and capacity of the private marketing sector to accumulate rice from farmers and store, transport and process it before shipment to overseas customers.

• Foreign Trade and Agricultural Exports

Perhaps the dominant lesson from development experience since the 1960s has been the importance of an “outward orientation” for economic strategy. Foreign trade has been recognized as a crucial growth factor.Vietnam, Cambodia, Indonesia, Thailand and Laos all adopted liberal foreign-investment laws and gave priority to agricultural exports. In these countries, foreign trade is no longer a state monopoly(nor a privilege of a select few private companies) and individual private enterprises and suppliers can enter into direct contracts with foreign trading companies.

In the case of Vietnam, the government’s attitude toward foreign trade started to change in the mid-1980s, when export was made one of three priorities (the other two being agriculture and consumer goods.) The country desperately needed alternative sources of foreign exchange.In the short run, theseforeign exchange earnings had to come from agricultural exports, and agricultural products were Vietnam’s best export opportunity at the time - withmarket/price incentives beginning to generate surpluses of various cash crops.

• Technical Assistance

Learning from the experiences of other countries was especially valuable in managingagricultural policy reforms. In 1991, the Prime Minister of Vietnam stated his main objective of reform was to generate rapid growth, while preserving important social gains and catching up with neighboring countries. Towards this goal, Vietnamese government officials and Party members wanted to learn from the experiences of economists from South Korea, Indonesia, France, Sweden, the U.S., the World Bank and other countries and institutions before submitting proposals to the Communist Party Congress. They sought the experiences of other Asian countries in the management of enterprises, about banking, taxation, and about other elements of a market economy. Scores of Vietnamese were sent abroad every year for training in agricultural policy and macro-economic management. From their difficult past, Vietnam found that they had made a serious mistake in assuming they could bring about change as a function of sheer will. (Ljunggren 1993).

• Institutional setting

In the tradition of socialist economies, Vietnam, Cambodia and Laos, like Myanmar, were managed directly through central plans, state ownership and control of trade and finance. However, during their transitions to a market economy, these Asian governments learned a new way of managing their agriculture – by managing indirectly through the control of interest rates, trade policy, and regulation of the “rules of the game” governing competition in the marketplace.At a most basic level, the responsibility for decisions about farm inputs and cultivation was returned to individual households.

• Rural Infrastructure

To improve agricultural production and exports, large investments in improved irrigation, roads, storage, processing and marketing facilities were required. Basic small-scale infrastructure at the village level was also just as important, to connect isolated villages to markets. To guarantee a certain level of exports, Myanmar’s neighbors also developed communications infrastructure, information systems, grading, marketing and distribution, storage and transport facilities to compete with other exporting countries.

3. What Can MyanmarDo for its Agriculture Sector?

The initial conditions in many Southeast Asian countries for the success of agriculture as the engine of pro-poor economic growth were the same as in Myanmar today: a growing population, low productivity of farms, poorly educated and overwhelmingly rural populations, poor social and economic infrastructure, widespread and deep poverty – these conditions were precisely the same conditions that made policy changes and investments in new agricultural technology and rural infrastructure highly profitable.

Following are priority policy steps that can be taken to prepare Myanmar for future growth:

1. Make farming profitable for small farm households. Since farmers form the “backbone” of Myanmar’s economy, a priority must be to raise theproductivity and incomes of the more than four million small, farm households. [1](If the government thinks prices should be kept low for agricultural crops, it shows a low commitment to farmers’ incomes and rural growth. This bias against small farm households mustbe corrected.)

Given the small size of farms in Myanmar, household incomes are particularly sensitive to the intensity and efficiency with which the land is used. The per-acre earning power of a farm is determined by the mix of crops, yields and prices. These determinants of income -- what a farmer decides to grow, and the yields and prices he or she gets -- are in turn influenced by the farmers’ access to research and technology, markets, credit and infrastructure.

Farmers – not the State - should decide on whatcrops to grow and when. It has been recognized worldwide, thatfarm households are natural profit or net income maximizers. They can easily adjust their methods of operation to market prices easier than large State enterprises or cooperatives. Both the governments of Laos and Vietnam began to recognize the importance of allowing farm households to make their own cropping decisions. As a result, they changed their agricultural policies to focus on the farmer’s household economy; their stated policy in agriculture was to “strongly promote the farmer’s household economy aiming at gradually shifting from subsistence production to commodity production.” (Ljunggren 1993).

Myanmar, also, will need to focus on the entrepreneurial needs of small farm households, rather than focusing solely on agricultural production through a handful of large, privateentrepreneurs. This will mean that farmers must be given the choice about when and what crops to plant. For example, dry season paddy cultivation should not be mandatory as is the case in some areas of the country. In these areas, farmers areprevented from growing other more profitable crops during the dry season, such as mung beans, which are nitrogen-fixing and improve soil fertility . If farmers are not allowed to maximize their profits, the agriculture sector and economy cannot grow in the long run.

2.Allow farmers to benefit from world markets. To raise their incomes, Myanmar’s farmersneed higher pricesfor their produce through profitable markets.World markets, in particular, can be quite profitable – if Myanmarfarmers had easy access to them. For example, rice prices in the world market are currently double what Myanmar paddy farmers are getting. Myanmar’s farmers have, for decades, not been allowed to compete freely with other producers in Asia and the rest of the world. Instead, they have had to sell their produce for low prices, which makes it difficult for them to generate incomes, savings and invest in their farms. As a result, thequality and quantity of rice andyields of other crops have become exceedingly low among farms, when compared to the rest of Asia.

3 .Ensure competition, transparency and fair rules for trade. Farmers, traders and consumers in Myanmar will need to respond quickly to opportunities in world markets if they are to benefit from them as an important source of growth. Institutional rules have to be clear for determining who participates in international trade, the licenses and permits required, and the role of government officials. Otherwise, world market prices or signals do not get passed on quickly to farmers, traders and consumers inside Myanmar. Also, there is very little to be gained by turning over marketing activity from the government to a private entrepreneur or a select group of them that uses monopolistic practices to restrict competition.

Ad hoc governmental price intervention is also dangerous for agricultural markets and trade. For example, a few years ago, thousands of farmers in the Dry Zone –Magway area- suffered severe losses at harvest time when the sesame export trade was abruptly closed. The price of sesame dropped drastically and farmers were forced to sell at a loss. Shortly after, the trade ban was suddenly lifted and sesame was again selling at higher prices. But the damage to farm incomes had been done. Farming is a risky enough business that farmers cannot survive without the benefits of reliable and profitable markets.

Some State and Divisional commanders also consider it an important priority to have local and regional self-sufficiency in rice, but this only stifles competition and specialization of local farmers to make use of their comparative advantage in production. Making the rules of price intervention clear is the most effective way of helping markets function.

4.Fund agricultural research and rural infrastructure appropriate for local farm conditions.No country has successfully transformed its agricultural sector without sharply improving the level of technology used on its farms. New irrigation, crop and livestock technologies have raised yields and generated rapid growth in rural households. It is especially important to focus on adaptive technologies and research that translates basic agricultural science or technologies from the international centers into locally adapted plants and animals, and their dissemination and adoption through an effective agricultural extension service.

It is also vital to invest in community infrastructure, so Myanmar’s villages can grow and connect to the outside world. An isolated village is a poor village. There are countless examples of small-scale projects that cost in the range of 50 to 100 lakhs kyats. These include small infrastructure projects like repairing oxcart roads so farmers can spend less time taking their goods to market, building village foot paths or foot bridges over streams so children can walk to school safely, building small check-dams or collection ponds to harvest rainwater, and planting community woodlots for fuelwood.

In developing rural infrastructure, it is important to identify and fix the most pressing problem areas, rather than having a comprehensive plan to rehabilitate the country’s entire rural infrastructure. This requires a focus on lower marketing and transport costs, in the most pressing locations. For example, transportation and marketing bottlenecks can be identified by looking at locations in the country where farm prices are low (compared to other areas of the country) and where consumer prices are high. After investigation, the cause of the high marketing margin can be identified – the road repaired, the ferry fixed, a bridge built, or additional competitors brought in.