BURMA'S COCKROACH ECONOMY

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 001552

SIPDIS

STATE FOR EAP/BCLTV, EB
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OASIA JEFF NEIL
USPACOM FOR FPA

E.O. 12958: DECL: 11/30/2013
TAGS: ECON PGOV BM
SUBJECT: BURMA'S COCKROACH ECONOMY

REF: A. RANGOON 1512

B. BANGKOK 7434

C. RANGOON 1452

D. BANGKOK 6604

E. RANGOON 1197 AND PREVIOUS

F. RANGOON 1164 AND PREVIOUS

G. RANGOON 910

H. RANGOON 194

Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D)


1. (C) Summary: Considering the dismal state of the Burmese
economy, it is surprising that the Burmese state remains both
viable and stable. How is that people are able to quietly
endure and survive? How can the ruling military regime be in
a stronger position than ever? We see three major factors at
work: (1) a well developed informal economy, (2) a sufficient
supply of food and of high-value, highly prized natural
resources, and (3) wealthy and friendly neighbors who are
willing to conduct business as usual despite the economic and
political transgressions of the current regime. Though these
do not make a good recipe for long-term economic development,
they work well enough for immediate survival. End summary.

First the Bad News


2. (C) There can be no dispute that over the last several
years, Burma's formal economic indicators have been quite
negative. Tales are legion, and well documented by the
international media, the IMF, the UN, and Embassy Rangoon
(ref E, F, G),of misguided economic policies leading to
economic woe and hardship for the Burmese people, spiraling
inflation and a plummeting kyat, the hollowing out of Burma's
formal economy, and departing foreign investors. We continue
to be pessimistic about the formal economy's future, and are
confident that the next IMF Article IV assessment (due out
early next year) will bear us out.


3. (C) The UN and international NGOs have also made clear the
terrible social conditions in which the Burmese people live;
in part due to poor economic policies, in part due to cruel
budgetary choices by the GOB. For example, the GOB budgeted
only US$10 million, about one percent of the proposed
national budget in FY 2003-04, for health for a population of
50 million (ref H). Unfortunately, we do not anticipate a
reverse in these trends anytime soon.

The Cockroach Lives


4. (C) However, like the proverbial cockroach in a nuclear
blast, the Burmese economy and the country's senior
leadership continue to survive and, in the case of the
generals and their cronies, thrive in this harsh climate. We
see three major reasons for this: (1) a large,
well-established, and cushioning informal economy, (2)
abundant and highly sought after natural resources, and (3)
politically and economically supportive neighboring states.
It is these factors which help keep Burma from becoming a
classic "failed state" and can explain, in part, the Burmese
people's placid acceptance of what the numbers show to be
increasingly hard times.

Wanna Buy a Watch?


5. (C) The informal economy, though arguably the most
important to the people's ability to survive, is the most
difficult to quantify. We have heard estimates that the gray
and black market, with strong roots in the nation's socialist
era (1962-88),is as much as three or four times larger than
the formal economy. This sector encompasses a vast array of
shops and vendors, cottage industries, unreported farming,
gambling and entertainment, narcotics, and financial
services. This sector also includes extremely active
smuggling networks -- particularly overland with neighboring
China, Thailand, and Bangladesh, and with Malaysia by sea via
Burma's southern port of Kawthaung. Because of Burma's
restrictive and confusing import regulations, most of this
smuggling brings in needed consumer goods, pharmaceuticals,
diesel fuel, cooking oil, or whatever else is in shortage at
the moment. Outflow is in agricultural products and
high-value items like hardwoods, gems, and narcotics.


6. (C) People are very comfortable with these informal
methods, often more so than with "newfangled contraptions"
like private banks. The informal economy is also incredibly
elastic -- able to expand and contract easily in response to
the country's evolving economic condition.
Trading Teak for Legitimacy

7. (C) The country's abundant resources and fertile soil are
crucial to the people's survival, but are also exploited by
the ruling regime. Though price inflation and distribution
problems have led to widespread malnutrition and even food
shortages in parts of the country, few are starving. Despite
a lack of reliable data, we believe Burma still produces an
annual food surplus. With a weak manufacturing sector, and
government jobs paying next to nothing, farming and resource
extraction remain the country's largest employers -- both
organized and informally. Also, especially in rural areas,
people rely on consumption and informal selling of
agricultural and forest products to supplement their diets
and incomes.


8. (C) Government or military domination, either through
monopoly or licensing, of the extraction and sale of
high-value natural resources and some farm products provides
a steady source of foreign exchange income through export
revenue and taxes, profit sharing, leases, and license fees.
Solidifying this cash flow is the comparative wealth of
neighbors like Thailand and China, who have an appetite for
Burmese raw materials. Burma also benefits because some of
its resources, such as jade and teak, are considered the
highest quality in the world. Thus there is very strong
international demand for these products that has proven very
resistant to boycott pressure.


9. (C) Two notable cash cows for the government are copper
and natural gas. According to IMF statistics, Burma's copper
production rose from 472,000 long tons in FY 1997-98 to 24.5
million long tons in FY 2001-02. Copper industry sources
tell us deposits, which are focused in one area near Monywa,
Sagaing Division, are such that extraction could be increased
manifold if financing were available. This mine is in the
process of being sold to the Chinese quasi-parastatal CITIC.
As for natural gas, the development of two offshore sites by
foreign investors, and a ready customer in Thailand, mean
about US$350 million net for the GOB coffers per year
beginning in 2003. There is also talk of new South
Korean/Indian investment in a potential gas field off the
coast of Rakhine State.

Help from Non-Interference Policies


10. (C) The "friendly neighbors" factor dovetails with the
other parts of the equation, and is the most vital to the
survival of the ruling junta. As reported in ref C, from the
Thai perspective trade with Burma is relatively small
potatoes. However, for Burma, a consistently reliable Thai
market for natural gas and timber -- accounting for the
majority of Burma's US$902 million of exports to Thailand in
2002 -- is very important to the regime's wallet and well
being. According to RTG statistics, imports of Burmese
products have risen steadily since 1998. These numbers are
understated due to an unknown quantity of illegal exports
(mostly drugs and timber) to Thailand from border zones under
the economic suzerainty of various ethnic ceasefire groups.
Burmese people and private businesses rely on consumer goods
imported and smuggled from Thailand. Further north, IMF
numbers show that Chinese demand for Burmese raw materials,
mostly gems and timber, is still relatively small, but has
steadily increased since 1998.


11. (C) It's not just China and Thailand's taste for
GOB-controlled natural resources that help keep the regime in
power and resistant to U.S. sanctions. China has been
actively extending trade benefits, seller's credit, and other
concessional loans to Burma. Thailand just recently
launched, at a summit meeting in Burma, an "Economic
Cooperation Strategy" to extend loans, development aid, and
trade preferences to Burma, Laos, and Cambodia (refs A and
B). India too is joining the game, though bilateral trade is
still tiny in comparison to Thailand and China, extending new
trade credits and cheap loans (ref D). Public political
support from China, India, and Thailand gives the SPDC
tremendous confidence and comfort to go alongside economic
survivability.

Comment: SPDC Won't Go Down with the Ship


12. (C) The extraction and export by the government and its
foreign and local contractors, of raw resources, with no
local value added, is wasteful and does little to develop the
economy -- which remains 50 percent agricultural. Also,
there are already whiffs of resource exhaustion of some
precious metals and gems, and a fear of deforestation is
clear and present. These trends may accelerate as the regime
becomes more desperate for cash in the face of U.S. sanctions
that have been effective in cutting off most formal conduits
for the inflow of U.S. dollars. The SPDC is not making
policy for long-term, efficient, development of the economy
but for self-perpetuation and national stability. Thus its
survivability and the sustainability of the Burmese people at
subsistence levels are feasible in the short-term, regardless
of what the economic numbers say.
Martinez