103334 ALL ABOARD Policies for shared prosperity in Myanmar POLIC IES F OR SH AR E D P R O SP ER ITY IN M YAN M AR This note was prepared by: Habib Rab (Senior Country Economist) under the guidance of: Ulrich Zachau (Country Director, South East Asia), Abdoulaye Seck (Country Manager, Myanmar), Mathew Verghis (Practice Manager, Macro-Fiscal Management), and Shabih Mohib (Program Leader, Equitable Growth, Finance and Institutions). ALL ABOARD Policies for shared prosperity in Myanmar ALL ABOARD Policies for shared prosperity in Myanmar Introduction The November 8, 2015 elections in Myanmar Policies that can enable a structural shift to more marked a historic milestone in the country’s polit- productive and labor intensive activities could make ical and economic transition that began in 2011. a big dent on poverty and inequality in Myanmar. Incoming policy makers are preparing to pick up the These would include expanding access to essential baton and deliver on the people’s strong aspirations for public services. This could enable a bigger share of a harmonious and prosperous Myanmar. In this series the population to benefit from the agglomeration of of policy notes, the World Bank Group seeks to pro- economic activities around Myanmar’s growth poles, mote dialogue on critical development challenges and namely Yangon and Mandalay, which account for on options for policies and reforms that can contribute roughly 35 percent of national GDP. to shared prosperity for the people of Myanmar. The sound governance and use of Myanmar’s nat- Myanmar has strong medium-term growth potential. ural resource wealth are also critical to inclusive Efforts to open up and liberalize the economy over the growth. Around 10 percent of Myanmar’s official GDP past 4 years have revealed pent up demand, brought is derived from natural resources, though some esti- in new investments, and increased productivity from mate unofficial trade in natural resources at more than a very low base. Between 2011 and 2014 Myanmar’s 20 percent of official GDP. This not only concentrates economy grew at an average real rate of 7 percent per wealth from non-renewable national assets in the hands year, which is among the fastest in East Asia, and com- of a few, but also finances conflicts, which have created parable to other high performing countries in their initial vicious cycles of poverty that are geographically and phase of liberalization. In the coming years, further ethnically concentrated. removal of economic controls could help Myanmar to maintain a strong pace of growth. Policy reforms since 2011 have started to promote inclusion so that a growing share of Myanmar’s Myanmar has a real opportunity in ensuring people can take advantage of new opportunities that growth is also inclusive. This not only means and benefit from economic growth. Higher tax col- sustaining a strong pace of growth, but doing so lections from non-agriculture sectors and rising natural through a diversified economy that can absorb the resource rents have enabled Myanmar to reprioritize labor force into higher productivity sectors. The public spending towards critical economic and social agriculture sector, which suffers from low productivity, service needs. Foreign exchange, trade and investment contributing on average only 10-15 percent to annual liberalization have opened up economic opportunities real GDP growth over the past 4 years, employs over and the space for investment beyond a small group of half of the country’s labor force. The manufacturing and highly protected sectors. Increased public sector trans- construction sectors on the other hand, which have parency and decentralization have started to gradually the highest value added per unit of labor, employ only bring the state closer to the people. 10-15 percent of the labor force. 1 Policy options for shared prosperity Given this context, how can Myanmar advance Investment in higher productivity sectors is also likely reforms to close the disparities across its geography, to require breaking business as usual to foster com- ethnic communities, and income groups; and to petitiveness and a dynamic environment for private promote productivity and competitiveness? This is sector growth across the country, which are discussed the question that this series of policy notes, “All aboard! in the third policy note. These include policies that are Policies for shared prosperity in Myanmar,” aims to targeted at reducing the costs of doing business and generate debate and ideas. The theme “All aboard” is engaging in international trade. The relative impact meant to reflect inclusivity and imminent departure on of these could be enormous in terms of incentivizing a positive journey. private sector investments, expanding access to eco- nomic opportunities for rural and urban populations, The policy notes focus on six interconnected areas and diversifying the sources of growth. that are likely to be high priorities for shared pros- perity (figure 1). The first is on closing the gap in access Enabling these to drive major structural transformations to social services for improving Myanmar’s human in the economy is likely to require policy reforms in two development outcomes. This could help to strengthen important areas. The fourth policy note therefore looks the productivity and employability of Myanmar’s cur- at options to expand Myanmar’s ability for financing the rent and future labor force, which is the critical input to future through an open, modern, and inclusive financial inclusive growth and a precondition to success in all system. This is important not only for channeling savings the other areas. The second policy note is on growing to large private investments, but also to finance public together by reducing poverty in rural areas. Policies sector operations and service delivery, facilitate the to boost agriculture productivity and accelerate the expansion of international trade, and enable the transfer delivery of essential services in rural areas, where they of increased remittances to rural areas. The fifth policy lag the most, could help to supply the much needed note is on energizing Myanmar by enhancing access to labor and food for the rapidly expanding industrial, sustainable energy for all. Myanmar’s growing economy manufacturing and service sectors. will need more energy than is currently supplied – not only for productive sectors, but also for the delivery of GROWING TOGETHER FINANCING THE FUTURE BREAKING BUSINESS AS USUAL ENERGIZING MYANMAR CLOSING THE GAP PARTICIPATING IN CHANGE Reducing rural poverty Building an open, modern and Fostering competitiveness and a dynamic public services Enhancing access to across the Expanding country. access to Promoting public sector in Myanmar inclusive financial system environment for private sector growth sustainable energy for all social services accountability to all Figure 1: All aboard Policies for shared prosperity in Myanmar CLOSING THE GAP GROWING TOGETHER BREAKING BUSINESS AS USUAL Expanding access to Reducing rural poverty Fostering competitiveness and a dynamic social services in Myanmar environment for private sector growth FINANCING THE FUTURE ENERGIZING MYANMAR PARTICIPATING IN CHANGE Building an open, modern and Enhancing access to Promoting public sector inclusive financial system sustainable energy for all accountability to all 2 Prioritizing, implementing and adjusting policies across by the World Bank Group. The policy notes do not all the above areas could be facilitated by an enabling discuss important environmental and natural resource public sector that is open and adaptable to Myanmar’s management issues, except for the management evolving needs. The sixth policy note is on participating natural resource rents, though they are central to in change through a public sector that is accountable to Myanmar’s development and are being studied in all. The public sector could not only help to implement depth through other channels including the Extractive change directly through service provision, but it can Industries Transparency Initiative. Important issues also help remove obstacles for private sector growth. such as gender and anti-corruption, although not This may require a new mindset in which paying taxes covered as separate topics, are highlighted across the is motivated by greater transparency and participation policy notes. by the people of Myanmar in prioritizing public policy and services. This overview note summarizes the key messages from the six policy notes and policy options. More detail can The six policy notes cover a selected group of be found in the individual notes. The note ends with a important issues around shared prosperity. They discussion on possible ways to create the fiscal space do not offer a comprehensive treatment of the matter. needed to implement some of the above policies within There are clearly other critical areas that are not a stable macroeconomic environment, which is a pre- discussed in these notes. For example, policies around condition to inclusive growth and shared prosperity. land tenure and property rights, although touched Broader macroeconomic stability and inclusive growth, on, is one such area that is being studied separately are discussed separately.1 1 Please see WBG Myanmar Economic Monitor, October 2015 3 CLOSING THE GAP Closing the gap: Expanding access to social services Expanding access to social services Myanmar’s human capital is its greatest asset. Its This has been exacerbated by low levels of social current population structure holds the promise of a assistance, which reach only 0.1 percent of the popula- potential “demographic dividend” that increases the tion, compared to an average of 39 percent among East supply of productive labor for inclusive growth. Around Asian and Pacific countries. 29 percent of the population are children (under the age of 15) – the future workforce of the country – and 66 A big increase in public spending on health and edu- percent are of productive age (15-64 years).2 Myanmar cation since 2011 (figure 2) has helped to improve therefore has the potential to get rich before it gets old. access by targeting this spending on areas that help relieve the burden on household budgets.3 There are Yet, decades of underinvestment in health, educa- early signs of results in terms of reduced out-of-pocket tion and social protection have negatively impacted spending on health and education. These changes on human development outcomes. Only those that should help to improve the productivity and employa- could afford social services out of their own incomes bility of Myanmar’s current and future workforce. Early could adequately access them, which has widened ine- evidence shows that an additional year of schooling is quality in both social and economic outcomes across associated with 6.7 percent higher income. the country. Figure 2: Government expenditure on education and health Figure 3: Government expenditure on education and health – Low Income Countries (% of GDP) Middle Income Countries (% of GDP) Source: WDI and WB Staff Estimates Source: WDI and WB Staff Estimates (Indonesia, Malaysia and (Cambodia and Lao PDR data cover 2000, 2004, 2007 and 2010; Thailand data cover 1996, 2001, 2007 and 2010) Myanmar data covers 2011-2014) 2 Republic of the Union of Myanmar, “The 2014 Myanmar 3 Per capita GDP in constant 2005 US $ for Myanmar is a highly Population and Housing Census – Volume 2,” (May 2015) indicative estimate due reliability of historical national accounts data. 4 Continued improvement in the quality of spending spending on the social sectors will also likely increase is likely to be as important as increasing the level with Myanmar’s income (figure 2), though this has to of spending in education and health. The policy be aligned with human and institutional absorptive note provides some options in terms of the targeting capacity. Finally, the ongoing peace process will require and reprioritization of expenditure. It proposes the special attention to harmonize financing and delivery of pooling of resources for social protection against social services in conflict-affected areas. shocks particularly for the most vulnerable. The level of Objectives Short-term options (1year) Long-term options (3-5years) Expand coverage of school stipends to Adopt formal targeting system based on Spending disadvantaged children. household characteristics. better Develop performance management Use 2014 Census for better targeting. system for service providers. Pooling Develop financial risk protection Financing roadmap to achieve Universal system, which prioritizes the poor and resources health coverage. vulnerable. Spending Increase Union grants to frontline Conduct regular expenditure reviews service delivery units based on fiscal to align budgets with emerging policy more affordability. priorities. Harmonizing and Harmonize financing and delivery of social services in conflict-affected converging areas. 5 GROWING TOGETHER Growing together: Reducing rural poverty in Myanmar Reducing rural poverty in Myanmar Myanmar’s rural communities provide the foun- Higher agriculture productivity is necessary but not dation for major structural transformations in the sufficient for sustained structural transformation. country. They are home to 70 percent of the country’s Rural communities lag furthest behind in terms of population, with agriculture employing over half of the access to economic and social services. This is not labor force. Myanmar’s non-agriculture sectors, which only a drag on the rural economy, but also a bottleneck on average have contributed to around 80 percent of for rural-urban migration and productive employment annual real GDP growth since 2011, are already pulling in urban areas. Recent efforts to help address these workers into urban areas. At the same time, rising issues include increased spending on public services incomes from higher productivity sectors are rapidly at the local level. This has been complemented by increasing the demand for food. a gradual increase in planning, budgeting and pro- gram implementation responsibilities to sub-national Boosting agriculture productivity could therefore authorities through fiscal decentralization, and down not only improve the incomes of the rural poor but to communities through a national community driven also contribute to structural transformation. This is development program. evident from the experience of countries in the region where agriculture productivity increased with growing The policy note therefore proposes a mix of options urbanization on the one hand (figure 4), and the falling that include measures to boost agriculture produc- share of agriculture in GDP on the other (figure 5). There tivity, and measures that give rural communities may be a lag between the start of structural transfor- a greater say on public interventions. It also offers mation and agricultural take off, which itself may be ideas on how to further improve the targeting of public a function of higher productivity in other sectors (e.g. resources based on data and evidence, which can help transportation, communications, education services). to improve service delivery outcomes. Figure 4: Structural transformation (rural-urban migration and Figure 5: Structural transformation (agriculture as % of GDP and agriculture productivity) agriculture productivity) Source: WDI and WB Staff Estimates 6 Objectives Short-term options (1year) Long-term options (3-5years) Enhance supply of technology, seeds, Boosting and agriculture extension programs. Implement strategic land reform. agriculture productivity Remove regulatory restrictions to (foreign) private investment in agriculture. Strengthen community planning and Review capital spending priorities for Increased access budgeting (2012 presidential directive). local infrastructure investment. to services Adopt fiscal decentralization strategy. Data for better Conduct updated living conditions Integrate regular M&E in rural develop- targeting surveys. ment programs. 7 BREAKING BUSINESS AS USUAL Breaking business Fostering competitiveness and a dynamic environment for private sector growth Figure 6: Global Competitiveness Index scores (1-7) as usual: Fostering competitiveness and a dynamic environment for private sector growth The positive impact of the gradual lifting of controls over factors of production and trade flows since 2011 reflects Myanmar’s strong potential for private sector led growth. The number of registered com- panies has increased from 30,000 in 2011 to around 58,000 in early 2015. Foreign Direct Investment com- Source: World Economic Forum, GCI (2014-2015) mitments have increased from US$ 3.6 billion in 2013 to around US$ 8 billion in 2014. These have also been facilitated by the expansion of critical infrastructure in telecommunications, transportation and energy. Figure 7: Doing Business Rankings for selected countries in the region (out of 189 countries) The efficiency of the business regulatory environment can have a relatively large bearing on the ability of factor driven economies like Myanmar to sustainably promote private sector growth. This, together with public institutions, basic human capital (as discussed above), basic infrastructure, and macroeconomic stability tend to matter relatively more for competitiveness and productivity than for example labor market efficiency and market size, which become relatively more important as countries transition from factor-based to efficiency and innovation driven economies (figure 7).4 In Myanmar this is most clearly reflected by the liberalization (efficiency of business regulation) of telecommunications (basic infrastructure), Source: Doing Business indicators which will have contributed to inclusive growth in the past two years. 4 World Economic Forum, Global Competitiveness Index (2014-2015) 8 Myanmar’s rankings in the Doing Business survey facilitation – including for example, logistics services, point to a relatively big agenda on tackling the regu- customs procedures, freight handling services – are a latory environment for private sector activity (figure significant drag on Myanmar’s external competitive- 7). There have been recent improvements including ness and its ability to engage in global value chains. on business registration. But challenges on contract Myanmar’s trade potential is enormous especially when enforcement the protection of minority investors, and considering that it borders 40 percent of the world’s resolving insolvency all weigh on the efficiency of population and over 15 percent of global GDP. existing businesses and on the incentives of potential new entrants into the market. The policy note presents options that could help improve the efficiency of the business regulations Enhancing competitiveness in these areas can be and trade facilitation. On business regulations, the critical for attracting investments in Myanmar’s adoption of the Investment Law, the Companies Law, tradable sectors, which could otherwise suffer due and the Arbitration Law could potentially help to to the potential offsetting effects of real exchange address a number of the priorities highlighted in the rate appreciation that affects many resource-rich Doing Business survey. On trade facilitation, improving and newly reengaging economies. The liberalization freight handling at Yangon port, simplification of cus- of Myanmar’s foreign exchange regime was an impor- toms procedures, and simplification of Myanmar’s tariff tant step in promoting competitiveness. However, structure could potentially help to reduce the costs of the current weaknesses in the institutions of trade trading across borders. Objectives Short-term options (1year) Long-term options (3-5years) Adopt Investment, Companies, and Implement investment policy reforms. Effective and Arbitration Laws to promote market Implement corporate governance reforms. reforms. efficient business regulations Implement DB survey priorities e.g. Support development of alternative protection of minority investors, contract dispute resolution mechanism. enforcement. Approval of telecom Master Plan, Implement trade corridor development e-Government Master Plan, Spectrum to link cross-border trade with local Improved trade roadmap. economic activities. facilitation and policy Freight handling in Yangon; Customs Improve access to trade finance clearance procedures; and reforming instruments. tariff structure and non-tariff policies. 9 Financing the future: FINANCING THE FUTURE Building an open, modern and inclusive financial system Building an open, modern, and inclusive financial system The expansion of Myanmar’s financial system The ability of the financial sector to expand both the between 2011 and 2014 has played a critical role scale and range of products and services available in enabling much of the above growth in both to private businesses, the public sector and house- domestic and foreign trade. Credit to the private holds could play a determining role for inclusive sector has expanded by an average of 50 percent per growth in Myanmar. Despite the rapid growth, private year and banking sector deposits have grown from 16 sector credit to GDP in Myanmar is still relatively low at percent of GDP to around 33 percent of GDP over this around 16 percent of GDP, which is partly linked to the period. Financial sector services have also been critical country’s overall level of economic development (figure in facilitating the rapid increase in public sector opera- 8). These services can be critical not only for directing tions, which expanded from 17 percent of GDP in 2011 savings to investments but also public service delivery to around 29 percent of GDP in 2014. and remittance of migrant income to poor rural areas. Figure 8: Credit to the private sector (% of GDP) across Figure 9: Access to finance in Myanmar and Cambodia selected countries in the region (2014) Cambodia: 2.3 commercial bank Branches/100,000 adults in 2006 vs. 5.6 in 2014 Myanmar: 1.4 commercial bank Branches/100,000 adults in 2010 The size of the bubbles vs. 3.1 in 2014 represent real per capita GDP (constant 2005 US$) Source: WDI, IMF Article IV reports, and WB Staff Estimates Source: WDI, IMF Article IV reports, and WB Staff Estimates 10 Expanding the financial sector in a way that also promotes financial inclusion in Myanmar could be aided by a number of structural reforms. Cambodia in 2006 was at a similar level of income and credit to GDP ratio as Myanmar today. Within 8 years, credit to GDP increased fivefold and the number of commercial bank branches per 100,000 adults more than doubled (figure 9). It is however important to note that overly rapid expansion of credit can fuel a build up of macro-financial risks.5 It is therefore important that credit expansion goes hand in hand with policies that promote competition; avoid distortionary policies such as subsidized credits to specific sectors or enterprises; establish a modern legal and regulatory framework that helps prevent the accumulation of bad assets and other risks in the financial system; and help develop a modernized payments system that reduces the dependence on cash transactions. Each of these factors could play a critical role ensuring that the system expands in a stable and inclusive manner. Based on this, the policy note proposes options to phase reforms in a way that could help to put the system on a solid footing to effectively and efficiently finance inclusive growth in Myanmar. This includes the strengthening of the financial sector legal and regulatory framework; establishing a modern, electronic National Payments System; reforming state- owned banks, which can otherwise thwart competition; and expanding the depth of the financial sector through the development of new products. Objectives Short-term options (1year) Long-term options (3-5years) Legal and Develop the legal and regulatory Implement the Banking and Financial framework in debt collections and regulatory Institutions Law. creditors’ rights. framework Establish crisis management system. Modern financial Adopt the legal and regulatory basis for Implement the National Payments National Payments System including infrastructure System. mobile financial services. Reformed State Conduct due diligence on restructuring Develop and implement strategic reform of two largest State Owned Banks Owned Banks plans for MEB and MADB. (MADB and MEB). Expanded depth of Develop consumer protection policies. Strengthen microfinance and insurance Promote market development initiatives financial sector regulatory capacity. for the non-bank sector. 5 WBG, “Cambodia Economic Update: Resilience Amidst a Challenging Environment,” (September 2013). 11 Energizing Myanmar: ENERGIZING MYANMAR Enhancing access to Figure 10: Access to energy – Electric power consumption (kWh per capita) sustainable energy for all Enhancing access to sustainable Electric power consumption (KWh per capita) energy for all The relative impact of increasing access to energy on productivity, competitiveness and inclusive growth in Myanmar could be very significant. Access to affordable power is not only critical for the expansion of productive sectors, but is also vital for the delivery of public services in urban and rural areas. Electricity consumption (kWh per capita) in fast growing countries in the East Asia region has expanded rapidly in the past 40 years, whilst it has remained depressed in Myanmar, falling to among the lowest levels in the world (figure 10). The experience from other countries demonstrates how, with the right policies, access to energy could be expanded quite rapidly within a relatively short period Source: WDI and WB Staff Estimates of time (figure 11). Figure 11: Access to electricity (% of population) in selected countries 1990-2012 For these reasons, access to energy policies have taken center stage in Myanmar since 2011. Efforts have focused on strengthening the institutional and policy environment in the energy sector, which remains somewhat fragmented, affecting policy coordination and the speed of decision-making. Institutional reform is likely to be critical for establishing a strong plat- form for reforming this large sector, which is likely to require US$ 2 billion per year over the next 15 years for investment in power generation, transmission and distribution. Public resources, including concessional and donor support, will not be sufficient to foot such a large bill. On the other hand, private investments in the energy sector is likely to require, among other things, energy pricing policies that are aligned with the finan- cial viability of the sector. Source: WDI and WB Staff Estimates; all countries cover the periods 1990, 2000, 2010 and 2012, except Cambodia, which does not cover 1990 and Myanmar, which covers only 2012. 12 Policy reforms over the past four years have shown The policy note proposes a mix of options to early signs of progress. Electricity tariff reforms have accelerate the implementation of the National enabled power generators and suppliers to cover the Electrification Plan in a way that can achieve at least cost of service, whilst protecting households from 500,000 connections per year through improved energy price hikes through cross-subsidies from com- policy coordination and increased efficiency in mercial customers. Restructuring and corporatization power distribution. It proposes to enable this under of power distributors in Yangon and Mandalay have a strong regulatory framework that improves trans- helped to reduce distribution losses to 16 percent and parency and competition in the electricity market, and 14 percent respectively in 2014, down from an esti- mobilizes private sector investments, whilst ensuring mated 23 percent in 2009. A newly enacted Electricity the protection of vulnerable consumers. To meet the Law has contributed to a significant increase in private longer term energy demands of Myanmar, the policy sector participation in power generation, with IPPs note proposes to develop strategic plans for the effec- reaching around 10 percent of installed generation tive and efficient development of gas and hydropower capacity by 2015. resources. Objectives Short-term options (1year) Long-term options (3-5years) Maintain a strong National Electrification Strengthen institutional capacity Executive Committee accountable for At least 500,000 across value chain, including utilities, implementation of National Electrification contractors, and sector institutions. connections per year Plan. Adopt grid codes and introduce modern by 2020 Strengthened project management technologies and low cost solutions for offices in MOEP and MLFRD for country- rural power. wide electrification program. Adopt secondary legislation for Electricity Transparency, Law. competition; Merger of MOEP and MOE. Establish Electricity Regulatory Agency. Private participation by leveraging of private investment; Adopt pricing policy based on full cost public resources through PPP and IPPs. protection of con- recovery of the economic cost of gas sumers and electricity supply. Targeted subsidies to vulnerable groups. Divestment in the power sector focusing Efficiency through on YESC and MESC. Restructuring of MEPE and hydropower Restructuring program for ESE and corporatization and enterprises and establish Myanmar create Rural Electrification Agency. commercialization Electric Power Generation Corporation. Establish Myanmar Transmission System Operator. Resource mapping and GIS-based Gas sector masterplan. Strategic planning maps of renewable energy resources. Hydropower plan. with environmental System studies for integration of Guidelines for environmental and social renewable energy in power grid. and social safeguards, including public consulta- Integrated generation and transmission sustainability tions on formulation of energy master expansion plan based on gas and plans. hydropower plans. 13 Participating in change: PARTICIPATING IN CHANGE Promoting public sector accountability to all Public sector accountability to all The transparency and accountability of the public Evidence from other countries demonstrates that sector could be a determining factor in how well active citizen participation in public policy can and quickly Myanmar can take forward policies for have a positive developmental impact. In Myanmar, shared prosperity. The trajectory from policy reforms to a lack of transparency and public engagement have shared prosperity is multi-dimensional. Progress in one bred corruption and a loss of trust in the public sector area (e.g. closing the gap) can impact on progress in (figure 12).6 Since 2011, there has been a gradual another (e.g. growing together). Progress within policy transformation with more transparency in public policy areas is also subject to learning by doing and factors making. Seizing the opportunity to further improve that are beyond policy makers’ control. Engaging those public sector accountability could be critical in the affected by policy reforms and promoting adaptability context of high public expectations for change. in the public sector could be important for course corrections that help Myanmar to remain on target for inclusive growth and shared prosperity. Figure 12: The World Justice Project, Rule of Law Index (2014) Figure 13: Size of general government (% of GDP) and economic growth (real % change) Source: The World Justice Project, Rule of Law Index (2014), score 0=weakest and score 1=strongest Source: WDI and WB Staff Estimates 6 http://worldjusticeproject.org/: The World Justice Project Rule of Law Index measures rule of law (as measured by 8 factors: constraints on government powers, absence of corruption, open government, fundamental rights, order and security, regulatory enforcement, civil justice, and criminal justice) based on the experiences and perceptions of the general public and in-country experts. Scores range from 0 to 1 (with 1 indicating strongest adherence to rule of law). Scoring is based on answers drawn from a representative sample of 1,000 respondents in the 14 three largest cities and a set of in-country legal practitioners and academics. The size of general government in Myanmar has historically been small (figure 13) relative to the country’s large service delivery needs. Recent efforts to reprioritize government spending away from general administration towards the delivery of health and edu- cation services in particular have been complemented by more public availability of information on the budget. Tax collections have improved, though remain con- strained by an official system for tax declarations that is susceptible to corruption. This is compounded by large undeclared natural resource rents that prevent the people of Myanmar from reaping the benefits of these vast national assets. The policy note proposes to build on Myanmar’s step-by-step progress over the past four years in gradually introducing more transparency and accountability throughout the public sector, including in revenue collection, the management of public expenditure, public policy making, and service provision. On management of public finances, regular information on public expenditures. Beyond this could include on the revenue side the implementa- public finances, however, the policy note also proposes tion of the self-assessment system for tax declarations options to institutionalize public engagement in policy beyond its current coverage of large taxpayers and reforms, and improve the responsiveness of local greater transparency through EITI; and on the spending authorities, including by setting standards for public side it could include publication of more detailed and service delivery. Objectives Short-term options (1year) Long-term options (3-5years) Self-assessment system for tax Fair and transparent declarations. Publish tax expenditure and compliance Annual EITI Reconciliation report tax system rates. including increased coverage of jade and gems. Publish key fiscal reports: Publish quarterly budget execution data, Transparent public Citizens’ Budget MTFF statement, annual audit report, and more informa- budget proposal to parliament. expenditures tion on Union and sub-national level Publish database on public finances spending. (BOOST). Empowering local Establish secretariat function for Public administration reforms to promote authorities to meet technical advice on implementation of accountability for results. local needs fiscal decentralization. Public engagement Public consultations on all legislative Law on Regulating Issuance of Legal in policy reform instruments relating to public finances. Documents. Minimum standards Publish performance on service delivery Minimum standards on response time for public services by municipal authorities. for selected municipal services. 15 Continued economic growth and implementation of tax administration reforms could help to improve the efficiency of Myanmar’s tax system and enable Improved the government to collect more for each percentage revenue collection and more diversified sources of point of tax rate. Some of these tax administration financing since 2009 have helped to substantially reform options, including the expansion of the self- increase spending on public services, whilst maintaining assessment system, are discussed in more detail in the a relatively prudent fiscal stance.7 Between 2009 and note on participating in change. 2014, general government spending as a share of GDP went from 7 to 15 percent. General government There are also important revenue policy reforms revenue over the same period went from 6 to 11 percent that could impact positively on general government of GDP, thanks to a combination of one off measures receipts.8 One important option could be the (e.g. exchange rate devaluation, one-off receipts from consolidation of all hydrocarbon rents in the general telecom licenses) and policies that helped to expand government budget. Currently the Myanmar Oil and the tax base. Gas Enterprise is able to retain more than half of after tax profits, though given the current context, Myanmar has strong potential to further increase it may make more sense to channel these to the public sector revenues over the coming years. Other Union Budget. Another option could be to rationalize countries in the region have been able to increase tax incentives. At the moment, tax incentives are their general government revenue to GDP ratio by 3-4 provided with little understanding of their net impact percentage points of GDP over a 5-year period (figure on government revenues, whereas experience from 14). This includes the late 1990s and early 2000s in other countries illustrate that tax incentives are not Cambodia when per capita GDP in constant 2005 US$ necessarily the determining factor in investment was lower than Myanmar today, or the mid-2000s in decisions. With a combination of above administration Lao PDR when per capita GDP in constant 2005 US$ and policy reforms, Myanmar could potentially target was similar to what it is today in Myanmar. It also an average of 0.5-0.6 percent of GDP of additional includes the early 2000s in Thailand when the country general government receipts per year over the next 5 was recovering from a major economic crisis that also years (figure 14).9 caused a sharp drop in government revenue. Part of the recovery in Thailand’s revenue was aided by the establishment of a Large Taxpayers’ Office, similar to Myanmar’s efforts today. Figure 15: General government balance, revenue and debt, Figure 14: Real GDP growth and general government revenue to 2014 (% of GDP) GDP, 1996-2014 (2015-2020 projected) (%) Source: IMF WEO and WB Staff Estimates Source: IMF WEO and WB Staff Estimates 7 WBG, “Realigning the Union Budget to Myanmar’s 8 WBG, “Realigning the Union Budget to Myanmar’s Development Priorities: Myanmar Public Expenditure Review Development Priorities: Myanmar Public Expenditure Review 2015,” Chapter 3, (September 2015) 2015,” Chapter 2, (September 2015) 9 Subject to review based on more accurate information on the potential impact of consolidating hydrocarbon rents in the Union 16 Budget. Figure 16: Shifts in functional spending 2013-2015 Figure 17: Military vs. health and education expenditure (% of general government expenditure) Source: MOF and WB Staff Estimates Source: WDI and WB Staff Estimates Even with this, the growth in general government Fiscal space from a growing spending envelope revenue could be outpaced by Myanmar’s spending has to be consistent with macroeconomic stability needs for critical public services, notwithstanding objectives if it is to be effective in implementing absorptive capacity constraints. The elimination of policies for shared prosperity. For example, more Myanmar’s external debt arrears in 2013 has created spending out of costly short-term borrowing could some fiscal space that could enable additional affect debt sustainability and displace spending on borrowing to meet those needs. The current level of policy options for closing the gap and growing together; public debt stock, which stood at around 31 percent of and it could thwart efforts at financing the future by GDP in 2014 (figure 15), falls within thresholds of debt crowding out credit to the private sector. It could fuel sustainability.10 Debt service payments also do not inflation, thereby offsetting the competitiveness gains pose a major issue for short to medium-term liquidity. from policy options for breaking business as usual; and disincentivizing much needed private investments for At the same time, Myanmar’s additional borrowing policy options in energizing Myanmar. space could be constrained by its access to low- cost, long-term financing. Myanmar has rightly Reprioritizing resources across sectors in the started to move away from short-term Central Union Budget can therefore be an important source Bank financing, which historically has contributed of fiscal space for implementing policy priorities. to macroeconomic instability. But financing options This is already evident in some of the recent shifts in are also limited due to small domestic debt markets, the Union Budget. For example military and general and the country’s early reengagement with external services expenditure declined by an estimated 0.8 per- concessional lenders. Any potential new borrowing cent point of GDP between 2013 and the 2015 Union could be usefully informed by its impact on the overall Budget, whereas spending on the social sectors and level of public debt stock and on the composition of the economic services is expected to have increased by public debt portfolio, which affect debt sustainability. roughly this amount over the same period (figure 16). Within these constraints, Myanmar could potentially target an average of 2 percent of GDP in additional net, Beyond such reallocations, options for an increase long-term, concessional borrowing per year over the in public spending in education, health, or social next 5 years (figure 15). protection deserve careful consideration. On the one hand, increased spending on programs such as school stipends, basic healthcare packages, and social assistance has the potential to improve education and health outcomes significantly and effectively. On the 10 IMF-WB Debt Sustainability Analysis for Myanmar in: IMF, “Myanmar – Staff Report for the 2015 Article IV Consultations,” August 14, 2015 17 other hand, a more sudden increase in the financing Reallocations within sectors could usefully comple- of other programs may be less effective and may not ment the above measures in redirecting resources achieve the intended public service gains. For example, to areas that are likely to have a relatively bigger more resources for building health facilities in rural impact on shared prosperity e.g. from curative areas could be constrained by public investment man- to preventive healthcare, or from tertiary to basic agement capacity in the public sector; or increased education. These could be further complemented by spending for teacher recruitment could be constrained efficiency gains within sectors. The 2015 Myanmar by the availability of qualified instructors that are cur- Public Expenditure Review identified for example more rently available to join the workforce. strategic procurement of pharmaceuticals to generate savings; and better quality textbooks to reduce their It is therefore not necessarily a matter of reallocating replacement rate (and associated costs) from annual spending in the Union Budget to the social sectors. to every three years. Subject to more detailed analysis, For example, some other countries with initially high Myanmar could potentially target an average of 0.5 levels of military spending, reallocated funds gradually percent of GDP of additional fiscal space per year over towards health and education over several years (figure the next 5 years from reallocations and efficiency gains 17). The pace of such reallocations will depend greatly within sectors. on country-specific economic, institutional, and social factors. Combining all the above measures could potentially enable Myanmar to target an average of 3.4 percent With the above in mind, if Myanmar wishes to of GDP in additional fiscal space per year over the achieve spending levels across government func- next 5 years (figure 19). On the other hand, bringing tions that are closer to the average for Lower Middle Myanmar’s spending across government functions to Income Countries, then it could potentially target 0.3 similar levels as that of other Lower Middle Income and 0.4 percent of GDP per year in fiscal space from Countries, could require an average of 4 percent of GDP reallocations in expenditure across sectors over the in fiscal space per year over the next 5 years. These next 5 years (figure 18). numbers are indicative and subject to more detailed analysis, including costing of specific options proposed in the policy notes and broader macroeconomic impact. The numbers are used more to illustrate the potential sources of fiscal space and their trade-offs. Figure 18: Functional spending in Myanmar vs. Lower Middle Figure 19: Potential targets for sources of fiscal space Income Countries (% of GDP) (% of GDP) Source: WB Staff Estimates Source: IMF GFS and WB Staff Estimates 18 Conclusion At the turn of the 20th Century, Myanmar was one of The above does not substitute for visionary and deci- the richest countries in South East Asia. This instills in sive leadership, which, to the contrary, has been a the people of Myanmar a strong ambition to succeed in big part of other countries’ inclusive growth stories.12 reinstating the country’s rightful position in one of the Choosing not to pursue a particular policy option is not most dynamic regions in the world and in the global necessarily a missed opportunity, particularly if such a economic community. It also provides a strong founda- choice is borne out of consensus. It may open the door tion for Myanmar’s ability to stay the course on its bold to think even more creatively about ways to achieve agenda for change. shared prosperity in Myanmar. Myanmar has the potential to follow the same path of Figure 20: GDP per capita (constant 2005 US$) inclusive growth as other high performing countries in the region (figure 20), and also catch up at a faster rate e g ge ra with the help of technology and knowledge transfer. ra ge e ra Av e e Av Av a China, for example, had a lower per capita GDP at the in nd am Ch aila tn start of its growth acceleration in 1977 than Myanmar e Th Vi in 2011 (US$ 177 vs. US$ 361 in constant 2005 US$) and was able to increase per capita GDP nearly 5-fold Myanmar 2014 within 20 years (figure 20). Over this period, the poverty headcount ratio in China (at $1.90 a day, 2011 PPP) fell from around 90 percent to roughly 60 percent, falling further to 11 percent by 2011 (figure 21). In Vietnam, per capita GDP increased nearly 3 fold (US$ 300 to US$ 855 in constant 2005 US$) in the first 20 years since the start of its growth acceleration (1990), whilst the poverty headcount fell dramatically from 50 percent to around 3 percent over the same period (figure 21). Although the above policy options could help Myanmar Source: WDI and WB Staff Estimates to get onto a similar track, there are many other issues that will affect progress.11 Myanmar is working to bring an end to longstanding conflicts and bridge social divi- Figure 21: Poverty headcount ratio at $1.90 a day (2011 PPP) sions across the country’s ethnic and religious groups. (% of population) Whilst the above policy options aim to support these efforts, much more would be needed to foster national unity under a strong leadership that can provide a common vision for Myanmar’s development. These are preconditions to and determinants of Myanmar’s pro- gress towards shared prosperity. The ultimate success of policy reforms will also depend on their degree of ownership in Myanmar. The people of Myanmar should decide on the best course of action. This may involve extensive debate, which the policy notes aim to promote, and building consensus across a wide range of stakeholders. This could generate significant benefits in terms of building trust and generating the drive to implement reforms. Source: WDI and WB Staff Estimates 11 WBG, “Myanmar – Ending poverty and boosting shared 12 WB and the Commission on Growth and Development, “The prosperity in a time of transition: A Systematic Country Growth Report – Strategies for Sustained Growth and Inclusive Diagnostic,” November 2014 Development,” (2008) 19 references IMF, “Myanmar - Staff Report for the 2015 Article IV Consultations,” August 14, 2015 Republic of the Union of Myanmar, “The 2014 Myanmar Population and Housing Census - Volume 2,” (May 2015) The World Justice Project Rule of Law Index WB and the Commission on Growth and Development, “The Growth Report - Strategies for Sustained Growth and Inclusive Development,” (2008) WBG, “Cambodia Economic Update: Resilience Amidst a Challenging Environment,” (September 2013) WBG, “Myanmar Economic Monitor,” (October 2015) WBG, “Myanmar - Ending poverty and boosting shared prosperity in a time of transition: A Systematic Country Diagnostic,” November 2014 WBG, “Realigning the Union Budjet to Myanmar’s Development Priorities: Myanmar Public Expenditure Review 2015,” (September 2015) World Economic Forum, Global Competitiveness Index (2014-2015) 20 ALL ABOARD Policies for shared prosperity in Myanmar GROWING TOGETHER FINANCING THE FUTURE BREAKING BUSINESS AS USUAL ENERGIZING MYANMAR CLOSING THE GAP PARTICIPATING IN CHANGE Reducing rural poverty Building an open, modern and Fostering competitiveness and a dynamic Enhancing access to Expanding access to Promoting public sector in Myanmar inclusive financial system environment for private sector growth sustainable energy for all social services accountability to all “This Policy Note is part of a series entitled All Aboard! Policies for shared prosperity in Myanmar” CLOSING THE GAP GROWING TOGETHER BREAKING BUSINESS AS USUAL Expanding access to Reducing rural poverty Fostering competitiveness and a dynamic social services in Myanmar environment for private sector growth FINANCING THE FUTURE ENERGIZING MYANMAR PARTICIPATING IN CHANGE Building an open, modern and Enhancing access to Promoting public sector inclusive financial system sustainable energy for all accountability to all ALL ABOARD Policies for shared prosperity in Myanmar The World Bank Myanmar No.57, Pyay Road 61/2 Mile, Hlaing Township, Yangon, Republic of the Union of Myanmar. www.worldbank.org/myanmar www.facebook.com/WorldBankMyanmar myanmar@worldbank.org