US embassy cable - 03RANGOON1552

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, Economy 
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