Myanmar within ASEAN: Economic and Political Challenges of the Coup

Abstract

International attention on Myanmar has generally ebbed and flowed. While the Myanmar economy has benefitted from opening up in the past decade, recent political instability seems to have reversed most of these gains. Here, we explore some of the implications of the civil strife on their economy, as a case study on how political considerations can materially impact economic growth.

There have also been calls by the international community for ASEAN to do more to “restore” Myanmar to its former state. However, on the contrary, we believe that ASEAN has taken unprecedented and remarkable steps that are usually rather uncharacteristic of the bloc. We also argue why political, geopolitical and historical complexities make it impossible for ASEAN to be the silver bullet some onlookers believe it has the capacity to become.

Myanmar and Military Rule

The coup in Feb 2021 took the international community by storm, with many governments, multinational brands, and non-governmental organisations condemning the Myanmar military, or the Tatmadaw, for taking away democracy. There were many calls to free some of the democratically-elected politicians and activists - including the leader of the National League of Democracy (NLD), Aung San Suu Kyi.

While many are leaping to her defence now, just a few years ago in 2018, she endured the brunt of international criticisms for not taking sufficient action to further civil rights in the country (Ellis-Petersen, 2018), until the point her honorary Canadian citizenship was revoked.

Some might believe that elections in Myanmar are assured, perhaps as a result of about a decade of the existence of these democratic processes. That these elections meant that certain political freedoms would always exist. However, Myanmar has long been entrenched in military rule; not just since the recent coup. It is likely more accurate to say that Myanmar has long flirted with democratic processes, rather than military rule being the odd event. While the 2020 elections resulted in a resounding victory for the NLD, the Tatmadaw alleged voter fraud.

In Feb 21, senior officials of the NLD were detained, with the police claiming that Suu Kyi had illegally imported unlicensed walkie-talkies. Civilian demonstrations began in protest of the move, which quickly escalated into civil strife. Use of lethal force by the Tatmadaw for stability was met with guerilla attacks by organised groups. Paramilitary forces and a shadow government emerged as fighting intensified, while ASEAN member states convened and discussed the way forward. Estimates by ISP Myanmar put the civilian death toll at 5600 at May 2022, and this has only increased since then exclusive of the recent activist and politician executions (RFA Myanmar Service, 2022).

The political instability and intense fighting has affected Myanmar’s economy through 4 broad flows.

Inconsistent domestic consumption

Myanmar’s domestic sectors have been hurting. Between FY2017-22, domestic private consumption on average accounted for about 52.1% of Myanmar’s GDP, meaning that households are the main driver of growth (Fig. 1). While quarterly data is no longer published, we reason that the coup, for many reasons, has resulted in demand destruction. Citizens choose to demonstrate rather than work retail - meaning that consumers are unable to make purchases. More importantly, heavy fighting and the conflict would mean persons would not take unnecessary risks through discretionary retail and recreational spending, instead choosing to minimise time spent outdoors. Those afraid of being detained by authorities would also understandably go into hiding.

Figure 1: Consumption is the lion’s share of GDP

Figure 2: Less movement and economic activity after Feb 21

Source: CEIC, Google, World Bank

Google mobility index changes have observed depressed levels of movement around retail and recreational sectors, with pre-pandemic levels being the baseline (Fig. 2). By extension, this suggests lower levels of retail and recreational spending if lesser persons are observed in these areas. While some of these movements are due to COVID-19 related disruptions, conflict-related considerations are likely playing a role in depressing movement around retail and recreation as well.

• First, the trough in mobility during the early days of protests (-85.0%) were worse than when lockdowns were first implemented to control the spread of COVID-19 (-73.0%), suggesting that it at least has a strong correlation with lesser movement. Blockades and barricades demarking battlegrounds will also restrict movement - and hence activity.

• Second, there have also been multiple reports of displaced persons due to heavy fighting. Assault-laden areas need to be evacuated, meaning that there is little chance economic activity in those areas will return to a normal level anytime soon. Infrastructure for activity such as shops and roads are also damaged.

• More saliently, there was some recovery in mobility after the easing of COVID-19 waves, only for it to falter after demonstrations and fighting started. Later waves of COVID-19 in early Feb 22 also only resulted in a blip, rather than a change in trajectory.

With less mobility, comes less economic activity, which also loosely translates to less employment and income.

Struggling subsectors

Myanmar’s growth sectors which were once thought as an avenue for accelerated GDP will take a hit. Primarily, manufacturing has started to slow. Between 2012-2020, Myanmar’s manufacturing sector yielded the highest average annual growth rate (Fig. 3) - a large part due to investment liberalisation after 2011. The sector also comprises up to 29.0% of the country’s exports in 2020 (United Nations Department of Economic and Social Affairs, 2022). However, since the beginning of the coup, the monthly manufacturing indicator, the Purchasing Managers’ Index, has been trending downwards until it has consistently settled below the 50.0 no-change mark (Fig. 4).

Figure 3: Manufacturing a supposed bright spot for Myanmar…

Figure 4: … But is underperforming as of late

Source: S&P, CEIC, Authors’ calculations

The recent dataprint of August 2022’s headline figure remarks the fastest level of contraction from the month before October 2021. Not only are factories closed due to the fighting, but workers are scarce when they are either escaping conflict-laden areas, or joining demonstrations or paramilitary forces seeking to take back control from the Tatmadaw. For the few who do still wish to work, barricades by authorities and damaged roads make it difficult for workers to reach their workplace. With tensions continuing to escalate such as through the shelling of schools, it is unlikely that normalcy will return in the near-future.

Tourism, another source of revenue for Myanmar (as well as most of emerging Southeast Asia), is also set to lag behind their peers. Most of Southeast Asia has been eager to open up their borders again for tourists to return. However, despite being open to fully vaccinated tourists like the rest of the region, visitor arrivals are still at an all-time low compared to pre-pandemic figures in 2019 (Fig. 5). Political instability until the point of conflict rarely bodes well for visitors, and the rest of Southeast Asia meanwhile are experiencing a steady recovery in tourism.

Figure 5: Tourism figures still lagging behind peers

Source: CEIC, Author’s calculations. Average monthly arrivals in 2019 was taken as 100%. For Malaysia, Tourist Arrivals were used instead of Visitor Arrivals. For Myanmar, data past Jun 22 are rough projections.

The impact goes beyond just short-term drags on growth. Other than multiplier effects, high rates of unemployment for extended periods of time also translate into lower levels of human capital accumulation, as the unemployed do not enjoy labour productivity growth. This reduces the long-term productivity prospects of the labour force and worsens the already occurring brain drain.

Political headwinds to FDI Re-emerging

Political challenges, differences, and uncertainties also usually spillover into an economy through the backbone of an accelerated growth-path: investments. Foreign Direct Investments (FDI) has traditionally been a convenient resource for emerging economies to rapidly build infrastructure, gain access to private capital, have a surge of job vacancies, and ultimately, facilitate growth. To this end, Myanmar is no stranger to struggling with attracting FDI due to their politics (Fig. 6 and 7).

Figure 6: Number of foreign enterprises fluctuate

Figure 7: FDI has been largely inconsistent due to sanctions

Source: CEIC, SEIC

The US first imposed broad sanctions on Myanmar after the 8888 Student Uprising in 1988. In 1997, however, US President Clinton took it a step further and implemented the ‘‘Cohen-Feinstein’’ Amendment, banning all American companies from investing in Myanmar. The EU also banned the transfer or sales of arms in 1996. In 2007, after the junta's strict crackdown on the Saffron Revolution (demonstrations against fuel subsidy removals), Australia and Canada also acted to impose sanctions on their own. Japan, ASEAN's 4th largest trade partner and 2nd highest source of infrastructure investments in ASEAN, suspended all development assistance in 2003.

Other than sanctions, political instability until the point regular services are disrupted makes for a very unattractive investment destination as it becomes difficult to guarantee returns.

• In the short-term, projects that once had a pathway to profitability are no longer viable due to cost overruns, damaged infrastructure after fighting, and an unreliable labour force. Working in warzones is not an attractive employment prospect, and foreign firms are likely to also prioritise the safety of their expatriate workers and send their human capital home.

• In the long-run, the trend of consistent political instability is harmful. Investors will understand that even if current instability ends, the risk of political clashes happening again makes investments rather risky. Neighbouring safe havens like Japan and Singapore, or even competitors for investments like Indonesia and Malaysia, are less riskier and more attractive. The likelihood of capital returning in the future is lower too.

Without the resource of foreign capital, it becomes more difficult to raise the funds needed for expensive infrastructure projects, high-value job creation and income, and growth (Bissinger, 2012).

With investors running to exchange their Myanmar Kyat for other foreign currencies, downwards depreciation on the Kyat is to be expected. Already, between the start of the coup in Feb 21 and Sep 22, the Kyat has devalued a shocking -57.9% against the greenback (Fig. 8). It is likely that market pressures will continue to devalue the Kyat further - especially considering the Fed’s aggressive rate hike cycle.

Figure 8: Rapid depreciation of the Kyat coincides with political conflict

Source: CEIC, SEIC. The start of the coup is the red line.

With this trend, Myanmar joins a growing line of Asian economies whose currencies have experienced severe depreciation from political instability and economic mismanagement such as Sri Lanka. Import-inflation becomes a very real issue: it becomes more expensive for Myanmar to afford their energy needs at a time of already elevated energy prices. Essentials like food and pharmaceutical products also become more expensive. While manual intervention through increased purchases of the Kyat while selling foreign currencies is possible, it is only a stop-gap solution insofar as Myanmar has sufficient foreign currency reserves. It will eventually run out.

The other option, imposing capital controls such as the fixed/reference exchange rate (Central Bank of Myanmar, 2022) or mandating all firms to exchange all profits in foreign currencies (Central Bank of Myanmar, 2022) to the local Kyat to create artificial demand for the Kyat, signals to investors that future capital has a material risk of becoming illiquid. This is yet another hurdle for investors to overcome before choosing to invest into Myanmar. A point of interest is that, despite the reversion to a fixed exchange rate against the USD, Myanmar has been forced to devalue the exchange rate from MMK1850 in Apr 22 to MMK2100 in Aug 22. This is also after a rather flat 3 months of MMK1778 between Nov 22 and Apr 22, after a reference point cap. This suggests that the rate of currency intervention is unsustainable, as market pressures to further devalue the currency remain strong.

Politics through Trade

Historically, Western economies had refrained from trading with Myanmar due to disagreements on the use of harsh authoritarian measures, such as the detainment of activists and crackdowns on demonstrators. However, after democratisation in the 2010s, we have seen a gradual shift: foreign companies were now more willing to involve Myanmar in their supply chain and purchase goods from the economy. This is particularly pertinent for the domestic garment industry, which used to sell products to international brands such as Marks & Spencer, H&M, and Gap as part of their supply chain. This has resulted in exports being another engine of growth after 2011 (Fig. 9).

Figure 9: Exports has accounted for 20-25% of Myanmar's GDP since liberalisation

Source: CEIC. Last datapoint was 2018. Red line marks liberalisation

However, due to the coup, these trade flows are unlikely to continue on a similar level for two reasons. First, with supply chain disruptions through road blockages and damage, it becomes more difficult to transport goods out of Myanmar. Production also becomes an issue due to closed factories, as we have explored earlier.

Second, and perhaps more importantly, consumers and shareholders are increasingly associating brands beyond just the quality of their products. Ethical consumption is on an upwards trend, and it is in these firms’ best interests to at least show that they are applying some pressure on the junta regime. We have seen large MNCs like Next, OVS, British Foods and H&M issuing statements that they will either pause imports from Myanmar, or discontinue working with “discriminatory” suppliers in the country that contribute to the political strife. This form of international pressure means that this pillar of growth, which supported up to 25% of Myanmar’s economy, is no longer available as an engine in the short-term.

The ASEAN Factor?

Onlookers have hoped that ASEAN as a bloc would be able to apply more international pressure onto Myanmar to resolve the conflict. After all, on paper, the coup seems to have violated some statutes related to the “principles of democracy”.

However, despite some wanting the regional bloc to take the step to be an ultimate solution to resolve Myanmar’s political challenges, it will never be the silver bullet, and we should not expect it to be one. We suggest three reasons.

First, the most central principle of the bloc is that of non-interference. Article 2 of the ASEAN Charter enshrines “non-interference in the internal affairs of ASEAN Member States” (Association of Southeast Asian Nations, 2008). A key reason behind ASEAN’s current success and existence as a bloc, is because this principle was attractive to different countries with diverging politics, objectives, and strategies. The Bangkok Declaration, the founding document of ASEAN, focussed largely on cooperation for economic growth, regional peace, and mutual assistance. Regional alignment of political goals and strategies for survival were omitted because of the region’s diversity.

This poses two challenges to enacting hard sanctions.

1. The first is fundamental: interference through non-agreed upon sanctions to address violations of the ASEAN Charter or regional insecurity undermines the non-interference principle, which is the most fundamental tenet of the bloc in the first place. This potentially poses more questions about the legitimacy of the association - which some might see as more destabilising rather than rebalancing.

2. Second, as a result of this unwillingness to step on each others’ toes, dispute mechanisms in ASEAN are notedly unused or not thoroughly developed. In the ASEAN Charter, Article 20 punishes for “a serious breach of the ASEAN Charter or non-compliance” (Association of Southeast Asian Nations, 2008), through referring the case to the ASEAN Summit - an arguably vague and ambiguous course of action. Compare this to the Statute of the Council of Europe for example that governs the Committee of Ministers in the European Commission, which has Article 9 explicitly noting that violating member states may be “suspended from its rights of representation” (Council of Europe, 2015). These provisions made it possible for the bloc to enact the suspension of the Russian Federation from their rights of representation on the Council with relative ease with the outbreak of the Ukraine-Russian war - a move that is difficult to implement in ASEAN due to the lack of statutes translating into the lack of legitimacy for heavy-handed measures.

The flexibility that comes with ASEAN also generates uncertainty as a by-product - which sometimes makes decisions more difficult. While ASEAN can and has evolved overtime to better manage regional challenges, one-sided intervention would inadvertently bring the bloc closer to a re-examination of its founding principles. And this takes time.

The second reason why ASEAN states prefer to not get involved in the affairs of their regional partners is that it would set precedence for the bloc to intervene in their own internal affairs as well. Some members might feel that this is not in their national interest, as they enjoy the flexibility of managing their own internal affairs effectively without international interference. If there are disagreements, they are generally discussed on a bi-lateral basis or off-the-record if at all, rather than through formal institutions. The 2014 military takeover in Thailand for example only resulted in Indonesia making a brief statement on the restoration of democracy, but other member states remained publicly muted. Even in trade pacts, the RCEP characteristically left out the creation of a dispute resolution mechanism in favour of having the pact become easier to ratify.

Lastly, historical realities would make any form of external intervention unlikely to succeed. Myanmar’s military, not unlike other Southeast Asian countries like Indonesia, is a central part of local power structures due to its role during the independence era (Bünte, 2022). Aung San, the father of Aung San Suu Kyi and the first commander of the Burmese Independence Army, played a pivotal role in uniting various factions and is considered the founder of modern-day Myanmar. When the Burmese nationalist movement led by General Aung San rose to prominence, the Tatmadaw also became the strongest institution in the decolonisation era. While there has been some politicisation of the Tatmadaw as the guardian of the country, there is some truth in that as the military as an institution did play a significant role in independence. With the role of the military being so intertwined with the nation, it becomes difficult for external influences to be the deciding factor in internal affairs related to the military - no matter how much ASEAN tries.

Despite constraints, ASEAN should be commended

That is not to say that ASEAN has done nothing at all to move the needle. On the contrary, this is arguably the bloc’s most proactive response towards a regional challenge. Convening an emergency meeting of Foreign Ministers and leaders, creating a 5 Point Consensus as a starting point for negotiation, and sending a Special Envoy multiple times to Myanmar are rather remarkable steps for the bloc given its previous adherence to non-interference. The move to exclude a political appointment from representing Myanmar at the October 2021 ASEAN Summit was unprecedented, and remarks a significant shift from a bloc that only issues harshly-worded statements, to one that is starting to actively seek to curate their own future through ASEAN Centrality. Perhaps, there is an understanding that previous strategies of engaging with the Myanmar crisis have not worked, and the bloc is willing to seek new strategies. This paves the way for an understanding that modern problems require modern solutions - and hopefully ASEAN will always strive towards creating them.

While Myanmar’s economic outlook is battered in the short-to-medium-term, and a sudden internal change is very unlikely due to the interconnectedness of the military regime with Myanmar as a nation, the silver lining for the region remains. It (along with other recent developments) has resulted in a markedly bolder ASEAN, potentially marking a turning point in the bloc’s history beyond fostering integration, and into actively building a regional security architecture that reflects ASEAN as an harmonised whole rather than a sum of parts.

This article was written by Adam Ahmad Samdin and Glenda Chong, with inputs from Aces Low.

About the Authors

Adam Ahmad Samdin and Glenda Chong are Research Analysts at the Southeast Asia & Oceania desk at SEIC.

Aces Low was the Research Director at SEIC.

The authors’ views are their own and do not represent the official position of the SMU Economics Intelligence Club. These articles may be reproduced with prior permission from SEIC and due credit to the author(s) and SEIC.

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