Black economy in Myanmar soared since country’s opening

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Tachileik_Myanmar_Arno Maierbrugger
Myanmar-Thai border at Tachileik, a town in the Shan State of eastern Myanmar © Arno Maierbrugger

Flows of illicit money in and out of Myanmar increased heavily since the country started to open its economy to the outside world, a new study released shortly ahead of Myanmar’s crucial general elections on November 8 shows.

The so-called “shadow economy” soared alongside large legit investments made by telecom, oil, trading and manufacturing companies and a general economic upswing after the junta established a quasi-civilian government in 2011, placing Myanmar on the list of countries with the largest informal economies in the world, according to US-based non-profit organisation Global Financial Integrity (GFI).

GFI looked at illicit money flows through Myanmar from the early 1960s, when a military government in the country took over, up to 2013, and found that nearly $100 billion were funneled illegally through Myanmar, whereby the flows swelled massively over the past few years. In 2013 alone, unregulated financial inflows totaled some $10 billion, more than 20 per cent of Myanmar’s official GDP.

The report, entitled “Flight Capital and Illicit Financial Flows to and from Myanmar: 1960-2013” and released on September 10, does not even include the smuggling of drugs, timber, precious stones and other goods, as these deals are of course settled off-the-books in cash and are beyond the scope of a serious analysis.

Instead, the report used a methodology based on multi-equation economic models highlighting the interactions between illicit flows and the underground economy and came to the conclusion that fraudulent over- and under-invoicing of trade transactions accounted for the majority of the country’s illicit financial outflows and inflows over the 54-year period, at 59.6 per cent and 89.2 per cent, respectively.

“Myanmar has a very serious problem with illicit financial flows, and curtailing them should be a priority for the government that will form following the forthcoming elections,” said GFI President Raymond Baker, adding that such illicit flows “have drained billions of dollars from Myanmar’s official economy – this money could have otherwise been used to help the nation’s economy grow. But beyond the direct loss to the economy, these flows are driving the underground economy, fueling crime and corruption and costing the government significant revenue.”

Myanmar-underground economy_GFI

The biggest problem at present are Illicit inflows, which totaled a whopping $77.7 billion over the 54-year period, but nearly half of those inflows (in real US dollar terms) occurred during the last four years of the study, between 2010-2013. On average, Myanmar’s illicit inflows were equivalent to 14.4 per cent of its GDP, the study shows.

A major driver for illicit inflows was the government’s “export first” policy from 1997 to 2012, a period during which import licenses were only awarded to exporters who could bring in enough foreign currency to cover their import costs. This created an incentive to over-invoice exports, the study found. Economic sanctions have further encouraged this by creating excess demand for consumer goods and other items in the domestic market, which had dried up over more than two and a half decades of economic mismanagement during the 1962-to-1988 period of the “Burmese Way To Socialism,” an interesting mix of Buddhist, humanist and Marxist views in theory, but a total failure in economic practice.

After the country’s opening, foreign direct investment initiatives set by the government further lured back money from semi-legal or illegal businesses previously siphoned out of the country back into Myanmar as legit investment by intermediary companies, to a large part into property, a measure with the side effect that the money gets laundered in the process, but also causing real estate prices skyrocketing.

Illustrating the effects of such huge black money flows on Myanmar’s social system, the researchers point out that total illicit money flows were the equivalent of 172 per cent of health expenditure and 73 per cent of education spending in the period. The movement of black money also deprives the government of crucial tax revenue, leaving little leeway to improve Myanmar’s tax collection rates which are among the lowest in the world at 7 per cent of economic output.

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Reading Time: 3 minutes

Myanmar-Thai border at Tachileik, a town in the Shan State of eastern Myanmar © Arno Maierbrugger

Flows of illicit money in and out of Myanmar increased heavily since the country started to open its economy to the outside world, a new study released shortly ahead of Myanmar’s crucial general elections on November 8 shows.

Reading Time: 3 minutes

Tachileik_Myanmar_Arno Maierbrugger
Myanmar-Thai border at Tachileik, a town in the Shan State of eastern Myanmar © Arno Maierbrugger

Flows of illicit money in and out of Myanmar increased heavily since the country started to open its economy to the outside world, a new study released shortly ahead of Myanmar’s crucial general elections on November 8 shows.

The so-called “shadow economy” soared alongside large legit investments made by telecom, oil, trading and manufacturing companies and a general economic upswing after the junta established a quasi-civilian government in 2011, placing Myanmar on the list of countries with the largest informal economies in the world, according to US-based non-profit organisation Global Financial Integrity (GFI).

GFI looked at illicit money flows through Myanmar from the early 1960s, when a military government in the country took over, up to 2013, and found that nearly $100 billion were funneled illegally through Myanmar, whereby the flows swelled massively over the past few years. In 2013 alone, unregulated financial inflows totaled some $10 billion, more than 20 per cent of Myanmar’s official GDP.

The report, entitled “Flight Capital and Illicit Financial Flows to and from Myanmar: 1960-2013” and released on September 10, does not even include the smuggling of drugs, timber, precious stones and other goods, as these deals are of course settled off-the-books in cash and are beyond the scope of a serious analysis.

Instead, the report used a methodology based on multi-equation economic models highlighting the interactions between illicit flows and the underground economy and came to the conclusion that fraudulent over- and under-invoicing of trade transactions accounted for the majority of the country’s illicit financial outflows and inflows over the 54-year period, at 59.6 per cent and 89.2 per cent, respectively.

“Myanmar has a very serious problem with illicit financial flows, and curtailing them should be a priority for the government that will form following the forthcoming elections,” said GFI President Raymond Baker, adding that such illicit flows “have drained billions of dollars from Myanmar’s official economy – this money could have otherwise been used to help the nation’s economy grow. But beyond the direct loss to the economy, these flows are driving the underground economy, fueling crime and corruption and costing the government significant revenue.”

Myanmar-underground economy_GFI

The biggest problem at present are Illicit inflows, which totaled a whopping $77.7 billion over the 54-year period, but nearly half of those inflows (in real US dollar terms) occurred during the last four years of the study, between 2010-2013. On average, Myanmar’s illicit inflows were equivalent to 14.4 per cent of its GDP, the study shows.

A major driver for illicit inflows was the government’s “export first” policy from 1997 to 2012, a period during which import licenses were only awarded to exporters who could bring in enough foreign currency to cover their import costs. This created an incentive to over-invoice exports, the study found. Economic sanctions have further encouraged this by creating excess demand for consumer goods and other items in the domestic market, which had dried up over more than two and a half decades of economic mismanagement during the 1962-to-1988 period of the “Burmese Way To Socialism,” an interesting mix of Buddhist, humanist and Marxist views in theory, but a total failure in economic practice.

After the country’s opening, foreign direct investment initiatives set by the government further lured back money from semi-legal or illegal businesses previously siphoned out of the country back into Myanmar as legit investment by intermediary companies, to a large part into property, a measure with the side effect that the money gets laundered in the process, but also causing real estate prices skyrocketing.

Illustrating the effects of such huge black money flows on Myanmar’s social system, the researchers point out that total illicit money flows were the equivalent of 172 per cent of health expenditure and 73 per cent of education spending in the period. The movement of black money also deprives the government of crucial tax revenue, leaving little leeway to improve Myanmar’s tax collection rates which are among the lowest in the world at 7 per cent of economic output.

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