Thursday, 28 June 2012

A sweet success? Sanctions in Myanmar

One of the most surprising things about this recipe is how quickly it seemed to come together. Be warned it takes a while to really ‘set’ and won’t necessarily work as well with different ingredients

  •      Base:
  • A government desperate for financial resources
  • An authority group that’s lost political legitimacy
  • A reliance on ‘ally’ countries with extractive agendas
·         ‘Carrot’:
  • High profile visits and diplomatic relations
  • Debt forgiveness
  • Support and aid from the World Bank and IMF
  • Interest and  investment from foreign companies
  • No involvement of the International Court of Justice at the Hague
·         ‘Stick’ – strict EU, US, Norwegian, Japanese, and Australian sanctions including:
  • Arms embargo,
  • Ban on Burmese goods including timber, mining and gems industry
  • Ban on companies investing and working in the country 
  • No humanitarian aid
  • No visas for army members and junta.

            Anyone who has spent the last six months watching the political developments in Myanmar unfold could be excused for experiencing some degree of vertigo. The progress of reforms appears to be so rapid the even South East Asian experts failed to predict the military junta’s political u-turn. However, a closer look at Myanmar’s situation reveals a rather interesting recipe; perhaps one which offers for hope for the much disparaged sanctions. These economic restrictions are often derided, especially by those who disapprove of the ‘soft power’ approach. Yet Myanmar’s recent reforms have shown how successful sanctions can be, if done properly and made with the right ingredients.                                                                                                                                                                                                                                                                                               
            For an effective recipe made with sanctions, it is crucial that you have the right base for reform. This shouldn’t be too tricky as sanctions are usually applied to countries with deeply corrupt and extractive institutions that profit a self-serving elite. Over time, the nature of these institutions typically leads to the type of base required; an authority or government that is desperately short of both resources and political legitimacy. Such was the case for Myanmar. The base was improved further by its alienation from other countries, leaving it hopelessly dependent on one country; China. China, like Myanmar’s own military junta had an extractive agenda in the country, and the government eventually found that Chinese business investment was often little more than a snatch and grab, with companies mistreating employees and damaging the local environment. These factors, when combined, make an ideal base for the next step. 
            However, this part of this recipe is probably the trickiest, as it requires a careful culinary balancing act; offsetting the right amount of ‘carrot’ against the right amount of ‘stick’. This balance must be exactly right for reforms and development in a country to ‘set’. In the case of Myanmar it began with the ‘stick’; the harsh sanctions imposed on it by countries as diverse as the US, Norway, Japan and Australia. These took the form of a prohibition on companies investing and working in Myanmar, a ban on exports such as teak and gems, no visa’s for any members of the army or junta and eventually a suspension of humanitarian aid. Over time these sanctions began to bite, and in turn help prepare the base. Once this is ready, you gradually, and I stress gradually, add your ‘carrot’ while slowly taking away the ‘stick’. In the case of Myanmar it began with President Obama promising a visit by Secretary of State Hilary Clinton following the release of Aung San Suu Kyi. Myanmar then freed 650 political prisoners and in turn the US re-established diplomatic ties. This careful removal of ‘stick’ and addition of ‘carrot’ encouraged Myanmar’s reform and on the 1st of April Myanmar held the first free and fair elections since 1990. As a result, the EU is suspending all sanctions (apart from the arms embargo) for one year and multinational companies are clamouring to invest in Myanmar.
            As successful as these reforms have been so far, their speed risks upsetting the careful balance that is required in this recipe. It is essential that other countries give only enough ‘carrot’ to encourage the current reform while still reserving some rewards for future reform. While Myanmar has made impressive progress there are still some fundamental changes which need to be made. Primarily the army’s power needs to be greatly reduced. While Aung San Suu Kyi’s National League picked up 43 out of the 45 seats in the recent election, this comprises only 6% of the 650 seat parliament. In addition to this, the constitution of Myanmar still leaves the army with a significant power. If Myanmar is to become a fully functioning democracy it still has plenty of improvement to make and for the sake of preserving the fragile balance, countries should be careful not to make too many concessions to the regime too quickly. Aung San Suu Kyi put it best when she said “the world loves a happy ending...but there is still a long way to go”. Myanmar’s reforms haven’t quite ‘set’ yet.
            Nevertheless, if this does prove to be a successful recipe using sanctions, could this be applied elsewhere in the world? One obvious thought might be Iran. Another ‘rogue nation’, to use the famous American phrase, is facing its toughest round of sanctions yet. From the 1st of July the EU will halted all imports of Iranian oil and earlier in the year the US government announced that it would penalise any financial institution found to be doing business with Iran’s central bank. Yet, despite the severity of these sanctions, the method of applying them cannot be the same in Iran as in Myanmar. With Iran one is working with an entirely different set of ingredients.
            On the surface the situations appear similar; a hard-line regime, with extractive institutions and mired in corruption. However, their ingredients that comprise the base of the two are subtly different.  To begin with, the Iranians base is not nearly strong enough (i.e. the government is not yet desperate enough) to support a fragile ‘carrot and stick’ manoeuvre. While the government does not enjoy much support (as shown by the Green Revolution in 2009), the theocracy still maintains a powerful ideology and one that many Iranians still support. Secondly, while sanctions are beginning to sink in, Iran is in a financially stronger position than Myanmar. It is more developed than its Asian peer and still has some semblance of a strong middle class remaining. Iran also has enough resources saved up to weather EU sanctions, at least according to the government. Ahmadinejad announced recently that Iran has an oil fund worth some $35 million to tide the country over to 2015, even if they didn’t sell any oil during that period. This is crucial, because in an extractive economy like Iran’s, the government very much relies on handouts for support and their control of citizenry. Iran is also not dependent on one ally, as Myanmar was. Due to its vast resources of oil, it still maintains relationships with countries that have no qualms about its nuclear activities.
            With an entirely different set of ingredients for the base, sanctions will not come together as quickly or as sweetly as they did in Myanmar. Nonetheless, a longer preparation time shouldn’t lead us to write recipe off straight away. Iran’s base may not be ready now there is a chance that sanctions will push it there for the future. As they at last begin to bite, Iran’s economy is stuttering and ordinary Iranians are suffering. Food inflation is running at above 50% and food shortages have been reported. Unemployment is a problem too; 22% of Iranian families have no breadwinner. As this continues the regime will begin to lose whatever remains of its political legitimacy. Despite deeper coffers, the Iranian government are also deeply concerned about their oil flow. Harsh new EU sanctions will cut Iran’s oil exports by at least 25% and this for a government which is dependent on oil for 50% to 70% of their revenues.  The EU and U.S. have also put banking penalties on financial transactions with Iran which have effectively, in the words of Ahmadinejad, shut Iran out of international banking. This lack of finance is aggravated by the fact local investment in Iranian business has slumped. Iranian investors are now investing spare resources in ‘havens’ such a property, gold and even carpets. Finally, as Iran increasingly becomes a pariah state, it will be forced into greater reliance on allies such a China and India. These are countries that are already prepared to push Iran for discounts on oil following the latest t round of sanctions. 

So there it is; a sweet, simple and hopefully successful recipe for reform through sanctions in Myanmar. Whether the long-time frame and varied ingredients prove too much for this recipe in Iran remains to be seen.

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