In Myanmar, low-profile aid can have greatest impact

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It was not long after then US Secretary of State Hillary Clinton visited Myanmar in late 2011 that a new donor darling was born. Sanctions were eased and diplomatic relations restored. The promising democratic transition, currently under much scrutiny following the Rohingya tragedy, uncorked a bonanza of aid.

Given the mixed track record of such external interventions, one may wonder how virtuous all this good intent has been. In a promising break from traditional aid, however, a more business-oriented approach seems to be hitting home in Myanmar.

Going by the statistics, aid has little to brag about. Over the past 50 years, rich countries spent more than $4.14 trillion on development, yet the vast majority of academic studies attempting to correlate increases in aid with economic growth have failed to deliver robust evidence. It is often argued that aid aggravates the existing ails of corruption and nepotism. Politics rarely stay out of decisions on where to allocate funds.

It is often argued that aid aggravates the existing ails of corruption and nepotism

When considering the positive achievements, the track record is equally unsupportive. The much-heralded success of the Millennium Development Goals (MDGs) largely came on the back of China’s embrace of the free market, not donor intervention.

This is not to say that aid is by definition bad, or that the sole objective should be economic growth. Propping up public goods that are underprovided by the government, such as education and healthcare, could have a positive impact. The same holds for disaster relief management. It is crucial however that donors are able to distinguish between supplementing public services and distorting otherwise functioning markets. The unintended harm that poor aid policy can inflict is nowhere potentially more destructive than in the financial sector.

In Myanmar, amidst a challenging environment scarred by reckless past monetary policy, financial institutions are offered one rare treat: remarkably strong repayment behavior. These virtues, however, are particularly at risk when faced with ignorant donor intervention. A telling tale by one of the larger micro-finance institutions showcases that the exception to their clients’ strong repayment records is found exactly in an area where aid money had been doled out for free. It is such ruinous interference that destroys the fabric of accountability on which economic progress is built, and undermines the upstart potential of Myanmar’s nascent financial sector as the engine of economic revival.

Fortunately, there are also examples in which the donor community appears to have learned from past mistakes. One particular challenge in Myanmar is the lack of formal credit to the agricultural sector, which accounts for 38% of GDP and employs 70% of the labour force. The culprit of this market failure is a central bank-imposed interest rate ceiling of 13% on bank lending. This cap inadvertently prohibits lenders’ ability to price risk, which is inherently higher in the primary sector. The introduction of a first loss buffer for agricultural lending, sponsored by the Livelihoods and Food Security Trust Fund (LIFT), a multi-donor initiative, absorbs the higher risks for banks to lend to farmers, stimulating loans to the sector.

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The results to date have been encouraging. After 18 months, financing of agricultural equipment under the programme had been a multiple of eight times the original donor money contributed. The key to this success is the covert subtlety of the intervention, which addresses one particular flaw in the system. The bank and their clients, steered by Adam Smith’s invisible hand, do the rest of the work. Crucially, neither branch staff nor customers are aware of the reallocation of risks behind the scenes.

Contrastingly, in their endeavors to secure future funding, NGOs often flaunt their supposed impact. This creates an image of westerners handing out freebies, diverts would-be aid money to marketing purposes, and produces a bias towards causes that appeal emotionally. What resonates nicely with the public back home, however, is often at odds with the impact on the ground. Interventions aimed to prevent smallholder farmers from ending up behind a sewing machine in Yangon´s outskirts might sound laudable, but merely postpone an unavoidable trend of increasing labor productivity and rural-urban migration. Romantic as it might seem, no country has ever grown rich by keeping the majority of its workforce plying their two acres of land behind a wooden plow and a draft animal.

Real impact is often less visible to the public at large and doesn’t necessarily look good on a billboard. It includes strengthening local institutions by providing technical assistance to lawmakers, facilitating FDI by enabling cross-currency hedging in an otherwise too shallow market, and breaking down trade barriers erected to protect uncompetitive agricultural producers in the West. If the objective is for Myanmar to catch up with the rest of the world, donors have to work with the free market, not against it.

Responsibility for the information and views expressed are exclusively those of the author and are not in any way related to his employers.

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