Myanmar (Burma) is seeing a constant flow of VIPs keen to monitor the changes unfolding there. Hillary Clinton dropped by in December, to great fanfare. Last week it was fund manager George Soros, a tireless funder of civil society activism. This week it was the turn of William Hague, foreign secretary of Britain, the former colonial power and a hardliner within European circles on maintaining Myanmar sanctions. Hague met government officials, made encouraging noises on the pace of reforms, and enjoyed the obligatory photo session with Aung San Suu Kyi. Her diary is increasingly full these days, and not only with VIPs. Her party is contesting by-elections due to be held on April 1, and hopes are high that Ms Suu Kyi will soon be sitting in parliament, which is stuffed with active and retired army officers.

So much for politics. What about the economic prospects for Southeast Asia’s poorest nation? Myanmar appears to be on the radar of international investors. Standard Chartered Banks is eyeing a return once Western sanctions are lifted, which its CEO for Asia predicted would happen this year. Thai banks are also planning to open representative offices, and a $8 billion Thai-led deep-sea port project may be gathering steam. But much of Myanmar’s economy remains opaque to outsiders. A new paper by Stuart Larkin, a former UK-based fund manager provides some clues. The paper was recently posted [pdf] on networkmyanmar.org and makes for engrossing reading on the backdrop to Myanmar’s dysfunctional governance. Larkin is a researcher based in Yangon who has worked for Malaysian billionaire Robert Kuok‘s investment arm, as well as the UN and other multilateral agencies. His paper examines the policy choices facing the new government. Simply put, Myanmar has to reform an uncompetitive hybrid economy in such a way that its dominant business families – the One Percent – become a force for broader economic growth, rather than a rent-seeking deadweight.

The partial economic reform and reversals since 1988 created a hybrid economy which is not socialist, mixed economy nor market oriented. Clear demarcation lines between State and non-State actors are absent and there is a wide array of players involved in industrial activities: these include SEEs, military holding companies, other semi-government organizations such as semi-government banks, rent seekers in the ministries (including inside the MOD), three ministries directly involved in industry (Ministries of Industry I and II and the Ministry of Myanma Industrial Development), the business leaders who head up the largest family-run conglomerates who enjoy privileged access to the ruling class (the Biz- 15), small and medium sized enterprises (SMEs), and foreign investors.

Larkin warns that economic growth alone isn’t enough to rescue Myanmar from its current morass. One ongoing risk is the ‘resource curse’, as foreign investors buy up the country’s natural resources while an overpriced currency, lack of export knowhow and shoddy infrastructure drive away manufacturers. The result could be a form of de-industrialisation. To some extent, this is already happening. Nearly 60% of exports are made up of natural gas, timber and precious gems. Garment factories are limping along. Last year, a record $20 billion in foreign investment was pledged. To put this in perspective, Larkin notes that Myanmar’s annual GDP is estimated to be only $32 billion.

The optimistic scenario, as outlined in the paper, is the emergence of an export-oriented SME sector that is aligned with the needs of Asia-based manufacturers. Myanmar has resources, cheap labor and is at a crossroads between China, India and the rest of Southeast Asia. This scenario offers a bonanza for the ‘Biz-15?, the so-called cronies who got rich under previous juntas and stand to benefit from industrialisation.

Rapid industrial development hinges on the Biz-15 aligning their interests with SMEs since they stand to vastly increase their fortunes by building and operating the modern infrastructure essential for a competitive and dynamic SME-populated manufacturing exports sector, and also by facilitating “anchor” FDI from MNCs. Such fortunes, commensurate with those in the region, would be justified if the Biz-15 can raise the rate of progressive change acceptable to their political patrons so Myanmar’s 60mn population can all prosper.

Larkin admits that there is plenty that can go wrong, starting with the vested interests in government, military and state-run enterprises. But he sees the Biz-15, some of whom are under Western sanctions, as being in a position to bring their military patrons around to the idea of deregulation, stronger institutions and the rule of law as the way forward. This is quite a change from the mindset of the past, which favoured import substitution, case-by-case approval of investments and arbitrary rule changes. Yet Larkin makes the argument that this is a win-win for the cronies.

If the Biz-15 want to make the really big money they are going to have to promote as well as adjust to the new era. The really big fortunes of the next 10-15 years in Myanmar are going to be made by those of the Biz-15 with the capabilities to (i) build, own and operate (BOO) the key modern infrastructure that makes a flourishing export sector populated by SMEs dynamic and internationally competitive and (ii) be able to guide in some of the world’s most powerful MNCs into Myanmar to make “anchor investments” which facilitate backward supply linkages to SMEs to support their export platforms. Also, for (i), the big winners amongst the Biz-15 will be those sophisticated enough to tap international sources of project finance commensurate with the new requisite scale of operations. Those members of the Biz-15 uninterested or unable to make the transition face the risk of being marginalized by fast moving events.

Critics might argue that the old cronies should get out of the way and allow real entrepreneurs to take up the reins. After all, their main talent was keeping the generals happy, not providing a competitive service or product. Myanmar has a large and diverse diaspora, which was a crucial ingredient in the revival of Vietnam’s post-socialist economy. As long as the entrenched families dominate the economy, it’s harder to see why exiles would return and risk their savings. Larkin would argue, however, that the opportunities for new entrepreneurs depend on modern infrastructure being in place, and you can hardly rely on the government to provide these facilities. This means an ongoing role for the business elite, particularly if they can access global capital (enter Standard Chartered).

In his policy recommendations Larkin also offers a word of caution for Myanmar’s one percent.

Biz-15 members should never forget that their prosperity takes place within a social context. Just as the Wall Street and City bankers in the world economy are discovering, actions have consequences and the abuse of wealth and position is only tolerated by society to a finite degree.