Nobel Peace Prize laureate Aung San Suu Kyi, Burma’s effective opposition leader, irritated the regime with her recent caution against “reckless optimism” on the country’s reform and opening. But there is much truth in her warning. Foreign governments and investors should keep a skeptical eye on President Thein Sein’s political and economic reforms. Admirable as far as they go, they remain limited and are far from irreversible.Optimism on Burma and its prospects has been a rare commodity for much of the past half-century. The country was locked away by the autarkic policies of successive military regimes and hemmed in by international sanctions. Burma was bypassed by the economic forces that transformed its peers and neighbors, so the economy was completely off international investors’ radar.

In 2012, all that seems to have changed. Flights to Burma these days are bursting with prospectors of every conceivable kind, whose only remaining anxiety seems to be that they may miss out on what they dimly perceive to be the rise of Asia’s last remaining “tiger.”

But leaving breathless investors to one side, a careful look at the country’s recent reforms shows why Ms. Suu Kyi is right to rein in the enthusiasm. The president’s political opening remains confined within a constitution created by the past military regime, one of the key provisions of which grants the military 25% of the seats in the parliament. Hundreds of political prisoners remain in jail, and the Burmese Army’s civil war in ethnic minority areas has created, in the president’s own words, a “hell of untold miseries.” This week’s ethnic violence between Buddhists and Muslims in western Rakhine state also highlights law and order issues.

Economic reform lags even further behind the political variety. Burma lacks sound property rights, the rule of law, much basic infrastructure and other critical foundations of a market economy. Despite the tireless efforts of the country’s band of reformers, decades of isolation have left a chronic lack of capacity in the country’s economic policy-making bodies.

By contrast, reform in China, Vietnam and just about every other country in Asia has been primarily economic and only later (if at all) political. While this is in part because of the already established appeal of Burma’s political opposition as an alternative government, it shows how much is left to be done. On the plus side, if Burma can create some decent political institutions, sustainable and non-crony economic growth will be simpler.

Despite these serious challenges, producing transformational economic change in Burma is possible. The most important economic reform Burma needs to implement is to clear the thicket of rules, regulations and restrictions from the country’s military past. Reduce the government footprint on the economy and give Burma’s people greater freedom to pursue their interests.

Such an approach must include slimming down Burma’s military. The institution absorbs the bulk of government spending and is financed via central bank borrowing (which means printing money and stoking inflation). This is the source of Burma’s monetary and macro-economic instability. The high military budget has long come at the expense of spending on health and education. In a ratio that makes Burma unique in Southeast Asia, combined spending on the latter two is less than the military budget.

Beyond these skewed spending priorities, there are a number of other measures that could liberalize Burma’s economy, and in so doing yield meaningful and quick dividends to the broader populace. the most quickly realizable measures include:

•End once and for all government controls on farmers that tell them what, how and at what price to produce.

•Eliminate the costly and corruption-inducing system of export and import licensing.

•Remove the many socialist-era restrictions on banks. These include a ban on lending to farmers, on lending without collateral, on lending for a term of more than a year and on opening new branches without state approval. Meanwhile, government-mandated interest rates render much financial intermediation unprofitable.

•Simplify and reduce the procedures for registering a business. At present such procedures are amongst the world’s most arduous and time-consuming. It takes six to seven months to register a business and get it up and running in Burma.

•Make transparent the earnings of the state-owned enterprises that have exclusive control of Burma’s lucrative exports of natural gas. These earnings have been ill-appropriated and squandered, but they are of a magnitude to make a difference.

Until these and other reforms have been enacted, it is too early for unalloyed optimism. The country’s reform process is both incomplete and overly top-down. Burma in 2012 is full of promise, but redeeming that promise through practical and meaningful reform is now the job at hand.

Mr. Turnell is an associate professor in economics at Macquarie University in Sydney. A related editorial appears nearby.