Myanmar has a long and difficult road ahead to achieve political stability, democracy and economic development. Hope rests on Aung San Suu Kyi to pull the nation together and lead the reforms after the 2015 election. Are Myanmar’s, and the world’s, expectations too high?

I went to Myanmar recently as part of the ‘young global leaders’ club organised by the World Economic Forum. I saw a country changing fast, full of anticipation but with an uncertain destiny. Yangon, the country’s old capital and commercial hub, illustrates Myanmar’s economic challenges, while Naypyidaw, the eerie new administrative capital, shows its political challenges.

Ramshackle Yangon (formerly Rangoon) almost comes as a shock, so used are we to ultra-modern and gleaming Asian cities. There are no multi-storey department stores, branded coffee shops or air-conditioned office towers. It feels weird to walk through crowded alleys where not a single person is on a mobile phone. Even though the price of a SIM card has come down from $1,000 a couple of years ago to around $60 today, mobile phone penetration in Myanmar is still only 4 per cent (in Thailand: 117 per cent). Internet penetration is even lower.

Myanmar is one of the world’s poorest countries. A quarter of the people live on less than $1.25 a day (though all statistics in Myanmar should be treated with great caution). The McKinsey Global Institute has calculated that even under a best-case scenario in which annual GDP growth doubles, GDP per head (on a PPP basis) would reach only $5,000 in 2030 – roughly where Morocco and Mongolia are today. While other ASEAN economies are thriving on the production of cars, electronics and consumer goods, almost half of Myanmar’s output comes from agriculture. The biggest export items are jade, logs and natural gas.

Training a skilled workforce will take decades: children stay in school for only four years on average, while the higher education system – 164 universities overseen by 13 ministries – is designed to prevent student revolts rather than produce good doctors and engineers. Frequent power-cuts make manufacturing difficult. Logistics are a struggle in the absence of modern road and rail networks. And only North Korea has a less developed banking sector.

But Myanmar offers plenty of opportunities, too. Labour is cheaper than in other Asian countries so Myanmar will attract the garment trade and other low value-added industries. McKinsey thinks that Myanmar could ‘leapfrog’ several stages of development by using digital technology to upgrade education, health-care and finance. Its strategic location between China, India and South East Asia could be attractive to investors. And the country has plenty of natural resources, including vast swathes of fertile land.

The West has lifted almost all economic sanctions. So far, however, potential foreign investors remain cautious: foreign direct investment was a paltry $1.4 billion in the year to April 2013 – though this was a fivefold increase on the previous year, when sanctions were still in force. If economic reforms reached a critical mass, that sum could quickly multiply.

That is a big ‘if’. A visit to Naypyidaw, in the centre of the country, suggests that the political system may not yet be able to sustain ambitious economic reforms. Naypyidaw is military dictatorship set in concrete: a vast expanse of emptiness (the city is seven times the size of Singapore), dotted with enormous official buildings (the parliament is bigger than the Pentagon) and connected by eight-lane highways (24 lanes in front of the presidential palace). These are completely empty – devoid of cars, mopeds or people. Although the government has forced civil servants to relocate and claims (implausibly) a population of 1 million, this place resembles a ghost town.

Other than official palaces and pastel-coloured condominiums for civil servants, Naypyidaw offers little else: a big new airport with few staff and even fewer passengers, a conference centre donated by China, a couple of American-style hypermarkets surrounded by deserted parking lots, a replica of Yangon’s golden Shwedagon pagoda and a zoo with penguins. The city also has a surprisingly large number of hotels, with lots more being built – presumably in preparation for the South East Asian games that Myanmar is hosting later this year and its forthcoming ASEAN chairmanship. But who will stay in them once these events are over?

Some say that the astrologer of Than Shwe, the former military dictator, told him to build the new capital in the middle of nowhere; others that the junta simply wanted an inland capital to avoid an American invasion or bombing (in Naypyidaw the ministerial buildings are several miles apart). Construction began in 2001, in secret. Five years later, the Burmese learnt about the new capital when it appeared on daily weather reports. Naypyidaw makes sure that Myanmar’s people are far removed from their rulers.

The big hope now is that the reform ambitions of President Thein Sein have more substance than the city in which he reigns. Over the last three years, the speed of Myanmar’s democratic opening has been breath-taking: Aung San Suu Kyi has been released from house arrest and her National League for Democracy (NLD) allowed to run in last year’s by-elections; most political prisoners have been set free; press censorship has been lifted; and the blacklist of foreigners and dissidents barred from entering the country has been cut drastically.

However, Myanmar still lacks many of the necessary ingredients for a successful reform programme: policy is made in a haphazard fashion and there is no medium-term roadmap; state administration is weak since civil servants have traditionally been appointed for their loyalty rather than their skills; and levels of corruption are on par with Afghanistan and Sudan.

Investors will stay wary as long as the outcome of the reform process remains uncertain. The army and its cronies, who used to benefit handsomely from Myanmar’s monopolistic and over-regulated economic system, appear resigned to the reforms, but may start pushing back. Perhaps the biggest risks stem from the country’s long-standing ethnic and religious conflicts. Around 60 per cent of the population are Buddhist Burman (or Bamar) people, while the rest are from various ethnic and religious minorities fighting for equality and economic opportunity. The government has now concluded ceasefires with all the armed groups, most recently in May with the Kachin Independence Army in the far north of the country. These conflicts were the cause of and justification for military rule over 60 years. Myanmar will not achieve liberal democracy unless it deals with them in a sustainable way.

The International Crisis Group warns that the ceasefires will fail without first, a political settlement in the shape of a constitution that gives significant autonomy and rights to the minorities; second, a workable plan for integrating the often war-ravaged minority areas (home to 70 per cent of the country’s natural resources) into Myanmar’s economy; and third, an effort to root out the cronyism and crime on which many of the country’s military have flourished.

Then there is the separate issue of the Rohingyas – an oppressed Muslim minority whose origins and right to be in Burma are disputed, unlike those of other ethnic groups. The growing tensions surrounding the Rohingyas have fostered some nasty Buddhist nationalism and violence against Muslims in Myanmar. 

Although some journalists and NGOs are speaking out about the need for a comprehensive settlement of the minorities problem, most people react with palpable unease when asked about it. Aung San Suu Kyi hesitated before condemning the violence against the Rohingyas, and when she did, she remained vague and cautious. Her reticence has upset some of her supporters in the West. One person who knows her well says that she is the only person who can unify her nation but that she needs to pick her fights carefully: if she pushes too hard on the minority issue now, her chances of becoming president in 2015 might diminish. Another of Aung San Suu Kyi’s contacts welcomes her transition from “icon to politician”, predicting that as president she would be more courageous on the ethnic minority conflicts than the present government.

At the World Economic Forum in Naypyidaw in early June, Aung San Suu Kyi declared that she would like to run for president in 2015. But this cannot happen unless the government changes the constitution, which prohibits people with foreign spouses and children from running for the office. Aung San Suu Kyi is the widow of the British academic Michael Aris, and her two children have British citizenship. If she is allowed to run and wins, she is almost bound to disappoint, given how enormous Myanmar’s challenges are. “There is perhaps too much hope”, she said in a briefing recently.

Given Aung San Suu Kyi’s iconic image and the sincerity with which Thein Sein seems to be pursuing reform, the West stands ready to help Myanmar with money, advice and trade. The EU has responded sensibly to Myanmar’s opening. It has lifted sanctions in a two-stage process, reinstating the so-called GSP preferences (free market access to goods from poor countries) and widening its aid effort beyond humanitarian programmes. The EU’s priorities – peace, democracy and development – seem right, and probably in that order too. The challenge now is to find ways of turning ambition into reality, including through co-ordination with the US on the one hand and China on the other.

Myanmar is so backward that even ‘capacity building’ – strengthening local administrations and the infrastructure needed to absorb aid programmes – will be difficult. At the same time, there is so much international goodwill that a surge of aid seems inevitable.  Among several things that can be done, the EU should help to channel aid towards capacity building. Despite all the difficulties and inevitable disappointments, this is a time and a place where anything is possible.

Katinka Barysch was until recently deputy director of the Centre for European Reform