In the dark, narrow aisles of Rangoon's Nyunt Pin Lay Plaza wholesale market, merchants await customers at small stalls laden with rice, onions, tumeric, chilli, lentils, dried fish, peanuts, sandalwood and other staples. But it is only at a small shop where a youth ladles out subsidised cooking oil that there are queues.
Under a state rationing system, the residents of Burma's capital are entitled to buy 400 grammes of imported oil for 150 kyat, about 20 cents. In the open market, the oil fetches 180 kyat. Since rations can be bought from several shops each day, re-selling oil has become a means of scraping together a living in the face of rising food prices and a lack of jobs. Such is the parlous condition of one of Asia's most fertile and resource-rich countries.
Burma's military junta is the regime that western governments and human rights groups love to hate. Since the generals' refusal to honour the results of 1990 elections in which the opposition National League for Democracy won a resounding victory, Burma has become a pariah, a position encouraged by Aung San Suu Kyi, the daughter of Burma's independence leader General Aung San and the junta's Nobel Prize-winning nemesis.
In an attempt to end the long isolation, the generals in October 2000 embarked on secret "confidence building" talks with Ms Suu Kyi, then, as now, confined to her family bungalow. Eighteen months later and with little progress to show, the junta is under intense pressure to make a significant gesture of reconciliation. In particular, its postponement of last month's scheduled visit by Razali Ismail, the United Nations mediator, has renewed doubts about whether there will be substantive dialogue with Ms Suu Kyi.
Refusal to move towards political transition would almost certainly result in fresh sanctions, including a US ban on all imports from Burma. But there is a dilemma here for the international community: further action against the regime would worsen the humanitarian crisis among the poverty-stricken Burmese.
In national Army Day celebrations in Rangoon last week, Senior General Than Shwe, the junta's top boss, gave little hint of which way the political winds were blowing. Instead, he confidently pronounced that his country of 50m people, strategically located between India and China, was already on its way to becoming a "modern, developed nation", with an economy growing recently by as much as 8.4 per cent a year.
That optimism is not noticeably shared in Rangoon, whose residents are besieged by rampant inflation, a fast depreciating currency, fuel shortages, power blackouts and tightening import restrictions - all the consequence of a decade of economic mismanagement, exacerbated by western sanctions.
A tiny elite that has grown wealthy by holding lucrative import licences excepted, Burma's economy is stagnating, constrained by tight bureaucratic controls, distortions from a dual exchange rate system, lack of investment and unpredictable state intervention. Agriculture suffers from fertiliser shortages and mandatory government procurement of part of the harvest at below market prices.
"They are running the economy like any army camp," says one Rangoon-based academic. "It's a command economy: 'You make the foreign exchange rate this. You build this bridge here.' The government can suddenly stop people from any private business."
Western investment has dried up, while many Asian companies that did invest, including Toyota and Ajinomoto, have gone. Consumer boycotts also hurt: 800 garment workers are losing their jobs as Triumph, a German lingerie maker, withdraws from Burma after a recent campaign.
Manufacturing today accounts for just 7 per cent of gross domestic product, slightly less than in it did 1988, according to a recent Asian Development Bank report. Money sent home by overseas workers is the most important source of scarce foreign exchange, though credit from friendly Asian countries, especially China, also helps. "The middle class is disappearing," says one local businessman. "A few are going very high, and most are getting poorer."
In 1988, after 26 years of central planning resulted in food shortages and mass social unrest, the military shifted towards a more market-oriented system, loosening some controls on agriculture and opening space for the private sector. But many loss-making state enterprises with nearly 280,000 workers survived.
Nor has the junta proved to be efficient tax collectors. According to the ADB, tax revenues in 1999-2000 were among the lowest in the world, just 2.3 per cent of gross domestic product, down from 3.7 per cent in the mid-1990s.
Instead, the regime has financed huge budget deficits by printing money. The result has been surging import demand and inflation that has averaged about 27 per cent annually for much of last six years.
The economic situation has deteriorated further in the past year, due to the depletion of the A'pyauk gas field, which supplies energy for Rangoon and southern Burma. Despite early warnings of an imminent drop in production, the regime rejected as too costly a $750m plan to build a pipeline to tap huge offshore gas deposits. So now, with daily production at A'pyauk down to just 40m cubic feet from 130m cubic feet a few years ago, the junta has been forced to import large quantities of diesel oil at $30 to $40 a barrel.
The result has been intense pressure on the currency. Officially pegged at a rate of about 6 to the dollar since 1977, it has plunged in the black market to about 820 to the dollar, down from 425 in January 2001. Inflation accelerated to 50 per cent last year, with prices for some key food items surging as much as 150 per cent, according to Rangoon-based diplomats who track prices.
With diesel fuel imports still only a fraction of what is needed, Rangoon residents endure blackouts of between eight and 12 hours a day. Many gas-based industries, including fertiliser plants, cement plants, refineries and steel mills have had to curtail production.
The regime has responded by getting tough. When the kyat fell last year, police arrested moneychangers. To conserve scarce foreign currency, the government in January banned deferred payments for imports, which businesspeople say prevented the arrival of some capital goods. It has also suspended the licences for foreign trading companies, which is likely to hamper exports and exacerbate shortages of essential imported items.
But the generals show little appetite for the kind of radical change of direction needed to get the economy back on track, even when suggestions come from inside the fold. In 2000, the deputy economics minister was sacked after warning publicly of worsening problems and criticising the falsification of economic data.
The crumbling of Burma's economy could yet force the regime to accelerate political change as the outside world demands. The main obstacle, diplomats say, is that the military benefits from the current system, being one of the few groups with access to foreign currency at the official rate.
Any reluctance to reform will only strengthen the determination of foreign governments to continue ostracising Burma. But, as a report from the International Crisis Group argues this week, Burma's political crisis may soon be overshadowed by a looming humanitarian crisis.
"The human costs of social deprivation in [Burma] are simply too large to be ignored until some indefinite democratic future, which could be years, or even decades, away," the international policy group concludes. Foreign governments, it argues, should now re-engage with Burma to bring relief to the poor and vulnerable. A settled policy towards Burma, based on black and white certainties, may soon come in for renewed scrutiny.