BUSINESS IS BLOOMING

IN THE COOL, OPIUM-rich hills of Myanmar's northeast, the more things change the more they seem to stay the same. Back in the early 1970s, Lo Hsing-han was a celebrated figure in the Asian drug trade. From a fortified villa in the town of Lashio, the ethnic Chinese warlord ran a powerful government-backed militia force -- as well as convoys of opium from northern Shan state south to heroin refineries along the Thai border. Across the rugged swathe of the Golden Triangle and as far south as Bangkok, Lo Hsing-han was a name to reckon with.

Twenty-five years on, it still is. Since his early days as an opium-running militia boss, Lo has had his ups and downs. He joined the Shan rebel opposition and turned his guns against the government; was captured in Thailand and extradited to Myanmar; and then served time in a Yangon jail. But at 63 he's back again, no less influential a figure in the tangled skein of business-politics in northern Myanmar. If anything, he's far more powerful, infinitely more wealthy, and these days positively respectable politically. From a gracious home in Myanmar's capital Yangon, Lo runs one of Myanmar's largest business conglomerates with interests in real estate, manufacturing, export-import and construction that includes key infrastructure projects. Serving as an adviser on ethnic affairs to the military junta's chief, Lt.-Gen. Khin Nyunt, his political connections go straight to the top.

One recent afternoon back in that original villa on a hillside overlooking Lashio, an expansive Lo held forth on development plans for a 30,375-hectare stretch of hill country northwest of the town that is projected to involve new crops, roads and light industry. "Retired?" he growled in Mandarin thick with the accent of his native Kokang district. "I haven't retired! The older I get, the more there seems to do!"

Lo Hsing-han's zest for life and enthusiasm for "agricultural development" does nothing to reassure foreign anti-narcotics officials monitoring Myanmar's booming opium crop and the tons of high-quality heroin refined from it each year. In 1996 the northeastern poppy-belt produced a potential crop of 2,560 tons of opium sap -- compared with a mere 400 tons when Lo first entered the fray in 1968. And these days the heroin refineries are no longer only on the Thai border but conveniently dotted across the hills along the Chinese frontier in the heart of opium country. "Lo Hsing-han is not the kind of guy you're going to give the benefit of the doubt to," says a Yangon-based foreign envoy. "We're very suspicious of him."

Lo Hsing-han's past and present epitomize much of Myanmar's crisis of international legitimacy. Many of the shadowy figures long associated with the drug trade have insinuated themselves into the political and business fabric of the nation. Heroin production is close to an all-time high, while narco-profits flood the economy. Given the power and connections these people wield, Myanmar seems well on its way to becoming a narco-state -- a country where officialdom, if not directly involved in trafficking, is certainly providing drug lords tacit sanction. "Those guys were once beyond the reach of the central authorities," says an anti-narcotics official. "Now they are right downtown." A senior Thai drug-suppression official recently expressed what many have been saying in private -- that a nation with Myanmar's reputation for drug production should never have been allowed to join ASEAN.

HOW THE POPPIES FLOURISHED

In 1989, the Communist Party of Burma collapsed and set the stage for Myanmar's insurgents to forsake the hills for the boardrooms of Yangon. The government's toughest guerrilla foe since the late 1960s, the CPB splintered along ethnic lines -- Kokang Chinese, Wa and Shan -- around the country's rugged northeastern marches. Desperate to prevent a link-up between the insurgents and the Burman democratic opposition, the junta moved swiftly to neutralize the guerrillas.

Enter Lo Hsing-han, who helped junta chief Khin Nyunt reach a swift ceasefire with the CPB's Kokang Chinese-dominated Northern Bureau. Overnight, the Kokang Chinese territory, wedged against the China border, was transformed into Myanmar's Special Region No. 1. Not long after, the militarily strongest portion of the CPB, the tribal Wa, concluded a similar deal, establishing Special Region No. 2 in the Wa hills to the south. Linking up with another ethnic Wa force on the Thai border, they set up the 15,000-strong United Wa State Army. In eastern Shan State, meanwhile, a third CPB component became Special Region No. 4 headed by two ex-Red Guards who joined the CPB during China's Cultural Revolution.

The ceasefire deals soon were extended into agreements with a patchwork of 12 other ethnic insurgent groups scattered across the north and east. The agreements stipulated that the insurgents would halt their attacks on government positions. In exchange they were permitted to keep their weapons, administer their areas and move into business. It was an arrangement that suited both sides, particularly the ex-CPB guerrillas who promptly opened refineries producing No. 4 heroin. At the same time, they responded enthusiastically to the government's carte blanche invitation to participate in the country's newly liberalized but ramshackle economy.

In 1989, the junta dropped a policy of confiscating bank deposits and foreign currency of dubious origin. Instead it opted for a "whitening tax" on questionable repatriated funds levied first at 40% and since reduced to 25%. Equally significant, in early 1993, de facto legalization of the black-market exchange rate took place and narco-funds previously held in Bangkok, Singapore and Hong Kong flooded back into Myanmar. Construction in Yangon and Mandalay boomed, most obviously in lavish, international hotels -- most of which now stand virtually empty. "It's clear it all started with dirty money," says a diplomat. Equally clear is that "legitimate" businesses in downtown Yangon also provided ideal conduits for laundering repatriated narco-funds -- and continue to do so. A retired Myanmar banker reckons "at least 60% of private business in Yangon is drugs-related."

THE MONEY WASHING-MACHINE

In this lush new business environment, it was not long before the United Wa State Army had evolved into what the U.S. State Department has described as the world's largest armed narcotics-trafficking organization. Vital international connections were provided by three China-born heroin traders based along the Thai border -- Wei Hsueh-long and brothers Hsueh-kang and Hsueh-yin. In 1992, Wei Hsueh-long moved north to Wa army headquarters at Panghsang on the Chinese frontier and set up heroin refineries. More recently, the Wa have moved into large-scale amphetamine production, targeted mainly at the Thai market.

They also established in Yangon an impressively diversified line of businesses under a flagship company, the Myanmar Kyone Yeom Group. It has moved into construction, real estate, mining, tourism, transport, forestry products and finance -- though the profitability of many of its ventures remains murky. With branch offices around the globe, Kyone Yeom has also established significant reach.

Group chairman is a mustachioed insurgent colonel of Chinese ancestry, Kyaw Myint -- or Michael Hu Hwa -- whose management style owes more to jungle boot camp than Harvard Business School. Described as arrogant and given to explosive outbursts of temper, the colonel has attended board meetings flanked by bodyguards with a pistol strapped to his hip. Uninitiated visitors to company headquarters on Botahtaung Pagoda Rd. have been startled to be received by the chairman in full uniform in an office with assault rifles hanging from the walls.

Perhaps predictably, Kyaw Myint's transition to Yangon polite society has not been without setbacks. Efforts to secure a seat on the board of the Yangon International School where his son is enrolled were rebuffed by expatriate parents skeptical that their offspring's education would benefit from association with an organization that the U.S. State Department has put on its blacklist. Last year Kyaw Myint tried to railroad a job as chairman of Prime Commercial Bank, in which his company held a controlling stake. He showed up, pistol in hand, at the Central Bank to press his case. But his application was turned down, and, shortly after, authorities quietly closed Prime Commercial.

Ventures into the murky world of Myanmar's fledgling finance industry have met with better success. Since late 1995, Kyone Yeom has established a nationwide financial operation widely viewed as a thinly disguised money-laundering vehicle. The scheme involves a subsidiary, the National Races Cooperative Society, offering a startling 7% interest per month -- or 84% per annum -- on term deposits, a rate that undercuts Chinatown's informal banking network by a full 2 percentage points. Good going in a country where finance companies have no legal standing and where only banks are permitted to offer interest, currently capped at 16% a year. But then as one Kyone Yeom employee cheerfully pointed out: "They're the Wa! They can do anything they want."

PAINT, WHISKY AND HEROIN

The headquarters of Peace Myanmar Group are housed in a gracious, if dilapidated, colonial mansion on Kaba Aye Pagoda Rd., where neither rifles nor military uniforms are in view. The company holds the Mitsubishi Electric franchise, runs a paint factory, a liquor distillery producing Myanmar Rum and Myanmar Dry Gin, as well as Myanmar Peace drinking water and several energy drinks. Its latest play is a joint venture bottling whisky under the brand name of Highland Pride for informal export to China. Founded in 1994, Peace Myanmar is owned by Yang Maoliang, head of Kokang's ruling Yang clan.

In late 1992, a brief mini-war flared in Kokang; it was about neither liquor nor paint. Pitting the Yangs against the rival Peng clan, the fight was for control of the booming opium and heroin trade in an area where 23 refineries were set up between the 1989 ceasefire and 1991. A settlement brokered by junta chief Khin Nyunt and his adviser Lo Hsing-han restored an uneasy peace.

Several refineries run by the Yangs in Kokang continued to operate, producing between 1,800 and 2,400 kg of No. 4 heroin annually and providing working capital for the rapid expansion of Peace Myanmar. The same year the company was founded, one of the three Yang brothers, Yang Maoxian, was arrested in China and executed for smuggling massive heroin shipments into the People's Republic. The Yangs were unmoved: In April 1996, Guangzhou police intercepted 598.85 kg of No. 4 heroin -- the biggest bust in China's history. Investigations later revealed that Chinese traffickers drove the shipment from Longtan village in Kokang -- not far from Yang Maoliang's military headquarters at Xi-ou and a nearby heroin refinery. Before crossing back into China on April 7, 1996, say Chinese sources pointedly, the convoy was waved through a Burmese military checkpoint, no questions asked.

THE UNDISPUTED KING OF KOKANG

The real godfather of Kokang, however, is undoubtedly Lo Hsing-han. "Lo is hugely influential and powerful," says a diplomat. "The government thinks he made a major contribution to their efforts to reach ceasefires with the insurgents and in exchange they have provided a variety of economic concessions and opportunities to him." In June 1992, Lo founded the family's flagship company Asia World with his Western-educated son, Steven Law (a.k.a. Htun Myint Naing) acting as managing director. Since then, Asia World and its subsidiaries have expanded from an import-export and trading base, into bus transport, housing and hotel construction, a supermarket chain, manufacturing and major infrastructure projects, notably Yangon port development and upgrading the highway between Mandalay and Muse on the Chinese border.

One of the group's highest profile ventures is the Traders Hotel in downtown Yangon, in which the Los hold a 10% stake. Put up in expectation of a tourism and business boom that never happened, like all the other prestige inns built at the time, Traders is largely empty and running at a loss. The Lo family has an enduring connection with Singaporean business figures, and Steven Law is a frequent visitor to the island republic. But the welcome enjoyed by the Lo family in drugs-tough Singapore has not been extended by the international community as a whole. In 1996, Steven was added to the list of those refused visas to the U.S. for suspected involvement in narcotics trafficking.

Now older and mellower, Lo Senior has apparently stepped back from hands-on involvement in the drug trade. Nonetheless, he maintains close links to his old stomping grounds in northern Shan state. Armed Kokang loyalists are still based at Salween Village, a militia headquarters near Nampawng, south of Lashio, which was set up by Lo with government assistance on his 1980 release from jail. Today the area presents a telling reflection of the armed stand-off prevailing across the northeast. In Nampawng an army garrison maintains a government presence in -- but not beyond -- its own compound. The Shan village itself is controlled byÊtroops of the Shan State Army; while Salween Village, four km away, is guarded by Lo followers. In the Kutkai region north of Lashio another insurgent group, the Kachin Defense Army, rules its own enclave in one of the richest opium-producing areas in the north. The KDA is assuming a growing prominence in the narcotics trade. Armed with government-issued "special permits," KDA trucks run consignments of opium and refined heroin on behalf of Kokang Chinese producers to the border of India's Manipur state -- an export route now preferred to the increasingly risky Chinese border. Heroin refineries also operate in the Indian border area.

THE PRINCE OF DEATH'S PENSION PLAN

One of the most notorious names associated with Myanmar's drug trade is that of Khun Sa. After surrendering to the government in January 1996, he also gave up the rigors of the jungle for a comfortable villa in Yangon, where he re-invented himself as something more than a "liberation-fighter." Khun Sa is far from retired, and up in opium country his armed loyalists still operate in his original Loi Maw fiefdom, as well as on the Thai border. Khun Sa's 39-year-old second son, Sam Heung, now oversees operations near his father's old Thai border base.

Having arrived in Yangon with boxes of cash in various currencies, Khun Sa has not been short of start-up capital for new ventures. The man once dubbed the "Prince of Death" has bought up prime real estate in the capital's Sanchaung township, part of which is to be developed as an amusement park. But last year's eviction of locals from the site and the bulldozing of Kyun Taw cemetery amused no one and threatened to spill over into communal rioting.

Elsewhere, Khun Sa is involved in two casino projects, aimed at high-spending Thais -- one outside Tachilek overseen by Sam Heung, the other on an island opposite the Thai province of Ranong. Both are joint ventures with politically well-connected Thai businessmen.

If Khun Sa and Lo Hsing-han represent the old breed of Myanmar businessmen, then Kyaw Win symbolizes a new, increasingly prominent class of entrepreneurs, who are flourishing in the liberalized economy. An ethnic Chinese educated in Mandalay, Kyaw Win has since the mid-1980s been closely associated with Thai timber tycoon Choon Tangkakarn, head of Pathumthani Sawmills and a man with a dubious reputation among law enforcers. In 1989, Choon and Kyaw Win cooperated in a logging venture in a government-approved concession near the Thai border. At the time, the area was controlled by Khun Sa's army. "There is no way they could have operated there without making a deal with Khun Sa," says a narcotics agent. Also in on the logging deal was Maj.-Gen. Maung Aye, who is now Myanmar's army commander and whose association with Kyaw Win continues.

In 1990, Kyaw Win moved to Yangon, founding May Flower Trading Company in 1991 and Myanmar May Flower Bank in 1994. Two years ago, the bank was granted a foreign-exchange license, making it the only lender in Myanmar to earn such a privilege; Kyaw Win frankly attributes the honor to his influence in high places. Interestingly enough, since Khun Sa's surrender, the bank has enjoyed sudden and remarkable growth. Since near bankruptcy in late 1995, it has opened branches across the country. "May Flower was nothing just two years ago," says an intelligence source. "There has been incredible expansion in a short period of time."

The latest acquisition in Kyaw Win's burgeoning business empire is Yangon Airways, one of two private, domestic carriers operating in Myanmar. Last year, he approached the airline's Thai shareholder, Adul Chayopas, with an offer to buy the loss-plagued airline. "What could possibly prompt an investor to invest in an airline when the tourist campaign has flopped?" asks a bemused narcotics agent. But Kyaw Win has both invested and added some improbably remote destinations to the airline's network, including Lashio and Mergui -- neither of which are noted tourist attractions.

KICKING THE HABIT GETS HARDER

There is only one charitable interpretation of why narco-barons and their associates are quietly taking over Myanmar's private sector: The government is prepared to turn a blind eye to the process in the overriding interests of securing peace, integrating insurgent-held areas into the national mainstream and, at the same time, promoting economic development -- if necessary with dirty money. "The regime feels it has the upper hand on the traffickers and can force them to use their money for the good of the country," says a veteran Western narcotics official.

Those who are actually prepared to credit the junta with a long-term narcotics strategy say the government may hope that over time today's drug lords, attracted by the prospect of making real money legally, may mellow into legitimate tycoons. "Just as the government wants to deal with opium cultivators by showing them a different way to make a living, so it is trying to deal with leaders by showing them too there's a different way of making a living," says a diplomat in Yangon. "We'll let you go legit, if you stop your refining and trafficking."

Both Asian and Western diplomats point to the junta's more muscular approach to narcotics interdiction in the field over the past year. Military units have attacked narcotics convoys and refineries, while drug seizures have risen -- albeit from a conspicuously low base. In 1996 one ton of opium and 500 kg of heroin were seized, while in the first eight months of 1997 six tons of opium and one ton of heroin were seized. "It's still spotty and not uniformly effective, but there's increasing military pressure against the whole area," concedes one diplomat. For its part, the regime -- to widespread incredulity -- has vowed to enforce "opium-free zones" in border areas by 2000.

The notion that Yangon's corruption-riddled regime is able -- or willing -- to force a well-entrenched narco-mafia to become respectable businessmen is probably naive. The traffickers have evinced no interest in turning their backs on drugs in favor of legitimate business. In January 1991, Kokang warlord Peng Jia-sheng assured visiting U.N. officials of plans to end heroin production in Special Region No. 1 within one year and eradicate opium cultivation within seven. But the opium poppy still blooms in Kokang and heroin production in the region continued its relentless rise during the early 1990s.

Indeed, the narco-traffickers themselves undoubtedly view their situation in Myanmar today rather differently from the junta. "They're building for the future, entrenching themselves and making investments," says the intelligence source. "They feel they have the generals in their pockets." Just how many generals is open to debate. But they certainly have quite a few colonels and majors. At unit level, military complicity in both narcotics production and transport has been long-standing, a situation aggravated by the collapse of the kyat and dire conditions in the field.

There is no hard evidence that military involvement is orchestrated from Yangon as a matter of policy. However, the repatriation and laundering of narco-profits, as well as the impunity enjoyed by the traffickers has reached an institutionalized level. A diplomat, impatient over Yangon's conspicuous inaction over money-laundering, says: "There is no question that this government has a 'don't ask' policy over the source of funds or start-up capital used by these groups."

Moreover, a recent anti-corruption purge does not appear to have hurt the operations of major narco-traffickers. "What they're going after is the personal squeeze typified by [purged ex-ministers] Kyaw Ba and Tun Kyi," says the intelligence source. "The drug barons aren't hurting. It's business as usual." Significantly, on Dec. 11, an article in the state-run Yangon press announced the blacklisting of the Kyone Yeom Group for "submitting false accounts." But after meetings between Wa leaders and junta chief Khin Nyunt, the minister responsible was abruptly shunted to an inactive post.

Whether Myanmar can be said to constitute a "narco-state" remains for the most part a matter of semantics and opinion. Fact is, however, that narco-capitalists and their close associates are now involved in running ports, toll roads, airlines, banks and industries, often in joint ventures with the government. And the junta is increasingly dependent on narco-dollars to keep a floundering economy above water. The danger is that the wary but mutually beneficial relationship between Myanmar's military regime and drug barons becomes a habit that is ever more difficult to kick. For ultimately their survival may depend on it.

Anthony Davis is an Asiaweek Special Correspondent.

Bruce Hawke is a business journalist specializing in Myanmar.