emerging asia swot report

7/27/2019 Emerging Asia SWOT Report

1/90

Emerging Asia

S.W.O.T. ReportAugust 2011

POLITICAL & ECONOMIC RISK CONSULTANCY LTD.

Comparing risks and opportunities in:ChinaIndia

IndonesiaMalaysia

PhilippinesThailandVietnam

0

2

4

6

8

10Economic dynamics

Infrastructure

Ease of doing business

Domestic political risksSocial instability risks

External political risks

Systemic risks

ChinaIndia

IndonesiaMalaysia

PhilippinesThailandVietnam


2/90


3/90

Contents I. SUMMARY ........................................................................................................................................ 1

II. ASSESSMENT OF BUSINESS ENVIRONMENT ................................................................................... 3

A. ECONOMICDYNAMICS........................................................................................................................... 3 1. Growth prospects data .............................................................................................................. 4 2. Market size prospects data ....................................................................................................... 5 3. Wealth ....................................................................................................................................... 6 4. Inflation ..................................................................................................................................... 6 5. Public debt ................................................................................................................................ 7 6. Balance of payments ................................................................................................................. 8 7. Foreign debt .............................................................................................................................. 9 8. Foreign direct investment inflow dynamism........................................................................... 10 9. Export dynamism .................................................................................................................... 11 10. Import dynamism ................................................................................................................... 13

B. HUMAN AND PHYSICALINFRASTRUCTURE SUPPORT.................................................................................... 16 1. Physical infrastructure/utilities for domestic market ............................................................. 17 2. International infrastructure links (airports, communications, etc.) ........................................ 18 3. Pollution .................................................................................................................................. 19 4. Technical labor pool depth ...................................................................................................... 20 5. Depth of higher education ...................................................................................................... 21 6. English speaking / comprehension proficiency of labor force ................................................ 22 7. Health facilities ........................................................................................................................ 23 8. Natural disaster disruption potential ...................................................................................... 24

C. EASE OF DOING BUSINESS...................................................................................................................... 27

D. DOMESTIC POLITICAL RISKS.................................................................................................................... 32 1. The risk of a change of government and key leaders in coming two years ............................ 33 2. The risk of a disruptive political transition .............................................................................. 35 3. Quality of the governments policies ...................................................................................... 37 4. Ineffectiveness of the government in implementing its policies ............................................ 38

E. SOCIAL INSTABILITY RISKS...................................................................................................................... 40 1. Labor activism ......................................................................................................................... 40 2. Social activism / unrest ........................................................................................................... 43 3. Terrorism and personal security risks ..................................................................................... 45 4. Extent that regionalism is a problem ...................................................................................... 47

F. EXTERNAL POLITICAL RISKS

.................................................................................................................... 49 1. Direct military threats ............................................................................................................. 49 2. Vulnerability to social instability in other countries ............................................................... 52 3. Vulnerability to policy changes by governments in other countries ....................................... 54

G. SYSTEMIC RISKS................................................................................................................................... 57 1. Extent that corruption is a problem ........................................................................................ 57 2. Nationalism and other cultural risks ....................................................................................... 61 3. Institutional weaknesses ......................................................................................................... 63


4/90

4. Intellectual property rights risks ............................................................................................. 65

III. S.W.O.T. REVIEW ....................................................................................................................... 68

A. CHINA............................................................................................................................................... 68

B. INDIA................................................................................................................................................ 70

C. INDONESIA......................................................................................................................................... 72

D. MALAYSIA.......................................................................................................................................... 74

E. PHILIPPINES........................................................................................................................................ 76

F. THAILAND.......................................................................................................................................... 78

G. VIETNAM........................................................................................................................................... 80

APPENDIX 1: FORMULA FOR CALCULATING THE BUSINESS ENVIRONMENT INDEX ................................ 82

APPENDIX 2: ALL GRADES USED TO ASSESS THE BUSINESS ENVIRONMENT ........................................... 83

APPENDIX 3. ABOUT POLITICAL & ECONOMIC RISK CONSULTANCY, LTD. ............................................. 85


5/90

A S.W.O.T. Study of Asias Emerging Countries August 2011

Political & Economic Risk Consultancy, Ltd. Page 1

I. SUMMARY

Overall Business Environment Scores

1. China has the best overall score of the emerging Asian economies covered by this report, while Indonesia has

the worst overall score. However, as the SWOT review in Section III indicates, each country has its own

strengths and weaknesses and there are plenty of opportunities in the higher risk countries just as there are

numerous threats that investors need to be careful of in the lower risk countries. In fact, while global

investors are likely to grow increasingly nervous about China risks in the coming year, they are likely to grow

more comfortable with Indonesian risks due to the reliability of the domestic consumer market and the

relatively predictable political environment.

2. China stands alone as having the most interesting economic prospects of the seven emerging markets covered

by this report, while the Philippines and Vietnam will have to work the hardest to attract foreign investor

attention.

3. India is the most difficult country in which to do business, followed by Indonesia and the Philippines, while

Thailand and Malaysia are to two countries where it is easiest for foreign investors to do business. However,

0

1

2

3

4

5

6

7

8

9

10

China India Indonesia Malaysia Philippines Thailand Vietnam

Economic dynamics InfrastructureEase of doing business Domestic political risksSocial instability risks External political risksSystemic risks

4.58

6.11 6.18

4.67

5.97

5.165.80

Grades are scaled from zero to 10, with zero being the best possible and 10 the worst.


6/90



domestic political risks are highest in Thailand and Malaysia too, while India s democratic system might be

messy but it is also stable.

4. Companies that consider intellectual property risks and other threats posed by China to be unacceptably high

are likely to focus more on Malaysia and Thailand, both of which have better reputations for being more

straight forward in their approach to foreign investment and trade than the other emerging economies

covered in this report. They also offer relatively good human and physical infrastructure support.

5. Social instability risks are highest in India and Indonesia. They are lowest in Vietnam and China, although

social instability has been increasing in both these countries lately.

6. External political risks are highest for India due mainly to security threats posed by Pakistan, while China is in

second spot in terms of external risks, as it is encountering more friction with many of its neighbors, it is more

exposed to instability in developing countries elsewhere due to its growing foreign investments in oil and

other commodities, and trading relations with the US and the EU are increasingly problematic.

7. All of the countries covered by this report have some major systemic problems, ranging from corruption to

financial sector inadequacies, and other institutional weaknesses. This is one of the main reasons why they

are still emerging market economies and have not yet reached developed status. Although systemic

deficiencies are some of the biggest problems foreign investors and traders will face in doing business with

these countries in the near term, in the medium term some of the biggest opportunities in all the countries

covered here will involve providing solutions to the systemic problems namely, environment, humanresource, and physical infrastructure deficiencies. Industry-wise, this implies some of the biggest growth

opportunities will be in education, health care, environmental clean-up, and the provision of infrastructure

that can help countries and major cities overcome gridlock and other bottlenecks that interfere with the

movement of people and goods.

8. Corruption and bureaucratic inefficiency will remain prominent problems in all of emerging Asia, but they are

not insurmountable obstacles to economic development. The bigger threat to development comes from

entrenched local groups (in both the public and state-owned sectors) who fear competition and favor the

status quo. Such groups have the capability to block necessary reforms from taking place. Corruption in India

and Malaysia, although not worst in absolute terms than in many of the other countries covered by this

report, has the potential to be most destabilizing socially and politically in the coming year. Popular

backlashes against the problem of graft are building in both these countries.


7/90



II. ASSESSMENT OF BUSINESS ENVIRONMENT

A. ECONOMIC DYNAMICS

Below we give grades on a zero to 10 scale assessing various aspects of the countries we surveyed interms of economic strengths and weaknesses (S-W). A grade of 10 is the worst grade possible, indicating a seriousinadequacy or drawback. A grade of zero is the best grade possible, indicating a very positive feature or aspect of the country.

Variables and Grades Assessing Economic Dynamics

Variables China India Indonesia Malaysia Philippines Thailand Vietnam

a. Growth prospects 1.00 3.00 5.00 8.00 7.00 8.00 5.00

b. Market size 0.00 2.00 4.00 8.50 6.50 6.00 7.00

c. Wealth 5.00 9.00 7.00 0.00 8.00 4.00 9.00

d. Inflation 3.00 6.00 6.00 2.00 4.00 3.00 8.00

e. Public debt 2.00 8.00 4.00 8.00 8.00 7.00 8.00

f. Balance of payments 3.00 7.00 5.00 1.00 3.00 3.00 8.00

g. Foreign debt 1.00 3.00 5.00 6.00 6.00 5.00 6.00h. Foreign investment success 4.00 7.00 6.50 3.50 9.00 3.50 5.00

i. Export dynamism 2.33 6.00 6.33 4.00 8.33 4.67 5.67

j. Import dynamism 2.67 4.67 5.33 4.33 8.33 4.67 5.33

Economic dynamism score 2.40 5.57 5.42 4.53 6.82 4.88 6.70

Ranking Emerging Asian Countries byEconomic Dynamics

2.40

5.57 5.42

4.53

6.82

4.88

6.70

0

1

2

3

4

5

6

7

8

9

10


Grades are scaled from zero to 10, with one being the best possible and 10 the worst.


8/90



Data and Definitions Used to Calculate Economic Grades

1. Growth prospects data

Real GDP Growth Rate (Percent change)

Country 2009 2010 2011 2012 2013 2014 2015 Average

China 9.20 10.30 9.59 9.52 9.48 9.52 9.46 9.58

India 6.76 10.37 8.24 7.82 8.17 8.14 8.12 8.23

Indonesia 4.58 6.11 6.20 6.50 6.70 7.00 7.00 6.30

Malaysia -1.71 7.16 5.50 5.20 5.10 5.10 5.00 4.48

Philippines 1.06 7.33 4.95 4.97 5.00 5.00 5.00 4.76

Thailand -2.33 7.80 3.96 4.53 4.70 4.75 4.85 4.04

Vietnam 5.32 6.78 6.26 6.75 7.23 7.44 7.50 6.75

Source: International Monetary Fund, World Economic Outlook Database, April 2011


Grade for growth prospects 1.00 3.00 5.00 8.00 7.00 8.00 5.00

Definition: The average annual rate of real GDP growth between 2009 and 2015 as estimated by the IMF in its

World Economic Outlook Database in April 2011.

Grading scale:

Grade Real GDP growth rate average

0 >10

1


9/90



Size of GDP

5878.26

1537.97

706.74237.96 188.72 318.85

103.570

1000

2000

3000

4000

5000

6000

7000


GDP in 2010 -- US$ billion

2. Market size prospects data


GDP (US$ billion in 2010 ) 5,878.26 1,537.97 706.74 237.96 188.72 318.85 103.57

Population (millions in 2010) 1,341.41 1,215.94 234.38 28.25 94.01 63.88 88.26



GDP -- US$ billion 0.00 4.00 5.00 7.00 8.00 6.00 9.00Population -- 2010 0.00 0.00 3.00 10.00 5.00 6.00 5.00Grade for market size 0.00 2.00 4.00 8.50 6.50 6.00 7.00

Definition: The simple average of two variables: the US dollar size of the GDP, in current terms in 2010, plus thesize of the population in 2010. In both cases we used hard data published in the IMF in its World EconomicOutlook Database, April 2011.

Grading scale:

GradeGDP size in US$billion in 2010

Population inmillions in 2010

0 >5000 >1000

1


10/90



Wealth

4.382

1.265

3.015

8.423

2.007

4.992

1.174

0

1

2

3

4

5

6

7

8

9


Per capita GDP in US$ thousands, 2010

3. Wealth


Per capita GDP (US$

thousand in 2010 ) 4.382 1.265 3.015 8.423 2.007 4.992 1.174



Grade for wealth 5.00 9.00 7.00 0.00 8.00 4.00 9.00

Definition: The US dollar size of the GDP in 2010 divided by the size of the population for that same year.

Grading scale:

Grade Per capita GDP (thousands of US$)

0 >8000

1


11/90




Grade for inflation 3.00 6.00 6.00 2.00 4.00 3.00 8.00

Definition: The average annual rate of consumer price inflation for the previous year, the current year and the

forecast rate for the coming year.

Grading scale:

Grade Consumer price inflation

0


12/90



Grading scale:

Grade Public debt to GDP ratio

0


13/90



Grading scale:

Grade Current account BoP/GDP

0 >15

1 >10 - 15

2 >6 - 10

3 >4 - 6

4 >2 - 4

5 >0 - 2

6 >-2 - 0

7 >-4 - -2

8 >-6 - -4

9 -10 - -6

10


14/90



8. Foreign direct investment inflow dynamism


Stock of FDI (US$ billion through

December 2010 ) 574.3 191.1 81.2 77.4 24.5 117.9 78.0

Per capita FDI through 2010 (US$) 428.1 157.2 346.5 2741.1 260.6 1845.7 883.2

Source: CIA World Factbook.


Stock of FDI 0.00 4.00 5.00 5.00 9.00 4.00 5.00

Per capita FDI 7.00 10.00 8.00 1.00 9.00 3.00 5.00

Grade for foreign investment dynamism 3.50 7.00 6.50 3.00 9.00 3.50 5.00

Definition: The simple average of two variables: the US dollar size of total stock of foreign direct investment

inflow through December 2010 plus the per capita size of stock of FDI inflow for that same period. Our logic forcombining these two variables is that the absolute size of the FDI inflow is an indication of the focus of interest on

the part of foreign investors while the per capita FDI size is an indication of both the openness and wealth of the

country to foreign investment. We chose the stock of foreign investment rather than FDI inflow for a single year

because the longer term is a better indication of the consistency of government policies and investor interest.

Grading scale:

GradeStock of FDI inflow

(US$ billion through Dec. 2010 ) Per capita stock of FDI

through Dec. 2010 (US$)

0 >500 >3000

1


15/90



9. Export dynamism


Merchandise exports (US$ bil.in 2010 ) 1577.93 211.95 157.82 207.36 51.50 195.30 71.63

Per capita exports in 2010 (US$) 1176.3 174.3 673.4 7339.9 547.8 3057.4 811.6

Average annual growth rate of exports between 2001 and 2010 21.3% 17.4% 10.7% 8.6% 4.1% 11.7% 18.0%

Sources: Asian Development Bank, Key Indicators for Asia and the Pacific. Figures for 2010 are national estimates.


Grade for merchandise exports in 2010 1.00 5.00 6.00 5.00 9.00 6.00 9.00

Grade for per capita exports in 2010 5.00 10.00 7.00 0.00 7.00 2.00 6.00

Grade for average annual growth rate of exports between 2001 and 2010 1.00 3.00 6.00 7.00 9.00 6.00 2.00

Average 2.33 6.00 6.33 4.00 8.33 4.67 5.67

Definition: The simple average of three variables: the US dollar size of merchandise exports in 2010, the per capita

size of exports for that same year, and the average annual growth of merchandise exports for the decade from

2001 through 2010.

Grading scale:

Grade Exports (US$ billion in 2010 ) Per capita exports in 2010

(US$)Average annual growth rate of exports between 2001

and 2010

0 >2000 >5000 >30

1


16/90



7


17/90



10. Import dynamism


Merchandise imports (US$ bil.in 2010 ) 1006.00 268.40 96.86 127.05 43.00 144.74 68.80

Per capita imports in 2010 (US$) 753.70 223.84 418.30 4576.40 466.24 2160.85 788.89

Average annual growth rate of imports between 2001 and2010

20.7% 8.4% 4.2% 12.0% 20.0% 18.0% 20.4%

Sources: Asian Development Bank, Key Indicators for Asia and the Pacific. Figures for 2010 are national estimates.


Grade for merchandise imports size in2010 2.00 4.00 7.00 6.00 9.00 6.00 8.00

Grade for per capita imports in 2010 5.00 9.00 7.00 0.00 7.00 3.00 6.00

Grade for average annual growth rateof imports between 2001 and 2010 1.00 1.00 2.00 7.00 9.00 5.00 2.00

Average 2.67 4.67 5.33 4.33 8.33 4.67 5.33

Definition: The simple average of three variables: the US dollar size of merchandise imports in 2010, the percapita size of imports for that same year, and the average annual growth of merchandise imports for the decade

from 2001 through 2010.

Export Growth Dynamism

21.3%

17.4%

10.7%8.6%

4.1%

11.7%

18.0%

0%

5%

10%

15%

20%

25%


Average annual export growth between 2001 and 2010


18/90



Grading scale:

Grade Imports (US$ billion in 2010 ) Per capita imports in 2010

(US$)Average annual growth rate of imports

between 2001 and 2010

0 >2000 >5000 >301


19/90



Per Capita Imports in 2010

1039.82

262.67578.81

6074.83

584.31

2727.82

951.77

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


Per capita imports in 2010 in US dollars

Import Growth Dynamism

20.9% 21.3%

18.0%

9.4%

5.8%

12.3%

19.3%

0%

5%

10%

15%

20%

25%


Average annual import growth between 2001 and 2010


20/90



B. HUMAN AND PHYSICAL INFRASTRUCTURE SUPPORT

We got the grades for this section by interviewing expatriate managers in the countries. We asked each

manager to use his/her subjective opinion to grade the specific infrastructure / backdrop feature on a one to 10

scale, with one being the best grade possible and 10 the worst. We limited the survey audience to expatriates

because they have foreign reference points against which to benchmark local conditions, whereas many local

managers lack such reference points. The survey audience consisted of at least 100 people in each of the countries

surveyed. Respondents provided scores only for the country in which they are residing and working, not for other

countries in the region.

Following the table of grades is a brief explanation explaining the specific infrastructure and backdrop

conditions. These are the views of PERCs senior analysts shaped by the ir personal experiences and the comments

of the survey respondents.

Variables and Grades Assessing Human and Physical Infrastructure Support

Variables China India Indonesia Malaysia Philippines Thailand Vietnam

a. Physical infrastructure/utilities fordomestic market 5.00 10.00 8.00 4.00 9.00 3.00 9.00

b. International infrastructure links(ports, airports, communications,

3.00 9.00 8.00 4.00 8.00 3.00 9.00

Overall Scores for Human and PhysicalInfrastructure Support

4.505.13

7.88

3.50

6.38

4.63

7.38

0

12

3

4

5

6

7

8

9

10




21/90



etc.)

c. Pollution 9.00 9.00 7.00 5.00 6.00 4.00 6.00

d. Technical labor pool depth 2.00 1.00 8.00 3.00 5.00 7.00 7.00

e. Depth of higher education 1.00 1.00 9.00 4.00 5.00 6.00 7.00f. English speaking / comprehension

proficiency 4.00 1.00 7.00 2.00 2.00 8.00 6.00

g. Health facilities 5.00 3.00 8.00 3.00 7.00 1.00 8.00

h. Natural disaster disruption potential 7.00 7.00 8.00 3.00 9.00 5.00 7.00

Infrastructure and backdrop score 4.50 5.13 7.88 3.50 6.38 4.63 7.38

Grades range from zero to 10, with zero being the best possible and 10 the worst.

Explanation for Human and Physical Infrastructure Support Grades

1. Physical infrastructure/utilities for domestic market

Country Grade Rationale

China 5.00 China is a big country and there are still parts, particularly inland, where theinfrastructure is inadequate. If we were rating only the major coastal cities,Chinas score would be much better, but these more developed regions still havetrouble interfacing with inland regions, where the quality of infrastructure isworse. The government has been aggressively investing in roads, rail facilities,power, domestic communications and other facilities and conditions today aremuch, much better than they were just a decade ago. The biggest problem inthe near term will relate to traffic on roads and rail facilities. They areincreasingly clogged due to heavy freight usage (particularly moving coal). Safety

issues are also a concern.India 10.00 India has not invested nearly as much in its domestic infrastructure as China has.

Consequently, it is much more difficult moving goods around the country. Powerblackouts are a serious problem. Water is in short supply in many areas. Thepoor quality of Indias physical infrastructure is one of the countrys biggestproblems.

Indonesia 8.00 One of President Susilos biggest failures to date has been his inability tostimulate investment in physical infrastructure despite his labeling this a toppriority. Two big signposts to watch in the immediate future are newinvestments in the power sector and the success or failure of a mass transitrailway project in Jakarta.

Malaysia 4.00 Malaysia has relatively good infrastructure. There are some periodic problemswith power and water, but overall conditions are quite good and theinfrastructure for moving goods around the country is adequate.

Philippines 9.00 The Philippines has not invested nearly as much as it should in maintainingexisting physical infrastructure and building new infrastructure. It is difficultmoving goods around the country and companies need to invest in back-up


22/90



systems to make up for public infrastructure deficiencies.

Thailand 3.00 Until the recent political turmoil, Thailand had been doing a good job of improving its physical infrastructure. The political turmoil has slowed newinfrastructure investment and is diverting resources away from what should bepriority areas to political powerful areas like the military, which could meanbigger problems further down, but the quality of the country s current domesticinfrastructure is still good relative to most of the other emerging countriescovered here.

Vietnam 9.00 Vietnam has not invested nearly enough in physical infrastructure. There aredeficiencies and delays in the development of interprovincial roads, bridges,intra-city public transportation and power projects. The transport infrastructuresystem in Vietnam had fallen far behind economic growth and is an impedimentto those who want to expand their businesses in the nation. Rail service isshoddy, four-lane highways are an exception rather than a rule, and airports areonly just beginning to be modernized.

2. International infrastructure links (airports, communications, etc.)


China 3.00 China would score the best of all emerging countries rated here if our gradewere confined to the quality of international infrastructure links in major coastalcities and national development zones like Pudong and Tianjin, but infrastructurein second- and third-tier cities is not as developed, which is one of the mainreasons why the major coastal cities have such a big advantage over more inlandcities, where it is more difficult to get goods into and out of the country.

India 9.00 Civil aviation and ports are crying out for modernization. India would deserve a10 were it not for the countrys international telecommunications links, whichare good enough to have enabled the country to become the worlds premierbackroom processing center. International airports and the quality of international air services are improving as the government allows the privatesector to play a larger role.

Indonesia 8.00 Indonesia has a few ports and airports such as near Jakarta and in Batam that arenot bad by international standards, but efficiency even at these ports of entry ispoor. The physical quality of ports and airports in many other parts of thesprawling archipelago is very poor.

Malaysia 4.00 Malaysias ports and airport links, as well as its inter national communicationslinks, are quite good. If anything, they are under-utilized relative to theircapacity.

Philippines 8.00 The Philippines ports and airports are notoriously bad. In addition to poormaintenance and physical standards, bureaucratic inefficiency and corruptionare other problems. As in India, telecommunications infrastructure is betterthan the infrastructure required to ship goods into and out of the country, so thePhilippines has been able to develop backroom processing industries.


23/90


24/90



Part of the problem is bureaucratic, but a major part has to do with a lack of financing. Only 7% of the countrys total population is connected to sewersystems and a minority of households has acceptable effluent from on-sitesanitation facilities.

Thailand 4.00 Tourism is such an important industry in Thailand that there has been moreattention to protecting the environment than in many other Asian countries.There is still a big problem with water and air pollution in Bangkok, but manyother parts of the country are in much better shape. Over-development is agrowing problem in areas catering to foreign tourists, straining the ability of these areas to provide enough clean water and deal with waste.

Vietnam 6.00 Pollution is likely to become a bigger issue in Vietna m in view of the countrysrapid rate of industrialization and the lack of official attention to managingenvironmental degradation. However, the country is less developed industriallythan most of the others covered here and the problem of pollution has thereforenot grown as large. It is the trend that is worrying. A 2008 environmental report

by the World Bank ranked Hanoi and Ho Chi Minh City as the worst in Vietnamfor pollution, while an environmental study by 400 international scientists in thesame year said Hanoi and Ho Chi Minh City were the worst-ranked cities for dustpollution in the whole of Asia.

4. Technical labor pool depth


China 2.00 China has a large pool of engineers, scientists and other technically-skilled labor.Its universities graduate more than 800,000 engineers a year and thousandsmore receive overseas training in the best universities the US has to offer. The

only reason the country does not get a better grade is because growth has beenso rapid and there has been such a large influx of foreign direct investment thatthis kind of labor is getting more expensive and turnover rates are increasing.

India 1.00 India has more than 400,000 university educated engineers entering the labormarket each year, and as in China there are also thousands of Indian studentsstudying in the US and other foreign universities. The main difference betweenChina and India in terms of the depth of the pool of technical labor is that therehas been less foreign direct investment in India and slower growth overall, so thestrains on the technical labor pool have not been as obvious.

Indonesia 8.00 Indonesia lacks engineers and technically skilled labor. Much of this labor has tobe imported, since the local universities are not turning out enough qualified

graduates fast enough.

Malaysia 3.00 This is one of Malaysias biggest strengths. The absolute size of the pool is notnearly as large as in India or China, but the lack of foreign direct investment andthe relocation of many electronic industries to China mean the demand forengineers and technically skilled labor has been weaker in Malaysia lately. It isprobably easier for a foreign investor to staff a new facility in Malaysia with


25/90



experienced technical talent than it is in either India or China, but it would nottake long before this slack is taken up, which is why we have given Malaysia aslightly worse grade than the two much larger countries.

Philippines 5.00 The Philippines has a reputation for a talented labor force, and its universitiesgraduate more than 40,000 engineers a year. However, the quality of that laborforce is starting to suffer as a result of low investment in education and a lack of

job opportunities, which denies many technically-trained workers the actualexperience they need to match the skill levels available in countries likeMalaysia, India and China.

Thailand 7.00 Limited technical labor availability in Thailand is a major reason why someforeign investors are looking elsewhere. Thailands educational policy isprimarily at fault for the shortage. The country has been successful in attractingforeign investment in a number of technologically-sophisticated industries, butthe demand this has created for technical talent has squeezed the countrysability to supply this kind of labor.

Vietnam 7.00 The lack of technical talent remains a major source of concern for enterprises inVietnam. Around 65% of the countrys total workforce is unskilled. Some 78 % of Vietnamese people aged 20-24 are either untrained or do not have the skills theyneed.

5. Depth of higher education


China 1.00 In addition to turning out large numbers of engineers, China s universities are also turning out an increasing number of business managers, financial specialists,lawyers and people with other skills that companies need. There are over 110

million students in primary and secondary education and 11 million in highereducation. Around 19% of the age group 18 24 years has access to (post-secondary) higher education, which includes both higher vocational anduniversity education. Higher education is being reformed rapidly, with a focus onboth expansion of capacity and improvement of quality.

India 1.00 More than one third of Indias population might be illiterate, but the populationis so large and the university system so well developed that the country alsoturns out a huge number of highly educated graduates. Indias universities andtechnical institutes face a shortage of faculty and concerns have been raised overthe quality of education, but the country is still turning out a large number of quality graduates.

Indonesia 9.00 Indonesia produces a lot of higher education graduates but there are majorquestions with regard to the quality of these graduates. Indonesia's NationalBoard for Higher Education Accreditation has announced a target stopping thebad teaching practices and ridding universities of unaccredited undergraduatecourses by 2012. However, this is more an indication that there are big problemsin the countrys higher education system than a sign that headway will be madein reducing those problems.


26/90



Malaysia 4.00 The governments affirmative action policies probably did more to harm thecountrys higher education system than to help it. There has been a move awayfrom subjects like mathematics and engineering to subjects like religious studies,which means there has been a mismatch between the talent Malaysian industry

needs and what its schools are supplying. However, the countrys universit iesare still turning out quality graduates and recently there has been a move toredirect higher education back toward subjects like engineering, economics andscience.

Philippines 5.00 The Philippines education system is becoming a victim of under-investment.The quality of teaching is deteriorating as more Filipinos look abroad for work,and funding constraints affect both who can afford to go to schools and how theschools are equipped. There was a time when the Philippines would have beengraded near the top of this list of countries here, but it currently deserves to berated only near the middle of the pack, which is what we have tried to indicatewith a grade of five.

Thailand 6.00 Reform in Thailands education system succeeded at achieving almost universalprimary education in the 1990s. Secondary education, though, continued to lag;and the countrys university and post -graduate system is not producing enoughtalent to match the demand that is resulting from the growing number of foreigninvestors that have set up in the country. The quality of the countrys existinguniversities is quite good, but the Education Ministry is highly politicized and thisis seriously interfering with the development of the countrys education system.

Vietnam 7.00 Vietnams culture puts a high priority on education, but a lack of funding andout- dated teaching methods mean the countrys institutes of higher educationare not turning out the quality of graduates that the country really needs. A lackof linkage between teaching and research activities and a large discord between

theory and practical training lead to a large number of graduates being unable tofind a job, while skills shortages is a bottleneck for companies in many industries.

6. English speaking / comprehension proficiency of labor force


China 4.00 English is taught at all levels of education starting from junior middle school andin some cases also at some primary schools, especially in Beijing and Shanghai.English also is one of the three compulsory subjects of the national collegeentrance examinations and thus a requirement for university admission. Englishis also taught at all university programs. In order to obtain a Bachelor degree, all

students must pass the so-called College English Test (CET) at level four. Manyuniversities and colleges employ foreign teaching staff to teach English tostudents and staff. Private English language schools are wildly popular all overChina. At the company level, English is not widely spoken among manualworkers, but it is widely spoken among while collar workers and managers.

India 1.00 India's emergence as a major software and IT hub has in part been possible dueto its English-educated workers. However, there are concerns that the teaching


27/90



of English is not being pushed as hard in India as in other countries like China andthat this could hurt the countrys competitiveness further down the road. Westill think India deserves to be rated a one for this variable. English is still morewidely spoken in India than in China, including among workers with only a

primary level of education, but it is not a given that this favorable score will bemaintained in the medium term. There might be too much complacency thatpast standards are being maintained.

Indonesia 7.00 Although English is understood and commonly spoken in the tourist areas, theIndonesian people as a whole are often not fluent speakers of English. Except forthose who work in international business or the travel industry, English is notusually essential to daily life in Indonesia and thus not practiced on a regularbasis.

Malaysia 2.00 Language is a politically-charged topic in Malaysia more so than in the othercountries covered here. There are groups who favor teaching in native tongues,especially Malay, but there are other groups who favor the use of English in

order to maintain and enhance Malaysias international competitiveness. Latelythis latter group seems to be winning the debate and English is being pushedharder. Throughout the debate, English standards have remained relatively highin Malaysia compared with the other countries covered here.

Philippines 2.00 English is still widely spoken in the Philippines, but teaching standards aredeteriorating and the country no longer deserves to be graded a zero or even aone. To be sure, the widespread use of English remains a selling point for thecountry, but it is exaggerated in terms of the percentage of the population thatfeels comfortable communicating in this medium.

Thailand 8.00 The use of English, while increasing, remains at a sub-standard level. Thegovernment is pushing the teaching of English in schools, but it does not have

the infrastructure to support this program. Many primary teachers freely admitthat they are forced to teach English although they have little or no knowledgeof the language.

Vietnam 6.00 In recent years, English is becoming more popular as a second language. Englishstudy is obligatory in most schools and the language is seen as being importantto landing better jobs. Hence, many Vietnamese are studying English at theirown initiative in their spare time, which stands in stark contrast to places likeThailand and Indonesia.

7. Health facilities


China 5.00 Chinas medical infrastructure is improving. More hospitals and clinics cateringto expatriates are available in major coastal cities and industrial zones, butfacilities in secondary cities are much more basic. In most rural areas, onlyrudimentary medical facilities are available, often with poorly trained medicalpersonnel who have little medical equipment and medications.


28/90



India 3.00 Medical care is available in the major population centers that approaches andoccasionally meets Western standards. Th is industry is supporting Indias pushto develop medical tourism the way Thailand is doing. However, outside of themajor cities medical care is usually very limited and it is frequently unavailable in

rural areas.

Indonesia 8.00 The general level of sanitation and health care in Indonesia is sub-standard. Routine medical care is available in all major cities, but mostexpatriates leave the country for all but the simplest medical procedures,preferring their home countries or neighboring countries like Singapore andThailand.

Malaysia 3.00 Malaysia would like to take a page out of Thailands book and turn health careinto a major foreign-exchange earning industry. In view of the country s Islamicmajority, it should be able to market its services especially well to Middle Eastcountries.

Philippines 7.00 Health care in the Philippines suffers from serious financial constraints. Thecountry has excellent doctors and nurses, but many of these people emigrate toother countries, where the pay is better. Staffing quality in the Philippines is stillacceptable, but the quality of equipment in most hospitals is lacking. This poorphysical infrastructure, together with poor sanitation conditions, is why we havescored the health care system as poorly as we have.

Thailand 1.00 The quality of som e of Thailands hospitals and clinics is so good that it hasbecome a major draw for people from other countries to travel to Thailand fortheir medical care.

Vietnam 8.00 International health clinics in Hanoi and Ho Chi Minh City can provide acceptablecare for minor illnesses and injuries, but more serious problems will often

require medical evacuation to Bangkok or Singapore. Emergency medicalresponse services are generally unreliable or completely unavailable. Manymedicines that are readily available in the West are frequently hard to obtain inVietnam.

8. Natural disaster disruption potential

Disaster Statistics by Asian Country (period covered: 2000 2009)

Country Number of disasters Deaths Affected (mil) Cost (US$ mil)

China 286 98,663 1,173.102 181,749.0

India 186 59,462 608.611 23,739.29Indonesia 154 179,875 11.748 12,573.74

Malaysia 34 267 0.461 1,501.00

Philippines 146 9,535 50.152 2,225.04

Thailand 53 9,481 28.211 2,101.11

Vietnam 82 3,533 20.914 5,055.21


29/90



Source: "EM-DAT: The OFDA/CRED International Disaster Database. www.emdat.be - Universit Catholique de Louvain -Brussels - Belgium"

The biggest number of natural disasters in the years ahead will be precisely in those populous, emergingmarket economies like China, India and Indonesia that are supposed to lead Asia economically in the comingdecades. As they increase in economic size, it is inevitable that the economic cost of natural disasters will alsoincrease. However, our scoring is based not only on the number of natural disasters but also on a governmentsperceived capability to deal with such disasters in terms of advanced warning systems, preparing the population,and responding with emergency relief when disasters happen. Some governments like China and India have abetter record in this regard than do the governments of Philippines and Indonesia. This influenced our grading.


China 7.00 China suffers from more natural disasters than any other country in the world. Itis particularly vulnerable to typhoons, flooding and earthquakes. China has along record of trying to develop early warning systems for natural disasters and itdoes a good job of mobilizing the PLA and other bodies to mount emergencyrelief efforts. What it does not have a long history of doing is being transparentin its handling of domestic emergencies or the damage they cause. It also doesnot publicize man-made actions (like shoddy building construction) that couldhave aggravated the tolls from the disasters.

India 7.00 Parts of northern India are highly susceptible to earthquakes. Severe flooding iscommon in Bihar, Assam and Orissa. However, the government has a fairly goodtrack record of responding to such disasters when they occur. In 2009, Indiasuffered more mortalities than any other country in the world due to disasters,had the third largest number of victims, and ranked fourth in terms of dollardama ges. On the positive side, Indias whole approach to disaster managementis much more transparent than Chinas, and while the government plays a

prominent role, there is more reliance on non-government organizations like theRed Cross than in the Mainland. This helps to depoliticize the issue of disasterrelief.

Indonesia 8.00 Many areas of Indonesia are at high risk for natural disasters due to itsgeographic location and topography. Earthquakes, volcano eruptions, tsunamisand massive forest fires are a sampling of types of disasters Indonesia hassuffered in the recent past. The Indian Ocean earthquake and tsunami inDecember 2004 killed more than 130,000 people and left over 37,000 missing inAceh and North Sumatra. Flooding and landslides frequently follow heavy rains.The governments track record in dealing with emergencies is not particularlygood, and this shortcoming also carries over into its handling of most kinds of man-made emergencies.

Malaysia 3.00 Malaysia does not experience many natural disasters. It does suffer periodicallyfrom fallout from Indian Ocean earthquakes and forest fires in Indonesia, but thecountry rarely suffers from natural disasters of its own. This relative safetyfeature is something that the Malaysian authorities should probably stress morein their marketing efforts to investors and tourists.


30/90



Philippines 9.00 The Philippines is a volcano-, typhoon-, flood-, and earthquake-prone country.Mak ing matters worse, the governments financial constraints have reduced itsability to respond to natural disasters. Consequently, more lives are lost anddays of business lost to natural disasters than is the case in most of the other

countries covered by this report. We grade the Philippines worse than Indonesiabecause Manila, the capital of the Philippines where business is heavilyconcentrated, has a worse record of being disrupted by typhoons and otherdisasters than does Jakarta.

Thailand 5.00 Parts of Thailand were hit by the 2004 tsunami, but by and large the country isnot exposed to the kinds of natural disasters that are more typical in places likethe Philippines and Indonesia. We grade the country more harshly than Malaysiabecause the g overnments track record for dealing with disasters when they dohappen is much less impressive. The same poor response capabilities carriesover to other man-made kinds of emergencies, be it in dealing with insurrectiongroups in the south or political protesters in Bangkok. Instead of dealing with

problems quickly, the government and the institutions like the military andpolice that are supposed to be at the front line in dealing with emergencies makemistakes that allow the problems to drag on longer than they should, exaggeratethe problems of property damage and loss of lives, and hurt the countrysinternational image.

Vietnam 7.00 Vietnam experiences frequent weather related natural disasters similar to othercoastal nations like the Philippines and Cambodia. The major cities of Vietnamare generally not as vulnerable as the rural areas, where the people have limitedinfrastructure to protect them in extreme weather events, and rely on thenatural environment as their primary source of income. As prone as Vietnam isto disasters, mega-catastrophes are rare, and the government can deal withmost of the crises itself. But it does need and accepts foreign aid to mitigatedamage by natural disasters.


31/90



C. EASE OF DOING BUSINESS

PERCs Evaluation of the Ease of Doing Business


1. Starting a Business 3.00 9.00 8.00 5.00 8.00 3.00 7.00

2. Dealing with Construction Permits3.00 10.00 5.00 5.00 6.00 2.00 4.00

3. Registering Property 3.00 6.00 6.00 5.00 6.00 3.00 4.00

4. Getting Credit 4.00 3.00 6.00 2.00 7.00 4.00 7.00

5. Protecting Investors 6.00 6.00 8.00 4.00 7.00 5.00 8.00

6. Paying Taxes 7.00 9.00 7.00 2.00 8.00 5.00 8.00

7. Trading Across Borders 3.00 8.00 7.00 3.00 7.00 3.00 5.00

8. Enforcing Contracts 3.00 9.00 8.00 4.00 7.00 3.00 5.00

9. Closing a Business 4.00 7.00 8.00 4.00 7.00 4.00 6.00

Ease of Doing Business 4.00 7.44 7.00 3.78 7.00 3.56 6.00

Grades range from zero to 10, with zero being the best possible and 10 the worst.

The World Bank ranks 183 economies on their ease of doing business, from 1 183, with first place beingthe best. A high ranking on the ease of doing business index means the regulatory environment is conducive tothe operation of business. This index averages the country's percentile rankings on 9 topics, made up of a varietyof indicators, giving equal weight to each topic. The rankings presented in the table below are from the DoingBusiness 2011 report, published November 4, 2010.

Overall Scores Assessing the Ease of

Doing Business

4.00

7.447.00

3.78

7.00

3.56

6.00

0

1

2

3

4

5

6

7

8

9

10




32/90



The table presents the World Banks conclusions for the seven countries we cover in this report. Therankings are useful and in most cases a fairly good reflection of reality. Please note, however, that we do not agreewith all the grades provided by the World Bank. The table above show how we would grade these same variables,while the textual part of this section explains our rationale for changing the grades the way we have.

World Bank Ease of Doing Business Rankings


1. Starting a Business 151 165 155 113 156 95 100

2. Dealing with Construction Permits 181 177 60 108 156 12 69

3. Registering Property 38 94 98 60 102 19 40

4. Getting Credit 65 32 116 1 128 72 30

5. Protecting Investors 93 44 44 4 132 12 172

6. Paying Taxes 114 164 130 23 124 91 147

7. Trading Across Borders 50 100 47 37 61 12 74

8. Enforcing Contracts 15 182 154 59 118 25 32

9. Closing a Business 68 134 142 55 153 46 127

Ease of Doing Business Rank 79 134 121 21 148 19 93

Source: World Bank, Doing Business ranking, ranging from 1 to 183, with one being the best rated country and 183the worst.

In order to be able to incorporate the World Banks findings with our own report, we had to change thegrading scale. The method we used to do this was to assume that the ranking for an individual country for aspecific variable corresponded to a particular position on a line ranging from one to 183. Starting a business inChina, for example, corresponded to the 151 position on the line. We then converted this position to a lineranging from zero to 10, using the following formula, assuming a = the World Banks grade and b = the gradeconverted to a 0 10 scale:

(a-1) / (183-1) = b/10

or

b = (a 1) x (10)(183-1)

In the case of starting a business in China, this converts to the following score:

b = (151 1) x (10)

(183-1)

b = 8.24

Applying the formula to all the grades in the World Banks East of Doing Business ranks produces the followingtable converted to PERCs 0 to 10 grading scale:


33/90


34/90


35/90



labor intensive manufacturing. The country is more advanced than that and is more suitable for moresophisticated investments. Finally, although foreign investors generally enjoy better protection in Malaysia than inthe other countries covered here, with the possible exception of Thailand, the situation is not as favorable as theWorld Bank indicated. Many foreign investors in the local stock market, for example, were caught short when the

government imposed capital controls in response to the 1997-98 financial crisis. In general, if the foreigninvestment is in an industry that is a high priority for the government, the investors get a lot of governmentsupport and protection, but if they are a lower priority, the door is more closed and help let alone protection is lessforthcoming.

Philippines: We were slightly more generous in our grading for the Philippines than was the World Bank. Ingeneral, we felt that the Philippines needed to be graded more closely to difficult environments like Indonesia andIndia, not a lot worse. That said, most of our scores were also quite negative. It is not easy doing business in thecountry. However, it is not nearly as hard employing labor as the World Bank indicated in its Doing Businesssurvey. And despite the shortcomings of the local judicial system, it is a bit easier for investors to get protectionand enforce contracts than the Doing Business survey indicated.

Thailand: Conditions in Thailand are similar to those in Malaysia except that Thailand is more open to a widerrange of foreign investment. The most notable case is automotive manufacturing, which Malaysia has tried toshelter from foreign competition in order to groom local champion companies, while Thailand has pursued exactlythe opposite strategy and has opened the door to foreign investment with huge success. The World Bankranking does not adequately reflect the level of bureaucracy that exists in Thailand, particularly when it comes tocompanies that both sell to (and source from) the local market and export product that they manufacture. Foreigninvestors enjoy a fairly high level of protection, but the situation differs from industry to industry. Investors ininfrastructure and other projects in which the state sector figures prominently are much more vulnerable thaninvestors in fields like export-oriented manufacturing that are the preserve of the private sector.

Vietnam: As one of Asias newest markets and production sites, Vietnam is enjoying a level of investor enthusiasmthat is somewhat inflated. Those foreign companies that have made the plunge are pioneers and tend to accept

the difficulties of newly emerging markets as a given. For example, Vietnams judicial system is weak and thecountry does not offer the level of contract enforcement that the Doing Business survey indicated. It is also moredifficult dealing with the bureaucracy than is indicated by such scores as registering property, and the financialsystem is still quite underdeveloped, which means getting credit is a lot harder than the World Bank indicated.


36/90



D. DOMESTIC POLITICAL RISKS

Variables and Grades Used to Compute Domestic Political Risks

Domestic political risks China India Indonesia Malaysia Philippines Thailand Vietnam

a. The risk of a change of government and key leadersin coming two years

6.75 4.00 4.00 7.00 3.00 7.00 4.00

b. The risk of a disruptivepolitical transition 4.00 3.00 3.50 7.00 5.00 8.00 3.00

c. Quality of the government'spolicies 4.00 5.50 5.50 4.00 5.00 5.50 6.50

d. Ineffectiveness of thegovernment inimplementing its policies

4.00 5.50 6.00 5.00 5.50 6.75 6.50

Average score 4.69 4.50 4.75 5.75 4.63 6.81 5.00

Grades are scaled from zero to 10, with zero the best grade possible and 10 the worst.

This section analyzes risks to the business environment caused by potential threats to governmentstability and the quality of government policies. Some government changes, such as those in mature democraciesbrought about by regularly scheduled elections, are part of the normal political process, while others such thosebrought about by coups or revolutions are much more disruptive. Policies can change quite radically from onegovernment to the next, and even if there is no change in government, it is possible for the party in power tochange policies in ways that radically alter the business environment. Another type of domestic political riskrelates to a governments ability to implement its policies. The best of plans can fail if the government cann ot sellthem to the public or get government institutions responsible for implementing policies to do their jobs properly.

Domestic Political Risks

4.69 4.50 4.75

5.75

4.63

6.81

5.00

0

1

2

3

4

5

6

7

8

9

10




37/90



Other sections in this report assess social unrest risks and institutional weaknesses, but this section focuses on thegovernments ability to implement its policy agenda as well as potential quality changes in that agenda.

The risk of a change of government and key leaders in coming two years (elections, major

reshuffles, key retirements, death risks, etc.)

The risk of a disruptive political transition (coups, bitterly contested elections in which legitimacyof results is questioned, manipulation of elections and key government appointments, etc.)

Quality of the government's policies (to what extent are government policies conducive to rapideconomic growth, stable inflation, trade growth, foreign investor confidence, etc.)

Ineffectiveness of the government in implementing its policies (due to bureaucratic interferencewith policy implementation, vulnerability to populism, interference from special interest groups,etc.)

The sum of the four sub-variables is equal to 100% of the score for total domestic political risks. For thepurpose of this report, which is being written for a general audience, we are giving all the sub-category variablesthe same weighting. Therefore, each of the four sub-variables in the domestic political risk section carries a weightof 25%.

Variables are graded on a scale of zero to 10, with zero being the best or most favorable grade possibleand 10 the worst. All grades were arrived at by polling PERCs senior analysts and discussing the appropriategrades among ourselves. We have tried to explain our rationale in the text provided for analyzing each variable.These are perceptions and probably include personal biases. There are different perspectives than our own.However, we have tried to be objective in providing our scores and assessments based on our years of working inAsia and assessing exactly these same variables for companies that need an independent audit of a range of risksto which they are exposed. Please bear in mind that PERC does not do lobbying, deal facilitation, or publicrelations work. Our only function is to identify and assess country risks. We give as objective an evaluation as wecan on a range of variables, many of which are extremely difficult to quantify (like corruption, nationalism andinstitutional quality) but have an undeniable impact on the quality of the business environment and the risks towhich companies are exposed.

1. The risk of a change of government and key leaders in coming two years

This variable relates to key leadership changes such as the presidency, premiership, monarchy, cabinetpositions and legislative leaders. The business environment can be disrupted by a change in government leaders,be it in the form of a cabinet reshuffle, the death of a person in power, elections, or coup. A grade of zero isequated to a situation where the governments position is secure and current leaders are expected to stay inpower for the next 24 months. A grade of 10 would indicate a major leadership change is likely that couldprofoundly alter the business environment for the worse. Elections normally indicate higher grades, especially if new people who will be assuming positions of power hold significantly different policy views than the out-goingleaders. However, the highest or worst scores are reserved for possible leadership changes that are either extra-constitutional or happen so infrequently (such as the death of a long-serving authoritarian leader) that there is agreat deal of uncertainty about exactly what the impact would be on policy, social and political stability.


38/90




China 6.75 There will be a generational change in top leadership in late 2012, which is whythe grade assessing the risk of a change of leadership is as high as it is. There willbe major changes, but all the new leaders will have Communist Part backgroundsand share similar goals. There seems to be a consensus on the individuals toreplace Hu Jintao as president and Wen Jiabao as premier. They are Xi Jinpingand Li Keqiang, respectively. Other positions are still up for grabs. The currentbias is favoring individuals who lean toward conservatism, particularly when itcomes to national security issues and dealing with threats to social stability.

India 4.00 One of the most profound differences between India and China is the nature of their political systems. India has a multi-party democracy, while China has a one-party authoritarian system. Indias system might appear more disorderly thanChinas, but there is plenty of factional maneuvering in both systems. In fact, werate the risks associate with a change of leadership in India to be less than inChina. Another reason for the more favorable grade is that the next change of

leadership in China will come a year before the next change in India, wherelegislative elections do not have to be called until May 2014, although the actualdate will probably be earlier. Prime Minister Manmohan Singh, who is 78, is notlikely to seek another term. If the Congress Party is able to head up the nextcoalition government, the front-runners to become the next prime ministerinclude Rahul Gandhi (son of Congress Party President Sonia Gandhi), HomeMinister Palaniappan Chidambaram, Finance Minister Pranab Mukherjee andDefense Minister A. K. Antony.

Indonesia 4.00 The next national elections will not be held until 2014. Leadership changesbetween now and then will be confined mainly to Cabinet-level positions, whichare important but do not normally result in radical changes in policy. Indonesias

political system today is much more stable than during the Suharto days duemainly to the formalized democratic transition process and the decentralizationof power from the executive branch to the legislature and local-levelgovernments.

Malaysia 7.00 Domestic political risks are relatively high due to the strong challenge posed bythe political opposition and differences within the ruling Coalition. Elections donot have to be held until mid-2013, but they are likely to be held earlier, which isone reason we graded the risk of a change in key leaders as high as we have. Theother reason is because the outcome of the election is anything but certain, andsince only one political coalition has led Malaysia since independence, thepossibility of seeing an election put the current opposition in power has raisednew questions, foremost among them being if a new coalition would be anybetter at healing the countrys racial differences and forging a new sense of national unity.

Philippines 3.00 The main reason domestic political risks are as low as they are in the Philippinesis because the country has just held presidential elections and the next one willnot be held until 2016. There will be congressional and senate elections beforethen (in May 2013), but the country is in the early stages of what is likely to be a


39/90


40/90



exist and it is possible that their maneuvering could turn disruptive. However,we consider the risk unlikely.

India 3.00 Ruling parties and coalitions frequently change in India, but the process is part of the system. It is not particularly disruptive, even when changes have beenprecipitated by shocks like assassinations. Consequently, we rate the risk of adisruptive political transition to be less in India than in China.

Indonesia 3.50 Indonesia has had its disruptive political change back in 1998. Since then thesystem of elections has improved and is now sufficiently mature to warrantconfidence that future political transitions will be relatively smooth.

Malaysia 7.00 UMNO has dominated the political scene in Malaysia for so many years thatthere are major questions about what would happen if it were to lose power tothe opposition, which is now a greater possibility than in the past. Islamic groupswith somewhat fundamentalist views could figure prominently in a transition, aswould groups with much more secular, liberal views. Bridging the gap betweenthese positions would not be easy and could be a cause of disruption. At thesame time, new Muslim Malay rights groups like Perkasa are emerging thatmight react violently if threatened with a loss of political power or the abolitionof certain Malay entitlements. Many Malaysians, foreign investors and otherobservers are likely to draw comparisons between the way a grassrootsmovement seems to be building for political and systemic change in Malaysiawith recent social uprisings in Egypt, Libya, Syria and other Islamic countries.Malaysia might be in a different part of the world, but its population still followsdevelopments in the Middle East closely and many Malaysians identify with thegrievances being voiced by demonstrators in these other Islamic countries withlong-standing governments that have been extremely resistant to change.

Philippines 5.00 Election campaigns in the Philippines have a record of involving considerable

violence. However, the system itself is durable. It involves the same elitefamilies jockeying for power, but the process is hardly smooth. Moreover, aswe have seen with the transition from the Arroyo to the Aquino governments,there can be special complications that are not typical in other Asian countries for example, in the way Mrs. Arroyo tried to force her own people into keypositions so they could continue to influence policy and offer her a degree of protection against her alleged abuses of power even after she left office.

Thailand 8.00 The transition to the new government so far has gone smoothly, but the risk thatit could turn disruptive remains formidable. A grade of 10 would mean a civilwar, with the possibility of a radical change in the system, such as whathappened in Iran when the Shah was deposed. We think this risk is very low.

Thailands personality as a country will not change radically, but th e politicalsystem is in a state of flux that could involve some violence and policyuncertainty.

Vietnam 3.00 Vietnams political system is fairly stable. The only reason we did not give thecountry a more favorable score is because of the rigidities of a one-party systemthat is intolerant of opposition or dissent. This system will have to evolve as theeconomy modernizes and peoples expectations rise.


41/90



3. Quality of the governments policies

This variable refers to the economic and socio-political policies of a government that could be initiated orchanged in a way that threatens the business environment. Policies that open the door to foreign investment,

improve infrastructure, and promote greater social and diplomatic stability are graded favorably, while policiesthat restrict foreign investment or imports, interfere with the independence of key institutions, cause socialtensions, or limit development of foreign business are graded negatively.


China 4.00 In terms of following policies that sustain rapid economic growth and maintainoverall social stability, China deserves very high marks. However, both thenational and local governments are becoming more selective in the kinds of foreign investment they want to attract and some existing investors claim thatgovernment policies are starting to discriminate more against them.

India 5.50 India is more protectionist than China and the quality of its policies reflect this.

The government is also not doing as well as China and many other Asiangovernments in managing its fiscal accounts, holding down inflation, and buildinginfrastructure fast enough to sustain the level industrialization and economicgrowth that is taking place.

Indonesia 5.50 The quality of the gov ernments policies is very mixed. It has been quite goodwhen it comes to managing fiscal and balance of payments problems, as well asinflation. There has also been a positive move away from the use of subsidies.However, policy has not been nearly as good when it comes to clarifyinginvestment laws and regulations, fighting corruption, and creating conditionsthat foreign investors in mining and many other industries, includinginfrastructure development, find attractive.

Malaysia 4.00 The government is moving in the right direction in terms of opening the doormore to foreign investment and moving away from counter-productiveaffirmative action policies, but the speed of change is not fast enough. Thegovernment has also not done enough to reduce fears of foreign investors thatspecial interest groups, including Islamic fundamentalists, will not gain too muchinfluence in shaping economic policy.

Philippines 5.00 Government leaders say the right words in analyzing the countrys numero usproblems, but their actions and the policies they actually implement have beenconsistently disappointing. In the final months of the Arroyo government, forexample, the administration misrepresented the actual conditions of the fiscalaccounts to make them look better than they wore. It is too early to make many

conclusions about the quality of the Aquino governments policies, but economicmanagers have been successful in convincing international ratings agencies toimprove the countrys sovereign ri sk rating.

Thailand 5.50 The previous governments political policies have been bad, but its economicpolicies, particularly with respect to protecting important sectors like tourismand export-oriented manufacturing, have been quite good. This is a majorreason why the economy has not suffered more than it has from the political


42/90



turmoil. Foreign investors have been saying for years that while political risks domatter to them they are of less concern than oil prices and the cost of otherenergy, constraints on the business activities of foreign companies, and theambiguity of many business laws, including new regulations relating to

environmental and health issues.Vietnam 6.50 The government still does not feel comfortable with free market policies and is

unwilling to push reform of the state sector hard or fast enough. Lately, policyhas been more reactive than proactive, and the result has been relatively radicaleconomic swings to which the government has responded by announcing newadministrative controls and measures that frequently do more to treat thesymptom of problems than the problems themselves. This is why we rate thequality of the governments policies as poorly as we do.

4. Ineffectiveness of the government in implementing its policies

This risk refers to the inability of a government to implement policy due to some factor such as lame duckstatus, bureaucratic inertia, a coalition gridlock, etc. A grade of zero is given to a country with a governmentexperiencing no problem at all formulating and implementing its policies. On the other hand, a grade of 10 isreserved for a country whose government has little or no power to carry out policies of any significance.


China 4.00 The authoritarian form of government lends itself well to implementing policiesquickly. However, there is frequently a tendency of local governments to givethe impression that they are following national government policy when, in fact,they are following their own agendas in ways that are actually at odds withcentral government policy. This lack of transparency can create the misleadingimpression that the government is being more effective than it actually is inimplementing its policies.

India 5.50 Indias policies are constrained more by the need to strike compromises withdifferent stake holders, including different political parties that make up theruling coalition, civil servants, and labor groups. Consequently, many policies areimplemented more slowly than in China and they frequently sacrifice economicprudence for the sake of political expediency. India is one of the most regulatedcountries in the world, and the red tape is a major cause of slow policyimplementation. The red tape also is conducive for corruption. Fightingcorruption scandals has seriously distracted the current government and is oneof its major vulnerabilities.

Indonesia 6.00 The government does not match its rhetoric with follow through policies.Legislation is slow, slanted toward elite special interest groups, and frequentlyimplemented very poorly by a bureaucracy that is bent on pursuing its ownagenda and protecting its turf. These problems are becoming more apparent asthe second and final term of the Susilo government enters its final phase.

Malaysia 5.00 The government has not pushed reform fast enough, especially when it comes tomovement away from policies designed to groom national champion companies


43/90



in priority industries like automotive manufacturing or in adopting policies thatare less discriminatory against ethnic Chinese and Indians. However, there areMalay groups who complain that the government has been moving too fast inthese reforms and warn that social instability could result. This threat is why

Prime Minister Najib Razak is proceeding as cautiously as he is. The politicalrealities are understandable, but they could cost Malaysia considerably in termsof fulfilling its economic development potential.

Philippines 5.50 The governments ineffectiveness in implementing its policies is largely bydesign. Many vested interest groups like things just the way they are and areblocking reforms that should be taken for the sake of the overall economy. It willprobably not be long before President Aquino starts losing support due to hisfailure to deliver on many of his promises. However, he faces many obstaclesand the system is resistant to reforms that upset the status quo.

Thailand 6.75 Political infighting is interfering with policy implementation more than was thecase a few years ago. While the election may have cleared away some

uncertainties, the result has not removed doubts about the competence andpolicies of the new government, although business leaders have reiteratedearlier comments that irrespective of the outcome of the election, the economicgrowth needed to encourage foreign and local investment would be sustained.Business supports many of the new governments policies i n principle, but thereis still anxiety about their formulation into legislation and their actualimplementation. The government can claim to have a clear mandate for thesepolicies and they certainly have the numbers in parliament. But there are doubtsabout government spending plans, particularly big increases in the basic wage,higher salaries for civil servants and guaranteed incomes for graduates,guarantees of high rice prices, provision of hi-tech equipment including onemillion tablet computers for schools and other subsidies and welfare handouts.

Vietnam 6.50 The government is fairly effective at implementing its policies when it puts itsmind to it. As in China, many lower level groups pay lip service to orders fromthe central government, but when the national level leaders really want to crackthe whip, they can and are effective at doing so. However, there is a bias towardthe state sector that has created problems and will continue to do so.


44/90



E. SOCIAL INSTABILITY RISKS

This section refers to risks associated with tensions within society that could affect the businessenvironment. The variables relate to such issues as labor unrest, cultural and ethnic divisions, and law and orderconsiderations. It also includes insurrection movements and societal splits based on such considerations as race,religion, and historical regional frictions. It includes problems caused by religious extremism, and demonstrationsby the general public or vested interest groups that have the potential to upset political stability, force importantpolicy changes that could be negative for the business environment, or result in discrimination against foreigninvestment and imports.

Social instability risks China India Indonesia Malaysia Philippines Thailand Vietnam

a. Labor activism 5.60 7.00 5.25 4.00 4.50 4.00 4.00b. Social activism/unrest 4.00 6.00 6.50 6.30 6.50 7.00 3.50c. Terrorism and personal

security risks 3.00 7.00 7.00 5.00 7.00 6.00 3.00

d. Extent that regionalism is aproblem 5.00 7.50 6.80 6.50 6.25 7.00 4.50

Average score 4.40 6.88 6.39 5.45 6.06 6.00 3.75

Grades are scaled from one to 10, with one the best grade possible and 10 the worst.

1. Labor activism

The labor variable refers to the threat of union activism, strikes, and other acts by workers that disruptthe business environment, block important policy reforms, threaten privatization programs, and pressure thegovernment to adopt measures that discriminate against foreign business or certain nationality groups.

Social Instability Risks

4.40

6.886.39

5.456.06 6.00

3.75

0

1

2

3

4

5

6

7

8

9

10




45/90




China 5.60 Although China has developed a reputation for having little labor unrest, thiscould now be changing. There has been a noticeable increase in labor unrest inthe past year. It has been concentrated in the Pearl River Delta region but hasaffected other parts of the country as well. Some of the strikes have resulted insizeable pay hikes, but labor has other demands than just wage hikes. New laborregulations which took effect January 1, 2008 are designed to protect betterworkers' rights, including signed, written contracts for all employees. The newmandates have also hiked labor costs. Some of the strikes that are now takingplace reflect workers attempts to see that these new regulations are enforcedbetter than before, but there is an underlying frustration among some groupsthat costs have risen faster than their incomes and they are finding it increasinglydifficult to make ends meet.

India 7.00 India has a militant labor force. Unions are well organized and have considerablepolitical clout. The government cannot afford to alienate organized labor and

has adopted laws that offer workers considerable protection, particularly onmatters relating to firing. Industry

emerging asia swot report

Documents