Emerging Asia SWOT Report

Emerging Asia S.W.O.T.
Report
August 2011
Economic dynamics 10 8 Systemic risks 6 4 2 China India
Malaysia 0 Indonesia Philippines Thailand Vietnam
Infrastructure
External political risks
Ease of doing business
Social instability risks
Domestic political risks
Comparing risks and opportunities in: China India Indonesia Malaysia Philippines Thailand Vietnam
POLITICAL & ECONOMIC RISK CONSULTANCY LTD.
Contents
I. II. A. SUMMARY ........................................................................................................................................ 1 ASSESSMENT OF BUSINESS ENVIRONMENT................................................................................... 3 ECONOMIC DYNAMICS........................................................................................................................... 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 HUMAN AND PHYSICAL INFRASTRUCTURE SUPPORT .................................................................................... 16 Physical infrastructure/utilities for domestic market ............................................................. 17 International infrastructure links (airports, communications, etc.) ........................................ 18 Pollution .................................................................................................................................. 19 Technical labor pool depth ...................................................................................................... 20 Depth of higher education ...................................................................................................... 21 English speaking / comprehension proficiency of labor force ................................................ 22 Health facilities ........................................................................................................................ 23 Natural disaster disruption potential ...................................................................................... 24 EASE OF DOING BUSINESS ...................................................................................................................... 27 DOMESTIC POLITICAL RISKS .................................................................................................................... 32 The risk of a change of government and key leaders in coming two years ............................ 33 The risk of a disruptive political transition .............................................................................. 35 Quality of the governments policies ...................................................................................... 37 Ineffectiveness of the government in implementing its policies ............................................ 38 SOCIAL INSTABILITY RISKS ...................................................................................................................... 40 Labor activism ......................................................................................................................... 40 Social activism / unrest ........................................................................................................... 43 Terrorism and personal security risks ..................................................................................... 45 Extent that regionalism is a problem ...................................................................................... 47 EXTERNAL POLITICAL RISKS .................................................................................................................... 49 Direct military threats ............................................................................................................. 49 Vulnerability to social instability in other countries ............................................................... 52 Vulnerability to policy changes by governments in other countries ....................................... 54 SYSTEMIC RISKS ................................................................................................................................... 57 Extent that corruption is a problem ........................................................................................ 57 Nationalism and other cultural risks ....................................................................................... 61 Institutional weaknesses ......................................................................................................... 63
B. 1. 2. 3. 4. 5. 6. 7. 8. C. D. 1. 2. 3. 4. E. 1. 2. 3. 4. F. 1. 2. 3. G. 1. 2. 3.
4. III. A. B. C. D. E. F. G.
Intellectual property rights risks ............................................................................................. 65
S.W.O.T. REVIEW ....................................................................................................................... 68 CHINA ............................................................................................................................................... 68 INDIA ................................................................................................................................................ 70 INDONESIA ......................................................................................................................................... 72 MALAYSIA.......................................................................................................................................... 74 PHILIPPINES........................................................................................................................................ 76 THAILAND .......................................................................................................................................... 78 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
A S.W.O.T. Study of Asias Emerging Countries
August 2011
I.
SUMMARY
Overall Business Environment Scores
10 9 8 7 6 5 4 4.58 6.11 Economic dynamics Ease of doing business Social instability risks Systemic risks 6.18 4.67 Infrastructure Domestic political risks External political risks
5.97 5.16
5.80
3
2 1
0
China India Indonesia Malaysia Philippines Thailand Vietnam
Grades are scaled from zero to 10, with zero being the best possible and 10 the worst.
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,
Political & Economic Risk Consultancy, Ltd.
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domestic political risks are highest in Thailand and Malaysia too, while Indias 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, human resource, 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. backlashes against the problem of graft are building in both these countries. Popular
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II.
ASSESSMENT OF BUSINESS ENVIRONMENT
A. ECONOMIC DYNAMICS
Ranking Emerging Asian Countries by Economic Dynamics

10 9 8 7 6 5 4 3 2 1 2.40 5.57 5.42 4.53 6.82 4.88 6.70
0
Grades are scaled from zero to 10, with one being the best possible and 10 the worst.
Below we give grades on a zero to 10 scale assessing various aspects of the countries we surveyed in terms of economic strengths and weaknesses (S-W). A grade of 10 is the worst grade possible, indicating a serious inadequacy 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 a. Growth prospects b. Market size c. Wealth d. Inflation e. Public debt f. Balance of payments g. Foreign debt h. Foreign investment success i. Export dynamism j. Import dynamism Economic dynamism score China 1.00 0.00 5.00 3.00 2.00 3.00 1.00 4.00 2.33 2.67 2.40 India 3.00 2.00 9.00 6.00 8.00 7.00 3.00 7.00 6.00 4.67 5.57 Indonesia 5.00 4.00 7.00 6.00 4.00 5.00 5.00 6.50 6.33 5.33 5.42 Malaysia 8.00 8.50 0.00 2.00 8.00 1.00 6.00 3.50 4.00 4.33 4.53 Philippines 7.00 6.50 8.00 4.00 8.00 3.00 6.00 9.00 8.33 8.33 6.82 Thailand 8.00 6.00 4.00 3.00 7.00 3.00 5.00 3.50 4.67 4.67 4.88 Vietnam 5.00 7.00 9.00 8.00 8.00 8.00 6.00 5.00 5.67 5.33 6.70
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Data and Definitions Used to Calculate Economic Grades 1. Growth prospects data Real GDP Growth Rate
(Percent change)
Country China India Indonesia Malaysia Philippines Thailand Vietnam 2009 9.20 6.76 4.58 -1.71 1.06 -2.33 5.32 2010 10.30 10.37 6.11 7.16 7.33 7.80 6.78 2011 9.59 8.24 6.20 5.50 4.95 3.96 6.26 2012 9.52 7.82 6.50 5.20 4.97 4.53 6.75 2013 9.48 8.17 6.70 5.10 5.00 4.70 7.23 2014 9.52 8.14 7.00 5.10 5.00 4.75 7.44 2015 9.46 8.12 7.00 5.00 5.00 4.85 7.50 Average 9.58 8.23 6.30 4.48 4.76 4.04 6.75
Source: International Monetary Fund, World Economic Outlook Database, April 2011
China Grade for growth prospects 1.00 India 3.00 Indonesia 5.00 Malaysia 8.00 Philippines 7.00 Thailand 8.00 Vietnam 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 0 1 2 3 4 5 6 7 8 9 10 Real GDP growth rate average >10 <10 <8.99 <8.25 <7.5 <6.75 <6 <5.25 <4.5 <3.75 <3
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2. Market size prospects data

China GDP (US$ billion in 2010) Population (millions in 2010) 5,878.26 1,341.41 India 1,537.97 1,215.94 Indonesia 706.74 234.38 Malaysia 237.96 28.25 Philippines 188.72 94.01 Thailand 318.85 63.88 Vietnam 103.57 88.26
China GDP -- US$ billion Population -- 2010 Grade for market size 0.00 0.00 0.00 India 4.00 0.00 2.00 Indonesia 5.00 3.00 4.00 Malaysia 7.00 10.00 8.50 Philippines 8.00 5.00 6.50 Thailand 6.00 6.00 6.00 Vietnam 9.00 5.00 7.00
Definition: The simple average of two variables: the US dollar size of the GDP, in current terms in 2010, plus the size of the population in 2010. In both cases we used hard data published in the IMF in its World Economic Outlook Database, April 2011. Grading scale:
Grade 0 1 2 3 4 5 6 7 8 9 10 GDP size in US$ billion in 2010 Population in millions in 2010
Size of GDP
GDP in 2010 -- US$ billion
7000 6000 5000 4000 3000 2000 1000 1537.97 706.74 5878.26
>5000 <5000 <3999 <3000 <2000 <1000 <500 <250 <200 <150 <100
>1000 <1,000 <500 <250 <200 <100 <75 <60 <50 <40 <30
237.96
China India
188.72
318.85
103.57 Vietnam
0
Indonesia Malaysia Philippines Thailand
Size of Population
Population in 2010, millions
1600
1400
1200 1000 800 600 400 200
1341.41 1215.94
234.38 28.25 China India 94.01 63.88 88.26 Vietnam
0
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3. Wealth
China Per capita GDP (US$ thousand in 2010) 4.382 India 1.265 Indonesia 3.015 Malaysia 8.423 Philippines 2.007 Thailand 4.992 Vietnam 1.174
China Grade for wealth 5.00 India 9.00 Indonesia 7.00 Malaysia 0.00 Philippines 8.00 Thailand 4.00 Vietnam 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 0 1 2 3 4 5 6 7 8 9 10 Per capita GDP (thousands of US$) >8000 <8000 <7000 <6000 <5200 <4500 <3800 <3100 <2400 <1700 <1000
Per capita GDP in US$ thousands, 2010
9 8.423
Wealth
8
7 6 5 4 3 2 1 1.265 4.382 4.992
3.015
2.007 1.174
0
4.
Inflation
Country China India Indonesia Malaysia Philippines Thailand Vietnam 2010 4.7 8.6 7.0 2.4 3.0 3.0 11.8 2011 4.2 7.7 7.3 2.8 5.1 5.1 15.0 2012 2.0 5.9 5.5 2.5 4.2 2.4 8.0 Average 3.6 7.4 6.6 2.6 4.1 3.5 11.6
Source: International Monetary Fund, World Economic Outlook Database, April 2011, except for Vietnam. We used our own forecasts for 2011 and 2012 for Vietnam.
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China Grade for inflation 3.00
India 6.00
Indonesia 6.00
Malaysia 2.00
Philippines 4.00
Thailand 3.00
Vietnam 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 0 1 2 3 4 5 6 7 8 9 10 Consumer price inflation <1 <2 <3 <4 <5 <6 <8 <10 <15 <20 >20
14 12 10 8 6 4 2 3.6 2.6 4.1 7.4 6.6 11.6
Inflation
Annual average consumer price inflation between 2010 and 2012
3.5
0
5. Public debt
China Public debt as a percentage of GDP in 2010 Source: CIA World Factbook India Indonesia Malaysia Philippines Thailand Vietnam
17.5%
55.9%
26.4%
53.1%
56.5%
42.3%
56.7%
China Grade for public debt 2.00
India 8.00
Indonesia 4.00
Malaysia 8.00
Philippines 8.00
Thailand 7.00
Vietnam 8.00
Definition: The US dollar size of the public debt in 2010 divided by the size of the GDP for that same year.
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Grading scale:
Grade 0 1 2 3 4 5 6 7 8 9 10 Public debt to GDP ratio <10 <15 <20 <25 <30 <35 <40 <50 <100 <200 >200
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Public Debt
Public debt as a percentage of GDP in 2010
55.9%
53.1%
56.5% 42.3%
56.7%
26.4% 17.5%
China
India
Vietnam
6. Balance of payments Current Account BoP as a Percentage of GDP

(Percentage)
Country China India Indonesia Malaysia Philippines Thailand Vietnam 2009 5.95 -2.82 2.58 16.50 5.81 8.29 -6.56 2010 5.21 -3.19 0.89 11.82 4.49 4.64 -3.79 2011 5.71 -3.67 0.89 11.39 2.92 2.75 -4.01 2012 6.31 -3.79 0.40 10.83 2.82 1.92 -3.93 Average 5.80 -3.37 1.19 12.63 4.01 4.40 -4.57
Source: International Monetary Fund, World Economic Outlook Database, April 2011 China Grade for balance of payments 3.00 India 7.00 Indonesia 5.00 Malaysia 1.00 Philippines 3.00 Thailand 3.00 Vietnam 8.00
Definition: The current account balance of payments measured in US dollars divided by the Gross Domestic Product in current US dollar terms. Estimates for 2009 and 2010 and forecasts for 2011 and 2012 are provided by the IMF in its World Economic Outlook Database in April 2011.
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Grading scale:
Grade 0 1 2 3 4 5 6 7 8 9 10 Current account BoP/GDP >15 >10 - 15 >6 - 10 >4 - 6 >2 - 4 >0 - 2 >-2 - 0 >-4 - -2 >-6 - -4 -10 - -6 <-10
14 12 10 8 6 4 2 0 -2 -4 -6 %
Balance of Payments
Current account-to-GDP average for 2009-2012
12.63
5.80 4.01 4.40
1.19
-3.37 China India Indonesia Malaysia Philippines Thailand
-4.57 Vietnam
7. Foreign debt
China External debt as a percentage of Gross Domestic Product in 2010 Source: CIA World Factbook China Grade for foreign debt 1.00 India 3.00 Indonesia 5.00 Malaysia 6.00 Philippines 6.00 Thailand 5.00 Vietnam 6.00 6.92% India 15.42% Indonesia 27.75% Malaysia 30.51% Philippines 31.67% Thailand 25.87% Vietnam 32.30%
Definition: The US dollar size of the external debt in 2010 divided by the size of the Gross Domestic Product for that same year. Grading scale:
Grade 0 1 2 3 4 5 6 7 8 9 10 External debt as a % of GDP <5% <10% <15% <20% <25% <30% <35% <40% <50% <100% 100%
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8. Foreign direct investment inflow dynamism

China Stock of FDI (US$ billion through December 2010) Per capita FDI through 2010 (US$) 574.3 428.1 India 191.1 157.2 Indonesia 81.2 346.5 Malaysia 77.4 2741.1 Philippines 24.5 260.6 Thailand 117.9 1845.7 Vietnam 78.0 883.2
Source: CIA World Factbook.

China Stock of FDI Per capita FDI Grade for foreign investment dynamism 0.00 7.00 3.50 India 4.00 10.00 7.00 Indonesia 5.00 8.00 6.50 Malaysia 5.00 1.00 3.00 Philippines 9.00 9.00 9.00 Thailand 4.00 3.00 3.50 Vietnam 5.00 5.00 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 for combining 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:
Grade 0 1 2 3 4 5 6 7 8 9 10 Stock of FDI inflow (US$ billion through Dec. 2010) >500 <500 <400 <300 <200 <100 <75 <50 <40 <30 <20 Per capita stock of FDI through Dec. 2010 (US$) >3000 <3000 <2500 <2000 <1500 <1000 <750 <500 <400 <300 <200
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Foreign Direct Investment

Stock of FDI through 2010, US$ billion
700 600 500 400 1,500 300 200 100 191.1 81.2 77.4 24.5 117.9 78.0 1,000 500 428.13 574.3 3,000 2,500 2,000
Per Capita FDI

Per capita stock of FDI through Dec. 2010, US$
2,741.14
1,845.71
883.22 346.49
157.16 China India
260.60
Vietnam
0
0
9. Export dynamism
China Merchandise exports (US$ bil. in 2010) Per capita exports in 2010 (US$) Average annual growth rate of exports between 2001 and 2010 1577.93 1176.3 21.3% India 211.95 174.3 17.4% Indonesia 157.82 673.4 10.7% Malaysia 207.36 7339.9 8.6% Philippines 51.50 547.8 4.1% Thailand 195.30 3057.4 11.7% Vietnam 71.63 811.6 18.0%
Sources: Asian Development Bank, Key Indicators for Asia and the Pacific. Figures for 2010 are national estimates.
China Grade for merchandise exports in 2010 Grade for per capita exports in 2010 Grade for average annual growth rate of exports between 2001 and 2010 Average 1.00 5.00 1.00 2.33 India 5.00 10.00 3.00 6.00 Indonesia 6.00 7.00 6.00 6.33 Malaysia 5.00 0.00 7.00 4.00 Philippines 9.00 7.00 9.00 8.33 Thailand 6.00 2.00 6.00 4.67 Vietnam 9.00 6.00 2.00 5.67
Definition: The simple average of three variables: the US dollar size of merchandise exports in 2010, the per capita size of exports for that same year, and the average annual growth of merchandise exports for the decade from 2001 through 2010. Grading scale:
Grade 0 1 2 3 4 5 6 Exports (US$ billion in 2010) >2000 <2000 <1500 <1000 <500 <250 <200 Per capita exports in 2010 (US$) >5000 <5000 <4000 <3000 <2000 <1500 <1000 Average annual growth rate of exports between 2001 and 2010 >30 <30 <20 <18 <16 <14 <12
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7 8 9 10
<150 <100 <75 <50
<750 <500 <300 <200
<10 <8 <6 <4
Total Merchandise Exports

Merchandise exports in 2010 in US dollar billion
1,800 1,600 1,400 1,200 1,000 800 600 400 200 211.95 157.82 207.36 51.50 195.30 71.63 Vietnam
1577.93
0
China India Indonesia Malaysia Philippines Thailand
Per Capita Exports in 2010

Per capita exports in 2010 in US dollars
8,000 7339.9
7,000
6,000 5,000 4,000 3,000 2,000 1,000 1176.3 174.3 China India 673.4 3057.4
547.8
811.6
0
Indonesia Malaysia Philippines Thailand Vietnam
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Export Growth Dynamism

Average annual export growth between 2001 and 2010
25% 21.3% 20% 15% 10.7% 10% 5% 11.7% 17.4% 18.0%
8.6%
4.1%
0%
10. Import dynamism

China Merchandise imports (US$ bil. in 2010) Per capita imports in 2010 (US$) Average annual growth rate of imports between 2001 and 2010 1006.00 753.70 20.7% India 268.40 223.84 8.4% Indonesia 96.86 418.30 4.2% Malaysia 127.05 4576.40 12.0% Philippines 43.00 466.24 20.0% Thailand 144.74 2160.85 18.0% Vietnam 68.80 788.89 20.4%
Sources: Asian Development Bank, Key Indicators for Asia and the Pacific. Figures for 2010 are national estimates.
China Grade for merchandise imports size in 2010 Grade for per capita imports in 2010 Grade for average annual growth rate of imports between 2001 and 2010 Average 2.00 5.00 1.00 2.67 India 4.00 9.00 1.00 4.67 Indonesia 7.00 7.00 2.00 5.33 Malaysia 6.00 0.00 7.00 4.33 Philippines 9.00 7.00 9.00 8.33 Thailand 6.00 3.00 5.00 4.67 Vietnam 8.00 6.00 2.00 5.33
Definition: The simple average of three variables: the US dollar size of merchandise imports in 2010, the per capita size of imports for that same year, and the average annual growth of merchandise imports for the decade from 2001 through 2010.
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Grading scale:
Grade 0 1 2 3 4 5 6 7 8 9 10 Imports (US$ billion in 2010) >2000 <2000 <1500 <1000 <500 <250 <200 <150 <100 <75 <50 Per capita imports in 2010 (US$) >5000 <5000 <4000 <3000 <2000 <1500 <1000 <750 <500 <300 <200 Average annual growth rate of imports between 2001 and 2010 >30 <30 <20 <18 <16 <14 <12 <10 <8 <6 <4
Total Merchandise Imports

Merchandise imports in 2010 in US dollar billion
1,600
1,400
1,200 1,000 800 600 400 200
1394.8
319.4 135.7 China India 171.6 54.9 182.0 84.0 Vietnam
0
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Per Capita Imports in 2010

Per capita imports in 2010 in US dollars
7,000 6,000 5,000 4,000 3,000 2,000 1,000 1039.82 262.67 China India 578.81 584.31 951.77 2727.82 6074.83
0
Indonesia Malaysia Philippines Thailand Vietnam
Import Growth Dynamism

Average annual import growth between 2001 and 2010
25% 20.9% 20% 15% 10% 5% 9.4% 5.8% 21.3% 18.0% 12.3% 19.3%
0%
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B. HUMAN AND PHYSICAL INFRASTRUCTURE SUPPORT
Overall Scores for Human and Physical Infrastructure Support

10 9 8 7 6 5 4 3 2 1 4.50 5.13
7.88
6.38 4.63
7.38
3.50
0
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 a. Physical infrastructure/utilities for domestic market b. International infrastructure links (ports, airports, communications, China 5.00 3.00 India 10.00 9.00 Indonesia 8.00 8.00 Malaysia 4.00 4.00 Philippines 9.00 8.00 Thailand 3.00 3.00 Vietnam 9.00 9.00
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etc.) c. Pollution d. Technical labor pool depth e. Depth of higher education f. English speaking / comprehension proficiency g. Health facilities h. Natural disaster disruption potential Infrastructure and backdrop score 9.00 2.00 9.00 1.00 7.00 8.00 5.00 3.00 6.00 5.00 4.00 7.00 6.00 7.00
1.00
4.00 5.00 7.00 4.50
1.00
1.00 3.00 7.00 5.13
9.00
7.00 8.00 8.00 7.88
4.00
2.00 3.00 3.00 3.50
5.00
2.00 7.00 9.00 6.38
6.00
8.00 1.00 5.00 4.63
7.00
6.00 8.00 7.00 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 China Grade 5.00 Rationale China is a big country and there are still parts, particularly inland, where the infrastructure is inadequate. If we were rating only the major coastal cities, Chinas score would be much better, but these more developed regions still have trouble interfacing with inland regions, where the quality of infrastructure is worse. The government has been aggressively investing in roads, rail facilities, power, domestic communications and other facilities and conditions today are much, much better than they were just a decade ago. The biggest problem in the near term will relate to traffic on roads and rail facilities. They are increasingly clogged due to heavy freight usage (particularly moving coal). Safety issues are also a concern. 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. Power blackouts are a serious problem. Water is in short supply in many areas. The poor quality of Indias physical infrastructure is one of the countrys biggest problems. One of President Susilos biggest failures to date has been his inability to stimulate investment in physical infrastructure despite his labeling this a top priority. Two big signposts to watch in the immediate future are new investments in the power sector and the success or failure of a mass transit railway project in Jakarta. Malaysia has relatively good infrastructure. There are some periodic problems with power and water, but overall conditions are quite good and the infrastructure for moving goods around the country is adequate. The Philippines has not invested nearly as much as it should in maintaining existing physical infrastructure and building new infrastructure. It is difficult moving goods around the country and companies need to invest in back-up Page 17
India
10.00
Indonesia
8.00
Malaysia
4.00
Philippines
9.00
August 2011
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 new infrastructure investment and is diverting resources away from what should be priority areas to political powerful areas like the military, which could mean bigger problems further down, but the quality of the countrys current domestic infrastructure is still good relative to most of the other emerging countries covered here. Vietnam has not invested nearly enough in physical infrastructure. There are deficiencies and delays in the development of interprovincial roads, bridges, intra-city public transportation and power projects. The transport infrastructure system in Vietnam had fallen far behind economic growth and is an impediment to those who want to expand their businesses in the nation. Rail service is shoddy, four-lane highways are an exception rather than a rule, and airports are only just beginning to be modernized.
Vietnam
9.00
2. International infrastructure links (airports, communications, etc.)

Country China Grade 3.00 Rationale China would score the best of all emerging countries rated here if our grade were confined to the quality of international infrastructure links in major coastal cities and national development zones like Pudong and Tianjin, but infrastructure in second- and third-tier cities is not as developed, which is one of the main reasons why the major coastal cities have such a big advantage over more inland cities, where it is more difficult to get goods into and out of the country. Civil aviation and ports are crying out for modernization. India would deserve a 10 were it not for the countrys international telecommunications links, which are good enough to have enabled the country to become the worlds premier backroom processing center. International airports and the quality of international air services are improving as the government allows the private sector to play a larger role. Indonesia has a few ports and airports such as near Jakarta and in Batam that are not bad by international standards, but efficiency even at these ports of entry is poor. The physical quality of ports and airports in many other parts of the sprawling archipelago is very poor. Malaysias ports and airport links, as well as its international communications links, are quite good. If anything, they are under-utilized relative to their capacity. The Philippines ports and airports are notoriously bad. In addition to poor maintenance and physical standards, bureaucratic inefficiency and corruption are other problems. As in India, telecommunications infrastructure is better than the infrastructure required to ship goods into and out of the country, so the Philippines has been able to develop backroom processing industries. Page 18
India
9.00
Indonesia
8.00
Malaysia
4.00
Philippines
8.00
August 2011
Thailand
3.00
Thailand has invested quite heavily in its ports and airport infrastructure. Statistics indicate that Laem Chabang port can compete with ports in the region relatively well in areas of freight carrying rates and docking times. Malaysia actually has better sea ports than Thailand, but we gave Thailand a better grade overall mainly because its international airport has many more direct international flights to more parts of the world. Most of Vietnams ports are relatively small with obsolete facilities and poor support services. For now, Vietnam is a feeder country in the context of global trade, relying on transshipment in one of Asias larger ports to get its goods to the rest of the world. On the import side, it relies overwhelmingly on Asia, with eight of every 10 boxes coming into Vietnam provided by its Asian neighbors.
Vietnam
9.00
3. Pollution
Country China Grade 9.00 Rationale China has a big problem with air and water pollution. Some cities are worse than others, but the quality of the environment nationwide has suffered as a result of rapid industrialization. Official statistics understate the actual magnitude of the problem, but the poor quality of air and water are some of the biggest complaints that expatriates working in the country have. Industrial pollution, soil erosion, deforestation, poor water quality, and land degradation are all worsening problems. The government is also constrained financially from mounting an effective program to pay for the clean-up. The problem of pollution in Indonesia is largely regional. Some parts of the country, like Bali, are pristine, but others like Jakarta are suffering from air, water, and other types of pollution that are as bad as in any major city in Asia. Unfortunately, the quality of the physical environment is worst in the most populated areas. Poor waste management, traffic and weak regulation of industrial waste are all contributing factors. Water is not potable. Only bottled water should be consumed. Sewage and drainage systems are incomplete. In rural areas, the burning of rainforests, illegal mining and other abuses are contributed to environmental degradation. The Green movement is fairly strong in Malaysia, and parts of the country market themselves on the basis of their eco-tourism potential. Part of Malaysias problem with air pollution is imported from Indonesia due to the forest fires that sometime burn there. The country also has its own problems dealing with industry and vehicular emissions, as well as waste management, but it generally does a better job of managing these environmental issues than other emerging Asian economies. Water pollution is probably a bigger problem than air pollution in the Philippines. The discharge of domestic and industrial wastewater and agricultural runoff has caused extensive pollution of the receiving water-bodies. The government is unable to back up its strong environmental rhetoric and regulations with action. Page 19
India
9.00
Indonesia
7.00
Malaysia
5.00
Philippines
6.00
August 2011
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 sewer systems and a minority of households has acceptable effluent from on-site sanitation facilities. Thailand 4.00 Tourism is such an important industry in Thailand that there has been more attention to protecting the environment than in many other Asian countries. There is still a big problem with water and air pollution in Bangkok, but many other parts of the country are in much better shape. Over-development is a growing problem in areas catering to foreign tourists, straining the ability of these areas to provide enough clean water and deal with waste. Pollution is likely to become a bigger issue in Vietnam in view of the countrys rapid rate of industrialization and the lack of official attention to managing environmental degradation. However, the country is less developed industrially than most of the others covered here and the problem of pollution has therefore not 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 Vietnam for pollution, while an environmental study by 400 international scientists in the same year said Hanoi and Ho Chi Minh City were the worst-ranked cities for dust pollution in the whole of Asia.
Vietnam
6.00
4. Technical labor pool depth

Country China Grade 2.00 Rationale China has a large pool of engineers, scientists and other technically-skilled labor. Its universities graduate more than 800,000 engineers a year and thousands more 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 been so rapid and there has been such a large influx of foreign direct investment that this kind of labor is getting more expensive and turnover rates are increasing. India has more than 400,000 university educated engineers entering the labor market each year, and as in China there are also thousands of Indian students studying in the US and other foreign universities. The main difference between China and India in terms of the depth of the pool of technical labor is that there has been less foreign direct investment in India and slower growth overall, so the strains on the technical labor pool have not been as obvious. Indonesia lacks engineers and technically skilled labor. Much of this labor has to be imported, since the local universities are not turning out enough qualified graduates fast enough. This is one of Malaysias biggest strengths. The absolute size of the pool is not nearly as large as in India or China, but the lack of foreign direct investment and the relocation of many electronic industries to China mean the demand for engineers and technically skilled labor has been weaker in Malaysia lately. It is probably easier for a foreign investor to staff a new facility in Malaysia with Page 20
India
1.00
Indonesia
8.00
Malaysia
3.00
August 2011
experienced technical talent than it is in either India or China, but it would not take long before this slack is taken up, which is why we have given Malaysia a slightly worse grade than the two much larger countries. Philippines 5.00 The Philippines has a reputation for a talented labor force, and its universities graduate more than 40,000 engineers a year. However, the quality of that labor force 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 actual experience they need to match the skill levels available in countries like Malaysia, India and China. Limited technical labor availability in Thailand is a major reason why some foreign investors are looking elsewhere. Thailands educational policy is primarily at fault for the shortage. The country has been successful in attracting foreign investment in a number of technologically-sophisticated industries, but the demand this has created for technical talent has squeezed the countrys ability to supply this kind of labor. The lack of technical talent remains a major source of concern for enterprises in Vietnam. 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 they need.
Thailand
7.00
Vietnam
7.00
5. Depth of higher education

Country China Grade 1.00 Rationale 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 higher education. Around 19% of the age group 18 24 years has access to (postsecondary) higher education, which includes both higher vocational and university education. Higher education is being reformed rapidly, with a focus on both expansion of capacity and improvement of quality. More than one third of Indias population might be illiterate, but the population is so large and the university system so well developed that the country also turns out a huge number of highly educated graduates. Indias universities and technical institutes face a shortage of faculty and concerns have been raised over the quality of education, but the country is still turning out a large number of quality graduates. Indonesia produces a lot of higher education graduates but there are major questions with regard to the quality of these graduates. Indonesia's National Board for Higher Education Accreditation has announced a target stopping the bad teaching practices and ridding universities of unaccredited undergraduate courses by 2012. However, this is more an indication that there are big problems in the countrys higher education system than a sign that headway will be made in reducing those problems. Page 21
India
1.00
Indonesia
9.00
August 2011
Malaysia
4.00
The governments affirmative action policies probably did more to harm the countrys higher education system than to help it. There has been a move away from 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 universities are still turning out quality graduates and recently there has been a move to redirect higher education back toward subjects like engineering, economics and science. 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 the schools are equipped. There was a time when the Philippines would have been graded near the top of this list of countries here, but it currently deserves to be rated only near the middle of the pack, which is what we have tried to indicate with a grade of five. Reform in Thailands education system succeeded at achieving almost universal primary education in the 1990s. Secondary education, though, continued to lag; and the countrys university and post-graduate system is not producing enough talent to match the demand that is resulting from the growing number of foreign investors that have set up in the country. The quality of the countrys existing universities is quite good, but the Education Ministry is highly politicized and this is seriously interfering with the development of the countrys education system. Vietnams culture puts a high priority on education, but a lack of funding and out-dated teaching methods mean the countrys institutes of higher education are not turning out the quality of graduates that the country really needs. A lack of linkage between teaching and research activities and a large discord between theory and practical training lead to a large number of graduates being unable to find a job, while skills shortages is a bottleneck for companies in many industries.
Philippines
5.00
Thailand
6.00
Vietnam
7.00
6. English speaking / comprehension proficiency of labor force

Country China Grade 4.00 Rationale English is taught at all levels of education starting from junior middle school and in some cases also at some primary schools, especially in Beijing and Shanghai. English also is one of the three compulsory subjects of the national college entrance examinations and thus a requirement for university admission. English is 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. Many universities and colleges employ foreign teaching staff to teach English to students and staff. Private English language schools are wildly popular all over China. At the company level, English is not widely spoken among manual workers, but it is widely spoken among while collar workers and managers. India's emergence as a major software and IT hub has in part been possible due to its English-educated workers. However, there are concerns that the teaching Page 22
India
1.00
August 2011
of English is not being pushed as hard in India as in other countries like China and that this could hurt the countrys competitiveness further down the road. We still think India deserves to be rated a one for this variable. English is still more widely 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 be maintained in the medium term. There might be too much complacency that past standards are being maintained. Indonesia 7.00 Although English is understood and commonly spoken in the tourist areas, the Indonesian people as a whole are often not fluent speakers of English. Except for those who work in international business or the travel industry, English is not usually essential to daily life in Indonesia and thus not practiced on a regular basis. Language is a politically-charged topic in Malaysia more so than in the other countries 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. Lately this latter group seems to be winning the debate and English is being pushed harder. Throughout the debate, English standards have remained relatively high in Malaysia compared with the other countries covered here. English is still widely spoken in the Philippines, but teaching standards are deteriorating and the country no longer deserves to be graded a zero or even a one. To be sure, the widespread use of English remains a selling point for the country, but it is exaggerated in terms of the percentage of the population that feels comfortable communicating in this medium. The use of English, while increasing, remains at a sub-standard level. The government is pushing the teaching of English in schools, but it does not have the infrastructure to support this program. Many primary teachers freely admit that they are forced to teach English although they have little or no knowledge of the language. In recent years, English is becoming more popular as a second language. English study is obligatory in most schools and the language is seen as being important to landing better jobs. Hence, many Vietnamese are studying English at their own initiative in their spare time, which stands in stark contrast to places like Thailand and Indonesia.
Malaysia
2.00
Philippines
2.00
Thailand
8.00
Vietnam
6.00
7. Health facilities
Country China Grade 5.00 Rationale Chinas medical infrastructure is improving. More hospitals and clinics catering to expatriates are available in major coastal cities and industrial zones, but facilities in secondary cities are much more basic. In most rural areas, only rudimentary medical facilities are available, often with poorly trained medical personnel who have little medical equipment and medications. Page 23
August 2011
India
3.00
Medical care is available in the major population centers that approaches and occasionally meets Western standards. This industry is supporting Indias push to develop medical tourism the way Thailand is doing. However, outside of the major cities medical care is usually very limited and it is frequently unavailable in rural areas. The general level of sanitation and health care in Indonesia is substandard. Routine medical care is available in all major cities, but most expatriates leave the country for all but the simplest medical procedures, preferring their home countries or neighboring countries like Singapore and Thailand. Malaysia would like to take a page out of Thailands book and turn health care into a major foreign-exchange earning industry. In view of the countrys Islamic majority, it should be able to market its services especially well to Middle East countries. Health care in the Philippines suffers from serious financial constraints. The country has excellent doctors and nurses, but many of these people emigrate to other countries, where the pay is better. Staffing quality in the Philippines is still acceptable, but the quality of equipment in most hospitals is lacking. This poor physical infrastructure, together with poor sanitation conditions, is why we have scored the health care system as poorly as we have. The quality of some of Thailands hospitals and clinics is so good that it has become a major draw for people from other countries to travel to Thailand for their medical care. International health clinics in Hanoi and Ho Chi Minh City can provide acceptable care for minor illnesses and injuries, but more serious problems will often require medical evacuation to Bangkok or Singapore. Emergency medical response services are generally unreliable or completely unavailable. Many medicines that are readily available in the West are frequently hard to obtain in Vietnam.
Indonesia
8.00
Malaysia
3.00
Philippines
7.00
Thailand
1.00
Vietnam
8.00
8. Natural disaster disruption potential Disaster Statistics by Asian Country

(period covered: 2000 2009)
Country China India Indonesia Malaysia Philippines Thailand Vietnam Number of disasters 286 186 154 34 146 53 82 Deaths 98,663 59,462 179,875 267 9,535 9,481 3,533 Affected (mil) 1,173.102 608.611 11.748 0.461 50.152 28.211 20.914 Cost (US$ mil) 181,749.0 23,739.29 12,573.74 1,501.00 2,225.04 2,101.11 5,055.21
Page 24
August 2011
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, emerging market economies like China, India and Indonesia that are supposed to lead Asia economically in the coming decades. As they increase in economic size, it is inevitable that the economic cost of natural disasters will also increase. However, our scoring is based not only on the number of natural disasters but also on a governments perceived 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 a better record in this regard than do the governments of Philippines and Indonesia. This influenced our grading. Country China Grade 7.00 Rationale China suffers from more natural disasters than any other country in the world. It is particularly vulnerable to typhoons, flooding and earthquakes. China has a long record of trying to develop early warning systems for natural disasters and it does a good job of mobilizing the PLA and other bodies to mount emergency relief efforts. What it does not have a long history of doing is being transparent in its handling of domestic emergencies or the damage they cause. It also does not publicize man-made actions (like shoddy building construction) that could have aggravated the tolls from the disasters. Parts of northern India are highly susceptible to earthquakes. Severe flooding is common in Bihar, Assam and Orissa. However, the government has a fairly good track record of responding to such disasters when they occur. In 2009, India suffered 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 dollar damages. On the positive side, Indias whole approach to disaster management is much more transparent than Chinas, and while the government plays a prominent role, there is more reliance on non-government organizations like the Red Cross than in the Mainland. This helps to depoliticize the issue of disaster relief. Many areas of Indonesia are at high risk for natural disasters due to its geographic location and topography. Earthquakes, volcano eruptions, tsunamis and massive forest fires are a sampling of types of disasters Indonesia has suffered in the recent past. The Indian Ocean earthquake and tsunami in December 2004 killed more than 130,000 people and left over 37,000 missing in Aceh and North Sumatra. Flooding and landslides frequently follow heavy rains. The governments track record in dealing with emergencies is not particularly good, and this shortcoming also carries over into its handling of most kinds of man-made emergencies. Malaysia does not experience many natural disasters. It does suffer periodically from fallout from Indian Ocean earthquakes and forest fires in Indonesia, but the country rarely suffers from natural disasters of its own. This relative safety feature is something that the Malaysian authorities should probably stress more in their marketing efforts to investors and tourists.
India
7.00
Indonesia
8.00
Malaysia
3.00
Page 25
August 2011
Philippines
9.00
The Philippines is a volcano-, typhoon-, flood-, and earthquake-prone country. Making matters worse, the governments financial constraints have reduced its ability to respond to natural disasters. Consequently, more lives are lost and days 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 Indonesia because Manila, the capital of the Philippines where business is heavily concentrated, has a worse record of being disrupted by typhoons and other disasters than does Jakarta. Parts of Thailand were hit by the 2004 tsunami, but by and large the country is not exposed to the kinds of natural disasters that are more typical in places like the Philippines and Indonesia. We grade the country more harshly than Malaysia because the governments track record for dealing with disasters when they do happen is much less impressive. The same poor response capabilities carries over to other man-made kinds of emergencies, be it in dealing with insurrection groups in the south or political protesters in Bangkok. Instead of dealing with problems quickly, the government and the institutions like the military and police that are supposed to be at the front line in dealing with emergencies make mistakes that allow the problems to drag on longer than they should, exaggerate the problems of property damage and loss of lives, and hurt the countrys international image. Vietnam experiences frequent weatherrelated natural disasters similar to other coastal nations like the Philippines and Cambodia. The major cities of Vietnam are generally not as vulnerable as the rural areas, where the people have limited infrastructure to protect them in extreme weather events, and rely on the natural environment as their primary source of income. As prone as Vietnam is to disasters, mega-catastrophes are rare, and the government can deal with most of the crises itself. But it does need and accepts foreign aid to mitigate damage by natural disasters.
Thailand
5.00
Vietnam
7.00
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August 2011
C. EASE OF DOING BUSINESS
Overall Scores Assessing the Ease of Doing Business

10 9 8 7 6 5 4 3 2 1 4.00 7.44
7.00
7.00
6.00
3.78
3.56
0
PERCs Evaluation of the Ease of Doing Business

China 1. 2. 3. 4. 5. 6. 7. 8. 9. Starting a Business Dealing with Construction Permits Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing a Business 3.00 3.00 3.00 4.00 6.00 7.00 3.00 3.00 4.00 4.00 India 9.00 10.00 6.00 3.00 6.00 9.00 8.00 9.00 7.00 7.44 Indonesia 8.00 5.00 6.00 6.00 8.00 7.00 7.00 8.00 8.00 7.00 Malaysia 5.00 5.00 5.00 2.00 4.00 2.00 3.00 4.00 4.00 3.78 Philippines 8.00 6.00 6.00 7.00 7.00 8.00 7.00 7.00 7.00 7.00 Thailand 3.00 2.00 3.00 4.00 5.00 5.00 3.00 3.00 4.00 3.56 Vietnam 7.00 4.00 4.00 7.00 8.00 8.00 5.00 5.00 6.00 6.00
Ease of Doing Business
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 being the best. A high ranking on the ease of doing business index means the regulatory environment is conducive to the operation of business. This index averages the country's percentile rankings on 9 topics, made up of a variety of indicators, giving equal weight to each topic. The rankings presented in the table below are from the Doing Business 2011 report, published November 4, 2010.
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August 2011
The table presents the World Banks conclusions for the seven countries we cover in this report. The rankings are useful and in most cases a fairly good reflection of reality. Please note, however, that we do not agree with 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

China 1. Starting a Business 2. Dealing with Construction Permits 3. Registering Property 4. Getting Credit 5. Protecting Investors 6. Paying Taxes 7. Trading Across Borders 8. Enforcing Contracts 9. Closing a Business Ease of Doing Business Rank 151 181 38 65 93 114 50 15 68 79 India 165 177 94 32 44 164 100 182 134 134 Indonesia 155 60 98 116 44 130 47 154 142 121 Malaysia 113 108 60 1 4 23 37 59 55 21 Philippines 156 156 102 128 132 124 61 118 153 148 Thailand 95 12 19 72 12 91 12 25 46 19 Vietnam 100 69 40 30 172 147 74 32 127 93
Source: World Bank, Doing Business ranking, ranging from 1 to 183, with one being the best rated country and 183 the worst. In order to be able to incorporate the World Banks findings with our own report, we had to change the grading scale. The method we used to do this was to assume that the ranking for an individual country for a specific variable corresponded to a particular position on a line ranging from one to 183. Starting a business in China, for example, corresponded to the 151 position on the line. We then converted this position to a line ranging from zero to 10, using the following formula, assuming a = the World Banks grade and b = the grade converted 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 following table converted to PERCs 0 to 10 grading scale:
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August 2011
World Bank Ease of Doing Business Rankings Converted to 0 10 Grading Scale

China 1. 2. 3. 4. 5. 6. 7. 8. 9. Starting a Business Dealing with Construction Permits Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing a Business 8.24 9.89 2.03 3.52 5.05 6.21 2.69 0.77 3.68 4.29 India 9.01 9.67 5.11 1.70 2.36 8.96 5.44 9.95 7.31 7.31 Indonesia 8.46 3.24 5.33 6.32 2.36 7.09 2.53 8.41 7.75 6.59 Malaysia 6.15 5.88 3.24 0.00 0.16 1.21 1.98 3.19 2.97 1.10 Philippines 8.52 8.52 5.55 6.98 7.20 6.76 3.30 6.43 8.35 8.08 Thailand 5.16 0.60 0.99 3.90 0.60 4.95 0.60 1.32 2.47 0.99 Vietnam 5.44 3.74 2.14 1.59 9.40 8.02 4.01 1.70 6.92 5.05
Ease of Doing Business
Grades range from zero to 10, with zero being the best possible and 10 the worst. It is important to note that the original number we changed was intended by the World Bank to be a ranking, not a score. Turning the ranking into a score is a bit like turning an orange into an apple. It does necessarily follow that a poor ranking necessarily means the variable in question is being performed poorly in the country in question, i.e., that it deserves a poor grade. Perhaps all 183 countries are performing that function relatively well in terms of meeting the expectations of a company and the margin of difference between countries is very small. However, the World Bank ranking is informative in its own right, which is why we have reproduced it here, and we used this ranking as a starting point not the end point for arriving at our own grades. It is also important to note that we have taken a much more subjective approach to grading than the World Bank and that there are advantage and shortcomings to each approach. The World Bank defines each variable it is quantifying according to very specific criteria. For example, the variable dealing with construction permits looks specifically at the procedures a business in the construction industry goes through to build a standardized warehouse. It does not look at the procedure a manufacturer goes through to build a factory or a bank goes through to set up an office. Similar standardized case studies are used to quantify the other variables. Thus, while the scores are accurate for the specific case studies, they are not necessarily accurate for different situations involving different industries. Our own approach is more subjective and is based on the replies we received from senior managers in a wide range of industries. In order to obtain grades to be used in this report, we started with the findings of the World Bank, but then modified specific grades based on our own experience and the findings from our interviews. The table presented at the start of this section shows how we have modified the World Banks data. In all cases, we did not try to have two-digit accuracy but provided grades that were rounded to the nearest integer. Below we present our explanation for changing the scores the way we did. China: First of all, China is a big country and some parts of the country score much better than others, depending on such variables is the quality of the local governments and the autonomy of the local authorities to deal with issues like taxation and permits. The grades we used relate to well-developed national level industrial zones like Shenzhen, the Tianjin Economic Development Authority and Pudong. Zones like TEDA in China are very professionally managed. The zones themselves have most of the approval powers that a foreign investor would Political & Economic Risk Consultancy, Ltd. Page 29
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need. It is fairly straight forward and quick to start of business and deal with construction permits not nearly as onerous as the World Banks Doing Business Survey indicated. Indeed, the process is easier than in most of the other countries covered by this report, if not all of them. There is also a very effective system in place for employing workers, although with foreign and domestic companies searching for professionals in the same talent pool, the process of recruiting, developing and retaining employees is increasingly arduous for Western business. If we were to score the industrial zone in Suzhou, China, many of the scores would be worse, and if we were grading some inland areas like Chongqing or Xian, they would be worse still. We are assuming in our scoring, therefore, that foreign investors will go through the necessary due diligence to select the areas that are most suitable for them. Simply going by the number of foreign investments that have been approved and progressed to the operational stage, China deserves to be rated very strongly for starting a business, as well as dealing with construction permits. Moreover, in view of the success both foreign investors and local companies have had in growing their exports and, in recent years, bringing in more imports, China deserves to be rated more strongly than the World Bank has done for trading across borders. India: Our biggest difference with the World Bank with respect to India is that as high as the World Banks score was for dealing with labor issues, the situation is actually more difficult. It is particularly difficult firing workers and labor militancy is another problem. Also foreign investors do not have the degree of protection that the World Bank survey implied. The local court system is slow and can be difficult to work with even though the necessary laws are on the books. State and city authorities can also cause problems for investors against which national level authorities can offer little protection. On the other hand, the tax situation in India is not quite as bad as the World Banks survey indicated. Most investors know where they stand tax -wise. Finally, trading across borders should be graded more critically. India is good when it comes to international flows of data, but there are many barriers to merchandise exports and imports. This is why the country has not attracted more export-oriented foreign investment than it has and why most foreign companies are looking at domestic market opportunities, not using India as an export base. Indonesia: As critical as the World Banks grades generally were of Indonesia, several were not critical enou gh. Dealing with any permits in Indonesia, be they construction or some other kind, means dealing with the countrys notorious bureaucracy. It can be a frustrating experience. Trading across borders is also more difficult in Indonesia than the World Bank indicated. There are all sorts of barriers to imports, while exporting can also be difficult and in some industries like timber and minerals is complicated by smuggling. In view of Indonesias huge population and its substantial mineral resources, the absolute level of both exports and imports should be much larger were it not for the barriers that exist. Finally, foreign investors do not generally enjoy the level of protection that the World Banks favorable score seemed to imply. A look at the exp erience of major investors in the wake of the 1997/98 financial crisis shows that many had extreme difficulty exiting from their investments when they wanted, and there are many other cases where foreign investors have found themselves discriminated against by Indonesias judicial system. Malaysia: Just because Malaysia has not been attracting large amounts of foreign direct investment does not mean the government does not want to. The investment promotion agencies are very aggressive and have considerable authority that can assist foreign investors in dealing with construction permits, visas, and other paperwork. The labor force is a mixed picture. The more pessimistic World Bank grade is accurate when it comes to employing unskilled, production labor, which is in short supply and sometimes needs to be imported. However, it is relatively easy to employ high quality, local skilled labor, which is why we graded the variable assessing employing workers more favorably since few foreign investors would be looking at Malaysia as a low-cost base for Political & Economic Risk Consultancy, Ltd. Page 30
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labor intensive manufacturing. The country is more advanced than that and is more suitable for more sophisticated investments. Finally, although foreign investors generally enjoy better protection in Malaysia than in the other countries covered here, with the possible exception of Thailand, the situation is not as favorable as the World 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 foreign investment is in an industry that is a high priority for the government, the investors get a lot of government support and protection, but if they are a lower priority, the door is more closed and help let alone protection is less forthcoming. Philippines: We were slightly more generous in our grading for the Philippines than was the World Bank. In general, we felt that the Philippines needed to be graded more closely to difficult environments like Indonesia and India, not a lot worse. That said, most of our scores were also quite negative. It is not easy doing business in the country. However, it is not nearly as hard employing labor as the World Bank indicated in its Doing Business survey. And despite the shortcomings of the local judicial system, it is a bit easier for investors to get protection and 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 wider range of foreign investment. The most notable case is automotive manufacturing, which Malaysia has tried to shelter from foreign competition in order to groom local champion companies, while Thailand has pursued exactly the opposite strategy and has opened the door to foreign investment with huge success. The World Bank ranking does not adequately reflect the level of bureaucracy that exists in Thailand, particularly when it comes to companies that both sell to (and source from) the local market and export product that they manufacture. Foreign investors enjoy a fairly high level of protection, but the situation differs from industry to industry. Investors in infrastructure and other projects in which the state sector figures prominently are much more vulnerable than investors 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 enthusiasm that 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 the country does not offer the level of contract enforcement that the Doing Business survey indicated. It is also more difficult dealing with the bureaucracy than is indicated by such scores as registering property, and the financial system is still quite underdeveloped, which means getting credit is a lot harder than the World Bank indicated.
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D. DOMESTIC POLITICAL RISKS
Domestic Political Risks

10 9 8 7 6 5 4 3 2 1 4.69 4.50 4.75 5.75 4.63 5.00 6.81
0
Variables and Grades Used to Compute Domestic Political Risks

Domestic political risks a. The risk of a change of government and key leaders in coming two years b. The risk of a disruptive political transition c. Quality of the government's policies d. Ineffectiveness of the government in implementing its policies Average score China 6.75 4.00 4.00 4.00 4.69 India 4.00 3.00 5.50 5.50 4.50 Indonesia 4.00 3.50 5.50 6.00 4.75 Malaysia 7.00 7.00 4.00 5.00 5.75 Philippines 3.00 5.00 5.00 5.50 4.63 Thailand 7.00 8.00 5.50 6.75 6.81 Vietnam 4.00 3.00 6.50 6.50 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 government stability and the quality of government policies. Some government changes, such as those in mature democracies brought about by regularly scheduled elections, are part of the normal political process, while others such those brought about by coups or revolutions are much more disruptive. Policies can change quite radically from one government to the next, and even if there is no change in government, it is possible for the party in power to change policies in ways that radically alter the business environment. Another type of domestic political risk relates to a governments ability to implement its policies. The best of plans can fail if the government cann ot sell them to the public or get government institutions responsible for implementing policies to do their jobs properly. Political & Economic Risk Consultancy, Ltd. Page 32
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Other sections in this report assess social unrest risks and institutional weaknesses, but this section focuses on the governments 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 legitimacy of 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 rapid economic growth, stable inflation, trade growth, foreign investor confidence, etc.) Ineffectiveness of the government in implementing its policies (due to bureaucratic interference with 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 the purpose of this report, which is being written for a general audience, we are giving all the sub-category variables the same weighting. Therefore, each of the four sub-variables in the domestic political risk section carries a weight of 25%. Variables are graded on a scale of zero to 10, with zero being the best or most favorable grade possible and 10 the worst. All grades were arrived at by polling PERCs senior analysts and discussing the appropriate grades 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 in Asia and assessing exactly these same variables for companies that need an independent audit of a range of risks to which they are exposed. Please bear in mind that PERC does not do lobbying, deal facilitation, or public relations work. Our only function is to identify and assess country risks. We give as objective an evaluation as we can on a range of variables, many of which are extremely difficult to quantify (like corruption, nationalism and institutional quality) but have an undeniable impact on the quality of the business environment and the risks to which 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, cabinet positions 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 is equated to a situation where the governments position is secure and current leaders are expected to stay in power for the next 24 months. A grade of 10 would indicate a major leadership change is likely that could profoundly 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-going leaders. However, the highest or worst scores are reserved for possible leadership changes that are either extraconstitutional or happen so infrequently (such as the death of a long-serving authoritarian leader) that there is a great deal of uncertainty about exactly what the impact would be on policy, social and political stability.
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Country China
Grade 6.75
Rationale There will be a generational change in top leadership in late 2012, which is why the grade assessing the risk of a change of leadership is as high as it is. There will be major changes, but all the new leaders will have Communist Part backgrounds and share similar goals. There seems to be a consensus on the individuals to replace Hu Jintao as president and Wen Jiabao as premier. They are Xi Jinping and Li Keqiang, respectively. Other positions are still up for grabs. The current bias is favoring individuals who lean toward conservatism, particularly when it comes to national security issues and dealing with threats to social stability. 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 oneparty authoritarian system. Indias system might appear more disorderly than Chinas, but there is plenty of factional maneuvering in both systems. In fact, we rate the risks associate with a change of leadership in India to be less than in China. 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, where legislative elections do not have to be called until May 2014, although the actual date will probably be earlier. Prime Minister Manmohan Singh, who is 78, is not likely to seek another term. If the Congress Party is able to head up the next coalition government, the front-runners to become the next prime minister include Rahul Gandhi (son of Congress Party President Sonia Gandhi), Home Minister Palaniappan Chidambaram, Finance Minister Pranab Mukherjee and Defense Minister A. K. Antony. The next national elections will not be held until 2014. Leadership changes between now and then will be confined mainly to Cabinet-level positions, which are important but do not normally result in radical changes in policy. Indonesias political system today is much more stable than during the Suharto days due mainly to the formalized democratic transition process and the decentralization of power from the executive branch to the legislature and local-level governments. Domestic political risks are relatively high due to the strong challenge posed by the political opposition and differences within the ruling Coalition. Elections do not have to be held until mid-2013, but they are likely to be held earlier, which is one reason we graded the risk of a change in key leaders as high as we have. The other reason is because the outcome of the election is anything but certain, and since only one political coalition has led Malaysia since independence, the possibility of seeing an election put the current opposition in power has raised new questions, foremost among them being if a new coalition would be any better at healing the countrys racial differences and forging a new sense of national unity. The main reason domestic political risks are as low as they are in the Philippines is because the country has just held presidential elections and the next one will not be held until 2016. There will be congressional and senate elections before then (in May 2013), but the country is in the early stages of what is likely to be a Page 34
India
4.00
Indonesia
4.00
Malaysia
7.00
Philippines
3.00
August 2011
period of stability in key government positions. Those changes that do take place will be mainly to replace holdovers from the former Arroyo government with appointees with whom the Aquino government feels more comfortable. Thailand 7.00 Domestic political risks are higher for Thailand than any of the other countries covered here. The score we have assigned to the variable assessing the risk of a change in key leaders has fallen since the elections, which went relatively smoothly, but political risks will remain high until the new government is showing some success and it becomes clear that its life will not be cut short by a coup. The newly-elected government is untested and, despite outward signs of acceptance by rival parties and special interest groups like the military and royalists, could yet have the rug pulled out from under it. The divide among different special interest groups remains wide. It is possible that the latest election has begun the healing process, but it is also possible that it will ultimately only polarize the country further. There are also major uncertainties about how stability will be affected by a change in the monarchy, which could happen at any time. The Communist Party is firmly in control. It has a track record for orchestrating smooth changes in leadership. Thus, while top level changes are possible in the coming year, they are not a factor that need concern foreign investors a great th deal. At the 11 National Party Congress in January 2011, National Assembly Chair Nguyen Phu Trong, 67, was elected as the Party Secretary General, while Prime Minister Nguyen Tan Dung, 62, was re-elected as Politburo member. At th the first session of the 13 National Assembly, which was held in July, the NA approved a second five-year term for Prime Minister Nguyen, despite criticism of his perceived mishandling of the economy and the debt bomb that nearly brought down state-run Vietnam Shipbuilding Industry Group. The NA also endorsed Mr. Truong Tan Sang to succeed Nguyen Minh Triet as president.
Vietnam
4.00
2. The risk of a disruptive political transition

This category refers to a situation in which there could be an exceptional change in government and the extent that this change is likely to be orderly. Normal elections would score low or favorably provided the outgoing government is likely to retire gracefully and the in-coming government is not promoting negative revolutionary changes. Note, even revolutionary changes from the status quo per se need not be bad. For example, foreign business and the local population might welcome a radical change in government in a country like Burma or North Korea. This variable refers to potentially disruptive changes like assassinations, violent coups, a shift to anarchy, or other changes that seriously undermine the ability of key institutions like the judiciary to function independently. This variable does not refer to the quality of political leadership, which is covered in variables 1c and 1d assessing policies. It refers strictly to the extent that future changes of government could be disruptive. Country China Grade 4.00 Rationale Low but possible considering the number of disruptive changes that have occurred since 1949. The system for selecting new governments is now more a matter of top-level consensus bargaining than it was, but different factions still Page 35
August 2011
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 been precipitated by shocks like assassinations. Consequently, we rate the risk of a disruptive political transition to be less in India than in China. Indonesia has had its disruptive political change back in 1998. Since then the system of elections has improved and is now sufficiently mature to warrant confidence that future political transitions will be relatively smooth. UMNO has dominated the political scene in Malaysia for so many years that there are major questions about what would happen if it were to lose power to the opposition, which is now a greater possibility than in the past. Islamic groups with somewhat fundamentalist views could figure prominently in a transition, as would groups with much more secular, liberal views. Bridging the gap between these positions would not be easy and could be a cause of disruption. At the same time, new Muslim Malay rights groups like Perkasa are emerging that might react violently if threatened with a loss of political power or the abolition of certain Malay entitlements. Many Malaysians, foreign investors and other observers are likely to draw comparisons between the way a grassroots movement seems to be building for political and systemic change in Malaysia with 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 follows developments in the Middle East closely and many Malaysians identify with the grievances being voiced by demonstrators in these other Islamic countries with long-standing governments that have been extremely resistant to change. Election campaigns in the Philippines have a record of involving considerable violence. However, the system itself is durable. It involves the same elite families jockeying for power, but the process is hardly smooth. Moreover, as we 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 key positions 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. The transition to the new government so far has gone smoothly, but the risk that it could turn disruptive remains formidable. A grade of 10 would mean a civil war, with the possibility of a radical change in the system, such as what happened 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 political system is in a state of flux that could involve some violence and policy uncertainty. Vietnams political system is fairly stable. The only reason we did not give the country a more favorable score is because of the rigidities of a one-party system that is intolerant of opposition or dissent. This system will have to evolve as the economy modernizes and peoples expectations rise. Page 36
Indonesia
3.50
Malaysia
7.00
Philippines
5.00
Thailand
8.00
Vietnam
3.00
August 2011
3. Quality of the governments policies

This variable refers to the economic and socio-political policies of a government that could be initiated or changed 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 policies that restrict foreign investment or imports, interfere with the independence of key institutions, cause social tensions, or limit development of foreign business are graded negatively. Country China Grade 4.00 Rationale In terms of following policies that sustain rapid economic growth and maintain overall social stability, China deserves very high marks. However, both the national and local governments are becoming more selective in the kinds of foreign investment they want to attract and some existing investors claim that government policies are starting to discriminate more against them. 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 Asian governments in managing its fiscal accounts, holding down inflation, and building infrastructure fast enough to sustain the level industrialization and economic growth that is taking place. The quality of the governments policies is very mixed. It has been quite good when it comes to managing fiscal and balance of payments problems, as well as inflation. 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 clarifying investment laws and regulations, fighting corruption, and creating conditions that foreign investors in mining and many other industries, including infrastructure development, find attractive. The government is moving in the right direction in terms of opening the door more to foreign investment and moving away from counter-productive affirmative action policies, but the speed of change is not fast enough. The government has also not done enough to reduce fears of foreign investors that special interest groups, including Islamic fundamentalists, will not gain too much influence in shaping economic policy. Government leaders say the right words in analyzing the countrys numero us problems, but their actions and the policies they actually implement have been consistently disappointing. In the final months of the Arroyo government, for example, the administration misrepresented the actual conditions of the fiscal accounts 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 economic managers have been successful in convincing international ratings agencies to improve the countrys sovereign risk rating. The previous governments political policies have been bad, but its economic policies, particularly with respect to protecting important sectors like tourism and export-oriented manufacturing, have been quite good. This is a major reason why the economy has not suffered more than it has from the political Page 37
India
5.50
Indonesia
5.50
Malaysia
4.00
Philippines
5.00
Thailand
5.50
August 2011
turmoil. Foreign investors have been saying for years that while political risks do matter to them they are of less concern than oil prices and the cost of other energy, constraints on the business activities of foreign companies, and the ambiguity 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, policy has been more reactive than proactive, and the result has been relatively radical economic swings to which the government has responded by announcing new administrative controls and measures that frequently do more to treat the symptom of problems than the problems themselves. This is why we rate the quality 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 duck status, bureaucratic inertia, a coalition gridlock, etc. A grade of zero is given to a country with a government experiencing no problem at all formulating and implementing its policies. On the other hand, a grade of 10 is reserved for a country whose government has little or no power to carry out policies of any significance. Country China Grade 4.00 Rationale The authoritarian form of government lends itself well to implementing policies quickly. However, there is frequently a tendency of local governments to give the impression that they are following national government policy when, in fact, they are following their own agendas in ways that are actually at odds with central government policy. This lack of transparency can create the misleading impression that the government is being more effective than it actually is in implementing its policies. Indias policies are constrained more by the need to strike compromises with different stake holders, including different political parties that make up the ruling coalition, civil servants, and labor groups. Consequently, many policies are implemented more slowly than in China and they frequently sacrifice economic prudence for the sake of political expediency. India is one of the most regulated countries in the world, and the red tape is a major cause of slow policy implementation. The red tape also is conducive for corruption. Fighting corruption scandals has seriously distracted the current government and is one of its major vulnerabilities. The government does not match its rhetoric with follow through policies. Legislation is slow, slanted toward elite special interest groups, and frequently implemented very poorly by a bureaucracy that is bent on pursuing its own agenda and protecting its turf. These problems are becoming more apparent as the second and final term of the Susilo government enters its final phase. The government has not pushed reform fast enough, especially when it comes to movement away from policies designed to groom national champion companies Page 38
India
5.50
Indonesia
6.00
Malaysia
5.00
August 2011
in priority industries like automotive manufacturing or in adopting policies that are less discriminatory against ethnic Chinese and Indians. However, there are Malay groups who complain that the government has been moving too fast in these reforms and warn that social instability could result. This threat is why Prime Minister Najib Razak is proceeding as cautiously as he is. The political realities are understandable, but they could cost Malaysia considerably in terms of fulfilling its economic development potential. Philippines 5.50 The governments ineffectiveness in implementing its policies is largely by design. Many vested interest groups like things just the way they are and are blocking reforms that should be taken for the sake of the overall economy. It will probably not be long before President Aquino starts losing support due to his failure to deliver on many of his promises. However, he faces many obstacles and the system is resistant to reforms that upset the status quo. Political infighting is interfering with policy implementation more than was the case a few years ago. While the election may have cleared away some uncertainties, the result has not removed doubts about the competence and policies of the new government, although business leaders have reiterated earlier comments that irrespective of the outcome of the election, the economic growth needed to encourage foreign and local investment would be sustained. Business supports many of the new governments policies i n principle, but there is still anxiety about their formulation into legislation and their actual implementation. The government can claim to have a clear mandate for these policies and they certainly have the numbers in parliament. But there are doubts about 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 one million tablet computers for schools and other subsidies and welfare handouts. The government is fairly effective at implementing its policies when it puts its mind to it. As in China, many lower level groups pay lip service to orders from the central government, but when the national level leaders really want to crack the whip, they can and are effective at doing so. However, there is a bias toward the state sector that has created problems and will continue to do so.
Thailand
6.75
Vietnam
6.50
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August 2011
E. SOCIAL INSTABILITY RISKS
Social Instability Risks

10 9 8 7 6 5 4 3 2 1 4.40 3.75 6.88 6.39 5.45 6.06 6.00
0
This section refers to risks associated with tensions within society that could affect the business environment. The variables relate to such issues as labor unrest, cultural and ethnic divisions, and law and order considerations. 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 demonstrations by the general public or vested interest groups that have the potential to upset political stability, force important policy changes that could be negative for the business environment, or result in discrimination against foreign investment and imports.
Social instability risks a. Labor activism b. Social activism/unrest c. Terrorism and personal security risks d. Extent that regionalism is a problem Average score China 5.60 4.00 3.00 5.00 4.40 India 7.00 6.00 7.00 7.50 6.88 Indonesia 5.25 6.50 7.00 6.80 6.39 Malaysia 4.00 6.30 5.00 6.50 5.45 Philippines 4.50 6.50 7.00 6.25 6.06 Thailand 4.00 7.00 6.00 7.00 6.00 Vietnam 4.00 3.50 3.00 4.50 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 disrupt the business environment, block important policy reforms, threaten privatization programs, and pressure the government to adopt measures that discriminate against foreign business or certain nationality groups.
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August 2011
Country China
Grade 5.60
Rationale Although China has developed a reputation for having little labor unrest, this could now be changing. There has been a noticeable increase in labor unrest in the past year. It has been concentrated in the Pearl River Delta region but has affected other parts of the country as well. Some of the strikes have resulted in sizeable pay hikes, but labor has other demands than just wage hikes. New labor regulations which took effect January 1, 2008 are designed to protect better workers' rights, including signed, written contracts for all employees. The new mandates have also hiked labor costs. Some of the strikes that are now taking place reflect workers attempts to see that these new regulations are enforced better than before, but there is an underlying frustration among some groups that costs have risen faster than their incomes and they are finding it increasingly difficult to make ends meet. India has a militant labor force. Unions are well organized and have considerable political clout. The government cannot afford to alienate organized labor and has adopted laws that offer workers considerable protection, particularly on matters relating to firing. Industry wants more freedom to hire and fire. Its demands include a ban on flash strikes; a reduction in the number of labor laws; closure without prior permission of units employing up to 1,000 employees (against 100 at present); greater use of contract labor in non-core areas; and a different dispensation for special economic zones to compete in export markets with China (where it is far easier to close shop and sack employees). However, the government is not in a strong position to make these reforms. A series of labor law reforms that strengthened basic labor rights were passed in Indonesia soon after the fall of Suharto. The pendulum of influence swung toward organized labor, and most employers have been complaining about labor issues ever since, claiming labor laws are frequently open to different interpretations that are enforced inconsistently and in ways that are open to abuse usually in favor of militants. Labor laws have been revised, so the situation is not as bad as it was. The movement has become highly fragmented, with more than 180 unions officially registered today. Pressure is therefore building for a consolidation of labor unions into three or four large confederations. However, there are so many turf wars within the movement that it will be difficult actually bringing this consolidation about. Indonesias labor movement has been greatly politicized in recent years. This has taken some of the sting out of the movement, since some of the most active labor leaders have moved into politics. Union members also complain that some unionists who led major industrial strikes and demonstrations during the final years of the New Order era have been co-opted by the Establishment after getting positions as commissioners at state-owned enterprises and enjoying wealth, like houses and cars. Labor militancy is not a big problem in Malaysia. There is a shortage of many types of production labor, which has prompted many companies to rely on imported migrant workers from countries like Indonesia and Bangladesh. Page 41
India
7.00
Indonesia
5.25
Malaysia
4.00
August 2011
However, this means companies are more vulnerable to periodic policies designed to clamp down on illegal migrants and the use of imported labor than by domestic labor militancy. In general, companies have a great deal of flexibility in managing the size of their labor force. Individual employees can use the system quite effectively to challenge layoffs if they feel they are justified, but workers are severely restricted in their ability to organize and strike. Large groups of workers including immigrants, employees in the electronics industry (the countrys largest) and certain classifications of employees in the public sector face restrictions on the right to organize. The right to strike is not specifically recognized and many legal restrictions to strikes exist, both in terms of workers who are excluded as well as in terms of procedures. The formation of general unions is prohibited and trade union membership is limited to workers in similar trades. Trade unions cannot form general/national confederations of trade unions; the Malaysian Trade Union Congress, which acts as an association established under the Societies Act, cannot conclude collective agreements nor call for industrial action. Philippines 4.50 The Philippines has an active labor movement that in many ways is more typical of a developed economy than a developing one. Union membership has fallen in recent years in part because there has been a shift away from manufacturing, where there is a tradition of unions, to services, where unionism is less well established. The government is also not aggressively promoting the formation of unions in workplaces. Laws exist to guarantee minimum wages, provide for overtime, and guard against abuses like child labor, but they are frequently ignored more by locally-owned companies than foreign investors. The union movement has helped to reduce many of these abuses and keep them in check. In theory, companies are free to hire and fire workers. However, in practice care has to be taken in doing so. It is important to make sure workers receive all the benefits to which they are entitled, but conferring with local officials beforehand in order to make sure that everything is done properly frequently runs the risk of having those same officials leak the companys plans to the affected workers, who are then in a stronger position to take disruptive action. Organized labor has rarely displayed any political muscle. Less than 10% of Thai workers are in labor unions. Only the public sector unions made up of workers in railways, other transport, the docks, telecommunications and electricity generation wield some political influence but invariably in pursuit of their own narrow interests, not for any political cause or to benefit workers more broadly. They have, for instance, with help from other quarters, been able to stymie successive governments attempts to privatize state -owned assets in transport and the utilities because they believe the change would harm them. Vietnamese workers are not free to join or form unions unless they are affiliated with and have been approved by the Communist Party-controlled Vietnam General Confederation of Labor (VGCL). Under the Vietnamese Labor Code, the VGCL is required to organize a union within six months of the creation of any new business. However, only 85% of state-owned enterprises, 60% of foreigninvested enterprises, and 30% of private enterprises actually have been Page 42
Thailand
4.00
Vietnam
4.00
August 2011
unionized. Where VGCL-affiliated unions have been established, the representatives often have close ties to the management. Workers at their own initiative have set up hundreds of unaffiliated labor associations. These unaffiliated labor organizations are not afforded the legal protections that are given to the VGCL-affiliated unions, but they have still staged strikes and other demonstrations. Starting in 2006, unprecedented numbers of workers began to join "wildcat" strikes at foreign-owned factories around Ho Chi Minh City and in surrounding provinces in the south.
2. Social activism / unrest

This variable covers threats posed by public demonstrations other than labor strikes. Such demonstrations might be held by students, political activists and any other special interest groups. Demonstrations per se do not push up risks provided they are orderly, but if they threaten the stability of the government, the quality of government policies, the governments ability to implement positive policies, or the quality of the environment for foreign investors, we view them as a negative development. Country China Grade 4.00 Rationale One of the governments top priorities is maintaining social stability. However, the emphasis is more on short-term stability than on reforms that would maintain stability in the medium term. Some of the short-term measures, like arresting artists, dissidents, lawyers and Internet users, might be intimidating enough to keep the lid on unrest but the same measures also risk a backlash eventually that could be more destabilizing than if different tactics had been employed to begin with. China is a high risk country in terms of the potential for social unrest to deteriorate and become a much bigger problem than it is at present. Income inequality is growing, creating resentment among poor Chinese, especially migrant laborers and farmers. The media is being censored even more than usual, and the government is cracking down hard on Internet sites considered to be controversial and taking other steps to control Web content. The authorities are using carrots as well as sticks to hold down the risks of social unrest. For example, the government plans to cut taxes for people with lower incomes and raise them for rich under new legislation expected to pass shortly. The government is also emphasizing a subsidized housing program to help urban poor. However, there has been a lot more effort in cracking down on dissent than on addressing the causes of complaints, indicating that the government is much more sensitive about social stability, with the implication being that potential problems could be building and threats intensifying. India, a diverse, multi-ethnic, multi-faith country, has always struggled with a degree of social instability as various minority groups seek redress against discrimination. India's policymakers have historically been able to manage the risks fairly well, considering the complexities of a varied and open society. Still, the risks exist, and in some ways the rapid growth of the economy is aggravating rather than reducing them, since it is widening the gap between the haves and Page 43
India
6.00
August 2011
have-nots in ways that could cause more social tensions. There are a number of causes of social unrest in India, but most of them are local issues, which mean the unrest stays local and disaffected groups from different parts of the country have little reason to unite. Two issues that are exceptions are the high rate of inflation, particularly food prices, and corruption at the national level. Indonesia 6.50 Religious activism is a source of unrest not only between Islamic and non-Islamic groups but also between Islamic groups with different views. So far the government has not handled these conflicts well at all and has allowed some more conservative views to dominate others by sheer intimidation. The problem of basic crime against persons and property also remains moderately high in parts of the country, while migration is another cause of friction that can at times result in violence. In Maluku, West Timor, West and Central Kalimantan and Central Sulawesi, some former displaced groups are actively discriminated against by indigenous residents. These groups often share a number of common problems including poor housing conditions, lack of access to land, lack of economic opportunities, food insecurity, and limited social integration with surrounding communities. Malaysia's government does not take any kind of disobedience lightly. It grants few licenses for free assemblies. When illegal ones are planned, police detain opposition leaders and at times invoke the controversial Internal Security Act (ISA) to arrest activists. Even so, the number and intensity of demonstrations have been increasing in recent years, as the opposition gains strength and is willing to challenge the governments attempts to keep a lid on protests. There are even protests against the tactics of the government (like employing the ISA) to block demonstrations. In addition to politics, race and religion are other causes of unrest, with ethnic Indians, Chinese and Malays all highly protective of their own interests. Ethnic Chinese and Indians, the two largest minorities, have become more vocal in demanding racial equality in part because of growing economic hardships, while the governments recent moves to scale back affirmative action policies for native Malays runs the risk of angering younger Malays who view such policies as entitlements. Recently there have even been frictions within the same ethnic and religious groups. For example, there is a growing rift between conservative and moderate/liberal Muslims over who can act as a religious leader and how Islamic law should be applied. Of the economies covered by this report, wealth discrepancies in the Philippines are second only to those in China. Not surprisingly, this disequilibrium has contributed to various kinds of social unrest, including moderately high crime rates (especially for cash-raising activities like kidnapping and extortion), a communist guerrilla movement and insurrections by groups like Muslim rebels in Mindanao that feel disadvantaged. However, as in India, the Philippines political structure is adaptive and flexible enough to survive these kinds of problems probably better than countries like China and Vietnam, which are more rigid and place so much emphasis on control that they would be discredited by the kind of turmoil that is the norm in the Philippines. The grade for the Philippines is higher than for the two more authoritarian Communist Page 44
Malaysia
6.30
Philippines
6.50
August 2011
countries because social unrest in the coming year or two will be higher and more publicized in the Philippines, but the risk of this unrest escalating to really disruptive proportions is low. Thailand 7.00 Recent elections have resulted in a reduction in the number and intensity of public demonstrations, but this could be temporary. Social unrest is likely to remain a prominent problem in Thailand through 2012, as the so-called Red Shirts and Yellow Shirts keep using public protests as a way to press their positions. The country is divided into camps, with one mainly drawing from rural areas and now in power supporting the position of exiled former Prime Minister Thaksin Shinawatra, while the other drawing mainly from middle-class urban groups and royalists, supporting almost anyone but Thaksin and his associates. This group has lost power and is now in the opposition, but it remains very influential in the military and has the capability to organize more demonstrations to protect and promote its interests. If the current king were to die within the next two or three years, social instability could be further aggravated. The country would go into a period of mourning, but a monarchy transition could make it more difficult for opposing groups to find enough common ground to strike a compromise. Vietnams Communist Party places a very high priority on maintaining social stability and has the power to prevent isolated outbreaks of unrest from spreading nationwide. There are dissidents in Vietnam, including democracy activists, human rights defenders, cyber-dissidents, and members of unsanctioned religious organizations. The government keeps all these groups on a very short leash, frequently arresting leaders and jailing them.
Vietnam
3.50
3. Terrorism and personal security risks

This variable refers to insurrection movements, the focus of foreign terrorist groups and crimes against persons and property. Country China Grade 3.00 Rationale From the perspective of foreign investors, China is one of the safest countries in Asia. The risk of being a victim of a terrorist attack is small. Petty crime is a problem, but not major crimes like murder and assault. In the wake of the military crackdown on Uighurs in Xinjiang province in the Summer of 2009, China now faces a greater threat from foreign Islamic terrorists. Al Qaeda has threatened retribution. However, China is a very hard target for such terrorists. Threats are higher in regions like Xinjiang where minorities are actually located than in major cities like Shanghai, Beijing or Guangzhou, where most foreign investors are concentrated. India has more domestic insurgency movements than any other country covered by this report. It also has a serious problem with Islamic terrorists, which is aggravated by continuing instability in neighboring Pakistan. Unlike in many countries, where terrorism risks are in secondary cities, in India they are high in Page 45
India
7.00
August 2011
primary cities like Mumbai too. All of these problems will keep terrorism and personal security risks higher in India in the coming few years than in most countries. Indonesia 7.00 There has been a reduction in insurrection threats in recent years. The reason the grade remains high is because there is still a threat of acts of terrorism by Islamic extremists. The government has reduced but not eliminated the ability of such terrorists to carry out acts of violence. Indonesia is a front-line state in the fight for the hearts and minds of Muslims, so Islamic extremists have a strong interest in keeping their cause alive in the country, just as the US, Australia and other governments have an interest in supporting the Indonesian government to make sure the Republic remains a showcase example of a moderate Islamic democracy. Government security forces have done a good job of fighting Islamic terrorism. The grade of five reflects a situation where extremists would like to have a higher profile but when the government has succeeded in preventing this from happening. There is no reason to expect this status quo to change in the coming year. There are threats posed by domestic insurrection movements, including a Communist insurgency and Islamic extremism. Separatist extremism in southern Philippines is a particularly complex issue that involves religion, regionalism, economic and ethnic dimensions. Furthermore, it is linked in various ways to global and regional terrorist problems. As in China but unlike India and Indonesia, terrorism threats in the Philippines are much bigger in some regions than others. For example, risks are much higher in Mindanao than in the capital region around Manila where most expatriates live and work. In the capital region concerns center much more around common crime and similar personal security risks, not terrorism. However, these types of personal security risks are higher in the Philippines than in other countries covered here. Personal security from crime is probably a bigger threat than terrorism. The latter problem exists in the south of the country, where there is an Islamic rebellion, but so far acts of terrorism have been confined largely to this region. Acts of terrorism that have taken place in Bangkok and other areas outside the south have been associated less with the Islamic rebellion than with the fight for political power between different groups, including the police and military. Most of these incidents have been small in scale such as a hand grenade being thrown in a public place but they do show such risks exist. Vietnam has even less of a threat of terrorism than China. Its minority problems are much less than Chinas and there are no ties linking local issues with globa l extremist groups. Expatriates have to worry about petty crimes like pickpocketing and robbery, but major crimes against persons and property are unusual.
Malaysia
5.00
Philippines
7.00
Thailand
6.00
Vietnam
3.00
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4. Extent that regionalism is a problem

Regionalism refers to the problems that can result when people from one part of a country defend their regional interests in ways that can put them at odds with the national government or with people from other parts of the same country. This may be due to economic or historical circumstances, for example when a national government is dominated by people coming from one region and is perceived to discriminate against people from other regions. It includes problems arising when different regions of the same country fail to cooperate on mutual problems like pollution. However, for the purposes of our model, the religious and ethnic motivations that may also underlie regional sentiments are not included in this section. They are covered in the earlier section analyzing social activism/unrest risks. The same goes for insurrection movements attempting to gain independence or autonomy for a particular region, which are covered in section 3. Country China Grade 5.00 Rationale Regionalism has been an issue in China since the days of the war lords. There are numerous dimensions to the modern problem, and some are growing. One involves minority groups living in places like Tibet and Xinjiang who resent the way they have been treated by Han Chinese and the government. Another involves provincial-level governments that pay lip-service to instructions from the national government in Beijing while pursuing policies that are motivated more by local priorities that sometimes are not aligned with national priorities. Finally, there is a cultural dimension to the problem. The Mainland might use the Mandarin dialect as the common language, but China is still divided by groups distinguished by their individual dialects. They might be all Han Chinese, but they still identify more with their localities in China and have strong biases against people from other localities. This type of problem is growing more complicated with the reintegration of special administrative regions like Hong Kong and Macao, and it will become even more so as the differences between Taiwan and the Mainland shift from being identified as mainly political to being regional/cultural, with people interfacing more who have very different backgrounds, experiences and aspirations. Regionalism is a major feature of India. State politics is extremely important and conditions vary greatly from state to state. Kashmir is one of the most extreme examples of regionalism in India that has a big negative impact on social instability. However, there are many more, with different regions run by governments with very difficult ideological philosophies and different religious dynamics. There are also big differences in wealth and population density between regions, fueling migration flows that can aggravate social tension. Regionalism has decreased as a problem compared with five years ago due mainly to the progress that has been made in restoring peace to Aceh province. Papua province remains a conflict area, but in general violence associated with regionalism and separatist movements has decreased in Indonesia. Instead, the main way regionalism is manifesting itself as a problem is in dividing resources with the national government. Since the fall of the Suharto regime, power has been decentralized much more. Most regional governments have fought for a greater share of income that previously went to Jakarta. This has resulted in Page 47
India
7.50
Indonesia
6.80
August 2011
disagreements that have squeezed foreign investors, interfered with the building of new infrastructure, and cause inconsistent application of regulations. It has also added a new local dimension to such problems as corruption. Malaysia 6.50 Regionalism in Malaysia takes two forms. The oldest form divides Peninsula Malaysia from Sarawak and Sabah. There has been considerable resentment in the latter two regions that they have not received as many economic and political benefits as they should have from the wealth they generate the country through their natural resources. In some ways, the growing problems of the ruling Coalition have reduced this problem, since they have increased the power of politicians from Sabah and Sarawak to leverage their support for the government in exchange for more positions of influence. However, a growing new form of regionalism is the way the political opposition is winning control of more states. It was one thing when the opposition controlled only one state, but now that the opposition controls a large number of the 13 states, it is much more difficult for the government to use fiscal inducements and penalties to either woo back or penalize errant states. Regionalism is a big factor in the Philippines but not a particularly disruptive one except for the Islamic separatist movement in the south of the country. People throughout the country strongly identify themselves with the regions in which they originate. They normally vote along regional lines and their personal allegiances are based mainly on family and regional connections. Except for in the south of the country, migration is not a major source of friction between people from different parts of the Philippines. The political stalemate between so-called Red and Yellow Shirts can be defined in regional terms, with the division separating rural northeast from urban areas. The Islamic insurrection movement in the south of the country is a different manifestation of problems associated with regionalism. A lasting solution to Thailands current problems is unlikely to happen until those aspiring to political power find a formula that is inclusive of a critical mass of both rural and urban groups, not one or the other. Regionalism is a problem in Vietnam since it contributes to widening income gaps and a sense of ethnic discrimination. Vietnam has 54 ethnic groups, with the Kinh comprising more than 80% of the population of 85.8 million, according to government figures. They are the dominant ethnic group. A few others, such as the Tay and Hoa (ethnic Chinese), have similar standards of living and education. But most other ethnic minorities -- more than eight million people -live in the mountainous and remote areas and are economically disadvantaged. The poverty rate for these groups is 69.3%, compared with 23.11% for the majority Kinh and Chinese ethnic groups, according to the UN Childrens Fund.
Philippines
6.25
Thailand
7.00
Vietnam
4.50
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F. EXTERNAL POLITICAL RISKS
External Political Risks

10 9 8 7 6 5 4 3 2 1 5.27 4.00 6.33 4.33 4.67
3.92
4.08
0
This section evaluates risks associated with changes in other countries that could directly or indirectly harm the business environment in the country being analyzed. Some forms of direct external risks are the possibility of being attacked by another countrys military or subjected to trade and other forms of discrimination. Indirect forms of external risks include policies by other governments that might affect global economic and trade growth, exchange rate stability, immigration flows, and direct investment trends.
External political risks a. Direct military threats b. Vulnerability to fallout from socio-political instability in other countries c. Vulnerability to policy changes by governments in other countries Average score China 6.00 4.50 India 7.50 7.00 Indonesia 4.00 4.00 Malaysia 3.50 4.25 Philippines 3.50 4.50 Thailand 3.50 4.25 Vietnam 5.00 4.00
5.30
4.50
4.00
4.00
5.00
4.50
5.00
5.27
6.33
4.00
3.92
4.33
4.08
4.67
Grades are scaled from zero to 10, with zero the best grade possible and 10 the worst.
1. Direct military threats

This variable refers to threat of being attacked or invaded by another countrys military. It also refers to fallout from military activity involving other countries.
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Country China
Grade 6.00
Rationale Chinas military risks are increasing, and the country is also increasing as a military risk to some other countries. China is aggressively trying to modernize its army, navy and air force and also the capability to project military power longer distances. A lot of public attention is on Chinas rise as a power capable of confronting the US, and recently Washington has been raising its profile as a counter-balance to China in the region, particularly in the South China Sea. However, Washington is not where the biggest military threats to China lay or where China poses the biggest risks. They are much closer to home and involve neighbors such as North Korea, India, Russia and Vietnam. China has more countries along its border than any other country in the world, and relations with many of these countries are not particularly stable. It has fought wars with Russia, Vietnam, Japan, and India, as well as a civil war with the KMT on Taiwan. It shares a border with North Korea, which is aspiring to develop nuclear weapons capability something that Russia, India and Pakistan already have. Although North Korea is supposed to be an ally, there are clearly limits on Chinas ability to influence the behavior of the regime in Pyongyang.
India
7.50
In the immediate future, Indias biggest military threat comes from Pakistan, while in the medium future, China could emerge as a bigger threat, particularly if it tries to increase its naval presence in the Indian Ocean and presses its claims to disputed territory along its Himalayan border with India. Although relations between New Delhi and Islamabad have improved in recent years, the continuing high level of our score reflects concern that the rise of Islamic extremism, especially along the tribal areas near the border with Afghanistan, has put Pakistan in an unstable political situation. This problem is likely to intensify as a result of the US fight against Al Qaeda, the Taliban and the desire to stabilize the political situation in Afghanistan. These objectives cannot be achieved unless Pakistan has success in containing its own problem with extremists. If it fails to do so, instability in Pakistan could greatly intensify. There could be government changes, fallout from which could include a harder military line against India or, at the very least, more activity involving coordinated action by Islamic extremists on both sides of the border. Indonesia does not face any significant military threats from another sovereign country, which is fortunate since the countrys military capabilities are limited due to its scarce financial resources. There are some border issues with Malaysia, the Philippines and Singapore but nothing that is really a major military threat. What the country does face is a threat from foreign Islamic extremists who are giving support to indigenous terrorist groups. Indonesian security forces would like to be more effective in blocking the movement of Islamic militants between Indonesia and southern Philippines. They would also like to be able to fight smuggling and piracy in the waters surrounding Indonesia much better than they are currently able to do. One of the bigger security issues Indonesia will have to face in the years ahead is adjusting to Chinas desire to project its own naval power. China is investing heavily in blue-water capabilities Page 50
Indonesia
4.00
August 2011
and wants to raise its profile in the Indian Ocean, which means it will also have to raise its profile in waters surrounding Indonesia on its way to this region. With the US Navy also patrolling these waters, Indonesia could feel pressured to beef up its own naval capabilities to protect its interests and avoid being ignored in its own backyard. Malaysia 3.50 Malaysia does not face many direct military threats. The countrys armed forces are concerned mainly with border patrol activity, which includes fighting pirates in the waters around Malaysia, defending the countrys claims of sovereignty over outlying islands also claimed by other countries like China and Indonesia, and preventing the Islamic insurgencies in the Middle East as well as in neighboring countries like Thailand, the Philippines and Indonesia from spilling across the border into Malaysia. Malaysia potentially could be targeted by Islamic terrorists, with foreign groups assisting domestic extremists, but the countrys security forces so far have done a good job of policing against this threat. Most security threats to the Philippines are internal rather than external, which is fortunate since the countrys armed forces are poorly equipped and stretched thin by fighting domestic insurgencies. They can patrol the countrys waters against limited threats like pirates and smugglers, but they do not have the capacity to confront larger threats. This is one reason why China has tended to emphasize its sovereignty claims over islands also claimed by the Philippines since it knows the risk of a confrontation is small. Fortunately for the Philippines, it does not face many other direct military challenges. Most of Thailands security challenges are internal, and its armed forces are illequipped to engage in foreign wars with other countries, including even less well-equipped neighbors. Fortunately, Thailand does not have any outright enemies on its borders. There are outstanding border disputes, smuggling and other cross-border criminal activities to police against, and insurgency problems in other countries that at times can spill across the border into Thailand, but these are well-known risks that have been managed for decades. They have never been allowed to escalate to the point where they adversely affect the Thai economy or the environment for foreign investors. The Thai military might at times be involved with clashes with troops from neighboring countries (such as recently happened with Cambodia), but there are also cross-border commercial interests (some involving Thai military leaders) that help to stabilize cross-border relations and prevent disputes from escalating to really dangerous levels. Vietnam has the strongest military of any ASEAN country much stronger than immediate neighbors like Cambodia and Laos. It faces no significant military threats from these countries. However, the military risk from China, Vietnams northern neighbor, is formidable. Vietnam and China each assert claims to the Spratly and Paracel Islands, archipelagos in a potentially oil-rich area of the South China Sea. While China occupies the entire Paracels, having forced off Vietnamese forces 35 years ago, the Spratlys are dominated by Vietnam, which has built military bases on more than 20 reefs and islets. The governments of the two counties have tried to minimize their differences in recent years, Page 51
Philippines
3.50
Thailand
3.50
Vietnam
5.00
August 2011
stressing economic cooperation, but their strategic interests still clash when it comes to who has sovereignty rights over some of the most significant waterways in the world. In a direct reaction to Chinas naval expansion and improving power projection capabilities, Vietnam is building up its fleet of Kiloclass submarines and new jet fighters. Hanoi has also been pursuing closer military relations with the United States through joint military exercises, and sharing intelligence on terrorism, drugs, and other transnational threats. Vietnam has also hosted US warships at its ports recently.
2. Vulnerability to social instability in other countries

This is a measure of the potential for political turmoil or social unrest in another country to harm or upset the business environment in the country being analyzed. Such instability could affect such factors as immigration, investor confidence, and capital flows. Country China Grade 4.50 Rationale Perhaps the most profound change that has taken place in China over the past three decades is how much more interdependent it has become with other countries in the world. This has enabled the economy to perform as spectacularly as it has, but it has also made China much more vulnerable to social unrest and other developments around the world. For example, Chinas growing economic links with other countries as far away as Africa and Latin America mean its supply lines are increasingly vulnerable to being disrupted by instability in these countries. China is now threatened by piracy off the coast of Africa in ways it never was before. In some ways, unrest in countries like Iran and Sudan is creating openings for China to make strategic investments in oil and other resources on favorable terms, but these investments also entail significant risks and could put China at odds with the US if Washington feels Chinas policies are negating the effectiveness of its own policies toward these countries. China also has to worry about how smoothly North Korea is able to carry out its next political succession and how allies like Pakistan cope with increasing instability. There are indications that recent terrorist incidents in Xinjiang Province were supported by Islamic radicals in Pakistan. India is more vulnerable to social unrest in other countries than most of the other countries covered by this report. In particular, adverse developments in Pakistan could result in more terrorist acts and other security risks in India. Risks arising from the Sri Lanka have fallen as a result of the end of the civil war there. However, a number of other neighboring countries have domestic insurgency problems that pose risks for India too. Further afield unrest by Tibetans in China creates diplomatic problems for India too, since many Tibetan exiles live in India. Sympathy by Tibetan exiles in India to the plight of Tibetans in China could be a source of future diplomatic problems between New Delhi and Beijing. Indonesia has religious and ethnic sensitivities that can be inflamed by foreign developments, particularly in countries where Islamic groups are perceived to be fighting for a righteous cause, but the government has done a good job of Page 52
India
7.00
Indonesia
4.00
August 2011
managing these sensitivities lately. The local population today is focused more on domestic problems and less on developments involving Israelis and Palestinians, the war in Iraq, social unrest in Egypt, Libya and Syria, or problems in southern Philippines. Indonesia has avoided being drawn into regional conflicts like the controversy surrounding the military regime in Myanmar or the on-going border dispute between Thailand and Cambodia, although it has tried (so far unsuccessfully) to play the role of a mediator in the latter dispute. In general, it only makes comments on regional developments that directly affect Indonesia, such as Malaysias treatment of Indonesian workers. This kind of issue can spark local protests and some government initiatives to protect the interests of Indonesians, but the government has been careful not to allow these kind of periodic points of friction from driving the countrys relations with its neighbors. Malaysia 4.25 Malaysia does have to worry about insurrection movements in neighboring countries like Indonesia, Thailand and the Philippines. Insurgents from these countries have at times fled to Malaysian territory to escape capture. Poverty, natural disasters and other factors in neighboring countries like Indonesia and Bangladesh have also fuelled illegal immigration to Malaysia, contributing to domestic social problems. Up to 850,000 illegal immigrants, mostly Indonesians, are believed to be in Malaysia, meeting the labor-short country's chronic need for cheap, semi-skilled workers at construction sites, plantations, factories, restaurants and hotels. They are blamed by ordinary Malaysians for crime, the growth of shanty settlements and the spread of disease. They are also resented for repatriating their wages rather than spending the money in Malaysia. The recent rise of social unrest in Middle Eastern Islamic countries could be a new challenge for the Malaysian government if the local population identifies with the grievances of protestors in these countries and is motivated to mount similar protests against their government. Social unrest and other forms of violence in countries like Saudi Arabia and other Middle East nations create risks for the hundreds of thousands of Filipinos who work in these regions. The actual magnitude of these risks has decreased in the past year. A year ago we were concerned that the global recession could seriously hurt remittances of Filipinos working abroad. However, as it turned out such remittances continued to grow, helping to support the entire Philippine economy. External socio-political risks for Thailand are steady and average. To be sure, Thailand is vulnerable to illegal immigration flows from neighboring countries, particularly Myanmar. The Thai government is also worried that Islamic extremists in the south might be getting support from sympathizers across the border in Malaysia and possibly from even further afield. However, these risks need to be kept in perspective. The past year has seen social turmoil in Myanmar, but it did not have a major impact on Thailand. The Cambodian government is applying diplomatic pressure on Thailand because of a border dispute that has been largely instigated by the Thai military, but Phnom Penh has been careful not to allow large local demonstrations directed against Thai Page 53
Philippines
4.50
Thailand
4.25
August 2011
interests, and it is likely to keep a lid on these kind of nationalist pressures because it would be bad for tourism and other sectors of the Cambodian economy. Vietnam 4.00 Vietnam is not particularly vulnerable to social instability elsewhere in the region. In some cases it even benefits from problems elsewhere in the region. For example, to the extent that Thailands domestic political problems are hurting rice and other agricultural exports, Vietnam has been able to fill in the gap and push its own exports of these commodities. Developments in Cambodia and Laos generally do not have a big impact on Vietnam, while recent labor problems in China do more to shift investor attention to Vietnam than to aggravate problems there.
3. Vulnerability to policy changes by governments in other countries

This variable refers to the extent to which policies advocated by foreign governments could disrupt the business environment in the country being analyzed either directly or indirectly. Direct examples include embargoes and boycotts taken by one government against another country. Indirect examples of negative fallout for one country arising from policies taken by another government that might be motivated by strictly domestic considerations include environmental degradation, economic mismanagement, and health care mistakes.
Country China
Grade 5.30
Rationale Power is shifting to China from the US, and this is affecting not only Chinas policies with other countries but also those countries policies with China. Most are trying to move closer to China economically, but they are wary about how China will try to flex its new economic, military and diplomatic muscles. US and European policy toward China could turn more protective due to these countries problems with unemployment. This will put more pressure on China to find new sources of growth, which means it will have to adjust its policies to take into account the new global conditions. Whereas it is relatively easy for China to articulate its policy differences with Japan and Western governments, it is more difficult to do so with Russia, North Korea, Southeast Asia, the Central Asian Republics, and governments of developing countries in Africa. China wants to maintain the public image that its relations with all these countries are close and smooth. In fact, there are growing points of potential friction. These countries fear having their own manufacturing sectors overwhelmed by cheap Chinese imports and most of the benefits from Chinas direct investments going to China and Chinese businessmen, not local companies. They do not want to place all their eggs in the Chinese basket and their policies could start reflecting these concerns more in the years ahead. Indias economy is more self-contained than Chinas and therefore is not as vulnerable to policy changes in other countries. Indias trade levels are much smaller than Chinas and it also has less foreign investment exposure. Much of what it does have is in developed countries like the US and UK, but both these Page 54
India
4.50
August 2011
governments are trying to strengthen their relations with India. One government that could change its policies in ways that hurt India by increasing national security threats is Pakistan. In the longer term, Chinas policies toward India might not be supportive if the two countries clash in sourcing raw materials from emerging markets and in competing for markets. China is increasing its voice in bodies like the ADB and the IMF. It could use this clout to oppose giving certain kinds of assistance to India. Indonesia 4.00 Indonesia is heavily reliant on multilateral agencies and foreign governments to provide financial support for the countrys development efforts but there is little risk that this support will weaken or be interrupted. Foreign governments like Australia, Japan and the US want very much for the Susilo government in Indonesia to succeed and are therefore extending it a lot of financial and other support. One of the bigger security issues Indonesia will have to face in the years ahead is adjusting to Chinas desire to project its own naval power. China is investing heavily in blue-water capabilities and wants to raise its profile in the Indian Ocean, which means it will also have to raise its profile in waters surrounding Indonesia on its way to this region. Indonesia could feel pressured to beef up its own naval capabilities to protect its interests. Malaysia is doing a good job of managing its relations with major trading partners like China, the US, Japan, Australia and the EU. There are some strains, but the overall trend is good and stable. The most important single relationship that Malaysia has is with Singapore. The two governments have recently settled some long-standing points of disagreement and they are starting to stress more their complimentary possibilities that can be exploited to their mutual benefit rather than get hung up on points of competition as was often the case in the past. ASEAN is the most important regional grouping for Malaysia. So far the group has fallen short of its goals, holding back regional integration possibilities, but the groups free trade agreement with China could be used by Malaysia to attract more foreign direct investment. The foreign policies of other countries that Manila most needs to worry about relate to how they manage their economies, accept Philippine labor, and permit outsourcing to offshore call centers. The relationship between the US and the Philippines is stable, while the Philippines also gets considerable financial help from Korea and Japan. Relations with China, on the other hand, are mixed. The Philippines is not benefiting from Chinas economic boom as much as many other Asian countries, while Beijings recent assertion of its sovereignty rights over islands in the South China Sea that are also claimed by the Philippines could be a source of diplomatic friction in the future. The botched hostage attempt that saw a number of Hong Kong tourists killed will cause governments to issue travel warnings to the Philippines that will hurt the tourism industry. The incident is also continuing to complicate Philippine relations with both Hong Kong and China as the issue of appropriate compensation to families of the victims drags on. Most major foreign governments like those of the US, China, Japan and the EU members tend to cultivate close relations with Thailand and avoid getting Page 55
Malaysia
4.00
Philippines
5.00
Thailand
4.50
August 2011
involved with its political affairs. There has also not been any increase in protectionism directed against Thai exports. The one government that has adopted a policy change recently that has upset Bangkok is neighboring Cambodia. The government in Phnom Penh changed its policy in response to provocation by Thailand regarding sovereignty over a temple and border area that the UN has long recognized as belonging to Cambodia. However, neither side wants this dispute to escalate and their responses to date have been measured. As of this writing, this dispute is de-escalating, but it is unlikely to be resolved completely. Vietnam 5.00 The two most important governments to Vietnam are the US and China. Relations with the US have improved considerably and Vietnam would like the US to stay engaged with the region so it plays a balancing role vs. China. This policy could get more attention in the coming year if China keeps trying to assert its control over disputed islands in the South China Sea. In the longer-term, the most important external policy changes that will affect Vietnam relate to decisions by countries like China, Thailand, Laos and Cambodia on how to use the Mekong River for their own interests. The Mekong Delta is the source of 25% of Vietnams GDP and half of its rice production. Decisions by governments of countries lying upstream from Vietnam that affect the flow and quality of water to Vietnam have tremendous implications for Vietnam. There are efforts to coordinate policies relating to the Mekong, but major differences could still arise since the main motivating factor of upstream governments will be to maximize their use of the river for their own development purposes.
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G. SYSTEMIC RISKS
Systemic Risks
10 9 8 7 6 5 4 3 2 1 6.79 7.81 6.94
6.56 5.76
7.10 6.18
0
This category of risk focuses on the quality of a countrys key institutions, including its judiciary, media, financial system, regulatory bodies, organized religion, and major branches of government. They also include corruption and cultural traits like nationalism and xenophobia. These risks are some of the most difficult for a country to eliminate since they are a part of its "personality," but they can and do change with time.
Systemic risks a. Extent that corruption is a problem b. Nationalism and other cultural risks c. Institutional weaknesses d. Intellectual property rights risks Average score China 7.00 6.00 6.25 7.90 6.79 India 8.00 7.25 6.00 6.50 6.94 Indonesia 8.50 6.75 7.50 8.50 7.81 Malaysia 6.25 6.00 5.00 5.80 5.76 Philippines 8.40 5.00 6.00 6.85 6.56 Thailand 8.00 4.00 6.50 6.20 6.18 Vietnam 7.00 6.00 7.00 8.40 7.10
Grades are scaled from zero to 10, with zero the best grade possible and 10 the worst.
1. Extent that corruption is a problem

Corruption is operationally defined as the misuse of entrusted power for private gain. This variable evaluates the risks associated with economies that tolerate bribery or the granting of favors, normally to government employees, for approvals or concessions that would not be granted without these favors. In some cases a bribe is paid to receive preferential treatment for something that the bribe receiver is required to do by Political & Economic Risk Consultancy, Ltd. Page 57
August 2011
law. In other cases the bribe is paid to obtain services the bribe receiver is prohibited from providing. Corruption exists in one form or another in all countries. However, the problem is especially bad in countries lacking the systemic checks and balances needed to prosecute instances of corruption when uncovered. It is also a major problem in countries where those involved with corruption can change the laws and regulations to legitimize what would normally be considered to be corruption. This type of corruption might be tolerated today by the government in power but those involved risk being prosecuted by a successor government or a foreign policing organization with cross-border powers. Country China Grade 7.00 Rationale The level of corruption in China is not just large; it is a potential political and economic cancer that could undermine the economy, sap public confidence, and result in political turmoil. It is one variable that threatens the sustainability of the governments entire modernization program. Communist Party leaders, including President Hu Jintao, have repeatedly said the fight against corruption is crucial to the partys survival. The recent crackdown on organized crime and corruption in the province of Chongqing is the tip of the iceberg when it comes to corruption in China. Graft takes many forms such as bribery, fraud, influence pedaling and abuse of power particularly at the city and provincial levels of government, although the past year has seen one Supreme Peoples Court judge fired on suspicion of taking bribes, while a former chairman of Sinopec was convicted of taking bribes and given a suspended death sentence. Most recently, the Railway Ministry has been caught up in a range of corruption scandals. These are particularly sensitive since this ministrys high-speed rail projects are under the direction of the national government, not the local government, and therefore link corruption to national-level leaders. Corruption is also evident in the flood of underground capital leaving China and being gambled away in Macao and invested in prime real estate in Hong Kong. The most serious problems with corruption do not involve foreign investors. The heart of the problem lies with state-owned companies and those with access to state-assets. Anti-corruption crackdowns have had limited success. The closer the government gets to its next generational change in leadership, the more the authorities are likely to want to be seen as cracking down on corruption. Unfortunately, they are also likely to be less tolerant of whistleblowers who are stirring up for public view examples of corruption that the authorities would rather not have publicized. From the perspective of national leaders, they need to be seen as being effective, and whistleblowers threaten this image. India 8.00 Corruption is a major problem in India not simply because it exists but also because average Indians are sick and tired of it and are extremely frustrated that more is not done to reduce the problem, which they blame on excessive bureaucracy, political greed, and institutional deficiencies. The local judicial system is so slow moving that people who carry out corrupt acts are able to go unpunished for much longer than in most countries and are actually encouraged by both the delays in litigation and the low pay of judges and lawyers. According to the Central Bureau of Investigation, which is in charge of rooting out and prosecuting corruption, there are 9,240 corruption cases still pending in courts. Page 58
August 2011
Considering that the CBI averages 1,200 investigations a year, this implies a backlog of 7.7 years. Indians are freer to express their frustrations with corruption than are average Chinese and they do so. However, the governments recent arrest of anti-corruption activist Anna Hazare has backfired badly and shows both how strongly the public feels about corruption and how it has the potential to destabilize the government. Indonesia 8.50 Corruption remains one of Indonesias biggest problems. During the first term of President Susilo, people were encouraged by his efforts to fight corruption. In particular, they were impressed with the record of the anti-corruption commission (KPK) in pursuing cases against high officials and in securing convictions (including against President Susilos own father-in-law). However, those spearheading the anti-corruption fight stepped on so many toes of bureaucrats and politicians that they have become victims of a backlash, seriously hindering their efforts. Establishment figures who would rather preserve the system just the way it is rather than permit real reform to take place have forced the ouster of some of the leading corruption fighters in the government and are blocking lasting reform. The anti-corruption fight recently escalated when the KPK widened its bribery investigation into Muhammad Nazaruddin, the former treasurer of the ruling Democrat Party. The probe now spans the ministries of sport, health and education and involves at least US$350 million in suspect transactions. The investigation of Mr. Nazaruddin is the first time a sitting member of Mr. Susilos political circle has been implicated in wrongdoing, but the case is far from complete. There could be a backlash against the KPK that ultimately weakens its power and hurts the reputation of Indonesias institutions, much as the recent court verdict against an Ahmadiyah sect member who was defending himself against Muslim hard-liners as they attacked his place of worship hurt the reputations of the judicial system and the governments ability to withstand pressure by conservative Islamic groups. Malaysia 6.25 The problem of corruption in Malaysia is not generally seen to be as bad as it is in most other developing Asian countries, but it is a political hot button and has the potential to destabilize the government and be the cause of national demonstrations. For years the ruling coalition refused to admit that corruption was a big problem, but when Abdullah Ahmad Badawi took office as prime minister, his admission that graft was a problem paved the way for a more open discussion. It soon became clear that this is an issue that many Malaysians care deeply about. One of the big complaints that Malaysians had of Mr. Abdullah was that he did not fight the problem of corruption in his own party or in the countrys key institutions nearly as hard as he indicated he would. The baton has now passed to his successor, Najib Razak, who is trying to convince the public that he is indeed serious. To the extent that he succeeds or fails could be shown by the next national elections, since corruption could be the main issue on which the elections will hinge. The Opposition has been galvanized around a new label: Bersih, or the Coalition for Clean and Fair Elections, which highlights concerns over corruption and election fraud. These are complaints that could unite the Page 59
August 2011
Opposition in the next elections and generate enough public appeal to topple the government. Philippines 8.40 The sad fact is that there is a culture of corruption in the Philippines. It is difficult for companies to deal with and is one of the main reasons that the country is not getting more foreign direct investment than it is getting. Official bodies that are supposed to fight corruption have limited resources. They do score some victories, but these bodies are still overwhelmed by the sheer magnitude of the problem they are up against. The problem affects the perceived quality of institutions like the court system, the office of the ombudsman, the tax authorities and Customs. The Philippine military also does not escape the reputational damage. In addition to the actual problem of corruption, the topic has been highly politicized. Public perceptions are manipulated by politicians intent on undermining the credibility and reputation of their rivals. In the coming year a lot of attention will be on how President Aquino addresses allegations of corruption leveled against the previous Arroyo administration. In the process, specific acts of corruption are likely to be revealed that fortify perceptions of just how serious the problem of corruption really is in the Philippines. Allegations of corruption have been used to remove most of the Thai governments elected in the past 20 years. It is therefore a highly politicized topic. Even today, those who staged the coup against former Prime Minister Thaksin Shinawatra justify their actions on alleged corrupt practices by Mr. Thaksin and his family, while supporters of Mr. Thaksin accused those who replaced him of being corrupt. Now that Mr. Thaksins sister has become prime minister, there could be a move to overturn his conviction and pave the way for him to return to the country. If so, this will create more controversy, since it would send out the message that the judiciary, in passing its verdict against Mr. Thaksin, was not acting independently and was using charges of corruption to achieve the political ends of a particular group of insiders. With as much finger pointing as there is, it is not surprising that Thailand fairs as badly in corruption surveys as it does. This does not mean, however, that it is a factor that foreign investors encounter on a daily basis. Although foreign investors may see corruption as rife in government, institutions like the police and military, and state-owned companies, not many feel it is a handicap to doing business and making profits in Thailand. They are much more concerned with ensuring that there is a stable political and economic environment for doing business, that Thailands economic dynamism is maintained and that there are clear -cut regulations for firms operating in Thailand. Corruption remains one of Vietnams biggest problems. From contractors skimming funds off large-scale infrastructure projects to health care officials getting kickbacks on equipment purchases, the problem is pervasive. Just as in China, Vietnams leaders know that corruption could ultimately hurt the Communist Party. However, also as in China, they know that much of the problem is at the grassroots base of the Party itself and if the government were to attack the problem comprehensively and systematically, it would risk hurting Page 60
Thailand
8.00
Vietnam
7.00
August 2011
the very underpinning of the Party. Therefore, Hanoi is careful in selecting which cases it wants to prosecute and which ones it wants to ignore. This approach is unlikely to change. Moreover, there are almost as many reports of whistleblowers being jailed for making corruption public as there as cases of corruption being prosecuted. This creates the impression that the authorities are more interested in keeping the problem swept under the rug than they are in actually cleaning it up.
2. Nationalism and other cultural risks

This variable refers to the risk that cultural values or prejudices in the country being analyzed will be allowed to manifest themselves in ways that threaten to discriminate against foreign business or expatriates living in the country. Racism, xenophobia, historical animosities based on national origin or religion are all examples of the types of cultural risks that can create difficulties for foreign investors and traders in certain markets. Country China Grade 6.00 Rationale In the past, Beijing used anti-Japan nationalism as a superglue to hold society together and distract it from domestic problems. Chinas nationalism this past year has been focused less on Japan and more on foreign groups supporting uprisings by internal ethnic minorities like Uighurs and Tibetans. Key dates like th the 60 anniversary of the founding of the Peoples Republic, and external shocks like the financial sector meltdown in the US have also set the backdrop of more nationalist rhetoric by those who feel Chinas system and culture are superior to others. To Chinas credit, it did not allow nationalistic rhetoric get out of hand. China can look and sound humble when it wants. Its leaders know that if feelings of nationalism are too blatant, it could complicate relations with neighbors by making China look like more of a threat than a strategic partner. However, the Communist Party of China is repositioning itself less in terms of its communist ideology and more as the party representing the interests of all Chinese. In view of the increase in domestic demonstrations over a range of local issues, it is very possible that the government will in the coming year once again raise nationalistic issues in an attempt to distract the local population from their grievances and to unify the population against perceived external threats. Nationalism can be a major issue confronting foreign investors in India, depending on the industry and location. Foreign investors that are seen as threats to domestic companies can find themselves the target of nationalists, who are frequently able to lobby for protection and adopt other tactics like unsubstantiated rumors to hurt the reputation of the products of foreign companies. However, the bigger problem with nationalism in India does not have to do with anti-foreign sentiments but with religious nationalism that pits one part of the population against another and can, at times, result in social unrest. Indonesias history as a Dutch colony is evident in the nationalism by political leaders. This has diminished with time, and today under President Susilo Indonesia is much less nationalistic than it was during the days of the late Page 61
India
7.25
Indonesia
6.75
August 2011
President Sukarno. Today nationalism is an excuse used by certain special interest groups to protect their positions in the economy, particularly against foreign competition. Even in industries where foreign investment is welcome, there is an underlying desire to transfer ownership eventually to local interests, and disagreements frequently emerge both with respect to the pricing of assets being transferred and which Indonesian groups should be the beneficiaries of such transactions. Cultural risks take a different form. In general, Indonesians get along well with foreigners. However, there are serious internal divisions between different ethnic groups, with perhaps the most prominent being between native Indonesians and ethnic Chinese. So far these local differences have not interfered with Indonesias business and diplomatic relations with Mainland China, but that could change if Chinese investors in Indonesia clash with either their local work forces or special interest groups with an anti-Chinese bias. Malaysia 6.00 A major challenge for Malaysia is managing its domestic cultural fault-lines. This is a leading political issue that will affect the outcome of the next elections, since a growing number of the countrys Chinese and Indian ethnic minorities have been voting for the opposition, while many ethnic Malays could resist reforms by the government that reduce entitlements for this group. There is a growing recognition that Malaysia has to do more to regain its competitiveness or risk losing ground, on the one hand, to low-cost producers like Vietnam, India and China, and, on the other, to higher-tech producers like Singapore, Taiwan and Korea. This means the government cannot use the nationalistic arguments is has relied on in the past to protect such industries as automotive manufacturing, banking and many services from foreign competition and it also has to do more to attract foreign capital to the countrys stock market. Nationalism is not a major problem in the Philippines. It is a factor that Manila and Washington need to be careful of as they cooperate on matters like using US troops to help the Philippines fight insurgents. It is also a factor that could complicate Philippine relations with China, since many Filipinos feel very strongly about Chinese claims to territory the Philippines considers its own. Nationalism is also a factor that affects the reception foreign investors get in some industries like mining, agriculture and in takeovers of major local companies focusing on the domestic market. However, it is not a major obstacle to most exportoriented manufacturing and service industries. Nationalism is not a feature that is likely to differentiate the Aquino from the Arroyo government. Nationalism has not been a big obstacle to foreign investors in Thailand. It is significant to note that there has not been an increase in rhetoric directed against foreign companies during the past three years of political turmoil. To the contrary, the falloff in new foreign direct investment and the fears that foreign tourists might be scared away from the country have encouraged the Thai authorities to step up their efforts to make Thailand appear as welcoming as ever. The one place where nationalism is evident is in the way the Thai military and certain political groups have tried to raise border disputes with Cambodia to generate grassroots political support at home. Now that the elections are over Page 62
Philippines
5.00
Thailand
4.00
August 2011
and the Opposition has won, it is possible that these tactics will be abandoned or at least not pushed as aggressively as before. Vietnam 6.00 The government might want to use nationalism as a tool to unite the country. It works for older Vietnamese who personally experienced the civil war and the process of uniting the peninsula. However, it is much less of a motivating factor for younger Vietnamese who lack this experience and are motivated much more by economic growth opportunities, which involving inviting in more foreign investment and globalizing the economy. This is why nationalism is decreasing with time. Vietnam is growing more comfortable with its own place in the region and the world.
3. Institutional weaknesses
This variable refers to the integrity and independence of national institutions, such as the judicial system, the media, the financial system and local capital market, and different branches of government. More specifically, it seeks to assess the ability of such institutions to function smoothly through changes in government, carrying out their assigned functions in the face of pressure from such powers as political parties and vested-interest groups.
Country China
Grade 6.25
Rationale Many important institutions in China are weak. Most were set up to function in a central-command economy, something they never did very well. As the government has shifted to a more market-oriented economy, it has also had to reform institutions so they can perform in the new environment. In almost all cases the judicial system, the financial system, and the media, for example this reform process is still a work in progress. In a few cases, like the national welfare and social security/pension system, the reform process has barely begun. In others, like institutions responsible for protecting the environment and regulating the stock market, the quality of the institutions does not match their rhetoric. In a few, like the military, the government has been investing so much that their capabilities have been greatly enhanced. The major problem in most cases is still a lack of institutional independence and governance standards. The Communist Party is still the countrys No. One institution, and all o thers are under it, making them overly vulnerable to political interference. The Party has to police itself, which means the main checks and balances that exist are in the form of different factions within the Party that jealously guard their own turf. India takes great pride in the existence of institutions that would be typical in a developed democracy. However, very few of its institutions work really efficiently. They are underfinanced, poorly equipped, and frequently vulnerable to political interference. Some institutions like the anti-corruption agency and national security agencies are severely understaffed, but most institutions are too bureaucratic. This applies to most regulatory bodies, the financial system, and state-owned companies, especially in utilities and infrastructure. Private companies are forced to spend large amounts of money and time dealing with institutions, and the results are frequently unsatisfactory. Page 63
India
6.00
August 2011
Indonesia
7.50
Indonesia has weak institutions, which is one of the reasons many foreign companies are reluctant to invest in the country. They lack confidence in the judicial system and their ability to defend their interests when disputes arise. The countrys biggest institution is the military, but its strength as a fighting force is not as formidable as its reputation for protecting its political and business interests. The second biggest institution is the civil service, which is a source of policy inertia and excessive bureaucracy. That said, some institutions have improved considerably since the days of the Suharto regime. The media is much freer and quality of reporting has risen. The countrys financial system has been strengthened through reforms and shake-ups initiated in the wake of the 199798 financial crisis. The national legislature is no longer a rubber-stamp body. It is a power center in its own right and, for better or worse, is playing the role of a check and balance on executive power. On the whole, however, Indonesia is a very young democracy with a weak institutional structure. Malaysia has better institutions than most of the regions poorer developing economies and the gap has actually improved in Malaysias favor compared with some countries like Thailand. However, its institutions are not regarded as highly as those in places like Hong Kong and Singapore. Their reputation outside Malaysia is also not as good as the image the government would like. The perception is that they are more vulnerable to political interference and have spotty governance practices. A large part of this image problem relates to the Mahathir years, when the prime minister was so strong that he cast a shadow over most major institutions, from the media to the judicial system. The reputational damage done during those years will take time to repair, especially now that the political opposition is in a stronger position and is freer to publicize its criticisms of various institutional weaknesses. Some of these criticisms might be exaggerated or even unjustified, but they are making it more difficult for the government to convince the public that institutional quality is being improved. The quality of most Philippine institutions has improved a lot since the collapse of the Marcos regime. Still, many are suffering from serious financial constraints, which reduce their ability to carry out their functions. This applies to such institutions as the educational system, health care industry, military, police, and judiciary. Corruption is another problem detracting from the reputation of some institutions like Customs and the Bureau of Internal Revenue, as well as the legislative and executive branches of government. Economic institutions like the stock market and the banking system are fairly well managed. It is tempting to say that the deterioration in Thai institutions began with the coup that ousted former PM Thaksin Shinawatra in September 2006. However, that is incorrect. Thai democratic institutions were never very mature, and when Thaksin came to power he took steps that further weakened institutional checks and balances. When Mr. Thaksin was ousted, the institutional deterioration continued. The military and police became even more actively involved with politics. The judiciary has been given too much power, with the result that it is more politicized than before. Perhaps most importantly, the monarchy has been weakened. Fears are growing that when the present king dies, his successor will Page 64
Malaysia
5.00
Philippines
6.00
Thailand
6.50
August 2011
not be held with the same sense of reverence and irreproachability and the stature of the monarchy as an institution that can play a stabilizing role in political fights is likely to diminish. Even the Thai constitution cannot be relied upon as a durable framework. It is likely to be revised by the newly-elected government. Vietnam 7.00 With the exceptions of the Communist Party and the military, most institutions in Vietnam are relatively weak. The state sector still dominates the economy and many institutions are geared to support this sector rather than private enterprise and foreign investment. This includes the banking system, stock market, the health care industry and the media. All of these institutions are vulnerable to political interference and corruption. The country has not progressed nearly as far as China in reforming its legal system, which means not only drafting new laws needed by a modern economy but also training the lawyers and judges in how to apply these laws. Vietnam has extensive strategies for legal and judicial reform. A National Bar Association has been established and the Ministry of Justice is overseeing a program of legal training, with the aim to triple the number of lawyers in Vietnam. The judicial strategy aims to improve the system of judicial appointments and conduct. The challenge will be implementing the reforms in practice and uniformly across the country. The system is not very good at settling disputes or enforcing contracts.
4. Intellectual property rights risks

This variable refers to the extent that intellectual property piracy is rampant and the ability of a foreign investor or other owner of the intellectual property to use the judicial system to fight abuses. Intellectual property rights are the rights given to persons over the creations of their minds. Intellectual property rights are customarily divided into two main areas: (1) the rights of authors of literary and artistic works (such as books and other writings, musical compositions, paintings, sculpture, computer programs and films); and (2) industrial property. Country China Grade 7.90 Rationale Other countries have higher piracy rates than China, but the volume of business at stake is so large and China has a number of large companies that are capable of using pirated technology to compete in foreign markets that IPR violations are potentially a much bigger problem for foreign companies. Countries like Vietnam, the Philippines and Indonesia do not have this same ability to inflict global damage through IPR piracy as Chinese companies do. IPR theft is viewed in some sectors of the economy as a legitimate strategy for Chinese competitiveness. China has also emerged as the global epicenter for the production and export of circumvention devices. Physical piracy also remains problematic for the US book publishing and computer software industries. India generally has a good copyright law, but enforcement is terrible and abuses so widespread that the country ranks among the biggest violators of intellectual property rights of any country in Asia, if not in terms of piracy rates than certainly in terms of the dollar magnitude of the problem. The pirate retail trade Page 65
India
6.50
August 2011
is vast throughout all big cities in India. Factory-produced, imported and burned discs are sold openly. The pirate book trade is also alive and doing well. Software is still a thorny issue and one that has caused a lot of rifts with other world economies that are major IT players. India might be a world leader in backroom logistics, but corporate end-user piracy is a huge problem. The International Intellectual Property Alliance estimates that trade losses to the software industry from this and all other types of piracy increased in 2009 to an estimated US$1.5 billion, while the piracy rate fell from 68% in 2008 to 66% in 2009. India is a signatory of most major IPR accords like the Agreement of Trade Related Intellectual Property Rights - better known as TRIP's but the countrys criminal IPR enforcement regime remains weak. As a result of overly burdensome court procedures, courts are severely backlogged and there are major delays in bringing both criminal and civil cases to final judgment. Further problems include the lack of deterrent penalties and the existence of procedural barriers that impede remedies for legitimate rights holders. Indonesia 8.50 Indonesia seems to have lost its momentum for cracking down on IPR abuses and making the system more compliant with international standards. To be sure, it has passed new laws that should improve protection of intellectual property, but those rules are not enforced effectively at all, and piracy levels in Indonesia remain among the highest in the world. Laws limiting market access for many types of foreign intellectual property have helped to create market conditions that make piracy extremely profitable with limited downside risk. One of the biggest problems with IPR violations in Indonesia is the inability of victims to use the judicial system to fight abuses effectively. IPR cases move slowly through the judicial process, few cases result in successful convictions, and convictions often result in small fines that do not deter repeat infringers. Malaysias system for protecting intellectual property is not perfect, but it is better than any of the other emerging countries covered here. The government has set up special courts to handle IPR cases. In the past two years there has been a slowdown in the number of prosecutions, but there is a system in place and it is being used with considerable effect. Malaysia is under some pressure to update its IPR laws, including by acceding to and fully implementing the WIPO Internet Treaties. The major complaints foreign pharmaceutical companies have is that the government sometimes does not offer enough protection against commercial use of undisclosed test or other data generated to obtain marketing approval for pharmaceutical products and has issued marketing approvals for some unauthorized copies of patented pharmaceutical products. The piracy rate for business software and other forms of intellectual property is high in the Philippines even by regional standards. As in a number of other Asian countries, the biggest problem with intellectual property rights in the Philippines is the difficulties owners of property have in using the judicial system to prosecute violators. Laws exist and there are a number of bodies charged with policing against IPR violations, including an Intellectual Property Office, but the court system does not enforce them consistently. Since 2002, there have only been a handful of convictions under the Copyright Act, and penalties have been Page 66
Malaysia
5.80
Philippines
6.85
August 2011
so light that they have been ineffective deterrents. Foreign governments like the US are pressing the Philippines government to set up specialized IP courts. Thailand 6.20 Copyright piracy in Thailand has grown worse over the past three years, and piracy levels remain well above average for the Asia region. The on-going political turmoil has distracted politicians from more routine matters like fighting intellectual property abuses, and problems of piracy and counterfeiting remain widespread. Some of the biggest problems involve entertainment and business software piracy, cable and signal theft, and organized book piracy, as well as actions to address delays in granting patents. The previous government also stirred up a controversy among foreign pharmaceutical companies by unilaterally issuing compulsory licenses on patented pharmaceutical products. Vietnam is further behind than any of the other countries covered here in passing legislation to protect IPR. In fact, the International Intellectual Property Alliance is complaining that the country is going in the opposite direction, with the National Assembly revising the Criminal Code at the start of this year in ways that weakened criminal penalties for copyright violations. While intergovernmental discussions have ensued on judicial reforms, there still seems to be reluctance to apply criminal remedies to even the most egregious cases involving copyright infringement. No criminal case has ever been brought in Vietnam for copyright infringement. Equally, there have to date been relatively few civil court actions. Moreover, any gains being made in enforcement have, in some areas, not kept pace with rising piracy levels. This is particularly true for copyright enforcement regarding products in both physical and digital form. Piracy rates remain high for business software and entertainment media, while growing Internet penetration has been accompanied by greater online piracy.
Vietnam
8.40
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August 2011
III.
S.W.O.T. review
A. CHINA
Chinas Business Environment

Economic dynamics 10 8 Systemic risks 6 4 2 0 External political risks Ease of doing business Infrastructure
Strengths: 1. 2. Chinas strongest point is its large, dynamic economy complemented by the worlds largest population . The government has done a better job than most emerging markets in putting in physical infrastructure required to support the rapid industrialization. China is already a powerhouse of manufactured exports and its domestic market is emerging as another growth engine. There are a large number of highly educated workers, and even uneducated labor has a reputation for working hard and being productive. There are advantages to Chinas authoritarian system in terms of being able to make and implement decisions quickly.
3.
4.
5.
Weaknesses: 1. Systemic risks like corruption are a major problem. Similarly, the quality of major institutions like the judiciary is compromised by political interference.
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2.
Problems with the accuracy of official data are worrying. It is not just the quality of the data in China that is an issue; it also is the transparency and clarity with which it is presented, as well as the legal risks that companies are exposed to when they try to collect data independently. The lack of convertibility of the Chinese yuan is a drawback to doing business in and with the country. Negative side-effects of Chinas scorching economic growth include severe air pollution, traffic gridlock, and worsening income inequality. Local governments frequently pay lip-service to Beijing policy instructions if they are against their interests.
3. 4.
5.
Opportunities: 1. Some of the biggest opportunities in China involve providing solutions to the negative side-effects mentioned above specifically goods and services that clean up pollution and help protect the environment, infrastructure to support the worlds largest car market, and new logistical systems that overcome gridlock that can interfere with the distribution of goods and services. As Chinas mass labor pool gains higher disposable income, a sizable number of households will cross the income threshold at which the consumption of more diverse food categories, branded apparel, education and entertainment as well as travel services becomes viable. The new emphasis of many state-owned companies is on purchasing foreign technology outright. The opportunity is for foreign companies to sell China this technology and to help facilitate such transactions. Because of the economies of scale that exist and the extreme price sensitivity of the domestic market, companies can use China to develop a whole range of new products and services that could also be well received in other markets around the world. The internationalization of the renminbi is creating a whole new dimension to the global financial industry.
2.
3.
4.
5.
Threats: 1. China is likely to experience more diplomatic strains with its neighbors, trading partners and governments of countries in which Chinese companies have invested heavily As large as Chinas labor force is, labor costs are rising rapidly and China is losing its competitive edge in many industries. Enforcement of rules and regulations in China can vary widely by location and change without warning. Chinas business environment is competitive in the extreme. New competitors can emerge and become major threats almost overnight, and the rules by which these competitors play are frequently flexible in the extreme. Social unrest could increase. There could be many causes, including both economic growth that is too rapid and unevenly distributed among the population and a slowdown in growth that frustrate the higher aspirations of the general population. One form of social unrest will be greater labor militancy. Losing control of intellectual property is the concern that foreign high-tech manufacturers often express when it comes to investing in China.
2. 3. 4.
5.
6.
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B. INDIA
Indias Business Environment

Strengths: 1. 2. 3. India has developed a diversified industrial base and a relatively sophisticated financial sector. Like China, Indias biggest strength is the large size of its domestic market , especially the rapidly growing size of its middle class. A large proportion of India's educated population is highly qualified, fluent in English and cheap to employ. The number of Indian scientists and engineers is among the highest in the world, Indias democratic political system offers a large degree of stability and predictability. It is less rigid than Chinas authoritarian system and in a strong position to withstand shocks, including criticism.
4.
Weaknesses: 1. Corruption is a big problem and a potential source of social and political instability in the near term as a result of the populations growing frustration with graft and the governments failure to ta ckle the problem. Indias development strategy for far too many years emphasized import substitution and government intervention. This has created systemic weaknesses. The vast majority of public-sector enterprises are unproductive, massively overstaffed and debt-ridden. In their struggle to protect their own interests, they can hurt or limit private sector opportunities. A high level of unionization (and political expediency) has restricted labor reforms and technological advances that could threaten jobs -- and, has therefore deterred investors. Page 70
2.
3. 4.
August 2011
5.
India's cities are beset by environmental hazards and sanitation problems due to years of under-investment and inadequate budgets. Another growing problem is the regulatory hurdles companies face from the environmental ministry. Indias physical infrastructure is very weak. In particular, there is a shortage of electric power and there is no indication that new investments will be undertaken fast enough to reduce this problem. Fiscal populism has ensured that Indias public finances are wobbly. The countrys bureaucracy is so overbearing and the political system so vulnerable to special interest groups that even key reforms and projects are implemented slowly. Foreign investors have to wade through more red tape in India than in any other country covered by this report.
6.
7. 8.
Opportunities: 1. Indias rapid economic growth and low per capita penetration rates of many goods and services, from hotels to telecommunications have created obvious investment opportunities. Areas that were previously the exclusive domain of the public sector -- heavy manufacturing, banking, civil aviation, telecommunications, power generation and distribution, ports, and roads -- are now opening to the private sector. Technology is opening up Indias borders and enabling it to develop globally competitive services, including in the computer and other IT, legal, accounting, and medical service fields. Problems with investing in certain industries at home (such as mining) and a growing need for raw materials to fuel industry are causing many Indian companies to step up their foreign investments. This is creating new cross-border business opportunities linking India with a number of other countries, particularly in Southeast Asia, Central Asia, and Africa.
2.
3.
4.
Threats: 1. India's weak power, transport and communications infrastructure is increasingly seen to be a constraint on economic growth. Volatile capital flows threaten to increase pressure on the countrys balance of payments, which is recording the widest current-account deficit among large emerging economies. Land acquisition is the bane of many Indian infrastructure and industrial problems. Poor policy co-ordination among different government agencies is hurting the developing of a number of industries. Foreign buyers of Indian companies are vulnerable to tax surprises and other regulatory and judicial challenges by different government bodies than those involved with the actual investment approval process. The actual cost of investments can be much higher than originally thought and the time it takes to implement investments can be much longer than originally anticipated.
2. 3. 4.
5.
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August 2011
C. INDONESIA
Indonesias Business Environment

Strengths: 1. Real economic growth is sustainable at 4% to 6% in the medium term thanks mainly to remarkably stable domestic consumer demand. With over 220 million consumers, Indonesia represents Southeast Asias largest potential market. Two thirds of GDP is generated by domestic consumption. Indonesia has a wealth of natural resources and the capability to step up development of these resources quite quickly if the government really wants to. Indonesias democratic system is still young, with weak institutions, but it has survived its start -up years and has resulted in better overall political stability, including better checks and balances, a process that enhances the likelihood of smooth political transitions, and better, more active support from the general population. With continued progress of the Aceh Peace Accords and significant success in counter-terrorism operations, Indonesia has made great strides in reducing regional security risks. The vast majority of Indonesias 200 million Muslims practice a moderate form of the faith, reject violence, and favor a secular government. Indonesia is such a strategically important country that it can count on considerable foreign government and multilateral support more so than any other emerging country in Southeast Asia. The US, Australia, the EU and Japan all have strong economic and political interests in seeing Indonesia staying on its present development course, while the country is also getting more assistance from China, India and Korea.
2.
3.
4.
5.
Weaknesses: 1. Logistical shortcomings make it difficult moving goods into and out of the country as well as internally. Page 72
August 2011
2.
Corruption, excessive bureaucracy, and inadequate physical infrastructure make Indonesia a very difficult place to do business and add significantly to operating costs. The legal environment is uncertain and the court system cannot be relied upon. While policing is weak, enforcement is even weaker. There is more policy indecision today than was the case during the Suharto years, and special interest groups can and do slow down reforms that are needed to improve the environment for foreign investors. Investment in many sectors, from mining, oil and gas to pharmaceuticals and security services provide examples where investment is blocked or hindered by bad policy, often with nationalist overtones. The local education system is weak. This affects the quality of labor available and the ability of government officials to respond to challenges, particularly at the local level.
3.
4.
5.
Opportunities: 1. Investors consider natural resources, banks, infrastructure and consumer goods industries to offer some of the biggest opportunities. Education and health care will be huge growth opportunities as more foreign involvement is allowed. The head of the Jakarta stock exchange has set a goal of taking 75 companies public by the end of 2012 and to boost the market capitalization to US$300 billion from slightly more than US$250 billion. This should stimuluate still more capital inflow. Foreign companies selling to the private sector generally have a more straight-forward time than those selling to the government or state sector. Indonesia has very large geothermal resources that it is just starting to develop. This is creating opportunities for banks and investment houses helping the country to raise the funds needed to pay for these investments. There will also be a big market for alternative energy technology and equipment. Badly needed infrastructure investment, stalled for years by government indecision and infighting, is now moving ahead, albeit slowly. Jakarta is getting ready to launch a massive mass transit development program that will create major opportunities for financial firms, construction companies and equipment providers.
2.
3.
4.
5.
Threats: 1. Corruption, bureaucratic inertia, and inconsistent and unclear regulations are three of the biggest threats foreign investors face in Indonesia. Rules can change on very short notice. Labor unions can be unreasonable in their demands, and the legal structure does not offer employers much protection. Weak infrastructure such as a deficient healthcare system adds to complications and risks for expatriates living in Indonesia. Security threats, including both terrorism and crimes against persons and property, are relatively high. There is a cultural predisposition among some indigenous groups that considers foreign direct investment exploitive. These groups frequently lobby for legislation during good times that restricts or caps foreign ownership and, during bad times, makes it difficult for foreign companies to exit Indonesia with their capital. Page 73
2.
3.
4. 5.
August 2011
D. MALAYSIA
Malaysias Business Environment

Strengths: 1.
Malaysia offers investors an educated workforce that, although on the high-cost side, is still competitive with other countries in Asia provided the emphasis is more on skills than on a large supply of cheap, unskilled labor. In particular, Malaysia has good technicians. English is widely spoken, as are a number of other key languages,
which makes it relatively easy to interface Malaysian managers with other Asian operations. 2. Malaysias physical infrastructure is good. Peninsula Malaysia has an excellent system of well-maintained highways, and its sea ports and main airport are also high quality. Malaysia is well-endowed with natural resources in areas such as agriculture, forestry and minerals. This wealth of resources, together with the relatively small size of the population, underpins Malaysias economy and provides for higher per capita incomes than is the case in the other countries covered by this report. Industrial relations in the country are harmonious with minimal trade disputes that result in strikes. Living conditions for expatriates are comfortable. In particular, quality housing is available at a relatively low cost, and supporting infrastructure from schools to health and recreation facilities are superior to most of the other countries covered here, with the main exception of Thailand, which rivals Malaysia for these facilities.
3.
4. 5.
Weaknesses: 1. 2. Race relations are a cause of social and political problems. They complicate policy formulation. The political system has been unchanged for so long, with a coalition headed by UMNO heading the government, that there is much more uncertainty than would normally be the case in a democratic country Page 74
August 2011
about what would happen if the parties in power were to be voted out of office. This uncertainty hurts foreign investor confidence. 3. The government has wasted so much time trying to groom national champion local companies like the Proton car that it has missed the boat in terms of attracting a critical mass of foreign investment in these industries, which will make it difficult to catch up with countries like Thailand in developing these industries. Corruption within UMNO and other parties in the ruling coalition is both a real and perceived problem. In view of the rising strength of the opposition, it could be more difficult dealing with perceptions than the actual problem, since it is in the oppositions self-interest to publicize and even exaggerate government corruption.
4.
Opportunities: 1. Malaysia is moving up the value chain of industries and is currently focusing on attracting high-technology, high value-added, knowledge-based and skill-intensive industries, incorporating activities such as design, research and development. Some of the biggest opportunities could lie in the provision of services like healthcare, eco-tourism, and education. Prime Minister Najib is liberalizing a number of service sectors and reducing affirmative action policies in ways that should create more opportunities for foreign investors and also reduce red tape. The government is also pushing to develop the local capital market. Malaysia is already the worlds largest market for sukuk, the Islamic equivalent of bonds. As a member of ASEAN and a country that has signed a free-trade pact with China, Malaysia has the potential to be used as a base to produce goods and services sold in other, larger but more difficult markets in the region. If Kuala Lumpur can also sign free-trade pacts with India and Muslim countries in the Middle East, its potential role as a base to promote certain kinds of business would be even larger. The recent push to cooperate more with Singapore economically could create new business opportunities in both countries, especially if there is a better interfacing of key institutions in the two countries..
2.
3.
4.
Threats: 1. 2. 3. There is a risk that hard-line elements in the dominant political party, UMNO, might instigate or trigger a political crisis if they lose at the next general election. This would have negative economic implications. Religious and ethnic tensions have the potential to cause social and political instability. Advocates of Malay entitlements also have the potential to slow government reform policies by threatening a Malay backlash. Government-linked entities and local companies with strong political connections can crowd out other private sector players, including foreign investors, and have advantages in how big government contracts are awarded and development plans are focused. The political opposition, if it were to win the next general elections, might be unable to stay united or to implement social and economic policies that enable Malaysia to progress on to developed-country status. The main policy uniting the opposition is their desire to topple the existing government. The actual governing capabilities of the opposition are untested and therefore a cause of uncertainty.
4.
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E. PHILIPPINES
The Philippines Business Environment

Strengths: 1. The economy is likely to weather the downturn in the global economy in the coming year due to lower dependence on exports than most other Asian countries, relatively resilient domestic consumption, and strong growth of remittances by overseas Filipino workers. A large, low-cost labor force that is moderately fluent in English, The large number of Filipinos working abroad reduce the risk of balance of payments problems and help to finance relatively buoyant levels of domestic consumer demand. The current government has done a good job of portraying itself as being cleaner than at least the two preceding governments. Economic managers have a good track-record of managing the countrys external debt. International credit rating agencies have responded by recently upgrading the countrys rating.
2. 3. 4.
5.
Weaknesses: 1. High corruption levels, closely related to weak rule of law and justice system. The political system is based more on personalities than ideologies, fostering an environment that weakens the ability of institutions to do their job and stimulating problems like patronage and nepotism. The problem of the large fiscal deficit is compounded by weaknesses in collecting taxes that are due. Although the Philippines has a high literacy rate, there are weaknesses in the education system that are being aggravated by a lack of resources, funding and emigration of some of the countrys best talent. Page 76
2. 3.
August 2011
4. 5.
Poor social safety net programs. High poverty incidence: The Philippines has one of the worst poverty percentage rates in East Asia, with 32% of the population earning less than US$$1 a day. Negative international perceptions relating to political instability, personal security, red tape/bureaucracy, unclear policies on labor and land ownership. The Philippines has had much less success as an exporter compared with any of the other countries covered here. The quality of the Philippines physical infrastructure is poor and likely to remain so. Failure to attract enough foreign investments and tourists to boost jobs and incomes in the poor.
6.
7. 8.
Opportunities: 1. On the services side, business process out-sourcing is growing rapidly. This industrys potential is not as great as many in the Philippines are forecasting but it should help provide new jobs and act as an alternative to seeking work overseas, thereby helping to slow the brain drain. Catering to overseas Filipinos is a growing source of business for a range of industries ranging from real estate development/management to wealth management. Domestic consumption is stable and businesses focusing on local consumers offer good potential. At a time when US interest rates are as low as they are, Philippine sovereign and private bonds offer attractive returns for investors. Sovereign risks are not as high as many people think.
2.
3. 4.
Threats: 1. Of all the countries covered in this report, the Philippines is the most susceptible to having factory work disrupted by natural disasters like typhoons and earthquakes. The quality of physical infrastructure is poor and breakdowns can be very disruptive for business, as well as add to costs because of the need to invest in back-up systems. Brain drain arising from increasing emigration abroad due to poor job opportunities at home. Security threats. Communist and Islamic insurrection movements will remain problematic, as will the relatively high level of crimes against persons and property. Police are seen by many as being more a part of the problem than of the solution. Inconsistent application of laws and regulations and difficulties in maintaining good relations with officials at the local level can add to costs and result in surprises that complicate the management of labor problems, local logistics, and expansion plans. Major policy flip-flops from one government to the next can quickly change the reception that major deals involving foreign companies receive and undermine confidence in contract durability. The present government might be doing a good job of winning back confidence, but there is no guarantee that the next government will continue with these policies.
2. 3.
4.
5.
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F. THAILAND
Thailands Business Environment

Strengths: 1. The Thai economy is resilient and has weathered years of political turmoil much better than most economists were anticipating. Overall GDP growth, exports, foreign direct investment inflow and tourism have all outperformed most forecasters in the public and private sectors. Thailand is far ahead of other ASEAN countries in attracting foreign direct investment into the automotive sector and supporting industries. It also has a good reputation for attracting foreign investment in other export-oriented manufacturing industries, from consumer electronics to sporting goods to processed foods. Thailand has a particularly strong medical industry that is turning into a major foreign exchange earner for the country and a generator of medical tourism. There are some weak points like power generation, but Thailand has relatively good physical infrastructure and is also more internationally connected than most other developing Asian countries. There is a large supply of operator-level labor at a relatively low price. It is also easier and less expensive to hire expatriate managers in Thailand than it is in most emerging markets of Asia. The agricultural sector is a strong contributor to the economy in its own right and a buffer that can absorb surplus labor from urban areas during cyclical downturns.
2.
3. 4.
5.
6.
Weaknesses: 1. Political risks are likely to stay high until the new government demonstrates it can withstand challenges from special interest groups, including the military. Uncertainties will also stay high until the country demonstrates it can manage a succession in the monarchy without experiencing political turmoil or social unrest. Page 78
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2.
One of the casualties of the political turmoil and increase in the militarys role in politics is that Thailand has changed from having one of the freest medias in Asia to having one of the most censored. The crackdown on on-line political discussion over the Internet has been especially severe. The reputations of other institutions like the judiciary have also be damaged. Energy costs in Thailand are relatively high, and the country is lagging behind others in Asia in putting in the latest telecommunications technology. The supply of skilled technical labor is less than in other countries covered here with the exception of Indonesia and the standards of spoken English are the worst of any country covered here. It can be difficult to recruit and retain experienced, skilled Thai labor. One of the biggest drawbacks to Thailand is its bureaucracy. It can also be difficult getting cooperation between different government departments.
3.
4.
5.
Opportunities: 1. Following chronic shortages in recent years and an import-driven power economy, Thai utility Electricity Generating Public Company EGCO announced plans to invest US$1 billion in expanding its power generation capacity through 2014. Industry experts say Thailand has huge potential for solar power and other green power technologies, which can be used to address rising power demand. The recent increase in labor unrest and rising wages in China will give Thailand a chance to market itself more as an alternative investment site for foreign companies. Most of the policies reforms the new government has announced should put more money in the hands of average Thais and help stimulate consumer spending, which has depressed in recent years by social turmoil and political uncertainty. The new governments policies could create new local market opportunities at a time when export prospects have been damped by adverse global developments. Recently announced measures to improve agricultural productivity should, if implemented, will bring new skills, investment and other resources into neglected areas raising local incomes and business activities. Under China-ASEAN free trade agreements, China is required to open up wide areas of the services sector to Thailand and other ASEAN members. That will provide fresh opportunities to Thai firms in several sectors such as legal services, finance and accounting, telecommunications, education, tourism and logistics.
2.
3.
4.
5.
Threats: 1. Political risk is the dark spot in Thailands otherwise stable business environment. With it comes a string of other issues, such as the reliability of policy continuity, especially concerning infrastructure investments, and excessive military spending that is diverting financial resources away from what should be higher priorities. The size of the public debt could become a bigger problem if the new government is as aggressive in in spending policies as it has indicated it wants to be. Terrorism threats are increasing in the south of the country. Problems in the US, Japan and the EU could hurt the growth of Thai exports and cause some foreign investors to have second thoughts about going ahead with planned disbursements in Thai projects. Page 79
2.
3. 4.
August 2011
G. VIETNAM
Vietnams Business Environment

Strengths: 1. 2. 3. A stable political regime with leadership committed to achieving socio-economic development. Labor costs are relatively slow and skill levels are improving. Reasonably well-endowed with natural resources oil and natural gas, forests, marine and agricultural commodities. Novelty as an attractive tourist destination in Southeast Asia. Vietnam has already brought down its foreign debt substantially and has the potential to exploit oil and other resources more effectively than it is now doing. Vietnam is growing as an exporter. As incomes rise, domestic market opportunities are also growing. Vietnam is also becoming a major source of tourists to neighboring countries like Cambodia.
4. 5.
6.
Weaknesses: 1. Shortcomings in economic policies have resulted in major imbalances that need to be addressed urgently. The biggest problems include high inflation, a surging trade deficit, and a lack of local confidence in the currency. The government so far has failed to reassure Vietnamese citizens and international investors that it has a coherent approach to dealing with these mounting problems. Official signals have been mixed. The dominate role played by the state sector remains a major problem since the SOEs lack focus, management skills, and profit motivation. They account for a majority of the countrys non-performing assets and have a poor track record of channeling capital into priority investments. Page 80
2.
August 2011
3. 4. 5.
The government is limited in the amount of financial support it can extend troubled state-owned companies. Growing rural-urban income split. Technological stock is largely obsolete, managerial skill is limited, and corruption is widespread -- all of which contribute to inefficiencies. Under-developed capital markets and nonbank financial services. Governance and public administration reform implementation is shallow and slow.
6. 7.
Opportunities: 1. Projects related to infrastructure development currently provide some of the most promising areas for exporters to Vietnam. Domestic demand and export growth have been the major sources of growth in recent years. The biggest opportunities are in low-skilled and cheap labor-based goods. Garments, footwear, furniture and processed foods have emerged as successful nontraditional exports. Vietnam is in a strong position to attract foreign business that is starting to find China too expensive. Prospects for foreign firms in the financial services sector should improve over the next few years. Vietnam will need additional resources to finance its policy and institutional reform agenda, and infrastructure development. About half of the capital resources are expected to come from the non-state sector. The rapid increase in consumer spending power is turning private consumption into a stronger engine of growth, creating more opportunities for industries selling to individual Vietnamese. This includes marketing gaming and other entertainment services to Vietnamese in neighboring countries like Cambodia.
2.
3.
4.
Threats: 1. International credit rating agencies have become more critical of Vietnam. The country could be in for further downgrades if the government does not get inflation under better control soon. Rapid economic growth may result in unsustainable use of natural resources and unintended environment implications. If the government does not simplify and improve its project processing and implementation procedures, the planned investments may not materialize on time. Unemployment could emerge as a bigger problem. Relations with China could deteriorate over disputed territory in the South China Sea and prevent smooth economic interfacing between the two countries. The economy is heavily dependent on the flow and quality of water flowing through the Mekong River. If this waterway were to be hurt by other countries through which it flows first, it could seriously hurt Vietnam. Some such projects are being discussed in Laos. The government continues to favor administrative controls to deal with problems like inflation and shortages of foreign exchange. These controls could result in major regulation changes that interfere with the operations of foreign investors and make planning difficult.
2.
3. 4.
5.
6.
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Appendix 1: Formula for Calculating the Business Environment Index

China A. Economic dynamics B. Infrastructure C. Ease of doing business D. Domestic political risks E. Social instability risks F. External political risks G. Systemic risks TOTAL RISKS Grade (0-10) Weight (%) Grade (0-10) Weight (%) Grade (0-10) Weight (%) Grade (0-10) Weight (%) Grade (0-10) Weight (%) Grade (0-10) Weight (%) Grade (0-10) Weight (%) Grade (0-10) Weight (%) 2.40 14.29% 4.50 14.29% 4.00 14.29% 4.69 14.29% 4.40 14.29% 5.27 14.29% 6.79 14.29% 4.58 100% India 5.57 14.29% 5.13 14.29% 7.44 14.29% 4.50 14.29% 6.88 14.29% 6.33 14.29% 6.94 14.29% 6.11 100% Indonesia 5.42 14.29% 7.88 14.29% 7.00 14.29% 4.75 14.29% 6.39 14.29% 4.00 14.29% 7.81 14.29% 6.18 100% Malaysia 4.53 14.29% 3.50 14.29% 3.78 14.29% 5.75 14.29% 5.45 14.29% 3.92 14.29% 5.76 14.29% 4.67 100% Philippines 6.82 14.29% 6.38 14.29% 7.00 14.29% 4.63 14.29% 6.06 14.29% 4.33 14.29% 6.56 14.29% 5.97 100% Thailand 4.88 14.29% 4.63 14.29% 3.56 14.29% 6.81 14.29% 6.00 14.29% 4.08 14.29% 6.18 14.29% 5.16 100% Vietnam 6.70 14.29% 7.38 14.29% 6.00 14.29% 5.00 14.29% 3.75 14.29% 4.67 14.29% 7.10 14.29% 5.80 100%
The overall index score for each section is calculated by adding the products of the individual grades for the specific variables multiplied by their specific weights in percentage terms. The overall business environment model has seven major categories of variables. We have treated each major category as having equal importance, i.e., we have weighted each major category of variables the same. Thus, each of the five major variable categories has a weight of 100 divided by 7 or roughly 14.29%. In each section, the maximum possible risk rating is 10 (the average grade had every variable been graded 10, or the worst possible), while the minimum is zero (the average grade had every variable been graded a zero, or the best possible). Therefore, the formula for calculating the risk rating for China is:
(0.1429 x 2.40) + (0.1429 x 4.50) + (0.1429 x 4.00) + (0.1429 x 4.69) + (0.1429 x 4.40) + (0.1429 x 5.27) + (0.1429 x 6.79)
or 4.58 = the overall business environment risk rating for China
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August 2011
Appendix 2: All grades used to assess the business environment

A. Economic dynamics 1. Growth prospects 2. Market size 3. Wealth 4. Inflation 5. Public debt 6. Balance of payments 7. Foreign debt 8. Foreign investment success 9. Export dynamism 10. Import dynamism Economic dynamism score B. Human and physical infrastructure support 1. Physical infrastructure/utilities for domestic market 2. International infrastructure links (ports, airports, communications, etc.) 3. Pollution 4. Technical labor pool depth 5. Depth of higher education 6. English speaking / comprehension proficiency 7. Health facilities 8. Natural disaster disruption potential Human and physical infrastructure score C. Ease of Doing Business 1. Starting a Business 2. Dealing with Construction Permits 3. Registering Property 4. Getting Credit 5. Protecting Investors 6. Paying Taxes 7. Trading Across Borders 8. Enforcing Contracts 9. Closing a Business Ease of doing business score China 1.00 0.00 5.00 3.00 2.00 3.00 1.00 4.00 2.33 2.67 2.40 China 5.00 3.00 9.00 2.00 1.00 4.00 5.00 7.00 4.50 China 3.00 3.00 3.00 4.00 6.00 7.00 3.00 3.00 4.00 4.00 India 3.00 2.00 9.00 6.00 8.00 7.00 3.00 7.00 6.00 4.67 5.57 India 10.00 9.00 9.00 1.00 1.00 1.00 3.00 7.00 5.13 India 9.00 10.00 6.00 3.00 6.00 9.00 8.00 9.00 7.00 7.44 Indo. 5.00 4.00 7.00 6.00 4.00 5.00 5.00 6.50 6.33 5.33 5.42 Indo. 8.00 8.00 7.00 8.00 9.00 7.00 8.00 8.00 7.88 Indo. 8.00 5.00 6.00 6.00 8.00 7.00 7.00 8.00 8.00 7.00 Mal. 8.00 8.50 0.00 2.00 8.00 1.00 6.00 3.50 4.00 4.33 4.53 Mal. 4.00 4.00 5.00 3.00 4.00 2.00 3.00 3.00 3.50 Mal. 5.00 5.00 5.00 2.00 4.00 2.00 3.00 4.00 4.00 3.78 Phil. 7.00 6.50 8.00 4.00 8.00 3.00 6.00 9.00 8.33 8.33 6.82 Phil. 9.00 8.00 6.00 5.00 5.00 2.00 7.00 9.00 6.38 Phil. 8.00 6.00 6.00 7.00 7.00 8.00 7.00 7.00 7.00 7.00 Thai. 8.00 6.00 4.00 3.00 7.00 3.00 5.00 3.50 4.67 4.67 4.88 Thai. 3.00 3.00 4.00 7.00 6.00 8.00 1.00 5.00 4.63 Thai. 3.00 2.00 3.00 4.00 5.00 5.00 3.00 3.00 4.00 3.56 Viet. 5.00 7.00 9.00 8.00 8.00 8.00 6.00 5.00 5.67 5.33 6.70 Viet. 9.00 9.00 6.00 7.00 7.00 6.00 8.00 7.00 7.38 Viet. 7.00 4.00 4.00 7.00 8.00 8.00 5.00 5.00 6.00 6.00
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D. Domestic political risks 1. The risk of a change of government and key leaders in coming year 2. The risk of a disruptive political transition 3. Quality of the government's policies 4. Ineffectiveness of the government in implementing its policies Average score for domestic political risks E. Social instability risks 1. Labor activism 2. Social activism/unrest 3. Terrorism and personal security risks 4. Extent that regionalism is a problem Average score for social instability risks F. External political risks 1. Direct military threats 2. Vulnerability to fallout from sociopolitical instability in other countries 3. Vulnerability to policy changes by governments in other countries Average score for external political risks G. Systemic risks 1. Extent that corruption is a problem 2. Nationalism and other cultural risks 3. Institutional weaknesses 4. Intellectual property rights risks Average score for systemic risks
China 6.75 4.00 4.00 4.00 4.69 China 5.60 4.00 3.00 5.00 4.40 China 6.00 4.50 5.30 5.27 China 7.00 6.00 6.25 7.90 6.79 China 4.58
India 4.00 3.00 5.50 5.50 4.50 India 7.00 6.00 7.00 7.50 6.88 India 7.50 7.00 4.50 6.33 India 8.00 7.25 6.00 6.50 6.94 India 6.11
Indo. 4.00 3.50 5.50 6.00 4.75 Indo. 5.25 6.50 7.00 6.80 6.39 Indo. 4.00 4.00 4.00 4.00 Indo. 8.50 6.75 7.50 8.50 7.81 Indo. 6.18
Malaysia 7.00 7.00 4.00 5.00 5.75 Mal. 4.00 6.30 5.00 6.50 5.45 Mal. 3.50 4.25 4.00 3.92 Mal. 6.25 6.00 5.00 5.80 5.76 Mal. 4.67
Phil. 3.00 5.00 5.00 5.50 4.63 Phil. 4.50 6.50 7.00 6.25 6.06 Phil. 3.50 4.50 5.00 4.33 Phil. 8.40 5.00 6.00 6.85 6.56 Phil. 5.97
Thailand 7.00 8.00 5.50 6.75 6.81 Thai. 4.00 7.00 6.00 7.00 6.00 Thai. 3.50 4.25 4.50 4.08 Thai. 8.00 4.00 6.50 6.20 6.18 Thai. 5.16
Vietnam 4.00 3.00 6.50 6.50 5.00 Viet. 4.00 3.50 3.00 4.50 3.75 Viet. 5.00 4.00 5.00 4.67 Viet. 7.00 6.00 7.00 8.40 7.10 Viet. 5.80
TOTAL BUSINESS ENVIRONMENT SCORE
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Appendix 3. About Political & Economic Risk Consultancy, Ltd.

Robert Broadfoot researched and wrote this report. Mr. Broadfoot is the founder and Managing Director of Political & Economic Risk Consultancy, Ltd. (PERC). Established in 1976, PERC is headquartered in Hong Kong. From this base PERC manages a team of researchers and analysts in the ASEAN countries, the Greater China region and South Korea. PERC helps companies understand how politics and other subjective variables are shaping the business environment. Such variables may be difficult to quantify, but nevertheless can have a critical impact on investment performance and therefore have to be factored into the decision-making process, which is the function of PERC's services. PERC's value lies in the organization's experience, its Asian network of seasoned analysts, its emphasis on primary research, its complete independence from any vested interest groups, its pioneering work in the technical aspects of country risk research, its discretion, and its integrated, regional approach to analysis. Surveying businesspersons in all Southeast and East Asian countries is one of the main ways that PERC conducts primary research. Some of the indices PERC has developed over the years through its surveys have become the standard reference for monitoring such variables in Asia. For example, for over a decade now, PERC has been surveying business-persons perceptions of corruption in all major Asian countries. Transparency International, the organization that works with the United Nations and looks at corruption on a global basis, incorporates PERC's index on Asian countries into its own index, and these figures in turn are used as the standard reference for corruption by such bodies as the World Bank and the UN, as well as by OECD governments. Mr. Broadfoot is frequently quoted by such publications as the Wall Street Journal and the South China Morning Post, by wire services like Reuters, Bloomberg and Dow Jones, as well as by CNN, the BBC, CNBC and other broadcast media. He has lectured at the Pacific Rim Bankers Program of the Uni versity of Washington in Seattle, where he has taught skills for analyzing country risk. He also conducts scenario planning workshops for individual companies and government organizations. He is the publisher of PERCs Asian Intelligence newsletter and its Monthly Country Risk Monitoring Service. He is a contributing author to a book called China Into the Future Making Sense of the Worlds Most Dynamic Economy, which was published in 2008 by John Wiley & Sons.
Page 85
Published by: Political & Economic Risk Consultancy, Ltd. 20th Floor, Central Tower 28 Queens Road, Central, Hong Kong Mailing address: G.P.O. Box 1342, Hong Kong Tel: (852) 2541 4088 Fax: (852) 2815-5032 E-Mail: info@asiarisk.com Web site: http://www.asiarisk.com
The material in this report may not be reproduced in whole or in part without permission in writing from the publisher. While every effort has been made to collate, check and present without ambiguity all data contained herein, the variety of sources from which they have been assembled and differing methods of reporting render verification oftentimes impossible. Thus, they are published without warranty.

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Emerging Asia S.W.O.T.

External political risks

Ease of doing business

Social instability risks

Domestic political risks

POLITICAL & ECONOMIC RISK CONSULTANCY LTD.

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

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

Political & Economic Risk Consultancy, Ltd.

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

Political & Economic Risk Consultancy, Ltd.

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

ASSESSMENT OF BUSINESS ENVIRONMENT

Ranking Emerging Asian Countries by Economic Dynamics

Variables and Grades Assessing Economic Dynamics

Political & Economic Risk Consultancy, Ltd.

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

Political & Economic Risk Consultancy, Ltd.

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

2. Market size prospects data

234.38 28.25 China India 94.01 63.88 88.26 Vietnam

Political & Economic Risk Consultancy, Ltd.

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

Political & Economic Risk Consultancy, Ltd.

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

China Grade for inflation 3.00

China Grade for public debt 2.00

Political & Economic Risk Consultancy, Ltd.

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

Indonesia Malaysia Philippines Thailand

6. Balance of payments Current Account BoP as a Percentage of GDP

Political & Economic Risk Consultancy, Ltd.

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

5.80 4.01 4.40

-3.37 China India Indonesia Malaysia Philippines Thailand

Political & Economic Risk Consultancy, Ltd.

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

8. Foreign direct investment inflow dynamism

Source: CIA World Factbook.

Political & Economic Risk Consultancy, Ltd.

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

Foreign Direct Investment

Per Capita FDI

157.16 China India

Political & Economic Risk Consultancy, Ltd.

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

<150 <100 <75 <50

<750 <500 <300 <200

<10 <8 <6 <4

Total Merchandise Exports

Per Capita Exports in 2010

Political & Economic Risk Consultancy, Ltd.

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

Export Growth Dynamism

10. Import dynamism

Political & Economic Risk Consultancy, Ltd.

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

Total Merchandise Imports

319.4 135.7 China India 171.6 54.9 182.0 84.0 Vietnam

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

Per Capita Imports in 2010

Import Growth Dynamism

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