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Emerging Asia

S.W.O.T. ReportAugust 2011

POLITICAL & ECONOMIC RISK CONSULTANCY LTD.

Comparing risks and opportunities in:ChinaIndia

IndonesiaMalaysia

PhilippinesThailandVietnam

0

2

4

6

8

10

Economic dynamics

Infrastructure

Ease of doing business

Domestic political risksSocial instability risks

External political risks

Systemic risks

China

India

Indonesia

Malaysia

Philippines

Thailand

Vietnam


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Contents

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

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

A. 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

B. HUMAN AND PHYSICAL INFRASTRUCTURE SUPPORT .................................................................................... 16

1. Physical infrastructure/utilities for domestic market ............................................................. 17

2. International infrastructure links (airports, communications, etc.) ........................................ 18

3. Pollution .................................................................................................................................. 19

4. Technical labor pool depth ...................................................................................................... 20

5. Depth of higher education ...................................................................................................... 21

6. English speaking / comprehension proficiency of labor force ................................................ 22

7. Health facilities ........................................................................................................................ 23

8. Natural disaster disruption potential ...................................................................................... 24

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

D. DOMESTIC POLITICAL RISKS .................................................................................................................... 32

1. The risk of a change of government and key leaders in coming two years ............................ 33

2. The risk of a disruptive political transition .............................................................................. 35

3. Quality of the government’s policies ...................................................................................... 37

4. Ineffectiveness of the government in implementing its policies ............................................ 38

E. SOCIAL INSTABILITY RISKS ...................................................................................................................... 40 1. Labor activism ......................................................................................................................... 40

2. Social activism / unrest ........................................................................................................... 43

3. Terrorism and personal security risks ..................................................................................... 45

4. Extent that regionalism is a problem ...................................................................................... 47

F. EXTERNAL POLITICAL RISKS

.................................................................................................................... 49 1. Direct military threats ............................................................................................................. 49

2. Vulnerability to social instability in other countries ............................................................... 52

3. Vulnerability to policy changes by governments in other countries ....................................... 54

G. SYSTEMIC RISKS ................................................................................................................................... 57

1. Extent that corruption is a problem ........................................................................................ 57

2. Nationalism and other cultural risks ....................................................................................... 61

3. Institutional weaknesses ......................................................................................................... 63


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

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

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

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

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

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

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

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

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

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

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

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


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A S.W.O.T. Study of Asia’s Emerging Countries August 2011

Political & Economic Risk Consultancy, Ltd. Page 1

I. SUMMARY

Overall Business Environment Scores

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

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

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

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

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

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

relatively predictable political environment.

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

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

attention.

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

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

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3

4

5

6

7

8

9

10

China India Indonesia Malaysia Philippines Thailand Vietnam

Economic dynamics Infrastructure

Ease of doing business Domestic political risks

Social instability risks External political risks

Systemic risks

4.58

6.11 6.18

4.67

5.97

5.16

5.80

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


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

messy but it is also stable.

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

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

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

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

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

social instability has been increasing in both these countries lately.

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

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

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

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

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

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

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

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

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

covered here will involve providing solutions to the systemic problems – namely, environment, 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. Popular

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


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II. ASSESSMENT OF BUSINESS ENVIRONMENT

A. ECONOMIC DYNAMICS

Below we give grades on a zero to 10 scale assessing various aspects of the countries we surveyed 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 China India Indonesia Malaysia Philippines Thailand Vietnam

a. Growth prospects 1.00 3.00 5.00 8.00 7.00 8.00 5.00

b. Market size 0.00 2.00 4.00 8.50 6.50 6.00 7.00

c. Wealth 5.00 9.00 7.00 0.00 8.00 4.00 9.00

d. Inflation 3.00 6.00 6.00 2.00 4.00 3.00 8.00

e. Public debt 2.00 8.00 4.00 8.00 8.00 7.00 8.00

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

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

i. Export dynamism 2.33 6.00 6.33 4.00 8.33 4.67 5.67

j. Import dynamism 2.67 4.67 5.33 4.33 8.33 4.67 5.33

Economic dynamism score 2.40 5.57 5.42 4.53 6.82 4.88 6.70

Ranking Emerging Asian Countries by

Economic Dynamics

2.40

5.57 5.42

4.53

6.82

4.88

6.70

0

1

2

3

4

5

6

7

8

9

10


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


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Data and Definitions Used to Calculate Economic Grades

1. Growth prospects data

Real GDP Growth Rate (Percent change)

Country 2009 2010 2011 2012 2013 2014 2015 Average

China 9.20 10.30 9.59 9.52 9.48 9.52 9.46 9.58

India 6.76 10.37 8.24 7.82 8.17 8.14 8.12 8.23

Indonesia 4.58 6.11 6.20 6.50 6.70 7.00 7.00 6.30

Malaysia -1.71 7.16 5.50 5.20 5.10 5.10 5.00 4.48

Philippines 1.06 7.33 4.95 4.97 5.00 5.00 5.00 4.76

Thailand -2.33 7.80 3.96 4.53 4.70 4.75 4.85 4.04

Vietnam 5.32 6.78 6.26 6.75 7.23 7.44 7.50 6.75

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


Grade for growth prospects 1.00 3.00 5.00 8.00 7.00 8.00 5.00

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

World Economic Outlook Database in April 2011.

Grading scale:

Grade Real GDP growth rate average

0 >10

1


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Wealth

4.382

1.265

3.015

8.423

2.007

4.992

1.174

0

1

2

3

4

5

6

7

8

9


Per capita GDP in US$ thousands, 2010

3. Wealth


Per capita GDP (US$

thousand in 2010) 4.382 1.265 3.015 8.423 2.007 4.992 1.174

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


Grade for wealth 5.00 9.00 7.00 0.00 8.00 4.00 9.00

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

Grading scale:

Grade Per capita GDP (thousands of US$)

0 >8000

1


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Grade for inflation 3.00 6.00 6.00 2.00 4.00 3.00 8.00

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

forecast rate for the coming year.

Grading scale:

Grade Consumer price inflation

0


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Grading scale:

Grade Public debt to GDP ratio

0


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Grading scale:

Grade Current account BoP/GDP

0 >15

1 >10 - 15

2 >6 - 10

3 >4 - 6

4 >2 - 4

5 >0 - 2

6 >-2 - 0

7 >-4 - -2

8 >-6 - -4

9 -10 - -6

10


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8. Foreign direct investment inflow dynamism


Stock of FDI (US$ billion through

December 2010) 574.3 191.1 81.2 77.4 24.5 117.9 78.0

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

Source: CIA World Factbook.


Stock of FDI 0.00 4.00 5.00 5.00 9.00 4.00 5.00

Per capita FDI 7.00 10.00 8.00 1.00 9.00 3.00 5.00

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

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

inflow through December 2010 plus the per capita size of stock of FDI inflow for that same period. Our logic 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:

GradeStock of FDI inflow

(US$ billion through Dec. 2010)

Per capita stock of FDI

through Dec. 2010 (US$)

0 >500 >3000

1


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9. Export dynamism


Merchandise exports (US$ bil.

in 2010) 1577.93 211.95 157.82 207.36 51.50 195.30 71.63

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

Average annual growth rate of

exports between 2001 and 201021.3% 17.4% 10.7% 8.6% 4.1% 11.7% 18.0%

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


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

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

Grade for average annual growth rate of

exports between 2001 and 20101.00 3.00 6.00 7.00 9.00 6.00 2.00

Average 2.33 6.00 6.33 4.00 8.33 4.67 5.67

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

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

2001 through 2010.

Grading scale:

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

(US$)

Average annual growth rate of exports between 2001

and 2010

0 >2000 >5000 >30

1


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10. Import dynamism


Merchandise imports (US$ bil.

in 2010) 1006.00 268.40 96.86 127.05 43.00 144.74 68.80

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

Average annual growth rate of

imports between 2001 and

201020.7% 8.4% 4.2% 12.0% 20.0% 18.0% 20.4%

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


Grade for merchandise imports size in

20102.00 4.00 7.00 6.00 9.00 6.00 8.00

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

Grade for average annual growth rate

of imports between 2001 and 20101.00 1.00 2.00 7.00 9.00 5.00 2.00

Average 2.67 4.67 5.33 4.33 8.33 4.67 5.33

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

from 2001 through 2010.

Export Growth Dynamism

21.3%

17.4%

10.7%

8.6%

4.1%

11.7%

18.0%

0%

5%

10%

15%

20%

25%


Average annual export growth between 2001 and 2010


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Grading scale:

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

(US$)

Average annual growth rate of imports

between 2001 and 2010

0 >2000 >5000 >301


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Per Capita Imports in 2010

1039.82

262.67 578.81

6074.83

584.31

2727.82

951.77

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


Per capita imports in 2010 in US dollars

Import Growth Dynamism

20.9% 21.3%

18.0%

9.4%

5.8%

12.3%

19.3%

0%

5%

10%

15%

20%

25%


Average annual import growth between 2001 and 2010


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B. HUMAN AND PHYSICAL INFRASTRUCTURE SUPPORT

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

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

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

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

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

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

countries in the region.

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

conditions. These are the views of PERC’s senior analysts shaped by their personal experiences and the comments

of the survey respondents.

Variables and Grades Assessing Human and Physical Infrastructure Support

Variables China India Indonesia Malaysia Philippines Thailand Vietnam

a. Physical infrastructure/utilities for

domestic market5.00 10.00 8.00 4.00 9.00 3.00 9.00

b. International infrastructure links

(ports, airports, communications,3.00 9.00 8.00 4.00 8.00 3.00 9.00

Overall Scores for Human and Physical

Infrastructure Support

4.505.13

7.88

3.50

6.38

4.63

7.38

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6

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10




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etc.)

c. Pollution 9.00 9.00 7.00 5.00 6.00 4.00 6.00

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

e. Depth of higher education 1.00 1.00 9.00 4.00 5.00 6.00 7.00

f. English speaking / comprehension

proficiency4.00 1.00 7.00 2.00 2.00 8.00 6.00

g. Health facilities 5.00 3.00 8.00 3.00 7.00 1.00 8.00

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

Infrastructure and backdrop score 4.50 5.13 7.88 3.50 6.38 4.63 7.38

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

Explanation for Human and Physical Infrastructure Support Grades

1. Physical infrastructure/utilities for domestic market

Country Grade Rationale

China 5.00 China is a big country and there are still parts, particularly inland, where the

infrastructure is inadequate. If we were rating only the major coastal cities,

China’s 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 10.00 India has not invested nearly as much in its domestic infrastructure as China has.

Consequently, it is much more difficult moving goods around the country. Power

blackouts are a serious problem. Water is in short supply in many areas. The

poor quality of India’s physical infrastructure is one of the country’s biggest

problems.

Indonesia 8.00 One of President Susilo’s 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 4.00 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.

Philippines 9.00 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


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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 country’s current domestic

infrastructure is still good relative to most of the other emerging countries

covered here.

Vietnam 9.00 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.

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


China 3.00 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.

India 9.00 Civil aviation and ports are crying out for modernization. India would deserve a

10 were it not for the country’s international telecommunications links, which

are good enough to have enabled the country to become the world’s 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 8.00 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.

Malaysia 4.00 Malaysia’s ports and airport links, as well as its international communications

links, are quite good. If anything, they are under-utilized relative to their

capacity.

Philippines 8.00 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.


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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 directinternational flights to more parts of the world.

Vietnam 9.00 Most of Vietnam’s 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 Asia’s 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.

3. Pollution


China 9.00 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.

India 9.00 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.

Indonesia 7.00 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.

Malaysia 5.00 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

Malaysia’s 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.

Philippines 6.00 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.


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Part of the problem is bureaucratic, but a major part has to do with a lack of

financing. Only 7% of the country’s 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.

Vietnam 6.00 Pollution is likely to become a bigger issue in Vietnam in view of the country’s

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 Vietnamfor 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.

4. Technical labor pool depth


China 2.00 China has a large pool of engineers, scientists and other technically-skilled labor.

Its universities graduate more than 800,000 engineers a year and 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 beenso 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 1.00 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 8.00 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.

Malaysia 3.00 This is one of Malaysia’s 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


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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.

Thailand 7.00 Limited technical labor availability in Thailand is a major reason why some

foreign investors are looking elsewhere. Thailand’s 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 country’s

ability to supply this kind of labor.

Vietnam 7.00 The lack of technical talent remains a major source of concern for enterprises inVietnam. Around 65% of the country’s total workforce is unskilled. Some 78% of

Vietnamese people aged 20-24 are either untrained or do not have the skills they

need.

5. Depth of higher education


China 1.00 In addition to turning out large numbers of engineers, China’s universities are

also turning out an increasing number of business managers, financial specialists,

lawyers and people with other skills that companies need. There are over 110

million students in primary and secondary education and 11 million in highereducation. Around 19% of the age group 18 – 24 years has access to (post-

secondary) higher education, which includes both higher vocational and

university education. Higher education is being reformed rapidly, with a focus on

both expansion of capacity and improvement of quality.

India 1.00 More than one third of India’s 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. India’s 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 9.00 Indonesia produces a lot of higher education graduates but there are majorquestions 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 country’s higher education system than a sign that headway will be made

in reducing those problems.


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Malaysia 4.00 The government’s affirmative action policies probably did more to harm the

country’s 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 country’s universitiesare still turning out quality graduates and recently there has been a move to

redirect higher education back toward subjects like engineering, economics and

science.

Philippines 5.00 The Philippines’ education system is becoming a victim of under-investment.

The quality of teaching is deteriorating as more Filipinos look abroad for work,

and funding constraints affect both who can afford to go to schools and how 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.

Thailand 6.00 Reform in Thailand’s education system succeeded at achieving almost universalprimary education in the 1990s. Secondary education, though, continued to lag;

and the country’s 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 country’s existing

universities is quite good, but the Education Ministry is highly politicized and this

is seriously interfering with the development of the country’s education system.

Vietnam 7.00 Vietnam’s culture puts a high priority on education, but a lack of funding and

out-dated teaching methods mean the country’s 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 tofind a job, while skills shortages is a bottleneck for companies in many industries.

6. English speaking / comprehension proficiency of labor force


China 4.00 English is taught at all levels of education starting from junior middle school 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. Manyuniversities 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 1.00 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


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of English is not being pushed as hard in India as in other countries like China and

that this could hurt the country’s 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 bemaintained 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.

Malaysia 2.00 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 Malaysia’s international competitiveness. Latelythis 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.

Philippines 2.00 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.

Thailand 8.00 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 admitthat they are forced to teach English although they have little or no knowledge

of the language.

Vietnam 6.00 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.

7. Health facilities


China 5.00 China’s 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.


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India 3.00 Medical care is available in the major population centers that approaches and

occasionally meets Western standards. This industry is supporting India’s 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.

Indonesia 8.00 The general level of sanitation and health care in Indonesia is sub-

standard. Routine medical care is available in all major cities, but most

expatriates leave the country for all but the simplest medical procedures,

preferring their home countries or neighboring countries like Singapore and

Thailand.

Malaysia 3.00 Malaysia would like to take a page out of Thailand’s book and turn health care

into a major foreign-exchange earning industry. In view of the country’s Islamic

majority, it should be able to market its services especially well to Middle East

countries.

Philippines 7.00 Health care in the Philippines suffers from serious financial constraints. Thecountry has excellent doctors and nurses, but many of these people emigrate 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.

Thailand 1.00 The quality of some of Thailand’s 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.

Vietnam 8.00 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 medicalresponse services are generally unreliable or completely unavailable. Many

medicines that are readily available in the West are frequently hard to obtain in

Vietnam.

8. Natural disaster disruption potential

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

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

China 286 98,663 1,173.102 181,749.0

India 186 59,462 608.611 23,739.29

Indonesia 154 179,875 11.748 12,573.74

Malaysia 34 267 0.461 1,501.00

Philippines 146 9,535 50.152 2,225.04

Thailand 53 9,481 28.211 2,101.11

Vietnam 82 3,533 20.914 5,055.21


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Source: "EM-DAT: The OFDA/CRED International Disaster Database. www.emdat.be - Université 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 government’s

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.


China 7.00 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.

India 7.00 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, India’s whole approach to disaster management

is much more transparent than China’s, and while the government plays a

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

relief.

Indonesia 8.00 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 government’s 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 3.00 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.


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Philippines 9.00 The Philippines is a volcano-, typhoon-, flood-, and earthquake-prone country.

Making matters worse, the government’s 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 Indonesiabecause 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.

Thailand 5.00 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 government’s 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 andpolice 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 country’s

international image.

Vietnam 7.00 Vietnam experiences frequent weather‐related 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.


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C. EASE OF DOING BUSINESS

PERC’s Evaluation of the Ease of Doing Business


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

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

3. Registering Property 3.00 6.00 6.00 5.00 6.00 3.00 4.00

4. Getting Credit 4.00 3.00 6.00 2.00 7.00 4.00 7.00

5. Protecting Investors 6.00 6.00 8.00 4.00 7.00 5.00 8.00

6. Paying Taxes 7.00 9.00 7.00 2.00 8.00 5.00 8.00

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

8. Enforcing Contracts 3.00 9.00 8.00 4.00 7.00 3.00 5.00

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

Ease of Doing Business 4.00 7.44 7.00 3.78 7.00 3.56 6.00


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.

Overall Scores Assessing the Ease of

Doing Business

4.00

7.447.00

3.78

7.00

3.56

6.00

0

1

2

3

4

5

6

7

8

9

10




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The table presents the World Bank’s 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


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

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

3. Registering Property 38 94 98 60 102 19 40

4. Getting Credit 65 32 116 1 128 72 30

5. Protecting Investors 93 44 44 4 132 12 172

6. Paying Taxes 114 164 130 23 124 91 147

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

8. Enforcing Contracts 15 182 154 59 118 25 32

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

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

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

the worst.

In order to be able to incorporate the World Bank’s 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 Bank’s 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 Bank’s East of Doing Business ranks produces the following

table converted to PERC’s 0 to 10 grading scale:


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World Bank Ease of Doing Business Rankings Converted to 0 – 10 Grading Scale


1. Starting a Business 8.24 9.01 8.46 6.15 8.52 5.16 5.44

2. Dealing with Construction Permits 9.89 9.67 3.24 5.88 8.52 0.60 3.74

3. Registering Property 2.03 5.11 5.33 3.24 5.55 0.99 2.14

4. Getting Credit 3.52 1.70 6.32 0.00 6.98 3.90 1.59

5. Protecting Investors 5.05 2.36 2.36 0.16 7.20 0.60 9.40

6. Paying Taxes 6.21 8.96 7.09 1.21 6.76 4.95 8.02

7. Trading Across Borders 2.69 5.44 2.53 1.98 3.30 0.60 4.01

8. Enforcing Contracts 0.77 9.95 8.41 3.19 6.43 1.32 1.70

9. Closing a Business 3.68 7.31 7.75 2.97 8.35 2.47 6.92

Ease of Doing Business 4.29 7.31 6.59 1.10 8.08 0.99 5.05


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 Bank’s 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


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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 Bank’s 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. Ifwe 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 Bank’s scorewas 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

Bank’s 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 Bank’s grades generally were of Indonesia, several were not critical enough.Dealing with any permits in Indonesia, be they construction or some other kind, means dealing with the country’s

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 Indonesia’s 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 Bank’s favorable score seemed to imply. A look at the experience 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

Indonesia’s judicial system.

Malaysia: Just because Malaysia has not been attracting large amounts of foreign direct investment does notmean 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


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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 foreigninvestment 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 widerrange 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 Asia’s 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, Vietnam’s judicial system is weak and thecountry 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

Variables and Grades Used to Compute Domestic Political Risks

Domestic political risks China India Indonesia Malaysia Philippines Thailand Vietnam

a. The risk of a change of

government and key leaders

in coming two years6.75 4.00 4.00 7.00 3.00 7.00 4.00

b. The risk of a disruptive

political transition4.00 3.00 3.50 7.00 5.00 8.00 3.00

c. Quality of the government's

policies4.00 5.50 5.50 4.00 5.00 5.50 6.50

d. Ineffectiveness of the

government in

implementing its policies4.00 5.50 6.00 5.00 5.50 6.75 6.50

Average score 4.69 4.50 4.75 5.75 4.63 6.81 5.00

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

This section analyzes risks to the business environment caused by potential threats to 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 government’s ability to implement its policies. The best of plans can fail if the government cannot sell

them to the public or get government institutions responsible for implementing policies to do their jobs properly.

Domestic Political Risks

4.69 4.50 4.75

5.75

4.63

6.81

5.00

0

1

2

3

4

5

6

7

8

9

10




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Other sections in this report assess social unrest risks and institutional weaknesses, but this section focuses on the

government’s 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 PERC’s 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 government’s 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 extra-

constitutional 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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China 6.75 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.

India 4.00 One of the most profound differences between India and China is the nature of

their political systems. India has a multi-party democracy, while China has a one-

party authoritarian system. India’s system might appear more disorderly than

China’s, 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, wherelegislative 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.

Indonesia 4.00 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. Indonesia’s

political system today is much more stable than during the Suharto days duemainly to the formalized democratic transition process and the decentralization

of power from the executive branch to the legislature and local-level

governments.

Malaysia 7.00 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 country’s racial differences and forging a new sense of

national unity.

Philippines 3.00 The main reason domestic political risks are as low as they are in the 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


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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.

Vietnam 4.00 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

deal. At the 11th

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

the first session of the 13th

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 t

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