SMU Political-Economic Exchange

AN SMU ECONOMICS INTELLIGENCE CLUB PRODUCTION - There is Nothing Beyond Hope - Cracks in the BRIC - ASEAN 2015: Enough Protection for Unskilled labour? The Fortnight In Brief (31th July to 12nd August) US: Unemployment dry spells The August FMOC meeting resulted in the Federal Reserve not changing any of its policies. With the elections drawing perilously close, the Fed might be wary of eliciting criticism for influencing the markets too much. The employment report for July saw jobs gain by 163,000, but the overall unemployment nudged up to 8.3%. The unemployment rate would have been higher if not for a decline in labour force participation, which is a negative sign. Production wages also remained stagnant m/m. Asia Pacific ex-Japan: Low price pressures create room for more stimulus measures Chinese factory output has grown at its slowest since 2009 and cost pressures remain low for Japan, China and Korea as the global economic slowdown continues to sweep through Asia. Despite a rise in commodity prices, the central banks of Korea and Japan are considering expansionary monetary policy while Chinese leaders pledged to adjust policies to ensure stable growth this year. EU: Spain and Italy, welcome France The new ECB bond purchase programme, accepting of unsterilized interventions, was promptly dissented by the German in an otherwise unanimous agreement. Though PMI contraction was smaller in July (up to 43.7 from 43.4 in June), with a sizeable redemption due in October, Spain would lose access to the markets if the ECB cuts funding from EFSF/ESM to Spain. Banque de France, the central bank of France forecasts GFP growth of -0.1% for the next 2 quarters, this mean that the second largest European economy would officially join both Spain and Italy in the recession. The troika agreed to the Greeks 11.5 billion austerity plan for 2013-14, hence sealing the next tranche of 31.2 billion. ISSUE 22 13 AUGUST 2012

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There is Nothing Beyond Hope

By Sagar Hiren Desai, Singapore Management University

In the first quarter review of its Monetary Policy (2012-13), the Reserve Bank of India (RBI), cut its FY2013 growth forecast for India by 80 basis points to 6.50%, after GDP fell to 5.3% in the final quarter of FY2011-12 the worst one in the last nine years. Unlike the trend in developed as well other emerging markets, the Wholesale Price Index1 (WPI) inflation has failed to nudge downwards from over-7%. Likewise, the Consumer Price Index2 (CPI) inflation, a figure that embeds more reality for the common man, continues to be in the double digits. India just recorded one of the weakest monsoon rainfalls, almost 22% below its long period average (LPA), which will irrefutably have an adverse impact on its agricultural production. Index of Industrial Production3 (IIP) in April May 2012 slowed unbelievably to 0.8% as compared to the 5.7% recorded a year earlier during the same period. The Current Account Deficit4 (CAD) stood at 4.2% of the GDP in 2011-12, up from a small 2.7% in the previous year, mainly due to large imports of petroleum, oil, gold and silver. The low capital inflows during the same period only worsened the CAD situation further. Unless one resided in Mars for the last two years, it would be difficult to not be aware of the string of Indian political scams involving both, the political as well as the corporate elite of India. And, to add fuel to this fire, the recently and widely reported power outage across the whole of North India and affecting almost half of its 1.2-billion population only made the international arena more confident of Indias incompetence. These abysmal figures and news stories compel one, obviously, to speedily conclude that the end to Indias growth story is near. However, Shashi Tharoor, one of most sought-after intellectuals on India, aptly remarks in The Indian Miracle Lives, Todays pessimism [for India] is as exaggerated as yesterdays optimism was overblown. I too, in this editorial, will promote that Indias growth story is still intact and far from over, half-heartedly though. Halfheartedly only because Indias economic destiny is largely in its own hands: its economic potential remains decoupled, to a large extent, from the currently-troubled developed markets. Hence, what India does with what it has depends on how Indian policy makers make use of what India has. There is as much a chance of policies going awry as there is of policy making bodies paving the wave for Indias next stage of development. I remain fairly confident there are two fundamental factors that will drag (not smoothly though) India out of the mess that it is today conveniently identified with. Domestic Consumption Domestic demand for goods and services is my biggest bet. As is a popularly-cited statistic, India is home to over 1.2 billion people. Currently, almost 57% of the GDP is made up by private domestic consumption as reported by China Daily in A tale of two Asian nations. In a 2011 report prepared by ICICI Bank, Indias largest private bank, private domestic consumption has been slated to grow at about 10% Y-o-Y in this decade. When the population statistic is read in context of the age demographic of the country, the argument of private domestic consumption becomes all the more convincing to me. As the Figure 1 below shows, over 64% of this population is between the age of 15 and 49, the working age population deemed by the World Bank. Given that employment opportunities continue to grow, this would mean that over 64% of the Indian population will not simply demand more goods and services but more important, will have the ability to consume these goods and services too. In October 2011, India Brand Equity Foundation highlighted that companies are increasingly 2 Copyright 2012 SMU Economics Intelligence Club

aiming at inclusive growth and targeting the 69% bottom of the pyramid population. Evidence from the 68th Round of the National Sample Survey Organizations (NSSO) reveals that average monthly per capita incomes in rural India has grown to Rs. 707 in 2012 as compared to Rs. 558 in 2005. Thus, as I highlighted at the very outset, the Mumbai Consensus model of economic growth is only minimally dependent of the growth in the West and hence, remains hedged against major risks that the Western economies are facing right now. This is unlike its main competitor, China, which has a heavy reliance on exports of cheaply-made products to the West. Tapping the full potential of growing domestic demand is a challenge as well as the biggest advantage India has among its emerging market peers.

Figure 1: Percentage of Indian Population in the age group 15 - 64 from January 2002 2012 Source: Tradingeconomics.com

A Peoples Government In the real world, economic policies cannot be isolated from the political environment that they operate in. While some political analysts bark that the Indian democratic model becomes an impediment to economic development, I argue that unless a country is as lucky as say, Singapore, this is the only sustainable model for growth, which India openly embraces. In March 2012, when the Indian government proposed the General Anti-Avoidance Rules (GAAR) giving it the power to retroactively tax the indirect transfer of assets of foreign companies, investors pulled out almost US$ 927 million in the following month. Whats more, the incumbent governments failure to implement a uniform Goods and Services Tax (GST) and allow 100% Foreign Direct Investment5 (FDI) in the retail space hurt the investor sentiment further. Despite such imminent problems, Indian equities have attracted a whopping US$ 11 billion from foreign institutional inflows: this is more than for any other Asian market thus far in 2012. In June 2012, IKEA, the Swedish home products giant, committed about US$ 2 billion towards opening 25 stores in India. Coca Cola followed suit by announcing a US$ 5 billion investment by 2020 to establish new plants in the country. Such high investments in a country are a function of its long-term growth prospects as well as the business climate that the countrys government is expected to provide. What makes Indias case particularly interesting is this: the government openly acknowledges that there are regulatory problems and delays within the system as do the companies that invest in India. Hence, every time, Indias people and institutions become disgruntled with the economic climate, the ruling party has to immediately redress the situation as was seen by the replacement of Pranab Mukherjee by PC Chidambaram, widely known for his market-friendly approach to economics. Some may argue that such a people-centric democracy allows for high volatility in the business environment. But then again, at the cost of sounding amateurish, who wants to follow the unsustainable China-like model of governance in this day and age? 3 Copyright 2012 SMU Economics Intelligence Club

I am not too concerned about the pace of Indian growth, though. For a country as diverse as India, diverse challenges will require diverse solutions. But when the fundamental drivers of growth are intact, there is little that the vagaries of economic weather can do to discredit them. Oscar Wilde once aptly remarked, Nothing is as powerful as an idea whose time has come. If and when Indias time will come, nothing better would be able to summarize this sub-continents growth story. Until then of course, Theres nothing beyond hope. The Indian would say, I hope.

1 An

index that measures and tracks the changes in price of goods in the stages before the retail level.
2A

measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.
3 An

index which details out the growth of various sectors in an economy. Indian IIP will focus on sectors like mining, electricity and manufacturing.
4 Occurs

when a country's total imports of goods, services and transfers are greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world.
5 An

investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Sources: China Daily, GreaterKashmir.com, Tradingeconomics.com, The Indian Miracle Lives

4 Copyright 2012 SMU Economics Intelligence Club

Cracks in the BRIC

By Zhang Tengen, University College of London

For 11 years since the term was coined by Jim ONeill, BRIC1 has been a key driver of the global economy. The prolonged slowdown in recent years in the BRIC economies had raised questions about the sustainability of the worlds powerhouse economies into the future. The miracle When the global financial crisis hit in 2008, the BRIC economies produced the miracle of sustaining their GDP growths via government fiscal stimuli, policy changes and rapid credit growth. In China, the Chinese Communist Party (CCP) injected 4 trillion yuan worth of stimulus into its economy. In India, the liberalisation of economic reforms and shift from discretionary policy making to that of a rules-based policy framework helped to achieve a market oriented growth strategy to sustain GDP growth. Brazil and Russia experienced hikes in available credit, which boosted spending and hence GDP. The stellar performance of the BRIC nations allowed them to maintain their high GDP growth despite the financial crisis occurring in the rest of the world, leading many to believe that the BRIC nations were the next powerhouse economies. Panting panda, gasping elephant The next 3 years was a dream come true for the BRIC economies as they cruised along with astronomical GDP growth rates in each quarter. However, since the beginning of 2011, there have been signs of a slowdown as GDP growth forecasts have started heading downhill as shown in Figure 1 below.

Figure 1: Slowing growth in BRIC Source: IMF

In mid-June 2012, the MSCI BRIC index2 was down 25 per cent from a year ago, reflecting the movement of capital away as asset managers lower their exposure to these markets. While the reduction of exposure to the BRICs signal a general decrease in confidence in the BRICs, will the BRICs be able to regain investors confidence?

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Another miracle? As Europe struggles to resolve its debt problems, the engines of the world economy seem to be stuttering as well. In contrast to the global financial crisis in 2008, the BRICs are struggling to meet their projected growth targets due to the delayed effects of policies undertaken in 2008. As Chinas growth slows to 7.6% for the second quarter of 2012, hopes for the worlds second largest economy to offset wider woes have been dampened. The stimulus spree in 2008 has led to rising inflation and a mountain of government debt. Curbs on speculative home buying have been imposed and interest rates have been raised to quell inflation, yet inflation is still persistently above target. Furthermore, even as China shifts away from being an export driven economy, the slump in demand from Europe has left a big dent in the economy. Domestic issues also reined in Chinas GDP growth, and whilst this has not put the Chinese economy on the edge of a financial precipice, China is not likely to be able to pull a similar feat as in 2008 to tide through this slump. Whereas Chinas growth is stumped by huge government debt, Indias slowing GDP growth has in large part to do with the political roadblocks that litter the way. Political corruption that surfaced in recent months has increased the risk of reversal of policies that made India a more market-oriented economy3 in the past decade. Bearish investors and higher import costs have contributed to lower export growth, which when compounded with persistent inflation, make an increase in government spending to boost the economy unlikely. In Brazil, GDP grew at just 2.7% as the country began winding down monetary and fiscal stimulus from the last year of President Luiz Inacio Lula da Silvas term. As credit dried up, GDP growth in Brazil slowed dramatically. With a low savings rate of only 16.5% of GDP since the mid-1990s, another fiscal stimulus is not an option for Brazil. Growth in Russia slowed to 4% in the last quarter as two of its biggest trading partners, China and the European Union, remained sluggish. Another huge variable component of the Russian GDP is the price of oil. Given that sales of oil make up a significant proportion of GDP, Russias GDP is vulnerable to fluctuations in oil prices, and could head in either direction. The Verdict The BRIC economies may not perform as well in this crisis as they did in 2008, and whilst they may never again grow as fast as before, it does not discount the fact that the BRIC economies are still the fastest growing economies and have the potential to drive the world economy.
1A

grouping acronym that refers to the countries of Brazil, Russia, India and China, which are all deemed to be at a similar stage of newly advanced economic development
2A

market capitalization weighted index that combines the components of MSCI Brazil, MSCI Russia, MSCI India and MSCI China equity indices.
3 An

economy that operates by voluntary exchange in a free market and that is not planned or controlled by a central authority such as the government.
Sources: Standard & Poors, The Economist, Bloomberg, IMF

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ASEAN 2015: Enough Protection for Unskilled labour?

By Lisa Farrah Ho, Singapore Management University

Introduction The Roadmap for the ASEAN Community 20151 aims to accelerate ASEAN integration by relying on, inter alia, the ASEAN Economic Community (AEC). The AEC envisions ASEAN as a single market and production base, with free movement of goods, services, investment, skilled labour and capital. It is logical, given the high intra-ASEAN migration levels (Figure 1). Yet, a glaring gap remains: unskilled labour. The AEC references only professionals, despite the fact that non-professionals comprise the majority of ASEANs migrant workers: 93% of Malaysias migrant workforce are semi-skilled or unskilled,. Entire sectors of Thailands economy fishing, seafood processing, agriculture and construction in many provincial areas are wholly dependent on Burmese, Cambodian and Laos workers. Even Singapores economy relies significantly, albeit indirectly, on migrant workers: how many Singaporean women are able to work and contribute to Singapores economy thanks to domestic workers? Hence, though businesses will be permitted to move their operations to anyplace they desire within ASEAN, the unskilled workers involved may not be able to move as readily. If they can, they may not receive adequate legal protection. By ignoring the reality of intra-ASEAN unskilled labour flows, it is very possible that many ASEAN countries will find themselves with insufficient capacity to address the full extent and reality of the migrant worker situation come 2015.

Intra-ASEAN Migration Outward Migration Inward Migration Ratio: outbound/ inbound 0.08 0.17

Total Migration Outward Migration Inward Migration

Share of Intra-ASEAN to Total Migration (%)

9313 120,578 24,343 148,123 53 722 320,573 350,485 335,829 1, 518, Indonesia 158,485 9.58 2,504,297 397,124 687 Lao PDR 82, 788 10,134 8.17 366,663 18,916 Malaysia 1,195,566 1,882,987 0.63 1,481,202 2,357,603 Myanmar 321,100 814 394.47 514,667 98,008 Philippines 335,407 9,096 36.87 4,275,612 435,423 Singapore 122,254 1,162,960 0.11 297,234 1,966,865 Thailand 262,721 448,218 0.59 811,123 1,157,263 Vietnam 221,956 21,511 10.32 2,226,401 69,307 Total 4,123,515 4,135,357 1.00 12,852,027 6,984,461 Figure 1: Intra-ASEAN Migrant flow Source: Social Security and Labour Migration in ASEAN, 2011

ASEAN country Brunei Cambodia

Ratio: Outward Inward outbound/ Migration Migration inbound 0.16 38.26 81.40 1.04 15.33 95.46 6.31 19.38 0.63 5.25 9.82 0.15 0.70 9.97 1.84 60.64 22.58 80.72 62.39 7.84 41.13 32.39 9.97 32.08 39.91 53.58 79.87 0.83 2.09 59.13 38.73 31.04 59.21

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Two significant existing problems Two problems are especially worrying: the misconception that unskilled workers are shortterm migrants, and shadow recruitment channels2. Misconceptions on migrant worker patterns A common misconception is that unskilled migrant workers between ASEAN countries are short-term workers. Many governments mistakenly assume that formal regulations on their duration of stay are sufficient to guarantee voluntary departure, and that the threat of deportation is adequate to ensure compliance. However, many migrants are long-term migrants like the Rohyinga, living for a decade in Malaysia. Moreover, unskilled migrant workers often set up their own families in the recipient country. Cambodian fishermen, with their families in Rayong, provide an example. Evidently, though ASEAN governments may expect unskilled labour to travel only as dictated, the borders between ASEAN countries are too porous for that. The AECs failure to address this situation may well result in the eventual over-burdening of the recipient countries economies, given that the actual volume of incoming labour is not officially reflected. Recruitment channels Governments often assume that incoming migrant workers will enter through formal, legal recruitment channels. While this may be true in certain countries and industry sectors, the fact remains that shadow recruitment channels remain very much alive for unskilled labour. Their existence is due, ironically, to the extreme corruption in the formal recruitment processes of many ASEAN countries. It would, for example, cost a Laos worker seeking to go to Thailand 10,000 15,000 baht should he apply formally for a placement, as opposed to the 2000 4000 baht charged by informal recruitment channels. The formal process effectively places him in debt bondage3. Corruption within formal channels also results in exploitation of vulnerable groups. Girls are frequently sent to Malaysia as migrant domestic workers through legal recruitment agencies. Government officials deliberately ignore the fact that they are under-aged. Children are heavily trafficked in the Philippines for agricultural labour, deep-sea mining, etc. The corruption in formal and informal channels results in non-enforcement or deliberate infringement of basic labour rights such as safe working conditions. What can be done? Unskilled labour flows are important: all ASEAN economies rely on labour-intensive sectors. The Roadmaps silence on the legal framework applicable to unskilled labour is hence worrying. Firstly, governments may not anticipate the extent of migrant flows, and fail to prepare adequately for it. This would place their economies under great strain. The outflow of labour in sending countries might temporarily relieve employment pressures, especially in poorer areas unattractive to foreign investments. However, excessive reliance on labour exports and income generation from their remittances may delay or prevent policy reforms that encourage income generation based on trade. Furthermore, the influx of labour into recipient countries could, if inadequately controlled, create social tensions that undermine domestic and regional stability and economic progress. Finally, abuses of migrant workers' rights will continue unchecked, which may well adversely affect ASEANs political relations, and its progress as a bloc. Some efforts have been made to address the problems flowing from ASEANs migrant worker situation. However, these are inadequate. Most prominent has been the 2007 ASEAN 8 Copyright 2012 SMU Economics Intelligence Club

Declaration on the Protection and Promotion of the Rights of Migrant Workers (the 2007 Declaration). It was an ambitious effort, addressing the duties and responsibilities of sending and receiving states towards migrant workers. No distinction was drawn between skilled and unskilled labour. In fact, a Committee was established to discuss the Declarations implementation. Yet the entire process stalled upon Malaysias refusal to allow the Declaration to cover undocumented migrant workers, and has not been renewed. It is heartening that the the ASEAN Socio-Cultural Community (ASCC) addresses the protection and promotion of the rights of migrant workers. Its aim of ensuring fair and comprehensive migration policies and protection for all migrant workers in accordance with the laws, regulations and policies of ASEAN countries is commendable. The measures proposed therein operate on several levels: protection of fair wages and decent working and living conditions; adequate access to the recipient states judicial system; and encouraging labour-sending states to better regulate migrant worker recruitment. Yet one wonders whether all the recommendations can or will be concretely implemented, given the limitation that the ASCC cannot contradict the general principles in the 2007 Declaration. One hopes that this caveat will not be exploited to effect a similar delay. Other ASEAN legal instruments can also be used. The ASEAN Human Rights Declaration, currently being drafted, would be a powerful tool for institutionalising migrant worker rights. The ASEAN Charter is another: it compels member states to uphold international treaties they subscribe to. This includes the Convention on the Rights of the Child and the Convention on Elimination of Discrimination Against Women. Hence, ASEAN states are, in fact, already obliged to protect children from performing work that will likely harm their mental or physical development. Likewise, they cannot forbid migrant females from marrying citizens a prohibition that nearly all ASEAN states currently enforce. Evidently, ASEAN has to relook its existing legal obligations carefully in the lead up to 2015, and adjust its policies on migrant workers accordingly. Companies, too, have responsibilities. Supply-chain management policies that uphold industry-wide and/or international standards on labour recruitment processes and workers rights are vital. Standard-form contracts and lobbying governments to change migrant worker policies that fall short are other powerful tools. A multi-stakeholder approach would go a long way. But ASEAN governments should first relook the Roadmap, to maximise the effect of this approach on minimising adverse economic fallouts from unskilled labour flows. The Roadmap comprises three pillars: the ASEAN Political-Security Community, the ASEAN Economic Community, the ASEAN Socio-Cultural Community, as well as the Initiative for ASEAN Integration Work Plan 2. It is meant to facilitate the integration and community-building mandated by the 2007 ASEAN Charter.
1 2 Analogous

to a shadow economy or black market, shadow recruitment channels are a sector of economic activity derived from sources and transactions which occur outside of a country's laws and regulations on commerce. An arrangement whereby a person is forced to pay off a loan with direct labour in place of currency over an agreed or obscure period of time.
3

Sources: Roadmap for an ASEAN Community 2009-2015, Social Security and Labour Migration in ASEAN, 2011, Human Rights Watch, the International Labour Organisation 9 Copyright 2012 SMU Economics Intelligence Club

The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large- cap common stocks actively traded in the United States. It has been widely regarded as a gauge for the large cap US equities market The MSCI Asia ex Japan Index is a free float-adjusted market capitalization index consisting of 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The STOXX Europe 600 Index is regarded as a benchmark for European equity markets. It represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Correspondents Shane Ai Changxun (Vice President, Publication) changxun.ai.2010@smu.edu.sg Singapore Management University Singapore Herman Cheong (Vice President, Operations) Wq.cheong.2011@economics.smu.edu.sg Singapore Management University Singapore Fariha Imran (Marketing Director) Farihaimran.2010@economics.smu.edu.sg Singapore Management University Singapore Randy Lai (Editor) Tw.lai.2010@smu.edu.sg Singapore Management University Singapore Sagar Hiren Desai sagarhirend.2009@business.smu.edu.sg Singapore Management University Singapore Lisa Farrah Ho lisa.ho.2010@law.smu.edu.sg Singapore Management University Singapore Ben Lim (Vice President, Publication) ben.lim.2010@smu.edu.sg Singapore Management University Singapore Tan Jia Ming (Publications Director) jiaming.tan.2010@smu.edu.sg Singapore Management University Singapore Vera Soh (Liaison Officer) Vera.soh.2011@economics.smu.edu.sg Singapore Management University Singapore Seumas Yeo (Editor) Seumas.yeo.2010@smu.edu.sg Singapore Management University Singapore Zhang Tengan tengenzhang@gmail.com University College London The United Kingdom

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