SPEX Issue 22

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ISSUE 22

13 AUGUST 2012- 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 changingany of its policies. With the elections drawing perilously close, the Fedmight be wary of eliciting criticism for influencing the markets too much.

The employment report for July saw jobs gain by 163,000, but the overallunemployment nudged up to 8.3%. The unemployment rate would havebeen higher if not for a decline in labour force participation, which is anegative 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 costpressures remain low for Japan, China and Korea as the global economicslowdown continues to sweep through Asia. Despite a rise in commodityprices, the central banks of Korea and Japan are considering expansionary

monetary policy while Chinese leaders pledged to adjust policies to ensurestable growth this year.

EU: Spain and Italy, welcome France

The new ECB bond purchase programme, accepting of unsterilizedinterventions, was promptly dissented by the German in an otherwiseunanimous agreement. Though PMI contraction was smaller in July (up to43.7 from 43.4 in June), with a sizeable redemption due in October, Spainwould lose access to the markets if the ECB cuts funding from EFSF/ESM toSpain. Banque de France, the central bank of France forecasts GFP growth

of -0.1% for the next 2 quarters, this mean that the second largestEuropean economy would officially join both Spain and Italy in therecession. The troika agreed to the Greeks 11.5 billion austerity plan for2013-14, hence sealing the next tranche of 31.2 billion.

SMU Political-Economic

Exchange

AN SMU ECONOMICS INTELLIGENCE CLUB PRODUCTION

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Copyright 2012 SMU Economics Intelligence Club

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There is Nothing Beyond HopeBy 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% inthe 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 hasfailed 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 doubledigits. India just recorded one of the weakest monsoon rainfalls, almost 22% below its longperiod average (LPA), which will irrefutably have an adverse impact on its agriculturalproduction. Index of Industrial Production3 (IIP) in April May 2012 slowed unbelievably to0.8% as compared to the 5.7% recorded a year earlier during the same period. The CurrentAccount Deficit4 (CAD) stood at 4.2% of the GDP in 2011-12, up from a small 2.7% in theprevious year, mainly due to large imports of petroleum, oil, gold and silver. The low capitalinflows 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 Indianpolitical scams involving both, the political as well as the corporate elite of India. And, to addfuel to this fire, the recently and widely reported power outage across the whole of NorthIndia and affecting almost half of its 1.2-billion population only made the international arenamore confident of Indias incompetence.

These abysmal figures and news stories compel one, obviously, to speedily conclude that theend to Indias growth story is near. However, Shashi Tharoor, one of most sought-afterintellectuals on India, aptly remarks in The Indian Miracle Lives, Todays pessimism [forIndia] is as exaggerated as yesterdays optimism was overblown. I too, in this editorial, willpromote that Indias growth story is still intact and far from over, half-heartedly though. Half-

heartedly only because Indias economic destiny is largely in its own hands: its economicpotential remains decoupled, to a large extent, from the currently-troubled developedmarkets. Hence, what India does with what it has depends on how Indian policy makers makeuse of what India has. There is as much a chance of policies going awry as there is of policymaking bodies paving the wave for Indias next stage of development.

I remain fairly confident there are two fundamental factors that will drag (not smoothlythough) 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 byprivate domestic consumption as reported by China Daily in A tale of two Asian nations. In a2011 report prepared by ICICI Bank, Indias largest private bank, private domesticconsumption has been slated to grow at about 10% Y-o-Y in this decade. When the populationstatistic is read in context of the age demographic of the country, the argument of privatedomestic 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 populationdeemed by the World Bank. Given that employment opportunities continue to grow, thiswould mean that over 64% of the Indian population will not simply demand more goods andservices 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

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aiming at inclusive growth and targeting the 69% bottom of the pyramid population. Evidence from the 68thRound of the National Sample Survey Organizations (NSSO) revealsthat average monthly per capita incomes in rural India has grown to Rs. 707 in 2012 ascompared to Rs. 558 in 2005. Thus, as I highlighted at the very outset, the Mumbai Consensusmodel 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 isunlike its main competitor, China, which has a heavy reliance on exports of cheaply-madeproducts to the West. Tapping the full potential of growing domestic demand is a challenge aswell 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 becomesan 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. InMarch 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 foreigncompanies, 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 investorsentiment further. Despite such imminent problems, Indian equities have attracted awhopping US$ 11 billion from foreign institutional inflows: this is more than for any otherAsian 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 byannouncing a US$ 5 billion investment by 2020 to establish new plants in the country. Suchhigh investments in a country are a function of its long-term growth prospects as well as thebusiness climate that the countrys government is expected to provide. What makes Indiascase particularly interesting is this: the government openly acknowledges that there areregulatory 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 economicclimate, the ruling party has to immediately redress the situation as was seen by thereplacement of Pranab Mukherjee by PC Chidambaram, widely known for his market-friendlyapproach to economics. Some may argue that such a people-centric democracy allows for highvolatility 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?

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

Sources: China Daily, GreaterKashmir.com, Tradingeconomics.com, The Indian Miracle

Lives

1 An index that measures and tracks the changes in price of goods in the stages before the retail

level.

2 A 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.

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Cracks in the BRICBy Zhang Tengen, University College of London

For 11 years since the term was coined by Jim ONeill, BRIC1 has been a key driver of theglobal economy. The prolonged slowdown in recent years in the BRIC economies had raisedquestions 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 ofsustaining their GDP growths via government fiscal stimuli, policy changes and rapid creditgrowth. In China, the Chinese Communist Party (CCP) injected 4 trillion yuan worth ofstimulus into its economy. In India, the liberalisation of economic reforms and shift fromdiscretionary policy making to that of a rules-based policy framework helped to achieve amarket oriented growth strategy to sustain GDP growth. Brazil and Russia experienced hikesin available credit, which boosted spending and hence GDP. The stellar performance of theBRIC 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 nextpowerhouse economies.

Panting panda, gasping elephant

The next 3 years was a dream come true for the BRIC economies as they cruised along withastronomical GDP growth rates in each quarter. However, since the beginning of 2011, therehave been signs of a slowdown as GDP growth forecasts have started heading downhill asshown 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 themovement of capital away as asset managers lower their exposure to these markets. While thereduction of exposure to the BRICs signal a general decrease in confidence in the BRICs, willthe BRICs be able to regain investors confidence?

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1 A 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

2 A 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.

Another miracle?

As Europe struggles to resolve its debt problems, the engines of the world economy seem tobe stuttering as well. In contrast to the global financial crisis in 2008, the BRICs are strugglingto meet their projected growth targets due to the delayed effects of policies undertaken in2008.

As Chinas growth slows to 7.6% for the second quarter of 2012, hopes for the worlds secondlargest economy to offset wider woes have been dampened. The stimulus spree in 2008 hasled to rising inflation and a mountain of government debt. Curbs on speculative home buyinghave been imposed and interest rates have been raised to quell inflation, yet inflation is stillpersistently above target. Furthermore, even as China shifts away from being an export driveneconomy, the slump in demand from Europe has left a big dent in the economy. Domesticissues also reined in Chinas GDP growth, and whilst this has not put the Chinese economy onthe edge of a financial precipice, China is not likely to be able to pull a similar feat as in 2008to 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 theway. Political corruption that surfaced in recent months has increased the risk of reversal ofpolicies 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 whencompounded with persistent inflation, make an increase in government spending to boost theeconomy unlikely. In Brazil, GDP grew at just 2.7% as the country began winding downmonetary 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 only16.5% of GDP since the mid-1990s, another fiscal stimulus is not an option for Brazil. Growthin Russia slowed to 4% in the last quarter as two of its biggest trading partners, China and theEuropean Union, remained sluggish. Another huge variable component of the Russian GDP isthe price of oil. Given that sales of oil make up a significant proportion of GDP, Russias GDP isvulnerable 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 theymay never again grow as fast as before, it does not discount the fact that the BRIC economiesare still the fastest growing economies and have the potential to drive the world economy.

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 asingle 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 themajority of ASEANs migrant workers: 93% of Malaysias migrant workforce are semi-skilledor unskilled,. Entire sectors of Thailands economy fishing, seafood processing, agricultureand construction in many provincial areas are wholly dependent on Burmese, Cambodianand Laos workers. Even Singapores economy relies significantly, albeit indirectly, on migrantworkers: how many Singaporean women are able to work and contribute to Singaporeseconomy thanks to domestic workers? Hence, though businesses will be permitted to movetheir operations to anyplace they desire within ASEAN, the unskilled workers involved maynot be able to move as readily. If they can, they may not receive adequate legal protection. Byignoring the reality of intra-ASEAN unskilled labour flows, it is very possible that manyASEAN countries will find themselves with insufficient capacity to address the full extent andreality of the migrant worker situation come 2015.

ASEAN

country

Intra-ASEAN Migration Total Migration

Share of Intra-ASEAN

to Total

Migration (%)

Outward

Migration

Inward

Migration

Ratio:

outbound/

inbound

Outward

Migration

Inward

Migration

Ratio:

outbound/

inbound

Outward

Migration

Inward

Migration

Brunei 9313 120,578 0.08 24,343 148,123 0.16 38.26 81.40

Cambodia 53 722 320,573 0.17 350,485 335,829 1.04 15.33 95.46

ndonesia1, 518,

687158,485 9.58 2,504,297 397,124 6.31 60.64 39.91

Lao PDR 82, 788 10,134 8.17 366,663 18,916 19.38 22.58 53.58

Malaysia 1,195,566 1,882,987 0.63 1,481,202 2,357,603 0.63 80.72 79.87

Myanmar 321,100 814 394.47 514,667 98,008 5.25 62.39 0.83

Philippines 335,407 9,096 36.87 4,275,612 435,423 9.82 7.84 2.09

Singapore 122,254 1,162,960 0.11 297,234 1,966,865 0.15 41.13 59.13

Thailand 262,721 448,218 0.59 811,123 1,157,263 0.70 32.39 38.73

Vietnam 221,956 21,511 10.32 2,226,401 69,307 9.97 9.97 31.04

Total 4,123,515 4,135,357 1.00 12,852,027 6,984,461 1.84 32.08 59.21

gure 1: Intra-ASEAN Migrant flow

ource: Social Security and Labour Migration in ASEAN, 2011

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Two significant existing problems

Two problems are especially worrying: the misconception that unskilled workers are short-term migrants, and shadow recruitment channels2.

Misconceptions on migrant worker patterns

A common misconception is that unskilled migrant workers between ASEAN countries areshort-term workers. Many governments mistakenly assume that formal regulations on theirduration of stay are sufficient to guarantee voluntary departure, and that the threat ofdeportation is adequate to ensure compliance. However, many migrants are long-termmigrants like the Rohyinga, living for a decade in Malaysia. Moreover, unskilled migrantworkers often set up their own families in the recipient country. Cambodian fishermen, withtheir families in Rayong, provide an example. Evidently, though ASEAN governments mayexpect unskilled labour to travel only as dictated, the borders between ASEAN countries aretoo porous for that. The AECs failure to address this situation may well result in the eventualover-burdening of the recipient countries economies, given that the actual volume ofincoming 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 areheavily trafficked in the Philippines for agricultural labour, deep-sea mining, etc. Thecorruption in formal and informal channels results in non-enforcement or deliberateinfringement 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 henceworrying. 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 oflabour in sending countries might temporarily relieve employment pressures, especially inpoorer areas unattractive to foreign investments. However, excessive reliance on labourexports and income generation from their remittances may delay or prevent policy reformsthat encourage income generation based on trade. Furthermore, the influx of labour intorecipient countries could, if inadequately controlled, create social tensions that underminedomestic 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 migra nt worker

situation. However, these are inadequate. Most prominent has been the 2007 ASEAN

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1 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.

2 Analogous to a shadow economy or black market, shadow recruitment channels area sector ofeconomic activity derived from sources and transactions which occur outside of a country's laws

and regulations on commerce.3 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.

Declaration on the Protection and Promotion of the Rights of Migrant Workers (the 2007Declaration). It was an ambitious effort, addressing the duties and responsibilities of sendingand receiving states towards migrant workers. No distinction was drawn between skilled andunskilled labour. In fact, a Committee was established to discuss the Declarationsimplementation. Yet the entire process stalled upon Malaysias refusal to allow theDeclaration to cover undocumented migrant workers, and has not been renewed.

It is heartening that the the ASEAN Socio-Cultural Community (ASCC) addresses theprotection and promotion of the rights of migrant workers. Its aim of ensuring fair andcomprehensive migration policies and protection for all migrant workers in accordance withthe laws, regulations and policies of ASEAN countries is commendable. The measuresproposed therein operate on several levels: protection of fair wages and decent working andliving conditions; adequate access to the recipient states judicial system; and encouraginglabour-sending states to better regulate migrant worker recruitment. Yet one wonderswhether all the recommendations can or will be concretely implemented, given the limitationthat the ASCC cannot contradict the general principles in the 2007 Declaration. One hopes thatthis 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 theysubscribe to. This includes the Convention on the Rights of the Child and the Convention onElimination of Discrimination Against Women. Hence, ASEAN states are, in fact, alreadyobliged to protect children from performing work that will likely harm their mental orphysical development. Likewise, they cannot forbid migrant females from marrying citizens a prohibition that nearly all ASEAN states currently enforce. Evidently, ASEAN has to relookits existing legal obligations carefully in the lead up to 2015, and adjust its policies on migrantworkers accordingly.

Companies, too, have responsibilities. Supply-chain management policies that upholdindustry-wide and/or international standards on labour recruitment processes and workersrights are vital. Standard-form contracts and lobbying governments to change migrant workerpolicies that fall short are other powerful tools. A multi-stakeholder approach would go a longway. But ASEAN governments should first relook the Roadmap, to maximise the effect of thisapproach on minimising adverse economic fallouts from unskilled labour flows.

Sources: Roadmap for an ASEAN Community 2009-2015, Social Security and Labour

Migration in ASEAN, 2011, Human Rights Watch, the International Labour Organisation

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