ASIAN INTELLIGENCE An Independent Fortnightly Report on Asian Business and Politics No. 819
Wednesday January 26, 2011
Regulatory Overkill Grade
10 9 8 7 6 5 4 3 2 1 0
9.16 8.83 9.04
8.26
5.89 6.09 4.56 3.83 3.28
0.98 1.08
1.51
Grades range from zero to 10, with zero being the best grade possible and 10 the worst.
REGIONAL OVERVIEW .................... 2
PHILIPPINES ...................................... 9
CHINA .................................................. 4
SINGAPORE ..................................... 10
HONG KONG ....................................... 4
SOUTH KOREA ............................... 11
INDIA ................................................... 6
TAIWAN ........................................... 12
INDONESIA ......................................... 7
THAILAND ....................................... 12
JAPAN .................................................. 8
VIETNAM ......................................... 13
MALAYSIA .......................................... 9
EXCHANGE RATE TABLE ............. 13
POLITICAL & ECONOMIC RISK CONSULTANCY LTD.
Political & Economic Risk Consultancy, Ltd.
Issue #819
REGIONAL OVERVIEW Backlash against excessive government regulation US President Barak Obama has created quite a buzz with his new campaign to streamline the US regulatory system. His executive order, which was unveiled last Thursday, calls for a government-wide review of federal regulations to “make sure we avoid rules that stifle job creation and make our economy less competitive.” The aim is “to root out regulations that conflict, that are not worth the cost, or that are just plain dumb.” The review “will help bring order to regulations that have become a patchwork of overlapping rules, the result of tinkering by administrations and legislators of both parties and the influence of special interests in Washington over decades.” We agree with all this and most of what else Mr. Obama said when he unveiled his new regulatory simplification campaign, especially the comments in the previous paragraph relating to the influence of special interest groups. However, one of his central statements was more worrying insofar as it indicates a misunderstanding of the fundamental nature of the regulatory problem, and if he does not grasp the real cause of the problem, his chances of making lasting headway are next to non-existent. His mistake was in talking about regulations as if they were product of an equation balancing the public interests against the pursuit of progress and the growth of the economy. In fact, no such equation exists. Protecting the public’s interest need not be at the expense of economic growth. To the contrary, the public’s interest is closely aligned with the pursuit of progress and the growth of the economy. Regulations should be there not to “balance” these goals but to keep them closely aligned. The US regulatory process is not dominated by groups who are anti-business or anti-growth. To the contrary, in the case of the US the vast majority of regulatory changes passed by Congress are in response to pressure from one business group or another that is using the legislative process to promote its own agenda or to hurt the competitive position of a rival constituency. Companies have
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entered politics to gain or keep a competitive advantage over their business rivals, and the demands of corporations seeking to influence the policy process have grown as competition among them has intensified. The “public’s interest” has little to do with the legislation except as a debating point by lobbyists who are really not concerned with the general public at all but with the commercial interests of the industry group that pays their fees. Business is a victim of its own strategy to use politics to promote its agenda. Because all the major players are doing it, no one is really gaining a lasting advantage and the entire system is getting clogged up by legislation and laws that are confusing and redundant. Moreover, different government agencies are being empowered in ways that result in overlapping responsibilities and invite inconsistencies of the kind that Mr. Obama noted when he singled out saccharin as being something that was ruled by the Food and Drug Administration as being safe for people to consume yet the Environmental Protection Agency made companies treat it like other dangerous chemicals. Hopefully, Mr. Obama’s campaign to review regulations will bring order to a system that has grown unwieldy and confusing. However, unless it addresses the fundamental problem that arises from a system of corporate lobbying run amok, the machine that churns out the uncoordinated regulations will go right on churning. Since politicians of both parties need the money that comes from the lobbying to pay for increasingly expensive election campaigns, it is doubtful they will do anything that addresses the root of the problem. Still, Mr. Obama’s speech is significant for a number of reasons. First, it shows that the problem of excessive regulation has become a political hot button. Mr. Obama is responding to a grassroots movement in the US that is labeling the government and its perceived intrusiveness to be a central part of the problem rather than a part of the solution. This is a frustration felt by the public in many other countries as well. According to surveys like those conducted by Heritage Foundation and the World Bank, the US has one of the better regulatory systems in the world. If politicians there are feeling compelled to be seen taking steps to eliminate
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unnecessary rules, similar or even more intense pressures are undoubtedly building in other countries too. Secondly, just as Mr. Obama erred when he argued that the real reason for rules and regulations is to protect the public, other governments also fall back on rules and regulations for reasons that really have little if anything to do with protecting the public good. In some countries, politicians and government bureaucrats use excessive regulation as a way to protect and project their own power, as well as to raise funds either legally or illegally. In other countries, they are a way to protect the position of an absolute leader or a single party political system. In still other countries they are a way to protect the positions of local companies against foreign competition. It is easy for defenders of regulations to argue that the rules are for the good of the public, but one does not have to scratch too far below the surface to find there really are ulterior motivations that have little to do with the public good and frequently come at the expense of economic growth and personal freedoms. We have conducted our own survey of expatriate business people working in Asia to assess their perceptions of the quality of the regulatory environment of the country in which they are working. We asked them to grade on a scale of zero to 10 the extent that they thought the regulatory environment was an impediment to their ability to develop their business in the country in which they were working, with zero being no impediment and 10 being a huge impediment or major drawback of the business environment. Altogether, 1,370 executives responded to the survey, which we conducted in the fourth quarter of 2010. They provided two grades: one for the country in which they were working and one for their home country. We used the responses from American executives about regulatory conditions in the US to provide a benchmark against which to assess the Asian scores. Hong Kong was rated to have the environment that was least burdened by regulations – better than the US. Singapore also scored better than the US, although slightly worse than Hong Kong. As for the worst rated countries, the field is very congested, with the Philippines, Indonesia, China and
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India all being viewed negatively. However, India managed to win the wooden spoon for having the worst regulatory environment of any country covered by our report. Indian politicians can argue if they want that all the regulations are necessary and protect the public, but that is not a perception shared by foreign investors or the general public in India. They see the penchant for over-regulation as a way for politicians and bureaucrats to exert power, line their own pockets, and justify their existence. If the country were to eliminate laws and regulations, it would eliminate jobs in the civil service – and that is something most civil servants will fight tooth and nail to prevent. China’s survey grade was not much better than India’s. Many of the reasons are the same, foremost among them being that interpreting regulations is the major source of power of bureaucrats. However, China’s regulatory environment is also affected by the desire of the Communist Party to fortify its own position. As in Vietnam, the China’s Communist Party uses laws restricting freedom of speech, the Internet, public gatherings, and certain associations (like the Falun Gong and the Catholic Church) to protect the party from potential criticism and competition. Thailand is the other country where the legal and regulatory structure is being modified to protect certain special interest groups. In the case of Thailand, since the coup that ousted Thaksin Shinawatra, those in power have tightened up and broadened the interpretation of lèse majesté laws to protect not only the royal family but also a lengthening radius of people associated with the royal family. Paradoxically, in the case of Thailand, regulations and laws relating to political affairs have been tightened at the same time that regulations and laws governing most economic activities, including foreign direct investment, have been liberalized. Since most of the people we interviewed were business executives who try to steer well clear of politics, it is understandable that they did not grade the Kingdom’s regulatory environment as critically as their counterparts in places like the Philippines and Indonesia, which probably have fewer regulations limiting political behavior than they do ones
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Issue #819
regulating economic activities. Many of the rules in Indonesia and the Philippines are designed to protect local special interest groups. Institutions like the judiciary can and are frequently manipulated by these groups in ways that result in inconsistencies in rulings that damage confidence and highlight other systemic shortcomings like corruption.
recent cases of senior chaebol family members being convicted of one crime or another only to have their sentence commuted so they can return to their companies that the impression is clearly that regulations and laws are not evenly applied, that some people are above them, giving their companies a business advantage over competition.
Our grade for Malaysia is relatively encouraging. Unlike in most of the other countries, where there was a great deal of consistency in the perceptions, scores for Malaysia were more spread out, with some respondents being much more positive than the average score and some being much more negative. Our own interpretation of this spread is that it reflects some progress by PM Najib Razak in changing perceptions toward Malaysia for the better. Previously, Malaysia suffered from the weaknesses of both Thailand and Indonesia insofar as a lot of rules and regulations were designed to protect those in power from criticism and being challenged successfully by the opposition while other regulations protected local industry from foreign competition and, within the domestic economy, Malay interests from ethnic Chinese and Indian interests. Beginning with Mr. Najib’s predecessor, PM Abdullah Ahmad Badawi, the government opened itself up more to criticism, while Mr Najib has promised to move away from affirmative action policies that favored Malays to more inclusive policies that promote the interests of all Malaysians. This involves reducing regulations. Much remains to be done, but our survey score indicates that the efforts taken so far are producing some results.
As in Taiwan and Japan, Korea puts a great deal of power in the hands of bureaucrats, and they use these powers not only to protect and promote their own positions but also to favor certain companies over others. There are also language barriers and a relative shortage of lawyers and other experts in these countries who can help guide foreign companies through the complexities of the local regulatory environment. Consequently, it is much more difficult (and expensive) for foreign investors to find out exactly where they stand in these countries than it is in either Singapore or Hong Kong, where such information is much easier to obtain.
Of Asia’s developed economies, Korea is graded the most critically in terms of its regulatory quality. The reason for this is probably because foreign investors feel somewhat discriminated against when it comes to doing local business, particularly vis-à-vis the family-owned conglomerates, or chaebol. There have been so many
We go into these nuances between countries in more detail in the country entries that follow. Suffice it to say here that President Obama’s new campaign to create a 21st Century regulatory system for the US is likely to be followed by similar initiatives by the Asian governments covered in this report. However, just as in the US, it is very unlikely that the results of these campaigns will be very satisfying. Hong Kong and Singapore are really the only two economies that place a high priority on simplicity and transparency in regulations. They write rules with more input from experts and businesses, and they make sure that government departments can be coordinated better by working on-line and that consumers can use this same technology to keep informed. They genuinely want to eliminate unnecessary paperwork, whereas many of the other countries view such paperwork as vital to justifying a role for the bureaucracy – something they feel should be protected, not eliminated.
CHINA Comments With inflation higher than usual, the government is likely to increase its administrative controls in 2011. These will cover property sales and prices, bank lending, food prices, and subsidies. One of the problems with
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the heavy reliance on regulations is that the government gives the impression it has more control over the economy than is actually the case. If that were so, there would not be a property bubble, corruption would be less than it is, and the money supply would be growing more slowly than it is. The old adage was that “the mountains are high and the emperor is far away,” implying that provinces further away from the center of power in Beijing could more easily ignore central government directions and regulations. Technology has made the distance from Beijing less of a relevant variable than was the case before, but finding ways around official regulations is standard practice not only for individuals and private companies but also for state-owned companies. For example, the government has been unable to stop state-run banks from pumping too much credit into the economy. China’s financial institutions made Rmb 7.95 trillion of loans in 2010, exceeding the official ceiling of Rmb 7.5 trillion. Banks got around regulatory curbs in part by shifting loans off their books and onto those of lightly regulated trust companies. This month, therefore, China’s banking regulator unveiled new restrictions on trusts – which is an example of how regulations have been built upon regulations over the years. The problem would not be so bad if the regulatory system were more transparent and companies could find out quickly and cheaply what is and is not allowed. However, this is usually not the case. There are so many regulations – and so many different government departments with overlapping authority – that it is difficult getting an answer to exactly what is allowed. Local level authorities have a great deal of discretion, and this results in inconsistencies between different regions and even in the same region over time. Relatively radical regulation changes can happen with little notice. For example, one industrial zone lengthened with no debate or forewarning the minimum distance required between factories, putting factories that had already been built according to the old rules into an extremely difficult position. Factories in another area found they has to relocate when the authorities decided they wanted to build a car racing track, while in the run-up to the 2008 Olympics some factories around Beijing were ordered to close temporarily in order to reduce air pollution during the Games. On the one hand, this kind of power to order changes fast is a strength for China. It has enabled the country to build physical infrastructure fast enough to support the expanding industrial base. On the other hand, the sudden changing of the ground rules has resulted in radical changes in the business environment that frequently have caught investors off guard and upset their best-laid plans.
HONG KONG Comments Hong Kong has one of the freest, most open economies in the world. To be sure, there are regulations, and red tape is bigger in some sectors than others. However, when it comes to foreign trade in goods and services, setting up companies or bank accounts, or moving capital into or out of the territory, the system is open and remarkably free from paperwork. Indeed, one of the territory’s biggest challenges in recent years has been in putting new regulations in place so it could comply with OECD standards of information disclosure and avoid being blacklisted as place that did not do enough to deter money laundering and tax evasion in other countries. Perhaps one of the most obvious examples of Hong Kong’s attempts to simplify paperwork is the tax system. There is a flat tax rate, and companies and individuals have limited scope to search for loopholes or deductions. Consequently, the standard tax form is four pages long and one rarely needs to fill out all four pages.
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The government has also taken advantage of the Internet to communicate rules and regulations to the public and to facilitate application procedures. For most types of questions, a company or individual does not have to go to a lawyer for advice but can get a quick, accurate and free answer from the relevant regulatory body. Singapore is the only other place in Asia that has embraced the Internet as fully to simplify regulatory processes. The biggest recent changes in Hong Kong have less to do with any regulatory reforms its government has initiated but with reforms that Beijing has initiated. These have included allowing more Chinese to travel abroad and using Hong Kong as the main testing site to experiment with currency liberalization. Beijing is using Hong Kong as a laboratory where international companies can hold and trade renminbi-denominated products. At the same time, Hong Kong’s stock, property and financial markets are benefiting from a liberalization of rules governing capital outflows from China. In the latest reform, the city of Wenzhou will allow its residents to invest directly overseas – a move that should quickly benefit Hong Kong equities and real estate. Beijing also recently allowed export companies to keep more of their foreign exchange earnings offshore – a move that should benefit Hong Kong’s banks. Because China sometimes backtracks on its experiments, Hong Kong is at risk of suffering whiplash at times. However, history has shown that such setbacks are usually only temporary. Hong Kong’s government has a reputation for being pro-business in its entire approach to regulation. Standard criticism is focused more on how its policies are sometimes perceived to be biased toward a small group of local tycoons (mainly property developers) rather than toward the broader business community, but business in general benefits from the regulatory environment. It is possible that going forward there will be a shift in emphasis more to protect local groups like retired residents and low-income households who are being squeezed by the SAR’s high-cost structure. However, Hong Kong is not about to become socialist in its approach to government. Any reforms designed to protect the poor and less fortunate are likely to be debated heavily. Their costs will also be kept low enough to ensure the government does not suffer chronic budget deficits. However, the government has already indicated that some segments of the population are more in need of help than others and its policies going forward will pay more attention to these groups.
INDIA Comments India is one of the most over-regulated countries in the world. In general, regulations are complex and non-transparent, while standard and certifications procedures are onerous. Foreign exchange, capital transactions, and some credit operations are subject to approvals, restrictions, and additional requirements that go far beyond what most other countries require. Even procedures for something as simple as getting a tourist visa are more cumbersome than is typical elsewhere. The World Bank’s Doing Business Survey gives some specific examples of why India’s regulatory system deserves to be graded as poorly as it is: It can take a month and a half to register property, almost 200 days to obtain a construction permit, over 1,400 days to enforce a contract, and seven years to close a business. Documentation requirements for both exports and imports are onerous. Labor requirements are strict and companies lack flexibility on hiring and firing workers. What bothers business groups most can be seen from what these same groups are lobbying hardest to change: they want liberalization of the retail and financial services sector, labor market reform and state disinvestments. They want badly needed infrastructure projects to be implemented more quickly, and they want costly government subsidies reduced.
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Regulations are frequently not enforced, which raises the question of why they are on the books at all. In a recent scandal involving the telecommunications ministry’s mishandling of a landmark allocation of mobile telephone spectrum, as many as 85 of 122 new licenses, which were bundled with the bandwidth allocation, were issued to companies that did not have the required capital to seek bandwidth. These companies “suppressed facts, disclosed incomplete information and submitted fictitious documents.” Of course they could not have done so without with complicity of bureaucrats at the ministry, who overlooked qualification shortcomings and arbitrarily moved forward the cut-off date for applying by one week to favor some companies that had applied earlier, while leaving others out. A few Indian states are trying to differentiate themselves from others by stressing how they are more efficient and pro business. The states of Gujarat and Tamil Nadu, for example, are trying to market themselves as being pro-business and efficient. Their actual situation is not as good as the states’ marketing rhetoric, but the civil services of the both states are being given credit by some investors for approving land purchases and environmental permits more quickly than is the case in other states. In the case of Gujarat, it has set up a Web portal that lets foreign investors track their government requests and complain about delays.
INDONESIA Comments Corruption; unpredictable, inconsistent, and non-transparent regulations; and weak contract enforcement are all problems in Indonesia. Also, compared with other economies in the region, Indonesia’s rigid labor market imposes more regulatory costs on the creation and termination of employment relationships. Indonesia’s regulatory regime is inefficient almost by design. Individual groups including police, Customs inspectors, judges, tax officials and many others earn the bulk of their incomes by playing on the inefficiencies of the system. In most cases, the database system is still manual and different departments are not integrated in ways that facilitate information sharing. This creates room for loopholes and bureaucratic discretion without any real risk of accountability. Although one could look at the World Bank’s Doing Business indicators (Indonesia a ranked 121st out of 183 countries in terms of the ease of doing business in 2010) or the Heritage Foundation’s Index of Economic Freedom (Indonesia is ranked 116th out of 179 countries) and get a good idea of the magnitude of the problem compared with other countries, anecdotal evidence is really needed to show some of Indonesia’s unique negative features. Most observers report that Indonesia’s regulatory environment has improved in recent years, but procedures for establishing and running a private enterprise are still time-consuming and costly. What they do not show, however, is why many bureaucrats like the system just the way it is, since they personally profit from it, and they have the power to resist lasting reform. The most embarrassing recent incident showing how bureaucrats personally exploit the lack of transparency and lack of accountability involves an Indonesia tax official, Gayus Tambunan, who not only made millions of dollars helping companies evade taxes but also made a mockery of the court and prison system by paying off police inspectors and prison guards in exchange for allowing him out of jail for dozens of day trips (including family outings to Bali, Macao, Kuala Lumpur and Singapore). Apparently, this was not jut an isolated incident but a common practice. In another case, an Indonesian business woman sentenced to seven years in jail for selling government-subsidized fertilizer, hired someone else to go to jail on her behalf. The good news, of course, is that both these cases finally surfaced and action was taken to stop the abuses, but the institutions responsible for allowing the abuses were forced by outside pressures to act. Moreover, no action has been taken against any of the 150 companies that allegedly had dealings with Mr.
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Tambunan. This means the government has failed to take advantage of an opportunity to publicly penalize firms for bribing tax inspectors in order to avoid paying all the taxes that were due. The implication is that in Indonesia corruption is a way to cut through the bureaucracy and get things done faster and more cheaply, including things that are obviously illegal. Thus, while the World Bank might calculate that it takes on average 160 days to deal with construction permits, 47 days to start a business, 22 days to register property, 20 days to export a product, 27 days to import a product, and 570 days to enforce a contract, this is not the way most Indonesians view the situation. A few well-placed payments can make everything possible much faster, which for them is a rationale why corruption is not such a bad thing and why, from a bureaucrat’s perspective, it is more profitable and therefore preferable to keep things just the way they are. Even if President Susilo has the political will to change this, it is doubtful whether he has the power to do so in a really major way during the remainder of his term in office. Power has shifted to the Legislature, and it is more on the side of the bureaucrats than the president.
JAPAN Comments Japan’s regulatory system relies more heavily on government bureaucrats to enforce than on the judicial system. This gives civil servants more power than their counterparts in places like the US and most European countries. However, the system is fairly efficient. It is particularly good at facilitating exports. But critics complain that domestic service industries and imports are a different story, since farmers and other agricultural interests have resisted the lowering of tariff barriers. The longer Japan’s economy stagnates and the government’s debt situation worsens, the more pressure is building on those sectors that had been protected behind a wall of regulation to accept reform. Protection given to the agricultural sector, for example, has prevented Japan from signing as many free trade pacts as its exporters would have liked. New moves to promote free trade areas with partner nations – especially in the wake of South Korea’s sealing of trade deals with the US and the EU -- are likely to add to pressure on domestic industries to open up to more competition, while other trends like the aging population are resulting in more pressure to ease immigration rules. One of Japan’s biggest challenges is overhauling the tax system. The country has high income tax and corporate tax rates, and the entire tax system is extremely cumbersome. The World Bank ranks Japan only 122nd out of the 183 countries covered in terms of the user-friendliness of its tax system. It takes an average of 355 hours per year for a company to prepare, file and pay the corporate income tax, the value-added tax and social security contributions. This compares with an average of 199 hours for the entire OECD. Yet despite the high level of taxation, Japan’s total public debt and unfunded liabilities are several times larger than the GDP – much more than any other OECD country. It is difficult to see how the debt dilemma can be resolved without a complete tax overhaul, which might see some taxes reduced but on balance will require a big increase in total taxes – and therefore an even heavier tax burden than is currently the case. The trick will be to place the burden on individuals rather than companies, so the latter are freer to act as growth engines for the economy. On the other hand, it is wrong to be too critical of Japan’s regulatory structure. At a time when countries like China and the US are both worrying about the negative economic, social and political implications of widening income gaps, Japan has never lost sight of quality of life issues affecting average Japanese. The country’s regulatory structure has done a better job than most countries of protecting “the public against threats to its health and safety and to safeguard people and business from abuse” – a yardstick cited by President Obama last week when he noted why rules and regulations are necessary. Japanese live longer than citizens of any other
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large country; the country has one of the lowest crime rates; its unemployment rate is half that of most developed Western economies; and not only is the gap between the wealthiest and poorest segments of society narrower than in any other OECD country but also, on a per capita basis, real income has been increasing for the bottom half of society more rapidly than in most other OECD countries.
MALAYSIA Comments The quality of Malaysia’s regulatory system has improved in recent years, particularly from the perspective of foreign investors in certain industries. Regulations regarding the export-oriented manufacturing sector have been fairly efficient for years now. Where problems exist is in service industries and manufacturing focused on the domestic market, particularly when the government has identified local companies that it wants to groom as national champions. These industries have been protected behind a wall of regulations that severely limit competition. It has taken years, but the government is finally realizing that the economy has not really benefited from these protectionist policies, and the trend for the past few years has been to open previously protected industries to more competition. The financial sector is probably the one that has undergone the most reform, including liberalization to foreign direct investment. At the same time, the government has strengthened its supervision of the banking sector, and it is taking steps to stimulate more activity in the local stock market by getting state-owned firms like Petronas to list more of their subsidiaries. The quality of Malaysia’s regulatory system is head and shoulders above most other developing Asian economies, including Indonesia, the Philippines, Vietnam and India. Its main competitor is probably Thailand. Some observers would rate Thailand better than Malaysia, while our own survey gave Malaysia a slight edge. The important point to note is that the trend is positive in both countries when it comes to regulations governing economic activities. The jury is still out when it comes to Malaysia’s regulations governing political and social activities. These spill over critically into the economic sphere too, since one of the biggest complaints people have is that previous governments’ affirmative action policies favoring native Malays have not only failed to groom an entrepreneurial Malay class but also have discouraged foreign investors and held back ethnic Indian and Chinese Malaysians from being as productive as they might have been had they not been discriminated against. The current Prime Minister, Najib Razak, is trying to win back the support of ethnic Chinese and Indians by promising an end to such policies. So far these promises have not had time to be implemented so it is difficult to say how much substance is behind them. But the rhetoric implies a reduction in affirmative action regulations and the adoption of policies that would focus more on raising Malaysia’s economy to developed-country status rather than policies that focus on re-engineering society. Our relatively favorable survey score for Malaysia, especially compared with Thailand, could be an indication that more people are taking Mr. Najib at his word. The real test will be the next elections and whether or not Mr. Najib can lead the ruling coalition to a victory in which they regain their two-thirds majority in parliament. This would be not just a psychological booster but is also necessary for smooth passage of the legislation that would be needed to enact Mr. Najib’s reform agenda.
PHILIPPINES Comments
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The main problem with the Philippines’ regulatory system is not so much the poor quality of rules and laws, a lack of transparency, or confusion resulting from overlapping responsibilities of different government departments but the way the rule and laws are implemented. Officials responsible have a poor reputation for performing their duties the way they are supposed to. Some blame corruption. Some blame the lack of financing that makes it impossible for the bodies responsible for regulating and enforcing to do their jobs properly. Some blame the poor level of pay of civil servants, which provides little incentive unless the pay is supplemented by unofficial payments. Some blame a lack of training and other manpower problems. In short, there are a lot of excuses. But the result is that in surveys like the World Bank’s Ease of Doing Business, the Philippines ranks in the bottom half, if not the bottom quarter, of all countries in all measures of efficiency except trading across borders, in which it ranked 61st out of 183 countries. Because a number of government departments, from the police to the tax authorities and Customs, do not do their jobs very well, the government has a much larger fiscal deficit than it really should have; industries like tourism are suffering because foreigners are afraid of perceived personal security risks; and foreign companies look elsewhere in the region for their investments because there are, quite simply, easier places to do business. Contrary to what President Obama implied in his recent analysis of regulatory systems, regulations in the Philippines frequently do not protect the public against threats. They might be written with this in mind, but in their execution, rules and regulations all too often victimize the public and hinder the growth of the economy. More often, they protect the interests of a few well-placed insiders. Still, this does not stop the government from writing great regulations and announcing them like they are bench-marked against the best practices elsewhere. This applies to environmental regulations, labor rules, corporate governance practices, anti-corruption initiatives, and foreign investment approval processes. But the results speak for themselves. Changing the wording of the regulations will not make a bit of difference. What is needed is a political will to enforce the regulations and the muscle behind that will to back up the rhetoric. The new government of President Aquino seems to have convinced many that the political will is stronger than before, but there is no sign yet that he has the muscle to do what he says he wants to do.
SINGAPORE Comments In many ways, Singapore and Hong Kong are polar opposites. Hong Kong prides itself for having a government that limits its role and stays well out of the way of business. In contrast, Singapore makes no apologies for relying heavily on state-linked companies and for its no-nonsense approach toward regulation to achieve national goals – such as recent rules to curb property speculation and to limit the influx of foreign workers. Both systems work well. In Singapore’s case, companies know exactly where they stand. Regulations are clear and applied consistently. People generally understand why they have been imposed, which makes it easier to follow the spirit of the regulations rather than look for ways to circumvent the specific wording of the rules. Civil servants are also generally efficient in performing their duties. As in the case of Hong Kong, most business people compare their experience in Singapore not with the other island business center but with neighboring countries – China in the case of Hong Kong, and Indonesia and Malaysia in the case of Singapore. This is another reason both Singapore and Hong Kong score as well as they do in our survey. Compared with their neighbors, both systems “work” well, which is why multinationals choose these locations to coordinate their regional business. Singapore’s government pays close attention to surveys like those conducted by the World Bank and the Heritage Foundation. These give the authorities the specific criteria on which Singapore’s performance is
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measured and they strive to make sure Singapore meets international best practices when it comes to such variables as starting a business, dealing with construction permits, trading across borders, protecting investors and paying taxes. When it comes to most variables, Singapore is graded in the top 10 in the world. In a few cases it is Number One or Number Two. Taken together, Singapore’s grades for all the variables generally ensure the country is in first or second spot globally. One could argue that there are more criteria determining the quality of a business environment than the variables listed in such benchmark surveys. For example, as the global economy shifts from the West to Asia and industries like capital markets and professional services are reshaped by the emergence of new players like China, other criteria against which Singapore will be measured in the future include the size, depth and liquidity of the markets in which it is trying to compete. This is one reason why the Singapore Exchange is trying to acquire Australia’s ASX Ltd. However, keeping the regulatory structure of these markets transparent and efficient so that they protect certain standards without obstructing business is a key ingredient to success that Singapore has been doing well.
SOUTH KOREA Comments Part of Korea’s reputation for having a harsh regulatory structure is a carryover from its days as a more authoritarian system. In fact, the transition to one of the world’s more vibrant democracies has been accompanied by a simplification and softening of regulations. They are no longer geared to protect the position of those in political power but are motivated mainly by economic and social issues, and they clearly have not stifled economic growth. Korea has prospered and remains very entrepreneurial. That said, Korea’s regulatory environment is still strict and biased in favor of major Korean companies. Deregulation has been pushed by successive administrations, including the present one headed by President Lee Myung-bak. Progress has been particularly noticeable since 1998, especially in the financial sector. However, regulations are still used to protect certain industries. Some foreign buyers of distressed Korean banks and companies have found it difficult exiting from these investments, especially if they earned big profits and tried to use structuring vehicles to avoid Korean taxes. These problems are reflected in the World Bank’s Doing Business Survey by relatively poor scores for variables assessing how well investors are protected and tax payment difficulties. The government also uses regulations in ways that keep certain companies considered to be strategic in Korean hands. Regulations are also not applied consistently. There have been a number of cases where owners of major family-owned conglomerates have violated certain laws such as bribery or illegal campaign financing, been convicted in court and sentenced to jail terms only to be immediately pardoned so they could return to their companies – ostensibly because it was in the country’s interest that they not be jailed but stay at the helm of their companies. These decisions have not, in general, been at the expense of foreign investors, but they have created the impression that some Koreans are above the law and the playing field is tilted in their favor. In many ways, Korea’s regulatory system has parallels to Japan’s. Neither country has a large number of lawyers, and bureaucrats wield considerable power. It can be difficult appealing against decisions once they are made. Korea is more hierarchical than Japan, and rather than make decisions themselves, many lower- and middle-ranking bureaucrats feel safer pushing decisions up the ladder to their superiors. This takes time and makes it difficult for individuals and companies to get quick answers to their questions.
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TAIWAN Comments As in the case of Korea, Taiwan’s evolution from an authoritarian system to a democracy has been accompanied by the elimination of regulations that were designed to protect the dominant position of the KMT and its commercial interests. Today, Taiwan’s relationship with Mainland China is the main issue overshadowing the island’s regulatory structure. For decades now regulations have been designed with the defense of Taiwan’s autonomy from China in mind. Rules restricted the flow of capital from Taiwan to China and blocked it entirely from China to the island. Travel, communications, and investment were limited. The proper word would really be “banned” but Taiwanese got around the ban by going through Hong Kong and adopting other tactics for complying with the letter of the law but not the spirit. Hence, the end result was a restriction and distortion of Taiwan’s interactions with China, not an outright ban. The current trend is to liberalize cross-Strait trade, travel and investment. This means a liberalization of the rules both by Beijing and Taipei. So far Taiwan is insisting that the focus be on economic matters, where progress has been quite rapid and probably irreversible. This does not mean that regulations are being jettisoned, but they are being modified so the economic interlinkages are less restricted than before. The changes taking place in the framework defining Taiwan’s relations with the Mainland are also affecting Taiwan’s frameworks with other economies. It is possible that Taiwan will henceforth find it easier to negotiate free-trade agreements with other countries, which would mean a simplification of tariffs and rules governing trade and investment with countries other than just China. Still, Taiwan has a long way to go before its interactions with the Mainland are really open. The most restrictive rules are likely to apply in the future to China’s investments in Taiwan, but it should still be possible for foreign companies to study ways to integrate their Taiwan operations more closely in their Greater China operations in ways that were not possible in the past.
THAILAND Comments Recent surveys have indicated that the poor quality of some government regulations are bad for business in Thailand. One conducted by the Board of Investment, which is among the most respected of government agencies, reported investors urging the government to remove “bureaucratic regulations” that impeded business. The World Bank has found that a variety of regulations created particular difficulties for companies trying to start or close down a business. There were also problems associated with the inordinate time consumed in paying taxes and obtaining credit. The latter probably stems from the shortage of qualified risk analysts. Many of the difficulties encountered by foreign firms in Thailand are made worse because full, precise and soundly-based information is often hard to find. Even in the better places such as the Commerce Ministry, the Board of Investment and the Central Bank, the fully-informed people cannot always be found. Because of these problems the WB in its Doing Business 2011 Report lowered Thailand three places to 19th in a table of 183 countries as a place for doing business. Even so it was still ahead of all its ASEAN partners except Singapore. It was rated very poorly indeed as a place for starting a business (95th place), ease of paying
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taxes (91st), obtaining credit (72nd), and closing a business (46th) but quite well when it comes to dealing with construction permits (12th), protecting investors (12th), registering property (19th), and enforcing contracts (25th). The WB report actually showed that Thailand is among the 10 best countries in the world for protecting the rights of minority investors. It believes that improvements to company regulations over the past 4-5 years have saved many Thai businesses from collapse or serious loss of value. Our own survey, which focuses only on regulations, not other aspects of doing business, is more critical of Thailand than the World Bank is. In addition to Singapore, Malaysia also gets a slightly better grade. Paying taxes, particularly personal income tax, is much easier than in the past, but Thailand’s competitors have streamlined the process much more successfully. The Thais need more one-stop shops dealing with all business regulations under one roof and more procedures available online. Of course, when it comes to tax issues the view of the Thai system inevitably is colored by its high corporate tax rate, which at 30% is the highest in ASEAN. Many of the major regulations that expatriate executives must deal with are unclear even to the bureaucrats supposedly enforcing them. Some of the difficulties arise from faulty drafting of the regulations at the outset and by irrationalities created by prejudice and ignorance and often by xenophobia. These are evident in the hospitality and tourist industries and particularly rules about foreign ownership in them. Clouds of uncertainty continue to hang over property ownership when foreigners are involved. Some regulations have been deliberately made opaque over the years by corrupt politicians and officials hoping thereby to extort pay-offs from bewildered firms struggling in muddied waters. The telecom industry faces further uncertainty and disruption by a new regulation proposed by the National Telecommunications Commission aimed at curbing so-called “foreign dominance” in the industry. It includes a controversial provision that the nationality of senior executives would be considered by licensing authorities. If these proposals become law, political and legal challenges would seriously impede the future development of the industry. Some experts claim that the proposals conflict with other regulations. The government has just announced a fresh effort to clarify information about business regulations by establishing a new Web-site that will be a one-stop portal through which individuals can with a single sign-on gain access to all electronic information offered by the government. It will be run by a new agency named the eGovernment Agency (eGA).
VIETNAM Comments Vietnam is one country where the near term is likely to see an increase in regulations. The government still feels the need to respond to free-market forces by using administrative controls. With inflation high (11.75% in December), the dong under speculative pressure, and some state-owned companies unable to repay their debts, the reaction of the authorities will be to resort to more controls. The state will retain a dominant role in the economy and state-owned enterprises will continue to receive favorable treatment. The latest Communist Party Congress, which ended this month with the reappointment of Nguyen Tan Dung as Prime Minister and the selection of Nguyen Phu Trong as the new party boss, did not indicate any radical changes in direction are likely. But this means that most of the shots will be called by people closely aligned with
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conservative bodies like the security forces and military. These are not the kind of people who will favor a hands-off approach to economic management or put their faith in the private sector. The problem, however, is not just that Vietnam’s leaders are opposed to liberalization. It is also that many foreign investors are losing their appetite for Vietnam risk until they see the government getting on top of current problems. The foreign debt default by Vinashin, the state-owned shipbuilder, has raised questions about Vietnam’s sovereign risk. It will take more than regulatory reforms to change this negative sentiment. Investors now feel they lack protection in Vietnam. They are more aware of the inefficiencies and lack of transparency of the regulatory environment, and they know the legal system is unreliable. Moreover, if it is true that the government’s foreign exchange reserve are running low, it is possible that the coming year will see some import bans and restrictions, new services market access barriers, tougher import licensing requirements, export limitations, and an increase in non-transparent regulations. Late last year, for example, the finance ministry announced plans to introduce a 10% export tax on gold from January 2011. Foreign investors in mining in Vietnam have responded by warning that the sudden unilateral changes to the tax system, legal framework and regulatory environment have caused them to conclude that the government might want to shut foreign investors out of the sector.
EXCHANGE RATES Currency
1/21/11
Chinese renminbi
6.5835
Hong Kong dollar
7.7908
Indian rupee
45.620
Indonesia rupiah
9,058
Japanese yen
82.563
Malaysian ringgit
3.0618
Philippine peso
44.444
Singapore dollar
1.284
South Korean won
1,118
Taiwan dollar
29.0951
Thai baht
30.675
Vietnamese dong
19,498
Commercial middle rate expressed in terms of US$1.
Published by: Political & Economic Risk Consultancy, Ltd. 20th Floor, Central Tower 28 Queen’s Road, Central, Hong Kong Mailing address: G.P.O. Box 1342, Hong Kong
Tel: (852) 2541 4088 Fax: (852) 2815-5032 E-Mail:
[email protected] Web site: http://www.asiarisk.com
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