Social unrest risks in Asia

ASIAN INTELLIGENCE An Independent Fortnightly Report on Asian Business and Politics No. 827

Wednesday May 18, 2011

Current Social Unrest Levels and Risks for Next Five Years 10.0 10.0 10.0

= status quo likely to prevail or some improvement = moderate deterioration possible = major deterioration possible 6.5 6.0 6.0 6.0 6.3 6.3

8.0 6.5

7.0

5.0 5.0 3.0

3.5

4.0 4.0

2.0

Syria

Libya

Egypt

Pakistan

Thailand

Indonesia

Philippines

Malaysia

India

Myanmar

Taiwan

Cambodia

South Korea

Hong Kong

North Korea

China

Vietnam

Laos

Japan

1.0

Singapore

10 9 8 7 6 5 4 3 2 1 0

REGIONAL OVERVIEW ..................... 2

PHILIPPINES ..................................... 10

CHINA .................................................... 6

SINGAPORE ........................................ 11

HONG KONG ........................................ 7

SOUTH KOREA .................................. 12

INDIA ..................................................... 8

TAIWAN .............................................. 12

INDONESIA .......................................... 8

THAILAND .......................................... 13

JAPAN .................................................... 9

VIETNAM ............................................ 15

MALAYSIA ............................................ 9

EXCHANGE RATES ........................... 16

POLITICAL & ECONOMIC RISK CONSULTANCY LTD.

Political & Economic Risk Consultancy, Ltd.

Issue #827

The Threat of Income Inequality

REGIONAL OVERVIEW Social unrest risks in Asia This report compares existing social unrest levels in different Asian countries. It also looks at the potential for deterioration in social unrest levels during the coming five years. In arriving at grade for individual countries, we assumed that social unrest pressures are made more dangerous by such factors as growing income inequality, the extent that a government tries to hide information from the public on the grounds that social instability would be aggravated if the public knew the real facts or could debate the issues, and the type of political system governing society. The opinions of PERC’s senior analysts are subjective and based on experience, but they are supported by the following outside data: As a measure of income inequality, we relied on the income Gini coefficient published by the World Bank. In the case of Taiwan, which is not covered by WB figures, we used an estimate provided by the US CIA in its World Factbook. The Gini coefficient measures the deviation of the distribution of income (or consumption) among individuals or households within a country from a perfectly equal distribution. A value of zero represents absolute equality, a value of 100 absolute inequality. Our working assumption is that the higher the inequality, the more prone a country is to social unrest. Gini coefficients for income range from approximately 23 (Sweden) to 70 (Namibia) although the WB has not assessed every country. Considering that Egypt has a Gini coefficient of 32.1, serious social unrest could obviously occur at this level. By this benchmark, therefore, Japan, with a Gini coefficient of only 24.9, is the only Asian country that is well below threat levels, while South Korea’s Gini coefficient is close to Egypt’s, at 31.6. Every other Asian country covered by this report has a Gini coefficient that is well above Egyptian levels. Bear in mind, however, that the Gini coefficient for the US is 40.8 and the UK is about 34. This implies that income inequality might not result in popular uprisings in Asia, but – judging from recent demonstrations in the US and UK and from the

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50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

Income Gini Coefficient 36.8 37.6 37.8 37.9

44.0 42.5 42.5 43.4 40.8 41.5 42.2

31.6 32.1 32.6 32.6 24.9

Sources: UNDP, World Bank, and CIA Factbook

emergence of disaffected groups like the Tea Party movement in the US – the growing wealth gap in Asia is turning into a political hot button that could prompt some demonstrations and lead to dissatisfaction that ultimately affects election outcomes and political stability. A second measure we incorporated in our assessment of social instability risks in Asia is the extent that governments try to prevent debates on sensitive issues. One of the techniques they use is to control what is and is not reported in the media. Countries that control information flows normally paint too favorable a picture of social conditions in the countries and tend to avoid an objective assessment of issues that are highly sensitive to the public. It is no coincidence that the media in Egypt, Libya, and Syria are considered to be tightly controlled. Control of the media is an indication of the “brittleness” of a particular country or system – the more press freedom is limited, the more brittle a country is. Countries with free media tend to air their dirty linen regularly. Controversial topics are dealt with openly and different opinions are expressed. The impression might be messy and the news might result in public demonstrations, whereas countries that limit press freedom are normally also much less willing to permit public demonstrations in which different points of views can be aired. In the normal course of events, therefore, countries with free media can appear to have more social instability than do countries with tightly controlled media, but the risks are much higher in controlled systems – especially today when new technology like cell phones, the Internet and social networking make it

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so easy for people to communicate directly with each other to share news – that certain issues can move quickly from being hidden from public view to where they become the focus of riots that are much more intense and potentially destabilizing than anything that exists in countries with free media. In order to quantify press freedom, we looked at two sources. One was the index published by Freedom House, as well as Freedom House’s assessment of whether a local media is free, partly free, or not free. We also looked at the index on press freedom published by Reporters Without Borders (RWB). The two measures are similar, but there are some differences in the order in which countries are ranked. The grading scales are also different, with the Freedom House system based on a zero to 100 scale, while the RWB has a more complicated grading system that theoretically runs from 0 to 180.5. However, its worst rated country is Eritrea, with a score of 105.0, so for purposes of converting the RWB score to a 0 to 100 scale, we assumed that 105.0 is the worst grade possible and therefore equates to a 100 on the common scale. We took an average of the Freedom House index and the modified index published by RWB to produce the results shown in the graph here.

Press Freedom: An Indication of Systemic “Brittleness” Grade 92 77 78

44

47

98

86 81 83

56 57 57 58 52 52 53

36 19 21 22 12 12

Japan US Taiwan Hong Kong South Korea India Indonesia Bangladesh Philippines Cambodia Egypt Malaysia Singapore Pakistan Thailand Libya Vietnam Laos China Syria Myanmar North Korea

100 90 80 70 60 50 40 30 20 10 0

Sources: A composite of press freedom indices published by Freedom House and Reporters Without Borders, with zero being the best grade possible and 100 the worst.

According to Freedom House, the media in Japan, the US and Taiwan are “free.” Those from Hong Kong to the Philippines in our graph are classified as being “partly free,” while those from Cambodia to North Korea are classified as “not free.” In other words, countries like South Korea, India,

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Indonesia, Bangladesh and the Philippines might have some well-publicized social problems and their media might have their shortcomings, but there is still a good deal of discussion of important issues, including different points of view. This gives these systems a degree of flexibility to deal with social unrest. On the other hand, all the countries from Cambodia through North Korea have such tight controls over their media that their political and social systems should be considered “brittle.” Their governments might not like this term, since it implies a weakness or vulnerability, but the governments concerned are clearly concerned with the potential for instability or social discord to occur if the government’s ability to influence the news was any less. Finally, the potential for social instability is a function of the quality or type of government. We are assuming that democratic governments with strong institutions are more stable than both democratic governments with weak institutions and authoritarian governments. Authoritarian governments that have demonstrated institutional durability by lasting through several generations of leadership are less vulnerable and face fewer uncertainties than authoritarian governments in which a single leader or family has held power for long periods (measured in decades rather than years). Social instability risks are also higher in systems where governments have a reputation for being corrupt than in systems where the governments have a reputation for being intolerant of corruption. Social unrest is less likely to escalate to destabilizing proportions in countries that are under a secure rule of law, where people are not imprisoned for their views, where torture is rare or exceptional, and where political murders are extremely rare than is the case in countries that fall short of these measures – and the more they fall short, the bigger the social unrest risks. In attempt to quantify political system risks, we drew on the Political Terror Scale (PTS), which has been published since the early 1980s (www.politicalterrorscale.org). This scale draws on reports by Amnesty International and the US State Department and uses a five-point grading scale to rate countries from the best (where there is a secure rule of law and political freedom) to the worst

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(where there is extensive political imprisonment and leaders place no limits on the means or thoroughness with which they pursue personal or ideological goals. In general, Amnesty International and the US State Department have similar scores for the same countries, but there are some differences. We present the individual scores and the average of the scores in the table below:

Political Terror Scores Amnesty International

US State Department

Average

Bangladesh

4

4

4

Cambodia

3

3

3

China

4

4

4

Egypt

4

3

3.5

n.a.

n.a.

n.a.

India

4

4

4

Indonesia

4

3

3.5

Japan

1

1

1

Laos

2

2

2

Libya

3

3

3

Malaysia

2

2

2

Myanmar

5

4

4.5

North Korea

5

5

5

Pakistan

5

4

4.5

Philippines

4

4

4

Singapore

2

1

1.5

South Korea

3

2

2.5

Syria

4

4

4

Taiwan

1

1

1

Thailand

3

3

3

Vietnam

3

3

3

Hong Kong

Source: The Political Terror Scale (www.politicalterrorscale.org)

Note that the PTS grades Egypt, Libya and Syria all a three or worse. The implication is that countries receiving lower scores are less vulnerable to social unrest crises than are countries with scores of three or worse. This is good news for countries Page 4

like Taiwan, South Korea, and Japan, but it is particularly bad news for countries like North Korea, Myanmar, and Pakistan. We are not in complete agreement with either Amnesty or the US State Department on some of their scores. For example, we would not rate either India or the Philippines a four, the same as China. They deserve to be a three. And with the benefit of hindsight, the grade of three for Libya looks overly generous. And we are not sure why Taiwan is graded so much more favorably than Korea as it is. But for purposes of consistency and in order to eliminate our own biases, we are sticking with the PTS scores. Putting these different indicators of social unrest vulnerabily together, we see social unrest risks in Asia in the following way: Some Asian countries are vulnerable to relatively high levels of social unrest, details of which can be found in the country entries of this report. In particular, Indonesia, the Philippines, Thailand, and Pakistan are likely to suffer from different forms of social unrest that could intimidate some foreign investors. However, in the cases of Indonesia, the Philippines, and Thailand, the level of social unrest is unlikely to intensify greatly from current levels. Unrest might cause national and local level government changes in elections in all these countries -- through elections in Indonesia and the Philippines and possibly through another coup in Thailand if future elections do not satisfy special interest groups -- but the unrest will not cause the political system in any of these countries to change fundamentally. Nor will it alter the current environment for foreign investors in a major way. We indicated this faith in the consistency of the systems and their environments for foreign investment by using the color blue for the rating bar for this countries on the cover of this report. Pakistan is a different case. As high as the social unrest is at present, it could get significantly worse. There is potential for a major confrontation between various segments of society intent on forcing political and policy change, and it remains to be seen if the present government can deal with these forces effectively. In this sense, as bad as the current social stability situation is in Pakistan, it has the potential to get significantly worse within the next five years, resulting in controversial policy swings that could further hurt the foreign investment

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environment. We tried to indicate this negative possibility by using the color red for the rating bar for Pakistan. We gave three other countries a red color: China, North Korea, and Myanmar, indicating that although the current status quo might prevail for the next five years, there is a potential for higher levels of social unrest that could bring about major political changes and alter perceptions of foreign investors. These are all “brittle” countries, although North Korea and Myanmar are more so than China. It is quite possible that the status quo will prevail – but in large part because the governments of these countries will crack down hard on the first signs of potential social problems, not because they address effectively the root causes of these problems. Their media are all tightly controlled, and in the case of China, income inequality is growing to a dangerous level. There are no hard figures on income inequality in either Myanmar or North Korea, but it is clear that these authoritarian regimes are remaining in power more because of their ability to fend off any opposition and to use force to keep the population submissive. China has given its citizens much more freedom than have either North Korea or Myanmar, but there are definite limits to this freedom. China’s special problem, unlike North Korea or Myanmar, is that its economy is growing so rapidly that the complexities of maintaining stable social conditions in a country with more than 1.2 billion people are increasing rapidly. People have aspirations and expectations, and it is clear that the benefits of growth are not simply being enjoyed much more by a fortunate minority than the majority but also that a significant portion of the population is finding it increasingly difficult to make ends meet. This was made clear by recent demonstrations by truck drivers in Shanghai. The major question mark for China is not whether such protests will continue – they certainly will – but whether or not they can be kept localized. What the authorities are loathe to see is anything that has the potential to develop into a national movement. However, such a threat is still possible because an issue like inflation is a national frustration, not just a local one, which is why we have colored China’s bar red.

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If China is a red, there is no way we could give Hong Kong a blue rating. The two economies are too interlinked. Hong Kong’s residents have more leeway to demonstrate than do their Mainland counterparts, and this helps to release pressure. The media in Hong Kong is much freer than China’s, and issues get debated. However, the rapid increase in income inequality in recent years has the potential to divide Hong Kong society more than in the past and also to intensify public resentment with the government, whose leaders are seen as being relatively well rewarded and largely immune to the problems many poor and middle-income Hong Kong residents experience. However, the main reason why social unrest could intensify more in Hong Kong than many observers are currently anticipating is because of the SAR’s links with China and the potential for Hong Kong residents to act in sympathy to largescale protests that might arise in the Mainland – particularly if the issue is one that Hong Kong people also identify with, like inflation. We tried to indicate this by giving the Hong Kong social unrest bar a color of yellow, indicating caution. Social unrest could intensify but the threats to the system and the foreign investment environment are not as great as in China. Singapore is in a similar situation to Hong Kong but for different reasons. We gave it a color of yellow because Singapore is in the process of trying to open up public debate more and permit a political opposition to raise its profile. PAP is not ready to share power, but the economy and society have developed too much for the authoritarian approach to government to be as effective as before. The trick will be to permit debate that is more open and loosen up controls on the media so that the focus stays on issues whose solutions will push Singapore further down the road of development and not be sidetracked by divisive and potentially disruptive issues like race and religion. It is because of this risk that we have colored Singapore’s bar a yellow. The island has such a strong reputation for stability that even small demonstrations have the potential to be treated as a seismic change by PAP and many Singaporeans who have come to accept the status quo as the only scenario for Singapore. There are others.

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For many of the same reasons, we have colored the Malaysia bar a yellow also. Malaysia has done a much worse job than Singapore of maintaining stable relations among its different ethnic groups. The government has a worse reputation for corruption than Singapore. Both governments try to control the media, but Malaysia’s opposition has made more inroads in criticizing the government through the Internet and other new media formats. Consequently, current levels of social unrest are higher in Malaysia than in Singapore, but that is less significant than the risk in both countries that the status quo could change and greater social unrest is possible that affects investor confidence.

Finally, that leaves countries like Japan, India, South Korea and Taiwan, as well as countries we do not normally cover in Asian Intelligence like Cambodia and Laos. The level of social unrest that currently exists in all these countries differs considerably, with Japan being one of the most stable countries in the world, while India has a reputation for a variety of different forms of social unrest. However, in all these cases, the odds are very high that the magnitude of social unrest that exists currently will not change much over the next five years. Governments might come and go in these countries, but social unrest that occurs is unlikely to change foreign investors’ perceptions of risks in a major way.

CHINA Comments China is running a high growth balancing act. On the one hand it needs strong economic growth to maintain the support of the population and justify its legitimacy. On the other hand, if it allows inflation to accelerate too high and large numbers of people feel the pain, the risk of social unrest would intensity. At the present time, inflation is too high for comfort. Consumer prices rose 5.4% in April-over-April, but food prices jumped by 11.5%, and rising fuel prices have already prompted truck drives to protest in Shanghai. One of the government’s top priorities is maintaining social stability. However, the emphasis is more on short-term stability than on reforms that would maintain stability in the medium term. Some of the short-term measures, like arresting artists, dissidents, lawyers and Internet users, might be intimidating enough to keep the lid on unrest but the same measures also risk a backlash eventually that could be more destabilizing than if different tactics had been employed to begin with. The way the government responded to recent anonymous calls over the Internet for a “Jasmine revolution” sheds more light on the government’s deep-rooted fear of such a risk than on the potential for Chinese to take up the call to rebell. The government is extremely insecure, and its recent actions reflect this. It is not behaving like a government that is confident in the support of the people. Almost all criteria in the Regional Overview of this report point to China as a high risk country in terms of the potential for social unrest to deteriorate and become a much bigger problem than it is at present. Income inequality is growing, creating resentment among poor Chinese, especially migrant laborers and farmers. The media is being censored even more than usual, and the government is cracking down hard on Internet sites considered to be controversial and taking other steps to control Web content. And the way the government in recent weeks has been detaining dozens of lawyers, artists, Tibetan monks and other perceived critics has already sparked strong criticism from the US and is likely to cause organizations like Amnesty International to raise their already strong criticism of China’s human rights practices even higher. However, Beijing has little concern with the opinions of foreign governments or human rights organizations; it is driven by the fear of social unrest threatening the rule of the Communist Party. The authorities are using carrots as well as sticks to hold down the risks of social unrest. For example, the government plans to cut taxes for people with lower incomes and raise them for rich under new legislation

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expected to pass shortly. The government is also emphasizing a subsidized housing program to help urban poor. However, there has been a lot more effort in cracking down on dissent than on addressing the causes of complaints, indicating that the government is much more senstive about social stability, with the implication being that potential problems could be building and threats intensifying. What is not clear is whether or not the entire national leadership believes such risks are rising and a crackdown is appropriate or if there is a difference of opinion on both the magnitude of the risks and how they should be addressed. If there is a difference of opinion, it could affect how smoothly next year’s generational change in leadership goes.

HONG KONG Comments The exceptionally wide gap that exists between Hong Kong’s richest and poorest segments of society is a growing source of controversy. The economy is growing on a broad front, but many lower and middle-class Hong Kong residents are feeling squeezed by rising costs. Many younger Hong Kongers are also frustrated that property prices have been rising so fast that the cost of home-ownership is moving beyond their capability even when they do have good-paying jobs. Add to that continuing problems with pollution, the way government allows property developers to get away with misleading marketing practices, and dissatisfaction with education and health care policies and there are more than the usual number of grievances, which are reflected in the growing frequency of demonstrations. People are angry over the specific quality-of-life problems noted above, but democratic activists are trying to capitalize on this undercurrent of discontent by linking what are mostly economic complaints to their political agenda. In most cases, protesters over a specific issue number fewer than one hundred people. Rarely does the number get up to 500. These types of smaller, very focused protests are common, and they are taken as a normal part of the system. What the democratic activists now seem to be trying to do is link all these issues to their call for greater democracy and to use this consolidation as a way to jack up their own numbers attending demonstrations. July 1 is normally the day when democratic activists try to mount their biggest demonstration of the year. This year the organizers are trying to link their push for democracy with other, more quality-of-lifefocused themes like concern over rising property prices, growing discontent with developers, and complaints about the government’s budget. This is why we have raised our assessment of social disorder risks. Negative comments by leaders in China regarding the behavior of demonstrators in recent Hong Kong protests could be an indication that Beijing is growing impatient with activism in Hong Kong. So far, Beijing has not intervened and has let the Hong Kong authorities deal with the problem as they see fit. However, recent unrest in Egypt, Libya and other countries combined with a call by activists in China to use social networking websites to coordinate a “Jasmine revolution” have prompted a crackdown on these threats by Chinese security authorities. They might view demonstrations in Hong Kong as a threat that could be used by Mainland activists to cause greater unrest in all of China. If China were to push the Hong Kong authorities to be less tolerant of demonstrations, it could have negative implications for social stability too, since Hong Kong activists would resist such limitations on their activities. This is a risk that will need to be monitored closely during the coming year as China prepares for its own generational change in leadership and Hong Kong will be getting ready for a change in government as well.

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INDIA Comments India, a diverse, multi-ethnic, multi-faith country, has always struggled with a degree of social instability as various minority groups seek redress against discrimination. India's policymakers have historically been able to manage the risks fairly well, considering the complexities of a varied and open society. Still, the risks exist, and in some ways the rapid growth of the economy is aggravating rather than reducing them, since it is widening the gap between the “haves” and “have-nots” in ways that could cause more social tensions. These tensions could affect election outcomes at the state and national level, but they are unlikely to change the way foreign investors perceive Indian risks. There are a number of causes of social unrest in India, but most of them are local issues, which means the unrest stays local and disaffected groups from different parts of the country have little reason to unite. Two issues that are exceptions are the high rate of inflation, particuarly food prices, and corruption at the national level. These are the two issues that could bring down the government of Prime Minister Manmohan Singh and hurt the chances of the Congress Party from winning the next elections. Past governments have paid a high political price for the failure to control food prices, particularly dietary staples like onions. In the 1980s, the Congress Party forced out a national government over the price of onions, and in 1998, the Hindu nationalist Bharatiya Janata Party lost conrol of the New Delhi state government due to a similar issue. In March, the headline inflation rose just under 9%. Price pressure that month came from rising energy costs, which surged 12.9% year-on-year from 11.5% in February-over-February. Primary food inflation slowed to 9.5% from 10.6% in February, but it is still a major source of complaint. India has more ways to relieve building social pressure than China. Thus, while the current – and normal -- level of social unrest in India might be much higher than in China, there is much less of a risk in India that social unrest could suddenly escalate to the point where the political system itself is vulnerable or foreign investors are forced to re-evaluate their assessment of country risks. Issues like inflation and corruption are widely covered in the media, which is much freer than in China. People are freer to demonstrate, which provides a way to relieve pressure between elections. And ultimately people can vent their frustrations at the ballot box at both the local and national levels. This makes India much less “brittle” than China, and the country’s politicians are much more comfortable dealing with demonstrations and other forms of social unrest than are their counterparts in China.

INDONESIA Comments Religious activism remains a source of unrest not only between Islamic and non-Islamic groups but also between Islamic groups with different views. So far the government has not handled these conflicts well at all and has allowed more conservative Islamic views to dominate others by sheer intimidation. The problem of basic crime against persons and property also remains moderately high in parts of the country, while migration is another cause of friction that can at times result in violence. There is also a big problem in the form of a widening wealth gap, which is aggravated by corruption and abusive behavior by some well-off individuals who act as if they are above the law. These problems notwithstanding, social stability has improved more in Indonesia in recent years than in any other country covered by this report. Moreover, the future is more likely to see a further improvement or the status quo continue than a reversal in the favorable social trends.

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The Suharto years saw social stability maintained through an authoritarian system of control. When the Suharto regime collapsed, pressures that had been building were suddenly released and social unrest intensified considerably. Problems were further aggravated by 911, which contributed to a rise in Islamic militancy in Indonesia that resulted in the Bali bombings and other terrorist incidents. However, Indonesia turned the corner with the election of Susilo Bambang Yudhoyono as president in 2004. The situation is still far from perfect, but the comparison between conditions today and before 2004 are stark. Peace has been restored to Aceh. The ongoing trial of Islamic cleric Abu Bakar Bashir is not stirring up nearly the emotions it did when Mr. Bashir first surfaced as a alleged supporter of terrorist activities. Ethnic Chinese who fled the country during the unrest that followed the collapse of the Suharto regime have returned to Indonesia and are helping to lead a remarkable economic recovery. There has even been progress in reducing labor activism. Except for the growing wealth gap, which is a potential source of instability, reasons why social stability is likely to be preserved include the relatively free media and the open discussion of controversial issues, the end of authoritarian tactics to suppress dissent, and the ability of individuals to vote out unpopular politicians not only at the national level but also at the local level. As in India, this means there are a lot of pressure relief valves that can help to manage social tensions and reduce the risk of a social explosion. Indonesia might be the world’s largest Islamic country and its residents might be looking at developments in Egypt, Libya and other troubled Islamic countries with considerable interest, but Indonesia is more likely to be seen as a model these countries could follow in order to get back on their feet and restore sustainable stability than it is to be infected by the same kinds of unrest that are currently destabilzing these countries.

JAPAN Comments Japan has a very homogeneous society. Protests in the recent past have focused mainly on regional issues like the US military bases in Okinawa. The recent earthquake and tsunami disaster, called by some to be the biggest challenge for Japan since World War II, is likely to be a catalyst for national unity, which we expect will be a key defining feature of Japan in the coming year. It takes an emergency like the earthquake reconstruction effort to show some of the most positive aspects of Japanese society, which include unity and single-minded determination to overcome major challenges. Japan does not have many of the ingredients normally associated with high potential for social unrest. Its media is free. The weath gap is among the narrowest in the world. The political system is democratic and highly inclusive. The entire system is built on consensus and there is a cultural predisposition to group reponsibility over individual rights. Society is very cohesive. If there are any major “faults” it is the homogenous nature of society does not absorb outside groups easily. Consequently, there are tensions between many average Japanese and non-Japanese groups like ethnic Koreans who have lived in the country, in many cases, for generations, as well as more recent immigrants from China, Thailand, the Philippines and other countries that Japanese companies have tapped to bridge domestic labor shortages.

MALAYSIA Comments Malaysia's government does not take any kind of disobedience lightly. It grants few licenses for free assemblies. When illegal ones are planned, police detain opposition leaders and at times invoke the controversial Internal Security Act (ISA) to arrest activists. Even so, the number and intensity of demonstrations have been

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increasing in recent years, as the opposition gains strength and is willing to challenge the government’s attempts to keep a lid on protests. There are even protests against the tactics of the government (like employing the ISA) to block demonstrations. In addition to politics, race and religion are other causes of unrest, with ethnic Indians, Chinese and Malays all highly protective of their own interests. Ethnic Chinese and Indians, the two largest minorities, have become more vocal in demanding racial equality, while the government’s recent moves to scale back affirmative action policies for native Malays run the risk of angering Malay nationalists who view such policies as entitlements. Although we do not believe Malaysia will experience a magnitude of social unrest that Thailand is currently experiencing, racial divisions and the way they are being politicized are probably the biggest threats to Malaysia’s future. The country has progressed beyond “developing” stage, but it does not yet have “developed” status like Singapore. It is caught in a limbo, and unless it can deal with the country’s racial divisions more effectively than it has, it will not make the transition to developed status. Better educated non-Malays will look for opportunities outside the country, while foreign investors will look elsewhere because of perceived social threats and the limitations these problems are putting on the country’s economic development prospects. Prime Minister Najib Razak is saying the right words, and if we were confident he could actually implement his plans, we would be much more positive on Malaysia’s prospects. The potential is certainly there. But Mr. Najib is encounting strong resistance from nationalists in his own UMNO party, and countering Mr. Najib’s call for national unity are hard-line Malays who are trying to mount a new pro-Malay campaign. Because of the potential for these groups to keep race-based politics a central divisive issue, we consider Malaysia to be a country where social unrest, including some violence, could deteriorate at some point during the coming five years.

PHILIPPINES Comments Of the economies covered by this report, wealth discrepancies in the Philippines are the worst or near the worst in Asia. The political structure is also flawed by weak institutions and an ability of an elite minority to act as if they are above the law and to exert an unhealthy degress of power at the local level. This is reflected in a high level of corruption that goes unpunished. Not surprisingly, this disequilibrium has contributed to various kinds of social unrest, including moderately high crime rates (especially for cash-raising activities like kidnapping and extortion), some serious incidents of violence like the massacre of 57 people in Mindinao in the last election campaign by supporters of clan that ruled the province for nearly a decade, a Communist guerrilla movement and insurrections by groups like Muslim rebels in Mindanao that feel disadvantaged. However, as in India, the Philippines’ political structure is adaptive and flexible enough to survive these kinds of problems – better than countries like China and Vietnam, which have systems that are more rigid and place so much emphasis on control that the governments in power would be discredited by the kind of turmoil that is the norm in the Philippines. The grade for the Philippines is higher than for the two more authoritarian Communist countries because social unrest is currently higher and likely to remain so. But the downside risks for the Philippines are much more limited than what exists for the countries we labeled as high-risk in the Regional Overview of this report and colored red in the chart on the cover page.

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The Philippines has a lot of pressure relief valves. First, the media is relatively free and there is plenty of debate on a whole range of issues, including corruption, environmental degradation, and poverty. Secondly, people can and do demonstrate to air their grievances, and the government rarely responds by cracking down on demonstrators. Third, people can vote out officials who really over-step the bounds of acceptable behavior. For example, in the case of the clan that was responsible for the campaign violence in Mindanao, the deputy mayor whose wife, two sisters and four other relatives were among 57 people killed in the election-related massacre was declared winner of the governorship over the people believed to be responsible for the massacre. Finally, as difficult as life is in the Philippines, only a very small minority turn to groups like the Communist guerrillas out of frustration. A much larger number choose the alternative of leaving the country for work abroad. This is not the healthiest pressure relief valve. So far, 10% of the population has moved abroad, denying the country some of its best talent it could use to carry out a more effective development strategy. But it does mean there is an option that can prevent people from becoming so desparate that they see no alternative to revolt.

SINGAPORE Comments The government has used a carrot and stick approach very effectively to keep social unrest low. Laws make it difficult for people to assemble and stage protests, and until recently the government made it difficult for a political opposition to grow and offer alternative points of view. The local media was tightly controled when dealing with local issues, and the overall level of public debate on many issues was very limited. The government has also done a good job of addressing the basic needs of society in terms of the provision of housing, health care, and education. It has pursued policies that have been effective in preventing potential differences involving race and religion from flaring up into different forms of social unrest. Instead, Singapore’s multi-racial population has a reputation for living in harmony. The ruling People’s Action Party, which has ruled Singapore since independence, has justified its political dominance by pointing to the economic results it has consistently produced and its high governance standards. It has also been able to contrast Singapore’s performance with its two neighbors, Malaysia and Indonesia, which have not faired nearly as well politically, have a reputation for corruption, and have been struck by periodic bouts of racial and religious violence. Whatever one might have thought of PAP’s authoritarian leanings, its strategy has worked remarkably well. However, the old model needs to be revised. Younger Singaporeans do not have the same priorities as their elders and PAP needs to find ways to reach out to this new generation. Growth for growth’s sake is less appealing to many Singaporeans than is the need to address such issues as income disparity, the rising cost of housing, and the surge in the number of foreigners living in Singapore. In 1990, Singaporean citizens represented 86% of the island’s three million population. Last year they were 64% of the 5.1-million population. These changing demographics have created new social pressures, and the local population wants to discuss them. Unless the government opens up public forums and participates in the debate itself, it runs the risk of critics moving the debate to the Internet, where the government will have less ability to direct the discussion. Moreover, at a time when many Singaporeans are feeling squeezed by rising costs, they are especially senstive to the growing wealth gap, which is among the highest in Asia, and to how senior politicians, civil servants and managers of state-linked companies are well rewarded financially. Since the politicians are responsible for setting their own salaires and those of the public sector, the lack of open discussion on this issue has the potential to drive a wedge between PAP and parts of the population the ruling party is supposed to represent.

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The results of the latest elections were not a surprise at all. PAP took 81 of 87 elected seats in the May 7 elections, with 60.1% of the popular vote. This compares with 82 of 84 seats with 67% of the popular vote in the previous elections. The government is using elections as a step in the direction of political reform that will permit more open, broader debate of sensitive issues. The major question is that once the genie is out of the bottle, how well will the government be able to control it? Will the policies shaped by the debates be the best for Singapore in the medium-term or will they be compromised by short-term populist pressures? Will Singapore’s international competitiveness be affected? Is the political opposition, with its new stature and influence, mature enough to play a constructive role that will leave Singapore better off or will it fail to raise the quality of the debate and be obstructive simply for the sake of being obstructives or, worse, embrace policies that exploit ethnic differences and parochial biases that might win votes but at the expense of Singapore’s competitiveness? And if the latter happens, how will PAP respond? Once the process of greater democratization has begun, PAP will not be able to return to more authoritarian ways.

SOUTH KOREA Comments Korea has a number of groups who use demonstrations to press their agendas. Such groups include students, farmers, different religious groups, and other activists who oppose everything from importing beef from the US to Japan’s claims to islands that Korea considers to be its own. There are also demonstrations over the South Korean government’s policies toward North Korea and toward Pyongyang’s actions that threaten South Korea. At times the demonstrations can involve punches being thrown and clashes with police but usually in ways that are more street theater than a serious attempt to upset social stability. This is why we have not graded Korea worse for this variable. While protests are a common part of the Korean political scene and can have an impact on official policy, they do not really threaten political stability and are unlikely to in the coming five years. Foreign investors do care about the unrest, since they are sometime the target of demonstrators. This is one reason many foreign companies consider Korea to be one of the more difficult countries in which to operate, and this is reflected in the score measuring current levels of social unrest. However, the trend of this threat is not increasing or decreasing. Foreign companies should consider it a feature of the environment they will have to deal with for the foreseeable future. The political system is stable, and demonstrations are a feature of it that help to relieve pressure. Although there are extremely wealthy families in Korea – mainly the chaebol owners – the overall level of income inequality is less than in most other Asian countries. The media is relatively free and the government has long moved beyond its authoritarian practices to where today it is a genuine democracy, with relatively strong institutions. It also adheres to international human rights standards. Consequenlty, while foreign investors might consider the environment to be difficult, it is also stable.

TAIWAN Comments In some ways social unrest risks in Taiwan are similar to Korea. Crime and religious/ethnic sensitivities are not particularly big problems. The main social unrest risks center on political protests, with the population perhaps more polarized in Taiwan than in Korea between supporters of different parties. However, the demonstrations that do take place tend to be more orderly than those in Korea and are rarely something that

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foreign investors need to worry about. Moreover, whereas sometimes foreign investors are the target of the demonstrators in Korea, depending on the industry, this is rarely the case in Taiwan. However, this could change as Mainland China raises is profile as an investor in Taiwan. There have already been demonstrations when prominent Mainland officials have visited Taiwan, and as the points of contact increase, there will be more opportunity and reason for groups who feel threatened by Mainland China to stage demonstrations. In other ways, Taiwan shares more in common with Singapore and Hong Kong in terms of the hot buttons that are threatening unrest today. Average Taiwanese are frustrated with the low level of pay increases relative to the rise in costs they are experiencing. They have not personally benefited from President Ma’s push for closer links with Mainland China and, instead, have seen housing prices surge and the wealth gap widen. The growth in the uneven disribution of wealth is a particularly sensitive point. The main reason we rate social unrest risks to be higher in Taiwan than in either Singapore or Hong Kong is because Taiwanese have more of an incentive to stage demonstrations. Taiwan’s political opposition is much stronger than anything that exists currently in Singapore, while the public’s opinion has a much bigger impact on the selection of political leaders than Hong Kong’s system allows. Consequently, both the ruling and opposition parties employ tactics that include large scale public demonstrations to press their agendas, and with elections coming up in January next year, the number and intensity of demonstrations could increase as this year progresses and the election campaign gets in full swing. These demonstrations could affect the selection of the next government, but they will not change Taiwan’s political system or the environment for foreign investors, with the possible exception of Mainland Chinese individuals and companies.

THAILAND Comments Social unrest is likely to remain a prominent problem in Thailand through 2011, as the so-called “Red Shirts” and “Yellow Shirts” keep using public protests as a way to press their positions. If the current King were to die within the next two or three years, social instability could be further aggravated. The country would go into a period of mourning, but a monarchy transition could make it more difficult for opposing groups to find enough common ground to strike a compromise. Based on the criteria outlined in the Regional Overview of this report that provides fertile ground for social unrest to grow, Thailand rates very poorly. Its income inequality is high and growing. The local media and Internet are heavily censored. And military powers behind the government have been increasingly negligent of human rights. Not surprisingly, therefore, the level of existing social unrest in Thailand is higher than in any of the other countries regularly covered by this report. The major question is how much worse could matters get, especially with elections coming up. The answer is probably not much worse, although there could be some more incidents of street violence and crackdowns by security forces. In general the level of unrest that has prevailed over the past two years is likely to continue until there is a resolution to the political divide that is splitting society. The coming elections, at best, will be only a step in this direction, and they might not even achieve this. The Red Shirt movement and their political wing will not quietly accept any reversal of the reforms that are designed to create a fairer society. But the same powerful forces that backed the army coup against Thaksin five years ago will probably take to the streets again to defend the interests of the urban middle class and elite if they believe they are again threatened by reformers.

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Risks of disruptive unrest are higher than in the past if only because activists are much better informed and organized than they have been previously. Improved communications, the social networks created by the Internet, Facebook, etc. are all empowering the reforming groups in ways never before possible and enabling them to challenge the established authorities much more effectively. The government is keen not to allow the threat of social unrest to dominate the election campaign and still contends that the unrest has largely been invented by former Prime Minister Thaksin Shinawatra and his supporters. They argue that the violent street protests in Bangkok last year owed little to angry and rebellious citizens with justified grievances but were orchestrated as part of Thaksin’s campaign to regain political power. Just as the military and other influential groups are using unspecified threats to the monarchy to raise fears about the demands for change, Thaksin has manipulated the public anger to stir up violence against the authorities. However, that does not make any less valid the growing demands for a fairer society nor alter the fact that millions of Thais see themselves as victims of a system where inequalities of wealth, power, national resources, and opportunities are the norm. To underline their grievances, they point to the growing gap between rich and poor which in Thailand is now one of the widest in the Asia, as can be seen in the chart in the Regional Overview of this report showing income Gini coefficients for Asia. After the bloodshed last year in which nearly 100 Thais (most of them civilians ) died, even some on the government side conceded that major social reforms were needed to bridge social divisions. The foreign minister speaking in the US said that a greater involvement of the rural poor in politics might have to be part of any resolution. His speech remarks were dismissed by his own colleagues as “purely personal,” and back in Thailand he has not repeated them. However, the government’s key social policies confirm that it is well aware of the seething discontent among the rural and urban poor who are being hurt by higher living costs, particularly for food which takes much of low income budgets. Soaring food prices now hitting Thai consumers are a lightning rod for social unrest. The minimum daily wage has been increased and the government has promised to raise it again after the election. The opposition has made similar promises. The wage hikes, which are hotly opposed by employers, will intensify inflationary pressures and in themselves could exacerbate tensions in society. There are already costly government subsidies for some foods and other essential items like electricity, cooking gas, public transport fares and diesel fuel, as well as cheap loans and subsidized crop prices for farmers. In fact the government in this way has adopted many of Thaksin’s populist polices, which previously were condemned by his opponents as wasteful. Social discord is also evident among the better off sections of society. An influential group called the Governing Officer Association of Thailand has furiously condemned proposals to decentralize government authority by terminating the system whereby provincial governors and other local officials are appointed not elected. They declared that rural people were too uneducated and politically immature to elect their own governor or even village headman. “Have the people really achieved that level of maturity” asked one former governor. Millions of Thais of the middle class and the elite would ask the same question. Most members of the present government do not appear to share these reactionary views. Indeed they have in the pipeline many reforms for the tax system, land allocation laws and education that if implemented would answer many grievances. The denial of equal education opportunity is one of the bitterest complaints heard from Thai families who do not have the money to pay the bribes often required to obtain places for their children in good schools and universities.

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Although this fractious situation may contain the seeds, violent conflict is not inevitable. Antigovernment demonstrations have been continuing in Bangkok, but they have been non-violent and disciplined. Both sides of politics and the military say they will accept the election result whatever that may be. Similar promises have been made by the generals in the past but later have often been broken. Today it is inconceivable that they and their supporters would accept an election outcome that saw Thaksin regain any semblance of political power.

VIETNAM Comments Vietnam’s Communist Party places a very high priority on maintaining social stability and has the power to prevent isolated outbreaks of unrest from spreading nationwide. There are dissidents in Vietnam, including democracy activists, human rights defenders, cyber-dissidents, and members of unsanctioned religious organizations. The government keeps all these groups on a very short leash, frequently arresting leaders and jailing them. The biggest threat to social stability is inflation. In April consumer prices jumped 17.51% from a year earlier and 3.32% from March. Making matters even worse, most of the recent increase in inflation has been accounted for by higher prices for education services, food and foodstuffs and housing and building materials – all critically important to the general population. Average Vietnamese do not really care about the widening trade deficit or the fall in the government’s foreign exchange reserves – both big problems – but they do care deeply about inflation and their ability to keep up with rising costs. In an attempt to reduce the threat of unrest arising from the government’s failure to keep prices under control, the authoriites on May 1 raised wages by 14% for civil servants and employees of state-owned companies, who together account for about one third of the total salaried workforce. It also raised pensions and social insurance contributions by the same percentage. It is with this underlying fear of public unhappiness with inflation that the government views the uprisings in the Middle East and North Africa with some alarm. In fact, even with inflation as high as it is, there is little support for any sizeable anti-government movment. Most young people are still optimistic about the country’s future and their ability to improve their livelihoods. Moreover, they fear criticizing the government openly – and with good reason. The government has been even less tolerant of dissent than usual in the past year. It has arrested dozens of dissidents and restricted Internet access across the country, curtailing protesters’ ablity to organize. Official trade unions are tightly controlled by the Communist Party and rarely take a confrontation approach. Still, the longer that inflation remains out of control and the higher it goes, the bigger the risk that unrest will intensify. This is why we colored yellow the bar rating prospects for an increase in social unrest in Vietnam. There will not be a backlash of a magnitude that resembles what is currently taking place in Egypt, Libya or Syria, but there could be more unrest by Vietnam’s historical standards.

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EXCHANGE RATES Currency

5/13/11

Chinese renminbi

6.4980

Hong Kong dollar

7.7727

Indian rupee

44.863

Indonesia rupiah

8,540

Japanese yen

80.808

Malaysian ringgit

3.0021

Philippine peso

43.103

Singapore dollar

1.245

South Korean won

1,087

Taiwan dollar

28.6369

Thai baht

30.266

Vietnamese dong

20,610

Commercial middle rate expressed in terms of US$1.

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