First Quarter 2018 Economic and Wood Product News Part 1 -Feng Shui forecast, Why Asia’s Tigers Suffer while the Nordics Thrive…

Well this news blog is a bit late but always fascinating to look at what happened retrospectively. I thought this was entertaining. A lot of things going on in the first quarter. I split the blog in two pieces…

Here’s the Feng Shui financial forecast for 2018, the Year of the Dog

I thought this entertaining!!

Chris Pash,

Business Insider Australia

Feb. 13, 2018, 9:57 PM

wong Campion

Wong Campion/Reuters

  • The Chinese Year of Dog is a good time to be cautious when it comes to finances, according to this year’s CLSA Feng Shui Index.
  • The guide, which farewells the Year of the Rooster, also includes top sector picks, property tips and zodiac predictions for health, wealth, love and careers in the Year of the Earth Dog.
  • In terms of sectors, the index says to stick with pharma and consumer as the Earth Dog sees strong gains in wood-related industries overall.
  • Telcos/internet, technology and utilities perform well but casinos and transport won’t get a leg up until October.

The Chinese Year of Dog is a good time to be cautious when it comes to finances, according to this year’s CLSA Feng Shui Index.

CLSA, a Hong Kong-based capital markets and investment group, has launched its 24th index, a tongue-in-cheek alternative look at what’s in store in the Chinese New Year.

The guide, which farewells the Year of the Rooster, also includes top sector picks, property tips and zodiac predictions for health, wealth, love and careers in the Year of the Earth Dog.

Feng Shui is a mystical system used in China seeking a balance between people and the elements of the world. Feng Shui masters are regularly consulted, sometimes at great expense, to make sure buildings about to be constructed are sited in harmony with its surroundings.

CLSA Feng Shui Index

“The Dog represents duty and loyalty and is a sign of defence and protection,” says CLSA.

“It’s a good time to be level headed and to err on the side of caution. Entrepreneurs should stick with their most loyal clients, and investors are advised not to bite off more than they can chew.”

The path of the Hang Seng index as mapped by the Feng Shui experts:

CLSA Feng Shui Index 2018 CLSA

According to the index, there could be a stock market high ahead.

It says: “The Earth Dog jumps out of the kennel, tossing the Fire Rooster back to the barn and sending the Hang Seng index in Hong Kong skyward.

“After a great start, the hound takes a tumble in March which sees the Index head south.

“Through to summer the market chases its tail and drops, before the Dog and our favourite Earth Rooster, the HSI (Hang Seng index), extend a little more consideration towards each other and get back on track.”

In terms of sectors, the index says to stick with pharma and consumer as the Earth Dog sees strong gains in wood-related industries overall.

Telcos/internet, technology and utilities perform well but casinos and transport won’t get a leg up until October.

Investors who expect decent returns from banking and financials are definitely barking up the wrong tree this year,” says CLSA.


The Bitter Truth: Why Asia’s Tigers Suffer while the Nordics Thrive 

why Asia tigers suffer

Yulin Huang

Why you need to know

Justin Hugo looks at how statistics suggesting the Asian Tiger economies have caught up with their Scandinavian counterparts mask a more sobering wage-based reality.

Wage wars

The Asian Tigers and Japan have enjoyed a remarkable growth streak over the last half a decade that has put them firmly in the league of high-income countries – at least as measured by GDP per capita – a phenomenon bested by only some oil-rich Gulf states.

But in terms of the actual livelihoods of their citizens, have they caught up?

Nordic countries are upheld as the gold standard of what a model country should look like, often featuring in lists of the world’s best places to live with the happiest people in the world. How would the Asian Tigers – known on the contrary for their high stress levels and rates of suicide – compare with the Nordics, and with the Netherlands, which Taipei mayor Ko Wen-je (柯文哲) said is “an excellent model [… and] the best country for Taipei to learn from,” having realized that Taiwan’s thriving democracy discounts emulating the region’s leading economic light, Singapore.

“[Former] President Lee Teng-hui (李登輝) had led Taiwan along a “democratic path,” that meant [that Taiwan] could never be like Singapore,” Ko reportedly said. Taiwan and the Netherlands also have significant historical links dating back to when Taiwan was a Dutch colony (1624-1662), the Taipei mayor added.

But the growth spurt among the Asian Tigers did not happen all at once. Back in 1950, the real GDP per capita of Hong Kong, Japan and Singapore was already among the highest in Asia, at US$4,013, US$2,519 and US$2,439, respectively. Taiwan’s real GDP per capita was US$1,393 and South Korea’s US$1,122, according to data from the University of Groningen’s Maddison Project Database, which provides researchers with tools to compare economic performance between regions.

real gdp per capita 1950

Source: University of Groningen

Meanwhile, the real GDP per capita of the Nordics and the Netherlands was twice at high, at between US$5,208 (Finland) and US$9,376 (Denmark) – they were already one of the richest countries in the world at that time.

real GDP per capita 2016

SnSource: University of Groningen

Nearly 70 years later, in 2016, Norway’s real GDP per capita had grown to US$76,397 while Singapore’s had shot past the rest of the pack to US$67,180.

At the same time, Hong Kong’s real GDP per capita had grown to US$47,043, similar to the Netherlands’ US$49,254 and Denmark’s US$45,141, Taiwan’s had risen to US$42,304 which is comparable with Sweden’s US$44,371. Japan and South Korea real GDP per capita were roughly on par with Finland’s US$38,335.

real GDP per capita 1950 to 2016

Source: University of Groningen

One might assume that a similar level of national wealth might equate to citizens enjoying a similarly high standard of living, but this is where the GDP per capita statistics are misleading.

A more illuminating comparison involves looking at the minimum and median wages of each country.

monthly minimum wage

Source (data from latest year): Norway: Norwegian Labour Inspection Authority, Denmark: 3F – Danmarks Stærkeste Fagforening, Sweden: Swedish Work Environment Authority, Finland: Service Union United PAM, Netherlands: Government of the Netherlands, Japan: Japan International Labour Foundation, South Korea: (Maeil Business Newspaper’s English news site), Taiwan: Ministry of Labor Republic of China (Taiwan), Hong Kong: Labour Department The Government of the Hong Kong Special Administrative Region, Singapore: Ministry of Manpower Singapore.

In the Nordics, there are no minimum wages – salaries are collectively bargained for by labor unions in different industrial sectors – which by the way, results in the highest wages in the world. According to the International Labour Organisation (ILO), collective agreements cover about 90 percent of workers in Finland, 89 percent in Sweden, 84 percent in Denmark and 67 percent in Norway.

For the purposes of this comparison, we can use the wages of transport workers as the de facto minimum wages in the Nordics: Norwegians earn a monthly minimum of approximately 27,662.25 krone (US$3,517), the Swedes 25,088.00 krona (US$3,107) and the Finns €2,080 (US$2,542). For the Danes, workers in the industrial sector earn a minimum of 18,502.22 krone (US$3,039). In the Netherlands, where there is a nationally legislated minimum wage, it is €1,578.00 (US$1,929).

Turning to East Asia, Japan has the most respectable monthly minimum wage, at about 168,608 yen (US$1,524). South Korea’s historic minimum wage increase to 1,573,770 won (US$1,475) last year is also palatable.

So far, the minimum wages of these countries correspond roughly to their nominal GDP per capita, where the higher the nominal GDP per capita, the higher the minimum wage.

GDP per Capita vs Min wage

Source (data from latest year): Nominal GDP per Capita: The World Bank, Monthly Minimum Wage: Norway: Norwegian Labour Inspection Authority, Denmark: 3F – Danmarks Stærkeste Fagforening, Sweden: Swedish Work Environment Authority, Finland: Service Union United PAM, Netherlands: Government of the Netherlands, Japan: Japan International Labour Foundation, South Korea: (Maeil Business Newspaper’s English news site), Taiwan: Ministry of Labor Republic of China (Taiwan), Hong Kong: Labour Department The Government of the Hong Kong Special Administrative Region, Singapore: Ministry of Manpower Singapore.

Denmark, Sweden and Finland generally perform better by having minimum wages that are higher than the regression line, and the minimum wage increase that South Korea implemented last year elevated its position to a similarly lofty level.

Taiwan’s minimum wage of NT$22,008 (US$749) that took effect at the start of this year still leaves the country lagging below the regression line.

There are two other distinct outliers – Singapore and Hong Kong. Even though they have higher nominal GDP per capita than Taiwan, their minimum wage is set at a similarly depressed level – Singapore’s de facto monthly minimum wage is SG$1,100 (US$833) and Hong Kong’s is HK$6,724.74 (US$860).

In fact, Singapore does not have a minimum wage – basic minimum wages are set for the cleaning, landscape and security sectors but unlike the Nordics, the “minimum wages” set for these sectors are low – basic minimum wages for security officers are used for this comparison. According to Singapore’s Ministry of Manpower, these “minimum wages” are “developed by tripartite committees consisting of unions, employers and the government.”

However, it should be noted that the government has its hands in the unions and businesses, which precipitates something more like a “one-partite” arrangement. The confederation of trade unions in the country – the National Trades Union Congress (NTUC) – is headed by a minister – Chan Chun Sing – who is widely tipped to be Singapore’s next prime minister. There is also high state control of publicly traded companies in Singapore – 23.6 percent as compared to only 1.1 percent, 3.0 percent, 3.7 percent and 5.1 percent in Japan, Taiwan, Hong Kong and South Korea, respectively ­– though the figure for Taiwan is higher if you include companies indirectly controlled by state-owned shareholders.

Singapore’s nominal GDP per capita of US$52,963 is two times higher than Taiwan’s and puts it in between Denmark and Sweden. If Singapore were to adopt a similar minimum wage, it would be at least US$3,000 (SG$3,963) – or around US$2,300 (SG$3,039) if following the regression line above. Similarly, Hong Kong’s minimum wage should be closer to US$1,850 (HK$14,459) – on a par with the Netherlands, which has a similar level of nominal GDP per capita.

As such, low-income workers in Singapore and Hong Kong are being short-changed.

But the minimum wage does not give an overall perspective of the wage situation in these countries, so we also need to address median wages.

Monthly Median Wage

Source (data from latest year): Eurostat, Sweden: Statistics Sweden, Finland: Statistics Finland, Japan: (derived from Ministry of Health, Labour and Welfare Summary Report of Basic Survey on Wage Structure (Nationwide) 2012 and Ministry of Health, Labour and Welfare Year Book of Labour Statistics 2015, South Korea: The Hankyoreh, Taiwan: Focus Taiwan News Channel, Hong Kong: Census and Statistics Department The Government of the Hong Kong Special Administrative Region, Singapore: Ministry of Manpower Singapore.

Norway has the highest monthly median wage (€4,562.37 / US$5,576) among the Nordics and the median wage in the Netherlands is €2,672 (US$3,226).

Japan has the highest median wage among the East Asian countries, of an estimated US$2,711, while Taiwan (NT$40,612 / US$1,382) has the lowest. South Korea’s (2,017,692.31 won / US$1,891) median wage is second-lowest.

As you can also see from the below, the higher the nominal GDP per capita, the higher the median wage as well.

GDP per Capita vs median wgae

Source (data from latest year): Nominal GDP per Capita: The World Bank, Monthly Median Wage: Eurostat, Sweden: Statistics Sweden, Finland: Statistics Finland, Japan: (derived from Ministry of Health, Labour and Welfare Summary Report of Basic Survey on Wage Structure (Nationwide) 2012 and Ministry of Health, Labour and Welfare Year Book of Labour Statistics 2015, South Korea: The Hankyoreh, Taiwan: Focus Taiwan News Channel, Hong Kong: Census and Statistics Department The Government of the Hong Kong Special Administrative Region, Singapore: Ministry of Manpower Singapore.

Denmark (€ 3,828 / US$4,679) and Finland (€3,001 / US$3,668) have the second- and third- highest median wages in the Nordics and also sit above the regression line.

On the other hand, for Singapore and Hong Kong, median wages are considerably lower than trend. If median wages were to follow the regression line, Singapore’s should be closer to US$3,800 (S$5,020) and that of Hong Kong should be nearer to US$3,000 (HK$23,448), instead of the current S$3,500 (US$2,649) and HK$16,200 (US$2,073), respectively. In other words, the citizens of both cities should be earning a median wage of about US$1,000 more.

Whys and wages shares

What accounts for the discrepancy between wages and the GDP per capita in Singapore? If Singapore is considered one of the richest places in the world, why would its (de facto) minimum wages be among the lowest in high-income countries?

To see why, let’s look at the wage share of each country – or the share of GDP that goes to wages.wage share

Source: OECD Statistics Working Papers, Taiwan: Directorate General of Budget, Accounting and Statistics (DGBAS), Executive Yuan, (R.O.C. Taiwan), Hong Kong: Hong Kong Economy The Government of the Hong Kong Special Administrative Region, Singapore: Ministry of Trade and Industry Singapore.

We saw that Denmark, Sweden and Finland had de facto minimum wages that were higher than the regression line. One reason for this is their relatively higher wage shares – of 63.4 percent, 62.1 percent and 62.0 percent.

At the other end of the scale, Singapore’s wage share of only 42.5 percent explains why its de facto minimum wage is lower than the regression line.

Of note, too, is that Taiwan’s wage share is also low – at only 44 percent. As such, similar to Singaporeans, Taiwanese are not being compensated fairly for their labor, at least compared with high-income peers.

If the Taiwanese were paid a wage share of 50 percent – closer to the workers of South Korea (wage share of 51.8 percent) and Hong Kong (50 percent), then it follows by a back-of-an-envelope calculation that the minimum wage would also fall in line with theirs at about NT$25,000 (US$851). By the same logic, if wage share was elevated to the 60 percent level of Denmark, Sweden and Finland, then Taiwan’s minimum wage would amount to NT$30,000 (US$1,021)

Moreover, Chang Wen-po (張溫波), a former professor at National Taiwan University and retired department director at the Economic Development Council has shown in a Taipei Times article that when dividing Taiwan’s nominal GDP per capita last year by current wage share, the amount of NT$26,974 is actually lower than the NT$30,792 you would have obtained in the late 1980s and early 90s, when wage share was half of GDP. “[NT$30,792] would probably be acceptable for low-income earners [as a minimum wage],” he concluded.

Of course, a minimum wage of NT$30,000 (US$1,021) is “a dream” according to Taiwan President Tsai Ing-wen (蔡英文), who in a television interview recently declined to set out a timetable for when that dream might come true. Still, the fact that the figure is on the table is a step in the right direction.

Similarly, if Singapore’s wage share were to increase to 50-60 percent, minimum wages should correspondingly rise to between SG$1,230 (US$931) and SG$1,550 (US$1,173) – just a touch higher than in Taiwan under the same framework. But as explained previously, Singapore’s minimum wage should range between US$2,300 and US$3,000.

Inequality, poverty and corporate cultures

What is the cause of the large differentials in wage levels outlined in part 1? The reason lies in the Gini coefficient *. Singapore is the most unequal country among the developed nations – even when you include the United States and the United Kingdom.

Singapore also has the highest Gini coefficient, at 0.38 of the countries we are considering here. Hong Kong has the second-highest at 0.379 (derived from the Hong Kong’s Census and Statistics Department for comparison on OECD’s scale.)

By contrast, Denmark and Norway are the most equal countries in the world, with Gini coefficients of 0.256 and 0.257, respectively. (Note that the Gini coefficient figures account for taxes and transfers aimed at reducing the inequality – even so, Singapore and Hong Kong still present the largest income inequality.)

gini coefficient

Source (data from latest year): OECD, Taiwan: Directorate General of Budget, Accounting and Statistics (DGBAS), Executive Yuan, (R.O.C. Taiwan), Hong Kong: Census and Statistics Department The Government of the Hong Kong Special Administrative Region, Singapore: Department of Statistics Singapore

*The Gini coefficient; sometimes expressed as a Gini ratio (or a normalized Gini index) is a measure of statistical dispersion intended to represent the income or wealth distribution of a nation’s residents and is the most commonly used measurement of inequality.

You can see income inequality manifested in the gap between minimum and median wages. Because Singapore and Hong Kong have the highest Gini coefficient, they also have the highest wage gap – the median wage is 3.18 times higher than the de facto minimum wage in Singapore and 2.41 times higher in Hong Kong.

In Denmark and Norway, the median wage is 1.5 times higher – even so, de facto minimum wages in Norway, Denmark and Sweden are already higher than even median wages in the East Asian nations. Their workers already earn higher wages than half the population of the East Asian countries – because workers at the bottom in the Nordics start from a high wage base. South Korea’s wage difference is lower because of this year’s robust minimum wage increase. As a result, income inequality in South Korea could be even lower next year.

wage difference vs gini coefficient

If Singapore’s inequality were reduced and the wage share returned to Singaporeans, you might see a wage distribution like that of Denmark and Sweden.

After all, Singapore has a nominal GDP per capita similar to both countries, and taking the median wage share of above 60 percent as a reasonable optimal level – and which Denmark and Sweden employ – and a Gini coefficient on par, then Singapore should have a similar wage distribution.

That would put the city state’s minimum wage at about US$3,000 (SG$3,963) or US$2,300 (SG$3,039) if it were to follow the regression line, instead of the SG$1,100 (US$830) we see now. The median wage would be around US$3,800 (SG$5,020), similar to Sweden, instead of the current SG$3,500 (US$2,635). Another way to look at it would be that if Singapore’s wage share were 60 percent instead of 42.5 percent, then Singapore’s median wage should correspond to US$3,720 (SG$4,914) – giving a similar result.

As for Taiwan, it has a comparable nominal GDP per capita to South Korea. By the same logic of adjusting wage share and Gini coefficient, this should give the country a similar minimum and median wage, putting the former twice as high as it is now, closer to US$1,500 (NT$44,078). The median wage would balloon to US$2,000 (NT$58,771) instead of the US$1,382 (NT$40,612) it is now.

Alternatively, if Taiwan’s wage share of 44 percent were increased to 60 percent, it would give the Taiwanese a median wage of NT$55,380 (US$1,884), achieving much the same result.

Is NT$40,000 as a minimum wage feasible? It is already being done on a localized level in Taiwan. A-Zen Bakery in Changhua County’s Lugang Township already gives its workers a minimum monthly salary of more than NT$40,000 a month. In fact, owner Cheng Yung-feng has increased his workers’ wages by 20 percent for the past two consecutive years, Taipei Times reported President Tsai as sharing. Because of that, the newest employees – who have two to three years of experience – have seen their salaries rise to more than NT$40,000 and are set to receive NT$48,000 this year. Workers who have been with the company for more than 20 years earn more than NT$100,000.

Now, A-Zen Bakery is an SME, yet it has the resources to give its workers significant wage increases and so far, it is still earning high profits, suggesting that Taiwan’s businesses do have a lot of leeway to increase the wages of Taiwan’s workers. In fact, in spite of the significant increase in wages, A-Zen Bakery continues to sell its buns at a low price of NT$20 and generates annual revenue of NT$50 million – resisting the temptation to raise prices along with wages. It is therefore not a question of how much the wages of Taiwan’s workers should increase, but how we can develop a roadmap to increase the wages of Taiwan’s workers to the ideal. As Tsai said, “Business owners should not think of raising wages as a burdensome increase to their overheads, but as a way for them to share their joy with colleagues who have worked hard to grow their businesses.”

According to Cheng, business owners and their employees are in the same boat. He believes that if everyone reaps the benefits together, employees would be more than willing to strive hard together with a company to help it succeed. His motto is, “The more we give, the more we get,” and as long as his company earns profits, he is happy to share them with his workers and increase their wages. Indeed, Cheng’s workers reveal that over the years, he has been giving the workers significant increases in salary, and because of that, not only has it done much to boost staff morale, they say that this has made them put in more effort to work harder for the company.

Salaries and poverty

comparison of salaries at the top makes the disparity even more glaring. Top executives in Singapore earn €250,000 / US$305,566 per annum (about €210,000 after taxes and social security – which is the second-highest net executive salary in the world). Those in Hong Kong earn about €230,000 (close to €200,000 after deductions, or the fourth highest).

In the Nordics, the Netherlands and Japan, executives earn about €150,000 to €185,000 per annum (or €115,000 to €125,000 after deductions in Japan and South Korea, respectively, and between €80,000 and €100,000 in the Nordic countries and the Netherlands).

Taiwan’s executives earn about €120,000 before taxes and social security but about the same as the Norwegians, Danes and Dutch after deductions – around €95,000.

Middle managers in Singapore and Hong Kong earn similarly higher salaries, both before and after taxes and social security, as the Nordic countries, the Netherlands and the other East Asian countries.

The fact that the Nordics have the highest “minimum wages” in the world but executive pay is relatively lower reflects how a fairer wage distribution helps reduce inequality.

Taiwan’s executives earn a similar net salary as their Norwegian and Danish counterparts but the minimum wage in Taiwan is only a fifth or a quarter of the de facto minimum wage in Norway and Denmark, which clearly shows the massive income gap in Taiwan vis-à-vis the Nordics. Taiwan’s low Gini coefficient therefore does not present a complete picture of Taiwan’s income distribution.

Singapore and Hong Kong also have one of the lowest minimum wages among the developed high-income countries – on par with Taiwan – but among the highest executive pay brackets in the world, helping explain the extremely high inequality that plagues the two cities.

This also explains the high level of poverty in both the cities.

poverty rate

Source (data from latest year): OECD, Taiwan: National Statistics, Republic of China (Taiwan), Hong Kong: The Government Information Centre The Government of the Hong Kong Special Administrative Region, Singapore: Singapore Management University and Lien Centre for Social Innovation.

The Singapore government has refused to define a poverty line, claiming to fear an arbitrary “cliff effect”. However, a report by the Singapore Management University and Lien Centre for Social Innovation quoted Associate Professor Irene Ng from the National University of Singapore as estimating Singapore’s relative poverty rate to be about 20 percent, which would put the city as a leader in poverty among high-income countries.

This is perfectly plausible since Singapore has a de facto minimum wage that is even lower than Hong Kong’s and a cost of living ranked by The Economist as the highest in the world for the fourth year in a row in 2017 – Hong Kong’s poverty rate is 14.7 percent. Japan (16.1 percent) and South Korea (13.8 percent) have similar levels of poverty.

The Nordics and the Netherlands all have low levels of poverty, at between 6.3 percent (Finland) and 9 percent (Sweden).

Interestingly, Taiwan’s relative poverty rate is also low at 6.6 percent but this could be due to stagnant wages, which depress the median wage and therefore the relative poverty rate (which is defined by the Organisation for Economic Co-operation and Development (OECD) as half the median household income of the total population). On a similar note, Singapore’s depressed wages and the lower median wage could also result in a lower estimation of the poverty rate.

A better estimation of relative poverty would be to first define the optimal median income corresponding to the country’s GDP per capita, and calculating the poverty line from this optimal level – so, half of optimal median income. In Singapore, taking the optimal median wage as about US$3,800 (SG$5,020) would correspond with a poverty line at SG$2,500 (US$1,892). This puts more than 30 percent of the population in relative poverty. Professor Hui Weng Tat of the Lee Kuan Yew School of Public Policy estimated a relative poverty rate of around 35 percent based on a poverty line set at 60 percent of the national median equivalized income.

One other statistic gives us a broader perspective of the countries’ wage situation – the top 10 percent income shares.

Top 10% income share

Source (data from latest year): World Wealth & Income Database, South Korea: The Hankyoreh, Hong Kong: Education Bureau The Government of the Hong Kong Special Administrative Region.

Naturally, Singapore’s and Hong Kong’s high income inequality implies that the share of income that goes to the top 10 percent is one of the highest among the high-income countries – at 43.8 percent and 41 percent, respectively.

The top 10 percent income share in the Nordics and the Netherlands is lower, ranging from 26.9 percent in Denmark to 30.9 percent in the Netherlands.

Japan and South Korea’s top 10 percent income share is also high at 41.6 percent and 45 percent, respectively. However, they have relatively higher minimum wages, which should help close the wage gap, and the higher wage shares should enable a greater portion of the GDP allocated to wages to be available for fairer distribution, when compared with Singapore and Hong Kong. (Note that South Korea’s income share statistic comes from a separate source, and is used as an approximate.)

As a comparison, assuming the top 10 percent income share as a portion of the wage share, Chart 13 below shows the share of GDP that can be distributed to the remaining 90 percent of workers. For Singapore, this allows only 23.9 percent of the GDP to be distributed to the 90 percent of workers. In South Korea, it would be higher, at 28.5 percent, while Japan would register 36.1 percent. The shares are higher in the Nordics and the Netherlands. The share in Norway is slightly lower than the other Nordics because Norway starts off with a higher GDP per capita, and a higher income base.

In other words, because Singapore has a low wage share of 42.5 percent but 43.8 percent of the income goes to the top 10 percent, only 23.9 percent of the GDP would be available for the rest of the 90 percent as wages – based on our assumptions. In comparison, even though the top 10 percent income share in Japan is also high at 41.6 percent, but there is a high wage share of 61.8 percent, there is still 36.1 percent of the GDP that can be distributed to workers in terms of wages.

income share GDP for bottom 90% work share

When we compare the difference between the annual executive pay and minimum wage, Singapore and Hong Kong again have the highest wage gap. Even though Taiwan’s wage disparity is not as wide, it still has the third highest gap ahead of Japan and South Korea.

ratio of exec pay to min wage

Moreover, when comparing the pay gap between executives and middle managers (see chart below), the gap in Taiwan shows a similar disparity with Singapore and Hong Kong, suggesting that wages also fall off quickly from the top in Taiwan as well. Still, Taiwan’s income inequality is notably low as compared to the other East Asian countries, which could be due to the social welfare transfers that compensate for the wage gap, or the higher concentration of small and medium-sized enterprises (SMEs) – we will look at these later.

ratio of exec pay to middle managerpay

Source: Approximate data of executive and middle manager pay from ECA International.

One possible reason why Taiwan’s executives and the rich pay themselves such high comparative salaries in relation to the minimum wage could be due to the control of top families in the largest firms. As can be seen in the chart below, two-thirds of the 20 largest firms in Taiwan were controlled by families (defined as having 10 percent control rights) in 1996. A similar pattern is also seen in Hong Kong and Singapore, with 70 percent and 45 percent, respectively – which helps further explain the high inequality in those cities. Taiwan’s Gini coefficient might therefore be relatively low due to the sharp drop-off in wages from the top which influences a more equitable wage distribution at the bottom. This idea led to a popular joke in Taiwan: “That wages are equal – because they are equally low.”

Taiwan’s low wages could therefore be attributed to the high family control which in spite of the country’s democracy has resulted in its economy functioning in a similarly familial fashion as Singapore and Hong Kong. But how does a politically-democratic and corporately-authoritarian country run? Could Taiwan’s relatively strong social welfare system but depressed wages and relatively poor labor standards in terms of rest days be a result of this odd combination?

family ownersip 20 largest firms

Source (data from 1998 to 2000): Eklund, Johan E., and Sameeksha Desai. “Ownership and allocation of capital: Evidence from 44 countries.” Journal of Institutional and Theoretical Economics JITE 170.3 (2014): 427-452.

Among the Nordics, Sweden’s top families also have significant control in the top 20 largest firms – 55 percent – but the developed culture of collective bargaining for workers’ wages and a transparent democratic structure might serve to limit the families’ ability to expand their wealth at the expense of workers.

Fortunately, even as the top families in Taiwan have significant control in the largest firms, the corporate assets held by the top 15 families in Taiwan as a percentage of GDP is still not as high as Singapore and Hong Kong.

corporate assets top 15 families as % GDP

Source (data from 1996): Claessens, Stijn, Simeon Djankov, and Larry HP Lang. “The separation of ownership and control in East Asian corporations.” Journal of financial Economics 58.1 (2000): 81-112.

The concentration of control of the top 15 families comprised 17 percent of GDP in 1996, which is lower than in Hong Kong (84.2 percent) and Singapore (48.3 percent). However, it is still higher than Japan (2.1 percent) and South Korea (12.9 percent), which could explain the challenges faced by the Taiwanese in reforming their system for more equitable distribution, vis-à-vis Japan and South Korea.

State control publicly traded corp

Source (data from 1996): Claessens, Stijn, Simeon Djankov, and Larry HP Lang. “The separation of ownership and control in East Asian corporations.” Journal of financial Economics 58.1 (2000): 81-112.

However, as mentioned, Singapore stands out from other East Asian Tigers due to high state control – when looking at control of publicly traded companies in East Asia, 52 percent of companies are in family hands (with at least 10 percent of voting rights) while 23.6 percent is controlled by the state, effectively totaling 75.6 percent.

state & family control of publically traded companies

Source (data from 1996): Claessens, Stijn, Simeon Djankov, and Larry HP Lang. “The separation of ownership and control in East Asian corporations.” Journal of financial Economics 58.1 (2000): 81-112.

In South Korea, 67.9 percent of companies were controlled by families but only 5.1 percent were state-controlled. Similarly, in Hong Kong, it was 64.7 percent versus 3.7 percent and 65.6 percent versus 3.0 percent in Taiwan. In Japan, the control by both families (13.1 percent) and state (1.1 percent) is low.

But as Johan E. Eklund and Sameeksha Desai, authors of the study “Ownership and Allocation of Capital: Evidence from 44 Countries”, explain, “family control and ownership concentration negatively influence capital allocation. Economies with highly concentrated ownership structures display economic entrenchment and persistent misallocation of capital.”

There is evidence to support this. In “Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance,” researchers found that “the longer CEOs were at the helm, the more pronounced was their firms’ poor performance.” Forbes reported the study’s authors as saying this is “because those CEOs are able to appoint more allies to their boards, and those board members are likely to go along with the bosses’ bad decisions.”

Among the Asian Tigers, the top firms are predominantly family-controlled (and state-controlled, in Singapore’s case), and the families’ (and state’s) voting rights of at least 10 percent effectively allow them to appoint their allies to company boards.

Michael Cooper of the University of Utah’s David Eccles School of Business, a co-author of the “Performance for Pay” study, added: “For high-pay CEOs, with high overconfidence and high tenure, the effects are just crazy” In fact, the returns on shareholder value of these companies over three years is 22 percent worse than their peers.

Indeed, long tenures are also a concern in Taiwan – a 104 Job Bank survey last year showed that 86.1 percent of Taiwanese companies polled do not have any succession plans while only 13.9 percent have thought of enacting one.

However, the problem also lies with how well executives pay themselves. Historian Nancy F. Koehn from the Harvard Business School suggests that in America, the salaries of board directors are usually decided by compensation committees, and since “Most board members of public companies are themselves well-paid executives … they have incentives to approve large pay packages for men (and the many fewer women) who are effectively their peers.”

Bloomberg writes up a very good summary of the thinking here.

In essence, the make-up of the companies in the Asian Tigers mean that they already function internally like compensation committees, and in conjunction with other families related to them, and via their intermarriages. Blogger Jess C. Scott has dug out and pieced together the relationships of the top families in Singapore from the corporate and political scene. Blogger Roy Ngerng had also drawn out several family tree maps of their relationships.

Koehn adds that these executives are “operating in a system that presumes the contribution of a good senior executive is very, very high.” But as we have seen from Cooper’s study, the evidence points to the contrary – “the more CEOs get paid, the worse their companies do over the next three years.”

In an analysis of American companies, former CEO Steven Clifford concludes that, “board directors and compensation committees have directly contributed to the rising salaries and bonuses of the country’s richest executives; [… but] each of those companies could have paid their CEOs 90 percent less and performed just as well.”

“From the outside, this may look a lot like cronyism or poor corporate governance, and no doubt both are at work,” says Koehn.

The Economist has calculated that Taiwan – and Singapore – has high levels of crony capitalism, at 3.2 percent and 10.7 percent of the GDP, respectively, when analyzing for billionaire wealth in the crony sector. In an earlier reiteration of the index, Hong Kong was also ranked as having the highest crony capitalism* level in the world, at 58 percent of the GDP. In comparison, Japan and South Korea have comparatively low levels of cronyism – at 0.6 percent and 0.5 percent, respectively. You can see a correlation between crony capitalism and the control of corporate assets within the top 15 families in the GDP.

corp assets of top 15 familes vs crony capitalism

Source: Corporate Assets of Top 15 Families: Claessens, Stijn, Simeon Djankov, and Larry HP Lang. “The separation of ownership and control in East Asian corporations.” Journal of financial Economics 58.1 (2000): 81-112., Crony Capitalism: The Economist, Crony Capitalism (Hong Kong): The Economist.

*Crony capitalism is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism.

As The Economist explains, “Behind the crony index is the idea that some industries are prone to “rent seeking” […] when the owners of an input of production – land, labour, machines, capital – extract more profit than they would get in a competitive market.

“Rent-seeking can involve corruption, but very often it is legal,” it adds.

But Eklund and Desai offer this point of view: “We argue that it is not ownership concentration per se that creates inefficiencies in the allocation of capital but rather, key governing institutions. Therefore, strong private property and investor protection [will] reduce [the] equilibrium concentration ownership and improve [the] allocation of capital.”

In short, when wages are low and inequality is high, it is because of government inaction, and if wages are to be increased, then the government needs to act or citizens have to badger their government to do so, and hold politicians accountable for not acting on their promises to the citizens and workers, or for having too cosy relationships with big business.

The authors Stijn Claessens, Simeon Djankov and Larry H.P Lang, of the paper, “The separation of ownership and control in East Asian Corporations”, explain: “In most developing East Asian countries, wealth is very concentrated in the hands of few families. Wealth concentration might have negatively affected the evolution of the legal and other institutional frameworks for corporate governance and the manner in which economic activity is conducted.

“It could be a formidable barrier to future policy reform,” they conclude.

Singapore’s case therefore presents a danger to its citizens. Whereas in Norway the state also has a high control of publicly traded firms, there is transparency as to how these firms are managed and the Norwegian government is therefore accountable to its citizens and cannot withhold from them their rights and gains.

However, the Singapore government does not operate in a transparent manner. It was Singapore Prime Minister Lee Hsien Loong who famously said: “I would not believe that transparency is everything” when discussing the government’s management of investment funds (which the country’s national pension funds are transferred into).

Social protections and saving graces

As touched on in part 3, Taiwan’s saving grace lies in its social welfare system.

Taiwan ranks eighth in a global list of unemployment benefit replacement rates*, which compare unemployment benefits received when not working to wages earned when last employed in a given year (in this case the year 2000). The list was compiled based on underlying data for this IMF working paper and does not take into account the eligibility of recipients for unemployment benefit, the duration they are able to receive it, or the conditions attached to its distribution.

Taiwan can be said to offer adequate protection, which at 60 percent of the previous salary is just below the Netherlands’ 70 percent, Sweden’s 68.5 percent and Norway’s 62.4 percent. In general, the Nordics and the Netherlands have high replacement rates, and they also start at a high wage base.

Singapore does not have any unemployment benefits – the government has refused to considerintroducing them on the basis that employers are mandated to pay laid off workers retrenchment benefits and Singapore has persistently low unemployment. Manpower Minister Lim Swee Say told Singapore’s parliament in 2016 that nine out of 10 retrenched workers receive such benefits.

Prime minister Lee Hsien Loong said at the May Day Rally in 2016: “Actually, we have something even better than unemployment insurance, because (for) unemployment insurance the worker has to pay out of his salary.” He added, “Ours is different. The scheme is not paid by the workers or the employers. It is paid by the government and the scheme is […] to help you get employed, get a job [and] upgrade yourself.” Lee was referring to the SkillsFuture scheme introduced in 2016 where Singaporeans aged 25 and above received SG$500 to attend training courses. However, this money is not given on an annual basis and Singaporeans only receive “periodic top-ups”. But early this month, it was revealedthat since its launch, only 285,000 working adult Singaporeans used SkillsFuture and in 2017, only about 160,000 Singaporeans, did so. The Online Citizen calculated that this would mean that only 11.4 percent of Singaporeans have used this money over the last two years – it would be lower when accounting for only 2017. It is not known if these figures account for the money which Singaporeans were scammed of – it was later found that SG$40 million worth of fraudulent claims to SkillsFuture were made by a criminal syndicate and 4,400 individuals submitted false claims of SG$2.2 million.

But academics, economists and opposition members have been calling for unemployment benefits. In the book, “Singapore Perspectives 2012: Singapore Inclusive : Bridging Divides”, published by the Institute of Policy Studies, the authors wrote that, “within policymaking circles, it is often argued that unemployment benefits create moral hazard, […] but even if our policymakers remain sceptical, […] how should our social security system help workers transit between sectors as the pace of restructuring intensifies?” At a budget forum organized by the Economic Society of Singapore in 2016, Assistant Professor Giovanni Ko at Nanyang Technological University also said, “You can’t just have a push towards automation without something to help catch these people who will probably lose their jobs,” and that, “there needs to be some kind of safety net”.

OCBC Bank’s head of treasury research and strategy Selena Ling echoed: “I think if you want people to take risks, you want people to give up their bread-and-butter kind of jobs to start up companies, try new things, see the world, fail nine times before they get one right … definitely you have to have some form of support infrastructure.”

Japan and South Korea’s unemployment benefits provide for only 28.9 percent and 25 percent of the previous salary, respectively, and in Hong Kong, it is only 41 percent.

It should be noted that in Japan, unemployment insurance is legislated at 50 percent to 80 percent of the previous salary but because there is a maximum daily limit of 7,830 yen (US$70.75) in unemployment benefits, the average gross replacement rate is therefore low in comparison with wages. Similarly, in South Korea, unemployment benefits cover 50 percent of the previous salary, and again because the maximum daily limit is only 40,000 won (US$37.48), the average gross replacement rate is low as well.

Source: European Welfare States blog (based on: IMF).

unemployment benefits gross replacement rate

*Replacement Rates The replacement rate for given income levels measures the proportion of out-of-work benefits received when unemployed against take home pay if in work. While there is no pre-determined level of replacement rate which would influence every individual’s decision to work, clearly the higher the replacement rate, the lower the incentive to work. A replacement rate more than 70% is considered to be excessive.

On pension adequacy, Taiwan also does well – the gross pension replacement rate stands at 70 percent, coming third after the Netherlands and Denmark, at 96.9 percent and 86.4 percent, respectively.

pension fund gross replacement rate

Source: OECD (2017 report), Taiwan; OECD (2009 report), Hong Kong and Singapore: OECD (2013 report).

However, there is a wide disparity in the pension payments received by Taiwanese workers. Before last year’s pension reform, the average monthly pension for public school teachers was NT$68,025 (US$2,315), NT$49,379 for military personnel and NT$56,383 for civil servants. However, for private sector employees, private school teachers only received NT$17,223 – just a quarter to a third of what their public sector counterparts received – while employees covered by labor insurance received only NT$16,179 and farmers received a paltry NT$7,256.

Moreover, 46 percent of retirees actually received an average pension of only NT$3,791 because they have not worked enough years to be eligible for pension payments. After the pension reform, the replacement rates for public teachers have decreased from 75 percent to 60 percent – still high – with a base pension payment amount of NT$32,160, which means that public school teachers will still receive at least twice as much as their private sector counterparts.

In addition, public sector workers already earn higher wages, a minimum of NT$29,345 as compared to NT$22,000 for private sector workers. Private sector workers in Taiwan are short-changed in terms of their wages and benefits.

The other East Asian countries fared poorly in their pension adequacy, with replacement rates at between 34.6 percent (Japan) and 39.3 percent (South Korea). Singapore’s and Hong Kong’s replacement rates were 38.5 percent and 34.8 percent, respectively. In addition to Hong Kong’s Mandatory Provident Fund (MPF) public pension scheme, the government also provides various social security schemes for the elderly based on their income level: 13 percent of the elderly received a monthly payment of HK$5,548 (US$710) in 2015, 37 percent received HK$2,390 and 19 percent received HK$1,235.

The amounts are actually low in comparison to the cost of living and do not do much to increase the replacement rates, but if you think these are low, look at what Singapore provides – only between SG$100 (US$76) and SG$250 a month, and it is only given to the bottom 20 percent of retirees, who have to meet stringent criteria. Retirees in Singapore are also not guaranteed a minimum pension amount or a minimum pension payment as a percentage of their previous wage as the other countries do. In 2014, the median pension payment from Singapore’s Central Provident Fund (CPF) was only SG$394, as compared to the median wage of SG$3,276 in that year, making up only 12 percent of the median wage.

The Singapore government transfers Singaporeans’ CPF pension funds into the government investment firm GIC Private Limited. The fund claims on its website that it “receives funds from the government […] without regard to the sources” while the Singapore government claims that the funds from the CPF are “comingled” with other funds such as government surpluses and land sales, and ultimately transferred to GIC for management.

The other government investment firm, Temasek Holdings, clearly states that “Temasek does not manage CPF savings.” There is little transparency in how the GIC and Temasek are being managed, and the size of the funds managed by the GIC are not even published. In 2015, Nominated Member of Parliament Chia Yong Yong said that she was “not entirely sure” if Singaporeans “have the right to spend [their CPF monies]” because “at the end of the day […] I am not the only person contributing to that fund, I cannot be the only person to call the shots as to how I’m going to spend it.”

Prime Minister Lee later said that Chia “made an excellent speech about the CPF” about the “broader perspective: whether it is right to think of the CPF as “our money”, to be spent solely as we choose.”

“I am glad that she did, and to such good effect,” Lee added.

Singaporeans have often complained that their CPF monies are trapped inside the government’s coffers and it has become commonplace to hear Singaporeans lament that the “CPF is not my money.”


On health expenditure, the Taiwanese government’s contribution of 60 percent of total health expenditure again puts Taiwan ahead of Singapore and Hong Kong, where the governments only spend 52 percent and 49 percent, respectively. However, Taiwan is still some way off from the governments of the Nordics, the Netherlands and Japan, which spend between 77 percent and 85 percent on healthcare.

govt health expenditure as % total Health expend

Source (data from latest year): World Health Organisation, Taiwan: Ministry of Health and Welfare Taiwan, Hong Kong: Food and Health Bureau The Government of the Hong Kong Special Administrative Region.

Also in the Nordics, the Netherlands and Japan, there is an annual maximum payment limit that citizens need to pay when they seek healthcare, or a limit to the co-payment. Citizens in these countries only need to pay a maximum of between US$409 (Sweden: 3,300 krona) and US$845 (Finland: €691) in a year. It is higher in South Korea, where the limit is set at 2 million won (US$1,874) for the bottom 50 percent, 3 million won for the middle 30 percent, and 4 million won for upper 20 percent.

There is also an annual limit in Taiwan, but the cap of NT$59,000 (US$2,008) pertains to each condition, though it is understood that patients seldom have to pay this maximum amount. Patients pay as low as NT$50 (US$1.70) to see a general practitioner (GP) or NT$150 (US$5.10) for emergency care at a district hospital.

annual payment limit for patient fees

Source (data from latest year): Norway: The Local Norway, Denmark: Danish Medicines Agency, Sweden: The Newbie Guide to Sweden, Finland: City of Helsinki, The Netherlands: Zilveren Kruis, Japan: Tokyo Securities Industry Health Insurance Society, South Korea: National Health Insurance Service South Korea, Taiwan: National Health Insurance Administration, ROC, Hong Kong: Hospital Authority.

In Hong Kong, there is no annual limit set, but the government mandates specific charges that patients only need to pay when they seek healthcare at public hospitals. These charges are relatively low, ranging from HK$50 (US$6.40) for general outpatient services to HK$180 (US$23) per attendance to the Accident and Emergency.

Again, Singapore stands out for not having such protections – there is no annual payment limit. In the GP Fee Survey in 2013 published last year by the Singapore Family Physician journal, it was found that the median consultation fee was SG$35 (average of SG$40) with fees going up to as high as SG$100 (US$75.70).

Citizens have been known to pay astronomical amounts for healthcare – in fact, in 2012, it was foundthat 2,400 Singaporeans had to pay more than SG$10,000 (US$7,570) for their hospital bills. A studyby Associate Professor Tilak Abeysinghe and then-PhD student Himani Aggarwal in 2014 also showed that as early as 2007, of 30,192 cases of elderly patients hospitalized at a public hospital, there were seven cases where the net hospital bill after government subsidies exceeded SG$100,000 (US$75,670), where the highest was SG$207,741 (US$157,259). In fact, Singaporeans have been known to “choose death over dialysis when their kidneys fail,” one reason being that dialysis is too expensive. It is preposterous that whereas other countries set a limit as to how much citizens have to pay for healthcare, the Singapore government instead sets a limit as to how much citizens’ can claim for healthcare.

In contrast, it is free for citizens to see a GP in FinlandDenmark and the Netherlands. In Sweden, it is between 100 krona (US$12.39) and 300 krona (US$37.16), and between 152 krone (US$19.32) and 257 krone (US$32.67) in Norway. In Taiwan, it is only NTS$50 (US$1.70). In Singapore, median and average consultation fees in 2013 were SG$35 (US$26.49) and SG$40 (US$30.27), respectively, but can go as high as SG$100 (US$76).

In Japan, people who go to the GP only need to pay 20 to 30 percent of the costs, while in South Korea, it is 30 percent. In Singapore, the average citizen stumps up the full cost.

In almost all these countries, there is a maximum limit for how much citizens need to pay for patient fees in a year, but again, there is no such ceiling in Singapore.

Lancet study has shown that high co-payments and hospital bills increase “potentially avoidable hospital admissions due to worsening of the condition, or emergency visits to obtain medication in acute episodes in patients with chronic diseases. Co-payments reduce demand for preventive services, because people tend to overestimate present costs and underestimate future health benefits.” This results in patients still having to go to hospital and pay even more than they would initially.

Unless they choose to die – which some Singaporeans have opted to do.

This could be why Singaporeans have developed a “kiasu” and “kiasee,” or fight or die, attitude. But this has created a self-centered culture – studies have shown that given Singapore is the most unequal country among the developed nations, Singaporeans are also less trusting towards one another and the level of self-enhancement – where people believe that they are better than someone else – is also the highest among developed nations. Social mobility in Singapore is impeded because of the city state’s unequal social and economic structure.

On the other hand, even though wages in Taiwan are the lowest in this comparison, the country in fact offers a solid social safety net – even though it might not seem so to some Taiwanese. By most metrics, Taiwan’s social welfare system can be considered a strong one – it just does not feel like it because low wages make the benefits look insufficient.

It should also be noted, however, that Taiwan’s government pays for only 60 percent of health expenditure, which compared to other developed countries, is relatively low. As such, there is room for the government to increase spending to between 70 and 85 percent, so that the quality of Taiwan’s healthcare system can be maintained, and is not compromised by unnecessary cost-cutting measures. As such, instead of reducing the top rates of income tax, the Taiwan government would do better to redistribute the budget to improving healthcare standards. This could begin with improving the quality of life of healthcare workers by hiring more of them – Taiwan already has the lowest physician densityamong the high-income countries – tied with Singapore and Hong Kong. Their governments spend the lowest among the developed countries on healthcare.

physician density.png

Source (data from latest year): World Economic Forum, Hong Kong: Department of Health The Government of the Hong Kong Special Administrative Region.

On paper, Taiwan stands out as a place that protects its poor and sick. That’s a saving grace, at least.

Equality and the future

There is an important area in which East Asian countries still have not caught up and perform poorly as a whole – work hours and off days.

annual hours worked

Source (data from latest year): The Conference Board.

In terms of work hours, Singaporeans work the longest among the developed countries – 2,237 hours annually. People in Hong Kong work the second-longest, at 2,175 hours, while South Korea comes in third at 2,088 hours. Taiwanese endure long hours as well, but not to the same extent as their counterparts in the other Asian Tigers do, clocking in 1,915 hours per year.

Japan fares a bit better, but it is the Nordics that shine – after the Germans, the Danes, Norwegians and Dutch work the shortest hours in the world.

fertility rate

Source (data from latest year): Central Intelligence Agency

It would also be reasonable to conclude that the situation for low-income workers in Singapore is completely out of whack – they earn comparatively low wages, work long hours and can only take short breaks, but suffer from scant social protection. Workers have limited protection from unemployment.

Singapore’s harsh inequality therefore also results in the country having one of the lowest purchasing powers (as measured by purchasing power parity*) when compared with the high-income countries. Even though Singapore has one of the highest GDPs per capita in the world, because the wage share is low and inequality is high, wages are therefore relatively low. This, coupled with being the most expensive place to live in the world, equates to low purchasing power. If it is of any consolation to Singaporeans, Taiwan has a lower purchasing power, though Taiwan’s redeeming feature is that it has a stronger social welfare system. On the other hand, precisely because the Nordics have one of the highest GDPs per capita in the world, and these countries have a high wage share and the lowest income inequality in the world, they therefore also have the highest purchasing power in the world after Switzerland and Australia and enjoy a high standard of living that is only available to the rich in Singapore and Hong Kong.

prchasing power parity

Source (data from latest year): World Economic Forum

Purchasing power parity (PPP) is an economic theory that compares different countries’ currencies through a “basket of goods” approach. According to this concept, two currencies are in equilibrium or at par when a basket of goods (considering the exchange rate) is priced the same in both countries.

Singapore’s socio-economic structure embodies many of the fundamentalist views on eugenics expressed by Singapore’s first prime minister Lee Kuan Yew. In 1969, the late Lee said in parliament: “free education and subsidized housing lead to a situation where less economically productive people in the community are reproducing themselves at rates higher than the rest.”

In 1980, as the birthrate among women who were more educated fell faster than that of those who were less educated, Lee then said: “If we continue to reproduce ourselves in this lop-sided way, we will be unable to maintain our present standards. Levels of competence will decline. Our economy will falter; and administration will suffer; and society will decline.”

The irony is that it is these very beliefs that have resulted in Singapore developing along such unequal lines. Singapore’s government has implemented these ideas to their full extent, treating the poor with contemptible disdain. If “society will decline” – as Lee put it – then it is because of his own ideals. By marginalizing the poor and denying them opportunities to move up the social ladder – Singapore’s social mobility is low because of its inequality – the Singapore government reinforces structural poverty. The poor cannot move up not because they do not want to, but because they are not allowed to. The examples of the Nordics show that that where resources are distributed equally, and everyone is uplifted, society progresses together. Whether or not the current leaders in Singapore subscribe to the late Lee’s views, they have continued to indulge them.

In truth, it is not because people are “less educated” that makes them poor, it is their poverty that makes them “less educated.” A study in the American Journal of Preventive Medicine found that people who are consistently exposed to having low incomes for two decades showed worse cognitive function and intelligence levels, and that living in poverty and hardship also meant a higher possibility of premature aging.

Research from Princeton University suggests that people who are poor are not less capable because of any inherent traits but because poverty impedes their cognitive capacity. The researchers explain: “Poverty and all its related concerns require so much mental energy that the poor have less remaining brainpower to devote to other areas of life.”

The researchers go on: “Thusly, a person is left with fewer mental resources to focus on complicated, indirectly related matters such as education, job training and even managing their time.” As a result, the poor “make mistakes and bad decisions” because they are poor – and must spend too much time thinking about how to make ends meet. It might take having to fall into poverty for people to really appreciate what this means.

But the study also shows that when people are lifted out of poverty, “low-income individuals performed competently, at a similar level to people who were well off,” then doctoral student and co-author Jiaying Zhao explains. As such, people who are considered intelligent now but who are made to live in poverty can also become less intelligent, when their resources are constrained. It is not a zero-sum game and definitely does not conform to the eugenics ideology expounded by the late prime minister.In sum, our society can be smarter as a whole when people are paid higher wages, and when resources are more equitably distributed to let everyone have the same chance. Unfortunately, the ruling People’s Action Party appears too deeply embroiled in the situation to pull itself out and Singaporeans are too fearful – or complacent – to do anything about it.

Taiwan’s future

Taiwan, on the other hand, by its metrics, has a relatively strong social welfare system, with high adequacy in unemployment benefits and gross pension replacement rates, as well as healthcare that is generally cheap.

However, the key issue with Taiwan is low wages, which drag down Taiwan’s otherwise strong social welfare system. It has thus become commonplace to read reports or hear government officials talk about how the national health insurance or pension system might go bankrupt, but this neglects the wage issue, which results in lower contributions to Taiwan’s social welfare system.

But Taiwan is on the crux of change. Should the country continue down the misguided path of neoliberalism and inequality, which even the IMF is now cautioning against, or focus on pursuing progressive ideals as part of its democratic evolution?

When Taiwan’s President Tsai Ing-wen (蔡英文) was elected, she promised to increase workers’ wages.

“Our young people still suffer from low wages. Their lives are stuck, and they feel helpless and confused about the future,” she said.

Indeed, Commonwealth Magazine wrote about the 30-somethings in Taiwan who grew up during as wages became depressed, and because of that, Lin Thung-hong, an associate research fellow in Academia Sinica’s Institute of Sociology, explains, “(Living in the moment) is rational behavior when wages are low because saving doesn’t have any benefits.”

Therefore, when Hsu Chung-jen (徐重仁), president of PX Mart, one of Taiwan’s largest supermarket chains, complained that Taiwan’s youths were “spending too much money” and that they should “tolerate rather than complain about low pay,” he could not be more out of touch.

“Nowadays, young people are really spendthrift,” Hsu said, “Young people should not fuss over having lower salaries than other people. Withstand rather than complain; work diligently and your boss will see you one day.” But have the bosses of Taiwan met his expectations?

Hsu later apologized, saying “the incident led him to reflect whether he — and those of his generation — tend to pass judgement too quickly on the younger generation,” Taipei Timesreported him as saying.

Perhaps Hsu might not be completely to blame for his lack of understanding. As in Singapore, the rich-poor gap in Taiwan has also resulted in a separation of experience and understanding, where “the Elites – due to their wealth – do not suffer the detrimental effects” of inequality and “appear to be oblivious” to the plight of those at the bottom, as a study on collapsed societiesexplains.

Taiwan and Singapore are of course different – Taiwan is a democracy where its citizens have the right and ability to push for change. In Singapore, activists have been intimidated,interrogatedsuedcharged and jailed, while some have lost their jobs simply for speaking up – just like in China.

Taiwan president Tsai also said at her inauguration: “Young people’s future is the government’s responsibility. If unfriendly structures persist, the situation for young people will never improve, no matter how many elite talents we have. My expectation is that, within my term as president, I will tackle this country’s problems step by step, starting with the basic structure.”

Compare this with Singapore’s Prime Minister Lee who mocked income inequality as a “fashionable thing to talk about.”

He also said: “If I can get another 10 billionaires to move to Singapore and set up their base here, my Gini coefficient will get worse but I think Singaporeans will be better off, because they will bring in business, bring in opportunities, open new doors and create new jobs, and I think that is the attitude with which we must approach this problem.”

Well, statistics suggest otherwise.

President Tsai also campaigned on a platform of marriage equality in the last general election, yet her administration has dragged its heels on following through. Premier William Lai (賴清德)said in October last year that the Legislative Yuan was still working on submitting a proposal on marriage equality for discussion before the end of 2017 but we are now into the new year, and not a sound has been heard. Nonetheless, Taiwan remains the only Asian country which has a road map towards marriage equality by the middle of 2019 – putting it in the same league as the Nordics and the Netherlands, even as its East Asian counterparts remain nonplussed by the issue.

Same-sex marriage recognition (year of legalization) No same-sex marriage recognition Criminalization of male same-sex sexual relationships
Netherlands (2001) Norway and Sweden (2009) Denmark (2012)Finland (2017) Japan (partnership certificates issued in six local governments)

Hong Kong and South Korea-none


In Singapore, after a record number of international corporate sponsors joined in the eighth run of the annual PinkDot SG event in 2016, held in support of the Lesbian, Gay, Bisexual and Transgender (LGBT) community, the government announced that foreign entities would not be allowed to sponsor the event unless they apply for permission. Even then, Google, Apple, Facebook, Salesforce, Airbnb, Uber, Microsoft, NBC Universal and Goldman Sachs did just that,but had their applications rejected. The government also introduced new rules to prohibit foreigners from participating or to sponsor the event. Those deemed to be illegally participating can be fined while organizers are threatened with fines and jail time if they flout the rules.

However, the ban has had the opposite effect – more than 100 local companies then stepped up to provide sponsorship for the event. Still, male same-sex sexual relationships are still illegal even though the ILGA-RIWI Global Attitudes Survey on Sexual, Gender and Sex Minorities released last year showed that 61 percent of Singaporean participants believe that equal rights and protections should be applied to people who are romantically or sexually attracted to people of the same sex – which was the second-highest acceptance level in Asia.

In Hong Kong, the High Court said in a landmark ruling last year that the government should provide the same benefits that it provides to heterosexual couples, to same-sex couples. Justice Anderson Chow Ka-ming (周家明) called the Civil Service Bureau’s policy “indirect discrimination” – the bureau had denied benefits to senior immigration officer Leung Chun-kwong and his partner, Scott Adams from New Zealand, whom he married in 2014, claiming the need to protect “the integrity of the institution of marriage”, leading Leung to challenge the bureau in court. However, the government has decided to appeal the ruling.

In South Korea, homosexual activity is banned in the military and after a video showing two male soldiers having sex was uploaded onto social media, human rights group reported a witch hunt against gay soldiers which even used dating apps to entrap them, leading to 32 soldiers being charged. The Associated Press also reported the South Korean President Moon Jae-in as opposing homosexuality.

On the other hand, in Japan, partnership certificates can be issued to same-sex couples in six local governments and the city of Sapporo, even though they are not legally recognized as marriage certificates. Attitudes towards homosexuality are said to be conservative, though the ILGA-RIWI survey also showed that 55 percent of participants believe that same-sex couples should be treated with equal rights and protections.

Overall, among the Asian Tigers, Taiwan is a mixed bag. On the one hand, wages are low but on the other, Taiwan has a good social welfare structural system and same-sex marriage will soon be legal in the next one and a half years at most. It seems almost as if the Taiwanese government is pushing all the right buttons except the most important one – wages (and related to it, rest days).

Vice Premier Shih Jun-ji did discuss the possibility of increasing wages by 6 percent every year to achieve a minimum wage of NT$30,000 (US$1,021) by 2024, or by 8 percent to achieve it by 2022. However, Shih’s calculations do not consider the inflation rate, which in 4 years time might mean minimum wage should have gone up to NT$32,000 (US$1,089), which would mean that wages should be increasing by 9 to 10 percent every year – noting the study mentioned earlier which showed that a 10 percent increase would only lead to a 0.4 percent increase in overall prices and 4 percent in food prices.

Taiwan’s government should come out with a projection as to the different scenarios that wages can be increased by, and how these would affect prices and employment, so as to come out with a practical solution.

Even so, Premier William Lai had side-stepped the topic of implementing a minimum wage of NT$30,000 even as he suggested that listed companies and multinational corporations should pay graduates a starting wage of NT$30,000. But a minimum wage policy is important as can be seen in the announcement of the Workforce Development Agency (WDA) annual career fair. At its upcoming fair, of the 3,500 jobs available, only half will have a starting salary of NT$30,000 per month. In spite of Lai’s calling on businesses to increase starting salaries to NT$30,000, this call has not been heeded – which is why increasing minimum wage as a policy is necessary.

While NT$30,000 is not only the “ideal” minimum wage, it is also necessary to bring Taiwan’s wages to parity. Taiwan’s current minimum wage is only NT$22,000, but public-sector workers already earn a minimum of NT$29,345 and with the pension reform last year public sector pensioners are also guaranteed a minimum pension payment of NT$32,160.

Clearly, the government acknowledges that NT$30,000 to NT$32,000 is the minimum necessary for basic living for the Taiwanese. Leaving private-sector workers in the lurch to earn only NT$22,000 and leaving it to the private sector to increase wages without legislating minimum wages to the ideal would be irresponsible.

In fact, when you take the example of Denmark and Sweden, public and private-sector workers earn about the same wages, and skilled private-sector workers actually earn higher wages than public-sector workers, so it begs the question why public sector workers in Taiwan are earning such significantly higher wages than private-sector workers. Shouldn’t they be earning similar – and higher – wages if the Taiwanese are to be uplifted together? Which is why the continuous push by retired public servants to fight to keep their high pension payments – which already would put them in the top 10 percent income earners – is incredulous.

What kind of example are the public school teachers setting for their students when they would fight for their own pension and not for the general public, when the very people they teach would go out into the workforce to earn significantly lower pay than them? Already, public school teachers already received an average pension of NT$68,025 last year, or 18 times higher than the average pension of only NT$3,791 that 46 percent of Taiwanese retirees were able to receive. Shame is perhaps not the right word, but where we should work for the benefit of all of Taiwan, where is the self-respect of the public school teachers when their role should be to educate the public of their responsibility to society?

Shih also said that the government would adopt a targeted approach to increase minimum wages in industry sectors where wages are low such as in the retail and food industries, and where unemployment is high such as among young workers and first-time job seekers, instead of a “broad approach aimed at improving the entire economy.”

But labor unions should take note – the Nordic example where collective bargaining is done for each sector actually helped to increase wages to the highest in the world, but that is because they are democracies. Taiwan may be a democracy, but it has not attained the level of transparency that the Nordics have and because the top families’ control of businesses in Taiwan is similar to Singapore’s top families’ (and state’s) control – and where crony capitalism is high. Taiwan might fall into a similar situation where wages would remain low as in Singapore’s case, even if there were any increase. Where Taiwan will go depends on the integrity of Taiwan’s politicians and their commitment to democracy, and the strength of the labor unions and the Taiwanese to hold the government accountable.

The World Economic Forum highlighted this: “Recent empirical research indicates that the most important explanation for the falling wage share is workers’ weaker bargaining position.”

It added that, “The conclusion is that it is absolutely possible to restore the wage share through the right policies, [… by] strengthening the welfare state, supporting trade unions and providing workers with […] a social safety net,” among other things.

Additionally, the Nordic model has shown how high wages and a strong social welfare system can help design an ecosystem which has led the Nordic countries to be one of the most innovative in the world, and which has moved the Nordic countries into high-skilled and high-value industries.

At the very least, at her year-end conference, President Tsai did talk up her promise of setting a minimum wage act.

Tsai also said: “The government will provide support to companies willing to give bigger pay raises. When companies share more of their profits with employees, this increases employees’ buying power, creating a positive cycle that benefits both enterprise and labor.”

Tsai’s point is backed up by evidence which showed that “the marginal propensity to consume of high-income earners is substantially less than for low-income earners,” as reported by The Guardian of the study by Brookings Institution and the Reserve Bank of Australia. also showed that the richest 10 percent in America actually spends about the same on basic necessities as the rest of the 90 percent – US$1,601 vs US$1,455, respectively, but with the top 10 percent spending only 10 percent of their income. As such, Michael Linden of the Center for American Progress’ managing director for economic policy told HuffPost: “It’s a real problem to the extent that more and more income is going to people at the top and more of that income is not going to places that are productive.”

Sam Pizzigati, an associate fellow at America’s Institute for Policy Studies added that, “This whole hoarding episode [among the rich] just tells us once again that any society that lets wealth concentrate at the top is making a very foolish move economically.”

“There’s a bit of a vicious cycle,” Linden said. And this is where Taiwan is today.

For too long, Taiwan’s government has pandered far too much to the big businesses. This has resulted in a vicious cycle, as Tsai’s proposal hopes to undo, or at least we hope it will. But this also requires the cooperation of the top families in Taiwan and the bosses of SMEs to understand the role they play not only as business leaders but as the citizens of Taiwan. If Taiwan is to become relevant on the international stage again, the Taiwanese have to first take themselves seriously and to uplift the livelihoods of one another, so that the Taiwanese will gain a new confidence and foothold and be able to take Taiwan forward together as a nation.

On many indicators, Taiwan already performs admirably – in terms of social welfare and human rights. But if Taiwan were to truly become one of the developed and democratic countries in the world, it has to start with wages – by increasing them.

The World Economic Forum explained: “Strong unions, collective wage bargaining and high minimum wages can offset the negative impact of other factors, as the Nordic countries have proved,” which together can help design an ecosystem which has led the Nordic countries to be one of the most innovative in the world, and which has moved the Nordic countries into a high-skilled and high-value industry.

The solution therefore, is doable. Writing before the recently-concluded World Economic Forum Annual Meeting 2018, Executive Director of Oxfam International Winnie Byanyima said: “I will be urging political leaders [at the meeting] to limit rewards to shareholders and senior executives, introduce a statutory living wage, build fairer tax systems, invest in healthcare and education, and shepherd in a technological revolution that works for all. I will be calling on business leaders to stop paying huge share dividends and awarding bumper pay packages to top executives until they can guarantee that all of their workers are getting a living wage and that their suppliers in their supply chains are being paid fair prices.”

The same needs to be done in Taiwan.

Already, Taiwan’s low wages are causing Taiwanese youths to leave to seek higher paying jobs, ironically in China. Where Taiwan is losing talent, the other irony is that Taiwan’s companies are still resistant to increasing wages while yet fretting about losing talent. In short, Taiwan’s businesses cannot have their cake and eat it. If they want wages to be kept low, then they have to content with Taiwan losing its lead and the continued stagnation. Otherwise, Taiwan’s businesses need to also increase wages to kickstart Taiwan’s economy once again.

It is a misguided strategy to hope that Taiwan can be kept as a low-cost manufacturing hub to compete with countries like Vietnam or Cambodia. Like the World Economic Forum explained, Taiwan’s government has to “avoid a prisoner’s dilemma in which [they] suppress wages to gain a competitive advantage over others”. Taiwan has outgrown this strategy and needs to move up the value chain to become more like the Nordic countries and the Netherlands. What it takes now is whether Taiwan’s businesses – and the government – have the foresight and confidence to take the next step to bring Taiwan forward. This means investing in Taiwan’s workers, to lift their wages, so that in turn they can help to lift local businesses.

Premier Lai had mentioned that in Taiwan, the “private sector is not short of funds, [however] much of it is invested overseas.” If Taiwan’s businesses would heed the government’s call to channel the funds back to Taiwan, this could give Taiwan the much-needed chance for change.

At this juncture, where the government’s Southbound policy seems to be gaining traction, Taiwan’s renewed collaborations with countries like Japan, Australia and India, as well as the United States and parts of Europe means that Taiwan can once again play a central role in the regional economy. Now all it takes is for the Taiwanese and Taiwan’s businesses to believe in Taiwan’s potential and to help bring Taiwan’s hopes and possibilities to fruition.

First Quarter 2018 Economic and Wood Product News Part 2- China, India, and Second Quarter Forecast by Strafor

China economy stable but housing to hit growth

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Real estate again weakest link as FTCR Business Activity Index drops below 50

China economy stable but housing to hit growth Real estate again weakest link as FTCR Business Activity Index drops below 50

Financial Time’s latest data covering the Chinese economy pointed to stable growth as 2017 ended. FTCR measures of internal and external trade continued to defy expectations for a meaningful slowdown in the fourth quarter, while household sentiment remained near record levels of optimism.

The FTCR Freight Index ended the year at 52.5, slightly below the previous month’s reading but suggesting a fourth straight month of improving conditions. Our export index also weakened on slower volume growth, but exporting companies reported that profits improved for a ninth straight month. However, our Business Activity Index, a monthly aggregate of our data, was dragged to a four-month low of 49 in December on the back of a slowing housing market.

Other public and private sector measures of the economy, released after our data were published, confirmed that growth remained strong last month. The purchasing managers’ index distributed by Caixin rose to a four-month high, while that produced by the China Federation of Logistics and Purchasing, a government-linked association, remained at levels suggesting manufacturing conditions continued to improve in the final month of the year.

purchaser's managers indice

The FTCR Real Estate Index fell to its lowest level since January 2017, however, as rising mortgage rates continued to strangle sales activity, particularly in first-tier cities. We anticipate more pain ahead for housing, and its importance to the Chinese economy is such that overall growth will slow.

The government sees financial risk as a key threat to national security, and the country’s property market as a major source of that risk. Deleveraging was not directly name-checked in the statement marking the conclusion of the Central Economic Work Conference in December, prompting speculation that growth considerations will dominate in 2018. However, enough was made of the need to prevent financial system risk to suggest the leadership will continue its regulatory crackdown on finance in 2018. This also means that the purchase restrictions introduced by city governments starting at the end of 2016 will remain in place to snuff out speculation.

Despite tighter policies, consumers are still bullish on house prices. Our monthly gauge of price expectations showed that 62.5 per cent of respondents in December expected prices to keep increasing in the first half of this year, including 18.1 per cent who expect gains of more than 10 per cent. Over a year after local governments began making it more difficult to buy, far more Chinese consumers still expect prices to continue rising than during the peak of the previous tightening cycle in 2014, when just 41.5 per cent expected continued gains.

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As price inflation cools, the market’s ongoing slowdown will have a knock-on effect on consumer views towards the economy. Recommended Chinese consumers fret about healthcare and education costs. Rising Chinese interest rates will suppress future Tier One City house price gains. China governments will see more defaults as regulators implement tougher regulations. The government’s response to a slowing economy will be crucial. Previously when growth fell below target, the Chinese leadership would loosen policy. Although the 2018 annual growth target will reportedly be set at 6.5 per cent again, the government has signalled that it will tolerate a slower pace of expansion, in accordance with its new-found goal of improving the lot of Chinese households rather than just chasing growth. The growth target will be announced at the opening of the annual meeting of the National People’s Congress in early March. Allowing growth to slip below target, to about 6.3 per cent, would demonstrate the leadership’s commitment to reform. However, while we expect greater tolerance for slower economic growth, the government will resort to stimulus if the slowdown goes too far. The FTCR China Business Activity Index is a composite reading of business activity and sentiment based on our surveys of companies in the real estate, export and freight sectors. For individual survey methodologies click here. A full set of survey results can be found in the Financial Times Database.

purchaser's managers indice
Rising Chinese interest rates check big-city house price gains

FTCR China Real Estate Index takes another lurch down as credit woes hit sales
Rising Chinese interest rates check big-city house price gains FTCR China Real Estate Index takes another lurch down as credit woes hit sales Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Mail Save Save to myFT FT Confidential Research DECEMBER 28, 2017 Print this page House prices stopped rising in major Chinese cities in December as a scarcity of cheap mortgage deals choked sales. The FTCR China Real Estate Index fell to 43.5, its lowest level since January, as sales activity across all city tiers slowed further. Although prices continued to rise in second- and third-tier cities, developers in China’s biggest markets, where the gains have been most intense during this most recent cycle, said that prices had stopped rising in December, the first time they had done so since July 2014. This is not to say that prices are falling outright; 77.8 per cent of developers in these cities said that prices were unchanged relative to the previous month. Nonetheless, the Chinese housing market’s woes look set to continue as the government tries to make good on its pledge to stamp out the speculative impulses that have driven heady price gains across the country during the past two years. Although the number of developers reporting the availability of discounted mortgage rates ticked up in December, more than 90 per cent said first-time buyers were having to pay at or above the benchmark, signalling that credit remains historically tight. Although developers expect sales to fall again at the start of 2018, prices are expected to remain supported by a widespread belief among consumers that prices will continue to rise in the coming months. Share this graphic Sales fell across all city tiers at a faster pace than in November, with our Home Sales Index down another 4.1 points to 39.5, its lowest reading since January. First-time buyers were again the biggest source of demand (47.2 per cent), with those looking to buy an additional home accounting for 20.7 per cent of buyers, and upgraders making up the remaining 32.1 per cent. Developers reported that the volume of sales inquiries fell for a second month, with our inquiries index at 46.4, versus 45.1 in November. Share this graphic Developers in first-tier cities reported that house prices failed to rise in November, the first month they have done so since mid-2014. Increases in second- and third-tier cities were enough to lift the FTCR China Home Price Index 0.3 points to 58.5. The proportion of developers offering discounts rose 2 percentage points to 57.4 per cent, having hit a 44-month low of 53.1 per cent in October. Share this graphic The supply of new houses to the market shrank in all city tiers for a second month, with our New Home Supply Index falling 1.1 points to 44.6. The share of developers reporting rising sales volumes outstripped those reporting supply growth: 16.7 per cent said transactions increased while 15.8 per cent said supply did. Share this graphic Our Home Sales Outlook Index dropped 1.1 points in December to 47.9, but developers across all city tiers expect prices to rise further in the coming month. Our Home Price Outlook Index rose 0.3 points month on month to 56.9. Share this graphic The number of developers reporting that discounted mortgage rates were available for first-time buyers rose for the first month since January. However, credit remains historically tight, with 91.4 per cent saying that buyers are paying rates at or above benchmark. Share this graphic Our Home Sales Index for first-tier cities dropped 2 points to 37.8, in second-tier cities it fell 4.7 points to 39.1, and in third-tier cities it fell 3.9 points to 41.2. Our first-tier-city house price sub-index fell 3.4 points to 50, while the second-tier city sub-index rose 1.2 points to 60.4 and the third-tier city index increased 0.5 points to 59.3.

No ordinary ZhouZhou Xiaochuan, China’s central-bank chief, is about to retire

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If you seek his monument, survey China’s economy

 Print edition | Finance and economics

Feb 1st 2018

WHEN Zhou Xiaochuan took the helm of China’s central bank 15 years ago, the world was very different. China had just joined the World Trade Organisation and its economy was still smaller than Britain’s. Foreign investors paid little heed to the new governor of the People’s Bank of China. He seemed safe to ignore: another black-haired, bespectacled official whose talk was littered with socialist bromides.

Mr. Zhou is widely expected to retire in the coming weeks. He leaves with China far stronger and his own role much more prominent. No one person can take credit for the flourishing economy. But Mr. Zhou, who is 70, deserves more than most. He helped forge the monetary environment for China’s growth. He also went a long way to dragging the financial system out of the mire of central planning, even if reforms fell short of his own wishes.

His achievements are surprising. China makes no pretence of having an independent central bank. The People’s Bank is under the State Council, or cabinet. But with political acumen and a command of economics, Mr. Zhou carved out power for himself. As the years silvered his hair, his decision to leave it undyed, rare among high-ranking cadres, marked him out as different, even a bit daring.

It did not hurt that, as the son of Zhou Jiannan, a senior Communist official, he enjoyed the privileged status of “princeling”. From his early career in the 1980s, he advocated a more market-based economy. He helped design the “bad banks” that freed Chinese banks of their failed loans and paved the way for a boom. As stock market regulator, he was nicknamed “The Flayer” for trying to root out corruption. Mr. Zhou was not a radical but, by China’s standards, a staunch economic liberal.

When party leaders chose Mr. Zhou as central-bank governor in 2002, they made him the point-man for financial reform. Over time he also became the face of Chinese economic policy in global markets, much liked for his jovial manner and straight talk. At the last big shuffle of government personnel five years ago, he was old enough to retire. A former aide says that Mr. Zhou hoped to return to his other love, music. Sent to work on a farm during the Cultural Revolution, he kept a contraband collection of classical-music records; in the 1990s, when he was a banker, he wrote a book about musicals on the side. But when Xi Jinping became China’s leader in 2012, he asked Mr. Zhou to stay on. The Flayer had come to be seen as a wise elder, an indispensable guide for the financial system through a dangerous period.

His first big move as central banker, back in 2005, was to unpeg the yuan from the dollar. China’s currency remains tightly managed, but it has not stood still. It rose by a third against the dollar in the decade after unpegging. Mr. Zhou also steered China towards a system in which banks set interest rates themselves, rather than merely follow government diktats. Frustrated by the torpor of China’s other regulators, he oversaw the creation of a vibrant exchange for “medium-term notes”, a bond market in all but name. Rather than big-bang reforms, with all their attendant dangers, these were small changes that added up to something bigger.

Yet Mr. Zhou craved more. He wanted to open China’s financial system to the world, believing that only with true competition would it be possible to curb wasteful investment. As a vehicle for this he lighted on internationalising the yuan. Politically, it was an easy sell—leaders liked the idea of having a powerful currency. Economically, it proved complex, requiring China to open its sheltered financial system to more risks. When cash flooded out of the country in 2016, the central bank retreated, ratcheting up capital controls.

Criticism has come from opposite sides. Some economists, mostly in China, feel that Mr Zhou pushed too hard for market forces, especially in his drive to internationalise the yuan. One former adviser, a more conservative economist, calls him “relentless”. The other criticism, more often heard abroad, is that Mr Zhou did too little to cure China’s financial ills. Debt levels soared on his watch, a threat to stability that the government is trying to reduce.

Neither criticism is entirely fair. The project to make the yuan global was never just about the currency. Mr. Zhou knew that opening the capital account would reveal financial shortcomings in China and press the government to crack on with reform. To some extent this is now happening, with officials more focused on risks. As for the debt explosion, Mr. Zhou could do little to restrain it. Given that the government was committed to ambitious growth targets, the central bank had to provide supportive monetary policy. But it has not let things get out of hand: inflation has remained generally low and stable.

Legacy systems

Mr. Zhou is well aware that reputations change. He started his term as central-bank governor when Alan Greenspan was seen as the Federal Reserve’s “maestro”, not yet as a villain of the 2008 global financial crisis. Over the past half-year Mr. Zhou issued several warnings that debts were too high and that, without stricter regulation, China could face serious trouble. To some it looked as if he was trying to protect his legacy, since, if financial turmoil erupts, he cannot be accused of failing to foresee it.

The front-runners to replace him are Guo Shuqing, China’s most senior banking regulator, and Jiang Chaoliang, party chief of Hubei, a central province. Whoever gets the job will have less personal clout than Mr. Zhou. And with decision-making more centralised under President Xi, the central bank itself may play a diminished role. Yet in one respect its next governor will start from a much stronger position. China’s financial reforms are far from finished, but the system as a whole is much more advanced than 15 years ago. As an architect, Mr. Zhou never saw his vision fully realised, but he designed solid foundations.

China Economic Update

By Eric Wong 

eric wongManaging Director, Canada Wood China

May 2, 2018

Posted in: China

2018 Q1 highlights:

  • Based on the report issued by the official statistics bureau on April 17th, China’s GDP growth increased 6.8% in the first quarter which exceeded the previous expectation (6.7%); real estate investment is expected to go slower because China intends to restrain excessive speculation in this sector;
  • The industrial output growth in March 2018 slowed down to 6% year-on-year compared to the 7.2% from January to February period which showed the strengthen policy to reduce environmental pollution from industry; retail sales are estimated to have rose 9.7% in March which match readings in the first two months, meanwhile industrial production increased 6.4%, made a slower pace compared from January and February; fixed asset investment grew slowly to 7.5% year-on-year from January to March 2018, decreased from 7.9% in January and February this year. Above-mentioned indicators are combined for the first two months of the year because of the annual holiday in China.ii

PMI (Caixin) indexes decreased unexpectedly to 51.0 in March 2018 from 51.6 in February which skipped market consensus of 51.8.iii China Exports dropped 2.7% year-on-year to USD 174.12 billion in March 2018 which didn’t make the market expectations of a 10% growth

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China Consumer Price Index (CPI) fluctuated, rose from 101.5 (January 2018) to 102.9 (February 2019) and then decreased slightly to 101.7 (March 2018).v USD/CNY fluctuated, increased from 6.30 (February 1st) to 6.36 (March 1st) and then went slightly lower to 6.29 (April 1st);vi CAD/CNY dropped continuously from 5.13 (February 1st) to 4.95 (March 1st) to 4.88 (January 1st), hit the lowest spot (4.83) on March 16th during the past 12 months.vii

Building material prices

Cement price dropped slightly from RMB 410.83 to RMB 398.33 per metric ton (down 3.04%) over March 2018.viii Rebar steel price went down by 12.22% from RMB 4,088.12 per metric ton on March 1st 2018 to RMB 3,588.46 per metric ton on March 31st 2018.ix The log price index in March 2018 was 1,115.91 points which decreased 0.48% less than February 2019 and grew 2.22% compared to the same period year-on-year; the lumber price index in March 2018 was 1,123.99 which went down slightly of 0.33% month-on-month and decreased 0.56% year-on-year.x

Wood import of Chinaxi

Normally during Chinese New Year (January to February) wood imports to China tend to decrease lower while volume of wood inventory stays higher in most ports. This year the volume of wood imports in total dropped to a new low at 5.49 million m3 in February which decreased 14.81% year-on-year and 35.28% month-on-month. On the contrary log and softwood inventory at Taicang, Wanfang and Meijing Ports increased steady from September 2017 (1.05 million m3) and hit 1.26 million m3 in February 2018, the latter figure shows 2.5% growth year-on-year and fits the total trend. Based on the market trend in previous years it is expected to see wood imports to China to go up and inventory goes down in the coming months. This trend shows consistency when it comes to softwood lumber imports from Russia and Canada, both figures decreased to new lows in February 2018 during the past 12 months especially for Canadian softwood lumber (194,423m3) which dropped 38.93% year-on-year and almost half (44.95%) compared to the volume of last month.

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demand for wood

i Huileng Tan (April 17th, 2018). China says its economy grew 6.8% in the first quarter of 2018, topping expectations
ii Bloomberg News (April 16th, 2018). China’s Economy Brushes Aside Trump to Power Ahead in 2018
iii Trading Economics (April 17th, 2018). China Caixin Manufacturing PMI
iv Trading Economics (April 17th, 2018). China Exports
v Trading Economics (April 17th, 2018). China Consumer Price Index (CPI)
vi XE Currency Charts: USD to CNY
vii XE Currency Charts: CAD to CNY
viii Sunsirs (April 2018). Spot Price for Cement
ix Sunsirs (April 2018). Spot Price for Rebar Steel
x BOABC (April 2018). China Wood and Its Products Market Monthly Report
xi BOABC (January to April 2018). China Wood and Its Products Market Monthly Report


Lumber Shipments

By Tai Jeong

Tai JeongTechnical Director, Canada Wood Korea

May 2, 2018

Posted in: Korea

BC softwood lumber export volume to South Korea for the first two months of 2018 decreased 38.6% to 24,430 cubic meters as compared to 39,784 cubic meters for the same period of 2017.

This significant downward trajectory comes from many reasons including weakened BC Coastal shipments in the first quarter of 2018 (36% decrease) and decreased housing starts in the South Korean residential construction segment forced by the South Korean government’s strong intervention to limit the supply of new homes from August 2016 to check rise in household debts and curb rising house prices.

Export value for the same period decreased 23.3% to CAD$8.048 million as compared to CAD$10.489 million for the same period in 2017.

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Bank of Japan abandons ‘fiscal 2019’ target for inflation goal

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Time frame on Kuroda’s pledge to hit 2% inflation has been postponed six times Haruhiko Kuroda has begun his second term as Bank of Japan governor The Bank of Japan has abandoned a pledge to hit its 2 per cent inflation target “around fiscal 2019” in a belated recognition that prices are less sensitive to monetary policy than it once believed. Japan’s central bank did not change its inflation forecasts, continuing to predict price rises of 1.8 per cent in the year to March 2020, but it scrapped the written time frame it has kept in place since the start of its massive monetary stimulus in 2013. The change of wording signals the BoJ is settling in for a long campaign to raise prices as Haruhiko Kuroda began his second term as governor. Policy stayed on hold, with overnight interest rates kept at minus 0.1 per cent, 10-year bond yields capped at around zero per cent and the BoJ buying assets at an official pace of around ¥80tn ($730bn) a year. “We do not think this will have any near term policy implications, but think the removal of the fiscal year 2019 timeline gives the BoJ more policy flexibility, avoiding the need for more aggressive stimulus,” said Mitul Kotecha, a strategist at TD Securities in Singapore. At the start of his stimulus in 2013, Mr Kuroda promised to hit 2 per cent inflation in about two years, but he has been forced to postpone the time frame six times since then. Those repeated changes have undermined Mr Kuroda’s credibility. Recommended The Big Read Central bankers face a crisis of confidence as models fail The lack of change in policy signals that the reconstituted BoJ board, including two new deputy governors, will carry on with the stimulus in place since 2013. The policy board voted 8-1 in favour of the decision. Board member Goushi Kataoka dissented in favour of more stimulus. New deputy governor Masazumi Wakatabe, who is regarded as a dove, followed tradition and voted with the governor. Inflation in Japan remains subdued with prices, excluding fresh food and energy, up 0.5 per cent on a year ago in March. There is little momentum towards the BoJ’s objective of 2 per cent inflation. Speaking at a press conference, Mr Kuroda said there was no change in policy, but the BoJ had dropped the language to correct market misconceptions about a direct link between changes in the date and changes in the BoJ’s monetary stance. “I think there is a high chance we will achieve something like 2 per cent inflation around fiscal 2019,” he said. The BoJ left its economic forecasts largely unchanged. It expects inflation of 1.3 per cent in the year to March 2019 and 1.8 per cent in the year after that, excluding the effects of a planned rise in consumption tax. Most external analysts are more pessimistic. “Japan’s economy is likely to continue growing at a pace above its potential in [the year to March 2019],” said the BoJ. But it added: “The year-on-year rate of change in the consumer price index has continued to show relatively weak developments.” The BoJ said that risks to growth next year were “skewed to the downside” because of the consumption tax rise, from 8 per cent to 10 per cent, scheduled for October 2019. Its cautious outlook highlights how far Japan still has to go to achieve a permanent escape from the past two decades of on-and-off deflation. Despite slow progress on inflation, economic activity remains robust, with the ratio of open jobs to applicants hitting a fresh 44-year high of 1.54 times. The unemployment rate held steady at 2.5 per cent. The BoJ hopes that tight labour markets will ultimately lead to upward pressure on wages, higher consumption and a faster pace of increase in prices.


The elephant in the room India’s missing middle class

Multinational businesses relying on Indian consumers face disappointment


Print edition | Briefing

Jan 11th 2018| MUMBAI

THE arrival of T.N. Srinath into the middle class will take place in style, atop a new Honda Activa 4G scooter. Fed up with Mumbai’s crowded commuter trains, the 28-year-old insurance clerk will become the first person in his family to own a motor vehicle. Easy credit means the 64,000 rupees ($1,000) he is paying a dealership in central Mumbai will be spread over two years. But the cost will still gobble up over a tenth of his salary. It will be much dearer than a train pass, he says, with pride.

Choosing to afford such incremental comforts is the purview of the world’s middle class, from Mumbai to Minneapolis and Mexico City to Moscow. Rising incomes and the desire for status have, in recent decades, seen such choices become far more widespread in a host of emerging markets—most obviously and most spectacularly in China. The shopping list of the newly better off includes designer clothes, electronic devices, cars, foreign holidays and other attainable luxuries.

Many companies around the world are looking to India for a repeat performance of China’s middle-class expansion. India is, after all, another country with 1.3bn people, a fast-growing economy and favourable demography. And China’s growth is flagging, at least by the standards of the past two decades. Companies which made a packet there, both incomers such as Apple and locals like Alibaba, are seeking pastures new. Firms that missed the boat on China or, like Amazon and Facebook, were simply not allowed in, want to be sure that they do not miss out this time.

Enthusiasm about India is boundless. “I see a lot of similarities to where China was several years ago. And so I’m very, very bullish and very, very optimistic about India,” Tim Cook, Apple’s boss, recently told investors. A walk around the Ambience Mall in Delhi shows he is not the only multinational boss with big ambitions in the country. Indian brands like Fabindia, a purveyor of fancy clothes and crafts, are outnumbered by Western ones such as Levi’s, Starbucks, Zara and BMW. The slums that host a quarter of all India’s city dwellers feel a long way off.

Beyond the mall, Amazon has committed $5bn to establish a presence in the world’s biggest democracy. Alibaba has backed Paytm, a local e-commerce venture, to the tune of $500m. SoftBank, a Japanese investor, has funded a slew of start-ups premised on the potential buying power of India’s middle class. Uber, the world’s biggest ride-hailing firm, has hit the streets. Google, Facebook and Netflix are vying for online eyeballs. IKEA is putting the finishing touches to the first of 25 shops it plans to open over the next seven years. Paul Polman, boss of Unilever, has described India as potentially the consumer giant’s biggest market. Reports put out by management consultants routinely point to 300m-400m Indians in the ranks of the global middle class. HSBC, a bank, recently described nearly 300m Indians as “middle class”, a figure it thinks will rise to 550m by 2025.

But for some of the firms trying to tap this “bird of gold” opportunity, as McKinsey once called it, an awkward truth is making itself felt: a lot of this middle class has little money to spend. There are many rich people in India—but they number in the mere millions. There are a great many more who have risen above the poverty line—but not so far above it that they spend much on anything other than feeding their families. And there is less in between the two than meets the eye.

Missing the mark

Companies that have tried to tap the Indian opportunity have found that returns fell short of the hype. Take e-commerce. The expectation that several hundred million Indians would shop online was what convinced Amazon and local rivals to invest heavily. Industry revenue-growth rates of well over 100% in 2014 and 2015 prompted analysts to forecast $100bn in sales by 2020, around five times today’s total.

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That now looks implausible. In 2016, e-commerce sales hardly grew at all. At least 2017 looks a little better, with growth of 25-30%, according to analysts (see chart 1). But that barely exceeds the 20% the industry averages globally. Even after years of enticing customers with heavily discounted wares, perhaps 50m online shoppers are active in India—roughly, the richest 5-10% of the population, says Arya Sen of Jefferies, an investment bank. In dollar terms, growth in Indian e-commerce in 2017 was comparable to a week or so of today’s growth in China. Tellingly, few websites venture beyond English, a language in which perhaps only one in ten are conversant and which is preferred by the economic elite.

India has yet to move the needle for the world’s big tech groups. Apple made 0.7% of its global revenues there in the year to March 2017. Facebook, though it has 241m users in India, probably the most in the world in one country, registered revenues of just $51m in the same period. Google is growing more slowly in India than in the rest of the world. Mobile phones have become popular as their price has tumbled—but most handsets sold are basic devices rather than the smartphones that are ubiquitous elsewhere in the world.

Eating their words

Fast-food chains once spoke of a giant market. Their eyes were bigger than Indian stomachs. Despite two decades of investment McDonald’s has hardly any more joints in India than in Poland or Taiwan. The likes of Domino’s Pizza and KFC have struggled to come close to expectations that were once sky-high. Starbucks says it has big plans for India but has opened about one new coffee shop a month over the past two years, bringing its total to around 100—on a par with Utah or the United Arab Emirates. A new Starbucks opens in China every 15 hours, adding to 3,000 already operating.

Executives remain relentlessly upbeat in public—even if investments do not always follow. Anurag Mehrotra, boss of Ford India, told the Financial Times in May that car sales in India were set to double every three to five years. That would be an extraordinary change in fortunes: sales grew by less than 20% overall in the six years to 2016. There is one car or lorry for every 45 Indians, according to OICA, a trade group. The Chinese own five times as many. Motorbike sales have grown fast but only because their price has tumbled by 40% since 2000, points out Neelkanth Mishra of Credit Suisse, another bank.

India-boosters point to middle-class services that have taken off. With 20% annual growth in passengers, aviation is already booming at the rate Mr Mehrotra hopes to see in the car industry. But taken together, all India’s domestic airlines are no larger than Ryanair, the world’s fifth-biggest carrier, according to FlightGlobal, a consultancy. SpiceJet, an airline, says that 97% of Indians have never flown. A mere 20m Indians travelled abroad in 2015, about one in 40 adults.

Optimists also argue that the rapid growth of things like Chinese mobile-phone brands shows that the Indian middle class is out there and spending—just not on Western brands. Locally based fast-food chains that undercut McDonald’s or KFC have done much better than the new arrivals. But local consumer businesses face much the same problem as multinationals. Inditex, Zara’s parent firm, has 46 clothes shops in India, fewer than in Ireland, Lithuania or Kazakhstan. For the kind of goods the global middle class aspires to own at least, executives whether at global or local firms clock the number of potential customers at 50m and no more. Even selling basic consumer goods does not necessarily work. Hindustan Unilever, which purveys sachets of shampoo for just a few rupees, has seen virtually no sales growth in dollar terms since 2012.

“The question isn’t whether Zara or H&M can open 50 stores in India. Of course they can. The question is whether they can open 500,” says a banker who asks not be named, on the ground that it is best not to be seen questioning the Indian middle-class narrative. “You can try to push beyond the 50m people who have money, but how profitable would that be? Companies can expand for a time, but the limits to growth are getting obvious.”

The bullish argument that brought Western brands to India was basically this: although the country remains, for the most part, very poor, its population is so enormous that even a relatively small middle class is large in absolute terms, and fast overall growth will, as in China, quickly increase its size yet further. This assumes two things. One is that the middle class in India is the same relative size as in other developing countries where marketers have succeeded in the past. The other is that growth will benefit this middle class as much as other parts of the population. Neither is true in India, which as well as being poor is deeply unequal, and becoming more so.

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For all the talk of wanting to tap the middle class, no firm moving into India thinks it is targeting the middle of the income distribution. India’s mean GDP per head is just $1,700, and 80% of the population makes less than that. Adjust for purchasing-power parity by factoring in the cheaper cost of goods and services in India and you can bump the mean up to $6,600. But that is less than half the figure for China (see chart 2) and a quarter of that for Russia. What is more, foreign companies have to take their money out of India at market exchange rates, not adjusted ones.

Defining the middle class anywhere is tricky. India’s National Council of Applied Economic Research has used a cut-off of 250,000 rupees of annual income, or about $10 a day at market rates. Thomas Piketty and Lucas Chancel of the Paris School of Economics found in a recent study that one in ten Indian adults had an annual income of more than $3,150 in 2014. That leaves only 78m Indians making close to $10 a day.

Meager market

Even adjusting for the lower cost of living, that is hardly a figure to set marketers’ heartbeats racing. The latest iPhone, which costs $1,400 in India, represents five month’s pay for an Indian who just makes it into the top 10% of earners. And such consumers are not making up through growing numbers what they lack in individual spending power. The proportion making around $10 a day hardly shifted between 2010 and 2016.

Another gauge is whether people can afford the more basic material goods they crave. For Indians, that typically means a car or scooter, a television, a computer, air conditioning and a fridge. A government survey in 2012 found that under 3% of all Indian households owned all five items. The median household had no more than one. How many of them will be anywhere near able to buy an iPhone or a pair of Levi’s if they cannot afford a TV set?

To get in the top 1% of earners, an Indian needs to make just over $20,000. Adjusted for purchasing-power parity, that is a comfortable income, equating to over $75,000 in America. But in terms of being able to afford goods sold at much the same price across the world, whether a Netflix subscription or Nike trainers, more than 99% of the Indian population are in the same league as Americans that count as below the poverty line (around $25,000 for a family of four), points out Rama Bijapurkar, a marketing consultant.

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The top 1% of Indians, indeed, are squeezing out the rest. They earn 22% of the entire income pool, according to Mr Piketty, compared with 14% for China’s top 1%. That is largely because they have captured nearly a third of all national growth since 1980. In that period India is the country with the biggest gap between the growth of income for the top 1% and the growth of income for the population as a whole. At the turn of the century, the richest 10% of Indians made 40% of national income, about the same as the 40% below them. But far from becoming a middle class, the latter’s share of income then slumped to under 30%, while those at the top went on to control over half of all income (see chart 3).

Such economic success at the top leaves less for everyone else. Consider the 300m or so adults who earn more than the median but less than the top 10%. This group has fared remarkably badly in recent decades. Since 1980, it has captured just 23% of incremental GDP, roughly half what would be expected in more egalitarian societies—and less than that captured by the top 1%. China’s equivalent class nabbed 43% in the same period.

The rich get richer

Some have doubts about Mr Piketty’s methodology. But other surveys suggest similar distribution patterns. Looking at wealth as opposed to income, Credit Suisse established in 2015 that only 25.5m Indians had a net worth over $13,700, equating roughly to $50,000 in America. And two-thirds of that cohort’s wealth was held by just 1.5m upper-class savers with at least $137,000 in net assets.

India’s middle class may be far from wealthy, but the rich are truly rich. There are over 200,000 millionaires in India. Forbes counts 101 billionaires and adds one more to the list roughly every two months. It shows. The Hermès shop next door to the Honda dealership frequented by Mr. Srinath sells scarves and handbags that cost far more than his scooter. Flats in posh developments start at $1m. In other emerging economies, there are fewer very rich and a wider base of potential spenders for marketers to tap.

In absolute terms, India has wealth roughly comparable to Switzerland (population 8m) or South Korea (51m). Although India’s population is almost the size of China’s, it is central Europe, with a population about the size of India’s top 10% and boasting roughly the same spending power, that is a better comparison. Global companies pay attention to markets the size of Switzerland or central Europe. But they do not look to them to redefine their fortunes.

Confronted by this analysis, India bulls concede the middle class is comparatively small, but insist that bumper growth is coming. The assumptions behind that, though, are not convincing. For a start, the growth of the overall economy is good—the annual rate is currently 6.3%—but not great. From 2002 China grew at above 8% for 27 quarters in a row. Only three of the past 26 quarters have seen India growing at that sort of pace.

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Another assumption is that past patterns will no longer hold and that the spoils of growth will be distributed to a class earning decent wages and not to the very rich or the very poor. Yet the sorts of job that have conventionally provided middle-class incomes are drying up. Goldman Sachs, another bank, estimates that at most 27m households make over $11,000 a year—just 2% of the population. Of those, 10m are government employees and managers at state-owned firms, where jobs have been disappearing at the rate of about 100,000 a year since 2000, in part as those state-owned enterprises lose ground to private rivals.

The remaining 17m are white-collar professionals, a lot of whom work in the information-technology sector, which is retrenching amid technological upheaval and threats of protectionism. In general, salaries at large companies have been stagnant for years and recruitment is dropping, according to CLSA, a brokerage.

Might those below the current white-collar professional layer graduate to membership of the middle class? This happened in China, where hordes migrated from the countryside to relatively high-paying jobs in factories in coastal areas. But such opportunities are thin on the ground in India. It has a lower urbanisation rate than its neighbours, and a bigger urban-rural wage gap, with little sign of change. It is not providing jobs to its young people: around a third of under-25s are not in employment, education or training.

There are other structural issues. Over 90% of workers are employed in the informal sector; most firms are not large or productive enough to pay anything approaching middle-class wages. “Most people in the middle class across the world have a payslip. They have a regular wage that comes with a job,” points out Nancy Birdsall of the Centre for Global Development, a think-tank. And women’s participation in the workforce is low, at 27%; worse, it has fallen by around ten percentage points since 2005, as households seem to have used increases in income to keep women at home. Households that might be able to afford luxuries if both partners worked cannot when only the man does.

Spent force

Across the income spectrum, households that do make more money tend to spend it not on consumer goods but on better education and health care, public provision of which is abysmal. The education system is possibly India’s most intractable problem, preventing it becoming a consumer powerhouse. Attaining middle-class spending power requires a middle-class income, which in turn requires productive ability. Yet most children get fewer than six years of schooling and one in nine is illiterate. Poor diets mean that 38% of children under the age of five are so underfed as to damage their physical and mental capacity irreversibly, according the Global Nutrition Report. “What hope is there for them to earn a decent income?” one senior business figure asks.

None of this leaves India as an irrelevancy for the world’s biggest companies. Whether India’s consumer class numbers 24m or 80m, that is more than enough to allow some businesses to thrive—plenty of fortunes have been made catering to far smaller places. But businesses assuming the consumer pivot in India is the next unstoppable force in global economics need to ask themselves why it already looks to have run out of puff—and whether it is likely to get a second wind any time soon.

This article appeared in the Briefing section of the print edition under the headline “The elephant in the room”

BanyanAsia is taking the lead in promoting free trade

Asian voters know open markets have lifted billions of them out of poverty

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 Print edition | Asia

Jan 24th 2018

THE obituary of the Trans-Pacific Partnership (TPP) was widely written when Donald Trump pulled America out of the 12-country free-trade deal on the third day of his presidency. Yet, a year later and against all the apparent odds, the pact lives on. On January 23rd its remaining 11 members met in Tokyo to thrash out the final details of pressing ahead regardless. The plan is to sign a final agreement in March, to come into force in 2019. It will be one of the world’s most exacting trade pacts, measured by openness to investment from other members, the protection of patents and environmental safeguards.

The pact’s resurrection is one of the more unlikely events in a year of surprises. After all, America accounted for almost two-thirds of the original bloc’s $28trn in annual output. Access to the vast American market was what made other members readier to open up their own. Moreover, Mr. Trump’s retreat had sent a dismal message about the prospects of the open, rules-based order that America had underwritten. The Asia-Pacific region had benefited more than any from that order in recent decades—yet Mr. Trump was declaring multilateralism dead and signalling an intention to raise barriers to trade. Soon afterwards, he ordered South Korea to renegotiate its free-trade agreement with America. And this week he imposed punitive tariffs on imported washing machines and solar panels, aimed at South Korean and Chinese manufacturers (see article).

In spite of this forbidding backdrop, the dauntless 11—Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam—have regrouped. In Vietnam in November their leaders sketched out an agreement on the core features of a revised deal. The pact’s name has changed, to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), in case the original had tripped too lightly off the tongue. But remarkably few (22, to be precise) of the original provisions have been frozen. The victims are mainly strictures insisted on by America. For instance, copyright has been reduced from 70 to 50 years. And special protections for biologics, a booming category of drugs, have been suspended.

A few concessions were made to those still in the pact. Malaysia will not immediately have to liberalise its state-owned enterprises. Communist Vietnam can put on hold new rules about resolving labour disputes and allowing independent trade unions.

The biggest foot-dragger was Canada, the second-biggest economy in the group (after Japan), which had wanted special treatment for cultural industries such as television and music—a concern for Francophone Canadians—and changes to the rules on imports of cars. Canada has a big car-parts industry, which caters mainly to American carmakers. Now that America has dropped out of the pact, fewer cars from this integrated North American supply chain will have enough content from CPTPP countries to qualify for tariff-free access to other members. But Canada will still have to open its market to Asian cars, subjecting its car-parts firms to a one-sided dose of foreign competition.

In the end Canada’s concerns were met with a favourite TPP trick: “side letters” between it and other members, that are not officially part of the deal. One of them promised Canada greater access to the Japanese car market. CPTPP’s members were sufficiently determined to revive the pact, in other words, that they gritted their teeth and compromised.

How does CPTPP carry on, even as multilateralism has fallen out of favour elsewhere? For some members, including Japan, which has done most to keep the show on the road, there is a strategic imperative: to prop up the old rules-based order in America’s absence. (The less-welcome alternative might be an order overseen by China.) Bilahari Kausikan, a Singaporean ambassador-at-large, predicts that America will eventually return to the partnership. After all, CPTPP (and TPP before it) is not typical of the tariff-cutting deals that Mr. Trump claims have shafted America. Rather, it breaks ground in setting American-inspired standards and safeguards for everything from online commerce to creative industries. Mr. Kausikan believes it is only a matter of time before American firms are clamouring to take part.

Before then, others may seek to join an arrangement designed to be infinitely expandable. South Korea, Indonesia and the Philippines have expressed interest—even Britain has. And CPTPP is not the only trade deal making progress in Asia. Japan has just concluded a sweeping agreement with the European Union. The Association of South-East Asian Nations is seeking to create a vast free-trade area encompassing China and India, among others.

Fair blow the Asian trade winds

In Asia free trade is more popular than it is in America and much of Europe. The question is why. One explanation is that in the West, trade creates winners and losers; in Asia, at a lower stage of development, it mainly creates winners, though some gain more than others.

Yet that is not quite right. Asia’s pell-mell development creates lots of losers. It can be traumatic to be forced off your land to make way for a palm-oil plantation or a high rise. Inefficient rice-farmers across the continent have much to fear from free trade. Even in prosperous Singapore, points out Deborah Elms of the Asian Trade Centre, an advocacy group, it is still an emotional wrench to see nearly every landmark of your childhood vanish in an orgy of rebuilding.

The difference is that most Asians don’t have what Mr Kausikan calls the illusion of choice. Trade is how billions of them have attained a modicum of prosperity. And thanks to rapid, trade-fuelled growth, the drawbacks of opening markets seem relatively insignificant. For as long as wrenching change is offset by the prospect of a better tomorrow, Asia will fly the flag of global trade even when it is being furled elsewhere.


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Stratfor Worldview March 11 2018


The White House Takes on the World: The White House will bump up against the laws of the United States and the central tenets of the World Trade Organization as it launches a global trade offensive in the name of national security. U.S. production costs will rise in response, and countries will target America’s politically sensitive sectors in retaliation.

Trade, Technology and Taiwan: Tension between the United States and China will spike, putting businesses caught in the fray at risk. While the White House targets Chinese trade and investment with its protectionist policies, Congress will rouse Beijing’s ire by upgrading U.S. ties with Taiwan.

A Race to the Cutting Edge: As the United States turns its attention toward its competition with China and Russia, the development of disruptive weapons technology among the great powers will further degrade the world’s arms control treaties. Beijing will funnel state funds toward artificial intelligence research in hopes of catching up with its American adversary while the West struggles to navigate antitrust and data privacy concerns.

The Stubborn Problem of Nuclear Proliferation: Building on a brief detente, South Korea will try to persuade the United States and North Korea to reconcile their mostly intractable positions on the issue of denuclearization. Meanwhile, Iran will rely on Europe’s support to keep its nuclear deal alive as Saudi Arabia uses the same agreement to negotiate a civilian nuclear program of its own.

Fighting for the Future of Europe: Headed by a divided Germany and an emboldened France, the debate over euro zone reforms will expose the deeper divides threatening Continental unity as Italy stands ready to flout any rules-based regime that Berlin and its northern allies propose.

Balancing Oil and Building Batteries: Global oil producers, led by Saudi Arabia and Russia, will extend and adjust their agreed-upon production cuts to counter U.S. shale output over the long run. In the alternative energies sector, battery developers will have to contend with the Democratic Republic of the Congo’s attempt to rake in more revenue as the world’s demand for cobalt grows.

Trouble Brews in the Americas: Mexico will let Canada take the lead in confronting the United States on trade issues during NAFTA negotiations. Trade tension will likewise mar Washington’s rocky relationship with Brazil as the two remain at odds over how to manage Venezuela’s economic crisis and its regional spillover.

India Protects Its Periphery: China’s deep pockets and wide maritime reach will draw India into closer defense cooperation with the United States, Japan and Australia as it works to balance against its increasingly powerful neighbor.

Ankara’s Ambitions Take Center Stage: A rising power in its own right, Turkey will push its troops deeper into northern Syria and Iraq while laying claim to the eastern Mediterranean Sea, upsetting Cyprus’ plans for the energy resources that lie beneath the disputed waters.

Global Trends

The Bull in the China Shop

As U.S. President Donald Trump’s 2018 trade agenda put it, “these are exciting times for U.S. trade policy.” That may be the understatement of the year. The White House is ready to take aim at the global economy this quarter, and the bull’s-eye is sitting squarely on Beijing.

Trump is convinced that China’s economic rise poses a national security threat. And when it comes to China’s penchant for dumping goods, enacting unfair subsidy regimes, distorting the market and violating intellectual property rights, many countries in the developed world would agree. The United States, however, isn’t willing to wait around for the European Union and Japan to address these challenges in a managed, multilateral forum. Instead it will follow an “act now, talk later” strategy that it believes — rightly or wrongly — will coerce Beijing into coming to the negotiating table on Washington’s terms. The United States also hopes its tactics will galvanize free-trade advocates to reform institutions like the World Trade Organization (WTO) so that they, too, can bring China in line with international trade and investment norms. That’s the idea, anyway.

But just as the United States claims that China benefits from a rules-based global trade order [1] by refusing to play by those rules, the White House is bending many of them to make its point. For instance, the sweeping tariffs on steel and aluminum [2] that Washington will use to combat overcapacity in the name of national security will produce a litany of legal challenges within the United States and at the WTO, as affected countries — including members of the European Union, China, Brazil, Japan and South Korea — protest the measures.

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In fact, many will retaliate with anti-dumping and countervailing duties of their own against the United States, taking care to target politically sensitive sectors like agriculture ahead of midterm elections in November. These reprisals may even take on an anti-American tone: The European Union has already threatened to crack down on iconic American imports, including Harley Davidson motorcycles, bourbon and blue jeans.

By using creative arguments to wield the most powerful trade weapons in its arsenal, the United States will back the WTO into a corner. Legal challenges in the organization take years to play out, but if the arbitration ends in Washington’s favor, it will endorse a dangerous precedent of invoking national security to justify economic protectionism. Should the WTO rule against the United States, the White House could opt to ignore the decision altogether by citing American sovereignty, undermining the institution’s credibility in the process. (Notably, the White House will also continue to paralyze the WTO’s arbitration system by blocking new appointments to the appellate body.)

In the meantime, steel and aluminum consumers in the United States will have to bear higher input costs. Contrary to Trump’s logic that higher tariffs will reduce trade deficits, they aren’t guaranteed to make Chinese steel less competitive in the United States. Metals exporters subject to U.S. tariffs will divert their goods to other markets around the world, which in turn will cause big metals importers to throw up barriers to protect their markets from a flood of foreign products. Amid the ensuing trade scramble, the United States hopes to persuade the European Union and Japan to join its crusade to counter excess global steel capacity. But Washington’s partners may instead choose to stand up to its blatant protectionism and push back against the United States under the auspices of the WTO.

The United States’ opening trade move may be to target overcapacity, but intellectual property will be high on its list of concerns as well. Under a Section 301 investigation into whether China’s technology transfer and investment requirements of American firms operating inside its borders are discriminatory, Washington will take action against Beijing — both within and beyond the bounds of the WTO. (The investigation must wrap up by August, but Washington may release its findings before then.) The United States is already entertaining some legally questionable moves, such as declaring a national emergency [6] in response to China’s intellectual property violations, to impose punitive measures and erect safeguards around certain U.S. industries like consumer electronics, household appliances and automotives. Along with Europe, it will also continue to block Chinese investments in the tech sector as it sees fit, pointing to national security as its motive.

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China, of course, won’t take Trump’s trade jabs lying down. In addition to imposing its own restrictions on some U.S. agricultural goods, Beijing is likely to selectively apply regulatory pressure on American companies with stakes in China. And when the time comes for Beijing to negotiate with Washington, it will have a handful of concessions — expanding U.S. access to the Chinese market and boosting Chinese imports of U.S. goods in certain sectors, to name a few — to offer. The external pressure mounting against China’s economy may even accelerate the country’s ongoing attempts to tackle overcapacity at home.

Though the White House may be willing to stomach the political risk attached to tariffs that ratchet up metals prices for U.S. industrial consumers, it will show more caution as it navigates North American trade negotiations. The ongoing NAFTA talks will stretch beyond this quarter, thanks to major sticking points on rules of origin requirements for the auto sector and to Canada’s more assertive stance against the United States. So far, domestic political checks on Trump’s actions have dissuaded the president from abruptly withdrawing from the pact. As he leans on more aggressive trade measures in the months ahead, overruling defenders of free trade within his administration, Congress will take on a more assertive role in regulating the country’s commerce abroad. Though U.S. lawmakers will have greater room to insulate existing free trade agreements, including NAFTA, their ability to counter unilateral tariffs leveled by the executive branch will be limited.

The White House’s trade policy will be one of several factors fueling market volatility [in the second quarter. Any uptick in expectations of inflation could lead to four hikes in U.S. interest rates this year instead of three. While by no means certain, this outcome would cause overvalued asset prices in U.S. equity markets to deflate. Higher interest rates could also strengthen the dollar and put more pressure on the central banks of the euro zone, Japan and China to tighten their monetary policies as they guard against the outflow of capital — with consequences for economic growth that could ripple across the globe.

Reining in Rogues and Rivals

The president’s approach to trade offers yet another example of his willingness to override the concerns of national security professionals within his administration on certain issues. Many have called for a more measured and targeted approach to avoid entrapping strategic U.S. allies and increasing the costs of U.S. defense. Still, as long as these voices remain in the White House, they will continue to restrain Trump’s responses to thornier foreign policy matters.


Among them will be nuclear containment. Despite worsening military friction between the United States and North Korea this quarter, a U.S. strike on the Korean Peninsula will remain an unlikely prospect — particularly given the promised summit between Trump and North Korean leader Kim Jong Un. Meanwhile, even as the United States urges Europe to threaten Iran with sanctions related to its ballistic missile program, Washington will stop short of tearing up Tehran’s nuclear deal altogether. But new nuclear proliferation concerns are emerging in the Middle East. Having already secured Russia’s stamp of approval for a preliminary roadmap, Saudi Arabia will use the Joint Comprehensive Plan of Action between Iran and global powers as a framework for a deal on a civilian nuclear program in the kingdom that includes domestic enrichment rights. Though it won’t be thrilled with the idea, the United States will work to ensure that it — rather than a rival like Russia — is best positioned to partner with allies in the Arab world that seek civilian nuclear programs of their own.

As it fends off Moscow’s encroachment in the Middle East, Washington will prepare for a more fundamental competition with Russia and China. At the beginning of the year, a series of U.S. defense reviews all but confirmed this by dubbing the two eastern giants the main strategic threats to the United States today. As the great power competition [9] takes shape, countries caught in the middle will have no choice but to adapt. Some, like Ukraine and Taiwan, will use the contest to fortify their alliances with the United States. Others, like the Philippines, will find it increasingly difficult to balance their relationships with both sides.

Spurred by their rivalry, the United States, China and Russia will continue to develop disruptive weapons technology. But rather than force all parties into compliance with existing arms treaties, this dangerous race is more likely to further degrade the deals [10] as time goes on. Accusations of violations will continue to fly between the United States and Russia as the pivotal Intermediate-Range Nuclear Forces Treaty steadily falls apart, undermining talks on the extension of the New Strategic Arms Reduction Treaty in the process.



A Mad Dash to the Cutting Edge

At the same time, the United States and China will jockey for the leading edge in artificial intelligence, which stands to have a profound impact on both military and civilian life. The United States is still ahead of China on this front, but Beijing is sprinting to catch up. And whereas big tech firms will have to contend with data privacy concerns and antitrust investigations in the West, China’s corporate giants will be largely unfettered in the mad dash for technological dominance [11].

Data privacy and its role in the evolving relationship among citizens, companies and states will take the spotlight in the European Union in the months ahead. Though European governments are particularly keen to protect the privacy rights of individuals, the Continent is simply too large a market for tech companies to avoid entirely. The General Data Protection Regulation set to take effect across the European Union on May 25 will thus set a global precedent for tech firms trying to navigate data privacy challenges.

The financial tech sector will follow the same path. Now that the speculative bubble around cryptocurrencies has burst, states will have more space to craft rules for cryptocurrencies, distributed ledger technology and initial coin offerings. Other industries — from supply chain management to insurance to health care — are beginning to adopt and regulate distributed ledger technology as well, albeit at a slower pace. Pending regulatory approval, a recently announced joint venture between IBM and Maersk Line shipping will bear watching because it may pioneer the use of block chain technology in the management of global supply chains.

As governments wrap their heads around the benefits of alternative currencies, more state-backed cryptocurrencies will crop up throughout the year, each driven by a different motive. For advanced countries, such as Estonia, cryptocurrency adoption is a natural step in digitizing their economies. For Iran and Russia, it could offer some insulation from the sanctions against them. Cryptocurrencies can also be useful to shambolic economies like Venezuela or Zimbabwe, where people have lost trust in fiat currencies, want to back their currencies with a commodity or hope to shield themselves from sanctions. And as small, dollarized countries like the Marshall Islands are discovering, cryptocurrencies can offer greater economic flexibility and an alternative to the dollar.

Old Challenges and New Appetites in Energy

The U.S. energy industry, a major steel consumer, will be hit hard this quarter by hefty steel tariffs that jack up its production costs — and at a time, no less, when U.S. oil output has broken records at over 10 million barrels per day. Though U.S. shale production may moderately decline as a result, it won’t be enough to ease the concerns of OPEC and its external partners, which have trimmed back their output in an effort to balance out the growing supplies of their American competitors. So far, production dips in Mexico, China and Venezuela are helping to offset the relentless climb in U.S. and Canadian output. OPEC and non-OPEC producers will probably extend their cuts through the end of the year when they meet in Vienna in June. The details of a longer-term agreement, led by Saudi Arabia and Russia, to counter U.S. shale production will likely emerge around the same time as well.

Elsewhere in the energy realm, demand for lithium-ion batteries — and the corresponding need for cobalt and lithium — is on the rise. At its heart is China, whose environmental reforms and technological drive are fueling the development and demand for electric vehicle batteries. But the world’s newfound appetite [15] for these resources will create a host of geopolitical challenges. This quarter, battery producers will have to grapple with new legislation in the Democratic Republic of the Congo, a major source of cobalt that will increase mining royalties owed to the government. And although Argentina and Chile are well-positioned to attract foreign investment into their lithium sectors, growing political instability in Bolivia will hurt its chances of doing the same.



The Bell Heard ‘Round the World

For months, the nuclear threat rising from the Korean Peninsula has transfixed the globe, but during this quarter, a different issue will take center stage in Asia: China’s brewing trade spat with the United States. With Washington determined to bring Beijing’s behavior in line with its own agenda, it will ratchet up pressure by targeting China’s economy and strategic interests in the region — including its claim to sovereignty over Taiwan. Rather than take these measures lying down, China will retaliate, sounding the bell for a boxing match that will determine the moves and countermoves of smaller nations caught between the sparring giants.

The impending showdown has loomed for over a year. Throughout 2017, China parried most of the United States’ jabs by answering Washington’s calls to ramp up economic pressure on North Korea. To that end, Beijing scaled back its trade ties and severed its lingering financial connections with Pyongyang. But as North Korea accelerated its weapons development, China’s ability to shape events on the peninsula waned, eroding its ability to link trade matters to security issues [17] in the process. No longer able to fend off the United States’ blows, and faced with the maturation of several U.S. punitive trade measures against it, China could respond in kind by slapping tariffs on U.S. exports, including on agricultural and chemical products; by challenging U.S. measures at the World Trade Organization (WTO); and by pressuring American firms operating in China. All the while, Beijing will try to create room for negotiation with Washington by offering to open up Chinese markets and boost its imports of U.S. goods. Despite its best efforts, however, the United States will keep its sights trained on Chinese trade practices.

The timing of this feud couldn’t be worse for Beijing. On the heels of a crucial quinquennial transition in political leadership, China’s elite face the daunting task of pushing through a raft of delayed socio-economic reforms. Over the past few months, the country has taken advantage of its robust economic growth and stable trade ties to advance important aspects of a plan to shift its economic model away from credit-based investment and toward domestic consumption. Among these steps are deleveraging China’s financial system and deeply indebted state-owned enterprises, eliminating overcapacity in resource-intensive industries, and increasing the enforcement of environmental regulations.

As Beijing expands its reforms in the months ahead, the central government will concentrate on making sure that local governments and industries effectively enforce them. So far China’s attempts to curb informal lending and overhaul the bloated state-run companies at the heart of the nation’s debt crisis have fallen short at the local level; governments and companies there collectively hold debt equal to about 80 percent of China’s gross domestic product. Likewise, the implementation of environmental laws has been lackluster across the southern provinces and among a handful of industries, including steel and coal. Beijing will try to rectify these problems by stressing the importance of compliance but doing so will carry the risk of widespread failure caused by overly hasty implementation or by local resistance stemming from a desire to preserve economic growth and jobs.

Having cemented his grip on power, President Xi Jinping will have few excuses left for such failures. He will rely in part on the new National Supervision Commission to keep a sharp eye on local officials’ performance and ensure that they don’t botch the job. One issue will draw particularly close attention from Beijing: easing China’s massive local debt burden by correcting an imbalance between the fiscal responsibilities of the central and local governments. Since the start of the year, Beijing has made significant headway on its long-delayed tax reforms, in part by shoring up local tax bases. Though its centerpiece property tax likely won’t emerge until 2020, the Chinese government will continue to enact fiscal reforms, encourage domestic consumption, reallocate resources to underdeveloped regions and lighten corporate debt loads in the coming months — all with the aim of setting the Chinese economy down a more sustainable path.

Of course, a deepening trade dispute with the United States [25] will present a formidable obstacle on the road to reform. On March 23, Washington will impose high tariffs on U.S. steel and aluminum imports to protect itself from what it deems to be unfair trade practices by other countries, including China. Because only about 2 percent of U.S. steel imports come from China, the volume of these imports will remain fairly steady. But China, which accounts for roughly half of the world’s steel production, will still be hit hard as steel prices tumble and major exporters divert their supplies from the United States, snatching up a portion of China’s market share along the way. To make matters worse, Washington’s actions could inspire European countries and Japan to erect their own trade barriers against China to protect producers at home. Each new source of strain could damage China’s steel industry, potentially reducing employment in the sector and undermining Beijing’s ability to address stubborn overcapacity issues.

Steel and aluminum tariffs aren’t the only weapon at the United States’ disposal, either. Washington could opt to establish tariffs or import quotas on major Chinese exports, such as electronics. It may also charge hefty fines intended to alter China’s market restrictions and intellectual property practices. Each of these tactics would become even more effective if the United States were to join forces with the European Union and Japan — a scenario China is undoubtedly eager to avoid. But try as it might, Beijing’s efforts to open up its services, finance and manufacturing industries to the rest of the world won’t satisfy Washington’s demands or discourage its scrutiny of Chinese investment in the high-tech sector.

Regardless of which means the United States uses to achieve its ends, China will have to expend more and more resources to prop up its precarious economy. And as its funds run low, Beijing will be forced to compromise on some of its key economic objectives. For instance, should Washington’s measures chip away at China’s growth or employment figures, Beijing may back off its planned production cuts and environmental reforms, or it may use lines of credit to buoy the economy. In the direst circumstances, the central government could even bolster the real estate market, potentially creating a real estate bubble and, in the long run, the heightened risk of a national debt default.

Second Quarter 2018 Economic and Wood Product News -Demographic Challenges, Update China’s Belt and Road Initiative, North Korean and Stratfor’s Outlook

Gone in their prime Many countries suffer from shrinking working-age populations

There are things they can do to mitigate the dangers

 Print edition | International

May 5th 2018| VILNIUS

workin age populations

MANY developed countries have anti-immigration political parties, which terrify the incumbents and sometimes break into government. Lithuania is unusual in having an anti-emigration party. The small Baltic country, with a population of 2.8m (and falling), voted heavily in 2016 for the Lithuanian Farmer and Greens’ Union, which pledged to do something to stem the outward tide. As with some promises made elsewhere to cut immigration, not much has happened as a result.

“Lithuanians are gypsies, like the Dutch,” says Andrius Francas of the Alliance for Recruitment, a jobs agency in Vilnius, the capital. Workers began to drift away almost as soon as Lithuania declared independence from the Soviet Union in 1990. The exodus picked up in the new century, when Lithuanians became eligible to work normally in the EU. For many, Britain is the promised land. In the Pegasas bookshop just north of the Neris river in Vilnius, four shelves are devoted to English-language tuition. No other language—not even German or Russian—gets more than one.

Mostly because of emigration, the number of Lithuanians aged between 15 and 64 fell from 2.5m in 1990 to 2m in 2015. The country is now being pinched in another way. Because its birth rate crashed in the early 1990s, few are entering the workforce. The number of 18-year-olds has dropped by 33% since 2011. In 2030, if United Nations projections are correct, Lithuania will have just 1.6m people of working age—back to where it was in 1950.

Lithuania was an early member of a growing club. Forty countries now have shrinking working-age populations, defined as 15- to 64-year-olds, up from nine in the late 1980s. China, Russia and Spain joined recently; Thailand and Sri Lanka soon will. You can now drive from Vilnius to Lisbon (or eastward to Beijing, border guards permitting) across only countries with falling working-age populations.

It need not always be disastrous for a country to lose people in their most productive years. But it is a problem. A place with fewer workers must raise productivity even more to keep growing economically. It will struggle to sustain spending on public goods such as defence. The national debt will be borne on fewer shoulders. Fewer people will be around to come up with the sort of brilliant ideas that can enrich a nation. Businesses might be loth to invest. In fast-shrinking Japan, even domestic firms focus on foreign markets.

The old will weigh more heavily on society, too. The balance between people over 65 and those of working age, known as the old-age dependency ratio, can tip even in countries where the working-age population is growing: just look at Australia or Britain. But it is likely to deteriorate faster if the ranks of the employable are thinning. In Japan, where young people are few and lives are long, demographers expect there to be 48 people over the age of 65 for every 100 people of working age in 2020. In 1990 there were just 17.

Some countries face gentle downward slopes; others are on cliff-edges. Both China and France are gradually losing working-age people. But, whereas numbers in France are expected to fall slowly over the next few decades, China’s will soon plunge—a consequence, in part, of its one-child policy. The number of Chinese 15- to 64-year-olds, which peaked at just over 1bn in 2014, is expected to fall by 19m between 2015 and 2025, by another 68m in the following decade, and by 76m in the one after that (see chart 1).

sloping off

Jörg Peschner, an economist at the European Commission, says that many countries face demographic constraints that they either cannot or will not see. He hears much debate about how to divide the economic cake—should pensions be made more or less generous?—and little about how to prevent the cake from shrinking. Yet countries are hardly powerless. Even ignoring the mysterious business of raising existing workers’ productivity, three policies can greatly alleviate the effects of a shrinking working-age population.

Never done

The first is to encourage more women to do paid work. University-educated women of working age outnumber men in all but three EU countries, as well as America and (among the young) South Korea. Yet female participation in the labour market lags behind men’s in all but three countries worldwide. Among rich countries, the gap is especially wide in Greece, Italy, Japan—and South Korea, where 59% of working-age women work compared with 79% of men.

Governments can help by mandating generous parental leave—with a portion fenced off for fathers—to ensure that women do not drop out after the birth of a child. And state elderly care helps keep women working in their 50s, when parents often become needier. But a recent IMF report argues the greatest boost to recruiting and keeping women in paid jobs comes from public spending on early-years education and child care.

Employers can do more too, most obviously by providing flexible working conditions, such as the ability to work remotely or at unconventional hours, and to take career breaks. Fathers need to be able to enjoy the same flexible working options as mothers. Some women are kept out of the workforce by discrimination. This can be overt. According to the World Bank, 104 countries still ban women from some professions. Russian women, for example, cannot be ship’s helmsmen (in order, apparently, to protect their reproductive health). More often discrimination is covert or the unintended consequence of unconscious biases.

Countries can also tap older workers. Ben Franklin, of ILC UK, a think-tank, argues that 65, a common retirement age, is an arbitrary point at which to cut off a working life. And in many countries even getting workers to stick around until then is proving difficult. Today Chinese workers typically retire between 50 and 60; but by 2050 about 35% of the population are expected to be over 60. Thanks to generous early-retirement policies, only 41% of Europeans aged between 60 and 64 are in paid work. Among 65- to 74-year-olds the proportion is lower than 10%. In Croatia, Hungary and Slovakia it is below one in 20.

The levers for governments to pull are well known: they can remove financial incentives (tax or benefits) to retire early and increase those to keep working. Raising the state retirement age is a prerequisite almost everywhere; if the average retirement age were increased by 2-2.5 years per decade between 2010 and 2050, this would be enough to offset demographic changes faced by “old” countries such as Germany and Japan, found Andrew Mason of the University of Hawaii and Ronald Lee of the University of California, Berkeley.

Employers, too, will have to change their attitudes to older workers. Especially in Japan and Korea, where they are most needed, workers are typically pushed out when they hit 60 (life expectancy is 84 and 82 respectively). Extending working lives will require investment in continued training, flexible working arrangements, such as phased retirement, and improved working conditions, particularly for physically tough jobs. In 2007 BMW, a German carmaker, facing an imminent outflow of experienced workers, set up an experimental older-workers’ assembly line. Ergonomic tweaks, such as lining floors with wood, better footwear and rotating workers between jobs, boosted productivity by 7%, equalling that of younger workers. Absenteeism fell below the factory’s average. Several of these adjustments turned out to benefit all employees and are now applied throughout the company.

A final option is to lure more migrants in their prime years. Working-age populations are expected to keep growing for decades in countries such as Australia, Canada and New Zealand, which openly court qualified migrants. Others can try to entice foreign students and hope they stick around. Arturas Zukauskas, the rector of Vilnius University, thinks that he could improve greatly on the current tally of foreign students—just 700 out of 19,200. In particular, he looks to Israel, which has the highest birth rate in the rich world. Lithuania had a large Jewish population before the second world war, and many prominent Israelis have roots in the country. Partly to signal the academy’s openness, Vilnius University has started awarding “memory diplomas”, mostly posthumously, to some Jewish students evicted on Nazi orders.

The trouble is that the countries with the biggest demographic shortfalls are often the most opposed to immigration. For example, the inhabitants of the Czech Republic and Hungary view immigrants more negatively than any other Europeans do, according to the European Social Survey. Those countries’ working-age populations are expected to shrink by 4% and 5% respectively between 2015 and 2020. Countries that lack a recent history of mass immigration may have few supporters for opening the doors wider. Even if they wanted new settlers, they might have to look for them far afield. Countries with shrinking working-age populations are often surrounded by others that face the same problem.

“China has never been a country of immigrants,” explains Fei Wang of Renmin University in Beijing. It is unlikely to become one, but is trying to lure back emigrants and to attract members of the ethnic-Chinese diaspora. In February the government relaxed visa laws for “foreigners of Chinese origin”. In Shanghai, and perhaps soon in other cities, foreign-passport holders are allowed to import maids from countries such as the Philippines. That is a small step in the right direction.

italian jobs

Just as countries’ demographic challenges vary in scale, so the remedies will help more in some countries than in others. Take Italy and Germany. Both have shrinking working-age populations that are likely to go on shrinking roughly in parallel. But Italy could do far more to help itself. Because the women’s employment rate in Italy lags so far behind the men’s rate, its active population would jump if that gap closed quickly—and if everybody worked longer and became more educated (see chart 2). Germany could do less to help itself, and Lithuania less still.

In theory, every rich country can prise open the demographic trap. Governments could begin by lowering barriers to immigrants and raising the retirement age. They could entice more women into the workforce. They could raise the birth rate by providing subsidised child care, which would create a wave of new workers in a couple of decades, just when the other reforms are petering out. But, when a country is shrinking, many things come to seem more difficult. Earlier this year, Poland built up a large backlog of immigration applications, many of them from Ukrainians. It turned out that the employment offices were badly understaffed, and could not process the paperwork in time. They had tried to take on workers, but failed.

This article appeared in the International section of the print edition under the headline “Small isn’t beautiful”


Why people are working longer

Labour-force participation rates are rising for older people in advanced economies


The Economist explains

Jun 11th 2018

THE golden years of retirement, when decades of toil are traded for some downtime, are starting later. In the mid-1980s, 25% of American men aged 65-69 worked; today, nearly 40% do. The situation is the same for younger men. In 1994, 53% of 60- to 64-year-olds worked; now 63% do. American women are working longer too, and similar upticks have been witnessed in Japan and other parts of western Europe. Since unhealthy workers tend to retire earlier, many attribute the ageing workforce of today to improvements in health. Mortality rates for American men in their 60s have declined by 40% since 1980; for women, they have fallen by 30%. Education and occupation are also relevant. In countries of the OECD, the share of 55- to 64-year-olds with a college education has increased in the past three decades, and better-educated people tend to work longer, doing white-collar jobs. In a similar vein, the fact that modern jobs in general are less physically taxing than those of yore allows all people to work for longer or look for jobs suitable to their advancing years.

But these are not the primary drivers of the greying workforce, suggests Courtney Coile, an economist at Wellesley College. Social-security reforms and other institutional changes play a central role. In recent decades, many countries and companies have altered the way they fund pensions. About half of Americans working in the private sector participate in employer-sponsored plans. In the 1980s a third of these were “defined benefit” (DB) schemes, under which a company pays its retired employee a predetermined lump sum depending on tenure, age and past earnings. Now, though, “defined contribution” (DC) plans, for which employees contribute a percentage of their paycheques to their retirement fund, have largely supplanted DB plans. These are generally lower than DB pensions (hence their popularity with employers), so their recipients cannot afford to retire so early. By working longer, they increase the size of the pot. Researchers reckon the growth in DC plans has led to a five-month increase in the median retirement age.

Reductions in the generosity of social security and disability insurance have also had an impact. Since the 1990s, Italy, Germany, Japan and others have raised the minimum age at which citizens can accept retirement benefits. The labour-force participation rates for older workers there have risen in lock-step, with a one- to two-year lag. A final factor is the increased number of women in the workforce: about 44% more hold a job now, across 12 developed countries, than in 1995. And, like men, they are working longer. Given that married couples often retire at the same time, this “co-ordination”, which sees men working longer to keep up with Stakhanovite wives, can have profound effects. In Canada, for example, it could explain around half the change in the labour-force participation rates of married men aged 55-64.

This is good news. The “lump of labour” fallacy holds that older workers threaten economic prosperity by crowding out younger workers. (The same argument had been used to exclude women from the workforce.) In fact the economies of many countries with ageing workforces are growing quite quickly. Older workers use their wages to buy goods and services made by other workers. And as Lisa Laun of Sweden’s Institute for Evaluation of Labour Market and Education Policy points out, with more workers, of whatever age, tax revenues and pension contributions rise. That means a larger pie for everyone.

Not much leeway Singaporeans are in the dark about their next prime minister

Not that their views count for much

lee hsien loong

Print edition | Asia

Apr 25th 2018 | SINGAPORE

A PILLAR of stability, Lee Hsien Loong, son of Singapore’s independence leader, Lee Kuan Yew, has run the country since 2004. Despite a decline in his party’s popularity, the manicured electoral system has returned him to office time and again, most recently in 2015. The country is now more than halfway to the next election, which must be held in 2021 at the latest. As it nears, a tricky subject looms: who will replace Mr. Lee? He plans to step down as prime minister ahead of his 70th birthday in 2022. The question has the government on edge.

Mr. Lee will almost certainly win the next election. The ruling People’s Action Party has held power since before independence in 1965. It holds 83 of the 89 elected seats in Singapore’s parliament. Predicting the identity of the next prime minister is trickier. But a cabinet reshuffle this week provided clues. Three older ministers, all in their 60s, stepped down. Younger ones won more responsibility.

Mr. Lee’s possible successors include Heng Swee Keat, the finance minister, Ong Ye Kung, the education minister and Chan Chun Sing, newly promoted from the prime minister’s office to the Ministry of Trade and Industry. Mr. Heng, who has led the education ministry and the Monetary Authority of Singapore, as well as serving as an aide to Mr. Lee’s father, is regarded as the frontrunner. One former official praises him for his growing ease in the public eye, despite not being “a natural politician”. Wonkiness does not tend to hold Singaporean politicians back. His health, however, might: he suffered a stroke in 2016.

Public opinion is unlikely to play much part in the decision. In fact, the government is further crimping freedom of speech in a country not exactly known for it. In March parliament passed a law that allows police to ban the dissemination of videos or pictures of certain events. The sorts of incidents that qualify range from terrorist attacks to demonstrations that block pavements or disrupt business. Plans to put cameras linked to facial-recognition software on more than 100,000 lampposts will further discourage even the most respectable protests. Social media are also being scrutinized by a parliamentary committee which wants to fight “deliberate online falsehoods”. Whoever ends up in charge, the government will be well defended against unruly critics.

This article appeared in the Asia section of the print edition under the headline “Not much leeway

Haiyan Zhang

By Haiyan Zhang

Technical Director, Canada Wood Shanghai

May 30, 2018

 speakers Shanghai.jpg

Fire safety symposiums held in Shanghai and Beijing

Guest speakers at the event venue in Shanghai on April 27th.

Canada Wood China joined European Wood to hold symposiums on fire safety in timber structures. The first was in Shanghai on April 27th while the second was in Beijing on April 28th.

The seminars attracted more than 400 industry professionals including researchers, designers and developers. Five guest speakers from Canada, Europe and China gave presentations on fire safety attributes in modern timber structures. They also shared insight into the history and evolution of fire safety code requirements for timber structures in Canada and Europe. The latest in fire research, alternative solutions in fire safety design, and fire safety codes for timber structures in China were also discussed.

delegates shanghai.png

Audience members listen to a presentation at the event venue in Beijing on April 28th.

Officials from the Canadian Embassy, Canadian Consulate in Shanghai and MOHURD attended the seminars and made opening remarks.


Japan Housing Starts Summary for February & March 2018

By Shawn Lawlor

shawn lawlorDirector, Canada Wood Japan

May 30, 2018

Total February housing starts edged down 2.6% to 69,071 units. Wooden starts fell 3.2% to 38,340 units. Pre-fab housing fell 8% to 10,063 units. Post and beam housing declined 3.2% to 29,070. Platform frame starts fell 3.0% to 8,255 units. The decline in 2×4 starts was primarily attributable to a 5.9% decrease in multi-family rentals. Platform frame custom ordered and built for sale spec housing gained 0.8% and 4.4% respectively.

March housing activity decelerated significantly with an 8.3% drop in total starts. Rental housing fell 12.3% compared to owner occupied single family starts which dropped 4.2%. Total wooden housing retreated 4.3% to 39,736 units. Post and beam starts fell 4.3% to 30,106 units. Wooden pre-fab fell 4% to 911 units. Platform frame starts fell 4.4% to 8,719 units. As with the previous month, results for platform frame were dragged down by weakness in rentals; single family starts showed gains. Platform frame rentals fell 9.1% to 5,385 units, custom ordered single family homes increased 3.0% to 2,226 units and built for sale spec homes increased 7.4% to 1,086 units.

Japan Economic Update

By Shawn Lawlor

Director, Canada Wood Japan

May 30, 2018

According to Cabinet Office date, Japan’s first quarter GDP slipped by 0.2%, thereby ending two consecutive years of continuous growth. The decline was attributable to flat consumer spending and a slight decrease in capital investment. The majority of analysts contend that this decline is a temporary blip and that economic fundamentals remain strong. A tightening labour market resulted in a 1.3% year increase in average wages and inflationary pressures are picking up. Improved capital spending and exports are expected to Japan’s GDP is expected to return into positive territory for the balance of the year.


Leading Architectural Firm and Prefabricator in Korea Join Forces for the Creation of Industrialized Wood Frame House

By Tae Hwang

HwangProgram Manager / Market Development & Market Access, Canada Wood Korea

May 30, 2018

Gansam Architects & Partners, one of the top 10 architectural firms in Korea and Refresh House, the leading prefabricator-builder-developer of energy efficient wood frame houses, have joined their efforts together for the creation of small ready-to-order wood frame structure called “Off-site Domicile Module” or ODM. The ODM, with slogan of “Small but Enough,” has footprint of 7.25-meter x 3 meter rectangular shape with 20 m2 of floor area.

Several types of the module designed by Gansam will be built completely and entirely under the roof of Refresh House’s factory and can be transported to sites. The Nest, pictures shown in this article, is designed as small home consists of sleeping and living area, kitchen and bathroom. And other types for different uses include canteen, pop-up store, exhibition, café,etc. Also, you can order single module or two modules which can be joined at the site for more space.

Industrialized construction, off-site construction or prefabrication is gaining momentum in Korea as the weather dependent traditional site building is getting less and less productive due to harsher weather arising from climate change and the shortage of skilled labours combined with rising wages.

Korean Architecture Fair demos

Japanese-style housing projects planned

Update: June, 25/2018 – 14:56

TWGroup Corporation and Japan’s Hinokiya Group Co. on June 22 sign an agreement to develop housing and other projects in Việt Nam. — VNS Photo

Viet Nam News


HCM CITY — TWGroup Corporation and Japan’s Hinokiya Group Co. have signed an agreement to develop housing and other projects in Việt Nam, starting off with a Japanese-style housing project in HCM City next year.

The low-rise residential project will have intelligent solutions enabling residents to live close to nature.

TW said in a press release that the outstanding elements of the project would include a relaxing onsen area – a Japanese hot spring for dipping in the buff — and a Japanese-style park with fresh greenery.

Lê Cao Minh, general director of TWGroup, said: “Hinokiya is a leading corporation of Japan, a pioneer in bringing solutions to improve the quality of life.

“After contacting Hinokiya leaders and visiting their projects in Japan, we are really convinced by their convenience, intelligence, safety, and, especially, the humanity.

“Hinokiya builds not only housing but also pre-schools and nursing homes for old people.”

Hinokiya said it fully believed that the experience of both parties would create projects bearing their own marks, meeting the needs of customers for ideal living spaces.

The company, established in 1988, designs, builds, and sells houses; undertakes renovation, expansion, and reconstruction works; offers real estate brokerage services; leases houses; provides real estate investment and lease management consultancy, and produces and sells thermal insulation materials.

It also operates nursing and childcare facilities.

TWG has interests in property, construction, construction consultancy, education, and healthcare. — VNS

Chinas belt and Road

China’s ambitious Belt and Road Initiative, formally announced in 2013, has revived the country’s ancient concept of the Silk Road.


◾Despite its success in the developing world, Beijing’s approach to the Belt and Road Initiative has raised concerns over corrupt practices and financial sustainability in several recipient countries.

◾Beijing’s ambitious outreach, and its hidden agenda for strategic expansion riding on the initiative, will continue to fuel skepticism, suspicions and resistance among core powers.

◾Ultimately, given the sheer scale of the Belt and Road Initiative, snags, delays and cancellations are to be expected.

Since it began in 2013, the Belt and Road Initiative has become the centerpiece of China’s domestic and foreign policy, jump-starting diplomatic, financial and commercial cooperation between China and more than 70 neighboring countries across the Eurasian landmass. When complete, the massive infrastructure project will increase China’s overland and maritime connectivity to other regions, extending its trade and technology to new markets. The initiative also gives Beijing the opportunity to offload some of its excessive industrial capability, facilitating the necessary domestic industrial reforms it needs to establish a more stable economy.

In the past five years, China has spent at least $34 billion on the Belt and Road Initiative, focusing primarily on connectivity projects such as railways, ports, energy pipelines and grids. And though China has made major progress toward its long-term goals, it has also experienced several delays and setbacks. Given the sheer scale of the Belt and Road Initiative and how many large projects it encompasses, hold-ups, cancellations and failures are to be expected. But the causes of delays, in some cases a result of increased skepticism and resistance to China’s strategic aims, will continue to shape the future development of the Belt and Road Initiative.


The Big Picture

China’s ambitious Belt and Road Initiative, formally announced in 2013, has revived the country’s ancient concept of the Silk Road. Stratfor has closely tracked the development of this continent-spanning project, and in 2017 they published a four-part series discussing the underlying motivations behind this grand initiative — and the challenges it faces. Now that the Belt and Road Initiative has entered its fifth year, Stratfor is taking the time to examine the current state of the project and how its challenges will impact the way we analyze the initiative in the coming year

See China in Transition

Strategic Partnerships

Though one of Beijing’s stated goals is to foster inclusive Eurasian integration with the Belt and Road Initiative, its scheme so far has focused on the developing world, particularly countries in Central and Eastern Europe, South and Southeast Asia and Central Asia. It has achieved only limited success drawing developed states, such as Japan, and core European powers into the Belt and Road project. After all, though they may share business interests with China, they also maintain a strong and growing skepticism about Beijing’s means of increasing its competitiveness and its agenda for strategic expansion on the global stage.

According to a survey covering primarily emerging and transitional economies, Chinese financing — such as the Silk Road Funds and the Asian Infrastructure Investment Bank — provides a more significant boost to the majority of Belt and Road countries than their own domestic financing or even, in many cases, the International Monetary Fund, the World Bank and other international financing institutions.

China has many reasons for focusing on developing nations with strategic positions. And the developing countries themselves, which in many cases have weak economic foundations and governance, have been extremely welcoming to the Belt and Road Initiative. Many of these countries — 11 of which have been identified by the United Nations as the world’s least developed, such as Laos, Tanzania and Djibouti — have major infrastructure deficits but are eager to avoid the kind of restrictive, strings-attached financing offered by Western institutions. Since China’s approach to funding emphasizes non-interference and is generally unconditional and indiscriminate of regime, Beijing has achieved more access and goodwill than is usually given to its Western competitors. China’s methods to draw these smaller countries into its Belt and Road framework also offer them a way to leverage their strategic positions and balance regional powers such as Russia, the European Union and India.

Domestic Complications

China’s aspirations with the Belt and Road Initiative have increasingly been constrained by its own approaches and strategic objectives. Though the Belt and Road gained great success in the developing world, challenges over financing capabilities and political instability in the recipient states have repeatedly caused delays and even cancellations. This has been the case with several transportation and energy projects in countries such as Kazakhstan, Bangladesh, Myanmar and Pakistan. Beijing also had the unlikely hope that it could link several war-torn states, such as Afghanistan and Yemen, but that will certainly not happen in the foreseeable future.

Moreover, China’s partnership and perceived support for partner countries’ ruling regimes have led to domestic political polarization, opposition and international criticism. In some cases, leaders of these states have used the Belt and Road Initiative in service of their domestic political agendas, leveraging Beijing’s international clout to further their own international interests. And more significantly, corrupt governments have used Chinese funds for their own personal and political benefit.

Problem Countries

Problem Countries

problem Countries 2

Political corruption and instability have not only invited judgment but have also put Belt and Road projects at risk of delay. In Malaysia, for example, a game-changing May election turned several China-backed infrastructure projects into centerpieces of the political discourse. The new ruling power in Kuala Lumpur aims to investigate investments to not only delve into the corruption of the former government but to reduce its debt burden. Although Beijing’s policies are mostly to blame for such complications, China has also been frustrated by the liabilities caused by corrupt regimes. For instance, despite early investment, China has had to hold back some of its projects in politically risky countries such as Djibouti and Venezuela.

Finally, China’s eagerness to draw in partner countries provides these governments with leverage as they attempt to win investment from China’s rivals. Countries such as Thailand, Indonesia and some South Asian states, in particular, have been able to encourage Japan and India to compete with China over railways and hydropower projects at home, dampening Beijing’s objective of becoming the most influential regional power.

Debt Concern, or Debt Strategy?

China’s approach to debt financing in key strategic projects has also led to pushback, mainly over Beijing’s level of influence. For example, the East Coast Rail Link in Malaysia and the deep-water Kyaukpyu port in southern Myanmar are currently under review by the recipient governments, which are already critical of Beijing’s goal of securing supply routes other than the Strait of Malacca. Like Malaysia, Myanmar is concerned about the possibility of ending up in a “debt trap,” where China holds disproportionate control over the nation’s economy. After all, the $9 billion Kyaukpyu project is equivalent to 14 percent of Myanmar’s gross domestic product. As a result, the country is fearful that China could ultimately exert its influence to gain ownership of the strategically important Kyaukpyu port.

Myanmar’s concern is not unfounded. Both Sri Lanka and Pakistan — governments struggling with debt repayment and financing negotiations — have entered into “debt-for-assets” land-lease agreements with Chinese companies. In Sri Lanka, the Hambantota Port is now leased for 99 years, while areas around the Gwadar Port in Pakistan are leased for 43 years. In other states that already have high external debt or rely excessively on direct Chinese investment — such as Djibouti, Laos, Tajikistan, Kyrgyzstan and Montenegro — Beijing has used different forms of debt relief or forgiveness measures, in some cases resorting to acquiring the recipient country’s natural resources or long-term oil contracts to offset the loans. And speculation is rising over whether China will leverage its financing of strategic deep-water ports in countries like Myanmar and Djibouti to gain an advantage in the Indian Ocean supply routes. Just recently, China established its first overseas naval base in Djibouti.

High debt to GDP Ratio

Confronting the Core Powers

There is a growing wariness of China’s strategic intent and expanding influence with the Belt and Road Initiative. Beyond the concerns of developing states, China’s strategic rivals and powers throughout the developed world maintain a strong, if not growing, resistance to the project. Though core regional powers such as India, Russia and some European countries share business interests with China, they also maintain a strong and growing skepticism about Beijing’s means of increasing its competitiveness. And beyond that, China’s hidden agenda for strategic expansion on the global stage.

Despite India’s tactical recalibration to ease its tense relationship with China, New Delhi remains vehemently opposed to the China-Pakistan Economic Corridor. This is seen by India as part of Beijing’s strategy to encroach on the subcontinent and could potentially undermine New Delhi’s claims to the contested Kashmir region. Indeed, India’s opposition has factored significantly in some South Asian states’ strenuous geopolitical balance. For instance, last year Nepal scrapped a $2.5 billion Budhi Gandaki hydropower project, because of Indian concerns.

In Europe, core EU members such as Germany and France have found Beijing’s outreach in Central and Eastern Europe to be more competitive than cooperative, viewing the project as an attempt to dilute the bloc’s rule and agenda. This led to ongoing criticism and increased scrutiny over Chinese investment and projects in Eastern and Central Europe. The proposed railway between Budapest and Belgrade — a key piece of Beijing’s strategy to link to the Mediterranean port of Piraeus — is under review.

Where China’s outreach has received some success in the developed world is in Russia and, to some extent, Japan. Initially suspicious of the Belt and Road Initiative, Russia has grown more amiable as it recognizes how Chinese investment can benefit its own economy and foster development in Central Asian countries over which it exerts significant control. Moscow has begun supporting and even participating in some Belt and Road projects. Most recently, it entered into a co-financing agreement with China for close to 70 projects under its own Eurasian Economic Union, a move that will greatly ease the barriers to Beijing’s investment in some Eastern European and Central Asian countries as well as the Arctic.

Japan, for its part, continues to refrain from openly endorsing the Belt and Road Initiative. But in more tacit ways, the Japanese government is working to encourage its companies to participate in some of China’s projects. This is especially true in areas such as Central Asia and Africa, where Tokyo hopes to boost Japanese corporations’ waning overseas presence.

Looking Forward

Despite these successes, Beijing’s ambitious outreach will continue to fuel skepticism, suspicion and resistance among the core powers and complicate its agenda, especially as it works to hedge against increased pressure from the United States. And China has even inadvertently encouraged loose regional blocs to counter it. Japan and India, for instance, have begun working on an alternative to the Belt and Road Initiative on the African continent, participating in a U.S.-led proposal to establish a quadrilateral framework for infrastructure investment. Elsewhere, Australia is pledging an extensive campaign of aid, trade and diplomacy in the South Pacific, hoping to regain the position it has lost to China in its traditional backyard.

The reality is that none of these countries’ proposals can outdo China’s enormous and well-funded infrastructure plan. They lack China’s capital, human resources and moral flexibility. For participating countries, the long-term benefits of Chinese investment and infrastructure construction in many ways outweigh the risks. So, while investors should be aware that China will continue to experience setbacks in its Belt and Road projects, the initiative is still moving along relatively successfully, as are Beijing’s expansionary aspirations.


Economic scramble for North Korea picks up pace

Pyongyang appears to favour state-guided Chinese model over unfettered capitalismNorth Korea

Bryan Harris in Seoul, Lucy Hornby in Beijing and Demetri Sevastopulo in Washington JUNE 19, 2018

When Donald Trump outlined his vision for the economic development of North Korea, he played on western ideals of luxurious apartments with sea views.

But just days after a landmark summit with the US president, North Korean leader Kim Jong Un has made clear he has a different model in mind: China.

The 34-old-year dictator was set to depart Beijing on Wednesday after a two-day tour aimed at winning China’s financial backing for what Pyongyang says will be a new era of reduced international tensions and domestic economic development.

Scepticism persists about North Korea’s true ambitions, but the renewed optimism has investors salivating over the country’s untapped markets, including its substantial mineral deposits and inordinately cheap workforce.

As the scramble for North Korea picks up pace, however, it is becoming clear that Pyongyang is veering not towards unfettered capitalism but rather a state-guided model along the lines of its huge neighbour.

Beijing — with its long history of friendship and political affinity with Pyongyang as well as its geographical proximity — appears poised to reap its dividend.

North Korea 2.jpg© AP

“China is eager to encourage the North Koreans to take up the Chinese model because it will bind Pyongyang closer to Beijing and therefore lower the chances of Pyongyang either falling into the US orbit or experiencing a democratic uprising against the Kim regime,” said Dennis Wilder, a former top China analyst at the CIA.

China is holding out the promise of economic development to Mr. Kim if he lowers tensions with the US, Mr. Wilder added.

Long viewed as the last bastion of Stalinist economics, North Korea has undergone a period of quiet but transformative change since Mr. Kim took power in 2011.

The regime introduced agricultural reforms in 2012, legal revisions in 2014 and an overhaul of enterprise laws in 2015 — all of which loosened state control over the market and have contributed to an uptick in wages and the quality of life.

But most of the changes have been spearheaded by ordinary North Koreans, who have found themselves free to eke out a living through private enterprise within the shadows of the state’s hulking institutions.

North Korea 3

Unlike his father and predecessor Kim Jong Il, Mr. Kim has allowed marketisation to flourish and has vowed to pursue economic development. These changes, however, have not been accompanied by political liberalisation.

“He is copying China without admitting it. These are reforms without openness,” said Andrei Lankov, a North Korea expert at Kookmin University in Seoul.

“North Korea wants foreign direct investment. The problem for them now is they don’t know how to get it,” added Prof Lankov, who regularly travels to the reclusive nation.

In this regard, Beijing appears to be willing to offer assistance. Last month, the Chinese Communist party escorted a group of North Korean officials around Beijing to study “reform, opening up and economic development”, according to the Global Times, a Chinese newspaper.

Their trip followed a visit by the Chinese ambassador to Sinuiju, North Korea’s special economic zone near the Chinese border, as part of a broader push by Beijing to promote its model of controlled economic opening.

wage growth North korea.gif

Mr. Kim’s interest in the Chinese model was further highlighted by his inclusion of Pak Pong Ju, a key official spearheading North Korea’s economic reform, in this week’s delegation to Beijing.

“This visit to China was primarily aimed at winning economic support,” said Lee Seong-hyon, researcher at Sejong Institute in Seoul. “China’s economic model is the most viable, realistic option for North Korea and [Chinese President Xi Jinping] must have assured Kim about how North Korea can achieve economic development without risking political stability.”

One part of the model that North Korea has already sought to replicate are the special economic zones (SEZs), which China used effectively in southern cities Shenzhen and Zhuhai.

North Korea operates more than 20 SEZs, mostly in its border regions, although few have attracted foreign investment.

Even before the implementation of international sanctions, the attractiveness of the zones was undercut by entrenched North Korean bureaucracy, a lack of infrastructure — including electricity and roads — and the fear that assets could be expropriated.

av ratio offical_unofficial jobs to total income

“Sometimes they even put these SEZs in the middle of nowhere, so they could not cause a political disturbance,” said Prof Lankov.

“North Korea always wanted investment but on its own conditions. China used to be annoyed by these conditions. But now that Beijing is in a trade war with the US, it may accept.”

Lee Sung-yoon, a Korea expert at Tufts University, cast doubt on the scope of economic reform in North Korea, saying that Mr. Kim only sought “controlled SEZs which are more like enclaves for generating foreign currency”.

“Genuine reform and opening would entail liberalising banking and the private sector [and increasing] transparency in finance and trade — all anathema to long-term regime preservation,” he added.

South Korea is also anticipating economic liberalisation and the lifting of sanctions.


North Korea nuclear tensions


Kim Jong Un visits Beijing after Trump summit

The Moon Jae-in administration has already outlined to Mr. Kim its plans to develop rail routes along North Korea’s east and west coasts, which could integrate the reclusive nation into the wider region.

The country’s dominant conglomerates, meanwhile, have established task forces to probe opportunities in the North amid concerns about the longer-term economic outlook in South Korea.

According to a survey of 167 businesses earlier this month, almost 75 per cent would be prepared to invest in the North if sanctions were lifted. Companies that stand to benefit, such as steel and cement groups, have seen their stock prices soar in recent weeks.

Shares in Hyundai Cement rose more than 500 per cent between March and June as detente unfolded on the Korean peninsula. US-North Korea summit: a win for Kim Jong Un

“There is a lot of enthusiasm. Maybe too much,” said Chung Yeon-wook, a private banker with NH Investment and Securities.×1080.mp4

However, many in Seoul feel that South Korea’s historically adversarial relationship with the North may undermine its prospects.

“The rivalry between China and South Korea [for access to North Korea] has already been there for 10 years. China is now taking advantage of the situation because the North Koreans feel more comfortable dealing with them,” Mr. Chung added. Additional reporting by Song Jung-a

Q3_18 Stratfor forecast

Stratfor Worldview June 7 2018


China Remains in the U.S. Cross-hairs. The United States will impose tariffs, sanctions and blocks on investment and research in a bid to frustrate China’s development of strategic technologies. China not only has the tools to manage the economic blow, but will also accelerate efforts to lessen its reliance on Foreign-sourced technological components.

Trade Battles Fall Short of a Full-Fledged War. Trade frictions will remain high this quarter as the White House continues on an economic warpath in the name of national security. U.S. tariffs will invite countermeasures from trading partners targeting U.S. agricultural and industrial goods. As Congress attempts to reclaim trade authority, the White House will refrain from escalating these trade battles into an all-out trade war.

Taking the First Big Step with North Korea. Drama will inevitably surround the negotiation, but the United States and North Korea have a decent shot at making progress toward a political agreement this quarter, something that will set the stage for much thornier and lengthier technical discussions on denuclearization. Even if talks appear to break down in the coming months, Pyongyang will avoid more aggressive measures in the near term while working to maintain diplomatic and economic momentum with China and South Korea.

Tremors in Europe. The new Eurosceptic government in Rome will hold off on threats to leave the Eurozone for now, but will be seeking allies in southern Europe to battle Brussels on fiscal deficit and debt rules. Divisions within the British government will meanwhile raise the potential for Parliament to take more control of the Brexit process to keep the UK in the customs union.

All Eyes on Riyadh. As Iran’s major European and Asian clients negotiate waivers with the U.S. in return for reducing oil exports from Iran, the United States will be looking to Saudi Arabia to coordinate with major oil producers to make up the supply gap. Riyadh will nonetheless be cautious in planning a market intervention as it aims for a higher price band in anticipation of the Saudi Aramco IPO.

Moscow Tries to Break a Stalemate with Washington. Poland and other borderland states will make appeals for stronger security guarantees from Washington while they still have the United States’ attention. Moscow will try to break a negotiating stalemate with the U.S. to talk sanctions, military build-ups and arms control by promoting its mediation in the Syrian conflict and its potential utility in North Korean denuclearization. Don’t hold your breath for a breakthrough, though.

Polarizing Allies. In harnessing the power of tariffs and extraterritoriality in sanctions, the United States will polarize many of its security allies in Europe and Asia — strategic partners that Washington needs to counterbalance the emerging threat from China and Russia. Attempts to target Russia’s strategic relationships will call into question the long-term reliability of the U.S. as a defense partner and invite heavy push back from Turkey, Vietnam, Germany and India, in particular.

Iran’s Return to the ‘Resistance Economy.’ As the limits of EU economic safeguards are exposed, Tehran will cautiously walk back its commitments to the JCPOA while seeking out willing partners to circumvent sanctions. Russia will take advantage of Iran’s rising vulnerability to deepen its military ties with Tehran while mediating between Iran and Israel in Syria.

The Big Turkish Gamble. Turkey will be a big feature of the third quarter following a precarious electoral gamble by Turkish President Recep Tayyip Erdogan. Erdogan has the tools to eke out a win and whip up a nationalist reaction to any outside questioning of the vote, but the highly polarized country will remain on shaky economic ground amid worsening relations with the West.

Votes against the Status Quo. Mexico’s populist candidate stands a chance of winning big in July elections, which could pose a threat energy and education reforms while further complicating NAFTA talks. A strong anti-establishment current will also be on display in Colombia, where the FARC peace deal is under threat, and in Brazil and Argentina, where the appetite for economic reform will plummet.

Key Trends

The Constant Battle Against Unpredictability

As the United States enters the long summer stretch before midterm congressional elections in the fall, the midpoint of Donald Trump’s presidency will also come into sight this quarter. And after a particularly suspenseful spring of sanctions, tariffs, Cabinet changes and summit surprises, the U.S. president has only reaffirmed to the world his reputation for bending constraints toward a particular policy end — even if the means to that end cause considerable collateral damage at home and abroad.

And so, with several negotiations still pending — including discussions over the fate of the Korean Peninsula and high-stakes trade talks — a world weary from grappling with the fitful superpower is bracing itself for another quarter of whiplash from White House maneuvers.

The world is muddling through a blurry transition from the post-Cold War world to an emerging era of great power competition.

 But while Trump thrives on unpredictability as his chief negotiating tactic, many of his moves fit quite neatly— Even predictably — in the context of the United States’ great power rivalry with China and Russia. The United States’ intensifying economic pressure on China, its harder-hitting sanctions on Russia and its growing support for critical borderland states, such as Taiwan, Ukraine and Poland, are all a part of this budding competition. Even the U.S. search for a way to reunify and denuclearize the Korean Peninsula is a piece of a broader long-term strategy to balance against China.

Yet the United States is creating bigger distractions for itself in the Middle East with Iran while putting stress on the very alliances it needs in its global competition with China and Russia. Although the contradictions in U.S. policy are taxing much of the world, this prolonged state of confusion is par for the course as the world muddles through a blurry transition from the post-Cold War world to an emerging era of great power competition.

U.S.-China Competition Builds

Narratives casting China as an economic imitator, as opposed to an innovator, are out of date. As the country grows more economically advanced, focusing its attention on game-changing technologies, the United States will heighten its economic scrutiny on China — and squeeze numerous companies along U.S.-Asian supply chains in the process. This dynamic will endure well beyond the quarter and the Trump presidency. In the name of national security, the executive and legislative branches of the U.S. government will continue to target China’s Made in China 2025 strategic development program through various means, including tariffs, sanctions and restrictions on investment and research. U.S. companies, particularly those involved in sensitive technology sectors, will face growing risk and uncertainty over the potential for export controls and for closer monitoring of foreign investments.

Specific measures to watch for in the third quarter include a special investment regime for Chinese companies designed to block investment into sensitive areas like robotics, telecommunications, semiconductors, artificial intelligence (AI), virtual and augmented reality, and new energy. The White House already has announced its intention to impose tariffs on up to $50 billion worth of Chinese industrial technology goods under a Section 301 investigation into Chinese intellectual property and technology theft. (More details are expected June 15.) The United States will apply tight scrutiny to outbound investment to or informal collaboration with Chinese companies, especially in high-tech sectors. Telecommunications firms Huawei and ZTE are already feeling the pressure; the U.S. Commerce Department has slapped hefty penalties on ZTE, while Huawei is under investigation by the Justice Department. In addition to those companies, the United States could expand its net to ensnare tech giants like Baidu, Alibaba and Tencent, launching investigations into web services they provide. Washington is also likely to impose visa restrictions on Chinese researchers and students in the United States.

U.S. pressure will only make China more determined to accelerate its drive to forge its own supply chains for sensitive technologies.

 Deepening U.S.-China economic competition, however, does not guarantee a trade war, in which tit-for-tat trade measures escalate with no clear end in sight. China, along with the European Union,

Japan and other major U.S. trade partners, is trying to avoid destabilizing the global economy more severely. The United States, meanwhile, despite an apparent penchant for picking trade spats, will run into political constraints that will avert a worst-case scenario. Washington and Beijing alike will eventually make concessions to justify dialing back their more extreme tariff threats. Still, the negotiations will be bumpy.

There are hard limits to what each side can concede, and Chinese compliance is not assured, leaving the door open for some tariffs, and retaliatory measures, to shake out this quarter.

Internal White House dynamics will also be key to watch in tracking the progress (or lack thereof) in trade negotiations. Treasury Secretary Steven Munchkin and White House economic adviser Larry Kudlow will push for a compromise that minimizes collateral damage, while economic adviser Peter Navarro and U.S. Trade Representative Robert Lighthizer drive a much harder, and perhaps impossible, bargain with China. In the lead-up to U.S. midterm elections, the White House will probably be more sensitive to retaliatory tariffs targeting the U.S. farm belt, where support for Trump was strong during the 2016 presidential race. Tariffs on smaller crops such as cranberries and ginseng, for example, could hit a political nerve in Wisconsin, a state in which the farming vote could make a big difference.

Even as the negotiation inches ahead, the United States won’t prevent China from providing heavy, focused support to Made in China 2025 sectors. The U.S. pressure will only make China more determined to accelerate its drive to forge its own supply chains for sensitive technologies. China will, however, be willing to negotiate ways to increase U.S. imports, including of energy, semiconductors, vehicles and agricultural products; to partially liberalize certain sectors, such as the financial sector; to reduce some trade barriers for imported vehicles; to enhance intellectual property protection rights; and to restructure state-owned enterprises as part of its reform drive. Even if the United States hits it with tariffs this quarter, China has the political and economic means to withstand the blow at home [10]. A growing number of maturing corporate bonds will add to the financial strain on local state-owned and private enterprises, but Beijing will inject liquidity selectively to ease the pain, particularly in central and northeastern China, and to manage any fallout.

A Framework for North Korean Denuclearization

Trump and North Korean leader Kim Jong UN will meet face-to-face June 12 for a much-anticipated summit in Singapore]. While there will be moments throughout the process where it appears as if the whole     dialogue is collapsing, there is reason to believe that the negotiation will still have legs by the end of the quarter. Our focus will not be so much on the drama to come — the typical walk-outs,

Name-calling and muscle-flexing — as Trump and Kim battle to prove who can play the unpredictability card most effectively in the talks. Setting aside the theater of the negotiation, the fundamental question for the quarter is whether both sides will muster enough political will to develop a framework for denuclearization. If a dialogue advances, it will likely start with freezing nuclear development, leaving room to tighten the screws on denuclearization over time. Just as the United States is unwilling to offer North Korea instant regime security, North Korea will negotiate denuclearization only over a long period of time.

Compared with previous efforts at negotiation, the stakes are much higher this time around. North Korea is closer than ever to its nuclear deterrent, and if the talks fail, the United States will have invalidated the diplomatic route. The United States would find it difficult to build international consensus to reinstate crippling sanctions on North Korea, much less a consensus to pursue a military option.

If the United States can manage to avoid a military conflict with North Korea, it will be able to apply more resources and attention to reinforcing countries in China’s borderlands.

 But a breakdown in talks with the United States would not necessarily lead North Korea to resume its nuclear testing immediately. Even if the United States walks away, China and South Korea would keep up the diplomatic momentum with North Korea, giving Pyongyang an opportunity to press its neighbors to ease up on their own economic sanctions.

Japan will remain largely on the sidelines of the negotiation], given its frosty ties with South Korea and even frostier ties with North Korea. As trade tensions mount between the United States and Japan over the threat of auto tariffs, Tokyo will do its best to keep them separate from its security partnership with the United States. Japan’s biggest concerns lie in North Korea’s short- and medium-range ballistic missile threats and any short-term shifts to the U.S. force presence on the Korean Peninsula that could also lead to a draw down in Okinawa before it is politically and militarily ready to compete with China. Japanese Prime Minister Shinzo Abe will try to keep a high diplomatic profile this quarter both to try to insert Japan’s security interests into the U.S.-North Korea dialogue and to distract his own constituency from a scandal that threatens his six-year tenure. Should Abe lose the critical contest for the ruling party’s leadership in September, Japan could enter another period in which prime ministers come and go more frequently, creating more uncertainty as the great power competition in the Pacific heats up.

If the United States can manage to avoid a military conflict with North Korea, it will be able to apply more resources and attention to reinforcing countries in China’s borderlands [19]. Though China has managed to ease tensions with the states in its periphery, its continued militarization in the South China Sea will draw the United States into a more active military role in the region to balance it. The United States will increase naval deployments and patrols in the South and East China seas this quarter while working to expand military exercises with members of the Association of Southeast Asian Nations (ASEAN). An increase in U.S. deployments will lead to a period of heightened tension between Chinese and U.S. forces in these waters, and instances of harassment could become more frequent as the rate of close encounters and interceptions increases.

Friction Points in the U.S.-Russia Relationship

Russia’s influence over North Korea will remain limited so long as Washington sustains its diplomatic engagement with Pyongyang through the quarter. If the talks make progress, Russia will try to secure a role in the denuclearization process to make sure it has a seat at the table. And should the talks collapse, Russia will align itself closely with China to resist the United States in the U.N. Security Council on sanctions and military action.

The push and pull between the U.S. Congress and the president on Russia policy [20] can be messy and contradictory at times, but the result tends to be a harder U.S. line on the country. Congress will lean on the Treasury Department to sharpen its aim in targeting Russian elites with an eye toward sowing divisions in the Kremlin without creating the kind of significant global economic blowback that sanctions against Russian aluminum producer Rusal caused in the second quarter [21]. At the same time, U.S. lawmakers will be working to implement the Russia-related provisions of the Countering America’s Adversaries through Sanctions Act [22] (CAATSA) to coerce other countries to reduce their defense, intelligence and energy ties with Russia.

Though the White House has been more reluctant in the past to confront Moscow, secondary sanctions targeting Russia’s defense and energy sales appeal to its business sense by creating more export opportunities for U.S. liquefied natural gas producers. They will also appeal to the United States’ business sense by potentially creating more export opportunities for U.S. defense firms and for U.S. liquefied natural gas producers. Commercial interests, along with a growing U.S. strategic focus on Central and Eastern Europe in its competition with Russia and China, will give Poland, Ukraine and the Baltic states an opportunity to appeal to the White House for stronger security commitments. Warsaw, in particular, will try to advance talks with Washington over a permanent U.S. military presence in Poland, which will in turn cause Russia to up the pressure on Belarus to host a Russian airbase in its borders.

A potential military buildup in Russia’s periphery is one of several factors that could prompt a high-level dialogue, or at least preparations for one, between Washington and Moscow this quarter. Russian President Vladimir Putin has a long list of items ready for when he sits down with Trump, including sanctions, military buildups and stymied arms control talks. Russia will try to use its mediation in the Syrian conflict and offers to help with North Korea’s prospective denuclearization to present itself as a more constructive force. But the White House will engage with Moscow at a high level only if it feels that it has made enough progress on North Korea that it can deflect negative attention from the Russia-related investigations underway. Even if Trump and Putin manage to set up a meeting, the geopolitical environment will not be conducive to a grand bargain.

It will be important to watch how Putin handles the various challenges facing him this coming quarter.

 Having made it to a fourth term in office in elections in March, Putin will have to maneuver carefully among the government, his inner circle and Russia’s powerful oligarchs as the United States dangles the threat of heavy sanctions over them. Efforts to consolidate the assets of Russia’s elite will continue in the third quarter, as the Kremlin works to maintain economic stability and political loyalty. Higher oil prices will help ease some of the strain that honoring social pledges made during the campaign season, increasing security spending and hosting the World Cup have put on the Kremlin’s finances. Competition among the security services remains a key area to watch as Putin balances among rival factions. We’ll also be watching carefully for further signs that the longtime president is elevating younger members of the elite in search of a successor.

The more immediate priority in the quarter will be for Putin to try to take more steam out of opposition protests. In the second quarter, a wave of opposition protests in Armenia that swept longtime leader Serzh Sargsyan from power was another wake-up call for the Russian government and the heads of other former Soviet states: Once a protest movement has gathered enough momentum, not even brute force tactics can quell it. Determined to avoid a similar fate, the Kremlin will work on co-opting opposition leaders into government positions. Opposition leaders like Alexei Navalny are unlikely to fall for this strategy. But figures from other prominent dissident parties — especially those that stand to do well in September’s regional elections, including Yabloko and the Communist Party — may yield to the Kremlin.

Doubling Down on Iran

A big element of the U.S.-Russia competition will also play out in the Middle East. In walking away from the Iran nuclear deal and reinstating hard-hitting sanctions, the White House is hoping against all odds to foment enough economic frustration in Iran to set regime change in motion. Israel, meanwhile, is seizing a rare opportunity to escalate its military campaign against Iranian and Hezbollah assets in Syria, knowing that it has firmer security guarantees from the United States to manage the fallout of a cycle of attacks and retaliatory attacks that risks drawing in Russia. Moscow will plan its next steps carefully with the aim of avoiding a direct collision with the United States while exploiting U.S. and Israeli needs to disengage on the Syrian battlefield. Despite its attempts to mediate between Israel and Iran — in hopes of bargaining on a more strategic level with the United States — Russia’s limited influence on the Syrian battlefield will prevent a lasting truce. Russia also will try to take advantage of Iran’s vulnerability with the United States to deepen its own military footprint in the region. Watch for discussions between Iran and Russia over boosting Iranian air defenses and appeals from Moscow for access to Iranian bases.

Tehran’s focus for the third quarter will be to buy itself as much room to maneuver as possible with those trading partners willing to risk U.S. secondary sanctions. In the immediate term, Iran will take care to avoid aggressive actions that could push the European position closer to that of the United States. But as the limits of the European Union’s economic guarantees become more evident in the coming months, Iran’s internal debate over how to proceed will intensify. Iran will probably still confine retaliatory attacks against Israeli strikes in Syria to the Golan and potentially the Palestinian territories as it tries to avoid a bigger conflagration. It will also test the limits of the nuclear deal and its cooperation with Europe, for instance by threatening to increase enrichment, to limit access to International Atomic Energy Agency inspectors or to withdraw from the Nuclear Non-Proliferation Treaty.


Philippine infrastructure push is unlikely to boost wages as lack of high-paying jobs hinders government’s poverty reduction plan FT Confidential Research JUNE 18, 2018

As living costs in the Philippines rise, neither the government nor the private sector can provide Filipinos with higher-paying jobs. Dissatisfied workers demanding more work, more money and better career options threaten President Rodrigo Duterte’s poverty reduction agenda. In our first-quarter survey of 1,000 urban Filipinos, 55 per cent of respondents said they had a “secure” or “very secure” job. The figure is in line with the average for the other ASEAN-5 economies included in the Economist survey. Although the majority enjoy job security, people looking for a new job are having a hard time. Forty per cent of our respondents said they found it difficult to get hired, while only 11 per cent said it was easy. Among job seekers, 34 per cent said they wanted a higher salary, while 28 per cent wanted career growth.

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The survey corroborates government data showing that while unemployment is down, underemployment is high. The underemployment rate — defined as those wanting to work longer hours or get an additional job to earn more — rose to 17 per cent in April, from 16.1 per cent the year before.

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The Economist sees underemployment as a more formidable challenge than unemployment. In the public sector, Mr. Duterte’s promise to spend up to 8.44tn pesos ($158bn) to fix the country’s dilapidated infrastructure is producing low-paid, temporary construction jobs, incapable of sustaining a typical Filipino family. Private companies, meanwhile, are bracing for wage rises this year that could increase labour costs. This, in turn, is making the Philippines unattractive to private investors, who are critical to the creation of competitive jobs.

Low pay, temporary work

The government’s ambitious “Build, Build, Build” programme aims to generate 6.4m jobs by 2022, mostly by employing low-skilled workers in construction. We think the programme is a good way to absorb poor rural agricultural workers into higher-paying jobs, especially since some of the projects are in regions outside Metro Manila.


This is all part of Mr. Duterte’s plan to spread wealth beyond Manila. But while the infrastructure push will indeed reduce unemployment, it is unlikely to offer the competitive salaries and permanent positions available in the private sector, or overseas. In fact, government data show that 96 per cent of current vacancies would pay only a minimum wage, below the amount needed for a decent living. In Manila, the minimum wage amounts to 15,360 pesos a month, but wages in poorer areas tend to be lower and fall near the 2015 poverty line of 9,064 pesos.  Although there is no official definition, Ernesto Pernia, the socio-economic planning secretary, recently said that a “decent income” for a family of five would be at least 42,000 pesos a month. This is achievable if two family members are earning 21,000 pesos each, near the average entry-level salary in the booming business process outsourcing industry. Construction jobs are also temporary. Since none of the 75 big-ticket infrastructure projects are under way yet, government contractors concentrate on smaller projects that require fewer workers and are completed in a shorter time. Some bigger projects funded by China are also likely to employ Chinese workers, leaving fewer opportunities for Filipinos. The lack of job security and decent pay make local construction jobs unattractive compared with employment overseas. There is no incentive for skilled Filipino engineers and architects currently working abroad to heed Mr. Duterte’s call to come home and contribute to his nation-building project. This could partly explain why construction jobs remain open, and state projects delayed.

Tough times all round

Poverty also affects households with permanent jobs. The World Bank, in a recent report on the Philippines, found that 54 per cent of poor households are headed by wage earners (as opposed to those who are self-employed). These include university graduates who work for private companies that typically pay more than the government.

Businesses are also operating in a more difficult environment. Accelerating consumer prices and a weaker peso, which hit a 12-year-low against the dollar this month, are increasing operational costs. Central bank data show fewer companies are planning to hire workers in the next quarter and we believe this will only get worse in succeeding months, especially as the government is pushing for a higher minimum wage. The minimum wage level in the Philippines in certain regions is already higher than in more developed Malaysia.

The private sector picture is not encouraging. Infrastructure projects have been delayed and the government plans to reduce tax incentives for investors under its proposed tax reform. As a result, foreign investment in the economic zones where these incentives are offered has fallen to its lowest level since 2010. Never mind tackling underemployment; even sustaining the recent drop in unemployment could be challenging. — Prinz Magtulis, Philippines Researcher,


Economic Snapshot for ASEAN

June 21, 2018

Economic momentum remains solid in Q2 after a positive Q1

The latest indicators suggest that ASEAN’s economy continues to perform well in the second quarter despite swirling global trade tensions, with growth forecast to come in at 5.2% year-on-year. With the exception of Malaysia, manufacturing PMIs for April and May were firmly in expansionary territory across the region, supported by strong domestic demand. In May, Indonesia’s PMI reached a near two-year high, while readings also improved in the Philippines and Vietnam. In Singapore, the indicator has moderated slightly so far in Q2 despite remaining firm, while in April Myanmar’s PMI reached its highest level in the survey’s history before a correction in May.

Other signs corroborate the ongoing momentum, with internal dynamics buttressed by strong labor markets and wage gains. In April, Indonesia saw healthy retail sales growth, while industrial production grew at a robust pace throughout the region. In contrast, the external sector appears to be softening. Import growth is outpacing export growth in many countries, on strong private consumption, higher international oil prices and tough prior-year comparisons for export growth.

The latest GDP readings for the first quarter confirmed regional growth at 5.4%. Comprehensive data for Singapore saw GDP growth revised up, on the back of an expansion in the services sector that was stronger than previously estimated. In addition, the figures point to a broadening of economic momentum towards more domestic-oriented sectors, as well as an incipient recovery in the construction sector. In Thailand, growth was clocked at 4.8% year-on-year in Q1, marking a five-year high and in line with FocusEconomics panelists’ forecasts. The reading was underpinned by higher farming and non-farming incomes, and a recovery in public investment.

On the political front, Malaysia reduced the Goods and Services Tax (GST)—an important source of revenue for the government—to 0% effective 1 June. This should give private consumption a shot in the arm in the short term, at least until a substitute Sales and Services Tax (SST) takes effect from September. However, the move creates fiscal uncertainty. Until the SST is introduced there will likely be a fiscal shortfall, despite the breathing space provided by higher oil prices. In addition, it is unclear whether, once introduced, the SST will raise as much revenue as the GST. To convince investors that it is serious about fiscal discipline, the new administration has moved to reduce infrastructure spending—including scrapping a planned high-speed rail link to Singapore—and trim ministries’ spending and the public sector wage bill.

Thailand is also trying to present a fiscally responsible image; the Junta recently presented a draft budget for FY 2019 aimed at reigning in the budget deficit. Proposed spending is slightly below the FY 2018 budget, although defense spending will receive a notable boost. In contrast, several areas important for future economic development will see spending cuts, including education, agriculture and social development.

 See the full FocusEconomics Consensus Forecast ASEAN report

Economic outlook looks rosy, but trade concerns are rising

Economic growth should remain solid going forward, as the region continues to benefit from resilient domestic demand. Public infrastructure investment in key economies such as Indonesia and Philippines will support growth, while strong labor markets bode well for private consumption. On the downside, external sectors will likely continue to weaken, as export growth eases after a stellar performance in 2017 and higher crude prices raise the import bill. In addition, tighter financial conditions could weigh on activity, while a further escalation of trade tensions between the U.S. and China would hit the generally open economies of ASEAN hard, particularly given the importance of both countries as key export markets. GDP growth for the region is expected to come in at 5.2% this year, which is up 0.1 percentage points from last month’s estimate and matches last year’s expansion.

This month’s upgrade comes on the back of higher 2018 growth projections for Thailand—following a strong Q1 outturn—and the Philippines. In contrast, growth forecasts for the rest of the economies surveyed in the ASEAN region—including heavyweights Indonesia, Malaysia and Singapore—were unchanged from the prior month. For 2019, our panel sees growth at 5.1%.

Our panel projects that Myanmar will be the fastest-growing economy in the region, with a 7.1% increase expected in 2018. Conversely, Brunei is foreseen logging the weakest expansion this year, at 1.4%. Among the major economies in the region, the Philippines will record the fastest increase, followed by Indonesia and Malaysia.

INDONESIA | Economic growth appears firm in the second quarter

The most recent indicators from Q2 suggest that economic activity is picking up from Q1’s muted performance. Retail sales growth accelerated to a ten-month high in April and should remain elevated, as consumer confidence in May improved markedly. The manufacturing PMI increased in May to the best print in almost two years, underscoring the improving health of the sector. Against this positive backdrop in the domestic economy, S&P Global Ratings affirmed the country’s BBB- rating and stable outlook on 31 May. The ratings agency applauded the government’s prudent handling of fiscal accounts and the recent reform that has increased tax collection. Nevertheless, it warned that increasing external financing costs because of faster-than-expected monetary tightening in the United States and modest increases in the prices of Indonesian key exports could cause external buffers to deteriorate and expose the country to economic shocks.

The economy is expected to accelerate slightly compared to last year on faster growth in government consumption and fixed investment. Higher crude oil prices and a modest price outlook for Indonesian commodities, however, are weighing down growth prospects. FocusEconomics panelists see GDP growth of 5.3% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is seen growing 5.4%. 

THAILAND | Growth hits a multi-year high in Q1, data for Q2 suggests continuing momentum

National accounts data showed the economy continued to enjoy a strong run in the first quarter, growing at the quickest pace in five years. This was largely due to strong activity in the domestic economy as private consumption benefitted from an increase in non-farming income. In addition, the external sector remained solid despite a moderation in export growth and a pick-up in import growth on the back of a strong domestic economy. Data for Q2 continues to suggest that the domestic economy is gaining traction, while the external sector is softening slightly. In April, manufacturing growth accelerated, while the country recorded its second trade deficit of the year, owing to strong import growth outpacing double-digit export growth.

Although growth is expected to moderate in the coming quarters, economic growth should remain robust this year due to healthy domestic demand. Export growth is, however, likely to ease due to a large base effect. Looking to 2019, a tight fiscal stance as outlined in the recent draft budget could drag on growth. Risks to the outlook stem from rising trade tensions, mostly coming out of the United States. Furthermore, high household indebtedness and political uncertainty in the lead up to elections to be held no later than February 2019 could drag on economic prospects. FocusEconomics panelists expect the economy to grow 4.2% in 2018, which is up 0.3 percentage points from last month’s forecast. The panel projects growth of 3.8% in 2019.

See the full FocusEconomics Consensus Forecast ASEAN report

MALAYSIA | Economic signs are positive, although fiscal concerns emerge following tax change

Following a robust Q1, the economy appears to have gotten off to a solid start to Q2: Exports jumped and industrial production growth accelerated in April. On the downside, the manufacturing PMI moved further south of the neutral 50-point threshold in May due to weakening domestic demand. The new government reduced the Goods and Services Tax (GST) to 0% effective 1 June. This should provide a boost to private consumption in the short term until the Sales and Services Tax (SST) is introduced on 1 September. However, slashing the GST creates a sizable gap in the budget, raising questions about the government’s finances and whether it will be able to stick to the 2.8% deficit target for 2018. To rein in spending, Prime Minister Mahathir Bin Mohamad has cancelled big infrastructure projects and told ministers to implement austerity measures.

GDP should remain resilient this year on the back of strong private consumption growth, although government consumption is likely to suffer in the near term from the cancellation of previously approved projects and expenditure cuts. Risks are, however, titled to the downside: High household debt servicing costs could drag on private consumption, while uncertainty over government policy and the fiscal situation could dent private sector activity and investment. FocusEconomics Consensus Forecast panelists expect the economy to grow 5.3% this year, unchanged from last month’s forecast, and 5.0% in 2019.

MONETARY SECTOR | Inflation picks up marginally in May

A preliminary estimate by FocusEconomics shows regional inflation accelerated to 2.6% in May from 2.5% in April, on the back of stronger inflation in Laos, the Philippines, Thailand and Vietnam. Price pressures dipped in Indonesia and are still outstanding for the remaining countries in the region. In an unscheduled meeting on 30 May, Indonesia’s Central Bank raised its policy rate from 4.50% to 4.75%, mere weeks after a similar rate hike to 4.50%. The move was designed to support the depreciating currency, particularly given the prospect of the Federal Reserve raising interest rates in mid-June.

Inflation will be supported this year by higher global oil prices and solid domestic activity, although price pressures will remain relatively muted. Our panelists expect inflation to average 2.9% this year, which is unchanged from last month’s estimate and marginally above the 2.8% inflation figure recorded for 2017. Our panel foresees inflation ticking up and averaging 3.1% in 2019.

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Oliver Reynolds