Legacy of Lee Kuan Yew

It would be impossible to live in Singapore and not write a post this week about the late Lee Kuan Yew.  So many people lined up to pay their respects that the line stretched for several kilometers and people stood for more than 8 hours.  Nearly every company gave employees time off.    The response was so overwhelming that the government has had to extend the viewing period to 24 hours.  The subway and feeder bus lines also had to be opened nonstop to accommodate everyone.

Local media coverage was nearly as wall-to-wall.  On the first day, the Straits Times ran an extra 32 page section on the Minister Mentor’s life and legacy.  The second day, the tribute section ran another 20 pages.  On the third day, 18 pages more. 

With all the coverage, it may not be possible to comment on anything new.  What is striking in many of these retrospective articles is the extent to which myriad economic policies put into place from the very beginning have been continuously refined and enhanced over the decades.  The foundation for Singapore’s explosive economic growth—from third world to first, as Lee famously proclaimed—was set from the earliest days of independence.

Lee left much of the day-to-day management of government when he retired from the post of Prime Minister after 31 years at the helm.  He continued to be involved in high-level policy decisions afterwards as Minister Mentor and a member of Parliament, although his influence tapered over time.  

Clearly, the city state would not likely be what it is today without the policies put into place by Lee and his cohort of officials from the beginning.  At the time of independence, 50 years ago, Singapore few obvious advantages.  It had a limited population.  No natural resources.  Limited land.

It did have a strategic location and a history of being a port city.  Lee and his colleagues set about enhancing the assets that were available.  The market had been focused under colonial times on re-exporting products made elsewhere.  But a relatively large number of unemployed, low skilled people needed to be put to work.  Despite limited domestic savings and not a very deep bench of skilled entrepreneurs, the government decided that Singapore would have to focus outward to survive. 

The neighboring countries, however, were not particularly helpful as destinations for the new strategy.  After all, some of the neighbors were in similar situations and were likely to be aiming at the same markets.  This meant that Singapore could not just concentrate on the region, but had to be planning from the earliest times to sell to a broader marketplace. 

The lack of domestic skills meant inviting outsiders in to help and invest.  Foreign investors were granted concessions, including favorable taxes, as part of a broader plan to encourage economic development.  Foreign capital was combined with domestic savings, gathered through a new program called the Central Provident Fund (CPF) started in 1955 for civil servants and later expanded to include all citizens. 

These policies continued and were expanded over the decades.  Foreigners still receive concessions for investment and Singapore now receives more inward foreign direct investment than most of the rest of Asia, totaling $850 billion by the end of 2013.  The CPF scheme has shifted Singaporeans from a nation of limited savings to a country with significant capital. 

The Economic Development Board (EDB) was established in 1960 to direct the government’s industrialization drive.  Over time, the government continued to expand the number of agencies tasked with assisting companies and economic development.  In addition to the EDB bringing in foreign companies, Singapore now has Spring to help local small and medium enterprises as well as International Enterprise (IE) Singapore to help local firms that are interested in expanding into new overseas markets.  These agencies are given ample funding to help encourage economic growth and development for local firms and, especially, to continue to attract foreign investors in targeted sectors.

Education was also a key early focus.  Originally, Singaporeans were given basic vocational training to help them transition into factory positions.  Over time, the orientation shifted to creating higher skills and, eventually, into advanced knowledge.  Lee also emphasized language training, requiring students to be bilingual.  He continued to promote the use of English and famously switched local Chinese language skills from various dialects to Mandarin.

Workers were housed in new high rise buildings, largely built by the Housing Development Board and sold to citizen owners at heavily subsidized rates.  Given the scarcity of land, the government has always been extremely active in managing this resource.  Buildings have been routinely demolished to make room for new, more productive construction and facilities.

As manufacturing began to take off, the country also highlighted its traditional role as a trading hub.  The government continually took steps to ease the movement of goods in and out of the country.  The sea and air ports were continuously improved.  Government officials have always emphasized the development of excellent infrastructure in general. 

From the beginning, Lee and his government put in place the foundations for strong economic growth.  After 50 years, the lines of people waiting to pass by his coffin to pay final respects could be sheltered by gleaming glass skyscrapers inhabited by some of the most competitive and dynamic firms in the world.  Other countries have tried to make a similar leap to economic development.  Singaporeans have been lining up in droves to commemorate the man that they believe made the country succeed where many others have not.

***Talking Trade is a blog by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

How Oreo Could Become Best Friends with the Marlboro Man

Last week I wrote about how lobbyists should be an important part of the policy landscape, particularly for trade issues.   Companies, consumer groups and others need to pay careful attention to what governments across Asia are doing.  The consequences of inattention could be significant.

As an example, one deeply problematic regulatory issue that appears to be spreading across the region is the introduction of plain packaging.  While initially targeted at cigarettes, the momentum seems to be building for the use of plain wrappers for other products as well, including alcoholic beverages and even ordinary food items. 

The results would be a disaster for companies both big and small and potentially a nightmare for consumers.

Let’s start with understanding plain packaging for cigarettes.  Under an Australian plan, cigarettes were singled out for special treatment.  The intention was to reduce the number of Australians who smoke cigarettes.  By limiting the marketing and branding of cigarettes, the government hoped to reduce the incentives for taking up the habit.

Changing labeling for cigarettes is not new.  Many governments around the region have special rules around packaging.  In Singapore, for example, packets require graphic and gory photographs of the damage caused to smokers (and their offspring).  Advertising for cigarettes, like in many markets, is heavily restricted.

Cigarette companies have managed to live with these rules.  The key issue for companies has been to have clarity.

But plain packaging is a whole different level of regulatory influence.  Under plain packaging, every element of the product is made to look identical to every other product.  For cigarettes, imagine that the carton is Army green.  The Marlboro name is written in courier font.  Every pack of cigarettes inside the carton has the same green wrappers with courier font.  Even every cigarette stick inside looks identical between brands. 

Thus a consumer cannot tell what cigarette is being sold, bought or smoked very easily at all.  From a glance, the Marlboro looks like a Salem which also looks like a generic product. 

The purpose of this change in packaging was to get consumers to stop smoking.  It is not clear whether this objective will be met.  What is likely to happen instead is that consumers will continue to use cigarettes but may shift preferences between brands over time.  Absent clear quality differences, some consumers will likely migrate to cheaper products.

This is, of course, deeply problematic for companies that have spent a lot of time and money building up brands.  As a result, Philip Morris sued the government of Australia for invalidating the intellectual property embedded in their packaging.  While this case is not yet resolved, Ireland has also passed plain packaging legislation for cigarettes.

Governments have the right to regulate in the interest of health.  Philip Morris would likely argue that they are fine with the various regulations on packaging and advertising prior to the plain packaging rules.  These new rules, however, took a legal product and changed the regulations in ways that did not automatically appear to confer health benefits but could be very damaging to the company’s brands.

Leave aside for the moment whatever you think of cigarette smoking or the use of investor state dispute settlement as a means to resolve this dispute.  Of greater interest for this blog post is the likely spread of this regulatory measure if the cigarette case gets resolved in favor of the government.

One of the lobbyists from Philip Morris has been arguing for several years that plain packaging would spread to other sectors.  But no one seems to have taken her comments very seriously.  However, looking at the ground in Asia, it appears she was right and companies from across the spectrum should be deeply concerned. 

Government officials in Indonesia have already said that they will use plain packaging on alcoholic beverages with high levels of alcohol content.  But really, why stop there?  If plain packaging is required for strong spirits, it might as well be required on all alcoholic beverages. 

Imagine trying to shop for wine in a world of plain packaging.  If every bottle on the shelves has an identical shape with labels in Army green and brands listed in courier font, how will a consumer find the best product?  How will a consumer find any new brand?  How will a company reach new consumers?

Will the change in packaging result in less wine being drunk?  Will fewer people become impaired if all the labels look the same?  It is not at all clear that plain packaging would, in fact, resolve public health concerns related to alcohol use.

Consumers are still likely to buy wine.  What I suspect will happen is that consumers will reach for brands and products they know.  They will shun anything unfamiliar, making it nearly impossible for new companies to grow or for existing companies to expand product lines.  While major brands will be affected, the change could be most problematic for smaller firms and new entrepreneurs.    

Now think about this brave new world if the plain packaging mania spreads to food products or even to just processed food products.  Already, officials in Malaysia have apparently commented on their intention to proceed in this sector. 

Imagine if every Oreo cookie looks like very other biscuit—no more blue packaging as it could also end up Army green.  No more happy Oreo logo.  Every single cookie inside the packet could also lose identifying markers—no Oreo stamp on the cookie and no raised design on the chocolate cookie at all.  How will Oreo distinguish their products from others on the shelf?

Again, would plain packaging keep consumers from eating Oreos?  Would customers be healthier if food labels were identical and Army green? 

I’m sure that many will rush to say that there is no public health reason for plain packaging on food.  But I suspect that a creative government could come up with something.

The point is that this sort of regulatory behavior is likely to spread, particularly in the absence of clear information from companies and consumer groups about how such rules will affect the marketplace.   

As I said last time—government is going to make policy.  The extent to which those policies are helpful or not may depend on having information from companies and others about the implications of different policy decisions on real-world behaviors in the marketplace.

***Talking Trade is a blog by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

An Ode to Lobbyists

Bangkok--Here is a post I never expected to write—a note praising the efforts of lobbyists.  It wasn’t exactly that I was hostile to the idea of lobbying, but more that I regarded the industry as pushing objectives that could be problematic for society as a whole.  However, after working with the Asian Trade Centre for the past 8 months, I’ve come to more deeply appreciate the need for the sector and to regard the abilities of a good lobbyist (sadly in short supply in the region) much more highly.

One basic problem that the Centre was created to address was a broken or non-existent transmission belt between government and business in Asia.  In the area of trade policy, it makes little sense for government (especially) to be operating without clear knowledge of the needs and demands of the business community. 

Yet I’ve seen it over and over again in different governments across Asia—there is no clear mechanism for business to feed in even basic information to government officials.  To the extent that information flows, it tends to be ad-hoc and often conveyed informally.  It may have once taken place over the golf course, but now is done over tea, coffee or other beverages, perhaps at a reception somewhere for a different matter entirely. 

Alternatively, business relies on informal connections—the board chairman went to school with the key government official or has useful relatives.  The board chairman may even have been selected precisely because he (and it’s nearly always a he) went to the same school and has these types of personal connections. 

This model is clearly limited—there are just not enough people who went to school with key officials.  

Foreign companies hope to connect with the “right” local partner (meaning, preferably, someone who has these types of informal relationships with key stakeholders).  Companies often drag in their own government officials in embassies in the region only when things go horribly wrong.

What is largely missing in this region is a good lobbying sector with clear mechanisms for engaging with government at different levels and in different ministries to address specific trade-related policy issues.   Such a system would help head off many of the problems across the region and ultimately lead to more efficient, more effective policies with greater opportunities for growth.

Given that the business of trade policy is to create an environment for conducting business, the lack of feedback between government and business is deeply problematic.  Government officials end up trying to make policy in the absence of information about their own economy and have even less knowledge of systems in other countries.  It is perhaps not surprising that the outcomes from such a flawed system can be disappointing.

I remain an optimist and assume that most government officials in trade actually do want to create certain outcomes.  Even when the intended result is to protect the local industry, however, government often acts in ways that fail to achieve the desired outcome.  A lack of knowledge makes it more likely that decisions will actually create unintended consequences and perverse incentives. 

The problems are significant.  Start with the fact that many companies in Asia do not have anyone actively paying attention to government policy at all.  Most local companies—even the biggest, most powerful players in any given field—will not have a single person in the firm paying attention to trade and trade policy.  There will simply not be a government affairs or government relations person (let alone a whole team).  The marketing or corporate affairs or PR person may also pay zero attention to the policy side.  As a result, local companies can be blindsided by policy and regulatory changes in their own countries and in neighbors.

Also surprising—many foreign companies do not have anyone paying attention to policy in Asia.  They may have a team very busy in Washington or in Brussels, but no one on the ground in Asia.  If there is any attention paid to the region at the corporate level, it might be handled by someone based in the headquarters. 

In the relatively rare company that does have someone to follow trade policy in Asia, the person (or, perhaps, limited team) generally has no budget and limited ability to actually follow policy.  More problematic, the Asia-based staff members rarely have a good grasp or connections to government individuals involved in making policy so even if they are on the ground, they have limited capacity to influence outcomes.

Of course, this becomes a reinforcing mechanism—with limited staff and no budget, the Asia policy team rarely succeeds in making a difference, making it harder to justify the existence of the person and/or budgets in the future for the task.

The exception to this pattern is generally American companies (and, to a lesser extent, European companies).  Of course, many will say, the American approach to corporate lobbying is not something that anyone wants to emulate. 

However, if you look at who gets what they want and who succeeds, American companies have a much better track record than others.  This is true even for firms that might be thought of as competitors, like the Australian or Canadians.  Companies from both countries, by and large, do not engage in lobbying.  Except for the biggest global firms, both tend to wait for a crisis and then, perhaps, call in their own government or embassy staff to help.  Companies are just not as successful in reliably getting what they want.

As an example of the relative difference, last week the American Chamber of Commerce held their annual Asian conference in Singapore.  This event brought together the 27 AmChams from Mongolia to ASEAN.  The ballroom at the Marina Bay Sands was full. 

The Canadians held a similar event in Bangkok today.  The Canada/ASEAN Business Forum had less than half the number of people participating.  Of course, it was focused more narrowly on ASEAN than the American event with an Asia-wide remit.  The entire CABC has only been in existence for a few years (which also helps illustrate the problem).  Finally, the scale and scope of US versus Canadian investment is quite different—there are 3600 American companies in Singapore alone. 

But the important point remains—nearly all of the participants in Bangkok from Canadian companies were not following trade policy and government affairs as their sole job.  Most were company heads who grasp the importance of Asia to their corporate bottom line.  While welcome, such individuals are unlikely to be deeply engaged in following policy changes in the region over time.  

Canada does have more than 1000 trade commissioners located around the world.  These people do work full-time on trade issues.  However, each of these individuals is unlikely to be an expert in the industry, and certainly do not fully understand specific firms.  Thus, while government officials like trade commissioners should be a key element of a company’s strategy, they cannot and should not be the first (or only) line of defense for a firm.

A complex, shifting economic and policy environment like Asia requires the full-time attention of company staff.  Without a sustained focus, companies cannot hope to get the results and policy environment that they would like.

Government is going to make policy decisions.  Companies can either try to influence these decisions in a proactive, preferably helpful manner, or they can be reactive.  Those companies that do it well will likely have more success than those that do not.

***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

ASEAN Economic Community (AEC): Preparing for Disappointment?

The ASEAN Economic Community (AEC) is set to take off at the end of this year.  Companies around Asia are increasingly paying attention to the creation of this trade arrangement.  But most are likely to be disappointed on January 1, 2016. 

In 2007, ASEAN leaders announced a highly ambitious plan to unite the 10 member countries of ASEAN:  Brunei, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, and Vietnam. 

The original plan called for the creation of an ASEAN Economic Community in 2020.  The plan has multiple elements, including the creation of a single market and production base, a highly competitive economic region, equitable economic development, and a region fully integrated in the global community.  These economic components are joined by a broader agenda of political and security integration.

However, for business, the most important part of the AEC has been the commitment to create "a free market for goods, services, investment, skilled labor and the freer movement of capital."  

Such a goal would have been difficult for nearly any grouping to reach.  For ASEAN, the gaps in economic development in 2007 were significant.  To bring together nations ranging in GDP from Myanmar at just over USD$215 per year to Singapore at more than USD$35,000 would have been challenging under any timeline.

But ASEAN leaders made the task more difficult by moving the deadline forward by five years.  Instead of 2020, the ASEAN Economic Community would take effect in 2015.  (Although this originally meant January 1, 2015, the deadline was then shifted backwards to the end of the year giving members an additional 365 days to succeed.)  Thus member states with an ambitious deadline suddenly faced the conclusion five years sooner than anticipated.

Fortunately, ASEAN has had a mechanism for releasing the pressure.  Members could reach any goal by using pilot projects.  In addition, ASEAN works on the ASEAN Minus X system where somewhere between 10 and 0 members actually move forward with any commitment. 

No one actually checks for implementation.  The ASEAN Secretariat is very small and has no capacity to ensure that members follow through on their various commitments.  Although there is a dispute settlement mechanism in ASEAN, it is not used.

Despite these challenges, ASEAN countries mostly managed to drop all tariffs to zero by 2010.  The “newer” members of ASEAN (Cambodia, Laos, and Myanmar) have until 2015 to finish the job. 

However, tariffs are not the only way that countries can keep out foreign products.  Other kinds of non-tariff barriers are also supposed to be removed from ASEAN countries.  Most of these discussions have moved forward slowly.

Services are supposed to be opened as well on the way towards the AEC.  By 2014, members had agreed on eight “packages” of market opening.  Each package is designed to open up a set of subsectors for other ASEAN firms.  For example, each member might decide to open up hotels, clinics or accounting firms.   Of the 160 subsectors, ASEAN members have already agreed to open up roughly 65.  Not all commitments are likely to be equally meaningful for companies.

The AEC also includes free movement of investment.  ASEAN members have made limited progress towards meeting this goal.

Finally, the AEC also promises the free movement of skilled labor.  This is a highly sensitive topic for most members.  As a result, little progress has been made.  Although members have drafted a few mutual recognition agreements (MRAs) for specific sectors like engineering and architecture, none (or, at best, very few) have been able to take advantage of the provisions.  This is because an MRA does not negate the need for immigration or visa rules.

The deadline for the freer movement of capital was not moved forward to 2015, but remains at 2020.

By the end of 2015, then, what is likely to change in ASEAN?  The opening of goods markets beyond existing tariff reductions has slowed to a crawl.  Efforts to address non-tariff barriers have not moved ahead by much. 

For services, ASEAN members are supposed to complete two more “packages” of services liberalization this year.  While these are meant to result in the free movement of services, it is still likely that ASEAN firms will find challenges in operating around the region.  This is partly because the levels of commitment (unless something drastic happens) are likely to be limited.

Labor and investment are not likely to be significantly opened for the rest of this year. 

As a result, at the end of 2015, the primary difference between now and then is likely to be two additional rounds of services opening and very little else.  For many ASEAN member firms, January 1 is likely to be very disappointing.  While companies are increasingly starting to expect ASEAN to deliver on the sweeping goals promised for the past few years, the free movement of goods (other than tariffs), services, investment, skilled labor and freer movement of capital are likely to prove elusive.

Trade Bottlenecks: A Review of One Day in the Jakarta Post

I was in Jakarta, Indonesia last weekend and picked up the Jakarta Post from Saturday, March 7.  I was struck by the sheer number of articles highlighting issues around trade—or with strong trade implications.  Nearly all highlighted bottlenecks that impede economic growth and development in Indonesia.

The first page notes, “RI Faces Major Infrastructure Project Delays.”  As any visitor to Jakarta knows, infrastructure in Indonesia has been unable to keep up with the demands of a growing population. 

The Public Works and Housing Minister is supposed to open significant new construction contracts by March.  But because of the number and size of the contracts, the ministry has announced that less than half of the proposed projects will meet the deadlines for tender announcements. 

Over the next five years, the government expects to complete 1,000 km of new toll roads and 2,650 km of main roads.  By comparison, the total length of road in China increased from 3.7 million kilometers in 2008 to an estimated 4.7 million kilometers in 2014. Meanwhile, the total length of highway in China rose from 60,300 kilometers to about 112,200 kilometers.

Admittedly, it may not be fair to compare any other country to China’s streak of roadbuilding.  But the contrast certainly in stark.  At the end of 5 years, Indonesia will have less than 4,000 new kilometers of main and toll roads.

The delays in Jakarta in tendering out projects relates in part to problems with land acquisition and paperwork problems in getting the tender documentation prepared.  Land and paperwork challenges will ring familiar with many businesspeople struggling to operate in Indonesia.

The second page of the paper highlighted how police are being urged to obey the president’s order to stop prosecuting the people who are trying to fight corruption.  Another article notes that Jakarta may be unable to pass a budget, so the city is preparing to use last year’s budget as a guidepost. 

One of most disturbing articles can be found on page 4, where President Jokowi has urged farmers to work harder for food sufficiency.  The government has already announced that it will not import any rice to meet rising demands for this staple crop from consumers.  As a result, the government hopes that farmers will start growing more rice to make the entire country self-sufficient in rice production.

The paper reported that Jokowi said, “I asked all farmers to be more confident in producing rice.”  The government is expected to announce a price of unhusked rice that will be “consistent with farmer’s expectations.”  The president has already said he wants the country to be self-sufficient in rice, sugar and corn within five years. 

To achieve the targets, the Indonesian Military (TNI) has been ordered to assist.  The Army signed a Memorandum of Understanding with the Agriculture Ministry for cooperation.  The Army agreed to deploy 50,000 people plus 50,000 non-commissioned officers to serve as agricultural field advisors.

Where to begin on unpacking this story?  I think a future post will go into some of the issues around food self-sufficiency in greater detail.  For now, just note that this is likely to be a poor idea with a fairly miserable track record of success wherever it has been tried.

Banning the importation of rice, sugar and corn (which is what the government seems to believe is necessary to ensure sufficient local production), only distorts the market even more.  It will likely lead to ruinous costs for the government as price supports will likely be needed, as well as all sorts of subsidies and assistance to farmers for things like fertilizers.

The Indonesian distaste for imports is deeply problematic.  In general, a great deal of time and effort has been spent complaining about the trade balance and decrying imports.  Imports are not automatically bad.  Many exports, for instance, require a certain level of imported content.  Again, I could go on, but will move along.

It is unclear to me how bringing the Army into the field will improve the capacity of farmers or the ability of the Army to do its job. 

The business section opened with an article on how the ministry is building roads to connect up seaports and airports.  The government has already announced plans to develop 24 seaports across the next five years, along with 5 new airports.  But none of these projects will work if the road infrastructure is not also in place.

As a result, the article notes, the Public Works and Housing Ministry has pledged to build 1,000 km of roads to connect these facilities (to what, exactly, is not clear from the article).  The ministry is also tasked with creating 1,350 km of roads to support 15 national strategic tourism areas. 

What is not obvious at all is whether the roads announced in the business section are the same roads announced on the first page of the paper.  If they are, then most of the new road construction will be aimed at getting goods and people out of seaports and airports and getting people to tourist destinations.  While necessary, such construction will not solve many of the road and trade bottlenecks that are causing companies major headaches when trying to operate in Indonesia.

Sixty percent of the budget will go to road building in the eastern part of the country.  The government is hoping that public-private partnerships will boost infrastructure and accelerate growth. 

Another great story on the business front page related to e-commerce.  The government has asked for the development of an “e-commerce roadmap” in the next 3-6 months.  Right now, there is a ban on foreign investment in e-commerce.  (I’m not sure exactly how this works frankly.) 

The government is to discuss whether online merchants should have to register with the government or not and become a licensed provider of e-commerce products.  Surely one of the biggest benefits of e-commerce is that it allows anyone—from one person operating in their own home to some of the biggest firms in the world—to buy and sell goods and services.  If every merchant has to be licensed, much of the benefit is likely to be lost, particularly for smaller firms.

In any case, the government has promised to list all the “lingering” issues in the industry to sort out the most pressing.  Hopefully, businesses from around the world will let Coordinating Economic Minister Sofyan Djalil know all about those lingering issues that impede the growth of what ought to be the most dynamic sector of the economy.

The last two articles on the front page are also of relevance to a trade audience.  One announces the launch of a banking road map in May.  The roadmap is supposed to include options for consolidation including the integration of IT systems for state-owned sharia and commercial lenders.  Finally, the government announced the preparation of regulations for the water industry.  One issue is whether or not the government ought to seize control over the bottled water industry.

Thus, this random day in the Jakarta Post highlights so many of the issues for businesses trying to operate in Indonesia: struggles with infrastructure, land and paperwork issues, fear of imports, desire for self-sufficiency in food production, desire to regulate business and create greater opportunities for corruption, and the possible seizure of assets by the government for all sorts of reasons.  It's a challenging place to work.

*******Talking Trade blog is written by Deborah Elms, Executive Director, Asian Trade Centre*****