The Slow Road to Southeast Asian Integration

Here is an update on something I follow quite closely from my home region: Southeast Asian economic integration. Unlike the European Union (liberal democracies) or the Gulf Cooperation Council (Islamic monarchies), Southeast Asia possesses countries with a range of political and economic systems. You also observe sizeable economic disparities between countries that span from Myanmar to the virtually first world Singapore.

What's more, differences in institutional capacity mean that economic integration will be bound to occur in fits and starts since the respective starting points and learning curves of these countries are vastly different. As we approach 2015, the stated target date for completing processes of economic integration in the region save for a currency union, let's just say much work remains to be done.

Notably, speakers at a recent Euromoney conference voiced more optimism that the newer CLMV (Cambodia, Laos, Myanmar & Vietnam) member states were better poised to achieve integration target dates more readily, probably since they have not become as accustomed to shielding certain products via sensitive lists that allow for the retention of intraregional tariffs for designated goods. There too remains confusion among exporting firms about the benefits of integration. On this point Christopher Dent notes that the paperwork involved in availing of tariff-free trade often exceeds the cost of just paying the duties--not a good sign--as is the still-low percentage of tariff-exempt trade. Still, it's early days and better cross-border facilitation can go a long way towards making the ASEAN Economic Community something which offers benefits to member countries come 2015. From Xinhua:

ASEAN economic integration will expand trade and investment opportunities among the regional grouping's members, but a full-fledged integration is not seen in the next few years, speakers at a regional conference said on Monday. The grouping is seen most likely to achieve import tariffs cut by its own version of integration while more complicated issues such as customs procedures or investment will be more difficult to be integrated due to the diversity among its members, the speakers said.

The so-called ASEAN Economic Community (AEC) is set to be launched in 2015, integrating a market of over 600 million population in Southeast Asia, or the same size of all European nations, and a combined gross domestic product of over $1.77 trillion.

"2015 is probably a very aggressive target," said Sopon Asawanuchit, executive vice president for corporate finance at Siam Commercial Bank, at a Euromoney conference. Sopon said cooperation in trade was easier to achieve while unifying the members' financial system would need to create a major organizational structure comparable to that of the European Union.

Pornsil Patcharintanakul, deputy secretary general of the Thai Chamber of Commerce, said tariff cut could be expected though the rate would not go down to zero percent for all items as many members keep their "sensitive" products out of the target list.

Others believed Myanmar, Laos and Cambodia, the lesser developed among the grouping's 10 members, could be seen to better integrate into the ASEAN, or the Association of South East Asian Nations, in the next few years. "Our problem is our diversity," said Kobsak Pootrakul, executive vice president for international banking at Bangkok Bank, at the conference titled "The 5th Annual Euromoney Thailand Investment Forum: Continued Growth in Uncertain Times." Kobsak did not foresee the possibility of launching a single currency system in the ASEAN in the near future.

But he and others agreed that members in the ASEAN needed to integrate their economies to make them more competitive globally as each member alone is a small economy. Speakers also saw the need of ASEAN members to learn more about each other in the grouping's integration attempt. Kobsak said 70 percent of Thai companies still did not understand the AEC and how they would benefit from the scheme. He said the integration would provide opportunity for Thai businesses to invest overseas at a time when the country was facing labor shortage and the local currency's value was rising.

Sopon agreed that as currently many Thai businesses needed to employ people from Myanmar due to lack of Thai labor, they should move their operation to the country to enjoy the cheaper wage and the abundance of resources there. He believed that Myanmar would provide a great opportunity for foreign companies to invest for manufacturing there and, then, export products to other ASEAN members.

Would You Stay in Libya as a Nurse for More Pay?

The Philippines is widely recognized as one of the world's top labour exporters. Although its Department of Foreign Affairs began evacuations from Libya shortly after the troubles began like many other countries, it appears that one of its main exports have chosen to stay. Among others, Filipino medical professionals--doctors, dentists, and nurses--have been in great demand abroad as evidenced by their sheer numerical strength.

The situation is no different in the Middle East. With their ability to adapt to local cultures, Filipino nurses--particularly those of Muslim faith--have been practising in these countries. Loath to let them go, it turns out the Libyan government has promised increased pay in exchange for Filipino nurses not leaving the country immediately. While the risk-reward ratio of such an action is debatable, these nurses are hedging on medical facilities not being targets for the pro-Gadhafi forces, the rebels, or the Western no-fly zone enforcers. Risky? Yes, but I hope their safety is indeed what they believe it is. From the Philippines' Daily Tribune:

At least 2,300 Filipino nurses have refused to be evacuated even after the United Nations approved military strikes against Libya. Acting Foreign Affairs Secretary Albert del Rosario said the nurses, 2,000 of whom are based in capital Tripoli and 383 in the rebel stronghold of Benghazi, opted to stay following request from the Libyan government, which promised to increase their pay significantly if they remain.

“We have not received any request to come and provide transport so they can leave Tripoli,” Del Rosario said. “They feel safe being in a hospital and there’s nothing safer than being in a hospital.” But if the situation worsens, he said the government can arrange another ship to pick them up. The government has ended its evacuation in Libya and has moved to safety some 13,000 Filipinos.

Foreign Affairs spokesman Eduardo Malaya said the Filipino nurses chose to stay “in order to fulfill their professional obligation and attend to the needs of the sick and wounded...The safest places for them are the hospitals were they work. Hospitals are considered protected areas under international humanitarian law,” he added.

Matters are complicated by Manila throwing its backing to UN Resolution 1973:

Manila has expressed support to the UN resolution in Libya. Malaya said the Philippines “abides by the decision of the UN security council in imposing a no-fly zone over Libyan airspace as a member of the UN and a signatory of the UN charter. “This UN action is a humanitarian measure which is meant to safeguard the civilian population in Benghazi and other contested areas of said country,” he said.

Recent developments, he added, “will not likely adversely affect Filipinos, as the bulk of our nationals already exited Libya.” The Philippine Embassy in Tripoli will remain open to serve the needs and oversee the safety of the remaining Filipinos there, he said. “Ambassador Alejandrino Vicente and the embassy staff in Tripoli will remain to take care of the country’s interests and ensure the safety of Filipinos who chose to remain for personal reasons,” Malaya said.

And speaking of which, the Philippine government is on the hook for its citizens in several other Middle East destinations where ongoing protests may yet put them in harm's way. Take Syria and Bahrain:

In Syria, Philippine officials there are ready to activate the country’s contingency measures once the political strife worsens. A stock estimate from the Commission on Filipinos Overseas showed 19,423 Filipino workers in Syria. Syrians also took the same path as their neighbors by staging similar loud protests against their authoritarian government, hoping it would result in having their political freedom restored.

“The Philippine Embassy in Syria is closely monitoring developments in certain parts of the country,” Malaya said, adding that the 1,050-strong Filipino peacekeepers stationed in Golan Heights who were deployed to the country as part of a UN peacekeeping contingent can be mobilized to evacuate the thousands of Filipinos if needed.

Meanwhile, Bahrain Prime Minister Shaikh Khalifa Bin Salman Al Khalifa has assured the Philippine government that all Filipinos will be provided protection amid the growing unrest in the Middle East state. Khalifa on Saturday personally relayed this message to Del Rosario, who is currently on five-day Middle East swing to check on the condition of Filipino workers trapped in the spreading conflict across the region.

I suppose this is one of the unspoken responsibilities of mass migration in the 21st century. For, we have an international system where (economic) migrants are ultimately no one's responsibility except for the home country.Given that the Philippines does promote such migration, it's only fair. Then again, there will always be those who are more adventurous--alike the Filipino nurses in Libya.

Philippine-PRC Spratly Islands Spat + PR Spin

In politics, joining up seemingly unrelated issues is a frequent occurrence. Sometimes it goes by the name horse-trading, other times logrolling. Whatever it's called, there's no escaping it. A few months ago I penned a feature for LSE IDEAS that neatly encapsulates my ideas about China's territorial conflicts with its Southeast Asian neighbours over islands in the South China Sea. So many months after that Hillary Clinton-fuelled diplomatic row, we have another one on our hands. Last week, a Philippine-flagged vessel it calls a seismic surveillance ship was confronted by Chinese vessels in these troubled waters. The PRC calls the surrounding islands Nansha, while the Philippines calls them the Kalayaan ("freedom") islands. In geographic terms, the Red Bank where the incident took place shows you the vastness of China's claim given how much nearer it is to the Philippines (see map point). Feeling aggrieved, the Philippine armed forces scrambled a few planes and boats to look into what was going on, but the Chinese boats had already left the scene when they got there:

Two Chinese Navy gunboats reportedly harassed a vessel owned by the Department of Energy (DOE) that was conducting maritime research off the disputed Spratly Islands last Wednesday. Armed Forces Western Command (Westcom) commander Lt. Gen. Juancho Sabban confirmed that the Air Force deployed bombers and an Islander reconnaissance aircraft while the Navy dispatched three vessels to intercept the two Chinese vessels. “But they did not catch the Chinese vessels that already left when the planes arrived. The DOE ship just resumed their research in the area,” Sabban said in a telephone interview.

Sabban said the incident occurred at around 9:30 a.m. in the vicinity of Reed Bank, 250 kilometers west of Palawan. He said Reed Bank is well within Philippine territory and Navy gunboats were deployed to secure the DOE [Department of Energy] research vessel M/V Venture...

Initial exploration of the Reed Bank by the DOE revealed that the area contains about 3.4 trillion cubic feet of natural gas and 440 million barrels of oil. Sabban said two white Chinese gunboats with the markings No. 71 and No. 75 tried to drive away the DOE research vessel from Reed Bank. The Navy and the Air Force reported that the two Chinese vessels conducted a side-by-side maneuver, virtually “sandwiching” the DOE research vessel, prompting its alarmed personnel to radio for help.

The incident also prompted the Philippine government to file a protest with the PRC:

Manila has filed a formal protest with Beijing after two Chinese patrol boats allegedly harassed a government-authorized seismic survey ship near the disputed Spratly Islands "We have already brought the matter up [with China]. We handed them a protest [letter] on the incident," President Benigno S. C. Aquino III told reporters in an interview after attending a multisectoral dialogue here.

Mr. Aquino also said the country will send to Beijing an expert on the issue to discuss the matter. Pending resolution of the issue, he said a Philippine Coast Guard vessel has been deployed to the area to assist the survey ship. "The Coast Guard ship will ensure that our rights are protected by making sure that this survey ship [authorized] by our government would finish its job," said the President.

The Chinese embassy got a ring from the president's office shortly thereafter:

Meanwhile, "peaceful negotiations" are the way to "solve the dispute, if there is indeed a dispute" over the incident last March 2, said Ethan Y. Sun, deputy chief of political section and spokesperson of the Embassy of the People’s Republic of China in Manila. Mr. Sun said China has always been "committed to maintaining the peace and stability in the South China Sea...If there is dispute between China and the Philippines, this should be made up by peaceful bilateral negotiations," said Mr. Sun in an interview on Friday.

"Aggressive" is not a word he would use to describe any of the recent the actions from the Chinese and the Philippines side, as "it does nothing beneficial to peace and stability in the region." Nevertheless, he maintained that "ever since ancient times, China has indisputable sovereignty over Nansha Islands and their adjacent waters." Nansha is the Chinese name for the Spratlys.

China, Mr. Sun added, has been consistent in upholding the Declaration on the Conduct of Parties in the South China Sea [signed in 2002]. He reiterated a statement made by the Department of Foreign Affairs that the lines of communication between the Philippines and China remain open.

A consideration is that Chinese Ambassador to the Philippines Liu Jianchao will likely return to Manila next week from an annual home office reporting to discuss the matter with the government. "Sometimes it is necessary and more than appropriate to have a high-level exchange," Mr. Sun said.

And now for the joining up of issues. It is well-known that 8 million Filipinos are economic migrants working abroad. As it so happens, some of them just happened to work in Libya. The Philippine press has been critical of what it perceives to be slow government evacuation of its nationals from Libya. While visiting the China Daily, still our favourite official publication, I came across an article which boasts of how China is facilitating the evacuation of other countries' expatriates. As you would expect, including those of the Philippines:

China, in conducting its largest overseas evacuation, helped more than 1,100 foreigners leave Libya over the past two weeks, transporting them on chartered Greek vessels, said China's Ambassador to Greece Luo Linquan. Calling it an act of humanitarianism, Luo said the foreigners were mainly from Greece, Italy, Poland, Bangladesh, the Philippines and Vietnam. A total of 35,860 Chinese citizens had been evacuated from Libya as of Wednesday night, according to the Foreign Ministry. Of these, 20,745 had already returned to China, Vice-Foreign Minister Song Tao said...

Once the maritime evacuation commenced on Feb 22, three Greek ships undertook six voyages from the Cretian capital, Heraklion, to Benghazi and Misurata, two port cities in eastern and western Libya. By Wednesday, more than 13,000 Chinese citizens had been transported to Crete. So far, eight chartered flights have been arranged to take Chinese citizens home...

On the morning of Feb 22, the Chinese government leased two Greek ships to sail to Libya and the vessels departed at 6:50 pm that same day. "The efficiency was unimaginable," as in normal circumstances the process should take days, said Luo.

These seemingly unrelated but ultimately linked occurrences demonstrate a couple of things. First, China would waste the Philippines if hostilities broke out given the former's vastly superior resources. Second, China is still canny in using other diplomatic avenues to win over Philippine friends such as by helping the evacuation of RP nationals from Libya. Third, the Spratly islands issue is not yet out of the limelight, though you'd wish they'd come up with a lasting diplomatic solution sooner or later.

BTW: There is video footage available of the Philippines' modest installation in the disputed islands.

UPDATE: The Philippines is thinking of sending an envoy to China to discuss things. The Reed Bank itself is not being contested according to reports, but the waters in which the incident took place are, hence the entanglement.

Can Manny Pacquiao Knock Out Chinese Textiles?

Yours truly aside, survey after survey usually shows the same phenomenon among Filipinos of having a very favourable opinion of their former colonial masters in the United States. (Having the second largest Asian population Stateside may have something to do with it.) This was true even at the height of global anti-American fervour after the invasion of Iraq. As a minnow in world affairs, minor players like the Philippines need to piggyback on others' efforts. So, when Bush called for GWOT, our government thought "free money from Washington!" and went along. It seems old habits die hard even when the Chinese are now around who are perhaps even more eager to win friends and influence people.

I have thus been following the progress of the "Save Our Industries Act" whose progress has been mixed in the American legislature. Alike nearly every other country in the world, the Philippines and the United States' textiles and garments industries have not been faring well in the face of Chinese competition, especially since the phase-out of textile quotas (the Multi-Fibre Agreement or MFA) in 2005. Go ask Brazil. Sensing an opportunity to ride the wave of Sinophobia as well as industrial survival instincts, both countries have teamed up to try and beat China at its own game by tilting the playing field via political shenanigans.

What does this bill involve? Essentially, US-made fabrics and yarns sent to the Philippines for assembly (undies, t-shirts, trousers, etc.) would be able to claim duty-free re-importation back into America. From the blurb of the "Save Our Industries" website (yes, its proponents have put up an entire site). There is, unsurprisingly, a lot of buddy-buddy rhetoric involved -
--------------------------------

A Historical Partnership: the United States and the Philippines

• The United States and the Philippines share enduring historical and cultural ties. The Philippines, a former U.S. colony, continues to share goals and foster strong political, economic and security relationship with the United States.
• The United States maintains special preference trading relations with all its former colonies, but not the Philippines.
• The Philippines maintains a fair and balanced trading relationship with the United States: In 2008, U.S. exports to the Philippines were US $8.3 billion and the U.S. imports from the Philippines amounted to some US $8.7 billion, while the U.S. trade deficit reached as high as US $10-18 billion with other ASEAN countries.
• The program would continue this balanced, mutually beneficial trade relationship.

SUMMARY OF THE PROPOSED SAVE OUR INDUSTRIES ACT OR THE SAVE ACT

THE 809 COMPONENT:
• Under the 809 component of the program, if the eligible garment’s essential character is comprised of U.S.-made fabrics and yarns and is cut and wholly assembled in the Philippines, then it would qualify to re-enter the United States free of duty.
• In addition, if the eligible garment’s essential character is comprised of U.S. spun yarn or extruded yarn formed in the Philippines, it may re-enter the United States at 50 percent of the most favored nation (MFN) duty.

CUT & SEW RULES FOR SELECTED PRODUCTS:
• Recognizing the success of the 809 component requires a competitive Philippine sewing industry to provide U.S. retailers with a variety of products, the program would also provide duty-free benefits for a limited number of non-import sensitive apparel articles.

ENFORCEMENT:
• Ensuring strict customs enforcement and preventing transshipment of apparel articles is central to the proposed program. The Philippines continues to enforce the Memorandum of Understanding Concerning Cooperation in Trade in Textile and Apparel Goods it signed with the United States in August 2006.
• The Philippines would also establish procedures to allow the U.S. Government access to information for shipments before they reach U.S. Customs, similar to the Electronic Visa Information System (ELVIS), which had previously been in force in the Philippines.

MUTUAL BENEFITS FOR U.S. & PHILIPPINE INDUSTRIES & WORKERS
• U.S. textile and Philippine apparel manufacturers share the same challenges and risks stemming from the end of the U.S. quota system that controlled apparel imports from China until the beginning of 2009. Moreover, over the past several years both industries continued to incur substantial job losses.
• Under the SAVE Act, for the first time, U.S. textile manufacturers would have a meaningful opportunity to compete in Asia in the higher end fashion market in addition to their already established market presence with Western Hemisphere countries, which account for 75 % of U.S. fabric exports.
• The proposed program is designed to facilitate higher levels of trade in textiles and apparel between the United States and the Philippines, to enhance the commercial well being of their respective industries, and to sustain and create jobs in times of global economic hardship.

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And now for the bit I promised with the title on famed boxer / congressman / budding protectionist Manny Pacquiao. The man who's arguably the world's most famous pugilist has been approached by those championing this bill. They're betting on Manny delivering the goods Stateside where they assume he's popular, too. Boxers not being well-known for their modesty, Manny claims that he helped deliver the sizable Filipino-American vote, ensuring electoral wins for Senate Majority Leader Harry Reid and new California Governor Jerry Brown:

“[Reid] was behind 4% in the polls before I got out there,” Pacquiao told The Times on Wednesday before a workout at Wild Card Gym in Hollywood, where he’s preparing for his Nov. 13 junior-middleweight title fight against Mexico’s Antonio Margarito. “There’s a lot of Filipinos in Las Vegas.” Population figures show an estimated 30,000 Filipinos in Las Vegas, with perhaps triple that in all of Nevada. Reid defeated Tea Party candidate Sharron Angle by 40,000 votes, with three-fourths of Asians reporting at exit polls that they voted for Reid.

Pacquiao smiled at the thought of how the assistance he provided a major Washington player could benefit his country in the future. “I also helped Brown here,” Pacquiao said, referring to the governor-elect who defeated Meg Whitman by a more lopsided margin Tuesday. “I helped him campaign. I gave a message to the Filipino community to support Gov. Brown, and they did.”

In addition to recruiting Pacquiao, Philippine trade promotion authorities are spending big on US lobbyists despite taking it on the chin the last time around:

The Department of Trade and Industry (DTI) believes it has a better chance of passing its proposed "Save our Industries Act" bill, which has been refiled in the US Congress recently, as the new bill presents a more comprehensive strategy to justify its passage. "At this point, our chance is 50-50, but I believe we will improve our chances as more sponsors of the bill come in," Trade and Industry undersecretary Cristino L. Panlilio told reporters.

The proposed legislative measure was refiled recently by Senator John Ensign of Nevada. "We are still seeking for additional sponsors to help push this bill," Panlilio said. While the "Save Act" bill is a stand-alone legislative measure, Panlilio said it could still be incorporated or as a rider in other proposed trade bills [whoa, talk about the rest of the world learning dirty tricks of American politics].

In the last US Congress, the Save Act bill was principally authored by Senators Jim McDermott, Daniel Inouye, Kit Bond and Harry Reid. It also gained support from 15 representatives. This time the DTI has adopted a comprehensive approach including the bill’s champion, the extent of activities to be undertaken and a mapping operation of the local industry.

Earlier, Panlilio said that DTI has spent P60 million [about USD 1.4M] in the last two years, including that of the DTI leaders of the past administration and the new government in pushing for the passage of the bill. Panlilio said the bulk of this money went to Washington consultants who helped in the crafting of the bill, but which failed to pass in the last US Congress.

The P60 million formed part of total of P250 million that have been spent on various initiatives for the garment sector out of the P650 million industry fund, which represents the revenues generated from the fees in administering the garments export quota by the defunct Garments and Textile Export Board.

The lobby to push for the bill in the US Congress started in 2009 that resulted in the filing of the bill in June of that same year. The DTI had mounted several initiatives to lobby for the passage of the bill including tapping the Filipino-American communities in the U.S. and a viral marketing campaign that also involved Rep. Manny Pacquiao, who is again endorsing the bill. “Last year this administration conducted two missions to the U.S. for this bill, but the bulk of the expenses involved the consultancy fees for the experts that the government had to hire,” Panlilio said.

Under the Save Act bill, the Philippines will produce garments using American textile, yarns and fabrics. The finished product would then be exported to the U.S. duty-free. This bill is seen as a win-win solution to revive the ailing textile industry in the U.S. and revive the garments manufacturing of the Philippines. The passage of the Save Act is expected to revive the country’s garment industry that used to export over $3 billion and employ over 600,000 people because exports of garments to the U.S. using American yarns and fabrics would be allowed duty-free access in the U.S. market.

For those of you who are trivia buffs, IPE junkies, or textile industry followers, the Garments and Textile Export Board mentioned above was a Marcos-era creation designed to administer Philippine garments and textiles export quotas during the Multi-Fibre Agreement (MFA) era. With the lapse of MFA in 2005 under WTO strictures, it is not only developed but also developing countries who've been scrambling to contain China's exporting powerhouse.

This bill is interesting as a collaboration between a former textile oppressor (the US which largely set up the MFA) and the oppressed (the Philippines) when faced up with an even more formidable foe in China. Still, I have some simple questions I'd particularly like Philippine trade officials to answer:

1. Isn't this Act a blatant violation of WTO principles of non-discrimination?
2. Given its lack of American legislative success and possible WTO litigation, aren't limited Philippine trade promotion funds better spent elsewhere?
3. What is the wisdom in the Philippines siding with a falling world power (the United States) and offending a rising one (China)?
   

Given the likely answers to these questions, I think "Save Our Industries Act" is a really bad idea. Then again, I don't set Philippine policy--but I'll bet a boxer seeking to KO Chinese imports does [!?]

UPDATE: After consulting with Simon Lester of the IELP blog, he suggests that US/Philippine attempts to include this Act under the Generalized System of Preferences (exemptions from WTO rules) is unlikely. Given that the phasing out of MFA was meant to remove such exceptions, I'd say international momentum is against this bill's champions.

Bahrain GP in Jeopardy: F1 and Authoritarianism

In olden days a glimpse of stocking
Was looked on as something shocking
But now, heaven knows - anything goes

It's weekend feature time. I suppose that hosting a Formula One grand prix is, above all else, a vanity project. In the same way that hosting the World Cup or the Winter or Summer Olympics is a way of saying that you've arrived on the world stage, so too does having a spot on the F1 calendar. Unfortunately, however, it's another truism that vanity projects do not always make money. For instance, there were worries over even whether the Shanghai Grand Prix would get a contract extension from the F1 powers-that-be this year given its lacklustre attendance figures. And this is in the mother of all growth markets, mind you:

The Chinese Grand Prix will stay on the Formula One calendar until 2017 after the Shanghai International Circuit agreed a new deal to host the event. Attendances have decreased at the venue since the inaugural race in 2004 attracted a crowd of 240,000. Ticket prices are set to be cut to attract yet more fans while the new deal between Bernie Ecclestone's Formula One Management and organisers Shanghai Juss Event Management Co. is thought to be at a reduced financial rate.

Alike Shanghai which commenced operations in 2004, most of the purpose-built F1 tracks were penned by the German circuit designer Hermann Tilke--the so-called Tilkedromes. Even many of the road races that have been held recently such as the Valencia and the Singapore Grands Prix have received input from him. Hence, charges that the new circuits lack character are rife. Monopolies tend to have their detractors.

Sports-worthiness aside, something that scholars of international political economy have failed to investigate is the link between authoritarianism and new F1 venues. While there are certainly new races in places that do reasonably well on measures of democracy--Istanbul (2005), Valencia (2008), and South Korea (2010) come to mind--more are held in decidedly authoritarian confines: Malaysia (1999), Bahrain (2004), Shanghai (2004), Singapore (2008), and Yas Maria Abu Dhabi (2009). Given the large expenditures associated with putting up racetracks or organizing street races, it is likely easier to create venues in conjunction with maximum leaders (or those approaching such status).

Last season we ended with a climactic race in the desert as Sebastian Vettel became the youngest-ever F1 champion in Abu Dhabi. This year us F1 fans find ourselves in the Middle East sands amidst yet more momentous occasions. However, the excitement at the start of his season will not be on the track but in the host country of the first scheduled race, Bahrain. Cracking down on protesters usually does that. Having brought his racing circus maximus to nearly every (prosperous) corner of the globe, F1 impresario Bernie Ecclestone has been there and done that. Perhaps the prospect of sports event cancellation due to old-fashioned "political risk" in Bahrain may yet be a novel experience.

That is, does F1 with its bevy of Western teams, sponsors, and drivers view popular uprisings with an attitude of "the show must go on," or are there political sensitivities that get in the way? Here's Bernie Ecclestone:

Bernie Ecclestone has expressed hope that the bloody unrest in Bahrain will "blow away" by next week, when he plans to decide whether to pull the opening race of the season. Formula One's commercial rights holder sounded more confident early on Friday that the Bahrain grand prix would go ahead despite the protests in Manama, which have put the race on 13 March at serious risk. But amid reports of renewed unrest in Manama's Pearl Square, with shots fired and reports of at least 20 injuries, Ecclestone later said the situation remained fluid.

"From a realistic point of view it appears that things are changing hourly," he said. "I feel the most important thing now is to wait until after the weekend, to see what happens over the next few days, and then make a decision next Tuesday or Wednesday."

Ecclestone, having sought to expand the Formula One calendar into new, profitable parts of the world in recent years, sidestepped questions about whether the sport should travel to countries that meet protests for democratic change with violent crackdowns. "It seems as if people thought it was democratic a few weeks ago," he said. "We have never, ever, ever been involved in religion and politics. We don't make decisions based on those things..."

"Let's hope this all just blows away. In these parts there have always been skirmishes. This is perhaps a bit more than that." The teams say they will follow guidance from Ecclestone and motor sport's world governing body, the FIA. Speaking on behalf of the Formula One Teams Association after a two-hour meeting, Red Bull's team principal, Christian Horner, said: "It's obviously a really difficult situation in Bahrain.

"But we have complete trust in Bernie, FOM [Formula One Management] and the FIA to make the right decision. They will only send us there if it is safe. It would be a great shame to lose the race, but it's not the teams' decision - it's down to the promoter. Bernie and the FIA will have much more information than us and we will trust their decisions..."

"Consultations are taking place on the whole logistic possibilities and what is happening in Bahrain," Fota's general secretary, Simone Perillo, said. "If things don't calm down then we'll have to consider the possibilities." If the Bahrain race was cancelled, the Melbourne grand prix on 27 March would be the first in a truncated 19-race season, but it is not thought that Ecclestone would be out of pocket, with the costs of up to $60m (£37m) in race fees being swallowed by the Bahraini organisers.

But cancellation would be a blow for both the sport and Bahrain, which became the first Middle East country to host a round of the championship in 2004 in an attempt to transform itself into a tourist destination as well as a business hub. While Abu Dhabi, Dubai and Doha have increasingly sought to attract a range of world-class sporting events as means to showcase their potential, Bahrain has relied on the annual grand prix.

As its energy reserves dwindle, Bahrain has sought to diversify itself as a banking, tourism, and services destination alike Dubai (Abu Dhabi and the Qataris have reserves up the wazoo). The response so far from Bernie Ecclestone is an automotive spin on the non-intervention in the affairs of other countries ("we don't do politics"). However, as a cash-spinner or at least as an event that would clearly not take place with considerable cooperation from Bahrain's rulers, F1 is implicated quite deeply by its previous actions.

While many F1 bigwigs prefer that the political mess just "blow away," Renault driver Nick Heidfeld has perhaps heaped trouble on himself by honestly suggesting that F1 should be more responsive to current events:

Nick Heidfeld says Formula One's rulers should be sensitive to the Bahraini people when it comes to whether the grand prix gets the go ahead. The island kingdom was again rocked by further unrest on Friday as the army and police moved in on anti-Government demonstrators who earlier in the day had attended the funerals of three protesters.

Formula One is undoubtedly on edge at the prospect of visiting a country at the centre of such political unrest and uncertainty. F1 supremo Bernie Ecclestone has promised a decision will be made by next Wednesday at the latest as to whether next month's season-opening race is given the green light or cancelled.

Heidfeld, this week confirmed as a Renault driver in the absence of the injured Robert Kubica, feels there is more at stake than just the safety of drivers, team personnel, media and fans. "It is not only down to how it is for the drivers, but how it is to the general public, to everybody who visits, to all the spectators and whether the risk is too high," said Heidfeld. "It's not just about the safety of those involved, but being sensitive to what is going on in the country."

Former champion Damon Hill once said of F1: "It's all about the wonga [money], isn't it?" I guess we'll find out more come Wednesday. As the graphic above taken from the event website suggests, people fuel their passion in different ways.

UPDATE: Ecclestone now says he will leave it in the hands of the local organizers. More specifically, the House of Khalifa's heir apparent. What's more, rumour has it that some F1 teams are thinking boycott if the event pushes through:

Ecclestone told BBC Sport that Crown Prince Salman ibn Hamad ibn Isa Al Khalifa was best placed to decide. "He will decide whether it's safe for us to be there," Ecclestone said. "I've no idea. I'm not there, so I don't know." He added: "We won't advise people to go unless it's safe..."

He said Bahrain could be moved to another date later in the year if the race in March was called off. Ecclestone said a decision on whether the race could go ahead would be made on Tuesday. "Let's hope it'll be all right," he said. His comments come as the Sunday Times reported that some teams would boycott the grand prix if it went ahead. F1 insiders have told BBC Sport that the teams' contractual commitments to Ecclestone's Formula 1 Management company mean they would be obliged to attend the race if it is held.

It's hard for some to let go. Still, I very much doubt whether Ecclestone's eagerness to avoid political entanglements is best served by placing the decision of whether the race goes on in the hands of someone affiliated with the party with the most vested political interests. You can argue though that the race won't proceed if the kingdom believes it cannot put its best face forward, but the notion of sporting impartiality is not obvious, to say the least [!]

Singaporean PM Lee: PRC Revaluation a Win-Win

Well here's an interesting news item: China's model of authoritarian development is said to be based on the example of Singapore [1, 2]. Whereas Deng Xiaoping's predecessors always derided the minuscule nation-state as some sort of degenerate capitalist roader, his game-changing visit there in the late 1970s is often said to be a turning point. Not only did official commentary cease deriding Singapore, but Deng Xiaoping's eyes were opened as to how far behind China had fallen and how it could move ahead without really going the proto-neoliberal route.

As you know, the rest is history. Singapore's guiding light, Lee Kuan Yew, always spoke highly of Deng Xiaoping after that as the latter began to talk about the colour of the cat not mattering as long as it caught mice. Fast-forward a couple of decades and we have a different situation: Lee Hsien Loong, the son of Lee Kuan Yew, is now the prime minister of Singapore. Meanwhile, the Chinese leadership has gone through regularly scheduled changes culminating in the current Hu Jintao and Wen Jiabao combination. Also, China is more than flush with foreign exchange as I'm sure you've noticed.

Hence, another Mr. Lee from Singapore is trying to advise China on what it should do with its currency, the renminbi. Instead of listening to (often hypocritical) white people telling the Chinese what to do all the time, perhaps hearing the same idea from the leaders of Singapore will actually register, right? At any rate, here is your guided tour of the world economy care of Lee Hsien Loong's commentary:

The most consequential relationship in the world today is between the U.S. and China. There has been significant friction, notably over exchange rates. The yuan issue is politically hard -- the U.S. sees an undervalued Chinese currency as unfair competition, while China fears that sharp revaluation will disrupt its economy, causing unemployment and unrest.

But from an economic point of view, this needn’t be a win- lose battle. A gradually appreciating yuan will encourage Chinese export industries to restructure and upgrade, help distribute the gains from growth more broadly beyond exports to the rest of the economy, and mitigate inflation, which is a growing problem in China. At the same time, it will help ease political pressures in the U.S. and tensions in the relationship.

The Chinese are aware of foreign perceptions that with growing strength it has become more assertive. China’s leaders have emphasized that the country is committed to peaceful development and has no aggressive intentions. China’s domestic challenges are numerous and daunting. Its government must uplift hundreds of millions who remain in poverty, create social safety nets for its people, moderate major disparities in wealth and development, and maintain social and political stability so that progress can continue...

No less than the U.S. or other democracies, China has its own domestic politics that it can’t ignore. China’s leaders need to explain this reality, and their basic thinking, convincingly to international audiences, who see Beijing and Shanghai and think that is China. But countries will also watch China’s actions -- how it conducts itself on international issues such as climate change, and what the leaders say to their own people on China’s role in the world.

As world economies recover, governments must continue promoting global trade, to deepen the international division of labor and foster long-term prosperity for all. More immediately, the win-win results of freer trade will give a badly needed boost to demand and growth. During the crisis, protectionist pressures were a real worry. Fortunately, governments took fewer protectionist and retaliatory actions than many feared, but they also made very few positive trade moves.

In the U.S., there is little political appetite for free trade; hence the slow progress of its bilateral Free Trade Agreements and the World Trade Organization’s Doha Round. But there are some recent positive developments. The renegotiated free-trade agreement between South Korea and the U.S. was settled recently, though not yet ratified. The U.S. is also one of nine Asia-Pacific countries negotiating a Trans-Pacific partnership, which will be a pathway toward the Asia-Pacific Economic Cooperation’s vision of a free-trade area of the Asia- Pacific region.

As usual, it's smart, observant talk from the leaders of Singapore--a country that others listen to because, well, it actually works. I can't say that others lend the same ear to a certain North American country that loves telling others what to do despite falling apart economically, politically, and socially, but I'll save that refrain for another time.

Lastly, one shouldn't lose sight of the fact that, as a country in export competition with the PRC in quite a number of areas, Singapore would undoubtedly benefit from yuan revaluation.

Will Japan Join the Trans-Pacific Partnership PTA?

If there's a developed country suffering from typical developed country maladies, it's Japan. Massive public debt (largely counterbalanced by huge FX reserves some would argue); a shrinking and aging population; chronic deflation; and a moribund non-export oriented sectorare among its many woes. Meanwhile, I recently discussed how South Korea's leadership was keen on signing on to the Korea-US Free Trade Agreement (KORUSFTA). Many observers including myself saw this as a move partly aimed at shoring its security alliance with the US given North Korea's volatile situation. And so it is with Japan and the US. Given the growing heft of China in the region and its own security-related tussles over the Senkaku islands, Japan's DPJ leadership has for now watered down its rhetoric about being more independent of America and all that jazz. Given their often-uncertain low politics of economic benefits, trade deals are often struck for other considerations--including the high-politics of security.

Like his Korean counterpart Lee Myung-Bak, Prime Minister Naoto Kan of the DPJ is eyeing a trade deal almost as a cure-all. While Japan's economic situation appears less promising than South Korea's, it is also appears keen on solidifying military relations with the US. All the while, the usual promise of more jobs is being bandied about. In either case, liberalization of highly protected agricultural sectors--Japan and South Korea apply among the highest tariffs in the world for imports such as rice--is the politically heavy cost that must be incurred. Naturally, influential and vote-heavy agricultural constituencies are not so happy.

In Japan's case, PM Kan wants to enter negotiations to join the APEC member-based Trans-Pacific Partnership (TPP) of Brunei, Chile, New Zealand, and Singapore alongside potential entrants Australia, Malaysia, Peru, the United States, and Vietnam. What's immediately noticeable about this grouping is China's absence unlike in ASEAN +3 or ASEAN+6 groupings. (For a guide to the bewildering array of Asia-Pacific plutilateral arrangements, see my previous post on an event we held here at LSE IDEAS on Asian economic integration.) The Wall Street Journal writes:

Japan's embattled prime minister vowed to intensify his push for a controversial free-trade agreement, using his New Year's statement to promise progress on one of his top policy initiatives, despite his political weakness. Prime Minister Naoto Kan said he will focus this year on the Trans-Pacific Partnership [TPP] Agreement and will seek the overhaul of Japan's agricultural sector that would be required to join the pact...

In the New Year's message the prime minister laid out goals for 2011 in broad terms that include steps to help reignite Japan's economic formidability. Japan will "seek new possibilities in agriculture, forestry and fisheries," while also promoting free trade, he said.

Mr. Kan's ability to win the reforms needed to make those policy changes—or even to stay in office much longer—is unclear. A flurry of recent public opinion polls show his popular support rate has fallen below 30%, a level that leaves him little political capital to make tough reforms.

On the trade agreement, the prime minister faces tough resistance from farm lobbies and fellow party politicians in his battle to lift heavy tariffs that have long protected the domestic agricultural sector from overseas competition. Mr. Kan's plans to initiate talks to join the Trans-Pacific Partnership during the Asia-Pacific Economic Cooperation meeting in early November sparked broadsides from Japanese farming groups.

The regional trade agreement seeks to eliminate all tariffs among member nations in 10 years. While the pact would pinch the country's declining agricultural sector even more, it would help make Japanese manufacturers more competitive on the international stage. Facing increasingly tough competition from China and fearing the empowerment of South Korean rivals as a result of Seoul's aggressive trade liberalization, Japanese manufacturers are fighting hard to get the government to commit to the agreement.

To be sure, there's an element of Japanese firms believing they will be at a competitive disadvantage (from trade diversion) if they fall behind in signing trade deals alike regional competitors such as South Korea. In a manner of speaking, it's precisely the effect the US wants to create of "bandwagoning" on an American- and not a Chinese-led trade facilitation vehicle: if you don't get on board, you may be left behind.

In related developments, also see the Asahi Shimbun's insightful if downcast prognosis on Japan's plight. I honestly wish the Japanese the best of luck since, unlike a certain other country that's also active in the Asia-Pacfic, it isn't trying its darndest to economolest the rest of us.

FX Intervention Trifecta: Korea, Malaysia, Thailand

Oh, will the combatants ever cease from "international currency war" so we can celebrate the holidays in relative peace? With the US dollar doing another of its habitual swoons due to much-lamented American free money policies, Asian economies not particularly keen on shooting themselves in the foot are having to wade into the open market and buy the godforsaken and hapless greenback to stem the appreciation of their currencies. From the Wall Street Journal comes this snippet:

Central banks in South Korea, Malaysia and Thailand are believed to have intervened in foreign-exchange markets Thursday as Asian currencies surged against the dollar on optimism about the region's economic outlook, underscored by strong economic data from China and signals that the yuan will continue to strengthen.

Taiwan, meanwhile, unveiled measures to buttress its banking system against rapid movements in foreign capital, the latest Asian economy to introduce stricter regulations to control the risks posed by such capital flows...

In Kuala Lumpur, traders said Malaysia's central bank was suspected of buying dollars to curb a rise in the ringgit, which hit a three-month high Thursday. Bank Negara Malaysia may have bought dollars at around 3.0810-3.0820 ringgit per dollar, dealers said. The dollar was at 3.0846 ringgit in late trade.

Traders in Seoul said they suspected the Bank of Korea entered the market, buying more than $500 million at several intervals between 1,135 and 1,140 won per dollar. The dollar closed at 1,134.80 won, bringing the won's gains against the dollar to 2.6% for the year.

In Bangkok, the dollar was at 30.15 baht in late trade—down from 30.16 baht late Wednesday—with suspected buying by the central bank around that level to limit the downside, two dealers said.

In Taipei, which has been trying to temper gains in the New Taiwan dollar—a favorite among investors seeking exposure to China, given Taiwan's increasingly close economic ties to the mainland—Taiwan's central bank announced new measures to control capital flows. Starting Saturday, local banks will have to set aside 90% of foreign investors' new deposits as reserves, a leap from the current level of 9.775%.

So the usually America-friendly Martin Wolf believes Asian countries cannot win in the US-led "international currency war." I don't see any sign of many of these Asian countries relenting just yet, though. 2011 promises to be more of the same unless something major changes the outlook of these nations. For, Bernanke's chopper will surely be strafing us with greenback emissions from greater heights--of that you can be as certain of as death and taxes.

Indonesia Mounts Its Defence in Int'l Currency War

Just a little over a decade ago, Indonesia was the epicentre of the Asian financial crisis. In a matter of months, the local currency, the Indonesian rupiah (IDR), had lost eighty percent of its value as foreign investors fled the country as quickly as they came. After all, they call it "hot money" for a good reason. Amidst all this were food riots, race riots, and various separatist movements trying to take advantage of the seeming loss of control by the central government. By 1998, harsh IMF conditionalities had helped ease out the long-running Suharto regime.

But that was then and this is now. The--how should I describe them--flatulent fiscal and monetary policies of the Americans, currency warriors extraordinaire, now threaten to overwhelm Indonesia's financial stability. Like in so many other countries in the region, the nearly unlimited ammunition the Yanks threaten to use causes asset bubbles, inflation, and a diminution of export performance.

And so it has come to pass that our Indonesian colleagues have sounded the warning bells. While not slapping capital controls per se, there has been considerable use of macroprudential measures such as increasing reserve requirements. It should be noted that the Chinese use a lot of this tinkering as well:

Indonesia said it will tighten rules on banks’ foreign-exchange holdings and overseas borrowing to cope with capital inflows that have pushed up inflation and strengthened the rupiah this year. Bank Indonesia will also reintroduce a 30 percent cap on lenders’ short-term overseas borrowing to minimize the risk of sudden capital outflows, it said yesterday. Banks must set aside 5 percent of their total foreign-exchange holdings as reserves as of March 2011, from 1 percent currently, Deputy Governor Budi Mulya said at a press briefing in Jakarta yesterday. The reserve requirement will rise to 8 percent effective June.

“These rules will ease pressure on the rupiah,” said Anton Gunawan, chief economist at Jakarta-based PT Bank Danamon Indonesia. “The central bank wants to absorb excess liquidity in the banking system.” Indonesia and its peers are grappling with increasing capital inflows as borrowing costs and growth rates that are higher than those of developed economies boost the appeal of emerging-market assets. Taiwan tightened curbs on exchange-rate derivatives this week and South Korea plans similar measures, according to an official at the country’s financial regulator...

Bank Indonesia has resisted imposing capital controls or raising its benchmark interest rate from a record-low 6.5 percent, choosing instead to increase bank reserve requirements and encourage investors to keep their money in the country for longer periods. The current benchmark rate is consistent with Indonesia’s goal of achieving inflation of 4 percent to 6 percent in 2011 and 3.5 percent to 5.5 percent in 2012, Mulya said yesterday.

The higher foreign-exchange reserve ratios may absorb as much as $3 billion in excess liquidity, and are “prudent banking” measures aimed at helping Southeast Asia’s largest economy cope with capital inflows, Mulya said. “If money is pulled into the reserve requirement then it cannot circulate within the system,” said Purbaya Yudhi Sadewa, an economist at PT Danareksa Research Institute in Jakarta. “That’s a disincentive to avoid banks attracting too much dollar since they must pay interest on that dollar whereas the money is put away at Bank Indonesia, which may not even earn interest.”

Lenders will be required to limit their short-term overseas borrowing to no more than 30 percent of their capital starting in January, the central bank said. The rule aims to encourage a shift to long-term foreign borrowing and reduce the risk of sudden reversals in capital flows, it said. The requirement was scrapped in 2008 because of the global financial crisis...

Five state-owned Indonesian financial institutions, including PT Bank Mandiri, have given their commitment to buy back bonds to ease the impact of sudden capital outflows during a crisis, Agus Suprijanto, acting head of fiscal policy at the Finance Ministry, said this week. The government is still in talks over the use of their funds and will prioritize funding from the state budget for any buybacks, he added.

Indonesia will also require lenders with assets of at least 10 trillion rupiah ($1 billion) to announce their prime lending rates, effective in March 2011. This rule will push banks to decrease their net interest margin and become more efficient, the central bank said. Lending growth may reach 22 percent this year, it said.

Bridging the Asian financial crisis era of foreign exchange pouring out and today's Indonesia with money pouring in, keep in mind that former Indonesian Finance Minister Sri Mulyani Indrawati has become a managing director at the World Bank for her widely praised efforts to stabilize Indonesia's economy post-financial crisis. Aside from reining in foreign short-term borrowing, she also did much to address the pervase corruption of the Suharto era. We wish our fellow Southeast Asians all the best, and I guess it's better to have problems dealing with excessive foreign exchange inflows instead of the opposite, right?

Philippines' Economics of Excessive Vacation

Is too much vacation bad? Working in academia right now, I must unreservedly state that one of its perks is having more free time once the semester is out. However, for the clock puncher / office slave classes, things are not as straightforward. Take the example of the Philippines. Inheriting a "hectic" holiday schedule from its colonial masters of manana the Spanish, things have gotten out of hand in recent years. In a bid to supposedly increase vacation trips and decrease disruptions due to holidays, it has had a habit of moving holidays that fall midweek to Fridays and Mondays.

However, the economic benefits of doing so are not clear. Indeed, industry voices and the president himself are looking to reduce the number of paid holidays to a more manageable 16 [!] days--still world-leading by any standard, though:

With less than two weeks left before Christmas this year, the Philippine government unveiled a holiday gift to its people: Friday would be day off to mark Christmas Eve, and a second public holiday, in honor of a national martyr, would be observed on Monday, Dec. 27.

The result was a windfall four-day weekend. But instead of invoking cheer, such surprises are increasingly being met with grumbles from Philippine business leaders, its president and even some of its heavily vacationed workers. The Dec. 12 holiday shuffle was part of a distinctly Philippine way of handing out and scheduling days off—offering many official vacation days, and often rearranging them at the last minute to fall on the nearest Friday or Monday.

The country's leaders have hoped the long weekends will encourage citizens to shop and travel, boosting retail sales and the local tourism industry. Former Philippine President Gloria Macapagal Arroyo embraced the strategy, dubbed "holiday economics," and was often photographed on long weekends kitted out in a wetsuit for some surfing, or visiting her home province [of Pampanga], north of Manila.

Not working out that way. First, disposable income is not high enough to encourage jaunts elsewhere in the Philippines during long weekends. Let's just say there isn't yet a habit of going around Europe on cheap Easyjet or Ryanair weekend trips:

The tourism industry in the Philippines accounts for 8% of total gross domestic product, compared with nearly double that in nearby Thailand, so shuffling and adding holidays to benefit the travel industry would have a relatively slight knock-on effect on the broader economy. Many Filipino workers don't earn enough to go off on lavish jaunts around the country anyway. The per capita income here averages under $2,000 a year. Even those with solid professional jobs struggle to make ends meet, and don't necessarily get paid on national holidays.

Second, all these paid holidays are, according to some, making the Philippines less attractive as a business destination compared to its neighbouring countries which get by on less R&R:

Fewer holidays could help stir more foreign interest in the economy. In a recent study, the Joint Foreign Chambers of Commerce warned that the number of holidays and their erratic timing dissuades some foreign companies from coming here. Under Philippine law, businesses have to double daily wages for those who work through the main public holidays, or pay up to 50% on other selected holidays. That is a powerful deterrent as lower-cost locations such as Bangladesh and Vietnam open up to the global economy.

Already, foreign direct investment is the lowest of the major Southeast Asian countries, totaling $1.95 billion in 2009 compared with $4.88 billion in Indonesia, $7.60 billion in Vietnam and $5.96 billion in Thailand.

Maybe too much vacation isn't good. But then again, I'm not exactly in a position to gripe, right?

'Indonesian & Filipino Corruption Compared'

With Christmas a few hours away, here's more lighthearted fare for you all. A few weeks ago, I attended an LSE event held by our colleagues here at the Asia Research Centre intriguingly titled "Where Have all the Bad Guys Gone? Governance in Indonesia Today." Since Southeast Asia is my area of interest for obvious reasons, governance matters are a matter near and dear to me. Needless to say, it was a very interesting discussion. After the event, Roger Montgomery told me the following joke about the difference between Indonesia and Filipino corruption, with the latter coming out worse and being the punch line.

So the Philippines ranks rather lower than Indonesia in corruption perceptions via the likes of Transparency International .The latter has made some strides towards combating corruption that the Philippines should investigate. Ah well, I just hope my retelling is reasonably accurate for now. Here it goes...

---------------------------------
A decade and a half ago, Dian and Renato were roommates at Harvard Business School studying for their MBAs. Reminiscing about their B-school days, Dian rung up his Filipino friend Renato from his office in Jakarta. When Renato had free time, Dian said, he should come visit Indonesia.

And so it came to pass that Renato found some time off work to accept the invitation of his old roommate. Upon arriving at Soekarno-Hatta International Airport, Renato was suitably impressed when Dian sent a Mercedes-Benz limousine to pick him up. Arriving at Dian's sprawling mansion in Jakarta's exclusive Kebayoran Beru residential district, Renato greeted his old friend warmly:

"I've got to hand it to you, Dian. You've really made it. Once we were just grad students struggling to get by. But look at you now, you're a wealthy industrialist--one of Indonesia's elite! What's the secret of your success?"

Dian just grinned, told Renato to get back in the car, and instructed his chauffeur to drive to the outskirts of Jakarta. While approaching a power plant, Dian asked Renato, "Do you see that geothermal plant?"

Renato nodded.

Dian smiled broadly at his friend and said, "ten percent!"

Renato gave Dian a big pat on the back and replied, "That's brilliant, Dian!" For the rest of his stay, Renato was treated to the finest entertainment money can buy in Jakarta. But, in the back of his mind, he was already plotting how to top his old schoolmate.

Four years later, Dian was at work when Renato rang him up and invited him to visit the Philippines. Renato assured him of a good time, and Dian found himself in Manila two months afterward.

Arriving at Ninoy Aquino International Airport, Dian was suitably impressed when Renato sent a stretched Mercedes-Benz limousine to pick him up, complete with a chauffeur wearing immaculate white gloves. Arriving at Renato's mansion in Manila's exclusive Forbes Park residential district, Dian greeted his old friend warmly:

"I've got to hand it to you, Renato. You've really made it. Not so long ago we were just MBA students scrounging for our meals. But wow, you're now the toast of the town --one of the Philippine elite! What's the secret of your success?"

Renato just grinned, told Dian to get back in the car, and instructed his chauffeur to drive to the outskirts of Manila. For two hours they talked about the good old days until they came upon an empty stretch of road. Renato pointed at nothing in particular and asked Dian, "Do you see that geothermal plant?"

Dian looked at the empty expanse, scratched his head and said, "I don't see anything."

Renato smiled broadly and said, "one-hundred percent!"
---------------------------------

This joke is probably based on the infamous Bataan Nuclear Power Plant that the US-based firm Westinghouse built under the rule of Ferdinand Marcos but was never used. (History buffs will also remember Bataan as the site of the infamous 1942 Bataan Death March.)

Philippines, Not India is World's Call Centre Capital

Now this article kind of took me by surprise. While India is renowned as a global hub for business process outsourcing (BPO)--we even have popular entertainment glamorizing its services-led economic renaissance in Slumdog Millionaire--it seems another country has been away from the BPO limelight that has just stolen India's thunder. Alike India, the Philippines has been subject to the (English-speaking) white man's burden of enlightening us coloured people about the benefits of markets and democracy (well sort of). Also like India, then, the Philippines has a large English-speaking population which happens to be tertiary educated. And while India has its slumdog millionaires, the Philippines has its own emerging call centre subculture of those who work the night shift to synchronize with overseas markets like Western Europe and North America. (As a side note, I am very pleased with phenomenon since daytime traffic in Manila is horrendous.) Heck, stories of escapades by call centre workers are rife with alleged rises in HIV cases being attributed to them.

Anyway, back to the story. Earlier this year, I was struck by outgoing Philippine President Gloria Macapagal-Arroyo claiming in May that the Philippines was second only to India in BPO foreign exchange revenues. Pretty impressive for a country that's not been as widely stereotyped as a call centre destination, right? Well now comes news that, actually, the Philippines is set to end the year ahead of India in terms of call centre new hires and revenues for 2010. Of course, call centres are only a sliver of the BPO market--and not often very attractive ones unless you consider telemarketing and fielding customer service calls fun.

I am also not entirely sure if the head of the Commission on Information and Communications Technology (CICT)--an executive-level body in the Philippine government--has his numbers entirely right. But, as the Indians aren't contesting these figures, perhaps they're correct. From BusinessWorld:

The [Philippines] may have surpassed India in terms of call center employees and revenues, but it has yet to take a similar lead in other segments of outsourcing, an official said Tuesday. Commission on Information and Communications Technology Chairman Ivan John E. Uy told reporters at the sidelines of an electronics industry conference that the Philippines had exceeded India in the number of new employees, with 15,000 as of end-October. "India had 13,800 new hired [sic] employees for this year but we still have to wait until the year ends."

Mr. Uy said the Philippines had also surpassed India in call center revenues, with $5.5 billion as of end-October against the latter’s $5.3 billion. "We are projecting to reach $5.8 billion by the end of the year, while India projected $5.5 billion. These are significant accomplishments, but the entire [Philippine outsourcing] industry is still valued at $9 billion, while India is at $47 billion," he said.

On its Web site, IT services firm SourcingLine said the entire outsourcing industry goes beyond call centers, to include services that demand higher skills like software development, engineering design and investment research. Business Process Outsourcing Association of the Philippines chief executive officer Oscar R. Sañez said in a phone interview that the country’s annual offshore outsourcing revenues could more than double to $25 billion, equivalent to a 10% share of the global market, by 2016.

"The industry can grow from $9 billion in annual revenues and approximately 500,000 direct employees today to $20 billion and 900,000 employees by 2016 if current conditions are sustained and with a lot of hard work," he said.

The reasons given for this surprising factoid are many (and a few are likely self-serving): Filipinos have a more "neutral" accent (i.e., they can imitate talking like white people more easily--cue "Apu Nahasapeemapetilon"); Philippine workers are better equipped with relevant skills; etc -

"We won this war not because we're lower cost than India. To some extent, we are a little bit higher priced to operate a call center compared to India. We won this battle by virtue of Filipino quality. We grew faster than India because it's the Filipino talent, which is world class caliber," he said. He noted that Indian call centers are already migrating some of their operations to the country.

Jojo Uligan, CCAP corporate secretary and executive director, said the Philippines played up its strengths in the past 10 years by being a superior value destination for US companies. He said Filipinos have a better cultural affinity to Americans, and their accents are more neutral. "When you train a Filipino to speak English, you would never know it is a Filipino. I think Americans like to talk to a person they can understand," he said...

"We're not just focusing on the United States but other English-speaking countries like the UK, which we only service a little. Australia and New Zealand are also good potential for us. But again, if you can market in these areas where we service a smaller percentage of the business, then we will have a better chance of getting more jobs," he said...

But then comes the honest truth: call centres are atthe bottom end of the BPO totem pole. So, in reality, India may already be leaving such services behind in search of greener and more profitable pastures:

Call centers are generally positioned at the bottom of the BPO value chain since they provide lower profit margins compared to other BPO offerings. Non-voice BPO offerings, such as financial, medical, editorial, and engineering services, contribute higher profit margins, thus is preferred by more established BPO players, including those from India.

Local BPO firms have pursued call center services as part of a strategy. Call centers are considered as their entry point for a slice of the non-voice outsourced and/or offshored businesses of clients.

So perhaps it's Jai-Ho (You Are My Destiny) for the Philippines to rule the roost in call centre operations, but the challenge is to continue to move up the ladder like India in terms of the sophistication and profitability of services on offer such as CAD/CAM work, digital animation and so forth. In the meantime, Shakalaka Baby not to Bangalore but to Manila!

Already I'm thinking of preparing my screenplay for The Great Philippine Call Centre Movie to raise public awareness about the country's status as the world leader. In tawdry modern fashion, it will concern before or after work-hours recreational (procreational?) activities by call centre workers. Fielding calls by Yanks who don't know what a MAC address is, long-distance love triangles at Hewlett-Packard Philippines, an A.R. Rahman soundtrack, Danny Boyle for the director...it's a guaranteed hit, I tell you. I am yours forever; yes forever I will follow...

Cam Ranh Bay, Now Open for Business

Here's another story that has failed to get much play in Western media for one reason or another. Being a Southeast Asia scholar, however, I believe that I should point out its implications. I probably needn't explain the importance of Cam Ranh Bay in the Asia-Pacific (above is a picture of it in its Soviet-era prime). This Vietnamese port has been a gateway to Indochina in particular and Southeast Asia in general for centuries. Very recently, the Vietnamese government declared that it would reopen Cam Ranh Bay for business to undertake ship repairs and other services to passing vessels--both commercial and military [1, 2, 3, 4, 5]. The timing, of course, is suspicious since it coincides with Vietnam's contretemps with China over the South China Sea that it's been more vocal about this year as the rotating chair of the Association of Southeast Asian Nations (ASEAN). See my previous scribblings on the curious efforts of the US to re-involve itself in Southeast Asia via the South China Sea issue [1, 2]

To make a long story short: the ostensibly "commercial" motives in opening Cam Ranh Bay for business since it fell into disuse when the Russians left in 2002 need to be considered in light of emerging security concerns about a more assertive China. Among ASEAN members, Vietnam has the most strained relations with China--especially over Vietnam's invasion of Cambodia and China striking back when the Khmer Rouge was still a PRC client.

For kicks, let's try a different Q&A format. The answers are mine:

1. What is Vietnam’s plan to reconstruct Cam Ranh Bay? Does Vietnam indeed have an economic stake in reopening this port?

The Vietnamese leadership has not established a definite plan yet. Instead, they are signalling their intention to create a maritime service centre at Cam Ranh Bay to provide repair and maintenance services to both commercial and naval vessels. Also, they want to create shopping opportunities onshore catering to crews of passing ships. Cam Ranh Bay is a fine deepwater port, and so Vietnam has naturally considered its use for commercial purposes. A notable regional example of a former US naval installation being converted for commercial purposes is the Subic Bay Freeport in the Philippines. Plans to reconstruct Cam Ranh Bay may lead it in this direction.

2. Why is Vietnam's motive in reviving Cam Ranh Bay?

Overall, there are two likely reasons. The first is the one mentioned above of it being an excellent deepwater port with revenue-generating possibilities given its prime location near commercial sea lanes traversing the South China Sea. The second relates to Vietnam’s interest in limiting perceived Chinese aggression over contending claims to islands in the South China Sea. If Cam Ranh Bay becomes established as a regular port of call for vessels of different naval powers--including China--then Vietnam may feel more secure. For instance, having American or Russian vessels regularly use these facilities can remind China that Vietnam has increasingly good relations with other powers. Vietnam itself has limited naval capabilities compared to China’s.

3. It seems there is a great opportunity for Russia to come back to Vietnam. It is said Vietnam will hire Russian consultants and buy Russian technology for the new repair facilities in Cam Ranh Bay. What is Russian interest in this region now?

The Russians left Cam Ranh Bay in 2002 prior to completing the 25-year lease Vietnam had given Russia in 1979. Vietnam tried to raise the rent charged to the Russians and this action hastened the Russian withdrawal. Now in better financial condition than in 2002 due to the elevated energy prices, Russia is said to express interest in using Cam Ranh Bay as a staging area for combating maritime piracy in the Horn of Africa as opposed to any geopolitical interest. However, the Vietnamese indicate that they will not tolerate use of the port for military purposes. The Russian Pacific Fleet has not seen major upgrades in recent years, suggesting that re-establishing a visible regional presence is not a key Russian objective at the current time.

4. How has the Vietnam/Russia relationship fared in the recent years? What will Vietnam get from its cooperation with Russia?

Russia left Cam Ranh Bay in 2002. Prior to their departure, however, the Soviet Union was an important benefactor of the Vietnamese. It was with Soviet support that Vietnam was able to maintain its presence after the invasion of Cambodia from 1979 to 1989. However, the collapse of the Soviet Union meant that it could no longer afford to keep funding Vietnam. Additional pressure was applied when the Chinese made Vietnam’s withdrawal from Cambodia a precondition for normalizing PRC relations with the Soviet Union.

Today, the Vietnamese and the Russians maintain cordial relations. Stated plans to refurbish Cam Ranh Bay for commercial purposes will be primarily economic in nature such as providing jobs to the Vietnamese.

5. This time around, Vietnam does not say it will rent the bay to any individual country. Do you think it is a ploy towards multilateral diplomacy and to make sure Vietnam can get benefits from several powers include the US and Russia?

Vietnam would create a serious political problem for itself and ASEAN if it were to lease Cam Ranh Bay to a foreign power. Like all ASEAN members, Vietnam is a signatory to ASEAN’s Treaty of Amity and Cooperation (TAC) that emphasizes principles of non-interference. Additionally, all ten ASEAN members have signed the Southeast Asia Nuclear Weapon Free Zone (SEANWFZ) treaty that came into effect in 1997. Among other things, SEANWFZ bans stationing of nuclear devices in member states. Still, as I mentioned as a response to the second question, Vietnam may be more comfortable welcoming the presence of other power’s vessels to counteract China’s increasingly sophisticated naval capabilities.

6. Cam Ranh Bay has been a very attractive place for major powers for a long time. What makes it so important in politic and military strategy? How do you evaluate Vietnam's role in Southeast Asia against the backdrop of current regional and global geopolitics?

Cam Ranh Bay’s features as a deepwater bay with a 14-meter deep harbour make it very attractive since it can easily accommodate large vessels. Its strategic position at the heart of sea lanes in the South China Sea also make it very attractive. Accordingly, many foreign powers—the French, the Japanese, the Americans, and the Russians—have used it as a key staging area to facilitate their interests in Indochina and Southeast Asia more generally.

Vietnam’s role in Southeast Asia—particularly ASEAN—has been growing since joining the organization in 1995. As the current rotating chair of ASEAN (which changes annually), Vietnam has been very active in bringing up its interests this year. With regard to China, these include territorial disputes in the South China Sea as well as Chinese construction of dams upstream on the Mekong River that poses difficulties for countries lying downstream like Vietnam.

APEC: To a 'Free Trade Area of the Asia-Pacific'

This story is convoluted, but it will be of interest to all you followers of trade negotiations. Again somewhat lost in all the talk about international currency wars and global economic imbalances was the just-concluded APEC meeting in Yokohama, Japan. The Asia-Pacific Economic Cooperation (APEC) is rightly regarded by many as a non-event on the world's calendar, being little more than an opportunity to play dress-up in nifty native costumes and make Dubya look silly in times past. However, the Yokohama meeting may be said to be a tick above the moribund in the arena of regional economic integration that I have great interest in following.

A few weeks ago, an event hosted here at LSE IDEAS (this link contains a video interview of Warwick's Asia expert Shaun Breslin) discussed contrasting visions of economic integration in the Asia-Pacific. My previous wrap-up post featuring presentation slides has more. In brief, the three largest economies in the world are proposing different versions of integration that suit their interests. China is keenest on ASEAN+3 or ASEAN's ten member states plus China, Japan, and South Korea, Meanwhile, the Japanese are championing the East Asian Community or the so-called ASEAN+6: the countries mentioned above plus Australia, New Zealand, and India. Lastly, the Americans still want to turn APEC--not originally envisioned as a free trade grouping--into one. The US is keen on turning the current Trans-Pacific Partnership (TPP) among Brunei, Singapore, Chile, and New Zealand--a very odd set of countries in geographical terms--into something wider. The US aside, Australia, Vietnam and Peru are also in the negotiating process. Malaysia recently joined TPP negotiations--perhaps a sign that the US strategy of making TPP a bandwagon for regional integration that doesn't leave it behind alike ASEAN+3 or +6 is working.

Professor Breslin believes that the proliferation of preferential trade agreements is designed to forestall the creation of a regional FTA. That is, it becomes more and more difficult to conclude an agreement once you gather more economies with disparate interests. Notice that I said "parties" instead of "countries." For, in an interesting twist, Taiwan is considering whether to join TPP negotiations as well. Remember, APEC is composed of economies, not countries. This expediency allows APEC member Taiwan a workaround to its exclusion in the likes of ASEAN+3 or +6 at China's will.

For a counterblast to Professor Breslin's idea that the proliferation of such proposals is meant to delay the emergence of a pan-regional trade deal, consider what the APEC participants have said in their 2010 Leaders' Declaration. By contrast, they suggest that ASEAN+3, ASEAN+6, and TPP are not competing but complementary arrangements that may eventually lead to a Free Trade Area of the Asia-Pacific" presumably involving the bulk of APEC economies:

We will further promote regional economic integration, working toward the target year of 2020 envisaged by the Bogor Goals for all APEC economies to achieve free and open trade and investment.

We will take concrete steps toward realization of a Free Trade Area of the Asia-Pacific (FTAAP), which is a major instrument to further APEC's regional economic integration agenda. An FTAAP should be pursued as a comprehensive free trade agreement by developing and building on ongoing regional undertakings, such as ASEAN+3, ASEAN+6, and the Trans-Pacific Partnership, among others. To this end, APEC will make an important and meaningful contribution as an incubator of an FTAAP by providing leadership and intellectual input into the process of its development, and by playing a critical role in defining, shaping, and addressing the "next generation" trade and investment issues that FTAAP should contain. APEC should contribute to the pursuit of an FTAAP by continuing and further developing its work on sectoral initiatives in such areas as investment; services; e-commerce; rules of origin; standards and conformance; trade facilitation; and environmental goods and services.

Again, there is much reason for scepticism. How can the US complete a deal with nine participants when it cannot even complete a bilateral arrangement with South Korea after three years, for example? Recall, too, that the Bogor Goals are well off track. The text of the 1994 Leaders' Declaration says APEC's achievements should include "the industrialized economies achieving the goal of free and open trade and investment no later than the year 2010 and developing economies no later than the year 2020." 2010 is about to end, yet agricultural protectionism remains rife in the likes of the US and Japan. As for the Doha Development Round, forget about it since most of the rest of the world already has.

Importantly, remember that this is not the first time the US has tabled the FTAAP idea. Alike the Free Trade Area of the Americas (FTAA), FTAAP has singularly failed to find adherents. Ah well, hope always springs eternal for some.