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Issue No. 9, Fall 2013

• Interview with former Minister of Singapore • Corporate Social Responsibility in Asia • Fukushima and the Future

How Mongolia Should Manage Its Resource Wealth

FACING A CROSSROADS Cover photo shows the dramatic change in Mongolia


06 Corporate Social Responsibility in Asia

In the west, corporate philanthropy has been seen in the past as obligatory, inconsequential, and hardly heartfelt. Corporate Social Responsibility, however, indicates a shift in the way businesses approach giving - in Asia in particular, CSR shows signs of being quite distinct from it’s western counterparts. Undoubtedly, how Asian businesses approach corporate giving will shape the structure and long term success of their society.

08 Fukushima and the Future

The Fukushima disaster greatly altered Japan’s use of energy sources. Prime Minister Shinzo Abe must ensure that nuclear power has a role to play in the more varied landscape that has emerged following the nuclear accident.

10 China’s Ascension into the WTO

China became more and more inclined to pursue economic growth, however, they were forced to abandon these outdated positions on international cooperation. As they realized that joining the WTO would be necessary for economic growth, they strove to join the organization in such a way that their internal governmental hierarchy would remain intact.

12 Declining Business Trust — An Ominous Sign for Asia?

Trust in business is running out in Asia. What can companies do to regain the trust they have frittered away?

14 16 18


China’s Increasing Demand for Natural Resources

With the rising concerns for the environmental damage and resource depletion globally, it is increasingly difficult for other countries to justify any efforts to reduce waste in energy arena.

Macau—Moving Beyond Casinos?

Ever since its liberalization of the casino business, Macau has become the go-to gambling destination in Asia. But how sustainable is this casino-centric economic model for Macau?

Currency, Trade Relations, and Korea from Abenomics

When Shinzo Abe assumed office almost a year ago, he introduced a massive expansionary fiscal policy, which is now known as Abenomics, in the hopes of boosting the Japanese economy. His policy has drastically changed the value of yen relative to other currencies as well as the Japanese trade relations with neighboring countries.

Facing A Crossroads

Massive resource deposits has created the potential for enormous wealth. Yet Mongolia is faced with several crucial decisions that will force them to question their historical values, notions of nationalism, and even personal integrity as they seek solutions to benefit their people while still appearing attractive to foreign investors.

Table of Contents 25 Prospect of Liberlization in China

An interest rate more vulnerable to market influence and the potential introduction of private banks signal the transformation towards a more liberal Chinese financial market. What’s the approach? What’s the impact?

27 The Relationship between Government and Business in Asia

Interview with Mrs Lim Hwee Hua, former Minister in the Prime Minister’s Office, Singapore How should businesses navigate the intertwined web of government and business in Asia? Has the presence of large state-backed companies in Singapore affected the development of local businesses? Which economies in Asia and in ASEAN hold the greatest potential in the next 10 years? Read the exclusive interview with the former Minister of the Republic of Singapore, Mrs Lim Hwee Hua, as she shares her thoughts on the relationship between government and business in Asia.

29 Exploring A Bubble

This article explores social and economical factors behind China’s booming property market and how they affect real estate consumers in the middle to lower income bracket. Issues such as real estate investments, social implications of owning houses, and restrictions to owning houses in some cities are addressed.

31 Ensuring Food Security

In September of 2013, the Indian parliament passed a bill aimed at delivering subsidized food to about 800 million people, but given India’s budget deficit, slowing economy, and depreciating currency, does India have the resources to devote to such an initiative? Is there a larger question of whether India is able to produce enough food to support its growing population?

34 Islamic Finance Revisited

Taking another good look at Islamic finance and how it could be safer for us all.

39 India at Crossroads

With an economy in the doldrums and a new election cycle on hand, India faces a formative year ahead. Congress has governed for nearly a decade, but the opposing coalition has placed it’s bets on Narendra Modi, a Prime Ministerial candidate with rock star appeal. The decision Indian voters make this year will could have a major impact on the country’s development for decades to come.



editor’s letter

Advai S. Pathak is a Junior in the ILR school. He grew up across Britain, Asia, and the United States and completed an internship with an international investment bank in Singapore this past summer. Outside of the Business Asia Journal, he is also a member of Alpha Kappa Psi, a professional business fraternity on campus.

As 2013 draws to a close and the world economy continues its stodgy march towards growth, Asian countries face several crucial decisions as they adjust to positions of increasing prominence on the global stage. This ninth issue of the Cornell Business Asia Journal explores the challenges and changes that face many major Asian countries over the coming months as they jostle to assume prevalence in the region. In some cases, Asia is taking a leading role in affecting the world and its actions necessitate moral introspection. China’s increasing thirst for resources is leading it across the globe as it seeks commitments to continue to fuel its explosive growth. This is causing tension with several resource-wealthy nations, including its suspicious neighbour, Mongolia, which is on track to become a nation of millionaires. Despite its outward position of strength China faces several challenges internally, from dealing with inorganic bubbles in its real estate market to reconciling the madness of Macau with the order of the mainland. In other instances, nations are adopting reactionary positions to changing circumstances. Energy has become a central issue in Japan as well, as the country creates a new long-term energy plan in the wake of the Fukushima nuclear disaster. There is more immediate reform, ‘Abeconomics’, designed to shift back the center of power in East Asia, as Japan grows increasingly wary of China’s regional strength. In India, change is necessary and long overdue. The country remains in limbo heading into its 2014 general election. The South Asian giant is achieving paltry economic growth and continues to grapple with longstanding issues over its foreign investment regulation and food security. Change breeds innovation and creates new avenues for growth and development. Our writers also highlight changes in business trust across the region and innovations in corporate social responsibility that are adding to the dynamism of the environment and provide some reason for optimism over the direction Asia is headed. As Asian countries choose among the several paths laid before them, change is also afoot with the Business Asia Journal. This issue was created by Editorial and Design teams welcoming several new and talented members and under the guidance of our new President, Zhi-Yen. We have several initiatives being acted upon over the coming year that we hope you find as exciting as we do. We value your opinion and welcome your thoughts. If you have comments, critiques, or suggestions, please contact us at BusinessAsia.Journal@gmailcom. Sincerely, Advai S. Pathak

Special thanks to our sponsors!

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EDITORIAL Yiwei Chen Kevin Hua Shuang Jia Jihoon Lim Timothy Lin Maria Marcia University of Indonesia Advai Pathak Jiting Wang Mengtian Wu Ben Zehr Priyanka Panigrahi Emma McGrath Sanjeev Dhara



CSR IN ASIA Introduction Corporations are a source of contention. Criticized on one hand as the source of many societal ills and praised on the other as the purest distillation of human ingenuity and ambition, how corporations conduct themselves is a central focus for policy-makers worldwide. The potential for companies to contribute to societal and environmental betterment is great, and ensuring that these interests do not conflict with profits is rapidly becoming a priority for communities and governments. Corporate social responsibility (CSR) has arisen as a favored solution in many circles in recent years, to some controversy. Seen by some as an easy way out for evil corporations to donate large sums without any regard for results, and by others as the dawn of a new era for a more responsible form of capitalism, CSR is often imprecise in its measurement. Nonetheless, it is a concept that is changing the way people see business. Asian companies in particular serve as interesting case-studies when discussing

CSR, because of their cultural differences and distinct national challenges. CSR can imply anything from donating money to charities, to funding specific projects, to changing corporate structure and work environment to reflect company values. Though the primary measure of CSR is often as a percentage of profit contributed to various social or environmental causes, steps such as actively attempting to change corporate culture or operating a social for-profit enterprise are often difficult to monetize. Nonetheless, corporate benefaction worldwide has been growing as a share of profits over the past decade, due to various factors such as tax incentives, consumer preferences, and other, less tangible shifts in business attitudes. Although CSR is often critiqued as a western idea being applied in the developing world without regard for local caveats, there is evidence to suggest that the reality is more complex.


There are clear distinctions in how CSR is practiced regionally. Despite recent changes, Chinese companies have traditionally held greater emphasis on bottom line figures and have been less inclined actively involve themselves in social or environmental programs. On the other hand, several of India’s largest corporations have held societal issues at the heart of their business culture since inception. Furthermore, the uniquely Japanese focus on employee loyalty and discipline have shaped how the private sector has approached this modern iteration of community service, with companies making employee contributions to their communities an important part of the job description. Historical differences among cultures have led to divergent CSR practices in these large Asian economies, which are often very dissimilar to their western counterparts. In recent years, these countries have seen a more rapid integration of CSR into the explicit mission statements of their companies. For instance, regional and global pressures from more conscious consumers in the emerging middle class have precipitated as the revised Companies Act in India. The recently passed legislation has made CSR-type contributions of 2% of profit essentially mandatory for all registered corporations with an annual profit above about $78 million, including guidelines (albeit unspecific) as to where the investments should go . The head of the Indian Institute of Corporate Affairs, Bhaskar Chatterjee, said that the purpose was to “divert some corporate energy and the corporate way of doing business into our development sector” in order to benefit the country as a whole”. The private sector has had a largely negative reaction to these guidelines, asserting that businesses are not likely to give to worthwhile projects when faced with such rigid regulations. Western observers are also criticizing this step by the Indian government as counter-productive and ultimately unhelpful to the poorest of people who are in need of better infrastructure and institutions, calling the mandate a potential source of corruption and passive, compliance-based activity that would only undermine the bill’s purpose.

Whatever the ultimate effectiveness of the bill may be, the move to create positive legislation is a sign of the growing importance of businesses being actively involved in their communities. Indian businesses are already known for their focus on social end-goals; Reliance launched its telecom business with the express goal to provide every Indian with a cell phone connection and Tata designed its Nano car (one of the least expensive in the world) to provide the poorest Indians with mobility. What sets these businesses apart is their integration of a people-centered mission into their business model. For Tata and Reliance, increasing social capital and raising standards of living are vital to their success as businesses. Their projects actively create positive externalities, as opposed to simply allocating funds to various charities out of a sense of obligation. Additionally, the unique developmental challenges faced by the nation are resulting in a renewed focus on valuesdriven businesses that invest in both human capital and the local economy. Similar trends are becoming more apparent across other large Asian economies. Recent surveys indicate that the majority of donations in China come from the private sector, about 80%, with the rest coming from individuals. This lies in stark contrast to the American data-set, which has the opposite characteristics. Such giving indicates an inherent belief in the ability of CSR to both influence market share and contribute to society. As citizens grow more concerned with the impact of their consumption on the world at large, they are more likely to purchase products made by companies who reflect those values through fair wages and low environmental impact, and are often willing to pay a premium for them. China has become home to a large cohort of billionaires in recent years, many of whom are keen to assist a social sector dealing with challenging development issues such as children’s nutrition, community based health, and basic needs. Furthermore, transparency is on the rise among both private sector and nonprofit organizations - partly due to both increasing public pressure and the perceived benefits for nonprofits themselves - leading to further focus on


how they are interacting with their local communities and where the profits are being channeled. Where charity groups and their benefactors have been tarnished by scandal in the past, people are beginning to feel more confident in these institutions and are getting more actively involved in both contributing and following up with them. In contrast to their Chinese counterparts, Japanese companies have invested in their CSR programs long before it became fashionable and the source of heated discussion in the West. Japan is the oldest developed nation in Asia with a strong traditional emphasis on benefaction and working for society.

Since the 1970’s Japanese companies have actively sought to respect the interests of all stakeholders, including local communities affected by their activities, employees, customers, as well as shareholders. At the same time, transparency via the dissemination of statistics about their contributions is paramount, and stakeholder relationships are just as important as share price in measuring performance. Japan has historically been home to the “salary man”, an employee who is fiercely loyal to their company and rewarded with almost permanent employment and a consensus based decision-making model. Diverging from corporate culture in the USA, this emphasis on stability is symptomatic of a socialbenefit oriented cultural paradigm.

• Ben Zehr

Benjamin Zehr is a citizen of both India and the USA. He spent his childhood in rural India and completed his upper education in the United States. He seeks solutions to the problems he grew up around and was co-founder of a network of affordable and financially sustainable rural eye hospitals in Maharashtra. He is a Sophomore studying International Agriculture and Rural Development with a focus on economics, food, and sustainability.

Japanese Prime Minister Shinzo Abe is briefed on the situation at the Fukushima Dai-ichi nuclear power plant as he tours the facility, Sept. 19, 2013. AFP/Getty Images

Fukushima and the Future Although the tsunami and the resulting nuclear accident at the Fukushima power plant are over two years old, many of the questions surrounding Japan’s energy future are still up in the air. This past September, Japan’s last active nuclear reactor was turned off for an indefinite amount of time. According to estimates used by the Economist, prior to the Fukushima incident, nearly 30% of Japan’s electricity demands were satisfied through nuclear power plants. Since then, Japan has struggled to fill this void and seems at a crossroad over how its energy policies should proceed. Despite counter-arguments and popular sentiment in Japan, however, Prime Minster Shinzo Abe’s best path forward is to reintegrate nuclear power into Japan’s energy portfolio, albeit at reduced levels as compared to the past. It is useful to explore the economic costs of the dramatic reduction in nuclear power generation in Japan. Before Fukushima, Japan ran trade sur-

pluses; now it carries a deficit. The World Nuclear Association has stated that, while the deficit is not solely due to imports of liquefied natural gas – sought as an alternative to nuclear fuel – this outside investment has made an impact on Japan’s trade stance. Many members of the largely pro-nuclear LDP have warned that the rising cost of importing fossil fuels will severely hurt Japan’s economic competitiveness in the long run. However, when analyzing the economic costs of the rapid denuclearization of Japan, it is important not to get carried away in figures such as the trade deficit, without examining the surprising resiliency of the Japanese economy in the face of such strenuous energy shocks. According to a study by the Oxford Energy Institute, Japan has increased its usage of alternative renewable energy sources to around 10% of its overall power generation. Furthermore as noted by three members of the Osaka Gas Company, the much feared energy

blackouts never really hit Japan because many of the reactors that were burning fossil fuels were already running at levels far below full capacity. As such, they were equipped to handle an increased load after the Fukushima disaster occurred. Thus it is clear that the economic costs of the rapid denuclearization are less clear-cut than how members of Abe’s party have portrayed them. That being said, the arguments to reintegrate nuclear energy into Japan’s energy portfolio largely rest upon feasibility, both in terms of political posturing and the realities of energy production. Shinzo Abe’s party, the Liberal Democratic Party (LDP), has been an aggressive proponent of nuclear power throughout its history. Following the oil shocks of the 1970s, nuclear power gained traction throughout Japan. However news outlets within Japan have stated that there are younger members within the LDP that are calling on reduced nuclear power, in part to align themselves with the vast


majority of public opinion. Abenomics, Shinzo Abe’s bold plan to revitalize the Japanese economy, has certainly lost traction in the past few months. As argued by the Economist, Shinzo Abe’s various proposed reforms would require a tremendous amount of political capital and wrangling in order to see fruition. Not paying credence to the calls from within his own party regarding nuclear power would be counterproductive to Abe’s larger goals of curbing deflation. Reviving the dormant Japanese economy and returning Japan to its former status as the East Asian miracle were the goals that made Abe’s ascent to power so alluring. While Abe will not win or lose that fight with his approach to nuclear power, it does not make sense for him to fragment his base on an issue that he does not equate as being one of his important goals while in power. Rather than a wide-scaled re-nuclearization, it would seem more politically expedient to suggest a less-aggressive approach while diversifying Japan’s energy portfolio. Beyond making political sense, the push for reintegrating nuclear power into Japan’s energy generation system is also strengthened by the fact that Japan’s nuclear infrastructure is among the best in the world. Foreign policy experts as well as various news sources including the Economist have stated that companies such as Hitachi, Toshiba, Westinghouse, and General Electric have contributed extensively to Japan’s nuclear “know-how”. The level of sophistication and knowledge within Japan’s leading companies regarding nuclear power generation is not something that should be so readily discarded. In many ways Fukushima demonstrated the flaws within large monolithic Japanese firms such as Tokyo Electric Power Co. (TEPCO), the company responsible for the power plants at Fukushima. According to the World Energy Council, the indefinite shutdown of Japan’s nuclear shutdown has been accompanied by stringent stress tests. Moving forwards, Japanese energy reform should be directed towards improving the corporate governance, accountability, and transparency

of companies such as TEPCO. For a country to build up nuclear energy requires years of capital investment and years of developing an army of scientists and engineers. Japan should place its faith in its scientists and engineers while directing its considerable ire towards government officials and the management within TEPCO. Transitioning away from nuclear power would represent transitioning away from a large infrastructural and intellectual investment, without addressing the root cause of the Fukushima disaster. It cannot be denied that much more thought needs to given to both the locations of nuclear plants and the structural barriers in place to insulate them from the elements. Of greater importance, however, are the arrangements between government regulators and the management of companies such as TEPCO. In this regard, there are strong parallels between Fukushima and the Deepwater Horizon oil spill, in that both exposed flaws in government’s ability to properly regulate the actions of energy companies. Focusing on these problems within the Japanese institutional framework could have long-term beneficial impacts to numerous aspects of Japanese governance. Furthermore a full transition away from nuclear power would necessitate an increased medium-term demand on liquefied natural gas (LNG), while in the long run emphasizing the importance of renewables. It is important to note that the transitioning of facilities for extended use of natural gas will require capital investment. Additionally, despite the American shale boom, global natural gas prices are still higher than those in North America, and will most likely continue to remain so. LNG is not a global market due the nature of the natural gas and will continue to remain so—meaning that low North American natural gas prices will not translate in Japan. The LNG market is not globalized due the difficulties that still remain in shipping it across continents in ways similar to crude oil. Furthermore, European, Indian, and Chinese demand for natural gas will only


increase in the future creating significant global demand that will certainly drive up prices further. Therefore, while the cries raised by Abe’s party regarding the unfeasibility of continued fossil fuel usage are overblown in the short-term, they do appear accurate in the long term. Fukushima did give an unintended blessing in that it has increased Japan’s reliance on renewable sources of energy. This newfound reliance is not argument enough to reduce the diversity within Japan’s energy portfolio. The response to the Fukushima crisis has demonstrated how adaptable Japan’s energy matrix is in the face of rapid change. The country has still not experienced blackouts despite losing nuclear power generation and this is because it has rapidly increased its usage of fossil fuels and renewables. Returning nuclear power to the mix, albeit at a reduced level, allows Japan to continue to diversify its energy portfolio while also proving politically useful for Shinzo Abe’s larger goals. With new and more stringent safety protocols, nuclear energy will hopefully remain a safe, viable option for Japan moving forward—but in a less prominent role as before the Fukushima crisis. Moving forward, the Japanese public as well as Shinzo Abe must pay more attention to strictness of government standards and regulations on power companies like TEPCO. Reforming these systems will allow for Japanese to feel safer about all their various forms of power generation. • Sanjeev Dhara Sanjeev Dhara is a Sophomore majoring in Chemical Engineering from Rockville, Maryland. In addition to writing for the Business Asia Journal, he is also a member of Alpha Kappa Psi and is involved with Cornell Current, MICC, and Society for India. This past summer, Sanjeev interned at a private wealth management office.



China’s Ascension into the WTO “At the Silk Market located in the center of the country’s capital one can find a counterfeit version of virtually every popular American product.” After Reform and Opening in 1978, China began to investigate the most effective way of globalizing on a large scale and simultaneously encouraging growth in their stagnant economy. After much consideration, Chinese leaders discovered that the only way to accomplish both of these goals would be to try and become a member of General Agreement on Tariffs and Trade (GATT), which would subsequently become the World Trade Organization (WTO). From the beginning, however, the Chinese government was intent on maintaining a strong commitment to domestic socialism while still radically modernizing the economy. In many ways, this discrepancy between modernization and the ghost of Maoist thought has been the defining conflict that has existed within the People’s Republic of China (PRC) for the past twenty years. The result of this conflict is that the PRC government has tried to accept just enough western influence to benefit economically, but not so much that Chinese culture is radically altered. In Wang Yong’s article, “WTO Accession, Globalization and a Changing China,” Yang highlights the effort China had to put forth to join the WTO, but he also focuses on China’s occasional disregard of WTO agreements in order to protect Chinese exports and encourage the consumption of domestic goods in China. He mentions that before China joined the WTO, many people in China thought of the WTO as, “clubs of

the rich, in which wealthy, developed countries imposed rules on poor, weak developing nations” (32). Before it’s accession, it is apparent that China viewed the WTO as just another capitalist organization that had no place in China. As China became more and more inclined to pursue economic growth, however, they were forced to abandon these outdated positions on international cooperation. As they realized that joining the WTO would be necessary for economic growth, they strove to join the organization in such a way that their internal governmental hierarchy would remain intact. To strengthen their campaign, China, “modified more than 2,300 national laws and regulations to adapt to WTO commitments, while localities modified or canceled 190,000 related local laws and regulations, to improve policy transparency and ensure conformity with WTO rules” (32). In the beginning it is evident that China altered laws in order to be admitted into the WTO, but, today, the country often faces charges that it is not doing all that it could to abide by WTO laws. These accusations typically revolve around two separate perceived violations of WTO commitments. First, China is frequently accused of violating intellectual property rights (IPR), and second, it is often charged with adopting discriminatory trade barriers. China’s violation of IPR and its protectionist policies are both closely related to China’s desire to maintain sovereignty and

the aforementioned governmental hierarchy within the country. According to Margaret Pearson’s article “China’s Integration into the International Trade and Investment Regime,” when China decided to pursue Reform and Opening in 1978, they “repeatedly expressed that they had the ability to utilize the benefits from participation in the world economy, while avoiding the elements of integration that were harmful to China’s economy or sovereignty”. From this statement, it is apparent that from the beginning, China chose to operate in such a way that its control over domestic policies would always to some extent remain in their own hands. Later in the article Pearson evaluates, “the degree to which China’s gradual integration into the international regime has been – and can continue to be – shaped by external pressures” (163). These are simply predictions made by Pearson long before China actually ascended into the WTO in 2001, but she


accurately pinpoints China’s willingness to acquiesce to some pressures, while opposing others. As an example of this opposition, China still shows a rampant disregard for IPR. Pirated TV shows, movies, handbags, clothes and bags are abundant in China. While some are low in quality and obviously fake, others bear striking resemblance to the original product and are bought en masse by foreigners during visits. In the article, “China’s Continuing Need for the WTO,” written by James Baachus, it is noted that, “pirating and counterfeiting employ millions of Chinese,” but, “WTO rules require the enforcement of patents, trademarks, and other IPR” (30). Intermittently, officials crackdown on the production of counterfeit goods, but generally the sale of these goods is allowed to thrive and remains one of the biggest tourist attractions in Beijing. At the Silk Market located in the

center of the country’s capital one can find a counterfeit version of virtually every popular American product. Combined with Chinese protectionist policies, it is apparent that even though China for the most part adheres to WTO regulations, it selectively decides to enforce others. Whether or not China will amend its policies anytime soon is difficult to say, but these problems will undoubtedly continue to cause rifts in Chinese international relations with several countries throughout the world that respect and follow virtually every WTO guideline. • Emma McGrath Emma McGrath is a Sophomore Government Major from New York City. In addition to serving as Assistant Editor for the Business Asia Journal, Emma is a member of Alpha Kappa Psi and sails for the Cornell Sailing Team.


November 11, 2001, Shi Guangsheng, the then Minister of Foreign Trade and Economic Cooperation, signing the protocol on China’s accession to the WTO on behalf of the Chinese government in Doha, the capital of Qatar. China officially entered the WTO on December 11 of that year, becoming its 143rd member. / Photo by Xinhua and caption by QiuShi News



Declining Business Trust — An Ominous Sign for Asia? Asia’s top companies, especially those in the finance sector, are becoming increasingly wary in their business outlook, due to a stark decline in business trust amongst the general public as well as investors. According to the 2013 Edelman Trust Barometer, an annual survey con-

ducted by the global PR consulting firm Edelman, trust in business institutions, industries and leaders is taking a severe hit across Asia. Due to the financial crisis and the uncertainty in economic recovery, trust in business in Asia fell three points on average to 53%, with countries like

South Korea and Japan moving squarely into the “distrust” category. As the financial situations in Asia and around the globe remain bleak, financial services unsurprisingly remains the least trusted industry sector in Asia for the second year running. In South


As INSEAD’s Professor Fatas noted, “Uncertainties do remain but, if I were to conduct the survey this week, businesses might be more confident.” Photo of Shanghai skyline

“companies in Asia are now taking steps to build confidence and trust”


Korea especially, the financial services industry has slipped 25 points on the Edelman index, finding itself at an alltime low level. The economic crisis is the leading culprit for the continent-wide decline in business trust. Although Asian countries have, on the whole, been less adversely affected by the crisis directly, Asian companies still face a high level of uncertainty as global markets remain unsettled. Equity and debt markets are unreliable, especially as global political

wrangling continues to disrupt efforts at complete economic recovery. Overall, people are less willing to invest their money in the financial system. Not only is the poor market performance affecting people’s desire to buy stocks, it is also

upsetting the consumer banks as people withdrew their deposits and stored them as cash instead. Along the depressing stock markets,, diminishing disposable income and a hike in consumer prices has led to what is called a liquidity trap: where households and investors sit on cash instead of investing. Japan is one such victim suffering from the liquidity trap. It has seen a huge, steep and sustained fall in private-sector debt. Japanese investors and households have no confidence that they can earn a higher rate of return by investing. So they want to wait to invest and consume. These are all signals of the severe drop in business confidence in Asia. The weak figure in business trust may come as a surprise to those who would expect trade and business to grow in Asia amid a gradual improvement in the global economy. However, that recovery has been slower than expected and Asian markets are bracing for further volatility due to the inevitable tapering of quantitative easing in the United States. Most importantly, regaining solid momentum after a protracted slowdown is simply not easy. A low-trust environment makes business more difficult. For an individual company, loss of trust leads to lower brand value and heightened difficulty in attracting, retaining and managing talents. For business in general, loss of confidence in the honesty and credibility of corporate leaders could lead to the imposition of rules-based systems, potentially increasing compliance costs and reducing flexibility (as happened when Sarbanes-Oxley regulations were put in place after the scandals in 2000). David Brain, President and CEO of Edelman Asia-Pacific, has warned that companies will pay the price if they fail to regain public trust. “Trust is money. Low trust among customers will surely lead to artificially low valuations in initial public offerings, or delays or failure in overseas acquisition,” he said. Indeed, lack of trust has a huge impact on the level of mergers and acquisitions. When confidence in the economy is low and there is a lack of trust in financial institutions, busi-


nesses are less likely to grow and expand. They become less willing to increase their assets, or to travel to new cities and increase their global footprint. Fortunately, many companies in Asia are now taking steps to build confidence and trust in the post-crisis business. Credit Suisse is trying to pull its business “out of the woods by looking for new growth engines in China to put itself on a ‘sustainable track’”, said Dong Tao, economist at Credit Suisse at Hong Kong. Small and medium-sized firms are also actively building future trust. The Trust Barometer reveals that companies value factors that would shape future trust levels more than those affecting current trust. Therefore, instead of focusing only on factors contributing to the current trust level like financial returns, innovative products and fhighly regarded senior leadership, Asian companies are taking a multi-stakeholder approach. They are paying more attention to customer feedback and other key stakeholders including employees, suppliers, the press and civil Wang Jianlin, chairman of Dalian Wanda Group Co Ltd, a major Chinese real estate developer, said that Wanda had discussed its expansion plan fully with its key stakeholders before seeking shareholder approval. The business future in Asia seems promising. As INSEAD’s Professor Fatas noted, “Uncertainties do remain but, if I were to conduct the survey this week, businesses might be more confident.”

• Jiting Wang

Jiting Wang is a Junior in the Engineering school majoring in Operations Research. She was born in China and schooled in Singapore. Other than writing for the Business Asia Journal, she is also a dancer in Amber Dance Troupe on campus.


China’s Increasing Demand for Natural Resources


As its economy and industrialization picks up speed as a result of the Open Door Policy and economic reform, China is facing an energy crisis. According to Zhou Shengxian, the Minister of Environment, “in China’s thousands of years of civilization, the conflict between humanity and nature has never been as serious as it is today.” Taking the lack of water as an example, over-use and pollution have caused serious water shortage issues, which are worsened by the uneven distribution of resources. Northern China, with over 40% of the country’s total population, receives only 12% of total precipitation each year. However, the major reason behind the growing water crisis is the tremendous amount of water wasted. China’s industry uses 10 times more water per unit of GDP than other competitive economies. Each year China uses 40 billion cubic meters of water and it is more than

A worker stokes pots containing the rare earth metal Lanthanum. /Photo and caption from Business insider

its resources can sustain. The real cause of China’s energy crisis is the lack of appropriate and effective waste management in coping with the energy crisis. According to a World Bank study, Waste Management in China: Issues and Recommendations, urbanization, urban population growth, and increasing affluence are the three key factors in total waste generation in China. Additionally, the paper posited that between 2005 and 2030 China would need to develop strategies to deal with two-and-a-half times more waste. The massive consumption brought by the rapid industrialization and lack of waste management has generated energy shortage in not only water, but also other main types of natural resources, including oil and timber. Recent reports say that China will increase its domestic demand for oil by 13% before 2014 and surpass the US as the world’s largest net oil importer. In dealing with the increasing oil


China accounts for about 97 percent of the world’s supply of rare earths.


Pouring liquid Lanthanum into a mold.

“China is also the biggest trader in illegal timber” demand, the State Council proposed an increase in the government’s annual investment in energy-saving technologies by 15% through 2015. The government is hoping to promote China’s exporting industry by promoting efficient energy technologies. As things stand, China’s solar panel champions have swiftly overtaken their main French and German competition. Due in large part to rapid urbanization, China is now the world’s top consumer of cement, metal ores, and biomass, among other materials. China is also the biggest trader in illegal timber, triggering the concern of environmental protection organizations. At current rates of growth, China’s timber consumption will rise to 477 million cubic meters by 2020. The major barrier to China’s antiillegal logging crackdown is inaction – the country’s “stated unwillingness to

explicitly prohibit illegal timber trade”. China’s State Forestry Administration (SFA) has resisted calls from the international community for legislation prohibiting illegal timber trade into and within the country. Nevertheless, is central government really the one to blame? In the case of electricity, regardless of formal ownership ties running up to the center, power plants built to meet local demand are often built with local financing. Consequently, central government control is rendered ineffective because local decisions aren’t always necessarily coherent with national policy. In addition to the lack of regulation, the Chinese government is hesitant to take action because energy saving is a cause that is inconsistent with the ‘core objective’ of the state – maximization of economic growth. The Chinese government’s ca-

pacity to deal with energy crisis is therefore fairly limited in practice. Indeed, China has been making commitments, but those are more concentrated on acquiring outside resources rather than saving or recycling existing resources – not a sustainable practice in the long run. With the rising concerns for the environmental damage and resource depletion globally, it is increasingly difficult for other countries to justify any efforts to reduce waste in energy arena. • Michelle Wu Michelle Wu is a junior majoring in Economics and Government. Born and raised in Beijing, she is interested in business and politics and completed an internship in Ernst & Young’s Beijing office over the past summer. Outside of Business Asia Journal, she is also involved in Amber Dance Troupe and Phi Alpha Delta.



Macau—Moving Beyond Casinos? Triumphing over the Sin City, Macau has become the ‘Xin City’ with its charm and glamor. Situated right in the center of Asia, Macau has transformed into a must-visit place for those who are looking for fun and feeling a little lucky. Casino developers and investors, who have lovingly termed Macau as ‘Vegas on steroids, fervently seek after Xin City, with its skyrocketing gambling revenue,’. While favorable policies have hastened the growth in the gambling industries, it is the escalating demand that has fueled the craziness of casino developments. However, this has also led to an economy that increasingly relies almost exclusively on the gambling industry. This situation sits uneasily with the incumbent Chinese government which tries to steer clear from extravagance and indulgence, especially in the wake of the Bo Xilai affair. After the monopoly of Stanley Ho’s casino empire ended in 2002, casino developers from Las Vegas rushed into the Macau market to claim a share of the Asian gambling fervor. While it is directly connected to mainland China, Macau is also easily within reach of visitors from other Asian countries. A fair supply of casinos coupled with a rising demand for legalized gambling has pushed gaming revenue to $25.5 billion, up 15% year to date. In view of the stellar performance results, developers like the Wynn and the Las Vegas Sands seem determined to take root in Macau, expanding aggres-

sively by undertaking more development projects that would further enlarge the gaming market place in a few years’ time. Without doubt, the success of Macau as a gaming destination largely depends on the policies set by the Chinese government. Even though Macau, like Hong Kong, enjoys a separate system of government from mainland China, it largely follows the tone set by the Chinese government since 60% of its visitors are mainlanders. Any policy changes on the other side of the barrier gate would change the market climate in Macau almost instantaneously. That being said, the Chinese government has long been supportive of the economic developments in Macau even though the gaming industry is the major, if not only, economic driver. In recent years, Beijing has made it easier for mainlanders to travel to Macau and a high speed rail linking Macau to mainland China has almost completed construction. Moreover, almost in answer to the prayers of casino developers, the government has decided to significantly improve the infrastructure of the Cotai Strip, where most new casino developments will be concentrated. Besides favorable government policies, Macau’s success lies in its close proximity to countries like China and Japan, neither of which have legalized gaming, Macau is one of few places in East Asia where people can gamble at their convenience. More importantly, as the Asian economy develops, more high

net worth individuals have filled up the VIP rooms at casinos, which bodes well – VIP spending traditionally constitutes 60% of the total gaming revenue. To improve prospects further, China’s middle class has seen a rise in its discretionary income, lending support to casino developers’ bet on mass market appeal. Macau’s economy is heavily skewed by its reliance on gambling and this creates obvious and inherent risk. Junket operators, shadowy organizations that attract China’s elite to Macau through credit extensions and debt collection, have long been central to the health of the gaming business. These companies operate in legal grey areas, acting as moneylenders and concierge service providers in exchange for commission fees. A weakened Chinese economy led to reduced liquidity and this has increasingly protracted the debt collection period, making it more difficult for junket companies to turnover funds as fresh loans. Macau’s casinos have suffered slightly as a result. Additionally, the Chinese government has begun investigations of state officials gambling with sovereign funds, it is beginning to exert pressure on Macau to move away from a gaming-centric economic model. It is a safe bet that Macau will, in the long term, be forced to adopt a more diversified economy to appease the Chinese government. Nonetheless, Macu’s economy is booming economy and it currently enjoys extremely low unemployment.


Despite widespread fears, it was not overly affected by the slowdown in the Chinese economy. Huge increases in the minimum stakes across all casinos has increased profitability from the VIP market segment significantly without reducing the numbers of visitors. VIP revenues account fro 70% of total profit but are expected to fall to 60% within two years as the mass market recovers from the economic slowdown. Last year, Macau’s gaming revenues reached US$38 billion, making it six times larger than Las Vegas. That revenue line expected to reach US$77 billion by 2017, especially once capacity increases with further development in the Cotai region. The Chinese government has exerted increased pressure on developers diversify into a “family friendly integrated resort” rather than purely a gambling haven. In following this track, Macau

would increasingly face competitive pressure from other Asian destinations like Singapore, where integrated resorts mesh family friendly atmospheres with high-stakes casinos free from government intervention. While places like Singapore are its competitors, Macau can certainly learn from them. Rather than headlining casinos as their main business line, integrated resorts in Singapore advertise gambling as one of many aspects to their luxury vacations. Singapore has long branded itself as a tourist destination and the relatively recent rise of the gaming industry has simply added another layer to its appeal. For Macau to diversify its economy and successfully compete, it needs to actively develop other tourist attractions to offset the powerful presence of casinos and to widen the scope of its appeal.


Doing business in China remains tricky. Both investors and developers need to understand national politics correctly. Policy changes in heavily controlled environments like China can have enormously positive impacts but they can also bring a booming economy to its knees. As investors and developers diversify from core gaming businesses under the direction of the government, it is unclear how future of Macau’s future will play out. What Macau needs now is a holistic solution that will ease its path to a diversified economy. • Yiwei Chen Yiwei is a sophomore from the hotel school. She loves all Asian food and table tennis. She has a keen interest in business developments in Asia because of its increasingly integral role in the future.

“Macau’s success lies in its close proximity to countries like China and Japan”



Currency, Trade Relations, and Korea from Abenomics For the past 20 years, Japan’s economy experienced stunted economic growth due to deflation. In the hopes of boosting the economy, Japanese Prime Minister Shinzo Abe decided to implement a quantitative easing policy that would increase the inflation rate to 2% in two years. PROBLEMS DEFLATION



A macroeconomic analysis is required for a better understanding of Japan’s interest as well as the policy’s impact on its neighbors. Deflation serves as one of the main reasons for Japan’s sluggish economy. For more than a decade, Japanese citizens experienced a decrease in their nominal wages. Deflation creates a stronger currency, but the problem lies in that the purchasing power of the yen fell faster than the nominal value. Decreases in prices and lower purchasing power mean that consumers have to cut down their expenses to a bare minimum. “We also need to save for expenses down the road,” said Yuichi Kawakami in a statement that echoed the sentiment of many Japanese consumers. They have become more reluctant to consume goods because of their increasingly tight budget constraint. Decrease in consumer confidence results in a decrease in aggregate demand, which is then followed by disinflation, or even deflation, and lower real GDP growth. A large number of Japanese people, facing similar situations as Kawakami, have higher propensities to save than to consume. As a result, Japan fails to meet its long-run aggregate supply, or its full economic growth potential.

WHAT ABENOMICS DOES Abe’s policy attempts to reverse this trend by printing more money. The Japanese economy has shown little eco-

nomic growth and has deflated over the past two decades. The incumbent government’s plan, dubbed Abenomics, aims to achieve three goals: increased government spending with fiscal stimulus, expansionary monetary policy, and structural reform in the Japanese economy. Inflation achieves several goals. An increase in the money supply allows people to believe that their income has increased, and it boosts consumer and investor confidence because people will have a higher nominal wage and lower interest rate. As a result, consumers will spend more on goods, and investors will be more willing to take entrepreneurial and investment risks. Another interpretation of Abe’s policy is to claim that more money gives incentive for people to work more productively and to consume more; investors are more willing to take risks, thereby augmenting the multiplier effect. Aside from its domestic implications, Abenomics is a significant because of how it affects the countries neighboring Japan. Printing more Yen depreciates the currency relative to others. From the perspective of Korea or China, other exporting nations, Abe’s new policy creates strategic advantages for Japanese firms since other nations are able to buy Japanese goods more cheaply. For the Korean economy, a sudden increase in money supply (of Yen) appreciates the value of the Korean Won against Yen, which makes exports from Korea

From the perspective of Korea or China, other exporting nations, Abe’s new policy creates strategic advantages for Japanese firms since other nations are able to buy Japanese goods more cheaply. more expensive. Not only are Korean firms less competitive relative to their Japanese counterparts, but Korean consumers will be drawn to the cheapness of Japanese goods. Imports aren’t limited to the goods that people consume on a daily basis but also refer to services, such as college tuition. For example, say a Korean student wishes to pay his tuition for an American university next semester in Korean Won. Because of the weaker Yen, the Korean Won becomes stronger. For example, what used to be 1 USD = 1100 KRW becomes 1 USD = 1050 KRW due to Japan’s stimulus policy. The Korean student is paying less for his college education, given that the quality of the education remains constant. The above example demonstrates Korea’s case for importing services from the U. S. With an increase in the amount of yen in circulation, the imports from Japan are also cheaper because Japanese firms can export their goods at a cheaper price than before with exchange rates in favor of them. On an individual level, a consumer



is satisfied because he pays less to get the same good, but on a national level, Abenomics is hurting other countries’ export sectors because it creates unfavorable exchange rates for other countries, which hinders them from maximizing its exports. Foreign individuals will continue to pursue cheaper imported goods and services, but in aggregate, the government will face trade deficits.

SOCIETY’S REACTION According to the New York Times, Japan experienced economic growth in the first quarter of 2013, but the private sector investment within Japan has not shown signs of growth. With the yen weakening, investors are putting more money into other parts of Asia. In other words, Abenomics has not yet succeeded in boosting investment in the domestic market. This policy led to some success in economic growth as the money supply increased, but investor confidence remained largely unchanged as people continue to invest in different parts of Asia. Abe’s policy showed some degree of success in monetary and fiscal stimulus, but it has yet to show signs of change in the dynamics of Japanese economy. Abenomics comes with costs to the Japanese society as well. A weaker Yen is better for Japanese exports but worse for their imports. When the exchange rate changes due to increases in money supply, the weakened Yen causes domestic consumers to spend more (in terms of nominal price). In other words, importing goods becomes more expensive, as the exchange rates distinctively favors exporting. With deflation, nominal income decreases; but with a weaker domestic currency, purchasing power decreases. Japanese consumers will at some point buy imported goods, and the consumption of these goods will create a tighter budget constraint because an export-favored exchange rate led the government to spend more Yen to import them. In order to make profits, domestic vendors have to sell the goods at a higher price than the amount they spent to buy them. The Japanese consumers bear the burden of paying a higher price, which results in a reluctance to spend and therefore potentially decreases aggregate


HOW ABENOMICS DIFFERED FOR KOREA AND JAPAN In recent months, Abenomics has not affected the Korean economy as drastically as previously anticipated. The impact of Abe’s policy on KRW was mitigated because of military tensions between the two Koreas. Heightened tension between the two countries led to a dip in investor confidence, which led to weakened KRW. As a result, Korean export-sector companies avoided what could have been an unfavorable exchange rate in the global market. Another hindrance to Abenomics is the Japanese export sector itself. Norio

Abenomics is a significant because of how it affects the countries neighboring Japan Miyagawa, a senior economist at Mizuho Securities Research & Consulting Co. recently stated, “What’s more worrying is that Japan’s export competitiveness may be waning.” In addition to Japan’s declining export sector, Korean smart phone and motor industries have fared strongly in the global markets. Thanks to their competitive edge, Korea’s biggest export industries did not suffer from Abe’s stimulus policy. Abenomics’ failure to materialize indicates that in addition to the monetary and fiscal stimulus, the policy should include measures to boost the Japanese export industries. One of the foremost solutions to Japan’s economic woes would be for the export companies to gain a competitive

edge in the global market. As demonstrated by some of Korea’s companies, once the product gains credibility in the market, it can withstand currency fluctuations. In the domestic sphere, Abenomics has achieved only two of the three intended goals. The expansionary monetary and fiscal policies put more money in circulation. However, it has not accomplished its third goal. One of the main problems in Japan’s economy is the rapid decrease in the purchasing power of Yen. Because of this issue, even with deflation, average Japanese consumers are reluctant to spend, or put money into circulation. Inflation weakens the purchasing power of the currency because one can consume less with the same amount of money today than in the previous period. An increase in money supply will further weaken the purchasing power of Yen. In order to overcome its economic issues, Japanese economic policies should focus on changes that will help increase the purchasing power of Yen.

• Jihoon Lim

Jihoon Lim is a sophomore in the College of Arts and Sciences double majoring in Statistics and Economics. He was born in Korea, but he also lived in the U.S., Latvia, and Russia. Most recently, he completed an externship with the OCI Chemical Corporation, which involved analysis on global R&D and business strategies. Outside of the Business Asia Journal, he serves as an economics tutor.




FACING A CR How Mongolia can thrive in the long run




Geographically landlocked and situated between massive historical superpowers, Mongolia has had to fight desperately throughout its history to maintain independence and relevance on the world stage. In the 13th century, the Mongol Empire, uniting several nomadic tribes, spanned the majority of the world. Its people led an age of enlightenment, religious freedom, and global trade. Today, herders and nomads dominate the beautiful but arid landscape. The nation is desperately poor and one of the world’s least populous by area – over 40% of its citizens reside in the capital, Ulaanbaatar. Few outsiders brave the rustic and harsh conditions to visit. Yet change is afoot and Mongolians are being forced to adapt very quickly.

ROSSROADS By Advai Pathak



Vast wilderness in Mongolia

Sunset in the ancient landscape

Nigeria: what Mongolia is hoping to avoid

Graffiti mirroring the fight for Tibet

Geographically landlocked and situated between massive historical superpowers, Mongolia has had to fight desperately throughout its history to maintain independence and relevance on the world stage. In the 13th century, the Mongol Empire, uniting several nomadic tribes, spanned the majority of the world. Its people led an age of enlightenment, religious freedom, and global trade. Today, herders and nomads dominate the beautiful but arid landscape. The nation is desperately poor and one of the world’s least populous by area – over 40% of its citizens reside in the capital, Ulaanbaatar. Few outsiders brave the rustic and harsh conditions to visit. Yet change is afoot and Mongolians are being forced to adapt very quickly. Although Mongolia’s mining industry dates back to 1922, when the state developed a national coal fixture, its economy has traditionally relied upon its modest agricultural produce and herding. That balance has been shifting over the past two decades since significant resource deposits were discovered in the

Gobi Desert. Since then, Mongolia has grown faster than any other country – between 15-17% annually, twice the rate of its neighbour China. How the nation chooses to manage its development is currently the subject of intense debate and national introspection. For global investors, the situation laid bare seems a fortuitous coincidence of timing and placement. The world’s fastest growing source of natural resources shares a border with the world’s most resource-thirsty developing nation. Mongolia has significant deposits of copper, iron ore, gold, and coal, among several others. Minimal transportation costs to China and a lack of serious competitors has created the potential for Mongolia to develop into the next Qatar or Brunei – a nation of millionaires. Yet Mongolia’s relationship with China over the past millennium and its continued distrust of its secretive neighbour could restrict its growth potential. The histories of the ethnic Mongols and the Han Chinese have been interrelated – and fraught – for centuries. The Yuan

Dynasty was spawned from the breakup of Genghis Khan’s Empire. The subsequent Qing Dynasty ruled over Mongolia from 1635 and crushed several attempts at independence with great cruelty. By 1911 when Mongolia finally won independence with Russian assistance, the nation was almost entirely impoverished. Mongolia has undergone several changes of government over the past century. A Communist regime was established for much of the 20th Century as the USSR sought a buffer state with China. For decades, its Choir province housed a Soviet airbase with several cross-border missiles directed at Beijing. With the fall of Communism, a democratic system was erected in 1990. Yet Mongolians’ mindsets are united. Its people are proud and resent the centuries when it was reduced to little more than a tract of land regarded as border protection between Russia and China. Although relations with Russia have largely been amicable (Soviet aid accounted for as much as 30% of Mongolian GDP for much of the 20th cen-




For global investors, the situation seems a fortuitous coincidence of timing and placement.

Mongolia must avoid the ‘resource curse’ that has inflicted enormous long-term damage on mineral-rich nations around the world.

Serious complications and several delays have already arisen in the form of contract dispute at the Oyu Tolgoi mine.

tury), its relationship with China remains complex. An aggressive and unprovoked occupation in 1919 was beaten back two years later (with Russian military support) but has influenced the national mindset ever since. China’s subsequent conquest and cruelty in Tibet and Xinjiang, its continued harassment of Taiwan, and its ceaseless border disputes in Kashmir fuel Mongolian fears of invasion. The Tibetan situation, in particular, affects Mongolians deeply. The two peoples have long been allies. Tibetan Buddhism spread from the religious Kingdom after an alliance in 1578 that legitimized Mongol imperial ambitions and created the title of Dalai Lama which has been retained today. Not only did China invade Tibet on spurious grounds in the chaos of the post-WWII environment but its subsequent actions to incorporate Tibet are tantamount to human rights abuses under the United Nations Declaration of Human Rights. Today, Tibetans are forced to carry special identification documents and free travel is heavily restricted. Their ancient culture and history have slowly been eradicated by Communist Chinese propaganda. Mass resettlement of Han Chinese has destabilized the region and diluted the power of native Tibetans to appeal against their treatment. Self-immolations and public protests are swiftly quelled by authorities and shielded from public and international view. An identical history describes the Chinese invasion and incorporation of Xinjiang, a semi-autonomous province bordering Central Asia. Today, China is a key trading partner. It purchases almost 80% of Mongolian exports (almost entirely minerals) and supplies half of their imports. An

explosion of trade in natural resources promises to make Mongolia a very rich nation on the back of this relationship. Most Mongolians value their autonomy and pristine landscape above riches and China’s protracted dispute with Japan over the Senkaku Islands has exacerbated its image as an aggressive regional bully with expansionary ambitions. The country is now faced with a dichotomy that questions their historical values, notions of nationalism, and even personal integrity. Aside from its preferred choices of trading partners, several other factors deserve serious consideration. Chief among them, Mongolia must avoid the ‘resource curse’ that has inflicted enormous long-term damage on mineral-rich nations around the world. The paradox highlights the fact that many nations grow at much slower rates than their collection of natural resources would suggest. Several factors contribute to this. In the Netherlands, the discovery of a major natural gas field in 1959 and the subsequent glut of foreign direct investment caused the real inflation rate to rise alarmingly, thereby stunting the domestic manufacturing sector for decades. Nigeria is another more current example. 40% of GDP and 80% of government revenue is derived from its oil sector. Its purchasing power parity doubled between 2005 and 2010 yet 45% of its population still lives below the UN poverty line. Corruption and mismanagement are largely to blame for this discrepancy. In general, national control over natural resources enables governments to buy off the opposition and construct institutions and structures to protect their authority. The example of

the Democratic Republic of Congo, which suffered for decades under Joseph-Desire Mobutu’s exploitative regime, is just one of several. Although Nigeria’s corruption hasn’t been institutionalized to the same extent, only a small minority of citizens are currently benefitting from the outflow of oil. Citigroup’s analysts have forecast that the nation will be the world’s fastest growing on average between 2010 and 2050, a statistic that becomes relatively meaningless if 80% of Nigerian energy revenues continue to benefit just 1% of its population. Yet the situation is far graver than one of just corruption and theft. The oil-rich Niger Delta has become the scene of vicious violence, a toxic epicenter of a national battle in which international corporations, armed protest groups, extreme environmentalists, and Islamic piracy all seek to maximize their interests. The Nigerian people have been largely forgotten as these competing actors wreak havoc, destroying the natural ecosystem and destabilizing the social and political climate. According to national figures, there have been over 7,000 oil spills between 1970 and 2000 in the Delta and the international corporations responsible have claimed little more than limited responsibility. Transnational exploitation by foreign governments is an important factor in many of these issues. The West buttressed Mobutu’s rule in the DRC in return for the uninterrupted flow of resources, much as it has in several repressive Middle Eastern states over the past half century. Today, China’s conduct, in particular, has been questioned in international circles over the past decade as it has sought to feed its insatiable ap-



petite for resources through even more blatantly exploitative actions in Africa. Its actions have led China to be dubbed a ‘Modern Imperialist’. China has developed several long-term relationships with African governments to purchase their resources. However, it has done so in every case with the mass migration of Chinese workers, firms, and technologies, denying the locals much-needed skills transference. Following the example of 19th century European colonists, China is importing natural resources from these developing countries and then flooding their markets with Chinese goods, undercutting local business and manufacturers who are unable to compete. Only by promoting growth of national industries, spreading wealth evenly, and managing capital influxes can Mongolia thrive in the long run. To reap long-term rewards from their resources, its government should look to the example set by Norway. Since oil reserves were first discovered in the North Sea in the 1960’s, Norway has managed its energy revenues carefully and implemented a long-view approach to maximize the benefits its geological lottery ticket have provided. The Scandinavian state has always maintained that their resource wealth should be used as a gift to promote national well-being for decades to come. Rather than taking a royalty share of its oil production, Norway levies heavy taxes on energy producers and often takes a considerable equity share in projects. Both these factors ensure that the interests of companies and the government are aligned. Additionally, the government set up a state-owned oil company, Statoil, once it became apparent that their energy industry was set to grow drastically. In doing so, they created a socially responsible body that could be controlled and directed, thereby prevent-

ing the international disputes with multinational corporations that plague most other resource-rich companies. Most importantly, the government established a sovereign wealth fund which absorbs all oil revenue and from which only 4% can be extracted annually to be spent on public works and services. The fund has quadrupled in size since 2005, becoming the world’s largest sovereign fund and an enormously influential investor in global markets. Following the success of the National Petroleum Fund, Israel (natural gas), Chile (cooper) and Colombia (oil) have all duplicated the model successfully redressing the argument that only developed nations can manage resource wealth successfully. The Oyu Tolgoi copper mine is Mongolia’s first major mining project and represents a test of how the country will manage its deposits over the coming decades. A Canadian company, Ivanhoe Mines, discovered gold-copper ore in 2001 and production at the site began in 2010, led by Rio Tinto, a leader in mining operations. The project has been largely financed by the London-based company and began shipping copper this past summer. Serious complications and several delays have already arisen in the form of contract dispute between the government and overseas investors over the share of profits and the speed of withdrawal. Moody’s has viewed the various delays as “credit negatives because they lower investor confidence and underscore institutional weaknesses” in Mongolia. A recent election has returned the incumbent Prime Minister, Tsakhiagiin Elbegdorj to power, which has calmed investors who have harbored fears of political corruption and instability. Elbegdorj is committed to promoting Mongolian development through resource extraction and hopes his reelection and

continued battle against corruption will convince the populace and international community that through political transparency and free elections, Mongolia can manage its growth in a sustainable and mutually beneficial manner. Although Elbegdorj is committed to seeing out a successful operation at Oyu Tolgoi, he remains critically aware of the need to reform Mongolia’s hole-ridden international investment legislation to create a regulatory framework that protects Mongolia’s sovereign rights while still maintaining an environment attractive to international investors. He is firm in the belief that his country will not be bullied into concessionary agreements with foreign corporations and investment banks that are circling Mongolia’s mineral wealth predatorily. As a developing economy, Mongolia is particularly susceptible to the perils of its resource wealth. Yet the country has been presented with an opportunity denied to most. Beneath its dusty and ancient landscape lie unimaginable riches. Managed in a thoughtful manner, it could lift the whole nation from poverty and create lasting industries, skills, and advantages to continue development long after the last miners leave. Mismanaged, or extracted without forethought, and Mongolia will allow this great opportunity to slip through its grasp, becoming a nation of unequals or worse, an unwilling vassal fuelling the development of its great historical rival.

• Advai Pathak

Advai Pathak is a Junior in the ILR school. He grew up across Britain, Asia, and the United States and completed an internship with an international investment bank in Singapore this past summer. Outside of the Business Asia Journal, he is also a member of Alpha Kappa Psi, a professional business fraternity on campus.



BBC News Images

Exploring A Bubble China’s property market has been the subject of concern for several years now and rising property prices are fuelling further speculation and debate amid fear of a housing bubble. As the Chinese property market grows, however, so does the disparity between housing prices and the average house buyer’s budget. In the West, property prices are generally seen as a market driven by supply and demand, where those with stable jobs afford the luxuries of a house. In China, there are a few cultural angles that may be unfamiliar to the West and that influence the property market. A home is a necessity for men seeking to settle down and start a family, irrespective of how luxurious or big the house may be. Larger houses are actually unfavorable in China due to fengshui beliefs that big houses with small family units are not

aligned in energy. Though building more houses seems to be a reasonable and immediate strategy for lowering housing prices and accommodating more families, the current business model for building and selling houses has many shortcomings. At present, many private real estate developers start new projects from the sales of houses at lavish prices, and so attempt to continue marketing them at high prices. Furthermore, there is currently a lack of access to affordable housing for low-income families, especially in big tier 1 cities such as Beijing, Shanghai, and Hong Kong. Though the Chinese government has planned a 5-year project for building sustainable solutions, there are fundamental societal issues that contribute to the high real estate prices in cities that are not accounted for simply by supply and demand of housing. Over the past year, prices in two

of China’s biggest metropolises, Beijing and Shanghai, registered property price increases of 15% overall, with larger increases in especially lavish areas. The popular explanation by observing economists in China is that the housing market boom is driven by the lack of a stable financial market and that overinvestment in properties will continue as long as alternatives don’t emerge. Currently there are several trade restrictions that prevent Chinese investors from seeking foreign markets, and most believe that gains from equities pale next to the performance of the domestic property market. Thus, the desire to invest heavily in the domestic property market is driven by a combination of stagnant performance in other markets, lack of confidence in the transparency and governance of the stock market, and low returns from fund managements. Among most middle



income Chinese, this lack of alternative generally pushes them towards buying a house or apartment as property is generally viewed to be a safe and profitable investment. The approval in 2007 of the Property Law, which guarantees private property for the first time, has also increased popular beliefs in the safety of brick-and-mortar investments. In response to these issues, Chinese regulators are attempting to restore financial confidence in the stock market by promising to crack down on insider trading, fraud, and accounting errors. However, many homeowners still believe that housing prices are safer and more resistant to falling than any other asset and are thus critical in planning for retirement. Because the social welfare and pension systems are not as refined as in other countries, Chinese people often feel safer investing in homes as opposed to just savings funds. This mentality explains why houses are sold for lucrative prices even in unfavorable neighborhoods with low renting prices, and why even middle to low income families are so eager to invest in houses. A decent measure of affordability is the average housing price to income ratio in any given country, and China marks a massive 133.72x ratio, compared to more stable housing markets such as 25.05x ratio in Japan. The ideal ratio lies between 4.60x and 6.80x for city residents. Yet there are underlying social issues that prevent the government from aggressively tackling this real estate bubble. Chinese culture encourages saving money rather than spending on credit, which also applies to large transactions such as buying houses. For this reason, the Chinese real estate boom is different to the bubble that brought down the American financial system. Chinese residential mortgage debt was 15% of GDP in 2009 as compared to 81% in the U.S. However the direct consequence of this is that many families have spent their hard earned savings on high priced properties in expectations of returns. There would be serious social repercussions among the middle class if the government took action to reduce real

estate prices since this would effectively rob many of their investments. Chinese society remains relatively new to the cyclic depression of the finance market. The Chinese government so far has attempted to douse enthusiasm in investing by only allowing one private house per family with hukou, the urban resident registration only allowed to natives in cities to discourages urban migration. Furthermore, the Chinese government has tightened interest rates in an attempt to quench the tremendous growth. What does unaffordable housing market mean for the average and lowincome buyers? To the younger generation that migrated into cities for education or better opportunities, prohibitive housing prices can create an additional obstacle for men at a time when prospective brides are far outnumbered by

2007 Property Law guarantees private property for the first time eager suitors. Mothers of brides in China will only accept suitors that have a home and there are currently 30-35 million marriage-seeking bachelors. The average two-bedroom apartment in Beijing is $330,614, thirty-two times the average annual salary of a Beijing worker. This social impetus further drives prices – cities with bigger gender gaps are seen to have sharper price increases for properties, indicative that marriage is a main concern of male homebuyers. China needs to create an effective and affordable housing system catered to low-income families and the younger generation. As of 2012, urban residents account for 51.27%, a majority of the Chinese population. This increased population density in Chinese cities calls for massive efforts in building affordable housing. The Minister of Housing and Urban-Rural Development, Jiang Weixin, has instigated a Five-Year plan to build 36 million government-subsidized units by 2015 for low-income families.

Furthermore, the plan has promised greater oversight of mortgages and the real estate market. However, building more housing units will not be enough to quench the tremendous growth of prices and population caused by the discussed societal, cultural, and political factors. The Chinese government must encourage a willingness to seek alternative investments or enable investment in overseas markets if housing prices are to be controlled. There are many politicoeconomic angles that prevent both a transparent and successful stock market and openness to outwards investment. Incidents such as the infamous Bo-Xilai scandal have only only further increased distrust of politically influenced finances and stocks market. China encourages inward investments and shuns outward investments in order to keep its export prices highly competitive. A reasonable way to allow for low-income families and younger generations to afford new houses would be to allocate government-funded housing projects at affordable prices. Increased urban developments near cities may also be a viable plan, as that would allow for more space to accommodate housing and migrants. Nevertheless, China’s housing issue is tied down fundamentally to its societal and political systems, and not observed elsewhere, making it extremely hard for policy makers to prescribe a clear strategy. How this issue develops will influence society and politics in China enormously over the coming decades.

• Kevin Hua

Kevin Hua is a junior in biological engineering with a operations research minor. He has spent part of his childhood in Beijing and Shanghai. Outside of his interest in Business Asia Journal, he volunteers and shadows dentists, with a future interest in dental medicine.


The Relationship between Government and Business in Asia





1. How would you characterize the relationship between government and business in Asia, vis-à-vis other regions such as the Americas or Europe? The tension between government and business exists all over the world. The debate over how involved a government should be in the economy continues through time and market cycles. In developing Asia, however, this relationship takes on greater significance as government involvement is justified in areas that require substantial capital investment or in nurturing nascent industries.

2. In your opinion, what advantages are there for strong government involvement in the business sector? What are the challenges? The strongest justification for heavy government involvement can be found in the provision of public or essential goods, capital investment in transport infrastructure, nurturing specific industries, and during a crisis – for example, in the bailout of major institutions. A government can also exert influence as a regulator or as a major customer. The challenge lies in deciding when to get involved and when to bid retreat. Often, governments start off with good intentions and then wind up overstaying their usefulness, for example, in the bailout of national airline companies. There is also a tendency for governments to overregulate beyond solving an initial problem – the global financial services sector is replete with examples of over-regulation, often with dubious outcomes.

3. How should businesses navigate the intertwined web of government and business in Asia? Do you see a level playing field for global businesses operating in these environments? The reality is that in most markets, there is seldom an even playing field. This reality must be embraced by all would-be participants. We should also recognize that not all national, social or political interests are best-served by the free market. However, what I think is the greater chal-

lenge these days is policy risk arising from political pressure, which may lead to unanticipated changes in operating rules and the business environment – for example, by the imposition of foreign shareholding restrictions on domestic companies. Nondomestic players should try to identify sectors that are vulnerable to political pressure and mitigate the risks as far as possible.

lenges of managing economic growth and the concomitant social issues such as wid-

4. A significant number of the largest companies in Singapore are government-linked, with a dominant local presence. Have these large statebacked companies affected the development of local businesses? The government-linked companies in Singapore are run on a commercial basis, no different from private interests, and several are competent global players in their own right. Given the genesis of their roles at the infancy stage of the Singapore economy, where no foreign investments were forthcoming, some still command significant domestic market positions. The formation of the Competition Commission and the Singapore government’s deliberate insistence on commercial discipline help to guard against any untoward crowding out of local businesses.

Lim Hwee Hua is a non-executive director of Jardine Cycle & Carriage Ltd, a Senior Advisor to Kohlberg, Kravis and Roberts, and an Independent Non-Executive Representative of the Ernst & Young Global Advisory Council. She became Singapore’s first female Minister in 2009, serving concurrently in the Prime Minis5. How can we ensure that statebacked enterprises remain market ter’s office and in the Ministries of competitive and not fall behind in Finance and Transport. terms of productivity and performance? ening wealth inequality, China continues to This is a tough aspiration – the more pervasive state-backed enterprises, the greater the challenge. Many state enterprises are deeply entrenched in old, commercially unviable practices. Many become bloated over time and corruption is rife. To arrest poor performance, a multifaceted approach – constituting the state enterprise appropriately, defining its mission and strategy in current market terms, staffing with the right talent, and exercising accountability – is necessary.

offer growth potential. Japan is interesting to watch as far as the recent awakening goes, though the structural problems associated with an ageing population remain. ASEAN as a bloc is promising, in light of the trade and related initiatives, offering collectively a sizeable market. Indonesia and, to a certain extent, the Philippines stand out for healthy domestic demand while Singapore offers a decent bet as a predictable provider of innovative goods and services, in addition to its staple financial and business services.

6. From both a political and business standpoint, which economies 7. You have transitioned from being in Asia and in ASEAN hold the great- a Minister to joining the corporate est potential in the next 10 years? sector focused on international Notwithstanding its current chal- investment. How different are the


challenges, and which are you enjoy- young people starting out in their in terms of career, family, community and ing better? careers today? personal pursuits. When my husband and From my perspective, the two roles are not too dissimilar. While I was in government, I devoted substantial time towards studying macro trends and the development of small and medium enterprises, along with other policies to enhance the operating environment for businesses. I am now back to what I used to do before such policy work. I see both roles as complementary and enjoy both sets of challenges just as much. My experience in the private sector helped inform my policy formulation and execution efforts. Now, I bring insights into how governments function to business.

8. From your experience, which is more challenging for women in Asia – politics or business? It is difficult to generalize, and the situation varies greatly across countries in Asia. For example, Singapore and Malaysia have many female business leaders but an under-representation of women in politics. India has a relatively healthy level of female representation in politics but not in business. In countries where family or concentrated ownership is pervasive, equality of opportunity would be more difficult to achieve.

My decision to switch from the public sector to the private sector (financial services) was a major move that enabled me to marry experience in public policy formulation with the realities of the market place. It was a calculated move into something I had no prior experience in, but I wanted to understand how the market worked. For young people starting out in their careers today, I would advise them to reflect seriously on both their interests and strengths, which may not always be aligned. Be prepared to take calculated risks and avoid acting under peer pressure – every MBA graduate during my time wanted to be a management consultant, then investment banking became the favorite. A successful career begins with what you can bring to the table. No one owes you a job, regardless of your type of degree or GPA.

I decided that we wanted to have children, I was prepared to subordinate my career goals to establishing a family. It is important to identify and appreciate the larger purpose in everything we do. As a Christian, I try my best to be led by God and to do His will. What I have found most fulfilling in my life so far is the opportunity to make a difference wherever I can. As a politician, it could be thinking hard about helping small enterprises or facilitating the conditions for a fellow citizen to realise his or her potential. As a grandmother, it would be to provide as much support as I can to both my son and daughter-in-law as they juggle their careers and a young family. What keeps me going? Change – by analysing trends, anticipating needs and seeing how best I can help propose solutions for my community.

10. You have a wonderful family with a loving husband and three beautiful children, and a distinguished career in both the government and business sectors. What have you found most fulfilling in your life so far, and what continues to motivate you?

Juggling is very real. I have found

9. Tell us more about your career it quite essential to stay focused on my path. What advice do you have for goals and what I can realistically achieve –

• Timothy Lin

Timothy Lin is a second and final year Master’s candidate in the Baker Program in Real Estate at Cornell University. He has worked in real estate private equity in Asia and is deeply interested in global macroeconomic and financial developments and how they impact the real estate industry.




ENSURING FOOD SECURITY In early July of 2013, India’s Congress-led government passed the National Food Security Bill into temporary law. The Bill aims to guarantee cheap food grain to nearly 70% of India’s population of 1.2 billion and has the broader aim of alleviating chronic hunger and poverty in India.1 In order to fully understand the Bill, it is important to first understand why such a bill is necessary at all: both the precise intent of the legislation, as well as its positive and negative attributes. In addition, the Bill can be compared to a similar piece of legislation currently in place in the state of Chhattisgarh, which can help put the challenges the Bill faces into perspective. According to the World Bank, earlier this year, India accounted for a third of the world’s poor. Nearly 43% of children under the age of 5 are underweight, 70% are anemic, and 57% are vitamin A deficient. According to India’s National Family Health Survey in 2006, almost half of the country’s children under the age of five are classified as malnourished, and more than a third of Indians between the ages of 15 and 49 are undernourished. The Food Security Bill aims to reduce the rates of malnutrition across the country, and targets specific demographics within the population who are most likely to experience the nutritional deficiencies highlighted in these studies.1 The Food Security Bill proposes to make food a legal right and seeks to provide five kilograms of grain every month to some 800 million poor people. The Bill provides subsidies for grain,

“the Act is not just momentary in that it feeds India today, but it is an investment in the nation’s future. “ enabling qualifying participants to buy a kilo of rice at three rupees (six cents), wheat at two rupees, and millet at one

rupee, which is far cheaper than the market rates of 20 to 25 rupees2. Under current food security schemes, the Indian government buys food grain at the “minimum support price” from farmers, which bolsters production, but lowers consumer demand because of the unreasonably high price of food. The government is then forced to buy the difference in order to sustain the artificially high prices. However, much of this food rots in warehouses and in open space. By one estimate, India would need 60 million tons of food stock to service the plan. India does have the capacity to produce over 90 million tons of food stock, which highlights the inadequate food storage in the nation3. Although the Food Security Bill has a noble motive, it has been met with fierce criticism from opposition. This criticism ranges from its impact on India’s fiscal responsibility to its actual ability to improve the health measures. In recent months, India has made headlines for its economic woes including its budget deficit, slowing economy, and depreciating currency. Some economists believe that the program, for which the government will be spending an additional $4 billion in spending a year, will hurt the economy by widening the fiscal deficit. According to research published by Forbes, the bill will expand subsidized food coverage at a cost of about 1.4% of GDP, increasing India’s budget deficit to 5.2% of GDP. However, as an economist interviewed by the BBC said: “in the end, it’s not really a question of whether the bill will add to India’s soaring subsidy bill. The government can easily cut other subsidies in fuel and fertilizer that end up benefiting the well-to-do. It’s about

the quality of the delivery system and to ensure that the food reaches the beneficiaries.” There are also global implications of India’s Food Security Law that need to be taken into consideration. For example, earlier this year, Commerce Minister, Anand Sharma had plans to speak to the new WTO Chief, Roberto Azevedo, to request an amendment to

the Agreement on Agriculture (AoA). The AoA restricts India and other developing nations from exceeding “market distorting subsidies” given to farmers, beyond 10% of total production. Due to the ambitious food security program, India is among the countries that risks exceeding this threshold. Many also highlight the capacity of the food entitlement


program to send global food grain prices soaring in a year when rainfall is deficient and India has had to import grain to support this program. Recently, lack of rain has had a significant impact on food grain production. Highlighted by statistics indicating that India’s food grain production reduced from 259.29 million tons in 2011-2012 to 250 million tons in 2012-2013. Another criticism of the Food Security Bill lies in how it identifies beneficiaries of the program. Under the existing food program, subsidized grain is provided to individuals who earn less than the benchmark poverty line, which is set at 33 rupees (55 cents) a day in urban areas and 27 rupees (45 cents) a day in rural areas. However, the new scheme classifies two categories of beneficiaries, who shall be identified by the federal government as well as the states. Classifying these beneficiaries is a complex task given the number of different groups who must work together as well as ensuring benefits for only those who meet the specified criteria. This may also lead to corruption, because there the power to distribute the grain rests in the hands of a handful of people, and the current distribution has been suffered from irregularities and corruption, which many fear. The proposed distribution system of the grain through existing ration shops is also plagued with irregularities and corruption. Experts say that the Public Distribution System in India is highly inefficient, largely due to corruption. The Wall Street Journal, for example, told the story of Sanjay Kumar, a 32-year old driver who lives in west Delhi. Kumar is entitled to subsidies under India’s existing food welfare program, says that his wife and young daughter would go hungry if they relied solely on those

benefits. According to Kumar, “The wheat and rice I get from the shop is inedible. The quality is terrible. There are always pebbles in the rice and I am forced to purchase from the open market. They tell us either buy this, or you get nothing.” In many cases, the fair-price shops only open when their deliveries arrive, often after the middle of the month, when they inform beneficiaries that they should come in. However, beneficiaries who need to work during the day and cannot stand in line, don’t collect their allotment, so their share is appropriated to the following month’s demand. Therefore, the government sends less grain to the shop. Beyond the logistical issues affecting the Public Distribution System, a report by India’s Planning Commission in 2005, estimated that as much as half of the grains procured by the government are siphoned off by middlemen. Much of this grain is then taken and sold on the open market, putting those in need at a further disadvantage. In addition to the criticism regarding cost and distribution of the grain, many health analysts argue that the Bill doesn’t really achieve its purpose of improving the nutrition of those who need it most. For example, many argue that the Bill is merely an amalgamation and continuation of previous nutrition and food distribution programs including the Integrated Child Development Services, which was launched in 1974 to provide additional nutrition to children up to the age of six. However, by focusing purely on food intake, these programs fail to address malnutrition in India because they do little to address different nutritional needs, many of which, vary according to age and gender. Marginalized groups such as street children and child laborers. who tend to be the most malnourished, are also largely excluded

from such programs because the bills do not accurately reflect the most vulnerable segments of society. Simply distributing food, they argue, does not ensure that it will get to the people who need it the most. Nor does it ward off infections that preclude participants from absorbing the food’s nutrients. Therefore, solely focusing on increasing food intake, as the Food Security Bill does, will do little to improve the nutritional status of children in India. Despite such criticisms of the Food Security Bill, there is hope in its ability to achieve its goals and improve the plight of India’s poorest citizens. A similar program, developed by the state of Chhattisgarh in central India, has been successful in providing grain to the most needy. In an interview with Raman Singh, the chief minister of Chhattisgarh, he explained how almost 90% of the state’s population has benefitted from cheap food grains under the Chhattisgarh Food and Nutrition Security Act 2012. The entitlements are provided to each household, with the eldest woman in the family regarded as the head of the household. The law has covered 55% of small migrant farmers with less than two hectares of land, construction workers and those in the urban informal sector. The act has also benefitted one in four families with particularly vulnerable members, such as those who are terminally ill or physically challenged. The success of this program can be attributed to the unique way the program distributes grain. To address the issues highlighted in ration shops, the government of Chhattisgarh deprivatized the ration shops by shifting the management from private licensees to community-based organizations such as gram panchayats (village councils), female self-help groups, and co-operative

Facts related to the Food Security Bill 1

Nearly 43% of children under the age of 5 are underweight, 70% are anemic, and 57% are vitamin A deficient.


According to India’s National Family Health Survey in 2006, almost half of the country’s children under the age of five are classified as malnourished.


The Food Security Bill seeks to provide five kilograms of grain every month to some 800 million poor people.




societies. They organize a Chawal Utsav (rice festival) at each ration shop during the first week of every month, which helps to ensure that all the food items are adequately stocked in each shop by the last day of the previous month. In turn, this helps to address the issue of the late arrival of grain. In addition, the food items are delivered directly to the doorstep of ration shops by yellow government and private trucks, which helps to curtail diversion and ensure the timely stocking of the grain. Lastly, to ensure the financial viability of the ration ships and reduce the chance of leakage, the state increased the commission paid to shop owners and gram panchayats from 8 rupees (13 cents) for 100 kilograms of food to 45 rupees (65 cents). The public distribution system was also computerized in 2007, which helps to ensure the strict monitoring of stocks and inventory levels at all warehouses and shops. The ration cards were also computerized and only centrally printed ration cards are distributed to the beneficiaries. The state government also started a tollfree public distribution helpline and took various transparency measures to

involve the community in the process of monitoring the ration shops. The Act has also expanded to include products such as lentils and iodized salt in addition to providing entitlements for children, pregnant and lactating mothers, people living with hunger, destitute, homeless, migrants, and people affected by disasters. Although critics and oppositions leaders have highlighted a number of issues with the national Food Security Bill, and some believe that the Bill is merely to persuade voters to go to the polls next year, there is a glimmer of hope as demonstrated by the success of the Chhattisgarh Food and Nutrition Security Act 2012. In the long term, India’s farmers should invest in better agricultural techniques to prevent large fluctuations in grain prices. For now, however, the Food Security Act is a step in the right direction to ensuring better health of India’s people. The Act is expensive, especially in a time when India’s economy is already struggling, but, given the right adjustments to the distribution system, and considerations of possible pitfalls, the Act has potential to increase the overall

health of the Indian population. The spending on the Act is not just momentary in that it feeds India today, but it is an investment in the nation’s future. In the words of Sonia Gandhi, “There are people who ask whether we have the means to implement this scheme. I would like to say that we have to figure out the means. The question is not whether we can do it or not. We have to do it.” If India wants to ensure its position as an global power in the future, it is important to first start with ensuring that its population is as healthy and productive, which is exactly what the Food Security Bill aims to do.

• Priyanka Panigrahi

Priyanka Panigrahi is a junior in Applied Economcs and Management specializing in Finance and Strategy. In addition to writing for the Business Asia Journal, she is also involved in the South Asian Council, the Society for Women in Business, and Rose House. In the future, Priyanka hopes to pursue a career in Consulting.

Laborers loading sacks of wheat onto a truck in the outskirts of Amritsar, Punjab, on May 16. Narinder Nanu/Agence France-Presse — Getty Images


Islamic Finance Revisited In my previous article, I talked about Islamic banking and the differences it has with conventional banking. Now, let’s dig deeper into the concept of Islamic finance. Remember that riba (interest) is considered haram (sinful) by Syariah law. For those who study finance, a big question surfaces: if interest is considered sinful, how do we calculate the time value of money? Time has a value. 100 USD today may grow 10% to 110 USD next year. And that 10% is usually from interest (cost of debt, cost of equity, required rate of return or whatever name you choose to call it). Time value of money is a concept that lies in the core of finance discipline. If interest is considered haram, does Islamic finance count for time value of money? The answer is a big YES (so don’t throw the idea of Islamic finance out of the window yet). In Islamic law, there’s a distinction between investment and lending. When you invest your money, you own a capital of a business. Then you give time for the business to do an economic activity which creates value (and profit!). Islam acknowledges that this return on investment is due to an act of economic activity. On the other hand, if your money is in the form of a loan, it is considered an act of charity and you should not expect any monetary benefit from it. Islam recognizes the time value of money only if it acts as a capital, not

as a “potential” capital. When you give a loan, the interest you charge is determined before any act of economic activity is done; therefore, the interest is a “potential” capital and is haram. Another thing we need to establish is the definition of riba itself and its scope of prohibition. There are four characteristics of the prohibited interest rate: 1. it is positive and fixed ex ante (before any act of economic activity is done) 2. it is tied to the time period and the amount of the loan 3. its payment is guaranteed, regardless of the outcome or the purposes of the loan 4. the government sanctions and enforces its collection Since interest is such a fundamental and useful tool of our modern economy, why does Islam forbid it? One reason is history, which I’m not going to get into in this particular article. Another reason is that the concept of interest, or debt, has serious disadvantages. Debt contracts, when unfulfilled, create inefficient defaults. A new company may file for bankruptcy when it can’t pay its loans in time even though it has superb human resources and could succeed if given more time (and/or guidance). Such default is inefficient. Debt also creates a conflict of interest between the borrowers and the lenders. Borrowers do not want to get

into a business if they can’t get the financing they need. Lenders do not want to lend their money to new entrepreneurs with good projects because of the high risk. As a result, businesses that have low profitability but high social benefit will not get finance; and growth of entrepreneurs is stumped. Islam proposes risk sharing as an alternative to debt. Risk sharing means minimizing joint losses and maximizing joint rewards. Agency problem and asymmetric information would be reduced because management and stockholders must work together to reduce the risks they share. This common goal also enhances cooperation among economic agents. Interest-based contracts are considered to be a risk transfer because such contracts transfer the risk from the lender to borrower. Risk transfer when combined with high leverage (e.g. financial derivatives that have little or no connection to real assets) outpaces the growth of the real sector. The result is financial instability. Reinhart and Rogoff (2009) show that all crises, whether classified as a currency or banking crisis, have been at their core, a debt crisis. The Islamic financial system is inherently more stable than the conventional system. The non-existence of debt means banks do not engage in leveraged or debt financing. Assets and liabilities are matched because of the profitsharing system. The growth of financing activity is stable because it is backed by




real assets and not speculative money creations. Islamic finance is not a perfect system (at least not yet). For now, it has several challenges. First, Islamic finance still lacks sufficient development of theoretical foundation. Conventional economics is the result of decades of rigorous theoretical and empirical research, debate and analytical argument and has gone through many iterations (Iqbal & Mirakhor, 2011). The result is a solid foundation that we can build on for further analytical work. The same cannot be said for Islamic economics. Most of the research done is driven by business needs to develop

Islamic banking or the financial system, not for the development of comprehensive analytical framework of Islamic economics. This prevents us from building on further analytical work because there is not yet a solid foundation. Second, is the reluctance to hold risk sharing assets. This is despite the fact that risk sharing is the objective of Islamic finance. Most banks have a high percentage of sale-based financing (Murabahah) in their asset composition, not risk sharing assets (such as Musharakah and Mudarabah contracts). This behavior means that Islamic banks are not taking full advantage of the system. Islamic finance seems to be able

to solve modern economy’s problems, but is it ready to face those problems head on? • Maria Marcia Maria Marcia is a Senior in Universitas Indonesia, majoring in finance. She had the opportunity to work with students from Cornell two summers ago when she joined the Business Asia Journal. Ever since then, she has been a recurring guest writer for the magazine.

“Islam proposes risk sharing as an alternative to debt.” “If interest is considered sinful, how do we calculate the time value of money?”

100% 90% 80% 70%











Leasing and Hire Purchase

10% 0%

Murabahah and Deferred Sales Qard Hasan

Figure 1: Composition of Financing Modes in Islamic Banking Sectors, 2008. Source: MENA Flagship Report (2011)


Photo from Reuters

India at Crossroads India’s potential to return to nearly double digit GDP growth has not died out

The political climate in India as the AADHAR scheme, which aims to is rarely amicable. The ruling Indian give each Indian a unique identificaNational Congress has been running the tion number and centralize the storcountry as part of a coalition governage of their data to be used for future ment since 2004, with Prime Minister development strategies. Yet, India today Manmohan Singh faces significant “Modi has successfully at the helm. Unchallenges on all der his watch, the sides - social, enrebranded the state as a Indian economy vironmental, and vibrant place to visit and has grown by economic - as the all measurable Indian Rupee has do business.” standards - from plunged in value, GDP of $700 bilGDP growth has lion to over $1.8 trillion in a decade, the stalled, and the burgeoning populaHuman Development Index increasing tion has placed immense pressure on in lockstep. The government has also the nation’s once bountiful natural implemented landmark programs such resources. To further complicate an




already muddled situation, the next election cycle has begun, and the opposing Bharatiya Janata Party (BJP) has finally found a popular champion. While Congress has openly represented a more internationalist and some would say Western ideology, the BJP has often been more provincial, speaking for the common man and placing emphasis on Hinduism and what they refer to as Cultural Nationalism - a political philosophy that defines the nation as a single shared culture. If ever there was a Prime Ministerial candidate that represented both India’s potential for resounding success and dramatic failure, it is Narendra Modi. Framed from the beginning by the media as a controversial figure, Modi has garnered immense praise from proponents and intense criticism from the opposition. As Chief Minister of the western state of Gujarat for the past 12 years, the skilled orator has invested massive sums into the physical infrastructure of the state and – in part through the establishment of Special Economic Zones – has lured more investors, Indian and foreign, to Gujarat than any other state. Growth rates have also stayed high, though never firmly rising to the top tier as compared to other states. In any case, over the past decade Modi has successfully rebranded the state as a vibrant place to visit and do business. On the campaign trail, the BJP has touted these accomplishments as ample justification for his nomination – especially given India’s current economic malaise. Modi’s critics, however, hit a bit closer to home. In February of 2002, Gujarat suffered a series of targeted acts of violence between the Hindu majority and the Muslim minority, resulting in at least 1,000 deaths – mostly Muslims – and many more injuries. During this emergency, Modi’s efforts to control the violence proved insufficient and riots continued for weeks in the major city of Ahmedabad. Since the incident, NGOs, leaders of the Muslim community, and prominent figures in the government have accused him of complacency and even incitement of the violence – though

official investigations have not found any direct evidence of his involvement. Regardless of their validity, the accusations have shone a spotlight on the BJP’s one throbbing weakness, unapologetic Hindu bias. From its political philosophy which extols the Hindu tradition, to rhetoric that creates an “Us vs. Them” mentality, the BJP has never been considered the party of secular social policy. The country, therefore, faces a stark choice between an Oxford educated Singh and a Gujarati purist Modi. What inevitably gets lost in this heated political climate, however, are the actual needs of the country and its people over the next decade. As the young population enters the workforce, they need jobs – but they also need a democratic government that does not favor the majority. As the majority in a proudly democratic nation, Hindus in India have a responsibility to ensure that its large swath of minorities is given equal opportunity, and that the system of governance works for everyone. With regards to the millions of impoverished and underserved citizens in need of inclusive growth, Modi’s policies might increase output on the whole, but may not tackle several fundamental challenges facing the country. After all, highways and industrial zones are only useful for those who can afford to use them. Although proponents cite per capita GDP figures and manufacturing growth as a mandate for the post, the BJP must prove its good intentions when it comes to marginalized groups and must provide a clear plan for sustainable and inclusive development. Furthermore, after years of easing restrictions across their borders, India and Pakistan are finally within arm’s reach of being generally friendly towards one another – something a Modi Prime Minister-ship could turn sour if he does not clarify his party’s position. India’s potential to return to nearly double digit GDP growth has not died out – its population is younger and larger than ever and a variety of sectors from technology to manufacturing to social enterprise show tremendous opportunities for growth. Either party

has the potential to ensure that India resumes its prodigious rise, provided they stabilize inflation, increase investor confidence and cut arbitrary red tape in the infamous “license Raj”. Essentially, the economic policies of the two are not as dramatically different as the two parties in the United States. That said, however, India has always been exemplary in its founding tenet of “unity in diversity”, individual episodes of communal violence notwithstanding. In its quest to keep pace with China, matching growth numbers is not the issue. In China, the rise of an ultra-rich faction is evidence of dramatic wealth inequality, though its economic figures are “desirable” and its growth rates double those of India. The question to ask Indian voters, then, is - if and when the growing economic pie is cut, who do you want holding the knife? • Ben Zehr Benjamin Zehr is a citizen of both India and the USA. He spent his childhood in rural India and completed his upper education in the United States. He seeks solutions to the problems he grew up around and was co-founder of a network of affordable and financially sustainable rural eye hospitals in Maharashtra. He is a Sophomore studying International Agriculture and Rural Development with a focus on economics, food, and sustainability.

“The ruling Indian National Congress has been running the country as part of a coalition government since 2004, with Prime Minister Manmohan Singh at the helm. Under his watch, the Indian economy has grown by all measurable standards - from GDP of $700 billion to over $1.8 trillion in a decade, the Human Development Index increasing in lockstep.” Photo of Moanmohan Singh, Prime Minister of India.



In the past, state or local governments have owned 95% of China’s commercial banks. These banks have also all used a common interest rate managed by the central bank.


Liberlization in China


One important motivation behind introducing private banks and marketizing the interest rate is to provide SMEs with access to less costly capital. In China, SMEs account for 60 percent of GDP and around 75 percent of new jobs.


The first quote of the loan prime rate was 5.71%, down from a state set bench mark of 6%.

“It will be a challenge, but also a great opportunity for growth” In the past, state or local governments have owned 95% of China’s commercial banks. These banks have also all used a common interest rate managed by the central bank. Under this traditional model, large banks earn money by using a low deposit interest rate and making soft loans to large stateowned enterprises. Small and medium enterprises (SMEs), however, face difficulty when trying to raise capital from big commercial banks. Investors, unsatisfied with the low deposit interest rate and limited range of investment tools offered by large commercial banks, are forced to turn to the housing market and shadow banks. However, this unhealthy trend is likely to change as the government starts to free the interest rate to become more market-oriented. This will bring competition back into the banking system and push for a healthier banking sector. It will also increase accessibility to credit for SMEs and offer investors more competitive options of investment. In early July 2013, the state council released ten guidelines regarding the

An investor looks at the stock price monitor at a private securities company in Shanghai, China Photo provided by AP PHOTO and caption by Inquirer Business

reform of the financial system. These changes will support the economic restructure and according to the government “will actively develop small-sized financial institutions and open up the channel for private capital to enter the financial sector. We will encourage private capital to establish private banks which will be responsible for their own risks, as well as financial leasing companies, consumer finance companies and other financial institutions.” In addition to bringing in private capital to the banking sector, the central bank is also pushing for a more liberalized interest rate. On October 25th 2013, China’s central bank, People’s Bank of China, announced the introduction of the “loan prime rate” to serve as a more market-oriented benchmark for one year loans. The rate will be calculated daily through an official price quotation system, and be based on a weighted average of rates from nine domestic commercial banks on loans to their most favorable customers. The first quote of the loan prime rate was 5.71%, down from a state set bench mark of 6%.



Since these banks themselves are largely owned by the state, the interest rate is not fully market based. Nonetheless,this move is still regarded as an important step towards a market-driven interest rate and a more liberal financial system. Experts in the field are expecting a loan rate involving more banks and the removal of deposit ceiling One important motivation behind introducing private banks and marketizing the interest rate is to provide SMEs with access to less costly capital. In China, SMEs account for 60 percent of GDP and around 75 percent of new jobs. Despite their pivotal role in the economy, SMEs usually face difficulty when trying to raise capital from the big commercial banks. This is due to the fact that they do not possess sufficient collateral to meet the lending requirement. Many of the small businesses have to turn to private credit companies that provide more flexible loans but at a much higher cost. This results in significant loss of growth in the SMEs sector. Henry Cai, executive chairman of corporate finance of Deutsche Bank’s Asia Pacific region, commented that, “It is the real economy, other than banks, that is short of money”. The introduction of private banks and removal of the lending interest rate floor will introduce more competition into to the banking market. It is expected that big state owned commercial banks will offer more competitive rates to attract business without the restraint of the standard set by the central bank. The introduction of private banks will also reduce the monopolistic power of the traditional big commercial banks and improve the efficiency of the financial system by channeling monetary resources to the needy enterprises. This in turn will benefit the real economy. One key expectation for private financial institutions is to introduce a more comprehensive and differentiated range of financial services that will cater to the needs of different sectors of the society. The government has pointed out prioritized targets that will be supported by the reform of financial sector. These prioritized targets include SMEs, agricultural industry, and high-tech enterprises. The government expects that the diversification of the finance sector will more effectively channel resources towards

industries with better growth prospects, while simultaneously ensuring sufficient funding for major infrastructure projects. A market-oriented distribution of financial resources will greatly facilitate the restructuring of macroeconomic structure by supporting healthier industries with better growth potential and gradually reducing outdated industries with excess production capacity. This reform also puts more pressure on state owned enterprises that previously enjoyed generous financial resources sponsored by large state-controlled commercial banks. In addition to the aforementioned state wide policies, the policies for the Shanghai Free Trade Zone have been formulated to test out an open financial market in regards to market oriented interest rates, convertible currency and offshore finance. Some experts believe that a more robust introduction of private banks must be established on the basis of a marketized interest rate and a deposit insurance system. Currently, the interest rate is not fully market-oriented, as the interest rate ceiling for deposits is still in existence. The big commercial banks in the country are mostly state backed, and there is no insurance policy for deposits in place yet. The guidelines for private banks only comment that private banks should be responsible for their own risks, but there is no detailed set of rules and regulations in regards to this issue. China Banking Regulation Commission is believed to be in the process of drafting guidelines for the introduction of private banks. Despite the lack of clear, publicly announced guidelines, publicly traded companies in China responded to this news with overwhelming excitement. There have been at least 27 companies that applied for the one or two banking licenses that will be released early next year. Tencent Holdings Ltd, China’s largest internet company based on market value, is among those that have applied to start a banking business. Jack Ma, chairman of Alibaba Group Holding Ltd., has also pledged to “stir things up” in banking. Suning Commerce Group, a large electronics retailer, also announced plans to establish a private bank. The companies that are involved saw an average increase in stock price by about 25% in September when this news was announced.

The lucrative profits in the banking industry and the prospect of using capital at a lower cost have attracted those firms with large financial resources and good reputations. However, it is unlikely that such private banks would ameliorate SME’s difficulty of raising capital in the short run, as the firms themselves may face difficulty attracting deposits. It will also be difficult for these firms to compete with the state-owned commercial banks before the interest rate becomes market-oriented. The lack of experience and the uncertainty in future reform will pose challenges to private banks. However, in the long run, the financial market will become more market-oriented in order to facilitate a healthy and efficient economy. The Chinese citizens, as individuals, could potentially benefit from a more developed and competitive range of investment or lending opportunities in face of greater competition and diversity in the banking industry. Also, with increased competition among banks, it is likely that the public will see a diversification of services with improved quality. So far, many Chinese banks only offer basic banking services and instruments. Private banking, asset management services and in general the range of tools for individual investors are very limited in most Chinese banks. It will be a challenge, but also a great opportunity for growth for the banks that choose to cater to the investment habits and needs of Chinese investors. Overall, it is exciting to see the beginning of the intense reform that the Chinese banking system is slated to go through. How well the government and economy cope with the transformations to come will determine how far this Asian giant can go in the future.

• Shuang Jia

Shuang Jia is a sophomore majoring in statistics and economics. She grew up in China and went to Singapore for high school. During freshmen summer she interned with two investment banks in Beijing, China.



ABOUT BUSINESS ASIA Business Asia is the first undergraduate-run magazine in the nation focused on the changing business landscape in Asia. Our mission is to deliver an informative yet interesting magazine that will keep you updated with current events. From a small idea back in Fall 2008 to the actual magazine today, we owe our success to a team of 20 dedicated students at Cornell, our foreign correspondents in London and Beijing, and our partners in Hong Kong and Canada. Without their hard work and valuable opinions, this magazine would not have been possible. Business Asia is an independent student publication produced by Cornell Asia Business Forum. We are an independent student organization located at Cornell University who produced and is responsible for the content of this publication. This publication was not reviewed or approved by, nor does it necessarily express or reflect the policies or opinions of, Cornell University or its designated representatives.


Cover photo shows the dramatic change in Mongolia

Business Asia Journal Fall 2013 - Change In Asia  

Business Asia is the first undergraduate-run magazine in the nation focused on the changing business landscape in Asia. Our mission is to de...