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Exclusive Interview Former Indonesian Minister of Finance


By: Advai Pathak & Brandon Greer

South Asia’s Best Kept Secret By: Benjamin Zehr

Congress: Turn Around Needed By: Sanjeev Dhara

The Domino Effect By: Nicole Schmit




Reinventing Japan: The Key to Resuming By: Brandon Greer

8 Indonesia’s Road to Success 10 12 South Asia’s Best Kept Secret Why Starting a Business in 14 Hong Kong is a Good Idea Passing of a titan By: Advai Pathak

By: Jeffrey Fung

By: Benjamin Zehr


By: Megan Lee

18 Women in the Indian Economy 20 22 Bank accounts for India’s Poor 24 nterview with Chatib Basri China’s Challenge in Sustaining 28 Economic Growth Congress: Turn Around Needed By: Sanjeev Dhara

By: Catherine McAnney

By: Madison Leonard

By: Advai Pathak & Brandon Greer

By: Harrison Tighe

30 The Domino Effect 34 Why the Chinese Real Estate 37 Market is Unlikely to Nosedive China’s Next Great Leap




By: Steven Salenik


By: Nicole Schmit

By: Yiwei Chen



Editor’s Letter As Adam Smith discussed in An Inquiry into the Nature and Causes of the Wealth of Nations, economic growth depends on improvements in productivity, which today result from either technological innovation or industrial upgrading. For the last 50 years, the world economy has benefited from a demographic boom that has contributed 1.8 percent to average annual global GDP increases, helping to generate an unprecedented level of growth. This demographic tailwind is coming to an end. With populations aging and fertility rates dropping around the world, the growth rates of the past 50 years may prove to be the exception, not the rule. One of the biggest challenges to sustaining growth in Asia is accelerating productivity—yet it also presents opportunities. For several decades, countries in Asia have grown faster than their North American and Western European counterparts. China is only the most noteworthy, growing more than 7 percent a year, but it is by no means alone. Korea, Indonesia, and India are all growing more than 5 percent per year. Even Japan, at 3.3 percent over the past 50 years, has been growing faster than the US and Western Europe. As we go forward, many of the shifting demographics—the change that was motivating much of this growth—will change in both magnitude and pace. Nations across this continent will be challenged to address their future trajectories by investing in the future and empowering its leaders. That means women. That means young people. That means nations embracing all of their people and making growth a shared experience. Our journal would be remiss if not to pay respect to Nepal and to mention its most recent natural disaster. Our thoughts are with the nation and its people during this time of healing and regrowth. May their future be an expression of resilience and resolve and may all nations work together to ensure the future well being of Nepal. Following is Business Asia Journal’s Spring 2015 publication. We hope you enjoy what is, for us, an incredible semester-long endeavor to bring awareness to a continent rich with opportunities and insights. We welcome any feedback or questions via email at Additionally, we welcome you to visit our website at

Brandon Marshall Greer Editor-in-Chief

Special thanks to our sponsors!





President’s Letter 2015 has been a tremendously productive period so far for Business Asia. Internal reorganization and full integration of new members of our team has created a cohesive structure from both a professional and personal viewpoint. Having such a high level of enthusiasm and commitment has also allowed us to pursue our greater goals on campus. In April, we hosted Dr. Shashi Tharoor to discuss ‘Rising Nationalism in Asia: Causes and Ramifications’. Dr. Tharoor’s experience as former Under-Secretary-General of the United Nations and Indian Minister of State for External Affairs created the foundation for an insightful discussion ranging from China’s motives in Southeast Asia and the potential for an Indian-Japanese alliance to check its rise, to the role that America has and should play in the region’s geopolitics. Dr. Tharoor also cited the First World War as “a sobering reminder” of economic integration failing to prevent conflict and cited both prosperity and poverty as drivers of increased nationalism. The discussion was led by Professor Tom Pepinsky of the Government Department, Director of the International Political Economy Program, the Associate Director of the Cornell Modern Indonesia Project, and Business Asia’s new faculty advisor. The event was a resounding success (attracting students from as far as the University of Toronto!), and our success is owed to the sponsors, advisors, and benefactors who helped it take shape. On other fronts our group is growing as well. This semester saw the creation of a friendship with RAND Corporation, the renowned international policy think tank. RAND graciously invited Business Asia to their headquarters in Santa Monica and have committed further advice, research, and participants for future speaking engagements. In keeping with the progress in our region of focus, Business Asia continues to flourish as well. I leave the organization in the extremely capable hands of our Executive Board, Sanjeev, Brandon, and Arthur, and will join the ranks of our alumni keenly following its progress. Sincerely,


Advai Pathak President



Reinventing Japan: The Key to Resuming



which its population began to decline in 2011. As of 2013, a quarter of its population was age 65 or older; by 2040, that share will rise to more than one-third. The implications of this shift are already being felt economically and socially. Japan’s productivity growth has been stalled below 2 percent for much of the past two decades, reflecting both missed opportunities to grow value added and deteriorating cost competitiveness. A continuation of this trend would put the economy on pace to grow by only 1.3 percent annually through 2025. Another decade of sluggish growth would do little to boost household purchasing

power. Even more ominously, it would constrain the resources available for social security and health care just as demand for them intensifies. There is still time to head off this outcome. With its working-age population shrinking, Japan has to focus on productivity as the primary catalyst for economic momentum. If Japan can successfully double its rate of productivity growth, it could boost annual GDP growth to approximately 3 percent. By 2025, this would increase Japan’s GDP by up to 30 percent over the current trajectory. The size of the prize is $1.4 trillion in annual GDP growth in that year alone. Public policy changes can



espite two painful “lost decades,” Japan remains the third-largest economy and the fourth-leading exporter in the world. It is a nation with advanced technological know-how, a formidable manufacturing base, world-class infrastructure, and a large and affluent consumer market. This is a rare combination of strengths— and yet the world remains pessimistic about Japan’s prospects for growth and reinvention. A demographic challenge of historic proportions has arrived on the nation’s doorstep, and many Japanese themselves regard the future with anxiety. Japan passed the tipping point at

Editor In Chief


create the right conditions for growth, but most of the outcome is in the hands of the private sector. Individual companies can do a great deal immediately and on their own without waiting for government action. Reigniting the Japanese economy will depend on their willingness to invest and take risks. The good news is that multiple industries are ripe for revenue growth and efficiency improvements. This effort is not simply about cost cutting. It is also about spurring growth by launching business lines, pushing the boundaries of innovation, and entering new markets. A major private-sector initiative to accelerate productivity growth can constitute a “fourth arrow” of economic stimulus that complements the Abenomics agenda.


00 Japan’s productivity growth has been hobbled by inadequate competitive pressures and a rigid labor market


After making rapid leaps forward in the 1970s and 1980s, productivity growth has steadily eroded in almost every sector, including Japan’s signature advanced manufacturing industries. Today there are widening labor and capital productivity gaps between Japan and other advanced economies. In 2010, the mean return on invested capital for large listed Japanese companies was 23 percentage points lower than that of non-financial institutions in the US S&P 500, a symptom of large-scale misallocation of capital. Japan has been unable to sustain consistent growth in value added, and the economy continues to operate below its potential. Competition fuels productivity, as the most nimble and innovative companies win out over less efficient firms. But in Japan, highly indebted firms and even uncompetitive divisions of large conglomerates have often been kept alive in the interest of stability. As banks continue to roll over bad loans, and corporate headquarters continue to allocate funds

to underperforming units, resources are diverted that could be put to better use elsewhere and the process of creative destruction is impeded. In addition, regulatory barriers make it difficult for new competitors to challenge incumbents in certain sectors. The presence of multinationals could provide additional competitive intensity, but Japan attracts very little foreign direct investment (FDI). Japan’s long-standing lifetime employment model has also contributed to a certain degree of stasis. Today the legal strictures around lifetime employment have mostly been lifted, making the labor market more flexible in theory. But downsizing is viewed in a strongly negative light in practice, producing inefficient bureaucracies that lack agility. Workers, too, are reluctant to advance their careers by changing employers, which limits their incentive to develop new skills.

00 A continuation of current trends would have profound consequences, but Japan can change course. Although unemployment has remained low for the past two decades, deflation has eaten away at income growth and discouraged consumer spending. Japan has maintained global market share in automotive and other select industries, but many of its companies are being outperformed by Korean, Chinese, and US competitors. Few Japanese startups have broken through on a global scale. Perhaps most worrisome is Japan’s fiscal trajectory; in 2014, its public debt stood at 234 percent of GDP.

00 Japan has an opportunity to once again outpace the world in efficiency and quality. If current trends hold, Japan’s GDP per capita would grow by a mere 1.3 percent annually over the next decade. Its overall

labor productivity gap with the United States is on track to widen from 29 percent in 2011 to 37 percent in 2025. Japan could face a third decade of stagnation— one that would collide with an unprecedented demographic shift, creating even more damaging consequences. But Japan has a window of opportunity to create a different outcome—to once again outpace the world in efficiency and quality, emerging as a global leader in fields such as advanced materials, 3D manufacturing, and the life sciences. In this scenario, Japan would open the door to greater competition from multinationals, and its large companies would rise to the challenge. The Japanese education system would foster experimentation and critical thinking. Entrepreneurship would become rooted in campus life, with students in Tokyo University dorms cooking up plans for the next Google, Facebook, or Alibaba. In this future, Japan proves that it is possible to provide an aging population with top-quality medical care while containing costs. Improved health allows experienced workers to remain on the job as they age, as physically demanding tasks are automated. Millions of women join the workforce, and many rise through the leadership ranks. This vision is highly aspirational, but Japan can begin to move in this direction. Instead of settling for 1.3 percent annual GDP growth, Japan could grow by an average of approximately 3 percent through 2025. This would lift Japan’s projected annual GDP in 2025 by almost 20 to 30 percent over current trends—for an increase of up to some $1.4 trillion in that year alone. To get there, Japan will need to more than double its labor productivity growth rate, boosting it to approximately 4 percent. This is an ambitious goal for any economy, but with its labor force shrinking, Japan has to focus on productivity to accelerate growth. Increased labor force

00 Firing a fourth arrow: Individual companies can transform Japan’s productivity performance A nationwide effort to accelerate productivity growth—led by the busi-

ness community and spanning every sector of the economy—could amount to a “fourth arrow” for Abenomics. Many of the barriers and bottlenecks that have constrained growth are not imposed by regulation; they stem from traditional ways of doing business. Japan can reach some 50 to 70 percent of its productivity goal by adopting practices that are already in use around the world, while most of the remaining improvement can be captured by deploying new technologies. What is different about today’s environment that could support a fundamental shift in Japan’s direction? The answer is simple: everything. This is an era of explosive growth in global trade, yet Japan’s share of global exports has fallen from 7 percent in 2000 to 4 percent in 2013. But Japan has the manufacturing, export,

and innovation capabilities to make up for lost time and lost market share. As emerging economies continue to industrialize, they will become growth markets for vehicles, machinery and equipment, and electronics, all long-standing areas of strength for Japan. | BA Brandon is a junior majoring in Applied Economics and Management from the Washington, DC area. Brandon has worked over five years for the ranking member of the United States House Financial Services Committee and has published works at the London School of Economics. Most recently, Brandon worked as a Summer Analyst at J.P. Morgan in New York City.


participation will also play a part, as will innovative business models and social paradigms. Japan’s capital productivity could improve by 25 percent through better allocation of resources, higher revenues, and a push for greater cost effectiveness in infrastructure spending. New efficiency measures such as increased automation will affect jobs in many industries. But a growing economy combined with a projected 3.7 percent decline in Japan’s labor force by 2025 can cushion the net impact on employment.




Passing of a Titan


Amongst the pantheon of great modern national leaders– Churchill, Kennedy, Mandela – Lee Kuan Yew deserves prominent mention. In that Singapore has been molded so closely in the ideals of its patriarch, the timing of his passing in March of this year seems fitting; one period of Singapore’s history seems to be ending and change is necessary as the city-state grabbles with new challenges. Contact with the West influenced Lee’s beliefs and actions throughout his life. Born in the interwar period when British imperialism still extended over Singapore, he was raised by Englishspeaking parents and graduated from Cambridge with a double-starred First. The inability of the British to defend Singapore from Japanese invasion in 1942 and the subsequent instability of living under repressive leadership also left indelible impressions on the young man. In his memoirs he specifically cited the intrinsic power of punishment in deterring disobedience, a lesson learnt firsthand. Through these experiences he gained an acute understanding for the strengths and weaknesses of the Western liberal system and this formed the basis for his critique of the Western

model, especially with regards to its application in the developing world. The Sook Ching massacres which targeted the Chinese population, daily shortages of basic foods and supplies, and imposition of Japanese culture and values were fundamental in the development of his outlook. Pragmatism dominated his political philosophy and took precedence over more romantic western notions of individual liberty. Though draconian to foreign visitors, Singapore’s efficiency and respect for the rule of law stemmed from these firm beliefs, and they have benefitted society and business tremendously. Today, Singapore’s rate of crime is among the lowest globally on every scale from petty theft to murder. The infamous ban on chewing gum importation is one particularly well-known example enacted to counter youth mischievously spitting gum on door sensors, keyholes, and lift buttons. Punishment for spitting merits a S$500 fine. Individual rights, paramount in the United States, are secondary to social stability. Singaporean Police retain the authority to detain and force urine samples from any individuals suspected of using drugs, a concept utterly alien to most westerners. The correspond-



ing punishment for drug possession (in small quantities) includes caning and a life sentence, while capital punishment is carried out for individuals deemed of drug trafficking. Whatever the respective arguments regarding liberty and the individual, Singapore has succeeded in becoming virtually a ‘crime-free’ state which the Government cites in its defense when chastised internationally. This discipline extends into business and has contributed enormously to Singapore’s outstanding growth story. Singapore’s transformation, from a third-world swamp to the most successful city-state since Venice in the 12th century, is admired globally. Respect for the law, an efficient bureaucracy, and low tax rate have all contributed to make Singapore an attractive hub for foreign direct investment. A GDP per capita of just USD$516 in 1965 – equal to Ghana – has translated to over USD$55,000 in 2013, surpassing almost every developed country globally, including the United States, UK, and Norway. Singaporeans today benefit from heavily subsidized education and strict learning standards – allowing them to compete for top university places which are often funded by the Government. Singapore stands at the centre of Asia – it is the continent’s largest financial hub, second largest port after Shanghai, and a base for many international companies with operations in Asia. A deep understanding of individual identities and shared cultures drove the fundamental basis for Singapore’s model. Lee’s greatest challenge was to forge a nation from, in his words, “different peoples with no shared destiny.” The violent tension between racial groups – predominantly Han Chinese and Malay

has been drawn from immigration rather than solely through increasing the productivity of local citizens. Thus, a shrinking population creates serious sustainability issues moving forward both for Singapore’s economy and unique social structure. Immigrants accounted for 38% of Singapore’s population in 2014, up from 14% in 1990. As local citizens become a smaller proportion of the whole, social issues have risen anew. An influx of the super-wealthy has driven up prices, placing added stress on local citizens. Equally concerning though is the societal stress that these individuals face – the casinos (from which locals are dissuaded by prohibitive entrance fees), luxury fashion outlets, and mega-homes accentuate the increasing wealth inequality in the tiny city-state. The other aspect of this influx is from foreign labourers who increasingly bear the brunt of violent xenophobia. Lowwage workers have depressed wages, created stress on public transit and infrastructure, and increased congestion adding to the rumblings of discontent with immigrants. Public responses to these issues do not sit comfortably with Singapore’s celebrated history of racial understanding. Illegal strikes by Chinese bus drivers in 2011 were attributed to the torrent of abuse immigrants receive from Singaporeans. Race riots in 2013 in predominantly Indian and Bangladeshi districts (the main sources of cheaper labour) were also met with fierce backlash from citizens. Incidents like these are more reminiscent of the Singapore Lee originally took the helm of, than the cohesive, multi-ethnic example from the intervening half century. However, until fundamental solutions are devised, it seems certain that immigration issues will continue and likely become increasingly contentious. Dissatisfaction is increasingly expressed through both a lively blogosphere and political backlash against

the People’s Action Party. In 2011, the PAP suffered its worst election results to date, winning mandate over the government but with just 60.7% of the vote, its worst performance since inception. Prime Minister Lee Hsien Loong, Lee Kuan Yew’s eldest son, has responded by raising social spending and taxes on the wealthiest 5%. Whether his government will only manage stopgap measures or will find structural reforms to solve the more systemic politico-social issues outlined above remains to be seen. These issues raise several interesting prospects for the outside observer. Increased political dissension invites new entrants to the public sphere, creating alternatives to the PAP which is more uncertain today than at any point in its history. The feasibility of removing the PAP does remain remote despite the present issues on hand. Yet, Lee Hsien Loong does not carry the single-minded determination and ruthlessness that his father exemplified over the past half century, and this presents the first small cracks in a model that relied on obedience, respect, and discipline over analytical thought. Singapore grew under the leadership and vision of a truly great man although one who could not allow himself to trust in the democratic process. He was clear with his biographer, Tom Plate, in outlining his belief in his mandate to lead: “I do not believe that one-man, one-vote [i.e. the fundamental basis of democracy]… is the final position.” Serious questions are being asked of Singapore moving forward. With Lee Kuan Yew no longer able to drive forth his nation through unique ingenuity and iron-will, the institutions and legacies he created amongst the elite must carry on his legacy. If they fail, the tiny city-state will need an entirely new model to teach itself how to govern. Without a leader of Lee’s convictions and strength of character, which road Singapore will follow is now unclear. | BA


– had led to Singapore’s expulsion from the Malay Federation and threatened Singapore’s very existence in the 1960’s. Yet through planned districting and public housing schemes designed to intermingle the races, Lee succeeded in creating a shared identity for Singaporeans. Despite its astounding success, Singapore remains a controversial model of development. Lee was firm in his convictions and brazen in the face of criticism. Throughout his life, he attracted controversy for the undercurrents of parental autocracy that formed the backbone of the ‘Singapore model’. He served as Prime Minister for thirty-one years before stepping aside voluntarily in 1990 (at the relatively modest age of 66) to first assume the title of Senior Minister and then, in 2004, of Minister Mentor, Cabinet advisory roles created to aid the leadership succession and preserve his influence. Dissidence was not accepted. Critical journalists were sued for libel and political opponents were imprisoned without trial. The Internal Security Act, granting authority of preventative detention was initially legislated in 1960 while Singapore’s political future with Malaysia seemed uncertain. Under this system, the People’s Action Party, which Lee founded in 1962, has remained the incumbent government since Singapore’s independence. Until now, this model of governance has been largely successful. Today, however, Singapore is at a critical junction. Economic woes have created a general discontent. Singapore was greatly impacted by the 2007 recession as its reliance on the global economy opens it to cyclical flows. However, deeper fundamentals are involved as well not least an ageing and shrinking population still affected by the PAP’s ‘Stop at Two’ population control policies from the 1980’s. Misguided initiatives like these form the underpinnings of relatively open immigration policies over the previous two decades. Over this period, growth



Indonesia’s Road to Success




oko Widodo has a huge task ahead of him. As the newest president of Indonesia, he is going to be held responsible for the mission to rejuvenate an economy that grew at only 5.02% in 2014, its slowest pace in 5 years. All eyes would be on him as Indonesia is one of the most important of the world’s emerging markets, being the biggest economy in the Southeast Asian region. As such, he must take firmer, bigger steps to swiftly utilize government spending efficiently, bolster Indonesia’s investment prospects and improve the political environment. Indonesia’s economic performance has not been impressive in recent times. Exports, which represent 24% of its GDP, saw the slowest expansion in years at 1%, down from 5.3% in 2013. Imports in January 2015 reportedly dropped 15.6% when compared with January 2014. In addition, following the plunge in global oil price, Indonesia has been hit hard by the

worsening performance of its commodity sector. Prices of key commodities have been slashed due to weakening demand from several economies – most notably, China. Not only do these hurt Indonesia’s economic growth and income generated, but they also impair the current account balance which would in turn undermine the Rupiah’s performance. All this being said, Widodo has made decent strides to improve Indonesia’s economic outlook. He has removed fuel subsidies – this move freed up fiscal budget for the government to engage in revival initiatives such as lowering transportation costs, improving the investment climate, and making healthcare provisions more accessible. Widodo has set out to build power points for better electricity transmission and efficiency, and to revitalize run-down seaports. With improvements in energy efficiency, factories in Indonesia will now be easier to operate and manufacturing industries will be able




to thrive. The president has also used the extra funds to aid the poorest in the nation, providing health and education assistance to improve their standard of living. Perhaps the biggest use of funds, however, is for development of infrastructure in the next 5 years. As ambitious as Widodo may be with his plans for infrastructure projects, there remains much work to be done. He has to make the most of the new land acquisition rules to speed up public works projects. He must ensure that all infrastructure project proposals are approved quickly. In previous years, many tenders were completed by regional governments only at the end of the year. These tenders were rushed and some even had to be cancelled or delayed due to procrastination. Whether or not Widodo makes plenty of land purchases, if the infrastructure projects take too long to get off the ground, then the acquisitions would have been wasted and the spending would have been fruit-

to the rank of 110th in labor market efficiency. The government should take bold actions to reform the labor market to make it more business friendly, such as trimming the excessive severance payment requirements that have led to many ineffective employees. Widodo must also take advantage of Indonesia’s high birth rate and low dependence ratio to train a skilled and productive workforce, bolstering the prospects of the country’s labor market, and thus the Indonesian economy. By providing better short term and long term incentive compensation rather than severance pay, companies will get more bang for their buck.

To accomplish all that Widodo desires, he must anchor investors’ confidence in Indonesia’s prospects.”

To accomplish all that Widodo desires, he must anchor investors’ confidence in Indonesia’s prospects. He must also attract foreign investments to assist in the economic development and infrastructure enhancement of Indonesia. Whilst he has gotten off to a good start on the fiscal and monetary policy fronts, Widodo’s recent actions on the political front seem to have gone in the opposite direction, tarnishing his reputation and leading many to doubt his fight against corruption. The appointment of his cabinet and an attorney general based on political party background and the nomination of corruption suspects into the National police have caused the Indonesian population to doubt Widodo’s impartiality and his ability to lead the nation out of its struggles. To make things worse, Widodo has insisted on executing foreign drug traffickers and sinking foreign boats that were caught illegally fishing in Indonesian territory, despite vigorous attempts by countries like Australia to reason with

him. The hostility generated by such political moves are bound to adversely impact on Indonesia’s legal environment, investment prospects, and capital flows. Widodo must repair his public image if Indonesia is to continue its path of revival. To do so, first and foremost, he will need to reshuffle his cabinet. He should also eliminate any temptations for corruption amongst civil servants by providing them with a competitive compensation structure and attractive ancillary benefits. In addition, he must encourage officials to embrace international relations and outward-looking agendas involving partner countries instead of clinging to nationalist and protectionist policies. Widodo should take steps to strengthen Indonesia’s leadership role in ASEAN and avoid involvement in conflicts with its major international partners. Through these measures, Widodo can drastically improve relations in his own government as well as with the major international partners. In the long run, if President Widodo can deliver on his promises, Indonesia will benefit from an economic revival supported by increased capital inflows and reflected in enhanced standards of living. The benefits of today’s heavy government spending will far outweigh the cost of the budget deficit. As Indonesia revamp its infrastructure and economy, it will become less dependent on its commodities exports and will move to build upon a healthy, well-educated, and resourceful workforce. There are high hopes for Indonesia’s future, but there are also much more work to be done to realize these dreams. | BA Jeffrey Fung is a Sophomore majoring in Economics. He was born in Australia and grew up in Hong Kong. In the past summer, he completed an internship at a leading Australian investment management firm in Hong Kong.


less. Despite expectations for Indonesia’s economy to rebound at a growth rate of 6% this year due to better business environment, there is still plenty Widodo can do to make Indonesia more attractive for investors. Actions by Widodo to facilitate ease of doing business in Indonesia, such as creating a single service allowing investors to gain business permits, rather than requiring them to go through a convoluted process of seeking licenses from different agencies, have prompted more foreign capital inflows. Apart from the immediate economic benefits of investments, this would also assist in shifting Indonesia’s economy to a more diversified model in which more people can find work in the services and value-added manufacturing sectors. To streamline this process further and make it even more effective, Widodo should consider delegating the authority to the services personnel to approve foreign investment applications locally to minimize the length of time in obtaining the permits. Indonesia faces a number of other challenges with regards to increasing capital inflows and foreign investments. Its Negative Investment List has closed many sectors to foreign investment. Not only that, but there are also restrictions on the legal entity format available for foreign ownership. Such restrictions deter investors from putting their money in Indonesia and must be relaxed appropriately as soon as practicable despite good nationalist intentions. Additionally, there is now increasing pressure for foreign employees to pass an Indonesian language test before being eligible to work in Indonesia. Such rules should be eliminated as they limit the desirability of Indonesian companies as an investment target , being burdened with the local labor market’s inefficiencies. Other troubles with the labor market include stringent labor regulations that drag Indonesia



South Asia’s Best Kept Secret



Associate Editor

Sri Lanka could be the perfect underdog story if it plays its cards right.




he Pearl of the Indian Ocean is in need of some polish. In the years since the end of its recent civil war, Sri Lanka has taken strides towards rehabilitating its image, particularly in South Asia. The island nation off the coast of southern India is often overlooked, falling in the shadow of both its larger neighbor and its recent domestic turmoil. Historically, Sri Lanka has relied upon the export of its world famous Ceylon teas, its textiles, tourism and remittances from the Middle-East, where over 90% of its expatriates live and work. In the wake of the end of the civil war in 2009, the government must continue to shift its focus and pay more attention to the future economic

prospects of the country - a focus on regional cooperation, infrastructure, utilization of its strong human capital, and investing in its tourism industry are major focuses going forward. Furthermore, the recent election of Maithripala Sirisena as president, replacing the allegedly corrupt Mahinda Rajapaksa, is a signal of shifting priorities for the country, and could have interesting geopolitical consequences with respect to relationships with India and China. Rising to the political forefront during a whirlwind of anti-establishment sentiment, Sirisena was elected president in 2015 to continue to revive the Sri Lankan economy and heal wounds left by its civil war. Sirisena has inherited

broken infrastructure and debt from the previous government. When the fierce, long-lived civil war with an ethnically charged militia known as the Tamil Tigers ended in 2009, Sri Lanka’s northern province in particular was in disrepair - most symbolically represented by the historic northern railroad originally built by the British 100 years prior. To finance reconstruction efforts, the IMF granted the Rajapaksa government a $2.6 billion bailout in 2009, for which it is struggling to make payments six years on. Despite key challenges stemming from its recent turmoil however, Sri Lanka has some key advantages compared to its peers in the region. A historically diverse and well educated

Sri Lanka boasts world class warm white beaches, lush greenery, varied topography, and diverse wildlife that could propel it to the top of the list of eco-tourism destination both in Asia and the world.

Sri Lanka has also demonstrated a commitment to becoming a more globally competitive, inclusive economy as well. Its economy grew at an impressive 7.3% in 2013 and has a GDP of US $193 billion in PPP terms, with a remarkably low Gini coefficient of 36.4, reflecting a relatively equal distribution of the country’s wealth amongst its population. Moreover, unemployment is low at 4.3% and only around 4% of the population falls below the poverty line. Over the past five years, its growth areas have been in its exports of tea and textiles, increasing investment to repair or replace damaged domestic infrastructure, and growing its tourism industry. After a decade of working almost exclusively with China for its infrastructure development, the new president has opened up to Indian investment in particular - a sharp contrast to his predecessor. Perhaps Sri Lanka’s biggest opportunities lie with its largest neighbor in the Indian Ocean, as both physical and cultural proximity could provide an easy avenue for growth. Narendra Modi’s India has likewise shown keen interest in work-

ing to strengthen ties between the two nations, as his recent visit - the first by a sitting Indian Prime Minister in decades - demonstrated. A channel for large Indian investment in Sri Lankan infrastructure, such as the symbolic northern railroad project completed this past year, would be welcome for both parties. At the same time however, President Sirisena should be careful not to step on too many Chinese toes or sour relations given the country’s active investment and interest in the country over the past few years, particularly with its work on the Port City, Colombo’s $20 billion play at becoming a major freight hub between Dubai and Singapore. Projects such as the Port City and the Northern Railroad are sure to be the first of many in the years to come as Sri Lanka establishes more solid economic ties and attracts investment from abroad. This investment will only serve to boost the country’s current exports, tea and textiles. Agricultural infrastructure is sure to play a major role in the modernization of and the drive to improve livelihoods of Sri Lanka’s rural population. As the world’s fourth largest exporter of tea in 2007, the development of the nation’s agricultural backbone will play a critical role in both raising standards of living and increasing output going forward. `A final area of focus and key strength for Sri Lanka is its heritage - one which is disproportionate to its physical size. Setting aside its diverse population, history, and colonial influences, Sri Lanka’s real gift is in its natural environment. It boasts world class warm white beaches, lush greenery, varied topography, and diverse wildlife that could propel it to the top of the list of eco-tourism destination both in Asia and the world. Furthermore, the country is able to offer a wide range of attractions for a fraction of the cost of comparable vacation spots in the American tropics. All of these factors give Sri Lanka the potential to be one of

South Asia’s best eco-tourism destinations in the coming years - a potential reflected in the most recent tourism numbers. In the year 2014, the country received over 1.5 million tourists, surpassing their official goal and marking up a record year. Tourism was up nearly 20% across the board, a huge improvement from 2013. The government is now considering revising its 2016 goal upwards to an ambitious 2.5 million as a result. The tourist infrastructure in the country remains underdeveloped, but presents an interesting opportunity for investment, given both a growing global eco-tourism trend and a safe location with the ideal conditions for a thriving industry. Sri Lanka could be the perfect underdog story if it plays its cards right. It is fortunate to have rich natural and cultural heritage which, combined with its well-educated and healthy population, make it an attractive location for investors in both eco-tourism and its other, less established, but rapidly growing sectors. Furthermore, cultivating a relationship with India’s eager and energetic Narendra Modi could pay dividends for the country both in terms of trade activity and critical infrastructure as it seeks to rebuild after the civil war, improve its primary agricultural productivity, and raise standards of living. While today Sri Lanka may be South Asia’s best kept secret, if it continues on its current trajectory - establishing partnerships with its neighbors and making the most of its core competencies - it may not remain a secret for long. | BA Benjamin Zehr is a Junior in CALS, double majoring in Applied Economics & Management, and International Agriculture & Rural Development. He grew up in India and spent a gap year between high school and university setting up a network of financially self-sustaining rural eye hospitals there.


population has outcompeted its larger, more influential neighbors to the north for years - Sri Lanka’s literacy rate was nearly a full 30 percentage points higher than India’s in 2011. This represents a huge opportunity for the country as technology uptake, productivity, and mobility go hand in hand with higher levels of education.



Why Starting a Business in Hong Kong is a Good Idea




ong Kong has always been one of the world’s financial capitals, with an abundance of the world’s best financial institutions inhabiting the city and a reputation of having the freest economy. It is not surprising then, that in recent years it has also become one of the best places to start a business. Hong Kong has been ranked second in “ease of starting a business” by World Bank’s Doing Business Report. It only takes 2.5 days and 3 registration procedures to start a business. What are some other factors that contribute to this environment that is conducive for entrepreneurial growth?

Hong Kong is a dynamic, cosmopolitan city of over 7 million individuals — there is much room to grow and niches to fill. Hong Kong has a mutualistic relationship with Mainland China, which comes with benefits such as an absence of trade tariffs between the two places therefore expansion into a larger market is possible. The Hong Kong government consistently works to encourage entrepreneurial activity, through funding initiatives for example. With the rise of many startup incubators in Hong Kong as well, resources are increasingly available for many aspiring entrepreneurs: funding, an entrepreneurial community,




and more.

Potential for Rapid Growth The cosmopolitan and bustling city is filled with many opportunities for growth. With a population consisting of a growing number of expats, Hong Kong is a city that has plentiful opportunities because of its diverse population and, as a result, a diverse consumer taste. This can be seen with the many restaurants that have sprung up around the city over the past few years. For instance, a restaurant serving California style Mexican food, Cali-Mex, opened seven locations within six months. Additionally, international

Mainland Relationships In 2003, Hong Kong and Mainland China put their heads together and formed the “Mainland and Hong Kong Closer Economic Partnership Arrangement” (CEPA). With its implementation came one of the many benefits of why Hong Kong is such a great place to start a business. CEPA loosened the trading terms between the two places (i.e. removal of tariffs for goods of Hong Kong origin), allowing improved penetration into both markets. Additionally, Hong Kong’s service providers have first priority in terms of entering the mainland market. This agreement is mutually beneficial to both places, as Hong Kong can help China attain a wider reach into the global market, while Hong Kong businesses benefit from its ability to successfully enter into the mainland market. Since 2003, ten supplements have been signed to perpetually improve their economic cooperation. Thus, this relationship makes starting business in Hong Kong attractive for foreign investors and entrepreneurs.

Growing Financing Sources With a robust financial industry and a number of business opportunities, Hong Kong has a growing variety of funding sources that aspiring entrepreneurs can tap into. Moreover, many of these are increasingly investing in Hong Kong’s entrepreneurial growth.

For instance, in the beginning of 2015, Alibaba announced that HKD $1 billion (US $129 million) would be used to create the “Alibaba Hong Kong Young Entrepreneurs Foundation”. This venture investment program, projected to begin in the latter half of the year, will provide funding and services like training to aid entrepreneurs in their ventures. Aside from providing resources for entrepreneurs, they are also taking the initiative to inspire youth to start their own business, by providing students in Hong Kong universities with internship opportunities at Alibaba and its partner firms. Furthermore, local sources such as the Hong Kong Science and Technology Park (HKSTP) help connect startups with venture capitalists or angel investors. HKSTP provides investment support free of charge for over 400 companies within their incubator program. Entrepreneurs have unique access to groups like the Hong Kong Business Angel Network. Initial funding is important for any startup and this important aspect of the business regulatory environment in Hong Kong is certainly seeing growth and improvement within recent years. For instance, of 85% of 13 local crowdfunding platforms in Hong Kong were started within the past three years. While there is certainly more room to grow in terms of the availability of funding options for entrepreneurs, rapid improvement efforts have been made in order to create an encouraging entrepreneurial community.

Government Support The Hong Kong government has consistently proposed new policies and changes that encourage entrepreneurial activity. For instance, in the 2014-2015 budget, Financial Secretary John Tsang announced several initiatives that would support ventures like technology startups through increasing R&D invest-

ments and commercialization activities. Additionally, small and medium-sized enterprises (SMEs) are also receiving government support, in areas such as financing and expansion. Additionally, the government has proposed many funding schemes to help encourage growth in areas such as design and technology. For instance, the CreateSmart Initiative helps drive growth of businesses in the creative industries. There is also an Innovation and Technology Fund where companies in Hong Kong are given funding to improve their technology in order to produce innovative ideas and products. The government has therefore definitely been a more positive force on the regulatory environment for businesses in Hong Kong, because innovation is highly encouraged for the community.

A Space to Grow: Online and Offline What makes Hong Kong’s startup scene so attractive is the number of incubators that are available to assist startups in their early stages of development. For instance, CoCoon has a 14,000 sq. ft. collaborative space where new entrepreneurs can develop and collaborate with a network of individuals ranging from experienced designers and engineers to investors. Their aim is to bring everyone together to produce innovative businesses. Additionally, they host monthly “idea sharing” events, networking sessions, and more. These are just some of the ways that this one incubator is trying to inject the entrepreneurial spirit throughout the city, by providing these resources for entrepreneurs. According to a report by Chinese University of Hong Kong’s Center of Entrepreneurship, between 2008 and mid-2014, the number of entrepreneurial topics related associations and groups tripled. In fact, startups themselves have


retailers like Topshop have seen rapid penetration in the Hong Kong market as well. The retailer has opened four locations since 2013 and all locations have been highly successful. This indicates that the Hong Kong market is relatively receptive to new companies. Hong Kong’s demographic characteristics and consumer spending habits indicate that there is a high potential for growth for many entrepreneurs.




also begun to look at ways to encourage more entrepreneurial activity. For instance, a recent tech startup based in Hong Kong, called Shopline, aims to create a more conducive environment for e-commerce growth. This innovative company provides a simple method to open an online shop, from offering design templates to an app to monitor progress, making it easier than ever to create an online business. For an easy payment of US $16 a month, vendors can create and maintain a high quality online store. Creating an online shop with no coding experience seems daunting; therefore Shopline is there to remove that extra obstacle, encouraging business development and growth in Asia. Local universities in Hong Kong have also taken steps to instill entrepreneurial spirit in the youth. Since 2010, efforts have been made to frequently organize entrepreneurship competitions, incubation programs, and more. Additionally, local university curriculums have been transformed to be more interdisciplinary, in the hopes of fostering more entrepreneurial activity. While there are certainly areas for growth in Hong Kong’s entrepreneurial environment, particularly the number


of available funding sources, there is increasing evidence of efforts to make the city more conducive for entrepreneurial activity. There is no better way of understanding the entrepreneurial environment in Hong Kong than to talk to someone who started a business there. We interviewed Jennifer Cheung, a successful entrepreneur herself, about her experience starting up her company in Hong Kong - her company has grown at a rapid pace and has become a household name in Hong Kong. Jennifer Cheung is the founder of Sift Desserts, a high-end patisserie that brings gourmet cupcakes and French pastries to the Hong Kong market. Upon graduation from Harvard College, she worked as an investment banker at Deutsche Bank in Hong Kong. After one year, she left her job to pursue her true passion in the culinary arts. After formal training at NYC’s Institute of Culinary Education and an internship at a renowned restaurant, she started her company in 2006 after returning to Hong Kong. Since then, Sift has successfully established five popular locations around Hong Kong, proving the assertion that Hong Kong is an ideal place for young entrepreneurs today to give their ideas traction

00 How did you locate the niche that Sift is currently fulfilling? Sift opened in the summer of 2006 and while there are a lot of boutique patisseries that have opened since then, we were, one of the first boutique patisseries in Hong Kong when we opened. Back then it was mostly cake shops in hotels that dominated the market. I knew there was a demand for this type of patisserie and also seeing the demand for cupcakes that took place in the US I thought we could do something similar but with a more gourmet positioning in Hong Kong.

cerns about how financially viable this business was. I do believe though that it is important to take that initial leap of faith as with all businesses, it’s with the actual doing and in actual execution can you see where the issues are and where and how you can rectify them.

00 Did you experience any difficulties in terms of acquiring funding (e.g. from investors) when you were starting up Sift? I used my own savings from my year in banking and some help from parents, so no I didn’t have much trouble with funding. We also started very small so the initial investment was not huge. How would you characterize the startup scene in Hong Kong right now? Compared to a few years ago? I think the start up scene in Hong Kong has gotten more and more vibrant. Hong Kong as a city, given it’s identity as the gateway to China, has gotten increasingly more enticing to individuals who have a desire to start a new business.

I think Hong Kong’s consumer has gotten more and more discerning. With the globalization of the world market, many brands that you used to only be able to find abroad are now available in Hong Kong. That makes the market a lot more competitive but at the same time it’s a much more nuanced market for the consumer. The Hong Kong consumer also likes to know what the current trends are and hence staying pertinent and “trendy” in consumers eyes, to continuously reinvent and create new initiatives that make your product interesting to the Hong Kong consumer, is also of utmost importance.

00 What resources (i.e. for entrepreneurs) in Hong Kong did you find useful when you started Sift? I spoke and continue to speak regularly with other entrepreneurs in the same industry. It’s always helpful to see what kind of challenges others are going through. What’s worked and what has

not worked for their business. As a business, how do you see Sift expanding in the next couple of years? We plan to open 2 to 3 more stores in Hong Kong and will look to expanding in the region after that.

00 Would you say Hong Kong is a good place to begin an entrepreneurial venture? Yes, I would but of course the experience varies in what industry. But I do believe Hong Kong’s a great place to begin an entrepreneurial venture given it’s a very fast moving place so as much as there are a lot of long entrenched players in every market there is always room for young blood. | BA Megan Lee is a Freshman in the College of Human Ecology. She grew up in Hong Kong and will be interning there this summer at a local business consulting firm. Around campus, she is also a marketing associate at the Cornell Daily Sun Business Department, a consultant for the Social Business Consulting group, and a member of the Cornell Undergraduate Asia Business Society.


00 What were some of the concerns you had prior to starting 00 How would you characterize Hong Kong’s consumer tastes Sift? and the consumer market in With starting any business there are always risks and hence yes there were con- general?



Congress: Turn Around Needed




The ineffectual organization of the Congress Party at the grassroots level and its lack of new and inspiring figures means that it remains doubtful that a leftward sway of the populace would result in meaningful legislative change.




he stunning sweep of the Bharatiya Janata Party (BJP) into power earlier this year was nearly overshadowed by the depressing performance of the Indian National Congress Party, colloquially referred to as the Congress Party. While the BJP was unbelievably resurgent underneath the leadership of Prime Minister Narendra Modi, then the Chief Minister of Gujarat—Congress’ return of 44 seats in the Lok Sabha was equally newsworthy. In the Lok Sabha the Official Opposition is a legally designated term that describes the party that holds at least 10 percent of the legislative seats and is not part of the ruling coalition. For the first time in the Congress Party’s history it was neither part of the ruling coalition nor serving as the Official Opposition. An examination of the composition of the current Lok Sabha reveals that the Congress Party’s count of 44 seats is barely ahead of the share held by regional parties such as the All India Anna Dravida Munnetra Kazhagam and the All India Trinamool Congress who hold 37 and 34 seats respectively. Many viewed these results as a rightful rebuke of the unimaginative policies and weak efforts to combat corruption that became a hallmark of the later years of Manmohan Singh’s tenure as Prime Minister. India’s economy had fallen off the roaring pace of the mid 2000s and numerous commentators were ques-

tioning whether India could unlock its economic potential. However a resurgent Congress Party is vital if India will make good on its promise and become a major global power in the 21st Century. India’s regional parties have held increasing sway within the country and commentators from groups such as the Carnegie Endowment for International Peace suggested in the years leading up to the election that it was a possibility that a regional party could lead India through a coalition government. While this did not come to fruition, it is hard to deny the growing importance of regional parties in Indian politics. Congress’ weakness means that in today’s Lok Sabha for any strong opposition to the BJP to emerge there must be coordination between the Congress Party and a diverse set of parties who do not necessarily have national ambitions or a mindset seeking to represent the interests of all Indians. Thus the Indian political system faces a potential breakdown in its ability to meet the expectations of the people. The absence in the long run of a meaningful national center-left opposition to the BJP would result in an Indian political system that is unable to effectively respond to the leftward swing of its voters or do so in a way that does not yield an actual ruling coalition. The stability and continuity that is granted in a parliamentary system where two major political parties, one on

the left and one on the right, seemingly alternate ruling, while also kept honest by small parties is crucial for India to be able to address the intractable problems that lie in the way of its continued national growth. Currently the United Kingdom faces a somewhat similar situation. In its case both the center-right Tory and center-left Labor look unable to captivate the majority of Britons who in turn are supporting parties such as the United Kingdom Independence Party (UKIP), the Green Party, or the Scottish National Party (SNP). Regardless of whether the Tory or Labor parties are able to form a ruling coalition, many British observers fear that neither could exert the necessary amount of political influence to avoid having their agendas hamstrung by smaller parties whose views may not be representative of a wider swath of Britons. The challenge for the Congress Party is to find a way back to electoral respectability. While its current platform and leaders may need changing, its importance to the Indian political landscape is paramount. A powerful and forward thinking Congress Party forces the BJP to broaden its appeal and avoid swinging far towards its Hindu nationalist wing. Prime Minister Modi’s success in the 2014 election was largely predicated on younger voters voicing displeasure with their current and future economic prospects. This version of the BJP, which

offering real center-left alternatives to the path of economic development set out by Prime Minister Modi and Minister of Finance Arun Jaitley. An opportunity for improvement that is perhaps being seized is the tentative amendments to the land bill. These amendments make it easier for larger corporations to purchase swathes of land that may be owned by different farmers in order to build industrial facilities amongst other things. Many of the unofficial opposition parties including Congress have used this bill to lend voice to the fears that poorer farmers may be unjustly forced out of their land. Despite the BJP’s absolute majority in the Lok Sabha, the lower house of the Indian parliament, the proposed amendments were thwarted in the Rajya Sabha, where the electoral system meant that the BJP did not also ride to a majority on Prime Minister Modi’s coattails. Regardless of the prudence of the law, there are always real discussions that must be had when such an influential bill

is on the legislative docket. The parliamentary system is meant to promote debate and on that front Congress has done excellently by organizing massive protests of farmers and giving credence to their fears. However the ineffectual organization of the Congress Party at the grassroots level and its lack of new and inspiring figures means that it remains doubtful that a leftward sway of the populace would result in meaningful legislative change. The party must reevaluate key aspects of its internal organization in order to be able to make good on its actions on issues such as the land bill at the polling stations. Hopefully Rahul Gandhi’s return from his sabbatical will allow the Congress Party to finally reorganize and recognize the missteps it made over the last few years. The alternative would be a very poor outcome for India. | BA Sanjeev Dhara is a Junior majoring in Chemical & Biomolecular Engineering. He has travelled through India and follows Asian affairs with keen interest.


offers business friendly policies, is a needed counterpart to a Congress Party that concerns itself with the broader social welfare of India’s underprivileged. To this end it appears necessary for the Congress Party to stop viewing the Gandhi family as its sole path to electoral success. While the family’s lineage and name continues to inspire a large amount of faith within sections of the Indian populace, the Congress Party would do well to move on. No member of the Gandhi family appears able to transition the Congress Party out of its current rut. As the Economist once noted, Rahul Gandhi’s hesitant unofficial leadership of the Congress Party has led to multiple electoral reversals in recent years. There are legitimate questions and debates to be had about Prime Minister Modi and the BJP’s plans to revitalize the Indian economy. Rather than predicating its electoral success on some form of cult of personality of the Gandhi family or trying to engage in political intransigence— the Congress party ought to focus on



Women in the Indian Economy:




Education, Social Norms, and Entrepreneurship




n 2000, India was one of 189 member countries of the United Nations to chart out an agenda for the next 15 years. The plan, called the Millennium Development Goals, outlined a set of goals each state would, ideally, accomplish by 2015. As the target year begins, it is only appropriate to look back at the member countries and observe their progress. India was able to make considerable strides in the areas of poverty and hunger by slashing its poverty and hunger levels virtually in half compared to 2000 levels. While these developments certainly should not be overlooked, India lacks improvements in one major area in comparison to other UN countries. To paint a picture, of the women aged 15 years or older in India, only 29% participate in the workforce. Only several countries perform worse than India in this statistic, including Iran, Pakistan, and Saudi Arabia. Additionally, in 2000, India set a goal to increase the number of Parliamentary seats held by women to 50%.

In 2015, this number is only 11.46%. By now, it must be easy to guess the area in which India falls behind other BRICS and emerging economy countries: gender equality and female empowerment. Goal 3 of the Millennium Development Goals seeks to eliminate gender disparity in primary and secondary education, increase the share of women in wage employment in the non-agricultural sector to 50%, and increase the proportion of seats held by women in national parliament to 50%. Goal 3 can be put simply as a mission to promote gender equality and empower women. The first measure of gender equality in the Millennium Development Goals is the level of access women have to an education. In this area, India actually made significant gains to increase the enrollment of young girls in primary, secondary and higher education. In both primary and secondary primary education, enrollment of young women as a percentage of total enrollment currently

stands at 48%, while the enrollment in higher education is 47%. These numbers show substantial increases from the 2000 levels. India made similar gains in literacy - literacy rates among female youth increased from 49.3% to 81.8% over the 2000-2015 period. An interesting divide occurs when the improvements made in gender equality in education are contrasted to the lack of improvements in actual employment. The most glaring failure in India’s attempt to achieve the Millennium Development Goals is the share of women participating in waged employment in the non-agricultural sector. In the report by the Ministry of Statistics on the MDG results, the Indian government stated that the share of women in waged employment can, at best, be 22.28% in 2015. The original goal was 50%. This is truly a horrific figure that places India low on the list of developed countries in this area. India is surrounded by countries like Saudi Arabia and Somalia at the bot-

of others. This causes many women to stay home and manage the household instead of finding employment elsewhere. Even if women do break this mold and find a job, workplace discrimination leads to higher rates of women dropping out of the economy and going back to the home. The struggle occurs in all aspects of life in India, as violence against women is both increasing and becoming more brutal. According to the National Crime Records Bureau, rape is the fourth most common crime in India, and younger women are increasingly becoming the targets. It is imperative that the international community addresses these issues in India and begins to challenge the problems women face all around the world. In order to successfully incorporate women into the economy, one must begin with female empowerment One way to achieve this is through entrepreneurship. Female-owned businesses are growing at an exciting rate in India with nearly three million micro, small, and medium enterprises with full or partial female ownership, according to a report from the International Finance Corporation. These businesses contribute over 3% of industrial output and employ 8 million people. While the number of small, female-owned firms is growing, it is becoming increasingly difficult for these women to gain access to formal finance. Over 90% of finance requirements in this area are met with informal sources, creating a huge barrier to entry for women trying to start their own businesses. In 2012, women-owned businesses required a large sum of Indian rupees 8.68 trillion ($158 billion), but only formally received 2.31 trillion ($42 billion). There are several reasons that account for this large gap in financing for Indian women entrepreneurs. First, due to the limitations in the Indian education system for women, there is a general lack of knowledge about available finance options and

products, which turns into reluctance to use these services. Additionally, the strong social norms in the country affect access to finance, as well. Land ownership rights outline that even if a woman legally owns an asset, male members in the family will often hold the official title on the deed. As a result, women lack the adequate collateral to secure a loan. There are structural changes to be made in India in order to tap into this market of consumers, workers, and members of the economy. As countries work hard to achieve the Millennium Development Goals, it is important to recognize critical challenges associated with transforming deep-rooted cultural traditions. The historically male dominated Indian government is now finally realizing that the state of the government and economy must evolve to provide equal opportunity for all of its constituents, women in particular. Women are an incredible asset to the economy and add value through a variety of avenues. The Indian economy will not be able to evolve into a dynamic, respected, and sustainable system without the full incorporation of women into every aspect of business and government. As stated above, this must start with the structural issues of poor educational opportunities, workplace discrimination, and poor enforcement of laws countering crimes against women - if leadership can come from respected figures representing all parts of India’s extremely diverse society, perhaps the attitude of the rest of the country will soon change in response. | BA Catherine McAnney is a Junior in the ILR school with minors in Business and Information Science. Originally from Pittsburgh, PA, Catherine will be working in investment banking in New York City this summer.


tom of the list, whereas the Netherlands, China, Brazil, and the United States round out the top. As India’s economy is growing at a significantly larger rate than the Netherlands, for example, it is surprising to see such a disparity in gender issues. As many gender equality issues derive from deep-rooted traditions and hierarchical systems, one can look at the leadership in a country as the place to start tackling the problem. Another factor of the Millennium Development Goals was the involvement of women in the nation’s government. The United Nations set the goal in 2000 that all participating countries would have 50% of their government seats filled by women. According to India’s 2015 progress report, of the 542 members of Parliament, there are only 65 women representatives. This is a measly 12.24%. As the world’s largest democracy, India ranks 115 in the world for proportion of National Parliament seats held by women. Given the economic benefits of instituting gender equality practices, it is important to consider the reasons that lead to the low rates of women participation. There are two main factors that are contributing to these issues: education rates and social norms. As I outlined earlier, education levels have improved among Indian women in the past 15 years, but these women are finding it increasingly difficult to actually find a job. Many of the industries that are growing and adding jobs to the Indian economy include construction and manufacturing, which are sectors women historically do not enter. Additionally, the technical skills needed for positions in these industries are generally not a part of the curriculum for women. The power of social norms in India creates an environment in which women are not encouraged or supported throughout the employment system. An Indian woman is simply expected to sacrifice her happiness for the happiness



Bank Accounts for India’s Poor




o many, newly elected Prime Minister Narendra Modi is seen as the answer to India’s problems. Following a decisive shift away from Congress as a result of rampant corruption and popular perception of dissatisfactory economic growth, Modi of the Bharatiya Janata Party provided the people of India with hope that the new government would inspire positive change. In some respects, Modi has delivered on his promises—GDP growth is expected to rise to 7.5 percent, there have been notable advances in foreign

diplomacy, and increased optimism within the business community. Though still a work in progress, one major component of his reform agenda that is a plan to improve the banking sector by expanding the formal financial system to incorporate all citizens. To put the scope of this initiative into perspective, only 35 percent of nearly 1.3 billion Indian citizens have access to bank accounts, according to estimates by the World Bank. Low income individuals without accounts are left vulnerable to schemes by unregulated moneylenders charging




obscene interest rates and also lack safe methods to invest savings. Modi plans on tackling this issue of financial inclusion by targeting 75 million poor rural and urban families and incentivizing them to open accounts while continuing to subsidize banks. His new initiative has the potential to streamline cash flows by shifting savings from the pockets of India’s poor into savings accounts, thereby accelerating the transition to a more equitable banking system that benefits, rather than harms, the nation’s underprivileged.

Economically disadvantaged individuals with limited funds, but ample entrepreneurial drive, will finally have a method available to obtain the funds necessary for a start-up.

Banks will inevitably shoulder the majority of the fiscal burden associated with the implantation of this new policy, and could potentially suffer massive losses if there are a large number of defaults on loans. State-owned banks have traditionally resisted opening accounts for small savers due to high transaction costs and limited returns; however, this new government mandate will make participation compulsory and will be closely regulated to ensure compliance. Under this plan, banks are compelled to provide credit of 5,000 rupees to every new account holder at an interest rate 24% below

the standard rate. These guidelines will place an immense amount of pressure on banks to meet new consumer demand following a reduction in stringency of requirements that must be met prior to opening a bank account. This economic reform may seem overly ambitious but Modi has managed to gain the support of the financial services industry. Since 2012, both public and private banks have been derailed by bad loans and poor returns on equity. Yet microfinanciers who are drowning in outstanding loans of $5.5 billion from millions of borrowers have still agreed to help open accounts. The reason for this support stems from the fact that the banking system needs to be reenergized. An influx of capital derived from newly created accounts could do just that by capturing the 65 percent of savings currently withheld from the banking system. It is evident that banks can benefit from removing this deadweight loss and Modi has pledged to compensate a minimum of 5,000 rupees a month for full cooperation in hopes that future payoffs will outweigh short term costs. Another attractive aspect of this reform is the positive impact it will have on small business owners who will now qualify for loans, providing them with a more flexible cash flow. This growing contribution could increase job creation by 50 percent and stimulate the economy be encouraging entrepreneurship and innovation. Increased loan availability will also serve to reduce social mobility barriers. Economically disadvantaged individuals with limited funds, but ample entrepreneurial drive, will finally have a method available to obtain the funds necessary for a start-up. . At the launch of his scheme, Modi stated that, “if we want to get rid of poverty, then we have to first get rid of financial untouchability. We have to connect every person with the financial system.” Historically, a lack of accessible funding has been an insur-

mountable barrier for India’s poor, and Modi hopes that his initiative will serve to increase social mobility and enlarge India’s middle class Modi’s plans to utilize both the government and banking system to boost investment capital and empower small business owners by creating a financial environment primed to support entrepreneurship and business growth. A major determinant of Modi’s success is how effectively he incentivizes both the private and public sectors to support his initiative in the long-term; fortunately, for now at least, it appears that Modi has managed to capture both popular opinion and the support of financial institutions. There is some doubt about whether Modi’s plans for governance and economic development can really bring prosperity to 75 million people, let alone 1.3 billion people; however, Modi himself has no doubts that his reform is a step in the right direction for India’s economy. | BA Madison Leonard is a sophomore in Applied Economics and Management from Westport, CT. This summer she will be working for DFS Group in Hong Kong.


Addressing the issue of India’s poor has been a major driver behind many of Modi’s reforms. For years, the government under Congress failed to introduce policies that successfully curbed extreme poverty in India, a country where more than two thirds of the population live on two dollars or less per day. The current method of assisting India’s underprivileged has been to distribute subsidized goods, a highly inefficient practice that has led to corruption and unequal allocation of support. By providing the socioeconomically disadvantaged with bank accounts, Modi’s plan paves the way for direct cash transfers of social welfare benefits, significantly improving distribution efficiency and thereby decreasing the fiscal deficit. This new initiative clearly demonstrates the government’s willingness to take decisive action in order to implement policies that have meaningful impacts.






CHATIB BASRI A discussion of the main challenges facing the developing world today

Interview with the Former Indonesian Minister of Finance





Editor In Chief

CB: Well, my background is, I’m an academic. I’m teaching at the University of Indonesia, but for the last 10 years, I was involved with the government as an advisor to the president. I was the vice chairman of the Indonesian National Economic Committee. It’s quite similar to the council of economic advisors in the US, so I was the chairman of the Indonesian National Economic Committee. Then in 2012, I was appointed as the chairman of the Indonesian investment board, and then I became minister of finance. My background is similar to you, I’m an academic, so I’m teaching at the University of Indonesia. Next August, actually I will be based in Boston, I will take a position at the Harvard Kennedy School. BAJ: Congrats, that’s very exciting. Do you envision a return to public policy in the future? Obviously you’re working now at the university, but do you see a role for yourself in the future, maybe again as minister of finance or maybe in more of an advisory role? CB: It’s a difficult question because if you want to join the government, then the real question that you have to ask is whether you can really contribute, in the sense that you’re probably aware that a country like Indonesia, it’s not unique only for Indonesia, but also for many countries in the world, that if you want to be successful in policy then, you need to get the politician to support you. Because I’m a democrat, I don’t have the political affiliation, I don’t have the political backup, so it’s very important to ensure the government will support

you in the ideas of this economic reform, sort of like maintaining economic stability. So, it really depends on the feel of the government, so I’d certainly be happy to contribute if I see that we have a similar vision, we have a similar view in improving the situation in Indonesia. BAJ: On the topic of support, I know you’ve held positions with the World Bank, and ADB, OECD, among others, so in your time there what has been the biggest obstacle to getting support for Indonesia, as the country you represent? CB: In the past three years, I think Indonesia was a darling of the foreign investment in many multilateral institutions; and, also many businesspeople are really interested in Indonesia, but I think one of the biggest constraints. The [constraint] is needing to understanding the political setting, about the institution, and this is the thing I always said to my colleagues at the IMF and the World Bank, and also the Asia Develpoment Bank. They often come out with a very good policy recommendation, I would say a first rate policy implementation, but can only come out 25 years from now. Why? Because they don’t see the institutional set up, the political setting. So, I believe the approach should be, given the institutional setup, what kind of policy would still be accepted? Let me give an example. If your institutional setup is still in the Jurassic Park, there is no way that you can still give the policy recommendation for Star Wars, because it’s not going to work. So, understanding the institution is very important to ensure that your policy recommendation can be implemented. I think that’s the biggest challenge for many multilateral institutions including the World Bank, ADB, and the IMF, their policy recommendation is always good, but their question is whether it’s

implementable or not. Many people talk about the best practice, but I think in many emerging markets we miss the thing about the best fit, and I think that’s the real challenge. Because you cannot change the institution within one night, you cannot change the behavior of the culture within one night. So in my approach, I’m always very pragmatic, with the given constraint, what kind of policy can still work? BAJ: So following on from that, President Widodo has been very keen since he was reelected in upgrading Indonesia’s infrastructure, especially using money saved from petrol subsidies for infrastructure investment. So, what areas, in your opinion, what areas of infrastructure do you think are most in need of upgrading right now? And what are the most critical areas that should be developed and be in priority? CB: Well I think if we’re talking about infrastructure, then we probably need to focus on the issue of transport and land transport, but I can see the problem here, because the statement from the government said that we don’t have this. All the things are priorities, so if you say that all the things are priorities, it means that you don’t have a priority. That’s really the big issue. I don’t know whether you are aware of it or not, but our logistics costs are probably about 14% of our total production costs. So, if you compare a country like Japan or Singapore, in which their logistic costs are probably less than 5%, it’s very difficult for Indonesia to compete. The essence of modern business will be in the supply chain. So, if you’re talking about supply chain, then you’re talking about logistics, but here is the issue: logistics costs in Indonesia are very expensive. So if you ask me, my focus will be on support for land transport. That will be the priority. I think the government needs to put a


BAJ: We have some questions prepared, and we’d love to jump right in. So, initially to ask a couple of personal questions for our readership, could you just tell us a little bit about your career leading up to your role finance minister?


INTERVIEW priority because we also have a concern with macroeconomic stability. I don’t know whether you are aware of it or not, if we want to build an infrastructure, 70% of these materials may come from imports, so, if you boost the infrastructure too fast, too aggressively, then you will see the problem of the increasing current account deficit, and the market will punish you. So, my approach is you put up priorities, you want to create confidence to create a success story, then you repeat the [not understandable 10:20].


BAJ: So, in addition to that, where do you see funding coming from in developing this infrastructure, and how does Indonesia look to attract private investments, either whether that’s domestic private investments or foreign direct investment from abroad?


CB: Okay, so let me put it this way. Forgive me if I come up with the technical numbers, but since you are a student, I think you are very familiar with using numbers. Every year the new entrants into the labor market in Indonesia is probably around 2.4 million people, just as new entrants in the labor market. 1% economic growth can only absorb 300,000-350,000 people, so it means that if Indonesia wants to reduce or lower that unemployment, we need to grow by about 7%. The thing is 1% economic growth will beat investment over GDP by 5.3%. So if you want to grow by 7%, you need investment over GDP around 37 38%. The problem is our domestic savings now is only about about 33%, so there is no way Indonesia will achieve the 7% growth without being open for foreign investment. So, my point is it should be a combination of this domestic investment, but definitely needs to be supported by foreign investment. That is why, despite all the political gimmicks about nationalism, at the end of the day, the economic

rationality, will drive any government in Indonesia to open the [not understandable 12:30]. BAJ: Following into some more economic questions, you said that GDP slowdown was by design last May when Ben Bernanke made his comments about tapering. Could you just explain that sentiment a bit more? CB: This is really my favorite topic, because my background is an academic. In 2013, we had a challenge come from the decision made by the Fed to end quantitative easing at the time, what we call the “tapering tantrum”. At the same time, Indonesia faced the problem of a huge account deficit. In the second quarter of 2013, the current account deficit was about $10 billion US, or 4% of GDP. If you’re talking about current account deficit, it reflects the excess demand of the economy, because your demand is so strong, it cannot be fulfilled by your domestic production, that is way you have this current account deficit. The ideal solution for it is definitely to improve productivity, to improve the supply side, to improve the domestic production, but it takes time. So, as minister of finance at the time, I had to be very realistic, that’s what I call the given constraint, what kind of policy still works. Because if you ask me about what would be the ideal one, the answer is to improve productivity, improving the investment climate, improving the infrastructure, but it takes time to get there. But at the time, $10 billion US. So, I only had one option left at the time. If I cannot handle the issue on the supply side, I have to slowdown the demand. This is a classic example of the balance of human crisis. So, if you recall the introduction to finance of the macroeconomic textbook 101, you can see if you get a problem with current account deficit, what you need to do is called expendi-

ture reducing, and expenditure switching policy, and that’s exactly what I did. So, we adjusted the fuel price in 2013 by 44% in order to reduce the fiscal deficit, to help the current account deficit. My colleague Governor Martowardojo raised the interest rate by 175 basis points, and then, we let the [sensitivity depreciate?]. So this is the classic case in the textbook of dealing with the account. I was quite surprised it worked, usually the theory doesn’t work. So, within 4 months, we were able to lower the current account deficit from $10 billion to $4 billion. By 2014, if I’m not mistaken, The Economist and the Financial Times came out with an article that [not understandable 15:50] for Indonesia. So, my point is if you handle the supply side in a short period of time, what you need to do is slowdown the growth. So we chose the strategy of stabilizing the growth. BAJ: How do you predict or hedge against moves in places like the United States, where if inflation or if interest rates move in any direction, people jump, and that will obviously lead to divestment in emerging market currencies and divestment from emerging market investments of any kind. So, in your role and any subsequent role as the Minister of Finance, how do you compete or hedge against the risk of a more currency, like the dollar, or investments in the united States taking an upward move? CB: First, I entirely agree with you. Let me put it this way: I do believe that one day the normalization of monetary policy will take place in the US, because 2009 to 2013 was an abnormal world because, at the time, many emerging markets in the world were living under quantitative easing. At the end of the day, we should return to the normal world, the world without QE. The first question is whether

So, if the dollar appreciates, then you will expect that the expected inflation may come down, if the expected inflation may come down, then there is no need for you to raise the interest rate. It is why I doubt it that the Fed will do some normalization of monetary policy mid this year, but they will do it, maybe i don’t know end of this year or maybe next year, so we have to prepare for that. Because once the fed raises the interest rate, and there is a raise of the asset pricing. Once the raise of asset pricing happens in Asia, and not only in Asia, there will be a pressure for the capital outflow. Then strong pressure on the currency depreciation. So what the government

should do in emerging markets and also special emerging markets: the first one is we have to realize that probably the global community will be the title compared to the world under the quantitative easing. If that’s the case then the things that the government needs to do is to lower the dependency on external financing. That is why it is important to lower the fiscal deficit, because if you lower the fiscal deficit, you lower the needs of financing, and you lower your debt. That’s the first one, so the first step that has been undertaken by Joko’s administration is lowering the budget deficit, from 2.3% to 1.9%. The second one you have to reissue your dependency on external financing. So it means that we have to build the capacity due to financing deepening on domestic. I don’t know whether you are aware of it or not but in Indonesia, we do have a so-called “Hajj fund”, not hedge fund. Hajj funds means, you know 90% of the Indonesian population are every year they would like to go to pilgrimage to Mecca for Hajj. So this is very interesting because the quarter of Hajj in Indonesia

is about 1% of the total population, so about 240,000 people, and if they want to go for Hajj they have to pay a down payment of about $3000 US dollars. But they have to wait for about seventeen years before they can return to go for Hajj. So this scheme works like a pension fund because you put money in this year and you can only use it about seventeen years from now. So my projection is until 2020, we are talking about 15 billion US dollars Hajj fund, not hedge fund. And this money can be used as sort of like one of the sources of financing from domestic besides of course the conventional ones like the pension funds and insurance, so basically try to diversify the social finance link. The third part that Indonesia needs to do is continue with the tightening of the monetary policy, unfortunately. So if the fed raises the interest rate means the Banks in Indonesia need to raise the interest rate again so by doing this, I do believe that Indonesia will be more prepared in facing the normalization of monetary policy. | BA


the fact we will do the normalization of monetary policy soon. I may have a different view on this because what we are facing now, many countries in the world doing the so called competitive devaluation - they cut interest rates, they devalue the currency - so it makes the dollar relatively strong to many major currencies in the world, including rupiah.



China’s Challenge in Sustaining Economic Growth




ot too long ago, many economists and politicians believed that the unprecedented growth in China would pose a serious threat to the position of the world’s economic powerhouses. Recent indicators are seriously challenging that assertion, however. The Chinese government recently announced they are changing the 2015 GDP growth estimate to 7%, from 7.4% last year. As concerns about China’s growth loom in the , the actions of the People’s Bank of China (PBOC) highlight structural flaws in the nation’s economy. Despite recent implementation of easy money policies in China, government bureaucracy continues to limit free market forces such that the central bank is now faced with the challenge of addressing these structural concerns while simultaneously balancing the desires of the

Communist party. The central bank has recognized the need for reform and implemented several strategies to maintain the country’s famously explosive growth. Their first move was to lower interest rates and loosen credit restrictions. The State Council cut the benchmark lending and deposit rates in an attempt to guide targeted investments and mitigate a protracted economic slowdown. Additionally, they lifted the maximum amount banks are allowed to give out while tightening their ability to lend using alternative assets. One of the biggest issues contributing to China’s slowing growth is the so called credit binge - total debt now stands at 250% of GDP, a 100% increase since 2008. Corporations and households are burdened with heavy repayments, which works against continued growth in the




industrial and manufacturing sectors. The housing marketing is sufferingas the economy slows and housing prices fall, as many homeowners and businesses are having trouble paying back loans. Since the government controls the banks and has the power to bail them out however, this situation is not likely to escalate into a crisis, but is proving to be a serious drag on growth. The second step for the PBOC was reducing reserve requirements for the country’s commerical banks. Although the cuts were modest, theyset the stage for further loosening of monetary policy in the future. The move was intended to encourage banks to use their capital more efficiently and to combat deflation of the currency. Most importantly, as capital outflows increase and the yuan becomes devalued, they wanted to main-

ment, a crackdown that has recently extended to the country’s financial sector. Mao Xiaofeng, the former president of China Minsheng Bank, subsequently resigned amid an investigation into his association with a former top Chinese Communist Party official suspected of corruption. The crackdown is part of a plan to further liberalize the country’s financial system and allow for a more freely-traded currency, in hopes of the yuan someday becoming the world’s reserve currency. However, central bank policies are at odds with China’s long-term goals for global dominance. If China is serious about becoming the global benchmark, they will have to stabilize the true value of the yuan so it is more reliable for international transactions. A cheaper yuan would make it more difficult to loosen capital controls, which would discourage foreigners from using it in global exchanges.

The corruption crackdown is part of a plan to increase the country’s financial liberalization and allow for a more freely-traded currency, in hopes of the yuan someday becoming the world’s

Additionally, as part of the broader economic goals Xi introduced, China should be focused on establishing a more domestic-demand driven economy. A weaker currency promotes investments in industries with higher exports, encouraging reliance on the international market for demand. For the last few decades, China relied on exports and foreign investment to maintain double-digit levels of GDP growth, but they now have to consider how to maintain a more steady pace by increasing dependence on domestic consumption.

To become more efficient, the Chinese must shift the emphasis from an exportbased to a service-based economy. A stronger yuan increases the purchasing power of Chinese customers, which then forces manufacturers to produce more value-added goods. While the central bank has recently shown a willingness to allow a more free-floating currency, it is in their best interest to allow full appreciation to the dollar. This move could curtail their relative position in global trade, but is necessary for a sustainable economy. The central bank can also encourage market efficiency with easy money policies providing more capital to businesses, similar to actions taken by the United States following the recession in 2008 and the European Union in its current battle against deflation. The credit binge China currently faces is a consequence of the global recession and an indication of a cyclical economic shift, as their liabilities are coming due and the rest of the world is rebuilding after the global recession. While the central bank has made minor improvements by increasing liquidity and controlling credit, greater structural changes are required. The days of double-digit growth in China are finished, but their ability to maintain the position of a global economic powerhouse is dependent on the central bank being more decisive in implementing a more progressive monetary policy. | BA Harrison Tighe is a sophomore studying Applied Economics and Management from East Meadow, NY. This past summer he interned at a private wealth management firm on Long Island.


tain liquidity in the markets to ensure stability. Finally, China has attemped to control the value of the yuan in order to alter the international balance of trade. For years, China relied on an artificially low currency to depress imports and boost their growth statistics, but this policy is inhibiting long-term, sustainable growth, as more countries compete in the Asian market. As Raghuram Rajan, governor of the Reserve Bank of India noted, “If you’re not increasing domestic activity but depreciating your exchange rate, you’re essentially drawing demand from the rest of the world.” In 1994 China made the decision to peg the value of its currency, the yuan, to the US dollar. By controlling the exchange rate, the government ensured the value of the yuan was always lower than its true value. Thus, the PBOC continues to prints new currency daily and buy U.S. securities to offset the demand for China’s exports and maintain the strength of the dollar compared to the yuan. They have since abandoned the peg but still maintain a range that limits the exchange rate’s fluctuation. As the yuan depreciates, there is the potential for extreme volatility in currency markets and a bubble in certain asset classes, since the price of the currency does not represent its true value. Additionally, a depreciated currency would make it more difficult for business to pay off their debts overseas, thus leading to further stagnation. The long term growth potential of the Chinese economy hinges on establishing a more efficient financial system that facilitates healthy growth. Xi Jinping, the nation’s leader since 2013, introduced the term “new normal” to express that the world must tolerate slower growth as China enters a more mature phase of development. So far, Xi has tried to boost their legitimacy by consolidating power in the upper ranks and reducing corruption in the govern-



China’s Next Great Leap




Strengthening the Service Sector




ith one of the highest rates of auto accidents per vehicle in the world, a rapidly aging population, and the growing threat of obesity looming large over the nation, China’s medical industry faces serious challenges; but for the Chinese consumer, the biggest issue is often “who’s paying”? With insurance penetration of only 2.62% and density of just $128 USD in 2010, rates are roughly half of the global average for developing nations. Subsequently, many Chinese are faced with massive copays for even routine medical procedures and will make every possible effort to stay clear of hospitals and doctor’s offices. The result is diminished growth in the healthcare industry, lack of healthcare innovation, and poor service quality.

The state of China’s health insurance

industry is in many ways a symptom of an even bigger national problem: a critically underdeveloped service sector. The development of major service industries like insurance, finance, management consulting, accounting, and logistics has suffered in a country that is still seen by many as the “world’s factory”. It is only as China has begun to transform into what could be considered a consumer society in the last decade that the state of the service sector has garnered serious attention from Beijing. The 12th Five Year Plan details a strategy of proactively opening up key service industries, namely education, healthcare, consulting, logistics, and financial services (1). In the meantime however, Chinese people and businesses will continue to develop under-supported until the quality, availability, and

scope of China’s service sector catches up to those of countries with a comparative level of development.

And as of this year, China still has a long way to go. Since its first period of “opening up” in the late 1970’s, China has transformed itself into an export economy and manufacturing powerhouse, but due to heavy industry regulation, lack of available funds, and poor popular understanding of many types of service industries, growth in the service sector has been painfully slow. Currently, the Chinese service sector makes up only about 46% of China’s total GDP compared to nearly 80% for the United States, 67% for Brazil, and 60% for India (1). In many ways, China’s GDP breakdown makes sense considering the government’s emphasis

Chinese economy.

00 Insurance The insurance industry as it exists in the west is a fairly new phenomenon in China, and its growth since the opening of the People’s Insurance Company of China in 1949 has been inconsistent to say the least (6). The domestic industry was closed in 1959 coinciding with the Great Leap Forward disaster, and China was without any forms of insurance for people or businesses. This situation persisted until the third plenary session of the eleventh meeting of the Chinese Communist Party (CPC) Central Committee in 1978 when the People’s Bank of China gained control over the country’s entire financial system. The insurance industry has grown quickly since then resulting from an increasing number of private firms entering the market after 1985. In 1995, new legislation stipulated that insurance companies are to be divided into life and non-life categories, and that no single company may provide both life and non-life policies. Insurance for limited liability, export credit, and agriculture have since encouraged growth and investment in these key industries. In 2013, total insurance premiums in China totaled an impressive 283.97 billion USD and have been growing at about 11% per year. Today, problems with the Chinese insurance industry no longer have to do with a lack of premiums but instead involve low penetration rates and infamously poor claim settlement services. Since the 1980’s, government investment in the insurance industry has been made on the condition that insurance companies prioritize maximizing premium volume over profitability and adequate capital. As a result, despite massive investment into catastrophe insurance, insurance claims after massive flooding in 1998 covered only about 1% of damage due to poor investment

management over the previous decade. After the more recent 2008 Wenchuan earthquake in Sichuan Province, insurance covered only 0.2% of total losses. As of 2014, the total number of life insurance policies in Mainland China is just 0.1-0.3 per capita, compared to 3.5 in the United States or 7-8 in Hong Kong (5). This fact is hardly surprising, as according to Chinese popular opinion, the insurance industry is notorious for poor service and product misrepresentation. Surveys done by concerned institutions have shown that when asked to rank services based on overall satisfaction, insurance is often placed at the very bottom of the list (5). Even today, stories of sales personnel blatantly concealing important clauses in contracts or companies refusing to fulfill contractual obligations outright are fairly commonplace. The future success of the Chinese insurance industry will depend on its ability to change the prevailing service model and reliably pay claims. Positive changes have already begun following increasing competition among insurance companies. Taking life insurance as an example, the top three domestic players in China had a combined 53.7% market share in 2013. In comparison, other domestic companies captured 40.8%, and foreign firms took only a meager 5.6% (6). These proportions show a market environment quite different from the virtual oligopoly on life insurance that existed throughout much of the 1980s and 1990s. As competition continues to increase in the insurance industry, firms that falsely advertise, break contracts, or refuse to pay claims will begin to feel the consequences of their actions through declining market share. Since the 12th Five Year Plan’s unveiling in 2011, Beijing has officially relaxed its demands for increased insurance premiums in favor of encouraging


on the growth of heavy industry from the founding of the People’s Republic of China in 1949 onwards. Nonetheless a stunted service sector will continue to impede China’s development as a new middle-income nation. China’s GDP breakdown is unique among middle-income developing nations due to its comparatively small service sector, and it is precisely because of this unique GDP breakdown that many experts believe the strength (or weakness) of China’s service sector will dictate the speed and quality of Chinas growth from here on. As China’s GDP growth has slowed to about 7%, gaps in service sector offerings have become difficult for Beijing to ignore. Investment in manufacturing, real estate construction, and travel infrastructure has left the industrial sector of the economy flushed with funds. In some cases, speculative government investment has led to the construction of entire cities in underdeveloped areas complete with sewer infrastructure, apartment complexes, and office buildings, only to see them left abandoned due to lack of demand for new housing in an already saturated market. With Chinese industry operating close to maximum capacity, the expansion and streamlining of service industries will be necessary to maintain Beijing’s GDP growth target of 7.5% for China over the next few years. Certain key industries within the service sector are especially critical to the performance and efficiency of the overall economy. These industries include services that document and improve the way other businesses operate and/ or encourage individual or corporate consumption such as financial services, consulting, data collection, telecommunications, and logistics, among others. The growth and development of these key industries in the next decade will critically impact the future health of the


healthy insurance company investment portfolios and more reasonable claims collection. If the trend for increased competition and government deregulation continues, the forecast for the Chinese insurance industry will look increasingly bright. A healthy insurance industry will increase security and spur growth in a multitude of other industries through increased confidence in asset and investment security, and greatly encourage popular consumption by diminishing the public’s need for extensive emergency saving.

00 Consulting


The Chinese consulting industry took root in the early 1980s in Shenzhen when the Chinese government assembled specialty firms to provide advice and support to the newly created investment and high tech industries (7). Since then, these firms have expanded and adopted a business model that more closely resembles western consulting firms. By the late 1980s, other private firms using western consulting models arose in major Chinese cities, and by the early 1990s


foreign firms began to enter the market as well. Even today, Chinese CEOs, business managers, and the general public often lack understanding of what consulting firms actually do and the value they add to businesses. Many Chinese companies never think to hire consultants, perceiving the costs associated with hiring a consulting firm too prohibitive to seriously consider. These facts are acutely illustrated by the comparatively small size of the Chinese consulting industry. The Chinese management consulting industry is worth about USD 14.7 billion compared to about USD 180 billion in the USA (8). Despite a projected annual growth rate of over 10%, the industry is still in its formative stages of development. Today, the Chinese consulting industry suffers from problems common to most other newly developing industries, namely a lack of penetration and poor public support and understanding. The 1,500 or so domestic management consulting firms that have emerged over the years take in a disproportionally small share of industry

revenue. They tend to lose most of the country’s most profitable clients to the few international consulting firms that have adapted themselves to business in China including McKinsey and Company, Roland Berger, and Accenture (9). Most companies in China that seek out consulting services are mature firms with plenty of cash on hand, international companies, or massive state owned enterprises. Due to the small size and relative immaturity of the domestic consulting industry, Chinese companies looking to hire consultants tend to be extremely brand-sensitive, eschewing Chinese consulting firms for big name, big price tag internationals. Despite the high regard the Chinese seem to place on established foreign consulting firms over domestic ones, some internationals have been much more successful than others. Business in China is done mostly through personal connections, or guanxi (关系). With such emphasis placed on who you know, it is not surprising that the concept of hiring an outside firm to help guide business development is somewhat counterintui-

firms rely mostly on managers to synthesize and report on research done by lower level analysts. The resulting deliverables usually lack the depth and insight of those compiled by high-end foreign firms, and do not strongly encourage repeat business. Only by successfully communicating their value to Chinese businesses and then reliably delivering the value they promise to clients can domestic consulting firms hope to turn management consulting in China into a viable, mainstream service. A strong consulting industry will give Chinese businesses the boost in productivity needed to sustain the level of quality economic growth sought by Beijing. In 2014, perhaps realizing the huge gap in business that exists between domestic and foreign consulting firms, Beijing decreed that all state owned enterprises cease doing business with foreign consulting firms in the interest of “national security” (10). This move will no doubt provide a sizable boost to the domestic management consulting industry, but whether or not domestic firms can fill the shoes of the world renowned foreign firms they will be replacing will dictate industry growth in the next decade.

00 Moving Forward The health of key service sector industries like insurance, consulting, and logistics have a direct effect on the performance of other industries and have a reverberating impact on overall GDP. Though Beijing has only just begun to articulate possible solutions to the poor development of many service industries, it has not ignored a few select service industries that have developed more favorably on their own in the past few decades. In the 12th Five Year Plan, Beijing deemed China to have a competitive advantage in service industries like tour-

ism, construction, and transportation (1). Stunning scenery, a massive labor force, and comparatively expansive and well designed highway and rail systems have made government investment into these industries effective in promoting their growth and modernization. Successfully guiding the future development of key service industries in which China does not have a comparative advantage will prove a far greater challenge for Beijing and the Chinese Communist Party in the years to come. In a new Chinese era of increasing nationalism and shrinking foreign influence; an era without Google, Facebook, and certain international dating websites, as well as shrinking visitation periods for foreigners with all types of visas, nurturing a healthy, robust service sector may require larger adjustments than Beijing wishes to admit. Apathy towards service quality, low individual accountability, and comparatively low wages have become ingrained in much of China’s business culture, effectively squelching much of the impetus for improvement and innovation on the front lines of business. As long as Chinese managers remain complacent with ineffective and outdated business models, as Chinese college-educated workers struggle to afford small luxuries common in the developed world, and as Chinese customers remain ignorant of how excellent the services they rely on could be, positive change will be slow in coming. | BA Steven Salenik is a Sophomore in the College of Arts and Sciences. He is fluent in Mandarin Chinese and spent more than a year in Beijing helping several Chinese companies better market themselves internationally. This summer he will be interning with a major management consulting firm in Shanghai.


tive to many Chinese businesspeople. To surmount this cultural aversion towards hiring consulting firms, when expanding into China in the 1990s, firms like McKinsey from America and Roland Berger from Germany sought to endow their valuable international brand with a uniquely Chinese image. By hiring mostly local employees from top universities at extremely competitive salaries and training local managers who understand the way business is done in China, these firms managed to acquire top clients, including many of China’s largest state owned enterprises (10). One of the largest challenges for domestic firms to overcome in communicating their value to potential clients is poor branding. Most domestic Chinese consulting firms are not nearly as selective during the hiring process as foreign firms, and most of them pay wages about on par with other types of urban, whitecollar work. They rely mostly on guanxi connections to find clients, and do little in the way of marketing. Their websites tend to be notoriously outdated, and often do not clearly communicate a tenable value proposal. The result has been firm entrenchment of foreign brands as industry leaders, and great difficulties for domestic firms in communicating their value to small and medium sized companies. Another pressing issue facing domestic Chinese consulting firms is low quality of service. The corporate structure of most of these domestic firms (and Chinese firms in general) is very top heavy, with lower-level analysts lacking industry-specific training. Without a strong company culture to follow, low level employees often find themselves feeling somewhat expendable, lowering initiative and productivity. Lacking the teamwork skills and sophisticated group brainstorming techniques of mature, international consulting firms, domestic



The Domino Effect

Central Asian Nations Struggle to Withstand Russia’s Economic Collapse




he consequences of the recent ruble collapse have been farreaching, severely impacting the Central Asian countries reliant on the stability of the Russian currency and economy. Plummeting crude oil prices, international sanctions and economic mismanagement are largely responsible for the sharp descent in ruble value, a trend that began in the second half of 2014 and has continued into 2015. While Russia struggles to avoid further drops in its currency, many nations to the south of Russia’s border are still roiling from the shocks dealt to their economies by Russia’s decline. The ruble’s dismal prospects could devastate Central Asia’s economies, many of which depend on Russia for trade, military support and remittance income. Tajikistan and Kyrgyzstan have presumably suffered the harshest economic backlash following Russia’s collapse as a result of decimated remittance values. Approximately 25 percent of both countries’ GDP is comprised of remittances sent exclusively from Russia. Tajikistan, a small, destitute country, lacks the infrastructure and political framework necessary for a self-reliant economy. According to the World Bank, with nearly half of Tajikistan’s GDP earned by migrants working abroad, it is the world’s most remittance dependent nation. Beyond its reliance on Russian remittances, the former Soviet state depends heavily on Russian assistance to withstand security threats, such as Afghani drug smugglers and the growing influence of extremist

groups. In many respects, Kyrgyzstan is fairly similar to Tajikistan, its southern neighbor. Remittances from Kyrgyzstani migrants, predominantly from Russia, along with a few other sources of foreign aid, provide the funds necessary to feed and clothe the 5.6 million people living in the mountainous region. In the face of currency volatility, expected growth has been adjusted down several times. In 2013, the country thrived with a 10.9 percent growth rate while the International Monetary Fund estimates a growth rate of only 1.7 percent in 2015. Although Uzbekistan, Moldova, Armenia, Ukraine, Georgia and Azerbaijan are also somewhat dependent on remittances from Russia, funds sent home by migrant workers to the aforementioned countries account for less than 10 percent of GDP. Nations less reliant on remittances were better able to withstand Russia’s acute economic downturn but still saw drops in currency values and increases in unemployment rates.

Russia’s ruble troubles dragged local currencies down while inflation soared to double-digits, even as much-needed revenue from exports to Russia declined.

In the last year, Central Asian countries watched helplessly as their economic situations continued to deterio-



Associate Editor

rate; Russia’s ruble troubles dragged local currencies down while inflation soared to double-digits, even as much-needed revenue from exports to Russia declined. Armenia’s currency fell 12 percent against the dollar in 2014, Kyrgyzstan’s som depreciated by nearly 20 percent, and the Turkmenistan manta was devalued by 19 percent, to name just a few of the region’s struggling currencies. The ruble’s massive 50 percent drop in value over the last year created yet another issue for its neighbors—exports to Russia are no longer competitively priced. Uzbekistan’s car exports to Russia were 35 percent lower than in 2014 while Tajikistanis and Kyrgyzstanis attempting to export agricultural products, such as dried fruit and nuts, found that profit margins have all but evaporated. Russia’s economic retrenchment poses severe issues for Tajikistan, Kyrgyzstan and other countries heavily reliant on remittances sent home by nationals working abroad in Russia. With the fall of the ruble and stagnation of the Russian service and construction industries, demand for migrant workers experienced rapid decline. Not only are salaries worth a mere fraction of what they once were, many migrants unable to find work are left with little choice but to return home. The prospect of hundreds of thousands of unemployed men flooding into their home countries will put severe pressure on the graft-riddled Central Asian governments that depend on migrant workers’ income to preserve stability and ease social pressures in the absence of ample

ment. Near the end of 2014, the Chinese government committed six billion in foreign direct investment to Tajikistan over the course of the next three years, the equivalent of nearly two thirds of the struggling nation’s GDP in 2013. This is just one part of China’s larger push to enter Central Asia as a major player, a push that is welcomed with open arms by the countries that are in dire need of funds. While the financially strained Central Asian governments are eager to accept Chinese investment, Russia is not quite as enthusiastic about the shift in power and influence away from Moscow, towards Beijing. Beijing has already replaced Moscow as the region’s most substantive trading partner and has managed to obtain a chokehold on Central Asian gas by way of the ChinaCentral Asia pipeline matrix. Beijing invested heavily in the gas pipeline which extends from the Turkmen-Uzbek border to China’s Xinjiang province and serves as a basis for inter-governmental agreements with Tajikistan, Kazakhstan, Uzbekistan and Kyrgyzstan. Aside from the evident gains China, a massive importer of gas, derives from relationships with Central Asian countries, Beijing’s deepening involvement in the area is driven by more than just geopolitical influence and energy security; by investing and establishing relations with Central Asian leaders, Beijing believes that it may prevent civil unrest in Central Asia, and by extension, its western province, Xinjiang. The Chinese government has long been concerned about civil turbulence in Xinjiang amid growing Uighur separatism. Political instability in Central Asia would drastically increase the likelihood of unrest in Xinjiang, an intolerable development from the perspective of the Chinese government. Regardless of the primary motivation behind Beijing’s substantial investment and political involvement in the area, Central Asian

nations are the beneficiaries, at least in the short term.

China views Russia’s financial instability as an opportunity to increase geopolitical influence in Central Asia and gain a stake in the area’s natural resources through strategic investment.

Putin’s eagerness to further tie the region together is driven in part by worries that China’s increasing influence will surpass that of Russia, and appropriate Moscow’s sphere of influence as its own. The economies of Central Asian nations are tightly intertwined, with many former Soviet republics dependent on Russian economic and military support. The degree of reliance, along with the risk associated with it, became blatantly apparent when the collapse of Russia’s economy instigated a domino effect, quickly leading to the collapse of neighboring Central Asian economies, one after another. Despite the clear risks associated with such extreme levels of entanglement, at Russia’s behest, former Soviet states are agreeing to join the Eurasian Economic Union (EEU), effectively binding themselves into economic matrimony with union members. Although met with little fanfare, the (EEU) was officially created on January 1, 2015 by the three founding countries, Russia, Belarus and Kazakhstan. The union, designed to deepen economic ties between member states, has been met with tension and failed trade negotiations rather than the neo-imperial success Putin anticipated. It remains to be seen whether Russia will be successful in growing the union by convincing additional countries to become members. The nations of Central Asia are faced with many challenging decisions which will dictate their economic and political


domestic job opportunities. The last time Russia’s economy suffered so acutely following the 2009 financial crisis, remittance income was slashed by 28 percent and Kyrgyzstani men returned home in droves. Destitute families, unemployed men and a weak central government set the scene for the brutal upheaval of Kurmanbek Bakiyev’s regime early in 2010. History may well repeat itself; Kyrgyzstan has already witnessed protests in response to hikes in electricity rates this winter and rising inflation could easily prompt additional bouts of domestic unrest. Revolutions and uprisings aside, external menaces in the form of terrorist groups threaten to jeopardize the stability of economically insecure Central Asian nations. The Islamic State (IS) extremist group, in particular, has reportedly been gaining influence in Central Asia. Analysts estimate that over 200 Tajik nationals have joined terror groups and are fighting in Syria. Ikhom Kuliyev, one such analyst, stated that “Central Asian states are at the center of an ‘arc of instability’ through which an attack of global jihad is being launched.” Tajikistan, Kyrgyzstan and Uzbekistan are especially vulnerable to infiltration by extremist groups due to their proximity to several of the terrorist hotbeds in Afghanistan, Syria and Iraq. Central Asian governments have been desperately searching for funds to compensate for the economic downturn in an effort to both dodge a coup and reduce the likelihood that desperate, unemployed men will be drawn to enlist in terrorist organizations. To partially offset the loss of Russian remittances, many Central Asian countries are courting investors, the Chinese government in particular. China views Russia’s financial instability as an opportunity to increase geopolitical influence in Central Asia and gain a stake in the area’s natural resources through strategic invest-




stability in the foreseeable future. Assuming Russia makes a full recovery over the course of several years, the former Soviet republics may elect to return to the former status quo. Namely, the Russian economy will serve as the foundation on which former Soviet republics will construct their economic frameworks, and when the foundation cracks, their economic frameworks will crumble. Prior to Russia’s economic struggles, the Central Asian countries’ utter dependence on remittances gave their former imperial master great influence. Russia would not hesitate to issue threats of introducing work visas for Central Asians during negotiations for a new military base abroad, or even just as a method to play up nationalism domestically. Alternatively, the Central Asian countries may elect to turn away from Russia in favor of a pivot towards China in order to take full advantage of Chinese investment and political relationships as a method to grow their

economies. This option entails risks of its own. China’s eagerness to acquire ownership rights in natural resources, various infrastructure developments, and even influence over political leaders could leave supposedly sovereign nations in the uncomfortable positon of becoming de facto, if not de jure, Chinese territories. Clearly, neither option is ideal—a mix of the two extremes, combined in a delicate balancing act, would be optimal. Though Central Asian nations are not currently in an enviable position, the economic downturn does provide them with the unique opportunity to realize long-term economic and political gains. Specifically, there is ample opportunity to subtly play two regional powers against each other to improve standing during international negotiations and establish methods to isolate themselves from future weaknesses in Russian and Chinese markets. Although easier said than done, it is essential that Central Asian govern-

ments utilize incoming FDI to develop infrastructure and create domestic job opportunities, as it is unsustainable to continue to look to the Chinese for funding or to Russia for remittance income. Without strengthening domestic opportunity and stability, Central Asian nations will continue to be at the mercy of other governments. The only way forward for these countries is to develop their own economic capability, curb corruption and take advantage of FDI in a way that does not necessitate granting undue influence to foreign governments. | BA Nicole is a sophomore double majoring in Economics and China & Asia-Pacific Studies. In addition to writing for the Business Asia Journal, she is involved in the Cornell Consulting Club, Society for Women in Business and Cornell Undergraduate Asia Business Society. This summer, she will be working as a Deloitte Human Capital Consulting intern.



he year of Goat, which symbolizes prudence and circumspection, has indeed brought with it the sense of cautiousness even among the most optimistic investors. The fragile property market, which shows no sign of revival after multiple lending rate cuts, has given rise to widespread fear that the real estate bubble is bursting and bringing down the Chinese economy with it. The chairman of Dalian Wanda Mr. Wang went as far as to conjecture that the growth period of real estate has already ended. And 8 out of the 10 economists surveyed by CNNMoney named real estate sector as the area posing the biggest risk to China’s slowing economy. Unarguably, there are worrying signs in the Chinese real estate market, but downward trend is unlikely to continue in the long run. Will the Chinese housing bubble burst because of overbuilding? What does the new norm of slow growth mean for the Chinese property market? Will the government ever loosen its grip on the property market? The vivid depiction of ghost towns in second-tier cities points to an easy-credit fueled housing boom that is too reminiscent of the US property market in 2006; the failure to hit its GDP growth target seems to suggest waning business activities, and with it, the demand for commercial real estate; the government’s unexplained freeze on property sales, which forced Kaisa to default on its foreign loans, reminds inves-

tors too well of the business uncertainty of investing in China. While these concerns are not unfounded, it would be too extreme to suggest that the housing bubble will burst and in turn brings down the entire commercial real estate market. Despite the slow growth in the economy, the tight control from the government and the credit-fuelled overbuilding, there are positive signs which warrant a second thought among real estate investors who are shying away from the Chinese real estate market at this moment. Even though China’s growth came in at 7.4% last year—the slowest rate since 1990, it is still the fastest growing economy across the Asia Pacific. As shown in the graph, despite missing its growth target, China still tops the list of economic growth in the region. Additionally, with an economy of $17.6tn, this relatively high growth rate would translate into sizable real growth in absolute terms. More importantly, it is simply unrealistic to expect that the Chinese economy would expand at high single digit rate forever and a slower growth might well be the price tag of the necessary transitioning from an investmentdriven economy to one that is led by domestic consumption. According to the Economist, consumption drove 51.2% of growth last year, up 3 percentage points from a year earlier and at the same time, Services sector grew to account for 48.2% of the




growth, up 1.3% from 2013 as the performance of the Services sector is closely correlated with domestic consumption. In the meantime, the unemployment rate fell from 4.6% in 2013 to 4.1% in 2014. In turn, higher employment coupled with greater reliance on the service sector would translate into demand for space, which bodes well for the commercial real estate market. More importantly, according to Forbes, the per capita disposable income has increased by 10.9%, which would serve as the driving force behind the continual transformation of the economic base. Hence, the shift towards a consumption-driven and Services-based economy will be sustained in the long run. Besides the slower economic growth, some might argue that the easy credit policies after the global financial crisis have led to speculative overbuilding and as a result the housing bubble is on the verge of bursting. While it is true that speculative building has turned a vast number of second- and third-tier cities into ghost towns, the bubble is unlikely to burst as the government will not let housing prices head into a free fall. In fact, in early 2014, the Chinese housing bubble burst made into international headlines and stayed in the spotlight ever since. The truth is, the ‘pop’ will never come because it is in the economic interest of the Chinese government to do


Why the Chinese Real Estate Market is Unlikely to Nosedive



whatever it takes to keep the housing market afloat. First, unlike the US where is the real estate market is mostly driven by market demand and supply dynamic, the local governments run the show in China. Without property taxes, the local government relies heavily on land sale to fund government spending. Hence, booming real estate market plays an integral role on the local government level. Second, on the national level, Beijing is well aware that a healthy housing market is the cornerstone of social stability since agrarian discontent was the vital force that toppled the landlord and brought communist into power in the early 1930s. Specifically, last year the government loosened its restrictions on down payments of second homebuyers and cut the interest rate multiple times since November. It is arguably unsustainable


to put the property under life support, but this would buy the government time to steer the economy away from its past heavy reliance on investments. While the government’s tight monitoring on the property market stops the bubble from bursting, at times it also makes real estate investment less transparent. Since the government is able to disrupt business flow at companies such as Kaisa unexplained, it is understandable for investors to be wary of the uncertainty of the government interference. And if we were to take a step back, this current turbulence and temporary market distress may well give opportunistic investors the entry point that they have been longing for. Hence, investors should remain cautious of the real estate market in the year of Goat, but they should also recognize

that the positive fundamentals of the Chinese economy warrant a closer look at the prospect of real estate investment in China. | BA Yiwei is a junior in the School of Hotel Administration with a concentration in Finance, Accounting & Real Estate and a minor in Real Estate. She is orginially from China and went to High School in Singapore. On campus, she is involved with the Mutual Investment Club of Cornell, Business Asia Journal and Cornell Undergraduate Asian Business Society. She is also a teaching assistant for several courses at the hotel school. Fun facts about Yiwei: she likes reading, especially books with a light touch of sarcasm, good food and running in the city and on campus

The BAJ Team

President Advai Pathak Editor-in-Chief Brandon Greer Director of Design Arthur Teng Director of Speaker Series Sanjeev Dhara

EDITORIAL Benjamin Zehr Catherine McAnney Harrison Tighe Jeffrey Fung Madison Leonard Megan Lee Nicole Schmit Sanjeev Dhara Gwendolyn Umbach Yiwei Chen

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Business Asia Journal, an independent student organization located at Cornell University, 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.

BAJ Spring 2015