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THE WORLD THIS WEEK Mario Monti, a former European commissioner, was sworn in as Italy's prime minister following

Silvio Berlusconi's resignation. Mr Monti's technocratic cabinet contains bankers, ambassadors and bureaucrats but no politicians. Mr Monti reserved the finance portfolio for himself and said he intends to serve a full term, until 2013. Greece's new government of national unity, headed by Lucas Papademos, another technocrat, won a parliamentary vote of confidence. The government enjoys the backing of Greece's main parties, but is likely to serve only until an election in February. At the annual congress of her Christian Democratic Union, Germany's Angela Merkel said that Europe was facing its worst crisis since the second world war. Although she said that "political union" was necessary to save the euro, she also ruled out the use of Eurobonds. The Arab League voted to suspend Syria's membership and apply sanctions, after President Bashar Assad's regime failed to implement a plan to end the violence sweeping the country. Turkey joined the calls for action and King Abdullah of Jordan said Mr Assad should go. The league gave Syria three days "to stop the bloody repression". Seventeen members of Iran's Revolutionary Guard Corps died in a blast at an arms depot near Tehran, the capital. The dead included Hassan Tehrani Moghaddam, an architect of Iran's missile programme. Officials said the explosion was an accident. Fighting between rival Libyan militias near the city of Zawiya left at least ten people dead. Leaders of the ruling National Transitional Council said the dispute had been resolved, but the episode raised concerns about the stability of Libya. In Canberra Barack Obama announced that America would begin stationing marines near Darwin, on Australia's north shore, strengthening America's presence around the disputed South China Sea. The deployment is expected to reach 2,500 men over the coming years. Mr Obama told the Australian Parliament that America was ready to play "a larger and long-term role" in shaping the region, which will include providing humanitarian relief. The floodwaters that have surrounded central Bangkok for the past few weeks started to recede. Three months of flooding in Thailand have killed more than 500 people. It will take several more months for Thailand's many tech factories to recover capacity. Authorities in China issued new directives aimed at controlling the news media, in line with a broader effort to curtail the influence of radically popular Twitter-like microblogs. Journalists are to be banned from passing along rumour or information that has been gleaned from the microblogs, unless they have verified it in other ways. "Critical" reporting of any kind will now require at least two sources. Protesters from the Occupy Wall Street movement tried to regroup in lower Manhattan, after police cleared their main camp at Zuccotti Park in an early-morning operation. The protesters moved into the park in September. Authorities in other cities around the world are also taking action to dismantle anti-capitalist sites that have sprung up in their jurisdictions, including in London outside St Paul's Cathedral. America's total outstanding public debt rose above $15 trillion for the first time. The yields on American Treasury bonds remain at close to record lows. Credit-rating agencies criticised formal proposals from the European Commission that would require companies to rotate rating agencies and also give regulators the power to approve the methodology behind the agencies'

analyses. But the commission backed away from recommending an outright ban on providing credit ratings for countries seeking a bail-out. The Bank of England indicated that it would undertake more quantitative-easing measures over the coming months, as it reported that the prospects for the British economy have "worsened". Britain's unemployment rate rose to 8.3%, the highest since 1996. China's regulators announced an antitrust investigation into whether China Telecom and China Unicom, stateowned giants that dominate the communications sector, are abusing their position in the market for broadband internet connections. The move surprised many, given the government's previous tolerance of anti-competitive practices by favoured local firms. Sceptics are unlikely to be won over unless the tough talk leads to tough action to curb abuses. Boeing sealed its biggest single order for commercial aircraft to date when Emirates, an airline based in Dubai, announced that it would buy 50 777 jets with a listed dollar value of $18 billion, with an option to buy another 20. Google launched its own online music store, in an ambitious attempt to challenge Apple's iTunes. Along with more established players in the market, Google is basing its service in the cloud. Warren Buffett revealed that his Berkshire Hathaway investment company has been buying shares in IBM since March, the value of which amounts to a stake of around 5.5% in the information-technology company. It is the first time that Mr Buffett has taken such a big bet on a stock in the tech industry, on which he has been famously lukewarm. He said he made an exception for IBM as he is impressed with its long-term strategy and because IBM treats its share price "with reverence".

Vietnam, wracked by economic woes, plans new reforms By Tran Le Thuy and John Ruwitch, Reuters 13 November 2011 After four years of economic instability, Vietnam is embarking on reforms some believe could be its most significant since steps started in 1986 that ended stifling central planning and, eventually, turned the war-torn country into a tiger. However, there's substantial skepticism that policymakers can fend off resistance to major change from state-owned companies and other interest groups, including private conglomerates, whose influence has surged. Months of heated discussion have produced a consensus that Vietnam, wracked by Asia's worst inflation and other woes, needs to change tack, as it did 25 years ago when the "Doi Moi" (renovation) policy took flight. "It's not just talk anymore. This is serious business now," Vice Minister of Planning and Investment Dang Huy Dong told Reuters. "We've gone through careful analysis, painful analysis, to see where the shortcomings are and areas for improvement." It's far from certain, though, that the government will pursue reforms that are broad enough and deep enough to fix debt-ridden state banks and rein in inefficient state enterprises (SOEs) such as Vietnam Shipbuilding Industry Group, or Vinashin, which embarrassingly defaulted last year. "The Vietnamese economy, once again, is at a crossroads," said Le Dang Doanh, a reform-minded economist who has advised current and former leaders. And this time, in Doanh's view, moving decisively down a reform path is "more difficult because it touches powerful interest groups that are operating behind the scenes." At a crossroads in the mid-1980s when the economy was moribund, liberalisation that unleashed individuals and industries made Vietnam into a rising star. But in recent years, the star has burned out, and the country has evolved from one of Asia's most promising economies into one of the most unstable. The government hopes to shift its economic growth model away from reliance on cheap labor and capital, and has identified three areas of focus -- banks, public spending and SOEs -- but it is not expected to unveil a single "big bang" reform.

Proponents of major change hope it might unfold like Doi Moi did, as a process; Doi Moi was launched in 1986 but did not accelerate until the early 1990s, and over time Vietnam transformed from a post-war basket case to a budding regional powerhouse. There are optimists who believe Vietnam will make substantive change that undercuts what the World Bank calls "recurring and increasingly severe" economic instability. World Bank economist Deepak Mishra, who describes Vietnam as in "unchartered territory," is encouraged by how much officials are talking about change. "Nobody has seen anything like this in the recent past," Mishra said. "My hunch is we're not going to see massive clarity about the future course of action immediately, but after five or 10 years when we look back we may say, yeah, there was a real change that started in 2011." Economists agree about what the state should do, said Pham Chi Lan, a respected economist who has been invited by top leaders in recent weeks to discuss the country's woes. But then there's the big question: how far will the leadership go in implementing an agenda of major structural change? "If the leaders accept this," said Lan, "they will be leading this country to a second Doi Moi." There is little dispute about the challenges. Inflation has surged well above 20 percent twice in the past three years while foreign exchange reserves have slumped and the Vietnamese dong has lost more than 20 percent against the dollar. Vietnam's external debt has risen above its peers to more than 40 percent of gross domestic product (GDP) while credit-to-GDP has soared to 125 percent. Foreign direct investment pledges have slumped, dropping 22 percent this year so far from the same part in 2010. Last year, all three major ratings agencies -Fitch, Moody's and Standard & Poor's -- downgraded the country of nearly 90 million people. Experts say the root of Vietnam's boom-to-bust dilemma lies in excessive investment in inefficient state-owned corporations, which suck up capital and have diversified wildly from their core competencies into sectors such as property and stocks -- both of which have faltered. Growth since Doi Moi has been based on increasing capital investment and labor, but that is increasingly less able to drive the economy, said Nguyen Dinh Cung, deputy head of the government's top think tank, in a September report considered a cornerstone of the government's reform discussions. "Our economy is no longer able to maintain a high growth rate like the years before," wrote Cung of the Central Institute for Economic Management (CIEM). In July, a once-in-five-years leadership reshuffle appears to have cleared the way for reform. "We have to reform," said Cao Si Kiem, a member of the National Assembly's economic committee and a former central bank governor. "If not, it would be dangerous. The economy would be stuck behind and the faith of the people would decrease." Kiem said the Politburo, the 14-man group at the pinnacle of political power, has concluded reform is needed to "restore people's faith." Party leader Nguyen Phu Trong gave the strongest and most public signal of top-level support for it in an October 10 speech reciting a litany of problems. Trong blamed global conditions as well as "shortcomings in the economy, an ineffective growth model and an outdated economic mechanism." "We must restructure the economy along with renovating the growth model," he said, laying out the three priorities: public investment, finance and state-owned enterprises. Tran Dinh Thien, director of the Vietnam Economic Research Institute at the state-run Vietnam Academy of Social Sciences, said that speech amounted to "an announcement of action, that the whole party has agreed on restructuring of the economy." Talk on reform has advanced since the summer. Some proposals on the table have the potential to fundamentally change the relationship between government and business and reshape the economy. Government ministries have been told how to restructure themselves, and SOEs have been told to shrink holdings in non-core businesses. In September, the Finance Ministry proposed that the government compel state-owned firms to return 50 percent of their profits to the state and slash investments in non-core fields including banking, insurance and securities to 10 percent from up to 30 percent. Prime Minister Nguyen Tan Dung asked the Ministry of Planning and Investment to draft a plan to separate ownership and management at the biggest SOEs, such as oil and gas group Petrovietnam. Lan, the economist invited to talk with leaders, said "It's a strong plan in which state-owned companies have to follow OECD

standards of corporate governance. It's also modeled on China in having clear criteria of productivity and technology advancement, instead of investment and revenue." Officials have signaled that the long-clogged pipeline of initial public offerings will reopen, and chunks of major SOEs not previously on the block will be sold, although timing is unclear given poor market conditions. The government is also considering selling SOEs in industries where private and foreign-invested businesses are performing well, including seafood, textiles and coffee while retaining ownership in transport, oil and gas, and power. On October 24, the prime minister ordered creation of an advisory committee for monetary and fiscal policy. Also, the State Bank of Vietnam is working to avert a banking crisis by orchestrating consolidation of the crowded sector. Prime Minister Dung has asked the SBV to draft a plan for restructuring the commercial banking system. Whether the initiatives bear fruit may hinge on how united the leadership is and how much interest groups such as SOEs drag their feet. Trong, the party leader, is a clear supporter of action. Sources say President Truong Tan Sang, another party heavyweight, has also been talking up a new reform agenda. Prime Minister Dung has met domestic and international economists. Attendees say the meetings have been unusually critical and candid, and that Dung demonstrates understanding of the problems. Sources say one close Dung advisor now is Truong Dinh Tuyen, a reform-minded former trade minister nicknamed Mr. WTO for his role negotiating Vietnam's entry into the World Trade Organization in 2006. Some critics, however, remain unconvinced about the convictions of Dung, whose economic management during his first five-year term helped create the current conundrum. Analysts including Vietnam watcher Carl Thayer of the University of New South Wales say Dung emerged from the reshuffle as the most influential political figure. Doanh, the economist who has given advice, said the reform plan that party leader Trong outlined took a "harder and more straightforward look" at shortcomings than a government report to the Central Committee -- hinting at a possible wrangle between the government and party. The government's report was "very blurred" on SOE reform, a critical piece of any true reform agenda, Doanh said. The state sector has been shrinking and now accounts for about 40 percent of the economy, but it consumes an outsized piece of the investment pie. As an indicator of where things could go, the report by Cung of CIEM proposed a complete cut-off of SOEs from special privileges, forcing them to live or die by the market. "If they make losses and default, they should go bankrupt like other businesses. The State should provide no guarantees or debt payments," wrote Cung. But talk is cheap, says Doanh. He and other analysts worry that conditions may not be "painful" enough for leaders to take truly bold steps. "Sometimes you hear strong rhetoric, but what we need is action, not rhetoric," said the former official. Entrenched interests may already be slowing things down. The Ministry of Planning and Investment said in late October it had yet to complete its SOE reform proposal because it could not get data from the companies. SOEs are also fighting the finance ministry's plan to restrict their investment in banking, insurance and securities companies, state media have reported. "The difficulty is that the reforms directly impact the interests of some forces that the governing mechanism relies on," said Thien of the Vietnam Economic Research Institute, who's on a council advising the government on financial policy. "But not restructuring the economy is not an option."

Dodging Vietnam's economic woes South China Morning Post, 19 November 2011 Lee Wang-chung, general director of a Taiwanese family-owned motor vehicle parts plant in Vietnam, has weathered one thing after another since the fast-growing economy started to crack in 2007. The animated, coffee-chugging 41-year-old former salesman started the factory in 2003. His 20,000-square-metre factory employs more than 300 workers. Lee talked about his experience in steering his company around Vietnam's obstacles, and what lessons that holds for other foreign investors thinking of setting up shop there. Taking the obstacles one by one, how do you cope with inflation? Inflation is nasty. The government can't get it under control. Recently oil prices have gone down, but material prices haven't dropped with them, so what's going on there? We buy petrochemical products in Vietnam, like some basic cutting materials, but consumption

of those is lower in Vietnam, making unit prices higher. Our strategy is to export more, getting US dollars for exchange into dong [the local currency]. Salaries might go up 5 per cent, for example, and the dong drops 5 per cent. With US dollars we can get more. What about the threat of a weaker dong? We faced the problem three years ago. Our exports then were 30 per cent [of sales] and domestic 70. Then we increased exports and those have gone up to 70 per cent. We can use US dollars to exchange for dong and make our purchases. It's not a big issue now, but every year the currency falls again. How did you get so many orders outside Vietnam? Our main customers are Japanese. They prefer to co-operate with good suppliers, so we just play our role well, and then we can have a steady relationship. What about labour problems? In April we had a strike. The strike had no relation to salaries since we ultimately did not give anyone a raise, just an extra work uniform a year. There were a few people who spread the word because they were in a bad mood one day. The machinists also refused to work extra hours that day. I went down personally to handle things. Then we held a series of meetings with the police and the unions. The most recent strike before that was five years ago. Is there a secret to finding qualified workers? The biggest problem in Vietnam is lack of talent, so we've started to develop automation. From last year we brought in a lot of robots to replace people or to cover multiple tasks. The other thing is to train people to take on multiple functions. That overcomes the lack of talent. But training takes time because people's job stability and job loyalty are at low levels. So, automation is the simplest way. Before, we had one person in charge of a machine, now it's two people for six. In the past two years we've spent US$5 million on automation. Of a total US$12 million investment in Vietnam, we've spent 65 per cent on machinery and equipment. More is planned over the next five to 10 years. Why isn't there more worker loyalty? When we first started, we found some elite workers and trained them in Taiwan. But within one or two years they had all left. As soon as someone else pays just a tiny bit more, or if they lose some feeling about the job, they quit. What kind of hours do you work? About 14 hours a day. Is the company growing? Elma's revenues nearly doubled from US$2.9 million in 2009 to US$5.03 million last year. We forecast US$6.5 million for this year. Our profit will be 5 per cent for 2010 after 3 per cent in 2009 [when earnings were hit by the exchange rate]. Do you have any advice for other foreign investors eyeing Vietnam? If you asked me now, "should I go to Vietnam?" I would say "no". It looks cheap, but prices are going up fast and there's not much domestic market development.

Asean: Economic unity is a long way off By Ben Bland, 18 November 2011 AirAsia, the Malaysian no-frills airline, has tapped into demand from the fast-growing middle class in south-east Asia with its slogan: Now Everyone Can Fly. But, in a region where state-owned behemoths and favoured oligarchs still dominate in many domestic air-travel markets, it is not always so easy to get off the ground. The budget carrier pulled out of Vietnam last month, after four years of wrangling with the government, which refused to let it fly under the AirAsia brand, the key to its business model. Analysts believe the government was acting in defence of Vietnam Airlines, the well-connected state-owned flag-carrier, and that Vietnamese consumers will suffer as a result of the failure to open up the market to international competition. Such non-tariff

barriers to the expansion of trade and services are widespread within the 10-member Association of Southeast Asian Nations, despite an optimistic plan to turn this loose bloc into an integrated, free-trading economic community by 2015, complete with open skies for the regions airlines. There is no doubt that south-east Asia has vast potential as an integrated market. Its 620m people and forecast gross domestic product of $1,800bn for this year, makes it the third-largest economy in Asia, behind China and Japan. Asean's GDP has risen by 170 per cent over the past decade and the region accounts for 6 per cent of global trade, with intra-regional trade on the rise. But this politically and economically diverse bloc composed of Brunei, Cambodia, Indonesia, Laos, Malaysia, Burma, the Philippines, Singapore, Thailand and Vietnam is a long way from turning the lofty rhetoric of economic integration into reality. Asean as an entity is probably far too diverse to bring about such a shift, says Tai Hui, head of south-east Asian research at Standard Chartered bank in Singapore. Not only is there a wide array of political systems, from communist dictatorships to democracies, but also, unlike the European Union, Asean members are at very different stages of development, from desperately poor Burma, Cambodia and Laos, to the gleaming city-state of Singapore. And within south-east Asia, says Mr Hui, regionalisation tends to take a back seat to domestic politics during elections or times of political change. Economists say that, faced with stiff competition for foreign investment from China and India, south-east Asia has the potential to leverage its diversity to become an alternative production base and an attractive regional market for goods and services. The regions strategic location between Japan, China and India, in an area that encompasses many of the worlds main trade routes, leaves it well placed to capitalise if it can get its house in order. Some pioneers have already begun this journey, including Piaggio, the Italian scooter manufacturer, which has set up a factory in Vietnam and is exporting around the region. I see potential synergies for south-east Asia, with Singapore operating as a service hub, Thailand and Malaysia as advanced manufacturing centres and Indonesia and Vietnam as bases for low-cost production, with all sides making use of the regions commodities and natural resources, says Mr Hui. The key to this vision is establishing free circulation of goods, services, capital and, to some extent, people. The more advanced economies of the so-called Asean Six (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) have done the most to bring down regional tariffs under a series of phased free-trade agreements that date back to 1992. But utilisation of preferential tariffs on offer to Asean members remains low because of the complex administrative procedures that companies must complete before they can benefit, according to Claudio Dordi, an Italian law professor, who is advising the Vietnamese government on international trade issues. The predominance of stodgy bureaucracy points to a big hurdle in Aseans path: the lack of solid institutions to implement and police liberalising trade rules. The Asean way is based on consensus. The motley assortment of Marxist-Leninists, retired generals, technocrats and demagogues who rule the region have long agreed not to interfere in each others internal affairs. However, as Prof Dordi points out, it was only when the EU developed robust intermediary institutions, such as the European Court of Justice, that it was able to push ahead with deeper economic integration. This institutional weakness was one reason why the EU abandoned plans to negotiate a potentially transformative FTA with Asean, opting instead to enter bilateral trade talks with some of the blocs more advanced nations. Asean has managed to conclude more limited FTAs with Australia and New Zealand, China, India, Japan and South Korea. Surin Pitsuwan, Aseans secretary-general, accepts that the road to economic community is still a long one, with bumps and challenges along the way. But he says he is certain that by 2015 the foundations of the Asean economic community will be there. Prof Dordi believes that Asean has already gained a great deal from trade liberalisation and can expect many further benefits from dropping barriers in future. But he is less sanguine about the speed with which the region can overcome challenges. Proper integration will take years, if not decades, he says.

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