Issue #14 Fall 2015 | www.cornellbusInessasIacom

Unsanctioned Influenceby: benjamin Zehr

Market Interventionby: nicole schmit

Umbrella Revolutionby: natalie leung & nicole Kwok

The TRans-PacIfIc PaRTneRshIP

cover article

By: angela Zhang

china’s Influence as an Outsider

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eDITOR’s LeTTeR

5 The Umbrella RevolutionBy: Natalie Leung & Nicole Kwok

8 TheTrans-pacificPartnershipBy: Angela Zhang

12 2022 Beijing Winter olympics By: Kevin Chan

14 MARKET INTERVENTIONBy: Nicole Schmit

16 PrivateequityinindiaBy: Brandon Greer

20 The arms race for soft powerBy: Ahaan Nachane

23 India,theNextBigTechEconomy?By: Erica DeMond

26 Japan’sLongRoadtoRecoveryBy: Jeffrey Fung

28 Global Healthcare: Japan’s Race to the TopBy: Catherine McAnney

3 1 The Rohingya RefugeesBy: Megan Lee

34 The Case for Australian Membership in ASEAN By: Sanjeev Dhara

36 The Domino EffectBy: Nicole Schmit

38 UnsanctionedInfluenceBy: Ben Zehr

40MovingForwardAfterScandalBy: Steven Salenik

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editor’s Letter

eDITOR’s LeTTeR

O ne year ago, Margareta Drzeniek-Hanouz, Lead Economist of the World Eco-nomic Forum noted that, “twenty-five years after the fall of the Berlin Wall, the world again faces the risk of major conflict between states.” Conten-

tious territorial claims in the South China Sea, violence in the Middle East, and slowing growth rates in emerging economies have all served to manufacture a climate ripe for international conflict. As 2016 approaches, it is undoubtable that geopolitical strife – regardless of whether that conflict comes in the form of competition for resources, cyberattacks, economic sanctions, or actual military engagement – will remain a key concern for Asia’s leaders.

Volatile commodities prices this year created clear winners in Asia’s oil importers, including Japan, China, South Korea, and India. For many Asian nations, the economic boost provided by falling crude prices came at the perfect time to help counteract

decreases in imports by China, following the Chinese stock market crash earlier this summer. Most analysts predict low oil prices to remain through 2016 which is encouraging news for Asia’s economies struggling to maintain GDP growth levels and increase domestic consumption.

During the planning stages of the magazine, we aimed to select a wide variety of interrelated topics that present varying opinions and perspectives. We hope you have found this issue to be interesting and informative.Business Asia Journal enjoys hearing from our readers, and all feedback, opinions, and suggestions are welcomed. Please do not hesitate to send your comments and critiques to BusinessAsia.Journal@gmail.com.

Sincerely,

Nicole R. SchmitEditor-in-Chief

special thanks to our sponsors!

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President’s Letter

PResIDenT’s LeTTeR

T he Fall 2015 semester has seen Business Asia Journal build upon the progress and accomplishments of the past few years. After hosting Dr. Shashi Tharoor last spring, we have worked to consolidate our relationships with our on-campus collaborators. In particular, I want to thank Professor Thomas Pepinsky and the Cornell University Gov-

ernment Department for their continued support and advocacy for our organization. Along with a few other writers, I have been diligently working on identifying candidates for the second edition of our Speaker Series which we anticipate hosting this upcoming Spring 2016 semester.

While bigger projects like the Speaker Series remain a focus of the organization, I wanted to spend this semester improving the quality and depth of our magazine, and I hope this edition reflects that commitment. Beyond recruiting six new writers for the magazine, we are also proud to feature multiple articles that include interviews with individuals from leading think tanks and international corporations.

Improving the quality of the magazine is a process that has naturally aligned itself with our desire to maintain organizational continuity. Business Asia Journal has seen rapid improvements over the past few years, many of which have been driven by key figures such as Advai Pathak, Brandon Greer, Arthur Teng, and Nicole Schmit, who have either graduated or are close to doing so. Efforts to maintain the culture and ambitions of our organization have centered on having younger writers be-come more involved with the search process for our Speaker Series as well as with the editing process. I am confident that this work will ensure the continued success and growth of Business Asia Journal following my graduation.

Sanjeev Dhara

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h ong Kong received un-precedented international coverage last year when the

famed Umbrella Revolution broke loose. Some called it a democratic movement, while others regarded it disparagingly as a demonstration of mass civil disobe-dience. So, while much has been said about the Revolution, what exactly has the movement done for Hong Kong today? Hong Kong, a British colony from 1841 to 1997, is a Special Administra-tive Region in China that operates under the “one country two systems” scheme, meaning that it enjoys a high degree of autonomy where its political and judicial systems operate independently from

those of mainland China. According to the 1997 agreement, it is slated to remain an SAR for fifty years, until 2047, after which it would be fully integrated back to China, returning to communism from a capitalist economic system. With this special status, Hong Kong has always felt the presence of a brewing undercurrent of democratic aspirations. After a popular proposal for universal suf-frage electoral reform was turned down in 2013, many Hong Kongers expressed rage and dissatisfaction over the denial of their supposed autonomy. The deci-sion, which was made by the Standing Committee of the National People’s Congress (NPCSC), was widely regarded as highly restrictive, tantamount to

the Communist Party dictating which candidates would be allowed to present themselves to the Hong Kong elector-ate. And thus, the spark of the historical Umbrella Revolution was ignited, forever altering Hong Kong on the fateful day of September 22nd, 2014. The Umbrella Revolution provoked much controversy. On one hand, it was deemed a great cause for the public good of Hong Kong, a fight for democ-racy, freedom and rights for SAR citizens. The well-educated young generation wanted more than simply what was deemed “reasonably free” by the Chinese government. Student protester Dodo Cheng expressed her concerns over the complex problems Hong Kong faces

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as a result of poor decisions made by the new chief executive CY Leung. She believes that the city’s leader should not be elected exclusively by the 689 people in the electoral committee. Without delving into a debate over whether democracy itself is an inherently better political system, it is apparent that the Umbrella Revolution (UR) did yield a number of benefits. With its large global media coverage, the UR attracted the at-tention of the world’s largest democratic countries, such as the United States. With US media outlets such as the Wall Street Journal and TIME magazine covering Hong Kong’s fight for democracy, Hong Kong’s young democracy supporters won themselves a supporter in the US, a country that is not only the biggest inter-national promoter of democracy, but also one of China’s biggest rivals. The ‘moral support’ given by the US helped boost Hong Kong’s image on a global scale. This high-profile fight for democracy also portrays Hong Kong as a city un-afraid to voice its opinions. Contrary to popular belief, most students involved had a realistic grasp of what their actions entailed. Karina Tsang, an active high school advocate for the UR, explains the students’ dream and mission: “Democracy is an ideology that is often actively being pursued in the world now. However, in Hong Kong, democracy is not necessar-ily seen as the best form of social struc-ture. While some Hong Kong people see democracy as a chance for citizens to participate in public discourse in order to attain certain level of political influence, some see it as the means to contest the invisible hand of the Chinese governing power.” The demonstration could perhaps establish the foundation for achieving full democracy. Demonstrators seemed to be saying, “it’s better to try and (perhaps) fail, than to not try at all.” Despite the unfa-vorable odds and given that the Chinese government aims to use Hong Kong as a

model city for the rest of the country, this strong show of the ‘power of the people’ reflects the idealism of Hong Kong’s citi-zens. On the other hand, the Revolution has incited numerous complaints regard-ing economic disruption, travel inconve-niences and safety issues – the key areas of Admiralty, Causeway Bay and Mong Kok were occupied and remained closed to traffic for over seventy days, with numer-ous incidents of intimidation and violence carried out by triads and thugs. Despite this, suffragists held their ground for over two months. From an economic standpoint, the UR did more damage than good with retail sales experiencing a sharp decline. Major jewelry chain Chow Tai Fook, for instance, reported that at least thirty of their stores around the demonstration area had to be shut down. The construction industry publicly pleaded the UR to retreat as it left more than 2,000 construction workers out of jobs. The Taxi Drivers and Operators Association twice initiated a “slow driving demonstration” to protest against the business they have lost due to the dem-onstrations. Hong Kong, as a service and finance based economy, has undoubtedly been negatively affected by the Revolu-tion. There was an immediate impact on the stock market, as the Hang Seng Index, the primary stock market index based in Hong Kong, dropped 1.9 percent due to escalation of the conflict between the police and protesters. In addition, Hong Kong’s tourism and retail sectors, which account for 10 percent of its GDP, were harshly affected as well, with travel agents reporting a 30 percent drop in inbound, mainly Chinese, tourist groups. The revo-lution also opened up easy opportunities for triad interference and fights, causing more trouble, unnecessary injuries, and fear. Is this the cost of democracy? With citizens’ convenience and safety at risk, as well as Hong Kong’s fate of being handed

back to communist China in thirty-four years hanging in the balance, was the UR worth the short-term pain? With the future unknown, it is impossible to be sure. In order to dig deeper into the value of this movement, however, it is impor-tant to explore the ideologies behind the revolution and the feasibility of true democracy in Hong Kong. Over the course of the Umbrella Revo-lution, questions were raised about where the revolution was ultimately headed. At one point during the demonstrations, the revolution seemed to have become a war against the police rather than a fight for democracy. The Hong Kong police used tear gas and pepper spray on crowds when the civil disobedience reached disruptive levels. This prompted rage from some demonstrators and only served to attract more youth to take a stand, not against the Chinese government, but against the Hong Kong police. This brings into question the legitimacy of the move-ment as a whole – it became difficult to tell whether the protesters were simply challenging authority or acting as cham-pions for democracy in Hong Kong. These apparently conflicting ide-als also cast doubt on the unity of the movement, leading to questions regard-ing whether people were protesting for a shared purpose, or if they were just expressing deep frustration, antagonism and a sense of cultural superiority towards mainland China, willing to seize any opportunity to demonstrate against the mainland. It is not a secret that a con-siderable number of Hong Kongers and members of the press call mainlanders “lo-custs” and deem mainlanders “backwards” because of certain public behavioral dif-ferences such as public urination (which are popularly shared as viral internet videos), or their reputation for occupying numerous Hong Kong hospital beds and hoarding baby milk formula. It is unclear, therefore, whether this cultural bias and

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desire to separate themselves from China played an important role in the Hong Kong demonstrations. A student pioneer of the revolution, Joshua Wong, talked about his take on the UR by saying, “Rather than rejecting the things that we don’t want, we want to fight for the things we want” in his interview with The New York Times. His position as an idealistic leader of the UR provides a hopeful counterpoint to the cynical debate over whether people in Hong Kong are united in the fight for democracy. It is important to note that the vast majority of protesters consisted of the city’s youth, while the voice of the working class and older genera-tions remained conspicuously absent. COO of the Mercedes-Benz Hong Kong dealership, Michael Leung, discussed his perspective as an upper-middle class male: “Democracy is a good ideology, but it might not be most suitable for Hong Kong. We depend on mainland China for almost everything – the economy, tourism, protection and more. Losing China will not play to our advantage. What the UR lacked was a true visionary to streamline conflicting thoughts and comb through interfering ideologies and develop a more realistic direction and timeline. I admire their fighting spirit, but this is an example of a fine intention, poorly led.” The older generation seemed

to have doubts about the youth’s opti-mism, believing that in the long run, such a “petty fight” would not make a differ-ence in Hong Kong’s outcome. Interestingly, when asked whether they believed the UR was worth it, de-spite the lack of immediate change, many expressed hope that the movement had great influence on the public discourse. Karina Tsang believes it “increased the po-litical awareness and participation among the entire population,” while also creating a change in the mindset of the youth. It served as encouragement to citizens of Hong Kong to become more vocal about their opinions, and caused civil disobe-dience on a scale never before seen in Hong Kong’s history. Indeed, the Umbrella Revolution was an admirable endeavor. For civil disobedi-ence to gain such great momentum and global recognition shows the support the international community is willing to pro-vide for the pro-democracy cause. Hong Kong students were courageous, in the face of violence, to fight for a cause they believed in. At the same time, however, given the revolution’s perceived lack of unity and focus along with the nonex-istent chance of garnering a favorable response form the Chinese government, the citizens of Hong Kong must reflect on the real impact of the revolution. Was the opportunity to express their

opinions worth the heavy economic cost and hindrance to daily activities of Hong Kongers? Changes in the public consciousness have undoubtedly come about as a result of this movement. The question that each Hong Kong citizen must answer remains: do the benefits of the Umbrella Revolution, and further action in favor of obtaining democracy, outweigh the costs associated with winning democratic reforms? It remains to be seen if the Umbrella Revolution will go down in history as a catalyst for democracy or eventually be forgotten as an inconsequential bout of youthful petulance, but for now, Hong Kong is undoubtedly changed in its wake. | BA

Natalie Leung is a freshman in CALS. She grew up in Hong Kong and attended a local school. She worked under the Human Resources department at a Hong Kong trade and investment firm this past summer. Nicole Kwok is a freshman in the School of Engineering. She was born and raised in Hong Kong, and attended an international school. She worked at an alternative asset management firm and retail marketing and strategy firm this past summer.

The Trans-Pacific Partnershipchina’s Influence as an Outsider“The Trans-Pacific Partnership may not constitute a powerful enough enticement to propel China to sign on to these new standards on trade and investment. China so far has reacted by accelerating its own trade initiatives in Asia.”

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a fter seven years of clan-destine negotiations and political contention over

controversial clauses, the Trans-Pacific Partnership (TPP) was finally revealed on October 5, 2015 as a comprehensive agreement that will link the twelve Pa-cific Rim countries of Singapore, Brunei, New Zealand, Chile, United States, Aus-tralia, Peru, Vietnam, Malaysia, Mexico, Canada, and Japan in a trade agreement of unprecedented scale. Members of the partnership will seek to lower trade barriers such as tariffs, institute a com-mon framework for intellectual property, enforce standards for labor and environ-mental law, and establish an investor-state dispute settlement mechanism. Together, the TPP countries will repre-sent 40 percent of global gross domestic product, 30 percent of global exports, and 25 percent of imports; the world has not seen a multilateral trade pact of this scale for over 20 years. However, a glar-ing absence is immediately noticeable in the line-up of TPP nations: China, the world’s second largest economy and the linchpin of most global supply chains, will not be a member of the TPP pact.

0 Why China’s Absence from the TPP is a Choice, not an Ex-clusion In the eyes of the Chinese government, the TPP is a containment of the nation’s economic activity and would result in a disproportionate sacrifice of national interests. As a member of the partner-ship, China would be required to open its market in highly lucrative sectors, such as services and investment, as well as agree to new rules in sensitive areas including the role of state-owned enterprises and internet access. Notori-ous for the favorable treatment it grants to government-owned enterprises, China has positioned them as dominat-ing performers in the Chinese market; a dramatic shift as demanded by the TPP

would likely bring economic instability and reduce political clout. Likewise, the regulatory transparency required by the TPP will force China to rapidly reform its production and manufacturing policy to meet the TPP’s standards on environ-ment, labor, and food safety. The biggest blow comes at the negotiations table; in order to join the TPP, China must ac-cept all agreed-upon terms of the TPP without further negotiation. No coun-try—not even an economic powerhouse like China—will be allowed to re-open aspects of the deal for discussion, thus forcing late arrivals, like China, to accept many policies adverse to their agendas. The potential role of China in the TPP has assumed both economic and geo-political dimensions, igniting friction between the United States and China in their perpetual struggle for dominance in the international sphere. In declaring the implementation of the TPP as one of the Obama administration’s foremost trade agenda goals, U.S. President Barack Obama issued a definitive statement on the United States’ stake and leadership role in the partnership: “We cannot let countries like China write the rules of the global economy.” The United States is seeking binding rules in the TPP that would punish trading partners for cur-rency manipulation, and as a country notorious for devaluing its currency to gain an edge on its competitors, China is the main target.

As the TPP seeks to write the rules of global trade, China is faced with two distinct choices:

1 Develop a pathway to eventually join the TPP, which would inevi-tably result in China recognizing

its lack of authority to determine the rules and standards of global trade. Chi-na would face the unpalatable prospect of consigning itself to significant policy compromises, and in the process, cede

a great deal of economic and political authority to the United States.

2 Formulate and propagate a uniquely Chinese vision for a comprehensive trade agree-

ment for the Asia-Pacific region with China as the definitive centerpiece and leader. The high cost of membership in the TPP unsurprisingly pushes China to follow this alternative road of national and international reform. If China plays its cards right, it will not only circum-vent the losses associated with absence from the TPP, but also acquire greater geopolitical and economic leverage in the Pacific Rim.

0 Inherent Weakness of the Trans-Pacific PartnershipThough the TPP countries have recently reached an agreement, the current con-dition of the deal is precarious at best, as the TPP is not as robust as initially anticipated. The deal can be easily voted down across any of the twelve partici-pant countries and has been met with especially crippling resistance in the United States, the country that is posi-tioned to emerge as a leader in the TPP. The Obama administration faced numer-ous legislative setbacks in the pursuit of a fast-tracked congressional vote on the TPP, and even after achieving this goal, the threat of future political op-position looms over the United States’ engagement in the TPP. Few presidential candidates are in favor of the partner-ship, leading to bleak forecasts for the implementation of the TPP. Hilary Clin-ton, once pro-TPP, has since criticized the poor quality of the agreement, and her top opponent for the Democratic ticket, Bernie Sanders, has also spoken out against the partnership. On the Republican side, Donald Trump has similarly denounced it as a “terrible deal.” Another significant weakness of the TPP is its limitation in addressing the ex-

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change of data; cross-border trade today is no longer merely the flow of tangible goods and services. In early October, the European court annulled a deal that had permitted American firms to transfer cus-tomer data across the Atlantic, creating concern for the TPP as it seeks to redefine activity across the Pacific Rim.

0 Beijing is Charting its Own Course in the Asia-PacificSome have argued that despite China’s importance in global supply chains, China can be locked out of the optimal trading network as supply chains will adjust to the advantage of preferen-tial access to TPP markets. However, this conclusion is limited in vision and scope. Despite its present currency and stock market corrections, China recently overtook the U.S. as the world’s leading trading nation, and looking towards the future, China is positioned to become the world’s largest economy in this decade. The strategic moves China takes now are crucial in attaining its goal of cementing a position at the center of trade in Asia, without the help of the TPP. China is creating an international, Beijing-based Asian Infrastructure Bank that will help finance infrastructure projects across the Asia Pacific and thereby fortify China’s regional power. The bank has the sup-port of 47 regional and 20 non-regional members, including TPP nations Australia, Brunei, Malaysia, New Zealand, Singapore, and Vietnam. In addition, within Asia, countries have been pursuing bilateral and regional trade negotiations among themselves, weakening the value and importance of the overarching TPP. China has negotiated Free Trade Agreements (FTAs) with ASEAN members, Chile, Costa Rica, and Peru, as well as separate bilateral agreements with Singapore. In the meantime, China is in discus-sion with South Korea and Japan for a separate FTA, and a trilateral meeting has

been arranged. Since 2005, China has been creating its own FTAs with Brunei, Malaysia, New Zealand, Singapore, and Vietnam, and the country is also party to the Regional Comprehensive Eco-nomic Partnership negotiations (RCEP), which includes ASEAN countries, Japan, Korea, New Zealand, Australia, and India. The negotiations of RCEP purposefully do not include the U.S., reinforcing the geopolitical struggle for supreme control in the Asia-Pacific. This Asian-centric FTA is regarded as a possible alternative regional trade bloc to the TPP, because it includes Asia’s three largest economies, Japan, India, and China. In response to the agreement reached recently for the TPP, China is seeking to conclude RCEP negotiations by the end of 2015, ahead of the East Asia Summit, demonstrat-ing its quick response and competitive resolve to establish influence outside the partnership.

0 To the Outside Victor Goes the Spoils With the capability to design, develop, and produce goods that can easily make their way into the U.S. market via TPP intermediaries, China succeeds in reduc-ing tariffs it might otherwise have to pay while still maintaining high export levels. For example, just in cotton shirt opera-tions, China is able to avoid a series of 5 percent, 10.9 percent, and 16.5 percent import duties that would have been applied at each stage in the distribution channel by working through its existing free trade agreements with members of the TPP. As explained by University of Pennsylvania Law Professor Jacques DeLisles, in this sense, China shares in many of the benefits of the TPP, with-out having its hands tied by the various member requirements. A multitude of the economic gains in the region will go to China, regardless of whether it is in the TPP, making its potential entry into the

partnership even less valuable.

0 Domestic Strength and ReformChina’s enormous domestic market with significant growth potential along with far-reaching supply chains, provide the country with significant heft against the TPP. Perhaps the most common argu-ment against China’s success outside the TPP is investment diversion as investors become less confident in the Chinese economy, where growth is already show-ing signs of slowing. However, KPMG reports that despite slowing GDP growth, in 2014, China’s outward direct invest-ment saw an annual increase of 14.1 percent and its foreign direct investment set a record of $119.6 billion. Figures are expected to continue in the double digits in 2015. Moreover, company executives and economists argue that despite Chi-na’s slowing growth, it is well-equipped to deflect harm from the TPP due to its shift to rely more on domestic consump-tion. In 2011-2012, consumption growth overtook investment growth as the main contributor to overall GDP growth, and in the last decade, China experienced an increase of eight to nine percent in real terms in its per-capita consumption. This dramatic growth in per capita consump-tion is two times more than that of other developing economies, and multiples more than that of developed economies. Furthermore, household savings as a share of disposable income play a significant role in the story of domestic consumption; since 2014, the Chinese household saving rate has been on a steady decline from its peak of 32 per-cent. Factors such as rising wages have helped expand demand at home, and essential reforms, including a more reli-able social safety net and an improved, government-funded, health care system, have reduced precautionary saving. This is a monumental change for domestic consumption, as China’s average house-

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hold saves as much as 40 percent of its income due to long-standing issues of insecurity. For perspective, the United States has a savings rate of 5.2 percent, and Japan has a rate of 1.8 percent. In this sense, domestic consumption is becoming a critical growth driver, with retail sales growing 10.5 percent in the first eight months of 2015, compared with GDP growth of only 7 percent. Looking forward, the Demand Institute, a think tank cooperatively operated by The Conference Board and Nielsen, predicts that China’s consumer base has the potential to reach a high of $67 trillion in spending power over the next decade. Industries are responding to this increased domestic consumption with growth at home, as witnessed in textile companies decreasing exports from 70% of sales to less than half. In addition, decades of industrialization have helped Chinese companies carve out market niches that are now tough for the TPP to challenge. For example, the production quality and economies of scale of China’s heavy machinery ensure that it still remains far more com-petitive than what could be produced by Asian rivals in the TPP. Likewise, in electronics making, due to the substan-tial number of non-Chinese companies that are already assembling products in China, large shifts is manufacturing locations would be difficult, especially for companies that have already made significant capital investment in tailor-ing factories for their purposes. Trade agreements like the TPP will not heavily affect certain industries like electron-ics, as the WTO already eliminated such tariffs. Another important source of domestic growth is tied to China’s ser-vices sector, which is one of the world’s most restricted; opened and managed effectively, it would provide immense value for the Chinese economy without the leakage that would have occurred

under TPP policies. China can also leverage its supply chains to facilitate multilateral trade with minimum tariffs; Chinese companies like Texhong Textile have already geared up in anticipation of the TPP. Overall, China’s scale gives many industries an advantage that fledgling manufacturing economies like Vietnam simply cannot hope to obtain.

0 Political and Economic Pres-ence and Penetration“China’s entry [into the TPP] would con-tribute largely to our nation’s security and Asia-Pacific regional stability.” -Japa-nese Prime Minister Shinzo Abe The TPP is regarded by many as a calculated move to weaken China’s eco-nomic dominance across the Pacific, but repeated concerns from TPP countries regarding China’s absence actually assert and strengthen the country’s perceived global influence. The reach of China is further witnessed in its strategic, global investments; at the end of 2014, China had $870 billion invested worldwide to expand its sources for raw materials and industrial inputs. China’s invest-ments of $3.8 billion and $17.8 billion in Bangladesh and Pakistan respectively far exceed loans provided to these coun-tries by the IMF, granting China more power in these countries’ economies and political debates than an international organization. Trade remains the most reliable way for impoverished countries to become richer, and China continues to be the most lucrative option for many. Are there distinct winners and losers in the context of international economic change? If so, does China’s nonparticipa-tion in the TPP, the largest multilateral trade partnership in over 20 years, di-minish its likelihood of ascension to the world’s greatest economic powerhouse? Should China surrender some of its na-tional goals for a stake in possibly defin-ing the new rules of global trade? As the

TPP slowly obtains political support from its member nations for the next step of implementation, China is navigating the Pacific Rim at an expedient rate. Aside from fortifying domestic sectors and industries and bolstering consumption at home, China is aggressively seeking powerful FTAs with Asian TPP nations and challenging the partnership with the creation of its own new international bank and trade bloc. These calculated moves allow China to bypass the losses associated with its absence from the TPP, thereby weakening the exclusivity and value of the TPP and also making the op-portunity cost of joining the partnership higher than ever. For China, its strategy outside the TPP is no longer a mere at-tempt to meekly avoid losses; its vision is economically and politically much more ambitious. If it joins the TPP, China sur-renders not only a few main points on its national agenda, but also the critical opportunity to rise as the next leader of the Pacific Rim. In this sense, the choice becomes clear. With its rejection of the TPP, China is sending the United States an unspoken, but painfully clear, message: contrary to President Obama’s words, China will have the opportunity and influence to shape the rules of the global economy. | BA

A native of Hangzhou, China, Angela Zhang is a Sophomore in the College of Arts and Sciences studying Biology and Economics. In addition to writ-ing for Business Asia Journal, she has contributed towards the Cornell Daily Sun, the Pillsbury Institute for Hospitality Entrepreneurship, and a health-focused project team. This past summer, Angela worked in Technology Development at Harvard University.

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f or the 2008 Beijing Summer Olympics, China built a city within a city filled with 20 new

venues, 42 multi-storied apartment buildings, extravagant hotels and many other attractions. Now, less than two de-cades later, Beijing has plans to do it all again. In preparing for the 2022 Winter Olympics, the city faces monumental new challenges – it must build facilities that support winter sports in a part of Asia that receives relatively low amounts of snowfall. Moreover, it is unclear what benefits the country will see from this Olympic bid – with infrastructure already in place from the 2008 games, the need for a local economic boost is substan-tially diminished. For a variety of reasons, both the Chinese Olympic Committee and the government’s views on the costs and benefits outcome of hosting the 2020 Winter Olympics are highly dispa-rate with public opinion, considering the People’s Republic of China’s unique and vastly different social, economic, and political position in the world today as opposed to 2008. Assuming plans to host the 2020

Winter Olympics are not derailed, Beijing will become the first city ever to host both a Summer and Winter Olympics – the number of cities able to accommo-date the needs of both games is exceed-ingly small due to cost and logistical hurdles associated with preparing for and managing the games. However, never one to shy away from a challenge, Beijing seems confident that seven years is long enough for it to make history. Tak-ing into account the capital and opera-tional expenses associated with hosting the Games, which include transportation, hospitality, event venue construction, and management of the event spaces, the Beijing Summer Olympics had a bill of nearly US US $40 Billion. Although some may argue that the pre-existing infrastructure left from the 2008 Olympic Games would reduce the overall cost of the city’s second Olympic iteration (costs associated with expanding the interna-tional airport, highways, living facilities and event centers around Olympic parks would be avoided), there is a second set of challenges that go beyond this baseline cost. The sheer expenditures as-

sociated with hosting the Winter Olym-pic Games in a geographic region that has neither sufficient snowfall nor the mountains and pre-existing resorts for athletes to train and compete would be tremendous. It is evident that the bill for the 2022 Winter Olympics will at least ri-val, if not exceed, the US $50-billion price tag for the Russian Sochi Winter Olym-pics. Considering the current state of the Chinese economy, where a decreasing degree of investment activity has led to lower overall growth projections for the manufacturing behemoth, the public has been wondering whether or not the costs associated with this endeavor are bearable. In the competition for hosting privi-leges, four out of the six contender cities withdrew from the 2022 Winter Olympics bidding process before voting even began due to the heavy losses expected from the whole affair. This begs the ques-tion – what is Beijing’s motivation behind bidding for, and eventually winning, the hosting privileges for yet another Olym-pic Games? The explanation appears to be two-fold. From an economic stand-

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point, perhaps China views the event as a means to revitalize or refine ailing sectors of its economy, such as construc-tion and other blue collar jobs, which have suffered from a housing glut and the recent economic slowdown. More interestingly however, the bid could be part of a larger Chinese strategy to invest in its soft power worldwide. Olym-pic Games have typically been seen as a means for countries to proudly display their cultural heritage and communicate their place in the world – China, often seen as lacking in the soft power depart-ment, likely views the opportunity of hosting the games as the ideal chance to improve its international image. It is widely accepted that China’s booming economy is a result of both a significant level of foreign investment, and the unprecedented growth of the country’s manufacturing sector. China’s high dependency on manufacturing has adversely affected the country’s economy during periods of low export growth and global economic turmoil, prompting the government to approach the Winter Olympics as an effort to both invigorate its blue collar industries as well as provide a jump-start to its service sector. With the construction of luxury ski resorts in nearby cities, China may be

attempting to further build its matur-ing tourism industry as one aspect of its overall strategy to diversify its economy and reduce structural risk. Due to the country’s poor record on labor practices and environmental stewardship – factors that affect foreign businesses that contract to Chinese companies as part of their supply chain – China has longed for opportunities to be seen in a more collaborative and welcoming light. Recent incidents such as the chemical explosion in a Tianjin manufacturing facility have not only amounted to immediate damages to companies and their employees, but have also adversely affected the reputa-tion of China worldwide as a well-regu-lated and mature economy. In response to incidents stemming from perceived lack of concern for their workers’ welfare in pursuit of profit, China is seizing every possible opportunity to reverse this reputation and increase soft power. After winning the bid for the 2008 Sum-mer Olympics, China temporarily tackled its infamous air pollution problem with drastic restrictions on the use of cars, reducing the emissions due to traffic on any given weekday by nearly 60 percent, eventually clearing up a substantial por-tion of the city’s chronic smog problem.

Undoubtedly, similar motivation to clean up and present a more attractive image of itself to the world can be expected when given the opportunity in 2022. For the government of the People’s Repub-lic, there is tremendous value in mov-ing away from a manufacturing-heavy economy, towards a more modern, service based one, and creating a more welcoming environment for future busi-ness ventures that attempts to counter the prevailing reputation of China as a heartless business partner. The cost and challenges that Beijing faces as it prepares to host the 2022 Winter Olympics may not be justifiable in the public’s opinion. Unnecessary spending on facilities and programs that will ultimately only have a limited impact on the wellbeing of Chinese citi-zens, divert funds away from more press-ing social and environmental challenges the country is facing today. The Chinese government, however, sees this second Olympic showing as a significant oppor-tunity to accelerate its tourism indus-try, create a launching pad for a more service based economy, and work to improve its international standing. The physical costs, due to both geographic and climatic challenges in the regions surrounding Beijing, can be expected to far exceed similar endeavors in the past. Even with a slowing economy however, the high costs are justifiable in the eyes of the government given the significant leverage that the country may attain by both diversifying its economy and continuing to transform its global repu-tation, an unquantifiable “soft” asset that will undoubtedly pay dividends in the decades to come.| BA

Kevin Chan is a Junior in the College of Engineering. He born in San Francisco, and spent three years living in Beijing and the every following summer since traveling to various parts of Asia. Kevin spent the previous summer working in a

Schematics of the proposed ski resorts and competition grounds

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c hina’s meteoric rise over the last several decades ensnared the attention of the world.

Unsurprisingly then, when China’s stock market lost a third of its value between June and August this year, the plummet-ing stock exchange made global head-lines and led to widespread speculation regarding the future of China’s eco-nomic stability, the possibility of a global downturn predicated on a bear market in China, and most notably, the suitability of government involvement in Chin’s financial sector. As stocks tumbled, so did the Com-munist Party’s credibility. Where Xi Jinping previously enjoyed a meticu-lously crafted image of infallibility in the eyes of most Chinese citizens, turbulent markets tarnished perceptions of his omnipotence. This loss in credibility was compounded by a sense of betrayal; middle class Chinese who were urged by Xi’s government to invest in the stock market saw their life savings decimated in a mere three and a half weeks. In the months leading up to the rout, China’s

state-run news media energetically celebrated rising indexes, and in April, the People’s Daily declared that index highs were “only the start of the bull market.” Given that the government’s propaganda and a variety of misrepre-sentative artificial measures provided by Chinese authorities led many to believe that the markets could go nowhere but up, it is unsurprising that many Chinese poured savings into stocks that they knew almost nothing about. Government involvement in encouraging companies to maintain unsustainably high stock prices and pushing overvalued stocks on trusting citizens clearly played a major role in the formation of China’s stock bubble. Xi’s party also served to prolong the bubble expansion by silencing any who dared to suggest that stocks were overvalued. Then, during the initial stages of falling prices, the government took increasingly desperate measures to avoid a market adjustment. In addition to restricting short-sellers, divestitures, and IPOs, the government spent as much as US $235 billion in share purchases.

In the aftermath of the market col-lapse, the government’s actions only served to confirm the extent to which the party is willing to manipulate stock indexes to satisfy political motives. Following a pause in large-scale stock purchases, the government decided to once again intervene and boost stock prices in order to create a “positive mar-ket environment” prior to China’s World War II anniversary military victory parade. Among advanced economies, electing to prop up the markets for a parade is inconceivable, but for the Politburo and Xi, it was an obvious choice to ensure that the Shanghai Composite Index was not going to put a damper on a patriotic parade intended to demonstrate China’s strength. It is understandable that the Chinese government feels the need to inter-vene in the financial sector – economic stability in China is political to such an extreme degree that, absent a strong economy, the Chinese Communist Party rightly fears losing its mandate to govern. Much of the government’s legitimacy is

A Shifting Dynamic in China Market Intervention bynIcole

scHmITEditor in Chief

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grounded in economic prosperity, and the Chinese Communist Party’s method of governing with respect to economic policy was seldom questioned. After all, it is challenging to argue with double-digit GDP growth, high levels of foreign direct investment and a massive trade surplus due to strong exports. In more recent years however, the government has had difficulty coming to terms with the fact that, as an industrial-ized economy, it is unrealistic to aim for the impressive growth rates that were attainable at the height of China’s indus-trialization. This leaves Xi in a somewhat uncomfortable position – the Chinese have developed an obsession with GDP growth, largely due to the emphasis placed upon it by the Communist Party. While there is still a strong culture of “GDP worship” in China, there have been repeated attempts by the government to promote a “new normal,” referring to lower growth rates in the neighborhood of seven percent. Naturally, the govern-ment has been exceedingly reluctant to surrender to slower growth as evidenced by the six recent interest rate cuts along with multiple releases of bank reserves, all designed to reinvigorate the economy. Unfortunately for Xi, his most recent attempts to stimulate the economy have largely fallen flat, even without directly considering the dismal performance of the stock market. Just this September, consumer prices fell 5.9 percent, marking the 44th month of decline. Falling im-ports for the last twelve months indicate sluggish domestic demand, and exports also suffered recent declines due to reduced demand abroad. To make mat-ters worse, China experienced its slowest quarterly expansion at 6.9 percent in the three months through September from a year earlier since the first quarter of 2009. Prior to the government’s market in-terventions this summer and accompany-ing yuan devaluation, the government’s tight control over the financial sector was

no secret but was also not subject to the high degree of scrutiny engendered by this recent market failure. In the period following the extreme market volatility this summer, questions regarding the ef-ficacy and reliability of the government’s involvement are inevitable. According to Mao Yushi, Honorary Director at the Unirule Institute of Economics, “From the very beginning, China’s stock mar-ket hasn’t been acting in the way that a normal stock market would … when China’s stock market was set up, its aim was to help state-owned enterprises raise money. It went wrong at the very begin-ning.” Yushi makes a convincing argu-ment; in a market where investors are basing decisions not on the merits of the stock, but rather on anticipated actions of the Chinese government, the “market” is essentially just one massive gamble on future decisions made by the Communist Party. Absent unreasonably high demands for economic growth, it is highly prob-able that the entire bubble and ensuing market crash could have been avoided. As other areas of China’s economy lost momentum, the government seized the opportunity to generate artificial growth in the stock market as a means of main-taining economic optimism. In this case, China’s insatiable demand for growth, and the government’s ability to artificially generate that growth, was its downfall. Although it may initially seem coun-terintuitive, relinquishing the power to interfere in the markets would strengthen Xi and the Communist Party. The Chinese government is currently vulnerable to market volatility that their actions helped create. When the government was able to ensure stable markets in conjunction with growth rates of unprecedented magnitude, there was no real substan-tive case for complete liberalization of the financial markets. However, that is unequivocally no longer the situation. China’s authoritarian management

of the business and financial realm was undoubtedly highly effective in el-evating China from a poor, developing economy to an industrialized economic powerhouse. Now however, the same market intervention that made China’s rapid growth possible is limiting future potential. To become a truly advanced economy, China’s state-oriented capital-ism must be supplanted by a free-market system where the market dictates the success of business enterprises and for-eign investors may have confidence that their funds are not subject to the whims of the Communist Party. Targeted government investment and state-run enterprises do not represent the path forward for China. This sum-mer’s market shock should indicate to the Chinese government that China is at a crossroads and must choose either a free market economy or one that is manipu-lated, often unsuccessfully, through a tightly regulated system that is not at all suited to managing the intricacies of the world’s second largest economy. China will struggle to proceed with true market liberalization for as long as the government fails to accept that ob-taining the benefits of a free market with-out surrendering the sense of security that comes with the ability to intervene is impossible. Unfortunately for Xi and the Communist Party, a free market economy managed by the government will never be a reality. Despite the strong argument for complete market liberalization, it will likely take some time, or another market collapse, before the Communist Party is ready to make such a leap of faith. | BA

Nicole Schmit is a Junior double major-ing in Economics and China & Asia-Pacific Studies. Outside of Business Asia Journal, she is involved in the Cornell Consulting Club, Cornell Investment Banking Club and Society for Women in Business. This past summer, she worked in New York City as an intern for Deloitte Consulting LLP.

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Private equity in IndiaOnce overestimated, now underserved

I n the early years of this cen-tury, private-equity (PE) firms and their investors were enthusiastic

about India’s potential. Fifty percent of the country’s 1.1 billion people were younger than 30. From 2003 to 2007, GDP grew by 7.5 percent annually, 88 million middle-class households were formed (more than twice the number in Brazil), urban dwellers grew by 35 million to 330 million, and 60 percent of the population was in the labor force.

Banks’ nonperforming-asset ratios fell from 9.5 percent to 2.6 percent. Further, the PE-to-GDP ratio stood at 1.8 percent, reassuring investors that India had plenty of headroom when compared with developed markets such as the United Kingdom (4.2 percent) and the United States (4.4 percent). Private investors poured about US $93 billion into India between 2001 and 2013. At first, returns were strong: 25 percent gross returns at exit for

investments made from 1998 to 2005, considerably better than the 18 percent average return of public equity. However, returns fell sharply in following vintages; funds that invested between 2006 and 2009 yielded 7 percent returns at exit, below public markets’ average returns of 12 percent. In fact, India’s PE funds in recent years have come up well short of benchmarks: with a 9 percent risk-free rate and a 9.5 percent equity risk premium (accounting for currency risk,

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country risk, and volatility), the climb for Indian PE investors is undisputedly steep. To be sure, returns are based on a small number of exits, but that in itself is a problem. Only US $16 billion of the US $51 billion of principal capital deployed between 2000 and 2008 has been exited and returned to investors.

Understanding what went wrong Where did PE firms go wrong? Many in the industry suggest that the man-agement approach favored by North American buyout firms was ill suited to the Indian opportunity and was made worse by the inexperience of PE firms operating on the home turf of experi-enced promoters (a unique form of busi-ness owner and investment syndicator). However, there are better explanations, in two categories, which provide lessons for investors to explore.

Estimates overshot the mark Firms overestimated the market in several ways. Some misjudged the in-vestable universe of private companies. The pull of public markets set the stage for some adverse selection of private companies and created unexpected competition from intermediaries. Overly optimistic GDP forecasts and a conve-nient interpretation of PE-to-GDP ratios also worked against some PE firms. Indian investors are fishing in a small pond. In 2013, India had 10,440 compa-nies with between US $25 million and US $500 million in revenue, excluding state-owned entities and publicly listed companies; China had 41,150 and Russia had 16,700. And investors can’t step up in size and pursue larger companies; there are about 270 private companies with revenues over US $125 million in In-dia, compared with 1,295 in Brazil, 7,680 in China, and 3,430 in Russia. India has about 30 private companies with more than US $500 million in revenues.

Indian investors are in constant competition with stubbornly high capital-market valuations. India has around 2,600 publicly listed compa-nies with less than US $125 million in revenue, compared with 1,000 in China. As a result, many private companies went public before PE managers could access them. This had two effects. First, it created pricing pressure on private buyers; indeed, India is one of the few markets where private valuations meet and often exceed public-market compa-rables. Second, some argue it created an adverse selection of private companies, as companies that could access public markets did.

Investors can use lessons from the past decade to build a new and better future.

With fewer investable private compa-nies, competition from capital markets, and growing levels of “dry powder” among PE firms, the environment be-came fertile for sell-side intermediaries, facilitating greater competition. Inter-mediaries push prices up via auctions, and, of course, public comps underpin the market. As a result, Indian investors saw a highly intermediated, fully priced market with few proprietary deals. Rewards for optimism persisted lon-ger than they should have. In every year but one between 2002 and 2010, India’s GDP exceeded all major analysts’ predic-tions. However, from 2011 on, that trend reversed sharply as India’s GDP came in either below or at the lower end of ana-lysts’ expectations. With so many models pegged to GDP growth estimates, vola-tility played havoc with returns.

Excess capital pressured discipline With excess capital on hand, inves-tors increased transaction sizes and

invested in a range of sectors, many of them capital intensive, relatively illiquid, and requiring longer times to exit. As a result, returns have been hurt, exits have been scarce, and secondary sales are becoming much more frequent. Between 2005 and 2008, firms deployed capital in several industries. In the next wave of investment, between 2009 and 2013, the investment mix shift-ed considerably, and not for the better. For one thing, more investments were directed to sectors that have longer gestation times and are more capital-expenditure intensive, such as engineer-ing and construction, hospitals, power generation, and real estate—in other words, infrastructure plays. In India, such investments are often greenfield and take longer to bear fruit. By 2013, all of the 25 largest firms had at least one such investment in their portfolios, represent-ing 43 percent of the US $77 billion invested between 2007 and 2013. In sev-eral cases, as bank lending got tighter, inflation rose, and policies wavered, the returns in these sectors dropped, just as firms were committing more capital to them. Second, many infrastructure invest-ments were made by generalist firms whose capabilities to manage risk and projects with longer exit horizons varied significantly. By contrast, consumer goods accounted for a mere 6 percent of investments in 2005–08 and 5 percent in 2009–13. The expansion of investors’ ap-petite for larger deals came at the same time that several capital-hungry sectors sought capital. But this increased risk, as these sectors were disproportionately affected by escalating input costs and policy-driven delays. The average investment holding peri-od for exited deals rose from 3.5 years in 2004 to 5.2 years in 2013. Those entering these relatively illiquid long-gestation businesses found it even harder to exit:

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of the US $51 billion in investments made between 2000 and 2008, only 14 percent (by value) of those in real estate exited, along with 29 percent in logistics plays, 21 percent in engineering and construc-tion companies, and 9 percent in energy and utilities. Shareholders and promoters found themselves in a tough position as input costs soared, working-capital needs increased, and the IPO market lost its appetite for midmarket listings. In ag-gregate, only US $16 billion (31 percent) of the US $51 billion invested has exited, at a value of US $27 billion. While several investors have successfully renegotiated extensions with limited partners, these forces can be expected to have a material impact on returns. Like many emerging markets, India is prone to momentum investing, with few contrarians to be found. More than 70 percent of private investments in the past ten years were made when the index traded above its ten-year median price-to-earnings multiple of 17.4. By contrast, firms in China deployed less than 50 percent of their capital at times of high valuation. In India’s volatile lend-ing environment, promoters learned to raise capital when capital is plentiful. Discussions with investors reveal a per-ception of unrealistic price expectations and overpriced investments in others’ portfolios. In a market that should prize liquidity, capturing liquidity premiums remains difficult. With pressure to find an exit mount-ing, sales to other PE buyers are now the second-largest way out. Nearly 30 percent of all exits by value in 2012–13 were sponsor-to-sponsor sales, up from 10 percent in 2010–11 and 5 percent in 2006–07. The good news: PE-backed companies appear to be better governed and managed. However, they do not come with a buyback guarantee. One prominent recent sponsor-to-sponsor deal wound up a total loss, with lawsuits

filed against the promoter and auditor.

What might go right For all these flaws, PE has grown to become a critical source of capital in the Indian economy. PE firms are respon-sible for 36 percent of the equity raised by companies in the past ten years and contribute even more when times are tough—47 percent in 2008 and 46 percent, on average, from 2011 to 2013. Further, ongoing research suggests that PE-backed companies in India increased revenue and earnings faster than public companies across nearly all sectors and vintages, and these companies are, on balance, better governed, more com-pliant with respect to regulatory and fiduciary obligations, more likely to pursue M&A, and better at seizing export opportunities.

“PE firms are responsible for 36 percent of the equity raised by companies in the past ten years and contribute even more when times are tough—47 percent in 2008 and 46 percent, on average, from 2011 to 2013.”

PE investors are clearly doing some-thing right, and they can build on this. Once investors set their sights appropri-ately and govern behavioral excesses, they can begin to invest in an India that is paradoxically underserved. There are five supports that might emerge for a new wave of growth and returns: an increasing bias toward control deals, a recognition of the complex needs of family-owned businesses, new supply to meet a large and unaddressed need for mezzanine financing and capital restruc-turing, greater limited-partner scrutiny of general-partner strategies with track

records, and support from regulators to boost the confidence of foreign and domestic investors. As they look for new targets, PE firms can seek more opportunities to exercise control. In 2006–07, 13 percent of Indian PE investments by value were control investments. By 2013, this had increased to 29 percent—a favorable trend. Control investments allow firms to support an ag-ing generation of entrepreneurs, ensure better capital discipline in portfolio com-panies across volatile cycles, and facili-tate easier exits so that firms can renew maturing portfolios. A recent survey of Indian investors revealed capital disci-pline was the second most important focus after management capabilities. Many of India’s aging owners have succession problems, underscoring the need to address the issues of family-owned businesses. An estimated 70 percent by volume of PE investment from 2007 to 2013 (46 percent by value) went into family-owned businesses. Firms that build a deeper appreciation of the com-plex needs of these businesses, including the dynamics that affect succession, tal-ent attraction, family trusts, liquidity, and governance, can bring significant value to their investments and align the inter-ests of promoters more easily. Investors confronted with issues in their family-owned-business investments need to act on early-warning signs and work through them in an orderly fashion to minimize impact on companies’ health and perfor-mance. In the diligence phase, placing an equal emphasis on the business and on the promoter and management can help firms anticipate governance issues. In a recent survey of portfolio-company pro-moters, investors and portfolio compa-nies identified the inability to recognize and navigate family issues as a weakness of investors. Lastly, some regulatory reform is needed to enable greater foreign and do-

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mestic PE participation. At the top of the list are providing clarity and parity on tax treatment for foreign and domestic funds (including issues such as pass-through status and capital gains), addressing restrictions on investment in certain sec-tors and on issuing convertible bonds, increasing the investable pool by simpli-fying the delisting process, encouraging distressed debt and mezzanine financing, simplifying fund-registration require-ments, and recognizing the difference between traditional promoters and active investors. While these reforms have been on the table for a few years, many hold out hope that the new government will see some of them through. The industry is poised for a new era of growth and returns if PE investors

gain greater control, develop active-ownership capabilities, and can identify and align family and promoter interests, and if regulators recognize that investors can deliver more than money across the capital structure. | BA

Brandon Greer is a senior majoring in Applied Economics and Management from Maryland. As a member of AKPsi, he served as the president of his pledge class in the fall of 2013 and currently serves as one of the Brotherhood Chairs. On cam-pus, Brandon sits on the executive board for the Dyson Business Inclusion and Di-versity Program, as well as on the Dyson Undergraduate Council. He is the past Editor-in-Chief for the Business Asia Jour-nal and is the piano accompanist for one

of Cornell’s choirs. Brandon has worked over five years in Congress for the rank-ing member of the United States House Financial Services Committee and has published works at the London School of Economics. Most recently, he worked at J.P. Morgan as a Summer Analyst in their Investment Banking division, covering financial institutions and governments.

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I magine the Cold War era, a time of tense hostility between the United States and the USSR. In

the midst of this arms race, with both countries on the brink of war, a young chess prodigy from Brooklyn took on the Russian Masters in the game of Chess. Chess had been a Russian dominated game for time immemorial, and Bobby Fischer was challenging their very best. The game of chess surged in popular-ity, with eyes glued to every move that Fischer made. It transcended being an intellectual sport, and became a soft power tussle between the world’s superpowers. On the other hand, the Beatles, arguably the most popular band of all time, won hearts across the world.

Irrespective of nationality, the Beatles struck a chord in every human heart, influencing people across the globe. These are two divergent examples of the subtle notion of soft power. The term “soft power” – the ability of a country to persuade others to do what it wants without force or coercion – is now widely invoked in foreign policy debates. Soft power is a very subtle term, encapsulating the effect of the cul-tural power of a nation, describing the ability of nations to alter the behavior of others absent use of force or traditional military threats. There are essentially three ways countries fight for sovereign interests in the global sphere: coercion (sticks), payments (carrots), and attrac-

tion (soft power). British historian Niall Ferguson described soft power as the combination of non-traditional forces such as cultural and commercial goods, and then promptly dismissed it on the grounds that it’s, well, “soft.” Soft power is like the social media profile of a na-tion – it is the collective picture that a nation paints, crafting its image across the globe. This is the decade of the resurgent Asian giants; India and China are undoubtedly the world’s emergent superpowers, intent on making changes to the world order. With two authorita-tive and dynamic leaders in Narendra Modi and Xi Jinping, we are witnessing constant sociopolitical combat be-tween these two nations, each wanting

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to assert their dominance on a global landscape. Given the ideological and geopolitical struggles with regard to issues such as Tibet, the Indo-China border conflict, and the situation in the South China Sea, both countries are attempting to outdo each other in every way possible. India has been extremely successful in the past few years with respect to its attempt to leverage soft power to gain international influence. India’s diaspora is a huge soft power asset – there are millions of Indians spread across coun-tries as far as Fiji, Guyana, Malaysia, Mau-ritius, Surinam, South Africa, Sri Lanka, and Trinidad. A professional elite from this expatriate community has found its way to the United States, Canada, Australia, and other nations of the West in the twentieth century. They have contributed immensely to the countries they have settled in and command influ-ence and respect in these countries. In fact, the Indian-American community in the US has been found to be the most

educated immigrant com-munity in the US. The recent upturn in Indo-US relations has much to do with the lobbying, influence and reputation of the Indian-American community. One of India’s most successful and enduring imports—yoga—is practiced all over the world both as a form of exercise and as a stress management tool by millions of people. Yoga is already a global phenomenon and is rapidly becoming part of mainstream culture, particularly in the West. Prime Minister Na-rendra Modi capitalized on the reach of Yoga by organizing the International Yoga Day, a day when people practiced Yoga in public places all across the world, from Times Square to the Sydney Opera House. Elements

of popular Indian culture like music and movies have a wide following in many countries – the power of music can bridge borders and bring people closer together. Indian music and movies have a large international market and have become increasingly viewed abroad. Indian movies are popular not only in South Asian countries like Bangladesh, Nepal, Pakistan, Afghanistan and Sri Lanka, due to their close proximity with India and similarities in cultural outlook, but also in Europe, Africa, South Asia, and West Asia. South Asia’s entertain-ment industry is already so dominated by Indian music and movies to the extent that at times it has even bred some resentment against India among the older, more traditional South Asian population.

“What China fails to un-derstand is that despite its world-class culture, cuisine,

and human capital, and despite its extraordinary economic rise over the last several decades, so long as its political system denies, rather than enables, free hu-man development, its pro-paganda efforts will face an uphill battle.”

As China’s global power grows, Beijing is learning that its image matters. For all its economic and military might, the country suffers from a severe short-age of soft power. According to global public opinion surveys, it enjoys a decid-edly mixed international image. While China’s economic prowess impresses much of the world, its repressive po-litical system and mercantilist business practices tarnish its reputation. And so, in an attempt to improve perception, Beijing has mounted a major public rela-tions offensive in recent years, investing billions of dollars around the world. Nobody but the Chinese government knows for sure how much China spends on these efforts, but analysts estimate that the annual budget for “external propaganda” runs in the neighborhood of US $10 billion annually. To contextual-ize, the U.S. Department of State spent US $666 million on public diplomacy in 2014. The father of soft power, politi-cal scientist Joseph Nye, defined it as emanating largely from society—spe-cifically cultural, political, and social values. Nye contended that a country’s political system and foreign policy could earn respect and thus contribute to soft power. This definition is premised on the clear demarcation that exists in democratic societies between state and non-state spheres. However, with regard to China, the government manipulates

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and manages almost all propaganda and cultural activities. The Chinese com-munist system has always accepted that information must be managed and that people must be indoctrinated. As the country has opened up to the world, the state has had to work significantly harder to maintain its grip on information flow, and its efforts on this front have become more sophisticated. The institutional nerve center of Chi-na’s public diplomacy is the State Coun-cil Information Office (SCIO). Located in a Soviet-era building in central Beijing, it looks like, and plays the part of, the Ministry of Truth in George Orwell’s Nine-teen Eighty-Four. The SCIO, which forms part of a broader propaganda apparatus, coordinates various propaganda efforts, and it boasts a large staff, an impressive budget, and a great deal of bureaucratic clout. As the SCIO acts as a key media watchdog responsible for censorship in China, the mere mention of its name brings an expression of concern to the faces of many Chinese, particularly intel-lectuals and journalists. Every December, the SCIO convenes an annual confer-ence at which it outlines guidelines for China’s external propaganda work for the coming year. Jiang Weiqiang, the SCIO’s Vice Minister, termed this as guidelines

for China’s soft power strategy. In Beijing, the SCIO and the Foreign Ministry often call foreign journalists in for “tea chats” to scold them for articles deemed un-friendly to China. The government has refused to renew the visas of a number of journalists (including some from The New York Times) and has refused to issue visas for American and European scholars on its blacklist. Outside of China, embassy officials sometimes warn news-paper editors not to publish articles on subjects that might offend Beijing. Thus, in tandem with its propaganda appara-tus, China’s censorship machine is going global. Yet for the billions of dollars China is spending on these efforts, it has failed to see any demonstrable improvement in terms of its global image, at least as measured by public opinion surveys. In fact, the country’s reputation has steadily deteriorated. A 2014 BBC poll showed that since 2005, positive views about China’s influence declined by 14 percent-age points in the last decade and that a full 49 percent of respondents viewed China negatively. Surprisingly, as a 2013 survey by the Pew Research Center’s Global Attitudes Project indicates, China’s soft-power deficit is apparent even in Africa and Latin America, precisely the

regions where one would think the country’s appeal would be strongest. In spite of these somewhat dismal results, Beijing is still expending enor-mous effort and resources to change perceptions. Why the disconnect? The answer is that the Chinese govern-ment approaches public diplomacy the same way it constructs high-speed rail or builds infrastructure—by investing money and expecting to see develop-ment. Where India is able to build soft power subtly with the natural integration of Indian culture into societies around the globe, China attempts to increase soft power with calculated investment and propaganda. What China fails to understand is that despite its world-class culture, cuisine, and human capital – and despite its extraordinary economic rise over the last several decades – so long as its political system denies, rather than enables, free expression of both its ideas and rich cultural heritage, China’s propa-ganda efforts will face an uphill battle.| BA

Ahaan Nachane is a sophomore study-ing Computer Science. He grew up in Mumbai, India and is also involved with the Engineers for a Sustainable World - Biofuels on campus.

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I t has been a little over a year since the decisive shift in Indian politics away from Congress to

the Bharatiya Janata Party (BJP) with the landslide election of Narendra Modi, India’s current Prime Minister. The victory of the BJP, and of a pro-business leader specifically, marked a desire by the Indian constituency to push for increased growth and prosperity for lower-income demographics. Modi campaigned on a platform of major reforms intended to boost India’s economy through increased foreign direct investment and reduced corruption. Modernization and mass adoption of technology constitute an integral pillar of this reform agenda. In his first year in office, Modi has focused much of his energy on technological de-velopment, recognizing India’s prospects for rapid growth and tying in outside forces to capitalize on this opportunity. However, the realization of India’s poten-tial for technological advancement will

depend on Modi’s ability to gain do-mestic support from political opposition parties and India’s rural citizenry. Modi has legitimate reason to be-lieve a technologically-enabled India is attainable; with its Ecommerce and smartphone industries rapidly expanding, India has great potential for technological advancement. The country’s Ecommerce sector has been growing at 34 percent CAGR since 2009, driven largely by the country’s fast-growing internet popula-tion. With 65 percent of the country’s population comprised of people under age 35, and 75 percent of its internet users between ages 15 and 34, India possesses the prime age demographic for rapid technology adoption. Smartphone applications have played an increasingly important role in Ecommerce purchases: the number of Ecommerce purchases made by smartphones in India more than doubled from 2013-2014 and smart-phone sales in general increased by 33

percent in fiscal year 2014-2015. The rise of Ecommerce has in turn boosted India’s smartphone sales with vendors using online retail as an additional channel for sales. With the help of these online chan-nels, smartphone sales increased by 44 percent from the first to second quarters in 2015. These potential technology gains can only be accomplished with global companies on board to provide invest-ment and supply. Recognizing India’s large potential, Chinese smartphone vendors such as Lenovo, Xiaomi, Huawei, and Gionee have pushed for more sales in the country and have doubled their combined percentage of smartphone sales in India from 2014 to 2015. This signifies a shift in the investment focus of large companies from China to India, as slowing economic growth has af-flicted the former. As recently as August, Chinese manufacturers announced plans to expand their manufacturing capabili-

byerIca DemonD

Writer

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India, the next Big Tech economy?

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ties in India. This includes a US $5 billion investment by contract manufacturing company Foxconn in partnership with the world’s fourth-largest smartphone producer and Chinese phone company, Xiaomi Corporation. On the other hand, favorable industry potential and foreign investment inter-est, though necessary, are not sufficient for India to succeed in rapid techno-logical growth. The country must also address its notorious regional fragmen-tation and lack of infrastructure. That is where Modi’s Digital India campaign, the driving force of his push for technologi-cal progress, comes into play. Launched in July 2015, Digital India aims to “transform India into a digitally empow-ered society and knowledge economy” through three focus development areas: infrastructure from which every citizen can benefit, governance and services on demand, and the digital empowerment of citizens. Modi aims to enable every Indian, regardless of location, to readily access government services by con-necting them to internet and telephone

networks. In order to realize these goals, Digital India focuses largely on integrat-ing rural areas which have historically been unable to participate in technology due to a lack of infrastructure. The Prime Minister has called for a US $800 billion increase in infrastructure spending for fiber optic cables that will build Internet capabilities in previously underserved regions. This includes creating cloud storage and a broadband grid linking 250,000 village areas. Digital India has already gained trac-tion among top technology companies worldwide; Modi’s efforts toward making strategic appearances and seeking criti-cal partnerships seem to be paying off. A recent trip to the Silicon Valley marked a big step forward for Digital India. During his visit, the Prime Minister secured the support of major U.S. technology com-panies, Google and Microsoft, to expand internet accessibility in India: Google signed a deal to provide free Wi-Fi in 500 Indian railway stations and Microsoft is set to provide 500,000 Indian villages with low-cost broadband services. If

successful, Digital India will give internet access to previously isolated country regions, expanding the reach of smart-phones and Ecommerce to the many Indians living in remote rural areas. Despite his successes, Modi’s efforts toward technological progress and eco-nomic growth have not been without their struggles. Though his reform plans have gained international support, it has unfortunately proven very difficult for the Prime Minister to obtain neces-sary domestic approval. Major resistance remains among the powers of Parlia-ment, specifically from the opposing Congress party. One of Modi’s proposals with implications for foreign technology investment was to amend the constitu-tion to allow for the GST tax, a standard-ized tax across the country that would make foreign operation in India less complicated. However, the proposal was blocked in the parliamentary session ending on August 13th and does not bode well for foreign investment into India. Companies may be deterred by the prospect of numerous tax policies

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and regulatory laws that vary based on the region of operation. The Prime Minister has also faced difficulties pass-ing land reforms intended to make it easier for the private sector to purchase rural land. Failure of land reforms could pose serious problems for Digital India, as there would be less opportunity for infrastructure investment by the private sector. Opposition for proposed land reforms comes directly from Indian citizens: with rural citizens comprising 70 percent of India’s population, a rebuff to the passage of land from farmers to busi-nesses was only to be expected. Amid major resistance by farmers’ groups and political adversaries in the upper house of Parliament, Modi has essentially given up on his land reform objectives in order to keep the support of rural voters in upcoming state-level elections. Notwithstanding the domestic obstacles that Modi has faced during his term, there remains much promise for his dream of a connected India. With the Reserve Bank of India’s recent inter-est rate cut to 6.75 percent, historically

weak domestic investment figures are likely to improve. In addition, it is appar-ent that Modi has gained clout among global technology superpowers and continues to do so. Top U.S. companies such as Google and Microsoft publicly announcing support for the Digital India campaign could pave the way for further international assistance. The global economic climate is favorable for gain-ing this additional support. As China’s economy slumps and Brazil and Russia are negatively affected by oil prices, India may be the most profitable of the emerging markets. India possesses many of the neces-sary preconditions for significant techno-logical development; the last critical step that remains is the alignment of politi-cal interests among the BJP, Congress, and the Indian constituency. This leads to two questions: when will alignment occur, if ever? And is it possible for India to reach its technology growth goals despite domestic hindrances? Unfortu-nately, even with additional progress as early as the next parliamentary session

that takes place in the winter, Modi will miss his initial mid-2016 target of implementing the new measures. But the Indian government is not immune to international pressures. If Modi can con-tinue to gain large-scale global support of his technology plan, strengthening his public image along the way, perhaps the government will finally give in to avoid tarnishing its international reputation. The Indian constituency elected Modi for a reason: progress. When the desires of the majority overpower the disagree-ment between political parties, India’s technology potential will likely be real-ized.| BA

Erica DeMond is a Junior majoring in Economics and minoring in English. She was born and spent much of her child-hood in Japan and is currently studying abroad at University College London, where she is furthering her interests in global economics and writing.

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SHINZO ABE COMES INTO POWER Prior to Shinzo Abe’s re-election in December 2012, Japan had suffered through decades of deflation and economic struggles. This long-standing situation was caused by multiple factors, such as the real estate boom and bust, the stock market crash in the 1980s, and the erosion of Japanese citizens’ pur-chasing power following the crash. All of these factors contributed to Japan’s eco-nomic decline that culminated in an era infamously known as “The Lost Decade.” Though there were multiple attempts at restoring Japan’s economy to previ-ous levels, recovery was slow and efforts were largely unsuccessful. Just as the Japanese market began to show signs of improvement in 1996, the government decided to raise the consumption tax from three percent to five percent and this sent the stock market plummet-ing by over 75 percent. Any progress made previously was effectively negated and Japan’s economic demise eventu-ally paved the way for the re-election of Shinzo Abe to the position of prime minister. The voters yearned for a much-needed reinvigoration of the Japanese economy, and Shinzo Abe had promised to give them just that.

THE THREE ARROWS OF ABENOMICSIn hopes of revitalizing Japan, Abe introduced a three-pronged strategy. This unprecedented approach, called the Three Arrows of Abenomics, seeks to reinvigorate Japan’s waning economy through monetary, fiscal, and structural policies. The first arrow of Abenomics is mon-etary easing. Monetary easing policy refers to the injection of liquidity into the economy through increasing bond purchases and decreasing interest rates. This would, in turn, raise asset prices, boost consumption and investment, and increase exports by way of a weaker Yen. The second arrow involves a huge fiscal stimulus package to revive the economy instantaneously through government spending. Once Abe took over, more than $120 billion was committed to public works projects and infrastructure investment. Lastly, the third arrow seeks to spur sustainable growth through structural reforms including tax breaks, deregulation, and higher participation of women in the workforce.

INITIAL IMPACTS OF AN UN-PRECENDENTED APPROACH During the first year of Abe’s second spell as prime minister, the country’s

economy seemed to respond favorably to Abenomics and so did the rest of the world. The Bank of Japan has been pur-chasing government bonds and other assets in enormous quantities ranging from US $60 to US $80 billion every month. Along with keeping interest rates between 0 and 0.1 percent, the govern-ment has utilized quantitative easing as a tool to encourage investments and do-mestic consumption. By May 2013, the Nikkei stock market rallied from around 11,000 at the start of Abenomics to 15,900, exemplifying the bolstered con-fidence of consumers in the initial stage. The unemployment rate dropped to around 3.7 percent and the Yen depreci-ated from 85 Yen/USD to 105 Yen/USD. Retail sales rose 3.1 percent from 2012 to 2013 and household spending rose 3.7 percent, both of which were higher than expected. The economic effects of Mr. Abe’s policies translated into tangible benefits for businesses in Japan. Since Abe’s term commenced in 2012, Japan’s Tankan Large Manufacturer’s Index, a measure of business sentiment of the large manu-facturing companies, surged from its previously negative values to 16 by the end of 2013. Exporters benefitted from Abenomics through a boost in overseas

Japan’s Long Roadto Recovery

byJeFFreY FunG

Writer

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demand for their products. In 2013, Ja-pan-based Toyota Motor Corp outsold all of its competitors twice in three quarters, recording a remarkable sale of 2.5 million vehicles during the third quarter of 2013, a 3 percent year-on-year increase. Based on cars sold to the US alone, Toyota’s deliveries rose by 12 percent in the same period. The automotive industry, along with many others, were certainly among the first to testify to the benefits of a weaker Yen under Abenomics.

SHAKY TIMES IN RECENT MEMORY More recently, however, Abe’s ap-proval ratings dropped to 41 percent as the success of Abenomics started to wane. In 2014, the economy experienced another recession as a result of the coun-try’s sales tax increase to eight percent in April 2014 – the first increase in 17 years. Despite delaying the second sales tax hike until April 2017 (originally planned for October 2015), weak industrial pro-duction and household consumption are taking their toll on the economy. GDP growth is expected to have declined 0.5 percent in the third quarter of 2015 as firms’ reluctance to invest or raise wages stunted growth. Annual export growth in September 2015 slowed to 0.6 percent – disappointing given the expected 3.4 percent gain. Declining exports to China, whose own economy is weakening, has sparked fears of over-reliance on overseas trading partners. While Shinzo Abe used to count on foreign investors’ enthusiasm to stimulate the stock market, investors have begun to lose confidence in Japan’s potential for growth, and the stream of foreign investment has died down to a trickle of previous highs. However, with Japan participating in the Trans-Pacific Partner-ship agreement, increased trade and investment flows could be in store for the country as it looks to boost economic growth. Easing monetary policy is now once

again brought to the forefront, as Japan looks to reach a target inflation rate of two percent next year and combat falling exports. On the other hand, with the Yen stabilizing at around 120 Yen per Dollar, the central bank may feel pressured to keep the policy unchanged rather than enacting additional easing policies. Other measures instituted by Abe include his continuous attempts to incentivize firms to spend and raise wages. He is also pushing for more daycare centers and improved working conditions in order to keep labor force participation, especially amongst women, up. Recent statistics show that 64 percent of Japanese women are now employed, surpassing the U.S. at 63 percent. Lastly, there are talks to revise tax laws so that property owners will be more inclined to accept proposals for reconstruction of their property sites to help boost the home construction and housing industries.

LOOKING TO THE FUTURE Shinzo Abe has long desired a return to economic stability and sustainability through increased spending by busi-nesses and consumers. Abenomics was, and still is, an unprecedented approach to economic stimulus in terms of the tools employed and magnitude. However, recent evidence suggests that his tactics are no longer effective in today’s environ-ment. Consumers’ reluctance to spend even after all these years of quantitative easing and low interest rates is a stub-bornly difficult issue that Japan faces; Japan’s dire fiscal position will undoubt-edly be a drag on future income and GDP. To aggravate the situation further, they have been negatively impacted by China’s economic dynamism. It is clear that more drastic measures ought to be taken to restore Japan’s economic sustainability, or Abenomics may not be around for much longer. Abe should look to increasing the pace of asset purchases and delay another sales

tax hike to avoid another decline in con-sumption spending. Over subsidization of the agricultural and automotive sec-tors is another area that Abe has failed to address. Instead of dedicating tax payer money to boosting select industries, capital should be allocated to industries that require only a temporary boost to generate long-term gains for Japan’s economy. Improving Japan’s subsidy structure would not only translate to a reduction in a massive budget deficit, but also enable more efficient allocation of capital and serve as a GDP growth driver, if skillfully managed. To increase incentives investment by corporations, Abe should reward invest-ment with tax benefits and leniency for undertaking capital spending. This might temporarily reduce government taxation revenues, but any short-term loss would be far outweighed by the long-term benefits of increased employment and economic activity increased investment would bring. Regulations should also be introduced to encourage the immigration of workers from overseas, as migrants would alleviate the problem of Japan’s shrinking and rapidly aging population. On the educational front, the govern-ment should partner with Japanese uni-versities in training and developing talent for the new economic era. This would promote the retention of young Japanese talent within the nation and improve participation in the labor force, spurring growth in important industries. Shinzo Abe has many weapons in his arsenal to make the most out of his re-election and reinvigorate Japan’s econo-my, but time is running against him. | BA

Jeffrey Fung is a Junior majoring in Economics. He was born in Australia but grew up in Hong Kong. This past sum-mer, he worked as an investment banking summer analyst at The Alberleen Group in New York City.

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bycaTHerIne mcanney

Writer

s ef Kurstjens, head of devel-opment at Astellas, Japan’s second-biggest drugmaker, is

part of a group of business leaders on a mission to revolutionize the healthcare landscape in Japan. Healthcare makes up a considerable portion of Japanese national expenditure and will remain a crucial market in the years to come. The country and its large pharmaceuti-cal companies are determined to be the new innovators on the world scene, but there are major hurdles to be overcome before Japan can begin to move up in the ranks. On the global stage, the healthcare industry as a whole is growing rapidly with a focus on mergers & acquisitions

as the main source of development. In the first quarter of 2015, the total value of healthcare deals reached US $95.3bn, leading the sector charts in M&A. The majority of these deals occurred in the United States and Europe. The block-buster transactions of 2015, including AbbVie’s purchase of Pharmacyclics for US $21bn in early February and Teva’s purchase of Allergan Generics for US $40.5bn in July, showcases the optimism and potential for growth in the health-care market. With an aging population and an increase in healthcare spending, Japan currently has the third largest healthcare market in the world with a total expendi-ture of US $480 billion in 2013. According

to Deloitte reports, this figure is expected to increase by an average of three per-cent per year between 2014 and 2018. Japan has traditionally excelled in the pharmaceutical market, with a predicted 2020 market value of US $79.8 billion. This number would make Japan the second largest prescription drug market in the world, behind the United States. Several major factors define the growing Japanese healthcare market. The first factor is Japan’s aging population. As a country’s population ages, healthcare services and medication become increas-ingly important, resulting in higher healthcare costs. Among developed nations, Japan currently ranks number one in the world for the percentage of

Global healthcare: Japan’s Race to the Top

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citizens 65 years and older. By 2050, it is expected that seniors will make up at least 40 percent of the Japanese popu-lation. As a result of this demographic shift, there will likely be a rapid increase in age-related diseases, which greatly burden healthcare systems. The second element in the Japanese healthcare equation is its prescription drug business model. Japanese citizens are required to participate in the National Health Insurance (NHI) program. All drugs on the NHI list must pass Pharma-ceutical and Medical Devices Agency approval to be marketable in Japan. After approval of a proposed drug, drug manu-facturers must then apply for reimburse-ment from the Drug Pricing Organization. During this DPO process, the manufac-turer is required to submit comparable prices for other drugs in the United States, Germany, and France. Due to this system of reimbursement, between 2005-2014, the median reimbursed price for drugs in Japan was 40 percent cheaper than the base price of compa-rable drugs in the United States. In an era when exorbitant drug prices are a major issue in the United States and elsewhere, Japanese policy is admirable in the way it protects vulnerable consumers.

“We’re never satisfied with what we have, so we are looking at strategies to aug-ment the portfolio.” – Sef Kurstjens

Despite its already elderly and rapidly aging population, and because of the DPO process, Japan lags behind both China and the United States in terms of healthcare spending as a percent-age of GDP. The United States spends an average of 17 percent of its GDP on healthcare costs, whereas Japan spends only about 10 percent. As healthcare

industries in the rest of the world turn to methods of inorganic growth through M&A, Japanese healthcare companies seem caught in the past. Although Japan is currently the world’s second largest drug market, in order to stay relevant, profitable, and competitive with other global pharmaceutical giants, it is likely that Japanese drug companies will soon be forced to seek out opportunities for expansion in the international market. Japanese pharmaceutical compa-nies’ hesitancy to expand internation-ally is in direct contrast to many of their peers abroad. Companies like Johnson & Johnson, AbbVie, Allergan, and Pfizer continue to grow by purchasing smaller biotech firms with late-phase drugs, while Japanese firms are not as active in blockbuster deals. The largest pharma-ceutical firms in Japan include Takeda, Otsuka, Daiichi Sankyo, and Astellas Pharma. As these companies reap the benefits of a heavily protected domestic market, an older population, and the Japanese preference for brand name drugs over generic counterparts, they have not faced strong incentives to join in the healthcare deal-making spree that has been going on in the United States and Europe. The instances where Japanese healthcare companies were major players in healthcare M&A were in 2011, when Takeda bought Nycomed for US $13.7bn and in 2010, when Fujisawa Pharmaceutical acquired New York based OSI Pharmaceuticals for US $4bn. Japan’s low percentage of healthcare spending as a portion of GDP will likely necessitate more such deal-making in the future. As Japanese patients demand new and more innovative drugs and the phar-maceutical market begins to change, international acquisitions could serve a valuable role. External acquisitions will also serve to bolster the existing research and development within Japanese pharma-

ceutical giants. There have been major concerns in the Japanese pharmaceutical industry regarding the lack of research and development spending in the areas of nanotechnology, biopharmaceutical drugs, and nucleic acid drugs. Due to the spending status quo, the future of the Japanese pharmaceutical industry would be strengthened if acquiring intellectual property through international acquisi-tions was more commonplace. Such practices would mitigate gaps in Japan’s healthcare research portfolio. Purchas-ing international firms also provides Japanese firms with the opportunity to expand their market share in other coun-tries, further incentivizing such behavior. Giants such as Takeda and Astellas could buy American innovation and quickly acquire the level of policy understanding necessary to sell drugs on the American market. Japan’s pharmaceutical industry is already poised to be a world leader due to many of the aforementioned charac-teristics of the Japanese healthcare mar-ket. First, the Drug Pricing Organization mandates an international drug price comparison process to allow for the most consumer-friendly system, meaning that Japanese companies are well versed in dealing with nations where the margins on pharmaceutical drugs are thinner. Ad-ditionally, the aging population in Japan makes it a hotbed for pharmaceutical activity. These features, along with the potential for innovation through world-renowned national academic centers like Tokyo University will contribute to Japan’s climb to the top in the healthcare and pharmaceutical fields. While pharmaceuticals currently make up the most substantial share of the Japanese healthcare industry, addi-tional markets are becoming increasingly active. In 2012, the Japanese market for medical devices was worth around US $32.5bn. Medical devices include any

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instruments or machines used in the healthcare system or throughout the treatment process. Despite its recent growth, the Japanese medical device market still depends largely on imports, with 58 percent of new medical devices approved in Japan over the last seven years coming from international compa-nies. If Japanese healthcare and phar-maceutical firms were to pursue a policy of international acquisition, the benefits could eventually result in new technolo-gies being produced domestically. A stronger presence in the healthcare de-vices market would inevitably strengthen Japan’s place as a world healthcare superpower. The type of aggressive expansion

led by individuals like Sef Kurstjens from Astellas and Shinji Honda, Director of Strategy at Takeda, will be necessary for Japanese pharmaceutical firms to gain international market share. Japan cannot continue to depend on the production of generic drugs and domestic growth alone to maintain its position as a global healthcare leader. Japanese firms would be wise to seek out the support of Ameri-can biotech firms and university scholars to compete with the likes of Johnson & Johnson and Pfizer. Despite the many challenges ahead, there remain numerous positive trends in the Japanese healthcare market. The Japanese population will continue to age, and Japan’s unique drug approval

system will continue to benefit consum-ers. It is now up to Japanese healthcare firms to make the crucial decisions that will allow them to take the lead in the race to the top of the global healthcare market. | BA

Catherine McAnney is a Senior in the ILR School. She is from Pittsburgh, PA and will be working at J.P. Morgan in their Healthcare Investment Banking group after graduation.

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M yanmar’s economy is bur-geoning with GDP growth rates of over 8 percent and

high levels of foreign investment, but it is also in the throes of an immense humani-tarian catastrophe, and almost no one has taken notice. The Rohingya people, a Muslim minority group in Myanmar, have endured rampant discrimination at the hands of their own government and Myanmar’s majority Buddhist population. A Human Rights Watch Report elucidates the injustice that exists within Myanmar’s borders, asserting that the government has “engaged in a campaign of ethnic cleansing against the Rohingya that continues today.” This report only cor-roborates the severe problem of discrimi-nation within a nation of multiple ethnic groups. The United Nations High Commis-

sioner for Refugees estimates that there are approximately 479,706 refugees that have fled Myanmar. This number has grown substantially within the past several years, due to the violence and brutal discrimination the Rohingyas face. The situation in Myanmar is so severe that the Simon-Skjodt Centre of America’s Holocaust Memorial Museum says that the Rohingyas are “at grave risk of addi-tional mass atrocities and even genocide.” This dire prediction should come as no surprise given the many horrors already committed against the Rohingya.

0 A History of Discrimination The Rohingya’s enemies claim that the Rohingya are nothing more than illegal immigrants from Bengal, despite the fact that there is strong evidence indicating the Rohingyas have lived in Myanmar

(formerly Burma) for centuries. Follow-ing the end of World War II, the Rohing-yas advocated forming their own nation. They were unsuccessful, and when the military junta succeeded in their coup d’état in 1962, the situation faced by the Rohingyas deteriorated considerably. The military junta government denied the Rohingya citizenship, labeling them as stateless Bengalis. The Burma Citizenship Law, passed in 1982 served to solidify the Rohingya’s stateless status. The law denied the Ro-hingya rights to a nationality, thereby re-voking the basic human right of freedom of movement, denying access to service and education, and even allowing arbi-trary confiscation of property. Rohingyas are also forced to abide by a two-child policy – an attempt to minimize growth in the Rohingya population. Denied citi-

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The Rohingya Refugees

bymeGan lee

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zenship at home, and lacking the proper documentation to apply for citizenship elsewhere, the Rohingya have no rights and no hope of obtaining them. But while the government has clearly contributed to the injustice that the Rohingya people face, it is the people of Myanmar that are primarily respon-sible for creating an environment of subordination and discrimination. The country has seen the rise of multiple anti-Muslim extremists and movements over the years. One such movement, the 969 Movement, was launched by Buddhist extremists as a national anti-Muslim campaign in Myanmar. These bigoted extremists engage in violent attacks on the minority Muslim popula-tion, using “moral justification for a wave of anti-Muslim bloodshed,” as reported by Reuters. Authorities have dedicated minimal effort to preventing these atrocities from continuing. In fact, after an attempt by the government to grant voting rights to the Rohingya and other minorities by passing a law that would allow temporary residents to hold “white papers,” enabling them to vote in general elections, the papers were rescinded in order to evade conflict. Following the passage of the law, there was swift backlash by Buddhists, with Buddhist

monks leading anti-Rohingya protests and making demands that the law be repealed. Just hours after the demon-strations, President Thein Sein revoked the temporary voting rights granted to the Rohingya in order to avoid further domestic unrest.

0 From Ethnic Minority to “The Stateless People” Members of the minority Rohingya population have no alternative but to lead their lives in fear if they remain in Myanmar, and have thus resorted to fleeing the country in hopes of seeking a safer place to call home. They often travel to neighboring countries such as Bangladesh, Thailand, Malaysia, and In-donesia. The first mass Rohingya exodus took place in 1978 when the Burmese army executed a military operation that pushed as many as 250,000 Rohingya refugees to neighboring Bangladesh which has accepted large numbers of Rohingya refugees. However, due to the fragility of the Bangladeshi economy and government, many Rohingya have been forced out of border camps in recent days. Other countries, such as Malaysia, Thailand, and Indonesia have turned the refugees away, leaving the Rohingya no choice but to continue searching for

somewhere they might find acceptance. Since 2012, there have been more than 120,000 Rohingya refugees who have fled Myanmar by boat, and have settled in various Southeast Asian coun-tries. However, many of the governments that have seen an influx of refugees within their countries’ borders have responded harshly, fearing that leniency would lead to a flood of incoming refu-gees. Unlucky refugees who have no-where to turn are forced to drift at sea on cramped boats. Rohingya refugees are dubbed the “stateless people” – they ultimately do not have a home country that truly accepts them as citizens and the countries that they flee to, such as Bangladesh, do not provide them with citizenship rights. This has led to the emerging problem related to the increase in the number of “boat people,” individuals who simply have no choice but to live on boats at sea temporar-ily. Their “home,” Myanmar, has failed to recognize them as citizens of the country and thus these individuals are in a perpetual transitory state. According to the United Nations High Commissioner for Refugees, the number of Myanmar’s stateless people is estimated at 810,000, most of whom are Rohingya.

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0 Does a solution exist? Ultimately, a restructuring and decen-tralization of the government in Myan-mar would make great strides in easing tensions. As a country comprised of such diverse ethnic groups, a more represen-tative group of leaders would be better suited to develop the rules for governing Myanmar in a way that would ensure equal representation and rights for all residents. The Rohingya minority clearly deserve citizen status, and all of the rights that go along with it. In addition, gradually changing the mindsets of the other more prominent ethnic groups to accept the Muslim minority will enable the Rohingyas to live more peacefully within their home country. All of this takes time, but in the long run, it will be the best option for not only the Ro-hingya people and Myanmar, but also for neighboring Southeast Asian countries who have been impacted negatively by this situation. It is time for a more permanent solution. Joshua Kurlantzick offers his insights on solving the Rohingya situation. He is a Senior Fellow for Southeast Asia at the Council on Foreign Relations and he has written extensively about Myanmar and the Rohingya refugees. Kurlantzic be-lieves that “if the government addresses

the rights of Rohingya and Muslims in the country more progressively, that will be the best approach other than trying to address how people flee.” He also stresses the importance of a paradigm shift within the Myanmar population. There needs to be a mindset change that will lead individuals to become more accepting of the Rohingya people. An important point that he brings up regarding how to change the mindset of the people in Myanmar is that “mindset change can be led by ordinary people, business leaders, and others.” He says that there are certain steps that the gov-ernment should take to reduce discrimi-nation, such as granting more rights to the Rohingyas and progressing towards allowing them to gain citizenship, but at the same time, change need not be mandated exclusively at the government level – ordinary citizens demanding change through a grassroots movement has the potential to be highly effective in changing the negative perceptions associated with the Rohingya. Ideally, there would be government legislation in addition to a movement led by the citizens of Myanmar in favor of granting Rohingya fair and equal treatment. The plight of the Rohingyas is in desperate need of global acknowledg-

ment and demands for improvement. It is essential for the public to be aware of the pressing issues facing the Rohingya population in Myanmar – individuals who are living on boats, separated from their families, and cast aside as “state-less people.” While the country’s own government and people will have to be proactive in striving towards a mindset change, individuals from all over the world can help contribute to funding and providing resources for the refugees while they are forced to remain in a dif-ficult transitory state.| BA

Megan Lee is currently a sophomore in the Dyson School of Applied Econom-ics and Management from Hong Kong. She is a member of the Cornell Under-graduate Asia Business Society (CUABS), a marketing associate in the business department of The Cornell Daily Sun, a Cornell Ambassador and a consultant at Social Business Consulting. She worked at a management consulting firm in Hong Kong this past summer.

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The case for australian Membership in asean

c olonial Australia is one of the few former British colonies in the Asia Pacific region that wel-

comed large a number of Western immi-grants. As a result, it is a nation nominally within the Asian sphere of events but far closer in culture, politics, and econom-ics to the Western world. In the 20th and 21st Centuries, many in Asia have viewed Australia as a country firmly aligned with the United States’ foreign policy agenda. While that may be true, the destination of Australian exports—important to analyze for any export driven economy—have shifted towards China. While this is an inevitable consequence of China’s raw-material intensive economic boom, it does put Australia in a difficult position for the future. Scholars, such as Anthony Milner, have suggested that Australia’s export driven economy means that it cannot risk upsetting China by too closely tailing American foreign policy. As such, a natural course of foreign

policy would be for Australia to more aggressively pursue membership in the Association of Southeast Asian Nations (ASEAN). Australia was selected as the first Dialogue Partner with ASEAN in 1974. However as Gareth Evans, Austra-lia’s former Foreign Minister noted, the economics of the 21st Century combined with the geopolitical tussle between the Chinese and Americans in the Asia Pacific region have led to Australia viewing its relations with these two major countries and to a lesser extent India and Japan as more important. Such a worldview has resulted in skepticism both from Austra-lia and the member states of ASEAN re-garding the fit between the two groups. However for the Australians and the member states of ASEAN, full Australian membership would be an important symbolic and strategic development. Australian membership in ASEAN is a symbolic recognition that Australia has evolved as a nation over the past 100

years, from one which was defined as almost a Western enclave in the Asia Pacific region to a nation that is now very much part of Asia. As Bob Carr, a former Australian Minister for Foreign Affairs, noted in a speech in Singapore in 2013, nearly 7.5% of Australians are born in Asia. In total, nearly 12% of Australians classified themselves as having some form of Asian heritage. Full-on Australian engagement within ASEAN would serve as an acknowledgement to a growing portion of the Australian population that the nation recognizes and embraces its changing demographics. Economically, Australia’s relationship with ASEAN member states is of great importance to both sets of countries. According to the World Bank, in be-tween the years of 2011 and 2015 the value of Australian exports correlated to nearly 20% of the nation’s GDP. These exports have primarily been raw materi-als destined for countries such as China

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and Japan. While both of the aforemen-tioned nations have GDPs surpassing US$1 trillion, ASEAN’s total GDP also surpasses US$1 trillion. Furthermore, it has been noted by the Australian government that the past three decades have seen an increasing portion of the exports to ASEAN be manufactured goods rather than raw materials. This is in contrast with much of the exports sent to China, Japan, and South Korea, Australia’s current three largest export destination. Encouraging such diversi-fication is crucial, and important steps have already been taken. On October 1, 2015 the ASEAN-Australia-New Zea-land Free Trade Agreement came into effect and promises a large decrease in tariffs on Australian exports destined for ASEAN. The countries within ASEAN also benefit from increased cooperation, as the largest consumer market in the nearby region will be more amenable for business.

“Furthermore, an ASEAN with Australia would boast a combined GDP greater than US$ 3 trillion.”

The existence of increasing eco-nomic cooperation might lead to questions regarding what added benefit full Australian membership would have for ASEAN. While the benefits may not necessarily be economic, they will certainly be geopolitical and strategic in nature. In recent years publications such as the Economist have noted that the foreign policy of nations in Asia has been marked by ever-closer economic cooperation with China and in many cases a deepening of security ties with the United States. Even the major trade deals in recent years, such as the Trans-Pacific Partnership (TPP) and the Asian Infrastructure Investment Bank (AIIB)

have simply been proxy geopolitical battles for influence between China and the United States over the Asian sphere of influence. While it is remiss to suggest that an ASEAN with Australia could provide a third power to challenge the economic and military might of either of these two nations, Southeast Asia could benefit from an organization interested in the welfare of its member states rather than the grander geopolitical aspirations of two large powers. On the military front, ASEAN has shown signs of moving towards increased defense cooperation, and Australian membership would bring more closely into the fold one of the region’s most powerful militaries. Furthermore, an ASEAN with Austra-lia would boast a combined GDP greater than US$ 3 trillion. Additionally, it would provide a forum for pan-Asian economic and political discussions which are more devoid of the geopolitical tensions that inevitably occur when the United States and China partake. Unlike other famous examples of international integration such as the European Union, the model for ASEAN most likely will not ever evolve into the level of economic and political integration witnessed in Europe. However, the aggregation of economic power and people that an ASEAN with Australia would contain, portends an organization that could potentially grow in stature and importance. If greater coordination, cooperation, and mutual interest are developed between nations in an ASEAN with Australia, the benefits for the member states could be signifi-cant. While not necessarily shifting the balance of power in the region as men-tioned previously, a more integrated and economically influential ASEAN could make both China and the United States take notice as they negotiate trade deals and jostle for influence in the region.

As mentioned previously, Australia like many nations in the Asian region faces increasingly stark choices and pressures from those seeking to embed them in the Chinese and American spheres of influence. As has been pointed out by Graeme Dobell at the Australian Strategic Policy Institute, closer ties and potential integration of ASEAN into Aus-tralia would not be seen as antagonistic moves by either China or the United States. Rather Australian membership in ASEAN would serve as a powerful mes-sage and potentially be strategically redefining. For the dynamics of the Asian region to tilt so that many of the countries outside China, India, Japan, South Korea, and the United States pos-sess increased agency it is necessary for economic power to aggregate else-where. While it is premature to suggest that ASEAN evolve into a European style union, the desire of both China and the United States to maintain nations within their spheres of influence within Asia could in time be curtailed by a group such as ASEAN. Such a curtailment would prove beneficial as it would allow member states to argue above their economic and geopolitical weight and obtain a fairer place in the international order which is currently being redefined in Asia because of the rise of China. Key to this improved version of events, is a more meaningful aggregation of economic power. Australian member-ship in ASEAN would serve as a first step towards making that future realizable. | BA

Sanjeev Dhara is a Senior in the College of Engineering majoring in Chemical & Biomolecular Engineering. He has always had a keen interest in Asian business and geopolitics. He currently serves as the President of Business Asia Journal.

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W hen Lee Kuan Yew, the founding father of mod-ern Singapore, first visited

Hong Kong in 1954, he marveled at the entrepreneurial spirit of the Hong Kong people. He said that Singaporeans needed that drive if they were going to successfully grow their economy. During his time, Lee Kuan Yew transformed Sin-gapore from a developing nation into a stable and prosperous economic system. While Hong Kong has long held the influential position as Asia’s preeminent financial center, Singapore is positioned to overtake Hong Kong if it can capital-ize on the government’s overwhelming support for new business creation and economic welfare for its citizens. In the last 50 years, Singapore has quickly become a gateway to the As-sociation of Southeast Asian Nations (ASEAN) and all of Asia. Sixty percent of

trade between the EU and ASEAN goes through Singapore, so if Europe wants exposure to the region, they will inevita-bly have to go through Singapore. Rec-ognizing this opportunity, the European Commission recently approved a free trade agreement between the EU and ASEAN that will eliminate tariffs, decrease tax burdens, and improve the accessibil-ity of ASEAN to Europe. The emerging nations of Southeast Asia, including Ma-laysia, Indonesia, and Myanmar, present an enormous business opportunity for developed nations, and Singapore’s stra-tegic position allows it to benefit from the increase in trade across the region. Europe and the Americas come to Asia seeking new business opportuni-ties and enlarged customer bases. Hong Kong has a thriving financial services industry that has helped it gain an elite status in the latter half of the twenti-

eth century. Singapore, however, has a more diverse collection of industries that makes it better positioned to suc-ceed in the twenty-first century. In 2013, manufacturing, construction, and utilities accounted for 23 percent of GDP in Singapore while services comprised 66 percent. In Hong Kong, these numbers are strikingly different – in 2013, services accounted for 92 percent of GDP. A more diversified industrial structure helps Singapore to better position itself as an attractive place to do business for many foreign companies looking to break into the Asian market across various indus-tries, including retail, technology, and manufacturing. While finance is still an important pillar of a thriving economy, growth opportunities in other sectors are the key to success in the twenty-first century. Part of why Singapore is such an

singapore’s Turn for economic superiority

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attractive destination for international investors arises from the fact that start-ing a business there is incredibly simple. It requires only three uncomplicated procedures and takes less than three days. A skilled workforce and business friendly taxation laws make it possible for foreign companies to establish themselves quickly and avoid financial and regulatory burdens. Singapore’s world-renowned cosmopolitan society also encourages foreigners to establish themselves there. The People’s Action Party (PAP), of which Lee Kuan Yew was the founding member, believes that eco-nomic success comes with a responsibil-ity to take care of ordinary citizens. This idea is called ‘growth with equity’ and encompasses welfare programs includ-ing medical care and state housing. This unique policy has made Singapore one of the world’s wealthiest nations with the highest standard of living.

“The emerging nations of Southeast Asia including Malaysia, Indonesia, and Myanmar present an enor-mous business opportunity for developed nations”

These programs are only possible in a nation where the government has an established and commanding rule. Singaporeans trust the party of Lee Kuan Yew, as they have never elected another ruling party in the history of the country. There is a strict code of law that includes restrictions on dissent against the party, which has prompted calls for change. After losing a number of Parliament seats in the 2011 election, the party won back three seats in the election earlier this year after indicating a willingness to be more flexible. The PAP rules with the elected consent of the people in a sys-tem that delicately balances democracy

and autocracy. Meanwhile, Hong Kong struggles with one-party rule, enforced by the Chi-nese government. Hong Kong officials are delegated by the mainland without the people’s consent, which has led to calls for increasing autonomy. In last year’s Umbrella Revolution, a group of university students protested for weeks in support of a more democratic and autonomous political system for Hong Kong to no avail. The instability in the region not only disrupted business flow, but also introduced concern as to how China’s policies will affect Hong Kong’s economic future. Since the stock market crash in China, Hong Kong has also been exposed to risk associated with China’s questionable central bank deci-sions. When the government is primar-ily concerned with the strength of the party followed by economic prosperity on the mainland, Hong Kong is often an afterthought. With the civil unrest and political uncertainty in the region, Hong Kong’s creative and entrepreneurial population is shrinking. Their distinct advantage that Lee Kuan Yew pointed out 60 years ago is eroding quickly. Protesters have also lashed out against increasing economic inequality in Hong Kong. The wealthiest 10 percent of those in Hong Kong hold 80 per-cent of the wealth, and the city-state is known for its rich and powerful tycoons, who dominate major industries. In real estate, three companies control 72 per-cent of the residential property market. Hong Kong lacks the extensive social welfare programs that Singapore boasts, and thus there is a self-perpetuating upper class in which the rich become richer, making social mobility appear to be a thing of the past. Younger genera-tions are discouraged by this trend and aren’t seeing action by politicians to alleviate their growing concerns. There are other signs that growth in Hong Kong is slowing down. As the

technology industry expands, it seems China is attracting most of the big names in everything from search with companies like Alibaba to smartphones with companies like Xiaomi. Hong Kong lacks a vibrant startup community like Silicon Valley, while Singapore is wel-coming entrepreneurs into their country. As part of a technology incubation scheme, the Singaporean government is providing funds for early stage startups to get off the ground. In one region of Singapore, a factory building known as Block71 is the center of the technol-ogy ecosystem, much like a condensed Silicon Valley. Lee Kuan Yew passed away earlier this year and left great uncertainty as to the future of a country without their charismatic founding father. With this transition, the PAP must continue to hold the support of the people and allow for a more open society. Most importantly, they must follow Lee Kuan Yew’s vision of creating a state-of-the-art, fully sustainable city, while allowing the people to achieve, and reap the ben-efits of, entrepreneurial successes. Nearly 60 years after Lee Kuan Yew marveled at Hong Kong’s entrepreneurial spirit, it appears that Singapore’s leadership has successfully fostered that same dynamic while Hong Kong risks losing its past identity as the politico-economic merg-ing with the Chinese mainland intensi-fies.| BA

Harrison Tighe is a junior studying Ap-plied Economics and Management from East Meadow, New York. In addition to the Business Asia Journal, Harrison is involved with Alpha Kappa Psi and the Alpha Fund. This past summer he worked at WR Hambrecht researching technol-ogy stocks and has previously interned in private wealth management. In his free time, Harrison enjoys being active, read-ing nonfiction, and following politics.

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I ran is generally viewed by the media through the nuclear lens – conversations about the Middle-

Eastern nation have been centered around its controversial atomic ambitions over the past decade, and little else. While a nuclear armed Iran would certainly be an important and pivotal state of affairs vis-á-vis the politics of the Middle East in particular, the eyes of the world have not strayed from the country’s centrifuges for years, even as the nation has not-so-secretly developed strong economic relationships with Asian powerhouses and is establishing itself as a critical stra-tegic ally for many nations in the region. Though Iran has been a trading partner of China, India, Japan, and South Korea for decades, bilateral trade is projected to pick up substantially in coming years – the easing of sanctions and a subse-quent increase in Iranian purchasing

power will serve as additional catalysts for dramatic growth in economic influence. This increase in geopolitical importance will come primarily from energy and infrastructure, as Iran sits on vast reserves of oil and the world’s richest natural gas field and is keenly negotiating investment deals with its neighbors further eastward. Historically, Iran has had shifting rela-tionships with a number of Asian coun-tries. Perhaps one of its most interesting and constantly evolving relationships is with India. Although the countries have often had similar foreign policy interests, the pendulum of political and economic relations has swung in tandem with a shifting global environment and important regional issues. During the Cold War period and the various encoun-ters with Pakistan in particular, the two nations had different political agendas, each taking opposing sides in a num-

ber of issues such as the Iran-Iraq war and the protracted Afghanistan conflict. Despite political tensions however, the two nations have been able to maintain good economic relations since they first established a relationship in 1950. Taking yet another step back in time, to an India before British colonization, Iran was a source of important agricultural imports and a number of Iranians known as the Parsis relocated to India, since becoming some of the most influential leaders in Indian business, research, and politics. In the modern era, trade between the two regions has naturally revolved around Iran’s oil and gas exports to the subcon-tinent. In fact, a pipeline under construc-tion from Iran to Pakistan is projected to supply 780 billion cubic feet of natural gas per year, with potential extension to India if the government deems it politi-cally and financially feasible. Today, as its second largest oil supplier, Iran is a critical

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part of India’s energy strategy going for-ward, with imports of oil and agricultural products growing at around 11 percent per year. Prior to international sanctions that limited bilateral trade, China was Iran’s largest source of trade by far, and remains its most important regional partner. The East Asian powerhouse accounted for over US $50 billion of its trading volume in 2013, 49 percent of its total exports, and 29 percent of its imports. In comparison, India accounted for 19 percent of exports and 11 percent of imports and was Iran’s second largest trading partner that year. Addition-ally, Iran is an important source of raw materials and is instrumental in provid-ing fuel for Chinese industry, supplying US $6-8 billion in iron ore and plastics to the manufacturing giant in 2013. China is especially interested in invest-ing in Iran’s natural resources, building infrastructure to boost the country’s production, and establishing relation-ships with its national corporations. The economic relationship is extensive, with the countries having inked a deal to give it control over a number of key Iranian oil fields for 10 years. Beyond simple economic ties however, China has been given another tactical advantage by being allowed to increase its military presence in and around these oil fields, claiming any attack or trespass as an attack on its sovereignty. Clearly, there has been a great deal of trust between the two nations, and each is able to sup-ply the other with important strategic assets. Despite sanctions, China invested US $20 billion in Iranian oil infrastructure in 2013, and as restrictions are eased and its energy demand skyrockets, China’s partnership with Iran is only expected to deepen. Aside from the two emerging econo-mies, Iran has strong economic rela-tionships with Japan and South Korea, both of which have historical ties to the

United States and even participated in the implementation of the original sanctions against Iran. Similar to China, both of these East Asian nations are dependent on imports of oil and gas to meet their energy needs. As Japan treads lightly with respect to nuclear power in the wake of the Fukushima disaster, it is left with an energy chasm to cover up – Iranian oil could serve as a US $6 billion bandage in 2016. Along with South Korea, Japan has supplied a diverse array of value added products such as elec-tronics, machines, vehicles, processed metals, plastics, and chemicals to Iran in exchange for its oil. This is a relationship that is only projected to grow in light of fewer sanctions; on October 13th, 2015, trade officials from Japan and Iran met in Tehran and agreed to a bilateral trade agreement involving infrastructure de-velopment and FDI, which has suffered at the hands of trade sanctions.

Despite sanctions, China invested $20 billion in Iranian oil infrastructure in 2013, and as restrictions are eased and its energy demand sky-rockets, China’s partnership with Iran is only expected to deepen.

An interesting paradigm that will undoubtedly be brought about by rising Iranian influence in the region will involve a uniquely Asian tension between strong economic ties and ideo-logical and political agendas. Reflecting historical disputes driven by non-eco-nomic tensions in Asia – India-Pakistan, Singapore-Malaysia, China-Japan, and China-India are a few examples – the dynamic between Iran and the growing economies of other Asian nations is likely to change in unpredictable ways over the coming decades. While economic

ties may continue to grow stronger and bring countries closer to Iran, the rigid rules of an Islamic theocracy will inevitably clash with the looser secular democracies of the rest of the continent, testing the strength of the relationship, and likely contributing to the web of confusion that defines the Middle East today. As the Iranian government imple-ments the particulars of the nuclear deal it recently struck with the West, competition to enter the Iranian market is expected to intensify dramatically. The softening of restrictions and balloon-ing trade between Iran and the rest of the world is likely to benefit all parties involved, resulting in an economic boom in the stagnating, oil dependent nation. In a recent statement, Prime Minister Hassan Rouhani noted that the most re-cent projections for the Iranian economy predict its lowest-ever dependence on oil, an emergence from recession, and the lowest inflation in a decade. Although Iran has been involved in un-precedented economic warfare against a Western alliance, its core relationships with major Eastern powers continued to grow and are now poised to take the Iranian economy to new heights. While it is unclear how this will impact Asian geopolitics going forward, Western observers would be foolish, in their rabid obsession with nuclear weapons, to discount Iran’s growing economic and political influence in the East. | BA

Benjamin Zehr is a Senior in the College of Agriculture, studying International Development and Business. He grew up in India, where he spent a gap year founding a non-profit network of eye hospitals which serves over 2 millions people today. He plans to start work at a management consulting firm in Chicago next fall, with the eventual goal of start-ing his own for-profit social enterprise in an emerging market.

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Moving forward after scandal

T he spring of 2013 saw the release of an enticing 10 year bond in Malaysia. The bond

offered a 4.4 percent return and was backed by the Malaysian state owned en-terprise 1Malasyia Development Berhad (1MDB). Since then, 1MDB has become the center of a scandal that rocked Malaysia, causing its currency, the ringgit, to slide to an all-time low against the US dollar, while reducing Malaysia’s for-eign reserves by more than 20 percent, compared to June of the previous year. In the aftermath of the scandal’s public reveal, it seemed to many that the issues revolving around 1MDB would result in the resignation of Malaysia’s Prime Minis-

ter Najib Razak. Although calls for Najib’s resignation have mostly ceased since the end of August 2015, the US $700 million scandal surrounding Najib and 1MDB has introduced new concerns regarding Malaysia’s ability to attract foreign invest-ment given the negative perception of unchecked corruption in Malaysia’s government. After being ushered into the role of prime minister in 2009 by his predeces-sor, Abdullah Ahmad Badawi, Najib put forth an initiative to rebrand the sov-ereign wealth fund Terengganu Invest-ment Authority as a development fund and renamed it “1Malaysia Development Berhad.” As chairman, Najib developed

the fund as part of the government’s long standing Economic Transforma-tion Programme. Despite its official goal of driving “strategic initiatives for long term economic development,” 1MDB has incurred debts of more than US $11.1 billion since Najib became chairman. This situation has fueled an economic crisis that has stifled investment, tanked the national currency, and seriously eroded foreign reserves. 1MDB’s damage to Malaysia has not only been economic, but has also seeped into the political arena as well. In an unexpected turn of events, for-mer Malaysian Prime Minister Mahathir Mohammad, a prior political mentor of

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Najib, claimed that huge sums of money have disappeared from 1MDB accounts. A political war has since broken out between Najib and Mahathir Mohamad, with repeated public calls by Moham-mad for his former mentee to step down as prime minister and admit to corrup-tion allegations. Rather than step down, Najib has elected to stifle protesters and agencies fueling the movement against him. In the months following initial allegations of corruption, Malaysian police have arrested over 150 journalists, lawyers, politicians, and other anti-Najib activists on sedition charges. At a forum on the issue of Najib’s alleged corruption, the 90-year-old Mahathir was cut off mid-speech by uniformed Malaysian police officers.

“At a forum on the issue of Najib’s alleged corruption, the 90-year-old Mahathir was cut off mid-speech by uniformed Malaysian police officers.”

Since mid-August of this year, Najib seems to have reconsolidated power around himself and mainstream calls for his resignation have been forcibly hushed. In their place, more radical pro-democracy groups have formed from Mahathir’s allegations and, in many areas, these activist groups have taken to the streets. On August 30th, a pro-democracy group, Bersih, attracted more than 25,000 protesters in Kuala Lumpur to call for Najib’s resignation. Bersih’s ap-plication for a protest permit was denied by the city authorities with accompany-ing threats of legal action against orga-nizers, leading to international fear of a repeat of a 2012 political rally in Kuala Lumpur that ended in water cannon and tear gas attacks on civilians by police officers. Though these political protests have

been featured prominently in global me-dia, the tangible impact of these corrup-tion allegations on Malaysian business has proven difficult to determine, likely due to the fact that, in the long run, the impact is negligible. Lee Yong Ming from the Malaysia In-vestment Development Authority (MIDA) provided his opinion with regard to both the historical trends and future pros-pects of foreign business in Malaysia. Mr. Lee was quick to point out that no major changes have been made to Malaysian policy since the scandal against the Prime Minister was first brought to light. Since 1998, foreigners in Malaysia have been able to own 100 percent equity in most types of businesses outside of a few critical manufacturing sectors – a policy that is highly unique in Asia (for example, in China, most foreign busi-nesses must have a Chinese partner with majority ownership). Therefore, regardless of the severity of the scandal in question and the degree to which the political environment is impacted, this liberal foreign ownership policy has con-sistently been instrumental in maintain-ing strong levels of foreign investment. Lee emphasized that no matter what unusual behaviors foreign businesses in Malaysia may or may not display in the coming months, wages are still on track to reach the US $15,000 per capita goal by the year 2020. This rise in wages would result in Malaysia’s official addi-tion to the list of the world’s developed nations. Looking exclusively at the num-bers, there is simply no strong indication that Malaysia will miss the goals Prime Minister Najib set for the country under his “New Economic Model” policy put forth in 2010 as a result of his recent fall from grace. Mr. Lee presented data that made it quite clear that FDI has not decreased during the summer months. With a smile on his face, he explained one of the fun-

damentals for governments doing the actual implementation of trade policies: “Keep it consistent, firm, and direct – and repeat it over and over again so people don’t forget it!” Mr. Lee’s point was well made. To change existing policy due to political scandal is a recipe for disaster, causing further confusion in an already unstable envi-ronment.

“Malaysia will remain a stable country with an indus-trialized economy, educated people, and very favorable trade policies.”

Many foreign businesses have faced hard times in recent months, observed Mr. Kenneth Chung, an associate from EY Malaysia. He pointed out that though many of the issues seem to have been caused by falling crude oil and palm oil prices which are two of Malaysia’s largest exports, recent political scandals do seem to have directly or indirectly affected the business service industry. According to Mr. Chung, despite the Big 4 accounting firms (Ernst and Young, Deloitte, Pricewaterhouse Coopers, and KPMG) achieving record high revenues in Malaysia, employees were told to be “ex-tremely vigilant.” State owned firms have cut consulting services and shelved ma-jor projects, putting strategy-consulting firms in a difficult position. He reported that after years of expansion, many major foreign consulting and accounting firms have frozen hiring in Malaysia for the near future. Ms. Kai Lin Tan, from Nestle Malay-sia’s marketing management practice, was quick to note that for foreign food product manufacturers like Nestle, a significantly weaker ringgit makes short term losses a real possibility. Food product manufacturing inputs produced

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outside Malaysia have become relatively more expensive, but weaker consumer demand makes it difficult to raise prices. The result has been dangerous pressure on already razor thin profit margins. Ms. Tan believes that one of the most lasting effects on foreign business as a result of the 1MDB scandal in Malaysia is weak-ened consumer demand. She explained that the Malaysian government may have made a major mistake interfering with media reporters and censoring stories, as the Malaysian people are lovers of democracy. Crackdowns following the scandal have shown that any non-demo-cratic action by the government nega-tively impacts consumer sentiment and behavior. Mr. Lee, Mr. Chung, and Ms. Tan held similar fundamental beliefs regarding Malaysia’s future, stressing Malaysia’s strong fundamentals as an extremely open and democratic nation on the cusp of breaking through the middle-income barrier. Despite the possible short-term

effects of the weakening ringgit and po-litical scandal, it seems that growth will continue chugging on, and Malaysia will remain a politically stable country with a successfully industrialized economy, edu-cated people, and very favorable trade policies. September 18th saw a new develop-ment on the issue when Prime Minister Najib announced a new stimulus pack-age. 20 billion ringgit will be pumped into ValueCap, a government affiliated Investment Company that buys under-valued stocks in an effort to stabilize the free falling stock market. Malaysia is not the first East Asian country to implement a stock market targeted stimulus plan. China, Thailand, and Indonesia have all made similar moves in the past with modest to strongly positive results, giv-ing investors even more reasons to count on a strong Malaysian comeback. It is worth noting that sensationalist reporters and shaky investors like to cry out after political scandal, but the reality

is that for the Malaysian people, life goes on as it always has. Aftershocks from government scandal may continue to affect foreign businesses in the coming months, but Malaysians still go to work in the morning, shop on weekends, and invest what is left over at the end of the month. What made Malaysia an attractive environment for investment historically has not changed, and it is only a matter of time before confidence in Malaysia is restored and there is a complete return to business as usual. | BA

Steven Salenik is a Junior studying Busi-ness and Government. He speaks fluent Mandarin and completed an internship with Roland Berger Strategy Consultants in Shanghai last summer.

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The BaJ Team

EXECUTIVE BOARDPresidentEditor-in-ChiefDirector of DesignAssociate EditorAssociate EditorAdviser

Sanjeev DharaNicole Schmit

Arthur TengSteven SalenikBenjamin Zehr

Prof. Thomas Pepinsky

EDITORIALKevin Chan

Erica DeMondJeffrey Fung

Brandon GreerNicole KwokMegan Lee

Shiu Yu Natalie LeungCatherine McAnney

Ahaan Nachane Harrison Tighe

Check us out, and our previous issues, online at: www.cornellbusinessasia.com

Interested in joining? Email us at:BusinessAsia.Journal@gmail.com

BUSINESSASIABusiness Asia Journal, an independent student organization located at Cornell University, produced and is responsible for the content of this publication. This publi-

cation was not reviewed or approved by, nor does it necessarily express or reflect the policies or opinions of, Cornell University or its designated representatives.

The Petronas Towers, also known as the Petronas Twin Towers, are twin skyscrapers in Kuala Lumpur, Malaysia. According to the Council on Tall Buildings and Urban Habitat (CTBUH)’s official definition and ranking, they were

the tallest buildings in the world from 1998 to 2004.