1416

New players,
New Game?
T h e Impact o f Emerging E co n o mi es
on Glo b al Gove rnance
The Hag ue CE N T R e fo R S TRAT E G I c S T UDI ES a nd T N O
A N N EX : I N D I V I D UAL CO U N T RY N O T ES
8 Annex: Individual
Co untry N o t es
8.1 Brazil
Key Takeaways
Strongly diversified economic base, consisting of agriculture, mining,

petroleum, manufacturing and service activities;
New oil finds grant Brazil the potential to develop into the 6th-largest oil
producer worldwide by 2035;
An expanding R&D sector and potential for specialized R&D firms to
enter the market;
A booming urban security market, particularly in the fields of public
safety and security, large events (2014 FIFA World Cup, 2016 Summer
Olympic Games), mass transportation, airport security, personal and
domestic defense, and cyber security. However, this is equally due to a
high incidence of urban crime.
Bureaucratic and inefficient business climate;
Slower economic growth and lower investment levels compared to other
emerging economies;
High levels of traffic congestion;
Ethanol market under pressure due to underinvestment; distorted
domestic fuel prices as a result of subsidies and government
bureaucracy.
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CHANG E RePORT 87
A N N EX : I N D I V I D UAL CO U N T RY N O T ES BRA Z I L
Variable
Brazils Rank
International Trade Logistics63
45th out of 155
Human Development
84th out of 187
64
101st out of 187
Education65
30th out of 132
Environmental Performance
66
53rd out of 142
Economic Competitiveness67
Perceived Governmental Corruption
73rd out of 182
Entrepreneurship69
56th out of 79
68
63 64 65 66 67 68 69
Population
In the period 2007-2011, the population of Brazil grew on average by 0.92%
per year.70 This rate of growth is similar to that experienced by European
countries such as Belgium and Sweden. Other emerging economies such

as Indonesia, India and Turkey grew slightly faster with around 1.2% growth
recorded in the same period. Like the aforementioned countries, Brazil has
a very high urbanization rate with 87% of its population living in cities. For
the period 2010-2015, urbanization is set to continue year-on-year by about
1.1%.71
63 The World Bank, 'Logistics Performance Index', August 23, 2012, http://info.
worldbank.org/etools/tradesurvey/mode1b.asp.
64 UNDP, 'International Human Development Indicators - UNDP', August 23, 2012,
http://hdr.undp.org/en/data/profiles/.
65 UNDP, 'Education Index (expected and Mean Years of Schooling)', August 23, 2012,
http://hdrstats.undp.org/en/indicators/103706.html.
66 Yale University, '2012 EPI:: Rankings | Environmental Performance Index', August 23,
2012, http://epi.yale.edu/epi2012/rankings.
67 The World Economic Forum, 'The Global Competitiveness Report 2011 - 2012',
August 23, 2012, http://reports.weforum.org/global-competitiveness-2011-2012/.
68 Transparency International, '2011 Corruption Perceptions Index -- Results', n.d.,
http://cpi.transparency.org/cpi2011/results/.
69 GeorgeMasonUniversityCentreforEntrepreneurshipandPublicPolicy(CEPP),

TheGlobalEntrepreneurshipandDevelopmentIndex(GEDI)2012Country
Rankings,2012.
70 The World Bank, 'Population Growth,' Population Growth (annual %), 2011, http://
data.worldbank.org/indicator/SP.POP.GROW.
71 US Central Intelligence Agency, 'CIA - The World Factbook. Brazil Country Page',
n.d., https://www.cia.gov/library/publications/the-world-factbook/geos/br.html.
88 NEW P L AY ER S , NE W G A M E ?
In terms of education, Brazil occupies place 101 out of 187 countries reviewed
in the context of the UNDP education index.72 University schooling in Brazil
has long been something available to the privileged few only, with a mere
11% of working age having a degree. Graduates earn on average 2.5 times as
much as those without a degree. Until recently those gains went mostly to
those who had attended private school. To make matters even more unfair,
they often studied at public universities for which they had to pay no fee.73
Recently however, an explosive growth in private, for-profit universities
is opening up higher education to the less privileged. A large and young
population, inadequate schools and the growth of industries, such as oil
(see also infra, societal challenges and opportunities) that demand skilled
workers all mean that the demand for higher education will continue to rise.
Since the public sector will not have the finances to expand, this will have to
come from private institutions.74 But, public universities still offer some of
the best courses. Charging fees would make up for some of the subsidy to
better-off Brazilians. However, this is not permitted under the constitution.
As a result, the government decided to install admission quotas. Universities
have until 2016 to reserve half of their places for students from state schools.
Of those, half must go to very poor students, and black, mixed-race or
Amerindian students must be admitted according to their share of the local
population.75
Economy
On average, the Brazilian economy grew by 3.7% in the period 2000-2010.

Compared to the rest of the BRICS+ countries, it finds itself in pursuit; with
the exception of South Africa (3.6%), all other BRICS+ countries experienced
stronger growth. China (10.3%) and India (7.4%) top the list (see Figure 1).76
Although still growing, there is some degree of concern about the Brazilian
economy. The 3% growth rate forecasted for 2012 may be high compared
to Western economies, it falls well short of what Brazil needs to continue
recent social gains.
72 UNDP, 'Education Index (expected and Mean Years of Schooling).'

73 The Economist, 'Higher Education in Brazil: The Mortarboard Boom', September 15,
2012, http://www.economist.com/node/21562955.
74 Ibid.
75 Ibid.
76 The World Bank, 'World Development Indicators | Data', July 2012, http://data.
worldbank.org/data-catalog/world-development-indicators.
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CHANG E RePORT 89
Brazil Figure 1
12
10
8
6
4
2
0
Brazil
China
India
Indonesia
South
Korea
Russia
South
Africa
Figure 1: Average GDP growth rates 2000-2010 (%)

Source: The World Bank, World Development Indicators July 2012;
International Monetary Fund, World Economic Outlook, April 2012.
Also, the Brazilian national currency, the Real, is overvalued compared to

the U.S. dollar and causes Brazilian products to be relatively expensive
abroad. An additional worrisome factor is what is known as the Brazil cost,
or the vast array of issues which make doing business in Brazil more costly
compared to elsewhere (see infra business climate).77
Brazilian exports were worth U.S. $19.4 billion in June 2012. Its main export
products are transport equipment, iron ore, soybeans, footwear, coffee,
autos, automotive parts and machinery. Furthermore, Brazil accounts for
25% of the worlds exports of raw cane and refined sugar and it is world
leader in soybean exports.78 Aided by recent oil and natural gas discoveries,
77 Bill Hinchberger, 'Carnaval Is Over,' Foreign Policy, April 7, 2012, http://www.

foreignpolicy.com/articles/2012/04/07/carnaval_is_over?print=yes&hidecomments=
yes&page=full; The Economist, 'The B in BRICS: The Brazil Backlash,' The Economist,
May 19, 2012, http://www.economist.com/node/21555583/; Albert Fishlow,
'Down, but Not Out,' Foreign Policy, May 18, 2012, http://www.foreignpolicy.com/
articles/2012/05/18/down_but_not_out.
78 Trading Economics, 'Brazil Exports,' Trading Economics, July 2012, http://www.
tradingeconomics.com/brazil/exports.
Turkey
Brazil is likely to develop into one of the worlds a major hydrocarbon

exporters in the years to come.79
Investment levels in 2010 (gross fixed capital formation) were, at 18.4% of
GDP, relatively low compared to other emerging economies. By comparison,
in 2011 China and India invested 45.4% and 29.5% of GDP, respectively.80
With terms of trade having improved by around 25% between 2000-2010,
Brazil needs productivity gains, more savings and investment to keep
growing. With productivity gains at 0.9% for the past decade, labor costs
rising and a strong currency, analysts expect that annual growth will remain
at current levels.81 Looking at foreign direct investment (FDI) levels, Brazil
scores on par with the leading emerging economies. With an inward FDI
stock of 22.9% of GDP in 2010, it performs roughly equal to Turkey (24.5%)
and Russia (28.7%).82 For the period 2008-2010, agriculture and the
extractive industries (mining, steel, oil, gas and petrochemicals) accounted
for the largest share of FDI inflow (18.2%). Industry, the automotive sector
in particular, also continued to attract large shares of investment (17.5%),
followed by the services sector (7%).83
The low level of investment has worried economists and led them to
downplay Brazilian GDP growth forecasts for 2012 to 2.3-2.5%. Despite
these concerns, the general belief is that the Brazilian economy will expand
79 Simon Romero, 'In Brazil, Energy Finds Put Country at a Whole New Power
Level', October 10, 2011, http://www.nytimes.com/2011/10/11/business/energyenvironment/in-brazil-energy-finds-put-country-at-a-whole-new-power-level.
html?pagewanted=all.
80 The World Bank, 'Gross Fixed Capital Formation (annual % Growth)', 2011, http://
data.worldbank.org/indicator/NE.GDI.FTOT.KD.ZG.
81 The Economist, 'Brazils Economy: A Bull Diminished', May 19, 2012, http://www.
economist.com/node/21555588?zid=305&ah=417bd5664dc76da5d98af4f7a640fd8
a; The Economist, 'The B in BRICS: The Brazil Backlash.'
82 UNCTAD, 'World Investment Report 2011. Country Fact Sheet: Brazil', 2010.
83 Economist Intelligence Unit, 'Brazil Business Environment', August 19, 2010, http://
store.eiu.com/article.aspx?productid=1930000193&articleid=417375826; KPMG,
'Investing in Brazil', 2011, 8.
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91
by around 4% in 2013.84 Moreover, long-term economic prospects for Brazil

are viewed positively in light of its strongly diversified economic base,
consisting of agriculture, mining, petroleum, manufacturing and service
activities.85
Political Developments
Dilma Rousseff, Brazils first ever female President, took office on 1 January
2011. Under her predecessor, Rousseff was an energy minister and chief of
staff. The Workers Party (PT) to which Rousseff belongs, now holds 383
out of 513 seats in the Brazilian lower house and 60 out of the 81 seats in
the Senate.86 Like under former President Luiz Incio Lula da Silva, Rouseff
has to maintain a cohesive alliance with the centrist Brazilian Democratic
Movement Party (PMDB). The PMDB has the largest number of governors,
mayors and senators, and is second only to the PT when it comes to the
amount of lower house representatives.87 Under Lula, Brazil saw a
spectacular rise of its middle class. Rouseffs biggest challenge undoubtedly
is to continue this development.88
On the external level, Brazil as many other emerging economies is
reinventing its foreign policy signature. Contrary to some of the other
BRICS+ countries, Brazil is not investing as heavily in military capabilities.
However, as one of the worlds five largest economies, and as an aspiring
leader in agribusiness and energy, Brazil is increasingly deserving of its
place at the table.89 Examples of Brazils new foreign policy posture are its
abstention on the UN resolution authorizing the NATO operation in Libya,
84 Francisco Marcelino & Andre Soliani, 'Credit Suisse Cuts Brazils 2012 GDP
Growth Forecast to 1.5%,' Bloomberg, June 20, 2012, http://www.bloomberg.com/
news/2012-06-20/credit-suisse-cuts-brazil-s-2012-gdp-growth-forecast-to-1-5-1-.
html; Reuters, 'Analysts Cut Brazil GDP Growth, Inflation Forecasts,' Reuters, June
11, 2012, http://www.reuters.com/article/2012/06/11/us-brazil-economy-surveyidUSBRE85A0JG20120611.
85 Albert Fishlow, 'Down, but Not Out'; The Economist, 'Brazils Economy: A Bull
Diminished.'
86 Bertelsmann Stiftung, 'BTI - Brazil Country Report', 2012, 31.
87 EDC Economics, 'Brazil Country Report', May 2012, 2.
88 Bertelsmann Stiftung, 'BTI - Brazil Country Report,' 31; Bill Hinchberger, 'Carnaval Is
Over.'
89 David Rothkopf, 'Brazils New Swagger,' Foreign Policy, February 28, 2012, http://
www.foreignpolicy.com/articles/2012/02/28/brazil_s_new_swagger?page=full.
its refusal to vote on a resolution to condemn the human rights violations

in Syria, and its alternative proposal, co-produced with Turkey, designed to
cut a deal to defuse the Iranian nuclear crisis.90 Equally, Brazil is keen on
acquiring a permanent seat in the United Nations Security Council. However,
during a visit to the United States in April 2012, U.S. President Barack
Obama only acknowledged Brazils aspiration for a permanent seat. He did
not endorse it, unlike his response to Indias wish in 2010.91
Research and Development
In 2007, the Brazilian government launched the 2007-2010 PACTI program,

which constituted the new setup of the National Policy of Science,
Technology and Innovation. The plan meant an increase in support for
scientific and technological research, in particular with respect to
engineering and areas which were deemed strategic for the countrys
development. The five most important strategic priorities are (i)
competitiveness
in
biotechnology
and
nanotechnology;
(ii)
biofuel
technological development and fuel types; (iv) R&D for refining, oil and gas
exploration, production, transport, natural gas, (clean) coal production and
usage; (v) satellite and earth observation technology; and (vi) nuclear
energy, enlargement of the Brazilian nuclear fuel cycle, construction of new
nuclear power plants and the implementation of a nuclear waste
management policy.92
90 James Traub, 'Will the Good BRICS Please Stand Up?,' Foreign Policy, March 9, 2012,
http://www.foreignpolicy.com/articles/2012/03/09/will_the_good_brics_please_
stand_up; David Rothkopf, 'Brazils New Swagger.'
91 Ian Bremmer, 'Brazil Wants Some Security Council Love. But It Wont Get It (yet),'
Foreign Policy, April 3, 2012, http://eurasia.foreignpolicy.com/posts/2012/04/03/
brazil_wants_some_security_council_love_but_won_t_get_it_yet; The Economist,
'Brazilian-American Relations: One Step at a Time | The Economist', April 14, 2012,
http://www.economist.com/node/21552592?zid=305&ah=417bd5664dc76da5d98af
4f7a640fd8a.
92 Erawatch, 'Brazil Country Report', 2011, 34.
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Over the years, the R&D intensity of the Brazilian economy has been
steadily rising from 1.02% of GDP in 2006 to 1.16% of GDP in 2009.93 The
goal was to nearly double per capita Gross Domestic Expenditure on R&D
(GERD) from 58.19 to 107.49 and business sector R&D intensity also
jumped from 0.62% of GDP to 0.74%.94 The share of the total GERD borne
by the private sector amounted to 45.25% in 2009, and that borne by the
public sector stood at 54.75% of GDP. The goal is to raise overall R&D
intensity to 2.2% by 2020.95 For 2012, R&D intensity is forecasted at 1.25%
of GDP.96
Brazils research system is clearly expanding, however the capacity of
research institutions and universities to interact with firms is still lacking.
The number of innovative firms is still small (106,800 firms in industry,
services and R&D sectors) and the number of those who do actual R&D is
even smaller (a mere 38.7%; 41,300 firms, of which 17,679 industrial and 727
service related). According to an innovation survey covering the period
2006-2008, many industrial firms reported a high cost of innovation,
excessive economic risks, a shortage of qualified personnel and of finance
resources in general. For those who did not engage in innovative practices,
the main issues are market conditions, a lack of experience in doing
innovation and other obstacles.97
93 Brazilian Ministry of Science and Technology, 'PORTAL DO MINISTRIO DA

CINCIA, TECNOLOGIA E INOVAO', September 24, 2012, http://www.mct.
gov.br/index.php/content/view/336625/Dispendios_nacionais_em_pesquisa_e_
desenvolvimento_P_D_em_relacao_ao_produto_interno_bruto_PIB_de_paises_
selecionados.html.
94 Erawatch Brazil, 'Basic Characterisation of the Research System', 2011, http://
erawatch.jrc.ec.europa.eu/erawatch/opencms/information/country_pages/br/countr
y?section=Overview&subsection=BasicChar.
95 Erawatch, 'Erawatch Country Reports 2010: Brazil', 2010, 3.
96 R&D Magazine, Batelle, International Monetary Fund, World Bank and CIA
Factbook, '2012 Global R&D Funding Forecast: R&D Spending Growth Continues
While Globalization Accelerates', December 16, 2011, http://www.rdmag.com/
Featured-Articles/2011/12/2012-Global-RD-Funding-Forecast-RD-Spending-GrowthContinues-While-Globalization-Accelerates/.
97 Erawatch, 'Erawatch Country Reports 2010: Brazil,' 34.
Business Climate
According to the 2012 edition of the World Banks Ease of Doing Business
Monitor, doing business in Brazil is not particularly easy. Brazil ranks number
126 out of a total of 183 countries reviewed. Compared to other emerging
economies, Brazil is positioned roughly equal to Russia (120) and India
(132), but is outperformed by China (91) and Turkey (71). Brazil has a poor
reputation when it comes to starting up a business (120/183), dealing with
construction permits (127/183), trading across borders (121/183) and the
ease with which insolvency can be dealt with (136/183). These poor scores
however are dwarfed by the bureaucratic tax system which is ranked at
number 150 out of 183.98 This is deemed so problematic in fact, that some
authors speak about the Brazil Cost, or the myriad of issues that make
doing business in Brazil more costly than in other countries.99
Brazil has a relatively high import tariff100 compared to other emerging
economies, almost twice that of Russia and China and three times as high
as Turkey, Indonesia. Compared to the OECD average , Brazil charges the
highest rate in U.S. Dollars for container imports, twice that of India, Turkey
and the EU and more than three times the rate of China, Indonesia and
Turkey. Custom formalities are not spared by the Brazil cost where it takes
up to 8 different documents to clear imported goods. By comparison
however, South Korea (3) and China (5) require significantly less documents
to clear an import.101
Societal Challenges and Opportunities
Urban Security
The high growth and economic pull of Brazils larger cities such as Sao
Paolo and Rio de Janeiro have caused large-scale urbanization. This urban
sprawl concentrated itself in the favelas or shanty towns located on the
98 'Ranking of Economies - Doing Business - World Bank Group', June 2011, http://
www.doingbusiness.org/rankings/.
99 The Economist, 'The B in BRICS: The Brazil Backlash'; Bill Hinchberger, 'Carnaval Is
Over.'
100 Applied weighted mean for all products imported.
101 The World Bank, 'Data on Trade and Import Barriers', December 2011, http://econ.
worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:21051
044~pagePK:64214825~piPK:64214943~theSitePK:469382.00.html.
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CHANG E RePORT 95
edge of the cities and surrounding hills. Often disengaged from the up-town
areas, crime is rife. Muggings, kidnappings, gang violence and homicide
incidences are high in Brazil and have given birth to a sprawling urban
security industry, designed specifically to counter these problems. The
designation of the 2014 FIFA World Cup and the 2016 Olympic Games to
be hosted in Brazil are a further stimulus for an already booming sector.
Brazils security industry recorded an average annual growth of 15-20%
during the last eight years and annual sales amounted to 24 billion Brazilian
Real. The market is divided with a roughly 50% foreign share of the market,
with half of these imports represented by American products. Other
important actors come from Israel, South Korea and Japan, with each
taking up approximately 10 to 15% of the import market share.102
Crime rates set aside, another reason for the high growth rates of the
Brazilian urban security market is the fact that prosperity in Brazil has been
rising fast.103 There are around 8,000 private security companies operating
in the country, the majority of which provide either security to retailers and
installers (49%), or monitoring services (30%). The vast majority (84%) of
Brazils electronic surveillance is in the hands of a few small and micro
businesses, but the highest revenues are generated by a few large
companies. Bosch, Johnson Controls, Tyco, Siemens, Pelco, Samsung,
General Electric and others have already established representations, and/
or joint-ventures in Brazil. Key-sectors for security services are public safety
and security, large events, mass transportation, airport security, personal
and domestic defense, and cyber security, data cryptography in
particular.104
102 Juliana Mello, 'Introduction to the Security Industry in Brazil,' The Brazil Business,
March 28, 2012, http://thebrazilbusiness.com/article/introduction-to-the-securityindustry-in-brazil.
103 Newsweek, 'How Street Gangs Have Replaced Cops in Rio - The Gangs
of Rio,' Newsweek, February 22, 2009, http://www.thedailybeast.com/
newsweek/2009/02/22/the-gangs-of-rio.html; Juliana Mello, 'Introduction to the
Security Industry in Brazil.'
104 Juliana Mello, 'Introduction to the Security Industry in Brazil.'
Mobility and Transport

Due to its high degree of urbanization and the strong growth of its cities,
Brazilian urban centers suffer from congestion. The 2010 IBM Commuter
Pain Index105 an index which ranks the emotional and economic toll of
commuting places Sao Paolo on sixth place with a score of 75/100.106
Urban public transport systems are said to be deficient and responsible for
holding back economic potential. Some estimates claim that wasted time
and fuel consumption cost the Sao Paolo economy nearly U.S. $20 billion in
2008, or about 10% of its GDP.107 Brazil ranked fourth worldwide in terms of
annual registration of new vehicles in 2010, up from ninth a decade ago.
Population growth was 11% in that period, vehicle registration however
increased by 120%.108 The share of public transport usage when commuting
from A to B in Brazilian urban centers has been declining for years, from
85% in 1960 to 50% in the period 2000-2010 a trend which is set to
continue.109 Congestion is so bad in fact, that it has prompted affluent
residents of Sao Paolo to resort to unorthodox solutions, using helicopters
instead.110
105 The IBM Commuter Pain Index is the result of a survey among 8,192 motorists in 20
cities on six continents. The index is comprised of 10 issues: 1) commuting time, 2)
time stuck in traffic, agreement that: 3) price of gas is already too high, 4) traffic
has gotten worse, 5) start-stop traffic is a problem, 6) driving causes stress, 7)
driving causes anger, 8) traffic affects work, 9) traffic so bad driving being stopped,
and 10) decided not to make trip due to traffic. The results of the survey are
compiled into an index on a scale of one to 100, with 100 being the most onerous.
106 IBM, 'IBM Global Commuter Pain Study Reveals Traffic Crisis in Key International
Cities', June 30, 2010, http://www-03.ibm.com/press/us/en/pressrelease/32017.
wss?re=traffic_hero.
107 Economist Intelligence Unit, 'Traffic Congestion in Brazils Metropolitan Regions
Undermines Countrys Competitiveness,' EUI for the Media, November 3, 2011, http://
www.eiumedia.com/index.php/latest-press-releases/item/247-traffic-congestionin-brazil%E2%80%99s-metropolitan-regions-undermines-country%E2%80%99scompetitiveness; Economist Intelligence Unit, 'Making up for Lost Time: Public
Transportation in Brazils Metropolitan Areas', November 2011, 3.
108 Economist Intelligence Unit, 'Making up for Lost Time: Public Transportation in
Brazils Metropolitan Areas,' 4.
109 Ibid., 7.
110 Rafael Romo, 'Rich Fight Brazils Congestion with Helicopters,' CNN, April 8,
2010, http://articles.cnn.com/2010-04-08/world/brazil.congestion_1_motorcyclemessengers-anderson-silva?_s=PM:WORLD.
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CHANG E RePORT 97
It is clear that to be able to host the 2014 FIFA World Cup and the 2016
Summer Olympic Games, public transport systems have to be radically
upgraded. In addition, restrictions on private car usage should be
implemented, analogous to for example the congestion charge used in
central London. The reality however does not reflect this necessity. The
projected increase in infrastructure investment from U.S. $34 billion
between 2006 and 2009 to U.S. $80 billion from 2011 to 2014 falls well
short of the U.S. $250 billion required to adequately host the events.111
Multimodal transport systems which integrate bus rapid transit, metro and
train traffic in an intelligent way are urgently needed.
Energy
According to the US Energy Information Administration, Brazilian oil
production will reach 2.8 million barrels per day in 2012 and 3 million barrels
per day (bbl/d) in 2013.112 Oil exploration and production is expected to
increase strongly in the coming years, particularly due to the exploitation
of Brazils off-shore pre-salt deposits. The pre-salt is composed of oil
deposits located under thick layers of salt, in areas on average 18,000 feet
below the oceans surface. This new development requires heavy
investments in the latest technologies and provides strong incentives for
Western companies to become involved.113 However, the difficulty in
accessing reserves, considering both the great depths and pressures
involved, represent technical hurdles which still need to be overcome.114
The total recoverable volume of oil and gas reserves is estimated to be
around 50 billion barrels of oil equivalent (boe), thus quadrupling Brazils
current reserves and potentially making the country the worlds 6th largest
oil producer by 2035. 28% of concessions have been granted so far. The
rest will be developed under a new regulatory framework of productionsharing agreements.115
111 Economist Intelligence Unit, 'Making up for Lost Time: Public Transportation in
Brazils Metropolitan Areas,' 5.
112 US Energy Information Administration, 'Country Analysis Briefs: Brazil', February 28,
2012, 2.
113 Swiss Business Hub Brazil, 'The Brazilian Oil and Gas Sector', September 2011, 1.
114 US Energy Information Administration, 'Country Analysis Briefs: Brazil,' 6.
115 Swiss Business Hub Brazil, 'The Brazilian Oil and Gas Sector,' 2.
In addition to oil production, Brazil is the second largest producer of

ethanol in the world, after the United States. A combination of high world
sugar prices, a poor sugar cane harvest and underinvestment however
caused ethanol production to seriously decline in 2011 to around 390,000
bbl/d, down from 486,000 bbl/d in 2010.116 The sector continues to struggle
as investment was down to U.S. $700 million in 2011, from U.S. $7.84 billion
in 2008. Satisfying domestic demand has been difficult as Brazils fastgrowing fleet of hybrid cars will cause domestic demand to skyrocket in
the coming years to 50 billion liters per year by 2018. Brazil requires an
average of 15 new distilleries annually to reach its government target of 60
billion liters by 2021. Biofuel investors however are faced with poor
infrastructure, government bureaucracy and distorted domestic fuel prices
which are below international market levels. The low prices for competing
fuels have caused ethanol producers to be unwilling to raise prices, thus
capping profits and reducing investment.117
116 US Energy Information Administration, 'Country Analysis Briefs: Brazil,' 4.

117 Raymond Colitt and Stephan Nielsen, 'Brazil Ethanol Drive Falters on Domestic
Supply Shortage,' Bloomberg, March 13, 2012, http://www.bloomberg.com/
news/2012-03-13/brazil-ethanol-slows.html.
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A N N EX : I N D I V I D UAL CO U N T RY N O T ES CH I N A
8.2 China
Key Takeaways
The average age of population in China is quite high the country might
grow old before it gets rich. Its labor force is likely to start declining after
2015;
China achieved almost 10% average growth rate in the last decade. It can
become the largest economy in the world around 2030;
Chinas R&D expenditure increased by a factor of 8 and the number of
researchers almost tripled over 1996-2008;
Political transition to a new generation of political leaders might increase
political risk in near term;
Urbanization, environmental degradation, health and food safety are
among the most important societal challenges in China.
Variable
Chinas Rank
26th out of 155
Human Development
101st out of 187
119
114th out of 187
Education120
116th out of 132
121
26th out of 142
75th out of 182
Entrepreneurship124
58th out of 179
123
118 The World Bank, 'Logistics Performance Index.'

119 UNDP, 'International Human Development Indicators - UNDP.'
121 Yale University, '2012 EPI:: Rankings | Environmental Performance Index.'
122 The World Economic Forum, 'The Global Competitiveness Report 2011 - 2012.'
123 Transparency International, '2011 Corruption Perceptions Index -- Results.'

'TheGlobalEntrepreneurshipand DevelopmentIndex(GEDI)2012Country
Rankings.'
Population
China has 1.3 billion inhabitants and is the most populous country in the
world. Chinas population its median age was 34.5 years in 2010 is older
than in other developing countries with a similar level of per capita income.
Two other countries in the BRICS+ group that have a somewhat higher
median age South Korea and Russia are substantially wealthier than
China. Total fertility rate in China has been steadily declining in the last few
decades and reached 1.6 in 2010, which is far below the replacement level
(approximately 2.1) and lower than in many EU countries. As a result, in the
last decade population growth in China has been quite low less than 0.6%
pa, which is again not much higher than in the EU. The 'one child' policy
undoubtedly has a substantial effect on slowing down population growth
but a rapid fall in the fertility rate began even before this policy was
introduced in 1978.
These developments suggest that China will experience a rapid population
aging in the not so distant future. Chinas labor force is likely to start
declining around 2015.125 At the same time its old age dependency ratio126
will grow substantially. In recent years China has also rapidly extended
pension system coverage.127 These factors suggest that China might see
growing pressures on its public finances in the future.
Another demographic issue that has significant economic and other
implications is a rapid growth in urbanization. China has the second lowest
rate of urbanization among all BRICS+ countries 44.9% in 2010 (India has
the lowest). This suggests that its rapid urbanization (in 2001-2010 the
annual average growth in urban population was 2.8%) will continue in the
future. It is expected that by 2030 urban residents will make up
approximately two thirds of the total population. This means an addition of
about 13 million new urban residents each year. As a consequence, the
125 World Bank, China 2030: Building a Modern, Harmonious, and Creative High-Income
Society, 2012. At http://www.worldbank.org/content/dam/Worldbank/document/
China-2030-complete.pdf.
126 The ratio of the number of people aged 65 and above to the number of working
age people (aged between 15 and 64 years).
127 The Economist, 'Asias next revolution', September 8th, 2012.
ST RAT EGY
CHANG E RePORT 101
development of urban infrastructure and delivery of public services in the

cities will continue to be important issues for policy-makers.
Economy
Chinas economic development over the last three decades was remarkable
and unprecedented for such a large country. Its growth rate in this period
averaged almost 10% and dropped below 7% only twice. Over this time
China managed to lift out of poverty some 500 million people as the
poverty rate fell from more than 65% to less than 10%.128 Its share of the
worlds economy has increased by 270% since 1990 (to more than 13% in
2010 see Figure 1). It is poised to overtake the U.S. and to become the
worlds largest economy by 2030.
(%"#
($"#
(!"#
'"#
&"#
%"#
$"#
!"#
Figure 1 Chinas Economy as a Percentage of Worlds Economy (in PPP)

Source: World Development Indicators
128 World Bank, op.cit.
However, economic growth in China in the years ahead should slow down.
Several structural factors will push the growth rate toward a lower level:
Demography as it was mentioned above Chinas labor force will soon
start falling;
China has an exceedingly high investment ratio (45% of GDP) and it is
unlikely to be sustained at this level. In any case, the capital-labor ratio
will increase thus reducing marginal productivity of capital and its
contribution to growth;
Wage growth for unskilled workers has accelerated and now exceeds
that for skilled workers.129 This indicates that the growth model built on a
large supply of cheap labor may run its course.
The IMF predicts that growth rates in China in the next few years will still be
above 8%. However, longer term forecasts foresee significantly lower
growth. For example, a recent review of 27 projections for long-term
economic growth in China and India130 found that the average GDP growth
rate in China for the period from 2020 through 2025 was 5.7% pa with the
range of 3.8 -9.0% (almost the same as in India).
China is the worlds largest manufacturing power. Manufacturing has an
unusually high share in Chinas economic output it stayed within a narrow
range between 31 and 34% in 1990-2009. This is the largest share among
BRICS+ countries. The principal manufacturing sectors are basic metals,
ICT and the chemical industry.
Political developments
The year 2012 marks an important milestone in Chinas political development.

In the fall China Communist Partys congress should select a new generation
of political leaders, including a new general secretary of the party, who is
speculated to be Xi Jinping.131 While China would like to present to the
outside world as smooth a picture of transition as possible, the scandal
surrounding the fall of Bo Xilai, a Politburo member and leader of the
129 Sharma, R., Breakout Nations: In Pursuit of the Next Economic Miracles , 2012.
130 Wolf, C., et al. China and India, 2025: A Comparative Assessment, RAND Corp. 2011.
131 http://en.wikipedia.org/wiki/18th_National_Congress_of_the_Communist_Party_of_
China (assessed July 13, 2012).
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CHANG E RePORT 103
Chongqing region, has revealed signs of internal strife within the

leadership.132 In any case, leadership transition means higher political risk
for China at least in short-term.
R&D performance and priorities
One distinct feature of Chinas recent development was a very rapid

increase in R&D expenditure and the number of researchers. China became
the third largest R&D spender in the world after the U.S. and Japan. As a
share of GDP its expenditure more than doubled from 0.57% in 1996 to
1.47% in 2008. Given that its GDP also grew rapidly over the same period its
monetary expenditure on R&D increased by a factor of 8 (in real terms)!
The number of researchers almost tripled over the same period.
China also achieved some significant and visible milestones in its technical
development in the last 10-15 years: it launched its first manned space flight
in 2003, opened the worlds first commercial operation of a high-speed
maglev train in 2004, developed indigenous versions of modern defense
technologies, such as a fourth-generation jet fighter aircraft, anti-satellite
missile, etc.
The countrys leadership put a strong emphasis on innovation and
technology development. For example, the 12th five-year plan (2011
2015) set the following objectives:133
Raising expenditure on research and development to 2.2% percent of
GDP;
Increasing rates of patenting to 3.3 per 10,000 people;
Promoting enterprise-led innovation.
It also assigns a central role to selected strategic industries, which include
energy-saving and environmental protection, next generation information
technology, bio-technology, high-end manufacturing, new energy, new
132 http://www.cfr.org/china/chinas-leadership-shift-disarray/p27974 (assessed July 16,

2012).
133 World Bank, 2012, p.176.
materials and clean-energy vehicles. In addition, government plans to

support a number of mega-projects with a focus on basic research including
two in the life sciences on drug discovery and on major infectious
diseases.134
Patent statistics provides another way to look at the sectors that are most
active in terms of R&D output. WIPO data on international patents for
2007-2009 show that electrical engineering, in particular electrical
machinery and energy, telecommunications and digital communications,
were the most active fields. For example, in digital communication Chinese
residents held more than 17% of all international patents.135 Similar results
emerge from the U.S. Patent and Trademark Office (USPTO) data as well.
Chinese telecommunication technology companies such as Huawei and
ZTE are quickly expanding on the global market and might become world
leaders in this sector. For example, Huawei filed for more international
patents than any other firm in 2008.136
Business climate
In general the business climate in China is not particularly business friendly.

The 2012 Ease of Doing Business Index compiled by the World Bank put
China in 31st place out of 49 upper-middle income countries.137 This means
that China has better business conditions than Russia or Brazil but worse
than South Africa or Turkey. Despite this, foreign investors have been very
active in China attracted by the rapidly growing domestic market and the
opportunity to cut production costs by relocating manufacturing facilities
to China. China received the largest volume of foreign direct investment
among all BRICS+ countries in the last decade even when measured as a
percentage of GDP.
134 Ibid.,p.176.
135 Ibid., p.209.
136 The Economist, 'The end of cheap China', March 10th, 2012.
137 A high ranking on the ease of doing business index means the regulatory
environment is more conducive to the starting and operation of a local firm.
ST RAT EGY
CHANG E RePORT 105
Chinas market is often very competitive and many foreign investors

struggled to achieve an acceptable level of profitability. Protection of
intellectual property rights has been another large concern for foreign
investors in China. However, in recent years there have been some signs
that the Chinese leadership has started to take this issue more seriously,
especially because many Chinese companies are becoming more and more
active in patenting.138
Societal challenges and opportunities
Environmental degradation and pollution

One of the most visible downsides of Chinas economic growth is
environmental degradation and resource depletion. The cost was estimated
to be close to 10% of Chinas GDP over the last decade. This includes the
cost of air and water pollution and soil degradation.139 Out of the worlds 30
most polluted cities, 20 are in China. Over 300 million people in China use
contaminated water supplies.140
Chinas soaring energy consumption has made it the worlds largest emitter
of carbon dioxide, a greenhouse gas. Its per capita emissions have been
growing very rapidly as well and are now above those of France and Spain.141
At the same time, China is quite vulnerable to climate change. Our
calculations of climate change vulnerability indicates that China will be
among 20% of countries worst affected by climate change.
These problems have not been unnoticed by policy makers. China intro
duced ambitious energy efficiency and emissions goals, and heavily
promoted the development of green industries. Since 2009 China has been
the worlds leader in terms of investment in renewable energy. Investment
in renewable power and fuels in China increased from U.S.$2.2 bn in 2004
to U.S.$52.2 bn in 2011, a compounded annual growth rate of 57%142 In 2010,
138 The Economist, 'Patents, yes; ideas, maybe', October 14th, 2010.
139 World Bank, op. cit., p.39
140 Ibid., p.70
141 Ibid., p.235.
142 UNEP and Bloomberg New Energy Finance, Global Trends in Renewable Energy
Investment 2012, 2012.
China became the largest wind energy provider in the world , with a total
installed capacity of 41.8 gigawatts (GW).
Urbanization
As it was mentioned earlier Chinese cities experience a large influx of new
residents. Many cities are undergoing construction and transportation
booms. Some side effects of these developments have been air pollution,
traffic jams, high energy consumption, etc. Although urban air pollution has
been declining it still has a very large impact on health, which was nearly
3% of GDP in 2009.143 The downsides of rapid urbanization might become
even more serious because urban residents will buy more cars, electrical
appliances and demand more living space as their income grows.
Cities provide many opportunities to reduce energy consumption and
emissions of greenhouse gases. One area for improvement is smarter and
greener buildings that use energy, water and other resources much more
efficiently. Greater use of energy efficient appliances provides another area
for the reduction of energy use. Analysis done by McKinsey & Co highlights
large potential of many existing technologies to reduce energy use and
carbon emissions in China. 144
New approaches to urban planning that aim at creating denser urban areas
with high-rise buildings to are also important. Dense cities make it easier to
encourage important behavioral changes such as more frequent use of
public transportation instead of cars.
Health care
Given rapid population aging, pollution, and some bad health habits (there
are 350 million Chinese smokers145) some experts argue that China faces a
'perfect storm' with 'steeply rising social and financial costs that could
143 World Bank, op.cit., p.251.

144 McKinsey & Company. 2009. 'Chinas Green Revolution: Prioritizing Technologies to
Achieve Energy and Environmental Sustainability'.
145 http://en.wikipedia.org/wiki/Smoking_in_the_People's_Republic_of_China, assessed
on July 17, 2012.
ST RAT EGY
CHANG E RePORT 107
become a huge burden on the nation in a handful of decades.'146 One of the

big concerns is the rise of non-communicable diseases, which account now
for 80% of all deaths higher than in advanced countries.
There are many areas in which technological innovation can play an
important role in addressing health related problems. Some concern very
basic needs such as ensuring access to clean water and good sanitation.
Better use of digital technologies (ICT) technologies should improve health
care quality and efficiency. Bio-pharmaceutical innovation is also important
China Figure 2
and became one of the strategic priority industries designated by the

central government.
600
500
400
300
200
100
0
Figure 2 Top 15 Countries of Origin for Notifications to the RASFF
146 World Bank, 2012, p. 201.
Food Safety
Chinese food is bedeviled by scandal after scandal, particularly relating to
chemical adulterations.147 The most significant of these was in 2008 and
involved melamine intended to disguise fraudulently diluted milk in protein
tests a cost-cutting measure with disastrous consequences as dozens
were killed and hundreds hospitalized with kidney stones, including many
babies. Empty supermarket shelves became iconic of the tragedy and
highlight the enormous cost to the economy. Europe also feels the impact
of Chinas food safety difficulties: Chinese food is by far the largest source
of notifications to the Rapid Alert System for Food and Feed (RASFF) for
alerts, information and border rejections; see Figure 2.148 Food safety is a
problem recognized all the way up to the highest echelons of Chinese
society, with former vice premier Wu Yi forced to issue an apology for the
multiple crises which have occurred.149
147 Nicholas Zamiska, 'Whos Monitoring Chinese Food Exports?,' The Wall Street
Journal, April 9, 2007, http://online.wsj.com/article/SB117608207682763704.html;
Morgan Figuers, 'Apologies for Food Safety in China,' China Digital Times, March
9, 2007, http://chinadigitaltimes.net/2007/03/apologies-for-food-safety-in-china/;
Patti Waldmeir, 'China Milk: Not so Bright,' Financial Times, June 28, 2012, http://
blogs.ft.com/beyond-brics/2012/06/28/china-milk-not-so-bright/#axzz252PzGVPh.
148 Rapid Alert System for Food and Feed, 2011 Annual Report (Luxembourg: European
Commission, 2012), http://ec.europa.eu/food/food/rapidalert/docs/rasff_annual_
report_2011_en.pdf.
149 Figuers, 'Apologies for Food Safety in China.'
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A N N EX : I N D I V I D UAL CO U N T RY N O T ES I N D I A
8.3 India
Key Takeaways
India has a young and rapidly growing population and is poised to

overtake China as the most populous nation around 2020;
The share of working age population as a proportion of the total is growing
rapidly. As a result India might enjoy benefits of a 'demographic dividend'
in the future;
India is the poorest country among all other BRICS+ nations (in terms of
GDP per capita). Agriculture still employs more than 50% of the labor force;
It enjoyed a period of rapid economic growth between 2003 and 2008
with the average GDP growth rate approaching 9%;
There are significant risks to future growth that include inadequate
infrastructure, corruption, absence of further economic reforms, weak
public finances;
India has some successful high-technology sectors, such as IT services,
pharmaceutical and space;
Addressing challenges related to agriculture and infrastructure will be
one of the main issues for decision-makers.
Variable
INDIas Rank
46th out of 155
Human Development
134th out of 187
151
134th out of 187
Education152
125th out of 132
153
56th out of 142
95th out of 182
Entrepreneurship156
74th out of 179
155

152 'Education Index (expected and Mean Years of Schooling).'
155 Transparency International, '2011 Corruption Perceptions Index -- Results.

'TheGlobalEntrepreneurshipandDevelopmentIndex(GEDI)2012CountryRankings.'
Population
India is the second most populous country in the world with 1.22 billion
inhabitants; approximately 10% less than in China.157 However, unlike Chinas
population, which is aging rapidly, India s population is young and growing
fast. In the last 10 years (1991-2010) it has increased by 37% and is expected
to continue to grow faster than any other BRICS+ country. India should
overtake China as the most populous country in the world right after
2020.158
At the same time the population growth rate in India is steadily falling (from
2.1% in 1991 to 1.4% p.a. in 2010) driven by the rapidly declining fertility rate,
which fell from 3.9 in 1991 to 2.6 in 2010. Since old age cohorts are still very
small, the falling birth rate will decrease Indias total dependency ratio (the
number of young- and old-age dependents to the working-age population).
This opens a window of opportunity in the countrys demographic transition
for a so-called 'demographic dividend' that could boost growth. However,
this outcome is far from certain and its realization depends on the creation
of favorable conditions for economic growth including better education for
younger generations.
Currently the education level of the population is quite poor. The literacy
rate among adults is just 74% and is well below the world average of 84%,159
or the rate in China and Indonesia. Only 21% of rural males and 10% of
females had an education of secondary school or higher. Unless the Indian
government takes more serious measures to improve the situation, Indian
ambitions to become a more knowledge-oriented economy might run into
difficulties and a demographic dividend can easily become a population
bomb or poverty trap.
Economy
Economic growth in India strongly accelerated in 2003 and exceeded 8%

p.a. until the economic crisis struck in 2008. The impact of the crisis was
157 Unless specifically noted all figures quoted in this brief are from the World
Development Indicators database, at http://data.worldbank.org/data-catalog/worlddevelopment-indicators.
158 UN World Population Prospects. The 2010 Revision, UN, New York, 2011.
159 http://en.wikipedia.org/wiki/Literacy_in_India.
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CHANG E RePORT 111
relatively mild Indias GDP still grew 4.7% in 2008 and 9% the following
year. However in 2011 it slowed to 7%, constrained by an uncertain global
economic environment and tighter monetary policy triggered by high
inflation. Current projections from the IMF expect even slower growth
(6-6.5%) for 2012-2013.160
The recent economic growth has been service-led. The service sector grew
significantly faster than overall GDP and contributed more than 60% to the
total GDP increase between 1993 and 2007.161 The IT-related service sector
that includes software development and business process outsourcing
(BPO) is one of the main success stories of the Indian economy. The sector
revenues as a proportion of GDP increased from 1.2% in fiscal year (FY)
1998162 to an estimated 7.5% in FY 2012.163 It provides direct employment to
about 2.8 million people and generates a further 8.9 million indirect jobs. It
accounts for 25% of total Indian exports (merchandise plus services)
compared with just 4% in 1998.
Another success story but probably less known is the pharmaceutical
industry. Industry turnover increased from just U.S.$300 million in 1980 to
about U.S.$19 billion in 2008.164 The industry consists of about 5,000 firms
and employs 340,000 workers directly. India is currently the third-largest
pharmaceutical producer worldwide by volume behind the U.S. and Japan.
Pharmaceutical exports grew at an average rate of 22% between 2003 and
2008.
These high-technology success stories should not mask the fact that India
is still mostly a poor country. It is significantly poorer than the other seven
BRICS+ countries its GDP per capita is less than 80% of Indonesias and
less than 50% of Chinas (measured at purchasing power parity, PPP). In
160 http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm.
161 WIIW, Models of BRICs Economic Development and Challenges for the EU
Competitiveness, Research Report #359, December 2009.
162 Fiscal year in India runs from 1 April to 31 March, http://en.wikipedia.org/wiki/Fiscal_
year.
163 Data are from the NASSCOM, the industry association for the IT-BPO sector in India,
http://www.nasscom.org/indian-itbpo-industry.
164 Mani, S., Ch.17 'India' in UNESCO Science Report 2010, UNESCO, Paris, France, 2010.
2010, 32.7% of Indias population lived below the international poverty line
of U.S.$1.25 (PPP) per day (compared to 18% in Indonesia) and 51.7% lived
on less than U.S.$2 per day.
Agriculture plays a very prominent role in the economy and accounts for
51% of total employment. The shift from agriculture to manufacturing and
the rate of urbanization have been relatively slow in India. Many farmers
show a tendency to stay on the farm instead of moving to cities to take
more productive manufacturing or service jobs.165 Only 7% of Indias labor
force is employed in the organized sector with formal work contracts, twothirds of which are in the public sector.166 Indias labor regulations some of
the most restrictive and complex in the world are at least partially
responsible for this. More rapid urbanization is going to be one the main
challenges if India wants to achieve a high level of economic growth
comparable to that of China.
Meta-analysis of long-term economic growth estimates for India shows that
the average forecasted GDP growth rate for the period from 2020 through
2025 was 5.6%, essentially the same as the 5.7% growth rate predicted for
China for the same period.167 However, growth in employment is expected
to be much more rapid in India (1.6% pa) than in China (only 0.4% pa).
Political developments
The current government is led by Manmohan Singh, who as minister of

finance was instrumental in initiating economic reforms in 1991 that
dismantled the License Raj and liberalized the Indian economy. Many
observers are however skeptical about the governments performance in
recent years. Even a cabinet minister has called the government
directionless.168 It has not implemented any major economic reforms in
several years and is beset by a series of corruption scandals. It has reversed
its decision to open the retail industry to foreign investment and failed to
165 Sharma, R., Breakout Nations: In Pursuit of the Next Economic Miracles, 2012 .
166 http://en.wikipedia.org/wiki/Economy_of_India#Employment.
167 Wolf, C., et al. China and India, 2025: A Comparative Assessment, RAND Corp.,
Santa Monica, 2011.
168 The Economist, 'Booted Upstairs', July 21, 2012, http://www.economist.com/
node/21559360.
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CHANG E RePORT 113
cut costly and inefficient subsidies. Foreign investors were also put off by
its plans to introduce some retroactive taxes.169
From a longer-term perspective, regionalization and fragmentation in
Indian politics represent an important trend. Two large national parties, the
ruling National Congress and the opposition Bharatiya Janata Party, are
becoming less popular while regional parties are increasing their
importance. This has made coalition government the norm at federal level
and as a consequence reaching agreement on major reforms more
difficult.
Another interesting fact is that the average age of cabinet ministers in India
is the highest compared to other major countries including China, Brazil
and Russia, while its population is the youngest.170
R&D performance and priorities
Indias gross expenditure on R&D (GERD) has been growing strongly in

absolute terms in the last decade but as a ratio to GDP (or R&D intensity) it
has not changed much and remains below 1% because of rapid GDP growth.
The Indian government had planned to increase the R&D intensity to 2% of
GDP by 2007 in its Tenth Five-Year Plan but the GERD/GDP ratio lagged at
0.76% in that year. Its Eleventh Plan (2007-2012) aims to triple R&D
expenditure to 2.5% but this also seems unlikely.
Government funding accounts for two-thirds of all R&D expenditure, higher
than the BRICS+ and OECD averages. Government expenditure tends to
focus on nuclear energy, defense, space, health and agriculture.171
Business R&D expenditure has increased more rapidly than public R&D
expenditure in recent years. There has been a very large increase in the
number of foreign R&D centers from around 100 in 2003 to about 750 at
the end of 2009, with most of these centers working in the IT, automotive
169 New York Times, 'Indias Tax Plan Troubles Foreign Investors', April 6, 2012, http://
www.nytimes.com/2012/04/07/business/global/tax-plan-gives-a-chill-to-indiasforeign-investors.html?pagewanted=all.
170 http://www.economist.com/blogs/graphicdetail/2012/07/daily-chart-14.
171 Mani, S., Ch.17 'India' in UNESCO Science Report 2010, UNESCO, Paris, France, 2010.
and pharmaceutical fields.172 In general, the pharmaceutical and transport

sectors (in this order) account for the lions share of business R&D
expenditure, with the IT sector a distant third.
One particular feature of the Indian innovation system is its focus on
innovation at the 'bottom of the pyramid' i.e. for a very large, low-income
market. Tata Nano as the 'worlds cheapest car' is the most publicized
example of this type of innovation but there are many others. These include
a U.S.$34 water purification system, a U.S.$70 refrigerator that runs with
batteries and a babys heart monitoring system at 10% of the world price.173
Rapid expansion of knowledge-intensive industries has significantly
increased demand for highly educated personnel. Many companies have
been complaining of serious shortages of skilled workers. The central
government aims to improve the quality and quantity of human resources
in science and engineering in its eleventh plan by establishing, for example,
30 new central universities and opening the country to foreign universities.174
These and other measures will however take time to make an impact and
currently scientists and engineers remain in short supply.
Business climate
India scores very poorly in the World Banks 'Doing Business' surveys. It
was ranked 132nd out of 183 countries in the latest edition (in 2012), the
worst of all the BRICS+ countries. Especially troublesome are such issues
as dealing with construction permits and enforcing contracts, where India
was at the very bottom of the world rankings.
Other authors draw attention to problems such as corruption and crony
capitalism and express concern that these problems are becoming more
serious in recent years.175 A hunger strike by social activist Anna Hazare in
2011 to demand a stringent anti-corruption law led to nation-wide protests
in his support and the government in the end accepted Hazare's demands.
172 Op. cit., p.363.

173 Wolf, C., et al. China and India, 2025: A Comparative Assessment, RAND Corp.,
Santa Monica, 2011.
174 Mani, S., Op. cit., pp.367-369.
175 Sharma, R., Op. cit.
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CHANG E RePORT 115
Figure 1 Average age of Cabinet Ministers, July 2012.

Source: The Economist
Developing Agricultural Sector

A rapidly growing population and rising living standards put pressure on
the agriculture sector to expand food supply and increase productivity.
While meeting food demand of the growing population is challenging
already there are at least two major factors that make achieving this
objective even more difficult.
First, India and its agriculture are going to be strongly impacted by climate
change. According to calculations done by HCSS, India is among 20% of
countries that will be worst affected by climate change. Changing climate
patterns will be very unfavorable to the yields of many crops in India.
W.Cline projects that India might see a drop in agricultural crop output of
30-40% by 2080 as a result of climate change.176 There are already signs of
176 Cline, W., 2007. Global Warming and Agriculture: Impact Estimates by Country.
Washington, DC: Center for Global Development and Peterson Institute for
International Economics. http://www.cgdev.org/doc/books/Cline%20global%20
warming/Chapter%205.pdf.
climate change affecting the monsoon patterns, making them more volatile
and unpredictable.177
A second factor is water stress. Agriculture is by far the main consumer of
water in India. The 2030 Water Resources Group predicts that in 2030 it
will still account for 80% of total water demand and the gap between
existing supply and projected demand could be 50% in a base case
scenario.178 The gap might be amplified by the effects of climate change.
Addressing the problems of Indias agricultural sector under the conditions
of water and climate-change stress will require a significant and broad
portfolio of R&D investment including new varieties of heat-resistant crops,
improved water management and irrigation.
Improving physical Infrastructure
The World Economic Forum identified an inadequate supply of physical
infrastructure as the main problem for doing business in India.179 Improving
physical infrastructure was also selected as one of the main challenges for
India in the BRICS report written with active participation of officials from
the five BRICS countries.180 One recent example demonstrating these
infrastructure problems was a large-scale blackout that included two
successive power outages on 30th and 31st July 2012. They affected over
600 million people in 14 states and were the largest blackouts in history.181
The power grid is only one element of a more general problem. Ports, roads,
bridges, airports and power plants are all generally underfunded. Many
experts consider chronic underinvestment in infrastructure as one of the
main reasons for the low competitiveness of Indias manufacturing.
McKinsey estimates that the national electricity transmission system alone
177 The Economist, 'Monsoon, or later', July, 28, 2012.

178 2030 Water Resources Group, Charting Our Water Future: economic framework to
inform decision-making, 2009.
179 World Economic Forum, Global Competitiveness Report 2011-2012, 2011, http://
reports.weforum.org/global-competitiveness-2011-2012/.
180 The BRICS Report, Oxford Univercity Press, 2012.
181 http://en.wikipedia.org/wiki/July_2012_India_blackout.
ST RAT EGY
CHANG E RePORT 117
needs some U.S.$110 billion of new investment.182 Infrastructure experienced

an investment boom in the years of the rapid economic growth. Private
firms have been actively involved in infrastructure investment. However the
slowing economy, high leverage at many infrastructure firms and a string of
corruption scandals related to infrastructure projects and deals has brought
a halt to new investments.183 The government, expected to run a fiscal
deficit of 5.5% of GDP this year, is also severely constrained in its ability to
increase funding for infrastructure projects. Nevertheless, better infrastructure is essential for economic growth in India.
Information technologies
The IT-BPO sector is undoubtedly one of the great success stories in the
Indian economy. It has experienced very rapid expansion and has now
become one of Indias key economic sectors. Such Indian companies as
HCL, TCS, Wipro, and Infosys have developed into the worlds services
behemoths and take top spots in various rankings of global IT companies.
A large diaspora of Indian researchers and entrepreneurs abroad has played
an important role in establishing the sector and helping it grow.
The sector provides a large variety of IT-enabled services such as backoffice operations, remote maintenance, accounting, public call centers,
medical prescriptions, insurance claims, and other processing. There is also
a trend toward increasing the sophistication of the services that the sector
provides. U.S. and European companies now outsource to India not just
simple tasks but also analytical jobs such as financial analysis, data mining,
etc. India is now encouraging foreign firms to set up R&D centers in Indian
knowledge hubs. Over 250 Fortune-500 firms have established R&D
centers/labs in various cities such as Bangalore, Delhi, Mumbai, Chennai,
etc.184
182 http://www.economist.com/blogs/banyan/2012/07/india%E2%80%99s-power-cuts.
183 The Economist, 'Ifrastructure in India: Infrastruggles', December 31st, 2011, http://
www.economist.com/node/21542184.
184 ERAWATCH Country Reports 2010: India by V.Krishna, http://erawatch.jrc.ec.europa.
eu/erawatch/export/sites/default/galleries/generic_files/file_0133.pdf.
A N N EX : I N D I V I D UAL CO U N T RY N O T ES I N D O N ES I A
8.4 Indonesia
Key Takeaways
Strong and steady economic growth, with an expanding middle class

giving rise to a fast-growing services market;
High levels of domestic, as well as foreign direct investment compared to
other emerging economies;
Limited science and technology possibilities, in light of low public and
private funding and low availability of adequate knowledge pools;
Inefficient business climate and high and widespread levels of corruption;
Uneven distribution of economic gains, fueling a divide between a growing
middle class and a poor underclass, which in turn breeds crime, piracy and
social tension;
A seeming inability of the government to adequately handle the recent rise
in ethnic and religious violence;
High levels of traffic congestion and an overburdened and underdeveloped
power infrastructure. Government aims to significantly increase
investments in infrastructure;
An enormous natural resources sector, including a largely untapped
geothermal energy market, with unprecedented potential.
Variable
Indonesias Rank
59th out of 155
Human Development
124th out of 187
186
119th out of 187
Education187
74th out of 132
188
46th out of 142
100th out of 182
Entrepreneurship191
60th out of 79
190
185186187188189190191


'TheGlobalEntrepreneurshipandDevelopmentIndex(GEDI)2012 CountryRankings.'
ST RAT EGY
CHANG E RePORT 119
Population
Indonesia is the largest Muslim country in the world, with roughly 248
million inhabitants.192 It is a patchwork of more than 300 different ethnic
groups. The largest are the Javanese who make up around 40% of the
population, followed by the Sundanese at 15%.193 Population growth has
been stable throughout the last five years at around 1% per year.194 The rate
of population increase thus roughly equals that of European countries such
as Norway, Sweden and Belgium. Population growth remained slightly
below that of other emerging economies such as Turkey and India who
grew around 1.2%.195 The degree of urbanization is relatively low at 44% of
the population living in cities compared to countries such as Brazil (87%),
Turkey (70%) and South Africa (62%). Urbanization is nonetheless set to
continue by 1.7% per year.196 The consequences of increased urbanization
for Indonesias already overburdened infrastructure are severe (see infra,
societal challenges and opportunities).
In terms of education, Indonesia occupies place 119 out of 187 countries
reviewed in the context of the UNDP education index.197 In order to continue
its strong economic growth and to be able to create enough jobs in the
future, the International Labour Organization (ILO) and the Asian
Development Bank warned Indonesia that more investments in education
are required in order to make the transition from a middle-income to a
high-income economy.198
192 U.S. Central Intelligence Agency, 'CIA - The World Factbook, Indonesia Country
Page', September 10, 2012, https://www.cia.gov/library/publications/the-worldfactbook/geos/id.html.
193 Institute of Southeast Asian Studies, 'Indonesias Population: Ethnicity and
Religion in a Changing Political Landscape', 2003, http://muse.jhu.edu/
login?auth=0&type=summary&url=/journals/population_review/v042/42.1hugo.pdf.
194 The World Bank, 'Population Growth,' Population Growth (annual %), 2011, http://
data.worldbank.org/indicator/SP.POP.GROW.
195 The World Bank, 'Population Growth.'
Page.'
198 Z. Nazeer, 'Indonesia Warned to Invest More in Education', March 27, 2012, http://
www.thejakartaglobe.com/education/indonesia-warned-to-invest-more-ineducation/507426.
Economy
Average GDP growth over the past decade was a healthy 5.2%, with which
Indonesia finds itself performing on par with most other emerging
economies (see Figure 1).199 Projections are that Indonesia will continue to
boom as its middle class expands, with growth climbing to 6.9% this year
and reaching 8.5% annually in 2017.200 Household spending, responsible for
around 60% of economic output, has been growing year-on-year at over
6%.201 In 2013, Indonesia is expected to join a venerable club of 15 economies
with an annual GDP over $1 trillion.202
The economy was not substantially affected by the 2008 financial crisis.
This is due to a large domestic market exports make up about one-third
of Indonesian GDP and most of its exports are to the region. Net foreign
debt now stands at less than 10% of GDP.203 Gross National Income (GNI)
per capita over the period 2007-2011 was U.S.$ 2,940, roughly double that
of India (U.S.$ 1,410).
12
10
8
6
4
2
0
Brazil
China
India
Indonesia
South
Korea
Russia
South
Africa
Turkey
Figure 1: Average GDP growth rates 2000-2010 (%)

199 The World Bank, 'World Development Indicators | Data.'

200 Ibid.
201 Oxford Analytica, 'Indonesia: Country Profile' , 16 July 2012.
202 The Economist, 'Indonesia: The Komodo Economy', February 18, 2012, http://www.
economist.com/node/21547866.
203 Ibid.
ST RAT EGY
CHANG E RePORT 121
Agriculture took up a 17% share of GDP over the period 2007-2011.

Industry takes up almost half (45%), and the services sector which has
been making impressive inroads in recent years due to the burgeoning
middle class is responsible for 38% of total GDP.204 The biggest source of
economic growth in the first half of 2011 was the trade, hotel and restaurant
sector (1.4%) with total growth at around 8.7%.205 Export is mostly focused
on East- and South Asia and heavily dominated by natural resources (oil,
gas, minerals, plywood, rubber and food) and manufactured products such
as electrical appliances and textiles.206 Oil and gas exports make up a little
over a quarter of total exports.207 Indonesias lush natural resources are,
next to a blessing, also a source of tension as illegal fishing and logging are
rampant, causing widespread deforestation, high CO2 emissions, overfishing
and impoverished fishing communities. 208
Investment levels in the Indonesian economy (gross fixed capital formation)
stood at 32.2% of GDP in 2010. Compared to other emerging economies,
this is relatively high. Turkey, Brazil, South Africa and Russia all invested
around 20%; South Korea and India around 28-30%. Indonesia was only
surpassed by China, at 45.4% of GDP.209 With a Foreign Direct Investment
(FDI) stock of 17.2% of GDP in 2010, Indonesia outperformed China (9.9%),
India (12%) and South Korea (12.6%).
204 The World Bank, 'World Development Indicators - Agriculture, Value Added (%
of GDP) | Data | Table', September 24, 2012, http://data.worldbank.org/indicator/
NV.AGR.TOTL.ZS; The World Bank, 'World Development Indicators - Industry, Value
Added (% of GDP) | Data | Table', September 24, 2012, http://data.worldbank.
org/indicator/NV.IND.TOTL.ZS; The World Bank, 'World Development Indicators Services, Etc., Value Added (% of GDP) | Data | Table', September 24, 2012, http://
data.worldbank.org/indicator/NV.SRV.TETC.ZS.
205 Statistics Indonesia, 'BPS Strategic Data', August 2011, 14.
Page.'
207 Statistics Indonesia, 'BPS Strategic Data,' 26.
208 K. Marks, 'Illegal Logging Responsible for Loss of 10 Million Hectares in Indonesia,'
The Independent, October 26, 2009, http://www.independent.co.uk/news/world/
asia/illegal-logging-responsible-for-loss-of-10-million-hectares-in-indonesia1809417.html?printService=print; D. Prasodjo, 'Fighting Illegal Fishing Is a Net Gain |
The Jakarta Post,' The Jakarta Post, September 12, 2011, http://www.thejakartapost.
com/news/2011/09/12/fighting-illegal-fishing-a-net-gain.html.
209 The World Bank, 'Gross Fixed Capital Formation (annual % Growth)', 2011, http://
data.worldbank.org/indicator/NE.GDI.FTOT.KD.ZG.
Unfortunately, economic growth has mostly benefited a small part of

society. Poverty remains a critical issue as more than 100 million Indonesians
have to get by on less than $2 per day.210 Connected to this is the wide
range of socio-economic conditions across the various islands that make
up Indonesia. Social mobility of the lower socio-economic classes in
Indonesian society is limited. Access to education is a problem and many
socio-economic initiatives are directed at the middle-class or at the very
poorest. Those in between are left by the side.211 Corruption plays a role in
the poor distribution of wealth, with Indonesia ranking 100th out of 182
countries reviewed in the 2011 Transparency International Corruption
Perception Index.212 Within the political establishment there seems little
willingness to effectively tackle the corruption. No political party has made
a priority out of doing away with corruption and attempts to discredit KPK,
the countrys corruption watchdog, are frequent. Corruption is said to also
play a key role in fueling the illegal logging activities in the country.213
Although president Yudhoyono has committed to fighting the growing
inequality in the country, progress has been slow.214 A factor to keep an eye
out for is the fact that food price increases have hit Indonesia much harder
than most other countries in the region. While the government has been
able to soften the impact of the price increases on the rural and urban poor
through its National Community Empowerment Program (PNPM), increased
small-holder productivity in the medium and long term is vital to limit
volatility, poverty and pressure on natural resources.215 Related to the
poverty issue is the occurrence of piracy in the waters around Indonesia
210 '120 Million Surviving on $2 a Day,' Jakarta Post, September 15, 2010, http://www.
thejakartaglobe.com/home/120-million-surviving-on-2-a-day/396341#Scene_1.
211 Labour and Social Trends in Indonesia 2010: Translating Economic Growth into
Employment Creation (Genve: International Labour Organisation, 2011), 24.
212 Transparency International, '2011 Corruption Perceptions Index -- Results',
September 24, 2012, http://cpi.transparency.org/cpi2011/results/.
213 K. Brooks, 'Is Indonesia Bound for the BRICs?,' Foreign Affairs, December 2011,
http://www.foreignaffairs.com/articles/136539/karen-brooks/is-indonesia-boundfor-the-brics.
214 'Indonesias Poverty Line: To Make a Million People Unpoor,' Economist, August 3,
2011, http://www.economist.com/blogs/banyan/2011/08/indonesias-poverty-line.
215 The World Bank, 'Country Partnership Strategy Progress Report for Indonesia
FY2009-2012. Investing in Indonesias Institutions for Inclusive and Sustainable
Development', February 8, 2011, 9.
ST RAT EGY
CHANG E RePORT 123
an issue which directly affects western economic interests.216 Indonesia

remains one of the worlds piracy hot spots, accounting for almost 20% of
the global cases of piracy.217 The gap between the poor underclass and the
growing middle class is thus a cause for concern also from the point of
view of piracy.
Among other things, due to the remoteness of some parts of the country
and its challenging geography, infrastructure and access remain an issue of
concern (see infra, societal challenges and opportunities).
Indonesias first parliamentary elections were held in 1999, after over thirty
years of authoritarian rule under General Suharto. Direct presidential
elections were held for the first time in 2004 during which incumbent
president Megawati was defeated in a run-off vote by the current president
Yudhoyono. In 2009, Yudhoyono was reelected for another five years with
a landslide victory.218
As noted in the section on population, Indonesia is an extremely multiethnic,
multilingual and multi-religious state. Following the step-down of General
Suharto, communal violence occurred in all parts of the country, occasionally
spurred by ethno-religious or separatist motives. Conflict somewhat
subsided thereafter. After the independence of East-Timor and the end to
the violence in Maluku, Indonesia proved capable of dealing with the threats
of religious extremists such as Jemaah Islamiyyah and Javanese separatists.
Police have managed to capture or kill several high-profile terrorist
suspects, including Noordin Mohammad Top, the alleged ringleader behind
the twin suicide bombings at the JW Marriott and Ritz-Carlton hotels in
216 J. Kraska, Contemporary Maritime Piracy: International Law, Strategy, and

Diplomacy at Sea (Santa Barbara, CA: ABC-CLIO, 2011), 42.
217 CNN, 'Report: 2010 Was Worst Year yet for Piracy on High Seas This Just
In - CNN.com Blogs', January 18, 2011, http://news.blogs.cnn.com/2011/01/18/
report-2010-was-worst-year-yet-for-piracy-on-high-seas/; International Chamber
of Commerce, 'Six Month Drop in World Piracy, IMB Report Shows', July 16, 2012,
http://www.icc-ccs.org/news/747-six-month-drop-in-world-piracy-imb-reportshows.
218 Bertelsmann Stiftung, 'BTI 2012 | Indonesia Country Report', 2012, 34.
Jakartas business district on 17 June 2009.219 Recently, however, ethnic and

religious unrest has been on the rise again (see infra, societal challenges
and opportunities).
Indonesia is home to the Association of South-East Asian Nations (ASEAN)
and in 2011 it stood at the helm of the organization. Where the organization
has led a largely blameless existence, it now faces a serious setback after
the 45th ASEAN Ministerial Meeting in Phnom Penh, Cambodia. For the first
time since its establishment, the organization failed to reach a consensus
on a joint communiqu.220 The cause was open disagreement among
ASEAN members over Chinas territorial claims in the South China Sea.
ASEAN members with claims in the South China Sea themselves Vietnam,
the Philippines, Malaysia and Brunei, supported by Singapore and Thailand
wanted to include a concern over what they view as belligerent moves by
China. Others however, mainly Cambodia with the support of Laos and to
some extent Myanmar, were reluctant to alienate China. The idea to reach a
Code of Conduct on the South China Sea now appears a distant prospect,
with ASEAN unable to speak with a single voice on the topic.221
The challenge for ASEAN and Indonesia as host of its secretariat is now
to make sure the organization is not marginalized due to a renewed great
power struggle in the region, with some countries (Thailand, the Philippines
and Singapore) looking to the U.S. for support and others to China
(Cambodia, Laos and possible Myanmar).222
Although Indonesia has identified research and development (R&D) as a

policy priority, its efforts to promote national R&D have been severely
reduced ever since the Asian financial crisis of the late 1990s and have
219 Bertelsmann Stiftung, 'BTI 2012 | Indonesia Country Report', 2012, 5.

220 R. Sukma, 'Insight: Without Unity, No Centrality,' The Jakarta Post, July 17, 2012,
http://www.thejakartapost.com/news/2012/07/17/insight-without-unity-nocentrality.html; The Economist, 'ASEAN in Crisis: Divided We Stagger', August 18,
221 R. Sukma, 'Insight: Without Unity, No Centrality'; The Economist, 'ASEAN in Crisis:
Divided We Stagger.'
222 The Economist, 'ASEAN in Crisis: Divided We Stagger.'
ST RAT EGY
CHANG E RePORT 125
hardly increased since then.223 Gross Domestic Expenditure on R&D (GERD)

in Indonesia is low compared to other emerging economies at a mere 0.1%
of GDP in 2010. By comparison, Brazil, India, Russia, South Africa and
Turkey spend roughly 8 to 10 times as much.224 Indonesian GERD is
projected to increase to 0.20% of GDP in 2012.225
Indonesias poor business climate (see infra, business climate) causes
investors to have a preference for short-term investments that can be more
easily liquidated over projects with a longer time horizon. The negative
implications for the more risky, R&D-intensive investments are obvious.
Multinational enterprises do not consider the country a suitable base for
R&D policy, owing to a weak skill base, limited protection of intellectual
property rights and the absence of any significant public support for
R&D.226
Characteristic of the Indonesian science and technology landscape is the
large number of actors, including governmental and research institutions.227
The Indonesian Institute of Sciences (LIPI) plays a major role, but its funding
and scientific resources are however insufficient to support a major research
effort.228 The 2010-2014 Mid Term Development Plan (NMDP) aims, inter
alia, to work towards the management of maritime resources in an
encompassing way towards security in energy and the anticipation of
climate change impacts (including in the form of tsunami and adverse
weather early-warning systems). This also involves the enhancement of
223 SEA-EU-NET, 'R&D Country Profile Indonesia', 2009, http://www.sea-eu.net/asia/

info/4/indonesia.html.
224 The World Bank, 'Research and Development Expenditure (% of GDP)', 2009,
http://data.worldbank.org/indicator/GB.XPD.RSDV.GD.ZS; R&D Magazine, Batelle,
International Monetary Fund, World Bank and CIA Factbook, '2012 Global
R&D Funding Forecast: R&D Spending Growth Continues While Globalization
Accelerates.'
225 R&D Magazine, Batelle, International Monetary Fund, World Bank and CIA
Factbook, '2012 Global R&D Funding Forecast: R&D Spending Growth Continues
While Globalization Accelerates.'
226 H. Hill and P. Tandon, 'Innovation and Technological Capability in Indonesia', June
2010, 10.
227 SEA-EU-NET, 'R&D Country Profile Indonesia.'
228 H. Hill and P. Tandon, 'Innovation and Technological Capability in Indonesia,' 10.
skills related to technology. With respect to food security in particular, R&D

activities in the field of agriculture should be stepped up in order to create
superior seeds and other research outputs aimed at the enhancement of
the quality and output of national agricultural products.229
Beyond these governmental targets, there is little support for innovation.
None of Indonesias major conglomerates has yet shown any inclination to
support large scale innovation programs, as occurs for example in China or
India.230 Overall, the Indonesian R&D sector is plagued by a predominance
of (limited) public R&D, weak linkages among science and technology
actors, few technical-economic cluster initiatives and limited access to
knowledge pools.231
Business Climate
The 2012 edition of the World Banks Ease of Doing Business Monitor ranks
Indonesia 130th out of a total of 183 countries reviewed for their business
climate. Compared to other emerging economies, Indonesia is placed at
roughly the same position as Brazil (126), India (132) and Russia (120). China
(91) and Turkey (71) perform significantly better however. Setting up a
business in Indonesia proves notoriously difficult (155/183), as is getting
access to basic services such as electricity (161/183) and filing taxes
(131/183). Similar difficulties exist when faced with resolving insolvency
(146/183), enforcing contracts (156/183) and getting credit (126/183). By
contrast, Indonesia performs fairly well on the ease with which one can
trade across borders (39/183) and with respect to investor protection
(46/183).232
229 Ministry of National Development Planning/National Development Planning

Agency, 'Appendices Regulation of the President of the Reupblic of Indonesia
Number 5 of 2010 Regarding the National Medium-Term Development Plan (RPJM)
2010-2014 Book 1 National Prorities', 2010, 53 and 57.
231 SEA-EU-NET, 'R&D Country Profile Indonesia.'
232 'Ranking of Economies - Doing Business - World Bank Group.'
ST RAT EGY
CHANG E RePORT 127
Indonesia has a fairly low import tariff233 compared to other emerging

economies. By comparison, importing goods into Brazil, India and South
Korea costs more than three times as much. General import tariffs for
Indonesia are still roughly 1.5 times as high as for the European Union, yet
relatively cheap compared to other emerging markets. Container import
tariffs differ, where Indonesia charges a comparably low fee ($660). It costs
almost twice as much to import a container into the EU, Turkey and India.
For Russia, Brazil and South Africa this is at least three times that price.
Customs formalities are a real nuisance however, with up to 7 different
documents required to clear imported goods. By comparison, South Korea
(3) and China (5) require significantly fewer documents to clear an
import.234
Business dynamism is stifled due to the high costs of setting up and closing
a business. On top of this, restrictive severance pay and related conditions
make innovative firms with inherently uncertain business prospects
reluctant to hire new workers. Moreover, weak contract enforcement
provides little protection for intellectual property rights and in light of the
rampant commercial piracy that exists in the country, the legal system is
unlikely to offer much protection.235 Widespread corruption represents a
further hindrance to the ability to do business efficiently within
Indonesia.236
Overburdened Infrastructure
As highlighted in the introductory and economy section, Indonesias
infrastructure is heavily overburdened. Traffic jams are boosting delivery
costs and times, a lack of power restricts capital investment and delays at
airports and ports are slowing down the flow of exports. As in other
developing nations, a complex bureaucracy, a cautious attitude towards
involvement of the private sector and a lack of financing have prevented
Indonesia from building the necessary roads, bridges, airports and power

234 The World Bank, 'Data on Trade and Import Barriers.'
236 The Economist, 'Indonesias Politics: Corruption Everywhere', September 2, 2011,
http://www.economist.com/blogs/banyan/2011/09/indonesias-politics.
stations it needs in order to sustain its economic growth. In order to

alleviate the countrys overburdened and outdated infrastructure, President
Yudhoyono announced a plan in 2012 to increase spending on ports, roads,
power plants and other infrastructure by 15% next year.237
President Yudhoyono has made the revitalization of Indonesias infrastruc
ture a political priority. He has proposed to increase infrastructure spending
to 194 trillion rupiah (U.S.$ 20 billion) in 2013 from a target of 169 trillion
rupiah this year. The fund will be used to improve 4,431 kilometers of road,
add 380 kilometers of new railway, and finance the construction of 15 new
airports and the expansion of another 120. To encourage local and
international investment, the President said he planned to abolish more
than 800 regional restrictions on businesses that clash with national
regulations.238
Skepticism surrounds the ambitious nature of these plans. One of the
biggest problems is the sliding popularity of his party. Subdued popular
support seems to hinder Yudhoyono in making the tough decisions required
for the plan. Support for Yudhoyono has been waning in light of his struggle
to quell the countrys widespread corruption. The bribery charges brought
against his partys former treasurer in September 2011 were particularly
painful in that regard. Indicative was his failure to push through an increase
in fuel prices, which are highly subsidized in Indonesia.239
Another problem seems to be that there is little interest from foreign
investors. At an infrastructure conference in Jakarta in August 2012,
237 E. Bellman and A. Ismar, 'Indonesia to Ramp Up Infrastructure - WSJ.com,' The

Wallstreet Journal, August 16, 2012, http://online.wsj.com/article/SB100008723963
90444375104577592690374350480.html; B. Bland, 'Indonesia Infrastructure: Good
Intentions, Little Progress,' Financial Times - Beyondbrics, August 28, 2012, http://
blogs.ft.com/beyond-brics/2012/08/28/indonesia-infrastructure-good-intentionslittle-progress/#axzz27f3ueBxt.
238 E. Bellman and A. Ismar, 'Indonesia to Ramp Up Infrastructure - WSJ.com.'
239 Y. Rusmana and F. Wulandari, 'Yudhoyonos Support Slips as Indonesia Stalls
on Fuel Policy,' Bloomberg, n.d., http://www.bloomberg.com/news/2012-0401/yudhoyono-s-support-falters-as-indonesia-stalls-on-fuel-policy.html; The
Economist, 'Indonesias Politics: Corruption Everywhere'; E. Bellman and A. Ismar,
'Indonesia to Ramp Up Infrastructure - WSJ.com.'
ST RAT EGY
CHANG E RePORT 129
President Yudhoyono repeated his pledge to tackle the infrastructural

issues once more. Few investors had turned up to the event however. In the
past, Hitachi, the Japanese industrial group, has attempted to build a mass
transport system in Jakarta. A monorail was supposed to be built, but the
project was abandoned in 2008 due to financial and political problems. The
company has however not given up hope to bid for contracts for the
proposed new Japanese-funded Jakarta Mass Rapid Transport network
(MRT).240
The entire MRT project which spans approximately 110.8 kilometers
throughout Jakarta and creating two transit corridors, North-South and
East-West, is planned to be ready by 2024. Earlier sections of the network,
including the North-South line which will create a section from Lebak Bulus
to Kampung Bandan is scheduled to be operational in 2018. The East-West
corridor is currently still in a feasibility study phase.241
Ethnic, Religious Unrest and Piracy
As mentioned under political developments, after the fall of the Suharto
regime, violence erupted. Despite the surge in tensions, Indonesia proved
capable of dealing with the threats of extremists following the independence
of East-Timor and the end to the violence in Maluku. Recently however,
religious and ethnic tensions have been on the rise. Two suicide attacks on
places of worship took place in 2011, killing one person and injuring dozens
of others.242 These attacks were not the work of organized terrorist
organizations, but rather a manifestation of extreme activism. The
perpetrators
were
not
affiliated
to
any
underground,
clandestine
organization, yet were involved in a popular protest targeted against

Christians.243 In many cases, the perpetrators of such acts carry at least the
tacit support of the authorities, who in many cases have not intervened to
240 B. Bland, 'Indonesia Infrastructure: Good Intentions, Little Progress.'

241 MRJ Jakarta, 'Overview - Project Feature', September 27, 2012, http://jakartamrt.
com/index.php?option=com_content&view=article&id=52&Itemid=95&lang=en.
242 Australian Government Department of Foreign Affairs and Trade, 'Indonesia | Travel
Advice', September 20, 2012, http://www.smartraveller.gov.au/zw-cgi/view/Advice/
Indonesia.
243 International Crisis Group, 'Asia Briefing No 132 Indonesia: From Vigilantism to
Terrorism in Cirebon', January 26, 2012, 910.
stop the events from occurring.244 Also in the Maluku province, ethnic
tensions have escalated into riots and arson attacks, while violence in the
struggle for the independence of Papua seems to be increasing.245 It is in
this province that for some time already small scale violent clashes have
been taking place between the police and rebel movements. Casualties
have been recorded on both sides.246
Next to ethnic and religious unrest, Indonesias large and spread-out
geography is difficult to control and makes it tough for the authorities to
prevent acts of piracy in their waters. The occurrence of piracy can not be
seen independently from the issue of poverty within the country. The big
increase in the number of piracy attacks in Indonesian waters and ports
over the past ten years was largely due to its sharp economic downturn
and domestic instability following the end of the Suharto regime. After that,
when the country began to experience rapid economic growth, the uneven
nature of the benefits of this growth have caused a widening gap between
the middle class and the poor. This in turn has led to a new breed of pirates.
Most pirates are themselves poor fishermen and traders.247 In other words,
piracy puts the issue of overfishing and social deprivation in a whole
different perspective.
244 The Economist, 'Religious Persecution in Indonesia: Lightly on the Lynch Mob', July
31, 2011, http://www.economist.com/blogs/banyan/2011/07/religious-persecutionindonesia.
245 International Crisis Group, 'Asia Briefing No 126 Indonesia: Hope and Hard Reality
in Papua', August 22, 2011; International Crisis Group, 'Asia Briefing No 128
Indonesia: Trouble Again in Ambon', October 4, 2011.
246 N. Dharma Somba and R. Pramadutama, 'Shoot First, Riot Later in Papua,' The
Jakarta Post, June 8, 2012, http://www.thejakartapost.com/news/2012/06/08/
shoot-first-riot-later-papua.html; 'Papua Man Injured in Police Shootout,' The
Jakarta Globe, September 25, 2012, http://www.thejakartaglobe.com/lawandorder/
papua-man-injured-in-police-shootout/546383; B. Ambarita, 'Separatists Kill
Soldier, Attack Chopper in Papua: Police,' Jakarta Globe, August 3, 2011, http://
www.thejakartaglobe.com/home/separatists-kill-soldier-attack-chopper-in-papuapolice/457062.
247 International Chamber of Commerce, 'Six Month Drop in World Piracy, IMB Report
Shows'; D. Rosenberg, 'The Political Economy of Piracy in the South China Sea,'
Naval College War Review 62, no. 3 (2009): 46.
ST RAT EGY
CHANG E RePORT 131
Increasingly, piracy incidents are moving closer to land, even to docked

ships. Armed robberies aboard ships docked in Indonesia reached a sixyear high in 2012 with 32 recorded incidents, according to the International
Chamber of Commerces International Maritime Bureau. The year before, 21
incidents were reported between the months of January and June of
2011.248
Energy Sector
Indonesias crude oil production has been declining since 1998 due to the
maturation of its oil fields and the failure to develop new, comparable
reserves. In the meantime, its total primary energy consumption grew by
nearly 50% between 1999 and 2008. As a result, the country became a net
oil importer in 2004. Indonesia was a member of the Organization of
Petroleum Exporting Countries (OPEC) until it suspended its membership
in January 2009. Indonesias two largest producing oil fields are the Minas
and Duri fields, located on the eastern coast of Sumatra and operated by
Chevron. Production in both fields is in decline, even with enhanced oil
recovery techniques such as the injection of steam. An important discovery
of the past years which may offset some of Indonesias declining oil industry
is the Cepu Block of East and Central Java. Exxon Mobil operates Cepu PSC
(45% interest) in a joint-venture with PT Pertaminas E&P unit (45% working
interest) and four local government companies (10% interest). Cepu is
estimated to hold around 600 million barrels of recoverable oil. Although
originally discovered in 2001, the project has experienced manifold delays,
causing Exxon to revise its goal for peak production from 2012 to 2014. In
general, Indonesia has difficulties to increase investments in the countrys
upstream sector, inter alia due to investors still viewing the upstream
investment environment as risky. Recent attempts by the government to
mandate cost recovery caps for all new production sharing agreements
(PSAs) were not a welcome relief in that regard. New PSAs have been in
decline already for a number of years. 249
248 J. Vit, 'Criminals Increasingly Targeting Indonesian Ports: World Piracy Report,' The
Jakarta Globe, n.d., http://www.thejakartaglobe.com/home/criminals-increasinglytargeting-indonesian-ports-world-piracy-report/530837.
249 U.S. Energy Information Administration, 'Country Analysis Brief Indonesia', May
2011, 13.
Where the oil sector is in relative decline, Indonesia continues to be a major

exporter of pipeline and liquefied natural gas (LNG). In 2011, Indonesian
natural gas production was 75.6 billion cubic meters (bcm), an increase of
19% compared to ten years before. LNG exports are particularly important
to Indonesia as the country was the third largest LNG exporter worldwide
in 2011, holding 9% of the market, just after Malaysia (10%) and Qatar
(31%).250 However, domestic consumption is steadily rising as economic
growth continues, up by 22% compared to a decade ago to 37.9 bcm in
2011.251 Indeed, LNG exports have been a politically charged topic in
Indonesia due to this growing domestic consumption, leading the
government to pursue policies for securing domestic supplies for the local
market before issuing approval for new LNG-export projects. There have
been recent reports that the government considered a moratorium on new
gas exports.252 Recently, the centrally located Bontang LNG plant has
started to serve the domestic market. The majority still gets shipped
overseas, however the trend towards increased domestic use cannot be
ignored.253 A clear need thus exists for the construction of additional LNG
terminals in order to keep the balance between LNG for the domestic and
export market. Indonesias largest publicly listed oil and gas company, PT
Medco Energi Internasional (MEDC), is currently constructing a LNG plant
at Donggi-Senoro in Central Sulawesi. It is expected to complete its first
deliveries in 2014.254
In addition to the hydrocarbon sector, Indonesia is home to 40% of the
worlds
known
geothermal
resources,
but
these
remain
vastly
250 International Gas Union (IGU), 'World LNG Report 2011', 2011, 8.
251 'Indonesia Considers Limiting Gas Exports,' UPI, July 6, 2012, http://www.upi.com/
Business_News/Energy-Resources/2012/07/06/Indonesia-considers-limiting-gasexports/UPI-77801341590232/.
252 Ibid.; U.S. Energy Information Administration, 'Country Analysis Brief Indonesia,' 6.
253 R.D. Fadillah, 'First LNG for Domestic Users Dispatched,' The Jakarta Post, April 26,
2012, http://www.thejakartapost.com/news/2012/04/26/first-lng-domestic-usersdispatched.html.
254 R. Pramudatama, 'LNG Plant Construction on Schedule: Medco,' The Jakarta Post,
August 3, 2012, http://www.thejakartapost.com/news/2012/08/03/lng-plantconstruction-schedule-medco.html.
ST RAT EGY
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underdeveloped with only a little over 3% being used.255 By 2025, the

Indonesian government aims to install 6.7 gigawatts (GW) of new renewable
energy capacity, including geothermal, but also wind, solar, biomass and
hydropower. The share of renewables in total energy production thus would
increase from 7 to 15%.256 In order to meet this goal, 6.7 GW of new
renewable energy capacity must be installed in the next 15 years based on
current growth projections.257 Since 2008 the government has offered tax
incentives for foreign investment, including for renewable energy. For
geothermal companies, additional incentives are afforded, including longterm licenses for land use (more than 30 years) and a regulated price for
geothermal energy. However, the fact that the Indonesian state electricity
company PLN has a monopoly on the provision of electricity does put
some stress on the profitability of projects.258 Also, similar to the oil and gas
industry, geothermal in Indonesia is prone to policy inconsistency and
unclear regulation.259
Nonetheless, as an emerging sector, much of its potential remains untapped
and unexplored, particularly in the western part of Indonesia. This area has
more advanced infrastructure, thus lowering costs for any potential
investors.260 Indeed, several U.S. companies have already invested in the
Indonesian geothermal sector, a trend which is likely to increase as policy
incentives for geothermal energy continue to improve.261 Recently, the
Indonesian energy minister announced a raise in the feed-in-tariff for
geothermal energy in an attempt to lure more investors to the market.
255 U.S. Department of Commerce / International Trade Administration, 'Renewable

Energy Market Assessment Report: Indonesia', May 2010, 3.
256 Ibid., 1.
257 Ibid., 3.
258 Ibid.
259 Global Intelligence Alliance, 'Geothermal Energy in Indonesia Heating Up', June 28,
2012, http://www.globalintelligence.com/insights-analysis/bulletins/geothermalenergy-in-indonesia-heating-up.
260 Ibid.
261 U.S. Department of Commerce / International Trade Administration, 'Renewable
Energy Market Assessment Report: Indonesia,' 3.
A N N EX : I N D I V I D UAL CO U N T RY N O T ES K OREA
8.5 SOUTH Korea

Key Takeaways
One of the highest levels of education in the world, but rapidly aging
population with no positive net migration;
Considerable export sector, particularly in high-tech products, but also
heavy exposure to external shocks;
One of the most research-intensive economies in the world with R&D
expenditure continuing to rise fast;
Strong reliance on large conglomerate businesses (chaebols) might
stifle dynamism and innovation.
Variable
Koreas Rank
21st out of 155
Human Development263
15th out of 187
Education
6th out of 187
264
Environmental Performance265
43rd out of 132
Economic Competitiveness
24th out of 142
Perceived Governmental Corruption267
43rd out of 182
Entrepreneurship
26th out of 179
266
268
Population
The Republic of Koreas population of almost 49 million makes it the worlds
25th most populous country. With respect to many demographic indicators
Korea is very similar to the European Union Member States. Its population
growth is just around 0.2%, which is quite close to the EUs rate. The degree
of urbanization in South Korea is one of highest in the world: 83% of the


'TheGlobalEntrepreneurshipandDevelopmentIndex(GEDI)2012 Country
Rankings.'
ST RAT EGY
CHANG E RePORT 135
population lives in urban areas and its share is slowly increasing at a rate
of 0.6% per year. One big difference is migration: virtually all developed
countries experience positive net migration, while South Korea, like Japan,
is balanced with a rate of zero.269 Life expectancy at birth in the Republic
of Korea is high at 79.3 years, just outside the world top 40. The population
is rapidly aging and predicted to become the worlds second-oldest by
2050.270 The level of education in South Korea is very high, ranking sixth
overall worldwide. 63% of Koreans aged 25-34 have completed tertiary
education, the highest rate in the OECD.271
Analysts have highlighted three key limiting factors to the Korean economy
relating to the population: low birth rates, low net migration and the large
gender gap in the labor market.272 The problem of a declining population
and excessive numbers of people with high levels of education risks
creating an imbalance in various job sectors which, without a boost from
migration to compensate for declining birth rates, will be a difficult issue
to resolve. To this end the government has embarked on a campaign
promoting acceptance and welcoming migrants into South Korean society.273
Koreas fertility rate is one of the lowest in the world and has exhibited a
dramatic shift, falling from around six children per woman in 1960 to just
1.3 in recent years. This is seen as one of the biggest challenges to Koreas
economy as the working population declines and may struggle to support
the baby-boomers as they become older and their health-care needs
increase. Figure 1 illustrates Koreas fall from an exceptionally high to an
exceptionally low birth rate.
269 U.S. Central Intelligence Agency, 'CIA - The World Factbook. South Korea Country
Page.,' CIA - The World Factbook, September 10, 2012, https://www.cia.gov/library/
publications/the-world-factbook/geos/ks.html.
270 Seo Eunkyung, 'South Korea Shuns Moms at Peril as Workforce Shrinks,'
Bloomberg, July 3, 2012, http://www.bloomberg.com/news/2012-07-03/southkorea-shuns-moms-at-peril-a-workforce-shrinks.html.
271 The Economist, 'Exams in South Korea: The One-shot Society,' The Economist,
December 17, 2011, http://www.economist.com/node/21541713.
272 Ibid.; Eunkyung, 'South Korea Shuns Moms at Peril as Workforce Shrinks.'
273 The Economist, 'South Koreas Foreign-born: The Lovable Ms Lee,' The Economist,
May 12, 2012, http://www.economist.com/node/21554582.
Korea Figure 1
Average number of children per woman
7
6
5
4
Korea
3
OECD
2
1
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
Figure 1 Korea's falling birth rate
South Korea is an exception among rich countries in the sense that women
with lower levels of education are more likely to work than those with
higher levels.274 Women frequently report the inability to combine a
demanding career with raising a family, given traditional expectations that
the latter task falls entirely in the domain of women.275 The problems have
been slow to shift, with no appreciable improvement in participation rates
for twenty years, despite measures from the government including free
daycare for all children up to two years old and requiring firms of a certain
size to adopt measures promoting gender equality.
Economy
South Korea has gone through a dramatic transformation over the past
decades. It was part of the first wave of Asian tigers along with Hong
Kong, Singapore and Taiwan. Its GDP per capita stands at U.S. $32,100 (at
PPP, in 2011), making it one of the wealthiest countries in Asia and one of
the 20 largest economies in the world. This is a remarkable turnaround
from the 1960s when Korea was comparable with the poorest countries of
274 The Economist, 'South Koreas Economy: What Do You Do When You Reach
the Top?,' The Economist, November 12, 2011, http://www.economist.com/
node/21538104.
275 Ibid.; The Economist, 'The One-shot Society'; Eunkyung, 'South Korea Shuns Moms
at Peril as Workforce Shrinks.'
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Africa and Asia.276 The Korean economy has grown steadily over the past
ten years by 4.6%, and expectations are that similar, though somewhat
depressed growth will continue for the next several years. IMF estimates an
average growth of 3.9% over the next five years, considerably lower than
the new Asian tigers China (8.6%) and India (7.6%), though comparable to
Brazil and Russia (both also 3.9%).
South Korea is known for its high-tech knowledge economy, fuelled by the
hard work and high education of its people. The 2008 crisis hit the economy
hard, with 1.2 million jobs lost in the nine months between June 2008 and
February 2009, but recovery was faster than in any other rich country, with
growth back to 6% in 2010 and unemployment down to 3% in 2011.277
However these strong headline figures hide what analysts identify as
serious underlying concerns in the sustainability of South Koreas success.
Koreas economy is strongly influenced by the phenomenon of chaebols:
large business conglomerates such as Samsung and LG which have
benefited, particularly in the past, from strong state backing.278 Chaebols
have been credited for Koreas strong recovery from the recent crisis, with
many of them gaining market share.279 However despite this success, there
are inherent risks in putting all of ones eggs in one basket, as the Asian
crisis of 1997 demonstrated, with the collapse of around half of Koreas
chaebols, including Daewoo, the biggest corporate bankruptcy in history at
the time.280 There is concern that society at large does not benefit
sufficiently from chaebols: President Lee Myung-bak has called on them to
Page.'
277 The Economist, 'South Koreas Economy: What Do You Do When You Reach the
Top?'.
Page.'
279 Christian Oliver, 'South Korea: An Economy Divided,' Financial Times,
May 29, 2011, http://www.ft.com/intl/cms/s/0e9c9e6a-8a1c-11e0-beff00144feab49a,Authorised=false.html?_i_location=http%3A%2F%2Fwww.
ft.com%2Fcms%2Fs%2F0%2F0e9c9e6a-8a1c-11e0-beff-00144feab49a.html&_i_
referer=#axzz26R5tMzOh.
280 The Economist, 'Reformed Characters,' The Economist, September 25, 2008, http://
www.economist.com/node/12237177; Oliver, 'South Korea: An Economy Divided.'
share more of their takings, particularly with small and medium enterprises,
and the government has acknowledged the need to support these smaller
firms. Corporate governance at chaebols is often an issue for outside
investors. Circular shareholding is commonplace founding families are
thus often able to control the firm with only a small stake. In addition, their
close ties with the government have made dubious transactions and
arrangements a concern.281Meanwhile problems on the horizon require
attention now: the population issues highlighted above are widely
considered a major threat. Household debt in 2011 had reached 146% of
income higher than the level recorded in the U.S. just before the subprime
crisis (138%).282 Youth unemployment is also a challenge: the number of
university students may be reaching excessive levels as 40% of the last
cohort of graduates failed to find work in the four months after leaving
university.283 Lastly, the Korean economy is heavily reliant on exports, which
make up over half of GDP; this leaves it as open as ever to shocks from
markets abroad.284
Emerging from dictatorship in the mid 20th century, South Korea has
developed into a sophisticated representative democracy. The center-right
conservative Saenuri Party secured a slender majority in the April 2012
legislative election. Park Geun-hye, daughter of assassinated authoritarian
leader Park Chung-hee and Saenuri candidate for the forthcoming
presidential elections enjoys consistently strong performance in opinion
polls, giving her a good chance of becoming the countrys first female
president in Decembers election.285
Koreas position in the Corruption Perception Index puts it in the league of
countries such as Poland, Brunei and Dominica. Though still in the top 50
least-corrupt, it lags behind most developed countries. This is reflected in
281 The Economist, 'Reformed Characters.'

282 Oliver, 'South Korea: An Economy Divided.'
283 The Economist, 'The One-shot Society.'
Page.'
285 The Economist, 'South Korean Politics: The Iron Lady in Red,' The Economist, July
14, 2012, http://www.economist.com/node/21558623.
ST RAT EGY
CHANG E RePORT 139
news reports of scandals surrounding families in politics and chaebols.286

This culminated in president Lee making a public apology on national
television for a string of scandals involving most prominently his brother,
arrested on bribery charges. Other scandals have involved three relatives,
four senior presidential aides and several former senior officials in the
cabinet and government-run companies, all indicted or convicted of
corruption.287
In foreign policy, Koreas clear focus on economic development is evident
and likely both a cause and effect of its strong export trade. South Korea is
a founding member of the Asia-Pacific Economic Cooperation forum and
chaired the organization in 2005. It maintains relations with virtually every
country in the world and a broad network of trading relationships.288 Its
current major objective is to secure its place in a free-trade agreement with
China and Japan.
The legacy of Japanese occupation which ended in 1945 is still evident.
There has been a steady thawing of bilateral relations in the decades since,
culminating in the joint hosting of the 2002 FIFA World Cup. There are
nevertheless tensions between the two countries in some areas, e.g. the
dispute regarding sovereignty over the Liancourt Rocks, a group of small
islets. The latest manifestation of the dispute involved president Lee Myungbak becoming the first South Korean president to visit the Rocks, resulting
in Japan temporarily withdrawing its ambassador to South Korea.
Tensions between North and South Korea are persistent and pernicious.
Dating back to the end of the Second World War, the division of Korea by
the United States and the Soviet Union resulted in two regimes, both of
which claimed sovereignty over the whole nation and territory. Sixty years
286 The Economist, 'Corruption in South Korea: Rotten Shot,' The Economist, July 21,
287 Sang-Hun Choe, 'President Lee Myung-bak of South Korea Apologizes for
Corruption Scandals,' The New York Times, July 24, 2012, http://www.nytimes.
com/2012/07/25/world/asia/lee-myung-bak-of-south-korea-apologizes-forcorruption-scandals.html?_r=1.
288 U.S. Department of State, 'South Korea,' U.S. Department of State, April 12, 2012,
http://www.state.gov/r/pa/ei/bgn/2800.htm#foreign.
since the Korean War which cemented this division through a demilitarized
zone between the two states, tough rhetoric and occasional incidents
continue, including the November 2010 artillery firing on Yeonpyeong
Island, in which four South Koreans were killed. Some analysts assert that
the Souths incumbent president Lee Myung-bak has aggravated the
situation with a hard-line approach. Whoever wins the presidential election
later this year is likely to employ softer tactics and Park has signaled her
intention to do so in an effort to break 'the vicious cycle of distrust' between
the two states.289
Relations between the Peoples Republic of China (PRC) and South Korea
have been steadily improving, and China is now South Korea's largest
trading partner. China often plays the role of mediator in relations between
the two Koreas, Japan and the U.S. The talks on setting up a free-trade area
with China, Japan and Korea promise to cement a relationship already
worth U.S. $690 billion in 2011.290
The Republic of Korea leads in the field of research and development (R&D)
with one of the worlds highest R&D expenditures as a percentage of GDP
(R&D intensity) at 3.36%.291 This has also been growing at a very fast rate as
illustrated by Figure 2. It also reveals the substantial role played by private
firms in this; as an example, Samsungs R&D expenditure has been increasing
rapidly in recent years, increasing 23.3% from 2009 to reach U.S. $7.873
billion in 2010. In perspective, this means that Samsung alone accounts for
almost 15% of South Koreas R&D expenditure.292
289 Oxford Analytica, 'South Korea: Country Profile,' Oxford Analytica, July 2, 2012,
http://www.oxan.com/; The Economist, 'South Korean Politics: The Iron Lady in
Red.'
290 Bloomberg News, 'China Plans Talks With Japan, Korea on Free-Trade Area,'
Bloomberg, May 13, 2012, http://www.bloomberg.com/news/2012-05-12/chinajapan-korea-to-start-free-trade-talks-this-year.html.
291 OECD, 'Country Statistical Profile: Korea,' OECD iLibrary, January 18, 2012, http://
www.oecd-ilibrary.org/economics/country-statistical-profile-korea_20752288table-kor.
292 Barry Jaruzelski and John Loehr, The Global Innovation 1000: Why Culture Is
Key, Strategy + Business (Booz & Company, 2011), http://www.booz.com/media/
uploads/BoozCo-Global-Innovation-1000-2011-Culture-Key.pdf.
ST RAT EGY
CHANG E RePORT 141
Korea Figure 2
Expenditure on R&D, $m currrent, PPP
60000
50000
40000
30000
Private Non-Profit
Higher Education
Government
20000
10000
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Figure 2 Expenditure on R&D by funding sector. Source: OECD
Recent substantial increases in R&D expenditure have been spread among

a number of fields of specialism for the Korean economy: information
technology including semiconductors and displays, green technology,
nanotechnology and biotechnology. Analysts see the biggest increases
going into green research, such as energy-efficient and environmentally
friendly technologies. Materials are also an area of focus, with a trillion-won
(U.S. $865 million) programme underway to support research into world
premier materials, future industry-leading products to be developed over
the coming years.293
But issues remain. Expenditure on R&D does not always deliver value for
money,294 and chaebols even stand accused of stifling innovation by
squeezing small high-tech companies.295 There is also concern that the
power of the chaebols may be rising, making many markets in which they
operate more and more oligopolistic. Chaebols have been known to acquire
small firms likely to threaten their market dominance, sometimes simply to
293 David Cyranoski, 'South Korean R&D Budget to Soar,' Nature, November 19, 2009,
http://www.nature.com/news/2009/091119/full/news.2009.1090.html.
294 Jaruzelski and Loehr, The Global Innovation 1000: Why Culture Is Key.
295 The Economist, 'South Koreas Economy: What Do You Do When You Reach the
Top?'.
Private Enterprise
'strip out talent and snuff out competition'.296 There have been some moves
toward improving market contestability, but skepticism remains. 297
Business Climate
The World Banks 2012 Ease of Doing Business ranking places South Korea
as one of the easiest in the world for doing business, in 8th place of 183, up
from 15th in 2011.298 This outperforms BRICS countries to quite a considerable
degree, with Brazil (126), Russia, (120), India (132), China (91), South Africa
(35) and Turkey (71) all far lower down the list.
Some of the governments measures to encourage more small businesses
and reduce the dominance of the chaebols are evident here. For example,
Koreas ranking for ease of starting up a business moved from 59th to 24th,
an impressive 35-step leap, thanks in part to a new online service known as
StartBiz, launched in 2010, which simplifies and streamlines six separate
bureaucratic procedures into a single all-online system.
Remaining challenges include the dominance of the chaebols and weak
protection of minority shareholders. Some founding chaebol families seem
to have been placed above the law, as was illustrated for instance by the
pardoning of Samsung chairman Lee Kun-hee, convicted of serious financial
crimes.299
Aging Population
South Koreas population has been growing at a glacial pace for some years
now and, according to one report, will have begun to shrink within the next
four years.300 Koreas population will be the second-oldest in the world by
2050, with one of the highest old-age-dependency ratios in the world. This
could have dire consequences for the economy, holding back growth and

297 Ihlwan Moon, 'Do the Chaebol Choke Off Innovation?,' Bloomberg Businessweek,
December 3, 2009, http://www.businessweek.com/magazine/content/09_50/
b4159058699422.htm.
298 'Ranking of Economies - Doing Business - World Bank Group', June 2011, http://
www.doingbusiness.org/rankings/.
300 Eunkyung, 'South Korea Shuns Moms at Peril as Workforce Shrinks.'
ST RAT EGY
CHANG E RePORT 143
putting pressure on the relatively new national health insurance system,

established in 2000. The Korean government has recognized this concern
and in 2008 introduced a long-term care insurance scheme as part of the
social insurance system. While initial developments have been promising,
the World Health Organization (WHO) identifies a number of challenges as
the elderly population in need of care continues to proliferate.301 In
particular, disparities between numbers needing care and the capacity of
facilities are already appearing, with some areas such as Seoul
oversubscribed and more rural facilities undersubscribed. Ensuring the
quality of care is also a challenge, particularly in the training given to lowskilled carers.
Maintaining Innovation
South Koreas information society is readily identifiable as one of the big
factors behind its success, however it will have to maintain its pace to avoid
being eclipsed by new, powerful competitors also undergoing rapid
development, particularly China. The issues related to the cheabols are
particularly relevant here: changes in regulation and governance are needed
to increase the level of competition and dynamism in many of Koreas
industries in order to award greater opportunities to deserving small
players.
Korea lags behind other OECD countries on sustainability and environmental
responsibility. The Greenpeace Guide to Greener Electronics ranks Koreas
top electronics firms Samsung and LG among the worst of the 15 firms
evaluated, in 7th and 13th place respectively. The Tomorrows Value Rating is
a report which assesses firms long-term investment value given future
sustainability needs by looking at the importance of building sustainability
into sound strategic business models.302 Its authors have highlighted some
of the achievements of South Korean firms in terms of understanding and
addressing certain issues such as energy efficiency and recycling, however
there are shortcomings in terms of integrating these points into an overall
301 Chang Bae Chun et al., 'Republic of Korea: Health System Review,' Health Systems
in Transition 11, no. 7 (2009), http://www.euro.who.int/__data/assets/pdf_
file/0019/101476/E93762.pdf.
302 Two Tomorrows, 'Tomorrows Value Rating 2011,' Tomorrows Value Rating, 2011,
http://www.tomorrowsvaluerating.com/Page/TomorrowsValueRating2011.
strategy. Korean firms need to become leaders in this field in order to

continue adding value in a sustainable way; the increase in R&D expenditure
on green technologies is a step in this direction.
Defense
In the wake of increased tension between the two Koreas, the Souths tough
rhetoric the Defense Ministry vows to 'pulverize the enemys will to attack
again' is being supported with increased military spending and a crucial
change is planned: on the 1st December 2015, Seoul will take over wartime
control of South Korean troops from the U.S., a process already half
complete.303 But there are also opportunities: South Korean annual defense
expenditure is expected to increase and with it the market for homeland
security is forecast to grow at a rate of 9.01% from its U.S. $324-million
value in 2012. Defense imports, despite a sharp decline in 2009, grew at a
rate of 7.73% in 2011 to reach U.S. $1.42 billion.304
303 Sangwon Yoon, 'South Korea to Focus Defense Strategy on Possible Border Island
Conflict,' Bloomberg, January 4, 2012, http://www.bloomberg.com/news/2012-0104/south-korea-to-focus-defense-strategy-on-possible-border-island-conflict.html.
304 ICD Research, The South Korean Defense Industry: Market Opportunities and Entry
Strategies, Analyses and Forecasts to 2017, July 2012, http://www.reportlinker.com/
p0936510-summary/The-South-Korean-Defense-Industry-Market-Opportunitiesand-Entry-Strategies-Analyses-and-Forecasts-to.html.
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A N N EX : I N D I V I D UAL CO U N T RY N O T ES R U SS I A
8.6 Russia
Key Takeaways
Although there are some positive signs in Russias demographic situation

longer-term trends suggest that Russia will be severely impacted by
population aging;
Russias economic growth in the next decade is likely to be slower than
in 1998-2008;
Russian government is eager to develop a strong high-tech sector in
order to diminish dependence of the economy on the oil and gas sector.
It has undertaken several initiatives to promote innovation but bad
business climate and weak institutions are major hurdles for faster
development;
President Putins popularity is likely to deteriorate but there is no
unifying opposition figure at the moment;
Some major opportunities in Russia might include:
- Energy production and energy efficiency
- Health
- Economic modernization
Variable
Russias Rank
95th out of 155
Human Development
66th out of 187
306
49th out of 187
Education307
106th out of 132
308
66th out of 142
143rd out of 182
Entrepreneurship311
62nd out of 179
310


'TheGlobalEntrepreneurshipandDevelopmentIndex(GEDI)2012Country
Rankings.'
Population312
Russia has severe demographic problems and will be heavily impacted by

population aging. It is one of the few countries that has already experienced
a fall in population in the last two decades since 1991 its population has
decreased by 4.5%. However, at the moment the Russian population is not
particularly old, at least judged by the European standards, and on many
demographic metrics Russia is quite close to the average EU values.313
The dissolution of the Soviet Union and market restructuring of the Soviet
economic system coincided with a rapid fall in birth rates and a substantial
increase in death rates (see Figure 1). The increase in mortality rates in
Russia was unprecedented for an industrialized nation in peacetime. This
increase was particularly large for working age adult males. The probability
that a newborn male will live until 65 is only 48% in Russia. This is
approximately the same level as in many poor Sub-Saharan African
countries and well below the level, for example, in North Korea, India, or
Indonesia. The difference in life expectancy between males and females in
Russia is one of the highest in the world almost 12 years. Risky behavior
and unhealthy lifestyles are some of the reasons for these striking figures.
These negative trends started to slow down and in some cases reverse in
early and middle 2000s. In 2009 the Russian population increased for the
first time since 1994 because of positive net migration. This growth
continued in subsequent years (since the crude death rate is still above the
birth rate, the population would be still shrinking if the effect of migration
is excluded). The total fertility rate increased from 1.2 in 2001 to 1.6 in 2011
as steadily rising living standards encouraged couples to have more
children. The Russian government also undertook several measures in
recent years to stimulate births.
312 A good but somewhat outdate review of the demographic trends in Russia is:
DaVanzo J. and C.Grammich, Dire Demographics: Population Trends in the Russian
Federation, RAND, Santa Monica, MR-1273, 2001.
313 Median age in Russia was 38.5 years in 2010 compared to 40.9 in the EU (data
from CIA and Eurostat). Total fertility rate in Russia was 1.6, higher than, for
example, in Spain or Germany.
ST RAT EGY
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Russia Figure 1
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
1985
1990
1995
Birth rate
2000
2005
Death rate
Figure 1 Crude birth and death rates in Russia (per 1,000 people)
Source: World Development Indicators
Despite these positive trends Russian population is aging fairly rapidly and
the challenges related to this will be quite serious. The sustainability of the
public pension system already raises many questions and an increase in the
pension age is considered as unavoidable by many experts although it has
been ruled out for now by the government.
Economy
Russias economy grew very rapidly in the first years of the 21st century. In
1999-2008 its GDP growth rate averaged almost 7%. Growth in Russias
dollar GDP (measured at market exchange rates) was even more impressive
it increased at an average annual rate of 24% or more than eightfold in
the same period.314 This rapid growth has changed Russias fortunes. From
a country that was unable to service its debt in 1998, which reached almost
100% of GDP, it has transformed into a country with one of the largest
foreign reserves and government debt of less than 8% of GDP in 2008.
Living standards of the population have also improved dramatically over
314 Russias dollar GDP grew more rapidly than its GDP in constant prices because of a
rapid appreciation of the rouble against dollar in that period, see Oliker, O., K.Crane,
L.Schwartz, and C.Yusupov, Russian Foreign Policy: Source and Implications, RAND,
Santa Monica, MG-768, 2009.
2010
the same period. The average wage increased more than eleven fold from
approximately U.S. $60 in 1999 to almost U.S. $700 in 2008.
The basic factors driving growth in Russia were very much the same as in
other transition economies, including: privatization of state-owned
companies, market discipline, competitive pressures, foreign direct
investment. In addition the rising prices for energy commodities also
provided a substantial boost to the growth.
The financial crisis of 2007-2009 hit Russia hard and its GDP dropped 7.8%
in 2009. The recovery, however, was relatively rapid and Russias GDP
reached its pre-crisis level by early 2012. Nevertheless the after-crisis
growth trend seems to be significantly slower than in the pre-crisis years.
The economy grew by 4.3% both in 2010 and 2011. Forecasts from the
OECD and the IMF for the next few years suggest that growth should be
close to 4% pa or slightly lower. Many factors that boosted Russias growth
in 1999-2008 are unlikely to be major drivers of growth in the future,
including:
Very favorable changes in terms of trade due to rapidly rising oil prices;
Low utilization of production capacity inherited from the Soviet Union;
Low-hanging fruits of corporate restructuring and more professional
management;
Rapid expansion of bank credit (it increased from 10 to 40% of GDP).
Therefore, one of the main issues confronting Russia is the diversification
of its economy away from reliance on oil and gas toward innovation-based
development. The oil and gas sector has been the main source of export
revenues for Russia earnings from exports of crude oil, petroleum
products and natural gas increased from U.S. $53 billion in 2000 (or about
50% of total exports) to U.S. $310 billion in 2008 (or 66% of total exports).315
At the same time, its links to the rest of the economy are limited. All
extractive industries employ just 1.6% of all workers in Russia. Hence it is
315 Most of this growth came from rising prices for oil and gas. In constant prices
Russias energy exports increased by 51% between 2000 and 2008.
ST RAT EGY
CHANG E RePORT 149
unlikely to serve as a engine of diversification.316 Moreover, the sectors

dependence on volatile oil and gas prices serves as a major source of
instability for the economy. 317
Recent parliamentary (in December 2011) and presidential (in March 2012)
elections were marred by abuses of administrative resources and
widespread allegations of vote rigging. They led to numerous protests and
some of the largest demonstrations in Russia since the break-up of the
Soviet Union. Putin was elected as president for 6-year term and still retains
a large approval rating although his popularity fell compared to the precrisis years. Political opposition with the exception of the Communist party
is weak, disorganized and does not have popular leaders.
The Kremlins recent political steps have been contradictory. On the one
hand, some barriers to participation in the political process have been
reduced including a simplified registration of new parties and the return to
popular elections of regional governors. On the other hand, a new law has
increased fines for participation in unsanctioned demonstrations, and new
bills could create a 'blacklist' of websites to be blocked and put NGOs that
receive funding from abroad under more scrutiny.318
The Russian government is well aware of the dangers related to

overdependence on oil and gas and has developed several programs that
intend to promote innovation and high-technology industries. One of the
strengths it can rely on to achieve these goals is a highly educated
population. For example, gross enrolment rate for tertiary education in
Russia is one of the highest in the world (76%) although many observers
have serious doubts about the quality of education. The number of
researchers per million people is also quite high around 3,000 a level
comparable to that of the Netherlands. In addition Russia has significant
316 World Bank, Export Diversification through Competition and Innovation: Overview,
April, 2012.
317 For example, exports of petroleum and natural gas dropped by 39% in 2009, from
U.S. $310 billion to U.S. $191 billion.
318 The Economist, 'If you cant suppress them, squeeze them', July 21st, 2012.
strengths in several high-tech sectors.319 Some of these sectors, such as

nuclear technologies, aerospace and armaments are, to a large extent, the
legacy of large investment in the military-industrial complex in the Soviet
period. Development of others sectors such as software and nanotechnologies is a more recent phenomenon.
One of the most ambitious Russian projects in the area of innovation policy
is the Skolkovo Innovation Center. Located near Moscow, it is intended to
house up to 1,000 technological start-ups, 40 corporate R&D centers and a
research university (in partnership with the MIT). Companies located in
Skolkovo will get substantial tax breaks and grants, simplified regulation
and visa procedures. Around 20 companies have already signed up,
including such names as IBM, SAP, and Cisco. Skolkovo will have five
clusters that broadly correspond to Russias main high-tech strengths: 320
IT
Space
Energy efficiency
Biomedical technologies
Nuclear technologies
Business Climate
The Russian business climate leaves much to be desired and is one of the
main barriers for a bigger role for innovative and high-tech industries. The
World Bank in its Doing Business-2012 ranking puts Russia in 120th place
out of 183 countries in terms of quality of business regulation. Russia scores
particularly badly on such issues as getting electricity, dealing with
construction permits and trading across borders. More generally, the quality
of institutions in Russia is quite low (judged by the Worldwide Governance
Indicators from the World Bank). The Corruption Perception Index from
Transparency International ranks Russia 143 among the 182 countries in the
2011 survey.
319 Crane, K., and A.Usanov, 'The Role of High-Technology Industries', in Russia
after the Global Economic Crisis, Petersen Institute for International Economics,
Washington DC, 2010.
320 http://www.sk.ru/Model.aspx.
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However, recently there have been some positive signs as well. After 18
years of negotiations (the longest in the history of the WTO) Russia finally
joined the World Trade Organization in July 2012. This should lower tariffs,
improve customs administration and treatment of foreign investors. The
World Bank estimates that Russia should gain more than 3% of GDP per
year in the medium term through lower prices and increased FDI.321
President Putin in his speeches has emphasized that Russia needs to
improve its business climate. He set the goal to raise Russias position in
World Banks 'Doing Business' ranking from 120th place to 20th in a few
years. Plans to sell shares in several state-owned companies have been also
approved.
Energy Production and Energy Efficiency

Russia is the largest producer and exporter of fossil fuels. The bulk of its
production comes from mature fields with declining productivity. Arresting
or slowing down the decline in production at these fields requires the
application of new technologies. Another area where foreign technologies
should play a bigger role involves modernization of energy transmission
and distribution infrastructure, including the electrical grid and pipelines.
Russia is also a very large consumer of energy. It is the third largest emitter
of greenhouse gases in the world. Atmospheric pollution caused by the
energy sector is estimated to cause up to 40,000 deaths annually among
the urban population. The energy intensity of GDP in Russia in 2008 was
estimated to be more than double the world average and triple the
European average (in PPP terms).322 The Russian government has made
energy efficiency one of its modernization priorities and approved the
Energy Efficiency Program until 2020.
321 World Bank, Russian Economic Report, #27, April 2012, at http://www-wds.
worldbank.org/external/default/WDSContentServer/WDSP/IB/2012/05/02/00033
3037_20120502005616/Rendered/PDF/682760WP0Box360C000270march20120
eng.pdf
322 OECD Reviews of Innovation Policy: Russian Federation, OECD, Paris, 2011.
Health
Poor health of the Russian population represents one the most serious risks
to Russia. It will increase medical costs, reduce the number of healthy
workers, raise absenteeism, destabilize families and raise national security
risks. The main causes of deaths and poor health in Russia are injuries and
non-communicable
cancers.
323
diseases,
including
cardiovascular
diseases
and
Dealing with many non-communicable diseases requires early
detection and better diagnostics tools.

In the injuries category, road traffic accidents are one of largest causes for
deaths and disability-adjusted life years (DALYs) lost. Rapid raise in car
ownership led to much higher traffic while investments in road infrastructure
were lagging behind. Better design of new road infrastructure and retrofitting the existing one should be one of the main ways to address the road
safety problem.
Economic modernization and diversification
Finally, industrial diversification and modernization of the economy is
probably the main economic challenge. Russia can rely on its strengths in
high-technology sectors to jump start the process but to promote
innovation in a wider range of industries it needs more foreign direct
investment and R&D cooperation. One area where such cooperation might
take place is in the area of infrastructure. The Russian government and
companies are making substantial investments in railroads, ports, electricity
grids, natural gas pipelines, etc. These investments often rely on foreign
technologies. However, Russian institutions and business climate should
improve in order to attract more private investment from abroad.
323 World Bank, Dying Too Young: Addressing Premature Mortality and Ill Health Due
to Non-comminicable Diseases and Injuries in the Russian Federation, Washington
DC, 2005.
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A N N EX : I N D I V I D UAL CO U N T RY N O T ES SO U T H AFR I CA
8.7 South Africa

Key Takeaways
Positive economic growth forecasts for the medium-term;

The South African economy is a magnet for FDI, particularly in the
extractive industries;
Fast-growing services sector;
High-quality business climate compared to other emerging economies;
Fast-growing private security industry, yet this is also a reaction to
security concerns;
Ambitious R&D goals for the next few years and good opportunities in
the fields of public health and energy;
Public health situation under stress, low life expectancy due to, inter alia,
a high prevalence of HIV/AIDS and tuberculosis and underinvestment in
the public health system yet this also represents an opportunity;
Extreme youth unemployment of over 50%. Potential source of instability
if left unmanaged;
High incidence of crime, although this has been dropping slightly in
recent years.
Variable
South Africas Rank
23rd out of 155
Human Development
123rd out of 187
325
82nd out of 187
Education326
128th out of 132
327
50th out of 142
64th out of 182
Entrepreneurship330
45th out of 179
329
324325326327328329330


'TheGlobalEntrepreneurshipandDevelopmentIndex(GEDI)2012Country
Rankings.'
Population
In the period 2007-2011, South Africa experienced a population growth of

around 1.2% per year on average. This rate of growth outpaced that of most
Western countries and is comparable to the population growth recorded in
other emerging economies, such as Indonesia, India and Turkey.331 Similar
to other emerging economies, population growth is also strongly an urban
phenomenon. South Africa has a relatively high degree of urbanization with
62% of the population living in cities. The urbanization rate for the period
2010-2015 is estimated to be about 1.2%.332
A big difference in South Africas demographic statistics compared to the
worlds average is life expectancy at birth. Whereas worldwide a newborn
has on average 68 years to live, in South Africa this number is significantly
lower, at only 54 years. Manifold health-related issues lie at the basis for
this low number, including a high prevalence of HIV/AIDS of over 20 times
the global average (see also infra, Public Health, p. 101).333
In terms of education, South Africa occupies place 82 out of 187 countries
reviewed in the context of the UNDP education index.334 This might seem
reasonable, but as Africas largest and most advanced economy, the
country is not performing as well as it should in terms of education. Only
one out of six South Africans ever makes it to university in the end. Of
those who do make it, a third drop out within a year. With a few notable
exceptions, university standards in South Africa are rather low. Employers
frequently complain that universities produce graduates who are largely
unemployable.335 Three million South Africans in the age of 18-24, over half
of the total, are outside of education, training or employment. Seven out of
ten lack any qualification and even among those who graduate from high
school, only 17% are likely to get a job within a year of leaving school.336

332 U.S. Central Intelligence Agency, 'CIA - The World Factbook. South Africa Country
Page.', 2011, https://www.cia.gov/library/publications/the-world-factbook/geos/
sf.html.
333 World Health Organization, 'South Africa Health Profile', May 2012.
335 The Economist, 'Education in South Africa: Still Dysfunctional', January 21, 2012,
http://www.economist.com/node/21543214.
336 Ibid.
ST RAT EGY
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Economy
During 2000-2010, GDP grew by 3.6% on average. Other BRIC countries

China
Southsuch
Africaas
Figure
1 (10.3%) and India (7.4%) experienced stronger growth in the
same period. Brazil (3.7%) only just manages to stay ahead of South Africa
(see Figure 1).337
12
10
8
6
4
2
0
Brazil
China
India
Indonesia
South
Korea
Russia
South
Africa
Turkey
Figure 1 Average GDP growth rates 2000-2010 (%)

South Africa is a country well endowed with minerals and other natural
resources. It is no surprise therefore that their export takes up a dominant
position in the economy. The main export products are gold, platinum,
diamonds and coal, but also machinery and equipment. Despite the strong
focus on the extractive industries (16% of total value added to the GDP),
the services sector in South Africa is booming and contributed around 66%
of the value added to GDP in 2010.338
Investment levels (gross fixed capital formation) in South Africa stood at
19.6% of total GDP in 2010. Compared to other BRIC countries, investment
levels in the economy are lower. By comparison, in 2011, China and India
invested 45.4% and 29.5% of GDP, respectively. Compared to developed
economies, the South African investment rate is slightly above OECD
average (17.8%).339

338 Ibid.
339 The World Bank, 'Gross Fixed Capital Formation (annual % Growth).'
When it comes to foreign direct investment (FDI), South Africa is the

leading economy among the BRICS. In 2010, South African inward FDI
stock stood at 36.6% of GDP the highest rate of all the BRICS countries.340
Extractive industries played a major role, consistently having attracted the
bulk of FDI over the last ten years. In 2010, mining and quarrying attracted
over 38% of total FDI. Services come close, having attracted a good 35% of
FDI in 2010. The majority share goes into the financial services sector, which
attracted 66% of services-related FDI in 2010 and 23.8% of total FDI in
2010.341
South AfricaAFigure
2
potential
source of instability however is South Africas staggeringly high
level of youth unemployment (see Figure 2 for a comparison for 2009).
With over 50% of the people aged 15-24 without a job in South Africa
during the first quarter of 2012, the government should place a high priority
on finding an adequate solution.342
50
45
40
35
30
25
20
15
10
5
0
Brazil
Russia
South Africa
Turkey
Indonesia
South Korea
Figure 2 Youth Unemployment Rates in 2009 for Several Emerging Economies 343
Source: United Nations Statistics Division. Millennium Development Goals
Indicators.
340 UNCTAD, 'World Investment Report 2011. Country Fact Sheet: South Africa', 2010.
341 UNCTAD, 'Investment Country Profiles: South Africa', February 2012, 6.
342 Statistics South Africa, 'Quarterly Labour Force Survey. Quarter 1, 2012.', May 2012,
36.
343 Comparison based on most recent data year available. China and India have data
which is too outdated.
ST RAT EGY
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Overall, despite being the undisputed leader in Africa in terms of GDP,

quality of infrastructure and with unrivalled soundness of auditing standards
and
securities
exchanges
regulation,
the
South
African
economy
increasingly feels the heat from other African economies. Nigeria has been
growing at twice the speed for the past eight years and Egypt if it
manages to become more politically stable could develop into a regional
economic powerhouse. Other countries, such as Ghana and Kenya equally
compete with South Africa for the location of multinationals African
headquarters General Electric for example recently chose Nairobi as its
sub-Saharan hub.344
The fourth general election in South Africa since apartheid was held on 22
April 2009. ANC leader Jacob Zuma was elected President for a term of
five years after having won 65.9% of the vote. The largest opposition party,
the Democratic Alliance (DA) won a share of 16.7% of the vote. The second
biggest opposition party, the New party Coalition of the People (COPE
formed by former ANC members), secured 7.4% of the vote.345 A new
candidate for the ANC for the next presidential elections will be chosen in
2012. Although all-out popular support for the ANC seems to be waning, it
is expected that it will remain the largest party after the 2014 general
elections.346
In terms of foreign relations, South Africas foreign policy has long been
influenced by the end of apartheid and its desire to be a force for good in
the world. However, much has changed since Nelson Mandela was president.
Under Thabo Mbeki, Mandelas successor, foreign policy moved more in the
direction of asserting South Africas position as a regional power, even if
that meant ignoring some of the human rights violations in countries such
344 'South Africa: The Gateway to Africa? | The Economist', June 2, 2012, http://www.
economist.com/node/21556300?zid=304&ah=e5690753dc78ce91909083042ad12
e30.
345 UK Foreign and Commonwealth Office, 'Country Profile: South Africa', May 2012,
http://www.fco.gov.uk/en/travel-and-living-abroad/travel-advice-by-country/
country-profile/sub-saharan-africa/south-africa/?profile=politics.
346 Rabobank, 'Country Report South Africa', February 2012.
as Myanmar and Zimbabwe.347 Under Jacob Zuma, Mbekis successor, this

process has continued. Recently for example, after initially backing the
no-fly-zone to support Libyan rebels, South Africa turned around and
openly criticized the NATO bombing campaign. South Africas foreign
policy seems to be contradictory. On the one hand, it upholds the principles
of national sovereignty and non-interference and on the other hand its aim
is to contribute to the ideals of democracy, human rights and justice.348
Other examples include Zumas call for the resignation of Hosni Mubarak
after unrest erupted in Egypt and his silence when Cote dIvoire plunged
into violence, refusing to acknowledge Alassane Ouattaras internationally
recognized election victory.349
In 2007/2008, over 70% of South Africas business and enterprise-funded

research and development (R&D) was devoted to engineering sciences,
medical and health sciences, information and communication technologies
and applied sciences and technologies. Whereas private sector R&D is
spread out over the extractive industries, IT and health, the government
spends more than 50% on social, agricultural and medicine health
sciences.350 The R&D intensity of the South African economy stood at 0.92%
in 2008, down slightly from 0.93% in 2007. Business R&D intensity for the
same year stood at 0.54% of GDP.351
In 2008, South Africa launched its Ten-Year Innovation Plan to guide the
countrys transformation toward a knowledge-based economy. A keycomponent of the Plan is the National Strategic Infrastructure Programme,
347 The Economist, 'South Africas Foreign Policy: All over the Place', March 24,
2011, http://www.economist.com/node/18447027; Eve Fairbanks, 'South Africas
Awkward Teenage Years,' Foreign Policy, February 2012, http://www.foreignpolicy.
com/articles/2012/01/03/south_africa_s_awkward_teenage_years?page=0.1.
348 The Economist, 'South Africas Foreign Policy: All over the Place'; James Traub,
'Will the Good BRICS Please Stand Up?'.
349 The Economist, 'South Africas Foreign Policy: All over the Place.'
350 SAccess ACCESS4EU - South Africa, 'Supporting the EU Access to South Africas
Research and Innovation Programmes', 2011, 17.
351 Erawatch, 'Basic Overview of South African Research System', July 16, 2012, http://
erawatch.jrc.ec.europa.eu/erawatch/opencms/information/country_pages/za/coun
try?section=Overview&subsection=BasicChar.
ST RAT EGY
CHANG E RePORT 159
which targets investment in high quality research equipment and

infrastructure. Five priority areas for investment have been identified: (i)
scientific equipment, (ii) specialized facilities both physical and
organizational which allow for the best performance of research equipment,
(iii) cyber infrastructure, (iv) high-end infrastructure which is at the bridging
point between R&D and commercialization, and (v) global networked
international infrastructure both single-sited and distributed.352
For 2018, the Plan formulated a number of grand challenges in the areas
of pharmaceuticals, space science and technology, energy security, climate
change and human and social dynamics. South Africa envisages becoming
one of the top three emerging economies in the global pharmaceutical
industry, increasing foreign investment in health-related R&D and creating
and funding five centers of competence focused on national health
priorities. Equally by 2018, the country plans to become a key contributor
to global space science and technology. Among other things, the Plan
foresees the development of an African network of satellites, the actual
launch of a satellite and the construction of a powerful radio-astronomy
telescope. To meet its future energy demands, South Africa turns to an
expansion in the energy supply infrastructure so that more than 50% of
additional capacity is derived from clean coal technologies and nuclear
plants and more than 50% of all new capacity is sourced from local
suppliers. To make best use of its geographic position to play a leading role
in global climate science, South Africa wants to develop several centers of
excellence on climate change and southern oceanography with robust and
strengthened research and global monitoring capabilities. Finally, through
the Plan, South Africa wishes to increase its contribution to a greater global
understanding of shifting social dynamics and the role of science in
stimulating growth and development, inter alia through the development
352 Erawatch South Africa, 'Research Infrastructures', July 16, 2012, http://erawatch.jrc.
ec.europa.eu/erawatch/opencms/information/country_pages/za/country?section=
NationalPolicyDevAndEuropeanResearchArea&subsection=ResearchInfraestructur
es.
of an internationally recognized knowledge hub on social sciences

research in Africa.353
Business Climate
In the 2012 edition of the World Banks Ease of Doing Business Monitor,
South Africa ranked 35 out of a total number of 183 countries reviewed.
When compared against other emerging economies, South Africa strongly
outperforms Brazil (126), Russia, (120), India (132), China (91) and Turkey
(71), who are all placed much lower on the scale. When set against
developing economies South Africa is ranked only slightly below the OECD
average which occupies place 31. Notable areas where South Africa stands
out are the ease with which credit can be obtained and the quality of
investor protection.354
When it comes to issues which potentially hamper efficient trade, a number
of observations can be made. Looking at import tariffs355, South Africa has
a rate almost half of that of South Korea, India and Brazil. Still, imports
tariffs in South Africa are approximately twice as high as in Turkey and in
the OECD and almost three times as high as in the EU.356
When it comes to customs formalities (the number of permits and
documents required for importing), South Africa demonstrates a similar
level of bureaucracy as other emerging economies. South Africa (8
documents required in total) is on the same level as Brazil (8), India (9),
Turkey (8) and Indonesia (7). By comparison however, South Korea (3) and
China (5) require significantly fewer documents to clear an import.357 The
number of formal documents required is also reflected in the total time it
takes for a product to be imported, which in South Africa takes 32 days on
353 Erawatch, 'Erawatch - Research Policy Goals', n.d., http://erawatch.jrc.ec.europa.eu/

erawatch/opencms/information/country_pages/za/country?section=ResearchPolic
y&subsection=RecentPol.
354 'Ranking of Economies - Doing Business - World Bank Group.' South Africa ranks
number 1 in terms of getting credit and tenth with respect to the quality of investor
protection.
357 Ibid.
ST RAT EGY
CHANG E RePORT 161
average. With this amount, South Africa is among the countries for which it
takes longest for imports to clear customs. Only Russia has a longer
clearance time, at 36 days. China (24), India (20), Brazil (17), Turkey (15)
and South Korea (7) move goods considerably faster.358
Public Health
As mentioned under demographic developments, newborns in South Africa
have a life expectancy that remains far below the worlds average. In
particular, this is caused by an HIV/AIDS prevalence among adults aged
15-49 of 17.8% in 2009. Pregnant women attending antenatal clinics showed
a prevalence of 29.4% in 2009. Mother-to child-transmission of HIV/AIDS
therefore is also the number-one cause of death among children under the
age of five (28%).359
In addition to problems with HIV/AIDS, South Africa also deals with a high
incidence of tuberculosis (TB) of 981 per 100,000. South Africa has the
worlds highest TB-HIV co-infection rate at 73%. South Africa is one of the
22 High Burden Countries that contribute around 80% of the global burden
of all TB cases.360 TB is also the leading cause of death for people living
with HIV.361 TB cure rates have gone up from 40-55% to 70% in 2009.
Detection rates have risen to 78%, and success rates by means of Directly
Observed Therapy Short course (DOTS) treatment a World Health
Organization (WHO) recommended treatment strategy achieved a
success rate of 74%.
358 Ibid.
359 World Health Organization, 'South Africa Health Profile,' 1; World Health
Organization, 'Country Cooperation Strategy South Africa', May 2011, 1.
360 Department Health, Republic of South Africa, 'Tuberculosis Strategic Plan for South
Africa, 2007-2011', 2007, 5.
361 The Center for Strategic and International Studies (CSIS) Global Health
Policy Cente, 'South Africa and Tuberculosis', August 5, 2011, http://www.
smartglobalhealth.org/blog/entry/south-africa-and-tuberculosis/; World Health
Organization, 'Global Health Observatory Data Repository', 2011, http://apps.who.
int/ghodata/?vid=18400&theme=country.
Health issues weigh heavily on South Africas government budget with

40.1% of general government expenditure and 8.5% of GDP having gone
into health spending in 2009. Next to HIV/AIDS and TB, priority areas for
future health spending and investment in South Africa are malaria; maternal,
child and adolescent health; and the prevention of road traffic accidents.362
Private Security Industry
In 2011, the South African private security industry reached a turnover of 50
billion Rand, or approximately U.S. $6 billion. The biggest sector of the
security services industry is the security guarding segment, which
contributed 18 billion Rand, close to U.S. $2.2 billion. Since 2001, the number
of private security officers and companies in South Africa increased by
111.3% and 66.7% respectively, making the industry one of the largest
worldwide. The amount of security officers outnumbers the South African
police by 2:1.363
The growth of the South African private security market has turned the
country from an importer of security goods, to an exporter of security
services and products. Four key technology segments form the backbone
of the South African private security market: access control, CCTV
surveillance, intrusion detection and alarms, and fire protection. Other
important sectors are asset tagging, physical- and perimeter security,
vehicle security and IT security.364
The tremendous growth is propelled by a number of factors: first, violent
crime in South African cities has been one of the main drivers of the growth
of the private security industry. Although the homicide rate has been
decreasing in recent years, violent crime is still a major problem in South
Africa compared to other countries. Second, the changes in property
associations as a result of the growth of mass private property caused by
urbanization, new building demands related to social controls and the need
362 World Health Organization, 'Country Cooperation Strategy South Africa.'

363 Elite SA Security Solutions, 'Private Security Growth in 2012 | Security Guarding In
Pretoria', April 10, 2012, http://securityguardinginpretoria.co.za/private-securitygrowth-in-2012/.
364 Swiss Business Hub South Africa, 'South Africa Private Security Industry',
December 2011.
ST RAT EGY
CHANG E RePORT 163
to secure new properties drive the sector forward. Third, the growing trend
toward viewing security as a good which can be purchased led to
individuals buying their own security, including the use of armed response
companies and counter surveillance. Companies went on to acquire security
services from security companies, such as security guarding, equipment
surveillance and armed response reaction all largely as a result of the
inability of the state to provide these services. Finally, the rise of cooperative
systems whereby not only the police, but increasingly also private security
patrols, metro police and neighborhood-watch organizations work together
to secure an area caused a rise in the presence of security services.365
Transport, Mobility and Road safety
South Africas high degree of urbanization and strong population growth
put a lot of stress on the countrys ability to deal with traffic congestion.
The capital city, Johannesburg, has a notorious reputation when it comes
to traffic congestion; the average one-way commuting time is close to 40
minutes.366 The 2010 IBM Commuter Pain Index367 an index which ranks
the emotional and economic toll of commuting places Johannesburg on
third place with a score of 97/100, just after Mexico City and Beijing.368
Apart from causing irritation among commuters, congestion in South
African cities makes businesses incur enormous costs. According to a
survey conducted by mobile GPS manufacturer TomTom, 78% of
Johannesburgs 3.8 million drivers are stuck in a severe traffic jam on a daily
365 Elite SA Security Solutions, 'Private Security Growth in 2012 | Security Guarding
In Pretoria'; United Nations Office on Drugs and Crime, 'Homicide Statistics', 2011,
http://www.unodc.org/unodc/en/data-and-analysis/homicide.html.
366 PayScale South Africa, 'Johannesburg City Commute Time Survey', July 17, 2012,
http://www.payscale.com/research/ZA/Location=Johannesburg/Commute_Time.
367 The IBM Commuter Pain Index is the result of a survey among 8,192 motorists
in 20 cities on six continents. The index is comprised of 10 issues: 1) commuting
time, 2) time stuck in traffic, agreement that: 3) price of gas is already too high, 4)
traffic has gotten worse, 5) start-stop traffic is a problem, 6) driving causes stress,
7) driving causes anger, 8) traffic affects work, 9) traffic so bad driving being
stopped, and 10) decided not to make trip due to traffic. The results of the survey
are compiled into an index on a scale of one to 100, with 100 being the most
onerous.
368 IBM, 'IBM Global Commuter Pain Study Reveals Traffic Crisis in Key International
Cities.'
basis. As a result, 10% of commuters are forced to cancel meetings due to

traffic and over 40% are late for work. Employers are estimated to lose
approximately U.S. $34 per employee per month and just under U.S. $130
million on aggregate per month.369 To tackle this problem, simply building
more or wider roads is an inadequate solution. The results of these surveys
demonstrate that what South African cities urgently need is the
development of a smart, sustainable and above all rapid public transport
system.
Road safety in South Africa has a bad reputation and much remains to be
done to improve the countrys record. According to the WHO, South Africa
has a road traffic death rate of 33.2 per 100,000, an unusually high figure
compared to developed countries such as the Netherlands (4.8), Sweden
(5.2), France (7.5) and the United States (13.9). Other emerging economies
such as Turkey (13.4), Indonesia (16.2), China (16.5) and India (16.8) also
appear to have much safer roads.370
WHO data shows that the seat-belt wearing rate in South Africa is very low.
In only 50% of cases is a seat-belt worn in the front of the car and only 8%
of the time in the back.371 When it comes to enforcement of the seat-belt
law, results are equally disappointing. A survey conducted by the South
African Ministry of Health indicates a perceived lack of adequate
enforcement of legislation with respect to speed limits, drunk-driving and
seat-belt wearing to be partly responsible for South Africas poor road
safety record.372
369 GPS Navigation & Road Safety Blog, 'TomTom Releases Remarkable Traffic
Statistics in South Africa', May 16, 2012, http://gps.arrivealive.co.za/2011/05/
tomtom-release-remarkable-traffic-statistics-in-south-africa/.
370 World Health Organization, 'Global Health Observatory Data Repository.'
371 Ibid.
372 World Health Organization, 'South Africa Road Safety Profile', 2008.
ST RAT EGY
CHANG E RePORT 165
A N N EX : I N D I V I D UAL CO U N T RY N O T ES T U R K EY
8.8 Turkey
Key Takeaways
Fast-growing, young, relatively well educated population;

High urbanization rate and a subsequent high demand for construction
and urban redesign;
High levels of FDI and a steadily growing economy with a positive
medium-term outlook;
Fast-growing services sector;
A booming defense industry, aided by an assertive Turkish foreign policy;
A fast-growing automotive industry at a strategic location with
continued positive growth perspectives;
Low import tariffs and fast logistical handling of container imports.
Construction sector plays a pivotal role in the economy and is very
sensitive to economic growth fluctuations;
Major tensions on the Turkish border with Syria and a threat of domestic
terrorism;
Relatively low levels of investment (gross fixed capital formation) in the
Turkish economy compared to other emerging economies.
Variable
Turkeys Rank
27th out of 155
Human Development
92nd out of 187
374
120th out of 187
Education375
109th out of 132
376
59th out of 142
61st out of 182
Entrepreneurship379
36th out of 79
378
373374375376377378379


'TheGlobalEntrepreneurshipandDevelopmentIndex(GEDI)2012
CountryRankings.'
Population
Compared to most western European countries, Turkey has experienced a

rapid and steady population growth over the last twenty years. For the
period 2007-2011, Turkeys population grew by 1.3% annually.380 This rate of
growth outpaced that of most Western countries and is comparable to the
population growth recorded in other emerging economies, such as
Indonesia and India.381 Much of Turkeys population growth manifests itself
in urban areas. By 2010, 70% of Turkeys population was living within urban
centers and it is estimated that urban population will continue to increase
in the foreseeable future, growing 1.7% annually.382 In terms of education,
Turkey takes up place 120 out of 187 countries reviewed in the context of
the UNDP education index.383 Among younger people, 42% of 25-34 yearolds have earned the equivalent of a high-school degree. This is below the
Organization for OECD average of 81%, but showing signs of progress.384
Economy
During the period 2000-2010, the Turkish economy experienced consistent

growth with a 4.2% annual increase of GDP on average. With this growth,
the Turkish economy finds itself performing roughly on par with the
majority of emerging economies (see Figure 1).385 After the 2008 financial
crisis when the country was badly hit, Turkey showed great resilience in
coming back. In 2010, the economy grew by as much as 9%.

381 Ibid.
382 U.S. Central Intelligence Agency, 'CIA - The World Factbook. Turkey Country Page.',
2010, https://www.cia.gov/library/publications/the-world-factbook/geos/tu.html.
384 OECD, 'Turkey OECD Better Life Index', October 1, 2012, http://www.
oecdbetterlifeindex.org/countries/turkey/.
ST RAT EGY
CHANG E RePORT 167
Turkey Figure 1
12
10
8
6
4
2
0
Brazil
China
India
Indonesia
South
Korea
Russia
South
Africa
Turkey
Figure 1 Average GDP growth rates 2000-2010 (%)

Although, its exports are still heavily dominated by clothing and textiles,
foodstuffs, metal manufactures and transport equipment, the strength of
the services sector is increasing. In 2010, the services sector accounted for
75% of the value added to the GDP.386
The levels of investment (gross fixed capital formation) in the Turkish
economy stood at 18.7% of GDP in 2010, compared to 17.8% for OECD
countries.387 By comparison, other emerging economies such as India, China
and Indonesia demonstrate much higher levels of investment. The low
Turkish figure could potentially hint at underinvestment in infrastructure
and the productive capacity of the economy. However, FDI stock in the
Turkish economy stood at 24.5% of GDP in 2010 and was significantly
higher than that of India (12%), China (9.9%), and Indonesia (17.2%), hinting
at positive growth prospects for the near to medium-term future.388 The
majority of foreign direct investment in the period 2001-2010 accrued in
the utilities (36%) and financial services sectors (31%).389
386 The World Bank, 'World Development Indicators | Data', July 2012, http://data.
worldbank.org/data-catalog/world-development-indicators.
387 The World Bank, 'Gross Fixed Capital Formation (annual % Growth).'
388 UNCTAD, 'Investment Country Profiles: Turkey', February 2012.
389 Ibid., 7.
The Justice and Development (AKP) Party led by Prime Minister Recep
Tayipp Erdo an has been in power since 2002 and has won three
consecutive elections. Not an Islamist party in the traditional sense, it sticks
to a principle what Erdo an dubbed conservative democracy, rather than
strict Islamic references.390 The Turkish military who is wary of the potential
Islamist intentions of the AKP has held a strenuous relationship with the
party ever since it came to power. The failed attempt by Turkeys chief
prosecutor in 2008 to have the AKP banned on grounds that it pursued an
Islamist agenda to subvert the secular republic, and the fact that by early
2012 half of all Turkish admirals and one out of ten active-duty generals
were jailed for plotting against the government, are tell-tale signs of the
troublesome ties.391
Internationally, hesitation on part of the EU to embrace Turkeys membership
aspirations worsened by the economic crisis have meant a reorientation
of Turkish foreign policy and warmer ties to Iran and Arab neighboring
states as a result. Accentuating its role as regional power broker, the AKP
foreign policy in general aimed at zero problems with neighbors.392
However, closer ties with Iran and the Hamas government in Gaza saw
relations with Israel dwindle. Particularly damaging were the 2009 Israeli
assault against Gaza and the incident where Israeli commandos raided a
Turkish flotilla destined for Gaza to deliver humanitarian aid and
construction materials in May 2010.393
The Syrian crisis put Turkey in a dilemma as to whether to continue to
support its ally in the region. The Turks however feel they cannot stand by
and watch innocents being killed in a former Ottoman region. Recent
390 mer Taspnar, 'Islamist Politics in Turkey: The New Model? | Brookings Institution',
April 2012, http://www.brookings.edu/research/papers/2012/04/24-turkey-newmodel-taspinar.
391 Ibid.
392 'Turkeys Foreign Policy: Growing Less Mild | The Economist', April 14, 2012, http://
www.economist.com/node/21552602?zid=307&ah=5e80419d1bc9821ebe173f4f0f
060a07; mer Tapnar, 'Islamist Politics in Turkey: The New Model? | Brookings
Institution.'
393 'Turkeys Foreign Policy: Growing Less Mild | The Economist'; mer Tapnar,
'Islamist Politics in Turkey: The New Model? | Brookings Institution.'
ST RAT EGY
CHANG E RePORT 169
incidents including the firing on Syrian refugees on Turkish territory and

the downing of a Turkish F4 Phantom jetfighter by Syrian anti-aircraft fire
caused relations between the two countries to reach an all-time low. An
emergency NATO meeting urged restraint and claimed intervention is not
under discussion.394
The international tensions also touch upon one of Turkeys own top
domestic problems, the Kurdish question. Despite promises to the contrary,
Erdo an has not worked to expand the limited political space for Turkeys
ethnic groups. Some commentators insist that Turkeys tough stance on
Syria also has to do with its desire to prevent the Syrian Kurds from
acquiring more rights than Ankara is willing to grant its own.395
Sectors of the Turkish economy which have a strong research and

development (R&D) and innovative basis are the automotive, machine
manufacturing and ICT sectors. Sectors which for continued and
accelerated growth are dependent on further R&D and innovation efforts
are Turkeys energy, water, food, defense and space sectors.396
In 2010, the portion of Turkish GDP spent on R&D, or the R&D intensity of
the Turkish economy, stood at 0.84%. The business sector was responsible
for 42.5% of this share. Despite falling short of the EU average of 2%, R&D
intensity in Turkey has been steadily increasing over the years and increased
by 15% over the last three years. This steady increase shows that the
394 'Turkey and Its Neighbours: Delicate Balance | The Economist', July 7, 2012, http://
www.economist.com/node/21558279?zid=307&ah=5e80419d1bc9821ebe173f4f0f
060a07; 'Turkeys Foreign Policy: Growing Less Mild | The Economist'; Justin Vela,
'Turkeys Not Messing Around Anymore - By Justin Vela | Foreign Policy', June 27,
2012, http://www.foreignpolicy.com/articles/2012/06/27/turkey_s_not_messing_
around_anymore.
395 mer Tapnar, 'Islamist Politics in Turkey: The New Model? | Brookings Institution';
'Turkeys Foreign Policy: Growing Less Mild | The Economist.'
396 TBTAK - BTYPD (STIPD), 'National Science, Technology and Innovation Strategy
(2011-2016)', 2010, http://www.tubitak.gov.tr/sid/2415/pid/2400/index.htm;jsess
ionid=D8765AD20D4E48F6029BB30638F10B7D%20(link%20to%20UBTYS%20
strategic%20framework%20in%20English).
financial crisis had little impact on existing R&D policies.397 According to

the Turkish National Science, Technology and Innovation Strategy (NSTIS)
for 2011-2016, R&D intensity should reach 3% by 2023. At the same time,
business R&D expenditure is projected to reach 2% of GDP (up from 0.36%
in 2010).398
Business Climate
A 2012 World Bank review of Turkeys business climate places the country
at number 71 out of a total of 183 countries analyzed for the ease with
which business can be conducted. Compared to the BRIC countries,
Turkeys stands out favorably, with Brazil (126), Russia, (120), India (132)
and China (91) all placed lower than Turkey. South Africas business climate
however is valued much better at number 35. Compared to developed
economies, Turkey also scores much lower than the OECD average at 31.399
Taking a look at specific barriers to trade, a number of things stand out.
Compared to other emerging economies400, Turkey imposes the lowest
import tariff rate401 and it requires the least amount of days (15) for a
product to be imported. In terms of how many U.S. dollars it costs to import
a container, Turkey is only outmatched by South Korea, Indonesia and
China.402
When it comes to import formalities however (the number of permits and
documents required), the emerging economies score poorly. Turkey (8 in
total) scores similar to Brazil (8), India (9), South Africa (8) and Indonesia
(7). By comparison, importing goods into South Korea (3) and China (5)
requires significantly less documents and permits.403
397 Erawatch, 'Turkey Country Report', February 13, 2012, 20.

398 Ibid., 21.
399 'Ranking of Economies - Doing Business - World Bank Group.' Turkey rankings:
starting a business (61); dealing with construction permits (155); getting electricity
(72); registering property (44); getting credit (78); protecting investors (65);
paying taxes (79) trading across borders (80); enforcing contracts (51); resolving
insolvency (120).
400 Compared to the BRICS countries, Indonesia and South Korea.
403 Ibid.
ST RAT EGY
CHANG E RePORT 171
Urban Construction and Redesign

As a result of strong urbanization and continued population growth it is to
be expected that Turkish cities continue to grow rapidly in the coming
years, providing opportunities in the housing and urban (re)design market.
The Turkish construction sector is growing strongly as indicated by a 10.6%
growth between July and September 2011. Although growth will continue,
it is expected that the pace will be somewhat subdued as a result of the
recession in Europe and more expensive domestic loans.404
Turkey Figure 2
FDI flows into the Turkish economy are largely flowing into sectors which
are highly sensitive to changes in economic growth as Figure 2 points out.
2.400
2.250
2.100
1.950
1.800
1.650
1.500
1.350
1.200
1.050
900
750
600
450
300
150
0
Agriculture, hunting forestry

and fishing
Mining, Quarrying and
Petroleum
Food, Beverages and
Tobacco
Machinery and Equipment
Construction
2008
2009
2010
Transport, Storage and

Communications
Figure 2 FDI flows into the Turkish economy by industry (million U.S. dollars)
Source: UNCTAD Investment Country Profile Turkey, February 2012.
404 Company in Turkey, 'Turkish Construction Sector Increases by 10.6% in 2011', n.d.,
http://www.companyinturkey.com/turkish-construction-sector-increases-in-2011.
html.
FDI flows into the food, beverages and tobacco sector were reduced to less
than half of their 2008 levels, but the Turkish construction sector also got
badly hit. Having attracted a large portion of FDI in 2008 (U.S. $336
million), it shrunk in 2009 (U.S.$208 million) and expanded again in 2010
(U.S. $328 million). As one of the most sensitive sectors to changes in
economic growth, the construction sector should thus be eyed with
caution.
Alongside new construction, emphasis should be placed on urban redesign
and smart building solutions. Apart from the argument of sustainability, the
fact that Turkey lies in a seismically active region prone to earthquakes,
which cause heavy damage to buildings and often result in casualties,
builds a strong case for urban redesign from the point of safety. By
comparison, the 2003 earthquake in the Japanese city of Hokkaido which
measured 8.3 on the Richter scale caused 1 fatality, whereas the 2011
earthquake in the Turkish city of Ecris of 7.3 on the Richter scale caused
over 534 deaths.405
Defense Industry
After the United States, the Turkish army is the largest army within NATO,
and measured in terms of armed forces personnel, it is the eighth largest
army in the world. Turkish defense exports have doubled in the period
2005-2009 from U.S. $337 million to U.S. $669 million. By comparison,
Turkey is still far from a top-level defense exporter on a global scale. Italy,
for example, the number 10 defense exporter worldwide, exported 11 times
as much in 2009.406 Nevertheless, figures for 2011 underline the sectors
continued growth as defense exports amounted to nearly U.S. $1 billion.
405 Wikipedia, 'List of Earthquakes in Japan - Wikipedia, the Free Encyclopedia',

June 6, 2012, http://en.wikipedia.org/wiki/List_of_earthquakes_in_Japan.The
Huffington Post, 'Turkey Earthquake 2011: Death Toll Rises To 534', October 27,
2011, http://www.huffingtonpost.com/2011/10/27/turkey-earthquake-2011-deathtoll_n_1034565.html.
406 Francesco F. Milan, 'Turkeys Booming Defense Industry', May 17, 2011, http://www.
isn.ethz.ch/isn/Digital-Library/ISN-Insights/Detail?lng=en&id=129257&tabid=14507
52282&contextid734=129257&contextid735=129255.
ST RAT EGY
CHANG E RePORT 173
The Turkish government is working hard to strengthen its defense industry.

The strategic plan of the Undersecretariat for the Defense Industry (SSM)
for 2012-2016 aims to increase revenue to U.S.$8 billion, having generated
approximately U.S. $3 billion in 2011, and exports to U.S. $2 billion by
2016.407 Furthermore, through the creation of the Ostim Defense & Aviation
Cluster, an organization which consists of over 60 small and medium sized
enterprises (SMEs), it tries to enhance coordination of SMEs in the industrial
area of Ostim, Ankara.408
Turkeys active foreign policy in turn aims to forge strategic partnerships
with the aim to expand its defense industry. In 2009 for example, during a
visit to Indonesia, President Gll signed a U.S.$400 million contract for the
delivery of armored vehicles, wireless devices and rockets. Other
noteworthy deals include the sale of armored vehicles to Malaysia and
Azerbaijan, and the modernization of Pakistans F-16 air force, as well as the
sale of wireless equipment to the Pakistani military.409
Auto Industry
The Turkish auto industry has firmly established itself as a regional hub for
automotive production. Labor costs are generally low and the strategic
location offers companies a good position to serve export markets in
Europe, North Africa and Asia. Companies such as ThyssenKrupp, MercedesBenz, Cummins, Michelin, Toyota and Ford have all invested large sums of
money in Turkish industrial development.
Production levels increased by 25.9% in 2010 compared to 2009 and
domestic vehicle sales boomed with a 37.3% increase compared to 2009.
The first half of 2011 showed similar growth figures when passenger car and
light commercial vehicle sales increased even by as much as 59%. The
second half of 2011 showed a slowdown in demand caused, among other
407 Aydin Albayrak, 'Turkish Defense Industry Set to Boost Economy', May 27, 2012,
http://www.todayszaman.com/newsDetail_getNewsById.action?newsId=281588.
408 Francesco F. Milan, supra note 16.
409 mit Eginsoy, 'ECONOMY - Turkey Targets Indonesia, Malaysia for Defense
Exports', March 29, 2011, http://www.hurriyetdailynews.com/default.
aspx?pageid=438&n=turkey-targets-indonesia-malaysia-for-defense-exports-201103-29.
things, by the governments increase in the rate of Special Consumption

Tax which levies 25% extra on the price of larger engine vehicles and 10-15%
on those with smaller engines. This tax was introduced to subdue public
consumption a bit and to attempt to prevent the industry from boiling over.
After the tax increase, car sales dropped to a 21% year-on-year rise in
November 2011.410 2012 started off with an 8% drop in vehicle manufacturing
in January 2012 compared to the same month in 2011. Passenger car sales
also declined by 29% year-on-year. Nevertheless, it is expected that growth
will continue, albeit at a slower pace of around 7.1% for the entire year.411
410 Agentschap NL, 'Turkije: Automotive, Kwartaal I - 2012', January 31, 2012, http://
www.agentschapnl.nl/onderwerp/turkije-automotive-kwartaal-i-2012.
411 Business Monitor International, 'Turkey Autos Report Q2 2012', June 2012, http://
www.marketreportsonline.com/158897-turkey-autos-repo.html.
ST RAT EGY
CHANG E RePORT 175
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New players,

Strongly diversified economic base, consisting of agriculture, mining,

International Trade Logistics63

45th out of 155

84th out of 187

101st out of 187

30th out of 132

53rd out of 142

73rd out of 182

countries such as Belgium and Sweden. Other emerging economies such

On average, the Brazilian economy grew by 3.7% in the period 2000-2010.

72 UNDP, 'Education Index (expected and Mean Years of Schooling).'

Figure 1: Average GDP growth rates 2000-2010 (%)

Also, the Brazilian national currency, the Real, is overvalued compared to

77 Bill Hinchberger, 'Carnaval Is Over,' Foreign Policy, April 7, 2012, http://www.

Brazil is likely to develop into one of the worlds a major hydrocarbon

by around 4% in 2013.84 Moreover, long-term economic prospects for Brazil

its refusal to vote on a resolution to condemn the human rights violations

In 2007, the Brazilian government launched the 2007-2010 PACTI program,

93 Brazilian Ministry of Science and Technology, 'PORTAL DO MINISTRIO DA

Mobility and Transport

In addition to oil production, Brazil is the second largest producer of

116 US Energy Information Administration, 'Country Analysis Briefs: Brazil,' 4.

International Trade Logistics118

26th out of 155

101st out of 187

114th out of 187

116th out of 132

26th out of 142

75th out of 182

58th out of 179

118 The World Bank, 'Logistics Performance Index.'

CHANG E RePORT 101

development of urban infrastructure and delivery of public services in the

Figure 1 Chinas Economy as a Percentage of Worlds Economy (in PPP)

128 World Bank, op.cit.

The year 2012 marks an important milestone in Chinas political development.

CHANG E RePORT 103

Chongqing region, has revealed signs of internal strife within the

One distinct feature of Chinas recent development was a very rapid

132 http://www.cfr.org/china/chinas-leadership-shift-disarray/p27974 (assessed July 16,

materials and clean-energy vehicles. In addition, government plans to

In general the business climate in China is not particularly business friendly.

CHANG E RePORT 105

Chinas market is often very competitive and many foreign investors

Environmental degradation and pollution

143 World Bank, op.cit., p.251.

CHANG E RePORT 107

become a huge burden on the nation in a handful of decades.'146 One of the

and became one of the strategic priority industries designated by the

Figure 2 Top 15 Countries of Origin for Notifications to the RASFF

146 World Bank, 2012, p. 201.

CHANG E RePORT 109

India has a young and rapidly growing population and is poised to

International Trade Logistics150

46th out of 155

134th out of 187

134th out of 187

125th out of 132

56th out of 142

95th out of 182

74th out of 179

150 The World Bank, 'Logistics Performance Index.'

Economic growth in India strongly accelerated in 2003 and exceeded 8%