Publications

Background

Despite the collapse of the Thai Baht in the summer of 1997 and subsequent reverberations in the Asian region, Southeast Asia will remain one of the highest growth areas in the world well into the 21st century. While future annual growth rates are expected to slow from approximately 6-10% (the historical growth rates of the past 15 years) to the 5-7% range, this figure represents almost double the growth rate evident in many industrialized countries.

Economic growth has fundamentally changed the composition and distribution of Southeast Asias labor force. Over the past 25 years, a labor force that was predominantly agrarian and rural has become increasingly urban and industrial. As Southeast Asias regional economy shifts from agriculture towards industrial and technological pursuits, employers increasingly require talented professionals, which local educational institutions cannot always supply. Consequently, the developing nations of Southeast Asia now face a variety of human resource dilemmas.

A Shortage of Professionals

Thailand, Indonesia and Malaysia currently face a pronounced shortage of both skilled and technical workers. Maturing economies often face this problem; their educational systems cannot produce enough highly trained workers to fill the positions created by rapid economic growth. Southeast Asia is no exception to this; in fact, most Southeast countries face this problem to a certain degree.

By the year 2000, Thailand will have up to 15,000 unfilled positions in the information technology industry alone. Despite meteoric growth in Indonesia, 76% of the total workforce possesses only primary education (through 6th grade) and does not possess the technological training or knowledge for the numerous open positions. Malaysia similarly suffers from a shortfall in various skilled professions, as the following table indicates:

Table 1: Demand and Supply of Engineers, Engineering Assistants, and Craftsmen in Malaysia

The shortage of professional staff can cause serious problems to employers including high job turnover rates, escalating wages and employees who often expect unreasonable pay.

The Philippines, however, faces an employment surplus rather than a staffing shortage. Although the Philippines is experiencing economic growth, its economy does not provide sufficient opportunities for its relatively well educated work force. In fact, the Philippines currently has three qualified graduates for every one available position. Consequently, the Philippines suffers from a serious unemployment problem.

The Philippines also provides an excellent example of another employment-related problem that many Southeast Asian countries face: emigration of professional workers. Large-scale emigration in many countries further exacerbates the shortage of skilled professionals. As salaries tend to be lower in Southeast Asian countries like the Philippines or Indonesia than in Singapore and Hong Kong, many professionals emigrate to more developed nations in search of higher salaries and better employment opportunities. In fact, according to the Commission on Filipinos Overseas (CFO), there were 6.41 million Filipinos overseas in 1995. Although 2.69 million of these Filipinos were overseas contract workers, professionals accounted for a great number of these individuals.

To compensate for their human resource shortages and to further modernize their economies, governments in the region are making efforts to create updated labor policies. As a general rule, the governments hope to simultaneously improve the skills of their labor force and fill as many skilled positions as they can, while not dissuading foreign investors.

Education and Training

The governments of Southeast Asia are cognizant of the shortage of educated workers and thus are striving to rectify the problem. Recently, both Thailand and Indonesia increased compulsory education requirements from six to nine years to increase the educational level of the average worker. Furthermore, Thailand has initiated a skills development plan for educational development of the existing workforce. Under this plan, the government will spend US$415 million to train 1.9 million workers and 24,390 instructors, and to construct labor development centers nationwide. In addition, Thailand has eased the requirements for organizations to establish private high schools and universities. Currently, the only requirements for such private high schools and universities are that 80% of the students are Thai and that English is a mandatory language. Indonesia has also begun to invest heavily in education.

Last year, the Indonesian government received two large World Bank loans to increase access to its educational facilities. One of the World Bank loans was a US$164 million loan solely intended to finance educational projects. Of the US$164 million, US$99 million was earmarked for funding of junior secondary education in East Java and East Nusa Tenggara, and US$65 million went to improve the quality and efficiency of high schools and universities nationwide. Several weeks later, the World Bank granted a second loan of US$104 million to improve access and quality of junior secondary education in central Indonesia.

The educational system in the Philippines is more established than the systems in other Southeast Asian countries. Filipino students are required to attend school for 10 years, and schooling must be conducted in both Filipino and English. After graduation, students may choose to attend one of the Philippines 55 universities. To make education as universally available as possible, the Filipino government established a broad scholarship program.

While higher education in the Philippines, Malaysia, Indonesia, and Thailand is improving, it still lags far behind educational investment in Singapore, as demonstrated by the following table:

Table 2: Expenditures on Education in Southeast Asia

Efforts to improve each countrys talent pool in technical areas have gone beyond improving basic education. Both Thailand and the Philippines have programs that extend scholarships to talented people in technical fields. The Philippines Department of Science and Technology offers 3,500 scholarships to masters-level candidates in the areas of science and mathematics. Thailand has a similar program that offers assistance to both masters and doctoral candidates. In Malaysia, the number of candidates receiving their first degree increased from 15,000 to 75,000 between 1975 and 1993.

Due to the intent of these nations to improve their workforce, they have concurrently set certain requirements for foreign companies and foreign workers. For example, in Indonesia, foreign companies must pay a compulsory training levy to equip Indonesians with the necessary skills to replace expatriate workers. Additionally, the government imposes a $100 tax on every expatriate worker, for the purpose of establishing a skills development fund.

Recruiting

With such severe shortages of qualified professionals and technical people in these countries, recruiting is difficult and competitive among employers. Firms that wish to recruit skilled workers have three main options: (1) Hire local workers and college graduates and provide on the job training, (2) hire "returnees" (locals who have studied and/or worked abroad who want to return), or (3) hire expatriates.

Local Employees

Companies typically recruit local employees through ads in the newspaper or university job fairs. As many multinational corporations are unable to hire enough skilled workers, many of them elect (or are sometimes required by government) to provide their employees with on the job training. The drawback to this training is that other companies will often "poach" employees from multinationals. In fact, the finance, banking, telecommunications, and electronics industries in Thailand have 20-30% annual employee turnover rates. This turnover trend works as both an advantage and a disadvantage, as many multinationals can also "poach" from firms in their field by offering higher wages and better benefits. This in turn causes wage inflation and unrealistic expectations on the part of "poached" workers.

Hiring "Returnees"

Recruiting nationals who have worked or studied abroad and are willing to return to the country for employment opportunities is another way to find qualified candidates. Recruitment of these returnees will often provide a qualified candidate who is somewhat familiar with both Western business practices and local customs. Unlike the vast majority of expatriates, these returnees also speak the local language. Additionally, these individuals present fewer problems with housing and visa requirements than expatriates do. On the other hand, returnees are typically far more expensive than local workers and often demand greater benefits. In Thailand, for example, returnees children are sometimes placed in expensive international schools, as they are unaccustomed to the Thai education system.

There are many avenues a company can take to recruit "returnees." As Southeast Asian governments are very aware of staffing problems, many countries have introduced some kind of policy to attract "returnees" or foreign-educated nationals. Thailand has established the "Reverse Brain Drain" project, a program that is intended to entice academic and professional scientific and engineering personnel to return to Thailand. This is not an easy goal to achieve, as salaries abroad tend to be significantly higher. In fact, the starting salary for a Thai lecturer at a public university is only around US$4,500.

Indonesia has established a placement program at Northeastern University in Boston called Home Country Placement. More than 400 major US and Indonesian companies send their employment-related requests to this center daily. Inquiries are then matched with student profiles. This program allows Indonesian students studying in America to find employment in their home country and also permits firms with operations in Indonesia to pick qualified recent graduates. The center also assists the U.S. Indonesian Students Association in holding a job fair each year.

Hiring Foreign Workers

Hiring an expatriate who already knows your companys products, culture, and future goals may seem attractive when opening an office in Southeast Asia. However, employing expatriates can often be an expensive, tiring, and cumbersome process. Government regulations typically stipulate that foreign workers may only fill a skilled position if no qualified citizen is available for the job. Often, the foreign worker is also required to train another worker to take over his position after a given period of time. This commitment to training a replacement is required in Thailand, Malaysia, and Indonesia. The Philippines also has laws that generally discourage firms from hiring foreign nationals. However, as there is a surplus of skilled Filipino workers, hiring an expatriate is not generally a cost-effective strategy.

Visa restrictions for expatriates and foreign workers are quite stringent. In Malaysia, Indonesia, Thailand and the Philippines, expatriates must submit written evidence to prove that there is no national qualified to perform the job for which the expatriate applies. Due to a commercial treaty between the US and the Philippines, US expatriates may acquire a "treaty trades" visa to enter that country. This visa is available to US citizens as long as the US holds up its end of the treaty.

The employment of foreign workers and expatriates remains a very sensitive issue throughout much of Southeast Asia. This tension is particularly strong in Malaysia, which has over one million legal and illegal immigrants living within its borders. The Malaysian government believes that approximately half of these immigrants are working illegally. From a political perspective, Malaysias immigration woes will certainly not make the government more receptive to foreign workers or expatriates.

To discourage companies from hiring too many expatriates, and to raise revenue for training programs, Malaysia and Indonesia both levy taxes on expatriates. The Indonesian levy amounts to US$100. The Malaysian equivalent differs by profession, but is between RM360 for general workers and RM2,400 for upper management.

There are also other significant costs incurred when hiring expatriates. Employers must consider the costs of additional benefits such as car with driver, maids, taxes, and executive club memberships. Additionally, the company must often pay sizable education costs, as expatriate children typically have a difficult time adapting to public schools in Southeast Asia and may elect to attend expensive international schools instead.

Benefits

Time Off

Today, most of the Southeast Asian governments have tried to establish new labor laws that ensure a wide variety of benefits to workers. In Southeast Asian countries, workers are usually entitled to national holidays (12 in the Philippines, 13 in Thailand) and one day of rest per week. Malaysian workers typically receive two to three weeks of annual leave, but Filipino employers are only required to give one week of vacation per year.

Sick leave and maternity leave vary greatly from country to country. While paid sick leave is 30 days in Thailand, Filipino employers must provide only 15 days. Maternity leave is 60 days in the Philippines, 60-75 days in Indonesia, and 90 days in Thailand. The Philippines, however, allows for maternity leave on four occasions, whereas Thailand only allows individuals to utilize the leave twice.

Social Security Benefits

All Southeast Asian nations have some kind of evolving social security system. These systems were established to provide health benefits, retirement benefits and compensation for injured workers. In most cases, taxes levied on both employers and employees fund the majority of these systems.

Indonesia established a new program in 1992 that covers life insurance, retirement funds, free health care for workers, their spouses and up to three dependents, and compensation for work related sickness or injury. Additionally, employers must contribute 2% of the employees wages to the retirement fund to provide these benefits. Companies with superior benefits may elect not to take part in the program.

In Thailand, the government, the employer, and the employee each contribute 1.5% of the employees wage to the Social Security Fund. Compensation from the Social Security Fund is available to employees and their families for non-work related conditions. The Workmens Compensation Fund covers compensation for work-related injuries. Unlike other Southeast Asian countries, the Thai government requires employers alone to bear the burden of payment through contributions of 0.2-2.0% of the employees salary to this fund. Benefits from these programs are commensurate with the length of time the employee has been employed at the company.

In the Philippines, the Social Security System covers Medicare and employment compensation. The system provides for disability, retirement, funeral benefits, sickness allowances, maternity leave and pay, and miscellaneous loans. The employee contributes 5.07% of his or her monthly salary, and the employer contributes 1.25% of the monthly salary. Multinational corporations typically belong to a large insurance company or HMO, which eliminates the need for employees to pay and file for reimbursement.

Retirement Benefits

As many of these countries have experienced difficulties with inflation, retirement benefits in these countries are often paid in a lump sum. Payment of retirement benefits in a lump sum occurs in both the Philippines and Thailand. The present currency problems suggest that this method of payment is unlikely to change in the short term. In Malaysia, the government has established the Employees Provident Fund (EPF). Employees must contribute 10% of their salary and employers must contribute 12% of the employee's salary to this fund. EPF members can withdraw from the fund once they reach the age of 55, in the event of mental incapacitation that prevents work, for medical expenses or for death. Unlike the Philippines and Thailand, the Malaysian government has made it possible to withdraw the funds incrementally.

Housing

In addition, Southeast Asian nations often offer some type of housing assistance. In the Philippines, the housing assistance is provided through the Home Development Mutual Fund (HDMF) which is supported by a combination of employee and employer contributions. All employees who earn over $135 a month must contribute 2% of their basic salary to the HDMF; their employers must match this contribution. Overall, the fund serves a similar function to EPF in Malaysia; members may withdraw the total accumulated value after 10 or 15 years of continuous membership if they do not apply for a housing loan.

Employers in Southeast Asia usually offer few other benefits, unless the employee is a high level executive or expatriate. Benefits for such high level employees may include housing, car costs (which may include gasoline, maintenance, and registration costs) maid services and executive club membership. Expatriate employees may also receive education, relocation and hardship benefits to work in the region.

Wages and Salaries

Blue Collar Wages

Wages for blue-collar workers in the Southeast Asian nations are generally quite low. The minimum daily wages in each of the Southeast Asian countries are less than US$10 a day. In addition to this wage, employers are usually required to pay a yearly bonus, or a thirteenth month of salary. In Thailand, this bonus customarily amounts to three months of pay, depending on the success of both the individual and the company. Overtime rates are 150% of the regular wage rates in all countries except the Philippines, where they are 125%. Wages in Thailand, Malaysia, Indonesia, and the Philippines are low when compared to other, more developed countries in the Asian region. In fact, a Singapore workers salary is equivalent to the pay of seven or eight Indonesian workers.

In part due to Southeast Asian governments wish to promote development outside the capital and largest cities, and in part due to a lower cost of living in rural areas, the Southeast Asian governments have set lower minimum wages for the outlying regions of their countries. The difference in the rural wage rate varies quite widely from country to country. In the Philippines, the rural minimum wage is as low as US$4.50 a day while the minimum wage in Manila is about US$5.60. In Thailand, the difference between rural and urban wage rates is less pronounced. The lowest rural daily minimum wage is US$5.13, and the daily minimum wage in Bangkok is approximately US$6.00.

Minimum wages have increased substantially over the last few years in all of the aforementioned Southeast Asian countries. Although Indonesia had no minimum wage until 1989, the minimum compensation level within the country has steadily increased since the establishment of the minimum wage. In the first half of the 1990s, the minimum wage tripled in nominal terms and doubled in real terms. According to a World Bank report, this increase in minimum wage led to a 10% increase in average wages, a 2% decrease in wage employment, and a 5% decrease in investment. As investment is an essential part of growth in the area, the issue of minimum wages is one with which governments continuously grapple.

Professional Salaries

Professional salaries in the Southeast Asian nations also tend to be lower than in the developed Asian countries such as Singapore and Hong Kong. However, with a short supply of well-trained and educated professionals, salaries in Thailand, Malaysia, and Indonesia are rapidly increasing as companies pay greater compensation amounts to keep employees from job hopping or being "poached" by other companies. Executive salaries have increased steadily in recent years. In 1995, increases in professional salaries in these countries were substantial, as the following table indicates:

Table 3: Comparison of Executive Salary Increases in Southeast Asia

Although useful, these averages do not accurately depict several other important aspects of salaries in the Southeast Asian nations. For example, the salaries of returnees and expatriates tend to be significantly higher than the corresponding salaries of locally educated employees. For example, in one recruiting assignment Pacific Bridge, Inc. recently conducted, a Thai national with 11 years experience in pharmaceutical sales was making US$29,000 whereas a Thai returnee with similar background but only 7 years experience was expecting US$48,000 on returning to Bangkok. Expatriate workers usually cost the company even more because they receive relatively high western salaries as well as hardship allowances, housing and education benefits. Additionally, Southeast Asian governments typically tax corporations more if they decide to hire a foreign worker.

Labor Law and Unions

Unions generally hold less power in Southeast Asian nations than they do in the industrialized West. Labor movements are not well established, and they typically receive little support from government.

Although Thailand has more than seven hundred trade unions, only 3% of the workforce are members. Thai nationals regard unions with a certain degree of suspicion because past labor disruptions have caused power blackouts and slowed telephone operations. In response to these problems, the Thai government rescinded the right to unionize state enterprises, and made it more difficult for private enterprise unions to act. Furthermore, union members cannot boycott, picket, block entrances, or do anything else that inhibits non-union workers. Unions are permitted to strike only if negotiations fail and a simple majority of union members vote in favor of a strike by secret ballot.

Traditionally, the Malaysian government has done little to cooperate with labor unions. Although Malaysian law does not explicitly prohibit strikes, they are very restricted in practice. Any industrial action must be reported to the Ministry of Human Resources, which may become actively involved in conciliation efforts. If these efforts fail, the minister may refer the matter to an industrial court. It is unlawful to strike during any stage of this process. Thus, in practical terms, most disputes are handled by compulsory arbitration. If a union does participate in these procedures and still intends to strike, the union members must vote a two-thirds majority by secret ballot. In contrast, all other Southeast Asian governments require only a simple majority.

Indonesia possesses only one licensed union: The All Indonesia Workers Union (Serikat Perburuhan Seluruh Indonesia - SPSI), which is separated into industry based sections. Although approximately 40% of the labor force are unionized, the Hong Kong and Shanghai Bank estimates that active membership is between 5-10%. Rules regulating the unions are similar to those in Malaysia. Unions must go through a process of bipartite negotiations, mediation by a Ministry of Manpower official, and settlement by regional and central committees. Workers may only strike if negotiations with an official fail, or if the employer refuses to negotiate.

The labor movement in the Philippines has a longer history than union counterparts in neighboring countries. As of October 1993, there were over 3 million workers organized into 5,757 active unions and three major federations. During the late 1980s and early 1990s, the Philippines suffered from many violent episodes of labor unrest. However, this trend has subsided due to increased communication between labor and management and a general economic recovery. Unlike Thailand and Malaysia, foreign workers are permitted to join unions in the Philippines. Filipino Unions have most often protested via picketing, but they are permitted to strike when a simple majority votes in favor of a strike via secret ballot. Although the law theoretically protects workers, there is often no effective legal recourse in rural areas.

Business and Culture

When doing business in another country, it is always wise to learn about the local culture. In Southeast Asia, there are many cultural factors to keep in mind.

Corporations must remember that Southeast Asia is an ethnically and religiously diverse area. Indonesia and Malaysia are predominantly Muslim countries, Thailand is mainly Buddhist and the Philippines is largely Catholic. In all of these countries, a sizable ethnic Chinese community also exists. The Chinese community comprises 10% of the population in Thailand and 2.5% of the population in Indonesia. The Chinese community is usually disproportionately well represented in business. It would certainly not be considered unusual to do business with someone of Chinese descent in Indonesia, Thailand, or Malaysia.

Ethnic difficulties between Chinese and other groups occur with frequency. In Malaysia, the Chinese are economically better off than the Malays. After rioting in 1969, the government instituted an affirmative action program designed to help Malays advance. Since that time, relations between the two groups have been fairly stable. Likewise, the diverse ethnic and religious composition of Indonesia has also been a source of strife in the past. Recently, an American company suffered from ethnic squabbling. A mining company named Freeport-McMoran Copper and Gold Inc. witnessed 3,000 people from villages surrounding its mining operation attacking homes, shops, buildings and vehicles. They were forced to call in the Indonesian army to quell the unrest. Community leaders later issued a list of demands, which included improved social and economic conditions for indigenous people and respect for local customs.

Companies must also be careful to address the religious needs of workers. Muslims in Malaysia and Indonesia may wish to pray five times a day and their meals must be prepared in accordance with Islamic dictates. The Philippines represents somewhat of an anomaly in this respect, as it is a predominantly Catholic country. Since many Filipinos speak English, there is perhaps a greater degree of familiarity with Western culture and tradition than in some other countries.

As a rule, Southeast Asian cultures tend to be less oriented towards the individual and more oriented towards the group. Malaysians and Indonesians believe that there are no "single monkeys," or people who are islands unto themselves; they tend to be cooperative rather than competitive. Thai workers tend to be very tolerant and have great respect for paternalistic hierarchy where age commands respect. Thai culture values social harmony and shuns conflict, and Thai workers are quick to recognize authority.

Conclusion

Finding adequate human resources in Southeast Asia presents a problem, as there is a shortage of skilled labor in many of the developing countries. However, doing business in the region represents a fantastic opportunity for firms who seek a relatively inexpensive workforce in the Asian region. Despite the collapse of the Baht, expanding markets and growing economies are propelling these countries towards industrialization. The potential for catastrophe exists for those who are not careful, as the Freeport-McMoran debacle demonstrated. However, if a company respects local traditions, and is cautious in its dealings with government, Southeast Asia can provide incredible potential.

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