Analysis: SE Asian governments gamble on making cheap labor less cheap

After years of profiting from cheap labor, Southeast Asian businesses paying wages low enough to undercut China are being forced to accept it is time they paid people a bit more.

In Thailand, minimum wages will jump by 35 percent in some regions from January, on top of a nationwide increase of 40 percent last April. Big percentages that add up to just a few dollars more in pay packets each month.

The country's finance minister says it will be good for workers and industry.

"People getting higher wages will not want to lose their jobs and employers will not want to increase wages for nothing. They will have to work together to boost efficiency and productivity," Kittirat Na Ranong told Reuters this week.

Economists also point out that if you pay people more they'll buy more. But the nagging worry is that everyone could eventually lose out if wages rise too fast, resulting in higher inflation and job losses as firms lose competitive edge.

While the political benefits are easy to see in a region where a vast majority of people are clamoring for a better life, the economic calculation is a harder sell to a business community whose margins depend on cheap labor.

The chairman of the Federation of Thai Industries was ousted last month for failing to lobby hard enough to convince the government to go back on a promise to voters, and the surrender to higher wages left the federation riven with factions.

Similar social and economic tensions are evident elsewhere in Southeast Asia, a region that has otherwise come through the global slowdown better than most.

DYNAMIC ECONOMIES, CHANGING SOCIETIES

The emerging market boom that characterized the first decade of the millennium saw growth rates surge and profits multiply, but now countries such as Thailand, Indonesia and Malaysia face pressure from workers for a bigger share of the wealth.

The World Bank designated Thailand an upper-middle-income country in 2011 after national income per capita almost doubled in a decade but it has fretted about wealth inequality.

As a former stock exchange president, the Thai finance minister seems an unlikely class warrior.

But that is how he sounds.

"We have a duty to improve the distribution of wealth," said Kittirat. "For over 30 years that economic records have been kept, it seems income distribution has not improved. The proportion of low-income earners is still the same."

After years of political turmoil, broadly pitting the lower classes against Bangkok's middle class and "old money" elite, Prime Minister Yingluck Shinawatra's government was elected in July 2011 with a promise to bring in a nationwide minimum wage of 300 baht a day.

At $9.80, it is hardly a princely sum, but it equates to an increase of up to 90 percent, in two stages, by January for workers in the poorer provinces.

Similar trends are evident elsewhere in Southeast Asia.

In Indonesia, trade unions have rallied in several cities in recent weeks to protest at employers using contract labor to circumvent employment regulations.

And in the capital, Jakarta, a newly elected mayor has announced a 44 percent increase in the monthly minimum wage to 1.5 million rupiah ($160).

Apindo, the employers' association, has warned it will cause "waves of layoffs".

"This is a populist decision that doesn't take account of reality," said Apindo official Hariyadi Sukamdani.

MALAYSIA'S NEW MINIMUM

Malaysia plans to bring in a minimum wage in January of up to $300 a month, which will give some 3 million workers an increase averaging 5 percent.

The change comes in the run-up to an election that should be held in the first half of next year.

Singapore, wealthier, tightly controlled and more capitalist-oriented than most of the region's states, doesn't have a minimum wage and has no plans to introduce one.

But pay strains are showing there, too.

Bus drivers from China went on strike last month over pay and working conditions, complaining they were less well paid than drivers from Singapore and Malaysia.

Singaporeans, in turn, have complained about the competition for jobs and the government has made it harder for low-skilled foreigners to get jobs, which could exert upward pressure on wages.

In Vietnam, the prime minister signed a decree on December 4 raising the minimum wage for laborers by 16 to 18 percent, lifting laborers' wages to anywhere between 1.65 million to 2.35 million dong ($79-$113) per month.

That was a compromise figure after business associations kicked back against plans for a 20 to 35 percent rise.

Cao Sy Kiem, head of the Vietnam Association of Small and Medium Enterprises, acknowledged workers were struggling to make ends meet but said companies, too, would have struggled with the original proposal after rises in fuel, power and other prices.

Vu Tien Loc, chairman of the Vietnam Chamber of Commerce and Industry, said nearly 100,000 businesses folded in 2011 and 2012, half of the total business failures in the past 20 years.

Vietnam's annual inflation was still running over 7 percent in November, having been reduced from double digits in 2011.

PRICE PRESSURES

Inflation elsewhere in ASEAN, the 10-member Association of Southeast Asian Nations, has been fairly well contained, allowing central banks to loosen monetary policy to support their economies as global weakness hit export markets.

Any general increase in wages could complicate coming policy decisions.

Credit Suisse forecast this week that wages in Thailand would rise 10 percent in 2013 after 12 percent this year, pushing average inflation up to 3.7 percent next year from 3.0 percent.

In Indonesia, it forecast wages would rise 10 percent next year after 6 percent this year. Credit Suisse saw inflation averaging 5.7 percent in 2013 after 4.3 percent in 2012.

It noted in a quarterly report that many districts in Indonesia were being granted big rises in minimum pay for next year. "With the minimum wage already roughly two-thirds of the national average wage, we see a good chance that upcoming increases will impact wages higher up the spectrum as well."

CHINA COMPARISON

The other big worry is that a rise in wages could hurt ASEAN's exports, especially in markets where it competes with China.

But China's wages are higher, and rising. And demographics work in ASEAN's favor, said Citigroup economist Wei Zheng Kit, with China's working-age population likely to decline as a proportion of the overall population from 2015.

The cost of industrial land, utilities and transport in ASEAN also compare favorably with China.

Thai Finance Minister Kittirat highlighted the boost to domestic consumption from higher wages.

"It's a shame that we produce many good products but our people don't have purchasing power ... If our people are able to buy those goods, they will want to do that. It will be good for producers, better business and sales," Kittirat said.

The argument is all the more valid for Indonesia, by far the most populous ASEAN country.

"Foreign direct investment is drawn to Indonesia for reasons beyond cheap labor," said HSBC economist Su Sian Lim.

"Its population of 240 million represents not just a resource but also a significant market," she wrote in a report.

"Rising incomes -- helped along by minimum wage hikes -- only raise its allure." ($1 = 30.68 Thai baht) ($1 = 9,610 Indonesian rupiah) ($1 = 20,820 dong)

(Additional reporting by Orathai Sriring in Bangkok, Ho Binh Minh and Ngo Thi Ngoc Chau in Hanoi, John O'Callaghan in Singapore, Stuart Grudgings in Kuala Lumpur, Neil Chatterjee and Rieka Rahadiana in Jakarta; Editing by Simon Cameron-Moore)