World Economic Forum On East Asia 2006

Creating a New Agenda for Asian Integration Tokyo, 15-16 June 2006

INSIGHTS

WORLD ECONOMIC FORUM

World Economic Forum on East Asia

The views expressed in this publication do not necessarily reflect those of the World Economic Forum.

World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744 E-mail: [email protected] www.weforum.org © 2006 World Economic Forum All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system.

REF: 240706

Contents

Preface

3

Summary – Creating a New Agenda for Asian Integration

4

Integration & Identity

7

Competitiveness & Creativity

10

Security & Sustainability

13

Regional Change – Japan

16

The Creative Imperative in East Asia

19

Acknowledgements

22

World Economic Forum on East Asia

1

Preface Japan’s economic recovery, coupled with the rapid growth of China and India, is changing mindsets and not just trade and investment flows in Asia. Some believe robust intra-Asian trade will eventually offset the region’s exposure to economic cycles in the United States. Others see looming challenges linked to demography and to tensions rooted in history posing threats to future growth and stability. The theme Creating a New Agenda for Asian Integration highlights the need to re-evaluate strategic priorities and working assumptions as the region enters an era of newfound opportunities and emerging risks. No single institution can be expected to both anticipate and address the region’s evolving agenda. Therefore, the programme of the World Economic Forum on East Asia was designed to generate insight and guide action in order to improve the alignment of the region’s industry, political and economic agendas. Moreover, the programme was organized under four thematic pillars to help participants make the most of the opportunity to shape the regional agenda. The pillars were: Integration & Identity, Competitiveness & Creativity, Security & Sustainability and Regional Change – Japan. The thematic pillars were built on important strategic assumptions. First, Japan, Korea and China face the task of adapting to rapidly ageing populations while India and ASEAN nations will need to create jobs for growing numbers of young workers, mainly from rural areas. New expectations will emerge as society changes in these countries, particularly with the integration of India further into East Asia and the push to improve the competitiveness of ASEAN economies. Thus, business will not only contend with the scarcity of highly skilled workers in current major markets but also the dangers of unsustainable income disparities in future growth markets. Second, building stronger trilateral relations among China, Japan and Korea is not only critical for the region’s long-term growth but also for realizing any vision of an integrated East Asian community. A driver of integration may be the growing regional convergence and consolidation across critical growth sectors such as ICT and finance. Alternatively, a failure to deepen regional cooperation in areas linked to Asia’s growing demand for energy and raw materials may stall the process by promoting unhealthy national and zero-sum strategies.

Lee Howell Director, Asia

World Economic Forum on East Asia

3

Summary – Creating a New Agenda for Asian Integration “We must look at the big picture and not let the baggage of history deter us.” Najib Tun Razak Deputy Prime Minister of Malaysia

“The challenge we have in the 21st century is to reconcile our global, national and regional identities. The key will be to make sure we keep up to our global responsibilities.” Klaus Schwab Founder and Executive Chairman, World Economic Forum

“The new century belongs to Asia” agreed more than 300 senior government, business and civil society leaders at the World Economic Forum on East Asia. The region will fulfil this potential, participants said, provided it meets the following top challenges: • Create or assign regional institutions to discuss energy, security and environmental issues • Address the impact of Indian and Chinese growth on the future competitiveness of South-East Asia • Increase energy efficiency in major consuming countries and industries • Sustain Japan’s recovery while cutting its fiscal deficit and resolve Japan’s historical and territorial disputes with China and Korea More than half of the meeting’s participants prioritized these issues of paramount concern in a survey conducted in the closing plenary session. Participants concluded that existing regional institutions and networks are not yet capable of confronting the many interconnected threats posed by the pressures of globalization and the rise of competition in the global market. To meet emerging risks, they called for a new agenda for Asian integration.

“The new century belongs to Asia. But at the same time we need to seriously tackle the many challenges we face today.” Jiang Jianqing Chairman of the Board, Industrial and Commercial Bank of China, People’s Republic of China

4

This will require cooperation on a range of urgent issues including energy efficiency and environmental protection, corporate social responsibility, widening the access to financial markets, education reform, poverty alleviation and the sharing of technology. In addition, the rest of the region and its partners must also individually and collectively address the commercial and political implications of the surging growth of China and India, as well as Japan’s economic recovery. “Increased market-driven integration and economic cooperation in the region are creating a more open and frank dialogue on pressing issues such as corporate social responsibility, energy efficiency and the enhancement of regional dialogue,” said Peter Torreele, Managing Director, World Economic Forum. The consensus among participants was that business and civil society should take the lead in speeding up the region’s “market driven” integration. But they also called on governments and political leaders to tackle geopolitical problems such as maritime piracy, migration, and in particular, long-standing disputes over territorial claims, interpretations of history and nationalist sentiment that could lead to conflict. The survey results and the interactive sessions in Tokyo will now shape the World Economic Forum’s agenda at future meetings in Beijing, New Delhi, Davos and Singapore, where next year’s World Economic Forum on East Asia will take place on 24-25 June 2007.

World Economic Forum on East Asia

“The process of realizing East Asian integration depends very much on the political will and trust of our countries as there is a big gap in the levels of development.”

“If you can’t beat India or China, you have to join them.” Mari Pangestu Minister of Trade of Indonesia

Hoang Trung Hai Minister of Industry of Vietnam

Integration & Identity

Competitiveness & Creativity

The proliferation of global and regional risks from pandemics to piracy on the high seas is putting pressure on East Asia to deepen integration.

East Asian economies are facing heightened competition for trade and investment from China and India.

• The institution-heavy European Union model is not appropriate for the region. • East Asia will continue to pursue its “softinstitution”, “bottom-up” approach, in which the drivers of integration are business and civil society. • Governments must still deal with cross-border problems such as migration that require cooperative solutions. • Historical enmities between countries should be resolved to allow for enhanced integration. Countries should not let these disputes impede the integration agenda.

• Companies are integrating Asia and its range of manufacturing platforms and service providers into the global supply chain, further stimulating trade and investment in the region. • The web of free trade arrangements that are under construction across the region will create a panAsian market of over 3 billion people. • Enterprises and countries have to develop the human resources and technology they need to create profitable niches in the global economy.

"Oil consuming countries in Asia need to cooperate to promote more efficient energy usage, develop and share energy-efficient technologies and promote energy security." Zhang Xiaoqiang Vice-Chairman, National Development and Reform Commission, People's Republic of China

World Economic Forum on East Asia

“ASEAN has to be more effective in differentiating niche positions.” Sir Martin Sorrell Group Chief Executive, WPP, United Kingdom; Co-Chair, World Economic Forum on East Asia

5

“If the major consuming countries are more energy efficient, this can help stabilize energy prices and benefit the rest of the world.”

“We’re about to go through a core transformation.” Junichi Ujiie Chairman, Nomura Holdings, Japan; Co-Chair, World Economic Forum on East Asia

Tran Trong Toan Executive Director, APEC Secretariat (Asia-Pacific Economic Cooperation), Singapore

Security & Sustainability

Regional Change – Japan

Income disparities, energy shortages and environmental degradation are serious risks to sustaining Asia’s growth.

The emergence of China and India is heightening competitive pressure on Japan.

• Poverty and rural discontent can lead to extremism and social unrest that could threaten stability in many countries. • Energy inefficiency in China is a global concern, given its effects on the environment and on global energy markets. • These problems require a concerted regional response to improve energy security and share energy-saving technologies. • Exchanges among countries in the region will mitigate the threat to stability from simmering historical disputes.

6

• Japan’s current economic recovery is being driven by legacy sectors of the economy. • To sustain growth, Japan must find ways to build on successes in IT and financial services, where reforms unleashed much-needed structural changes. • Japan must address its growing fiscal deficit by increasing productivity and the productive use of capital. • To do so will require innovation, a willingness to break with tradition and strong political leadership. • Japanese leaders must also build bridges with their East Asian neighbours.

“We also see within countries and within the region the widening gap of the rich and the poor in the region. This is a risk of instability.”

“Japan will continue to try to reduce barriers to Asian trade by pursuing bilateral and multilateral free-trade agreements with its Asian trading partners.”

Hassan Marican President and Chief Executive Officer, PETRONAS (Petroliam Nasional), Malaysia; Co-Chair, World Economic Forum on East Asia

Toshihiro Nikai Minister of Economy, Trade and Industry of Japan

World Economic Forum on East Asia

Integration & Identity

“The assumption that an older society can’t create wealth is wrong. You just can’t have people being old and disabled; you need to have them in the workforce.” Henry A. McKinnell Chairman and Chief Executive Officer, Pfizer, USA; ViceChairman of the Foundation Board of the World Economic Forum; Co-Chair, World Economic Forum on East Asia

East Asian integration has been mainly an informal “market driven” process with weak institutions. The proliferation of global and regional risks requires a much more intensive approach, but it is unlikely that countries in the region would move towards a European Union-style model with more active institutions and shared political power. However, for the preferred “bottom-up” integration, led by business and civil society, to deepen, political leaders must resolve historical enmities that could hamper closer cooperation.

revealing how many young Europeans now value their national identities over a regional one. Crises of course have a way of forcing mindsets to change. The financial meltdown of 1997-98, 9/11 and the terrorist attacks in Bali and elsewhere, the outbreaks of the SARS virus and avian flu, and crossborder problems such as the haze from forest fires in Indonesia and maritime piracy on the Straits of Malacca – all these challenges have highlighted the deficiencies of the region’s minimalist approach to greater unity. The integration of India further into East Asia and the emergence of China as a trading powerhouse and investment magnet have raised the stakes. See Figure 1.

Figure 1: ASEAN has continued attracting strong FDI inflows, with a larger FDI stock than “Chindia”

Whenever East Asian leaders gather to talk about regional integration, the European Union model invariably comes up in the discussion: a single market with a single currency (at least for a good part of it); common policies and standards; centralized administrative and legislative institutions, though without the fusion of ultimate political power and sovereignty. This is not what Asians want, so the accepted wisdom goes. Asia’s integration gambits have been lowest-commondenominator efforts supported by weak institutions. Perfunctory ministerial meetings and summits have driven the process. As in the Association of Southeast Asian Nations (ASEAN), the stress has been on cooperation, abstract goals such as peace and amity, and “non-intervention”, with any hint of “community” building dismissed as premature. At the World Economic Forum on East Asia, participants challenged that traditional passivity. Could the region aspire to something more? To be sure, forging a common Asian or even East Asian identity would be as difficult, if not more so, than for other regions. Europe took decades to get where it is today. And even then, attempts to create a constitutional underpinning for the European Union have stalled, World Economic Forum on East Asia

Source: UNCTAD World Investment Report 2005

7

As these pressures of globalization and competition continue to mount, Asians have begun to question old notions. With global and regional risks multiplying, requiring global and regional solutions, the implication for East Asia’s integration is clear: the good-fences-good-neighbours model is unsustainable. But the region is still trying to figure out how to turn the neighbourhood into a community. Overlapping regionalization options have proliferated in recent years, from ASEAN and its flexible formats to last year’s East Asian Summit that excluded the US. The ASEAN Free Trade Area (AFTA) is forging links with India, China and the rest of North Asia, while the Asia-Pacific Economic Cooperation (APEC) is keeping alive its grand vision of free and open trade and investment among its 23 members, which together account for about half of global trade, by 2010 for developed economies and 2020 for developing ones. The number of bilateral free trade arrangements across the region has increased as the Doha Round of global trade talks continues to flag. That meeting participants identified the need to address the absence of regional institutions to discuss energy, security and environmental issues as a top priority for the region – when APEC and ASEAN have long offered such forums – indicates a lack of awareness. “We have not been effective in communicating the work we do,” Ong Keng-Yong, SecretaryGeneral, ASEAN, Jakarta, acknowledged. Added Tran Trong Toan, Executive Director, APEC Secretariat, Singapore: “We don’t shout out loudly about what we have.” Yet the selection of participants was also a telling rebuke of integration performance so far. When it comes to regional economic integration, said 8

“We should make an effort to better understand each other’s history and customs to increase mutual understanding. If we hang on to the past, we are only impeding each other’s progress.” Yun Jong-Yong Vice-Chairman and Chief Executive Officer, Samsung Electronics, Republic of Korea; Co-Chair of the World Economic Forum on East Asia

Hellmut Schutte, Dean, Asia Campus, INSEAD, Singapore, “we have to be honest: for 40 years, ASEAN hasn’t been very successful. We are seeing the end of ASEAN. The year 2020 will not be a target [for industrialization]. ASEAN will be buried beforehand.” An extreme view perhaps, but indicative of the frustration among some participants and the urgent need for more intensive communication among East Asian countries. But EU-style integration cannot be forced, some panellists warned. The softinstitution approach with weak monetary integration would prevail, Indonesian Trade Minister Mari Pangestu predicted. Because of its “honest broker” role between the major economies of North Asia and India, “ASEAN will be in the driver’s seat.” East Asia, Pangestu reckoned, would continue to pursue “market driven” integration – what Sadako Ogata, President, Japan International Cooperation Agency, called the “bottom-up” approach. Business, civil society and other “non-state actors” will push regionalization forward through the multitude of cross-border commercial and cultural

World Economic Forum on East Asia

connections and exchanges that take place every day. Indeed, for Asia’s growing number of globally integrated enterprises such as Samsung, borders are already meaningless. There is still a role for governments in pushing integration forward, said Najib Tun Razak, Deputy Prime Minister of Malaysia. Common challenges such as maritime piracy and migration require cooperation. Migration, for example, will have to be part of the solution to the problem of ageing demographics in Japan. “We must look at the big picture and not let the baggage of history deter us,” Najib concluded. Yet heightened tensions between Japan and its neighbours Korea and China, as well as concerns about potential conflict on the Korean Peninsula and across the Taiwan Strait, could easily derail the East Asian integration train. “Parochial nationalism,” said Chen Feng, Chairman, China Hainan Airlines, People’s Republic of China, “must be eliminated.” Peter M. Beck, Director, International Crisis Group (ICG), Republic of Korea, fretted that with a “statesmanship deficit” on both sides of the Pacific, the threat of military clashes over territorial disputes and energy needs is a real one. “How do we find solutions if there are no good leaders?” Yotaro Kobayashi, Chief Corporate Advisor, Fuji Xerox Company, Japan, expressed faith that a “maturing and wiser citizenship” throughout East Asia will act as a brake on incompetent leadership. To shape a new East Asian community, the region “should make an effort to better understand each other’s history and customs to increase mutual understanding,” said Yun Jong-Yong, Vice-Chairman and Chief Executive Officer, Samsung Electronics, Republic of Korea, and a Co-Chair of the World Economic Forum on East Asia. “If we hang on to the past, we are only impeding each other’s progress.”

World Economic Forum on East Asia

Asia’s Risk Factors Participants in a Global Risk Network workshop expressed concern about the mounting economic, geopolitical and societal risks facing East Asia. Global fiscal imbalances brought on by the large surpluses accumulated by Asian countries and the US twin deficit were rated a major source of economic risk. Perceived as particularly relevant in Japan, but also in South Korea and China, is the risk of fiscal crises as a result of a rapidly ageing society. Societal risk in the region includes potential breakdowns of control in restive rural areas in China and growing shortages of both oil and clean drinking water. The workshop also highlighted the lack of visionary political leadership in the region, as well as the absence of an overarching regional security framework, as negative factors affecting efficient risk mitigation strategies.

Participants' impressions of risks facing Asia

An issue survey conducted among the participants in the closing plenary session of the World Economic Forum on East Asia complemented the workshop findings. Participants ranked the lack of energy efficiency in major consuming countries and industries of the region as one of the factors with the highest potential impact (64% of respondents). Participants also voted the absence of regional institutions to discuss security, energy and environmental issues (58%) and the economic impact of Indian and Chinese growth on ASEAN's future competitiveness (61%) as particularly risky issues. The geopolitical implications of unsolved territorial disputes between Japan and its neighbours China and Korea (45%) was the final issue participants said should be at the top of the region’s agenda.

9

Competitiveness & Creativity

“We tend to think of innovation in terms of products and patents. But it’s also about business models and processes.”

Figure 2: China and India are experiencing faster per capita economic growth than ASEAN

Nandan M. Nilekani President, Chief Executive Officer and Managing Director, Infosys Technologies, India; Member of the Foundation Board of the World Economic Forum; Co-Chair of the World Economic Forum on East Asia

Competition from China and India for trade and investment has undermined the ability of Asian nations to use manufactured exports as an easy avenue to jobs and economic growth. Fortunately, Asia has two potent tools to help it cope with China and India – China and India. Companies increasingly use Asia as part of a global supply chain that is stimulating trade and investment within Asia. And free trade pacts being negotiated between the Association of Southeast Asian Nations (ASEAN), India, China and Japan promise to create a pan-Asian market of over 3 billion people. But companies and countries alike will have to continue struggling for ways to harness the region’s talent and technologies in order to create new niches for themselves in the global economy. The rise of China and India as competitors for trade and investment has shattered the post-war Asian formula for creating jobs and economic growth: channelling public savings into manufactured exports. With China slowly catching up in the manufacture of the most sophisticated electronics and India gobbling up information-based services, the rest of Asia is in a squeeze. As Figure 2 shows, per capita incomes in China and India are growing faster than anywhere else in the region. So while they occupy opposite ends of the development spectrum, Japan, Korea and the 10 members of ASEAN face a renewed challenge to reinvent themselves, find new export niches and generate domestic engines of growth. In short, they must innovate or stagnate.

10

Source: World Trade Organization statistics

Fortunately, Asia has China and India to help it cope with the “Chindia” phenomenon. Companies increasingly use Asia as links in a global supply chain that relies on intra-Asian trade and investment. Breakneck growth in China and India is also producing bottlenecks, shortages of skilled labour and rapid cost increases that are compelling many foreign direct investors to spread some production and services back towards South-East Asia, and even to Japan. As a result, intra-Asian trade already accounts for roughly half of all Asian imports and exports. And, while Asia serves as a major investor into China and India, investment flows into China and India now correspond with higher – not lower – foreign investment into the rest of Asia. In the rapidly evolving global economy, however, even the concept of innovation is getting a makeover. “We tend to think of innovation in terms of products and patents,” said meeting Co-Chair Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India; Member of the Foundation Board of the World Economic Forum. “But it’s also about business models and processes.” For companies, that means using information technology to become a global company. It also means conceiving of new products that take advantage of the borderless, collaborative market that the Internet has created.

World Economic Forum on East Asia

Asia has demonstrated significant achievement in this regard. Korea, for example, has become a laboratory for broadband Internet-related services. Tech-savvy Japan is also well ahead in rolling out fibre optic networks and digital TV. Cellular operators, such as NTT DoCoMo, are moving beyond telephony into cellular-based commerce, from ticketing to vending machines. The Philippines, for example, is proving a test bed for turning the cellular phone into a cash register. Some worry that despite such technological advances, Asia is still dominated by conservative corporate mindsets and resistance to further integration with neighbours of different language or race. In Japan, for example, services and software sectors are still immature and economists are concerned that its recovery from 15 years of economic stagnation is being led not by an entrepreneurial new economy transformation, but by a mere resurrection of its old economy industries. Japan also suffers from what some say is a stubborn insularity. Thus, Japan’s research and development educational institutions are not open fully to foreign students and professors with the fresh ideas needed to fully exploit the trillions of yen being spent to beef up their R&D facilities, according to Yuichiro Anzai, President, Keio University, Japan, and Kiyoshi Kurokawa, President, Science Council of Japan. Kurokawa urged bringing in large numbers of foreign students to revitalize Japanese higher education, in much the way Singapore has done.

purse strings of Japan’s consumer-led economy, but are prevented by traditional mores from doing their part to raise productivity in Japan’s maledominated corporate world. Also overlooked are older workers. “One hundred years ago we created wealth with manual labour, but that’s not how wealth gets created anymore,” said Henry A. McKinnell, Chairman and Chief Executive Officer, Pfizer, USA; Vice-Chairman of the Foundation Board of the World Economic Forum; Co-Chair of the World Economic Forum on East Asia. “The assumption that an older society can’t create wealth is wrong. You just can’t have people being old and disabled; you need to have them in the workforce.” Integration is essential to ASEAN as well, and the regional group is using a free trade agreement between its members to help create a common market of 600 million people that can rival China and India as a market for labour and consumers. ASEAN is also pursuing trade agreements with India, China and Japan aimed at creating an even larger, pan-Asian market of over 3 billion people. As Figure 3 shows, this market is lucrative, accounting for US$ 1.2 billion of world trade in 2004. Yet, as competition within the region increases, branding will become more important, according to Sir Martin Sorrell, Group Chief Executive, WPP, United Kingdom, and Co-Chair of the World Economic Forum on East Asia. “ASEAN has to be more effective in differentiating niche positions,” he advised.

Figure 3: Asia accounts for more than 25% of world trade, and more than half of that is intra-Asia

Japan’s failure to better integrate with the region through immigration also highlights a looming Asian labour imbalance: as developing Asian nations such as Indonesia and the Philippines struggle to find jobs for their growing populations, Japan’s workforce is shrinking even as it strives for the economic growth needed to pay for its rapidly ageing society. Japan also still largely fails to exploit one of its largest pools of domestic talent – women. Women control the Source: World Trade Organization statistics

World Economic Forum on East Asia

11

“There will be no vitality if society does not have any disparities. A society where everybody makes an effort, and those efforts are rewarded, is preferred. The problem lies with disparities that are fixed. For those people who fail, we should have a mechanism so they can make another challenge.” Kakutaro Kitashiro Chairman, Keizai Doyukai, Japan

“When everyone said the Japanese economy was bad three or four years ago, I wasn't that pessimistic, but now, when people say the economy is getting better, I don't really feel optimistic… What we face now is whether [Prime Minister Junichiro] Koizumi’s successor really can take over his reforms.” Heizo Takenaka Minister for Internal Affairs and Communications and for Privatization of the Postal Services of Japan

Japan’s Demographic Deficit Japan is the oldest of the advanced industrial economies. Moreover, it is ageing even faster than anyone expected: a few years ago, demographers thought the workforce would start to decline in 2012. But the labour pool actually started shrinking in 2005, as new retirees for the first time outnumbered fresh entrants.

Japan’s Demographic “Shape” 2004 vs 2030

Source: Euromonitor, National Institute of Population and Social Security Research

One clear cause of rapid population ageing is that fewer women are choosing to have children – a trend largely due to gender inequality, according to Kuniko Inoguchi, Minister of State for Gender Equality and Social Affairs of Japan. In tackling the problem of an ageing population, Japan must also find a way to pay for the massive costs of retirees. This is especially important given a huge fiscal deficit which has climbed above 5% of GDP.

12

World Economic Forum on East Asia

Security & Sustainability “Japan has made great efforts to increase energy efficiency. There has to be such a grand design in the policies of each country.” Kunio Nakamura President, Matsushita Electric Industrial Co., Japan

Growing income disparities, energy shortages and pollution pose a risk to growth across Asia. While poverty serves as a reservoir for militant Islam in South-East Asia, rural unrest poses a challenge to state authority in China. China’s inefficient use of energy is causing global environmental problems and placing additional stress on vulnerable supplies of oil and gas. The region’s problems demand a collective response. Politicians and companies should work together on ways to improve energy security, reduce volatility in energy prices and share energy-efficient

technologies. They should also promote exchanges that will enhance mutual understanding and defuse historical misunderstandings. “The new century belongs to Asia,” Jiang Jianqing, Chairman of the Board, Industrial and Commercial Bank of China, People’s Republic of China, told participants in the meeting’s opening plenary. “But at the same time we need to seriously tackle the many challenges we face today.” Asia’s remarkable economic growth is steadily enabling the region to replace its long reliance on exports to the West with intraregional trade in goods and services for its own consumers, as Figure 4 demonstrates. Ensuring that this kind of growth continues smoothly, however, will depend on finding common solutions to shared problems such as disparities of income, energy shortages and pollution. There are a host of challenges to Asia’s security and long-term growth: long-simmering rebellions, North Korea, terrorism and bird flu just to name a few. None of these problems pose as significant a threat, however, as the growing inequities and imbalances stemming from Asia’s own growth.

Figure 4: Significant trade flows are reinforcing economic and financial ties between Asian countries

$2B $4B $30B

$22B

$50B

$44B

$8B $96B

$5B

$109B $69B

$7B

$52B

$21B

$20B $66B

$11B

$73B

$3B $3B

Note: China includes Hong Kong Source: World Trade Organization 2004 statistics, ASEAN Secretariat, Indian Ministry of Commerce and Industry, Korean International Trade Association, lit search

World Economic Forum on East Asia

13

“The performance of administrators is judged by GDP growth, tax revenue and jobs created. Energy efficiency is simply not in the vocabulary of bureaucrats.” Xu Xiaonian Professor, Economics and Finance, China Europe International Business School (CEIBS), People's Republic of China

In particular, Asia needs to address the growing gap between its haves and have-nots.

At the same time, one of the hungriest energy consumers, China, is also one of the most inefficient. China already consumes more than twice as much energy as Japan and emits three times as much carbon dioxide. China requires eight times as much energy as Japan to produce US$ 1 of economic output as Figure 5 shows. And pollution from China is already having a global impact. Many worry that China is failing to take advantage of the experience of its more advanced neighbours. Japan, for example, developed its energy-efficient capabilities in the mid-1970s in response to a similar combination of high oil prices and rising pollution.

In South-East Asia, poverty provides a reservoir for militant Islam, while in China restive rural areas challenge state control. And across Asia, barriers to the flow of skilled workers mean that ageing Japan lacks workers while poor and growing nations like the Philippines want for jobs. While workers compete for jobs, nations are vying for diminishing resources, especially water and oil. Oil is a particularly urgent concern, as the demands of China and India push up global energy prices and reduce supplies. With new reserves getting harder and more expensive to reach, existing supplies are increasingly vulnerable to disruptions such as storms or political unrest.

Figure 5: Relative energy efficiency per US$ 1bn GDP

Yet, rather than working with the Japanese to increase efficiency at home, China’s officials end up competing with Japan to secure more energy assets abroad. “The problem is the central government,” said Xu Xiaonian, Professor, Economics and Finance, China Europe International Business School (CEIBS), People’s Republic of China. “The performance of administrators is judged by GDP growth, tax revenue and jobs created. Energy efficiency is simply not in the vocabulary of bureaucrats.” The problem is exacerbated by the fact that China and several other Asian governments subsidize fuel prices, keeping prices for consumers artificially low and encouraging waste. Such subsidies should be replaced with incentives for conservation.

* Expressed using purchasing power parities Source: IEA “Energy Balances of OECD Countries and Non-OECD Countries 2003”

14

World Economic Forum on East Asia

For companies in Asia, the potential for disruptions demands a comprehensive risk-management policy that involves senior management and recognizes that a company is only as insulated as the least prepared of its major suppliers and customers. With so much at stake, cooperation between all of Asia’s stakeholders is key to managing the region’s risks. Asia’s energy situation in particular demands a collective response. Oil consuming nations should cooperate on energy security, reducing volatility in energy prices and sharing energy-efficient technologies. They should also raise the level of dialogue with oil producers.

More broadly, Asia’s leaders need a more open conversation with each other. Academic exchanges and joint research efforts are another way to deepen the region’s collective pool of knowledge while bridging the historical and cultural gaps that threaten to divide Asia. “We should make an effort to better understand each other’s history and customs,” said Yun Jong-Yong, Vice-Chairman and Chief Executive Officer, Samsung Electronics, Republic of Korea, and Co-Chair of the World Economic Forum on East Asia. “If we hang on to the past we are only impeding each other’s progress.”

Fuelling Asia’s Growth China has overtaken Japan in terms of energy use and CO2 pollution. Can industrialized Japan and Korea pass on to fast-moving, energy-hungry China and India the wisdom of energy efficiency and environmental protection? Are Japan and Korea willing to sell this technology? And are China and India willing to purchase it?

China has overtaken Japan in terms of energy use and CO2 pollution

Source: IEA “Energy Balances of OECD Countries and Non-OECD Countries 2003”

Oil consuming countries in Asia need to cooperate to promote more efficient energy usage, develop and share energy-efficient technologies and promote energy security. At the same time, those countries need to boost their dialogue with oil producing countries to encourage the stability of supply and transportation.

World Economic Forum on East Asia

15

Regional Change – Japan After its lost decade of stagnation, Japan faces two immediate priorities: how to sustain its economic recovery and how to resolve simmering disputes with its neighbours China and Korea. Essential to addressing these challenges are reform and leadership. Economic rebound should not be mistaken for renewal. Japan has to continue to pursue a raft of structural reforms, including initiatives to reduce its huge fiscal deficit (see Figure 6). This will require innovative solutions such as more open immigration and the employment of the elderly beyond the traditional retirement age. Implementing such policies will require a break with tradition, a change of mindset and strong political leadership.

Figure 6: In Asia, Japan appears to have the worst fiscal imbalance

“For a long time, we placed priority on equality of results. Maybe we should shift to equality of opportunity.” Sadakazu Tanigaki Minister of Finance of Japan

The concern today is how Japan can sustain its recovery and temper its new self-confidence to resolve disagreements with China and Korea. The two priorities are linked. An economically stronger Japan will more confidently project its image and promote its interests abroad. To sustain and expand its economic recovery over the long term, Japan must somehow deal with lingering enmities that cloud its ties with the rest of Asia. “For the further development of the Japanese economy, we have to think of how Japan can transform itself while jealously guarding the dignity of the nation,” said Charles D. Lake II, Vice-Chairman and Representative, Aflac Japan, Japan. “The Japanese people have not fully realized what they need to do given the international situation.”

Source: IMF World Economic Outlook April 2006

After a decade of debate over whether stagnating Japan was heading for recovery or relapse, the conclusion is clear: the second biggest economy in the world is back. Participants at the World Economic Forum on East Asia heard tales of a more dynamic Japan – a country with a high level of energy efficiency and environmental consciousness, economic growth in nominal terms for three consecutive years as Figure 7 shows, deep penetration of broadband services, and a growing entrepreneurial spirit despite government constraints and cultural impediments. They also heard of a more assertive, outward-looking Japan, a nation more engaged in global affairs, as demonstrated by its military contingent in Iraq, but also locked in tense disputes with its neighbours.

16

Figure 7: Japan has now experienced economic growth in nominal terms for three consecutive years

Source: Statistics Bureau, Japan Ministry of Internal Affairs and Communications “Monthly Statistics of Japan (March 2006)”

World Economic Forum on East Asia

“It might be warranted to move cautiously to make sure we don’t uproot the factors in Japan’s success. But we’re talking about the international arena, and given the change in China, India and Korea, [reform] is too slow.” Hellmut Schutte Dean, Asia Campus, INSEAD, Singapore

During Japan’s lost decade, global conditions changed dramatically – China emerged as a formidable global manufacturing platform thanks in part to Japanese investment, India became a force in business process outsourcing and the IT services sector, and Korea rebounded from the Asian financial crisis to turn into one of the most tech-savvy economies in the region. As for Japan, some important economic and political reforms have gone through, but the restructuring agenda remains long. “Japan has changed enormously in the last five years, but did we change sufficiently?” asked Heizo Takenaka, Minister for Internal Affairs and Communications and for the Privatization of the Postal Services of Japan. “No. The world is changing very fast and proactive reform is in order. We have only begun.” Economic rebound should not be mistaken for renewal. “The old economy is leading the current recovery,” Takenaka pointed out. Meanwhile, the “New Japan” is struggling to emerge. There have been notable successes. According to Nobuyuki Idei, Chief Corporate Adviser, Sony Corporation, Japan, the spread of broadband at low cost to users and the proliferation of 3G mobile

World Economic Forum on East Asia

technology are the result of cooperation between the private sector and the bureaucracy, which together agreed that competition should be allowed to drive growth in the IT sector. Moreover, the banking system was overhauled, with non-performing loans sharply reduced. The unwinding of cross-shareholdings has meant that companies are turning more and more to the capital markets for financing, spurring entrepreneurship. Further, stock market scandals are a wake-up call for Japan to improve standards of accountability and disclosure. “We’re about to go through a core transformation,” declared meeting CoChair Junichi Ujiie, Chairman, Nomura Holdings, Japan. Not everybody is convinced that the creative destruction that structural reforms can unleash is good for Japan. “People’s mentalities haven’t changed that much,” said Masao Hirano, Director, McKinsey & Company, Japan. “Many Japanese managers feel reform will destroy the Japanese business regime.” Some companies have slowed efforts to increase transparency standards and accountability. But the recalcitrant appear to be a dying breed. The enormity of the challenges posed by Japan’s ageing demographics should be enough to convince all but the most diehard of the need for strong action and new, possibly radical approaches. For example, as Figure X shows, tackling Japan’s huge fiscal deficit, which is above 5% of GDP, is essential to paying the costs of the growing ranks of retirees. “From an economic perspective, the solution is that Japan must raise its productivity and, in particular, the productivity of capital,” said Jesper Koll, Managing Director and Chief Economist, Merrill Lynch Japan Securities Co., Japan. Two ways to increase productivity would be to allow in more immigrants and to harness the energy of the elderly. “One hundred years ago, we created wealth with manual labour, but that’s not how wealth

17

“Companies in the private sector need to compete in within the global market and I think they have succeeded in achieving a basic transformation. But equality in results is something people value… and so the community mindset has not been transformed completely.”

“Competition is happening in Japan.” Nobuyuki Idei Chief Corporate Adviser, Sony Corporation, Japan

Yoshihiko Miyauchi Chairman and Chief Executive Officer, Orix Corporation, Japan

gets created anymore,” meeting Co-Chair Henry A. McKinnell, Chairman and Chief Executive Officer, Pfizer, USA; Vice-Chairman of the Foundation Board of the World Economic Forum, explained. “The assumption that an older society can’t create wealth is wrong. You just can’t have people being old and disabled; you need to have them in the workforce.” But this would require a change in cultural norms. Some have half-jokingly called Japan the world’s only successful communist country. It is time that Japan shed that image and mindset. “For a long time, we placed priority on equality of results,” Sadakazu Tanigaki, Minister of Finance of Japan, remarked. “Maybe we should shift to equality of

opportunity.” Such moves have sparked a growing debate about the widening income gap that economic reforms have brought. The appointment later this year of a new prime minister to replace Junichiro Koizumi will be a key indicator of the zeal for sustaining crucial reforms. It will also signal how Japan is likely to manage its relations with its closest neighbours and its growing role in world affairs. How Japan squares national dignity and economic resurgence with its global responsibilities and the need to build bridges with the rest of Asia will be its people’s biggest challenge ever. “We know what must be done,” Takenaka concluded. “The question is whether there is the leadership.”

Plenary session: The Japan that Returned: Does It Look Like the Rest of Asia?

18

World Economic Forum on East Asia

The Creative Imperative in East Asia

Working session: Smart Growth: What Can China and India Learn from Japan and Korea?

The interactive sessions at the World Economic Forum on East Asia, including several private meetings and workshops on emerging capital markets, the digital ecosystem and global risks, continued discussions and consultations carried forward from the Annual Meeting 2006 in Davos and other regional meetings. Through frank and open dialogue, more than 300 business, government and civil society leaders sought to apply the “creative imperative” in setting “a new agenda for Asian integration”. Following is a selection of creative ideas and approaches that were discussed in Tokyo:

Integration & Identity – Ageing Demographics: Mitigate the economic burdens caused by the burgeoning ranks of retirees in Japan and other countries facing ageing demographics through more open immigration and the deployment of the elderly in the workforce. – Education: Promote youth and student exchanges to boost regional understanding, particularly between Japan and its neighbours. – Regionalization: Review the integration initiatives in East Asia to focus strategic thinking and direction. What kind of integration does Asia want – how do we get there? More importantly, how can Asia achieve optimum regional integration, while meeting its global responsibilities?

World Economic Forum on East Asia

Competitiveness & Creativity – Values: Establish common values to drive growth in globally integrated companies, ensuring that local cultural differences are not ignored. Too much globalization can be a bad thing. – Mobility: Use technology to develop innovative processes and business models that make full use of a company’s diverse human resources regardless of distance or geography.

Security & Sustainability – Technology Transfer: Allow major energy consumers access to energy-saving industrial technology developed by Japan and other energyefficient countries. – Energy: Create a forum for Japan and Korea to discuss with the Chinese government and business leaders China’s energy needs and what its neighbours can do to help.

Regional Change – Japan – Sustainable Development: Deploy Japan’s expertise in environmental management to contribute the technology and skills required to promote sustainable practices in the rest of Asia and elsewhere. – Mindset: Change the rules to change the mindset. Japan must give second chances to those who fail. Encouraging entrepreneurship is crucial to the strengthening of the vital new economy. Promote role models of success not just paragons of humility. Open Japanese universities to more faculty and students from overseas. 19

Leaders forged closer economic ties during the World Economic Forum on East Asia

The Secretary-General of the Association of South East Asian Nations gave his support for the Japanese trade minister’s offer of setting up a free trade area in East Asia. Ong Keng-Yong also agreed to Japan’s proposal for a new regional policy coordination body modelled on the Organization for Economic Cooperation and Development (OECD). Japan’s Economy, Trade and Industry Minister Toshihiro Nikai said that the East Asian version of the OECD needed to be established in the medium and long term, with ASEAN as a motor. He told participants that the East Asian market could attain further growth and integration by forming free trade agreements among the region’s economies.

ASEAN Secretary-General Ong Keng-Yong gave assurances that the emerging East Asian community would not exclude the United States.

“Japan should show the lead in opening its market because for ASEAN as well as for the East Asian community to prosper, we have to do a lot of trade among ourselves.” Ong Keng-Yong Secretary-General, ASEAN, Jakarta

The United States meanwhile is ready to consider an Asian Currency Unit, Undersecretary of the Treasury for international affairs, Tim Adams, said. Japan and the Asian Development Bank are in favour of creating a weighted basket of Asian currencies similar to the European Currency Unit, a precursor of the euro. Japan and India signed an agreement encouraging Japan’s small to medium size companies to enter into the Indian market by providing information and business-matching opportunities.

20

World Economic Forum on East Asia

Acknowledgements The World Economic Forum would like to thank Keizai Doyukai (Japan Association of Corporate Executives) for its support at the World Economic Forum on East Asia.

The World Economic Forum wishes to recognize the support of the following companies as Partners or Supporters of the World Economic Forum on East Asia: Strategic Partners Audi Avaya Bain & Company Barclays Capital Citigroup Credit Suisse Economic Development Board of Bahrain Infosys Technologies JPMorgan Chase KPMG Kudelski Group Lehman Brothers McKinsey & Company Manpower Merrill Lynch Microsoft Corporation Pfizer Zurich Financial Services Regional Partners Geopost International Phoenix Satellite Television UPS Roundtable Supporters AFLAC Japan Ogilvy Public Relations Worldwide Official Carrier Japan Airlines International

The World Economic Forum also thanks Nestlé for its in-kind support, NHK Japan Broadcasting Corporation as host broadcaster and India Brand Equity Foundation (IBEF) for hosting the India Night.

22

World Economic Forum on East Asia

Contributors Peter Torreele is Managing Director of the World Economic Forum. Lee Howell is Director, Head of Asia, at the World Economic Forum. The World Economic Forum on East Asia was under his direct responsibility. Akira Tsuchiya is Global Leadership Fellow and Manager, Japan. Laura de Wolf is Senior Event Manager and Meeting Coordinator. Vidhi Tambiah is Associate Director, Global Agenda, and Samantha Tonkin is Senior Media Manager at the World Economic Forum. They worked with Alejandro Reyes and Wayne Arnold to produce this report. The World Economic Forum would like to express its appreciation to the summary writers for their work at the World Economic Forum on East Asia in Tokyo. Session summaries are available at: www.weforum.org Fabienne Stassen Fleming, Senior Specialist, Editing Nancy Tranchet, Associate Principal, Editing Design and Layout: Kamal Kimaoui, Associate Principal, Production and Design Photographs: Hitoshi Fugo with Caroline Parsons, Editor and Susumu Ishito Special thanks to Bain & Company for their help in preparing data and statistics underpinning this report. The World Economic Forum also recognizes Heng Kim-Song and No-rio Yamanoi, Editorial Cartoonists, for their insightful and entertaining contribution to the programme and report of the World Economic Forum on East Asia.

The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and based in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. (www.weforum.org)