World Economic Forum On East Asia 2008

World Economic Forum on East Asia Responding to New Uncertainties Kuala Lumpur, Malaysia 15-16 June 2008

Report

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

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Contents

Page 3 Preface Page 4 Summary: Responding to New Uncertainties Page 8 Asian Leadership Page 12 Global Risks Page 16 Sustainable Growth Page 20 Competitiveness Page 24 Acknowledgements

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Preface

“Responding to New Uncertainties” was the theme of the 17th World Economic Forum on East Asia, which was held in Kuala Lumpur. As such, 300 leaders from over 25 different countries examined and discussed the challenges and priorities that will ultimately shape the region’s future agenda. At the last World Economic Forum on East Asia, confidence in the resilience of Asia’s economies was marked by positive economic growth forecasts, expanding intra-regional trade, rising investments and staggering levels of US currency reserves. In this context, leaders from Asia expressed their readiness to enlarge their leadership role in global and regional affairs as the centre of power shifts to Asia’s capitals and corporate boardrooms. Only one year later, the prospect of a US recession, soaring food and fuel prices, and a downturn in global demand have led to concern about Asia’s ability to decouple from the US sub-prime mortgage crisis, which is expected to lead to worldwide losses close to US$ 945 billion. At the same time, the urgency to resolve the specific consequences of climate change, renewed tensions on the Korean Peninsula and inflationary pressures are challenging the premise that Asia’s healthy domestic consumption alone can ensure continued growth and stave off the negative externalities of a global economic slowdown. Although ASEAN now has an economic blueprint and charter,

Japan holds the G8 presidency and the economic influence of China and India continues to rise, the need for a common agenda in East Asia to address the key regional and global challenges is unequivocally pressing. For these reasons, we hope you find the report of this year’s proceedings to be an insightful and timely guide to how the region’s leaders can respond to these new uncertainties in the short term, but also which collective actions and innovative approaches by governments, businesses and key regional institutions will be critical for dealing with these global and regional challenges. The World Economic Forum would like to thank the Co-Chairs of the meeting: Peter Brabeck-Letmathe, Chairman of the Board, Nestlé, Switzerland; Member of the Foundation Board of the World Economic Forum; Jamshyd N. Godrej, Chairman and Managing Director, Godrej & Boyce, India; Takao Kusakari, Chairman, Nippon Yusen Kabushiki Kaisha (NYK Line), Japan; Lord Levene, Chairman, Lloyd's, United Kingdom; and Ralph R. Peterson, Chairman and Chief Executive Officer, CH2M HILL Companies, USA.

W. Lee Howell Senior Director, Head of Programming Senior Adviser, Asia

Sushant Palakurthi Rao Director, Head of Asia

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Summary: Responding to New Uncertainties

“We have faced serious challenges before, but rarely in such a potent combination.” Abdullah Ahmad Badawi, Prime Minister of Malaysia

“Until very recently, East Asia was a follower of the global agenda but, for the first time, it is now a leader. The world looks to the region to get it out of the current financial crises.” Peter Brabeck-Letmathe, Chairman of the Board, Nestlé, Switzerland; Member of the Foundation Board of the World

At the 17th World Economic Forum on East Asia, more than 300 business, government and civil society leaders from 25 countries arrived knowing that the region is facing new uncertainties. While it remains clear that the geopolitical and economic power equation is shifting its direction, rising food and fuel prices are raising the spectres of inflation and protectionism and, worst of all, the possibility that many Asians – who in recent years have scrambled out of poverty – may again be forced back down. This could lead to social and political instability in several countries in the region. Indeed, these may be the best of times and the worst of times for East Asia. At the Welcome Reception for participants, Malaysian Prime Minister Abdullah Ahmad Badawi hailed the region as full of “immense promise and dynamism” with people who “brim with entrepreneurial spirit and competitive drive”. But, he warned, “the economic well-being of the region and, indeed, the world, is coming under increasing and serious threat. The threat is emanating from three primary sources: rising food prices, spiralling costs of

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Economic Forum; Co-Chair of the World Economic Forum on East Asia

energy and the very real prospect of global economic recession. We have faced serious challenges before, but rarely in such potent combination.” The World Economic Forum on East Asia offered an excellent platform to discuss these difficult issues. As Ahn Ho-Young, Deputy Minister for Trade of the Republic of Korea, put it, “the World Economic Forum is about turning challenges into opportunities.” That is precisely what participants aimed to do in Kuala Lumpur. It was evident from the interactive discussions that East Asia’s leaders are responding to the new uncertainties by taking a long-term view, not panicking. A survey by the World Economic Forum indicated that the business sector remains resolutely focused on the big picture and how Asia can contribute to securing and sustaining global growth,

peace and stability. An overwhelming 81% chose “addressing growing global concern over environmental challenges such as climate change and water” as their top priority among issues with potential impact on Asia. Other choices included “preventing political and economic instability linked to rising food and energy prices” and “managing the social, environmental and infrastructural implications of rapid urbanization”. East Asia is at a crossroads in its role in the global economy. “Until very recently, East Asia was a follower of the global agenda but, for the first time, it is now a leader,” explained Peter Brabeck-Letmathe, Chairman of the Board, Nestlé, Switzerland; Member of the Foundation Board of the World Economic Forum; and Co-Chair of the World Economic Forum on East Asia. “The world looks to this region to get it out of the current financial crises.” While there is clearly some ambivalence about Asia’s readiness to take up the mantle, Asian leaders must step up to the challenge. The business sector must take the lead – especially in addressing pressing problems such as rising food and energy prices that are generating discontent among people. “We are closer to the people, while government tends to lead and tell people what to do,” said Lam Di Don, Chief Executive Officer and CoFounder, VinaCapital Group, Vietnam. The key to responding to uncertainties is to provide effective leadership in both the public and private sectors. “We should always establish a very good mechanism to

“Things are moving so fast that government cannot respond.” Lam Di Don, Chief Executive Officer and Co-Founder, VinaCapital Group, Vietnam

connect the people and government so that the complaints of ordinary people are heard,” said Huang Xingguo, Mayor of Tianjin, People’s Republic of China. “The best solution is transparency and openness.” Concluded Jamshyd N. Godrej, Chairman and Managing Director, Godrej & Boyce, India; Co-Chair of the World Economic Forum on East Asia: “It’s a problem of governance, not with the type of government you have.” The World Economic Forum on East Asia was organized under four sub-themes: Asian Leadership, Global Risks, Sustainable Growth and Competitiveness.

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“This meeting is a good opportunity to study what changes are happening in the region and how we can collaborate to affect its politics and economics.”

“The mood today is more concerned about food prices than protecting farmers.”

Takao Kusakari, Chairman, Nippon Yusen Kabushiki Kaisha

Boyce, India; Co-Chair of the World Economic Forum on East

(NYK Line), Japan; Co-Chair of the World Economic Forum on

Asia

Jamshyd N. Godrej, Chairman and Managing Director, Godrej &

East Asia

Global Risks Asian Leadership Asian economic dynamism amid the faltering global economy has underscored how the centre of gravity of the global economy is shifting. • While Asia’s voice and influence on the world stage are increasing, the region remains underrepresented in international institutions • But the readiness of Asia to assume the mantle of global leadership is in question, given what some perceive to be weak leadership at the national and regional levels • A key question is whether Asia has the capacity to address the challenges posed by rising energy and food prices, as well as the issue of environmental degradation

Asia is facing three major global risks – inflation resulting from soaring food and fuel prices, the rise of protectionism, and questions about security in the region. • The rise of inflation spurred by increases in fuel and food prices could undo the economic progress that the region has made since the financial crisis more than a decade ago • Solving the food and energy problems will require concerted action among countries in the region and cooperation between the region and the rest of the world • Given the rising spectre of protectionism, the international community must refocus attention on the Doha Round of global trade talks and the need for the negotiations to be concluded quickly and successfully • East Asia must reflect on how the security architecture of the region should develop. The ASEAN Regional Forum could play an expanded role as the main pan-Asian forum for discussions on security issues with all the global players, including the US, Europe and Russia

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F

M

“I wish to examine together with you comprehensive and integrated responses to the issues of climate change, development, water, and food, which are all mutually interlinked.”

“Multilateralism is still the priority. Asian countries feel that it is crucial to complete the Doha negotiations. We need to gain certainty.” Mari Pangestu, Minister of Trade of Indonesia

Yasuo Fukuda, Prime Minister of Japan

Competitiveness Sustainable Growth Concerns over food and fuel prices seemed to overshadow long-term questions about sustainable growth in Asia. Still, participants stressed the importance of addressing the challenges of climate change and water scarcity. • Efforts to address the fuel and food crises must include both short-term measures and more longterm remedies to ensure sustainable growth • As the continent gets wealthier, Asia must resolutely focus on the problem of the gradual depletion of its resources, including water • To effectively address the challenge of sustainable management of resources to secure growth, the region must find collaborative solutions, including public-private partnerships • Companies must embrace their social responsibilities and the importance of engaging in society on major global issues. Corporate engagement in society is most effective when aligned with the enterprise’s business proposition

Fast-growing Asia may be a “cushion” for the faltering global economy, but it has not yet become the finetuned engine of growth that many may already perceive it to be. • The current global economic storms will be a major test for Asia’s economies • The key question is whether Asian countries can continue to improve their competitiveness • Collaboration among governments and enterprises, between the public and private sectors, and among and within companies, is a key to boosting competitiveness. Collaboration in R&D increases advantages for Asian companies • The main challenge for government and business is to improve governance standards and to constantly retool and reform

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From left to right: Jaime Morales Carazo, Vice-President of Nicaragua; Elias Antonio Saca, President of El Salvador; Patrick Manning, Prime

Minister of Trinidad and Tobago; Susan L. Segal, President and Chief Executive Officer, Council of the Americas, USA; Manuel Zelaya Rosales,

Asian Leadership

“If you’re travelling in Europe and the US, there’s a feeling of doom and gloom. Here, you step off the plane and it’s the opposite. This is the right place to be at the moment.”

“The question is: Does Asia have the institutions, the leadership and the inclusiveness to lead in the long run?” Azman Mokhtar, Managing Director, Khazanah Nasional, Malaysia

Lord Levene, Chairman, Lloyd’s, United Kingdom; Co-Chair of the World Economic Forum on East Asia

Asia’s dynamism is cushioning the global economy from a sharp slowdown brought about by the US subprime crisis and Europe’s anaemic growth. Led by China and India, the region is picking up the slack in global demand and staving off recession as it faces strong headwinds of falling US import demand and rising food and fuel prices. Taking particular note of Asia’s robustness, Lord Levene, Chairman, Lloyd’s, United Kingdom; Co-Chair of the World Economic Forum on East Asia, told participants that the centre of economic gravity has shifted dramatically. “If you’re travelling in Europe and the US, there’s a feeling of doom and gloom. Here, you step off the plane and it’s the opposite. This is the right place to be at the moment,” he said. In contrast, a faltering US economy and the much-criticized US military attack on Iraq have greatly discredited the country’s image, power and self-confidence. While the US is widely expected to remain a dominant player in world affairs, its recent problems and hubris are increasingly seen to have hastened the shift to a new post-US world.

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That shift was most sensationally signalled when Asian and Middle Eastern sovereign wealth funds bailed out Wall Street’s finest after they suffered multibillion dollar write-offs from derivatives trading and sub-prime and real estate lending. The humiliating reversal of fortunes came just over a decade after the 1997-1998 Asian finance crisis unleashed a series of reforms across the region aimed at improving corporate and macroeconomic governance. In keeping with its growing economic clout (see Figure 1), Asia has also been given a louder voice and greater responsibility on the world stage. International institutions of global governance such as the United Nations, the World Bank and the International Monetary Fund (IMF) have begun to place Asians at the apex of their leadership. Today, a former South Korean foreign minister is the Secretary-General of the UN; a former Hong Kong civil servant runs the World Health Organization; a Japanese heads the United Nations Educational, Scientific and Cultural Organization; and a Chinese academic is the World Bank’s chief economist. In addition, three Asian countries – China, India and South Korea – have been

invited to the G8 Summit on climate change in Hokkaido, Japan. Figure 1: East Asia's Share of the World Economy East Asia's increasing share of the world economy is not limited to China's forecast growth 50

Forecast

Marcus Agius, Chairman, Barclays, United Kingdom

G7 (x-Japan) 40

30

20 Japan China

10

Rest of East Asia 0 1980

1985

1990

1995

2000

2005

2010F

Source: International Monetary Fund, World Economic Outlook Database (April 2008)

But more needs to be done to convince many Asians that the region’s representation within global governing bodies is commensurate with its economic prowess. Consider the UN Security Council: its only permanent Asian representative is China, even though Asia claims 60% of the world’s population and generates one-third of global GDP. Europe, with just 11% of the global population, boasts three members. Then there is the rule that a European should occupy the top seat at the IMF, while the chief position at the World Bank is reserved for an American. No wonder Yashwant Sinha, Member of Parliament; Minister of External Affairs (2002-2004) and Minister of Finance of India (1998-2002), was sceptical. He maintained that, had the sub-prime crisis originated in Asia or Latin America, the IMF would have dispatched “huge teams” there to order reforms. Yet in the face of

a major regulatory failing in the US, the “IMF is keeping quiet, doing nothing,” he charged. To be sure, soaring commodity prices (see Figure 2), food and fuel in particular – rice, the staple food for 2.5 billion Asians, has more than tripled in price in Thailand since January, while diesel has risen over 26% in Vietnam – are reinforcing the perception that present global governance is inadequate. Marcus Agius, Chairman, Barclays, United Kingdom, described the international institutions as “pretty out of date”. Figure 2: Commodity Prices Prices for iron ore and rice rising as dramatically as oil 500 Oil**

Index of real prices* (100=January 2002)

Percentage of world GDP (PPP)

“The global economic slowdown may inspire protectionism and the imposition of regulations that would impede rather than support growth.”

400

300

Iron ore Soybeans

200

Rice 100

0 Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

* Priced in US$; US-inflation adjusted prices with April 2008 as base month ** West Texas Intermediate Crude

Source: IMF; US Bureau of Labor Statistics; PwC analysis

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“Research is of paramount importance when it comes to food and agriculture solutions.” Musa Hitam, Chairman, Sime Darby, Malaysia

“In Japan, the government has been reforming for the last seven years, with or without a crisis, but it is also key to look at reforms both on a short and long term basis.” Yoriko Kawaguchi, Member of the House of Councillors, Japan; Minister for Foreign Affairs of Japan (2002-2004).

Meanwhile, as Yasuchika Hasegawa, President, Takeda Pharmaceutical Company, Japan, argued, it is unfair to blame high-consuming developing nations in Asia for high energy prices and place more of the burden on them to deal with the problem of climate change. Asking developing economies such as China to shoulder more of the responsibility for reducing carbon emissions is unfair when developed countries such as Japan and Germany produce more than three times per head the CO2 levels, Hasegawa reckoned. Is Asia ready to assume the global mantle of leadership? Can it? There are those who have their doubts. “The question is: Does Asia have the institutions, the leadership and the inclusiveness to lead in the long run?” Azman Mokhtar, Managing Director, Khazanah Nasional, Malaysia, asked. He is not sanguine. “We don’t see it,” Azman said. “There is a lack of leadership in the national and regional levels, much less at the global level.” Citing the track record of ASEAN, the region’s most established multilateral grouping, Musa Hitam, Chairman, Sime Darby, Malaysia, a former Malaysian

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deputy prime minister, said he, too, is not hopeful. ASEAN, for instance, has the capacity to tackle the food inflation problems in a collective and concerted manner but has not done so, despite much talk over the years of collaboration in agriculture, he pointed out. Asian countries have to stop being insular if the region is ever to forge a shared agenda for tackling global uncertainties including energy, water and environmental constraints, participants agreed. Badawi issued a timely call for national and regional action: “Many of us have instituted measures we consider in the best interests of our economies and our people. But it is too evident that these measures will only have limited impact as food and fuel prices continue to soar while the global economy is on the verge of a recession.” For now, Asia’s insatiable appetite for consumer goods and the abundance of investment opportunities will ensure that the region remains the locomotive for the world economy.

Governments’ Role in Fuel and Food Hikes Business leaders at the World Economic Forum on East Asia highlighted the role of government in food price increases, warning of mounting unrest and protectionism if urgent action is not taken. Peter Brabeck-Letmathe, Chairman of the Board, Nestlé, Switzerland; Member of the Foundation Board of the World Economic Forum; Co-Chair of the World Economic Forum on East Asia, attributed two-thirds of the food price rises to government decisions. He said: “About 10% of food price increase can be due to the increase in fuel, 10% from changes in lifestyle … about one-third of the price increase, we will give it to the decision to use food for biofuels … and about one-third to political decisions to stop exports … and 10% from speculators.” Government subsidies, which have long distorted agricultural prices, keep food issues political.

Other factors driving up food prices include inadequate investments in infrastructure, particularly in developing countries like Indonesia, resulting in higher logistical costs, and in research and development. Musa Hitam, Chairman, Sime Darby, Malaysia, called on ASEAN to act collectively in search of long-term solutions rather than knee-jerk reactions. Michael J. Roux, Chairman, Roux International, Australia, said the issue of food price increase should be treated separately from the fuel crisis, noting that factors supporting the oil price increase are less sustainable. He said he believes that the oil price would collapse if the US goes into a recession. Some participants felt reform is needed in structuring incentives to influence energy consumption behaviour, for example, lifting fuel subsidies that have led to price distortions.

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Global Risks

“The food crisis is an affordability – not an availability – problem.” Rajat M. Nag, Managing Director-General, Asian Development

“We are in the same boat; we share the same destiny. We should not fall into the trap of protectionism but should help each other.”

Bank, Manila Yoshimi Watanabe, Minister of Financial Services and Administrative Reform of Japan

Words of one Asian minister at last year’s World Economic Forum on East Asia proved to be prophetic when he warned, “It’s precisely because everyone’s feeling good that we know something is coming.” The Asian landscape then was brimming with optimism. Interest rates and inflation were low, companies were enjoying booming profits and governments were reporting healthy tax takings. Fast forward a year – and that upbeat sentiment has given way to deep anxiety. With soaring food and fuel prices, regional equity markets rapped by the unwinding sub-prime crisis and threat of a global economic downturn, the mood at this year’s World Economic Forum on East Asia was predictably sombre. Inflation was understandably foremost on the minds of participants. Rajat M. Nag, Managing Director-General, Asian Development Bank, Manila, called it an issue of grave concern. He predicted inflation for the region would surpass the ADB’s April forecast of 5.1% for the year.

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Nag also warned that Asia’s “good growth story” is under threat if swift government response is not forthcoming in the form of tightened monetary and fiscal policies. However, noted one panellist, raising interest rates may not arrest rising prices, especially if inflation is not generalized and limited to food and energy. Leaving aside the debate on monetary policy, there was agreement that governments should intervene quickly by giving targeted support to the poor – hardest hit by rising prices (see Figure 1). According to some estimates, about 100 million people have descended into poverty worldwide in the wake of this crisis. Low and middle income groups are feeling the strain.

“Given the deep integration of the global economy, the slowdown is having a great impact on our economies. We in Asia should work together to find solutions.”

Figure 1: Rising Food Prices, Unequal Impacts (food weighting within consumer price index, percent) 80 Bangladesh 70 Nigeria 60 Afganistan

50 40

Kenya

Russia

Vu Van Ninh, Minister of Finance of Vietnam

30 20 10

India

China

Brazil US

UK

0 0

1

2

3 4 5 Per capita income (in log)

6

7

8

back on old tools” such as authoritarian measures to squelch protests.

Note: Poor people tend to spend relatively more of their income on food, and therefore suffer more when food prices go up. Source: International Monetary Fund

Participants concurred that solving the food problem will require concerted action within Asia and between the region and rest of the world. Food surplus nations need to put collective interests above national ones by releasing their stockpiles to those facing shortages. International aid is also urgently required to supplement national rescue efforts aimed at easing the suffering of those most affected. While solutions are being deliberated, simmering tension over the hike in food and fuel prices has meanwhile led to mass protests reminiscent of riots in the immediate aftermath of the Asian financial crisis. Inflation has morphed into a political risk, testing the mettle of several regimes in the region. “Things are moving so fast that government cannot respond,” warned Lam Di Don, Chief Executive Officer and CoFounder, VinaCapital Group, Vietnam. “If government doesn’t come out with new solutions, they will fall

Asian governments, some participants pointed out, need to rethink existing policies in view of current realities – notably fuel subsidies, which have led to price distortions and unbridled energy consumption. However, it is a task that requires tremendous political resolve as governments face the conundrum of balancing the total or gradual removal of an unsustainable policy that threatens to further stoke inflation with the political costs of doing so. In the longer term, reform is needed to address the deeper issue of the energy crisis – excessive dependence on fossil fuels. One panellist said that it is time for Asian governments to seriously consider diversifying their energy mix to include hydroelectricity, solar and wind power, fuel derived from biomass and – albeit controversial – even nuclear energy.

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Yasuchika Hasegawa, President, Takeda Pharmaceutical Company, Japan; Lord Levene, Chairman, Lloyd's, United Kingdom; Co-Chair of the World Economic Forum on East Asia; Rajat M. Nag, Managing Director-General, Asian Development Bank, Manila; and Ralph R. Peterson, Chairman and Chief Executive Officer, CH2M HILL Companies, USA; Co-Chair of the World Economic Forum on East Asia

Agreeing on the need to keep free trade alive, Ralph R. Peterson, Chairman and Chief Executive Officer, CH2M HILL Companies, USA; Co-Chair of the World Economic Forum on East Asia, said protectionism is an enormous risk and its pursuit will be tragic. He added that a retreat from a liberal trade regime is a grave danger to the world. Another participant issued a dire warning: the ingredients are there for a trade war to break out. “What will we be celebrating in 2019?” he asked. “Are we going to be looking at the opportunities that this fantastic era of globalization has brought about or are we going to be reflecting on the ashes of World War Three?” The rising threat of protectionism has refocused attention on the outcome of the Doha Round of global trade talks. Many participants shared the concern

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that, if no breakthrough is achieved at the negotiations before the US presidential elections in November, free trade and other global endeavours will suffer a setback that will stall progress for years. Lamented one panellist: “How can we envisage collaborating on critical issues such as climate change and poverty if we cannot collaborate on Doha?” In the meantime, Asian countries are certainly collaborating together, with intra-Asian trade growing faster than trade between Asia and the rest of the world (see Figure 2). Figure 2: Trade within Asia Exports within developing Asia represent a growing share of all exports from developing Asia 45%

Intra-Asia exports as a percentage of all exports from developing Asia*

Another looming global risk is the rise of protectionism. There are worrying signs that politicians in Europe and the United States are prepared to introduce policies to shield their domestic industries in view of the global economic slowdown, observed several participants. Sharply critical of politicians who pander to their electorate, meeting Co-Chair Lord Levene cautioned Western developed economies that erecting protectionist barriers would backfire. “If you go to any Wal-Mart store in the US, about 60% to 80% of everything is made in China. If you cut off all that manufacturing and say you are going to produce these things domestically, the cost will go up to levels such that the public – which enjoys a high standard of living now – will not be able to buy these things anymore.”

43

41

39

37 1999

2000

2001

2002

2003

2004

2005

2006

* Excludes Japan

Source: IMF Direction of Trade Statistics

Security in the region was yet another concern vexing participants. The United States’ heavy involvement in Iraq and Afghanistan in recent years has raised doubts over its commitment to East Asia. Coupled with the rise of China and India, the region faces an emerging security dilemma that may potentially threaten its prosperity. What should replace a US-centric security architecture if it is deemed irrelevant in a multipolar world order?

The Systemic Financial Risks ahead for Asia

The international credit drought created by the US subprime meltdown has challenged the underlying risk management models of both central bankers and industry executives. While there has not been a decoupling of Asian and US financial markets as a result of the interconnectedness of financial systems, the current financial turmoil does not pose systemic risks to countries in East Asia. This was the unanimous assessment of panellists in a session on financial risk, including Shaukat Aziz, Prime Minister of Pakistan, (2004-2007); Nobuyoshi John Ehara, Partner and Representative Director, Unison Capital, Japan; Benjamin Jenkins, Senior Managing Director, Blackstone Group, Hong Kong SAR; and Zeti Akhtar Aziz, Governor, Bank Negara Malaysia, Malaysia. They pointed out the need to differentiate between capital markets and the real economy. While Asian countries have seen a dent in their equity markets in tandem with the fall in US stock markets, most Asian economies are still recording good growth, unlike their Western counterparts. Summing up the sentiment of most of the panellists, one participant said: “When we faced the financial crisis 10 years ago, all analysts and the IMF said we would have a lost decade. But there was a quick resumption of growth for most countries in the region. That is due to the flexibility of Asian economies, which were able to bounce back in a short space of time. Therefore, in the current environment, if we strip away the contagion effect from the sub-prime crisis and look at the economies, I’m optimistic.”

At a panel discussion on the issue, participants were confident that US troops are not likely to significantly reduce their troop presence in Asia. Even in the event of a diminished US military role in the region, most were optimistic that closer ties between China and Taiwan will offset the reduced presence. Cross-strait relations recently improved when both sides signed a pact to improve economic and cultural links. Better relations further north are also helping to lessen tensions. Beijing and Tokyo have just concluded a landmark deal to set aside a territorial dispute and jointly develop natural gas fields in the East China Sea.

Zeti Akhtar Aziz, Governor, Bank Negara Malaysia, Malaysia

Participants voiced their belief that, a year from now, Asia will remain the fastest-growing region in the world because of its resilience in absorbing the shocks from the current financial crisis, its talented pool of human capital, competitiveness relative to other parts of the world, and political stability. Turning to the issue of inflation, most of the panellists agreed that it is a threat that must be addressed immediately as the situation is fermenting social unrest. However, they were cognizant of the difficulty Asian governments face in balancing the seemingly conflicting interests of monetary policy and economic growth.

Even the US, one panellist noted, is gradually changing its mindset and has come to realize that military force itself does not guarantee security in Asia. He observed that the US is increasingly more supportive of using regional forums to deal with security issues (e.g. its recent appointment of a permanent ambassador to ASEAN). Some participants suggested that the ASEAN Regional Forum (ARF) play this prime role. They proposed that the ARF should be expanded to create a pan-Asian dialogue and added that the US, Europe and Russia should not be left out of this expanded forum.

Most panellists favoured having a less formal multilateral security arrangement over a new regional military alliance. They noted that ad hoc and less institutional arrangements have served the region well and cooperation should continue in this less rigid format, citing the six-party talks on North Korea and collaboration among the navies of the US, Australia, India and Japan during the Asian tsunami crisis as examples of success. 15 | World Economic Forum on East Asia

Sustainable Growth

“Governments should take the shortterm pressures and challenges and turn them into opportunities, such as seeking alternative fuel resources and increasing efficiency in oil and food consumption.” Ahn Ho-Young, Deputy Minister for Trade of the Republic of Korea

An overwhelming 81% of business leaders responding to a World Economic Forum survey voted for “addressing growing global concern over environmental challenges such as climate change and water” as the top choice of issues with the greatest impact on Asia. Other major concerns included “preventing political and economic instability linked to rising food and energy prices” and “managing the social, environmental and infrastructural implications of rapid urbanization”. Notwithstanding, at the World Economic Forum on East Asia, climate change and water were somewhat sidelined by the clear and present danger of spiralling food and fuel prices. Food, fuel and finance, or the “Three Fs”, as Ahn HoYoung, Deputy Minister for Trade of the Republic of Korea, put it, were hot topics as rising prices have stoked public anger and sparked demonstrations

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across Asia in recent months. The morning Ahn spoke at a panel session, the front page of a Korean newspaper carried a photograph of more than 5,000 truck drivers striking in South Korea, demanding that the government increase subsidies for fuel, authorize higher freight charges and introduce a minimum wage. Demonstrations were also held in Indonesia, Malaysia, India, Thailand, Myanmar, Hong Kong and Nepal, where prices of daily necessities like rice, corn, soybeans, cooking oil, kerosene and gasoline have surged. Governments have been forced into quick-fix actions including reductions in import tariffs on agriculture products, cash rebates on petrol and diesel and incentives for farmers to increase productivity. Fuel subsidies are common in Asia’s developing countries – they account for 2% of India’s GDP and 30% of Indonesia’s budget. Governments risk fomenting political unrest if they raise prices or cut subsidies, as those affected are mainly poor people who spend the bulk of their earnings on food and transport. Last year’s mass protest in Myanmar – the country’s largest in 20 years – and the resulting military crackdown followed announcements by the government of hikes in gasoline and diesel prices. Mari Pangestu, Minister of Trade of Indonesia, said her government responded to the global shock of rising food and fuel prices by lowering tariffs related to agriculture products. It tries not to control fuel prices, which have increased by 30%, preferring to let domestic prices adjust as gradually as possible. At the same time, the government aims to ease the burden

of rising food prices by giving incentives to farmers to expand production, especially of crops that can be harvested quickly.

“Water systems are so Balkanized [that] it’s difficult to get a comprehensive view of how to use the resources efficiently.”

In South Korea, the government introduced a US$ 10 billion programme of short- and long-term solutions to benefit small enterprises and low-income workers. “This is a clarion call for us to reduce our dependence on foreign oil,” said Ahn.

CH2M HILL Companies, USA; Co-Chair of the World Economic

Inflation aside, the falling US dollar is also adding to Asia’s economic woes. The faltering currency is making locally manufactured goods relatively more expensive in dollar terms and, coupled with the sharp slowdown in the US economy, is threatening to undermine Asia’s much-vaunted export power. Day to day, currency volatility is hampering the ability of businesses to run their operations and plan strategy. Exports have held up so far, thanks to gains in Asian productivity and growing intra-regional trade. Whether the strengthening of Asian currencies is a long-term phenomenon remains to be seen.

Ralph R. Peterson, Chairman and Chief Executive Officer, Forum on East Asia

Asian companies need to find innovative ways to get around resource constraints and infrastructure bottlenecks. Solutions could include telecommuting and the creation of smaller urban centres. Some participants argued that mounting urbanization would lead to more pressure for democracy, which Asian governments may not be able to ignore. Local governments could become more powerful engines of change than central governments. Figure 1: Water Rates Around the World Water tariffs across Asia are lower than in other developing countries

$1.25

1.00

Average water tariff (US$/kl)

Also straining resources is the growing urbanization of Asia resulting from rural-urban migration. This has also widened the gaps in infrastructure and skilled human capital in many of the region’s economies. Participants debated whether the private or public sector should take the lead, or whether public-private partnerships should be the main catalysts for change. Explosive growth has outpaced the capacity of institutions to supply skills.

.75

.50

.25

0 OECD

Latin America Caribbean

Middle East North Africa

East Asia Pacific

Eastern and Central Asia

South Asia

Source: World Bank, 2005

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Klaus Schwab, Founder and Executive Chairman, World Economic Forum; Takao Kusakari, Chairman, Nippon Yusen Kabushiki Kaisha (NYK Line), Japan; Co-Chair of the World Economic Forum on East Asia; Lee Bill Byunghoon, Chairman and Chief Executive Officer, Univera, Republic of Korea; and Yoshitaka Kitao, Representative Director and Chief Executive Officer, SBI Holdings, Japan

Another pressing long-term concern is the gradual depletion of Asia’s resources, including water. Overexploitation, excessively low tariffs (see Figure 1), rapid urbanization, industrial pollution and climate change have exacted a heavy toll on this precious resource. Growing affluence in China and India have also led to a higher meat diet, which requires 10 times more water than a vegetarian diet. Co-Chair BrabeckLetmathe did not mince words when he repeated this warning: “We will be running out of water long before we run out of oil.” He lamented that more of the world’s GDP has been devoted to the climate change issue and not enough resources allocated to water. “One out of every five children is dying every 20 seconds because we haven’t been able to solve the problem of clean water today,” said BrabeckLetmathe. Meeting Co-Chair Peterson called for more political and institutional collaboration, saying that the water systems are “so Balkanized [that] it’s difficult to get a comprehensive view of how to use the resources efficiently.” He noted that water is not free and the sooner market forces are applied to the pricing of water, the better. A more realistic pricing would minimize leakage and act as a deterrent to wastage. Water tariffs across Asia are among the lowest in the world. The issue of water, like climate change, is gaining more awareness as Asian corporations consider their social responsibilities in championing the cause of

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sustainable growth. Many are realizing that regional and international agendas are increasingly forming around universal issues, and environment-related problems such as sustainable resources and health affect all countries and, consequently, all businesses. Corporate engagement can take five forms: corporate governance, corporate philanthropy, corporate social responsibility (CSR), social entrepreneurship and corporate global citizenship. Corporate global citizenship and CSR are distinct but interlinked. CSR programmes often include incentives to promote the environment. Companies can encourage fuel savings, sustainable farming and clean air with a variety of financing incentives and technological innovation. Japanese shipping line Nippon Yusen Kabushiki Kaisha (NYK Line), for example, has cut its fuel bill by 9% by taking advantage of sea currents to help its vessels sail. Corporate global citizenship and CSR activities are most effective when aligned with a corporation’s own unique resources. Goodyear Tire Management Company (Shanghai), for example, conducts free inspections for cars in China and researches the potential use of new materials, such as corn, to make tyres. By becoming more aware of how interconnected the world and its trading systems have become, Asian enterprises are slowly but surely stepping up to their responsibilities of being good global corporate citizens.

“We will be running out of water long before we run out of oil.” Peter Brabeck-Letmathe, Chairman of the Board, Nestlé, Switzerland; Member of the Foundation Board of the World Economic Forum; Co-Chair of the World Economic Forum on East Asia

Managing Asia’s Most Valuable Resource Rapid urbanization, industrialization, changing diets and climate change are aggravating the effects of unsustainable water use in Asia. The first issue is lack of awareness by most countries and policy-makers of the urgency and scale of the impending global water crisis. People expect water to be available and inexpensive, but don’t realize that, like oil, it is a scarce commodity. There is also a need to create greater awareness of the use of water for agriculture, which normally uses the largest proportion of the supply. The second issue is fixing the problems in developing countries. One-third of the world still does not have access to clean water despite technological advances and assistance from developed countries. In fact, whether run by the public or private sector, water leakage and pollution continue to plague both developed and developing countries. While water supply in most countries is managed mostly by the public sector, there is no clear consensus as to who can do a better job in preventing such problems.

Water should be viewed on a more multidimensional scale, because it is interconnected with issues like climate change and other global problems. This would help overcome constraints developed countries experience when devoting resources to water separately. Water pricing was a favoured measure among leaders at the World Economic Forum on East Asia in Kuala Lumpur. One suggested providing a minimum level to meet “human rights” requirements free of charge, and pricing upwards to encourage proper usage. Finally, more research is needed to produce hard-hitting facts and figures to convey the severity of the problem.

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Competitiveness

With the downturn in the US and the resulting slowdown in the global economy, Asia’s economies, particularly the fast-growing giants China and India, have been recognized for providing a “cushion” for the rest of the world. “In the short run, Asia will take up the slack,” said Azman Mokhtar, Managing Director, Khazanah Nasional, the investment holding arm of the Malaysian government. This is a significant turnaround from 1997-1998, when a financial crisis hobbled East Asia and pushed many of the region’s economies into recession, wiping out significant wealth and pushing many people back into poverty. This has certainly heightened the perception that the global economic centre of gravity is inexorably shifting to Asia. Days after the meeting in Kuala Lumpur ended, the news that Hong Kong and Singapore took the top two positions in the Enabling Trade Index ranking released by the World Economic Forum served as further evidence of East Asia’s economic strength and openness to trade and investment. But it is important to maintain perspective. While East Asian growth may be strong and its economies are certainly in better condition and more resilient than they were a decade ago when the financial crisis hit, most of the region’s economies are not as competitive as they may be perceived. Only Singapore, at number seven, ranked in the top 10 on the World Economic Forum’s 2007-2008 Global Competitiveness Index. Other top East Asian performers included South Korea (11), Hong Kong SAR (12) and Taiwan, China (14). The People’s Republic of China, meanwhile, ranked 34th, while India was 48th. Cambodia came in at 110.

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“Economic globalization and regional integration will further promote cooperation among Asian countries and Asia will be the most dynamic region and backbone of the world economy.” Huang Xingguo, Mayor ot Tianjin, People's Republic of China

Indeed, with the storms in the global economy and high energy and food prices raising uncertainties about the benefits of globalization, “the question is whether Asia can maintain its growth momentum against strong headwinds,” said Børge Brende, Managing Director, World Economic Forum. Certainly, there is cause for concern that some Asian economies are in trouble. “Given the deep integration of the global economy, the slowdown is having a great impact on our economies,” Vu Van Ninh, Minister of Finance of Vietnam, explained. “Vietnam is being impacted especially by high inflation. We in Asia should work together to find solutions.” Implicit in Brende’s observation is a warning that Asian economies cannot be complacent and must focus on improving productivity and boosting competitiveness if they are to become an authentic and sustainable driver of growth in the world economy and not just a reliable “cushion”. As Vu pointed out, the way to find solutions is to collaborate. Reckoned Yoshimi Watanabe, Minister of Financial Services and

“The international institutions we have at the moment are woefully inadequate to meet the global challenges. If we are providing the bulk of the incremental growth globally, we Asian nations have a vested and immediate interest in making sure that the global institutions respond to the global crisis as they should.” Yashwant Sinha, Member of Parliament; Minister of External

collaboration and the forming of partnerships. Consider the plaintive question of one participant: “Do we need to replicate everything?” He wondered aloud whether it makes sense for neighbouring countries to build airports and seaports so close to each other. National pride and the drive to preserve one’s turf have, in many instances, stifled logic and the understanding that collaboration can make everyone more competitive and result in win-win solutions. Politics and competing motives have impeded the creation of effective public-private partnerships, which today are regarded as critical to development success.

Affairs (2002-2004) and Minister of Finance of India (1998-2002)

Administrative Reform of Japan: “We are in the same boat; we share the same destiny.” A paradoxical principle for success in the global economy is that collaboration can enhance competitiveness. Faced with the emergence of China and India, the 10 nations of South-East Asia have come to understand and accept that they must collaborate and aim to create a European Union-style community if they are to remain competitive and relevant in the global economic landscape. But creating the political and commercial will to embrace such an enterprise has been difficult. In Asian economies, many participants observed, governments or major family-owned corporations with vested interests control much of the value. National interests and protectionist tendencies have limited

But all this is changing in Asia, however gradually. Governments are starting to collaborate on critical issues including financial market stability, energy security and the environment. But the level of cooperation, despite the ambitions of ASEAN, remains low. Corporations are also cooperating – enterprises with suppliers, partner with partner, and even competitor with competitor. Collaborators must understand how the other business works. For a successful venture, it is important to understand the “psyche” of the organization, and have a shared vision, aspiration and culture. As in a marriage, both sides have to work to make the relationship prosper. There is further cause for optimism on the research and development front. In the session entitled The Myths and Realities of the R&D Advantage, panellists provided insights into how Asia is emerging as a major hotbed of research and development, which has led to the rise in innovation – the transformation of ideas

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Kishore Mahbubani, Dean, Lee Kuan Yew School of Public Policy, Singapore

into commercial value – coming out of the region in recent years. India and China are increasing their R&D spending by over 25% per year (see Figure 1). Moves like these are correcting perceptions that Asia’s main advantage is its pool of cheap labour.

Figure 1: Worldwide R&D Spending R&D spending in China and India is growing rapidly, but from a small base

Change in R&D intensity, 2005-06 (R&D spending as a percentage of revenues)

0.4%

Indeed, the globalization of best practices, if embraced by the region, is likely to be Asia’s trump card – the way in which it finally transforms its governments and companies into flexible and innovative institutions and competitive enterprises such as Japan’s Toyota. The automotive giant has proven that collaboration within the group is integral to its success and a sense of community enhances the effectiveness and cooperation of employees and suppliers.

North America $194.2 0.2

India/China $2.1 0

Japan $96.3

Europe $132.6

-0.2 Rest of World $21.4 -0.4 0

5

10 20 15 One year growth in R&D spend, 2005-06

25

30%

Note: Size of circle represents relative size of R&D spend, 2006. All figures in US$, billions

Source: Booz & Company’s Global Innovation 1000 study

In the discussion, panellists focused on how collaborative efforts within enterprises and among companies have yielded significant opportunities for “research arbitrage” and boosted the productivity of enterprises in such sectors as pharmaceuticals, healthcare, manufacturing and IT. In addition, the shortage of talent – not just skilled managers but for technical specialists such as engineers and workers with vocational skills – means that business and government must work together to enhance the quality of educational institutions from the primary level upwards.

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In short, governance in both the private and public sectors must be improved if Asia is to transcend from “cushion” to fine-tuned “engine” of competitiveness. In the session on Delivering a Governance Dividend for Asia, Shaukat Aziz, Prime Minister of Pakistan (20042007), provided a template for a new paradigm of governance that emphasizes delivery and substance. Governments, he stressed, need to retool and reform at all levels to quickly meet new challenges such as the food and energy crises. Strong leadership at the top is essential, with those in authority taking preemptive measures to head off problems, rather than simply reacting to events. “Things move so fast,” warned Aziz, who could well have been speaking about the business sector too. “You have got to apply new solutions to deal with new challenges that emerge. To do that, you need proactive government, strong leadership and a bureaucracy that will support change. You need a total shift in thinking.”

Competitiveness in East Asia The general perception is that Asians are not just competitive; they are hyper-competitive. But is this perception representative? The truth draws a more nuanced picture as the region encompasses a large range of competitiveness performances, from highly competitive countries to those among the most challenged. This provides an extremely heterogeneous picture with respect to the levels of economic growth and prosperity achieved in the region.

In this sense, can one prioritize the key factors on which countries in the region should focus to become more competitive? Innovation and business sophistication is crucial for the top-tier countries; improving the quality of human capital and market efficiency provides a basis for development and growth for the middle ranking countries; and factors such as improving basic education, health systems and infrastructure are critical for the lowest-ranked economies.

In The Global Competitiveness Report 2007-2008, nine Asia Pacific countries are among the top 30 in the index rankings, led by Singapore, Japan, South Korea and Hong Kong. The countries in the next tier are among the largest markets in the region, led by China and India. A number of smaller economies close the ranking for the region, with Mongolia, Bangladesh, Cambodia, Nepal and Timor-Leste all positioned at the very bottom.

The World Economic Forum on East Asia addressed, in its various sessions, the drivers of economic development and, more specifically, held a discussion on identifying best practices in competitiveness. The session highlighted a need for a solid macroeconomic architecture including strong and transparent governance, public-private sector alignment, an efficient business infrastructure, openness to international trade and investment, among other factors.

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Acknowledgements

The World Economic Forum on East Asia is held with the support of the Institute of Strategic and International Studies (ISIS) Malaysia. 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 American International Group (AIG) Bain & Company Barclays PLC Credit Suisse Forbes Kudelski Group Manpower Marsh & McLennan Companies (MMC) NBC Universal Nestlé SK Group Unilever WPP Zurich Financial Services

Regional Partner Sicpa Holding

Meeting Supporters Lloyd’s Ogilvy Public Relations Worldwide Sime Darby

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Contributors

Sushant Palakurthi Rao is Director, Head of Asia, at the World Economic Forum. W. Lee Howell is Senior Director, Head of Programming, and Senior Adviser, Asia, at the Forum. The World Economic Forum on East Asia was under their direct responsibility, with Laura de Wolf, Senior Specialist, Events and Meeting Coordinator; and Fabien Clerc, Community Relations Manager, Asia. Samantha Tonkin, Senior Media Manager at the World Economic Forum, worked with Ciara Browne, Senior Community Manager, Catherine Ong, Alejandro Reyes and Wong Soo How to produce this report. The World Economic Forum would like to express its appreciation to the summary writers for their work at the meeting. Session summaries are available at: www.weforum.org/eastasia2008/summaries Editing: Janet Hill, Editor Design and Layout: Kamal Kimaoui, Associate Principal, Production and Design Photographs: Azmi Abdul Alim

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The World Economic Forum on East Asia Report is also available in electronic form on the World Economic Forum website: http://www.weforum.org/summitreports/eastasia2008 (HTML) The electronic version of this report allows access to a richer level of content from the meeting, including photographs, session summaries and webcasts of selected sessions. The report is also available as a PDF: http://www.weforum.org/pdf/summitreports/eastasia2008.pdf Other specific information on the World Economic Forum on East Asia, Kuala Lumpur, Malaysia 15-16 June 2008, can be found at the following links:

Meeting News Session Summaries Photographs Programme Interviews Partners Webcasts

www.weforum.org/eastasia2008 www.weforum.org/eastasia2008/summaries www.pbase.com/forumweb/eastasia2008 www.weforum.org/eastasia2008/programme www.weforum.org/eastasia2008/regionalupdate www.weforum.org/eastasia2008/partners www.weforum.org/eastasia2008/webcasts

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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)