World Economic Forum on East Asia 2006
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  • 1. WORLD ECONOMIC FORUM World Economic Forum on East Asia Creating a New Agenda for Asian Integration Tokyo, 15-16 June 2006 INSIGHTS
  • 2. 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: contact@weforum.org 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
  • 3. 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 1 World Economic Forum on East Asia
  • 4. 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 3 World Economic Forum on East Asia
  • 5. Summary – Creating a New Agenda for Asian Integration “We must look at the big “The challenge we have in picture and not let the the 21st century is to baggage of history deter reconcile our global, us.” national and regional identities. The key will be to Najib Tun Razak make sure we keep up to Deputy Prime Minister of our global responsibilities.” Malaysia Klaus Schwab Founder and Executive Chairman, World Economic Forum “The new century belongs to Asia” agreed more than This will require cooperation on a range of urgent 300 senior government, business and civil society issues including energy efficiency and environmental leaders at the World Economic Forum on East Asia. protection, corporate social responsibility, widening The region will fulfil this potential, participants said, the access to financial markets, education reform, provided it meets the following top challenges: poverty alleviation and the sharing of technology. In addition, the rest of the region and its partners must • Create or assign regional institutions to discuss also individually and collectively address the energy, security and environmental issues commercial and political implications of the surging • Address the impact of Indian and Chinese growth growth of China and India, as well as Japan’s on the future competitiveness of South-East Asia economic recovery. • Increase energy efficiency in major consuming countries and industries “Increased market-driven integration and economic • Sustain Japan’s recovery while cutting its fiscal cooperation in the region are creating a more open deficit and resolve Japan’s historical and territorial and frank dialogue on pressing issues such as disputes with China and Korea corporate social responsibility, energy efficiency and the enhancement of regional dialogue,” said Peter More than half of the meeting’s participants prioritized Torreele, Managing Director, World Economic Forum. these issues of paramount concern in a survey conducted in the closing plenary session. The consensus among participants was that business and civil society should take the lead in speeding up Participants concluded that existing regional the region’s “market driven” integration. But they also institutions and networks are not yet capable of called on governments and political leaders to tackle confronting the many interconnected threats posed geopolitical problems such as maritime piracy, by the pressures of globalization and the rise of migration, and in particular, long-standing disputes competition in the global market. To meet emerging over territorial claims, interpretations of history and risks, they called for a new agenda for Asian nationalist sentiment that could lead to conflict. integration. 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, “The new century belongs to Asia. But at the same time we need to seriously tackle the many challenges we face Davos and Singapore, where next year’s World today.” Economic Forum on East Asia will take place on 24-25 June 2007. Jiang Jianqing Chairman of the Board, Industrial and Commercial Bank of China, People’s Republic of China 4 World Economic Forum on East Asia
  • 6. “The process of realizing “If you can’t beat India or East Asian integration China, you have to join depends very much on the them.” political will and trust of our countries as there is a big Mari Pangestu Minister of Trade of Indonesia gap in the levels of development.” Hoang Trung Hai Minister of Industry of Vietnam Integration & Identity Competitiveness & Creativity The proliferation of global and regional risks from East Asian economies are facing heightened pandemics to piracy on the high seas is putting competition for trade and investment from China and pressure on East Asia to deepen integration. India. • The institution-heavy European Union model is • Companies are integrating Asia and its range of not appropriate for the region. manufacturing platforms and service providers into • East Asia will continue to pursue its “soft- the global supply chain, further stimulating trade institution”, “bottom-up” approach, in which the and investment in the region. drivers of integration are business and civil • The web of free trade arrangements that are under society. construction across the region will create a pan- • Governments must still deal with cross-border Asian market of over 3 billion people. problems such as migration that require • Enterprises and countries have to develop the cooperative solutions. human resources and technology they need to • Historical enmities between countries should be create profitable niches in the global economy. resolved to allow for enhanced integration. Countries should not let these disputes impede the integration agenda. quot;Oil consuming countries “ASEAN has to be more in Asia need to cooperate effective in differentiating to promote more efficient niche positions.” energy usage, develop Sir Martin Sorrell and share energy-efficient Group Chief Executive, WPP, technologies and promote United Kingdom; Co-Chair, energy security.quot; World Economic Forum on East Asia Zhang Xiaoqiang Vice-Chairman, National Development and Reform Commission, People's Republic of China 5 World Economic Forum on East Asia
  • 7. “If the major consuming “We’re about to go through countries are more energy a core transformation.” efficient, this can help stabilize energy prices and Junichi Ujiie Chairman, Nomura Holdings, benefit the rest of the Japan; Co-Chair, World 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 The emergence of China and India is heightening environmental degradation are serious risks to competitive pressure on Japan. sustaining Asia’s growth. • Japan’s current economic recovery is being • Poverty and rural discontent can lead to extremism driven by legacy sectors of the economy. and social unrest that could threaten stability in • To sustain growth, Japan must find ways to many countries. build on successes in IT and financial services, • Energy inefficiency in China is a global concern, where reforms unleashed much-needed given its effects on the environment and on global structural changes. energy markets. • Japan must address its growing fiscal deficit by • These problems require a concerted regional increasing productivity and the productive use response to improve energy security and share of capital. energy-saving technologies. • To do so will require innovation, a willingness to • Exchanges among countries in the region will break with tradition and strong political mitigate the threat to stability from simmering leadership. historical disputes. • Japanese leaders must also build bridges with their East Asian neighbours. “We also see within “Japan will continue to try countries and within the to reduce barriers to Asian region the widening gap of trade by pursuing bilateral the rich and the poor in the and multilateral free-trade region. This is a risk of agreements with its Asian instability.” trading partners.” Hassan Marican Toshihiro Nikai President and Chief Executive Minister of Economy, Trade and Officer, PETRONAS (Petroliam Industry of Japan Nasional), Malaysia; Co-Chair, World Economic Forum on East Asia 6 World Economic Forum on East Asia
  • 8. Integration & Identity revealing how many young Europeans now value their national identities over a regional one. “The assumption that an older society can’t create wealth is wrong. You just Crises of course have a way of forcing mindsets to can’t have people being old change. The financial meltdown of 1997-98, 9/11 and and disabled; you need to the terrorist attacks in Bali and elsewhere, the have them in the workforce.” outbreaks of the SARS virus and avian flu, and cross- border problems such as the haze from forest fires in Henry A. McKinnell Indonesia and maritime piracy on the Straits of Chairman and Chief Executive Malacca – all these challenges have highlighted the Officer, Pfizer, USA; Vice- Chairman of the Foundation deficiencies of the region’s minimalist approach to Board of the World Economic greater unity. The integration of India further into East Forum; Co-Chair, World Asia and the emergence of China as a trading Economic Forum on East Asia powerhouse and investment magnet have raised the stakes. See Figure 1. East Asian integration has been mainly an informal “market driven” process with weak institutions. The Figure 1: ASEAN has continued attracting proliferation of global and regional risks requires a strong FDI inflows, with a larger FDI stock much more intensive approach, but it is unlikely that than “Chindia” 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. 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-common- denominator 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 Source: UNCTAD World Investment Report 2005 underpinning for the European Union have stalled, 7 World Economic Forum on East Asia
  • 9. “We should make an effort As these pressures of globalization and competition to better understand each continue to mount, Asians have begun to question other’s history and customs to increase mutual old notions. With global and regional risks understanding. If we hang multiplying, requiring global and regional solutions, on to the past, we are only the implication for East Asia’s integration is clear: impeding each other’s the good-fences-good-neighbours model is progress.” unsustainable. Yun Jong-Yong Vice-Chairman and Chief But the region is still trying to figure out how to turn Executive Officer, Samsung the neighbourhood into a community. Overlapping Electronics, Republic of Korea; Co-Chair of the World Economic regionalization options have proliferated in recent Forum on East Asia 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 Hellmut Schutte, Dean, Asia Campus, INSEAD, keeping alive its grand vision of free and open trade Singapore, “we have to be honest: for 40 years, and investment among its 23 members, which ASEAN hasn’t been very successful. We are seeing together account for about half of global trade, by the end of ASEAN. The year 2020 will not be a 2010 for developed economies and 2020 for target [for industrialization]. ASEAN will be buried developing ones. The number of bilateral free trade beforehand.” An extreme view perhaps, but arrangements across the region has increased as indicative of the frustration among some the Doha Round of global trade talks continues to participants and the urgent need for more intensive flag. communication among East Asian countries. That meeting participants identified But EU-style integration cannot the need to address the be forced, some panellists absence of regional warned. The soft- institutions to discuss institution approach with energy, security and weak monetary environmental issues as integration would a top priority for the prevail, Indonesian region – when APEC Trade Minister and ASEAN have Mari Pangestu long offered such predicted. forums – indicates Because of its a lack of “honest broker” awareness. “We role between the have not been major economies effective in of North Asia and communicating the India, “ASEAN will work we do,” Ong be in the driver’s Keng-Yong, Secretary- seat.” East Asia, General, ASEAN, Pangestu reckoned, Jakarta, acknowledged. would continue to Added Tran Trong Toan, pursue “market driven” Executive Director, APEC integration – what Sadako Secretariat, Singapore: “We don’t Ogata, President, Japan shout out loudly about what we have.” International Cooperation Agency, called the “bottom-up” approach. Yet the selection of participants was also a telling Business, civil society and other “non-state actors” rebuke of integration performance so far. When it will push regionalization forward through the comes to regional economic integration, said multitude of cross-border commercial and cultural 8 World Economic Forum on East Asia
  • 10. connections and exchanges that take place every day. Asia’s Risk Factors Indeed, for Asia’s growing number of globally integrated enterprises such as Samsung, borders are Participants in a Global Risk Network workshop already meaningless. expressed concern about the mounting economic, geopolitical and societal risks facing East Asia. There is still a role for governments in pushing integration forward, said Najib Tun Razak, Deputy Global fiscal imbalances brought on by the large Prime Minister of Malaysia. Common challenges such surpluses accumulated by Asian countries and the as maritime piracy and migration require cooperation. US twin deficit were rated a major source of Migration, for example, will have to be part of the economic risk. Perceived as particularly relevant in solution to the problem of ageing demographics in Japan, but also in South Korea and China, is the Japan. “We must look at the big picture and not let the risk of fiscal crises as a result of a rapidly ageing baggage of history deter us,” Najib concluded. society. Societal risk in the region includes potential breakdowns of control in restive rural areas in China Yet heightened tensions between Japan and its and growing shortages of both oil and clean drinking neighbours Korea and China, as well as concerns water. about potential conflict on the Korean Peninsula and The workshop also highlighted the lack of visionary across the Taiwan Strait, could easily derail the East political leadership in the region, as well as the Asian integration train. “Parochial nationalism,” said absence of an overarching regional security Chen Feng, Chairman, China Hainan Airlines, People’s framework, as negative factors affecting efficient risk Republic of China, “must be eliminated.” mitigation strategies. Peter M. Beck, Director, International Crisis Group Participants' impressions of risks facing Asia (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 An issue survey conducted among the participants understanding,” said Yun Jong-Yong, Vice-Chairman in the closing plenary session of the World and Chief Executive Officer, Samsung Electronics, Economic Forum on East Asia complemented the Republic of Korea, and a Co-Chair of the World workshop findings. Participants ranked the lack of Economic Forum on East Asia. “If we hang on to the energy efficiency in major consuming countries and past, we are only impeding each other’s progress.” 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 World Economic Forum on East Asia
  • 11. Competitiveness & Creativity “We tend to think of Figure 2: China and India are experiencing innovation in terms of faster per capita economic growth than products and patents. But it’s ASEAN also about business models and processes.” 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 Source: World Trade Organization statistics nations to use manufactured exports as an easy Fortunately, Asia has China and India to help it avenue to jobs and economic growth. Fortunately, cope with the “Chindia” phenomenon. Companies Asia has two potent tools to help it cope with increasingly use Asia as links in a global supply China and India – China and India. Companies chain that relies on intra-Asian trade and increasingly use Asia as part of a global supply investment. Breakneck growth in China and India is chain that is stimulating trade and investment within also producing bottlenecks, shortages of skilled Asia. And free trade pacts being negotiated labour and rapid cost increases that are compelling between the Association of Southeast Asian many foreign direct investors to spread some Nations (ASEAN), India, China and Japan promise production and services back towards South-East to create a pan-Asian market of over 3 billion Asia, and even to Japan. As a result, intra-Asian people. But companies and countries alike will have trade already accounts for roughly half of all Asian to continue struggling for ways to harness the imports and exports. And, while Asia serves as a region’s talent and technologies in order to create major investor into China and India, investment new niches for themselves in the global economy. flows into China and India now correspond with higher – not lower – foreign investment into the rest The rise of China and India as competitors for trade of Asia. and investment has shattered the post-war Asian formula for creating jobs and economic growth: In the rapidly evolving global economy, however, channelling public savings into manufactured even the concept of innovation is getting a exports. With China slowly catching up in the makeover. “We tend to think of innovation in terms manufacture of the most sophisticated electronics of products and patents,” said meeting Co-Chair and India gobbling up information-based services, Nandan M. Nilekani, President, Chief Executive the rest of Asia is in a squeeze. As Figure 2 shows, Officer and Managing Director, Infosys per capita incomes in China and India are growing Technologies, India; Member of the Foundation faster than anywhere else in the region. So while Board of the World Economic Forum. “But it’s also they occupy opposite ends of the development about business models and processes.” spectrum, Japan, Korea and the 10 members of ASEAN face a renewed challenge to reinvent For companies, that means using information themselves, find new export niches and generate technology to become a global company. It also domestic engines of growth. In short, they must means conceiving of new products that take innovate or stagnate. advantage of the borderless, collaborative market that the Internet has created. 10 World Economic Forum on East Asia
  • 12. Asia has demonstrated significant achievement in this purse strings of Japan’s consumer-led economy, but regard. Korea, for example, has become a laboratory are prevented by traditional mores from doing their for broadband Internet-related services. part to raise productivity in Japan’s male- Tech-savvy Japan is also well ahead dominated corporate world. in rolling out fibre optic networks and digital TV. Cellular Also overlooked are older workers. operators, such as NTT “One hundred years ago we created DoCoMo, are moving wealth with manual labour, but beyond telephony into that’s not how wealth gets cellular-based created anymore,” said Henry A. commerce, from McKinnell, Chairman and Chief ticketing to vending Executive Officer, Pfizer, USA; machines. The Vice-Chairman of the Philippines, for Foundation Board of the World example, is proving a Economic Forum; Co-Chair of test bed for turning the World Economic Forum on the cellular phone into East Asia. “The assumption a cash register. that an older society can’t create wealth is wrong. You just Some worry that despite can’t have people being old and such technological disabled; you need to have them in advances, Asia is still the workforce.” dominated by conservative corporate mindsets and resistance Integration is essential to ASEAN as well, to further integration with neighbours of and the regional group is using a free trade different language or race. agreement between its members to help create a common market of 600 million people that can rival In Japan, for example, services and software sectors China and India as a market for labour and are still immature and economists are concerned that consumers. ASEAN is also pursuing trade agreements its recovery from 15 years of economic stagnation is with India, China and Japan aimed at creating an even being led not by an entrepreneurial new economy larger, pan-Asian market of over 3 billion people. As transformation, but by a mere resurrection of its old Figure 3 shows, this market is lucrative, accounting for economy industries. Japan also suffers from what US$ 1.2 billion of world trade in 2004. Yet, as some say is a stubborn insularity. Thus, Japan’s competition within the region increases, branding will research and development educational institutions are become more important, according to Sir Martin not open fully to foreign students and professors with Sorrell, Group Chief Executive, WPP, United Kingdom, the fresh ideas needed to fully exploit the trillions of and Co-Chair of the World Economic Forum on East yen being spent to beef up their R&D facilities, Asia. “ASEAN has to be more effective in differentiating according to Yuichiro Anzai, President, Keio University, niche positions,” he advised. Japan, and Kiyoshi Kurokawa, President, Science Council of Japan. Kurokawa urged bringing in large Figure 3: Asia accounts for more than 25% of numbers of foreign students to revitalize Japanese world trade, and more than half of that is higher education, in much the way Singapore has intra-Asia done. 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 11 World Economic Forum on East Asia
  • 13. “There will be no vitality if “When everyone said the society does not have any Japanese economy was bad disparities. A society where three or four years ago, I everybody makes an effort, wasn't that pessimistic, but and those efforts are now, when people say the rewarded, is preferred. The economy is getting better, I problem lies with disparities don't really feel optimistic… that are fixed. For those What we face now is whether people who fail, we should [Prime Minister Junichiro] have a mechanism so they Koizumi’s successor really can can make another take over his reforms.” challenge.” Heizo Takenaka Minister for Internal Affairs and Kakutaro Kitashiro Communications and for Chairman, Keizai Doyukai, Japan 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
  • 14. Security & Sustainability “Japan has made great technologies. They should also promote exchanges efforts to increase energy that will enhance mutual understanding and defuse efficiency. There has to be such a grand design in the historical misunderstandings. policies of each country.” “The new century belongs to Asia,” Jiang Jianqing, Kunio Nakamura Chairman of the Board, Industrial and Commercial President, Matsushita Electric Industrial Co., Japan 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 Growing income disparities, energy shortages and its own consumers, as Figure 4 demonstrates. pollution pose a risk to growth across Asia. While Ensuring that this kind of growth continues smoothly, poverty serves as a reservoir for militant Islam in however, will depend on finding common solutions to South-East Asia, rural unrest poses a challenge to shared problems such as disparities of income, energy state authority in China. China’s inefficient use of shortages and pollution. energy is causing global environmental problems and placing additional stress on vulnerable supplies of oil There are a host of challenges to Asia’s security and and gas. The region’s problems demand a collective long-term growth: long-simmering rebellions, North response. Politicians and companies should work Korea, terrorism and bird flu just to name a few. None together on ways to improve energy security, reduce of these problems pose as significant a threat, volatility in energy prices and share energy-efficient 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 $21B $20B $69B $52B $7B $66B $73B $11B $3B $3B Note: China includes Hong Kong Source: World Trade Organization 2004 statistics, ASEAN Secretariat, Indian Ministry of Commerce and Industry, Korean International Trade Association, lit search 13 World Economic Forum on East Asia
  • 15. At the same time, one of the hungriest energy “The performance of administrators is judged by consumers, China, is also one of the most GDP growth, tax revenue inefficient. China already consumes more than and jobs created. Energy twice as much energy as Japan and emits three efficiency is simply not in the times as much carbon dioxide. China requires eight vocabulary of bureaucrats.” times as much energy as Japan to produce US$ 1 Xu Xiaonian of economic output as Figure 5 shows. And Professor, Economics and pollution from China is already having a global Finance, China Europe impact. International Business School (CEIBS), People's Republic of China 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 In particular, Asia needs to address the growing pollution. gap between its haves and have-nots. 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. Yet, rather than working with the Japanese to Figure 5: Relative energy efficiency per US$ increase efficiency at home, China’s officials end up 1bn GDP 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
  • 16. For companies in Asia, the potential for disruptions More broadly, Asia’s leaders need a more open demands a comprehensive risk-management policy conversation with each other. Academic exchanges that involves senior management and recognizes that a and joint research efforts are another way to company is only as insulated as the least prepared of deepen the region’s collective pool of knowledge its major suppliers and customers. while bridging the historical and cultural gaps that threaten to divide Asia. “We should make an effort With so much at stake, cooperation between all of to better understand each other’s history and Asia’s stakeholders is key to managing the region’s customs,” said Yun Jong-Yong, Vice-Chairman and risks. Asia’s energy situation in particular demands a Chief Executive Officer, Samsung Electronics, collective response. Oil consuming nations should Republic of Korea, and Co-Chair of the World cooperate on energy security, reducing volatility in Economic Forum on East Asia. “If we hang on to energy prices and sharing energy-efficient the past we are only impeding each other’s technologies. They should also raise the level of progress.” dialogue with oil producers. 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. 15 World Economic Forum on East Asia
  • 17. Regional Change – Japan After its lost decade of stagnation, Japan faces two “For a long time, we placed priority on equality of immediate priorities: how to sustain its economic results. Maybe we should recovery and how to resolve simmering disputes shift to equality of with its neighbours China and Korea. Essential to opportunity.” addressing these challenges are reform and leadership. Economic rebound should not be Sadakazu Tanigaki mistaken for renewal. Japan has to continue to Minister of Finance of Japan 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. The concern today is how Japan can sustain its Figure 6: In Asia, Japan appears to have the recovery and temper its new self-confidence to worst fiscal imbalance 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 Figure 7: Japan has now experienced After a decade of debate over whether stagnating economic growth in nominal terms for three Japan was heading for recovery or relapse, the consecutive years 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 Source: Statistics Bureau, Japan Ministry of Internal Affairs and Communications “Monthly Statistics of Japan (March 2006)” also locked in tense disputes with its neighbours. 16 World Economic Forum on East Asia
  • 18. “It might be warranted to technology are the result of cooperation between the move cautiously to make private sector and the bureaucracy, which together sure we don’t uproot the factors in Japan’s success. agreed that competition should be allowed to drive But we’re talking about the growth in the IT sector. Moreover, the banking system international arena, and was overhauled, with non-performing loans sharply given the change in China, reduced. The unwinding of cross-shareholdings has India and Korea, [reform] is meant that companies are turning more and more to too slow.” the capital markets for financing, spurring Hellmut Schutte entrepreneurship. Further, stock market scandals are a Dean, Asia Campus, INSEAD, wake-up call for Japan to improve standards of Singapore accountability and disclosure. “We’re about to go through a core transformation,” declared meeting Co- Chair Junichi Ujiie, Chairman, Nomura Holdings, Japan. Not everybody is convinced that the creative During Japan’s lost decade, global conditions changed destruction that structural reforms can unleash is good dramatically – China emerged as a formidable global for Japan. “People’s mentalities haven’t changed that manufacturing platform thanks in part to Japanese much,” said Masao Hirano, Director, McKinsey & investment, India became a force in business process Company, Japan. “Many Japanese managers feel outsourcing and the IT services sector, and Korea reform will destroy the Japanese business regime.” rebounded from the Asian financial crisis to turn into Some companies have slowed efforts to increase one of the most tech-savvy economies in the region. transparency standards and accountability. But the As for Japan, some important economic and recalcitrant appear to be a dying breed. political reforms have gone through, but the restructuring agenda remains The enormity of the challenges posed long. “Japan has changed by Japan’s ageing demographics enormously in the last five should be enough to convince all years, but did we change but the most diehard of the sufficiently?” asked Heizo need for strong action and Takenaka, Minister for new, possibly radical Internal Affairs and approaches. For example, Communications and as Figure X shows, tackling for the Privatization of Japan’s huge fiscal deficit, the Postal Services of which is above 5% of Japan. “No. The GDP, is essential to paying world is changing the costs of the growing very fast and ranks of retirees. “From an proactive reform is in economic perspective, the order. We have only solution is that Japan must begun.” raise its productivity and, in particular, the productivity of Economic rebound capital,” said Jesper Koll, should not be mistaken for Managing Director and Chief renewal. “The old economy is Economist, Merrill Lynch Japan leading the current recovery,” Securities Co., Japan. Takenaka pointed out. Meanwhile, the “New Japan” is struggling to Two ways to increase productivity would be to emerge. There have been notable successes. allow in more immigrants and to harness the energy of According to Nobuyuki Idei, Chief Corporate Adviser, the elderly. “One hundred years ago, we created Sony Corporation, Japan, the spread of broadband at wealth with manual labour, but that’s not how wealth low cost to users and the proliferation of 3G mobile 17 World Economic Forum on East Asia
  • 19. “Companies in the private “Competition is happening sector need to compete in in Japan.” within the global market and I think they have Nobuyuki Idei Chief Corporate Adviser, Sony succeeded in achieving a Corporation, Japan basic transformation. But equality in results is something people value… and so the community mindset has not been transformed completely.” Yoshihiko Miyauchi Chairman and Chief Executive Officer, Orix Corporation, Japan gets created anymore,” meeting Co-Chair Henry A. opportunity.” Such moves have sparked a growing McKinnell, Chairman and Chief Executive Officer, debate about the widening income gap that Pfizer, USA; Vice-Chairman of the Foundation economic reforms have brought. Board of the World Economic Forum, explained. “The assumption that an older society can’t create The appointment later this year of a new prime wealth is wrong. You just can’t have people being minister to replace Junichiro Koizumi will be a key old and disabled; you need to have them in the indicator of the zeal for sustaining crucial reforms. It workforce.” will also signal how Japan is likely to manage its relations with its closest neighbours and its growing But this would require a change in cultural norms. role in world affairs. How Japan squares national Some have half-jokingly called Japan the world’s dignity and economic resurgence with its global only successful communist country. It is time that responsibilities and the need to build bridges with Japan shed that image and mindset. “For a long the rest of Asia will be its people’s biggest time, we placed priority on equality of results,” challenge ever. “We know what must be done,” Sadakazu Tanigaki, Minister of Finance of Japan, Takenaka concluded. “The question is whether remarked. “Maybe we should shift to equality of 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
  • 20. 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 Competitiveness & Creativity on East Asia, including several private meetings and – Values: Establish common values to drive growth in workshops on emerging capital markets, the digital globally integrated companies, ensuring that local ecosystem and global risks, continued discussions and cultural differences are not ignored. Too much consultations carried forward from the Annual Meeting globalization can be a bad thing. 2006 in Davos and other regional meetings. Through – Mobility: Use technology to develop innovative frank and open dialogue, more than 300 business, processes and business models that make full use government and civil society leaders sought to apply of a company’s diverse human resources regardless the “creative imperative” in setting “a new agenda for of distance or geography. Asian integration”. Security & Sustainability Following is a selection of creative ideas and – Technology Transfer: Allow major energy approaches that were discussed in Tokyo: consumers access to energy-saving industrial technology developed by Japan and other energy- Integration & Identity efficient countries. – Ageing Demographics: Mitigate the economic – Energy: Create a forum for Japan and Korea to burdens caused by the burgeoning ranks of retirees discuss with the Chinese government and business in Japan and other countries facing ageing leaders China’s energy needs and what its demographics through more open immigration and neighbours can do to help. the deployment of the elderly in the workforce. – Education: Promote youth and student exchanges Regional Change – Japan to boost regional understanding, particularly – Sustainable Development: Deploy Japan’s between Japan and its neighbours. expertise in environmental management to – Regionalization: Review the integration initiatives contribute the technology and skills required to in East Asia to focus strategic thinking and direction. promote sustainable practices in the rest of Asia What kind of integration does Asia want – how do and elsewhere. we get there? More importantly, how can Asia – Mindset: Change the rules to change the mindset. achieve optimum regional integration, while meeting Japan must give second chances to those who fail. its global responsibilities? 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 World Economic Forum on East Asia
  • 21. Leaders forged closer economic ties during the World Economic Forum on East Asia The Secretary-General of the Association of South “Japan should show East Asian Nations gave his support for the the lead in opening its Japanese trade minister’s offer of setting up a free market because for ASEAN as well as for trade area in East Asia. Ong Keng-Yong also the East Asian agreed to Japan’s proposal for a new regional community to policy coordination body modelled on the prosper, we have to Organization for Economic Cooperation and do a lot of trade Development (OECD). among ourselves.” Ong Keng-Yong Japan’s Economy, Trade and Industry Minister Secretary-General, Toshihiro Nikai said that the East Asian version of ASEAN, Jakarta 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 The United States meanwhile is ready to consider forming free trade agreements among the region’s an Asian Currency Unit, Undersecretary of the economies. Treasury for international affairs, Tim Adams, said. Japan and the Asian Development Bank are in favour of creating a weighted basket of Asian ASEAN Secretary-General Ong Keng-Yong gave currencies similar to the European Currency Unit, a assurances that the emerging East Asian precursor of the euro. community would not exclude the United States. 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
  • 22. 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
  • 23. 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.
  • 24. 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)