world economic forum on east asia 2006

WO

RL

D

EC

ON

OM

IC

FO

RU

M

INS

IGH

TS

World Economic Forum onEast Asia

Creating a New Agenda for

Asian Integration

Tokyo, 15-16 June 2006

The views expressed in this publication do notnecessarily reflect those of the World EconomicForum.

World Economic Forum91-93 route de la CapiteCH-1223 Cologny/GenevaSwitzerlandTel.: +41 (0)22 869 1212Fax: +41 (0)22 786 2744E-mail: [email protected]

© 2006 World Economic ForumAll rights reserved.No part of this publication may be reproduced or transmitted inany form or by any means, including photocopying and recording,or by any information storage and retrieval system.

REF: 240706

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

Contents

World Economic Forum on East Asia

3

Preface


Japan’s economic recovery, coupled with the rapid growth of China and India, ischanging mindsets and not just trade and investment flows in Asia. Some believerobust intra-Asian trade will eventually offset the region’s exposure to economic cyclesin the United States. Others see looming challenges linked to demography and totensions rooted in history posing threats to future growth and stability. The themeCreating a New Agenda for Asian Integration highlights the need to re-evaluatestrategic priorities and working assumptions as the region enters an era of newfoundopportunities and emerging risks.

No single institution can be expected to both anticipate and address the region’sevolving agenda. Therefore, the programme of the World Economic Forum on EastAsia was designed to generate insight and guide action in order to improve thealignment of the region’s industry, political and economic agendas. Moreover, theprogramme was organized under four thematic pillars to help participants make themost 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, Koreaand China face the task of adapting to rapidly ageing populations while India andASEAN nations will need to create jobs for growing numbers of young workers, mainlyfrom 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 improvethe competitiveness of ASEAN economies. Thus, business will not only contend withthe scarcity of highly skilled workers in current major markets but also the dangers ofunsustainable income disparities in future growth markets.

Second, building stronger trilateral relations among China, Japan and Korea is not onlycritical for the region’s long-term growth but also for realizing any vision of anintegrated East Asian community. A driver of integration may be the growing regionalconvergence and consolidation across critical growth sectors such as ICT and finance.Alternatively, a failure to deepen regional cooperation in areas linked to Asia’s growingdemand for energy and raw materials may stall the process by promoting unhealthynational and zero-sum strategies.

Lee HowellDirector, Asia

“The new century belongs to Asia” agreed more than300 senior government, business and civil societyleaders at the World Economic Forum on East Asia.The region will fulfil this potential, participants said,provided it meets the following top challenges:

• Create or assign regional institutions to discussenergy, security and environmental issues

• Address the impact of Indian and Chinese growthon the future competitiveness of South-East Asia

• Increase energy efficiency in major consumingcountries and industries

• Sustain Japan’s recovery while cutting its fiscaldeficit and resolve Japan’s historical and territorialdisputes with China and Korea

More than half of the meeting’s participants prioritizedthese issues of paramount concern in a surveyconducted in the closing plenary session.

Participants concluded that existing regionalinstitutions and networks are not yet capable ofconfronting the many interconnected threats posedby the pressures of globalization and the rise ofcompetition in the global market. To meet emergingrisks, they called for a new agenda for Asianintegration.

This will require cooperation on a range of urgentissues including energy efficiency and environmentalprotection, corporate social responsibility, wideningthe access to financial markets, education reform,poverty alleviation and the sharing of technology. Inaddition, the rest of the region and its partners mustalso individually and collectively address thecommercial and political implications of the surginggrowth of China and India, as well as Japan’seconomic recovery.

“Increased market-driven integration and economiccooperation in the region are creating a more openand frank dialogue on pressing issues such ascorporate social responsibility, energy efficiency andthe enhancement of regional dialogue,” said PeterTorreele, Managing Director, World Economic Forum.

The consensus among participants was that businessand civil society should take the lead in speeding upthe region’s “market driven” integration. But they alsocalled on governments and political leaders to tacklegeopolitical problems such as maritime piracy,migration, and in particular, long-standing disputesover territorial claims, interpretations of history andnationalist sentiment that could lead to conflict.

The survey results and the interactive sessions inTokyo will now shape the World Economic Forum’sagenda at future meetings in Beijing, New Delhi,Davos and Singapore, where next year’s WorldEconomic Forum on East Asia will take place on24-25 June 2007.

4

Summary – Creating a New Agenda forAsian Integration


“The challenge we have inthe 21st century is toreconcile our global,national and regionalidentities. The key will be tomake sure we keep up toour global responsibilities.”

Klaus SchwabFounder and ExecutiveChairman, World EconomicForum

“The new century belongs to Asia. But at the same timewe need to seriously tackle the many challenges we facetoday.”

Jiang JianqingChairman of the Board, Industrial and Commercial Bank of China,

People’s Republic of China

“We must look at the bigpicture and not let thebaggage of history deterus.”

Najib Tun RazakDeputy Prime Minister ofMalaysia

5World Economic Forum on East Asia

Competitiveness & Creativity

East Asian economies are facing heightenedcompetition for trade and investment from China andIndia.

• Companies are integrating Asia and its range ofmanufacturing platforms and service providers intothe global supply chain, further stimulating tradeand investment in the region.

• The web of free trade arrangements that are underconstruction across the region will create a pan-Asian market of over 3 billion people.

• Enterprises and countries have to develop thehuman resources and technology they need tocreate profitable niches in the global economy.

“If you can’t beat India orChina, you have to jointhem.”

Mari PangestuMinister of Trade of Indonesia

Integration & Identity

The proliferation of global and regional risks frompandemics to piracy on the high seas is puttingpressure on East Asia to deepen integration.

• The institution-heavy European Union model isnot appropriate for the region.

• East Asia will continue to pursue its “soft-institution”, “bottom-up” approach, in which thedrivers of integration are business and civilsociety.

• Governments must still deal with cross-borderproblems such as migration that requirecooperative solutions.

• Historical enmities between countries should beresolved to allow for enhanced integration.Countries should not let these disputes impedethe integration agenda.

“The process of realizingEast Asian integrationdepends very much on thepolitical will and trust of ourcountries as there is a biggap in the levels ofdevelopment.”

Hoang Trung HaiMinister of Industry of Vietnam

"Oil consuming countriesin Asia need to cooperateto promote more efficientenergy usage, developand share energy-efficienttechnologies and promoteenergy security."

Zhang XiaoqiangVice-Chairman, NationalDevelopment and ReformCommission, People's Republicof China

“ASEAN has to be moreeffective in differentiatingniche positions.”

Sir Martin SorrellGroup Chief Executive, WPP,United Kingdom; Co-Chair,World Economic Forum on EastAsia


Regional Change – Japan

The emergence of China and India is heighteningcompetitive pressure on Japan.

• Japan’s current economic recovery is beingdriven by legacy sectors of the economy.

• To sustain growth, Japan must find ways tobuild on successes in IT and financial services,where reforms unleashed much-neededstructural changes.

• Japan must address its growing fiscal deficit byincreasing productivity and the productive useof capital.

• To do so will require innovation, a willingness tobreak with tradition and strong politicalleadership.

• Japanese leaders must also build bridges withtheir East Asian neighbours.

Security & Sustainability

Income disparities, energy shortages andenvironmental degradation are serious risks tosustaining Asia’s growth.

• Poverty and rural discontent can lead to extremismand social unrest that could threaten stability inmany countries.

• Energy inefficiency in China is a global concern,given its effects on the environment and on globalenergy markets.

• These problems require a concerted regionalresponse to improve energy security and shareenergy-saving technologies.

• Exchanges among countries in the region willmitigate the threat to stability from simmeringhistorical disputes.

“If the major consumingcountries are more energyefficient, this can helpstabilize energy prices andbenefit the rest of theworld.”

Tran Trong ToanExecutive Director, APECSecretariat (Asia-PacificEconomic Cooperation),Singapore

“We’re about to go througha core transformation.”

Junichi UjiieChairman, Nomura Holdings,Japan; Co-Chair, WorldEconomic Forum on East Asia

“We also see withincountries and within theregion the widening gap ofthe rich and the poor in theregion. This is a risk ofinstability.”

Hassan MaricanPresident and Chief ExecutiveOfficer, PETRONAS (PetroliamNasional), Malaysia; Co-Chair,World Economic Forum on EastAsia

“Japan will continue to tryto reduce barriers to Asiantrade by pursuing bilateraland multilateral free-tradeagreements with its Asiantrading partners.”

Toshihiro NikaiMinister of Economy, Trade andIndustry of Japan


East Asian integration has been mainly an informal“market driven” process with weak institutions. Theproliferation of global and regional risks requires amuch more intensive approach, but it is unlikely thatcountries in the region would move towards aEuropean Union-style model with more activeinstitutions and shared political power. However, for thepreferred “bottom-up” integration, led by business andcivil society, to deepen, political leaders must resolvehistorical enmities that could hamper closercooperation.

Whenever East Asian leaders gather to talk aboutregional integration, the European Union modelinvariably comes up in the discussion: a single marketwith a single currency (at least for a good part of it);common policies and standards; centralizedadministrative and legislative institutions, thoughwithout the fusion of ultimate political power andsovereignty. This is not what Asians want, so theaccepted wisdom goes.

Asia’s integration gambits have been lowest-common-denominator efforts supported by weak institutions.Perfunctory ministerial meetings and summits havedriven the process. As in the Association of SoutheastAsian Nations (ASEAN), the stress has been oncooperation, 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. Couldthe region aspire to something more? To be sure,forging a common Asian or even East Asian identitywould be as difficult, if not more so, than for otherregions. Europe took decades to get where it is today.And even then, attempts to create a constitutionalunderpinning for the European Union have stalled,

revealing how many young Europeans now value theirnational identities over a regional one.

Crises of course have a way of forcing mindsets tochange. The financial meltdown of 1997-98, 9/11 andthe terrorist attacks in Bali and elsewhere, theoutbreaks of the SARS virus and avian flu, and cross-border problems such as the haze from forest fires inIndonesia and maritime piracy on the Straits ofMalacca – all these challenges have highlighted thedeficiencies of the region’s minimalist approach togreater unity. The integration of India further into EastAsia and the emergence of China as a tradingpowerhouse and investment magnet have raised thestakes. See Figure 1.

Integration & Identity

Figure 1: ASEAN has continued attractingstrong FDI inflows, with a larger FDI stockthan “Chindia”

Source: UNCTAD World Investment Report 2005

“The assumption that anolder society can’t createwealth is wrong. You justcan’t have people being oldand disabled; you need tohave them in theworkforce.”

Henry A. McKinnellChairman and Chief ExecutiveOfficer, Pfizer, USA; Vice-Chairman of the FoundationBoard of the World EconomicForum; Co-Chair, WorldEconomic Forum on East Asia


As these pressures of globalization and competitioncontinue to mount, Asians have begun to questionold notions. With global and regional risksmultiplying, requiring global and regional solutions,the implication for East Asia’s integration is clear:the good-fences-good-neighbours model isunsustainable.

But the region is still trying to figure out how to turnthe neighbourhood into a community. Overlappingregionalization options have proliferated in recentyears, from ASEAN and its flexible formats to lastyear’s East Asian Summit that excluded the US.The ASEAN Free Trade Area (AFTA) is forging linkswith India, China and the rest of North Asia, whilethe Asia-Pacific Economic Cooperation (APEC) iskeeping alive its grand vision of free and open tradeand investment among its 23 members, whichtogether account for about half of global trade, by2010 for developed economies and 2020 fordeveloping ones. The number of bilateral free tradearrangements across the region has increased asthe Doha Round of global trade talks continues toflag.

That meeting participants identifiedthe need to address theabsence of regionalinstitutions to discussenergy, security andenvironmental issues asa top priority for theregion – when APECand ASEAN havelong offered suchforums – indicatesa lack ofawareness. “Wehave not beeneffective incommunicating thework we do,” OngKeng-Yong, Secretary-General, ASEAN,Jakarta, acknowledged.Added Tran Trong Toan,Executive Director, APECSecretariat, Singapore: “We don’tshout out loudly about what we have.”

Yet the selection of participants was also a tellingrebuke of integration performance so far. When itcomes to regional economic integration, said

Hellmut Schutte, Dean, Asia Campus, INSEAD,Singapore, “we have to be honest: for 40 years,ASEAN hasn’t been very successful. We are seeingthe end of ASEAN. The year 2020 will not be atarget [for industrialization]. ASEAN will be buriedbeforehand.” An extreme view perhaps, butindicative of the frustration among someparticipants and the urgent need for more intensive

communication among East Asian countries.

But EU-style integration cannotbe forced, some panellists

warned. The soft-institution approach with

weak monetaryintegration would

prevail, IndonesianTrade MinisterMari Pangestupredicted.Because of its“honest broker”role between themajor economiesof North Asia and

India, “ASEAN willbe in the driver’s

seat.” East Asia,Pangestu reckoned,

would continue topursue “market driven”

integration – what SadakoOgata, President, Japan

International Cooperation Agency,called the “bottom-up” approach.

Business, civil society and other “non-state actors”will push regionalization forward through themultitude of cross-border commercial and cultural

“We should make an effortto better understand eachother’s history and customsto increase mutualunderstanding. If we hangon to the past, we are onlyimpeding each other’sprogress.”

Yun Jong-YongVice-Chairman and ChiefExecutive Officer, SamsungElectronics, Republic of Korea;Co-Chair of the World EconomicForum on East Asia


connections and exchanges that take place every day.Indeed, for Asia’s growing number of globallyintegrated enterprises such as Samsung, borders arealready meaningless.

There is still a role for governments in pushingintegration forward, said Najib Tun Razak, DeputyPrime Minister of Malaysia. Common challenges suchas maritime piracy and migration require cooperation.Migration, for example, will have to be part of thesolution to the problem of ageing demographics inJapan. “We must look at the big picture and not let thebaggage of history deter us,” Najib concluded.

Yet heightened tensions between Japan and itsneighbours Korea and China, as well as concernsabout potential conflict on the Korean Peninsula andacross the Taiwan Strait, could easily derail the EastAsian integration train. “Parochial nationalism,” saidChen Feng, Chairman, China Hainan Airlines, People’sRepublic of China, “must be eliminated.”

Peter M. Beck, Director, International Crisis Group(ICG), Republic of Korea, fretted that with a“statesmanship deficit” on both sides of the Pacific,the threat of military clashes over territorial disputesand energy needs is a real one. “How do we findsolutions if there are no good leaders?” YotaroKobayashi, Chief Corporate Advisor, Fuji XeroxCompany, Japan, expressed faith that a “maturing andwiser citizenship” throughout East Asia will act as abrake on incompetent leadership.

To shape a new East Asian community, the region“should make an effort to better understand eachother’s history and customs to increase mutualunderstanding,” said Yun Jong-Yong, Vice-Chairmanand Chief Executive Officer, Samsung Electronics,Republic of Korea, and a Co-Chair of the WorldEconomic Forum on East Asia. “If we hang on to thepast, we are only impeding each other’s progress.”

Asia’s Risk Factors

Participants in a Global Risk Network workshopexpressed concern about the mounting economic,geopolitical and societal risks facing East Asia.

Global fiscal imbalances brought on by the largesurpluses accumulated by Asian countries and theUS twin deficit were rated a major source ofeconomic risk. Perceived as particularly relevant inJapan, but also in South Korea and China, is therisk of fiscal crises as a result of a rapidly ageingsociety. Societal risk in the region includes potentialbreakdowns of control in restive rural areas in Chinaand growing shortages of both oil and clean drinkingwater.The workshop also highlighted the lack of visionarypolitical leadership in the region, as well as theabsence of an overarching regional securityframework, as negative factors affecting efficient riskmitigation strategies.

An issue survey conducted among the participantsin the closing plenary session of the WorldEconomic Forum on East Asia complemented theworkshop findings. Participants ranked the lack ofenergy efficiency in major consuming countries andindustries of the region as one of the factors with thehighest potential impact (64% of respondents).Participants also voted the absence of regionalinstitutions to discuss security, energy andenvironmental issues (58%) and the economicimpact of Indian and Chinese growth on ASEAN'sfuture competitiveness (61%) as particularly riskyissues. The geopolitical implications of unsolvedterritorial disputes between Japan and itsneighbours China and Korea (45%) was the finalissue participants said should be at the top of theregion’s agenda.

Participants' impressions of risks facing Asia


Figure 2: China and India are experiencingfaster per capita economic growth thanASEAN

Source: World Trade Organization statistics

Competition from China and India for trade andinvestment has undermined the ability of Asiannations to use manufactured exports as an easyavenue to jobs and economic growth. Fortunately,Asia has two potent tools to help it cope withChina and India – China and India. Companiesincreasingly use Asia as part of a global supplychain that is stimulating trade and investment withinAsia. And free trade pacts being negotiatedbetween the Association of Southeast AsianNations (ASEAN), India, China and Japan promiseto create a pan-Asian market of over 3 billionpeople. But companies and countries alike will haveto continue struggling for ways to harness theregion’s talent and technologies in order to createnew niches for themselves in the global economy.

The rise of China and India as competitors for tradeand investment has shattered the post-war Asianformula for creating jobs and economic growth:channelling public savings into manufacturedexports. With China slowly catching up in themanufacture of the most sophisticated electronicsand India gobbling up information-based services,the rest of Asia is in a squeeze. As Figure 2 shows,per capita incomes in China and India are growingfaster than anywhere else in the region. So whilethey occupy opposite ends of the developmentspectrum, Japan, Korea and the 10 members ofASEAN face a renewed challenge to reinventthemselves, find new export niches and generatedomestic engines of growth. In short, they mustinnovate or stagnate.

Fortunately, Asia has China and India to help itcope with the “Chindia” phenomenon. Companiesincreasingly use Asia as links in a global supplychain that relies on intra-Asian trade andinvestment. Breakneck growth in China and India isalso producing bottlenecks, shortages of skilledlabour and rapid cost increases that are compellingmany foreign direct investors to spread someproduction and services back towards South-EastAsia, and even to Japan. As a result, intra-Asiantrade already accounts for roughly half of all Asianimports and exports. And, while Asia serves as amajor investor into China and India, investmentflows into China and India now correspond withhigher – not lower – foreign investment into the restof Asia.

In the rapidly evolving global economy, however,even the concept of innovation is getting amakeover. “We tend to think of innovation in termsof products and patents,” said meeting Co-ChairNandan M. Nilekani, President, Chief ExecutiveOfficer and Managing Director, InfosysTechnologies, India; Member of the FoundationBoard of the World Economic Forum. “But it’s alsoabout business models and processes.”

For companies, that means using informationtechnology to become a global company. It alsomeans conceiving of new products that takeadvantage of the borderless, collaborative marketthat the Internet has created.

Competitiveness & Creativity

“We tend to think ofinnovation in terms ofproducts and patents. But it’salso about business modelsand processes.”

Nandan M. NilekaniPresident, Chief ExecutiveOfficer and Managing Director,Infosys Technologies, India;Member of the FoundationBoard of the World EconomicForum; Co-Chair of the WorldEconomic Forum on East Asia


Asia has demonstrated significant achievement in thisregard. Korea, for example, has become a laboratoryfor broadband Internet-related services.Tech-savvy Japan is also well aheadin rolling out fibre optic networksand digital TV. Cellularoperators, such as NTTDoCoMo, are movingbeyond telephony intocellular-basedcommerce, fromticketing to vendingmachines. ThePhilippines, forexample, is proving atest bed for turningthe cellular phone intoa cash register.

Some worry that despitesuch technologicaladvances, Asia is stilldominated by conservativecorporate mindsets and resistanceto further integration with neighbours ofdifferent language or race.

In Japan, for example, services and software sectorsare still immature and economists are concerned thatits recovery from 15 years of economic stagnation isbeing led not by an entrepreneurial new economytransformation, but by a mere resurrection of its oldeconomy industries. Japan also suffers from whatsome say is a stubborn insularity. Thus, Japan’sresearch and development educational institutions arenot open fully to foreign students and professors withthe fresh ideas needed to fully exploit the trillions ofyen being spent to beef up their R&D facilities,according to Yuichiro Anzai, President, Keio University,Japan, and Kiyoshi Kurokawa, President, ScienceCouncil of Japan. Kurokawa urged bringing in largenumbers of foreign students to revitalize Japanesehigher education, in much the way Singapore hasdone.

Japan’s failure to better integrate with the regionthrough immigration also highlights a looming Asianlabour imbalance: as developing Asian nations such asIndonesia and the Philippines struggle to find jobs fortheir growing populations, Japan’s workforce isshrinking even as it strives for the economic growthneeded to pay for its rapidly ageing society.

Japan also still largely fails to exploit one of its largestpools of domestic talent – women. Women control the

purse strings of Japan’s consumer-led economy, butare prevented by traditional mores from doing their

part to raise productivity in Japan’s male-dominated corporate world.

Also overlooked are older workers.“One hundred years ago we created

wealth with manual labour, butthat’s not how wealth getscreated anymore,” said Henry A.McKinnell, Chairman and ChiefExecutive Officer, Pfizer, USA;Vice-Chairman of theFoundation Board of the WorldEconomic Forum; Co-Chair ofthe World Economic Forum onEast Asia. “The assumption

that an older society can’tcreate wealth is wrong. You just

can’t have people being old anddisabled; you need to have them in

the workforce.”

Integration is essential to ASEAN as well,and the regional group is using a free trade

agreement between its members to help create acommon market of 600 million people that can rivalChina and India as a market for labour andconsumers. ASEAN is also pursuing trade agreementswith India, China and Japan aimed at creating an evenlarger, pan-Asian market of over 3 billion people. AsFigure 3 shows, this market is lucrative, accounting forUS$ 1.2 billion of world trade in 2004. Yet, ascompetition within the region increases, branding willbecome more important, according to Sir MartinSorrell, Group Chief Executive, WPP, United Kingdom,and Co-Chair of the World Economic Forum on EastAsia. “ASEAN has to be more effective in differentiatingniche positions,” he advised.

Figure 3: Asia accounts for more than 25% ofworld trade, and more than half of that isintra-Asia

Source: World Trade Organization statistics


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 actuallystarted shrinking in 2005, as new retirees for the first time outnumbered fresh entrants.

One clear cause of rapid population ageing is that fewer women are choosing to have children – a trend largelydue to gender inequality, according to Kuniko Inoguchi, Minister of State for Gender Equality and Social Affairs ofJapan.

In tackling the problem of an ageing population, Japan must also find a way to pay for the massive costs ofretirees. This is especially important given a huge fiscal deficit which has climbed above 5% of GDP.

“There will be no vitality ifsociety does not have anydisparities. A society whereeverybody makes an effort,and those efforts arerewarded, is preferred. Theproblem lies with disparitiesthat are fixed. For thosepeople who fail, we shouldhave a mechanism so theycan make anotherchallenge.”

Kakutaro KitashiroChairman, Keizai Doyukai, Japan

Japan’s Demographic “Shape” 2004 vs 2030

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

“When everyone said theJapanese economy was badthree or four years ago, Iwasn't that pessimistic, butnow, when people say theeconomy is getting better, Idon't really feel optimistic…What we face now is whether[Prime Minister Junichiro]Koizumi’s successor really cantake over his reforms.”

Heizo TakenakaMinister for Internal Affairs andCommunications and forPrivatization of the Postal Servicesof Japan


Growing income disparities, energy shortages andpollution pose a risk to growth across Asia. Whilepoverty serves as a reservoir for militant Islam inSouth-East Asia, rural unrest poses a challenge tostate authority in China. China’s inefficient use ofenergy is causing global environmental problems andplacing additional stress on vulnerable supplies of oiland gas. The region’s problems demand a collectiveresponse. Politicians and companies should worktogether on ways to improve energy security, reducevolatility in energy prices and share energy-efficient

technologies. They should also promote exchangesthat will enhance mutual understanding and defusehistorical misunderstandings.

“The new century belongs to Asia,” Jiang Jianqing,Chairman of the Board, Industrial and CommercialBank of China, People’s Republic of China, toldparticipants in the meeting’s opening plenary. “But atthe same time we need to seriously tackle the manychallenges we face today.”

Asia’s remarkable economic growth is steadily enablingthe region to replace its long reliance on exports to theWest with intraregional trade in goods and services forits own consumers, as Figure 4 demonstrates.Ensuring that this kind of growth continues smoothly,however, will depend on finding common solutions toshared problems such as disparities of income, energyshortages and pollution.

There are a host of challenges to Asia’s security andlong-term growth: long-simmering rebellions, NorthKorea, terrorism and bird flu just to name a few. Noneof these problems pose as significant a threat,however, as the growing inequities and imbalancesstemming from Asia’s own growth.

Security & Sustainability

$109B

$96B

$44B

$22B

$50B

$30B

$66B $73B

$20B$21B$52B$69B

$4B

$2B

$5B

$8B

$3B

$3B

$11B

$7B

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

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

“Japan has made greatefforts to increase energyefficiency. There has to besuch a grand design in thepolicies of each country.”

Kunio NakamuraPresident, Matsushita ElectricIndustrial Co., Japan


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

In South-East Asia, poverty provides a reservoir formilitant Islam, while in China restive rural areaschallenge state control. And across Asia, barriers tothe flow of skilled workers mean that ageing Japanlacks workers while poor and growing nations likethe Philippines want for jobs.

While workers compete for jobs, nations are vyingfor diminishing resources, especially water and oil.Oil is a particularly urgent concern, as the demandsof China and India push up global energy pricesand reduce supplies. With new reserves gettingharder and more expensive to reach, existingsupplies are increasingly vulnerable to disruptionssuch as storms or political unrest.

At the same time, one of the hungriest energyconsumers, China, is also one of the mostinefficient. China already consumes more thantwice as much energy as Japan and emits threetimes as much carbon dioxide. China requires eighttimes as much energy as Japan to produce US$ 1of economic output as Figure 5 shows. Andpollution from China is already having a globalimpact.

Many worry that China is failing to take advantageof the experience of its more advanced neighbours.Japan, for example, developed its energy-efficientcapabilities in the mid-1970s in response to asimilar combination of high oil prices and risingpollution.

Yet, rather than working with the Japanese toincrease efficiency at home, China’s officials end upcompeting with Japan to secure more energyassets abroad. “The problem is the centralgovernment,” said Xu Xiaonian, Professor,Economics and Finance, China Europe InternationalBusiness School (CEIBS), People’s Republic ofChina. “The performance of administrators isjudged by GDP growth, tax revenue and jobscreated. Energy efficiency is simply not in thevocabulary of bureaucrats.”

The problem is exacerbated by the fact that Chinaand several other Asian governments subsidize fuelprices, keeping prices for consumers artificially lowand encouraging waste. Such subsidies should bereplaced with incentives for conservation.

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

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

“The performance ofadministrators is judged byGDP growth, tax revenueand jobs created. Energyefficiency is simply not in thevocabulary of bureaucrats.”

Xu XiaonianProfessor, Economics andFinance, China EuropeInternational Business School(CEIBS), People's Republic ofChina

More broadly, Asia’s leaders need a more openconversation with each other. Academic exchangesand joint research efforts are another way todeepen the region’s collective pool of knowledgewhile bridging the historical and cultural gaps thatthreaten to divide Asia. “We should make an effortto better understand each other’s history andcustoms,” said Yun Jong-Yong, Vice-Chairman andChief Executive Officer, Samsung Electronics,Republic of Korea, and Co-Chair of the WorldEconomic Forum on East Asia. “If we hang on tothe past we are only impeding each other’sprogress.”


For companies in Asia, the potential for disruptionsdemands a comprehensive risk-management policythat involves senior management and recognizes that acompany is only as insulated as the least prepared ofits major suppliers and customers.

With so much at stake, cooperation between all ofAsia’s stakeholders is key to managing the region’srisks. Asia’s energy situation in particular demands acollective response. Oil consuming nations shouldcooperate on energy security, reducing volatility inenergy prices and sharing energy-efficienttechnologies. They should also raise the level ofdialogue 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 energyefficiency and environmental protection? Are Japan and Korea willing to sell this technology? And are China andIndia willing to purchase it?

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

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

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


After its lost decade of stagnation, Japan faces twoimmediate priorities: how to sustain its economicrecovery and how to resolve simmering disputeswith its neighbours China and Korea. Essential toaddressing these challenges are reform andleadership. Economic rebound should not bemistaken for renewal. Japan has to continue topursue a raft of structural reforms, includinginitiatives to reduce its huge fiscal deficit (see Figure6). This will require innovative solutions such asmore open immigration and the employment of theelderly beyond the traditional retirement age.Implementing such policies will require a break withtradition, a change of mindset and strong politicalleadership.

After a decade of debate over whether stagnatingJapan was heading for recovery or relapse, theconclusion is clear: the second biggest economy inthe world is back. Participants at the WorldEconomic Forum on East Asia heard tales of amore dynamic Japan – a country with a high levelof energy efficiency and environmentalconsciousness, economic growth in nominal termsfor three consecutive years as Figure 7 shows,deep penetration of broadband services, and agrowing entrepreneurial spirit despite governmentconstraints and cultural impediments. They alsoheard of a more assertive, outward-looking Japan,a nation more engaged in global affairs, asdemonstrated by its military contingent in Iraq, butalso locked in tense disputes with its neighbours.

The concern today is how Japan can sustain itsrecovery and temper its new self-confidence toresolve disagreements with China and Korea. Thetwo priorities are linked. An economically strongerJapan will more confidently project its image andpromote its interests abroad. To sustain andexpand its economic recovery over the long term,Japan must somehow deal with lingering enmitiesthat cloud its ties with the rest of Asia. “For thefurther development of the Japanese economy, wehave to think of how Japan can transform itselfwhile jealously guarding the dignity of the nation,”said Charles D. Lake II, Vice-Chairman andRepresentative, Aflac Japan, Japan. “The Japanesepeople have not fully realized what they need to dogiven the international situation.”

Regional Change – Japan

Figure 7: Japan has now experiencedeconomic growth in nominal terms for threeconsecutive years

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

“For a long time, we placedpriority on equality ofresults. Maybe we shouldshift to equality ofopportunity.”

Sadakazu TanigakiMinister of Finance of Japan

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

Source: IMF World Economic Outlook April 2006


During Japan’s lost decade, global conditions changeddramatically – China emerged as a formidable globalmanufacturing platform thanks in part to Japaneseinvestment, India became a force in business processoutsourcing and the IT services sector, and Korearebounded from the Asian financial crisis to turn intoone of the most tech-savvy economies in the region.As for Japan, some important economic andpolitical reforms have gone through, butthe restructuring agenda remainslong. “Japan has changedenormously in the last fiveyears, but did we changesufficiently?” asked HeizoTakenaka, Minister forInternal Affairs andCommunications andfor the Privatization ofthe Postal Services ofJapan. “No. Theworld is changingvery fast andproactive reform is inorder. We have onlybegun.”

Economic reboundshould not be mistaken forrenewal. “The old economy isleading the current recovery,”Takenaka pointed out. Meanwhile,the “New Japan” is struggling toemerge. There have been notable successes.According to Nobuyuki Idei, Chief Corporate Adviser,Sony Corporation, Japan, the spread of broadband atlow cost to users and the proliferation of 3G mobile

technology are the result of cooperation between theprivate sector and the bureaucracy, which togetheragreed that competition should be allowed to drivegrowth in the IT sector. Moreover, the banking systemwas overhauled, with non-performing loans sharplyreduced. The unwinding of cross-shareholdings hasmeant that companies are turning more and more tothe capital markets for financing, spurringentrepreneurship. Further, stock market scandals are awake-up call for Japan to improve standards ofaccountability and disclosure. “We’re about to gothrough a core transformation,” declared meeting Co-Chair Junichi Ujiie, Chairman, Nomura Holdings,Japan.

Not everybody is convinced that the creativedestruction that structural reforms can unleash is goodfor Japan. “People’s mentalities haven’t changed thatmuch,” said Masao Hirano, Director, McKinsey &Company, Japan. “Many Japanese managers feelreform will destroy the Japanese business regime.”Some companies have slowed efforts to increasetransparency standards and accountability. But the

recalcitrant appear to be a dying breed.

The enormity of the challenges posedby Japan’s ageing demographics

should be enough to convince allbut the most diehard of the

need for strong action andnew, possibly radicalapproaches. For example,as Figure X shows, tacklingJapan’s huge fiscal deficit,which is above 5% ofGDP, is essential to payingthe costs of the growingranks of retirees. “From aneconomic perspective, the

solution is that Japan mustraise its productivity and, in

particular, the productivity ofcapital,” said Jesper Koll,

Managing Director and ChiefEconomist, Merrill Lynch Japan

Securities Co., Japan.

Two ways to increase productivity would be toallow in more immigrants and to harness the energy ofthe elderly. “One hundred years ago, we createdwealth with manual labour, but that’s not how wealth

“It might be warranted tomove cautiously to makesure we don’t uproot thefactors in Japan’s success.But we’re talking about theinternational arena, andgiven the change in China,India and Korea, [reform] istoo slow.”

Hellmut SchutteDean, Asia Campus, INSEAD,Singapore


gets created anymore,” meeting Co-Chair Henry A.McKinnell, Chairman and Chief Executive Officer,Pfizer, USA; Vice-Chairman of the FoundationBoard of the World Economic Forum, explained.“The assumption that an older society can’t createwealth is wrong. You just can’t have people beingold and disabled; you need to have them in theworkforce.”

But this would require a change in cultural norms.Some have half-jokingly called Japan the world’sonly successful communist country. It is time thatJapan shed that image and mindset. “For a longtime, we placed priority on equality of results,”Sadakazu Tanigaki, Minister of Finance of Japan,remarked. “Maybe we should shift to equality of

opportunity.” Such moves have sparked a growingdebate about the widening income gap thateconomic reforms have brought.

The appointment later this year of a new primeminister to replace Junichiro Koizumi will be a keyindicator of the zeal for sustaining crucial reforms. Itwill also signal how Japan is likely to manage itsrelations with its closest neighbours and its growingrole in world affairs. How Japan squares nationaldignity and economic resurgence with its globalresponsibilities and the need to build bridges withthe rest of Asia will be its people’s biggestchallenge ever. “We know what must be done,”Takenaka concluded. “The question is whetherthere is the leadership.”

“Competition is happeningin Japan.”

Nobuyuki IdeiChief Corporate Adviser, SonyCorporation, Japan

“Companies in the privatesector need to compete inwithin the global marketand I think they havesucceeded in achieving abasic transformation. Butequality in results issomething people value…and so the communitymindset has not beentransformed completely.”

Yoshihiko MiyauchiChairman and Chief ExecutiveOfficer, Orix Corporation, Japan

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


The interactive sessions at the World Economic Forumon East Asia, including several private meetings andworkshops on emerging capital markets, the digitalecosystem and global risks, continued discussions andconsultations carried forward from the Annual Meeting2006 in Davos and other regional meetings. Throughfrank and open dialogue, more than 300 business,government and civil society leaders sought to applythe “creative imperative” in setting “a new agenda forAsian integration”.

Following is a selection of creative ideas andapproaches that were discussed in Tokyo:

Integration & Identity– Ageing Demographics: Mitigate the economic

burdens caused by the burgeoning ranks of retireesin Japan and other countries facing ageingdemographics through more open immigration andthe deployment of the elderly in the workforce.

– Education: Promote youth and student exchangesto boost regional understanding, particularlybetween Japan and its neighbours.

– Regionalization: Review the integration initiativesin East Asia to focus strategic thinking and direction.What kind of integration does Asia want – how dowe get there? More importantly, how can Asiaachieve optimum regional integration, while meetingits global responsibilities?

Competitiveness & Creativity– Values: Establish common values to drive growth in

globally integrated companies, ensuring that localcultural differences are not ignored. Too muchglobalization can be a bad thing.

– Mobility: Use technology to develop innovativeprocesses and business models that make full useof a company’s diverse human resources regardlessof distance or geography.

Security & Sustainability– Technology Transfer: Allow major energy

consumers access to energy-saving industrialtechnology developed by Japan and other energy-efficient countries.

– Energy: Create a forum for Japan and Korea todiscuss with the Chinese government and businessleaders China’s energy needs and what itsneighbours can do to help.

Regional Change – Japan– Sustainable Development: Deploy Japan’s

expertise in environmental management tocontribute the technology and skills required topromote sustainable practices in the rest of Asiaand elsewhere.

– Mindset: Change the rules to change the mindset.Japan must give second chances to those who fail.Encouraging entrepreneurship is crucial to thestrengthening of the vital new economy. Promoterole models of success not just paragons of humility.Open Japanese universities to more faculty andstudents from overseas.

The Creative Imperative in East Asia

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


Leaders forged closer economic ties duringthe World Economic Forum on East Asia

The Secretary-General of the Association of SouthEast Asian Nations gave his support for theJapanese trade minister’s offer of setting up a freetrade area in East Asia. Ong Keng-Yong alsoagreed to Japan’s proposal for a new regionalpolicy coordination body modelled on theOrganization for Economic Cooperation andDevelopment (OECD).

Japan’s Economy, Trade and Industry MinisterToshihiro Nikai said that the East Asian version ofthe OECD needed to be established in the mediumand long term, with ASEAN as a motor.

He told participants that the East Asian marketcould attain further growth and integration byforming free trade agreements among the region’seconomies.

ASEAN Secretary-General Ong Keng-Yong gaveassurances that the emerging East Asiancommunity would not exclude the United States.

The United States meanwhile is ready to consideran Asian Currency Unit, Undersecretary of theTreasury for international affairs, Tim Adams, said.Japan and the Asian Development Bank are infavour of creating a weighted basket of Asiancurrencies similar to the European Currency Unit, aprecursor of the euro.

Japan and India signed an agreement encouragingJapan’s small to medium size companies to enterinto the Indian market by providing information andbusiness-matching opportunities.

“Japan should showthe lead in opening itsmarket because forASEAN as well as forthe East Asiancommunity toprosper, we have todo a lot of tradeamong ourselves.”

Ong Keng-YongSecretary-General,ASEAN, Jakarta


The World Economic Forum would like to thank Keizai Doyukai (Japan Association of CorporateExecutives) 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 orSupporters of the World Economic Forum on East Asia:

Strategic PartnersAudiAvayaBain & CompanyBarclays Capital CitigroupCredit SuisseEconomic Development Board of BahrainInfosys Technologies JPMorgan Chase KPMGKudelski GroupLehman BrothersMcKinsey & CompanyManpowerMerrill LynchMicrosoft CorporationPfizerZurich Financial Services

Regional PartnersGeopost InternationalPhoenix Satellite TelevisionUPS

Roundtable SupportersAFLAC JapanOgilvy Public Relations Worldwide

Official CarrierJapan Airlines International

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

Acknowledgements

Peter Torreele is Managing Director of the World Economic Forum. Lee Howell is Director, Head of Asia, at theWorld Economic Forum. The World Economic Forum on East Asia was under his direct responsibility. AkiraTsuchiya is Global Leadership Fellow and Manager, Japan. Laura de Wolf is Senior Event Manager and MeetingCoordinator.

Vidhi Tambiah is Associate Director, Global Agenda, and Samantha Tonkin is Senior Media Manager at the WorldEconomic 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 theWorld Economic Forum on East Asia in Tokyo. Session summaries are available at: www.weforum.org

Fabienne Stassen Fleming, Senior Specialist, EditingNancy 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 theirinsightful and entertaining contribution to the programme and report of the World Economic Forum on East Asia.

Contributors

The World Economic Forum is an independentinternational organization committed to improvingthe state of the world by engaging leaders inpartnerships to shape global, regional andindustry agendas.

Incorporated as a foundation in 1971, and basedin Geneva, Switzerland, the World EconomicForum is impartial and not-for-profit; it is tied tono political, partisan or national interests.(www.weforum.org)

world economic forum on east asia 2006

Business

economic cycles

economic agendas

integration of india

regional agenda

chinese growth growth

asian integration tokyo

driver of integration

regional cooperation