world economic forum on east asia 2007

World Economic Forum on East AsiaResponding to New UncertaintiesKuala Lumpur, Malaysia 15-16 June 2008

Report

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1 | World Economic Forum on East Asia

Preface

Page 4

Summary: Responding to New Uncertainties

Page 8

Asian Leadership

Page 12

Global Risks

Page 16

Sustainable Growth

Page 20

Competitiveness

Page 24

Acknowledgements

Contents


“Responding to New Uncertainties” was the theme ofthe 17th World Economic Forum on East Asia, whichwas held in Kuala Lumpur. As such, 300 leaders fromover 25 different countries examined and discussedthe challenges and priorities that will ultimately shapethe region’s future agenda.

At the last World Economic Forum on East Asia,confidence in the resilience of Asia’s economies wasmarked by positive economic growth forecasts,expanding intra-regional trade, rising investments andstaggering levels of US currency reserves. In thiscontext, leaders from Asia expressed their readinessto enlarge their leadership role in global and regionalaffairs as the centre of power shifts to Asia’s capitalsand corporate boardrooms.

Only one year later, the prospect of a US recession,soaring food and fuel prices, and a downturn in globaldemand have led to concern about Asia’s ability todecouple from the US sub-prime mortgage crisis,which is expected to lead to worldwide losses closeto US$ 945 billion. At the same time, the urgency toresolve the specific consequences of climate change,renewed tensions on the Korean Peninsula andinflationary pressures are challenging the premise thatAsia’s healthy domestic consumption alone canensure continued growth and stave off the negativeexternalities of a global economic slowdown. AlthoughASEAN now has an economic blueprint and charter,

Japan holds the G8 presidency and the economicinfluence of China and India continues to rise, theneed for a common agenda in East Asia to addressthe key regional and global challenges is unequivocallypressing.

For these reasons, we hope you find the report of thisyear’s proceedings to be an insightful and timely guideto how the region’s leaders can respond to these newuncertainties in the short term, but also whichcollective actions and innovative approaches bygovernments, businesses and key regional institutionswill be critical for dealing with these global andregional challenges.

The World Economic Forum would like to thank theCo-Chairs of the meeting: Peter Brabeck-Letmathe,Chairman of the Board, Nestlé, Switzerland; Memberof the Foundation Board of the World EconomicForum; Jamshyd N. Godrej, Chairman and ManagingDirector, Godrej & Boyce, India; Takao Kusakari,Chairman, Nippon Yusen Kabushiki Kaisha (NYK Line),Japan; Lord Levene, Chairman, Lloyd's, UnitedKingdom; and Ralph R. Peterson, Chairman and ChiefExecutive Officer, CH2M HILL Companies, USA.

Preface

W. Lee HowellSenior Director, Head of ProgrammingSenior Adviser, Asia

Sushant Palakurthi RaoDirector, Head of Asia


Summary: Responding to New Uncertainties

“We have faced serious challengesbefore, but rarely in such a potentcombination.”

Abdullah Ahmad Badawi, Prime Minister of Malaysia

“Until very recently, East Asia was afollower of the global agenda but, forthe first time, it is now a leader. Theworld looks to the region to get it out ofthe current financial crises.”

Peter Brabeck-Letmathe, Chairman of the Board, Nestlé,

Switzerland; Member of the Foundation Board of the World

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

East Asia

At the 17th World Economic Forum on East Asia,more than 300 business, government and civil societyleaders from 25 countries arrived knowing that theregion is facing new uncertainties. While it remainsclear that the geopolitical and economic powerequation is shifting its direction, rising food and fuelprices are raising the spectres of inflation andprotectionism and, worst of all, the possibility thatmany Asians – who in recent years have scrambledout of poverty – may again be forced back down. Thiscould lead to social and political instability in severalcountries in the region.

Indeed, these may be the best of times and the worstof times for East Asia. At the Welcome Reception forparticipants, Malaysian Prime Minister AbdullahAhmad Badawi hailed the region as full of “immensepromise and dynamism” with people who “brim withentrepreneurial spirit and competitive drive”. But, hewarned, “the economic well-being of the region and,indeed, the world, is coming under increasing andserious threat. The threat is emanating from threeprimary sources: rising food prices, spiralling costs of

energy and the very real prospect of global economicrecession. We have faced serious challenges before,but rarely in such potent combination.”

The World Economic Forum on East Asia offered anexcellent platform to discuss these difficult issues. AsAhn Ho-Young, Deputy Minister for Trade of theRepublic of Korea, put it, “the World Economic Forumis about turning challenges into opportunities.”

That is precisely what participants aimed to do inKuala Lumpur. It was evident from the interactivediscussions that East Asia’s leaders are responding tothe new uncertainties by taking a long-term view, notpanicking. A survey by the World Economic Forumindicated that the business sector remains resolutelyfocused on the big picture and how Asia cancontribute to securing and sustaining global growth,


peace and stability. An overwhelming 81% chose“addressing growing global concern overenvironmental challenges such as climate change andwater” as their top priority among issues with potentialimpact on Asia. Other choices included “preventingpolitical and economic instability linked to rising foodand energy prices” and “managing the social,environmental and infrastructural implications of rapidurbanization”.

East Asia is at a crossroads in its role in the globaleconomy. “Until very recently, East Asia was a followerof the global agenda but, for the first time, it is now aleader,” explained Peter Brabeck-Letmathe, Chairmanof the Board, Nestlé, Switzerland; Member of theFoundation Board of the World Economic Forum; andCo-Chair of the World Economic Forum on East Asia.“The world looks to this region to get it out of thecurrent financial crises.” While there is clearly someambivalence about Asia’s readiness to take up themantle, Asian leaders must step up to the challenge.

The business sector must take the lead – especially inaddressing pressing problems such as rising food andenergy prices that are generating discontent amongpeople. “We are closer to the people, whilegovernment tends to lead and tell people what to do,”said Lam Di Don, Chief Executive Officer and Co-Founder, VinaCapital Group, Vietnam. The key toresponding to uncertainties is to provide effectiveleadership in both the public and private sectors. “Weshould always establish a very good mechanism to

connect the people and government so that thecomplaints of ordinary people are heard,” said HuangXingguo, Mayor of Tianjin, People’s Republic of China.“The best solution is transparency and openness.”

Concluded Jamshyd N. Godrej, Chairman andManaging Director, Godrej & Boyce, India; Co-Chair ofthe World Economic Forum on East Asia: “It’s aproblem of governance, not with the type ofgovernment you have.”

The World Economic Forum on East Asia wasorganized under four sub-themes: Asian Leadership,Global Risks, Sustainable Growth andCompetitiveness.

“Things are moving so fast thatgovernment cannot respond.”

Lam Di Don, Chief Executive Officer and Co-Founder,

VinaCapital Group, Vietnam


Asian Leadership

Asian economic dynamism amid the faltering globaleconomy has underscored how the centre of gravityof the global economy is shifting.

• While Asia’s voice and influence on the world stageare increasing, the region remains under-represented in international institutions

• But the readiness of Asia to assume the mantle ofglobal leadership is in question, given what someperceive to be weak leadership at the national andregional levels

• A key question is whether Asia has the capacity toaddress the challenges posed by rising energy andfood prices, as well as the issue of environmentaldegradation

Global Risks

Asia is facing three major global risks – inflationresulting from soaring food and fuel prices, the rise ofprotectionism, and questions about security in theregion.

• The rise of inflation spurred by increases in fuel andfood prices could undo the economic progress thatthe region has made since the financial crisis morethan a decade ago

• Solving the food and energy problems will requireconcerted action among countries in the region andcooperation between the region and the rest of theworld

• Given the rising spectre of protectionism, theinternational community must refocus attention onthe Doha Round of global trade talks and the needfor the negotiations to be concluded quickly andsuccessfully

• East Asia must reflect on how the securityarchitecture of the region should develop. TheASEAN Regional Forum could play an expandedrole as the main pan-Asian forum for discussions onsecurity issues with all the global players, includingthe US, Europe and Russia

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“This meeting is a good opportunity tostudy what changes are happening inthe region and how we can collaborateto affect its politics and economics.”

Takao Kusakari, Chairman, Nippon Yusen Kabushiki Kaisha

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

East Asia

“The mood today is more concernedabout food prices than protectingfarmers.”

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

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

Asia

7 | World Economic Forum on East AsiaFrom left to right: Jaime Morales Carazo, Vice-President of Nicaragua; Elias Antonio Saca, President of El Salvador; Patrick Manning, Prime

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

Sustainable Growth

Concerns over food and fuel prices seemed toovershadow long-term questions about sustainablegrowth in Asia. Still, participants stressed theimportance of addressing the challenges of climatechange and water scarcity.

• Efforts to address the fuel and food crises mustinclude both short-term measures and more long-term remedies to ensure sustainable growth

• As the continent gets wealthier, Asia must resolutelyfocus on the problem of the gradual depletion of itsresources, including water

• To effectively address the challenge of sustainablemanagement of resources to secure growth, theregion must find collaborative solutions, includingpublic-private partnerships

• Companies must embrace their socialresponsibilities and the importance of engaging insociety on major global issues. Corporateengagement in society is most effective whenaligned with the enterprise’s business proposition

Competitiveness

Fast-growing Asia may be a “cushion” for the falteringglobal economy, but it has not yet become the fine-tuned engine of growth that many may alreadyperceive it to be.

• The current global economic storms will be a majortest for Asia’s economies

• The key question is whether Asian countries cancontinue to improve their competitiveness

• Collaboration among governments and enterprises,between the public and private sectors, and amongand within companies, is a key to boostingcompetitiveness. Collaboration in R&D increasesadvantages for Asian companies

• The main challenge for government and business isto improve governance standards and to constantlyretool and reform

“Multilateralism is still the priority. Asiancountries feel that it is crucial tocomplete the Doha negotiations. Weneed to gain certainty.”

Mari Pangestu, Minister of Trade of Indonesia

“I wish to examine together with youcomprehensive and integratedresponses to the issues of climatechange, development, water, and food,which are all mutually interlinked.”

Yasuo Fukuda, Prime Minister of Japan


Asian Leadership

Asia’s dynamism is cushioning the global economyfrom a sharp slowdown brought about by the US sub-prime crisis and Europe’s anaemic growth. Led byChina and India, the region is picking up the slack inglobal demand and staving off recession as it facesstrong headwinds of falling US import demand andrising food and fuel prices.

Taking particular note of Asia’s robustness, LordLevene, Chairman, Lloyd’s, United Kingdom; Co-Chairof the World Economic Forum on East Asia, toldparticipants that the centre of economic gravity hasshifted dramatically. “If you’re travelling in Europe andthe US, there’s a feeling of doom and gloom. Here,you step off the plane and it’s the opposite. This is theright place to be at the moment,” he said. In contrast,a faltering US economy and the much-criticized USmilitary attack on Iraq have greatly discredited thecountry’s image, power and self-confidence. While theUS is widely expected to remain a dominant player inworld affairs, its recent problems and hubris areincreasingly seen to have hastened the shift to a newpost-US world.

That shift was most sensationally signalled when Asianand Middle Eastern sovereign wealth funds bailed outWall Street’s finest after they suffered multibillion dollarwrite-offs from derivatives trading and sub-prime andreal estate lending. The humiliating reversal of fortunescame just over a decade after the 1997-1998 Asianfinance crisis unleashed a series of reforms across theregion aimed at improving corporate andmacroeconomic governance.

In keeping with its growing economic clout (see Figure1), Asia has also been given a louder voice andgreater responsibility on the world stage. Internationalinstitutions of global governance such as the UnitedNations, the World Bank and the InternationalMonetary Fund (IMF) have begun to place Asians atthe apex of their leadership. Today, a former SouthKorean foreign minister is the Secretary-General of theUN; a former Hong Kong civil servant runs the WorldHealth Organization; a Japanese heads the UnitedNations Educational, Scientific and CulturalOrganization; and a Chinese academic is the WorldBank’s chief economist. In addition, three Asiancountries – China, India and South Korea – have been

“If you’re travelling in Europe and theUS, there’s a feeling of doom andgloom. Here, you step off the plane andit’s the opposite. This is the right placeto be at the moment.”

Lord Levene, Chairman, Lloyd’s, United Kingdom; Co-Chair of

the World Economic Forum on East Asia

“The question is: Does Asia have theinstitutions, the leadership and theinclusiveness to lead in the long run?”

Azman Mokhtar, Managing Director, Khazanah Nasional,

Malaysia


invited to the G8 Summit on climate change inHokkaido, Japan.

But more needs to be done to convince many Asiansthat the region’s representation within global governingbodies is commensurate with its economic prowess.Consider the UN Security Council: its only permanentAsian representative is China, even though Asia claims60% of the world’s population and generates one-thirdof global GDP. Europe, with just 11% of the globalpopulation, boasts three members. Then there is therule that a European should occupy the top seat atthe IMF, while the chief position at the World Bank isreserved for an American.

No wonder Yashwant Sinha, Member of Parliament;Minister of External Affairs (2002-2004) and Minister ofFinance of India (1998-2002), was sceptical. Hemaintained that, had the sub-prime crisis originated inAsia or Latin America, the IMF would have dispatched“huge teams” there to order reforms. Yet in the face of

Japan

G7 (x-Japan)

Forecast

Figure 1: East Asia's Share of the World Economy

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

East Asia's increasing share of the world economy is not limited to China's forecast growth

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a major regulatory failing in the US, the “IMF iskeeping quiet, doing nothing,” he charged. To be sure,soaring commodity prices (see Figure 2), food and fuelin particular – rice, the staple food for 2.5 billionAsians, has more than tripled in price in Thailand sinceJanuary, while diesel has risen over 26% in Vietnam –are reinforcing the perception that present globalgovernance is inadequate. Marcus Agius, Chairman,Barclays, United Kingdom, described the internationalinstitutions as “pretty out of date”.

Figure 2: Commodity Prices

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

Prices for iron ore and rice rising as dramatically as oil

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“The global economic slowdown mayinspire protectionism and the impositionof regulations that would impede ratherthan support growth.”

Marcus Agius, Chairman, Barclays, United Kingdom


Meanwhile, as Yasuchika Hasegawa, President,Takeda Pharmaceutical Company, Japan, argued, it isunfair to blame high-consuming developing nations inAsia for high energy prices and place more of theburden on them to deal with the problem of climatechange. Asking developing economies such as Chinato shoulder more of the responsibility for reducingcarbon emissions is unfair when developed countriessuch as Japan and Germany produce more than threetimes per head the CO2 levels, Hasegawa reckoned.

Is Asia ready to assume the global mantle ofleadership? Can it? There are those who have theirdoubts. “The question is: Does Asia have theinstitutions, the leadership and the inclusiveness tolead in the long run?” Azman Mokhtar, ManagingDirector, Khazanah Nasional, Malaysia, asked. He isnot sanguine. “We don’t see it,” Azman said. “There isa lack of leadership in the national and regional levels,much less at the global level.”

Citing the track record of ASEAN, the region’s mostestablished multilateral grouping, Musa Hitam,Chairman, Sime Darby, Malaysia, a former Malaysian

deputy prime minister, said he, too, is not hopeful.ASEAN, for instance, has the capacity to tackle thefood inflation problems in a collective and concertedmanner but has not done so, despite much talk overthe years of collaboration in agriculture, he pointedout. Asian countries have to stop being insular if theregion is ever to forge a shared agenda for tacklingglobal uncertainties including energy, water andenvironmental constraints, participants agreed.

Badawi issued a timely call for national and regionalaction: “Many of us have instituted measures weconsider in the best interests of our economies andour people. But it is too evident that these measureswill only have limited impact as food and fuel pricescontinue to soar while the global economy is on theverge of a recession.” For now, Asia’s insatiableappetite for consumer goods and the abundance ofinvestment opportunities will ensure that the regionremains the locomotive for the world economy.

“Research is of paramount importancewhen it comes to food and agriculturesolutions.”

Musa Hitam, Chairman, Sime Darby, Malaysia

“In Japan, the government has beenreforming for the last seven years, withor without a crisis, but it is also key tolook at reforms both on a short andlong term basis.”

Yoriko Kawaguchi, Member of the House of Councillors,

Japan; Minister for Foreign Affairs of Japan (2002-2004).

Business leaders at the World Economic Forum on EastAsia highlighted the role of government in food priceincreases, warning of mounting unrest andprotectionism if urgent action is not taken.

Peter Brabeck-Letmathe, Chairman of the Board,Nestlé, Switzerland; Member of the Foundation Boardof the World Economic Forum; Co-Chair of the WorldEconomic Forum on East Asia, attributed two-thirds ofthe food price rises to government decisions. He said:“About 10% of food price increase can be due to theincrease in fuel, 10% from changes in lifestyle … aboutone-third of the price increase, we will give it to thedecision to use food for biofuels … and about one-thirdto political decisions to stop exports … and 10% fromspeculators.”

Government subsidies, which have long distortedagricultural prices, keep food issues political.

Other factors driving up food prices include inadequateinvestments in infrastructure, particularly in developingcountries like Indonesia, resulting in higher logisticalcosts, and in research and development. Musa Hitam,Chairman, Sime Darby, Malaysia, called on ASEAN toact collectively in search of long-term solutions ratherthan knee-jerk reactions.

Michael J. Roux, Chairman, Roux International,Australia, said the issue of food price increase shouldbe treated separately from the fuel crisis, noting thatfactors supporting the oil price increase are lesssustainable. He said he believes that the oil price wouldcollapse if the US goes into a recession.

Some participants felt reform is needed in structuringincentives to influence energy consumption behaviour,for example, lifting fuel subsidies that have led to pricedistortions.

Governments’ Role in Fuel and Food Hikes



Global Risks

Words of one Asian minister at last year’s WorldEconomic Forum on East Asia proved to be propheticwhen he warned, “It’s precisely because everyone’sfeeling good that we know something is coming.” TheAsian landscape then was brimming with optimism.Interest rates and inflation were low, companies wereenjoying booming profits and governments werereporting healthy tax takings. Fast forward a year –and that upbeat sentiment has given way to deepanxiety.

With soaring food and fuel prices, regional equitymarkets rapped by the unwinding sub-prime crisisand threat of a global economic downturn, the moodat this year’s World Economic Forum on East Asiawas predictably sombre. Inflation was understandablyforemost on the minds of participants. Rajat M. Nag,Managing Director-General, Asian Development Bank,Manila, called it an issue of grave concern. Hepredicted inflation for the region would surpass theADB’s April forecast of 5.1% for the year.

Nag also warned that Asia’s “good growth story” isunder threat if swift government response is notforthcoming in the form of tightened monetary andfiscal policies. However, noted one panellist, raisinginterest rates may not arrest rising prices, especially ifinflation is not generalized and limited to food andenergy.

Leaving aside the debate on monetary policy, therewas agreement that governments should intervenequickly by giving targeted support to the poor –hardest hit by rising prices (see Figure 1). According tosome estimates, about 100 million people havedescended into poverty worldwide in the wake of thiscrisis. Low and middle income groups are feeling thestrain.

“The food crisis is an affordability – notan availability – problem.”

Rajat M. Nag, Managing Director-General, Asian Development

Bank, Manila

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

Yoshimi Watanabe, Minister of Financial Services and

Administrative Reform of Japan


Participants concurred that solving the food problemwill require concerted action within Asia and betweenthe region and rest of the world. Food surplus nationsneed to put collective interests above national ones byreleasing their stockpiles to those facing shortages.International aid is also urgently required tosupplement national rescue efforts aimed at easingthe suffering of those most affected.

While solutions are being deliberated, simmeringtension over the hike in food and fuel prices hasmeanwhile led to mass protests reminiscent of riots inthe immediate aftermath of the Asian financial crisis.Inflation has morphed into a political risk, testing themettle of several regimes in the region. “Things aremoving so fast that government cannot respond,”warned Lam Di Don, Chief Executive Officer and Co-Founder, VinaCapital Group, Vietnam. “If governmentdoesn’t come out with new solutions, they will fall

Figure 1: Rising Food Prices, Unequal Impacts

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

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back on old tools” such as authoritarian measures tosquelch protests.

Asian governments, some participants pointed out,need to rethink existing policies in view of currentrealities – notably fuel subsidies, which have led toprice distortions and unbridled energy consumption.However, it is a task that requires tremendous politicalresolve as governments face the conundrum ofbalancing the total or gradual removal of anunsustainable policy that threatens to further stokeinflation with the political costs of doing so.

In the longer term, reform is needed to address thedeeper issue of the energy crisis – excessivedependence on fossil fuels. One panellist said that it istime for Asian governments to seriously considerdiversifying their energy mix to include hydro-electricity, solar and wind power, fuel derived frombiomass and – albeit controversial – even nuclearenergy.

“Given the deep integration of theglobal economy, the slowdown ishaving a great impact on oureconomies. We in Asia should worktogether to find solutions.”

Vu Van Ninh, Minister of Finance of Vietnam


Another looming global risk is the rise ofprotectionism. There are worrying signs that politiciansin Europe and the United States are prepared tointroduce policies to shield their domestic industries inview of the global economic slowdown, observedseveral participants. Sharply critical of politicians whopander to their electorate, meeting Co-Chair LordLevene cautioned Western developed economies thaterecting protectionist barriers would backfire. “If yougo to any Wal-Mart store in the US, about 60% to80% of everything is made in China. If you cut off allthat manufacturing and say you are going to producethese things domestically, the cost will go up to levelssuch that the public – which enjoys a high standard ofliving now – will not be able to buy these thingsanymore.”

Agreeing on the need to keep free trade alive, RalphR. Peterson, Chairman and Chief Executive Officer,CH2M HILL Companies, USA; Co-Chair of the WorldEconomic Forum on East Asia, said protectionism isan enormous risk and its pursuit will be tragic. Headded that a retreat from a liberal trade regime is agrave danger to the world. Another participant issueda dire warning: the ingredients are there for a tradewar to break out. “What will we be celebrating in2019?” he asked. “Are we going to be looking at theopportunities that this fantastic era of globalization hasbrought about or are we going to be reflecting on theashes of World War Three?”

The rising threat of protectionism has refocusedattention on the outcome of the Doha Round of globaltrade talks. Many participants shared the concern

that, if no breakthrough is achieved at the negotiationsbefore the US presidential elections in November, freetrade and other global endeavours will suffer asetback that will stall progress for years. Lamentedone panellist: “How can we envisage collaborating oncritical issues such as climate change and poverty ifwe cannot collaborate on Doha?” In the meantime,Asian countries are certainly collaborating together,with intra-Asian trade growing faster than tradebetween Asia and the rest of the world (see Figure 2).

Security in the region was yet another concern vexingparticipants. The United States’ heavy involvement inIraq and Afghanistan in recent years has raised doubtsover its commitment to East Asia. Coupled with therise of China and India, the region faces an emergingsecurity dilemma that may potentially threaten itsprosperity. What should replace a US-centric securityarchitecture if it is deemed irrelevant in a multipolarworld order?

Figure 2: Trade within Asia

Source: IMF Direction of Trade Statistics

Exports within developing Asia represent a growingshare of all exports from developing Asia

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


At a panel discussion on the issue, participants wereconfident that US troops are not likely to significantlyreduce their troop presence in Asia. Even in the eventof a diminished US military role in the region, mostwere optimistic that closer ties between China andTaiwan will offset the reduced presence. Cross-straitrelations recently improved when both sides signed apact to improve economic and cultural links. Betterrelations further north are also helping to lessentensions. Beijing and Tokyo have just concluded alandmark deal to set aside a territorial dispute andjointly develop natural gas fields in the East China Sea.

Most panellists favoured having a less formalmultilateral security arrangement over a new regionalmilitary alliance. They noted that ad hoc and lessinstitutional arrangements have served the region welland cooperation should continue in this less rigidformat, citing the six-party talks on North Korea andcollaboration among the navies of the US, Australia,India and Japan during the Asian tsunami crisis asexamples of success.

Even the US, one panellist noted, is graduallychanging its mindset and has come to realize thatmilitary force itself does not guarantee security in Asia.He observed that the US is increasingly moresupportive of using regional forums to deal withsecurity issues (e.g. its recent appointment of apermanent ambassador to ASEAN). Someparticipants suggested that the ASEAN RegionalForum (ARF) play this prime role. They proposed thatthe ARF should be expanded to create a pan-Asiandialogue and added that the US, Europe and Russiashould not be left out of this expanded forum.

The international credit drought created by the US sub-prime meltdown has challenged the underlying riskmanagement models of both central bankers and industryexecutives.

While there has not been a decoupling of Asian and USfinancial markets as a result of the interconnectedness offinancial systems, the current financial turmoil does not posesystemic risks to countries in East Asia. This was theunanimous assessment of panellists in a session on financialrisk, including Shaukat Aziz, Prime Minister of Pakistan,(2004-2007); Nobuyoshi John Ehara, Partner andRepresentative Director, Unison Capital, Japan; BenjaminJenkins, Senior Managing Director, Blackstone Group, HongKong SAR; and Zeti Akhtar Aziz, Governor, Bank NegaraMalaysia, Malaysia.

They pointed out the need to differentiate between capitalmarkets and the real economy. While Asian countries haveseen a dent in their equity markets in tandem with the fall inUS stock markets, most Asian economies are still recordinggood growth, unlike their Western counterparts.

Summing up the sentiment of most of the panellists, oneparticipant said: “When we faced the financial crisis 10 yearsago, all analysts and the IMF said we would have a lostdecade. But there was a quick resumption of growth formost countries in the region. That is due to the flexibility ofAsian economies, which were able to bounce back in ashort space of time. Therefore, in the current environment, ifwe strip away the contagion effect from the sub-prime crisisand look at the economies, I’m optimistic.”

Participants voiced their belief that, a year from now, Asiawill remain the fastest-growing region in the world becauseof its resilience in absorbing the shocks from the currentfinancial crisis, its talented pool of human capital,competitiveness relative to other parts of the world, andpolitical stability.

Turning to the issue of inflation, most of the panellists agreedthat it is a threat that must be addressed immediately as thesituation is fermenting social unrest. However, they werecognizant of the difficulty Asian governments face inbalancing the seemingly conflicting interests of monetarypolicy and economic growth.

The Systemic Financial Risks ahead for Asia

Zeti Akhtar Aziz, Governor, Bank Negara Malaysia, Malaysia


Sustainable Growth

An overwhelming 81% of business leaders respondingto a World Economic Forum survey voted for“addressing growing global concern overenvironmental challenges such as climate change andwater” as the top choice of issues with the greatestimpact on Asia.

Other major concerns included “preventing politicaland economic instability linked to rising food andenergy prices” and “managing the social,environmental and infrastructural implications of rapidurbanization”.

Notwithstanding, at the World Economic Forum onEast Asia, climate change and water were somewhatsidelined by the clear and present danger of spirallingfood and fuel prices.

Food, fuel and finance, or the “Three Fs”, as Ahn Ho-Young, Deputy Minister for Trade of the Republic ofKorea, put it, were hot topics as rising prices havestoked public anger and sparked demonstrations

across Asia in recent months. The morning Ahn spokeat a panel session, the front page of a Koreannewspaper carried a photograph of more than 5,000truck drivers striking in South Korea, demanding thatthe government increase subsidies for fuel, authorizehigher freight charges and introduce a minimum wage.

Demonstrations were also held in Indonesia, Malaysia,India, Thailand, Myanmar, Hong Kong and Nepal,where prices of daily necessities like rice, corn,soybeans, cooking oil, kerosene and gasoline havesurged. Governments have been forced into quick-fixactions including reductions in import tariffs onagriculture products, cash rebates on petrol and dieseland incentives for farmers to increase productivity.

Fuel subsidies are common in Asia’s developingcountries – they account for 2% of India’s GDP and30% of Indonesia’s budget. Governments riskfomenting political unrest if they raise prices or cutsubsidies, as those affected are mainly poor peoplewho spend the bulk of their earnings on food andtransport. Last year’s mass protest in Myanmar – thecountry’s largest in 20 years – and the resultingmilitary crackdown followed announcements by thegovernment of hikes in gasoline and diesel prices.

Mari Pangestu, Minister of Trade of Indonesia, said hergovernment responded to the global shock of risingfood and fuel prices by lowering tariffs related toagriculture products. It tries not to control fuel prices,which have increased by 30%, preferring to letdomestic prices adjust as gradually as possible. At thesame time, the government aims to ease the burden

“Governments should take the short-term pressures and challenges and turnthem into opportunities, such asseeking alternative fuel resources andincreasing efficiency in oil and foodconsumption.”

Ahn Ho-Young, Deputy Minister for Trade of the Republic of

Korea


of rising food prices by giving incentives to farmers toexpand production, especially of crops that can beharvested quickly.

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

Inflation aside, the falling US dollar is also adding toAsia’s economic woes. The faltering currency ismaking locally manufactured goods relatively moreexpensive in dollar terms and, coupled with the sharpslowdown in the US economy, is threatening toundermine Asia’s much-vaunted export power. Day today, currency volatility is hampering the ability ofbusinesses to run their operations and plan strategy.Exports have held up so far, thanks to gains in Asianproductivity and growing intra-regional trade. Whetherthe strengthening of Asian currencies is a long-termphenomenon remains to be seen.

Also straining resources is the growing urbanization ofAsia resulting from rural-urban migration. This has alsowidened the gaps in infrastructure and skilled humancapital in many of the region’s economies. Participantsdebated whether the private or public sector shouldtake the lead, or whether public-private partnershipsshould be the main catalysts for change. Explosivegrowth has outpaced the capacity of institutions tosupply skills.

Asian companies need to find innovative ways to getaround resource constraints and infrastructurebottlenecks. Solutions could include telecommutingand the creation of smaller urban centres. Someparticipants argued that mounting urbanization wouldlead to more pressure for democracy, which Asiangovernments may not be able to ignore. Localgovernments could become more powerful engines ofchange than central governments.

Source: World Bank, 2005

Figure 1: Water Rates Around the World

$1.25

1.00

.75

.50

.25

0

Ave

rage

wat

erta

ri!(U

S$/k

l)

OECD East AsiaPaciÞc

Latin AmericaCaribbean

Middle EastNorth Africa

South Asia

Water tari!s across Asia are lower than in other developing countries

Eastern andCentral Asia

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

Ralph R. Peterson, Chairman and Chief Executive Officer,

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

Forum on East Asia


Another pressing long-term concern is the gradualdepletion of Asia’s resources, including water. Over-exploitation, excessively low tariffs (see Figure 1), rapidurbanization, industrial pollution and climate changehave exacted a heavy toll on this precious resource.Growing affluence in China and India have also led toa higher meat diet, which requires 10 times morewater than a vegetarian diet. Co-Chair Brabeck-Letmathe did not mince words when he repeated thiswarning: “We will be running out of water long beforewe run out of oil.” He lamented that more of theworld’s GDP has been devoted to the climate changeissue and not enough resources allocated to water.“One out of every five children is dying every 20seconds because we haven’t been able to solve theproblem of clean water today,” said Brabeck-Letmathe.

Meeting Co-Chair Peterson called for more politicaland institutional collaboration, saying that the watersystems are “so Balkanized [that] it’s difficult to get acomprehensive view of how to use the resourcesefficiently.” He noted that water is not free and thesooner market forces are applied to the pricing ofwater, the better. A more realistic pricing wouldminimize leakage and act as a deterrent to wastage.Water tariffs across Asia are among the lowest in theworld.

The issue of water, like climate change, is gainingmore awareness as Asian corporations consider theirsocial responsibilities in championing the cause of

sustainable growth. Many are realizing that regionaland international agendas are increasingly formingaround universal issues, and environment-relatedproblems such as sustainable resources and healthaffect all countries and, consequently, all businesses.

Corporate engagement can take five forms: corporategovernance, corporate philanthropy, corporate socialresponsibility (CSR), social entrepreneurship andcorporate global citizenship.Corporate global citizenship and CSR are distinct butinterlinked. CSR programmes often include incentivesto promote the environment. Companies canencourage fuel savings, sustainable farming and cleanair with a variety of financing incentives andtechnological innovation. Japanese shipping lineNippon Yusen Kabushiki Kaisha (NYK Line), forexample, has cut its fuel bill by 9% by takingadvantage of sea currents to help its vessels sail.

Corporate global citizenship and CSR activities aremost effective when aligned with a corporation’s ownunique resources. Goodyear Tire ManagementCompany (Shanghai), for example, conducts freeinspections for cars in China and researches thepotential use of new materials, such as corn, to maketyres. By becoming more aware of howinterconnected the world and its trading systems havebecome, Asian enterprises are slowly but surelystepping up to their responsibilities of being goodglobal corporate citizens.

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

Rapid urbanization, industrialization, changing diets andclimate change are aggravating the effects ofunsustainable water use in Asia.

The first issue is lack of awareness by most countriesand policy-makers of the urgency and scale of theimpending global water crisis.

People expect water to be available and inexpensive,but don’t realize that, like oil, it is a scarce commodity.There is also a need to create greater awareness of theuse of water for agriculture, which normally uses thelargest proportion of the supply.

The second issue is fixing the problems in developingcountries. One-third of the world still does not haveaccess to clean water despite technological advancesand assistance from developed countries. In fact,whether run by the public or private sector, waterleakage and pollution continue to plague bothdeveloped and developing countries. While watersupply in most countries is managed mostly by thepublic sector, there is no clear consensus as to whocan do a better job in preventing such problems.

Water should be viewed on a more multidimensionalscale, because it is interconnected with issues likeclimate change and other global problems. This wouldhelp overcome constraints developed countriesexperience when devoting resources to waterseparately.

Water pricing was a favoured measure among leadersat the World Economic Forum on East Asia in KualaLumpur. One suggested providing a minimum level tomeet “human rights” requirements free of charge, andpricing upwards to encourage proper usage.

Finally, more research is needed to produce hard-hittingfacts and figures to convey the severity of the problem.

Managing Asia’s Most Valuable Resource


“We will be running out of water long beforewe run out of oil.”

Peter Brabeck-Letmathe, Chairman of the Board, Nestlé,

Switzerland; Member of the Foundation Board of the World Economic

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


Competitiveness

With the downturn in the US and the resultingslowdown in the global economy, Asia’s economies,particularly the fast-growing giants China and India,have been recognized for providing a “cushion” for therest of the world. “In the short run, Asia will take upthe slack,” said Azman Mokhtar, Managing Director,Khazanah Nasional, the investment holding arm of theMalaysian government. This is a significant turnaroundfrom 1997-1998, when a financial crisis hobbled EastAsia and pushed many of the region’s economies intorecession, wiping out significant wealth and pushingmany people back into poverty.

This has certainly heightened the perception that theglobal economic centre of gravity is inexorably shiftingto Asia. Days after the meeting in Kuala Lumpurended, the news that Hong Kong and Singapore tookthe top two positions in the Enabling Trade Indexranking released by the World Economic Forumserved as further evidence of East Asia’s economicstrength and openness to trade and investment.

But it is important to maintain perspective. While EastAsian growth may be strong and its economies arecertainly in better condition and more resilient thanthey were a decade ago when the financial crisis hit,most of the region’s economies are not as competitiveas they may be perceived. Only Singapore, at numberseven, ranked in the top 10 on the World EconomicForum’s 2007-2008 Global Competitiveness Index.Other top East Asian performers included South Korea(11), Hong Kong SAR (12) and Taiwan, China (14). ThePeople’s Republic of China, meanwhile, ranked 34th,while India was 48th. Cambodia came in at 110.

Indeed, with the storms in the global economy andhigh energy and food prices raising uncertaintiesabout the benefits of globalization, “the question iswhether Asia can maintain its growth momentumagainst strong headwinds,” said Børge Brende,Managing Director, World Economic Forum. Certainly,there is cause for concern that some Asian economiesare in trouble. “Given the deep integration of theglobal economy, the slowdown is having a greatimpact on our economies,” Vu Van Ninh, Minister ofFinance of Vietnam, explained. “Vietnam is beingimpacted especially by high inflation. We in Asiashould work together to find solutions.”

Implicit in Brende’s observation is a warning that Asianeconomies cannot be complacent and must focus onimproving productivity and boosting competitiveness ifthey are to become an authentic and sustainabledriver of growth in the world economy and not just areliable “cushion”. As Vu pointed out, the way to findsolutions is to collaborate. Reckoned YoshimiWatanabe, Minister of Financial Services and

“Economic globalization and regionalintegration will further promotecooperation among Asian countries andAsia will be the most dynamic regionand backbone of the world economy.”

Huang Xingguo, Mayor ot Tianjin, People's Republic of China


Administrative Reform of Japan: “We are in the sameboat; we share the same destiny.”

A paradoxical principle for success in the globaleconomy is that collaboration can enhancecompetitiveness. Faced with the emergence of Chinaand India, the 10 nations of South-East Asia havecome to understand and accept that they mustcollaborate and aim to create a European Union-stylecommunity if they are to remain competitive andrelevant in the global economic landscape. Butcreating the political and commercial will to embracesuch an enterprise has been difficult.

In Asian economies, many participants observed,governments or major family-owned corporations withvested interests control much of the value. Nationalinterests and protectionist tendencies have limited

collaboration and the forming of partnerships.Consider the plaintive question of one participant: “Dowe need to replicate everything?” He wondered aloudwhether it makes sense for neighbouring countries tobuild airports and seaports so close to each other.National pride and the drive to preserve one’s turfhave, in many instances, stifled logic and theunderstanding that collaboration can make everyonemore competitive and result in win-win solutions.Politics and competing motives have impeded thecreation of effective public-private partnerships, whichtoday are regarded as critical to developmentsuccess.

But all this is changing in Asia, however gradually.Governments are starting to collaborate on criticalissues including financial market stability, energysecurity and the environment. But the level ofcooperation, despite the ambitions of ASEAN, remainslow. Corporations are also cooperating – enterpriseswith suppliers, partner with partner, and evencompetitor with competitor. Collaborators mustunderstand how the other business works. For asuccessful venture, it is important to understand the“psyche” of the organization, and have a sharedvision, aspiration and culture. As in a marriage, bothsides have to work to make the relationship prosper.

There is further cause for optimism on the researchand development front. In the session entitled TheMyths and Realities of the R&D Advantage, panellistsprovided insights into how Asia is emerging as a majorhotbed of research and development, which has ledto the rise in innovation – the transformation of ideas

“The international institutions we haveat the moment are woefully inadequateto meet the global challenges. If we areproviding the bulk of the incrementalgrowth globally, we Asian nations havea vested and immediate interest inmaking sure that the global institutionsrespond to the global crisis as theyshould.”

Yashwant Sinha, Member of Parliament; Minister of External

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


into commercial value – coming out of the region inrecent years. India and China are increasing their R&Dspending by over 25% per year (see Figure 1). Moveslike these are correcting perceptions that Asia’s mainadvantage is its pool of cheap labour.

In the discussion, panellists focused on howcollaborative efforts within enterprises and amongcompanies have yielded significant opportunities for“research arbitrage” and boosted the productivity ofenterprises in such sectors as pharmaceuticals,healthcare, manufacturing and IT. In addition, theshortage of talent – not just skilled managers but fortechnical specialists such as engineers and workerswith vocational skills – means that business andgovernment must work together to enhance thequality of educational institutions from the primary levelupwards.

Figure 1: Worldwide R&D Spending

Source: Booz & Company’s Global Innovation 1000 study

R&D spending in China and India is growing rapidly, but from a small base

0.4%

0.2

0

-0.2

-0.4

Chan

gein

R&D

inte

nsity

,200

5-06

(R&

Dsp

endi

ngas

ape

rcen

tage

ofre

venu

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0

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

105 30%2520

Europe$132.6

Japan$96.3

Rest of World$21.4

North America$194.2

India/China$2.1

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

Indeed, the globalization of best practices, ifembraced by the region, is likely to be Asia’s trumpcard – the way in which it finally transforms itsgovernments and companies into flexible andinnovative institutions and competitive enterprisessuch as Japan’s Toyota. The automotive giant hasproven that collaboration within the group is integral toits success and a sense of community enhances theeffectiveness and cooperation of employees andsuppliers.

In short, governance in both the private and publicsectors must be improved if Asia is to transcend from“cushion” to fine-tuned “engine” of competitiveness. Inthe session on Delivering a Governance Dividend forAsia, Shaukat Aziz, Prime Minister of Pakistan (2004-2007), provided a template for a new paradigm ofgovernance that emphasizes delivery and substance.Governments, he stressed, need to retool and reformat all levels to quickly meet new challenges such asthe food and energy crises. Strong leadership at thetop is essential, with those in authority taking pre-emptive measures to head off problems, rather thansimply reacting to events. “Things move so fast,”warned Aziz, who could well have been speakingabout the business sector too. “You have got to applynew solutions to deal with new challenges thatemerge. To do that, you need proactive government,strong leadership and a bureaucracy that will supportchange. You need a total shift in thinking.”

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

The general perception is that Asians are not justcompetitive; they are hyper-competitive. But is thisperception representative? The truth draws a morenuanced picture as the region encompasses a largerange of competitiveness performances, from highlycompetitive countries to those among the mostchallenged. This provides an extremely heterogeneouspicture with respect to the levels of economic growthand prosperity achieved in the region.

In The Global Competitiveness Report 2007-2008, nineAsia Pacific countries are among the top 30 in the indexrankings, led by Singapore, Japan, South Korea andHong Kong. The countries in the next tier are amongthe largest markets in the region, led by China andIndia. A number of smaller economies close the rankingfor the region, with Mongolia, Bangladesh, Cambodia,Nepal and Timor-Leste all positioned at the verybottom.

In this sense, can one prioritize the key factors on whichcountries in the region should focus to become morecompetitive? Innovation and business sophistication iscrucial for the top-tier countries; improving the quality ofhuman capital and market efficiency provides a basis fordevelopment and growth for the middle rankingcountries; and factors such as improving basiceducation, health systems and infrastructure are criticalfor the lowest-ranked economies.

The World Economic Forum on East Asia addressed, inits various sessions, the drivers of economicdevelopment and, more specifically, held a discussionon identifying best practices in competitiveness. Thesession highlighted a need for a solid macroeconomicarchitecture including strong and transparentgovernance, public-private sector alignment, an efficientbusiness infrastructure, openness to international tradeand investment, among other factors.

Competitiveness in East Asia



Acknowledgements

Strategic Partners

American International Group (AIG)Bain & CompanyBarclays PLCCredit SuisseForbesKudelski GroupManpowerMarsh & McLennan Companies (MMC)NBC UniversalNestléSK GroupUnileverWPPZurich Financial Services

Regional Partner

Sicpa Holding

Meeting Supporters

Lloyd’sOgilvy Public Relations WorldwideSime Darby

The World Economic Forum on East Asia is held with the support of the Institute of Strategic and InternationalStudies (ISIS) Malaysia.

The World Economic Forum wishes to recognize the support of the following companies as Partners orSupporters of the World Economic Forum on East Asia:


Contributors

Sushant Palakurthi Rao is Director, Head of Asia, at the World Economic Forum. W. Lee Howellis Senior Director, Head of Programming, and Senior Adviser, Asia, at the Forum. The WorldEconomic Forum on East Asia was under their direct responsibility, with Laura de Wolf, SeniorSpecialist, Events and Meeting Coordinator; and Fabien Clerc, Community Relations Manager,Asia.

Samantha Tonkin, Senior Media Manager at the World Economic Forum, worked with CiaraBrowne, Senior Community Manager, Catherine Ong, Alejandro Reyes and Wong Soo How toproduce this report.

The World Economic Forum would like to express its appreciation to the summary writers fortheir work at the meeting. Session summaries are available at:www.weforum.org/eastasia2008/summaries

Editing: Janet Hill, Editor

Design and Layout: Kamal Kimaoui, Associate Principal, Production and Design

Photographs: Azmi Abdul Alim


The World Economic Forum on East Asia Report is also available in electronic form on the WorldEconomic Forum website: http://www.weforum.org/summitreports/eastasia2008 (HTML)

The electronic version of this report allows access to a richer level of content from the meeting, includingphotographs, session summaries and webcasts of selected sessions.

The report is also available as a PDF:http://www.weforum.org/pdf/summitreports/eastasia2008.pdf

Other specific information on the World Economic Forum on East Asia, Kuala Lumpur, Malaysia 15-16 June2008, can be found at the following links:

Meeting News www.weforum.org/eastasia2008Session Summaries www.weforum.org/eastasia2008/summariesPhotographs www.pbase.com/forumweb/eastasia2008Programme www.weforum.org/eastasia2008/programmeInterviews www.weforum.org/eastasia2008/regionalupdatePartners www.weforum.org/eastasia2008/partnersWebcasts www.weforum.org/eastasia2008/webcasts

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 2007

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