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World Economic Forum on East Asia

Responding to New Uncertainties


Kuala Lumpur, Malaysia 15-16 June 2008

Report
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Contents

Page 3
Preface

Page 4
Summary: Responding to New Uncertainties

Page 8
Asian Leadership

Page 12
Global Risks

Page 16
Sustainable Growth

Page 20
Competitiveness

Page 24
Acknowledgements

1 | World Economic Forum on East Asia


2 | World Economic Forum on East Asia
Preface

“Responding to New Uncertainties” was the theme of Japan holds the G8 presidency and the economic
the 17th World Economic Forum on East Asia, which influence of China and India continues to rise, the
was held in Kuala Lumpur. As such, 300 leaders from need for a common agenda in East Asia to address
over 25 different countries examined and discussed the key regional and global challenges is unequivocally
the challenges and priorities that will ultimately shape pressing.
the region’s future agenda.
For these reasons, we hope you find the report of this
At the last World Economic Forum on East Asia, year’s proceedings to be an insightful and timely guide
confidence in the resilience of Asia’s economies was to how the region’s leaders can respond to these new
marked by positive economic growth forecasts, uncertainties in the short term, but also which
expanding intra-regional trade, rising investments and collective actions and innovative approaches by
staggering levels of US currency reserves. In this governments, businesses and key regional institutions
context, leaders from Asia expressed their readiness will be critical for dealing with these global and
to enlarge their leadership role in global and regional regional challenges.
affairs as the centre of power shifts to Asia’s capitals
and corporate boardrooms. The World Economic Forum would like to thank the
Co-Chairs of the meeting: Peter Brabeck-Letmathe,
Only one year later, the prospect of a US recession, Chairman of the Board, Nestlé, Switzerland; Member
soaring food and fuel prices, and a downturn in global of the Foundation Board of the World Economic
demand have led to concern about Asia’s ability to Forum; Jamshyd N. Godrej, Chairman and Managing
decouple from the US sub-prime mortgage crisis, Director, Godrej & Boyce, India; Takao Kusakari,
which is expected to lead to worldwide losses close Chairman, Nippon Yusen Kabushiki Kaisha (NYK Line),
to US$ 945 billion. At the same time, the urgency to Japan; Lord Levene, Chairman, Lloyd's, United
resolve the specific consequences of climate change, Kingdom; and Ralph R. Peterson, Chairman and Chief
renewed tensions on the Korean Peninsula and Executive Officer, CH2M HILL Companies, USA.
inflationary pressures are challenging the premise that
Asia’s healthy domestic consumption alone can
ensure continued growth and stave off the negative W. Lee Howell Sushant Palakurthi Rao
externalities of a global economic slowdown. Although Senior Director, Head of Programming Director, Head of Asia
ASEAN now has an economic blueprint and charter, Senior Adviser, Asia

3 | World Economic Forum on East Asia


Summary: Responding to New Uncertainties

“We have faced serious challenges “Until very recently, East Asia was a
before, but rarely in such a potent follower of the global agenda but, for
combination.” the first time, it is now a leader. The
world looks to the region to get it out of
Abdullah Ahmad Badawi, Prime Minister of Malaysia the current financial crises.”

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


Switzerland; Member of the Foundation Board of the World
At the 17th World Economic Forum on East Asia, Economic Forum; Co-Chair of the World Economic Forum on
more than 300 business, government and civil society East Asia
leaders from 25 countries arrived knowing that the
region is facing new uncertainties. While it remains
clear that the geopolitical and economic power
equation is shifting its direction, rising food and fuel energy and the very real prospect of global economic
prices are raising the spectres of inflation and recession. We have faced serious challenges before,
protectionism and, worst of all, the possibility that but rarely in such potent combination.”
many Asians – who in recent years have scrambled
out of poverty – may again be forced back down. This The World Economic Forum on East Asia offered an
could lead to social and political instability in several excellent platform to discuss these difficult issues. As
countries in the region. Ahn Ho-Young, Deputy Minister for Trade of the
Republic of Korea, put it, “the World Economic Forum
Indeed, these may be the best of times and the worst is about turning challenges into opportunities.”
of times for East Asia. At the Welcome Reception for
participants, Malaysian Prime Minister Abdullah That is precisely what participants aimed to do in
Ahmad Badawi hailed the region as full of “immense Kuala Lumpur. It was evident from the interactive
promise and dynamism” with people who “brim with discussions that East Asia’s leaders are responding to
entrepreneurial spirit and competitive drive”. But, he the new uncertainties by taking a long-term view, not
warned, “the economic well-being of the region and, panicking. A survey by the World Economic Forum
indeed, the world, is coming under increasing and indicated that the business sector remains resolutely
serious threat. The threat is emanating from three focused on the big picture and how Asia can
primary sources: rising food prices, spiralling costs of contribute to securing and sustaining global growth,

4 | World Economic Forum on East Asia


peace and stability. An overwhelming 81% chose “Things are moving so fast that
“addressing growing global concern over government cannot respond.”
environmental challenges such as climate change and
water” as their top priority among issues with potential
impact on Asia. Other choices included “preventing Lam Di Don, Chief Executive Officer and Co-Founder,
political and economic instability linked to rising food VinaCapital Group, Vietnam
and energy prices” and “managing the social,
environmental and infrastructural implications of rapid
urbanization”.

East Asia is at a crossroads in its role in the global connect the people and government so that the
economy. “Until very recently, East Asia was a follower complaints of ordinary people are heard,” said Huang
of the global agenda but, for the first time, it is now a Xingguo, Mayor of Tianjin, People’s Republic of China.
leader,” explained Peter Brabeck-Letmathe, Chairman “The best solution is transparency and openness.”
of the Board, Nestlé, Switzerland; Member of the
Foundation Board of the World Economic Forum; and Concluded Jamshyd N. Godrej, Chairman and
Co-Chair of the World Economic Forum on East Asia. Managing Director, Godrej & Boyce, India; Co-Chair of
“The world looks to this region to get it out of the the World Economic Forum on East Asia: “It’s a
current financial crises.” While there is clearly some problem of governance, not with the type of
ambivalence about Asia’s readiness to take up the government you have.”
mantle, Asian leaders must step up to the challenge.
The World Economic Forum on East Asia was
The business sector must take the lead – especially in organized under four sub-themes: Asian Leadership,
addressing pressing problems such as rising food and Global Risks, Sustainable Growth and
energy prices that are generating discontent among Competitiveness.
people. “We are closer to the people, while
government tends to lead and tell people what to do,”
said Lam Di Don, Chief Executive Officer and Co-
Founder, VinaCapital Group, Vietnam. The key to
responding to uncertainties is to provide effective
leadership in both the public and private sectors. “We
should always establish a very good mechanism to

5 | World Economic Forum on East Asia


“This meeting is a good opportunity to “The mood today is more concerned
study what changes are happening in about food prices than protecting
the region and how we can collaborate farmers.”
to affect its politics and economics.”
Jamshyd N. Godrej, Chairman and Managing Director, Godrej &
Takao Kusakari, Chairman, Nippon Yusen Kabushiki Kaisha Boyce, India; Co-Chair of the World Economic Forum on East
(NYK Line), Japan; Co-Chair of the World Economic Forum on Asia
East Asia
Global Risks

Asian Leadership Asia is facing three major global risks – inflation


resulting from soaring food and fuel prices, the rise of
Asian economic dynamism amid the faltering global protectionism, and questions about security in the
economy has underscored how the centre of gravity region.
of the global economy is shifting.
• The rise of inflation spurred by increases in fuel and
• While Asia’s voice and influence on the world stage food prices could undo the economic progress that
are increasing, the region remains under- the region has made since the financial crisis more
represented in international institutions than a decade ago
• But the readiness of Asia to assume the mantle of • Solving the food and energy problems will require
global leadership is in question, given what some concerted action among countries in the region and
perceive to be weak leadership at the national and cooperation between the region and the rest of the
regional levels world
• A key question is whether Asia has the capacity to • Given the rising spectre of protectionism, the
address the challenges posed by rising energy and international community must refocus attention on
food prices, as well as the issue of environmental the Doha Round of global trade talks and the need
degradation for the negotiations to be concluded quickly and
successfully
• East Asia must reflect on how the security
architecture of the region should develop. The
ASEAN Regional Forum could play an expanded
role as the main pan-Asian forum for discussions on
security issues with all the global players, including
the US, Europe and Russia

6 | World Economic Forum on East Asia


F
M
“I wish to examine together with you “Multilateralism is still the priority. Asian
comprehensive and integrated countries feel that it is crucial to
responses to the issues of climate complete the Doha negotiations. We
change, development, water, and food, need to gain certainty.”
which are all mutually interlinked.”
Mari Pangestu, Minister of Trade of Indonesia
Yasuo Fukuda, Prime Minister of Japan

Competitiveness
Sustainable Growth
Fast-growing Asia may be a “cushion” for the faltering
Concerns over food and fuel prices seemed to global economy, but it has not yet become the fine-
overshadow long-term questions about sustainable tuned engine of growth that many may already
growth in Asia. Still, participants stressed the perceive it to be.
importance of addressing the challenges of climate
change and water scarcity. • The current global economic storms will be a major
test for Asia’s economies
• Efforts to address the fuel and food crises must • The key question is whether Asian countries can
include both short-term measures and more long- continue to improve their competitiveness
term remedies to ensure sustainable growth • Collaboration among governments and enterprises,
• As the continent gets wealthier, Asia must resolutely between the public and private sectors, and among
focus on the problem of the gradual depletion of its and within companies, is a key to boosting
resources, including water competitiveness. Collaboration in R&D increases
• To effectively address the challenge of sustainable advantages for Asian companies
management of resources to secure growth, the • The main challenge for government and business is
region must find collaborative solutions, including to improve governance standards and to constantly
public-private partnerships retool and reform
• Companies must embrace their social
responsibilities and the importance of engaging in
society on major global issues. Corporate
engagement in society is most effective when
aligned with the enterprise’s business proposition

7 | World Economic Forum on East Asia


From left to right: Jaime Morales Carazo, Vice-President of Nicaragua; Elias Antonio Saca, President of El Salvador; Patrick Manning, Prime
Minister of Trinidad and Tobago; Susan L. Segal, President and Chief Executive Officer, Council of the Americas, USA; Manuel Zelaya Rosales,
Asian Leadership

“If you’re travelling in Europe and the “The question is: Does Asia have the
US, there’s a feeling of doom and institutions, the leadership and the
gloom. Here, you step off the plane and inclusiveness to lead in the long run?”
it’s the opposite. This is the right place
to be at the moment.” Azman Mokhtar, Managing Director, Khazanah Nasional,
Malaysia
Lord Levene, Chairman, Lloyd’s, United Kingdom; Co-Chair of
the World Economic Forum on East Asia

Asia’s dynamism is cushioning the global economy That shift was most sensationally signalled when Asian
from a sharp slowdown brought about by the US sub- and Middle Eastern sovereign wealth funds bailed out
prime crisis and Europe’s anaemic growth. Led by Wall Street’s finest after they suffered multibillion dollar
China and India, the region is picking up the slack in write-offs from derivatives trading and sub-prime and
global demand and staving off recession as it faces real estate lending. The humiliating reversal of fortunes
strong headwinds of falling US import demand and came just over a decade after the 1997-1998 Asian
rising food and fuel prices. finance crisis unleashed a series of reforms across the
region aimed at improving corporate and
Taking particular note of Asia’s robustness, Lord macroeconomic governance.
Levene, Chairman, Lloyd’s, United Kingdom; Co-Chair
of the World Economic Forum on East Asia, told In keeping with its growing economic clout (see Figure
participants that the centre of economic gravity has 1), Asia has also been given a louder voice and
shifted dramatically. “If you’re travelling in Europe and greater responsibility on the world stage. International
the US, there’s a feeling of doom and gloom. Here, institutions of global governance such as the United
you step off the plane and it’s the opposite. This is the Nations, the World Bank and the International
right place to be at the moment,” he said. In contrast, Monetary Fund (IMF) have begun to place Asians at
a faltering US economy and the much-criticized US the apex of their leadership. Today, a former South
military attack on Iraq have greatly discredited the Korean foreign minister is the Secretary-General of the
country’s image, power and self-confidence. While the UN; a former Hong Kong civil servant runs the World
US is widely expected to remain a dominant player in Health Organization; a Japanese heads the United
world affairs, its recent problems and hubris are Nations Educational, Scientific and Cultural
increasingly seen to have hastened the shift to a new Organization; and a Chinese academic is the World
post-US world. Bank’s chief economist. In addition, three Asian
countries – China, India and South Korea – have been

8 | World Economic Forum on East Asia


invited to the G8 Summit on climate change in “The global economic slowdown may
Hokkaido, Japan. inspire protectionism and the imposition
Figure 1: East Asia's Share of the World Economy of regulations that would impede rather
East Asia's increasing share of the world economy is not limited to China's forecast growth
than support growth.”
50
Forecast

G7 (x-Japan)
Marcus Agius, Chairman, Barclays, United Kingdom
40
Percentage of world GDP (PPP)

30

20
Japan

10 China a major regulatory failing in the US, the “IMF is


Rest of East Asia
keeping quiet, doing nothing,” he charged. To be sure,
0
1980 1985 1990 1995 2000 2005 2010F soaring commodity prices (see Figure 2), food and fuel
in particular – rice, the staple food for 2.5 billion
Source: International Monetary Fund, World Economic Outlook Database (April 2008)
Asians, has more than tripled in price in Thailand since
January, while diesel has risen over 26% in Vietnam –
But more needs to be done to convince many Asians are reinforcing the perception that present global
that the region’s representation within global governing governance is inadequate. Marcus Agius, Chairman,
bodies is commensurate with its economic prowess. Barclays, United Kingdom, described the international
Consider the UN Security Council: its only permanent institutions as “pretty out of date”.
Asian representative is China, even though Asia claims
60% of the world’s population and generates one-third Figure 2: Commodity Prices

of global GDP. Europe, with just 11% of the global Prices for iron ore and rice rising as dramatically as oil

population, boasts three members. Then there is the 500


Oil**
rule that a European should occupy the top seat at
Index of real prices* (100=January 2002)

400
the IMF, while the chief position at the World Bank is
reserved for an American. 300
Iron
ore

Soybeans
200
No wonder Yashwant Sinha, Member of Parliament;
Rice
Minister of External Affairs (2002-2004) and Minister of 100

Finance of India (1998-2002), was sceptical. He


0
maintained that, had the sub-prime crisis originated in Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Asia or Latin America, the IMF would have dispatched * Priced in US$; US-inflation adjusted prices with April 2008 as base month
** West Texas Intermediate Crude

“huge teams” there to order reforms. Yet in the face of Source: IMF; US Bureau of Labor Statistics; PwC analysis

9 | World Economic Forum on East Asia


“Research is of paramount importance “In Japan, the government has been
when it comes to food and agriculture reforming for the last seven years, with
solutions.” or without a crisis, but it is also key to
look at reforms both on a short and
Musa Hitam, Chairman, Sime Darby, Malaysia long term basis.”

Yoriko Kawaguchi, Member of the House of Councillors,


Japan; Minister for Foreign Affairs of Japan (2002-2004).
Meanwhile, as Yasuchika Hasegawa, President,
Takeda Pharmaceutical Company, Japan, argued, it is
unfair to blame high-consuming developing nations in deputy prime minister, said he, too, is not hopeful.
Asia for high energy prices and place more of the ASEAN, for instance, has the capacity to tackle the
burden on them to deal with the problem of climate food inflation problems in a collective and concerted
change. Asking developing economies such as China manner but has not done so, despite much talk over
to shoulder more of the responsibility for reducing the years of collaboration in agriculture, he pointed
carbon emissions is unfair when developed countries out. Asian countries have to stop being insular if the
such as Japan and Germany produce more than three region is ever to forge a shared agenda for tackling
times per head the CO2 levels, Hasegawa reckoned. global uncertainties including energy, water and
environmental constraints, participants agreed.
Is Asia ready to assume the global mantle of
leadership? Can it? There are those who have their Badawi issued a timely call for national and regional
doubts. “The question is: Does Asia have the action: “Many of us have instituted measures we
institutions, the leadership and the inclusiveness to consider in the best interests of our economies and
lead in the long run?” Azman Mokhtar, Managing our people. But it is too evident that these measures
Director, Khazanah Nasional, Malaysia, asked. He is will only have limited impact as food and fuel prices
not sanguine. “We don’t see it,” Azman said. “There is continue to soar while the global economy is on the
a lack of leadership in the national and regional levels, verge of a recession.” For now, Asia’s insatiable
much less at the global level.” appetite for consumer goods and the abundance of
investment opportunities will ensure that the region
Citing the track record of ASEAN, the region’s most remains the locomotive for the world economy.
established multilateral grouping, Musa Hitam,
Chairman, Sime Darby, Malaysia, a former Malaysian

10 | World Economic Forum on East Asia


Governments’ Role in Fuel and Food Hikes

Business leaders at the World Economic Forum on East Other factors driving up food prices include inadequate
Asia highlighted the role of government in food price investments in infrastructure, particularly in developing
increases, warning of mounting unrest and countries like Indonesia, resulting in higher logistical
protectionism if urgent action is not taken. costs, and in research and development. Musa Hitam,
Chairman, Sime Darby, Malaysia, called on ASEAN to
Peter Brabeck-Letmathe, Chairman of the Board, act collectively in search of long-term solutions rather
Nestlé, Switzerland; Member of the Foundation Board than knee-jerk reactions.
of the World Economic Forum; Co-Chair of the World
Economic Forum on East Asia, attributed two-thirds of Michael J. Roux, Chairman, Roux International,
the food price rises to government decisions. He said: Australia, said the issue of food price increase should
“About 10% of food price increase can be due to the be treated separately from the fuel crisis, noting that
increase in fuel, 10% from changes in lifestyle … about factors supporting the oil price increase are less
one-third of the price increase, we will give it to the sustainable. He said he believes that the oil price would
decision to use food for biofuels … and about one-third collapse if the US goes into a recession.
to political decisions to stop exports … and 10% from
speculators.” Some participants felt reform is needed in structuring
incentives to influence energy consumption behaviour,
Government subsidies, which have long distorted for example, lifting fuel subsidies that have led to price
agricultural prices, keep food issues political. distortions.

11 | World Economic Forum on East Asia


Global Risks

“The food crisis is an affordability – not “We are in the same boat; we share the
an availability – problem.” same destiny. We should not fall into
the trap of protectionism but should
Rajat M. Nag, Managing Director-General, Asian Development help each other.”
Bank, Manila
Yoshimi Watanabe, Minister of Financial Services and
Administrative Reform of Japan

Words of one Asian minister at last year’s World Nag also warned that Asia’s “good growth story” is
Economic Forum on East Asia proved to be prophetic under threat if swift government response is not
when he warned, “It’s precisely because everyone’s forthcoming in the form of tightened monetary and
feeling good that we know something is coming.” The fiscal policies. However, noted one panellist, raising
Asian landscape then was brimming with optimism. interest rates may not arrest rising prices, especially if
Interest rates and inflation were low, companies were inflation is not generalized and limited to food and
enjoying booming profits and governments were energy.
reporting healthy tax takings. Fast forward a year –
and that upbeat sentiment has given way to deep Leaving aside the debate on monetary policy, there
anxiety. was agreement that governments should intervene
quickly by giving targeted support to the poor –
With soaring food and fuel prices, regional equity hardest hit by rising prices (see Figure 1). According to
markets rapped by the unwinding sub-prime crisis some estimates, about 100 million people have
and threat of a global economic downturn, the mood descended into poverty worldwide in the wake of this
at this year’s World Economic Forum on East Asia crisis. Low and middle income groups are feeling the
was predictably sombre. Inflation was understandably strain.
foremost on the minds of participants. Rajat M. Nag,
Managing Director-General, Asian Development Bank,
Manila, called it an issue of grave concern. He
predicted inflation for the region would surpass the
ADB’s April forecast of 5.1% for the year.

12 | World Economic Forum on East Asia


“Given the deep integration of the
Figure 1: Rising Food Prices, Unequal Impacts
global economy, the slowdown is
(food weighting within consumer price index, percent)
80 having a great impact on our
Bangladesh
70
Nigeria
economies. We in Asia should work
60

50 Afganistan
together to find solutions.”
40
Kenya Russia Vu Van Ninh, Minister of Finance of Vietnam
30

20

10 India China Brazil


UK US
0
0 1 2 3 4 5 6 7 8
Per capita income (in log)
back on old tools” such as authoritarian measures to
squelch protests.
Note: Poor people tend to spend relatively more of their income on food, and therefore suffer more when food prices go up.
Source: International Monetary Fund

Asian governments, some participants pointed out,


Participants concurred that solving the food problem need to rethink existing policies in view of current
will require concerted action within Asia and between realities – notably fuel subsidies, which have led to
the region and rest of the world. Food surplus nations price distortions and unbridled energy consumption.
need to put collective interests above national ones by However, it is a task that requires tremendous political
releasing their stockpiles to those facing shortages. resolve as governments face the conundrum of
International aid is also urgently required to balancing the total or gradual removal of an
supplement national rescue efforts aimed at easing unsustainable policy that threatens to further stoke
the suffering of those most affected. inflation with the political costs of doing so.

While solutions are being deliberated, simmering In the longer term, reform is needed to address the
tension over the hike in food and fuel prices has deeper issue of the energy crisis – excessive
meanwhile led to mass protests reminiscent of riots in dependence on fossil fuels. One panellist said that it is
the immediate aftermath of the Asian financial crisis. time for Asian governments to seriously consider
Inflation has morphed into a political risk, testing the diversifying their energy mix to include hydro-
mettle of several regimes in the region. “Things are electricity, solar and wind power, fuel derived from
moving so fast that government cannot respond,” biomass and – albeit controversial – even nuclear
warned Lam Di Don, Chief Executive Officer and Co- energy.
Founder, VinaCapital Group, Vietnam. “If government
doesn’t come out with new solutions, they will fall

13 | World Economic Forum on East Asia


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

Another looming global risk is the rise of that, if no breakthrough is achieved at the negotiations
protectionism. There are worrying signs that politicians before the US presidential elections in November, free
in Europe and the United States are prepared to trade and other global endeavours will suffer a
introduce policies to shield their domestic industries in setback that will stall progress for years. Lamented
view of the global economic slowdown, observed one panellist: “How can we envisage collaborating on
several participants. Sharply critical of politicians who critical issues such as climate change and poverty if
pander to their electorate, meeting Co-Chair Lord we cannot collaborate on Doha?” In the meantime,
Levene cautioned Western developed economies that Asian countries are certainly collaborating together,
erecting protectionist barriers would backfire. “If you with intra-Asian trade growing faster than trade
go to any Wal-Mart store in the US, about 60% to between Asia and the rest of the world (see Figure 2).
80% of everything is made in China. If you cut off all
that manufacturing and say you are going to produce Figure 2: Trade within Asia

these things domestically, the cost will go up to levels Exports within developing Asia represent a growing
share of all exports from developing Asia
such that the public – which enjoys a high standard of 45%

living now – will not be able to buy these things


Intra-Asia exports as a percentage of

anymore.”
all exports from developing Asia*

43

Agreeing on the need to keep free trade alive, Ralph 41

R. Peterson, Chairman and Chief Executive Officer,


CH2M HILL Companies, USA; Co-Chair of the World 39

Economic Forum on East Asia, said protectionism is


an enormous risk and its pursuit will be tragic. He 37
1999 2000 2001 2002 2003 2004 2005 2006

added that a retreat from a liberal trade regime is a * Excludes Japan

grave danger to the world. Another participant issued Source: IMF Direction of Trade Statistics

a dire warning: the ingredients are there for a trade


war to break out. “What will we be celebrating in Security in the region was yet another concern vexing
2019?” he asked. “Are we going to be looking at the participants. The United States’ heavy involvement in
opportunities that this fantastic era of globalization has Iraq and Afghanistan in recent years has raised doubts
brought about or are we going to be reflecting on the over its commitment to East Asia. Coupled with the
ashes of World War Three?” rise of China and India, the region faces an emerging
security dilemma that may potentially threaten its
The rising threat of protectionism has refocused prosperity. What should replace a US-centric security
attention on the outcome of the Doha Round of global architecture if it is deemed irrelevant in a multipolar
trade talks. Many participants shared the concern world order?

14 | World Economic Forum on East Asia


The Systemic Financial Risks ahead for Asia

The international credit drought created by the US sub-


prime meltdown has challenged the underlying risk
management models of both central bankers and industry
executives.

While there has not been a decoupling of Asian and US


financial markets as a result of the interconnectedness of
financial systems, the current financial turmoil does not pose
systemic risks to countries in East Asia. This was the
unanimous assessment of panellists in a session on financial
risk, including Shaukat Aziz, Prime Minister of Pakistan,
(2004-2007); Nobuyoshi John Ehara, Partner and
Representative Director, Unison Capital, Japan; Benjamin
Jenkins, Senior Managing Director, Blackstone Group, Hong
Kong SAR; and Zeti Akhtar Aziz, Governor, Bank Negara
Malaysia, Malaysia. Zeti Akhtar Aziz, Governor, Bank Negara Malaysia, Malaysia

They pointed out the need to differentiate between capital Participants voiced their belief that, a year from now, Asia
markets and the real economy. While Asian countries have will remain the fastest-growing region in the world because
seen a dent in their equity markets in tandem with the fall in of its resilience in absorbing the shocks from the current
US stock markets, most Asian economies are still recording financial crisis, its talented pool of human capital,
good growth, unlike their Western counterparts. competitiveness relative to other parts of the world, and
political stability.
Summing up the sentiment of most of the panellists, one
participant said: “When we faced the financial crisis 10 years Turning to the issue of inflation, most of the panellists agreed
ago, all analysts and the IMF said we would have a lost that it is a threat that must be addressed immediately as the
decade. But there was a quick resumption of growth for situation is fermenting social unrest. However, they were
most countries in the region. That is due to the flexibility of cognizant of the difficulty Asian governments face in
Asian economies, which were able to bounce back in a balancing the seemingly conflicting interests of monetary
short space of time. Therefore, in the current environment, if policy and economic growth.
we strip away the contagion effect from the sub-prime crisis
and look at the economies, I’m optimistic.”

At a panel discussion on the issue, participants were Even the US, one panellist noted, is gradually
confident that US troops are not likely to significantly changing its mindset and has come to realize that
reduce their troop presence in Asia. Even in the event military force itself does not guarantee security in Asia.
of a diminished US military role in the region, most He observed that the US is increasingly more
were optimistic that closer ties between China and supportive of using regional forums to deal with
Taiwan will offset the reduced presence. Cross-strait security issues (e.g. its recent appointment of a
relations recently improved when both sides signed a permanent ambassador to ASEAN). Some
pact to improve economic and cultural links. Better participants suggested that the ASEAN Regional
relations further north are also helping to lessen Forum (ARF) play this prime role. They proposed that
tensions. Beijing and Tokyo have just concluded a the ARF should be expanded to create a pan-Asian
landmark deal to set aside a territorial dispute and dialogue and added that the US, Europe and Russia
jointly develop natural gas fields in the East China Sea. should not be left out of this expanded forum.

Most panellists favoured having a less formal


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

15 | World Economic Forum on East Asia


Sustainable Growth

“Governments should take the short- across Asia in recent months. The morning Ahn spoke
term pressures and challenges and turn at a panel session, the front page of a Korean
newspaper carried a photograph of more than 5,000
them into opportunities, such as truck drivers striking in South Korea, demanding that
seeking alternative fuel resources and the government increase subsidies for fuel, authorize
increasing efficiency in oil and food higher freight charges and introduce a minimum wage.
consumption.”
Demonstrations were also held in Indonesia, Malaysia,
India, Thailand, Myanmar, Hong Kong and Nepal,
Ahn Ho-Young, Deputy Minister for Trade of the Republic of where prices of daily necessities like rice, corn,
Korea soybeans, cooking oil, kerosene and gasoline have
surged. Governments have been forced into quick-fix
An overwhelming 81% of business leaders responding actions including reductions in import tariffs on
to a World Economic Forum survey voted for agriculture products, cash rebates on petrol and diesel
“addressing growing global concern over and incentives for farmers to increase productivity.
environmental challenges such as climate change and
water” as the top choice of issues with the greatest Fuel subsidies are common in Asia’s developing
impact on Asia. countries – they account for 2% of India’s GDP and
30% of Indonesia’s budget. Governments risk
Other major concerns included “preventing political fomenting political unrest if they raise prices or cut
and economic instability linked to rising food and subsidies, as those affected are mainly poor people
energy prices” and “managing the social, who spend the bulk of their earnings on food and
environmental and infrastructural implications of rapid transport. Last year’s mass protest in Myanmar – the
urbanization”. country’s largest in 20 years – and the resulting
military crackdown followed announcements by the
Notwithstanding, at the World Economic Forum on government of hikes in gasoline and diesel prices.
East Asia, climate change and water were somewhat
sidelined by the clear and present danger of spiralling Mari Pangestu, Minister of Trade of Indonesia, said her
food and fuel prices. government responded to the global shock of rising
food and fuel prices by lowering tariffs related to
Food, fuel and finance, or the “Three Fs”, as Ahn Ho- agriculture products. It tries not to control fuel prices,
Young, Deputy Minister for Trade of the Republic of which have increased by 30%, preferring to let
Korea, put it, were hot topics as rising prices have domestic prices adjust as gradually as possible. At the
stoked public anger and sparked demonstrations same time, the government aims to ease the burden

16 | World Economic Forum on East Asia


of rising food prices by giving incentives to farmers to “Water systems are so Balkanized [that]
expand production, especially of crops that can be it’s difficult to get a comprehensive view
harvested quickly.
of how to use the resources efficiently.”
In South Korea, the government introduced a US$ 10
billion programme of short- and long-term solutions to Ralph R. Peterson, Chairman and Chief Executive Officer,
benefit small enterprises and low-income workers. CH2M HILL Companies, USA; Co-Chair of the World Economic
“This is a clarion call for us to reduce our dependence Forum on East Asia
on foreign oil,” said Ahn.

Inflation aside, the falling US dollar is also adding to Asian companies need to find innovative ways to get
Asia’s economic woes. The faltering currency is around resource constraints and infrastructure
making locally manufactured goods relatively more bottlenecks. Solutions could include telecommuting
expensive in dollar terms and, coupled with the sharp and the creation of smaller urban centres. Some
slowdown in the US economy, is threatening to participants argued that mounting urbanization would
undermine Asia’s much-vaunted export power. Day to lead to more pressure for democracy, which Asian
day, currency volatility is hampering the ability of governments may not be able to ignore. Local
businesses to run their operations and plan strategy. governments could become more powerful engines of
Exports have held up so far, thanks to gains in Asian change than central governments.
productivity and growing intra-regional trade. Whether
Figure 1: Water Rates Around the World
the strengthening of Asian currencies is a long-term
phenomenon remains to be seen. Water tariffs across Asia are lower than in other developing countries

$1.25

Also straining resources is the growing urbanization of


Asia resulting from rural-urban migration. This has also 1.00
Average water tariff (US$/kl)

widened the gaps in infrastructure and skilled human .75

capital in many of the region’s economies. Participants


.50
debated whether the private or public sector should
take the lead, or whether public-private partnerships .25

should be the main catalysts for change. Explosive


0
growth has outpaced the capacity of institutions to OECD Latin America Middle East East Asia Eastern and South Asia
Caribbean North Africa Pacific Central Asia
supply skills.
Source: World Bank, 2005

17 | World Economic Forum on East Asia


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

Another pressing long-term concern is the gradual sustainable growth. Many are realizing that regional
depletion of Asia’s resources, including water. Over- and international agendas are increasingly forming
exploitation, excessively low tariffs (see Figure 1), rapid around universal issues, and environment-related
urbanization, industrial pollution and climate change problems such as sustainable resources and health
have exacted a heavy toll on this precious resource. affect all countries and, consequently, all businesses.
Growing affluence in China and India have also led to
a higher meat diet, which requires 10 times more Corporate engagement can take five forms: corporate
water than a vegetarian diet. Co-Chair Brabeck- governance, corporate philanthropy, corporate social
Letmathe did not mince words when he repeated this responsibility (CSR), social entrepreneurship and
warning: “We will be running out of water long before corporate global citizenship.
we run out of oil.” He lamented that more of the Corporate global citizenship and CSR are distinct but
world’s GDP has been devoted to the climate change interlinked. CSR programmes often include incentives
issue and not enough resources allocated to water. to promote the environment. Companies can
“One out of every five children is dying every 20 encourage fuel savings, sustainable farming and clean
seconds because we haven’t been able to solve the air with a variety of financing incentives and
problem of clean water today,” said Brabeck- technological innovation. Japanese shipping line
Letmathe. Nippon Yusen Kabushiki Kaisha (NYK Line), for
example, has cut its fuel bill by 9% by taking
Meeting Co-Chair Peterson called for more political advantage of sea currents to help its vessels sail.
and institutional collaboration, saying that the water
systems are “so Balkanized [that] it’s difficult to get a Corporate global citizenship and CSR activities are
comprehensive view of how to use the resources most effective when aligned with a corporation’s own
efficiently.” He noted that water is not free and the unique resources. Goodyear Tire Management
sooner market forces are applied to the pricing of Company (Shanghai), for example, conducts free
water, the better. A more realistic pricing would inspections for cars in China and researches the
minimize leakage and act as a deterrent to wastage. potential use of new materials, such as corn, to make
Water tariffs across Asia are among the lowest in the tyres. By becoming more aware of how
world. interconnected the world and its trading systems have
become, Asian enterprises are slowly but surely
The issue of water, like climate change, is gaining stepping up to their responsibilities of being good
more awareness as Asian corporations consider their global corporate citizens.
social responsibilities in championing the cause of

18 | World Economic Forum on East Asia


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

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


Switzerland; Member of the Foundation Board of the World Economic
Forum; Co-Chair of the World Economic Forum on East Asia

Managing Asia’s Most Valuable Resource

Rapid urbanization, industrialization, changing diets and Water should be viewed on a more multidimensional
climate change are aggravating the effects of scale, because it is interconnected with issues like
unsustainable water use in Asia. climate change and other global problems. This would
help overcome constraints developed countries
The first issue is lack of awareness by most countries experience when devoting resources to water
and policy-makers of the urgency and scale of the separately.
impending global water crisis.
Water pricing was a favoured measure among leaders
People expect water to be available and inexpensive, at the World Economic Forum on East Asia in Kuala
but don’t realize that, like oil, it is a scarce commodity. Lumpur. One suggested providing a minimum level to
There is also a need to create greater awareness of the meet “human rights” requirements free of charge, and
use of water for agriculture, which normally uses the pricing upwards to encourage proper usage.
largest proportion of the supply.
Finally, more research is needed to produce hard-hitting
The second issue is fixing the problems in developing facts and figures to convey the severity of the problem.
countries. One-third of the world still does not have
access to clean water despite technological advances
and assistance from developed countries. In fact,
whether run by the public or private sector, water
leakage and pollution continue to plague both
developed and developing countries. While water
supply in most countries is managed mostly by the
public sector, there is no clear consensus as to who
can do a better job in preventing such problems.

19 | World Economic Forum on East Asia


Competitiveness

With the downturn in the US and the resulting “Economic globalization and regional
slowdown in the global economy, Asia’s economies, integration will further promote
particularly the fast-growing giants China and India,
have been recognized for providing a “cushion” for the
cooperation among Asian countries and
rest of the world. “In the short run, Asia will take up Asia will be the most dynamic region
the slack,” said Azman Mokhtar, Managing Director, and backbone of the world economy.”
Khazanah Nasional, the investment holding arm of the
Malaysian government. This is a significant turnaround Huang Xingguo, Mayor ot Tianjin, People's Republic of China
from 1997-1998, when a financial crisis hobbled East
Asia and pushed many of the region’s economies into
recession, wiping out significant wealth and pushing
many people back into poverty.
Indeed, with the storms in the global economy and
This has certainly heightened the perception that the high energy and food prices raising uncertainties
global economic centre of gravity is inexorably shifting about the benefits of globalization, “the question is
to Asia. Days after the meeting in Kuala Lumpur whether Asia can maintain its growth momentum
ended, the news that Hong Kong and Singapore took against strong headwinds,” said Børge Brende,
the top two positions in the Enabling Trade Index Managing Director, World Economic Forum. Certainly,
ranking released by the World Economic Forum there is cause for concern that some Asian economies
served as further evidence of East Asia’s economic are in trouble. “Given the deep integration of the
strength and openness to trade and investment. global economy, the slowdown is having a great
impact on our economies,” Vu Van Ninh, Minister of
But it is important to maintain perspective. While East Finance of Vietnam, explained. “Vietnam is being
Asian growth may be strong and its economies are impacted especially by high inflation. We in Asia
certainly in better condition and more resilient than should work together to find solutions.”
they were a decade ago when the financial crisis hit,
most of the region’s economies are not as competitive Implicit in Brende’s observation is a warning that Asian
as they may be perceived. Only Singapore, at number economies cannot be complacent and must focus on
seven, ranked in the top 10 on the World Economic improving productivity and boosting competitiveness if
Forum’s 2007-2008 Global Competitiveness Index. they are to become an authentic and sustainable
Other top East Asian performers included South Korea driver of growth in the world economy and not just a
(11), Hong Kong SAR (12) and Taiwan, China (14). The reliable “cushion”. As Vu pointed out, the way to find
People’s Republic of China, meanwhile, ranked 34th, solutions is to collaborate. Reckoned Yoshimi
while India was 48th. Cambodia came in at 110. Watanabe, Minister of Financial Services and

20 | World Economic Forum on East Asia


“The international institutions we have collaboration and the forming of partnerships.
at the moment are woefully inadequate Consider the plaintive question of one participant: “Do
we need to replicate everything?” He wondered aloud
to meet the global challenges. If we are whether it makes sense for neighbouring countries to
providing the bulk of the incremental build airports and seaports so close to each other.
growth globally, we Asian nations have National pride and the drive to preserve one’s turf
a vested and immediate interest in have, in many instances, stifled logic and the
understanding that collaboration can make everyone
making sure that the global institutions more competitive and result in win-win solutions.
respond to the global crisis as they Politics and competing motives have impeded the
should.” creation of effective public-private partnerships, which
today are regarded as critical to development
Yashwant Sinha, Member of Parliament; Minister of External success.
Affairs (2002-2004) and Minister of Finance of India (1998-2002)
But all this is changing in Asia, however gradually.
Governments are starting to collaborate on critical
Administrative Reform of Japan: “We are in the same issues including financial market stability, energy
boat; we share the same destiny.” security and the environment. But the level of
cooperation, despite the ambitions of ASEAN, remains
A paradoxical principle for success in the global low. Corporations are also cooperating – enterprises
economy is that collaboration can enhance with suppliers, partner with partner, and even
competitiveness. Faced with the emergence of China competitor with competitor. Collaborators must
and India, the 10 nations of South-East Asia have understand how the other business works. For a
come to understand and accept that they must successful venture, it is important to understand the
collaborate and aim to create a European Union-style “psyche” of the organization, and have a shared
community if they are to remain competitive and vision, aspiration and culture. As in a marriage, both
relevant in the global economic landscape. But sides have to work to make the relationship prosper.
creating the political and commercial will to embrace
such an enterprise has been difficult. There is further cause for optimism on the research
and development front. In the session entitled The
In Asian economies, many participants observed, Myths and Realities of the R&D Advantage, panellists
governments or major family-owned corporations with provided insights into how Asia is emerging as a major
vested interests control much of the value. National hotbed of research and development, which has led
interests and protectionist tendencies have limited to the rise in innovation – the transformation of ideas

21 | World Economic Forum on East Asia


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

into commercial value – coming out of the region in Indeed, the globalization of best practices, if
recent years. India and China are increasing their R&D embraced by the region, is likely to be Asia’s trump
spending by over 25% per year (see Figure 1). Moves card – the way in which it finally transforms its
like these are correcting perceptions that Asia’s main governments and companies into flexible and
advantage is its pool of cheap labour. innovative institutions and competitive enterprises
such as Japan’s Toyota. The automotive giant has
proven that collaboration within the group is integral to
Figure 1: Worldwide R&D Spending its success and a sense of community enhances the
R&D spending in China and India is growing rapidly, but from a small base effectiveness and cooperation of employees and
0.4%
suppliers.
North America
Change in R&D intensity, 2005-06 (R&D
spending as a percentage of revenues)

$194.2
0.2
In short, governance in both the private and public
India/China
$2.1 sectors must be improved if Asia is to transcend from
0
Japan
$96.3 “cushion” to fine-tuned “engine” of competitiveness. In
Europe
$132.6
the session on Delivering a Governance Dividend for
-0.2

Rest of World
Asia, Shaukat Aziz, Prime Minister of Pakistan (2004-
$21.4

-0.4
2007), provided a template for a new paradigm of
0 5 10 15 20
One year growth in R&D spend, 2005-06
25 30%
governance that emphasizes delivery and substance.
Note: Size of circle represents relative size of R&D spend, 2006. All figures in US$, billions Governments, he stressed, need to retool and reform
Source: Booz & Company’s Global Innovation 1000 study
at all levels to quickly meet new challenges such as
the food and energy crises. Strong leadership at the
In the discussion, panellists focused on how top is essential, with those in authority taking pre-
collaborative efforts within enterprises and among emptive measures to head off problems, rather than
companies have yielded significant opportunities for simply reacting to events. “Things move so fast,”
“research arbitrage” and boosted the productivity of warned Aziz, who could well have been speaking
enterprises in such sectors as pharmaceuticals, about the business sector too. “You have got to apply
healthcare, manufacturing and IT. In addition, the new solutions to deal with new challenges that
shortage of talent – not just skilled managers but for emerge. To do that, you need proactive government,
technical specialists such as engineers and workers strong leadership and a bureaucracy that will support
with vocational skills – means that business and change. You need a total shift in thinking.”
government must work together to enhance the
quality of educational institutions from the primary level
upwards.

22 | World Economic Forum on East Asia


Competitiveness in East Asia

The general perception is that Asians are not just In this sense, can one prioritize the key factors on which
competitive; they are hyper-competitive. But is this countries in the region should focus to become more
perception representative? The truth draws a more competitive? Innovation and business sophistication is
nuanced picture as the region encompasses a large crucial for the top-tier countries; improving the quality of
range of competitiveness performances, from highly human capital and market efficiency provides a basis for
competitive countries to those among the most development and growth for the middle ranking
challenged. This provides an extremely heterogeneous countries; and factors such as improving basic
picture with respect to the levels of economic growth education, health systems and infrastructure are critical
and prosperity achieved in the region. for the lowest-ranked economies.

In The Global Competitiveness Report 2007-2008, nine The World Economic Forum on East Asia addressed, in
Asia Pacific countries are among the top 30 in the index its various sessions, the drivers of economic
rankings, led by Singapore, Japan, South Korea and development and, more specifically, held a discussion
Hong Kong. The countries in the next tier are among on identifying best practices in competitiveness. The
the largest markets in the region, led by China and session highlighted a need for a solid macroeconomic
India. A number of smaller economies close the ranking architecture including strong and transparent
for the region, with Mongolia, Bangladesh, Cambodia, governance, public-private sector alignment, an efficient
Nepal and Timor-Leste all positioned at the very business infrastructure, openness to international trade
bottom. and investment, among other factors.

23 | World Economic Forum on East Asia


Acknowledgements

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

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

Strategic Partners

American International Group (AIG)


Bain & Company
Barclays PLC
Credit Suisse
Forbes
Kudelski Group
Manpower
Marsh & McLennan Companies (MMC)
NBC Universal
Nestlé
SK Group
Unilever
WPP
Zurich Financial Services

Regional Partner

Sicpa Holding

Meeting Supporters

Lloyd’s
Ogilvy Public Relations Worldwide
Sime Darby

24 | World Economic Forum on East Asia


25 | World Economic Forum on East Asia
Contributors

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

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

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

Editing: Janet Hill, Editor

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

Photographs: Azmi Abdul Alim

26 | World Economic Forum on East Asia


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

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

The report is also available as a PDF:


http://www.weforum.org/pdf/summitreports/eastasia2008.pdf

Other specific information on the World Economic Forum on East Asia, Kuala Lumpur, Malaysia 15-16 June
2008, can be found at the following links:

Meeting News www.weforum.org/eastasia2008


Session Summaries www.weforum.org/eastasia2008/summaries
Photographs www.pbase.com/forumweb/eastasia2008
Programme www.weforum.org/eastasia2008/programme
Interviews www.weforum.org/eastasia2008/regionalupdate
Partners www.weforum.org/eastasia2008/partners
Webcasts www.weforum.org/eastasia2008/webcasts

27 | World Economic Forum on East Asia


The World Economic Forum is an independent
international organization committed to improving
the state of the world by engaging leaders in
partnerships to shape global, regional and
industry agendas.

Incorporated as a foundation in 1971, and based


in Geneva, Switzerland, the World Economic
Forum is impartial and not-for-profit; it is tied to
no political, partisan or national interests.
(www.weforum.org)