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World Economic Forum on East Asia 2007

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

The views expressed in this publication do not
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World Economic Forum on East Asia 2007

  1. 1. World Economic Forum on East Asia Responding to New Uncertainties Kuala Lumpur, Malaysia 15-16 June 2008 Report
  2. 2. The views expressed in this publication do not necessarily reflect those of the World Economic Forum. World Economic Forum 91-93 route de la Capite CH-1223 Cologny/Geneva Switzerland Tel.: +41 (0)22 869 1212 Fax: +41 (0)22 786 2744 E-mail: contact@weforum.org www.weforum.org © 2008 World Economic Forum All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system. REF: 020708
  3. 3. 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
  4. 4. 2 | World Economic Forum on East Asia
  5. 5. 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
  6. 6. 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 the current financial crises.” Abdullah Ahmad Badawi, Prime Minister of Malaysia 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
  7. 7. “Things are moving so fast that peace and stability. An overwhelming 81% chose “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
  8. 8. “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
  9. 9. “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 rom left to right: Jaime Morales Carazo, Vice-President of Nicaragua; Elias Antonio Saca, President of El Salvador; Patrick Manning, Prime inister of Trinidad and Tobago; Susan L. Segal, President and Chief Executive Officer, Council of the Americas, USA; Manuel Zelaya Rosales,
  10. 10. 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
  11. 11. “The global economic slowdown may invited to the G8 Summit on climate change in Hokkaido, Japan. inspire protectionism and the imposition of regulations that would impede rather Figure 1: East Asia's Share of the World Economy than support growth.” East Asia's increasing share of the world economy is not limited to China's forecast growth 50 Forecast Marcus Agius, Chairman, Barclays, United Kingdom G7 (x-Japan) 40 Percentage of world GDP (PPP) 30 20 Japan a major regulatory failing in the US, the “IMF is China 10 keeping quiet, doing nothing,” he charged. To be sure, Rest of East Asia soaring commodity prices (see Figure 2), food and fuel 0 1980 1985 1990 1995 2000 2005 2010F in particular – rice, the staple food for 2.5 billion Asians, has more than tripled in price in Thailand since Source: International Monetary Fund, World Economic Outlook Database (April 2008) 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 Figure 2: Commodity Prices 60% of the world’s population and generates one-third 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-in ation 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
  12. 12. “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 long term basis.” Musa Hitam, Chairman, Sime Darby, Malaysia 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
  13. 13. 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
  14. 14. 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 help each other.” Rajat M. Nag, Managing Director-General, Asian Development 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
  15. 15. “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) having a great impact on our 80 Bangladesh economies. We in Asia should work 70 Nigeria 60 together to find solutions.” Afganistan 50 40 Kenya Russia Vu Van Ninh, Minister of Finance of Vietnam 30 20 10 Brazil China India US UK 0 0 1 2 3 4 5 6 7 8 back on old tools” such as authoritarian measures to Per capita income (in log) squelch protests. 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 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
  16. 16. 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 Figure 2: Trade within Asia that manufacturing and say you are going to produce 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
  17. 17. 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
  18. 18. Sustainable Growth “Governments should take the short- across Asia in recent months. The morning Ahn spoke at a panel session, the front page of a Korean term pressures and challenges and turn 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, where prices of daily necessities like rice, corn, Ahn Ho-Young, Deputy Minister for Trade of the Republic of soybeans, cooking oil, kerosene and gasoline have Korea 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
  19. 19. “Water systems are so Balkanized [that] of rising food prices by giving incentives to farmers to 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 tari s across Asia are lower than in other developing countries $1.25 Also straining resources is the growing urbanization of Asia resulting from rural-urban migration. This has also 1.00 Average water tari (US$/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 Paci c Central Asia supply skills. Source: World Bank, 2005 17 | World Economic Forum on East Asia
  20. 20. 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
  21. 21. “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
  22. 22. Competitiveness “Economic globalization and regional With the downturn in the US and the resulting slowdown in the global economy, Asia’s economies, integration will further promote particularly the fast-growing giants China and India, cooperation among Asian countries and have been recognized for providing a “cushion” for the Asia will be the most dynamic region rest of the world. “In the short run, Asia will take up and backbone of the world economy.” the slack,” said Azman Mokhtar, Managing Director, 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
  23. 23. “The international institutions we have collaboration and the forming of partnerships. Consider the plaintive question of one participant: “Do at the moment are woefully inadequate 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 have, in many instances, stifled logic and the a vested and immediate interest in 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 success. Yashwant Sinha, Member of Parliament; Minister of External 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
  24. 24. 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 effectiveness and cooperation of employees and R&D spending in China and India is growing rapidly, but from a small base suppliers. 0.4% 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 sectors must be improved if Asia is to transcend from India/China $2.1 0 “cushion” to fine-tuned “engine” of competitiveness. In Japan $96.3 Europe the session on Delivering a Governance Dividend for $132.6 -0.2 Asia, Shaukat Aziz, Prime Minister of Pakistan (2004- Rest of World $21.4 2007), provided a template for a new paradigm of -0.4 governance that emphasizes delivery and substance. 0 5 10 15 20 25 30% One year growth in R&D spend, 2005-06 Governments, he stressed, need to retool and reform Note: Size of circle represents relative size of R&D spend, 2006. All gures in US$, billions at all levels to quickly meet new challenges such as Source: Booz & Company’s Global Innovation 1000 study 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
  25. 25. 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
  26. 26. 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
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  28. 28. 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
  29. 29. 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
  30. 30. 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)