Creating a New Agenda for Asian Integration: Top Challenges and Need for Regional Cooperation

WORLD ECONOMIC FORUM

World Economic Forum on
East Asia

Creating a New Agenda for
Asian Integration

Tokyo, 15-16 June 2006
INSIGHTS

The views expressed in this publication do not
necessarily reflect those of the World Economic
Forum.

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REF: 240706

Contents

Preface 3

Summary – Creating a New Agenda for Asian Integration 4

Integration & Identity 7

Competitiveness & Creativity 10

Security & Sustainability 13

Regional Change – Japan 16

The Creative Imperative in East Asia 19

Acknowledgements 22

1
World Economic Forum on East Asia

Preface

Japan’s economic recovery, coupled with the rapid growth of China and India, is
changing mindsets and not just trade and investment flows in Asia. Some believe
robust intra-Asian trade will eventually offset the region’s exposure to economic cycles
in the United States. Others see looming challenges linked to demography and to
tensions rooted in history posing threats to future growth and stability. The theme
Creating a New Agenda for Asian Integration highlights the need to re-evaluate
strategic priorities and working assumptions as the region enters an era of newfound
opportunities and emerging risks.

No single institution can be expected to both anticipate and address the region’s
evolving agenda. Therefore, the programme of the World Economic Forum on East
Asia was designed to generate insight and guide action in order to improve the
alignment of the region’s industry, political and economic agendas. Moreover, the
programme was organized under four thematic pillars to help participants make the
most of the opportunity to shape the regional agenda. The pillars were: Integration &
Identity, Competitiveness & Creativity, Security & Sustainability and Regional Change –
Japan.

The thematic pillars were built on important strategic assumptions. First, Japan, Korea
and China face the task of adapting to rapidly ageing populations while India and
ASEAN nations will need to create jobs for growing numbers of young workers, mainly
from rural areas. New expectations will emerge as society changes in these countries,
particularly with the integration of India further into East Asia and the push to improve
the competitiveness of ASEAN economies. Thus, business will not only contend with
the scarcity of highly skilled workers in current major markets but also the dangers of
unsustainable income disparities in future growth markets.

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

Lee Howell
Director, Asia

3

Summary – Creating a New Agenda for
Asian Integration

“We must look at the big “The challenge we have in
picture and not let the the 21st century is to
baggage of history deter reconcile our global,
us.” national and regional
identities. The key will be to
Najib Tun Razak make sure we keep up to
Deputy Prime Minister of our global responsibilities.”
Malaysia
Klaus Schwab
Founder and Executive
Chairman, World Economic
Forum

“The new century belongs to Asia” agreed more than This will require cooperation on a range of urgent
300 senior government, business and civil society issues including energy efficiency and environmental
leaders at the World Economic Forum on East Asia. protection, corporate social responsibility, widening
The region will fulfil this potential, participants said, the access to financial markets, education reform,
provided it meets the following top challenges: poverty alleviation and the sharing of technology. In
addition, the rest of the region and its partners must
• Create or assign regional institutions to discuss also individually and collectively address the
energy, security and environmental issues commercial and political implications of the surging
• Address the impact of Indian and Chinese growth growth of China and India, as well as Japan’s
on the future competitiveness of South-East Asia economic recovery.
• Increase energy efficiency in major consuming
countries and industries “Increased market-driven integration and economic
• Sustain Japan’s recovery while cutting its fiscal cooperation in the region are creating a more open
deficit and resolve Japan’s historical and territorial and frank dialogue on pressing issues such as
disputes with China and Korea corporate social responsibility, energy efficiency and
the enhancement of regional dialogue,” said Peter
More than half of the meeting’s participants prioritized Torreele, Managing Director, World Economic Forum.
these issues of paramount concern in a survey
conducted in the closing plenary session. The consensus among participants was that business
and civil society should take the lead in speeding up
Participants concluded that existing regional the region’s “market driven” integration. But they also
institutions and networks are not yet capable of called on governments and political leaders to tackle
confronting the many interconnected threats posed geopolitical problems such as maritime piracy,
by the pressures of globalization and the rise of migration, and in particular, long-standing disputes
competition in the global market. To meet emerging over territorial claims, interpretations of history and
risks, they called for a new agenda for Asian nationalist sentiment that could lead to conflict.
integration.
The survey results and the interactive sessions in
Tokyo will now shape the World Economic Forum’s
agenda at future meetings in Beijing, New Delhi,
“The new century belongs to Asia. But at the same time
we need to seriously tackle the many challenges we face Davos and Singapore, where next year’s World
today.”
Economic Forum on East Asia will take place on
24-25 June 2007.
Jiang Jianqing
Chairman of the Board, Industrial and Commercial Bank of China,
People’s Republic of China

4

“The process of realizing “If you can’t beat India or
East Asian integration China, you have to join
depends very much on the them.”
political will and trust of our
countries as there is a big Mari Pangestu
Minister of Trade of Indonesia
gap in the levels of
development.”

Hoang Trung Hai
Minister of Industry of Vietnam

Integration & Identity Competitiveness & Creativity

The proliferation of global and regional risks from East Asian economies are facing heightened
pandemics to piracy on the high seas is putting competition for trade and investment from China and
pressure on East Asia to deepen integration. India.

• The institution-heavy European Union model is • Companies are integrating Asia and its range of
not appropriate for the region. manufacturing platforms and service providers into
• East Asia will continue to pursue its “soft- the global supply chain, further stimulating trade
institution”, “bottom-up” approach, in which the and investment in the region.
drivers of integration are business and civil • The web of free trade arrangements that are under
society. construction across the region will create a pan-
• Governments must still deal with cross-border Asian market of over 3 billion people.
problems such as migration that require • Enterprises and countries have to develop the
cooperative solutions. human resources and technology they need to
• Historical enmities between countries should be create profitable niches in the global economy.
resolved to allow for enhanced integration.
Countries should not let these disputes impede
the integration agenda.

quot;Oil consuming countries “ASEAN has to be more
in Asia need to cooperate effective in differentiating
to promote more efficient niche positions.”
energy usage, develop
Sir Martin Sorrell
and share energy-efficient
Group Chief Executive, WPP,
technologies and promote
United Kingdom; Co-Chair,
energy security.quot;
World Economic Forum on East
Asia
Zhang Xiaoqiang
Vice-Chairman, National
Development and Reform
Commission, People's Republic
of China

5

“If the major consuming “We’re about to go through
countries are more energy a core transformation.”
efficient, this can help
stabilize energy prices and Junichi Ujiie
Chairman, Nomura Holdings,
benefit the rest of the
Japan; Co-Chair, World
world.”
Economic Forum on East Asia
Tran Trong Toan
Executive Director, APEC
Secretariat (Asia-Pacific
Economic Cooperation),
Singapore

Security & Sustainability Regional Change – Japan

Income disparities, energy shortages and The emergence of China and India is heightening
environmental degradation are serious risks to competitive pressure on Japan.
sustaining Asia’s growth.
• Japan’s current economic recovery is being
• Poverty and rural discontent can lead to extremism driven by legacy sectors of the economy.
and social unrest that could threaten stability in • To sustain growth, Japan must find ways to
many countries. build on successes in IT and financial services,
• Energy inefficiency in China is a global concern, where reforms unleashed much-needed
given its effects on the environment and on global structural changes.
energy markets. • Japan must address its growing fiscal deficit by
• These problems require a concerted regional increasing productivity and the productive use
response to improve energy security and share of capital.
energy-saving technologies. • To do so will require innovation, a willingness to
• Exchanges among countries in the region will break with tradition and strong political
mitigate the threat to stability from simmering leadership.
historical disputes. • Japanese leaders must also build bridges with
their East Asian neighbours.

“We also see within “Japan will continue to try
countries and within the to reduce barriers to Asian
region the widening gap of trade by pursuing bilateral
the rich and the poor in the and multilateral free-trade
region. This is a risk of agreements with its Asian
instability.” trading partners.”

Hassan Marican Toshihiro Nikai
President and Chief Executive Minister of Economy, Trade and
Officer, PETRONAS (Petroliam Industry of Japan
Nasional), Malaysia; Co-Chair,
World Economic Forum on East
Asia

6

Integration & Identity

revealing how many young Europeans now value their
national identities over a regional one.
“The assumption that an
older society can’t create
wealth is wrong. You just Crises of course have a way of forcing mindsets to
can’t have people being old
change. The financial meltdown of 1997-98, 9/11 and
and disabled; you need to
the terrorist attacks in Bali and elsewhere, the
have them in the
workforce.” outbreaks of the SARS virus and avian flu, and cross-
border problems such as the haze from forest fires in
Henry A. McKinnell
Indonesia and maritime piracy on the Straits of
Chairman and Chief Executive
Malacca – all these challenges have highlighted the
Officer, Pfizer, USA; Vice-
Chairman of the Foundation deficiencies of the region’s minimalist approach to
Board of the World Economic
greater unity. The integration of India further into East
Forum; Co-Chair, World
Asia and the emergence of China as a trading
powerhouse and investment magnet have raised the
stakes. See Figure 1.
East Asian integration has been mainly an informal
“market driven” process with weak institutions. The Figure 1: ASEAN has continued attracting
proliferation of global and regional risks requires a strong FDI inflows, with a larger FDI stock
much more intensive approach, but it is unlikely that than “Chindia”
countries in the region would move towards a
European Union-style model with more active
institutions and shared political power. However, for the
preferred “bottom-up” integration, led by business and
civil society, to deepen, political leaders must resolve
historical enmities that could hamper closer
cooperation.

Whenever East Asian leaders gather to talk about
regional integration, the European Union model
invariably comes up in the discussion: a single market
with a single currency (at least for a good part of it);
common policies and standards; centralized
administrative and legislative institutions, though
without the fusion of ultimate political power and
sovereignty. This is not what Asians want, so the
accepted wisdom goes.

Asia’s integration gambits have been lowest-common-
denominator efforts supported by weak institutions.
Perfunctory ministerial meetings and summits have
driven the process. As in the Association of Southeast
Asian Nations (ASEAN), the stress has been on
cooperation, abstract goals such as peace and amity,
and “non-intervention”, with any hint of “community”
building dismissed as premature.

At the World Economic Forum on East Asia,
participants challenged that traditional passivity. Could
the region aspire to something more? To be sure,
forging a common Asian or even East Asian identity
would be as difficult, if not more so, than for other
regions. Europe took decades to get where it is today.
And even then, attempts to create a constitutional Source: UNCTAD World Investment Report 2005
underpinning for the European Union have stalled,
7

“We should make an effort
As these pressures of globalization and competition to better understand each
continue to mount, Asians have begun to question other’s history and customs
to increase mutual
old notions. With global and regional risks
understanding. If we hang
multiplying, requiring global and regional solutions,
on to the past, we are only
the implication for East Asia’s integration is clear: impeding each other’s
the good-fences-good-neighbours model is progress.”
unsustainable.
Yun Jong-Yong
Vice-Chairman and Chief
But the region is still trying to figure out how to turn Executive Officer, Samsung
the neighbourhood into a community. Overlapping Electronics, Republic of Korea;
Co-Chair of the World Economic
regionalization options have proliferated in recent
Forum on East Asia
years, from ASEAN and its flexible formats to last
year’s East Asian Summit that excluded the US.
The ASEAN Free Trade Area (AFTA) is forging links
with India, China and the rest of North Asia, while
the Asia-Pacific Economic Cooperation (APEC) is Hellmut Schutte, Dean, Asia Campus, INSEAD,
keeping alive its grand vision of free and open trade Singapore, “we have to be honest: for 40 years,
and investment among its 23 members, which ASEAN hasn’t been very successful. We are seeing
together account for about half of global trade, by the end of ASEAN. The year 2020 will not be a
2010 for developed economies and 2020 for target [for industrialization]. ASEAN will be buried
developing ones. The number of bilateral free trade beforehand.” An extreme view perhaps, but
arrangements across the region has increased as indicative of the frustration among some
the Doha Round of global trade talks continues to participants and the urgent need for more intensive
flag. communication among East Asian countries.

That meeting participants identified But EU-style integration cannot
the need to address the be forced, some panellists
absence of regional warned. The soft-
institutions to discuss institution approach with
energy, security and weak monetary
environmental issues as integration would
a top priority for the prevail, Indonesian
region – when APEC Trade Minister
and ASEAN have Mari Pangestu
long offered such predicted.
forums – indicates Because of its
a lack of “honest broker”
awareness. “We role between the
have not been major economies
effective in of North Asia and
communicating the India, “ASEAN will
work we do,” Ong be in the driver’s
Keng-Yong, Secretary- seat.” East Asia,
General, ASEAN, Pangestu reckoned,
Jakarta, acknowledged. would continue to
Added Tran Trong Toan, pursue “market driven”
Executive Director, APEC integration – what Sadako
Secretariat, Singapore: “We don’t Ogata, President, Japan
shout out loudly about what we have.” International Cooperation Agency,
called the “bottom-up” approach.
Yet the selection of participants was also a telling Business, civil society and other “non-state actors”
rebuke of integration performance so far. When it will push regionalization forward through the
comes to regional economic integration, said multitude of cross-border commercial and cultural

8

connections and exchanges that take place every day. Asia’s Risk Factors
Indeed, for Asia’s growing number of globally
integrated enterprises such as Samsung, borders are Participants in a Global Risk Network workshop
already meaningless. expressed concern about the mounting economic,
geopolitical and societal risks facing East Asia.
There is still a role for governments in pushing
integration forward, said Najib Tun Razak, Deputy Global fiscal imbalances brought on by the large
Prime Minister of Malaysia. Common challenges such surpluses accumulated by Asian countries and the
as maritime piracy and migration require cooperation. US twin deficit were rated a major source of
Migration, for example, will have to be part of the economic risk. Perceived as particularly relevant in
solution to the problem of ageing demographics in Japan, but also in South Korea and China, is the
Japan. “We must look at the big picture and not let the risk of fiscal crises as a result of a rapidly ageing
baggage of history deter us,” Najib concluded. society. Societal risk in the region includes potential
breakdowns of control in restive rural areas in China
Yet heightened tensions between Japan and its and growing shortages of both oil and clean drinking
neighbours Korea and China, as well as concerns water.
about potential conflict on the Korean Peninsula and The workshop also highlighted the lack of visionary
across the Taiwan Strait, could easily derail the East political leadership in the region, as well as the
Asian integration train. “Parochial nationalism,” said absence of an overarching regional security
Chen Feng, Chairman, China Hainan Airlines, People’s framework, as negative factors affecting efficient risk
Republic of China, “must be eliminated.” mitigation strategies.

Peter M. Beck, Director, International Crisis Group Participants' impressions of risks facing Asia
(ICG), Republic of Korea, fretted that with a
“statesmanship deficit” on both sides of the Pacific,
the threat of military clashes over territorial disputes
and energy needs is a real one. “How do we find
solutions if there are no good leaders?” Yotaro
Kobayashi, Chief Corporate Advisor, Fuji Xerox
Company, Japan, expressed faith that a “maturing and
wiser citizenship” throughout East Asia will act as a
brake on incompetent leadership.

To shape a new East Asian community, the region
“should make an effort to better understand each
other’s history and customs to increase mutual An issue survey conducted among the participants
understanding,” said Yun Jong-Yong, Vice-Chairman in the closing plenary session of the World
and Chief Executive Officer, Samsung Electronics, Economic Forum on East Asia complemented the
Republic of Korea, and a Co-Chair of the World workshop findings. Participants ranked the lack of
Economic Forum on East Asia. “If we hang on to the energy efficiency in major consuming countries and
past, we are only impeding each other’s progress.” industries of the region as one of the factors with the
highest potential impact (64% of respondents).
Participants also voted the absence of regional
institutions to discuss security, energy and
environmental issues (58%) and the economic
impact of Indian and Chinese growth on ASEAN's
future competitiveness (61%) as particularly risky
issues. The geopolitical implications of unsolved
territorial disputes between Japan and its
neighbours China and Korea (45%) was the final
issue participants said should be at the top of the
region’s agenda.

9

Competitiveness & Creativity

“We tend to think of
Figure 2: China and India are experiencing
innovation in terms of
faster per capita economic growth than
products and patents. But it’s
ASEAN
also about business models
and processes.”

Nandan M. Nilekani
President, Chief Executive
Officer and Managing Director,
Infosys Technologies, India;
Member of the Foundation
Board of the World Economic
Forum; Co-Chair of the World

Competition from China and India for trade and
investment has undermined the ability of Asian Source: World Trade Organization statistics

nations to use manufactured exports as an easy
Fortunately, Asia has China and India to help it
avenue to jobs and economic growth. Fortunately,
cope with the “Chindia” phenomenon. Companies
Asia has two potent tools to help it cope with
increasingly use Asia as links in a global supply
China and India – China and India. Companies
chain that relies on intra-Asian trade and
increasingly use Asia as part of a global supply
investment. Breakneck growth in China and India is
chain that is stimulating trade and investment within
also producing bottlenecks, shortages of skilled
Asia. And free trade pacts being negotiated
labour and rapid cost increases that are compelling
between the Association of Southeast Asian
many foreign direct investors to spread some
Nations (ASEAN), India, China and Japan promise
production and services back towards South-East
to create a pan-Asian market of over 3 billion
Asia, and even to Japan. As a result, intra-Asian
people. But companies and countries alike will have
trade already accounts for roughly half of all Asian
to continue struggling for ways to harness the
imports and exports. And, while Asia serves as a
region’s talent and technologies in order to create
major investor into China and India, investment
new niches for themselves in the global economy.
flows into China and India now correspond with
higher – not lower – foreign investment into the rest
The rise of China and India as competitors for trade
of Asia.
and investment has shattered the post-war Asian
formula for creating jobs and economic growth:
In the rapidly evolving global economy, however,
channelling public savings into manufactured
even the concept of innovation is getting a
exports. With China slowly catching up in the
makeover. “We tend to think of innovation in terms
manufacture of the most sophisticated electronics
of products and patents,” said meeting Co-Chair
and India gobbling up information-based services,
Nandan M. Nilekani, President, Chief Executive
the rest of Asia is in a squeeze. As Figure 2 shows,
Officer and Managing Director, Infosys
per capita incomes in China and India are growing
Technologies, India; Member of the Foundation
faster than anywhere else in the region. So while
Board of the World Economic Forum. “But it’s also
they occupy opposite ends of the development
about business models and processes.”
spectrum, Japan, Korea and the 10 members of
ASEAN face a renewed challenge to reinvent
For companies, that means using information
themselves, find new export niches and generate
technology to become a global company. It also
domestic engines of growth. In short, they must
means conceiving of new products that take
innovate or stagnate.
advantage of the borderless, collaborative market
that the Internet has created.

10

Asia has demonstrated significant achievement in this purse strings of Japan’s consumer-led economy, but
regard. Korea, for example, has become a laboratory are prevented by traditional mores from doing their
for broadband Internet-related services. part to raise productivity in Japan’s male-
Tech-savvy Japan is also well ahead dominated corporate world.
in rolling out fibre optic networks
and digital TV. Cellular Also overlooked are older workers.
operators, such as NTT “One hundred years ago we created
DoCoMo, are moving wealth with manual labour, but
beyond telephony into that’s not how wealth gets
cellular-based created anymore,” said Henry A.
commerce, from McKinnell, Chairman and Chief
ticketing to vending Executive Officer, Pfizer, USA;
machines. The Vice-Chairman of the
Philippines, for Foundation Board of the World
example, is proving a Economic Forum; Co-Chair of
test bed for turning the World Economic Forum on
the cellular phone into East Asia. “The assumption
a cash register. that an older society can’t
create wealth is wrong. You just
Some worry that despite can’t have people being old and
such technological disabled; you need to have them in
advances, Asia is still the workforce.”
dominated by conservative
corporate mindsets and resistance Integration is essential to ASEAN as well,
to further integration with neighbours of and the regional group is using a free trade
different language or race. agreement between its members to help create a
common market of 600 million people that can rival
In Japan, for example, services and software sectors China and India as a market for labour and
are still immature and economists are concerned that consumers. ASEAN is also pursuing trade agreements
its recovery from 15 years of economic stagnation is with India, China and Japan aimed at creating an even
being led not by an entrepreneurial new economy larger, pan-Asian market of over 3 billion people. As
transformation, but by a mere resurrection of its old Figure 3 shows, this market is lucrative, accounting for
economy industries. Japan also suffers from what US$ 1.2 billion of world trade in 2004. Yet, as
some say is a stubborn insularity. Thus, Japan’s competition within the region increases, branding will
research and development educational institutions are become more important, according to Sir Martin
not open fully to foreign students and professors with Sorrell, Group Chief Executive, WPP, United Kingdom,
the fresh ideas needed to fully exploit the trillions of and Co-Chair of the World Economic Forum on East
yen being spent to beef up their R&D facilities, Asia. “ASEAN has to be more effective in differentiating
according to Yuichiro Anzai, President, Keio University, niche positions,” he advised.
Japan, and Kiyoshi Kurokawa, President, Science
Council of Japan. Kurokawa urged bringing in large Figure 3: Asia accounts for more than 25% of
numbers of foreign students to revitalize Japanese
world trade, and more than half of that is
higher education, in much the way Singapore has
intra-Asia
done.

Japan’s failure to better integrate with the region
through immigration also highlights a looming Asian
labour imbalance: as developing Asian nations such as
Indonesia and the Philippines struggle to find jobs for
their growing populations, Japan’s workforce is
shrinking even as it strives for the economic growth
needed to pay for its rapidly ageing society.

Japan also still largely fails to exploit one of its largest
pools of domestic talent – women. Women control the
Source: World Trade Organization statistics

11

“There will be no vitality if “When everyone said the
society does not have any Japanese economy was bad
disparities. A society where three or four years ago, I
everybody makes an effort, wasn't that pessimistic, but
and those efforts are now, when people say the
rewarded, is preferred. The economy is getting better, I
problem lies with disparities don't really feel optimistic…
that are fixed. For those What we face now is whether
people who fail, we should [Prime Minister Junichiro]
have a mechanism so they Koizumi’s successor really can
can make another take over his reforms.”
challenge.”
Heizo Takenaka
Minister for Internal Affairs and
Kakutaro Kitashiro
Communications and for
Chairman, Keizai Doyukai, Japan
Privatization of the Postal Services
of Japan

Japan’s Demographic Deficit

Japan is the oldest of the advanced industrial economies. Moreover, it is ageing even faster than anyone expected:
a few years ago, demographers thought the workforce would start to decline in 2012. But the labour pool actually
started shrinking in 2005, as new retirees for the first time outnumbered fresh entrants.

Japan’s Demographic “Shape” 2004 vs 2030

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

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

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

12

Security & Sustainability

“Japan has made great
technologies. They should also promote exchanges
efforts to increase energy
that will enhance mutual understanding and defuse
efficiency. There has to be
such a grand design in the historical misunderstandings.
policies of each country.”

“The new century belongs to Asia,” Jiang Jianqing,
Kunio Nakamura
Chairman of the Board, Industrial and Commercial
President, Matsushita Electric
Industrial Co., Japan Bank of China, People’s Republic of China, told
participants in the meeting’s opening plenary. “But at
the same time we need to seriously tackle the many
challenges we face today.”

Asia’s remarkable economic growth is steadily enabling
the region to replace its long reliance on exports to the
West with intraregional trade in goods and services for
Growing income disparities, energy shortages and its own consumers, as Figure 4 demonstrates.
pollution pose a risk to growth across Asia. While Ensuring that this kind of growth continues smoothly,
poverty serves as a reservoir for militant Islam in however, will depend on finding common solutions to
South-East Asia, rural unrest poses a challenge to shared problems such as disparities of income, energy
state authority in China. China’s inefficient use of shortages and pollution.
energy is causing global environmental problems and
placing additional stress on vulnerable supplies of oil There are a host of challenges to Asia’s security and
and gas. The region’s problems demand a collective long-term growth: long-simmering rebellions, North
response. Politicians and companies should work Korea, terrorism and bird flu just to name a few. None
together on ways to improve energy security, reduce of these problems pose as significant a threat,
volatility in energy prices and share energy-efficient however, as the growing inequities and imbalances
stemming from Asia’s own growth.

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

$2B

$4B

$30B
$22B

$50B $44B

$8B
$96B
$5B
$109B

$21B $20B
$69B $52B
$7B
$66B $73B
$11B

$3B

$3B

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

13

At the same time, one of the hungriest energy
“The performance of
administrators is judged by consumers, China, is also one of the most
GDP growth, tax revenue inefficient. China already consumes more than
and jobs created. Energy
twice as much energy as Japan and emits three
efficiency is simply not in the
times as much carbon dioxide. China requires eight
vocabulary of bureaucrats.”
times as much energy as Japan to produce US$ 1
Xu Xiaonian of economic output as Figure 5 shows. And
Professor, Economics and
pollution from China is already having a global
Finance, China Europe
impact.
International Business School
(CEIBS), People's Republic of
China
Many worry that China is failing to take advantage
of the experience of its more advanced neighbours.
Japan, for example, developed its energy-efficient
capabilities in the mid-1970s in response to a
similar combination of high oil prices and rising
In particular, Asia needs to address the growing pollution.
gap between its haves and have-nots.

In South-East Asia, poverty provides a reservoir for
militant Islam, while in China restive rural areas
challenge state control. And across Asia, barriers to
the flow of skilled workers mean that ageing Japan
lacks workers while poor and growing nations like
the Philippines want for jobs.

While workers compete for jobs, nations are vying
for diminishing resources, especially water and oil.
Oil is a particularly urgent concern, as the demands
of China and India push up global energy prices
and reduce supplies. With new reserves getting
harder and more expensive to reach, existing
supplies are increasingly vulnerable to disruptions
such as storms or political unrest.
Yet, rather than working with the Japanese to
Figure 5: Relative energy efficiency per US$ increase efficiency at home, China’s officials end up
1bn GDP competing with Japan to secure more energy
assets abroad. “The problem is the central
government,” said Xu Xiaonian, Professor,
Economics and Finance, China Europe International
Business School (CEIBS), People’s Republic of
China. “The performance of administrators is
judged by GDP growth, tax revenue and jobs
created. Energy efficiency is simply not in the
vocabulary of bureaucrats.”

The problem is exacerbated by the fact that China
and several other Asian governments subsidize fuel
prices, keeping prices for consumers artificially low
and encouraging waste. Such subsidies should be
replaced with incentives for conservation.

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

14

For companies in Asia, the potential for disruptions More broadly, Asia’s leaders need a more open
demands a comprehensive risk-management policy conversation with each other. Academic exchanges
that involves senior management and recognizes that a and joint research efforts are another way to
company is only as insulated as the least prepared of deepen the region’s collective pool of knowledge
its major suppliers and customers. while bridging the historical and cultural gaps that
threaten to divide Asia. “We should make an effort
With so much at stake, cooperation between all of to better understand each other’s history and
Asia’s stakeholders is key to managing the region’s customs,” said Yun Jong-Yong, Vice-Chairman and
risks. Asia’s energy situation in particular demands a Chief Executive Officer, Samsung Electronics,
collective response. Oil consuming nations should Republic of Korea, and Co-Chair of the World
cooperate on energy security, reducing volatility in Economic Forum on East Asia. “If we hang on to
energy prices and sharing energy-efficient the past we are only impeding each other’s
technologies. They should also raise the level of progress.”
dialogue with oil producers.

Fuelling Asia’s Growth

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

Can industrialized Japan and Korea pass on to fast-moving, energy-hungry China and India the wisdom of energy
efficiency and environmental protection? Are Japan and Korea willing to sell this technology? And are China and
India willing to purchase it?

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

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

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

15

Regional Change – Japan

After its lost decade of stagnation, Japan faces two “For a long time, we placed
priority on equality of
immediate priorities: how to sustain its economic
results. Maybe we should
recovery and how to resolve simmering disputes
shift to equality of
with its neighbours China and Korea. Essential to
opportunity.”
addressing these challenges are reform and
leadership. Economic rebound should not be Sadakazu Tanigaki
mistaken for renewal. Japan has to continue to Minister of Finance of Japan
pursue a raft of structural reforms, including
initiatives to reduce its huge fiscal deficit (see Figure
6). This will require innovative solutions such as
more open immigration and the employment of the
elderly beyond the traditional retirement age.
Implementing such policies will require a break with
tradition, a change of mindset and strong political
leadership.

The concern today is how Japan can sustain its
Figure 6: In Asia, Japan appears to have the recovery and temper its new self-confidence to
worst fiscal imbalance resolve disagreements with China and Korea. The
two priorities are linked. An economically stronger
Japan will more confidently project its image and
promote its interests abroad. To sustain and
expand its economic recovery over the long term,
Japan must somehow deal with lingering enmities
that cloud its ties with the rest of Asia. “For the
further development of the Japanese economy, we
have to think of how Japan can transform itself
while jealously guarding the dignity of the nation,”
said Charles D. Lake II, Vice-Chairman and
Representative, Aflac Japan, Japan. “The Japanese
people have not fully realized what they need to do
given the international situation.”
Source: IMF World Economic Outlook April 2006

Figure 7: Japan has now experienced
After a decade of debate over whether stagnating
economic growth in nominal terms for three
Japan was heading for recovery or relapse, the
consecutive years
conclusion is clear: the second biggest economy in
the world is back. Participants at the World
Economic Forum on East Asia heard tales of a
more dynamic Japan – a country with a high level
of energy efficiency and environmental
consciousness, economic growth in nominal terms
for three consecutive years as Figure 7 shows,
deep penetration of broadband services, and a
growing entrepreneurial spirit despite government
constraints and cultural impediments. They also
heard of a more assertive, outward-looking Japan,
a nation more engaged in global affairs, as
demonstrated by its military contingent in Iraq, but Source: Statistics Bureau, Japan Ministry of Internal Affairs and Communications
“Monthly Statistics of Japan (March 2006)”
also locked in tense disputes with its neighbours.

16

“It might be warranted to
technology are the result of cooperation between the
move cautiously to make
private sector and the bureaucracy, which together
sure we don’t uproot the
factors in Japan’s success. agreed that competition should be allowed to drive
But we’re talking about the growth in the IT sector. Moreover, the banking system
international arena, and
was overhauled, with non-performing loans sharply
given the change in China,
reduced. The unwinding of cross-shareholdings has
India and Korea, [reform] is
meant that companies are turning more and more to
too slow.”
the capital markets for financing, spurring
Hellmut Schutte entrepreneurship. Further, stock market scandals are a
Dean, Asia Campus, INSEAD,
wake-up call for Japan to improve standards of
Singapore
accountability and disclosure. “We’re about to go
through a core transformation,” declared meeting Co-
Chair Junichi Ujiie, Chairman, Nomura Holdings,
Japan.

Not everybody is convinced that the creative
During Japan’s lost decade, global conditions changed
destruction that structural reforms can unleash is good
dramatically – China emerged as a formidable global
for Japan. “People’s mentalities haven’t changed that
manufacturing platform thanks in part to Japanese
much,” said Masao Hirano, Director, McKinsey &
investment, India became a force in business process
Company, Japan. “Many Japanese managers feel
outsourcing and the IT services sector, and Korea
reform will destroy the Japanese business regime.”
rebounded from the Asian financial crisis to turn into
Some companies have slowed efforts to increase
one of the most tech-savvy economies in the region.
transparency standards and accountability. But the
As for Japan, some important economic and
recalcitrant appear to be a dying breed.
political reforms have gone through, but
the restructuring agenda remains
The enormity of the challenges posed
long. “Japan has changed
by Japan’s ageing demographics
enormously in the last five
should be enough to convince all
years, but did we change
but the most diehard of the
sufficiently?” asked Heizo
need for strong action and
Takenaka, Minister for
new, possibly radical
Internal Affairs and
approaches. For example,
Communications and
as Figure X shows, tackling
for the Privatization of
Japan’s huge fiscal deficit,
the Postal Services of
which is above 5% of
Japan. “No. The
GDP, is essential to paying
world is changing
the costs of the growing
very fast and
ranks of retirees. “From an
proactive reform is in
economic perspective, the
order. We have only
solution is that Japan must
begun.”
raise its productivity and, in
particular, the productivity of
Economic rebound
capital,” said Jesper Koll,
should not be mistaken for
Managing Director and Chief
renewal. “The old economy is
Economist, Merrill Lynch Japan
leading the current recovery,”
Securities Co., Japan.
Takenaka pointed out. Meanwhile,
the “New Japan” is struggling to
Two ways to increase productivity would be to
emerge. There have been notable successes.
allow in more immigrants and to harness the energy of
According to Nobuyuki Idei, Chief Corporate Adviser,
the elderly. “One hundred years ago, we created
Sony Corporation, Japan, the spread of broadband at
wealth with manual labour, but that’s not how wealth
low cost to users and the proliferation of 3G mobile

17

“Companies in the private “Competition is happening
sector need to compete in in Japan.”
within the global market
and I think they have Nobuyuki Idei
Chief Corporate Adviser, Sony
succeeded in achieving a
Corporation, Japan
basic transformation. But
equality in results is
something people value…
and so the community
mindset has not been
transformed completely.”

Yoshihiko Miyauchi
Chairman and Chief Executive
Officer, Orix Corporation, Japan

gets created anymore,” meeting Co-Chair Henry A. opportunity.” Such moves have sparked a growing
McKinnell, Chairman and Chief Executive Officer, debate about the widening income gap that
Pfizer, USA; Vice-Chairman of the Foundation economic reforms have brought.
Board of the World Economic Forum, explained.
“The assumption that an older society can’t create The appointment later this year of a new prime
wealth is wrong. You just can’t have people being minister to replace Junichiro Koizumi will be a key
old and disabled; you need to have them in the indicator of the zeal for sustaining crucial reforms. It
workforce.” will also signal how Japan is likely to manage its
relations with its closest neighbours and its growing
But this would require a change in cultural norms. role in world affairs. How Japan squares national
Some have half-jokingly called Japan the world’s dignity and economic resurgence with its global
only successful communist country. It is time that responsibilities and the need to build bridges with
Japan shed that image and mindset. “For a long the rest of Asia will be its people’s biggest
time, we placed priority on equality of results,” challenge ever. “We know what must be done,”
Sadakazu Tanigaki, Minister of Finance of Japan, Takenaka concluded. “The question is whether
remarked. “Maybe we should shift to equality of there is the leadership.”

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

18

The Creative Imperative in East Asia

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

The interactive sessions at the World Economic Forum Competitiveness & Creativity
on East Asia, including several private meetings and – Values: Establish common values to drive growth in
workshops on emerging capital markets, the digital globally integrated companies, ensuring that local
ecosystem and global risks, continued discussions and cultural differences are not ignored. Too much
consultations carried forward from the Annual Meeting globalization can be a bad thing.
2006 in Davos and other regional meetings. Through – Mobility: Use technology to develop innovative
frank and open dialogue, more than 300 business, processes and business models that make full use
government and civil society leaders sought to apply of a company’s diverse human resources regardless
the “creative imperative” in setting “a new agenda for of distance or geography.
Asian integration”.
Security & Sustainability
Following is a selection of creative ideas and – Technology Transfer: Allow major energy
approaches that were discussed in Tokyo: consumers access to energy-saving industrial
technology developed by Japan and other energy-
Integration & Identity efficient countries.
– Ageing Demographics: Mitigate the economic – Energy: Create a forum for Japan and Korea to
burdens caused by the burgeoning ranks of retirees discuss with the Chinese government and business
in Japan and other countries facing ageing leaders China’s energy needs and what its
demographics through more open immigration and neighbours can do to help.
the deployment of the elderly in the workforce.
– Education: Promote youth and student exchanges Regional Change – Japan
to boost regional understanding, particularly – Sustainable Development: Deploy Japan’s
between Japan and its neighbours. expertise in environmental management to
– Regionalization: Review the integration initiatives contribute the technology and skills required to
in East Asia to focus strategic thinking and direction. promote sustainable practices in the rest of Asia
What kind of integration does Asia want – how do and elsewhere.
we get there? More importantly, how can Asia – Mindset: Change the rules to change the mindset.
achieve optimum regional integration, while meeting Japan must give second chances to those who fail.
its global responsibilities? Encouraging entrepreneurship is crucial to the
strengthening of the vital new economy. Promote
role models of success not just paragons of humility.
Open Japanese universities to more faculty and
students from overseas.

19

Leaders forged closer economic ties during
the World Economic Forum on East Asia

The Secretary-General of the Association of South “Japan should show
East Asian Nations gave his support for the the lead in opening its
Japanese trade minister’s offer of setting up a free market because for
ASEAN as well as for
trade area in East Asia. Ong Keng-Yong also
the East Asian
agreed to Japan’s proposal for a new regional
community to
policy coordination body modelled on the
prosper, we have to
Organization for Economic Cooperation and do a lot of trade
Development (OECD). among ourselves.”

Ong Keng-Yong
Japan’s Economy, Trade and Industry Minister
Secretary-General,
Toshihiro Nikai said that the East Asian version of ASEAN, Jakarta
the OECD needed to be established in the medium
and long term, with ASEAN as a motor.

He told participants that the East Asian market
could attain further growth and integration by The United States meanwhile is ready to consider
forming free trade agreements among the region’s an Asian Currency Unit, Undersecretary of the
economies. Treasury for international affairs, Tim Adams, said.
Japan and the Asian Development Bank are in
favour of creating a weighted basket of Asian
ASEAN Secretary-General Ong Keng-Yong gave currencies similar to the European Currency Unit, a
assurances that the emerging East Asian precursor of the euro.
community would not exclude the United States.
Japan and India signed an agreement encouraging
Japan’s small to medium size companies to enter
into the Indian market by providing information and
business-matching opportunities.

20

Acknowledgements

The World Economic Forum would like to thank Keizai Doyukai (Japan Association of Corporate
Executives) for its support at the World Economic Forum on East Asia.

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

Strategic Partners
Audi
Avaya
Bain & Company
Barclays Capital
Citigroup
Credit Suisse
Economic Development Board of Bahrain
Infosys Technologies
JPMorgan Chase
KPMG
Kudelski Group
Lehman Brothers
McKinsey & Company
Manpower
Merrill Lynch
Microsoft Corporation
Pfizer
Zurich Financial Services

Regional Partners
Geopost International
Phoenix Satellite Television
UPS

Roundtable Supporters
AFLAC Japan
Ogilvy Public Relations Worldwide

Official Carrier
Japan Airlines International

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

22

Contributors

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

Vidhi Tambiah is Associate Director, Global Agenda, and Samantha Tonkin is Senior Media Manager at the World
Economic Forum. They worked with Alejandro Reyes and Wayne Arnold to produce this report.

The World Economic Forum would like to express its appreciation to the summary writers for their work at the
World Economic Forum on East Asia in Tokyo. Session summaries are available at: www.weforum.org

Fabienne Stassen Fleming, Senior Specialist, Editing
Nancy Tranchet, Associate Principal, Editing

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

Photographs: Hitoshi Fugo with Caroline Parsons, Editor and Susumu Ishito

Special thanks to Bain & Company for their help in preparing data and statistics underpinning this report.

The World Economic Forum also recognizes Heng Kim-Song and No-rio Yamanoi, Editorial Cartoonists, for their
insightful and entertaining contribution to the programme and report of the World Economic Forum on East Asia.

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)

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