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.

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
World Economic Forum on East Asia
 Summary – Creating a New Agenda for
Asian Integration
“We must look at the big
picture and not let the
baggage of history deter
us.”
Najib Tun Razak
Deputy Prime Minister of
Malaysia
“The new century belongs to Asia” agreed more than
300 senior government, business and civil society
leaders at the World Economic Forum on East Asia.
The region will fulfil this potential, participants said,
provided it meets the following top challenges:
• Create or assign regional institutions to discuss
energy, security and environmental issues
• Address the impact of Indian and Chinese growth
on the future competitiveness of South-East Asia
• Increase energy efficiency in major consuming
countries and industries
• Sustain Japan’s recovery while cutting its fiscal
deficit and resolve Japan’s historical and territorial
disputes with China and Korea
More than half of the meeting’s participants prioritized
these issues of paramount concern in a survey
conducted in the closing plenary session.
Participants concluded that existing regional
institutions and networks are not yet capable of
confronting the many interconnected threats posed
by the pressures of globalization and the rise of
competition in the global market. To meet emerging
risks, they called for a new agenda for Asian
integration.
“The new century belongs to Asia. But at the same time
we need to seriously tackle the many challenges we face
today.”
Jiang Jianqing
Chairman of the Board, Industrial and Commercial Bank of China,
People’s Republic of China
4
“The challenge we have in
the 21st century is to
reconcile our global,
national and regional
identities. The key will be to
make sure we keep up to
our global responsibilities.”
Klaus Schwab
Founder and Executive
Chairman, World Economic
Forum
This will require cooperation on a range of urgent
issues including energy efficiency and environmental
protection, corporate social responsibility, widening
the access to financial markets, education reform,
poverty alleviation and the sharing of technology. In
addition, the rest of the region and its partners must
also individually and collectively address the
commercial and political implications of the surging
growth of China and India, as well as Japan’s
economic recovery.
“Increased market-driven integration and economic
cooperation in the region are creating a more open
and frank dialogue on pressing issues such as
corporate social responsibility, energy efficiency and
the enhancement of regional dialogue,” said Peter
Torreele, Managing Director, World Economic Forum.
The consensus among participants was that business
and civil society should take the lead in speeding up
the region’s “market driven” integration. But they also
called on governments and political leaders to tackle
geopolitical problems such as maritime piracy,
migration, and in particular, long-standing disputes
over territorial claims, interpretations of history and
nationalist sentiment that could lead to conflict.
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,
Davos and Singapore, where next year’s World
Economic Forum on East Asia will take place on
24-25 June 2007.
World Economic Forum on East Asia
 “The process of realizing
East Asian integration
depends very much on the
political will and trust of our
countries as there is a big
gap in the levels of
development.”
Hoang Trung Hai
Minister of Industry of Vietnam
Integration & Identity
The proliferation of global and regional risks from
pandemics to piracy on the high seas is putting
pressure on East Asia to deepen integration.
• The institution-heavy European Union model is
not appropriate for the region.
• East Asia will continue to pursue its “soft-
institution”, “bottom-up” approach, in which the
drivers of integration are business and civil
society.
• Governments must still deal with cross-border
problems such as migration that require
cooperative solutions.
• Historical enmities between countries should be
resolved to allow for enhanced integration.
Countries should not let these disputes impede
the integration agenda.
"Oil consuming countries
in Asia need to cooperate
to promote more efficient
energy usage, develop
and share energy-efficient
technologies and promote
energy security."
Zhang Xiaoqiang
Vice-Chairman, National
Development and Reform
Commission, People's Republic
of China
World Economic Forum on East Asia
“If you can’t beat India or
China, you have to join
them.”
Mari Pangestu
Minister of Trade of Indonesia
Competitiveness & Creativity
East Asian economies are facing heightened
competition for trade and investment from China and
India.
• Companies are integrating Asia and its range of
manufacturing platforms and service providers into
the global supply chain, further stimulating trade
and investment in the region.
• The web of free trade arrangements that are under
construction across the region will create a pan-
Asian market of over 3 billion people.
• Enterprises and countries have to develop the
human resources and technology they need to
create profitable niches in the global economy.
“ASEAN has to be more
effective in differentiating
niche positions.”
Sir Martin Sorrell
Group Chief Executive, WPP,
United Kingdom; Co-Chair,
World Economic Forum on East
Asia
5
 “If the major consuming
countries are more energy
efficient, this can help
stabilize energy prices and
benefit the rest of the
world.”
Tran Trong Toan
Executive Director, APEC
Secretariat (Asia-Pacific
Economic Cooperation),
Singapore
Security & Sustainability
Income disparities, energy shortages and
environmental degradation are serious risks to
sustaining Asia’s growth.
• Poverty and rural discontent can lead to extremism
and social unrest that could threaten stability in
many countries.
• Energy inefficiency in China is a global concern,
given its effects on the environment and on global
energy markets.
• These problems require a concerted regional
response to improve energy security and share
energy-saving technologies.
• Exchanges among countries in the region will
mitigate the threat to stability from simmering
historical disputes.
“We also see within
countries and within the
region the widening gap of
the rich and the poor in the
region. This is a risk of
instability.”
Hassan Marican
President and Chief Executive
Officer, PETRONAS (Petroliam
Nasional), Malaysia; Co-Chair,
World Economic Forum on East
Asia
6
“We’re about to go through
a core transformation.”
Junichi Ujiie
Chairman, Nomura Holdings,
Japan; Co-Chair, World
Economic Forum on East Asia
Regional Change – Japan
The emergence of China and India is heightening
competitive pressure on Japan.
• Japan’s current economic recovery is being
driven by legacy sectors of the economy.
• To sustain growth, Japan must find ways to
build on successes in IT and financial services,
where reforms unleashed much-needed
structural changes.
• Japan must address its growing fiscal deficit by
increasing productivity and the productive use
of capital.
• To do so will require innovation, a willingness to
break with tradition and strong political
leadership.
• Japanese leaders must also build bridges with
their East Asian neighbours.
“Japan will continue to try
to reduce barriers to Asian
trade by pursuing bilateral
and multilateral free-trade
agreements with its Asian
trading partners.”
Toshihiro Nikai
Minister of Economy, Trade and
Industry of Japan
World Economic Forum on East Asia
 Integration & Identity

revealing how many young Europeans now value their

“The assumption that an national identities over a regional one.
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
and disabled; you need to
change. The financial meltdown of 1997-98, 9/11 and
have them in the the terrorist attacks in Bali and elsewhere, 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
Chairman and Chief Executive Indonesia and maritime piracy on the Straits of
Officer, Pfizer, USA; Vice- Malacca – all these challenges have highlighted the
Chairman of the Foundation deficiencies of the region’s minimalist approach to
Board of the World Economic
Forum; Co-Chair, World greater unity. The integration of India further into East
Economic Forum on East Asia 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
World Economic Forum on East Asia
 “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
old notions. With global and regional risks to increase mutual
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
World Economic Forum on East Asia
 connections and exchanges that take place every day.
Indeed, for Asia’s growing number of globally
integrated enterprises such as Samsung, borders are
already meaningless.
There is still a role for governments in pushing
integration forward, said Najib Tun Razak, Deputy
Prime Minister of Malaysia. Common challenges such
as maritime piracy and migration require cooperation.
Migration, for example, will have to be part of the
solution to the problem of ageing demographics in
Japan. “We must look at the big picture and not let the
baggage of history deter us,” Najib concluded.
Yet heightened tensions between Japan and its
neighbours Korea and China, as well as concerns
about potential conflict on the Korean Peninsula and
across the Taiwan Strait, could easily derail the East
Asian integration train. “Parochial nationalism,” said
Chen Feng, Chairman, China Hainan Airlines, People’s
Republic of China, “must be eliminated.”
Peter M. Beck, Director, International Crisis Group
(ICG), Republic of Korea, fretted that with a
“statesmanship deficit” on both sides of the Pacific,
the threat of military clashes over territorial 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
understanding,” said Yun Jong-Yong, Vice-Chairman
and Chief Executive Officer, Samsung Electronics,
Republic of Korea, and a Co-Chair of the World
Economic Forum on East Asia. “If we hang on to the
past, we are only impeding each other’s progress.”
World Economic Forum on East Asia
Asia’s Risk Factors
Participants in a Global Risk Network workshop
expressed concern about the mounting economic,
geopolitical and societal risks facing East Asia.
Global fiscal imbalances brought on by the large
surpluses accumulated by Asian countries and the
US twin deficit were rated a major source of
economic risk. Perceived as particularly relevant in
Japan, but also in South Korea and China, is the
risk of fiscal crises as a result of a rapidly ageing
society. Societal risk in the region includes potential
breakdowns of control in restive rural areas in China
and growing shortages of both oil and clean drinking
water.
The workshop also highlighted the lack of visionary
political leadership in the region, as well as the
absence of an overarching regional security
framework, as negative factors affecting efficient risk
mitigation strategies.
Participants' impressions of risks facing Asia
An issue survey conducted among the participants
in the closing plenary session of the World
Economic Forum on East Asia complemented the
workshop findings. Participants ranked the lack of
energy efficiency in major consuming countries and
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
innovation in terms of
products and patents. But it’s
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
Economic Forum on East Asia
Competition from China and India for trade and
investment has undermined the ability of Asian
nations to use manufactured exports as an easy
avenue to jobs and economic growth. Fortunately,
Asia has two potent tools to help it cope with
China and India – China and India. Companies
increasingly use Asia as part of a global supply
chain that is stimulating trade and investment within
Asia. And free trade pacts being negotiated
between the Association of Southeast Asian
Nations (ASEAN), India, China and Japan promise
to create a pan-Asian market of over 3 billion
people. But companies and countries alike will have
to continue struggling for ways to harness the
region’s talent and technologies in order to create
new niches for themselves in the global economy.
The rise of China and India as competitors for trade
and investment has shattered the post-war Asian
formula for creating jobs and economic growth:
channelling public savings into manufactured
exports. With China slowly catching up in the
manufacture of the most sophisticated electronics
and India gobbling up information-based services,
the rest of Asia is in a squeeze. As Figure 2 shows,
per capita incomes in China and India are growing
faster than anywhere else in the region. So while
they occupy opposite ends of the development
spectrum, Japan, Korea and the 10 members of
ASEAN face a renewed challenge to reinvent
themselves, find new export niches and generate
domestic engines of growth. In short, they must
innovate or stagnate.
10
Figure 2: China and India are experiencing
faster per capita economic growth than
ASEAN
Source: World Trade Organization statistics
Fortunately, Asia has China and India to help it
cope with the “Chindia” phenomenon. Companies
increasingly use Asia as links in a global supply
chain that relies on intra-Asian trade and
investment. Breakneck growth in China and India is
also producing bottlenecks, shortages of skilled
labour and rapid cost increases that are compelling
many foreign direct investors to spread some
production and services back towards South-East
Asia, and even to Japan. As a result, intra-Asian
trade already accounts for roughly half of all Asian
imports and exports. And, while Asia serves as a
major investor into China and India, investment
flows into China and India now correspond with
higher – not lower – foreign investment into the rest
of Asia.
In the rapidly evolving global economy, however,
even the concept of innovation is getting a
makeover. “We tend to think of innovation in terms
of products and patents,” said meeting Co-Chair
Nandan M. Nilekani, President, Chief Executive
Officer and Managing Director, Infosys
Technologies, India; Member of the Foundation
Board of the World Economic Forum. “But it’s also
about business models and processes.”
For companies, that means using information
technology to become a global company. It also
means conceiving of new products that take
advantage of the borderless, collaborative market
that the Internet has created.
World Economic Forum on East Asia
 Asia has demonstrated significant achievement in this
regard. Korea, for example, has become a laboratory
for broadband Internet-related services.
Tech-savvy Japan is also well ahead
in rolling out fibre optic networks
and digital TV. Cellular
operators, such as NTT
DoCoMo, are moving
beyond telephony into
cellular-based
commerce, from
ticketing to vending
machines. The
Philippines, for
example, is proving a
test bed for turning
the cellular phone into
a cash register.
Some worry that despite
such technological
advances, Asia is still
dominated by conservative
corporate mindsets and resistance
to further integration with neighbours of
different language or race.
In Japan, for example, services and software sectors
are still immature and economists are concerned that
its recovery from 15 years of economic stagnation is
being led not by an entrepreneurial new economy
transformation, but by a mere resurrection of its old
economy industries. Japan also suffers from what
some say is a stubborn insularity. Thus, Japan’s
research and development educational institutions are
not open fully to foreign students and professors with
the fresh ideas needed to fully exploit the trillions of
yen being spent to beef up their R&D facilities,
according to Yuichiro Anzai, President, Keio University,
Japan, and Kiyoshi Kurokawa, President, Science
Council of Japan. Kurokawa urged bringing in large
numbers of foreign students to revitalize Japanese
higher education, in much the way Singapore has
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
World Economic Forum on East Asia
purse strings of Japan’s consumer-led economy, but
are prevented by traditional mores from doing their
part to raise productivity in Japan’s male-
dominated corporate world.
Also overlooked are older workers.
“One hundred years ago we created
wealth with manual labour, but
that’s not how wealth gets
created anymore,” said Henry A.
McKinnell, Chairman and Chief
Executive Officer, Pfizer, USA;
Vice-Chairman of the
Foundation Board of the World
Economic Forum; Co-Chair of
the World Economic Forum on
East Asia. “The assumption
that an older society can’t
create wealth is wrong. You just
can’t have people being old and
disabled; you need to have them in
the workforce.”
Integration is essential to ASEAN as well,
and the regional group is using a free trade
agreement between its members to help create a
common market of 600 million people that can rival
China and India as a market for labour and
consumers. ASEAN is also pursuing trade agreements
with India, China and Japan aimed at creating an even
larger, pan-Asian market of over 3 billion people. As
Figure 3 shows, this market is lucrative, accounting for
US$ 1.2 billion of world trade in 2004. Yet, as
competition within the region increases, branding will
become more important, according to Sir Martin
Sorrell, Group Chief Executive, WPP, United Kingdom,
and Co-Chair of the World Economic Forum on East
Asia. “ASEAN has to be more effective in differentiating
niche positions,” he advised.
Figure 3: Asia accounts for more than 25% of
world trade, and more than half of that is
intra-Asia
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
Kakutaro Kitashiro Minister for Internal Affairs and
Chairman, Keizai Doyukai, Japan Communications and for
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
World Economic Forum on East Asia
 Security & Sustainability
“Japan has made great
efforts to increase energy
efficiency. There has to be
such a grand design in the
policies of each country.”
Kunio Nakamura
President, Matsushita Electric
Industrial Co., Japan
Growing income disparities, energy shortages and
pollution pose a risk to growth across Asia. While
poverty serves as a reservoir for militant Islam in
South-East Asia, rural unrest poses a challenge to
state authority in China. China’s inefficient use of
energy is causing global environmental problems and
placing additional stress on vulnerable supplies of oil
and gas. The region’s problems demand a collective
response. Politicians and companies should work
together on ways to improve energy security, reduce
volatility in energy prices and share energy-efficient
Figure 4: Significant trade flows are reinforcing economic and financial ties between Asian countries
$2B
$4B
$8B
$5B
$7B
$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
World Economic Forum on East Asia
technologies. They should also promote exchanges
that will enhance mutual understanding and defuse
historical misunderstandings.
“The new century belongs to Asia,” Jiang Jianqing,
Chairman of the Board, Industrial and Commercial
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
its own consumers, as Figure 4 demonstrates.
Ensuring that this kind of growth continues smoothly,
however, will depend on finding common solutions to
shared problems such as disparities of income, energy
shortages and pollution.
There are a host of challenges to Asia’s security and
long-term growth: long-simmering rebellions, North
Korea, terrorism and bird flu just to name a few. None
of these problems pose as significant a threat,
however, as the growing inequities and imbalances
stemming from Asia’s own growth.
$30B
$22B
$50B $44B
$96B
$109B
$21B $20B
$69B $52B
$66B $73B
13
 “The performance of
administrators is judged by
GDP growth, tax revenue
and jobs created. Energy
efficiency is simply not in the
vocabulary of bureaucrats.”
Xu Xiaonian
Professor, Economics and
Finance, China Europe
International Business School
(CEIBS), People's Republic of
China
In particular, Asia needs to address the growing
gap between its haves and have-nots.
At the same time, one of the hungriest energy
consumers, China, is also one of the most
inefficient. China already consumes more than
twice as much energy as Japan and emits three
times as much carbon dioxide. China requires eight
times as much energy as Japan to produce US$ 1
of economic output as Figure 5 shows. And
pollution from China is already having a global
impact.
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
pollution.

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.
Figure 5: Relative energy efficiency per US$
1bn GDP
Yet, rather than working with the Japanese to
increase efficiency at home, China’s officials end up
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”

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

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.

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World Economic Forum on East Asia
 Regional Change – Japan

After its lost decade of stagnation, Japan faces two “For a long time, we placed
immediate priorities: how to sustain its economic priority on equality of
recovery and how to resolve simmering disputes results. Maybe we should
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
worst fiscal imbalance
Source: IMF World Economic Outlook April 2006
recovery and temper its new self-confidence to
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.”

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
conclusion is clear: the second biggest economy in
consecutive years
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.

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

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

17
World Economic Forum on East Asia
 “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
succeeded in achieving a Chief Corporate Adviser, Sony
basic transformation. But Corporation, Japan
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.
McKinnell, Chairman and Chief Executive Officer,
Pfizer, USA; Vice-Chairman of the Foundation
Board of the World Economic Forum, explained.
“The assumption that an older society can’t create
wealth is wrong. You just can’t have people being
old and disabled; you need to have them in the
workforce.”
But this would require a change in cultural norms.
Some have half-jokingly called Japan the world’s
only successful communist country. It is time that
Japan shed that image and mindset. “For a long
time, we placed priority on equality of results,”
Sadakazu Tanigaki, Minister of Finance of Japan,
remarked. “Maybe we should shift to equality of
opportunity.” Such moves have sparked a growing
debate about the widening income gap that
economic reforms have brought.
The appointment later this year of a new prime
minister to replace Junichiro Koizumi will be a key
indicator of the zeal for sustaining crucial reforms. It
will also signal how Japan is likely to manage its
relations with its closest neighbours and its growing
role in world affairs. How Japan squares national
dignity and economic resurgence with its global
responsibilities and the need to build bridges with
the rest of Asia will be its people’s biggest
challenge ever. “We know what must be done,”
Takenaka concluded. “The question is whether
there is the leadership.”

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

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

Japan’s Economy, Trade and Industry Minister Ong Keng-Yong

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
forming free trade agreements among the region’s
economies.
ASEAN Secretary-General Ong Keng-Yong gave
assurances that the emerging East Asian
community would not exclude the United States.
The United States meanwhile is ready to consider
an Asian Currency Unit, Undersecretary of the
Treasury for international affairs, Tim Adams, said.
Japan and the Asian Development Bank are in
favour of creating a weighted basket of Asian
currencies similar to the European Currency Unit, a
precursor of the euro.
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.

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World Economic Forum on East Asia
 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.

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World Economic Forum on East Asia
 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)