EAST-WEST CENTER
Summary Report
Asia Pacific Executive Forum SUMMARY REPORT
Doing Business in a Changing Asia: A Strategic Vision
January 16-19, 2001 East-West Center, Honolulu
Sponsored by the East-West Center, East-West Seminars in Partnership with Frost & Sullivan The Asia Pacific Executive Forum "Summary Report" summarizes the presentations, discussions and conclusions of the conference. The Summary Report reflects the diverse perspectives of the participants and does not necessarily represent the views of the East- West Center or its sponsors. The price per copy is $20.00 plus shipping and handling. For more information, please contact:
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© East-West Center 2001 TABLE OF CONTENTS
Preface
Acknowledgements
Executive Summary
Welcome and Opening Remarks Dr. Charles E. Morrison, President, East-West Center Mr. Aroop Zutshi, President, Asian Operations, Frost & Sullivan, San Jose
Keynote Address: Asian Options and the New American Administration Professor Tom Plate, Professor, Policy Studies and Communications Studies, University of California, Los Angeles; Pacific Perspectives Columnist Moderator: Dr. Charles E. Morrison, President, East-West Center
Corporate Restructuring After the Asian Crisis Mr. David D. Hale, Global Chief Economist, Zurich Financial Services, Chicago Moderator: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center
Post-Cold War U.S. Interest in the Asia Pacific Dr. Charles E. Morrison, President, East-West Center Moderator: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center
Shifting Trading Arrangements in Asia Pacific: Implications for Market and Nonmarket Strategies Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost & Sullivan, San Francisco Moderator: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center
Keynote Luncheon Address: Protecting You and Your Business: Report on Terrorism and Other Risks Mr. Myron R. Fuller, Special Agent in Charge, U.S. Federal Bureau of Investigation, Honolulu Moderator: Ms. Karen Knudsen, Director, Office of External Affairs, East-West Center
Key Issues for Doing Business in the Asia Pacific: Energy, Environment and Business, and Population Is Energy the Region's Achilles Heel? Dr. Fereidun Fesharaki, Senior Fellow, East-West Center Environment and Business, Ms. Lyuba Zarsky, Program Director, Globalization and Governance Program, The Nautilus Institute, Berkeley Aging Asia, Dr. Andrew Mason, Senior Fellow, East-West Center and Professor and Chair, Department of Economics, University of Hawaii, Honolulu Co-Moderator: Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost & Sullivan, San Francisco Co-Moderator: Dr. Jefferson Fox, Acting Director of Studies, East-West Center
Political Changes in Asia: An Overview 21 Dr. Muthiah Alagappa, Senior Fellow, East-West Center Moderator: Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost & Sullivan
Panel Session: A Business Agenda for the Region 23 Mr. Roberto F. de Ocampo, President, Asian Institute of Management, Makati City, Philippines Mr. Bob Ellison, Director, SwapNet Limited Mr. James B. Gebhard, (retired) Regional Vice President, Southeast Asia, Hughes Electronics International Corp. Moderator: Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost & Sullivan
Panel Session: Japan 27 Competitive Telecom Environment and IT Ventures Will Become the Driving Force of the New Economy in Japan, Dr. Sachio Semmoto, Founder, Chairman, and CEO, eAccess Ltd. Tokyo, Japan U.S.-Japan Relations, Dr. David McClain, Dean and First Hawaiian Bank Distinguished Professor of Leadership and Management, College of Business Administration, University of Hawaii, Honolulu Moderator: Dr. Susan J. Pharr, Edwin O. Reischauer Professor of Japanese Politics and Director, Program on U.S.-Japan Relations, Harvard University
Panel Session: China 32 Where is China Heading? Mr. John Thomson, Managing Editor, China Online Inc., Chicago U.S.-China Relations, Dr. Susan L. Shirk, Professor, Graduate School of International Relations and Pacific Studies, University of California, San Diego and Research Director, Institute on Global Conflict and Cooperation, San Diego Moderator: Mr. Dennis Donahue, Coordinator, Media Program, East-West Center
India: New Market Opportunities 37 Mr. Aditya Sapru, Director, India Operations, Frost & Sullivan, Mumbai, India Moderator: Mr. Dennis Donahue, Director, Media Program, East-West Center
Keynote Luncheon Address: 40 Election 2000: What Really Happened? Mr. Neil S. Newhouse, Partner, Public Opinion Strategies* Alexandria, Virginia Moderator: Mr. Charles E. Morrison, President, East-West Center The Koreas 43 Dr. Ungsuh Kenneth Park, President and CEO, KOHAP Corporation, Seoul Moderator: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center
Panel Session: ASEAN 46 Mr. Jusuf Wanandi, Chairman, Supervisory Board, Centre for Strategic and International Studies, Jakarta His Excellency Rodolfo C. Severino Jr., Secretary General, ASEAN Moderator: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center
Concurrent Roundtable Sessions 50 Track A Information Technology and Telecommunications Roundtable Discussion Co-chairs: Dr. Mark Hukill, Associate Professor, School of Travel Industry and Management, University of Hawaii, Honolulu Mr. Manoj Menon, Director, Technology Practice (Asia Pacific), Frost & Sullivan, Singapore
Track B 52 Banking and Finance Roundtable Discussion Co-Chairs: Dr. S. Ghon Rhee, K. J. Luke Chair of International Finance and Banking and Executive Director, Asia-Pacific Financial Markets Research Center, University of Hawaii, Honolulu Mr. Paul Tarn, Director, International Business Development, OffRoad Capital Corp., San Francisco
Track C 54 Energy Industry Roundtable Discussion Co-Chairs: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center Mr. Larry M. Rinek, Director of Consulting, Industrial Technologies, Frost & Sullivan, San Jose
Appendices Program Agenda 59 Speaker Participant List 66 Sponsor Profiles 70
PREFACE
The "Asia Pacific Executive Forum - Doing Business in a Changing Asia: A Strategic Vision" (January 16-19, 2001) was sponsored by the East-West Center in partnership with Frost & Sullivan, an international marketing consulting company. Supporting organizations included the Pacific Basin Economic Council, the U.S. Department of Commerce, the International Trade Administration, the U.S. Commercial Service, and the Honolulu Export Assistance Center.
Designed as a corporate retreat, the Asia Pacific Executive Forum brought together senior multinational executives, government policymakers and experts from the East-West Center and Frost & Sullivan for intensive dialogue on critical issues facing Asia Pacific and their impacts on economics and business in the region. The two-day meeting provided a unique opportunity for corporate leaders to gain insights into and discuss key issues relating to the future economic and business outlook in Asia Pacific.
Participants benefited from analyses of political trends in the region, shifting trade arrangements, and changing U.S. policies towards major Asian countries. Panel sessions focused on Japan, China, South Korea, and ASEAN, as well as corporate restructuring, energy, population and aging, and the environment. Participants also attended sessions on key industry sectors, including information technology and telecommunications; banking and finance; market engineering; and energy. Participants were also invited to schedule private consultations with East-West Center and Frost & Sullivan experts on specific areas of interest. ACKNOWLEDGEMENTS
The East-West Center's East-West Seminars and Frost & Sullivan would like to acknowledge the speakers and moderators for contributing their knowledge and expertise on the critical issues addressed at the forum. The forum could not meet its objectives without the participation of the audience for providing lively and informative discussions on the key issues.
The organizers would like to extend their special thanks to the supporting organizations: The Chamber of Commerce of Hawaii, the Pacific Basin Economic Council, Red Herring Communications, and the U.S. Department of Commerce's U.S. Commercial Service, Honolulu Export Assistance Center.
Lastly, warm expressions of appreciation are extended to Ms. Jane Skanderup at the Pacific Forum/CSIS for the task of rapporteuring and writing the summation of the forum, Mr. Ken Banks, the copyeditor, for completing the summary draft for publication in a timely manner, and Mr. John Countryman and Mr. Takashi Yamamoto for rapporteuring and providing the summaries during the forum's roundtable sessions.
ii Executive Summary
The Asia Pacific Executive Forum addressed a variety of topics. The purpose of the meeting was to facilitate dialogue and not necessarily to come to conclusions. Some of the more salient points made by presenters or other participants are summarized below.
Weak political leadership in much of Asia and the Pacific reflects the relatively newness of the political systems and the magnitude of the challenges facing rapidly changing societies. As the economic crisis demonstrated, many Asian countries are still in the process of developing modern states and institutions. New factors complicating politics include the introduction of new political value (often through the internet), the rise of the middle class, and the development of independent civil society organizations.
In the banking and corporate sectors, banks in Asia have been dominated by local players, and laws limited the ability of international banks to make loans, establish branches, or purchase local banks. The financial crisis left the region's banks with many non-performing loans, and banks reduced their lending. More recently, there has been improvement in these areas. Both Korea and Thailand have allowed medium-sized banks to be bought. Indonesia was on the verge of selling Bank Bali but a political crisis prevented the sale. The role model for Asia is Latin America; foreign banks control half of the banks in Mexico and Argentina, which has allowed recapitalization and better managers. Despite these improvements the pace of reform is slow and lending by banks is still low. Asia is moving incrementally toward a system of protection of minority shareholders, setting the stage for a major transformation over the next five to ten years to a more healthy form of capitalism. The most dramatic change will be in banking. The IMF programs in Korea, Thailand, and Indonesia were catalysts that helped these countries to open up to foreign investment.
The information technology (IT) sector is taking off. Korea and Hong Kong both created stock exchanges for small-tech companies, providing new sources of capital. China has developed a significant stock market in the last 10 years, and during the next two years it will open the A-share market to foreign investors. Japan adopted the IT Basic Law in December 2000. The law aims high: to have in place by 2005 high-speed constant access networks to reach 30 million households, and ultra high-speed constant access to reach 10 million households. This would exceed broadband capacity in the United States, and would dramatically increase Japan's Internet usage, which now ranks 19th globally. Still, the NTT monopoly continues to be a drag on the pace of growth in the IT sector by discouraging new competition and slowing the development and upgrade of the telecommunications network. Japan needs more local exchange carriers to promote competition.
Japan's economy is undergoing its biggest change since the Meiji restoration. Corporate cross-shareholdings are dropping, and foreigners own 18 percent of the capital stock compared with 5 percent in 1990. Individuals also own more stock, so profitability is becoming more important as the number of players increases and the stakeholder system evolves into a shareholder system. But this transition creates economic insecurity and
iii depressed consumer spending. Japan is in a policy box: with national debt near 130 percent of GDP, the use of fiscal policy is near its limit, and the effectiveness of monetary policy has been limited by disputes between the central bank and the finance ministry. The yen should be allowed to fall by vigorously monetizing the debt and adopting an inflation target, but a weak yen hampers Asia's recovery. Japan could buy time until the IT revolution takes hold, but if consumer demand does not recover soon, the crisis may resume.
China's economy is reviving after suffering from declining demand for exports in 1997- 98. Rising consumer saving in preparation for privatization of housing and medical services contributed to a drop in the GDP growth rate to 7.1 percent in 1999. But in 2000 exports rose 30 percent and the GDP growth rate of 8.2 percent in 2000 is expected to hold in 2001. Foreign direct investment has averaged $40 billion per year, but is expected to reach $100 billion by 2004. The leadership transition in 2002 brings questions concerning whether President Jiang Zemin and his proteges will exert control from the sidelines when the third generation of leadership takes over. If the new leadership wants full control, this would cause political uncertainty.
This is a challenging time for ASEAN. Many ASEAN members, notably Indonesia, are in political and economic transition. The group as a whole was deeply impacted by the Asian economic crisis. While they responded in different ways, with Thailand and Indonesia accepting IMF-led plans and Malaysia imposing capital controls, the ASEAN countries managed to avoid "beggar thy neighbor" policies. The crisis also resulted in a new awareness of the need for regional cooperation in Southeast Asia and also with Northeast Asia through a new "ASEAN Plus Three" process. ASEAN is developing a "peer review" process of financial systems, continuing its efforts to create a free trade area, and establishing a broader East Asian regional currency swap arrangement. Meanwhile individual countries, especially Singapore, are vigorously moving ahead with bilateral trading arrangements. Indonesia faces an unresolved leadership crisis, which is part of its broader political transition, to democratic governance.
South Korea's government pushed industry to maximize output, not profits. During the economic and financial crisis, debt levels were high, and bank capital fled. Current reforms are stalled due to the inability of the government to maintain a stable economic policy and to "restructuring fatigue." The government oversold the achievement of 9.5 percent GDP growth in 1999 and 10 percent in 2000, leading to complacency and carelessness across sectors. The political and economic systems are in transition from a communitarian, Confucian, and authoritarian tradition to a more democratic political system and a free market economy. On the positive side, Korea is recovering from the effects of the financial crisis. The banking system is now more open, and the information technology sector is growing. But the 2002 elections and a new "emperor" on the horizon only increase the tendencies of bureaucratic rigidity and party grandstanding. The threat from North Korea can best be addressed through economics, not armaments.
iv Significant change in the structure of the Asian oil market is underway. The four largest users are China, India, Japan, and Korea. India and China will be much more influential in the oil market. There is an irreversible decline in the United States oil supply, which is making all regions more reliant on the Middle East. This trend will see a doubling in tanker traffic over the next decade, increasing environmental risks. It also means that East Asian oil supplies become even more hostage to political developments in the Middle East or along the oil supply routes. Asia and the world face continued high petroleum prices as demand continues to increase and OPEC increases its ability to control supplies in a manner maximizing producer profits. Another issue is poor price transparency in Asia's oil markets. Transparency was reduced following the price shocks of the 1970s, when trading in Asia shifted to floating prices from fixed when forward markets, oil swaps and particularly formula pricing became the chief trading mechanism in Asia. Transparency should improve as oil trading moves online, but the switch will be slower in Asia than elsewhere because there are no futures markets in Asia, and traders in Asia are unused to trading on computer screens.
The safety and stability of the global trading system is being challenged by bilateral, regional, "minilateral," and sectoral accords. These accords could lead to trade diversion, increased regulation, and an undermining of the World Trade Organization. Ideally regional accords should be integrated and reconciled. But distinct free trade agreements are the trend. Business managers are challenged to respond with market and "nonmarket" solutions, and deal with a wider variety of players and issues.
The rapid aging of Asia's societies brings many challenges, among them the erosion of traditional support systems. The percentage of the elderly who are cared for by children has declined from 80 percent 20 years ago to about 50 percent now, and most of those who are now working expect to be on their own when they reach old age. Asia will be forced to adopt pension systems, and countries need to start now because it takes 50 years to develop a viable pension system.
A Corporate Social Responsibility (CSR) model was proposed that considers a greater emphasis on ethics, and on environmental and social responsibility. Asia has many environmental problems, some of which, such as lack of access to clean water and air pollution, are also health issues. Industrialization and urbanization are expected to continue, which puts pressure on the environment. While government can help by promoting sustainable development, business can also help. The CSR model offers business a method to help as well. Under this model, companies have a triple bottom line: financial, social and economic, and environmental. Sustainability is integrated into corporate policy. Companies set performance goals for environmental responsibility and keep affected communities informed about progress toward meeting them. Corporations also consider social issues such as labor rights, worker health and safety, and the welfare of indigenous peoples. NGOs are the chief drivers of the CSR model in Asia, but some large corporations are also implementing CSR strategies. The model must be tailored to the Asian context.
v
East-West Center Asia Pacific Executive Forum
Welcome and Opening Remarks
Speakers Dr. Charles E. Morrison, President, East-West Center, Honolulu Mr. Aroop Zutshi, President, Asian Operations, Frost & Sullivan, San Jose
Dr. Morrison stated that the purpose of this business forum is to provide insights concerning the economic and political dynamics in the region, and to better understand how national issues affect other states and the region as a whole. He presented an overview of the mission and functions of the East-West Center, and noted the importance of East-West Center alumni in building a common community of interests in the Asia Pacific region.
Mr. Zutshi described the business of Frost & Sullivan. The company provides strategic consulting, develops strategic marketing reports, and also has a conference division that cosponsors about a dozen activities a year in the areas of technology and competitive intelligence. The company also provides training out of its London office. Frost & Sullivan has eight offices throughout Asia and will open a ninth in Sydney.
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Keynote Address: Asian Options and the New American Administration
Moderator Dr. Charles E. Morrison, President, East-West Center, Honolulu
Speaker Dr. Tom Plate, Professor, Policy Studies and Communications Studies, University of California, Los Angeles; Pacific Perspectives columnist
Highlights
Professor Plate identified three "noes" for the incoming Bush adrninistration; three "ironies," or policies that could result in the opposite of their intended effect; and he identified three well- respected Asian leaders who could help the administration understand what makes Asia tick.
The first "no" is to not waste time knocking China on human rights issues but to press American concerns quietly. The Clinton administration's approach irritated the Chinese, depressed Asia and embarrassed U.S. allies. The second "no" is for senior officials not to go to Europe before visiting Asia. The Clinton administration prioritized the Middle East with little result, and a more balanced approach is needed. The third "no" is to not disregard the historic roles of Japan and China. The Clinton administration may have been too brusque toward Japan, but the answer is not to be brusque toward China. Rather, the Bush administration should construct a subtle diplomacy based on respect for both of these great Asian powers.
The three "ironies" reflect Professor Plate's concerns that the new administration's most senior State Department officials have military backgrounds, and while he feels that they are capable people, he hopes they will not depend too much on military power. The first irony is that an increase in armaments and troops can result in less security rather than more. Rising levels of arms can trigger hostile buildups that render everyone less well-off than before. The second irony is that an almighty dollar is more important than an almighty military. Keeping the economies of Asia strong will help solve the social and environmental problems that threaten to undermine Asian societies.
The third irony is that focusing only on the military balance in the region and ignoring questions of ecological balance will produce the wrong set of answers. For China, the threat is internal implosion rather than external military build-up and aggression, and for Japan the question is how to expand its economy rather than expanding its military role. The most traumatic event in recent years was not the North Korean missile test, but the Asian financial crisis; future foreign policy efforts should not be directed toward creating an anti-Communist alliance among Japan, Taiwan and South Korea, but toward addressing the emergence of an anti-western movement in Asia, led by xenophobia in Malaysia and possibly Thai populism. Finally, the North Korean threat can best be addressed not by a new defensive missile program, but by helping to diminish the North's paranoid isolation and stock of armaments. Professor Plate also urged the new administration not to ignore the problems in Indonesia, which could unravel further and would make the Yugoslavia breakup seem pale in comparison.
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Professor Plate described three of our epoch's political giants in Asia, leaders who have had truly consequential ideas. The first is Deng Xiaoping, under whom economic growth and personal wealth began to replace Marxism as China's creed. The second is former Singapore President Lee Kuan Yew, who has successfully argued that the American way is not the only way. The lesson he taught was that the United States should honor and not be threatened by those who succeed in their own way. The third is South Korean President Kim Dae-Jung, who has set an example of enlightened diplomacy: that leaders must look forward to relate peacefully, and not backward to old poisons. Peace is the necessary condition of prosperity, which is the necessary condition of security, and President Kim's vision will help the region move toward a community of interests, and away from the Hobbesian state of continual war that for much of its regional history has been the Asian way.
Discussion
1. Is Japan more important than the United States for the region?
Often U.S. influence is overplayed, and Japan has been increasing its role in the region. But the United States plays a key economic role—for example by soaking up Asia's exports following the financial crisis while Japan muddled through. The United States may exaggerate its importance, but with regard to regional security, Asia wants U.S. involvement.
2. How can Asia get on President Bush's radar screen with so many other contending issues at play?
It is up to Secretary of State Colin Powell and the Assistant Secretary of State for East Asia and the Pacific to press the Asia agenda. The crisis-diplomacy of the Clinton administration resulted from inattention to problems, but this is not likely to be repeated. Powell's stature is greater than the two secretaries of state under Clinton, and Powell will be able to focus the attention of the president on the problems that most need his personal involvement.
3. One participant noted that United States national missile-defense needs investment in research and development to determine if it will work.
Professor Plate agreed, but argued that the American national mind should stay focused on economic and political development in the region. The most effective anti-missile defense system for North Korea is economic development.
4. What role can the United States play in resolving tensions between China and Taiwan?
It is important not to underestimate the emotions on both sides of the Straits, but economic trends are bringing the two sides together. Secretary Powell's instincts for caution will win out, and he will employ triangular diplomacy to bring China into all aspects of U.S. diplomacy. The future
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will see some kind of co-federation, or similar relationship between the two. As democracy in Taiwan evolves and China's economy becomes stronger, the dynamic will change the relationship.
5. At the Asia Pacific Economic Cooperation (APEC) forum in Brunei in November 2000, nearly all members pursued bilateral trade agreements at the expense of APEC-wide agreements. Will these bilateral deals undermine APEC?
The bilateral deals are mostly for the good, given that the concept of regionalism has been so slow to take hold. It is important to develop more, not fewer, bilateral and regional institution building to induce Asia out of its Hobbesian ways. Asian leaders should look forward, as President Kim Dae-Jung has advised, not back.
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Corporate Restructuring After the Asian Crisis
Moderator Dr. Fereidun Fesharaki, Senior Fellow, East-West Center, Honolulu
Speaker Mr. David D. Hale, Global Chief Economist, Zurich Financial Services, Chicago
Highlights
The East Asian financial crisis of 1997-98 will go down in the history books as the harbinger of massive structural change in the region's economic system. The crisis was unique for emerging- market economies in that it resulted from microeconomic problems, rather than from the usual cyclical imbalances such as large fiscal deficits or higher inflation. At the center of the micro- economic problems was corporate governance, regarding which there are three key issues:
• The banking systems of Asia were dominated by local players. International banks were allowed to make loans only to banks or companies, and they were not allowed to establish branches or purchase banks in the region. It is astounding that international banks loaned the Asian corporate sector so much money, but given the incidence of cross-shareholding, it was difficult to assess indebtedness.
• The corporate sector is dominated by insiders made up of family groups, especially in Southeast Asia. In Indonesia, 80 percent of business is family owned, in Malaysia and Thailand 30 to 40 percent. Asset swapping within family groups is common, such as in Thai real estate, which was massively over-leveraged before the crisis and overbuilt because the family groups that dominated the sector owned large construction companies.
• Government's role was highly interventionist on a micro basis and government policy shaped the parameters of the crisis. In Korea, the government maximized industrial output, not profitability, for four decades. By 1996-97, the chaebols were highly indebted, and bank capital fled. Korea is one of the top 5 global producers of steel, semi• conductors, and in shipbuilding, so government policy did achieve output, but it sowed the seeds of its own destruction. In Malaysia, government policy favored indigenous Bumiputras so as to increase their economic role, but their businesses were allowed to become highly leveraged and the banking system came under pressure. Marginal debt reached 9 percent of GDP, while in the United States it is 1.5 percent. A policy of exchange controls was introduced to insulate the economy from high interest rates, which would have destroyed many businesses but still leaves them indebted. Indonesia's economy was dominated by the Suharto family, which intruded on successful businesses throughout the 1990s. This is not a case of government industrial policy or discrimination, as in Korea and Malaysia, but of a dictator who dominated the economy, and his children, who were involved in many sectors. In Thailand the crisis was real- estate driven. The international banking community never examined company details.
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Government had not established a rule of law for defaults and bankruptcy.
Where do we go from here, and what is the state of reforms aimed at improving corporate governance?
• The IMF programs in Korea, Thailand, and Indonesia were catalysts for more-open banking systems, setting the stage over the next 5 to 10 years for major transformation. There is foreign presence in the banking sector in Korea for the first time, and Thailand also allowed medium-sized banks to be bought by foreigners. Indonesia was prepared to sell Bank Bali, but a political crisis intervened. Indonesia still needs an injection of foreign capital because public debt is close to 100 percent of GDP. The role model for Asia is Latin America. Foreign banks control half of the banks in Mexico and Argentina and have recapitalized them and brought in better managers. This is also the trend in Eastern Europe; banks are 75 percent foreign-owned in Hungary and Estonia.
• The information technology (IT) sector is taking off. Korea and Hong Kong both created stock exchanges for small tech companies, and these have become new sources of capital. China has developed a significant stock market in the last 10 years, and there are now 80 million retail shareholders. During the next two years it will open the A share market to foreign investors, a major development that will allow Chinese companies to raise foreign capital at home rather than by listing abroad. But the Hong Kong exchange is still an important vehicle to raise capital; its largest company, based on market capitalization, is China Telecom. China has listed major oil companies on Wall Street, and this is significant because the banking system is still weak from over-indebtedness, with 30 to 40 percent in nonperforming loans (NPLs). So the stock market will play a greater role in China's development than in the case of Korea in the 1950s.
• Micro-economic reforms: Korea banned cross-payment guarantees by the chaebols, a major breakthrough in de-leveraging companies. But government is not willing to drive still-indebted companies to bankruptcy or force wholesale restructuring. Only a few dramatic bankruptcies, such as Daewoo and Hyundai, have been forced in the effort to restructure. Indonesia's restructuring agency is selling assets too slowly. A few big sales, such as Astra, have occurred, but mostly there is political gridlock, with politically connected businessmen hoping to get favorable deals. Indonesia has not seen the large increases in foreign direct investment (FDI) that Korea and Thailand have. Korea was particularly closed before the crisis, and FDI has played a major role in its recovery. Japan is undergoing its biggest change since the Meiji restoration. The corporate culture in the modern period, since 1940, has been stakeholder capitalism, which aims to maximize sales, not profit. Initially rates of return were high, around 35 percent, but the system of cross-shareholdings gradually produced an inefficient allocation of capital, and rates of return dropped to 8 percent, and in the last few years, to 2 percent. Cross- shareholdings are dropping now, and foreigners now own 18 percent of capital, compared with 5 percent in 1990. Individuals also own more stock, so profitability is becoming
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important as the number of players increases and the system is restructured as a shareholding system. The corporate sector is becoming stronger, but the problem is that the transition creates economic insecurity and depresses consumer spending. Recent signs of recovery have depended on exports, not on consumer spending. Japan cannot avoid making more changes.
Looking forward, the most dramatic changes will be in banking. The economies are moving incrementally toward a system of protection for minority shareholding, setting the stage for a more healthy form of capitalism in Asia.
Discussion
1. For the energy sector to maximize profits, more coal and gas will need to be produced, but how can this be reconciled with the Kyoto protocol of reducing emissions?
The mix of energy production depends on the regulatory system. The Kyoto protocol requires new laws that favor nuclear power or natural gas, so it is a question of public policy—companies will do what they're told. Korea has always had cartels, so at issue is not only trade liberalization but also antitrust policy.
2. One participant commented that there is a political reluctance to implement restructuring. Wealthy businessmen persuade the government to assume their debt through asset management agencies, which shifts costs to the public, slows economic growth, and exacerbates income gaps.
The jury is still out on what will happen to the assets the government has assumed. In Korea, no one is bidding for assets, and the government needs to decide to sell them at more-distressed prices. In Indonesia, it is possible that wealthy businessmen may be successful in buying their own assets back at reduced prices. This issue is still in play.
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Post-Cold War U.S. Interest in the Asia Pacific
Moderator Dr. Fereidun Fesharaki, Senior Fellow, East-West Center, Honolulu
Speaker Dr. Charles E. Morrison, President, East-West Center, Honolulu
Highlights
Dr. Morrison provided "snapshot" analyses of three U.S. interests in the region: current domestic politics, the region's international-relations dynamics, and economic trends.
In domestic politics, many states in the region are experiencing weak political leadership. This was underscored at the APEC Leaders Meeting in November 2000, where many heads of state arrived in Brunei with political troubles brewing at home. Peruvian President Alberto Fujimori did not even return home after the summit, but went directly to Japan, seeking exile to avoid corruption charges. U.S. President Clinton attended as a lame duck whose successor had not yet been determined; Thailand's Chuan Lukpai faced a re-election contest in December which he lost; the Philippines' Joseph Estrada attended under the cloud of impeachment hearings back home; Japan's Prime Minister Mori heard loud threats of impeachment; and although Taiwan's President Chen Shui-bian is prevented from attending APEC, he too faced threats of impeachment at the time, from a Legislative Yuan controlled by the opposition.
One explanation for this weakness in political leadership across the region is that its political systems are not fully consolidated, and at the same time, leaders must deal with the economic pressures and social upheavals resulting from globalization. The United States also faces pressures from globalization, but because it is at the forefront of technological change, it has been able manage the pace of change over time. In contrast, globalization is occurring at a faster pace in Asia, and yet its political systems are less able to cope.
There are important distinctions in the way political systems have evolved in Northeast and Southeast Asia. South Korea, Taiwan, and Japan, for example, have long traditions, ethnic homogeneity, and a strong sense of unity or nationhood. Yet their political systems are relatively new, and with social structures still rigid, there is ongoing experimentation with how leaders can gain legitimacy. In Japan, in particular, despite much economic change, political leadership is still weak. This creates a crisis of stalled policies and failure to adjust flexibly with the times.
In contrast, the nations in Southeast and South Asia, as well as in the Pacific Islands, were created during colonialization, yet building their senses of identity as countries is still a challenge. In the early period of independence, these countries tended to inherit political systems made up of a small political elite with strong roots in society. But those systems disappeared rather quickly after independence. There is now an arc of crisis in economic and political systems, and in the state itself, from the island states of Solomons and Papua New Guinea (which sit on the margins of the international system) to the vast archipelago of Indonesia, which is the
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third largest global source of natural resources and most populous country in Southeast Asia. These political systems are gradually becoming more accountable, but it is not a smooth and easy process. Washington should be mindful of the pitfalls.
Regarding the region's international relations dynamics, the triangle comprising Japan, China, and the United States is the most central to the overall tenor of the Asia Pacific region's international relations. This is a significant change from the two dominant patterns of relations during the Cold War era, with the Russia-China partnership first prevailing, and then the United States-Japan partnership. In the post-Cold War era, the rigidities of the Cold War have been replaced by fluidity, which can be positive. However, there is a tendency for the United States and China to move toward crisis; this has not yet crystallized, and both countries ultimately realize that it would not be advantageous. China is in an awkward position; it wants to be recognized as a pre-eminent power with a wealthy society, but it can achieve this goal only through involvement with the United States. China is more important economically to the United States than is often realized, both as a source of cheap imports to the United States and as a market for U.S. goods. Any open confrontation between the two states would thus prove costly to U.S. society. The two states' interests are sometimes overlapping, but are diametrically opposed on the issue of Taiwan. To the United States, Taiwan represents both an important achievement of democracy and a historic commitment, while to China it is a breakaway province. The Taiwan Security Enhancement Act reinforces China's concerns about Taiwan independence. Growing interdependence makes it advantageous to avoid conflict. The incoming Bush administration faces the question of arms sales to Taiwan, which will be a significant test to its ability to manage the complicated natures of China and Taiwan. The priority for the incoming Bush administration should be a security dialogue with China, focused on national missile defense and Taiwan. The lack of communication mechanisms between the United States and China during the 1996 Straits crisis, which prevented any messages from being exchanged, was startling.
In reviewing the region's economic situation, Dr. Morrison pointed out that the outlook one year ago was more positive than it is now. Lower growth is projected, in part because there has been such a sharp recovery that it is difficult to sustain. Declining stock markets have created uncertainty, and with 30 percent of China's exports absorbed by the United States, the slowing U.S. economy is worrisome for Asian exports. The region would welcome initiatives for free trade from the incoming Bush administration, but with less emphasis and lecturing on trade linkages to labor and the environment.
Finally, the nonmilitary, non-economic aspects of U.S. relations with the region are very important. Some attention by the new administration to the dimension of cultural values would be worthwhile. There is a significant segment of Asians who studied in the United States. While they operate in an Asian context with Asian values, they also appreciate the American way and the United States system as something that could help bridge the divide of perception and understanding.
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Discussion
1. How important are the recent efforts by Russia and China to create a "strategic partnership?"
Dr. Morrison did not give much credence to such a partnership, because both states recognize that the United States is more important to their national interest. Yet both have legitimate concerns about the role of United States that cannot be dismissed. The United States can tip the balance of their sense of security. In China's eyes, for example, NATO is expanding, India's nuclear capabilities may be growing, and Taiwan may become more militarily capable. Thus, the world does not look so secure. The United States should not assume that unipolarity is a permanent condition; this type of international system is historically unstable, and there will challengers. This is particularly likely if the Asian states do not perceive U.S. intentions as in their interest.
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Shifting Trading Arrangements in Asia Pacific: Implications for Market and Nonmarket Strategies
Moderator Dr. Fereidun Fesharaki, Senior Fellow, East-West Center, Honolulu
Speaker Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost & Sullivan, San Francisco
Highlights
Trade arrangements are increasingly characterized not only by the traditional market transactions of firms, but also by the "t" environment. This refers to a host of social, political, and legal arrangements that work outside of, but in conjunction with, market strategies. The market and nonmarket environments are closely related, and firms need to develop strategic responses in both areas to be effective. For example, U.S. automotive firms initially responded to the "market" challenge of Japanese car imports by developing their own small cars, and later pursued the nonmarket strategy of pressing for the imposition of voluntary export restraints. Strategies in both areas should be adopted early on.
The trading system also reflects the changing nonmarket environment. The General Agreement on Tariffs and Trade (GATT) used to be the dominant global trading system, with regional and sectoral agreements being secondary to it. However, this pattern is shifting and it is not clear whether the World Trade Organization (WTO) will continue to be the dominant structure for global trade, or whether sectoralism or regionalism will rise to replace it, or perhaps all three will coexist with equal weight. With the rise of regionalism, however, firm managers face three challenges: the expension of players and trade issues; a deepening of the organizations involved and integration of activities; and how regional and sub-regional arrangements will be "nested" in the global economy.
For example, a study of European firms operating in Asian economies reveals that firms fared better when they integrated market and nonmarket strategies, rather than using market responses alone. In addressing the market challenge of high start-up costs, for example, the typical advice is to cost-share with partners, subcontract, and co-produce. Firms that also adopted the nonmarket strategies of lobbying for government subsidies, relocation incentives, or tax breaks in the home market were more successful. To deal with barriers to entry, firms typically devolve production regionally, but they should also pursue nonmarket strategies such as R&D subsidies and tax incentives. European firms' responses to nonmarket challenges in Asian economies should also integrate market and nonmarket solutions. Local content requirements, for example, are typically dealt with by establishing local R&D operations and by using local suppliers, but this should be joined with the nonmarket approach of lobbying to change the requirements, or joining a country's regional accord, such as the automotive accord within the ASEAN Free Trade Area. A third example of a nonmarket challenge in Asia is the highly regulated and protected markets. The market strategy of developing local alliances is important, but it is more successful
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when pursued in combination with the nonmarket strategy of lobbying for increased liberalization under the WTO or through sectoral, bilateral, or regional accords.
The need to incorporate these distinct strategic responses into firms' operations in Asian economies reflects the fact that the global trading system is shifting to a combination of systems that govern different groups of products and involve different sets of countries. Sectoral accords can involve a few products or many products, and they can be unilateral (quotas and tariffs), bilateral (the United States-Canada auto agreement), involve minilateral groupings (the EU, NAFTA, AFTA), or multilateral groups (the WTO Information Technology Agreement). In contrast to minilaterals that are geographically concentrated (EU), there are also minilateral groupings that are geographically dispersed, such as the "early voluntary sectoral liberalization" within APEC, or bilateral accords that are geographically dispersed, such as the United States- Japan voluntary export restraints or the Mexico-Chile free-trade agreement. The fact that these latter two bilateral accords are totally disconnected from other agreements these same countries are parties to—such as NAFTA, APEC, or Mercosur—makes the trading system dramatically challenging at the level of the individual firm. All of these accords have sometimes distinct, sometimes overlapping, requirements.
The best way forward is "transregionalism," bringing together different regions into broader agreements—reconciling NAFTA with AFTA, for example. This is the optimum way to support the WTO process, and the integration of regionalism and globalism. Yet this may not happen. APEC members are already pursuing multiple bilateral deals, which is the worst scenario for the global trading system. A global trading system governed by too many bilateral and minilateral accords is, in fact, the system of the 1930s, and it leads to trade diversion and increased domestic-content regulations, and strikes at the core of the international trading system. Increased regionalism appears to be the trend, and this has dramatic implications for corporate strategy. Integration of market and nonmarket solutions offers a way to meet this challenge.
Discussion
1. If the incoming Bush administration succeeds in passing fast-track legislation, will this help build momentum to support the WTO and globalism, and to overcome regional and bilateral forces?
Dr. Aggarwal agreed that fast track would help, but noted that the trend in U.S. domestic politics is to include labor and environmental agreements in trade accords. The recent U.S.-Jordan FTA, for example, sets a bad example, and Asian countries would likely not agree to such a deal. This provides more motivation for Asia to pursue bilateral and regional options.
2. Given the weak institutionalism in Asia, isn't it better for countries to pursue bilateral agreements so as to at least move forward with free trade among willing partners?
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Dr. Aggarwal disagreed. He cited the example of the WTO agreements on financial services and telecommunications, which left pro-trade advocates dissatisfied and on the sidelines, and left the anti-trade interests to dominate the trade agenda. Secondly, the United States preaches multilateralism to Asia, but signs bilateral deals, so Asia thumbs its nose and goes it alone. The bicycle metaphor is relevant: if you stop pedaling, you fall off. Bilateral deals are like stopping pedaling; they make global deals more difficult because they "buy off the winners and diminish the likelihood of achievements in the broader trade rounds. It is better to keep everyone in the game and build coalitions; bilaterals are detrimental.
3. With APEC's failure to implement Early Voluntary Sectoral Liberalization, does APEC play any role?
Dr. Aggarwal expressed his belief that there is a misunderstanding about APEC. Many believed that the main purpose was to create a small group in which it would be easier to negotiate deals. This has not been the case. The main benefits have been to get countries to talk trade issues and to expose developing countries to the discipline of implementing WTO accords.
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Luncheon Address: Protecting You and Your Business: Report on Terrorism and Other Risks
Moderator Ms. Karen Knudsen, Director, Office of External Affairs, East-West Center, Honolulu
Speaker Mr. Myron R. Fuller, Special Agent in Charge, U.S. Federal Bureau of Investigation, Honolulu
Highlights
Mr. Fuller cited the dramatic rise of international terrorism in the last decade, drug trafficking patterns, cyber crime, and transnational crime. Other problems are foreign counter-intelligence, corruption, and fugitives. The FBI's principal goals in dealing with these challenges are protecting people, property, and information, as well as critical infrastructure such as energy, transportation and communications links.
This is tremendously difficult for the United States. Half a billion people cross its borders annually, primarily by car from Mexico, and 200,000 ships arrive on its shores annually. The volume is far too large for U.S. customs to monitor adequately, and in reality, only 1 to 2 percent of goods are examined. Crimes have become so global in nature that a new strategy is needed, and this has meant a growing FBI presence in Asia and elsewhere around the world.
In the last decade, nearly every terrorist act against Americans originated out of Afghanistan; before that it was the Middle East. This is directly attributable to the chaos following the Soviet invasion of 1979-89, and the subsequent withdrawal of the Soviets and the United States involvement left a vacuum with the Taliban spreading into other central Asia republics. The United States and Russia are cooperating, but the Pakistani leadership will not control Taliban cells there, and India and other players are needed.
The attack on the USS Cole, in Yemen, demonstrates how intractable international terrorists have become, particularly toward American targets. The striking aspect of this case is that the terrorists lived in the Yemeni port town for three years, getting to know people and becoming familiar, with the purpose of gaining trust in order to strike. The FBI has to assume that this could occur anywhere and anytime, and that it is nearly impossible to anticipate.
Policy solutions include developing strategies such as cooperation on the diplomatic, military, and law enforcement fronts. Agreement on tactics is also important. Nations should agree not to make concessions, to charge criminals under the rule of law, and to isolate target countries and apply pressure jointly. The Philippines is problematic in this regard because President Estrada has chosen to use the military, rather than Philippine law, to bring terrorists to justice. New laws are needed, but the political leadership has not focused on that.
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The second area of concern, fighting drug trafficking, is also a difficult battle for law enforcement, and it is getting worse. Colombia provides 80 percent of the world's cocaine, and up to 14 drug-trafficking groups have been identified in Mexico. After 20 years of cooperation in intelligence monitoring among the United States, Mexico, and Latin America, there are more interdictions, yet no one can say that usage is reduced. The conclusion is that the volume of drug trafficking continues to outpace interdiction ability. In Asia, Burma and Afghanistan produce 70 percent of the world's opium, and the Golden Triangle is a particular locus of production. There is a "dark corridor" of drug trafficking extending into China, then the Koreas, Japan, and Europe.
The third area of concern, cyber crime, occurs as a national security threat and as a structural threat. Several cases exemplify the ease and variety of ways cyber crime can occur. The "Solar Sunrise" case involved three teenagers who met in a chat room and subsequently hacked into 600 sensitive computers at the U.S. Department of Defense. There was no serious security breach, but the case demonstrates the potential threat to national security. The case called the "NET Jam," in which major web sites were overloaded with hits and forced to shut down temporarily is estimated to have cost $100 million in losses. In another potentially damaging financial case, one hacker schemed to get access to 80,000 credit cards numbers.
Policy responses to managing transnational crime require the sharing of intelligence, cooperation country-to-country and cop-to-cop, and training programs. The FBI's National Academy, in Washington, D.C., may be supplemented by a new Pacific Training Institute, in Honolulu, specifically for Asia. Mutual legal assistance treaties, aimed at simplifying the exchange of court documents among nations, are also important. There are currently 23 such treaties in force.
Discussion
1. Who funds terrorism? Is income from drug sales a principal source?
Mr. Fuller responded that terrorists are motivated not by money, but by religious extremism. They are willing to live relatively simple lives, with few amenities, and so cutting off funds to terrorists is not a viable strategy.
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Key Issues for Doing Business in the Asia Pacific: Energy, Environment and Business, and Population
Co-Moderator Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group,
Frost & Sullivan, San Francisco
Co-Moderator Dr. Jefferson Fox, Acting Director of Studies, East-West Center, Honolulu
Panelists Dr. Fereidun Fesharaki, Senior Fellow, East-West Center, Honolulu "Is Energy the Region's Achilles' Heel?" Ms. Lyuba Zarsky, Program Director, Globalization and Governance Program, The Nautilus Institute, Berkeley "Environment and Business"
Dr. Andrew Mason, Senior Fellow, East-West Center and Professor and Chair, Department of Economics, University of Hawaii, Manoa "Aging Asia"
Highlights
Dr. Fereidun Fesharaki
Dr. Fesharaki outlined recent trends in energy demand and supply in the Asia Pacific region and predicted trends for the next ten to twenty years.
Although there was a sharp decline in energy demand in 1998 due to the Asian financial crisis, the recovery of energy demand in 1999-2000 has been quite spectacular. In 1999, excluding China, demand had recovered to 783 kilo barrels/day (kb/d), greater than the 1997 figure of 708 kb/d. Demand is estimated to rise to 813 kb/d in 2000. The region depends on imports, mainly oil and on gas to a lesser degree. So in issues of energy security, is the petroleum sector the Achilles' heel of Asia, or not? In 1993, world demand grew at a greater rate than Asian demand, but in 2000, 94 percent of the growth in global demand came from Asia. The United States is the largest player in the international market now, economically and politically, as demand is growing and supply is declining.
A significant change in the structure of the Asian oil market is underway as the roles of the four largest consumers—China, India, Japan, and Korea—are changing. Gross demand by these four has accounted for about 70 percent of total oil demand in the Asia Pacific region, and this total figure is expected to remain roughly the same. China and India will be the new drivers of the international energy market, and with the potential to make linkages with suppliers, these two countries will be more influential players than Korea and Japan have been in the past. China has
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been a net importer since 1993, and India has had no growth in domestic supply while demand is growing at 6 to 7 percent per year.
What are the implications for the international oil market? OPEC has just decided to cut back production by one million barrels per day. This creates a situation where the international market has two to three big players on the demand side, and on the supply side OPEC is getting the cartelization game more under control. Years ago, OPEC decided to fix production, and by trial and error has been successful in getting prices right. In many ways, higher oil prices are the order of the day and will be with us for the next few years. Will supply grow? Oil companies are not exploring for new fields because stockholders do not favor smokestack industries, resulting in low investment in R&D to avoid getting stocks punished. With this aversion to new investment, and with consolidation within the industry, there is no new oil on the market. Thus the supply shortfall is great in the midst of demand growth. Until companies decide that it is rewarding to invest, or if the United States or Asian economics slow down, oil prices will be stuck in the $25-$30 range.
How does this price level affect Asia? It has hurt the Philippines somewhat, and it has affected Thailand and Korea some. But other countries have not been affected, showing that the current price is sustainable. The percentage of the world's crude oil used in the Asia Pacific region will decline from 41 percent to 33 percent; however, because regional crude production is flat, Asia's dependence on imports will vastly increase, nearly doubling by 2010. In security terms, this means China will need to make alliances in the Middle East to assure its oil supply, and this may involve selling sensitive technology. Given flat production in the United States, there will also be a greater Asian dependence on the Middle East, and lesser dependence on the United States.
Discussion
1. The new Bush administration has said it would consider opening the Alaskan oil fields. Will this improve U.S. supply capacity?
Dr. Fesharaki indicated that there has been a 60 percent fall in the productivity of Alaskan oil fields since inception, so that even if new areas are opened, the United States will not return to the productivity levels of earlier years.
2. What about the application of new technologies to improve U.S. productivity or further development of alternative energy sources to offset the lack of supply?
Dr. Fesharaki replied that barring some new technological development, the decline in the U.S. oil supply is irreversible. Regarding alternative energies, fuel-cell technology could make a difference, but it is hard to imagine that electric cars will make the world independent of petroleum. It may be possible to slow down or stabilize oil demand through massive taxes, or by recession, but in any other scenario, alternative energies will not make a difference.
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Ms. Lyuba Zarsky
Ms. Zarsky outlined a new model of business management that combines ethics, environmental responsibility, and social responsibility. Asia has a litany of environmental woes: a rapid loss of biodiversity and forest cover, urban and marine pollution, creating problems in human health. The next ten years will see continued industrialization and urbanization, with increasing numbers of people without access to basic necessities like clean water. Governments are grappling with these issues, helped by the spread of sustainable development notions following the Rio conference, in 1992. But there is also an important role for business to play.
In the Corporate Social Responsibility (CSR) model, the company mission is to develop social goods as well as profits. There is a triple bottom line: financial, social and economic, and environmental. Performance benchmarks and information disclosure are the twin pillars of the CSR model. Transparency with the community is the key, as companies make performance data on goals available to outside groups and work with them to seek ways to improve environmental performance.
In addition to monitoring progress toward environmental goals, the model entails attention to human rights and social issues, such as child labor and sweat shop labor, and to the economic impacts of corporate behaviors such as targeting poorer communities for location of factories or, on the positive side, designing products particularly useful for poorer communities.
The three goals of the environmental component of the model are to reduce water and air pollution; adopt clean technologies through modifying internal processes and upgrading and investing in newer technologies; and product stewardship to establish systems to reuse and recycle end-products.
The two principal goals of the social-issues/human-rights bottom line are to promote labor rights, including worker health and safety.
The two goals of the economic "bottom line" are to contribute to community development, such as by paying taxes rather than lobbying for tax-free zones; and by designing products for low- income consumers.
The drivers of CSR in Asia range from NGOs to local branches of multinational companies. The Green Rating of Industry Project at the Center for Science and Environment, in Delhi, is one example of how bottom-up demand for sound environmental practices is growing. Parent companies of Asian subsidiaries, such as Hewlett Packard and Intel, are implementing forms of CSR in localities where they operate. Intel, for example, organizes community advisory panels to monitor its business, whether in Malaysia or Silicon Valley. Some transnational companies, such as Agilent, have adopted procedures to improve oversight of their procurement/supply chain. Finally, there is interest in developing "International Finance Corporation" guidelines to promote socially responsible investment and shareholder advocacy.
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Where do we go from here? The CSR model has gained momentum in the United States and Europe, and is gaining momentum in Asia, but in Asia, its implementation is still in the experimental stage. There is a precedent in Asia for companies working with local communities, and local interest groups have been effective in pressing for an improved environment. The CSR model should be tailored to the Asian context.
Discussion
1. What labor standards are expected in the CSR model?
Ms. Zarsky explained that standards regarding child labor vary, particularly because the CSR model is tailored differently for different situations. The International Labor Organization (ILO) provides a sound set of principles that are different from what U.S. labor groups want. But because they were the result of a global consensus, Ms Zarsky believes that the ILO guidelines are good norms to follow.
2. One participant observed that using the CSR model suggests using the market to achieve non-market aims. But this was a significant problem among Asian companies that contributed to the financial crisis, and they must now pay attention to profitability rather than lifetime employment and other social issues.
Ms. Zarsky clarified that profitability is always important, but can it be achieved with broader goals in mind. Business should take into account the well-being of the communities they operate in, even while staying competitive.
Dr. Andrew Mason
Dr. Mason outlined three key issues regarding demographics in Asia. First, since 1950, there has been rapid growth in the number of elderly as a percentage of total population due to increases in life expectancy and a decline in child bearing. Since 1975, birth rates have dropped precipitously in East Asia, from six children per woman to two. As a result, the 0-14 age group is in decline, and the working age population is growing—but not as fast as the numbers of elderly. In Japan, for example, there are more people over 65 than under age 15. Predictions are uncertain because, historically, gains in life expectancy have been underestimated. Declines can occur, such as in Russia, due to the economic crisis, or in Africa, due to AIDS. Predictions are also uncertain due to the persistence of low fertility and because they are dependent on immigration policy. For example, in the United States the aging of the population has not been as rapid as in Asia due to a relatively relaxed immigrant policy compared with Asia. Immigrants tend to be young and child producing.
The second key issue for the region resulting from aging populations is a range of economic implications. There will be a rapid increase in the share of GDP that goes to health care, and this
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is a global phenomenon. The causes include a reflection of preferences; health care is more affordable now, and technology has increased healthcare possibilities. The changes in population characteristics also affect costs; older people are healthier now, but more costly to care for in the later years of life. Pension issues are another key economic variable for aging societies. There has not only been a rapid increase in the number of elderly, but as importantly, a decline in retirement age. In Japan over the last 15 years, about half of those who have retired have taken retirement at a younger age. In the United States, this has stabilized due to the elimination of a mandatory retirement age. The result is that there are fewer workers to support retirees. An additional cost factor in Asia is the erosion of traditional support systems; these have been breaking down precipitously in Japan and Korea. About half of the elderly in these countries live with children, but 20 years ago it was 80 percent. Now the greater part of the working-age population does not expect children to help them. This will force Asia to adopt some kind of pension system. Globally, there are three principal approaches to old-age support: financing by family, pay-as-you-go social security (as in the United States), or employment and saving (voluntary, or compulsory, as in Singapore and Malaysia). The drawback to the pay-as-you-go approach is that it does not induce savings, and a big question for Asia is whether there will be public policies that encourage savings for pensions.
The third key implication of aging is macroeconomic. Due to slower growth of the work force, there will be lower rates of saving and investment just as a large segment of the population moves into retirement age. This will result in slower economic growth overall. However, due to greater pension wealth, there will be strong growth in some sectors, such as financial services, the health care sector, and possibly tourism. The elderly tend to be tourists, but in the case of Japan, primarily the young travel. The other impact will be capital outflows from aging societies, given their low rates of demand for capital and the attraction of capital to countries with larger workforces.
The outlook for addressing this array of issues is not that sanguine. Countries must plan fifty years ahead to craft a viable pension policy, but this is difficult for Asia because it is needed now, when many countries, such as Indonesia, are still at low levels of development.
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Political Changes in Asia: An Overview
Moderator Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost & Sullivan, San Francisco
Speaker Dr. Muthiah Alagappa, Senior Fellow, East-West Center, Honolulu
Highlights
Ten years ago the outlook for Asia was rosy. Economic performance was strong, and there was a sense that if the economies were doing well, the political side would do well too. Democratic transitions in the Philippines and Taiwan in the late 1980s seem to reinforce this belief. In the last several years, however, we have seen that economic development is insufficient, and that economic gains can be undone by political upheaval.
In Indonesia, for example, many economic developments cannot be explained without reference to political events—a drop in the rupiah is more likely to be driven by political news than economic news. Political turmoil in other countries also reflects the wedding of economics and politics. In the Philippines, economic scandal led to a vote to impeach President Estrada, and it appears likely that he will be acquitted by the Senate. It is unclear if the public will accept this conclusion, or if there will be a return to street or "mock" politics. The challenge there is how to move from street politics to the rule of law. It is relatively easy to remove governments by protests, but more difficult to govern by means of institutions rather than by personalities. In Taiwan, newly elected President Chen Shui-Bian finds it difficult to govern because the parliamentary majority is held by the opposition, and he faces impeachment threats of his own. In Taiwan, democratic transition is accompanied by conservative elements and complicated by the role of mainland China in domestic politics.
South Korean President Kim Dae-Jung is more popular outside his country than within it; while democratic norms have progressed there, the president still possesses absolute power and behaves in an autocratic manner. In Malaysia, Prime Minister Mahathir's position is shakier than it used to be, accompanied as it is by much party infighting. In Thailand, presidential candidate Thaksin won with more popular support than any leader in ten years, but he has been indicted by the newly created anti-corruption commission. The Constitutional Court that will rule on the corruption charges could force him to resign, resulting in new political tensions. Even the more- established democracies, such as Japan and India, are unstable, with coalition governments often failing. In China and Vietnam, there is a question whether the Communist parties can survive as they try to monopolize politics while liberalizing the economy. Burma's leaders terrorize the people they are supposed to look after, and there was a military coup in Pakistan in 1998.
China and Burma, in particular, will experience upheaval. Will China follow a Taiwan/South Korea-type transition, where democratic transition was led by the ruling party? This would be less turbulent. Or will it follow the experience of the Philippines and Indonesia, whose leaders
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were forced from the scene, leading to total collapse? Or will the Communist party try to monopolize political power as long as it can, with only incremental reforms? The role the military will play in any of these scenarios is also a question.
Across the region, the political picture does not look bright, yet a longer historical sweep produces a more optimistic view. Some countries have long histories but not as modem nation- states—apart from Japan, every country in the region is a post-World War II construction. All are artificial creations, particularly with regard to their borders. It takes political leadership to build the nation state from the ground up, including basic institutions such as law enforcement, the parliament, and the judiciary. This institution building is particularly difficult, because during the last 50 years, political development has been arrested by authoritarian rule: in South Korea until 1987, Taiwan until 1988, Thailand until 1993, Indonesia until 1998, and the Philippines until 1986. The authoritarian states froze political development, and when the lid came off, many issues came to the fore that are still being dealt with. These countries are in a process of state- and institution-building. Conflict will be the order of the day, but political systems are gradually being forged.
There is no smooth sailing for political developments ahead. Only over time will there be visible progress.
Discussion
Dr. Alagappa was asked to address the quality and nature of political leadership in Asia, as well as the role of civil society.
1. The Asian leadership model is based on benevolent leaders, not the rule of law, and that is the challenge. Singapore is the exception; it has not had exceptional leaders, but has good laws. Perhaps as part of the transition away from focusing on single leaders, there will be a trend toward coalition government. The problem is that coalition politics would be very messy, in part because of the weakness of political parties in Asia. Parties come together for election purposes, but then fall apart because there is no unifying concept for governing.
2. The development of civil society throughout Asia is a new and important factor in political developments. It is important both for accountability and as a motivation for change. But demands from civil society can be too great to meet, especially in a country with a large youth population, such as India. Another factor is the growth and maturation of the middle class. Initially, the middle class is pro-state, but with the growth of a market economy, the middle class becomes more independent from government and can be a force for change.
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Panel Session: A Business Agenda for the Region
Moderator Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost & Sullivan, San Francisco
Panelists Mr. Roberto F. de Ocampo, President, Asian Institute of Management, Makati City, Philippines
Mr. Bob Ellison, Director, SwapNet Limited
Mr. James B. Gebhard, (retired) Regional Vice President, Southeast Asia, Hughes Electronics International Corp.
Highlights
Mr. Ocampo briefly reviewed lessons learned from the financial crisis and the challenges facing business during the recovery stage. The crisis presents Asia with the opportunity to reposition itself in the global economy through a new partnership between the public and private sectors.
One problem that contributed to the financial crisis was that global supply outpaced global demand. To avoid this, there should be macroeconomic coordination, perhaps even an Asian monetary union or compatible exchange rate regimes. Also contributing to the financial crises were the bubble economies. These were fueled by overvalued currencies that encouraged companies to borrow in dollars and sell in local markets, creating interest rate spreads. There is now a recognized need to avoid this moral hazard. The third contributor to the crisis was over• investment in manufacturing conventional retail products. To avoid this, Asian economies should emphasize high-tech industries. Over-reliance on foreign investment and aid should be reviewed to improve use of domestic savings. In addition, the liberalization of financial markets was not implemented well, and a lesson learned is proper sequencing of financial liberalization.
The Manila Framework agreed to in 1998 provides a scorecard of reforms to date:
• A quick-response funding mechanism has been funded by Japan. • Increased capitalization of IMF and World Bank did occur, but took longer than expected. • A surveillance mechanism is not completely in place, although ADB has begun. • To create better capital markets (mutual funds and pension funds) and to move away from reliance on banks to mobilize financial resources, reform of the financial sector must go further. • A deeper understanding of the international financial sector is still needed, particularly with regard to how markets are influenced by technology, so that funds may be moved more easily and rapidly.
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Building a business agenda depends on three factors:
1. Development of institutions to improve governance, including reforms to ensure an even playing field and consistent policies. This includes developing economic strategies that provide not only safety nets for the poor, but real economic opportunities. Cronyism and corruption have come at the expense of opportunities for the middle class.
2. The private sector must accept financial restructuring; including the notion that to establish viable companies is a requirement of good corporate governance.
3. International assistance should focus on building financial institutions to improve governance and preparing governments for the role of regulator.
The Asian crisis has given the region the opportunity to relaunch itself onto a sustainable growth path. However, governance has to be improved for the other economic and social sectors to be able to benefit from the digital revolution. Sound macro- and micro-economic foundations must be laid down in both the real estate and financial sectors. Finally, better governance through more transparent, well-informed, and decisive leadership should not be forgotten.
Mr. Ellison reviewed transparency in the oil-trading sector in Asia and how this relates to the Western oil community. Prior to 1973, the world experienced several decades of stable oil prices of two to three dollars a gallon. However, the first series of oil shocks dramatically altered the way the oil industry did business. In the early 1980s, a major challenge was how to deal with the risks of price volatility. This spurred a change away from fixed-price contracts to floating contracts, with the price tied to an independent marker.
In Asia, the product market is very fragmented: there are very few standards and many boutique grades. In the late 1980s, a new mechanism emerged, the oil swap, which was transacted on the over-the-counter (OTC) futures market and through bilateral deals. Transparency in the United States was good, due to Nimex, and in Europe there was International Petroleum Exchange (IPE).
Transparency in Asia was reduced due to the shift to floating prices from fixed. There was no underlying fixed-price market, and prices became notional and difficult to assess. A by-product of the shift to floating prices is that trading in Asia does not begin until the IPE opens in London. Thus, trading in Singapore begins in the late afternoon. The floating-price basis can also be a tool for manipulation of prices. This is done by signing fixed-price contracts at higher-than- market figures to move prices up.
The OTC swap market is becoming larger, but it is limited by its own inefficiency. There will be dramatic change brought about by e-commerce. With trading online, there are no margin payments and the market is totally unregulated, which are pluses for oil companies. What will eventually happen as online trading develops is that the consolidated averages of prices of business done online will replace oil journals as price setters. Asia will take longer than the rest
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of world to reach this point; because there are no futures markets traders in Asia are familiar with trading on computer screens.
Mr. Gebhard shared his views and described his experiences as Singapore representative for Hughes, where he sold defense systems and satellites to Southeast Asia. Mr. Gebhard described how parent companies make the decision to open a corporate office in Asia. Initially he was frustrated that Hughes was not paying enough attention to Asia; he believed that while the United States is chasing Europe, Europe is chasing Asia. Hughes established an office in Bangkok, but closed it after the first recession in 1987-89. Hughes shortly opened an office in Singapore, which covered Japan to India. The company still had a European mind-set, thinking they could handle all of Asia from that one office. But this attitude gradually changed. Defense sales to Asia from the United States had difficulty getting export clearance, which delayed the introduction of commercial high-tech exports to Asia. Eventually high-tech manufacturing moved to Asia.
The hardest part of representing a company in Asia is to get the support of senior people in the home office. Delays in getting approvals from the United States government are also a problem. For example, Hughes was able to launch satellites for Indonesia from the NASA space shuttle, but after the 1986 accident, these launches were no longer authorized. With U.S. private-launch systems way behind, Hughes turned to the French, and it took a long time for the United States to catch up. At that time, Hughes sold military systems to Raytheon, and technology development proceeded faster than getting through export restrictions. For example, Hughes was encouraged by the United States government to launch satellites using Chinese launch vehicles during times of good relations, but this changed after Tiananmen, and suddenly Hughes needed to utilize other country launches.
The corporate boardroom in America needs a better understanding of Asia. Only by thinking long term will U.S. businesses appreciate the opportunities there. Hughes made the decision in 1997 to close its Singapore office, which was shortsighted and led to missed opportunities. Businesses are also hindered in their Asian operations by U.S. export controls. If the United States is to improve its ability to export to the region, these need to be re-examined.
Discussion
1. In response to a question on the premium that Asians pay for oil, Mr. Ellison responded that due to their dependence on imports they prefer long-term contracts that lock in higher prices. E-commerce might level the playing field.
2. In response to a question on how bilateral or international aid can help improve governance, Mr. de Ocampo responded that aid can assist in institution-building at all levels. For example, privatization often involves the risk of turning a public monopoly into private monopoly. The government must, therefore, establish a regulatory regime. But public officials are poorly paid and poorly trained, and are not able to negotiate
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effectively with foreign-trained, local private-sector managers. Law enforcement also needs better training and pay to reduce corruption. In order to achieve lasting effects on poverty, bilateral or international aid is needed to help build democratic institutions.
3. What are the reasons to invest in Asia today, given the economic instability, political turmoil, piracy, and the problems of an aging society?
Mr. de Ocampo responded that Asia still has a high savings rate by global standards, so there are opportunities in services, particularly in the development of capital markets such as insurance, rating agencies, and mutual funds. There are also opportunities in the new-economy sector. Mr. de Ocampo observed that investments in Asia are relatively safe in comparison with the risks in Africa, the Middle East, and parts of Latin America. Mr. Gebhard agreed that e-commerce is booming and that there are many opportunities due to increased privatization. He urged caution about real estate pricing, but said that there are still opportunities in cheap manufacturing.
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Panel Session: Japan
Moderator Dr. Susan J. Pharr, Edwin O. Reischauer Professor of Japanese Politics and Director, Program on U.S.-Japan Relations, Harvard University
Panelists Dr. Sachio Semmoto, Founder, Chairman, and CEO, eAccess Ltd., Tokyo "Competitive Telecom Environment and IT Ventures Will Become the Driving Force of the New Economy in Japan"
Dr. David McClain, Dean and First Hawaiian Bank Distinguished Professor of Leadership and Management, College of Business Administration, University of Hawaii, Manoa "U.S.-Japan Relations"
Highlights
Dr. Sachio Semmoto '
Participants learned from the moderator's introduction that Dr. Semmoto has a long record in the telecommunications industry. He developed the personal handiphone and started the first private telephone company in Japan. His current company is the first Internet infrastructure company in Japan.
Dr. Semmoto provided an overview of the competitive telecom environment and the state of IT ventures in Japan. There is no question that IT is the driving force of the new economy. Across the region, Singapore, Taiwan, Hong Kong, South Korea, and China have seen robust economic recovery, in part based on IT initiatives. However, Japan is lagging behind and needs to change. The lack of a sweeping IT revolution in Japan is owed to the NTT monopoly, which discourages new competition and causes slow development and upgrade of the telecommunications network. To promote competition, more competitive local exchange carriers (CLEC) must appear. There are significant obstacles in the environment for CLEC to carry out business and these impediments must be solved. These include:
• Shorter length of time to collocate • Disclosure of cost details and prior notification of costs • Liberalization of the right to lay fiber-optic cables, including the right to use available infrastructure, such as electric poles, to carry the cables • Full unbundling of network elements, including optical fiber unbundling
The lack of these prerequisites translates into very low Internet subscriber growth in Japan, which has an Internet penetration rate of 21.4 percent, or 19th worldwide. Consumers pay high Internet usage costs, about five times more than in California. Narrow bandwidth is also a problem
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because NTT provides only ISDN. Consumers still have to dial up every time they want to get on online.
Another major problem is that the environment is not conducive to IT start-ups. Japanese culture, education, workforce, and capital supply are all biased toward a non-entrepreneurial vocation. There is a lack of technology and innovation, as well as a clear vision. The erosion in share prices of firms listed on the Mothers and NASDAQ Japan exchanges attests to such problems. Softbank's total market capital, for example, is one tenth of what it was one year ago. There is a need for credible start-ups to exemplify the potential that Japan holds.
Recently there has been a "rebirth" of public policy toward the IT sector. The Mori administration initiated the IT Strategy Council, chaired by Mr. Nobuyuki Idei, CEO of Sony The council issued its report in November 2000. This resulted in the IT Basic Law, adopted in December 2000 and aimed at fostering the creation of an extensive IT network. By 2005, the goal is to have in place high-speed, constant-access networks (ADSL/CATV) reaching at least 30 million households, and ultra high-speed constant access (FTTH) reaching 10 million households. This is an extremely aggressive target, even compared with access available in the United States, and will entail a huge investment.
Dr. Semmoto related his personal experience building eAccess, which he established in November 1999 to address the twin problems of the lack of appropriate telecom infrastructure and the lack of credible start-ups. The goal of eAccess is to construct the IT fiber-optic backbone, and its mission is to become the provider of choice for seamless, broadband Internet Protocol (IP) services for businesses and households over the world's best IP network. There has never been a start-up in Japan with a strong business plan focused on providing broadband IP services and with an entrepreneurial and assertive management team to execute an e-business plan. The management team is unique because in Japan it is hard to find people willing to take the risk of working in an entrepreneurial culture. At eAccess, there is no discrimination based on race, age, gender, or nationality (foreigners are included); the average age is less than 30, and the organizational structure is flat.
Investors have provided strong financial support for eAccess. They include Goldman Sachs, Morgan Stanley Dean Witter, and Azeo, whose representatives also serve on eAccess' board. Its growth- rate is exceeding plans, with initial financing of $45 million in February 2000 and second-round financing of $50 million, with third round financing expected by year end. Personnel hires are growing as planned, and eAccess will employ 100 employees in less than one year. The quality of the workforce is also significantly higher than was initially expected.
The lesson learned is that there is a demand for IT start-ups in Japan. The IT sector, in fact, is towing Japan's real economy, and although it is somewhat lethargic now, corporate profits have increased and capital investment has grown. Investment in the IT sector has increased in recent months, even while the U.S. IT sector experiences a recession. Dr. Semmoto is optimistic about
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the recovery of the Japanese stock market, and believes IT investment in Japan is just picking up and will grow steadily over the next five years.
Dr. David McClain
Dr. David McClain described the 1990s as a decade of shifting positions in U.S.-Japan relations. The decade began with security relations stronger than economic relations, as some in the United States worried about Japan's relative economic strength. But as the decade evolved, the United States moved rapidly ahead while Japan lost a decade. Both countries are wealthy, but the sense of dynamism has changed. Initially, the Clinton administration took a hard line with Japan, but shifted its approach in mid decade. Since the Asian financial crisis, the United States adopted a softer approach.
Japan is experiencing "multiple disorders." It lacks the flexibility and adaptability to change its economic model, which was established in the 1930s. Economic growth of 5.1 percent in 1996 was remarkable, and now 1.5 percent growth may be the most that can be expected without a commitment to full economic liberalization. In recent years there has been particular weakness in three policy areas:
• Poor timing in addressing the fiscal consequences of an aging population: The 1997 consumption tax increase occurred three months before the devaluation of the Thai baht. Japan was trying to deal with the long term too soon.
• A tragically independent monetary policy: The August 2000 interest-rate increase was an expression of new central-bank independence and was a misguided attempt to raise bank profits.
• Embracing Keynesian fiscal stimulus without structural reform: The government understands that monetary forces do not have much affect and that fiscal stimulus is needed, but it is a mistake to embrace fiscal stimulus without structural reform. This puts government in a policy box.
As a result of these policy errors, nonperforming loans remain huge in Japan—estimated at 20 percent of GDP, compared with 3 percent of GDP during the S&L crisis in the United States. Some Japanese banks have been cleaned up, recapitalized, and merged, yet problems remain, and asset prices continue to decline. It is a positive that asset-backed securities have been introduced and that mergers and acquisitions, as well as FDI volume, have been strong. There is a new bankruptcy law, and airlines have been deregulated. Yet real forward movement in Japan has stalled.
For Japan to revive, it needs a world favorable to trade and investment, but this is questionable given that there is no consensus on a new WTO round. To stimulate domestic demand and resolve nonperforming loans, Japan needs political leadership. Decisive action should be taken to
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increase the efficiency of Japanese companies that are competing for the first time "on their own."
Japan is in a policy box: the use of fiscal policy is near its limits, as debt is near 130 percent of GDP. Monetary policy suffers from disputes between the central bank and the finance ministry; Japan should allow the yen to fall by vigorously monetizing the debt and adopting an inflation target. But the constraint here is that a weak yen hampers Asia's recovery, and Japan wants to play a role in Asia.
Japan could simply buy time until the IT revolution from outside and from within takes hold. The Japanese government has turned on the switch to develop broadband capability, and as a small, compact nation, if there is political will, it could leapfrog the United States in bandwidth capability. The United States has a hodgepodge of cable and phone networks that are difficult to upgrade.
All of these factors make Japan's long-term prospects uncertain. Lacking a recovery, a renewed financial crisis may materialize. Japan has shown a new enthusiasm for regional free trade agreements, rather than the WTO, which may create more common interests with regional governments and fewer with the United States. Given growing concern in Japan over U.S. military bases, the United States needs to guard against an "Asia versus United States" tendency in Japanese government policies.
In conclusion, Japan is the second wealthiest country in the world with a $5 trillion economy, and the United States and Japan both have a big stake in its recovery. But with the benefit of ten years of hindsight, we have learned that Japan has to catch up on its own and will evolve with its own traditions and beliefs. The United States should take a softer, more sophisticated, approach, and the Bush White House seems capable of this.
Discussion
1. What policy options does Japan have to resolve the banks' debt?
Dr. McClain responded that an inelegant but direct solution is to nationalize the banks, to spread the burden among all taxpayers, rather than leave it only to banks and shareholders. An indirect way is to print money to devalue the yen, but the range of 140 would be disastrous for the rest of Asia.
2. Of the three obstacles to start-ups—personnel, raising capital, and the NTT monopoly eAccess seems to have gotten around the first two, but what about the monopoly issue?
For the first time in history, the Fair Trade Commission has begun an investigation of NTT. The commission is generally considered a second-class ministry, so time will tell if it can exert any authority should it find unfair practices. Dr. Semmoto added that with regard to finding
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personnel, he has learned that young people have less appetite to join large corporations, so there is a larger pool of workers for start-ups than one might think.
3. What are the constraints and drivers of IT in Japan? In the United States, it is not just the ' start-ups but large companies like GE that apply IT to global supply-chain management. To what degree are large Japanese companies doing this?
Some Japanese companies are beginning to change their approach to IT, but top management is the key factor. Fujitsu has first-class engineers and marketing, and the new CEO is young and has a clear vision, Dr. Semmoto observed. NEC made a serious mistake in the last 10 years, and its former head Mr. Sakemoto has been blamed for too much expansion. The new CEO, Mr. Nishigaki, comes from the computer world, although not the telecom sector, and is taking strong measures to restructure NEC. He has the ability to change the company. The top business leaders are not ignorant; they understand the drawbacks of how their companies were managed in the past. The situation is similar to the 1960s when Japanese companies learned total quality control from U.S. business and by the 1980s had exceeded U.S. businesses in this area. The big issue is for top management to acknowledge the drawbacks and be less arrogant and more willing to learn from U.S. companies, such as from the GE model. Japanese firms are beginning to outsource like U.S. companies, but it is emotionally difficult for them.
4. How much of a problem for economic recovery is Prime Minister Mori's weak political leadership and lack of vision?
Dr. Semmoto responded that it is true that Mr. Mori does not have a clear vision, but he does listen, and so far he has paid attention to good recommendations from individuals in the private sector, such as Sony's Mr. Idei.
5. A participant commented that the Japanese people do not seem to feel a sense of urgency about the economy, and that Japan's "gross national happiness" seems pretty good.
Dr. McClain agreed that this could indeed be the case. Partly because of the lack of public pressure, the United States has decided to accept a slow recovery.
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Panel Session: China
Moderator Mr. Dennis Donahue, Coordinator, Media Program, East-West Center, Honolulu
Panelists Mr. John Thomson, Managing Editor, China Online, Inc., Chicago "Where is China Heading?"
Dr. Susan L. Shirk, Professor, Graduate School of International Relations and Pacific Studies, University of California, San Diego and Research Director, Institute on Global Conflict and Cooperation, San Diego "U.S.-China Relations"
Highlights
Mr. John Thomson
Mr. Thomson described China as more of a continent than a country, comprising a collection of regions defined by dialect, culture, climate, and level of economic development. In economic terms, there are really two Chinas: the 900 million people in rural areas with per-capita annual incomes of $100, and the 400 million in developed areas along the coast and Yangtze River with "per-capita annual incomes of $800. In certain areas, such as Shanghai, or among certain factory workers and white-collar management, per-capita income is much higher. There really is no undifferentiated, "vast China market."
Population growth is less than 1 percent annually, but that translates to an increase of 10 million each year. Population is expected to peak around 2040, when population growth is expected to be zero. There is a pending shift in demographics, with the percentage of people over 65 expected to climb from about 7 percent, in 1995, to 13.5 percent, by 2025, and the ratio of workers to retirees will drop from 10 to 1 to 4 to 1. The estimated 100 million "floating workers" from rural areas are also a problem. They are not eligible for education, medical care, or other social services in the cities where they work.
China is also dealing with a host of chronic environmental problems, including water and air pollution and the loss of farmland. Water resources are concentrated in the south of the country and must be transported north, but there are still an estimated 50 million people in northern China without reliable drinking water, in part due to irrational pricing. China is the largest producer and consumer of coal in the world. In the winter, in many northern cities, concentrations of soot and sulfur dioxide exceed World Health Organization (WHO) standards by five to ten times. According to a recent U.S. embassy report, pollution costs China an estimated 3 to 8 percent of its GDP, and environmental damage costs another 5 to 14 percent.
The economy is reviving somewhat after suffering from declining demand for exports during the Asian financial crisis. Economic growth in 1999 was also affected by rising consumer savings in
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preparation for privatization of housing and medical services, and dampened consumer demand contributed to a drop in the GDP growth-rate to 7.1 percent that year. Retail sales have recovered somewhat, and with exports rising 30 percent in the first nine months of 2000, the growth rate of GDP rose to 8.2 percent for 2000. This rate is expected to hold through 2001. FDI has averaged about $40 billion per year, but is expected to be as much as $100 billion by 2004, with a much larger share coming from multinational firms than from overseas Chinese, which is usually the case.
The economic challenge now is for the government to develop a viable banking system and open up capital markets. In addition, the central government is utilizing the Internet and other information technology tools to increase efficiency and to re-establish control over local governments. In one case, using satellite remote-sensing technology to obtain geographic data, the government discovered that one province had under-reported its arable land by 50 percent. This illustrates the basic challenge the government faces in collecting reliable statistics.
In the socio-political realm, one concern is that the political legitimacy of the Communist party will be tested anew when the third generation of leaders takes over in 2002. Mr. Johnson believes that democratization will occur from within the party, and following the Taiwan model, will be evolutionary. More important than democracy to China's leaders is government accountability— public opinion does matter. There is rising popular discontent about corruption, which has become endemic due to the "dual-track" mixed economy (private and state-owned enterprises) which still favors the politically connected. The government is responding with a determined effort to punish corrupt officials.
Finally, the country's commitment to reform has been a unifying factor for three decades, and this will continue. In the 1980s, reform focused on agriculture, in the 1990s on urban areas and infrastructure, and in the coming decade, it will focus on integration into the world economy. In this regard, the benefit from China's entry to the WTO will not be so much from tariff reductions as from opening the service sector, and the banking and capital markets. The Internet is playing a central role in economic development by centralizing information important to business, providing access to laws, detailed maps, the yellow pages, and advertising. All in all, Mr. Johnson predicts more changes in the next five years than in the last twenty.
Dr. Susan Shirk
Dr. Shirk stated that the Clinton administration bequeaths to President Bush a bilateral relationship in surprisingly good shape. The accidental U.S. bombing of the Chinese embassy in Belgrade was a trauma that took a year and a half to recover from, and there is still a legacy of public suspicion in China. On the positive side, the United States has just transferred funds to China to pay for the Chinese Embassy damage, and according to a bilateral agreement, China will now transfer funds for the mob-damage to the United States embassy in Beijing. The Belgrade bombing was a disruption the two countries did not need, but significant progress has been made in the last few months. There is the recent agreement on missile non-proliferation,
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which entails a commitment from China to establish export control laws, including laws governing transfer of missile technology to third countries. On trade, there has been hard bargaining in Geneva, and at least one more meeting, scheduled for March, will be needed. Cooperation on Korean peninsula issues has been somewhat coordinated in encouraging the North to strengthen dialogue with the South, to invest in economics rather than missiles, and to continue to open up diplomatically. Kim Jong-D was just in Shanghai to see how China is reforming its economy while keeping the Communist party in control. This kind of North Korean contact with China is good for U.S. interests.
The three key challenges in U.S.-China policy for the new administration are Taiwan, human rights, and national missile defense (NMD).
Relations between Taiwan and China remain unstable and pose a top security risk for the United States. If strained relations erupt into direct military conflict, the United States will be drawn in due to moral and legal commitments. This will be destabilizing for the region, if not the world. The positive dimension is that trade and investment ties have multiplied even during this period of political tension. We can expect this to continue, especially after the two sides join the WTO. Taiwan has just established direct trade with China, and there is momentum on both sides given their high economic complementarity.
But despite these ties, domestic political dynamics continue to draw the two apart. The Taiwanese want to associate with China only if it makes them better off than they are today. In China, nationalism is used as a basis to legitimize leadership rule and Taiwan is used as a focus. In China, it is difficult, if not impossible, to have a rational discussion about Taiwan—no one can be seen as proposing flexible, pragmatic solutions. This is particularly difficult for the party leadership, which is expected to look tough. This often comes out as threats, which further alienates the Taiwanese.
The Clinton administration was successful in preventing these dynamics from erupting into conflict, but not successful in bridging the "theological" differences and getting the two sides to talk. This is the principal task for the Bush administration. It can do this through constant contact with the two sides and by actively urging them to talk, including on the issue of military confidence-building measures. Congress should also be engaged in this effort. Too often Taiwan hears one policy from the administration, and contradictory voices from Congress that support Taiwan independence. This encourages Taiwan to think it does not need to talk with China. It is critical for the United States to have a stable and consistent set of policies toward the two sides. Small shifts in rhetoric make huge differences, as each side is constantly trying to pull Washington into its comer. They need to realize that direct talk is the only way. The United States must fulfill its obligation to help Taiwan defend itself, but it must do so in a prudent way and realize that arms are not its principal defense, but rather the U.S. presence and negotiations with China. Even if Taiwan were independent, it would have to come to terms with its large
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neighbor. If selling certain weapons systems makes it more difficult for Taiwan to do that, then it is not in Taiwan's interest.
On human rights, the Clinton administration tried many ways to pressure China for change in China—from delinking the human rights issue from trade to public shaming through speeches and resolutions in Geneva. But nothing has worked. China resents external pressure. The new U.S. administration should push the trade agenda just as hard as the Clinton administration did— some believe Clinton emphasized trade too much, but this is the best way to open Chinese society and create internal demand for change. The United States should also be active in providing technical assistance to help develop China's legal system. The outgoing administration finally won Congressional approval to provide aid to improve rule-of-law programs in China, and this will be constructive over the long term. The United States can continue to express its democratic values, but should realistically acknowledge the limits of its influence and recognize that what ultimately drives change in China is domestic demands and values.
On U.S. nuclear missile defense, China worries that although this would be a system designed for defense against North Korea, Iran, and Iraq, it will render China's 20 nuclear weapons irrelevant. China is already planning to expand and modernize its nuclear arsenal, but not in an accelerated or ambitious form. Should the United States go forward with NMD, China would be more aggressive, perhaps building up to 200 solid-fuel weapons. This does not pose a problem for U.S. security per se, but it does create a problem of perception—that China is building up to counter the United States. China will view NMD as representing hostile intent toward them, and the United States will view China's response as representing hostile intent, and the risk of conflict will be increased. The new administration should know and accept that China will build up, and not take it as evidence of hostility. The administration should continue to state that NMD is not aimed at China.
These are difficult challenges, but the Bush administration is up to the task. With the new administration, there will be more continuity than change in U.S. policy toward China. There could be minor differences in rhetoric, but essentially, the United States will continue to pursue a policy of engagement. There has been some talk about Bush paying less attention to China and placing more emphasis on Japan and other allies, but this is unlikely. U.S. relations with the two countries are not a zero sum game: Japan has a stake in the United States nurturing its China relationship and not adopting a hostile position. Recent statements from President Bush and his foreign-policy team also suggest more continuity than change.
Discussion
1. What are the prospects for political change in China?
Mr. Thomson responded that China has a tradition of a central state, despite periods of disunity, so he considers the danger of a social meltdown unlikely but not impossible. However, given that China's distinct regions and cities often compete with each other (Wuhan and Shanghai both
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make cars, and Wuhan taxes cars from Shanghai), there should be some type of confederation within China. The current system is not adequate for the coming decade, and a federal or confederate system would allow more decentralization. There are drivers for political instability—population growth, environmental degradation, income inequality—but all Chinese remember the cultural revolution and want to avoid repeating the experience at all costs.
Dr. Shirk disagreed, and said she believes there is a serious risk of internal division and conflict. The history of China is one of periodic division and civil war. Of its 2000 year history, it has been divided for one-third of the time. It is a difficult task to keep China together administratively and politically, and the current leadership is not up to the task. There have been improvements in China's fiscal system, but there are still tensions and weaknesses between the central government and the provinces and between the provinces themselves. The whole system will be challenged when it comes to implementing WTO commitments in every nook and cranny of this huge country. In addition, successions are the Achilles' heel of authoritarian regimes, and in 2002 President Jiang Zemin and other incumbent leaders will step down from their formal posts. They have already stated their intent to continue to exert influence from behind the scenes, as Deng did. The newly published Tiananmen Papers show that the elders overruled the decision of the sitting Politburo, which did not want the military to intercede. This puts the issue of institutional versus informal rule front and center for the 2002 transition, particularly if the new generation will not allow Jiang et al. to exert informal rule.
2. Will China accept U.S. assistance in developing the rule of law, and what will this entail?
There is real demand from China for technical help on rule-of-law issues. Dr. Shirk stated that it would not be expensive for the United States to help. Congress did not appropriate additional money, but simply allowed the existing budget to be reprogrammed for this purpose. There is a well-designed program in place that includes support for legal clinics to promote civil rights; legal training and education for the judiciary, and in administrative law. There are also programs to bring Chinese judges to the United States.
3. How can we know that public opinion matters in China, given the lack of freedom of expression?
Mr. Thomson stated that public opinion is difficult to assess, and there is a question as to what degree it is stylized or formulated for foreigners or for the government. The leadership does pay attention to how it is perceived by the public as part of maintaining stability, and its anti- corruption campaign is at least in part due to public resentment of corrupt officials.
Dr. Shirk agreed that it is difficult to know what the public really thinks. Regarding anti-U.S. sentiment, for example, it is difficult to know how much this is sincerely felt, and how much is fabricated by the party—or for the party.
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India: New Market Opportunities
Moderator Mr. Dennis Donahue, Director, Media Program, East-West Center, Honolulu
Speaker Mr. Aditya Sapru, Director, India Operations, Frost & Sullivan, Mumbai, India
Highlights
The Indian economy has seen more structural change in the early 1990s than during the previous 40 years. Reforms aimed at opening up the service sector and decreasing the reliance on manufacturing were made not by choice, but were forced on India by the compulsions of an empty treasury. Because reforms were undertaken out of need, they have been partial; for example, 15 percent of GDP is still spent on subsidies rather than on productive investments.
Yet India can boast a population of 1 billion, GDP has been growing by 6.5 to 7 percent annually, and export growth is likely to grow into the double digits. Inflation is likely to increase, however, due to an increase in energy costs and stagnant food prices. As a result, the current account deficit is likely to be stagnant, as decreased exports are offset by an increase in private remittances and income from IT-related businesses.
The service-industry success story in India is software services. India's expertise in software initially developed as workers gained the necessary skills through their training and education in the United States. India became a center for offshore software-development, and now is home to numerous research and development centers. This triggered Frost & Sullivan to ask if there were other service industries that could be leveraged around the same model. The company examined the comparative competencies of different countries in Asia to determine what they should do to further their economies. They concluded that for India to further develop its service industry, India must encourage the entrepreneurial spirit by making the bureaucracy more responsive and reducing regulation.
The company also concluded that there is a "new malleability of space" that makes location irrelevant. This is defined by:
• The shrinking firm: reduced interaction costs shrink the firm's core but expand its periphery.
• The expanding market: the ubiquitous network expands the geographical scope of the market, as well as geographical location of competitors.
• The virtual factor: improved communication with suppliers reduces vertical integration in sourcing and production.
• The deconstructed channel: connectivity with customers permits deconstruction and
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reconstruction of vertically integrated channels.
Profit strategies include global arbitrage, where technology destined for markets in Europe and Asia can be developed in India or Israel, with labor from India or Latin America, while the coordinator and arbitrage designer is based in the United States. This highlights India's being a source of skills as an asset, versus traditional notions of India's assets being its huge market and its middle class. For example, Jack Welch, of GE, once said that India disappointed them as a market but exceeded their expectations as a source of intellectual capital. As a result, GE has moved many back-office systems to India.
Companies that increase their Web site and marketing sophistication will increase their interactions with customers. Marketing and sales teams are traditionally based in Europe or the United States, but this does not assure that customer-service support costs are reduced by automation. Mass marketing does not differentiate among customers, but this model uses loyalty programs through developing a customized database. Studies show that online customers prefer to be served through email slightly more than by regular mail.
Discussion
1. Although India's outsourcing capabilities are unique, there is still an element of chaos and uncertainty in the Internet market in India. What is the government doing to address this?
Mr. Sapru responded that the government is trying to facilitate the coherence of IT services by investing in infrastructure, albeit at a slower pace than other countries. It is considering providing special benefits, such as software export zones, for outsourcing companies. India has not solved all the problems, but the government does realize the value of foreign capital, and this will not change even if the current leadership changes.
2. How important is English fluency among India's population in making it a competitive outsourcing center?
Mr. Sapru responded that India's long-term education in English is a competitive advantage, because English is the language of commerce and the Internet. But other Asian nations are catching up; the upcoming generation in many Asian countries is fluent in English. English fluency will be less a differentiating factor in the near future.
3. How can India overcome its reputation as a difficult place to do business?
Mr. Sapru agreed that India is one of the emerging economies that is doing well, but there are subtle factors at work in the market and it can be puzzling to operate in. In part this is because the government adopted reforms not out of belief in them, but as a way to do something quickly to solve its balance of payments problem. There are still no clear rules, and even "if there were, people do not always obey the rules.
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4. Can India's outsourcing capability help develop the overall economy, or do these companies operate as sweatshops, isolated from broader economic development?
India's outsourcing shops actually pay quite well, Mr. Sapru observed, taking into account purchasing-power parity, which will, over time, allow experienced workers to save and spin off their own companies. The real value added is that over the next three to five years the polity will build a mindset favorable to opening up, and will force government change.
5. One participant commented that India's government has traditionally interceded too much in the economy. For example Nehru's vision of the socialist state bogged India down. The government is now trying to get out of the business arena and allow for entrepreneurship, which is very important for India. In fact, a government "vision" may be more detrimental than helpful. The point was also made that public universities have lacked investment for two decades, but that there have been recent investments by the private sector in engineering and business schools that will form a new educational resource. A third point is that there is great decentralization among states and competition among them to attract foreign investment. Similar to China, India is not one country but many distinct states with great differences in policy.
Mr. Sapru agreed that the government has gotten in the way of business and still does. He believes that policy should not be haphazard and that it is important for politicians to agree on a long-term approach to change. This is still a few years away. He also agreed that states are unique. Uttar Pradesh, for example, recently passed an "e-government" package consisting of policies to provide public services over the Internet. So local initiative does make a difference for business.
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Keynote Luncheon Address:
Moderator Dr. Charles E. Morrison, President, East-West Center, Honolulu
Speaker: Mr. Neil S. Newhouse, Partner, Public Opinion Strategies, Alexandria, Virginia "Election 2000: What Really Happened?" Highlights
Mr. Newhouse presented data from public opinion surveys taken in the post-election period. There are four reasons why the U.S. Presidential vote was so close:
• Gore did well among late deciders. Although the popular vote favored Bush on Election Day, exit polls show that about 17 percent of voters deciding in the last five days went for Gore. This pushed the overall vote to a tie.
• The issue agenda moved to social security as a vote determinant. Bush failed to respond to Gore's ad campaigns in key contested states, such as Pennsylvania and Florida. The survey showed that 24 percent of voters ended up deciding on the basis of social security, while only 15 percent said this was a determinant in the pre-election poll. Gore successfully moved this issue to front and center.
• High "right direction" numbers finally moved most of these late deciders to Gore. The mood of the country on Election Day was the highest since 1984, with 65 percent saying the country was going in the right direction, and only 31 percent said the wrong direction. Actually, Gore should have done better, because high "right-direction" numbers give the advantage to the incumbent party. Voters' "Clinton fatigue" drew votes away from Gore.
• Gore consolidated Democratic voters in what became a very ideological campaign. A high turnout among union members and African-Americans helped Gore. The percentage of union members who voted rose from 19 percent in 1992 to 26 percent in 2000, partially because AFL/CIO members got Election Day off. Gore also won states where African- American turnout increased from the 1996 election. In Florida, turnout increased from 10 to 15 percent; in Missouri, from 5 to 12 percent. In West Virginia, where Bush won handily, the increase was only from 1 to 3 percent, and in Ohio, it was from 6 to 9 percent.
The closeness of the race was also closely tied to advertising decisions, with the starkest case being in California, where Bush lost the popular vote 54 to 42 percent, but spent $10 million to Gore's $127,000. In Florida, where the vote was a tie, Bush spent almost $5 million more than Gore.
Other characteristics of the 2000 election:
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• The vote was divided along geographical lines, with Bush getting 59 percent of the rural vote compared with Gore's 37 percent. The two candidates split the suburban vote nearly evenly, while Gore won the urban vote 61 percent to Bush's 35 percent.
• The vote was divided along secular lines: 58 percent of voters who seldom or never attend church favored Gore, while 60 percent of voters who attend church weekly or more voted for Bush. This partly reflects Bush's anti-abortion constituency, which includes many churchgoers.
• Of gun owners, 61 percent voted for Bush to Gore's 36 percent. This pool of voters is not an insignificant minority; 48 percent of Americans own guns, and this number has increased since the shootings at Colombine High School in Colorado.
What does the survey say about Clinton's legacy and Bush's prospects? Clinton received the highest job-approval rating in history for an outgoing president: 65 percent favorable to 31 percent unfavorable. But his personal approval rating was the inverse: 54 percent disapproving and only 41 percent approving. It is common to see personal ratings higher than job approval ratings, so Clinton's profile is a first. But by a two-to-one margin, voters believe Clinton made progress toward solving the nation's problems.
Bush got high marks in both categories: approval for the Bush transition was 65 percent favorable to 26 percent unfavorable, and his personal approval was 60 percent approving to 26 percent disapproving. And voters said by an overwhelming margin—73 to 21 percent—that Bush should pursue his agenda despite the closeness of the election.
The survey indicated increasing worry about the economy. In August 2000, 60 percent thought the economy was getting better, but by early December that figure had dropped to only 26 percent. But 57 percent still thought the economy was headed in the right direction, and 60 percent expressed optimism about the future, compared with 26 percent who felt pessimistic. Americans may think a recession is coming, but they have not felt the effects yet.
The survey also measured priorities for the national agenda. In response to the question, what is the most important issue for the Bush administration to address, a strong economy led the list, with 81 percent agreeing; second was education, with 78 percent (it is rare for education to show up at the federal level because it is considered a state issue); social security followed, at 74 percent; and adding drug coverage to Medicare was 73 percent—a seemingly high number until one realizes that 50 percent of Americans take prescription drugs daily. The second tier of priorities included tax cuts, the environment, poverty, and health care, all in the 60-percent range. The third tier included paying off the national debt, strengthening the military, strengthening gun- control laws, and national missile defense, all in the 40-percent range. Trade and campaign finance reform tied for last place, at 37 percent each.
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The political outlook for the period leading up to the 2002 election is for increasing divisiveness. The Democrats have little incentive to give Bush any victories, and the spirit of bipartisanship will be short lived. Both sides think they won the presidential election, and there will be a repeat of the tactics and strategies the campaigns used, particularly negative ads. Redistricting will be a factor in the 2002 election. The new redistricting favors Republicans, and the Democrats need to aggressively mobilize their base to win back control of the House of Representatives. Meanwhile, the issue agenda in Washington will reflect the campaign—prescription drugs and Medicare, social security, tax cuts, and education. Issues normally confined to the local and state level may rise to the federal level, as people across the nation increasingly share common problems of urban congestion, transportation, and high energy costs, as well as the looming issues of Internet taxation, and concerns about medical and personal privacy, and education spending and accountability.
The bottom line is that Americans are eternally optimistic. They feel good about themselves and their financial status. Many believe that Bush was elected legitimately and will give him time to prove that his agenda will work. The issue agenda is internally oriented; Americans believe they can affect other countries and that other countries do not really affect them. Foreign policy will remain in the second or third tier of priorities unless there is a crisis.
Discussion
1. Was Gore's tactic of distancing himself from Clinton the right one, or would he have benefited from Clinton's campaigning?
Gore was exactly right to keep Clinton as far away from his campaign as possible. Clinton- fatigue and the Lewinsky scandal were major drags on votes for Gore, and it could have been worse.
2. One participant observed that it often seems that U.S. presidents play a foreign policy card to improve their standing.
Mr. Newhouse responded that unless there is a crisis, foreign policy is so low on Americans' radar screens that there is no political gain from playing up foreign policy issues.
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The Koreas
Moderator Dr. Fereidun Fesharaki, Senior Fellow, East-West Center, Honolulu
Speaker Dr. Ungsuh Kenneth Park, President and CEO, KOHAP Corporation, Seoul
Highlights
Dr. Park provided an overview of the Korean recovery. In his view, the recovery is far from complete, and, lacks prospects for addressing current problems in political leadership, corporate restructuring, and the role of the IT sector in future economic growth.
The unusual speed of economic recovery in South Korea is due primarily to the currency crisis itself, which forced a dramatic devaluation of the won. This immediately improved the price- competitiveness of industrial exports, and even with operating capacity down 50 percent and no new capital spending, companies were still able to export and grow. Korea's imports also declined by 25 percent compared with pre-crisis levels. This allowed the current account surplus to go from a negative $100 million at the time of the crisis to $60 billion within the first year, and close to $100 billion now.
There were achievements in corporate restructuring during the initial phase of recovery. Of the 20 largest companies, 12 major industrial companies went into either court receivership or workout arrangements with creditors. Out of the 100 largest companies, 52 went through this process. Of course this did not include companies that later got into trouble, such as Hyundai, Daewoo, and Dong-A Construction. In the banking sector, at least 10 major banks either lost their licenses or merged with stronger banks, reducing the number to 23. Out of 30 short-term financing companies, 21 were closed down. Out of 50 insurance companies, 13 lost their licenses, and out of 1,666 credit cooperatives, 231 went bankrupt. To complete this restructuring, the government raised about $88 billion from the sale of treasury bonds to inject capital in the domestic market and complete debt-equity swaps.
Liberalization measures were a second factor contributing to the recovery of the capital markets. Liberalization drew new domestic and foreign portfolio capital into the traditional Kospi, and the secondary, Kosdaq markets. The Kosdaq, in particular, attracted huge volumes of formerly curb- market funds, which by nature seek high-return projects. With Korea's tremendous increase in the number of IT start-up businesses, Kosdaq took over leadership of the capital market from the traditional market, a significant switch. The total capitalized value of Korea's stock markets used to be under 25 percent of GDP, but the figure reached 100 percent of GDP at its peak, at the end of 1999.
By the beginning of 2000, Korean economic managers were highly confident in the state of the economy, which generated 9.6 percent growth in 1998 and more than 10 percent growth in 1999.
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But companies that skillfully weathered the crisis gained confidence and acquired weaker competitors using borrowed money. Banks that needed to dispose of weak companies' debt were motivated to lend to get it off the books, and sales of industrial assets to the likes of Daewoo and Hyundai appealed to nationalistic patriotism. This set in motion a sense that the recovery had been achieved, and to complacency, overconfidence, and carelessness.
This led to a policy error in June 2000, when the government set a goal for banks to achieve an 8 percent BIS ratio by December. This was asking too much in too short a time, and had a damaging effect on reform. In order to meet this goal, banks simply stopped lending—except to the most powerful companies. They also began refusing workouts to write off Non-Performing Loans (NPLs), and the money sat idle in banks' coffers, creating a credit crunch. Banks that were profitable were made to look like they had a capital loss: Hanbil made 2.4 trillion won ($2 billion), but it had to set aside 3.1 trillion won, so the bank appeared to have a 700-billion-won net loss. The Kospi index declined nearly 500 points from it 1999 peak of 1059, and by the end of the year there was such a cash shortage that people began to claim there that was another crisis.
Today the unemployment rate is 3.5 percent compared with 8 percent in the six months after the crisis, and in September 2000, the government began paying off its IMF loan. However, the economic recovery has stalled. First there is "restructuring fatigue." The government oversold the achievement of the recovery at the start of 2000 and created expectations that restructuring and sacrifice were over. Second is the policy ambivalence shown by the makers of economic policy: on the one hand there is a commitment to the liberal market principles of competition and transparency, but on the other hand there is the long tradition of a communitarian culture. This led to a mixture of humanistic and competitive policies, which became indecisive and inconsistent. The government has tended to back off from restructuring when labor or the chaebols protest too much, destroying public confidence in the government's ability to pursue hard options. The public is particularly unhappy with government laxness toward Hyundai because of its role in President Kim's Sunshine policy toward North Korea.
In the current stall, corporate restructuring has progressed 80 percent, but restructuring in the banking sector has progressed only 50 percent because most major banks still possess large NPLs that more than wipe out their current-year earnings in the form of loss-write-off provisions. Labor sector rigidities remain, and reform in this sector has progressed only 20 percent. The government gets zero percent success, given its vacillating policies, lack of leadership, and for allowing violence in the labor market. If this state of the economy continues, it could be 1997 all over again.
Discussion
1. What are the prospects for the North adopting economic reforms, and is Kim Jong-H's visit to Shanghai significant in this regard?
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Dr. Park responded that any change in the status quo on the peninsula would need to be gradual. Kim Jong-Il is dreaming the wrong dream if he thinks the North's reforms can be modeled after reforms in China. Its market is very limited compared with China's, and there is little in the North to interest foreign investors. Its economy and political system are too undeveloped to be modeled on China's experience.
2. Does the opposition Grand National Party (GNP) offer any solutions to the current stalemate?
Both parties are extremely unpopular, Dr. Park said. The GNP's leader, Mr. Lee, is particularly unpopular. There is a new scandal that political donations were given by the CIA to Mr. Lee during the recent presidential campaign, and three people who channeled the money are under investigation.
3. Why is there such a lack of political leadership to address restructuring, particularly presidential leadership?
Korean society is in transition from a communitarian, authoritarian, and Confucian political culture to a hybrid breed of democracy and a market economy. The president still sets the direction, and there is no tradition of give-and-take with society. The tripartite committee of government, the chaebols, and labor sputtered out because there is no tradition of working together. The bureaucracy is not ready to give up its vested interests, and the sense of shared pains and gains is gone. As the 2002 election draws near, with a new "emperor" on the horizon, these tendencies will accelerate. The nature of the political leadership itself has to change, and this won't happen in a natural, logical, sequential way.
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Panel Session: ASEAN
Moderator Dr. Fereidun Fesharaki, Senior Fellow, East-West Center, Honolulu
Panelists Mr. Jusuf Wanandi, Chairman, Supervisory Board, Centre for Strategic and International Studies, Jakarta
His Excellency Rodolfo C. Severino, Jr., Secretary General, ASEAN, the Philippines
Highlights
Mr. Jusuf Wanandi
Mr. Wanandi stated that this is a challenging time for ASEAN for a number of reasons, but it is important to remember that its achievements can work to its advantage now. ASEAN has created unity for internal and neighborly peace and stability. Regional economic cooperation has shown its limits, but it has allowed each economy to develop over 30 years. ASEAN has expanded up. Southeast Asia's regional role, particularly in the post-Cold War era, and it has become a core diplomatic community and has sponsored regional institution building. APEC, ARF, and ASEAN Plus Three are examples of organizations made possible with the help of ASEAN. These are not small achievements, but at same time ASEAN faces new challenges.
The first challenge is the economic crisis, which has diverted attention and resources inward, to cope with internal problems. This translates into less public support for ASEAN, making it more difficult to move forward. It is necessary to stabilize the crisis before a broad consensus can be again established.
The second challenge is to develop rules and institutions. ASEAN's doctrine has always been to adopt principles, not rules—this is decision-making the ASEAN way. But this is changing, and the sense that ASEAN members do not "intervene" in each other's affairs is recognized as no longer being viable. ASEAN members have to deal with each other's problems because each is affected by the problems of the others. Cooperation on monetary, financial, and aid issues is moving forward. Rules and institutionalization will happen; the Secretariat has been improved somewhat, but not enough to meet future challenges.
The third challenge is to integrate new members. One problem has been that the four new members have expected concrete, rapid benefits from joining ASEAN. There is some progress on the Mekong River cooperation, but there is the political issue of how to get China more involved. There is little private-sector involvement, so it is hard to get concrete projects going. The new members also need education and training to catch up with the core six. A third area is infrastructure development, and Japanese aid is needed for this.
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A fourth challenge is to make ASEAN more than an intergovernmental institution by involving communities, as envisioned in the ASEAN 2020 plan. The ASEAN People's Assembly held a meeting of NGOs for example, to explore how to better link ASEAN to local communities. A fifth challenge is how to capture Indonesia's attention and renew its interest in ASEAN. At the working level, there has been no diminution of commitment by Indonesia, but leadership at the top level is also needed. Indonesia's internal distractions are not unique; other countries have also turned inward, but Indonesia's leadership in ASEAN is missed. While domestic economic problems are bound to affect on the president's ability to be involved, a good foreign minister and good diplomats can improve Indonesia's involvement.
A sixth challenge is for ASEAN to build integration with Northeast Asia. The problems are distinct in the two sub regions; in some sense the problems in Southeast Asia are more diffused. The ASEAN Plus Three summits have been productive in bridging the political and economic gap between the two sub regions and more can be done.
A seventh challenge is improving ASEAN's relationship with the United States. ASEAN is not as important strategically for the United States as other parts of Asia, but ASEAN is important to Japan, and what is important for Japan is important for the United States.
In conclusion, ASEAN is still an important institution for helping the nations of Southeast Asia to solve their mutual and individual problems. The economic crisis has been very deep, but the fact that there has been no backstabbing among neighbors is due to ASEAN. Its importance cannot be underestimated.
Secretary General Rodolfo Severino
Secretary General Severino explained that economic indicators vary widely among ASEAN economies but do point to a recovery. Economic growth has resumed, and reached an average of 4.5 percent in 2000. Inflation is under control, financial reserves are up, and interest rates are down. Exports play a key role for the six core ASEAN members. Export growth was 7 percent in 1999 and is expected to rise to 12 percent in 2000, due to the steady expansion of the United States economy. In 1999, 21 percent of ASEAN exports went to the United States, primarily electronics goods. Since the second quarter of 2000, external factors have turned down: a rise in oil prices, the diminished tech boom, and the United States economic slowdown all could put a damper on the ASEAN recovery. ASEAN can do little about the external environment, but it is working to improve internal factors in five main areas.
• Internal changes: ASEAN members are all in transition—at different paces and in various forms—and it is too early to tell how successful the transitions will be. Problems related to political transition exacerbate a sense of uncertainty, but a general move toward greater openness in government seems clear in most ASEAN countries
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• Deeper regional integration: The ASEAN free-trade area (AFTA) is the cornerstone of market integration, which targets a tariff reduction of zero to five percent among the six core members by 2005, and complete removal of tariffs by 2010. The ASEAN industrial cooperation scheme gives benefits to companies operating in two or more countries; most are Japanese automotive companies and a few are electronics firms. The ASEAN investment area extends national treatment to other ASEAN investors, including joint ventures between ASEAN and non-ASEAN companies. Roads connecting mainland ASEAN countries are being upgraded, and intra-state transport agreements are being negotiated. Navigation on the Mekong River is also being improved, and China has offered to dredge parts of the upper Mekong. An ASEAN power grid is being planned. It will connect power systems on mainland Southeast Asia. A pipeline for the export of natural gas is under consideration. Interconnectivity and harmonization of product standards are also being established, and cooperation on training and education in the knowledge industries is being considered.
• Financial cooperation: A system of joint surveillance has been established, and periodic peer review by finance ministers is in place, aided by technical help from the Asian Development Bank. These measures encourage internal reforms and promote transparency in the financial markets. A currency-swap arrangement includes all 10 members, and the approved amount has recently been increased.
• Development of stronger linkages with the outside world: The most prominent effort in this area is the process, and within ASEAN Plus Three, the area of greatest momentum is a planned network of currency-swap agreements and joint financial oversight through frequent consultations among finance ministers. The ASEAN Plus Three dialogue has led to cooperation on the Mekong river and on rail and sea transport, and the group is exploring ways to cooperate in the IT sector. Exploratory talks are also underway on a free trade agreement among ASEAN Plus Three, and on agreements between ASEAN and China and ASEAN and Japan.
• Rules-based system: An increasing number of formal agreements are governing ASEAN. These include the AFTA treaty, and agreements relating to the investment area, and to goods in transit. Work is already underway on an agreement to address the problems of atmospheric pollution and haze.
In conclusion, ASEAN is working hard to increase members' competitiveness and to ease cross- border burdens for businesses, not only for foreign investors but for ASEAN businesses as well.
Discussion
1. Will ASEAN Plus Three take the energy out of ARF?
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These two dialogue groups are complementary, Mr. Wanandi stated. One of the goals of the East Asian institution-building process is strengthening members' ability to cope with a severe economic crisis in the future. ASEAN Plus Three can address this in a way that ARF cannot. ASEAN Plus Three is having a positive political effect because Japan, China, and South Korea are meeting on the side. It is in the region's interest to avoid a Japan-China relationship characterized by rivalry and confrontation, and ASEAN Plus Three allows for closer interaction between them. It is expected that Australia and New Zealand will join ASEAN Plus Three at some point, creating more linkage with ARF. Because of United States involvement, ARF and APEC are still the most important regional dialogues.
2. What are the prospects for ASEAN dealing with China on South China Sea conflicts?
There has been a marked shift by China toward acceptance of a multilateral approach because ASEAN stood together in rejecting the piecemeal, bilateral approach. A code of conduct among the claimants is being finalized after heated debate among ASEAN members on the terms. The ASEAN draft is being discussed with China, although the issue of bans on new construction is still unsettled. There is a basic understanding that there will be no new construction, but the question is how to formulate it. The Code is based on the Manila Declaration, which pledges to resolve the issue peacefully.
3. What is the impact of secession movements in the Philippines and Indonesia on their economies and trade?
Secretary General Severino responded that there is no possibility of secession in Philippines, as it is difficult to distinguish political acts from those that are just criminal (kidnapping). Mr. Wanandi responded that there are two seccession movements of significance in Indonesia. In Aceh, abuses of human rights are the main issue, and resentment that the central government siphons off their natural resources. This province of four million people has been a force for Indonesian nationalism since 1908, so it is unlikely to break away. Nonetheless, they need a sense that the perpetrators of human rights violations are being brought to justice. The weak central government has not been able to do this. The second movement is in Irian Jaya, which poses a larger problem for the future. It has been part of Indonesia only since 1963 due to Dutch colonialism there is no historic connection. In area, Irian Jaya is larger than Java but the population is just two and a half million. With this being the case, it is not easy for them to organize, but there is more solidarity among the secession movements because of their common Melanesian and Christian roots. The weak central government's lack of response may lead to an East-Timor-type problem, but the government will not easily agree to independence, given the province's natural gas resources.
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Concurrent Roundtable Sessions Track A: Information Technology and Telecommunications
Co-Chairs Dr. Mark Hukill, Associate Professor, School of Travel Industry Management, University of Hawaii, Manoa
Mr. Manoj Menon, Director, Technology Practice (Asia Pacific), Frost & Sullivan, Singapore
Highlights
Mr. Menon expressed optimism regarding the Asia Pacific region's continuing growth in telecom and IT development. The region will be one of the largest markets in the world for these new technologies, and Japan will play an increasingly important role in leading the region in this sector. Broadband and wireless technologies were identified as important areas of growth and development in the region, but there are still regulatory issues to be dealt with.
Dr. Hukill agreed with Mr. Menon and pointed out that these dynamic developments are primarily due to the regulatory restructuring over the past decade and changes that are still occurring, particularly in Southeast Asia. Restructuring in Southeast Asia has opened up new opportunities and released pent-up demand, but the needs and directions of focus in each country are different, depending upon the form deregulation has taken, the degree of liberalization of the markets, and the introduction of competitive factors within and outside of each country. The ASEAN Regional Telecom Forum (ARTF) was formed in 1999 to address regulatory issues such as harmonizing equipment standards and standardizing the infrastructure given the free trade and liberalization policies of ASEAN.
Discussion
The question-and-answer session and discussion focused primarily on deregulation issues in the Asia Pacific region, with emphasis on rural access and approaches to the more under-developed areas of the region, such as Laos and Cambodia, will result in the development of new business models. Telephony will not come to rural areas in the near future. Wireless will be the first opportunity for telephony in many of these under-developed areas because telecom companies are not interested in laying telephone cable in remote rural areas.
The digital divide was another issue brought up for discussion. Deregulation was seen as widening the disparity between the "haves" and the "have-nots." Government subsidies were suggested as a means to bridge the gap and to provide universal service to rural areas. A debate ensued concerning whether government subsidies would result in a "begging" model, and whether alternatives such as providing entrepreneurial seed capital to rural areas would be a better way to encourage technological advancement. Assessing and understanding local needs and finding applications to address these needs is necessary. While wireless was seen as a
50 East-West Center Asia Pacific Executive Forum solution, it is still too expensive to implement without subsidies. There was also the question of whether it was good to skip a technological level and go from no access directly to wireless, rather than using cable as a transition.
Important issues, that will require much examination in the IT and telecom sectors, are global standardization and integration of applications between countries and regions. Each country has different problems requiring different solutions. There is no one solution to apply across the board. Competing interests in the various markets and countries also contribute to the difficulties.
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Track B: Banking and Finance
Co-Chairs Dr. S. Ghon Rhee, K. J. Luke Chair of International Finance and Banking and Executive Director, Asia-Pacific Financial Markets Research Center, University of Hawaii, Manoa
Mr. Paul Tarn, Director, International Business Development, OffRoad Capital Corp., San Francisco
Highlights
Dr. Rhee presented two main questions concerning possible regional bond markets in the Asia Pacific region: (1) Why are regionalized bond markets necessary? (2) Was the capital reversal after the Asian financial crisis so large that the Asian economies as a group could not mitigate its impact on their currencies and equity markets?
Using data on stock market performance in Asia, Dr. Rhee argued that the crisis was not yet over, although some mitigation measures had already been taken. These measures, called the New Miyazawa Initiatives, were expected to encourage and vitalize the securities markets in Asia. He described why the Asian stock markets were not active. Contributing factors were that the Japanese government bond market has been suffering from its own weakness, due to administrative and physical capacity reasons, and Asia's failure to attract capital from outside the region. On the other hand, Singapore and Hong Kong extended their programs of financial deregulation and have started to function as regional securities hubs. Dr. Rhee explained that Japan alone could not create a truly regional bond market and that a joint effort by the region's economies would be necessary.
Dr. Rhee proposed a comprehensive study that could produce a detailed blueprint for regionalized bond markets in the Asia Pacific region. He suggested that the study should encompass the establishment of a cross-border system for trading, clearing, and settlement of securities transactions; harmonization of accounting rules and tax treatments; and the feasibility of an Asian common currency.
Mr. Tarn expressed similar views regarding the current economic situation in Asia. He suggested that in spite of continuing reforms in the region's systems, lending from banks was still low, and improvement in corporate governance was not thorough. In addition, foreign direct investment was not active. Equity markets in Asia followed the movements in the New York Stock Exchange and experienced a dip last year.
Mr. Tarn pointed out that a venture capital market has rapidly developed in Asia. The size of the market more than doubled in a single year. In 1998, it was $4.9 billion and by 1999, it had grown to $9.99 billion. Insurance companies actively participated in the venture capital market. The venture capital market in Asia was still smaller than that in the United States ($80 billion) and
52 East-West Center Asia Pacific Executive Forum than in Europe ($13 billion). Still, the venture capital market contributed to the creation of new capital in Asia.
Mr. Tarn described the general characteristics of venture capitalists in Asia. While more and more professional venture capitalists have emerged, the majority consisted of foreign ownership. Private equity does not seem to be well understood in the Asia Pacific region. Traditional investors in venture-capital markets were still a minority. Mr. Tarn felt that in Asia this was because personal relationships might be more important than due diligence.
Discussion
Questions and comments from the audience highlighted two concerns:
1. Bond Markets in Asia
One participant asked about the characteristics of the bond market in South Korea. Dr. Rhee replied that the first (bond issue) market is large, while the secondary (bond circulation) market in South Korea is not fully developed, partly due to transparency problems. Another participant asked how likely was that the proposed regionalized bond market would be established. Dr. Rhee confirmed that the comprehensive study should be implemented at first.
2. Venture Capital Markets in Asia
One participant asked about the activities of investment banks. Mr. Tarn explained that some investment banks focused on the launching stage or the early stages of firms and others focused on later stages. The former are called "angel funds." He further explained that it was riskier to invest in the earlier stages.
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Track C: Energy
Co-Chairs Dr. Fereidun Fesharaki, Senior Fellow, East-West Center, Honolulu
Mr. Larry M. Rinek, Director of Consulting, Industrial Technologies, Frost & Sullivan, California
Highlights
The two speakers focused on two important topics—the availability of natural resources, namely oil, and the efficiency of oil extraction and use. It was asked, "What are the toys?" in reference to the types of modem-day petroleum-industry machinery, and what technological advances are being made.
Discussion
Major points resulting fromth e discussion are:
• In terms of efficiency, Europe on the whole was considered the most advanced, then Japan. The United States still rates poorly in efficiency, but is improving.
• Greater investment is needed in energy development and research, increased oil prices on a global scale, and improved conservation measures.
• Consumption, in general, is too high. Motor vehicles were deemed the greatest consumers of oil. Rising vehicle sales in Japan contribute to the increase in overall consumption. Demand and prices for oil cannot rise forever at equal levels.
• Conservation in Asia and Africa is lacking, and the situation in China was discussed in particular. Coal consumption in China is declining, yet output is still high. It is expected that soon China will increase its oil imports. This will have grave political implications because China must find secure sea-lanes through waters that are now under territorial dispute. Higher living standards within China will lead to major increases in consumption.
• For 30 years, there has not been a major oil find. A debate arose over whether or not there exists an untapped oil reserve in Afghanistan. The belief on this side is that we know where it is, but we just do not know how to gain access to it. Political issues being the major barrier.
• Investment should be made in efficient extraction machinery and in conservation. This
54 East-West Center Asia Pacific Executive Forum
will be difficult in places like Indonesia because of political unrest. ASEAN seemed to be a key participant in the discourse concerning Asia's energy future and resource development.
• Infrastructure of the various nations should be examined.
55
APPENDICES
Program Agenda Speaker Participant List Sponsor Profiles
ASIA PACIFIC EXECUTIVE FORUM DOING BUSINESS IN A CHANGING ASIA: A STRATEGIC VISION
January 16-19,2001 Keoni Auditorium, Imin International Conference Center East-West Center, Honolulu
AGENDA
Tuesday, January 16
Morning and afternoon Arrival into Honolulu; Check-in at the Ala Moana Hotel
4:00 pm Early Registration at the Ala Moana Hotel
6:00-8:00 pm WELCOME RECEPTION at the Ala Moana Hotel, Plumeria Room
Wednesday. January 17
8:00-8:10 am Board shuttle bus at the Ala Moana Hotel for East-West Center
8:30-9:00 am REGISTRATION and CONTINENTAL BREAKFAST at East-West Center, Garden Level, Imin International Conference Center (Welcome Remarks and Keynote Address open to the public.)
9:00-9:15 am WELCOMING REMARKS (garden level) • Dr. Charles E. Morrison, President, East-West Center • Mr. Aroop Zutshi, President, Asian Operations, Frost and Sullivan, San Jose
9:15-10:00 am KEYNOTE ADDRESS — ASIAN OPTIONS AND THE NEW AMERICAN ADMINISTRATION (garden level) Moderator: Dr. Charles E. Morrison, President, East-West Center • Prof. Tom Plate, Internationally syndicated Pacific Perspectives Columnist for The Honolulu Advertiser and the South China Morning Post, syndicated to The Strait Times of Singapore, the Seattle Times, the Korea Times and many other papers; Professor, Policy Studies and Communications Studies, University of California, Los Angeles; Founder and Director, Asia Pacific Media Network
For eight years, the Clinton administration practiced two brands of diplomacy in Asia: crisis diplomacy and international trade diplomacy. But surely these cannot be the only Asian options open to the incoming administration.
10:00-10:15 am Forum moves upstairs to Keoni Auditorium.
10:15-10:45 am CORPORATE RESTRUCTURING AFTER THE ASIA CRISIS Moderator: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center • Mr. David D. Hale, Global Chief Economist, Zurich Financial Services, Chicago
59 This session will look at the prospects for corporate restructuring in Asia in the post-crisis era. How well has Asia responded to pressures for restructuring? Where has the opposition to restructuring come from, and how effective has it been? What are the prospects in the future especially in the light of the vigorous recovery in most economies of the region? Does restructuring imply that there must be some convergence in economic structures and business cultures and practices around a Western model? Or is there a viable Asian alternative?
10:45-11:00 am Coffee Break
11:00-11:35 am POST-COLD WAR U.S. INTEREST IN THE ASIA-PACIFIC Moderator: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center • Dr. Charles E. Morrison, President, East-West Center
This presentation will examine the changing U.S. relationship with major Asian countries and the region as a whole. In view of the U.S. presidential election, Dr. Morrison will consider the likely impact of new U.S. policies in the region.
11:35-12:15 pm SHIFTING TRADING ARRANGEMENTS IN ASIA PACIFIC: IMPLICATIONS FOR MARKET AND NONMARKET STRATEGIES Moderator: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center • Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost and Sullivan, San Francisco and Director and Professor, Berkeley APEC Study Center, University of California at Berkeley
What trends do we see in Asia Pacific with respect to trading arrangements? What scenarios are likely for the near future? What kinds of market and non- market strategies will help firms develop strategic relationships in the region and improve their competitive position?
12:15-1:30 pm LUNCHEON SPEAKER — PROTECTING YOU AND YOUR BUSINESS: REPORT ON TERRORISM AND OTHER RISKS (garden level) Moderator: Ms. Karen Knudsen, Director, Office of External Affairs, East- West Center • Mr. Myron R. Fuller, Special Agent in Charge, U.S. Federal Bureau of Investigation, Honolulu
The key issues of human security and the region and the capacity of the international community to address them effectively will be the focus of this luncheon presentation. Mr. Fuller will examine crime and terrorist threats, from a global as well as regional perspective, and will discuss factors that have contributed to the current situation and the efforts and actions that can be taken to deal with them.
1:30-3:00 PM KEY ISSUES FOR DOING BUSINESS IN THE ASIA PACIFIC: ENERGY, ENVIRONMENT AND BUSINESS, AND POPULATION Co-Moderator: Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost and Sullivan, San Francisco Co-Moderator: Dr. Jefferson Fox, Acting Director of Studies, East-West Center
• is ENERGY THE REGION'S ACHILLES HEEL? Dr. Fereidun Fesharaki, Senior Fellow, East West Center
The economic recovery in Asia has resulted in unexpectedly increased energy demand. This demand cannot be satisfied from internal resources and requires massive imports from the outside—particularly in light of the politically volatile
60 Persian Gulf. Major pressures on the environment will be exerted by the surge in energy demand. How Asia handles this surge in demand within the free market system and the privatization process will have a key impact on the long-term prospects for Asia.
• ENVIRONMENT AND BUSINESS Ms. Lyuba Zarsky, Program Director, Globalization and Governance Program, The Nautilus Institute, Berkeley
Key environmental challenges to the region and the constraints on actions towards these challenges will be the focus of this session. The roles of regional and global organizations in dealing with these issues will also be discussed.
o AGING ASIA Dr. Andrew Mason, Senior Fellow, East-West Center and Professor and Chair, Department of Economics, University of Hawaii, Honolulu
Japan, China, South Korea and other Asian countries are beginning to experience rapid aging of their populations as birthrates drop to low levels and life expectancy increases. Aging with bring important challenges to the Asia Pacific region including labor shortages and an aging workforce, lower rates of saving and investment, and substantially higher tax rates. This session will highlight these issues, uncertainty about demographic trends, and the implications of alternative public policy responses.
3:00-3:20 pm Coffee Break
3:20-4:00 pm POLITICAL CHANGES IN ASIA: AN OVERVIEW Moderator: Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost and Sullivan • Dr. Muthiah Alagappa, Senior Fellow, East West Center
This session will provide an overview of recent and anticipated political developments in Asia with a focus on the interconnection between economic development, social change, political mobilization, and democratization.
4:00-5:30 pm A BUSINESS AGENDA FOR THE REGION: PANEL Moderator: Dr. Vinod Aggarwal, Managing Director, Nonmarket Strategy Group, Frost and Sullivan • Mr. Roberto F. de Ocampo, President, Asian Institute of Management, Makati City, Philippines • Mr. Bob Ellison, Director, SwapNet Limited • Mr. James B. Gebhard, (retired) Regional Vice President, Southeast Asia, Hughes Electronics International Corp.
In this panel, business leaders will share their perspectives on key business issues in the Asia-Pacific region such as transparency, corruption, risks, etc.
5:30-7:00 pm RECEPTION at EWC, Burns Hall Art Gallery with Hawaii community guests
7:00 pm Board shuttle bus at East-West Center, Burns Hall to return to the Ala Moana Hotel
61 Thursday, January 18
8:00 am Board shuttle bus at the Ala Moana Hotel for East-West Center
8:30-9:00 am CONTINENTAL BREAKFAST at East-West Center, Keoni Auditorium, Imin International Conference Center
9:00-10:15 am JAPAN PANEL Moderator: Dr. Susan J. Pharr, Edwin O. Reischauer Professor of Japanese Politics and Director, Program on U.S.-Japan Relations, Harvard University • COMPETITIVE TELECOM ENVIRONMENT AND IT VENTURES WILL BECOME THE DRIVING FORCE OF THE NEW ECONOMY IN JAPAN Dr. Sachio Semmoto, Founder, Chairman and CEO, eAccess Ltd., Tokyo
Dr. Semmoto will focus on Japan's economic prospects with an emphasis on the potential for information technology as a driving force in economic development.
• U.S. -JAPAN RELATIONS Dr. David McClain, Dean and First Hawaiian Bank Distinguished Professor of Leadership and Management, College of Business Administration, University of Hawaii, Honolulu
Japan and the United States are redesigning their relationship to reflect new political, economic and security realities in Asia Pacific, as well as ongoing economic transformations and political realignments in both Japan and the United States. This session will survey these recent developments in the context of other evolving bilateral and multilateral arrangements, and assess prospects for future collaboration and cooperation.
10:15-10:30 am Coffee Break
10:30-11:30 am CHINA PANEL Moderator: Mr. Dennis Donahue, Coordinator, Media Program, East-West Center • WHERE IS CHINA HEADING? Ms. Lyric M. Hughes, CEO and Publisher, China OnLine, Chicago
This panel highlights prospects for China's economic future, the sociopolitical factors influencing China's future direction, and what corporate leaders need to know in developing their business strategies.
• U.S.-CHINA RELATIONS Dr. Susan L. Shirk, Professor, Graduate School of International Relations and Pacific Studies, University of California, San Diego and Research Director, Institute on Global Conflict and Cooperation, San Diego
This session will focus on prospects for U.S.-China relations.
11:30-12:00 noon INDIA: NEW MARKET OPPORTUNTTIES Moderator: Mr. Dennis Donahue, Director, Media Program, East-West Center • Mr. Aditya Sapru, Director, India Operations, Frost and Sullivan, Mumbai, India
This session will focus on opportunities in India as an end-user market both in technology and consumer markets, India as a center for IT services (call centers,
62 back office processing and offshore development), and opportunities for companies to nurture start-ups.
12:00-1:45 pm LUNCHEON SPEAKER — ELECTION 2000: WHAT REALLY HAPPENED? (garden level) Moderator: Dr. Charles E. Morrison, President, East-West Center • Mr. Neil S. Newhouse, Partner, Public Opinion Strategies, Alexandria, Virginia
This luncheon presentation will assess the U.S. election, the general mood of the country, and implications for U.S. foreign policy.
1:45-2:30 pm THE KOREAS Moderator: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center • Dr. Ungsuh Kenneth Park, President and CEO, KOHAP Corporation, Seoul
Dr. Park will cover the Korean economic crisis, recovery plans in the public, financial, corporate and labor sectors, as well as economic recovery and structural reforms.
2:30-3:15 pm ASEAN PANEL Moderator: Dr. Fereidun Fesharaki, Senior Fellow, East-West Center • Mr. Jusuf Wanandi, Chairman, Supervisory Board, Centre for Strategic and International Studies, Jakarta • His Excellency Rodolfo C. Severino Jr., Secretary General ASEAN
This session will look at current and future developments in the ASEAN region with an emphasis on issues pertaining to the business community.
3:15-3:30 pm CONCLUSION AND WRAP-UP (KEONI AUDITORIUM)
3:30-3:45 pm Coffee Break
3:45-5:15 pm CONCURRENT SESSIONS These special breakout roundtable sessions will focus on the challenges and opportunities of key industry sectors in Asia Pacific.
TRACK A (Tagore Room, second floor) INFORMATION TECHNOLOGY AND TELECOMMUNICATIONS ROUNDTABLE DISCUSSION Co-chairs: • Dr. Mark Hukill, Associate Professor, School of Travel Industry and Management, University of Hawaii, Honolulu • Mr. Manoj Menon, Director, Technology Practice (Asia Pacific), Frost and Sullivan, Singapore
63 TRACK B (Kaniela Room, second floor) BANKING AND FINANCE ROUNDTABLE DISCUSSION Co-Chairs: • Dr. S. Ghon Rhee, K. J. Luke Chair of International Finance and Banking and Executive Director, Asia-Pacific Financial Markets Research Center, University of Hawaii, Honolulu Mr. Paul Tarn, Directory International Business Development, OffRoad Capital Corp., San Francisco
TRACK C (Kamehameha Room, second floor) ENERGY INDUSTRY ROUNDTABLE DISCUSSION Co-Chairs: • Dr. Fereidun Fesharaki, Senior Fellow, East-West Center • Mr. Larry M. Rlnek, Director of Consulting, Industrial Technologies, Frost and Sullivan, San Jose
5:15 pm Board shuttle bus at Imin Center, East-West Center for the Ala Moana Hotel
Friday, January 19 OPTIONAL, Burns Hall
8:00-8:10 am Board shuttle bus at the Ala Moana Hotel to East-West Center, Burns Hall
8:30-9:00 am CONTINENTAL BREAKFAST at East-West Center, Burns Hall, 4th floor lobby
9:00-10:30 am CONCURRENT SESSIONS • PRE-ARRANGED PRIVATE CONSULTATIONS WITH EAST-WEST CENTER EXPERTS Meet privately with senior East-West Center research fellows on several areas: Energy, Environment, Population and Health, Politics, Economics, and Strategic/Security.
• THE MARKET ENGINEERING APPROACH TO BUSINESS INTELLIGENCE: USING MEASUREMENTS TO DRIVE STRATEGY (room 4005) Mr. Greg Caressi, Research Manager, Telecom Services, Frost and Sullivan, Burlingame
Topics include: identifying key internal and external challenges to growth; using market engineering as a measurement and forecasting tool; applying market engineering strategies to your organization; and building a successful business intelligence system within your organization.
10:30-10:45 am Coffee Break
10:45-12:15 pm CONCURRENT SESSIONS (continued) • PRE-ARRANGED PRIVATE CONSULTATIONS WITH EAST-WEST CENTER EXPERTS • MARKET ENGINEERING SESSION (room 4005)
12:15-1:30 pm LUNCHEON, Burns Hall Lunch Room, 1M floor, behind Art Gallery
1:30 pm Board shuttle bus at East-West Center, Burns Hall to return to the Ala Moana Hotel
64 ASIA PACIFIC EXECUTIVE FORUM DOING BUSINESS IN A CHANGING ASIA: A STRATEGIC VISION
January 16-19,2001 Keoni Auditorium, Imin International Conference Center East-West Center, Honolulu
SPEAKER/ MODERATOR PARTICIPANT LIST
Dr. Vinod K. Aggarwal Dr. Jefferson Fox Managing Director Acting Director of Studies Nonmarket Strategy Group East-West Center Frost & Sullivan and Honolulu, HI U.S.A Director and Professor Berkeley APEC Study Center (BASC) Mr. Myron Fuller Berkeley, CA U.S.A. Special Agent in Charge Federal Bureau of Investigation Dr. Muthiah Alagappa Honolulu, HI U.S.A. Senior Fellow, Research Program East-West Center Mr. James B. Gebhard Honolulu, HI U.S.A. Kailua, HI U.S.A.
Mr. Gregory Caressi Mr. David D. Hale Research Manager, Telecom Services Global Chief Economist Frost & Sullivan Zurich Financial Services Burlingame, CA U.S.A. Chicago, IL U.S.A.
Mr. Roberto F. de Ocampo Dr. Mark Hukill President Associate Professor Asian Institute of Management School of Travel Industry Management Makati City, Philippines University of Hawaii Honolulu, HI U.S.A. Mr. Dennis D. Donahue Coordinator, Media Program Ms. Karen Knudsen East-West Center Director, External Affairs Honolulu, HI U.S.A. East-West Center Honolulu, HI U.S.A. Mr. Bob Ellison Director Dr. Andrew Mason SwapNet Limited Senior Fellow, Research Program Kailua, HI U.S.A East-West Center Honolulu, HI U.S.A. Dr. Fereidun Fesharaki Senior Fellow, Research Program East-West Center Honolulu, HI U.S.A
66 Dr. David McClain Dr. Sachio Semmoto Dean and First Hawaiian Bank Founder, Chairman & CEO Distinguished Professor of Leadership eAccess Ltd. and Management Tokyo, Japan College of Business Administration University of Hawaii His Excellency Rodolfo C. Severino, Honolulu, HI U.S.A. Jr. ASEAN Secretary General Mr. Manoj Menon Association of Southeast Asian Nations Director, Technology Practice Secretariat Frost & Sullivan Jakarta, Indonesia Singapore Dr. Susan L. Shirk Dr. Charles E. Morrison Professor, Graduate School of President International Relations and Pacific East-West Center Studies, University of California, Honolulu, HI U.S.A. San Diego and Research Director, University of Mr. Neil S, Newhouse California Partner Institute on Global Conflict and Public Opinion Strategies Cooperation Alexandria, VA U.S.A. La Jolla, CA U.S.A.
Dr. Ungsuh Kenneth Park Mr. Paul Tarn President and CEO Director, International Business KOHAP Corporation Development Seoul, Korea San Francisco, CA U.S.A.
Dr. Susan J. Pharr Mr. John Thomson Edwin O. Reischauer Professor of Managing Editor Japanese Politics and China Online, Inc. Director, Program on U.S.-Japan Chicago, IL U.S.A. Relations Harvard University Mr. Jusuf Wanandi Cambridge, MA U.S.A Chairman, Supervisory Board Centre for Strategic and International Mr. Larry M. Rinek Studies Director of Consulting, Industrial Jakarta, Indonesia Technologies Frost & Sullivan Ms. Lyuba Zarsky San Jose, CA U.S.A Program Director Globalization and Corporate Mr. Aditya Sapru Governance Program Director, India Operations Nautilus Institute Frost & Sullivan Berkeley, CA U.S.A. Mumbai, India
67 Mr. Aroop Zutshi President, Asian Operations Frost & Sullivan San Jose, CA U.S.A.
EAST-WEST CENTER
ASIA PACIFIC EXECUTIVE FORUM DOING BUSINESS IN A CHANGING ASIA: A STRATEGIC VISION January 16-19,2001 East-West Center, Honolulu Supporting Organizations
THE CHAMBER OF COMMERCE OF HAWAII
The Chamber of Commerce of Hawaii is the State's premier business advocacy organization. Its members represent businesses and organizations statewide, from small businesses to large corporations, from the tourism and military sectors to trendy shops and generations-old family businesses, and from airlines and auto dealers to hotels and manufacturers. Established in 1850 during the reign of King Kamehameha HI, the Chamber is the second oldest Chamber west of the Rockies and is one of the oldest business organizations in the State of Hawaii. The Chamber offers a diverse array of benefits, programs and services to promote a healthy business environment in the State.
EAST-WEST CENTER
The East-West Center is an education and research organization established by the U.S. Congress in 1960 to strengthen relations and understanding among the nations of Asia, the Pacific and the United States. The Center promotes the development of a stable, prosperous and peaceful Asia Pacific community through cooperative study, training, research and dialogue. Funding for the Center comes from the U.S. government, international organizations, corporations, foundations, and Asia Pacific governments. The East-West Seminars provide short-term educational programs for professionals, scholars and policy makers from Asia, the Pacific and the United States to learn more about the region.
FROST & SULLIVAN
Frost & Sullivan is an international marketing consulting company founded in 1961 in New York City to provide strategic market research that monitors and forecasts emerging market trends. The company quickly became the world's largest and most respected market consulting
70 publishing and corporate training firm. Today it has a worldwide reputation for high-quality marketing consulting in more than 300 key industries. In the early 1970s, Frost & Sullivan established a European headquarters in London and developed the first pan-European strategic market reports. In 1972 the company founded its Corporate Training Division. In 1993, Frost & Sullivan merged with Market Intelligence Research Corporation (MIRC) of Mountain View, California and now provides clients with a complete product line of worldwide training and marketing consulting. Frost & Sullivan employs more than 400 international consultants and works with clients in more than 50 countries around the world.
PACIFIC BASIN ECONOMIC COUNCIL
The Pacific Basin Economic Council (PBEC) is an association of senior business leaders from throughout the Pacific Basin region dedicated to expanding trade and investment through fostering open markets. Founded in 1967, PBEC serves as the key organization through which regional executives create business relationships, encourage increased trade and investment, support open markets to lower trade barriers, and address emerging issues likely to shape the Pacific and global economies. PBEC's mission is to achieve a business environment in the region that ensures open trade and investment and encourages competitiveness based on the capabilities of individual companies. It also provides information, networking fora, and services to members that increase their business opportunities; and supports cooperative business efforts to address the economic well-being of citizens in the Asia Pacific region.
RED HERRING COMMUNICATIONS
Red Herring Communications is the leading media company that meets the specialized information needs of strategic business decision-makers. With print, events and online products, Red Herring provides executives with in-depth analysis, news, and high-level forums on the trends and companies driving the business of technology.
For marketers, Red Herring Communications is also dedicated to offering access to this high level audience in a variety of ways to support corporate marketing goals. Since 1993, Red Herring Magazine has built a reputation among the most important strategic business decision-makers as the business magazine for technology. These executives depend on Red Herring for analytical look at the most innovative companies. Red Herring also provides them with a business perspective, an integrated view of technology, and a critical analysis of trends that are driving the digital economy and creating economic growth.
U.S. DEPARTMENT OF COMMERCE INTERNATIONAL TRADE ADMINISTRATION U.S. COMMERCIAL SERVICE
The mission of the U.S. Commercial Service is to support U.S. commercial interests in the United States and help companies increase their sales and market share around the world. The U.S. Commercial Service is committed to promoting the export of U.S. goods and services to strengthen the U.S. economy, maintain job security, and create jobs; protecting and being an advocate for U.S. business interests abroad; assisting U.S. firms in realizing their export potential
71 by providing counseling, overseas market information, international contacts, and trade promotion vehicles; and supporting the export promotion efforts of other public and private organizations, creating, through partnership, a full-service development infrastructure. Recognizing that exporting is a critical part of ensuring a healthy future for the U.S. economy and American jobs, the U.S. Commercial Service champions the interests of U.S. businesses around the world, particularly small and medium- small sized enterprises. Its global network delivers and connects U.S. businesses to the overseas markets. As part of the International Trade Administration, the Commercial Service's strategically-located global network operates more than 100 offices in the United States and more than 130 offices in 70 countries around the world with 1,200 employees dedicated to serving U.S. businesses. No other government agency and very few corporations have the global capabilities of the U.S. Commercial Service. Knowing that companies survive in the international marketplace on informed and timely decision-making, the service has expanded its flexibility and market knowledge through specialized industry and country-focused teams that take group action to accomplish clients'export goals. The U.S. Commercial Service domestic trade professionals serve as the front line for one-on-one federal export counseling. Available in virtually all U.S. business centers, its cadre of trade professionals offers a unique link to overseas market information, contacts, and trade expertise.
72
EAST-WEST CENTER
The East-West Center is an education and research organization established by the U.S. Congress in 1960 to strengthen relations and understanding among the nations of Asia, the Pacific and the United States. The Center promotes the development of a stable, prosperous and peaceful Asia Pacific community through cooperative study, training, research and dialogue. Funding for the Center comes from the U.S. government, international organizations, corporations, foundations, and Asia Pacific governments. The East-West Seminars provide short-term educational programs for professionals, scholars and policy makers from the U.S. and the region.