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Globalization (I): India the Isotope

Reading Kishore Mahbubani's recent essay on Yale Global regarding India's emergence as a global power, we were reminded of an idea we and a colleague of ours in Singapore have been discussing for some time. A couple of years ago, we had been musing about how developed India has many things that the developed West has - high-rise buildings, luxury hotels, industries such as automaking and steel production, a sophisticated business culture, financial markets, and so on. While these exist, they were built by Indians for Indians according to Indian tastes and style, created at a time when import substitution was the way to go. Rather than bring in what you needed from the West, you made your own.

Today, visitors to India are struck by how "Indian" things are. Now, that may sound naive, maybe even stupid. But hear us out. What we mean is that the buildings, the airports, the hotels, the vehicles, the physical stuff we see and use, they are all familiar to those of us from other parts of Asia but yet are distinctly Indian. The cars on the road are probably the best example. India developed its own auto industry and produces automobiles that are unmistakably Indian. The Ambassador taxis are as much an iconic presence on the streets of Delhi and other Indian cities as the black "hackney carriage" cabs are in London. The distinctiveness may be discerned in service practices, customs and procedures too. Indian English, both written and spoken, has its own special characteristics. The quirky half hour added on top of the five-hour time difference from Greenwich Mean Time says it all: Indians may tell time like the rest of the world but they set their own pace and standards.

Fair enough. So consider India's development path something of an isotopic phenomenon. The part of India that modernized - mainly its cities and industrial areas - did so in an Indian way. Imitation wasn't really a motive. In those days, the notion of global competition and producing world-class products, ie the pressures of globalization, were not paramount. The aim was development - to meet the needs of citizens.

Times have changed. As India has opened up, the world has creeped in and Indians have been looking out. There are now foreign marques from Japan, Korea and Europe among the Tatas and Marutis on the road. The question is whether India the Isotope is converging with the rest of the world - or will India globalize in its own distinctive way? To us, the latter seems the most plausible. Already, India has turned conventional Asian development wisdom on its head. Its service economy has led the way in growth and it has achieved international success in such sectors as IT and pharmaceuticals. Meanwhile, agriculture has faltered and manufacturing has not grown as fast.

India is still beating its own path. And given the extreme poverty that continues to plague the country, it must produce its own globalization format - what we might call Globalization (I). It's a development model that is both outward-looking and inward-focused. It is about keeping India on a high-growth track equal to those of the most open dynamic markets in Asia, while aiming for inclusiveness. India will develop innovative products and services but at a low cost that would make them available and accessible to its people and those of other emerging markets. That's the global niche India is claiming for itself.

While China is trying to become the United States and Japan and has an embarrassment of riches in foreign direct investment and foreign exchange reserves, India doesn't have the money to throw at its ambitions. In this, it seems more like Brazil or South Africa. Will Indian cars start looking like American, European and Japanese models? Maybe so, but we reckon they will still retain a clearly Indian style. Will Delhi begin to look like Bangkok or Detroit? Again, perhaps some of the city will, but more than likely Delhi won't get scrubbed clean and bland like Singapore.

Isotopes are typically the less stable form of an element. It may be, however, that the Indian way of globalizing will slowly but surely result in a stable, equitable and self-confident society that projects and protects what Indians want to preserve of their unique culture yet remains as open to the world as any.

High-Priced Hotels and Other Hassles: India Welcomes the World

Globophobe has been going to India at least once or twice a year for the past five years. Since we have been on business, our visits have mainly been to Delhi, Mumbai and the area around those two cities. So when we read in the International Herald Tribune the other day about the shortage of hotel rooms in India, we were nodding our head in agreement. In March, we attended a conference in Mumbai, arriving two days before the start of the meeting to wander around on our own (our own dime, that is). The cheapest business hotel we could find was charging USD250 a night! A couple of years ago, when we took two days to walk around Delhi, we shifted from the luxury conference hotel (about USD400 a night) to a more modest establishment (still overpriced at just under USD200) which was decidedly wanting in service and services.

(Okay, so Globophobe is no scruffy backpacker; while we have been known to rough it once in a while, at our age, we like to have our creature comforts, ie high-speed Internet, 24-hour room service, and satellite or cable TV. But Tyler Brulé on the Fast Lane we are not; we're almost always at the back of the Airbus and have no lovely and resourceful personal assistant at headquarters doing secretarial work, making our travel plans, preparing those dreadful invoices and expense claims, and scouting on our behalf for a fashionable and expensive overnight bag.)

According to the article, the government is encouraging Indians to convert their homes into bed & breakfast inns. This could be a promising solution if some of these B&Bs turn out to be like the many comfortable family-run boutique hotels in Vietnam's big cities that cater to businesspeople, but it cannot work in the long run. Business and leisure travelers from the West are still likely to prefer to stay at full-service, high-quality hotels. With only 110,000 hotel rooms, roughly the same number in the New York City area, India simply cannot accommodate the planeloads of tourists and businesspeople that are pouring in. The way things are going, the tight situation does not look like it will get better anytime soon.

That's yet another hassle for the many people - tourists and investors alike - who are fascinated by the country and are serious about learning more about the culture but are put off by the difficulties involved in visiting. The bad experience starts when you go to get your visa. Globophobe has only had to endure the bureaucratic torture of the Indian consulates in New York and Hong Kong. Last year, we went to the New York consulate as soon as it opened. The line was already long. The proper procedure was not easily understood. The ticket number dispenser was empty. And a gruff, Hispanic security guard was barking orders at arrivals.

After waiting in line for more than 90 minutes, we got to the counter and were told that, because we had a Canadian passport and were not resident in the United States, it would take a week to process the visa application. A week later, after we were told on the phone that our visa was ready, we returned to the cauldron (a very hot basement) and queued up again. Thirty minutes later, we were told that the visa was not yet ready. We had been told otherwise on the phone, we protested. Don't complain, the frowning lady said brusquely. Call again. As we were scheduled to leave for India in just two days, we resorted to methods we normally employ only when desperate. We called an Indian friend of ours who works at an international organization in Washington, DC, and who has contacts at the embassy there. He got on the phone, called someone and rang back to tell us that the visa would certainly be ready the next day. It was. Of course, we had to go through the same routine of lining up behind the same counter from which you lodged your application - all very...well...bureaucratic.

Because Globophobe also carries a permanent Hong Kong identity card, we are able to get an Indian visa on the same day at the consulate in Hong Kong. A few weeks ago, we went to the office to apply, having downloaded the application form online, filled it in, and prepared the requisite photocopies of our ID card and the letter of invitation from the organizers of the conference we were attending. We also had the necessary passport-size photos. Since we had been given a six-month multiple-entry business visa in our old passport, we applied for exactly the same permit and brought the exact fee in Hong Kong dollars. For once, we thought, the process would be quick and smooth. It wasn't. No, you cannot apply for this visa, we were told by another brusque bureaucratic lady (Is brusqueness a requirement for recruitment to the Indian civil service?). We showed her the previous visa we had received in New York. Why show this, she asked dismissively. Don't try to get a visa this way, she growled. We knew enough not to protest further, but made the point that we had to have at least a double-entry visa, as we would be entering India twice - once to transit to Germany and again to stay for a week. Okay, she grumbled. And so that afternoon, on returning to the consulate, we received a double-entry visa valid for just three months.

What an introduction to India! In a way, it is best that prospective visitors get a taste for what could lie ahead before they get a rude awakening inside the country itself. But India should take a page out of China's book and make the visa application process kinder and gentler. Okay, so the Chinese visa officers in Hong Kong may be businesslike, but they are not rude. In Hong Kong or elsewhere, if you are not a resident of the jurisdiction in which you are applying, the Chinese do not subject you to a week's wait. Duration-of-stay rules are standard, not applied haphazardly. And the process at Chinese consulates is far more efficient and orderly.

On top of our problems getting a visa, Globophobe has never had a good experience at India's airports. Our experience is limited to Delhi and Mumbai, we admit. But we are reasonably certain that conditions are similar at India's other ports of entry. Why do most international flights arrive and depart around the same time and at the most ungodly hours, usually very late at night or way early in the morning? This may have made sense in the days when flights between Asia and Europe had to make refueling stops in the dead of the night. But India as now a popular destination in it own right and the airlines as well as the Indian government should rearrange the schedules.

On arrival, the heavy flight traffic in the evening or early morning usually means long queues at the immigration counters and a long wait for baggage to emerge. At departure, the flight congestion results in long lines just to get into the terminal building and then to get your bags x-rayed and then to check in and then to go through immigration and then to go through the security check and then to board the aircraft.

Last year, when we were leaving Delhi, passengers fumed as they waited behind one x-ray machine at the terminal entrance. One other machine was not being used; the screening team manning it had gone on break but were just lying around, chatting. A couple of passengers managed to get them back to work by pointing at them and berating them for being idle. All the waiting would be bad enough - and there are many airports around the world that are more crowded (Heathrow in the early morning comes to mind), but it's much worse if you have to steam and stew in a facility such as Delhi's Indira Gandhi International Airport that is stuffy, cramped and lacking in services. It's standing room only in the business and first-class lounges! And be careful of the mosquitoes. They are everywhere in the terminal.

If you are willing to endure the arduous visa application process, the hassle of using the awful airports, and the high cost of hotels with patchy service standards, then you are obviously dedicated enough to really want to be in India and to experience India. For all our troubles, we have always found it worth it because we have so much yet to learn about this great country and the way of life of its people. Still, here is a fair warning: India had better attend to these bureaucratic bottlenecks, unnecessary irritants and grave infrastructure deficiencies quickly. Once it is no longer the alluring belle of the ball that it is today - and that time will surely come - these "small" hassles could turn into serious turn-offs for people who, for now, are willing to give India a big break and the benefit of many doubts.

Six-Party Talks: Who's Really on the Ropes?

So the threat of sanctions on North Korea has apparently brought Pyongyang back to the six-party talks so favored by the Bush administration as a way to get the DPRK to shut down its nuclear program. That's right, hit Kim Jong Il where it really hurts: cut off his supply of caviar and cognac. (Are platform shoes luxury items?)

Poor Chris Hill - able diplomat as he is, he's gone to Beijing without any clothes. On the first day of the meeting, he told reporters that he and the North Korean negotiator merely exchanged pleasantries; Kim Kye Gwan would not meet separately with Hill on the sidelines. Not yet. In Mr Kim's own time, Mr Hill. (The US refuses to hold head-to-head negotiations with the DPRK, preferring to meet 'casually', off to the side of the six-party talks, while the four other 'negotiators' - China, Japan, Russia and South Korea - twiddle their thumbs.)

Back home in Washington, Hill's former boss, Colin Powell, was telling it like he didn't when he was in office. The US is losing in Iraq and simply does not have the troops needed to "win", Powell said. America's power and influence diminished by Bush's folly in Iraq. Powell believes Washington should talk to the Iranians and the Syrians. Bush 41's consiglieri James Baker thinks so too. Does Bush 43 have any choice? No more "Axis of Evil"; it's now all about just getting access to those who really have influence in Iraq.

Surely Kim Jong Il was watching Powell on CBS's "Face the Nation" and must be thinking that eventually the US will have to agree to honest-to-goodness bilateral talks. The six-party show going on in Beijing is bound to yield only more posturing, more recalcitrance (from both Washington and Pyongyang), more nothing. And now that North Korea has gone nuclear, would Pyongyang ever agree to denuclearize? Can they even be trusted to do so?

America's got zero leverage. It relies on Beijing to muscle Pyongyang back to the negotiating table, but only offers the threat of sanctions that won't stick. What's needed is more crow on the White House menu. Forget the six-party dance. It's time for the US to say to North Korea: Let's just sit and talk one-on-one.

Between Promise and Pitfall: A Bumpy Road to the “Asian Century”

The financial crisis that hit East Asia in 1997-8 put a stop to talk of miracle “tiger” economies and the Asian Century. Nine years on, however, the argument that the global economic center of gravity is inexorably shifting to Asia has never been more compelling. China is growing by more than 10%, reshaping the global markets for everything from minerals to microchips; through its success in IT services, India has deftly changed its image from poverty-stricken basket case to dynamic democracy; and Japan, the world’s second biggest economy, has stirred from a lost decade of stagnation. In the global growth stakes, Asia seems on the way to winning a sweet trifecta. Declared Jiang Jianqing, chairman of the Industrial and Commercial Bank of China (ICBC), at a World Economic Forum conference in Tokyo in June: “The new century belongs to Asia.”

Statement of the obvious – or irrational hype before another fall? Perhaps both. Asia has for years been the fastest growing region in the world, and China and India, each with a billion-plus population, are setting the pace – and boosting growth in their neighbors. In 2005, developing Asian economies grew 7.4%, the highest rise since the financial crisis. Even in the face of competition from China, the world’s biggest destination for foreign direct investment, FDI in Southeast Asia rose to US$38 billion last year, US$4 billion more than the last peak in 1997.

While the US and Europe remain key drivers of global growth, “East and Southeast Asia, including India, are bound to increase their profile and relevance to the global economy,” Manmohan Singh, India’s prime minister and architect of his country’s economic reform program, said in an address to the Asian Development Bank (ADB) in Hyderabad in May. “Asia is once again on the move. Millions of people have been liberated from poverty, ignorance and disease.”

Yet the road to that ineluctable destiny will be full of the same bumps over which the resilient region has stumbled in the past, from political tremors such as the military crackdown that shook China in June 1989 to economic earthquakes such as the 1997-8 crisis. Consider the many shocks that have rocked Asia in just the past five years – the aftermath of 9-11; terrorist bombings in Indonesia, India, and elsewhere; the wars in the Gulf and Afghanistan; tensions in the Taiwan Strait, the Korean Peninsula and Kashmir; outbreaks of the SARS virus and avian flu; the tsunami and other natural disasters; and soaring energy prices. Each episode has highlighted a threat to the proposition that the 21st Century belongs to Asia. As Mr. Jiang warned in sober qualification of his initial exuberance, “at the same time we need to seriously tackle the many challenges we face today.”

The financial crisis, for example, underscored the importance of constant restructuring and governance reform to cope with the unrelenting pressures of globalization. For Asia’s two most populous countries, this is particularly important during what is a pivotal period of transformation. China is no longer simply a manufacturer of cheap goods; India is not just a low-cost IT services processor anymore.

According to the International Monetary Fund (IMF), between 2000 and 2005, China’s share of global services exports increased by half to 3%, while India’s rose from just above 1% to more than 2.5%. Says British marketing guru Sir Martin Sorrell, group chief executive of global communications and advertising group WPP: “We tend to think of China as a low-cost manufacturing economy. But it’s quality manufacturing at the price they deliver. China is clearly becoming more important as a service economy. India provides high-quality services at the price they deliver. And more and more, India is becoming a manufacturing-based economy.”

China cannot afford to cruise complacently on the low-cost advantage. It has to bridge widening income gaps, particularly between regions, and temper a red-hot economy. It must aim for sustainable growth with environmental responsibility. It needs to stimulate domestic consumption, build world-class companies, turn state-owned firms into competitive enterprises, and promote innovation.

One key priority is to reform a banking system that promotes irresponsible lending to favored but unproductive state enterprises. While foreign banks have been snapping up stakes in Chinese financial institutions and investors have made the IPOs of Chinese state banks – Bank of China, China Construction Bank, and ICBC – highly successful, the banking system remains highly inefficient and vulnerable to crises that would require government bailouts. “China is clearly at a peak, with data showing a modest deceleration from the growth surge in the first half of 2006,” says Manu Bhaskaran, CEO of Centennial Asia Advisors, the Singapore arm of Washington-based policy and strategic advisory firm Centennial Group. “If policy is not implemented well, there is a risk that this slight slowdown turns into something worse than intended and, combined with all the structural weaknesses in China – including overcapacity and bad loans – this could precipitate a really painful correction.”

For India to avoid its own hard landing, it has to address persistent bottlenecks including a serious infrastructure deficiency and an abundance of bureaucratic red tape. Despite its success in high-tech services, it must develop a broader manufacturing base to create jobs and lift millions out of poverty. India must do much more to empower women and educate girls. Its youthful demographics – 60% of its population is below the age of 25 – could prove a huge advantage or a major headache. “There is this demographic bubble with a lot of young people,” Nandan Nilekani, chief executive officer of Indian IT services group Infosys Technologies, explains. “If you educate them well and create jobs for them, then you have a lot more people working. If India does it right, you will have a lot of economic growth. If not, then you have a lot of unemployed young people which could lead to unrest and alienation.”

For every Asian country, restructuring success could mean the difference between promise and pitfall. In Japan, the previous government of Prime Minister Junichiro Koizumi struggled over five years in office to push reform policies forward in the face of recalcitrant vested interests and conservative political opposition. There is still much to do. A pressing challenge for the new administration of Prime Minister Shinzo Abe is to reduce Japan’s ballooning fiscal deficit, now over 5% of GDP.

With the economy on the rebound, many companies have backed away from commitments to improve transparency and accountability. “People’s mentalities haven’t changed that much,” explains Masao Hirano, Tokyo-based director of management consultants McKinsey & Company. “Many Japanese managers feel reform will destroy the Japanese business regime.” According to Heizo Takenaka, Koizumi’s Minister for Internal Affairs and Communications and for the Privatization of the Postal Services, the “old economy” – traditional sectors such as manufacturing and exports – is driving Japan’s current recovery. “Japan has changed enormously in the last five years, but did we change sufficiently? No, the world is changing very fast and proactive reform is in order. We have only begun.”

There are broader regional risks that could threaten Asia’s growth. “We see within countries and within the region the widening gap between the rich and the poor,” says Hassan Marican, president and chief executive officer of Malaysia’s national oil company Petronas. “This is a risk of instability.” According to the ADB, between 1990 and 2003, the number of Asians living on less than a dollar a day dropped from about 920 million to about 620 million. But about two thirds of the poor people in the world live in Asia’s developing countries.

In some economies, development indicators reveal worsening conditions. In the Philippines, for example, the literacy rate dropped from 97% to 94% between 1990 and 2004, according to the ADB. Meanwhile, the child immunization rate decreased by five percentage points to 80%. “In many countries, inequalities are exacerbated by public spending such as on tertiary education that supports better-off segments of society but does little to help the poor,” says ADB economist Ajay Tandon. Unless government policies change, warns Ifzal Ali, the bank’s chief economist, “the part of Asia that is shining will come crashing down sooner or later.”

There are of course serious security threats to stability in the region. The recent missile test by North Korea put the spotlight once again on the nuclear ambitions of the enigmatic regime of Kim Jong Il. In August, another pilgrimage by Japan’s Koizumi to the controversial Yasukuni Shrine in Tokyo to honor his country’s war dead once again stirred protests in China and Korea. Japan’s relations with its neighbors have soured over Koizumi’s shrine visits, longstanding territorial disputes, and differing interpretations of historical events. “We should make an effort to better understand each other’s history and customs,” says Yun Jong Yong, vice-chairman and chief executive officer of Korea’s Samsung Electronics. “If we hang on to the past we are only impeding each other’s progress.”

The key to resolving – or at least mitigating – the threats to Asian progress is deeper regional integration and cooperation. From pandemics to maritime piracy, from terrorism to energy security, Asia will have to overcome diversity and division to address a host of challenges and keep to the path of growth.

The region’s resilience has been proven. “Economically, there is global dislocation, a hike in petroleum prices and the dollar has weakened,” Rafidah Aziz, Malaysia’s trade minister, said at an Association of Southeast Asian Nations (ASEAN) meeting in Kuala Lumpur in August. “We have been in the doldrums. There have been so many uncertainties and internal problems for some countries. In spite of that, we [in Southeast Asia] were able to see positive growth in our FDI. That is a good sign.” Warned ASEAN Secretary-General Ong Keng Yong in remarks to the Associated Press that could well have applied to the rest of Asia: "If we want to be in the marathon, we cannot stop for too long and say ‘time out, we need to massage our feeble legs’. We've got to keep on pushing."

Globalization for Dummies

In the course of our work, Globophobe attends more than one conference a month. This year, we have been to meetings in Beijing, Cape Town, Davos, Hong Kong, Istanbul, Mumbai, New Delhi, New York, San Francisco, São Paulo, Sharm El Sheikh, Singapore, Tällberg, Tokyo, and Washington. While themes have varied, most of the events we attend deal with the pressures of globalization and related issues. For those desk-bound policy wonks out there - both globophobe and globophile - here's a summary of all those many hours of "interactive discussions", plenary sessions and workshops, in other words, all you need to know about sustainable development without having to log the air miles or, more importantly, create an embarrassing carbon emissions trail:

- EDUCATION: At some time during any globalization conference, somebody will get up and say "It's all about education" or "Innovation has got to be at the top of our agenda". Well, let me say this: It's all about education and innovation has got to be at the top of our agenda.

- INFRASTRUCTURE: The state of it is always poor and there's always a deficit or an appalling lack of it. We need to invest more in building bridges, ports, airports, railways and roads. And don't forget the "social infrastructure" - the schools (see above), the hospitals, and the access to them. Worried about all the planes, trains and automobiles that will be using these spanking new facilities? See below.

- FINANCING: We need to improve access to capital particularly for the private sector (Damn those capital-hogging state-owned enterprises!) and the small and medium-sized enterprises.

- GOOD GOVERNANCE: This is crucial in our governments, our companies, our civil society organizations. It's all about transparency and accountability. Good governance is like motherhood and apple pie in the sky.

- ENVIRONMENT: We have to adopt socially responsible environmental practices. While we have to ensure the world's energy security, we also must protect the environment. Globophobe is doing its part. To make amends for flying all over the globe to attend conferences, we are offering this mother-of-all-summaries to save you the time and save us from global warming.

- LEADERSHIP: This is the one thing that is needed above all else. Without leadership, none of the above can happen. We need leadership today more than ever. In a world of platitudes, what we require is action. This is no time for milk-toast management. It doesn't matter what your policies are so long as they are implemented with conviction, clarity and a good spin.

So now that you know all that you need to know about solving the world's development problems, get out there and be sustainable. Lead!

Japan: Recovery and Renewal

After its lost decade of stagnation, Japan faces two immediate priorities: how to sustain its economic recovery and how to resolve simmering disputes with its neighbours Korea and China. Essential to addressing these challenges are reform and leadership. Economic rebound should not be mistaken for renewal. Japan has to continue to pursue a raft of structural reforms, including initiatives to reduce its huge fiscal deficit. This will require innovative solutions such as more open immigration and the employment of the elderly beyond traditional retirement age. Implementing such policies will require a break with tradition, a change of mindset, and strong political leadership.


“For a long time, we placed priority on equality of results. Maybe we should shift to equality of opportunity.”

- Sadakazu Tanigaki, Minister of Finance of Japan

“When everyone said the Japanese economy was bad three or four years ago, I wasn't that pessimistic, but now, when people say the economy is getting better, I don't really feel optimistic… What we face now is whether [Prime Minister Junichiro] Koizumi’s successor really can take over his reforms.”

- Heizo Takenaka, Minister for Internal Affairs and Communications and for Privatization of the Postal Services of Japan

“Competition is happening in Japan.”

“The Japanese government does not wish to meddle into the affairs of the private sector, particularly in the age of the Internet.”

- Nobuyuki Idei, Chief Corporate Adviser, Sony Corporation, Japan



After a decade of debate over whether stagnating Japan was heading for recovery or relapse, the conclusion is clear: the second biggest economy in the world is back. Participants at the World Economic Forum on East Asia in Tokyo in June heard tales of a more dynamic Japan – a country with a high level of energy efficiency and environmental consciousness, deep penetration of broadband services, and a growing entrepreneurial spirit despite government constraints and cultural impediments. They also heard of a more assertive, outward-looking Japan, a nation more engaged in global affairs, as demonstrated by its military contingent in Iraq, but also locked in tense disputes with neighbours.

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

During Japan’s lost decade, global conditions changed dramatically – China emerged as a formidable global manufacturing platform thanks in part to Japanese investment, India became a force in business process outsourcing and the IT services sector, and Korea rebounded from the Asian financial crisis to turn into one of the most tech-savvy economies in the region. As for Japan, some important economic and political reforms have gone through, but the restructuring agenda remains long. “Japan has changed enormously in the last five years, but did we change sufficiently?” asked Heizo Takenaka, Minister for Internal Affairs and Communications and for the Privatization of the Postal Services of Japan. “No. The world is changing very fast and proactive reform is in order. We have only begun.”

Economic rebound should not be mistaken for renewal. “The old economy is leading the current recovery,” Takenaka pointed out. Meanwhile, the “New Japan” is struggling to emerge. There have been notable successes. According to Nobuyuki Idei, Chief Corporate Adviser, Sony Corporation, Japan, the spread of broadband at low cost to users and the proliferation of 3G mobile technology are the result of cooperation between the private sector and the bureaucracy which together agreed that competition should be allowed to drive growth in the IT sector. Moreover, the banking system was overhauled, with non-performing loans sharply reduced. The unwinding of cross-shareholdings has meant that companies are turning more and more to the capital markets for financing, spurring entrepreneurship. “We’re about to go through a core transformation,” declared meeting Co-Chair Junichi Ujiie, Chairman, Nomura Holdings, Japan.

Not everybody is convinced that the creative destruction that structural reforms can unleash is good for Japan. “People’s mentalities haven’t changed that much,” said Masao Hirano, Director, McKinsey & Company, Japan. “Many Japanese managers feel reform will destroy the Japanese business regime.” Some companies have slowed efforts to increase transparency standards and accountability. But the recalcitrant appear to be a dying breed.

The enormity of the challenges posed by Japan’s ageing demographics should be enough to convince all but the most diehard of the need for strong action and new, possibly radical approaches. For example, tackling Japan’s huge fiscal deficit, with debt equivalent to about 170% of GDP, is essential to paying the costs of the growing ranks of retirees. “From an economic perspective, the solution is that Japan must raise its productivity and, in particular, the productivity of capital, “ said Jesper Koll, Managing Director and Chief Economist, Merrill Lynch Japan Securities Co., Japan.

Two ways to increase productivity would be to allow in more immigrants and to harness the energy of the elderly. “One hundred years ago, we created wealth with manual labour, but that’s not how wealth gets created anymore,” meeting Co-Chair Henry A. McKinnell, Chairman and Chief Exeuctive Officer, Pfizer, USA; Vice-Chairman of the Foundation Board of the World Economic Forum, explained. “The assumption that an older society can’t create wealth is wrong. You just can’t have people being old and disabled; you need to have them in the workforce.”

But this would require a change in cultural norms. Some have half-jokingly called Japan the world’s only successful communist country. It is time that Japan shed that image and mindset. “For a long time, we placed priority on equality of results,” Sadakazu Tanigaki, Minister of Finance of Japan, remarked. “Maybe we should shift to equality of opportunity.”

The appointment of Shinzo Abe to replace Junichiro Koizumi suggests that the zeal for sustaining crucial reforms will continue. Abe will early on signal how Japan is likely to manage its relations with its closest neighbours and its growing role in world affairs. How Japan squares national dignity and economic resurgence with its global responsibilities and the need to build bridges with the rest of Asia will be its people’s biggest challenge ever. “We know what must be done,” Takenaka concluded. “The question is whether there is the leadership.”

East Asia: An Ever Closer Union?

East Asian integration has been mainly an informal “market-driven” process with weak institutions. The proliferation of global and regional risks requires a much more intensive approach, but it is unlikely that countries in the region would move towards a European Union-style model with more active institutions and shared political power. But for the preferred “bottom-up” integration to deepen, led by business and civil society, political leaders must resolve historical enmities that could hamper closer cooperation.


“We must look at the big picture and not let the baggage of history deter us.”

- Najib Tun Razak, Deputy Prime Minister of Malaysia

“We should make an effort to better understand each other’s history and customs to increase mutual understanding. If we hang on to the past, we are only impeding each other’s progress.”

- Yun Jong-Yong, Vice-Chairman and Chief Executive Officer, Samsung Electronics, Republic of Korea; Co-Chair of the World Economic Forum on East Asia


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

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

At the World Economic Forum on East Asia, participants challenged that traditional passivity. Could the region aspire to something more? To be sure, forging a common Asian or even East Asian identity would be as difficult if not more so than for other regions. Europe took decades to get where it is today. And even then, attempts to create a constitutional underpinning for the European Union have stalled, revealing how many young Europeans now value their national identities over a regional one.

Crises of course have a way of forcing mindsets to change. The financial meltdown of 1997-98, 9-11 and the terrorist attacks in Bali and elsewhere, the outbreaks of the SARS virus and avian flu, and cross-border problems such as the haze from forest fires in Indonesia and maritime piracy on the Straits of Malacca – all these challenges have highlighted the deficiencies of the region’s minimalist approach to integration. The emergence of China as a trading powerhouse and investment magnet has raised the stakes.

As these pressures of globalization and competition have mounted, Asians have begun to question old notions. With global and regional risks multiplying, requiring global and regional solutions, the implication for East Asia’s integration is clear: the good-fences-good-neighbours model is unsustainable.

But the region is still trying to figure out how to turn the neighbourhood into a community. Overlapping regionalization options have proliferated in recent years, from ASEAN and its flexible formats to last year’s East Asian Summit that excluded the US. The ASEAN Free Trade Area (AFTA) is forging links with India, China and the rest of North Asia, while APEC is keeping alive its grand vision of free and open trade and investment among its 23 members, which together account for about half of global trade, by 2010 for developed economies and 2020 for developing ones. The number of bilateral free trade arrangements across the region has increased as the Doha Round of global trade talks have flagged.

That meeting participants identified the need to address the absence of regional institutions to discuss energy, security and environmental issues as a top priority for the region when APEC and ASEAN have long offered such forums indicates a lack of awareness. “We have not been effective in communicating the work we do,” Ong Keng Yong, Secretary-General, ASEAN, Jakarta, acknowledged. Added Tran Trong Toan, Executive Director, APEC Secretariat, Singapore: “We don’t shout out loudly about what we have.”

Yet the participants’ selection was also a telling rebuke of integration performance so far. When it comes to regional economic integration, said Hellmut Schutte, Dean, Asia Campus, INSEAD, Singapore, “we have to be honest: for 40 years, ASEAN hasn’t been very successful. We are seeing the end of ASEAN. The year 2020 will not be a target [for industrialization]. ASEAN will be buried beforehand.” An extreme view perhaps, but indicative of the frustration among some participants and the urgent need for more intensive communication among East Asian countries.

But EU-style integration cannot be forced, some panellists warned. The soft-institution approach with weak monetary integration would prevail, Indonesian Trade Minister Mari Pangestu predicted. Because of its “honest broker” role between the major economies of North Asia and India, “ASEAN will be in the driver’s seat.” East Asia, Pangestu reckoned, would continue to pursue “market-driven” integration, what Sadako Ogata, President, Japan International Cooperation Agency, Japan, called the “bottom-up” approach. Business, civil society, and other “non-state actors” will push regionalization forward through the multitude of cross-border commercial and cultural connections and exchanges that take place every day. Indeed, for Asia’s growing number of globally integrated enterprises such as Samsung, borders are already meaningless.

There is still a role for governments in pushing integration forward, said Najib Tun Razak, Deputy Prime Minister of Malaysia. Common challenges such as maritime piracy and migration require cooperation. Migration, for example, will have to be part of the solution to the problem of ageing demographics in Japan. “We must look at the big picture and not let the baggage of history deter us,” Najib concluded.

Yet heightened tensions between Japan and its neighbours Korea and Japan, as well as concerns about potential conflict on the Korean Peninsula and across the Taiwan Strait, could easily derail the East Asian integration train. “We should make an effort to better understand each other’s history and customs to increase mutual understanding,” said Yun Jong-Yong, Vice-Chairman and Chief Executive Officer, Samsung Electronics, Republic of Korea, and a Co-Chair of the World Economic Forum on East Asia. “If we hang on to the past, we are only impeding each other’s progress.”

China's Transformation

China’s chief economic challenge for the next decade is clear: how to shift from an export-led growth model to one driven by consumption and innovation, while maintaining social stability and avoiding a hard landing. When an economy as big as China’s – now the fourth largest in the world – is growing at a 10%-plus clip, that task is the macroeconomic equivalent of getting a charging elephant to turn the right corner without crashing or slipping. But make the turn the giant must. Heavy fixed-asset investment has led to overcapacity in many industries, while China’s high savings rate of over 40% of GDP is unsustainable, particularly as the population ages. Meanwhile, in 2004, pollution was estimated to have resulted in economic losses equivalent to 3.05% of GDP. “We cannot continue with the traditional development approach and growth pattern,” concluded Zeng Peiyan, Vice-Premier of the People’s Republic of China, in a special address to open the World Economic Forum’s China Business Summit 2006. “We have to transform our approach.

The key to that transformation was obvious from the Summit theme: Sustainable Growth Through Innovation – China’s Creative Imperative. Among the buzzwords of development discourse, “sustainability”, “innovation” and “creativity” are practically regarded as off-the-shelf ingredients for a magic potion to combat the pressures of globalization. But China’s current five-year plan offers a real recipe for action that can hardly be dismissed as glib: stimulate domestic demand, shift investment away from industries with too much capacity such as automobiles and steel, and shore up the financial system so that it can better absorb the savings of Chinese and mobilize more capital to productive investments. As for innovation, the plan commits China to increasing R&D spending from the current 1.2% of GDP to 2.4%, just above the OECD average. “Only by constructing new ways of development can China enhance overall growth,” said Summit Co-Chair Chen Yuan, Governor of the China Development Bank.

But there are obstacles and risks. “To keep growing quickly, China needs to improve its institutions,” warned David Dollar, Country Director, China and Mongolia, World Bank, Beijing. For example, a basic impediment to implementing much of the transformation plan is the lack of safety nets for unemployment, healthcare and retirement. Without them, Chinese will continue to save at prodigious rates, instead of channeling funds to more productive purposes. The absence of social security also limits entrepreneurship and the willingness of investors to take risks. “Savings are high because there is insecurity,” said Pierre E. Cohade, President, Asia Pacific Region, Goodyear Tire Management Company (Shanghai).

The weak rule of law is another hindrance. Take intellectual property rights. Enforcement of IPR protection, while improving, remains patchy due to feeble commitment at the local level and the lack of a sufficiently independent legal system. This is not just a problem for foreign investors. In fact, about 90% of IPR infringements involve domestic firms. “The general issue is the extraordinary degree of decentralization in China,” Dollar explained.

This problem also undermines efforts to boost China’s energy efficiency, secure its energy needs, and improve environmental protection. “Energy and the environment are two sides of the same coin,” said Pan Yue, Vice-Minister of China’s State Environmental Protection Administration. “Local governments want to focus on increasing GDP and, in doing so, favour vested local interests such as factories that may also be polluters.” Pan called for an honest evaluation of the state of China’s environment and urged local governments to adopt sustainable practices. “Not all central government policies are fully implement in the localities,” noted Zhang Xiaoqiang, Vice-Chairman of China’s National Development Reform Commission. “We need to improve the quality of our civil servants and the whole administrative mechanism has to deal in a balanced way with short- and long-term issues, all of which have to be coordinated on a national basis.”

The onus for action must also fall on enterprises. “Many companies in China have focused on the short term such as on increasing revenues from sales and marketing,” said Zhang Weiying, Vice-Dean, Guanghua School of Management, Peking University. Instead of focusing on racking up double-digit sales, enterprises have to put more effort and investment into R&D and generating sustainable profits, Zhang advised. Said Chen Tonghai, Chairman of China Petroleum & Chemical Corporation (Sinopec), which leads Chinese enterprises in annual patent applications: “In our industry, we not only have to look for new types of energy but to develop environmentally friendly products. We have to constantly conduct systematic innovation or else we will be eliminated by the competition.”

The obstacles and risks that could block China’s economic transformation offer the very commercial opportunities that could drive new, sustainable growth. Japan and the US could supply China with the technology to enhance energy efficiency. The lack of social safety nets represents a “humongous opportunity not just for improving the quality of life in China but for unleashing all these savings,” said Cohade. He predicted that “empty nesters”, parents born during the years of the Cultural Revolution whose single child has already grown up and left home, would be “the engine of consumption” in coming years. “Understanding the empty nesters is going to be critical” for retailers and financial services providers.

Indeed, the maturation of China’s economy will surely speed up its transformation – naturally. The services sector already contributes 40% of GDP, Hellmut Schutte, Dean, Asia Campus, INSEAD, Singapore, remarked. “As manufacturing productivity growth comes in, more people will be laid off with many of them starting their own little shop along the street,” he explained. “It’s pretty obvious that as China’s economy grows, consumption patterns will change, with very high growth in the leisure industries, healthcare and education.” The elephant is making the turn, but will it keep its balance?

"China Has Globalized"

In 30 years, China has transformed itself from command economy inhospitable to overseas investors to emerging free-enterprise market that attracts the biggest share of global foreign direct investment. China is a key driver of globalization and one of its major beneficiaries. The world’s third biggest trader and the fourth largest economy, China combines geographic and demographic heft with purchasing power and manufacturing prowess. “China has globalized,” Winfried Vahland, President and Chief Executive Officer, Volkswagen Group China, told participants at the World Economic Forum’s China Business Summit 2006. “China is one of the fastest-growing economies and one of the engines of the global economy.”

Even so, China is still a developing country. China’s per capita GDP is above the Philippines’ but below Thailand’s. It is just 48th on the World Economic Forum’s competitiveness ranking. According to the World Bank, over the past two decades, China accounted for over 75% of the poverty reduction achieved in developing economies. Yet today more than 135 million people, mainly in China’s Western and interior regions, scrape by on less than a dollar a day, without the benefits of clean water, adequate healthcare and education.

Armed with increasing economic clout, China has become a leading player in the international community, both through roles it has sought such as its membership in the World Trade Organization (WTO) and those that have been thrust upon it. Beijing has emerged as something of a spokesman and role model for developing economies, its non-judgmental foreign policy serving as a counterweight to the ideology-laden line of Western developed countries, particularly the United States.

The recent agreement to increase China’s voting power in the International Monetary Fund (IMF), albeit by only a small percentage, is an acknowledgement of its rising profile – and mounting responsibilities. China’s participation in the six-party talks on North Korea’s nuclear programme has been pivotal. And as a permanent member of the UN Security Council, Beijing is playing a key behind-the-scenes part in the selection of the next UN Secretary-General, who is expected to be an Asian. “Anything that happens in China will have a global impact so we have to be globally responsible,” said Wang Jianmao, Professor of Economics and Associate Dean, China Europe International Business School (CEIBS).

Chinese diplomacy, however, has largely been driven by pragmatic economic motives, particularly the need to meet its burgeoning energy, raw materials and components requirements. China has been an enthusiastic driver of integration with Southeast Asia. It has also forged strong commercial links with resource-rich countries in Central Asia, Latin America, the Middle East and Africa, as well as Australia. Energy imports rose by 55% in the first four months of this year to US$ 21.3 billion. Meanwhile, China’s exports have increased to all-time highs, pushing its trade surplus to monthly records – US$ 18.8 billion in August 2006. This has inundated China’s economy with cash, boosting its foreign exchange reserves to nearly US$ 1 trillion.

Chinese enterprises, particularly industrial groups, have accompanied the country’s diplomats to far-flung countries from Venezuela to Sudan, as well as to developed markets in Europe and North America. While some companies, notably the state energy groups, have gone global for strategic reasons, many others are seeking to hone their competitiveness and, facing thinning margins at home, generate new business. “The reason for going global is simple: to create new opportunities to make profits today and in the future,” said Wang Jianzhou, Chief Executive, China Mobile Communications Corporation. Added Yang Yuanqing, Chairman of the Board of Lenovo Group, which went global through its acquisition of IBM’s personal computing division: “Internationalization is not an end in itself; it is a means to help you grow and develop.”

China’s value-neutral foreign policy, its rapid economic ascendancy and the adventures of its zealous enterprises have at times put Chinese ambitions at odds with the global establishment, particularly the US. Beijing has clashed with Washington over how to deal with Sudan and the conflict in Darfur, Iran and its nuclear programme, and Myanmar and its reluctance to adopt political reforms. The bid by a Chinese state firm to take over the American petroleum group Unocal alarmed many US politicians. And of course, China’s trade surplus with the US has fueled accusations that China manipulates its currency and led to enormous pressure on Beijing to move to a more flexible currency regime faster than it is willing to allow.

The frequency of such friction is likely to increase. For now, China has played the unassuming new kid on the block with benign intentions. At the same time, it basks in the acclaim of those who see its market as a glowing opportunity no sensible investor can resist. After all, China will be hosting an Olympic Games, what for the previous Asian hosts – South Korea and Japan – was something of a global coming-out party. China’s attempts to set its own industry and technology standards have raised concerns among some trading partners and investors. “Our policy of reform and opening up to the world means we embrace globalization,” said Wu Jianmin, President of the China Foreign Affairs University. “The most important feature of China’s rise is to share the growth with the rest of the world.”

The awkward vacillating between humility and what critics may perceive as hubris suggests that China is still feeling its way in a world where it has a leading part and may be counted on for solutions. The role China plays in the WTO in the aftermath of the collapse of the Doha Round will be an immediate indicator of its willingness to shoulder new responsibilities. Beijing could be instrumental in reviving the talks. China’s trading partners, meanwhile, will be assessing how well Beijing implements its WTO commitments, including the opening of the banking sector next year.

China’s grace, diplomatic skill, sense of responsibility and capacity to lead will be tested further. How it shapes its relations with Africa and its poor Asian neighbours could be especially telling. Some in the aid community worry that the generous, no-strings and lecture-free financing offered by the Chinese government and enterprises to support contracts to build infrastructure might induce countries to relax their commitment to governance reform. The question is: Would China the responsible stakeholder insist on transparency?

Turkey and Europe Need Each Other

“Our people want to see Turkey as a free and prosperous partner of the free world. This is what Turkey deserves. But sometimes some wrong and unjust views from the EU have had an impact on public opinion. The EU must understand this.”

Recep Tayyip Erdogan, Prime Minister of Turkey

“There are mutual benefits to being together. We share global challenges. There are many global risks around us. The EU needs Turkey as much as Turkey needs the EU.”

Ferit F. Sahenk, Chairman, Dogus Holding, Turkey

"Some reforms have not advanced as quickly as we hoped. If the questions linked to Cyprus are not solved, this will affect the overall negotiations."

Joaquín Almunia, Commissioner, Economic and Monetary Affairs, European Commission, Brussels

“Turkey is going through an incredible economic, political and social transformation. What is most important is that Turkey has been the owner of this transformation. Ownership has been the key to success."

Ali Babacan, Minister of the Economy of Turkey; Chief Negotiator for the European Union; World Economic Forum Young Global Leader


Turkey’s application to join the European Union (EU) has become the concern of the day, hovering above all others on the nation’s agenda. It is linked to practically every challenge confronting Turkey today including its global competitiveness, the rule of law, freedom of expression, the labour market, and even religion. Yet EU membership is not the over-arching question. What is really at issue is the globalization of Turkey and how it addresses the many pressures and risks it faces at home, in the neighbourhoods to which it belongs, and in the world. “In terms of globalization, the EU is the major part of the economic programme and development of Turkey, but the rest of the world is also very important,” said meeting Co-Chair Peter D. Sutherland, Chairman, Goldman Sachs International, United Kingdom; Member of the Foundation Board of the World Economic Forum.

The significant geopolitical and strategic roles Turkey plays in the world, as well as its position as a bridge between civilizations, cannot be minimized. Nor should its growing potential as a major energy corridor, a big consumer market, a large source of skilled labour, and a financial services hub be dismissed. “There are mutual benefits to being together,” said Ferit F. Sahenk, Chairman, Dogus Holding, Turkey. “ We share global challenges. There are many global risks around us. The EU needs Turkey as much as Turkey needs the EU.”

Yet the overwhelming logic of a partnership is typically lost amid the debate over differences or potential sources of friction. Turkey’s accession has divided governments and public opinion in Europe, with those against membership worried that it will lead to a surge in migration and then to job losses in their countries. Others dwell on Turkey’s roots in the East and the fact that it is a predominantly Muslim country. Can such a place fit into the European club?

Still others focus on Turkey’s turbulent past and the remains of those days – the role of the military, the controls on the press and freedom of expression, doubts about the rule of law, and corruption. Cyprus, of course, is still a highly emotional issue that raises nationalist sentiment in Turkey, even more so now that the Greek-controlled part of the divided island was admitted to the EU in 2004 after the Turkish side approved a UN-brokered solution which the Greek side rejected. "Some reforms have not advanced as quickly as we hoped,” said Joaquín Almunia, Commissioner, Economic and Monetary Affairs, European Commission, Brussels. He added: "If the questions linked to Cyprus are not solved, this will affect the overall negotiations."

Participants at the World Economic Forum in Turkey were in the main among the believers so discussion focused more on how to convince an increasingly skeptical Turks – once wildly enthusiastic about membership – and suspicious Europeans that Turkey’s joining the EU would be in their interest. The mood of both publics is fluctuating. The move by the EU to freeze part of the membership talks over Turkish restrictions on the access of ships and planes from Cyprus to its ports and airports will inevitably deepen Turkish disappointment and encourage opponents of accession. Pope Benedict XVI’s surprise gift of support for membership on his arrival in Ankara in November boosted Turkish spirits.

The challenge for Turkey is keep its eye on the prize and resist walking away from the talks in a nationalist pique. Turkish leaders should resist stoking such sentiment, even though it may be natural to do so in the run-up to elections. The Turkish people should understand that EU accession will take time and require further economic, political and social reforms, though they have already paid a price in accepting the structural changes that have been implemented so far. To be sure, they should appreciate their considerable achievements. “Turkey is going through an incredible economic, political and social transformation,” said Ali Babacan, Minister of the Economy of Turkey; Chief Negotiator for the European Union; World Economic Forum Young Global Leader. "What is most important is that Turkey has been the owner of this transformation. Ownership has been the key to success." Added Victor Halberstadt, Professor of Public Economics, Leiden University, Netherlands, who was also a meeting Co-Chair: “My impression is that all this is irreversible.”

For all its pains, Turkey is sending a strong signal to Europe and others that democracy, secularism, Islam and economic growth can co-exist, Babacan explained. These are positive factors that Turkey brings to the negotiating table. Turkey, after all, can help Europe address its demographic deficits, provide deeper links to a large market and low-cost labour pool that is already in a customs union with the EU, and offer a bridge between civilizations. Said Babacan: "Turkey has a young and growing population. Until recently, this was perceived as a problem, a burden that Turkey would bring to the EU. But it is in fact an asset that can help the population deficit of the EU and the economic growth of Turkey."

For their part, the Europeans should update their perceptions of Turkey and focus not on the risks but on the opportunities that Turkey clearly offers in helping Europe mitigate a range of risks. And as much as Turkey should do so, they too must recognize that accession negotiations usually take years and that Turkey has implemented many reforms that will take time to implement in full. “This is a change of mentality,” Recep Tayyip Erdogan, Prime Minister of Turkey, explained. “Our people want to see Turkey as a free and prosperous partner of the free world. This is what Turkey deserves. But sometimes some wrong and unjust views from the EU have had an impact on public opinion. The EU must understand this.”

The EU should resist imposing double standards or new requirements on Turkish membership. It has not been unfair, EU leaders at the meeting insisted. Valdas Adamkus, President of Lithuania, called allegations of double standards "nothing but false illusions." No prospective member has waltzed to Brussels without their share of stumbles. “We are not dealing with easy issues,” said Sutherland. “It’s a long road with bumps and difficult turns. It requires patience and understanding of the difficulties.” Many Europeans have feel threatened by Turkey’s knock on the door, he acknowledged. Some who had been among the most open-minded have suddenly become the most intolerant. Obviously, Europe too is changing, Halberstadt remarked.

Perhaps then the greatest mutual benefit of Turkey’s EU accession will be the bridging of East and West that would have been impossible to contemplate only a few years ago and, in the shadow of 9-11 and the bombings in Madrid and London, might still seem improbable even wrong to many. But it is precisely the evil motives of the perpetrators of those tragic attacks that drive the logic of a Turkey-EU embrace. "The alliance of civilizations is the antidote to the clash of civilizations," Sutherland concluded. "Neither Europe nor Turkey will see this as a dialogue of constant remonstration but it should be a dialogue of constant reconciliation."

Turkey Steps Up

“We are here at a moment when the region is more and more characterized by instability but Turkey is characterized more and more by stability.”

Klaus Schwab, Founder and Executive Chairman of the World Economic Forum

“We need a stable Turkey to help Europe tackle today’s challenges and risks. It is the responsibility of the EU to cooperate with Turkey and to support Turkish reforms. The process needs to be finished with success.”

Joaquín Almunia, Commissioner, Economic and Monetary Affairs, European Commission, Brussels

“Turkey has all the ingredients to become a global force, politically and economically.”

Ali Y. Koç, President, Koç Information Technology Group, Koç Holding, Turkey

“Turkey’s significance does not stem from its role as an energy supplier.”

Gareth Evans, President, International Crisis Group, Belgium

“Perceptions in Europe lag ten years behind reality. Europe was uninterested in Turkey in the early 1990s and gave no thought to its role in the energy sector. Now energy is the hot issue.”

Huge Pope, author and journalist, Turkey

Glance at a world map and Turkey’s unique geopolitical position is obvious. Literally at the strategic crossroads where West collides with East, this stable, secular, moderate Muslim democracy straddles Europe and Asia. A staunch member of the North Atlantic Treaty Organization (NATO), the bulwark of Western European security during the Cold War, Turkey is in the midst of applying for membership in the European Union (EU), the most ambitious regional integration project in the world that began with Western Europe and has since absorbed countries in Central and Eastern Europe. Yet with its cultural and linguistic links that stretch to Central Asia and even as far as North Asia and the Islamic faith which it shares with neighbours in the Middle East and North Africa, Turkey is firmly rooted among the civilizations of the East.

Despite its record of three military coups, Turkey has chosen the path of stability and democracy, uneasy as it may be. The decision to aim for EU accession and launch into the tough negotiations required for membership underscored Turkish commitment to modernization and reform. When an Islamist government was elected in 2003, fears that Turkey’s secular foundation might crack proved unfounded. While its neighbourhood “is more and more characterized by instability, Turkey is characterized more and more by stability,” noted Klaus Schwab, Founder and Executive Chairman of the World Economic Forum.

Indeed, Turkey is all the more remarkable because it belongs to two distinct and exclusive groups. It is one of the few moderate Islamic countries in the world – Indonesia and Malaysia are two other examples – that have embraced democratic politics and pursued free market policies to promote growth. And while Turkey is only a mid-sized country with a population (73 million) smaller than Germany’s but larger than France’s, its 8%-plus economic growth is brisk enough to inspire some investors to bracket it with that fascinating club of dynamic emerging markets known as the BRICs – Brazil, Russia, India and China.

And while economic growth and prosperity and its pursuit of reform will further strengthen its political and social stability, it will also enhance its power and influence, whether or not it eventually joins the EU. “Turkey is not a supplicant,” said meeting Co-Chair Peter D. Sutherland, Chairman, Goldman Sachs International, United Kingdom, and Member of the Foundation Board of the World Economic Forum. “It is a major player in the world in which we live.” Consider the recent conflict in Lebanon and the decision by the Turks to join peacekeeping operations there. Turkey’s military, still a powerful institution, is the largest armed force in Europe.

Turkey has clashed with the US over the Turkish parliament’s refusal to let the country be used by American forces as a staging ground for the Iraq war. Ties with Israel have been strained over the Palestinian issue and the Lebanon conflict. Despite these disputes, Turkey has maintained its close strategic relationship with both countries. Clearly, Turkey is more forcefully asserting its interests in its foreign policy and deepening its engagement in the region as a defender of peace and stability. “Turkey has all the ingredients to become a global force, politically and economically,” said Ali Y. Koç, President, Koç Information Technology Group, Koç Holding, Turkey.

Yet outsiders particularly in Europe have not appreciated how Turkey and its geopolitical have evolved. “Perceptions in Europe lag ten years behind reality,” said Huge Pope, former Wall Street Journal reporter and a leading Turkey analyst. “Europe was uninterested in Turkey in the early 1990s and gave no thought to its role in the energy sector. Now energy is the hot issue.” Indeed, Turkey is emerging as an important nexus for oil and gas pipelines from Russia’s Caspian region, Central Asia, the Middle East and North Africa to Europe. The Baku-Tbilisi-Ceyhan (BTC) oil pipeline running from Azerbaijan to Turkey’s southeaster coast via Georgia, which was launched this year, is the second longest such conduit in the world. While in its initial stage the pipeline will supply only 1% of global demand, it is an important step in the diversification of the sources of petroleum and will make a critical contribution to global energy security. By aligning its energy policies with Europe’s, Turkey could reap enormous strategic and financial benefits from its energy initiatives.

Yet in Europe, Turkey’s potential as an energy artery is still a matter of debate. “There is a tacit belief that energy is not a card Turkey brings to the table,” said Sinan Ülgen, Chairman, Centre for Economic and Foreign Policy Studies (EDAM), Turkey. Of course, it is important not to exaggerate the contribution Turkey could make to Europe’s energy security. “Turkey’s significance does not stem from its role as an energy supplier,” Gareth Evans, President, International Crisis Group, Belgium, pointed out. To be sure, the reality is that Turkey is already an integral part of the global campaign against terrorism and a voice against militant Islamic extremism. It demonstrates every day how Islam and secularism can co-exist in the context of economic growth and increasing prosperity.

Turkey’s stability, however, cannot be taken for granted. Guardians of secularism, notably the military, remain fearful of religious agendas. The economy was rocked by a financial crisis only five years ago, leading to a major plunge in the value of the currency. The lira was hit again earlier this year, dropping 29%. Interest rates rose nearly seven points. Turks head to the polls in 2007. Another smooth election will surely solidify further its democracy. But EU membership is now a more divisive issue since support for accession among Turks has fallen sharply. And anti-Europe, anti-US and anti-Israel sentiment has risen.

For this reason, it is crucial that Europe and the US recognize Turkey’s considerable geopolitical value and provide it with the appropriate financial, strategic and moral support the country needs to continue necessary political and economic reforms and realize its ambitions including EU accession. Concluded Joaquín Almunia, Commissioner, Economic and Monetary Affairs, European Commission, Brussels, in remarks that apply as much to the rest of the world as they do to Europe: “We need a stable Turkey to help Europe tackle today’s challenges and risks. It is the responsibility of the EU to cooperate with Turkey and to support Turkish reforms. The process needs to be finished with success.”

India’s Growth Challenge

“Many years ago people used to doubt whether we knew how to grow fast. Now the question is can we make growth inclusive.”

Montek S. Ahluwalia, Deputy Chairman, Planning Commission, India

“The demand for people is just going through the roof. Many industries are simply competing for the same pool of labour.”

Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India; Co-Chair, India Economic Summit 2006

“If you want to develop the agricultural sector, one of the preconditions is a proper supply chain. It is still very difficult to move food and vegetables from one state to another. There should be a focus on the supply chain to secure future growth.”

Hans-Joachim Körber, Chairman and Chief Executive Officer, Metro, Germany


India’s economy grew by 9.2% in the third quarter of 2006, the sixth time in the past seven quarters in which GDP growth has surpassed 8%. The economy is clearly climbing to a higher altitude. “Our overall macroeconomic position is very strong,” said Montek S. Ahluwalia, Deputy Chairman of India’s Planning Commission. “The external position is very strong; Indian business has gained a lot of self-confidence; and international perceptions of India are better than they were four years ago.” The good news has prompted Ahluwalia and his team to target 9% growth for the first three years of the next five-year plan to be launched in 2007 and then aim for 10% for the remaining time covered by the blueprint. Achievable goals – but is such growth sustainable?

The trouble is that as India manages its growth higher, the going will only get tougher. Constraints such as poor infrastructure, the underperformance of the agriculture sector, and the shortage of skills will make it more difficult to sustain the fast pace unless significant progress is made in resolving bottleneck problems. It will be even more difficult to ensure that growth is equitable, the top priority for India’s leaders. “Many years ago people used to doubt whether we knew how to grow fast,” Ahluwalia observed. “Now the question is can we make growth inclusive.”

It will take strong partnerships between the public and private sectors and better political and corporate governance to address the drags and disparities that could spoil India’s ambitions. “Industry will do what is necessary to achieve the targets we set provided we do what we can to provide them a decent level of infrastructure,” Ahluwalia reckoned. But the government alone cannot come up with the US$ 350 billion in investment needed over the next five years to construct or upgrade the airports, ports, bridges, roads, ports and other facilities it needs to support 10% growth. Public-private partnerships and significant private investment are essential.

Another critical factor is agriculture, which still employs 70% of the population. The sector has slowed down since the mid-1990s and is currently growing at just 2%. For the economy to achieve 10% growth, agriculture will have to grow by at least 4%. “The agriculture sector will be India’s powerhouse,” predicted Indian Member of Parliament Jyotiraditya Scindia, But for this to come true will require significant restructuring. The sector must diversify beyond traditional cereal production into more high-value businesses such as horticulture, floriculture and fisheries. But this will involve the production, distribution and marketing of perishable products. Rural supply chains today are highly inefficient. About 40% of Indian produce is wasted due to insufficient transport, storage and handling facilities. “If you want to develop the agricultural sector, one of the preconditions is a proper supply chain,” said Hans-Joachim Körber, Chairman and Chief Executive Officer, Metro, Germany. “It is still very difficult to move food and vegetables from one state to another. There should be a focus on the supply chain to secure future growth.”

A further constraint on growth is human resources. Pay increases in IT are running at a staggering 20%, indicating how tight the labour market is in India’s flagship services sector. Companies complain of inadequate talent among graduates and difficulties retaining personnel after spending money and resources on their training. If manufacturing and agriculture are to expand, if the retail sector is to modernize to cater to the expanding ranks of middle-class consumers and to the untapped rural market, if the infrastructure the nation badly needs is to be built, if the health and education facilities and programmes the country requires are to push ahead, and if the economy’s knowledge base is to widen, what India needs are workers with the skills to carry out this ambitious growth agenda. “The demand for people is just going through the roof,” said India Economic Summit 2006 Co-Chair Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India. “Many industries are simply competing for the same pool of labour.”

The onus is on the education sector, particularly India’s universities. “You can’t have rapid growth or inclusive growth unless the education system is providing enough expansion of the relative skills,” explained Ahluwalia. “As we move towards 9% or 10% growth, the constraint in terms of available skills will become marked in certain areas.” Added Sunil Kant Munjal, Chairman, Hero Corporate Service, India: “For India, innovation will be the key to moving forward. Our labour costs are already not that low when you compare them to some other nations. The supply of people is large, but what matters is our ability to train people. It’s not just formal education; it’s all manner of skills and vocational education.”

Again, the participation of the private sector will be vital. At the closing plenary, Indian Minister of Commerce and Industry Kamal Nath announced that the Cabinet is moving to introduce legislation to allow foreign educational institutions to set up in India. The twin aims: to boost the quality of education by opening the market to foreign competition, and to attract accomplished Indian educators at universities abroad to come home.

This landmark measure is the sort of bold decision that the government has to make to eliminate or at least reduce the obstacles to sustaining 10% growth and to ensure that the benefits of high growth are fairly shared. “There are many countries that use education as an excuse for an underperforming economy,” said Graham Mackay, Chief Executive, SABMiller, United Kingdom, who was also a Summit Co-Chair. “Most of the time the question is whether there is an enabling environment for growth. Is there a business-friendly enabling environment?” The key is good governance, Mackay argued.

Unfortunately, India’s record so far is patchy, he reckoned. India can do better. The battle to get the economy in shape to sustain 10% growth is inextricably linked to the drive to improve state and national competitiveness. While making workhorse sectors work better and more efficiently, India needs to find new sources of growth. This means making it easier for companies to access capital and encouraging capable enterprises to go global to hone their competitiveness. It means further reform of the financial services sector, including the deepening of the bond markets. It means modernizing the retail sector to trigger a consumer revolution with the participation of international players such as Wal-Mart and Metro in partnership with local firms. It means letting the private sector step forward and promoting a wide range of public-private partnerships. “The private entrepreneurial spirit that has come out of economic reforms is a genie that has been let out of the bottle and is impossible to put back in,” said Rajiv Kumar, Chief Executive and Director of the Indian Council for Research on International Economic Relations (ICRIER).

India, to be sure, is in “a new growth trajectory,” Kumar concluded. “While 10% growth is very possible, anyone who assumes that it is a given is being complacent.” In managing the growth of this large, sprawling economy of over a billion people, there is certainly no room for complacency.

India's Competitive Niche

“The great champions of globalization have started shirking it, but we in India trumpet globalization because we are getting globally competitive.”

Kamal Nath, Minister of Commerce and Industry, India

“Every consumer in the world wants a product at the lowest possible price and at the highest quality. We have a low-cost economy and a high-quality resource base so we will be able to produce quality goods at a low price. But we need to build that resource base further.”

Kapil Sibal, Minister of Science and Technology and Earth Sciences, India

“We need to revamp the higher education system.”

Hari S. Bhartia, Co-Chairman and Managing Director, Jubilant Organosys, India

“The important thing is that there is a huge volume of intelligence in the rural area – 70% of the intelligence is out there – so we are not really increasing our knowledge base.”

Jaggi Vasudev, Sadhguru and Founder, Isha Foundation, India

At the World Economic Forum's India Economic Summit 2006 in New Delhi, many participants called for India to repeat in other sectors the successes it has achieved in IT, pharmaceuticals and telecommunications. The message of this refrain: that India should find new drivers of growth, reform and open up its markets further, and find niches in which it can shine internationally. India’s global competitiveness – it is 43rd on the World Economic Forum’s latest ranking – compares well with those of the three other large, emerging economies with which it is often grouped: China (54th), Russia (62nd) and Brazil (66th). India’s rise has turned it into a globalization booster, said Indian Minister of Commerce and Industry Kamal Nath. “The great champions of globalization have started shirking it, but we in India trumpet globalization because we are getting globally competitive.”

Yet as it strives over the next five years to achieve and sustain 10% growth, the level where China is today, India will need to address serious competitive shortcomings, particularly in education and human resources, governance, and the rural economy. It will also need to exploit its competitive advantages, especially its youthful demographics – over half the population is under the age of 25 – and the value-for-money proposition that won it 85% of the global business process outsourcing (BPO) market or more than US$ 6 billion in revenues. “Every consumer in the world wants a product at the lowest possible price and at the highest quality,” said the Indian Minister of Science and Technology and Earth Sciences, Kapil Sibal. “We have a low-cost economy and a high-quality resource base so we will be able to produce quality goods at a low price. But we need to build that resource base further.”

It is a unique business plan, one that builds on India’s recent successes, particularly in IT services and pharmaceuticals. Indeed, India’s pharmaceutical firms are moving beyond generic production to innovative R&D in partnership with global companies to develop new drugs. The same is true in software development. In the BPO market, India is expanding its repertoire to include so-called knowledge process outsourcing (KPO), or the offshoring of high-end knowledge work in various fields including engineering, design, medicine, finance and law. And India is aiming to develop an effective innovation ecosystem. “Innovation is not buying up technology,” reckoned Sibal. “It may be quality, but it’s not affordable. We need to partner with industry to adapt technology and innovate to meet the needs of the common folk.”

It is all about competitiveness through increased efficiency. “What makes Indian firms more competitive is that they can absorb technology,” said Rajiv Kumar, Chief Executive and Director, Indian Council for Research on International Economic Relations (ICRIER). “We are increasingly a productivity-driven economy.”

Yet India’s competitiveness drive has long been stymied by its poor infrastructure and the lack of viable supply chains. Rural development and agriculture have suffered without adequate transport, storage and handling facilities. India’s supply chain, said Pankaj Chandra, Professor, Operations and Technology Management, Indian Institute of Management, is “fragmented, complex and lacks discipline.” Added Hans-Joachim Körber, Chairman and Chief Executive Officer, Metro, Germany: “If we get a proper supply chain, then the vision of India as the food factory of the world may be possible.”

That future for India’s agribusiness sector depends not just on the building of the physical infrastructure needed in rural areas, but also on other issues including the modernization of the retailing sector and distribution networks, and how effectively India can resolve the anomalies that characterize cross-state commerce, the software of supply chain management. These problems are also hampering growth in the manufacturing sector. A key problem: the variety of tariffs and fees levied on goods and transport entering states. It can take eight days for a truck to deliver goods from Kolkata to Mumbai, a distance of 2,500 kilometres. “The goal is to create a single Indian common market,” said India Economic Summit 2006 Co-Chair Nandan M. Nilekani, President, Chief Executive Officer and Managing Director, Infosys Technologies, India. “To create that single market requires government intervention if you are going to reform all of this. There are a lot of stakeholders with a claim on these taxes.”

There are doubts that this major stumbling block can be effectively addressed soon, given India’s federal structure and democratic political system. Montek S. Ahluwalia, Deputy Chairman of India’s Planning Commission, has described the country’s states as the principal shareholders in Indian development. “I wish we were China; we are a democracy,” said Kamal Nath. “Some things possible in China aren’t possible in India. States are looking for revenues, but we are inducing and counseling states to make them see the larger growth picture.” Some states have started rationalizing their tax systems, spurring others to act, Nath noted. “The new thing that is happening is the competitive atmosphere among the states.” States differ widely in income level, quality of infrastructure, and governance standards. Foreign investors are increasingly more discriminating in their choice of state to target.

Relying on the market to produce better governance may be the best approach democratic India can take. Indian companies are working around the problems. The automotive parts sector, for example, has managed to build up a 7% share of the global market, supplying components to BMW, DaimlerChrysler and other global carmakers. The key to such successes is largely a matter of skills and talent. All of India’s competitive ambitions depend on its ability to improve higher education standards and technical training. “We need to revamp the higher education system,” Hari S. Bhartia, Co-Chairman and Managing Director, Jubilant Organosys, India, said, noting the low number of Indian PhD students. ”We have no talent going through the postgraduate programme.” India’s low R&D spending relative to GDP is also hampering the development of its innovation ecosystem.

Other participants hailed India’s educational achievements so far, while acknowledging that there is enormous room for improvement. “We should really give some credit that the Indian education system has done something,” argued Mohamed A. Alabbar, Chairman, Emaar Properties, United Arab Emirates; Co-Chair of the India Economic Summit 2006. Said Jaggi Vasudev, Sadhguru and Founder, Isha Foundation, India: “The important thing is that there is a huge volume of intelligence in the rural area – 70% of the intelligence is out there – so we are not really increasing our knowledge base.”

That plea to focus on the poor and remote seemed to neatly summarize the two factors that will determine India’s future competitiveness: how well it can develop its human resources to meet its growth and equity goals as well as the demands of globalization, and how well it can tap the great potential of its rural economy. Concluded R. Seshasayee, Managing Director, Ashok Leyland, India, and President, Confederation of Indian Industry (CII): “You can’t attack the top end unless you nurture the bottom end.”