Asian Trends Monitoring Bulletin 8: The experts weigh in

The Asian Trends Monitoring Bulletin is a project sponsored by the Rockefeller Foundation, New York, the Centre for Strategic Futures, Singapore and the Lee Kuan Yew School of Public Policy, National University of Singapore. The Lee Kuan Yew School of Public Policy gratefully acknowledges the financial assistance of the Rockefeller Foundation and the Centre for Strategic Futures, Singapore.

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Production Manager, Production & Research Dissemination Chris Koh Editorial Trade & Investment Facilitation Darryl S.L Jarvis Johannes Loh Health Systems Phua Kai Hong Nicola Pocock Energy Security Benjamin K. Sovacool Anthony D’Agostino Contact details of the editorial team are available on the last page of this publication.

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CONTENTS Imagining Asia in 2020: Future Risks, Future Trends

1

Response from Rolf Tanner

3

Response from Kishore Mahbubani

7

Response from Hugo B채nziger

9

Response from Charles Adams

10

Response from Vishnu Juwono

12

Response from Ambassador Ong Keng Yong

14

Response from Jan Willem Blankert

16

Response from Pushkala Lakshmi Ratan

17

Response from Puvan J Selvanathan

19

Response from Secretary Jose Rene D. Almendras

20

Response from Lawrence Wong

21

Response from Jacques Jeugmans

23

response from Roberto Taboada

25

Response from Dr. Tikki Pang (Pangestu)

27

Editorial Team

29

AT A GLANCE

According to the World Bank Group rising food prices have driven 44 million people in developing countries into poverty since June 2010. While wheat prices have doubled between June 2010 and January 2011, the price of rice has increased at slower rates.

The last country in the region, Indonesia, that has yet to endorse the trans-boundary haze agreement in Southeast Asia, announced that it will ratify the haze agreement in 2011.

The agreement has been around since 2002.

In a speech on February 21st 2011, Indonesian President Susila Bambang Yudhoyono identified five factors that have hindered development at the national and regional level. Among others he named inefficient bureaucracy, broken commitments by investors and a flawed legal framework as major impediments.

The IMF has raised concerns over the financial oversight capacity by Cambodia’s central bank in its 2010 Country Report. Major deficits exist in the areas of human resources, crisis management and enforcement.

An electronic cross border trading system, the ASEAN Trading Link, will soon interconnect the stock exchanges of Malaysia, the Philippines, Singapore and Thailand. The system is expected to go live at the end of 2011.

On January 11th 2011, the Lao Stock Exchange opened for trading, initially listing two major companies. Officials expect the new exchange to generate strong interest from local private companies as well as foreign investors to raise capital.

Due to full implementation of the ASEAN FTA in January last year, Thailand has reported a surge in exports by 32.88 % to its four bordering countries – Malaysia, Cambodia, Laos and Burma.

Thailand and Cambodia agreed to a permanent ceasefire around the Preah Vihear temple. The deal was brokered by ASEAN officials and will include Indonesian military and civilian observers on both sides to monitor the disputed border areas.

Thai energy regulators are concerned that the recently introduced electricity bill waiver to households consuming less than 90 kWh/month could derail the country’s broader energy efficiency goals.

The World Bank has approved a US$1.8 million grant to support rural electrification in Laos using both grid and off-grid technologies. The Lao government has targeted achieving a 90% electrification rate by 2020.

More Singaporeans have been heading to Malaysia for medical treatment in the past 12 months. Reports showed a 60% increase in the number of Singaporean citizens and permanent residents crossing the border for services in 2010 compared with 2009. Since March 2010, Singaporeans can use their medical savings accounts (Medisave) in 12 hospitals in Malaysia operated by Health Management International Ltd and Parkway Holdings.

Jakarta has allocated Rp1.16 trillion (US$132 million) in the State Budget to manage risks associated with exploration of geothermal energy sites. State electric utility PT PLN plans to develop 10–20 MW sites in Maluku and East Nusa Tenggara.

The inaugural Asian Conference on Integrated Care was held on 25–26 February 2011 in Singapore. Participants from across Asia Pacific and Europe discussed the need to integrate patient care over the life course and reduce healthcare costs.

The Philippines’ Power Sector Assets and Liabilities Management Corp. (PSALM) anticipates US$7 billion of outstanding debt, even after the privatisation of all governmentowned power plants. This marks a substantial reduction in the US$16.5 billion of debt owed by the National Power Corporation in 2009.

Brunei’s MOH’s sports and social welfare cooperative (Koperasi BKSS) has revealed plans to invest in agriculture as part of its diversification strategy in 2011, in order to improve its financial standing and support the government’s efforts to raise Brunei’s self sufficiency in agriculture. Koperasi BKSS is a cooperative body made up of 1,406 officers and staff under the Ministry of Health from the four districts.

In a February speech, Thailand’s Energy Ministry permanent secretary predicted that smart grid adoption in the country would lead to ten billion baht in investment. Shifting to a smart grid would facilitate connection to community power projects utilising renewable energy sources.

Vietnam Prime Minister Nguyen Tan Dung approved a 15.28% electricity tariff increase, effective March 2011. The Ministry of Industry and Trade claims that higher electricity prices will help attract the US$40–US$50 billion in energy infrastructure investments needed in upcoming years.

Out of 22 major cities considered in the Asian Green City Index, Singapore topped the list. Jointly commissioned by the Economist Intelligence Unit and Siemens, results indicate that air pollution is the biggest challenge affecting Asian cities.

The Thai government has extended the diesel subsidy until April in a move that businesses criticise as politically-motivated.

Health experts in Thailand are calling for the Board of Investment (BoI) to scrap its plans to promote Thailand as a medical hub, due to fears that it could limit access to healthcare and lure specialists from the public health system. The BoI wants to encourage FDI in the health sector and allow tax exemptions for private hospitals. PM Abhisit Vejjajiva has put medical hub plans on hold pending more research.

Cambodia’s Prime Minister Hun Sen and Council of Ministers approved a draft subdecree prohibiting the advertisement of tobacco products via media, billboard and live events on 11 February 2011, in accordance with the WHO’s Framework Convention on Tobacco Control (FCTC), ratified by Cambodia in 2005. Businesses will be given a six-month grace period to pull their ads once the sub-decree is formally adopted.

Indonesia is the only country in ASEAN yet to ratify the FCTC.

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1 | OVERVIEW

Imagining Asia in 2020: Future Risks, Future Trends In 2010 we can look back on the past few decades and observe Asia’s remarkable transformation. Absolute rates of abject poverty have been dramatically reduced, malnourishment and acute privations have largely abated, primary health care and public health programmes have improved the quality of life and longevity, while access to public services, energy and telecommunications have grown enormously.

In 2020, however, will we be able to look back on the previous decade and proclaim similar stories of success? Is Asia’s growth unstoppable? More importantly, does the region face a series of emerging risks, trends and tensions that might threaten Asia’s success story or pose speed bumps that cause marginal communities to be adversely impacted, the resilience of poor communities compromised or the emerging political and social stability of Asian states to be reversed?

In this issue of the Asian Trends Monitoring (ATM) Bulletin we ask a series of prominent leaders in their field to reflect on these issues, possible emergent risks and their likely implications.

Their responses are sobering. As Figures 1, 2 and 3 highlight, respondents see a variety of risks and threats to the region emerging, proffering more dark clouds and reasons for concern that is perhaps often assumed of Asia’s future. Of particular note are concerns about rising economic and social inequalities and how these might manifest in domestic settings but also potentially spill across borders and act as catalysts of regional

instability. Equally, respondents ranked looming energy shortages, concerns about energy prices and increasing energy competition as an emergent risk that poses an urgent challenge to the region – but one where the solutions and mechanisms for diffusing these risks are not yet apparent.

Respondents also identified Asia’s economic success as itself generating a series of risks that could potentially threaten its continued growth and stability. As incomes rise and as the region’s agricultural sector moves increasingly from the production of food to cash crops (palm oil, for example), food security, domestic vulnerabilities to food shortages and increasing food prices will pose serious challenges to Asia’s poor – perhaps even generating social unrest. As Figure 4 highlights, food price increases are accelerating and, for the most part, outstripping wage increases, portending to a looming set of issues for policymakers in terms of calibrating land management use, agricultural production, trade in food and the affordability of food staples for Asia’s poor. Importantly, the severity of food Figure 2: Asia's exogenous risks Energy shortage / energy crisis

Food price rises and acute food shortages

Trade / currency war (US–China)

Figure 1: Emerging risks and threats Perception of urgency (%) Growing inequality

78%

Energy shortage

73%

Food price crisis

68%

Regional instability

65%

Outbreak of trade protectionism

Major adverse climate system changes

Figure 3: Asia's endogenous risks Growing economic and social inequalities

Trade protectionism

58%

Climate change

57%

Financial crisis

54%

US-China trade war

53%

Mass migration

48%

Military confrontation

21%

Financial (banking sector) crisis in China

All experts were asked to rank the listed risks from 1 to 10. This chart depicts the relative assessment accumulated from all respondents.

Mass migrations in response to environmental crisis

Regional instability (failing states)

Military confrontation

Overview | 2

Figure 4: Food price indices, 2003-2011

Figure 5: Failed State Index and state vulnerability

450

Failed State Index (score)

400

Overall vulnerability (%)

350

Myanmar

99.4

92%

Cambodia

88.7

82%

Laos

88.7

82%

Philippines

87.1

81%

Indonesia

83.1

77%

Sugar price index

China

83.0

77%

FAO (2011). FAO Food Price Index. Retrieved February 13, 2011 from http:// www.fao.org/worldfoodsituation/FoodPricesIndex/en/.

India

79.2

73%

Thailand

78.8

73%

Vietnam

76.6

71%

Malaysia

69.2

64%

Brunei

67.6

63%

Republic of Korea

41.3

38%

Singapore

34.8

32%

Japan

31.3

29%

300 250 200 150 100 50 0 2003

2004

Food price index

2005

2006

Dairy price index

2007

2008

2009

Cereals price index

2010

2011

prices rises could also be exacerbated by climate change issues, declining crop yields or climatic induced crop failures.

And, relatedly, risks such as emerging trade protectionism could increase the impact of food shortages and the severity of price rises for food staples.

While these factors could morph into a series of cascading and interrelated risks, there is also reason for optimism. Governance capacity is rapidly increasing in Asia and the quality and probity of public administration likewise improving. Corruption, generally, has been abating and demands for transparency, accountability and efficiency in the delivery of public services and the formulation of public policy are now widely voiced across the region. Yet, despite positive trends, wide variance in both levels of probity and the quality of public administration continues to plague Asia. As Figure 5 illustrates, far from a homogenous set of countries, Asia remains a collection of economically dynamic and fast developing states as well as a region where the possibility of state failure looms larger.

Myanmar and North Korea, for example, pose on-going risks of collapse, radical coup, social unrest and political turmoil, while states such as Cambodia and Lao PDR continue to be fragile and prone to governance failure. Equally, governance stability in countries such as Indonesia, the Philippines or Thailand, likewise poses challenges, as the ranks of a growing, aspirational middle demand greater participation in national affairs and exert greater political power. Far from a region of stability, Asia could equally turn into a region of increasing tensions and unstable governance.

These risks, however, will not be shared equally. As many of our expert respondents note, Asia remains home to a vast number of rural poor whose livelihoods depend fundamentally on agriculture and whose resilience to withstand economic shocks, cyclical economic downturns or political instability is fragile. The

12 minimum score

120 maximum score

Range = 108

Foreign Policy (2010). The Failed State Index 2010. Retrieved February 14, 2011 from http://foreignpolicy.com/files/fp_uploaded_documents/100629_ FSI%20Scores2010Clean.pdf

vast majority of people in Bangladesh (81.3%), Lao PDR (76.9%), India (75.6%), Indonesia (53.8%) and Vietnam (48.4%) continue to survive on US$2 a day or less, exposing hundreds of millions of Asia’s poor to a precarious and vulnerable existence. Any interruption to the livelihoods of Asia’s poorest populations will have far reaching implications. These realities raise on-going and urgent concerns for Asian policymakers if the health, energy and security needs of Asia are to be realised and the well being of marginal and poor populations secured.

We hope you find this issue of the ATM Bulletin informative and welcome your feedback and suggestions.

Darryl S.L. Jarvis Associate Professor National University of Singapore

Top keywords from the responses received

Rolf Tanner Former Head of Political and Sustainability Risk Management, Swiss Reinsurance Company

What are the greatest risks and vulnerabilities to Asia’s current growth trajectory? Can they be overcome?

When asked about the future, experts tend to over-predict change.1 Looking back to the year 2000, Asia was not much different from how it looks today, at least superficially. In the year 2020, we may look back to 2010 and find that Asia have not changed dramatically too. So a safe default assumption about the future of Asia is that we will have 'more of the same', i.e., a continuity of the trend. This will not come as a surprise if we were to buy into the cyclical explanations of history.

We would then be only half way through the Kondratiev cycle of Asian growth and stability that began with the end of the Indochina wars, the formation of ASEAN, the beginning of reform in

China and the sunset for Nehru socialism in India. Independently, an analysis of the underlying fundamentals confirms that we have good reasons to believe in a projection of this trend.

Asia 2020 through three different risk ‘lenses’ But trends can be derailed or deflected. One common definition of risk is that it represents the deviation from our expectations about the future. The deviation may be positive or negative, but the focus today is firmly with the 'worse than expected' outcomes when the talk is about risk. The degree of deviation, i.e., the magnitude of the risk, is determined by the degree of vulnerability of a society, economy or country to a particular risk. Risks and vulnerabilities complement each other.

Mapping risks for our default expectation about Asia 2020 seems to be most sensibly done by taking different measurements. After all, Asia is very heterogeneous and outlining risks with only one metric seems plainly inadequate. Instead, different risk ‘lenses’ need to be applied.

Facing endogenous and exogenous risks The continuity of the 'Asian Miracle' can be threatened by exogenous and endogenous risks (See Figure 1). Asia has its share of endogenous risks. Given the importance that exports play,

Trade & Investment FACILITATION | 4

Figure 1: Exogenous and endogenous risks Exogenous risks

Figure 2: The 'heartland' and the 'marginal crescent'

Endogenous risks

Heartland

Marginal crescent

Currency instability and

Major inter-state armed

Protectionism and currency

Breakdown of economies,

currency wars

conflicts (Korea, Taiwan straits,

instabilities

sovereign defaults

India / Pakistan, Iran)

War on the Korean peninsula,

Islamist terrorism and extrem-

Outbreak of global

Regional instability / Failing

in the Taiwan straits or India /

ism (incliding Afghanistan,

protectionism

states (North Korea, Myanmar,

Pakistan

Pakistan, India)

Political stability in China

War in Iran / military con-

Pakistan, Afghanistan) Commodity supply crisis (oil,

Challenges to regime stability

frontations about nuclear

food)

proliferation

Major adverse climate system

Social conflicts and ethnic

Short of war spill-overs from

Regime stability and dynastic

changes

tensions

failed states

successions

Negative impact from new

Regional protectionisms due

Social conflicts and ethnic

Desertification, droughts,

global governance initiatives

to shortages of key commodi-

tensions

water shortage

ties (energy, food)

for instance and are likely to continue to play in the future, Asia is very vulnerable to outside developments. The emergence of global protectionism, currency instabilities – perhaps likely given the structural problems of Europe and the US – and commodity supply shocks pose serious risks. Additionally, major changes in the climate system, earlier and more extreme than currently predicted by models, can also threaten this trend

practiced growth model is threatened by the emergence of protectionism and currency instabilities. A shift towards more domestic consumption, however, could salvage growth. In the ‘marginal crescent’, political conflicts and volatility in commodity pricing may jeopardise the fundamental stability of economies and increase the risk of sovereign defaults.

The ‘heartland’ and the ‘marginal crescent’

Social transformations raise issues of political legitimacy and regime stability

Another lens through which to look at the risks is a regional one.

Risks are quite different in different parts of Asia (See Figure 2).

And not everywhere is the trend, as defined above, dominant.

Borrowing the terminology from Halford MacKinder, Asia can be subdivided – from a trend perspective – into a ‘heartland’, i.e., South and East Asia, including Southeast Asia and a ‘marginal crescent’, including West, Central and North Asia.

A third lens is the one separating risks into those that are more likely and those that are more severe (See Figure 3). Of all the risks to Asian trends, the ‘big war’ risks and the collapse of governance in China remain the most severe. ‘Big war’ could easily involve nuclear powers. Even a comparatively ‘regional’ event like a major Indo-Pakistan nuclear war will have major consequences for both the international system and Asian economies.

In the heartland, economic growth is firmly rooted in industrialisation, while stability is cemented in (though occasionally shaky) socio-political consensus. In the marginal crescent stability is fragile and repressive, growth is based on the exploitation of non-renewable resources and entanglements with geopolitical conflicts loom.

The ‘marginal crescent’ has a number of risks which are actually shared with adjacent regions (e.g., the Middle East and Eastern Europe). Risks such as terrorism and extremism are present in both sub-regions, but their impact is likely to be more dramatic in the ‘marginal crescent’ than in the ‘heartland’ (e.g., Islamist extremism is much less of a major risk in Indonesia than in Pakistan). The economic risks to both regions are of a quite different nature as well. The main risk in the ‘heartland’ is that the hitherto

Luckily, a governance collapse in China or ‘big war’ risks are very low in likelihood (though 2010 saw numerous reminders that international tensions may be higher in Asia than many thought). More likely, but less severe – at least in comparison to the ‘big war’ risks – are currency instabilities, regional protectionism, adverse weather events, challenges to regime stability and social conflicts. On-going social transformations in the wake of economic growth raise the issues of political legitimacy and regime stability. This applies particularly to those middle income countries where politics remains dominated by authoritarianism and where the social contract is under challenge, simultaneously by the emergence of new, aspirational social forces (e.g., Thailand) and by growing socioeconomic inequalities and the persistence of poverty.

5 | Trade & Investment FACILITATION

Figure 3: Likelihood and frequency High likelihood Currency instabilities

High severity Sino-American military confrontation

Regional protectionisms due

Major armed inter-state

to shortages of key commodi-

war (Korea, Taiwan, India /

ties (energy, food)

Pakistan, Iran)

Major adverse weather events

Collapse of governance in

(cyclones, desertification,

China

drought) Political challenges to regime

Global protectionism

stability and legitimacy Social conflicts due to rising

Pandemic with higher mortal-

inequalities

ity than Spanish flu

If, by 2020, Asia is to be free of mass poverty, governments in the region will need to . . .?

Poverty reduction: humanitarian imperatives and risk management policies Poverty reduction is one of the big Asian success stories of the last 30 years. According to most projections, Asia’s middle classes, the drivers of capitalist growth, will numerically explode in the years and decades to come.2 But in absolute figures, Asia still harbours the largest share of the world’s poor: nearly one billion. And while many of Asia’s poor have escaped poverty, their existence remains precarious and can be easily reversed when crisis strikes: in Indonesia, the share of the rural poor rose from 46.8 % (1996) to 53.4 % (1999) during the Asian financial crisis, for example.3 Thus poverty reduction remains on the Asian agenda, both for reasons of political stability and regime legitimacy, as well as a key humanitarian imperative. The starting point for successful poverty alleviation however, rests on the risks to Asia’s trend scenario being well managed and mitigated. Make no mistake: the poor will suffer most from inter-state war, protectionism, revolutions, pandemics, chronic diseases, slowing economies and, most obviously, food and energy shortages. But even if economies continue to grow, widening income disparities may mean more poor and more trouble for the poor.

This brings us to the debate about how to continue fighting poverty over the coming decade. There will be those arguing that what worked in the first place – emphasis on growth first – will work again through a ‘trickle down’ effect. They will be opposed by those who favour a more targeted approach to poverty reduction if the longer term goal of poverty eradication is

to be achieved. Regardless of the approach adopted, however, it is clear that eradicating poverty among the next 20% or 30% of the population will be a much more difficult task than was poverty eradication for the first 20% or 30% of the population.

Eradicating the next 30% of poverty will much harder than the first 30% Anti-poverty policies over the last two decades have seen traditional top-down approaches – job creation through public works programmes and subsidies – complemented with bottom-up programmes focused on the development of local capacities. There is reason to suppose that these patterns will continue. With economic growth likely to remain robust, Asian countries will continue to produce strong fiscal revenues, limiting budgetary pressures to reduce top-down policies.

It could also be the case that more effective policies targeting the poor will emerge. As governance capacity increases, government subsidies will be more targeted and tied to conditionalities, drawing inspiration from successful schemes in other areas, e.g., from the ‘Zero hunger’ programme in Brazil.

For bottom-up approaches, micro-finance, including micro-insurance, will increase in importance. The current debate about micro-finance’s methods and morality will not stop its advancement. For micro-insurance, the biggest potential is in the AsiaPacific region. The commercially viable target group is those living on US$1 to US$3 per day.4 This group numbers some 2.6 billion people globally, with the majority located in Asia. In India and Bangladesh micro-insurance has grown rapidly. Moreover, large new schemes are now under development in China and the Philippines.5 Another way to improve access of the poor to the financial system is mobile banking, i.e., banking services via mobile phones. Successes in Africa can easily be replicated in Asia where mobile penetration rates among Asia’s poorer countries are broadly similar. The effects could potentially be highly beneficial for the poor. A recent World Bank study, for example, shows that adding 10 mobile phones per 100 people in developing countries potentially boosts GDP by 0.8%.

Increasing intra-Asian migration of the poor as labour?

Beyond targeting the poor, other approaches are likely to gain momentum. With the improvement in travel and technology, remittances are becoming an important source of revenue for the poor and their dependents. Demographic trends will soon lead to labour shortages; before 2020, this will already be felt in Northeast Asia. On the other hand, South Asia and parts of Southeast Asia still have 'excess labour' – though it remains to be seen how quickly this is absorbed by growing domestic labour markets.

Whether there will be intra-Asian labour migration of the poor to Northeast Asia, however, will depend a great deal on whether Japan, South Korea and possibly other countries liberalise their immigration laws and employment practices. If not, South Asian labour will continue to migrate to their traditional destinations

Trade & Investment FACILITATION | 6

in the Middle East and possibly Europe – which historically has been more welcoming to migrant labour than Northeast Asia.

What future trends do you see emerging in the Asia of 2020?

To look at Asia in 2020, let’s take a scenario built on our default assumption of trend continuation, but with some surprises and unexpected outcomes due to the risks considered. Under this scenario, Asia maintains strong economic growth throughout the 2010s while Europe and the US grapple with sluggish growth. As export markets weaken, domestic consumption is stimulated. To push consumption, the eradication of poverty gains new impetus. This development ties in with a trend towards populist economic measures.

A decade of reform and social transformations Governments respond to the emergence of newly aspirational social forces and to demographic challenges. Old age pension systems are aggressively promoted. The 2010s become the decade of social reform in Asia. In some countries, this opens opportunities for the private sector, as social service systems are designed primarily as public-private partnerships. In other countries, the private sector remains confined to the high end, though a lucrative segment of the population.

Economic populism also becomes more visible as temporary export restrictions are placed on food and energy when domestic supplies are strained. Droughts and tropical cyclones become more frequent in Indonesia and the Philippines where the agricultural base is already under strain due to the substitution of food crops for cash crops (palm oil). Thanks to technological improvements, the oil intensity of GDP declines steeply in India and China.

Populist economic policies are also a response to regime and elite challenges. Some countries in Southeast Asia will undergo a transformation, adopting more participatory and democratic forms of political representation. In China, the transfer to the fifth generation leadership takes place according to plan. But the Chinese Communist Party (CCP) sees itself confronted by a new generation of young workers who self-confidently push for better working conditions. The CCP responds partly by co-opting them. New labour laws are implemented to target foreign companies more forcefully than Chinese businesses and state-owned firms. Among the middle classes, the government’s legitimacy is strengthened by China’s ascending power.

Geopolitical trends: compensating for an attenuated US presence East Asia does not develop a formal security structure like NATO, but continues to rely on a network of conferences and informal meetings to ensure that China’s rise remains peaceful. Increasingly, India is brought into this system to counterbalance China. The US announces in 2015 that it will drastically cut its military presence in the region as part of a wider effort to restore fiscal balance. To compensate for this loss of 'boots

on the ground', the US re-emphasises nuclear weapons in its security posture, offering a more formal 'nuclear umbrella' to countries feeling threatened by China’s rise.

Failing states remain a challenge. But Pakistan becomes Asia’s positive surprise. Though initially overshadowed by political turmoil and the effects of the flood catastrophe of 2010, the country returns to growth rates of the mid-2000s and sustains them throughout the decade. Growing economic strength translates into more stable politics. The threat of confrontation with India remains, but is complemented by dialogue. After the withdrawal of the US and NATO, Afghanistan is converted into a Sino-Pakistani condominium, which stabilises the Karzai government and contains the Taliban in Afghanistan while undercutting their influence in Pakistan.

The end of North Korea: a thought experiment North Korea becomes a failed state. A genius at surviving on the brink of the abyss for almost 20 years, the 2010s finally sound the death knell for this relic of Stalinism. Tired of the constant tensions and crises, the Chinese leadership eventually gives a green light to younger army officers to stage a coup after Kim Jong-il dies. Kim Jong-un is airlifted into exile in a villa next to his half-brother in Macao. (They share a table at The Venetian henceforth). But with the Kim dynasty gone, the Chinese quickly learn the Soviet's 'German' lesson: you cannot prop up a failing state. A moderately Communist military junta in Pyongyang cannot maintain order.

Chaos breaks out despite massive food aid. Hundreds of thousands want to cross the border into the South – the government in Seoul eventually gives in. There remains no other option but Korean reunification. The Chinese accept it, in return for 50-year concession rights on the North’s mineral resources and the neutralisation of the Korean peninsula. The Japanese are not happy with this decision, but can do little about it. Korea, for its part, is fully absorbed internally for more than a decade. Whatever the cultural heritage and affinity – a nation must be forged out of 22 million Northerners with an average per capita income of US$1,800 and of 48 million South Koreans with an average per capita income of US$28,100. One of the wealthiest countries in the world suddenly sees itself confronted with massive abject poverty again. Eradication of this poverty is the first and foremost task.

1. Philip E. Tetlock. Expert Political Judgment. How Good is it? How can We know?

Princeton, 2005; p. 52 2. “Stroll to a new status”. Financial Times, 5/1/2011, p. 7 3. http://iresearch.worldbank.org/PovcalNet/povDuplic.html. PovcalNet: the on-line tool for poverty measurement developed by the Development Research Group of the World Bank.

4. International dollar adjusted for Purchasing Power Parity 5. Microinsurance – risk protection for 4 billion people. Sigma No 6/2010. Swiss Re. pp. 9, 14

7 | Trade & Investment FACILITATION

Kishore Mahbubani Dean of the Lee Kuan Yew School of Public Policy, National University of Singapore

What are the greatest risks and vulnerabilities to Asia’s current growth trajectory? Can they be overcome?

There are three major risks that Asian countries face in trying to maintain their current growth trajectory. Two are external.

One is internal.

Possible breakdown of the open and liberal multilateral trading order The first external risk is the possible breakdown of the open and liberal multilateral trading order that has provided the foundation for Asia’s rapid economic growth for the past few decades. The danger of the breakdown comes from the fact that no longer is there a strong custodian to protect the multilateral order. In the past, the US and the EU were good custodians because they believed that an open trading order would benefit their economies. Now they fear that any further liberalisation of the world trading order will mean job losses to China and India. This fear explains why the Doha Development Road has failed to be concluded. To make matters worse, while the US and the EU are retreating from their traditional leadership of the world trading order, the two new biggest beneficiaries of this order, China and India, are not yet ready to step into the shoes of the US and the EU and provide the leadership that is required.

Major power shifts – the risk of bad geopolitics The second external risk that Asia faces is the danger of rising geopolitical tensions. Asia’s economic growth has been remarkable and over the last three decades responsible for a transformation in the global economic landscape as power shifts from the West to the East. Such major power shifts, however, are normally accompanied by tension and conflict.

While, fortunately, outright war is unlikely, there will inevitably be contests for influence.

Clearly the most important relationship to observe is the USChina relationship. As of now, even though China is emerging rapidly to challenge America’s preeminent position in the Asia-Pacific region, America has not launched any containment policy of China. Despite this, we will certainly see both the US and China attempt to increase their influence in the region. As long as the contest for influence is peaceful, it will

bring benefits to the region. For example, ASEAN has benefited from several Free Trade Agreements (FTAs) as a result of the geo-political courting of ASEAN by several powers. We should hope that this non-zero-sum competition will continue instead of countries being forced to choose sides.

Curbing corruption: the single biggest challenge The third risk is internal. Corruption remains the single biggest challenge for all countries in the region, with the exception of Singapore. It may be impossible to completely eradicate corruption. However, the leaders of the region have a responsibility to try to constrain it as much as possible. From time to time, it is important to put public figures on trial for corruption to send a signal that corruption is unacceptable. This is what China did in February 2010, when it detained 1,200 people suspected of corruption, including 12 high-ranking officials such as former vice-president of the Supreme People’s Court, the head of the China National Nuclear Corporation and the head of the Chinese Football Association.6 If, by 2020, Asia is to be free of mass poverty, governments in the region will need to . . .?

Governments in the region will need to take several steps during the next decade: • The first step is to pragmatically study the best practices of neighbouring countries. Deng Xiaoping, the greatest leader of the 20th century, catapulted China into rapid economic growth by copying the best practices of other Asian states, including the 'Four Tigers'. The good news is that Asian leaders do not have to re-invent the wheel. They can copy and implement, as Vietnam for example, is learning from China; • The second step is to progressively open up their economies and encourage greater free trade. It is good that ASEAN has signed FTAs with China, India, Japan, South Korea and Australia / New Zealand. The challenge now is to implement these agreements even if opposition to these agreements increases from local vested interests. It is a tragedy that some ASEAN countries are back-tracking from their commitments to the ASEAN FTA; • The third step is to balance pro-growth policies with poverty-eradication policies. Economic growth, in itself, does not reduce poverty. In December last year, Amartya Sen, the Nobel laureate, noted that it was 'stupid' to aspire to double-digit economic growth in India without addressing the chronic undernourishment of tens of millions of Indian citizens. However, the lack of economic growth also guarantees that there will be no significant reduction in poverty.

Here, we should take heart from one important statistic. In the year 2000, the UN established a series of Millennium Development Goals (MDGs). One MDG was to reduce global poverty by half in the year 2015. While the UN will not

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Transparency International Perceived Corruption Index

What future trends do you see emerging in the Asia of 2020?

By 2020, it will be clear that Asia is by far the most promising economic region of the world. For the year 1 to 1820, China and India provided the world’s two largest economies. The last 200 years of western domination have been an historical aberration that will come to a natural end. The evidence for this will be clear by 2020.

China and India will provide the two largest economies (although Japan will remain significant). However, both the US and the EU will also participate in the economic growth of the region. We will be living in a smaller more inter-dependent world with many successful economies. The brief unipolar moment of American domination will have disappeared. It will be replaced by a multi-polar and inter-dependent world which will constrain any single power from exercising domination.

Not all of Asia will be doing well by 2020. There will be obvious laggards like North Korea, Myanmar and Pakistan. However, all these states will be under enormous pressure to open up their economies and join the rest of the region. By and large, the prospects for war will have diminished. China and Taiwan, for example, will have reached a high level of economic interdependence.

Transparency International (2010). Corruption Perception Index 2010.

meet many of its MDGs, it will actually meet the MDG of reducing global poverty. The main reason for this is the high economic growth rates of both China and India. However, as India has the largest number of absolute poor people in the world, it still needs to increase the scope of its poverty eradication programmes, despite its recent successes; • The fourth step is to invest more in education. There is a significant correlation between high literacy levels and poverty reduction. For example, neither Sri Lanka nor Kerala (India) enjoy high per-capita incomes. However, high literacy levels have produced a higher material quality-of-life in these two states compared to states with similar levels of per-capita income. Indeed, the life expectancy of those living in Kerala is equal to those in America or Europe; and • The fifth step is to encourage a stronger culture of philanthropy. Asia is now producing billionaires faster than any other region in the world. There are over two hundred billionaires in Asia, measured in U.S. dollars. However, unlike Bill Gates and Warren Buffet, few Asian billionaires have committed themselves to sharing their fortunes with the less privileged. There are some generous Asian donors, including Dr. Li Ka-Shing, who has massively supported education efforts in the region, including the Lee Kuan Yew School of Public Policy.

There will be continuing challenges. The US-China relationship could go through some testing times as China may try to progressively reduce US influence in the region. However, there will not be any breakdown in the relationship. Instead a whole series of multilateral arrangements centred around ASEAN will provide political stability in the region. The East Asia Summit (EAS) will provide the primary political vehicle and the ASEAN Regional Forum will provide the primary security vehicle for regional cooperation.

Trade and investment links in the region will explode. To get a sense of how fast they can grow, just look at the rate of growth in trade volume between some of the major Asian economies. China-Japan bilateral trade in 2010 reached a record US$297.77 billion, up 30.2% year on year; China-ASEAN trade volume in January last year reached US$21.48 billion, up 80% compared to the year before, while China and India recently agreed on a new US$100 billion bilateral trade target by 2015, up from US$60 billion in 2010. The rising levels of prosperity will in turn lead to the emergence of large new middle-classes, who will provide not only political stability domestically, but also create a regional culture of peace and cooperation, similar to what the European Union has achieved. Unlike Europe, the East Asian region will not have achieved zero prospect of war but it will have significantly reduced the prospect of war by 2020.

6. Emily Chang, “Trial begins in Chinese corruption crackdown”, February 02, 2010, CNN.

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Hugo Bänziger Chief Risk Officer and Member of the Managing Board, Deutsche Bank

What are the greatest risks and vulnerabilities to Asia’s current growth trajectory? Can they be overcome?

A lack of diversification is often a risk in finance, but also holds true for economies. Some of Asia’s main vulnerabilities arise from its dependence on external demand due to the region’s reliance on export-led growth strategies. While Asia has benefitted strongly from exports to generate the resources necessary for domestic development, sustainable growth should be balanced between external and domestic demand. Asian countries exhibiting large external surpluses will need to switch towards more domestic consumption-led growth strategies.

They will need to diversify their economies by, for instance, supporting a more rapid expansion of the domestic service sector.

This would also facilitate the reduction of external imbalances.

In some countries, such as China, high levels of precautionary household savings and sizeable corporate and government savings depress higher private consumption. As far as household consumption is concerned, it would be desirable for the Chinese government to raise spending on healthcare and retirement provision allowing people to reduce precautionary savings. Thanks to its strong fiscal position, the government has the financial resources to implement such reforms, but they require time. Just as important is the provision of broader access to financial services and tertiary education.

for making domestic institutions more rule-based, transparent and accountable, available to the majority of Asian countries, should not be left unused. This will enhance their efficiency and hence their capacity to support economic growth.

If, by 2020, Asia is to be free of mass poverty, governments in the region will need to . . .?

Over two-thirds of the world’s poor still live in Asia, with more than 1.8 billion people in the region subsisting on less than US$2 per day. Clearly, eliminating mass poverty by 2020 will be a challenging task. However, by building sustainable economic growth and by directing generated revenues to build infrastructure and develop targeted anti-poverty programmes, significant progress can be made.

Economic growth creates new economic opportunities. This, in turn, provides employment and raises living standards – all of which are essential to eliminate poverty. The emphasis should be on sustainable growth and increasing disposable incomes to help create a broader middle-class. As living standards and disposable incomes rise, consumer needs and demand will change.

As people will no longer have to spend their entire incomes on basic necessities, the emergence of diversified economies will be possible.

Families will want to educate their children, which stimulates demand for a developed education sector and related infrastructure. A member of a prosperous middle class will aspire to own his or her own property, which stimulates the construction and housing industries. Increased demand for leisure items, such as consumer electronics or tourism, will trigger a boost to these industries, too. As members of a broader middle class look ahead to their retirements, demand for extensive pension and insurance products in the financial sector will become more pronounced.

As their middle classes grow, Asian countries should take advantage to diversify their growth strategies. A more balanced economy with a focus on stronger private consumption and lower export dependence would also reduce the risk of trade protectionism. There is a political and economic limit to the size of the external surpluses that the rest of the world is willing to absorb. IMF research has shown that a re-balancing towards greater domestic demand can be achieved without a significant reduction in economic growth.

Asian governments can do a lot to facilitate this development process by developing better infrastructure, creating new jobs and nurturing new industries via credit incentives and sustainable spending programmes. In terms of social infrastructure, education is a key tool for poverty alleviation. Beyond increasing literacy rates, governments must look at industry demand and ensure that the skills taught in the classroom match the requirements of the labour market. Governments could also provide education subsidies to broaden access to higher education for poorer students.

Sustaining medium-term growth also requires well-functioning, efficient domestic markets. Governments face a need to further improve domestic institutions and legal frameworks, including reforms of corporate governance and financial sector regulation. Both Korea and Taiwan have proved that maintaining solid growth, while garnering sufficient political support for continued institutional reform, is achievable. The significant scope

Better physical infrastructure is also essential as it can improve the distribution of goods, advance communication and productivity and enhance labour mobility – all factors that increase income. Given that the majority of Asia’s poor still live in rural areas, increased spending on agricultural and rural programmes (such as building roads to better connect farmers to urban markets) are key strategies that can make a big impact.

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Governments should also harness the power of the private sector. By engaging in public-private partnerships and improving investment and regulatory environments, private businesses can be enticed to expand domestically and thereby create new jobs. Likewise, concrete steps in the public-private partnership arena should provide poorer groups in society with greater access to social services and education, as well as more inclusive healthcare.

What future trends do you see emerging in the Asia of 2020?

By 2020, China will have emerged as the world’s largest economy and Asia (ex-Japan) will be about five years away from overtaking the advanced economies in terms of economic size. The region will still remain very diverse. On average, GDP per capita (in PPP terms) will have doubled to US$10,000 but still only amount to less than a quarter of per capita income in the world’s most advanced economies. Demographically, population growth in East Asia will be about to level off, while populations in South Asia and Southeast Asia will continue to grow solidly, albeit at declining rates, for two more decades. Economically, China will be the undisputed, dominant economy, a first among equals, given India’s smaller economic size, lower per capita income and less extensive trade relations. Asia will become less dependent on extra-regional demand due to prolonged de-leveraging, rising public debt and adverse demographic trends in advanced economies.

Asia is likely to continue moving up the value-chain, not least because adverse labour supply trends and rising wages will leave no other option.

Renminbi may help advance China’s ambition to turn Shanghai into a global financial centre. In just ten years from now, China is likely to account for 13% of the world’s banking market, over 16% of the global stock market and over 5% of the bond market. This compares to shares of 9%, 6% and 2.5%, respectively, today.

Emerging financial centres such as Beijing, Seoul, Mumbai and Shanghai have strongly improved their global competitive position. Several reforms such as the Asian Bond Market Initiative will foster the development of deeper and more liquid bond markets. Asian stock exchanges will be linked to improve the flow of capital across borders within the region.

While some of these initiatives will take time and require visionary leadership from Asian policymakers, it is likely that the development of the region’s financial markets will make significant progress over the next decade.

Charles Adams Visiting Professor of Economics, Lee Kuan Yew School of Public Policy, National University of Singapore

China 2020 – a global financial centre Share (%) today

Share (%) 2020

World's banking market

9%

13%

Global stock market

6%

16%

Global bond market

2.5%

More than 5%

Income inequality within Asian countries may rise, notwithstanding the fact that hundreds of millions of people will be lifted out of poverty. Equally, income differentials among Asian countries will remain significant. South Asia, including India, will be relatively poor, while China will be close to breaking into the group of high-income countries.

Intra-regional trade and investment will intensify further. If China keeps liberalising outward investment, it may become the single largest investor in the region. Intensifying trade relations, accompanied by wider use and greater convertibility of the

What are the greatest risks and vulnerabilities to Asia’s current growth trajectory? Can they be overcome?

Key economic vulnerabilities of the region Aside from the immediate risk that the global recovery will falter, there are several longer-term risks that could inhibit the region’s growth trajectory. The key economic vulnerabilities reside within the region and relate to the unbalanced nature of many of the region’s development models. Four main factors should be highlighted: • Heavy dependence on export-led growth; • Undue reliance on very high levels of investment spending (extensive rather than intensive growth); • Fragile financial systems that continue to allocate credit inefficiently; and • Increasing social and economic inequality, within and across countries.

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Beyond these factors, systems of corporate governance, accountability and transparency remain weak in many countries, even as political accountability has increased and public policy frameworks have improved. Although the weaknesses will not necessarily derail the region’s strong performance, they impede the continuation of rapid growth as the region seeks to further narrow its income gap with the advanced countries.

Asia’s external pressures becoming more challenging Trade and currency tensions with the major advanced countries are likely to occur periodically unless the region’s undue reliance on export-led growth is reduced. Several countries, including Malaysia and Thailand, will need to avoid middle-income 'traps' resulting from a failure to move into higher valueadded manufacturing. The Philippines, on the other hand, will need to undertake the domestic reforms required to break free from its unsustainable reliance on overseas foreign workers.

Based on Asia’s track record, there is no reason to doubt that these challenges can be successfully overcome. Addressing the challenges, however, will require much deeper reforms than in the past to better balance the region’s economies. At the same time, the external environment facing the region will be considerably more challenging than during the last two decades. The major economic powers will continue to address domestic and external imbalances that contributed to the global financial crisis and face protectionist pressures from domestic constituencies.

The region’s fate depends on the Big Three One important set of emerging risks relates to the region’s big three economies of China, Japan and India. Each will face significant, but different, economic challenges over the coming decade, while their success in meeting these challenges will have wide-ranging implications for the rest of the region. In addition, the region’s performance is likely to depend increasingly on whether these countries can put aside their historical and other differences.

Japan – facing an uphill battle against fiscal imbalances In the case of Japan, the key economic challenge will be to revitalise its economy and deal with its severe fiscal imbalances in the context of an aging population. Unless serious progress is made in dealing with fiscal problems, Japan faces a high risk of an economic crisis with very large adverse spillovers to the rest of the region.

state’s support of the financial sector may avoid a conventional financial crisis, there is a significant risk that China’s highly leveraged banking sector will require further fundamental restructuring and recapitalisation. Any sharp slowing of China’s growth would have momentous adverse implications within and beyond the region.

India – deep reforms and infrastructure spending required The key challenges in India relate to the need to undertake deep reforms and to put into place the needed infrastructure to further develop the manufacturing sector and absorb large amounts of relatively unskilled labor. Even though India’s fiscal position is not currently a major source of concern, the failure to make sizeable progress in deficit reduction during the period before the global crisis, along with huge infrastructure demands on the budget, could lead to fiscal pressures in the future. Besides, social inequality could become an important risk factor in India.

If, by 2020, Asia is to be free of mass poverty, governments in the region will need to . . .?

Based on historical relationships, broad based economic growth has been the single most important contributor to poverty reduction. Accordingly, reducing poverty in the region further – and eventually eliminating mass poverty – will require governments in the region to continue to pursue growthfriendly policies consistent with the challenges noted above.

Poverty reduction – a long way to go for Asia The record, thus far, suggests that the region has been very successful in poverty reduction with millions being brought out of poverty during the last two decades, in particular in China and India. At the same time, however, millions across the region remain in poverty even when measured by broad indicators such as the proportion of the population living on less than one or two dollars a day. Considering some of the micro-indicators of deprivation tracked under the Millennium Development Goals (MDGs), the problem seems even more severe. Poverty remains a serious challenge not only in China and India but also in many parts of Southeast Asia and South Asia.

Apart from growth, the region needs social safety nets

China – imminent risks from its fast-paced export-led growth

Looking forward, not all of the region’s poverty will be fully addressed by growth. Even broad-based economic growth can leave disadvantaged groups behind and targeted programmes will be needed to address hard-core poverty within a number of countries.

In the case of China, the key challenge will be to rebalance its economy from currently high dependence on exports, to reduce its savings rates, to rebalance from investment towards consumption and to address huge income disparities between the coastal and inland provinces. Even though the

Governments may also need to revisit their mechanisms for providing social insurance to the most vulnerable groups in order to help protect them from the consequences of structural change and adverse shocks. Over a slightly longer time span, population aging in the region will likely require more

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attention for pension systems in order to avoid poverty issues with older demographic groups.

What future trends do you see emerging in the Asia of 2020?

There are two broad possibilities for 2020. Based on a simple extrapolation of trends, Asia 2020 will be much richer than today but even more dominated by the economic giants of China and India, while Japan’s share in regional output will shrink even further.

'Asia 2010 + 10' – Intra-regional trade and free crossborder movement Within countries, populations and workforces will likely be a lot more urbanised, there will be significant middle class consumer groups in each country and high-end services will account for a larger share of GDP. Depending on the progress of regional integration initiatives – including the ASEAN Economic Community – there will be higher intra-regional trade flows in final goods and services, more harmonisation of regulatory regimes across countries and much freer cross-border movement of people within the region.

reunification on the Korean peninsula, the durable easing of cross-strait tensions between China and Taiwan and the emergence of a strong and credible ASEAN grouping that manages to prevent the marginalisation of Southeast Asia. The significant negative 'wild card' would be mismanagement of China’s growing wealth and influence.

Wild card events in Asia 2020 Peaceful reunification on the Korean peninsula Durable easing of tensions between China & Taiwan Emergence of a strong and credible ASEAN grouping Mismanagement of wealth and influence by China

Asia 2020: marginalisation of ASEAN, China pulling away?

Under this vision, Asia 2020 would essentially be 'Asia 2010 + 10', but we know from experience that such extrapolation may be misleading. A less sanguine vision for Asia in 2020 would be a region of much greater inequality, within and across countries, in which much of Southeast Asia and South Asia continue to lag behind China. Indeed, there appears to be a not so small risk of the region’s centre of gravity shifting even further away from the Asean countries as they become increasingly marginalised.

With continued upward pressure on commodity prices, the resource-based countries in the region would continue to gain from the terms of trade implied by rapid growth in China and India but some may not welcome the 'back to the farm' implications.

A shift of emphasis toward geopolitical security Even less positively, high resource prices could lead to an intensification of territorial disputes in the region, especially in the South China Sea. How things might evolve in such an environment would depend critically on whether the United States remain actively engaged in the region to defuse tensions.

Reflecting on budget and other pressures, a decision by the US to disengage would leave a dangerous vacuum. Ultimately, a peaceful and successful Asia 2020 will depend critically not only on US engagement, but also on constructively managed relations between the United States, India and China.

Four potential 'wild cards' for the region Three positive 'wild cards' for the region would be peaceful

Vishnu Juwono Head of Communications, Universitas Indonesia

What are the greatest risks and vulnerabilities to Asia’s current growth trajectory? Can they be overcome?

The main challenge facing Asia’s current growth trajectory lies within individual states – it is their increasingly unequal wealth distribution. While we have witnessed a significant broadening of the middle-classes in Asia, driven by strong economic growth, poverty in the region remains persistently high. Rural areas, in particular, are falling further behind with the majority of people still earning a living from agriculture or low-skilled manufacturing jobs.

This trend will exacerbate social and economic inequality and could feed serious social unrest which has occasionally erupted in the region in the past. If policymakers do not manage to tackle inequality early enough, the widening income gap will make it more difficult for the poor to escape the vicious poverty cycle as opportunities for empowerment remain scarce.

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Economic and political stability in the region

GINI Index of Income Inequality 2008

The next biggest challenge is regional security. The United States is still one of the most significant players acting as a guarantor of security and balance of power in the region. For example, Japan and South Korea still rely on the US military’s presence to counter the imminent security threat from China and North Korea, respectively.

Governments in the Asia-Pacific region understand the nature of these challenges and are gradually realising that political stability and security, both domestic and regional, are crucial factors in addition to economic growth. To that end, they have initiated various efforts to help diffuse tensions in the region, especially through multilateral efforts sponsored by ASEAN. A more global perspective needed To achieve a sustainable peace in the region, one big question for the next decade is how far the big players in Asia, namely China, India, Japan and South Korea, are willing to give up parts of their narrow self-interest for the sake of regional interests?

There is optimism in the new generation of Asian leaders who will bring a more global perspective to the table; will not be burdened by their national history; and will push for further regional integration.

If, by 2020, Asia is to be free of mass poverty, governments in the region will need to . . .?

The challenge for Asia’s leaders is to overcome the enormous economic disparity within their respective countries. They have to empower poorer and economically underdeveloped areas to catch up with the thriving, mostly coastal, economic zones. If political leaders fail to implement policies that facilitate this transfer of knowledge and resources, the consequences could be dire.

Better governance – better service provision for the poor In order for this knowledge and resource transfer to be effective Asian countries need better governance. As shown by a number of countries in the region, such as Singapore, the government can provide public services as efficiently as private companies with clear standard operating procedures along with transparent and accountable performance review systems that provide honest feedback for future service improvements.

More importantly, governments in the region have to put into place a welfare system that provides a minimum of healthcare and education services for the poor. There are still hundreds of millions of poor in Asia that struggle desperately to cover their basic needs, missing out on basic access to health, education and other essential services.

Policymakers need to ensure that the poor gain access to education and other fundamental public services if the depth of

Source for GINI Index: Human Development Report 2009. http://hdrstats. undp.org/en/indicators/161.html. No data for Brunei and Myanmar.

social capital in the region is to be broadened and Asia’s development sustained. Failing this, the large number of poor people in Asia will become a liability and create disruptions in the social and economic order of the societies in which they live.

What future trends do you see emerging in the Asia of 2020?

Corruption is still one of the main impediments for economic development and a barrier to combating poverty. In many developing countries in the Asian-Pacific (such as Indonesia, Thailand or the Philippines) corruption occurs mainly due to dysfunctional legal systems and poor law enforcement.

Governments in the region should step up their efforts to build impartial and credible judicial systems as part of their capacity development and institution building to provide a transparent and predictable framework for policy making.

A well-functioning judicial system also works to uphold the laws that protect the poor and disenfranchised from arbitrary injustice or exploitation.

Creating value beyond 2020 The Asia of 2020 will have a broad, technology savvy, globally oriented middle class that will transform the region into a center of world trade and investment growth. China and India will constitute the main driving force for this growth, followed closely by the Southeast Asian countries.

But in order to reach levels similar to societies in Western Europe or Northern America, governments will need to focus on developing competitive high-tech industries and knowledge

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economies that substantially add value. In turn, this transition will allow governments to move from export-led to consumerled growth models.

Building equitable societies Despite the likely continued growth trajectory of Asia’s economies, Asia will also continue to suffer from growing inequalities.

A major challenge for the Asia-Pacific region in 2020 will be vast economic and social inequalities, with Asia producing a cohort of super-rich Asian individuals that are able to benefit disproportionally from Asia’s new-found growth, innovation and technological progress. Equally, Asia will need to innovate its domestic institutions and improve its systems of protection if poor and marginal populations are to be protected and if emerging and growing practices like human trafficking, prostitution, drug trafficking and other illicit business practices are to be mitigated.

Ambassador Ong Keng Yong Director of the Institute of Policy Studies, LKY School of Public Policy and Ambassador-At-Large, Ministry of Foreign Affairs, Singapore

What are the greatest risks and vulnerabilities to Asia’s current growth trajectory? Can they be overcome?

Asia consists of diverse countries with different economic structures and natural resource endowments. Broadly speaking, there are three centres of economic dynamism in Asia.

The biggest is China. Next would be India and last but not least, Southeast Asia. In all these centres, growth projections will be undermined if there is political instability and domestic socio-economic troubles such as widening income gaps and rising inflation.

• Perceptions matter: In essence, everything depends on public perception of the prospects for a good future. If there is a negative feeling or a disturbance which shakes the confidence of the market, the consequence could be a range of negative events adversely affecting the whole region; • Loss of confidence could trigger monetary pullout: All three centres of economic dynamism are open to international

Fostering a climate of entrepreneurship & leadership Again, the ultimate task for the leaders of this decade is to engineer governmental systems that provide incentives for hightech and knowledge-based entrepreneurs as well as facilitate the education of a new generation of professional bureaucrats and policymakers.

The creation of merit-based systems for public administration will ensure that the majority of Asian countries will be able to deliver efficient public services to the poor and create conducive business environments that allow them to compete in an increasingly global market place.

With the focus of the current leadership on this path, the majority of Asian countries will overcome these challenges and make the transition to advanced economies by 2020.

trade and the flow of Foreign Direct Investment. This means significant movements of capital and liquidity. A run on public confidence arising from political problems or security risks will certainly result in a quick pullout of huge amounts of money; • Export-led growth bears significant risks: The economic conditions in the USA and Europe, which are the destinations of most exports from Asian economies, are still uncertain. Similarly, Japan has not overcome its anaemic economic growth; and • Korean Peninsula, the greatest risk to continuation of growth trajectory: North Korea will remain the key uncertainty. The use of the nuclear option by the government of the Democratic People’s Republic of Korea (DPRK) and the paranoid perceptions of DPRK actions in Japan and South Korea will result in constant pressure on the perception of peace and security in the region. The Korean Peninsula will remain the greatest risk to Asia’s growth trajectory.

If, by 2020, Asia is to be free of mass poverty, governments in the region will need to . . .?

• It is unlikely that by 2020, Asia would be free of mass poverty. Even if China and India grow 8%–10% annually, there are other heavily populated countries in Asia such as Bangladesh, the Philippines, Indonesia, Myanmar and Vietnam, which are unlikely to turn the corner within the next ten years in their fight against poverty;

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• Deeper regional cooperation is imperative: Governments in the region will have to work together through regional bodies such as the Association of Southeast Asian Nations (ASEAN), the Asian Development Bank (ADB) and the South Asian Association for Regional Cooperation (SAARC) to maintain the momentum for trade liberalisation and market opening in order to expand their respective gross domestic product (GDP) per capita; and • Good political relations among governments in the region will engender positive developments in regional economic relations, trade and investment and will help to keep poverty reduction on track.

What future trends do you see emerging in the Asia of 2020?

• Similar political boundaries by 2020: the political boundaries of Asia are unlikely to change. Asia’s trajectory towards prosperity in terms of GDP per capita will continue while the economies of China and India will command even more weight in the global economy. They will be the central players in the region; • Economic powerhouse with pockets of exclusion: many parts of Asia will be transformed into competitive economic zones and buzzing centres for services. There will be more inequalities within and between countries. Poverty is likely to remain in sizeable pockets across the region; • The two Asian giants: the voices of China and India will be loud and influential. They will know how to deal with

Poverty in Asia’s populous countries Country

Population (millions)

People living on less than US$2 a day (millions)

People living on less than US$2 a day (% of population)

Bangladesh

162

132

81.3%

1,155

873

75.6%

Indonesia

230

124

53.8%

Vietnam

87

42

48.4%

Philippines

92

41

45.0%

1,331

483

36.3%

India

China

Source: World Development Indicators (2010). Data are available for 2005 only, except for Philippines and Vietnam, where data are available for 2006.

their neighbours and get what is desired in political and strategic terms; and • Incomplete regional integration for ASEAN: ASEAN will have a single market under the ASEAN Economic Community framework albeit incomplete in various aspects. However, we will not witness the emergence of a single currency for ASEAN. In political and strategic terms, ASEAN will be a significant pivot between China and India and between these Asian giants and external powers such as the USA and Europe.

IA 10 IND8.9% in o2f0

e grew r forc GDP Labou million 450

CHINA

SOUTHEAST ASIA

GDP grew 7.4% in 201 Labour force of 0 287 million

GDP grew 10.3% in 20 Labour force of 10 777 million

Sources: ADB (2011). Key Indicators for Asia and the Pacific. Retrieved 12 February, 2011 from http://www.adb.org/Documents/ Books/Key_Indicators/2010/Country.asp and World Bank (2010). Labour force, total. World Development Indicator Database.

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inequality and hence political instability. The risk of political instability may be greatest in Myanmar and in China;

Jan Willem Blankert Special Adviser ASEAN, Delegation of the European Union, Jakarta

What are the greatest risks and vulnerabilities to Asia’s current growth trajectory?

• Worrying trend of rising prices: With the economic crisis behind us – if we have really overcome the crisis – trends of rising energy and food prices are emerging. Price increases are fueled by rapidly growing demand as a result of sustained economic growth in the region. The situation is exacerbated by expansionary policies in the US and China; • Considerable risk of growing social inequality: The aforementioned combination of internal and external factors implies a modest to considerable risk of greater social

Establish a better business climate

Address the cancer of corruption

Improve social justice

Improve / Enforce the rule of law

Better infrastructure, including public transport

Regulatory policies

Tackle congestion

Address urban overpopulation

• Major environmental degradation and disaster: A combination of internal and external factors, further man-made and / or naturally occurring environmental disasters could become a major liability for Asia’s recent economic success stories and its future growth trajectory; • Military tensions in the region: The occurrence of a military conflict cannot be ruled out completely. The recurrent diplomatic and military provocations from North Korea and tensions between China and Japan will most likely remain contained. In the case of North Korea it is extremely difficult to predict future outcomes for the next ten years; and • Carving out the right role for ASEAN: With some luck ASEAN’s strategy of an 'ASEAN centred regional architecture' will work as a catalyst for the region. ASEAN is too large and important to ignore as a partner and too nonthreatening to bully. If the region manages to tackle most of the risks and threats it faces over the next decade, Asia will enjoy greater prosperity, increasing trade and investment ties and ever-improving opportunities.

Access to potable water and sanitation

Free & fair contestation

Access to affordable health services

Allow greater freedom of expression

Access to education, including higher education

Clear separation of powers

Accomplish the MDGs or even set more ambitious goals

Enhance democracy

Working and living in Indonesia, Jan Willem Blankert has experienced firsthand how the region is hit by volatile food and energy prices, growing social inequality and extreme poverty. He sees the largest deficiencies in the above areas if governments were to continue with a business-as-usual attitude throughout the period 2010-2020.

Top keywords from the responses received

Pushkala Lakshmi Ratan Energy Consultant and former Vice-President of Environmental Financial Products, Deutsche Bank AG, Singapore

What are the key growth opportunities you foresee over the next decade for energy companies working in Southeast Asia?

The International Energy Agency has predicted that energy demand in Southeast Asia will increase by 76% in 2030. This presents tremendous opportunities for energy companies in the region.

Energy companies include not only power producers but also power transmission and distribution entities as well as manufacturers of energy equipments.

Much of the Asian region is characterised by the fact that the generation, transmission and distribution entities are owned wholly or partly by the state. Privatising electricity markets will

bring much needed efficiency, competition and lower prices.

Some Southeast Asian countries are already actively considering the implementation of necessary regulatory frameworks to facilitate privatisation and unbundling of state utilities.

With a limited supply of oil available, many countries are turning to natural gas and other newer fuel sources to meet their burgeoning energy demand. The United States has recently signed landmark agreements with the governments in India and China for the exploration of shale gas. Over the next decade, it is likely that similar partnerships may be undertaken in the Southeast Asian region in a quest to find solutions to ease the supply constraints as well as reduce emissions associated with traditional sources of energy.

Most countries in the region are expected to be net importers of energy by the turn of the next decade, which even includes countries like Malaysia and Indonesia which presently meet 50% of the LNG gas demands of the Southeast Asian countries. With a favourable policy framework in place, these reserves will play a major role in meeting the energy demand requirements in the region.

There is enormous potential for the development of renewable energy and measures to increase energy efficiency. With the right incentives and regulatory structure, energy companies

ENERGY SECURITY | 18

can play a vital role in the assessment, development and implementation of renewable energy and energy efficiency.

efficiency as well as a better policy framework for forestry and REDD will be a significant step towards lowering emissions.

How do you envision the energy industry in the region responding to climate change over the next decade?

The biggest change will be in the electricity markets. Some of the Southeast Asian countries are in advanced stages of unbundling state utilities and assessing the possibility of interconnecting with their neighbours and trading. Trading electricity outside country borders, transparent contracts and regulations will be key factors in making the process viable. Reforms will take some time to be implemented and as with any new structural change, there will be a gestation period before it becomes efficient. However, this will be an important and progressive step for ASEAN countries in the next 5–10 years.

The energy industry will respond to climate change in two ways: firstly, by redesigning their energy production and supply processes and secondly, by diversifying their portfolio to include renewables and forestry in an effort to reduce their carbon footprint.

The energy industry will have to look at the entire process chain and hence include greening mining, shipping and transportation activities in addition to the actual generation of power. Some energy companies have already started implementing these measures, but these are invariably foreign companies that have operations in Asia. Over the next decade, domestic energy companies would also have to implement similar measures to remain competitive and align with the local rules and regulations.

Energy companies need to ensure that there are adequate internal measures to monitor and verify the various energy efficiency measures being undertaken. It is likely that Asian countries may adopt a sectoral approach whereby companies and industries would need to implement necessary measures to 'green' their processes and portfolio.

Companies will also diversify their energy portfolio by investing in renewable energy and forestry as a way to reduce their carbon footprint. It is acknowledged that the forestry sector in Asia has tremendous potential in reducing emissions and energy companies are getting involved either directly or through Reducing Emissions from Deforestation and Forest Degradation (REDD) programmes.

What will be the biggest changes in ASEAN’s energy sector (electricity markets, liquid fuels, renewables, etc.) over the next 5–10 years?

Southeast Asian countries are viewing natural gas and liquid fuels as the solution for the future and are ramping up to incorporate this into their growth and development plans.

Public transport for instance, is already being retrofitted to use LPG and CNG, which is more energy efficient.

Renewables will become a large part of each country’s energy mix in view of more coherent policies and new legal and regulatory frameworks that are currently on the drawing board.

Equipment manufacturers may set up new plants in Southeast Asian countries over the next ten years as the market will be large enough to warrant this investment. Capital costs will be reduced substantially due to local manufacturing capabilities, which will provide the necessary boost for the sector.

Sectoral policies to address emissions will find a place in some Southeast Asian countries and steps to improve energy

What measures must policymakers in the region pass to protect energy security and improve the business environment for energy companies?

An important factor will be to maintain transparency and certainty in the way the electricity markets work. Privatisation will play a large role in helping governments achieve their targets.

Structural reform will result in a regulatory and legal framework that needs to be adapted and coordinated properly. It is difficult to reverse these changes once they are in place as they would have a bearing on commercial transactions that have already been entered into.

To promote renewable energy too, governments will need to look at the possibility of having private participation in the generation of power. This model has worked in countries like India and led to the rapid growth of the sector. To incentivise private participation, governments would need to implement a clear and transparent tariff system, ensure access to finance, maintain fairness in contracts as well as certainty in the regulatory and legal structures. A key part to reducing costs and making renewable energy a more viable resource for investors, would also require governments to provide the necessary infrastructure for equipment manufacturers. This will benefit the local economy and make renewable investments more sustainable.

The potential for energy efficiency measures can be realised though better financial incentives, removing barriers and addressing market failures as well as potentially rewarding companies undertaking these measures through a Energy Efficiency Certificates (EECs or white certificates) trading system, similar to what is being implemented in India.

Addressing climate change must be done on the basis of a multisectoral framework and hence governments must involve energy, mining, agriculture, transport and infrastructure sectors in a coordinated manner. Governments in the Southeast Asian region must strengthen the policy, planning and cooperation amongst various ministries and also involve industry representatives in the process. Hence a holistic framework on the part of governments in the region will provide a more conducive environment for energy companies to participate, invest and perform well.

19 | ENERGY SECURITY

Puvan J Selvanathan Chief Sustainability Officer, Sime Darby Group

What are the key growth opportunities you foresee over the next decade for energy companies working in Southeast Asia?

Renewable energy (RE) presents a significant key growth opportunity for energy companies in Southeast Asia over the next decade due to a number of factors: • The region has huge untapped RE resources – biomass, biogas, solar, wind and geothermal; • Southeast Asia is among the fastest growing regions in the world. Energy demand is increasing correspondingly, but with an acute awareness of the need to decouple this from increased greenhouse gas (GHG) emissions; • Policy frameworks promoting RE are being introduced or further promoted in line with the global drive to reduce GHG emissions; and • Green technology-friendly policies and factoring of income generated from carbon markets, is further enhancing the viability and profitability of RE projects.

In Malaysia, key energy and plantation sector players such as Sime Darby are awaiting the Renewable Energy Act (expected mid-2011) and feed-in tariff (FIT). These will allow those with plantation-based businesses the potential to develop biomass and biogas energy projects throughout Malaysia and Indonesia, as well as develop services and technologies to support the rapid and effective use of these assets.

What are the major challenges you anticipate impacting energy security among Southeast Asian countries?

Southeast Asian countries currently rely primarily on coal and natural gas for energy. There are risks arising from such dependency, such as: • the rapid depletion of these fossil fuel reserves and corresponding price instability and shocks; • the removal of fuel and energy-related subsidies that have underpinned economic growth in key countries within the region but are increasingly unsustainable; • the knock-on increases in commodity and cost-of-living prices; and

• the pace of successful implementation of RE projects and reform of incumbent energy regulatory environments and players.

Indonesia is key to the energy balance within Southeast Asia.

It has the greatest abundance of natural resources for RE in the region and is presently a net exporter of coal. If it continues to develop over the next 10–15 years in the same mode, it will become a net importer of coal (as did China) and make less coal available to its neighbours. Already Indonesian national policy does not allow for export of natural gas to the non-domestic customers.

Malaysia is already considering importing LNG in the near future to meet domestic demand as its own reserves are fast depleting and production is declining. Commodity prices, led by crude oil, also have a major impact on the supply of energy products. Malaysia has contracted out a sizeable amount of its natural gas output to take advantage of high market prices for oil-based commodities. This is one reason why it cannot meet it own domestic gas consumption needs.

Many Southeast Asian countries have either moved or are beginning to move towards RE. The challenge is in developing sound policies and frameworks to promote the development of RE in the region. Thailand already has an effective programme in place (Very Small Power Producer Programme) while Malaysia is still waiting for a FIT. How do you envision the energy industry in the region responding to climate change over the next decade?

Businesses generally, not only energy-based companies, will orientate themselves to respond positively to climate change over the next decade. The behavioural drivers will be regulation and policies promoting green technology and RE making it more cost-effective for businesses to alter processes and practices: • Disincentives and penalties will be introduced in various forms to limit emissions. These will be driven by exportmarket needs; • Higher targets will be expected to be set by governments for RE as a component of the fuel-mix portfolio; and • The prospect of additional revenue from the sale, handling and sequestering of carbon will also influence business thinking and operation.

What will be the biggest challenges in ASEAN’s energy sector (electricity markets, liquid fuels, renewables, etc) over the next 5–10 years?

Ensuring a sustainable energy sector for the next 5–10 years is one of the biggest challenges for ASEAN. With the exception of Singapore and perhaps Thailand, ASEAN nations all have

ENERGY SECURITY | 20

Regional and aggregate oil spot prices from May 2000 – Feb 2011

Source: Energy Information Administration. http://www.eia.gov/dnav/pet/pet_pri_wco_k_w.htm

some level of price subsidies. As Southeast Asia grows rapidly its energy needs are increasing. Price subsidies hide the growing disparity between prices (due to inflation and fuel price hikes) that national utilities pay for new capacity relative to what it recovers from end-consumers. Indonesia is already

Secretary Jose Rene D. Almendras Department of Energy, Philippines

What are the key policy initiatives needed in the region to ensure continued energy security over the next decade?

The overriding concern in ASEAN, now and in the next decade, remains to be how to ensure the security of energy supply. On top of the policy initiatives identified by the energy ministers of the region lies the diversification of energy resources. While the

experiencing difficulty in soliciting investments for new power plants as it can no longer afford to pay for new power due to subsidised electricity tariffs and it has not secured international investment to build new large capacity to meet its electricity demands since the 1997 financial crisis.

region (just like the rest of the world) will continue to be highly dependent on the conventional fossil fuels (oil, gas and coal), the area is also identified to be suitable for renewable sources of energy. Thus, the policy and emphasis to further strengthen renewable energy development.

The energy ministers of the region also underscored the need for collaborative partnership in the development and operation of regional energy infrastructure in the form of the ASEAN Power Grid for electricity and the Trans-ASEAN Gas Pipeline for natural gas. The same will be required in pushing for the use of cleaner fuels, energy efficiency and conservation as well as in addressing the region’s vulnerability to the impacts of climate change.

ASEAN also recognises the importance of establishing efficient, transparent, reliable and flexible energy markets in the region and improve access to affordable energy to eradicate energy poverty.

21 | ENERGY SECURITY

In what ways do you envision ASEAN governments responding to climate change over the next decade?

The region’s vulnerability to the many impacts of climate change is well recognised. The region’s policies and programmes on energy diversification, use of cleaner fuels, development of renewable energy, energy efficiency and conservation all form part of the collective efforts to address climate change. Collectively, however, the region has lesser ability and capability to cope with the impacts of climate change compared to other regions, especially on adaptation. In fact, this is one area where the international community can help ASEAN. Some member economies are already facing financial constraints in addressing additional cost associated with climate change mitigation and adaptation. Specifically, the region may benefit from understanding how it can benefit from climate change technologies such as Carbon Capture and Sequestration. Additionally, we need to be able to 'climateproof' our existing and upcoming energy facilities to ensure they continue to supply energy and services even under the destructive impacts of climate change.

The year is 2020: has nuclear energy in ASEAN made the big gains everyone in 2010 had anticipated?

Malaysia is looking to have its first 1,000 MW nuclear power plant by 2022. Their decision to fully undertake this project may come by 2014. By 2020, the nuclear power projects of other member economies could very much be underway.

What will be the biggest changes in ASEAN’s energy sector (electricity markets, liquid fuels, renewables, etc.) over the next 5–10 years?

The ASEAN energy market in the next 5–10 years will be largely integrated, accessible and diversified. Electricity will be the major form of energy spurring development down the country side and small islands. However, oil may continue to be the dominant fuel for the transport sector. On the other hand, electricity spot markets will be set in place in many member economies but may take longer time to scale up to the regional level.

Natural gas could play a larger role for LNG supply in Asia.

It is also possible, with technological breakthroughs, for the region’s energy diversification programme to benefit mainly from the renewable forms of energy.

Net generation of renewable electricity, in billions of kWh

Source: Energy Information Administration. 2010.

International Energy Statistics.

affordable supply of energy while maintaining environmental sustainability and competitiveness.

Renewable energy will be widely available to form a critical part of the energy mix. However, the right conditions to fully tap these sources are not in place yet.

By 2020, what do you think will be the status of regional cooperation projects like the ASEAN Power Grid and the Trans-ASEAN Gas Pipeline?

If ASEAN plans and programmes on both regional interconnection projects work well, they will be fully in place and operational even earlier than 2020.

Lawrence Wong Chief Executive, Energy Market Authority, Singapore

What are the major challenges you anticipate impacting energy security among Southeast Asian countries?

Energy security will stimulate investment, trade and development in ASEAN. The major challenges to ensuring energy security in the region includes the availability of massive investment required for energy infrastructure to meet rising regional energy demand, expanding energy access and addressing energy poverty. Across the region, the challenge is how to ensure a reliable, stable and

What are the key policy initiatives needed in the region to ensure continued energy security over the next decade?

The security of energy supplies is an important concern for all ASEAN countries. One strategy to achieve this is to diversify

ENERGY SECURITY | 22

fuel sources. Several ASEAN countries are already tapping on renewable energy sources like geothermal and hydro. Some have also announced plans to build nuclear power plants in the longer term.

Last year, the ASEAN Energy Ministers endorsed the Terms of Reference for the Nuclear Energy Cooperation Sub-Sector Network, which will form the body to coordinate such activities in the region.

Singapore imports all its energy and have limited scope to deploy alternative energy on a large scale. 80% of its electricity today comes from gas-fired power plants using piped natural gas. Hence, the first priority in diversification is to diversify the sources of gas by importing liquefied natural gas (LNG). To enable this, Singapore is building an LNG terminal which will be ready by 2013.

What will be the biggest changes in ASEAN’s energy sector (electricity markets, liquid fuels, renewables, etc.) over the next 5–10 years?

Given the variation in energy resource endowments and demand requirements, each country in Southeast Asia will need to develop its own mix of measures to achieve energy diversification. As a region, it needs to continue to promote energy cooperation and work jointly on initiatives to build a more resilient energy market that enhances energy security for all ASEAN members.

In what ways do you envision ASEAN governments responding to climate change over the next decade?

Climate change and energy issues are inextricably linked. On the energy side of the equation, ASEAN governments are pursuing several strategies. The first is to diversify to clean and renewable energy sources. There are, for example, several large-scale hydro projects being planned in Laos, Malaysia and Vietnam.

Second, governments are putting in place measures to promote energy efficiency. As a region, ASEAN is aiming for an 8% reduction in energy intensity by 2015 (compared to the 2005 level). ASEAN energy officials are now developing a systematic plan of action and monitoring mechanism to achieve this target and to see if more can be done beyond that.

Third, there will be greater investments in energy research and development (R&D). The new wave of energy technologies will cover the entire spectrum, from cleaner power generation to smarter distribution and usage of electricity. Across the region, countries are doing more in energy research. For example, Singapore have invested considerable sums in energy R&D and are also providing platforms for piloting and test-bedding of new energy technologies.

The year is 2020: has nuclear energy in ASEAN made the big gains everyone in 2010 had anticipated?

Harnessing nuclear energy is a complex and long-term enterprise for any country. Rather than focusing on achieving 'big gains' within a certain timeline, it is more important to systematically build up the capability base and to have the proper systems, safeguards and standards. ASEAN is looking at efforts to build regional capacity in civilian nuclear energy.

Energy is a long-term business. So the changes in the sector over the next 5–10 years are likely to be a continuation of present trends. One key driver is the continued increase in energy demand. The International Energy Agency has projected energy demand in ASEAN to grow at an annual rate of 2.5%, much faster than the world average of 1.5%. While the region may be using energy more efficiently, the growing appetite for more power as a result of rapid economic growth will far outpace any efficiency gains. New power plants will have to be built to meet this demand. Notwithstanding the growing interest in renewable energy, the reality is that green power currently is still more expensive than fossil fuels by a significant margin and lacks the scale to replace more than a small proportion of fossil fuel use. Hence, most of the new plants over the next 5–10 years will be powered by fossil fuels. Within the fossil fuel mix, however, it is likely to see an increase in gasfired plants. From a sustainability perspective, this is a positive trend because gas is the cleanest of fossil fuels – compared to other hydrocarbons like oil and coal, natural gas produces lower levels of carbon emissions and air pollution. To ensure access to gas supplies, several ASEAN countries are also developing facilities to import LNG. This can help to facilitate LNG trading among the regional countries.

By 2020, what do you think will be the status of regional cooperation projects like the ASEAN Power Grid and the Trans-ASEAN Gas Pipeline?

To improve the resilience of the region’s electricity and gas systems, it makes sense for ASEAN to pursue an integrated power grid and a connected gas pipeline. However, these are very complex undertakings. Realistically, it will take a long time to achieve the vision of a fully inter-connected regional energy market, especially given the diverse natures of the electricity and gas industries across the region. But there are already efforts to connect more countries bilaterally, whether through transmission cables or gas pipelines. As these efforts take shape, a gradual and steady move towards closer regional connectivity will evolve as well.

Top keywords from the responses received

Jacques Jeugmans Former Practice Leader (Health), Chair of the Health Community of Practice, Asian Development Bank, Manila, Philippines

What are the key obstacles to developing affordable, accessible and equitable health systems in the next ten years?

• Political will: health has a cost and someone will always have to pay for health services. At the household level, when there is a choice (and now in Asia, there is some choice everywhere), every family is deciding how much and how they want to spend on health. Each society decides what level of health services they want. At the level of society, it is a political decision. Most countries for example, aim at universal coverage i.e., universal access to essential health services; • Capacity: once the political will exists, policymakers have to rely on experts. The difficult decision to make, most often,

is not to decide to guarantee access to essential health services to everybody. The issue is to define the scope of 'essential health services'. What should be considered 'essential'? The appropriate answer will come from a dialogue among public health specialists and others (economists and other sectors’ representatives). Besides strengthening links between the components of health systems (financing, delivery, regulation), there is also a need to strengthen capacity for operational research. Regional players must design appropriate mechanisms to identify, consolidate and disseminate knowledge. Asian governments must be ready to learn from their own experience and from others’ experiences, successes or failures; and • Regional coordination: the region is developing fast, there is increasing connectivity and people and goods move around, crossing borders. Public health needs to be treated as a regional public good. No government can fully protect its population alone, without considering what is happening in neighboring countries. Regional cooperation, information exchange of experiences, must be strengthened. After SARS and H5N1, this is now clear for everyone with regards to prevention and control of communicable diseases. But the same apply for regional

HEALTH SYSTEMS | 24

health security in general, which involve food safety, toxic waste, air and water pollution, medicines and counterfeit drugs, etc. It is essential to develop regional sharing of information, capacity building, coordination and collaboration among countries, among sectors and among all stakeholders (governments, private sector, civil society) at the regional level to improve regional health and regional health security in particular.

50 40 Prevalence (%)

In most Asian countries, the government should progressively withdraw from direct services delivery and pay more attention to the regulatory framework and to sector governance: ensuring that services are delivered; ensuring that services are accessible – equity in access; quality control of services; and cost containment. In some cases (remote areas, indigenous people and other vulnerable populations), governments may still have to ensure services delivery themselves for a while.

But the focus should not be on 'delivery' but on access, equity and quality and prevention / mitigation of market failures in the health sector. As part of their responsibility for ensuring equitable access to quality services, governments will have to develop appropriate financing mechanisms and pay attention to the incentives that exist in all financing mechanisms.

Incentives have a major impact on costs and quality, but can also be used for improving quality, access and equity. This will be the major challenge of governments in the short- to medium-term.

Prevalence of current daily smokers

30 20 10 0 Malaysia

Philippines

Vietnam

Laos

Myanmar

Prevalence of insufficient fruit and vegetable consumption 100 80 Prevalence (%)

What role will governments / the public sector play in health systems of the future (financing, provision, regulation, etc)?

Prevalence of behavioural risk factors across income quintiles in selected southeast Asian countries in 2003

60 40 20 0 Malaysia

Philippines

Vietnam

Laos

Myanmar

What are the five greatest health threats that you envision in the next ten years, particularly those that will affect the poor?

• Pollution and toxic waste;

Prevalence of insufficient physical activity 20

• People’s mobility and trade and increased risks of communicable diseases; • Lifestyle changes and increased risk of chronic diseases; • Ageing and change in the burden of diseases; and • Neglected diseases of the poor, like tuberculosis (those that do not cost much to be addressed, but to eradicate requires much more effort).

How will health systems cope with population ageing?

• Social protection: society should organise itself to protect the elderly. To ensure equity (among rich and poor, rural and urban populations, young and older generations) governments must develop a fair and sustainable social protection mechanism and avoid relying on families and communities only;

Prevalence (%)

• Medicines (quality of drugs and inappropriate use of medicines);

15 10 5 0 Malaysia

Philippines

Vietnam

Q1, least wealthy

Q3

Q2

Q4

Laos

Myanmar

Q5, most wealthy

Source: Dans A, Ng N, Varghese C, Tai ES, Firestone F, Bonita R. The rise of chronic non-communicable diseases in Southeast Asia: time for action.

Lancet 2011; 377: 680 - 689. Data originate from World Health Survey 2003 country reports

25 | HEALTH SYSTEMS

• New skills for health workers: governments and schools (training health workers) must adapt the curriculum to ensure that health workers are getting the right skills. With ageing populations, the burden of diseases will shift and new skills are necessary;

Behavior change is difficult. We need indicators that allow policymakers to evaluate the impact of their policies on behavior changes at the society level, as a public health objective (versus individual monitoring, still needed of course, but this is more difficult to interpret for public health policies).

• Looking at what is happening in other societies (Europe, Japan), governments should develop quality home care services. This may involve families and the communities, but if this is the case, governments will have to pay particular attention to the status and the role of women, who are too often the ones required to care for older parents and relatives;

Public health specialists and policymakers will also have to become much more involved in other sectors. Governments should support and encourage this collaboration. Non-health sectors (transport, urban development, energy, water supply and sanitation, etc …) should systematically think about the health impacts of their activities. Those activities that benefit health should be given priority ('co-benefits') and when there are health risks, appropriate mitigating measures must be developed and implemented.

• In this context, aging women may face particular issues and problems (widowhood, rights to land and other household properties) that governments have to specifically address; and • Cost containment: with age, the burden of diseases will shift towards chronic diseases, to be treated for a longer timeframe. Governments will have to pay even more attention to sustainability of health systems that provide equitable access to quality services. Cost containment will become a major issue.

Forecasted average life expectancy, 2010–2040

Roberto Taboada President and Managing Director, GlaxoSmithKline, Philippines

What are the key obstacles to developing affordable, accessible and equitable health systems in the next ten years?

In many developing countries like the Philippines, there is an imbalance of socio-economic development which favours the high income, urban-based population. The low-income group in rural and poor urban areas, who have limited access to health professionals and facilities, tend to demonstrate poorer healthcare indicators.

Source: United Nations world population prospects 2008 revision. http://esa.un.org/UNPP/

How will health systems address the looming chronic disease burden?

Health systems will have to emphasise prevention. More research will be needed to ensure effective prevention: clear messages, culturally adapted, which results in change of risky behaviors such as lack of exercise or excessive calorie intake.

Under-investment in health also leads to a weak health infrastructure, which presents challenges for patients to have access to quality treatment. Because of the country’s limited resources, public spending on health in the Philippines costs around 3.3% of the GDP, below the WHO-recommended 5%.

Most Filipinos pay out-of-pocket for health and medicine expenses, which can become catastrophic for the poor.

The industry has committed to support the government in looking for ways to provide healthcare access for the poor. If, for the next ten years, we are able to address the poor’s needs for quality healthcare, we will achieve a significant milestone in social equity.

HEALTH SYSTEMS | 26

Total expenditure on health, as a % of GDP

increased awareness, good sanitation and environmental quality and vaccination programmes. Top killer diseases amongst children such as pneumonia, measles and diarrhea are just a number of the serious health threats facing the population. There is also dengue fever, cancer (though relatively low in prevalence, is terribly catastrophic in nature and in the associated treatment costs), respiratory conditions (due to high incidence of smoking, air pollution and lifestyle) and the rise of debilitating chronic conditions like heart disease and diabetes. New and emerging diseases, such as SARS, avian and pandemic influenza, while a great health threat to all communities, will have a more devastating impact on poor communities, who do not have access to healthcare professionals, facilities, treatment and vaccines.

Tuberculosis remains an important public health concern as well as the growth in prevalence of HIV-AIDS. What role will the private sector play in mitigating these threats?

Source: WHO Global Health Observatory. Data for 2008. http://apps.who.int/ghodata/#

What opportunities for private sector intervention do you foresee in health systems of the future (financing, provision, regulation, etc)?

To strengthen health systems, GSK supports efforts to promote greater investment in health and is looking at a combination of private and public financing mechanisms that will reduce out-of-pocket payments, whilst increasing pre-payment or risk-pooling mechanisms. Together with the industry association, GSK is looking at how to develop the public channel to be able to subsidise medicines and vaccines for the poor.

Differential pricing has to be considered to address both the needs of the poor and the need to sustain research and development of new products. In the Philippines, GSK made a pioneering and bold move to expand access to its products.

The launch of the ValueHealth initiative reduced the prices of most of GSK medicines and vaccines by 30%–50%, making these globally-trusted brands more affordable to the Filipinos.

For several years, GSK has also worked with the national insurance agency PhilHealth to enroll indigent families into the social health insurance system and to help them avail of health services when necessary. GSK will continue working with PhilHealth to find ways to cover out-patient medicines and vaccines and provide these free for lowincome families, alongside the establishment of disease prevention programmes.

What are the five greatest health threats that you envision in the next ten years, particularly those that will affect the poor?

There is the persistent threat of infectious diseases that are otherwise preventable if the poor are able to benefit from

GSK reiterates the value of differential pricing in helping more people to access the treatments that they need. Just as GSK has done, the pharmaceutical industry can find ways to expand access to its medicines and vaccines to more people. The private sector also plays a crucial role in supporting government disease prevention and health promotion programmes.

GSK is also focusing on developing new treatments to fight diseases of the developing world. To encourage more research in this area, the company recently announced that it is opening up its research facility in Tres Cantos, Spain to create an ‘Open Lab’ for more scientists to tap into the expertise, knowledge and infrastructure, while pursuing their own projects as part of an integrated drug discovery team focusing on finding solutions for neglected diseases.

How will health systems cope with population ageing?

Unlike other ASEAN and developed countries, the Philippines’ population has a larger share of the young. Nevertheless, the government has provided privileges for senior citizens including the Expanded Senior Citizens discount on medicines and mandatory vaccination schemes. Having a strong disease prevention and health management programme in place can also reduce the risk of disease amongst the elderly and promote healthy ageing.

How will health systems address the looming chronic disease burden?

There should be more aggressive campaigns on healthy lifestyles and disease prevention. Vaccination is an area that can still be optimised, while health education requires a concerted effort amongst different stakeholders, including not just the government but the private sector as well. There is also a need to improve patient diagnosis and access and compliance to treatment to reduce complications.

27 | HEALTH SYSTEMS

Dr. Tikki Pang (Pangestu) Director, Research Policy & Cooperation (RPC / IER), World Health Organisation

regulation but will need to be more inclusive, consultative and innovative in listening to the views of the non-state sector.

Governments and the public sector have another important role to play in the evaluation of public health policies and programmes in order to improve accountability and transparency and to ensure the most efficient use of limited resources.

What are the five greatest health threats that you envision in the next ten years, particularly those that will affect the poor?

What are the key obstacles to developing affordable, accessible and equitable health systems in the next ten years?

• Chronic, non-communicable diseases (e.g. diabetes, cardiovascular diseases, cancer);

First, the important primary obstacles are limited resources and fragmented health systems, where the key components (financing, human resources, information, service delivery) are operating independently without a 'holistic' systems thinking approach.

• Continued threats from emerging and re-emerging infections (including anti-microbial resistance);

Second, in many low-income developing countries, the large amounts of external aid from wealthy countries and other donors are adding to the problems rather than helping to solve them. These funds are placing onerous reporting demands on recipients, driven primarily by donor agendas and tend to focus on short-term, disease-specific results rather than the longer-term, overall strengthening of the health system.

Third, the development of affordable, accessible and equitable health systems requires the effective use of evidence in health policy development and decision-making – this capacity is woefully lacking in many developing countries. This obstacle also reflects the meagre evidence base due to poor support and visibility of health systems and health services research in these countries.

• Inequitable access to medicines and other advances resulting from research – these threats revolve around availability (none or very few drugs for neglected tropical diseases) and access (unaffordable prices); • Health impacts of climate change-global warming (natural disasters, severe weather events, spread of disease vectors such as mosquitoes); and • Ageing populations.

Age-standardized mortality rate by cause (per 100,000 population)

Fourth, corruption in many developing countries is a major obstacle. WHO's World Health Report 2010 on financing of health systems identifies waste, corruption and fraud as major sources of health system leakages which lead to wastage and inefficiency.

What role will governments / the public sector play in health systems of the future (financing, provision, regulation, etc)?

There is no 'one size fits all' solution and health system performance is closely tied up to local resources, capacities, priorities, players / actors and values. Importantly, governments and the public sector, although still expected to play a key leadership role, cannot go it alone – they must look to cooperate and integrate the activities of the non-state sector. It is well known that in many developing countries, NGO's are a critical and vital part of the health system and the private healthcare sector often plays important roles in supplementing the public sector, especially in the areas of financing and provision of health services. Governments will still play the lead role in

Source: WHO Global Health Observatory. http://apps.who.int/ghodata/#

How will health systems cope with population ageing?

Health systems must be prepared for the longer-term challenge of providing more chronic and supportive care, including

HEALTH SYSTEMS | 28

promoting home-based care which will serve to alleviate pressure on limited hospital and nursing home facilities for the aged. An important component which is often neglected concerns the mental health of ageing populations, which can place a great burden on health systems. Many developing countries, like China are woefully unprepared in management of mental illness even amongst the general population. In order to be better prepared, health systems must also invest in human capacity in the relevant medical disciplines (e.g. geriatric medicine) as well as supporting research in the social sciences (e.g. demography, sociology, behavioral sciences, etc).

How will health systems address the looming chronic disease burden?

Chronic diseases will prove much more expensive to deal with compared to infectious disease episodes – for example, a one week course of antibiotics will be much cheaper than life-long care for diabetic complications. In times of limited resources and competing priorities, health systems must thus seek efficiencies through strategies which ensure that evidence informs decisions and, most importantly, give greater attention to preventive strategies, e.g. health promotion activities which encourage healthier lifestyles (e.g. encouraging exercise, avoiding cigarettes, healthy diets, etc) as well as vigorously pursuing legislative approaches, e.g. fully implementing the various articles of the FCTC (Framework Convention on Tobacco Control) to reduce tobacco use, which is related to many chronic ailments. Preventive strategies will, in the long term, be much more cost-effective than curative ones.

29 | editorial team

Trade & investment FACILITATION Darryl Jarvis is an Associate Professor at the LKY School of Public Policy. He specialises in risk analysis and the study of political and economic risk in Asia, including investment, regulatory and institutional risk analysis. He is an author and editor of several books and has contributed articles to leading international journals. He has been a consultant to various government bodies and business organisations and for two years was a member of the investigating team and then chief researcher on the Building Institutional Capacity in Asia project commissioned by the Ministry of Finance, Japan.

His current research is a large cross-national study of risk causality in four of Asia’s most dynamic industry sectors. He teaches courses on risk analysis, markets and international governance and international political economy.

His email is darryl.jarvis@nus.edu.sg Johannes Loh is working as a Research Associate at the Lee Kuan Yew School of Public Policy. He holds a Master’s degree in Public Policy from the Hertie School of Governance in Berlin.

His previous research experience includes international student mobility, visual political communication, aid governance and public sector reform in developing countries. Recently, he completed a research project on Success Factors for Police Reform in Post-conflict Situations with the German Technical Cooperation.

Prior to joining the Lee Kuan Yew School of Public Policy he has also worked for the United Nations Environment Programme in Geneva, Transparency International Nepal and the Centre on Asia and Globalisation in Singapore.

His email is johannes.loh@nus.edu.sg and you can follow his updates on trade & investment facilitation on Twitter, @seasiatrade.

HEALTH SYSTEMS Phua Kai Hong is a tenured professor at the LKY School of Public Policy and formerly held a joint appointment as Associate Professor and Head, Health Services Research Unit in the Faculty of Medicine.

He is frequently consulted by governments within the region and international organisations, including the Red Cross, UNESCAP, WHO and World Bank. He has lectured and published widely on policy issues of population aging, healthcare management and comparative health systems in the emerging economies of Asia. He is the current Chair of the Asia-Pacific Health Economics Network (APHEN), founder member of the Asian Health Systems Reform Network (DRAGONET), Editorial Advisory Board Member of Research in Healthcare Financial Management and an Associate Editor of the Singapore Economic Review.

His email address is spppkh@nus.edu.sg Nicola Pocock is a research associate at the Lee Kuan Yew School of Public Policy. She is also the research manager at aidha, a non-profit financial education and entrepreneurship training school for migrant domestic workers in Singapore. Prior to joining the LKY School of Public Policy, she was the general manager at aidha. She has interned as a Fast stream trainee in the UK civil service at the Home Office and as a research volunteer at Amnesty International. Nicola has also carried out social work in Marseille, France as a European Union sponsored youth volunteer.

Her research interests span health and social policy, health systems financing, social impact assessment, gender, migration and financial behaviours.

Her email is sppnp@nus.edu.sg and you can follow her work on health systems on Twitter @healthSEAsia.

ENERGY SECURITY Benjamin K. Sovacool is an Assistant Professor at the LKY School of Public Policy. He is also a Research Fellow in the Energy Governance Programme at the Centre on Asia and Globalisation.

Dr Sovacool has worked as a researcher, professor and consultant on issues pertaining to energy policy, the environment and science and technology policy. He has served in advisory and research capacities at the U.S. National Science Foundation’s Electric Power Networks Efficiency and Security Programme, Virginia Tech Consortium on Energy Restructuring, Virginia Centre for Coal and Energy Research, New York State Energy Research and Development Authority, Oak Ridge National Laboratory, Semiconductor Materials and Equipment International, U.S. Department of Energy’s Climate Change Technology Programme and the International Institute for Applied Systems and Analysis near Vienna, Austria.

Dr Sovacool has published four books, more than 80 academic articles and presented at more than 30 international conferences and symposia. His email address is bsovacool@nus.edu.sg Anthony D’Agostino is a research associate at the Centre on Asia and Globalisation (CAG) with research interests in energy policy, climate change adaptation and environmental decision analysis. Prior to joining CAG, Anthony worked with the Institute of Water Policy at the LKY School of Public Policy, using system dynamics to address public policy and water policy challenges.

He has worked with the Greenhouse Gas Protocol at the World Resources Institute and at UNEP-ROAP, respectively focusing on corporate GHG emissions and sustainable buildings. In addition to consultation work on transportation and corporate environmental reporting, Anthony has worked for organisations in India, Australia, New Zealand and the US on rural development and sustainable agriculture issues.

His email is sppald@nus.edu.sg and you can follow his work on the Southeast Asian energy sector on Twitter, @seasiaenergy.

The Lee Kuan Yew School of Public Policy is an autonomous, professional graduate school of the National University of Singapore.

Its mission is to help educate and train the next generation of Asian policymakers and leaders, with the objective of raising the standards of governance throughout the region, improving the lives of its people and, in so doing, contribute to the transformation of Asia. For more details on the LKY School, please visit www.lkyspp.nus.edu.sg