Opening Remarks

Mr. Koichi Takemasa (State Secretary for Foreign Affairs) opened the first day of the meeting. He first expressed his condolences for the people of Chile, who had recently been affected by a violent earthquake. He noted that he was honored to give the opening remarks for the workshop, given his previous work experience with Saburo Okita, former Minister for Foreign Affairs for Japan and former Chairman of PECC.

2010 is a very important year for Japan, as it will be hosting the APEC Leaders' Meeting in Yokohama. Twenty years have passed since the formation of APEC, and in that time, advances in information technology, the progression of globalization and climate change, and the birth of new regional frameworks such as ASEAN+3 have changed the world. The theme chosen by Japan for APEC 2010 is "Change and Action". Japan chose the theme in order to position APEC as the most effective framework for the issues of the 21^st century. Japan's proposal for the 2010 APEC agenda consists of three pillars: 1) regional economic integration; 2) human security in order to ensure safer business environment; and 3) the chartering of a new regional growth strategy to overcome the economic and financial crisis.

First Session (Pensions)

Prof. Noriyuki Takayama (Institute of Economic Research, Hitotsubashi University) opened the first session and introduced the panel.


Speaker 1: Prof. Mukul Asher (Professor, Lee Kuan Yew School of Public Policy, National University of Singapore)

There had been an evident need for better social protection schemes in Asia since the 1997-1998 economic crisis, and this need had been strengthened in the wake of the 2008 economic crisis.

Researchers had not always provided policymakers with the right information to allow them to pick policies which emphasized social protection and inclusive growth. The global crisis presented the possibility of reducing the mid-term growth rate and adversely affecting the pace and quality of jobs available. It would possibly raise the cost of debt refinancing, lower remittance flows, and lower medium-term real investment returns on pension assets. Fiscal stimulation packages in response to the crisis could lead to higher inflation. In order to guard against these threats, economies needed to: 1) think about how to reduce the correlation between old age and poverty; and 2) forward policy that worked to enhance employment elasticity with respect to GDP.

Social protection systems were only going to become even more difficult to operate and mistakes in these systems were only going to become more difficult to reverse. It was projected that by 2050, the world would have over 2 billion people over age 60, and more than half of them would be in Asia.

The rapidly aging population signified a need to expend greater resources on social protection in Asia. However, this was a problem due to the massive opportunity cost it incurred - the more that was spent on programs for the elderly, the less money that was available for other purposes. Demographics suggested that along with growing elderly populations, Asia was also shifting toward a situation in which a little over three-fifths of the new livelihoods created in the world between 2005 and 2020 were expected to be created in the region. Generating new livelihoods on such a scale was itself a challenge even without having to put a large quantity of resources into social protection for the elderly. It was likely that 40-80% of all the livelihoods created would be within the informal sector.

Opportunities could be created in Asia for better social protection. Asian economies could combine traditional schemes with innovative measures to increase social protection around the region. This could be accomplished by modernizing and professionalizing existing formal social security organizations to strengthen their ability to perform five core functions: 1) the reliable collection of contributions, taxes and other receipts; 2) the payment of benefits in a timely and correct way; 3) the securing of financial management and productive investment; 4) the maintenance of an effective communication network regarding fiscal matters; and 5) the production of financial statements and reports. Other specific solutions included reductions in investment management, administrative and compliance costs; the use of different types of retirement income transfers not dependant on formal sector market relationships, and social assistance targeted at the poor. There was a need to implement more dynamic solutions for social protection issues. Countries needed to think more creatively and provide a greater range of schemes in order to enhance the amount of room available for reversibility.


Speaker 2: Prof. John Piggot (Director, Australian Institute for Population Ageing Research, Australian School of Business, University of New South Wales)

The problem of social pensions was not a short-term problem, but something that societies would have to deal with more intensively over the next 30 years. By 2050, Asia was going to see more growth in its over 65 population than anywhere else in the world. In particular, China was going to shift from having less than 7% of its population over 65 to having more than 30% of its population over 65.

In Australia, social security pensions were not connected to rights, but needs. Workers did not have to work for so many years or have contributed a certain amount to social security to gain pensions; rather, pensions were allotted to those who needed them. Those with enough assets did not receive any pension, those without assets received the full amount of pension, and those in between received a proportional allotment. As populations in Asia aged, the countries of the region would be forced to adopt a similar system as well. Means testing was often an unpopular idea, but it had a lot of merits worth considering. For one thing, it reduced the fiscal burden placed on social support systems, allowing for less taxation throughout the economy.

Researchers in Australia had been investigating into the effects of offering lower income taxes to the elderly in order to encourage them to work longer. Another idea that was being debated was the funding of social protection through personal capital taxation, which would fatten social protection programs while reducing disparity.

Especially in emerging Asian economies, there was not much of a structure through which social security systems might deal with population aging. Enhanced communication (about fiscal products, pensions and households), a rethinking of government debt issues (the promotion of inflation indexed bonds and longevity bonds) and the strengthening of systems for international financial transactions could help. Additionally, given the demographic trends and fiscal situation of many Asian economies, each country may want to seriously consider implementing means testing.


Speaker 3: Dr. Hyungpyo Moon (Senior Fellow, Department of Public Economics and Social Development, Korean Development Institute)

South Korean society had gone through a number of changes and had faced new challenges since the economic crisis in 1997. There had been rapid increases in social expenditures, growing disparities in terms of income distribution, and a general decline in social mobility. Additionally, South Korea faced falling fertility rates, an aging population, and did not posses adequate social safety nets.

In response to these problems, South Korea had introduced four major social insurance schemes: basic old-age pensions, long-term care insurance, disability allowances, and public childcare systems. Earned income tax credits had also been adopted.

Beyond these concrete measures, South Korea was working to develop "new social policy," which Dr. Moon explained as "social policy for preemptive social investment and system improvement with an aim to build competency to counter potential risk factors in individual life cycles and enhance individual progress" This policy aimed to create a large middle class and foster social mobility and sustainable economic growth potential. The South Korean government intended to do this through agendas on the basic social security net, education, welfare services and the labor market.

South Korea faced many issues regarding pension coverage. The country's elderly household poverty rate was among the highest of OECD member countries. Most elderly households were dependant on their offspring. One-third of the total insured were non-contributors. In order to deal with these issues, South Korea needed to improve its administrative capacity, create a contribution subsidy scheme to support elderly workers, and work to encourage those workers to continue to work as they aged.


Q & A

Dr. Yasuhiro Kamimura (Associate Professor, Graduate School of Environmental Studies, Nagoya University) asked Prof. Piggot about what the main factors were which made means testing successful in Australia and if the success was repeatable in Asian countries as well. He also inquired about how Australia had overcome the problem of stigma around means testing. Prof. Piggot responded that means testing had a particularly bad name in academic circles. He believed that in Australia, there was no stigma regarding means testing. This was because those excluded were extremely well off. As for whether the success in Australia was repeatable in Asian countries, Prof. Piggot answered that he was not sure, but that means testing was an option that should be on the table in every country. Means testing was a way to provide adequate social protection while coping with fiscal stress.

Ms. Gloria Pasadilla (Research Fellow, ADBI) asked about the monitoring challenges presented by means testing. Prof. Piggot responded that it could be difficult to identify who should and should not get pensions using means testing. Although those who would not get pensions were usually in the formal sector and were easy to track, the fact that those who were actually in need of pensions were often working in the informal sector meant that making sure people actually received pensions was sometimes difficult.

Mr. Jargal Dambadarjaa (Secretary General, Mongolian National Committee for Pacific Economic Cooperation (MONPECC)) asked about the wisdom of using inflation indexed bonds in social protection programs. Prof. Asher stated that it was important to track the real rate of return when considering pension funds. If this could be done, and if that real rate of return over a long period of time proved to be 3-5%, such funds were good ideas. It was important to collaborate investment management capabilities and fiscal market reforms in any investment policy. Countries in which macroeconomic management was particularly difficult should be very careful about inflation indexed bonds, because under new accounting rules, these could count as a fiscal liability of the state.

Dr. Soogil Young (Chair, Korea National Committee for Pacific Economic Cooperation (KOPEC)) asked each panelist what one piece of advice they would like to give APEC leaders on their topic. Prof. Piggot suggested that countries agree to reduce international blockages regarding insurance systems. This would allow countries with more developed insurance systems to help other countries, and in turn would prepare markets to deal with coming challenges. Prof. Asher answered that he would advise that progress be made in totalization agreements and the improvement of working conditions. Dr. Moon stated that for him the most important issue was the closing of the pension coverage gap, especially for those in the non-formal sector.

A member of the audience asked Prof. Asher if he had measured and compared employment elasticity in APEC economies. Did Prof. Asher think that policies with considerations for employment elasticity could improve the situation of migrant workers as well? The audience member asked Dr. Moon for more concrete information about those over 70 who were below the poverty line in South Korea. Dr. Moon responded that the figure he offered was based on income levels, not assets. Many of those over 70 lived with their offspring, and were not actually so bad off. Prof. Asher stated that there had not been a specific economic study comparing employment elasticity in APEC countries yet. However, studies did show that employment elasticity was decreasing in countries around Asia. He believed that more research needed to be done on a sectoral basis, and posited that increasingly, many of the jobs that were being created in Asia were precarious and did not provide workers with access to a social safety net.

Keynote Speech: Prof. Hiroshi Yoshikawa (University of Tokyo)

Growth theory normally focuses on supply side of the economy, but demand is just as important. Prof. Yoshikawa brought up Engel's law, which stated that the higher one's income is, the lower one will spend on food. It means that the demand for foodstuff eventually reaches a point of saturation. This law applies not only to food stuff, but actually to everything. Engel's law is the fundamental constraint for economic growth. The key to creating economic growth therefore, is the creation of new products and services.

Why do new products or services emerge? Because new challenges emerge. Issues of social resilience are a new challenge as well, and they will lead to innovation.

In Japan, inequality is one of the most important political issues. There are many ways to measure inequality. One of these is the Gini coefficient. Another is to look at the percentage of income held by the richest one percent. The Gini coefficient has been rising in Japan, Canada and Australia, but was flat in many European countries. Why did the Gini coefficients rise? The most important reason is aging. Inequalities among the aged are higher than among the young. By the end of the century, almost all of the major countries in the world will have to deal with aging populations.

Japan has a decent public pension system. The pension system is decent, but not perfect. One of the major proposals to improve the pension system is the introduction of a social security number system.

The social security system is not sustainable. It is sustained by public deficits. Japanese GDP amounts to 500 trillion yen, whereas the public debt is close to 800 or 900 trillion yen. The government debt to GDP ratio is therefore around 160%, whereas the EU criterion is that the ratio must be less than 60%. Greece, a country in deep financial trouble at the time, has a debt ratio of about 115%. Why is Japan's ratio so high? The main reason is mounting social security.

The Japanese government is expecting a 54 trillion yen budget for the coming fiscal year. The amount allotted for social security is 27 trillion yen. Every year social security expenditures are to increase by roughly 1 trillion yen; the greatest expenditure of the Japanese government is social security.

Japanese people do not pay enough in taxes. Consumption tax (VAT) in Japan is 5%. In the EU the minimum VAT tax rate is 15%. Prof. Yoshikawa brought up the example of the German national election in 2005, in which Angela Merkel had proposed that Value Added Tax (VAT) be raised from 16% to 19% in order to safeguard the German social security system, and this had allowed her party to win the election. In Japan however, the idea of raising consumption tax is incredibly unpopular. It is important that people be helped to understand what the social security system is and what its prospects are. Every country can learn a lot from every other country on this issue.

Mr. Dambadarjaa noted that the Japanese economy was not competitive and that Japan was losing its export market. Wouldn't an increase in consumption tax make Japanese businesses even less competitive? Prof. Yoshikawa answered that competition was more effected by corporate income tax, which was effectively set at roughly 40% in Japan. Many economists had suggested increasing consumption tax and at the same time cutting corporate income tax to increase competitiveness. Prof. Yoshikawa noted that this sort of package was hard to sell politically as many called it an effort to decrease the tax burden of corporations while increasing the burden on the public.

Dr. Tan Khee Giap (Chair, Singapore National Committee for Pacific Economic Cooperation (SINCPEC)) asked if it was possible to increase the retirement age in order to decrease the burden on the social security system. Prof. Yoshikawa responded that the starting age for pensions in Japan used to be 60. Prof. Yoshikawa believed that 68 was reasonable.

Dr. Young asked Prof. Yoshikawa for what specific recommendation he would give APEC leaders. Prof. Yoshikawa responded that the social security system reflected the values of each economy, and more than anything, he hoped that APEC economies could be encouraged to have shared values so that they could develop a shared social security system.

Second Session (Medicare)

Prof. Yasuo Uchida (Emeritus Professor, Kobe University; Dean of the Graduate School, Ritsumeikan Asia Pacific University) opened the second session with a presentation on 'hared growth' in Asia.

There were positive correlations between economic growth and the percentages of the population over the age of 65 in East Asian countries. In Europe, Scandinavian and Mediterranean countries had also had high aging ratios, but Scandinavian countries with better social supporting systems have gradually improved birth rates.

Although East Asian economies were growing, the high aging ratios indicated the need for strengthening social security. The main characteristic of social security systems in Asia was the way public and private schemes were combined to provide services. Japan, Taiwan, and Korea used schemes based on the social insurance systems of Germany, while the system of Hong Kong was tax-based, a British model. Singapore was based on the medical savings account, tax and voluntary insurance schemes.

Apart from the structure of each countries scheme, there were epidemiological transitions throughout East Asia away from communicable diseases to non-communicable / lifestyle diseases. Prof. Uchida hoped that the second session would see an interesting discussion on how Asian social security and medical care systems could deal with changing disease structure and aging populations.


Speaker 1: Prof. Masako Ii (School of International Public Policy, Hitotsubashi University)

Japan had implemented universal health care since 1961. The country had the world's highest average lifespan and a high standard of health care. In Japan, hospitalization was very common. Japan had the highest number of hospital beds of OECD countries and a low number of practitioners -12.8 practitioners per bed in Japan, as opposed to 41.1 in other OECD countries.

Medical costs in Japan were rising, especially for the elderly. One reason for this was the changes that took place in the 1970s that allowed the aged to receive free medical treatment in hospitals. Since that time, the number of elderly inpatient and outpatient consultations at hospitals had jumped. Other factors that had caused health expenses to rise were the aging of the population, the spread of the health-care insurance system, rising personal incomes, supplier-induced demand, and prices in the health sector.

There were three major solutions to rising health care expenses: 1) efforts to control health care costs through cost-cutting measures and a medical supervision system for insurers; 2) streamlining a multi-faceted health insurance system; 3) the use of consumption tax funds for medical services.


Speaker 2: Dr. Etsuji Okamoto (Physician and Chief of Management Science, National Institute of Public Health)

One of the problems Japan was facing was that many people in Japan did not pay for health insurance. This problem stemmed in part from the fact that, because Japan had universal coverage, at one time insurers would give insurance cards to everyone whether they paid or not. This practice had changed in recent years.

Japan's health insurance programs were divided between those administrated by local governments and those administrated by employers. The National Health Insurance Program of municipal governments was financed half from government subsidies and half from premiums charged on those enrolled in the program. Those enrolled in municipal government systems were charged a basic household premium, a basic premium per enrollee, and income related premium, and a real-estate related premium. Statistics showed that those with lower incomes tended to spend more on health care. Likewise, residents of wealthier areas tended to spend less on health-care. The latter relationship remained constant when looking at any region in Japan.

Dr. Okamoto concluded that given the trends he had discovered, policy makers may want to pay greater attention to the relationship between health and wealth when creating policy.


Speaker 3: Dr. Rouselle Lavado (Research Fellow, Philippine Institute for Development Studies)

The health sector in the Philippines was complex. Consumers paid taxes to the government, premiums to health insurance, and user fees to their health care providers. The government finances public hospitals and public health programs as well as pay for premiums of indigent population to the national health insurance program (called Philhealth). Philhealth reimbursed health care facilities and workers who in turn provide health care to consumers.

The national health insurance program was established in the Philippines to help offset medical costs. It was divided into five programs: the employed sector program, the individually paying program, the overseas workers program, the sponsored program, and the non-paying program/lifetime program for those who had reached 60 and above.

Based on the latest health accounts data, 57% of all health care costs were paid out-of-pocket. Heavy dependence on out-of-pocket spending suggested that health insurance provided inadequate benefits. One issue was that health insurance spending showed a bias toward hospital-based care, and unlike Japan, Filipinos rarely visited hospitals for treatment. In relation to the previous presentation, the data suggested that in the Philippines it was actually the richest part of the population that spent the most on medical expenses. Households unable to afford medical care were forced to spend less on food and education, but this only freed up a small amount of money.

In order to analyze the effectiveness of health insurance in the Philippines, Dr. Lavado had researched into whether membership led to a higher rate of using hospitals for births instead of more traditional methods. She had found that insurance did not have an effect on the likelihood of going to a hospital for a birth, rather wealth and one's educational background seemed to be the dominant factors.


Commentator: Dr. Tan Khee Giap (Chair, Singapore National Committee for Pacific Economic Cooperation (SINCPEC))

Dr. Tan stated that he felt that Dr. Lavado's presentation had revealed the severe market failure of health care in the Philippines. He highlighted a number of points from her presentation which he found to be worrying.

The problem of health care in Japan was the problem of success. Increasing life expectancies had caused health care expenditures to increase. This was worrying. If Japan could not deal with increased costs along with economic success, how could smaller economies hope to deal with costs in the future? Dr. Giap asked about what other factors there were for rising costs in Japan, and the extent that supplier-induced demand had reduced costs.

As a fundamental model for APEC, every researcher should think about models in which the state was not overburdened by the costs of healthcare. Countries like the Philippines, they should seriously look into reexamining co-payment systems.

Dr. Lavado responded that decentralization had been a problem in the Philippines and had led to a loss of economies of scale. She agreed that there should be work regarding co-payment schemes. She suggested that a system like the 30 baht program in Thailand may work in the Philippines.

Dr. Ii explained what the other factors were in creating rising health care costs in the Japanese system. In particular, advances in medical technology had led to greater demand for surgery and rehabilitation and increased costs. As for supplier-induced demand, studies had shown both evidence that they had reduced costs and increased costs.


Q & A

Dr. Gloria Pasadilla suggested to Dr. Lavado that perhaps one reason why women did not go to hospitals was that, especially in poorer areas, the nearest hospital may be very far away.

Dr. Lavado answered that although it had not been included on the slide, she had looked into travel distances from hospitals, and found that this was unrelated to whether or not a woman decided to go to a hospital for a birth. Rather, women tended to respond that they did not go to a hospital because they did not like going to hospitals. They stated that the medical workers at hospitals were not friendly, they could not ask the worker to do housework for them after the birth, and they could not pay hospitals in installments.

Third Session (Unemployment Insurance System)

Speaker 1: Prof. Yasuhito Asami (Professor, Graduate School of Social Sciences, Hitotsubashi University)

About one-quarter of the total labor force in Thailand is now covered by the unemployment insurance. Insurance is compulsory for employees in the formal sector, but unfortunately, people working in the informal sector are not covered.

The number of people receiving unemployment benefits in Thailand fluctuated greatly from month to month. 6.7-17.7% of the unemployed received unemployment benefits in 2007. About one-third of the unemployed in 2007 were involuntarily laid-off and were eligible to receive benefits worth 50% of their salaries. The other two-thirds were voluntarily laid-off and were eligible for 33% of their salaries.

When Thailand first introduced an unemployment insurance system in 2004 its GDP per-capita was US$2,479, considerably lower than other APEC countries at the times that they had introduced unemployment insurance systems. Why did Thailand introduce the system at such an early stage, and what implications did this have for other second-tier newly-industrialized countries?

The unemployment system was implemented in 2004 under the Thaksin Administration. At that time, there was strong support from the Labor Ministry but weak support from business leaders. The political bonus the system provided was one reason for its introduction. He noted that additionally, one of the interesting features of Thailand's system was that it was sustainable, and even profitable. The benefit itself was not enough to survive on, which kept costs low and ensured that people did not rely solely on unemployment benefits. Under the present unemployment insurance system in Thailand, the employee and employer are required to contribute 0.5% of the employee's salary, while the government contributes 0.25% of the salary. The amount of unemployment benefits is set at only 50% of the salary (not exceeding 7,500 baht per month) even for involuntarily laid-off workers, and they can get it only for the first six months. So even if the unemployment rate becomes unprecedentedly high, it is unlikely for the Thai unemployment insurance system to run a deficit.

Thailand had shown that the introduction of unemployment insurance could be both financially viable and politically attractive for other second-tier newly-industrialized countries most of which have not introduced the unemployment insurance yet.


Speaker 2: Dr. Ke-Jeng Lan (Associate Professor, Department of Labor Relations and the Institute of Labor Studies, National Chung-Cheng University, Taiwan)

Chinese Taipei as well had an aging population, low fertility rate, and increasing unemployment rate. In 2009, there had been an amendment to the Employment Insurance (EI) Act to extent unemployment benefits from six to nine months for older workers and disabled and offer extra payment for the dependants of the unemployed. All national and permanent residents of Chinese Taipei between the ages of 15-65 were allowed to enter into the system. EI membership trends had declined up until 2008, but had increased after the 2009 amendment. The EI premium was 1% of insured wages. Workers qualified for unemployment if they could show evidence of involuntary unemployment, had paid into EI for one year, and had registered for job search services through the Public Employment Services Institution (PESI). Five types of benefit were offered through EI: 1) unemployment benefits; 2) early reemployment awards; 3) vocational living allowances; 4) national healthy insurance premium support; and 5) parental leave allowances.

Taiwan had a high proportion of SMEs which were able to absorb laid off workers and Taiwan offered many benefits which helped workers to survive when laid off. Taiwan also had a lot of unskilled foreign workers whose employers paid into the employment stabilization fund and helped to support native workers.


Speaker 3: Dr. Myoung-Jung Kim (Research Fellow, NLI Research Institute)

South Korea had a low employment rate, low unemployment rate, high ratio of non-regular workers, and had seen a rapid increase in those seeking job allowances since 2008. Its ratio of self-employed workers was high, and the poverty rate in the country had been rising since 2008.

All employers and employees in the covered enterprise should pay an insurance premium. They are entitled to receive grants or unemployment benefits from the employment insurance fund. South Korea's employment insurance system consists of (1)the unemployment benefits, a passive labor market policy which provides cash benefits to the unemployed, and (2)Employment Stabilization program and (3)Skills Development Program, those are active labor market policies. Also (4)Mother Protection Program was included in 2002.

The insurance system was financed by a deduction of 0.45% of employee paychecks and 0.45% or more of each employer's payroll budget. Certain workers were excluded from the system, such as workers employed in extremely small scale businesses in the agriculture, forestry, fishery, hunting or construction industries, government and private school workers, part-time workers, and workers employed in household services. In 2008, 35.5% of those eligible for social insurance claimed it, and this figure seemed to be rising every year.

In addition to social insurance programs, the South Korean government also implemented many active labor market policies to strengthen the countries social safety net, which the government had placed more and more emphasis on since the 1997 financial crisis. Programs implemented included an internship program for the young, a work program for vulnerable groups, a social service job creation policy, and work sharing.

Since the 1997 financial crisis, the South Korean government had been introducing more and more social programs, and while they had been successful to an extent, he believed that more needed to be done to strengthen the programs.


Speaker 4: Prof. Naoki Mitani (Graduate School of Economics, Kobe University)

Unemployment in Japan had soared to 5.1% at the end of 2009. The number of unemployed insurance recipients grew to over 1.01 million people in 2009.

The Japanese employment insurance scheme was composed of unemployment benefits (budget: 2.261 trillion yen; funded by employee/employer contributions equal to 8/1000 of employee wages), services for the stabilization of employment and services for developing human resources (budget: 1.191 trillion yen for both services; funded by employee contributions equal to 3/1000 of employee wages). In order to qualify for unemployment insurance, employees were required to work more than 20 hours per week for more than 6 months and be younger than 65. To qualify for unemployment benefits, employees were required to have paid at least 12 months of insurance, be registered with the public employment security office.

The Japanese unemployment insurance system had effectively maintained social resilience in Japan. However, it was not well suited for non-standard employees, and with the changing times, it should be changed to help the vulnerable by offering more resources for training and job-search assistance.


Speaker 5: Dr. Yasuhiro Kamimura (Associate Professor, Graduate School of Environmental Studies, Nagoya University)

Deepening the free trade market without implementing social policy was the road to the satanic mill (Polanyi). East Asia had a need to restructure its boundaries of welfare. He welcomed the meeting as an opportunity for mutual learning, and exclaimed that the examination of unemployment insurance was essential for the future of the region.

Each country in East Asia was experiencing a different phase of industrialization. For many countries, unemployment was a new issue that had seriously come to light after the 1997 economic crisis. In East Asia there were countries which had unemployment insurance (Japan, Taiwan, South Korea, Thailand, China, and Vietnam) and countries which did not (Hong Kong, Singapore, Malaysia, Philippines, and Indonesia). What differentiated these countries? Prof. Kamimura had investigated the possible relationship between unemployment insurance and economic development but found no correlation.

Prof. Kamimura had also analyzed the unemployment insurances of Japan, Korea and Taiwan, and compared the ratios of the insured persons among the labor forces, and the ratios of the beneficiaries among the unemployed persons. He had found that, especially among young people, those unemployed often did not receive unemployment benefits.

Hong Kong, Singapore, Malaysia, the Philippines, and Indonesia should introduce unemployment insurance, and that countries that already had unemployment insurance should reexamine their schemes to ensure that those who needed unemployment benefits were receiving them.


Commentator: Amb. Donald Campbell (Chair, Canadian National Committee for Pacific Economic Cooperation (CANCPEC))

Employment insurance was a limited but direct tool to support social resilience. Most everyone had agreed that employment insurance was a positive development, which was surprising, as in the past many in Canada had viewed employment insurance as something which slowed growth.

Amb. Campbell agreed with Prof. Kamimura that countries that had not introduced unemployment insurance should do so. It did not matter at what stage of development a country was at. Unemployment insurance was useful in creating economic confidence, and was politically popular.

Active labor market policies were an essential feature of employment insurance. Evidence had shown that such schemes were stabilizing factors in the workforce and contributed to growth over the longer term.


Q & A

Mr. Dambadarjaa asked about who administered unemployment insurance in each country. Amb. Campbell responded that in the case of Canada it was administrated by the government. Prof. Mitani answered that this was true for Japan as well.

Dr. Wisarn Pupphavesa (Advisor, Thailand Development Research Institute) commented that for countries without employment insurance schemes, it would take time to introduce them. In the case of Thailand, one political issue had been whether the government had enough money to introduce the scheme. Dr. Pupphavesa also argued that former-Thai Prime Minister Thaksin's actions were not due to political motives, but pressure from business. After the 1997 economic crisis, many businesses had realized that there was not an effective social net that could prop up the economy in times of crisis, unemployment insurance was not necessary the result of work by politicians. Mr. Asami responded that he may have over-emphasized the political reasons for the introduction of employment insurance, but he still believed that there was a political reason. The scheme would not have been able to be introduced without political momentum.

Prof. Horioka commented on Prof. Mitani's analysis of the Japanese unemployment insurance system. He wondered about why the system provided subsidies to companies that retain workers, and not to those that hire workers, and why it provided subsidies for mid-career workers and not new workers. He suggested that more resources go to programs which actually help those who really need them in Japanese society.

An audience member asked about whether other Asian countries aside from Japan were debating an increase in the minimum wage and whether this would be good for Asian economies. Prof. Lan responded that in Taiwan in the past two years, trade unions had been lobbying for an increase in the minimum wage. In the future, the government intended to let the market decide. Employers did not want the minimum wage raised as they argued that most minimum wage earners were foreign and they did not want to pay more to foreigners. Prof. Asami responded that in Thailand, the minimum wage system had been implemented since 1972, and that an increase in the minimum wage would probably have a positive impact on the economy. This is because employers may simply lay off old workers rather than increase wages and then they, in particular growing industries, may be able to hire new workers at the higher wages.

Roundtable Discussion: "Toward APEC 2010-2011"

Amb. Nogami opened the roundtable discussion and introduced each participant. The theme for the discussion was how PECC could contribute to the APEC process. The current year was extremely important for the future of Asia Pacific cooperation.

Amb. Nogami mentioned that he hoped that the new growth strategy of APEC would include what the meeting participants had discussed throughout the day. He expressed his wish that the PECC could also discuss issues of human security, given the earthquake that had occurred in Chinese Taipei that morning. He then turned the floor over to Mr. Jusuf Wanandi (Vice Chair, Board of Trustees, Centre for Strategic and International Studies (CSIS) / Chair, Indonesian National Committee for Pacific Economic Cooperation (INCPEC) / Co-chair, PECC).

Mr. Wanandi stated that, before the panel moved into discussion, he would first give an overview about the main issues concerning APEC that the panel was expected to discuss. He started with key dimensions of APEC's Agenda with its four pillars comprising trade and investment facilitation, trade and investment liberalization, economic and technical cooperation, and human security. The agenda is divided into two parts: the unfinished agenda and the new agenda. This agenda has to be in line with the regional and international dimension and objectives.

APEC's Trade Agenda has been going on since 1989, and so far there has been some noticeable progress although there are some still unfinished agenda. In 1989, the Agenda focus on facilitation and strengthening of multilateral trading system. At the Bogor Summit in 1994, the Leaders issued the Bogor Goal which focused especially on trade liberalization. Similarly, the Osaka Action Agenda 1995 and the Manila Action Plan 1996 also focused on trade liberalization.

Meanwhile, the Busan Roadmap 2005 and the Hanoi Action Plan 2006 focused on the trade facilitation to achieve the Bogor Goals. In 2007 the focus was on strengthening regional economic integration, by promoting further liberalization including structural reform. Finally, the agenda for 2010 is to set the target date for developed members to achieve Bogor Goals by reassessing the overall trade agenda.

Where is APEC going from here? It is still uncertain whether the Bogor Goals be achieved partly because there are actually no clearly defined targets for this. Currently, the nature of APEC is called V-APEC or in voluntary process and it is clear whether there is any initiative to move from V-APEC to B-APEC, i.e., APEC with more binding process. Moreover, the components of APEC's agenda consist of economic and technical cooperation (ECOTECH) and trade and investment facilitation (TILF) have some issues of their own. The ECOTECH is insufficient to support TILF. APEC needs to move from focusing on 'at border' measures to focusing on 'behind-the-border' and cross border measures. Mr. Wanandi hoped that eventually APEC could declare that the Bogor Goals have been accomplished and move forward with a new set of objectives. The APEC region has achieved a lot more regarding trade liberalization than other regions, but is a lot more that APEC could do.

Mr. Wanandi ended his comments by stating that he hoped that APEC could propose a new agreement focusing on cross-border and behind-border measures including social safety net and social security issues as a new issue of human security.

Amb. Nogami commented that he would rather see the social safety net issue as a part of the new growth strategy rather than a human security issue.

The roundtable discussion moved on to receive a comment from Dr. Tan, who stated that he had three points to make. The first was that, in view of the mushrooming of regional cooperation architecture, APEC was still by far the most relevant framework, and would continue to be. The second point was that rather than waiting until next year to find out now what Russia would do for APEC 2012, everyone should ask the country about its plans immediately and begin making suggestions. For the third point, Dr. Tan noted that there were many issues that APEC needed to study, including to what extent trade liberalization had actually led to non-inclusive growth. Despite efforts for the opposite, to what extent had APEC economies actually moved apart in terms of income disparity, social safety nets, public housing and healthcare?

The floor was handed to Amb. Antonio Basilio (Chair, Philippine Pacific Economic Cooperation Council). Amb. Basilio stated that he would focus on two issues.

The first issue was the Bogor Goals. It was clear that the definition of clear and open trade within the Bogor Goals had become imprecise and outdated because of changes in the global market. The official measure of tariff liberalization was no longer as relevant as trade facilitation and behind-the-border measures. The focus of APEC work was shifting away from not just on the elimination of tariffs but to market integration, services, investments, standards, customs, administration, competition, and legal and regularity systems.

The second issue was labor mobility. This was a phenomenon that was going to continue in the future, and an issue of business facilitation, as it involved an agreement between businesses to bring in labor to fulfill specific skill sets. It was important that APEC develop good policy on labor mobility.

Dr. Young then spoke to the meeting. He noted that the meeting marked the broadening of the agenda of PECC. PECC had recently submitted a proposal to APEC to help societies in the region continue on their path toward liberalization. This proposal had suggested that the APEC work agenda cover: work to improve the outcomes in education and skill training in order to enhance long term economic security; earned income tax credits to encourage enterprises; the creation of better social safety nets to provide long-term economic security.

The day's workshop had discussed the last item, and the findings from the discussions would contribute to the work of APEC ministers on the topic. Dr. Young stated that he personally had leaned a lot from form the discussion that day. He listed off some of the things he had learned: that enhancing social safety nets alone did not lead to a simple solution for labor issues; that the design of the final shape of effective social safety nets would inevitably differ from one economy to the other; and that social safety nets differed between countries because values differed between countries.

There was a need for cooperation among regional economies in the form of experience and best practice sharing. The concept of social resilience may even need to be grown beyond the idea of social safety nets. Work needed to be done to the strengths and impediments of social safety nets, and how the impediments may be overcome.

Dr. Young commented that the following day's meeting would address the creation of low carbon societies. He brought up the proposals of the President of South Korea Lee Myung-Bak, who had suggested that climate change adaption be looked at as an opportunity for economic growth. Green growth was being positioned as one part of South Korea's new growth strategy. The government projected that its green growth plan would add up to 1.8% to South Korea's GDP. The country had established emission reduction targets of 30% by 2020. South Korea was committed to providing leadership for developing countries by establish a green growth institute.

The last speaker of the roundtable discussion was Amb. Campbell, who proclaimed that 2010 would be both a critical and interesting year from the point of view that one of the Bogor Goal target dates was 2010. Amb. Campbell did not believe that they had met the goal, but that did not mean they could not declare victory. He reflected that there had been three phases in APEC's lifecycle. The first period was the wonder years, the second period was the disillusionment years, and the next period was when the organization found itself. APEC was created based on the belief that greater economic integration would lead to prosperity for the region.

Where was APEC going? The changes of the 21^st century meant that APEC needed to seek a new mission. Trade and security were becoming more important issues for APEC, and Amb. Campbell surmised that the organization had abandoned regionalization except in rhetoric. One of the major challenges for the world and the region was the rebalancing that would take place in terms of export and economic demand. Behind-the-border issues would be incredibly important in the coming years. He hoped that PECC and APEC could work together to facilitate change and action on growth, social resilience and the green economy.

Amb. Nogami stated that one thing he felt during the course of the seminar, was that recently, many media outlets, journalists and books were talking about the shift of gravity in the world toward the Asia Pacific region. That may sound good, but were the societies of the region really able to hold this shifting gravity? The left this question up to the attendees to decide, closing the first day of the meeting.

Fourth Session (Macro Analysis)

Prof. Charles Horioka opened the meeting's second day at 9:35, thanking PECC and the Japan Institute of International Affairs for organizing the research project and conference. He gave a summary of the previous day's session and introduced the panelists for the fourth session.


Speaker 1: Dr. Zhou Yanfei (Japan Institute for Labor Policy and Training)

There was a positive relationship between pension uncertainty and the accumulated assets of close-to-retirement households and specifically, approximately 10% of net financial assets and 5% of gross financial assets are held by such households as a precaution to uncertainty.

The public pension system in Japan was a two-layer system, but both layers were operated as pay-as-you-go systems. Because of this, the transformation of Japan into an aging society meant that it was necessary to raise collection rates or cut benefits. This had led to a series of reforms in 1985, 1994, 1999 and 2004. Demographics suggested that there was no need to institute further reforms until 2050, but researchers had found that despite this uncertainty about the future would cause households to save more than was necessary against that chance that further reforms would occur.

Dr. Zhou and Prof. Suzuki had used data from a 2008 JILPT survey on the employment and working conditions of elderly people. They selected respondents that were working and had some income, had not yet received any pension benefits, and were the head of their household. 1.4% of those surveyed expected a rise in benefits in the future and 43.8% expected a drop. The average anticipated change was -9.3% and the average value change was -21.9 thousand yen. Measuring the amount that each household was saving in terms of gross and net assets, the two scientists had found strong evidence to support a precautionary savings model. It seemed that when people felt greater uncertainty about public pensions, they saved more and accumulated more wealth.

If that was the case, then public pensions were responsible for excessive saving. There were three major reasons for public pension uncertainty: 1) national distrust toward the management of the pension system; 2) anxiety about the sustainability of the public pension system; 3) irrational panic due to a lack of knowledge about the public pension system and pension reforms. The government could therefore ease pension security by providing reliable and easy-to-understand reform plans and working to improve the transparency and efficiency of management systems. Increasing trust of the pension system could reduce excessive saving and increase consumption rates, helping to push the economy out of recession, although increasing consumption rates among elderly households may have only a limited effect on the economy.


Speaker 2: Prof. Charles Yuji Horioka (Professor, Institute of Social and Economic Research, Osaka University)

Prof. Horioka presented a paper he had written with Ting Yin. The purpose of the paper was to conduct a panel analysis of the determinants of household savings in OECD countries, analyzing the impact of the age structure of the population, social benefit levels, and credit availability on the household saving rate.

The life cycle hypothesis posits that people work and save when they are young and then retire and dissave when they are old. Therefore, the higher the ratio of the aged population to the working-age population, the lower the household savings rate should be. Social benefits should have a negative impact on savings as households will not need to save if they feel social benefits are adequate. Likewise, financial development should have a negative impact on saving as households would know that they could borrow freely when emergencies arose. Finally, social benefits and private borrowing are considered to be substitutes for one another in that they are both risk-coping mechanisms, and therefore, the coefficient of the cross-product of the two should be positive.

Prof. Horioka and Ting Yin analyzed data from 23 OECD countries for three years: 1995, 2000 and 2005. They found that the age structure of the population and the availability of credit were more important as determinants of cross-country difference in the household saving rate than the social benefit ratio. The data also suggested that credit availability and the social benefit ratio were indeed substitutes for one another.

What are the policy implications of these findings? 1) the unclear relationship between social safety nets and household saving rates implies that improving social safety nets would not necessarily improve consumption; 2) the finding that the availability of credit has a greater impact on household saving rates than the social benefit ratio suggests that developing capital markets could improve consumption.


Commentator: Dr. Robert Dekle (University of Southern California)

Dr. Dekle stated that he wished to put both papers in a broader macroeconomic framework. In particular, the Zhou-Suzuki paper had shown that eliminating uncertainty regarding social benefits could reduce the wealth-income ratio by 10%. This would raise consumption in Japan between 0.4 and 1%. Assuming that investment and other factors did not change too much, this would increase the current account of Japan by about 1%. In terms of a monetary amount, the removal of uncertainty would increase Japanese consumption by about 50 billion yen.

The elderly held on to wealth for three reasons: 1) to give it to the younger generation; 2) to use it to receive attention from the younger generation; 3) to guard against unexpected contingencies such as diseases. Zhou-Suzuki had shown that increases in social insurance uncertainty increased savings and lowered consumption. A very interesting finding of the survey was that the average expectation of households was that pension benefits would decrease 9.6%. In contrast, the Japanese government was projecting that pension benefits would fall only 5%. This suggested that the public did not trust the government.

Dr. Dekle asked why female household heads and more educated households had higher saving rates.

Moving on to the Horioka-Yin paper, Dr. Dekle said that he found the finding that a 1% increase in credit availability lowered household savings by 0.35% to be interesting. The paper suggested that demographics had a strong impact on savings. He noted that the results of the first paper and the second paper were not always consistent, and he suggested that some reconciliation be done. He asked Prof. Horioka how he reconciled his findings with papers that showed that increases in the social security-wealth ratio caused social security saving to fall.


Commentator: Dr. David S. Hong (President, Taiwan Institute of Economic Research / CTPECC)

Regarding the Zhou-Suzuki paper, Dr. Hong said that he had a few observations. Public pension uncertainty had been described as anticipated change in the paper, and Dr. Hong wondered if the authors could clarify this. It was stated that lower levels of anticipated benefits would cause a rise in household savings. However, this implication was inconsistent with the results of the 1994 reforms, following which household savings declined. This contradiction may have been due to the paper only considering the behavior of households near retirement. It would be advisable to extend the analyses to other age groups. While those near retirement could anticipate lower future incomes because of cuts in benefits, younger age groups would conversely expect lower social security taxes and therefore a higher future incomes.

On the Horioka-Yin paper as well, Dr. Hong said that he had some observations. The authors failed to take into account cross-product terms when estimating the impact of the social benefit ratio. In emerging countries, a higher social benefit ratio should lead to a lower household savings rate where credit availability was low. In advanced countries where credit availability was high, the opposite should be true.

Dr. Zhou responded to the commentators. In response to Dr. Dekle's question regarding why more educated households had higher saving rates, Dr. Zhou admitted that the results were confusing. People with higher wealth should be less motivated to save. The fact that the results Dr. Zhou and Prof. Suzuki had found suggested the opposite was indicative of the general aversion to risk to Japan.

On Dr. Hong's questions, regarding the drop in retirement savings following the 1994 pension reforms, she agreed that the reforms had given people greater confidence in the system and therefore savings should have fallen. She welcomed the idea to extend the study to other age groups.

Prof. Horioka then responded. Regarding Dr. Dekle's comments, he stated that one possible reason for any inconsistencies was that he had used only one measure of social benefits instead of breaking down social benefits into types. He thanked Dr. Hong for his questions and said they were interesting.


Q & A

Mr. Takashi Omori (Policy Advisor, Cabinet Office / Chair, Economic Committee, APEC / SR Project Advisor) asked about the timescale for the decline expectation of -9.3%. He suggested that if one thought that they were living 20 years more, -9.3% was a reasonable expectation, but it depended on the time horizon. Secondly, Mr. Omori asked how much of an increase in consumption could be expected by a government announcement of higher pension benefits. To Prof. Horioka, Mr. Omori stated that he did not think that the credit situation in Japan was really comparable with the credit situation in other countries. He also asked if Prof. Horioka had thought about including unemployment as an explanatory variable.

Mr. Dambadarjaa requested to know who ran the Japanese pension fund. Second, he asked what was the total amount a Japanese retiree usually expected to receive at the time of retirement.

Mr. Taisuke Mibae (Senior Coordinator for APEC, Economic Affairs Bureau) asked why there was a link in Japan in between uncertainty regarding the pension system and the household saving rate.

Prof. Zhou responded to each question. To Mr. Omori, she stated that the time horizon chosen was based on the assumption that people would live until 85 years old. Close-to-retirement households held approximately 30 trillion yen in precautionary wealth. If this money was consumed, Japan's GDP would increase 1%.

To Mr. Dambadarjaa she stated that public agencies run pension funds. Typical Japanese retirees expected to receive up to 66,000 yen per month if they qualified for the first layer of pensions, and 150,000 yen per month if they qualified for the second layer. Thus, the typical benefit for a salaryman-housewife household was 216,000 yen per month.

To Mr. Mibae, she suggested that Japan in particular reacted to public pension insecurity because of the way that the typical family structure had been changing in Japan since World War II. More and more, elderly people were not relying on their children after retirement, and this meant that public pension were often the only source of income for them. Secondly, Japanese people were very risk adverse compared to the people of other countries. She noted that Japanese people tended to put savings into bank accounts, and did not invest much into bonds or risky assets.

Prof. Horioka responded to Mr. Omori that he agreed that the definition of the availability of credit used in his paper was not the best but that he could not find a superior measure for the full set of countries. He agreed that unemployment rate was something to take into account.

Fifth Session (Toward a Low Carbon Society)

Mr. Katsuhiko Suetsugu (Asia-Pacific Energy Forum) opened the fifth session, stating his hope that the discussion could lead to suggestions on how to create a low carbon society. He introduced the experts on the panel.


Speaker 1: Dr. Kaoru Yamaguchi (Institute of Energy Economics, Japan)

Until the industrial revolution, countries in the world had used only renewable energy such as biomass and hydropower.

Japan had been promoting renewable energy since the 1970s. One reason for this was that Japan did not have its own large oil reserves and did not want to grow completely dependent on other countries. Since the late 1990s, Japan had been moving toward the utilization of not just domestic, but also renewable fossil fuels. In 1997 Japan had hosted COP3, also known as the Kyoto Conference. In 2003, Japan had defined "Renewables Portfolio Standards." Additionally, Japan had been promoting Cool Earth 50, "Low Carbon Society 2008" announced at the G8 Hokkaido Toyako Summit, and a Japanese version of the Green New Deal.

Renewable energy made up only 2.2% of power generation energy sources in Japan, whereas fossil fuel accounted for 67.4%. However, the government of Japan was working to change this, and hoped to significantly increased the amount of photovoltaic (PV) energy used in the country, up to 20% by 2020. In order to do this, the PV costs needed to be reduced. The government aimed to halve PV costs in 3-5 years.

As overall strategies, Japan was aiming for increased liberalization in the energy sector along with an increase in renewable energy sources.


Speaker 2: Dr. Tetsuroh Muramatsu (Executive Officer, Group General Manager, Solar Systems Development Group, Sharp Corporation)

Sharp was doing its part to increase the share of renewable energy sources used in the world to 30.6%, which was the value specified by the European Renewable Energy Council in order to keep global temperature rises within 2 degrees Celsius. Sharp estimated that 45 billion PV modules needed to be installed around the world by 2040 to meet this target. This was based on the assumption that by 2040 300GW of PV modules would be installed per year in all over the world.

In order to create the required number of PV units, Sharp estimated that three conditions needed to be met: 1) every year a new PV production line needed to be built with a capacity of 109% the previous year's line; 2) every PV production line would need to produce continuously for 30 years; 3) existing PV units would have to keep reliably producing energy for 30 years.

As the world changed and emerging economies continued to work toward better lives, global energy consumption levels would rise. For Japan, this presented two challenges:
1) how could the Japanese electronics industry contribute to greater energy production?
2) how could Japan appeal its existence to the world?

Sharp was facilitating technology transfers between developed and developing countries. The company had identified many issues which hindered the expansion of PV power generation. The company believed that by providing solutions to lower costs, the expansion of alternative energy sources would take off.


Speaker 3: Dr. Lobo Balia (Assistant Minister for Environmental and Regional Affairs, Ministry of Energy and Mineral Resources, Republic of Indonesia)

As an archipelago, Indonesia was very concerned about global warming. President of Indonesia Susilo Bambang Yudhoyono had announced at G20 Pittsburg that the country would reduce emissions 26% by 2020. Although the country wished to make contributions to the environment, movements to provide cleaner energy threatened to raised energy costs to much higher levels than what were being enjoyed at the time.

An analysis of the energy sources used in Indonesia suggested that the country was not in an industrial stage. Its main emission sources were Land Use Change and Forestry (LUCF), peat land and energy. Most Indonesian energy came from oil. Consumption was steadily increasing, at a rate of about 7% growth annually. The total installed capacity of Indonesian energy generators was 30GW, half of Japan's capacity. Only 64% of the country enjoyed electricity. As it thought about renewable energy, the Indonesian government was focused on how to fix these problems as well.

The government had developed a primary mix target for energy. By 2025, the country aimed to decrease oil consumption by around 20%, replacing it with renewable energy. Dr. Balia noted that a presidential decree in 2005 had declared a shift away from a dependency on oil. The main barrier to this shift was the development of technology to facilitate it.

Dr. Balia illustrated three scenarios for the future of the energy field in Indonesia. With a business-as-usual scenario, emissions would increase exponentially. The primary mix target suggested by presidential decree would slow the rise in emissions. A third scenario would be one in which the country was able to invest in clean energy technology, reversing the emissions trend.

There needed to be a paradigm shift in energy policy in order to turn Indonesia into a low-carbon society. Improvements in demand side management would encourage energy supplies. In order to do this, international support, including the transfer of technology, was very important.


Q & A

Amb. Nogami asked about the required capacity for PV generators and actual generation capacities. Were PV generators very matured products, or was there still technological innovation to be done to lower the amount of units that needed to be produced?

Dr. Muramatsu answered that the amount of required PVs is estimated based on current technology level, and that if the conversion efficiency grew to over 50%, the number of units required to make renewable energy sources more than 30% of world energy generation would drop to one-third.

Mr. Yoshihiro Watanabe (Advisor, Bank of Tokyo-Mitsubishi UFJ) thanked the panelists for the perspective they had provided and asked each panelist about feed-in tariffs. Feed-in tariffs were often criticized as being a system through which benefits were provided to the rich at the expense of the poor, as the tariffs granted subsidies to producers through public funding. To Dr. Muramatsu, he asked how a Japanese company like Sharp planned to compete with Korean and Chinese competitors who offered more efficient PV generators. To Dr. Balia, he stated that he believed that the Japanese government was ready to offer help to the Indonesian government as it pursued its paradigm shift. How could Indonesia improve its environment in order to absorb offers of support from Japan and elsewhere?

Dr. Yamaguchi responded that in countries like Germany, feed-in tariffs had been introduced not just for energy but also to improve the agricultural sector as the tariffs had been used to attempt to induce farmers to produce wind energy. He suggested that Japan as well should think about how to help a wider part of the population benefit from a feed-in tariff scheme.

Dr. Muramatsu answered that Sharp would overcome competitors by lowering costs, and it would be more important at present that whole PV manufacturers together need to expand business dimension and technology level.

Dr. Balia said that Indonesia was in a very difficult situation. First, there needed to be strong policy interpretation in all sectors. It required very extensive coordination. He hoped that Indonesia could achieve the target energy mix by 2025 as this would ease the situation in Indonesia a lot and help it to accept more support for greater reductions.

Lunch Keynote Speech: Dr. Masahiro Kawai (Dean, ADBI / JANCPEC Member)

The motivation for the keynote speech was to fully explain the difference between poverty reduction and inclusive growth.

As a background to this issue, Dr. Kawai said that he would first discuss the trans-pacific growth rebalancing issue. East Asian economies had been running large current account surpluses for years by exporting to North America and Europe. Export levels had fallen as the economies in these two locations contracted as a result of the financial crisis. Even with economic recoveries in North America and Europe, no one could be sure if East Asia's export levels would return to what they once were. The challenge faced by East Asian countries was how to achieve economic growth without excessively relying on exports to these external markets.

Both demand-side and supply-side efforts were vital. On the demand side, Dr. Kawai hoped household consumption could be raised on a sustained basis. Investment would also help the overall growth strategies of countries where investment was stagnant. On the supply side, a number of shifts were necessary, including those to reduce market distortions, enhance the production of services, promote green industries, improve investment climates, support SMEs, and develop human resources.

There was a need for an environment in which East Asian economies could produce and export more within the region in order to reduce dependence on the outside. Asia was also in need of a new development paradigm to redress imbalances by encouraging inclusive growth. Inclusive growth meant the promotion of greater access to opportunities and efforts to make the benefits of growth more equitably and broadly shared. It focused on the needs of low income people aspiring to join the middle class.

The concept of inclusive growth included poverty reduction, but its primary focus was different. Dr. Kawai showed the meeting a chart detailing the average income levels of each country in East Asia. He noted that, as an example, in 1990 about 65% of Chinese were in the lowest income bracket, earning between US$0-1,000 per household per year. That number had shrunk to 9% in 2008. The biggest income group was now the US$1,000-5,000 group, which accounted for 57%, followed by the US$5,000-35,000 group accounting for 33%. In other words, the majority of the people in China were no longer in the "poor" group but were now in the low income and middle income groups. Poverty reduction continued to be important because 9% of the country's population was still impoverished, but if the government was to be truly effective, it had to focus policy on the majority group, which was now slightly wealthier. Throughout Asia, people were shifting from the poor to the low-income group, and to the middle class. This was why policy programs were shifting from poverty reduction to inclusive growth. Newly emerging people required new policies

One of the challenges for inclusive growth is to address inequalities in income distribution. Rising gaps in income and non-income inequalities may negatively affect economic growth. According to available statistics, there had been a slight increase in income inequality in China, Indonesia, Philippines, and Vietnam, and large increases in Hong Kong, Singapore, and Japan. Korea, Malaysia, and Thailand had seen declines, though there may be some data problem in Korea and Malaysia.

There were two tracks for creating inclusive growth. One was to create new opportunities for balanced and sustainable growth through the right macro, trade, and financial sector policies combined with good governance. The second track was the promotion of social inclusion, through social sector protection programs, which could broaden access to opportunities for all members of society. In this context, support for infrastructure, education, health, housing, unemployment systems, SMEs, and microfinance was important.

Dr. Kawai noted that, for some participants, his emphasis on infrastructure as a basis for inclusive growth may be a surprise. He said that infrastructure programs to improve water, electricity, and transportation had a strong impact on each country's economic well-being and public health. Soft infrastructure was important as well; if there was no clear rule of law, transparency or accountability in government, citizens in society had nothing to protect them.

The Asian Development Bank has compiled an index concerning the amount spent on social protection in each country in the region and found that Japan and South Korea were the East Asian countries which spent the most as a share of GDP (Japan being the first and Korea the fifth). However, when compared to countries in the industrialized world, Japan ranked number 20, and South Korea ranked number 30 and lowest among 30 OECD countries - facts which Dr. Kawai said highlighted that countries in East Asia did not spend enough on social protection. Countries in the region spent on average only 4.8% of their GDP on social protection, and more than a half of this usually went to social insurance, which more than likely only benefited those working in the formal sector.

East Asian countries needed to work to transform their economies and shift their sources of growth away from dependency on extra-regional demand toward domestic and regional demand. At the same time, Dr. Kawai hoped that the region could work to foster inclusive growth in order to help low- and middle-income people cope with risks and make greater contributions to the region.