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COMMITTED TO

IMPROVING THE STATE
OF THE WORLD

Global Growth@Risk

The World Economic Forum is an independent
international organization committed to improving
the state of the world by engaging leaders in
partnerships to shape global, regional and
industry agendas.

Incorporated as a foundation in 1971, and based
in Geneva, Switzerland, the World Economic
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no political, partisan or national interests.
(www.weforum.org)

A Report of the Global Risk
Network

in collaboration with
PricewaterhouseCoopers
Contents

Page 4
Foreword

Page 7
Driving Growth

Page 13
Constraints and Risks

Page 19
Growth@Risk in China

World Economic Forum Page 22
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REF: 160807
The 23 Core Global Risks: Likelihood with Severity by Economic Loss

Increasing consensus around risk

Foreword The Global Risk Network of the World Economic Forum

250 billion - 1 trillion more than 1 trillion
is composed of an unparalleled network of industry, risk Retrenchment from
and regional experts who work with business leaders globalization Asset price collapse
and policy-makers to:
This report has been prepared by the Global Risk
Network for the Inaugural Annual Meeting of the New • Create a framework for assessing and prioritizing
Champions (Dalian, People’s Republic of China, 6-8 existing and emerging risks to global business over Interstate and
September 2007). In preparing this report, more than 30 the short and long term Pandemics civil wars
Oil price shock
experts from business, academia, and policy-making • Alert key decision-makers to the impact these risks
were asked to consider the recent period of might have on their environments China economic hard landing
unprecedented global growth: its drivers, its champions • Assist leaders in their reflection on how risks may be

Severity (in US$)
Middle East Transnational crime and corruption
and the challenges facing the businesses, countries, mitigated at the global, regional, industry and instability
Breakdown of CII
regions and emerging leaders who will pilot growth for company levels Coming Fall in $
Chronic disease in

50-250 billion
the next 10 years. • Transform these global risks into business fiscal crises Climate change developed countries
opportunities NatCat: Tropical storms Liability regimes
Key conclusions of the report: NatCat: Earthquakes Developing world disease
To generate a global risk, an issue must have global
NatCat: Inland flooding Loss of freshwater services
1. Many of the economic underpinnings of global scope, cross-industry impact, and there must be
Failed and failing states
growth will remain in place for the next 10 years, but uncertainty as to how the risk will manifest itself (in

10-50 billion
this does not mean that a continuation of recent regard to the likelihood of occurrence and severity of Proliferation of WMD
Nanotechnology
trends is certain or even likely. impact). International terrorism
2. Economic interdependence means that downturns
and shocks are more likely than ever to be global. Over the last three years, the Global Risk Network has
New consumer markets must develop to mitigate engaged a wide range of experts in the economic,
this risk. geopolitical, environmental and societal fields to explore

2-10 billion
3. Global growth is threatened not just by shocks and the nature of the risk landscape facing governments,
shifts but by curbs and constraints: political, social, societies and businesses. In conjunction with its
economic and environmental constraints to current partners, the Global Risk Network has identified an
growth trends are already beginning to show. annually updated list of 23 core global risks to the
4. Unfettered globalization and growth is coming to an international community over the next 10 years.
below 1% 1-5% 5-10% 10-20% above 20%
end, as governments seek to balance economic
Likelihood
expansion with political priorities and sustainability These core global risks have been assessed in terms of
Note: Likelihood was based on actuarial principles where possible. For most risks, however, qualitative assessment was used.
concerns. likelihood and severity (see Figure). In addressing
Source: World Economic Forum Global Risks 2007
likelihood, actuarial principles were applied in the few
The winners of this next phase of globalization will cases where sufficient data existed; in most cases only
recognize that growth will not be a free-for-all. Rather, qualitative assessments, based on expert opinion, were
increasingly, political, social, environmental and possible. Although some risks are inherently long term
economic forces will obligate business to participate in (such as climate change) and others (such as an oil- Risk to Whom? A New Perspective: Global
an exchange with society that balances what is taken price shock) could occur in the near term, all risks were Growth@Risk
from participating markets with productive contributions evaluated within a 10-year time frame. The Global Risk Network considers risk and mitigation
in return. from a truly global perspective: the human and Inspired by the Inaugural Annual Meeting of the New
A more detailed description of the core global risks can economic welfare of the world is its stakeholder at risk. Champions and the World Economic Forum’s new
be found in the Global Risks 2007 report, published for Using the results of the Global Risks report as a starting community of Global Growth Companies, this report
About the Global Risk Network the World Economic Forum Annual Meeting in Davos point, the Network has begun to look at global risks takes as its primary stakeholder groups the companies,
(and available at from a variety of narrower perspectives: exploring industries, countries and regions at the front edge of
The report builds on the existing work of the Global Risk www.weforum.org/en/initiatives/globalrisk). regional perspectives in Europe@Risk, India@Risk, Latin global economic growth, and those who will continue to
Network: primarily, the annual Global Risks report America@Risk, and Middle East@Risk, and diving into champion that growth during the coming 10 years.
produced in collaboration with Citi, MMC, Swiss Re and The World Economic Forum Global Risk Network has mitigation of specific risks such as natural catastrophes
the Wharton Risk Center. identified 23 core global risks over a ten-year time and unsustainable water use in collaboration with This report does not seek to apply or recreate the more
frame: specific industry groups. Information on these projects rigorous methodological approach of the Global Risk
can be found at Network, but rather to provide a qualitative first review
www.weforum.org/en/initiatives/globalrisk. of the trends, issues, threats and vulnerabilities that may
affect global economic growth and its new champions
over a 10-year horizon.
4 | Global Growth@Risk 5 | Global Growth@Risk
From Global Risk to Business Risk

How do global risks impact business operations in global growth markets? Growth – particularly at the rates the world has seen for the
past 10 years – is not a given. As such, the question of
Global Growth@Risk is one of opportunity cost: not current
Driving Growth
The holistic nature of global risks implies that no single company, industry or state can successfully mitigate them on their
assets in jeopardy, but future opportunities that may or may
own. Unfortunately, the larger than life character of such risks has led some enterprises to conclude that there is nothing that
not come to fruition. Thinking about opportunities is at the
can be done to address global risks. A closer look reveals that executives ignore global risks at their own peril, however, The Global Risk Network has attempted to clarify some of
heart of the new champions’ world view, as
because they lead to operational realities. A significant variety of operational risks that routinely challenge enterprises in key entrepreneurship at its core means putting scarce assets at the important drivers of recent global expansion, in an effort
global growth markets – such as China, India and Brazil – are embodiments of global risks. For example: risk to seize great opportunities. If these opportunities to better assess their inherent sustainability and vulnerability
become limited or constrained, the spirit of to exogenous risks.
entrepreneurship that drives growth will suffer.
Three interlocking trends form an umbrella over the factors
Global Risk Related Operational Risks Often Cited in driving growth in recent years: national economic reform,
Thus, the biggest risks to today’s global wealth and welfare
Global Growth Markets globalization and technological development.
may be shocks and shifts (pandemics, climate change), but
the biggest risks to tomorrow’s growth are brakes (political,
Retrenchment from globalization • Protecting against foreign exchange and interest rate economic, social, and environmental issues) that may slow Global Growth
risk under conditions of significant government economic and entrepreneurial activity. Developing world sets the pace for global economic growth

intervention
• Competing against societal or government-driven There is great optimism that many of the drivers of the 8%
Emerging market and
developing countries
favouritism in business practices, including in pricing recent global expansion are robust, and that the next 10
6
and procurement practices years will be good ones for economic growth. There is also World

GDP growth
• Navigating different standards of ethics when debate, however, about the sustainability of some of those 4
operating across borders or within different economic drivers, and significant concerns about non-economic
Advanced
economies

sectors of a market constraints that are already emerging to challenge 2

conventional approaches to expansion at both the
Breakdown of critical information • Controlling operating costs and/or possible company and macroeconomic level. 0
Forecast

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2007F

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infrastructure disruptions in production due to quality and delivery
levels of state-owned services and infrastructure Source: IMF
Whether growth continues at speed remains to be seen.
• Planning for business continuity in circumstances of
What is clear is that assumptions about yesterday’s growth
infrastructure breakdown Reform
opportunities are very unlikely to apply to tomorrow’s.
The past 10 to 15 years have been dominated,
Transnational crime and corruption • Protecting intellectual property and combating piracy
amidst inconsistent regulations and enforcement economically, by the decline of centrally planned economies
• Complying with overseas laws that place restrictions and the implementation (often halting and imperfect) of
on local operations (e.g., bribery and corruption CEO Perspectives comparatively liberal, market-led economic strategies.
statutes)
As part of its research on Global Growth@Risk, the Reform has had many faces, from deregulation to lower
Spread of liability regimes • Managing gaps between stated requirements and Global Risk Network interviewed more than 30 leading taxation to the exit of the state from ownership of certain
what is acceptable practice thinkers from business, academia and policy-making. industries. But in the economies that have benefited most
• Developing systems to comply with complex financial Crucial to building the report were perspectives from from ongoing reform – China, India, East Asia and Eastern
regulations and reporting requirements CEOs from companies operating in high-growth Europe – the results have had much in common. Reform
• Complying with a complex set of non-aligned laws environments: emerging markets, fast-growing sectors has released pent-up entrepreneurship, labour and capital,
(including local and regional enactments, and and globalizing businesses. PricewaterhouseCoopers, and, crucially, consumer demand that had lain dormant in
international agreements) a strategic partner of the World Economic Forum and
many locations.

Climate change • Addressing different standards and enforcement of the Forum’s Global Risk Network, conducted
Many observers have also noted a domino effect in
emissions quotas and other environmental norms interviews with a number of these CEOs, five of which
economic reform. National self-interest encourages
have been included throughout this report under the countries to follow their neighbours in liberalizing market
CEO Perspectives heading. activity (indeed, the downside of this phenomenon has
Enterprises would benefit from taking their own steps to mitigate these operational risks, without neglecting the connection
frequently been called “the race to the bottom”). As the
to global risk.
world’s largest economic domino – China – fell and began
Penetration of Markets Seen as the Most Important Opportunity for Growth
trading, the effect on other economies was remarkable.
To make global risk mitigation manageable and relevant to their unique standing in global markets, enterprises should also Survey: "Which one of the following do you see as the major
opportunity to grow your business in the next 12 months? Even North Korea has begun consulting with China about
ask themselves the following questions: the creation of Special Economic Zones.
30%
• What global risks are most salient to our company, and to the industry(ies) and state(s) in which we do business?
25
• What global risks are we best equipped to help manage in view of our core competencies, geographic position(s), Averages
Liberalizing reforms, where successful, have often been
Percentage of respondents

20
economic power and other factors? cautiously managed. But, in many of the world’s highest
• How can we contribute to risk mitigation, in collaboration with companies, industries and states, in ways that would 15
growth economies, reform has been partial at best, and
benefit individual market actors and societies alike? 10 political environments have remained unstable. Yet, the

Western Europe
North America
Latin America
Asia Pacific
5 effects of this uncertainty on growth have been less than

CEE
0
might have been expected. This suggests a (at least
Improved
supply chain
mgnt
Improved
customer
service
Access
to key talent
Technological
innovation
New product
development
M&A Access new
geographic
markets
Expand
existing
markets
relative) decoupling of politics and economic trends. This is
Source: PricewaterhouseCoopers probably driven by the declining share of the economy

6 | Global Growth@Risk 7 | Global Growth@Risk
CEO Perspectives
Robert A. Willett, CEO, Best Buy International
and Chief Information Officer, Best Buy Co. Inc.
owned by governments, and relatively credible production and the resulting gains from trade. Offshoring,
What have been the global growth drivers for you With risks of that sort – let’s take religion-driven commitments to medium-term stability (in monetary policy, outsourcing and supply chain optimization have allowed
historically? I know you’re fairly new in China. conflict – is there an opportunity there for Best Buy? business cycle management, etc.) that have outweighed firms, countries and regions to establish comparative
short-term uncertainty. advantage in aspects of production, lowering costs and
Think scale, learn carefully, and scale fast, resist looking at The Middle East is a tremendous opportunity. I think Turkey improving technical efficiency. These effects generate
every country through a core US lens but through the lens is a great opportunity – Istanbul is the only city that sits in The next 10 years. Economic policy reform is an ongoing growth for new producers and maximize the welfare of
of customers in whatever country we are entering. both Europe and Asia. There are substantial sums of global consumers. As Esmeralda Da Silva Dourado, Chief
process, even in the world’s most advanced economies.
money being spent in those countries; they’re really Executive Officer of SAG Gest in Brazil, puts it: “China will
Concern is already emerging that some recent “success
We are also going to focus on countries that provide us investing in manufacturing. We’re going to retail [in Turkey] be the ‘industrial plant’ of the world; India the ‘back office’
with the ability to be #1 in the eyes of the customer and a and source [from Turkey]. I think that’s what you always story” economies may be resting on their laurels and not
of the world; and Brazil the food provider of the world” (see
minimum of US$ 6 billion of sales, if not, we will not go have to do. You go to a country and say ‘What can we doing enough to foster growth, for example, by
CEO Perspectives, p. 8). Of course specialization has been
there at this stage in our maturity. offer to them and what can we learn from them.’ encouraging investment of accumulated savings or
even more granular – Bangalore in IT services, Taiwan in
increasing labour market flexibility. Reform for many
semi-conductors, Singapore and Hong Kong in financial
Are the drivers now going to be the same as the Does the thought of China building new coal-fired emerging economies is already taking on a different
services.
drivers in the next 10 years? What are the risks that plants and every day billions more people driving cars character – from the removal of shackles on business to the
you’re most worried about? and using electricity concern you? creation of proactive and enabling policies focused on This specialization has been funded by increasing capital
productivity. flows. Investment has flowed to fast-growing producers
I believe that the more balanced our country portfolio is Yes, I think it does. But we shouldn’t be selfish because the
over the years to cope with turbulence in different markets US and UK did the same thing – we were burning coal in through increasingly open financial markets, whose
the better, as turbulence is not going to go away, so we the UK for 100 years. We had pollution where you couldn’t Sustainability and constraints. Reformist policy-making integration has outpaced the integration in goods and
need as many ‘fingers’ as possible in developing growth see your hand in front of your face. China’s evolved in 10 will always face political constraints — not only from vested services trade. But these years have also seen enormous
markets. years – guess what? They’re going to make some interests and populists, but also from the understandable growth in foreign direct investment (FDI), particularly in
mistakes. But the powers that be are aware of this. I think political priority of minimizing socio-economic turmoil, China and Eastern Europe.
The challenge is also to stay focused on your core market, their problem isn’t central government, it’s local level environmental degradation and insecurity. Indeed, the
in our case the US. The moment you lose focus on that government. They’re on a real journey in making change pendulum in many places already appears to be swinging Facilitating both types of flow have been twin sources of
market, you are ‘dead in the water’, and forget happen locally that’s difficult. I think they’ll address it over back towards these priorities and away from the sometimes liquidity – easy access to capital for investors and
international. time … the expectation of the West is ‘You guys have got competing priority of economic growth. This may shape a businesses. The first, ‘traditional’ source of liquidity, has
to get this right now.’ Well, look in the mirror. been easy monetary policy, with the OECD countries
very different – and more active — kind of economic
If some day the Chinese economy is larger and your maintaining low interest rates since 2000. Despite a
revenues in China are larger than they are in the US Is climate change a threat to Best Buy? governance in the coming 10 years.
startling rise in energy and commodity prices, core
will that become your core market?
No, I think it’s an opportunity. You know, you look at the consumer prices have dodged inflation during this period,
The US is our core market but I do not think that matters. packaging of products – look at the amount of cardboard
Global Flows with upward pressures eased by rapidly implemented
Goods, capital and communications all crossing borders more easily
Retail used to be about location, location, location. Today it and stuff that’s around a product. If you could take out 1/2 technological change and the continuing supply of low-cost
is innovation, innovation, innovation that comes from of that and push it back up the pipeline. What would that labour. Central banks have therefore been able to keep
2600

multiple geographies which is one of the most significant do? Isn’t that a better way to resolve the problem? I think money loose while remaining hawkish on inflation.
benefits of going international, and the learnings flowing all of those risks we talk about are also opportunities for us 2100

back to the core are outstanding. Product convergence to create different solutions – looking through the lens of The second, ‘new’ source of liquidity, is a product of

Index (100=1985)
FDI inflows (US$)
1600
and market consolidation is happening at a significant pace the consumer and creating work in developing countries. 2005: $916 billion
financial innovation. The remarkable growth in derivative
International outgoing
and you also have all types of non-standard competition 1100
telephone traffic (minutes)
2005: 167 billion minutes
credit products and risk management tools has allowed
emerging. So, the more you‘re in these other markets, the Back to consumer markets and scale – what about Total exports (US$)
2006: $12 trillion
lenders to allocate risks to a greater number of willing
600
more you are seeing different ways of doing things; so you India and Indonesia? World GDP (US$) owners and lower the cost of risk financing. These
2006: $48 trillion
bring those back and refresh your core business. 100 phenomena have been symbiotic, and have made access
We are looking but we have to consolidate successfully

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to investment capital available on an unprecedented scale.
So, unlocking innovation is one of the upsides of what we already have. We mustn’t apply our own Source: WTO; ITU; IMF; UNCTAD
going international. What are the risks? orthodoxy when we look at these countries; sometimes you
This flow of capital has been accompanied by information
have to say no that’s the orthodoxy that existed for a
and ideas. Productivity in emerging markets has benefited –
The most important topic that government can address – thousand years, don’t say it’s wrong. India is a great
and you don’t want government to do too much, because opportunity for the future. Globalization and will continue to benefit – from the transfer of
they do too much as it is – is to really inspire Another meta-trend underpinning growth dynamics has, of technologies, processes and ideas that spur
entrepreneurship. That’s what you want and there is a big We are entering Turkey and Mexico ‘greenfield’; it will be course, been globalization. Globalization is many things, but entrepreneurship. Some of this transfer comes with people,
risk that it won’t happen. slow and we’ll listen and listen to the customer, learn, can be thought of in this context as the increasing flows of and the rich challenge for globalizing businesses has been
understand and then scale fast. Make an acquisition? I’m trade, capital, information and, to a much lesser extent, to globalize management and corporate culture. Successful
Risks such as political turbulence and restrictive markets not saying it’s out of the question. [But] We can make our people across national borders. The most celebrated facet transfer is not one-way: globalizing businesses are
need to be addressed ongoing. Yes these are risks…but I own problems without cleaning up somebody else’s. I think of globalization has been the revolution in global business, benefiting greatly from the repatriation of ideas, and not just
don’t think they’re any greater today. Do you think the that Best Buy values are so unique and special, that we’re via increased trade flows, foreign direct investment and the profits.
world is in a riskier place than it was in the 40s, 50s, and actually better off initially going greenfield to start, but we geographic disaggregation of value chains around the
60s? When we all had atomic warheads facing one will always keep an open mind to do what is best for the globe. This process has been facilitated by domestic To a certain extent, the specialization of production has
another? customer and our shareholders. created its own markets, lowering costs, improving quality,
economic reforms and international agreements on trade
and investment, but is also driven by the new economic or both, and stimulating additional demand. But recent
The biggest risk is in the Middle East, the risk to the stability We’re off to Dubai in the autumn – let’s just say there’s a decades have also seen export markets opened by free
fundamentals that these policies have unleashed.
of the world and the peace of the world is not addressing great opportunity for us there. If you think about all the trade agreements, both bilateral and multilateral. The lion’s
that issue, plus you have some seriously disadvantaged countries that utilize the resources Dubai offers that are share of recent growth has been characterized as ‘export-
people. First world and other countries could wipe out so around the Middle East … you start by building a brand The opening of economies to trade and foreign investment
has created value through more efficient allocation of led growth’. The greatest – and most problematic – source
many diseases overnight if they made medicine much and a reputation with governments together with customer
cheaper or even free in so many countries. Look how many centric skills, but it is not a race, you are going to be there
years they wanted to charge African countries for small pox for the millennium, so do it properly.
and malaria instead of just giving it to them. That’s where I
think there’s a problem – with values.

8 | Global Growth@Risk 9 | Global Growth@Risk
CEO Perspectives
Esmeralda Da Silva Dourado, CEO, Solucoes Automovel Globais SGPS SA

What do you view as being the fundamental drivers of What do you think are the main threats that could of this demand has been the US consumer. Consumption Technology
global economic growth over the last 10 years? derail this growth in the next 10 years? in the world’s largest economy has grown at 3.5% per
annum since 1998, not far off rates of global economic Trends in technology have also underpinned many of the
growth.
Eastern Europe and the BRIC countries becoming more Economies with regulations that impose rigidities for globalization effects noted above. The spread of
open for international trade. In the last 10 years the factor reallocation, capital accumulation, market The next 10 years. The ongoing integration of the BRIC information technologies, particularly those driving
openness for trade between countries, together with competition and innovation will have growth constraints. economies into the global trading and financial system is efficiencies in manufacturing, inventory management and
technological progress, has made the world economy Security is also a major issue. The risk of terrorism is no expected to continue to drive economic growth for the next logistics, have had a huge effect on the speed with which
more and more global. Trade stimulates economic growth longer a problem of specific regions of the globe, it is a 10 years. In addition, there are likely to be multiple new operations can be globalized and value chains optimized.
as it channels resources into their most productive uses, global phenomenon. champions of growth during the next phase, with observers As noted above, information technologies have also
both geographically and within industries. suggesting that Vietnam, Indonesia, Mexico and Turkey are played a significant role in the globalization of ideas and
particularly well positioned.
What is your organization doing to manage these processes, accelerating the process of technology
What do you think will be the main drivers of threats? The nature of capital flows may change dramatically in the transfer and productivity improvement. Finally,
economic growth over the next 10 years? coming decade. With enormous savings surpluses pooled communication technologies have created a significant
In its sustainable growth strategy, SAG [places] a high in Asia and among energy-producing nations, investment global market as end products.
For this pattern to continue in the future it is important degree of importance on analysing the political and patterns will have to change. While some countries, such
that the most developed as well the emerging market macroeconomic environment in the various markets and as South Africa, will need to address an underinvestment The next 10 years. Given the constraints and risks on
countries provide the necessary environment for their regions it operates. In addition to the market conditions, challenge, and domestic infrastructure investment will be a the horizon, technology will need to play an enormous
priority for most emerging markets, China, Russia and
economies to stimulate trade and investment. The we need to understand and accept all the other macro- role in facilitating growth in the next 10 years. This need
select Middle Eastern nations may become significant
flexibility an economy can have to manage negative environmental variables. global financiers. This development is already signposted by is obvious with respect to energy and environmental
impacts and take advantage of growth opportunities is the recent emergence of sovereign funds investing in a risks, where management of natural resources, the
key. range of assets, as well as the outward expansion of climate and water systems will need to make huge
Chinese firms via M&A and direct investment. progress if another 10 years of growth is not to generate
Those countries that develop strategies to improve the significant negative outcomes in the longer term.
investment climate will be the ones that will experience
faster growth. Key drivers will be flexibility of labour
markets; fiscal systems; policies towards R&D and
innovation; responsibility towards the environment and
“ The flexibility an economy can
have to manage negative impacts
and take advantage of growth

As wages have risen in emerging economies, new
consumer markets have also begun to emerge. The
robustness of these markets, and the ability to connect to
them, may be the defining issue of the next 10 years of
global growth. Governments may face challenges in
Renewable energy production, waste management,
water management, carbon capture and sequestration,
and radically improved efficiencies in most economic
activity may all become priorities for technological
climate change; and social stability and welfare opportunities is key. ‘gearing’ economies to service emerging domestic markets, development. Likewise, new demographic challenges
distribution. as much infrastructure investment has been focused on such as ageing populations and rapid urbanization will
exports. place great demands on tomorrow’s technologies, from
China will be the ‘industrial plant’ of the world; India the healthcare to infrastructure.
Sustainability and constraints. The sustainability of
‘back office’ of the world; and Brazil the food provider of
globalization has already been called into question on
the world. numerous fronts. Apparent increases in inequality, Sustainability and constraints. It is very difficult to tell
protectionist reactions to jobs moving overseas, increased how much additional productivity can be wrung out of
competition over natural resources and the fear of a ‘race technological and process improvement in the
to the bottom’ in social and environmental standards are manufacturing sectors, but indications are that the major
already threatening to constrain what Ian Bremmer, emerging economies still have a long way to go, and new
President of the Eurasia Group, calls “the tightening and needs are revealed as companies move up the value
quickening of global markets.” The constraints and risks
chain. This will create opportunities for technology
imposed by a variety of potential policy responses –
discussed in more detail below – may be the most developers and may continue to offset rising costs of
important consideration for the next 10 years of labour and commodity inputs.
globalization. Even the new champions of global growth
can frequently be heard to call for a move to ‘sustainable The major constraint on this process may be the
growth’ rates, implying the unsustainability of the current availability of talent to develop and implement
trajectory. technologies. Talent development and talent transfer are
both complex challenges to governments and
businesses.

10 | Global Growth@Risk 11 | Global Growth@Risk
CEO Perspectives
Liu Jiren, Chairman and CEO, Neusoft
Constraints and Risks
What do you view as being the fundamental drivers of We will face the challenge to get more talents and leaders to
growth for Neusoft? drive Neusoft’s growth. The shortage of IT talents at a Economic Constraints and Risks very likely to spread to other vulnerable economies. The
reasonable cost is a global issue. Even India and Japan are credit crunch foreshadowed by increasing foreclosures
There was huge economic growth in China over the last 30 facing the same problem of finding enough people that have and tightening of lending covenants in 2007 may prove to
years. The main reason is the change of our political and the skills to deliver the global services at a reasonable price Declining returns and the productivity challenge. be the first such adjustment, though how painful it will
economic system when Deng Xiaoping introduced the …. We need to train more high quality people to cope with The primary constraint on continuing growth is the prove remains to be seen.
“Chinese Economic Reform” which slowly opened up the the demands. So, having a good education system is very inevitable flattening of the growth curve: declining rate of
China market to the rest of the world. This new direction has important. returns on inputs. Put simply, each new worker and each Interdependence and vulnerability. How vulnerable
changed the mindset and attitude of its people … people are new machine has a smaller marginal effect on the are the emerging economies? Consumption, specifically
more receptive to a market-driven economy and this change What is your organization doing to manage these economy. in Asia, appears to be on the rise, suggesting new and
in people’s attitude attracted a lot of foreign direct investment threats? diversified sources of demand. Likewise, growing
to China. As emerging economies develop, less of growth’s ‘low-
The development of people is the most important drive that intraregional trade has suggested a more diversified
IT was not considered an independent industry in China 30 hanging fruit’ will remain, and rates will slow. While it is trading system than the unidirectional trans-Pacific trade
contributes to Neusoft’s sustainable growth for the next 10
years ago. Only sensitive business sectors (i.e. the military, difficult to tell exactly where China, Indonesia or Poland of conventional wisdom.
years or even to a longer term. Neusoft has invested three
etc.) would have IT development. [Lately] but after the lies on its growth trajectory, most observers indicate
universities in China and formed a network with more than 20
economic reform, we have [seen] more than 20% growth of IT plenty of room for continued rapid growth by factor Yet, both developments may prove to be too nascent to
of the best universities in China. We recruit students as early
expenditure in this country [annually] to build IT infrastructure, accumulation. Many developing nations still have vast mitigate the global risk of a US downturn. David Bowers,
as their second or third year of studies. We help universities to
and businesses in general are willing to spend money to develop an education programme so that we can train our
numbers of people to put to work, and room to invest in Managing Director at Absolute Strategy, has argued that
increase efficiency and cope with growth. The other driving staff at an early stage. The students will learn industry the capital stock they will employ. This phenomenon Asian consumption remains a multiplier effect of export-
force is the increase in demand from the manufacturing practices so we can shorten the training period of new should outlast the next 10 years. led growth. Consumption markets may be too immature
sector. Since IT is essential to support manufacturing employees. Leadership development is another very to be creating much wealth domestically, hence
businesses (for example, ERP, CRM, etc.), there is an important part in developing people. We have established a Nonetheless, as countries become wealthier, wages will economies remain dependent on export industries to
increasing demand for IT development. leadership development centre to train the leaders of Neusoft rise. For business, wage pressures are already becoming create consumer wealth. At this stage a collapse of US
to become more skilled in business management. a reality in all of the BRIC economies, both in terms of demand could therefore still entail a collapse of regional
More and more products have software embedded inside to
salaries workers can command and the costs of and domestic demand in Asia.
support the product’s function, and China produces a lot of
What are other key factors in prolonging the global increased employee turnover. On a macro level these
these products, such as mobile phones, TVs, digital cameras,
expansion? increases have been more than offset by advances in Likewise, Nouriel Roubini of Roubini Global Economics
cars, etc. The growth in the manufacturing sector demands
more IT support and this is not only driven by the domestic technology and process – keeping costs low, demand notes that intra-Asia trade has been largely characterized
I think IT services or the IT industry in the next 5 or 10 years robust and growth fast. But technological progress, too,
market, but the increasing demands from the global markets by increased specialization in manufacturing, with smaller
will generate more business opportunities. First, it is because becomes more difficult as countries move up the value
as a result of globalization. About 10 years ago, many global Asian countries producing commodities and intermediate
the life cycle of the IT products has been shortened … now chain. Productivity-driven growth may be slower, less
companies started to move their research and development goods, which are finished and exported from China. This
people buy a new phone and use it for only a few months. IT predictable and more difficult to shape with economic
(R&D) work to China for the purpose of getting more talents stretching of supply chains may lengthen the ‘bullwhip’
services will become ubiquitous, and software will become a policy.
and to reduce R&D cost. effect produced by a cyclical downturn, as more
commodity product. Services globalization will give China
more opportunities just like manufacturing did 30 years ago. countries will need to respond to changes in demand.
What do you think will be the main drivers of economic The phenomenon also increases interdependence and
growth over the next 10 years? China will become one of the destination countries for the
shift of the IT services industry. nodes of vulnerability: even if China were positioned to
The main drivers will still be the increase in demands of the withstand a US downturn, Vietnam may not be, and
government IT infrastructure as well as the business sectors in Which countries do you think will champion economic effects on Vietnam could in turn disrupt otherwise
China. The IT infrastructure in China is still lagging behind, growth over the next 10 years and why? sustainable Chinese production.
maybe a 10-20 year gap, compared with developed countries
The US and China will rely on each other. India has a great Financial system vulnerability. While financial
(i.e. US, Europe and Japan). There are lots of things we need
potential but it will still need 20-30 years to build the integration has facilitated rapid growth, there remains
to do to catch up. For example, Neusoft is helping the
infrastructure. Russia is also growing very fast and attracts
government develop a system that helps keep track of and great concern that a globally integrating financial system
many investments. But I believe the US and China will play
controls the use of national natural resources (i.e. the land, is producing a riskier world. Geographical diversification
very important roles in the economic growth in the next 10
water, energy, mountains, forests, mining, rivers, etc.) and possibilities are declining, as markets become
years.
provides data for environmental protection analysis. increasingly correlated. The complexity of credit and
Which companies or industries do you think will derivative markets has led to greater opacity for
Neusoft is also involved in a product quality control project
dominate the economic growth landscape in 10 years regulators. And with so much growth currently funded by
that is driven by the government. Right now, there are a lot of
and why? retained corporate profits, a serious asset price downturn
issues relating to food safety, and the government would like US consumers: The single engine of growth? With
to be able to track down where the food product came from in a major financial market could drain capital expenditure
I think energy companies will be very important. They control consumption by the world’s largest economy rising at from growing markets within a year.
and be able to put a stop to it. This system should be able to strategic resources and influence the lives of everybody. 3.5% per annum since 1998, and growth over the same
track down the entire food chain and the distribution Financial sectors are also very important. period ranging from 2.8% to 5.5%, it is easy to see why
channels. Commodity prices. Markedly higher commodity prices
many observers fear the dependency on a single source have been a source of global growth since 2000, as low
Neusoft has a 50% market share which is related to social How have recent trends in globalization affected the of demand. There is a great deal of debate about the inflation has sustained growth and commodity exporters
insurance and healthcare. At the moment, the systems for way that businesses work at the strategic and extent of that dependency, and therefore the vulnerability have been able to reinvest and recycle their windfalls.
each province are independently upgrading; the government operational levels? of growth to a cyclical downturn in the United States. Benign inflationary conditions are not guaranteed
will be able to build a system that tracks the demands from its however, and supplies of energy, and potentially
people and provide a better insurance policy or health plan. Cultural integration. Today, people who have different cultural Concern about such a downturn is driven by the extent
backgrounds need to work with each other – they need to agricultural products, could remain tight for the next 10
Neusoft has a very high share of the market in telecom, to which US consumption is funded by debt – at a micro years. If this supply-side tightness raises costs more
power industry, finance, transportation, healthcare and those communicate with a common language and be willing to level by consumers borrowing against elevated house
accept each other’s differences. The Internet is the best quickly than they can be offset by businesses, prices will
sectors will continue to drive Neusoft growth in the next 10 prices, and at a macro level by Asian and oil-exporting
platform to equalize culture and connect people. But culture rise and growth will suffer.
years. countries’ willingness to plough money into US Treasury
conflicts are still the main reason for the failure of global
Bills. Should either factor unwind in a disorderly fashion,
What do you think are the main threats that could businesses. Cultural integration costs will impact the
through a housing market adjustment or changes in the
derail this growth in the next 10 years? performance of business.
bond markets, the effects on US consumption would be
I think the growth rate of the IT industry will be very much
related with the GDP of China. The IT business will maintain a
higher growth rate than other business sectors.
12 | Global Growth@Risk 13 | Global Growth@Risk
Political Constraints and Risks they are fundamentally symbiotic, with neither China nor
On Political Risk
the United States benefiting from an unmanaged
rebalancing. With perceptions of geostrategic rivalry
Should the economic issues mentioned above not between the two nations on the rise, however, political
emerge and hamper growth, there still remains a very management of the issue has struggled to find a
strong chance that politics will. In many cases, political collaborative tone, with finger-pointing and even tit-for-tat Political risk is a measure of the impact of politics on An understanding of stability – how durable it is and
risks to growth stem from undesirable economic side trade strategies dominating the (public) discourse. This markets. Investors in emerging market states, those in where it comes from – is critical for investors. China is
effects of political dynamics and policy-making. In other bilateral tension is all the more inappropriate given the which politics matters at least as much as economics for politically stable as the Communist Party maintains
cases, political constraints on growth are explicitly aimed extent of Korean and Japanese ownership of many of market outcomes, are especially vulnerable. monopoly control of political power in the country. But
at slowing that growth in the interest of sustainability. The China’s exporting industries.
latter type of policy is primarily treated below, under globalization is already generating new wealth wishing to
Societal and Environmental Constraints and Risks, Energy security. Energy futures markets, led by oil, have Political risk is composed of two elements: shock and have a political voice, as well as social dislocations that
though the responses will be political in nature. become increasingly global and liquid in the last half- stability. Shock is not a useful object of analysis because have led to localized protests. China’s government
Regardless, both types of political force will likely century. This phenomenon has been a very positive one most shocks are virtually impossible to forecast. How do spends considerable resources to manage the risks of
combine to put an end to what Ian Bremmer (see for the economy, smoothing the price effects of OPEC’s we know when a tsunami will hit Indonesia, a chemical social and economic change, but the country’s
sidebar, p. 15) calls “unfettered” globalization and supply control and providing signals about supply and
economic growth. spill will generate unrest in China, or an embarrassing transformation comes with a risk premium.
demand to decision-makers in business and finance.
audio recording of the Hungarian prime minister will go
Terrorism and the geopolitics of the Middle East. But as supplies tighten and discretionary output falls to public? There are several longer term political risk trends of
The headline geopolitics of the last 10 years have been ever-fewer producers, political concerns over the security particular importance for the global economy. New
instability in the Middle East, conflict in Iraq and of supplies have begun to trump free market thinking energy reserves will come increasingly from potentially
Afghanistan, and the risk of terrorist attacks globally. about energy. Countries have already begun to make unstable countries and regions, injecting political
Thousands of lives have been lost and untold assets uneconomic (and often environmentally harmful) policy
destroyed – but the long-term effect on global economic considerations into market outcomes. The proliferation of
choices about the promotion of corn-based ethanol,
growth remains uncertain. What is the opportunity cost of nuclear power and coal. potentially dangerous new technologies will intensify,
these geopolitical risks? making the threat of large-scale terrorist attack more
With conventional oil supplies at or near their peak credible. The threat of a transnational health crisis related
For some businesses, these risks have meant that production, political collaboration on energy strategies is to avian flu or some other disease may produce political
globalization has been a necessarily partial phenomenon: essential to minimize wasteful distortions and investment
many CEOs believe the present geopolitical risk profile of responses with substantial economic impact.
in economically or environmentally ‘wrong’ technologies.
Middle Eastern countries (with the exception often of Such collaboration is directly threatened by the potential
Dubai) precludes entry there. Those who do operate in geopolitical implications of access to energy. The geopolitical balance of power will continue to shift
regions with high perceived risk of conflict have had to from a US-dominated international order towards one in
change much of the way they think about risk Asset Nationalism. Exacerbating energy security which a much wider range of actors exert geopolitical
management, building capacities in security and crisis concerns is the worrying trend towards asset Stability, a measure of a government’s ability to influence. The new order may prove as stable as the old
management that may be far from the core of their nationalization and redistribution in Venezuela, Bolivia,
business. implement policy following an incidence of shock, is one, but the transition itself will generate uncertainty,
Russia and elsewhere. If much recent growth was
another matter. In Ukraine in 2004, demonstrators mistrust and, for business, political risk.
supported by the declining share of government in the
A changing world order. In the background of the US- economy, and the increased competition and incentives flooded city streets and paralyzed their government. A
and Middle East-centric conflicts has been the gradual that engendered, (re)nationalization of assets threatens to new election was held, and the original outcome was – Ian Bremmer, President, Eurasia Group, and Young
evolution and end of the unipolar geopolitical landscape. reverse that. reversed. But the battle of political personalities continues Global Leader
While no great power has risen to join or supplant the
to damage public confidence in the country’s governing
United States yet, it seems clear that the rise (and re-rise) Some part of this trend can be attributed to the political
of China, India, Russia and to a lesser extent Brazil as institutions, the bedrock of stability, and the country has
desire to redistribute wealth more fairly and equitably,
economic and military powers will soon reshape global yet to fully recover.
which is explored further below. But a significant driver is


power dynamics. clearly power politics – both domestic and international.
While this trend is often most associated with developing Shift the scenario to Mexico. In July 2006, Felipe Investors did not foresee the
With power in transition in the coming 10 years, many and former socialist/communist countries, the ongoing
experts believe that non-economic considerations –
Calderon defeated Andres Manuel Lopez Obrador by less intensity of the shock produced by
‘national champion’ approach to protectionism in parts of than one percentage point. Lopez Obrador charged fraud
security, military power, international political influence – the rich world has provided political cover and justification the electoral controversy. But
will drive state decision-making more than they have in and threatened to form a shadow government. Hundreds
for the regression. those who recognized Mexico’s
the past 10 years. This is likely to ‘fetter’ globalization, as
openness and economic competition take a backseat to
power and political competition.
of thousands of his supporters transformed Mexico City’s
central square into a protest camp – until courts affirmed
Calderon’s victory.

underlying political stability never
blinked.
Managing Imbalances. The US-China economic
imbalance is one area where political management of Investors did not foresee the intensity of the shock
economic concerns is already off to a rocky start. While produced by the electoral controversy. But those who
the current account imbalances may not be sustainable, recognized Mexico’s underlying political stability never
blinked. There was no market crisis or capital flight. The
post-election conflict demonstrated that however
polarized Mexico’s politics, the country is governed by
institutions and laws. The shock failed to generate
substantial political risk.

14 | Global Growth@Risk 15 | Global Growth@Risk
Societal Constraints and Risks India’s population has been labelled the ‘demographic economies to find new and more sustainable patterns of
dividend’, as the working age population is unlikely to production and consumption. The emerging climate
Many political decisions that will affect economic growth peak before 2016. If growth is about seizing opportunity, change crisis has shown that free market competition
in the coming decade will be made in response to then such a population bubble is a massive one that India cannot provide all the necessary signals and incentives
changes in society that are already underway. To the cannot afford to miss. But providing education, training for sustainability. If governments are not able to provide
extent that these decisions address rising inequalities, and jobs for this labour force will not be easy, and most them, the next 10 years of growth are likely to generate
education and training, social safety nets and quality of observers doubt that the services sector and IT jobs will negative environmental externalities that undermine
life issues, they will likely be seen as necessary and be the answer. India’s growth strategy will need to include wealth and welfare for years to come.
appropriate constraints. Such measures, implemented in a much larger and more competitive manufacturing
a timely and measured fashion, may help prevent sector. Climate Change. One of the biggest risks facing the
potential backlashes, regulatory overreach and other planet is climate change; it is worth noting that many
phenomena that could undermine the long-term The movement of people will also be highly relevant to experts are sanguine about its potential effects on the
sustainability of economic growth. The challenge is, of growth prospects. With working age “bubbles” in Africa engines of global growth. While costs – from both
course, designing policies that do just enough to manage and the Middle East, and deficits in Europe, the pressure regulation and some extreme weather impacts — are
these risks without suffocating economic activity. to accept and/or encourage migration will be great on likely to emerge in the next 10 years, the new champions
both sides. While migration might be economically in emerging markets and high-growth sectors are likely to Local environmental risks. More immediate impacts
Inequality. The emergent argument that there are two efficient and help sustain growth, it presents one of the bear less of the regulatory burden in the near term, and will come from localized environmental risks, particularly
globalizations taking place – one for the wealthy and one most difficult political challenges of the coming decades. share much of the upside opportunity. air, water and soil pollution. China, India and Russia have
for everyone else – has its basis in rising income and all struggled with episodes of contamination in recent
asset inequality. Many observers believe that Many observers see urbanization as one of the key In the next decade energy efficiency, carbon capture and years, and water scarcity is already creating political and
governments have already done too little to mediate the drivers of the next phase of growth. Urban workers are storage, and renewable energy should all become economic problems around large cities like New Delhi
inequities of growth, and that societal demands for a more economically productive for a variety of reasons – priorities in economic policy around the world, and as and Beijing. While these problems are local in their
more activist state are beginning to gel into a global higher value-added occupations, resource efficiencies, such significant incentives for research and development manifestation, the regulatory environment for global
movement. That this sentiment pervades the lower and network effects in production and consumption. But rapid will emerge. There is great optimism about the business is very likely to change as a result. Increased
middle classes of the rich world, probably more than in urbanization can create extreme challenges around commercialization potential in these areas, and a widely- environmental regulation has been a part of economic
the developing world, has surprised many. The largest quality of life, social harmony and environmental impact. held belief that a changing energy paradigm could be the development for the past century, and as long as the
risk may not be rising inequality as such, though that may As Paola Subbacchi, Head of the International next great technological driver of growth. regulatory burden is well managed, it will be an important
be undesirable even in a world of absolute gains for Economics Programme at Chatham House, asks: “Do we factor in sustaining growth.
everyone. The bigger risk may be that offshored jobs, want cities in developing countries to turn into Tokyo or Ambient Air Pollution Worsens With Larger City Populations

imbalanced growth and distaste for a highly visible Lagos?" 6 Delhi Beijing

Mexico City

economic elite fuel economically harmful policies instead
5 Accra Rio de Janeiro
of socially beneficial ones.

Log of ambient particulates
Milan

4
Perhaps the most feared outcome is the return of trade Tokyo


Madrid

protectionism. With global trade talks already struggling, Reykjavik
Climate change risks are real and
3
geopolitical competition on the rise, and a complex web Oslo
Paris

of regional and bilateral agreements complicating the Stockholm potentially severe. But the
possibilities, popular displeasure with the effects of 2
10 12 14 16 18

challenge may spur innovation
globalization threatens to sound the death knell for global
free trade. There are divergent opinions on whether this
phenomenon has truly gained political traction, but wide
North America
Europe and Central Asia
Latin America/Caribbean
Africa
Asia/Pacific
Log of City Population in 1995

Source: Matthew Kahn, Green Cities: Urban Growth and the Environment (Brookings, 2006)

and be a positive force for the
agreement that a retrenchment from globalization in the next decade of growth.
next 10 years would have radically negative effects on International negotiation of a climate change regime is
growth. likely to be difficult. But there is emerging consensus that
the system will be pro-technology and will seek
Demographic change, migration and urbanization. efficiencies that smooth impacts on consumption. The
Slow-moving demographic trends are very rarely regime is also likely to include one or more transfer
successfully addressed by politicians working on 2 to 6 mechanisms (such as an improvement on the current
Clean Development Mechanism) that allow rich countries
year cycles. When they are addressed (as in Deng Environmental Constraints and Risks to fund carbon reductions in emerging markets.
Xiaoping’s birth planning policies), they may set in motion
changes that are difficult to reverse. Yet, varieties of
Environmental constraints on economic growth have Climate change risks are real and potentially severe. But
demographic trends around the world present challenges
been a topic of global debate since the work of the Club the challenge may spur innovation and be a positive force
to growth that cannot be ignored.
of Rome in the 1960s. While natural resources and for the next decade of growth.
systems have proven abundant, they are clearly under
Japan, China and Europe face the challenge of ageing
strain. Whether 6 or 9 billion people can share the current
populations, though on different time frames. This may
western economic status will depend greatly on
shrink the labour force (where retirement ages stay low)
technological progress and the ongoing ability of
or harm productivity. For much of Europe where pensions
are state-supported, it is already a looming financial
burden that may force tax increases.

16 | Global Growth@Risk 17 | Global Growth@Risk
CEO Perspectives
Martin A. Schoeller, Co-Chairman, Schoeller Group
Growth@Risk in China
What do you view as being the fundamental drivers of What is your organization doing to manage these What are the biggest risks to economic growth over The 9-11% annual economic growth in China has lifted
the current period of growth for your company and threats? the next 10 years? How will they play into growth in millions of Chinese citizens out of poverty, inspired
region? your region and sector? economic reform and competition from other countries,
We have identified the energy sector as a further area for our and driven global flows of trade, capital and talent. The
Five factors: 1) outsourcing combined with putting company and I see an enormous long-term trend for There are five factors which are huge: 1 and 2) climate importance of the Chinese economy to global growth also
production and services in India and China; 2) Eastern sustainable energy. We have a company there, which we use change and environmental degradation – very, very means that risks to Chinese growth are of particular
Europe – driven also by implementing western standards into important: we’re going to need far beyond a thousand billion concern to the new champions of the next decade.
as a platform to make it grow so energy becomes a new leg
Eastern European countries. I think the standards have a sort – even though we’re a packaging and logistics company – euros of clean energy investment; 3 and 4) geopolitical
of pulling force, raising the bar, though the political and and that comes from looking at the new global world and not tensions and terrorism and armed conflict – this will just keep Economic constraints and risks
economic system has to raise to the bar as well, which is not just the microcosms of our own company. us out of the whole area from Syria to Iran so it’s purely
Happening in many emerging countries yet; 3) revival and about a delay. In terms of both the geopolitical tensions and Declining returns and the move up the value chain.
appreciation of entrepreneurship in Europe; 4) private equity For me it’s the chance for the entrepreneurs – the speed and the risks of terrorism, these are drawdowns – the tensions Chinese industry is at a turning point. Wage pressures,
in connection with entrepreneurship; and 5) the mobile phone energy and [flexibility] that entrepreneurs can offer – that will delay investments and the speed of trust-building; 5) while still mild at the macroeconomic level, are changing
sector which is an exploding sector everywhere. demographic change – this will give new opportunities in costs for many firms. Profits are also shrinking from the
really gives us a chance to shift. We’ve seen the shift of
revenue side, as domestic competition in the
power in the media by the Internet and I think they will be taking care of the elderly and new services and healthcare for
manufacturing sector becomes ever more intense.
[Each of these has a little effect on our industry] because another shift to new entrepreneurs in the energy sector. So consumers over 60, and that will give us very sustainable
we’re growing in Eastern Europe, we’re moving into India we have our foot in there. trends. Structural factors contribute to this phenomenon. The rarity
and China and we have activity in mobile phones, so this of bankruptcy creates barriers to exit: struggling firms with
[view] comes from an inside perspective. The other thing is we are focusing on our environmental Which countries and sectors do you think will drive continuing access to credit more typically jump into
economic growth in the next 10 years, and why? competitor’s product lines and new ventures rather than
packaging, so we have our reusable packaging which avoids
What do you think will be the main drivers of economic innovate to exit the marketplace. New entries are in turn
the burning of packaging. We also have recycling of one-way
growth over the next 10 years? Globally? Russia and Mexico, not to mention the two that everyone is facilitated by weak protection of intellectual property,
packaging and we’re building recycling factories. We think allowing copycat product plays. This increased competition
talking about. Our company has an explosion of revenue and
that with the environmental aspect of our business – we have thins margins, leaving very little capital for investment in
I see Russia coming up not only as an energy supplier but as jobs in Mexico. The US has the problem with immigrants
put our sail where the wind is. But we are also missionaries – research and development and new product lines.
a consumer [market]; and I see the consumer in India and which it has to solve, which puts pressure on the Mexicans
we were preaching this before the wind came.
China. Not only are they brining us cheap manufacturing, to increase their wages.
How will Chinese manufacturing break this vicious circle?
they have their own internal consumer potential. The Chinese What are other key factors in prolonging the global The growth of the domestic consumer market is playing an
have 200 million people in the middle class growing by 10% expansion? I think that entrepreneurs do too little to emphasize that it’s in important role. As investors begin to take more of an
– or 20 million – a year. the interests of everyone, politically and economically, to have interest in Chinese consumers than in cheap Chinese
Russia – I’ve been to Russia and I’m totally amazed by the the salaries rise and get away from the very short-sighted labour, many have begun to fund the development of local
So that leads to the energy sector, green technologies that salary policy. The Russians are increasing their salaries so thinking that low salaries are low costs. The effect of higher design capabilities. Many firms are discovering that these
salaries creating consumer markets has a hundred times capabilities are excellent, and are beginning to export
are needed to make this sustainable. They need that the employee has money. The Chinese and Indians are
designs for manufacture elsewhere.
infrastructure so that the whole pull is somehow logical. doing it too but much slower. The Russians already have more impact for the economy than … arbitrage between one
$500/month in lower jobs and this will be increased to guy making it cheaper than another guy.
Export dependence and the domestic market.
One of the drivers from the entrepreneur’s point of view, $1,000/month in the next five years, so you have a country Dependence on the consumption patterns of US and EU
which is very positive, is the financial liquidity of the market where people at the lower end of the scale will earn a In terms of sectors I see the Indian, Russian and Chinese consumers, as discussed above, may be the biggest
providing more risk financing or skill financing. thousand dollars a month and 140 million Russians can buy consumers driving infrastructure, telecoms, consumer vulnerability of the Chinese economy. But the domestic
what 1 billion Chinese can buy. The Russians are transport, energy and health. We’re in packaging, in market is growing – the retail sector is growing at 13% and
consumer transport, we have a diversification in telecoms will probably accelerate to keep pace with urbanization.
So, it’s the Eastern consumer, Russia becoming a consumer, underestimated.
The question remains whether the market will grow fast
the energy sector and the green technologies, the and we’re boosting energy, but we have nothing in health.
enough to credibly mitigate a downturn in export markets,
infrastructure and the liquidity are the drivers in our view and We’ve mentioned the consumer and green energy, but if we or whether China will be left with huge overcapacity and a
we hope that it stays like that. want to take countries out of poverty and if the rich How have recent trends in globalization affected the
cyclical downturn of its own.
way that businesses work at the strategic level?
Europeans want to influence that we should export
What do you think are the main threats that could standards. The Chinese have their social system and they’re Overinvestment. There remains some concern that
derail this growth in the next 10 years? Globally? I can only say that we are looking to internationalization and investment rates have been excessive and not driven by
only giving it up piece by piece as fast as the free liberal
building our ventures in India, China and Mexico and also demand. Part of this concern is related to the type of
economy can take over to feed the people. But in Asia,
I think the focus is all around Palestine and Iraq and that the looking into energy, which is not a typical area that we would investment – in export-geared manufacturing and
Africa, and especially South America, they don’t take care of
world has two wounds and they could heal the wounds have looked into if the fever hadn’t reached us. infrastructure – more than the absolute level. Nonetheless
their people and have 60% of their people living in misery. So investment rates may have to slow if consumption is to
instead of putting salt into them.
the Europeans can bring in a requirement to gradually build rise.
How have recent trends in globalization affected the
social and ecological standards in countries that don’t have way that businesses work at the operational level?
I also see dangers from the immigration push from African
them. We have proven how standards can help the Eastern Political constraints and risks
poverty pushing into Europe and there are no real recipes
countries to catch up and a full cohesion policy works well. If We are amazed about credit and risk financing availability.
here at the moment.
we do this to other poor countries – this is not about helping Now there is more money than ideas. We entrepreneurs have
Institutional constraints. China has surprised many
our industry but about protecting the poor and helping the more ideas than money, and now we have a counterpart. We
And the fear of having explosive consumption from India and western observers with its ability to generate free market-
countries to create a consumer society. If the Europeans can [issue] bonds, we can get very [reasonable] covenants. led growth without the types of political institutions
China and also in Russia in an unsustainable way – having 1
start with a programme to link social and ecological Perhaps in the longer term future some things will explode generally associated with market activity. There remains
billion cars using our air. These are the three things I’m most
standards to the import duty access to their market then because of sloppy credit, but on the other hand I believe that widespread belief that some of this institutional
worried about. underdevelopment will need to be addressed lest it
they can create growth in other areas of the world. The many things will be able to survive that would have been
Americans might follow, but I trust much more in the killed and I see this positively. constrain growth in the near future.
reasonableness of the Europeans at this moment and the
One major concern is the judicial and legal system, which
awareness that they have to get more organized. There are
still struggles with corruption. Low pay and local
areas such as South America that one day can become
18 | Global Growth@Risk growth areas just as you have now in India. 19 | Global Growth@Risk
CEO Perspectives
Johnny Chen, CEO, Greater China and South-East Asia, Zurich Financial Services

appointment and accountability for judges may need to be been 20% from 2004 to 2006. Finding a balance whereby What do you view as being the fundamental drivers of What do you think are the main threats that could
reviewed. A system of national appointments and rotating growth is made inclusive without creating disincentives is growth in China and Asia? derail this growth in the next 10 years?
jurisdictional assignments could mitigate the possibility of one of China’s major challenges in the next decade.
corruption becoming locally entrenched. The free flow of capital – in the form of foreign direct First, threats of social and political instability. Border
Demographics, migration and urbanization. Given the investment for example, is coming to China in excess of disputes still remain very sensitive. The second threat
Freer press and information flows may also strengthen current retirement age, which can be as early as 50, it is US$ 50 billion per year. The second form is through the would be income disparity and the spread of uneven
entrepreneurship and generate confidence in political very likely that the number of working age people in China booming capital markets, specifically in Hong Kong, wealth. It also [depends] whether the government will
transparency with respect to business. A stronger political will peak within the next 10 years. Whether or not this allowing capital to further flow into China. continue to reform in terms of per capita income. The
voice may emerge from the growing middle class. becomes a drag on Chinese growth may depend on how wealth creation cycle needs to take its place. Without
successfully the country sustains growth up to that point. The second driver is the leap in wireless communications that continuous reform, inequality may be the biggest
At the same time, as one observer noted: “Change cannot As yet the Chinese government does not hold any technology. Information is shared almost instantaneously, threat in the next 10 years.
happen quickly for 1.3 billion people – that would cause retirement-related liabilities. With growth rates still high, which allows China to be almost at the same level as any
turmoil. It must be a gradual process.” however, concern for social welfare and stability has led of the international players. Although many state China is currently struggling with the foreign exchange
the government to begin considering national retirement enterprises are still very far behind in terms of experience imbalance and the trade imbalance. China will need to
Protectionism. The biggest external political risk may be benefits. in the marketplace, at least they have access now. continue to open up and to spend on foreign imported
resurgent protectionism in the West. While China has some products. Without that, they will have many of the
levers to pull in mitigating this risk – gradual currency As many as 400 million Chinese will move to cities in the One other flow of capital is the continued investment from sanctions and barriers imposed on China and that can
reform, support of imports – the most important factors next 20 years. This migration and urbanization of the rural the government in infrastructure. If you look at the roads, extend to India too.
may be the diplomatic capabilities of future US Chinese population has the potential to boost productivity bridges and the highways, some of them didn’t even
governments and the flexibility of the US economy. The and strengthen the development of consumer markets. To exist 10 years ago. That expanded the reach for all the The third thing is the restriction on free trade. The
latter will help absorb the effects of globalization, and the date China has successfully avoided the emergence of goods and services: one way through wireless, and one continued Middle East instability sooner or later will [also]
former will help prevent amplification of any backlash. mega-slums that have appeared in much of the developing way through all the transportation systems. impact this region as well as the global economy.
world, but the risk may get worse if urbanization rates
Geopolitical tensions. China does not see itself as accelerate. While service provision and infrastructure will The rise of domestic consumption and wealth I think one of the other main [challenges], critically for
expansionist, but the rise of a great economic, and be a challenge, the greatest concerns about urbanization accumulation in the last 10 years has increased the China and India, will be the availability of talented
potentially military, power cannot help but reshape the may be environmental. spending power from the commercial and personal resources, especially for our industry. We are all
attitudes of other countries towards China. Again, sectors. If you picked up a South China Morning Post competing from the same pool of talent, driving all the
diplomacy will be key, as will the ability to separate efficient today, it talked about Shanghai women looking for costs up to operate.
economic outcomes from the politics of global influence.
As discussed above, the expected conflation of these two
Environmental constraints and risks husbands – a 25-year-old real estate professional who
owns two apartments, with a net worth of over half a What other issues will affect the sustainability of
areas may undermine trade, globalization and economic growth in the coming 10 years?
million US dollars, and drives a BMW. This is the picture
growth in China and the world. Local environmental risks. The Chinese government is
right now. So in the aggregate, in this region, there is a
extremely concerned about the effects of air, water and soil In terms of issues that will impact this region –
need, a wish and a desire for a better quality of living.
pollution on human health, quality of life and the demographic change, migration from rural to urban
That’s driving the whole growth engine.
Forecast Consumption Growth in China sustainability of economic growth. Xinghai Fang, Deputy areas. Population in China is a double-edged sword. You
Overall spending expected to increase almost 9% per year Director of the Office for Financial Services in Shanghai, can afford to have cheaper skilled labour, but all the
What do you think will be the main drivers of
noted that: “Tai Lake near Shanghai is now completely social welfare benefits issues are compounded … the
Recreation, Housing, Transportation, economic growth over the next 10 years?
Food Education Utilities Communication Healthcare Apparel contaminated and local people can no longer drink the government systems [can be] very stretched.
2025
water. Air pollution, soil contamination – these are all Free trade agreements will fuel continuous economic
constraints. Fast growth is important, but environmental growth. The unfortunate thing I read about in the press a Which companies or industries do you think will
:6
.7
%
CA
GR
:9
.5%
R: 11
.8% Household
products
challenges are too large for the economy not to slow few days ago between US and China: now they are dominate the economic growth landscape in 10
G
R CAG
Personal
CA products down.” years, and why?
preventing a lot of goods from the US to come in. Once
you get into retaliation mode, everyone loses. If the free
2004 Global climate change. Already, by some measures, the Technology companies, for example ZTE and Huawei that
trade agreements do not broaden out, that will surely
world’s largest emitter of greenhouse gases, China’s role in do all the data centres and data exchanges. Energy [and
hinder growth.
0 5,000 10,000 15,000 20,000 the global fight against climate change will be central. One mining] companies. Those are the holders and owners of
Real consumer spending (RMB, billion)
observer argued that the country sees itself as the “voice the resources, whether they be iron, copper, oil or gas.
Source: National Bureau of Statistics of China; McKinsey Global Institute analysis To fuel growth, sooner or later, currency convertibility is
for all developing nations.” While local environmental These companies will continue to dominate the market.
concerns are a much higher priority, the country can be
going to take a place to allow more transparency in the
expected to take an active role in attempting to shape a fluctuations of exchange rates. That will allow the
economy to be further in line with the markets. The dominance of state-owned enterprises (SOEs) in
fair global policy that allows for continued Chinese growth. China will gradually erode. With the further reform of the
shareholding structures of the SOEs, eventually the
Societal constraints and risks Further, many of the lowest-cost carbon reductions for the The third area is the further opening up of domestic
government may hold 10 or 20%. So the further
next 10 years may be in China, which should encourage markets: Eliminate all the equity and territorial restrictions
currently still imposed. [There also] will be regionalization privatization of SOEs will be positive for the marketplace.
Inequality. Paramount among social issues in China is financial and technology flows towards the country. While
of the Asian markets. Somehow, the borders are There will be [a boost] for market-driven principles, and
rising inequality. If rapid growth creates “two Chinas” it will China has famously been building coal-fired generation
becoming more invisible. The region is following the the corporate governance will be more transparent and
almost certainly prove unsustainable, and President Hu capacity at the rate of one power plant per week,
European model, which does not give up sovereignty but open.
Jintao’s calls for “harmonious growth” are aimed at investment in renewables has also been heavy and is likely
to increase. gives up certain customs and sanction rules. The
addressing this very risk.
increase in the demand in the region alone will fuel
growth.
There is some concern already about overreaction. One
observer noted that growth in Chinese tax receipts has

20 | Global Growth@Risk 21 | Global Growth@Risk
Acknowledgements
This report was prepared by Jesse Fahnestock of the Global Risk Team of the World Economic Forum, in
collaboration with its partners.

Global Risk Team, World Economic Forum
Charles Emmerson, Global Leadership Fellow
Jesse Fahnestock, Associate Director; Editor, Global Growth@Risk
Johanna Lanitis, Research Analyst
Sylvia Lee, Global Leadership Fellow
Gareth Shepherd, Global Leadership Fellow

PricewaterhouseCoopers
Christopher Michaelson, Director, US Advisory
Sophie von der Brelie-Lambin, Director, Global Thought Leadership
Jean-François Samson, Manager, Global Thought Leadership

Material for the report was gathered through interviews with leading academic, business and policy-making
experts on emerging markets, industry and growth. The following individuals provided input that shaped the
content of this report:

Fatih Birol, Chief Economist and Head, Economic Analysis Division, International Energy Agency
David Bowers, Managing Director, Absolute Strategy
Ian Bremmer, President, Eurasia Group
John Bussey, Editor, The Wall Street Journal Asia
Gavin Cameron, University Reader in Macroeconomics, University of Oxford
Johnny Chen, Chief Executive Officer, Greater China and South-East Asia, Zurich Financial Services
Esmeralda Da Silva Dourado, Chief Executive Officer, SAG Gest - Solucoes Automovel Globais SGPS SA
Xinghai Fang, Deputy Director-General, Office for Financial Services, Shanghai Metropolitan Government
Sophy Fisher, Regional Information Officer, ILO Regional Office for Asia and the Pacific
Witold Henisz, Associate Professor of Management, The Wharton School, University of Pennsylvania
Wi Jianmin, President, Chinese Foreign Affairs University
Pierre-Benoit Joly, Director of Research, INRA/TSV
Liu Jiren, Chairman and Chief Executive Officer, Neusoft Group
Vijay Joshi, Reader in Economics, Merton College, University of Oxford
Steven Kapsos, Labour Economist, ILO Regional Office for Asia and the Pacific
Jean-Pierre Lehmann, Professor of International Political Economy and Founding Director, The Evian Group, IMD
David Li, Mansfield Freeman Professor of Economics, and Director, Center for China in the World Economy,
School of Economics and Management, Tsinghua University
Debbie Orgill, Senior Economist, CEMA, ABNAmro
Zsolt Papp, Head, CEMA Local Markets Research, ABNAmro
Nouriel Roubini, Professor of Economics, New York University; Founder and Chairman, Roubini Global Economics
Jacques Sapir, Director of Studies (Economics), EHESS; Director of the Centre of Studies of the Modes of
Industrialization, CEMI-EHESS
Martin A. Schoeller, Co-Chairman, Schoeller Group
Yat Siu, Founder and Chief Executive Officer, Outblaze
Eric Thun, Peter Moores Professor in Chinese Business Studies, Saïd Business School
Christopher To, Secretary-General, Hong Kong International Center for Arbitration
Paola Subbacchi, Head, International Economics Programme, Chatham House (Royal Institute for International
Affairs)
Gabriele Suder, Professor of International Business and Risk Management; Head of Global Management, CERAM
Robert A. Willett, Chief Executive Officer, Best Buy International and Chief Information Officer, Best Buy Co. Inc.

22 | Global Growth@Risk