Global Growth@Risk

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A Report of the Global Risk Network
in collaboration with PricewaterhouseCoopers


Page 4 Foreword Page 7 Driving Growth Page 13 Constraints and Risks Page 19 Growth@Risk in China Page 22 Acknowledgements

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REF: 160807

The 23 Core Global Risks: Likelihood with Severity by Economic Loss
Increasing consensus around risk

250 billion - 1 trillion more than 1 trillion

This report has been prepared by the Global Risk Network for the Inaugural Annual Meeting of the New Champions (Dalian, People’s Republic of China, 6-8 September 2007). In preparing this report, more than 30 experts from business, academia, and policy-making were asked to consider the recent period of unprecedented global growth: its drivers, its champions and the challenges facing the businesses, countries, regions and emerging leaders who will pilot growth for the next 10 years. Key conclusions of the report: 1. Many of the economic underpinnings of global growth will remain in place for the next 10 years, but this does not mean that a continuation of recent trends is certain or even likely. 2. Economic interdependence means that downturns and shocks are more likely than ever to be global. New consumer markets must develop to mitigate this risk. 3. Global growth is threatened not just by shocks and shifts but by curbs and constraints: political, social, economic and environmental constraints to current growth trends are already beginning to show. 4. Unfettered globalization and growth is coming to an end, as governments seek to balance economic expansion with political priorities and sustainability concerns. The winners of this next phase of globalization will recognize that growth will not be a free-for-all. Rather, increasingly, political, social, environmental and economic forces will obligate business to participate in an exchange with society that balances what is taken from participating markets with productive contributions in return.

The Global Risk Network of the World Economic Forum is composed of an unparalleled network of industry, risk and regional experts who work with business leaders and policy-makers to: • Create a framework for assessing and prioritizing existing and emerging risks to global business over the short and long term Alert key decision-makers to the impact these risks might have on their environments Assist leaders in their reflection on how risks may be mitigated at the global, regional, industry and company levels Transform these global risks into business opportunities

Retrenchment from globalization

Asset price collapse


Interstate and civil wars

• •

Oil price shock China economic hard landing

Severity (in US$)

Middle East instability Coming fiscal crises NatCat: NatCat: NatCat: Tropical storms Earthquakes Inland flooding

10-50 billion

To generate a global risk, an issue must have global scope, cross-industry impact, and there must be uncertainty as to how the risk will manifest itself (in regard to the likelihood of occurrence and severity of impact). Over the last three years, the Global Risk Network has engaged a wide range of experts in the economic, geopolitical, environmental and societal fields to explore the nature of the risk landscape facing governments, societies and businesses. In conjunction with its partners, the Global Risk Network has identified an annually updated list of 23 core global risks to the international community over the next 10 years. These core global risks have been assessed in terms of likelihood and severity (see Figure). In addressing likelihood, actuarial principles were applied in the few cases where sufficient data existed; in most cases only qualitative assessments, based on expert opinion, were possible. Although some risks are inherently long term (such as climate change) and others (such as an oilprice shock) could occur in the near term, all risks were evaluated within a 10-year time frame. A more detailed description of the core global risks can be found in the Global Risks 2007 report, published for the World Economic Forum Annual Meeting in Davos (and available at The World Economic Forum Global Risk Network has identified 23 core global risks over a ten-year time frame:

50-250 billion

Transnational crime and corruption Breakdown of CII Fall in $ Chronic disease in Climate change developed countries Liability regimes Developing world disease Loss of freshwater services Failed and failing states Proliferation of WMD International terrorism


2-10 billion

below 1%




above 20%

Note: Likelihood was based on actuarial principles where possible. For most risks, however, qualitative assessment was used. Source: World Economic Forum Global Risks 2007

Risk to Whom?
The Global Risk Network considers risk and mitigation from a truly global perspective: the human and economic welfare of the world is its stakeholder at risk. Using the results of the Global Risks report as a starting point, the Network has begun to look at global risks from a variety of narrower perspectives: exploring regional perspectives in Europe@Risk, India@Risk, Latin America@Risk, and Middle East@Risk, and diving into mitigation of specific risks such as natural catastrophes and unsustainable water use in collaboration with specific industry groups. Information on these projects can be found at

A New Perspective: Global Growth@Risk
Inspired by the Inaugural Annual Meeting of the New Champions and the World Economic Forum’s new community of Global Growth Companies, this report takes as its primary stakeholder groups the companies, industries, countries and regions at the front edge of global economic growth, and those who will continue to champion that growth during the coming 10 years. This report does not seek to apply or recreate the more rigorous methodological approach of the Global Risk Network, but rather to provide a qualitative first review of the trends, issues, threats and vulnerabilities that may affect global economic growth and its new champions over a 10-year horizon.
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About the Global Risk Network
The report builds on the existing work of the Global Risk Network: primarily, the annual Global Risks report produced in collaboration with Citi, MMC, Swiss Re and the Wharton Risk Center.

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From Global Risk to Business Risk
How do global risks impact business operations in global growth markets?
The holistic nature of global risks implies that no single company, industry or state can successfully mitigate them on their own. Unfortunately, the larger than life character of such risks has led some enterprises to conclude that there is nothing that can be done to address global risks. A closer look reveals that executives ignore global risks at their own peril, however, because they lead to operational realities. A significant variety of operational risks that routinely challenge enterprises in key global growth markets – such as China, India and Brazil – are embodiments of global risks. For example:
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 assets in jeopardy, but future opportunities that may or may not come to fruition. Thinking about opportunities is at the heart of the new champions’ world view, as entrepreneurship at its core means putting scarce assets at risk to seize great opportunities. If these opportunities become limited or constrained, the spirit of entrepreneurship that drives growth will suffer. Thus, the biggest risks to today’s global wealth and welfare may be shocks and shifts (pandemics, climate change), but the biggest risks to tomorrow’s growth are brakes (political, economic, social, and environmental issues) that may slow economic and entrepreneurial activity. There is great optimism that many of the drivers of the recent global expansion are robust, and that the next 10 years will be good ones for economic growth. There is also debate, however, about the sustainability of some of those drivers, and significant concerns about non-economic constraints that are already emerging to challenge conventional approaches to expansion at both the company and macroeconomic level. Whether growth continues at speed remains to be seen. What is clear is that assumptions about yesterday’s growth opportunities are very unlikely to apply to tomorrow’s.

Driving Growth
The Global Risk Network has attempted to clarify some of the important drivers of recent global expansion, in an effort to better assess their inherent sustainability and vulnerability to exogenous risks. Three interlocking trends form an umbrella over the factors driving growth in recent years: national economic reform, globalization and technological development.

Global Risk

Related Operational Risks Often Cited in Global Growth Markets
• Protecting against foreign exchange and interest rate risk under conditions of significant government intervention • Competing against societal or government-driven favouritism in business practices, including in pricing and procurement practices • Navigating different standards of ethics when operating across borders or within different economic sectors of a market • Controlling operating costs and/or possible disruptions in production due to quality and delivery levels of state-owned services and infrastructure • Planning for business continuity in circumstances of infrastructure breakdown • Protecting intellectual property and combating piracy amidst inconsistent regulations and enforcement • Complying with overseas laws that place restrictions on local operations (e.g., bribery and corruption statutes) • Managing gaps between stated requirements and what is acceptable practice • Developing systems to comply with complex financial regulations and reporting requirements • Complying with a complex set of non-aligned laws (including local and regional enactments, and international agreements) • Addressing different standards and enforcement of emissions quotas and other environmental norms

Retrenchment from globalization

Global Growth
Developing world sets the pace for global economic growth

8% Emerging market and developing countries

6 GDP growth



Advanced economies


Breakdown of critical information infrastructure


1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007F 2008F 1984 1985 1986 1987 1988 1989

Source: IMF

The past 10 to 15 years have been dominated, economically, by the decline of centrally planned economies and the implementation (often halting and imperfect) of comparatively liberal, market-led economic strategies. Reform has had many faces, from deregulation to lower taxation to the exit of the state from ownership of certain industries. But in the economies that have benefited most from ongoing reform – China, India, East Asia and Eastern Europe – the results have had much in common. Reform has released pent-up entrepreneurship, labour and capital, and, crucially, consumer demand that had lain dormant in many locations. Many observers have also noted a domino effect in economic reform. National self-interest encourages countries to follow their neighbours in liberalizing market activity (indeed, the downside of this phenomenon has frequently been called “the race to the bottom”). As the world’s largest economic domino – China – fell and began trading, the effect on other economies was remarkable. Even North Korea has begun consulting with China about the creation of Special Economic Zones. Liberalizing reforms, where successful, have often been cautiously managed. But, in many of the world’s highest growth economies, reform has been partial at best, and political environments have remained unstable. Yet, the effects of this uncertainty on growth have been less than might have been expected. This suggests a (at least relative) decoupling of politics and economic trends. This is probably driven by the declining share of the economy

Transnational crime and corruption

CEO Perspectives
As part of its research on Global Growth@Risk, the Global Risk Network interviewed more than 30 leading thinkers from business, academia and policy-making. Crucial to building the report were perspectives from CEOs from companies operating in high-growth environments: emerging markets, fast-growing sectors and globalizing businesses. PricewaterhouseCoopers, a strategic partner of the World Economic Forum and the Forum’s Global Risk Network, conducted interviews with a number of these CEOs, five of which have been included throughout this report under the CEO Perspectives heading.

Spread of liability regimes

Climate change

Enterprises would benefit from taking their own steps to mitigate these operational risks, without neglecting the connection to global risk. To make global risk mitigation manageable and relevant to their unique standing in global markets, enterprises should also ask themselves the following questions: • What global risks are most salient to our company, and to the industry(ies) and state(s) in which we do business? • What global risks are we best equipped to help manage in view of our core competencies, geographic position(s), economic power and other factors? • How can we contribute to risk mitigation, in collaboration with companies, industries and states, in ways that would benefit individual market actors and societies alike?

Penetration of Markets Seen as the Most Important Opportunity for Growth
Survey: "Which one of the following do you see as the major opportunity to grow your business in the next 12 months?


Percentage of respondents





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

Source: PricewaterhouseCoopers

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CEE Latin America Asia Pacific Western Europe North America


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CEO Perspectives
Robert A. Willett, CEO, Best Buy International and Chief Information Officer, Best Buy Co. Inc.
What have been the global growth drivers for you historically? I know you’re fairly new in China. Think scale, learn carefully, and scale fast, resist looking at every country through a core US lens but through the lens of customers in whatever country we are entering. We are also going to focus on countries that provide us with the ability to be #1 in the eyes of the customer and a minimum of US$ 6 billion of sales, if not, we will not go there at this stage in our maturity. Are the drivers now going to be the same as the drivers in the next 10 years? What are the risks that you’re most worried about? I believe that the more balanced our country portfolio is over the years to cope with turbulence in different markets the better, as turbulence is not going to go away, so we need as many ‘fingers’ as possible in developing growth markets. The challenge is also to stay focused on your core market, in our case the US. The moment you lose focus on that market, you are ‘dead in the water’, and forget international. If some day the Chinese economy is larger and your revenues in China are larger than they are in the US will that become your core market? The US is our core market but I do not think that matters. Retail used to be about location, location, location. Today it is innovation, innovation, innovation that comes from multiple geographies which is one of the most significant benefits of going international, and the learnings flowing back to the core are outstanding. Product convergence and market consolidation is happening at a significant pace and you also have all types of non-standard competition emerging. So, the more you‘re in these other markets, the more you are seeing different ways of doing things; so you bring those back and refresh your core business. So, unlocking innovation is one of the upsides of going international. What are the risks? The most important topic that government can address – and you don’t want government to do too much, because they do too much as it is – is to really inspire entrepreneurship. That’s what you want and there is a big risk that it won’t happen. Risks such as political turbulence and restrictive markets need to be addressed ongoing. Yes these are risks…but I don’t think they’re any greater today. Do you think the world is in a riskier place than it was in the 40s, 50s, and 60s? When we all had atomic warheads facing one another? The biggest risk is in the Middle East, the risk to the stability of the world and the peace of the world is not addressing that issue, plus you have some seriously disadvantaged people. First world and other countries could wipe out so many diseases overnight if they made medicine much cheaper or even free in so many countries. Look how many years they wanted to charge African countries for small pox and malaria instead of just giving it to them. That’s where I think there’s a problem – with values.
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With risks of that sort – let’s take religion-driven conflict – is there an opportunity there for Best Buy? The Middle East is a tremendous opportunity. I think Turkey is a great opportunity – Istanbul is the only city that sits in both Europe and Asia. There are substantial sums of money being spent in those countries; they’re really investing in manufacturing. We’re going to retail [in Turkey] and source [from Turkey]. I think that’s what you always have to do. You go to a country and say ‘What can we offer to them and what can we learn from them.’ Does the thought of China building new coal-fired plants and every day billions more people driving cars and using electricity concern you? Yes, I think it does. But we shouldn’t be selfish because the US and UK did the same thing – we were burning coal in the UK for 100 years. We had pollution where you couldn’t see your hand in front of your face. China’s evolved in 10 years – guess what? They’re going to make some mistakes. But the powers that be are aware of this. I think their problem isn’t central government, it’s local level government. They’re on a real journey in making change happen locally that’s difficult. I think they’ll address it over time … the expectation of the West is ‘You guys have got to get this right now.’ Well, look in the mirror. Is climate change a threat to Best Buy? No, I think it’s an opportunity. You know, you look at the packaging of products – look at the amount of cardboard and stuff that’s around a product. If you could take out 1/2 of that and push it back up the pipeline. What would that do? Isn’t that a better way to resolve the problem? I think all of those risks we talk about are also opportunities for us to create different solutions – looking through the lens of the consumer and creating work in developing countries. Back to consumer markets and scale – what about India and Indonesia? We are looking but we have to consolidate successfully what we already have. We mustn’t apply our own orthodoxy when we look at these countries; sometimes you have to say no that’s the orthodoxy that existed for a thousand years, don’t say it’s wrong. India is a great opportunity for the future. We are entering Turkey and Mexico ‘greenfield’; it will be slow and we’ll listen and listen to the customer, learn, understand and then scale fast. Make an acquisition? I’m not saying it’s out of the question. [But] We can make our own problems without cleaning up somebody else’s. I think that Best Buy values are so unique and special, that we’re actually better off initially going greenfield to start, but we will always keep an open mind to do what is best for the customer and our shareholders. We’re off to Dubai in the autumn – let’s just say there’s a great opportunity for us there. If you think about all the countries that utilize the resources Dubai offers that are around the Middle East … you start by building a brand and a reputation with governments together with customer centric skills, but it is not a race, you are going to be there for the millennium, so do it properly.

owned by governments, and relatively credible commitments to medium-term stability (in monetary policy, business cycle management, etc.) that have outweighed short-term uncertainty. The next 10 years. Economic policy reform is an ongoing process, even in the world’s most advanced economies. Concern is already emerging that some recent “success story” economies may be resting on their laurels and not doing enough to foster growth, for example, by encouraging investment of accumulated savings or increasing labour market flexibility. Reform for many emerging economies is already taking on a different character – from the removal of shackles on business to the creation of proactive and enabling policies focused on productivity. Sustainability and constraints. Reformist policy-making will always face political constraints — not only from vested interests and populists, but also from the understandable political priority of minimizing socio-economic turmoil, environmental degradation and insecurity. Indeed, the pendulum in many places already appears to be swinging back towards these priorities and away from the sometimes competing priority of economic growth. This may shape a very different – and more active — kind of economic governance in the coming 10 years.

production and the resulting gains from trade. Offshoring, outsourcing and supply chain optimization have allowed firms, countries and regions to establish comparative advantage in aspects of production, lowering costs and improving technical efficiency. These effects generate growth for new producers and maximize the welfare of global consumers. As Esmeralda Da Silva Dourado, Chief Executive Officer of SAG Gest in Brazil, puts it: “China will be the ‘industrial plant’ of the world; India the ‘back office’ of the world; and Brazil the food provider of the world” (see CEO Perspectives, p. 8). Of course specialization has been even more granular – Bangalore in IT services, Taiwan in semi-conductors, Singapore and Hong Kong in financial services. This specialization has been funded by increasing capital flows. Investment has flowed to fast-growing producers through increasingly open financial markets, whose integration has outpaced the integration in goods and services trade. But these years have also seen enormous growth in foreign direct investment (FDI), particularly in China and Eastern Europe. Facilitating both types of flow have been twin sources of liquidity – easy access to capital for investors and businesses. The first, ‘traditional’ source of liquidity, has been easy monetary policy, with the OECD countries maintaining low interest rates since 2000. Despite a startling rise in energy and commodity prices, core consumer prices have dodged inflation during this period, with upward pressures eased by rapidly implemented technological change and the continuing supply of low-cost labour. Central banks have therefore been able to keep money loose while remaining hawkish on inflation. The second, ‘new’ source of liquidity, is a product of financial innovation. The remarkable growth in derivative credit products and risk management tools has allowed lenders to allocate risks to a greater number of willing owners and lower the cost of risk financing. These phenomena have been symbiotic, and have made access to investment capital available on an unprecedented scale. This flow of capital has been accompanied by information and ideas. Productivity in emerging markets has benefited – and will continue to benefit – from the transfer of technologies, processes and ideas that spur entrepreneurship. Some of this transfer comes with people, and the rich challenge for globalizing businesses has been to globalize management and corporate culture. Successful transfer is not one-way: globalizing businesses are benefiting greatly from the repatriation of ideas, and not just profits. To a certain extent, the specialization of production has created its own markets, lowering costs, improving quality, or both, and stimulating additional demand. But recent decades have also seen export markets opened by free trade agreements, both bilateral and multilateral. The lion’s share of recent growth has been characterized as ‘exportled growth’. The greatest – and most problematic – source

Global Flows
Goods, capital and communications all crossing borders more easily



Index (100=1985)


FDI inflows (US$) 2005: $916 billion International outgoing telephone traffic (minutes) 2005: 167 billion minutes Total exports (US$) 2006: $12 trillion World GDP (US$) 2006: $48 trillion



100 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


Another meta-trend underpinning growth dynamics has, of course, been globalization. Globalization is many things, but can be thought of in this context as the increasing flows of trade, capital, information and, to a much lesser extent, people across national borders. The most celebrated facet of globalization has been the revolution in global business, via increased trade flows, foreign direct investment and the geographic disaggregation of value chains around the globe. This process has been facilitated by domestic economic reforms and international agreements on trade and investment, but is also driven by the new economic fundamentals that these policies have unleashed. The opening of economies to trade and foreign investment has created value through more efficient allocation of

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CEO Perspectives
Esmeralda Da Silva Dourado, CEO, Solucoes Automovel Globais SGPS SA
What do you view as being the fundamental drivers of global economic growth over the last 10 years? What do you think are the main threats that could derail this growth in the next 10 years? of this demand has been the US consumer. Consumption in the world’s largest economy has grown at 3.5% per annum since 1998, not far off rates of global economic growth. The next 10 years. The ongoing integration of the BRIC economies into the global trading and financial system is expected to continue to drive economic growth for the next 10 years. In addition, there are likely to be multiple new champions of growth during the next phase, with observers suggesting that Vietnam, Indonesia, Mexico and Turkey are particularly well positioned. The nature of capital flows may change dramatically in the coming decade. With enormous savings surpluses pooled in Asia and among energy-producing nations, investment patterns will have to change. While some countries, such as South Africa, will need to address an underinvestment challenge, and domestic infrastructure investment will be a priority for most emerging markets, China, Russia and select Middle Eastern nations may become significant global financiers. This development is already signposted by the recent emergence of sovereign funds investing in a range of assets, as well as the outward expansion of Chinese firms via M&A and direct investment. 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 ‘gearing’ economies to service emerging domestic markets, as much infrastructure investment has been focused on exports. Sustainability and constraints. The sustainability of globalization has already been called into question on numerous fronts. Apparent increases in inequality, protectionist reactions to jobs moving overseas, increased competition over natural resources and the fear of a ‘race to the bottom’ in social and environmental standards are already threatening to constrain what Ian Bremmer, President of the Eurasia Group, calls “the tightening and quickening of global markets.” The constraints and risks imposed by a variety of potential policy responses – discussed in more detail below – may be the most important consideration for the next 10 years of globalization. Even the new champions of global growth can frequently be heard to call for a move to ‘sustainable growth’ rates, implying the unsustainability of the current trajectory.

Trends in technology have also underpinned many of the globalization effects noted above. The spread of information technologies, particularly those driving efficiencies in manufacturing, inventory management and logistics, have had a huge effect on the speed with which operations can be globalized and value chains optimized. As noted above, information technologies have also played a significant role in the globalization of ideas and processes, accelerating the process of technology transfer and productivity improvement. Finally, communication technologies have created a significant global market as end products. The next 10 years. Given the constraints and risks on the horizon, technology will need to play an enormous role in facilitating growth in the next 10 years. This need is obvious with respect to energy and environmental risks, where management of natural resources, the climate and water systems will need to make huge progress if another 10 years of growth is not to generate significant negative outcomes in the longer term. 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 development. Likewise, new demographic challenges such as ageing populations and rapid urbanization will place great demands on tomorrow’s technologies, from healthcare to infrastructure. Sustainability and constraints. It is very difficult to tell how much additional productivity can be wrung out of technological and process improvement in the manufacturing sectors, but indications are that the major emerging economies still have a long way to go, and new needs are revealed as companies move up the value chain. This will create opportunities for technology developers and may continue to offset rising costs of labour and commodity inputs. The major constraint on this process may be the availability of talent to develop and implement technologies. Talent development and talent transfer are both complex challenges to governments and businesses.

Eastern Europe and the BRIC countries becoming more open for international trade. In the last 10 years the openness for trade between countries, together with technological progress, has made the world economy more and more global. Trade stimulates economic growth as it channels resources into their most productive uses, both geographically and within industries.
What do you think will be the main drivers of economic growth over the next 10 years?

Economies with regulations that impose rigidities for factor reallocation, capital accumulation, market competition and innovation will have growth constraints. Security is also a major issue. The risk of terrorism is no longer a problem of specific regions of the globe, it is a global phenomenon.
What is your organization doing to manage these threats?

For this pattern to continue in the future it is important that the most developed as well the emerging market countries provide the necessary environment for their economies to stimulate trade and investment. The flexibility an economy can have to manage negative impacts and take advantage of growth opportunities is key. Those countries that develop strategies to improve the 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 climate change; and social stability and welfare distribution. China will be the ‘industrial plant’ of the world; India the ‘back office’ of the world; and Brazil the food provider of the world.

In its sustainable growth strategy, SAG [places] a high degree of importance on analysing the political and macroeconomic environment in the various markets and regions it operates. In addition to the market conditions, we need to understand and accept all the other macroenvironmental variables.

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The flexibility an economy can have to manage negative impacts and take advantage of growth opportunities is key.

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CEO Perspectives
Liu Jiren, Chairman and CEO, Neusoft
What do you view as being the fundamental drivers of growth for Neusoft? There was huge economic growth in China over the last 30 years. The main reason is the change of our political and economic system when Deng Xiaoping introduced the “Chinese Economic Reform” which slowly opened up the China market to the rest of the world. This new direction has changed the mindset and attitude of its people … people are more receptive to a market-driven economy and this change in people’s attitude attracted a lot of foreign direct investment to China. IT was not considered an independent industry in China 30 years ago. Only sensitive business sectors (i.e. the military, etc.) would have IT development. [Lately] but after the economic reform, we have [seen] more than 20% growth of IT expenditure in this country [annually] to build IT infrastructure, and businesses in general are willing to spend money to increase efficiency and cope with growth. The other driving force is the increase in demand from the manufacturing sector. Since IT is essential to support manufacturing businesses (for example, ERP, CRM, etc.), there is an increasing demand for IT development. More and more products have software embedded inside to support the product’s function, and China produces a lot of these products, such as mobile phones, TVs, digital cameras, cars, etc. The growth in the manufacturing sector demands more IT support and this is not only driven by the domestic market, but the increasing demands from the global markets as a result of globalization. About 10 years ago, many global companies started to move their research and development (R&D) work to China for the purpose of getting more talents and to reduce R&D cost. What do you think will be the main drivers of economic growth over the next 10 years? The main drivers will still be the increase in demands of the government IT infrastructure as well as the business sectors in China. The IT infrastructure in China is still lagging behind, maybe a 10-20 year gap, compared with developed countries (i.e. US, Europe and Japan). There are lots of things we need to do to catch up. For example, Neusoft is helping the government develop a system that helps keep track of and controls the use of national natural resources (i.e. the land, water, energy, mountains, forests, mining, rivers, etc.) and provides data for environmental protection analysis. Neusoft is also involved in a product quality control project that is driven by the government. Right now, there are a lot of issues relating to food safety, and the government would like to be able to track down where the food product came from and be able to put a stop to it. This system should be able to track down the entire food chain and the distribution channels. Neusoft has a 50% market share which is related to social insurance and healthcare. At the moment, the systems for each province are independently upgrading; the government will be able to build a system that tracks the demands from its people and provide a better insurance policy or health plan. Neusoft has a very high share of the market in telecom, power industry, finance, transportation, healthcare and those sectors will continue to drive Neusoft growth in the next 10 years. What do you think are the main threats that could derail this growth in the next 10 years? 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.
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Constraints and Risks
We will face the challenge to get more talents and leaders to drive Neusoft’s growth. The shortage of IT talents at a reasonable cost is a global issue. Even India and Japan are facing the same problem of finding enough people that have the skills to deliver the global services at a reasonable price …. We need to train more high quality people to cope with the demands. So, having a good education system is very important. What is your organization doing to manage these threats? The development of people is the most important drive that contributes to Neusoft’s sustainable growth for the next 10 years or even to a longer term. Neusoft has invested three universities in China and formed a network with more than 20 of the best universities in China. We recruit students as early as their second or third year of studies. We help universities to develop an education programme so that we can train our staff at an early stage. The students will learn industry practices so we can shorten the training period of new employees. Leadership development is another very important part in developing people. We have established a leadership development centre to train the leaders of Neusoft to become more skilled in business management. What are other key factors in prolonging the global expansion? I think IT services or the IT industry in the next 5 or 10 years will generate more business opportunities. First, it is because the life cycle of the IT products has been shortened … now people buy a new phone and use it for only a few months. IT services will become ubiquitous, and software will become a commodity product. Services globalization will give China more opportunities just like manufacturing did 30 years ago. China will become one of the destination countries for the shift of the IT services industry. Which countries do you think will champion economic growth over the next 10 years and why? The US and China will rely on each other. India has a great potential but it will still need 20-30 years to build the infrastructure. Russia is also growing very fast and attracts many investments. But I believe the US and China will play very important roles in the economic growth in the next 10 years. Which companies or industries do you think will dominate the economic growth landscape in 10 years and why? I think energy companies will be very important. They control strategic resources and influence the lives of everybody. Financial sectors are also very important. How have recent trends in globalization affected the way that businesses work at the strategic and operational levels? Cultural integration. Today, people who have different cultural backgrounds need to work with each other – they need to communicate with a common language and be willing to accept each other’s differences. The Internet is the best platform to equalize culture and connect people. But culture conflicts are still the main reason for the failure of global businesses. Cultural integration costs will impact the performance of business.

Economic Constraints and Risks
Declining returns and the productivity challenge. The primary constraint on continuing growth is the inevitable flattening of the growth curve: declining rate of returns on inputs. Put simply, each new worker and each new machine has a smaller marginal effect on the economy. As emerging economies develop, less of growth’s ‘lowhanging fruit’ will remain, and rates will slow. While it is difficult to tell exactly where China, Indonesia or Poland lies on its growth trajectory, most observers indicate plenty of room for continued rapid growth by factor accumulation. Many developing nations still have vast numbers of people to put to work, and room to invest in the capital stock they will employ. This phenomenon should outlast the next 10 years. Nonetheless, as countries become wealthier, wages will rise. For business, wage pressures are already becoming a reality in all of the BRIC economies, both in terms of salaries workers can command and the costs of increased employee turnover. On a macro level these increases have been more than offset by advances in technology and process – keeping costs low, demand robust and growth fast. But technological progress, too, becomes more difficult as countries move up the value chain. Productivity-driven growth may be slower, less predictable and more difficult to shape with economic policy.

very likely to spread to other vulnerable economies. The credit crunch foreshadowed by increasing foreclosures and tightening of lending covenants in 2007 may prove to be the first such adjustment, though how painful it will prove remains to be seen. Interdependence and vulnerability. How vulnerable are the emerging economies? Consumption, specifically in Asia, appears to be on the rise, suggesting new and diversified sources of demand. Likewise, growing intraregional trade has suggested a more diversified trading system than the unidirectional trans-Pacific trade of conventional wisdom. Yet, both developments may prove to be too nascent to mitigate the global risk of a US downturn. David Bowers, Managing Director at Absolute Strategy, has argued that Asian consumption remains a multiplier effect of exportled growth. Consumption markets may be too immature to be creating much wealth domestically, hence economies remain dependent on export industries to create consumer wealth. At this stage a collapse of US demand could therefore still entail a collapse of regional and domestic demand in Asia. Likewise, Nouriel Roubini of Roubini Global Economics notes that intra-Asia trade has been largely characterized by increased specialization in manufacturing, with smaller Asian countries producing commodities and intermediate goods, which are finished and exported from China. This stretching of supply chains may lengthen the ‘bullwhip’ effect produced by a cyclical downturn, as more countries will need to respond to changes in demand. The phenomenon also increases interdependence and nodes of vulnerability: even if China were positioned to withstand a US downturn, Vietnam may not be, and effects on Vietnam could in turn disrupt otherwise sustainable Chinese production. Financial system vulnerability. While financial integration has facilitated rapid growth, there remains great concern that a globally integrating financial system is producing a riskier world. Geographical diversification possibilities are declining, as markets become increasingly correlated. The complexity of credit and derivative markets has led to greater opacity for regulators. And with so much growth currently funded by retained corporate profits, a serious asset price downturn in a major financial market could drain capital expenditure from growing markets within a year. Commodity prices. Markedly higher commodity prices have been a source of global growth since 2000, as low inflation has sustained growth and commodity exporters have been able to reinvest and recycle their windfalls. Benign inflationary conditions are not guaranteed however, and supplies of energy, and potentially agricultural products, could remain tight for the next 10 years. If this supply-side tightness raises costs more quickly than they can be offset by businesses, prices will rise and growth will suffer.

US consumers: The single engine of growth? With consumption by the world’s largest economy rising at 3.5% per annum since 1998, and growth over the same period ranging from 2.8% to 5.5%, it is easy to see why many observers fear the dependency on a single source of demand. There is a great deal of debate about the extent of that dependency, and therefore the vulnerability of growth to a cyclical downturn in the United States. Concern about such a downturn is driven by the extent to which US consumption is funded by debt – at a micro level by consumers borrowing against elevated house prices, and at a macro level by Asian and oil-exporting countries’ willingness to plough money into US Treasury Bills. Should either factor unwind in a disorderly fashion, through a housing market adjustment or changes in the bond markets, the effects on US consumption would be

Political Constraints and Risks
Should the economic issues mentioned above not emerge and hamper growth, there still remains a very strong chance that politics will. In many cases, political risks to growth stem from undesirable economic side effects of political dynamics and policy-making. In other cases, political constraints on growth are explicitly aimed at slowing that growth in the interest of sustainability. The latter type of policy is primarily treated below, under Societal and Environmental Constraints and Risks, though the responses will be political in nature. Regardless, both types of political force will likely combine to put an end to what Ian Bremmer (see sidebar, p. 15) calls “unfettered” globalization and economic growth. Terrorism and the geopolitics of the Middle East. The headline geopolitics of the last 10 years have been instability in the Middle East, conflict in Iraq and Afghanistan, and the risk of terrorist attacks globally. Thousands of lives have been lost and untold assets destroyed – but the long-term effect on global economic growth remains uncertain. What is the opportunity cost of these geopolitical risks? For some businesses, these risks have meant that globalization has been a necessarily partial phenomenon: many CEOs believe the present geopolitical risk profile of Middle Eastern countries (with the exception often of Dubai) precludes entry there. Those who do operate in regions with high perceived risk of conflict have had to change much of the way they think about risk management, building capacities in security and crisis management that may be far from the core of their business. A changing world order. In the background of the USand Middle East-centric conflicts has been the gradual evolution and end of the unipolar geopolitical landscape. While no great power has risen to join or supplant the United States yet, it seems clear that the rise (and re-rise) of China, India, Russia and to a lesser extent Brazil as economic and military powers will soon reshape global power dynamics. With power in transition in the coming 10 years, many experts believe that non-economic considerations – security, military power, international political influence – will drive state decision-making more than they have in the past 10 years. This is likely to ‘fetter’ globalization, as openness and economic competition take a backseat to power and political competition. Managing Imbalances. The US-China economic imbalance is one area where political management of economic concerns is already off to a rocky start. While the current account imbalances may not be sustainable,

they are fundamentally symbiotic, with neither China nor the United States benefiting from an unmanaged rebalancing. With perceptions of geostrategic rivalry between the two nations on the rise, however, political management of the issue has struggled to find a collaborative tone, with finger-pointing and even tit-for-tat trade strategies dominating the (public) discourse. This bilateral tension is all the more inappropriate given the extent of Korean and Japanese ownership of many of China’s exporting industries. Energy security. Energy futures markets, led by oil, have become increasingly global and liquid in the last halfcentury. This phenomenon has been a very positive one for the economy, smoothing the price effects of OPEC’s supply control and providing signals about supply and demand to decision-makers in business and finance. But as supplies tighten and discretionary output falls to ever-fewer producers, political concerns over the security of supplies have begun to trump free market thinking about energy. Countries have already begun to make uneconomic (and often environmentally harmful) policy choices about the promotion of corn-based ethanol, nuclear power and coal. With conventional oil supplies at or near their peak production, political collaboration on energy strategies is essential to minimize wasteful distortions and investment in economically or environmentally ‘wrong’ technologies. Such collaboration is directly threatened by the potential geopolitical implications of access to energy. Asset Nationalism. Exacerbating energy security concerns is the worrying trend towards asset nationalization and redistribution in Venezuela, Bolivia, Russia and elsewhere. If much recent growth was supported by the declining share of government in the economy, and the increased competition and incentives that engendered, (re)nationalization of assets threatens to reverse that. Some part of this trend can be attributed to the political desire to redistribute wealth more fairly and equitably, which is explored further below. But a significant driver is clearly power politics – both domestic and international. While this trend is often most associated with developing and former socialist/communist countries, the ongoing ‘national champion’ approach to protectionism in parts of the rich world has provided political cover and justification for the regression.

On Political Risk
Political risk is a measure of the impact of politics on markets. Investors in emerging market states, those in which politics matters at least as much as economics for market outcomes, are especially vulnerable. Political risk is composed of two elements: shock and stability. Shock is not a useful object of analysis because most shocks are virtually impossible to forecast. How do we know when a tsunami will hit Indonesia, a chemical spill will generate unrest in China, or an embarrassing audio recording of the Hungarian prime minister will go public? An understanding of stability – how durable it is and where it comes from – is critical for investors. China is politically stable as the Communist Party maintains monopoly control of political power in the country. But globalization is already generating new wealth wishing to have a political voice, as well as social dislocations that have led to localized protests. China’s government spends considerable resources to manage the risks of social and economic change, but the country’s transformation comes with a risk premium. There are several longer term political risk trends of particular importance for the global economy. New energy reserves will come increasingly from potentially unstable countries and regions, injecting political considerations into market outcomes. The proliferation of potentially dangerous new technologies will intensify, making the threat of large-scale terrorist attack more credible. The threat of a transnational health crisis related to avian flu or some other disease may produce political responses with substantial economic impact. The geopolitical balance of power will continue to shift from a US-dominated international order towards one in which a much wider range of actors exert geopolitical influence. The new order may prove as stable as the old one, but the transition itself will generate uncertainty, mistrust and, for business, political risk. – Ian Bremmer, President, Eurasia Group, and Young Global Leader

Stability, a measure of a government’s ability to implement policy following an incidence of shock, is another matter. In Ukraine in 2004, demonstrators flooded city streets and paralyzed their government. A new election was held, and the original outcome was reversed. But the battle of political personalities continues to damage public confidence in the country’s governing institutions, the bedrock of stability, and the country has yet to fully recover. Shift the scenario to Mexico. In July 2006, Felipe Calderon defeated Andres Manuel Lopez Obrador by less than one percentage point. Lopez Obrador charged fraud and threatened to form a shadow government. Hundreds of thousands of his supporters transformed Mexico City’s central square into a protest camp – until courts affirmed Calderon’s victory. Investors did not foresee the intensity of the shock produced by the electoral controversy. But those who 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.

Investors did not foresee the intensity of the shock produced by the electoral controversy. But those who recognized Mexico’s underlying political stability never blinked.

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Societal Constraints and Risks
Many political decisions that will affect economic growth in the coming decade will be made in response to changes in society that are already underway. To the extent that these decisions address rising inequalities, education and training, social safety nets and quality of life issues, they will likely be seen as necessary and appropriate constraints. Such measures, implemented in a timely and measured fashion, may help prevent potential backlashes, regulatory overreach and other phenomena that could undermine the long-term sustainability of economic growth. The challenge is, of course, designing policies that do just enough to manage these risks without suffocating economic activity. Inequality. The emergent argument that there are two globalizations taking place – one for the wealthy and one for everyone else – has its basis in rising income and asset inequality. Many observers believe that governments have already done too little to mediate the inequities of growth, and that societal demands for a more activist state are beginning to gel into a global movement. That this sentiment pervades the lower and middle classes of the rich world, probably more than in the developing world, has surprised many. The largest risk may not be rising inequality as such, though that may be undesirable even in a world of absolute gains for everyone. The bigger risk may be that offshored jobs, imbalanced growth and distaste for a highly visible economic elite fuel economically harmful policies instead of socially beneficial ones. Perhaps the most feared outcome is the return of trade protectionism. With global trade talks already struggling, geopolitical competition on the rise, and a complex web of regional and bilateral agreements complicating the possibilities, popular displeasure with the effects of 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 agreement that a retrenchment from globalization in the next 10 years would have radically negative effects on growth. Demographic change, migration and urbanization. Slow-moving demographic trends are very rarely successfully addressed by politicians working on 2 to 6 year cycles. When they are addressed (as in Deng Xiaoping’s birth planning policies), they may set in motion changes that are difficult to reverse. Yet, varieties of demographic trends around the world present challenges to growth that cannot be ignored. Japan, China and Europe face the challenge of ageing populations, though on different time frames. This may shrink the labour force (where retirement ages stay low) or harm productivity. For much of Europe where pensions are state-supported, it is already a looming financial burden that may force tax increases.

India’s population has been labelled the ‘demographic dividend’, as the working age population is unlikely to peak before 2016. If growth is about seizing opportunity, then such a population bubble is a massive one that India cannot afford to miss. But providing education, training and jobs for this labour force will not be easy, and most observers doubt that the services sector and IT jobs will be the answer. India’s growth strategy will need to include a much larger and more competitive manufacturing sector. The movement of people will also be highly relevant to growth prospects. With working age “bubbles” in Africa and the Middle East, and deficits in Europe, the pressure to accept and/or encourage migration will be great on both sides. While migration might be economically efficient and help sustain growth, it presents one of the most difficult political challenges of the coming decades. Many observers see urbanization as one of the key drivers of the next phase of growth. Urban workers are more economically productive for a variety of reasons – higher value-added occupations, resource efficiencies, network effects in production and consumption. But rapid urbanization can create extreme challenges around quality of life, social harmony and environmental impact. As Paola Subbacchi, Head of the International Economics Programme at Chatham House, asks: “Do we want cities in developing countries to turn into Tokyo or Lagos?"

economies to find new and more sustainable patterns of production and consumption. The emerging climate change crisis has shown that free market competition cannot provide all the necessary signals and incentives for sustainability. If governments are not able to provide them, the next 10 years of growth are likely to generate negative environmental externalities that undermine wealth and welfare for years to come. Climate Change. One of the biggest risks facing the planet is climate change; it is worth noting that many experts are sanguine about its potential effects on the engines of global growth. While costs – from both regulation and some extreme weather impacts — are likely to emerge in the next 10 years, the new champions in emerging markets and high-growth sectors are likely to bear less of the regulatory burden in the near term, and share much of the upside opportunity. In the next decade energy efficiency, carbon capture and storage, and renewable energy should all become priorities in economic policy around the world, and as such significant incentives for research and development will emerge. There is great optimism about the commercialization potential in these areas, and a widelyheld belief that a changing energy paradigm could be the next great technological driver of growth.
Ambient Air Pollution Worsens With Larger City Populations
6 Delhi Beijing Mexico City

Local environmental risks. More immediate impacts will come from localized environmental risks, particularly air, water and soil pollution. China, India and Russia have all struggled with episodes of contamination in recent years, and water scarcity is already creating political and economic problems around large cities like New Delhi and Beijing. While these problems are local in their manifestation, the regulatory environment for global business is very likely to change as a result. Increased environmental regulation has been a part of economic development for the past century, and as long as the regulatory burden is well managed, it will be an important factor in sustaining growth.



Rio de Janeiro

Log of ambient particulates

Milan 4 Madrid Tokyo

Reykjavik 3 Oslo Paris Stockholm 2 10 12 14 16 18

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)

Climate change risks are real and potentially severe. But the challenge may spur innovation and be a positive force for the next decade of growth.

Environmental Constraints and Risks
Environmental constraints on economic growth have been a topic of global debate since the work of the Club of Rome in the 1960s. While natural resources and systems have proven abundant, they are clearly under strain. Whether 6 or 9 billion people can share the current western economic status will depend greatly on technological progress and the ongoing ability of

International negotiation of a climate change regime is likely to be difficult. But there is emerging consensus that the system will be pro-technology and will seek efficiencies that smooth impacts on consumption. The regime is also likely to include one or more transfer mechanisms (such as an improvement on the current Clean Development Mechanism) that allow rich countries to fund carbon reductions in emerging markets. Climate change risks are real and potentially severe. But the challenge may spur innovation and be a positive force for the next decade of growth.

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CEO Perspectives
Martin A. Schoeller, Co-Chairman, Schoeller Group
What do you view as being the fundamental drivers of the current period of growth for your company and region? Five factors: 1) outsourcing combined with putting production and services in India and China; 2) Eastern Europe – driven also by implementing western standards into Eastern European countries. I think the standards have a sort of pulling force, raising the bar, though the political and economic system has to raise to the bar as well, which is not Happening in many emerging countries yet; 3) revival and appreciation of entrepreneurship in Europe; 4) private equity in connection with entrepreneurship; and 5) the mobile phone sector which is an exploding sector everywhere. [Each of these has a little effect on our industry] because we’re growing in Eastern Europe, we’re moving into India and China and we have activity in mobile phones, so this [view] comes from an inside perspective. What do you think will be the main drivers of economic growth over the next 10 years? Globally? I see Russia coming up not only as an energy supplier but as a consumer [market]; and I see the consumer in India and China. Not only are they brining us cheap manufacturing, they have their own internal consumer potential. The Chinese have 200 million people in the middle class growing by 10% – or 20 million – a year. So that leads to the energy sector, green technologies that are needed to make this sustainable. They need infrastructure so that the whole pull is somehow logical. One of the drivers from the entrepreneur’s point of view, which is very positive, is the financial liquidity of the market providing more risk financing or skill financing. So, it’s the Eastern consumer, Russia becoming a consumer, the energy sector and the green technologies, the infrastructure and the liquidity are the drivers in our view and we hope that it stays like that. What do you think are the main threats that could derail this growth in the next 10 years? Globally? I think the focus is all around Palestine and Iraq and that the world has two wounds and they could heal the wounds instead of putting salt into them. I also see dangers from the immigration push from African poverty pushing into Europe and there are no real recipes here at the moment. And the fear of having explosive consumption from India and China and also in Russia in an unsustainable way – having 1 billion cars using our air. These are the three things I’m most worried about. What is your organization doing to manage these threats? We have identified the energy sector as a further area for our company and I see an enormous long-term trend for sustainable energy. We have a company there, which we use as a platform to make it grow so energy becomes a new leg – even though we’re a packaging and logistics company – and that comes from looking at the new global world and not just the microcosms of our own company. For me it’s the chance for the entrepreneurs – the speed and energy and [flexibility] that entrepreneurs can offer – that really gives us a chance to shift. We’ve seen the shift of power in the media by the Internet and I think they will be another shift to new entrepreneurs in the energy sector. So we have our foot in there. The other thing is we are focusing on our environmental packaging, so we have our reusable packaging which avoids the burning of packaging. We also have recycling of one-way packaging and we’re building recycling factories. We think that with the environmental aspect of our business – we have put our sail where the wind is. But we are also missionaries – we were preaching this before the wind came. What are other key factors in prolonging the global expansion? Russia – I’ve been to Russia and I’m totally amazed by the salary policy. The Russians are increasing their salaries so that the employee has money. The Chinese and Indians are doing it too but much slower. The Russians already have $500/month in lower jobs and this will be increased to $1,000/month in the next five years, so you have a country where people at the lower end of the scale will earn a thousand dollars a month and 140 million Russians can buy what 1 billion Chinese can buy. The Russians are underestimated. We’ve mentioned the consumer and green energy, but if we want to take countries out of poverty and if the rich Europeans want to influence that we should export standards. The Chinese have their social system and they’re only giving it up piece by piece as fast as the free liberal economy can take over to feed the people. But in Asia, Africa, and especially South America, they don’t take care of their people and have 60% of their people living in misery. So the Europeans can bring in a requirement to gradually build social and ecological standards in countries that don’t have them. We have proven how standards can help the Eastern countries to catch up and a full cohesion policy works well. If we do this to other poor countries – this is not about helping our industry but about protecting the poor and helping the countries to create a consumer society. If the Europeans start with a programme to link social and ecological standards to the import duty access to their market then they can create growth in other areas of the world. The Americans might follow, but I trust much more in the reasonableness of the Europeans at this moment and the awareness that they have to get more organized. There are areas such as South America that one day can become growth areas just as you have now in India. What are the biggest risks to economic growth over the next 10 years? How will they play into growth in your region and sector? There are five factors which are huge: 1 and 2) climate change and environmental degradation – very, very important: we’re going to need far beyond a thousand billion euros of clean energy investment; 3 and 4) geopolitical tensions and terrorism and armed conflict – this will just keep us out of the whole area from Syria to Iran so it’s purely about a delay. In terms of both the geopolitical tensions and the risks of terrorism, these are drawdowns – the tensions will delay investments and the speed of trust-building; 5) demographic change – this will give new opportunities in taking care of the elderly and new services and healthcare for consumers over 60, and that will give us very sustainable trends. Which countries and sectors do you think will drive economic growth in the next 10 years, and why? Russia and Mexico, not to mention the two that everyone is talking about. Our company has an explosion of revenue and jobs in Mexico. The US has the problem with immigrants which it has to solve, which puts pressure on the Mexicans to increase their wages. I think that entrepreneurs do too little to emphasize that it’s in the interests of everyone, politically and economically, to have the salaries rise and get away from the very short-sighted thinking that low salaries are low costs. The effect of higher salaries creating consumer markets has a hundred times more impact for the economy than … arbitrage between one guy making it cheaper than another guy. In terms of sectors I see the Indian, Russian and Chinese consumers driving infrastructure, telecoms, consumer transport, energy and health. We’re in packaging, in consumer transport, we have a diversification in telecoms and we’re boosting energy, but we have nothing in health. How have recent trends in globalization affected the way that businesses work at the strategic level? I can only say that we are looking to internationalization and building our ventures in India, China and Mexico and also looking into energy, which is not a typical area that we would have looked into if the fever hadn’t reached us. How have recent trends in globalization affected the way that businesses work at the operational level? We are amazed about credit and risk financing availability. Now there is more money than ideas. We entrepreneurs have more ideas than money, and now we have a counterpart. We can [issue] bonds, we can get very [reasonable] covenants. Perhaps in the longer term future some things will explode because of sloppy credit, but on the other hand I believe that many things will be able to survive that would have been killed and I see this positively.

Growth@Risk in China
The 9-11% annual economic growth in China has lifted millions of Chinese citizens out of poverty, inspired economic reform and competition from other countries, and driven global flows of trade, capital and talent. The importance of the Chinese economy to global growth also means that risks to Chinese growth are of particular concern to the new champions of the next decade.

Economic constraints and risks
Declining returns and the move up the value chain. Chinese industry is at a turning point. Wage pressures, while still mild at the macroeconomic level, are changing costs for many firms. Profits are also shrinking from the revenue side, as domestic competition in the manufacturing sector becomes ever more intense. Structural factors contribute to this phenomenon. The rarity of bankruptcy creates barriers to exit: struggling firms with continuing access to credit more typically jump into competitor’s product lines and new ventures rather than innovate to exit the marketplace. New entries are in turn facilitated by weak protection of intellectual property, allowing copycat product plays. This increased competition thins margins, leaving very little capital for investment in research and development and new product lines. How will Chinese manufacturing break this vicious circle? The growth of the domestic consumer market is playing an important role. As investors begin to take more of an interest in Chinese consumers than in cheap Chinese labour, many have begun to fund the development of local design capabilities. Many firms are discovering that these capabilities are excellent, and are beginning to export designs for manufacture elsewhere. Export dependence and the domestic market. Dependence on the consumption patterns of US and EU consumers, as discussed above, may be the biggest vulnerability of the Chinese economy. But the domestic market is growing – the retail sector is growing at 13% and will probably accelerate to keep pace with urbanization. The question remains whether the market will grow fast enough to credibly mitigate a downturn in export markets, or whether China will be left with huge overcapacity and a cyclical downturn of its own. Overinvestment. There remains some concern that investment rates have been excessive and not driven by demand. Part of this concern is related to the type of investment – in export-geared manufacturing and infrastructure – more than the absolute level. Nonetheless investment rates may have to slow if consumption is to rise.

Political constraints and risks
Institutional constraints. China has surprised many western observers with its ability to generate free marketled growth without the types of political institutions generally associated with market activity. There remains widespread belief that some of this institutional underdevelopment will need to be addressed lest it constrain growth in the near future. One major concern is the judicial and legal system, which still struggles with corruption. Low pay and local
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CEO Perspectives
Johnny Chen, CEO, Greater China and South-East Asia, Zurich Financial Services
appointment and accountability for judges may need to be reviewed. A system of national appointments and rotating jurisdictional assignments could mitigate the possibility of corruption becoming locally entrenched. Freer press and information flows may also strengthen entrepreneurship and generate confidence in political transparency with respect to business. A stronger political voice may emerge from the growing middle class. At the same time, as one observer noted: “Change cannot happen quickly for 1.3 billion people – that would cause turmoil. It must be a gradual process.” Protectionism. The biggest external political risk may be resurgent protectionism in the West. While China has some levers to pull in mitigating this risk – gradual currency reform, support of imports – the most important factors may be the diplomatic capabilities of future US governments and the flexibility of the US economy. The latter will help absorb the effects of globalization, and the former will help prevent amplification of any backlash. Geopolitical tensions. China does not see itself as expansionist, but the rise of a great economic, and potentially military, power cannot help but reshape the attitudes of other countries towards China. Again, diplomacy will be key, as will the ability to separate efficient economic outcomes from the politics of global influence. As discussed above, the expected conflation of these two areas may undermine trade, globalization and economic growth in China and the world. been 20% from 2004 to 2006. Finding a balance whereby growth is made inclusive without creating disincentives is one of China’s major challenges in the next decade. Demographics, migration and urbanization. Given the current retirement age, which can be as early as 50, it is very likely that the number of working age people in China will peak within the next 10 years. Whether or not this becomes a drag on Chinese growth may depend on how successfully the country sustains growth up to that point. As yet the Chinese government does not hold any retirement-related liabilities. With growth rates still high, however, concern for social welfare and stability has led the government to begin considering national retirement benefits. As many as 400 million Chinese will move to cities in the next 20 years. This migration and urbanization of the rural Chinese population has the potential to boost productivity and strengthen the development of consumer markets. To date China has successfully avoided the emergence of mega-slums that have appeared in much of the developing world, but the risk may get worse if urbanization rates accelerate. While service provision and infrastructure will be a challenge, the greatest concerns about urbanization may be environmental.
What do you view as being the fundamental drivers of growth in China and Asia? What do you think are the main threats that could derail this growth in the next 10 years?

The free flow of capital – in the form of foreign direct investment for example, is coming to China in excess of US$ 50 billion per year. The second form is through the booming capital markets, specifically in Hong Kong, allowing capital to further flow into China. The second driver is the leap in wireless communications technology. Information is shared almost instantaneously, which allows China to be almost at the same level as any of the international players. Although many state enterprises are still very far behind in terms of experience in the marketplace, at least they have access now. One other flow of capital is the continued investment from the government in infrastructure. If you look at the roads, bridges and the highways, some of them didn’t even exist 10 years ago. That expanded the reach for all the goods and services: one way through wireless, and one way through all the transportation systems. The rise of domestic consumption and wealth accumulation in the last 10 years has increased the spending power from the commercial and personal sectors. If you picked up a South China Morning Post today, it talked about Shanghai women looking for husbands – a 25-year-old real estate professional who owns two apartments, with a net worth of over half a million US dollars, and drives a BMW. This is the picture right now. So in the aggregate, in this region, there is a need, a wish and a desire for a better quality of living. That’s driving the whole growth engine.
What do you think will be the main drivers of economic growth over the next 10 years?

First, threats of social and political instability. Border disputes still remain very sensitive. The second threat would be income disparity and the spread of uneven wealth. It also [depends] whether the government will continue to reform in terms of per capita income. The wealth creation cycle needs to take its place. Without that continuous reform, inequality may be the biggest threat in the next 10 years. China is currently struggling with the foreign exchange imbalance and the trade imbalance. China will need to continue to open up and to spend on foreign imported products. Without that, they will have many of the sanctions and barriers imposed on China and that can extend to India too. The third thing is the restriction on free trade. The continued Middle East instability sooner or later will [also] impact this region as well as the global economy. I think one of the other main [challenges], critically for China and India, will be the availability of talented resources, especially for our industry. We are all competing from the same pool of talent, driving all the costs up to operate.
What other issues will affect the sustainability of growth in the coming 10 years?

Environmental constraints and risks
Local environmental risks. The Chinese government is extremely concerned about the effects of air, water and soil pollution on human health, quality of life and the sustainability of economic growth. Xinghai Fang, Deputy Director of the Office for Financial Services in Shanghai, noted that: “Tai Lake near Shanghai is now completely contaminated and local people can no longer drink the water. Air pollution, soil contamination – these are all constraints. Fast growth is important, but environmental challenges are too large for the economy not to slow down.” Global climate change. Already, by some measures, the world’s largest emitter of greenhouse gases, China’s role in the global fight against climate change will be central. One observer argued that the country sees itself as the “voice for all developing nations.” While local environmental concerns are a much higher priority, the country can be expected to take an active role in attempting to shape a fair global policy that allows for continued Chinese growth. Further, many of the lowest-cost carbon reductions for the next 10 years may be in China, which should encourage financial and technology flows towards the country. While China has famously been building coal-fired generation capacity at the rate of one power plant per week, investment in renewables has also been heavy and is likely to increase.

Forecast Consumption Growth in China
Overall spending expected to increase almost 9% per year


Recreation, Education

Housing, Utilities

Transportation, Communication



In terms of issues that will impact this region – demographic change, migration from rural to urban areas. Population in China is a double-edged sword. You can afford to have cheaper skilled labour, but all the social welfare benefits issues are compounded … the government systems [can be] very stretched.
Which companies or industries do you think will dominate the economic growth landscape in 10 years, and why?



% .7 :6

.5% :9 .8% GR R: 11 CA CAG

Household products Personal products


Free trade agreements will fuel continuous economic growth. The unfortunate thing I read about in the press a few days ago between US and China: now they are preventing a lot of goods from the US to come in. Once you get into retaliation mode, everyone loses. If the free trade agreements do not broaden out, that will surely hinder growth. To fuel growth, sooner or later, currency convertibility is going to take a place to allow more transparency in the fluctuations of exchange rates. That will allow the economy to be further in line with the markets. The third area is the further opening up of domestic markets: Eliminate all the equity and territorial restrictions currently still imposed. [There also] will be regionalization of the Asian markets. Somehow, the borders are becoming more invisible. The region is following the European model, which does not give up sovereignty but gives up certain customs and sanction rules. The increase in the demand in the region alone will fuel growth.






Real consumer spending (RMB, billion)

Source: National Bureau of Statistics of China; McKinsey Global Institute analysis

Technology companies, for example ZTE and Huawei that do all the data centres and data exchanges. Energy [and mining] companies. Those are the holders and owners of the resources, whether they be iron, copper, oil or gas. These companies will continue to dominate the market. The dominance of state-owned enterprises (SOEs) in China will gradually erode. With the further reform of the shareholding structures of the SOEs, eventually the government may hold 10 or 20%. So the further privatization of SOEs will be positive for the marketplace. There will be [a boost] for market-driven principles, and the corporate governance will be more transparent and open.

Societal constraints and risks
Inequality. Paramount among social issues in China is rising inequality. If rapid growth creates “two Chinas” it will almost certainly prove unsustainable, and President Hu Jintao’s calls for “harmonious growth” are aimed at addressing this very risk. 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

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

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