Global Growth @ Risk

COMMITTED TO IMPROVING THE STATE

OF THE WORLD

Global Growth@Risk

A Report of the Global RiskNetwork

in collaboration withPricewaterhouseCoopers

The World Economic Forum is an independentinternational organization committed to improvingthe state of the world by engaging leaders inpartnerships to shape global, regional andindustry agendas.

Incorporated as a foundation in 1971, and basedin Geneva, Switzerland, the World EconomicForum is impartial and not-for-profit; it is tied tono political, partisan or national interests.(www.weforum.org)

Foreword

Page 7

Driving Growth

Page 13

Constraints and Risks

Page 19

Growth@Risk in China

2

Acknowledgements

Contents

World Economic Forum91-93 route de la CapiteCH-1223 Cologny/GenevaSwitzerlandTel.: +41 (0)22 869 1212Fax: +41 (0)22 786 2744E-mail: [email protected]

© 2007 World Economic ForumAll rights reserved.No part of this publication may be reproduced ortransmitted in any form or by any means, includingphotocopying and recording, or by any informationstorage and retrieval system.

REF: 160807

5 | Global Growth@Risk

Risk to Whom?

The Global Risk Network considers risk and mitigationfrom a truly global perspective: the human andeconomic welfare of the world is its stakeholder at risk.Using the results of the Global Risks report as a startingpoint, the Network has begun to look at global risksfrom a variety of narrower perspectives: exploringregional perspectives in Europe@Risk, India@Risk, LatinAmerica@Risk, and Middle East@Risk, and diving intomitigation of specific risks such as natural catastrophesand unsustainable water use in collaboration withspecific industry groups. Information on these projectscan be found atwww.weforum.org/en/initiatives/globalrisk.

A New Perspective: GlobalGrowth@Risk

Inspired by the Inaugural Annual Meeting of the NewChampions and the World Economic Forum’s newcommunity of Global Growth Companies, this reporttakes as its primary stakeholder groups the companies,industries, countries and regions at the front edge ofglobal economic growth, and those who will continue tochampion that growth during the coming 10 years.

This report does not seek to apply or recreate the morerigorous methodological approach of the Global RiskNetwork, but rather to provide a qualitative first reviewof the trends, issues, threats and vulnerabilities that mayaffect global economic growth and its new championsover a 10-year horizon.


Foreword

This report has been prepared by the Global RiskNetwork for the Inaugural Annual Meeting of the NewChampions (Dalian, People’s Republic of China, 6-8September 2007). In preparing this report, more than 30experts from business, academia, and policy-makingwere asked to consider the recent period ofunprecedented global growth: its drivers, its championsand the challenges facing the businesses, countries,regions and emerging leaders who will pilot growth forthe next 10 years.

Key conclusions of the report:

1. Many of the economic underpinnings of globalgrowth will remain in place for the next 10 years, butthis does not mean that a continuation of recenttrends is certain or even likely.

2. Economic interdependence means that downturnsand shocks are more likely than ever to be global.New consumer markets must develop to mitigatethis risk.

3. Global growth is threatened not just by shocks andshifts but by curbs and constraints: political, social,economic and environmental constraints to currentgrowth trends are already beginning to show.

4. Unfettered globalization and growth is coming to anend, as governments seek to balance economicexpansion with political priorities and sustainabilityconcerns.

The winners of this next phase of globalization willrecognize that growth will not be a free-for-all. Rather,increasingly, political, social, environmental andeconomic forces will obligate business to participate inan exchange with society that balances what is takenfrom participating markets with productive contributionsin return.

About the Global Risk Network

The report builds on the existing work of the Global RiskNetwork: primarily, the annual Global Risks reportproduced in collaboration with Citi, MMC, Swiss Re andthe Wharton Risk Center.

The Global Risk Network of the World Economic Forumis composed of an unparalleled network of industry, riskand regional experts who work with business leadersand policy-makers to:

• Create a framework for assessing and prioritizingexisting and emerging risks to global business overthe short and long term

• Alert key decision-makers to the impact these risksmight have on their environments

• Assist leaders in their reflection on how risks may bemitigated at the global, regional, industry andcompany levels

• Transform these global risks into businessopportunities

To generate a global risk, an issue must have globalscope, cross-industry impact, and there must beuncertainty as to how the risk will manifest itself (inregard to the likelihood of occurrence and severity ofimpact).

Over the last three years, the Global Risk Network hasengaged a wide range of experts in the economic,geopolitical, environmental and societal fields to explorethe nature of the risk landscape facing governments,societies and businesses. In conjunction with itspartners, the Global Risk Network has identified anannually updated list of 23 core global risks to theinternational community over the next 10 years.

These core global risks have been assessed in terms oflikelihood and severity (see Figure). In addressinglikelihood, actuarial principles were applied in the fewcases where sufficient data existed; in most cases onlyqualitative assessments, based on expert opinion, werepossible. Although some risks are inherently long term(such as climate change) and others (such as an oil-price shock) could occur in the near term, all risks wereevaluated within a 10-year time frame.

A more detailed description of the core global risks canbe found in the Global Risks 2007 report, published forthe World Economic Forum Annual Meeting in Davos(and available atwww.weforum.org/en/initiatives/globalrisk).

The World Economic Forum Global Risk Network hasidentified 23 core global risks over a ten-year timeframe:

The 23 Core Global Risks: Likelihood with Severity by Economic Loss

Note: Likelihood was based on actuarial principles where possible. For most risks, however, qualitative assessment was used.

Source: World Economic Forum Global Risks 2007

Likelihood

Sev

erit

y (in

US

$)

below 1%

2-10

bill

ion

10-5

0 bi

llion

50-2

50 b

illio

n

1-5% 5-10% 10-20% above 20%

250

billi

on -

1 tr

illio

nm

ore

than

1 tr

illio

n

Retrenchment from globalization Asset price collapse

Fall in $Climate changeLiability regimesDeveloping world disease

Loss of freshwater servicesFailed and failing states

Proliferation of WMD

International terrorism

Oil price shock

Coming fiscal crises

NatCat: Tropical stormsNatCat: Earthquakes

NatCat: Inland flooding

Nanotechnology

Middle East instability

China economic hard landing

Transnational crime and corruptionBreakdown of CII

Chronic disease in developed countries

PandemicsInterstate and civil wars

Increasing consensus around risk


Growth – particularly at the rates the world has seen for thepast 10 years – is not a given. As such, the question ofGlobal Growth@Risk is one of opportunity cost: not currentassets in jeopardy, but future opportunities that may or maynot come to fruition. Thinking about opportunities is at theheart of the new champions’ world view, asentrepreneurship at its core means putting scarce assets atrisk to seize great opportunities. If these opportunitiesbecome limited or constrained, the spirit ofentrepreneurship that drives growth will suffer.

Thus, the biggest risks to today’s global wealth and welfaremay be shocks and shifts (pandemics, climate change), butthe biggest risks to tomorrow’s growth are brakes (political,economic, social, and environmental issues) that may sloweconomic and entrepreneurial activity.

There is great optimism that many of the drivers of therecent global expansion are robust, and that the next 10years will be good ones for economic growth. There is alsodebate, however, about the sustainability of some of thosedrivers, and significant concerns about non-economicconstraints that are already emerging to challengeconventional approaches to expansion at both thecompany and macroeconomic level.

Whether growth continues at speed remains to be seen.What is clear is that assumptions about yesterday’s growthopportunities are very unlikely to apply to tomorrow’s.

Driving Growth

The Global Risk Network has attempted to clarify some ofthe important drivers of recent global expansion, in an effortto better assess their inherent sustainability and vulnerabilityto exogenous risks.

Three interlocking trends form an umbrella over the factorsdriving growth in recent years: national economic reform,globalization and technological development.

ReformThe past 10 to 15 years have been dominated,economically, by the decline of centrally planned economiesand the implementation (often halting and imperfect) ofcomparatively liberal, market-led economic strategies.

Reform has had many faces, from deregulation to lowertaxation to the exit of the state from ownership of certainindustries. But in the economies that have benefited mostfrom ongoing reform – China, India, East Asia and EasternEurope – the results have had much in common. Reformhas released pent-up entrepreneurship, labour and capital,and, crucially, consumer demand that had lain dormant inmany locations.

Many observers have also noted a domino effect ineconomic reform. National self-interest encouragescountries to follow their neighbours in liberalizing marketactivity (indeed, the downside of this phenomenon hasfrequently been called “the race to the bottom”). As theworld’s largest economic domino – China – fell and begantrading, the effect on other economies was remarkable.Even North Korea has begun consulting with China aboutthe creation of Special Economic Zones.

Liberalizing reforms, where successful, have often beencautiously managed. But, in many of the world’s highestgrowth economies, reform has been partial at best, andpolitical environments have remained unstable. Yet, theeffects of this uncertainty on growth have been less thanmight have been expected. This suggests a (at leastrelative) decoupling of politics and economic trends. This isprobably driven by the declining share of the economy

As part of its research on Global Growth@Risk, theGlobal Risk Network interviewed more than 30 leadingthinkers from business, academia and policy-making.Crucial to building the report were perspectives fromCEOs from companies operating in high-growthenvironments: emerging markets, fast-growing sectorsand globalizing businesses. PricewaterhouseCoopers,a strategic partner of the World Economic Forum andthe Forum’s Global Risk Network, conductedinterviews with a number of these CEOs, five of whichhave been included throughout this report under theCEO Perspectives heading.

CEO Perspectives


Global Risk Related Operational Risks Often Cited inGlobal Growth Markets

Retrenchment from globalization • Protecting against foreign exchange and interest raterisk under conditions of significant governmentintervention

• Competing against societal or government-drivenfavouritism in business practices, including in pricingand procurement practices

• Navigating different standards of ethics whenoperating across borders or within different economicsectors of a market

Breakdown of critical informationinfrastructure

• Controlling operating costs and/or possibledisruptions in production due to quality and deliverylevels of state-owned services and infrastructure

• Planning for business continuity in circumstances ofinfrastructure breakdown

Transnational crime and corruption • Protecting intellectual property and combating piracyamidst inconsistent regulations and enforcement

• Complying with overseas laws that place restrictionson local operations (e.g., bribery and corruptionstatutes)

Spread of liability regimes • Managing gaps between stated requirements andwhat is acceptable practice

• Developing systems to comply with complex financialregulations and reporting requirements

• Complying with a complex set of non-aligned laws(including local and regional enactments, andinternational agreements)

Climate change • Addressing different standards and enforcement ofemissions quotas and other environmental norms

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 theirown. Unfortunately, the larger than life character of such risks has led some enterprises to conclude that there is nothing thatcan 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 keyglobal growth markets – such as China, India and Brazil – are embodiments of global risks. For example:

Enterprises would benefit from taking their own steps to mitigate these operational risks, without neglecting the connectionto global risk.

To make global risk mitigation manageable and relevant to their unique standing in global markets, enterprises should alsoask 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?

From Global Risk to Business Risk

Global Growth

Source: IMF

8%

6

4

2

0

GD

P g

row

th

Emerging market anddeveloping countries

World

Forecast

Advancedeconomies

1993

1984

1985

1986

1987

1988

1989

1990

1992

1991

1994

1995

1996

1998

1999

2000

1997

2003

2002

2006

2005

2007

F

2004

2001

2008

F

Developing world sets the pace for global economic growth

Penetration of Markets Seen as the Most Important Opportunity for Growth

Source: PricewaterhouseCoopers

30%

25

20

15

10

5

0

Per

cent

age

of r

espo

nden

ts

Improvedsupply chain

mgnt

Improvedcustomerservice

Technologicalinnovation

Accessto key talent

New productdevelopment

M&A Expandexistingmarkets

Access newgeographic

markets

Averages

Survey: "Which one of the following do you see as the majoropportunity to grow your business in the next 12 months?

Latin

Am

eric

aC

EE

Asi

a P

acifi

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CEO Perspectives

What have been the global growth drivers for youhistorically? I know you’re fairly new in China.

Think scale, learn carefully, and scale fast, resist looking atevery country through a core US lens but through the lensof customers in whatever country we are entering.

We are also going to focus on countries that provide uswith the ability to be #1 in the eyes of the customer and aminimum of US$ 6 billion of sales, if not, we will not gothere at this stage in our maturity.

Are the drivers now going to be the same as thedrivers in the next 10 years? What are the risks thatyou’re most worried about?

I believe that the more balanced our country portfolio isover the years to cope with turbulence in different marketsthe better, as turbulence is not going to go away, so weneed as many ‘fingers’ as possible in developing growthmarkets.

The challenge is also to stay focused on your core market,in our case the US. The moment you lose focus on thatmarket, you are ‘dead in the water’, and forgetinternational.

If some day the Chinese economy is larger and yourrevenues in China are larger than they are in the USwill 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 itis innovation, innovation, innovation that comes frommultiple geographies which is one of the most significantbenefits of going international, and the learnings flowingback to the core are outstanding. Product convergenceand market consolidation is happening at a significant paceand you also have all types of non-standard competitionemerging. So, the more you‘re in these other markets, themore you are seeing different ways of doing things; so youbring those back and refresh your core business.

So, unlocking innovation is one of the upsides ofgoing international. What are the risks?

The most important topic that government can address –and you don’t want government to do too much, becausethey do too much as it is – is to really inspireentrepreneurship. That’s what you want and there is a bigrisk that it won’t happen.

Risks such as political turbulence and restrictive marketsneed to be addressed ongoing. Yes these are risks…but Idon’t think they’re any greater today. Do you think theworld is in a riskier place than it was in the 40s, 50s, and60s? When we all had atomic warheads facing oneanother?

The biggest risk is in the Middle East, the risk to the stabilityof the world and the peace of the world is not addressingthat issue, plus you have some seriously disadvantagedpeople. First world and other countries could wipe out somany diseases overnight if they made medicine muchcheaper or even free in so many countries. Look how manyyears they wanted to charge African countries for small poxand malaria instead of just giving it to them. That’s where Ithink there’s a problem – with values.

With risks of that sort – let’s take religion-drivenconflict – is there an opportunity there for Best Buy?

The Middle East is a tremendous opportunity. I think Turkeyis a great opportunity – Istanbul is the only city that sits inboth Europe and Asia. There are substantial sums ofmoney being spent in those countries; they’re reallyinvesting in manufacturing. We’re going to retail [in Turkey]and source [from Turkey]. I think that’s what you alwayshave to do. You go to a country and say ‘What can weoffer to them and what can we learn from them.’

Does the thought of China building new coal-firedplants and every day billions more people driving carsand using electricity concern you?

Yes, I think it does. But we shouldn’t be selfish because theUS and UK did the same thing – we were burning coal inthe UK for 100 years. We had pollution where you couldn’tsee your hand in front of your face. China’s evolved in 10years – guess what? They’re going to make somemistakes. But the powers that be are aware of this. I thinktheir problem isn’t central government, it’s local levelgovernment. They’re on a real journey in making changehappen locally that’s difficult. I think they’ll address it overtime … the expectation of the West is ‘You guys have gotto 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 thepackaging of products – look at the amount of cardboardand stuff that’s around a product. If you could take out 1/2of that and push it back up the pipeline. What would thatdo? Isn’t that a better way to resolve the problem? I thinkall of those risks we talk about are also opportunities for usto create different solutions – looking through the lens ofthe consumer and creating work in developing countries.

Back to consumer markets and scale – what aboutIndia and Indonesia?

We are looking but we have to consolidate successfullywhat we already have. We mustn’t apply our ownorthodoxy when we look at these countries; sometimes youhave to say no that’s the orthodoxy that existed for athousand years, don’t say it’s wrong. India is a greatopportunity for the future.

We are entering Turkey and Mexico ‘greenfield’; it will beslow and we’ll listen and listen to the customer, learn,understand and then scale fast. Make an acquisition? I’mnot saying it’s out of the question. [But] We can make ourown problems without cleaning up somebody else’s. I thinkthat Best Buy values are so unique and special, that we’reactually better off initially going greenfield to start, but wewill always keep an open mind to do what is best for thecustomer and our shareholders.

We’re off to Dubai in the autumn – let’s just say there’s agreat opportunity for us there. If you think about all thecountries that utilize the resources Dubai offers that arearound the Middle East … you start by building a brandand a reputation with governments together with customercentric skills, but it is not a race, you are going to be therefor the millennium, so do it properly.

9 | Global Growth@Risk8 | Global Growth@Risk

owned by governments, and relatively crediblecommitments to medium-term stability (in monetary policy,business cycle management, etc.) that have outweighedshort-term uncertainty.

The next 10 years. Economic policy reform is an ongoingprocess, even in the world’s most advanced economies.Concern is already emerging that some recent “successstory” economies may be resting on their laurels and notdoing enough to foster growth, for example, byencouraging investment of accumulated savings orincreasing labour market flexibility. Reform for manyemerging economies is already taking on a differentcharacter – from the removal of shackles on business to thecreation of proactive and enabling policies focused onproductivity.

Sustainability and constraints. Reformist policy-makingwill always face political constraints — not only from vestedinterests and populists, but also from the understandablepolitical priority of minimizing socio-economic turmoil,environmental degradation and insecurity. Indeed, thependulum in many places already appears to be swingingback towards these priorities and away from the sometimescompeting priority of economic growth. This may shape avery different – and more active — kind of economicgovernance in the coming 10 years.

GlobalizationAnother meta-trend underpinning growth dynamics has, ofcourse, been globalization. Globalization is many things, butcan be thought of in this context as the increasing flows oftrade, capital, information and, to a much lesser extent,people across national borders. The most celebrated facetof globalization has been the revolution in global business,via increased trade flows, foreign direct investment and thegeographic disaggregation of value chains around theglobe. This process has been facilitated by domesticeconomic reforms and international agreements on tradeand investment, but is also driven by the new economicfundamentals that these policies have unleashed.

The opening of economies to trade and foreign investmenthas created value through more efficient allocation of

production and the resulting gains from trade. Offshoring,outsourcing and supply chain optimization have allowedfirms, countries and regions to establish comparativeadvantage in aspects of production, lowering costs andimproving technical efficiency. These effects generategrowth for new producers and maximize the welfare ofglobal consumers. As Esmeralda Da Silva Dourado, ChiefExecutive Officer of SAG Gest in Brazil, puts it: “China willbe the ‘industrial plant’ of the world; India the ‘back office’of the world; and Brazil the food provider of the world” (seeCEO Perspectives, p. 8). Of course specialization has beeneven more granular – Bangalore in IT services, Taiwan insemi-conductors, Singapore and Hong Kong in financialservices.

This specialization has been funded by increasing capitalflows. Investment has flowed to fast-growing producersthrough increasingly open financial markets, whoseintegration has outpaced the integration in goods andservices trade. But these years have also seen enormousgrowth in foreign direct investment (FDI), particularly inChina and Eastern Europe.

Facilitating both types of flow have been twin sources ofliquidity – easy access to capital for investors andbusinesses. The first, ‘traditional’ source of liquidity, hasbeen easy monetary policy, with the OECD countriesmaintaining low interest rates since 2000. Despite astartling rise in energy and commodity prices, coreconsumer prices have dodged inflation during this period,with upward pressures eased by rapidly implementedtechnological change and the continuing supply of low-costlabour. Central banks have therefore been able to keepmoney loose while remaining hawkish on inflation.

The second, ‘new’ source of liquidity, is a product offinancial innovation. The remarkable growth in derivativecredit products and risk management tools has allowedlenders to allocate risks to a greater number of willingowners and lower the cost of risk financing. Thesephenomena have been symbiotic, and have made accessto investment capital available on an unprecedented scale.

This flow of capital has been accompanied by informationand ideas. Productivity in emerging markets has benefited –and will continue to benefit – from the transfer oftechnologies, processes and ideas that spurentrepreneurship. Some of this transfer comes with people,and the rich challenge for globalizing businesses has beento globalize management and corporate culture. Successfultransfer is not one-way: globalizing businesses arebenefiting greatly from the repatriation of ideas, and not justprofits.

To a certain extent, the specialization of production hascreated its own markets, lowering costs, improving quality,or both, and stimulating additional demand. But recentdecades have also seen export markets opened by freetrade agreements, both bilateral and multilateral. The lion’sshare of recent growth has been characterized as ‘export-led growth’. The greatest – and most problematic – source

Robert A. Willett, CEO, Best Buy Internationaland Chief Information Officer, Best Buy Co. Inc.

Global Flows

Source: WTO; ITU; IMF; UNCTAD

2600

2100

1600

1100

600

100

Inde

x (1

00=

1985

)

World GDP (US$)2006: $48 trillion

International outgoing telephone traffic (minutes)2005: 167 billion minutes

FDI inflows (US$)2005: $916 billion

Total exports (US$)2006: $12 trillion

Goods, capital and communications all crossing borders more easily

1986

1990

1992

1994

1988

2000

1998

2004

2002

1996

2005

2006

1985

1987

1991

1993

1995

1989

2001

1999

2003

1997


of this demand has been the US consumer. Consumptionin the world’s largest economy has grown at 3.5% perannum since 1998, not far off rates of global economicgrowth.

The next 10 years. The ongoing integration of the BRICeconomies into the global trading and financial system isexpected to continue to drive economic growth for the next10 years. In addition, there are likely to be multiple newchampions of growth during the next phase, with observerssuggesting that Vietnam, Indonesia, Mexico and Turkey areparticularly well positioned.

The nature of capital flows may change dramatically in thecoming decade. With enormous savings surpluses pooledin Asia and among energy-producing nations, investmentpatterns will have to change. While some countries, suchas South Africa, will need to address an underinvestmentchallenge, and domestic infrastructure investment will be apriority for most emerging markets, China, Russia andselect Middle Eastern nations may become significantglobal financiers. This development is already signposted bythe recent emergence of sovereign funds investing in arange of assets, as well as the outward expansion ofChinese firms via M&A and direct investment.

As wages have risen in emerging economies, newconsumer markets have also begun to emerge. Therobustness of these markets, and the ability to connect tothem, may be the defining issue of the next 10 years ofglobal growth. Governments may face challenges in‘gearing’ economies to service emerging domestic markets,as much infrastructure investment has been focused onexports.

Sustainability and constraints. The sustainability ofglobalization has already been called into question onnumerous fronts. Apparent increases in inequality,protectionist reactions to jobs moving overseas, increasedcompetition over natural resources and the fear of a ‘raceto the bottom’ in social and environmental standards arealready threatening to constrain what Ian Bremmer,President of the Eurasia Group, calls “the tightening andquickening of global markets.” The constraints and risksimposed by a variety of potential policy responses –discussed in more detail below – may be the mostimportant consideration for the next 10 years ofglobalization. Even the new champions of global growthcan frequently be heard to call for a move to ‘sustainablegrowth’ rates, implying the unsustainability of the currenttrajectory.

Technology

Trends in technology have also underpinned many of theglobalization effects noted above. The spread ofinformation technologies, particularly those drivingefficiencies in manufacturing, inventory management andlogistics, have had a huge effect on the speed with whichoperations can be globalized and value chains optimized.As noted above, information technologies have alsoplayed a significant role in the globalization of ideas andprocesses, accelerating the process of technologytransfer and productivity improvement. Finally,communication technologies have created a significantglobal market as end products.

The next 10 years. Given the constraints and risks onthe horizon, technology will need to play an enormousrole in facilitating growth in the next 10 years. This needis obvious with respect to energy and environmentalrisks, where management of natural resources, theclimate and water systems will need to make hugeprogress if another 10 years of growth is not to generatesignificant negative outcomes in the longer term.Renewable energy production, waste management,water management, carbon capture and sequestration,and radically improved efficiencies in most economicactivity may all become priorities for technologicaldevelopment. Likewise, new demographic challengessuch as ageing populations and rapid urbanization willplace great demands on tomorrow’s technologies, fromhealthcare to infrastructure.

Sustainability and constraints. It is very difficult to tellhow much additional productivity can be wrung out oftechnological and process improvement in themanufacturing sectors, but indications are that the majoremerging economies still have a long way to go, and newneeds are revealed as companies move up the valuechain. This will create opportunities for technologydevelopers and may continue to offset rising costs oflabour and commodity inputs.

The major constraint on this process may be theavailability of talent to develop and implementtechnologies. Talent development and talent transfer areboth complex challenges to governments andbusinesses.

CEO Perspectives

What do you view as being the fundamental drivers ofglobal economic growth over the last 10 years?

Eastern Europe and the BRIC countries becoming moreopen for international trade. In the last 10 years theopenness for trade between countries, together withtechnological progress, has made the world economymore and more global. Trade stimulates economic growthas it channels resources into their most productive uses,both geographically and within industries.

What do you think will be the main drivers ofeconomic growth over the next 10 years?

For this pattern to continue in the future it is importantthat the most developed as well the emerging marketcountries provide the necessary environment for theireconomies to stimulate trade and investment. Theflexibility an economy can have to manage negativeimpacts and take advantage of growth opportunities iskey.

Those countries that develop strategies to improve theinvestment climate will be the ones that will experiencefaster growth. Key drivers will be flexibility of labourmarkets; fiscal systems; policies towards R&D andinnovation; responsibility towards the environment andclimate change; and social stability and welfaredistribution.

China will be the ‘industrial plant’ of the world; India the‘back office’ of the world; and Brazil the food provider ofthe world.

What do you think are the main threats that couldderail this growth in the next 10 years?

Economies with regulations that impose rigidities forfactor reallocation, capital accumulation, marketcompetition and innovation will have growth constraints.Security is also a major issue. The risk of terrorism is nolonger a problem of specific regions of the globe, it is aglobal phenomenon.

What is your organization doing to manage thesethreats?

In its sustainable growth strategy, SAG [places] a highdegree of importance on analysing the political andmacroeconomic environment in the various markets andregions it operates. In addition to the market conditions,we need to understand and accept all the other macro-environmental variables.

Esmeralda Da Silva Dourado, CEO, Solucoes Automovel Globais SGPS SA


The flexibility an economy canhave to manage negative impactsand take advantage of growthopportunities is key.

“ “


Economic Constraints and Risks

Declining returns and the productivity challenge.The primary constraint on continuing growth is theinevitable flattening of the growth curve: declining rate ofreturns on inputs. Put simply, each new worker and eachnew machine has a smaller marginal effect on theeconomy.

As emerging economies develop, less of growth’s ‘low-hanging fruit’ will remain, and rates will slow. While it isdifficult to tell exactly where China, Indonesia or Polandlies on its growth trajectory, most observers indicateplenty of room for continued rapid growth by factoraccumulation. Many developing nations still have vastnumbers of people to put to work, and room to invest inthe capital stock they will employ. This phenomenonshould outlast the next 10 years.

Nonetheless, as countries become wealthier, wages willrise. For business, wage pressures are already becominga reality in all of the BRIC economies, both in terms ofsalaries workers can command and the costs ofincreased employee turnover. On a macro level theseincreases have been more than offset by advances intechnology and process – keeping costs low, demandrobust and growth fast. But technological progress, too,becomes more difficult as countries move up the valuechain. Productivity-driven growth may be slower, lesspredictable and more difficult to shape with economicpolicy.

US consumers: The single engine of growth? Withconsumption by the world’s largest economy rising at3.5% per annum since 1998, and growth over the sameperiod ranging from 2.8% to 5.5%, it is easy to see whymany observers fear the dependency on a single sourceof demand. There is a great deal of debate about theextent of that dependency, and therefore the vulnerabilityof growth to a cyclical downturn in the United States.

Concern about such a downturn is driven by the extentto which US consumption is funded by debt – at a microlevel by consumers borrowing against elevated houseprices, and at a macro level by Asian and oil-exportingcountries’ willingness to plough money into US TreasuryBills. Should either factor unwind in a disorderly fashion,through a housing market adjustment or changes in thebond markets, the effects on US consumption would be

very likely to spread to other vulnerable economies. Thecredit crunch foreshadowed by increasing foreclosuresand tightening of lending covenants in 2007 may prove tobe the first such adjustment, though how painful it willprove remains to be seen.

Interdependence and vulnerability. How vulnerableare the emerging economies? Consumption, specificallyin Asia, appears to be on the rise, suggesting new anddiversified sources of demand. Likewise, growingintraregional trade has suggested a more diversifiedtrading system than the unidirectional trans-Pacific tradeof conventional wisdom.

Yet, both developments may prove to be too nascent tomitigate the global risk of a US downturn. David Bowers,Managing Director at Absolute Strategy, has argued thatAsian consumption remains a multiplier effect of export-led growth. Consumption markets may be too immatureto be creating much wealth domestically, henceeconomies remain dependent on export industries tocreate consumer wealth. At this stage a collapse of USdemand could therefore still entail a collapse of regionaland domestic demand in Asia.

Likewise, Nouriel Roubini of Roubini Global Economicsnotes that intra-Asia trade has been largely characterizedby increased specialization in manufacturing, with smallerAsian countries producing commodities and intermediategoods, which are finished and exported from China. Thisstretching of supply chains may lengthen the ‘bullwhip’effect produced by a cyclical downturn, as morecountries will need to respond to changes in demand.The phenomenon also increases interdependence andnodes of vulnerability: even if China were positioned towithstand a US downturn, Vietnam may not be, andeffects on Vietnam could in turn disrupt otherwisesustainable Chinese production.

Financial system vulnerability. While financialintegration has facilitated rapid growth, there remainsgreat concern that a globally integrating financial systemis producing a riskier world. Geographical diversificationpossibilities are declining, as markets becomeincreasingly correlated. The complexity of credit andderivative markets has led to greater opacity forregulators. And with so much growth currently funded byretained corporate profits, a serious asset price downturnin a major financial market could drain capital expenditurefrom growing markets within a year.

Commodity prices. Markedly higher commodity priceshave been a source of global growth since 2000, as lowinflation has sustained growth and commodity exportershave been able to reinvest and recycle their windfalls.Benign inflationary conditions are not guaranteedhowever, and supplies of energy, and potentiallyagricultural products, could remain tight for the next 10years. If this supply-side tightness raises costs morequickly than they can be offset by businesses, prices willrise and growth will suffer.

CEO Perspectives

What do you view as being the fundamental drivers ofgrowth for Neusoft?

There was huge economic growth in China over the last 30years. The main reason is the change of our political andeconomic system when Deng Xiaoping introduced the“Chinese Economic Reform” which slowly opened up theChina market to the rest of the world. This new direction haschanged the mindset and attitude of its people … people aremore receptive to a market-driven economy and this changein people’s attitude attracted a lot of foreign direct investmentto China.

IT was not considered an independent industry in China 30years ago. Only sensitive business sectors (i.e. the military,etc.) would have IT development. [Lately] but after theeconomic reform, we have [seen] more than 20% growth of ITexpenditure in this country [annually] to build IT infrastructure,and businesses in general are willing to spend money toincrease efficiency and cope with growth. The other drivingforce is the increase in demand from the manufacturingsector. Since IT is essential to support manufacturingbusinesses (for example, ERP, CRM, etc.), there is anincreasing demand for IT development.

More and more products have software embedded inside tosupport the product’s function, and China produces a lot ofthese products, such as mobile phones, TVs, digital cameras,cars, etc. The growth in the manufacturing sector demandsmore IT support and this is not only driven by the domesticmarket, but the increasing demands from the global marketsas a result of globalization. About 10 years ago, many globalcompanies started to move their research and development(R&D) work to China for the purpose of getting more talentsand to reduce R&D cost.

What do you think will be the main drivers of economicgrowth over the next 10 years?

The main drivers will still be the increase in demands of thegovernment IT infrastructure as well as the business sectors inChina. 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 needto do to catch up. For example, Neusoft is helping thegovernment develop a system that helps keep track of andcontrols the use of national natural resources (i.e. the land,water, energy, mountains, forests, mining, rivers, etc.) andprovides data for environmental protection analysis.

Neusoft is also involved in a product quality control projectthat is driven by the government. Right now, there are a lot ofissues relating to food safety, and the government would liketo be able to track down where the food product came fromand be able to put a stop to it. This system should be able totrack down the entire food chain and the distributionchannels.

Neusoft has a 50% market share which is related to socialinsurance and healthcare. At the moment, the systems foreach province are independently upgrading; the governmentwill be able to build a system that tracks the demands from itspeople 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 thosesectors will continue to drive Neusoft growth in the next 10years.


I think the growth rate of the IT industry will be very muchrelated with the GDP of China. The IT business will maintain ahigher growth rate than other business sectors.

We will face the challenge to get more talents and leaders todrive Neusoft’s growth. The shortage of IT talents at areasonable cost is a global issue. Even India and Japan arefacing the same problem of finding enough people that havethe skills to deliver the global services at a reasonable price…. We need to train more high quality people to cope withthe demands. So, having a good education system is veryimportant.


The development of people is the most important drive thatcontributes to Neusoft’s sustainable growth for the next 10years or even to a longer term. Neusoft has invested threeuniversities in China and formed a network with more than 20of the best universities in China. We recruit students as earlyas their second or third year of studies. We help universities todevelop an education programme so that we can train ourstaff at an early stage. The students will learn industrypractices so we can shorten the training period of newemployees. Leadership development is another veryimportant part in developing people. We have established aleadership development centre to train the leaders of Neusoftto become more skilled in business management.

What are other key factors in prolonging the globalexpansion?

I think IT services or the IT industry in the next 5 or 10 yearswill generate more business opportunities. First, it is becausethe life cycle of the IT products has been shortened … nowpeople buy a new phone and use it for only a few months. ITservices will become ubiquitous, and software will become acommodity product. Services globalization will give Chinamore opportunities just like manufacturing did 30 years ago.China will become one of the destination countries for theshift of the IT services industry.

Which countries do you think will champion economicgrowth over the next 10 years and why?

The US and China will rely on each other. India has a greatpotential but it will still need 20-30 years to build theinfrastructure. Russia is also growing very fast and attractsmany investments. But I believe the US and China will playvery important roles in the economic growth in the next 10years.

Which companies or industries do you think willdominate the economic growth landscape in 10 yearsand why?

I think energy companies will be very important. They controlstrategic resources and influence the lives of everybody.Financial sectors are also very important.

How have recent trends in globalization affected theway that businesses work at the strategic andoperational levels?

Cultural integration. Today, people who have different culturalbackgrounds need to work with each other – they need tocommunicate with a common language and be willing toaccept each other’s differences. The Internet is the bestplatform to equalize culture and connect people. But cultureconflicts are still the main reason for the failure of globalbusinesses. Cultural integration costs will impact theperformance of business.

Liu Jiren, Chairman and CEO, Neusoft


Constraints and Risks


Political Constraints and Risks

Should the economic issues mentioned above notemerge and hamper growth, there still remains a verystrong chance that politics will. In many cases, politicalrisks to growth stem from undesirable economic sideeffects of political dynamics and policy-making. In othercases, political constraints on growth are explicitly aimedat slowing that growth in the interest of sustainability. Thelatter type of policy is primarily treated below, underSocietal and Environmental Constraints and Risks,though the responses will be political in nature.Regardless, both types of political force will likelycombine to put an end to what Ian Bremmer (seesidebar, p. 15) calls “unfettered” globalization andeconomic growth.

Terrorism and the geopolitics of the Middle East.The headline geopolitics of the last 10 years have beeninstability in the Middle East, conflict in Iraq andAfghanistan, and the risk of terrorist attacks globally.Thousands of lives have been lost and untold assetsdestroyed – but the long-term effect on global economicgrowth remains uncertain. What is the opportunity cost ofthese geopolitical risks?

For some businesses, these risks have meant thatglobalization has been a necessarily partial phenomenon:many CEOs believe the present geopolitical risk profile ofMiddle Eastern countries (with the exception often ofDubai) precludes entry there. Those who do operate inregions with high perceived risk of conflict have had tochange much of the way they think about riskmanagement, building capacities in security and crisismanagement that may be far from the core of theirbusiness.

A changing world order. In the background of the US-and Middle East-centric conflicts has been the gradualevolution and end of the unipolar geopolitical landscape.While no great power has risen to join or supplant theUnited States yet, it seems clear that the rise (and re-rise)of China, India, Russia and to a lesser extent Brazil aseconomic and military powers will soon reshape globalpower dynamics.

With power in transition in the coming 10 years, manyexperts believe that non-economic considerations –security, military power, international political influence –will drive state decision-making more than they have inthe past 10 years. This is likely to ‘fetter’ globalization, asopenness and economic competition take a backseat topower and political competition.

Managing Imbalances. The US-China economicimbalance is one area where political management ofeconomic concerns is already off to a rocky start. Whilethe current account imbalances may not be sustainable,

they are fundamentally symbiotic, with neither China northe United States benefiting from an unmanagedrebalancing. With perceptions of geostrategic rivalrybetween the two nations on the rise, however, politicalmanagement of the issue has struggled to find acollaborative tone, with finger-pointing and even tit-for-tattrade strategies dominating the (public) discourse. Thisbilateral tension is all the more inappropriate given theextent of Korean and Japanese ownership of many ofChina’s exporting industries.

Energy security. Energy futures markets, led by oil, havebecome increasingly global and liquid in the last half-century. This phenomenon has been a very positive onefor the economy, smoothing the price effects of OPEC’ssupply control and providing signals about supply anddemand to decision-makers in business and finance.

But as supplies tighten and discretionary output falls toever-fewer producers, political concerns over the securityof supplies have begun to trump free market thinkingabout energy. Countries have already begun to makeuneconomic (and often environmentally harmful) policychoices about the promotion of corn-based ethanol,nuclear power and coal.

With conventional oil supplies at or near their peakproduction, political collaboration on energy strategies isessential to minimize wasteful distortions and investmentin economically or environmentally ‘wrong’ technologies.Such collaboration is directly threatened by the potentialgeopolitical implications of access to energy.

Asset Nationalism. Exacerbating energy securityconcerns is the worrying trend towards assetnationalization and redistribution in Venezuela, Bolivia,Russia and elsewhere. If much recent growth wassupported by the declining share of government in theeconomy, and the increased competition and incentivesthat engendered, (re)nationalization of assets threatens toreverse that.

Some part of this trend can be attributed to the politicaldesire to redistribute wealth more fairly and equitably,which is explored further below. But a significant driver isclearly power politics – both domestic and international.While this trend is often most associated with developingand former socialist/communist countries, the ongoing‘national champion’ approach to protectionism in parts ofthe rich world has provided political cover and justificationfor the regression.

Political risk is a measure of the impact of politics onmarkets. Investors in emerging market states, those inwhich politics matters at least as much as economics formarket outcomes, are especially vulnerable.

Political risk is composed of two elements: shock andstability. Shock is not a useful object of analysis becausemost shocks are virtually impossible to forecast. How dowe know when a tsunami will hit Indonesia, a chemicalspill will generate unrest in China, or an embarrassingaudio recording of the Hungarian prime minister will gopublic?

Stability, a measure of a government’s ability toimplement policy following an incidence of shock, isanother matter. In Ukraine in 2004, demonstratorsflooded city streets and paralyzed their government. Anew election was held, and the original outcome wasreversed. But the battle of political personalities continuesto damage public confidence in the country’s governinginstitutions, the bedrock of stability, and the country hasyet to fully recover.

Shift the scenario to Mexico. In July 2006, FelipeCalderon defeated Andres Manuel Lopez Obrador by lessthan one percentage point. Lopez Obrador charged fraudand threatened to form a shadow government. Hundredsof thousands of his supporters transformed Mexico City’scentral square into a protest camp – until courts affirmedCalderon’s victory.

Investors did not foresee the intensity of the shockproduced by the electoral controversy. But those whorecognized Mexico’s underlying political stability neverblinked. There was no market crisis or capital flight. Thepost-election conflict demonstrated that howeverpolarized Mexico’s politics, the country is governed byinstitutions and laws. The shock failed to generatesubstantial political risk.

An understanding of stability – how durable it is andwhere it comes from – is critical for investors. China ispolitically stable as the Communist Party maintainsmonopoly control of political power in the country. Butglobalization is already generating new wealth wishing tohave a political voice, as well as social dislocations thathave led to localized protests. China’s governmentspends considerable resources to manage the risks ofsocial and economic change, but the country’stransformation comes with a risk premium.

There are several longer term political risk trends ofparticular importance for the global economy. Newenergy reserves will come increasingly from potentiallyunstable countries and regions, injecting politicalconsiderations into market outcomes. The proliferation ofpotentially dangerous new technologies will intensify,making the threat of large-scale terrorist attack morecredible. The threat of a transnational health crisis relatedto avian flu or some other disease may produce politicalresponses with substantial economic impact.

The geopolitical balance of power will continue to shiftfrom a US-dominated international order towards one inwhich a much wider range of actors exert geopoliticalinfluence. The new order may prove as stable as the oldone, but the transition itself will generate uncertainty,mistrust and, for business, political risk.

– Ian Bremmer, President, Eurasia Group, and YoungGlobal Leader


On Political Risk

Investors did not foresee theintensity of the shock produced bythe electoral controversy. Butthose who recognized Mexico’sunderlying political stability neverblinked.

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economies to find new and more sustainable patterns ofproduction and consumption. The emerging climatechange crisis has shown that free market competitioncannot provide all the necessary signals and incentivesfor sustainability. If governments are not able to providethem, the next 10 years of growth are likely to generatenegative environmental externalities that underminewealth and welfare for years to come.

Climate Change. One of the biggest risks facing theplanet is climate change; it is worth noting that manyexperts are sanguine about its potential effects on theengines of global growth. While costs – from bothregulation and some extreme weather impacts — arelikely to emerge in the next 10 years, the new championsin emerging markets and high-growth sectors are likely tobear less of the regulatory burden in the near term, andshare much of the upside opportunity.

In the next decade energy efficiency, carbon capture andstorage, and renewable energy should all becomepriorities in economic policy around the world, and assuch significant incentives for research and developmentwill emerge. There is great optimism about thecommercialization potential in these areas, and a widely-held belief that a changing energy paradigm could be thenext great technological driver of growth.

International negotiation of a climate change regime islikely to be difficult. But there is emerging consensus thatthe system will be pro-technology and will seekefficiencies that smooth impacts on consumption. Theregime is also likely to include one or more transfermechanisms (such as an improvement on the currentClean Development Mechanism) that allow rich countriesto fund carbon reductions in emerging markets.

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

Local environmental risks. More immediate impactswill come from localized environmental risks, particularlyair, water and soil pollution. China, India and Russia haveall struggled with episodes of contamination in recentyears, and water scarcity is already creating political andeconomic problems around large cities like New Delhiand Beijing. While these problems are local in theirmanifestation, the regulatory environment for globalbusiness is very likely to change as a result. Increasedenvironmental regulation has been a part of economicdevelopment for the past century, and as long as theregulatory burden is well managed, it will be an importantfactor in sustaining growth.


Societal Constraints and Risks

Many political decisions that will affect economic growthin the coming decade will be made in response tochanges in society that are already underway. To theextent that these decisions address rising inequalities,education and training, social safety nets and quality oflife issues, they will likely be seen as necessary andappropriate constraints. Such measures, implemented ina timely and measured fashion, may help preventpotential backlashes, regulatory overreach and otherphenomena that could undermine the long-termsustainability of economic growth. The challenge is, ofcourse, designing policies that do just enough to managethese risks without suffocating economic activity.

Inequality. The emergent argument that there are twoglobalizations taking place – one for the wealthy and onefor everyone else – has its basis in rising income andasset inequality. Many observers believe thatgovernments have already done too little to mediate theinequities of growth, and that societal demands for amore activist state are beginning to gel into a globalmovement. That this sentiment pervades the lower andmiddle classes of the rich world, probably more than inthe developing world, has surprised many. The largestrisk may not be rising inequality as such, though that maybe undesirable even in a world of absolute gains foreveryone. The bigger risk may be that offshored jobs,imbalanced growth and distaste for a highly visibleeconomic elite fuel economically harmful policies insteadof socially beneficial ones.

Perhaps the most feared outcome is the return of tradeprotectionism. With global trade talks already struggling,geopolitical competition on the rise, and a complex webof regional and bilateral agreements complicating thepossibilities, popular displeasure with the effects ofglobalization threatens to sound the death knell for globalfree trade. There are divergent opinions on whether thisphenomenon has truly gained political traction, but wideagreement that a retrenchment from globalization in thenext 10 years would have radically negative effects ongrowth.

Demographic change, migration and urbanization.Slow-moving demographic trends are very rarelysuccessfully addressed by politicians working on 2 to 6year cycles. When they are addressed (as in DengXiaoping’s birth planning policies), they may set in motionchanges that are difficult to reverse. Yet, varieties ofdemographic trends around the world present challengesto growth that cannot be ignored.

Japan, China and Europe face the challenge of ageingpopulations, though on different time frames. This mayshrink the labour force (where retirement ages stay low)or harm productivity. For much of Europe where pensionsare state-supported, it is already a looming financialburden that may force tax increases.

India’s population has been labelled the ‘demographicdividend’, as the working age population is unlikely topeak before 2016. If growth is about seizing opportunity,then such a population bubble is a massive one that Indiacannot afford to miss. But providing education, trainingand jobs for this labour force will not be easy, and mostobservers doubt that the services sector and IT jobs willbe the answer. India’s growth strategy will need to includea much larger and more competitive manufacturingsector.

The movement of people will also be highly relevant togrowth prospects. With working age “bubbles” in Africaand the Middle East, and deficits in Europe, the pressureto accept and/or encourage migration will be great onboth sides. While migration might be economicallyefficient and help sustain growth, it presents one of themost difficult political challenges of the coming decades.

Many observers see urbanization as one of the keydrivers of the next phase of growth. Urban workers aremore economically productive for a variety of reasons –higher value-added occupations, resource efficiencies,network effects in production and consumption. But rapidurbanization can create extreme challenges aroundquality of life, social harmony and environmental impact.As Paola Subbacchi, Head of the InternationalEconomics Programme at Chatham House, asks: “Do wewant cities in developing countries to turn into Tokyo orLagos?"

Environmental Constraints and Risks

Environmental constraints on economic growth havebeen a topic of global debate since the work of the Clubof Rome in the 1960s. While natural resources andsystems have proven abundant, they are clearly understrain. Whether 6 or 9 billion people can share the currentwestern economic status will depend greatly ontechnological progress and the ongoing ability of

Ambient Air Pollution Worsens With Larger City Populations

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

Europe and Central Asia Log of City Population in 1995

Log

of a

mbi

ent p

artic

ulat

es

6

5

4

3

212 14 16 1810

Madrid

Reykjavik

Milan

Accra

Tokyo

Rio de Janeiro

Mexico City

BeijingDelhi

OsloParis

Stockholm

Latin America/CaribbeanAfricaAsia/Pacific

North America

Climate change risks are real andpotentially severe. But thechallenge may spur innovationand be a positive force for thenext decade of growth.

“ “


The 9-11% annual economic growth in China has liftedmillions of Chinese citizens out of poverty, inspiredeconomic reform and competition from other countries,and driven global flows of trade, capital and talent. Theimportance of the Chinese economy to global growth alsomeans that risks to Chinese growth are of particularconcern 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 changingcosts for many firms. Profits are also shrinking from therevenue side, as domestic competition in themanufacturing sector becomes ever more intense.

Structural factors contribute to this phenomenon. The rarityof bankruptcy creates barriers to exit: struggling firms withcontinuing access to credit more typically jump intocompetitor’s product lines and new ventures rather thaninnovate to exit the marketplace. New entries are in turnfacilitated by weak protection of intellectual property,allowing copycat product plays. This increased competitionthins margins, leaving very little capital for investment inresearch and development and new product lines.

How will Chinese manufacturing break this vicious circle?The growth of the domestic consumer market is playing animportant role. As investors begin to take more of aninterest in Chinese consumers than in cheap Chineselabour, many have begun to fund the development of localdesign capabilities. Many firms are discovering that thesecapabilities are excellent, and are beginning to exportdesigns for manufacture elsewhere.

Export dependence and the domestic market.Dependence on the consumption patterns of US and EUconsumers, as discussed above, may be the biggestvulnerability of the Chinese economy. But the domesticmarket is growing – the retail sector is growing at 13% andwill probably accelerate to keep pace with urbanization.The question remains whether the market will grow fastenough to credibly mitigate a downturn in export markets,or whether China will be left with huge overcapacity and acyclical downturn of its own.

Overinvestment. There remains some concern thatinvestment rates have been excessive and not driven bydemand. Part of this concern is related to the type ofinvestment – in export-geared manufacturing andinfrastructure – more than the absolute level. Nonethelessinvestment rates may have to slow if consumption is torise.

Political constraints and risks

Institutional constraints. China has surprised manywestern observers with its ability to generate free market-led growth without the types of political institutionsgenerally associated with market activity. There remainswidespread belief that some of this institutionalunderdevelopment will need to be addressed lest itconstrain growth in the near future.

One major concern is the judicial and legal system, whichstill struggles with corruption. Low pay and local

CEO Perspectives

What do you view as being the fundamental drivers ofthe current period of growth for your company andregion?

Five factors: 1) outsourcing combined with puttingproduction and services in India and China; 2) EasternEurope – driven also by implementing western standards intoEastern European countries. I think the standards have a sortof pulling force, raising the bar, though the political andeconomic system has to raise to the bar as well, which is notHappening in many emerging countries yet; 3) revival andappreciation of entrepreneurship in Europe; 4) private equityin connection with entrepreneurship; and 5) the mobile phonesector which is an exploding sector everywhere.

[Each of these has a little effect on our industry] becausewe’re growing in Eastern Europe, we’re moving into Indiaand 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 economicgrowth over the next 10 years? Globally?

I see Russia coming up not only as an energy supplier but asa consumer [market]; and I see the consumer in India andChina. Not only are they brining us cheap manufacturing,they have their own internal consumer potential. The Chinesehave 200 million people in the middle class growing by 10%– or 20 million – a year.

So that leads to the energy sector, green technologies thatare needed to make this sustainable. They needinfrastructure 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 marketproviding more risk financing or skill financing.

So, it’s the Eastern consumer, Russia becoming a consumer,the energy sector and the green technologies, theinfrastructure and the liquidity are the drivers in our view andwe hope that it stays like that.

What do you think are the main threats that couldderail this growth in the next 10 years? Globally?

I think the focus is all around Palestine and Iraq and that theworld has two wounds and they could heal the woundsinstead of putting salt into them.

I also see dangers from the immigration push from Africanpoverty pushing into Europe and there are no real recipeshere at the moment.

And the fear of having explosive consumption from India andChina and also in Russia in an unsustainable way – having 1billion cars using our air. These are the three things I’m mostworried about.


We have identified the energy sector as a further area for ourcompany and I see an enormous long-term trend forsustainable energy. We have a company there, which we useas 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 notjust the microcosms of our own company.

For me it’s the chance for the entrepreneurs – the speed andenergy and [flexibility] that entrepreneurs can offer – thatreally gives us a chance to shift. We’ve seen the shift ofpower in the media by the Internet and I think they will beanother shift to new entrepreneurs in the energy sector. Sowe have our foot in there.

The other thing is we are focusing on our environmentalpackaging, so we have our reusable packaging which avoidsthe burning of packaging. We also have recycling of one-waypackaging and we’re building recycling factories. We thinkthat with the environmental aspect of our business – we haveput 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 globalexpansion?

Russia – I’ve been to Russia and I’m totally amazed by thesalary policy. The Russians are increasing their salaries sothat the employee has money. The Chinese and Indians aredoing 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 countrywhere people at the lower end of the scale will earn athousand dollars a month and 140 million Russians can buywhat 1 billion Chinese can buy. The Russians areunderestimated.

We’ve mentioned the consumer and green energy, but if wewant to take countries out of poverty and if the richEuropeans want to influence that we should exportstandards. The Chinese have their social system and they’reonly giving it up piece by piece as fast as the free liberaleconomy can take over to feed the people. But in Asia,Africa, and especially South America, they don’t take care oftheir people and have 60% of their people living in misery. Sothe Europeans can bring in a requirement to gradually buildsocial and ecological standards in countries that don’t havethem. We have proven how standards can help the Easterncountries to catch up and a full cohesion policy works well. Ifwe do this to other poor countries – this is not about helpingour industry but about protecting the poor and helping thecountries to create a consumer society. If the Europeansstart with a programme to link social and ecologicalstandards to the import duty access to their market thenthey can create growth in other areas of the world. TheAmericans might follow, but I trust much more in thereasonableness of the Europeans at this moment and theawareness that they have to get more organized. There areareas such as South America that one day can becomegrowth areas just as you have now in India.

Martin A. Schoeller, Co-Chairman, Schoeller Group

What are the biggest risks to economic growth overthe next 10 years? How will they play into growth inyour region and sector?

There are five factors which are huge: 1 and 2) climatechange and environmental degradation – very, veryimportant: we’re going to need far beyond a thousand billioneuros of clean energy investment; 3 and 4) geopoliticaltensions and terrorism and armed conflict – this will just keepus out of the whole area from Syria to Iran so it’s purelyabout a delay. In terms of both the geopolitical tensions andthe risks of terrorism, these are drawdowns – the tensionswill delay investments and the speed of trust-building; 5)demographic change – this will give new opportunities intaking care of the elderly and new services and healthcare forconsumers over 60, and that will give us very sustainabletrends.

Which countries and sectors do you think will driveeconomic growth in the next 10 years, and why?

Russia and Mexico, not to mention the two that everyone istalking about. Our company has an explosion of revenue andjobs in Mexico. The US has the problem with immigrantswhich it has to solve, which puts pressure on the Mexicansto increase their wages.

I think that entrepreneurs do too little to emphasize that it’s inthe interests of everyone, politically and economically, to havethe salaries rise and get away from the very short-sightedthinking that low salaries are low costs. The effect of highersalaries creating consumer markets has a hundred timesmore impact for the economy than … arbitrage between oneguy making it cheaper than another guy.

In terms of sectors I see the Indian, Russian and Chineseconsumers driving infrastructure, telecoms, consumertransport, energy and health. We’re in packaging, inconsumer transport, we have a diversification in telecomsand we’re boosting energy, but we have nothing in health.

How have recent trends in globalization affected theway that businesses work at the strategic level?

I can only say that we are looking to internationalization andbuilding our ventures in India, China and Mexico and alsolooking into energy, which is not a typical area that we wouldhave looked into if the fever hadn’t reached us.

How have recent trends in globalization affected theway 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 havemore ideas than money, and now we have a counterpart. Wecan [issue] bonds, we can get very [reasonable] covenants.Perhaps in the longer term future some things will explodebecause of sloppy credit, but on the other hand I believe thatmany things will be able to survive that would have beenkilled and I see this positively.

Growth@Risk in China



appointment and accountability for judges may need to bereviewed. A system of national appointments and rotatingjurisdictional assignments could mitigate the possibility ofcorruption becoming locally entrenched.

Freer press and information flows may also strengthenentrepreneurship and generate confidence in politicaltransparency with respect to business. A stronger politicalvoice may emerge from the growing middle class.

At the same time, as one observer noted: “Change cannothappen quickly for 1.3 billion people – that would causeturmoil. It must be a gradual process.”

Protectionism. The biggest external political risk may beresurgent protectionism in the West. While China has somelevers to pull in mitigating this risk – gradual currencyreform, support of imports – the most important factorsmay be the diplomatic capabilities of future USgovernments and the flexibility of the US economy. Thelatter will help absorb the effects of globalization, and theformer will help prevent amplification of any backlash.

Geopolitical tensions. China does not see itself asexpansionist, but the rise of a great economic, andpotentially military, power cannot help but reshape theattitudes of other countries towards China. Again,diplomacy will be key, as will the ability to separate efficienteconomic outcomes from the politics of global influence.As discussed above, the expected conflation of these twoareas may undermine trade, globalization and economicgrowth in China and the world.

Societal constraints and risks

Inequality. Paramount among social issues in China isrising inequality. If rapid growth creates “two Chinas” it willalmost certainly prove unsustainable, and President HuJintao’s calls for “harmonious growth” are aimed ataddressing this very risk.

There is some concern already about overreaction. Oneobserver noted that growth in Chinese tax receipts has

been 20% from 2004 to 2006. Finding a balance wherebygrowth is made inclusive without creating disincentives isone of China’s major challenges in the next decade.

Demographics, migration and urbanization. Given thecurrent retirement age, which can be as early as 50, it isvery likely that the number of working age people in Chinawill peak within the next 10 years. Whether or not thisbecomes a drag on Chinese growth may depend on howsuccessfully the country sustains growth up to that point.As yet the Chinese government does not hold anyretirement-related liabilities. With growth rates still high,however, concern for social welfare and stability has ledthe government to begin considering national retirementbenefits.

As many as 400 million Chinese will move to cities in thenext 20 years. This migration and urbanization of the ruralChinese population has the potential to boost productivityand strengthen the development of consumer markets. Todate China has successfully avoided the emergence ofmega-slums that have appeared in much of the developingworld, but the risk may get worse if urbanization ratesaccelerate. While service provision and infrastructure willbe a challenge, the greatest concerns about urbanizationmay be environmental.

Environmental constraints and risks

Local environmental risks. The Chinese government isextremely concerned about the effects of air, water and soilpollution on human health, quality of life and thesustainability of economic growth. Xinghai Fang, DeputyDirector of the Office for Financial Services in Shanghai,noted that: “Tai Lake near Shanghai is now completelycontaminated and local people can no longer drink thewater. Air pollution, soil contamination – these are allconstraints. Fast growth is important, but environmentalchallenges are too large for the economy not to slowdown.”

Global climate change. Already, by some measures, theworld’s largest emitter of greenhouse gases, China’s role inthe global fight against climate change will be central. Oneobserver argued that the country sees itself as the “voicefor all developing nations.” While local environmentalconcerns are a much higher priority, the country can beexpected to take an active role in attempting to shape afair global policy that allows for continued Chinese growth.

Further, many of the lowest-cost carbon reductions for thenext 10 years may be in China, which should encouragefinancial and technology flows towards the country. WhileChina has famously been building coal-fired generationcapacity at the rate of one power plant per week,investment in renewables has also been heavy and is likelyto increase.

Forecast Consumption Growth in China

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

2025

2004

0 5,000

Real consumer spending (RMB, billion)

10,000 15,000 20,000

CAGR: 6.7

%

CAGR: 9.5%

Overall spending expected to increase almost 9% per year

CAGR: 11.8%

FoodRecreation,Education

Housing,Utilities

Transportation,Communication Healthcare Apparel

Householdproducts

Personalproducts

CEO Perspectives

What do you view as being the fundamental drivers ofgrowth in China and Asia?

The free flow of capital – in the form of foreign directinvestment for example, is coming to China in excess ofUS$ 50 billion per year. The second form is through thebooming capital markets, specifically in Hong Kong,allowing capital to further flow into China.

The second driver is the leap in wireless communicationstechnology. Information is shared almost instantaneously,which allows China to be almost at the same level as anyof the international players. Although many stateenterprises are still very far behind in terms of experiencein the marketplace, at least they have access now.

One other flow of capital is the continued investment fromthe government in infrastructure. If you look at the roads,bridges and the highways, some of them didn’t evenexist 10 years ago. That expanded the reach for all thegoods and services: one way through wireless, and oneway through all the transportation systems.

The rise of domestic consumption and wealthaccumulation in the last 10 years has increased thespending power from the commercial and personalsectors. If you picked up a South China Morning Posttoday, it talked about Shanghai women looking forhusbands – a 25-year-old real estate professional whoowns two apartments, with a net worth of over half amillion US dollars, and drives a BMW. This is the pictureright now. So in the aggregate, in this region, there is aneed, 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 ofeconomic growth over the next 10 years?

Free trade agreements will fuel continuous economicgrowth. The unfortunate thing I read about in the press afew days ago between US and China: now they arepreventing a lot of goods from the US to come in. Onceyou get into retaliation mode, everyone loses. If the freetrade agreements do not broaden out, that will surelyhinder growth.

To fuel growth, sooner or later, currency convertibility isgoing to take a place to allow more transparency in thefluctuations of exchange rates. That will allow theeconomy to be further in line with the markets.

The third area is the further opening up of domesticmarkets: Eliminate all the equity and territorial restrictionscurrently still imposed. [There also] will be regionalizationof the Asian markets. Somehow, the borders arebecoming more invisible. The region is following theEuropean model, which does not give up sovereignty butgives up certain customs and sanction rules. Theincrease in the demand in the region alone will fuelgrowth.


First, threats of social and political instability. Borderdisputes still remain very sensitive. The second threatwould be income disparity and the spread of unevenwealth. It also [depends] whether the government willcontinue to reform in terms of per capita income. Thewealth creation cycle needs to take its place. Withoutthat continuous reform, inequality may be the biggestthreat in the next 10 years.

China is currently struggling with the foreign exchangeimbalance and the trade imbalance. China will need tocontinue to open up and to spend on foreign importedproducts. Without that, they will have many of thesanctions and barriers imposed on China and that canextend to India too.

The third thing is the restriction on free trade. Thecontinued 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 forChina and India, will be the availability of talentedresources, especially for our industry. We are allcompeting from the same pool of talent, driving all thecosts up to operate.

What other issues will affect the sustainability ofgrowth in the coming 10 years?

In terms of issues that will impact this region –demographic change, migration from rural to urbanareas. Population in China is a double-edged sword. Youcan afford to have cheaper skilled labour, but all thesocial welfare benefits issues are compounded … thegovernment systems [can be] very stretched.

Which companies or industries do you think willdominate the economic growth landscape in 10years, and why?

Technology companies, for example ZTE and Huawei thatdo all the data centres and data exchanges. Energy [andmining] companies. Those are the holders and owners ofthe resources, whether they be iron, copper, oil or gas.These companies will continue to dominate the market.

The dominance of state-owned enterprises (SOEs) inChina will gradually erode. With the further reform of theshareholding structures of the SOEs, eventually thegovernment may hold 10 or 20%. So the furtherprivatization of SOEs will be positive for the marketplace.There will be [a boost] for market-driven principles, andthe corporate governance will be more transparent andopen.

Johnny Chen, CEO, Greater China and South-East Asia, Zurich Financial Services



Acknowledgements

This report was prepared by Jesse Fahnestock of the Global Risk Team of the World Economic Forum, incollaboration with its partners.

Global Risk Team, World Economic ForumCharles Emmerson, Global Leadership FellowJesse Fahnestock, Associate Director; Editor, Global Growth@RiskJohanna Lanitis, Research AnalystSylvia Lee, Global Leadership FellowGareth Shepherd, Global Leadership Fellow

PricewaterhouseCoopersChristopher Michaelson, Director, US AdvisorySophie von der Brelie-Lambin, Director, Global Thought LeadershipJean-François Samson, Manager, Global Thought Leadership

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

Fatih Birol, Chief Economist and Head, Economic Analysis Division, International Energy AgencyDavid Bowers, Managing Director, Absolute StrategyIan Bremmer, President, Eurasia GroupJohn Bussey, Editor, The Wall Street Journal AsiaGavin Cameron, University Reader in Macroeconomics, University of OxfordJohnny Chen, Chief Executive Officer, Greater China and South-East Asia, Zurich Financial ServicesEsmeralda Da Silva Dourado, Chief Executive Officer, SAG Gest - Solucoes Automovel Globais SGPS SAXinghai Fang, Deputy Director-General, Office for Financial Services, Shanghai Metropolitan GovernmentSophy Fisher, Regional Information Officer, ILO Regional Office for Asia and the PacificWitold Henisz, Associate Professor of Management, The Wharton School, University of PennsylvaniaWi Jianmin, President, Chinese Foreign Affairs UniversityPierre-Benoit Joly, Director of Research, INRA/TSVLiu Jiren, Chairman and Chief Executive Officer, Neusoft GroupVijay Joshi, Reader in Economics, Merton College, University of OxfordSteven Kapsos, Labour Economist, ILO Regional Office for Asia and the PacificJean-Pierre Lehmann, Professor of International Political Economy and Founding Director, The Evian Group, IMDDavid Li, Mansfield Freeman Professor of Economics, and Director, Center for China in the World Economy,School of Economics and Management, Tsinghua UniversityDebbie Orgill, Senior Economist, CEMA, ABNAmroZsolt Papp, Head, CEMA Local Markets Research, ABNAmroNouriel Roubini, Professor of Economics, New York University; Founder and Chairman, Roubini Global EconomicsJacques Sapir, Director of Studies (Economics), EHESS; Director of the Centre of Studies of the Modes ofIndustrialization, CEMI-EHESSMartin A. Schoeller, Co-Chairman, Schoeller GroupYat Siu, Founder and Chief Executive Officer, OutblazeEric Thun, Peter Moores Professor in Chinese Business Studies, Saïd Business SchoolChristopher To, Secretary-General, Hong Kong International Center for ArbitrationPaola Subbacchi, Head, International Economics Programme, Chatham House (Royal Institute for InternationalAffairs)Gabriele Suder, Professor of International Business and Risk Management; Head of Global Management, CERAMRobert A. Willett, Chief Executive Officer, Best Buy International and Chief Information Officer, Best Buy Co. Inc.

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