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July 11, 2005

What Could Go Wrong?

Peter Coy

After decades of poor economic performance, both China and India appear to be on a path of strong and sustainable growth, lifting hundreds of millions of people out of poverty. What, if anything, might knock China or India off this path? In other words, what could go wrong?

08:52 PM

India has four major risks: international terrorism, infrastructure, health and politics.

China has, in my opinion, one major risk: will "opening up" lead to a demand for democracy?

If yes, will it lead to unpredictable consequences- somewhat like what we see in the erstwhile USSR?

Posted by: Subroto Bagchi at July 12, 2005 12:53 AM

A number of us, from the Confederation of Indian Industry and the World Economic Forum, have used the process of 'scenario thinking' to do a systems' analysis, involving many economists, social scientists, NGOs and others, to understand what could go wrong as well as what is required to make more sure that things will go right in the ongoing development of India. Invariably, a comparison of India and China creeps into an examination of India's future progress. Therefore, even though the principal focus of the scenario thinking was India, some thoughts on what may go wrong for China also came in.

For both countries, a principal source of dislocation is internal. And for both countries there are some external factors, some common, and some specific to each, that can trigger or aggravate the internal disruptions. It can also work the other way--the internal tensions can trigger external actions by the political leaders that can have further ramifications. Therefore, let me first mention the internal sources of disruption.

To put it very simply, India and China are on different paths to develop and grow. Both have the same objective to reach, on the other side of a turbulent river, as it were. That objective is an economically richer, and politically stable society in which the benefits of development have reached almost everyone, if not everyone. Both are midway across the river, and their feet are feeling their way across slippery stones beneath. For China, the slippery stones are political change. For India, the slippery stones are economic policy changes--one foot tentatively forward but then back again and then the other forward... Both countries are holding onto a rope with their hands, to steady themselves, should the feet slip. For China, the rope is faster economic growth, with which the political backlash may be avoided. For India, the rope is the democratic process, which slows but steadies the progress across the river.

The external factors common to both are the global economy, slowdown in which will affect both countries to some extent, and the oil situation. The specific external factors for both countries are in the international political realm. For China, Taiwan is perhaps the rock beneath the water, that can cause a stumble, and perhaps relations with Japan. For India, relations with its neighbours on the sub-continent, are a source of instability as well as a diversion of resources that could be used for development.

Posted by: arun maira at July 12, 2005 02:06 AM

China promises long term prosperity with short terms risks. These risks, if not handled properly will hinder growth and even reverse the trend.

What can go wrong?

- Power shortage: China's own natural power resources cannot catch up with its growth. How this issue can be tackled is fundamental to its long term growth

- Income disparity: Widening gap between rural and urban, west and east. China's go west policy is not yet reaping results, although there has been positive trends towards diverting investment in Chengdu, Chongqing and Wuhan. These social issues and infrastructural issues are yet to be resolved.

- Taiwan: neither parties or the US want to see war but will continue to be a contentious issue that need to be watched

- Renminbi: Economic experts predict that slight appreciation of no more than 5% is ok. Anything more than that will have repercussions on various social/economic aspects

- SARS: even though it is now under control, just a few incidences of SARS pre- 2008 Olympics will scare the international community away and negatively affect the heavy investments made.

Posted by: VIveca Chan at July 12, 2005 02:42 AM

China’s economic growth could be interrupted by:

China’s missteping in political reform. China needs political reform to satisfy the rising demand for participation, and to assure a clean government. But China’s elites and classes should reach consensus on how to proceed a pragmatic political reform plan. There is one over-simplistic expectation in the west about China’s “national election”. I think China should be careful about it, and communicate with them what kind of political reform is good to China and to the world.

Interruption of the global economic growth. China’s rise has taken place in the time of continuous high growth of the world economy. A robust global economy, especially a strong US economy, is a great help for China. But there seem some deep problems with the US and global economy. After the “roaring” decade of New Economy, the US economy is plagued by reliance on the virtual economy, the military industrial complex, a weak dollar propped up by strong army, and a worsening relations with Muslims. These uncertainties with the US economy are causing worries to China as well as in the world.

Taiwan issue. Taiwan issue could get out of control; miscalculations across the Taiwan Straits, and misdesigned role of the US and Japan, could lead to a war, which will definitely suspend the long-term growth of China. Fortunately, the both sides move to constraint themselves, and the relations seemingly start to be reshaped in mutual economic interest and a more flexible identity about “one China”.

Posted by: Wang Yong at July 12, 2005 03:38 AM

I think people should pay high attention to environment, ecosystem, and natural resources protection in order to keep strong and sustainable growth of economy in China. In some regions, the high growth of local economy is established upon exhausting the natural resources of the regions. The inefficient utilizing of natural resources and the destroying of environment will drag the pace of the economy development, and eventually terminate the path. People will also be required to pay many times of the current revenue to restore the environment from damage.

I observed the environment changes in some towns of east coastal areas of China. The air and water were once severely polluted by the drainage of hundreds and thousands of town-owned textile enterprises. Now the conditions are being improved as the economy of these areas has been developed and people are taking care of the pollution problems. The similar cycle is rotating to west areas of China.

Ensuring people with good education is also an important approach to secure strong and sustainable growth of economy in China. Now a large part of the economic growth of China relies on cheap labor force. This situation is certainly unsustainable. Ensuring people, especially people in rural areas, which compose the largest part of the population of China, with good education, is the ultimate correct solution.

Posted by: Jiang Li at July 12, 2005 05:53 AM

India's path to affluence is threatened by two major roadblocks. One, it is simply not generating enough jobs for a very large proportion of its population. Services are "bi-polar" in their job creation capacity. You either have very high end jobs, which require sigificant training and skills (even knowledge of English is a huge barrier) or very low-skill jobs with no entry barriers but very little income mobility. Yes, its better for people to have a job than be unemployed, so I'm not diminishing the importance of this process, but it represents a relatively slow and, ultimately, politically unacceptable path to prosperity. Rapid employment generation for all categories of workers is absolutely critical.

The second roadblock is the lack of delivery of public services. Lower income households are far more dependent for their quality of life on publicly provided services than more affluent ones. Affluence has allowed many people to opt out of public systems for virtually every need. This has hugely widened the gap between income classes and is understandably, even if erroneously, seen as an outcome of economic reforms. Anti-reform political platforms draw heavily on these sentiments and unfortunately realize short-term benefits. This will weaken the reform momentum, which I believe is critical to sustaining the growth momentum.

Posted by: Subir Gokarn at July 12, 2005 08:01 AM

A lot could go wrong in both countries.

In China: political flare-ups (e.g., Taiwan), social upheaval resulting from rising inequality, lack of representation, and the absence of a safety net, rising protectionism in the US and EU, among other potential pitfalls. The country also faces a demographic time bomb thanks to the one child policy. As to India, back-pedalling by the government on its reform agenda is possible, as are geo-political risks re Pakistan.

Posted by: Oded Shenkar at July 12, 2005 08:54 PM

As several of the experts have pointed out there will be internal and external factors. Some will be similar like global economic issues, climate change, population pressures, social and political presssure of economic and social growth.

But as Arun has pointed out the level of debate due to India's more open society is much larger here. The problem is the will to do something about. At Mission 2007 the inevitability of India's population reaching 1.5bln was pointed out. Now that will be a HUGE drag on our ability to resource and service that population despite India's much vaunted services led growth. That to my mind is the biggest thing that could go wrong.

With that will come environmental degradation, social discord due to disparities etc. That is ofcourse the dark side. I am still optimistic that if we can get education out to the masses the way China has a lot of this can be mitigated.

Posted by: Saurav Adhikari at July 13, 2005 12:02 AM

I urge that we qualify, or re-frame, the question itself. If "strong and sustainable growth" is measured in standard GDP terms, then it does not automatically follow that hundreds of million people will be lifted out of poverty -- given our inbuilt patterns of inequity. Also, an exponentially higher GDP could be the result of depleting natural capital at suicidal rates, so that's not 'growth' in a meaningful and long term sense.

There are two major anxieties about India's potential for long term holistic growth --

governance and the environmental crisis.

On Governance: Yes, attempts are being made to deepen democratic processes and there is a burgeoning right to information movement. BUT accountability structures are shockingly weak and show no signs of rapid improvement. The judicial system is over-burdened, inefficient and not free of corruption. The police force and administration in many parts of India is prone to take sides in situations of ethnic strife and violence.

On the ecological crisis:

A study by the Tata Energy Research Institute (TERI) in the late 1990s revealed a grim picture of ecological degradation across the sub-continent. It estimated that the 'annual economic value' of the impact of poor quality of drinking water was about $2.7 billion! The adverse effects on human health due to polluted air were estimated at over $ 20 billion!

The biggest obstacle to solving these problems is a culture of knowledge-resistance. We are applying creative solutions in a piece-meal manner but still persisting with old follies. For example, we are still building large dams despite poor cost-benefit analysis of existing projects. There is a desperate need for both India’s bureaucracy and corporate sector to absorb and apply state-of-the-art concepts about industrialization and agriculture that thrive on renewing the natural resource base and multliply livelihood opportunities. Many of the changes this would require may not be good for the short term bottom line of currently powerful corporations but would, like seeds properly sown, reap rich harvests for this economy in the long run.

Posted by: Rajni Bakshi at July 13, 2005 02:40 AM

I think the previous commentators have listed all the potential stumbling blocks – both internal and external.

To reiterate – for China, managing the possible social dislocation and instability that comes with rapid modernization and a burgeoning middleclass pushing for greater freedom will be key.

In India, developing and maintaining infrastructure is vital as well as the creation of adequate jobs to keep the educated workforce productively deployed. Also possible political instability with ongoing changes in the ruling party has the potential to threaten India’s growth path.

Manoj Singh


Deloitte Asia Pacific

Posted by: Manoj Singh, CEO Deloitte Asia Pacific at July 13, 2005 11:52 PM

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