Crouching Tigers, Hidden Dragons

By Pete Engardio

The economic momentum isn't unstoppable. China and India face huge obstacles to growth.

Plenty of forces can still throw the Chinese and Indian economies far off course. The economic fundamentals of both nations, with their enormous populations of young workers and consumers, point to strong growth for decades under almost every forecast. But it is instructive to remember that financial crashes, coups, political strife, and plain bad management have derailed many other miracle economies from Southeast Asia to Latin America. And the same huge populations that can translate into economic power for China and India also could prove to be a double-edged sword if social, political, and environmental challenges are not deftly managed. Indeed, growth doesn't have to slow all that much to pose serious social problems. Both China and India need annual growth of at least 8% just to provide jobs for the tens of millions joining the workforce each year. Fear of worker unrest is a big reason Beijing has kept stoking its boom with massive lending and growth in the money supply, despite economists' warnings that it is setting the stage for a nasty bust. If India grows only 6.5% a year, which seems a respectable rate, its jobless rate would still jump, resulting in another 70 million unemployed by 2012, forecasts India's Planning Commission.

Slower growth also could keep China and India from fulfilling the widespread predictions that they will become superpowers. For example, in forecasting that India will rank just behind the U.S. as the world's No. 3 economy by mid-century, with a gross domestic product of $30 trillion, Goldman, Sachs & Co. (NYSE:GS - News) assumes 8.5% average annual growth. But what if India grows at less than 6%, its average for the past 20 years? By 2050, it would have only a $7.3 trillion economy -- smaller than Taiwan's even then and just 2.6% of global GDP, notes Stephen Howes, the World Bank's former chief India economist. Worse, India's masses would remain extremely poor. "If you don't grow fast enough, will you have social forces that bring everything to a stalemate?" asks Infosys Technologies Ltd. (Nasdaq:INFY - News) CEO Nandan M. Nilekani. "That's the worry."

To achieve the high growth predictions, China and India will have to overcome formidable challenges. Some of the biggest:

ENVIRONMENT
Both countries have paid a steep ecological price for rapid industrial and population growth, with millions of deaths attributed to air and water pollution each year. Air quality in big cities like New Delhi, Chongqing, and Bombay is among the world's worst. And forests are vanishing at alarming rates.

Enforcement of environmental laws in both nations is poor. Many power plants and factories depend on coal and don't invest in clean technologies. China is one of the world's most wasteful users of oil. If it does not act quickly, the long-term costs of health problems linked to the environment and the required cleanup will skyrocket. A growing scarcity of water in both nations could slow industry within two decades.

Back to All Business: China and India -- the Challenge.