Hygiene doesn’t make it too often to the media. However, as anyone who’s spent more than 24 hrs in India knows, the lack of adequate toilets is a huge, huge issue.

Two links on that subject: Bloomberg – India Failing to Control Open Defecation Blunts Nation’s Growth and a more rigorous analysis from Nimai Mehta -The Preference Bias in Sanitation: Explaining Failures in Public Provision

Mira Kamdar’s recent piece in the World Policy Journal illustrates this well. By Ms. Kamdar’s account Indians are heading down an inevitable path to doomsday. Malthusian population pressures, resource scarcity, global warming, environmental degradation, industrial capitalism, and political corruption have combined with an inherently fractured society that is likely to erupt in caste, religious, and class warfare, terrorism, and self-destruction. Mix in the recent US-India civilian-Nuclear deal and the presence of unstable neighbors – Pakistan, Bangladesh – along with an aggressive China, and Ms. Kamdar offers up all the ingredients for a nuclear holocaust. The only uncertainty we are left with is: which doomsday will India break into first — internal implosion or external explosion?

And if this is not enough, Kamdar has one more concern: Indians are taking to cars rather than following the example of bicycle aficionados in Amsterdam, Paris, and New York.

All this, because Ms. Kamdar wishes to disabuse her readers of taking too seriously the rosy-scenarios painted for India in the 5 year old Goldman Sachs BRICS (Brazil-Russia-India- China) report. Perhaps the BRICS authors expected a less fundamental critique of their growth-accounting models? Instead, Ms. Kamdar offers her own BRICS dream in the very last para of her piece: India’s under-class and lower castes having finally usurped political power will magically transform Indian democracy, to root out corruption, poor governance, and “…will have delivered quality education and healthcare, housing, clean water and sanitation…. Its policies will reflect the active civic engagement of an informed electorate, becoming a model for the world of the advantages of truly democratic governance. Now that is what I call dreaming with a BRIC.”

An ongoing doomsday scenario in India that ends in a future utopian vision for India: Ms. Kamdar offers no intellectual bridge from here to there. So how can one trust the reality of either worldview?

Perhaps if she had considered the half-century lost under the unproductive haze of the License Raj; or the pernicious harm done to Indian polity by a caste based reservation system that actually reversed upward caste mobility and institutionalized caste divisiveness in Indian society — an outcome that ironically is the one real ingredient in Ms. Kamdar’s utopia; or, if Ms. Kamdar had considered the woeful neglect of land markets in India instead of choosing to paint the Nano plant site controversy in West Bengal in class-warfare terms; or, that even assuming the worst case global-warming outcome and its impact on agricultural productivity in India, opening up the rural economy to trade and investment offers the individual farmer more, rather than less, options – of goods, technology, and mobility – when dealing with a changing environment.

All of the problems Ms. Kamdar touches on are real and require incremental but genuine responses – to be provided by markets, entrepreneurship, leadership, and good governance. And these responses will by necessity emerge from what India is and not from some radicalized new society that Ms. Kamdar dreams.

Too bad Ms. Kamdar has chosen to neglect the reality and promise of progress in India, while conjuring up wild lurches between doomsday and utopia. One can only hope that the readers of WPJ are more grounded than the author.

Guest post by Nimai Mehta, Assistant Professor of International Trade and Business at American University, Washington DC.

Neither the commercial viability, nor the putative military strategic benefits, were adequately scrutinised.

The commercial case for the project rests on the time and cost saved due to a shorter route. The time saving will be most significant for India’s domestic littoral trade. If ports on either coast improve their efficiency, bulk cargo and container ships may be able to provide an attractive alternative for domestic freight that currently depends on India’s inefficient railways and abominable highways. As for international trade, Indian ports have a long way to go before the canal route can be compelling enough for global shipping for global shipping companies to consider.

Jacob John points out in a recent issue of the Economic and Political Weekly, project benefits are being overstated. “The promises of the project may be valid for some ships,” he concludes, ”but there has been a serious deficiency in studying its impact for other ships. This deficiency is likely to make the project economically unviable and more expensive for some ships to use. It is a project that is also likely to cost considerably more than what was originally proposed due to a lack of study on the amount of dredging needed. Given the likely escalation of costs and its extremely limited benefit, there is a need for mechanisms that ensure accountability of the project to its original claims”.

The trend in the shipping industry is towards larger ships. The canal, however, will allow only the smaller ships (those less than 20,000 DWT) to pass through. Even these have to slow down to be piloted across the canal.

It is inexcusable for the government to sink public funds into a project of questionable viability without a study of alternative means to achieve the same objectives. For instance, investing in improving highways and domestic gas pipelines can arguably achieve the same economic goals, with much larger external benefits.

It is possible to bring economic development to coastal Tamil Nadu without having to create another public sector behemoth. It is possible to improve domestic trade by building better highways and making the railways more efficient. And it is possible to strengthen maritime security by buying more hovercraft and ships for the coast guard and the navy. But if the government goes ahead with the project, it will not be possible to repair the damage it will cause to the environment. That alone should compel the government to explore alternatives than to stubbornly insist on sinking money down the Palk Strait.

Excerpted from “Dredging the Palk Strait”, Pragati – The Indian National Interest Review, Issue 7 – October 2007. Download | Subscribe

Nations usually enter treaties to help themselves, not others. In 1987, the US pushed hard for the Montreal Protocol, which restricted ozone-depleting chemicals. It did so not out of altruism but after a cost-benefit analysis convinced President Ronald Reagan that the US would gain far more than it would lose. Bans on ozone-depleting chemicals were not burdensome for US companies. By contrast, developing nations strongly resisted the protocol. They demanded and received a large side payment from the rich nations.

These side payments are not unusual. When a group of nations needs the co-operation of another nation in some area of international relations, and that nation does not gain through the proposed agreement, then some kind of payment or exemption is typically arranged. With its explosive emissions growth, China is by far the world’s biggest problem for climate change. Like it or not, the only way for other nations to ensure Chinese co-operation is through a special inducement, such as cash or extra emissions rights…

The debate about climate change has finally produced an understanding that the world as a whole would benefit from an emissions control agreement. The next stage is to recognise that a warmer planet presents much greater problems for some countries than others; that emissions controls would cost some nations much more than others; and that no nation is going to spend a lot in return for a little.

It is time for the world to take steps to pay China for its participation in an agreement. The richer US is unlikely to receive such payment or even to ask for it. Even so, we fear that if the world does not persuade the US that it has more to gain than to lose from a deal on climate change, an effective agreement will prove to be impossible.

This perspective, however, presents a huge dilemna for India. Climate change is a much greater problem for India than for other countries. Yet, emissions controls would also cost India much more than others. In essence, India stands on the loosing side of both issues – the cost of climate change, and the cost of climate change action. India should be pushing for international action on climate change, yet it stands to loose significantly by adopting stringent emission standards.

How is this contradiction to be solved? India can ask for monetary compensation – yet if it wants or needs climate change action more than others  it has a weak bargaining position. Ethical concerns notwithstanding, it will not be compensated any more than it benefits other rich countries. But there is a way out if one sees that India’s emissions pose not a current but future threat to the global environment. Simultaneously, climate change is very much a current threat to India, that must be adapted to now.

This means India needs to take adaptive action now, and mitigating action in the future. Nevertheless, to spur other major polluters into action, India must establish a roadmap for increasing emission regulations, while being compensated not directly for migitation, but for adaptation. In this manner, the rich countries pay mostly to reduce their own and China’s emissions now, while India signals its moral and practical commitment to the international process – thus encouraging US action.

I have previously discussed why India must embrace climate change action and push for an international treaty, on the IEB and Pragati. An upcoming article will discuss further what India’s negotiating strategy needs to be.

The paper has some weaknesses, but the conclusion if even partly correct is extremely important for Indian policymakers. It means economic incentives – which are at the heart of the Kyoto Protocol and the European Emissions Trading System (ETS) – will not work in India. Instead, producers will simply treat a carbon tax as a regular tax and pass on the expense to consumers, leading to inflation.

Far from weakening the case for India’s acceptance of binding targets, however, it strengthens it. The paper’s analysis of why the incentives don’t work is fascinating and illustrative:

It must be mentioned that economic incentive based mechanisms to limit pollution work effectively under certain assumptions, viz, low replacement cost of old technology and no supply constraints on “green technology”. In India, the replacement cost of old technology is high and there are constraints on the supply of green technology.

This suggests India should move aggressively to negotiate with the rest of the world for a international treaty on climate change friendly to its needs.

Both constraints on India moving to a low-carbon economy are exogenous, i.e. external to our own economy. They can, therefore, only be removed by our involvement in an international framework. They also substantially strengthen India’s case for concessions – in the form of access to clean technology and funding for replacing old technology – in return for that participation.

India’s position on climate change is simple:

1. 1. Climate change has been caused by the developed world, which must bear the costs of abatement and mitigation.
2. 2. India is not a significant greenhouse gas (GHG) emitter, and
3. 3. It will not accept binding emission cuts, without compensation, as that would conflict with the overarching goals of economic growth.

This position may be good for international negotiations. But as a policy, it is ethically indefensible, logically and economically inconsistent, and worse – a wasted opportunity.

Ethically Indefensible: The Futility of Taking the High Road
India’s primary logic is based on ethical reasoning. While India is the fifth largest CO2 emitter, on a per-capita basis its emissions remain very low. Since the developing world did not cause the problem it should not pay the price of repairing it, nor suffer its consequences. Prime Minister Manmohan Singh called this the “principle of common but differentiated responsibility,” on the eve of the G8 Summit.

Yet, this ignores reality. It is today accepted that despite our best efforts global warming will occur and its costs borne mostly by the poor. According to a report by Lehman Brothers cold countries such as Russia will actually benefit (receiving a GDP boost of 0.5%), while the regions to suffer the most will be India, Africa, and Europe (see graph). Critically, the poor regions – including India – will also lack resources to help their populations adapt to changes, or insure their consequences.

Given this reality, sitting on a pedestal and crying foul about who is responsible for climate change will not help. The Indian government’s primary responsibility is not to apportion blame for the world’s ills. It is to take action to protect its population against those ills.

Economically Inconsistent: Industrial vs. Agricultural Growth
The other argument is economic – mitigation is costly and threatens India’s economic growth. If India is to act, it should be compensated for lost GDP growth.

Again, a desirable goal, but one that also ignores reality. First, the West is unlikely to compensate India if it does not agree to be part of an international mitigation effort. Second, by not acting India endangers the very growth it wishes to protect.

As numerous studies have concluded, climate change will significantly impact weather patterns across the world. In India, it also threatens Himalayan glaciers that supply much of India’s freshwater supplies (the Gangotri glacier has been retreating since measurements began in 1842, but its rate of retreat has almost doubled from around 62 feet per year between 1935 and 1971). The likely long-term impacts are increased droughts and cyclones, higher temperatures, and scarcity of freshwater supplies.

These changes threaten India’s growth in the very important agricultural sector. For instance, the World Bank estimates (original article at FT.com) that climate change could cause crop yields to fall by 30% by mid-century. Contrast this with the government’s own target of raising agricultural growth from 2% to a trend average of 4% in the eleventh five-year plan, and the inconsistency becomes obvious. While the manufacturing and service sectors may indeed grow, it is hard to understand how that will compensate the 70% of India’s population living in rural areas, much of it dependent on the monsoons.

Perpetuating Inaction
There is one final reason for action – that inaction by India perpetuates inaction by others. The US has long held that it will not accept emissions targets unless India and China follow suit. India’s inaction is therefore doubly harmful, providing “a figleaf for US inaction”. Further, with India – and China’s – absence from international climate change negotiations, the needs of developing countries remain unaccounted for.

Given the inevitability of global warming, and given that India will bear a disproportionate cost of that change, India’s policy objectives need to be reversed:

1. 1. To encourage all countries to act urgently to mitigate climate change, and
2. 2. To develop an international mechanism that allows poor countries to mitigate, adapt to or insure against climate change, drawing resources from the developed world.

Turning Challenge into Opportunity
India’s lethargy to act has prevented both from happening. And in the process, the policymakers are loosing a major socio-economic opportunity.

Climate change may be a threat, but it is also transforming industries and creating new ones. As proof, consider the North American cleantech venture capital industry which grew by 78% in 2006 to $2.9billion (PE & VC funding grew 167%)! Over half of this goes into clean and renewable energies, but that is not the only sector and the US not the only country benefiting. Israel is the largest investor in the water segment of the cleantech industry. In great need, venture capitalists have seen great opportunity. The PM can very well demand cheap access to low-carbon technology, but he should be spending at least as much time encouraging R&D and investment in those very technologies. If nothing else, he’d be hedging his bets.

Second, moving to a low-carbon economy can actually save money. The Economist, in its special of June 2nd points out the cost of cutting carbon through various technologies (Irrational incandescence – see chart below).

The odd thing is that simple things – better fuel-efficiency, insulation, water heating, CFLs – actually save money. Admittedly, these are areas hard to get at for policymakers, since they affect distributed stakeholders. Yet, India cannot hide behind protecting its GDP growth. If anything, the government should accept binding cuts, then use that as an excuse to force its industries and consumers to become more energy efficient.

Finally, India’s position is a wasted political opportunity to shape the international climate change framework. By doing nothing, India can expect nothing in return. More and more, India does not look like a leader, but a laggard – and a unhappy one at that. What the country needs is to accept the need for binding cuts, specify a compensatory system that provides access to IPR and funding, and then start negotiations in earnest. This is particularly important now, when the world still wants our participation. Once the US and China (which published a policy paper prior to the G8 summit) take a definitive lead on the issue, we will be left not with the opportunity to shape an international framework, but with the responsibility to accept whatever is decided on in our absence.

This post does not argue what India should ask for, or can reasonably expect. It simply makes clear that there is an urgent need for India to act – in its own interest – to mitigate climate change. There is also an social and economic opportunity in doing so, with the costs of inaction likely to outweigh the costs of action. And finally, climate change presents a political opportunity to shape – to India’s benefit – an international framework (as India is doing with the Indo-US Nuclear Agreement).

It is time the Indian government moved beyond posturing, and did something.

Importantly though, a carbon tax by its very nature does not provide great incentives to an old and highly polluting power plant, with completely depreciated equipment, to reduce emissions. In the developed nations relatively little new power capacity has been added in the last 2 decades. Therefore the primary means to cut emissions in such nations has not been a carbon tax, but a cap-and-trade mechanism.

How does Cap-and-Trade work?

The Cap-and-Trade mechanism (CAT) has two components. First there is the cap. So the government takes a count of the CO2 being released by all companies in an industry – say coal-based power plants. For simplicity sake, let us consider a two company scenario – company Newex and Oldex, each emitting about 500 tonnes each, for an industry total of 1000 tonnes. Now the government applies the cap, and a reduction limit – the industry should cut down emissions by 10%. This would obviously imply that both Newex and Oldex should reduce emissions by 50 tonnes each. However, Newex has only recently already applied some expensive changes to its plants which have reduced its emissions significantly, while Oldex has not done so. So to cut additional emissions would be far more expensive for Newex than it would for Oldex. Thats where the “trade” in cap-and-trade comes in.

Newex can thus finance Oldex 50% of the cost of a total reduction of 100 tonnes – thus meeting the industry target at minimum cost, by the government set date. Once this deadline is met, the govt applies an additional limit of 10%, at which time Newex might find it cheaper to cut emissions that Oldex does. Thus the trade, helps meet the cap at minimal cost.

Will this work in the Indian context?
The problem with applying this to India is that the power sector is growing. Limiting emissions by an industrial sector as a whole would essentially mean that new companies would have to come in with zero emissions – or even negative emissions so that the sector as a whole meets the overall emission limits. Thats one reason why India refuses to accept emission caps under Kyoto. (China on the contrary remains “open” to accepting some caps, while it continues building one new coal power plant every week.)
One option would be to make a distinction for existing power plants. There too there are problems. For one it would immediately increase the cost to consumers, as against a more gradual increase as with the case of a carbon tax exclusively on new capacity. Secondly, the existing power producing sector is already in a mess of sorts, with low capacity utilization either because of maintenance or fuel supply issues. With India undergoing one of the worst power crises in recent history, it would be practically very difficult to push in such reforms.

But that still leaves us with an interesting scenario of how a CAT mechanism could co-exist with a carbon tax in a developing country. Thus the developing country would not cap emissions as a whole but still ensure that strong mechanisms are in place to control emissions within the country.

Lets start with the power plants. Lanco recently won the Sasan Ultra Mega Power Project deal where they offered to sell power to the SEB at just Rs 1.19 per unit. This is coal-based power – located at pit-head it involves some of the worst form of environmental pollution (CO2 and fly ash among others), besides some rather inhumane working conditions for very poor manual laborers, besides exposing them to huge risks to limb and life.

Dabhol on the other hand has a deal with the Maharashtra Govt to sell power at Rs 3.3 per unit and at current gas prices they just cannot do that. Lets assume that a more reasonable price would be Rs 3.55. Now, Dabhol is practically the anti-thesis of a coal-based plant. Much less CO2 pollution (since it runs on natural gas), no fly-ash and relatively good working conditions. At the other end of the spectrum Madhya Pradesh pays Rs 3.97 per unit (the highest in India) for wind-power, which is even cleaner than natural gas.

So if we set the price of gas-based power as the bench-mark, then consumers must pay around 3.55 for their power (ignoring the SEB’s margins for now). The difference between the cost of production at coal-based plants and the selling price would be collected by the Govt as Carbon Tax. In the case of the Lanco power for instance, the Govt would collect 3.55 – 1.19 = Rs 2.36 per unit as tax. Similarly if the benchmark is the MP rate for wind power (Rs 3.97), that tax will go up to Rs 2.78 per unit, while Dabhol would pay a tax of Rs 0.42 per unit.

Thus taking gas-based power as the benchmark would mean we should price power at above Rs 4.00 per unit (after the SEB’s charges), which is still lower than what industrial consumers pay, but much more than residential consumers do.

Automotive fuel on the other hand is already severely taxed in India. It is my firm belief that this tax should be phased out. Sources of energy should not be seen merely as wealth, but as the means to create more wealth. At the same time, removing tax on petrol/diesel should not bring the prices down, as consumption will shoot up, further discouraging energy efficiency. This is where the carbon tax should come in. Essentially what I am suggesting is that the carbon tax should replace all other forms of tax on automobile fuel (except a few targeted ones like the education and highway fund taxes). The difference is that the carbon tax will get used exclusively to get rid of our carbon addiction.

So the only group that would have to take a hit would be the residential electricity consumers. But they too will benefit enormously in the longer run, as we shall see below.

The argument for per-capita emission limits

This argument is seriously flawed. Air pollution works broadly at two levels: the local level and the global level. At the global level air pollution might cause drastic climate changes resulting in droughts, floods, hurricanes and all sorts of resultant human disasters. Even if the rich nations stop polluting today, the environment is still in a mess. And if the developing nations don’t stop, the environment is doomed anyway. Arguing that the rich nations should themselves stop polluting first, and then pay the poor nations to stop too, is fine. Only the practicality is zero.

However, while thinking global we have the option of acting local. And acting local on this issue makes tremendous economic and environmental sense. For instance the air in Delhi became much more pleasant once natural gas became the rule for public transport vehicles. Plus since natural gas costs less, the transport operators also make more money. Electricity will reduce the cost of operation even more, and pollute even less (even if the electricity comes from coal).

Talking of electricity, a fully depreciated wind power plant can produce electricity for as little as Rs 0.50 per unit, which is cheaper than the cheapest coal power. In time solar power will get there too. Better still, eventually we will all be able to afford our own solar panels which will pay back their cost in less than 5 years, and then we will not have to pay for electricity at all. And if we are already driving electric vehicles we wont have to pay for fuel either. In addition to all that we could also have a strong economy built on hi-tech industries and a strong entrepreneurial culture.
We can either opt to spend (a relatively little) more money today to get to the free energy utopia outlined above, or we can all go down in a blaze of fossil-fuel fires.

To me, the picture highlights the obvious point that wealth, economic growth, and energy use are fundamentally intertwined: where there is wealth or growth, energy is needed the most. If we could somehow see that picture evolve over the past 50 years, I am almost certain that we would see Europe, Japan, and the US brighten as their economies grew, with the rest of Asia emerging towards the tail end. The point of this silly astronomy lesson is simply to say that if India wants to grow at the pace necessary to lift our millions out of poverty within two or three decades, we’re going to have to power that growth – with lots of electricity and fuel; and hopefully some alternative methods too.

Currently, the average Indian consumes 0.9 barrels of oil, 31.5 cubic meters of natural gas, and 610 kilowatt hours of electricity every year – and these numbers are going up by 4.5% – 5% annually. Add to that 1% annual population growth, and our total energy needs will increase by about 5.5% – 6% a year. This year, we will produce about 90% of our natural gas and 30% of our petroleum domestically, and import the rest. Capacity addition over the last few years has been quite rapid, but not nearly fast enough to keep up with the growth of demand. Judging by current rates of capacity addition, and borrowing some projections from the EIA, by 2020 we will have to import 20% of our natural gas, and 80% of our oil; by 2030 those numbers will be around 30% and 90%, respectively.

A parallel problem is our pending electricity shortage. As far as I know, electricity cannot (and probably should not) be imported – it has to come from coal, nuclear, hydroelectric, and wind power plants at home. Even if we add power plants at the fast rate that we have over the last few years, demand will still outstrip our production capacity within another five years (It also doesn’t help that, at last check, our transmission and distribution losses were an astounding 27% of output) – by 2020 the shortage will be about 13% of demand, 25% by 2030. Right now, we have enough installed capacity to produce about 80,000 mw of electricity a year, and it is growing at about 5% a year. Consumption is currently at 75,000 mw, but is growing at about 6.5% a year. This implies that we face a cululative shortfall of about 20,000 mw by 2020, and 70,000 mw by 2030.

This is by far the biggest reason why signing the nuclear deal into law is extremely important for India. Right now, only 3% of our electricity production is from thermonuclear generation. Following the approval of the deal in the Senate, the Nuclear Power Corporation of India (NPCIL) announced that it planned to add 20,000 mw of capacity by 2020 and 50,000 mw by 2030. These sums are not trivial – they represent 10% and 15% of our projected electricity demand, respectively. While these alone still don’t cover the projected shortfall, the smaller margins (3% in 2020, 10% in 2030) can probably be made up for by an increased pace of capacity expansion (or, less favorably, by a mild recession).

The nuclear deal achieves two basic things: it hitches our foreign policy wagon for the time-being to the US, and it allows us a clear path towards energy security. In an important sense, it is foreign policy and economic policy rolled into one. Despite seemingly overwhelming support in the US Congress and in India, there are still loud critics on both sides. Publications like the New York Times and the Economist are urging that the deal be made contingent on a cap in India’s strategic arsenal (obviously a non-starter), and if that doesn’t work, that the other members of the Nuclear Suppliers Group (NSG) not follow the US’ lead. In India, critics from the BJP and CPIM are urging the government to back out of the deal because it infringes on India’s ability to pursue an independent foreign policy (which is essentially a way of saying, ‘Don’t align our interests with America’s’). While the argument that this deal may damage the Non-proliferation Treaty is reasonable; I would argue that the NPT was flawed from the beginning – both in being inherently unfair to India, and being completely ineffective (as demonstrated by Iran and North Korea’s unbridled march towards nuclear weapons).

The contention by those in India that we should back out of the deal because it impinges our sovereignty, however, is a shallow argument. The agreement represent somewhat of a turning point in Indian foreign policy. Through most of the past 60 years, our foreign policy has been predicated on two basic instincts. Firstly, there was a perpetual insecurity about transgressions on our sovereignty. This is understandable given our colonial experience, and our wars with China and Pakistan. Secondly, there was a tendency towards moralizing – using foreign policy to reward the “good guys” and punish or ignore the “bad.”

The deal marks a turning point because it is made purely out of economic self-interest. It understands the compromises required: align with an unpopular America, and join the global nuclear security architecture (via IAEA inspections, etc.) which we have thus far studiously avoided. This is precisely the approach to foreign policy which is required if we are to meet our energy needs. It has the added benefit that it will increase our influence in global affairs (which should help in trade negotiations, etc.), but it will also impose on us certain basic responsibilities and transparency requirements.

The remaining Indian critics of the deal must understand two fundamental realities about India and the world today. Firstly, if the emerging geopolitical realignment between energy exporters like Iran, Venezuela, and Russia; and energy importers like Europe, the US, Japan, etc. continues, India will invariably end up on the latter side. Secondly, we need rapid economic growth in order to fight poverty, create jobs, and develop our resources, and we face relatively severe electricity constraints in trying to achieve that level of growth. We will need big, out-of-the-box ideas to deal with this, and the agreement is a big step in that direction.

It is, in not so many words, the best way forward. If you’re still in doubt, take a look at that picture again, and think about what you would like India to look like from space in another 20 years.

Drawing upon the latest research, this volume analyzes the influences on the rapid future development of these two countries and examines how their growth is likely to impinge upon other countries. It considers international trade, industrialization, foreign investment and capital flows, and the implications of their broadening environmental footprints. It also discusses how the two countries have tackled poverty, inequality and governance issues and whether progress in these areas will be a key to rapid and stable growth. [World Bank]