Fixing an Out-of-Whack Global Economy
Opportunities and Challenges for a New Globalization
By Stephen Roach
Wiley; 414 pp.; $39.95 Stephen S. Roach has long been regarded as Wall Street's perennial bear. He has been predicting an American economic Armageddon since 2004, and though it took a while, history proved him right. Since leaving his job as chief economist at Morgan Stanley (MS) to become its chairman for Asia Pacific, in May 2007, Roach has trained his sights primarily on the East. Anyone looking for a solid primer on the region and its increasing interdependence with the West should give his new book, The Next Asia, a good thumbing.
In this collection of essays and quick hits written between 2006 and June 2009, Roach opines on everything from the North Korean nuclear threat to soft-headed Washington lawmakers. But the dominant theme is one Roach has harped on ad nauseum—his words, not mine—for years: The global economy is seriously out of whack and needs a complete rebalancing. American consumers need to stop spending, and Asians need to start.
As is now obvious, the asset-driven growth of America's economy was unsustainable. Roach deserves credit for sounding the alarm in early 2006, warning that the spending binge fueled by soaring housing and stock prices was a runaway train. Personal savings rates in the U.S. fell to virtually zero between 2005 and 2007, he notes in a short but dire chapter written in November 2008. Asia, especially China, had no choice but to run huge trade surpluses and buy dollar assets with foreign reserves to underwrite U.S. consumers.
The flip side is chronic underconsumption within China and its overdependence on export-led growth. Roach credits Chinese Premier Wen Jiabao with seeing the inherent weakness, despite its torrid growth, in China's economy, which Wen described as "unbalanced, unstable, uncoordinated, and unsustainable" at the National People's Congress in Beijing in March 2007. Roach argues that Chinese consumers, who accounted for just 35% of their country's GDP in 2007, compared with 72% for U.S. consumers, won't loosen their purse strings until China improves its tattered social safety net. The national social security scheme, for example, has just enough in its coffers to provide $100 per capita in lifetime benefits. No wonder China has 20% of the world's population but accounts for just 3% of global consumption.
One of the most thought-provoking sections of the book deals with the globalization debate. The IT-enabled trade in services has brought tremendous benefits to developing Asia, but the cross-border labor arbitrage hasn't helped white-collar workers in leading economies. Globalization was supposed to lift all boats, but labor's share of GDP in the U.S., Japan, and Europe sank to an all-time low of 54% in 2007. Roach warns that the protectionist backlash in the West against globalization has gathered force since the crisis hit, with potentially disastrous results.
It helps that he leavens his macro-speak with sprinkles of macro-whimsy. In blogs written while he attended Davos in 2008 he pokes fun at the Pollyannas who cling to "dreams of decoupling"—"a scenario where the world no longer sneezes when the United States catches a cold." Even so, some of his detractors begrudgingly tell him, "Well, you're finally right." Yet by the end of the alpine confab, he notes: "Around the world, market-friendly central bankers stand shoulder to shoulder in their penchant to keep the magic alive for an asset-dependent world. Time to get out of Davos."
Though the book's title suggests a pan-Asian treatment, the work is lopsided toward China, which gets 100 pages (170, if you include material on Sino-U.S. tensions); India gets a scant seven. Yet Roach describes India as the "sleeper," overlooked compared with the China miracle. The subcontinent could become "Asia's biggest surprise in the years immediately ahead," he writes, though he fails to flesh out this argument. And while the author says one cannot paint the rest of the countries in Asia with one brush, in the case of Singapore, Indonesia, and Taiwan, he doesn't even bother taking one up. He does argue the need for the region to wean itself from the manufacturing that feeds China's supply chain, which is dependent on the U.S. consumer. The only way Asia can avoid getting whacked by the next global downturn is to promote more internal private consumption, he says. Unfortunately, Roach doesn't provide a road map showing how to get there.
Perhaps because the book is made up of shorter, stand-alone pieces written over three years, Roach often returns to the same themes and employs the same phrasing from one chapter to the next. I lost count of the number of times Roach explained that a stronger yuan or higher tariffs would "amount to the equivalent of a tax hike on the American consumer" because the U.S. would merely respond by importing from a higher-cost trading partner.
Ultimately, Roach concludes that Asia's bright future is less certain than many would suppose. The sooner it shifts away from export and investment-led growth and figures out how to get its shoppers shopping, the less turbulence there will be on its economic ascent.