Stephen Roach on the Next Asia: Opportunities and Challenges for a New Globalization
Tan, Cliff, Business Economics
By Stephen S. Roach, 2009. Hoboken, NJ: John Wiley & Sons Inc. Pp. 414, $39.95 hardcover
Business Economics (2010) 45, 296-297. doi:10.1057/be.2010.27
For Stephen Roach, Asia Chairman for Morgan Stanley and its former chief economist, our present globalization is fraught with challenges brought about by the unbalanced way it has proceeded. The global credit crisis is but the biggest sign all has not been well. Still, challenges may turn into opportunities but only if the global economy--by which Roach means principally the U.S.-China axis--turns toward serious rebalancing in the next few years.
Roach's compilation of 74 of his short thought pieces (written from early 2006 to mid-2009) is thematically grouped into five sections (one on global macroeconomics; two on China and Asia; and two on globalization and U.S.-China trade tensions); these can be further distilled into three main themes.
The first and most important is Roach's global macro view, a view summarized by the words "imbalance" and "rebalance." Roach maintains a global economy balanced along an axis of an over-consuming United States and an over-producing China is unsustainable and has to give way and reverse. The global credit crisis is seen partly as a consequence of imbalances. Post crisis, Roach foresees a world in for several more years of rebalancing, driven by a retrenching U.S. consumer who has a long ways to go.
On the financial crisis, Roach makes hard-hitting critiques against, primarily, the U.S. Federal Reserve and its past and present Chairmen, Alan Greenspan and Ben Bernanke: Greenspan for too-loose monetary policy that fostered two bubbles (tech and credit) and Bernanke for hampering needed rebalancing. Globalization drove disinflation in the Great Moderation. Greenspan came to accept faster noninflationary growth as one dividend of IT-led productivity gains. But a drop in nominal interest rates even as retirement needs rose drove a search for yield that led to bubbles, which central banks tolerated because "they believed incorrectly the world was learning to live with its imbalances." This left monetary authorities "asleep at the switch"--particularly the U.S. Federal Reserve, with a philosophically driven blind spot about costs/benefits associated with financial innovation. Even today, "market-friendly central bankers stand shoulder to shoulder in their penchant to keep the magic alive for an asset-dependent world," by which Roach means the massive liquidity injections. Such injections, along with other efforts to keep homeowners in unaffordable housing and policies that effectively re-subsidize consumption, hamper the necessary rebalancing Roach sees in coming years.
Roach's proposed palliative for central banking--expanding the U.S. Federal Reserve's mandate to include financial market stability (in practice, that means monitoring asset prices against bubbles)--will be difficult to implement compared with simpler policies like the Taylor Rule, so that even with an expanded mandate the U.S. Federal Reserve may have enough wiggle room to still choose exactly the same policy. John Taylor had argued in 2007 that simpler rules by themselves might have been enough to steer the U.S. Federal Reserve away from too-easy money.
Once we understand Roach's world view, we understand why he focuses on China, a China that he says exports and invests too much, consumes too little and is otherwise on an unsustainable path. Therefore Roach repeatedly calls for Chinese policies that will reverse the situation. Roach's key advice for both China and Asia is that future opportunities in globalization for the region depend on reducing the overdependence on export/investment-led development strategies and rebalancing toward consumption. Otherwise, he says, the Asian Century may be a pipe dream.
But policy analysis is difficult, even after sitting in Hong Kong for three years. On Chinese rebalancing, Roach began his odyssey with high hopes in 2006, trumpeting, "One of China's most powerful economic policymakers is essentially pre-announcing a major shift toward a commodity-lite growth model. …