Financial crisis

By Minxin Pei

Stephen Roach, chairman of Morgan Stanley Asia, is an unusual Wall Street banker. In his previous incarnation as the investment bank's chief economist, Roach was one of the few who actually warned against both the tech bubble at the end of the 1990s and the credit bubble a few years ago. He characterized the former Fed Chairman Alan Greenspan as a "serial bubble blower." And he sounded alarm about America's overconsumption and debt binge. His bearish views, of course, earned him few friends during the bubble years.

Although he has been vindicated by the Great Recession, Roach has apparently set his sight on a new target: the booming Asia. If you shudder what a bull can do in a china shop, wait until you see a bear inside.

The Next Asia, on the surface, does not seem very bearish. A collection of Roach's essays on the United States, global trade, and Asia, this book tries to maintain a delicate balance between celebrating Asia's dramatic achievements in economic development since WWII and warning against complacency and the continuation of an unsustainable export-led growth model. Unlike the recent flood of books that portray Asia as an unstoppable juggernaut that will continue to grow at its current pace, The Next Asia provides a more realistic and cautious prognosis: While the region's fundamentals are strong, most of the Asian economies (except for India's) need to rebalance by boosting domestic consumption and reducing reliance on exports.

The reason, according to Roach, is straightforward. Asia's phenomenal growth in recent years was driven largely by rising exports absorbed by America's debt-fueled overconsumption. At the height of the boom, in 2007, exports accounted for a whopping 47 percent of Asia's GDP. Now that the party is over, Asia's export powerhouses cannot count on the ever-rising external demand to keep their factories running at full capacity. The danger, warns Roach in The Next Asia, is that Asia may not fully understand the permanent structural change in the American economy brought about by the Great Recession. With stagnant income and the end of excess consumption supported by asset bubbles, the overstretched American consumers will have no choice but to repair their household balance sheets and cut their purchases of goods made in Asia. Consumption as a share of the U.S. GDP, which reached 72 percent in 2007, will probably fall 4-5 percentage points and settle at its historical norm of around 67 percent, effectively taking $650-700 billion in final demand off the table. For Asia, this would be a huge demand shock.

To continue its drive to prosperity, Roach argues, Asia must reinvent itself.

But will Asia rebalance?

As a seasoned Asia-watcher steeped in the region's cultures, Roach is perhaps too polite to be blunt. But the sections on China in his book reveal his cautious pessimism (despite his repeated proclamation that he is an optimist). Roach pointed out China's structural imbalances -- such as overinvestment, excess export dependence, and anemic domestic consumption -- many years ago, but he steadfastly maintained his faith in Beijing's ability to tackle the challenges because he believed in China's "unrelenting commitment to reforms." But that was in October 2006. However, in early 2009, Roach clearly grew less confident in his earlier assessment. He characterized Beijing's pledge to boost domestic consumption "lip service." He noted Beijing's inadequate progress in building a social safety net in encouraging consumption. He was alarmed by the display of complacency and assertiveness by Chinese officials who were blissfully unaware of the changing landscape of the global economy.

China, of course, is not the only sinner in East Asia. Japan, according to Roach, has also miserably failed to rebalance its economy, and has suffered a lost decade.

So the record of economic rebalancing in Asia is not exactly encouraging. I wish that Roach had gone a step further and analyzed the deeper causes of the region's chronic structural distortions. Without understanding why such obvious problems are left uncorrected for so long, it is hard to be optimistic that Asian countries will actually heed the advice, however well-meaning and useful, proffered by Roach in The Next Asia.

Minxin Pei is the Tom and Margot Pritzker Professor of Government at Claremont McKenna College and an adjunct senior associate at the Carnegie Endowment for International Peace. His article, "Think Again: Asia's Rise," appeared in the July/August issue of FP.

By Blake Hounshell

Stephen Roach is a rare bird in the punditry business: He isn't afraid to make tough calls that might later embarrass him. Like anyone else, he gets things wrong from time to time. But on the big questions, he's more often right than not, and when he's "wrong," it's usually only because he makes predictions far ahead of most others. A one-man early warning system, it's no wonder he developed a cult following among the econoblogging community from his former perch on Morgan Stanley's research Web site (formerly chief economist, he has since moved on to chair the bank's operations in Asia).

For years, Roach was in the company of doomsayers like Nouriel Roubini, Mark Faber, and George Soros, and was warning as far back as 2004 that global imbalances and a U.S. real-estate bubble threatened to end in "economic Armageddon." Critics dismissed him as a Chicken Little. When the sky finally did fall, he says, even he hadn't anticipated just how bad it would get.

"I honestly thought that modern risk management practices," he writes, "were far more robust than they ended up being. Mea culpa."

In The Next Asia, Roach reviews his own track record and also makes a few new predictions. One interesting comment he makes, especially relevant in light of the recent G-20 conference in Pittsburgh, is that China will need to address its internal economic imbalances for its own reasons, and not because it is being badgered by the likes of Timothy Geithner. He approvingly quotes Wen Jiabao's "four uns" -- the Chinese premier's 2007 admission that his country's economy is "unstable, unbalanced, uncoordinated, and unsustainable." Roach says China has hardly addressed these problems yet, and its much-ballyhooed package of stimulus measures was only a short-term move designed to allow the country to muddle through the crisis.

Among other suggestions, Roach calls repeatedly for China to boost domestic consumption, a task that will require putting in place a modern safety net so that Chinese citizens don't feel compelled to sock away such a large percentage of their incomes (by some estimates, China's private savings rate is as high as 40 percent). He thinks China will eventually be able to pull this task off, but I'd be curious to know what sorts of unintended consequences he thinks might result. One of the great fears of environmentalists, for instance, is a world where tens of millions of Chinese and Indians begin driving cars and watching plasma TVs at the rate of Americans. Others worry about the effects on commodity markets for things like oil and all those rare minerals that go into cell phones.

Roach also warns of the continued risks of a lose-lose trade war between the United States and China, something he expected would have happened by now. Here again, maybe he was just early: After his book went to press, U.S. President Barack Obama slapped a much-criticized tariff on Chinese tires, and the Chinese retaliated by going after imports of U.S. chicken and car parts. It's not clear yet whether this particular skirmish will escalate into a full-blown conflict, but Roach thinks the ongoing rise in U.S. unemployment might make it inevitable.

As he puts it, with characteristic drama, "If these two nations end up at odds with one another, they will both suffer -- with dire consequences for the rest of a crisis-torn economy. The stakes are enormous. There is no margin for error."

He also still thinks, as he wrote in Foreign Policy last January, that the economic recovery will be "anemic at best," pointing to continued weakness in U.S. consumer demand, which for years was propped up by credit that is no longer so easy to get.

Roach's larger purpose in writing his book is to point out that although Asia has an extraordinary opportunity to grow and prosper, the region's rise is hardly written in the stars. ("It may be premature to crack out the champagne," he writes.) Getting there will take strong leadership, some very hard choices, and a much longer timeframe than most of us anticipate. Wen Jiabao, call your office.

Blake Hounshell is managing editor of Foreign Policy. 

PHILIPPE LOPEZ/AFP/Getty Images

This week, In Other Words reviews a new book, The Next Asia: Opportunities and Challenges for a New Globalization, by Stephen S. Roach.

In this collection of more than 70 essays, chairman of Morgan Stanley Asia and one of Wall Street's best-known economists, Roach takes a long hard look at the economy of the region and how it will shape the greater financial world of the future.

In The Next Asia Roach's analysis builds around five essential guideposts:

The world after the financial crisis; Asia's critical role in globalization; the upcoming rebalancing of the Chinese economy; a new pan-regional framework for integration and competition; and a frank discussion of the biggest risk to this remarkable transformation in the form of U.S.-China trade tensions."

Prior to assuming his current position at Morgan Stanley, Roach was the firm's chief economist, leading a global team of economists located in New York, London, Frankfurt, Paris, Tokyo, Hong Kong, and Singapore.

What follows this week is a running commentary with new discussion each day on Roach's book by special guest contributors.

In FP's latest issue, Leo Panitch writes:

The economic crisis has spawned a resurgence of interest in Karl Marx. Worldwide sales of Das Kapital have shot up (one lone German publisher sold thousands of copies in 2008, compared with 100 the year before), a measure of a crisis so broad in scope and devastation that it has global capitalism -- and its high priests -- in an ideological tailspin.

Yet even as faith in neoliberal orthodoxies has imploded, why resurrect Marx?" 

Panitch goes on to make a case for doing just that (an excerpt of which is below), but his article has sparked much debate on the merits of Marx, Das Kapital, and just how much his critique of capitalism applies to today's economic upheaval. 

All this week, FP will bring you a debate with new posts each day on Marx and whether or not his writings offer insight worthy of resurrection. 

Enjoy, and do weigh in!

An excerpt from "Thoroughly Modern Marx"

By Leo Panitch

To start, Marx was far ahead of his time in predicting the successful capitalist globalization of recent decades. He accurately foresaw many of the fateful factors that would give rise to today's global economic crisis: what he called the "contradictions" inherent in a world comprised of competitive markets, commodity production, and financial speculation.

Penning his most famous works in an era when the French and American revolutions were less than a hundred years old, Marx had premonitions of AIG and Bear Stearns trembling a century and a half later. He was singularly cognizant of what he called the "most revolutionary part" played in human history by the bourgeoisie-those forerunners of today's Wall Street bankers and corporate executives. As Marx put it in The Communist Manifesto, "The bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and thereby relations of production, and with them the whole relations of society. . . . In one word, it creates a world after its own image."