China and US will have to find the middle ground between spenders and consumers—too many of either will wreck the economy.
Let’s hope governments across the globe are following the suggestions of Morgan Stanley economist Stephen Roach. If they haven’t done so already, his book The Next Asia is a good way to begin. It puts together his writings over the last three years. The broad conclusion emerging over the 70-odd articles is that Asia shows promise but it’s high time it rebalanced its economy.
A good part of the book builds the case for the US and China to rebalance. How? The US needs to save more, consume less. China, vice versa. Easier said than done. The biggest strength of Roach’s book is the clarity it brings to complex macro-economic issues and international dynamics at play—due to Roach’s deep insights and simple writing.
For instance, take the case of US’ consumption binge. Consumption was a whopping 72% of GDP in 2007, and has since only decreased by a percentage point. This, Roach has been saying for years now, is powered by two important forces. One, an increase in labour income, which hasn’t been good enough in the US. Here, Roach highlights an anomaly in the relationship between labour productivity and income. Usually, an increased labour productivity results in increased labour compensation. In the US, the opposite has happened.
To make matters worse, the US consumers have been horrible savers. Roach notes how, as a share of disposable income, the personal savings rate in the US fell to nearly zero from 2005 to 2007. Which brings us to force number two. American consumers have supported their consumption spree by asset bubbles. The Fed has played ball, and as Roach puts, it created an asset-dependent US economy. Of course, all of us are now familiar with what happened after the subprime crisis. Rather than correct this lopsided model, the US, Roach believes, has over the years unfairly tried to put the blame on China, its biggest trade partner and creditor. Of late, the US is seeing things in the right context.
Dragon Call
China has just the opposite problem. It saves too much and has, for long, successfully grown through exports and fixed investments. It’s time to tweak the model, something that the Chinese are themselves keen on doing. What needs to be done, Roach argues, is increase consumption. “The Chinese consumer will not spring to life overnight,” he notes. The need is not only to create the infrastructure of consumer markets. China also needs to give reasons for people to save less—by creating social-security nets, for example. China’s case holds true for many other Asian emerging economies like Korea, which Roach discusses.
It would be great if both China and US can synchronise their rebalancing. But, Roach isn’t too optimistic about that.
Roach also mentions India, which he’s gung-ho about. But, somehow, the Indian example doesn’t fit in. India has followed a different path than China. India’s growth isn’t export-led. Nor does it over-save. Its physical infrastructure isn’t anything to write home about. But its financial infrastructure could make China envious. Where India comes into the picture isn’t clear from the book. Maybe, Roach could have stuck to a China-US paradigm.
Although, a whole lot of background information is repeated, the upside of such a book is you can choose any one article and still understand it in its entirety. It also needs to be mentioned that Roach has been good at spotting trends. For instance, he doubted the decoupling theory much before it turned out to be a hoax!