Talk is cheap in the not-so-rarefied world of economic punditry. On the one side are the pundits who argue that it was the ineptitude of the US government that caused the crisis; the too-big-to-fail nonsense and so on. On the other side, we have those who would spew fire and brimstone at the evils of Corporate America and Wall Street.
While many newspaper columnists have had their field day with this conflict between the sides, few have provided as shrewd an observation as Stephen S. Roach - perhaps understandably so, given that Roach has been honing his craft for more than 40 years, most of which was spent at Morgan Stanley where he was chief economist and is, presently, chairman of this prolific investment firm's Asia outpost. Roach also holds a Ph.D. in economics from New York University and was previously a member of the US Federal Reserve Board.
Over the years, his astute insights have informed many a politician, business leader and pundit. Those who feel like they have missed out will be happy to know about The Next Asia: Opportunities and Challenges for a New Globalization - a book that compiles more than 70 of Roach's commentaries from 2006 to 2009.
Roach's analysis of China's structural problems and consumption patterns deserve close reading. Some statistics to ponder, for a start: In 2005, China became the world's largest consumer of basic metals like lead, zinc and tin. Chinese consumption of iron accounted for 84% of global demand growth in that metal. For zinc, Chinese demand accounted for 120% of global demand growth. In copper, China's use spoke for a chart-topping 307%.
The voracious appetite for these commodities arose from China's export-led and FDI-driven (foreign direct investment) mode that together accounted for more than 75% of the Chinese economy. Left unchecked, the growth would inflate prices, setting up huge pressures in the supply chain, much of which is not under China's control. Plus, the demand is not just for metals, but also energy, cotton and materials of all kinds.
China's growing demand for these commodities has resulted in complications beyond simple buying and selling. Exhibit 'A': the yet-resolved saga involving the arrest of four of Rio Tinto's China-based staff over alleged price-fixing and the resultant diplomatic spat. It is probably more than just mere coincidence that this episode followed a failed Chinese bid to buy an 18% stake in Rio Tinto that Australia had rejected on the basis of national interests.
Roach had envisaged, in as early as 2006, that issues surrounding this growing demand would persist, and that China would need to rebalance its export-driven economy - foresight that later proved to be right on the button.
China's unease over the upcoming over the upcoming Rio Tinto-BHP production joint venture in early December 2009 was evident, as seen from the China Iron & Steel Association's newspaper, China Steel News, which had protested the merger, saying it will lead to monopoly power. China's Ministry of Commerce waded into the issue as well and said it is seeking the planned documents for review. No one, including Roach, expects the noise to die down quickly.
At the same time, as China's 1.3 billion people advance as consumers in their own right, Roach highlighted that the contours of the global market will take a new form - one that is more attuned to Chinese tastes and demand. China's National Development & Reform Commission (NDRC) has since instituted measures to support rural consumption (through coupons), reform the state social security system (through increased funding) and labour market (through minimum wage enforcement). Such reforms are designed to lower the total savings rate while increasing domestic consumption. Within the next two decades, China will thus emerge as a nation of consumers, not just a nation of savers.
Another area to watch, as pointed out by Roach, is the dissonance that features within China's command economy - that despite all the instruments available - is too big to be controlled effectively. This dissonance between the centre and the periphery is well typified by this fact: China's 11th Five Year Plan ending 2010 was supposed to cater for a 7.5% growth rate in its GDP. In reality, China is still bracing itself for a breakneck rate of 8% for 2010 which is already considered a slowdown from the average 9.5% for the last 25 years.
Engines of growth
Beyond China, The Next Asia documents the emerging changes that will transform the rest of the region as it moves past its central engine of growth - the preponderance of US demand. However, the lodestone of China as a market in its own right has seen it powering the growth prospects for the rest of Asia and lifting the region out of overdependence on traditional markets like the US. Asia's share of its own products that are domestically consumed grew from 26% in 1985 to 37% in 2005 based on a China-centric supply chain.
The continuing saga of American trade protectionism gets an airing as well. As America continues to increase the size of its trade deficit with the rest of Asia, its domestic political pressure will get increasingly strident in demands for limits, curbs and special deals. Meanwhile as its trade partners get stronger, their appetite and ability for trade retaliation grows. Roach quotes a seasoned investor stunned by US trade protectionism who asked what can we do to push back, to send a signal?
Roach was also ahead of the curve in his assessment of India's economic predicament. While US-centric magazines like Time and Newsweek werestill singing the praises of the Indian miracle in job creation that hinged largely on IT outsourcing, Roach wrote:
India's leaders have a very different vision of manufacturing. They have seen what China can do and genuinely hope to achieve a similar outcome... By contrast, unlike the Chinese, the Indian leadership is not that enamoured of the job creating potential of labour-intensive services. In particular, they point out that IT-enabled services - the crown jewel of India's new economy - mainly offer employment to the elite graduates of India's prestigious institutions of higher education rather than providing opportunity for the rural poor.
What is useful to note here is that this was written early 2006, when the craze for all things IT-related in India was fuelled by the fact that marquee names like General Electric and other US multinationals were moving their backroom operations into India; when most other columnists were full of praise.
Roach sounded his note of warning amidst this cacophony - something which the mainstream press only picked up much later. In a recent interview with Clay Chandler, the Asia editor for the McKinsey Quarterly, Roach broached the India-China contrast again:
Foreign direct investments accelerated dramatically - again, not up to Chinese standards, but a huge acceleration vis-à-vis where India has been historically... I think that India actually could be the real sleeper in Asia over the next few years. Just at a time when everybody is all lathered up and excited over a China-centric region.
Will Roach be proven right again?
Despite the gravitas of this 414-page tome, there are some residual faults. If anything, the book lacks depth in the way it analyses the economics of its time, compared to blogs written by economists such as Olivier Blanchard, Philip Lane and Barry Eichengreen. But for what it lacks in depth, the book more than makes up in terms of readability and prescience.
Coming from a background of traditional hard data economics research, Roach provides a unique point of view that informs the discussion without being overly theoretical or academic, so to speak. It doesn't hurt - having rubbed shoulders with great political luminaries - that Roach gets more than his share of glowing endorsements from the likes of Liu Mingkang (Chairman, China Banking Regulatory Commission), Henry Kissinger (former US Secretary of State) and Laura D'Andrea Tyson (Chair, National Economic Council, Clinton administration).
Indeed, you could do far worse than spending a few days with this book.