Wednesday, December 11, 2013

Roach, Unbalanced

Stephen Roach, formerly chairman and chief economist of Morgan Stanley Asia and now a senior fellow at Yale, is singularly well equipped to analyze the complex economic relationship between China and the United States. Unbalanced: The Codependency of America and China, forthcoming from Yale University Press, explores the evolution of this relationship, its current fragility, and future opportunities.

Codependency is a psychological term for a relationship disorder, probably most commonly associated with the relationship between an alcoholic and his family and friends. Roach extends it to economics. “The relationship between the U.S. and Chinese economies, with the world’s ultimate consumer locked in a tight embrace with the world’s ultimate producer, exemplifies this syndrome—not just in the cross-border transfer of goods but also in the exchange of financial capital. Two large, dynamic economies, both plagued with unbalanced and unstable tendencies, have become very needy in what they ask and expect of each other. This relationship obviously brings important benefits but there are serious risks. Psychologists warn that codependency ultimately leads to identity crisis, denial of responsibility, and the tendency to blame others for problems. China and the United States manifest most aspects of that mutual pathology.” (p. 250)

Although Roach focuses on codependency, he stresses that “there are no bilateral fixes to multilateral problems.” (p. 127) America’s current account deficit and trade imbalance, for instance, are not “made in China” and hence there is no Chinese “fix” for our economic woes. In 2012 the U.S. “ran deficits with 102 countries—up from 98 in 2011 and 88 in 2010.” (p. 126) China is “the hub of a massive, integrated, pan-regional export machine—in effect, a proxy for a large collection of tightly connected Asian economies that provide low-cost goods to a savings-short U.S. economy. … While China may be the final stop in this chain of production, assembly, and distribution, it is far from the only cog in the global trade machine that the U.S. has come to rely on.” (p. 140)

A theoretical sidebar for those who believe that David Ricardo’s work on comparative advantage and international specialization provides the intellectual underpinning for what Roach calls Globalization 2.0. Roach argues that, although Ricardian trade theory remains a pillar of economic theory and practice, it is not directly relevant to today’s world and that “the simple Ricardian models of exchange between producer and consumer economies [are] largely obsolete.” (p. 117)

Even though the U.S.-Chinese codependency cannot be viewed in isolation, the fact remains that “they suffer similar maladies: they are the most unbalanced major economies in the world today.” And, Roach warns, “no unbalanced economy is ultimately sustainable.” (p. 213) Both countries must undergo structural change. The U.S. should reduce its personal consumption share of GDP (currently at a record high of around 71%); China should reduce its combined share of exports and investments (more than 70% of GDP).

Structural reforms will face stiff resistance in both countries. In China “the national mantra of ‘reforms and opening up’ has been almost exclusively directed at strengthening China’s producer culture.” And the U.S. seems unwilling to stem the excesses of personal spending and false prosperity; consumerism is seen as personifying the American self-image. (p. 216)

Despite the extraordinary difficulties, “rebalancing is the only solution for unstable codependency.” It will “require a coherent framework of action—what might even be called a strategy. China excels at that—America abhors anything that even hints of a plan.” The endgame, as Roach admits, “is anyone’s guess. … [T]he strategic thinking and economic management skills of both the United States and China could ultimately determine whether this transition is both stable and peaceful.” (p. xiii)

Roach offers specific recommendations on how to move toward a stable relationship between the Next China and the Next America. Policy makers should pay heed.

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