Q&A with Stephen Roach

Stephen Roach, a senior lecturer and senior fellow of the Jackson Institute, is the nonexecutive chairman of Morgan Stanley Asia, where he has worked since 1982. Roach received his Ph.D. in economics from New York University and served on the research staff of the Federal Reserve Board in Washington, D.C., from 1972 to 1979. He is widely recognized as one of the most influential economists on Wall Street, and his recent research focuses on globalization and the emergence of China. The News interviewed Roach last week to discuss recent trade tensions between the United States and China and the strong growth of emerging markets.

Q The economic phenomenon of decoupling is the idea that emerging markets, especially those of Asia, are independent from developed economies such as the United States’. In the past, you have said that decoupling “is still a dream,” but is this still true?

A I think I said it was a “pipe dream.” Okay, “dream” is fine. What [the chart] says is that because the black line is going up, it means that exports are playing an increasingly more important role in driving the growth of developing Asia (i.e. China and India) as a region.

Q Does that mean that the emerging Asian markets are going to be depreciating their currencies?

A Well. So you have to look at decoupling from the standpoint of the competitiveness and the strength or lack thereof in foreign markets. And the currency issue gets into the first of those — the competitiveness issue. Just, if you want to focus on one economy in developing Asia, one of increasing concern in the United States is China. So there’s a lot of pressure in China to raise the value of its currency. China has increased the value of the yuan by roughly 24 percent relative to the dollar since 2005. And that has not made much of a dent at all in China’s export competitiveness. Where China got into trouble in the export business was in late 2008 or 2009. The global economy contracted sharply and, by being exposed to the global economy with a rising export share, the Chinese economy weakened dramatically and they had to take massive initiatives to shore up their economy. So no country in Asia, whether it’s China or India or even Japan, which doesn’t fit in here because it’s not a developing country, no country in Asia was spared during the recession crisis of 2008 and 2009.

Q These countries were hurt by the recession of 2008 because they were so export-dependent?

A Yup. Every single one went either to outright recession or their growth slowed sharply. So, we had a test of the so-called decoupling thesis in the crisis, and Asia came through with being extremely coupled, or linked, to the rest of the world.

Q Is one of the sources of economic growth that supports these countries an increase in internal demand?

A Internal demand is starting to pick up, as you can see from this red line it’s still …

Q Weakening?

A This doesn’t mean internal demand is weakening, it means its playing less and less of a role in driving overall economic activity in the region. But the other sectors other than internal private consumption, especially investment in infrastructure and equipment, are growing more rapidly.

Q In terms of all of this, what exactly is going on in the rest of the world that is leading economists to say that emerging Asian markets are decoupling?

A Well, on the surface, with China still growing at 9.5 to 10 percent, the performance speaks for itself. These economies have lots of other drivers of economic growth but they’re not delinked from the global business cycle given the large role that exports and external demand play in their respective economies. By the way, India is less dependent on the rest of the world than the generic economy is in developing Asia. You asked about consumption and if it’s picking up. It’s starting to improve but it’s coming off a low base, and countries like China — a lot of policies need to be put in place to stimulate internal private consumption. For example, they don’t have much of a social safety net, and that means social security, private pensions, medical insurance and unemployment checks. So lacking a social safety net makes people compensate for that by saving a disproportionate share of their income and not spending it. If you build a social safety net, it gives you some sense of security about the future. You will convert that fear-driven element of saving — what economists call precautionary saving — into buying power. So one of the big challenges for China is to do that — to build out a more robust social safety net framework. I think that they have a new set of policies coming out for their new five-year plan, which I think will be enacted early next year, and I think those types of policies will be teaching that plan.

Q So unlike the U.S. consumer, who is spending and not saving much, the Chinese consumer is the exact opposite?

A That’s right. We’re very much the opposite. We save too little and spend too much, and they save too much and spend too little. So, the happy medium is somewhere in between.