The one-man early warning system reviews old calls

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
. 

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