No Turning Back for The Next Asia

By Stephen S. Roach

Not surprisingly, Minxin Pei has hit the nail right on the head: It’s easy to make the case for Asia’s structural transformation from an export- to a consumer-led economy. But will Asia actually step up and do it? 

This question goes right to the core of my macro soul. I will confess that I am guilty of being an idealist. For most of my career, I have practiced what I would call disequilibrium macro — focusing on the destabilizing tensions that arise when economies have moved far from the tranquility of equilibrium. As such, I have tended to frame macro-analytic arguments and market calls from the standpoint of what should happen to relieve those tensions. That, of course, can often stand in sharp contrast to what actually will happen. As Blake Hounshell correctly observes, from time to time, this propensity has brought me to be “early” in several of my macro prognostications. And yes, I concede, that may also be the case with The Next Asia.

My fascination with Asia rests on a very optimistic conclusion: One of its greatest strengths lies in its practicality. As Clyde Prestowitz notes, that doesn’t necessarily make me an optimist or a pessimist — but hopefully something closer to a realist. Asia is pragmatic out of necessity. The pervasive and serious poverty that has long plagued the region really leaves it with no other choice. Asian economic development strategies have long been focused on alleviating this critical condition. The imperatives of social and political stability underscore the dark side of failure.

With that key premise in mind, I believe strongly that this crisis — and the Great Recession it has spawned — is Asia’s wake-up call. If the region’s export-led economies stick with the old way, growth will be much harder to come by in a post-crisis climate characterized by a much slower pace of consumption growth in a U.S.-centric developed world. The resulting shortfall would fail to absorb Asia’s surplus labor — leading to mounting unemployment and the heightened risk of social instability.

This would be an especially problematic outcome for China. Whenever I get stuck on a Chinese macro issue, I always go back to two key words — “social stability.” They are, in many respects, the Holy Grail of the Chinese growth miracle. I remain absolutely convinced that China’s leadership would do everything in its power to avoid destabilizing the social fabric of the nation’s vast population. In that vein, a weak external demand climate poses a serious threat to the employment underpinnings of China’s export-led growth model. The shift to internal demand is really Beijing’s only option. It’s just a question of when, underscoring yet another occasion when I could well be early on a macro call.

Experience tells us that the New Asia responds well to crises. That was certainly the case in the aftermath of the wrenching pan-regional crisis of the late 1990s. That crisis was a devastating blow to most in the region — China and India, of course, being important exceptions. It tore the fabric of what had been dubbed the “East Asian Growth Miracle” just a few years earlier by the World Bank. In the years immediately after that earlier crisis, Asia moved aggressively to convert current account deficits into surpluses, reduce its exposure to short-term capital inflows, and build up its reservoir of foreign exchange reserves. These steps served the region well when the global crisis of 2008-2009 hit — especially the “self insurance” that was provided by now massive portfolios of currency reserves.

Of course, the next crisis is never like the last one. For Asia, that is very much in the case in the present climate. The pan-regional currency and banking crisis of 1997-1998 has been followed by a massive external demand shock that strikes right at the heart of the region’s greatest structural vulnerability — over-reliance on exports and external demand.  That underscores the obvious and urgent imperative: If Asia’s external source of growth is drying up then it must uncover a new source of growth. Moreover, if it resists that shift, then it risks the protectionist pushback from the West that, as Ben Simpfendorfer notes, has long been a key feature of my Asia risk scenario.

This is where Asian pragmatism should come into play. Just as the region responded well to the wrenching pressures of a decade ago, I am convinced it will do the same this time as well. In the end, it really doesn’t have any choice. Be patient Minxin, the Next Asia could end up bearing fruit sooner than you think!

ED Jones/AFP/Getty Images