Two daunting challenges for Asia’s economy

By Clyde Prestowitz

In his new book, The Next Asia, Stephen Roach demonstrates yet again why he is the best economic analyst out there, not only on Asia but on the structure and underlying dynamics of the globalization that is revolutionizing our world and dramatically shifting the balance of international power.

The Next Asia, a collection of Roach’s columns and analyses over the past several years, could just as well be read from back to front as in the traditional front to back mode. Going backwards gives one the feeling of traveling with Sherlock Holmes as he unravels the threads of a great mystery to find the ultimate secret cause of the crime or accident. But either way you read it, the book is a constant reminder of how on target and correct Roach has been in his analyses of the causes and effects of economic trends over the past decade. In particular, he saw the recent crisis coming before almost anyone else, and also correctly foresaw that the much ballyhooed notion of Asian decoupling from the U.S. economy was a dangerous fallacy.

More important than what Roach saw in the past, however, is what he sees coming in Asia in the future. His fundamental view is bullish but realistic. The achievements of Asia, and particularly of China, in the past twenty years are presented not only as obviously impressive but also based on extraordinarily wise policies and leadership. At the same time, Roach focuses on the “four uns” of Chinese Premier Wen Jiabao whose statement at the conclusion of the March 2007 National People’s Congress acknowledged the economy’s strong performance but then went on to emphasize that despite its apparent strength, the economy was “unbalanced, unstable, uncoordinated, and unsustainable.”

Coming more than a year before the fall of Lehman Brothers and the eruption of the recent crisis now being called the Great Recession, that statement was prescient not only for China but also for the whole global economy. In The Next Asia, Roach makes a double point. Whether China and India and the rest of developing Asia will continue to prosper and to lift hundreds of millions out of poverty while shifting the center of the world economy to the east will depend on removing the “un” prefix from in front of each of Wen’s adjectives. This will entail two particularly daunting challenges. The Asian developing economies are unbalanced and unstable by dint of their reliance on exports to generate growth. To become balanced and stable, they must shift to domestic consumption led growth. That sounds easy but in fact will be quite difficult because the physical, institutional, political, and social structures are all organized around exports. Changing that will not be just a matter of a stroke of the Premier’s pen. Similarly, the second challenge of developing in a way that does not result in unacceptable global warming and environmental degradation will also not be met only by making policy statements. Roach shows that spectacular as the Asian performance has been thus far, it will have to be even more spectacular going forward.

His second point is that the outcome is just as important to the United States and the rest of the world as it is to Asia, and that a positive outcome is not possible unless America also acts much more wisely in the future than it has in the past.

Clyde Prestowitz is founder and President of the Economic Strategy Institute. 

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