How the world works
The subtitle of Stephen Roach’s new book has an arresting image. “Unbalanced: the Codependency of America and China” describes two economies with mutually reinforcing dysfunctions. This approach is sometimes helpful, but the book’s strongest argument concerns the retired Morgan Stanley economist’s homeland. He makes a persuasive case that “most of America’s deep-seated economic problems…are of its own making.”
Roach, who is now teaching at Yale, is well aware that his model does not describe all the differences between the two countries. China is growing fast from wretched poverty while the United States still enjoys one of the highest standards of living in the world. The political and social positions are quite different. Meanwhile, China and America’s geopolitical concerns are more hostile than dependent.
The unhealthy mutual support system is found in consumption, production, trade and finance. American consumers depend too much on cheap Chinese imports. The U.S. financial system depends too much on the dollars that China collects from the excess of its exports over imports. On the other side, China depends on American consumers to buy its goods and help develop its industrial production.
The result, according to Roach, is two economies with compensating imbalances. The import-dependent United States does not save or invest enough while export-dependent China invests too much and does not consume enough. In Roach’s mind, the American imbalance is clear from the trade deficit and the low savings rate. He thinks the Chinese problem was expressed most clearly by Wen Jiabao in 2007, when the country’s then-premier described its economy as “unstable, unbalanced, uncoordinated and ultimately unsustainable.”
Roach wants China to switch to a consumption-led economy. He basically believes it will, because he greatly respects the intelligence and competence of the Chinese leaders. Indeed, in large part thanks to that leadership, both China’s “Four Uns” and its dependence on the United States have diminished in the seven years since Wen made his comment.
While China still runs a big trade surplus with America, the government has allowed the currency to rise enough that the overall surplus is too low to justify complaints about currency manipulation. Chinese consumption is still growing more slowly than the economy, but the government seems keen to cool down overinvestment in heavy industries. The country’s main risk now may well be excessive domestic debt. That sounds more like a copy of the American way than a mirror image.
These are minor caveats to what is generally a clear account of the basic pattern of Chinese-American economic relations. Readers unfamiliar with this history can learn a great deal from Roach’s narrative and analysis.
However, in many ways the most interesting part of the book is a barely disguised morality play. Roach sees Chinese leaders as clever, purposeful and far-thinking. He sees Americans as undisciplined and led by people who undervalue investment and economic planning.
The U.S. criticism is particularly strongly felt. For Roach, persistent fiscal and trade deficits seem to be evidence of something like a flawed national character. American politicians’ frequent carping about China’s progress and the American central bank’s desire to keep growth going at any long-term price are further signs that something has gone badly wrong in the spiritual home of free-market dynamism.
In his preface, Roach approvingly cites Paul Kennedy’s “Rise and Fall of Great Powers,” a 1987 book which predicted the end of the era of American glory and a long period of American decline. Kennedy was certainly early. Roach, who has spent several decades studying both the reigning great power and its most likely successor, seems to have concluded the prediction will be right in the end. His fervour is persuasive.