Once again, all eyes are on emerging markets. Long the darlings of the global growth sweepstakes, they are being battered in early 2014. Perceptions of resilience have given way to fears of vulnerability.
The US Federal Reserve’s tapering of its unprecedented liquidity injections has been an obvious and important trigger. Emerging economies that are overly dependent on global capital flows – particularly India, Indonesia, Brazil, South Africa, and Turkey – are finding it tougher to finance economic growth. But handwringing over China looms equally large. Long-standing concerns about the Chinese economy’s dreaded “hard landing” have intensified.
In the throes of crisis, generalization is the norm; in the end, however, it pays to differentiate. Unlike the deficit-prone emerging economies that are now in trouble – whose imbalances are strikingly reminiscent of those in the Asian economies that were hit by the late-1990’s financial crisis – China runs a current-account surplus. As a result, there is no risk of portfolio outflows resulting from the Fed’s tapering of its monthly asset purchases. And, of course, China’s outsize backstop of $3.8 trillion in foreign-exchange reserves provides ample insurance in the event of intensified financial contagion.
Yes, China’s economy is now slowing; but the significance of this is not well understood. The downturn has nothing to do with problems in other emerging economies; in fact, it is a welcome development…Yet a superficial fixation on China’s headline GDP growth persists, so that a 25% deceleration, to a 7-8% annual rate, is perceived as somehow heralding the end of the modern world’s greatest development story…
The economic analogue of codependency applies especially well to the US and China. China’s export-led growth miracle would not have started in the 1980’s without the American consumer. And China relied heavily on the US dollar to anchor its undervalued currency, allowing it to boost its export competitiveness.
The US, for its part, relied on cheap goods made in China to stretch hard-pressed consumers’ purchasing power. It also became dependent on China’s savings surplus to finance its own savings shortfall (the world’s largest), and took advantage of China’s voracious demand for US Treasury securities to help fund massive budget deficits and subsidize low domestic interest rates.
In the end, however, this codependency was a marriage of convenience, not of love. Frictions between the two partners have developed over a wide range of issues, including trade, the renminbi’s exchange rate, regional security, intellectual property, and cyber attacks, among others. And, just as a psychologist would predict, one of the partners, China, has decided to go its own way.
China’s rebalancing will enable it to absorb its surplus savings, which will be put to work building a social safety net and boosting Chinese households’ wherewithal. As a result, China will no longer be inclined to lend its capital to the US.
For a growth-starved US economy, the transformation of its codependent partner could well be a fork in the road. One path is quite risky: If America remains stuck in its under-saving ways but finds itself without Chinese goods and capital, it will suffer higher inflation, rising interest rates, and a weaker dollar. The other path holds great opportunity: America can adopt a new growth strategy – moving away from excess consumption toward a model based on saving and investing in people, infrastructure, and capacity. In doing so, the US could draw support from exports, especially to a rebalanced China – currently its third-largest and fastest-growing major export market.
One of the best of America’s sage economists, Stephen Roach draws on decades of global experience with special emphasis on Asia. I won’t attempt to rephrase analysis and conclusions that I thoroughly agree with.
I will express my cynicism. Roach the economist reaches conclusions shared by many progressives in American politics. What is the likelihood of his growth model being accepted by run-of-the-mill politicians on the liberal side of American electoral ethos? How likely is an ignorant and unsophisticated American electorate to vote into power a Congress and White House administration capable of instituting his suggested changes – when they are still easily led by the nose down the populist path.
Bigotry remains one of the most significant motivations in American politics and the election of creeps like Cruz and cretins like Bachmann proves it. Sexism, racism, homophobia, xenophobia and fear of things that go boomp in the night swing a lot of votes in a nation that has trouble achieving the average education level of a sixth-grader.