Stephen Roach, Chairman, Morgan Stanley Asia, is widely recognised as one of the most seasoned economists in the world. Known for his bearish forecasts, Roach’s research covers a broad range of topics, with particular emphasis on globalisation and the emergence of China. Roach, who has been with Morgan Stanley since 1982, was the financial services giant’s Chief Economist for 16 years. He has criticised the US Federal Reserve policies in the past, which, he feels, created the asset price bubbles responsible for the global economic meltdown. On his recent visit to India, BT’s Rishi Joshi caught up with Roach for a freewheeling discussion. Excerpts:When do you expect the global economy to start turning around?I don’t think the global economy will regain its prerecession peak until some point in 2011. So, the recovery will be sluggish, unemployment will continue to rise till the end of this year and, quite conceivably, during most of 2010. The main headwind will be on the demand side, which has been hit by a protracted slowing of US consumer demand.
When do you see consumer demand in the US picking up?Three-to-five years. We have had the biggest spending damage in history. It was not supported by income, (but) it was supported by two bubbles—property and credit, both of which have now burst. The consumer has been further hit by a massive shock in equity portfolios, sharply rising unemployment and weakness on the income side. So, the consumer is in probably the toughest place he or she has ever been in modern history.
We have seen the governments of most major economies stepping in with bailout packages. In the US alone, the Obama administration has unveiled a trillion-dollar package to jump-start the economy. Do you think these measures will have the intended outcomes?There is no quick fix; there is absolutely no quick fix. It doesn’t mean you cannot do anything. I give the Obama administration a huge amount of credit for trying. They have got the three legs to the stool—fiscal stimulus, fixing housing problems and dealing with the banks. They have got programmes for each of these areas, which may not be enough. I am reasonably confident, at least on the fiscal stimulus side, that this programme, though ambitious on paper, is not enough. It could have easily been 50 per cent larger.
Many are now questioning the future of market-based capitalism. Do you think there is some basis for these apprehensions?No, capitalism is fine. It’s always been subjected to periods of stresses and strains. The problem is in governance of capitalism and not in the market-based system of the invisible hand allocating goods and services to the most efficient users. We made very serious mistakes in the way we regulated and set policies in the context of a very complex system of across border, across market relationships that have developed under globalisation. You have in the past also challenged the conventional wisdom that the 21st century would be the Asian century.
Why are you a sceptic when two of the fastest-growing economies, India and China, are in the region?Let’s just stop for a second and think about what it’s going to take for this century to become the Asian century. I think it’s important for Asia to stand on its own and transform its growth model from one being driven by external demand to one being driven increasingly by internal demand. I am hopeful that Asia will get there, but I have yet to see convincing signs that trend is now underway. Today, along with the biggest economy in the world, the US, Asia is in trouble, too, because Asia is export-led, externally dependent. Every economy in Asia, every single one, is either in a recession or in the midst of a sharp slowdown. Is this the Asian century!
India, of course, is not an export-driven economy...India is not export-led, but it is still dependent on external funding. India has big budget deficits, big current account deficits. India needs external capital.
So, do you think that is the biggest challenge before the Indian government today—reining in the burgeoning deficits and reducing dependence on foreign capital flows to sustain our growth?Yes. India needs to save more. India has boosted its savings, but in light of the budget deficit, it’s not high enough to avoid the need to draw capital from abroad.
