Published on YaleGlobal Online Magazine (
Home > Global Rebalancing: Now or Never

Global Rebalancing: Now or Never

Recent history – the Latin America debt crisis, the US subprime mortgage crisis and now the European debt crisis – offers a lesson that global imbalances are unsustainable. Lured by false promises of future growth, countries borrow big, risking prosperity and stability. Global growth is in question: Wary of debt, US consumers have tightened spending; India and China, as emerging economies, cannot make up that spending in the global markets. Countries, particularly the world’s leading economic partnership, US and China, must confront the reality on debt and ease their imbalances, urges Yale professor and financial industry veteran Stephen Roach. He lays out a rebalancing plan that includes China building the services side of its economy. US political leaders must stop scapegoating the renminbi, which has been steadily rising in value since 2005, and instead examine their own track record – multilateral trade imbalances with dozens of countries. Roach warns, “There are no shortcuts to sustainable prosperity.” Americans must consume less, the Chinese should consume more, and all should consume sensibly. – YaleGlobal

Global Rebalancing: Now or Never

For sustainability’s sake, the US must save more, China must spend more
Stephen S. Roach
YaleGlobal, 19 July 2012
Balancing the shopping cart: American consumers run up debt in shopping malls (top); malls empty as the Chinese hang on to their purse (below)

NEW HAVEN: Time and again, the lessons of a troubled world economy are the same: An unbalanced world is an unsustainable world.

A decade ago, the world had just come through three difficult events in the span of three years – the Asian financial crisis, the Y2K scare, the bursting of the US equity bubble. The unbalanced world was ill equipped to deal with the asymmetrical shocks bound to follow. Steeped in denial, an unstable global economy continued its race to the edge.

The price for denial was steep. The world peered into the abyss in late 2008, experiencing the greatest financial disaster since the Great Depression of the 1930s. Sadly, this was just the latest in a steady string of crises over the past 30 years, including the 1980s Latin American debt crisis, the subprime crisis and the European sovereign debt crisis raging today. Behind most of these crises is a major macro imbalance, which could have been avoided with pro-active, disciplined and responsible policies. But the temptations of false prosperity proved far too alluring.

It’s essential to understand the forces at work on both sides of the unbalanced global macro equation. The demand side is dominated by the American consumer. With about 4 percent of the world’s population, US consumers spend about $10.7 trillion annually.  By contrast, China and India, collectively comprising nearly 40 percent of the world’s population, have combined consumption of about $2.5 trillion.

The outlook for global consumption is likely to be weak. The US consumer has pulled back as never before.

Based on this unbalanced mix of global demand, the outlook for global consumption is likely to be weak. The main source of this weakness can be traced to the United States. Reflecting bursting of US property and credit bubbles, the American consumer has pulled back as never before. Anemic consumption growth is also likely to persist in crisis-torn Europe and in Japan. China and India, with solid prospects for consumer demand, lack the scale to offset the US-led shortfall of consumer demand in the developed world. 

The supply side is dominated by the Asian producer. But the fastest growing economic region in the world has severe imbalances of its own. Specifically, the private consumption share of developing Asia’s pan-regional GDP has never been lower, its export share never higher, after recovering from the crisis-induced plunge of 2008-09. With anemic consumption growth likely to persist in the advanced economies, persistent imbalances on the Asian-led supply side of the global growth equation remain a worrisome feature of the post-crisis climate.

Nowhere is that more evident than in China. In 2007, Premier Wen Jiabao spoke of the great paradox of the Chinese economy: The economy looked strong on the surface, but was characterized by a model that he depicted as increasingly “unstable, unbalanced, uncoordinated, and ultimately unsustainable.” The 2008-09 crisis and collapse in world trade hit China’s most dynamic source of economic growth – exports – with an unprecedented shock. Lacking support from external demand and the backstop of internal private consumption, China relied on an aggressive stimulus of fixed investment.

China did what it needed to do to sustain economic growth and maintain social stability in the midst of wrenching crisis. Still, renewed weakness on the demand side of the global equation has pushed its GDP growth back down to 7.6 percent in mid-2012 – holding to a soft-landing trajectory, but yet another important reminder that China must change its growth model to derive greater support from internal demand, especially private consumption.

China’s in good shape, with plenty of ammunition to avoid a dreaded hard landing and get on with rebalancing.

China has made the transition to a pro-consumption growth strategy the centerpiece of its newly enacted five-year plan. It features three building blocks:

  • China has the smallest services sector of any major economy in the world, yet services in China generate about 35 percent more jobs per unit of GDP than do manufacturing and construction. By shifting from capital-intensive manufacturing to labor-intensive services, China could grow more slowly and still hit labor absorption targets.

  • Per capita income of urban workers in China now runs about three times that of their counterparts in the countryside. With China’s urban population exceeding its rural population for the first time in history, ongoing rapid urbanization, coupled with services-led employment opportunities, is a plus for boosting aggregate wage incomes.

  • China must build a social safety net. Lacking financial security, workers will continue fear-driven precautionary saving, an impediment to a flourishing Chinese consumer culture.

Fortunately, China is in good shape, with plenty of ammunition to deploy countercyclical stimulus in order to avoid the dreaded hard landing and get on with structural rebalancing.  Short-term policy benchmark lending rates of 6.0 percent are well above CPI inflation of 2.2 percent and a fiscal deficit of less than 2 percent of GDP is one of the lowest in the world. 

Predicting sources and timing of the proverbial next crisis are near impossible, but there are two destabilizing scenarios to ponder: 

First, the full risks of a sovereign debt overhang haven’t played out yet. With long–term government interest rates remaining low, there’s a false sense of complacency. In 2011, debt exceeded 100 percent of GDP for the broad collection of so-called advanced economies for the first time since the end of World War II. The overly-indebted can finesse this problem for the time being, but probably not much longer.

The global rebalancing agenda would be better served if the US-China trade relationship were recast as opportunity.

Second, the world’s most important economic relationship between the United States and China could fall victim to its own set of imbalances. Particularly troublesome is Washington’s bipartisan penchant for China bashing, with demands that China be forced to raise the value of the renminbi or face trade sanctions. 

This is the wrong response. The US suffers from a multilateral trade deficit – characterized by imbalances with 88 countries in 2010. It’s impossible to fix a multilateral imbalance by putting pressure on a bilateral currency. Instead, Washington must come to grips with its own unprecedented shortfall in national saving. Lacking saving and still wanting to grow, the US must import surplus saving from abroad – running massive current account and multilateral trade deficits to attract the foreign capital.

Unfortunately, the currency issue and the false hopes it spawns in resolving tough problems bearing down on US workers have hijacked the US-China trade agenda. The renminbi has risen 31.4 percent against the dollar since mid-2005 – well in excess of the 27.5 percent increase long demanded by Washington politicians. Of the two current account imbalances, the US deficit remains a far more destabilizing force. According to dollar-based International Monetary Fund estimates, the US deficit is likely to be 2.8 times the magnitude of the Chinese surplus in 2012.

The global rebalancing agenda would be better served if the US-China trade relationship were recast as an opportunity. For a growth-starved US economy hobbled by sluggish consumer demand, exports could become an important source of growth. China is America’s third largest and most rapidly growing export market. The US focus needs to shift toward market access – ensuring that its companies have a fair shot at Chinese markets as that nation ushers in what could be the greatest consumption story of the modern era.

In short, the outlook for sustainable world growth depends critically on how the United States and China address rebalancing imperatives. Advanced economies, especially the United States, must consume less and save more. The developing world, especially China, has no choice other than to draw down its excess saving and consume more. The sooner the world faces up to these urgent rebalancing imperatives, the better.



Stephen S. Roach, a member of the faculty at Yale University, was formerly chairman of Morgan Stanley Asia, and is the author of “The Next Asia.”

Rights:Copyright © 2012 Yale Center for the Study of Globalization

Comments on this Article

31 July 2012
On November 11, 2010, economist Dong Tao of Credit Suisse commenting on the G20 meeting said this:
"The days for the U.S. to get the jobs of making shoes and socks back is long over. The U.S. salary needs to decrease by at least 80 percent before they become competitive. China should give its workers more salary increase, and that’s going to create domestic demand in China, and that’s where the global rebalancing should be coming."
I find it curious that CNN had the part about Americans trying to get by on 80 percent less earnings stripped from their transcript (student news version) and the Lexus-Nexus system has removed it, too.
A recent article in the Mail Online, a UK newspaper, has this headline: "Households worse off now than they have been for nearly a decade".
Much the same article appeared in US newspapers not long ago indicating that Americans have lost a decade's worth of wealth.
How many people understand that this is not about Greece, the subprime meltdown or even Wall Street fraud as much as it is the realignment and rebalancing of the global economy as a result of years of unsustainable trade deficits?
Even in doing a web search most references I left to Tao's statement (at the time) have been stripped from blogs, where comments are not only "closed" but zeroed out entirely (TIME, among others).
I don't see the financial press talking about a rebalancing except in the sense that the Chinese need to spend more.
A July 22 headline from the Los Angeles Times sums it up: "The China Effect: China's population and economy are a double whammy for the world". In the article it is said that the equivalent of the entire US population in China has become middle class, all relatively recently. China is losing the Western consumer "conveyor belt" as consumers continue to "remain cautious" according to other headlines. Cautious? Many Americans don't remain cautious for reasons of national economic uncertainty but personal economic uncertainty, and the loss of some 40 percent of one's (middle class) income in recent years probably has more to do with it than any political or social worry generated by economic headlines. China's growth in consumption hardly had a chance to take hold before the Western consumer became overly-indebted, including the US Government, after years of downplaying $800 billion annual trade deficits. In plain English that's lost jobs. How long was the party going to last?
The Chinese may very well increase their consumption habits but it will be more than ironic if they do so working for and selling to their own immense populations as the traditional First World countries grapple with financial crisis and remain sluggish beneath the weight of their own deficits. This is not how globalism was envisioned; we were supposed to raise all boats! Funny how it didn't work out that way. Tragic, really. But not entirely unforeseen.
In other news of the day we have Angela Merkel "profoundly disturbed" that Germans are losing faith in the Euro (Mail Online).
I think this experiment at hitching international economies in a three-legged global sack race has run its course. The only rebalancing that's coming our way is a loss of the middle class, of the American Dream itself. In this overly codependent world we’ve created, the Chinese may not benefit from our decline, in the end, either. They’re buying our T-bills despite diminishing returns. How long will that keep up?
I urge those who read this comment to locate a copy of "The Trap" by the late Sir James Goldsmith. It is prescient in that, in 1993 when it was written, it predicts the future (current) problems of Greece and Italy, specifically (for reference, Goldsmith testified before Congress right before the US signed on to GATT --- he indicated that it would be disastrous in the long run). Goldsmith points out that a single currency is not flexible enough to respond to uniquely individual economies. A single currency is flawed insomuch as it is a one-size-fits-all solution. Moreover, much of what has transpired since GATT has facilitated outsourcing, Federal tax revenue loss and structural unemployment. It’s more than ironic that this Great Recession nonetheless failed to bring the global trade "tipping point" into sharp, public and political focus. These are, after all, the ills Ross Perot, in the US, and Goldsmith, of France, worked so hard to call attention to in the early 1990s. We now have the benefit of hindsight to appreciate how right they were. Alas, our economic experts and policymakers knew best. They are equally hard-pressed to admit a fault in their economic policy logic. And so we shall all pay the price not for the Great Recession but the Great Realignment. High unemployment and economic hardship is not going away. It’s here to stay!
It's a shame we, as Americans, still have such low tolerance for pinning the economic tail on the right elephant in the global living room (because unfair “free trade” is no longer a donkey but a hulking elephant in our midst that we refuse to talk about). American media and academia ought to dispense with the side-stepping euphemisms about the Chinese consuming more --- it all sounds so innocuous --- and tell the American reader what should have already become obvious by now but apparently isn’t: There are not enough natural resources to sustain endless growth, foremost, and even if there were or are we can't abide by the vast pollution of the planet --- in particular climate change --- by which to allow everyone to lead an American-style, First World lifestyle.
By opening the free-trade floodgates to China in the absence of equitable agreements we essentially invited more people to the party than can safely and reasonably squeeze into the house. By putting so little thought into the corporate tax havens, the offshore banking, the inequitable exchange of jobs for inexpensive Third World goods on which consumers became both dependent and indebted, we shot "free trade" in the foot before it gained the momentum to produce the free-market Utopia policymakers promised. Paying the global piper has taken all these years to catch up with us, but thanks to the enabling force of technology we've achieved efficiency levels that are themselves economically unsustainable in that they deprive too many people of gainful work (growth in the service economy matters little if wages are inadequate to promote the 70 percent of GDP consumer spending is expected to deliver). The breakdown of the global economy is going to continue not until we reach First World parity but something hardly satisfactory in-between: a Second World global economic melting pot. The bitter, the nostalgic, the indifferent, the greedy --- and chief among those will be the many, many impoverished American and European citizen despite the skills they possess and the education they've sought by which to “compete”.
-NewsView , USA
22 July 2012
I find the long comment by Joergen Moeller more promising than the original article.
The original article still tries to solve the present global problem from within the same "box", mindset from which the whole problem was created. Even Einsten supposedly told that we cannot solve problems at the same level, from the same mindset the problems were created from.
I especially like this part of the long comment of Mr. Moeller:
"...Until recently economic theory dictated that material consumption fulfilled that bill, but now we know better thanks to the work of brain researchers, psychologists, and anthropologists. They conclude that less materialistic consumption gives a better and longer lasting feeling of ‘happiness’ than material consumption. They also tell us that basically human beings are inclined to work together, help each other, and do something for others and with others. Some studies go so far as saying that generosity is built into our genes.
The door is open to switch consumption away from materialistic consumption to less materialistic or indeed non-materialistic consumption..."
With each day or the worsening global crisis (more precisely system failure) we learn that the present constant quantitative growth consumerism model is not only unsustainable, but self destructive, potentially leading us into unprecedented supply shortages, riots or even wars.
I fully agree with Mr. Moeller that any solution could only come from a complete change of mindset, attitude, humans have to adjust their inherently subjective, self centered and greedy nature and adapt to the conditions and necessities of the global, integral, interdependent human network we evolved into.
The future society needs to be based on a global, supra-national, mutually responsible and considerate human system living on a necessity and resource based consumption model.
We have a vast amount of respectable, transparent and scientific material pointing that way, and we also see it very clearly through the desperate helplessness of the present leaders and methods that we have run out of half measures.
-Zsolt , New Zealand
20 July 2012
With reference to Roach’s interesting essay I would like to submit a sketch for a new economic model.
By: Joergen Oerstroem Moeller
Despite all efforts the economy, in particular among industrialized countries, are caught in the doldrums. Low growth if growth at all, unemployment, rising debt levels, and persistent deficits on public finances. At the same time we see a lavish use of resources, no real progress to combat climate change, and good corporate governance especially in the financial sector confined to history books.
Politicians and mainstream economists all advocate a return to ‘normal’, which is doomed. The task ahead is to do the opposite of what we used to do: save resources, improve the environment, create jobs, shift to another model for consumption, and restore confidence in the economic system – all at the same time. Here is how it can be done:
First change the production process getting more output out of one unit of input of resources. Inspiration could come from Japanese industry that several decades ago went from quality testing after production to testing at every level of production – here and now.
Both the product itself and its components must be chosen on durability and embedded with applications to technological updates/upgrades – precisely as the military use platforms such as ships over half a century, but updates the weapon system they carry.
It is frequently costlier to replace than repair. Many consumer goods have inbuilt so-called terminator devices forcing a breakdown in a couple of years. These policies should be condemned and incentives introduced to repair instead of replace inter alia making it easy to get at components and price components to stimulate repair. It is grotesque that one of the fastest dying industries in the U.S. is appliance repair industry with thousands of jobs gone. Regenerating and recycling can do marvels. McKinsey has calculated that in the E.U. savings of $US 380 billion are at hand (two per cent of Gross Domestic Product, GDP).
The innovation process has for decades focused on labour saving equipment. Business schools teach cost saving mainly through retrenchment of workers. Unemployment testifies to the success (unexpected or unwanted) of these policies. Now the time has come for resource savings innovation and courses geared to do that.
These steps require a rebalancing of relative factor prices making resources relatively more expensive compared to cost of labour. Current price structure is defined by market economy pricing favouring individuals/corporations instead of society and reflecting short term extracting costs regardless of long term availability of resources. No wonder that cutting the labour force is synonymous with cutting costs. Rising commodity prices are helping to get the rebalancing under way, but it is not enough.
Adam Smith’s dictum that a society’s wealth is the accumulation of individual wealth does not work anymore. The market runs counter to the interest of society and jeopardizes the future. Taxes, levies, subsidies and other economic incentives supplemented by outright regulation should be introduced instead of allowing the market to set prices according to short term profit.
Second, change the perception of consumption. It seems obvious that the Western mass consumption model cannot be transferred to the emerging economies. Use of resources would go through the roof. So would prices. Social consequences inter alia food shortage would be terrifying.
Therefore we must seek refuge in a large number of analyses and studies disclosing what make people ‘happy’ as this naturally is the ultimate goal of economic activity. Until recently economic theory dictated that material consumption fulfilled that bill, but now we know better thanks to the work of brain researchers, psychologists, and anthropologists. They conclude that less materialistic consumption gives a better and longer lasting feeling of ‘happiness’ than material consumption. They also tell us that basically human beings are inclined to work together, help each other, and do something for others and with others. Some studies go so far as saying that generosity is built into our genes.
The door is open to switch consumption away from materialistic consumption to lees materialistic or indeed non-materialistic consumption. This is underpinned by a new phenomenon making the established consumption function obsolete. Economists say that if consumption is deferred, the consumer is rewarded by interest at least keeping purchasing power unchanged to consume later. Now, however, scarcity of resources is starting to enforce restrictions for consumption making it less certain that deferred consumption can take place at all. Many cities introduce restrictions on the number of cars sold and/or how a car can be used.
The high and persistent savings rate among Chinese consumers has puzzled economists who often air their frustration that the Chinese do not behave as theory prescribes. Perhaps the explanation is that the Asian consumers of the future do not see things in the traditional way. Maybe they prefer to use money for assets such as property or gold. Maybe they find more ‘happiness’ – satisfaction- this way than we are used to in the West. And even more interesting, just maybe they find it more attractive to communicate with each other than buying physical goods – materialistic consumption. There are 388 million mobile internet users in China. Economic statistics from China supports the thesis that materialistic consumption is not gaining ground. The standard reaction that theory is fine, but consumer behaviour wrong does not hold much water.
Third, corporate governance defined by the large American corporations and focusing on high and rising profits despite much lip service to corporate social responsibility must be redefined. The effect on society of business activities is far down on the list of priorities. Corporations have forgotten that ultimately they are there to produce goods and services to make society function. They can earn a profit doing so, but profit is not the end goal.
After a long list of dismal failures in the financial sector and pharmaceuticals people have lost confidence in the corporate world’s understanding of what society expects from ‘business’. Decades yes two centuries of common interests shared by society, workers, and the entrepreneurial class has been broken. The glue was mutually acceptable distribution of the fruits of economic activities to ensure a well-functioning society.
Until a few decades ago people got rich by building corporations delivering goods and services to society. The entrepreneur created jobs. The amount of goods and services went up. There were to distribute. Now most rich people are found inside the financial sector whose share of GDP in the U.S. and Britain has gone up from 2-4 per cent to almost ten per cent. As production has not grown very much, the financial sector encroaches on the stream of goods and services flowing out of the ‘productive’ part of the economy making it richer and the other economic sectors poorer. One of the implications is higher inequality further eroding the waning feeling of social coherence - togetherness. Main Street wants’ business’ to understand why they are there and behave accordingly.
The time has come to restructure and rebalance production, consumption, and corporate governance and how they work together, in short: invent a new economic model.
Joergen Oerstroem Moeller
Visiting Senior Research Fellow, Institute of Southeast Asian Studies, Singapore.
Adjunct Professor Singapore Management University & Copenhagen Business School.
-moeller joergen oerstroem , singapore
19 July 2012
U.S spending is based on a great Ponzi Scheme starting with Bretton Woods In 1973 where the gold standard was abolished.
A fake GDP economy was established by U.S. based on U.S. dollars ending up in another finale Ponzi by the banks and subsequently Quantitative Easing in 2009.
The world worked whilst the U.S. was enjoying the fruits of the world labour based on the rationale of its superior technology at that time and that it therefore sustained the world economy and gave it the basis to be master all over the world with its attendant carriers all over the world.
The ponzi scheme of Manifest Destiny and Exceptionalism is over
As ye sow so ye shall reap.
China must never follow the same path
-Victor , Singapore