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PS Say More


Stephen S. Roach
Says More…

This week, Project Syndicate catches up with Stephen Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia.

Project Syndicate: Much has been written about how emerging economies can protect themselves from risks generated by the advanced economies, and how the world can protect itself from the risks of a Chinese growth slowdown or debt crisis. But the new coronavirus, COVID-19, represents yet another economic risk, owing to the disruption of global value chains. Does this affect your prediction that even a protracted US-China rupture would not split the global economy? Are there steps the rest of the world can take to minimize the economic risks arising from COVID-19?

Stephen Roach: Economists (including me) have an unfortunate knack for compartmentalizing. We treat non-economic developments like COVID-19 as so-called exogenous shocks, rather than build them into our forecasting models as endogenous features.

In my work on China, I have long stressed the deficiencies of its social safety net – not just pensions, but also health care – as a key reason why families save so much: they are motivated more by fear of an uncertain future than by purely economically-driven life-cycle considerations. While I have argued that Chinese households’ precautionary saving remains a key impediment to more robust consumption growth, I am guilty of not anticipating how an underfunded public-health system left China highly vulnerable to the outbreak of another devastating virus, only 17 years after it was hit by severe acute respiratory syndrome (SARS).

As I discuss in my latest PS commentary, because global supply chains are China-centric, draconian quarantines and travel restrictions intended to contain COVID-19 have produced a full-blown supply shock, at a time when the global economy is already vulnerable. And with China accounting for 37% of cumulative world GDP growth since 2008, and representing the largest external market for most Asian economies, the demand side implications of COVID-19 are also significant.

While traditional monetary- and fiscal-stimulus measures cannot mitigate the adverse economic effects of quarantines, travel restrictions, and other virus containment measures, they offer some comfort to battered financial markets looking for what one hopes is the inevitable post-virus rebound.

PS: More broadly, you’ve emphasized that the global economy’s long-standing trade “cushion” – that is, rapid trade growth – is significantly depleted. Restoring that cushion through, say, free-trade agreements might be ideal, but trade pacts typically take years to negotiate. Are there other, more immediately viable ways to insulate the global economy against shocks?

SR: There has been a big debate over the sources of the post-crisis slowdown in global trade. Some say that it is traceable to a pronounced shortfall in business capital spending, while others point to the recent surge of protectionism. Yet at the root of both explanations is increased policy uncertainty in an era of subpar growth in global demand. While multilateral trade liberalization would be certainly be a good thing, it would not offset the headwinds produced by increasingly nationalistic, inward-looking politics in many countries.

PS: “Even if a new [US] president were to remain tough on China,” you wrote last summer, “a coherent and well-articulated US strategy would be far more effective in framing the debate and offering hope for constructive resolution of grievances.” What are the most critical elements of such a strategy?

SR: Playing by the rules, rather than ruling by tweet, would be an important first step. Yes, the rules-based trading system, underpinned by the World Trade Organization, needs reform. But championing such reform is very different from enfeebling the WTO’s dispute settlement system, as the United States has done by blocking new appointments to the Appellate Body of judges that arbitrates disagreements.

An interconnected world needs a robust multilateral policy architecture. Given America’s chronic domestic saving shortfall – which is going from bad to worse, owing to ever-expanding federal budget deficits – and its trade deficits with 102 countries, the bilateral approach favored by President Donald Trump’s administration is a recipe for failure. Addressing our saving problem through more disciplined fiscal policy and endorsing WTO reform would be a far more effective strategy.

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Roach recommends

We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Roach's picks:

  • The Age of Surveillance Capitalism

    The Age of Surveillance Capitalism

    We tend to think of surveillance in terms of cameras, images, and facial recognition. Zuboff forces us to expand the concept to large-scale data capture by the likes of Google, Facebook, and Amazon. She compellingly describes how such data are bought and sold, and ultimately exploited for behavioral modification. (And this is to say nothing of the intense debate over privacy.) Surveillance comes in many different forms, and it behooves us to ponder the implications of how it is done in the US, as well as in other countries, such as China.
  • AI Superpowers: China, Silicon Valley, and the New World Order

    AI Superpowers: China, Silicon Valley, and the New World Order

    At a time when China is being vilified in the West for cutting corners on technology, Lee takes us under the hood of the new wave of Chinese innovation and competition. He paints a provocative picture of a concerted effort and breakthroughs in artificial intelligence that favor China, with its comparative advantage in big data and frontier applications, such as fintech, life sciences, and e-commerce. He also raises profound questions about what is likely to be a lasting US-China tech conflict.

  • Capitalism Alone: The Future of the System That Rules the World

    Capitalism Alone: The Future of the System That Rules the World

    We tend to think about inequality as a country-specific problem. But Milanovic looks at it as a global issue. Back in 2012, he presented his now-famous “elephant curve,” which captures the twin pressures that the new middle class of the developing world (specifically, China) and the elites of the developed world (specifically, America’s 1%) place on the rest. His latest effort forces us to look at capitalism through a very critical lens: Is it truly the best system to address such profound global inequalities?

From the PS Archive

From 2018
Roach spells out five lessons from a decade of quantitative easing by central banks. Read more.

From 2017
Roach explains why forecasters continue to predict the worst of China’s economy, only to be proven wrong time and again. Read more.

Around the web

In an interview on CNBC, Roach considers just how disruptive COVID-19 could be to China and the global economy. Watch the video.

In an earlier CNBC appearance, Roach casts doubt on the Trump administration’s allegations that Huawei poses a security threat. Watch the video.;
  1. op_twliu1_XinhuaXiao Yijiu via Getty Images_wuhancoronavirushospitaldoctor Xinhua/Xiao Yijiu via Getty Images
    Free to read

    Witnessing Wuhan

    Tracy Wen Liu

    While Chinese authorities have been projecting an image of national triumph over the COVID-19 outbreak there, the doctors and nurses on the front lines tell a different story. Having lived through hell, they see little to celebrate, much to mourn, and reason to remain fearful.


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