the perils of false prosperity_110418c[1]

8/4/2019 The Perils of False Prosperity_110418c[1]

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Te Perils o False Prosperity:

China, America, and a New Globalization

April 18, 2011

Stephen S. Roach

Morgan Stanley Asia

Let me start with a confession: China haschanged my life. And like it or not, it haschanged yours. My advice is to get over it

and accept it. But most of all, figure outwhat it means. Chinas role in the globaleconomy is key to the fate of many nations.At the same time, Chinese prosperity isequally dependent on the state of the world.It is critical that we deepen our analysis ofthis all-important feedback loop.

I would like to explore this phenomenon rom two angles

ocusing irst on how China responds to the lingeringragilities o a world still struggling with the atershocks o

the Great Crisis. I will then turn to the other side o the

coinhow the world copes with what I believe is likely to

be a stunning transormation o the Chinese economy.

I will attempt to weave both aspects o this tale around

the broad abric o the globalization debatein particular,

emphasizing how China and the rest o us it into an I-

enabled globalization, whose breadth and speed challenges

our antiquated insights into how the world works.

Why China?Few can dispute the act that China matters a lot. Its a taleo one superlative ater another. As now the second largest

economy in the world, China has taken o like a rocket

growing at close to 10% per annum over the past 30 years

and boosting per capita incomes by more than ten-old over

this period. China has also become the worlds largest buyer

o many key natural resourcesrom copper and lead to

oil and cementand is now the dominant market or most

export-led economies in East Asia, Australia, Brazil, and is

a major source o external demand or Canada, Germany,

and the United States. James Kynge had it dead right in hisaward-winning book, China Shakes the World.1 For those

you in the macro modeling business, i you ignore China,

you do so at great peril.

he China story is irst and oremost about change. In act,

80% o the letters in both wordsChina and change

are the same. here are three characteristics o Chinasdynamism that have a critical bearing on the rest o the

worldspeed, scale, and the mix o demand. All o them

separate China rom the pack.

In terms o speed, China runs on its own development

clock. Chinese time is three to our times aster than

normal development time. It has accomplished in three

decades what has taken most economies easily a century,

or more. As recently as the early 1990s, China and India

had virtually the same per capita incomes. oday, Chinas

is more than 3.5 times that o India. ime and again,

I have ound that modern China is much quicker to

hit its strategic goals than any other large economy in

development history.

The real story of China is not mindless

extrapolation of the aggregate gures on growth

and scale. Far more important are coming

shifts in the mix of the economy.

Scale has always been Chinas most visible characteristic.

With a population mass o 1.3 billion people, it accounts

or ully 20% o the worlds inhabitants. With scale comes

clout. As China has climbed the development curve, the

absolute size o its economy now stands over 19 times that

o 1979 (as calculated in constant prices). As a result, its

share o world GDP has risen dramaticallyrom 4.5% in

the early 1970s to around 13% at present (as measured on

a purchasing power parity basis). I China stays the course

and eventually punches at its population weight, it will only

be a matter o time beore it surpasses the United States as

the largest economy in the worldmagniying the already

daunting scale eects that are playing such a major role in

driving global activity.

Note: This paper was presented as a Jackson Institute Lecture at Yale University on April 14, 2011.

1. See James Kynge, China Shakes the World: The Rise of a Hungry Nation , Weidenfeld & Nicolson, London, 2006.


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he real story o China, however, is not in the aggregate

igures on growth and scale. Nor can it be uncovered by

mindless extrapolation. Far more important is the mix o

the economyand how that mix might change in the years

ahead. he development miracle o the past 30 years has

largely been a tale o the Chinese producerwith rapidly

rising output directed increasingly at sourcing oreign

demand. he supply side o the Chinese economynamely, ixed investment and the exports it provides to

the rest o the worldwent rom 35% o GDP in 1979

to nearly 80% in early 2007. Meanwhile, the demand side

especially the Chinese consumerhas remained on

the outside looking in, with internal private consumption

alling to a record low o 35% o Chinese GDP in 2008.

The Next China will see a producer economy

increasingly giving way to a consumer society.

hat was then. Now it is time to prepare or a major role

reversal. he producer economy will increasingly need to

give way to a consumer society. his could well be Chinas

most daunting transitionwith proound and lasting

impacts on the rest o Asia. his transition is equally

daunting or the rest o us. Just when the world is iguring

out how to cope with a strong China, it will now need to

come to grips with he Next China.

Post-Crisis Pitallshe story starts where the Great Crisis o 2008-09 let o.History tells us that post-crisis damage is lasting.2 In part,

thats because pre-crisis booms distort balance sheets and

inect the real side o debt- and asset-dependent economies.

When the boom goes bust, the excesses then get unwound.

And that takes time. Balance sheet repair becomes essential,

as does a reversal o excess spending in the real economy.

Crises, o course, also wreak havoc on banks and other

inancial intermediarieswith lingering impacts on the

lending capacity o post-crisis economies.

hats pretty much what has happened in Japan over thepast 20 years and what now appears to be unolding in the

United States and Europe. In Japan, zombie companies

were the epicenter o a protracted post-crisis shakeout.3

In the United States, there may well be a new generation

o zombie consumers. In this case, the zombies would

be those alicted by acute labor market distress, under-

water mortgages, excessive debt, and subpar saving yet

sustained by the requisite lie-support measures o extended

unemployment beneits that have now been augmented

by home oreclosure containment programs, other orms

o debt orgiveness, and extraordinary monetary and iscalaccommodation. Bruised and battered by crisis, recession,

and its atermath, Americas zombie consumers are

desperately clinging to the lieline o political support.

his is obviously a deeply troubling issue or the worlds

most powerul economy. Saety nets, o course, are critical

in anchoring the moral abric o any society. hats

especially the case in the United States, where memories

have been seared by the experience o 25% unemployment

in the depths o the Great Depression. But there is a ine

line between the saety set and a sense o entitlement. I an

ever-expanding saety net becomes a permanent eature o

the environment, it can have the unintended consequences

o impeding the creative destruction that is necessary

to purge a system o its excesses. hats what happened in

Japan as its corporate zombies prevented the painul but

necessary adjustments in its post-bubble economy. And

thats what could happen in the United States i Americas

zombie consumers play a comparable role in hobbling the

deleveraging and balance-sheet repair that is now so sorely

needed in a post-crisis US economy.

Even so, there is good reason to expect ongoing consolidation

rom the American consumer. Personal consumption still

stands at 70% o real GDP in the United Statesdown just

one percentage point rom its pre-crisis peak o 71% but

ully our percentage points above longer-term average o

66% that prevailed in the inal quarter o the 20th century.

Lacking in post-bubble support rom income and wealth

and still acing the imperatives o major balance-sheet repair,

there is a distinct likelihood o a mean reversion o the

consumption share back to 66%. I that turns out to be the

case, the American consumer has completed only about 20%o the coming retrenchment.

Aftershocks from the Great Crisis of 2008-09

are likely to be lastingimparting stiff

headwinds to external demand for export-led

economies like China.

While the stories are dierent elsewhere in the developed

world, the outcomes are comparablemajor headwinds toaggregate demand in both Europe and Japan. In Europe,

its mainly the combination o the restrictive implications o

iscal consolidation as an outgrowth o the sovereign debt

crisis together with the ongoing pressures on a weakened

bank-centric system o credit intermediation. In Japan,

its the risk o two lost decades turning into a thirdas

structural productivity impediments are exacerbated by the

demography o a now shrinking population and an ever-

mounting overhang o sovereign debt that now exceeds

200% o Japanese GDP. In all three economiesJapan,

the United States, and Europeseverely impaired inancialsystems have exacerbated their crises and extended the post-

crisis adjustments.

2. See Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly, Princeton University Press, 2009.

3. See Ricardo J. Caballero, Takeo Hoshi, and Anil K. Kashyap, Zombie Lending and Depressed Restructuring in Japan, NBER Working Paper 12129, April 2006.


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In short, Japans lost decades could well be the template

or what now awaits other major developed economies.

his is obviously a tough prognosis or an interconnected,

or globalized, world. Despite the hopes and dreams o

the decoupling in a so-called two-track world, post-crisis

sluggishness o end-market demand in major developed

economies puts enormous pressure on the external demand

underpinnings o export-led developing economies. hatsespecially the case or China and Asias other developing

economies, where the combined export share o GDP rose

rom 35% in the late 1990s to 45% in mid-2007. In todays

post-crisis climate, that leaves export-led Developing Asia

with two optionsan acceptance o slower growth or a

rebalancing toward internal demand. No economy in the

region will be able to duck these choices.

Just as Japans corporate zombies were the

epicenter of its lost decade of the 1990s,America has a new generation of zombie

consumers who could play a similar role in

restraining the US recovery in the years ahead.

China in ransitionChina is an important case in point. Its economic power

did not arise in a vacuum. Export-led prowess has put

China in a league o its own. But that means China can

hardly aord to ignore weak post-crisis growth in its major

external markets. And so it aces its own set o critical

choices at this very moment in time.

But irst, a brie digression. he essence o modern Chinas

economic strength comes rom its unwavering commitment

to growth. I remember all too well when I irst started

ixating on China. It was in the depths o the Asian inancial

crisis in the late 1990s. Back then there was a strong

consensus that China would be the next to all. I begged to

dier. Ater repeated trips to China in late 1997 and early

1998, it quickly became evident to me that Chinadeeply

scarred by an economy that was in shambles just 20 yearsearlier in the atermath o the Cultural Revolutionwould

stop at nothing to maintain social stability and keep the

growth miracle alive. Signiicantly, China had the credible

wherewithal to deliver on this commitmenta vast reservoir

o domestic saving and policies that supported state-owned

enterprise reorms, massive rural-urban migration, and

population control. And the rest is now history.

he irst phase o Chinas development strategy has been

deined by the classic export-led model o economic

development. here can be little dispute over its success.Real GDP growth averaged close to 10% per year over the

past three decades and per capita incomes have risen by ten-

old over this period. In 2010, China surpassed Germany

as the worlds largest exporter. he critical question that

China must now address is whether it can stay the course o

export-led growth in a post-crisis world.

The essence of modern Chinas economic

strength comes from its unwavering commitment

to growthtogether with the crediblewherewithal to deliver on that commitment.

his, in act, has been the subject o intense debate inside o

China or several years. Chinese Premier Wen Jiabao put it

best in the pre-crisis days o early 2007 when he irst spoke

o the Paradox o the Four Unsa Chinese economy

that appeared strong on the surace but beneath the surace

was increasingly, unstable, unbalanced, uncoordinated,

and ultimately unsustainable.4 he Premier packed a lot

into that diagnosis. He raised a broad range o concernsrom income disparities and ragmented governance to

excess energy consumption and environmental degradation.

But he repeatedly underscored his concerns over Chinas

unbalanced macro structure. Nor was this idle conjecture.

It was a act-based critiquetoo much supply, too little

demand; too export-led and too little support rom internal

private consumption.

Needless to say, in this post-crisis climate, the Premiers

concerns take on even greater meaning. he atershocks in

crisis-battered economies such as the United States, Europe,

and Japan point to a major shortall o external demand

growth or Chinese products. As a consequence, there is a

new urgency or China to rebalance its macro structure.

In a weak post-crisis external demand climate,

China needs to turn to the internal demand of

its 1.3 billion consumers.

Moreover, there is an even deeper analytical point that lies at

the heart o the Four Uns. he manuacturing-led dynamicthat has driven Chinas 30-year export- and investment-

led miracle is in danger o hitting the proverbial wall. he

main reason is the time-honored ormula or manuacturing

productivity enhancementcapital-labor substitution. hats

right, by substituting machines or workers the modern

Chinese economy has morphed into a recipe or labor-saving

growth. he numbers certainly bear that out: Since the year

2000, China has led Asia in terms o average annual GDP

growth (10%), but has been the laggard in the region in

terms o net employment growth (+0.5%).

For a nation with daunting labor-absorption imperatives,

labor-saving growth presents China with a major

conundrum. Since it generates too ew jobs per unit o GDP,

4. See Stephen S. Roach, The Next Asia, John Wiley and Sons, 2009.


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China needs more units o GDP to hit its employment and

social stability objectives. In a nutshell, thats why China

now requires such rapid output growth. Meanwhile, despite

all the talk about scientiic development, China is a very

ineicient user o energy and other natural resources. Given

the hyper-growth requirements o labor absorption, that

leads to an increasingly resource-intensive mode o economic

growth. And with coal accounting or ully 70% o Chinasenergy consumption, resource-intensive growth also spells

environmental degradation and pollution.

A shift to labor-intensive services is a key aspect

of the coming transitionenabling China to

target lower growth and temper its resource- and

pollution-intensive development pattern.

Services, in one sense, are the antidote to labor-savingmanuacturing-led growth. hey oer the alternative o

labor-intensive growthprecisely what todays unbalanced

and unsustainable Chinese economy needs. he newly

enacted 12th Five-Year Plan places a heavy emphasis

on services as a pivotal aspect o Chinas structural

transormation.5 hat has the potential to be a huge plus

or lagging labor incomes, which currently limit overall

personal income to a mere 42% o Chinese GDPliterally

hal the share o the US. Moreover, to the extent that the

China also provides greater support to the unding o

its social saety net, an increasingly larger portion o theresulting increase in labor incomes would then show up in

the orm o discretionary consumer spending rather than as

a continued surge o ear-driven precautionary saving.6

here is an important added bonus to an increasingly

services-led Chinese growth pattern. By raising the labor

content o a unit o incremental GDP, China would

eventually be able to target a lower growth ratepossibly

somewhere in the 6-7% range. he reason: In China,

growth in services generates about 35% more jobs per unit

o GDP than does an average unit o manuacturing and

construction GDP.7 Consequently, an increasingly services-

based growth model would make it possible or China to hit

its employment and social stability targets with considerably

less GDP growth. hat, in turn, would provide signiicant

relie or Chinas resource- and pollution-intensive growth

equationunderscoring yet another important windall

o macro rebalancing and a key means o resolving the

Paradox o the Four Uns.

History speaks to a major pitall on the road to economic

developmentthe dreaded middle-income trap. Research

suggests that rapidly growing emerging economies are oten

stymied when their per capita incomes hit the $17,000

thresholds (as measured in US dollars at constant 2005

international prices).8 China is probably only about three

or our years away rom reaching this key income level. I it

stays the course with its current growth model and ails to

address the imperatives o the Four Uns, a middle-income

trap could become a very real possibility. Conversely, iChina embraces the services-led pro-consumption strategy

o the 12th Five-Year Plan, such a trap can be avoided. Yes,

these are all daunting challenges. But as was the case in the

late 1990s, I remain impressed by Chinas deep and credible

commitment to growthand to the rebalancing that will

now be required to achieve that outcome.

he Mirrors o GlobalizationChinas transition is an important segue to the inal point

I want to touch onthe globalization debate. China is

undoubtedly the greatest beneiciary o the modern era oglobalization. Since its economic takeo in the early 1980s,

Chinas share o world trade has increased by eight-old.

According to IMF calculations, that is 50% aster than

the average gains o Asias newly industrialized economies

(Korea, aiwan, Hong Kong, and Singapore), about three

times the gains o the major ASEAN economies (Indonesia,

hailand, the Philippines, and Malaysia), and more than

ive times the gains o Japan during comparable phases o

their respective development trajectories.9

China has been the greatest beneciary of the

current wave of globalization. The risks of a

backlash against globalization are serious.

Globalization assures us that nothing happens in isolation.

It underscores the obvious but important point that Chinas

transition will have equally important implications or

the rest o the world. Unlike Japan, with a chronically low

import share o its GDP, China is an open economy. Its

import-to-GDP ratio has luctuated in the 25% to 30%

range since 2000. hat means as the worlds largest mass

o consumers starts to play a more active role in driving

economic growth, Chinas major trading partners have the

potential to reap enormous beneitsespecially its East

Asian suppliers such as Japan, Korea, and aiwan. Over the

past dozen years, China has replaced the United States or

Europe as the major export destination or each o these

export-led economies.

o be sure, the current mix o Chinese imports relects

a heavy concentration o oreign-made components and

5. See Premier Wen Jiabao, Report on the Work of the Government, Delivered at the Fourth Session of the Eleventh National Peoples Congress, March 5, 2011 and Stephen S. Roach,

Chinas 12th Five-Year Plan: Strategy vs. Tactics, delivered at the 12th annual China Development Forum, Beijing, March 21, 2011.

6. See Marcos Chamon, Kai Liu, and Eswar Prasad, Income Uncertainty and Household Savings in China, IMF Working Paper, November 2010.

7. See Qing Wang, Steven Zhang, and Ernest Ho, The China Files: Chinese Economy through 2020, Morgan Stanley Blue Paper, November 8, 2010.

8. See Barry Eichengreen, Donghyun Park, Kwanho Shin, When Fast Growing Economies Slow Down: International Evidence and Implications for China, NBER Working paper No.

16919, March 2011.

9. See International Monetary Fund, World Economic Outlook, Chapter 3, Asia Rising: Patterns of Economic Development and Growth, September 2006.


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supplies that are assembled and then re-exported. But

as Chinese aggregate demand shits away rom products

directed at external markets toward those aimed at its

internal markets, China could become a new and important

source o growth or consumer-product export businesses

around the world. his would also be true o the United

Stateswith China its third largest and most rapidly

growing export market. It could also be the case orGermanywhere China has just replaced the United States

as its largest non-European export destination.

Despite the opportunities o a pro-consumer transormation

o the Chinese economy, the rest o the world is not exactly

thrilled over this possibility. At work are ears on the dark

side o the globalization debateespecially, pressures

bearing down on hard-pressed workers in the developed

world. hese ears are understandable in one important

sense: In the developed world, workers are being squeezed

as never beoreeeling the unrelenting pressures o subpar

job growth, high unemployment, and relatively stagnant

real wages.

At work is a new strain of white-collar shock

stemming from an IT-enabled globalization that

puts unprecedented pressure on knowledge

workers in the developed world.

his is where economic theory breaks down, in my view.

he apologists o globalization circle their wagons around

David Ricardo, the theory o comparative advantage, and

trade liberalizationarguing that answer to the angst o

labor rests in policies and dispute mechanisms that insure a

level playing ield in the cross-border exchange o tradable

goods. his underscores one o the great shortcomings o

modern economics: What looks good in theory is oten

irrelevant in practice. he current globalization is ar

removed rom the classic two-country, two-good Ricardian

models. Nor does it bear much resemblance to the irst era

o globalization in the early 20th century.

At work today is a powerul and increasingly disruptive

I-enabled globalization. Not only does it entail the ever-

expanding exchange o tradable goods produced by blue-

collar workers but it now also involves a rapidly growing

cross-border exchange o knowledge-based activities

generated by white-collar workers. And in this latter case

there is ar more at work than just the oshoring o

low-value added unctions such as data processing and

call centers. In the Internet era, the mid- to upper-end o

the services-based value chain has quickly come into play.

hats right, with the click o a mouse, counties like theUnited States have ready access to the knowledge-based

output o sotware programmers, actuaries, consultants,

inancial analysts, medical technicians, and a broad array o

proessional service providers rom distant platorms in India,

China, Eastern and Central Europe, and Latin America.

In the past, our two-sector models told us to relaxrich

countries that lost manuacturing jobs to low wage

developing countries could shelter their hard-pressed

workers in sacrosanct non-tradable services. hat doesnt

work any more. In the new globalization, the lines o

distinction have become blurred between tradables and

what used to be known as non-tradables. Courtesy o the

explosion o the Internet, the cross-border connectivity

o globalization has spread with hyper-speed rom

manuacturing to servicesrom blue-collar actory

workers to white-collar knowledge workers. And barring a

Luddite backlash, this trend has only just begun to expose

high-wage knowledge workers in the developed world to the

increasingly intense pressures o I-enabled international

competition.10 As a result, white-collar shockand the

political backlash it evokeshas become a very real threat

in this new era o globalization.

Nor do our economic theories and models shed meaningul

insight on how the world copes with this new globalization.

In act, none other than Paul Samuelsonone o the high

priests o modern economicsconceded near the end o

his lie that under certain assumptions, Ricardian models

o comparative advantage could break down.11 Ironically,

those conditions hit the nail right on the headnamely,

a disruptive technology (the Internet) and a rapidly rising

low-wage, low-productivity pool o labor (China). WhenSamuelson olded them into his mathematical rendition

o David Ricardo, he ound that a rich developed country

could well ace a permanent loss in real per capita income

rom international trade. And just like that, the theory o

globalizationi there ever was onegot turned inside out.

Full CircleGlobalization is long on questions and short on answers.

While it speaks to the increasing cross-border linkages

between sovereign economies, globalization doesnt oer

much hope or the harmonization o political valuepropositions. hats especially the case in the zero-sum

paradigm o global competition, where battles or market

share oten loom decisive in the political economy o

growth. he globalization debate ultimately boils down to

the key question as to whether there is an inherent conlict

between national and global aspirations or prosperity.

A vulnerable post-crisis world cant aord wrong answers.

At risk is nothing short o a destabilizing political

backlash against globalization that could an the lames

o protectionism. hats especially the case in the UnitedStates. With the post-crisis labor market remaining in acute

distress, Washington is reluctant to look in the mirror

10. See Alan S. Blinder and Alan B. Krueger, Alternative Measures of Offshorability: A Survey Approach, Princeton University CEPS Working Paper No. 190, August 2009.

11. See Paul A. Samuelson, Where Ricardo and Mill Rebut and Conrm Arguments of Mainstream Economists Supporting Globalization,Journal of Economic Perspectives, Summer 2004.


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and accept any responsibility or this wrenching problem.

Instead, it is all too quick to blame others or ailures made

at homeespecially China with its large trade imbalance

and so-called manipulated currency.

Beore you accuse me o ear mongering, keep in mind that

the US House o Representatives actually passed an anti-

China currency bill by a lopsided 4 to 1 bipartisan margin

in September 2010. I ever enactedand hopeully that

will never be the casesuch legislation would impose sti

sanctions on all Chinese products sold in the United States.

And China would most assuredly retaliate either with

reciprocal taris on US exports to Chinaagain, our third

largest and most rapidly growing export marketor with

reduced purchases o US reasuries, or both. Suddenly, the

two largest economies in the world would ind themselves

on a very slippery slope, painully reminiscent o a path

traveled during the 1930s.

American workers and Washington politicians

increasingly blame China for the distress

bearing down on labor.

I am not saying that the US-China trade relationship shouldnt

be an active point o ocus and negotiation on the political

agendas o both nations. What I am sayingor at least about

to sayis that the United States needs to do a much better

job in getting its act together on its own domestic economy.

hat should be a major challenge to the current generation oAmericas economists, politicians, and policymakers.

At the core o this challenge is the need or a deep dive

into the very concept o national prosperity. Americas core

value proposition is wrapped around the aspirations o a

consumer society. However, when labor income generation

comes under pressure, as it has in recent decades, we dont

ask why. Instead, we blame others or our problems. But

then we do something equally reckless: We deploy new-

angled tools o inancial engineering to uncover alternative

sources o consumer purchasing powernamely, thosethat arise rom the interplay between open-ended asset

appreciation and credit bubbles. And we are delighted to

use these tools as a means to und current consumption.

O course, our trading partners like China are equally

delighted to sell into our bubble-supported markets. In a

globalized world, we all share our collective madness.

Yet it doesnt stop there. As we in America become convinced

that this is the new way the world works, our mindset shits.

he income-based economy that was long conditioned to live

within its means morphs into an asset-based economy that

has discovered the Holy Grail o a new source o prosperity.

Saving the old-ashioned way out o income becomes pass

in an era o asset-and credit ueled saving. However, there is

an important twist or any saving-short economy. o keep

economic growth unded on a cash low basis, it must borrow

surplus saving rom abroadand run massive current-account

and trade deicits in order to attract the oreign capital.

However, Americas unprecedented saving

shortfall has led to a multi-lateral tradeimbalance that cannot be resolved through

bilateral actions against any one trading partner.

hat is one o the more divisive points where China enters

the US growth debate. Yes, America runs its largest trade

imbalance with China. ruth be known, however, it is only

one o 90 bilateral trade deicits that the United States

runs with the rest o the world. With apologies to Al Gore,

the inconvenient truth is that saving-short America has

a multi-lateral trade imbalance that cannot be solved bybilateral actions such as those contemplated by the US

House o Representatives last September.

Consider the ollowing scenario: Lets say that Washington

closes down trade with China and yet ails to address

the national saving problemunortunately, a very real

possibility or a dysunctional political system that appears

utterly incapable o dealing with open-ended ederal budget

deicits. Consistent with that scenario, the Chinese piece

o the multilateral trade deicit would just go somewhere

else. hat somewhere most likely would be a higher-cost

producerin eect, putting a tax on hard-pressed middle

class US workers. What happens then? Do we pick o

Americas other trading partners one by one?

At the heart o this dilemma is the dichotomy between

a true and a alse prosperity. In a true prosperity, an

economy lives within its meansas those means are largely

delineated by current production and by the labor income

associated with that production. Conversely, in a alse

prosperity, an economy lives beyond its meansand relies

on the surplus saving and suppressed consumption o others

to und its newound windalls. Unortunately, we in theUnited States have lost sight o true prosperity and have

become hooked on the temptations o a alse prosperity.

At the heart of this dilemma is the dichotomy

between a true and a false prosperityand the

global imbalances it has spawned.

hat takes me ull circle back to globalizationand to

the global imbalances it has spawned. rust methey arenot sustainable. Chinas pro-consumption 12th Five-Year

Plan speaks to one surplus saver who has igured this out.


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he budget iasco in Washington suggests that the worlds

biggest deicit saver has not igured this out. Denial is no

longer an option. he Great Crisis o 2008-09 was but a

warning shot o what lies ahead i we dont ace up to the

challenges and the pitalls o the quest or prosperity in a

new globalization.

Stephen S. Roach, a member of the faculty of Yale

University, is Non-Executive Chairman of Morgan Stanley

Asia and author ofThe Next Asia.


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Tis report does not provide individually tailored investment advice. It has been

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Te appropriateness o an investment or strategy will depend on an investors

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perormance. Estimates o uture perormance are based on assumptions that may

not be realized.

Permission rom Morgan Stanley is required beore republication o this essay.

Contact: Noel Cheung at Morgan Stanley Corporate Communications at

(852) 2848-6788 or [email protected]

2011 Morgan Stanley. All rights reserved.

www.morganstanley.com

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