Steven Roach is chief economist and managing director of Morgan Stanley worldwide. He has more than three decades of experience in economic forecasting, economic policy and the global financial markets. His responsibilities include overseeing the entities gamut of financial and economic research by Morgan Stanley, including country indexes and other financial forecasting products. He spoke to Ninad D Sheth on the global economy, its growth and weak spots:
The global economy is on a roll. There is growth everywhere.
Yes. The US, the primary engine of the world economy, had a very robust year, China grew officially at 9 per cent but in my view it was more like a whopping 12 per cent, India notched double digit and even Japan of all places had 4 per cent. Only Europe seems to have forgotten how to grow but still managed 1.4 per cent. There is an upswing. The issue is whether this is sustainable. There are too many fundamental gaps leading me to question the ability for the world’s leading economies to sustain growth.
How serious is the US deficit as a source of global financial instability on a 1 to 10 scale?
The US deficit is a serious, but secondary, issue. I would rate it 6 on 10, however, the dismal US savings rate is the largest single cause of worry for the global economy. This is 9 on the 10-point scale. The shopping addiction of the US household, which fuels a large part of global growth, is unsustainable and needs to be urgently tackled. US savings rate is at a historic low.
Is the Bush administration concerned?
Unfortunately, the administration is moving in the opposite direction. The tax cuts and the fact that there has been no movement on the interest rates combine to make a dangerous blend. Indeed, there is no appetite currently in Washington for a correction. The overriding theme seems to be to continue with the tax cuts and not allow for a rise in the interest rates. The only way the US can grow is to get capital from abroad. Thus, with so much money coming from foreign lands, there comes a point when this financing becomes unsustainable.
BPO has emerged as a major US issue. What is the worst case scenario likely to be?
I sincerely think the worse is behind us in the BPO backlash. The jobless recovery happening in the US is the real cause of this backlash fanned by populism in an election year. I do not think we can blame the layoffs to outsourcing. However, there is no doubt that outsourcing will hurt net new job creation. To stem the flow of outsourcing through government-sponsored incentives would be a very expensive choice.
So is the Bush administration committed to free trade on this issue?
George Bush is committed only to one thing, re-election. If he sees his numbers slipping, there is no preventing an about-turn on the outsourcing issue. The administration is currently in combat mode for re-election. This is not an issue of ideological commitment to them at all. He changed his mind on steel and went protectionist. He can do it on the outsourcing issue as well.
So should India worry about a protectionist phase in the US?
Yes, it should. However, China has much more to worry on this. Already, there are two very significant Bills in Congress with bipartisan support that attack China. China is an obvious target because of the incredibly huge trade surplus that it has with the US. However, should push come to shove, India with the attendant issues of outsourcing could become a victim of politics scoring over economics? The real problems are domestic — in the low savings, the poor education. But it is human nature to blame someone else for one’s own problems and this is exactly what is happening in the US.
How is India placed to leverage the labour arbitrage?
India is well placed, perhaps, in the best position as far as the outsourcing opportunity is concerned. It has a brand equity as well as ground strength in knowledge workers. These are well- educated people with a high motivational level and well-connected globally in cutting edge IT sectors. With a conducive environment, India can use this to immense benefit.
You are an old time China watcher. As the Indian economy takes off, what are the lessons India need to learn from the Chinese miracle?
The Chinese have a very powerful growth model. It is based on a currency pegged to the dollar, complete emphasis on infrastructure for manufacturing and a very business-friendly environment for foreigners. India, even today, lags on the last two counts and need to sort it out for a sustained bull run.
Do you see China devaluing her currency?
No, I don’t. What they will do — and some of this has already begun — is to tighten the credit in the economy and cool it down a few percentage points. A lower growth rate of 9 per cent will help China and I think there are other creative solutions — not devaluation — that the Chinese will opt for.
And the dollar?
I think that it will slide more. The fundamentals point to a much lower value for the dollar.
Is Morgan Stanley bullish on India?
Yes, we are. We believe that India is a real opportunity.
The global economy is on a roll. There is growth everywhere.
Yes. The US, the primary engine of the world economy, had a very robust year, China grew officially at 9 per cent but in my view it was more like a whopping 12 per cent, India notched double digit and even Japan of all places had 4 per cent. Only Europe seems to have forgotten how to grow but still managed 1.4 per cent. There is an upswing. The issue is whether this is sustainable. There are too many fundamental gaps leading me to question the ability for the world’s leading economies to sustain growth.
How serious is the US deficit as a source of global financial instability on a 1 to 10 scale?
The US deficit is a serious, but secondary, issue. I would rate it 6 on 10, however, the dismal US savings rate is the largest single cause of worry for the global economy. This is 9 on the 10-point scale. The shopping addiction of the US household, which fuels a large part of global growth, is unsustainable and needs to be urgently tackled. US savings rate is at a historic low.
Is the Bush administration concerned?
Unfortunately, the administration is moving in the opposite direction. The tax cuts and the fact that there has been no movement on the interest rates combine to make a dangerous blend. Indeed, there is no appetite currently in Washington for a correction. The overriding theme seems to be to continue with the tax cuts and not allow for a rise in the interest rates. The only way the US can grow is to get capital from abroad. Thus, with so much money coming from foreign lands, there comes a point when this financing becomes unsustainable.
BPO has emerged as a major US issue. What is the worst case scenario likely to be?
I sincerely think the worse is behind us in the BPO backlash. The jobless recovery happening in the US is the real cause of this backlash fanned by populism in an election year. I do not think we can blame the layoffs to outsourcing. However, there is no doubt that outsourcing will hurt net new job creation. To stem the flow of outsourcing through government-sponsored incentives would be a very expensive choice.
So is the Bush administration committed to free trade on this issue?
George Bush is committed only to one thing, re-election. If he sees his numbers slipping, there is no preventing an about-turn on the outsourcing issue. The administration is currently in combat mode for re-election. This is not an issue of ideological commitment to them at all. He changed his mind on steel and went protectionist. He can do it on the outsourcing issue as well.
So should India worry about a protectionist phase in the US?
Yes, it should. However, China has much more to worry on this. Already, there are two very significant Bills in Congress with bipartisan support that attack China. China is an obvious target because of the incredibly huge trade surplus that it has with the US. However, should push come to shove, India with the attendant issues of outsourcing could become a victim of politics scoring over economics? The real problems are domestic — in the low savings, the poor education. But it is human nature to blame someone else for one’s own problems and this is exactly what is happening in the US.
How is India placed to leverage the labour arbitrage?
India is well placed, perhaps, in the best position as far as the outsourcing opportunity is concerned. It has a brand equity as well as ground strength in knowledge workers. These are well- educated people with a high motivational level and well-connected globally in cutting edge IT sectors. With a conducive environment, India can use this to immense benefit.
You are an old time China watcher. As the Indian economy takes off, what are the lessons India need to learn from the Chinese miracle?
The Chinese have a very powerful growth model. It is based on a currency pegged to the dollar, complete emphasis on infrastructure for manufacturing and a very business-friendly environment for foreigners. India, even today, lags on the last two counts and need to sort it out for a sustained bull run.
Do you see China devaluing her currency?
No, I don’t. What they will do — and some of this has already begun — is to tighten the credit in the economy and cool it down a few percentage points. A lower growth rate of 9 per cent will help China and I think there are other creative solutions — not devaluation — that the Chinese will opt for.
And the dollar?
I think that it will slide more. The fundamentals point to a much lower value for the dollar.
Is Morgan Stanley bullish on India?
Yes, we are. We believe that India is a real opportunity.
