Stephen Roach is a respected authority on Asia — China in particular — and an often-cited and widely recognized prophet on the global economy.
Until recently chair of Morgan Stanley Asia and long the firm’s chief economist, Roach came to Yale in 2010 as a senior fellow in the newly inaugurated Jackson Institute for Global Affairs, with a joint appointment at the School of Management (SOM). This spring Roach announced he would be retiring from Morgan Stanley after 30 years with the firm to teach full time at Yale.
YaleNews recently met with the economist in his office to discuss his new career as a teacher and to get his prognosis on the future of the world economy.
How did you go from being chair of Morgan Stanley Asia to a full-time teacher at Yale?
I was nearing my 30th anniversary at Morgan Stanley, which is a long time to do anything. It was a fantastic job, and I loved it, but it was time to think about what comes next. I already had a strong hint. When I was at Morgan Stanley, I would frequently give lectures to students in universities all over the world. One day Jeff Garten, the former dean of SOM, whom I had known for 25 years, brought a class of his students to our headquarters in Hong Kong, and I spoke to them about Asia and China. At the end of the talk, Jeff came up and asked if I had ever thought about what I was going to do after finishing my career at Morgan Stanley. I said, “Yes, actually I have. I was thinking that I might be interested in spending more time with students.” And he said, “That’s what I was hoping you would say.”
That began a series of discussions with Jeff, which eventually involved Rick Levin and the establishment of the new Jackson Institute for Global Affairs. In mid-2010, I decided to come back from Asia and split my time between Morgan Stanley and Yale — to test out the waters and see how I really liked teaching.
While I stayed on as the non-executive chair of Morgan Stanley Asia, which meant I still had senior client responsibility in the region, I was also teaching a brand new course at Yale, “The Next China.” It was a big lecture class meeting twice a week, and I had to juggle it with a lot of travel commitments for Morgan Stanley. In straddling two worlds — academia and Wall Street — I was continuing to burn the candle at both ends. While I was used to the grind, I knew this was not a sustainable path. And so I finally made the choice to commit to teaching full time.
Describe your career pre-Yale.
For 30 years, my focus was market-based macroeconomics. Initially my emphasis was on the U.S., but in the late 1990s during the Asian financial crisis, I started to concentrate on Asia, and that led me to China. Since then, I’ve probably spent more time analyzing the Chinese economy than most of my counterparts on Wall Street.
The Wall Street perch allowed me to get underneath the hood of these economies. That came in very handy when I started to prepare new courses at Yale. Plenty of raw material came from my immersion in financial markets as well as from meetings with senior leaders, executives, and policymakers, along with students and think tanks. The feedback I get from students is very encouraging. While most of them are very appreciative of the rigorous grounding that Yale gives them in history and theory, there’s a real appetite to understand how that theory translates into practical experience — and what it portends for the future. Hopefully, that’s what I bring to Yale.
What courses have you taught at Yale?
In the fall semester of 2010 I created the class on “The Next China” from scratch — a course that focuses on the critical transitions that lie ahead for the Chinese economy. In the spring semester I taught two classes, one at SOM with Jeff Garten called “Wall Street and Washington” and an undergraduate seminar called “The Lessons of Japan.” This past fall semester, I added another new course that I co-taught with economics professor Aleh Tsyvinski. We called it the “Macro Debate” [“Debates in Macroeconomics”] because we met twice a week with upper-level economics majors and debated a wide range of very contentious economics issues. We challenged each other on the sources of the crisis, the role of monetary policy, the fate of Europe, the role of China, the role of regulators, fiscal policy, and globalization. It was a very exciting course, because we combined theory (Tsyvinski) and practice (me), and we tried to marry them together by giving the students a real-time glimpse into how the science of economics can, or cannot, address the burning issues of our times.
How do you apply your talents as economic soothsayer to the classroom?
A good example is the class I am teaching now on “The Lessons of Japan.” It starts out by taking a deep dive into Asia’s first growth miracle — Japan’s amazing high-growth story of the 1960s, 1970s, and 1980s that then imploded. We do that in about five or six weeks, and then we spend the balance of the course trying to understand lessons or characteristics of the Japanese experience that may be applicable to others. The balance of the course focuses on addressing a number of critical questions: Do these lessons apply to the U.S.? Do they apply to Europe? To China? To other developing countries? We look at each of these economies in detail through the same lens that we used to diagnose Japan.
It’s an exercise in what I call “forensic macro,” where you assemble a body of evidence from one economy and try to discern if there are some similarities to other economies. “Made in Japan” initially applied to a powerful growth model that then went horribly wrong. The tough and yet entirely relevant question we pose in this class is: Are we all now “made in Japan”? The jury’s certainly out on that.
How are the United States and Europe “made in Japan”?
The U.S. is in a very weak recovery. Europe is in another recession and also likely to experience a weak recovery. Nor does there look like much upside or revival for Japan. In short, the major developed nations all took their economic systems to excess. Now there is a multi-year payback from that period of excess, as nations repair severely damaged balance sheets and pay down their debts. While we study that phenomenon and what gave rise to it primarily from an economic point of view, we also look at the origins from political and social points of view, as well.
Our findings are fascinating: From Japan to the United States and now Europe, these large mature developed economies were unable to sustain the fundamental underpinnings of economic growth. Whether it was due to globalization, rapid technological change, or other factors, they all resorted to dangerously risky ways to extract extra growth — sowing the seeds of “false prosperity.” In the U.S., it was asset bubbles — dot-com, property, and credit bubbles. In Europe, it was a flawed currency union that provided artificial support to countries like Greece, Ireland, Spain, Italy, and Portugal — creating a false demand that supported the major exporters and financiers of these economies, Germany and France.
What’s the relationship between the creation of the Euro and the Japanese economy?
In the 1970s and 1980s, a mercantilist Japanese economy relied on a very weak currency. The yen was kept cheap in order to support the export machine. But around the mid-1980s, other countries in the world wanted to share in the Japanese growth dividend. So they put pressure on Japan to change the currency piece of the equation, and that culminated in the Plaza Accord of 1985 [an agreement with the United States, United Kingdom, France, West Germany, and Japan to lower the dollar against the yen].
Despite having given ground on the currency, Japan thought it could keep the miracle going with an accommodative monetary policy. Its central bank eased a lot, and that created massive property and equity bubbles — although no one thought they were “bubbles” at the time. People thought the Japanese miracle would go on, the way we thought dot-com stocks would keep going up. Well, the bubbles burst in 1990 and the Japanese economy has never come back.
You’re very upbeat about China’s prospects. Why?
To me, China’s the most fascinating development story of our lifetime. I don’t think we’ll see anything like that for generations to come.
When I was the chief economist at Morgan Stanley, I would go to Asia two or three times a year. In the early1990s, the worldview was that there was a true miracle in the East Asian economies — not so much China —but Korea, Taiwan, Malaysia, Philippines, and Indonesia, and the city-states of Hong Kong and Singapore. Many believed that these once poor countries had finally cracked the code of economic development. Then there was this seemingly innocent devaluation of the Thai Baht in June of 1997, and the whole house of cards came down. Every one of these economies went into horrific, deep recessions, with the notable and important exception of China.
I felt in my gut that China held the key to the endgame of the devastating crisis. So in the second half of 1997, I started going to China every other month to figure out how this crisis might play itself out. That became my macro passion. In 1998, I wrote an article in the Financial Times predicting that China would survive the crisis and emerge as the new economic leader of post-crisis Asia. Somehow this article reached China’s minister of finance, Xiang Huaicheng, who asked me to meet him when he was in Seattle on business. We spent a day together on a boat in the Seattle harbor, and we have been friends ever since. He brought me inside the senior leadership circle in China as a trusted adviser, and I have maintained that role to this very day.
How do prepare your students for an economic future dominated by China?
Domination is pure conjecture at this point. But to answer your question I think the best thing we can do as teachers is to provide a framework of analysis. When you’re looking into the future, there are an infinite number of potential outcomes that you can address. The key is to have analytical rigor in the way you assemble the building blocks to that future. You need to understand what the tensions are, how they can be resolved, both from within and through external forces. Anyone can leave the students with the conclusion of mindless extrapolation — for example, that China is going to be the largest economy in the world in the next 10 to 20 years. We can do much better than that.
I try to tell them that the China of tomorrow is going to be unlike anything it has been for the last 30 years. The key is how China will deal with its tensions and imbalances. This will require that the Chinese shift their model from one that derives most of its support from world, or external, demand to a growth model that derives much more support from the internal demand of the nation’s 1.3 billion people. That’s especially the case in this post-crisis era, where the external demand — driven by countries like Japan, the U.S., and Europe — is going to be weak for years to come.
What about those of us in the United States?
Number one, we should stop blaming China for our problems. We have problems of our own making. Washington is fixated on blaming China for problems weighing on the American worker. There’s an argument that if China raises the value of their currency, things will be a lot better for the middle class. I think that view is wrong. Unfortunately, it deflects attention away from taking the tough look in the mirror that we need to do in order to address our own issues.
In this post-crisis period, we need to think about new sources of economic growth and demand. Basically, we’ve lost our competitive edge. If China does undergo the dramatic transformation from being an exporter to a consumer, the country is going to have huge demand for American-made products. So if you’re looking for new sources of growth, look to China, which is already our third largest and most rapidly growing export market. Where we should be tough in our negotiations with China is in getting access to their markets, making certain they are open to American goods.
The United States has long been at its best in competing for market share. It runs against the grain of our national character to lapse into a destructive blame game. We should seek the high road to economic renewal.