A conversation with Stephen Roach on Charlie Rose
This morning, I ran across a post by Prieur du Plessis, which linked out to a Stephen Roach interview on Charlie Rose.
Roach is the head of Morgan Stanley Asia and has been a voice to listen to when trying to discern where China is headed and how its relationship with the United States will develop. That was the topic of conversation between Roach and Rose. Through the links on that post I happened upon a 1996 Roach interview on Charlie Rose of a very different sort where he talked about the hollowing out of America and his concern for the future. I want to link those two below.
In the transcript of the recent China interview on Rose’s website, Roach marvels about the progress made in China:
CHARLIE ROSE: You left Wall Street to go live in China.
STEPHEN ROACH: I did. About three years ago, your friend and mine, John Mack, called me up and said, 25 years as an economist, a long time, good job. How would you like to do something different and be the chairman of Morgan Stanley’s business activities in Asia? And I told John I thought he was nuts. I had the best job. I wasn’t going to leave it. He said, "Think about it."
And, you know, John, when he says, "Think about it," there’s a fair amount of emphasis there. I did think about it. And I’d built fabulous relationships in Asia over the years, Charlie. I was passionate about the region. I thought I knew it well, but I knew in my gut that it would be a lot different from the inside than from the outside, and I said, yeah, I’m going to go for it.
And I’ve been out there now about two and a half years. And I have no regrets. I love it. I have learned an awful lot about Asia, and I thought it was time to put it down in a book and get it out there when the world is very focused on Asia, its own challenges and its role in the global economy.
CHARLIE ROSE: What do you love and what have you learned?
STEPHEN ROACH: What I am most passionate about in terms of Asia is what they’ve done, especially in China, over the last 30 years. You know, big celebration, 60th anniversary of the People’s Republic of China. But the first 30 years were pretty awful and the next 30 years have been spectacular. And the difference is they have really put huge focus on transitioning this economy from one that was owned by the state to one that is more of a market-based economy. They’ve taken huge risks in terms of reforms, layoffs, building market structures, building companies that we’ve never seen before. And to be on the inside and watching, watching that risk taking up close is a pretty fascinating experience for anyone. And I love every bit of it.
They go on to talk about the outlook there as well as how the government is dragging its heels on increasing domestic demand and shoring up a porous social safety net among other things. I definitely suggest you read the full transcript here. It makes for a better understanding of China. A snippet of the video is embedded below.
However, what was equally interesting to me was that Roach and Robert Reich were talking to Rose about concerns over the hollowing out of America’s workforce through downsizing (off-shoring had not yet gathered full steam).
Roach says:
“What has changed for me is my appreciation for what it has taken to get from point A to point B over the last ten years. It would be one thing if these productivity gains were built on the back of a more talented, skilled, educated, dynamic work force, but it’s another thing altogether if these productivity or efficiency changes were built on the basis of strategies that are hollowing out our companies, hollowing out our workforces, stagnating real wages – tactics in the end that can really lead to industrial extinction.
I’m sure you see the connection. If not, watch the video below in the context of the more recent video and your knowledge of what is happening in the global economy. I will say this: Roach was right about the dichotomy between the benefits to the owners of capital and the benefits to labor that these corporate strategies created.
Where I think his view could be tweaked looking back 13 years is in terms of what it has meant for Corporate America. The hollowing out of America’s workforce and lack of investment domestically has not meant a hollowing out of Corporate America. Those companies that did downsize American workers in a ‘short-term’ play for next quarter’s earnings are many of the ones which have outperformed for the last 13 years because they have gone global. And the impressive leaps forward in China are testament to the gains made in places like China due in part to that move. It’s called ‘global labor arbitrage’ and it is what I see as the defining element of globalization as practiced.
In the end, however, a day of reckoning will come – not for the managers of the companies who have profited over the time span between these two interviews because they are going to keep their bonuses. The day of reckoning for America will come in terms of the growth and dynamism of its middle class. Whether the U.S. then moves toward a Latin American style economic structure of a few rich at the top, a weaker middle class, and everyone else at the bottom or back to a more equal income and wealth distribution depends on the reaction by the ‘body politic,’ not on Wall Street.
“It’s called ‘global labor arbitrage’ and it is what I see as the defining element of globalization as practiced”
It is the defining feature of globalization. Of course, as we know, there is a great divergence between the owners of capital and labor. Take the rally, for example, many firms were able to use the weak labor market to their advantage to cut costs. Do you the small “d” “depression” would last long enough in Western European countries and North America to encourage protectionist measures in those countries. While protectionism might lead to a net decline in wealth, it would be beneficial for laborers who produce labor intensive goods since it takes away power from capital by raising capital’s exit costs. For example, if a company wants to relocate to a cheaper country under a protectionist regime, it can do that, but the exit costs would be losing market share in that country. Free trade benefits capital by removing exit costs.
Capitalists oppose protectionism for their own interests; it is easy to understand why. Well, if labor arbitrage is gone, then capitalism is gone since there would be no way to make profits other than to actually technologically innovate.
My knee-jerk is to dismiss protectionism out of hand as it is certainly a non-market solution. But, with the predator state moving us toward a latin-american style outcome, there aren’t a lot of options.
I worry that any kind of protectionism beyond what we have already seen will draw a retaliatory response, leading to an extremely deflationary and bad outcome. Right now we are really on the edge and that leaves us with few exit strategies that don’t end up with catastrophic dislocations – the kind that create social upheaval, war, and so on.
The problem with protectionism is that, while it may protect workers in one country, what is good for the goose is good for the gander. And the abrupt shift to a less globalized world would not produce good geopolitical outcomes.
Is it worth the risk? No.
So, I have a 4 year degree in accounting. What category would that put me in, economic class wise? Will my degree end up being the 1960s equivalent high school diploma in 20 years?