Stephen Roach

Stephen Roach is chairman of Morgan Stanley Asia and former chief economist at the bank

A 3.8 per cent annualized decline in US GDP in the fourth quarter of 2008 is just the first validation of what is likely to be a series of sharp output declines reported in the major industrial economies. Moreover, to the extent that the decline in US GDP was tempered by an unintended pile-up of business inventories, there is good reason to look for further sharp cutbacks in production in the current quarter. Elsewhere around the developed world, the results are likely to be comparable—unusually steep declines in both the fourth quarter of 2008 and the first quarter of 2009.

Davos was early in proclaiming that the 21st century would be the Asian Century. China’s miraculous development story is central to this vision—a transformation that would inevitably push the pendulum of global power from West to East. This tectonic shift was very much on the minds of most who attended my final Davos session of the year “China, India and Japan: Asia’s Big 3.”

Not so fast, I argued—even though I have made my own career bet on just such a possibility. Yet the Asian century is hardly as preordained as the Davos consensus seems to believe. The main reason, in my view, is that the region continues to rely far too much on exports and external demand. Developing Asia’s export share hit a record high of 47 per cent last year—up 10 full percentage points from levels prevailing in the late 1990s. That hardly speaks of a true economic power that has become increasingly capable of standing on its own.

It had to happen. Every crisis invariably gives rise to finger pointing. This one is no exception. Sooner or later, the scapegoating had to break out in the open. It didn’t take long. At a dinner I attended on the first night of the World Economic Forum, the blame game erupted with full force.

The Davos consensus spoke up loud and clear on the first day of the World Economic Forum. As I suspected, the darkness of the here-and-now permeated the Congress Center. After I laid out my bearish prognosis in the opening session – an unprecedentedly anaemic growth rate in world GDP of just 2.5% for the next three years – there were those who actually called me an optimist. The indomitable Martin Wolf, whose platform I share temporarily in penning these missives, argued that I was far too sanguine for a world that was already in a “proto-Depression” – whatever that means.

Anything is possible, of course. But I think it is important to resist the bait of oneupmanship and put this prognosis in perspective.

A year ago, denial was still very much in the air at the World Economic Forum. The Davos consensus embraced a “small problems scenario.” Most believed that any recession would be confined to the US – and that it would be short and mild. A global recession was simply inconceivable.  In particular, a decoupled developing world – especially China-centric Asia – was thought to be largely insulated from any problems in the developed world and perfectly capable, in the view of many, of taking over as a new engine of global growth. And in light of a Fed-led policy stimulus, a US cyclical recovery was presumed to be just around the corner – and a pretty solid one at that. The financial system was not seen as an impediment to any of the above. In short, a year ago, the Davos consensus believed that every dark cloud had a silver lining.

Davos blog 2009

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