The Asian Way

What a contrast! After three years living in Asia, I returned to the United States a couple of months ago, with enormous respect for how Asia has pulled itself together after its own devastating crisis in the late 1990s. Now I was back.

Bouncing back and forth only deepened my conviction that an important shift in the gravity of global economic power from the West to the East could well be at hand.

It’s not just the Asian miracle that reinforces my belief in such a possibility. America has lost its way. In the years I was away, it has become a very different place. The despair of chronically high joblessness is sapping the nation’s sense of self and poisoning the political debate.

Back in mid-2007, when I moved to Hong Kong, the U.S. unemployment rate stood at just 4.6 percent. Today, it is more than double that at 9.6 percent. Nor is there much hope of a spontaneous resurgence of hiring that will temper the angst of this jobless recovery.

How could Asia get it so right, and the United States get it so wrong?

I suspect a good deal of the answer has to do with the arrogance of power. Long the dominant global power, America took its image for granted and its dominance as an entitlement. Asia, on the other hand, was far more humble. It learned painful lessons from a series of very tough experiences — the post-Cultural Revolution chaos of the Chinese economy, the post-bubble aftershocks of Japan, and the ravages of its own financial crisis in 1997-98.

But Asia also benefited from a deep appreciation of the limits of policy. Stability became the mantra of the region — especially social and economic stability. Asian policies — fiscal, monetary, currency and regulatory — are all focused on avoiding the types of disruptions that have wreaked such havoc on America.

Once that genie is out of the bottle, Asians are dubious of a policy fix. That is the lesson they take from Japan and now from the United States. It is a lesson that keeps Asian authorities committed to a preemptive approach in avoiding major threats to stability.

China is an obvious and important case in point. Hit hard by the collapse in global trade in late 2008 and early 2009, Chinese authorities implemented an aggressive proactive fiscal stimulus to counter the functional equivalent of a full-blown recession.

Yes, there were serious consequences of those actions that have also had to be addressed — namely, deteriorating loan quality of a bank-funded infrastructure stimulus and a liquidity driven bubble in high-end residential property markets. But Chinese authorities wasted little time in dealing with these aftershocks as well.

Significantly, China’s regulators have been quick to build firewalls between the real economy and distressed bank lending and asset markets. That stands in sharp contrast with the approaches in Japan and the United States, where asset and credit bubbles were condoned and allowed to infect the real side of their respective economies with devastating and lasting aftershocks.

Seared by the memories of its own painful experiences of the past 30 years, developing Asia does not trust counter-cyclical stabilization policies to put the post-bubble pieces of a crisis-torn economy back together again.

America, on the other hand, has yet to get it. The great debate over yet another stimulus is dominating pre-election posturing in Washington and Wall Street. Implicit in this debate is the presumption that the first stimulus — all $787 billion of it — was actually too small to jump-start a classic recovery. Up the ante, goes the argument, and the economy will finally heal.

Don’t bet on it. The lessons of Asia should give considerable pause for thought in accepting that premise on blind faith. As Japan’s experience suggests, post-bubble economies have an extremely tough time achieving policy traction. If Japan’s debt-to-gross domestic product ratio of 200 percent can’t pull its economy out of the quagmire, why should America be any different?

Just because the heavy artillery worked in arresting the Great Crisis, there’s no guarantee that another round of firepower will convert a weak post-crisis recovery into a strong one.

The United States needs to develop a greater appreciation for the Asian mindset of economic management and policy strategy. There is nothing wrong with focusing on financial and economic stability — and aiming the full force of regulatory, monetary and yes, even currency policy toward that end.

Rather than bashing China for using its currency as an anchor of financial stability, Washington needs to take a much deeper look in the mirror and come to grips with the perils of a savings-short U.S. economy that has lived beyond its means for close to 15 years.

The Asian way is far from perfect, especially its lack of support from internal consumption. But Asia offers a discipline and a focus on stability that is sorely lacking in post-crisis America.

The real lesson from Asia is that there is no quick fix for a post-bubble economy. Washington needs to crack the denial and stop blaming others for its own blunders. It needs a long-term strategy. Like Asia.

Stephen S. Roach, a member of the faculty at Yale University and non-executive chairman of Morgan Stanley Asia. He is the author of The Next Asia.