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 or click on the video links via Prieur’s site. It makes for a better understanding of China.

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.

Comments

[Leftfield:]

A main driver of social mobility has been the size and scope of our middle class. It encompassed the Wright brothers, whose bicycle shop paid them enough, before the income tax and omnipresent government servitude by all existed, to finance their winters inventing the airplane. Edison. Just a broad scope including almost any achiever you can think of.
Now, the remains of the middle class with any social mobility is mostly government employees, lawyers, accountants, and other skilled servers of the rich. Get the right training to be a specific cog in the machinery. Because the system has become too oppressive to allow the freedom we once took for granted to achieve middle class fairly easily and that be a steppingstone to greatness.
Get the right degree, hope you have parents to pay off the huge loans, get a job with the right employer, with benefits, marry a partner like yourself and you'll probably be middle class still. Not the inspiring story of what life in America once was.

Oct 27 11:07 AM

[CoverIsBetter:]

The hollowing out story is compelling. It is hard to ignore the social stigma associated with entry level white collar work that has emerged since the collapse of the tech bubble.
I can remember when you had to be a high tech worker to get into a night club. You couldn't buy a drink without a Cisco or Novell Netware certification.
Today, you have to have, or a be a personal trainer. You have to have a refined taste for MMA, ultimate fighting, and all things violent beyond the imagination of my 'Hip to be square' generation. This is being reinforced in our American born youth, with every desk job we ship overseas. Nobody with a social conscience will enter white collar America without a 15 pound sledge hammer, compliments of Donald Trump apprenticeship or 7 years of college.
So there is a hollowing out, at the middle and bottom. This is a drastic departure from where we were 15 years ago, that is not good. Opportunities have moved off the radar of those who most need them, and destructive alternatives have moved within arms reach.

Oct 27 12:06 PM

[Robert Mart...:]

Edward:

"It’s called ‘global labor arbitrage’ and it is what I see as the defining element of globalization as practiced."

You are correct.

"Global labor arbitrage" is leading to a complete disconnect between corporate profits and the American worker, which I discuss in "The Deflation of the American Dream." seekingalpha.com/artic...

When global trade is practiced fairly, companies and workers are rewarded for specializing in areas where their country has a natural competitive advantage.This begets Swiss watches, Italian handbags, American software, Japanese cars, Saudi Arabian oil, etc.

Unfortunately, global capitalism is often practiced with price as the sole determinant of value, and quality standards are absent. In addition, intellectual property rights must be respected, and there has to be a level playing field regarding the environment and workers rights. Finally, countries must let their currencies float, and avoid tariffs and dumping.

As it now stands, however, international standards are observed more in the breach than in practice, and China is the poster child for how NOT to practice global labor arbitrage. China violates standards in many ways: The country has a callous disregard for worker's rights and the environment, and makes it a national pastime to steal software, entertainment, and pharmaceuticals. China has exported dangerous plastics, poisonous infant formula, and the infamous "Chinese drywall" that sickens thousands of homeowners. Finally, by pegging their currency to the dollar, China is depressing the Yuan vs. Asian peers.

When I think of the "hollowing out" of manufacturing, it makes me realize that America is penalized for having high standards. Unfortunately, it is the working class who pay the price, since CEOs are rewarded for cutting workers, trimming benefits, and reallocating capital overseas. Their primary allegiance is to their company, not to their country, so they are motivated to CAPITALIZE on unfair international standards, rather than to fight against them.

People in America are upset at the disconnect between corporations and workers, and this will manifest itself in the political realm. The recent paycuts for bank CEOs are one example.

This is not just populism; rather, it's a logical response to the "global arbitrage of labor." As you rightly noted at the end of your article, this will play out in the "body politic" rather than on Wall Street.

From where I stand, people will not stand by idly and watch the deflation of the American Dream.

Thanks for the article.
Rob

Oct 27 12:11 PM

[Michael Clark:]

When global trade is practiced fairly, companies and workers are rewarded for specializing in areas where their country has a natural competitive advantage.This begets Swiss watches, Italian handbags, American software, Japanese cars, Saudi Arabian oil, etc.

Unfortunately, global capitalism is often practiced with price as the sole determinant of value, and quality standards are absent. In addition, intellectual property rights must be respected, and there has to be a level playing field regarding the environment and workers rights. Finally, countries must let their currencies float, and avoid tariffs and dumping."

Very well said. These are the issues we should be talking about as a culture -- and let go of the 'beat the street' cheerleading. We are not going back to the old world, pre-2007. That world is gone. We need to focus on the Next World, the world coming back around after we sink down and find delivery from our debt and our unhealthy self-indulgence.

Oct 27 01:08 PM

[Pat C:]

Excellent Article!!!!!

Oct 27 01:34 PM

[notsosmart:]

it might just be that we had our inning.many empires have crumbled in recent history.great britain,spain,portugal... dutch & all the way back to the romans.those societies did not know,understand,or ignored the downhill slide.just look around @ the fat & overfed dumb-dumb sheeples that have no idea how they are being fleeced.our grandchildren will be hard pressed to pay our debt while they learn mandarin.a country that papers the world with phony rated AAA crap paper will no longer be a leader.this country has no idea the damage the wall st ponzi/casino schemes have damaged capitalism & our reputation.nobody really cares about this country anymore.most all have a self serving agenda regardless of their field.eliminating the middle class is great for the rich. the poor never mattered.

Oct 27 04:29 PM

[Tony Petroski:]

Oh, if we could only follow the Chinese model. In the article, the money quote was:

"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."

First 30 years "pretty awful"? You might say so. Forced starvation and liquidation of tens of millions of people.

Oh, but you have to break a few eggs to make an omelette.

Oct 27 06:21 PM

[Bruman:]

Nicely written Ed. I've been trying to frame similar issues in my mind for a while. The big thing on my mind is "on what basis will the future of US economic growth be based." Yes, the liquidity and solvency of banks are important, because without that we can't get the other parts of the economy moving. But even with a functioning financial system, the economy still has to PRODUCE something that people want. I get the sense that the last 10 years has basically been about companies collecting rents from labor arbitrage, but also a kind of "consumer arbitrage" based on the fact that US consumers had been used to paying higher prices for stuff not produced in China and also consumers having more access to debt.

I used to live and work in Brazil, and during the Brazilian Miracle of the late 1960s, it was said by the military government "Brazil is doing well; Brazilians, not so well." I see this unfolding in the US these days. US-based corporations may end up doing well by globalizing, but the benefits of that growth will not trickle down to the average US citizen or resident until we can unburden ourselves from the consumption debts that we've accumulated.

Oct 28 12:27 AM

[Alphameister:]

The creative destruction of capitalism adopted on a world-wide basis can be terrible to behold in a country where the average worker is increasingly less competitive measured by cost-effectiveness. The same workers today bemoaning the loss of their jobs probably shop at Wal-Mart and drive cars made by Honda or Toyota. While many accuse international corporations of "exploiting" foreign workers around the world, the truth is that all our "foreign aid" programs through history had negligible impact compared with the international trade of recent decades in lifting people around the world out of poverty. But the younger generation in the US is growing up with a sense of entitlement that will not be readily fulfilled in a competitive worldwide economy. I remember Ayn Rand reacting to a strike in NYC by elevator operators, asking the question of what value their ability to read numbers and push a button would have if transferred into the jungle; her point was that most of the value of the operator's work derived from the minds of those that conceived, designed and built the elevator. The elevator operators of the world should have been profoundly grateful that their modest skills brought them a standard of living that would be the envy of billions of workers around the world who lived in poverty and slavery.

It is tragic that US workers were never given the opportunity to invest their "social security contributions" into a diversified fund of the American businesses that have prospered mightily from globalism. It also might have been better if free trade had been approached more gradually so that US workers would have had more time to adapt to the inevitable threats to their livelihoods.

Oct 28 02:47 PM

[Tony Daltorio:]

But Americans killing innocents in the Middle East and Central Asia is ok, of course!


On Oct 27 06:21 PM Tony Petroski wrote:

> Oh, if we could only follow the Chinese model. In the article, the
> money quote was:
>
> "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."
>
> First 30 years "pretty awful"? You might say so. Forced starvation
> and liquidation of tens of millions of people.
>
> Oh, but you have to break a few eggs to make an omelette.

Oct 28 03:28 PM

[Robert Mart...:]

Michael,
Thanks for your comments.

As you noted, America now has to wrestle with a deep socioeconomic question: What kind of capitalism do we want to have?

Until recently, this question was completely off the table, and was left to "socially responsible investors." (I always disliked that label, since it implies that other investors are IRresponsible.) Today, virtually every American acknowledges that we lack sufficient guardrails, and demands political change.

Nevertheless, I have to ask: To whom is the CEO accountable at an international firm? We can talk all we want about "stateholders" such as the community the customers, and the workforce, but the CEO of IBM is ultimately accountable to shareholders. If one country does not give IBM the answer it wants, the firm can simply shift labor and capital to a location where costs are lower and the regulatory environment is pro-business.

This is a rhetorical question, since most CEOs are not quite global citizens yet. But, as you noted, the genie is out of the bottle, and we can't go back. It's just not clear yet what kind of capitalism we are headed TOWARDS.

Always a pleasure,
Rob


On Oct 27 01:08 PM Michael Clark wrote:

> When global trade is practiced fairly, companies and workers are
> rewarded for specializing in areas where their country has a natural
> competitive advantage.This begets Swiss watches, Italian handbags,
> American software, Japanese cars, Saudi Arabian oil, etc.
>
> Unfortunately, global capitalism is often practiced with price as
> the sole determinant of value, and quality standards are absent.
> In addition, intellectual property rights must be respected, and
> there has to be a level playing field regarding the environment and
> workers rights. Finally, countries must let their currencies float,
> and avoid tariffs and dumping."
>
> Very well said. These are the issues we should be talking about
> as a culture -- and let go of the 'beat the street' cheerleading.
> We are not going back to the old world, pre-2007. That world is
> gone. We need to focus on the Next World, the world coming back
> around after we sink down and find delivery from our debt and our
> unhealthy self-indulgence.

Oct 28 07:11 PM