How Asia Copes with Americas Zombie Consumers

Stephen S. Roach, a member of the faculty of Yale University, is Non-Executive Chairman of Morgan Stanley Asia and author of The Next Asia (Wiley 2009).

NEW HAVEN – Asia needs a new consumer. A post-crisis generation of “zombie consumers” in the United States is likely to hobble growth in global consumption for years to come. And that means that export-led developing Asia now has no choice but to turn inward and rely on its own 3.5 billion consumers.

Of course, this is not the first time that Asia has had to cope with the walking economic dead. Japan’s corporate zombies were at the epicenter of its first “lost decade” in the 1990’s. Sclerotic companies were put on life-support credit lines by their zaibatsu – like banking partners – delaying their inevitable failure and perpetuating inefficiencies and disincentives that resulted in a post-bubble collapse in Japanese productivity growth.

Similarly, the crisis of 2008-2009 led to zombie-creating bailouts in the West. From Wall Street to AIG to Detroit, the US was quick to rescue corporate giants that would have failed otherwise. Britain and Europe did the same, throwing lifelines to RBS, HBOS-Lloyds, Fortis, Hypo Real Estate, and others. In the West, the excuse was “too big to fail.” How different is that from Japan’s mindset nearly 20 years ago?

But the most prominent zombie may well be a broad cross-section of American consumers who are still suffering from the ravages of the Great Recession. Afflicted by historically high unemployment, massive under-employment, and relatively stagnant real wages, while burdened with underwater mortgages, excessive debt, and subpar saving, US consumers are stretched as never before.

Yet the US government has tried virtually everything to prevent consumers from adjusting. Going well beyond the requisite extension of unemployment-insurance benefits, the safety net has been expanded to include home-foreclosure containment programs, other forms of debt forgiveness, and extraordinary monetary and fiscal stimulus.

Compassion is part of the moral fabric of any society. But a fine line separates it from the “creative destruction” that is essential to purge a post-crisis system of its excesses. Japan crossed that line in the 1990’s, as its corporate zombies prevented the painful but necessary adjustments in its post-bubble economy. That could happen in the US if Washington continues to favor policies that condone the reckless excesses of the recent past and inhibit the deleveraging and balance-sheet repair that America’s zombie consumers now need for post-crisis healing.

Notwithstanding government life-support initiatives, US consumers seem headed for years of retrenchment. Consumption’s share of US GDP currently stands at a sharply elevated 70%. While that’s down from the high of 71.3% in early 2009, it remains fully four percentage points above the 66% norm that prevailed in the final quarter of the twentieth century.

Reversion to that earlier share is likely as American consumers make the transition from the insanity of the boom to the sanity required of the bust. That spells subdued growth in US consumption for years to come – with a predictably massive impact on global consumption. While the US accounts for only 4.5% of the world’s population, its consumers spend $10.3 trillion annually – by far the most in the world.

So, with US consumption growth likely to be restrained, who will take America’s place? Europe? Japan? I wouldn’t bet on either.

That’s where Asia fits into the equation. As an export-led region, Asia remains heavily dependent on end-market demand from consumers in the developed world. The export share of developing Asia’s 12 largest economies rose from 35% of pan-regional output in the late 1990’s to 45% in early 2007. Little wonder that every economy in the region either fell into recession or experienced sharp slowdowns when global trade plunged in late 2008. Decoupling was not an option.

Nor should Asia draw a false sense of security from all the hype currently being accorded to the hopes and dreams of a so-called “two-speed world.” Heavily dependent on Western markets, Asia must seek support from a new source of demand.

It should start by looking in the mirror. For developing Asia as a whole, internal private consumption currently stands at a record low of just 45% of GDP – down ten percentage points from the 55% share prevailing as recently as 2002.

It’s not as if Asian consumer demand is dormant. But at the margin, economic growth is heavily skewed toward exports and fixed investment as the primary means of absorbing surplus labor and spreading prosperity. In a post-crisis world – impaired by America’s zombie consumers – export-led Asia is in serious need of a pro-consumption rebalancing.

Nowhere is that more evident than in China. With private consumption having fallen to a record low of 35% of GDP in 2008 (fully ten percentage points below the Asian norm), China faces major rebalancing imperatives – all the more urgent if post-crisis consumption growth in the West remains weak.

The good news is that China appears to have arrived at a similar conclusion. Its 12th Five-Year Plan is focused on three major pro-consumption initiatives: jobs (especially labor-intensive services); wages (underscored by accelerated urbanization); and a reduction of fear-driven precautionary saving (arising out of a broadening of the social safety net). If China delivers on each of these three fronts – as I suspect it will – private consumption’s share of Chinese GDP could rise by as much as five percentage points between now and 2015.

That would be good news for East Asia’s other economies – namely, Japan, Korea, and Taiwan. With relatively small populations – and a declining one in the case of Japan – these countries have no choice but to rely on exports and external demand to drive economic growth. In all three cases, China has replaced the US as their major export market.

That shift came just in the nick of time. If China is successful in implementing its pro-consumption agenda, the rest of Asia will be well positioned to avoid the fallout from America’s new generation of zombie consumers. How the United States copes is a different matter altogether.

Post-Crisis World Institute