Losing Traction

Even at cut-rate prices, there will still be fewer chickens to fry. At the Hsinchu Science and Industrial Park, home to many of Taiwan's flagship technology companies, more than three out of four workers are currently taking unpaid leave at least one day a week. Ryan Wu, chief operating officer of job-search website 1111 Job Bank, says that conditions at Hsinchu have never been so dire in the park's 29-year history. Wu says that two years ago, the companies that job hunters most often sought out using his service were microchip makers and electronics manufacturers; last year, the most-searched-for company was convenience-store chain 7-11. "I think there's extreme panic right now," Wu says.

That panic is felt by politicians and policymakers, who have slashed interest rates and hiked fiscal spending in an attempt to stimulate growth. In January, Taiwan's government doled out $2.6 billion in spending vouchers — or about $100 a person — to encourage consumers to splash out. The administration of President Ma Ying-jeou is also pushing a $14.7 billion program of infrastructure projects through the legislature, which includes funding for construction of better bridges and more subways. Singapore in January announced a $13.4 billion "Resilience Package" that will increase the country's budget deficit to a record level. Yet there is a limit to what governments can do. Exports are simply too important to the tiger economies to be easily replaced. They represented 74% of Taiwan's GDP and 46% of South Korea's in 2007. "You can't change the [export] model," laments Song Seng Wun, an economist at CIMB-GK Research in Singapore. "You just have to make sure everyone can take the downturn."

This Time It's Different
Asia has suffered recessions before, of course, and bounced back strongly. But this downturn is different. Unlike during recessions in 1997-98 and 2001-02, Asia's favorite customer — the American consumer — appears to be making profound changes in his purchasing habits. In the long run, this may be a good thing. Roughly 25% of Asia's final exports end up in the U.S., and economists have been warning for years that America's penchant for borrowing and spending, coupled with Asia's pattern of saving and selling, created massive trade imbalances that would ultimately prove to be economically destabilizing.

But in the short run, Asia is finding itself powerless to adjust quickly to the swift, steep decline in trade, which is not limited to U.S. exports. Trade among Asian countries is also plummeting, because much of this intraregional commerce is indirectly dependent upon Western consumption. A high proportion of Taiwan's trade with China, for example, has been made up of electronic components shipped to Chinese factories for assembly into finished products — which eventually wound up on the shelves of stores in the U.S. As a result, Taiwan's China trade is contracting twice as fast as the island's U.S. exports.

In short, Asia's growth model resembles a vast Ponzi scheme, one that is precariously perched on the expectation that Americans will continue buying more and bigger TVs, computers and cars forever — which in turn allows Asia to forever goose its growth by adding industrial capacity to feed the West.

This expectation has now been dashed, and the scheme is unraveling. Debt-ridden, house-poor and increasingly unemployed, U.S. shoppers are cutting back. Consumer spending in the U.S. dropped at an annual rate of more than 3% in both the third and fourth quarters of 2008 — the steepest consecutive quarterly declines on record. As incomes shrink and America adopts a more frugal mind-set, some economists do not expect shoppers to return to free-spending ways for years — or perhaps generations. Economist Stephen Roach, chairman of Morgan Stanley Asia, says that "there is good reason to believe the capitulation of the American consumer has only just begun." U.S. consumer spending as a percentage of GDP reached 72% in 2007, well above the pre-bubble norm of 67%. Using that as a gauge, Roach says that only 20% of the potential retrenchment of spending has taken place, even after the dramatic decline at the end of 2008. "The imbalance that contributed to the crisis — overconsumption and excessive savings — cannot continue," says Ajay Chhibber, director of the Asia bureau at the United Nations Development Program in New York City. "The model where you stimulate and [then] go back to the old days is gone."