Losing Traction

Building a Better Tiger
Asian leaders for years have recognized the need to reduce dependence upon exports to the developed world. But as long as the engine wasn't broke, they weren't inclined to make extraordinary efforts to fix it. Now, it appears Asia's primary growth driver is, at the very least, badly bent. Meaningful reforms that diversify the sources of economic growth may be needed if the region is to avert a prolonged period of moribund economic activity.

The first layer of diversification must come in the makeup of the tigers' export markets by strengthening and extending trade links beyond the U.S. and Europe. Policymakers in Taiwan aim to do this by stimulating trade with other emerging markets, such as Russia, Brazil, India and the Middle East. Commerce within the region also needs a boost. The tigers need to "open up trade among the markets here, and to develop local goods that are attractive to local markets," says Joe Zveglich, assistant chief economist at the Asian Development Bank in Manila.

The second layer of diversification requires reducing overall dependence on trade by promoting domestic consumption and expanding service sectors. Park Chung Hee's growth model discouraged investment in domestically focused sectors and consumer spending — both of which could provide a cushion to Asian economies in global downturns. Vestiges of his biases remain, to the detriment of the South Korean economy. For example, South Korea hasn't developed the kind of social services, such as day-care centers for the children of working parents and homes for the elderly, that would relieve some of the financial burdens on working-class families and encourage them to spend rather than save. "What tended to be taken care of in the household could become more marketized," says Lim Won Hyuk, an economist at the Korea Development Institute in Seoul. "There is a lot of room for job creation."

South Korea's service sector in general is still fettered by regulation that stifles its development as a source of growth and employment. A December report by the Organization for Economic Cooperation and Development found that service companies are burdened by higher taxes and energy costs than manufacturers, while excessive regulation creates barriers for start-ups. Hwang Doo Jin, an architect who operates his own small firm in Seoul, complains of endless, stressful hours untangling the confusing rules that govern his business. "It is easier to produce a masterpiece than run a viable business over time," Hwang says.

The tigers are already heading in the right direction. Shortly after South Korean President Lee Myung Bak took office last year, he launched a program to improve the services sector by increasing financial assistance to targeted businesses and by reducing red tape. Taiwan President Ma Ying-jeou is undertaking his own deregulation program, with a special focus on Taiwan's biggest trading partner, China. Ma believes that sectors of Taiwan's economy, such as tourism and finance, have been stunted by the island's political standoff with Beijing. (China considers Taiwan a renegade province.) Ma is pushing for an agreement with China that would allow for free flows of capital and services across the Taiwan Strait for the first time. He has already opened the island to mainland tourists and eased restrictions on Taiwan investment in China.

Yet if the tigers really want to thrive in the future, the answer might lie in rejecting another legacy of Park Chung Hee: the idea that governments alone can successfully engineer high economic performance. Jim Walker, an economist at independent research firm Asianomics in Hong Kong, argues that politicians still intervene too much in their economies instead of allowing market forces to work. "What governments need to do is start trusting their own people rather than hoping the West is going to get it right all of the time," Walker says. For the tigers to keep roaring, they may need to find their future, for the first time, at home.

— with reporting by Neel Chowdhury/Singapore, Natalie Tso/Taipei and Jennifer Veale/Seoul