The Tiger Trap

The developing world has had no shortage of dictators who made lofty promises to uplift the poor and build a powerful nation. Few ever delivered.

But then there was South Korea's Park Chung Hee. A general who took control of the country in a 1961 coup, he ruled, often with an iron fist, for 18 years. Yet he was deeply moved by South Korea's destitution. In the early 1960s, the country's per capita income was just over $100, and the economy depended on American aid. Park, a virulent nationalist, vowed to do something about it. "I had to break, once and for all, the vicious cycle of poverty and economic stagnation," he later wrote.

The solution Park divined was to hitch South Korea's future to an expanding global economy. The country used its cheap labor force to manufacture necessities like shoes and clothing to sell to consumers in the developed world, particularly those in the U.S. The strategy proved wonderfully efficient. It attracted investment capital, generated factory jobs for impoverished farmers, established infrastructure to supercharge commercial development and otherwise produced wealth that South Korea could never have generated by itself. Eager to raise living standards in their own countries, Asian policymakers and business people latched on to that formula. The economies of South Korea, Taiwan, Hong Kong and Singapore did so with such success that they became known as the Asian tigers. Their growth model produced miracles--and, as Park said in a 1965 speech, exports were "the economic lifeline."

Today the tigers are being tripped up by this same lifeline. As consumer and industrial demand dries up in recession-racked Western countries, East Asia's export-led nations are proving to be highly vulnerable to a synchronized global slowdown. Among the tigers, overseas trade is shrinking with frightening speed: Taiwan's exports in January plunged 44% from the same month a year earlier, while Singapore's fell 35% and South Korea's 33%.

Overall economic growth is following suit. In the fourth quarter of 2008, Taiwan's GDP contracted 8.4% from the same period a year earlier, making it the worst quarter on record. South Korea's GDP shrank 3.4%, Singapore's fell 4.2%, and Hong Kong's dipped 2.5%. Eric Fishwick, head of economic research at the brokerage CLSA in Hong Kong, predicts the dismal numbers will persist. He expects GDP in Taiwan and Singapore to contract at double-digit rates this year. "We've never seen an external shock in Asia like this," says Fishwick.

Asia has suffered recessions before, of course. But this downturn is different. Unlike in 1997-98 and 2001-02, Asia's favorite customer--the American consumer--is drastically cutting back. Consumer spending in the U.S. dropped at a rate of 4.3% in the fourth quarter of 2008, the steepest quarterly decline since 1980. Because roughly 25% of Asia's exports ultimately end up in the U.S., the region's manufacturing powerhouses are helpless to counteract this crash. Trade among Asian countries is also plummeting, since much of this intraregional commerce is indirectly dependent on the West. A high percentage of Taiwan's trade with China, for example, is made up of electronic components shipped to Chinese factories for assembly into finished products that eventually appear on U.S. store shelves. As a result, Taiwan's China trade is contracting twice as fast as the island's U.S. exports.