Published in: 2007
The book was published in 2007 by the journalist Joe Studwell and is a review of Southeast Asia’s dominant families. At the time, 13 of the world’s 50 richest families were from Southeast Asia – disproportionately many in relation to the region’s overall economy. The main thesis is that the Southeast Asian godfathers (Southeast Asian oligarchs) exploit political inefficiencies and operate in comfortable domestic markets that are free from global competition. In this way, they have built up great fortunes.
ELITE BACK SCRATCHING. According to Studwell, politicians and godfathers in Southeast Asia have a (too) close cooperation. Both parties are winning at the expense of ordinary residents. The godfathers get licenses and monopolies, the politicians get control and stability. The godfathers are likened to the oil barons of the United States in the early 20th century.
THE CHINESE ARE IN CONTROL. Most of the Southeast Asian godfathers are originally Chinese. In 2004, there were 50 million expat Chinese in Southeast Asia who together controlled 70% of the region’s assets. At the same time, the Chinese share of the populations was lower than 30% in all countries except Singapore.
50 FAMILIES ARE RUNNING THE SHOW. About 50 families control the business community in Southeast Asia through well-diversified conglomerates with interests in banking, real estate, shipping, food and gambling. The Godfathers are active on the region’s stock exchanges and have historically been good at putting companies on the stock market in good times to then repurchase them cheaply in bad times. Common to the industries in which they are active is that they very rarely compete in a global market. Exports, which have largely driven the region’s growth, have instead been financed by foreign interests, often from Northeast Asia or the West. Examples of godfathers are Hong Kong-based Li Ka-Shing (CK Hutchison Holdings) and the late Cheng Yu-tong (Chow Tai Fook Ent.). Both high on the Forbes list with fortunes of $35b and $17b respectively.
“’At the heart of the average godfather’s empire is a concession or license that gives rise to monopoly or oligopoly activity”
THE NORTH TRUMPS THE SOUTH. The proportion of Thais living in poverty has significantly decreased since the 1960s, from 65% to below 10% today. Similar statistics can be found for the neighboring countries. From that perspective, developments in Southeast Asia have been strong. But if one instead compares with Northeast Asia, whose populations are significantly better off than those in the south, it becomes clear what impact economic policy has had over time. Japan, South Korea and Taiwan have all implemented land reforms where almost everyone got to start with some capital – something that did not happen in Southeast Asia. According to the World Bank’s GINI index (which measures economic inequality), economic disparities are considerably smaller in Northeast Asia than in Southeast Asia. In addition, trade unions are also allowed in a completely different way in Northeast Asia than in Southeast Asia.
WEAK STOCK MARKETS. The stock exchanges in South as well as Northeast Asia have historically had a significantly weaker development than the markets in the USA and Europe. Studwell believes that one explanation for the lower returns is the large abundance of savings held in banks. This dampens the price of capital, which in turn lowers the general return on capital. The whole of Asia “suffers” from high savings. This also means that the godfathers, who often control the banks, have access to very cheap capital. And when cheap capital can be obtained from the house bank, the incentives to fight hard to increase productivity decreases.
CITY STATE ARBITRAGE. Studwell believes that Hong Kong and Singapore implement an arbitrage based on the inefficiency of neighboring countries. By offering services that are slightly better than what is offered in the domestic markets, Hong Kong and Singapore get large parts of the region’s business. In addition to this, they both have natural deep ports which has given them the opportunity to act as trade hubs.
THE SWITZERLAND OF SOUTHEAST ASIA. Hong Kong and Singapore have always been where the godfathers turn to for capital preservation. They usually do not dare to keep everything within the home country but secure it in HK or SG. The strong inflow of capital from foreign interests has since driven property prices in the city-states. In HK it has been the Chinese who have pushed up prices and in SG the Indonesians. Since HK’s and SG’s success is based on an image where there is order and safety, there has been much less corruption than in the surrounding countries.
“Since colonial inception they have offered tariff-free trade (with few or no questions asked about what is being traded) and have been places to park money (with few or no questions asked about where the money came from)”