Wednesday, August 17, 2016

Asian Godfathers

On a per capita basis, Asians earn far less and own much less wealth than North Americans and Western Europeans. And yet there are numerous extremely wealthy tycoons who hail from the region. How does this happen? Joe Studwell explains in Asian Godfathers.

The book focuses on events and people in Southeast Asia in particular, including Thailand, Indonesia, Singapore, and Hong Kong. Contrary to popular belief, these are not generally free economic zones (with certain exceptions in the export market and in the ports market, which are subject to global competition and therefore either must be competitive or shut down).

In general the book supported my existing world view of the region. That is, governments and big businessmen are in bed, which creates/enforces monopoly positions for the rich, which they then use to extract rents from the general population. This world view was formed thanks in part to a couple of favourite books of mine, Why Nations Fail and How to Get Filthy Rich in Rising Asia: A Novel, both of which I highly recommend.

But this book goes into far more detail about the people and the businesses in Southeast Asia that have created a bunch of tycoons while many get left behind. Politicians generally don't explicitly control businesses (with some exceptions like Suharto, with dire consequences for everyone else), which keeps society from complete dysfunction (unlike say, certain places in Africa). But politicians do count heavily on the rich for their support, and in a symbiotic relationship they repay the rich in kind with exclusive licenses (e.g. tycoons will often be granted the sole rights to sell staple commodities like sugar), rich government contracts and the like.

It's hard to see a way out of this. There are too many entrenched interests who are too vested in the status quo to do anything but fight reform. Even after economic crises offer burning platforms, there is little change that occurs. Taxpayer funds are often used to bail out banks that were used as piggybanks for the rich, and while a lot of the rich just flee to another nation or get prosecuted or attacked by mobs and activists, new godfathers get created from the rubble because that's just how the political/economic system operates. There likely needs to be some sort of separation between legislative, judiciary, and executive branches of government, as well as independent central banks. But when the people in control of this stuff get to extract mind-boggling rents, where is the incentive to do this?

From an investor point of view, it may seem like a paradise to be able to choose between all of these government-created moats. But the godfathers know better than to share their moats with minority investors. They use a number of tricks to ensure the excess returns accrue to them:

1) Vertically integrate, and then control what gets charged to who, ensuring privately-owned companies get the economic benefits
2) Acquire the licenses for cheap, and sell these at market rates to the public company
3) Use the cash flow from moats to diversify into other things. These other things are not great businesses, nor are they run by great businessmen. (These aren't people who are skilled at business, but rather skilled at getting what they want from politicians.)

The public companies therefore often generate low returns, or losses, and even go under quite a bit. Meanwhile the benefits of the moats accrue to the godfathers, who have no incentive to share with minority investors.

It got a bit difficult for me to follow the entire cast of characters, because there are too many to keep straight. But if you want the real history and the real events, then you'll want to read the book. If, on the other hand, you would prefer to understand the issues, then I highly recommend Why Nations Fail and How to Get Filthy Rich in Rising Asia: A Novel instead.

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