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Summary
Business in Southeast Asia is often controlled by immigrant entrepreneurs. These entrepreneurs came from China, India and the Middle East. They were unable to serve in government positions and instead became traders. Some of them became wildly successful.
After the end of colonial rule, rent-seeking in Southeast Asia continued in much the same fashion as before. The only difference is that a new group of tycoons teamed up with local politicians to gain control of scarce licenses previously held by European corporations.
Joe Studwell argues that four conditions have been necessary to maintain their business empires: developing relationships with politicians, obtaining scarce licenses from them, securing financing from captive banks and maintaining total control over their organisation.
Rent-seeking in Southeast Asia has retarded growth. Productivity in East Asia has come from innovation and manufactured goods exports. But so far, the economies across the region continue to be dominated by local tycoons.
Joe Studwell’s 2007 book Asian Godfathers continues to be the definitive text on the rise of tycoons dominating Southeast Asia’s economies. These groups of tycoons have built up conglomerates that span industries as diverse as banking, mining operations, airlines, and tobacco.
The tycoons had built up an extraordinary amount of wealth:
“A small region that, concurrently, could not boast a single non-state corporation among the global top 500 none the less accounted for a third of the wealthiest two dozen people on the planet.”
Why? The answer is rent-seeking: tycoons gathered forces with political leaders to extract rents from the economy. In other words, accumulating wealth without adding any value. In the book, Studwell shows how it’s done in practice, from one country to the next. This is his story of how tycoons have come to dominate Southeast Asia.
Table of contents:
1. Immigration from the North
2. The rise of Asia’s tycoons
3. How to become a tycoon: 4 easy steps
3.1. Develop relationships
3.2. Obtain scarce licenses
3.3. Secure financing
3.4. Maintain total control
4. The implications of Asian rent-seeking
5. Conclusions
1. Immigration from the North
Over the past centuries, immigrants have come to Southeast Asia: from China, India, Persia and even Arabic countries.
These immigrants often ended up becoming traders or businessmen. And over time, individuals from this group have become wildly successful, beyond anybody’s expectations.
From the 16th century onwards, Southeast Asia became dominated by European colonies. These included the Dutch East Indies, British Malaya and Burma, the Spanish colony of the Philippines and the French Indochina. Siam (= Thailand) had been an independent state all along.
Migration to the region sped up with the invention of the steamship and the opening up of Chinese ports in the mid-19th century. By this time, there were half a million Chinese in Southeast Asia. A huge number compared to the then 5 million people in Thailand and 2.5 million in what we today consider Malaysia.
The 1869 opening of the Suez Canal led to even greater trade. Spices had always been a sought-after commodity, but increasingly we also saw trade in sugar, tin and rubber. Traders flocked to the region. By the early 20th century, there were 3-4 million overseas Chinese in Southeast Asia.
One of the reasons for the success of ethnic Chinese in business in Southeast Asia is that they were unable to serve in the government and were too educated to become farmers. Instead, they’d operate trading monopolies, engage in tax farming, run mining ventures and plantations, gambling venues and even trade in liquor and opium.
Another reason for their success is that they did not threaten indigenous people's political power. The elites felt comfortable teaming up with them since they knew that immigrants would stay on as silent trading partners. Perfect for extracting economic rents.
Such arrangements had existed in the region for at least half a millennium. Colonialism reinforced such tendencies, with European companies teaming up with local elites.
In the late 20th century, large corporations started to outcompete the small-scale immigrant tycoons from China and India. The smaller-scale tycoons found it difficult to access credit from HSBC and Chartered Bank of India.
And the colonies imposed high taxes on the export of manufactured goods so that only resources would be extracted from them. Locals were unable to build export powerhouses. Instead, they turned to the domestic service economies to make a living.
2. The rise of Asia’s tycoons
The end of the Second World War proved to be a blessing for the Chinese and Indian immigrant tycoons in Southeast Asia.
European businessmen not killed in fighting during the war were either imprisoned or forced into exile. In the words of Japanese historian Suehiro Akira:
“When the Europeans returned to Thailand, they found that major industries, especially in the commercial and financial sectors, that they had previously controlled were now dominated by either the Chinese or Indians.”
This was their time to shine. In Indonesia, President Sukarno launched the Benteng programme, which was meant to support indigenous traders. But in reality, deals were made whereby immigrants teamed up with locals to bribe themselves into lucrative contracts.
The nationalisation of Dutch businesses in 1958 opened up further space for immigrant tycoons to extract rents. After Suharto became President in 1967, he doled out concessions to people familiar to him:
“When Suharto came to power he wanted to be king. So he did exactly what the Dutch did.”
So in the transition from colonialism to self-determination, nothing changed. The countries shifted from colonial rent-seeking to local rent-seeking, often in partnership with immigrant would-be tycoons.
3. How to become a tycoon: 4 easy steps
In the book, Joe Studwell offers four “tricks” needed to become a tycoon.
First, you need to develop relationships with people in power. Second, you must monetise that relationship by obtaining scarce licenses or concessions. Third, secure cheap financing for any capital expenditures or acquisitions needed to use the license. And finally, maintain total control over your operation.
This is a pattern that occurred over and over again across the region.
3.1. Develop relationships
In the decades after the Second World War, a new group of leaders took over the countries across Southeast Asia: Suharto in Indonesia, Ferdinand Marcos in the Philippines and Mohamad Mahathir in Malaysia.
These new leaders promoted their own businessmen partners to extract wealth from their positions. Often, the tycoons would hold shares on behalf of the leaders, obscuring any paper trail that could lead to accusations of corruption. And by promoting their partners, they gained ultra-dependent, ultra-loyal sources of finance.
If you read mainstream media or biographies, you’ll get the impression that many tycoons rose from rags to riches. And while it’s true that some grew up poor, most were privileged through their special connections.
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