THE ASIAN AFFAIRS PUBLISHER'S MOOD
WHY DIASPORAS SUCCEED WHERE OTHERS FAIL? (issue nș 14)
In the 1990s, a myriad of books argued that ethnic Chinese ‘networks’ were spearheading Asia’s economic growth and becoming a major global force.
To support this contention, a variety of figures were produced. Economists at the World Bank were quoted saying that the combined economic output of the approximately 50 million ethnic Chinese living in Asia (about 23 million in Southeast Asia, 20 million in Taiwan and the rest in Hong Kong) approached US$400 billion in 1991. To put the number in perspective, it is about six times the GDP of Malaysia and twelve times that of Vietnam.
In July 1994, Southeast Asian investments in China were US$8 billion, while total investments from Taiwan were US$5.4 billion. Hong Kong was already the top investor in China with US$40 billion. In July 1996, a magazine estimated that between 1978 and 1996, of the US$120 billion invested in China, almost 80 per cent of the total investment had originated from overseas Chinese.
The economists had discovered a new concept: that of the Chinese diaspora. What it meant, nobody quite knew, but the disclosure of its investment pattern led to speculation that it was channeling funds to China at a time where professional economists, all of them preaching the gospel of Asian economic superiority, were skeptic about the future of China (see Tao Wenzhao in this issue).
By 1997, four World Chinese Entrepreneurs’ Conventions and 21 World Chinese Traders’ Conferences had been convened and attended to by Chinese from all continents, suggesting that many ethnic Chinese were beginning to consider whether their common ethnic identity could be a means to facilitate business ties (see Zhuang Guotu in this issue).
As the Asian economies were delivering nothing but good news, the speculation that contemporary Chinese capitalism had distinctive characteristics which facilitated economic growth and superiority became the talk of the day. The institutions, norms and practices of ethnic Chinese were identified as reasons for the growth of their enterprises. The fact that a sizable number of them were ranked by Forbes among the richest people on earth gave them a notoriety they had never sought.
As always with the rich and famous, experts of all kinds came with many analysis to explain the rise of a diaspora which for most of the XXth century had been considered a bountiful reservoir of cheap manpower. Although a minority argued that there was very little trust among Chinese outside of their immediate family members, others took the view that an ethnic network, based on Confucian values, reduced the transaction costs, increased coordination and diminished risks. In economic terms, it meant that such a system was highly efficient. It was enough to justify part of the Asian miracle.
It was a troublesome conclusion. After all, the profit-maximizing model beloved to classical economists depends on harnessing our natural tendency for self-love (a term coined by Adam Smith). Capitalism, whatever that is, exhausts neither the range of mankind’s motives nor its capacity for folly. What it does best is to put the individual at the center of its system while the society’s motives are the center of the Asian model.
The irony is that we had been told in the early 1990s by Francis Fukuyama, the famed author of “The End of History and the Last Man”, that human civilization was at the brink of a new era. Yet, by the end of the decade we were knee-deep in a very old debate, and not further than the parable of Damascus, as Professor Wang Gungwu reminds us (see interview in this issue).
Then came the Asian crisis. Although it is today clear that the crisis was only Asian in name, many beliefs were shaken. The Asian values did not exist after all. What we had was “crony capitalism” or “ersatz capitalism”, characterized by “opacity” and lack of professionalism. Many fault lines were discovered, most of them if not all of them amongst the ethnic network that was, only months before, a recipe for success.
Equal division of family wealth among sons, a common Chinese practice, was all of a sudden considered undermining the development of Chinese business groups and leading to the dissipation of corporate holdings (in fact it was making life difficult for a banker trying to recover a non-performing loan). Academics in and outside the region sought to substantiate new claims. Was the domination of the corporate sector by a few politically well-connected Chinese families, the Forbes Chinese tribe, responsible for the crisis?
The current recovery has thrown most of the explanations of the time up in the air, nevertheless the stigma is still there while many questions remain.
Was and still is the Chinese diaspora that important? In fact, what are diasporas nowadays, knowing that today such a word has little to do with the dispersion of the Jews so many centuries ago?
The short answer is that they are basically communities sharing the same values, whatever the values are. To understand what the consequences of such sharing are, we looked at different overseas communities, the Chinese one of course, but also the Indian one and the Vietnamese one. Many others exist. In fact, they are today so many “diasporas” that we could say that seem to be a natural consequence of modern times. Many of them share only cultural values. Their wealth is relative and their impact on the homeland hard to judge.
Of course, it can be argued that China’s open-door policy without the overseas Chinese would have been a failure. But then how do we know? China’s open-door policy is certainly part of a larger historical process. To narrow it down to the issue of the overseas Chinese is probably wrong, and to keep alive in 2001 the suggestion that ethnic Chinese could influence world events by pooling their multi-billion dollars in assets to form a so-called “third China” is just racism under a new guise.
The only question that raises the strength of diasporas is not related to their assumed impact on the economy or world events. It is the simple realization that all the diasporas are more wealthy and more successful in economic terms than their country of origin.
Why is the overseas Indian community rich and India poor? Why is it the same with the Chinese community. Even, and it is a striking example, the overseas Haitian community is rich while Haiti remains, decade after decade, abysmally poor?
Of course, the short answer is that each diaspora harnesses the individual quality of its members much more efficiently than the country of origin harnesses its society. But it is not the whole story. After all, only 700 million people enjoy the benefit of capitalism while more than 4.2 billion don’t. That there is a natural limit to what we call economic efficiency is true. Such a principle is probably of the same order as the principle of the speed of light. The closer you are to the speed of light the smaller mass becomes. Is it the case that the closer capitalism is to its self-best, the smaller the number of people that benefit?
A more thorough explanation of the success of diasporas is mentioned by Raj Sital, one of the leaders of the Hong Kong Indian community. Diasporas seem to be more efficient at converting capital into money and money into capital than any other system.
That quality has in the past not only been overlooked but totally misunderstood.
This is not surprising. Today the real economy where physical goods are produced and consumed in real factories made of brick and mortar and manned by human power is increasingly overshadowed by a world made of computer screens where virtual reality reigns at all levels. Yet the financial crisis of 1997 and the debacle of the NASDAQ market in 2000 should have raised our awareness but what it did in fact was just the reverse. It increased the confusion and misled everyone a little bit more.
Capital is first an abstract concept that must be given a fixed tangible form to be useful, but with the advent of the E-economy and a new species of money-traders and fund managers, capital is now confused with money, while in fact it is only one of the many forms in which it travels.
It is ironic that we rely on fund managers to judge how well such a conversion process is done, knowing that they are today far less efficient at it than was previously thought: a recent study of the hedge funds published in the United States makes clear that such mega-funds carry as much as 80% of their value in “dead capital” (bonds and other monetarized papers that are locked out of the real economy).
It is quite telling in fact that the Chinese diaspora was in 1998 under attack for its perceived inefficiency, while in fact it was not its lack of it that was at the heart of the matter, but rather the reverse, its high efficiency making it more vulnerable to the vagaries of other economic actors.
But then, why are diasporas more efficient, and not less at converting capital into money and vice-versa. Hernando de Soto has a good comparison: capital, like energy, is a dormant value. Bringing it to life requires a process so that it can unleash its economic potential. What is then required to achieve that? Although Hernando de Soto was not studying diasporas but why capitalism triumphs in the west and fails everywhere else, he lined up six reasons that, in my view, are exactly why diasporas triumph where the others fail.
First reason: to fix the economic potential of capital, it needs to be valued. Western countries take it for granted that a value can easily be fixed. For that, they rely more and more on the stock-market in spite of its many failings. It is not so in non-industrialized nations where the non-visible qualities of the value (the fact that physical assets give birth to capital) are never fully represented. One of the essential characteristics of any diaspora, is precisely to transcend such non-visible qualities.
Such non-visible qualities, to be effective, need to be integrated into a formal representation system. In the third world, most of them end up being held extralegally. It would take too long here to explain why it is so, but a common particularity among the diasporas is the fact that each one is an integrated system. Information and rules are shared by all the members of the group. Hence there is no isolated data among them and no requirement for an extensive and expensive legal apparatus to keep track of the assets and fix the system. What the members of the diasporas can do is standardized and, at the level of the group, valid for everyone. Such commonality speeds up the process of transforming capital into money and gives it a higher rate of conversion than any other system.
The third reason is that the representation of value relies on accountability. The accountability of the individuals in a diaspora is far greater than in the Western world. As Raj Sital puts it, your word is your bond. To maintain such accountability, the Western world spends tremendous resources. Suffice to look at the increasing cost of legal representation and the absurdity of so many rulings in the United States to understand that a diaspora is using many cheaper means (cultural ones actually) to achieve the same result. In short the diaspora system is more effective.
The fourth reason is that, within a given diaspora, assets are more fungible than in any other structure. The fungibility is the quality that allows to uncouple the economic features of an asset from its physical state. The higher the fungibility, the better. That is where the Chinese excel and where Li Ka-shing, the Hong Kong magnate is the master of all. This is where what was thought to be a problem, the fact that Chinese families tend to divide assets was in fact a quality that fund managers and bankers do not appreciate for what it is. When you are able to split your assets into smaller, but individual holdings, you increase the possibility to carry out different economic functions. Thanks to that property, a single source of capital ends up being divided and recombined in more ways than a Meccano set, without the integrity of the system being affected. Hence its strength.
The fifth reason is the result of fungibility. The fact that assets are divided, combined or mobilized to suit any economic opportunity converted the members of the diasporas into an informal network of accountable individuals. Such a network has in the long term more economic potential for growth than a grouping of unreliable or opportunistic economic agents. This is because the network radically reduced the risk factor among its members. Without knowing who has the rights to do what, the network has to enforce obligations. As Raj Sital points out, you have to entrust your goods. Who will do that in Lagos unless to a member of the Indian diaspora?
The last reason which explains why diasporas succeed where others, and in particular their country of origin fail, is that their record-keeping system of economic transactions being immune to political changes, the conversion process of capital never ceases. Therefore people within such communities are constantly readier to make their assets lead a parallel life as capital and the threshold to do so is far lower, as the security is higher. People are able to make deals with little concern about the security of transactions. They can therefore focus not on the means but on the end, that is economic opportunities.
The six reasons mentioned above fix the economic characteristics of the diasporas. They challenge many conventional beliefs and do not cover all the points raised by the interviews published in this issue but they explain why diasporas are generally a cause for alarm for some. Scholars and policy-makers studying diasporas should spend more time pondering why they are efficient economic agents rather than trying to decipher if they have noble motivations, which nowadays is a way to say that they should adhere to Western norms, or be damned.