The four-generation curse

The three-generation curse of family businesses is well-known:  the self-sacrificing first generation makes the fortune; the more cosmopolitan second generation grows the wealth; and the more laid-back third generation squanders it all.

China Economic Quarterly founder Joe Studwell, best known for his 2007 book “Asian Godfathers,” opines that four generations are involved, as follows:

“The first generation establishes a kernel of capital that the second generation, with improved ties to political power, leverages into a serious fortune.  A third generation then tries to hold on to an extremely diversified range of assets that reflect the unique personality and relationships of the father. By the fourth generation, a lack of application to this task, the decay of the original relationships on which the empire was built, and the inherent weakness of businesses based on family rather than professional management bring the house down.”

The boom in exports in the 2000s, Studwell argued, accounted for the rise of Asian moguls, whom he termed “godfathers.”  He studied the political and economic ties that linked them to rulers and governments in the Philippines, Hong Kong, South Korea, Thailand, Malaysia and Indonesia.

The result is a riveting yet sad read, filled with names that span Fortune and Forbes lists, albeit in a less flattering light.

“These godfathers have been much more the beneficiaries than the instigators of growth,” Studwell wrote.

A decade later, Studwell said unfortunately, nothing has changed.

“In all of these Southeast Asian political environments, godfathers continue to prosper.  The economic environment remains like that in Russia or Latin America, not like that which took Japan, South Korea, Taiwan and China rapidly to prosperity,” he told reporter William Pesek of Barrons in 2007.

Studwell’s take on the Philippines?

There appeared to be “no real institutional progress or change in its developmental trajectory” and the result “will … in the end be judged as a return to business as usual.”

How can the Philippines become more like Japan or Singapore?  Studwell’s 2013 book “How Asia Works” proposes a three-step solution.

First, set up favorable conditions for agriculture (particularly small farmers) to thrive.

Second, once agriculture burgeons, use the proceeds to create a manufacturing sector that can drive exports.

The key to economic growth—which we cannot gloss over—would be manufacturing.  This should be reflected in government policy.

Retail industries dominate in the Philippines, but unless we invest in manufacturing (rather than in service industries only), we will never achieve genuine economic stability.

Microsoft founder Bill Gates said in his website Gates Notes:

“Studwell makes a strong historical case that the successful countries do not simply rely on the invisible hand of market forces; they supplement [these] … with the heavy hand of state-driven industrial policy. These countries engage in a combination of protectionism (coddling infant industries to give them time to become globally competitive) and then culling losers (cutting off resources to firms that don’t succeed in export markets).”

Third, ensure that financial institutions take care of these two sectors (farming and manufacturing) to sustain growth that is beneficial to all sectors of society.

The above process is not easy. With endemic corruption, things break down.  Government and business need to get their act together.  Instead of grandstanding, strive for sustainable growth not just on paper, but also in terms of impact on people’s lives.