Ancestral ties

Dispersed ethnic groups have always had a disproportionate impact on economic life - what makes these networks so successful?

by Michael Backman, World Business
Last Updated: 23 Jul 2013

Money makes the world go round. But what makes the money go round? More often than not, it's ethnic networks - groups of people who share a common ancestry and who for historical reasons are spread across the globe. Exile and persecution, as well as political and economic conditions, affect the numbers and dynamics of any diaspora.

This report looks at some of the most important ethnic groups in the world today. Overseas Chinese dominate the economies of south-east Asia and although India's Parsis are almost extinct, their worldwide business influence has never been greater, thanks largely to one business group.

So why do dispersed commercial groups work so well? Some, such as the Chinese, are at their best in business environments that are rough - where the rule of law is weak, transparency is poor and there are few formal means to enforce contracts. Ethnic minorities, by nature, tend to be insular and cohesive. Their minority status and very often feelings of persecution from the majority make them stick together for their mutual protection. The cohesiveness means familiarity: they know one another. Information flows fast within the group.

It also means that if a group member offends another member, perhaps by dishonouring an agreement or a contract, then social ostracism will be intense and swift. And that is a very powerful contractual enforcement mechanism. Some ethnic trading groups even set up their own bodies to adjudicate in disputes between members - the Chinese chamber of commerce in each south-east Asian city and town performed this function. It meant that such groups did not have to rely on corrupt and patchy local legal systems. It also gave them a comparative advantage in business over the rest of the community, which had to contend with the unreliable state legal system.

The power of education should not be underestimated: persecuted minorities or refugee minorities have a strong predilection for education. Jews throughout history, the Shanghai Chinese who fled Shanghai when the Communists took over, Vietnamese and Cambodian 'boat people' who fled Indochina in the 1970s - all have placed a high value on education and subsequently enjoyed disproportionate success because of it.

Another advantage that cohesive commercial minorities have is that they can internalise information costs. Information flows within the community - who is a bad credit risk, market shortages and so on. That many trading groups are spread across borders helps in the identification of international business opportunities. The costs of information-gathering and doing business across borders are then internalised within family and community networks.

When China first opened its doors to outside investors in 1979, it was not multinationals that were the first to go in - they were still commissioning expensive feasibility studies and trying to find consultants who might identify opportunities. Instead, it was the hundreds of Chinese investors from Hong Kong and south-east Asia, who used their ancestral and family links to identify opportunities. That is why most of the investment went first to southern China and not to Beijing: most overseas Chinese have their ancestral origins in southern China; almost none are from the north.

Some ethnic groups cope better with business in a structured, modern economy than others. It is said that Indonesia's Chinese comprise 3% of the total population but own about 70% of that country's non-government, non-foreign private, non-land capital. Chinese Australians probably account for about 3% of Australia's population, but there's no evidence that they account for much more than 3% of Australia's local, private wealth. Why the difference? Because traditional Chinese commerce works best when the rule of law is weak. When it's not, then the Chinese have no greater advantage over anyone else when it comes to doing business.

Why are Indians so prominent in Silicon Valley and the West's finance capitals when the Chinese are not? The answer is that, culturally, Indians are more prepared to work as employees. Chinese prefer to work in the family firm. Historically, they are traders, meaning that their business expertise is in goods; there is a cultural disregard for services. Indians, particularly Brahmins, are adept at the new economy (and many of India's outsourcing software firms are dominated by Brahmins).

The world of a trading minority is constantly changing.Occasionally, one minority moves in and replaces another. The Jains of India have displaced many Hasidic Jewish traders in the worldwide diamond trading business in recent years. And in Paris, the bar-tabacs or small bistros that once were mostly run by Auvergnats - French families from the mountainous Auvergne region - are today more likely to be run by ethnic Chinese from China, Cambodia and Vietnam. The Auvergnats have grown richer and no longer want to work the long hours that running a bar-tabac entails. So they are vacating the sector and another minority is moving in.

Cross-border networks appear whenever upheaval and migration occur; within a short time, capital and goods start to flow within those groups. One of the first major investors to arrive in Afghanistan after the Taliban was removed was Habib Gulzar, an overseas Afghani living in Dubai. His firm, Gulzar International, established a series of Toyota service shops around the country in 2001 and started work on a $25 million Coca-Cola bottling plant in Kabul in 2004. The overseas Lebanese are habitually called on to contribute investment funds to help rebuild Lebanon after each conflict. And money from ethnic Tamils around the world flows into the Tamil areas of Sri Lanka to keep the local economy afloat.

Which other dispersed ethnic group might emerge as tomorrow's trading powerhouse? Overseas Filipinos are a possibility. Filipino maids are spread across the world and remittances to the Philippines from overseas Filipinos were estimated to be $15 billion in 2006 - or a massive 15.2% of the Philippines' GDP, says the World Bank. Nigerians might be another successful trading minority. Nigerians in Diaspora, an NGO founded at the suggestion of Nigeria's President Obasanjo, says as many as 10 million Nigerians live outside the country. They turn up everywhere and their brazenness and tenacity are an irritant to regulators and immigration authorities worldwide, but they have the makings of a potentially successful commercial diaspora. Remittances of about $2.5 billion go back to Nigeria each year, accounting for 2.3% of Nigeria's GDP, according to the World Bank.

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