The rich, the affluent and how they got there

He dresses like a tai chi master and speaks softly like a poet. But once he starts rattling off figures and economic forecasts, you get a sense of why Dr. Yuwa Hedrick-Wong is one of the most sought-after economists and business strategists in the world today.

At the launching of his book, Succeeding Like Success: The Affluent Consumers of Asia, in Singapore recently, the MasterCard economic adviser revealed interesting findings about the rich and affluent, and how they got there.

Yuwa writes, "Most of Asia was dirt-poor at the end of the war," and when countries in Asia became success stories in the decades following the war, it "came as a surprise to many, including the specialists and experts who made it their business to know."

Yuwa attributes part of this success to the pragmatic, market-friendly approach of Asian countries that created "a fertile ground for entrepreneurs to flourish."

He traces the three routes Asians take to affluence, describing them as the inheritance pathway, where wealth is built through inheritance, family connections and support; the pioneering pathway, where one creates massive wealth from literally nothing through entrepreneurial energy and successfully seizing and exploiting opportunities; and the professional pathway, where one acquires professional skills to enter well-paid employment.

How people got their money also influences how they spend it. Those who got it through inheritance, according to Yuwa, have more sophisticated tastes and are very subdued about their luxuries. Those from the professional pathway are very information-driven and do research before spending their money and they’re not easily swayed by the usual marketing hype. Those from the pioneering pathway came from being very poor to being very wealthy and cannot wait to tell the world just how wealthy they are now. "You see a lot of the third type in China today," he says. "A lot of them are in their 40s and 50s, they worked so hard for 20 years, so now it’s time to reward themselves."

In the Philippines, Yuwa says the inheritance pathway is arguably the most important pathway to affluence with families such as the Ayalas and Sorianos belonging to the ilustrados, and the Sy, Gokongwei and Tan clans belonging to the Filipino-Chinese group.

"The professional pathway to affluence in the Philippines cannot be said to be functioning well, largely due to limited opportunities in well-paid professional employment in the country."

Compare this to Singapore, where a large number of multinational companies establish their Asian headquarters there and hire Singaporean professionals to run the show, and you understand why the mass affluent in Singapore have a much larger base.

In the Philippines, limited opportunities have led to an outflow of human resources, and Yuwa notes that while they’re "making a significant contribution to the economy, these overseas workers are not making progress on their own pathway to affluence."

As for the pioneering pathway, our country is not exactly a "hotbed of entrepreneurial startups and successes. Entrepreneurs without any political and business connections face formidable challenges." Government bureaucracy is practically discouraging small entrepreneurs from making the transition from underground economy (the tiangge type that doesn’t issue receipts) to mainstream – the same with India, where bureaucracy is so thick it takes years to register a business. The easiest place to set up a business in Asia? Hong Kong, according to Yuwa, where you only have to pay something like $2 to set up a business.

Yuwa researched the book for three years – or, as he put it, he spent three years thinking about it and four months writing it – spending time in all the countries covered in the book and, between the number-crunching and statistical analysis, taking time to talk to the rich and affluent.

A Canadian who grew up in Vancouver, Yuwa has been forecasting economic growth and emerging business development trends in Asia Pacific and has been the economic adviser of MasterCard since 1999. As a regular speaker on the Forbes CEO Forum, which attracts anywhere between 30 and 60 billionaires at any one time, he got anecdotes and insights from the rich and affluent in Asia. Of course, all this is backed by very systematic objective and quantitative research on how income is distributed across the region and how many households were moving from low income to high income, etc.

What was surprising to him is how big the mass affluent is in Asia and how much bigger it will become, especially in China and India, where the twentysomethings are the biggest spenders. "A lot of the common perception about Asia is that there are a lot of poor people and very few rich people. But the number of rich and affluent Asians is getting sizable. In some countries I had to recheck the numbers."

In the Philippines, the "mass affluent" are described as having household incomes between $15,000 and $75,000 (P750,000 and P3.75 million), and the "rich" from $75,000 (P3.75 million) and above.

Asked who among the Filipino billionaires earned his respect and admiration during his research, Yuwa says, "To me, the Ayala group in the Spanish side is the most distant from Philippine society. It’s almost as if they crafted the society but were never part of it. Whereas the other side, the Filipino-Chinese, grew organically within the society – they struggled within it. I think there’s a big difference. You have to give credit to the Ayalas for adapting to the times, for their ability to maintain the wealth, but they started out from a very privileged position with a really powerful mandate from the Spanish colonial government. But I admire the entrepreneurial energy of the other group more because they arrived in the Philippines penniless. I think they’re more impressive."

When told of the legend that some Chinese described Manila as having streets paved with gold, which is why they came over, Yuwa points out, "Mind you, they came from the poorest villages in China. In comparison, when they arrived in Manila 75 years ago, under the Americans, for example, the streets might as well have been paved with gold."

MasterCard also recently released its latest MasterIndex of consumer confidence.
What surprised Yuwa most is the strength of consumer confidence despite the global economic environment showing signs of a slowdown.

According to the MasterIndex, Asia Pacific remains fairly optimistic about the first half of 2007 at 64.3 percent, rising from six months ago (57.4) and a year ago (57.7). In the Philippines, consumer confidence has recovered from very low levels in 2005 and has turned "marginally optimistic." The MasteIndex pegs it at 57.2 percent compared with six months ago (51.9) and a year ago (28.9). While consumers are overall optimistic, they are still pessimistic about the economy (46.7), employment (45.0), and quality of life (42.8).

What’s interesting is that Korea has the lowest in the region at 29.3 percent. Even Koreans’ sentiments on employment (14.2) and economy (15.8), quality of life (30.1) are more pessimistic than Filipinos’.

Isn’t this just a matter of culture – that Filipinos are inherently positive about their lives even if the economy and the political situations remain the same? Yuwa says the numbers are more a reflection of expectations rather than differences in cultures. "Korean households have a very high income in society and clearly their expectations are very high. So objectively, they’re much better off than the average Filipino household, but since their expectations are so high, they just feel awful about their current situation. Whereas in the Philippines, the economy hasn’t changed that much, but on the ground household earnings have gone up – not because they have better jobs, but because remittances from overseas workers are rising and they go straight to the lowest one-third of households, so the impact is huge."

Yuwa explains that consumer confidence in Metro Manila is a direct consequence of the remittances of overseas workers. "The countryside (where most OFWs come from and send their money) creates domestic demand that drives domestic businesses. Domestic businesses are expanding in Metro Manila because of the rising demand in the countryside. We looked at the last three years and found that small business expansion is directly co-related to demand from the countryside. The money from the countryside is not because agriculture incomes have increased but it’s from remittances, therefore the urban middle-class who work in small business see better opportunities."

This may be well for now, but Yuwa warns that the situation may turn for the worse. "The Philippine situation is completely unique. Other countries do have overseas workers but the number is much smaller. In Singapore, you have foreign workers from Indonesia and India as construction workers, but there are also a lot of foreign workers from Europe as professionals. The Philippines is dominated by the lower end of the employment spectrum. But what is even more of a concern to me is that even the highly trained Filipino professionals are downgraded when they go overseas. If you contrast that to India, the boom in the IT sector happened because in the mid-1980s, Indian workers got upgraded when they went overseas. They literally were told to work above their capacity, so after five or seven years they became so good that they went back to India and set up businesses. That’s a positive backward linkage. What I’m talking about is knowledge flow. What are these people bringing back to the Philippines to create business opportunities? There has to be positive backward linkages."