LONDON, November 24 (IPS) – In our recent book, “The Connected World: The Future of Asia, published by Cambridge University Press in October 2022, we argue that mutually beneficial links between dynastic business conglomerates and political elites are important drivers behind Asia’s extraordinary renaissance. However, these close ties now threaten future economic growth.
That is because the corporate structures prevalent in Asia of Business Groups systematically work with politicians in Asia to create excessive market power and overall centralization. They were very adept at entrenchment.
Although, by concentrating resources in the hands of a relatively few, which has been a fairly effective growth engine over the past half-century, limited competition and the stifling of innovation threaten progress. set in the future.
Widespread and highly resilient networks of connections running between businesses and politicians have created a common backbone for Asia’s development and have crisscrossed political systems. We describe these networks as the Connected World.
That world consists of a web of interactions between businesses and politicians/political parties that are highly transactional and often have a significant degree of reciprocity.
As a result, politicians look to companies for personal campaigns or donations; give bribes; provide jobs for families or associates while providing reciprocal incentives, such as job creation in areas or at times of political advantage.
At the same time, businesses look to politicians for protection from domestic or foreign competition; providing grants, loans and/or contracts in the public sector. All parties benefit from these interactions, creating a stable political-economic equilibrium.
These arrangements have served Asia well over the past half-century, with Asia’s share of the world economy growing from 9% in the 1970s to almost 40% today. However, the connected world will provide less of a supporting platform for future growth for a variety of reasons. Neither politicians nor business groups are sufficiently concerned with stimulating competition, whether through the entry of domestic or foreign multinationals as competitors.
Furthermore, since Asian business groups are often very diverse, with oligarchic or dynastic control enhanced by cross-ownership and pyramiding of ownership, their economic consequences must be measured. measured not only by traditional measures of market power, but also by overall levels of market power. concentration as, for example, expressed as the ratio of the total sales of the five largest firms to GDP.
To put this in context, while the market concentration (CR5) of the largest US companies, mainly in the technology sector, is often high, the overall concentration of the five companies is only about 3%. The comparative figures across Asia in 2018 are much higher, as can be seen in Figure 1. CR5 in South Korea exceeds 30% and even in very large economies – India and China – exceeds more than 10%.
The findings were even clearer when we looked at the ten largest companies (CR10). In the US the figure is only about 4% but in Korea it exceeds 40% and in India and China it exceeds 15%.
Looking ahead, the consequences of the connected world will be much less favorable, not least because growth will increasingly depend on innovation. For the most part, existing networks are not suitable for fostering innovation that thrives on an open ecosystem of universities of science and business districts, funders, lawyers and entrepreneurs, and willing to take risks and healthy losses.
Furthermore, the connected world crowd out new entrants, attracting capital, skilled workers, and managers, and suppressing the competitive environment that is so essential for trial and error at the center. of many successful innovations. Even if the business groups themselves have innovated, there is relatively little innovation going on in the broader economy. What are other policies and measures that can address the shortcomings of the connected world? At the heart of the policy menu to loosen the grip of entrenched business will have to be measures designed to accelerate the transformation of business groups into more transparent and well-regulated businesses. while at the same time radically weakening the link between politicians and business.
This will not happen spontaneously because the mutual benefits from strengthening markets and political ties outweigh any benefits that existing actors gain from reform. Mandatory policies will need to include changes to corporate governance to cut ownership pyramids, mergers and cross-ownerships, impose inheritance taxes and shift to categories – and targets for – competition policy.
Some of those policies were successfully introduced in the United States under Roosevelt. More recently, Israel has applied competition policy criteria to concentration, as well as to specific markets, while South Korea has placed high inheritance tax at the heart of its series of policies to weaken the opposing grip of their giant business conglomerates. .
At the same time, measures should be taken to limit the scope of discretion and incentives for politicians to use their connections for personal or family gain. Although difficult to achieve, incremental improvements, such as through an audited register of interests, can begin to influence behavior.
In short, although many commentators have declared the 21st century to be Asian, that is far from predetermined. Unless the kinds of policies we propose are put in place to push back against the tentacles of the connected world, many Asian economies will in fact find themselves ill-advised to exploit their potential in the future. coming decades.
Commander Simon is the Managing Partner of Altura Partners. He is also a Visiting Professor of Economics at IE Business School in Madrid.
Saul ESTRIN is Professor of Management Economics at LSE and formerly Professor of Economics and Associate Dean at the London Business School.
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