The Power of Ties and Their Consequences – Global Issues

  • Opinion Simon Commander, Saul Estrin (London)
  • Inter Press Service

This is because Business Groups systematically work with politicians in Asia to create excessive market power and overall concentration of the ubiquitous Asian corporate structures. They have proven to be quite adept at asserting themselves.

Although, by concentrating resources in relatively few hands, this has been a fairly effective engine of growth over the past half century, limiting competition and stifling innovation threatens future progress.

Widespread and highly entrenched networks of ties between business and politicians have provided a common ground for Asian development and cut across political systems. We characterize these networks as the World of Connections.

This world consists of a network of interactions between businesses and politicians/political parties, which are highly operational and usually highly interconnected.

So politicians turn to firms to make campaign or personal contributions; to pay a bribe; providing employment to family or colleagues while providing reciprocal favors such as job creation in regions or politically advantageous moments.

At the same time, businesses look to politicians to protect themselves from foreign or domestic competition; provide subsidies, loans and/or public sector contracts. All parties benefit from these interactions, creating a stable political economic balance.

These arrangements have served Asia well over the past half century, with Asia’s share of the world economy rising from 9% in the 1970s to nearly 40% now. However, the world of relationships will provide a less supportive foundation for growth in the future for a variety of reasons. Neither politicians nor business groups are sufficiently interested in stimulating competition through the entry of a multinational, whether local or foreign, as a competitor.

Moreover, because Asian business groups are often highly diversified, with oligarch or dynastic control reinforced by cross-holdings and ownership pyramids, their economic performance should be measured not only by traditional measures of market power, but also by overall performance levels. for example, concentration indicated by the ratio of the total revenues of the five largest firms to GDP.

To put this in context, while the market concentration ratio (CR5) of the largest US firms, mainly in technology sectors, is often high, the combined concentration ratio of the five firms is only around 3%. Comparable figures for Asia in 2018 are even higher, as seen in Figure 1. In South Korea, CR5 exceeds 30%, and even in very large economies – India and China – 10%.

The findings are even more striking when considering the ten largest firms (CR10). In the US it is only about 4%, but in South Korea it is over 40% and in India and China it is over 15%.

Looking ahead, the outcomes for the connected world will be less favorable, not least because growth will have to rely more and more on innovation. Existing networks, in most cases, are not suitable for fostering innovation that thrives in an open ecosystem of science universities and business parks, capital funders, lawyers and entrepreneurs.

Moreover, the connected world crowds out new entrants, attracts capital, skilled workers, and managers, and suppresses the competitive environment essential to the trial-and-error process that underpins most successful innovations. Even when business groups themselves are innovative, relatively little innovation occurs in the wider economy. What should be the policies and other measures that can overcome the shortcomings of the communication world? To weaken the influence of entrenched business, the centerpiece of the policy menu should be measures designed to encourage business groups to become more transparent and better managed businesses, while at the same time fundamentally weakening the relationship between politicians and business.

This will not happen naturally, as the mutual benefits from market consolidation and political connections outweigh any gains from reforms to current players. The required policies should include changes in corporate governance that undermine pyramidal ownership structures, mergers and cross-holdings, introduce inheritance taxes and move to new types and targets of competition policy.

Some of these policies were successfully implemented in the United States during the Roosevelt era. Israel has recently adopted criteria for general, as well as market-specific, levels of concentration in its competition policy, while South Korea has placed high inheritance taxes at the heart of its policies to weaken the illegal control of giant business groups. .

At the same time, measures should be taken to limit discretionary scope and incentives for politicians to use their connections for personal or family interests. Although difficult to achieve, incremental improvements can influence behavior through, for example, registries of vetted interests.

In short, although many commentators have declared the 21st century to be the Asian century, it is not a predetermined thing. Unless the policies we propose are put in place to turn the hook on the world of connectivity, many Asian economies will be at a disadvantage in realizing their potential in the coming decades.

Simon Commander He is the Managing Partner of Altura Partners. He is also a visiting professor of Economics at the IE Business School in Madrid.
Saul ESTRIN He is Professor of Managerial Economics at the LSE and formerly Professor of Economics and Associate Dean at the London Business School.

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