Sunday, June 25, 2023

"Should Asia’s Business Giants Be Broken Up or Broken Down?"

 From Project Syndicate, June 23:

In recent decades, close ties between politicians and massive corporate conglomerates have proven effective in driving Asian economies’ development. But by concentrating and entrenching market power, this system has fueled a sharp increase in income and wealth inequality, as well as a lack of beneficial competition.

LONDON – The recent turmoil around the Adani Group in India has renewed old debates about inappropriate connections between the country’s politicians and its biggest businesses. Similarly, Thailand’s recent election revealed widespread frustration toward a regime that appeared to have grown too cozy with the monarchy, the military, and business elites.

None of this is new in Asia. When Suharto was ousted from power in Indonesia 25 years ago, similar concerns bubbled to the surface, if only briefly. Now, ties between business groups and politicians are coming under scrutiny once again, and not a moment too soon. Market concentration has been deepening across the region as big, highly diversified business groups – most of them family-owned – come to occupy the commanding heights of national economies.

In India and China, the combined revenues of each country’s top ten companies accounted for roughly 10-15% of GDP by 2018, and in Vietnam, Thailand, and South Korea, the ratio was 30-40%. Samsung’s revenues alone make up over 20% of South Korea’s GDP. Moreover, these ratios appear to have been rising – sometimes sharply – in recent decades. In India, the revenues of the 15 largest business groups grew from around 9% of GDP in 2000 to nearly 15% by 2019.

Greased Palms, Greased Wheels
Market concentration and corporate conglomeration tend to run together, giving rise to what we call the “connections world.” In our recent book, The Connections World: The Future of Asian Capitalism, we show how business groups have come to occupy the apex of this domain across the region. 

 Politicians routinely look to businesses to make campaign or personal contributions, pay bribes, provide sinecures for family members and associates, and create jobs in regions or at moments that are politically advantageous. In doing so, they generally prefer working with business groups, whose scale and influence allows for a more simplified policymaking process.

At the same time, business groups are organized so that their owners can respond rapidly to requests from politicians, and thus also to opportunities for acquisitions, licenses, permits, and public contracts. They maintain a capacity to reallocate resources quickly, often using transfer pricing or intra-group loans, in addition to their wider suite of financing options.
As a bonus, the complexity of these groups’ ownership and financial structures acts as a deterrent against possible predators, whether political or commercial. Having found a place in the sun, few of these groups get pushed permanently into the shade. Though new, well-connected companies can and do enter the market, the overall number of top players in Asian economies usually remains restricted.

To be sure, this is not a straightforward case of corruption or conflicting interests. In recent decades, the connections world has proven effective in providing solutions to many problems of economic development, owing to its unique power to achieve close coordination between the state and business. In addition to entrenching market power, however, the connections world has also generated sharp increases in income and wealth inequality, because most of the big players are owned and controlled by a very small cohort of extremely wealthy families....