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An Indian schoolgirl wears a mask of Chinese President Xi Jinping to welcome him on the eve of his visit in Chennai, India, Oct. 10, 2019.R. Parthibhan/The Associated Press

Simon Commander is managing partner of Altura Partners and visiting professor of economics at IE Business School. Saul Estrin is professor of managerial economics at the London School of Economics. They are the authors of The Connections World: The Future of Asian Capitalism (Cambridge University Press, 2022).

Close ties linking Asia’s business dynasties to politicians and political power will derail the continent’s economic success if left in place.

This sobering fact runs counter to the common refrain that the 21st century belongs to the Asia, not least its growth beacon, China.

From barely 9 per cent of world GDP in 1970 to more than 40 per cent now, Asia has surely been the rising economic force. And as Asian incomes per capita are still low compared with Canada and other advanced economies, the scope for future growth is clearly still enormous.

Yet Asia’s future success is far from predetermined – in fact, some of the very factors and forces that explain the continent’s success now stand in its way. Its achievements have been built not just on using more capital and labour – what economists call extensive growth – but also on the way in which its main businesses are organized and their copious interactions with politicians and the state.

These features have laid a deep and common imprint on Asia’s many economies. That imprint holds less promise for the future than it has in the past.

At the centre of the action lies the way in which Asian politicians and business interact. Their interactions are always highly transactional, often with a strong streak of reciprocity. Politicians get campaign and other contributions, jobs for themselves or their families, as well as for constituents, at propitious moments. Businesses get public contracts, licences, access to funding and other material rewards – often significant ones. This is the fertile interaction we term the Connections World.

That world operates throughout Asia, but with local features. For example, in China, it is mostly about the ties running between the various levels of the Chinese Communist Party, the government and business. In recent decades, an important component has been the mutually supportive interaction between large private companies – Huawei, Alibaba, Tencent and others – and the party and government.

Although many economies have some similar features, these webs of association have a dimension that is largely confined to Asia and one with major implications for how the region’s economies look and perform. Specifically, the business landscape is dominated by large business groups, often owned by families with a dynastic component. This format is infrequently found outside of Asia and almost never in the rich world.

There are a variety of reasons why businesses organize themselves this way. One is to deal with difficulties in accessing funding, management and skilled workers – something economists refer to as missing markets. Companies then create internal structures that can substitute. Even so, we could have expected that as Asia has developed and institutions have evolved, these motives would have faded away.

Not a bit of it. A more convincing explanation is that business groups persist because their owners find them very suitable for maintaining control, for allocating resources as they wish and, critically, as highly suitable vehicles for transacting with politicians. The complexity of these business groups’ structures – a feature throughout Asia, including China – gives their owners much bargaining power, as well as shielding their companies from predators, commercial or political.

The mutual and reinforcing interests of the business group owners and politicians ensure that both sides benefit. But those interactions also have a consequence that is altogether more disturbing for Asia’s prospects. That consequence is manifest in the extraordinary way in which many markets have come to be dominated by entrenched business groups. Strikingly, this is as true of the landscape in so-called socialist economies, such as Vietnam and even in China, as it is elsewhere.

A good way of capturing entrenchment is to calculate how much concentration has emerged in Asia. By concentration we mean the share of national income (GDP) accounted for by the revenues of the five or 10 largest companies in a country. With few exceptions, the largest companies are all parts of business groups or are owned by the state.

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A head cast in the likeness of Chinese President Xi Jinping is placed over a pile of effigies representing the dead from minority communities in China, during a street protest in Dharmsala, India, Thursday, Oct. 1, 2020.Ashwini Bhatia/The Associated Press

In India and China, the concentration ratio (CR5) is around 11 per cent. In South Korea, Thailand and Vietnam it ranges between 25 and 35 per cent, while elsewhere concentration is also significant. Certainly, far higher than either Canada (1.5 per cent) or the United States (3 per cent), let alone most advanced economies. For the top 10 companies, the numbers are even more stark: In South Korea their share tops 40 per cent, and in India and China over 15 per cent.

Such concentration, and the market power that tends to accompany it, brings many unwelcome consequences. While boosting incumbents’ profitability, it suppresses the entry of new ventures to the market. Most innovative economies are marked by large amounts of entry and exit of companies. That traction is generally absent in Asia. One consequence is that a very limited number of high productivity jobs are being created throughout the economy. Most individuals stay stuck working in the huge, but largely unproductive, informal economy.

Perhaps most importantly, concentration holds down innovation. As innovation will have to be the driver of Asia’s growth, this is a very serious impediment. The way this happens is not necessarily by entrenched companies failing to innovate themselves. They are often quite dynamic in this respect. But innovation is held back in the rest of the economy. Few other companies outside the business groups innovate due to lack of access to finance, skills and other reasons. This – rather than business groups acting as lotus eaters or rent takers – is the main channel by which innovation is restrained.

The vise-like grip of the Connections World in Asia needs to be challenged. Tax policies need to be changed to force business owners to shift away from the business group format. Substantial inheritance taxes – as have been imposed in South Korea – can also be an effective way of discouraging dynastic control. Competition policy needs to be nudged toward monitoring overall measures of concentration, not just concentration in specific markets.

And a slew of measures, including audited registers of interests and donations, are essential if the pressure is to be put on politicians to step away from these networks of influence and preferment. None of these measures are easy to introduce, particularly in the face of well-entrenched and powerful interests. But without such changes, Asia’s 21st century will be far less rosy than many people have predicted.

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