May 24, 2023
Asia’s complex network of connections has long intrigued the world. Within this nexus, lies the key to an intricate and seamless culture of how business and politics have long been negotiated. But will it continue to be what enhances the region, or will it dampen the region’s potential to be a major actor in the world economic scene?
Developing at an extraordinary pace over the past half century, Asia remains a source of untapped potential and according to Professor Simon Commander, this “Connections World”, if carefully curated, could spell a turning point for the region in the next few years to come.
“The connections world has been tremendous in driving growth and development but it needs adaptation in a direction that … opens it up to greater competition and to greater rivalry,” said Prof Commander, Visiting Professor of Economics at IE Business School and Managing Partner of Altura Partners.
Prof Commander was at the Lee Kuan Yew School of Public Policy (LKYSPP) for the launch and discussion of the book The Connections World: the future of Asian capitalism which he co-authored with Professor Saul Estrin, Emeritus Professor of Managerial Economics and Strategy at the London School of Economics and Political Science. The session was chaired by LKYSPP Dean and Li Ka Shing Professor in Economics, Professor Danny Quah.
The connections world and its consequences
Prof Quah began the session by sharing his thoughts on the theme of connections.
Considering Singapore’s experiment in meritocracy, he reflected, “Is it entirely connections free? Or is the blended meritocracy here a system of surfacing the people to slot into the work for which they best fit - a hybrid model of endogenous connections and level-playing-field social opportunity? … Compare this system with others around the world who have taken different approaches and have had to settle for less than spectacular economic performance held in place tentatively by extremes of inequality in wealth, income and power”.
Prof Commander then delved into a discussion of the Connections World of Asia, which is composed of interactions between businesses and politicians that are highly transactional in nature and often involve significant degrees of reciprocity. This results in business groups establishing excessive power and market concentration.
This close web of relationships is becoming increasingly problematic for Asia’s future.
Prof Commander noted the stifling of competition that comes with the concentration of resources. This limits productivity growth as well as the number of high-quality jobs.
The powerful connections running between businesses and politicians stand in the way of Asia shifting to an economy based on innovation. The Connections World hinders the emergence of new players in the market and does not foster a conducive environment for the trial-and-error approach that is the bedrock of successful innovation.
The need for intervention
The governments of Asia need to revise their policies to adapt to the changing landscape and promote future economic growth.
In the 1930s, then-US President Roosevelt removed the business group structure through radical policies. Amongst a variety of other measures, restrictions were imposed on the levels or tiers in ownership pyramids, and limits were applied on financial institutions acting as controlling shareholders and on business groups holding sway over public utilities. These measures were rolled out amid an economic depression and public opposition to large corporations.
However, implementing such radical changes is unlikely to be possible in modern-day Asia, due to the entrenchment of business groups and the huge power that they hold. A more effective approach would be to introduce incremental policies that focus on corporate governance, taxation and market structure.
Prof Commander expounded on interventions that would expedite the disappearance or transformation of business groups while also restricting the discretionary scope for politicians to leverage their business connections.
He suggested policies involving modifications to corporate governance that weaken pyramidal ownership structures, mergers and cross-holdings.
He also discussed superimposing additional tax liabilities on top of current corporate tax rates only for closely held family businesses. This would need to be conditioned on the size and longevity of a firm to avoid penalising entrepreneurial family firms.
Another suggestion brought up was the adoption of inheritance or successor taxes. South Korea has recently introduced a 50 per cent inheritance tax rate. Prof Commander raised the example of the heirs to the Samsung Chairman who faced 58 per cent effective tax rate and US$10bn in taxes in 2020. This would help to weaken the power of large family business groups when “the costs of passing on succession are so high”.
Furthermore, he shed light on competition policy and what could be changed. There needs to be a shift in attention towards an explicit evaluation of existing market structures and extent of concentration in sectors and in aggregate. One idea he put forth is to set limits on the market share that a business group can hold.
Also pertinent is the need to limit the scope for politicians to capitalise on connections with business groups. Prof Commander highlighted the importance of moving towards greater transparency, suggesting asset and interest declarations for politicians, frequent and external audits for public spending, and tighter rules for political donations.
The paradox surrounding Asia's economic development is that its growth was supported by the concentration in resources and market power, however, these very features have resulted in a structure that could impede the region's potential for future growth.
Although there is a widely held view that the 21st century will belong to Asia, the authors of The Connections World consider it far from inevitable. Significant policy and behavioural changes are necessary to foster more sustainable economic and political systems in Asia, so as to prevent the dimming of its future prospects.