Asia’s development model now threatens its future economic-diplomatic growth

Over the past half century, Asia has developed very rapidly. At present, growth is slowing down. Chinese growth, once in double digits, is struggling to reach 4 percent. This may, of course, be a picture in an inexorable upward trajectory, but it may be the first signs of something deeper wrong. In our just published book, “The Connections World: The Future of Modern Asia” (Cambridge University Press, 2022), we argue that Asia is indeed facing a watershed moment. We propose a way out of the shoals, but we show that it requires some tough political decisions.

Asia’s development model differed fundamentally from the model taken by today’s advanced economies in earlier times. Two of the most important differences were the major role played by the state’s industrial policy in regulating growth and the reliance on a particular form of firm structure: the business combination. This has allowed Asian economies to focus resources on priority areas and facilitated rapid development.

This model of Asian development is built on pervasive and enduring networks of contacts between corporations and politicians. We call this the “Communication World”. At the apex of the system, politicians and their parties sit alongside these family-owned business groups — often dynastic ones. Business groups look to politicians to protect them from competitors as well as provide them with cheap loans, subsidies and public sector contracts. Politicians look to these groups to support state-led initiatives and provide jobs, particularly in politically sensitive areas, as well as for themselves and their families. Thus, relations between politics and business are largely commercial, often containing a strong element of reciprocity.

Business groups are a format ideally suited to Connections World. From the point of view of politicians, business groups provide focused points of contact and thus reduce complexity in policy making. It is much easier to direct the economy if a large share of the economy is controlled by a small number of firms.

Business groups, in turn, are organized in ways that allow their owners to shift resources around the group, often using transfer pricing or intergroup loans. At the same time, its economic strength in multiple sectors allows business groups to dominate the many markets in which they operate. Our analysis shows that while in the United States, the revenues of the top five companies are no more than 3 percent of the country’s GDP, in China and India it is 11 percent. This type of focus is common throughout Asia.

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Perhaps most worryingly, by operating in many markets simultaneously, its scope relative to the economy allows business groups to consolidate their power in the market – not least by leveraging their relationships with politicians. This happens in both democracies and authoritarian regimes in Asia. In the most surprising case, Samsung, the group recently accounted for 21% of South Korea’s GDP. And even when parts of this world fall out of favor or falter commercially, other associated companies step in.

Among the consequences of the world of communications, the concentration of wealth was particularly striking. In particular, owners of business groups in emerging Asia have seen their fortunes exponentially increase over the past 20 years, with the continent’s number of billionaires swelling from 47 in 2000 to 719 in 2020.

For example, the number of billionaires in China increased from zero in 2002 to 42 in 2008 to 389 in 2020. Their average wealth also grew from $1.5 to $2.1 billion between 2008 and 2020. In India, the number increased from nine to 102 between 2000 and 2020. And in a much smaller economy, South Korea, the number of billionaires also jumped from one in 2000 to 28 in 2020. The increases have occurred across Asia. In China, this explosion of wealth now appears to be seen by President Xi Jinping as a potential threat to the regime’s political stability.

Thus, Connections World has supported the extraordinary growth in Asia. But problems mount. On one level, demographics in Asia are increasingly challenging a growth model that relies primarily on resource concentration. At the same time, the lack of competition that comes with having distinct business groups at its core impedes productivity growth as well as limiting the number of quality jobs. Perhaps most important is the way in which the telecommunications world stands in the way of Asia becoming more reliant on innovation. Also, the relationship between politicians and business impedes improvement in institutions and maintains the kind of corrupt and unwanted relationships exposed by the recent collapse in Sri Lanka.

In short, Connections World is shifting from being an engine to a potential impediment to growth and development in Asia. However, it will obviously not go away on its own because all the important players in the game gain from continuing it. It is the rest of the economy—firms and entrepreneurs unable to compete with business groups, workers unable to get good jobs, and excluded from income and wealth—that will benefit from change.

Changing the balance will require the adoption of policies that will accelerate the disappearance or more likely transformation of business groups as well as limit the discretionary scope of politicians to benefit from their business relationships. We can learn from the way the United States under President Franklin D. Roosevelt tackled a similar problem of group entrenchment in the 1930s by banning pyramid transactions and related party transactions while strengthening minority shareholder protections. Impact was increased by implementing a strict competition policy, including explicit targeting of business groups. Political change must start with more transparency and the strengthening of civil society, including the application of asset and interest declarations to politicians with tougher penalties for abuses.

To be very clear: Asia’s rise on the income ladder is not automatic. Indeed, failure to master the world of communications will dim the brightness of its future.

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