The pervasive ties between politicians and companies result in business groups getting privileged treatment and entrenching themselves. The consequences of the connections world will be far less propitious for Asia’s prospects not least because growth will have to rely more and more on innovation. The existing networks are, for the most part, ill-suited to promote innovation which thrives on an open ecosystem of science, universities and business parks, funders, lawyers and entrepreneurs, as well as a healthy willingness to risk and lose.
The connections world crowds out new entrants, soaks up capital, skilled workers and managers and suppresses the competitive environment so essential for the trial-and-error process at the heart of much successful innovation. Even when the business groups themselves are innovative – and a significant number are indeed so – there is relatively little innovation going on in the wider economy. This is because other businesses lack the access to funding, skills and other critical resources with which to innovate.
What should be the policies and other measures that could address the shortcomings of the connections world? Central to the policy menu for loosening the grip of entrenched business will have to be measures designed to induce the transformation of business groups into more transparent and better governed businesses, while also radically weakening the links between politicians and business. This will not happen naturally because the mutual benefits from market entrenchment and political connections outweigh any gains to the current players from reform.
The required policies will need to include changes to corporate governance that undercut pyramidal ownership structures, mergers and cross-holdings that impose inheritance taxes and shift to new types of and targets for competition policy. Some of those policies were successfully introduced in the US during the presidency of Franklin D Roosevelt in the 1930s. More recently, Israel has adopted criteria in competition policy for overall as well as specific market concentration levels, while South Korea has placed high inheritance taxes at the heart of their raft of policies to weaken the vice-like grip of gigantic business groups.