Asia’s Development Model Is Now Jeopardizing Its Future Economic Growth

Over the past half century, Asia has developed extremely fast. Currently, growth is slowing down; Chinese growth, once in double digits, is struggling to reach 4 percent. This could, of course, be a bump in an inexorable upward trajectory, but they could be the first signs that something deeper is amiss. In our newly published book, “The world of connections: the future of modern Asia” (Cambridge University Press, 2022), we argue that Asia is indeed facing a defining moment. We propose a route out of the shallows, but show that it requires some tough policy decisions.

Asia’s development model has differed fundamentally from that adopted in earlier times by today’s advanced economies. Two of the most important differences have been the major role played by state industrial policy in orchestrating growth and the reliance on a particular form of corporate structure: the business group. These have allowed Asian economies to focus resources on priority areas and have facilitated rapid development.

This Asian development model is based on pervasive and enduring networks of connections linking businesses and politicians. We call this the “World of Connections”. At the top of the system sit politicians and their parties along with these largely family-owned, and often dynastic, business groups. Business groups turn to politicians to protect them from competitors and provide them with cheap loans, subsidies and public sector contracts. Politicians turn to these groups to support state-led initiatives and provide jobs, especially in politically sensitive regions, as well as for themselves and their families. Relations between politics and business are therefore highly transactional, often with a strong element of reciprocity in them.

Business groups are an ideal format for the World of Connections. From the point of view of politicians, business groups provide concentrated points of contact and thus reduce complexity in policy making. It is much easier to guide the economy if a significant part of the economy is controlled by a small number of companies.

Business groups, in turn, are organized in ways that allow their owners to shift resources within the group, often using transfer pricing or intergroup lending. At the same time, its economic power 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 five largest companies amount to no more than 3 percent of the country’s GDP, in China and India they account for 11 percent. This type of concentration is common throughout Asia.

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Perhaps most worryingly, by operating in many markets simultaneously, its scale relative to the economy allows business groups to entrench their market power, especially by leveraging their connections to politicians. This is happening in both democracies and autocracies in Asia. In probably the most striking case, Samsung, the group recently accounted for 21 percent of South Korea’s GDP. And even when parts of this world fall out of favor or fail commercially, other connected companies step in.

Among the consequences of the World of Connections, the concentration of wealth is especially striking. In particular, business group owners in emerging Asia have seen an extravagant increase in their wealth over the past 20 years, with the number of billionaires on the continent rising from 47 in 2000 to 719 in 2020.

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

The Connections World has thus supported the extraordinary growth of Asia. But the problems are increasing. On one level, Asia’s demography is increasingly challenging a growth model that has been based primarily on resource concentration. At the same time, the attenuation of competition that comes with having privileged business groups at its core slows down productivity growth and limits the number of high-quality jobs. Perhaps most significant is the way Connections World is standing in the way of Asia shifting to a greater trust in innovation. The political-business nexus also impedes the improvement of institutions and sustains the kind of venal and undesirable relationships that have been exposed in the recent collapse in Sri Lanka.

In short, the World of Connections is turning from being an engine to a potential drag on growth and development in Asia. Even so, it clearly won’t go away on its own because every major player in the game benefits from its continuation. It is the rest of the economy—businesses and entrepreneurs unable to compete with business groups, workers unable to get good jobs, and those excluded from income and wealth—who will benefit from change.

Changing the balance will require the adoption of policies that speed the demise or, more likely, the transformation of business groups, as well as limit the discretionary leeway of politicians to take advantage of their business connections. We can learn from how the United States, under President Franklin Roosevelt, addressed a similar problem of entrenchment of business groups in the 1930s by outlawing pyramid schemes and related party transactions while improving minority shareholder protection. The impact was increased by the implementation of a strict competition policy that included explicit targeting of business groups. Political change must start from greater transparency and the strengthening of civil society, including the application of declarations of assets and interests for politicians with stricter sanctions for non-compliance.

To be very clear: Asia’s biggest climb up the income ladder is by no means automatic. In fact, not facing Connections World will affect the brightness of your future.

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