Saving Asia from stalling growth

Asia might not reach its full growth potential, argue the authors of The Connections World, thanks to the nexus between the state and selected private business enterprises in the continent

The Connections World: The future of Asian Capitalism

Author: Simon Commander & Saul Estrin

Publisher: Cambridge University Press

Pages: 253

Price: £74.99

The “Asia” that this book addresses spreads northwards across the Pacific Ocean from Indonesia till the borders of China, North Korea and Japan and Eastwards to Pakistan on the Indian Ocean, comprising Southeast Asia, Northeast Asia, and South Asia. That this Asia is different from Europe and North America is a truism.

The authors share a dark perception of why Asia might not reach its full growth potential. They applaud the increasing levels of economic growth across Asia — now higher than the growth rates in advanced economies (AE) — but worry that this happy trend might not persist long enough to pull all of Asia up to the high income status that Japan, South Korea, Singapore, Taiwan and Hong Kong already enjoy.

Growth could slow once the productivity gains from high savings (the consequence of placing creditworthiness above consumption), high investment and plentiful labour supply from a demographic dividend — most spectacularly in China — peter out. Productivity in Asia is low — East Asia is at 12 per cent and South Asia between 3.5 to 5.5 per cent of AE productivity levels. Asia must rework its institutional architecture to loosen the nexus between the state, selected private business enterprises — usually family-owned diversified groups — and dominant state-owned enterprises which remain “deeply entrenched across the resource, capital and product markets”, retarding wider productivity improvements.

To substantiate why Asian growth is more at risk from monopolistic shackles than the rest of the world, Chapter 3 introduces an analytical tool for mapping of networks to gauge the extent and intensity of connectedness of persons who matter — in politics, political parties and business — supported by journalistic anecdotes from a proprietary dataset. To know how other countries fare in comparison, readers are helpfully guided to other publications by the author.

Chapter 4 follows through by assessing the concentration of ownership (share of revenue to gross domestic product) for the 10 biggest firms.  Ownership disguised through pyramidical financial structuring and family ownership is aggregated across listed and unlisted companies — a fraught task given the paucity of publicly available information. The results are confusing. Vietnam (a lower-income economy) emerges more concentrated than South Korea (the richest in the group). Thailand ranks third and the Philippines fourth, while Malaysia (the second richest in the group) ranks fifth, China (the third richest) ranks seventh and lower income India ranks sixth.  Concentration levels are, however, consistently higher for the unlisted companies than the listed companies, possibly corroborating the beneficial impact of market regulation.

Chapter 5 explains why swift transition from product and process adaptation and diffusion to primary technological innovation could be held back. Deep innovation is the only option for growth once the benefits from more investment and higher employment levels reach saturation levels, as in the AE. Japan and South Korea have found the secret sauce. In China, innovation could be compromised by the political compulsion for conformity. In India, poor incentives for R&D, lack of business support and highly variable educational standards, constrain innovation.

Connectedness between selected business groups and governments also explains why, unlike in the AE, smaller companies face a bewildering spaghetti of constraining legislation (progressively less so in India since 1991) deterring them from growth. Secondly, within the big private business entities competition is substituted by collaboration, based on inter-business familial connections and the proclivity of governments to support favourites via fuzzy regulatory provisions. 

Consequently, value addition is concentrated in a few large businesses that “are connected” to the government of the day — and hence the title of the book. Much-needed incremental employment generation suffers because productivity and wages are low outside the small “formal” sector. Most businesses struggle to overcome low capitalisation, low availability of risk finance or bank finance and institution­alised barriers to growth. At best, they get relegated to becoming suppliers to the large business groups.

Selective comparative data in chapter 6, however, fails to convince that higher employment informality, associated with worse benefits for workers, is unique to Asia. In Japan (Asia’s richest large economy) 16 per cent of employment is informal, not much different from the United States at 18 per cent, though South Korea is higher at 29 per cent. Malaysia at 34 per cent is lower than comparator upper middle-income economies — Russia 36 per cent, Brazil 45 per cent and Argentina 47 per cent, though China is at 54 per cent, Thailand at 55 per cent and Indonesia at 80 per cent. Lower-middle income India is at 78 per cent. Possibly factoring in the time elapsed since graduation to an income group and ironing out definitional differences, whilst selecting the comparator group, might produce more compelling results.

A dour endnote ascribes Asia’s reluctance to decarbonise to the nexus between fossil fuels, the state and large business groups. It ignores the climate equity-driven, globally agreed principle of “common but differentiated responsibility” for carbon mitigation commitments. Big business, natural resource companies and governments everywhere tend to be joined at the hip, not least for ensuring energy security and price stability.

Nevertheless, the primary conclusion resonates that connectedness is not an unmixed blessing despite the growth dividend it offers. Care is advised while compromising the “good practice” norms of market-determined capital allocation and a minimalist industrial policy, which stops at creating a level playing field rather than choosing winners and thereby ending up creating losers.