SHOULD ASIA´S BUSINESS GIANTS BE BROKEN UP OR BROKEN DOWN? / PROJECT SYNDICATE

Should Asia’s Business Giants Be Broken Up or Broken Down?

In recent decades, close ties between politicians and massive corporate conglomerates have proven effective in driving Asian economies’ development. But by concentrating and entrenching market power, this system has fueled a sharp increase in income and wealth inequality, as well as a lack of beneficial competition.

Simon Commander, Saul Estrin

LONDON – The recent turmoil around the Adani Group in India has renewed old debates about inappropriate connections between the country’s politicians and its biggest businesses. 

Similarly, Thailand’s recent election revealed widespread frustration toward a regime that appeared to have grown too cozy with the monarchy, the military, and business elites.

None of this is new in Asia. 

When Suharto was ousted from power in Indonesia 25 years ago, similar concerns bubbled to the surface, if only briefly. 

Now, ties between business groups and politicians are coming under scrutiny once again, and not a moment too soon. 

Market concentration has been deepening across the region as big, highly diversified business groups – most of them family-owned – come to occupy the commanding heights of national economies.

In India and China, the combined revenues of each country’s top ten companies accounted for roughly 10-15% of GDP by 2018, and in Vietnam, Thailand, and South Korea, the ratio was 30-40%. 

Samsung’s revenues alone make up over 20% of South Korea’s GDP. 

Moreover, these ratios appear to have been rising – sometimes sharply – in recent decades. 

In India, the revenues of the 15 largest business groups grew from around 9% of GDP in 2000 to nearly 15% by 2019.

GREASED PALMS, GREASED WHEELS

Market concentration and corporate conglomeration tend to run together, giving rise to what we call the “connections world.” 

In our recent book, The Connections World: The Future of Asian Capitalism, we show how business groups have come to occupy the apex of this domain across the region.

Politicians routinely look to businesses to make campaign or personal contributions, pay bribes, provide sinecures for family members and associates, and create jobs in regions or at moments that are politically advantageous. 

In doing so, they generally prefer working with business groups, whose scale and influence allows for a more simplified policymaking process.

At the same time, business groups are organized so that their owners can respond rapidly to requests from politicians, and thus also to opportunities for acquisitions, licenses, permits, and public contracts. 

They maintain a capacity to reallocate resources quickly, often using transfer pricing or intra-group loans, in addition to their wider suite of financing options.

As a bonus, the complexity of these groups’ ownership and financial structures acts as a deterrent against possible predators, whether political or commercial. 

Having found a place in the sun, few of these groups get pushed permanently into the shade. 

Though new, well-connected companies can and do enter the market, the overall number of top players in Asian economies usually remains restricted.

To be sure, this is not a straightforward case of corruption or conflicting interests. 

In recent decades, the connections world has proven effective in providing solutions to many problems of economic development, owing to its unique power to achieve close coordination between the state and business. 

In addition to entrenching market power, however, the connections world has also generated sharp increases in income and wealth inequality, because most of the big players are owned and controlled by a very small cohort of extremely wealthy families.

WHAT SHOULD BE DONE?

These issues have increasingly led to calls to break up overly dominant business groups, especially now that there is a greater need to stimulate competition and hold down inflation. 

Among the measures being proposed, most have been tried before. 

The US government’s 1911 breakup of Standard Oil is the classic example. 

But such radical interventions generally are reserved for the most egregious monopoly cases, or for periods of acute crisis.

Yet there is no crisis across most of Asia (only some underlying discontent), and most local business groups are held up as national champions at the vanguard of economic progress. 

Although the region’s last major financial crisis, in 1997-98, killed off some larger businesses in the short run, it ultimately reinforced the connections system and the major players that managed to survive. 

Nowadays, all the key players – be they business owners or politicians – have very few reasons to support a change, and plenty of reasons to maintain the status quo. 

An extraordinary amount of wealth and economic influence is at stake.

Moreover, there are still big questions about what shape reforms should take. 

Is breaking up business groups even desirable or feasible, and are better alternatives available?

In assessing the desirability of breaking up business groups, one problem is that all the available evidence on pricing, profits, and anti-competitive behavior remains spotty and inconclusive, owing not least to the groups’ own opaque accounting practices. 

In some countries, such as the Philippines, a few families and their business vehicles clearly dominate much of the formal economy. 

But elsewhere, far more competition between groups results in a murkier picture.

In any case, even if national authorities do settle on a policy of breaking up business groups, it is not obvious what criteria they should use to determine which ones warrant enforcement action. 

Simply picking the top five or ten as measured by size would leave a significant number of other major players who could be expected to pick up any slack. 

Moreover, the mandated breakups may well trigger recombination of assets under different guises.

The usual response to such concerns is that the process will, of course, require political resolve. 

But this is similarly unconvincing, especially in the context of the connections world. 

Remember, politicians have very few incentives to act, and they also must worry about how breakups could affect business confidence more broadly.

HISTORICAL PRECEDENTS

Before focusing on alternative models, it is important to comprehend the most compelling reason for circumscribing or eliminating the business-group format. 

Aside from their common failings in corporate governance, business groups naturally drive the accumulation and entrenchment of market power, largely because they are such effective vehicles for leveraging relationships with politicians and access to power. 

Considered in this light, the route to a more competitive landscape becomes easier to discern.

There are some precedents for what an alternative might look like. 

In the early 1930s, US President Franklin D. Roosevelt’s administration specifically targeted business groups with policies limiting the allowable number of corporate tiers, imposing higher taxes on inter-group dividends, eliminating consolidated group tax filing, constraining financial institutions from acting as controlling shareholders, and barring business groups from controlling public utilities. 

These measures effectively reined in overly powerful business groups in the United States.

After Japan’s defeat in 1945, Douglas Macarthur, the administrator of the US occupation, adopted a similar approach to dispose of the zaibatsu – business groups that had become integral to the country’s militaristic regime. 

Holding companies were banned, and the practice of tying family assets to business groups was prohibited. 

As in the US, these measures proved effective not only in advancing market de-concentration and dismantling the business structures behind it, but also in unleashing Japan’s subsequent economic resurgence.

So, why not revert to FDR’s ambitious playbook? 

Simply put, there is no political consensus or trigger that would sanction such an across-the-board strategy today. 

Even more limited attempts to rein in business groups – for example, by banning crossholdings and limiting the number of tiers and/or subsidiaries – have failed. 

Today’s dominant business groups are highly skilled at circumvention. 

Measures carved from antitrust policy, as well as changes to corporate-governance rules (such as those designed to protect minority shareholders), have proven to be unequal to the task of unbundling business groups and limiting market power.

OTHER OPTIONS

There are still some measures that could work. 

Inheritance or successor taxes, for example, can drastically reduce the incentive for maintaining family control, as happened in Japan after it adopted a 55% top rate for inheritance tax in 1946. 

South Korea recently introduced a 50% top rate, and there are already indications – for example, with Samsung – that control of business groups will not remain dynastic in the future.

Another promising option is supplementary corporate taxes that explicitly target the business-group model. 

In other words, businesses that persist in operating as affiliates of groups would incur tax costs above and beyond the standard corporate rate. 

Such policies have the advantage of not penalizing the corporate sector as a whole, and they can be calibrated over time to achieve maximum effect. 

However, they do need to be accompanied by parallel measures to limit family business groups from taking their holdings abroad through trusts and other tax-avoidance vehicles.

When it comes to antitrust and competition policy, regulators across Asia are right to stick with the usual approach of focusing on the market share in specific industries. 

But they have so far failed to address concentration at the level of the economy as a whole, and they are generally prevented from doing so by a lack of technical capacity and political clout. 

With market concentration both high and rising, this will need to change.

Israel offers a useful precedent for targeting overall concentration. 

Starting in 2012, Israeli authorities took aim at business groups with a suite of policies that included limiting the number of corporate tiers and prohibiting financial and non-financial companies from being held within the same group. 

They also revised regulatory and privatization policies to account explicitly for the problem of economy-wide concentration. 

In the end, this multipronged approach led to a sharp decline in pyramidal business groups.

Building on this example, policymakers in Asia could try to set explicit and tighter limits on market shares when business groups are involved, as this might limit their ability to leverage resources and market power in other sectors. 

But, again, the question is whether today’s authorities would have both the technical capabilities and the political clout to mandate divestment once some threshold has been reached. 

In most countries, it seems they would not.

INCREMENTAL STEPS

Asian economies will remain dominated by powerful business groups with close ties to politicians. 

The latter have invested massively in their relationships with preferred businesses, which in turn can leverage and allocate resources to achieve greater scale and market concentration. 

By now, many account for large chunks of the economy, leaving little doubt that the problem of market power needs to be addressed.

But, as we have seen, breaking up large business groups might create more problems than it solves, and the political preconditions for doing so are largely absent. 

The best chance for improving the situation therefore lies in trying to break down the business-group model through incremental measures. 

This approach would allow policymakers to target the main redoubt of the connections world – the family-owned business group. 

Until such policy changes have been implemented and given time to erode incumbents’ power, traditional competition and antitrust policies will be unable to function effectively.

Simon Commander, Managing Partner at Altura Partners in London, is Visiting Professor of Economics at IE Business School.

Saul Estrin is Professor of Managerial Economics at the London School of Economics.