Simon Commander Authors

Connecting Capitalism

September 05, 2023

Simon Commander, co-author of The Connections World: The Future of Asian Capitalism, discusses how the web of close relationships between business and politics underpins capitalism in Asia

Connecting Capitalism

The story of Asian economic development over the past few decades has been one of many great successes, the most notable of which is China. Underpinning this growth is a complex and iterating network of relationships between state and private actors.

But for the continent to lay claim fully to the 21st Century, as is frequently asserted, there are a number of fallibilities within existing national systems that need to be addressed. In this interview Simon Commander, co-author of The Connections World: The Future of Asian Capitalism, discusses the nuances of capitalism in Asia, how it manifests itself in state-dominated China and the often lop-sided benefits of systems heavily based on networks of connections.

Q. How would you define capitalism as it exists in different places in East Asia?

A. There are many standard definitions that look at the role of the market relative to the state, as well as the nature of the political system. In the book, we have a slightly different take on the issue. We basically argue that capitalism is dominant throughout Asia, but it has some different and important nuances. And those nuances can be political, whether a system is largely autocratic or more democratic, and, if the latter, thenthe nature of that democracy. There are also differences in the regulatory role and other competences of government. For example, in China and Vietnam, it’s probably fair to say that the role of the state is significantly more intrusive than in say, India or Pakistan.

Having said that, our book about Asian capitalism has a simple argument.It says that it doesn’t really matter what label is applied—for example, authoritarian or democratic—all of these economies have a very similar underlying way of functioning. That is, they are all based on pervasive networks of connections that run between politicians and businesses. These may be more exaggerated in countries like China or Vietnam, but they are nevertheless very important throughout Asia and they have many similar ramifications. So, capitalism, according to our definition, is present throughout and despite local nuances and variations, is based everywhere on what we call the Connections World—a world that webs together businesses and politicians. These webs of connections deliver major benefits to both sides and affect how the economies are configured.

Q. Can you define what you mean by connections?

A. The Connections World is essentially a world in which networks of politicians, political parties and businesses come together, interact and extract benefits. It’s an immensely transactional world, with the fundamental question being: what benefits can I get from associating with this person or group? For politicians, it can be jobs for themselves or in their constituencies or provinces, and in democracies, you also see things like campaign donations. On the business end, you can get licenses and permissions, public contracts and other forms of preferment. Notably, businesses get market access and can establish market power from deft use of their connections.

Q. How would you say this capitalism manifests itself in China in particular, given the enhanced role of the state? And how would that compare to the traditional definition of Western capitalism?

A. The main thing in China is that the state is at the center of the economy, with significant parts of the economy directly owned, controlled or influenced by the government and the Party.

The other aspect that makes China very different is that it runs what we often term “industrial policy.” And industrial policy can have two components. It can be horizontal, whereby it’s just about certain framework policies being helpful for businesses to get established and flourish. Such policies are acceptable to most.

But the Chinese run something very different, which is called vertical industrial policy. That is they choose activities or sectors which they consider strategic and in which they are determined to play a role. A recent example is electric vehicles and batteries. For such strategic sectors, significant resources are made available as well as other policy supports. None of this is new in China. The question is whether the current set of priorities and the ways chosen for delivering those priorities are going to be more successful than earlier attempts at industrial policy. What is rather different is that some of these strategic goals have been effectively entrusted to private players rather than simply the public sector. However, as has become clear in the last couple of years, those private players have to be very attentive to the priorities of government. In fact, the line between private and public has if anything become more blurred in the last year or so. Not just in terms of funding but also in terms of business strategy.

Q. To what extent has this vertical industrial policy changed in China in recent years?

A. It has certainly changed. If you look at the strategic industries that are listed in the various five-year plans, they have evolved over time, there’s no doubt about it. Things like AI weren’t there 10 years ago, for obvious reasons, and other things like aviation and space have remained a constant.

In a way, China has gone back a little to some of its earlier ways of behaving, the so-called national champions approach but this time based on the so-called dual circulation idea of building domestic resilience. Yet, there are tensions there. Not only are exports still an important feature of the economy but supporting the domestic economy is constrained by chronic over-investment and the containment of domestic consumption. This is something that has proven hard to reverse. And so far, there are very few signs that they are going to do so. So the national champions approach ultimately boils down to building up specific industries that are related to the core concerns of the Chinese state.

Q. How does the nature of capitalism in China and its neighbors impact on the structure of their economies?

A. China’s Asian neighbors really don’t, for the most part, do “industrial policy,” and insofar as they have, they do it badly. There’s one big exception: South Korea. Elsewhere, it’s basically about politicians and big business houses or big business groups, mostly family-run, often dynastic, having rather cozy relationships. This helps boost market power and the profits of the connected companies as well as supporting politicians, overtly or corruptly. But it also means that the incentives for these businesses to innovate are quite limited. And few of the neighbouring governments have meaningful strategic goals, other than supporting the nexus of connections and benefits that have been established.

In China, the world of connections is hugely important but of course, the transparency is much less. The politicians undoubtedly do benefit, and that is not very desirable and has led to some of the corruption investigations that we see today. But the more interesting stuff is really the way in which the state, with its focus on these national champions and strategic goals, allocates resources and deploys instruments that confer advantages on particular groups that they deem to be reliable, essential and strategic. In so doing, of course, they lay bare some tensions of their own—not least the extent of autonomy that businesses can have and the freedom to make decisions based on business goals. What is common, however, to both China and its neighbours is the fact that connections bestow benefits on only certain businesses and business groups and these then tend to become dominant in the economy. In other words, while industrial policy may in principle try to support particular industries and activities, the reality is that throughout Asia public policy has de facto supported a set of business interests and in effect built the foundations of their market power.

Q. What are the benefits and drawbacks of this system on development?

A. The benefits of the Connections World are far from trivial, which is why it is so widespread and resilient. Those benefits include coordination, the ability to achieve scale and solve all sorts of market fragmentation issues. After all, many of these large business groups are formed in this way because they are perfect for leveraging connections, both good and bad. It’s much simpler for a politician to go to the head of a business group, rather than deal with a large number of separate companies and individuals. This can offer clear benefits.

The second thing, which is probably truer elsewhere in Asia than in China, is that many of these large business groups set themselves up in order to solve problems related to the way in which markets and capitalism work. For instance, they are quite useful vehicles for building up management cadres. Tata, for example, is one of the oldest Indian business groups and was one of the earliest to develop a really coherent and excellent management cadre. Business groups can also be a way of solving problems in finance—by having your own bank or having close relationships with financial institutions. This can, in some instances, lead business groups to behave dynamically. This is because they may have better access to capital, good quality staff, and so on.

The drawback of all of this is that it confers enormous advantages on very few players. And most of the markets in which these large business groups operate, including China, have very high degrees of concentration. For example, in South Korea, Thailand and Vietnam the top 10 companies’ revenues amount to 35-40% of GDP and even in China and India that share is between 12-15%. This degree of concentration dampens competition. So given that most economists think that competition is an essential element in driving innovation and dynamism, the reduction of competition that comes from these powerful entities is something quite negative.

One striking consequence of the entrenchment of this Connections World has been the growth in wealth inequality. There has been an extraordinary increase in the number of billionaires in China since 2000, as indeed has also been the case in India. There is no doubt that enormous wealth is accruing to relatively few people. And,at the same time, while these top businesses and business groups may be very successful, the number of jobs they create is actually very limited relative to the economy. Therefore, what you’re not getting, which is a central objective of just about every Asian government, is the broad-based growth in jobs and employment that these places need. In addition, whilst the jobs that the business groups create are often productive and well paid, this is not true in the rest of the economy. An allied consequence is that this difference also promotes growing income inequality.

Q. How important was China’s accession to the WTO in guiding the creation of these economic models in China and how is this changing?

A. WTO accession for China was extraordinarily important. The country began to increasingly engage with the world, initially selling low-quality, low-cost and low-margin goods. It has since tried to shift upwards in the value chain with some success, but in general much of the country’s recent thrust has been more towards developing industries oriented toward the domestic market. As already mentioned, that shift reflects not just geopolitical tensions but also runs up against other policy priorities, not least the aversion to boosting domestic consumption.

Interview by Patrick Body

Simon Commander is Managing Partner of Altura Partners, a public policy, investment and business strategy advisory firm and Visiting Professor of Economics at IE Business School.

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