Asia’s prospects: Status quo or a rougher ride?

Source: The post is based on the article “Asia’s prospects: Status quo or a rougher ride?” published in Business Standard on 16^th January 2023.

Syllabus: GS 3 – Economy

Relevance: Development model in Asia and issues associated with it.

News: The article discusses the prevailing Asia’s development model and the problems associated with it.

What are the features of Asia’s development model?

Asia’s development model is mainly based on – a) the way in which governments have used industrial policy to help new sectors and businesses develop, b) government’s reliance on business groups which is mostly absent in the advanced economies.

However, such reliance on business groups has negative consequences for the economy.

What are the issues with reliance on business groups?

Business groups and politicians both rely on each other for their mutual benefits.

For example, businesses protect politicians from competitors, provide them with cheap loans, subsidies, and public-sector contracts whereas politicians provide support through state-led initiatives, etc.

However, the problem with such business groups is that the market power is accumulated in few hands.

This power allows them to control the economy of a nation because of their large share in the economy. For example, the revenues of the largest 10 businesses account for around 15 percent of gross domestic product (GDP) in India and China.

Further, businesses having connections with politicians do not allow the way for new businesses to come up in the market. Thus, it decreases the competition.

This decrease in competition withholds productivity growth and limits the number of high-quality jobs. 

It also limits the scope of innovation in any economy as resources are controlled by few and those companies which are good at innovation are unable to access the resources.

It further leads to accumulation of wealth in few hands along with capturing a large amount of economic territory of a nation.

Therefore, these kinds of connections between the politicians and business groups make other businesses and entrepreneurs unable to compete with large business groups along with workers unable to get good jobs.

What steps can be taken to improve these connections?

First, it will require a strict policy for the transformation. For example, the US under Franklin Roosevelt in the 1930s addressed the problem of business groups by prohibiting families acquiring the businesses and related-party transactions while enhancing protection for minority shareholders.

Second, coming up with additional tax on the ownership format can also be an effective incentive to change. For example, South Korea has introduced a high inheritance tax which aims to limit family control across generations.

Third, there is the need to limit the scope for politicians to benefits their business connections by bringing greater transparency and the strengthening of civil society.