Transcript Types of Western - Capital Ideas Online

ECONOMIC DEVELOPMENT
IN CHINA & EAST ASIA:
LESSONS FOR INDIA
Leslie Young
Professor of Finance
Executive Director, Asia Pacific Institute of Business
The Chinese University of Hong Kong
Macro Comparisons
Russia
China
India
GDP/head (US$) 2003
2730
1070
507
GDP/head (US$) 2001
2740
790
450
-6.1
11.6
6.0
166.4
7.2
9.0
Literacy (%)
99.0
82.9
53.5
Female Life Expectancy
72.5
73.5
64.6
Male Life Expectancy
60.0
69.1
63.6
Births per 1000
8.5
14.3
23.7
Deaths per 1000
15.3
7.0
8.4
-0.36
0.90
1.69
Average GDP Growth 90-99 (%)
Average Inflation 91-00 (%)
Pop Growth 95-00 (%)
Geopolitics
India
China
Afghanistan/Central Asia developed
military skills but racially/ culturally
distinct.
Repeated conquest only implanted
temporary, distinct, extractive elite
Wei River Valley “land within the
passes” developed military skills but
not racially/ culturally distinct
Conquered Yellow River Valley
= Chou and Qin dynasties
Ganges Valley not large enough to
dominate South. Some internal barriers
but not enough for secure states
Yellow River Valley dominated South
Few internal barriers
Extension of culture by conquest.
Culture integrated population that
remained stratified and diverse.
No political tradition of unified empire
Steady southward expansion of
Chinese civilization, assimilation of
racially similar populations
Homogenous population, cultural
unity, political unity
Geography and Political Norms
India
China
Ganges Valley is world’s largest,
deepest alluvium bed
Ganges has many tributaries, hence
alternative sources of water.
River control important but not critical
Yellow River has no tributaries below
Wei Valley.
Break in dikes causes massive
disruption of irrigation systems
Dike maintenance metered corruption
Can support dense population with
light management
Yellow River valley requires intensive
management and organization to
support dense population
Change of rule by external conquest.
New rulers required no justification
Change of rule by internal revolt
New dynasty had to justify rule
Extractive elite
Responsible authoritarians justifying
rule by performance
= “Mandate of Heaven”
Spiritual Framework
India
China
Deep oral culture => Self as universe
Tolerant, inclusive, multifarious religion
Alphabetic culture => transcendental
thought/religion
Tension between oral and written =>
Enlightenment
Logographic writing
Analogical/Immanental thought
Taoism => quietism, laissez faire
Confucianism => social ethics
Legalism => ruthless state control, rule
by law
Philosophical/intellectual depth and
creativity. Detached, introspective elite
No duty to provide practical leadership
Stable literary culture restricted
creativity and change.
Duty to provide practical leadership
Concept of enlightenment exported to
China via Buddhism
Interpreted Buddhist enlightenment as
breakthrough to understanding structure
immanent in world (Zen)
Japan used Chinese logographs to write agglutinative language.
Constant tension between transcendental and immanental attitudes. Welcomed Zen.
First non-western modernization. Unique institutional/organizational creativity
Institutional Structure
India
China
Distinct castes of priests and warriors
Brahmins monopolized ritual but
validated rather than constrained power
No ideology unifying the culture area
No unified civil service
Viceroys broke away at first opportunity
Unitary elite class of scholar/
gentry/administrators open to
recruitment from homogenous
population by examination.
Principled critics of emperors
Viceroys circulated around empire
to disrupt personal power bases
Indo-Aryan languages spoken by 65%
Many scripts
Putonghua spoken by 85%
Universal written language
Periodic attempts at unification never
completely successful or long-lasting
Attempts to capture wealth of Deccan
let in more invaders from North
Political unity the norm
Empire stable and secure when
unified
Multiple regimes
Short-lived dynasties
Unified dynasties typically lasted
about 350 years
Peripheral States
India
China
Exported culture to Ceylon, Southeast
Asia
Exported culture to Korea, Japan,
Taiwan, Vietnam
Indian emigrants successful in business
but insufficient numbers to transform
overseas economies
Massive 19th Century emigration
to Southeast Asia
Overseas Chinese developed
business skills and networks
Peripheral states failed to provide
alternative models for India.
After WWII, peripheral East Asian
economies dominated by Overseas
Chinese followed Japan in exportled growth
Alternative Modernizations
India
West
East Asia
Democracy integrates
diverse peoples
Democracy legitimized
redistribution of
economic power
Authoritarians earn
legitimacy by improving
livelihoods
Bureaucracy of rent
seekers
Rule of Law, politically
manipulated by lobbies
Meritocratic civil service
Insulated from lobbies
Multi-generational
lawsuits withdraws
disputed property from
use
Law of Contract
Objective enforcement
and regulation
Business networks and
extended family relationships
substituted for contract
Regulators not independent
Import substitution
Black economy
Market driven economy Export led growth
Concept of laissez faire
native to China from Taoism
Mainland Modernizations
India
China
Colonial period reconfigured
institutions, property rights
West introduced industrialization but
affected only the Treaty Ports.
Assimilated Fabian Socialism at
Liberation
Converted to Marxism by revolution
Stable democracy maintained modest
growth.
Upheavals of Great Leap Forward and
Cultural Revolution decimated Communist
Party, led to crisis of legitimacy
No alternative models from “Overseas
Indian economies” Mauritius too small
Success of Overseas Chinese economies
challenged mainland
Some experimentation amongst states. Experiments in Special Economic Zones
NRIs discouraged by bureaucracy from and coastal provinces relaxed bureaucracy
investment
Overseas Chinese provided capital,
entrepreneurship skills
Rent-seeking interest groups cripple
economic efficiency. Bureaucrats
impede growth
Growth leadership brings bureaucratic
promotions and share in profits
Mainland Modernizations
India
China
Polity divided by class, caste,
language/region, religion
Homogenous population
Democracy gave each group a voice
and a veto over policy changes
Authoritarian government divided into
factions, but few differences in policy
Economic reforms often disrupted by
unrelated events and agendas
Consensus forced by need to keep power
that is not legitimized by democracy
Democratic leaders overloaded by
problems of managing diverse
coalitions
Leadership divided into political managers
and economic managers but integrated at
the top in Standing Committee and
Politburo
Elections introduce unpredictable
element into policy execution. Leads to
foot dragging
Turnover of leaders managed by having top
leader appoint the next leader but one.
Reputation for fairness and integrity a
strong plus.
Reforming Socialism
Capitalism with Russian Characteristics
Socialism with Chinese Characteristics
No “Overseas Russians”
Overnight promulgation of “AngloSaxon” formal rules without supporting
institutions.
Overnight formal democracy, collapse of
Party leaves no-one to enforce laws.
Overseas Chinese provide
entrepreneurship
Evolution from state to collective
enterprises
Contract enforcement via tacit
relationships (guanxi) and through
conglomerates of political units.
Cross-holdings by political conglomerates
control agency problems, limit free riding
Wholesale expropriation of state assets,
transfer to offshore havens.
Financial and economic collapse.
Large-scale corruption, but basic order
and political control maintained. Capital
account kept closed.
Strong economic growth
Socialism with Chinese Characteristics
•Collective (township and village) enterprises.
•State owns land, natural resources, key industries and financial institutions
•State holds shares in many other industries and institutions. Blocks
Russian-style expropriation of state assets.
•Entrepreneurship by Overseas Chinese and by investment trusts spun off by
many centres of political power: local governments, ministries
•Extensive cross-holdings by central government, local government and
collectives. Gives political leaders leverage over business performance.
•People’s Liberation Army owns Hong Kong taxi company and rents
artillery for recreational shooting outside Guangzhou.
•All governmental units participate in growth and rewards through taxsharing formulae that allow them to keep a share of revenue collected.
•Political competition within elite channeled into competition in economic
performance
Socialism with Chinese Characteristics
State
Legal
Persons
A Shares
Employees
B Shares
Shanghai
34.2%
27.4%
28.5%
0.4%
6.3%
Shenzhen
27.7%
29.9%
34.5%
0.4%
6.0%
About one-third of the shares are owned by the State, by
individuals (A Shares) and by legal persons. Employee and
foreign (B share) ownership is insignificant.
Socialism with Chinese Characteristics
Corporate performance improves with:
•Lower private ownership: private shareholders have little
leverage
•Lower state ownership: state administrators concerned with
welfare of workforce.
•Higher ownership by legal persons, i.e., institutions such as
stock companies, securities firms, trust and investment
companies, finance companies and mutual funds. Such legal
persons have substantial representation on the corporation’s
Board of Directors and Supervisory Committee and thus have
substantial leverage over management. This leverage they
exert to improve corporate performance and thus the payoffs
to their own units.
CORPORATE GROUPS IN ASIA
Leslie Young
Professor of Finance and Executive Director,
The Asia Pacific Institute of Business
The Chinese University of Hong Kong
Percent of Asian Companies that are Group Affiliated
Percent
90
80
70
60
50
40
30
20
10
0
Hong Kong
Indonesia
Japan
Korea (South)
Malaysia
Philippines
Singapore
Taiwan
Thailand
All
Perce nt of Stock Mark et C a iptalizati o n C trolled
o n B yTo p amilies
F
70
60
50
Perc e tn
22% GDP
84%
GDP
13%
GDP
48%
GDP
76%
GDP
40
30
39%
GDP
47% GDP
2%
GDP
20
17%
GDP
10
0
H ong K ong
Indonesi a
Top 1
Japa n
K oe ra
Top 5
M laa yias
Philippines
Top 10
Sing a pe o r
Ta wan
i
Top 15
Tha i nd
la
EXPROPRIATION, ASIAN STYLE
Many Asian corporate groups are today organized to exploit low
transparency and poor shareholder protection. The group structures and
styles of expropriation depend on:
•The type of entrepreneurship that originally created the surplus to be
expropriated
•The maturity of the stock markets
Japan
Overseas Chinese
China
Entrepreneurship
Bureaucratic/ Managerial Family
Political units/
families
Stock markets
Long-established
Well established
Recent
Objective of
group organization
Managerial control
Expropriation of
Theft of state
minority shareholders assets
•Downside
•Economic stagnation
Asian Financial
Crisis
Unstable banking
system
MITSUBISHI KEIRETSU
1. Core.
Mitsubishi Corporation (trading)
Mitsubishi Heavy Industries (manufacturing)
Mitsubishi Gingko (bank)
/Mitsubishi Trust and Banking/Tokyo Marine/Meiji Life
2. Kinyokai (Friday Club): 25-30 Main companies
3. Group Companies: several thousand
About 25% of Japanese derive livelihoods from Mitsubishi
companies
MITSUBISHI KEIRETSU
Core companies: about 3% of equity held by other core companies
Kinyokai: about 30% of equity held by core and other kinyokai
Group companies: over 50% of equity held by keiretsu members
MITSUBISHI KEIRETSU
Suppose that companies 1,…, 100 each hold 1% of the equity of
each of the others. How to take control of company 1?
Control all outside shares (1%) of company 1 and control the
shares held by companies 2,3,4,5…,50.
But control of company 2 requires control of all its outside
shares plus control of shares held by companies 1,3,4,5,..,50.
Thus to control company 1, must control all the outside shares of
companies 1,2,..,50.
But even this might not be enough..
MITSUBISHI KEIRETSU
To take control need to attend 50 shareholders’ meetings. At each
meeting, argue that you have control because you control all outside
shares plus each of the other 49 companies. Why?
Because you control each of their outside shares plus each of the other
companies. Why?
Because you control…. etc.
This argument is difficult to press home at any one meeting since it
depends on winning the arguments at all the other meetings, which
depend on winning the arguments at all the other meetings…..
What if all shareholder meetings are held on the same day?
What if shareholder meetings are held on different days?
… at each meeting hear the sound of one hand clapping….
Step 3
EXPROPRIATION IN INDONESIA
Wijaja Family
100%
3) Funds finally
flow to Widjaja
Family
Forestry, w ood
f amily business
100%
middle
companies
65%
53%
68%
A sia Pulp & Paper
(A PP)
PT Sinar Mas
Multiartha Tbk
Asia Food & Properties
18%
96%
PT Purinusa
Ekapersada
100%
28%
A PP China Group
Ltd
PT Sinar Mas Agro
Resources & Technology
Corp
PT Bank International
Indonesia Tbk ( BII )
20%
53%
63%
98%
PT Indah Kiat Pulp &
Paper Tbk.
Fuji Bank International
Indonesia
PT Pabrik Kertas Tjiwi
Kimia Tbk.
Other Fin. Institutions
PT Pindo Deli Pulp &
Paper Mills
PT Lontar Papyrus Pulp &
Paper
2) Lending to
Widjaja's related
companies
50 - 100%
Step 2
80%
20%
1) Placing of
deposit in BII
(on net basis)
Step 1
EX P ROP RIATION IN TH AILAND
Pr ivate ompany
c
of
cont rol ilng family
La n dso l dto D
at 1 0 xaluve
51%
Manag er from
co nrolli
t n gfamily
Company A
5%
51%
5%
B a nk E
Lo a n garan
u tee
Company B
5%
51%
Company C
30%
Fo reig n B ak n
Loan ot const ructi on
company secu red by
mort gage on over va ul ed land.
51%
C onstructi on C omp any D
Figure 1: Ownership, Control and Group Affiliation
Ownership of company C = 50% * 10% = 5%
Control of company C = Min(50%;10%) = 10%
Ownership/Control = 5%/10% = 0.5
A
50%O&C
B
B is tightly affiliated to group controlled by A
(i.e., at the 20% level)
C is loosely affiliated to group controlled by A
(i.e., at the 10% but not at the 20% level)
10%O&C Example of expropriation:
C
C buys asset from A overpriced by $10,000
Gain by A = $ 10,000 * (1-Ownership of C)
=$9,500
Ownership and Control in
Western Europe & East Asia
Cut-off = 20%
Cut-off=10%
Europe
Asia
Europe
Asia
A: % of corporations by controlling owner
Widely held
39.01
43.60
15.60
20.28
Family controlled
43.13
37.86
55.90
45.05
B: % of corporations with controlling owner that use control enhancements
Top manager from controlling family
68.12
57.10
66.04
54.55
No other shareholder has > 10% of control 54.69
67.80
54.91
62.26
C: % of corporations by forms of control
Affiliated to group
46.30
48.48
49.24
63.93
D: Mean % holding of largest shareholder of corporations where one
shareholder holds at least 5% of the control rights
Ownership rights
34.60
15.70
Control rights
37.75
19.77
Ownership/Control rights
0.877
0.746
TABLE 1: OWNERSHIP AND CONTROL IN WE STERN EUROPE, EAS TAS A
I, C
ANADA AND USA
S o ruce: “Divid e nsda n dExpropriati o n” Mara Faccio , arry
L Lan g an d eLsli e Yo u n gAmeric
,
a nEco n o imc Revie w, M
arch 2 0 0 1
20% cu t off
10% cu t off
Euro p e Asia
Canada
US
Euro p e
Asia
Canada
US
A: Percenta g e f corp
o
orati ons b yco ntrollin g wner
o
N o-one has > cu t off perce nta ge of co nrol
t rig h st
39.01
43.60
36.25
69.25
15.60
20.28
17.79
38.97
Family (has > cu t off perce nta ge of co nrol
t rig h st)
43.13
19.94
40.85
30.20
55.90
45.05
56.17
38.27
State
3.30
4.58
2.02
0.079
3.49
6.26
4.42
0.23
Wi dely-Hel d Fi nancial Instit u tion
10.12
4.94
11.07
5.16
19.64
17.80
17.81
19.94
Wi dely-Hel d Crporation
o
2.38
9.02
9.68
2.4
1.46
10.61
10.80
4.46
Misc. (F oreign-o w ned ,reci procal h lodin g s)
2.06
0.00
4.92
1.28
3.91
0.00
10.79
3.02
B: Percenta g e f co
o rpo r atio ns with co ntro lin g oner
w th at use c ontr ol en h ancements
To p m
anag er from c otrollin
n
g sareh
h o l edr's
family
N o oe nelse has > 10% of co nrol
t rig h st.
68.12
57.10
54.69
67.80
15.98
4.98
66.04
54.55
71.43
66.78
54.91
62.26
62.60
77.33
C: Percenta g e f corp
o
orati ons b yforms foco ntrol
Affil iate dto group
C o tnro le d vaipyramiding
C otro
n le d vaicro s -sholding
C otro
n led vairecipro cal h o l idng
46.30
48.48
49.24
63.93
15.33
39.60
18.41
45.68
33.82
8.52
6.01
10.12
6.27
11.02
8.18
1.15
0.90
n.a.
0.69
n.a.
2.6
0.13
Table 2: Group sizes in Western Europe & East Asia
Range for group
size n
100< n
20% cutoff
Europe
Asia
gps Co.s gps Co.s
10% cutoff
Europe
Asia
Europe
Asia
gps Co.s gps Co.s Loosely-affiliated
corporations
0
0
3
359
0
229
0
0
0
0
50 < n < 100
1
51
1
53
5
326
3
252
80
84
20 < n < 50
6
175
7
221
3
78
2
45
11
1
10 < n < 20
6
78
13
166
10
129
14
182
1
21
5 < n < 10
34
201
21
165
46
304
36
256
1
8
.
1020
.
657
.
785
.
570
4
59
97
402
n<5
Total group aff.
Corporations
1525
1262
1622
1664
Total corporations
3294
2603
3294
2603
Conclusions
• Higher dividends are paid by tightly-affiliated corporations
• For corporations tightly affiliated to a group, dividends are
negatively related to the O/C ratio to offset investor anticipation
of expropriation.
• For corporations loosely affiliated to a group, dividends are
positively related to the O/C ratio; investors less alert to
expropriation.
• Most loosely-affiliated corporations belong to a few large Asian
groups.
• Dividends are higher in Europe than in Asia;
• Multiple large owners imply higher dividends in Europe
(monitoring) but lower dividends in Asia (collusion). Why?
• In Europe, other large owners help contain expropriation of
minority shareholders by monitoring the controlling shareholder.
• In Asia, other large owners collude with the controlling
shareholder to expropriate minority shareholders.
In the smaller East Asian economies, private ownership of
assets and stock markets have been long established: the
structure of ownership and control permits the controlling
family to exploit minority shareholders who have already
contributed capital.
By contrast, the structure of company groups in China appears
designed to exploit opportunities to expropriate the state during
the transition to private ownership.
Since China’s companies have high state ownership, the
controlling family does not need a pyramid to control a
substantial portion of the shares available to the public.
Family
25%
100%
Company F
Holds D’s Stocks
Public Company D
30%
Company A
80%
Company B
90%
Company C
Family company F buys D’s shares at a low price. D then invests
in Companies A, B and C which are about to receive valuable state
assets. When these investments are announced, D’s stock market
price increases, benefiting the controlling family via its holdings
through F.
Expropriation takes place, not through related-party transactions,
but by exploiting insider information and manipulating the news
reaching the market.
Lessons from China
•Cannot transplant policies requiring authoritarian regime
based on homogenous population
•Precipitate privatization can result in massive theft of state
assets via manipulation of stock market
•Attract NRI investment to zones cleared of bureaucracy.
•Offer bureaucrats high rewards for
improvements in efficiency and productivity
measurable
•Convert state agencies into profit centres, gradually spin
off as companies
•Keep capital account closed but make foreign investment
attractive and simple.
Opportunities for Collaboration
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