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ABSTRACT
One of the most important developments in the modern global economy is financial globalization. This has raised threats to the stability of political regimes in two ways: (1) by enhancing the possibility of a financial crisis that could cause political turmoil; and (2) by easing access to foreign sources of financing for opposition political groups. I argue that state capitalism – defined as state-owned publicly listed corporations – is greater among one-party regimes as a way to address these dual threats. One-party regimes have both the motivation and a greater institutional capacity for addressing these threats in comparison to other regimes. Tests are conducted on 607 firms in 1996 and 856 firms in 2008 across seven East Asian economies, and are supplemented with case studies of Malaysia and South Korea. The evidence suggests that financial globalization is contributing to the rise of the state as a counter reaction.
ACKNOWLEDGEMENTS
I would like to thank the following individuals who made valuable comments on earlier drafts of the paper, including John Ravenhill, Stijn Claessens, Takeo Hoshi, Xiaoke Zhang, Michael Witt, and Steph Haggard. I would also like to thank Wai-Man (Raymond) Liu and Phong Ngo for advice on the idiosyncractic volatility tests.
Notes
1 See Fan, Wei, and Xu (Citation2011) for a review of the privatization literature for emerging economies. Examination of publicly listed firms is also methodologically helpful with regard to accurately identifying the ultimate owners and comparing the relative importance of state-owned to non-state-owned firms. This point is elaborated upon in the dataset construction section.
2 Between 1996 and 2008 each of the countries in the sample exhibited robust increases across a range of variables widely used as measures for financial globalization, including portfolio equity assets and liabilities, foreign direct investment assets and liabilities, debt assets and liabilities (portfolio debt plus other investment), and net foreign assets (Bluedorn et al., Citation2013). These variables were calculated using data from the IMF and in relation to each country's GDP.
3 See Magaloni and Kricheli (Citation2010) for an overview of recent work on one-party regimes.
4 On the diffusion of liberalization see Elkins and Simmons (Citation2004), Simmons, Dobbin and Garrett (Citation2006), Büthe and Mattli (Citation2010), and Bach and Newman (Citation2010).
5 For an example of the US government's unwinding of its ownership stakes following the 2008 crisis, see Canis and Webel (Citation2013).
6 On the corporatist model of small European states, see Katzenstein (Citation1984). See Hamilton-Hart (Citation2002) for an alternative application of this concept in the context of Southeast Asia.
7 Consider China for example (Shih, Citation2008).
8 A large literature examines the relationship between democracy and capitalism; Iversen (Citation2006) offers an excellent overview. I focus here on the relationship of business owners and the state because, in emerging economies, initiatives to enhance state ownership by acquiring private firms depend primarily on the power of business owners to block those efforts
9 While democracies also vary in the extent of the concentration of political power, checks on policymaking nevertheless remain far greater than in authoritarian regimes. For example, democracies with unicameral parliaments still retain an independent free press to monitor the government, and politicians must vie for re-election and thereby remain accountable to their constituents, unlike in authoritarian regimes.
10 Some autocratic regimes display robust institutional structures, but these tend to be the exception rather than the rule (Smith, Citation2005).
11 The deeper and wider institutional capacity of one-party regimes also enables them to spread risk and raise revenue more effectively.
12 The position would be short-term because executives are moved between companies to enforce party loyalty.
13 The discussion here is framed with respect to open emerging economies. For a comparative and historical survey of corporate ownership and changes to state ownership in particular, see Morck (Citation2005).
14 For an overview of the literature on this topic, see Megginson and Netter, Citation2001. Also see Boardman and Vining, Citation1989; Kikeri, Nellis, and Shirley, Citation1992; La Porta and López-de-Silanes, Citation1999.
15 See Allen and Gale (Citation2000) for discussion and evidence in the context of OECD countries.
16 Claessens et al. (Citation2000) explain that their dataset always covers the largest 100 firms in terms of market capitalization, and is then supplemented with data for additional firms depending on the availability of the data. Hence, the paper's analysis of their top 200 firms by country is a useful reflection of each country's largest firms in order to draw comparisons with a country's 200 largest firms in 2008.
17 Companies that belong to the same business group are not treated or counted differently from firms that do not belong to a group when determining the relative ownership levels as reported in Table 2.
18 The prevailing ownership patterns identified in table one do not change substantively when an ownership threshold of 20 per cent is used.
19 On the 25th anniversary of the GIC, former Prime Minister Lee Kuan Yew and Chairman of the GIC remarked in an address that his ‘cardinal objective’ in establishing the GIC ‘was not to maximise returns but to protect the value of our savings and earn a fair return on capital’ (Lee Kuan Yew, Citation2006).
20 The subscripts m and f refer to the market rate and risk-free rate, respectively.
21 These are standard controls for idiosyncratic volatility tests based on a survey of the literature on this topic. See, for example, Ferreira and Laux (Citation2007). Data availability limitations prevent the inclusion of additional controls that are used when testing firms in the context of the United States.
22 The results are substantively the same when tests are conducted with clustered standard errors by firm and by industry.
23 UMNO is an acronym for United Malays National Organization.
24 See Gomez Citation2006 and 2009 for details.
25 See Tan Citation2008 for detailed case studies of how the government would pay a higher market price for shares of companies linked to political allies than political foes.
26 Lee's privatization policies differed from those of Kim's because Lee would not place restrictions on their sale to domestic buyers which would allow the chaebol to acquire them.
27 Euromonitor International (2013).
Additional information
Notes on contributors
Richard W. Carney
Richard W. Carney has published articles in many academic journals including the Journal of Financial Economics, the Journal of East Asian Studies, and Business and Politics. He is also the author of the book Contested Capitalism: The Political Origins of Financial Institutions (Routledge, 2009), and editor of the book Lessons from the Asian Financial Crisis (Routledge, 2008).
