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HGR : Hierarchial Governance Regimes

This classification derives from Ben Ross Schneider’s ‘Hierarchical Market Economies and varieties of Capitalism in Latin America’ for those political and corporate systems, which are dominated by elite families. There are markets where some of the most prominent companies are family- controlled, but which fall into the coordinated category because they are much more subject to broader social and political constraints.

Definition

Equity markets

Control is exercised through hierarchical family structures, which are usually more concentrated than in CGRs or NGRs, through blocks or pyramid structures sometimes accompanied by differential voting share classes. Historically, most companies under hierarchical control have mainly funded themselves from retained earnings. HGRs are almost invariably characterised by weak de jure and/or de facto protection for minority shareholders as well as relatively low levels of financial transparency. Payout ratios are often very low (India, Korea) as controlling shareholders prefer to keep cash within the companies. In some cases, management is given significant autonomy (Turkey), but in others (Korea, much of India) controlling shareholders are more hands on.

Usually reflects a hierarchical society bound by family ties with relatively low levels of external trust. Labour markets tend to be very polarised between an elite group, which is often employed by the state or the dominant companies and a sizeable informal sector. The governing elite will often appeal over the heads of the middle classes to the masses, to remain in control, which can result in fiscally damaging populist policies.

Broader economy

Challenges
and potential change factors

Conventional wisdom says that HGRs are a necessary stage of development for developing countries which is why most EM’s fall into this category. However, some countries appear to have very sluggish economies precisely because they are ‘stuck’ in HGR systems. HGRs also tend to be characterised by blurred boundaries between the private sector and the state, leading to crony capitalism and other forms of moral hazard. Consequently, any significant structural reforms to reduce the power of elite families are often only possible after a major political or economic event, such as a financial crisis.

Markets