Political connections: How much do they matter?
| Author | Camilla Andersen |
| Position | IMF Survey |
| Pages | 316 |
Page 316
There is much anecdotal evidence to suggest that political connections play an important, even pivotal, role in business. As international financial institutions such as the IMF and the World Bank pay increasing attention to corruption, gaining a better sense of how political connections work is crucial. In a September 7 seminar organized by the IMF Institute, Professor Raymond Fisman from Columbia University suggested that political connections may account for as much as 20 percent of some companies' value in countries with high levels of corruption.
For politically connected firms, personal relations with people in political power are important. The most obviously connected firms have an elected official as owner or board member, but relations can also be more distant-maybe a politician's cousin or daughter is in charge of the company. And then, of course, there is lobbying, the most common form of political connections in the United States.
How do companies benefit from their political connections? And how do they reward their friends in high places? The answers vary widely across countries. Benefits may include gaining access to state or local subsidies, cheap loans from public sector institutions, lower taxes, licenses granted or tariffs imposed on competing goods, or influence over industry regulation. Politicians, in turn, often receive their payoffs in the form of campaign contributions, cash, or some form of in-kind remuneration (possibilities are legion).
The press may report on such dealings, but measuring the actual value of political connections is difficult.
To gauge this value, Fisman set out to estimate the degree to which firms rely on connections for their profitability. Using Indonesia under President Suharto as a case study, he correlated reports in the Indonesian press of rumors related to the president's declining health with movements in the shares of the 25 largest industrial groups listed on the Jakarta stock exchange (JSX).
He found that companies known to have close links with the Suharto regime consistently declined much more steeply on adverse news reports than did less well- connected firms.
Fisman also tried to ascertain the full value of these companies' connections with the...
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