Yeah that system is better because it fosters closer family ties.
In the culture grandparent comment describe, if someone comes into my office, any favoritism will be based on their being close to my family.
In a culture without that, if someone comes into my office, any favoritism will be based on their ability to offer me favoritism.
If anything, our system is worse because favoritism among the powerful is a worse problem that favoritism among families and friends.
So your first point is: one hand washes the other. I will show favoritism to people who can be of some benefit to me. Sounds like merit based favoritism. So for example could I show favoritism to a guy that works really hard? Is that corruption? Or I show favoritism to a guy who can invest in my company because his family has money? Is that corruption? (probably more so than the first example but I'm not sure).
The second point favoritism among the powerful is worse than the familial sort, because of your first point.
If anything it seems that the opposite is true because according to your logic the favoritism here is more merit based.
It actually does. Just look at the well known public companies in India (Reliance, Infosys, Wipro and many others). You will always see the son or some other relative of the chairman/CEO directly gets hired as a VP or a director.