We provide selective account of how and why the share of Asia in the world economy has more than quadrupled in the past half-century. In 1970, Asia (excluding Japan) accounted for around 9 per cent of the world economy. At the turn of the twenty-first century, this had climbed to 18 per cent and today exceeds 40 per cent. Asian growth has occurred rapidly regardless of political system, institutional arrangements or policy cocktails. We illustrate how far the Asian economies have come and how far they have left to go to attain the living standards of Europe or North America. For example, in India and China income per capita went from just under 5 per cent of the US level each to around 11 per cent and 28 per cent, respectively from 1970 to 2020. The main drivers of growth have been the accumulation of capital and labour along with improvements in the quality of the labour force. We also concentrate on the features that are both a cause and a consequence of the connections world. These include export-led growth, the role of the state, political systems and economic institutions, but also inequality. In so doing, we set the scene for the chapters that follow.

Business groups are ubiquitous in Asia. They are networks of firms bound together through formal and informal family ownership. Some are massive; most are highly diversified, and they are often the dominant players in their home country. Business groups are a uniquely well-suited format for the connections world. Opaque cross-holdings and pyramids of stocks ensure that families can exert effective control, even if their actual shareholdings are relatively small, and provide opportunities for playing reciprocity games with politicians, civil servants and members of other oligarchic dynasties. Although there are examples of efficient and well-run business groups, most are not. Furthermore, while it has often been argued that business groups are a response to institutional and market weaknesses – for example in relation to securing finance – they have not faded with growth and the improvement in institutions. Rather, we show how business groups have become more entrenched in Asia over time and their revenues constitute a huge share of GDP. Such concentrated ownership has also had an impact on extreme wealth, with a staggering growth in the number of billionaires.

This chapter provides historical background on Asia, amid talks of an Asian twenty-first century. We show that Asia’s resurgence has been based on models that differ substantively from those of capitalist development in Europe and North America, not least through the heavy reliance on the state. Further, they have had many common features, not least being centred on the pervasive use of connections – familial, commercial and political. We term these networks as the connections world. Whilst this world has been supportive to growth and development, it contains major fallibilities. These include cronyism and its consequences – high inequality and corruption. In addition, the connections world breeds market power which impairs efficiency and innovation. The resulting structure of the economy also holds back the creation of good jobs. Much of the connections world is also associated with autocracy or heavily managed democracies and this introduces risks of instability. As such, the broad model that has helped Asia grow so strongly is less likely to be so supportive in future. Rethinking the connections world will be required – not an easy task given strongly embedded and resilient foundations.

This chapter looks at how Asia’s connections world is configured, highlighting the extraordinarily pervasive nature of ties between business and politics and the networks on which they are based. Most of these relationships are strongly transactional but they also affect how individuals and companies organise themselves. For example, the institutional framework for private companies is often designed to leverage resources and assets, as well as gaining advantage, whether in relation to the regulator or competitors. We use a novel dataset with information on politically-exposed persons and institutions throughout Asia to map the various networks at the level of each country. There are significant differences between countries, mainly resulting from the variation in political systems. The network maps are complemented by detailed cases and examples from across Asia. Whatever the local variation, these webs of connections bind together with common purpose. Leveraging connections for mutual benefit delivers large and enduring benefits that have mostly proven resistant to changes of government or even political regime. Such behaviour also cuts across political systems.

We find that most Asian economies are not very innovative by international standards, though in line with their level of development. Asian economies mostly obtain their technologies from abroad through FDI or via technological diffusion. However, FDI to Asia has been modest and entrepreneurship limited, largely as a consequence of the connections world. Politicians and business groups have been mutually supportive in erecting barriers to entry. As a result, most innovation has been within business groups or by new firms entering new sectors where existing business groups were absent or had not managed to erect unscalable entry barriers. However, three countries have developed some base for innovation: China, India and South Korea. In each, efforts to construct a supportive ecosystem, including policies for education, science and technology, as well as encouraging returning migrants with knowledge, are reaping dividends. Each has adopted a rather different model which we discuss in detail. Despite these achievements, the power and influence of the connections world in these three countries also remains a serious brake on their ability to innovate in the future.

Asian governments focus on growth but also worry about employment; they need to create many new jobs just to keep employment stable. Moreover, most employment remains in the informal sector. Those jobs are generally fragile, low wage and low productivity. While many of the business groups that figure in the connections world also create productive and well-remunerated jobs, these are limited in number. Boosting formality and, with it, productivity – a clarion call of almost all Asian governments for decades – has largely failed to materialise. Further, the entrenchment of the connections world has also helped ensure that little progress has been made in bringing in more effective responses to employment risk. Neither government nor companies have a strong interest in promoting arms-length methods of dealing with such risk, preferring to rely on discretion. Jobs can be created, and their destruction tempered, as a result of interactions or even haggling between politicians and employers. The bulk of workers found in the informal economy are excluded. And the modernisation of welfare systems – now feasible given the income levels of many Asian countries – remains stalled.

We conclude with an analysis of the constraints that the connections world imposes on Asia’s growth prospects, and the policy options for relaxing them. One is the ability of powerful businesses and families to entrench themselves by virtue of their connections to government and/or politicians. Both parties gain so there is no incentive to change. Because marginal changes are unlikely to be credible, we propose a series of interrelated radical measures to disrupt and refashion the connections world including prohibitions on cross-holdings and inheritance taxation, as well as boosting competition policy and improving political transparency. We also outline some of the main pressure points in Asia going forward. These include the ability to innovate and construct effective entrepreneurial ecosystems and the pressure to create sufficient jobs. There is also the ballooning inequality of income and wealth. High inequality is associated with economic under-performance and susceptibility to political turmoil. Progressive taxes can mollify inequality, but permanent solutions rest in targeting their source: the connections world.

Introduction

In Russia and the rest of former Soviet Union (FSU), recent years have seen possibly the largest departure from conventional monetary transacting since the end of the Second World War. The growth in non-monetary transactions such as barter has occurred alongside large-order accumulation of arrears in the economy. The arrears have not only been inter-firm but have also included government, utilities and workers. While the accumulation of arrears has occurred at various points throughout Russia's transition (most strikingly in 1992), since 1994 there has been a clear and continuous increase not only in the scale of non-payments but also in the use of non-monetary transactions. So the obvious questions that arise are: why, and how are these phenomena related?

While the available statistics are far from robust, recent time series estimates show large and steady increases in the share of barter in total industrial sales. The Russian Economic Barometer panel suggests that between the first quarter of 1995 and 1998 the share of barter in industrial sales jumped from under 20 to around 50 per cent. However, what has loosely been termed barter has actually lumped together a variety of transaction types, including money surrogates. Evidence from other parts of the former Soviet Union – such as Belarus and Ukraine also indicates large shares of barter, for both domestic and external trades.

Introduction

In the years 1995–9 barter and demonetisation in the former planned economies moved from being considered minor, somewhat exotic, phenomena to being taken seriously as symptoms of major economic dislocation, and potentially as a barrier to successful transition towards a market economy. This volume has brought together both theory and evidence from a range of sources to enable us not only to describe these phenomena better, but also to evaluate them. Here we focus on what we have learned, and specifically try to answer the question of what lessons can be drawn for policy. In particular, to the extent that barter and demonetisation are symptomatic of general economic dislocation, do they imply the need for action by nation states, local governments or private parties? And to the extent that they do, are they purely symptomatic of economic dislocation or do they deepen and prolong the damage? Do they require action directly to discourage such transactions or are they principally a signal of the need for action of a different kind?

The evidence gathered in this volume reveals a remarkable variety of types of transaction that could be considered to fall under the general heading of ‘barter’. It would be tempting to conclude that it is impossible to generalise about the phenomenon.