Crony capitalism is a pejorative term describing an allegedly capitalist economy in
which success in business depends on close relationships between businessmen and government officials. It may be exhibited by
favoritism in the distribution of legal permits, government grants, special tax breaks, and so
forth.
Crony capitalism is believed to arise when political cronyism spills over into the business
world; self-serving friendships and family ties between businessmen and the government influence the economy and society to the
extent that it corrupts public-serving economic and political ideals.
Crony capitalism in practice
In its lightest form, crony capitalism consists of collusion among market players. While
perhaps lightly competing against each other, they will present a unified front to the government in requesting subsidies or aid
(sometimed called a trade association or industry trade group). Newcomers to a
market may find it difficult to find loans or acquire shelf space to sell their product; in technological fields, they may be
accused of infringing on patents that the established competitors never invoke against each
other. Distribution networks will refuse to aid the entrant. That said, there will still be competitors who "crack" the system
when the legal barriers are light, especially where the old guard has become inefficient and is failing to meet the needs of the
market. Of course, some of these upstarts may then join with the established networks to help deter any other new competitors.
The keiretsu of post-war Japan may be an example of such an arrangement, as would the
powerful families who control much of the investment in Latin America.
Crony capitalism is generally associated with more virulent government intervention, however. Intentionally ambiguous laws and
regulations are common in such systems. Taken strictly, such laws would greatly impede practically all business; in practice,
they are only erratically enforced. The specter of having such laws suddenly brought down upon a business provides incentive to
stay in the good graces of political officials. Troublesome rivals who have overstepped their bounds can have the laws suddenly
enforced against them, leading to fines or even jail time.
States often said to exhibit crony capitalism are the People's Republic of
China; India, especially up to the early 1990's when the manufacturing was strictly
controlled by the Central Government, giving rise to the phrase of "Licence Raj"; Indonesia;
Mexico; Brazil; Malaysia;
Russia;[1] and most other
ex-Soviet states. Critics claim that government connections are almost indispensable to
business success in these countries. Wu Jinglian, one of China's leading economists[2] and a longtime champion of its transition to free markets, says
that it faces two starkly contrasting futures: a market economy under the rule of law or crony capitalism.[3]
Cronyism in sections of an economy
More direct government involvement can lead to specific areas of crony capitalism. Governments will, often in good faith,
establish government agencies to regulate an industry. But, the members of an industry have a very strong interest in the actions
of a regulatory body, while the rest of the citizenry are only lightly affected. As a result, it is not uncommon for current
industry players to gain control of the "watchdog" and use it against competitors. This phenomenon is known as regulatory capture. A famous early example in the United States would be the Interstate Commerce Commission, which was established in 1887 to regulate the railroad
"robber barons;" instead, it quickly became controlled by the railroads,
who set up a permit system that was used to deny access to new entrants and functionally legalized price fixing. A more modern example would be the case of Creekstone Farms. After the mad
cow scare, Creekstone decided to test all its cows for mad cow disease. This would enable them to sell again to Japan,
which had blocked import of all American beef that had not been completely tested. After the proper facilities had been built and
the personnel hired to make such a change, the U.S. Department of
Agriculture issued an injunction and refused to allow Creekstone to buy the kits necessary to test.[4] This allowed the larger beef producers to keep costs low and not be
out-competed by a smaller rival. Creekstone sued the USDA in response for abrogating free competition in the market.
The so-called "military-industrial complex" in the United States is often
accused to be a case of crony capitalism in an industry. Connections with The Pentagon and
lobbyists in Washington are decried by critics as more important than actual competition, due to the political and secretive
nature of defense contracts. In the Airbus-Boeing WTO dispute, Airbus (which
receives subsidies from European governments) alleges that Boeing receives similar subsidies
hidden as inefficient defense contracts.
Creation of crony capitalism in developing economies
In its worst form, crony capitalism can devolve into simple corruption, where
any pretense of a free market is dispensed with. Bribes to government officials are considered de rigueur and
tax evasion is common; this is seen in many parts of Africa, for instance.
This is sometimes called plutocracy (rule by wealth) or kleptocracy (rule by theft).
Corrupt governments may favor one set of business owners who have close ties to
the government over others, as under Ferdinand Marcos under his dictatorship. This may
also be done with racial, religious, or ethnic favoritsm; for instance, Alawites in
Syria have a disproportionate share of power in the government and business there.
(President Assad is an Alawite.) Theoretically, this can be explained by considering
personal relationships as a social network. As government and business leaders try to
accomplish various things, they naturally turn to other powerful people for support in their endeavors. These people form hubs in
the network. In a developing country those hubs may be very few, thus concentrating economic and political power in a small
interlocking group. In a fully developed country, the processes of capitalism have already concentrated wealth into the
possession of a small group, with the same result: reduction of the number of hubs.
Normally, this will be untenable to maintain in business; new entrants will affect the market. However, if business and
government are entwined, then the government can maintain the small-hub network.
Political viewpoints
Socialists and other anti-capitalists often assert
that crony capitalism is the inevitable result of any capitalist system. Jane Jacobs
calls it a natural consequence of collusion between those managing power and
trade. Since businesses make money and money leads to political power, business will inevitably
use their power to influence governments. Much of the impetus behind campaign finance
reform in the United States and other countries is an attempt to prevent the leveraging of economic power into political
power.
Capitalists generally oppose crony capitalism as well, but consider it an aberration brought on by governmental favors
incompatible with true capitalism. In this view, crony capitalism is the result of an excess of socialist-style interference in
the market, which requires active corporate lobbying to reduce red tape. They point to the relatively higher levels of
interaction between corporations and governments that are considered more socialist, taken to its maximum in the form of
nationalization of industries. Even if the initial regulation was well-intentioned (to
curb actual abuses), and even if the initial lobbying by corporations was well-intentioned (to reduce illogical regulations), the
mixture of business and government eventually proves poisonous. Burton W. Folsom,
Jr., in his book The Myth of the Robber Barons, distinguished those that engage in
crony capitalism – designated by him "political entrepreneurs" – from those who compete in the marketplace without special aid
from government, whom he calls "market entrepreneurs". Economists of the Austrian School
are severe in attacking crony capitalism, although in more formal contexts the term "state
corporatism" is usually used.
Radical economists have described the term as an ideologically motivated attempt to avoid the more fundamental problems of
market capitalist economic arrangements. The term "crony capitalism" made its first significant impact in the public arena as an
explanation of the Asian financial crisis. However radical economists have frequently dismissed this explanation of the
Asian financial crisis as apologetics for failures of neoliberal policy and
more fundamental weaknesses of market allocation. According to radical economist Robin
Hahnel,
- IMF officials Michel Camdessus and Stanley Fischer were quick to explain that the afflicted economies had only themselves to
blame. Crony capitalism, lack of transparency, accounting procedures not up to international standards, and weak-kneed
politicians too quick to spend and too afraid to tax were the problems according to IMF and US Treasury Department officials. The
fact that the afflicted economies had been held up as paragons of virtue and IMF/World Bank success stories only a year before,
the fact that neoliberalism’s only success story had been the Newly Industrialized Countries (NIC's) who were now in the tank,
and the fact that the IMF and Treasury department story just didn’t fit the facts since the afflicted economies were no more rife
with crony capitalism, lack of transparency, and weak-willed politicians than dozens of other economies untouched by the Asian
financial crisis, simply did not matter.[5]
Finally, some critics question whether the concept is meaningful at all, pointing out that personal factors influence business
decisions in all economic systems that involve a government and that the existence of these factors is an insufficient
explanation for why certain economic systems work better than others.
See also
References
- ^ [1]
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- ^ [2]
(subscription required)
- ^ [3]
- ^ [4]
- ^ Hahnel, Robin. Panic Rules: Everything You Need to Know about the Global
Economy,Pluto Press.
External links
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