Defining Crony Capitalism

Crony capitalism is a term describing a capitalist economy in which success in business depends on close relationships between business people 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

Transparency International's overview of the index of perception of corruption, 2007

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 (sometimes 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. Examples of this have been argued to include the keiretsu of post-war Japan, the print media in India, the chaebol of South Korea, and 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 include the People's Republic of China; India, especially up to the early 1990s when manufacturing was strictly controlled by the government (the "Licence Raj"); Indonesia; Argentina;^[2] Brazil; Malaysia; Russia;^[3] and most other ex-Eastern Bloc states. Critics claim that government connections are almost indispensable to business success in these countries. Wu Jinglian, one of China's leading economists^[4] 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.^[5]

[edit]Cronyism in sections of an economy

More direct government involvement can lead to specific areas of crony capitalism, even if the economy as a whole may be healthy. Governments will, often in good faith, establish government agencies to regulate an industry. However, 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, which set up a permit system that was used to deny access to new entrants and functionally legalized price fixing.^[6]

An example from 2004 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.^[7] 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. Economist Paul Krugman commented that the incident showed that "the imperatives of crony capitalism trump[ed] professed faith in free markets," at least for the Department of Agriculture at the time.^[8]

The military-industrial complex in the United States is often described as an example of crony capitalism in an industry. Connections with The Pentagon and lobbyists in Washington are described 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 outright subsidies from European governments) has stated Boeing receives similar subsidies, which are hidden as inefficient defense contracts.^[9] In another example, Bechtel, claiming that it should have had a chance to bid for certain contracts, said Halliburton had received no-bid contracts due to having cronies in the Bush administration.

Gerald P. O'Driscoll, former vice president at the Federal Reserve Bank of Dallas, stated that Fannie Mae and Freddie Mac became examples of crony capitalism. Government backing let Fannie and Freddie dominate mortgage underwriting. "The politicians created the mortgage giants, which then returned some of the profits to the pols - sometimes directly, as campaign funds; sometimes as "contributions" to favored constituents."^[10]

In an article titled "The Occupy Wall Street Movement and the Coming Demise of Crony Capitalism", author and economics professor Ravi Batra argues that "all official economic measures adopted since 1981...have devastated the middle class" and that the Occupy Wall Street movement should push for their repeal and thus end the influence of the super wealthy in the political process.^[11]

[edit]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 andtax 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. 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.)^[12] 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.

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.

[edit]Political viewpoints

Critics of capitalism including socialists and other anti-capitalists often assert that crony capitalism is the inevitable result of any capitalist system. Jane Jacobs described it as a natural consequence of collusion between those managing power and trade, while Noam Chomsky has argued that the word "crony" is superfluous when describing capitalism.^[13] 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 in other countries is an attempt to prevent economic power being used to take political power.

Socialist economists, such as Robin Hahnel, have criticized the term as an ideologically motivated attempt to cast what is in their view the fundamental problems of capitalism as avoidable irregularities^[14]. Socialist economists dismiss the term as an apologetic for failures of neoliberal policy and, more fundamentally, their perception of the weaknesses of market allocation.

Laissez-faire economists oppose crony capitalism as well^[15] disparaging governmental favors^[16] as incompatible with a true free market^[17]. Laissez-faire advocates criticize the term as an ideologically motivated attempt to cast what is in their view the fundamental problem of government intervention or “investments” as an avoidable aberration; free-market advocates refer to governmental favoritism as "crony socialism"^[18], "venture socialism"^[19] or "corporatism, a modern form of mercantilism"^[20] to emphasize that the only way to run a profitable business in such systems is to have help from corrupt government officials^[21] . In this view, high levels of interaction between corporations and governments are considered socialist, which is taken to its maximum in the form of nationalization of industries^[22]. 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 stifle competition^[23], a collusive result called regulatory capture. In his bookThe Myth of the Robber Barons, Burton W. Folsom, Jr. 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" who succeed "by producing a quality product at a competitive price"^[24]

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