Crony capitalism

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Crony capitalism is a term describing an 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, or other forms of state interventionism.[1][2] Crony capitalism is believed to arise when business cronyism and related self-serving behavior by businesses or businesspeople spills over into politics and government,[3] or when 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.

The term "crony capitalism" made a significant impact in the public arena as an explanation of the Asian financial crisis.[4] It is also used world wide to describe virtually any governmental decisions favoring "cronies" of governmental officials. In many cases, the term is used interchangeably with corporate welfare; to the extent that there is a difference, the latter might be restricted only to direct government subsidies of major corporations, excluding tax loopholes and all manner of regulatory and trade decisions, which in practice could be much larger than any direct subsidies.

Crony capitalism in practice[edit]

Transparency International's overview of the index of perception of corruption, 2010

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 (sometimes called a trade association or industry trade group) to the government in requesting subsidies or aid or regulation.[5] Newcomers to a market may find it difficult to find loans, acquire shelf space, or receive official sanction (like the Medallion System of the Taxicabs of New York City created during the Great Depression) to sell their product or services; in technological fields, they may be accused of infringing on patents that the established competitors never assert against each other. Distribution networks will refuse to aid the entrant. In spite of this, some competitors will succeed 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.

However, crony capitalism is generally associated with more virulent government intervention.[2] 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. Even in high-income democracies with well established legal systems and freedom of the press a larger state is associated with more political corruption (including crony capitalism).[6]

States often said to exhibit crony capitalism include Hongkong,[7] the People's Republic of China, India[8] (especially up to the early 1990s when manufacturing was strictly controlled by the government, also known as "Licence Raj"), Indonesia, Argentina;[9] Brazil, United Kingdom - especially in the 1600s and 1700s, United States,[2][10] Malaysia,[11] Israel;[12]Russia;[13] most ex-Eastern Bloc states, as well as the most well-known case of economic crisis due to cronyism, Greece.[14] Wu Jinglian, one of China's leading economists[15] 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.[16]

Crony Capitalism Index[edit]

The Economist benchmarks countries based on a calculated Crony Capitalism Index. It's 2014 Crony Capitalism Index ranking listed Hongkong, Russia and Malaysia in the top 3 spots.[17]

Crony Capitalism in sections of an economy[edit]

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, known as regulatory capture, has a long history.

A 1824 landmark U.S. Supreme Court ruling overturned a New York State-granted monopoly ("a veritable model of state munificence" facilitated by one of the Founding Fathers, Robert R. Livingston) for the then-revolutionary technology of steamboats.[18] Leveraging the Supreme Court's establishment of Congressional supremacy over commerce, the Interstate Commerce Commission was established in 1887 with the intent of regulating railroad "robber barons". President Grover Cleveland appointed Thomas M. Cooley, a railroad ally, as its first chairman and a permit system was used to deny access to new entrants and legalize price fixing.[19]

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.[20] Several companies received expedited no-bid contracts for Hurricane Katrina and Iraq war reconstruction purportedly due to having cronies in the Bush administration.[21]

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."[22]

Creation of crony capitalism in developing economies[edit]

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. This may also be done with racial, religious, or ethnic favoritism; for instance, Alawites in Syria have a disproportionate share of power in the government and business there. (President Assad is an Alawite.)[23] 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.

Raymond Vernon, specialist in economics and international affairs,[24] wrote that the Industrial Revolution began in Great Britain, because they were the first to successfully limit the power of veto groups (typically cronies of those with power in government) to block innovations.[25] "Unlike most other national environments, the British environment of the early 19th century contained relatively few threats to those who improved and applied existing inventions, whether from business competitors, labor, or the government itself. In other European countries, by contrast, the merchant guilds ... were a pervasive source of veto for many centuries. This power was typically bestowed upon them by government". For example, a Russian inventor produced a steam engine in 1766 and disappeared without a trace. "[A] steam powered horseless carriage produced in France in 1769 was officially suppressed." James Watt began experimenting with steam in 1763, got a patent in 1769, and began commercial production in 1775.[26]

Anthropologist David Graeber's book Debt: The First 5000 Years provides an even broader perspective: For as far back as we can see in the historical and archaeological record, argues Graeber, people with wealth and power, typically a monarch and cronies, have written the rules to benefit them at the expense of others. The situation would deteriorate for common folk until it was interrupted by a peasant revolt. Then the cycle would start over again.

Political viewpoints[edit]

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.[27] 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.

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, which he considers a manifestation of crony capitalism.[28]

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.[29] 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[30] oppose crony capitalism as well[31] disparaging governmental favors[32] as incompatible with a true free market.[33] 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",[34] "venture socialism"[35] or "corporatism, a modern form of mercantilism"[36] to emphasize that the only way to run a profitable business in such systems is to have help from corrupt government officials.[37] 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,[38] a collusive result called regulatory capture. In his book The 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"[39]

See also[edit]

References[edit]

Vernon, Raymond (1989), "Technological Development", EDI Seminar Paper 39, ISBN 978-0821311622 

Notes[edit]

  1. ^ Helen Hughes (Spring 1999). "Crony Capitalism and the East Asian Currency and Financial 'Crises'". Policy [1] 15 (3). Retrieved 2012-07-22. "Japan’s dismal performance in the 1990s and the East Asian collapses of 1997 indicate that dirigisme can only boost economies in the short run and at high cost. It breaks down in the long run (Lindsey and Lukas 1998)." 
  2. ^ a b c Kristof, Nicholas (March 27, 2014). "A Nation of Takers?". New York Times. Retrieved March 27, 2014. 
  3. ^ The Discovery that Business Corrupts Politics: A Reappraisal of the Origins of Progressivism, by McCormick, Richard. 1981. The American Historical Review, Vol. 86, No. 2 (Apr., 1981), pp. 247-274.
  4. ^ Kang, David C. (2002). Crony Capitalism: Corruption and Development in South Korea and the Philippines. Cambridge: Cambridge University Press. ISBN 978-0-521-00408-4. "Focused only on explaining successful outcomes, the conventional model provided no analytic way to explain the 1997 crisis. Countries previously regarded as miracles now were nothing more than havens for crony capitalists (p.3)" 
  5. ^ "Uber vs. Washington, D.C.: This Is Insane". July 10, 2012. Retrieved July 11, 2012. "a fight over a new competitor to the District's (often horrible) taxi service offers something I haven't seen in a while. Not routine retail-level corruption, nor skillful top-level favor trading, but instead what appears to be a blatant attempt to legislate favors for one set of interests by hamstringing another." 
  6. ^ Hamilton, Alexander (2013), Small is beautiful, at least in high-income democracies: the distribution of policy-making responsibility, electoral accountability, and incentives for rent extraction [2], World Bank.
  7. ^ Vines, Stephen (1 April 2014). "Why Hong Kong’s latest No 1 ranking was greeted with silence". South China Morning Post. Retrieved 4 April 2014. 
  8. ^ "Govt Patronises Crony Capitalism Again". June 19, 2011. Retrieved 11 August 2013. 
  9. ^ "Peronism and its perils". The Economist. June 3, 2004. 
  10. ^ "Planet Plutocrat: The countries where politically connected businessmen are most likely to prosper". The Economist. March 15, 2014. 
  11. ^ http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1213&context=facultyworkingpapers
  12. ^ The shakshuka system: A view from 2009
  13. ^ "Having it both ways". The Economist. May 20, 2004. 
  14. ^ "The Scourge of Crony Capitalism". June 20, 2012. Retrieved 9 October 2013. 
  15. ^ "Keeping an eye on business". The Economist. May 27, 2004. 
  16. ^ Jinglian, Wu (June 2006). "The road ahead for capitalism in China". The McKinsey Quarterly. 
  17. ^ "The countries where politically connected businessmen are most likely to prosper". The Economist. 15 March 2014. Retrieved 4 April 2014. 
  18. ^ Styles, T.J. The First Tycoon: The Epic Life of Cornelius Vanderbilt. ISBN 978-0-375-41542-5. "Property requirements for suffrage under New York's constitution of 1777 hardened the culture of rank into law. Two distinct levels of wealth were required to vote, one for state assembly, and a second and higher level for the state senators and governor... [this suffrage scheme fostered] mercantilism, which in the state empowered private parties to carry out activities thought to serve the public interest. The standard reward for such an undertaking was a monopoly—just what Chancellor Livingston sought when he offered to meet a most pressing public need, the need for steamboats...Livingston maneuvered...the monopoly through the legislature ("a veritable model of state munificence," as legal scholar Maurice G. Baxter writes—that gave him the right to seize steamboats the entered New York waters from other states. But Livingston had overreached. With so many inventors and investors interested in the steamboat, the monopoly on served to limit its adoption. The new technology was simply too important for the monopoly to remain unchallenged. (pp.39-42)" 
  19. ^ Lee, Timothy (August 3, 2006). "Entangling the Web". The New York Times. Retrieved December 13, 2011. 
  20. ^ "Pulling Boeing Out of a Tailspin". Business Week. December 15, 2003. Retrieved December 13, 2011. "A national treasure, once No. 1 in commercial aviation, Boeing has become a risk-averse company stumbling to compete in the marketplace and dependent on political connections and chicanery to get government contracts. Boeing needs a strong board and a rejuvenated corporate culture based on innovation and competitiveness, not crony capitalism." 
  21. ^ Dreier, Peter (3-1-2006). "Katrina and Power in America". Occidental College. Retrieved July 22, 2012. "Three companies—the Shaw Group, Kellogg Brown & Root (KBR, a subsidiary of Haliburton, whose former CEO is Vice President Dick Cheney), and Boh Brothers Construction of New Orleans—quickly scooped up no-bid ACE contracts to perform the restoration. Bechtel and Fluor (also with close GOP ties) also reaped huge contracts. The Department of Defense has been criticized for awarding Iraq reconstruction contracts to Haliburton and Bechtel without competition (Broder 2005)" 
  22. ^ O'Driscoll Jr, Gerald P. (September 9, 2008). "Fannie/Freddie Bailout Baloney". New York Post. 
  23. ^ Syrian Businessman Becomes Magnet for Anger and Dissent "Like Mr. Ezz in Egypt, he has become a symbol of how economic reforms turned crony socialism into crony capitalism, making the poor poorer and the connected rich fantastically wealthier."
  24. ^ "Raymond Vernon Dies at 85". The Harvard University Gazette. President and Fellows of Harvard College. September 23, 1999. Retrieved February 9, 2013. 
  25. ^ Vernon (1989)
  26. ^ Vernon (1989, p. 8); see also Watt steam engine and James Watt
  27. ^ "Black Faces in Limousines:" A Conversation with Noam Chomsky from Chomsky.info accessed on June 5, 2009
  28. ^ Batra, Ravi (11 October 2011). "The Occupy Wall Street Movement and the Coming Demise of Crony Capitalism". Truthout. Retrieved 21 October 2011. 
  29. ^ Robin Hahnel. "Let's Review". "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." 
  30. ^ "Did Congress kill the Twinkie? The tariff tale behind the Hostess demise". Retrieved 2012-Nov-23. "When Hostess had to cut costs to stay in business, it picked unions, not the sugar lobby, to fight. “These large sugar growers ... are a notoriously powerful lobbying interest in Washington,” writes Chris Edwards of the Cato Institute in a 2007 report. “Federal supply restrictions have given them monopoly power, and they protect that power by becoming important supporters of presidents, governors, and many members of Congress.”" 
  31. ^ Thomas Beaumont (September 3, 2011). "Sarah Palin Addresses Iowa Tea Party Rally, Keeps 2012 Talk Alive". Huffington Post. Retrieved 2011-Nov-26. "Sarah Palin accused Obama and leaders in Washington of coddling corporations, at heavy cost to the taxpayers..."I want all of our GOP candidates to take the opportunity to kill corporate capitalism that is leading to this cronyism that's destroying our economy," Palin said" 
  32. ^ Nicholas D. Kristof (Oct 26, 2011). "Crony Capitalism Comes Home". The New York Times. Retrieved 2011-Nov-27. "some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us...featherbedding by both unions and tycoons...are impediments to a well-functioning market economy." 
  33. ^ John Stossel (2010 (copyright)). "Let's Take the "Crony" Out of "Crony Capitalism"". Retrieved 2011-Nov-26. "The truth is that we don't have a free market — government regulation and management are pervasive — so it's misleading to say that "capitalism" caused today's problems. The free market is innocent. But it's fair to say that crony capitalism created the economic mess." 
  34. ^ Andrew C. McCarthy (September 17, 2011). "The Solyndra Fraud". Retrieved 2011-Nov-26. "The Solyndra debacle is not just Obama-style crony socialism as usual. It is a criminal fraud...Why so much pressure to give half a billion dollars to a doomed venture? The administration insists it had nothing whatsoever to do with the fact that Solyndra’s big backers include the George Kaiser Family Foundation. No, of course not. George Kaiser, an Oklahoma oil magnate, just happens to be a major Obama fundraiser who bundled oodles in contributions for the president’s 2008 campaign. Solyndra officers and investors are said to have visited the White House no fewer than 20 times while the loan guarantee was being considered and, later, revised. Kaiser, too, made several visits — but not to worry: Both he and administration officials deny any impropriety." 
  35. ^ Jim DeMint (September 27, 2011). "Venture socialism: Obama agenda is about shoveling cash to cronies". Retrieved 2011-Nov-28. "Government officials rushed $535 million to Solyndra because the Obama administration was determined to make the company the centerpiece of its green agenda regardless of the law of supply and demand. ...using the brute force of government to force liberal preferences into the economy. Mr. Obama calls them “investments,” but this is really venture socialism" 
  36. ^ Ben Shapiro (2011 (copyright)). "There's No Such Thing as "Crony Capitalism"". Retrieved 2011-Nov-26. "This "crony capitalism," Sarah Palin said, is "not the capitalism of free men and free markets." In general, she's right. But...her terminology...is dead wrong. The fact is that there is no such thing as "crony capitalism." In reality, it is corporatism, a modern form of mercantilism. Corporatism is based on the notion that industries comprise the economy like body parts comprise the body — they must work in concert with one another, and they must take central direction." 
  37. ^ Thiessen, Marc A. (November 14, 2011). "Crony Capitalism Exposed". The Washington Post. Retrieved December 13, 2011. "Insider trading is illegal — except for members of Congress [who] are free to legally trade stock based on nonpublic information they have obtained through their official positions as elected officials — and they do so on a regular basis. On Sunday night, CBS News’ “60 Minutes” looked into this form of “lawful graft.” The “60 Minutes” story exposed, among others, then-House Speaker Nancy Pelosi for participating in a lucrative initial public offering from Visa in 2008 that was not available to the general public, just as a troublesome piece of legislation that would have hurt credit card companies began making its way through the House (the bill never made it to the floor)...The report was based on an explosive new book by Peter Schweizer that will hit stores on Tuesday. It’s called “Throw Them All Out: How Politicians and Their Friends Get Rich off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison.”" 
  38. ^ John Stossel (2010 (copyright)). "Let's Take the "Crony" Out of "Crony Capitalism"". Retrieved 2011-Nov-26. "Which are more likely to be hampered by vigorous regulatory standards: entrenched corporations with their overstaffed legal and accounting departments or small startups trying to get off the ground? Regulation can kill competition — and incumbents like it that way." 
  39. ^ Burton W. Folsom, Jr.. "Myth of the Robber Barons". Retrieved 2011-Nov-28. "The author, Burton Folsom, divides the entrepreneurs into two groups: market entrepreneurs and political entrepreneurs. The market entrepreneurs, such as Hill, Vanderbilt, and Rockefeller, succeeded by producing a quality product at a competitive price. The political entrepreneurs, for example, Edward Collins in steamships and the leaders of the Union Pacific Railroad in railroads, were men who used the power of government to succeed. They tried to gain subsidies or in some way use government to stop competitors." 

Further reading[edit]

External links[edit]