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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, 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.

Under Market socialism, or any other mixed economy, the political sector is more powerful and posses more influence compared to a free-market system where the government sector remains small and therefore provide less opportunities for businesses to seak political favors. The larger the government budget and the more regulations of the economy, the more opportunities for cronyism exists.

The term "crony capitalism" made a significant impact in the public arena as an explanation of the Asian financial crisis.[1]

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; Israel[3];Russia[4]; the United States; and most other ex-Eastern Bloc states. Wu Jinglian, one of China's leading economists[5] 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.[6]

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.[7]

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.[8] 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.[9]

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.[10] 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.[citation needed]

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."[11]

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.[12]

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. 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.)[13] 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.

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.[14] 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[15]. 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[16] disparaging governmental favors[17] as incompatible with a true free market[18]. 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"[19], "venture socialism"[20] or "corporatism, a modern form of mercantilism"[21] to emphasize that the only way to run a profitable business in such systems is to have help from corrupt government officials.[22] 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[23]. 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[24], 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"[25]

See also

References

  1. ^ Kang, David C. (2002). Crony Capitalism: Corruption and Development in South Korea and the Phillipines (PDF). Cambridge: Cambridge University Press. ISBN 978-0-521-00408-4.[page needed]
  2. ^ "Peronism and its perils". The Economist. June 3, 2004.
  3. ^ The shakshuka system: A view from 2009
  4. ^ "Having it both ways". The Economist. May 20, 2004.
  5. ^ "Keeping an eye on business". The Economist. May 27, 2004.
  6. ^ Jinglian, Wu (2006). "The road ahead for capitalism in China". The McKinsey Quarterly. {{cite web}}: Unknown parameter |month= ignored (help)
  7. ^ Lee, Timothy (August 3, 2006). "Entangling the Web". The New York Times. Retrieved December 13, 2011.
  8. ^ Ranney, Dave (January 2, 2005). "Meatpacker: USDA policy on mad cow to blame for layoffs". Lawrence Journal-World. Retrieved December 13, 2011.
  9. ^ Krugman, Paul (June 13, 2008). "Bad Cow Disease". The New York Times. Retrieved December 13, 2011.
  10. ^ "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.
  11. ^ O'Driscoll Jr, Gerald P. (September 9, 2008). "Fannie/Freddie Bailout Baloney". New York Post.
  12. ^ Batra, Ravi (11 October 2011). "The Occupy Wall Street Movement and the Coming Demise of Crony Capitalism". Truthout. Retrieved 21 October 2011.
  13. ^ 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."
  14. ^ "Black Faces in Limousines:" A Conversation with Noam Chomsky from Chomsky.info accessed on June 5, 2009
  15. ^ 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.
  16. ^ Thomas Beaumont (September 3, 2011). "Sarah Palin Addresses Iowa Tea Party Rally, Keeps 2012 Talk Alive". 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 {{cite web}}: Check date values in: |accessdate= (help)
  17. ^ Nicholas D. Kristof (Oct 26, 2011). "Crony Capitalism Comes Home". 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. {{cite web}}: Check date values in: |accessdate= (help)
  18. ^ 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. {{cite web}}: Check date values in: |accessdate= and |date= (help)
  19. ^ 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. {{cite web}}: Check date values in: |accessdate= (help)
  20. ^ Jim DeMint (Tuesday, 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 {{cite web}}: Check |url= value (help); Check date values in: |accessdate= and |date= (help)
  21. ^ 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." 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. {{cite web}}: Check date values in: |accessdate= and |date= (help)
  22. ^ 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."
  23. ^ Yen Chu (11 February 2010). "Is nationalization of the banks good for us? Is it socialism?". Retrieved 2011-Nov-26. Under capitalism, nationalization sometimes occurs when the private sector is unable to operate an industry, service or enterprise profitably. But because some enterprises are considered an economic priority, the government runs and operates them, such as VIA Rail. The working class does not have direct input into how these enterprises are operated and as such do not directly benefit from them. Today, the term nationalization is often used loosely – the current "nationalization" of banks means that the government owns shares in these firms, but the capitalist owners still run them and receive the profits. {{cite web}}: Check date values in: |accessdate= (help)
  24. ^ 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. {{cite web}}: Check date values in: |accessdate= and |date= (help)
  25. ^ 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. {{cite web}}: Check date values in: |accessdate= (help)

Further reading

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