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; 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 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.

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, 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. 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.

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 outright) alleges that Boeing receives similar subsidies hidden as inefficient defense contracts. In another example, Bechtel, claiming that it should have had a chance to bid for certain contracts, accused Halliburton of receiving 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 had become classic examples of crony capitalism. Government backing let Fannie and Freddie dominate the 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."

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.) 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

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.

Socialist 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 socialist 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.

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

• Corporate welfare
• Cronyism
• Iron triangle
• Patrimonialism
• Plutocracy
• Political families
• Political machine
• Regulatory capture

References

External links

• New York Times, "The Global Cost of Crony Capitalism"
• New York Times, "Vladivostok Journal: Out of Russia's Gangland, and Into Cafe Society."
• Joseph Stiglitz, "Crony capitalism American-style".
• Google Video, "Capitalism & Other Kids' Stuff".
• William Anderson, The Mises Institute, "Myths About Enron"