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.
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.
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."
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.
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,
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.