Crony capitalism
From Wikipedia, the free encyclopedia
Crony capitalism is a pejorative term describing an allegedly capitalist economy in which success in business depends on an extremely close relationship between the businessman and the state institutions of politics and government, rather than by the espoused "equitable" concepts of the free market, open competition, and economic liberalism. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, and so forth.
Crony capitalism arises when political cronyism spills over into the world of business, and the relationships between powerful businessmen and powerful politicians form a kind of aristocratic social hierarchy, influenced by self-serving friendships and family ties, to the extent that it corrupts public-serving economic and political ideals.
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[edit] 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, Indonesia, Mexico, Brazil, Russia[1], 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[2] 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.[3]
[edit] Cronyism in sections of an economy
More direct government involvement can lead to specific areas of crony capitalism. 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 phenomenom 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.[4] 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.
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) alleges that Boeing receives similar subsidies hidden as inefficient defense contracts.
[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 rigeur 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, as under Ferdinand Marcos under his dictatorship. 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.) Theoretically, 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. In a fully developed country, the processes of capitalism have already concentrated wealth into the possession of a small group, with the same result: reduction of the number of hubs.
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
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 ineveitably 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 favours 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.
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.
[edit] See also
[edit] References
[edit] 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"
