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Crony capitalism, sometimes also called simplycronyism, is a pejorative term used inpolitical discourse to describe a situation in whichbusinesses profit from a close relationship with state power, either through ananti-competitive regulatory environment, direct government largesse, orcorruption.[1] Examples given forcrony capitalism include obtainment of permits, government grants,[2]tax breaks,[2] or other undue influence from businesses over the state's deployment of public goods, for example, mining concessions for primary commodities or contracts for public works.[3] In other words, it is used to describe a situation where businesses thrive not as a result offree enterprise, but rather collusion between a business class and thepolitical class.[4][5]
Wealth is then accumulated not merely by making a profit inthe market, but through profiteering byrent seeking using thismonopoly oroligopoly.Entrepreneurship and innovative practices that seek to reward risk are stifled since thevalue-added is little by crony businesses,[citation needed] as hardly anything of significant value is created by them,[citation needed] with transactions taking the form of trading.[clarification needed] Crony capitalism spills over into the government, the politics, and the media,[6] when this nexus distorts the economy and affects society to an extent it corruptspublic-serving economic, political, and social ideals.[4][clarification needed]
The first extensive use of the term "crony capitalism" came about in the 1980s, to characterize thePhilippine economy under the dictatorship ofFerdinand Marcos.[7] Early uses of this term to describe the economic practices of the Marcos regime included that ofRicardo Manapat, who introduced it in his 1979 pamphlet "Some are Smarter than Others", which was later published in 1991;[7] formerTime magazine business editor George M. Taber, who used the term in aTime magazine article in 1980,[7] and activist (and later Finance Minister)Jaime Ongpin, who used the term extensively in his writing and is sometimes credited for having coined it.[8]
The term crony capitalism made a significant impact in the public as an explanation of theAsian financial crisis.[9]
It is also used to describe governmental decisions favoring cronies of governmental officials.[10]
The term is used largely interchangeably with the related termcorporate welfare, although the latter is by definition specific tocorporations.
Crony capitalism exists along a continuum. In its lightest form, crony capitalism consists of collusion among market players which is officially tolerated or encouraged by the government. While perhaps lightly competing against each other, they will present a unified front (sometimes called a trade association orindustry trade group) to the government in requesting subsidies aid or regulation.[12] For instance, newcomers to a market then need to surmount significant barriers to entry in seeking loans, acquiring shelf space, or receiving official sanction. Some such systems are very formalized, such as sports leagues and the Medallion System of thetaxicabs of New York City, but often the process is more subtle, such as expanding training and certification exams to make it more expensive for new entrants to enter a market and thereby limiting potential competition. In technological fields, there may evolve a system whereby new entrants may be accused of infringing on patents that the established competitors never assert against each other. In spite of this, some competitors may succeed when the legalbarriers are light.[13][14] The term crony capitalism is generally used when these practices either come to dominate the economy as a whole, or come to dominate the most valuable industries in an economy.[2] Intentionally ambiguous laws and regulations are common in such systems. Taken strictly, such laws would greatly impede practically all business activity, but in practice, they are only erratically enforced. The specter of having such laws suddenly brought down upon a business provides an incentive to stay in the good graces of political officials. Troublesome rivals who have overstepped their bounds can have these 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 in place, a larger state is generally associated with increased political corruption.[15]
The term crony capitalism was initially applied to states involved in the1997 Asian financial crisis such as Indonesia, South Korea and Thailand. In these cases, the term was used to point out how family members of the ruling leaders became extremely wealthy with no non-political justification.[16] Southeast Asian nations, such as Hong Kong[17] and Malaysia,[18] still score very poorly in rankings measuring this. It was also used in this context as part of a broaderliberal critique of economicdirigisme.[19] The term has also been applied to the system ofoligarchs in Russia.[20][21] Other states to which the term has been applied include India,[22] in particular the system after the1990s liberalization, whereby land and other resources were given at throwaway prices in the name of public-private partnerships, the more recentcoal-gate scam and cheap allocation of land and resources toAdani SEZ under theCongress andBJP governments.[23] Similar references to crony capitalism have been made to other countries such as Argentina[24] and Greece.[25]Wu Jinglian, one of China's leading economists[26] and a longtime advocate of its transition to free markets, says that it faces two starkly contrasting futures, namely amarket economy under therule of law or crony capitalism.[27] A dozen years later, prominent political scientistPei Minxin concluded that the latter course had become deeply embedded in China.[28] Theanti-corruption campaign under Xi Jinping (2012–) has seen more than 100,000 high- and low-ranking Chinese officials indicted and jailed.[29][30]
Many prosperous nations[clarification needed] have also had varying amounts ofcronyism throughout their history, including the United Kingdom, especially in the 1600s and 1700s, the United States[2][31] and Japan.
The Economist benchmarks countries based on acrony-capitalism index calculated via how much economic activity occurs in industries prone to cronyism. Its 2014 Crony Capitalism Index ranking listed Hong Kong, Russia and Malaysia in the top three spots.[21]
Crony capitalism in finance was found in theSecond Bank of the United States. It was a private company, but its largest stockholder was the federal government which owned 20%. It was an early bank regulator and grew to be one of the most powerful organizations in the country due largely to being the depository of the government's revenue.[32]
TheGramm–Leach–Bliley Act in 1999 completely removedGlass–Steagall’s separation between commercial banks and investment banks. After this repeal, commercial banks, investment banks and insurance companies combined theirlobbying efforts. Critics claim this was instrumental in the passage of theBankruptcy Abuse Prevention and Consumer Protection Act of 2005.[33]
More direct government involvement in a specific sector can also lead to specific areas of crony capitalism, even if the economy as a whole may be competitive. This is most common in natural resource sectors through the granting of mining or drilling concessions, but it is also possible through a process known asregulatory capture where the government agencies in charge of regulating an industry come to be controlled by that industry. Governments will often establish in good faithgovernment agencies to regulate an industry. However, the members of an industry have a very strong interest in the actions of that 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 typically takes the form of making it very expensive for a new entrant to enter the market. An1824 landmark United States Supreme Court ruling overturned a New York State-granted monopoly ("a veritable model of state munificence" facilitated byRobert R. Livingston, one of theFounding Fathers) for the then-revolutionary technology ofsteamboats.[35] Leveraging the Supreme Court's establishment of Congressional supremacy over commerce, theInterstate Commerce Commission was established in 1887 with the intent of regulating railroadrobber barons. PresidentGrover Cleveland appointedThomas M. Cooley, a railroad ally, as its first chairman and a permit system was used to deny access to new entrants and legalizeprice fixing.[36]
The defense industry in the United States is often described as an example of crony capitalism in an industry. Connections withthe 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 theAirbus-Boeing WTO dispute, Airbus (which receivessubsidies from European governments) has stated Boeing receives similar subsidies which are hidden as inefficient defense contracts and in the form of federal and tax tax breaks.[37] Other American defense companies were put under scrutiny for no-bid contracts for theIraq War andHurricane Katrina related contracts purportedly due to having cronies in theBush administration.[38]
Gerald P. O'Driscoll, former vice president at theFederal Reserve Bank of Dallas, stated thatFannie Mae andFreddie Mac became examples of crony capitalism as government backing let Fannie and Freddie dominatemortgage underwriting, saying: "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".[39]
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 consideredde rigueur andtax evasion is common. This is seen in many parts of Africa and is sometimes calledplutocracy (rule by wealth) orkleptocracy (rule by theft). Kenyan economist David Ndii has repeatedly brought to light how this system has manifested over time, occasioned by the reign ofUhuru Kenyatta as president.[40]
Corrupt governments may favor one set of business owners who have close ties to the government over others. This may also be done with, religious, or ethnic favoritism. For instance,Alawites in Syria have a disproportionate share of power in the government and business there (President Assad himself is an Alawite).[41] This can be explained by considering personal relationships as asocial 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.[42]
Normally, this will be untenable to maintain in business as new entrants will affect the market. However, if business and government are entwined, then the government can maintain the small-hub network.[citation needed]
Raymond Vernon, a specialist in economics and international affairs,[43] wrote that theIndustrial 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,[44] writing: "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." Vernon further stated that "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.[45]
Raghuram Rajan, former governor of theReserve Bank of India, has said: "One of the greatest dangers to the growth of developing countries is themiddle income trap, where crony capitalism creates oligarchies that slow down growth. If the debate during the elections is any pointer, this is a very real concern of the public in India today".[46]Tavleen Singh, columnist forThe Indian Express, has disagreed. According to Singh, India's corporate success is not a product of crony capitalism, but because India is no longer under the influence of crony socialism.[47]
While the problem is generally accepted across the political spectrum, ideology shades the view of the problem's causes and therefore its solutions. Political views mostly fall into two camps which might be called the socialist and capitalist critique. The socialist position is that crony capitalism is the inevitable result of any strictly capitalist system and thus broadly democratic government must regulate economic, or wealthy, interests to restrict monopoly. The capitalist position is thatnatural monopolies are rare, therefore governmental regulations generally abet established wealthy interests by restricting competition.[48]
Critics of crony capitalism includingsocialists andanti-capitalists often assert that so-called crony capitalism is simply the inevitable result of any strictly capitalist system.Jane Jacobs described it as a natural consequence of collusion between those managingpower and trade whileNoam Chomsky has argued that the word crony is superfluous when describing capitalism.[49] Since businesses make money and money leads to political power, business will inevitably use their power to influence governments. Much of the impetus behindcampaign finance reform in the United States and in other countries is an attempt to prevent economic power from being used to take political power.[50]
Ravi Batra argues that "all official economic measures adopted since 1981 ... have devastated the middle class" and that theOccupy 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.[51]
Socialist economists, such asRobin 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.[52] Socialist economists dismiss the term as anapologetic for failures ofneoliberal policy and more fundamentally their perception of the weaknesses of market allocation.[53]
Supporters of capitalism also generally oppose crony capitalism. Further, supporters such asclassical liberals,neoliberals andright-libertarians consider it an aberration brought on by governmental favors incompatible with thefree market.[54][55][non-primary source needed]. In the capitalist view, cronyism is the result of an excess of interference in the market which inevitably will result in a toxic combination of corporations and government officials running sectors of the economy. For instance, theFinancial Times observed that, in Vietnam during the 2010s, the primary beneficiaries of cronyism were Communist party officials, noting also the "common practice of employing only party members and their family members and associates to government jobs or to jobs in state-owned enterprises."[56]
Conservative commentatorBen Shapiro prefers to equate this problem with terms such ascorporatocracy orcorporatism, considered "a modern form ofmercantilism",[57] to emphasize that the only way to run a profitable business in such a system is to have help from corrupt government officials. Likewise,Hernando de Soto said that mercantilism "is also known as 'crony' or 'noninclusive' capitalism".[58]
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 stifles competition,[59] a collusive result calledregulatory capture.Burton W. Folsom Jr. distinguishes those who engage in crony capitalism—designated by him political entrepreneurs—from those who compete in the marketplace without special aid from the government, whom he calls market entrepreneurs. While market entrepreneurs such asJames J. Hill,Cornelius Vanderbilt andJohn D. Rockefeller succeeded by producing a quality product at a competitive price, political entrepreneurs such asEdward Collins in steamships and the leaders of theUnion Pacific Railroad in railroads were men who used the power of government to succeed. They tried to gain subsidies or in some way use the government to stop competitors.[60]
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)
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.
Japan's dismal performance in the 1990s and the East Asian collapses of 1997 indicate thatdirigisme can only boost economies in the short run and at high cost. It breaks down in the long run (Lindsey and Lukas 1998).
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... [thissuffrage 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]
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.
Three companies—the Shaw Group,Kellogg Brown & Root (KBR, a subsidiary of Haliburton, whose former CEO is Vice PresidentDick Cheney), and Boh Brothers Construction of New Orleans—quickly scooped up no-bid ACE contracts to perform the restoration.Bechtel andFluor (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)
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.
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.
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.
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 ofmercantilism. 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.
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.
The author, Burton Folsom, divides the entrepreneurs into two groups: market entrepreneurs and political entrepreneurs.
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