Crony capitalism is a pejorative term describing an allegedly
capitalistCapitalism is an economic and social system in which the means of production are privately controlled; labor, goods and capital are traded in a market; profits are distributed to owners or invested in technologies and industries; and wages are paid to labor...
economy in which success in business depends on close relationships between businesspeople and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special
tax breakA tax break is a tax saving. This includes:* Tax exemption, an exemption from all or certain taxes of a state or nation in which part of the taxes that would normally be collected from an individual or an organization are instead foregone....
s, and so forth.
Crony capitalism is believed to arise when political
cronyismCronyism is partiality to long-standing friends, especially by appointing them to positions of authority, regardless of their qualifications. Hence, cronyism is contrary in practice and principle to meritocracy...
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-servingIn economics, a public good is a good that is non-rivalrous and non-excludable. This means, respectively, that consumption of the good by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good...
economic and political ideals.
Crony capitalism in practice
In its lightest form, crony capitalism consists of
collusionCollusion is an agreement, usually secretive, which occurs between two or more persons to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage . It is an...
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 groupAn industry trade group, also known as a trade association, is an organization founded and funded by businesses that operate in a specific industry. An industry trade association participates in public relations activities such as advertising, education, political donations, lobbying and...
). 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
patentA patent is a set of exclusive rights granted by a state to an inventor or their assignee for a limited period of time in exchange for a public disclosure of an invention....
s 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
keiretsuA is a set of companies with interlocking business relationships and shareholdings. It is a type of business group.
Three types of keiretsu:
Kigyō shūdan : � horizontally diversified business groups
...
of post-war Japan, the
chaebolChaebol refers to a South Korean form of business conglomerate. They are government-supported powerful global multinationals owning numerous international enterprises...
of South Korea, and the powerful families who control much of the investment in
Latin AmericaLatin America is a region of the Americas where Romance languages – particularly Spanish, Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,501 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
.
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 ChinaThe People's Republic of China , commonly known as China, is the largest country in East Asia and the most populous in the world with over 1.3 billion people, approximately one-fifth of the world's population...
;
IndiaIndia, officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the south, the Arabian Sea on the west, and the Bay of Bengal...
, especially up to the early 1990s when manufacturing was strictly controlled by the government (the "
Licence RajLicence Raj, also the Permit Raj refers to the elaborate licences, regulations and the accompanying red tape that were required to set up and run businesses in India between 1947 and 1990....
");
IndonesiaThe Republic of Indonesia is a country in Southeast Asia and Oceania. Indonesia comprises 17,508 islands. With an estimated population of around 237 million people, it is the world's fourth most populous country, with the world's largest population of Muslims.Indonesia is a republic, with an...
;
ArgentinaArgentina, officially the Argentine Republic , is the second largest country in South America, constituted as a federation of 23 provinces and an autonomous city, Buenos Aires. It is the eighth largest country in the world by land area and the largest among Spanish-speaking nations, though Mexico,...
;
BrazilBrazil , officially the Federative Republic of Brazil , is a country in South America. It is the fifth largest country by geographical area, occupying nearly half of South America, the fifth most populous country, and the fourth most populous democracy in the world. Bounded by the Atlantic Ocean...
;
MalaysiaMalaysia is a country in Southeast Asia that consists of thirteen states and three Federal Territories, with a total landmass of . The capital city is Kuala Lumpur, while Putrajaya is the seat of the federal government. The population stands at over 28 million inhabitants...
;
RussiaRussia , officially known as both Russia and the Russian Federation , is a country in northern Eurasia . It is a semi-presidential republic, comprising 83 federal subjects...
; and most other ex-Soviet states. Critics claim that government connections are almost indispensable to business success in these countries.
Wu JinglianWu Jinglian is one of the preeminent economists of the People's Republic of China , primarily specializing in economic policy as it applies to China's ongoing series of economic reforms....
, 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 captureRegulatory capture is a term used to refer to situations in which a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating...
. A famous early example in the United States would be the
Interstate Commerce CommissionThe Interstate Commerce Commission was a regulatory body in the United States created by the Interstate Commerce Act of 1887, which was signed into law by President Grover Cleveland...
, which was established in 1887 to regulate the railroad "
robber baronsRobber baron is a term that revived in the 19th century in the United States as a reference to businessmen and bankers who dominated their respective industries and amassed huge personal fortunes, typically as a direct result of pursuing various anti-competitive or unfair business practices...
;" 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 fixingPrice fixing is an agreement between business competitors to sell the same product or service at the same price. Historically, such a group of businesses in price fixing was referred to as a combination....
. A more modern example would be the case of
Creekstone FarmsCreekstone Farms Premium Beef, LLC is a conventional and angus beef producer and limited liability company with livestock based in Campbellsburg, Kentucky and processing and sales in Arkansas City, Kansas. The CEO of Creekstone, John Stewart founded the company in 1995 along with his wife, Carol...
. After the
mad cowBovine spongiform encephalopathy , commonly known as mad-cow disease , is a fatal, neurodegenerative disease in cattle, that causes a spongy degeneration in the brain and spinal cord. BSE has a long incubation period, about 4 years, usually affecting adult cattle at a peak age onset of four to...
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 KrugmanPaul Robin Krugman is an American economist, liberal columnist and author. He is Professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs, Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist...
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
military-industrial complexMilitary-industrial complex is a concept commonly used to refer to policy relationships between governments, national armed forces, and industrial support they obtain from the commercial sector in political approval for research, development, production, use, and support for military training,...
in the United States is often described as an example of crony capitalism in an industry. Connections with
The PentagonThe Pentagon is the headquarters of the United States Department of Defense, located in Arlington, Virginia. As a symbol of the U.S. military, "the Pentagon" is often used metonymically to refer to the Department of Defense rather than the building itself....
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
subsidiesA subsidy is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more...
from European governments outright) has stated Boeing receives similar subsidies, which are hidden as inefficient defense contracts. 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.
Gerald P. O'Driscoll former vice president at the
Federal Reserve Bank of DallasThe Federal Reserve Bank of Dallas covers the Eleventh Federal Reserve District, which includes Texas, northern Louisiana and southern New Mexico. It has branch offices in El Paso, Houston, and San Antonio...
stated that Fannie Mae and Freddie Mac became classic 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."
Creation of crony capitalism in developing economies
In its worst form, crony capitalism can devolve into simple
corruptionPolitical corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
, 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
plutocracyPlutocracy is rule by the wealthy, or power provided by wealth. The combination of both plutocracy and oligarchy is called plutarchy.In a plutocracy, the degree of economic inequality is high while the level of social mobility is low...
(rule by wealth) or
kleptocracyKleptocracy, alternatively cleptocracy or kleptarchy, from Greek klepto and kratos , is a term applied to a government that extends the personal wealth and political power of government officials and the ruling class , via the embezzlement of state funds at the expense of the wider population,...
(rule by theft).
CorruptPolitical corruption is the use of legislated powers by government officials for illegitimate private gain. Misuse of government power for other purposes, such as repression of political opponents and general police brutality, is not considered political corruption. Neither are illegal acts by...
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
SyriaSyria , officially the Syrian Arab Republic , is a country in Western Asia, bordering Lebanon and the Mediterranean Sea to the west, Turkey to the north, Iraq to the east, Jordan to the south and Israel to the southwest....
have a disproportionate share of power in the government and business there. (
President AssadDr. Bashar al-Assad is the President of the Syrian Arab Republic, Regional Secretary of the Ba'ath Party, and the son of former President Hafez al-Assad.- Overview of Presidency :...
is an Alawite.) This can be explained by considering personal relationships as a
social networkA social network is a social structure made of individuals called "nodes," which are tied by one or more specific types of interdependency, such as friendship, kinship, financial exchange, dislike, sexual relationships, or relationships of beliefs, knowledge or prestige.Social network analysis...
. 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
socialistsSocialism refers to various theories of economic organization advocating public or direct worker ownership and administration of the means of production and allocation of resources, and a society characterized by equal access to resources for all individuals with a method of compensation based on...
and other
anti-capitalistsAnti-capitalism describes a wide variety of movements, ideas, and attitudes which oppose capitalism. Anti-capitalists, in the strict sense of the word, are those who wish to completely replace capitalism with another system....
often assert that crony capitalism is the inevitable result of
any capitalist system.
Jane JacobsJane Jacobs, OC, O.Ont was an American-born Canadian urbanist, writer and activist. She is best known for The Death and Life of Great American Cities , a powerful critique of the urban renewal policies of the 1950s in the United States...
described it as a natural consequence of collusion between those managing
powerPower is a measure of an entity's ability to control the environment around itself, including the behavior of other entities. The term authority is often used for power, perceived as legitimate by the social structure. Power can be seen as evil or unjust, but the exercise of power is accepted as...
and
tradeTrade is the voluntary exchange of goods, services, or both. Trade is also called commerce or transaction. A mechanism that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services. Later one side of the barter were the metals, precious...
, while
Noam ChomskyAvram Noam Chomsky is an American linguist, philosopher, cognitive scientist, political activist, author, and lecturer. He is an Institute Professor and professor emeritus of linguistics at the Massachusetts Institute of Technology. Chomsky is well known in the academic and scientific community as...
has argued that the word "crony" is superfluous when describing capitalism. 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 reformCampaign finance reform is the common term for the political effort in the United States to change the involvement of money in politics, primarily in political campaigns....
in the United States and in other countries is an attempt to prevent economic power being used to take political power.
Capitalists oppose crony capitalism as well, but consider it an aberration brought on by governmental favors incompatible with true capitalism. Sometimes it is referred to as "
state corporatismCorporatism is a system of economic, political, and social organization where corporate groups such as business, ethnic, farmer, labour, military, patronage, or religious groups are joined together into a single governing body in which the different groups are mandated to negotiate with each other...
." 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. In fact, some have advocated use of the term "crony socialism" instead to emphasize that the only way to run a profitable business in such systems is to have help from corrupt government officials. These advocates point to the higher levels of interaction between corporations and governments that are considered more socialist, taken to its maximum in the form of
nationalizationNationalization, also spelled nationalisation, is the act of taking an industry or assets into the public ownership of a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being state...
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. In his book
The Myth of the Robber Barons,
Burton W. Folsom, Jr.Burton W. Folsom, Jr. is an American historian and author. He received his doctorate in history from the University of Pittsburgh in 1976 and is a professor of American history at Hillsdale College....
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."
Socialist economists have criticized the term as an ideologically motivated attempt to cast what is in their view the fundamental problems of capitalism as avoidable irregularities. The term "crony capitalism" made its first significant impact in the public arena as an explanation of the Asian financial crisis. This explanation is frequently dismissed as apologetics for failures of neoliberal policy and more fundamental weaknesses of market allocation. According to socialist economist
Robin HahnelRobin Hahnel is a Professor of Economics at Portland State University. He is best known for his work on participatory economics with Z Magazine editor Michael Albert. He is currently a visiting professor at Lewis & Clark College....
,
- 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.
See also
- Corporate welfare
Corporate welfare is a pejorative term describing a government's bestowal of money grants, tax breaks, or other special favorable treatment on corporations or selected corporations. The term compares corporate subsidies and welfare payments to the poor, and implies that corporations are much less...
- Corporatism
Corporatism is a system of economic, political, and social organization where corporate groups such as business, ethnic, farmer, labour, military, patronage, or religious groups are joined together into a single governing body in which the different groups are mandated to negotiate with each other...
- Cronyism
Cronyism is partiality to long-standing friends, especially by appointing them to positions of authority, regardless of their qualifications. Hence, cronyism is contrary in practice and principle to meritocracy...
- Iron triangle
In United States politics, the iron triangle is a term used by political scientists to describe the policy-making relationship among the congressional committees, the bureaucracy , and interest groups....
- Patrimonialism
Patrimonialism is essentially the blending of the public and private sector. These regimes exclude the upper and middle classes from power, land and businesses can be seized by the leader without warning. The armies of these countries are loyal to the leader, not the nation.-Max Weber:Weber wrote...
- Plutocracy
Plutocracy is rule by the wealthy, or power provided by wealth. The combination of both plutocracy and oligarchy is called plutarchy.In a plutocracy, the degree of economic inequality is high while the level of social mobility is low...
- Political family
- Political machine
A political machine is a disciplined political organization in which an authoritative boss or small group commands the support of a corps of supporters , who receive rewards for their efforts...
- Regulatory capture
Regulatory capture is a term used to refer to situations in which a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating...
- Government-owned corporation
A government-owned corporation, state-owned enterprise, or government business enterprise is a legal entity created by a government to undertake commercial activities on behalf of an owner government, and are usually considered to be an element or part of the state...
External links