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Crony Capitalism

Crony capitalism is a term used where corporations have corrupt relationships with government officials and politicians in order to obtain an undue advantage over competitors, or to take over public assets for nominal or unfair prices. It has been frequently used to describe the form of capitalism that developed in South Korea and various S E Asian countries, and in other emerging markets, but it exists in all economies to a lesser or greater extent. A simple example would be the relationship between a local politician and a property developer to secure planning permission for a new development in circumstances where such development contravenes normal planning guidelines; in such a situation money or gifts, such as expensive holidays, may be given to the politician. Transparency International defines corruption as “the abuse of entrusted power for private gain”, and say that corruption can be classified “as grand, petty and political, depending on the amounts of money lost and the sector where it occurs.”[1] They add that, “Grand corruption consists of acts committed at a high level of government that distort policies or the central functioning of the state, enabling leaders to benefit at the expense of the public good. Petty corruption refers to everyday abuse of entrusted power by low- and mid-level public officials in their interactions with ordinary citizens, who often are trying to access basic goods or services in places like hospitals, schools, police departments and other agencies. Political corruption is a manipulation of policies, institutions and rules of procedure in the allocation of resources and financing by political decision makers, who abuse their position to sustain their power, status and wealth.”[2] Crony capitalism is endemic, from companies in wealthy countries who pay bribes to foreign officials to secure business, to local countries who find ways overcoming barriers to business, including bureaucratic delays and red-tape.

However, crony capitalism may not be the greatest problem in a developing economy, and as Doner and Ramsey argue in the case of Thailand it may, in some cases, be an effective way of dealing with local issues. Kang said, “cronyism is only one variable in developmental outcomes. Fostering economic growth requires much more than limiting cronyism and eliminating corruption.”[3] Doner and Ramsey, studying Thailand’s development said, “The presence of rapid economic growth in Thailand, despite extensive clientelism, corruption and rent-seeking, suggests that these phenomena can have different effects upon growth in different settings. In some countries, they can have strongly negative effects, while, in others, they do not. In sum, if corruption and rent-seeking can be damaging to growth in some countries, but not others, we need a clearer understanding of what kinds of corruption and rent-seeking affect economic performance in what kinds of circumstances.”[4] They concluded that the form of clientelism found in Thailand in the late 20th century actually made it easier for businesses to operate because the patrons had an interest in the success of their clients and provided protection against further corruption. New competitors could also find alternative patrons, and so competition was not restricted. Doner and Ramsey, do however, argue that, “corruption and rent-seeking have [  ] made it more difficult for Thai governments to extricate Thailand from the economic crisis that engulfed it in 1997.”[5] Kang also conceded there can be advantages from cronyism, and that “in countries with weak legal and political institutions, mutual hostages among a small set of government and business actors can provide a number of benefits that reduce transaction costs.”[6] He added that in such countries “long-term relationships may be difficult to create. In South Korea the balance kept corruption from swamping growth, while in the Philippines and Indonesia the lack of stability harmed long term growth.”[7] These studies highlight the fact that the operation of markets is more complex than classical economists may have us believe, and that the flow of information, credibility, trust and relationships all play their part, such patronage systems can play their parts in some economies, but it would be dangerous to see crony capitalism, or state capitalism as the answer to the problems of emerging economies, we are now more aware of the weaknesses of the Chinese model, and there are many examples where greed and a desire to acquire assets at the expense of the state and the public have reduced economic growth, increased inequality and created social unrest.

I personally experienced the problems of cronyism and straightforward criminality in Russia in the 1990s. Gulnaz Sharafudinova argues that “The authoritarian turn associated with Putin and supported in large part by the public should be viewed as a political response to the exigencies imposed by the interaction between crony capitalism, political competitiveness, and the electoral process,[8]” in other words Putinism, although it has enriched Putin and his key supporters, is actually a turning away from classic cronyism which dominated the 1980s and 1990s in Russia, a time when it was the Wild East and Moscow was ruled by the gun. I remember driving past a large Mercedes in Moscow, the driver and passengers all lying dead on the street, the car riddled with bullet holes, and restaurant guides rated establishments by their food, prices, and the chances of being involved in a gun fight, a good problem when gangsters in their black leather jackets entered a restaurant. Westerners may decry Putin and his aggressive foreign policy, and the loss of civil rights, but for the average Russian he is immeasurably better than what went before. You could say that in the 1990s the Mafia robbed the state and in the early 21st century Putin became the state, and its resources were his to deal with, he is a modern Tsar, above the law.

The real problem with cronyism, other than the concentration of wealth in elite control, is that organizations which rely on it as their business model may feel little pressure to innovate, invest and develop. Vuong and Napier make this point in their study of Vietnam, they say that scarce physical assets such as land, housing and have been acquired by crony capitalists and used inefficiently because the priority of these groups is in acquiring assets, for the purposes of personal enrichment, rather than creating economic growth. They say that, “the corporate sector’s addiction to resources may contribute to economic deterioration, through a downward spiral of lower efficiency leading to consumption of more resources.”[9] Chekir and Diwan also found evidence of the inefficiency of crony capitalism in their study of Egypt, they said, “Capital was being misallocated in the sense that it would have produced higher economic returns if it went instead to the non politically connected sector. The PC [politically connected] firms borrowed a larger share of national savings not because they were more efficient, but because of the implicit state guarantees that made them more attractive to banks in spite of their low levels of efficiency.”[10] Crony capitalism also kept inefficient businesses in existence at the expense of investment in more dynamic sectors of the economy. The exclusionary mechanisms erected by politicians also made it more difficult for new companies to enter the economy and this restricted economic growth. As a result, the Egyptian economy under-performed at a time when many new workers were trying to obtain jobs, the public perception of cronyism amongst leading politicians also had social implications.

© Andrew Palmer, 2016, do not reproduce

[1] Transparency International http://www.transparency.org/what-is-corruption#define accessed 7 October 2015

[2] ibid

[3] Kang, David C – “Transaction Costs and Crony Capitalism in East Asia”, Comparative Politics, Vol. 35, No. 4 (Jul., 2003), pp. 439-458

[4] Doner, Richard F and Ramsay, Ansil – “Rent-seeking and Economic Development in Thailand”, in Jomo K S and Khan M H (editors) – “Rents, Rent-Seeking and Economic Development, Theory and Evidence in Asia”, Cambridge University Press, Cambridge, 2000, pp. 146-7

[5] ibid p. 175

[6] Kang, David C – “Transaction Costs and Crony Capitalism in East Asia”, Comparative Politics Vol. 35, No. 4 (Jul., 2003), pp. 439-458

[7] Kang, David C – “Transaction Costs and Crony Capitalism in East Asia”, Comparative Politics Vol. 35, No. 4 (Jul., 2003), pp. 439-458

[8] Sharafudinova, Gulnaz – “Political Consequences of Crony Capitalism inside Russia”, University of Notre Dame Press, Notre Dame, Indiana, 2011, p.6

[9] Vuong, Quan Hoang and Napier, Nancy K – “Resource Curse or Destructive Creation: A Tale of Crony Capitalism in Transition”, Universite Libre de Bruxelles, Solvay Brussels School of Economics and Management, CEB Working Paper N° 12/037, 2012, p. 9

[10] Chekir, Hamouda and Diwan, Ishac – “Crony Capitalism in Egypt”, Journal of Globalization and Development. Volume 5, Issue 2, Pages 177–211

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