Crony Capitalism

The term ‘crony capitalism’ has been doing rounds in the news due to the Adani-Hindenburg issue. Cronyism is a type of economic system advantageous for individuals and businesses. The term first originated during the Asian financial crisis of 1997. Read here to learn more about crony capitalism.

The phrase “crony capitalism” was first widely used to describe the Philippine economy under Ferdinand Marcos’ dictatorship in the 1980s.

As a means of explaining the Asian financial crisis, the term “crony capitalism” had a big popular influence.

It can also refer to policies that benefit the friends of elected politicians. As a technical phrase frequently used to evaluate government bailouts and favoritism monetary policy as opposed to the economic theory outlined by crony capitalism, the term is frequently used in comparison with corporate welfare in this context.

What is crony capitalism?

In crony capitalism, also known as cronyism, businesses prosper not as a consequence of free enterprise but rather as a result of money made through a collaboration between a business class and the political class.

• In a crony capitalist system, government intervention, favoritism, and preferential treatment play a significant role in determining business success.

It is a capitalist economic system in which people or organizations with close relationships to political figures take advantage of those connections to acquire an unfair competitive advantage.

Instead of allowing for unrestricted competition to win permits, government grants, tax breaks, or other types of state intervention over resources, this is frequently accomplished by business interests manipulating their relationships with state power.

• Examples of this include mining concessions for essential commodities or contracts for public works.

An indicator called the “crony-capitalism index,” which was released by the British publication The Economist, purports to determine if the livelihood of citizens of a given nation or city with a capitalist economy is easily affected by cronyism.

• The index tries to track the growth in the number of people looking for financial rent.
• The underlying premise is that the tycoons’ wealth and interest are rising as a result of the pro-business political policies implemented by government officials.
• Instead, then increasing prosperity for society as a whole, they end up receiving a larger portion of people’s labor.

Due to the strong incentives faced by governments to extract resources through taxation, regulation, and the encouragement of rent-seeking activity, as well as those faced by capitalist businesses to increase profits through obtaining subsidies, limiting competition, and erecting barriers to entry, this is the predominant form of capitalism in practice around the world.

Why crony capitalism is an issue?

The rise of crony capitalism is attributed to both socialists and capitalists. According to socialists, crony capitalism is an unavoidable by-product of unadulterated capitalism. On the other hand, capitalists think that crony capitalism results from socialist governments’ need to exert economic control.

Crony capitalism is widely blamed for a range of social and economic woes.

• Collusion Between Business and Government: In a crony capitalist system, businesses seek to influence government policies and decisions in their favor. This can involve lobbying, campaign contributions, and other forms of political engagement to gain advantages such as regulatory exemptions, subsidies, or access to government contracts.
• Unfair Competition: Crony capitalism can distort free-market competition by giving certain businesses an unfair advantage. Smaller or newer companies that lack political connections may find it difficult to compete with well-connected, established firms.
• Rent-Seeking Behavior: Businesses in crony capitalist systems often engage in rent-seeking, which involves seeking economic gain through political means rather than through productive activities. This can result in inefficiencies and misallocation of resources.
• Corruption: Crony capitalism is often associated with corruption, as it frequently involves bribes, kickbacks, and other illicit practices to secure favorable treatment from the government. This erodes public trust and undermines the rule of law.
• Income Inequality: Crony capitalism can exacerbate income inequality because the benefits of government favoritism and economic privileges primarily accrue to a small, politically connected elite. This can lead to social unrest and economic disparities.
• Economic Instability: The concentration of economic power in the hands of a few politically connected entities can make an economy more susceptible to financial crises and economic instability.
• Undermining Institutions: Crony capitalism can erode the credibility and effectiveness of public institutions, as they may be perceived as serving the interests of a select few rather than the broader public.
• Diminished Innovation: In a system where success depends more on political connections than innovation, there may be less incentive for businesses to invest in research and development, potentially hindering technological progress.
• Lack of Accountability: Crony capitalist systems can lack transparency and accountability, making it difficult to identify and address corrupt practices.

In India, the union government’s aggressive disinvestment policy has been criticized by the opposition as crony capitalism.

Raghuram Rajan, former governor of the Reserve Bank of India, has said, “One of the greatest dangers to the growth of developing countries is the middle-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”

Crony capitalism: A Global menace

Crony capitalism is also not simply limited to emerging markets or developing countries. It exists everywhere with often disastrous consequences.

• The housing catastrophe in the USA a few years ago was due to a local form of crony capitalism.
• The oligarchs of Russia are certainly prime examples of crony capitalism, but they can hardly function without the aid of the government.
• China has a unique form of crony capitalism where most of the distortions are created by the state to give a competitive advantage to its own companies.

Way forward

India may undertake measures like open data projects, increase the independence of regulatory agencies, and improve the transparency of government contracts and subsidies to improve transparency and accountability in its political and economic processes.

• India can promote competition by lowering entrance obstacles for entrepreneurs and smaller enterprises, such as by cutting red tape and simplifying rules.
• This can lessen the concentration of wealth and power in the hands of a small number of people or firms and make it simpler for new competitors to compete with established companies.
• By putting policies in place to ensure that firms behave morally and sustainably, along the lines of CSR and sustainability programs, India may promote ethical business practices.
• By making political donations and lobbying efforts more transparent, India can promote ethical political behavior.
• By doing so, the possibility of corruption can be decreased and accountability for elected officials’ acts can be ensured.

Efforts to combat crony capitalism typically involve promoting transparency, strengthening regulatory and enforcement mechanisms, reducing the influence of money in politics, and ensuring that government decisions are made for the benefit of the public rather than a select few individuals or businesses. Promoting fair competition, a level playing field, and a strong rule of law are essential components of a healthy market economy.

-Article written by Swathi Satish