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Crony capitalism

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Crony capitalism is a liberal and fascistic economic system in which the government picks winners and losers through the use of grants, contracts, loan guarantees, regulations, bailouts and other ways of extending favors to friends while penalizing competitors.


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Crony capitalism is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism.<ref>

</ref> Crony capitalism is believed to arise when business cronyism and related self-serving behavior by businesses or businesspeople spills over into politics and government,<ref name=“The Discovery that Business Corrupts Politics: A Reappraisal of the Origins of Progressivism, 1981”>The Discovery that Business Corrupts Politics: A Reappraisal of the Origins of Progressivism, by McCormick, Richard. 1981. The American Historical Review, Vol. 86, No. 2 (Apr., 1981), pp. 247-274.</ref> or when self-serving friendships and family ties between businessmen and the government influence the economy and society to the extent that it corrupts public-serving economic and political ideals.

The term “crony capitalism” made a significant impact in the public arena as an explanation of the Asian financial crisis.<ref>

</ref> It is also used world wide to describe virtually any governmental decisions favoring “cronies” of governmental officials. In many cases, the term is used interchangeably with corporate welfare; to the extent that there is a difference, the latter might be restricted only to direct government subsidies of major corporations, excluding tax loopholes and all manner of regulatory and trade decisions, which in practice could be much larger than any direct subsidies.

Crony capitalism in practice

File:World Map Index of perception of corruption.svg

's overview of the index of perception of corruption, 2010]]

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 (sometimes called a trade association or industry trade group) to the government in requesting subsidies or aid or regulation.<ref>

</ref> Newcomers to a market may find it difficult to find loans, acquire shelf space, or receive official sanction (like the Medallion System of the Taxicabs of New York City created during the Great Depression) to sell their product or services; in technological fields, they may be accused of infringing on patents that the established competitors never assert against each other. Distribution networks will refuse to aid the entrant. In spite of this, some competitors will succeed 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 keiretsu of post-war Japan, the print media in India, the chaebol of South Korea, and the powerful families who control much of the investment in Latin America.

However, crony capitalism is generally associated with more virulent government intervention. 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. Even in high-income democracies with well established legal systems and freedom of the press a larger state is associated with more political corruption (including crony capitalism).<ref>Hamilton, Alexander (2013), Small is beautiful, at least in high-income democracies: the distribution of policy-making responsibility, electoral accountability, and incentives for rent extraction ://, World Bank.</ref>

<!– Please do not list every country in the world, just the ones that are both corrupt AND capitalist enough. Every country has a little, this is only for the best examples.–> States often said to exhibit crony capitalism include the People's Republic of China; India,<ref>

</ref> especially up to the early 1990s when manufacturing was strictly controlled by the government (the “Licence Raj”); Indonesia; Argentina;<ref>

</ref> Brazil; United Kingdom, especially in the 1600s and 1700s;<ref></ref> Malaysia; Israel;<ref>The shakshuka system: A view from 2009</ref>Russia;<ref>

</ref> the United States; most ex-Eastern Bloc states, as well as the most well-known case of economic crisis due to cronyism, Greece.<ref>

</ref> Wu Jinglian, one of China's leading economists<ref>

</ref> 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.<ref>


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, known as regulatory capture, has a long history.

A 1824 landmark U.S. Supreme Court ruling overturned a New York State-granted monopoly (“a veritable model of state munificence” facilitated by one of the Founding Fathers, Robert R. Livingston) for the then-revolutionary technology of steamboats.<ref>

</ref> Leveraging the Supreme Court's establishment of Congressional supremacy over commerce, the Interstate Commerce Commission was established in 1887 with the intent of regulating railroad “robber barons”. President Grover Cleveland appointed Thomas M. Cooley, a railroad ally, as its first chairman and a permit system was used to deny access to new entrants and legalize price fixing.<ref>


The military-industrial complex in the United States is often described as an example of crony capitalism in an industry. Connections with the 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 the Airbus-Boeing WTO dispute, Airbus (which receives outright subsidies from European governments) has stated Boeing receives similar subsidies, which are hidden as inefficient defense contracts.<ref>

</ref> Several companies received expedited no-bid contracts for Hurricane Katrina and Iraq war reconstruction purportedly due to having cronies in the Bush administration.<ref>


Gerald P. O'Driscoll, former vice president at the Federal Reserve Bank of Dallas, stated that Fannie Mae and Freddie Mac became 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.”<ref>


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 rigueur 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. This may also be done with racial, religious, or ethnic favoritism; for instance, Alawites in Syria have a disproportionate share of power in the government and business there. (President Assad is an Alawite.)<ref>Syrian Businessman Becomes Magnet for Anger and Dissent “Like Mr. Ezz in Egypt, he has become a symbol of how economic reforms turned crony socialism into crony capitalism, making the poor poorer and the connected rich fantastically wealthier.”</ref> 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.

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.

Raymond Vernon, specialist in economics and international affairs,<ref>

</ref> wrote that the Industrial 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.<ref>Vernon (1989)</ref> “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”. For example, a Russian inventor produced a steam engine in 1766 and disappeared without a trace. “[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.<ref>Vernon (1989, p. 8); see also Watt steam engine and James Watt</ref>

Anarchist anthropologist David Graeber's book The First 5000 Years provides an even broader perspective: For as far back as we can see in the historical and archaeological record, argues Graeber, people with wealth and power, typically a monarch and cronies, have written the rules to benefit them at the expense of others. The situation would deteriorate for common folk until it was interrupted by a peasant revolt. Then the cycle would start over again.

Political viewpoints

Critics of capitalism including socialists and other anti-capitalists often assert that crony capitalism is the inevitable result of any capitalist system. Jane Jacobs described it as a natural consequence of collusion between those managing power and trade, while Noam Chomsky has argued that the word “crony” is superfluous when describing capitalism.<ref>"Black Faces in Limousines:" A Conversation with Noam Chomsky from accessed on June 5, 2009</ref> 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 reform in the United States and in other countries is an attempt to prevent economic power being used to take political power.

Ravi Batra argues that “all official economic measures adopted since 1981…have devastated the middle class” and that the Occupy 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.<ref>


Socialist economists, such as Robin 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.<ref>

</ref> Socialist economists dismiss the term as an apologetic for failures of neoliberal policy and, more fundamentally, their perception of the weaknesses of market allocation.

Laissez-faire economists<ref>

</ref> oppose crony capitalism as well<ref>

</ref> disparaging governmental favors<ref>

</ref> as incompatible with a true free market.<ref>

</ref> Laissez-faire advocates criticize the term as an ideologically motivated attempt to cast what is in their view the fundamental problem of government intervention or “investments” as an avoidable aberration; free-market advocates refer to governmental favoritism as “crony socialism”,<ref>

</ref> “venture socialism”<ref>

</ref> or “corporatism, a modern form of mercantilism”<ref>

</ref> to emphasize that the only way to run a profitable business in such systems is to have help from corrupt government officials.<ref>

</ref> 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 stifle competition,<ref>

</ref> a collusive result called regulatory capture. In his book The Myth of the Robber Barons, Burton W. Folsom, Jr. 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” who succeed “by producing a quality product at a competitive price”<ref>


See also



Further reading

External links

Capitalism Political corruption Political terminology Public choice theory Economic problems

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Snippet from Wikipedia: Crony capitalism

Crony capitalism is an economic system in which businesses thrive not as a result of risk, but rather as a return on money amassed through a nexus between a business class and the political class. This is often achieved by using state power rather than competition in managing permits, government grants, tax breaks, or other forms of state intervention over resources where the state exercises monopolist control over public goods, for example, mining concessions for primary commodities or contracts for public works. Money is then made not merely by making a profit in the market, but through profiteering by rent seeking using this monopoly or oligopoly. Entrepreneurship and innovative practices which seek to reward risk are stifled since the value-added is little by crony businesses, as hardly anything of significant value is created by them, with transactions taking the form of trading. Crony capitalism spills over into the government, the politics, and the media, when this nexus distorts the economy and affects society to an extent it corrupts public-serving economic, political, and social ideals.

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