Contributing Writer: Shloka Mohanty | May, 2024
Economic transactions often entail an inherent information and control asymmetry between parties involved, with one side possessing greater insight and authority. Asymmetric information is particularly pronounced in lending scenarios, where borrowers typically have a more nuanced understanding of fund utilization and associated risks. Such informational asymmetry poses a significant challenge when lenders fear that borrowers might exploit their advantage, potentially leading to a dysfunctional financial ecosystem and impeding overall economic progress (Tiemstra 2006).
Various societies adopt distinct approaches to mitigate this issue. In traditional, tightly-knit communities rooted in shared values, opportunistic behaviors may be discouraged naturally. Conversely, in pluralistic societies, networks may form where individuals prioritize dealings within their circles, effectively excluding outsiders—a phenomenon often labelled as “crony capitalism” (Tiemstra 2006).
The concept of crony capitalism garners widespread disdain across the political spectrum, irrespective of ideological affiliations. This term encapsulates the cozy nexus between influential corporate lobbyists and lawmakers, particularly in Washington. Populists, whether from the left or right, vehemently oppose this practice, decrying it as a form of corporate welfare that disproportionately benefits large corporations at the expense of ordinary citizens (Irwin 2014).
This debate offers a compelling window into the dynamics of contemporary economies. In today’s complex societies, contracts serve as crucial tools to mitigate the risks of opportunistic actions. These agreements commonly entail substantial upfront investments such as down payments, collateral, performance bonds, and compensatory deposits (Tiemstra 2006). Yet this underscores the intricate relationship between major corporations and government entities, a reality that proponents of unfettered free markets may find uncomfortable acknowledging.
Irwin, writing for The New York Times, astutely observes that despite ideological stances, we all operate within a system where such interdependence is inevitable. Whether we embrace it or not, we are all participants in what can be termed crony capitalism. This acknowledgment challenges traditional notions of market purity and underscores the nuanced complexities inherent in modern economic interactions.
How is Crony Capitalism measured?
As per The Economist, measuring crony capitalism involves analyzing the wealth of billionaires who have gained economic advantages through relationships with governments or regulatory bodies. This analysis compares the total wealth of billionaires derived from rent-seeking sectors to global GDP to provide context. Forbes publishes an annual list of the world’s wealthiest individuals, and this data is utilized for analysis. Rent-seeking sectors are categorized into two main groups: rent-seeking and non-rent-seeking sectors. Rent-seeking activities involve leveraging relationships with the government or regulatory bodies to gain economic advantages. Researchers also examine the geographic distribution of crony-capitalist wealth, focusing on countries where a significant portion of billionaire wealth is derived from rent-seeking sectors. Longitudinal analysis is used to gauge the evolution and persistence of crony capitalism across different economies and regions. By combining these factors and methodologies, researchers can estimate the extent of crony capitalism and provide insights into the relationship between economic power, political influence, and regulatory capture.
Crony Capitalism Today
Russia is currently considered the most crony-capitalist country, with approximately 19% of its GDP being derived from billionaire wealth in crony sectors. However, due to the effects of the Ukrainian war, the wealth of these cronies has decreased from $456 billion in 2021 to $387 billion in 2023. Furthermore, only 20% of Russian billionaires’ wealth comes from non-crony sectors, indicating a significant economic distortion (“The 2023 Crony-Capitalism Index.”).
In contrast, the proportion of crony-sector wealth in America is around 2% of GDP, while non-crony-sector wealth is 15%. However, the tech industry exhibits specific crony characteristics, such as concentration of sales and significant lobbying in Washington. If tech were to be classified as a crony industry, America’s crony wealth would increase to 6% of GDP (“The 2023 Crony-Capitalism Index.”).
The situation is different in China, where billionaires face challenges from their government. Since Xi Jinping’s crackdown on private capital, crony wealth has fallen sharply from 4.4% of GDP in 2018 to 2.5% now. All tycoons in China are subject to the state’s approval. In 1998, the country had only eight billionaires with a total worth of $50 billion. Now, it boasts 562 billionaires with an actual cost of $2 trillion (“The 2023 Crony-Capitalism Index.”).
India’s Prime Minister, Narendra Modi, has his favorites among the country’s corporate captains. Over the past decade, wealth from crony capitalist sectors has risen from 5% to nearly 8% of GDP. Gautam Adani, the owner of the Adani Group, briefly held the title of the world’s third-richest person in September. However, in January of this year, the American short-seller Hindenburg Research accused his company of fraud and stock market manipulation. The company denies all allegations, but Adani’s wealth has fallen from $90 billion to $47 billion (“The 2023 Crony-Capitalism Index.”).
Crony Capitalism versus Cronyism
Cronyism is a term used for a phenomenon where people prefer others who are part of their social network, often at the expense of those outside their network. It is essentially a transaction between two parties where one party favors the other based on their social connections (Khatri et al. 2005). This can either be a private matter between two individuals or a public issue when public power is used to favor one party (Li 2009). When cronyism becomes prevalent in a business context, it can lead to a system of crony capitalism. In this system, business performance relies on political connections rather than market forces. Crony capitalism enables individuals with connections to those in political power to gain significant economic benefits, which gives them an unfair advantage over their competitors.
History of Crony Capitalism
“Crony Capitalism” was a term coined by George M. Taber in the 1980s while researching capitalism in the Philippines. It refers to market distortion where only a few people benefit while the majority suffer (Taber 2015). The term “crony capitalism” was first extensively used in the 1980s to describe the economy of the Philippines under the dictatorship of Ferdinand Marcos. During his rule, Marcos created new oligarchs who relied solely on him for their success and rewarded traditional elites who cooperated with him. His cronies were given special treatment, including monopolies and windfall profits, which enabled them to enjoy exclusive benefits (Thompson 1996). Therefore, the Philippines under President Ferdinand Marcos’s regime serves as an example of crony capitalism.
Today, the Philippines is still grappling with crony capitalism. However, this phenomenon is not limited to East Asian economies; it has also developed in Western countries, such as the United States, where similar relationships between businesses and politicians exist.
Conclusion
Examination reveals the pervasive influence of crony capitalism across global economies, exceeding geographical and ideological boundaries. It involves a complex interplay between economic power, political influence, and regulatory capture, significantly affecting societies as a whole.
Measuring the extent of crony capitalism provides a quantitative lens for assessing its prevalence and effects. Using metrics such as the proportion of crony-sector wealth to GDP offers insights into the degree of economic distortion caused by rent-seeking activities. Additionally, longitudinal analysis reveals the dynamic nature of this phenomenon and its evolution.
Different nations exhibit varying degrees of crony capitalism. Russia is a prominent example, with a considerable portion of its GDP derived from billionaire wealth in crony sectors. Conversely, China has experienced decreased crony wealth due to government crackdowns on private capital, while India grapples with increasing crony capitalist tendencies.
Crony capitalism’s historical roots can be traced to regimes like Ferdinand Marcos in the Philippines, where favored elites received exclusive benefits, leading to market distortions and widespread inequality. This phenomenon persists globally, extending its reach into Western democracies where cozy relationships between businesses and politicians breed economic favoritism.
Acknowledging the existence and impact of crony capitalism is crucial for fostering a more transparent and equitable economic landscape. This requires concerted efforts to strengthen regulatory mechanisms, enhance transparency, and promote stakeholder accountability. Additionally, reducing the influence of special interest groups and fostering a culture of ethical business practices can mitigate the adverse effects of crony capitalism, promoting fair competition and inclusive economic growth.
Addressing the complexities of crony capitalism demands a multifaceted approach that combines regulatory reforms, institutional strengthening, and societal vigilance. By confronting this phenomenon head-on, societies can strive towards creating more equitable and sustainable economic systems, ensuring prosperity for all stakeholders.
REFERENCE
Irwin, Neil. “Why We’re All Crony Capitalists, like It or Not.” The New York Times, The New York Times, 19 June 2014, www.nytimes.com/2014/06/19/upshot/why-were-all-crony-capitalists-like-it-or-not.html.
Taber , George M. “The Night I Invented Crony Capitalism.” Knowledge at Wharton, 3 Nov. 2015, knowledge.wharton.upenn.edu/article/the-night-i-invented-crony-capitalism/#:~:text=George%20Taber%20was%20credited%20with,environment%20developing%20in%20the%20U.S.
Thompson, Mark R. “Off the Endangered List: Philippine Democratization in Comparative Perspective.” Comparative Politics, vol. 28, no. 2, 1996, pp. 179–205. JSTOR, https://doi.org/10.2307/421980. Accessed 15 Mar. 2024.
Khatri, Naresh, et al. “Cronyism: A Cross-Cultural Analysis .” SpringerLink, Palgrave Macmillan UK, 19 Oct. 2005, link.springer.com/article/10.1057/palgrave.jibs.8400171.
Li, Peter Ping. “The Duality of Crony Corruption in Economic Transition: Toward an Integrated Framework.” Journal of Business Ethics, vol. 85, no. 1, 2009, pp. 41–55. JSTOR, http://www.jstor.org/stable/40294797. Accessed 15 Mar. 2024.
Tiemstra, John P. “FINANCIAL GLOBALIZATION AND CRONY CAPITALISM.” CrossCurrents, vol. 56, no. 1, 2006, pp. 26–33. JSTOR, http://www.jstor.org/stable/24461093. Accessed 15 Mar. 2024.
“The 2023 Crony-Capitalism Index.” The Economist, The Economist Group Limited, 2 May 2023, www.economist.com/international/2023/05/02/the-2023-crony-capitalism-index?utm_medium=cpc.adword.pd&utm_source=google&ppccampaignID=17210591673&ppcadID=&utm_campaign=a.22brand_pmax&utm_content=conversion.direct-response.anonymous&gad_source=1&gclid=Cj0KCQjwwMqvBhCtARIsAIXsZpZxKClRlaZ2O9WOLCNZYYkkc3oNGGHpMtWnWeivaZmy1ERqBCMC9NEaAsuXEALw_wcB&gclsrc=aw.ds.