By ANAYAT SEKHON, New Delhi, India
Crony capitalism is a phenomenon wherein the government colludes with market players and intervenes in an economy in their favour, by doling out grants, tax breaks, subsidies and other sops. This manipulation of market forces results in an “uneven playing ﬁeld”, reducing competition and stiﬂing innovation, in contravention to the guiding principles of free market capitalism wherein economic gains are solely merit-based. While market interventionism and monopolisation has been a characteristic feature of socialistic welfare states, capitalist economies are by no means bereft of oligopolies due to a myriad of factors—some are natural, such as the economies of scale—while others include weak or absent anti-trust legislation, regulatory capture and crony capitalism itself.
An obvious consequence of crony capitalism is the misallocation of resources, which can result in hampered growth, mounting public debt and corruption. (1) Mancur Olson, in The Wealth Of Nations, writes that the great majority of special-interest organisations redistribute income rather than create it in ways that reduce social efﬁciency and output. In countries like Greece and India, deeply entrenched cronyism and corruption contributed to policy paralysis; governments were unable to privatise loss-making industries in time to protect vested interests. On the other hand, in South Korea, the existence of the Chaebol has resulted in rapid economic growth, albeit it is contested that intangibles like innovation cannot be measured and the monopolisation prevalent in the Korean economy may have resulted in its overall decline. (2)
A net decrease in economic competition results in private gains at the cost of the consumer, since the consumer has limited options, and the consumer may be forced to purchase a commodity at artiﬁcially inﬂated prices. Economic competition, provided by the entry of new players, incentivises capital investment towards the exploration of more efﬁcient techniques of production as well as new technology (articulated by Joseph Berliner in his concept of the ‘Invisible Foot’ and dynamic economists such as Burton Klein) which in turn leads to product differentiation and a decrement in the cost of production. (3) While established ﬁrms have a signiﬁcant advantage in terms of available capital, new entrants have a very high incentive to channelise their efforts towards innovation, since the relative payoff is much higher. This is also the reason why ﬁrms often acquire small “niche” companies with something new to offer the marketplace — since the initial risk of failure has already been borne — which implies that the larger ﬁrm need not divert valuable capital from conventional avenues (where the certainty of earning a proﬁt in the near future has been established) towards capricious R&D.
A worrying facet of cronyism is the gradual deterioration in human capital within the workforce. Luigi Zingales of the University of Chicago observed that as a consequence of favouritism, intelligent people frequently end up in menial jobs, whereas mediocre people attain the best jobs simply because they happen to have the right connections, and they in turn hire mediocre people out of consideration for their job security. (4) Furthermore, the collusion of market players makes the adoption of new technologies and the enactment of legislation in response to changing conditions more challenging because of the number of stakeholders capable of exerting inﬂuence on such decisions. (5) Market players continue to hold signiﬁcant ﬁnancial clout over government, which implies that they can hinder the tabling, enactment or implementation of legislation that hurts their pecuniary interests, with scant regard for its net positive effect on welfare. Nothing springs more readily to mind than the lack of deterrence faced by large corporations while ﬂouting reasonable environmental norms. The resulting lack of proper treatment of efﬂuents, rampant water and soil pollution, high fuel emissions and general environmental degradation can be construed as a social cost.
In economic terms, the policy paralysis symptomatic of crony capitalism may result in diminished growth, lack of investor conﬁdence, barriers to capital infusion (through FDI, for example), liberalisation (to protect domestic interests) and inﬂation.
Crony capitalism in the United States has been observed in tax and copyright law (6, 7), Medicare, clean energy, farming and most notably, during the 2008 Financial crisis. The Federal Reserve was widely denounced (8) for bailing out banks “too big to fail” such as Morgan Stanley, amid allegations of unchecked borrowing and speculation, shadow banking, utilisation of high-risk ﬁnancial products such as Credit Default Swaps, failure of regulators and lack of transparency and corporate governance. (9) Government intervention was required during the crisis, but the moral hazard that the bailouts created is signiﬁcantly onerous. Empirical evidence shows that it unwittingly incentivised recklessness. (10) As a consequence of the crisis, people lost their jobs and homes, businesses went bust, debt shot up, disposable incomes fell and output declined. It also sent shockwaves through the global economy.
As Keynes puts it,
"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
Furthermore, the editors of Bloomberg View estimated there was an $83 billion annual subsidy to the 10 largest United States banks in 2011, reﬂecting a funding advantage of 0.8 percentage points due to implicit government support, tantamount to the government giving the banks about 3 cents of every tax dollar collected. Subsidies for energy ﬁrms in the United States have more than doubled from $17.9 billion in FY2007 to $37.2 billion in FY2010 and much of it is directed toward clean energy. Solyndra received $527 million and A123 spent $132 million of the $249 million in federal grants it was offered before declaring bankruptcy. Subsidies, when favourably augmenting market supply, are not an outcome of crony capitalism per se, but in this case the government was assisted by private entities with industry experience in investment decisions. On closer examination it was revealed that these entities served their own interests whilst guiding these decisions, which can be interpreted as a form of clandestine lobbying. (11) The IRS lost a court battle in 2012 against Solyndra’s private investors (who were attempting to claim Solyndra’s tax offsets post ﬁling for bankruptcy under Chapter 11) saying that the bankruptcy laws were actually designed to give hard-pressed businesses a chance to make their business models work, not, as the Wall Street Journal pointed out, to allow “Mr Obama’s billionaire friends to sidestep a federal tax bill amounting to hundreds of millions of dollars as a result of an epic crony capitalist ﬁasco” and “stick it to the taxpayers twice for the same failed investment”. The IRS cites their main motive as “tax avoidance”. (12,13) Amgen (a pharmaceutical company), aided by extensive lobbying, was able to get language quietly inserted in the Medicare bill which allowed Amgen to sell one of its highpriced drugs, Sensipar, with no government controls for two additional years - at a cost to the American taxpayer of an estimated $500 million. (14) Monsanto, a sustainable agriculture ﬁrm, along with Kraft, General Mills and Pepsi Co. leads a lobbyist group called GMA rallying against mandatory GMO labelling on food products, compromising a consumer’s right to make an informed choice. (15) GM’s anti-Tesla letter over direct distribution to can be interpreted either way— as merely contesting Tesla’s exclusive right to a more efﬁcient method of market interaction or proactively attempting to throttle the “little guy” by making their cars less price-competitive.
Rent-seeking and politics seem inexorably enmeshed, and one of the suggestions made to break this nexus is public ﬁnancing of elections. New York City, in 2009, publicly ﬁnances its elections through a multiple-match program: donor contributions up to $175 are matched by a state fund at a 6:1 ratio. (16) This program decreases the reliance of candidates on political contributions that come with strings attached, and makes corporate lobbying a less attractive proposition for big business. Crony capitalism is a multi-faceted, far-reaching phenomenon whose causative factors and effects vary from country to country. It is difﬁcult to measure its prevalence or effects using indices (The Economist’s crony capitalism index is ﬂawed; so is the Herﬁndahl-Hirschmann index which squares the market shares of ﬁrms in the industry and adds up the total to show market concentration). While the interaction between the government and the private sector is both unavoidable and important, this essay attempts to examine the deleterious effects it can have on a nation if the prevailing agenda forwarded supersedes the public good.
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