What does Crony Capitalism Mean?
Crony capitalism is an economic system where all individuals, as well as businesses with political connections and influence, are favoured. They are satisfied through tax breaks, grants, and other forms of government assistance in ways that are seen as suppressing open competition in a free market.
Crony capitalism is also another name for rent-seeking. Mancur Olson who was an American economist and political scientist famously worked discussing the increasing cronyism of an economy over time. The great economist Olson blamed crony capitalism for the decline of nations.
The answer to the question of what does crony capitalism mean and how it influences our fiscal situations are very definitive and have a wide impact. Scroll down to understand when it started and how it has influenced our lives.
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What is Crony Capitalism?
Before answering, what is Crony capitalism, one should first know the other term for Crony capitalism, which is standard special interest legislation and regulation. In easy terms, crony capitalism creates a society where it allows an elite person to profit from government resources in such a way that does not benefit the society. This is based on some forms of political corruption where the politicians personally benefit by granting rent-seeking demands to the elites.
George Stigler discussed the classes of benefits that a firm can get from the government. The classification is as follows:
Direct money transfers
Entry prevention (including tariffs)
Rules affecting substitutes
Complements
Direct price controls
How did Crony Capitalism Gain Ground?
In medieval and modern times, Guilds are another example of what is now termed crony capitalism. Guilds in medieval and also during the times of early modern Europe offered an effective institutional mechanism. During this time, only the Guild members and political elites could collaborate to capture a larger portion of the economy and redistribute it to themselves at the expense of the rest of the economy.
This is another statement of crony capitalism. It is also stated by many economists around the world that guilds lost power first in the “dynamic” European countries, mainly England, Belgium, and the Netherlands. Until the 1800s, Guilds continued in much of the rest of Europe. Also, it is considered that it may have been in part responsible for the relative lack of economic progress in those areas.
There is also only one difference between the usage of “crony capitalism” as well as normal special interest regulatory analysis and that is the emphasis on “crony.” Analysts are usually discussing crony capitalism focus more on particular individuals involved in the “cronies” than the analysts discussing special interest legislation in general. The normal analysis of such legislation is impersonal as well as bloodless, dealing with faceless interest groups. Analysts of crony capitalism are more personal. They often name the particular cronies involved. Whether named or not in one or the other of two cases there are individuals involved, so this difference is more stylistic than substantive.
Who First Coined the Term Crony Capitalism?
The first-ever use of the term "crony capitalism" came about in the 1980s to characterise the Philippine economy under the dictatorship of Ferdinand Marcos. Early uses of this term to describe the economic practices of the Marcos regime. It included that of Ricardo Manapat, who introduced it in the year 1979 pamphlet "Some Are Smarter than Others". In the year 1980, the former Time magazine business editor George M. Taber used the term in a Time magazine article.
Well, it is also used to describe governmental decisions that favour the cronies of governmental officials. If it is taken in this context, then the term ‘Crony Capitalism is often used comparatively with corporate welfare. Whereas a technical term is usually used to assess government bailouts as well as favouritism monetary policy, which is opposed to the economic theory described by crony capitalism. The difference between these terms is whether the action of the government can be said to benefit the individual rather than benefiting the industry.
Understanding the Crony Capitalism Index
The main aim of the crony-capitalism index is just to indicate whether or not the livelihood of the people from a region or a country or even a city with a capitalist economy is affected by crony capitalism. To be a measuring trend in the number of economic rent-seekers is also the aim of the index. The assumption behind this is due to the favourable political policies set by government officials, and tycoons are increasing their wealth and interest.
This results in them getting a larger part of people's fruits of labour instead of generating more wealth for the whole society. In few cases, few favoured suppliers are influential on the establishment as well as application of the business-impacting laws, and citizens pay the tax for purchasing the overpriced products supplied by the favoured corporations.
Examples of Crony Capitalism
Now with the help of some illustrative examples of crony capitalism, let's understand it better.
Colour of Law- Crony capitalism can also use a technique that is called the colour of law, where an action that violates the law and has some superficial appearance of being legal.
Example- A politician who awards a large government contract to associate with the formal procurement process. It appears to be legal, except that the politician has an influence over the process from the inside.
Enforcement- The selective enforcement of laws as well as regulations.
Example- A large firm that has connections with politicians freely ignores the environmental, labour, or consumer safety laws without any fear or threat of government enforcement.
Coercive Monopoly- A government that does not break a monopoly that engages in anti-competitive practices because politicians benefit from the monopoly.
Law and Regulations- Laws that are made in such a way that will benefit the firm as opposed to society.
Barriers to Entry- Large firms may benefit from the complexity of regulations but make it difficult for smaller firms to enter their market.
Tax Breaks- Tax structures that benefit the large firms because they are allowed to pay few taxes with structures that reroute revenue to low tax jurisdictions.
Government Spendings- in such cases, the entire government spendings are designed to enrich friends of the governments.
Procurement- The government spends a percentage of the GDP of the world each year in such a way that government contracts are a significant type of wealth distribution.
Grants- Directly granting of the funds to a firm.
Example- A grant is provided to a biotechnological company to do some research. In principle, the grants should be provided with the competitive process but this may be ignored by the political class.
Credit- The extension of credits to the firms by the government can be a form of rent-seeking.
Sale of Assets- Government sells the assets to their friends.
Too big to Fail- Rescuing the large failing companies. Legitimately this can be done to save the critical economic infrastructure. Also, management is sometimes replaced where the government resources are used to socialise the losses without cost to whoever created the loss.
Zombie Companies- In such cases, the term crony capitalism especially represses the free markets, therefore, creating and sustaining the zombie companies that could not exist with fair competition. Economies burdened with zombie companies, or big firms can fester for many decades and produce low-quality life.
Fun Facts about Crony Capitalism
In the year 2014, Germany was the cleanest country in the crony capitalism index.
Russia was among the worst countries in 2014, where almost 18% of the wealth of the country came from the crony sectors.
The problems that occurred due to crony capitalism are inherent in the Indian economy.
Initially, the term crony capitalism was applied to states that were involved in the 1997 Asian financial crisis like Thailand and Indonesia.
FAQs on Crony Capitalism
1. What is the difference as well as the similarities between capitalism and crony capitalism?
Capitalism
An individual has an idea.
In capitalism, it functions in such a way that the individual forms a company and makes a product from that idea.
For the product, the money is given by the consumers.
In capitalism, the company becomes successful.
Someone else has a better idea than that person who creates a better product.
The new companies are given money by the consumers to get a better product.
The new company becomes more and more successful.
Most are made by the most innovative corporations.
Crony Capitalism
An individual forms a company, and a product is made from that idea.
For the product, the money is given by the consumers.
In Crony Capitalism, the company becomes successful.
The company uses its wealth to manipulate the government. It manipulates, giving it more power through tax breaks, regulations, etc.
If someone else has a better idea, then that person creates a better product.
Consumers are forced to continuously buy the old product.
Most money is made by the most corrupt and manipulative corporations.
2. How did Crony Capitalism ruin India?
In the Indian context, Crony Capitalism is especially potent as well as all-pervasive because it can be seen from so many corporate scandals that have burst out into the open. Crony capitalism has been in India for decades now. It has intensified in the build-up to the Great Recession of 2008. During this time, banks and financial institutions unbridled an Orgy of cheap credit and lent it to anyone willing to participate in the Debt Binge. During the good times, the loans and the debts ensured that the Indian Economy grew leaps and bounds until 2008 when the music stopped, and the party ended, which led to a gigantic crash. The effects of it are being felt to this day.
