Crony Capitalism

A pejorative term used to describe a society, usually marked by an allegedly capitalist economy, where the close relationships between businessmen and government officials are used to succeed in business. Consequently, the success of a business is determined by favoritism by the ruling government rather than by a free market and the rule of law, thus corrupting public-serving and political ideals. Such favoritism is usually granted in the form of special permits, tax breaks, government grants, and other incentives. In crony capitalism, favoritism can also be shown based on race, religion, or ethnicity, which is especially so in developing countries. Countries noted for exhibiting or having exhibited crony capitalism include the People's Republic of China, India, Mexico, Brazil, Malaysia, Russia, and Indonesia, as well as most of the ex-Soviet countries.

The rise of crony capitalism has been blamed on both socialists and capitalists alike, with either party placing [Page 123]the blame on the other. Socialists have often declared crony capitalism to be the inevitable result of any capitalist system, asserting that people in power, whether business or government, intend to stay in power, and the only way to do this is to create networks between government and businesses that support each other. They believe that because businesses' main objectives are to make money and since money typically leads to political power, business entities will inevitably use their power to influence governments. On the other hand, while capitalists are also generally opposed to crony capitalism, they consider its occurrence to be the result of socialists' need to control the state, which requires close cooperation between businesses and governments.

At one end of the spectrum, crony capitalism exists in less extreme forms, such as collusion among market players. The market players, while still competing against each other to an extent, will combine efforts and present a united front to the government when requesting subsidies or aid. Such groups are referred to as trade associations or industry trade groups. Newcomers and other players in the market may find themselves alienated from these associations, finding it hard to gain market presence or find loans. To the other extreme, crony capitalism is usually associated with more powerful government interventions, such as ambiguous laws and regulations; these laws, when enforced, can greatly impede virtually all business, providing an incentive to stay in the good books of government officials.

In its worst and most extreme form, crony capitalism can devolve into corruption. Bribes to government officials and tax evasions are typical by-products of extreme crony capitalism.

As an example, crony capitalism has been evident in the process of privatization in Russia, notably with the transfer of major oil companies into private hands at extremely low prices. As crony capitalism implies that a tacit understanding exists between the country's government and oligarchs or business leaders, this method of privatization had an extreme, negative effect on the economy: The influence of the crony capitalists over the process led to a warped system of property rights.