Crony Capitalism

BIBLIOGRAPHY

The term crony capitalism refers to forms of capitalism in which leading businessmen enjoy close personal relationships with key politicians. Crony capitalism is often associated with corruption and many commentators have seen it as a major obstacle to Third World development. Commentators often contrast crony capitalism with highly idealized neoclassical models of capitalism. In actuality, however, significant linkages between political elites and business classes can be found in almost all capitalist regimes, past and present, and the real task is to identify the variety of ways in which such linkages either facilitate or hinder economic development.

In many underdeveloped countries crony capitalism may be perceived both as corrupt and as antinational. Crony capitalists often belong to ethnic minority groups whose activities have been historically concentrated within the business or financial sector and who in some cases had enjoyed protection under earlier colonial regimes. As in the cases of the Lebanese in Sierra Leone, Indians in Kenya, and the Chinese throughout Southeast Asia, perceived government favoritism toward entrepreneurial minorities may lead to fierce ethnic conflicts and the shattering of polities.

Crony capitalism may result in corruption. But corruption’s effects on economic development need not necessarily be lethal and corruption is certainly not unique to modern Third World nations. While the World Bank and the U.S. government have intervened to make aid conditional on struggles against corruption, relatively little attention has been given to historical studies of the effects of corruption on economic development. American civic life in the era of the Second Industrial Revolution between 1870 and 1914 was immensely corrupt, though the effect of this corruption on U.S. economic growth remains largely unexplored. In The Shame of the Cities (1902) the social reformer Lincoln Steffens documented many cases of corrupt ties between businessmen and politicians during the era of the so-called Robber Barons. Steffens condemned the “shamelessness” of municipal politics in St. Louis, a politics characterized by “government of the people, by the rogues and for the rich.” Recent examples of cronyism show that the spirit of the Robber Barons continues: In 2001 the Enron case revealed collusion between politicians and corporate executives, while 2006 saw the conviction of the lobbyist Jack Abramoff, who had served as an intermediary between businessmen and key congressmen.

Some sociologists and political scientists have even maintained that some forms of crony capitalism may be indispensable for capitalist development, particularly when those forms of cronyism help prevent untrammeled corruption. As modern China shows, personal political networks tying central government leaders to regional industrialists may be invaluable in combating entrepreneurial corruption. China’s increased movement away from state-owned enterprise has greatly increased opportunities for corruption at the higher ranks of society. Interestingly, however, the emerging Chinese culture of corruption so far seems mainly limited to regional levels, as the political elite that rules China at the national level has resisted absorption into this culture. Much of the success of the current Chinese economy may be due to the combination of local businessmen adept at adapting laws to local conditions and an uncorrupted political elite with ties to regional economic leaders that imposes limits on regional corruption and maintains a legal framework on which local and foreign businessmen can rely.

Cronyism has been an important element of capitalism everywhere, but the relationship between cronyism, business, and politics and cronyism’s effect on development vary greatly from nation to nation.

SEE ALSO Capitalism; Networks

BIBLIOGRAPHY

Chua, Amy. 2003. World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability. New York: Doubleday.

Domhoff, G. William. 1970. The Higher Circles: The Governing Class in America. New York: Vintage.

Lambsdorff, Johann Graf, Markus Taube, and Matthias Schramm, eds. 2005. The New Institutional Economics of Corruption. New York: Routledge.

Sun, Yan. 2005. Corruption, Growth, and Reform: The Chinese Enigma. Current History 104 (683): 257–263.

Michael Hanagan

CRONY CAPITALISM

Crony capitalism is a term that describes an economic system where people with good connections to the center of power—the "cronies" of the government—manage to place themselves in positions of undue influence over economic policy, thus deriving great personal gains.

In the case of Russia, the term implies that between the president and the country's business leaders—known as the "oligarchs"—there emerged a tacit understanding. If the oligarchs used their economic power to supply political and financial support for the president, in return they would be allowed to influence for their own benefit the formulation of laws and restrictions on a range of important matters.

A prominent example is that of insider dealings in the process of privatization, which, for example, allowed the transfer of major oil companies into private hands at extremely low prices. Another is the introduction of a system of "authorized banks," whereby a few select commercial banks were allowed to handle the government's accounts. Such rights could be abused: for example, by delaying the processing of payments received. Under conditions of high inflation, the real value eventually passed on to the final destination would be greatly diminished. There have also been serious allegations of insider dealings by the cronies in Russian government securities.

The overall consequences for the Russian economy were negative in the extreme. The influence of the so-called crony capitalists over the process of privatization led to such a warped system of property rights that some analysts seriously argued in favor of selective renationalization, to be followed by a second round of "honest" privatization.

Even more important, by allowing the crony capitalists to take over the oil industry for a pittance, the Russian government freely gave up the right to extract rent from the country's natural resource base. This represented a massive shift of future income streams out of the government's coffers and into private pockets, with severe implications for the future ability of the state to maintain the provision of public goods.

See also: economy, post-soviet; mafia capitalism

bibliography

Hedlund, Stefan. (1999). Russia's "Market" Economy. London: UCL Press.

Stefan Hedlund