Crony Capitalism


Crony capitalism is an economy in which businesses thrive not as a result of risks they take, but rather as a return on money amassed through a nexus between a business class and the political class. This is done using state power to crush genuine competition in handing out permits, government grants, special tax breaks, or other forms of state intervention over resources where the state exercises monopolist control over public goods, for example, mining concessions for primary commodities or contracts for public works. Money is then made not merely by making a profit in the market, but through profiteering by “rent seeking” using this monopoly or oligopoly. Entrepreneurship and innovative practices, which seek to reward risk are stifled, since the value-added is little by crony businesses as hardly anything of significant value is created by them, with transactions taking the form of “trading”.

Crony Capitalism

Crony capitalism is a situation in an economy where the success of a business does not depend on any other factor than the relationship between the government officials and the business people. This is a condition where there is a high level of favoritism exhibited by the government in the distribution if government grants, special tax breaks, legal permits, and several other forms of state intervention in the businesses.

The situation of crony capitalism arises usually when self serving behavior of the business people and business cronyism spills into the government or politics. Similarly, when there are self serving ties or friendships, and family relations between the government officials and the business people, the situation arise because of the influence of the government on the society and the economy. These relationships corrupt the political and the public serving ideals.

The Basics of Crony Capitalism

Who is to blame for this condition of crony capitalism? Socialist blames the capitalist, and vice versa for this economic condition. The socialists are of the point of view that crony capitalism is the unavoidable result of pure capitalism. They support their claim with the fact that people in power tend to like staying in power, and hence, they create networks between the government officials and the businesses. Just to make sure that both the business people and the government officials stay in power, they tend to support and favor one another.

On the contrary, capitalists are of the view that crony capitalism arises because the socialist government have the tendency to control the state, thus they favor a certain group of people to make sure that the resources remain in their control. The businesses, in socialist settings, have the need to operate with the government closely in order to be successful.

The concept of crony capitalism made a major impact when it came out as an explanation of the Asian Financial Crisis. The term is also used to describe the decisions of the government in favor of certain cronies. The term, crony capitalism, is also used for the term corporate welfare; however, it is important to understand the notable differences between the two. There is a difference between the actions of a government favoring and benefiting a certain individual or the entire industries.

Further Reading