Sakshi Education
Dr. B.J.B.Krupadanam, Civils Senior Faculty, R.C.Reddy IAS Study Circle, Hyderabad.
Of late, the term "Crony Capitalism," has become a buzz word in the media. Thanks to the liquor baron, Vijay Mallya, declared a proclaimed offender in a money laundering case, for refreshing our memory of the Asian Financial Crisis in 1997. Before, we analyze the impact of Crony Capitalism (CC) on the Indian economy, let's elaborate the concept:
It is a pejorative term used to refer to the corrupt business dealings carried out in a capitalist economy. It refers to the success of business based on close relationship between business people and government officials. The word 'crony' means friend. It is generally used to show disapproval. Crony Capitalism is reflected by favouritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state intervention. In such a system, the false appearance of 'pure' capitalism is publicly maintained to preserve the exclusive influence of well connected individuals. Both socialists, as well as capitalists accuse each other for the rise of CC. Socialists believe that CC is inevitable result of pure capitalism. This belief is supported by their claims that people in power try to stay in power and the only way to do this is to create networks between government and business that support each other. On the other hand, capitalists believe that CC arises from the need of socialist governments to control the state. This requires businesses to operate closely with the government to be in business. Both the contentions are partially true.
Who are the important players in this mischievous game?
What are the major drawbacks of CC?
As pointed out above,: 1) CC encourages the misallocation of resources. Government designates a set of economic policies that provides some privileged group of asset holders with high enough rate of return to induce them to invest. CC not only permits rent seeking, it requires rents to be earned and distributed. (2) Crony system depends on the personal connections of particular asset holders and government actors means that the commitments of the government are credible only as long as that particular government is in power. (3) CC has negative consequences for distribution of income.
CC of different dimensions
The economic costs of CC
How to combat CC?
What is the present status of CC around the world?
While the developed countries have a number of billionaires but fewer cronies,only 14% of billionaire wealth is from rent-heavy industries. It is a good omen. In the case of India, among the developing countries, the news are encouraging. In 2008, crony wealth reached 18% of GDP, putting it on a par with Russia. Today it stands at 3%, a level similar to Australia. A slump in commodity prices has adversely affected the balance sheets of mining tycoons. The government has got tough on graft, and the RBI has prodded the state owned banks not to be too generous in advancing loans to bogus companies. Even though, a bit late, the government is after defaulters, like, Vijay Mallya.
It is a pejorative term used to refer to the corrupt business dealings carried out in a capitalist economy. It refers to the success of business based on close relationship between business people and government officials. The word 'crony' means friend. It is generally used to show disapproval. Crony Capitalism is reflected by favouritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state intervention. In such a system, the false appearance of 'pure' capitalism is publicly maintained to preserve the exclusive influence of well connected individuals. Both socialists, as well as capitalists accuse each other for the rise of CC. Socialists believe that CC is inevitable result of pure capitalism. This belief is supported by their claims that people in power try to stay in power and the only way to do this is to create networks between government and business that support each other. On the other hand, capitalists believe that CC arises from the need of socialist governments to control the state. This requires businesses to operate closely with the government to be in business. Both the contentions are partially true.
Who are the important players in this mischievous game?
- The Politicians and the Business Class
The Economist in its May 7th 2016 issue has observed that "since globalisation had taken off in the 1990s, there had been a surge in billionaire wealth in industries that often involves cosy relations with the government, such as casinos, oil and construction. Over the two decades, crony fortunes had leapt relative to global GDP and as a share of total billionaire wealth." Indian companies are highly competitive when it comes to CC. The US based Misfortune Magazine has published the "Crony Fortune 100" - the world's largest and most powerful corporations that derive their competitive advantage from tweaking the rules of the game in their favour based on close this with the establishment. To the surprise of everybody, Indian companies have taken 34 out of the top 100 spots, outranking many of their better known global peers. India is really shining! Indian companies have excelled in appropriating natural resources, whether it's coal, oil or electro-magnetic spectrum at throw away prices from the government to make super normal profits. They have done so by investing heavily in donations to political parties and cultivating close ties with the politico-bureaucratic nexus. Veteran crony capitalist, Mr. Joy Aswal, whose company has been named in the Fortune list, said that CC is an innovative model for Public-Private Partnership (PPP). "It is mutually beneficial to both the politicians and corporations and hence is good for democracy and economic growth of the country. The core competence of many a business remains at the ability to manipulate ministers and civil servants. There is a great resistance to liberalisation from industrialists' lobby as it will level the playing field, open doors to honest and fair competition. Cronyism is a form of deviant economic behaviour that sucks fairness, competition and vitality out of capitalist systems. The sorry state of affairs of the Board of Control for Cricket in India (BCCI) reflect the scourge of CC which is deep rooted. The most powerful politicians, the most influential business persons make unscrupulous billions of unsuspecting consumers without a rule book and without even a fig leaf of accountability. Politicians are accountable to people, at least on the day of election, businessmen to shareholders but the politico-business combine, the BCCI, is not accountable to anybody.
- Bureaucracy
Vincent de Gournay, the French Economic Philosopher, coined the term 'bureaucracy' referring to the civil servants of the state that monopolise administrative power. But, Max Weber, a German Sociologist, scientifically explained this concept and described it as 'professionally competent body of employees of an organisation.' India inherited an apolitical bureaucracy from Britishers. It used to be fondly referred to as 'steel frame.' In independent India, the bureaucracy transformed into politicised institution and earned the epithet 'steal frame.' Today, bureaucracy has become synonym to corruption; it occurs at the point of public service delivery through payment of bribes to access or expedite these services. Bureaucracy has become the 'through proper channel' for crony capitalism. Decisions to allocate public resources are distorted by money, power, access, connections or some combinations of the above - the manifestations of crony capitalism. Bureaucrats in India excel in cronyism by extending preferntial treatment to old friends and associates, without regard to their qualifications. Backroom deals between members of governing class and their handpicked cronies influence the legislative, executive and regulatory actions of government. Such actions are not only morally hazardous but toxic to economic freedom. Cronyism and corruption pervert policy and rob the best ideas of legitimacy. Aspiring entrepreneurs, willing to work hard and full of ideas and energy, start out against a stacked deck because they lack bureaucratic support. According to a recent survey of the bureaucracies of 12 Asian economies, 'India's suffocating bureaucracy' ranked as the least efficient, and working with the country's civil servants was described as 'slow and painful process.' The idea of apolitical service was transformed to committed service and did a permanent damage to the fabric of services.
- Public Sector Banks of India
Taking advantage of the provision 'limited liability' under Company's law, many of the promoters of the companies are looting the Public Sector Banks. The banks have written off approximately Rs.1.14 lakh crores as Non Performance Assets (NPAs) which had been advanced to corporates in the last few years. RBI Governor, RaghuramRajan has rightly commented, 'India has poor companies and rich promoters'. As a cruel reminder of CC existing in India, more than 42.6 lakh crores have been given to corporates as 'revenue foregone' in the form of tax exemptions by the Government of India (GOI) in the last ten years alone. Compare this with the figure of much maligned debt waiver of farmers in 2008 which was estimated to be at 71,000 crores.
What are the major drawbacks of CC?
As pointed out above,: 1) CC encourages the misallocation of resources. Government designates a set of economic policies that provides some privileged group of asset holders with high enough rate of return to induce them to invest. CC not only permits rent seeking, it requires rents to be earned and distributed. (2) Crony system depends on the personal connections of particular asset holders and government actors means that the commitments of the government are credible only as long as that particular government is in power. (3) CC has negative consequences for distribution of income.
CC of different dimensions
- Public Policy and Cronyism - Policies are formulated at the behest of interest groups.
- Rent seeking and CC - Business approaches government to give protection in the form of tariffs, quotas or regulations that protect domestic firms.
- Regulatory capture and CC - Regulation may be introduced in public interest but over a period of time, regulatory authorities are captured by the industries and these bodies begin to protect the interests of business firms.
- Interest Group politics and CC - Nations decline when interest groups become well established in the political process so that firms gain more from their political connections than from their economic productivity. When the power of political connections overwhelms the power of economic productivity, nations enter a decline owing to the working of CC.
- Crony Capitalism and big government - The bigger the government, measured both in its expendituare and its regulatory power, the bigger the potential for CC. The potential profitability of rent seeking is directly related to the size and scope of government. Defence contracts encourage CC.eg., Augusta Westland helicopters deal; Subsidies to entrepreneurs, industries is another example of CC. A reduction in the size and scope of government reduces the benefit from cronyism. It helps to direct participants in the economy away from trying to obtain political benefits at the expense of others and toward engagement in productive economic activity. Quite often it is argued that big government is needed to stand upto CC. In reality, it is the other way. Because government power allows some interest groups to impose burden on others, which forces everyone to engage in political process and compete to be the cronies who benefit from the government's interference. CC is not controlled by the government but rather caused by it.
The economic costs of CC
- It reduces the overall degree of competitiveness.
- Results in rent seeking through subsidies or taxes.
- Impedes fundamental economic reforms.
How to combat CC?
- Limit the size and scope of government.
- Reform the system of campaign financing.
- Improve and comply with rules of the legislative process.
- Reform the lobbying system.
What is the present status of CC around the world?
While the developed countries have a number of billionaires but fewer cronies,only 14% of billionaire wealth is from rent-heavy industries. It is a good omen. In the case of India, among the developing countries, the news are encouraging. In 2008, crony wealth reached 18% of GDP, putting it on a par with Russia. Today it stands at 3%, a level similar to Australia. A slump in commodity prices has adversely affected the balance sheets of mining tycoons. The government has got tough on graft, and the RBI has prodded the state owned banks not to be too generous in advancing loans to bogus companies. Even though, a bit late, the government is after defaulters, like, Vijay Mallya.
Published date : 27 Jun 2016 12:34PM
