Tuesday, December 5, 2023

Crony capitalism: Electorally savvy but disastrous for economy


What is crony capitalism? How has it become a favourite for politicians but is disastrous for economies? Here is an in-depth analysis.

A ‘crony’ is a close friend or companion, especially when he/she is dishonest. The term ‘crony capitalism’ has been in use for the past three decades and has recently been the focus of much discussion and debate due to certain controversies. When capitalism is characterized by the incumbent (political party in power) granting certain favours through government institutions to one or more capitalists, crony capitalism is said to exist. Examples of these favours include special licenses or permits, loans of a large magnitude or at low rates of interest or the putting up of roadblocks to the entry of competitors in the market.

In this article, I am not going to discuss recent controversies which have made the headlines as I am hamstrung by the paucity of evidence. Rather I am going to argue that ‘crony capitalism’ is a potentially winning electoral strategy but most certainly bad for the economy. Finally, I am going to contend that the temptation to use ‘crony capitalism’ as an electoral strategy implies that judicial oversight to curb its spread is necessary.

The important role of money in winning elections is the cornerstone of the effectiveness of ‘crony capitalism’ as an electoral strategy. When an incumbent dispense favours to a crony capitalist, he/she obviously gets more electoral contributions in return. Thus, we have a symbiotic system: the rising graph of the crony capitalist coinciding with the favour-dispensing political party becoming more entrenched in power.

But crony capitalism is disastrous for the economy: the basic idea is to keep rivals to the ‘crony capitalists’ out of as many economic sectors as possible. This hurts competition and hampers the tendency of a capitalist system to keep prices and costs low. As a result, produced and consumed outputs are much lower than they would otherwise have been; economic growth and development obviously suffer. Because crony capitalism is almost always associated with ‘big business’, ‘crony capitalism’ is also mostly associated with the choking of ‘small businesses’, which are obviously the labour-intensive kind. As a result, employment generation suffers.

Crony capitalism affects many countries, including, quite understandably, major democracies, given the connection between money power and electoral power. In order to measure the incidence of crony capitalism, the British weekly newspaper, The Economist, has come out with a crony capitalism index. It measures the impact of crony capitalism on the livelihood of people in a given country and is based on the work of economists Ruchir Sharma, Aditi Gandhi and Michael Walton. In constructing this index, the wealth of billionaires is classified as crony or non-crony, and the ratio of crony wealth thus obtained to GDP is then used to construct the index.

The crony capitalism index, 2021 ranks 22 major economies, which include the United States, France, Britain, Germany and Japan, among the large developed economies and the BRICS economies of Brazil, Russia, India, China and South Africa, in terms of the extent of crony capitalism. Russia ranks first, India seventh, China tenth and United States seventeenth. The high Indian rank points to the significance of crony capitalism in the country. Apart from Russia, all the other BRICS economies are ranked lower than India.

It is quite obvious crony capitalism is a major obstacle to having a level playing field among electoral competitors, conferring very often a decisive advantage to the incumbent. It also squeezes out competition in the economic space. The simultaneous erosion of competition in both political and economic spheres can be ruinous for both economic development and the effectiveness of civic participation in the country.

Because of these reasons, judiciary oversight in regard to crony capitalism is needed. The judiciary needs to track the grant of major permits and licenses by the incumbent and ascertain whether these are being given to a handful of capitalists. By asking for justification from the incumbent in regard to the grant of these permits and licenses and initiating action for the cancellation of licenses/permits issued to ‘cronies’, it can perform an important service.

It is not that there has been no action by the Courts ever to check crony capitalism. Not very long ago, the Supreme Court had called for the demolition of Twin Tower in Noida, a multi-storey building which had been wrongfully constructed in a Green Belt.

A systematic, periodic and comprehensive review of crony capitalism is not outside the powers of the courts. To start with, the court might look at how much the wealth of the ten richest Indian billionaires as a proportion of GDP has grown. If this proportion sees significant growth in a year, then a more detailed review of permits, licenses and loans granted by the government to these billionaires can unearth the existence of crony capitalism. Such a review would be a boon to the economy and the political system.

Also Read: Neoclassical-behavioural synthesis: A significant development in economics

(Siddhartha Mitra is a Professor of the Department of Economics at Jadavpur University.)


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