Katana VentraIP

Crony capitalism

Crony capitalism, sometimes also called simply cronyism, is a pejorative term used in political discourse to describe a situation in which businesses profit from a close relationship with state power, either through an anti-competitive regulatory environment, direct government largesse, and/or corruption. Examples given for crony capitalism include obtainment of permits, government grants,[1] tax breaks,[1] or other undue influence from businesses over the state's deployment of public goods, for example, mining concessions for primary commodities or contracts for public works.[2] In other words, it is used to describe a situation where businesses thrive not as a result of free enterprise, but rather collusion between a business class and the political class.[3][4]

Wealth is then accumulated 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 spills over into the government, the politics, and the media,[5] when this nexus distorts the economy and affects society to an extent it corrupts public-serving economic, political, and social ideals.[6]

Historical usage[edit]

The first extensive use of the term "crony capitalism" came about in the 1980s, to characterize the Philippine economy under the dictatorship of Ferdinand Marcos.[7] Early uses of this term to describe the economic practices of the Marcos regime included that of Ricardo Manapat, who introduced it in his 1979 pamphlet "Some are Smarter than Others", which was later published in 1991;[7] former Time magazine business editor George M. Taber, who used the term in a Time magazine article in 1980,[7] and activist (and later Finance Minister) Jaime Ongpin, who used the term extensively in his writing and is sometimes credited for having coined it.[8]


The term crony capitalism made a significant impact in the public as an explanation of the Asian financial crisis.[9]


It is also used to describe governmental decisions favoring cronies of governmental officials.[10]


The term is used largely interchangeably with the related term corporate welfare, although the latter is by definition specific to corporations.

In finance[edit]

Crony capitalism in finance was found in the Second Bank of the United States. It was a private company, but its largest stockholder was the federal government which owned 20%. It was an early bank regulator and grew to be one being the most powerful organizations in the country due largely to being the depository of the government's revenue.[32]


The Gramm–Leach–Bliley Act in 1999 completely removed Glass–Steagall’s separation between commercial banks and investment banks. After this repeal, commercial banks, investment banks and insurance companies combined their lobbying efforts. Critics claim this was instrumental in the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.[33]

In developing economies[edit]

In its worst form, crony capitalism can devolve into simple corruption where any pretense of a free market is dispensed with, bribes to government officials are considered de rigueur and tax evasion is common. This is seen in many parts of Africa and is sometimes called plutocracy (rule by wealth) or kleptocracy (rule by theft). Kenyan economist David Ndii has repeatedly brought to light how this system has manifested over time, occasioned by the reign of Uhuru Kenyatta as president.


Corrupt governments may favor one set of business owners who have close ties to the government over others. This may also be done with, religious, or ethnic favoritism. For instance, Alawites in Syria have a disproportionate share of power in the government and business there (President Assad himself is an Alawite).[40] This can be explained by considering personal relationships as a social network. As government and business leaders try to accomplish various things, they naturally turn to other powerful people for support in their endeavors. These people form hubs in the network. In a developing country those hubs may be very few, thus concentrating economic and political power in a small interlocking group.[41]


Normally, this will be untenable to maintain in business as new entrants will affect the market. However, if business and government are entwined, then the government can maintain the small-hub network.


Raymond Vernon, specialist in economics and international affairs,[42] wrote that the Industrial Revolution began in Great Britain because they were the first to successfully limit the power of veto groups (typically cronies of those with power in government) to block innovations,[43] writing: "Unlike most other national environments, the British environment of the early 19th century contained relatively few threats to those who improved and applied existing inventions, whether from business competitors, labor, or the government itself. In other European countries, by contrast, the merchant guilds ... were a pervasive source of veto for many centuries. This power was typically bestowed upon them by government." For example, a Russian inventor produced a steam engine in 1766 and disappeared without a trace. Vermon further stated that "a steam powered horseless carriage produced in France in 1769 was officially suppressed." James Watt began experimenting with steam in 1763, got a patent in 1769 and began commercial production in 1775.[44]


Raghuram Rajan, former governor of the Reserve Bank of India, has said: "One of the greatest dangers to the growth of developing countries is the middle income trap, where crony capitalism creates oligarchies that slow down growth. If the debate during the elections is any pointer, this is a very real concern of the public in India today".[45] Tavleen Singh, columnist for The Indian Express, has disagreed. According to Singh, India's corporate success is not a product of crony capitalism, but because India is no longer under the influence of crony socialism.[46]

Vernon, Raymond (1989), "Technological Development", EDI Seminar Paper, 39,  978-0821311622

ISBN