Decoding Crony Capitalism

Decoding Crony Capitalism

With Supreme Court cancelling all 122 telecom licences allotted to 11 companies, crony capitalism has become the phrase to be dissected.

By Anand Vardhan

Published on :

“Crony capitalism is a danger that we must guard against”

– Prime Minister Dr Manmohan Singh

(at an interactive session with a group of newspaper editors, September 6 2010.)

It is ironical that the Prime Minister and other votaries of the liberal economic regime are advising precaution against a disease, which many believe is integral to the capitalist structures, built by pursuing the liberalisation of the Indian economy in the last two decades. The recent revelations about a slew of corruption scams and murky patronage patterns –  ranging from 2G spectrum allocation scam from Commonwealth Games scam  to the Adarsh Housing Society scam and various irregularities in awarding mining leases and land allotments – have set the alarm bells ringing for the government.

If the analogy of the Frankestein sounds too clichéd, one would be allowed to borrow the eloquent metaphor of a ‘spectre’ that Marx and Engels used in the Manifesto of the Communist Party.Thus, in a different context, we may say : ‘a spectre is haunting India- the spectre of crony capitalism.’

Crony capitalism has been the term most frequently used to explain the structural issues that have emerged from the recent scams. But  who is a  crony capitalist ?

Crony capitalism and economic growth-  A capitalist explanation

The term ‘crony capitalism’ describes the close relationship between the state and big business in contemporary world. Crony capitalists are ‘private-sector businessmen who benefits enormously from close relations’ with leading officials and politicians. They obtain not only protection from foreign competition, but also concessions, licences, monopoly rights, and government subsidies. Alan Greenspan in his testimony before the U.S. House of Representatives on January 30, 1998 defined crony capitalism as a system where stocks are purchased and loans are made on the basis of association, not economic value is an illustration of crony capitalism working in the financial market of an economy.

The debate over the statement that crony capitalism promote economic growth or not have been quite old and the literature on it have come up with different conclusions supported by the empirical findings. This can be very well explained when the above stated statement is verified with the ideas of different school of economic thoughts. Beginning the analysis of the given statement with the theories propounded by the classical economist, we find that classical economist from the time of Adam Smith have advocated laissez-faire policy. They have favored a free market economy, where they assume that the invisible hand of the market can help the economy in achieving all kinds of efficiency, be it allocative or distributive. Any interference in the working of free market would lead to sub-optimal outcome or the less desirable one. Therefore, according to the classical economist crony capitalism would lead to sub-optimal outcome as the market forces are guided by the collusive forces between government and private businesses rather than their free interplay. This would ultimately hinder the economic growth of the economy. Similar conclusion has been reached by the neo-classical economists, who are also the ardent supporter of the free market economy.

Keynesian school of thoughts which has its grounding in the great depression of thirties have supported the government intervention on the basis that the market imperfection can be overcome with the help of government intervention and the economy could be run in a smooth fashion. In a superficial manner Keynesian school of thoughts could be assumed to be nearer to the functioning of crony capitalism as the government and private business works closely.But, the difference between the two is that in Keynesian economics government intervention is for the developmental purposes but in case of crony capitalism government intervention results in to rent seeking. Therefore effect of crony capitalism on economic growth depends on the use of the rent obtained. If the rent is used for the developmental purpose then crony capitalism will promote economic growth and retard the growth process if it is used for the non developmental purpose.

The recent developments in the field of economics have been in the form of development of institutional economics, which have branched in to old and new institutional economics. This school of thoughts believe that institutions of an economy evolves over the period of time which results into reduction of the transaction cost and increases the efficiency of the economic system. On the other hand, neoclassical economic theory assumes that the institutional framework-the legal, political, and informational aspects of an economy is given. In a neoclassical world contracts are costlessly and immediately enforced, property rights are secure, and any initial distribution of resources can be voluntarily bargained over and exchanged in order to maximize efficiency. Thus the idea inbuilt in the model is that any government intervention must be growth retarding, since it involves a move away from a perfect market. However, the real world situation is different as assumed by the neo classical economic theory. The real world situation is much closer to the idea of new institutional economics which assumes that institutions are not perfect in any economy. Therefore, it is imperative to analyze the above statement with the lens of new institutional economics.

Crony capitalism is often seen as an impediment to economic growth because it implies decisions based on nonmarket principles, increases transaction costs, impedes efficiency, involves rent-seeking, distorts economic incentives, and makes exchange between economic actors more difficult. In most instances reliance on personal relations is detrimental toeconomic efficiency. However, personal relations sometimes enhance efficiency. Where legal, political and economic institutions are weak, as in most developing countries, information about market conditions and possibilities is both scarce and difficult to obtain, and investments and property rights may be insecure. Long-term commitments of any sort are more difficult, because political and economic conditions and actors can change rapidly. Capital markets do not function as effectively in developing countries,and political and economic decision making is subject to greater uncertainty than in developed and democratic systems. For businessmen and politicians, the transaction costs of making and keeping agreements and securing property rightscan be prohibitively high. Under these conditions, cronyism can reduce transaction costs, because actors have deep and enduring contact with and knowledge of each other and are able to make nuanced judgments about each other’s credibility and integrity. Monitoring isalso easier, because all parties know each other and actors with long-term, close, andoverlapping personal ties can sanction each other and spread information more easily.

Either form of conclusion has been empirically tested in the case of Asian economies, like South Korea and Philippines. Growth story of South Korea supports the view that crony capitalism promotes economic growth. Despite extensive crony capitalism in South Korea, corruption was constrained by mutual hostages between the business class and a coherent state. Each of these actors benefited from its close relationship with the other, but neither gained the upper hand. Business and government elites needed each other and relied upon each other, and stability allowed for long-term investment resulting in to growth. In the case of Philippines, crony capitalism has resulted into high transaction cost and low economic growth. The reason being that business groups competed with each other over the spoils of the state, with power shifting rapidly between groups. Both property rights and elites were not stable. Business itself was unable to organize and therefore had no coherent voice with which to press the government for consistent policies; and more important, business devoted many resources to competing among themselves for government favour. This led to increase in the transaction cost and lower economic performance.

Crony capitalism can promote or retard economic growth based on the relation between the businesses and government. If the relation is balanced that is none of them have an upper hand then it can promote economic growth in some situation as in case of South Korea.If the relation is unbalanced between the two then it will retard the economic growth of an economy as seen in the case of Philippines.

 Marxist dissection of crony capitalism

The Marxist approach has tended todemolish the conceptual core of crony capitalism in a very holistic sense.Marx himself never considered cronycapitalism as a distinct system deserving theoretical attention. The classicalMarxism has viewed the modern state as a bourgeois(capitalist) institution and this view is cogently expressedin the Manifesto of the Communist Party , as Marx and Engels wrote :“The executive of the modern state is a committee for managing the common affairs of the whole bourgeoisie.’’Though Marx gave indications of further developing his formulationsonthe state in his later work The18th Brumaire of Louis Bonaparte ,he never moved away from the essence of his argument which defined the modern state as a bourgeois institution.Thus, in classical Marxism, it can be inferred that the concept of crony capitalism becomes irrelevant because it asserts that state itself has a capitalist character.

Some later strands in the Marxist approachhave sought to analyse therelation between the state and thecapitalists in a different framework.The relative autonomy approach and the subsequent Poulantzas-Miliband

debate on the nature of relative autonomy are relevant in this context. The relative autonomy theory conceded

a limited degree of autonomy to the state but argued that such autonomy of the state is relative to the restrictions

defined by the socio-economic structures within which the state exists and which the state functions to uphold.

Response of the Marxist institutional politics in India to crony capitalism

The institutional form of Marxist politics in India ( the political parties which form the Indian left) has viewed crony capitalism as an integral part of capitalism, and hence, it has found the term obfuscating and contrived. SitaramYechury, Politburo member of the Communist Party of India (Marxist) has called crony capitalism

‘a tautology’. He has arguedthat capitalism inherently breeds cronyism,as he writes:“Capitalin its urge to maximise profits invariably seeks to bend, if notviolate, all rules and regulations. Thecapitalist State puts in place certainrules and institutionalises regulators to ensure adherence to these rules in order to provide a level playing fieldfor the capitalists. However, giventhe fundamental nature of capitalism,where the big fish eat the small ones,these rules and regulations are pushedto the limits of violation. Capitalisminherently breeds cronyism” .

Disillusionment : Corruptionand Cronyism in Post Liberalisation India

The recent instances of corruption involvingpoliticians , business entities,bureaucrats, lobbyists and a section of the media have brought the issue of crony capitalism in post liberalisation India to the centre of public discourse.Eminent journalist P Sainathhas observed that these revelations are reinforcing what some people have believed (or rather suspected),for the last 20 years of economic reforms in India. Such evidence of the entrenched tentacles of crony capitalism and rampant corruption have led to disillusionment, because reducing corruption was one of thekey promises made by the proponentsof economic liberalisation in India.

It is apparent that the liberal policyregime in India has not kept its wordon reducing corruption and ensuring transparency. Statistical study doneby the international advocacy groupGlobal Financial Integrity (GFI) ,also shows a dismal state of affairs,as it has found that India has lost billionsof dollars because of corruption, tax evasion and trade mispricing overpast years( particularly in the post liberalisationperiod).For instance, the GFI report has noticed the upsurge in tax evasion andresultant transfer of illicit moneyabroad , as it observes : “68 percentof India’s aggregate illicit capital lossoccurred after India’s economic reformsin 1991, indicating that deregulationand trade liberalisation actuallycontributed to/accelerated thetransfer of illicit money abroad.”

It could be inferred that the failure of economic liberalisation in bringing transparent governance stands exposed. Some commentators haveobserved that liberalisation has only given a different form to the statepatronage for the favoured capitalists and corruption continues to thrive relentlessly,as economist C P Chandrasekhar has remarked: “Advocates of liberalisation have always arguedthat by reducing state intervention and increasing transparency, economic reform will reducecorruption. The allegations of and evidence on large-scale corruption show this is not true. Infact, they make it clear that liberalisation does not mean that the state withdraws from intervention but merely that there is a change in theform of its intervention, which also enables thestate to deliver illegitimate gains to individualsand private players.”Some Perspectives on the nature of state –capital relations and the crony capitalism in Post Liberalisation India.

Some commentators are of the opinion that in the post liberalisation period , cronyism hassprung from a race among private capitaliststo manipulate the state and the public policyto suit their interests. But this is a two-way traffic because the state functionaries are also demanding a share for acting as facilitatorsof private capital. As former bureaucrat S P Shukla has explained , the nature of corruptionin the post liberalisation period has beendefined by the entry of market interests into the functioning of the government to suchan extent that ‘corporate houses have started deciding policies and price of governmenttransactions.’Arguing that the liberal policyregime has tended to legitimise the conversion of state into a site for the primitive accumulationof capital , C P Chandrasekhar has identified  two ways in which the Indian state and the capital are forming a collusive pattern-(a) the state promotes private investment andhelps it to grow in new areas and to expand its activities(b) those capitalists ,who draw benefit from state support ,are asked to share the a part ofthe monetary returns that they receive with then decision-makers involved.

It has been noticed that crony capitalism alsogets sustenance from the procedural aspects oftransition to a liberal regime (the process ofliberalising the economy), for instance, the undervaluationof public assets and favouritism in disposing off public properties to the private players. Sitaram Yechury cites the example of dubious deals struck in disposing of public-sector unit Balco and Centaur Hotel (Juhu,Mumbai) as part of the disinvestment policy of NDA government(1998-2004).Establishing a clear link between liberalisation and corruption. Apart from the Indian capitalist class, globalisation and the arrival of foreign capital in the Indian market have also opened some new spheres of engagement between the Indian state and capital.

Some scholars, like Aseema Sinha, have noted that in the context of these new elements emerging in the politics-business interaction in India, a more systematic study is required. There have also been attempts to analyse the structural issues concerning crony capitalism from a different perspective. Eminent political scientist Pratap Bhanu Mehta has sought to explain crony capitalism in terms of the vulnerability and even surrender of the Indian capital to the power of Indian state. He has made following observations in this context

(a)“The state still has inordinate power over capital. Business is vulnerable at the hands of the state at so many levels: at every moment it is taxed, licensed, stamped, assessed, audited, authorised, given permission. Liberalisation and reform have helped alter the structure of corruption in some sectors. But the blunt truth is that the state has such an extraordinary abilityto convert even basic procedural rights into discretionary entitlements.”

(b)“One larger consequence of this is how timid Indian capital still is in relation to the state. The horror is not whether a particular industrialist was lobbying for a particular minister; the deeper horror is how the private sector isstill so vulnerable, at every level, to the state.”

(c)“The picture that has emerged is not one of capital buying out the state, it is still one of capital in an abject State of dependence, where their very life depends upon getting politics right.” The different perspectives on theStructural and systemic aspects of crony capitalism and public corruption should not ignore the crucial subtext.

Corruption is an issue of moral reasoning. In the final analysis, the greed and pull of materialist gratification, that is driving the murky side of the capital- state relations , have to be made accountable to the individual value system and moral fibre of the society. The issues of governance, public policy, legislation and basiccontradictions of the political economy are also premised on larger questions of public morality, probity, welfare and egalitarian values. But to finally use a cliché, you cannot legislate for virtue.