Crony capitalism

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Crony capitalism is a term describing an allegedly capitalist economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, and so forth.

Crony capitalism is believed to arise when political cronyism spills over into the business world; self-serving friendships and family ties between businessmen and the government influence the economy and society to the extent that it corrupts public-serving economic and political ideals.


Crony capitalism in practice

In its lightest form, crony capitalism consists of collusion among market players. While perhaps lightly competing against each other, they will present a unified front to the government in requesting subsidies or aid (sometimes called a trade association or industry trade group). Newcomers to a market may find it difficult to find loans or acquire shelf space to sell their product; in technological fields, they may be accused of infringing on patents that the established competitors never invoke against each other. Distribution networks will refuse to aid the entrant. That said, there will still be competitors who "crack" the system when the legal barriers are light, especially where the old guard has become inefficient and is failing to meet the needs of the market. Of course, some of these upstarts may then join with the established networks to help deter any other new competitors. Examples of this have been argued to include the keiretsu of post-war Japan, the chaebol of South Korea, and the powerful families who control much of the investment in Latin America.

Crony capitalism is generally associated with more virulent government intervention, however. Intentionally ambiguous laws and regulations are common in such systems. Taken strictly, such laws would greatly impede practically all business; in practice, they are only erratically enforced. The specter of having such laws suddenly brought down upon a business provides incentive to stay in the good graces of political officials. Troublesome rivals who have overstepped their bounds can have the laws suddenly enforced against them, leading to fines or even jail time.

States often said to exhibit crony capitalism include the People's Republic of China; India, especially up to the early 1990s when manufacturing was strictly controlled by the government (the "Licence Raj"); Indonesia; Argentina;[1] Brazil; Malaysia; Russia;[2] and most other ex-Eastern Bloc states. Critics claim that government connections are almost indispensable to business success in these countries. Wu Jinglian, one of China's leading economists[3] and a longtime champion of its transition to free markets, says that it faces two starkly contrasting futures: a market economy under the rule of law or crony capitalism.[4]

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