Crony Capitalism:Rent-Seeking, Institutions, and IdeologyDragos Paul AligicaVlad TarkoGeorge Mason University, Mercatus CenterAssociation of Private Enterprise Education 2013
Outline• What is “crony capitalism”?• Microeconomic foundations: Rent-seeking– Cronyism restricts rent-seeking competition• Structural perspective: Cronyism with andwithout the rule of law– Corruption and the shadow economy– Cronyism and property rights• Ideological perspective– Populism
“Crony” relations• Management literature– Nepotism in hiring and promotion decisions• Two types of corruption– Cronyism– Bribery
Crony capitalism: Developingcountries• South America, India, South Korea, South-East Asia, and Eastern Europe• Haber (2002):– “a system in which those close to the politicalauthorities who make and enforce policies receivefavors that have large economic value”– “The favors allow politically connected economicagents to earn returns above those that wouldprevail in an economy in which the factors ofproduction were priced by the market”
Crony capitalism: tendency indeveloped countries• United States (Zingales 2012)• “the government rigs the market for thebenefit of government officials’ cronies”(Henderson, 2012).
Differences between developed anddeveloping countriesHigh-income DevelopingCorruptionComplementsofficial economyComplementsshadow economyProperty rightssecured by...Rule of law &Judicial SystemCrony relations:involves trust andfamily relations
Beyond ideology?• Buchanan (1992):– The “loss of faith in politics” has not been“accompanied by any demonstrable renewalor reconversion to a faith in markets”.– “We are left, therefore, with what is essentiallyan attitude of nihilism toward economicorganization. Politics will not work, but thereis no generalized willingness to leave thingsalone. There seems to be no widely sharedorganizing principle upon which persons canbegin to think about the operations of apolitical economy.”
Populism• Canovan (1999) :– “Populism is not just a reaction against powerstructures but an appeal to a recognizedauthority. Populists claim legitimacy on thegrounds that they speak for the people …Capitalizing on popular distrust of politicians’evasiveness and bureaucratic jargon, they pridethemselves on simplicity and directness.”• Dornbusch & Edwards (1992):– “emphasizes growth and income redistributionand deemphasizes the risks of inflation and deficitfinance, external constraints, and the reaction ofeconomic agents to aggressive nonmarketpolicies”
Crony capitalism• Rent-seeking society legitimized bypopulism.• Crony relations work to restrict thecompetition for rent-seeking, thusincreasing the size of rents.• In countries with low rule of law anddysfunctional judicial system, cronyrelations are the second-best solution forprotecting property rights (of some, not ofall).