Crony capitalism: A global malaise, not just restricted to emerging economies

Enterprises try to exploit a competitive advantage through the use of their government connections. And whenever governments intervene, bureaucrats gain more power, and invariably distort the markets. The graft issues in Russia & China, the US housing bubble, and the host of scandals currently swamping India are all related to crony capitalism. Can this ever be stopped?

The recent telecom scandal in India provokes a question about its market economy. Does India, like Russia, have crony capitalism? But before we can answer this question, we have to determine exactly what crony capitalism is. How and why is it created? How does it affect growth? And perhaps the most important question is whether it can be stopped.
The term 'crony capitalism' originated during the Asian financial crisis of 1997. For most of the 1990s, many economists, financial analysts, and investors treated the Asian 'Tiger' countries (South Korea, Taiwan, Hong Kong, Thailand, and Malaysia) with the reverence that is today reserved for BRIC (Brazil, Russia, India and China) countries. All that came to an end with the collapse of the Thai baht in July of 1997. To explain the collapse of economies that had been hailed as a new and more perfect model for rapid economic growth, economists created this pejorative term where a supposedly moral failure was the cause of their bad predictions.
The reality is that enterprises are simply trying to exploit a competitive advantage through the use of their connections. The problem with crony capitalism is that these connections are invariably connected to a government. It is the government that distorts the market.
Crony capitalism is sort of 'anti-antitrust'. It exists when the government itself colludes to decrease competition which eventually hinders the growth of the entire economy. The more accurate term would be the one coined by the great economist Mansur Olson. These are distributional coalitions or power groups who can utilise their greater resources, organisation, and networks to improve their position at the expense of competitors.
Crony capitalism is also not simply limited to emerging markets or developing countries. It exists everywhere with often disastrous consequences. The current housing catastrophe in the United States is directly due to a local form of crony capitalism. The two mortgage giants Fannie Mae and Freddie Mac exploited their close connections and semi-government status to prevent appropriate limitations on their activities. By becoming involved in legislation and even making major contributions to campaigns, they were able to avoid scrutiny and reform long enough to help create and invest in a housing bubble that eventually collapsed with horrendous consequences.
The oligarchs of Russia are certainly prime examples of crony capitalism. But they can hardly function without the aid of the government. For example according to the Kremlin's own statistics, Russia loses over 1 trillion roubles ($35 billion) a year through rigged state tenders. A draft new law rather than curb this theft will most likely institutionalise it.
The new law is instructive because it illustrates crony capitalism's methodology. It accomplishes its goal of restricting competition by eliminating limits on power. The law increases a bureaucrat's discretion and reduces transparency. Bureaucrats are allowed to preselect suppliers and can set requirements that can only be met by connected companies willing to compensate these officials. This is not exactly a shrinking of a moral universe, but rather constructing a system of government that reallocates wealth in a specific manner.
In contrast in China, the authorities have developed a distinct form of crony capitalism with Chinese characteristics. In most countries private companies achieve competitive advantage by distorting the legal landscape. Although this certainly occurs in China, most of the distortions are created by the state to give competitive advantage to its own companies. In a sense the genius of the Chinese system is that it bypasses the middleman and provides both profits and bribes to the government officials who have created a system that mainly benefits them.
The real problem with crony capitalism is that those involved become rentiers whose only economic incentive is to increase their income by increasing the restrictions. The annual survey taken by the American Chamber of Commerce of China shows that over 70% of the companies doing business in China said that they were "subject to regulatory discrimination" and over 30% felt that the problems had "become more difficult" over time.
The paradox of crony capitalism is that it exists because the power given to government officials to protect citizens provides them with an economic incentive to enrich themselves. More law may not help. Creating watchdogs may just create more rent seekers. Game theory postulates that and agents' best move is to suborn the watchdog.
Less government and intergovernmental competition are more effective. In India recently, as a response to the telecom scandal, the Supreme Court has become far more active in pursuing corruption.
Transparency, bureaucratic discretion, a free and protected press all can have economic consequences. One of India's tycoons, Anil Ambani and his company Reliance lost 25% in market value after some of his malfeasance was revealed.
Ultimately democracy is the best control. The Congress party in India might only be interested in curbing corruption-when the BJP, the main opposition, sees it as an issue central to winning an election.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])



yeshwant sane

6 years ago

It is certainly paradoxical for William gamble to observe in conclusion “Ultimately democracy is the best control” after identifying that,” The problem with crony capitalism is that these connections are invariably connected to a government. It is the government that distorts the market.”
In that case the Indian government of the Congress party has been “elected “by a Parliamentary democracy and is successfully managing the crudest example of crony capitalism through its corrupt coalition partner in the issue of scam raised by him,” The recent telecom scandal in India provokes a question about its market economy.”
It is obvious that crony capitalism also envisages managing any Political System whether democracy or monarchy or ‘dynasty control’ or of the society through manipulating the instrument of electing or choosing the ruler. This game of deception of the polity will never end; unfortunately, it has been perfected by the crony capitalism globally.


Sri Aurobindo did observe that” unless man and society rise to a higher level of consciousness where not material {economic} but spiritual values become the central motives governing the life, it will be impossible for the human society to reach its perfection.”

(Yeshwant Sane)
Shri.Yeshwant R.Sane
B.E. (Civil), F.I.V., F.I.S., R.I.C.S. (Lond),
Retd.Estate Manager, Bombay Port Trust, Mumbai,
Visiting faculty Member -Sardar Patel University,
Vallabh Vidyanagar, -388120,Gujarat State, India.,
Trustee- Valuation Study Center,Vileparle,Mumbai,
Ex-Trustee Granthali, Trustee- Brahman Shikshan Mandal, Thane,
President-Thane Nagar Wachan Mandir,
President, Spiritual Science Center, Thane.
Res: -Sonal Apartment,Chintamani Jewelers Square Near Saraswat Bank, above Gokhale Hall, Agiary Lane,
THANE (West)-400601, India
Tel: - 91-022-25368450
E-Mail: [email protected]
[email protected]

Flat-to-positive opening indicated for Indian share market: Monday Market Preview

Markets in Asia were mixed in early trade today while Wall Street continued its winning spree for the third day on Friday

The Indian share market is likely to witness a flat-to-positive opening on Monday, tracking mixed Asian markets in early trade today on global concerns. On the other hand, US markets continued their upmove into the third day on Friday on positive economic news with investors. The SGX Nifty, which opened higher, pared some early gains and was eight points up at 5,682 compared to its previous close of 5,674.

Domestic triggers for the week include the March futures and options contract expiry, infrastructure output, weekly food inflation, fiscal and trade deficit and factory output and auto sales numbers.

Last week the market closed with smart gains, mainly on institutional support and firm cues from the global arena. It had a negative bias at the close of the first day of the week, but climbed up and stayed positive on the other four days. The gains kept increasing, with the maximum registered on the last two days. The four-day rally and strong close changes the picture from a range-bound market to an uptrending market with the promise of further gains. The Nifty will now target 5,800 and the Sensex 19,400.

The market clocked gains of over 5% in the week (the best weekly gains since July 2009) with the Sensex closing on Friday at 18,816 and the Nifty at 5,654, their best closing levels since 27th January this year. The Sensex added a whopping 937 points and the Nifty jumped 281 points over the week.

The latest four-day rally (22nd March to 25th March) has added 977 points on the Sensex and 289 points on the Nifty. The rally has surpassed the three-day budget rally (28th February to 3rd March) when the Sensex gained 789 points and the Nifty 233 points.

Going forward there are tremendous headwinds like spiralling crude prices and inflationary pressures and the market will not run away at this stage. Besides, the next big trigger for the domestic market is the upcoming earnings season. Any entry into the market and specific stocks must be on the dips.

US markets continued their rally into the third day on Friday with Dow logging the best week since July last year. Positive economy news led investors to set aside worries of high oil prices, problems with Japan’s nuclear reactors and new developments in Europe's debt crisis, as Portugal looked likely to seek funds from the European Union. The US government said the economy grew at a 3.1% annual rate in the fourth quarter of 2010. Technology stocks rose after business software giant Oracle Corp. reported a 78% jump in income.

The Commerce Department reported that the economy, as measured by the gross domestic product (GDP), grew at an annual rate of 3.1% in the October-December quarter, an upward revision from last month’s 2.8% estimate for the same period. For the final three months of the year, consumer spending grew at an annual rate of 4%, the strongest showing in four years.

The Dow rose 50 points (0.41%) to 12,220.59. The S&P 500 added 4.14 points (0.32%) to 1,314 and the Nasdaq rose 6.64 points (0.24%) to 2,743.

Markets in Asia were mixed in early trade on Monday, on concerns within the region and across the world. The Nikkei 225, Japan’s benchmark was in the red as rising radiation levels hampered repairs at the country’s nuclear power plants. Political tensions in West Asia and the Middle East and renewed debt crisis in the Euro zone also kept investor sentiments low.

The Shanghai Composite gained 0.72%, the Hang Seng added 0.04% and the KLSE Composite rose 0.03%. On the other hand, the Jakarta Composite fell 0.18%, the Nikkei 225 declined 0.36%, the Straits Times was down 0.38%, the Seoul Composite shed 0.14% and the Taiwan Weighted fell 0.45% in early trade.

Back home, expressing concern over high costs and limited reach of banking services, finance minister Pranab Mukherjee on Sunday said that the government was working in collaboration with the Reserve Bank of India to address these concerns.

Mr Mukherjee also said that there was a need to “reflect upon possible flaws in our system and address them to withstand adversities. We need to make our financial sector more competitive by enhancing efficiency and transparency.”


Mukesh Ambani enters another Anil Ambani domain

Reliance Industries announces a tie-up with DE Shaw group to build financial services business in India

On a quiet Sunday morning, while the country was more excited about cricket, Reliance Industries Limited (RIL) announced plans for joint venture with the D. E. Shaw group “to build a leading financial services business in India”. D. E. Shaw group is a global investment and technology development firm with over $20 billion in aggregate investment capital as of March 1, 2011, but there is a big question about how and when this joint venture will take off. 

Reliance Industries is under investigation by the Securities and Exchange Board of India (SEBI) in connection with a 2007 matter when RIL sold 4.1% of the equity of Reliance Petroleum in an open market transaction, earning huge profits. Reliance Petroleum has since been merged and does not exist. Media reports have suggest that SEBI Chairman C B Bhave, who rejected RIL’s request to file consent proceedings had been looking to make an example out of RIL by imposing a penalty in the region Rs500 crore for insider trading, and probably other restrictions as well. However, there is now a new chairman at SEBI and there is some speculation that things may be different under U K Sinha’s leadership. 

Our queries to the top brass of SEBI and the media agency of Reliance Industries (NeUcom) about the implications of the insider trading investigation on the joint venture’s plans did not elicit a response at the time of publication this piece.

According to a press release issued on behalf of Reliance Industries, the “joint venture will incorporate the D. E. Shaw group’s investment and technology expertise with Reliance’s operational knowledge and extensive presence across India to offer a comprehensive array of financial services to the Indian marketplace”. It quotes Reliance Chairman Mukesh Ambani  saying, “Reliance is delighted to partner with the D.E. Shaw group in the financial services domain.  The D. E. Shaw group is a natural partner for Reliance. Together, we look forward to participating in the growing Indian financial services sector”.

Lou Salkind, a member of the D. E. Shaw group’s Executive Committee is quoted saying, “We are excited about this new partnership with Reliance.  We have had a long-term commitment to Asia generally and to India specifically, having begun our operations in the country fifteen years ago”. He is also quoted as saying, “We believe this joint venture allows us to apply to the Indian markets our historical success in investment management and market-making, and that strengthening our presence in India and deepening our relationship with Reliance benefits our business globally.”

Anil Chawla, a Managing Director and head of the D. E. Shaw group’s private equity activities in India is quoted in the release saying, “This joint venture will draw upon the core competencies of both firms to develop a platform that can serve the growing needs of Indian companies and individuals.” 

Reliance Industries Limited (RIL) is India’s largest private sector with a turnover of  Rs 2,00,400 crore and a net profit of  Rs 16,236 crore (US$ 3.6 billion) as of March 31, 2010.

The D. E. Shaw group has been in India since 1996, initially focusing on global information technology.  It now has over 700 employees in its Hyderabad, Gurgaon (Delhi), and Mumbai offices.




6 years ago

RIL will surely do good if this venture takes place. I dnt know why authorities always try to pull RIL down by some or the other law defaulting cases. May be coz they wanna mint some money too. Anyways, my best wishes to RIL for their new venture. Dhirubhai 1's said... Jab log tumhare khilaaf bolna shuru karein, tab samhjna ke tum tarakki kar rahe ho !

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