What is Crony Capitalism? Economy Learning Series

Crony refers to friendly or close relationships. So crony capitalism is favouring businesses close to you at the expense of others. Crony capitalism has been in the news recently owing to certain domestic and international developments.

In India, the Kingfisher airlines episode highlighted the close ties between the government and Kingfisher with the former doing its best to save the airlines from certain doom.

In fact the former DGCA chief Bharat Bhushan alleged that he was removed from office for opposing the special concessions being given to KA and the kids gloves treatment given to it in spite of serious lapses on the part of KA management including non-payment of salaries to its employees, frequent cancellations of flights, defaulting on loans, failure to pay fuel bills etc.

But crony capitalism is not just limited to India, rather one can see it entrenched in advanced capitalist societies like the US as well. Take for instance the recent sub-prime housing crisis where banks after banks and companies after companies were crumbling for laxity on their part and weak financial regulation of Govt. But the US govt. saved these companies by extending the tax-payer’s money as long-term loans and financial revival packages.

So what’s the problem with Crony Capitalism?

After all the government is saving the economy from collapsing. Right? Well not entirely. In a capitalist economy only the fittest can survive. Darwin’s survival of the fittest is applicable here as well. Companies that cannot meet challenges and face financial ruin should be replaced by other worthy companies like in the case of Daewoo being replaced its competitor Hyundai, Nokia being replaced by Samsung as the world’s top mobile handset seller and so on.

If companies are prevented from failing by infusing external funds that they themselves did not raise through market loans or public issue of shares, they are incentivised for their inefficiency and this acts as a disincentive for companies that have read the market trends and performing better and can capture a higher market share for their products or services but are prevented due to the helping hand extended by the government using public funds.

Going beyond helping failing companies, crony capitalism also refers to favoritism and nepotism displayed towards certain business houses through favourable policies or decisions like restricting competition (preventing auction like in the recent Coal scandal), award of licenses to a favorite few (spectrum scam), selling of national assets cheaply (BALCO sale), waiving off tax dues (estimated to be more than Rs 1 lac crore by P. Sainath of The Hindu) and so on.

If you are a student of Public Administration, this is exactly what Fred Riggs meant in his Prismatic-Sala model of economy witnessed in developing economies.

Crony capitalism also has a moral dimension to it. It is wrong to use tax payers money for benefiting private concerns and those that are not of national relevance or of relevance to only a few. For instance, according to one report there were just 15.75 crore air travelers in India in 2011 including international travelers which is nothing when compared with the number of Rail travelers every year. Still, special concessions were handed out to Kingfisher Airlines even though the national interest in the matter was very minute. It can be argued that the funds could have been better utilised for matters of greater social relevance like basic education or plugging the gaps in delivery of our below par public health services.

Tip for Mains: Use real-life examples as mentioned above in brackets. This makes the answers more relevant and unique.

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