Crony Capitalism:Rent-Seeking, Institutions, and Ideology

Dragos Paul AligicaVlad Tarko

George Mason University, Mercatus Center

Association of Private Enterprise Education 2013

Outline

• What is “crony capitalism”?• Microeconomic foundations: Rent-

seeking– Cronyism restricts rent-seeking competition

• Structural perspective: Cronyism with and without 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: Developing countries

• South America, India, South Korea, South-East Asia, and Eastern Europe

• Haber (2002):– “a system in which those close to the political

authorities who make and enforce policies receive favors that have large economic value”

– “The favors allow politically connected economic agents to earn returns above those that would prevail in an economy in which the factors of production were priced by the market”

Crony capitalism: tendency in developed countries

• United States (Zingales 2012)• “the government rigs the market for

the benefit of government officials’ cronies” (Henderson, 2012).

Differences between developed and developing countries

  High-income Developing

CorruptionComplements

official economyComplements

shadow economy

Property rights

secured by...

Rule of law & Judicial System

Crony relations: involves trust and family relations

Beyond ideology?

• Buchanan (1992):– The “loss of faith in politics” has not been

“accompanied by any demonstrable renewal or reconversion to a faith in markets”.

– “We are left, therefore, with what is essentially an attitude of nihilism toward economic organization. Politics will not work, but there is no generalized willingness to leave things alone. There seems to be no widely shared organizing principle upon which persons can begin to think about the operations of a political economy.”

Populism

• Canovan (1999) :– “Populism is not just a reaction against power

structures but an appeal to a recognized authority. Populists claim legitimacy on the grounds that they speak for the people … Capitalizing on popular distrust of politicians’ evasiveness and bureaucratic jargon, they pride themselves on simplicity and directness.”

• Dornbusch & Edwards (1992):– “emphasizes growth and income redistribution and

deemphasizes the risks of inflation and deficit finance, external constraints, and the reaction of economic agents to aggressive nonmarket policies”

Ideological justifications and legitimizations

Rent-seeking

societies

Legitimizing

Ideology

Mercantilism Religion

Real-life socialism Socialism

State capitalism Nationalism

Crony capitalism Populism

Crony capitalism

• Rent-seeking society legitimized by populism.

• Crony relations work to restrict the competition for rent-seeking, thus increasing the size of rents.

• In countries with low rule of law and dysfunctional judicial system, crony relations are the second-best solution for protecting property rights (of some, not of all).