In recent years, although various economies around the world especially emerging countries have gained riches, this has been concentrated in the hands of a few people rather than benefitting the entire country. Indeed, cries of income inequality have become louder by the day. And billionaire lists published by magazines only underlines this widening income gap. Now the reasons for this have been plenty. But one of the reasons attributed to such wealth concentration has been 'crony capitalism'.
As per Wikipedia, crony capitalism is a term describing an 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, or other forms of state interventionism. The Economist has also coined another term called 'rent seeking', which is a special type of money making made possible by political connections.
Crony capitalism is not a new phenomenon but has prevailed since quite some time and that too across nations. The emerging countries, particularly have seen instances of rent seeking rise in the last quarter of the century. For instance, surge in property prices have made developers rich especially those who rely on approvals for projects. Rent seeking has also been rampant in the commodities sector. The boom in commodities has fuelled the value of mines and oilfields and these sectors are ones where there is considerable government intervention. In China especially crony capitalism is quite visible given that one third of the billionaires in the country are party members.
Crony capitalism has reared its ugly head in the developed world too especially since the 2008 global financial crisis. This has been quite apparent in the banking and financial services sector, which having burnt their fingers badly in the crisis, turned to the government to bail them out.
India too is no stranger to crony capitalism. Rent seeking in the country is especially prevalent in sectors such as real estate, energy, mining to name a few. Not only is corruption high in these industries but there are vested interests for companies operating in these sectors as well. What more, it is hardly surprising that the level of corporate governance and transparency in these areas especially real estate is pathetic to say the least.
Is there any reason to believe that crony capitalism is on the wane? We are not sure. However, the tolerance for the rising inequality is coming down. At a time when many countries are battling an economic slowdown, the need to fuel growth through effective implementation of reforms has become vital. The revolutions seen in many of the emerging countries also highlight the growing intolerance for an ineffective government. Moreover, investors are becoming more aware of the need of investing in businesses where corporate governance and transparency rate high. Hence, instances of crony capitalism in these times would come under scrutiny like never before.
In India, eliminating crony capitalism entirely is not something that will happen overnight. But there are hopes that the coming general elections and a new government at the helm would go a long way in reversing the apathy that was displayed by the current UPA government. At least, we certainly hope so.
From Equitymaster.com (Recd thro CH MAHADEVAN)