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Mainstream, VOL LIII No 9, February 21, 2015

Crony Capitalism and its Implications

Monday 23 February 2015, by Girish Mishra

The AAP says it is only against ‘crony capitalism’ and not against capitalism as such. The following article attempts to clarify the term ‘crony capitalism’.

In Western Uttar Pradesh, the then SP-led State Government had allotted agricultural land, acquired from peasants on very low rates, to industrialist Anil Ambani for building power plants and setting up a special economic zone some time ago. This led to great discontent among local peasantry. Till then, the State Government never cared to pay any heed to the peasants’ discontent and their demand for market rates for their landholdings. However, since the peasants launched a powerful and sustained agitation, led by, among others, the former Prime Minister V. P. Singh and a film actor-turned-politician Raj Babbar, the government looked deeply worried because of immense media publicity and no sagging of the determination of the agitators in spite of police repression. It must not be forgotten that the Mumbai-based industrialist was very close to the Samajwadi Party that ruled the State and he was elected to the Upper House of Parliament with its support.

Take a look at another news item. K. Natwar Singh and his son were under cloud because of their role in helping some of their friends secure contracts from the erstwhile Saddam Hussein regime of Iraq under the UN’s ‘Oil for Food Programme’ and they were supposed to have made substantial amounts of money. K. Natwar Singh lost his portfolio of Foreign Minister while the Congress suspended his son from the party.

On the surface, these two developments do not seem to have anything in common; yet they symbolise the same phenomenon that goes by the name of ‘crony capitalism’. This term has gained prominence only in recent times; yet what the phenomenon symbolises has been present ever since the onset of modern industrial capitalism. A moment’s reflection will show that ‘crony capitalism’ is a contradiction in itself. To understand this, let us go a bit into history.

Raymond Williams in his Key Words dates the origin of the term ‘capitalism’ from the early 19th century while A Dictionary of Marxist Thought, edited by Tom Bottomore, et al, holds that the term ‘capitalism’ entered very late in Marxist parlance. “Marx, while he uses the adjective ‘capitalistic’ or talks of ‘capitalists’, does not use capitalism as a noun either in the Communist Manifesto or in Capital I. Only in 1877 in his correspondence with his Russian followers did he use it in a discussion of the problem of Russia’s transition to capitalism.” As is now universally accepted, William Makepeace Thackeray first used the term ‘capitalism’ in his novel Newcomes: Memoirs of a Most Respectable Family, published in 1877.

Very soon, ‘capitalism’ came to denote a specific mode of production, dominated by capital and its owners. The production for market in order to earn profit became the main motive. According to Adam Smith, the role of the state would be the minimum possible and that of a facilitator. All decisions relating to production, that is, what to produce, how to produce and for whom to produce, would best be left to the ‘invisible hand’ of the market forces. Any intervention by the state or any other organised entity, be it a labour union or association of merchants or producers, would lead to harmful consequences. Wherever the economic role was indispensable like construction of roads, public buildings, etc. and it had to take the help of private parties, it must invite tenders and go in for those who offered the most favourable terms and conditions without showing any discrimination.

This stipulation itself was violated even during the 19th century, especially in the case of colonies. The British, for example, in the case of India favoured their own capitalists by permitting them to build railways on lucrative terms and conditions. They discriminated against Indian entrepreneurs in cotton textiles, steel etc. This, however, was motivated by a general approach and no particular British capitalist was favoured against his compatriots.

The situation gradually changed and cronies came to be preferred and helped in the areas where the government had a say. Crony capitalism as a phenomenon came to be noticed in America and, much later, in East Asian countries. Joseph E. Stiglitz, while discussing the case of Enron, has this to say: “Crony capitalism is not new; nor is it the province of a single party. Former US Treasury Secretary Robert Rubin reportedly tried to influence the current government to intervene on behalf of Enron in its hotly contested dispute in India.” Further, “America’s willingness to provide multi-billion dollar bail-outs to airlines or to create cartels to protect its steel and aluminum industries suggests that free market ideology is but a thin guise for old-fashioned corporate welfare: give to those with the appropriate connections.” Stiglitz has underlined: “Campaign contributions were not just a matter of public spirit, but an investment.”

Lending support to Stiglitz’s contention, Paul Krugman (“Crony Capitalism, USA”, New York Times, January 15, 2002) says: “Cronyism is hardly novel in America, the Clinton administration took us to the edge of a trade war on behalf of Chiquita bananas, a major campaign contributor.”

A number of facts follow from what has been said above. First, it is patently bogus to claim that free market has its sway in America. In fact, it is not allowed to function because cronyism has an upper hand. It is crony capitalism that is the ruling ideology. Under it those close to the politicians wielding power of making and enforcing policies receive favours of significant economic value. Thus politically connected people or corporate entities corner returns normally, that is not possible when the market forces are allowed to dominate. Generally, capital and land are provided to the cronies at cheaper rates and on helpful terms and conditions. Land is acquired and given to the cronies at very cheap rates and credit is provided at low rates of interest and easy repayment terms from the government-controlled banks and other financial institutions. In addition, the cronies may be allowed to charge higher rates for their final products or accorded monopoly or quasi-monopoly position or protected from international competition in the domestic market. Thus the cronies earn an economic rent.

The cronies, in turn, help their political benefactors by funding their election campaigns under a democratic set-up and also enriching them, their families and relations irrespective of the fact whether democracy or dictatorship prevails. Any number of examples from Suharto and Marcos to others can be easily cited. Obviously, a quid pro quo exists.

Crony capitalism distorts the pattern of production, the allocation of resources and the distribution of national income. It divides the society into two, the first consisting of those who benefit from crony capitalism and the second comprising those who are discriminated against or cheated of their resources. In our example of Western Uttar Pradesh Ambani and his political patrons are the real beneficiaries while the potential competitors of Ambani and peasants are the losers. This generates a tension in the society. Here one may ask: if crony capitalism is bad for the economy and polity, why does it continue to flourish? And how can it be eradicated? Unfortunately, social scientists have not given adequate thought towards these questions.

In India, with a mushroom growth of political parties, the need for funds has increased enormously. People at large are generally indifferent and seldom contribute to their coffers. They depend largely on the corporate sector, traders, contractors and mafia besides looting the public exchequer. They do not approach people at large for contributions because this exercise is not rewarding. Fund-seekers have to face many inconvenient questions and spend a lot of time but the gain is not commensurate. It is better to help businessmen and criminals who, in turn, contribute sufficient funds for running the party concerned and its election campaign. Constituencies in India are relatively much bigger and very few parties have devoted full-time workers in sufficient numbers to help carry on the campaign. There are, however, numerous unemployed young men and women available for work provided they are sufficiently rewarded and this can be possible only when crony capitalism flourishes.

Crony capitalism invariably gives rise to scandals. K. Natwar Singh is in trouble because he recommended the names of Andleeb Sehgal and some Khanna while, knowingly or unknowingly, ignoring the claims of other potential competitors. Some years ago, the Rastogi brothers of Lucknow were interested in setting up a technology park. They approached the then Prime Minister and local MP, A. B. Vajpayee, to lay its foundation stone. Vajpayee obliged and this had a tremendous impact on the Unit Trust of India, a public financial institution that opened its coffers to the Rastogi brothers. The end result was the collapse of US-64 in which millions of middle class people had put in their hard-earned money. Undoubtedly, they turned out to be losers.

Obviously, crony capitalism prospers at the expense of the people at large. Hence, it must be fought tooth and nail and eradicated at the earliest. This is also necessary for stemming the growth of, what actor-turned-politician Raj Babbar terms, “broker culture”.

The author, a well-known economist, used to teach Economics at Kirorimal College, University of Delhi before his retirement a few years ago. He can be contacted at gmishra@girishmishra.com