Cronies

The opening paragraph from the Times Online describes the plight of billionaires in a regulated economy: many Chinese “capitalists” who made fortunes through their connections with the ruling Communist Party are falling into disgrace. Although the Times Online describes this as the effect of “the communist nation’s flirtation with capitalism turns sour”, the correct term for economies in which connections, rather the market are determinants for success is crony capitalism.

The richest man in China has ended up in police custody and other “red billionaires” have plunged into debt or political disgrace as the communist nation’s flirtation with capitalism turns sour. …

“There’s a grey area between planned economy and market economy, in which government officials wield power and businessmen bribe them,” said Professor Liu Xue of Beijing University in the China Youth Daily.

Last November, Huang, his wife, and their chief financial officer disappeared into the grey zone that awaits those who lose their high-level protection – a world without lawyers, court hearings or constitutional rights. Huang’s net worth has crumbled. While he sits in detention, lawyers and accountants in Hong Kong try to save the company, whose shares remain suspended. He is, of course, no longer the richest man in China.

Crony capitalism is “a pejorative term describing an allegedly capitalist economy in which success in business depends on close relationships between businesspeople and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, and so forth. Crony capitalism is believed to arise when political cronyism spills over into the business world; self-serving friendships and family ties between businessmen and the government influence the economy and society to the extent that it corrupts public-serving economic and political ideals.”

Although typically associated with business practices in Third World countries, the potential for crony capitalism exists wherever government is a major player in the markets. Under such conditions bureaucrats can make or break a business, whose success depends not only on their entrepreneurial performance but on their political connections.

The previous post quoted Niall Ferguson as saying the current economic crisis “hits others harder than the United States”, claiming that export dependent economies and European countries with exposure to Eastern Europe would soon be under stresses unknown to America. For all of the America’s troubles, he claims that it is relatively advantaged in what he called the “crisis of globalization” because of the institutional framework under which US business works. While it is certainly true that some things are broken in the current economic system, it is not clear which parts are due to bad government intervention and which are due to the absence of government regulation.

But the American economic landscape is about to change beyond recognition. Another article at the Times Online describes what Barack Obama has in store.

The scale of Obama’s ambition has only just begun to sink in. If his budget for 2010 passes through Congress largely unscathed, it will represent the “the biggest redistribution of income from the wealthy to the middle class and poor this nation has seen in more than 40 years”, said Robert Reich, a former secretary of labour under Bill Clinton who has been advising Obama.

Reich told The Sunday Times: “It is the boldest budget we have seen since the Reagan administration, and drives a nail in the coffin of Reaganomics. We can basically say goodbye to the philosophy espoused by Ronald Reagan and Margaret Thatcher.”

It is apparently an article of faith among certain members of the administration that America’s economy needs to be overhauled. Yet other economies with greater government involvement are faring poorly in this global crisis and may fare far worse than the United States. What is the evidence for the assumption that more government is better for the economy besides the bald assertion that it is so? What happened to the idea that government intervention is permissible only there is a compelling public interest to impose it — rather than making it the default condition? But indiscriminate government involvement brings with it not only economic dangers, it brings political peril implicit in the threat of cronyism. Once bureaucratic authority over economic activity transforms itself from a necessary evil to a condition to be desired, a fundamental political transformation will have taken place.

The problem with countries led by Leaders is that the Supremo’s friends soon become Cronies. It is inevitable. It would be tragic if those who seek to put an end to “unbridled capitalism” wind up substituting crony capitalism in its place.  The alternative to an economic downturn isn’t automatically a massively expanded role for government.