Business Entrepreneurship

The politico-capitalist nexus: crony capitalism

 It was the summer of 1766 when Ivan Polzunov, a Russian mechanic’s apprentice, invented a steam engine which was completely independent of the use of water power culminating into one of the most remarkable designs which had the potential to accelerate the industrial revolution by leaps and bounds. The project was sent to Empress Catherine II. She awarded him 400 rubles but did not seem to appreciate the new technology, as she found the British design more reliable.

A Scottish inventor, James watt started experimenting with steam, got a patent in 1769, and began commercial production in 1775. The Russian had disappeared in the backdrop without a trace (with the consolation, of a far off minor planet being named after him). The latter ,on the contrary ,is the same James Watt after whom the SI unit of power ‘watt’ has been named in honor of being the sole harbinger of revolutionizing the steam engine which was in turn fundamental for continuing the momentum of the industrial revolution.

The industrial revolution was able to germinate in Britain because they were the first to successfully limit the power of cronies, who thrived under government or monarchy support, to block innovations. This blatant attempt at the suppression of novelty, as attested by the history of the reforms that transformed the world has been one of the prime reasons for the existing inefficiency in the developing economies of the 21st century. The phrase “crony capitalism” was first used in The East Asian financial crises, wherein the practice of granting privatizations to the relatives and cronies of the political leadership, as well as monopoly rights and credit was prevalent and widely undertaken by the government, resulting in the misallocation of investment due to greedy rent-seeking behavior.

It is evident that when cronyism spills over to the government, businessmen often take advantage of the corrupt government (which sets up ambiguous laws in their favor) for tax credits and bail outs apart from forming an informal yet, obvious oligarchic front, and limiting competition in all its forms. This holds true even more in the Indian context; the governor of the RBI, Mr. Raghuram Rajan, clearly recognizing this problem and calling it as ‘one of the greatest dangers to growth’.  The prevalence of this issue in India is widely accepted across the spectrum of the foremost economists and ideologists. The supporters of socialism as well as capitalism strongly oppose this toxic combination of the corporations and the government in view of the fact that such large scale government intervention is unwarranted for in an economy striving for more free market policies.

Crony capitalism and elitism in India takes many other forms like regulated interest rates, zoning, licensing and even copyright favoritism. It takes root during the time of elections, where parties are funded by large corporations and the source of only 20% of the total funding is known. Some estimates of such “donations” claim that crony capitalists are in fact, indirectly and illegitimately, running entire markets of the country! It is here that the vicious circle of corruption is born; where the politician needs funding to provide subsidies to the poor in return for votes, and the businessman requires public resources at a cheaper cost.

The counterproductivity and inefficiency of such a regime can hinder economic advancement and inclusive growth since it benefits only a few influential corporations. The simplest solution to this problem is the allocation of natural resources in the form of transparent auctions, as done in the spectrum allocation and more recently in the case of re-allocation of coal mines. The government needs to put in place safeguards that will ensure that there is no collusion between bidders. This will facilitate entry of new comers in such natural monopolies; where earlier they were restricted only to unregulated sectors such as information technology.

By annihilating transparency and competition, crony capitalism affects the free market system and weakens possible trickle-down effects of opportunity and economic growth. As an Emerging Market Economy, India is walking on the pecuniary tightrope and it is imperative for the government to undertake corrective measures lest it be caught with the wrong hand in the cookie jar.


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