What is Crony Capitalism?
Crony capitalism is the unhealthy relationship between private interests (such as business, anti-business interests, professions, or specific social groups) and government, creating situations that meet the interests of a few at great cost to many.
Crony capitalism exists on a continuum. On one end are legal transactions where the government distributes benefits to powerful interest groups in return for their political support. Some of these public-private sector relationships are legitimate policy choices that can, under the right conditions, be beneficial to a majority of constituents and successfully grow the economy. The middle ground includes transactions that, while legal, come at the great expense of many. Predatory lending practices, for example, clearly benefit only a small sector of society while spreading significant economic costs to the general public. Most nefarious – and completely illegal – are public/private relationships with a quid pro quo, often known as “pay to play.” These relationships are corrupt and illegal and have tremendous short- and long-term economic consequences.
Today the size and role of both federal and state governments encourages many private-sector attempts to influence government policy. These efforts have taken many forms and include, but are not limited to:
- Obtaining exemptions from legislation or securing the passage of legislation to provide targeted benefits;
- Effecting regulatory changes, exemptions from regulation, or regulations that discourage new or small competitors;
- Obtaining targeted tax breaks or modification of tax penalties;
- Securing direct or indirect subsidies;
- Obtaining tariff or quota protection from foreign competition;
- Gaining access to bailout funds or loan guarantees; and
- Securing benefits from non-competitive bidding.
* as described by a report from George Mason’s Mercatus Center (Mitchell 2012):
The central problem with crony capitalism is that it benefits the few at great cost to the many. The research supports clear links between a state’s corruption ranking and its economic growth rate, connecting corruption to lower economic performance and a greater disparity between the wealthy and the poor. Both outcomes hurt business. Other ways that crony capitalism hurts economic growth include the following direct or indirect effects:
- Reduces local investment;
- Discourages foreign and interstate direct investment;
- Inflates government spending;
- Shifts government spending away from health, education, and infrastructure and toward less efficient, more malleable public projects;
- Distorts the proper functioning of the market economy for the benefit of the few;
- Hurts consumer spending (predatory lending);
- Hurts investment returns on government spending (pay to play); and
- Makes the state an unattractive place to do long-term business.