Crony Capitalism

Crony capitalism is a form of capitalism in which business success depends heavily on personal and political connections. Firms close to those in power win licenses, government contracts, cheap loans from state banks, tax breaks, import permits or protection from rivals, while less-connected competitors are held back. Wealth flows to insiders through favors from the state rather than through better products or lower costs.

The phrase is critical rather than technical. It describes a pattern found in many countries, rich and poor, democratic and authoritarian, and is closely linked to rent-seeking, regulatory capture and corruption. It is distinguished from state capitalism, where the state owns companies openly, and from competitive market capitalism, where profits are supposed to reward efficiency.

Imagine a school sports day where the head teacher's friends get to start ten meters ahead, the referee looks away when they trip a rival, and the prize money is quietly raised for the events they enter. The race still happens and some runners still try hard, but everyone knows the results depend partly on who knows the head teacher.

Under crony capitalism, markets and companies exist, but the rules are bent for insiders. Customers pay higher prices, taxpayers cover costs, and honest firms that lack connections find it harder to grow.

• Licenses and permits. Governments limit entry into lucrative sectors such as telecoms, mining, banking or import trade and award the few licenses to allies, creating economic rents.
• Public procurement. Contracts for roads, power plants or defense go to favored firms at inflated prices.
• Directed credit. State or connected banks lend to insiders on easy terms; when loans go bad, losses end up on the public balance sheet.
• Privatization on favorable terms. State assets are sold cheaply to connected buyers.
• Trade protection and subsidies. Tariffs, quotas and grants shield connected producers from competition.
• The revolving door. Officials move into jobs at the firms they regulated, and executives move into government.

The term became widespread in the 1980s and 1990s. It was applied to the Philippines under Ferdinand Marcos, where associates of the president controlled monopolies in sugar, coconuts and other sectors. After the 1997 Asian financial crisis, many analysts blamed connected lending and opaque corporate groups in Indonesia, South Korea and Thailand for the build-up of bad debt, although others argued that sudden reversals of hot money flows and policy mistakes mattered more. In Russia, the "loans for shares" auctions of 1995–96 transferred major natural-resource companies to a small group of businessmen who became known as oligarchs. Accusations of cronyism also arise in rich democracies, for example over bank rescues during the 2008 financial crisis, lobbying for tax carve-outs, and emergency procurement during the COVID-19 pandemic.

Cronyism is hard to measure directly. Researchers use indirect indicators: Transparency International's Corruption Perceptions Index, World Bank governance indicators, the share of billionaire wealth earned in rent-heavy sectors such as resources, real estate and licensed industries, and studies of how share prices of politically connected firms react when their patron gains or loses power.

Economists generally find that cronyism lowers productivity and growth because capital and talent flow to the connected rather than the capable, competition is suppressed, and innovation is discouraged. It can raise inequality, weaken public finances and leave hidden losses in banking systems. Economists Raghuram Rajan and Luigi Zingales argued in Saving Capitalism from the Capitalists (2003) that incumbent firms often lobby to block the competitive markets that created them. Countries rich in natural resources are especially exposed, part of the pattern known as the resource curse.

Common prescriptions include open and competitive procurement, transparent asset sales, strong antitrust enforcement, independent courts and regulators, disclosure of beneficial ownership and political donations, and anti-bribery laws such as the US Foreign Corrupt Practices Act and the UK Bribery Act. Free-market economists argue that the surest cure is a smaller state with fewer favors to hand out, a view associated with public choice theory. Others on the left argue that the problem is concentrated private power capturing the state, and favor stronger regulation, limits on lobbying and campaign finance reform. Both camps agree that cronyism undermines public trust in markets.

The line between legitimate engagement and cronyism is not always sharp. Businesses in every country lobby governments, sit on advisory bodies and bid for public contracts, and governments sometimes have good reasons to support particular industries through industrial policy. What marks cronyism is that benefits are handed out through personal ties, without open competition, transparent criteria or accountability, so that the returns go to insiders while the costs fall on consumers, taxpayers and rival firms.

• Transparency International: Corruption Perceptions Index