Aug 13 2014 : The Economic Times (Delhi)
What is Wrong with Crony Capitalism
Shun cronyism, state support is often okay
RBI governor Raghuram Rajan deplored crony capitalism recently , as it harms free enterprise, efficiency and growth. He is, of course, right. But crony capitalism has played a huge role in the initial, economic take-off of practically all countries. The British Crown gave the East India Company a monopoly over trade with India.
Abraham Lincoln, a successful, erstwhile railroad attorney , signed away one-tenth the land of the United States to some railroad companies to connect the east and west coasts of the nation by rail. Krupp and Thyssen grew into the builders of Germany's industrial and military muscle on the strength of the privileged access they had to bank finance. Japanese zaibatsu and South Korean chaebols spearheaded industrial growth in their countries.
China's state-owned and state-backed companies carry the tradition forward.Crony capitalism essentially boils down to the state extending privileged assistance to some companies and not to others. Whether these compa nies are initially chosen because of proximity to those in power, chance or corruption is a matter of detail as far as those who are denied such privileg ed treatment are concerned. In South Korea and Japan, performance in the export market was rigorously applied as a criterion to extend or terminate state patronage.
After a certain level of infrastructural and institutional development, discrimination in dispensing state support stymies competition and reduces efficiency . Till then, state support remains valid, in various ways. And even afterwards, during crises. But the point is to make selection of the recipient of such vital support wholly transparent and open to all players, and not just those who have proximity to the ruling dispensation. No laws of economics and competition dictated that Merrill Lynch should be salvaged while Lehman Brothers was allowed to collapse. As India evolves and acquires institutional maturity , it is imperative to shed cronyism from the process of selecting those to accord state support. But it is too early to rid the system of state support altogether.
Abraham Lincoln, a successful, erstwhile railroad attorney , signed away one-tenth the land of the United States to some railroad companies to connect the east and west coasts of the nation by rail. Krupp and Thyssen grew into the builders of Germany's industrial and military muscle on the strength of the privileged access they had to bank finance. Japanese zaibatsu and South Korean chaebols spearheaded industrial growth in their countries.
China's state-owned and state-backed companies carry the tradition forward.Crony capitalism essentially boils down to the state extending privileged assistance to some companies and not to others. Whether these compa nies are initially chosen because of proximity to those in power, chance or corruption is a matter of detail as far as those who are denied such privileg ed treatment are concerned. In South Korea and Japan, performance in the export market was rigorously applied as a criterion to extend or terminate state patronage.
After a certain level of infrastructural and institutional development, discrimination in dispensing state support stymies competition and reduces efficiency . Till then, state support remains valid, in various ways. And even afterwards, during crises. But the point is to make selection of the recipient of such vital support wholly transparent and open to all players, and not just those who have proximity to the ruling dispensation. No laws of economics and competition dictated that Merrill Lynch should be salvaged while Lehman Brothers was allowed to collapse. As India evolves and acquires institutional maturity , it is imperative to shed cronyism from the process of selecting those to accord state support. But it is too early to rid the system of state support altogether.
