Crony Capitalism in India

Establishing Robust Counteractive Institutional Frameworks

Naresh Khatri, Abhoy Ojha, Naresh Khatri, Abhoy Ojha

• Publisher: Palgrave Macmillan
• Year: 2017
• ISBN:
  9781137582874
• Topic: Business
• Subtopic: Management
• Index: Business

Crony Capitalism in India provides a comprehensive and scholarly examination of the important topic of crony capitalism, filling an important gap in the market. Bringing together experts from various backgrounds, it addresses the key underpinnings of this complex and multifarious issue. Given the emergent nature of the Indian economy, this book provides important information for decision makers in both government and business to help establish a robust institutional framework that is so desperately needed both in India and globally.

Part I

Cronyism, Corruption, and Crony Capitalism

1

Definitions of Cronyism, Corruption, and Crony Capitalism

Naresh Khatri

Introduction

Crony capitalism is an extension of the generic concept of cronyism as it applies to businesses and firms in a nation or society. A politicized or rigged economic system is dubbed crony capitalist to distinguish it from a system of free markets and limited government. It is the deliberate, systematic use of public policy to rig markets in ways that benefit politically connected actors. Crony capitalism breeds political entrepreneurs and stifles market entrepreneurs. By killing transparency and competition, it is harmful to free enterprise, opportunity, and growth. By substituting special interests for public interest, it is harmful to democratic expression and leads to income inequality and the middle-income trap, the often observed slowdown in growth that occurs once developing countries reach middle-income levels.

The study of corruption and cronyism cuts across diverse perspectives and embraces the academic disciplines of economics, political science, sociology, psychology, ethics, administration, and religion. The ever-expanding and cross-disciplinary literature on corruption and cronyism reveals the complexity and multifaceted nature of their causes (Laver, 2014).

One of the most common definitions of corruption is the use of public office for private gain. In virtually every society, historians and anthropologists have found that public affairs are distinguished by their exceptional privileges and trappings. Activities most prone to corruption include bidding on public contracts, the use of public funds, defense contracting, the handling of property, tax assessment and collection, zoning and land use, the legislative and elective processes, law enforcement, and the administration of public services (Caiden, 2001; Elliott, 2012; White, 2001).

However, the conventional definition of corruption as the use of public office for private gain is unnecessarily restrictive. Corrupt exchanges can take place not only between a public agent and a private agent, but also between one private agent and another or between one public agent and another. Thus, a broader definition of corruption that includes all types of agents and exchanges between them is more useful.

The most basic definition of ‘cronyism’ is the preferential treatment shown to old friends and associates without regard to their qualifications (Khatri & Tsang, 2003). Cronyism can occur in two basic forms: instrumental and relational (Khatri, Tsang, & Begley, 2006). Instrumental cronyism is motivated primarily by task, utilitarian, and self-interest considerations. Although the value and time period for exchange of favors are implicit, the exchange of favors usually takes place over a relatively short time and the value of favors exchanged tends to be more or less similar. Relational cronyism, on the other hand, has relationship, affection, and loyalty at its core. It is long term in its orientation, that is, the exchange of favors in relational cronyism takes place over a long period and the value of favors exchanged can differ greatly depending on the relative statuses of the giver and taker.

Although cronyism usually gets lumped with corruption, it is distinct from corruption. Cronyism is based on a tie or a connection or a relationship between actors and involves implicit, unspecified, and reciprocal transactions with no stipulation of a time period during which favors must be returned (Khatri et al., 2006). Unlike corrupt exchanges, cronyistic exchanges, more often than not, are based on trust, loyalty, and long-standing friendship. A review of the literature on corruption suggests that most so-called corrupt exchanges may actually be acts of cronyism, because corrupt exchanges often involve collaborators (Krug & Hendrischke, 2003; Roberts, 2010). Corruption is by far the more commonly used term in India, although cronyism appears to be far more pervasive in India and underlies even acts of corruption.

The phenomenon of cronyism is misunderstood when it is classified under corruption or malpractice (Mitchell, 2012). This combined with the fact that corruption is usually a symptom of institutional deterioration rather than the cause of it (Mudambi, Navarra, & Delios, 2013) means that research could benefit by focusing more on cronyism rather than corruption. Cronyism seems a more dynamic phenomenon and has greater explanatory power: it addresses the ‘how’ and ‘why’ of corrupt acts in India. In this book, corruption and cronyism are used interchangeably with greater emphasis on cronyism.

In crony capitalism, power and favors are wielded, exchanged, and acquired via an intricate system of personal contacts, favoritism, and championing of interests. Holcombe (2012) characterizes it as a system in which the profitability of a business depends on political connections. It results when those in political power alter the structure of incentives that firms face by providing profit opportunities for individuals who invest in political lobbying, campaigning, and relationships rather than in true profit opportunities (Olson, 1982). Consequently, the greater the political influence in economic decision-making, the greater the likelihood of crony capitalism. Limited government may partly be the solution to the problem of crony capitalism rather than greater governmental intervention in the economy (Haber, 2002); this argument has been elaborated in Chapter 4.

The structure of governmental institutions affects the level of malfeasance within a country; the root causes of malfeasance may lie in institutional weaknesses (Shleifer & Vishny, 1993). Cronies often stonewall the establishment of fair and transparent laws because such laws hamper their freedom to wheel and deal (Holcombe, 2012). An improvement in institutional quality reduces the shadow economy directly and reduces corruption both directly and indirectly (through its effect on the shadow market) (Snow, 2011). Acemoglu and Robinson (2012) reason that the ultimate cause for economic success or failure is rooted within each country’s institutions and that understanding how these institutions evolve is crucial for development.

Garen (2012) argues that when government becomes a vehicle for soliciting and rewarding cronies or interest groups, the society in which this happens heads toward crony capitalism and its consequences: mistrust in government and other institutions, economic stagnation, and social discord. Crony capitalism engenders a higher return on developing lobbying and political skills – that is, becoming a crony – rather than on developing economically productive skills. Business activities end up in the hands of those who are good at making political connections (political entrepreneurs) but not in the hands of those who are innovative and risk-takers (market entrepreneurs). Consequently, unimaginative, unproductive, inefficient, and wasteful economic initiatives, programs, and businesses are likely to be the hallmarks of an economic system riddled with crony capitalism.

Cronyism is not simply a zero-sum game that takes from some and gives to others; it is a negative-sum game (Haber, 2002; Henderson, 2012). The losses to the losers substantially outweigh the gains to the winners. In other words, cronyism destroys wealth. Under cronyism, the government rigs the market for the benefit of the cronies of government officials and, by creating privilege, transfers wealth from the many to the favored few. Crony arrangements lack transparency to the extent that a system rife with cronyism has a certain degree of legitimacy among the general public. This legitimacy seems to exist only thanks to certain amount of stealthy behavior and deception on the part of privileged economic groups and politicians complicit in providing those privileges (Aligica & Tarko, 2014). Under crony capitalism, politicians, government officials, and businesspersons must be able to make deals without public review and approval. Crony systems are not consistent with high levels of political democracy (Haber, 2002). Indeed, the more authoritarian the government, the more efficiently the system can work.

Crony capitalist coalitions invariably encompass big businesses and big banks. In order to generate abnormally high profits and share them with preordained ‘winners’, governments indulge in crony capitalism by manipulating trade, fiscal, monetary, and regulatory policies (Menaldo, 2014). The ‘losers’ include medium-sized firms, unorganized labor, agricultural interests, and unorganized taxpayers and consumers. These groups subsidize protectionism by paying higher prices for low quality goods and services and they also bear the burden of bailouts of financial institutions. Markets in crony capitalism are less competitive, they intensify rent-seeking, and shortchange innovation. Crony capitalist coalitions are built on unsustainable policies that produce adverse effects and hurt a society’s most vulnerable populations (Menaldo, 2014).

References

Acemoglu, D., & Robinson, J. A. 2012. Why nations fail: The origins of power, prosperity, and poverty. New York: Crown Publishers.

Aligica, P. D., & Tarko, V. 2014. Crony capitalism: Rent seeking, institutions, and ideology. KYKLOS, 67(2): 156–176.

Caiden, G. E. 2001. Corruption and governance. In G. E. Caiden, O. P. Dwivedi, & J. Jabbra (Eds.), Where corruption lives: 15–37. Bloomfield, CT: Kumarian Press.

Elliott, J. 2012. Corruption gossip floods India but change will be slow. The Independent, October 23.

Garen, J. 2012. Government cronyism and the erosion of public’s trust: An explanatory and cautionary essay. Working Paper, Mercatus Center, George Mason University, Arlington, VA.

Haber, S. 2002. Crony capitalism and economic growth in Latin America: Theory and evidence. Hoover Institution Press: Stanford University, Stanford, CA.

Henderson, D. R. 2012. The economics and history of cronyism. Working Paper, Mercatus Center, George Mason University, Arlington, VA.

Holcombe, R. G. 2012. Crony capitalism: By-product of big government. Working Paper No. 12–32, Mercatus Center, George Mason University, Arlington, VA.

Khatri, N., & Tsang, E. W. K. 2003. Antecedents and consequences of cronyism in organizations. Journal of Business Ethics, 43: 289–303.

Khatri, N., Tsang, E. W. K., & Begley, T. 2006. Cronyism: A cross-cultural analysis. Journal of International Business Studies, 37(1): 61–75.

Krug, B., & Hendrischke, H. 2003. The economics of corruption and cronyism – An institutional approach to the reform of governance. In J. B. Kidd & F.-J. Richter (Eds.), Corruption and governance in Asia: 131–148. Hampshire, UK: Palg...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright
• Dedication
• Contents
• List of Figures and Table
• Foreword
• Preface
• Series Preface
• Acknowledgments
• About the Editors
• Notes on Contributors
• Part I: Cronyism, Corruption, and Crony Capitalism
• Part II: Indian Brand of Crony Capitalism
• Index