Crony capitalism is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of dirigisme. Crony capitalism is believed to arise when political cronyism spills over into the business world; self-serving friendships and family ties between businessmen and the government influence the economy and society to the extent that it corrupts public-serving economic and political ideals.
The term “crony capitalism” made a significant impact in the public arena as an explanation of the Asian financial crisis. It is also used world wide to describe virtually any governmental decisions favoring “cronies” of governmental officials. In many cases, the term is used interchangeably with corporate welfare; to the extent that there is a difference, the latter might be restricted only to direct government subsidies of major corporations, excluding tax loopholes and all manner of regulatory and trade decisions, which in practice could be much larger than any direct subsidies.
In its worst form, crony capitalism can devolve into simple corruption, where any pretense of a free market is dispensed with. Bribes to government officials are considered de rigueur and tax evasion is common; this is seen in many parts of Africa, for instance. This is sometimes called plutocracy (rule by wealth) or kleptocracy (rule by theft).
Corrupt governments may favor one set of business owners who have close ties to the government over others. This may also be done with racial, religious, or ethnic favoritism; for instance, Alawites in Syria have a disproportionate share of power in the government and business there. (President Assad is an Alawite.) This can be explained by considering personal relationships as a social network. As government and business leaders try to accomplish various things, they naturally turn to other powerful people for support in their endeavors. These people form hubs in the network. In a developing country those hubs may be very few, thus concentrating economic and political power in a small interlocking group.
Normally, this will be untenable to maintain in business; new entrants will affect the market. However, if business and government are entwined, then the government can maintain the small-hub network.
Raymond Vernon, specialist in economics and international affairs,19 wrote that the Industrial Revolution began in Great Britain, because they were the first to successfully limit the power of veto groups (typically cronies of those with power in government) to block innovations. “Unlike most other national environments, the British environment of the early 19th century contained relatively few threats to those who improved and applied existing inventions, whether from business competitors, labor, or the government itself. In other European countries, by contrast, the merchant guilds … were a pervasive source of veto for many centuries. This power was typically bestowed upon them by government”. For example, a Russian inventor produced a steam engine in 1766 and disappeared without a trace. “[A] steam powered horseless carriage produced in France in 1769 was officially suppressed.” James Watt began experimenting with steam in 1763, got a patent in 1769, and began commercial production in 1775.