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Cronies Everywhere

From the Middle East and Russia to China and many other countries around the world, crony capitalism is alive and well. But what does this well-worn term actually mean in practice, and can it tell us anything about the likely fate of Russian kleptocracy, Chinese "state capitalism," or Middle Eastern rentier states?

WASHINGTON, DC – “Western market capitalism” is generally defined as a system in which many economic agents interact and compete in decentralized competitive markets, with the state’s role confined to enforcing property rights, regulating markets, ensuring competition, and providing basic public goods financed by taxes. Obviously, this is an idealized version of what actually exists. But many political economists find it useful to contrast market capitalism with “state capitalism,” wherein the state directs investment decisions and owns/controls large segments of the economy, while still allowing for private ownership of the means of production.

Crony capitalism, by contrast, represents a category of its own. It is usually defined as a system in which private business actors and powerful political players forge close “insider connections” to secure large material benefits for themselves. Because the state always plays some role in the economy (either at the national or subnational level), there will always be some potential for cronyism, such as through the capture of public procurement spending, regulatory agencies, subsidies, and land zoning. And generally speaking, greater state involvement implies more opportunities for such abuses. Ultimately, though, neither market nor state capitalist systems are immune to crony capitalism.

Another factor that can increase the potential for cronyism is a lack of democratic control and accountability. In autocratic regimes, the rents from insider connections tend to be larger and “safer” than in countries with strong democratic institutions, including an independent judiciary and a free press. That said, the quality of democracy still matters. There are plenty of countries with free elections and even a relatively free press that nonetheless suffer rampant clientelism, corruption, and perverse campaign finance mechanisms.