Crony capitalism: Dealing with murky moguls

The Economist: The past 20 years have been a golden age for crony capitalists—tycoons active in industries where chumminess with government is part of the game. As commodity and property prices soared, so did the value of permits to dig mines in China or build offices in São Paulo. Telecoms spectrum doled out by Indian officials created instant billionaires. Implicit state guarantees let casino banking thrive on Wall Street and beyond. Many people worried about a new ‘robber baron’ era, akin to America’s in the late 19th century. They had a point. Worldwide, the worth of tycoons in crony industries soared by 385% in 2004-14, to $ 2 trillion, or a third of total billionaire wealth; much of it (though by no means all) in the emerging world.

Now cronies are on the back foot. Their combined fortunes have dropped by 16% since 2014, according to our updated crony-capitalism index (see article). One reason is the commodity crash. Another is a backlash from the middle class. Corruption scandals have lit a fire under governments in Brazil and Malaysia. Elsewhere, pressure is coming from the top down. India’s reforming prime minister, Narendra Modi, is trying to subject his partly closed economy to a blast of competition. Xi Jinping, China’s autocrat, thinks graft is the big threat to one-party rule, and is trying to root it out.

Crony capitalism—or “rent-seeking”, as economists call it—shades from string-pulling to bribery. Much of it is legal, but all of it is unfair. It undermines trust in the state, misallocates resources and stops countries and true entrepreneurs from getting rich. So the dip in crony activity is welcome. To stop it roaring back, governments need to seize the moment.

A few will not want to. Cronyism is central to Vladimir Putin’s vision of Russia, the country that scores worst in our ranking. Others, though goaded by public anger at inequality and corruption, will find it hard to confront vested interests. On 29 April Mexico’s Senate failed to pass two anti-corruption measures (see article). Often the biggest difficulty is knowing where to start. It is all very well to demand efficient courts, fair regulators and an end to illicit political funding. These matter, but are the work of generations.

The quickest fixes

So governments should focus on four quicker steps. The first is to take care when public resources pass into private hands. Botched privatisations created Russia’s oligarchy—and many cronies elsewhere. Mexico is opening up its oil monopoly; Saudi Arabia plans to; and other developing countries, from Brazil to India to China, may privatise state-controlled firms to raise cash and improve efficiency. Unless the sales are fair, a new generation of cronies will be born.

Second, governments must rein in state-owned banks. In the past decade state-lending booms in Brazil, India and China have enriched well-connected moguls—and built mountains of bad debt. Rather than prop up the banks, governments should overhaul the way they are run.

The third step is to make it harder to stash crony cash overseas. Global capital flows have made the world richer, but also allowed cronies to hide in tax havens. Public registers of “beneficial ownership”—the humans behind the trusts and shell companies—would make that harder. This is on the agenda of an anti-corruption summit in London next week (see article).

Finally, be prepared for cronyism to adapt. China’s epic industrial boom will not be repeated; the days of making billions by shipping iron ore from Goa to Guangdong are over. Technology may be cronyism’s next frontier. It is ripe for rent-seeking: profits are huge and monopolies arise naturally. Governments should not seek to micromanage tech firms, but ought to push vigorously for competition and transparency.

America’s original robber barons provoked a reaction that led to the Progressive era. At the turn of the 20th century, politicians passed antitrust laws and corruption ebbed. America became richer, stronger and more politically stable. Emerging economies face a similar moment. They should not waste it.