Crony capitalism and its perils (Part II)

MY previous article on the cronyism conundrum dwelt on those who ride on connections to make it in life. The crony connections identified include (i) political relationships, (ii) family ties, (iii) natural friendships and (iv) religious and/or ethnic connections.

By and large, these are the widely known breeding grounds for cronyism. It is apparent that an economy which breeds crony capitalists is beleaguered with the perils of connections outmanoeuvring competence and money displacing merit.

In broad terms, cronyism comes with corruption and transaction costs. The glitches of social and political instability are also widely commonplace. Societal imbalances are usually noticeable where parents aggressively encourage their children to get to know the rich and powerful. This is typically visualised as a means of attaining upward mobility in society. At national level, the country’s method of selecting talent becomes entirely dysfunctional; intelligent people frequently end up in menial jobs, while mediocre people attain the best jobs simply because they happen to have the right connections.

Given that cronyism is intertwined with nepotism, in Zimbabwe there has been significant incidences where unqualified people get the jobs whilst qualified graduates remain unemployed. Signals on the ground demonstrate that a significant number of Zimbabwean graduates are absorbed with the informal sector. The broadly common jobs typically include being airtime and newspaper vendors, flee market hawkers, taxi drivers, car dealers, foreign currency traders, cross-border traders among others.

In more devastating terms, the detrimental effects of cronyism are allocative inefficiencies and dynamic inefficiencies. Dynamic inefficiencies relate to the form of low rates of innovation and technical change. Additionally, dynamic inefficiencies manifest through the creation of considerable impediments to corporate restructuring.

In the worst case scenarios, a country deeply engrossed with cronyism largely discourages restructuring and adjustment. Imperatively, corporate restructuring and adjustment are the major breeding ground for innovation. Given that cronyism stifles competition and innovativeness, the corruption that accompanies cronyism thus constitutes a considerable impediment to growth and development.

Fundamentally, cronyism is extensive where there are poor public governance practices. Once the economic monster settles in and gathers momentum, new forms of poor governance and unethical business practices form the fulcrum of private and government business dealings. Primarily, within most government offices, the appointment of relatives and friends in strategic roles is widespread. From a regulatory standpoint, there is the headache posed by a judicial system which is biased towards “cronies” in matters relating to commercial disputes.

The usual scenario is political entrepreneurship. Thus businesspersons seek to gain profit through subsidies, protectionism, government contracts, or other such favourable arrangements with government through political influence. There are usually hidden practices by private corporations, individual entrepreneurs and citizens at large being compelled to pay bribes to government officials so as to guarantee their access to state resources (capital) and the associated public projects.

In its extreme cases, cronyism extends to the “messy” religious and or ethnic favouritism. An empirical case study is that of Alawites in the Syrian economy, where the ethnic group benefits from its political network. Zimbabwe has gradually been experiencing forms of religious and ethnic favouritism, but very limited academic literature has fully explored the area. The area has also not been openly deliberated7, given the command control (political repression).

Imperatively, politicians and government officials generally present a false appearance of pure capitalism (free-market economic system) so as to protect their interests, connections and financial shenanigans. The pure capitalism hypocrisy is largely followed by public statements of openness, fairness and transparency with regards to government business transactions. The evangelisation of the gospel of fair treatment and good governance as well as the declaration that government arms are in pursuit of public interest become buzzwords.

The more robust the nexus between the business class and the political class, the higher the degree of cronyism and the attendant perils. Evidently one can notice that in a crony capitalism environment, business success stories are not hinged on risk taking but “connections”. Corrupt government officials usually display favouritism to one set of business entrepreneurs who are tied to them over those who are disengaged to their network.

Within this nexus (business class and political class), the role of the political class is that of abusing the state power by crushing or sabotaging genuine competition in areas where the state provide economic interventions.

There is ample evidence to prove that even the first-world countries are also plagued with the same economic monster. The prime case study of a country experiencing crony capitalism is Greece where the political class is unsustainably big and powerful with little hope for financial reformation.

The taxman is another strategic arm of the government where employment and promotions are largely based on political affiliation. The taxman (tax collectors in the bible) is the ‘old time’ most corrupt profession. In our motherland, it is suffice to posit that the instances of tax evasion and a variety of tax fraudulent activities have been gradually mounting. Overall, there have been widespread complaints about how government permits (import permits e.g. fuel, essential drugs etc.), governments grants, government subsidies, tax incentives (e.g. tax rebates, tax holidays) among others are being administered and managed.

Crony capitalism can devolve into a plutocracy (rule by wealth) or kleptocracy (rule by theft). In some instances, the political class intentionally enacts ambiguous laws and regulations that are selectively, intermittently and erratically enforced. Ordinarily, the troublesome adversaries of the favoured elite (cronies) who overstep their bounds can have the laws abruptly enforced against them, leading to fines or even jail time. This scenario thus largely manifests itself as political corruption. Regardless of having no official evidence or statistics of crony capitalism malpractices, it stands to be argued that there has been significant underhand government bribes and massive tax evasions in our motherland.

Empirical evidence from the Asian financial crisis exudes that crony capitalism creates oligopoly markets (in worst case scenarios it breeds monopolies). Generally speaking, oligopoly markets are largely blamed for their collusion strategies and the widely talked about rent seeking behavior.

Scholars widely agree to the fact that crony capitalism generates significant economic rents.

The pursuit of rent-seeking thus results in a misallocation of resources and creates lower incentives for wealth creation. The persistence of the rent seeking behaviour distorts business performance, through encouraging the search for economic rents at the expense of wealth creation.

Within the nexus of the political class and the business class, the role of business cronies is thus mainly profiteering by rent seeking from the monopoly or oligopoly positions created. Thus the problem of resource allocation (or misallocation) and the insatiable need to sustain high levels of economic rents becomes a major cost of cronyism.

In practice, businesses run by cronies have largely been blamed for having very little dosages of value addition given the limited degree of innovativeness and risk-taking behaviour. One major tell-tale sign of crony capitalism is a scenario experienced in Thailand and Indonesia where family members of the ruling leaders become extremely wealthy with no non-political justification. Thus, although no officially documented evidence exists in Zimbabwe regarding such cases, if cronyism is not halted, it is suffice to state that the monster of crony capitalism can derail our economic recovery efforts.

From an international perspective, the major economic segments which are largely plagued with crony capitalism are mainly the banking sector, mining sector, and defence and security industry among others. It is common cause that the defence and security industry business transactions usually remain secretive due to the sector’s strategic and political sensitivity to a nation’s defence and security. As such, any contracts arising from such industries are less likely made public knowledge, hence the breeding of cronies.

The experience of other nations, as the Asian financial crisis taught us, basically points to the fact that crony capitalism exacerbates the political and social problems of a nation. It is therefore common to find countries having crony capitalism to develop serious political and social imbalances (however not necessarily in a cause-and-effect relationship).

Some observers say countries with high levels of crony capitalism generally mutate into oligarchies. An oligarchy is a form of power structure in which power rests with a small number of people. These people may be distinguished by nobility, wealth, family ties, education or corporate, religious or military control. Though our country does not yet earn such a descriptor, the tale-tale signs within the political realm however signal in the direction of such a discourse.

In developing countries, business contracts within the agricultural, banking and mining sectors have largely been described as a manifestation of crony capitalists due to their strategic importance. Those wielding power usually amass vast tracts of land rich in mineral deposits and usually register such land in the names of their relatives and/or friends (cronies) whilst others accumulate shares in strategic private corporations (which in most cases they fail to manage). Zimbabwe has not been insulated from such unscrupulous practices, hence the ordinary economic inhabitants grapple with the opportunity costs of bad governance.

Cronyism creates a number of significant inequalities which have dire consequences on overall economic wellbeing of a country’s inhabitants. When the very wealthy lobby for favours, contracts and bailouts, their crony actions distort the markets. When such inequalities increase, they undermine the poor people’s capacity to invest in the very basic needs of food, water, shelter and education.

In shelling this opinion paper, cronyism is a by-product of a big government. Zimbabwe is no stranger to this economic discourse of being liable for having a “bloated” public sector.

Assuming our leadership is serious about combating cronyism and the accompanying corruption and nepotism, this is a time to reduce the size of the public sector. Failure to prioritise the reduction of the size of government (public sector) through the fiscal consolidation and austerity measures can be counterproductive to the economic recovery plans.

Paddington is an economic and financial analyst. He holds a Master’s degree in Finance and Investments with the National University of Science and Technology and a Bachelor of Commerce (Honours) degree in Finance with the same institution. A chartered secretary by profession, the writer is a graduate member of the Institute of Chartered Secretaries Association of Zimbabwe. He also holds an executive diploma in Business Leadership and is a graduate member of the Zimbabwe Institute of Management. — pmasamha@gmail.com.