The recent spate of events in India led to all kinds of fear mongering with most of it proven wrong. The finocracy had to soon lick their wounds but has not given the space completely. The articles keep coming over what India has lost which have no substance but mostly rhetoric. It is a pity to see such low standards from fairly eminent people. Is Indian economy just about one person?
Of all the articles this one on crony capitalism winning was both amusing and frustrating at the same time. These days crony capitalism has become the buzzword for all ills facing an economy. So let us define what it is. Wikipedia defines it as:
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 state interventionism. Crony capitalism is believed to arise when business cronyism and related self-serving behavior by businesses or business people spills over into politics and government, or when 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 to describe governmental decisions favoring “cronies” of governmental officials. In this context, the term is often used interchangeably with corporate welfare; to the extent that there is a difference, it may be the extent to which a government action can be said to benefit individuals rather than entire industries.
So basically businesses which benefit not due to their products/strategies etc but political favors. We all want businesses to grow fairly but here is the unfortunate truth. There are hardly any examples where countries have grown without any element of cronyism in place. Infact the best examples of high growth countries like Asian Tigers. Celtic tigers etc which were once tom tommed as market driven etc went on to to become a case of cronyism. So the question is not of whether cronyism but how much cronyism. It is always going to be present in some form or another.
The problem again is our econ teaching and preaching which makes us believe in this utopian world. Reading people like Ha Joon Chang is never encouraged anywhere who give you a real picture of how the world developed. Sample this from Chang:
You are visiting a developing country as a policy analyst. It has the highest average tariff rate in the world. Most of the population cannot vote, and vote buying and electoral fraud are widespread.
The country has never recruited a single civil servant through an open process. Its public finances are precarious, with loan defaults that worry investors. It has no competition law, has abolished its shambolic bankruptcy law, and does not acknowledge foreigners’ copyrights. In short, it is doing everything against the advice of the IMF, the World Bank, the WTO and the international investment community.
Sounds like a recipe for development disaster? But no. The country is the US – only that the time is around 1880, when its income level was similar to that of Morocco and Indonesia today. Despite wrong policies and sub-standard institutions, it was then one of the fastest-growing – and rapidly becoming one of the richest – countries in the world.
Especially in relation to trade policy. Many top economists, including Adam Smith, had been telling Americans for over a century that they should not protect their industries – exactly what today’s development orthodoxy tells developing countries.
But the Americans knew exactly what the game was. Many knew all too clearly that Britain, which was preaching free trade to their country, became rich on the basis of protectionism and subsidies. Ulysses Grant, the Civil war hero and US president between 1868 and 1876, remarked that “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade”. How prescient – except that his country did rather better than his prediction.
Surprised. Don’t be. Read likes of Chang more and more. Now the developed world and its institutions (and people behind those institutions) tell the developing world to be pristine and pure in their growth agenda just like we did… Take a walk guys. Please read your own history!
Coming to the title of the post. It just struck me that how this whole finocracy business is an equally big crony capitalist. Led by central bankers, they look to increasingly influence government decisions. They also draw large revenues/profits from their close ties with the establishment. How else can someone make so much money in a sector which is built on the edifice of market efficiency.
Unlike getting the close business deal, here the key is to get that information which will help you press buy/sell button faster than others. The governments are increasingly being pressurised to take decisions in their favor otherwise they will do the usual fear mongering amidst public. All policies like budgets have just become an exercise to please this very crowd.
The finocracy as explained earlier gains a lot from whatever their leader has to say. The monetary policy meetings and other discussions with the leader help the markets make their usual moolah. The markets hate uncertainities and here the central bank does them a great favor. The central banker is like a god here. Whenever there is any troublesome event in either interest rates, liquidity or exchange rates some intervention will follow. Or there will be some talk that we will manage things and markets recover.
And yes all all this is called as capitalism. When other sectors are helped in this way, it is called cronyism but not in world of finance?
Lately finocracy has managed to do which the other cronyists were unable to do as much- getting their key people into key government/policy positions as well. For instance the Wall Street-Treasury nexus ensured that most heads of US Treasury came from the financial world. Together they ensured that the sector only grew leaps and bounds and all attempts to clamp down were sidelined. In developing world there is a different kind of nexus between IMF and Central Bank ruling the roost with a near similar agenda of financial growth at any cost. It is all about the revolving doors really.
It is interesting and ironical that this Indian finocracy is passing their worries as victories by other sectors…