Somewhere in the box of our memories we all remember the infamous Coalgate Scam. Illegally allocated coal mines that bypassed all bidding processes benefitted private players such as Kamal Sponge Steel & Power Ltd. Lakhs of crores slipped under the table into the pockets of a few, and similar losses were incurred to protect an illegitimate process
Surprisingly this was not the first instance of the deep-rooted alliance between the political and corporate world. Dozens were observed before this and dozens are still practiced at different levels. The persistent gainers are those with resources and power, and the constant strugglers are the tax paying middle and lower middle class. Shady deals such as these raise serious questions not only towards the credibility, dependability and fidelity of our leaders, but also on the very responsibility of a republic to elect worthy representatives at the office. Let alone the corporate giants, to only think of their balance sheets at the cost of almost anything that seems exploitable is disheartening.
Unlike just any other form of corruption, this coalition for mutual gains between government officials and business leaders that kills one’s moral duties is known as Crony Capitalism. Those who were supposed to steer the economy towards prosperity, under this system direct their decisions towards favouritism. This is realised in the form of government grants, tax breaks, illegal permits, import restrictions, and a lot more. In return what political parties get is fat cash during elections that destroys the very essence of democracy is the republic that elects their own representatives. Such is observed even in constitutional monarchies. But the foul play knows no borders or governance systems, all it cares about is personal gains at the cost of those who lack resources and bargaining power.
CRONY CAPITALISM AND INCOME INEQUALITY
One of the most devastating results of these undue favours is the unequal distribution of income. Where the rich are piling up their bundles of cash, and the poor are surviving off the little that is left for them.
A concrete conviction is that we have become highly used to and dependable on the goods and services provided by large business houses. They come up with better production technologies, innovative and improvised offerings and we convincingly accept the accord. Such practices allow economic prosperity and serve justice to the principles of capitalism. But the picture gets ugly when closed door conversations result in unfair advantages.
For instance, European commission in 2015 decided that the tax advantage to Fiat in Luxembourg and Starbucks in the Netherlands are illegal under the EU state aid rules. Such a benefit gives companies an edge over those truthfully paying taxes. This way companies keep accumulating their wealth, mostly slipping into the hands of those on top and not benefitting people working at lower levels and small businesses creating an unfair market environment.
The infamous Jared Kushner, the beloved son-in-law of president Trump, was of the belief that “people are the customers to the government”. And following the path was found guilty of engaging in enforced eviction notices and accumulating millions of dollars as illegal rent collections fuelled by late fee, court fee etc. The pressure on tenants was so much so that the people were forced to pay money out of their guts.
In the last 30 years in the US the top 1% has grown richer by $21 trillion and the bottom 50% became poorer by $900 billion. A major portion of it is a result of having cronies in the White House. The following graph indicates household income distribution trends in the US by Gini index. It ranges from 0 (or 0%) to 1 (or 100%). Where 0 represents perfect equality and 1 showcases perfect inequality.
The scenario is no different for countries like China, Australia or India. Even in the second largest economy shooting to $14 trillion and the only country that grew as it passed through the coronavirus pandemic in the world, the top 20% earn 10.4 times the bottom 20%. Whereas the poverty rates in the country suggest that a mere 0.5% of the population or only 7.2 million people are yet to be alleviated (as of 2016, the latest data available). The per capita income as of 2019 was $10,261.68 whereas the top 1% of the nation hold a greater share of wealth than the bottom 50%. Ironical enough.
The essence is that the consequences of crony capitalism are keeping the middle and lower middle class from growing. And in more severe cases making them slip into poverty. Receiving bills greater than one’s income level, throws them into the debt trap, stripping them off essentials such as education and healthcare, and making it even more difficult to survive each day.
However, there is more to the list than just income inequalities. Political lobbying is often used to curb competition in the market, imports are regulated to save the domestic consumer base and the list goes on. Such events are not economically ideal, and soon enough monopolies start emerging which further squeezes out maximum profit. This is not what capitalism was meant to be in the first place. Capitalism is for the many not the few, and its shortcomings such as the implicit ability to create disparities, unethical business practices and exploitations, that’s where governance is supposed to play a vital role. A democracy is expected to reduce inequalities and protect resources and rights of all kinds. Thus, it arises from the tussle of survival of the fittest and equal entitlements, duties and opportunities, but ends up as a system that uses its own loopholes to benefit the few not the many.
Businesses worth billions of dollars are aware that their downfall would be followed by a brutal hit to the economy. Lobbying the government in such a situation to not let competition rise seems effortless enough. Rent seeking i.e., making money without engaging in any sorts of productive activities is seen on a rise in situations like these. Availing tariff protections, subsidies, tax breaks, grants etc. are not only one sided. Granting tax cuts, saving on taxes and donating the saved-up expenses at times of elections to political parties, seems like a pretty worked up system. Pure economic models and concepts often do not encompass such hurdles to economic growth but reality and experience has always taught us better.
The crony capitalism index of 2016 released by The Economist placed India at the 9th spot and awarded Russia the first. The index read India’s crony wealth in 2008 reached 18 percent of its GDP, at par with Russia. Whereas in 2016 it came down to 3 percent of its GDP. China was not much clean either, claiming the 11th spot. Of the 22 countries Germany ranked 22nd, with least instances of crony capitalism.
THE BRIGHT SIDE
If seen through a positive lens, rent seeking and lobbying in actual terms can benefit rather than harm the economy. For a developing nation, nothing can cause more harm than dumping i.e., exporting products to a nation at lower cost than its domestic market. This could have tremendous effects on the importing nation’s economy. Stretching up to the extent of extensive job losses and high levels of dependency. Businessmen from the victim nation can indulge into rent seeking to impose import tariffs and restrictions to improve their domestic economic numbers.
Secondly, not to forget that political lobbying is very much legal in the US government and is an integral part of the policy framing process. Not to confuse it with bribery or immoral use of rights; lobbying is a part of participatory democracy. Lobbying groups are the voice of common people, made heard to those who took the oath to serve for the welfare of all. The process of bringing public grievances directly to the government is often productive. But of course, the flip side is not preferred when this say in government decisions are misused and policies are favoured for the corporate giants.
There is enough evidence now that businesses all around the world have been using their governments to manipulate policy schemes and fill up their pockets. If there exists any, it shall always be a negative relationship between cronyism and democracy. However, it can only be accepted that this can not be rooted out of the system completely.
The king of good times (not so good anymore), the ultimate jeweller Nirav Modi, Sahara group owner Subrata Roy are some of the many who deceived the public and lived lavish lifestyles off the thousands of crores made from the tax-payers money. These amounts made to work for welfare would be more productive than being held up in banks of a few big shots. If governments do not fall prey to the corporates, it can use resources efficiently to vanish the demerits of capitalism and still contribute to a booming economy.