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    Crony Capitalism and Economic Growth in Latin America: Theory and Evidence
    Crony Capitalism and Economic Growth in Latin America: Theory and Evidence
    Crony Capitalism and Economic Growth in Latin America: Theory and Evidence
    Ebook206 pages2 hours

    Crony Capitalism and Economic Growth in Latin America: Theory and Evidence

    By Stephen Haber

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    Crony capitalism systems—in which those close to political policymakers receive favors allowing them to earn returns far above market value—are a fundamental feature of the economies of Latin America. Haber and his expert contributors draw from case studies in Mexico, Brazil, and other countries around the world to examine the causes and consequences of cronyism.
    LanguageEnglish
    PublisherIndependent Publishers Group
    Release dateNov 1, 2013
    ISBN9780817999667
    Crony Capitalism and Economic Growth in Latin America: Theory and Evidence

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      Book preview

      Crony Capitalism and Economic Growth in Latin America - Stephen Haber

      Krueger

      1

      Why Crony Capitalism Is Bad for Economic Growth

      Until the Asian financial crisis of 1997, economists and policymakers alike devoted much attention to analyzing the causes of the rapid growth of the East Asian economies. Some viewed their growth as a miracle; others (such as the World Bank) attributed it to high rates of capital accumulation.¹ But regardless of the analyst’s conclusions, all wanted to learn the lessons of the East Asian successes in order that other countries might emulate them.

      Since the crisis, those same economies are said to have had a large number of failures of economic policy; it is even said that there was no success story. Among the failures, a faulty banking system and cronyism are widely regarded as most fundamental. In this chapter, I examine these conclusions. To do so, I do three things. First, I provide an analysis of cronyism and investigate how and why it might have such negative effects as are now alleged. Second, I consider the role of domestic credit expansion in enabling cronyism and in contributing to the crisis. I then turn to the experience of one East Asian country—South Korea—and provide a possible explanation as to how cronyism and the banking system might have performed so well for so long and then have led to the crisis of late 1997. The explanation may apply to other Asian success stories as well—the reason for focusing on Korea is my own comparative advantage in being somewhat more familiar with that economy and economic policies than with the other Asian-crisis countries. Even for Korea, what is suggested is a plausible explanation, rather than a tested and proven hypothesis.

      At the outset, however, it is necessary to define cronyism, the subject under discussion. What is normally meant is that some of those close to the political authorities receive favors that have large economic value. Usually, these favors are not outright transfers of wealth (such as forgiving taxes or providing subsidies) but rather take place through provision of economic entitlements. These entitlements can take a variety of forms, but the ones that are most visible in the Asian crisis and the ones under discussion here normally entail ownership of a business or its operation. Ownership may come about when cronies are favored as state-owned enterprises (SOEs) are privatized. More frequently, however, economic entitlements have arisen by enabling the cronies—or, more accurately, the establishments they operate, which I shall call crony-operated establishments (COEs)—to receive privileged access to governmental favors that have economic value. It is a reasonable guess, although it would be hard to devise an empirical test, that the quantitatively most valuable favors received by COEs have been provision of monopoly or quasi-monopoly positions (often through the granting of import licenses only to COEs or the prohibition of imports of import-competing goods) and the extension of domestic credit at highly implicitly subsidized terms. A third form of cronyism—favoritism in awarding government contracts—is no doubt also important and may in some instances have been quantitatively as significant as the first two forms mentioned above.

      Cronyism and Its Effects

      Until the Asian crisis, it was widely recognized that SOEs were harmful and negatively affected economic growth prospects in most developing countries. In what follows, I shall argue that SOEs are almost exactly the same in their effects as cronyism and for much the same reasons: in both instances, the enterprises owe their existence not to their performance in a competitive market but to the nonmarket criteria by which they were established and are run. There are, of course, differences: the costs of SOEs are probably more transparent as they are normally financed out of the budget, whereas the costs of cronyism are more hidden in that profits are not necessarily publicly recorded and the value of privileged positions (monopolies, protective tariffs against imports of competing goods, favored access to subsidized credit, etc.) can be difficult to gauge; there may be a slight presumption that cronies are on average somewhat more competent as managers and somewhat more motivated to achieve profits and reduce costs. But, as I shall argue below, these are only mild presumptions, and there is undoubtedly a large random component in the performance of SOEs and of

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