07 Nov 2016 21:23 IST

Of capitalism and cronyism

Protesters wearing masks of South Korean President Park Geun-hye (C) and Choi Soon-sil at a protest in central Seoul denouncing the President over the recent influence-peddling scandal.

Raghuram Rajan was categorical in saying crony capitalism was bad not only ethically but for growth too

South Korea has of late been in the news over the arrest of Choi Soon-sil, a close friend of President Park Geun-hye, for alleged “influence peddling”. This political scandal has, not surprisingly, hit the image of the President. Choi is alleged to have “manipulated government affairs” and forced businesses to donate huge sums to foundations run by her. The charge against her is this would not have been possible but for her closeness to the Korean President.

The Korean President has since made a tearful public apology for the political scandal gripping the country which, of course, did not cut much ice either with the public or with opposition parties. Both were quick to level charges of ‘crony capitalism’ at the Korean government.

Historically, the Korean state has always had deep ties with Korean big business houses or chaebols. Even corporate majors such as Hyundai have been embroiled in scandals in the past with their top officials spending time in jail. Ex-Hyundai Motors chief Chung Mong Koo was arrested in 2006 over charges of embezzlement and other corruption, though this does not strictly come under the ambit of crony capitalism.

Different kind of entry barrier

Now crony capitalism was an issue that also captured the public and media’s attention in India especially during the UPA II regime, wracked as it was by the 2G and coal block allotment scandals. What exactly is crony capitalism? Though an exact definition is hard to arrive at, the Wikipedia definition captures its essence. It says that crony capitalism is a state where the business community enjoys close ties with government and, as a result, gets permits, licences, grants and tax breaks easily.

Crony capitalists, thanks to their close relations to the powers that be, also successfully manage to prevent other businesses, both domestic and global, from entering the market, hence erecting a kind of an entry barrier to protect their interests. The other important charge is that crony capitalists manipulate government rules and regulations to suit their interests.

Former RBI Governor Raghuram Rajan had come down hard on crony capitalism in a speech he delivered in 2014. He was categorical in saying that crony capitalism was not only bad from the ethical point of view it was even harmful from the viewpoint of growth, especially in a middle income country like India. In fact Rajan’s unexpected exit from the RBI and return to academia earlier this year was seen by many as a price he had to pay for tightening the NPA norms for public sector banks and preventing them from ‘ever-greening’ corporate loans. Many commentators were convinced that he was forced to leave the RBI as the ‘crony capitalists’ were unhappy with his tough stand against PSU banks’ bad loans.

Rank in index

In a recent survey conducted by the The Economist magazine, India was ranked ninth globally in the crony capitalism index with crony-capitalist sector wealth accounting for 3.4 per cent of GDP. The country that ranked top on this list was, not surprisingly, Russia, where crony capitalist sector wealth formed 18 per cent of GDP.

Russian oligarchs with strong links to the Russian political establishment have always flourished and it’s not new. It is perhaps a fallout of the botched privatisation programme of Soviet era state companies in the 1990s, where businessmen having close ties with the government acquired state assets, especially in the energy sector, for a song. More disturbingly Russian businessmen who have opposed the government in recent times have been hounded — Mikhail Khodorkovsky and the late Boris Berezovsky are just two example of this phenomenon.

The countries that followed Russia on this list are Malaysia, the Philippines and Singapore.

Tough line by RBI

But the heartening fact for India is that crony capitalists’ contribution to GDP, which was at 18 per cent in 2008, has now fallen sharply to 3.4 per cent. The Economist attributed this to the cracking down on corruption and the tough line taken by the RBI, especially under Rajan, against debt restructuring in favour of business houses — what the magazine calls “sweetheart deals to moghuls”. The Congress and other opposition parties also said that Rajan’s exit was linked to his tough stand on PSU bank NPAs, which seemed to hurt big industry.

Perhaps the most potent symbol of crony capitalism in India is Vijay Mallya, who is now in London fighting extradition. But the government, courts and regulatory authorities’ relentless pursuit of the erstwhile liquor baron is a positive note in this sordid saga of wealth, greed and corruption.

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