Crony Capitalism:
Rent-Seeking, Institutions, and Ideology
Dragos Paul Aligica
Vlad Tarko
George Mason University, Mercatus Center
Association of Private Enterprise Education 2013

Outline
• What is “crony capitalism”?
• Microeconomic foundations: Rent-seeking
– Cronyism restricts rent-seeking competition
• Structural perspective: Cronyism with and
without the rule of law
– Corruption and the shadow economy
– Cronyism and property rights
• Ideological perspective
– Populism

“Crony” relations
• Management literature
– Nepotism in hiring and promotion decisions
• Two types of corruption
– Cronyism
– Bribery

Crony capitalism: Developing
countries
• South America, India, South Korea, South-
East Asia, and Eastern Europe
• Haber (2002):
– “a system in which those close to the political
authorities who make and enforce policies receive
favors that have large economic value”
– “The favors allow politically connected economic
agents to earn returns above those that would
prevail in an economy in which the factors of
production were priced by the market”

Crony capitalism: tendency in
developed countries
• United States (Zingales 2012)
• “the government rigs the market for the
benefit of government officials’ cronies”
(Henderson, 2012).

Differences between developed and
developing countries
High-income Developing
Corruption
Complements
official economy
Complements
shadow economy
Property rights
secured by...
Rule of law &
Judicial System
Crony relations:
involves trust and
family relations

Beyond ideology?
• Buchanan (1992):
– The “loss of faith in politics” has not been
“accompanied by any demonstrable renewal
or reconversion to a faith in markets”.
– “We are left, therefore, with what is essentially
an attitude of nihilism toward economic
organization. Politics will not work, but there
is no generalized willingness to leave things
alone. There seems to be no widely shared
organizing principle upon which persons can
begin to think about the operations of a
political economy.”

Populism
• Canovan (1999) :
– “Populism is not just a reaction against power
structures but an appeal to a recognized
authority. Populists claim legitimacy on the
grounds that they speak for the people …
Capitalizing on popular distrust of politicians’
evasiveness and bureaucratic jargon, they pride
themselves on simplicity and directness.”
• Dornbusch & Edwards (1992):
– “emphasizes growth and income redistribution
and deemphasizes the risks of inflation and deficit
finance, external constraints, and the reaction of
economic agents to aggressive nonmarket
policies”

Ideological justifications and
legitimizations
Rent-seeking
societies
Legitimizing
Ideology
Mercantilism Religion
Real-life socialism Socialism
State capitalism Nationalism
Crony capitalism Populism

Crony capitalism
• Rent-seeking society legitimized by
populism.
• Crony relations work to restrict the
competition for rent-seeking, thus
increasing the size of rents.
• In countries with low rule of law and
dysfunctional judicial system, crony
relations are the second-best solution for
protecting property rights (of some, not of
all).