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Crony capitalism: corruption, disparities and stifled initiative

by Jeff Kingston

Special To The Japan Times

Crony capitalism is the scourge of contemporary Asia, lining pockets and diverting resources in ways that systematically undermine the public interest, accentuate disparities, sap innovative and entrepreneurial impulses — while also subverting governance.

Comprising the corrupt networks of power relations between businessmen and the state, and the institutionalized pilfering by those with favored access, it is a system in which connections matter more than merit. Government officials and politicians use their positions to bestow lucrative favors on relatives and cronies not only to enrich them and take a cut, but to nurture a supportive oligarchy that develops a shared interest in sustaining the entire system.

Selling access, sweetheart deals, insider information, licenses, monopolies, privileges, regulatory manipulation, cooking the books and legal shenanigans are all tools of this systematic plundering for private benefit.

China and India, with 2.6 billion people between them, are paying a high price for colossal levels of malfeasance. They rank 80th and 94th respectively on Transparency International’s 2012 corruption index of 174 nations, meaning both are considered highly corrupt.

As crony capitalism is not inclusive, nor transparent, it represents a vast looting of resources that could be invested in job training, education, clean water, mass transit, housing, renewable energy and social programs that would benefit hundreds of millions whose lives are unimproved by the so-called Asia-rising story.

It is a tale of greed, misallocation and squandered opportunities that nurtures poverty, injustice and instability. The 5,000 children who died and 15,000 injured in the 2008 Szechuan earthquake when schools collapsed because they were built below standard to eke out extra profits are just some of the collateral damage this system begets.

China’s kleptocracy is crony capitalism with Chinese characteristics. This means Communist Party officials using their discretionary, unaccountable authority over allocating resources or bending regulations to favor those who bribe or otherwise enrich them and their families. China’s kleptocracy was in the limelight for much of 2012, marring the celebratory fanfare of the leadership handover at the party’s 18th National Congress in November.

Every once in a while someone is caught, and corrupt officials are even executed, but in the opaque world of Chinese politics one wonders if such reprisals are a form of gang warfare among competitors vying for power and turf.

The trial of Bo Xilai’s wife, Gu Kailai, and his purging from the party in 2012 drew considerable attention in China and around the world. The state portrayed this former member of the Central Politburo, and secretary of the party’s Chongqing branch, as an out-of-control populist demagogue abusing his power and hiding his own nefarious activities behind a crackdown on organized crime and graft.

But it was the sex, murder and financial scandal involving his wife that grabbed the headlines. She allegedly killed a British businessman, possibly her lover, who had been helping her launder money and shift vast amounts overseas.

China’s central bank last year posted a report, swiftly expunged, indicating that 18,000 corrupt officials had managed to funnel a total of $120 billion overseas since 1990. New York Times reporter David Barboza also exposed high-level corruption, detailing $2.7 billion in assets amassed by the relatives of former prime minister Wen Jiabao during his tenure in office.

Ironically, Wen himself had campaigned against the very problem that tarnishes his legacy, saying in 2007, “Leaders at all levels of government should take the lead in the anti-graft drive. They should strictly ensure that their family members, friends and close subordinates do not abuse government influence.” Easier said than done.

Ventures by members of Wen’s family received financial backing from state-owned companies and Asia’s leading tycoons. Real estate, diamonds, telecommunications, manufacturing, infrastructure and insurance ventures proved remarkably profitable; there was even a finger in the Olympics pie. Wen has not been accused of directly profiting or intervening, but there is the whiff of impropriety even if it is not illegal to trade on the family name in striking lucrative deals. Some suspect that Wen’s enemies or those jockeying for power helped instigate the scandal to discredit him.

Given the lack of transparency, it is hard to know the extent of the rot, though few doubt it is widespread in the leadership of the party. Indeed, allowing the families of top officials to profit from China’s boom has been an effective way of coopting the elite into supporting market-oriented reforms.

Bloomberg has reported that the extended family of “princeling” Xi Jinping, China’s new president, also amassed hundreds of millions of dollars in assets. Other privileged princelings — a term used to describe scions of the party’s elite — have also cashed in because they are known as people with all the right connections who can get things done; they are China’s new upper class of Red aristocrats.

One suspects this is not exactly what Deng Xiao Ping had in mind when he declared in 1978, perhaps apocryphally, “To get rich is glorious.”

In India, the “I Paid A Bribe” website was set up in 2010, and by November 2012 it had attracted 21,000 reports. Efforts by Chinese citizens to follow suit failed and were shut down, revealing the advantages enjoyed by authoritarian governments in hiding inconvenient information.

Arvind Kejriwal, a prominent social activist and leader of the Aam Aadmi Party in India, has launched a campaign of civil disobedience and staged a two-week hunger strike this year demanding accountability and transparency. It is an agenda that resonates powerfully with a public fed up with a cascade of scandals.

None was more eye-popping than the 2008 telecoms scam in which officials sold bandwidth licenses to favored insiders at rock-bottom prices — costing the state some $40 billion in revenue. In 2012, the Supreme Court canceled 122 of those contracts.

Meanwhile, an audit uncovered extensive financial irregularities associated with the 2010 Commonwealth Games hosted by India. And as well, the parliamentary system works on a cash-and-carry basis. But what unseemly scam can top that involving officials taking over apartments meant for war widows? Well, perhaps the estimated $210 billion in lost government revenues between 2004-10 due to sales of coalfields without competitive bidding.

This massive venality tarnishes the image of a nation where, by some estimates, 77 percent of the population live below the poverty line — and the official lowball estimate suggests that villagers can live on a miserly 25 rupees ($0.46) a day.

Tragically, some 17,000 farmers in India commit suicide annually (a rate 47 percent higher than the rest of the population) because of debts and dire circumstances. Not surprisingly, there is a robust insurgency that draws considerable support in rural areas. But in the parliament it is business as usual; defanged anti-corruption legislation tabled earlier this year has been widely dismissed as a farce.

As Katherine Boo wrote in “Behind the Beautiful Forevers,” her superb 2012 book on life in an Indian slum, for the “poor of a country where corruption thieved a great deal of opportunity, corruption was one of the genuine opportunities that remained.” That is a sad and subverting commentary on the India-rising narrative.

The cumulative effect is damning and makes foreign investors suitably wary.

While Asia’s giants have much to gain through greater transparency and accountability, there are few signs this is happening. But this is not their problem alone: Remember how Wall Street’s sub-prime perps proved too big to fail and gamed a happy ending for themselves?

Jeff Kingston is Director of Asian Studies, Temple University Japan.

  • zer0_0zor0

    While a largely informative and correct portrayal of the need to root out corruption in Asia for manifold reasons, much of what is said still holds water with respect to the West, particularly the USA and the UK.

    For example, to which offshore havens are the Red aristocrats hording their booty? They are just late to that game.

    Let’s recall that perfidy of the Opium Wars in China was brought about with direct lobbying of the UK government by the president of Jardine Matheson, which is still the largest hong in Hong Kong. So,

    Comprising the corrupt networks of power relations between businessmen and the state, and the institutionalized pilfering by those with favored access, it is a system in which connections matter more than merit. Government officials and politicians use their positions to bestow lucrative favors on relatives and cronies not only to enrich them and take a cut, but to nurture a supportive oligarchy that develops a shared interest in sustaining the entire system.

    Is something that has been around since long before the free-market reforms in China.

    One need only look at the all too cozy relations between American and British politicos and their respective finance sector, which one mines for positive economic data to gain short term political capital, and repays the favors with deregulation.

    In fact, how many American Secretaries of the Treasury have come directly from Wall St investment banks and returned directly to those same banks after their tenure? I prefer to refer to that model as Empire finance, which puts that particular brand of corruption into starker relief than “crony capitalism”.

    Obviously, that is a representation of a “corrupt network of power relations between businessmen and the state”. Accordingly, the West can be seen as having some credibility problems when calling for reforms in Asia.