Friday, March 21, 2014

Crony Nations

This fascinating chart was included in an article in The Economist that reports on the relative proportion of cronyism to wealth concentration in different countries. As shown, Asian nations fared poorly, accounting for seven out of the top ten places where wealth in crony sectors is highest relative to the overall economy. By way of definition, “cronyism” refers to sectors that rely on the doling out of scarce resources (e.g. land, natural resources, utilities, gambling licenses) to a few private interests by the government. The business model is more about extracting “rents” from the assets, rather than creating value through ideas or innovation. While governments are meant to regulate how much “rent” is charged to the public in order to ensure equitable pricing, it’s too easy to conclude that, due to inherent inefficiencies and outright corruption, the benefits have been heavily skewed towards the asset owners. In effect, the economic rents extracted from the market have been far higher than what a more free and fair market would normally dictate. 
When one thinks of cronyistic countries, certain names easily jump to mind – Russia, China, Indonesia, Philippines, Latin America, India. These places are resource rich and/or have strong governments that control almost every major facet of the economy. Most illuminating to this blogger is how Hong Kong and Singapore pop up in the top five, with Hong Kong out front by a country kilometer. The prominence of the two city states on the list is largely a result of the scarcity of land and the often-infuriating land policies that the governments have adopted that enrich property developers. However, particularly in the case of Hong Kong, there are stark and incontrovertible lessons about the inherently Darwinian nature of supposedly free economies to amplify the advantage of the strong over the weak. Close to 60% of total GDP in the hands of crony billionaires in a bastion of free enterprise?? The biggest surprise may be that such wealth concentration should not be a surprise.
One final note – why isn’t China ranked higher? Because the state itself is still the biggest crony. And the chart is not able to calculate and include pockets of hidden wealth that exist behind the thick, musty curtain of state ownership.

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