Cronyism is ubiquitous across all political systems. Whenever political actors intervene in economic affairs, they provide the incentive for businesses to take legal (cronyism) and/or illegal (corruption) action to ensure that political actors intervene in their favor. Yet only recently have economists started to seriously study cronyism and its prevalence and economic impact. The lack of scholarly work is largely because cronyism, like corruption, is notoriously difficult to measure, and unlike corruption, cronyism is not illegal, making it even more difficult to define and measure because there are no court or indictment records. This paper surveys the research on cronyism and the available methods of measuring it—in particular, using surveys to measure the perception of cronyism. We also make suggestions for improving our measurements of cronyism.
The defense of free markets and limited government from Adam Smith and David Hume forward hinges on the key assumption that businesses in the pursuit of profit will serve the public interest. Instead of legislating against or awaiting a transformation of human nature, Smith and Hume argue that capitalist institutions harness human self-interest to advance the well-being of all. As Smith famously states, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” Most economists accept the argument that under market institutions, profit-seeking businesses will generally serve the interests of consumers. Yet profit seeking will not serve consumers if businesses can secure from government monopoly privileges or other regulations inhibiting their competitors. Such a mixed or politicized economic system has been dubbed crony capitalism, or cronyism, to distinguish it from a system of free markets and limited government.
While economists have been aware of cronyism since the beginning of economics, it has only recently become the focus of economic research. Several strands of literature in economics establish the general costs of cronyism and provide guidance for its scholarly investigation. The public choice analysis of rent seeking examines competition for favors or transfers from government and the costs of the transfers and lobbying activities. The analysis of corruption, illegal attempts to secure favors from politicians, establishes the negative impact on the investment environment of bribes for favors. And economic freedom has been strongly linked to prosperity and growth, yet as cronyism expands in a country, economic freedom will decline. The actual measurement of cronyism has proven difficult because the parties involved tend to hide their actions. Cronyism can also be obscured by public interest or consumer protection rationales for regulation, as Yandle’s example of the bootleggers and Baptists emphasizes.
This paper explores avenues for measuring cronyism as a means of advancing this new line of research. Although economists’ focus on cronyism is relatively recent, extensive literature exists on the related topics of corruption and rent seeking, and any attempt to investigate cronyism should be informed by these literatures. A first challenge is to distinguish cronyism from corruption and rent seeking, a task we consider in section 1. We consider in section 2 some general insights on the costs and measurement of cronyism offered by the corruption and rent-seeking literatures. Our focus then turns to the measurement of cronyism. Scholars have found surveys to be an effective means to measure corruption; surveys could also be used to mea- sure cronyism. Public perceptions of cronyism are important for the future of the free market economic system. Does the public consider cronyism to be endemic to or a corruption of capitalism? The public’s perception of cronyism will likely affect the future course of policy and may offer clues about how crony influences could be ameliorated. Section 3 discusses the reasons why perceptions of cronyism matter. Section 4 reviews some of the available evidence on insider and public perceptions.