The Index Of Cronyism By ‘The Economist’: A Call For Improvement.

Por Alejandro A. Chafuén. Publicado el 30/10/14 en: http://www.forbes.com/sites/alejandrochafuen/2014/10/30/the-index-of-cronyism-by-the-economist-a-call-for-improvement/

 

Several of the most important think tanks around the world that defend the virtues of the free market have programs that focus on the moral defense of free enterprise or the more tarnished term “capitalism.” The American Enterprise Institute (AEI) for example, has a program on Values and Capitalism. Most of the work of the Acton Institute, in Grand Rapids, Michigan, is devoted to show to the religious, that the free economy can lead to a more virtuous and prosperous society. Two of the most recent books by the leaders of these institutes focus on this challenge: “Defending the Free Market: The Moral Case for a Free Economy” by Father Robert Sirico; and “The Road to Freedom” by Arthur C. Brooks.

Donors to think tanks and university centers have invested millions to promote programs and publications that address the morality of “capitalism” and “free enterprise.” Capitalism has been defined by most friends and foes as the economic system based on the private ownership of the means of production. When the means of production are in private hands in countries with pervasive corruption, the moral defense of profits becomes very difficult.

The term “crony capitalism” is being used today by economists from all sides of the ideological spectrum. It usually refers to an economy where preferential regulation and other favorable government intervention—based on personal relationships—helps decide winners and losers.

Unfortunately, much of the debate about cronyism is based on anecdotes and generalizations. A few days ago, during the Free-Market Forum on “Markets, Government, and the Common Good” organized by Hillsdale College, several speakers address the topic of cronyism. Over 400 people attended the event, half of them professors at Christian colleges. One of the keynote speakers, Charles Payne, an entrepreneur and a Fox Business Network contributor, shared with the audience a litany of regulations and privileges which tarnish and corrupt the essence of the free enterprise system. Some anarcho-capitalists and libertarians regard receiving any income from government as crony. On the statist side, some regard economic freedoms as crony. They argue that they serve the rich at the expense of the poor.

In the United States we have efforts, such as Subsidy Tracker, which give some idea of the problem. Subsidies feed cronyism. Known state subsidies to private business add up to $153 billion. This represents approximately 10 percent of government spending at state level. Assuming that the federal and local governments are as generous with tax dollars as the states are—if the same percentage applies to all government spending (35 percent of the economy)—then the subsidized private sector economy might approach 3.5 percent. More research is needed as the existence of one element of cronyism in a contract does not prove that all the value added ex-post is also crony. A deal between PDVSA (Venezuelan Oil Company) and Boligarchs (Bolivarian Oligarchs) can be crony, but that does not mean that many of the small win-win retail transactions, like filling our gas tank at CITGO (a subsidiary of PDVSA), are also crony.

Earlier this year “The Economist” magazine released an index of crony capitalism. The index had Hong Kong with the worse score. In the article “The Economist” acknowledged the weakness of the methodology but still made it the cover story. As Hong Kong has consistently ranked as number one in economic freedom, the fact that “The Economist” ranked it as the most “crony” does great damage to the defense of the morality of capitalism or free enterprise.

In many countries, considerable amount of profits result from contracts with totalitarian structures such as state owned companies, or access to under-valued foreign currencies. One of the negative effects of cronyism is that it can lead to an unequal distribution of economic freedom, a concept that I have addressed before. The inequalities in income and opportunity produced by cronyism and an unequal distribution of economic freedom are not due to God, natural endowments, or personal effort. As such, many times they are scandalous. Tim Carney, of AEI’s Culture of Competition Project, also speaking at the Free-Market Forum mentioned above, argued that polls suggest that citizens are not so concerned with inequality. Bill Gates and Warren Buffet, for example, are greatly admired. Unfairness, however, which arises from cronyism, is disliked by the overwhelming majority. Carney endorsed the need of developing better indicators of cronyism.

Even before the fall of the Iron Curtain a consensus developed that when it comes to growth, economic freedom won hands down over socialism. But when it came to justice and morality, there is no such consensus. During these last two decades there has been a constant improvement in the quality of the measurements of economic freedom. There has also been an advance in the efforts to measure corruption. There has been very little advance, however, in the effort to measure cronyism.

As cronyism is regarded as a source of injustice and a consequence of immoral behavior, has the index developed by “The Economist” proved the immorality and injustice of capitalism?

The above question seems illogical and will likely be disregarded in circles that believe capitalists can do no wrong. If you point to a capitalist who seeks and profits from privileges, this group’s response is, “he is not a true capitalist.” In many socialist circles you find the same attitude, when you point to a failed socialist experiment they answer, “they were not true socialists.” But for the large majority of educated observers, who follow economic policy, the fact that a magazine such as “The Economist” would rank Hong Kong number one in cronyism in a leading article and cover page, is no laughing matter. It gave a rich cache of ammunition to the enemies of the free market.
It was not just Hong Kong either. The country ranked second in economic freedom, Singapore, did not do much better as it ranked fifth in cronyism. The index is indeed weak. It measures the weight of the sectors which are prone to cronyism (among them construction, oil, ports, and banking), it then factors in the number of local billionaires in those sectors, and comes up with the ranking. With the same methodology, even a libertarian utopia could end up being classified as 100 percent crony. Take for example an island or sea platform, such as the one promoted by the Seasteading Institute. Assume that most of the property in that island is owned by billionaires, and where the main product is oil and the main service is banking. Even if all transactions are voluntary the Economist Index it would show it as almost completely crony. Although cronyism is usually described as quasi-corruption, the index shows a very low correlation with corruption. China, which scores very bad in corruption, just 4 out of 10, appears as much less crony than Hong Kong, which scores a respectable 7.5 out of 10 in Transparency (a measure of lack of corruption). Singapore, which has the second least corrupt score (8.5) ranks fifth worst in cronyism.

More than a reason for criticism, “The Economist” and its Index of Cronyism should be a call for action and improvement. “If it Matters Measure It,” says the motto of the Fraser Institute. Cronyism matters. Measure it.

 

Alejandro A. Chafuén es Dr. En Economía por el International College de California. Licenciado en Economía, (UCA), es miembro del comité de consejeros para The Center for Vision & Values, fideicomisario del Grove City College, y presidente de la Atlas Economic Research Foundation. Se ha desempeñado como fideicomisario del Fraser Institute desde 1991. Fue profesor de ESEADE.