Crony Capitalism is Normal, Liberal Capitalism is Weird

Steve Randy Waldman has a fantastic piece on the “resource curse” faced by resource-blessed and governance-challenged places like Nigeria.  He suggests that as capital increasingly displaces labor, the economy of Western technological nations will increasingly come to resemble that of Nigeria – where one’s economic success is determined by either ownership of or access to capital, and those without either capital or connections to capital are increasingly irrelevant to the economy.  The pessimistic conclusion is that the Western world’s politics will come to resemble those of Nigeria – the optimistic one, which Waldman makes, is that some measure of redistribution via a “guaranteed basic income” will be what make the economy function.  He points to Alaska and Norway as resource-based Western societies that have done precisely that.

I think Waldman makes one key error – he views liberal capitalism as the base case and crony capitalism (or “corrupt, extractive regimes”) as the aberration.  Purely based on the relative prevalence of liberal capitalism and crony capitalism I would argue the reverse is more clearly true.  If we assume that corruption is a fairly good proxy for how well an economy adheres to the liberal ideal, then this picture does all the talking:


Lots of red on this map. Red is bad.

The vast majority of countries today follow some form of nominally capitalist economy, and the vast majority of those countries are defined by high corruption and highly unequal competition.  The difference in prosperity between the countries colored red above and those colored blue is enormous.  The causality is complex – Botswana, for example, is both the least corrupt and most prosperous country in sub-Saharan Africa.  Scholars have argued that its strong economy have enabled a level of professionalism absent in most African countries, while others argued that its strong institutions have allowed for natural resource wealth to lead to broad economic growth.  However, let’s put the causality aside for the moment to note that strong economies and liberal capitalism tend to go hand in hand.  Much like prosperity, liberal capitalism has had mixed success in spreading beyond its homeland.

I think we reveal our Western biases by treating crony capitalism as a degenerate form of liberal capitalism, when in fact it seems more like the normal state of affairs.  The Wikipedia page on crony capitalism even begins, “Crony capitalism is believed to arise when political cronyism spills over into the business world…”, treating it as though it’s a disease arising upon a previously pristine body politic.  In actuality, most of the countries in red on the map above have never had a liberal capitalist economy – most transitioned from colonialism or semi-feudalism straight into crony capitalism and have stayed there.  In contrast, there are few examples of liberal economies turning into crony capitalist economies – the main one being Nazi Germany in the 1930s.  The general applicability of that precedent is…um, let’s say troublesome.  Liberal capitalism seems much more like a disease (albeit a beneficial one) that can strike crony-based economies – which is the story of almost all the blue on the map above.

Based on this, this suggests that economic transition is unlikely to make the political economy of the US resemble Nigeria even if our resource distribution looks similar.  More likely, we will react similarly to Alaska, Norway, or for that matter the UK – use the surplus wealth production to feed aggregate demand in the economy.    While we can guarantee our policy structure will be ad hoc and poorly structured, it is more likely to be somewhat constructive rather than utterly destructive.

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