What is meant by ‘Crony Capitalism’?


The notion that capitalism is the root of evil (and responsible for many of our current problems) seems to be contemporary, politically correct and – unfortunately – widely held. And, as with many politically correct views, a blind eye is turned to the other side of the argument.

To address this issue effectively, a clear distinction must be made between that which is actual capitalism and that which may be best termed “crony capitalism”.

So, what is crony capitalism?

The answer to this seemingly difficult question is actually quite straightforward. To properly define crony capitalism, a look at what good old fashioned capitalism is proves helpful.

Capitalism is defined as the free exchange of goods and services between self-determining individuals. When this system is used by all 52 million South Africans, we see economic growth and development for all. Simply speaking, an individual will decide to buy his or her favourite brand of mealie meal based on which store provides it for the cheapest price, or for the best value.

When the government is responsible for the purchasing of this product, we often see them – hypothetically – buying from the more expensive option. Either because of corruption, cadre employment or financial contributions. This happens throughout a government when it is handed too much power. This failing is visible throughout the South African government, in areas as diverse as infrastructure development tenders to tax policy to industry subsidies. A government with wide-ranging power often becomes corrupt, to paraphrase Lord Acton’s the well-known quote.

In South Africa people overwhelmingly see service delivery as poor, all government functions marred by corruption, and that the system put in place with the aim to help people failing, because of mediocrity. Yet despite this many wish to create the perception that these woes should be blamed on capitalism.

Sadly, crony capitalism is all too often confused for capitalism. The biggest difference between these two systems is that capitalism in its true form is based on better morals than crony capitalism. Capitalism is moral, as it is premised on the voluntary exchange between independent parties who both agree to the transaction, as the transaction creates value for both of the involved parties.

Crony capitalism, in contrast, is immoral in three respects. Firstly, it is unfair – as the government is using public money, but not in the public’s interest. This money is rather spent on friends, supporters or themselves. One does not have to look far in South African politics to find examples where this has happened.

Secondly, crony capitalism is an extreme waste of taxpayers’ money, as these taxed Rands are not spent as efficiently as South Africans would do themselves. It is ironic that we trust our own people to elect a government, but we do not trust our own people to spend their money. Then after the money is ineffectively spent by our government, critics blame the capitalist system which would have avoided the government having the discretion to spend the money in the first place. In no universe is the government capable of being the best decision maker for all people.

Lastly, crony capitalism creates huge problems for our macro economy. In South Africa, the government is one of the biggest players in the telecommunications sector, healthcare and student loans. In other words, the government is one of the biggest purchasers of goods and services from these industries. Naturally, with this power comes abuse of power and the sector becomes dependent on the government as its biggest client. Once again one does not have to look too far to see examples of this happening in South Africa. With the student protests of the past two years, protesters have directed their anger at the wrong place. As the biggest supplier of student loans and financing in the country, surely their displeasure should be directed to our elected leaders and not to the academics on our campuses. Furthermore, the odd critic would rightly point to the government as the problem in our student finances but then suggest the government as the solution as well.

The actual solution to this problem is simple. In South Africa, we have seen a massive growth of government and bureaucracy over the years. Of course, no one would argue for government to completely disappear. There is a need for an authority to regulate the playing field and to establish and enforce laws. We do, however, need to limit the power of the government to also limit its potential to abuse this given power. If limiting crony capitalism is our goal, it all starts by limiting our government’s power.