In many underdeveloped countries business people accumulates wealth by utilizing their political connections. Their friends in government helps them to get big contracts and businesses. Creating wealth using political influence in the government has produced a new category of rich called crony capitalists. Crony capitalism is a situation where business people acquire wealth by getting favorable treatments and benefits from the government.
Business grows as some section of the society is benefited from despotism of the rulers. Instead of competition in the free market and through the working of rule of law, business success is obtained by getting favourable treatment from the government in the form of business contracts, tax concessions and other incentives.
Sectors mining, oil and gas, infrastructure provision are the major areas where crony capitalism may flourish.
A bad outcome of crony capitalism is that such entities grows by eliminating competitive people who are more efficient.
What is rent seeking?
Another closely related term is rent seeking. Here, a company, organization or individual uses their resources to get an economic gain without giving any benefits back to society. Lobbying political parties to obtain contracts or concession from the government is an example for rent seeking. Business activities based on rent-seeking are not just unfair, but also bad for long-term growth. Resources are misallocated and competition is repressed.
From crony capitalism, illegal business profits may occur. Such profits give births to black money which is another sin in India. Huge black income tempts the owners to shift it to foreign countries similarly; conspicuous consumption is yet another result of black money. Black money is a theft of resources from the welfare expenditure of the poor people.
Fighting corruption and putting good regulations on business are necessary to end both crony capitalism and rent seeking.
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