Current Events Labor Economics

Crony Capitalism

Recently, we have seen a shift towards the left in Latin America. Socialistic presidents Evo Morales of Bolivia (who just nationalized Bolivia’s national gas industry) and Hugo Chavez of Venezuela both enjoy much popular support. Brazilian president Lula Da Silva has a background as a union leader and Nestor Kirchner of Argentina also rose to power by bashing neo-liberal economics. The World Bank’s Private Sector Development blog gives links to a variety of articles arguing why this is the case.

The best article of the bunch is from a blog by famed economists Gary Becker and Richard Posner where the authors claim that crony capitalism is the reason why Latin American voters have been trending to the left. Becker states:

One legitimate reason for the opposition to capitalism in Latin America is that it frequently has been “crony capitalism” as opposed to the competitive capitalism that produces desirable social outcomes. Crony capitalism is a system where companies with close connections to the government gain economic power not by competing better, but by using the government to get favored and protected positions. These favors include monopolies over telecommunications, exclusive licenses to import different goods, and other sizeable economic advantages. Some cronyism is found in all countries, but Mexico and other Latin countries have often taken the influence of political connections to extremes.

In essence, crony capitalism often creates private monopolies that hurt consumers compared to their welfare under competition. The excesses of cronyism have provided ammunition to parties of the left that are openly hostile to capitalism and neo-liberal policies. Yet when these parties come to power they usually do not reduce the importance of political influence but shift power to groups that support them.

Another possible explanation for Latin America’s rejection of capitalism is the increased inequality in their societies.  The Economist (“Inequality in Latin America“) reports on this phenomenon:

Latin America is much more unequal than other regions. The reason is history. European colonisation set a pattern of exploitation of indigenous Indians. Its legacy, and that of slavery, live on. This helps to explain the ethnic character of some of the region’s inequality. The Bank finds that in Guatemala one in five “whiteâ€? men have a car, compared with only one in 20 men of indigenous blood. In Bolivia, 84% of “whiteâ€? women have access to electricity, compared with 64% of Indian women.

Skill biased technological change (SBTC) may be the cause of this increased inequality.   In Berman, Bound and Machin (QJE 1998), the authors argue that the increased inequality in the wages of workers in developed countries is due to the fact that returns to high skill (education) jobs has been increasing, while the return to low skill jobs has been flat or decreasing over the past decades.  While the authors do not specifically examine this phenomenon in the case of Latin American (OECD economies are used), it is very likely that SBTC could be taking place in Latin America as well.  If this is the case, the median voter would be more likely to have experience flat or reduced wages over time and thus a vote for socialism would be rational.