Cronies and capitols: Businesspeople have become too influential in government

Cronies and capitols: Businesspeople have become too influential in government

Aug 10th 2013 |From the print edition

IN 1994 many Italians voted for Silvio Berlusconi in the hope that he could use his skills as a businessman to revive a sclerotic economy. He had built a property-and-media empire out of thin air. He had reinvigorated one of the country’s great football clubs, AC Milan. Surely he would do a better job of running the country than the old guard of corrupt politicians and introverted bureaucrats? Well, si monumentum requiris, circumspice. Mr Berlusconi was prime minister of Italy for eight of the ten years between 2001 and 2011. During that time Italy’s GDP per head fell by 4%, its debt-to-GDP ratio rose from 109% to 120%, taxes rose from 41.2% of GDP to 43.4%, and its productivity stagnated. Rather than using his business skills to revive the Italian economy, Mr Berlusconi used his political skills to protect his business interests. The great seducer is an extreme example. And with luck Italy’s long Berlusconi-themed nightmare is drawing to a close. But the problem at the heart of Mr Berlusconi’s Italy—the commingling of power and business—is a growing worry around the world. In “Can Capitalism Survive?” (1947) Joseph Schumpeter argued that the answer to that question was probably “no”. The great battle of the 20th century was between the state and business. And the state was likely to win because the thinkers and bureaucrats at its service were better at occupying the moral and intellectual high ground. “A genius in the business office may be, and often is, utterly unable outside of it to say boo to a goose—both in the drawing room and on the platform,” he said. Times have changed. Most politicians now believe that businesses are better than bureaucracies at generating growth. Prime ministers and finance ministers flock to Davos not to lay down the law to businesspeople but to court their favours. Businesspeople have learned not just to say boo to a goose but to put a ring through its beak. Today the problem is often the very opposite of the one that Schumpeter imagined: not the marginalisation of business but its excessive influence.

The emerging world has gone furthest with what might politely be called “public-private partnerships”. The state grants franchises to well-connected businesspeople such as Carlos Slim in Mexico or Cyril Ramaphosa in South Africa. Those businesspeople then use their wealth to influence the state. In emerging markets such as China and Russia a group of state-owned enterprises (SOEs) dominate the economy. In “khaki capitalist” countries such as Pakistan and Egypt the army controls businesses that account for big chunks of the economy: their bosses, both as generals and as general managers, enjoy much political clout.

Crony capitalism seems to be getting worse. In China the SOEs call the tune: they suck up capital from the private sector and refuse to pay dividends to SASAC, the government body that nominally oversees them. Many of India’s dozens of billionaires made their fortunes in industries such as mining and infrastructure that are prone to rent-seeking, even if the most famous are in relatively politics-free ones such as computing.

This all matters more than it used to. The emerging world may be slowing but it now accounts for more than half of global GDP (using purchasing-power parity) compared with less than a third two decades ago. And SOEs strut the global stage. A quarter of the companies on the latest Fortune Global 500 list are from emerging markets, up from 15% in 2010. Of these, 58% are Chinese SOEs. The government has set them a target of getting half their profits from abroad in five years, up from 38% now.

The Anglo-Saxon world looks askance at Mr Berlusconi’s mixing of business and politics, and at the French phenomenon of pantouflage, in which senior civil servants move on to cushy jobs in business. But its superior attitude is misplaced. In Britain the revolving door is spinning ever more rapidly. Over the past decade 18 former senior ministers and civil servants have taken jobs with the biggest three accountancy firms, whose work includes helping businesses minimise their tax bills and lobby the government. They include Dave Hartnett, until last year the head of the revenue service, now a consultant at Deloitte. The boards of British energy firms are packed with ex-ambassadors and ex-spies.

Rome on the Potomac

In America relations between business and politics are even cosier, and more worrying. Luigi Zingales of the University of Chicago’s Booth School of Business left Italy in 1988 because he felt his country was being destroyed by cronyism. But in a recent book, “A Capitalism for the People”, he worries that America is turning Italian. Washington, DC, has taken over from Silicon Valley as the metropolis with the highest income per head. Spending on lobbying has more than doubled in the past 15 years. The Washington Post’s new owner, Jeff Bezos, promises that its coverage will not be the servant of his interests—but his company, Amazon, spends millions of dollars a year on lobbying. The Supreme Court’s 2010 “Citizens United” decision has given companies carte blanche to spend freely on influencing elections. The Treasury has all but dug an underground passage to Wall Street: four of the past seven treasury secretaries had close ties to investment banks.

Policing the relationship between government and business in a free society is difficult. Businesspeople have every right to lobby governments, and civil servants to take jobs in the private sector. Governments have to find the best people to fill important jobs: there is a limited supply of people who understand the financial system, for example. But governments must also remember that businesses are self-interested actors who will try to rig the system for their own benefit. The sad state of Mr Berlusconi’s Italy shows that a government that is too close to businessmen may be neither businesslike, nor do much to promote businesses other than their own.