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All governments are crony capitalists

GS Paper 4

 

Source: BS

 Context: The recent Hindenburg report on the Adani group and instances of business-political nexus have highlighted the term ‘crony capitalists’

  

What is Crony capitalism? 

A political-economic system in which success in business depends on close relationships between business people and government officials, rather than on merit and competition

 

Examples of Crony capitalism:

  • India: Adani Group (CAG report highlighted “undue benefits” that the Gujarat government gave to Adani Ports by waiving waterfront and other charges); The 2G spectrum scam; Coalgate Scandal etc.
  • Russia: Privatization of state-owned assets in the 1990s resulted in a small group of oligarchs acquiring significant wealth and political power
  • USA: The 2008 financial crisis: Several large banks received government bailouts
  • China: State-owned enterprises (SOEs) receive preferential treatment

 

Reason for high crony capitalism in India:

  • Weak governance and lack of transparency in the political and bureaucratic systems
  • Corruption
  • Lack of competition in the business sector dominated by a few large conglomerates
  • Influence of money and power where financial resources shape government policies
  • Weak legal and regulatory frameworks with slow and inefficient courts
  • Weak enforcement of laws and regulations.
  • Complex rules and regulations

 

Ethical issues with Crony Capitalism:

  • Corruption: It undermines the integrity of public institutions and erodes trust in the democratic process.
  • Inequality: It creates a two-tiered system and exacerbates income and wealth inequality, contributing to social injustice.
  • Reduced Competition: It stifles innovation, reduces economic growth, and limits opportunities for small businesses and entrepreneurs.
  • Lack of Social Responsibility: Crony capitalists often prioritize their own self-interest over the well-being of society.
  • Not good for democracy: Crony capitalists influence the political results and undermine the democratic process and erode the separation of powers.

 

Safeguards:

Uday Kotak Committee recommendations against Crony Capitalism:

  • Transparency in related-party transactions through complete disclosure
  • Independent directors: Companies should have a minimum of 50% independent directors
  • Enhanced role of audit committees
  • Strengthening the corporate governance framework

 

Other measures needed:

Related news:

Ethics and Business

Source: The Statesman, BS

What is Business ethics?

It refers to a collection of values and concepts that guide how businesses should conduct themselves and engage with stakeholders.

The world today is facing numerous negative issues such as widespread corruption, greed, violence, poverty, and environmental destruction.

  

The root cause of these issues:

  • Erosion of moral values and ethics, resulting in an unprecedented trust deficit.
  • Globalization and technological developments have sped up this process

Businesses have enormous potential to contribute to society but are also capable of causing harm through exploitation, corruption, and unethical practices.

Some examples of unethical practices of corporates are:

  • Accounting and Financial Information: Creative accounting, tax evasion, insider trading, securities fraud, forex scams, bribery, kickbacks, facilitation payments,
  • Human Resource Development (HRD): discrimination ~ age, gender, race, religion; at-will employment, surveillance, sexual harassment and whistle-blowing.
  • Sales and Marketing: Price fixing, anti-competitive practices, anti-trust laws, greenwashing, etc.
  • Production: Addictive, defective, inherently dangerous products
  • Intellectual Property: Patent infringement, bio-prospecting, bio-piracy, hijacking of traditional intellectual properties like Ayurvedic medicines
  • International Trade: Unfair trade, dumping, outsourcing to the cheapest destinations, globalization, economic and cultural imperialism, child labour, etc.
  • General Corporate Philosophy: Stockholder vs. stakeholder concept, corporate governance and corporate social responsibility, industrial espionage, political contributions, and corporate manslaughter.

Solutions:

  • Develop a code of ethics
  • Provide ethical decision-making training
  • Cultivate an ethical environment
  • Hold employees accountable for their actions

Case Study: Tata group prioritize ethics and integrity over profit and has earned the respect and trust of its stakeholders, increased its profitability, and contributes to a more sustainable and prosperous future for all.

Mains Links:

Q. Corporate governance in India is in need of structural reforms which will promote transparency, fix accountability and reward efficiency. Analyse. (15M)