However much judgement might be in the eye of the beholder we still tend to agree on lots of things. Social beings that we are that agreement is as important as the facts. Some argue, more important, or even all important. Don’t know about that but pretty important for sure. I’m no exception.
And although sharing the same world with my family, friends, neighbors, colleagues, and countrymen certainly gives me comfort, confidence and other good stuff, I love being rattled by something that shows the familiar in a totally different light. I wrote an earlier post about the joy of having one’s mind opened to other perspectives. Let’s move to the first of many concrete examples to come.
This one is again about Corruption (see also this post about it). And about a specific version of it: the mutually profitable nexus between politicians and business, often labeled crony capitalism, a term describing an economy in which success in business depends on close relationships between business people and government officials.
A basic question for everyone who is interested to look at this reality fact-based is how the hell to figure out how to identify if the relationships between business and government are comparatively unhealthy. Any somewhat successful economy includes a dense network of relationships between the two. For any economy one can identify anecdotal incidents of corrupt relationships, and many more that are ‘suspect’. But how to say something sensible about those relationships being more corrupt here than there?
A 2006 paper by Ahmed Mushfiq Mobarak and Denni Puspa Purbasari on corrupt political protection to Indonesian firms used what I think is a great indirect measurement innovation: they examined the response of the share returns of firms traded on the Jakarta stock exchange to a string of rumors about the adverse state of President Suharto’s health. The firms whose asset returns suffered abnormal negative shocks in response to the rumors were labelled politically connected. They then studied the impact of a connection to President Suharto on the probability that those firms were granted import licenses for raw-materials and for commodities for sale in local markets.
The conclusion as described in the abstract of the paper: By conservative estimates, being connected triples the likelihood of receiving a license relative to the firm’s competitors, and having a member of the Suharto family on the firm’s board of management quadruples this likelihood. Moreover, licenses often create monopolies for connected firms, as their competitors are less likely to receive the same import license.
As clear an indication of favoritism as any.
Neat isn’t it, looking at the stock market response to the vicissitudes of the political masters’ health. What is characteristic of a crony capitalist economy is very evident swings in share value related to political connectedness. Conservative political commentator Peter Schweitzer in his shocking Throw Them All Out which describes how members of the Congress are exempt from insider trading laws, makes exactly this observation about the importance of political connected for business in the US:
A study that looked at the political connections of board members of S&P 500 companies found that the price of a stock rose an unusual amount following the announcement of the nomination of a politically connected individual to any given board of directors. In response to the Republican win in the 2000 presidential elections, companies with connection to the Republican party increased in value, and companies connected to the Democratic party decreased in value. (p.162)
In other words, the Indonesian economy under Suharto and the US economy are systemically similar in the way business-politics relationships result in correlating swings of fortune.
Schweitzer’s target is the ‘honest’, because legally allowed graft of the ‘permanent political class’, and US style conservatism means that government is the ultimate target of his critique. Obviously, a commentator with other ideological feathers could and would target the connected businesses, and the return they get on their investment in their political relations. But that’s feed for another post.