A system of cronyism seems to have gripped Pakistan's economy. Every successive government since the Ayub regime is guilty of fostering it. Military regimes found cronyism too handy in overriding their lack of legitimacy. And the civilians promoted the system to ensure their permanent hold over economy's commanding heights. As a result, a group of Pakistani families has been extracting a growing share of society's wealth for itself as well as for all those associated with these families. Cronyism is a system of collusion among business enterprises, government officials, and ruling parties including Parliament itself. This collusion results in business-friendly policies and investments that serve private interests at the expense of the public interest. Cronies head regulatory bodies and to doubly ensure their loyalties they have been made subservient to the very ministries whose activities they are supposed to regulate.
According to Sami J. Karam (Capitalism did not win the cold war; why cronyism was the real victor - July 19, 2017 - Foreign Affairs weekly) cronyism occurs when government officials and business elites collude to benefit themselves in ways that would be impossible if they were limited to arms-length transactions. Collusion undermines both democracy in government and competition in business, and thus has damaging short-term and long-term effects. Karam points out that the democratic principles of fair representation and equal access are jeopardized by the greater political influence that well-connected individuals and interests get through tacit or explicit promises. Under cronyism, all tradeoffs are said to become common currency, but they are only available to the deep-pocketed large players, to the detriment of smaller businesses and private citizens. Although many industries could conceivably benefit from extractive or rent-seeking activities, however, in Karam's opinion some are historically more prone to it than other industries. The finance, energy, infrastructure, and real estate sectors all are said to have a troubling history of attracting and breeding cronies.
Karam further asserts that one can draw some conclusions about how much cronyism occurs in an economy (cronyism as an input) by looking at that economy's results (its output). Here are four key indicators which he says can serve as warning signs of where cronyism may rule: First, it should be considered a "red light" if a country scores poorly, (as Pakistan does) on widely accepted corruption indices (Transparency International's Corruption Perceptions Index, for example) and its economy is dominated by extractive industries. In many such places, ruling parties and business elites work hand in hand in ways that increase their hold on power and wealth, and close off opportunities to competitors. In many cases, these individuals are assisted by investments from foreign corporations, often in the energy or mining sectors, seeking to curry favor with local authorities in order to secure exploration rights. Here again, the high stakes and large amounts of money solidify the positions of elites, often to the detriment of ordinary citizens.
Closing off the circle of money flows, many of these developing country elites then, (like rich Pakistanis do), park a sizable portion of their assets in real estate of Western cities such as London or New York, or in Swiss or offshore bank accounts. A large share of these assets is then funneled to asset managers, hedge funds, and others in the large financial centers of the world-not only New York, London, and Hong Kong, but also the Cayman Islands, Panama, Cyprus, and other offshore havens.
Second, a country that lags on political pluralism, the independence of its judiciary, gender equality, or human rights, (like Pakistan does), cronyism can be safely assumed to be a factor. The Rule of Law Index produced by the World Justice Project has a long list of such countries. All such countries also suffer from very low ratings on measures of open government, civil justice, and criminal justice (like we do in Pakistan). Here again, it is no surprise that decisions pertaining to governing and business are made by a small coterie of people in such countries. That is how decisions pertaining to important national interests are taken in Pakistan. This is perhaps the reason why Pakistan's economy has been in a downward spiral, but the people in charge seem to have extracted and accumulated vast wealth. Indeed family members of ruling parties as well as their friends and associates seem to have amassed huge personal fortunes at the nation's expense. This has all taken place while the living conditions of average Pakistanis have kept deteriorating significantly.
Third, if a country's economy is overly reliant on raw materials exports or low value-added goods, rather than productivity or innovation like that of Pakistan's, cronyism is said to become a dominant factor. This long-standing collusion between ruling parties in Pakistan and big business has been exposed with telling effect during the Panama case hearings.
Fourth, high-income inequality found in Pakistan can mean that cronyism has played a role in reducing competition in the country's economy. Most of the wealth that ruling elite in developing countries like Pakistan have made through cronyism has flowed into developed economies. There is abundant evidence, according to Karam, that developed world elites have benefited from the wealth generated by cronyism in developing countries (like Pakistan) and other emerging nations. Investment banks have derived billions of dollars in fees by underwriting trillions in equity and debt since the early 1990s. They have curried favor with foreign leaders and other power brokers and have obtained massive contracts in return, some of which were not always in the best interest of the people in those foreign countries. For example, as Karam points out, it is evident that some oil-rich countries in Africa have made deals with foreign energy companies that were advantageous to domestic elites but harmful to their own citizenry.
In the same vein, asset managers of offshore funds have developed profitable new income streams managing the wealth that elites of cronyistic emerging-market nations (like Pakistan) invest in safer, more developed economies. The Tax Justice Network estimated in 2016 that $12 trillion from developing countries alone was parked in offshore havens. The total figure, including money originating from rich nations, is believed to be significantly higher.
Real estate can function in the same way, through the sale of apartments in politically stable markets to the oligarchs from corrupt, emerging-market economies. Pouring money into hedge funds and ultra-luxury real estate is often a poor investment choice, but to a wealthy oligarch, they are safer bets than keeping wealth in his or her home jurisdiction, where shifting politics heighten the risk of expropriation. That perhaps the reason why our rich park their ill-gotten wealth in foreign banks and overseas assets like London flats and New York pent houses.
According to Karam, the market for ultra-luxury condominiums has boomed for years in the United States, with cities such as New York and Miami attracting billions in foreign investments. "What many Americans might not realize," a Washington Post report explained in 2016, "is that foreign-owned shell companies play a big role in the US economy through the real estate market." The report continued:"...in the last quarter of 2015, 58 percent of all property purchases of more than $3 million in the United States were made by limited liability corporations, rather than named people. Altogether, those transactions totaled $61.2 billion, according to data from real estate database company Zillow."
Karam added that in 2015, an extensive report by the New York Times estimated, that in six of Manhattan's most expensive buildings, shell companies owned between 57 and 77 percent of the condominiums.
"The independence of the judiciary has likewise come into question in recent years due to the revolving door and what is called "elite affinity," which means the propensity of people who attended the same colleges and who worked at the same firms to value cooperation with each other over confrontation, even in cases when confrontation is necessary. "Last, as the economist Thomas Piketty and others have pointed out, the concentration of wealth has grown steadily since 1980. Piketty demonstrated that the percentage of income that accrued to the top decile remained near 30 percent for three decades after 1950. But starting in 1980, this percentage grew steadily until today, when it is near 50 percent. "To be fair, not all of this rise can be attributed to cronyism and a decline in competition. Technology and the ability to leverage strong brands into new overseas markets also played a role. But there is no doubt that people who have been well positioned in extractive sectors have benefited disproportionately. Among them are executives of some commodities and financial firms."
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