What to make of Singapore’s high “crony capitalism” ranking

Academic Views / Friday, May 12th, 2023

LINDA LIM (University of Michigan) explains the complexities behind Singapore’s seemingly alarming number four rank in The Economist’s Crony Capitalism index. Regardless of the scale and impact of political connections in the Singapore economy, though, the republic’s status as an enabler of crony capitalism in other countries should be of concern.

The Economist magazine has issued its 2023 Crony Capitalism index. Out of 43 countries measured, the index ranks Singapore fourth by “crony sector” billionaire wealth as a percentage of GDP, behind Russia, the Czech Republic and Malaysia (see table below).  The first time the index was issued, in 2014, Singapore was ranked fifth, and the last time it was issued, in 2021, it ranked third, behind Russia and Malaysia.

From The Economist, 2 May 2023

Crony capitalism is usually defined as an economic system where politically-connected individuals or businesses (“cronies”) in the private sector (“capitalists”) benefit from government policies giving them advantages over competing entities.

The methodology behind the index

Instead of attempting to measure political connections directly, The Economist’s particular ranking is based on the share in a country’s GDP of billionaire wealth generated in what it calls “crony sectors” (see table below).  These are sectors that The Economist identifies as highly prone to economic rents — producers enjoy surplus earnings (“supernormal profits” or “excess returns”) over what would be necessary to compensate capital and labor for their deployment in competitive markets (what they would accept in payment for their services where they have to compete with other providers).

From The Economist, 2016

Monopoly power is the source of most rents, and it derives from restrictions on the access of new entrants (competition) into a business or industry.  Land or natural resources are the most “natural” source of rents, since their supply is fixed, so real estate/the property market is a common source of billionaire wealth.  More recently, America’s tech sector is characterized by industry concentration and market power which, combined with intense lobbying, causes it to “exhibit some crony characteristics”, according to The Economist.

Government regulations or preferential treatment for particular firms or industries can also deliver rents to favored entities.  These affect sectors that are close to government or rely on government support, for example, through banking and casino licenses, infrastructure contracts, construction permits, concessions for resource extraction, import protection through tariffs and quotas, tax breaks, low-cost loans, grants and other corporate subsidies targeted for particular firms or industries.

In The Economist’s ranking, a high share of such “crony sectors” in a country’s economy is sufficient to give it a high “crony capitalist” rating.  Hence natural resource intensity accounts for much of Russia’s and Malaysia’s high rankings, while banking and real estate contribute to Singapore’s.  This does not necessarily mean that ownership or control of such sectors was obtained “corruptly” (through bribes or kickbacks), “uncompetitively” (without open competition) or “unfairly” (the winner of a competition being privileged over other parties)—the reasons why crony capitalism is usually of concern.

Crony sectors: how problematic?

The prevalence of Putin-connected “oligarchs” in Russia and racial affirmative action preferences in Malaysia might suggest that their high rankings do indeed reflect serious problems with their economic systems.  It is more difficult to ascertain competition in Singapore banking and real estate where powerful incumbents with scale and first-comer advantages are well-positioned to win any competition for a license, tax break or other special treatment from the government.

A Russian oil tanker. Natural resource intensity is a reason for Russia’s top ranking in the index. [Photo: Sergei]

Still, the implication of The Economist’s ranking is that crony capitalism thus defined is “bad”.  From the standard economists’ perspective, at best it is inequitable, in delivering excess returns to billionaires based solely on access to scarce resources and/or favored treatment.  At worst, it is inefficient in terms of misallocating resources, if such access is privileged by political or personal connections, rather than acquired competitively on the basis of business capacity and the most efficient technical criteria (like cost, pricing or carbon footprint).

Mitigating rent-seeking

The ranking also assumes that “rent-seeking” is “bad”, coming at the expense of consumers who pay the rents through higher-than-necessary prices, and of actual or potential competitors who are prevented by entry barriers from profiting by offering lower prices, and thus reducing rents.  While this is certainly economists’ theoretical presumption, empirically much depends on the size of the rents, how they are obtained, and what is done with or about them. 

Thus rents or excess profits can be limited by, for example, an auction that gives rise to a permit, resource concession, tax break or other government favor going to the highest bidder in a competitive process, like an open tender.  They can be taxed and redistributed to fund, say, social investments to increase productive capacity and reduce inequality.  

Rents can also have directly positive consequences, mainly by incentivizing or enabling innovation, as shown by the institution of patents, which offer a temporary period of monopoly rents to investors and innovators to motivate them.  Even here, however, rent-incentivized innovators like America’s Big Tech companies are accused of hampering further innovation by various anti-competitive business practices, pre-emptive acquisitions and “crowding out” new competition. 

It is arguable that rents are unavoidable in a small, resource-constrained, state-interventionist economy like Singapore’s.  But if they are acquired “competitively”, then appropriately taxed, redistributed and reinvested domestically—and not, for example, siphoned off overseas by billionaires desiring to diversify their portfolios—the negative impact of rent-seeking by crony capitalists may be minimized.

This is not done in Singapore, which attracts multinational investments by offering generous tax and other “incentives” (thus maximizing rather than minimizing rents), and has historically opposed social redistribution as an entitlement and at levels found in most other advanced economies.  The ability of footloose multinationals to register globally-developed intellectual property in different domains according to their tax treatment, also makes it difficult to ascertain the extent to which rents afforded by government policy in Singapore actually contribute to local innovation.

Singapore Economic Development Board website promoting Family Offices.

Haven for other countries’ cronies?

From a global perspective, what is probably more important, which The Economist index does not capture, is Singapore’s role in enabling crony capitalism in other countries.  It is a favored intermediary and repository for the crony wealth of foreigners through its ballooning wealth management and family office industry, lured by state-provided privileges like tax breaks, secrecy and expedited permanent residence, even citizenship. The influx and domestication of international billionaires then intensifies resource scarcity, creating more rents and increasing the share of billionaire wealth as a share of GDP, on which Singapore ranks among the top three, with Russia and Switzerland.

Setting the wealth cut-off at a billion US dollars probably understates the extent of cronyism (or government favor) in an economy, which would be much greater if mere multi-millionaires were included.  Two phenomenon which would be particularly salient in Singapore are “golden visas” or investment-for-residency policies, and the “revolving door” between government and private business.  “Golden visas” attract individuals with wealth in the eight and nine as well as ten-figure range; believed to contribute to local inequality and housing unaffordability (high rents), they are falling out of favor in Europe, but not yet in Singapore.

State/business overlaps

The strong presence of government-linked companies (GLCs) in Singapore, especially in “crony sectors”, creates many overlaps between the state and private business, including former or current politicians, civil servants and military officers serving in the senior management or boards of private or privatized companies.

Politically, crony capitalism is anathema to both right-wing market fundamentalists and left-wing market skeptics.  The former consider any government policy that affects the allocation of resources — including industrial policy, affirmative action, and ESG (environmental-social-governance) mandates — to be cronyism because it favors some individuals and businesses at the expense of others.  It can be dismantled only if the offending policies which link business and politics are undone.

The latter, market skeptics, believe “the market” itself is imperfect, so misallocates resources, typically according to extant power relations in society, including “state capture” by vested business interests which may or may not involve outright bribery and corruption.  Their policy preference is the opposite — for more state regulation and oversight of business.

The Economist index is unhelpful to both.  It is at once too broad, in designating entire sectors to be rent-seeking and thus crony-prone, and too narrow, focused only on this one metric. Those interested in crony capitalism, its causes and impacts in society and economy, including in Singapore, must dig deeper.

LINDA LIM, an AcademiaSG editor, is Professor Emerita at the Stephen M. Ross School of Business, University of Michigan.

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