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Entrepreneurship or Crony Capitalism?

Are the business activities of Chinese overseas best described as entrepreneurship or crony capitalism? How can one best understand Chinese capitalism and ethnic migrant entrepreneurship in Southeast Asia? What is the boundary between rent-seeking and migrant entrepreneurship? Are Chinese migrant rent-seekers entrepreneurs? Can the collaboration between Chinese migrant entrepreneurs and the Cambodian regime be viewed as an inevitable part of the early stage of economic development in the host society?

Crony capitalism refers to a situation in which success in business depends on close relations between business people and government officials. It may take the form of favoritism in the distribution of legal permits, government grants and special tax breaks, or other forms of state intervention. Yoshihara Kunio argues in his research on ersatz capitalism in Southeast Asia that crony capitalists are “private-sector businessmen who benefit enormously from close relations with leading officials and politicians, obtaining not only protection from foreign competition, but also concessions, licenses, monopoly rights, and government subsidies” (Yoshihara 1988). Rent-seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent by manipulating or exploiting the economic environment rather than by earning profits through economic transactions and the production of added value (Tullock 1967; Krueger 1974; Ross 1996). It generally implies the extraction of uncompensated value from others without making any contribution to productivity, such as by gaining control of land and other natural resources, or by imposing burdensome regulations or government decisions that may affect consumers or businesses. Rent-seeking in the aggregate imposes substantial losses on society (Kang 2003). Rent-seeking behavior is distinguished in theory from profit-seeking behavior, in which entities seek to extract value by engaging in mutually beneficial transactions. Critics point out that, in practice, it can be hard to distinguish between beneficial profit-seeking and detrimental rent-seeking (Pasour 1987). The term “rent-seeking” has been applied to bureaucrats who solicit and extract “bribes” or “rent” for applying legal but discretionary authority to benefit clients (Chowdhury 2006).

It is generally agreed that clean governments are better at fostering growth than those driven by crony capitalism and corruption. In Southeast Asia and East Asia, particularly in Indonesia, Malaysia and South Korea, crony capitalism is too widespread to ignore. Why does it impede growth in some developing countries but not in others? Theoretical advances on rentseeking, transaction costs and the new institutional economics can help explain when cronyism is deleterious and when it is not. Ifthere is a situation of mutual hostages among a small and stable number of government and business actors, for instance, cronyism can reduce transaction costs and minimize dead weight losses through its special links forged and arrangements reached with the government authorities.

By examining corruption and cronyism through the lens of transaction costs, it can be shown why a particular set of government-business relations, although corrupt, reduces transaction costs and makes investment more credible means while another set of relations does not. This approach can explain one aspect of corruption and offers a theoretically grounded causal mechanism that distinguishes between types of corruption. An analytic framework that contrasts a transaction-cost approach with neoclassical models of the economy will show that the former leads to different expectations and different conclusions regarding cronyism and policy-making.

The perspective of new institutional economics is particularly useful for understanding cronyism and Chinese capitalism in most of Southeast Asia, especially Cambodia. While personal relations sometimes enhance efficiency and reduce transaction costs, special links formed with local ruling elites can provide Chinese migrants with protection and opportunities for corporate expansion and investment. In a developing country where legal, political and economic institutions are weak, where information about market conditions is scarce and difficult to obtain, and where investments and property rights are often insecure, Chinese migrant entrepreneurs have to engage in crony capitalism by networking with local regimes to get protection and lower transaction costs. The boundary between rent-seeking and migrant entrepreneurship is blurred in such a context, and the actions of new Chinese migrant entrepreneurs in Cambodia are understandable. It is necessary for them to form rent-seeking connections with powerful ruling elites in the host society, especially in the early stages of economic development.

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