Economic Growth, Inequality and Crony Capitalism

Researchers in international development have long argued that the high costs of doing business harms prosperity in developing countries, a claim that invites the question of why governments impose these costs and why societies fail to enact reforms reducing them. This book seeks to answer the question by looking at the case of Brazil, a large and highly unequal economy riddled with state-imposed transaction costs. By delving into the political dynamics underlying a costly business environment, this book provides the reader with novel insights into crony capitalism and inequality. It argues that the root cause of a costly business environment is the collusion between political actors, bureaucrats and business insiders. Politicians and bureaucrats relish their discretion over rules and policies as a power resource, since they can increase or decrease the costs of doing business faced by firms and sectors. Business insiders collude with government agents to access the loopholes that decrease the cost of doing business, thus gaining a competitive edge over outsiders. This gives the insiders weaker preferences for reforms that could decrease the overall cost of doing business. By pursuing their self-interest, these actors create a low-level equilibrium that perpetuates crony capitalism and inequality to the detriment of overall prosperity. The book makes its case with a sophisticated combination of formal modeling, quantitative analyses and in-depth case studies of tax policy and of the pharmaceutical and agricultural sectors in Brazil. Observers have declared the need for reforms that improve the business environment in developing countries for a long time. However, the findings presented in this book suggest they might have underestimated the challenge ahead. Scholars and policy-makers in international development, business politics and political economy will be interested in the innovative perspective of this book.

"That Brazil is notoriously one of the hardest countries in the world to do business is often decried but largely unexplained. Combining a sophisticated theoretical approach with careful case studies of tax policies and the pharmaceutical and agricultural sectors, this innovative work shines a spotlight on the political equilibrium that sustains high transaction costs: politicians enjoy leverage over economic actors, who do not collectively resist because well-connected businesses benefit from a regulatory regime that raises the barriers to entry for new entrepreneurs. This book should be of broad interest to students of the political economy of emerging market economies." ? Frances Hagopian, Harvard University

"Observers in Brazil have long lamented both the excessive regulation by the public sector and the overweening power of big business in the private sector. This deeply researched book finally puts them together, under sustained scrutiny, to show how they are mutually reinforcing. Far from being a fervent advocate of free markets, big business in fact benefits from, and politically supports, the detailed rules and regulations that give big business a leg up and keep potential competitors out. Scholars of market reform and business power, in Brazil and elsewhere, will want to read this innovative and troubling book." ? Ben Ross Schneider, MIT