the emerging clan capitalism in the world

In the present article a number of critical economics situations are discussed based on clan capitalism as starting point. One can see clearly then, that instead of assuming 'ordinary economy’ and clan/crony capitalism is an exception in particular nation because of certain socio-historical context, one should begin with the opposite assumption instead: that can capitalism can be found almost everywhere in this planet.

Introduction
Many economists think that economy of any particular nation is something more or less like building a house: in that sense if all people work to maximize their utility (cf. Adam Smith) then eventually the house will be built properly, especially if market mechanism is allowed to function properly without too much government intervention. But nowhere in this world, this simple perceived assumption works. Mostly, either excessive market liberalization advocated by laissez-faire and neoliberalism proponents gives worst result (crises) or government intervention is too heavy, and then there is no incentive for enterprises to innovate and create new products and services.
Based on a number of previous study, (cf. Yoshihara Kunio and Mancur Olson), then we submit another approach, that is: instead of assuming 'ordinary economy’ and clan/crony capitalism is an exception in particular nation because of certain socio-historical context, one should begin with the opposite assumption instead: that can capitalism can be found almost everywhere in this planet (not only in Russia, latin America, or Japan), and if in a few nations there are normal/ordinary economy where all group of functions work well, that is only an exception. West Europe apparently perform quite good compared to other regions in the world in this respect, but one should be aware because as globalization takes full effect in the coming years, then just like a virus can spread all over the world, similarly clan capitalism can be transported and transformed on board to other countries. Excessive financial liberalization and integration can introduce further vehicle which can be used by those clan groups to take advantages.

Kunio [12] have conducted studies on south east asia, while Mancur Olson based his study on Russia economy in 80-90s. But then we know that similar situation can be extended to either USA or Japan economy,[1][6] i.e. that clan capitalism or ersatz capitalism can be found in all national economies both in developing countries and developed countries alike. The old phrase that 'money is the root of all evil' can be extended to become 'the root of all evil is money, power and clan.' To put emphasis on this framework, we should say that there is no such thing as a perfect building or house, because each house imposes particular defect or imperfection, just like in Corbusier's imperfection architectural style in the past. The question then is to start with such defects as norm, and then work based on that situation.
We hope that this article can be considered as starting point for imperfect economy study (not only asymmetric information), based on starting hypothesis that there is no such thing as 'normal economy.' All economy is influenced by a number of clan groups and also numerous sub-groups which join to those clans’ back wagon, and those create an ersatz-infected economy.
Quoted from a recent article: "This echoes some other crony capitalism contexts - Russia comes to mind - but differs from others, such as many cases in Latin America, and is unusual in a country with as much recent political stability as America."[1] That is what is supposed to happen in US.

What does happen in russia?
There are a number of viewpoint arguments have been pointed out to explain problems in Russia economy, i.e. neoliberalism, neo-keynesian, and clan capitalism argument. Of course, the neoliberalism proponents would argue that liberalism advises have never been put into practice, as quoted from an article: "In short, the neo-liberals explain the collapse of the Russian economy in terms of the perverse incentives provided by the policies and practices of the Russian government: failure, corruption and criminality is rewarded, while legitimate business activity is penalized. The collapse of production and investment is the result of the absence of the ‘order and good government’ that is the necessary foundation of liberal capitalism."[2] And the neo-keynesian proponent will argue that excessive liberalization and privatization has been put into effect in the past decade without sufficient preparation and transition, which then make the situation even worse.
The third argument, that is clan or crony capitalism would say that clan groups already take advantage of the transition process and that is to include sabotaging numerous amount of fund from external sources for their own clan groups. And the end of the transition process is that the economy takes the form of strengthened and consolidated clan capitalism, where excessive power is obtained by a few number of clan groups only, while leaving the rest of the public remain in suffering condition. A short description is given as follows:
"Under crony capitalism selected economic elites receive preferential treatment and privileges, thus making support from the state rather than market forces a crucial factor for maintaining and accruing wealth."[3]
Then one need to define what is clan capitalism. A useful term is suggested by Kosals[4], that is clan capitalism, which possibility to become worsening further and become oligarch capitalism [4, p.8]. The purpose of clan is as described as follows:
"First of all, such clan isn’t a group of relatives but it is business entity with for profit activity...The general strategic purpose of the clan is to accumulate the resources and to expand its power and influence in the field of operation. Every clan intends to reach a stable position and to control external environment, to create favor external socioeconomic and political conditions. Many clans desire to become a monopoly to protect internal operation." [4, p.11]

According to Kosals, elements of the clan include [4]:
a. chieftain: that is charismatic leader which control all operations of the clan;
b. the core: key persons which are closest collaborators of the chieftain.
c. skilled professionals: that is specialists who are hired with high salary.
d. ordinary members: those are specialists and manual workers employed in business entities.
e. agents of influence: people outside it but serving it because of their unique positions in the media, law enforcement agencies etc.
Quoted from Kosals: "the most powerful clans are in industries dealing with extraction, processing and export of natural resources (oil, gas, metals); FSB; financing; military; law enforcement agencies; defense industries." [4, p.20] Other quote: "The biggest clans at every level headed by so called oligarchs. There are around one - two hundreds of oligarchs at every level, therefore, obviously, near one thousand oligarchs are operating in Russia totally" [4, 23]
The situation apparently do not happen only in Russia, but also in Latin America. Quoted from Kosals: "Cronyism is one of the specific features of clan capitalism. It was examined in detail within analysis of the specific model of capitalism developing in Latin America crony capitalism." [4, 27]
That is why, one need to take a look further on the impact of clan capitalism and its respective negative impact to overall economy of a given country. One should begin that clan capitalism which is inevitably infectious but already epidemic in numerous states, either in the form of shadow economy, crony capitalism, ersatz capitalism, clan capitalism, or even oligarch economy. One can even hypothesize that actually clan capitalism is more than exception as often assumed; it is market economy governed by small business entities which is an exception. There is no such thing as free market economy, as all economies are cronies-infected.
Clan capitalism is a chronic disease, but the fact is that all economies suffer from more or less the same chronic disease. See Appendix I for a response to a questionnaire.

Japan economy, boryokudan, and botaiho
While it has been neglected in standard economics textbooks, clandestine groups such as yakuza can affect up to 40% of Japan economy problems. Quote: "The emergence of Jusen companies, which had strong links with Japanese mafia, otherwise known as Yakuza, proved to be one of the major hurdles in the Japanese banking reforms. The Jusen problem exposed the nexus between banks, Ministry of Finance and yakuza. ...Later, it was also revealed that some officials in the Ministry of Finance had strong links with yakuza." [5, p.3]
While one can think otherwise that such a yakuza(boryokudan)-related issues are diminishing, it has been concluded that: "The yakuza plays an important role in the Japanese financial system even today, thanks to the involvement of banks in the real-estate sector during the bubble period. These problems continued to haunt the Japanese banking sector and some believe that it was more of a socio-cultural problem than purely an economic one..." [5, p.5]
Unlike in Russia Federation, where clans are mostly organized around their chieftains, yakuza organizations are apparently more stable, with three big syndicates, i.e. yamaguchi-gumi, inagawa-kai, and sumiyoshi-kai [6, p.1]. Quite related to the problems emerge which are caused by such clandestine organizations including yakuza, there are concerns raised recently pertaining to possibility of Japan economy to experience similar crisis compared to what happen in Greece in the beginning and the first quarter of 2010. However, there is significant difference here, that is that Greece economy problem is not yakuza or clan related, while one great obstacle to reform Japan industrial sectors and also financial sectors alike were their relationship with yakuza and other clandestine groups, which have been tolerated since Showa era.[6]
Then with regards to question whether one should do or not do economics reformation, one can also refer to another recent suggestion by Posen (2009) that "but if you take a broader historical perspective, that essentially hesitation to finally fix the banks is what kept Japan from doing the right thing, in a sense, throughout the 1990s."

Lesson to learn: how to take proper measure on clan capitalism
And with regards to spectrum of choices available to policy makers, one first shall bear in mind that the clan capitalism are already there for quite some time, and that includes possibly a number of politician, and senate member, and other party alike, including a number of high-profile elites known as ‘oligarch’, which mean that it would take more than one sweep to clean up all the mess. Therefore, apparently there are only a limited number of possible approaches in order to take proper measure on those clan capitalists, such as:

a. anti-clan regulation: in Japan there was passage of anti-yakuza regulation which restrict their actions (botaiho), while at the same time give time for them to 'evolve' to put their feet on other kind of transactions.[6] In other countries too, such an anti-clan regulation can be put into effect, not only anti-drugdealing or anti-humantrafficking. In the case of Japan, the situation after passage of botaiho indicate decreasing attractiveness of joining clan group: "young males are ceasing to find gang membership an attractive career choice." [6,p.11]

b. very strict measures: just as what China do to all alleged problematic politicians or governors. But if too many clan-related politicians are involved in law enforcement agencies, and then perhaps this method may not be practically viable. See Figure 1 for illustration.

c. clean up the government offices first: this can be effective if one can estimate how many number of politician in government body and also in regional offices which are involved or participate in the predominating clans, then removing all of those clan-related officers can be a good choice. However, such a policy may not be viable in other countries, perhaps Russia, where state-clan relationship are quite neat and where it is not so easy to imagine that government officers can function without those chieftains entity. Military involvement in a number of clan-groups can make matters more difficult.

d. breaking the chains: one possible countermeasure of the clan's improper involvement in policy making is to identify the clandestine people which are not exactly part of the clans, but they play the role of intermediaries among clandestine groups and government officials. For instance, if one think that there are a few huge clans which can affect US national economy and those are oil-industrial-military complex clans, then perhaps one should track down to D. Rockefeller and zbigniew brzezinski if one wish to break their chains. For other example of oil-military industry clan group, see Carlyle group as discussed in Goodman & Goodman[11]. One can think that it is not unlikely that those clan groups can affect also news media and academic institutions (see diagram 2).

e. network analysis: one of recent tool to analyze gang's network is using network analysis. This method has been advanced by a number of theoretician, but in principle the same method can be used to find out how a clan is related to media, government officer, scientist, economist, public media, and perhaps policy influencer. Stop to think that economists including neoliberalist proponents are only doing their job as scientist. Of course, some economists are doing their job well for the wellness of a nation, but others are only profit maximizer, hence one good solution is to minimize their role as good policy-maker as a counter-measure to the clan groups’ influence to their advantage.

f. autopoeisis[8] and virus analogy: Autopoiesis can be defined broadly as ability and mechanism of bacteria and other life cell to retain its life: “The main feature of autopoiesis is the self-maintenance due to a process of self-generation from within. Although this concept came from the analysis of a living cell, it can be metaphorically applied to social systems.”[8, p.9] One can think that bacteria rely on and make interaction with their environment in order to get what they need and to give supporting conditioning. Similarly, a mafia or clan groups take much from their environment and people surrounding them in order they can continue their excessive spending. For example, it has been estimated that Japan economy suffer from yakuza clan groups because some 40% of transaction or project involve them. If then we assume a moderate estimate of 3% to 5% of 'security protection' then the amount siphoned for their clans amount to 40% x 3% = 1.2%. Similarly, in Russia economy, especially in metallurgy and oil producing and other natural resources industries, there are significant role played by clans and oligarchs, which at a time can influence russia economy and private business up to 70-80% around 90s.[10] Some of them ask that fee with label such as security protection, but you know that sometimes such extra security fee takes place because there are competition among clans themselves (that is, a client should hire a clan for protection against violence threat exercised by another clan). Therefore, in order to suppress and reduce actions of those clan groups, one need to understand better how the autopoiesis mechanism are used by bacteria to survive and grow in their environment, and then how to minimize their activities. One possible approach is to introduce obstacle in order those bacteria and virus will not escalate and move beyond their present environment. And after that, reduce and minimize their effect within that obstacle/barrier.
Other problem is that a number of those clan groups are already moving abroad, that is they become so large group and then they decide to go global. Such a globalization of clan groups can be thought of as parallel with virus which becomes epidemic.[8] There is no such easy measure to counter this tendency, for instance considering the increasing transactions related to human trafficking, drug dealing etc., which sometimes those large clan groups got support from other clandestine groups, that is secret agencies. Some of those secret agencies may need large support to continue their programs abroad, and they think that drug dealing etc. can be their vehicle for finding those support.[11]

g. counter-incentive measures: another difficult part for breaking the chains among the state and clan groups is to provide a proper scheme for young people in order they can stay away from clan groups. For instance, during a conversation with a Russia young man sometime ago, this writer were told that it is often a compulsory for an average high-school graduate young boy whose parents are not rich to be military officer, at least to serve there for a number of years, while other high-school graduate young boy who has rich parents is not required to be military officer. Then after a while, that average young boy would find himself to get lack of option to get normal wealthy. Perhaps this reasoning can explain why for some young boys/girls the only choice is to support or join a clan group in one or other way (for example, to become drug dealer), especially if he/she got lack training in other skills. That is why: being a part of clan groups (be it yakuza, or drug dealer, or other clandestine groups in asia) is an 'incentive' for those average young people because that path offers a short-cut to become wealthy in short time. One can perhaps reason that a proper counter-incentive scheme to reduce such a tendency to join clan group, is by offering support, perhaps by some kind of business start-up support to at least 10-20% of the brightest of those average young high-school graduates in order they can begin their own start-ups. Therefore, giving good incentives to new start-ups by young people is not only good practice for economics reason (creating new entrepreneurs), but perhaps it is also a good counter-measure toward joining clan groups which can devastate a nation's economy in the long-run.
Along with an effective anti-clan regulation such as botaiho in Japan, then implementing such a counter-incentive can be an effective approach.

Is there advantage for excessive liberalization?
One should realize that going to excessive liberalization (region 6) is unlikely to bring a healthier economy, especially when there are influential clan and oligarch groups, because they are likely to form better situation for their own advantage, and that is why there is strong tendency to prevent other private enterprises to grow and to be mature. At the end the result will be more or less like oligopoly situation in almost all industries, which real effect is likely to turn the entire economy to be less competitive, and domestic effect can be as far as scarcity of products and bad distribution because those clan and oligarch groups enjoy monopoly or oligopoly systems where there is lack of competitors.
Furthermore, from history one can learn a good principle, that is: excessive liberalization is often a precursor of financial crises. The example can be given here, that is knickbocker trust collapse in 1907 was a signal of a crises. And you should know that in that period, there are numerous trust which work as investment units but they are not banks, and there were lack of regulation for them. Similarly there are investment units which lack of regulation in 2007-2008 which then lead to financial turmoil. Another problem in excessive liberalization is that there will be numerous noise traders which often create noises (fluctuation in prices) for their own advantages. We discuss this issue in the following lines.
Krugman have published a recent book on depression economics, the title of his recent
book is: the return of depression economics[13]. A good chapter is devoted to history of America recession since 1907, exactly when knickerbocker trust collapse completely after failure to support numerous stock market trader, and they do not support anymore because of rush in their office that indicate that people lose their confidence in their scheme of investment (see page 156). And then you can compare that story of collapsing knickerbocker pseudobanking organization with Krugman’s explanation of logic behind America recession in 2008, exactly because a number of investment company do similar risky investment including in secondary mortgage, stock market and also foreign exchange market (page 190), and they are not properly regulated just like knickerbocker trust in 1907, and that is indicating one hundred year cycle of crisis (1907-2007). And you should know that there are numerous pseudo-banking company in America who accept investment from their client (--exactly similar to what they call as ‘trust’ around one hundred year ago, see again page 156 of that book--), but they do not provide security nor they provide insurance if something happen to their client’s investment, and don’t you know that America always are reluctant to regulate those pseudo-banking system.
That is a good article to ponder if you are really really really really really a good economist without a cruel cruel cruel cruel cruel heart, that is because you will find that volatility is often caused by foreign exchange trader, which you can call as ‘noise trader.’ Don’t you know that noise trader is everywhere, but there is no regulation at all especially to foreign exchange trader, as explained by Krugman in page 190:

‘there were some calls for long-term restrictions on international capital flows, not just temporary controls in times of crisis. For the most part of these calls were rejected in favor of a strategy of building up large foreign exchange reserve that were supposed to stave off future crises. Now it seems that this strategy didn’t work.’ [13] p.190

And that is why: you should not believe to noise trader, and you should not lend your
money to them too, because there is high likelihood that your investment money to them will disappear with probability chance more than 75%, just as what happen with ltcm.
Don’t you know that noise trader is well defined by J.a. Frankel,[14] and noise traders can and are willing to create needless volatility and thereby force more risk-averse investors to stay away from marketplace. And that is the meaning of noise trader: they often create a number of gossip story in order a number of investment company collapse and then there will be huge market volatility.


Concluding remarks
One perhaps would think that a good idea to comprehend real situation behind economy of a given nation is to study the relation and interaction among the actors of such a clan capitalism. That is, to begin with network analysis instead of doing cumbersome mathematical analysis which mostly are based on unrealistic assumptions such as information symmetry, efficient market hypothesis, or the social utility of market exchange, or value of liberalization and privatization process.
Based on Amartya Sen’s hypothesis, then one can hypothesize that (i) there is always tendency for clan groups to influence democracy system including news/media as the fourth pillar of democracy, in order to alter the course of distribution of resources for their advantage.
Apparently, more study on the extent and role of such clan capitalism in a nation's economy and also their role in globalized economy can be expected in the coming years.

28 july 2010
url: http://www.sciprint.org


Endnotes:
[1] j. maggs (2009), “crony capitalism in america?” url: http://veron.typepad.com/files/nationaljournal_090413.pdf
[2] S. Clarke, “globalization and the development of capitalism in russia,” p.6, url: http://www.nodo50.org/cubasigloXXI/congreso/clarke_10abr03.pdf
[3] g. sharafutdinova (2007), “crony capitalism and democracy: paradoxes of electoral competition in Russia regions,” working papers #335, p.6, http://kellogg.nd.edu/publications/workingpapers/WPS/335.pdf
[4] l. kosals (2006), “interim outcome of the Russian transition: clan capitalism,” KIER, discussion paper no.610, url: http://src-h.slav.hokudai.ac.jp/pdf_seminar/060124kosals.pdf
[5] ICFAI business school, “banking crisis in Japan,” p.4, url: http://129.3.20.41/eps/get/papers/0411/0411001.pdf
[6] P. Hill (2003), "heisei yakuza: burst bubble and botaiho," SSJJ vol 6 no.1. url : http://ssjj.oxfordjournals.org/cgi/reprint/6/1/1.pdf
[7] L. LaRouche (2009), Executive Intelligence Report, April 2009, vol 36 no.15, url: http://www.larouchepub.com/eiw/public/2009/2009_10-19/2009_10-19/2009-15/pdf/48-54_3615.pdf
[8] P.L. Luisi (2003) “autopoiesis, a review and a reappraisal,” Naturwissenchaften 90, 49-59, http://www.lapetus.uchile.cl/lapetus/archivos/1208975754Autopoiesis,areviewandareappraisal.pdf. For autopoiesis analogy to economics situation, see for example bob Jessop.
[9] contrary to popular belief, andrei shleifer can be considered as close associate of russian clan (chubais). quote: "In a narrow sense Harvard mafia is the team of experts who disastrously advised the Russian government on capitalism in the 1990s. Engaged by the U.S. to show the Russians how the West controls corruption, the advisers became models of what to avoid...January 2006 article claims to show that "economics professor andrei shleifer, in the mid-1990s, led a Harvard advisory program in Russia that collapsed in disgrace." The article drew considerable criticism among shleifer's colleagues, collaborators, close friends, and students." source: http://www.softpanorama.org/Skeptics/Pseudoscience/harvard_mafia.shtml
[10] M.I. Goldman (1996), "Why is the mafia so dominant in russia?" challenge vol. 39, quote: " Izvestiia on January 26, 1994, reported that the russian mafia now controls 70 to 80 percent of all private business and banking." source: http://www.questia.com/googleScholar.qst;jsessionid=MRFB1GBB72KzLBNGptqvTsGcTwmC7sw5L4dYTYND6cGJTTn28fTG!1798068544!162038653?docId=5000319091
[11] A. Goodman & D. Goodman (2004), The exception to the rulers: exposing oily politicians, war profiteers and the media that love them. Hyperion Books. See in particular chapter 1 and 2. url: http://democracynow.org/book/
[12] Y. Kunio (1988), The rise of ersatz capitalism. For an example of the role of clandestine group in business operation, see a quote from his earlier article on this issue: “Yap Ah Loy's mines in Kuala Lumpur employed several thousand people. His business may qualify as the first Chinese capitalistic institution in the region, but the reason he was able to organize such a large scale operation is that he was the head of a secret society who resorted to violence for the protection and expansion of his business,” Y. Kunio, “The rise of ersatz capitalism,” source url: http://repository.kulib.kyoto-u.ac.jp/dspace/bitstream/2433/56297/1/KJ00000131384.pdf
[13] P. Krugman (2009) the return of depression economics, w.w. norton and company, inc., new York. See p.156

[14] j.a. Frankel ( ), ‘International capital mobility and exchange rate volatility,’ URL:
http://www.bos.frb.org/economic/conf/conf32/conf32f.pdf
[15] N.L. Khrushcheva (2006), “money and wealth in russia: politics and perception.” international affairs working paper 2006.(p.58) source: url: http://www.gpia.info/files/u1/wp/2006-06.pdf
[16] V. Burgmann (2002), the cancer stage of capitalism and the politics of resistance. url: http://arts.anu.edu.au/sss/apsa/Papers/burgmann.pdf


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