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The value of political connections in turbulent times: evidence from the US

From VoxEU by Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak, Todd Mitton:

When assessing the political situation in many countries, it is common practice, and entirely reasonable, to consider who has what kind of personal connection to people in, or contending for, power.

  • Alliances in the ongoing struggle in Ukraine are partly determined by who has deep connections to President Viktor Yanukovych and his family (Shynkarenko 2014, Motyl 2012).
  • Assessing oil revenue management in Equatorial Guinea or the potential for full-blown civil war in South Sudan – both in the news recently – requires thinking about who has long been aligned with leading public figures, including family, friends, and established allies (Blum 2004, Ajak 2014).
  • The latest accusations of illegal behaviour by international banks are focused on whether UBS and JP Morgan Chase hired the children of prominent Chinese officials, specifically in order to make the kind of connection that can curry favour, or win business (Davies and Hall 2014).

In a seminal 2001 paper, Ray Fisman mapped out the connections of various Indonesian companies to then-President Suharto, and showed that the market value of these companies varied – relative to the value of otherwise similar companies – as rumours spread about Suharto’s health. When Mr Suharto’s life was considered to be in danger from a heart condition, there was a fall in the value of companies run by people with whom he had a long-standing relationship – presumably because these firms stood to lose a degree of access to power that was considered valuable. This kind of approach has become a powerful tool for understanding political realities, as well as the relationships between private firms and public officials. It also guides thinking about some macroeconomic situations, including financial crises.

For example, in his 2000 lecture to the American Economic Association, then-Treasury Secretary Larry Summers argued one element in “the loss of confidence in the financial system and episodes of bank panics” was political distortions and interferences in the way interventions [in insolvent financial institutions] were carried out (as when an Indonesian bank owned by a son of President Soeharto [sic] was closed one day to be reopened the next, under a different name in the same premises).

Connections matter in the US as well

Until recently, however, there was a general presumption in US policy circles that such connections mattered more in countries with weak rule of law, and not so much in richer parts of the world – like the US. And the pejorative term ‘crony capitalism’ was often used to describe the relationship between business people and politicians in countries without effective constraints on what elites can get away with.

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