Ebook Crony Lending: Thailand before the Financial Crisis
The Asian Crisis of 1997-98 has brought into sharp focus the distinctions between the relationship based economic and financial system prevalent in many emerging economies and the arms length, market-driven system that mainly characterizes the developed economies of Western Europe and North America. One influential view of the crisis (Krugman (1998), Corsetti et al. (1998a), Pomerleano (1998)) goes as far as to suggest that the crisis had it’s origins in the allocation of credit by banks and financial institutions on ‘soft’ terms to friends and relatives often termed cronyism rather than on the basis of ‘hard’ market criteria in the years leading up to the crisis.
While cronyism is anecdotally accepted as an endemic feature of emerging economies, empirical work linking close ties to preferential finance is scant. The goal of this paper is to examine whether cronyism is in fact a good predictor of preferential access to credit using a detailed dataset on Thai firms prior to the crisis period.
We believe our focus on corporate debt in Thailand is especially appropriate for the study of cronyism in lending practices. Thailand was the first casualty of the crisis, experiencing the first wave of serious speculative attacks on it’s currency in July of 1997 followed by a sharp decline in it’s stock market, after which South Korea, Malaysia, Indonesia and the Philippines were affected. Attempts to reconstruct the circumstances leading up to the crisis (such as Corsetti et al. (1998a), Corsetti et al. (1998b), Pomerleano (1998)) argue this was not surprising as Thailand was the country with the shakiest macro-economic fundamentals toward the end of 1996.
Among the manifestations of weakness were large external deficits, increasing short-term foreign indebtedness and the fragile conditions of banks due to an accumulation of bad loans. This last feature is of particular interest in the context of this study because the accumulation of bad loans prior to the crisis has been mainly attributed to moral hazard arising from bail-out guarantees that were implicitly provided by the government to banks. Corsetti et al. (1998b) describe an example which makes this clear and is worth reproducing.
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