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.