Define: Crony

Crony refers to a close associate or friend, especially one who is perceived to receive preferential treatment or benefits due to their personal relationship with someone in a position of authority or power. The term is often used in a pejorative sense to describe individuals who exploit personal connections for personal gain, such as securing lucrative contracts, government appointments, or favorable policies. Cronyism can undermine fairness, meritocracy, and public trust in institutions, as it may lead to nepotism, corruption, and the misallocation of resources. Efforts to combat cronyism include promoting transparency, accountability, and merit-based decision-making processes, as well as implementing rules and regulations to prevent conflicts of interest and undue influence in public and private sectors.

Crony literally means a longtime friend. Crony capitalism refers to a capitalist market structure, where businessmen and ruling government share a close relationship. Laissez-faire is not the sole determinant of the success of a business enterprise in crony capitalism. Businessmen form lobbies to extract favouritism from the ruling party. Favouritism accrues in the form of government grants, tax breaks and various financial incentives. It is argued that political parties and business enterprises form a kind of symbiotic relationship to stay in power via the creation of networks. Both parties reap positive gains from cooperation.

Crony Capitalism, Some Limitations

Suppose one starts with an economic model/system devoid of cronies. For simplicity, the banking industry is assumed to be perfectly competitive. Now project owners borrow loans from banks. Here representative banks, as well as borrowers, are risk-neutral. An equilibrium loan contract will fund only those investment projects, which have positive expected NPV values. Here, representative banks do not bear bankruptcy risks and earn zero profits.

Now let the crony system be introduced in this market framework. Suppose, the ruling government provides a guarantee of a portion of a crony’s loan repayments, in event of a project failure. [A crony project owner is entitled to pecuniary benefits as well as some potential non-pecuniary benefits. Government guarantees provided to cronies are not part of any formal legislative directive]. Banks write ‘crony-specific’ loan contracts for this purpose and its own capital is put at risk for ensuring solvency.[Bank’s normally cannot diversify away risks arising from crony lending]. In this type of market setup financial crisis becomes a simple fallout of a government’s inability to honour concerning guarantees.

Some key observations from this study have been summarized below.

• High loan guarantee rates imply low levels of bank capital. (Banking industry becomes more vulnerable to financial crises)
• Crony systems display a higher aggregate risk level
• Bank solvency and cronyism are inversely related
• Issues like moral hazard (under crony system) can easily destabilize a robust banking industry

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This glossary post was last updated: 29th March 2024.