21 serious macroeconomic adjustment<sup>(WorldBank1997a).</sup> Following the wide-reaching<sup>and</sup> aggressive privatization program<sup>ofthe Hungarianeconomy,aWorldBankcountrystudy</sup> concluded that, towards the<sup>endof thedecade:(i) mostfirmshave restructuredtheir operations</sup> although those that remained<sup>state-ownedhaverestructuredtheleast; and(ii)foreigndirect</sup> investment has been the key<sup>to the paceandscope of enterpriserestructuringin Hungary (World</sup> Bank 1999b).

Weakly capitalized banks, inadequate<sup>accountingframeworkandindirect ownership links</sup> persisted in Japan, encumbering<sup>thedecentralizedapproach.Forsevenyearsafterthecrisis</sup> began, the authorities relied on<sup>growth to restore the health of the corporateand financial sectors.</sup> The authorities largely pursued<sup>accommodatingfiscal and monetary policies tostimulate growth</sup> hoping that such a strategy<sup>wouldresolvetheproblems inthecorporate andbanikingsectors.</sup> Undercapitalized banks were<sup>allowed tolanguishforquiteanextendedperiod.This strategy</sup> only delayed the much-needed<sup>restructuring.</sup> For most of the crisis period,<sup>theincentive</sup> framework for corporate restructuring<sup>hardly improvedasit scored2.2 at the onset and fiveyears</sup> hence. Only in 1998 the government<sup>beganto takeamoreaggressiveapproachandstartedto</sup> strengthen the framework for<sup>restructuringinearnestwithapublicrecapitalizationprogram.</sup> This was followed by improvements<sup>in the accounting rulesand their enforcement.Nevertheless</sup> the corporate sector continues<sup>tobe weakandnon-performingloansinthe banking sectorare</sup> again on the rise (Goldman Sachs<sup>2002c).</sup> Thailand's overall incentive framework<sup>showedsomeimprovementasthe crisis ensuedas</sup> the score for the overall index<sup>changedfrom1.0 to1.7.While the government wasquick to offer</sup> the injection of public funds<sup>intothe bankingsystem,banks were slowto takethisupasthe</sup> government also allowed them<sup>torecapitalizeona flow basisviaretainedearningsand because</sup> the acceptance of public funds<sup>wouldhave resultedin the dilutionof ownershipandorin a</sup> change in management. The<sup>capital inadequacyof banks is compoundedby impedimentscaused</sup> by accounting rules that trail<sup>behindbestpractice,aweakenforcementof thelegalframework</sup> and continued, although slightly<sup>reducedownershipconcentrationandownership linksbetween</sup> banks and corporates. Progress with<sup>corporaterestructuringhasbeenlimitedand,forthe most</sup> part, banks have been willing to engage<sup>only incosmeticrestructuringof assets that are"easyto</sup> restructure". While the level of corporate<sup>distressimproved significantlyin Thailandcompared</sup> to the onset of the crisis, a large<sup>shareof companiescontinuetohaveweak financialstructures</sup> and more than 24 percent of companies<sup>didnothave enoughcash toservicetheirinterest</sup> (Claessens 2001), in the middle<sup>of 2001,four yearsinto the crisis.</sup>

# **IV. Conclusions**

The scatter plot in Figure 5 indicates<sup>thatthe decentralized restructuringstrategy resulted</sup> in viable financial structures of<sup>thecorporatesectorin thosecountrycaseswheretheincentive</sup> framework was conducive for bank-and<sup>corporaterestructuring,i.e.countriesscoredrelatively</sup> high on the incentive framework<sup>index. Firmsinonlythree countries-Norway,Chile, and</sup> Poland attained viable financial<sup>structures through decentralizedrestructuring.Theexperience</sup> of Chile and Poland also suggests<sup>thatweakincentivesframeworksat theonsetof a crises does</sup> not necessarily need to be a severe<sup>impedimenttoresolving corporatedistressif governments</sup>