This paper draws on evidence collected from nine systemic financial crisis episodes wherein the corporate sector played a key role according to the above four criteria (Table 1). Hungary and Poland are different from the others in that their crises marked the inevitable end of their legacies of central planning, as opposed to excessive leverage and a sudden and unexpected financial crisis. Thus, they are not included in the discussion of the buildup to crisis. However, comparison of their macro economic adjustment to crisis with that of the other countries seems useful, and they offer important lessons regarding restructuring policies. This group of episodes is not meant to be comprehensive and excludes especially problematic cases involving a large number of adverse and concurrent factors that render analysis less illumining (e.g., Romania and Russia in the early 1990s), and does not encompass small countries. Rather, these nine episodes seem to be particularly important, and data and documentation on them are more readily available. The dating of the rise and decline of corporate crisis dynamics in this paper is centered on the trough month of industrial production during the crisis because this seems to be the most sensible and widely available measure of the impact of the corporate sector on the economy at large.
Important Corporate Sector Dynamics
of seasonally adjusted industrial production during the crisis episode.
The evolution of linkages and policy challenges that arise during the course of a crisis episode lead naturally to their division into three phases:
1. During the vulnerability phase the susceptibility of the economy to a sudden cutoff of credit is intensified by interventionist government policies and poor governance that compel heavy corporate borrowing from domestic banks.
2. The contraction phase is triggered by an abrupt stop in capital inflows combined with a sudden downward shift in expectations, and followed by an historically severe recession, which is either the direct result of, or is amplified by, the links between overleveraged corporate sector balance sheets and aggregate economic activity.
3. During the recovery phase the economy rebounds and the government takes on a larger role in the economy with the aim of bringing about the restructuring of the corporate sector.
The linkages and policies that arise in each of the above three phases are examined in Sections II, III and IV, and Section V concludes.
II. VULNERABILITY PHASE
Vulnerability to the emergence of corporate sector crisis dynamics is rooted in interventionist government policies aimed at accelerating development and growth. These policies concentrate corporate lending in selected creditors and borrowers. While these policies may be successful at the outset, they ultimately result in excessively leveraged corporate balance sheets and undiversified creditor portfolios vulnerable to shocks. The buildup of vulnerability and crisis prevention policies are considered here in turn.
A. Vulnerability Buildup
Interventionist government policies set the stage for the buildup of vulnerability. To promote growth, especially at early stages of development, governments often direct credit toward and allow a high degree of concentration in favored sectors. These policies can be enacted overtly, for example, by ordering banks to dispense loans to particular sectors, or indirectly through incentives such as tax breaks and subsidies (Borensztein and Lee, 1999). Such policies can enhance growth during early stages of development, but "exiting" from these policies in a manner that does not foster vulnerability seems to be especially difficult, as shown by the experience of East Asia (World Bank, 1999 and Pyo, 1999).