Sympathy for the Zombies

Artigos de Opinião 3 weeks ago

Zombie firms weigh on economic performance because they are less productive and their presence lowers investment in and employment of more productive firms.

Zombie firms are among us at least since the 1990s. Before COVID-19 pandemic situation, they account around 15% of Portuguese companies 12. For years this ugly and increasing situation has been masked by easy money and deficit spending. Nowadays, given the fertile ground for a quick zombification of the economy, this type of firms may become the new normal 3.

This kind of firms weigh on economic performance because they are less productive and their presence lowers investment in and employment of more productive firms. So, they would typically exit in a competitive market. However, when they are being wastefully aided by public support, they become a structural barrier for productivity growth, since they make use of valuable social resources (human, material & financial). They difficult social innovation and technological progress, contribute for misallocation of capital, reduction of profits for more efficient firms, and lower employment dynamics.

Fearing coronavirus global economic impact, the Portuguese socialist government mimicked the approach of other countries developing the Zombieland with lavishing subsidies and all kind of support and interventions. Since most firms were already on the verge of bankruptcy, this approach is like satisfying thirst by drinking poison instead of facing the devil of economic fallout that is achieving the economy.

Banks are in the forefront of this crazy operation, which also includes the government’s micro-management and regulation 4. Government is acting indirectly, pushing the banks to adopt non-market-oriented rationales for selecting present and prospective borrowers – to provide low interest loans (and future “nonperforming loans’”) to firms with poor operations, particularly, the ones with special relations with government. For banks, the government’s presence it is the implicit necessary guarantee, which represents absolutely a mismatch with competitiveness requirements. Alea iacta est.

In other front, government applies micro-management for the sake of its own interest, namely, to avoid a massive jobs loss, covering inneficient and poorly managed state-(partly)owned firms, e.g., TAP, that survive solely by relying on government support. Etiam atque etiam.

Another front is the regulation. Several studies reveal that governments induce the formation of zombie firms when they subsidize firms with resource support, financial support, and tax reductions. Such easy money reduces the motivation to improve operational performance, undermining the firm and weakening its viability. Zombie firms are specialized in taking advantage of all spectrum of public incentives, but also for their poor (or even null) capacity to pay taxes, because of their low profitability. Moreover, these firms benefit of information asymmetry, providing often false information to obtain subsidies and engage in rent-seeking, rather than investing major resources to improve operational efficiency. Caesari quod est Caesaris.

So, what does the future hold for the economy in these circumstances of an excessive desire to intervene in the economy? As firms’ losses increase, as it will occur given the negative economic forecasts, the government will continue to provide assistance – to avoid losing the face (and the votes) – but, no doubts, without (healthy) revenue, it will become rigid as the firms they are supporting and this will open an inevitable political crisis.

The solution, to alleviate or possibly postpone a quick zombification of the economy, could be to target healthy firms and start-ups, which in general have high product quality, high technological innovation, entrepreneurship, and high quality of internal control. Banks also have an important role to play – if they avoid the temptation of turning losses into loans, as occurred with Japanese Banks during the “1990s lost decade”, when they provide credit to severely impaired borrowers in order to avoid the realization of losses on their own balance sheets. It has been common practice roll over loans to non-viable firms because there is an incentive to cover bad debt, i.e., if banks stop lending to firms already zombie (or even in bankruptcy), it’s very likely that previous loans will not be recovered.

As in the Rolling Stones’ Sympathy for The Devil, where “Lucifer narrates all the misfortunes of human history in which he was the protagonist, and asks for “understanding”, otherwise he will damn the souls of those who don’t respect him”, there is a need to look the Devil in the eyes and kick the zombies out of the economy.


1. Zombies are firms characterized by persistent unprofitability, i.e., with an interest coverage ratio less than one for 3 consecutive years; usually older firms, i.e., over 10 years old; and often with pessimistic market perceptions, i.e., lacking of viability – with a Tobin’s q bellow the median firm of the sector in a given year.

2. Ana F. Gouveia e Christian Osterhold, Fear the walking dead: zombie firms, spillovers and exit barriers, Working Papers 2018, Banco de Portugal.

3. Zombification involves poisoning an individual with neurotoxin (tetrodotoxine) from a puffer fish. For economists, the corporate version of the living dead is simply a business that is kept alive by financing instead of by making money.

4. The macro-control, i.e., macro-economic policies – monetary, fiscal & exchange rate, is out of countries’ control, at least individually.


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