Zombie firms and weak productivity: what role for policy?

There is growing recognition that the productivity slowdown experienced over the past two decades is partly rooted in a rise of adjustment frictions that rein in the creative destruction process. One important dimension of this phenomenon is that firms that would typically exit or be forced to restructure in a competitive market – i.e. “zombie” firms – are increasingly lingering in a precarious state to the detriment of aggregate productivity. In this view, reviving productivity growth will partly depend on the policies that effectively facilitate the exit or restructuring of weak firms, while simultaneously coping with any social costs that arise from a heightened churning of firms and jobs.
Findings from this new OECD project suggest that there is a wide scope for improving the design of insolvency regimes as measured by new cross-country indicators. It also shows that the survival of zombies is related to faltering bank health and the persistence of tax bias towards debt. Building on a large volume of cross-country research, the project presents evidence on the potential for reforms in the area of insolvency, banking supervision and taxation to revive aggregate productivity growth by facilitating the restructuring or exit of weak firms. Coupling these reforms with parallel changes in competition and social policies is shown to boost the productivity gains while minimizing the associated social costs.
http://bruegel.org/events/zombie-firm...