FOR YEARS economists have argued about whether governments and central banks in the rich world have mistakenly prolonged the lives of "zombie firms". The corporate landscape, it is said, has turned from one filled with red-blooded creatures of creative destruction to a grey zone of the living dead, incapable of innovation or dynamism. Now the debate has new importance. The pandemic could lead governments to prolong the life of many undeserving firms. Keeping the growth of the undead in check will be vital to the long-term economic recovery. Marginally profitable firms were central to Japan's "lost decade" in the 1990s, when banks, unwilling to recognise losses, kept credit flowing to otherwise insolvent borrowers. Zombie-infested industries suffered from inert labour markets and lower productivity growth. Since then, the rich world as a whole has begun to look more zombified (see Finance section). In advanced economies the share of listed firms with low market capitalisations given their book value, and whose profits are insufficient to cover their interest payments, grew from around 4% in the mid-1980s to 15% in 2017, according to the Bank for International Settlements. The OECD reckons Italian and Spanish productivity levels would be over 1% higher were it not for the growth of zombie firms, which are alleged to have crowded out would-be rivals.
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