In macroeconomics, the term “zombie” is used to describe “zombie companies”—firms that continue to operate despite being financially unsound.

These companies are often burdened by large debts and are unable to generate enough profit to meet their obligations.

However, they survive, primarily due to favorable economic conditions such as low-interest rates, easy access to credit, or government intervention.

Zombie companies are an important concept in discussions of economic health, productivity, and the long-term growth prospects of economies. Let’s dive deeper into what this means and how it affects the broader economy.

What Are Zombie Companies?

A zombie company is typically defined as a business that:

• Struggles to cover its interest payments with its operating income, meaning it doesn’t generate enough profit to service its debts.
• Continues to operate despite being financially weak, often thanks to external support like cheap loans, financial bailouts, or restructuring efforts.
• Lacks long-term growth potential, as it is usually stuck in a cycle of relying on credit or government intervention without addressing the root causes of its financial problems.

These companies tend to remain afloat for an extended period, despite their poor financial health, which can cause inefficiencies in the economy.

Why Do Zombie Companies Exist?

Zombie companies often arise due to economic policies and conditions that allow them to stay operational, despite their poor financial standing. Here are some key reasons why they continue to exist:

1. Low-Interest Rates and Easy Access to Credit

When interest rates are very low (as seen in the aftermath of the 2008 financial crisis or during the COVID-19 pandemic), it becomes easier for weak companies to borrow money to cover their debt obligations.

This enables them to avoid bankruptcy and continue operations, despite not being profitable.

2. Government Bailouts

In some cases, governments may intervene directly to save failing firms, either through bailouts, subsidies, or other forms of support.

While this can prevent widespread unemployment or financial panic, it can also allow inefficient companies to survive for longer than they might in a free-market scenario.

3. Weak Economic Growth

When an economy is stagnating or growing very slowly, companies may struggle to grow or innovate. In such environments, zombie firms are more likely to survive by relying on debt rather than generating profits from their business operations.

4. Bank Restructuring

In some cases, banks may choose to restructure loans to troubled firms instead of declaring them bankrupt. This can give the company more time to try and recover, even if they are not fundamentally viable in the long run.

The Impact of Zombie Companies on the Macroeconomy

While it may seem like keeping zombie companies alive might be a good thing (especially in terms of preserving jobs and preventing immediate economic disruption), there are several negative consequences for the broader economy:

1. Resource Misallocation

Zombie companies tie up valuable resources (such as capital and labour) that could otherwise be used more effectively elsewhere in the economy. When capital is misallocated to these non-productive firms, it prevents more innovative or efficient businesses from flourishing.

2. Reduced Productivity Growth

Zombie companies are typically not engaged in innovation or increasing productivity. Since they are often focused on just surviving, they are unlikely to invest in new technologies, workforce training, or expansion. This stagnates productivity growth, which is critical for long-term economic prosperity.

3. Weakening of Financial Systems

If too many companies in the economy are financially weak, it can undermine the stability of the financial system. Banks and financial institutions might struggle to recover bad debts, and in the long term, this can lead to a less resilient financial sector.

4. Hindering New Startups

When zombie firms dominate sectors of the economy, they may crowd out new, innovative companies that could bring fresh ideas and competition. New firms often face difficulties gaining access to credit or market share when established, unproductive companies occupy much of the economic space.

5. Long-Term Economic Stagnation

If the phenomenon of zombie companies persists over long periods, it can contribute to secular stagnation, where economic growth remains low for extended periods, even when interest rates are low. This can reduce the economy’s ability to fully recover from recessions and limit the potential for future growth.

How to Address Zombie Companies in the Economy

Addressing the issue of zombie companies is a challenge for policymakers and economists. Some potential solutions to the zombie problem include:

1. Tighter Credit Conditions

One way to reduce the prevalence of zombie companies is to increase interest rates or tighten lending conditions.

By making borrowing more expensive, it would be harder for financially weak companies to sustain themselves through debt.

However, this comes with risks, as it could slow down the economy or trigger a recession if not managed carefully.

2. Encouraging Market Discipline

Allowing market forces to determine the survival of firms can help eliminate inefficient businesses. In a more competitive market, weak companies that cannot adapt or innovate would be forced to fail, making room for stronger, more productive firms.

3. Supporting Restructuring and Innovation

Instead of letting zombie companies limp along, policymakers could focus on helping these firms undergo restructuring.

This could include incentivizing them to innovate, invest in new technologies, or change their business models to become more competitive and viable in the long term.

4. Promoting Entrepreneurship

Encouraging new businesses and startups can help revitalize sectors of the economy that are weighed down by zombies.

Governments can provide support to startups through favourable policies, funding opportunities, and reducing barriers to entry for new businesses.

Conclusion

Zombie companies represent a significant issue for the broader macroeconomy. While they may survive in the short term, their continued existence can lead to resource misallocation, lower productivity growth, and long-term economic stagnation.

Policymakers must carefully balance the benefits of preventing immediate disruption against the risks of propping up inefficient businesses that are holding back the economy’s growth potential.

By addressing the underlying causes of zombie firms—such as low-interest rates, poor corporate governance, and lack of innovation—economies can work toward creating a more productive and dynamic economic environment.