Tracing the Zombies: Unproductive Capital in Pakistan

Author: Naseem Faraz
Publication Year : 2020

The efficient allocation of capital plays a key role in development by nurturing innovation and increasing industrial productivity. However, the reallocation of capital towards less productive firms at the expense of more productive firms harm the growth of the industries. Recently economists discuss the existence and the rise of the Zombie firms which slowed down the growth in several countries including neighboring India. Zombie firm – a loss-making firm that lost the ability to generate enough profits to cover their interest payments. They survive only by repeatedly refinancing their loans. In the competitive market, Zombies have to either exit or restructure. If Zombies congestion rises, it potentially crowds-out growth opportunities for more productive firms. The term Zombie firms first time had been applied to Japanese firms during the period of the Lost Decade (1991-2000 – the period of economic stagnation in Japan). In that period, Japanese banks were kept injecting new loans to unprofitable firms to keep them alive. The Japanese economy did not begin to recover until this practice of misallocation of capital had ended. Recently literature revisits this connection and shows that misallocation of capital is emerging as a vital explanation of the fall in productivity in several OECD and Asian economies.