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Confronting the zombies: policies for productivity revival

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Confronting the zombies: policies for productivity revival

  1. 1. CONFRONTING THE ZOMBIES: POLICIES FOR PRODUCTIVITY REVIVAL Dan Andrews and Giuseppe Nicoletti Structural Policy Analysis Division OECD Economics Department Peterson Institute for International Economics 23 January 2018
  2. 2. Results from the project on: Exit Policies and Productivity Growth Based on research by: Müge Adalet McGowan, Dan Andrews, Valentine Millot, Filippos Petroulakis, Alessandro Saia
  3. 3. MOTIVATION WHY EXIT POLICIES AND PRODUCTIVITY?
  4. 4. A revival of OECD productivity is badly needed Contributions to potential per capita output growth (% pa) Source: OECD EO live December 2017 Pre-crisis: MFP story Post-crisis: K story
  5. 5.  Three stylised facts emerge: – Rising productivity dispersion – Declining efficiency of reallocation – Declining business dynamism (less entry and more zombie firms) Looking beyond averages: diagnosing the disease
  6. 6. Average of multifactor productivity across sectors (log, 2001=0) Looking beyond averages: the laggards’ disease Source: Andrews, D. C. Criscuolo and P. Gal (2016), “The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy”, OECD Productivity Working Papers, No. 5. Frontier Frontier Laggards Laggards
  7. 7. 50 100 150 200 250 300 2007 2008 2009 2010 2011 2012 2013 Share of zombie firms* Index, 2007=100 Euro-8** GB JP US * Firms (≥10 years) with an interest coverage ratio less than 1 for 3 consecutive years. Listed firms only. ** Euro-8 refers to AT, BE, DE, FR, GR, IE, IT, NL. The Walking Dead: zombie firms on the rise This points to policies that affect the exit or restructuring of weak firms. But most data and evidence is about entry!
  8. 8. .. piquing popular interest in the productivity slowdown
  9. 9. Much scope to revive productivity growth by promoting easier exit or restructuring Relevance of insolvency regimes for aggregate productivity: channels and mechanisms Cross-country comparison of effectiveness of insolvency regimes: stigma, barriers to restructuring Complementarity across insolvency, financial and other reforms is large The social costs can be contained via labour market policies The OECD contribution
  10. 10. THE PROBLEM WEAK FIRMS ARE STIFLING PRODUCTIVITY GROWTH
  11. 11. Zombies absorb an increasing share of labour and capital Firms aged ≥10 years and with an interest coverage ratio<1 over three consecutive years Source: Adalet McGowan, M., D. Andrews and V. Millot (2017), “The Walking Dead? Zombie Firms and Productivity Performance in OECD countries”, OECD Economics Department Working Paper No 1372. 0 5 10 15 20 25 2007 2010 2013 2007 2010 2013 2007 2010 2013 2007 2010 2013 2007 2010 2013 2007 2010 2013 2007 2010 2013 2007 2010 2013 2007 2010 2013 BEL ESP FIN FRA GBR ITA KOR SWE SVN Number of firms Employment Capital Stock%
  12. 12. Delaying their exit or restructuring: 1. Drags down average (unweighted) productivity 2. Stifles reallocation: by consuming scarce resources they congest markets, undermining growth opportunities for healthier firms 3. Deters entry of potentially innovative young firms When more capital is sunk in zombie firms: 1. The typical healthy firm invests less (↓ K deepening) 2. Particularly so young and more productive firms (↓ MFP) Why do zombie firms matter for aggregate productivity?
  13. 13. 0.0 1.0 2.0 3.0 4.0 GRC ITA BEL PRT ESP DEU FIN LUX SWE JPN KOR AUT GBR FRA % 0.0 0.4 0.8 1.2 ESP ITA SWE KOR GBR BEL FIN SVN FRA % Zombie firms congest markets and hamper labour productivity… Estimated gains from reducing zombie capital share to minimum level A: Business investment B: Multi-factor productivity
  14. 14. … by crowding-out credit availability to healthy firms Average bank loan availability for healthy firms for each bin of zombie congestion Source: D. Andrews and F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”, OECD Economics Department Working Papers, No. 1433. Healthy firms report greater difficulty accessing credit when they operate in sectors where more capital is sunk in zombie firms
  15. 15. WHAT TO DO? INSOLVENCY REFORM
  16. 16. Insolvency regimes are crucial for firm exit and restructuring since they can bring debtors and creditors to the table to deal with financial distress in an orderly fashion.  Thus, they can affect aggregate growth via reallocation and firm exit but also in terms of the types of firms that enter and the nature of their business strategies. BUT the limitations of existing policy indicators constrain cross-country research on insolvency regimes and growth  A new OECD policy questionnaire yielded harmonised cross-country indicators on the key design features of insolvency regimes that impact the timely initiation and resolution of proceedings Insolvency regimes and productivity: understanding the link
  17. 17. New data: improving the measurement of insolvency regimes
  18. 18. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 GBR RUS FRA JPN USA CHE DNK CHL DEU ESP FIN IRL ISR SVN CRI NZL PRT AUT GRC SVK ITA KOR MEX AUS LVA POL TUR NOR SWE CAN LTU BEL CZE NLD HUN EST Personal costs to failed entrepreneurs Lack of prevention and streamlining Barriers to restructuring 2010 overall Much scope to improve the design of insolvency regimes Composite indicators of insolvency regimes, 2010 and 2016 Increasing in barriers to exit or restructuring Insolvency reform and harmonisation at the EU level would lift potential growth and benefit US firms
  19. 19. Insolvency reform can address three structural sources of productivity weakness: 1. Reduce the capital sunk in zombie firms via: a) Exit of zombie firms b) Rehabilitation of weak firms thus implying lower social costs to job churn than if only exit was envisaged 2. Reallocation of capital to more productive firms 3. Productivity growth of laggard firms via more efficient technology diffusion Insolvency reform can revive productivity growth
  20. 20. 0 2 4 6 8 GBR FIN DEU JPN FRA PRT KOR SWE ESP SVN BEL AUT GRC ITA Impact of reforms since 2010 Insolvency reform can reduce zombie congestion… Estimated gains from reducing barriers to restructuring (BTR) to minimum level Reduction in zombie capital share (ZKS) % In 2013, the ZKS in Greece = 27%. Reforming BTR to best practice could reduce the ZKS by 9%pts, with recent reforms potentially accounting for 5%pts of these gains.
  21. 21. 0 1 2 3 GBR DEU FIN FRA POL PRT ESP SWE AUT BEL HUN ITA % Impact of reforms since 2010 0 1 2 3 4 GBR DEU FIN FRA PRT ESP KOR SWE SVN AUT BEL ITA % … and revive aggregate MFP growth via reallocation and diffusion Estimated gains from reducing barriers to restructuring (BTR) to minimum level A: Gain to productivity-enhancing capital reallocation B: Gain to laggard firm multi-factor productivity growth
  22. 22. WHAT TO DO? FINANCIAL REFORM
  23. 23. Zombie firms survive due to bank forbearance: NPL resolution is key Source: D. Andrews and F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”, OECD Economics Department Working Papers, No. 1433. Average zombie share for each bin of bank health Purged of country-industry-year fixed effects Weak banks increase the survival of zombie of firms and distort capital allocation
  24. 24. 012 GBR PRT FRA AUT DEU GRC ESP SVN EST LTV % Impact of reforms since 2010 … insolvency reform enhances the effectiveness of NPL resolution Source: D. Andrews and F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”, OECD Economics Department Working Papers, No. 1433. If bank health improves*, how much more would the zombie firm share decline if barriers to restructuring were at the minimum level? Improvements in bank health translate into larger reductions in the zombie firm share when insolvency regimes promote restructuring *Shock to bank health = 2 standard deviations Insolvency reform can reduce banks incentives to engage in forbearance
  25. 25. Promoting equity financing can revive productivity diffusion Gain to laggard firm MFP growth from reducing debt-bias to sample minimum Differential effect Debt bias in corporate tax systems %pt difference between effective tax rates on equity finance and debt finance Source: OECD and Adalet McGowan, Andrews and Millot (2017), “Insolvency regimes, technology diffusion and productivity growth: evidence from firms in OECD countries”, OECD Economics Department Working Papers No. 1425. 0 2 4 6 8 10 12 14 BEL POL HUN AUT SWE FIN GBR DEU PRT ITA ESP FRA USA % 0.0 0.5 1.0 1.5 2.0 2.5 3.0 BEL POL HUN AUT SWE FIN GBR DEU PRT ITA ESP FRA USA %
  26. 26. WHAT TO DO? ACTIVATION POLICIES
  27. 27.  Corporate restructuring intensifies job/firm churning: Benefits: ↑ job growth of non-zombies; better matching Costs: ↑ job destruction  political economy barriers to structural reform if left unaddressed.  Workers displaced by firm exit more likely to return to work when: More active measures – retraining, job placement – than passive measures – long-lasting unemployment benefits. Policy promotes residential mobility – i.e. tax wedge and transaction taxes in housing markets are lower. ALMPs more effective when public sector efficiency is higher and barriers to firm entry are lower Coping with creative destruction
  28. 28. 0 1 2 3 4 5 Low Entry Barriers Average Entry Barriers High Entry Barriers Impact of ALMPs on re-employment according to the level of entry barriers % Entry reform enhances the bang-for- the-buck of ALMP spending Impact of increasing ALMPs by 0.25%pts of GDP on re-employment probability of workers displaced by firm exit Source: Andrews and Saia (2016), “Coping with Creative Destruction: Reducing the Costs of Firm Exit”, OECD Economics Department Working Paper, No 1353. ALMPs are more effective when firm entry barriers are low as jobs are more abundant when new firms can enter the market and grow.
  29. 29. CONCLUSION © iStock-466601771
  30. 30. Productivity growth in Europe can be revived by:  Insolvency regime reform to reduce barriers to corporate restructuring and the personal costs of business failure  Restoring bank health and promoting non-bank financing by ↓ debt bias in corporate tax systems  Simultaneously pursue insolvency reforms with initiatives to reduce regulatory entry barriers and NPLs.  benefits for the US economy via multiple channels Since these reforms will amplify job/firm churning, they should be flanked by well-designed ALMPs  Reduce regulatory entry barriers to get better value for money from labour market spending. The corporate restructuring path to higher productivity growth
  31. 31. Technical background papers 1. Adalet McGowan, M. & D. Andrews (2018), “Design of Insolvency Regimes across Countries”, OECD Economics Department Working Papers, forthcoming. 2. Andrews, D. & F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”, OECD Economics Department Working Papers, No. 1433. 3. Adalet McGowan, M., D. Andrews & V. Millot (2017), "Insolvency Regimes, Technology Diffusion and Productivity Growth: Evidence from Firms in OECD Countries", OECD Economics Department Working Papers, No. 1425. 4. Adalet McGowan, M., D. Andrews & V. Millot (2017), “Insolvency regimes, zombie firms and capital reallocation”, OECD Economics Department Working Papers, No. 1399. 5. Adalet McGowan, M., D. Andrews & V. Millot (2017), “The Walking Dead?: Zombie Firms and Productivity Performance in OECD Countries”, OECD Economics Department Working Papers, No. 1372. 6. Andrews, D. & A. Saia (2017), "Coping with creative destruction: Reducing the costs of firm exit", OECD Economics Department Working Papers, No. 1353. 7. Adalet McGowan, M. & D. Andrews (2016), “Insolvency Regimes And Productivity Growth: A Framework For Analysis”, OECD Economics Department Working Papers, No. 1309.
  32. 32. APPENDIX
  33. 33. A1. What are zombie firms and how to identify them? Zombie firms are firms that would typically exit in a competitive market but nonetheless survive. Approach 1: Persistent financial weakness (Bank of Korea)  Old incumbent firms (≥10 years) with interest coverage ratio<1 for 3 consecutive years Approach 2: Firms receiving subsidized bank credit (Caballero et al., 2008)  Actual interest repayments < estimated benchmark R* based on the firm debt structure and market interest rates Our main econometric conclusions are robust to both measures. We focus on Approach 1 for simplicity and to maximise data coverage.
  34. 34. -0.30 -0.25 -0.20 -0.15 -0.10 -0.05 0.00 0 1 2 3 4 5 6 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Share of zombie firms (LHS) Labour productivity relative to non-zombie firms (RHS) % log points A2. The Walking Dead: zombie firms on the rise Firms aged ≥10 years with an interest coverage ratio<1 over 3 consecutive years Unweighted average across selected OECD countries Source: Adalet McGowan, M., D. Andrews and V. Millot (2017), “The Walking Dead? Zombie Firms and Productivity Performance in OECD countries”, OECD Economics Department Working Paper No. 1372. Conclusions are robust to alternate measures of zombie firms (see slide A1)
  35. 35. -1 0 1 High personal cost of entrepreneurial failure Low personal cost of entrepreneurial failure % A3. Insolvency reform raises the productivity gains of entry reform Gain to laggard firm MFP growth from reducing adm. burdens on start-ups Reducing the personal costs of entrepreneurial failure encourages more experimentation and create sufficient space for new entrants to grow Source: Adalet McGowan, Andrews and Millot (2017), “Insolvency regimes, technology diffusion and productivity growth: evidence from firms in OECD countries”, OECD Economics Department Working Papers No. 1425.
  36. 36. A4. Promoting equity financing can revive productivity diffusion Gain to laggard firm annual MFP growth from financial reform Raising VC financing to sample maximum Reducing debt-bias to sample minimum 0 1 2 3 % 0 1 2 3 % Source: Adalet McGowan, Andrews and Millot (2017), “Insolvency regimes, technology diffusion and productivity growth: evidence from firms in OECD countries”, OECD Economics Department Working Papers No. 1425.
  37. 37. October 2017March 2017 Exit Policies and Productivity Growth 2. Are weak firms stifling productivity growth? October 2016 2017 5. Can we improve the design of exit policies? October 2016 March 2017 3. What happens to the workers when firms exit? 4. Can we improve the measurement of exit policies? March 2016 1. How do we think about the exit margin, productivity and policy? Coping with Creative Destruction: Reducing the Costs of Firm Exit Policies and Productivity Growth: a Framework for Analysis New policy indicators of insolvency regimes The Walking Dead?: Zombie Firms and Productivity Performance in Insolvency Regimes, Technology Diffusion and Productivity Growth Insolvency regimes, zombie firms and capital reallocation Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring
  38. 38. Selected media (continued)

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