Connect with us

Economy

Zombie firms and weak productivity: What role for policy?

Published

on

Weak productivity growth is a major problem afflicting most societies. It curbs growth in incomes and endangers the sustainability of social security systems. An important, but often ignored, source of the productivity slowdown is the increasing prevalence of weakly productive firms and, among them, “zombie firms” – in essence  firms  that would typically exit or be forced to restructure in a competitive market.

 A new OECD study shows that the prevalence of “zombie firms” is closely related to weaknesses in the banking system and insolvency regimes. It argues that reviving productivity growth will partly depend on the policies that restore banking health and 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.

 The prevalence and productive resources sunk in zombie firms – defined as longstanding firms that have persistent problems meeting their interest payments – have risen since the mid-2000s in a number of OECD countries. In Italy, for example, the share of the industry capital stock sunk in zombie firms rose from 7% to 19% between 2007 and 2013. Zombie firms represent a drag on productivity growth as they congest markets and divert credit, investment and skills from flowing to more productive and successful firms and contribute to slowing down the diffusion of best practices and new technologies across our economies.

 New OECD indicators suggest that there is much scope to improve the design of insolvency regimes to accelerate the restructuring or exit of weak firms and thus revive productivity growth. For example, insolvency reforms that reduce barriers to corporate restructuring and the personal cost associated with entrepreneurial failure could translate into a decline in the zombie capital share of at least 9 percentage points in Spain, Italy or Portugal – countries where the zombie capital share stood at 28%, 19% and 16% in 2013, respectively.  Insolvency reforms have taken place in a number of countries, which are likely to partly achieve some of these gains.

 Zombie firms are more likely to be connected to weak banks, suggesting that zombie congestion partly stems from bank forbearance – i.e. the tendency for weak banks to bet on the resurrection of failing firms. This underscores the importance of a more aggressive policy to resolve non-performing loans, accompanied by complementary reforms to insolvency regimes.

Distortions in the banking sector also highlight the importance of market-based financing instruments for productivity growth, with the inherent debt bias in corporate tax systems and the lack of venture capital financing emerging as key barriers to technological diffusion.

Reforms that accelerate corporate restructuring should be coupled with policies to manage the social costs of worker displacement. Job search and retraining programs turn out to be effective in returning workers displaced by firm exit to work, particularly in environments where barriers to firm entry are low as this stimulates job creation.

Continue Reading
Comments

Economy

Afreximbank Meets Ahead of Russia-Africa Summit

Kester Kenn Klomegah

Published

on

The African Export-Import Bank (Afreximbank) plans to hold its 26th annual meeting in Moscow on 18-22 June. A series of closed sessions will be held as part of the event including the meeting of Board of Directors of Afreximbank and a meeting of Shareholders of Afreximbank, as well as the open Russia-Africa Economic Conference.

The African Export-Import Bank, the Roscongress Foundation, the Ministry of Finance of the Russian Federation, and the Russian Export Centre are the key organizers of this event. The Afreximbank Annual Meetings is a high-level event, bringing together political and business leaders from across Africa to discuss the issues of trade, industrialization, export, and financial stability and efficacy.

Key themes planned for the economic conference are: State of Russia-Africa Relations: An Overview; Mining Industry: An Integrated Approach to the Fields Development; Prospects for Multilateralism in an Era of Protectionism; Railways Infrastructure as the Key Element for Development in Africa; South-South Trade: Path for Africa Integration into the Global Economy.

The other topics are Emerging Trends in Sovereign Reserves Management; Reflections on the Transformative Power of South-South Trade; Launch Afreximbank ETC Strategy; Cyber Solutions and Cyber Security for Solving Governmental and Municipals Tasks; Financing South-South Trade in Difficult Global Financing Conditions; The Future of South-South Trade and Infrastructure Financing.

Over 1,500 delegates are expected to attend the economic conference, including shareholders and bank partners, government representatives, members of the business community and media representatives. The conference will be a crucial stage in preparation for the full-scale Russia-Africa political summit and the accompanying economic forum, scheduled for October 2019 in Sochi.

“Russian and African countries are basically on the track of bilateral strategic partnership and alliance based on openness and trust. The fact that the Afreximbank Annual Meeting is to be held in our country gives a positive momentum for the mutually beneficial cooperation of the parties ahead of the full-scale Russia-Africa Political Summit that will take place in Sochi in October, and will add to the inclusive nature of the events,” emphasized Anton Kobyakov, Advisor to the President of Russian Federation.

Following the setup of the Organizing Committee for the Russia – Africa summit and other Russia–Africa events in Russia in 2019, Russian officials have described that this year truly as a year of Africa for Russia.

“We witness the clear growing interests from the both sides to establish the new level of relationships, which means a perfect timing to boost the economic agenda. All economic events planned for this year will become a platform to vocalize these ideas and draw a strong roadmap for the future,” Russian Export Center’s CEO, Andrei Slepnev, argued in an emailed interview with Buziness Africa.

In December 2017, Russian Export Center became a shareholder of Afreximbank. Russian Export Center is a specialized state development institution, created to provide any assistance, both financial and non-financial, for Russian exporters looking for widening their business abroad.

On March 19, the Organizing Committee on Russia-Africa held its first meeting in Moscow. President Vladimir Putin put forward the Russia-Africa initiative at the BRICS summit (Russia, Brazil, India, China, and South Africa) in Johannesburg in July 2018.

Continue Reading

Economy

The silent revolution

Published

on

Jamaica is well known for its beautiful beaches, Bob Marley, and reggae music. But what is less known is that the Caribbean island started a silent revolution after being one of the most indebted developing countries in the world. Jamaica has shown a macroeconomic turnaround that is quite extraordinary.

As Bob Marley said, “It takes a revolution to make a solution”. After decades of high debt and low growth Jamaica has changed its growth trajectory, with positive economic growth for 16 consecutive quarters and growth getting closer to two per cent.

During that period, the Jamaica Stock Exchange went up more than 380 per cent.The credit agency Fitch upgraded the island’s debt to B+ rating with a stable fiscal outlook, and unemployment hit eight per cent in January, the lowest in decades.

The Government had a wake-up call when its debt overhang peaked at almost 150 per cent of GDP in 2013. With the support of the International Monetary Fund, the World Bank and the Inter-American Development Bank, the country embarked on an ambitious reform programme. These efforts have paid off. Jamaica is now one of the few countries that has successfully cut public debt by the equivalent of half its gross domestic product in a short time frame.

The fiscal turnaround and economic transformation were possible because of the strong commitment across political parties over two competing administrations and electoral cycles. The country also critically benefited from a sustained social consensus for change and the strong backing of the private sector.

The country has generated primary fiscal surpluses of at least seven per cent of GDP for the last six years, and remains steadfast in its commitment to fiscal discipline. These fiscal results make Jamaica a top performer internationally.

For this silent revolution to continue and bring greater prosperity to all its people, Jamaica will need to further boost the investment climate, strengthen economic and climate resilience and invest more in its people to build human capital. These are necessary complements to the maintenance of a strong macroeconomic framework and would help boost economic growth and job creation. There are encouraging signs that Jamaica is taking action in these areas.

With regard to the business climate, the National Competitiveness Council has adopted a road map to fast-track reforms to improve the business environment. Jamaica features in the top 20 countries in the world for its comprehensive credit reporting systems and ranks among the best globally in the area of starting a business, according to the World Bank’s 2019 Doing Business report. It only takes two procedures and three days for an entrepreneur to start and formally operate a business.

There have been advancements on public-private partnership investments. For instance, the Norman Manley International Airport public-private partnership was recently completed with advisory support from the International Finance Corporation — the private sector arm of the World Bank Group.

Jamaica is also a front-runner among Caribbean countries in promoting climate and financial resilience in the face of natural disasters. The economic cost of these disasters for the Caribbean is substantial, exceeding US$22 billion between 1950 and 2016, compared with US$58 billion for similar disasters globally. One serious storm or natural disaster could set back the country’s growth prospects and development achievements of recent years. To tackle this, the Government has adopted a Public Financial Management Policy Framework for Natural Disaster Risk Financing to facilitate the availability of dedicated resources for recovery in the face of disaster risks.

In order to further support Jamaica in its efforts to strengthen the economy, build resilience, and support human capital development, the World Bank will expand its financing by US$140 million. This financing package will be for a series of two operations to help Jamaica be better prepared to mitigate the financial impact of natural disasters and build stronger infrastructure, and an additional project to strengthen social protection.

Despite unemployment at a new low, still too many young people are struggling to find a job. For Jamaica to continue to grow and prosper, it also needs to develop the skills for the workforce of tomorrow, especially in the areas of technology and digitalisation. This requires a sharp focus on creating the conditions for youths to strive and succeed in the modern business world and close cooperation with the private sector in this respect.

Today, more than ever before, young Jamaicans can dream of a brighter future where “every little thing is gonna be alright”. This is the generation that must aim higher and can write a new chapter for its country.

As we celebrate the 55th anniversary of the World Bank-Jamaica partnership, we look forward to working together to build on the success of the past few years and promote growth, jobs and resilience for Jamaica.

World Bank

Continue Reading

Economy

With or without sanctions, Iran needs to say goodbye to oil money

Published

on

Except Norway, almost all oil producing countries have made themselves more or less reliant on oil money.

Only oil producing countries with a small population, such as Kuwait and Qatar which is also a great gas exporter, have so been safe from fluctuations in the oil market. But, countries with large population, such as Iran, are prone to volatility in the oil market, let alone the mad sanctions introduced against the country.

There is no doubt that oil money has affected politics, economy, management system, culture, spending and consumption habits and many other issues in oil rich countries.

For example, Iran now has one of the cheapest energy prices in the world. This has led to an extravagant use of energy, especially an excessive use of private car, in the country.

Let’s make an example to clarify that oil money is not the road to progress and a vibrant economy. In the 1970s, Iran was more developed than South Korea, but now South Korea is much more successful than Iran in terms of economy and technology. South Korea does not have oil, but it has provided an opportunity for a competitive economy and capitalized on its talents.

It is true that the war imposed on Iran in the 1980s hindered Iran’s progress and inflicted about 1 trillion dollar in damages on the country, yet officials failed to take serious steps toward creating a competitive economic atmosphere with a focus on research and technology. The oil money has been the main blame for such an economic approach.

According to the successive five-year development plans which end on 2021, Iran had to reduce dependence on oil to a great extent, however, successive administrations, with varying degrees, did not fully act based on the development plan.

Iran is now subject to the toughest ever illegal sanctions by the Trump administration. Just on April 22, the United States ended sanctions waivers on Iran’s exports and announced it wants to zero out Iran’s oil exports by May 1.

Whether the Trump administration succeeds or not to implement its oil threats is an issue that we should wait and see, but it is necessary that Iran take a departure from oil export how much painful it will be.

Sorena Sattari, a graduate of Sharif University of Technology who serves as vice president for scientific affairs, told a meeting in Hamedan on Tuesday that sanctions have provided an opportunity that knowledge-based companies to intensify their efforts. Sattari also said plans have been drawn up to manufacture equipment and machinery that are subject to sanctions. 

Also, whether we like it or not, fossil fuels, especially crude oil, are losing their importance as renewable energy resources are gradually taking the center stage.

Saying goodbye to easily-gained oil revenues is a bitter pill that Iran should swallow. To do so, though very difficult under tough sanctions, officials need to find other sources of income.

They can invest on tourism as Iran is among the top countries in hosting touristic sites, establish an environment for a transparent competitive economy, close loopholes of corruption, involve competent persons in managerial posts, introduce a sound and workable tax system, end unnecessary subsidies, and more importantly prioritize research and development (R&D).

First published in our partner Tehran Times

Continue Reading

Latest

Trending

Copyright © 2019 Modern Diplomacy