Image for Zombie Firms

Zombie. Origin Voodoo culture, West Indies,  Noun: the body of a dead person given the semblance of life, but mute and will-less, by a supernatural force, usually for some evil purpose.

After Japan’s property bubble burst in 1990, the financial landscape was populated by what became known as zombie banks – they had economic net worth less than zero but continued to operate because of government support. 

Zombies, it turned out, could breed.

For the decade after the bubble burst Japanese growth stalled as banks, in turn, kept companies on life support so as to conceal the true extent of the bad loans on their books.

The financial health of zombie companies, as they became known, was so poor they were unable to innovate, take risks, invest, or to undertake any of the activities on which a growing economy relies. 

Japan became the sick man of Asia.

At the time, the advice offered by many disinterested observers was to allow the banks and companies to be taken over by new owners.

Existing shareholders would take a bath but the underlying assets would, fairly quickly, be re-employed in productive uses, allowing growth to resume.
Perhaps more importantly politicians, whose lax oversight caused problems in the first place, would feel also feel the pain at the ballot box.  So they chose to prop up the zombies.

In retrospect it was a bad idea to take the easier political road with a long recession the causes of which were obscured by the passage of time.
Tasmanian politicians face the same choice now.

For almost a decade, structural change in the Tasmanian forest industry has been retarded by the presumption of explicit or implicit government support to maintain the status quo – long term pulpwood agreements from Forestry Tasmania, large scale plantation establishment for pulpwood, and so on. 

What started out as the icing on the cake ended up as the whole cake. 

The problem is, to follow the lead of others with mixed metaphors, the horse isn’t doing much work while munching away at most of the hay in the barn.

Maybe Gunns is a zombie firm – I don’t know, but governments should step back and let the market decide. 

Our political leaders should ask themselves – ‘Would it be so bad if explicit and implicit support for Gunns were withdrawn?’ 

If the underlying assets were used more productively by better managers, innovation in the forest industry, sorely needed, might at last get under way.

Some have argued that not only Gunns shareholders and incumbent politicians would lose, but Tasmania’s reputation as a place to invest would suffer.

Not so, in my view.

Keeping zombie firms alive is voodoo economics. 


Graeme Wells teaches and publishes in a variety of areas in macroeconomics and economic policy. He has also held teaching and research positions at ANU and universities in Wellington, Oslo, Santa Barbara and Guelph. In addition to his academic work, Dr Wells has been a consultant to a variety of policy-making agencies such as the Reserve Bank of New Zealand, The New Zealand Treasury, The Australian Treasury and EPAC. For a number of years was Co Editor of the journal ‘Agenda’, which provides a forum for debate on current policy issues in Australia and New Zealand.