Zombie firms transmit weaker growth across borders
Zombie firms in emerging Asia depress growth and inflation abroad through global value chains, illustrating how international production links transmit domestic economic weakness.
Zombie firms in emerging Asia reduce growth and inflation in advanced economies through global value chains and intermediate goods import prices. In “Zombie firms in emerging Asia: domestic and cross-border implications,” the researchers find that these effects extend beyond the economies where the firms operate. Disruptions to shipping carry a different combination of effects across borders: “Maritime chokepoints and the global economy: evidence from the Strait of Hormuz” finds that adverse shocks to traffic are systematically followed by lower global output and higher global consumer prices. Together, the findings establish how production and transport links transmit economic disturbances, with different consequences for inflation.
Zombie firms have become significantly more prevalent in emerging Asia, sustained by weak banks’ practice of evergreening loans. The study uses linked firm and bank data from 10 Asian emerging market economies over 2005–2021. Domestically, zombie prevalence depresses firm performance, crowds out healthy firms and lowers GDP growth and inflation. The cross-border effects follow principally from global value chains and the prices of imported intermediate goods. Cross-border bank linkages play no major role in those spillovers. Banks help sustain the firms at home; production and trade connections carry their macroeconomic effects abroad.
Traffic disruptions in the Strait of Hormuz also transmit through the supply side of the global economy. Using historical maritime traffic data, the chokepoints study identifies a recurring combination of weaker output and higher consumer prices after negative traffic shocks. The research characterises those disruptions as a global stagflation-inducing force and finds that they tighten financial conditions. This gives maritime traffic an economic significance beyond the volume of goods passing through a particular route: interruptions are associated with changes in global production, inflation and financing conditions.
International investment positions create another set of connections through which adjustments can spread. “Unraveling the cobweb of global imbalances: drivers, vulnerabilities, and adjustment scenarios” finds that financial factors are the primary drivers of changes in the stock of global imbalances at both short and long horizons. Trade also contributes significantly, especially over longer periods. Across a sample of 28 economies, the researchers document a sharp increase in these imbalances, with deterioration in the US net international investment position mirrored by improvements in most other major economies. Understanding those accumulated positions therefore requires attention to financial factors alongside trade flows.
The global imbalances study’s simulations associate reductions in those imbalances with large international spillovers. Different adjustment mechanisms produce different effects across countries, and the results identify limits to popular proposals for reducing the imbalances. That finding extends the digest’s central concern from disruptions in production and shipping to adjustments in international exposures. The researchers stress the importance of building resilience: countries’ exposure to spillovers depends on both their international connections and the mechanism through which adjustment occurs.