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Is Zombie Economicus Coming?

Economics / Recession 2008 - 2010 Feb 07, 2009 - 01:37 PM GMT

By: Submissions

Economics Best Financial Markets Analysis ArticleVladimer Papava writes: Under the circumstances of the modern global financial crisis, the problem of economy zombieing has become a very topical one. If in the 1990s the theme of zombieing was basically discussed within the context of the Japanese economy alone, this problem has also extended to the US and European economies today ( Jim Willie CB, 2008. U.S. Economy Disintegrating as Government Supports Zombie Banks. The Market Oracle , December 04 ; Jim Willie CB, 2009. Gold, Zombie Banking System, Lightning, Earthquakes and Hurricanes. The Market Oracle , January 20).


The question of economy zombieng is directly associated with the financial crisis. Specifically, companies become increasingly exposed to the threat of insolvency, as a result of financial difficulties, which eventually leads to the growth of unemployment. Obviously, such a situation makes governments feel politically uncomfortable and so they tend to provide financial assistance to such companies so that they could survive and avoid lay-offs. The Japanese experience suggests that governments must come up with some banking sector bailout plans in such a situation in order to enable banks to continue extending loans to insolvent companies. Further obviously, the continuation of lending programmes without such bailouts would lead to the bankruptcy of banks themselves.

This is exactly how dead companies and banks come back to life. In other words, it is the creation of zombie companies and zombie banks which, in their turn, make up a whole system of a zombie economy.

As far as the Japanese economy is concerned, the paradox herein is that zombie companies and banks tend to continue to exist even after the financial crisis ends. In other words, they continue living even though their existence is no longer necessary. This paradox is explained by the Nelson and Winter economic changes evolution theory ( Nelson Richard R., and Sidney G. Winter, 1982. An Evolutionary Theory of Economic Change. Cam­bridge , The Belknap Press of Harvard University Press ).

The key “tool” of this theory is a concept of “routines” which implies a complex of all those rules and methods of company behaviour which regulate the reproduction of the company's activities.

When a crisis continues to exist for a more-or-less long period of time, insolvent companies tend to adopt such rules and methods of behaviour which are basically aimed at obtaining some government bailout plans rather than providing for the growth of a company's competitive potential. As a result, such companies continue functioning in the same way as they did under the financial crisis.

The similar situations are observed in those banks which continue extending loans to zombie companies. The feeling that a government's support is in any case guaranteed promotes the forming of the same routine in such banks as well.

Due to zombie banks, a zombie company support routine develops in a government as well which comes at the expense of taxpayers who continue extending financial support to dead companies and banks.

It is this zombie routine which becomes the modus vivendi of a zombie economy; that is, an entire system of zombie companies, zombie banks and a zombie government.

The question which arises herein is this: who is the carrier of the zombie economy routine?

If we bear in mind that a zombie economy is a dead economy which can only survive by sucking the blood from taxpayers, it bares logical conclusion that the carrier of a zombie economy is a dead—not alive—being which maintains its existence artificially which is, in fact, precisely what a zombie is.

We can call this revived “dead man” of a zombie economy an Economic Zombie or Zombie Economicus . He is a main carrier of zombie economy routine and an implementing agent of a zombie economy.

A Zombie Economicus has no motivation to raise profits. His only goal is to survive and maintain his existence. He does not have to worry that his product may not be acceptable to the market and that consumers may not need his company's goods or services despite what their quality and costs might be.

A Zombie Economicus working in a zombie firm knows that he has a permanent credit line in a zombie bank where other Zombie Economicus like him work and that this zombie counterpart will give him credits without any hesitation.

A Zombie Economicus working in a zombie bank, in turn, knows that the other zombies working in the government will assure his deposits and that financial support from the national budget will be unconditionally guaranteed.

It is a well-known fact how damaging this zombie economy is to the healthy part of economy: firstly, economically viable companies have little, if any, access to the markets which are dominated by zombie companies with the latter enjoying an enormous advantage over their healthy competitors because they do not have to think about the ways in which to generate profits. Secondly, zombie companies cause the diminution of lending resources and, thereby, prevent healthy firms from reaching even those sectors of the economy in which zombie firms have little or no control.

This is exactly why the zombie virus of a Zombie Economicus may also be easily transferred to those people who work in healthy firms and healthy banks. The so-called zombieing of these healthy individuals and institutions makes it easier to operate in the economy dominated by Zombie Economicus .

The global financial crisis which, unfortunately, is not confined to the borders of any distinct nation, threatens different countries of the world with becoming infected by the zombie virus.

Much to the taxpayers' disadvantage, the anti-crisis plans of the governments of the US , the countries of the EU and Russia to a greater or lesser degree are oriented towards extending financial aid to insolvent banks and companies. As a rule, such financial aid is sought exactly by those banks and companies which paved the way for the emergence and deepening of this financial crisis.

Today, the world is exposed to the danger that the Zombie Economicus , whose domain was limited to Japan up until recently, may expand the area of his influence to the leading economies of the world. This danger threatens to become a serious obstacle for the development of the global economy.

Are there any defenses from the Zombie Economicus ?

One does not have to reinvent the bicycle. Simply, what needs to be done is that dead firms and dead banks must be legally recognised as being dead. This goal may be achieved by enacting an effective bankruptcy law. This is the only remedy against Zombie Economicus . First, it will reduce the area of influence of the Zombie Economicus and, eventually, will kill it.

The enactment of the effective bankruptcy law depends upon the existence of the political will of the leaders of the governments. If it appears that they do not have such a will, then they will expose themselves to a zombie virus and, thereby, place a big question mark over the future and the economic development of their own countries.

by Vladimer Papava

Dr. Vladimer Papava is a Senior Fellow at the Georgian Foindation for Strategic and International Studies (GFSIS), a Senior Associate Fellow of the Central Asia-Caucasus Institute & Silk Road Studies Program Joint Center, Johns Hopkins University-SAIS, and author of Necroeconomics , a study of post-Communism economic problems.

© 2009 Copyright Vladimer Papava - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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