Korea's currency crisis in the late 90s was attributed partly to the government's failure to deal with nonviable companies. It seems timely then that the Korea Development Institute (KDI) has preemptively warned against the upsurge in marginal firms, especially in the aftermath of the 2008 global financial crisis.
According to a report released by the state-funded economic think tank, the number of insolvent companies has risen sharply in recent years, causing a negative impact on the economy as a whole. The delayed restructuring of these so-called "zombie companies'' has hampered normal enterprises too.
Specifically, zombie firms accounted for 15.6 percent of total companies last year in terms of assets, up from 13 percent in 2010. The presence of such nonviable firms, which only manage to survive due to rollover loans from banks or interest cuts, is most conspicuous in the nation's shipbuilding and construction industries. In terms of the number of companies, the percentage of marginal firms rose from 12.1 percent in 2010 to 12.7 percent in 2013.
The sharp rise in zombie firms might be the natural result of reluctance among banks to weed out potentially nonviable entities, even if many of them have reached their limitations both in terms of growth and profitability. The big question is that the presence of such marginal firms is affecting the employment and investments of normal companies negatively because zombie firms that should have been kicked out earlier snap up resources.
The KDI answers that query in its report, forecasting that normal companies could have 110,000 new hires if the proportion of zombie firms fell from last year's 15.6 percent to 5.6 percent. This raises the urgent need for restructuring, centering on shipbuilding, construction and other industries that are in trouble.
It is worrisome that Korea could be following in the footsteps of its neighbor Japan. In the early 1990s following its property bubble burst, Japanese lenders came forward to rescue insolvent companies at the expense of viable firms, which resulted in Japan grappling with entrenched deflation and a prolonged slump.
KDI's message is clear: Korea will fall into recession like Japan if it ignores imminent restructuring and keeps zombie companies afloat artificially. In such a scenario, even normal companies could be in danger.
This warning sounds even more serious, given that the incumbent administration has been focusing more on stimulus rather than retooling since its inception. This may be unavoidable, considering the magnitude of our current economic doom and gloom.
What's needed is to combine structural reform with stimulus. Restructuring is painful because it causes more people to lose jobs temporarily. But letting nonviable firms go and supporting viable ones will result in creating more jobs in the long run.
According to a report released by the state-funded economic think tank, the number of insolvent companies has risen sharply in recent years, causing a negative impact on the economy as a whole. The delayed restructuring of these so-called "zombie companies'' has hampered normal enterprises too.
Specifically, zombie firms accounted for 15.6 percent of total companies last year in terms of assets, up from 13 percent in 2010. The presence of such nonviable firms, which only manage to survive due to rollover loans from banks or interest cuts, is most conspicuous in the nation's shipbuilding and construction industries. In terms of the number of companies, the percentage of marginal firms rose from 12.1 percent in 2010 to 12.7 percent in 2013.
The sharp rise in zombie firms might be the natural result of reluctance among banks to weed out potentially nonviable entities, even if many of them have reached their limitations both in terms of growth and profitability. The big question is that the presence of such marginal firms is affecting the employment and investments of normal companies negatively because zombie firms that should have been kicked out earlier snap up resources.
The KDI answers that query in its report, forecasting that normal companies could have 110,000 new hires if the proportion of zombie firms fell from last year's 15.6 percent to 5.6 percent. This raises the urgent need for restructuring, centering on shipbuilding, construction and other industries that are in trouble.
It is worrisome that Korea could be following in the footsteps of its neighbor Japan. In the early 1990s following its property bubble burst, Japanese lenders came forward to rescue insolvent companies at the expense of viable firms, which resulted in Japan grappling with entrenched deflation and a prolonged slump.
KDI's message is clear: Korea will fall into recession like Japan if it ignores imminent restructuring and keeps zombie companies afloat artificially. In such a scenario, even normal companies could be in danger.
This warning sounds even more serious, given that the incumbent administration has been focusing more on stimulus rather than retooling since its inception. This may be unavoidable, considering the magnitude of our current economic doom and gloom.
What's needed is to combine structural reform with stimulus. Restructuring is painful because it causes more people to lose jobs temporarily. But letting nonviable firms go and supporting viable ones will result in creating more jobs in the long run.
![[INTERVIEW] Can art become stable investment source?](https://img.koreatimes.co.kr/upload/thumbnailV2/d9b4b117e5b74f4c931de724ebd2ee68.jpg/dims/resize/178/optimize)
![[INTERVIEW] Choi Min-sik, Lee Dong-hwi on creating Korean-style noir with 'Big Bet'](https://img.koreatimes.co.kr/upload/thumbnailV2/8b795a8f6b42492db4e8fdc47e9abd8d.jpg/dims/resize/178/optimize)
