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Source: The post is based on an article “Zombies of the West” published in The Times of India on 19th July 2022.
Syllabus: GS 3 Issues and Challenges in the growth and development of Indian Economy
Relevance: Productivity; Zombie Economy
News: In late 2020, due to pandemic, people adopted digital technology at an accelerating pace. It was widely seen as an important milestone in terms of productivity, as it led to a surge in productivity across the economy.
Historical Trends of progress and innovation
In the earlier era of capitalism, the innovations generated advances such as electricity and gas engines, which lifted productivity across industries.
In the post-war period. The productivity increased. However, the post-war productivity boom ended in the 1970s.
Since 1970s, the computer age began, which contributed to the revival of productivity. In the 1990s, there was a productivity revival in retail stores. It was driven by checkout scanners and other digital inventions used in retail stores.
However, in terms of the overall trend, there has been a downward trend in productivity for more than 50 years.
Regional Variation in productivity
Advanced Countries: Productivity has declined mostly in all the advanced countries like the US Economy.
Emerging Countries: In emerging countries, productivity rose steadily from below zero in the 1970s to a peak above 5% in the late 2000s. Since 2010, nearly all developed countries have seen productivity drop. But the productivity in emerging countries grew by 3% in the 2010s.
What are the reasons for the downward trend in productivity in advanced economies?
First Perspective: The innovations like internet search fail to register in productivity measurements. Further, there are distractions like digital games and social media.
Second perspective – Big Government: The role of government has been expanding in advanced economies. The developed economies have increasingly socialized economic losses during the crisis period.
(1) Since, the 1970s, major capitalist countries began running budget deficits during the crisis period. Both monetary and fiscal stimulus has increased. For example, the stimulus was more than 7% of GDP in 2001, 12% in 2008, and 45% in 2020 during the respective crisis.
(2) The governments have allowed generous rescues to the companies. As a result, corporate defaults have fallen. For example, In Europe, the default rate fell from around 20% after the 2001 recession to 10% after 2008 and 5% in 2020.
(3) due to the first two, there has been a decline in entrepreneurial dynamism. The number of listed US companies fell by half in recent decades and, new business creation plummeted.
(5) More active government support has undermined creative destruction, which is the lifeblood of capitalism. Therefore, productivity growth fell, as bailouts and stimulus grew significantly.
(6) The US and European countries are facing the problem of a zombie economy. These zombies’ companies did not exist in 2000 but now account for 20% of listed companies in the US, and higher shares in Europe. These companies’ prey upon easy money. These firms suck resources from more dynamic companies and contribute to lower productivity across industries.
What are the explanations for the productivity paradox or high productivity in emerging economies?
(1) Productivity does not require scepticism of new technology.
(2) The role of the state has broadly declined in emerging economies since the 1970s. For example, countries like China and later India pivoted to more market-oriented economic systems.
What should be done?
Now Inflation is back. It may possibly end the era of easy money, which may in turn remove some of the zombie companies. This will induce a new productivity wave.
The governments need to think about their role in the economy and bring reforms like moving away from the culture of big government, a new governing culture of bailouts, market rescues, and constant stimulus.