During periods of low productivity and stagnation, banks develop incentives to renew loans at subsidized rates to firms that would otherwise be insolvent. Proliferation of these firms, which we label as Zombies, have ramifications on the economy. Theoretical models predict that industries with a large share of zombies should experience productivity slowdowns in conjunction with lackluster employment and investment trends.
In this paper, we try to document whether this form of capital misallocation prevails between 2007-2014, by analyzing balance sheet data for more than 19,000 non-financial companies from the AMADEUS database. In fact, Italy’s productivity growth has been ailing since the early 2000’s and the volume of non-performing loans increased dramatically after the 2008 financial crisis. Moreover, prevalence of relationship banking and lack of loan loss provisioning in the country created a breeding ground for zombie lending. We identify zombies by comparing the yearly interest rate payments for the companies in our sample with those implied by a weighted average of Italian sovereign yields.
Our main contribution to the literature is to extend the seminal work by Caballero et al. (2008) to Italy, so to quantify the statistical association between zombie lending and several indicators of economic performance. Up to our knowledge, we are the first to carry a similar exercise for an economy different from Japan, whose experience in the 1990’s gave rise to the literature on zombie lending.
The descriptive analysis of our data reveals the increasing trend in the number of zombies in the aftermath of the financial crisis of 2008; this phenomenon appears to be widespread across different sectors of economic activity.
Furthermore, by means of OLS regressions, we show that TFP is lower and more unequally distributed in sectors with a relatively higher fraction of zombie firms, in accordance with theoretical predictions. However, the same exercise hints to a positive partial correlation between employment in healthy firms and zombie-lending, at odds with the theory.
We call for future research to explain this finding, either by enriching the underlying theoretical model so to account for realistic features of labor market or by testing the same hypothesis for other countries.
In October 2015 I went on a cycle-touring holiday with my bici-friki boyfriend. It was loads of fun. And loads of hard work. Every day was a new challenge:
the fancy bike computer that was showing us the route was set on training mode on the first day – it took us 112km to do a 50km stretch on the back roads up the mountains;
I suffered not one, not two, but three unfortunate punctures on the road;
and then there was that storm we tried to ride through.
(I still highly recommend bike touring, and count the holiday as a highlight of the year. And I had an otherwise great year, too.)
We were trying to reach Trieste in Italy to visit our friend Rafael. We had two weeks before we were due to show up for a flight home from nearby Venice. (We were optimistic.) One week in – when it was clear we wouldn’t be able to cycle there in time unless our panniers turned into combustion engines overnight – we decided to bite the bullet and book a few trains that would get us there in time to hang out with Rafael for a few days and fly home.
Remember that storm I told you about? Well, it scuppered all our plans. There we were ready to take our trains in the direction of Italy, and the line was completely down due to storm damage.
There were six days left of our holiday before we needed to be back at work. We waited a day, figuring we could check out the town we found ourselves in (Avignon – beautiful) – it would take 1.5 days to get from Avignon to Trieste by train, so after waiting one day in Avignon and then travelling, we’d still have 3.5 days before needing to get our flight. That was cool with us.
However, the trains weren’t running the next day either. Should we wait another day? Now we’re only looking at 2.5 days in Trieste. Of course we waited. Rafael is an awesome guy and a great friend.
But the following day brought us no luck. If we waited another day, we’d only have 1.5 day between arriving in Trieste and flying back from Venice. Yes, it’s close, but it’s still half a day of travelling to the airport etc.
We were faced with the decision to either:
wait for another day and only perhaps be able to get on the train, and then spend half of our remaining three days of holiday travelling, only to spend one night with Rafael and then turn around and fly home.
Cycle back the way we had come, away from the bad weather, and enjoy four further days on the road.
How much had we paid on the tickets?
Two TGV tickets from Avignon to Nice +
Two fast rail tickets from Nice to Milan +
Two train tickers from Milan to Trieste +
Two flights from Venice to Barcelona, including luggage and bike fees =
Somewhere back there I estimated this to be in the region of €600 total.
We decided to turn our bikes around and cycle back to Barcelona. We could make it to the border in four days and then hop on a train.
That was one expensive decision, right?
No. The concept of sunk costs tells us why not.
This somewhat counter-intuitive lesson reminds us that we can’t change the past – perhaps not such a revolutionary concept when you put it that way. Sunk costs tells us to make decisions about the future, taking into account only prospective costs, and not those already incurred (unless you have a time machine, in which case don’t tell me because I will be mad you didn’t lend it to me when I clearly needed it to tell myself not to buy those tickets.)
We would have paid the money had we been sat on the trains or not. In this moment, we were facing the decision as per points 1 and 2 above, but with no reference at all to the expenditure on the tickets. That was history. Yesterday’s news. Somebody else’s money.
By Iacopo Tonini ’15, current student in the International Trade, Finance and Development program. Follow him on Twitter @iacopotoni
On April 8th Professor Ruben Durante (Sciences Po) visited the Institute of Political Economy and Governance (IPEG) to present his latest research paper, “Attack when the world is not watching? International Media and the Israeli-Palestinian conflict” (coauthored with Ekaterina Zhuravskaya, Paris School of Economics). The title clearly suggests that the article relates to the Israeli-Palestinian conflict, however the research aims at demonstrating a more general result. Indeed, the objective is establishing a causal relationship between unpopular policy choices and news with a “highly relevant” media content.
“I have noticed that my older daughter steals her brother’s toys when we (the parents) are not home”, the Italian professor stated cheerfully while explaining where he had initially gotten the idea for the research. The process seems to make sense. In the case of an influential conflict such as the Israeli-Palestinian one, it could well be the case that the factions involved wait for the world to look away before coordinating and ultimately launching a brutal offensive – or interrupting a ceasefire after a period of peace.
Beyond the intuitive example extrapolated from the professor’s family life, more concrete cases are the following. On the very same day in which the Italian National team qualified for the World Cup final (July 13, 1994), the Berlusconi government passed and approved an emergency decree – recently renamed the “save-the-thieves” decree– that allowed several politicians accused of corruption to avoid imprisonment, and keep working unscathed. Another example is the start of the Russian military operations to invade Georgia. The Russian army received the order to attack during the opening ceremony for the 2008 Beijing Summer Olympics. Finally, during the 2014 FIFA World Cup, while at the stadium Mineirão in Belo Horizonte the German national team was inflicting a historical débâcle to the Seleçao, Israel launched the operation “Protective Edge” against Gaza.
“Governments are accountable to the extent that the public is informed about their actions. Mass media ensure accountability by informing citizens about government actions (Besley and Prat, 2006; Snyder and Stromberg, 2010),” answered the professor to one of the questions asked by a scholar. “Yet, how effectively mass media inform the public depends, among other things, on the presence of other newsworthy events that may crowd out the news coverage of governments’ actions (Eisensee and Stromberg, 2007).” The assumption on which the study is built – and that the Israeli-Palestinian case seems to demonstrate – is that politicians might exploit the presence of other “newsworthy events” to put forward unpopular actions so that they coincide with major events that distract the audience.
However, could this perhaps be the overly-pessimistic vision of the researcher? The data shows otherwise. In particular, Professor Durante shows in his work that when the Israeli-Palestinian conflict is given coverage in the media, there is a 12% increase in the Google searches related to the topic.
Let us focus on the case studied in the paper: the Israeli-Palestinian conflict.
Since the 70s, the Israeli government has put a great effort in projecting a positive image of Israel and its army abroad. This policy is denominated Hasbara, which in Hebrew means “explanation”, and entails the production of informative material on issues regarding Israel and the Middle East. Furthermore, Hasbara includes collaborations between international and local journalists, and social-media usage to influence public opinion. Nothing similar is in place in Palestine.
In his article the Professor writes: “Most likely, in an armed conflict nothing has a worse impact on the international public opinion than civilian casualties.” The factions involved seem to be perfectly aware of the primary role mass media have in informing, and thus influencing, public opinion. Evidence of this is found, for instance, in the words of the Prime Minister Netanyahu who, when interviewed by the CNN about the numerous civilian victims, commented: “[Hamas] wants to pile up as many civilian dead as they can…they use telegenically dead Palestinians for their cause.”
By combining daily data on attacks on both sides of the conflict with data on the content of evening news for top U.S. TV networks, the authors show that: “Israeli attacks are more likely to be carried out when the U.S. news are expected to be dominated by important (non-Israel-related, such as an election or the Super Bowl) events on the following day.” Specifically, the empirical findings indicate that the strategic timing of the Israeli army is less relevant in a period of intense fighting as opposed to attacks in a period of relative peace. Moreover, the attacks are strategically planned only in the case when there is the possibility of civilian casualties. Thus, the facts documented in the paper confirm that the aim of Israel is that of “minimizing negative international publicity” – and in the case of graphic or emotional contents regarding civilian victims, would result in a strong, negative impact on the American public opinion.
In contrast, the researchers find “no evidence that attacks by Palestinian militant groups are timed to U.S. news pressure.” This might be reflecting the marked gap that exists between the two arrays: unlike Israel, Palestine does not have a structured or well-organized army, nor does it have the same level of resources that would allow it to plan such attacks strategically. Nevertheless, it should be noted that this does not exclude the possibility of Palestine’s lack of interest towards shaping American public opinion.
Beyond the interesting findings of the research on the role international media plays in the Israeli-Palestinian conflict, this study also reminds us of the powerful responsibility it holds. In particular, mass media is a watchdog powerful enough to influence the actions of governments by simply carrying out their mission of informing citizens. This becomes even more important when considering the exponential interconnectedness of people throughout the globe via technological progresses.
Besley, Timothy and Andrea Prat, “Handcuffs for the Grabbing Hand? Media Capture and Political Accountability,” American Economic Review, 2006, 96 (3), 720–736.
Eisensee, Thomas and David Stromberg, “News Droughts, News Floods, and U.S. Disaster Relief,” The Quarterly Journal of Economics, 05 2007, 122 (2), 693–728.
Snyder, James M. and David Stromberg, “Press Coverage and Political Accountability,” Journal of Political Economy, 04 2010, 118 (2), 355-408.
Ms. Tschekassin is Research Assistant at Bruegel in Brussels, Belgium. Follow her on Twitter @OlgaTschekassin
Since the beginning of the global financial crisis, social conditions have deteriorated in many European countries. The youth in particular have been affected by soaring unemployment rates that created an outcry for changes in labour market policies for the young in Europe. Following this development, the Council of Europe signed a resolution in 2012 acknowledging the importance of this issue and asking for implementation of youth friendly policies in the Member States. Yet, almost 5.6 million young people were unemployed in 2013 in the European Union (EU) – in nine EU countries the youth unemployment rate more than doubled since the beginning of the crisis.
Today I want to draw your attention to two more indicators reflecting the social situation of the young generation: the percentage of children living in jobless households and the percentage of young people that are neither in employment nor education nor training.
Children in jobless households
The indicator Children in jobless households measures the share of 0-17 year olds as a share of the total population in this age group, who are living in a household where no member is in employment, i.e. all members are either unemployed or inactive (Figure 1).
Source: Eurostat and Bruegel calculations. Country groups: 10 other EU15: Austria, Belgium, Denmark, Finland, France, Germany, Luxembourg, Netherlands, Sweden and United Kingdom; Baltics 3: Latvia, Lithuania, Estonia; 10 other CEE refers to the 10 member states that joined in the last decade, excluding the Baltics: Bulgaria Czech Republic, Croatia, Hungary, Poland, Romania, Slovenia, Slovakia, Cyprus and Malta; Sweden: data for 2007 and 2008 is not available, the indicator is therefore assumed to evolve in line with the other 9 EU15 countries. Such approximation has only a marginal impact on the aggregate of the other EU15 countries, because children in jobless HHs in Sweden represented only 3% of the country group in 2009. Countries in groupings are weighted by population.
In the EU28 countries this share rose only slightly over the past years to 11.2%. It is striking, however, that the ratio of children living in households where no one works more than doubled in the euro-area programme countries (Greece, Ireland, Portugal) as well as in Italy and Spain to 13% and 12%, respectively. And even more shocking – while the share stabilized in the programme countries, in Italy and Spain it is still sharply increasing. In Ireland in 2013 more than one in every six children lived in a household where no one worked. This is indeed an alarming development. Only the Baltics, which experienced a very deep recession among the first countries hit by the crisis, are reporting a sizable turning point in the statistic in 2010 and the share is presently continuing to decline. The numbers are, however, still well above pre-crisis levels.
A high share of children living in jobless households is not only problematic at the moment but can also have negative consequences for the young people’s future since it often means that a child may not only have a precarious income situation in a certain time period, but also that the household cannot make an adequate investment in quality education and training (see a paper on this issue written for the ECOFIN Council by Darvas and Wolff here). Therefore a child’s opportunities to participate in the labour market in the future are likely to be adversely affected. Moreover, as I discussed in a blog earlier this year, children under 18 years are more affected by absolute poverty than any other group in the EU and the generational divide is widening further.
Not in Education, Employment or Training (NEET)
The financial situation of young people between 18 and 24 years old who finished their education is less dependent on their parents income because they usually enter the labour market and generate their own income. Therefore we are going to have a closer look on their work situation, i.e. how many young people have difficulties participating in the labour market.
Source: Eurostat and Bruegel calculations. Country groups as in previous chart
The NEET indicator measures the proportion of young people aged 18-24 years which are not in employment, education or training as a percentage of total population in the respective age group. We can see in Figure 2 that the situation among EU28 countries stabilized over the last four years. The good news is that for the first time since 2007 we see a decline in the rate in the euro-area programme countries in 2013. This decline is, however, mostly driven by Ireland with an unchanged situation in Greece and Portugal. Also, in the Baltics the ratio is on a downward trend. More worrying, however, is the situation in Italy and Spain. Among all EU28 countries, the young generation in Italy with 22.2% of all young people being without any employment, education or training, is disproportionately hit by the deterioration in the labour market. Every fifth young person between 18 and 24 is struggling to escape the exclusion trap. Europe and especially Italy is risking a lost generation more than ever.
Labour market policies for young people should therefore stand very high on the national agendas of Member States. The regulations introduced in summer 2013 into the Italian labour market reform which are setting economic incentives for employers to hire young people build an important step towards more labour market integration of the youth in Europe. Their effects are yet to be observed in the employment statistics in the coming years in Italy. More action on the national and European level is needed to improve the situation of the young.