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Tuesday, June 18, 2024

The “Zombies” of the Korean Economy

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The persistent epidemic of “zombie” companies leaves economists worried about the future of the South Korean economy.

A zombie company is a business that, while pulling in revenue, does not generate enough profit to service its debts and can only pay off the interest on those debts. These corporations, which would normally go under or restructure, only manage to stay alive by relying on bailouts or cheap loans from banks, prolonging their current, unprofitable state.

Such firms end up dragging down other, more viable businesses and slowing overall economic growth; all of the capital provided to zombie companies through those loans is money that could have gone to newer but far more productive enterprises.

Furthermore, because of their high debt load, zombie companies are at risk of collapsing quickly if the economy experiences a downturn.

Over 3,000 zombie companies, including 9% of the top 500 Korean businesses, operated in Korea last year, employing roughly 100,000 people; in other words, they comprise a major and unstable portion of the Korean economy.

Many of these companies are subsidiaries of chaebols, the massive, family-owned conglomerates like LG or Hyundai that dominate the Korean economy. During his campaign, Korean president Moon Jae-in pledged to rein in the chaebol, which critics say hold undue political sway in the country.

By T. Kim