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Policy Implications
Chapter 2: Competition and Firm Recovery Post-COVID-19
Government policy measures aimed at supporting firms through the economic fall-out of the pandemic have in many cases provided immediate relief to protect firms and workers from the worst effects of the crisis. In times of extraordinary circumstances—such as the COVID-19 pandemic—general policy measures and even some flexibility in allowing exemptions to competition law and policies may be appropriate (Akcigit and others 2021; Pop and Amador, 2020). Such exceptions may include easing restrictions regarding state aid to business that would otherwise go bankrupt. Although such measures weaken competition under normal circumstances, they can be appropriate if temporary to avoid a larger economic fall-out. They should be designed to minimize the disruptive effects they can have on competition.7 Competition authorities can also potentially help mitigate anticompetitive effects of any such measures by providing guidance and closely monitoring the market. As countries emerge from the pandemic, however, it will be important to balance protection with the necessary reallocation among firms and sectors that is usual in the aftermath of major shocks (Blanchard, Philippon, and Pisani-Ferry 2020).
Government policy measures aimed at supporting firms through the economic fall-out of the pandemic have also reignited concerns about propping up so-called “zombie firms”—firms that are unprofitable but remain in operation only because of cheap credit and debt forbearance (ECB 2021). Zombie firms may reduce economy-wide productivity by crowding out resources for new, more productive firms. In the wake of the global financial crisis, low interest rates and weak insolvency frameworks contributed to a significant increase in the share of zombie firms in a number of European countries (Acharya and others 2020). Even before the outbreak of COVID-19, that share was larger than it was before the global financial crisis; government support measures enacted in response to the pandemic may have further increased the share.
As economies enter the economic recovery phase, it will be important for policy makers in all countries to phase out policy support measures and focus on fostering a competitive business environment that is key to a strong recovery, resilience to future crises, and sustainable long-term economic growth. The findings presented in this chapter support the policy priorities outlined in World Bank (2021c) and include the following:
• Better targeting government policy support measures. Many governments implemented broad policy support schemes to promptly address the immediate economic fall-out from the COVID-19 crisis. A cursory analysis of government support measures in the region suggests that there were no large differences in the type of firms that received assistance based on firm characteristics. A more careful analysis, however, suggests that more support appears to have gone to less productive firms. As conditions improve and economies enter the recovery phase, broad, indiscriminate policy support measures should be phased out as soon as ● 77
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appropriate. Although some policy support may continue to be necessary, it will be important to target remaining support better to viable, productive firms, in order to avoid propping up zombie firms and ensure that limited fiscal resources are deployed efficiently, to firms that will contribute to long-term economic growth. The World Bank is working across the region to improve the targeting of government support, and on-going projects in Turkey, Georgia, Romania, and the Kyrgyz Republic are good examples.
• Ensuring that policy support measures do not lock in market structures
with lower competitive pressures. All support measures should be designed in a way that minimizes the risks of distorting market incentives or crowding out market players. Transparency and accountability of government support schemes can mitigate the risks of providing preferential access to support schemes to certain types of firms, including state-owned enterprises (SOEs) or large firms, and creating an unlevel playing field.
Large firms in the region were more likely than smaller firms to receive aid in the form of payment deferrals and fiscal relief. Although there may be good reasons for this, transparency and accountability are key. Governments should also take this opportunity to review the economic rationale of SOEs and consider whether government support to them is the best use of limited resources, especially if these enterprises had structural viability issues even before the crisis. The authorities should also actively monitor all forms of government interventions and propose adjustments to policies that safeguard contestability and competition. Indeed, countries should not only ensure that they avoid locking in market structures with lower competitive pressures, they should also enhance their competition policy in support of the post-pandemic economic recovery phase.
Toward this end, the World Bank has been providing technical assistance on assessing the effect of state aid on market outcomes (Romania), strengthening competition policy design (Moldova and Uzbekistan), and reducing the role of state induced distortions to competition (Kazakhstan).
ening insolvency and resolution frameworks. Strengthening insolvency and resolution frameworks, including legal frameworks for corporate and debt restructuring, and out-of-court conciliatory measures are crucial to ensuring that uncompetitive firms are restructured or exit. As a result of the COVID-19 crisis, many firms will need to restructure their debt; others will have to be promptly resolved to prevent an increase in the number of zombie firms, which can lower economywide productivity by crowding out resources for more productive or new firms. The World
Bank is engaged with authorities on reforms in this area in some countries in the region, including in Bulgaria, Estonia, and Poland.
Countries can improve the competitiveness of their business environment by lowering regulatory costs to business, accelerating digitizing
