Chapter 2: Competition and Firm Recovery Post-COVID-19
Policy Implications 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
7. Pop and Amador (2020) provide an overview of the “Dos and Don’ts for State Aid Design.”
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