Avoiding a Lost Decade

Should someone of more superstitious bent read something deeper in the fact that this year’s annual IMF and World Bank get-together is taking place in Japan? The land of the “lost decade”, near permanent zero interest rates and perpetual low or stagnating growth? Is this the future for Europe and North America?


It may well be. Let’s carry on the theme from a fortnight ago, in defense of the free market. For those of you who thought that only the UK Liberal Democratic party believe that the key to kick-starting economic growth is to set up a public sector bank, think again — quite a lot of the noises coming out of the IMF meeting have been along similar lines. The IMF no less! It’s as if the author of a self-help book started advocating state help as the way forward for individual success and happiness.

There is a reason that banks with the highest levels of non-performing loans are generally state-owned banks. That in itself should tell us all we need to know, but there is a knock-on effect here that is even worse for an economy, and that is the sustaining of “zombie” companies that do not generate value but which are kept on life support for many years. This life support is often in the form of rolling over of bank debt, and is a misallocation of resources with profound consequences of the kind we have observed in Japan. The lending decision-making process at state-owned banks is at risk of being influenced by non-economic factors, which feeds through into higher bad debt levels compared to private sector banks.

The existence of large numbers of zombie companies is not a specter we are currently observing on either side of the Atlantic, but could well result in time if public sector banks start to get in on the act. They are not the solution.

Far better to tackle the labor market (and if I had a pound for every time I mentioned that in this column, I’d be pretty rich by now!). In a speech at the Conservative party conference in England this week, U.K. Chancellor George Osborne presented a plan aimed at easing red tape for companies hiring and firing staff. In principle it made sense, but the idea is to reduce bureaucracy, not replace one bit of it with another. Handing staff a share of equity in their company in return for giving up certain employment rights creates its own bureaucracy (anyone tried valuing a non-listed company recently? The answers give you a range so wide, one could drive a bus through them) and a small and medium-sized enterprise (SME)could do without that.

But the principle is the right one: to avoid a lost decade we need to make it easier for companies to hire and fire staff, as well as incentivize them to create jobs in the first place. The solution is in the labor market, not a new public sector bank. Reducing unemployment is the key to everything here, without that every other government economic policy is just so much ballast.


The author is Professor Moorad Choudhry, Treasurer, Corporate Banking Division, Royal Bank of Scotland. The views expressed in this article are an expression of the author’s personal views only and do not necessarily reflect the views or policies of The Royal Bank of Scotland Group plc, its subsidiaries or affiliated companies, or its Board of Directors. RBS does not guarantee the accuracy of the data included in this article and accepts no responsibility for any consequence of their use. This article does not constitute an offer or a solicitation of an offer with respect to any particular investment.