[Editorial] "Expelling marginal firms would benefit the economy"... The government must act quickly

South Korea faces a growing economic drag from "marginal firms" whose operating profits are insufficient to cover interest expenses, according to an analysis by the Bank of Korea. These companies, often described as "zombie firms," are not only struggling to survive but are also actively impeding the operational activities of healthier, normal businesses.

The central bank's report highlights that the proliferation of these financially weak entities can lead to a "zombie-like" contagion, where even sound companies become vulnerable. This situation stifles economic growth by monopolizing crucial financial resources and human capital, while also displacing legitimate businesses from the market. The analysis indicates that a 1% point increase in marginal firms correlates with a 0.14-0.18% point decrease in investment and employment growth for normal firms within the same industry, with effects lasting two to three years.

Compounding the issue, marginal firms disproportionately affect smaller businesses and non-manufacturing sectors. Their precarious financial state also poses a risk to the financial sector, potentially triggering a wider crisis if their bad debts spread to lending institutions. The Bank of Korea suggests that a targeted reduction of 25% in these marginal firms could lead to a 0.2% increase in total factor productivity and a 0.35% increase in added value for the overall economy.

Despite the economic rationale for restructuring, authorities and creditors have often opted for extending loan maturities and deferring repayments for marginal firms, particularly to mitigate impacts on regional economies. This approach has led to a situation where the proportion of marginal firms reached 17.1% by the end of 2024, the highest in 14 years. The editorial argues that delaying these necessary corporate restructurings only intensifies the pain when crises inevitably erupt, causing ripple effects throughout the economy.