Workers in a cotton processing facility in Burkina Faso
After a year of dramatically altered consumption, disrupted business operations, and corporate distress around the world, policy makers may need to take dramatic steps to shore up the private and financial sectors. In its recent report Reviving and Restructuring the Corporate Sector Post-Covid: Designing Public Policy Interventions, the G30, an international body of leading financiers and academics, examines potential governmental responses and provides a practical guide to inform policy makers’ future decisions amid the pandemic’s mounting human, social, and economic costs.
Several key findings emerge from this report regarding the shortcomings of initial economic and financial public policy responses to the pandemic. First, the G30 noted a trend in the inadequate targeting of public financial support. This was understandable given the need to act quickly, but if continued, this oversight can lead to inefficient allocation of resources and the propping up of “zombie firms” which can starve healthy firms of much needed capital in the post-crisis environment.
At this stage, governments should allow existing stakeholders to take appropriate losses, to speed up recovery of viable businesses and make the market exit of unviable firms quick and efficient. To ensure that post-pandemic economies emerge fitter and more resilient, policy makers must carefully tailor their support to the unique situations of different firms and sectors, with particular attention to micro, small, and medium-sized enterprises (“MSMEs”). MSMEs are among the largest commercial users of insolvency systems and are the hardest hit by many of the pandemic’s most pernicious financial effects.
The report also highlighted the need for policy makers to pivot from facilitating access to credit for businesses toward a focus on better corporate restructuring. An overemphasis on credit provision by governments can drive unsustainable levels of public spending and may encourage businesses to become overindebted —putting future growth prospects in peril. To combat this, the G30 recommends that governments implement or strengthen existing corporate restructuring mechanisms to enable viable companies to continue operating as going concerns, service their debts, restore their solvency in the post-pandemic economy, and mitigate a “cliff edge” of insolvencies before it is too late.
These recommendations align significantly with the World Bank Principles for Effective Insolvency and Creditor and Debtor Regimes. Optimally designed domestic insolvency systems complement recovery mechanisms and help resolve many of the challenges that firms and individuals will face in the post-pandemic context by increasing the availability of credit, improving creditor returns, preserving jobs through reorganization and business rescue, and providing incentives for entrepreneurship. It is important that policy makers avoid taking a one-size-fits-all approach to insolvency reform and develop specialized insolvency regimes for MSMEs, as underscored in the World Bank’s soon-to-be launched MSME principles. Governments should seize this opportunity to adapt their economic policy responses to new business realities and fashion complimentary insolvency-related measures to ensure the success of their post-pandemic recovery efforts.
Policy makers are in a tough position, with only limited information of what lies ahead and no option to double back. The programs and policies that governments implement in the coming months must reflect this immediate uncertainty. They must also account for the multiplicity of pandemic-initiated structural economic changes while contributing to goals for long-term economic growth, improved living standards for all, and the health of the corporate sector as a whole. Governments can—and should—lean on the private sector for its expertise and input when designing their recovery strategies. No stakeholder group, policy intervention, or legislative reform should be left unconsidered by policy makers as they continue to shape and adapt their pandemic responses. New challenges call for fresh perspectives and revised responses.
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