Summary

A necroeconomy, or a “dead economy,” in its essence, is the supply of goods manufactured using outdated technology for which (goods) there is no demand due to their low quality (or absence thereof) and/or high production costs but where demand is artificially generated by the government.  This ugly economic phenomenon was identified for the purposes of the post-Communist economy since the elimination of competition under the conditions of a command economy wiped out the economic interest to upgrade the technological base in many sectors of the economy (generally, with the exception of the military-industrial complex).

Due to the fact that the restriction of competition is a precondition for the creation of a necroeconomy, it can be concluded that the phenomenon of the necroeconomy is present wherever enterprises with technologically obsolete equipment operate solely at the expense of government support.  One example of this can be found in the India of the 1980s.  Thus, it appears that a necroeconomy is not only a symptomatic problem for post-Communist countries (as initially indicated in the publications referenced above), but it can be encountered in other countries where enterprises with outdated technology and no real demand for their products operate with government support and, in select cases, entirely at government expense.

The type of economy that fosters the functioning of firms (i.e., retro-firms) that are relatively technologically backward in comparison to contemporary global achievements but where, nevertheless, the demand for their products still exists is referred to as a retroeconomy (“retro” being Latin for “back”).  We suggest calling the theory of the technological backwardness of an economy retroeconomics.

The main similarity between a necroeconomy and a retroeconomy is that both types of economies make use of outdated technology; the difference is that under necroeconomic conditions, enterprises use equipment so out-of-date that the demand for products they manufacture is virtually nonexistent and, therefore, these enterprises operate solely with government support while in a retroeconomy, the demand for such products does exist and enterprises enjoy only moderate support from the government.  In other words, both types of economies require government intervention but while the former exists exclusively at the expense of the government, the latter requires a government-sanctioned protection of the domestic market from international competition.

It is an unfortunate fact that the preservation of non-viable firms receives active support from various politically and socially influential groups while groups representing the interests of yet unestablished industries or firms do not exist, precisely due to the fact that they (industries, firms) have not yet been established.  Under these circumstances, we believe, the only actor potentially able to lobby for new industries or firms to be created is the government.

Much significance is given to the enforcement of bankruptcy procedures against retro-firms.  There is admittedly no universal bankruptcy legislation and the key principle typical of bankruptcy regimes is the preservation of the balance between the protection of creditors’ interests, on the one hand, and the avoidance of premature liquidation of viable firms, on the other.  In our view, this principle does not fully reflect the challenges facing a modern economy, especially in economically backward poor countries.  In particular, the problem is as described below.

A more-or-less objective assessment of a firm’s viability is complicated as it calls for a comparison between the going concern value and the liquidation value:  if the going concern value exceeds the liquidation value, then the enterprise is viable.  The complexity is primarily associated with the determination of the going concern value which entails an evaluation of the future revenues and expenses of an enterprise for which achieving accuracy is not a simple task.  This requires the development of a business plan and a reorganization plan for the enterprise.  Based on the attitudes of the firm’s proprietors, these plans must be optimistic while the perspective of the creditors in terms of the plans is more critical.  The estimation of liquidation value is relatively easier, although this process also involves the resolution of several complex tasks (estimation of revenues to be derived from the sale of assets).  As a result, the decision-maker on the form of a firm’s bankruptcy, as a rule, leans towards the reorganization, rather than the liquidation, of the enterprise.  If we recall the circumstances mentioned above, where non-viable firms are actively preserved by various politically and socially influential groups, it becomes clear that zombified retro-firms and, in extreme cases, zombified necro-firms retain their place on the market.

Therefore, in our view, in order to evade the zombification of a retroeconomy or to contribute to creative destruction, the core principle of bankruptcy legislation should change and, in lieu of the above (i.e., the preservation of the balance between the protection of creditors’ interests on the one hand, and avoiding the liquidation of viable firms, on the other), a balance must be maintained between the requirement to protect creditors’ interests and the need for a timely liquidation of non-viable firms.  This approach will improve the competitive environment while competition is the sole basis for firms to generate demand for innovation without which the process of creative destruction, as such, is unfeasible.