Crises not guaranteed to engender higher productivity

The world is going through an economic crisis. Companies are having difficulty finding buyers for their products. Their profitability declines and many decide to let off staff and keep wages relatively low.
 
Yet some firms weather a crisis better than others. This may be due to differences in productivity. Companies that can produce a large quantity of output using a small amount of resources are called productive. They are typically profitable and tend to be financially sound. Such healthy firms are usually better able to withstand shocks than less productive peers. One would expect less healthy firms to be harder hit during a crisis and companies that started out in good health to hold out better.
 
Because crises are supposed to hit less productive companies harder, many economists believe that a crisis can increase a country's average productivity. Viewed in that light, a crisis may have its benefits: it may lay the foundation for economic recovery.
 
But do the facts confirm this? A recent study by DNB investigates this question by looking at one of the deepest crises of the past fifty years: that which hit Japan in the late 1990s. The Japanese economy has stagnated since the early 1990s, but experienced a deep trough in 1998–2002. This trough coincided with problems at its banks.
 
One would expect that some firms were hit harder than others during 1998–2002, and also that firms that were less healthy at the outset would incur the heaviest blows in terms of profitability and employment.
 
The DNB study shows that differences in growth rates of Japanese firms increased during the downturn of 1998–2002. This applies in particular to growth in profit and employment, but also sales. The finding that growth differences among Japanese companies increased suggests that some firms did indeed shrink considerably faster than others.
 
But were weaker companies indeed hardest hit by the crisis? In seeking an answer to this question, the study denotes a company as unhealthy if its profit growth was low or its leverage rose strongly during the years of economic stagnation before 1998. The results show that on average during the downturn of 1998–2002, previously unhealthy firms grew at similar rates to other firms.
 
The relation between this finding and the Japanese situation is as follows. Earlier research demonstrated that weak Japanese firms were protected in various ways during the 1990s. For instance, Japanese banks continued lending to moribund companies, a practice known as 'zombie lending'. 
 
The finding that during the deepest downturn, unhealthy firms did not grow more slowly than others suggests that the protection of unhealthy firms continued even when the economy was at its worst and—consequently—when it was harder to keep weak companies afloat.
 
The study therefore shows that while growth differentials between Japanese firms increased during 1998–2002, this was not connected to the firms’ health status before the crisis and must have a different cause. It may be attributable to increasing differences among banks. If banks that faced the greatest difficulties cut down most on lending, firms with the closest relations to those banks would have the hardest time to keep growing.
 
The study concludes that even at the depth of the Japanese crisis, unhealthy firms were still not replaced by healthier ones. Assuming that companies with the lowest profit growth and fastest-growing debt burdens were also the least productive, the conclusion is that the crisis in Japan did not lead to an increase in overall productivity.
 
While economic theory suggests that crises cause productivity to increase, this is not always the case in practice.