Our entire economy and government need a bailout plan

What you need to know:

The problem with bailing out companies that made losses due to bad decisions and taking on too much risk, is they continue to ‘infect’ the economy. Companies with wrong or obsolete business models should be restructured or left to collapse so that the scarce resources can be released to other viable ventures...

Bailing out distressed companies requires a clear understanding of the cause of the problem. Much as company problems manifest as financial, the true causes can be structural, managerial or a general economic downturn. Structural problems may be associated with use of obsolete technology while management may fail to adopt cost-effective approaches or have a high-risk appetite. An economic downturn, like the one Uganda and the wider world are experiencing, undermines sales and cash flows.
The magnitude of the proposed bailout in Uganda and the companies coming from many sectors seems to indicate that the problem is largely managerial and the general economic downturn. Several managers in both the private and public sector have not appreciated the negative impact of the global economic crisis that required adopting an austerity position or reduced appetite for new investments. Since the bailout cannot solve the deep-seated economic and firm level problems, its money will soon be lost to the same ‘winds’ that continue to shake the economy.

How should the bailout be done? Certainly, it should not be by the government even when public resources are to be used. The adverse selection problem (choosing a good orange from a basket of many rotten oranges) is too complex for government, which is likely to suffer the Principal-Agent problem. The agents of government (the executive and mostly civil servants) are prone to influences by the Principal (politically influential persons that range from politicians to civil servants and business owners). Thus, the process of identifying who should be bailed out will yield the wrong companies that should be restructured, merged or sold to new owners.
The problem with bailing out companies that made losses due to bad decisions and taking on too much risk, is they continue to ‘infect’ the economy. Companies with wrong or obsolete business models should be restructured or left to collapse so that the scarce resources can be released to other viable ventures, which can even be under the same ownership.

Decisions of this nature are not for bureaucrats or politicians. American Congressman Ron Paul put it better, “… we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians.” Identifying companies to bail out should be on a case-by-case basis and by independent professionals who should not copy and paste foreign solutions given the different contexts. For example, domestic airlines may be critical for a large country like the USA but not Uganda.
Finally, the slowdown in economic growth also requires redress through massive restructuring aimed at securing fair lending rates, appropriate exchange rates, reliable judicial systems, and protection of property rights, among others. I must say that the quest to build infrastructure at any cost as though it was the end and not part of the means to the end, has cost Uganda the next decade and possibly more.

The economy is already on an unsustainable path partly due to: commitment of short-term domestic resources to long-term causes at exorbitant rates; reduced aggregate demand; and inequality in income and other resources.
Sadly, the economy cannot readjust itself and hence requires external (not foreign but exogenous) policy interventions. The government also has financial pressures that require trillions of shillings. Simply put, the entire economy and government need a bailout plan.
Dr Muhumuza is a development economist committed to inclusive growth through markets that work for the poor. [email protected]