Monday, October 1, 2012


The shenanigans surrounding the construction of the $2.2b Karuma dam, the recent discovery by the President that all was not right with the national back bone, and many attempts to do business by government just serve to reinforce the idea that government has no business in business.

It is not nanotechnology (rocket science, is so dated).

Governments inability the world over to do business is because they operate under a totally different incentive structure from businesses.

Governments are more in the business of perpetuating themselves in power and not necessarily delivering services or products to their people.

To keep operating businesses need not only to provide a service or product acceptable to the public but have to do this at price higher than their costs in order to make a profit. Profit is what sustains business.

This separation is not bad in and of itself until we ignore it.

People have forgotten but the recovery of the economy really took off starting with the liberalization of markets and privatization of state enterprises in 1990s. Between 1986 and 1992 the government was going nowhere with its socialist rhetoric – in the famous words of former Kenyan President Jomo Kenyatta to his Tanzanian counterpart Julius Nyerere, “How can you distribute what you do not have?”

Liberalisation and privatization serve to unlock individual initiative, which finds its expression in ways unanticipated by central planners, lifts society along with the individual entrepreneurs.

Government’s role then is to create the enabling environment for this initiative to sprout and prosper. This fits very well into government’s goal to perpetuate itself without doing too much work or risking tax payers money.

But for government to do its role well it has to undergo a mindshift where it stops thinking as an enforcer and starts thinking like an enabler.

The respective roles of businesses and government should be one of wealth creator and distributor respectively.

Business by manipulating the factors of production – land, capital, labour and entrepreneurship create wealth and government by taxing business profit distributes the benefits to society by providing public goods like security and infrastructure and social services like health and education.

Contrary to some people’s thinking distribution is not by dishing out cash.

Critics of this thinking point to Asia where state enterprises have helped grow their economies as proof that this model works.

On the surface this looks true but on further scrutiny many of these companies even if they are profitable are inefficient, dens of political patronage and on the whole not good value for money.

The concern that in the absence of an indigenous entrepreneurial class many of the plum businesses will snapped up by foreign capital is a worthy one. But government does not redress this imbalance by going into business itself or by trying to manufacture an entrepreneurial class.

Idi Amin is a good case study of how not to build a business class. For all the assets he dished out to his cronies forty years ago none of those businesses is a regional or even national brand today.

It has its dangers but government can insist on local equity participation and management quota for nationals in the hope that some of the value these companies make can be retained by nationals or through interaction technology transfer can be effected, which can then be used to set up local businesses.

Government as a provider of venture capital is another way, but a venture capital firm of this nature would have to be run on very professional lines to guard from it being a bottomless money pit family and friends of the establishment. A hard ask at the best of times.

There are no shortcuts. A local business class cannot be wished into existence. The best thing government can do can ensure security of person and property and enabling laws, provide infrastructure, education and health services.

In the US one other thing government does is spend billions of dollars on research either through funding universities or through the military. The assembly line, laser technology, the internet and many high tech applications that were the basis of some of the biggest companies today and are now part of our daily lives came through the military.

But even in the US government has had a dismal record doing business.

The best thing the government can do for business is to shed its suspicion of the private sector, understand what is needed of it to make businesses work, provide the needful and get out of the way.

When I hear politicians and bureaucrats talking about reviving Uganda Airlines as a state corporation I am reminded that, the thing we learn from history is that we do not learn from history.

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