WHY GOVERNMENTS ARE INHERENTLY BAD AT BUSINESS

There is an older generation that looks back to pre-independence Uganda and the 1960s with nostalgia. They yearn for the good times when things worked, people behaved themselves in office and on the street and life was good generally.

A lot of this longing for bygone days revolves around the return of government to business sector. When government retained control of the commanding heights of the economy, with monopolies in utilities, produce marketing, transportation and heavy manufacturing.

The collapse of these industries in Uganda is coloured by the Amin era when the economy ground to a halt, allowing critics of our more liberal economy to argue that no business thrived during the time, but now we have better managers who in this more vibrant economy can make business work.

They have it backwards. An economy works because of the activity of its economic actors and not the other way around.

I remember in the heat of the privatisation process some people would argue that the companies we were flogging, would have done well if only capital was injected into them. Thankfully, government did not buy that argument and even if it wished to it didn’t have the money to recapitalise them. 

The failure of these companies was not for lack of capital, many of these companies collapsed for lack of proper management. And this was not entirely the fault of the managers, many of whom had high sounding academic credentials but more because of the incentive regime they operated under as laid down by their owner – the Government of the Republic of Uganda.

The incentives that drive governments often come into conflict with the profit motive that drives businesses.

Profit is what keeps businesses alive. Profit is basically the net after expenses are netted off the sales. In order to achieve profit your revenues have to exceed your expenditure. The best companies work at increasing revenues and keeping expenditures to the bare minimum. It is in manipulating this equation that businesses have often got a bad name. Either inflating prices or paying labour slave wages, both unpopular moves in the eyes of the wider public.

A government owned company can seem more benevolent, keeping the prices of its products unrealistically low while keeping the wage bill high, either by paying workers more than the company’s productivity allows or by having a bloated workforce. A scenario like this leads to low growth of the company at best or loss making black hole. Its losses ofcourse are plugged by the people’s taxes, money which would have to be diverted from social services and infrastructure development.

The nature of politics is that for a government, any government in the world, to hang on to power it has to dole out patronage. Inevitably these companies serve as the avenues through which favours are distributed. Politicians really cannot help themselves. Their raison d’etre is diametrically opposed to what it takes to run a sustainable business.

Recently the champions of greater state intervention in the economy smugly pointed to how the US had to nationalise private companies to save the economy. In hindsight the bailouts had political patronage written all over them and people are beginning to reconsider whether it was necessarily to funnel hundreds of billions of dollars at these companies instead of let them go belly up. They argue that it would have been cheaper had they folded.

Of course there are dangers in allowing businesses to go around unfettered chasing profit whichever way they can and that is where governments and civil society come in, to the extent that they can given their respective constituencies.

The free market or capitalism has suffered a bad name. It is not a perfect system, but man is yet to create an alternative system that is as efficient in manipulating the factors of production to generate wealth. 

Capitalism though is the worst distributor of the created wealth, concentrating it in the hands of a few, the entrepreneurs and financiers, often to the detriment of the rest. That maybe a discussion for another day.

 Our motives for clamouring for a return to state owned enterprises is not dictated by a desire for a greater efficiency by existing companies but more by our desire for the easy pickings that come with government enterprises.