GOVERNMENT BETWEEN A ROCK AND A HARD PLACE

In last week’s state of the nation address President Yoweri Museveni announced a battery of things the government was planning to jump start the economy after more than two months of lock down.

The restriction of movement and congregation, meant to slow the rate of infection of covid-19 the diseases caused by the Cororna virus, has ground the economy to a halt not only Uganda but all over the world.

The corona crisis is a health crisis that has escalated fast into an economic crisis.

The expectation has been that there will be a wave of business collapses and the subsequent job losses that could potentially spill over into social unrest and political upheaval.

To stave off this last scenario, governments around the world have opened the taps of government spending, economic stimulus, to help support their respective economies.

Unlike another crisis since the second world war, the economic dislocation has been swift, massive and global in its reach. But it has been unique in the total collapse in demand, in a situation of over capacity.

To illustrate, while many people –

up to 80% in certain segments have lost their incomes, the capacity to produce, to feed or service all those people is still there. It has just been switched off..

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The companies that have been shut down are facing the real possibility of closure, depending on the robustness of their balance sheets, but the most vulnerable members of our society are falling deeper into poverty and facing real existential questions.

The two are related. To the extent that people are unable to get back to spending money because of the uncertainties of the economy or because they have no money all together, is how long it will take for businesses to get back to full production and employment.

So the effectiveness of a government stimulus will depend on how well this reality is appreciated.

It is particularly important in Uganda where more than seven in ten dollars of economic output is attributed to the informal economy.

More formal economies in western Europe recognise this and their stimulus packages while shoring up big business, have emphasised support from Small and Medium size enterprises (SMEs) and individuals out of a job.

It is a lesson many learnt after the second world war. As they embarked on reconstruction they realised too that while industry was getting back on its feet they had to provide unemployment benefits. These monies provided the demand that helped spur industrial growth.

Many of them have maintained and even widened the nature of welfare benefits. While its critics have seen this as wasteful and prone to political manipulation, their criticism might be because they would rather those monies be used to support big business than disperse it among the masses.

The supporters of these “handouts” also argue that

if you give your everyday man sh50,000 he will buy from the local shops, seek treatment at the clinic and pay the boda boda....

These in turn will pay local suppliers and the local economies badly hit by this crisis will at worst not collapse all together.

If on the other hand you give a handful of suppliers sh80b, which is the sh50,000 distributed among the 1.6m families living in poverty, they will save it in his bank, import new furniture and vehicles, pay school fees for their children or seek treatment abroad and even invest abroad. True, they may also buy some land (keeping the money among the fellow rich) or build a new mansion, and even pay school fees for some village orphans.

It is hard to argue against a direct injection of cash into local communities, which incidentally, will still find its way into the pockets of big business, eventually. A trickle up effect. But

the connected don’t want these drip, drip returns, they want the money to be gushing hard and fast and to hell with the rest of us...

 

Beyond the pressure from the connected few, the idea of handing out cash to the vulnerable as part of package to jump start the economy is met with the argument that it will create dependency. We just sounds like a logical assumption to make but falls flat in the face of the evidence, which shows that most people who are beneficiaries find a way to wean themselves off the benefits to become more productive members of society.

The argument may mask the real reason. Many political disturbances have resulted when faced with worsening economic conditions, governments withdraw these benefits. 

To sustain a welfare system over generations, requires disciplined budgetary processes, so when the bad times come – as they inevitably do, you can still sustain welfare payments to your people....

The mixed Scandinavian economies could teach us a thing or two in this direction. 

In vulnerable economies like ours, financing even a minimal social benefits scheme would mean borrowing from abroad and there our fear – reasonably so, of donor interference rears its ugly head.

A running scale of benefits to small business and the poor, going from cash handouts or grants, to soft loans and all the way up would be a good idea.