Iraqi: Why bailing out struggling state enterprises is counterproductive
An article in local media quoted a government official as suggesting that the government should bail out universities the same way it bailed out tea and sugar cane producers as well as Kenya Airways (KQ).
It got me thinking: should we bail out struggling companies or let them die? It’s an emotional one given that the death of a business means lost jobs and distressed families.
Why do governments bail out struggling companies either by giving them money directly or by offering subsidies?
Why not let the market decide their fate? Subsidies can include businesses that sell their goods and services below cost and the government tops them up to make them appear profitable.
Giving companies monopolies or raising tariffs to keep competing products away are other forms of subsidies. Add interest-free loans or even government guarantees.
But why are bailouts popular? The main reason is that they are political. If struggling companies are allowed to die, the political cost would be too high.
The closure of the sugar factories would leave many farmers in distress and many votes would be lost. It would be the same for producers of khat or coffee.
The case of Kenya Airways is a bit different. This would tarnish Kenya’s national image and make the country unattractive to investors. Let’s not forget that each company is interconnected with others both locally and across borders.
For example, KQ has leased aircraft, has codeshare agreements with other airlines, and has suppliers for products such as food, spare parts, and fuel.
All of these supply chains would be affected by job losses. The government sees the big picture in terms of the votes and the potential instability if too many people find themselves out of work. The big question is why taxpayers’ money is used to keep unprofitable businesses going.
The overlooked reason is that the government seems to have a lot of money because it is “pooled”.
Second, the men and women who decide on bailouts are impersonal; it’s not their money.
They know it’s tax or debt, but who transpired for it isn’t their problem.
They often focus on the bailouts with the highest returns in terms of votes. Check which sectors have been bailed out in the past 20 years geographically.
And the economists? In a market economy, which we claim to be, the invisible hand of the market should be allowed to do its job.
If your products or services are in demand, you thrive and grow. Otherwise, you close your shop and let others grow in your market.
If a supermarket closes because it is inefficient or poorly run, we should let it close and let others take over.
Maintaining inefficient businesses is costly to the economy and to consumers. They pay more than market prices.
Bad people bear the cost of inefficiencies. Resources are diverted from potentially more productive sectors to less productive ones.
This is what makes bailouts attractive to politicians – they can reward some people at the expense of others.
Unprofitable businesses retain jobs but destroy others that would have been created by the expansion of others if they were run efficiently.
Sometimes the government can bail out a company to ensure competition in an industry and tame monopolies.
Do you remember when we only had one telephone company? It took me two years to get a phone line in my house.
The reasoning is that governments bail out companies to give them a chance to reform and regain financial health.
In the West, it is called bankruptcy protection. Given their importance to voters, it’s easy for these companies to become addicted to bailouts.
It takes very bold political decisions to stop, perhaps at the start of a political mandate. Bailouts are like first aid; the patient must then go to the hospital for medical examinations, which can lead to surgery or death.
By refusing to take companies to economic hospitals, we fail to prepare them for economic deaths.
The economy loses to bailouts by also discouraging innovation. Some companies are victims of innovations.
Think of the companies that have made money from landlines after cell phones. Think about the disruption electric cars will cause.
Through bailouts and subsidies, governments often try to stop Schumpeter’s wind of creative destruction that shows how creative and beneficial innovation is, bringing new industries, wealth and job opportunities. unique.
However, it destroys some established businesses, many products and jobs, and the dreams of failed entrepreneurs. Bailouts make political sense but not economic sense.
How will we develop our industries if they are protected from competition?
How can we boast of having local multinationals if we cannot allow our companies to be competitive?
Finally, if one can import the American political system with a little spice from Nigeria (commissions), why not their economic system, in particular their market system enamelled with the Protestant work ethic?