Should the Uganda Government Bailout Big Companies?

What is Government Bailout? Of recent, Media has been talking about the “One Trillion” Government bailout.

A bailout is a colloquial term for giving financial support to a company or country which faces serious financial difficulty or bankruptcy. It may also be used to allow a failing entity to fail gracefully without spreading contagion. A bailout can, but does not necessarily, avoid an insolvency process.

Several companies in Kikuubo Shopping Centre, such as Senana Enterprises, Ssebaggala and Sons, Steel companies such as Roofings Limited, Steel Rolling Mills, The Simba Group and Grapes Construction, which owns Freedom City Mall, are among the prominent companies that have lined up for the one Trillion Tax payer’s bailout.

However as of today, the government have not yet concluded with the bailout decision with some, in the Finance Ministry and Bank of Uganda (BoU) against the move to grant bailout to the listed companies.

Now, many people are asking the question, “why should the government bailout companies that are having trouble surviving?”  “Isn’t Uganda a capitalistic economy? Isn’t capitalism designed to get rid of the weak and the failed?” “So why intervene?”

In 2008/2009, the Bush and Obama administrations loaned the auto industry, including GM and Chrysler, which is now controlled by Italy’s Fiat, $80 billion to avoid the collapse of the industry that they felt would result in the loss of millions of U.S. jobs.

Critics of the bailout at the time had argued the companies should be allowed to fail and the industry that resulted from the aftermath would be stronger. Treasury officials repeatedly said the bailout was not an investment meant to turn a profit, but a move to save U.S. jobs.

“Two consecutive executive administrations in Washington decided in late 2008 and early 2009 that the consequences of the potential losses and outcomes to the U.S. economy … were worth avoiding through a federal intervention,” one of the chief economists Sean McAlinden, had said in a statement and that it was necessary for the U.S. government to intervene in the private sector.

It is estimated that a complete shutdown of the industry that was bailed out in 2009 would have resulted in the loss of 2.63 million jobs and those losses would still have stood at more than 1.5 million in 2010. If only GM had been shut down, the job losses would have been almost 1.2 million in 2009, shrinking to 675,000 in 2010.

While U.S. Treasury’s final loss on the bailout is estimated at $13.7 billion including $11.8 billion related to its investment in GM, it avoided the loss of $105.3 billion in unemployment benefit payments and the loss of personal and social insurance tax collections, according to CAR.

Many think government bailouts are bad because for proponents of a mostly capitalist economy, government intervention in the “free” markets is theoretically and often practically bad in the long run.

For one, it essentially gives the government partial ownership of and control over private companies. Capitalists believe, often rightly so, that market forces are better at deciding who should survive than a small number of humans in government.

Secondly, it could encourage poor business practices and unnecessary risk taking from financial institutions. If a private company that is in the risk business believes that the government will bail them out when they lose bets, what’s to stop them from making ever-increasingly risky bets? Those are some arguments.

Of course, capital markets don’t work well without a certain level of regulation so there’s always a balance of too much regulation and not enough, and there will always be some people arguing for more and some arguing for lessIn the case of the recent bank bailouts, it seems to have worked but there’s still no knowing if we’re better off having bailed the banks out or not

I think Bailout  makes good Economics Sense and here is why

I fully support that when large corporations are in trouble, the government should financially aid them. However, an assessment of the national economic damages that a corporation’s bankruptcy may produce will be vital in order to justify whether a bailout is legitimately justified. A massive corporations’ bankruptcy, if large enough, may have adverse effects on the economy such as; raising national unemployment rates dramatically, reducing GNP and GDP output and possibly influencing a devaluation of currency among many other direct and indirectly related negative effects…The severity of these adverse effects will ultimately depend on the size of the corporation at hand.

Corporations large enough, form such an integral part of a nation’s economic house of cards that when bankrupt, could partly or fully collapse the rest of an economic system. And indeed when it does, the effects are not only felt in the corporation’s home country, but also around global markets as with the 2008 economic crisis. Yes, taxpayers will have to pay for it but it should be seen more like a loan expedited in order to save the economy and further prevent a dispersal of negative economic effects from arising that can tear an economy progressively to shreds.

Throughout modern history and in most countries, Company bailouts have been used as a policy response to revive a failing Economic system. Although history has it that this type of crisis and subsequent government bailout are made to seem like an outlier, in many important respects it is not. In fact, there have been over 140 banking crises globally in the past 30 years alone, with a substantial number responded to with a large-scale, publicly-funded government bailout program. Unless we are Einsteinenly insane, therefore, we should not expect governments to act differently in the future.

While Lehman is the well-publicized case of an institution allowed to fail, we still do not know what would happen to the economy if the majority of critical institutions had instead met their deaths simultaneously, as no government has ever allowed this to happen (See Point above). Even in the Lehman case, without a counterfactual, one can argue that letting Lehman fail was a disaster as it accelerated the decline of the financial system, or alternatively that the lack of subsequent complete ruin of the U.S. economy and the eventual financial rebound suggests that in fact more banks could have failed without the system collapsing. The fact is that we just don’t know what the alternative would have looked like, and without a better picture, betting the global economy on the fact that a post-crisis bailout-less financial system would be stronger seems to be a risky bet.

With all the above said, Lets wait and see what decisions the Government comes up with.

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