BAILOUT OR INVESTMENT
BAILOUT OR INVESTMENT – BASIL SPRINGER COLUMN TO APPEAR IN THE BARBADOS ADVOCATE’S BUSINESS MONDAY ON 29 SEPTEMBER 2008
“So if you consider me your partner, welcome him as you would welcome me” – Philemon 1:17
At the end of last week, there were many global reports in the print and electronic media concerning the current crisis in the U.S. financial markets. The crisis has been blamed on the irresponsibility of some executives who have allowed greed and short term financial gain to govern their decision making processes at the expense of the sustainability of their enterprises and the general socio-economic well being of all their stakeholders.
It was reported that the French President Nicolas Sarkozy said Thursday that the world came=2 0within “a whisker of catastrophe” during this financial crisis and that those responsible for the crisis must be identified and held accountable. President Sarkozy was so concerned over the turn of events that he called President Bush last Friday to discuss the matter. Gordon Johndroe, a spokesman for Bush’s National Security Council, reported that the two Presidents talked about the ongoing negotiations taking place on Capitol Hill and they expressed confidence that something will be done.
It was reported that “the two leaders agreed that the world will need to engage in a dialogue to discuss how business is done in the 21st century, but that the immediate focus must be on securing congressional approval of a rescue plan.”
The implication here is that, to mitigate the full impact of the catastrophe and to lay a foundation for the recovery process, the government must intervene with a solution since this private sector slide has placed the US economy, in particular, in jeopardy. In any case, it is easier for the government, as a single entity, to mobilise US$700 billion, which is the estimate needed to implement a recovery process, than it is for individuals and the private sector to collectively mobilise a similar sum.
Interestingly enough, taxation, which is the primary source of government revenue, derives from individuals and the private sector. Government therefore becomes the conduit through which a solution is effected.
T he congressional rescue plan debate, as to what will be done, hinges around whether tax payers’ money is being used as a “bailout” or an “investment”.
If it is a “bailout” then this may be interpreted that irresponsible executives and owners of the businesses in crisis are being facilitated by the public purse and to some this is totally unacceptable. Smaller businesses and individuals who see this action as a government “bailout” process may ask “I too am in trouble, what about me?” Why not “bail out” the small man as you are bailing out these mega businesses which have been badly managed?
My preference is to regard the government intervention as an “investment”. This is related to my perception that the role of government is to provide regulatory and service functions to its people. Regulatory in the sense of fashioning and upholding the rule of law through appropriate legislation and the policing of that legislation and services as can be more effectively provided by a central body. These services include education, health, development, sports, disaster management, environmental protection, energy security, food security, national insurance, social care and security, emergency care and other support services.
The “investment” rather than “bailout” activity I see as an emergency care service where the government is acting on behalf of the people and for the people, not only for the owners of these businesses wh ich are in trouble. For the people because if these mega businesses are allowed to collapse then jobs will be lost (the social cost of an unemployed individual to the government is not insignificant), taxation will be reduced, the economic growth will suffer, there will be a deleterious impact on social security, net foreign exchange earnings will decline, poverty will be on the upsurge, quality of life will be reduced and the fallout from the interactions of all of the above will make life very uncomfortable indeed.
In the process the owners of these businesses too will be helped and government then has to enact their regulatory function to ensure that these businesses are well regulated, thus halting “abuses and scandals” involving executive pay (which is not in proportion to the value added), to the extent that further management catastrophes of this type will be averted well before any future impending crisis emerges.
The government’s return on investment is therefore through the achievement of macro-economic benefits. It may also be possible for government’s investment to be structured like that of a venture capitalist with the accompanying financial dividends at the point of repayment of capital injected when the business has recovered financially. In addition to the macro-economic benefits the “investment” may then be seen as an opportunity for the government to add to their coffers.
In the context of the small economies in the Caribbean, the government’s role20as a proactive “investor” can yield macro-economic benefits and can stimulate the growth in the economy. In Barbados the well established philosophy of public–private partnership augurs well for the future. This has been manifested most recently with the government’s announcement in the July 2008 budgetary proposals, of an innovative twin fund concept (1) A Quick Response Revolving Seed Capital Fund and (2) A Quick Response Venture Capital Fund, in partnership with and managed by the private sector as a means of stimulating enterprise development.
(Dr. Basil Springer GCM is Change-Engine Consultant, Caribbean Business
Enterprise Trust Inc. – CBET – Columns are archived at www.cbetmodel.org)