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Uchumi bailout ill-advised and shouldn’t be considered

By Makau Mutua | August 14th 2016

Methinks the Uchumi bailout is a gargantuan mistake. Is Uchumi too big to fail? The answer is an emphatic nyet. Even if it was too big to fail, I would let it crash to the ground like a ton of bricks.

 The state should treat Uchumi like an economic corpse — and escort it to the grave. The state shouldn’t be in the business of saving a duka [shop]. Uchumi is nothing but a grocery store, an outlet for selling produce and already made goods.

 Uchumi makes nothing. Zilch. It’s at the end of the production chain. Simply put, it’s on the parasitic end of the economy. So, why would the state be obsessed with saving a grocery store?

Let me delve into some history before peeling your eyes. Uchumi was founded by several Kenyan parastatal companies in 1976 ostensibly to facilitate a more equitable distribution of commodities in outlets throughout the republic. Sounds noble enough, but the idea was fundamentally wrong.

What’s the state doing in the retail business? Why in the world would the Kenya government want to be a dukawala [grocer]? I understand that the government still retains some shares in Uchumi to this day. Let me scratch my head again — a modern government shouldn’t be in the business of selling vegetables. In 2006, Uchumi collapsed, but then the state stepped in and bailed out. Uchumi has now collapsed again. Again, the state is coming to the rescue.

You would think that after 40 years the government has learnt that it can’t make a good dukawala. But no — that lesson has remained elusive.

The question is why. As a fraction of the economy, Uchumi is small potatoes. No pun intended. In 2014, Uchumi’s assets were only a meagre $79 million (KES 70 billion). Kenya’s GDP (Purchasing Power Parity) stands at $143 billion.

That’s why $78 million is a drop in the ocean. A pebble of sand at the beach. If Uchumi — the nightmare — went poof in the night no one would notice its disappearance. The economic impact of Uchumi’s funeral would be zero. Nada. That’s why it boggles the mind why the state is hell bent on resuscitating a terminal patient.

Take Uchumi off life support and let it expire, as it should have done decades ago. I don’t have a problem with the state using taxpayer funds to rescue a strategic and crucial industry or a particular commanding height of the economy in distress.

There are instances where the state must act to save a particular actor in the economy based on the importance of that actor to the nation. Several sectors and actors in the economy come to mind.

I would have no problem if the state acted to shore up a particular industry in agriculture — coffee or tea come to mind. Kenya Airways — once the pride of Africa — is another national institution that cannot be allowed to collapse.

In the United States, for example, the federal government acted swiftly in the aftermath of the 2008 Great Recession to bail out a number of key banks and industries. Among these were Bank of America and General Motors — all private concerns.

 The Americans understood what the total collapse of the financial sector — especially investment banks — would have meant for the economy. That’s because the financial sector — Wall Street — is one of the key pillars of the largest economy in the world. In fact, the collapse of Wall Street would have led to the collapse of the global economy. Similarly, the collapse of the auto industry in Detroit — one of the largest sectors of the US economy — would have been catastrophic.

There were fierce debates in the US about these bailouts. But history has proven President Barack Obama as well as his predecessor President George W Bush were right to bail them out.

All the banks and companies that were bailed out returned to profitability quickly and have repaid the loans advanced to them by taxpayers.

There have been heated policy discussions about whether some of the banks and companies were too big to fail, and whether they should be broken up for that reason.

The argument here is that a company that’s too big to fail can hold a whole economy — and taxpayers — to ransom. Unfortunately, the political gridlock in Washington has stopped legislative measures that would have broken up many of these companies.

The other argument against bailouts is about moral hazard. This is where captains of industry engage in profligate and irresponsible conduct — over-leveraging a company, for example, or paying CEOs unsustainable wages — to the detriment of the company.

The state shouldn’t be picking winners and losers in a market economy absent some strategic national interest. Uchumi doesn’t have a strategic national interest — it’s become a gravy train for the corrupt.

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