Singling out firms for help is unnecessary and unwise

Nearly every day we hear stories about the pleas of particular groups for special government assistance to deal with the economic slowdown. Like most of the rest of the world, SA is suffering from the macroeconomic knock-on effects of the global financial crisis.

Declining global demand will have negative repercussions for many in the South African economy, from mining to manufacturing to tourism. Many South African firms are adjusting in creative and productive ways to the slowdown, and most of them are doing this without the benefit of any special government assistance. Should we be doing more to directly assist firms to manage the downturn? Should we be giving selective bailouts to firms and industries that claim they need additional help?

Some companies claim that they are in need only of temporary loans, or “bridge financing”. Asking for government assistance assumes that South African financial markets are broken — that they are not working as they should. While this may be true of certain large developing economies, it is not the case in SA. There has been a decline in demand for loans, and some tightening of credit as a response to increased risk at a time of decreased demand. But firms that are fundamentally sound are not being denied capital to pursue sustainable business improvements.

Many firms, however, are asking for more than this — for loans at preferential rates from development finance institutions, for special tax breaks and various types of direct financial assistance that are essentially subsidies or bailouts. Bailouts and subsidies impose real costs on taxpayers, either directly through increased taxes or indirectly through the risks and costs of future public sector or state enterprise debt, and higher consumer prices.

In short, support for some firms and sectors that ignores the need for these firms to be competitive over the longer term — or makes it unnecessary for them to be so — imposes higher costs on the rest of the economy. This cannot be consistent with our goal of increasing long-term competitiveness.

Increasing the dependence of some sectors on subsidies is certainly not fair, and neither is it helpful in improving our long-term development prospects. We should not have a two-class private sector, with the majority of firms and workers using their efforts and entrepreneurial skills to improve their competitiveness in the market, while others rely primarily on lobbying efforts to increase their private profits at public expense.

Our goal in providing assistance to firms, whether short-term or long-term, should be to improve the long-run competitiveness of our economy. This is how we can ensure the growth that is necessary to meet our economic aspirations.

Source: Trevor Manuel, Singling out firms for help is unnecessary and unwise, Business Day, 08 April, 2009.

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FMF Policy Bulletin/ 14 April 2009
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