QUOTE OF THE WEEK
The only limit to our realisation of tomorrow will be 
our doubts of today. 
                                                               -- Franklin Roosevelt

Stepping into the Future or Leaving the Past Behind

An Article for the Mauritius Times

-- Percy S Mistry

Setting the Stage and Achieving Consensus for Moving Ahead  

Eight weeks have passed since I last left Mauritius. Seems like eight years when you leave a place so enticing and evocative. I found the island as enchanting as ever, though troubled by internal debate in political and business circles, and in trade unions and civil society, about how the challenges now confronting it should be met. These challenges include, inter alia: emerging large structural macroeconomic imbalances, unemployment, inflation, rapidly increasing pubic debt, increasing emigration of skilled human capital, insufficient progress in developing new economic opportunities, higher global energy prices, with the pressures of globalisation impinging inexorably and relentlessly on Mauritius. By now the new government should have made clear to the electorate how it was going to address these problems with new vision, strategic direction, policies and purpose because there is no time to waste. Procrastination in the face of these challenges can only make matters worse with each passing month.

It should be apparent after the WTO ministerial meetings in Hong Kong that Mauritius has no future in producing sugar and textiles/garments. No more public money should be wasted on keeping those sunset industries alive under the pretence of facilitating ‘vertical integration’. Arguments about whether Mauritius can continue with high-value niche activities in sugar, textiles and garments are moot. They should not divert attention from the core problems that need to be addressed. If there are niches in these areas that Mauritius can fill (e.g. ethanol or haute couture) then let private firms do that without public support.

Firms in these industries should be encouraged to move their production activities to lower-cost countries while keeping research, development, apex management, finance and marketing functions at home. But it is now untenable for vested interests (firms or unions) in these industries to argue for public support to prolong their existence artificially. And it is irresponsible for politicians and government (regardless of constituency pressures) to heed such calls under the kind of fiscal pressure that Mauritius confronts. Unfortunately, seeking protection has become something of a specialty in Mauritius. It has been done so often for so long that it has become an instinctive response to meeting any challenge. That proclivity is now counter-productive.

The remaining two pillars of the economy – tourism and financial services – are not robust enough to bear the full weight of future progress and growth. Nor should they be expected to; that would expose Mauritius to excessively concentrated economic and financial risk. For example, the events of 9/11/01 had a significant impact on global tourism, affecting Mauritius severely in their wake. Along with natural calamities, like tsunamis and earthquakes, such events could easily recur, as experience in Kashmir, Thailand, Indonesia, Sri Lanka, and Bali demonstrates. The OECD’s misguided initiatives on harmful tax competition, money laundering and countering the financing of terrorism have made offshore centres offering international financial services vulnerable to the fickle knee-jerks of larger countries.

Developing a more diverse and sophisticated base of economic activity is therefore essential for: (a) the numerous strategic risks that face the country to be managed and (b) to make full use of the island’s human capital endowment. Other opportunities must be made to materialise for Mauritius to survive. But the catch is that Mauritius must be globally competitive in undertaking such activities, not just at the present moment, but well into the future. It has to abandon the comforts of protection while sharpening its competitiveness, productivity and efficiency – a message that people in general, and militant unions in particular, have difficulty in hearing. Mauritians have to work harder and smarter to earn steady increases in incomes and standards of living instead of expecting to being taken care of from cradle to grave. They adapt to that imperative perfectly well when they migrate abroad. And more Mauritians are doing precisely that. So why should they behave differently in their own domain?

Areas of New Opportunity

It does not take a genius to deduce that the new opportunities Mauritius needs to attract to its shores lie in new emerging global service industries. Those who are adamant about having an industrial (manufacturing) base to be self-sufficient are plain wrong. In a global economy, the very notion of self-sufficiency is misplaced and absurd. The watchwords now are global integration and mutual interdependence. Mauritius has already transited into the post-industrial age. The island no longer has what it takes to be competitive in manufacturing, even in the domestic arena, when it faces global competition from giants like China and India, and further down the line from countries like Bangladesh, Myanmar and in Indo-China. In manufacturing for the global economy the competitive disadvantages that Mauritius has, in terms of location and geography, cannot be easily overcome. But these disadvantages are irrelevant when new opportunities being exploited are those in which large capital investment, and transport and communication costs, do not matter that much -- either in establishing new ventures or in influencing their competitiveness.

The new global opportunities that Mauritius needs to find will most likely be in the areas of: ICT, BPO, KPO, healthcare services outsourcing, legal and accounting services outsourcing, business consulting outsourcing, media and entertainment outsourcing, TV, movie and music industry services outsourcing, education/training services outsourcing, retirement services outsourcing, the global leisure and gaming (including horse-racing) industries etc. Surely this long list should be sufficient for those who pedantically insist on knowing the destination towards which Mauritius must navigate. How many more opportunities need to be identified when all those listed above are just appetisers?

In these industries it is the quality, flexibility, amenability and adaptability of human capital that matters in establishing a competitive edge; as does being bilingual (or multilingual), reasonably well educated, democratically governed, and in a convenient time-zone to accommodate the service needs of developed markets. Moreover, if Mauritius succeeds (as it must) in attracting such industries it will need to transform itself into an international centre with a more global expatriate population. That will provide opportunities for the construction sector (in building world class infrastructure as well as commercial, residential and leisure facilities) to feature heavily in the future growth as well – as indeed it has in all the other international centres like the Bahamas, Barbados, Cyprus, Dubai, Gibraltar, Hong Kong, Malta, and Singapore.

In mentioning these possibilities it becomes immediately obvious why Mauritius can no longer rely on its established small (and oligopolistic) base of incestuous, protected domestic private business groups to provide entry in new areas of emerging global service opportunity. They do not have the technical or market knowledge that is needed for success. While they have the financial capital, they do not have the human or institutional capital, the know-how, the managerial resources, nor the global customer base or global market share.

These indispensable resources cannot be easily hired or bought in the same way as hotel or resort management, or even garment manufacturing technology and management, can. The know-how to operate successfully in these areas is embedded in global “customer-service provider networks” that are now being serviced largely by Indian firms with a global presence and reach. Mauritius needs to open up to these firms, and to other similar ones from South Africa, the EU and US. Insistence on incoming foreign investors in these areas of opportunity entering into joint-ventures with Mauritian firms will no longer work. Such enterprises will enter Mauritius on their own terms or not at all. And it would be advantageous for Mauritius to accommodate their terms, encourage their entry, and provide the kind of environment in which they gradually become internalised, i.e. Mauritian, themselves.

The Psychological Incompatibility of Mauritius and Markets

That brings me to the discussion/criticism that has been unleashed by what I have been saying over the last year (in the Mauritius Times and working with NPCC) about Mauritius approaching another economic crisis, and the need for it to open up and let the market work in attracting the kinds of opportunities identified above. I thought what I was saying would be obvious to anyone with a respect for empirical observation and statistical fact. But the message has been more difficult to convey than I blithely assumed.

I have wondered why and, after reflection, have come up with the following rationale – it is a plausible explanation though not as yet a proven one. I have concluded that such a message is probably unacceptable in an island whose political ethos, family culture and education system, subliminally if not explicitly, teach people from an early age to be instinctively suspicious of the market (or in local political parlance, ‘the jungle’) and all that it implies. In Mauritius, as in many other excessively and prematurely socialised developing countries, the market is seen to favour: colonialism over independence, the strong over the weak, the competitive over the uncompetitive, individualism and excellence over solidarity, equality, social justice and ‘economic democratisation’ -- whatever that phrase means if it actually means something other than the no-longer politically correct, old-fashioned term ‘redistribution’.

These four terms seem to me to be overused in daily Mauritian political and social discourse. But they do not appear to have any clear implication or meaning that can be operationalised in practice. If they did, they should have been operationalised by now, after 40 years of independent governance, unless one believes that every government since independence has been hypocritical or exceptionally incompetent. As social ideals, and like the elusive concept of ‘motherhood’, notions of solidarity, equality, economic democratisation and social justice are instinctively understandable. It would be difficult, if not otiose (?) and heartless, to argue against them. That is why people who peddle these notions capture the moral high-ground before intellectual battle has begun! No human intellect could be complete without embracing these values. No human soul could rest without accepting the premises on which these ideas are based. For those reasons perhaps, they resonate well in political rhetoric aimed at arousing a sense of grievance and deprivation on the part of the hapless many at the expense of the privileged few.

Every five years, these four notions are deployed by political parties of all hues to galvanise an otherwise diffident and pliant electorate into righteous indignation. But carried to obsessive extremes a preoccupation with actually operationalising these ideas is invariably harmful if not counterproductive in furthering the process of ‘development’. In 15 years of experience (direct and vicarious) as a development banker-cum-economist with a multilateral bank, and another 18 years as a private investment banker, I have yet to come across a democratic country in which the poor have become richer because the rich have been made poorer as a consequence of government policy.

Where economic democratisation has occurred successfully it has been driven by market imperatives rather than government fiat. It has occurred when the real incomes and standards of living of the poor have risen faster than those of the rich rather than because assets or income were taken from the rich and given to the poor. And that will be the case in Mauritius too. If government is serious about economic democratisation then it should guarantee equality of respect, equality of opportunity and equality of access to the means of success, rather than attempt to equalise incomes or wealth. That is a job for markets not for governments.

Where governments have succeeded in making the rich poorer, through excessive taxation or ham-handed redistribution, the economy of such countries has suffered irreparable harm. The poor have not become richer as a result. They have become even poorer than before. On the other hand, those few countries that have: embraced the market, encouraged and supported entrepreneurship and wealth creation, regarded the pursuit of asset accumulation not as socially repugnant but as economically desirable and morally justifiable, and opened themselves up to trading competitively in the world economy, have prospered sustainably (some quite spectacularly) over long periods of time. In going for growth they have achieved social equity as well; seamlessly as a by-product.

It is paradoxical that it is a Labour Party-led coalition government that is now confronted with the challenge of making Mauritius more market-oriented and more capitalist. But then history abounds with similar political paradoxes: like the Congress Party in 1991 reforming an economic system that it had so thoroughly messed up over the previous 40 years in India; the Communist Party of China launching the most piratical market-based reforms in the world; Nixon’s Republican Party abandoning Taiwan recognising China and establishing formal diplomatic relations with it; Tony Blair’s New Labour Party adopting a Conservative economic and social agenda thus stealing their clothes and leaving them naked; George W. Bush Jr.’s Republican Party indulging in fiscal profligacy so extreme and so damaging as to make Clinton’s Democratic Party a veritable pillar of economic and fiscal rectitude; and so many other examples of the same ilk. Those examples should bolster the resolve of Navin Ramgoolam and Rama Sithanen to make a success of yet another political paradox in paradise. Their job is to make markets more compatible with the psychological ethos of Mauritius by changing the latter rather than the former.

Liberalisation and Equity

There will always be arguments about whether adopting a global market orientation, economic liberalisation lack of protection and competition, helps the rich more than the poor. Those arguments are now being made in India and China; and they are mildly absurd. India now has a middle class of between 200-300 million people (growing at the rate of about 10 to 15 million people annually) with real consumption capacity equivalent to a per capita income of about US$8,000. But in 1985 that middle-class comprised fewer than 50 million. How could that middle-class have quintupled in size in 20 years without trickle-down and market-driven rather than state-driven redistribution? It was not only the rich that got richer. They did. But a lot of upper middle class people became rich. Even more lower-middle-class people became upper middle class. And a lot of relatively poor people became lower-middle-class. Of course it is true that the absolute poor have not yet been as well served by the progress India has made. They have been left behind. But the fact remains that India’s capacity to improve their lot has improved dramatically. That the absolute poor have not yet enjoyed the fruits of India’s progress reflects a failure of its political system and the malfunctioning of its democracy. It does not point to the failure of its reformed economic system.

And I expect the same will apply to Mauritius with opening up. But because Mauritius is so small, changes will happen much faster. I would offer the proposition that the language and phraseology used in politically attractive terminology such as ‘economic democratisation’ (which is a non sequitur in the reductio ad absurdum) is suggestive of a political tendency that is hypocritical and counterproductive. In saying that I do not mean to argue that it would be a bad thing if there were a far greater number of domestic and foreign private businesses operating in Mauritius than the few ancien regime family-owned oligopolies that continue to dominate the Mauritian business scene. On the contrary it would be a very good thing.

To an international observer like me it is surprising and disconcerting that -- whereas in countries as traditional as China and India (and even across Europe and America) there has been a dramatic change in the types of people and firms that now dominate business in these countries compared to 20, 30 or 50 years ago -- in Mauritius there has been no such change. Instead every government since independence has been co-opted by, and implicitly colluded with, established business interests to protect Mauritian business space for the pre-colonial oligarchy. As a result their powers of monopoly/oligopoly and the concentration of wealth and financial capacity in a few business groups has been increased rather than decreased. That is because the market in entrepreneurship has not been permitted to work. That market has been kept closed through entry-barriers that in practice are very high although in law and regulation they were supposed to have been lowered some time ago. By and large these business interests have not served Mauritius too badly between 1982 and 1992. But since then they have been running out of ideas, innovation and capacity.

Why was the market for entrepreneurs kept so closed? Perhaps without realising it, most Mauritians were thoroughly prejudiced against the merits of markets and capitalism by a long tradition of anti-colonial socialism that mistakenly equated colonialism with capitalism, without sufficient intellectual rigour or scrutiny. Those who are not so afflicted preferred to leave the island and are more comfortable abroad. In such a country -- especially one in which a particular ethnic group is associated with the monopoly ownership of productive assets -- market-based dogma has become ideological anathema, even though the one serious alternative to it has been thoroughly discredited and the more diluted versions of “social markets” (as in most of Europe) have proven to be uncompetitive and sclerotic. Thus the anti-market beliefs of Mauritians actually worked against them by protecting and preserving in aspic the concentrated monopoly power of oligarchies that should have been diluted much earlier; and would have been if the market had been allowed to work.

Because of innate suspicion of the market and how it works the questions are also asked: “But how do you know that the market will work and foreign investors in new areas of opportunity will come to Mauritius? Can you provide guarantees that they will?” The answer to that is obvious; more obvious than most people realise. But perhaps they are not so obvious to people who have been cocooned for so long and insulated so much from the outside world through prolonged preferences and protection. In a global market economy, where competitiveness (based on overall multi-factor, cost-efficiency) is the principal driving force in determining the location (and frequent movement) of business activity, the only way to ensure that global entrepreneurs/investors in sunrise service industries will come to Mauritius is to create the most efficient, (tax-wise and administratively), least-cost, business-friendly environment and platform for them to operate in. If that happened, global investors would be foolish not to come to Mauritius if they were made aware of what it offered.

In providing such a platform Mauritius must take into account what other places (like Dubai, Hong Kong, Singapore as well as places like Malta, Cyprus, Gibraltar, etc.) are offering such investors (whom they are also competing to attract) as well, in terms of taxation, infrastructure, ease of dealing with government bureaucracy, overall living environment, social and cultural ease of entry, adherence to global standards of governance, probity, lack of corruption, productive vs. counter-productive unionisation and so on so forth. The real concern in Mauritius seems to be that global entrepreneur/investors won’t come because Mauritius is either unready, or incapable of changing itself sufficiently, to offering the right attractions and doing what needs to be done. If that proves to be the case, it will not be a failure of the market that is at fault but a failure of Mauritius, its government and its society.

There is much argument about what opening up means and implies. There is still an ostrich-like reluctance on the part of the Mauritian private sector, government, trade unions and civil society at large, to recognise the realities and contours of the global economy that is now emerging more rapidly than most realise. There is even greater reluctance to try and imagine what Mauritius’ role in such a global economy might be. With the government having always played a dominant role in leading development up to now, there remains an ill-placed, almost infantile, desire on the part of the public at large, and the private business sector as well, to have the government decide (as it did in promoting textiles, tourism and financial services) on what the next new areas of investment should be and to provide the incentives (and the financial credit) for protected domestic business firms to engage in these areas. There is a decided antipathy against letting the market decide those things instead of the government. The visible hand of government is trusted more than the invisible hand (or, as Ronald Reagan put it, ‘the magic’) of the market.

As an example, the seafood hub is talked about as one such government-driven new possibility. ICT, BPO and KPO have been talked about for some time as other possibilities. So have the development of local jewellery and precision light manufacturing industries. But nothing has come of these so-called new areas of growth. The reason is quite simple to understand. The dynamic needed to make progress in developing these new areas is quite different to the dynamic that was needed for diversification into garments, tourism and financial services. In those areas, relying on the protected domestic private sector was possible. They could buy or rent the talent they did not have to enter and succeed in those areas. In the new areas of global services the same approach is no longer as viable. And the proof of the pudding is in the eating. If the domestic private sector was capable of being successful in these areas (as successful say as firms in India that did not even exist 5-10 years ago) the results would have shown up clearly by now.

Thus the case for continued government-driven development, and continued reliance on a protected domestic private sector that has run out of capability, is getting weaker by the day. There really is no alternative to letting the market work now. Since the domestic market for entrepreneurship and innovation is too small, the market will not work unless Mauritius opens itself up to let more capable competitors enter the market for servicing both the domestic economy and the global economy. It really is as simple as that.

At least no one is arguing with me anymore that a crisis is not around the corner. It is now accepted as unarguable that the economy was seriously mismanaged by the previous government and that it’s rapidly deteriorating condition was obscured by ministers responsible for financial management. The IMF and Moody’s have confirmed the validity of the warning that I had raised in September 2004. I wish I had been wrong but the facts pointed in the other direction.

Realising belatedly the error of their ways it is to their credit that members of the former government have offered their support in achieving a consensus on the changes that must be made in policies and orientation. My concern is less the opposition to reform from the previous government than the opposition to reform from within the Labour Party (and its trade union base of support) on antediluvian ideological grounds. The Finance Minister has more to worry about being undermined by his own party members than by the Opposition. And the Prime Minister has to make sure that does not happen and the road is cleared for the FM/DPM to do what needs to be done without let or hindrance.

But though I may have been right about an imminent crisis there is still much argument about whether my prescriptions and remedies will cure or kill Mauritius. That is good. Debate and criticism are healthy and necessary to inform and shore up the foundations of public and expert opinion, and of government resolve.

The NPCC under its former CEO, Nikhil Treebhoohun (whose remarkable talents Mauritius should never have lost to the Commonwealth Secretariat), and after his departure, has played a vital role in getting the public involved in the debate as widely as possible before those responsible for shaping its destiny position the island to move forward instead of sideways or backward.

That reminds me of what a former Brazilian President – unfortunately no longer with us – said when he got his metaphors mixed. In his first inspirational public address upon being elected he said: “Fellow Citizens: My predecessors have brought us to the edge of a precipice. Join me in making a great leap forward!”

You may draw whatever conclusions you wish from that. My detractors will point to it as precisely the danger that I am putting Mauritius in by suggesting that it opens itself up to globalisation. But what they fail to realise is there is no other option. If there is, they certainly have not made a credible case for it.

For all these reasons the time is rapidly approaching where endless argument and debate need to come to natural closure and after that for a wide social and political consensus to emerge around the proposition that Mauritius must undertake a third generation of reforms, open itself up more fully in order to accommodate rather than resist in a futile fashion the realities of globalisation. In doing so it has to reshape itself as a global and regional business platform and as a ‘home’ for regional and international business in the service industries of the future. To do that what specific reforms must it consider? More next week!