We again find ourselves at an identical crossroad today.
Clearly formulated policies that might focus our economic activity with the right integrating incentives and access to resources and markets in our immediate region will turn the situation around
A senior adviser at the Ministry of Finance announced that today’s budget will be a “disruptive” one. Maybe he was drawing attention to its innovativeness, not to the disruption it may cause. This is because the word “disruption”, as far as local economic policy-making is concerned, may connote something disorderly, riotous, attention-seeking…
We have had enough of the latter type since the Bramer-BAI case was mishandled last year and after the India-Mauritius DTAA was emptied of its substance the way Indian tax officials had been asking for since a long time. A severe blow was dealt to business confidence from which the country has not recovered yet. Any departure from that style of policy-making should be welcome – call it disruptive, if you will — since the economy is faring none the better.
Specification of the current economic equation
As economists well know, the very foundation for making good policy decisions is to fully “specify” the economic equation needing to be addressed. The objective is to know clearly and comprehensively where we stand so that we don’t end up missing the forest for the trees.
Consider our economic condition at the moment.
For a number of years now, our economy has been performing on “auto-pilot”, on an economic model which has barely been overhauled by the addition of new sectors of self-sustaining activity. One might say that a positive annual average rate of economic growth of 3.5% recorded in past years is not bad after all in current international conditions. Certainly.
Our tourism sector has picked up again; our manufacturing sector is not increasing; agriculture is beset by phasing out of EU market preference while our international finance sector is facing the consequences of the India-Mauritius tax treaty renegotiation. Activity in construction and public utilities has been low key for quite some time now. International market developments have affected our garments and textile exports due to an intensification of competition on external markets in the context of falling international economic growth and unpredictable politics.
Sharp inequalities have appeared on our local front. The imbalance is reflected in several social and economic indicators. Investment is slow-paced, at least not enough to pick up the economic slack. Unemployment at around 8% is continuing while skilled workers are finding it increasingly difficult to find jobs matching their qualifications. In parallel, there is being seen a proliferation of petty crime, invasion of synthetic drugs in schools, deepening of poverty in some customary pockets of society, a general sense of social disorientation at the lower and middle levels. The situation needs to be quickly turned around.
In the context, it is widely acknowledged that the economy needs re-engineering either to sustain the present growth rate by stimulating existing areas of production or by not allowing it to fall behind, given a not-too-rosy international perspective, especially for our manufactured exports. No new all-embracing sustaining orientation, in view of the numerous challenges confronting the economy, has been given on the economic front since the advent of the new government as from 2015. It is the reason today’s budget is being seen as the harbinger of a more pragmatic economic management than it has been the case so far, addressing both internal inefficiencies and external market constraints which are in the offing.
Two Examples how we overcame economic hurdles
Consider now two examples of decisions taken by governments in the past when the economic challenge was no less acute. It may be worth the while to state in the beginning that the improvement which eventually came in place in both the examples was not the doing of one specific government or a single budget. It was patient but relentless collective work until the positive outcomes started kicking in finally.
Firstly, in the pre-independence days, the base of production in the economy was centred on a narrow sugar cane base. On the one hand, the workforce was increasing and thus keeping downward pressure on wages; on the other, income distribution was so skewed in favour of the few at the top that workers and their families down the line were trapped into a perpetual state of utter economic deprivation.
Policy makers responded to the situation by setting up the welfare state – despite screaming protests by the upper class — in such a manner that those lower down tangibly felt they would be lifted out from the deep economic morass they were finding themselves in through the widespread provision of supports like education, water, electricity, public health services and social aid. Certain misguided politicians protested even when new public roads were being built up after the railways had long been phased out. Many of our political and other leaders today have emerged thanks to those welfare policies.
Wittingly or unwittingly, these policies, particularly the emphasis on basic education for all, also laid down the foundation for our economic diversification into services – including financial services after India’s economic reform of 1991 – which occupies two-thirds of the economy today. They helped create the educated category which mans the services sector into which the economy has diversified.
The second example relates to numerous economic difficulties which came to a head in the post-independence period.
In 1970, in the face of unemployment in the 20% range, legislation was passed to bring up local production of textiles and garments for exports. But the activity was not picking up at first. The international trade regime at the time was confined to exclusive trade blocs trading with each other. It was a physical barrier we could not overcome. The price of oil – a major import item for Mauritius — shot up in 1973, throwing our balance of payments into disarray. In the late 1970s, we ran out of foreign exchange reserves to pay for our imports. With the currency having been massively devalued in 1979 and 1981, the population was reeling under the twin effects of unemployment and high inflation. We tried all sorts of single remedies without the expected success.
The turning point came in the early 1980s. A joint decision by Britain and UK to open up international trade suddenly started boosting our exports of textiles and garments. Investors from the Far East who already had export openings in western markets started expanding activity in this sector all over the island. Our exports to Europe boomed and, with it, local employment. The reason behind our success was the Lomé Convention we had signed up way back in 1973 when the UK joined the European Economic Community. It gave our textile exports preferential access to the EU market, which itself was able to generate the demand for our exports thanks to its higher economic growth in the now changed global trade context.
The right signals we had sent earlier to investors by slashing down direct tax rates and eliminating tariffs on imports of equipment and raw materials by industries, giving them tax holidays, coupled with the Lomé market access, made it such that, by 1987, it was difficult to find household help in Mauritius.
What was it that paid off? Obviously, opening up of global markets to a more liberal trade regime was the cornerstone. But, at home, we had also pursued pragmatic policies – rule of law as a founding principle, an exchange rate policy which favoured exports, open access free of quota and duties to a big export market in the EU through Lomé, a flexible supply of domestic labour to work cost-competitively in the emerging textiles sector, efficient connectivity with external markets for exports of manufactured goods and imports of inputs (Air Mauritius), social stability, a political environment which was business-friendly as well as providing free and frank on-going dialogue based on mutual trust between the public and private sectors and reasonably good domestic infrastructure for easy mobility of workers as well as manufactured goods all across the country.
We again find ourselves at an identical crossroad today. The budget can do only that much and no more. But clearly formulated policies that might focus our economic activity with the right integrating incentives and access to resources and markets in our immediate region will turn the situation around for both ourselves and our nearby potential economic partners. We need to expand our economic scope, no less. The process will take its time but what’s wrong if there will be light at the end of the tunnel?
* Published in print edition on 29 July 2016