A Budget for All Seasons

By Anil Gujadhur

Let the Europeans and Americans do the fire fighting; let’s not copy them blindly by adopting “fiscal rectitude”. Our priorities are and should be different. The moment you start pretexting the prevailing tough international economic conditions, you are confessing simultaneously that you are hardly doing anything about it. Our mission should be to get over them.

The government’s budget for the next year is being presented this afternoon. It is coming at a difficult juncture. It is well known that the world economy is not poised for great growth. The alarms have been sounding, on the one side, from a nearly malfunctioning Euro zone leadership unable to firmly get to grips with the fundamental flaws affecting this important economic zone on which we depend for our sustained growth.

Nor is America alive, on the other hand, to its global economic leadership role at a time distress signals are coming from all sides; some of its politicians are more focussed on next year’s presidential elections which explains their unthinking obstructionism towards the needed economic stimulus for taking America out of the current economic morass. They fear that if they did the right thing to give the economy a go, they might be helping the incumbent President towards his re-election.

Our budget for next year has to be cast against this not very brilliant international loss of economic orientation. Will the markets on which we depend for our exports shrink? If they do, demand for our products will suffer. Chances are that they will pick up only very slowly with the restoration of confidence in those places. Will we be able to perk up our exports by instilling a dose of rupee devaluation, bringing down the tax burden of businessmen and creating the right business environment for them to be able to get their exports out fairly more easily than at present? This is not certain. If our export outlets are closing down as economic conditions worsen over there, there is a physical constraint to export, not a pricing problem, which is what is normally addressed by currency devaluation and lower taxes. As for enhancing the business environment by adopting seamless administrative procedures, it is a good thing at any time, including when the world economy is in distress.

We should not however use the admittedly tough international economic conditions to pass on to the public higher prices by having recourse to currency devaluation or shifting the burden of taxation from corporations to the public, which is what is achieved by raising indirect taxes such as the Value Added Tax. But the budget must surely do something to tackle the situation of economic growth which has been stalling around 4% pa over the last two years? Adopting some explicit measures to uplift of the range of local production is better than leaving economic management to automatic pilot. The new budget must not hesitate to create new avenues for enterprise, independently of traditional export sectors hitting against depressed demand conditions in its external markets. One has to mark a significant break from the set pattern and the time of distress is the right time to test how far we can venture out.

It must be borne in mind that when the Export Processing Zone was started in the 1970s, this sector’s total annual exports amounted to Rs 3.5 million at first, going up to Rs 12 million in the best of the 1970s, which is the annual turnover we would expect today from a single performing SME. By dint of hard work, Export Oriented Enterprises (EOEs) sell today exports amounting to Rs 40 billion annually. It was necessary to do something new to overcome an economic condition that looked insuperable on the face of it. Introducing new activities and scaling them up is what public policy-making is all about and certainly an issue the budget can take up. Depressed demand conditions in those external markets may be putting pressure on the price the EOEs would be getting for their products; the answer to this factor is to raise their productivity in the teeth of intense international competition for markets.

Productivity enhancement

The budget achieves productivity enhancement in such cases by inducing new technically advanced investments in enterprises. How? Costs of production are streamlined by granting tax credits for incremental investments which, by improving the overall level of technology currently employed by enterprises, increase the overall efficiency with which the existing capital stock is exploited. Lower costs of production are thus realized. The budget also creates broader market contacts for local enterprises by making a dedicated use of our diplomatic resources in whichever countries where such marketing potential can be developed. Significant sums are being spent already by our foreign missions. Now, the time has come for the results to show up, in view of our urgent quest for newer export markets.

That the EU has accounted decades past and still accounts for 2/3 of our total exports (a case of putting all our eggs in one basket) shows that the diplomatic market diversification effort has not been that successful. Many past budgets have spoken about such efforts to be made and it is perhaps time now to go for the action. Let us be result-driven. Even if the public sector managed to pull its necessary weight to unleash this potential by these and other means, businessmen have to be willing to venture out further than what they are doing already. It is only combined and harmonised efforts by the public and private sectors that will take Mauritius out of its limited current externalisation. We will need adventurers who want to take risks.

We have another new Minister of Finance presenting the government’s budget today. This is an occasion perhaps for adopting a dose of fresh thinking on policy making. The experience from countries which have seen their economies expand in the past and those that are growing despite the current difficult international economic conditions hold some lessons for us. What do we see in places like India, China, South Korea, Brazil, etc? The secret of spearheading economies of the sort lies in a simple formula. It consists of casting out obsolete baggage (e.g., doing business in a protected cell at home, keeping down inside and outside competition with the help of the State, producing substandard products for captive domestic markets and, hence, having no incentive to innovate and beat the competition) from the past and moving on unrelentingly to aggressively adapted ingenious and combustible new structures of production in keeping with the changing times.

Examples abound. Nokia has been overcoming its falling market share by joining with Microsoft, Tata is producing the highest brand motor cars of the world by capitalising on the high engineering skills available in the UK by shifting production to Jaguar Land Rover and directing products to markets that had in the past found their prices out of their capacity to pay. Other past home-fed Indian companies such as Bajaj are exporting motorbikes and three wheelers to heretofore unsuspected countries; Samsung is vying with Apple, hitting the highest point in high definition “tablets” when, a decade ago, it did not even figure in the more sophisticated range of this internet market. Several mobile phone companies of Africa turned this device into a money transfer mechanism when we had not even thought about such a thing here.

Those countries and their innovating enterprises are consolidating their sustainable future. No longer are those adventurous and successful enterprises happy to take refuge in increased “rent-seeking” in the home market by bending short-term budget policies to make the maximum out of the situation. They have been shifting instead to dynamic export-driven and consumer-facing economic activities in global markets. It’s a tougher battleground but it’s worth it because you end up securing larger markets than you could ever have done by continuing to milk the domestic cow. This kind of reorientation of the model of our economic activity would serve us best the more so as, being small in terms of global market size, we will not be drawing negative attention to ourselves by exacting too big an incremental share of production from world markets at this time of economic uncertainty.

Our objective should therefore be to stick to a scheme which constantly innovates, re-designs and re-prices our products and production structures advantageously for the local and external markets. This demands know-how and a vision to foster the required platform. Even though this vision has been eluding us for many years, it is not too late to sharpen our skill and technology capabilities to go for this model. This model works on strict rules of good governance and the highest standards of integrity and professionalism on the part of those who are called to interact with the markets. It requires filling the gaps for getting on to the real market as quickly as possible in the style of Infosys which, short of getting publicly trained software engineers at the required level of proficiency and in the numbers needed for its product range, decided simply to build up its own campus and got off to become a global leader in software in consequence.

Governments which have spotted the opportunity to take off will not hesitate to spend money to get the core number of specialists to lift up whole new areas of activity from home with comparative cost advantage on global markets. It is clear that we have to make significant efforts to reach those high standards but we have no alternative than not to allow rigour and discipline to slip into every compartment of our undertaking if we want to make it finally to this goal and join the league of those who manage to break away from an underperforming mould.

A waste Mauritius can ill afford

Admittedly, we have not been showing the road to this high standard of performance, witness the succeeding reports from the Director of Audit about enormous waste occasioned by poor management of public and parastatal funds from year to year. Obviously, had the highest standards of management held sway at Air Mauritius and at the State Trading Corporation, surely this country would not have squandered in egregious hedging bets the several billions of rupees that have gone lately from out of our pockets through the agency of these two corporations merely to fatten speculators in other countries. It is a waste Mauritius can ill afford.

The Audit reports have also been pointing out waste occasioned by misapplication of funds in the central government sector as well involving diverse areas like roads, infrastructure, procurement, managing stocks, etc. Indeed, it is surmised that if an business-minded government were able to foreclose this tap of abuse effectively, it would save enough public sector funds as not to warrant any tax hike to balance budgets. We don’t have a precise idea of the scale of such waste but we do casually observe poorly executed public contracts, some simply of a poor standard as if calculated to deal with an emergency and no more, some suffering from poor sequencing of work resulting in eventual cost escalation due to duplication and others simply not undertaken on time and acting thus to hamper economic progress by failing the elementary test of synchronised spending.

Rather than going for a “good budget” for having given freebies and certain advantages to some select people or a “bad budget” for having shifted a higher burden of taxation on to the people, the today’s budget of the government may become an open “chantier” by an altogether innovative shift of emphasis. The watchword of this new field of opportunities to be opened up for the country is Efficiency.

Structural departure

A structural departure of this sort, laying down the foundation of the economy afresh, as it was done in the 1970s — e.g., break from a situation of stalemate that was becoming increasingly untenable economically, bringing in new concepts, identifying potential by learning from the experience of other pioneers in the field, developing those ideas to workable levels, overcoming legal and institutional limitations standing in the way, training up those who will engage in the work space being developed, start producing, on the novel platform thus created, goods and services that were not here before or, if they were here in some little scale, were too rudimentary to enable us to penetrate external markets meaningfully — would not only do justice to the people. It would also show that the government has a will to crunch real business over the remainder of its current term.

Were today’s budget to travel beyond the classic notion of merely collecting as much revenues as possible and redistributing them again, by centring efforts on laying down rather a strong foundation for expanding our space of economic production, it would not have been in vain. Let the Europeans and Americans do the fire fighting; let’s not copy them blindly by adopting “fiscal rectitude”. Our priorities are and should be different. The moment you start pretexting the prevailing tough international economic conditions, you are confessing simultaneously that you are hardly doing anything about it. Our mission should be to get over them.

* Published in print edition on 4 November 2011