Doing Business Indicators: Not the whole Story

There are so many reasons why we have to cut short the jubilation. Major risks to durable growth lie in the external sector, which is under pressure from a number of sources

Mauritius moves up five places relative to its last ranking and joins the Top 20 among 190 countries according to the World Bank’s Doing Business 2019 Report published on 31 October. Government jubilates about this good score being a testimony to Government’s efforts to build a robust and resilient economy. The PM highlighted the fact that “the efforts deployed since the past three years by Government have consolidated the position of Mauritius on the international front and have accentuated the trust of international investors vis-à-vis Mauritius.” This is testimony, he said, of the various measures implemented such as the enactment of the Business Facilitation Act 2007 as well as budgetary measures.

The country came first in all four indicators such as Safety and Rule of Law; Participation and Human Rights; Sustainable Economic Opportunity; and Human Development. Furthermore, Mauritius ranks 6th as regards the efficiency of its taxation system, and six indicators on 10 have been improved last year. Commenting on this progress, the CEO of the Economic Development Board (EDB), underlines that Mauritius remains a “competitive and attractive jurisdiction while consolidating investor confidence”. He added that the EDB is currently working on the establishment of e-licensing and business process re-engineering. Measures that should further contribute to business facilitation.

But critics will say that ‘Doing Business’ indicators do not tell the whole story. These indicators should be considered alongside many others. Doing Business is a sort of economic cholesterol check — important, even critical, but that’s not the whole story. We have seen this before: these reports come in quite glossy paper and well packaged to show that the poster boy Mauritius has carried out meaningful reforms which government and its cheerleaders repeat parrot-like.

In 2009, Mauritius improved its ranking from 24 to 17 (out of 183 countries). The improvement in ranking at that time was treated with the same kind of jubilation that we are seeing presently and with more or less the same comments about a more competitive and attractive Mauritius that “will bring in foreign direct investment, critical for country’s development, especially new and more committed capital, (it) will introduce new technologies and management styles, help create jobs, and stimulate competition to bring down local prices and improve people’s access to goods and services.” 

This is not necessarily true in our case; capital inflows were mainly in the real estate and banking sectors and, at the mere sight of some economic shocks, the capital inflows are found wanting. In such cases, these reports do add a footnote that “their indicators only provide a starting point for governments wanting to improve their global investment competitiveness. They do not measure all aspects of the business environment that matter to investors. For example, they do not measure security, macroeconomic stability, market size and potential, corruption, skill level, or the quality of infrastructure.” 

Since it is possible to improve competitive rankings by bringing a few changes to the indicators, governments go for the easiest reforms, which are not necessarily the most important ones for business or the economy. Like the previous regime, whose main reforms were the few touches brought to the tax rates and some improvements in the investment climate framework, the present government’s reform agenda remains unfinished while critical constraints to economic development are becoming increasingly evident.

At the end of 2014, the government inherited an economy with some weak macroeconomic fundamentals. The legacy was such that it could not continue on the same trend. Instead of bold decisions to carve out some decisive moves towards an alternative development paradigm anchored in the new realities – like, for example, the need to reorient the economy towards higher value added and more productive activities –, it continued with the same lethargy in policies formulation and project implementation, and this has resulted in the current failure to drive the economy to a new plateau of sustained growth.

The propensity for real estate rather than growth-enhancing investments and the ill-managed huge Global Business Companies (GBCs) net inflows that had led to the so-called “Dutch disease” — as reflected by the declining importance and the slowdown below trend growth of the manufacturing component of the Export Oriented Industries has continued. Same thing about private investments which continue to be geared towards real estate driven activities rather than to production for export, particularly of services.

It will take many more years for us to realise a more diversified, high income, high tech economy. We will continue with our steady growth course of below 4%, supported mainly by household consumption and public investments. In 2018, private investments will not grow in real terms. Even with the projected scaling up of the public investment programme, the investment rate will remain stuck at around 17-18% of GDP. The push for stronger GDP growth, well above 4% to achieve higher income status, will require a much higher level of investments, and a more ambitious gamut of policies to address structural economic imbalances and raise overall productivity and competitiveness.

Indeed there are so many reasons why we have to cut short the jubilation and rejoicing. Major risks to durable growth lie in the external sector, which is under pressure from a number of sources. The deficit on net exports could again widen sizeably as the rebound of oil and commodity prices and the appreciating US dollar raise the value of imports. Financial stability is heavily reliant on continued large inflows of capital for the balance of payments. It will become increasingly important to address the savings-investment imbalance, and revive the domestic savings rate in order to finance the country’s growing investment needs on a sustainable basis.

Unfortunately, even our government cheerleaders, now engrossed copiously in partying and celebrations, will have to finally come round to the hard realities of the economy once they have recovered from their hangovers.

Innovation and Productivity

Innovation: Ranked 49^th in 2015, Mauritius has regressed to the 75th position in the Global Innovation Index (GII) 2018 among 126 countries. Singapore is 7th. Our Innovation Efficiency has also deteriorated, which means we are getting less out of our inputs and we have some glaring weaknesses too. We are 105th, 93rd and 99th in Knowledge Creation, Knowledge Diffusion and Research and Development respectively.

GII, a benchmark for nations’ innovation capabilities, measures innovation based on a combination of innovation inputs (that is, institutions, human capital research, infrastructure, market sophistication and business sophistication) and innovation outputs (that is, knowledge and technology outputs and creative outputs) in a society. Innovation is known to be one of the best ways of creating economic growth, and the stagnancy in R&D investments and the decline in productivity can explain to some extent why we are having problems in boosting growth beyond 4% in the long run.

Productivity: Over the period 2007-17, the annual average growth in the compensation of employees in the manufacturing sector and in the Export-Oriented Enterprises (EOEs) has outstripped the average annual growth in labour and capital productivity; the Unit Labour costs in dollar terms have thus been increasing at an average rate 2.2% in the EOEs over the same period. This has affected the competitiveness of this sector.

The contribution of labour to the 3.8% average annual growth in GDP over the period is 13% and that of capital is 64%. The remaining 23% represents the contribution of Total Factor Productivity (TFP) – qualitative factors such as training, management, technology, institutions and policies. Most of the expansion was due to capital accumulation, with labour marginally different from the earlier periods, reflecting the capital deepening during this period, with TFP making a smaller contribution.

Mauritius will have to rely more heavily on TFP growth to sustain economic growth if it is to realize the transition to a high-income, high value added economy. Higher Total Factor Productivity growth could be the result of lesser misallocation of resources in the economy that is more of production efficiency. For e.g. a higher employment rate of women, better governance and labour market institutions as well as a reduction in the skills deficit, skill shortages and graduate underemployment, will boost TFP and economic growth

The Economic Development Board should consider the present state of our innovation and productivity as a matter of urgency. It should set up a taskforce on innovation, with the specific mandate to (a) improve the innovation ecosystem in the country, (b) reassess the role and contribution of the institutions and agencies in education and training, research and knowledge diffusion, and (c) re-examine the strength of the overall enabling environment they offer and development of links between various actors within the innovation systems. (Better linkages between teaching and research could be an important factor going forward – as presently being endorsed by the University of Mauritius – by fully exploiting the National Innovation Fund towards research and innovation excellence in line with its proven Centre for Biomedical and Biomaterials Research.)

Our innovation systems should place equal importance to investment in innovation in the form of borrowing and adopting technologies from elsewhere and as well as investment in developing our own unique advantages and addressing our particular challenges. For example, among others,
(1) setting up a SME Industrial Technology Research Institute, patterned along the Taiwan, South Africa and Singapore technology research institutes. It will scour the world for cutting technologies and use its own laboratory facilities to assess their appropriateness to local conditions and build pilot versions to demonstrate them to prospective investors,
(2) targeting FDI flows to high-value and technology-driven industrial activities, and (3) building our own innovation benchmarks and indicators in different sectors.

Building innovation capabilities takes time; we need to map out the long term investments needed to build the necessary innovation building blocks and to expand its research and innovation footprint. The leadership of the EDB as well as a long-term vision is primordial since they provide both focus and commitment, including long-term capability building.

* Published in print edition on 9 November 2018