“Gold should be our objective — nothing less”

Interview: Dr Ashok Aubeeluck, Former Budget Director

“The true potential of Mauritius is an annual growth rate of 6%. This implies that Mauritius is under-performing”

“When we compare ourselves internationally, we note that on the African continent 28 of the 48 countries are forecast to achieve above 6% annual economic growth rate, while the rest is growing modestly. Most of these countries experienced negative or very low economic growth when Mauritius used to achieve 6% annual growth rate. Apart from Japan, practically all Asian economies are experiencing high economic growth rates, albeit lower than the ambitious targets they set. India will achieve a growth rate of 5.8%. India used to struggle at 2.2% when Mauritius was achieving annual growth rate of 6%…” Why then is Mauritius under-performing? Dr Ashok Kumar Aubeeluck, who has served as Budget Director at the Ministry of Finance for a number of years in a recent past, provides some answers…

Mauritius Times: Whilst the Americans are apprehensive about what would happen if the US were to hit the “fiscal cliff”, Budget 2013 presented by Minister Xavier Duval gives the impression that the country is sailing in calm waters. That’s what some economists and private sector leaders are saying privately about what they qualify as a “business-as-usual” budget – the “handiwork of an accountant”, they add, which is not sufficiently ambitious in view of the difficult times we are living through and the uncertainty looming in the years ahead. What’s your take on that?

Ashok Aubeeluck: For months the various government spokespersons have been clamouring that the world is engulfed in a global crisis and an economic recession when there was actually a general pick up. It is not clear whether by harping ad nauseam on the prevalence of a world crisis these people have ended up believing that an economic crisis was hanging like a Damocles’ sword over Mauritius or they were doing so for strategic reasons to lull the population and manipulate public opinion. Or alternatively many have not done their homework and are just picking up views expressed by other persons, without caring to verify information and update about the economic evolution.

The Minister of Finance has an arsenal of trained officers at his disposal. He travels and is exposed through the various international conferences where pertinent information is exchanged. Being a bright politician he is aware of the positive evolution in international economic landscape. He is equally aware we could have done better but somewhere the system clogged. There are some positive social and economic measures but certainly the budget lacks ambition. The Minister has adopted a play-safe attitude, somewhat ultra-cautious and focusing more on fiscal discipline rather than creating a more dynamic investment climate. Given the proximity and influence of his closest advisers, he is trapped by their over-powering influence. Debt management and fiscal deficit control are given precedence over all other considerations. The Minister may have confused the priority of the nation with the priority of rigidly enforcing a tough fiscal discipline.

* As far as the performance of Mauritius on the economic front generally, the Finance Minister has been saying that the country’s performance has been an honourable one given the backdrop of not very reassuring prevailing external market conditions with FDI higher by 20% over the first 6 months of the year compared with the corresponding period last year, the budget deficit at a decent 2.2% of GDP. Is that indeed honourable?

Economics science is about trade-offs. Saying that our performance is honourable at a growth rate of 3.4% ignores both international benchmarks and Mauritius’ own historical performance. Understandably as a politician in the hot seat of the Ministry of Finance, the Minister cannot in public state dissatisfaction about the performance of a country. It is precisely such satisficing approach that betrays a lack of ambition and misleads the population in general and the youth in particular. As Mauritians are aware that no one owes us a living and without abundance of resources, we have no choice than to go for gold.

The Budget does not mention other variables which are central to growth and to maintain internal equilibrium. Savings as a proportion of GDP continues to hover around a low 14% while investment has gone down to some 22-23% against a desired 30% to sustain an economic growth rate of 6%. This leaves a resource gap of some 8%, ignoring change in inventory. Since savings are equal to investment, this implies we are not addressing key factors to generate growth. Investment is an injection that stimulates the economy. There is a well established correlation between savings and investment and investment and growth with a lagged effect of two years. For almost a decade we are trapped with low savings. The modest growth is partly explained by the low savings rate. Just compare our figures during the period 1983 -1991 with those of the last decade.

The higher FDI partly compensates for the low savings but is volatile and carries a high risk element. It is common knowledge that one little decision of George Soros crippled Thailand in the 1990s, leading to the Asian contagion effect. In a more recent Mauritian example the move of some South African investors to repatriate their investment could have created an economic tremor. Relying heavily on FDI to the detriment of domestically-generated savings requires a judicious approach. With FDI we obtain growth but remain a production base with the wealth ownership of national resources vested in the hands of foreigners. Navin Ramgoolam and his team launched the democratization of wealth concept. Too much dependence on FDI while downplaying the potential of savings are in sharp contradiction with the objective of wealth democratization. No wonder the progress in wealth ownership is woefully insignificant after seven years.

We need both savings and FDI to fuel our economy. However, we should adopt the GOLDILOCKS economy – not too much nor too little – just the RIGHT dose, or in the philosophy of Aristotle an intermediate or the mean of the two.

* The pace of the economy has slowed down even more this year, GDP is slated to grow by only around 3% this year (from 4%+ last year), unemployment is around 8%, inflation appears to be also on the rise, going towards 5% by the close of the year, private investment is hardly progressing from year to year, external markets remaining as depressed as ever, and our hotels staying on with a number of empty rooms to fill. Could we have done better?

Practically all economists agree that the true potential of Mauritius is an annual growth rate of 6%. This implies that Mauritius is under-performing – we are inside what economists call the Production Possibility Frontier curve when we should be producing on the curve and with the long term objective of pushing the PPF upward through higher productivity, innovation and new technology. We are not doing any of these in a visible manner that the population can understand.

The 2.2% fiscal deficit objective is at odds with the objective of rapid growth and job creation but good for debt management. It will allow considerable resources to stay idle including land, labour or the ocean. To achieve higher growth, create productive jobs and alleviate poverty we absolutely need to put our resources to work. So at this level we are economically inefficient.

When we compare ourselves internationally, we note that on the African continent 28 of the 48 African countries are forecast to achieve above 6% annual economic growth rate, while the rest is growing modestly. Most of these countries experienced negative or very low economic growth when Mauritius used to achieve 6% annual growth rate. Apart from Japan, practically all Asian economies are experiencing high economic growth rates, albeit lower than the ambitious targets they set. India will achieve a growth rate of 5.8%. India used to struggle at 2.2% when Mauritius was achieving annual growth rate of 6% – Western economists labelled such low growth as the Hindu Growth Rate to demarcate it from the double digit growth rates of the Asian Tigers. China would still grow at around 8%, even after deliberate policies to combat possibilities of the economy over-heating. Europe too is growing except for the PIGS – Portugal, Italy, Greece and Spain. Ireland is out of the danger zone and the UK is showing positive growth, albeit a low one. The French President François Hollande has publicly announced Europe is emerging from the crisis. Of the 192 countries only 4 countries face any economic crisis, and Mauritius has economic relationships of any significance with only two of them. Can we then say we have an economic crisis? It is too easy to blame the external environment when we did not take the right decisions to implement the right policies.

How can we, for instance, explain the double digit growth of the Seychelles and the Maldives in tourism when our growth rate is so low? They source their tourist product from practically the same countries. They are operating in the same international environment and we are not far from one another. Could it be that we have out-priced ourselves in the market, or that we took too much time to diversify our market, over-invested or lost the magic of our synergy that characterised our glorious past? We think we know too much and we no longer rely on scientific studies. It appears that the tourist industry no longer understands the concept of elasticity, and its importance in price determination!

The expected rises in inflation will likely lead to financial repression, deterring savings. This will exacerbate investment and dampen our growth potential. So too often we are encouraging measures that are not facilitating the progress towards attaining high economic growth. Private sector investment is moreover at less than 75% of total investment. If doing business is so good in Mauritius, why is private investment not rising to the optimum 80% of total investment or to the 30% mark as a ratio to GDP?

* One can well understand the dilemma for a Finance minister to produce a budget in an electoral year at the municipal level, but what else could have been expected from a government budget beyond dishing out yet more hand-outs? It is said that 2013 is going to be a difficult year on many counts whereas the Minister appears to look optimistic with his forecast 2013 growth rate of 4%?

Being optimistic is a preferred psychological state than being pessimistic as long as it is not misleading in generating data for decision-making. Sentiment analysis is growing in importance even in economics and a few economists have been awarded the Nobel prizes for their research in this field. It is vital that Xavier Duval with his legendary smile creates the enabling environment for investment to take place. So being optimistic is all to the minister’s credit and to that of the country!

When the market is distorted or experience failures, a responsible government has the ethical and economic duty to intervene positively to prevent a situation from degenerating to gloom. Dishing out hand-outs is too strong to qualify the present situation and unjustified. On the contrary, given the low deficit which is lower than the Stringent Maastricht Rule of Thumb, the Minister could have introduced a universal child benefit programme. Such a programme would have had positive ripple economic implications for building strong human capital, ensuring a reliable stream of human capital to run the economic machinery in the years ahead and correct the demographic imbalance to achieve an optimal pattern of consumer goods as well as not exacerbate the tax system in the future.

I believe if we implement the right policies we would ride on the crest of world economic recovery. We have a higher potential than the modest 4%. We have as yet untapped sectors like the Ocean economy or the development of light engineering or maximizing the potential of the educational hub by turning to Africa. To do so we should weigh the case whether we need a proliferation of sub-optimum universities with average standard or should we aim at consolidating and rationalizing our tertiary education to maximize research potential? And what about the standards of our examination or the contents of our syllabus? Just compare an economics paper of London School of Economics with that of our Mauritian universities. We need to enhance our standard to turn the educational hub into a viable competing export sector. A look at the international ranking of our universities reveals we still have a long way to go. So it is time we run, and think out of the box. We cannot aspire to play the role of regional leader if we implement policies of the least common denominator. Gold should be our objective, and nothing less.

* There is however a constant insofar the narratives that are rehashed time and again by different interest groups in Mauritius are concerned: for instance, the Mauritian exporters lobby was saying recently that the Central Bank’s monetary and exchange rate policies are not being tailored to come to their rescue — the IMF joined in the chorus by saying that had we allowed our exchange rate to slip by certain percentage points, something more than one percentage point of GDP growth would have been gained by the country. How does that sound to you?

There is no clear road to take, and I would refer you to Alice’s question to the cat and the latter’s reply in ‘Alice in Wonderland’. The cat’s reply to Alice was that it depends WHERE she wants to go. A basic flaw in our current economic situation is the absence of an in-depth analysis of the structure of our economy. This can only be achieved by employing economic mathematical models such as Computable General Equilibrium, Social Matrix or Input-Output. If we had these in hand, the decisions would have been clear-cut.

There has been significant evolution in the sectoral performance of our economy. The EPZ industries, precursor to the Export-Oriented Industries (EOI), had sustained growth rates as high as 30% per year, employed a peak of 93,000 jobs and accounted for 13% of GDP and together with other manufacturing made up 24.5% of the economy. Today there has been a dramatic transformation. EOI employ less than 50,000 Mauritians and account for less than 8.5% of GDP, on a declining trend. Similarly king sugar, once accounting for 33% of GDP, represents around 2% today. Presently we have a more diversified economy with new sunrise high-wage sectors emerging. More Mauritians travel and we have heavy dependence on imports of all food, capital equipment, pharmaceutical products, or vehicles. Despite the growing number of tertiary education institutions, Mauritians still go abroad to study and our import bills of fossil fuel, which are equally inputs in our industries, account for 24.5% of total import bills. Moreover we have a widening trade deficit.

The research of Michael Porter based on empirical evidence from 10 countries collected during a four-year period and conducted by PhD holders show that depreciating exchange rates are short term palliative remedies which would worsen the economic situation in the future.

We need to take account of inflation and its impact on both the domestic consumer and international competitiveness. As regards the IMF, too often they send to Mauritius experts with low experience. They are not infallible. In Thailand they created unemployment by making wrong assumptions and created huge unemployment. They also sacked Joseph Stiglitz, a Nobel Laureate for disagreeing with their policy recommendations.

The economic fundamentals and the forces of demand and supply are the best signals to tell us what, how and for whom to produce, and by extension help to determine the optimum exchange rate.

* Whereas Singapore’s export competitiveness stems from a much broader set of other factors, as spelt out by the Monetary Authority of Singapore — that is “innovation, creative products, productivity and so on,” — the Ministry of Finance chose to call for a stronger devaluation of the rupee by buying up $ 100 million for its own account on the local foreign exchange market with a view to apparently getting that additional notch in GDP? How did you react to that initiative?

The Singapore Approach is close to what Michael Porter found and therefore draws support both from theoretical and empirical evidence. We need to decide whether we want to chart our future on robust rocks as the little pig in the story of the Three Little Pigs did or do we build our home with straw and wood like the other two little brother pigs did and wait for the wolf to come with the risk of destroying their house and devouring them. Seeking to depreciate the rupee through direct government intervention to boost export artificially is a myopic approach.

* Another interest group, the trade unions were also saying that the lot of the working class and of the middle class in particular is getting worse by the day with the ever increasing cost of living, and the latest Pay Research Bureau’s report, which was expected to improve matters, but would have done the exact opposite. Can’t say if that forms part of the usual litany of grudging from the middle class, but an unhappy middle class is disquieting news for the political class, isn’t it?

You are absolutely right. The political class in the current conjecture can ill-afford to antagonise the middle class, the more so as the present government through its policies has provoked an impoverishment of this class, denying it successive wage adjustments, abolishing incentives taxes on which they had depended to finance the education of their children or themselves, build their house or to improve their savings. However, many of the trade union leadership are even worse than our politicians. At least there have been changes in political leadership during the past decades; in many trade unions we see the same heads. Some trade unionists spent their efforts in the corridors of ministries or enjoy the perks by virtue of their position. Some even travel more than ministers. Of course we have very dedicated trade unionists that fight for a cause. The behaviour of some trade unionists has led to an erosion of their credibility with the result that the decision-makers do not attach much importance to what they say. Such trade unionists should step down in the interest of the trade union movement and workers’ common cause.

* The London-based Legatum Institute’s 2012 Prosperity Index depicts a rapidly changing global environment. Besides China, Singapore, Taiwan, Hong Kong, Japan and Malaysia ranking within the top 15 countries in its economic rankings, the index also reveals a new group of “Asian up-and-comers: Vietnam, Thailand and Indonesia”. What does that inform us about what really drives economic prosperity and where exactly the opportunities for Mauritius are to be sought?

Economic power is shifting to the East. Make no mistake about it. China is already the second biggest economy, and India is fast approaching to take the third place. Even the once-war riddled Vietnam is aspiring for a top place accompanied by an unprecedented chauvinism. Indonesia is not only rich in resources but has a big internal population to create a dynamic internal domestic market. It does not appear we have done much to explore possibilities with Indonesia, apart from signing a DTA which has never been implemented.

Mauritius has made some timid efforts, very cautious. We need to be more aggressive and diversify our energy focus towards Asia, Africa, and Latin America while concentrating on Africa without losing sight of the asset of Europe. Our Africa policy is the best choice and we should put all our efforts to accelerate our actions. Africa is an emerging elephant and we have to position ourselves. It appears a synergy between private sector and public sector is gathering momentum.

* At the end of the day, would you say that it was necessary to give a new departure to the Mauritian economy, and that this factor been attended to in the Budget?

Certainly. We are progressing at a slow rate. As such we cannot attend to the legitimate aspirations of the people. Surprisingly, it is a nation with still an untapped economic might and the people are hungry for better lives. Most of the old politicians are cut off from what the people really want. The way we implement our infrastructure development is a case in point. We have huge potential to drastically reduce the foreign costs of our fossil fuel bills. But we are beating about on the periphery. We lack the drive to exploit potential areas. The MID project lacks ambition. We should take a big leap. We could, for instance, replicate the European experience of generating renewable energy through the setting up of floating windmill farms in the South of the Island. The Ocean is another missed opportunity. Setting up a pharmaceutical village deserves greater attention than a mere two sentences in a Presidential Address…

* Published in print edition on 16 November 2012

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