Interview – Dr Ashok Kumar Aubeeluck, for Budget Director
When most African countries used to have low or negative growth and India was saddled with the Hindu rate of growth, Mauritius rose from an economic debacle to ride on the crest of world economic recovery.
“Mauritius can potentially achieve a GDP growth rate in the range of 6 to 8% against the current growth rate of 4%”
* “We need to distil lessons from our past. The Ministry of Finance played a determining role under visionary ministers and financial secretaries who have been efficient drivers”
Transforming its mono crop culture into a well-diversified economy, it firmly anchored itself in the middle-income bracket. Today all these countries are experiencing 6-9% annual growth while Mauritius recorded sluggish growth for more than 5 years. Where have we gone wrong? 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: Let’s forget about the international rankings for Mauritius, which the government says should make us proud. Tell us, what are your personal feelings about how Mauritius is doing as a country?
Dr Ashok Kumar Aubeeluck: Different individuals have different ideas of what is good and bad. Objectively, Mauritius is doing below its potential. Based on a set of three models, namely the Harrod-Domar, Input-Output and Linear Programming suggest, studies have demonstrated that Mauritius can potentially achieve a GDP growth rate in the range of 6 to 8% against the current growth rate of 4%. Even so, the growth does not trickle down to the people as evidenced by the decile income distribution and the Gini Coefficient. The middle income continues to be fleeced as never before.
Today resources are lying involuntarily idle with an unemployment rate of around 8% excluding those “depressed who no longer register”, investments that do not yield the optimum return because of ineffective monitoring, absence of applications of relevant techniques in resource management and project implementation, poor planning, an energy policy that lacks ambition, forests that are depleted, oceanic resources that are not being tapped, or a total ignorance of restoration economics to mention a few areas of our inefficiency.
The last few years an avalanche of distrust and disgust has erupted in the aftermath of ethical transgressions by business leaders and political decision-makers. The most visible business executives and politicians created trauma on many fronts. Business leaders, government officials and politicians have been at the centre of the bitterest controversy and conflict of interest which combine to send the wrong signals and frustrate the rising youth population.
* If there is general agreement that we could do better, how and where do we start? That’s the crux of the matter, isn’t it?
When most African countries used to have low or negative growth and India was saddled with the Hindu rate of growth, Mauritius rose from an economic debacle to ride on the crest of world economic recovery. Transforming its mono crop culture into a well-diversified economy, it firmly anchored itself in the middle-income bracket. Today all these countries are experiencing 6-9% annual growth while Mauritius recorded sluggish growth for more than 5 years. Where have we gone wrong?
Mauritius’ success is based on the asset of nothing. We need to distil lessons from our past. The Ministry of Finance played a determining role under visionary ministers and financial secretaries who have been efficient drivers. The offshore sector, the ICT, the UTM, the Cyber city, you name it, were all initiated at the Ministry of Finance. Since the last 7 years no new sectors have seen the light. The Land-based Oceanic Industry, which holds immense potential in terms of energy substitute, economic and product diversification, technology transfer, democratization of wealth, ICT disaster centres, Green economy, production of nutrient-rich bottled water, has been woefully torpedoed. Arjun Suddhoo, Mohamed Vayid and I have seen this sector operating in Hawaii. Instead of allocating some Rs 250 million rupees annually over three years, the Ministry of Finance chose to entrust this project to SIC. We know how much money was spent on Request for Proposal without anything materializing.
It is time serious consideration is given to a planning and think-tank unit. The Ministry of Finance, which for years used the budget as an instrument of development, is today little more than a ministry for budget, focusing essentially on deficit and debt.
We need to start with an enlightened leadership. Leadership must be about high performance and high values. And values don’t come from some vacuum. They result from a strong heritage of trust and integrity… Three qualities are of prime importance: Integrity, Intelligence and Energy. When the Prime Minister started his political career, he sold himself as a package comprising values, rapid project implementation, thinking out of the box or meritocracy. There are very few evidences of thinking out of the box while the meaning of meritocracy has been woefully devalued. The recent episode leading to the perception on the way recruitment is being done is frustrating for hard work, learning, productivity, integrity and honesty. The nation expects assurances for a change in trajectory.
* “Growth for the Greater Good” – this is what Minister Xavier Duval says the Budget 2012 is about. Would you say that his Budget has indeed got “both its rhetoric and its actions right”, but more importantly actions that will match up to the budget promises?
No credible critic can say that the budget is totally good or totally bad. If we do so, we would be indulging in potted thinking. The budget is about allocating scarce resources to competing ends, about chalking and shaping the destiny of a nation. The tax abolition in the current conjecture is a positive measure. The taxes introduced last year were wrongly inspired. If they were aimed at speculators, then they dismally failed. Abolition of taxes leaves more money in the hands of consumers and investors, and has an expansionary impact on the economy, so critical when growth is sluggish and unemployment is high. Although there were still ample room for being more generous and innovative to the SMEs, we can credit Xavier Duval that at least he has set the ball rolling where his recent predecessors had not dared to tread.
A deeper look, however, reveals that from a macroeconomic perspective the Duval budget is a fabric of contradictions, a “trompe l’oeil” in some places and will mostly likely suffer from an absorption capacity.
The macroeconomic fundamentals are hardly impressive and spell disaster in the long run. Saving is still quite low at 16% by our own standard of around 26-27%, hardly conducive to growth. To the extent that savings and investment must be equal in the long run, this poses a serious problem of widening resource gap. Moreover, private sector investment is declining. Part of the reason stems from the huge investment in infrastructure, which the PBB document recognizes will crowd out private investment, thereby jeopardising the prospects of creating productive jobs and generating manufactured exports, currently in sharp decline compared to rising imports.
Moreover, some projects appear to be mutually exclusive. If traffic congestion is a problem, then common sense dictates that we address the problem. But do we need two mega projects that will absorb massive funds and crowd out private sector investment? The public needs to be convinced by empirical studies that we need both the LRT and the dream bridge together with the myriad widening of roads throughout the country. Meanwhile economic activities are gradually shifting away from Port Louis. Xavier Duval should be wary that some officers are not taking him for a ride. As regards the income tax allowances, a simple discounting exercise using inflation as the discounting factor would reveal that based on time preference value of money concept, income taxpayers are still worse off after the Rs 15,000 adjustment.
* The budget, as the Minister rightly said, will be judged by what it will concretely deliver – not by promises made, thus the setting up of a Budget Implementation Team (BIT) in the Ministry of Finance to see to it that policies and measures are implemented on time. Do you think that this will be the solution to the full implementation of the budget measures?
It is a good initiative. However, there is nothing new in it. There was in the past a monitoring of budgetary measures exercise to ensure prompt follow-up. May be this practice had been abandoned and is being revived. When new blood was injected in the ministry, babies and their bathwater were thrown out and replaced by new systems, often less effective and more opaque. Unfortunately, the new broom swept clean only for a few months. But the manipulation of public opinion through excellent communication to which the press and some members of the public lent their voice has created a system of underperformance and lack of transparency, clouded in thick documents that few understand and fewer read.
* It is said, however, that during past years 60% of the budget decisions were never implemented. This would suggest that we badly need “drivers” who can and will make things happen in the public sector. Do you agree?
In some ways some Civil Servants have been reduced to file pushers without any critical thinking or planning spirit while others have chosen to do so without daring to be creative. Many just wear blinkers and are mere followers without ever questioning any measure or project in terms of cost-effectiveness, cost and benefit or relevance. Very few dedicated officers of the type “Not that I love my boss or minister less but that I love my ministry or country more” exist today.
Our model rarely allows for dissent. Thinking differently is fraught with the danger of being purged administratively. The temptation to draw a shopping list to create a dramatic impact without due care to absorption capacity has now boomeranged to the Ministry of Finance. The tendency to indulge in intellectually deviant ways of renaming existing measures or funds smack of a propagandist approach and will serve little purpose in terms of developing the country. Finally it may reflect that the drivers entrusted with the budgetary exercise may not have the required experience or are extremely competent but are merely trying to impress the public. This little game of producing thick complex documents no longer convinces anybody. Planning and scenario analyses are vital if we are to avoid pipe dreams or mavericks.
* There is a feeling that many of the projects announced in the Budget can be qualified as good measures, but are too short-termist, in bits and pieces, stand-alone projects – with no links to clearly defined national objectives to realise a high-efficiency, high-wage economy. What do you think?
If there is anything most critics would agree with, it is that the budget lacks ambition. Here was an opportunity for the Minister to assert himself, but he chose to be timid. It was imperative that he came with daring policy measures and big ideas… Nothing or very little is said about research. Apart from wind power in Curepipe for a paltry investment, the budget has little to offer in reducing the imports of fossil fuel or protecting the environment from carbon emission. Imports of fossil fuel account for 24.5% of total imports. Huge, isn’t it? Even the Curepipe wind farm will have adverse environmental impact in that it will deplete the trees around, so crucial for retaining water at a time when Mare-aux-Vacoas is drying. It is time to examine or explore the possibility of setting the wind farm in the sea, say in the south. Is it not time to divert resources to developing a hydrogen economy by splitting seawater?
The high-wage economy is a concept that can transform our economic landscape. Henry Ford created a revolution in the car industry while Singapore made a calculated gamble and moved out of activities thriving on low technology. It is vital to think of high value-added products such as pharmaceuticals. The proposal gives the impression that the high-wage policy is mentioned merely for the sake of mentioning, otherwise how can we explain the meagre compensation when erosion of purchasing power was close to 18% during the last 5 years. Nor is there any concrete proposal how this is going to be achieved.
* It has been argued in some quarters that well defined strategies have not been spelt out with respect to food security (whilst there is urgency in the matter of tackling food inflation), the water and energy sectors. Your opinion?
I have to be blunt. Many of us harp on food security. For me, apart from producing perishables I find no economic logic to squander our scarce resources when we cannot achieve scale economies nor do we have the abundance of cheap labour and sufficient land acreage. In contrast we have acquired competitive advantages worldwide in various areas. The theory of international trade and globalization suggest that we produce the goods or services we know best how to do, sell them overseas and buy the food we need. I don’t foresee Mauritius facing any shortage as long as we have the money.
A central problem of water relates to water rights. Parliamentarians need to invite water rights owners, amend the law and offer them attractive compensation. No one wants to bell the cat. Water is essential. It is likely we have sufficient water. It suffices to ask them and wait for their reaction.
* There is also the fact that some measures are announced year after year in the budget, for e.g. strategic partner for Cargo Handling Corporation, Medical hub, etc., but never implemented. Is it because the budget measures lack research and proper analysis? What are your proposals to remedy that situation?
An idea often takes time to take shape. It is like a seed, needs time to germinate and grow into a plant. It would appear that in the past a development concept may take roughly a cycle of five years from the time it has been conceived until it reaches its cruising rate. The Cyber city appears to have taken slightly more than five years from the time we wanted to make Mauritius an intelligent island to the time it started blossoming and eventually attaining maturity. Some projects depend on long-winded negotiations; others may be subject to conflicting stands. Others involve trade-offs; interests may be undermined and there may be casualties. Others evolve with time and depend on other factors. The medical hub depends on tourism growth and tourism diversification, promotional campaigns, and technological know-how. There could be legal implications. Most of our economic pillars progressed within an incentive and legal framework. Some ideas may be mentioned, may be found infeasible and may reappear a few years later just as a theory can be discarded and revisited subsequently.
* Would you say that the main challenges in the education sector are being addressed? What did you expect to read in the Budget with regard to that sector?
Our educational system is not as bad as people tend to paint it. Our rapid development is a clear result of the positive impact of our educational system. There are certainly several areas which need to be polished or reformed but my view is that our core system remains one of the best in the world. Teachers certainly need higher wages. But they should equally admit that they cannot expect higher wages without working harder, assuming a wider responsibility and staying longer hours. Those who make efforts are always rewarded. Healthy competition has never given poor results. We should be careful that we do not fall into the trap of allowing sub-standard universities to mushroom without basic infrastructure or research facilities. Mauritius needs a high performing system with high standard and emphasis on knowledge, attitude, aptitude followed by proper evaluation. If we are ugly, we should not accuse the mirror. Part of the problem also stems from the fact that several semi-intellectuals having benefited from the system seeks to whip members of society with ideas they themselves only half understand.
* We know that there are limits to growth in the tourism sector, but does it seem to you that there is a clear commitment with respect to the big challenges and the need for greater work on a long term approach?
If we do not take bold measures we would not maximize the tourism potential, for instance. The Prime Minister set a target of 2 million tourists by 2015, subsequently revised. Surprisingly, this is economically feasible and can absorb the people currently unemployed. With current policies in place, we cannot expect to achieve this target. We need to transform Air Mauritius into a great aggressive airline by refusing to shield it from competition. This may mean giving more than fifth freedom rights unilateral, or adopting an open sky policy on certain routes. Emirates came to Mauritius some six years ago, and already enjoy an 11% share of the market with potential this year of this share rising to 13%. Hotels need to ensure that they do not outprice themselves.
* Private sector investments in productive sectors have gone down over the years in spite of lower corporate tax and the various stimulus packages made available to private operators. Now the abolition of capital gains tax on immovable property, the solidarity tax on dividends and interest is seen as another “stimulus package” for real estate speculators. How do you incentivise our private sector to go for productive investments?
The Stimulus Package is a waste of taxpayers’ money and was ill inspired by both Rama Sithanen and Pravind Jugnauth. Prof Paul Krugman, Nobel Prize in economics, has extensively written on this fallacy and been very critical of the wastes. We need to weed out inefficient firms to boost international competitiveness and generate productive jobs rather rescue lame ducks who often siphoned off the taxpayers money to their personal account. Add to this the political connections and the probable channelling of some of these funds to fight electoral battles. President Obama was quite stern towards a few recipients of taxpayers’ money during the financial crisis and caused them to refund the money. In Mauritius workers lose their jobs. Taxpayers finance unscrupulous businessmen and politicians misuse taxpayers’ money while the public watch passively.
As regards the decline of private sector investment there are a number of issues we need to look at. Already the returns on both private and public sector investment have dropped as evidenced by the ICOR (Incremental Capital Output Ratio). In the tourism industry there was a surplus capacity of some 18% while in the public sector investment in road infrastructure is sub-optimal owing to staggered and discriminatory project implementation. The huge public sector investment has crowded out private sector investment. However, as pointed out earlier, Xavier Duval is correct to abolish the taxes you mentioned. The tax abolition is certainly not another stimulus package. This measure is an elimination of a leakage that was constraining economic growth. We must not see policies under the myopic view of the rich or poor: it is a national policy measure that helps the rich to help the poor through investment and job creation.
Ethics, good governance, coherent policies, meritocracy, no ethnic targeting and an ambitious vision of developing strong home-based activities geared towards exports. We have mentioned construction, pharmaceuticals, energy, a revamping of the sugar industry and oceanic industry as the new pillars to add to existing ones.
* There are many doubts about realising a growth rate of 4% in 2012 with a strong rupee and without any effort to boost our competitiveness. Do you share these apprehensions?
In the light of what we have seen above we certainly have apprehensions with regard to growth rate. Last year we had to revise the growth rate downwards. This year the same scenario will repeat itself with growth stagnating at less than 4% unless there is a change in the policy framework.
Is the strong rupee a perception, a gossip among businessmen, the reflection of vested interests or a real reflection of current economic situation? An exchange rate policy should take into account our export and import structure as well as the nature of our products and market. If non-traditional exports are stagnant or declining, it is a case of overvaluation, which makes it difficult to sustain growth without encountering BOP problems. Nonetheless I may venture to propose the following for reflection, which apparently may be suitable for island economies: pick a basket of currencies reflecting our trade pattern and use it as the centre currency. Use a band of say 10% to allow the local currency to fluctuate.