Clouds on our Economic Horizon
There has been an on-going debate about the real state of the domestic economy. On the official side, the view has been that despite the international economic conditions, growth in 2012 will be around 3.1 to 3.7%. This is what the Mauritius Chamber of Commerce and Industry, amongst others, expects it to be as well. Others are less optimistic and they have been giving out the risk faced by the Euro zone, our principal export market, as a possible source for a more depressed or less sustainable rate of growth. The latter believe that something must be done to plug the loophole that will be created in terms of our economic performance in the event Indian decision-makers were to let go of the Double Tax Avoidance Treaty between the two countries.
A debate about the economy has the merit to keep minds focussed on it as the whole of social well-being is centred upon how the economy fares. It also has the merit to bring into consideration options available in case certain scenarios were actually enacted, independently of the steps we could take to beef up the economy. Actually, the uncertainty regarding economic performance in the west continues to dominate minds. We can either benefit if an upturn takes place or we would have to work it up painfully if the depressed economic conditions in our principal markets were to persist or deepen. In the latter case, no minister or government has the power to change the situation as it obtains. Abstracting from situations that are outside our control, we need to proceed by building substance in our economic platform. This is the agenda facing the country.
In terms of policies, some moderation is likely to come about especially in Europe. The election of a socialist as President of France on 6th May has sent signals that the purely conservative policies advocated so far by prospering countries like Germany would not have exclusive sway. There could be a blend of policies which advocate rigour in government finances but not without accommodating a certain number of pro-growth policies. If this trend is asserted not only across the western world but in the rest of the world as well, there is a good enough chance that there will be a pick-up of growth in Mauritius’ external markets. In that case, we will face a less strenuous adjustment process in time to come.
Some publications like The Economist have expressed doubt as to whether the scope exists for governments of the affected countries to be given time to harness public debts and fiscal deficits, thus postponing to some extent a regime of tough austerity measures so far adopted by the countries in economic difficulty. Right wing economic policies usually make short shrift of the social factor and can prove highly disruptive. The growth factor should be given a chance to avoid the risk of slipping away into economic depression. Europe’s central bank has shown its willingness to build confidence by injecting a huge dose of liquidity. If institutions play their role and the rigid rules are allowed some more time and flexibility to set in once the growth process shows signs of burgeoning, there is a chance that moderate governments can gain time from the reform process and possibly take Europe out of the woods. Timing of the recuperation process is important as Mauritius could get enough time to adjust its market structure and strategy, thus minimizing any adverse impact.
The more policies are modulated in time in our external markets, the less the risk that we could end up bringing our people currently in employment and our industry thumping down onto the ground.
Europe’s predicament is arising from the fact that a number of its countries have allowed public expenditures to go beyond bounds simply because funds were available at cheap interest rates to meet rising expenditures. Events in Europe show how very difficult it is to reverse gear and make people give up easy habits they have been weaned into by an overspending state. Huge amounts from those public expenditures represent wasted expenditures since no growth can be recouped from them.
On our side, we need to learn the lesson by keeping a stern eye on potential waste of public expenditures. It is well known, for example, that contractors of public markets have enormous appetites. Unless they are kept within bounds by severe contractual conditions, they could make the government exceed what it had budgeted for from time to time and give less than value to taxpayers. This kind of waste will become telling on the state of our public finances. It will represent sunken cost never to be recovered and calls therefore for the highest degree of vigilance so that we don’t slip in the direction of some of Europe’s periphery countries which cannot now invest when this is most needed because nobody is prepared to lend to them.
Another matter that calls our attention is the sustainability of the economic sector. As markets shrink, competition at the level of quality and pricing of our export products assumes great importance. Our aim should be to prioritize growth in this regard. That means playing with a number of levers which help our business get on with the external markets as the outlook of business goes on changing over time. Our prices should be right; we should work at higher levels of the value addition process if we are to meet our external markets on a firmer footing; short of this, there is an attendant risk is that we might lose out our jobs to numerous other competing suppliers at the lower end of the market. Never should we forget that we are in direct competition with alternative suppliers and that we could avoid being overrun by going for niche markets and at the right prices to keep industry alive. More skills should therefore go into our production for such markets and our pricing scrupulously monitored. Investment cannot be lagging behind if we wish to remain viable on those highly competitive external markets. So, private investment needs to crystallize up to prove that we have “animal spirits” enough to tackle our difficulties.
The other lesson to learn from the dramatic situation from which the world is trying to extricate itself is not to allow matters to worsen to such a point that the bitterness of the medicine which we might have to administer to set things right could create the scale of the catastrophe we’ve been seeing in western markets the past 4-5 years. Why allow things to get so much out of hand as to have to apply extreme measures all at once someday to redress the situation? We should at all times be seen to be cutting our coat according to our cloth; this is the context in which former German Chancellor Gerhard Schroder was heard saying last week that, for having insisted to keep up German productivity at the required levels, he lost his job in the last election even though the fruits of his initiative are being reaped by Germany to this day. If the right policies are implemented at the right time, the pain of eventual severe adjustment is warded off.
At the other extreme, we have seen governments with a mind to projecting a future sound state of health of public finances adopting at one go extremely harsh measures. This can have dramatic social consequences in the immediate, sometimes leading to a reversal of such measures if not now then later. It is better to be balanced when taking decisions of the sort because backtracking is not usually regarded favourably by everyone, including investors. A well-calibrated set of measures has the effect of yielding both growth and social stability. Had the Europeans, at least some of them, not gone into overdrive at some time into the past by pouring into unproductive investments, the ride would have been less rough than it is. It is a lesson we should not forget. It is important to be sober in public decision-making.