We heard this week that a report would have been submitted by an IMF team to the Minister of Finance on our exchange rate regime. The Minister would have been advised that had we allowed our exchange rate to slip by certain percentage points instead of letting it firm up in accord with prevailing market forces, something more than one percentage point of GDP growth would have been gained by the country.
That comment falls squarely into the courtyard of the central bank. This is because it is the central bank which is given by law the responsibility to manage the exchange rate of the rupee. In other words, the IMF would be saying that the central bank would not have done its economic duty to smooth the business cycle to engineer growth by manipulating the rupee’s exchange rate.
Those of us who follow closely what is going on in the global economy know that when central banks set out to do things that are outside their competence, there could be havoc at the end of the line. Doing economic growth by artificial manoeuvres is certainly not the plate of the central bank. One needs reminding. The US Fed and other key central banks brought interest rates to rock-bottom levels as from 2001 to boost up the prevailing economic boom of the previous decade.
The result: it fuelled up an explosion of consumer spending across the West, then the debt bubble, then the sweep of easy money across other countries of the world including our own, then the bursting of the debt bubble. We know the rest. The whole world is still swimming in the murky waters of the Great Recession that fiscal and monetary mismanagement unleashed as from 2008. The negative repercussions have now travelled far out into the hoped-for redeemers of the global economy, notably China, India and so many others. The ill-conceived plan has wrought havoc enough and we are all hoping that it will finish off sooner. The world economy could then start another period of sustainable growth.
Of all the actors playing on the international scene, the IMF should have known it best that specific policy makers can go up in their own domains to some length only to help cure an overall situation threatening to get out of hands. Each policy maker has to assume his role fully. Shifting it about is not the remedy. The last thing to do in this context would be to project political interference into the vital job of managing monetary policy independently. That would trump up the basic requirement of a modern financial system for the country. We would then be joining the ranks of those you can guess.
Monetary and exchange rate policies cannot fill up the excess capacity rapidly built up by hotels in the hope that the number of incoming tourists would double. They cannot also incentivise our businesses to form a wider well focussed and clustered external investment base for the country, jointly with regional economies, in preparation of the expected tougher global economic conditions to emerge. They are not capable of enlarging our economic aspirations by widening our skill base for it to adapt to emerging new global market conditions. They cannot allocate fiscal resources un-wastefully to where they make a significant difference for staging up our growth prospects. They don’t deliver on productivity increases – a much needed remedy for our ailing economy right now – or push entrepreneurs to innovate the more so as to keep ahead in the race.
It is surprising that the IMF would be telling us where to anchor our exchange rate. It appears that it was the role of the IMF to police movements in individual countries’ exchange rates until 1971. That was the time when the US dollar’s fixed link to gold was snapped unilaterally by the US. The whole world suddenly went adrift on a regime of freely floating exchange rates since then and the IMF lost its role of surveillance over individual countries’ exchange rates in the wake of these developments. We are still there. Frankly, the IMF could at best persuade policy makers, within four walls, as to where it thinks economic anchors were best allowed to stay. Clearly, it is not its role to deliver advice as if it were pitching one institution of the country against the other.
Having said all this, we need to look further ahead rather than pitching the countries’ key institutions against each other. Without cooperation, one cannot make enough headway. It is vital to pull all our resources together when defending separate turfs would be most counterproductive. The best thing is to bring about a non-conflicting growth environment. We need to identify where exactly the shoe has been pinching. The remedies will all spring from there. Our private enterprise should have come with the constructive ideas on how to advance this stage by fresh thinking. Do they, ever?
Mauritius has always thrived on its image as a path-breaker in matters of economic management. Past realisations show that we have copied – and very efficiently so – economic growth ideas of other more advanced economic performers. We set up manufacturing, made tourism contribute its share, developed ICT despite monopolizing presences in the sector and re-constructed the financial sector to give it substance and scope. These activities were similar to those undertaken in other places around the world before us. We took them up and adapted them to our circumstances.
Now, we need to go the further step. Beyond sheer copying. We have to move in the direction of seeking patents for what we develop on our own. We need the world class skills here at home. The work consists of innovating in those areas but more critically adding to the economic range. Only to give an idea of what is meant: South Korea was not a global leader in shipbuilding, classy car exports and sophisticated electronics after its economy was crushed in WW II. Does that say where we need to go? Monetary policy can help by shifting financial resources to their better applications elsewhere than in potential bad debts but the framework for confident forward movement in this direction has to come from the private sector and the fiscal authorities. We should give shape to this dream at the risk of remaining an island for ever.
It may look impossible at first. But we have no choice. Economic management has to climb up that further notch. If we don’t go in this direction, we might stagnate even as the world economy picks up in a year or so. This is where it matters as to who in our region might accompany us in that uphill adventure. They will hesitate to join up with us, whoever those strategic partners might be, if we fail to throw up the perception that we are a leader, always moving a step ahead of others. Singapore’s last week’s forward-leaping decision to thrash up those who evade taxes worldwide using its jurisdiction should not be seen as a leap in the dark. It is the stuff of which good perceptions are made around an efficient country and that kind of stuff is translated into substance, real substance. Efficient management is key.