Budget: Finding the Middle Path
We are most probably a few days away from the presentation of the new government’s first budget. Usually, depending on which side of the receiving end one finds oneself, divergent expectations are held about the desired budget policies.
There is agreement currently on one aspect at least across the spectrum: the policies should be balanced enough so as to sustain economic growth despite the prevailing difficult external environment; they should also provide some sort of relief to the middle and lower income groups who have had to put up with oppressive tax policies directed against them during the past five years. Ministers of Finance usually take a stand by tilting decisions to one side while claiming to be doing so for the long term benefit of the other side which is made to face the music. In past years, it was constantly being claimed that the private sector was constantly facing tough external market conditions. Fiscal policy was therefore eased in its favour. Evidently, all the rest had to bear the brunt of the ensuing fiscal adjustment.
Since coming to power in May this year, the new government has been faced with very uncertain external market conditions. Our principal export market, notably the Euro zone, saw an escalation of a crisis centred on excessive public debt. Nevertheless, as of today, order books of the local textile sector are in good shape although intense international competition on export markets is making companies scrutinise their price policies sternly enough so as not to lose it out to competitors. In the tourism sector, room occupancy remains reasonably high; however, local operators have to keep an eye on their packages so as not to lose out to competing destinations. Labour constraints are affecting activities in the ICT and construction sectors but demand in these areas is more or less sustained. Others like wholesale and retail trades, transport and communications, are moving on an even keel, supported by a steady flow of FDI. Despite being relatively sheltered so far from the full effects of the international economic crisis, the private sector has kept alive an element of fear of the future.
Governments have been responding to such fears for ages now. The government, by allowing the entry on the local market of foreign workers who are cost-effective, is permitting local enterprises to keep up to external competitive pressures. Similarly, when the government is spending its resources to train up and better equip Mauritians, it is helping to raise the efficiency of local enterprises and hence the employability of the domestic labour force. When the government is sinking money into production re-engineering of local enterprises, the impact is the same; it is giving them a new lease of life to the extent they are thereby made more viable. This is seen in the institution of the Economic Restructuring and Competitiveness Program in the second half of this year. All these are good policies to uphold our production structure.
The Bank of Mauritius (BoM) has adopted a similar accommodating stance in favour of the private sector. The decision of its Monetary Policy Committee at its last September meeting to reduce sharply its key repo rate by 100 basis points, goes in this direction. The rupee which had been on a salutary stable course heretofore, slipped against the Euro, the US Dollar and the Pound sterling in the wake of this decision of the central bank. Consequently, exporters have been gaining more rupees per unit of foreign currency and have seen their debt servicing decline. On the other hand, the public has to pay more rupees for imported items of consumption by virtue of rupee depreciation. It is also taking in a sharp fall in its interest income. The threat of higher inflation eating away moreover into the savings of the public is present besides. Although, according to official statistics, the domestic rate of inflation has come down from 8.8% and 9.7% respectively in 2007 and 2008 to 2.5% in 2009 and to around 2% in 2010, these incremental rates do not reflect the ground reality as regards the pressure under which the public’s purchasing power has been on a cumulative basis. That could be one reason why workers’ representatives have been asking for a large enough wage compensation at this point in time to make good the cumulative erosion of purchasing power workers have faced in past years.
The National Tripartite Forum, comprised of representatives of workers, employers and the government, has been commissioned to decide on the quantum of compensation to be awarded to workers in this context. Looking at the policies the government and the central bank have already taken to insulate local exporters of goods and services, compensation to be paid to workers is viewed as going in the direction of a partial negation of the various advantages already conferred on the private sector. Employers’ lobbies and their media have therefore not left things to chance. They have been active. In past years, workers were being under-compensated for the erosion of their purchasing power. Insufficient growth of worker productivity and lack of capacity of the private sector to pay were used under the previous regime, amongst others, to justify the under-compensation.
Thus, the private sector has got it all: low direct taxes, low interest rates, a depreciated rupee as well as taxpayer sponsorship of its advertising campaigns in the tourism sector. Its remaining apprehension is the risk that workers might nibble away part of its gains through wage compensation.
This situation shows that it is inconceivable that the next budget will claw back some of the advantages previous budgets, the NPC and the BoM have given to the private sector. The scenario has been worked up to such a point that that there will be a hue and cry against any reverses of decisions. It seems quite likely then that workers and the public will once again become the beast of burden.
In the circumstances, the government would be well inspired to bring comfort to workers by giving them the assurance that they will be over-compensated in the event the international economic crisis was over so that our production structure would by then have been sufficiently diversified to give true resilience to the economy. The government can earn the goodwill of workers nevertheless by giving special protection for the immediate to protect to the full those categories of workers who have been hardest hit; it may also show itself to be more humane than in the past by not denying altogether any compensation to those in higher income brackets as it was done under the previous Minister of Finance.
It is the duty of policy makers to show, on the other hand, that they will not fall into the trap of continuing to meet the litany of endless (often unjustified) demands of the private sector for ever increasing amounts of protection. After one reduction of the repo rate, the private sector is already asking for more interest rate reduction; after the recent reduction in its borrowing rates, it is already asking for more reduction; after a dose of rupee depreciation it benefited from in the wake of the repo rate reduction, it is asking for more depreciation; after obtaining deregulation of the labour market, it is leveraging its other demands for privileged treatment by the government against the threat of having to lay off workers, etc.
The government may, in the circumstances, be well advised to send to the private sector a strong signal that it will not continue to entertain its various abusive practices to the detriment of workers. There is a balance to be struck between the contending forces so that one part of the production mechanism does not keep gnawing all the advantages to itself under the pretext that it is eternally in dire straits. The problem is that the private sector is not giving up its classic attitude which consists of walking away with the spoils of the game it manages to secure under various pretexts, quietly leaving it to the government to pick up all the blame for the resulting social discontents.
The government has to change this one-sided equation that often characterises its dealings with the dominant economic operators. It has to walk along a fairer middle path instead of going to one extreme or the other. How can this be done? A number of actions would need to be taken.
Enlarge significantly the numbers of operators in the key sectors of the economy so as to reduce the government’s vulnerability to the few dominant players on the market. New comers should be competent, however. The extent to which it achieves this objective can become a key indicator on which to gauge progress from the present status quo in which it is perpetually held hostage by a few economic stakeholders. Increase the range of our production activities towards the internal and external markets through directed incentives to a new breed of more adventurous and less rent-seeking entrepreneurs. Take action to stop successive rounds of currency depreciation and inflation followed by wage compensations that have kept undermining the relative competitiveness of local production compared with other countries. Invite and support world class entrepreneurs to set up new business hubs in Mauritius with ever larger amounts of value-added going into the economy. Sharpen our diplomacy for it to become a smart vehicle to create synergy for us towards setting up many joint international ventures as possible with Mauritius as the centrepiece of emerging production structures.
Develop an even greater role for our big entrepot potential in the provision of both goods and services to the world, extending the duty-free concept well beyond our geographical bounds. Improve the scope of our higher educational and vocational training and convert this learning into high-tech local production for external markets. Prioritize higher skills and learning instead of losing direction by focussing on things like the introduction of Creole at the primary level. Improve our mastery of English instead to vie against the best in the world. Diversify production to improve our self-sufficiency as far as our key input and essential requirements are concerned. Do not allow our resources (land, infrastructure, marine resources) to be under-utilised or kept idle for lack of alternative profitable economic opportunities, if need be by government taking a stake directly in all those areas. In other words, identify the slack and get the people who can implement a larger economic scope to put the slack to profitable use. There are several others. Let us stop here for an initial list.
As one can see, there is plenty of scope to formulate a budget which will be different and more ambitious than the classic contentions we have been seeing so far. This kind of departure from the routine can free the economy from the stranglehold of divergent pressures that have kept us bogged down to a rather limited range of economic activities. If there is a factor that has kept us operating far below our potential and embroiled us in unnecessary class warfare, it is the absence of a decisive decision factor. We have not taken bold action to raise ourselves above pedestrian considerations which have thrived on stakeholders being engaged in perpetual conflicts. We could have employed our wits instead to use every possible opportunity to enlarge the national cake.
The decision failure which has created this situation of stalemate can be overcome. The budget is the tool par excellence to override the classical shortcomings of our decision-taking process and the new Minister has an opportunity to shine. No one will lose, not even the nail-biting classical private sector for that matter. In fact, the right decisions will make us go beyond what we have always thought to be our “natural” frontiers by repeating the mantra that we would have done well despite not being endowed with natural and mineral resources. Not every country that has made significant progress has based its success on the availability of such natural resources. Nigeria has failed in almost all compartments despite its oil exports bringing in some $200 billion dollars of income each year. We should rise above these self-inflicted complexes if we really want to improve the well-being of all our people. It is assertive decision-making of a new type that has been prominent each time we have crossed new thresholds of economic development in the past. It may be worth it to go along the same route with a well inspired budget.
* Published in print edition on 12 November 2010
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