Tackling poverty – Policies must be good
‘Alice in Dodoland: Looking to the Mauritian economy’
By Eric Ng Ping Cheun
‘Alice in Dodoland: Looking to the Mauritian economy’ is the third book authored by economist Eric Ng Ping Cheun. Released recently and on sale in our main bookshops, it is meant to sound a wake-up call to the Mauritian economy. It aims at shaking up the old-fashioned mindset and rent-seeking mentality that still befall many government bureaucrats and business leaders. Excerpts from one chapter taken out from ‘Alice in Dodoland’ deals with the issue of public policies that are effective in combating poverty. Read on:
The increasing number of forums and conferences on the determinants of poverty and strategies for alleviating it has provoked a renewed sense of urgency for faster and deeper poverty reduction. But who are the poor? The category “poor” is neither well-defined nor static, with people moving in and out of poverty, depending on their immediate economic circumstances. And it is hard to measure poverty because of the scarcity of poverty-related data.
Concerns about growing poverty in Mauritius should not be dismissed or sneered at. But that does not mean that we should give credence to the litany of complaints and fears of the anti-globalizers and other enemies of free-market economy who shed crocodile tears over poverty. These eternal well-wishers still believe that poverty is the result of the success of those who produce wealth, instead of the failure to produce it.
Poverty is not rife in Mauritius. To the credit of Statistics Mauritius, the government can even boast about the economic and social indicators that speak volumes for the well-being of Mauritians.
While economic decline does take its toll on the poor, the Mauritian economy is growing instead, albeit at a slower pace than in the 1990s. A weak spot is the jobless rate, still at 7.9 per cent in 2011. Household consumption expenditure keeps increasing moderately, at a real rate of 2.6 per cent in 2011. From September 1992 to September 2010, overall real wage rate (adjusted to the headline inflation rate) rose by a total of 30.6 per cent. Besides, official income indicators might underestimate the amount of money people have, on account of the growing informal sector: more people have jobs from which their income is not declared.
One cannot deny that the average quality of Mauritians’ lives has improved. Mauritians are living longer and in better conditions. Our infant mortality rate (the number of deaths of infants aged under one year per 1,000 live births) fell from 27.3 in 1986 to 12.5 in 2010. Our male and female literacy rates are high, respectively 88.7 per cent and 81.5 per cent in 2000.
The biggest drawback regarding social indicators is that they measure national averages. An improvement in such averages could presumably come from a disproportionate improvement in the position of richer people. However, it is unlikely that an increase in the national average does not imply some improvement for the worst off.
To the extent that human capital, being a crucial determinant of economic performance, allows people of poor backgrounds to rise in the economic hierarchy, the government’s achievements in the education sector can be hailed as being favourable to poverty reduction. Human capital refers to the skills, education, training and health of individuals. Public policies that raise the educational level do have an impact on the incomes of the poor. And more educated individuals tend to invest more in their health, thereby raising the nation’s productivity.
Pockets of poverty are often related to regional disparities in opportunities for education. In this respect, one cannot belittle the government’s efforts to eliminate these disparities by investing massively in educational infrastructure. For the year 2011, 13 per cent of total government expenditure was allocated to education, and the amount (Rs 11.5 billion) accounted for 4 per cent of GDP.
In 2011, the gross enrolment ratio was 97 in pre-primary schools, 100 in primary schools and 70 in secondary schools. Secondary enrolment gives a better representation of the quality of investment in human capital. Therefore, even if primary education plays a central role in lowering poverty, we should not neglect the importance of secondary school enrolment in directly raising the incomes of the poor.
It remains that simply educating the population does not provide a magic wand to economic prosperity. Communist countries such as Cuba and North Korea do pretty well, at least on paper, in terms of the education levels of their populations. Yet, they have very poor economic performance. This is because human capital is not enough. A well-functioning economy also needs the right institutional environment and policy reforms: free markets, a flexible price system and wage-determination mechanism, and individual choice as to what type of education people want.
Incentives to work harder to get paid more
The legal framework for industrial relations in Mauritius is still fraught with labour market rigidities that hinder job creation. Entrepreneurs lose their time juggling with more complex regulations, a process which is costly to business.
Union work rules are obstacles put in the way to improving labour productivity. What we need is a system which gives incentives to work harder to get paid more, to work on time, to develop good work habits and to innovate. Increases in labour productivity serve to enlarge the supply of goods relative to the supply of labour and thus to reduce prices relative to wage rates, which is to say that they raise real wages.
Mandatory wage rates have the ultimate effect of penalising the least skilled, the least educated and the poorest members of the economic system. For instance, workers who might have been carpenters, plumbers or electricians but who are denied employment in those lines by the height of union wage scales, are forced to seek work elsewhere, say, in factories or stores. Being more capable, the carpenters et al will be likely to find employment in them. To absorb the carpenters et al, wage rates in these lines would have to fall. If not, the workers in factories or stores will in turn be displaced, resulting either in unemployment or in less desired and lower paid occupations.
True, policies to help the poor are easier to advocate than to frame. But there are good, legitimate and effective ways to respond, and bad, illegitimate and ineffective ways. If public policies can alleviate poverty, it is mainly through their influence on economic growth. Emphasis must be placed on the importance of economic growth as the principal (but not the only) force in raising the incomes of the poor. Studies confirm the relationship between economic growth and poverty alleviation in many developing countries. Without growth, there is no chance of further reductions in poverty. Growth should be viewed as an active “pull-up” strategy for reducing poverty, rather than as a passive “trickle-down” strategy.
Our GDP growth averaged 4.2 per cent over the period 2008 to 2011. Such a level is not high enough to pull up the poor. The bottom line is that a lot of growth is needed so that the extra income generated can go to the poor.
Helping the poor without hurting the rich
Public policies must help the poor more than the rich, but they must not hurt the rich. Policies that foster poverty-reducing growth are those that enable the poor to benefit from the growth process through the labour market or self-employment, and to safeguard the purchasing power of their incomes. The Mauritian economy is still far from a low and predictable inflation which makes it possible for the poor to do it. Economic literature teaches that inflation is a “harsh tax” on the poor because they are less likely than the rich to have access to financial hedging instruments protecting the value of their income.
Public policies that shrink the size of the government, lower unproductive government consumption and reorient government resources to productive outlays, will allow more scarce resources to be devoted to investment in education and health. Improving education and health for the poor promotes economic growth and helps them participate in the process through employment.
The poor needs access to finance to join the mainstream of economic development. The problem is that micro-finance is too scattered and its projects too small to make an appreciable dent in poverty. Furthermore, micro-finance still leaves unanswered the question of whether it is really the most cost-effective way to reduce poverty. In fact, the ultimate effect is a displacement of labour to the lowest levels of employment and a corresponding unnecessary and artificial increase in the supply of labour at the bottom of the economic ladder.
Financial sector development also benefits the poor by facilitating access to credit and improving risk sharing and resource allocation. Large-scale credit intervention by the government can be more effective than micro-finance in providing credit to small entrepreneurs. In that respect, the Small and Medium Enterprises Scheme is a laudable government initiative whereby the domestic banking sector will extend Rs 3 billion of credit facilities to SMEs over three years (2012 to 2014) at 3 percentage points above the prevailing Key Repo Rate.
Concurrently, liberalisation of agricultural prices, accompanied by better “endowments” of land and labour, can help some people grow out of poverty. With access to world markets, small-scale producers can get a higher price for their products and pay less for their inputs.
It will be extremely difficult for Mauritius to reduce poverty if it shuts itself out of the global economy. Globalisation, for all its risks and challenges, is a force for poverty reduction because, first, it boosts economic growth and, second, growth reduces poverty. Lobbying at the international level should be directed at lowering trade barriers – both the barriers that the rich nations impose on the poorer ones and the barriers that the developing countries maintain against one another. It is noteworthy that 70 per cent of the tariff burden that developing countries face come from tariffs imposed by other developing countries.
Trade openness enhances economic growth and impacts positively on the incomes of the poor. Of course, it is important to complement open trade policies with good institutions and domestic policies. Lower tariffs will be translated into increases in trade in so far as corruption lessens, customs administration improves and ports become efficient.
The best medicine for the poor is strong and non-inflationary growth based on liberal trade policies, minimal government intervention and good governance.
* Published in print edition on 3 February 2012
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