Flogging dead horses and persisting with the same economic model

which has failed the country for so long is not a viable option

Running Around In Circles

No economic model which requires government to systematically bend over backwards and grant generous support measures to the corporate sector in a bid to continuously prop a below par growth rate performance in a context of growing and widening inequality in the country can be tenable or sustainable. This is the more so if such largesse is in the teeth of economic and commercial common sense and short changes the wider interests of the people, SMEs and the other stakeholders of the economy such as employees, consumers, other economic actors or government revenue. Such parochial and narrow policies can only backfire.

“Inclusive growth does not mean poverty alleviation or a more efficient use of CSR funds or financing do-good projects. Inclusive growth means creating the necessary conditions to have everyone on board through merit based gainful employment, equal opportunities for all which benefits every section of society and a fair sharing of the fruits of prosperity. Mauritius is at a crossroads. The economy is bogged down. Flogging dead horses and persisting with the same economic model which has failed the country for so long is not a viable option. We must stop running around in circles…”


Business Mauritius, which represents the interests of all the major organizations and key conglomerates of the private sector, has again requested a range of support measures from government in its submission in the context of the 2018/19 budget consultations which would impact government finances while in the same breath admonishing government on the urgent need for rigorous budgetary discipline and the reduction of public debt. These support measures include the panacea of reducing the corporate tax to a low level of 3% for an initial period of eight years for domestic oriented enterprises (DOEs), the global business sector and other private enterprises as well as various grants, investment tax credits, and a freight rebate scheme on imports of raw materials for DOEs.

We must recall that the government had itself paved the way for such inane measures when in last year’s budget it approved a reduced corporate tax rate of 3% applicable ‘on the profits derived by any company from exportation of goods’. What has been the outcome and benefits of this measure for the economy? Taking the cue from government, Business Mauritius simply proposed that this generous measure be extended to a wider range of sectors and private enterprises for an initial period of eight years? Pushing this logic further, why not cap VAT and income tax rates at 3% as well for the benefit of all?

Not rocket science

In a country with a standard low tax rate of 15%, it is not rocket science to understand that the burden of taxation in the country is borne by the multitude and mainstream Mauritius through consumption. From latest official figures available, corporate tax represents only some 13% of tax revenue whereas VAT, excise and taxes on goods and services reap some 64% of tax revenue.

Against such a backdrop and in an international context where corporate giants such as Starbucks, Google and Amazon are being pressured by governments across the world to pay their fair share of taxes in the countries they operate and earn their profit in, is it not galling and simply preposterous to propose a reduced corporate tax rate of 3%? How can government cut public debt and abide by rigorous rules of budgetary discipline if it does not cut its coat according to its cloth?

Since 2015, government has granted an unprecedented package of incentives and very generous exemptions of taxes and duties to promote the potentially lucrative smart city and property development schemes, which also allow the sale of a major share of their residential properties to foreigners. Government has thus already forfeited billions of Rupees of state revenue through a range of tax and duty exemptions granted to smart city project promoters richly endowed with land assets in prime locations. These include exemptions from the payment of land conversion tax, land transfer tax, morcellement tax, and income tax for a period of eight years, VAT as well as the registration duty and custom duties. No wonder widening inequality is growing exponentially.

It is also evident that the generous Indian grant of US$ 343 million or some Rs 12.7 billion and a line of credit from the government of India as well as grants from other countries have propped state finances and enabled the government to invest in major infrastructural projects such as the Metro Express. The country cannot depend on such support to manage its finances. Such support from friendly countries should also not be a licence for fiscal largesse. Without a rigorous management of state finances, budgetary discipline will remain an elusive objective.

Cutting the dead wood

Competitiveness is the underlying leitmotiv of the Business Mauritius submission. The stark commercial reality is that no sector can survive if it is not competitive per se in the liberalized world market place. It is pointless and tantamount to throwing good money after bad to persist in producing and selling products which are patently uncompetitive. The dead wood must be chopped. Foreign Direct Investment (FDI) in the manufacturing sector in 2017 was thus a paltry Rs 108 million i.e. 0.6% of the Rs 17.491 billion of FDI invested in the country.

The local and foreign investors operating in the local textile industry who thrived on preferential agreements had to adapt to fierce market competition in the wake of the end of the Multifibre Agreement in December 2004. Over the years large swathes of the textile industry involving some of the major players have been delocalized abroad in countries such as India, Bangaldesh or Madagascar providing better competitive advantages. As a consequence, textile and garments exports which accounted for 6.7% of Gross Value Added in 2006 have dropped by nearly half to 3.7% of GVA in 2018. It is the main cause of the decline in the exports of the manufacturing sector. However, within the manufacturing sector, exports of both food products excluding sugar fell from a share of 5.7% in 2008 to 4.7% in 2018 while the share of other exports fell from 5.5% in 2008 to 4.6% in 2018. Going forward, the better growth prospects in most of our main export markets will probably have a positive impact on export sales.

The world corporate history is full of examples of strategic delocalization and the re-engineering of the economy to sustain growth and exit from loss of competitiveness in traditional sectors towards higher value added segments of the market and upmarket services sectors such as Information and Communication Technology (ICT), the education hub and healthcare sectors as well as the financial services sector, high tech industries, the free port activities or the immense and diverse potential of the ocean economy, etc.

In contrast, Foreign Direct Investment in the 2015-2017 period in Mauritius was highly skewed towards real estate activities and construction. In 2017 more than 50% of the Rs 17.491 billion received as FDI went into real estate activities with some 30% invested in IRS/RES/IHS/PDS projects whereas some 38% of FDI went into financial and insurance activities. In 2016, a whopping near 73% of the Rs 13.648 billion of FDI received went into real estate activities whereas the share of FDI in real estate activities in 2015 was an enormous 84%. The economy is thus growing in a lopsided manner.

Conjuring subpar growth

For too long, the present economic model and its operators have been unable to break the barrier of 4% growth rate. Growth which stood at 4.4% in 2010 has dipped in the range of 3.4% – 3.9% during the last 7 years covering the 2012-2018 period. The business sector and government have a collective responsibility in this unacceptable state of affairs. Are economic actors out of their depths to cope with international trade liberalization and a very competitive export market environment?

Growth is a function of the innovativeness and entrepreneurship of the private sector and its capacity to seize opportunities of the market and the new pillars of the economy opened by government. There are already positive signs that in the absence of the required pointed expertise to tap the immense potential of these new sectors, successful partnerships have been established with foreign specialists in, for example, the state-of-the-art private healthcare sector, the education hub and the upmarket financial services sector.

Instead of groping clueless in the dark, we urgently need to induct the necessary foreign knowhow, expertise and qualified personnel required and attract major economic actors in these high value added services sectors to leapfrog Mauritius significantly up the value chain with the offer of a wide range of more pointed and sophisticated services in these potentially high growth sectors. Time is of the essence.

Inclusive growth does not mean poverty alleviation or a more efficient use of CSR funds or financing do-good projects. Inclusive growth means creating the necessary conditions to have everyone on board through merit based gainful employment, equal opportunities for all which benefits every section of society and a fair sharing of the fruits of prosperity.

Mauritius is at a crossroads. The economy is bogged down. Flogging dead horses and persisting with the same economic model which has failed the country for so long is not a viable option. We must stop running around in circles. The status quo is untenable. We need to do what it takes to urgently rejig the economy and chart the required strategy to steer the country on a more robust and innovative pathway towards a high income economy for the benefit of the multitude.

 


* Published in print edition on 18 May 2018

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