Focussing on Growth by Removing Constraints

The Economy in 2018

The biggest challenge facing the government in this critical year 2018 is how to kick-start a significant turnaround of the economy

By publicly stating that the next two years would be different from the past three since the last general elections the Prime Minister Pravind Jugnauth has explicitly admitted that, to say the least, these three past years have been far from satisfactory. The harshest critics would even suggest that they have been largely wasted and hugely unproductive, if not counterproductive.

It is encouraging that Pravind Jugnauth should admit to so much since as it is well known, recognizing that there is a problem is the first necessary step towards finding a solution. The consensus which seems to emerge from the comments of most analysts at the beginning of this critical year 2018 (sandwiched between the by-election in Quatre Bornes and the year of the general elections 2019) is that the biggest challenge facing the government is how to kick-start a significant turnaround of the economy. A rate of growth even marginally higher than 4% in 2018 would under the circumstances be considered as an achievement.

Indeed one need not be a rocket scientist to reach the conclusion that following these three fateful years the safest and most impactful proposal that can change the economic and political landscape would be a serious prioritization of the economic growth agenda. The questions which arise therefore are whether this is at all achievable and, if yes, what are the conditions which would make for its realization? What of the global economic environment which is totally beyond the control of government? And what about the availability of competencies and institutional capacity to master the controllable factors whether in the global economy or locally?

Global growth firing on all cylinders

When it comes to the principal and most impactful factor, which is obviously out of our control, the good news is that the global economy is definitely showing strong signs of finally turning the corner after the 2008 Great Financial Crisis. After a long time, global growth is firing on all cylinders as the economies of Asia, Europe and the United States simultaneously show positive signs of strong performance.

This happy conjunction will hopefully stimulate demand in these markets and especially in our traditional markets in Europe both for exports of goods (garments) and services (tourism). As for Africa, which must henceforth be an essential component part of any credible economic strategy for Mauritius, it stands to benefit from these same positive global economic forces. This should sustain the potential for Africa to remain a destination for Mauritian investments as well as provide a market for manufactured products.

Under the circumstances the realization of a rate of economic growth higher than 4% looks well within our reach and what is more is that this will depend almost entirely on our own capacity to create a new framework which will enable sound policy driven economic growth. In this connection we may advantageously borrow a leaf or two from the writings of well-known Harvard Professor Dani Rodrik. In a paper titled ‘A Practical Approach to Formulating Growth Strategies’, he reaches the following conclusion after a series of case studies of the experiences of a variety of developing nations:

One conclusion one could take from this is that our ability as economists to design and recommend growth strategies is extremely limited. Basically anything goes, and it is up to imaginative politicians to come up with recipes that will work.”

He then goes on to propose the following:

“First we need to undertake a diagnostic analysis to figure out where the most significant constraints on economic growth are. Second, we need creative and imaginative policy design to target the identified constraints appropriately. Third, we need to institutionalize the process of diagnosis and policy response to ensure that the economy remains dynamic and growth does not peter out.”

The trick, he adds, “is to find the areas where reform will yield the greatest return or where we can get the biggest bang for the reform buck. What we need to know, in other words, is where the most binding constraint on growth lies.”

The Mauritian Miracle

At the risk of sounding rather simplistic in the interpretation of Rodrik’s prescriptions, one could easily reach the conclusion that the famous “economic miracle” recorded in the 80s was indeed a consequence of the prevalence of such conditions – whether by design or through sheer circumstantial luck, one would be hard pressed to state.

It is nevertheless the overall conclusions that the authors of one of the most serious studies of the “miracle” seem to have reached. In effect Arvind Subramanian and Devesh Roy in an IMF Working Paper – ‘Who Can Explain the Mauritian Miracle: Meade, Romer, Sachs, or Rodrik?’ state among several other similar statements, the following: “Romer has strongly argued that the Mauritian experiment is a vindication of a strategy of importing ideas and allowing the economy to generate high rates of growth based on them.”

When it comes to growth strategy, for the sake of illustration an application of Rodrik’s methodology could lead to the identification of two fairly obvious instances where there exist severe constraints which have been hampering growth over recent years – exports of manufactured products and access to finance for SMEs. One can then venture to propose “some creative and imaginative policy design to target the identified constraints appropriately.”

As regards exports of manufactured products, government must have the guts to end the taboo surrounding the institution of some form of “industrial policy”. For thirty years or so the prevalent dominant neo-liberal ideology has banished the concept of industrial policy from the very vocabulary of government programmes. It is perhaps high time to reconsider making “industrial policy” a central plank of our strategy to revitalize manufacturing exports.

Industrial policy can offer an active platform for collaboration between the private and public sectors for the application of new thinking to diversify our markets as well as product offerings more in line with the latest trends of global demand. Industrial policy can also provide the “voie royale” for achieving the upgradation to more value added products which is an essential component of our ambition to attain high income country status.

Finally, the longstanding vexed issue of access to finance for SMEs must be addressed if government is serious about its commitment to the growth of this vital sector of the national economy. The setting up of an Enterprise Bank with a special remit to boost manufacturing can go a long way towards putting an end to the persistent bone of contention between small and medium entrepreneurs and government which is keen to promote the SMEs as a vehicle of economic growth and employment creation. Such a bank would preferably be run at arm’s length from the government and receive funds from the private sector. Its charter should unambiguously define the criteria for eligibility to different classes of financial support and applicants made fully aware of those so as to minimize the risks of undue “intervention” as well as recrimination among entrepreneurs.

Research in many countries has shown that the prosperity of a country is strongly dependent upon the mental models that its political leaders have about how wealth is created, what role the public and private sectors play, and how change happens. Even the best advice and policy prescriptions are likely to fail the test of success if leaders of the country have not clearly resolved these issues.

 

* Published in print edition on 12 Ocotober 2018

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