Interview: Percy Mistry
“Mauritius has to make a living out of becoming a global city-state…
that is its manifest destiny”
* “5 out of 10 for the present govt’s overall performance over the last five years …that beats the 2 out of 10 that the previous government deserved”
* “The agenda over the next five years ought to be to tame and re-educate the union movement in Mauritius”
Percy Mistry needs no introduction to readers of Mauritius Times and to policy makers here. He had spelled out in various articles and interviews to this paper over the past years his proposals for the economic recovery agenda, many of which have been taken on board by the present government. In this week’s interview, he comments on the Alliance sociale’s performance in meeting the challenges facing the country and provides his views on the way forward.
Mauritius Times: When you last spoke to us in 2006, you listed down the challenges facing Mauritius, namely “emerging large structural macroeconomic imbalances, unemployment, inflation, rapidly increasing pubic debt, increasing emigration of skilled human capital, insufficient progress in developing new economic opportunities, higher global energy prices”, etc, and hoped the new government would come forward with new vision, strategic direction, policies and purpose to address those challenges. How would you rate its performance vis-à-vis those challenges during the past five years or so in office?
Percy Mistry: On a scale of ‘0-10’ this government’s performance should be rated at ‘6’ on dealing with structural imbalances, inflation, and public debt, but at ‘4’ on dealing with unemployment, reducing outward emigration of skilled human capital, and creating new economic opportunities. It has been a mixed performance. The government started out well in 2005-06. It pursued the right economic recovery programme. It was fortunate that the agenda it used was given to GoM on a plate — by the competitiveness forum hosted by NPCC led by Nikhil Treebhoohun in the previous year — for tackling and reversing the poor policies the previous government had pursued with scant regard for, or understanding of, their economic and financial consequences.
Rama Sithanen is a more astute and experienced Finance Minister than his predecessor, who did not even understand his brief, leave alone master it. Rama is probably one of the best, if not the best, Finance Minister in Africa. It would be nice if he were nicer and more gracious to his friends and enemies in general but very bright people can be forgiven a few personal rough edges. It would also be nice if he did not initiate damaging and entirely unnecessary battles with the Governor of the Bank of Mauritius (who I think has done a tough job well with little credit for it). That said, I am less confident about the PMO and the Cabinet (driven by their own perpetual political machinations and fantasies) in standing behind the FM and FS and understanding fully the ramifications of what both are trying to achieve in transforming Mauritius from what it (unfortunately) is to what it should be.
On the whole I would give the present government 5 out of 10 for their overall performance over the last five years. But that beats the 2 out of 10 that the previous government deserved.
* In his speech on the Budget, last year, the Prime Minister said that it is the reforms initiated by his government that saved this country from economic chaos – “We have been ahead of the curve and we have been congratulated by many institutions for having been not only pro-active but also speedily reactive,” he said. Others argue that the economic storm did not really affect Mauritius the way it did elsewhere and this did not really invite the kind of solutions that were adopted in those places. Which is which?
The Sithanen/Mansoor reforms did change the downward trajectory that the Mauritian economy was on from 2000-05 when the global economic climate and external circumstances were more favourable. It is probably correct for the present government (or at least the FM) to indulge in self-congratulation (although overindulgence in that useless activity is distasteful) on being pro-active and reactive in what it has done at least from 2005-08 and in some of what it has done thereafter. But it has made some bad blunders by bringing in appalling taxes (like on residential property) and eschewing more appropriate taxes like on large heritage landholdings being used for the wrong purposes (sugar production and IRS). It has also eschewed a revenue windfall by opening up the domestic property market rather than confining such opening only to the IRS. That has only served to make a handful of the landed Franco-Mauritian super-rich (and allegedly some people in government as well) even richer – hardly in keeping with the Euro-socialist ethos that pervades the country (but which is totally counterproductive). GoM has also failed dismally on the infrastructure front over the last five years with traffic congestion becoming unbearable and problems looming with the future availability of water, electricity and competitively priced telecommunications as well as more efficient physical transport connections by air and sea to the rest of the world.
On the second issue of whether the global economic storm did or did not affect Mauritius the way it did elsewhere, and therefore whether the solutions applied (proactive/reactive fiscal and monetary stimulus) were necessary: I think those who argue that Mauritius was not affected are being myopically tendentious. This ‘perfect global storm’ affected every country, although to varying degrees. The only countries that were not seriously affected were China and India whose gargantuan internal markets and macroeconomic policies (which are now superior to those being pursued in the West and OECD countries) buffered them from the full impact that was felt elsewhere. Those two countries only suffered a growth recession as did Mauritius.
Therefore it seems to me foolish to argue that an economy like Mauritius was not affected – when it is so heavily dependent on (a) foreign earnings from tourism mainly from Europe where aggregate demand for such services has been severely affected by the global storm; (b) offshore financial services which have also been badly affected around the world, but because such services in MRU are largely India-related they have not been affected as badly as the financial services sectors in the EU and USA; and (c) on manufactured exports and services. The fact that the growth rate dropped so sharply from 2007-08 in 2008-09 is sufficient evidence in making that point. So I think some degree of stimulus was necessary though one can argue whether the tools and instruments used to provide that stimulus were necessarily the best ones.
* “Let the market work” – this is what you have been advocating in several articles and interviews given to this paper. We have seen how the markets failed to regulate themselves in the midst of the global economic downturn and span out of control and that it is thanks to the intervention of governments around the world that the impact of the world recession on their respective economies have been minimised. Do you still believe that there is no alternative than to let the market work?
No apology is offered for my previous stance on relying on markets and ensuring that they work properly. That remains my current stance as well. Despite the global blowout that occurred in 2008-09 (but whose origins became apparent in 2007) anyone who thinks that markets fail more often than they work does not understand economics, nor knows how to read events and history properly. Markets do fail from time to time for a variety of reasons. We keep learning each time how to avoid, prevent, or learn to deal with the consequences of such failures. But we never seem to learn well. Governments and regulators as well as corporations and financial institutions keep making some of the same mistakes over and over again. The other fact is that government failure is simply more endemic, pernicious and damaging than occasional market failure. Africa is a prime example of that. One simply has to look at what is happening in Cuba, North Korea, Venezuela and Zimbabwe to understand what happens when markets are not permitted to work.
But coming back to your basic point: what happened in 2008-09 was not just the consequence solely of market failure in global banking and financial markets. It was an even more grotesque and prolonged failure of government policy (especially of fiscal and monetary policies) in the US and EU from 2000 onwards, coupled with massive regulatory failure on the part of government owned and world renowned regulatory agencies and not simply a failure of self-regulation by the financial markets as MT suggests, though that did also occur.
Perhaps it would be best if I reiterated for MT a small part of what I wrote recently in the February issue of Pragati a prominent Indian current affairs journal:
“Current global trauma is ascribed to the failure of finance. But there is still much confusion and conflation about precisely what failed. Thousands of answers have been advanced. Yet, key questions remain, and some of the right questions have not even been asked, in coming to grips with what 2008-09 was all about. Was it a failure of: (a) Anglo-Saxon financial capitalism translated into a philosophy calling for lightly regulated, self-correcting markets involving perverse incentives caused by excessive compensation leading to blind risk-taking tantamount to gambling; (b) large, complex financial institutions(LCFIs) too systemically significant to be permitted to fail, thus vitiating market discipline and moral hazard; (c) hedge funds and arbitrageurs; (d) financial markets like the global interbank market; (e) financial derivatives like the vilified credit default swaps or CDS; (f) pooled asset backed securities (ABS) and collateralised debt obligations or CDOs; (g) financial techniques such as securitisation and risk transfer; (h) key financial supporting sub-systems, in particular, risk assessment and management systems, credit rating systems and agencies, internal and external accounting, reporting and audit systems and firms, and, finally (j) systems for global financial coordination or of regulatory systems and architecture?
When each of these questions is scrutinised under a microscope it becomes clear that what are commonly seen as obvious failures are neither failures nor obvious; the real underlying failures seem to have been deliberately obscured. To the non-cognoscenti the answer to these questions seems to be ‘all of the above’. Bankers brought about this cataclysm on blameless bystanders by defrauding governments and the public. Politicians around the globe have been the most vociferous in their condemnation of finance. They have been overanxious to shift the spotlight of blame from the follies of their governments to those of the financial world. Yet, while banks are blamed for the disaster that has befallen, the reverse side of the same coin – i.e. that banks got into trouble because their customers (i.e. individuals, households, companies and governments) defaulted, either because of changed circumstances, or because they had borrowed excessively under false prospectuses — is not considered suitable meat for equally legitimate condemnation. Look at what Dubai and Greece have done in borrowing irresponsibly and then massaging their books to hide the truth about reckless from everyone, including themselves! That has been the case with major corporations (like General Motors) and wealthy individuals around the world as well. What were the governments of Iceland and the UK thinking of or doing when the aggregate size of the balance sheets of their banking systems amounted to 750% and 475% of their respective GDPs?
To be sure, the financial world did fail. Many of the criticisms of finance are justified. But believing that the failure of financial markets was the prime cause of the current debacle misses the forest for the trees; it emphasises the meso and micro but hides the macro.
The real failure that resulted in the Great Recession of 2008-09 lay not as much in finance as in the failure of government and public policy; i.e. especially of macroeconomic/macrofinancial policy and a hubristic belief that the ebb and flow of business and credit cycles had been overcome. It was compounded by public faith in the positive marginal utility of over-indebtedness; a belief that you could have it all now and pay for it later in devalued coin, regardless of what the future held for the value of asset prices or for the security of jobs and income. Failure of finance was but a symptomatic manifestation of these deeper, more profound failures. And let’s be clear about something else as well; governments did not bail out banks, or their managers, or shareholders – all of whom took a phenomenal bath. Through their rescue packages what governments actually did was bail out bank depositors and customers. In other words governments bailed ‘us’ out and not the banks as such. You cannot really bail out what is essentially a pipe. But you can bail out what goes in and what comes out of that pipe.
The eternal verity obscured by public commentary is that the root of financial system instability or failure (national or global) lies always in a fatal trinity: (1) prolonged fiscal, monetary and social incontinence; (2) emergence of a culture of borrowing and dependency which prolonged policy incontinence creates and entrenches in governments, companies (public or private) and households (or individuals); and (3) inevitable sharp downward corrections of asset prices, that are at first inflated by loose money and easy credit, but whose values later collapse abruptly, because they cannot be supported by adjusted downward expectations of future discounted cash flows when a new reality suddenly sets in.
The real cause of what is actually the Bush-Greenspan-Blair-Brown debacle of 2008-09 has been failure on the part of the US, UK and the EU (except Germany) to acknowledge that they have been living beyond their means since the 1980s. They have waged unaffordable wars and financed unaffordable welfare states through borrowing rather than internal resource generation. Western governments have over-extended themselves in wars on terror, social engineering, and public intervention in the pursuit of an elusive notion of equality, through provision of cradle-to-grave welfare, intermediated by the government for a pliant, client electorate. In the process they have created egregious perverse incentives in overpriced labour markets and become uncompetitive. They have also bankrupted themselves. They have been able to finance these follies so far because, unlike India and China, they are issuers of reserve currencies; thus being able to sustain excessive borrowing domestically and abroad without having to go cap in hand to the IMF or World Bank.
What 2008-09 represents is a forced recognition of those fundamental realities through abrupt financial dislocation. Earlier the same follies were portrayed as the US helping the world out by absorbing China’s excess savings. A more truthful perspective would have acknowledged the reverse. The US was on a public and private consumption binge it could not afford, as were the UK, Italy, Spain and France. That binge was financed from 2000 to 2009 by surplus oil-producers, as well as reserve accumulating countries like China, Japan, Singapore, Hong Kong, Russia and India. Financial failure occurred because governments, corporations and households in major western countries (and Japan) overspent and overborrowed. Their governments and central banks pursued monetary policies making it cheap for them to do so. In Japan’s case the borrowing was more internal to finance its burgeoning fiscal deficits, rather than external to finance a current account deficit. In other developed countries (except Germany and commodity exporters like Canada and Australia) twin fiscal and current account deficits had to be financed in domestic and global markets. The recession of 2008-09 was the inevitable denouement.
The consequences of over-borrowing, which loose monetary policy encouraged, first emerged in US and UK asset markets (mortgage and housing). As they faced this reality, absorbed asset value losses, and began to ‘structurally adjust’ to their reduced circumstances, the rest of the world had to adjust to a drastic fall in global demand and diminished import capacity on the part of traditional importers. That sharp, sudden adjustment surfaced as a global recession. Like all such adjustments it will end. New problems will emerge requiring another set of structural adjustments; many of which are thwarted by profound policy errors.
These include, for instance, resort to unsustainable deficit financing and money printing by the West and China’s self-serving refusal to permit its currency to appreciate. China is using all the wrong arguments to defend an indefensible position. It is tantamount to asserting a divine right to export goods to, and import jobs from, the rest of the world ad infinitum. By doing so, China risks triggering protectionism, and possibly precipitating the unthinkable, i.e. obliging the rest of the world to impose collectively a uniform countervailing duty of 25-40% on imports from China. Its folly underlines one key reality that is all too often obscured, i.e. any national economy which is significant to the global economy must have an open capital account with exchange rate flexibility to permit seamless equilibration of the current account; especially when it is out of balance for a prolonged period of time. Using the developing country argument to forestall opening the capital account, and deploying market determined exchange rates, simply does not work.”
I hope the foregoing presents a more nuanced and accurate picture of where I come from and my interpretation of what actually happened to cause the debacle of 2008-09. So I do not apologise for my views on relying on markets for economic growth and well-being to the extent possible. It is because of market functioning that we are on the long slow road back to recovery.
* In other words, what you are saying is that there is indeed no alternative to future growth for a country like Mauritius than making it more market-oriented and more capitalist?
That is absolutely correct. I could not have put it more succinctly myself. I am sure others will disagree in absolute or relative terms or on some obscure points of disputation about depending on unreliable markets that fail. For an economy like Mauritius which is too small and too remote to be self-sufficient in any practical sense, and which has no domestic market to speak of, the only option to make its living in the world is to be nimble, flexible, opportunistic, and sensitive to every global wind of change that blows. No economy can be like that unless it is market orientated and not driven by government fiat or by utopian socialistic ideals that are never achievable in practice. That is a reality that even a corporate state like Singapore is coming to terms with.
The governments that do the most harm to their citizens are the ones who attempt misguidedly to do the most good. Governments do have a critical role to play in guiding, regulating, ensuring a level playing field, enforcing rules impartially, and ensuring equality of access to opportunities. They go off track and fail when they attempt to guarantee equality of outcomes, wealth or income through redistributive policies. Ensuring equality of access to education and opportunity is a win-win game. Attempting to ensure equality of outcomes, or equality of wealth and income, is a sure-fire lose-lose game for everyone concerned.
If you redistributed all the wealth of Mauritius evenly today, by the end of the week you would have rich and poor people all over again; simply because of innate differences in their preferences, strengths, weaknesses, inherited and learned abilities, and inclinations. So I am not a great believer in statistics that show disparities in income or wealth as a sign of something that is terribly wrong. I accept as a cardinal tenet of faith the simple and inalienable truth that the world will always be unequal. And I do not see that as a terrible thing at all. What is wrong is for governments and societies to encourage aspiration but penalise success in the name of equality. That sends mixed and contradictory signals to everyone concerned. But it is what most European governments do whereas in the US (and in Asia) they do not. The latter do not only encourage aspiration. They worship success. So should Mauritius! Rather than being drowned by the economics of envy because someone else has more or earns more, Mauritians should aspire to earn more and have more themselves. And GoM should encourage that to the extent it can.
Unfortunately the real deficit in Mauritius that impedes markets from working as well as they should is its local entrepreneurial deficit. Mauritius is going to have to overcome that by importing individual as well as corporate entrepreneurs and risk-takers from anywhere and everywhere it can.
* Do I take it that you would therefore argue that the reforms initiated by the present government have not gone far enough and have indeed been mostly timid? Have we lost out on some new opportunities to turn things around for the better for the benefit of the larger community?
Yes. To an extent I would argue that the reforms have been reluctant and timid largely because neither this government nor the Mauritian people as a whole really believe in markets and their efficacy. Everyone in Mauritius wants special treatment, privileges and social protection. No one wants to be exposed to the normal risks that operating in a market environment requires one to take. I think several opportunities have been foregone and the government’s radar has locked on to schemes like the IRS which seem to me to be indefensible and ludicrous. It is not that I have been engaging in empty criticism on this issue. Since 2005 I have been writing extensively in Mauritius Times, and participating in symposia to deal with the opportunities that could be exploited at the macro, meso and micro levels. In that sense we have come up with pretty detailed templates outlining what could and should be done. But movement in these directions is woefully slow. I think GoM lags badly on implementing privatisation opportunities which could transform Mauritius and play a major role in making Mauritians significantly richer by having state-owned assets being privatised and run more efficiently and productively. Of course it is blocked by unions and a variety of vested interests. The agenda over the next five years ought to be to tame and re-educate the union movement in Mauritius and make it a positive rather than the negative influence it is.
* But it’s paradoxical, isn’t it, that a Labour Party-led government should be forced into making Mauritius more market-oriented and more capitalist?
Not really. It may seem strange intellectually. But you usually find in politics that it is the erstwhile non-believing converts who eventually become fanatics in promoting their new cause. It has been ever so with religion. And politics is simply another form of religion practised by the wicked to exercise power over the not-so-wicked. The simplistic ‘right vs. left’ dichotomy in politics (which I have always seen as a ‘right vs. wrong’ dichotomy) has given way to a new political dichotomy between ‘interventionists and non-interventionists’ in economic governance. The interventionists (like Gordon Brown) believe that the state should have the right to intervene in every aspect of an individual’s life and scold him/her for being too fat/thin, smoking or not, being politically correct to the extent of becoming socially unpalatable and useless, etc. The non-interventionists (like me) believe that the role of government should be to govern properly and not live people’s lives for them through every minute of the day.
Over the second half of the 20th century, particularly in Europe, a broad consensus has emerged across the political left and right that markets are by and large a good thing. Markets are perhaps the only vehicle to drive the economic machine relatively successfully. As the collapse of the USSR (and the economic rise of China) demonstrated beyond any doubt markets are far superior to state intervention and state ownership to achieve economic growth objectives without which achieving social justice objectives becomes impossible. The Labour Party in the UK finally came around to that view in 1997 – later than almost every other lunatic left party in Europe.
At the same time there is another side of the broad political consensus across the right-left divide which I disagree with intellectually, but reluctantly accept the need for, practically and politically. It is that a high level of social protection and de-risking of individual vulnerability to the vicissitudes of markets (which have no social conscience) is essential to incorporate in modern developed social market states. Such protection is seen to be necessary in order to keep societies stable and secure, but also to make them clients of governments dependent on state protection to ensure electoral success and continuity and longevity for politicians of a particular ilk. What governments in Europe are finding out, however, is that such all-encompassing social protection becomes quickly unaffordable. De-risking individuals and societies also creates a number of perverse welfare-dependency incentives which makes them uncompetitive in a global environment which is still characterised by enormous income disparities across countries.
So what MT sees as a paradox is what I see as an inevitable process of left-wing socialist parties growing up, evolving, learning (too slowly) about the realities of life in a competitive world which is governed by markets that are beyond their political influence, whether they like it or not.
* Politicians and trade unionists have criticised the “ultra liberal” economic policies advocated by Finance Minister and are saying that income inequality between the rich and the poor has worsened as a result. Are these criticisms justified?
No they are not. Though I am weary of it, because I have been exposed to the same mantras and complaints for the last 45 years of my working life made by similar silly people in virtually every country in the world, I think these allegations are absolute nonsense. Frankly no one should care whether income or wealth inequality increases or not as long as those at the lowest end of the economic ladder can still have a decent standard of living in absolute not relative terms. It is an unfortunate fact of life that, for whatever reason, wealth is created by relatively few people who take very large risks and is shared by many in a variety of ways. When you try to keep equalising wealth and income what you actually achieve is to reduce both in absolute terms.
So, as long as those at the wrong end of the income/wealth ladder can still enjoy a life free of poverty and a decent standard of living, I think people in Mauritius should stop worrying about income or wealth inequalities. It should not matter that the richest person in Mauritians has a thousand, million or billion times more than the poorest as long as the poorest still has a decent standard of living in absolute terms. Let the Europeans get excited about such inequalities and become irrelevant and uncompetitive. Mauritius cannot afford to indulge in the same nonsense and cope with the consequences.
* You said at one time that “the rich and privileged should stop getting any protectionism whatsoever — even for transitional assistance. They have had enough time to transit…the private sector in Mauritius, and especially those phasing out of sugar, need no assistance at all”. Can that be taken to mean that you do not support things like our Stimulus Package (and the Additional one) put up to support firms from the economic storm and that all this should be done away with at the earliest?
No not necessarily. I am supportive of those aspects of the stimulus package that provide temporary relief in extraordinary circumstances, and enable the businesses of the future to ride out the difficult times without going under at considerable cost to society and themselves. But I am against those aspects of the stimulus package that keep the wrong kind of businesses (those of the past which have no future in a place like Mauritius) and traditional activities alive through non-transparent subsidies that Mauritius cannot afford. It is absurd that Mauritius still has a sugar production industry which is protected in a variety of ways. I have explained the reasons for my views on this issue time and again in MT and elsewhere. So there is no reason to repeat them again. Where the stimulus package supports and stimulates sunrise industries and activities I have no problem with that kind of assistance. But where it keeps alive sunset industries and activities that should have been phased out by the end of the 20th century I do have a problem.
* To come back to the world economic crisis, would you say that the appropriate lessons have now been learnt and that thanks to it and the heavy investment of governments in the salvaging of private markets, the worst is behind us and that we are now better prepared to work on building the long-term health of the global economy?
Sadly I would say that with bank and banker-bashing having become the new global game being played by governments, the popular media, academics, and publics around the world, very few lessons have been learnt that are worth learning. Also, I do not agree with the view that governments have invested heavily in salvaging private markets as you portray it. What governments have done is to provide a safety net to prevent their economies and societies from the risk of implosion caused by credit drying up completely. They have done so because they could not do otherwise. They have acted for reasons that have as much to do with the failure of markets as with the prolonged failure of public policy, the profound failure of government regulation, and the unfortunate encouragement through public policy of wasteful public and private consumption and expenditure, based on unsustainable borrowings in which governments have been as culpable as anyone else. In effect what governments have done is to bail out themselves, and their societies and economies, but to do so in a way that obscured their own prolonged failures, as well as those of their clientelist societies, by pointing the spotlight on market failures instead. That is fashionable and au courant. But it is hardly accurate or profound when it comes to learning the right lessons from this crisis.
I do not know if the worst is actually behind us because no one has yet found a perfectly calibrated strategy, replete with tactics and instruments, for a sensible exit from the predicament we are now in. The US, UK and many EU governments (the sole exception being Germany) are now taking profound risks in running extraordinarily large fiscal deficits and increasing public borrowing to monumental levels. They hope that these will be sustainable and be reversed when overextended balance sheets of households and corporations have been corrected and private demand growth can resume again; but with better balance between savings, consumption, investment and borrowing in developed countries. But right now that is a hope, not an expectation.
I do not see any real progress on building a more solid global economy in which large global imbalances in current and capital accounts are not permitted to escalate beyond manageable levels. Nor do I see any progress toward building a new international economic architecture that gives far more weight and influence to emerging markets; especially to Brazil, China and India and far less to the EU and US. It is absurd that in the World Bank and IMF, India has about the same weight as the Netherlands and Belgium.
I do not see much reason on the part of China in accepting that its currency must now freely floated and its value be subject to the discipline of markets rather be determined by government fiat to permit natural equilibration of global accounts to occur seamlessly. I do not see new rules and arrangements on global capital flows being put in place with appropriate tidal basin arrangements to ensure that sudden inward and outward surges of such capital movements do not destabilise or derail economies through a tsunami like effect. It is not beyond the wit of man to create these arrangements but I do not see the kind of progress that I would like to see. And the main reason for that is the asymmetry between politics which is always local/national and economics which is now so irretrievably global as to be beyond the reach of management through the traditional type of mechanisms and architecture that are presently in place and whose foundations and efficacy are now creaking.
* What’s the way forward to get back to balanced and more poised global economic growth and what does it take in terms of sharing the burdens of adjustment to reach that goal?
That’s the $65 trillion question and I wish I had a sensible answer. I could provide a well argued and long winded answer that would take the length of a textbook to write. The short and crude answer is the following:
(a) the US and EU have to curtail consumption, increase domestic savings levels (public and private) and accept a relative reduction in their standards of living to accommodate the realities of living in a far more competitive global environment in which they are on the defensive because their wage costs, their social costs, and their governance overheads are far too high and simply unaffordable – they have to roll back their unaffordable welfare states;
(b) large emerging markets like Brazil, China and India have to do the opposite by consuming more, saving a bit less, investing a bit less, and financing a greater degree of social protection to achieve better global balance while still maintaining relatively high growth rates;
(c) large emerging markets that are becoming significant global trading economies have to open their capital accounts and let their currencies float freely while reaching interim arrangements with western countries and the IMF which protect them from destabilising capital surges and from sharp market corrections in their currencies;
(d) such emerging markets have to accept the reality that their currencies must appreciate slowly but inexorably relative to the USD, EUR and JPY by not managing their currencies in a way that provides an effective and permanent export subsidy – i.e. they have to do what Japan and Germany did between 1960-90;
(e) India has to transform itself from a quasi-state-controlled economy to a more fully fledged market economy;
(f) China has to manage the transition to becoming a more acceptable and legitimate plural democracy rather than remaining a semi-fascist, autocratic, authoritarian state that is a threat to its own people and the world at large;
(g) OPEC needs to disband itself as a cartel and permit the price of energy to be market determined rather than manipulated to fill the coffers of unaccountable tiny nation-states capable of holding the world to ransom whenever they feel like it. I could go on and on but that would be counterproductive.
* You have often argued in favour of the need for Mauritius to “open up” to enable it to attract new global opportunities (healthcare services/legal and accounting services/business consulting/media and entertainment/TV, movie and music industry services/education/training services/retirement services outsourcing, etc). Do you think these opportunities are still available today despite the global financial crisis leading to a sharp contraction of international credit and a consequent drying up of FDI for developing countries?
I believe that what we suggested in the two symposia we held in 2008 for Mauritius in terms of meso and micro strategies remains the correct recipe for the future. The global storm of 2008 has rocked the boat unquestionably. But it has done nothing to shake my confidence that, in terms of a long term approach and strategy, Mauritius really has no other way to go. If anyone has an alternative to suggest I would be interested in debating it. I believe these opportunities are indeed still available today and that the opportunities for outsourcing in an even more sophisticated manner will increase rather than decrease through the transition towards a return to a new kind of global normality unaffected by credit constraints and recessionary influences.
I do not believe that FDI is drying up for the right opportunities in the right developing countries. It is not as reckless or indiscriminate in its choices for seeking new homes as it once was. But I actually see FDI in developing countries increasing dramatically over the next decade as a new reality takes hold in the boardrooms of the world’s largest insurance companies and pension funds. That reality is that their investments in emerging markets will need to increase by multiples of five or ten (and rise from around an average of 3% of their investment portfolios to nearer 20-25%) to meet their actuarial liabilities because their investments in developed economies will simply not generate the kind of returns that they need to generate to meet their contractual obligations.
* Do we still have the option to ‘go East’, notably towards India and China, which are likely to be the new poles of global economic growth or should we continue with the past pattern? How does one shift more fully and effectively in this direction in practice? What are the competitive advantages that we should put on our side to embark on such a new adventure?
I do not think any country in the world, large or small, now has any option but to look East in securing its future in the 21st century. Europe is now passé. It is yesterday’s news. The US will still be a force to be reckoned with. But India and China are going to become the world’s two largest economies by 2050. That is not as far away as it seems – a Mauritian born now will be in mid-career by then. Trans-Himalayan trade in the latter half of this century will exceed current volumes of trans-Atlantic trade. Trade between India-China, India-Asean, and China-Asean will be the dominant features of global trade. The 21st century will be Asian; mainly ‘Chindian’. Perhaps Africa’s turn will come in the 22nd century if it ceases to be an isolated reservation for people of a particular complexion, satisfied to be dependent on European aid and suffering from the patronisation, condescension and confusion which accompany it. But Africa will not succeed economically until it opens itself up to inflows of investment and human capital, primarily from Asia. That is a lesson that India and China finally learnt if somewhat belatedly. Africa needs to learn it too but it seems to be a little slower in getting there. That is not surprising. It took China 40 years to learn that lesson and India nearly 50. Given its starting point, Africa may need a 100 years to do the same thing.
Chindia is already the largest generator of growth in the world economy. That reality will be reinforced with each coming decade. So looking East is even more necessary for a country like Mauritius, which has to make a living out of becoming a global city-state (in the Singapore mould) whether it likes it or not. That is its manifest destiny. Its only choice is to do it well or do it badly. It has to aspire to catering to selective high value addition (almost entirely in a sophisticated range of IT dependent services) to serve the Indian and Chinese markets much more than the EU or NAFTA/North American markets.
The question for Mauritius is whether it will look East and develop its opportunities there sensibly and efficiently, or whether it will mess up that opportunity in a bureaucratic, ham-handed and awkward manner because it is so quintessentially Euro-centric in its culture, aspiration and outlook. That comes from its French colonial heritage which remains (oddly!) the dominant force driving business in Mauritius and also in driving government thinking about the future of Mauritian business – which is why foolish initiatives like the IRS are implemented!
I do not believe the Franco-Mauritians have any particular comparative or competitive advantage in developing future opportunities in China and India. They have not made any significant effort in developing the right partnerships with counterpart business groups in these two countries or in Asean. They are more comfortable operating in Madagascar or Mozambique where they do not have any real competition. Culturally and viscerally, they have looked down on India and China as relatively ‘uncivilised’ by their own faux standards. They simply do not comprehend why these two countries are as dynamic and aggressive as they are now. I think the Franco-Mauritian business community is intimidated by both these giant countries and ill-equipped to either understand or exploit the opportunities they both present.
Sadly, however, the Indian business community in Mauritius is small, fragmented and fractured. Apart from the Currimjees there is no big Indian business group in Mauritius. Even the Currimjees have not proven too adept at developing business in India or China; also preferring to be European or Middle Eastern in their outlook and vision.
So the only way in which Mauritius can really develop opportunities for the future in Chindia is by: (a) entering into sophisticated partnerships with business and trading groups in Singapore and Hong Kong that deal with both these Asian giants and (b) making itself more hospitable and open to Indian and Chinese firms with an interest in Mauritius and Africa to set up in Mauritius and use it as their regional or global business headquarters in managing global activities in a tax efficient manner.
The advantage that Mauritius has is its racial mix, its location, its climate and its ambience. The main disadvantage is the visceral reluctance of the local population to share their paradise with anyone from abroad. Also there is the issue of governance and the political system in Mauritius. Mauritian governance may be the best in Africa, but it is not yet world class (nor is governance in India or China). It does not inspire expatriates or foreigners with confidence in its management of affairs of state or business, in ensuring law and order as well as world class infrastructure, and in focusing the political system and legislature on something better than perpetually massaging the egos of insecure mediocrities posturing as political leaders. The potage of governance in Mauritius is too whimsical and unpredictable and too vulnerable to how the political leadership of the time feels when it wakes up on any particular day.
In posing this question Mauritius Times (MT) raises perhaps the most important issue for Mauritian policy-makers and society to ponder in the coming decade. And the answers are not as difficult to find if one stops looking at the world from the wrong end of the telescope. It is not just a question of what these two giants can do for Mauritius. It is more a question of what Mauritius can do for them, in a way that is better and cheaper than any other country, in providing the highest income earners in those countries (whether corporates or individuals) with the services that they need and are willing pay over the odds for.
* You have said it on previous occasions that you are not particularly impressed by the calibre of people attempting to run Mauritius as well as that of those at the commanding heights of the economy. The latter seem presently bent on putting together a Labour Party-MMM coalition in view of the next general election. Seeing the situation from outside, how do you react to this situation which is being considered in some quarters here to be a “capitalist plot” designed to protect capitalists’ interests?
If what you suggest is correct, then all I can say is that I never cease to be amazed by the smallness of myopic minds in Mauritius. They seem always more prone to conspiracy rather than cock-up theories. I think Mauritius is more given to political cock-ups than conspiracies. That is simply because of the incompetence, lack of vision, and paucity of intelligence on the part of its political class, as well as the counter-productivity of continued reliance by people who should know better on playing the politics of exclusion and division based on ethnicity. It is amazing to me that such a small island in such a remote location, which should by now have come to embrace the politics and spirit of inclusion and togetherness, and to demand that its politics be based on the merits of ideas and policies as well as rewarding administrative competence, is still so backward and un-evolved when it comes to politics. Sadly, although I find most Mauritians totally delightful and can claim without reservation to be quite madly in love with one or two of them, the more I see of its politicians the more I feel the urge to keep as far away from Mauritius as possible.
I do not see the possibility of a Labour-MMM alliance as a capitalist plot. Perhaps I am too dense to do so. That would be much too clever for those involved in the plotting. I see it as a political convenience to ensure the longevity of the current PM. Whether that longevity is deserved or not is for Mauritians to decide. If I were one, I know what my vote would be. In a place like Mauritius, the electorate has to be wary of tendencies on the part of political leaders to become Latin style caudillos or Bihari style reprobates of the Lalu Prasad variety. To protect democracy and its core values a change is sometimes better than a rest. But that is not always the case.
The problem with the upcoming election is the absence of viable or attractive alternatives. What is on offer from any side – and there are far too many sides in Mauritius as there are in India and a move towards a genuine two-party system would be a move in the right direction – is so unattractive that I would probably not want to vote at all except for the strong belief that not voting is a serious dereliction of civic duty in any democracy.
Even if I were inclined to throw the present rascals out I am not sure which other rascals I would want to put in. They all seem such a sorry and sad lot to me. But that is an endemic problem which affects not just Mauritius. I have the same problem with the next election in the UK where I am permitted to vote. There is no question that I would want to vote out with a resounding thump a PM and government that have both wilfully and stupidly bankrupted the country and governed it so badly for so many years. But would I really want to vote in the alternatives that are on offer? That is what makes me worried about the future of democracy. The way in which the machinery of candidate selection and party politics works it puts off the best and the brightest and leaves room only for the mentally feeble, vainglorious and incompetent. When choices are so unattractive, is it surprising that electorates get so turned off? So I can sympathise with the problem that the Mauritian voter faces in a few months.
All that said, Mauritius has come a very long way since 1968 when it was reborn in its present avatar. It still has a long way to go. But hopefully it will steer the right course and eventually get there with a little help from its friends! Bonne année. Vive l’indépendance!
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