‘Nobody can turn a middle-income economy into a high-income economy within five years…

forget about that. It’s good rhetoric, but the truth is that it takes time’

Interview: Lord Meghnad Desai

‘We should not underestimate Mauritius’ ability to rise to the level of a high-income economy, but the only way to do that is the high-tech way’

‘People only see miracles after they have happened; nobody plans a miracle and gets it. Most governments which planned to speed up growth fell flat on their face’

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Lord Meghnad Desai who had been head of the Centre for the Study of Global Governance and a Professor of Economics at the London School of Economics in the past is no stranger to Mauritius. We managed to interview him during a brief visit here recently, and obtain his views on the Mauritian economy. He feels that we are not doing too badly overall, but we have to do something about youth unemployment in particular. Smart cities and IRS developments are not, according to him, major employment generators. He is in favour of Mauritius taking as model comparable countries (in terms of population) like Estonia, Lithuania, which have taken off through high-tech and a high-skilled labour force.

 

Mauritius Times: The coming budget that the PM and Finance Minister will be presenting in a two weeks’ time will very likely set the stage for the next general elections that should be organised by mid-2020 latest. We can presume that it won’t be a traditional accounting exercise, for the temptation to start with the distribution of the goodies will be there. Is our economy doing well enough for it to afford such goodies?

Lord Meghnad Desai: My knowledge of the Mauritian economy now is not as it used to be earlier, but from what I have seen the numbers compared to other countries don’t look bad. There are however some particular problems like, for example, youth unemployment, especially women unemployment as compared to men. It’s striking because in other dimensions in Mauritius the gender equation looks very good – whether in education or otherwise. I think government should look into this problem. Is it because people are biased against employing educated women in responsible jobs? Every society has a gender bias, and you should be looking into ways and means to change that by having the right type of incentives. In any case youth unemployment in any growing society is a serious problem which can be attributed to a general macro-economic crisis – I don’t think there is any.

As for the distribution of goodies, there is indeed the temptation for most governments to do this type of thing when they want to get re-elected. It’s part of the political business cycle. That said, I have to add that from the economists’ perspective, Mauritius is a successful economy. I have been to Mauritius before, and I have seen much bigger problems. The challenge now is how do you grow from a middle income economy to a high income country.

* Tell us how do you see the Mauritian economy doing right now, and where will that lead us to. What do the fundamentals inform you?

I do not see any cause for alarm except for the high rate of unemployment amongst women.

* The economic fundamentals may speak well about the health of the economy, but the numerous signs of social disruption in the country relating to law and order breakdown, crimes including large-scale drug trafficking and rising numbers of road accidents tell us a different story – that of loss of faith in the existing system and a general malaise amongst the population. What’s your take on that?

Generally insiders who see many more things and keep track of happenings on a daily basis are generally more pessimistic about the situation prevailing in a country. As an outsider, I would put the following question: Is Mauritius in the news for any bad reason? As far I am concerned, from my perspective, that is sitting there in London, I would say: No. It may not be a good test, but judging from the coverage of the British media of events happening across the world, any major problem affecting any country will find mention in the British press – even if that would go in as a small item, but it does get covered. Fortunately you don’t see that happening as far as Mauritius is concerned; most African countries have to face much bigger problems than this country. When you think about what had been happening in Zimbabwe, for example, or in South Africa…

* Those are extreme examples, isn’t it?

Extreme examples, yes, but I could go on and mention other places like Congo, Somalia, Sudan, Nigeria, etc. The thing for me insofar Mauritius is concerned is that there is a regularity here with the democratic change of governments down the years, and a certain implicit faith in the system with people expecting elections on a certain date and these elections effectively held on that date. There is no certainty there that the incumbent government will be re-elected. This is what you need in a democracy: no guarantee that the incumbent government will get re-elected. If it does, that’s fine; if it doesn’t, life will go on. I have tracked Indian politics for so many years, and Indians have no fears that any government whatsoever would capture the electoral process and stay on. Nobody does such things there, elections are held on a regular basis, and governments come and go.

What happens in-between is a different story, but then one should not hold governments responsible for all the problems facing the country. It’s often the case when people indulge in unpleasant things, and it’s the government responsibility to act as regulator. So looking from a distance, I do not see Mauritius as a crisis-ridden country.

* Do economists think there is a causal relationship between social disruption and the health of the economy? What do you think about it yourself?

It depends on what sort of social disruption we are talking about. When rapid changes are taking place, you do have lots of stress with people losing jobs because of some technological revolution, or due to economic stagnation. Then there is also the problem of changing population age structures. All these factors raise the question of whether you are doing the right thing for the people who are coming into the job market, especially for the young people.

You do see a lot of inequalities in so many societies all over the world and people falling behind and unable to rise to the top, but by and large the unrest will come from the young who want to see better prospects for themselves. That will happen when an economy does not generate results which give hope to the young that better things are going to come. If the hope dies in the young, you are in for trouble.

* Do you see an economy that’s generating a growth rate of 3.7% able to give hope to the young people?

A growth rate of 3.5% in the post 2008 period is not bad. I don’t know offhand what the comparative growth rates of similar countries are presently. In India, which has got used to a high growth rate, all hell will break loose with a lower rate because of the many more problems that this will create for the country. The subcontinent probably needs a higher growth rate than a country like Mauritius which has a low population growth rate. This gives a per capita growth rate of 2 to 2.5%, which is higher than that of most European countries. I do not want to be sounding very blasé about this, but if the inflation rate or the unemployment rate was really bad and the growth rate was low, then that would be cause for concern.

The real issue that the country will have to face is how it generates jobs for young people who are highly educated. You’ll also have to address the issue of skills mismatch and try to figure out the reasons why some people remain unemployed in spite of the jobs that may be available in the market. Are they only waiting for desk jobs, those they would consider suitable for them – 9 to 5 and pensionable ones?

From the few conversations I have had, it looks like in Mauritius politicians are concerned about the problem of youth unemployment, on how they are going to solve it.

* What would be the best approach for Mauritius?

Encourage people to go for the unconventional things: self-employment, go after the opportunities in Fintech, for example. In India, lots of the young are setting up new and innovative business ventures; lots of start-ups are coming up, and this requires an element of entrepreneurship, risk-taking.

It may be the young have not been taught to think and take initiatives in that direction, or that they require some financial support in the form of initial business start-up grants and loans with a moratorium of say five years.

In India people have launched lots of business ventures in the field of IT, car hiring, apps development and things that allow them to reach the rural market as well, and these have been driven mostly by people who are well-educated, and versed in the field of computer technology, finance, etc. Obviously quite a good number have failed, but you have to take risks to be able to make a fortune. I do not know whether this is true or not, but I am told Mauritian youths are not used to risk taking, which was used to be said previously about Indian youths. It is important therefore to stimulate this entrepreneurial culture and risk taking mindset amongst Mauritians youths.

* Would growth driven by real estate development in Smart City, IRS, ERS projects help the country get out of the middle-income trap it finds itself today?

Real estate development cannot actually generate growth, because there is only so much land and so much building available. All you can do is to sell one house, which is there, at a higher price, but this is not a wealth generating thing – you are only redistributing wealth, just like what is done on the stock market.

What creates value for the economy is when you go into manufacturing or into the services industry, and penetrate new markets to sell your products and services. That is how and where growth takes place. Or you do more of the same.

* On assuming power, the present government said it would jumpstart the economy and that it would turn Mauritius into a high-income economy by the year 2020. Do you see that happening in two years’ time or not? Why so?

Five years is too short a time to do anything like that. Nobody can turn a middle-income economy into a high-income economy within five years… forget about that. It’s good rhetoric, but the truth is that it takes time; you need to have a 20-year plan to achieve that kind of result.

China, like Mauritius, is still a middle-income country; it is not a high-income country. India is a low-income country…

* In that case, what are the prospects of Mauritius reaching that level in the years to come?

What you should be doing is to compare Mauritius with countries which have a small population – places in Northern Europe like Estonia, Lithuania, or island economies like Malta. Singapore or Taiwan won’t fit the bill as they have both a very high population. A country with such a small population can only become a high-income economy if its skill level is extremely high; it will only become prosperous by having a highly skilled labour force and be able to produce business and services which compare favourably with competitors in the global market.

Mauritius is obviously good at tourism; the statistics indicate that tourist arrivals here top 1.3 million, surpassing the population of the country. It has also done well in the international financial services market, and it may get better. But it will have to get into the high brainpower markets, in which there will of course be a lot of competition, but ultimately that’s the only road to a high-income economy. Mauritius is never going to become a manufacturing hub; it’s too small to ever become one although it may go on to produce and export some selective services or products. But it will have to compete with countries like Estonia, Lithuania. Look at countries like Norway, Finland which have a relatively small population, but highly skilled and possess high entrepreneurial ability.

Basically, the question that Mauritians have to put is: which economies are similar to ours? I think they are mostly in Northern Europe with small population size and a high level of education, etc. Now, what did they do to get where they are, and how can we get there? Norway was lucky since it had oil, but one may as well look towards the others like Finland and Estonia. Mauritius has to think of itself in terms of a high-tech economy.

* You do need a critical mass for a start, don’t you?

You have got a population of one million people, and that should be enough. Mauritius has been able to become a middle-income country – one of the highest in Africa by achieving lots of things. We should not underestimate Mauritius’ ability to rise to the level of a high-income economy, but the only way to do that is the high-tech way. High-tech is presently less capital intensive than manufacturing used to be. For example, there is big demand for health care across the world. With artificial intelligence and appropriate high-tech, Mauritius can become a major hub for health care for the global market. Or it could become a hub for medical tourism, which is slightly more capital intensive. It is sectors like these which will have to be selected to form part of the growth strategy towards a high-income economy.

* In other words, Mauritius will have to put in a lot of hard work to achieve that kind of growth. We should not expect growth miracles to happen, right?

Of course not. People only see miracles after they have happened; nobody plans a miracle and gets it. Most governments which planned to speed up growth fell flat on their face like Mao Tse-tung did and who practically wrecked the Chinese economy.

I think Mauritius needs to overcome geographical restrictions. Don’t think you are an African country. It’s counted as part of the African continent, but Mauritius is very much an unAfrican country as African countries go. There is no other analogous country in Africa which compares to Mauritius. I was saying to one gentleman that Mauritius is one of the few African countries which have a favourable gender ratio: that is a mark of development. That way, Mauritius is a developed country in that dimension.

Again, as I said earlier, to get to that high-income level, Mauritius has to look at analogous, high-income European countries with a small, highly educated population, and to then say: What have they done right that we can do right? You’ll come up again to what I said before: high-tech is the only way to move forward. Let’s take the example of Estonia, where the progress achieved insofar as digitisation is concerned is amazing. All sorts of things are digitised for a number of purposes in different fields. Mauritius could do that.

* What would you say are presently the critical issues pertaining to the development of Mauritius that needs to be addressed?

One critical issue, to my mind, is low ambition. I think Mauritius has to see itself as a North European country. Think of Mauritius as Estonia, or Finland, Latvia – countries with a small, highly educated population, and making huge investments in technology. That’s the only way. How else can Mauritius rise to a high-income level?

The thing is that you really need a roadmap thinking of where you want to go and which country you’ll want to emulate in terms of economic progress. Mauritius is not an African country, and there is no analogy in Africa for Mauritius. Nor in Asia, which are mostly high population countries, so you are left with the small population highly educated countries of Northern Europe. There is no reason why Mauritius should not be like Estonia.

* What’s your assessment of how the global business sector is doing in the wake of the setback with regard to the renegotiation of the Double Taxation Avoidance Agreement with India? We hear local operators would be lobbying the government to seek a further extension of the Treaty with the Indian authorities. Do you think the Indian government would be amenable to such a request?

I think it will go through, the more so since by and large the misuse of the Treaty has been limited. The Mauritius jurisdiction has a high reputation, and people do not think it is being misused massively for money laundering.

In India, all foreign entanglements are unpopular, and it is in Indian nature to view certain things connected with foreign countries with suspicion. But the present government is very business oriented, and as of now it looks likely they may get re-elected in 2019. Governments in power have been friendly towards Mauritius, and that’s the way it should be… where else would they go?

When you think of the big financial scandals that took place in India, people like Nirav Modi, who has been accused of swindling $1.8 billion, or Vijay Mallya accused of fraud and money laundering to the tune of 90 billion rupees, have not run to seek shelter here as a hiding place. This goes on to prove that people involved in questionable deals or money laundering do not consider Mauritius as a soft country. That would have been bad for Mauritius’ image and reputation. The safest place to go for these people is to go to the UK, because its human rights law makes it difficult for foreign countries to get their nationals extradited. At times you can’t even extradite known terrorists who have sought refuge or could be operating from the UK.

To go back to the Treaty, I think we have to consider agreements like these as intermediate arrangements. Mauritius has to become a high-income country, not because of its DTAA with India, but because it is willing to embrace and adopt the new technologies that are coming up and taking over the world of business and trade like high-tech medical care, Fintech… That’s the future.

* Let’s go back to India: in which direction is the wind blowing, would you say?

Difficult to say, the democratic process is so strong and it is such a large country, but from what happened in the last State election in Karnataka, I think the current BJP government will face a tough time to get re-elected. It will however get through, but because of the instability that prevails there it’s difficult to say how large will be its majority or whether it will form a single government or coalition government majority. The more State elections it wins, the more partners it will get.

My view is it will become difficult for the opposition to come together into a formidable, combined, united group. On the other hand, Narendra Modi and Amit Shah are fantastic strategists…

* How is the BJP doing for the country?

I have by and large been positive about Modi; I do not care about his party. The fact that India is keeping up with a growth rate of 7-7.5% is a great thing. So are the initiatives to clean up the place with the Swachh Bharat Abhiyan campaign, or the one relating to gender equality. There have been of course some disturbing incidents, like rapes, like everywhere else, but Narendra Modi has been very positive about the gender issue.

Nobody can govern India and win praise for it; no government has ever achieved that. Whoever or no matter who wins or loses, India will be alright; it will stumble along.

 

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* Published in print edition on 1 June 2018

Tags:Amit Shah, BJP Government, estonia, Finland, High Brainpower Market, High-Income Economy, Inequalities, Latvia, Lord Meghnad Desai, Mauritius-India Double Taxation Avoidance Agreement, Narendra Modi, Nirav Modi, Real Estate Development, Social Disruption, Swachh Bharat Abhiyan, Vijay Mallya