The Economic and Social Transformation Plan – A Non-starter

Titbits

We recently had the opportunity in the context of the seminar on the ‘Country Strategy Paper – Mauritius’, presented by the African Development Bank, to listen to the arguments of the Financial Secretary (FS) on the Economic and Social Transformation Plan (ESTP). It was in reply to the few well-chosen barbs of his earlier mentor, Mr Rama Sithanen, with respect to the present state of policy paralysis, the absence of any meaningful reforms and the absence of development of opportunities for new sectors. The FS failed to convince us. After having held the country to ransom for seven years with its short-term incoherent and uncoordinated policies and undermining all attempts to set up an independent full-fledged planning unit, it is not the last-minute elbowing to pull out a summarily concocted 10-year plan — the famous ESTP — that will convince us that the Ministry of Finance (MOF) can carry out high level thinking, innovative policy making and planning. 

The ESTP is a non-starter. Different reports were already giving us an inkling into the failure of strategic planning at the level of the MOF, limited as it is by its excessive budgetary and narrow short-term focus. The Public Expenditure and Financial Accountability (PEFA) noted that “strategic planning capacity in MOFED and ministries remains limited. This is particularly apparent on capital side of the budget, where significant capacity constraints have emerged (…) Strategic planning capacity in government remains limited and the links between macroeconomic projections, fiscal strategy, ministry-level strategic plans, and the budget process require strengthening.” Not surprisingly we have scored a “C” in relation with PEFA’s “Multiyear perspective in fiscal planning, expenditure policy, and budgeting” dimension.

The Draft Technical Overview Note, August 2011 (World Bank), was more critical: “The merger of MEPD, which used to develop the National Strategic Plan for 5 years, with the Ministry of Finance in 2003 resulted in a loss of strategic planning capacity within the Government at the national level. This has created a challenge for Ministries in developing their strategic plans – as the link between sectoral and national objectives is not explicit. Sector planning capacity needs to be developed in order for the proper costing” (…) “Capacity of the Ministry of Finance to undertake sectoral analysis is limited… The Ministry of Economic Development has developed capacity for sectoral analysis but remains underutilised. The Ministry of Economic Development was the agency that has capacity for sectoral analysis.”

Both the Collaborative African Budget and Reform Initiative (CABRI) and the National Audit Office (NAO) had called for the alignment of planning and budgeting and recommended a “revamping the planning function and… ensuring that issues are raised and discussed at the technical levels in advance in order to facilitate the work of policy-making.”

In the preparation of the ESTP, which is a mere assemblage of inputs, ministries were asked to identify measurable outcomes for the next 10 years for each of the programmes in the Programme Based Budget. (PBB). Trying to prepare a plan within a 10-year fiscal framework, by forecasting sector expenditure on an incremental basis, is a futile exercise. Catching up on development planning after wasting so many years chasing short-term goals, the MOF started on a wrong note.

Budgeting, a financing exercise, cannot not drive planning. The PBB approach may be appropriate for a 3-year planning period – not for a long-term plan. The PBB is an operational plan, not a strategic plan. With the PBB as reference, ministries are extrapolating current problems over a 10-year period. When ministries identify their measurable outcomes along their PBB programmes, they do this in isolation. There is no analysis of how these outcomes taken together will impact at the national level.

Land for e.g. is a cross-sector issue. What is the sustainable level of land that the country can afford to put for development? Can it cater for the different demands for land by the Ministry of Tourism, Public Infrastructure, IRS projects, etc.? This level of coherence is not present in the approach adopted by the MOF.

The identification of outcomes is but one part of the planning exercise. A good plan consists of evidence-based policies that are analysed comprehensively on a thematic or sector-wise basis for the whole economy. Previous planning exercises have seen, first of all, a host of preliminary studies and analytical work. Preliminary data and relevant information have to be collected scientifically. The MOF does not have the capacity to make evidence-based policies at present despite its huge staff comprising some 35 analysts at PAS level — and it intends promoting some 15 more.

Various stakeholders (development partners, private sector, etc), including the PMO, are now convinced that we need a well-staffed, full-fledged Planning Unit to chart out a proper development strategy that will enable Government to achieve its medium- and long-term objectives. There is at present a general consensus to take stock and prepare a new National Long Term Perspective Study (NLTPS) for a better future – one that will shape a vision of Mauritius for the next 20 years, the likely course of events, the main constraints and opportunities that will emerge, the linkages between sectors, resource availability and the key choices that have to be made.

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The Poverty Issue

The MOF persiste et signe… in its doubtful methodology of estimating the relative poverty line; it continues to claim that the proportion of poor households has declined over the period 2006-07 to 2012, by adjusting the 2006-07 relative poverty line for inflation only without concomitantly updating the basket of goods (as it is done by Statistics Mauritius) to take into account the changes in the expenditure pattern of the population. Surveys that derive the relative importance (weight) of each item included in the basket of goods allow us to undertake analysis on income and expenditure of households, including poverty analysis. This is common practice for as far back as the early 90s when Professor Jagdish Bhagwati had already warned us in the outstanding Vikram Sarabhai Memorial Lecture in Ahmedabad on poverty and public policy that added incomes earned by the poor need not necessarily translate into improved nutrition, for example, and that education was necessary to nudge people into making good choices. That’s why it became necessary to update the basket of goods and services being consumed by the poor to properly track poverty over time.

In many countries changes in the standard of living have called into question the merits of continuing to use the values of the original thresholds updated only for inflation. Historical evidence suggests that poverty thresholds — including those developed according to “expert” notions of minimum needs — follow trends in overall consumption levels. Because of rising living standards, most approaches for developing poverty thresholds (including the original one) would produce higher thresholds today than the current ones that are adjusted for inflation only. In the United States, once a new reference family threshold is determined, it is updated every year with more recent expenditure data. The updating procedure automatically reflects real changes in the consumption of basic goods and services over time. It thus corrects the erroneous approach of simply updating the thresholds for price changes, which ignores changes in living standards over time.

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Cost-effective Social Transfers?

In many countries social transfers are one of the government’s most effective tools for tackling poverty. The well-designed social transfers (particularly with respect to dependency, affordability, sustainability, targeting and conditionality) support developmental impacts that help the poor lift themselves out of poverty. We believe that the fragmented amalgam of social programmes announced in successive budgets will not survive scrutiny. The patchwork of uncoordinated programmes do not seem to be having any meaningful impact on reducing poverty and vulnerability and promoting human development. Panel labour force surveys, panel datasets and other survey resources available that capture information about social transfers track social grant recipients over time, enabling impact assessments of programme participation.

Has the MOF carried out any such surveys to assess the impact of its redistributive policies, amounting to Rs 2.3 billion annually, before it starts extolling these policies for having considerably reduced the burden on low-income families? Are these progammes cost-effective? Is there an effective monitoring and evaluation system that we, including the policy-makers and voters, can rely upon to justify our continuous support of such programmes?

One of the recent IMF Article IV documents has noted that “… the social insurance payments exceeded 4 percent of GDP, including over 1.3 percent of GDP for the basic retirement pension scheme. However, almost 40 percent of the basic retirement pension benefits go to the richest 20 percent of the population. Only about 24 percent of direct and indirect beneficiaries of social protection programs are poor. The poor receive only about 13 percent of total social protection payments. Estimates from the latest household survey indicate that the two richest quintiles of the population (top 40 percent) receive close to 58 percent of all social protection benefits and the richest 20 percent receive about 37 percent of all Benefits.”

Indeed most of these redistributive social policies have been captured by the better-off consumers from the middle and rich classes.

Do these social progammes really help the poor? Subsidies for items of middle class consumption, for example on LPG, rice and wheat, contribute to the fiscal deficit, and thereby to inflation which is a crushing burden on the poor. This amounts to a betrayal of the very downtrodden sections of people that the redistributive social policies claim to cater for. And we talk of fiscal responsibility in our AC offices powered by subsidised gas, eating dholl puris and rotis made from subsidized flour and dropping our kids in our duty-free cars for their private tuition that has become indispensable for a free education system and its wasteful free transport which have become huge liabilities for the country. How can we thus expect to find resources for ZEP schools and for a robust and ambitious vocational education?

Direct intervention in the form of education, vocational training, health care, population control, nutrition for children and pregnant mothers, sanitation, shelter for all and old-age homes for the destitute, etc., would have a direct impact on the poor’s well-being and growth. The redistributive policies have paid little attention to such important development issues as well as those which actually matter to the poor. These policies need more of single-minded focus on issues that are affecting the marginalised sections of society, instead of providing general transfers that include elite economic issues to the exclusion of pressing social problems.

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The Evil of Inflation and Inequality

It is true that many economists, including Amartya Sen, lay much emphasis on the importance of redistributive policies to reduce poverty. But they do not in any way find it bizarre to contain inflation to protect the poor. On the contrary in Professor Sen’s exceptional academic work, two ironies stand out. His Nobel Prize-winning insight drew attention to the importance of broad purchasing power rather than the narrow (physical) availability of food in avoiding famines and mass starvation. Thus Sen stresses the point that the poor’s capacity to hedge against inflation is limited.

His second major insight was that development was about freedom, especially the freedom to exercise choice. Will the poor have greater choice in an economy which is experiencing deteriorating growth and inflation? Will the poor have greater choice in a system that reeks of a privileged paternalism approach — by determining in bits and pieces, without proper research and analysis, what that the poor need as specific assistance over expanded choice in the form of untied cash transfers, capacity building or broader employment opportunities that enhance purchasing power.

There has been a lack of commitment to capacity building, particularly at the national level, which is usually critical to reinforce the long-term sustainability of well-capacitated programmes. Directly, national capacity building improves a country’s ability to cost-effectively and efficiently deliver programmes that yield vital social and economic impacts. If the TINAs (There Is No Alternative) had paid more than lip service — les effets d’annonce — to the Rs 5 billion earmarked for the Empowerment Programme announced in budget 2006/7, it would have ensured the success of well-capacitated programmes in terms of tackling poverty and vulnerability as well as promoting pro-poor growth and the resulting fiscal resources would have thus directly supported long-term sustainability.

Like our friends from the research team of MOF, we would like to borrow a leaf from Amartya Sen’s treatise on inequality. Professor Sen believes that a country should invest more in its social infrastructure to boost the productivity of its people and thereby raise growth. Investing in health and education to improve human capabilities is central to Sen’s scheme of things. Without such investments, inequality will widen and the growth process itself will falter. For us, it is a reality: growth is puttering, inequality is rising and the trickling down of the fruits of the meagre economic growth has benefited the richer groups more than the poor as a result of the non- inclusive growth policies pursued by the TINAs and remnants.

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* Published in print edition on 23 August 2013

Tags:Amartya Sen, Collaborative African Budget and Reform Initiative, Economic and Social Transformation Plan, National Long Term Perspective Study, National Strategic Plan for 5 years, Poverty Issue, Professor Jagdish Bhagwati, R. Chand, Rama Sithanen, Technical Overview Note