R. CHAND

Titbits

The National Strategic Transformation Commission will have to be independent and transparent

After some six years of bumping into systemic dead ends, the Government Programme 2012-2015 took the bull by the horns by coming to the rescue of the economic management of the country. We have so far been having recourse to stopgap solutions and focussed mostly on short-term traditional macro-stabilization policies.

But that is not enough for establishing a solid base for sustained economic growth and get the economy going again at full blast. To anchor the growth dynamics in more solid stuff, the medium- to long-term strategies and measures will have to be elaborated within an overall conceptual framework or vision. We will then have the direction, consistency and focus to ensure that the structural reforms in the productive sectors succeed in improving economic efficiency and competitiveness.

 

 

The role of National Strategic Transformation Commission (NSTC) will be different from the days of allocative planning. Planning Commissions no longer set sector-wise targets as it used to be the case. However, they do provide a broad picture of the economy, its likely direction and pace of development, a consistent macro-picture, the plans for the development of infrastructure and the provision of public goods and services. All these help private entrepreneurs in their business. An important role that the Planning Commissions now play is in policy reforms and advocacy. Unlike other ministries, they do not have vested interests and so can be expected to give unbiased opinions; they can question what ministries propose and be trusted to adjudicate between alternative demands – working out the trade-offs based on the priorities of the economy. Planning is also needed for the coordination of projects even when one depends on private sector investments. Effective coordination reduces costs by reducing idle capacity.

The aim of the merger of the former Ministry of Economic Planning and Development (MEPD) with the Ministry of Finance (MoF) was to, besides optimising use of public resources, also optimally utilize the core competencies of the three cadres (MEPD, Management Audit Bureau and MoF) for the elaboration of a Multi-Annual Expenditure Framework. Unfortunately, the focus of the Ministry of Finance and Economic Development is principally directed towards budget work, which leaves little scope for the application of planning and strategic thinking skills. Very little research and sectoral analysis, which were the main focus at the ex-MEPD, have been carried out during the past years.

The economists of ex-MEPD with years of experience in strategic planning, sectoral analysis and research work should ideally constitute the backbone of the NSTC. This core team of experienced economists will need a strong and able leadership to work in harmony with line ministries, all relevant stakeholders, thinkers, academicians and consultants. Its main aim is not to produce just a loose collection of policy proposals but to carry out in-depth holistic analysis at both micro and macro levels and chart out a forward looking dynamic vision for the country in line with the aspirations of its people. It is a task that requires constant re-thinking and analysis, reflection and research, and which demands greater coherence and coordination across sectors in the formulation and implementation of comprehensive and integrated medium- to long-term policies and programmes.

To deliver on its mandate, the NSTC will have to be independent, transparent, and communicative whilst embracing all sectors, conscious of the need to optimize the use of scarce financial resources but unburdened by budgetary fixations. This is the model which has been successful elsewhere: the Planning Commission of India, the Ministry of National Economic Development in Singapore, the Economic Planning Units in Malaysia and New Zealand, the National Commission for Sustainable Development (NCSD) and such planning units in small economies like Malta, Fiji and Trinidad and Tobago, which have helped over the years to build in-house capacity for economic analysis of sectoral and national issues, thus decreasing dependence on foreign expertise.

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The Cost of Lower Public Debt to GDP Ratio

Over the past five years, from June 2006 to December 2011, total public sector debt as a percentage of GDP has decreased from 67% to 57%. This has been achieved as a result of the successive relatively lower budget deficits registered as from fiscal year 2007/08.

Table I: Public Finance

 As a % of GDP

2007/08

2008/09

2010

2011

Revenue

20.5

22.3

21.9

21.4

Revenue without grants and Special Funds

20.3

21.3

20.7

20.3

Current Expenditure

20.2

21.4

21.5

20.0

Capital Expenditure

1.7

2.2

3.4

3.6

Consolidated Deficit

-1.5

-1.3

-3.0

-2.3

Source: IMF figures adjusted for changes in GDP and inflows and outflows from Special Funds

 

However this has been achieved at a cost; the burden of fiscal adjustment fell mainly on capital expenditures. The efforts at fiscal consolidation seem to have gone waste. Without the substantial EU grants money, in compensation for sugar reform, and the transfer of Special Funds, revenue as a proportion of GDP has stagnated at 20%. While current expenditures barely changed, capital expenditures were slashed sharply. The average capital expenditure over the period 2006-11 (2.6%) fell short of that of period 2000-2005 (4.1%) by around 1.5% of GDP annually. This amounted to around Rs 21 billions of investment that were foregone over five years.

The underperformance in capital expenditure meant a low implementation capacity for many of the projects announced in the Budget. Fiscal adjustment relied mainly on lower capital expenditures at a time when the economy sorely needed to bridge the infrastructure deficit. The economy continues to be constrained by the unavailability of trained workers, water, energy, sewerage/waste disposal facilities in addition to bottlenecks at the port and airport and road congestion. By end February 2012, though on a purely cash basis, Government has spent less than Rs 700 million out of a capital budget of Rs 14 billion, which amounts to only 4.5% of the earmarked capital expenditure.

There was thus an urgency to remedy the situation and fill in the gaps. Government Programme 2012-2015 has announced, as we have often proposed in these very columns, the setting up of a Project Management and Delivery Unit, a multidisciplinary unit, which besides building the overall capacity of the government for a more effective approach to project design, monitoring and implementation, will be able to secure the right rigour for the implementation of priority capital projects selected across such sectors as health, education, policing, criminal justice, and transport. It is not enough to say that we are now engaged in the long-term thinking mode; this has to be translated into something real by creating the proper structures for realizing our lofty vision.

 

* * *

Managing Capital Inflows

Many emerging markets and developing countries have recently experienced historically high levels of positive capital flows. We note a more or less similar trend in the flows of FDI to Mauritius; inflows to real estate and accommodation accounted for an annual average of 84% of the total FDI, inclusive of the inflows to the banking sector, over the past six years. The evidence shows that the wave of capital inflows has been associated with strong exchange market pressures in all regions. These have been resisted through the accumulation of foreign reserves while also allowing some upward movement in exchange rates. Resistance to exchange rate changes during the inflow period and sterilized intervention were unable to prevent real appreciation.

So what should be the design of policy responses in the face of the large capital inflows and what is the effect of policy responses on the behaviour of the real exchange rate? In the cases of the countries that have a current account deficit and where the net total capital flows exceed this deficit, the recommended policy response is
a) to allow limited nominal exchange rate appreciation (whereas a large appreciation, by making investment in the country more expensive, would deter further inflows);
b) do not sterilize reserves accumulation for it will hike up interest rates that will encourage continued capital inflows;
c) do not tighten monetary policy because the resulting higher interest rates are likely to exacerbate the capital inflow problem;
d) tighten fiscal policy, especially if there are inflationary pressures; allow the nominal exchange rate to appreciate and the tightening of fiscal policy will lower interest rates and reduce inflows, and
e) relax controls on capital outflows and possibly impose controls on inflows.

Fiscal restraint in the face of strong capital inflows helps reduce pressures on the real exchange rate. The evidence suggests “that countries facing output growth and capital inflows would benefit from greater fiscal restraint, by saving a larger share of buoyant revenues, rather than allowing public spending to soar or prematurely cutting taxes.” (‘Capital Inflows and Balance of Payments Pressures —Tailoring Policy Responses in Emerging Market Economies’ prepared by Atish Ghosh, Manuela Goretti, Bikas Joshi, Uma Ramakrishnan, Alun Thomas, and Juan Zalduendo). Our Central bank is also worried about fiscal dominance (the extent to which the financing of government deficits condition the growth of the money supply) which explains its call for greater coordination between monetary and fiscal policy.

* * *

Labour Market Reforms: Flexibility is not on its own the solution to unemployment

Labour market reforms are back on the agenda with the proposed amendments to the labour laws; some of our IMF/WB adherents persist in propagating their views that the necessary and sufficient precondition for an optimal creation of jobs in the Mauritian economy is a flexible labour market. They claim that the more flexible labour markets have limited unemployment and resulted in a faster reversal of the unemployment created by the crisis. The removal of the soft constraints in the policy and regulatory environment of the labour market, namely a more flexible labour market policy is not on its own the solution to our unemployment problems. The “flexibility” argument is the newly received wisdom but it remains controversial with many economists who want to explore some of the assumptions behind the case for flexibility and clear the ground for more sophisticated discussions about the roots of strong labour market performance rather than generalized statements.

For far too long the proponents of a crude model of flexibility have had the best of the argument – even though an accumulating body of research suggests that different policy packages can produce equally good results. The relative success of the Nordic countries, the Netherlands and Austria, in keeping unemployment low is inexplicable when viewed through a standard neo-liberal lens. All these countries have higher taxes than the UK and the USA, larger states, more extensive welfare systems, strong trade unions, moderately tough employment laws and extensive coverage of collective bargaining.

It is important to understand these rather simple and straightforward facts. For example in our case, prior to 2009, despite the relatively rigid labour legislation, the active labour market programs for displaced workers from the sugar and textile sectors, SME development and incentives to boost placement of labour force entrants were critical in boosting employment creation. In Germany, it is not flexible labour laws but its corporatist model which gives workers a say in management that has made it easier to push structural reforms and hold down wages. Its system of apprenticeship and vocational training has helped to keep young unemployment lower than elsewhere in Europe. True labour flexibility must be based on worker versatility — the workers must possess a variety of skills, so that they are qualified to change jobs with the changing economy. Building those skills requires time, and creating the worker versatility that can provide true labour flexibility must be a continual process.

If we want to have a meaningful impact on unemployment, we need a more comprehensive programme of human capital formation that transcends short-termism and is supplemented by
a) appropriate reforms in the education sector to tackle the bottlenecks in primary and secondary education, vocational training that combines classroom instruction with work experience;
b) ensuring the creation of linkages between the education and training systems and the responsiveness of training to the changing demands of the market and the needs of the economy;
c) promoting the acquisition of higher skills for the upper end of the labour market for new technologies and new emerging sectors, and
d) enforcing a culture of training and lifelong learning at individual, organisational and national levels for enhancing employability and increasing productivity, and providing the necessary skill base and human resource thrust for successful transformation of Mauritius into a Knowledge Economy.

* * *

MK rescued again and again!

Stories of airlines in trouble or brought crashing down to earth in a financial fireball have become commonplace. The situation at air Mauritius is no better, the only difference being that the nosedives are continuous as well as the rescues — which involve rescuing one of top conglomerates which is an important but strangely invisible partner of MK. Some knowledgeable columnists believe that the nice sound bites about rescue plans will end up being mere slogans. Mr R. Ramlagun, in an interesting article – ‘MK: Is this serious Management’ (L’express, 25 April 12) – expresses doubts as to whether the national airline “with basically the same people in the driving seats” can come out of the ruts.

During the last rescue mission we were told Air Mauritius avoided not only liquidation but did not need recapitalization. The same discredited management and “board that was caught napping by the trail of scandals” (like the unsound hedging activities that swallowed billions of rupees and burdened the national debt) are still at the helm. It is the same old wine in new bottles. But it is turning out to be quite onerous for taxpayers.

The Chief Editor of L’express was recently querying whether « il y avait lieu d’avoir recours au prestigieux et coûteux cabinet «Seabury» pour savoir qu’il faut supprimer les lignes déficitaires et renforcer les dessertes les plus populaires. Pour redresser sa situation, MK envisage, outre la reconfiguration de son réseau, un dégraissage du personnel et un renouvellement de sa flotte avec des «Airbus» moins gourmands. Des décisions que la direction de la compagnie n’a pu prendre sans commander une étude onéreuse ?

Another correspondent (Icare: ‘MK: neuf mois pou enfoncer des portes ouvertes …’ in Le Mauricien of the 24 April 12), in an equally interesting article believes that after Consultants Mc Kinsey 1, Mc Kinsey 2, Lufthansa Techniks, “Seabury et ses recommendations… s’y fracasseront à leur tour”.
Are we getting value for money? Don’t we have a representative of the Ministry of Finance on the Board of our national airline company to precisely have an oversight over its financial issues?

R. CHAND

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