Getting More and More Difficult to Forecast: Specially the Future!

The Global Setting: Someone has rightly said that the future is no longer what it used to be. Indeed the era which is generally referred to as the “trente glorieuses” following the Second World War II up to the 1980s, was characterized by an extension of civil rights, strong economic growth, reducing inequality and improving social mobility, at least in the so-called “developed” countries.

The defining characteristics of this whole period were of course stability and predictability of economic trends. Economic operators were revelling in an environment where linear growth was the “natural” assumption driven by a “virtuous circle” of growing demand led by gains in productivity which were shared with a strongly unionized working class, while technological advances created new demands which resulted in a rise in living standards.

Paradoxically, the end of this era was brought about by the end of the Cold War with the demise of the USSR. As the fear of the threat of Communism receded, it unleashed reactionary forces which were bent on attacking the linear triumph of the Welfare State established in most European states since the end of WW II. The ideological arm of this reaction was of course the Neo=Liberalism of the fundamentalist right.

To cut a long story short, after two decades of de-regulation and liberalization the dominant supply-side economics theorists operated on a model which was unable to forecast any downturns, including the Great Financial Crisis (GFC) which hit the global economy in 2008. The aberration of the model based on the assumption of continuous economic growth was highlighted in the sub-prime housing market in the United States which kicked off the GFC.

In strictly business terms, this translated into the primacy of greed, selfishness and short-termism in reaching business decisions. The world is still reeling under the consequences of that crisis and Mauritius has not been spared. As has been intimated earlier, one significant consequence of the crisis is the fact that the stable, predictable and linear thinking which used to be the mainstay of political economic analysis has now been relegated to the realm of distant history.

Conventional wisdom and mainstream economic analysis are less and less helpful in the determination of future economic policies. This is reflected in the new post-GFC vocabulary where such concepts as the “new normal” (an environment in which conventional thinking can be harmful), the “real economy” (as opposed to outrageous financiarization) have been coined to deal with the new post-GFC global landscape.

It may be worth mentioning that the breakdown of the erstwhile model has also had some very serious political consequences in the form of a realignment of national politics and class relations in what are deemed to be mature democracies. The emergence of the far-right Front National and the aberration of the “increasing popularity” of a Donald Trump in France and the United States respectively are concrete manifestations of the inability of conventional thinking to grapple with the dysfunctions resulting from the breakdown of the old model.

Whither Mauritius in 2016?

Confronted with this sea of uncertainty a small island developing state, open economy like Mauritius is bound to find it increasingly difficult to “plan” its future. This is, however, not the same as saying that we should give up on our efforts to craft a strategy that will ensure we attain the kind of socio-economic development we wish for and the accompanying level of economic growth to sustain it.

The latest estimates of economic growth for 2014 published by the Central Statistical Office make for very grim reading. The projected growth of 3.6% has again been adjusted downwards to 3.4%. Matters could have been even worse had it not been for the saving grace resulting from the unexpected but quite significant pick-up in tourist arrivals. Some of this can be credited to the decision to allow more airlines to fly into the country.

There are reasons to believe that we may have hit the bottom in terms of rate of economic growth in 2015 if we assume that there will be no repeat of a “scandal” similar to the BAI affair in 2016. This event alone must have cost some decimals if not units of growth if we consider the destruction of economic value which has directly resulted from the demise of one of the most important financial conglomerates in the country. The Government will plead that this was a necessary evil and not dealing with it would only have kept a bomb ticking dangerously. Apart from the direct destruction of value, one must also factor in the distractions from more productive work occasioned at all levels of the country as the affair panned out in public for almost six months.

A second reason to be hopeful is the trend in oil prices over the coming year. All the pundits are predicting a price range not exceeding USD 50 and which could dip as low as 20. This will be a boon for government and should be used wisely partly to stimulate demand and partly to repair our impaired financial macroeconomic fundamentals.

Lower oil prices tend to have a serious dampening effect on inflation. This could represent an “ad hoc” opportunity to “stimulate’ exports through a prudent readjustment of the exchange rate of the rupee. It must be pointed out however that such a measure is most effective in the medium term if accompanied by a specific programme and conditions for improving productivity of enterprises through innovation, investments in new technology and training of workers. In 2016 the export manufacturing sector could therefore increase its contribution to the GDP.

As we look around, there seems to be no compelling reason in the international environment which would prevent the country from achieving a better rate of growth in the coming year. While things have not really picked up, except maybe in the US, matters are certainly not looking worse either. In addition to the favourable oil price even Europe, which is our privileged partner in trade and investments, seems to have left the worse behind it. This is a tough situation for government for it puts the onus for a satisfactory economic performance squarely in its camp. The good thing for government is that since there has been so little done in 2015 on the economic front, this leaves it substantial room to manoeuvre and a relatively easier target to achieve.

A good performance could take us to around 4 per cent while under a focused coherent and effective leadership a 5% rate of growth seems a not unreasonable target for 2016.

 

* Published in print edition on 31 December 2015

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