2016: High Time to take Bold Initiatives for Economic Growth

As we start the New Year, the issue of prioritisation of growth on the economic agenda of Government has unsurprisingly figured prominently among the wishes of most economic operators and observers.

This is largely due to the perception that this has not been the case during the first year of this new mandate in spite of the protests of government’s spokespersons.

Under the circumstances it can be a stimulating intellectual exercise to delve into the concept of growth and its different implications during the kind of economic transition through which Mauritius is more or less forcibly going through as it struggles to adapt to crises generated both locally and globally. This notion of “forced” adaptation is a critical one if only because it is antithetical to a policy-driven, strategically determined course of action.

It is perhaps appropriate that we should start with a definition of what economic growth is all about and a brief description of its essential components. One of the most succinct and simple definitions can be found in the introduction to Paul Baran’s book ‘The Political Economy of Economic Growth’, written as far back as in 1962. In that book economic growth is defined as what results from “bringing under-utilized resources into production, making organizational changes to increase productivity and capital accumulation or investment, either replacing old by better new machinery or building new plants.”

The aim of economic policy, according to the same author, is to create “economic surplus” – roughly the difference between what a country produces and what it consumes (actual surplus) or the difference between what it could produce and what it needs to consume (potential surplus). How this economic surplus is distributed and its eventual re-utilization towards investments (savings) or consumption will eventually determine the extent to which economic growth translates into economic development and welfare.

In line with the above considerations the most obvious candidates for “bringing under-utilized resources into production” remain the unemployed labour force, especially the skilled and qualified fraction. However, while a policy of employment creation per se (e.g. employment of graduates in various schemes where they are obviously underemployed) can be a short-term palliative to alleviate the misery of the unemployed, it cannot substitute for the more pressing need to create the conditions favourable for the setting of enterprises which are likely to employ the latter in productive and competitively sustainable activities. It is generally agreed that a growth rate of above 5% annually over a number of years is a necessary condition for the absorption of the persistently high level of 8 to 8.5% of unemployed. This of course raises the serious issues of honing the skills of the candidates to make them more “employable” through short-term training as well as the neglected question of “manpower planning.”

Then there are the two other two conditions for economic growth identified above – organizational changes to increase productivity, and capital accumulation and investments. From these two, the former seems more amenable to governmental actions and decisions for “quick” results. The efforts of the Prime Minister in re-establishing a dialogue with the private sector, while a step in the right direction, has as yet failed to gather the kind of momentum which would make it a significant force for change. It would seem that the called for dialogue suffers from a lack of structured approach and poor planning.

In July 2002 Harvard University Professor Dani Rodrik in a paper titled: ‘Feasible Globalizations’, wrote the following: “Transitions to high growth are typically sparked by a relatively narrow range of reforms that mix orthodoxy with domestic institutional innovations, and not by comprehensive transformations that mimic best-practice institutions from the West. South Korea and Taiwan since the early 1960s, Mauritius since the early 1970s, India since the early 1980s and Chile since the mid-1980s are some of the more significant examples of this strategy.”

It can be argued that as far as the orthodoxy and mimicry part of the equation is concerned, the outgoing government has played its part. Examples of the same are the liberalization of international trade with massive reduction of import tariff protection over a relatively short time, the introduction of Business Facilitation measures, the dismantling of labour laws protecting workers, etc. It is now incumbent on the present government that has been elected primarily on the promise of delivery of a second economic miracle to introduce the kind of “domestic institutional innovations” which will produce the same effects as in the 1980s.

In this connection the Great Financial Crisis of 2008 has seemingly created a more favourable climate for adoption of such unorthodox policies which would have been unacceptable in the era of  triumphant globalization. In a highly volatile global economy, the State, especially in a Small Island Developing country like Mauritius, can claim to have a more active role in defining the contours of the future economic orientation of the country. Whatever may have been the motivations of those who introduced the Flat Tax, it must now be obvious that it has failed miserably to deliver on its promises.

One of the most serious unintended consequences of the introduction of the Flat Tax is that it has deprived the government of one of its most effective tools of economic policy — the use of fiscal policy as an instrument for “incentivizing” investments in employment generating and competitively sustainable projects. The bias towards investment in real estate projects over almost a decade is a direct result of such passive surrender to what is justified as “market realities” whereas it is more of a reflection of historically determined pattern of land ownership and a dearth of alternative investment opportunities due to the lack of policy initiatives.

As regards the last part of the equation regarding capital accumulation and investment in new technology and in modernization of existing stocks of capital, it should by now be obvious that the government and the monetary authorities cannot continue to shy away from the central issue of deleveraging of private sector debts. High levels of private sector debt are probably the most critical constraint on future growth. Finding the right solutions to the problem demands hard work and imaginative proposals, which can reconcile the interests of all the protagonists (financial institutions and enterprises) including the interests of the public if government finances are involved. Acknowledging that the problem has already reached near crisis levels would be a good start to finding the appropriate solutions.

If government is serious about prioritizing the economic agenda, then 2016 is the year in which it needs to walk the walk. In this connection it is interesting to conclude with another quote from Professor Rodrik (‘A practical approach to formulating growth strategies’ -2004) in which he outlines his approach which consists of three elements, which could indeed form the basis of the new dialogue with the private sector:

“First we need to undertake a diagnostic analysis to figure out where the most significant constraints on economic growth are. Second, we need creative and imaginative policy design to target the identified constraints appropriately. Third, we need to institutionalize the process of diagnosis and policy response to ensure that the economy remains dynamic and growth does not peter out.”

* Published in print edition on 22 February 2016