The Soft Belly of Our Economic “Depression”

Arguably one of the principal causes of the present socio-economic stagnation in the country is the breakdown of trust among social partners as well as among the population at large. This is a situation that has been brewing for a long time

With GDP growth hovering between 3 and 4% over the last few years we are not technically in a depression except if we go by JM Keynes definition as follows: “a chronic condition of subnormal activity without any marked tendency either towards recovery or towards complete collapse”. Would any serious observer of the Mauritian economy disagree with the fact that this has been its defining characteristic over nearly a decade now? Certainly not the Governor of the Bank of Mauritius who observed recently that “this economy is still operating below its potential level, reflecting mostly sluggishness in investments.” Nor the Chief Strategy Officer of the Mauritius Commercial Bank who wrote that the investment record “is far below the targeted level for the country to successfully accomplish its socio-economic ambitions.”

Total investments in the economy as a percentage of GDP have been on the decline for a number of years, reaching 17% for 2015. The latest figures published by the Bank of Mauritius regarding Foreign Direct Investments in the country which shows a fall of nearly 50% year on year tends to confirm that the trend is unfortunately deteriorating.

According to most analysts, the level of investments in the country is far below what is required to even start causing a dent in the level of unemployment. Local and Foreign Direct Investments have been equally dismal. Closely linked with this dearth of investments is the other critical factor of falling productivity. An often disregarded effect of foreign direct investment is that it is a driver of innovation and modernization not only in terms of new products but also with regard to the introduction of technology and work and organisational methods.

Following the meeting of the Monetary Committee in February this year the BOM noted that among other factors impeding economic recovery was “productivity trends and wage growth in the economy, debts levels and trends in non-performing loans in the banking sector.”

Going by all the above we are clearly in the midst of a “vicious circle” where consumers will not spend because of a backlog of indebtedness and businesses will not invest because of lack of confidence in market prospects. The latest survey by the Mauritius Chamber of Commerce and Industry clearly validates this situation in its conclusion – that a large majority of entrepreneurs are not planning to employ more people in the coming months because they are worried about market prospects.

Such a grim picture of the economic future for the country is indeed a harbinger of worsening socio-economic conditions. They could translate into increased marginalization of large swathes of the population and the resulting proliferation of anti-social behaviour if urgent action and appropriate economic policies are not put in place urgently.

In the rest of this article though, we do not intend to comment on the many suggestions which are regularly proposed through commentaries in the press or in official reports from international institutions. We are more concerned here with one aspect which is less often mentioned but which could be as, if not even more, critical for remedying some of the problems identified above. This could be described as part of the soft solutions as compared to the mostly technocratic solutions which are proposed by professional economists.

We are talking here about the level of TRUST prevailing in an economy as a necessary, even essential factor in the determination of economic growth rate in a country. It is suggested that in the mixed economy model which prevails in Mauritius, where the operation of free market is meant to be the dominant vehicle for allocation of resources and distribution of income within the boundaries of a heavily policy and regulations driven environment, the issue of TRUST among stakeholders becomes even more decisive in the design of a coherent and successful economic strategy.

Arguably one of the principal causes of the present socio-economic stagnation in the country is the breakdown of trust among social partners as well as among the population at large. This is a situation that has been brewing for a long time and therefore cannot be attributed to the present government although events around the BAI and cases of ministers involved in enquiries by ICAC and others is terribly unhelpful in the circumstances.

Economic growth driven by the private sector and in partnership with government is the sum of numerous transactions among stakeholders. The level of trust – basically the belief and confidence that all parties to a transaction will comply with their obligations within the framework of accepted norms and practices — is therefore a major determinant of the cost of transactions whose final outcome is economic growth. Transactions among people and between stakeholders when properly governed operate on the basis of written or widely accepted “unwritten rules” (these are referred to as institutions) which create the confidence that the other party will deliver on his part of the bargain. This kind of predictability based on values, norms and unwritten rules finally makes for efficiency (in economic terms) and helps to build up the capital of trust in society.

Government’s role in amplifying the stock of trust is crucial, especially in a heterogeneous society and in the given historical context of a country such as Mauritius. However this is a systemic phenomenon. The roles of other stakeholders (corporate sector, trade unions, NGOs) are also critical to create situations in which all actors involved in continuing transactions ensure that others will perform according to the “social contract.” Clearly achieving this condition will require for starters that there is no perception among the people that the trust capital even among members of the government is dwindling with every passing day.

* Published in print edition on 6 May 2016