Avoiding the Economic Mediocrity Trap

One single budget is not a magic wand which will solve all our problems, but it does represent an opportunity for sending the right signals to operators and the population at large

The general environment in which the Minister of Finance and Economic Development will present his budget at the end of next week is, to say the least, extremely volatile. Surprisingly stock exchanges in most of the capitals of developed countries are booming after having absorbed the initial shock of the unexpected Brexit vote.

The general consensus seems to be that we are on the verge of a sustained bull market for shares. All this is happening at a time when the United States’ economy is showing all the signs of a robust pick-up while analysts are expressing serious concerns about the British and continental European economies in the immediate aftermath of Brexit.

The truth is that it is less and less easy to predict the future of economies in a global environment where sentiment plays a larger role than economic fundamentals in determining the expectations of economic players and on their decision making process. And heaven knows that, in the interconnected world, events such as terrorist attacks or even an attempted coup can have a determining influence on sentiment and turn a rosy picture into a nightmare overnight.

Budget blues…

On the local front, there is a mixed bag of serious reasons for concern as well as some rather positive factors. As would be expected from any Minister of Finance in his situation, Pravind Jugnauth and his advisors are clearly emphasizing the risks and challenges rather than the positive aspects. This is the habitual scenario of pre-budget public relations in most countries and it is fair game, although over the years it seems to have reached truly unusual proportions in Mauritius. Analysts though need to separate the one from the other and try to get as close as possible to an objective assessment of the prevailing conditions and thereby to the much debated marge de manoeuvre available to the Minister.

As soon as the issue of the latitude available to the Minister of Finance regarding fiscal policy is raised, the orthodox response is forthcoming: the Minister’s range of action is strictly bounded by the need to foster macroeconomic consolidation through reduced budget deficit and national debt. This standard formulaic response represents the quintessence of the one-size-fits-all type solutions to problems – they are meant to be universally applicable, independently of the circumstances of the national economy, the prevailing global and local environment or the political orientation of the government of the day.

Indeed for those who profess such approaches to economic problem-solving, macroeconomic stability becomes the end of policy-making and crowds out socially-oriented policies designed to alleviate poverty, create employment and foster fairer distribution of wealth and income. The focus on macroeconomic parameters under these conditions results in the replacement of development goals with the need to maintain market confidence – which is then somehow expected to boost growth through the proper functioning of market forces. Such applications of “textbook” economics unfortunately have little to show in terms of sustained success in any part of the world. Ironically enough, the above could easily be summed up by a remark from someone whose institution is a principal proponent of these same policies – IMF chief Christine Lagarde recently warned of “global economic mediocrity”.

As pointed out above, at his recent pre-budget press conference the Minister has painted a pretty dark picture of the economic conditions in Mauritius – a decelerating rate of growth of around 3.5%, low levels of investments, falling rates of savings and high unemployment most worryingly among the youth and educated sections of the population. This is an undeniable factual but partial description of the state of the economy. It is also true that there are a few silver linings which need mentioning.

Silver linings

The tourism sector has done particularly well during the past year with an above 10% rate of growth in arrival. The reasons for this success are twofold, namely, an intelligent and prudent opening of air access and the terrible events taking place in some of our major competing destinations (Tunisia and Turkey, for example). Since both conditions are likely to persist in the coming year, there is good reason to believe that the sector will continue on its growth path.

Then there is the price of oil on the international market. Through the complex Petroleum Price Mechanism, which fixes the price of oil at the pump, government finances have been considerably boosted during the whole of 2015 as the price of oil slumped to less that USD30 on the international market. Sugar production, according to the latest forecasts, is predicted to increase by more than 10% year on year while the Sugar Syndicate expects the revenue per ton to increase substantially. Finally, following the sale of assets of the defunct BAI, the government should recover even if partially some of the funds used for payouts during the last financial year.

The point about all this is that the situation is not quite the disaster that the pre-budget PR exercise would suggest. Consequently the onus for future development will depend on the deployment of the right policy choices, their sequencing and effective implementation. In view of the lack of clarity, which has prevailed over the past year or so, the coming budget would most likely be a determining milestone in this exercise. The Minister should have more room to manoeuvre to deliver a policy-driven budget based on a coherent and well-designed mid-term development strategy.

The urgency of the moment is clearly the setting up of a dynamic and transparent framework that establishes open, stable and predictable entry conditions for investments which will lead to economic growth, employment creation and innovations that enhance factor productivity in the country. This should not and need not, however, be at the expense of government’s responsibility towards the more vulnerable sections of the population as well as its duty to adopt progressive measures in favour of a more equitable and fair distribution of wealth and income.

Practical measures

Having thus defined the general context, the following are some of the practical measures which one would wish to find in the coming budget. The three areas which pop up for immediate attention for investments are: Public infrastructure, Export of Goods and Services, and Redefining and Consolidating the Foundations of the Financial Services Industry.

In a recent article, this column had explained the case for investments in public infrastructure as a “low lying fruit” for stimulating economic activity and the construction industry. Mention should be made that such investments need not be restricted to government funds but that a revamped and functioning framework of Public-Private Partnership (BOT, BOOT, etc.) can also help to mobilize private sector participation in such projects.

As regards the need for promoting exports, it is clear that in a globalized open trade world the prospects for firms which are focused on the local market are limited. The shift from local market to export orientation in a fiercely competitive global environment requires the establishment of a coherent programme of training, marketing support and financial re-structuring for transitioning firms. In this context, given the size of the country, the opportunities opening up in Africa and the “natural” trend of a shift to a services based economy, the government should seriously consider the setting up of a National Services Export Authority.

When it comes to the financial services industry, it is clear that the window of two years between now and the end of the DTAA with India must be put to good use for re-inventing the sector based on the foundations of accumulated experience and knowhow over the past nearly quarter of a century. The industry clearly needs a broadening of its products offering as well as a diversified geographical spread. A deliberate policy for attracting professionals and internationally reputed firms to locate their regional headquarters in Mauritius as a shortcut to acquisition of additional knowledge capital in the sector is now an urgent imperative.

Because of the prevailing economic conditions and probably because of the fact that the last budget has been such a non-event in terms of nudging the economy towards a growth trajectory, the expectations from the forthcoming budget are very high. One single budget is not a magic wand which will solve all our problems, but it does represent an opportunity for sending the right signals to operators and the population at large that the government has a coherent development strategy and a vision for the future of the country.

* Published in print edition on 22 July 2016