Enhanced Economic Growth: Necessary But Not Sufficient For A Miracle

“There have been some speculations about the use of the term “miracle” to qualify that exceptional economic performance from observers who claim that in fact the country was at the cusp of benefiting from the tough measures taken by the previous governments – Labour Party-PMSD (1976-82) which had implemented the Structural Reform Programmes imposed by the World Bank-IMF combine, and Paul Berenger’s decision in 1982 to introduce the Sales Tax which, while being hugely unpopular, was equally remunerating for the Treasury…”

We are now three days from Budget Day on Monday next. The Minister of Finance is expected to come out with what will be at least the premise of the promised second economic miracle under the same dual leadership (Anerood Jugnauth and Vishnu Lutchmeenaraidoo) who are credited for a similar feat in the mid-1980s.

There have been some speculations about the use of the term “miracle” to qualify that exceptional economic performance from observers who claim that in fact the country was at the cusp of benefiting from the tough measures taken by the previous governments – Labour Party-PMSD (1976-82) which had implemented the Structural Reform Programmes imposed by the World Bank-IMF combine, and Paul Berenger’s decision in 1982 to introduce the Sales Tax which, while being hugely unpopular, was equally remunerating for the Treasury.

Be that as it may, it takes nothing from the fact that the government which came out of the polls in 1983 was one of most efficient since Independence because it was driven by a set of coherent policy initiatives and a clear sense of vision and direction without which even the most favourable conditions would have been squandered.

This notwithstanding, however, the real “miracle” was not that this acceleration of economic growth was achieved in such a short time but, to use the words of Arvind Subramanian ( IMF Working Paper WP/01/116 – Who Can Explain The Mauritian Miracle: Meade, Romer, Sachs, or Rodrik):

“Mauritius’s economic performance has been sustained by OECD-type social protection. This has taken several forms: a large and active presence of trade unions with centralized wage bargaining; price controls, especially on a number of socially sensitive items; and generous social security, particularly for the elderly and civil servants. Unlike the OECD countries, however, generous social protection has thus far not necessitated high taxes, reflecting both strong growth and a favourable demographic structure with a high proportion of the population being of working age. The OECD affliction of a changing demographic structure, with rising number of dependents, however, looms large for Mauritius in the coming years.”

We have taken the liberty of quoting this paragraph of Arvind Subramanian’s paper because, to our mind, it encapsulates the achievements of the first economic “miracle” as well as the whole conundrum lying ahead for the realization of a second one.

To start with, there are stark differences between now and then. The three most striking ones are the following:

First, Mauritius was then at what economists have described as the “take-off” stage of its economic development trajectory. It is relatively easier to achieve economic success at that stage than to kick up an economy from a middle income to a high income one.

Second, whereas we were then in the midst of enjoying the “demographic dividends” of our population growth trends, the demographics are now proving to be formidable headwinds for the future.

Third, the whole global economic environment in which Mauritius is operating has changed drastically and mostly to the detriment of our historically “acquired” benefits leaving us to fend for ourselves on the proverbial “level playing fields.”

Adapting the Arvind Subramanian framework and translating this to the present day may then lead us to conclude that any new “economic miracle” cannot be assessed only in terms of an improved GDP growth even if it is around 5.5 or 6%. The real test of a “miracle” would be under what socio-economic conditions are these achieved? How do the more vulnerable sections of society fare in the process? How do the middle classes benefit from such rates of economic growth? In short, who will be the winners and losers?

A classic illustration of economic resurgence which has nothing to do even remotely with a miracle is the present case of the United States where the economy has witnessed a steady growth over the past eighteen months or so.

One need not be an economist to understand that this result has been made possible largely by economic policies which have, among other things, squeezed a defenceless working class to the bone and at the expense of thousands of families who have lost their homes and been on the dole for months on end while precariousness and poverty spread like wild fire.

The peculiar history of the US and the prevailing dominant ideology based on individual freedom embedded in society allows them to get away with such drastic social ups and downs in line with the business cycles.

The history, social fabric and even size of Mauritius militate for a more consensual approach and a different role for the State in our development paradigm. The constantly widening level of inequality in access to resources and in income distribution over the past decade or so is quickly reaching intolerable heights that is largely responsible for the kind of shocking anti-social behaviour which we read about in the daily press.

Designing the policy mix which will reverse these trends, by reconciling the need to accelerate the rate of public and private investments in the country while improving social cohesion, is what will constitute the stuff of the new miracle.

In this regard, in a recent interview, the former US Treasury Secretary Larry Summers had this to say, “Confidence is the cheapest form of stimulus. Governments need to recognize that fairness and inequality and sharing the benefits of growth more widely are crucial issues going forward, but they need to do it without invoking a politics of envy. That can be very debilitating to business investment.”

Monday’s budget will give us the first clues about how the Minister intends to achieve his ambitious objective of a second economic miracle in spite of a manifestly hostile economic environment. We expect, among other things, that he would finally get rid of the sterile “flat tax” in order to re-appropriate fiscal policy as a potent policy instrument to achieve his objectives.

* Published in print edition on 19 March  2015