It’s the Economy Stupid! Or why 5.3% growth will not be achieved

In 1992 Bill Clinton won the American Presidency after a successful campaign based on the simple slogan “it’s the economy stupid.”

Although we are not in an electoral campaign this is a lesson that the present government would do well to remember

As things have panned out over the past week or so, the government’s argument that “doing nothing” about the BAI saga was not an option has certainly been validated by the turn of events. There will be never ending debates about the timing and the active handling of the issue by government ministers instead of what would presumably have been more appropriately done by the Financial Industry Regulators. This would presumably have added water to the mills of those who insist that this is primarily a political vendetta.

More potentially damaging could be the fact that flaws in the process could open up gaping holes for lawyers of the parties involved to have a field day over years to come and that too to the detriment of the policyholders, employees and other stakeholders of the companies implicated in this maze. The news from the Privy Council concerning the case of Rainbow Insurance Company where policyholders have been waiting for nearly a decade for an outcome is a timely reminder of the legal intricacies involved in such matters.

In such situations where already financially and legally complex matters are embedded in a particular socio-political context, each one shall not only feel entitled to have his own views but feel that he has a right to stick to his own “facts”. In this regard it may prove rather futile to get involved in a blame game and probably more useful to analyse what could be some of the likely consequences of this yet evolving episode on the near future of the country, especially in terms of its impact on the rate of economic growth and, as a result, on the welfare of the population at large.

Disenchanted Portfolio Investors

One immediate and direct effect which may be yet underrated by analysts is the negative impact of the recent events on foreign portfolio investors. Stock markets are regarded the world over as being more and more primarily driven by sentiment as opposed to such considerations as liquidity or fundamentals. Analysis of recent trends indicates that foreign portfolio investors have divested very heavily over the past months. As a result the market capitalization of our quoted companies has taken a serious beating ever since October last year with a definite acceleration noted since the beginning of the year.

The present turmoil and several signals sent out recently concerning some of the largest quoted corporations will definitely not contribute to redress the situation. The large family-held companies which compose the economic landscape of Mauritius are all the poorer, a most relative term some would say, but nevertheless a significant factor in the determination of the appetite of corporate Boards when deciding whether to invest in restructuring and expanding existing activities, let alone investing in new ventures.

Low Risk Appetite from Local Operators

The “booster” effect generally expected of the exercise of Budget Presentation has been one of the other casualties of the persistent media frenzy over the BAI/Rawat affair. As far as substance is concerned, the fact remains that the thrust of government philosophy as exposed in the Budget was a heavy reliance on the private sector to participate actively in the investment-driven growth necessary to achieve the projected GDP growth of 5.3% for calendar year 2015. In the circumstances and given what we have described above, the task of mobilizing such participation becomes even more problematic.

If the appetite for risk-taking (investments) by private sector entities is a function of the prevailing economic environment, development policy initiatives as well as the “psychological” inclination of the principal decision makers, then one can surmise that any objective analyst would conclude that the situation has deteriorated substantially over the past months, albeit accentuating a trend which has been dominant over the past year.

Foreign Direct Investors and the New Paradigm

Foreign Direct Investments (FDI) constitutes the other essential component of private sector participation in the economic development of the country. FDI, it must be noted, is not only about the inflow of money but also brings with it transfer of knowledge, markets and technology. Surveys carried out by the Foreign Investment Advisory Service and others have established that private investors seek the following conditions, among others, in pursuit of their target rates of returns on their investments:

– Clear published rules and efficient administrative procedures for providing information and processing investment proposals.

– “Political stability” defined as the ability of governments to deliver on their side of their investment “contracts” (in the local context the promises made by the Board of Investment) without excessive pay-offs.

– Ready access to a skilled/semi-skilled workforce capable of quickly absorbing specialized training.

– Reliable infrastructure, utilities and public services available at competitive costs – of which first-class and competitively priced telecommunications services are now prime requirements.

– Freedom to manage the enterprise as they see fit within stable and transparent regulatory arrangements.

Whereas at first glance all of the above are very fairly familiar propositions which we as a nation have been practising for many years now, it is unfortunately far less obvious once one dares to delve deeper into the matter. Undoubtedly successive governments have, at least since 1983, been professing their support for such arrangements. Their actual translation into successful operational institutions has unfortunately varied in effectiveness over time.

Indeed the realization of the “economic miracle” of the 1980s is closely correlated with a period when the internal promotion agencies appeared to be working in seamless connection with the prevailing external environment, through the intermediation of coherent government policies. The disruptive events in our main export markets (Europe and the US) since the outbreak of the Great Financial Crisis in 2008, the emergence of India and China, traditionally trading partners which have now emerged as major sources of outward foreign investments, and the rise of Africa as the next economic frontier have failed to provoke the kind of tectonic shift in the re-thinking of our promotional strategies to attract the kind of FDI needed for the occasion.

These are only some of the most salient determinants of economic growth for Mauritius at “the crossroads”. Turning these around would itself constitute a major hurdle for achieving the government’s objective of a 5.3% GDP growth by the end of this year. However, since none of these can be construed to be beyond government control, one can safely surmise that the shortfall between the declared objective and the actual realization can be minimized through strong and determined policy implementation which aim to reverse these negative trends.

It has often been said that a key barrier to governments achieving their goals is insufficient alignment between Strategic and Operational decision-making. In this regard the dispersion of time and energy which we have witnessed for some time now may provide a perfect illustration of such misalignment. While no one in his right sense would dispute that there is a need for “cleaning the mess”, it is imperative that this should not happen at the cost of other equally important objectives such as creating jobs and improving the welfare of the population.

* Published in print edition on 24 April  2015