A New Recipe For Growth : A Layman’s View

Cheap money may lead to a decrease in interest expenditure and improve corporate bottom lines, but it does not necessarily lead to improved GDP growth! According to Tuesday 27-Sep-2016 l’express, the MCCI are proposing “4 Mesures Phares” to help kick start the economy and make it grow. These measures are as follows:

1. Reduce the Repo Rate (RR) by 1 percent straightaway.

2. Reduce the cost of exports by 10 percent.

3. Increase the consumer base by attracting 200k foreign retirees with a minimum pension of $1.5k pm (MUR 54K).

4. Create an Innovation Box.

Innovation Box

The MCCI proposes to promote Research and Development (R&D) and attract enterprises with high value added. But guess what? GM must, as always, give fiscal incentives. Fair enough, if it can work. The proof of the pudding will be in the eating, so let’s get baking!

Cost of Exports

In spite of the politicians’ rhetoric, our economy has not performed brilliantly during the last 10 years. So anything that helps boost growth and exports, and re-establish a decent balance of payments (BoP) is welcome. Thus there is much merit in this proposal and it is to be hoped that the authorities will work with the MCCI towards a consensus on how this can be achieved.

Doubts

While no sane person will quarrel with the above two proposals, I do have some reservation concerning the next two. Apart from the difficulty of persuading 200k people to up sticks and rush to our shores, there remains the infrastructural logistics, the real benefits to Mauritius as well as the local acceptability of this large immigration. As for a RR reduction, the evidence is far from convincing that it can contribute to GDP growth.

Foreign Retirees

We heard something similar from Navin Ramgoolam who was going to bring 200k additional (European?) tourists to do their shopping in Bagatelle Mall. At the cost of abandoning their winter/summer sales in Oxford Street and the Champs-Elysees or the Galleries Lafayette?!

Be that as it may, for now I cannot see many African, American or Asian retirees rushing to settle here. That leaves us with the Europeans, in which case I am afraid we may be onto a steep climb. Because people generally prefer to migrate to countries with a similar culture and way of life to theirs. Hence we find a lot of Britishers go to France, Spain, and even Cyprus. Living close to home also facilitates regular visits to/from relatives and, in case medical treatment is needed, they can quickly get back to their local NHS/Private Hospital with facilities that we can only read about in medical journals.

Since we import much of what we consume, the arrival of an additional 200k consumers will undoubtedly add to our Forex requirement. As it is, we go through periods of shortage of many common consumables. Any extra demand can only be met through expensive imports. Thus much of the Forex that the retirees may bring along with their “moderate pension” of $1.5k will probably be cancelled out. Then there is the cost of building at least 100k new houses which must be supplied with electricity from a generating capacity that is already under strain! And what of the additional pollution and our commitments to international conventions?

Now let us suppose that we succeed in attracting these 200k Europeans, most of them are likely to be Christians. When they die, their religion requires burial. Where in the world are we going to find enough land in this small overcrowded island to provide for enough suitable cemeteries?

Last but not least, how socially acceptable will be the influx of 200k foreigners to the local people who already feel that their space is being invaded in several areas; and feel like strangers in their own land?

Repo Rate

The MCCI points out that 40% of countries of the world have a RR of 2% or less. They are however silent on the remaining chunk of 60% which are probably developing countries like Mauritius.

Ever since the financial crisis of 2008, all developed countries including the EU, USA and Japan have held their RR on or close to the horizontal line, some simultaneously dosing up their economies with massive volumes of Quantitative Easing (QE, read Printing Money). Yet after eight years of a stringent policy on interest rates which penalizes the saving public, there is little sign of any significant recovery. In fact several EU countries are in negative growth territory.

On the other hand, in China the average RR for the last 10 years has been around 6.0 percent and this has been accompanied by an impressive average growth rate of 9.5 percent. The respective figures for India are 6.0 and 7.0%. This is in stark contrast to Mauritius’ interest rate of 5.0% and an unflattering growth rate of 4.0%.

If we go by recent international experience, it is clear that cheap money does not necessarily lead to growth. On the contrary it impoverishes long-term stable savers like pensioners, widows and orphans who rely partly/entirely on their interest income for their living. So when interest rates fall, they are obliged to cut down on their consumption which in turn leads to a decrease in demand and growth.

Furthermore a low interest regime generally discourages (other) people from saving. Thus with MRU banks presently paying 2 percent on savings accounts, it is little surprise that we have a paltry savings ratio of 12% of GDP. We can but wonder about the adverse negative effect on savings of a further cut of 1% or more in the RR.

Conclusion

If it helps our exports and consequently our BoP, by all means we must look at ways of reducing the costs. And only a fool would shun R&D or the installation of high value-added companies to our industrial base.

However I am afraid our sun, sand and smile are not enough to entice foreign retirees to leave home in a hurry for our shores, because culturally different — and the older people are, the more set they are in their ways and prefer to deal with the familiar. Furthermore the cost, time and ease (remember these are elderly people, many with serious medical conditions) of travel, state-of-the-art medical infrastructure, cultural attractions like museums, art galleries, theatre, ballet and opera — these are important to people who are used to it, as are a host of small mundane things too many to mention. A beautiful house in a beautiful island setting is fine for a holiday break under the tropical sun, but not sufficient to spend the autumn of their lives!

Of the four MCCI proposals, the RR is the only one that be acted upon straightaway; all the rest have medium/long term possibilities — if at all. Of course it is right and proper that organizations like the MCCI should get their best heads together and come up with proposals that would increase our economic growth. However if the package has been designed to instigate the authorities to reduce the RR, then I am afraid the evidence is far from convincing.

Cheap money may lead to a decrease in interest expenditure and improve corporate bottom lines, but it does not necessarily lead to improved GDP growth!

TD FUEGO

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