International Financial Services: The way forward


By V. BhardwaJ

We have carved out a comfortable niche in the world of international financial services thanks to our expanding tax treaty networks, a reputable offshore jurisdiction, its strategic location between the Far East and the European time zones, and its membership of major regional trading blocs. But recently, the Mauritian offshore sector has been caught in the midst of a series of financial scandals, including India’s biggest-ever corruption case, linked to the awarding of second-generation telecommunications licenses.

There was also the case of a German banker who allegedly made huge personal gains in a 2005 deal that shook up the ownership of Formula One to the extent that French investigative magistrate Renaud Van Ruymbeke joked that … “I recommend Mauritius to those with dirty money to launder. Whenever a judge asks for information from Mauritius during an investigation, there’s no response.”

We may continue to hold the fort warding them off with arguments that these are mere speculations, that there is lack of evidence especially in the cases of round-tripping of resident and non-resident Indian investment to India and that we have a number of agreements on exchange of information with regulators across the world. This is not the issue. The issue is that all these are the consequences of locking the IFS sector in “low-value added, passive administrative of foreign accounts established to benefit from double taxation treaties and agreements.” (Re: The Export of Tradeable Services in Mauritius: A Commonwealth Case Study in Economic Transformation).

The way forward is to continue adding momentum to the diversification and deepening of the IFS sector – developing a truly functional bond and debenture market supported by the setting up of a credit rating agency, ensuring the securitization of financial assets, adding more value and substance to global business activities, diversifying product offerings and providing higher value advisory work, risk management, trust administration, asset financing, securities custodial services, investment management and business process outsourcing activities — a sector that will be offering us access to a greater panoply of financial vehicles to tap the global and regional business and trade networks. It will allow Mauritius to obtain a larger role in international finance and forge the synergies between the export of commodities, financial and business services, and a more active domestic capital market.

Exceptional circumstances call for exceptional measure

In many countries governments are taking multi-pronged approaches to tackle the ravages of inflation. In Hong Kong for example, relief measures are costing close to HK$20 billion. Measures include the waiving of rates and public housing rents, electricity subsidies, extra allowances for the poor, aged and disabled as well as an increase of tax allowances for dependent parents, grandparents and children. In India, Public Sector Undertakings have intensified purchases of essential commodities, particularly edible oils and pulses, for distribution through their retail network and through the Public Distribution System operated by the State governments. The existing schemes for subsidized distribution of edible oils and pulses are continuing. The government is also taking stringent action against hoarders and black marketers manipulating market prices, under the relevant legal provisions, so as to ensure that products reach the markets in a timely manner to moderate the prices. Cartelization by large traders is being strictly dealt with. Awareness campaigns have been intensified bringing out the availability of alternatives at cheaper rates with a view to influencing consumption patterns in favour of such alternatives.

Other measures involved a somewhat larger horizon: an Inter-Ministerial Group (IMG) has been set up under the Chief Economic Adviser, Ministry of Finance, to review the overall inflation situation, with particular reference to primary food articles. The IMG will, inter alia, review production/rainfall trends and build an institutional machinery to read warning signals, assess international trends, recommend action on fiscal, monetary, production, marketing, distribution and infrastructure fronts to prevent price spikes, and suggest measures to strengthen collection and analysis of data and forecasting. The Indian government is watching the situation closely and is committed to containing the adverse impact of any inflationary pressures on the common man.

In Singapore, they have announced the formation of a new committee to prevent profiteering at a time of high inflation and have set out a clear-cut strategy to dealing with rising prices. The government is relying on the exchange rate policy to moderate medium-term inflationary pressures. The Monetary Authority of Singapore has permitted the Singapore dollar to appreciate against a basket of foreign currencies to help counter inflation in imported goods. The government is also staying alert to any attempts by businesses to profiteer or collude to raise prices excessively. The Ministry of Trade and Industry has been monitoring retail prices and is keeping “a closer watch” on any excessive price increases or anti-competitive practices. Moreover, the government is helping Singaporeans to cope with inflation through fiscal policies, such as providing greater subsidies and benefits to those who need it most.

Here, government has moved rapidly to double the amount of income support paid to the most vulnerable people from Rs123 per person per day to Rs246. About 90,000 people will benefit from the support, which is effective from March 31. This will have to be accompanied by other meaningful measures to alleviate the sufferings of lower- and middle-income families reeling from a surge in prices. The gimmick about a temporary decrease in some 64 to 89 products, in some way, acknowledges that price collusion is being practised by the cartels in our markets under the very nose of our Competition Commission.

Unions have been urging government to restore price controls temporarily on basic commodities and reactivate the Food Security Fund and accompanying activities. Others have suggested a reduction in excise duties on petroleum and a lowering of the VAT rate. The government has now set up a ministerial committee under the chairmanship of Xavier-Luc Duval, Vice Prime Minister, Minister of Social Integration and Economic Empowerment, to look into the pricing of essential commodities. Exceptional circumstances call for exceptional measures. These are tough times in Mauritius.

Reinforcing Central Bank‘s independence 

Some time back, we had followed up on the comments advanced by the Governor of the Central Bank on the « Questions for governance », and on « Who should decide interest rates? Should a Central Bank be truly independent on these technical matters or its assessments continually second-guessed by political placements appointed by the government?” by supporting suggestions that the selection of members of the Monetary Policy Committee (MPC) be carried out through hearings or through parliamentary committees. Some sort of droit de regard on these appointments should be opened to others — “The Prime Minister and the Minister of Finance can decide but I think that it is important that this decision is not taken solely by the Minister of Finance.”

We were not happy at all about the persons appointed on the MPC; many of them do not have any notion of the recent developments in monetary economics and central bank practice. We had lauded the Governor for daring to take up publicly both, the reality of the structural issues of governance and the independence of the BOM as a principle that has to be defended. The Governor is true to his word. Sir Alan Budd is presently in Mauritius to review the functions of the MPC; he will be consulting journalists to have their views on the functioning of the MPC, its method of reporting, the appointment of members of the MPC, the absence of publication of minutes of proceedings, the lack of transparency and on the independence of the Central Bank. This will be an excellent opportunity to get rid of the some of the political appointees and give back to the Board and the Monetary Policy Committee its “ lettre de noblesse”.

Model-building techniques

Five years have gone by, we are still in the process of developing a macro-model for our medium term fiscal and expenditure framework. If we go by the latest developments, the TINAs (There Is No Alternative) are debunking the whole idea of sophisticated model-building; they do not need these econometric modeling techniques; they have developed in-house techniques that even outperform Nouriel Roubini and Nassim Nicholas Taleb of the Black Swan fame — a more simplistic rule of the thumb technique, a newly discovered technique for forecasting that will in the near future decrease reliance on macro modelling and IMF Article IV forecasts.

Actually one of the TINA advisers, strolling in our very contextual Mauritian bazaar, was hit by the sudden hike in the price of dholpuris. (Mind you it was not the famous Newton’s apple or Archimedes bathtub but it had similar monumental effects). Eureka !!! the hike in the price of dholpuris relative to its weight or volume seemed to have catalysed our TINA stroller-cum-adviser/thinker into concluding that the rupee was overvalued by 20%.

You do recall that during the recent pre-election period, there were discussions about an alleged instruction from a TINA leader to the Central Bank to depreciate the rupee by 18%. You know now the underlying nitty-gritty behind this brilliant piece of advice. This rule of the thumb technique is still in its embryonic stage and it will have to undergo some further tests before it is available to one and all. We will keep you informed.

The False Panacea of Labour-Market Flexibility

We had the opportunity of writing on this topic some time back and we had argued that we do not fully subscribe to the general neo-liberal position that the necessary and sufficient precondition for an optimal creation of jobs in the Mauritian economy is a flexible labour market. The removal of the soft constraints in the policy and regulatory environment of the labour market, namely a more flexible labour market policy, on its own, is not the solution to our unemployment problems.

The “flexibility” argument is the new conventional wisdom but it remains controversial with many economists who want to explore some of the assumptions behind the case for flexibility and clear the ground for more sophisticated discussions about the roots of strong labour market performance rather than generalized statements. For far too long the proponents of a crude model of flexibility have had the best of the argument – even though an accumulating body of research suggests that rather different policy packages can produce equally good results.

The relative success of the Nordic countries, the Netherlands and Austria, in keeping unemployment low is inexplicable when viewed through a standard neo-liberal lens. All these countries have higher taxes than the UK and the USA, larger states, more extensive welfare systems, strong trade unions, moderately tough employment laws and extensive coverage of collective bargaining. It is important to understand these rather simple and straightforward facts. The “European” story is not simply a tale of high unemployment in France and Germany. Nor is it a story of widespread deregulation leading to better employment performance

A recent study by the Central Planning Bureau in the Netherlands shows that workers with a permanent contract receive more employer-funded training than workers with a temporary contract. Siemens of Germany, apparently conscious of the benefits of labour-market rigidity, has taken the unusual step of promising its employees a job for life. Last year, the company sealed an agreement with the trade union IG Metall that includes a no-layoff pledge for its 128,000-strong German workforce.

Revisiting the whole labour market flexibility argument Heleen Mees, a Dutch economist and lawyer, stresses the point that “we now know that labor-market deregulation does not ensure economic resilience and rapid job creation. On the contrary, the best solution is probably a diversity of labor contracts. A certain amount of labor-market rigidity may make economic sense for jobs that require firm-specific skills and training, alongside greater flexibility for jobs that require fewer skills.”

The fact that the TINAs are persisting with all kinds of short-term contracts and outsourcing of skills on a need driven basis — on pretensions of reaping the benefit of high flexibility and low fixed cost — with schemes like Capacity Building Programme, Service to Mauritius, etc., sounds like a sure recipe for encouraging further brain drain. 

* Published in print edition on 25 March 2011

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