The Timid Recovery: New Challenges
— V. BHARDWAJ
Le gratin of the public sector — always available for free lectures especially if they are from foreign experts — were all there in the front seats, avidly imbibing those glimpses of insights on the reasons of the resilience of the Mauritian economy to the global economic crisis and the need to reassess our strategies towards Asia which is gradually imposing itself as the “true engine” of global growth. The lecture of Professor Danny Quah of LSE did touch a chord.
Resilience of the economy
I went through my mail and retrieved an article sent to me by an economist who, contrary to the usual version of the TINAwallahs, credited the timid recovery of the Mauritian economy not to the reforms and the Additional Stimulus Package but to the fact that, as pointed out by the Professor, the economic centre of gravity has shifted from the West to the East and this had mostly immunised the spillover to the developing world including the export-oriented small economies. Thus we owe our recovery to the fact that many exporting economies were spared the blow as the BRIC countries (Brazil, Russia, India and China) were performing better and adding value to the global economy more than the US during the crisis. China and India alone contributed around 93% and all the BRIC countries put together contributed more than the US to the global economy.
Moreover in the developed economies the low interest rates and cheap money had encouraged investors to search for higher yields and buy into the new asset classes. This new money led to easier credit conditions, extending cash to borrowers, with patchy credit histories, who previously had been unable to buy property, cars and durable goods. This was unsustainable. The real estate bubbles finally blew up with the consequent unraveling of the faulty risk models as well as ill-considered investments. However, we, as also many African and East Asian economies, did not experience these ravages that ultimately led to a full-blown credit crisis.
But our economist did point out that we were one of the few countries where neither reforms nor the Stimulus Package have succeeded in boosting exports. Exports growth for goods have been negative for eleven quarters since the first quarter of 2007; what is more serious is that for the last two quarters of 2009 export growth fell by around 11%.
Exports of goods and services as a percentage of GDP have been declining as since 2006. Goods exports, a significant driver of the economy, which made up some 36% of GDP in 2006, now stands as low as 22% of GDP.
Our external trade balance has been deteriorating since 2005 from -13% of GDP to reach a high of -21% in 2008 and -18% in 2009. This slight improvement in the trade balance, however, may not be reflecting the healthy signs of an economic recovery as much as the weakening of the exports sector and particularly the imports of capital goods. Investment in the Export Oriented Enterprise (EOE) sector decreased by 50% in both 2008 and 2009. These developments may be undermining the prospects of near-term recovery in manufacturing activity. The outlook for the export sector for 2010 continues to be grim: with the appreciation of the rupee the growth of exports of goods will surely turn out be negative again this year. But even achieving the Rs 65 million mark in exports of goods for 2010 would be an uphill task given the slack in the growth of orders. The last time exports revenues fell was in 2002 when revenues came down by -2%. Export revenues from goods decreased by -5.1% in 2009 to around Rs 62 billion.
Our economist agrees that “la crise a mis au jour les faiblesses structurelles des compagnies qui n’ont pas su monter en gamme ou encore diversifier leurs marchés en prônant la créativité”.
During the first quarter of 2010, the situation of employment in the Export Oriented Entreprises continues to worsen. We continue to lose employment; 8,345 jobs have been lost in 2009. Since 2005, 93 enterprises have closed down and employment has fallen by 8365. It is thus obvious that the reforms and the Stimulus Package have not had much of an impact on the economy especially in boosting growth.
The economic centre of gravity is moving eastwards
Our economist had also proposed a new direction for our foreign policies. As no man is a prophet in his own land, his interesting piece must have ended up in some bins of the Ministry of Foreign Affairs or stuck up in some editor’s mailboxes of our local press. This is how we treat our local researchers and it is not surprising that we end up queuing up for foreign insights.
He had argued that our current regional strategy is centred mainly on our two major trading partners, the EU and the US. This may be because it was considered that only agreements with the EU and the US offer sufficient market access worth pursuing. Our regional efforts either through SADC or COMESA or other regional blocs seemed to be oriented mainly at deriving market access benefits by using the regional customs unions or Regional Trade Agreements (RTAs) as the Trojan horse for accessing US and EU markets. However, such a strategy does not fit our long-term objectives as it does not consider the current changes taking place both in Mauritius and internationally.
A formidable player in a post-crisis low carbon world, the fossil-fuel fed industrial era is coming to an end and the leading power of that age, the US, might not be able to maintain its economic dominance. Economic decoupling is very much a reality of today’s world. The new global players will be India (software and officework), China (software and technology), Brazil (food), Gulf (energy) and Russia (food and energy). Moreover the BRICs, the globe’s emerging economic giants, are negotiating their own terms on agriculture, access to energy, climate change. China is already emerging as a leader in electric cars, solar power and wind power. In other words the BRIC economies are spending massively to fund research in green technologies, including non-silicone-based solar cells, bio mass fuels and carbon collection, storage and collection.
And in 2007/2008 the world suddenly realized that they are celebrating two cumulative simultaneous developments: 1) the arrival of enormous numbers of new hard working young adults on planet earth, and 2) the arrival of 3 billion new people to the wealthy lifestyle (purchasing power growth), and all of them (3 billion) arrive at the same time together. With these two developments it’s getting real crowded in the global marketplace. Both factors (young adults population growth and purchase power growth) result in an exponential growth of global consumption levels. More people and changing habitats are joining forces in creating a ‘perfect economic market storm’. The challenge will be increasing pressure on global energy, global resources and global food supply.
The biggest opportunity will go to those economies that are complementary to the new configuration of global economic forces rather than in competition with it. We are aware that the long-standing sources of vulnerability may suddenly become the focus of more severe economic and financial crisis. Considering the current changes taking place both in Mauritius and internationally, and the efforts at diversifying its economic activities in ICT, financial services, general and professional services, we can expect to be an essential node in the ICT and services sectors and in special niches like renewable energy-efficient technologies and a conduit for essential investment between Asia and Africa. Mauritius will thus need to steer the changes in a direction that will be advantageous to its growth and development but only if it has a properly tuned and consistent new trade, regional and global strategy that is part and parcel of our responses to the global challenges and new developments.
Indeed our local researchers are not off target and much in line with the known Professors of esteemed universities. It is only a question of giving them a chance of being heard.