\u00a0<\/span><\/p>\n Euro Crisis<\/span><\/strong><\/span>\u00a0<\/span><\/p>\n \u201cIf the worst comes to the worst, then Mauritius will be hit. But, I see the impact as being temporary<\/span><\/strong>\u201d\u00a0<\/span>\u00a0<\/span><\/p>\n * Mauritius can become the centre-of-gravity locus for the Indian Ocean Rim and change the trajectory of its destiny by doing so<\/span>\u00a0<\/span><\/p>\n * Mauritius still remains much too Eurocentric in its economic and trade orientation, its social outlook, and its rooted pretence at faux cultural and fashion sophistication. <\/span>What will happen to small, out-of-the-way places like Mauritius if the \u201cEuropean Dark Age\u201d were to happen in the wake of the Euro crisis? Percy S Mistry, Chairman Oxford International Associates Ltd offers, in his usual forthright style, in this week\u2019 interview his views on this question and his comments on how we have been doing so far and proposes a list of measures to beef up the development agenda of this government\u2026<\/em><\/strong>\u00a0\u00a0<\/span><\/span><\/p>\n Mauritius<\/span><\/strong> Times: You were speaking last week of an impending \u201cEuropean Dark Age\u201d<\/em>, that may drag the rest of the world into a trillion-dollar crisis over the next five years. Is it that bad? <\/span><\/strong><\/p>\n \u00a0<\/span><\/p>\n Yes. It is. Though people think that I indulge in hyperbole, because of my use of adjectives and forthright expression, the fact is I often understate<\/em> reality. It surprises me that European political leaders do not appear so far to understand how \u2018existentially threatening\u2019 this Eurocrisis is becoming for: the Euro, monetary union, the EU\u2019s banking and financial system, and possibly even for the continuation of the EU in its present form; all because it has been handled ineptly by political leaders, especially the German Chancellor Angela Merkel. <\/span><\/p>\n \u00a0<\/span><\/p>\n She is someone whom I once had a very high opinion of as a political heavyweight in an \u2018EU-peer universe\u2019 of political pygmies. But I am beginning to realize that, as an \u2018Ossie\u2019 chemist, she may be seriously deficient in her understanding of broader regional\/global market economics, and of the febrile psycho-dynamics of global financial markets which provide so much funding for the EU. I cannot believe that, if she really understood what was at stake, she would be behaving in this fashion. She is politically astute and is playing to her domestic gallery, watching the opinion polls every day on what Germans think she should do. They seem split down the middle on whether the PIIGS (<\/span>Portugal<\/span><\/span>, Italy, Ireland, Greece and Spain)<\/span><\/span> should be bailed out or not. But that is not the point. <\/span><\/p>\n \u00a0<\/span><\/p>\n Sadly, Mrs Merkel is not using her weight and influence to overcome domestic constraints and show true European leadership\/statesmanship. She is not using her power to do what is right and urgently necessary for Europe, and the rest of the world, to prevent another slide into recession. At this juncture, it does not matter what the average German thinks, based on his\/her ingrained biases\/prejudices about other EU partners. If she continues on her present course, she will not only do serious damage to Europe, but to the world and Germany as well, on a scale she does not yet seem to realize the dimensions of. And her own electorate will not forgive her for that when they realize that neither she nor they knew what consequences would unfold. <\/span><\/p>\n \u00a0<\/span><\/p>\n Two hours ago the President of the European Commission J. M. Barrosso said precisely that in Brussels; but much less forthrightly than I am doing in the MT, for obvious reasons. He needs his job. I don\u2019t. But, more seriously, European central bank governors, bankers, and people in European capital markets and finance generally, are extremely worried about the disconnect between the apparent lack of understanding of their clueless political class, and the ugly reality that they now see unfolding in their economies, financial markets, and banking systems. It is like they are witnessing a car crash occurring before their eyes in slow-motion; but they seem helpless to do anything about it because their political leaders are reacting like rabbits caught in headlights in the middle of a foggy road on a dark night! The daily blog posts on the Eurocrisis in the Financial Times<\/em> (London) reflect that. <\/span><\/p>\n \u00a0<\/span><\/p>\n The EU\u2019s political leaders (especially in Germany, Holland and Scandinavia) see this problem in caricature: as one of the over-indebtedness of profligate southern European countries whose indolent populations and governments got into a financial mess because: (a) they created welfare states they could not possibly afford when they joined the EU; (b) they overspent, and financed that by over-borrowing too cheaply because of their access to Euro-finance based on the creditworthiness of Germany; (c) they lied for years about the bankrupt state of their public and private finances; (d) they did not pay (or collect) their taxes; (e) they were inefficient, too loving of sun, sand and hanky-panky frolic, unproductive and corrupt, etc. <\/span><\/p>\n \u00a0<\/span><\/p>\n To an extent, all that is, of course, sadly true; although the origins and nature of the \u2018real\u2019 problem in each of the affected PIIGS countries is different. So northern Europeans do not see why these spendthrift southerners should be bailed out. They see that as rewarding bad behaviour and compounding moral hazard. Such simplistic, partial reasoning may explain the past; but it is devastatingly wrong in its consequences where the future is concerned. <\/span><\/p>\n \u00a0<\/span><\/p>\n What northern Europe (especially Germany) refuses to recognize is that there is an underlying structural dilemma of egregious intra-EU external account imbalances as well. Germany has been running current (trade) account surpluses with the rest of its European neighbours (particularly the southerners) of around 6-7% of its GDP; year in year out for the last 10-15 years. That is unsustainable. It has been hollowing out its neighbours through a \u2018relative internal\u2019 euro exchange rate that is favourable to it (because of its productivity, efficiency and export competitiveness) but not to its neighbours. <\/span><\/p>\n \u00a0<\/span><\/p>\n As a result there has been a massive aggregate transfer of resources (since 1995) from its southern neighbours to Germany. It is conceptually the same as what China has been doing to the US, and the rest of the world, by maintaining its exchange rate at a much lower value relative to other currencies than is justified by \u2018open economics\u2019 theory. This requires that every micro-price involved in making up the total end-price of a tradable good or service, should be market determined (including the relative prices of currencies, especially of major trading nations). So by manipulating its currency\u2019s price China has accumulated, at the world\u2019s expense, reserves of over US$3.2 trillion and created a counterpart debt-crisis in the US and the rest of the world. <\/span><\/p>\n \u00a0<\/span><\/p>\n It is the accumulated structural intra-EU current account imbalance that is manifesting itself in the current Eurocrisis which must not be lost sight of. Given this fact, there has to be a counter-flow of money from northern to southern Europe on the capital account. That is not happening through either private investment flows from north to south or by way of financing sufficient public debt on a sustainably serviceable basis. The lid has blown in the PIGS. It is about to come off in Italy. And the future debt\/GDP ratios of the UK, Belgium and the Netherlands do not look too good either. So this systemic problem could cascade completely out of hand if markets become convinced that even major European countries like Italy might be unable (or unwilling) to repay the full extent of their rapidly accumulating mountain of debts. That would trigger a massive global flight out of European government bonds and the Euro with devastating consequences for European economies and societies. <\/span><\/p>\n \u00a0<\/span><\/p>\n * What will happen to small, out-of-the-way places like Mauritius if that (the European Dark Age) were to happen?<\/span><\/strong><\/p>\n \u00a0<\/span><\/p>\n That is always the quintessential small island Mauritian concern, is it not? What about moi<\/em>? Well, let\u2019s look at this carefully. If the worst comes to the worst, then Mauritius will be hit. But, I see the impact as being temporary \u2013 perhaps a short sharp shock of a 2-3% GNI loss for 1-2 years. That is because, contrary to my (boring) advice over the past decade or more, Mauritius still remains much too Eurocentric in its economic and trade orientation, its social outlook, and its rooted pretence at faux<\/em> cultural and fashion sophistication. <\/span><\/p>\n \u00a0<\/span><\/p>\n That is no doubt due to the European heritage of its economic elite, whose place at the top of the island\u2019s economic pyramid, and incestually blinkered outlook, which artificially confines what they think they know about the world outside Mauritius, Madagascar and France, has not changed. It probably never will, considering the way in which successive Mauritian governments behave; regardless of their absurd, meaningless rhetoric about \u2018economic democratization\u2019<\/em>. There is an understanding between Mauritian governments of whichever hue and the Franco-elite that the boat will not be rocked too much. <\/span><\/p>\n \u00a0<\/span><\/p>\n If the EU were to take an economic hit, because the Eurocrisis was mishandled, and Europe went over the cliff as a result, Mauritius would take a hit because of its dependence on EU-Euro-sourced tourism and other service export earnings. If the EU got into that kind of trouble then, even over the medium term, I can foresee Europeans being encouraged to take their holidays in Southern Europe rather than Mauritius. I can see some BPO outsourcing from Europe to Mauritius perhaps being shifted back to Europe if relative prices\/wages were to adjust enough. <\/span><\/p>\n \u00a0<\/span><\/p>\n I can also see Mauritius taking a hit on the holding of Euros in its central bank reserves, which \u2013 if I were advising the BoM, and I must emphasize that I am not, because they (rightly) think I am not clever enough — I would be inclined to shift more of MRU\u2019s reserves into currencies of the future such as the CNY, INR, SND, SWF, AUD, CND, BRL and away from USD, EUR and JPY. The latter three are pass\u00e9 currencies although they still account for over 80% of the world\u2019s reserves \u2013 for all the wrong reasons. The fundamentals of their economies suggest that these currencies are intrinsically unsound and will remain so for a considerable period of time. <\/span><\/p>\n \u00a0<\/span><\/p>\n I would also see remittance earnings from the EU drying up for a while as Mauritians in Europe lost their jobs and had to tighten their belts; and so on. <\/span><\/p>\n \u00a0<\/span><\/p>\n But, small out of the way places actually have a structural advantage in avoiding this kind of problem, if they know how to use it<\/em>. Because they are small they can be lean, mean, flexible adaptable and nimble; if they choose to be! Singapore is good example. Barbados is another. Mauritius has an option not to be too vulnerable to anything that happens in any particular part of the world. It can do so by making more rapid strides toward rebalancing its economy and trade dependency in a way that precludes over-reliance on any one region (particularly tired, old, pass\u00e9, uncompetitive Europe) and link its economy more to the \u2018new high-growth regions\u2019 of Asia (South, North, East, West and Central Asia including Asean and Greater China), Australia, the Middle East and Eastern\/Southern Africa. Mauritius can become the centre-of-gravity locus for the Indian Ocean Rim and change the trajectory of its destiny by doing so. <\/span><\/p>\n \u00a0<\/span><\/p>\n If Mauritius fulfils its destiny of becoming the residence of choice for Asian and African billionaires, just as Monaco is the choice for European billionaires, then it will cease to be as vulnerable as it is now to these kinds of vicissitudes. But it has a long way to go in providing the kind of probity and quality in its: overall governance, judiciary, law-and-order, political environment and physical infrastructure, to become such a place. I have no doubt this can be done if the political and social will exists to do it within the next 20-25 years. But, given the bizarre way in which Mauritius is run — by family-dominated politics and fiat that is sustained by the island\u2019s Franco (Euro) elite, rather than being run on the basis of genuine democracy — it may take 50-70 years instead; by which time the opportunity may have passed it by. <\/span><\/p>\n \u00a0<\/span><\/p>\n * Government and most of the stakeholders are no doubt aware of the heavy price the country risks having to pay in case Europe indeed goes bankrupt, but there is not much they can do in the meantime, isn\u2019t it? <\/span><\/strong><\/p>\n \u00a0<\/span><\/strong><\/p>\n I think there is actually a great deal that Mauritius can do to make itself much less vulnerable to what happens in Europe regardless of the degree of severity of what may afflict the EU or Euro. But I do not yet see the recognition of that reality in Mauritius itself for the reasons I have stated. <\/span><\/p>\n \u00a0<\/span><\/p>\n There is no \u2018natural\u2019 impediment to Mauritius doing much more to protect itself, or to make itself more robust and invulnerable to what happens in the EU, or for that matter in India, China or Africa. It can make itself relatively invulnerable; just as Singapore has. But I do not see that happening anytime soon. <\/span><\/p>\n \u00a0<\/span><\/p>\n What is lacking are the following: (a) enough vision, integrity, wisdom, understanding, imagination and wit of the kind needed in Mauritius\u2019 government political leadership, and across its rather pathetic and mediocre political class as a whole; (b) sufficient flexibility and bureaucratic capability in its civil administration regime; (c) sufficient entrepreneurial and managerial capacity in its domestic, claustrophobic private sector; (d) inclination to reduce dependence on the EU on the part of those who continue to sponsor political leadership through their choke-hold on Mauritius\u2019 purse-strings. <\/span><\/p>\n \u00a0<\/span><\/strong><\/p>\n * <\/span><\/strong>We are not yet there, but would a deteriorating crisis require more stimulus packages to industry and the export-oriented services, further devaluation of the rupee, etc\u00a0?<\/span><\/strong><\/p>\n \u00a0<\/span><\/p>\n That, of course, is the traditional MRU private sector and government response to any adverse development in the external environment. The instinct is always to seek government help, to devalue, to stimulate and subsidize. I would much prefer it if, instead of that perennial knee-jerk reaction, the Mauritian private sector (its parastatals will always be hopeless unless they are privatized and made more efficient) was encouraged to develop the internal capacity and resilience to anticipate, accommodate, and withstand these kinds of external shocks without resort to special assistance every time. <\/span><\/p>\n \u00a0<\/span><\/p>\n I am not sure that if (unlikely as it seems even now) the Euro were to disappear, or the EU slide back into deep recession, what the specific impact on particular industries in Mauritius might be. Sugar exports and prices might be adversely affected briefly; but demand from Asia would offset that. The government should have a task force in the MoF working on possible scenarios. <\/span><\/p>\n \u00a0<\/span><\/p>\n There would certainly be an impact on tourism immediately. Mauritius should, by now, have developed the \u2018switching\u2019 capacity to source tourists from so many other markets. It has just not done so as fast as it might have. Its tourism promotion efforts and its air transport connections are still much too Eurocentric. <\/span><\/p>\n \u00a0<\/span><\/p>\n Would there necessarily be an impact on financial services and other key service exports? I don\u2019t know but would not think so. But one would need to look at this issue in some specific detail before coming up with an intelligent response. It would be easy to generalize in broad terms. But it would not be useful and would probably be wrong. <\/span><\/p>\n \u00a0<\/span><\/p>\n The only thing I would emphasize is that I would prefer both government and the Mauritian private sector not to seek immediate knee-jerk resort to special stimulus, devaluation of the MUR, industry support packages and subsidies every time an external shock occurs. They have become much too dependent on that kind of nonsense. It is time to grow up. <\/span><\/p>\n \u00a0<\/span><\/p>\n Most of its key industries, especially its export industries, should by now have developed the internal robustness and resilience to expect and ride out these waves. They should not be like infants continually dependent on government to help them in time of every little bother. That mentality in Mauritius is so deep rooted it is both galling and counterproductive. I just wish most Mauritians could see that too. Mauritian service industries cannot always remain so infantile that they need to be spoon or breast-fed every time there is a strong breeze blowing in from the ocean. <\/span><\/p>\n \u00a0<\/span><\/p>\n * You have argued that \u201cEurope can no longer afford escalating social overhead expenditures given dismal fiscal situations and rapidly deteriorating demographic profiles\u201d. This also applies to India and China, which should avoid creating the same debilitating social overheads in their fiscal systems. The less fortunate therefore will have to go without the social safety nets which have kept them going so far \u2013 to save the banking and non-banking sectors from having their \u201cfunctioning limbs amputated\u201d. Right?<\/span><\/strong><\/p>\n \u00a0<\/span><\/p>\n As usual you are being provocative in the phrasing of your question, trying to put me in a defensive posture before answering. That is fine. The Mauritius Times<\/em> (MT) is adhering to its time-honoured tradition of portraying me as the Mad Mullah of Market Fundamentalism who is viscerally opposed to socialism and welfare states. <\/span><\/p>\n \u00a0<\/span><\/p>\n That is not actually the case. My views on how economies should be run in the interests of all citizens and not just the privileged, what it takes to run societies that are civilised, well-governed, fair and just in their treatment of the disadvantaged, about who should be helped and how, are more complicated and nuanced than the MT likes to portray. <\/span><\/p>\n \u00a0<\/span><\/p>\n But let me not apologize for being right wing in my views on political economies and societies. I am right wing because I started out on the far left. Sadly, I discovered over time that I was wrong about everything when I was a left-wing ideologue, when I joined the McNamara-led World Bank. I have learnt a lot since and am still learning. My motto now is: If you are not (on the) RIGHT; you are almost certainly (in the) WRONG!<\/em><\/strong> <\/span><\/p>\n \u00a0<\/span><\/p>\n I am sure that Tony Blair came to the same conclusion. He is more right-wing than I am. Gordon Brown had an unhappy time because he was too ideologically rigid to be capable of learning from experience. He was most successful as UK Chancellor when he was committed to pursuing policies laid down by his Conservative predecessor. He went completely off track and lost the plot when he departed from the safety of that originally successful strategy. <\/span><\/p>\n \u00a0<\/span><\/p>\n The story of post-war Britain is instructive. Every Labour government has eventually ended up bankrupting Britain with its social expenditures running out of control. Inevitably, Conservative governments are then re-elected that have to make savage cutbacks to bring public finances back into shape. For that they are regarded as anti-social Neanderthals. As soon as they have repaired the public finances, people forget to thank them and vote for the cuddly but useless softie-lefties<\/em> again. <\/span><\/p>\n \u00a0<\/span><\/p>\n And so the merry-go round revolves. That is why countries like Britain keep falling behind (except when a roundhead like Thatcher comes to save them from themselves) and countries like Singapore, that do not indulge in such idiocy, keep forging ahead. People forget that had it not been for the much reviled Mrs Thatcher \u2013 who, in my view, did not go half as far as she should have in changing permanently the nature of the welfare state — Britain would now have a per capita income lower than Greece; probably closer to Albania! <\/span><\/p>\n \u00a0<\/span><\/p>\n If the MT understood what I said, and interpreted it more accurately in phrasing its question, it would have become obvious that what I meant was nothing like what it seems to be suggesting. What I meant was the following: (a) well-intended governments usually start out with social safety nets for the genuinely poor and disadvantaged — to ensure sufficient incomes to support a minimally decent lifestyle, decent basic housing, sufficient basic nutrition and provide access to free education, healthcare, disability allowances, etc. \u2013 BUT <\/strong>(b) these safety-nets quickly morph into universal entitlements for the lower (and even upper) middle class because of populist inclined political processes especially in viscerally socialist, union-driven political environments. <\/span><\/p>\n \u00a0<\/span><\/p>\n Commitment to ever-rising (and unaffordable) social expenditure becomes in effect a means of vote-buying at elections by populist socialist governments who prefer to pander than lead. Such entitlements then become rigidly embedded \u2018rights\u2019 that are non-negotiable and non-reducible even when they are completely unaffordable. That is now the problem with unavoidable fiscal adjustment in all the PIIGS in the EU. <\/span><\/p>\n \u00a0<\/span><\/p>\n Once that happens, the original intent of targeting help for the poorest and most disadvantaged is lost. Worse still, so-called \u2018safety-nets\u2019 become steel fish-nets that end up breeding and perpetuating a large underclass of people who are excluded from economic activity because they game the system and make themselves unemployable. So a rigid system of perverse incentives emerges that becomes almost impossible to uproot. These societies then become structurally uncompetitive. <\/span><\/p>\n \u00a0<\/span><\/p>\n I am all for ensuring that no one in society is denied a basic decent level of income, housing, nutrition, education and healthcare. But I believe that should be done exclusively through targeted and means-tested income subsidies<\/strong> alone, administered through the tax system rather than through over-complicated and fragmented benefits systems run by fools. <\/span><\/p>\n \u00a0<\/span><\/p>\n Income support needs to be carefully monitored in real time, and withdrawn when individual circumstances change, rather than become embedded and enshrined in perpetuity in the structure of the fiscus. In a society the size of Mauritius that should be possible to do. The worst way of caring for the poorest and most disadvantaged is through a plethora of unmanageable and un-means-tested separate benefits and price subsidies for housing, food, fuel, energy, transport, etc. These types of \u2018benefits\u2019 only result in distorting demand and markets not permitting to adjust as they should to changing conditions. <\/span><\/p>\n \u00a0<\/span><\/p>\n Mauritius<\/span> has an enviable record of moderately successful social inclusion in its fiscal policies. But, my concern is that it is attempting to ape the European model too much, at an insufficiently high level of per capita income, without quite realising where that leads. Mauritius is a tiny micro-dot of a country that perforce has to be lean, mean, nimble, flexible, adaptable, efficient, productive and competitive to survive and earn its way in the world. Embedding into its fiscus a system of social expenditures that: creates perverse incentives, reduces fiscal flexibility in tough times when adjustment is unavoidable, and that becomes so non-negotiable and non-reducible that no government can afford to touch them, without inciting social explosion; is a recipe for disaster. At the same time I would agree that it must have sufficient provision for social expenditure to ensure that it protects and develops its human capital. It is a matter of balance. <\/span><\/p>\n \u00a0<\/span><\/p>\n The high level and cost of social overhead in Europe is what makes southern Europe so uncompetitive; which is why it is in such an irretrievable mess. For anyone who wants the same in Mauritius, that is their prerogative. It is not my country. It is yours. But I love it dearly and would hate to see it sink because of fiscal profligacy and unaffordable idiocy. By all means have an affordable<\/em> level of social overhead to maintain equity, social justice and a fair and decent society for all. But to do that Mauritius needs to grow at 8-10% per annum not 4%. It needs to run primary budget surpluses now and then, rather than continually running growing fiscal deficits. It needs to run down its public (and private) debt over time rather than having a trajectory where public debt keeps rising to finance public deficits. It needs to run current account surpluses and have much higher inward flows of foreign investment than it has now. <\/span><\/p>\n \u00a0<\/span><\/p>\n But, because of a mediocre, unimpressive government, pursuing wishy-washy economic and financial policies, without any clear sense of content, direction, ambition or vision, Mauritius has none of these attributes. Therefore it has to be careful and measured about how much social overhead it can continue to afford without tipping the balance into economic penury. <\/span><\/p>\n \u00a0<\/span><\/p>\n And all this has nothing to do with saving the banking system where you conflate two entirely different issues.\u00a0<\/span>\u00a0<\/span><\/strong><\/p>\n \u00a0<\/span><\/strong><\/p>\n \u201cMauritians, like Indians, are good at words \u2013 in at least two languages. It used to be the case till the 1990s\u2026\u201d<\/span><\/span><\/strong><\/p>\n \u00a0<\/strong><\/p>\n \u00a0<\/span><\/strong><\/p>\n * You know that the main thrusts of the present government\u2019s first Budget is rebalancing growth by reducing our economy\u2019s heavy dependence on Europe, by making greater use of economic diplomacy to open new markets, etc.), making a great leap forward on productivity, and consolidating social justice. Isn\u2019t that the massive overhaul and re-orientation (instead of the routine tinkering at the edges) which this country requires at this juncture?<\/span><\/strong><\/p>\n![](\"https:\/\/i0.wp.com\/mauritiustimes.com\/wp-content\/uploads\/2010\/08\/percy%20mistry.gif?resize=279%2C223\")
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