Our
past performance in boosting productivity has indeed been relatively poor. For the past decades (1983-2006), the
contribution of labour to the 5.3% growth in GDP, was 22% and that of capital,
64%. The residual 14% represents the
contribution of other factors such as training, management, innovation, and
technology also termed Total Factor Productivity (TFP). The contribution of TFP (14%) compares unfavorably
with that of the East Asian Economies, where TFP growth contributes to over 30%
of GDP. We certainly have lots of catching up to do in the productivity race.
Until we catch up, there is little choice than to achieve competitiveness by
allowing the rupee to depreciate.
In
analyzing the competitiveness of the Manufacturing sector, we should examine
the changes in Unit Labour Cost (ULC), that is not only labour
productivity growth but also the growth
in the average compensation of employees..ULC measures the remuneration of
labour per unit of output. It is
affected by changes in both average compensation of employees and labour
productivity. It is computed as the ratio of the labour cost index to an index
of production. In 2006, in the Manufacturing sector, average compensation
increased by 2.6% lower than the growth of 3.3% registered in labour
productivity, resulting in a decline of 0.7 % in ULC.
Trends in Unit Labour Cost – Manufacturing
sector, 1997 – 2007
Courtesy:CSO
However if we compare the changes in
ULC in the manufacturing sector with other countries, we notice that
most of them were experiencing a more significant drop in ULC. It is the
depreciation of the rupee against the dollar to the extent of 6.6 % that
enabled the sector to preserve its competitive edge. The ULC in dollar terms decreased
by around 7%., one of the highest.
International
comparison of ULC in Manufacturing – Growth rate (%) 2006
Country
|
||||||||
National currency
|
0.5
|
-1.0
|
-2.8
|
0.8
|
2.3
|
-0.7
|
-4.4
|
-3.6
|
US $
|
0.5
|
-0.1
|
-1.9
|
1.3
|
3.6
|
-6.8
|
-5.6
|
3.5
|
Courtesy: CSO
Thus we should
not underestimate the importance of rupee depreciation in boosting production,
enhancing EPZ exports and maintaining existing jobs. The EPZ sector recovered from a negative
growth of 14.7% to 2.9% in 2006 and 8.5% in 2007. And up to the third quarter
of 2007, the rupee had depreciated by around 5% against the dollar and exports of manufactured articles of apparel
and clothing went up by Rs. 2,939 million compared to the corresponding period
of last year. But during
the 4th quarter, the rupee appreciated by around 8% against the dollar, exports fell compared to the previous quarter
and compared to the 4th quarter of 2006. Moreover, 13 enterprises
closed down of which 6 in “Wearing apparel” and 3 in “Other manufacturing”.
A depreciation has two counteracting effects:
the price effect contributes to a worsening of the current account because the
depreciation makes exports cheaper and imports more expensive. The volume
effect contributes to improving the current account because cheaper exports
should lead to an increased volume of exports, while more expensive imports
should lead to a decreased volume of imports. Less than infinite supply
elasticities make the Marshall-Lerner condition less stringent (in the sense
that the CA might improve even if the demand elasticities sum to less than
unity) because the rise in demand for export goods leads to an increase in domestic
prices if supply is not perfectly elastic, and the fall in demand for foreign
import goods leads to a fall in the foreign currency price of imports if supply
is not perfectly elastic. Both effects work to improve the current account
balance.
It is however true that REER depreciation generally raises the
probability of reducing CA deficits, its impact is negligible in small
countries, probably because their imports are rather inelastic. With the
exception of some low-income counties that have supply rigidities ( which is
not the case of Mauritius
What is meant by competitiveness of an economy? The concepts of competitiveness
are the short-run versus long-run view of competitiveness and price versus
non-price measures of competitiveness. The commonly used measures of competitiveness
are multilateral or nominal effective exchange rates (NEER), real exchange
rates and real effective exchange rate (REER). In the long run, competitiveness
reflects the ability of an economy to improve living standards. In the short-run, the focus is on the current
account- price competitiveness. Not Export price Index but Export unit values based measures of
REER is an indicator of competitiveness.
An assessment
of external competitiveness will examine exchange rate developments, price
developments. cost developments., input costs, productivity, Unit labor Costs
and export performance.
The
graphs below show that, over the past three decades, Mauritius
In June 2006 , IMF also noted that the real effective exchange rate is
stronger than the equilibrium exchange rate and this led to the adjustment or
depreciation that we had experienced up to the 3rd quarter of 2007.
From 1998 to 2005, the terms of trade (ToT) deteriorated by 30% and since 2005 by 6%. Some studies have shown that the volatility of the external current
account changes in Mauritius
A negative ToT shocks lead
to a deterioration in the current account due to a decrease in a country’s real income.
Given that exports are more sensitive than imports to these ToT changes, it is
these negative ToT shocks that cause the external current account as a % of GDP
to deteriorate and thus forces the real exchange rate to depreciate and not the
other way round. The exchange rate does not have to bear the whole burden of
adjustment if “productivity can be improved
through investments, including in human capital through education and in new
technologies and …..an easing of labor market regulations.” You cannot both
have the cake and eat it. If you want to slow down the depreciation of the
rupee, we need a policy paradigm shift to enhance long term productivity
which is the key to ensuring Mauritius
