Labour Market Flexibility
You must have caught sight of the “Artworks” produced at strategic places by the temporary workers recruited under the Tourism Fund. These workers are under a one year contract and have been recruited to supplement the work already being done by others. The TINAwallahs have rushed in to claim that it is our flexible labour laws which have helped to create jobs, even in a recession. They had first of all, without much of evidence, but with lot of conviction in their neoliberal economic order, questioned the efficiency of the welfare state labour market institutions. They had pushed for the hire and fire employment laws but with a logic that lacks sufficient basis.
Now that concerns are being raised that pushing such policy unilaterally is simply breeding greater social conflict, they are trying to show that they were right in their flexible labour market policy as the universal 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 a more a more sophisticated discussion about the roots of strong labour market performance rather than generalized statements, myths, half-truths and a cynical manipulation of the evidence.
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.
For more evidence a summary indicator like the location of the "Beveridge curve" may help. (The Beveridge curve is the (negatively sloped) relation between the vacancy rate (the number of unfilled jobs expressed as a proportion of the labour force) and the unemployment rate (the number of unemployed job-seekers expressed as a proportion of the labour force). Labour-market rigidities (including skill mismatches now) are precisely what allow vacancies and unemployment to coexist, and the more rigidities there are, the further the Beveridge curve diverges from the limiting case, unachievable case of perfect flexibility. Studies carried out by some of our local researchers do not show any marked degree of rigidity in our national market - that is by how far the Beveridge curve is from the limiting case.
A recent International labor Organization study has argued that reducing employers' responsibility to provide job security inevitably ends up imposing new tasks on the state, which must provide stronger and wider social safety nets to take care of the unemployed workers. True labour flexibility must be based on worker versatility -- the workers must possess a variety of skills, so that they are qualified to change jobs as the changing economy alters (‘falters’ or ‘changes’ – believe the latter would be better) . Building those skills requires time, and creating the worker versatility that can provide true labour flexibility must be a continual process. Will the Empowerment Foundation be able assume this huge responsibility?
Depreciation of the rupee
For the whole year of 2008, a comparative analysis of other countries showed that the rupee was excessively appreciating against the Euro and not depreciating enough against the dollar.
Nominal Exchange rate changes (%) for 2008
|
Nominal Exchange rate changes (%) from Jan to July 2009
|
|||||
Textile producers
|
LC to Euro
|
LC to $
|
LC to Euro
|
|||
Indonesia
|
-10
|
-30
|
3.9
|
|||
Malaysia
|
0
|
-9
|
-5.2
|
|||
Pakistan
|
-9
|
-29
|
-10.0
|
|||
Thailand
|
-2
|
-5.6
|
-3.4
|
|||
South Africa
|
-30
|
-51
|
+14.6
|
|||
Tunisia
|
-13
|
-15
|
+3.9
|
|||
Morocco
|
-2
|
-13
|
-0.1
|
|||
Egypt
|
10
|
0
|
6.9
|
|||
Turkey
|
-33
|
-35
|
-0.1
|
|||
Mauritian Rupee
|
5
|
-5.5
|
-5.7
|
|||
Appreciation = +ve
|
||||||
LC=local currency
As for the period June to July 2009, the trend has reversed as far as the Euro is concerned; we are one of the few countries registering excessive depreciation. It is thus not surprising that we are not hearing much from the exporters lobby these days. They cannot believe it themselves; after the stimulus package , they say it’s now manna from the Central Bank. The good days of 2006 and 2007 are back; you recall the fillip that they got from an excessive depreciation of the rupee and we collected its resulting effect- the spoils of a high inflation of 10.1% in 2006 and 8.8% in 2007.
As for the trend against the dollar, we have more or less the same trend as in other countries over the same period. Voilà la reprise.
Inflation
When the inflation rate was 10.1%, we were provided with a whole set of international data to show that it was all because of imported inflation - a result of the surge in commodity prices. Now that inflation has come down to less than 7%, a similar exercise reveals that we are not doing well at all in denting the inflationary pressures. This is to some extent confirmed by the third survey on inflation expectations carried out by the Bank of Mauritius in June 2009. 56.8% of respondents found the inflation rate to be high where 13.6 % judged it to be too high. 50% of respondents also indicated that prices of goods and services have gone up and 47.8% expect prices to go up too. Though respondents expect a drop in inflation in the short term, they anticipated a pick up in the medium term to around 7.5% in December 2010.
Inflation rate (%)
China -0.5
Britain +1.7
Euro area +0.4
France +0.4
India +5.2
Indonesia +4.2
Malaysia -0.4
Singapore -0.2
South Africa +6.6
Mauritius Around 7.0
The pitfalls of a passive approach
It is election time and we have one last budget to go. As from now on it will more and more like a chess game. One will not be aimlessly pushing one’s pawns without a plan; Every move from now on is a new decision that will require quite some musings, advices, f0rethoughts - thinking a few steps ahead, asking “what if …? and even venturing for a paradigm shift in one’s thinking- and sacrifices. One will have to give up some of the smaller assets to achieve bigger milestones . A great many games - chess or political - have been won with brilliant sacrifices at the right time. If you take it too passively, allowing the monkey wrenches (TINA policies) thrown by the Tinawallas to continue spoiling the moves , it will be increasingly arduous to hold the fort till the end and you may end up miles away from victory-checkmate. But if you want to control the outcome, take the initiatives now - that’s the reward of an active approach.
Some time back this active approach had led to the backpedalling on some of the painful TINA policies- the taxation on the lump sum of civil servants, the Primary School Feeding Programme, subsidies on the HSC ans SC examination fees and forced the Tinawallahs to review their copy of the Multi Annual Adaptation Strategy for the Sugar Sector reform and ensure the full payment of the PRB in one budget (the anti-cyclical measure?).
What are these initiatives that will help to win back the disenchanted motley support base? These initiatives will help not only to get the political but also the economic arithmetic right. The priority should be domestic resource mobilization. We should adopt new monetary and fiscal policies aimed at increasing domestic savings. At the same time, provide secure investments for pensions and savings, using that capital to kick-start a massive public and private works programme to cut energy use.
Integrate all these funds that are proliferating all over the place into the budget for better expenditure coordination, accountability and transparency and we will end up with the true capital industry and budget deficit figures. Ease the tax burden on the middle class and rationalize the tax system to make it more progressive, raise Income Deduction Threshold to alleviate the taxpayers not liable to tax prior to publication PRB Report and do away with the NRPT and the tax on interest income and reintroduce the subsidies on the SC and HSC school fees. Introduce some new savings scheme within the tax system to encourage taxpayers to plan for a better future. It is the middle class that delves deep into its pockets to invest in the higher education of its children and thus substituting for an ineffective State in providing for the country’s human capital formation to international standards.
Strengthen the FRC to wean corporate Mauritius off its dubious labyrinth of financial reporting ways (on depreciation, inventory costs, other business expenses) and on to accounting standards grounded in simple and transparent principles. Negotiate with India by proposing to improve the sharing of confidential information to stall the direct tax code being envisaged by India to override our DTA treaty. Personally take the commitment to build strategic alliances with other global institutes of learning and centres of excellence to add gravitas to our present educational offerings. Appoint a driver at MOF who will succeed in rallying the civil service behind a genuine reform programme that succeeds in adding new pillars to the economy, in meeting our ambitions in human and physical capital formation and improving our implementing capacity. We should not let bad economics drive out good politics - the bedrock upon which our collective futures must be built.
