In the heat of debate that has followed the Central
Bank Governor’s announcement of bold measures to correct the misalignment of
the rupee, some of the arguments put forward by the Governor seemed to have
been sidelined. He has put the spotlight
back on the lingering policy paralysis and structural constraints that are
taking the rupee to lower levels.
The
structural issues among others are the wage increases that are not in line with
gains in productivity, skills mismatch,
need for diversification of markets
and products, addressing supply-chains bottlenecks
–efficiency in port, airport, road congestion, cost of energy
and telecommunications- reviewing spreads and charges and commissions in the
banking system, an enterprising human capital formation programme , food and energy
security and the need to develop the
"hard" and "soft" aspects of the infrastructure for a
sustainable, diversified premier financial centre.
These are the reforms that should have
been undertaken by the TINAwallahs (There Is No Alternative). We would have
been reaping the fruits now for their impact is felt over time. We did not
really go through the pains of restructuring- the painful changes involved in
improving competitiveness and ensuring cost-effectiveness in education, health
care, the public sector, social security and pensions. At the first outcry, they backed down. They
preferred the easy way out. The few touches to the tax rates and some
improvement to the investment climate framework were not the reforms that would
have generated sustainable growth. It is because of the absence of substantive
reforms and investment in the economic infrastructure during these past six
years that the growth rates of the productive sectors are being affected. Their
austerity measures boiled down to tax increases unaccompanied by efforts to
reduce wasteful expenditures and inefficient transfers; their fiscal
consolidation efforts did result however in budget deficits as low as 1.3 % of
GDP which was achieved by drastically slashing capital expenditures to an
average of only 2.6% of GDP over the period 2006-11. This drastic fiscal
adjustment generated surplus funds which Government reappropriated and
transferred to a set of Special Funds that were left idle in bank accounts and
some of it has now been credited to the National Resilience Fund . It was plainly a case of missed
opportunities. They have choked off growth by limiting public investments
in key sectors at a time that the private sector was finding it more profitable
to invest in real estate activities. It is essential investment in economic
infrastructure-roads, ports, airports, schools etc. and human capital
formation- that has been sacrificed.
All that their reforms
have delivered is billionaires through their real estate schemes. What about
the rest ? Disparities have widened and poverty still remain a challenge; the common man keeps getting the short end of
the stick again and again; the latest being that even the pittance distributed
through Corporate Social Responsibility is being denied to him. Where are the jobs ? You spend huge amounts
to provide education for your kids but without any assured jobs ! The money that is spent on educating them
doesn’t get them a job. The entire brunt of the resentment among people is
borne by their short-termism and stalled reforms. The long-term vision about
growth has been lacking.
There are huge events with massive magnitudes
that are hitting us. One of them is unemployed youth and graduates. Overall
confidence in the economy is waning and a recent survey is showing that some
55% of Mauritians want to migrate. We cannot continue to do more of the same-
the short term palliatives that lead nowhere. Lindsay Rivière in his article
titled « Inititiaves » in Lexpress of this Wednesday draws our
attention to the continuing reform and policy inertia »Le régime improvise souvent, alors qu’il faudrait davantage de «
creative thinking , d’imagination et de cohérence dans l’action d’ensemble, une
diplomatie mieux adaptée, une politique sociale plus ciblée. En l’absence de celles-ci, s’installe peu à
peu un immobilisme pernicieux, dangereux pour l’avenir. La banque centrale
assume, dans ce contexte, une responsabilité encore plus grande. Bheenick vient
de donner au pays la preuve que de nombreuses mesures techniques peuvent encore
venir soutenir l’économie… ». The CB Governor is alerting
us to the fact that we will be sacrificing an entire generation if we do not
think out of the box of IMF/WB policy prescriptions and the non-productive real
estate developments and act quickly. There is a need of urgency in
policy-making and concerted action to tackle the larger predicaments of
weakening growth and plunging business confidence starting with measures to
boost both public and private sector investment. We need to bring in a new team
that will generate greater collaboration between industry, civil society and
government to move ahead boldly in key areas- like accelerating the implementation of large projects in
the infrastructure sector- and transform existing governance and the economic model to find our
way back to the path of rapid asset creation and our potential growth level.
The Monetary
Policy Pause !!!
The Central Bank’s (CB)
decision to strike a monetary policy pause –i.e. not to cut interest rates amid
slowing economic growth - has not gone down well with the business community.
The main arguments of the CB are that though both headline inflation and core
inflation have moderated, the former is still above acceptable levels at 5.3 %
higher than the Key Repo Rate (KRR) ( meaning a negative real rate of interest
) and the mean inflation rate
expectations as at May this year were
5.7% for the twelve months ending December 2012. Excessive reliance of the export lobby on
the monetary policy tools – the KRR and depreciation of the rupee- to
revitalise growth seems to be the problem. The Governor demands a paradigm
shift in our thinking – this is long overdue. We need to tackle inflation and
the slackening growth by removing the supply-side and other structural constraints. These cannot be tackled by monetary measures
only, as the ability of monetary policy is limited. “ Monetary policy
alone cannot make the underlying structural imbalances disappear as it is made
out to appear. There was work to be done in other quarters.......”
The export lobby is not
convinced; it feels that there is enough room for the CB to cut interest
rate. An analysis of the inflation data
reveals it is being driven up almost entirely by external factors mainly food
articles prices, even as core inflation
remains below five per cent. Headline inflation was down to 5.3 per cent in
May, as compared to 6.6 per cent in November 2011. All the three underlying
measures of inflation eased in May 2012- CORE1 at 4.6 per cent, CORE2 at 3.8
per cent and TRIM10 at 4.4 per cent. Even in times of crisis the CB sees its
overriding mandate as keeping a lid on inflation. They argue that there is no
need to be too rigid about the inflation rate- the present rate of 5% is our
historical rate and as P. Krugman puts it, by breaking another of today’s
economic taboos that a bit of inflation would be good for us in that it reduces
the real value of all that depression-inducing debt. Exporters were thus
expecting a monetary stimulus from the CB on the plea that appreciating rupee,
demand slowdown and increasing debt have affected businesses. They believe that
there are enough arguments that lead to believe that a 50 points cut was
feasible and that the focus now needs to be on stimulating growth.
Even if the risks in the euro
zone are contained, the output gap is
negative as domestic growth is foreseen to stay below the projections made in
March at 3.6 per cent while risks to the inflation outlook appear skewed to the
downside in the near term, largely reflecting the risks arising from depressed
global demand conditions and the global commodity prices that are now in a
solid bear market. But external threats remain and the inflation outlook
may change drastically and this may not bore well for our economy as our rupee
start hitting new lows and this may be the worst time for our imports costs to
rise. Greece’s problems combined with the thin possibility of oil prices
hitting 140-160 $ a barrel as a result of EU pledge to enforce an embargo on
oil imports from Iran starting in July may intensify the pain to Mauritius of
imports paid with a falling rupee.
Innovation-led
growth
It seems that some of our
local thinkers have not totally outsourced their thinking to the foreign
think-tanks especially to the panel of experts at the Board of Investment.
There have been some valuable suggestions on the question of innovation-the
need for a
National Innovation Centre. Mauritius future
innovation-led growth must rely more on technical efficiency that requires an
efficient national environment which will reinforce innovation within the
business sector and encourage firms to compete on the basis of unique products
or services. In restructuring our existing economic activities and in
initiating new ones, innovation will have to be a key driver of this change. We
should encourage a new wave of Industrial Policies that strive to create a R&D
culture and foster innovation by new instruments (competitive bidding for
earmarked funds and a R&D tax credit). Given the fact that the private
sector underinvests in research, government can play a key role to support
growth by investing in science and technology, increase its funding for
research needs and create the institutional environment that supports
technological change.
We need a technology strategy to address specific needs of
innovation and technology diffusion. What about a publicly funded Mauritius
Industrial Technology Research Institute (MITRI)?. MITRI would be patterned
along the Taiwan, South Africa and Singapore technology research institutes.
MITRI will scour the world for cutting technologies and use its own laboratory
facilities to assess their appropriateness to local conditions and build pilot
versions to demonstrate them to prospective investors. The experience of
existing public research institutes grouped under MITRI will be an asset in
tapping the promising research areas like sugar-based technology (for plastics,
polymers and for medicinal purposes), renewable energy technologies, seafood
and ocean resources.
Paul
Romer contributed an approach to growth theory based on innovations in either products or production methods as the key
ingredient for development, rather than capital, labor, or other factors of
production. Romer argues that importing ideas from
abroad, through inward FDI, is an effective alternative to growing them at
home. We will have to be selective in our choice of Foreign
Direct Investment inflows, encouraging those
that are important sources
of managerial ability, technical personnel, technological knowledge,
administrative organisation and a source of innovations in products and
production techniques, all of which are in short supply in Mauritius. These well-screened FDI inflows
will impact positively on the economy
so far as product upgrading and increased productivity are concerned.
Capital inflows – a hypothetical catastrophic
scenario
European troubles could
send shockwaves round the globe with contagion spreading to all emerging
markets including Mauritius. This could induce investors to pull out of all
emerging markets and rush for the safe haven of the US dollar; Mauritius which
needs global financing to bridge its record current account deficit of 12.6 %
of GDP will be badly hit. If there is a marked diminution in capital inflows, especially
in the 70% of our FDI that goes to accommodation, construction and real estate,
asset prices would be first to feel the effects and asset saleability would be impaired.
Hot capital, a consequence of capital inflows
attracted by the real estate bubbles, will also take flight. Borrowers' incentives
to repay their loans will subside and, all of a sudden, domestic banks realize
that they face a mountain of nonperforming loans and stuck with collaterals whose
values are bound to fall. The liquidity crunch
will give rise to the drying up of credit causing a severe impact on output and
employment. Such a halt in inflows can lead to higher exchange rate fluctuation
(even a significant depreciation of the currency) and a widening current
account deficit that reduces the overall balance of payments surplus and thus
affect our long term growth prospects. Sudden decline in capital flows not only
contribute significantly to drops in economic growth, but their effect is more
pronounced in countries with large current account deficits. The appropriate macroeconomic
policy mix recommended in such cases that is likely to be associated with the
least output loss during a sudden-decline financial crisis is a discretionary fiscal
expansion combined with a neutral monetary policy.
