Managing Mauritius 

 Against the backdrop of world economic distress

By Anil Gujadhur 

Many observers reckon that not all has been for the best in global economic management. At a time, the world appeared to be just getting out of the recesses of economic depression into a fragile recovery, politicians deemed it right lately to fudge it up and land us all into another phase of uncertainty. Uncertainty is one of those poisons that investors like the least. This is what has sapped confidence across the board. No doubt, investors have been hesitating to expand, employ and send out the right signals to the credit markets since they do not know, for instance, which kinds of taxes they are likely to face up to in the event they forge ahead.

This situation shows that while the buck has to stop at the door of politics in economic matters, one does not always end up picking the best solution that could have made a difference in favour of rational behaviour. Fiscal authority is vested into politicians while the responsibility for monetary policy lies in the hands of the central bank. It is customary for the two of them to work coherently together in order to obtain the best outcomes in terms of growth and employment. However, when the fiscal hand does not go far enough, preferring to seek refuge in prudential norms that were best suited for situations when the economy is not in crisis, the pressure then comes to bear on monetary policy.

This is exactly what has been happening in two of the world’s most important economic poles, notably America and Europe. Whatever we may say nicely about the likely emerging economies and their capacity to pull the world economy out of its troubles, we have to reckon that those places have yet to develop the required openness to trade and exchange before they can become a locomotive for global economic growth. In that case, we look to the authorities in the traditionally rich countries to take up the right policies to enable them to draw the global economic bandwagon behind them again. However, both America and Europe appear to be amazed at the size of the debt they or their component members have accumulated over years and they have consequently suddenly become conservative in fiscal policy-making. This means they have been cutting down government expenditures principally by slashing down welfare spending and going for more taxes.

This is contractionary economic policy. It is good when an economic boom threatens to burst out into heavy inflation but it is hardly suitable when you have to induce households to give to the economy the boost it requires in terms of more demand for goods and services. When this kind of tight fiscal policy is adopted (for purely political reasons), the burden falls on central banks. In America and Europe, the central banks have been taking on that role; they have brought interest rates to very low levels in order to boost up demand; they have pumped liquidity into the financial system in large amounts to enable the system to cope with insufficient cash in a process known as Quantitative Easing. The European Central Bank has even undertaken to buy up bonds of weak European governments which the markets are loathe to hold on to, threatening to send the governments virtually into insolvencies. The central banks alone cannot cope however with the size of the economic problem facing the concerned countries.

The fiscal authority has to step in to reflate demand when central banks reach the limit of their possibilities. The latter cannot go on printing money without throwing into serious doubt their own credibility. They have to be funded by governments that have surplus resources to support a system that otherwise threatens to peter out at the least provocation. They cannot go on acting in a political vacuum. The failure of governments to make up their mind in this respect is what we have been seeing on the stock markets that have taken the plunge or behaved erratically with ups and downs, as they did last week and are continuing to do this week. The reason for this situation is not far to find.

European political leaders have reacted with delay and even then inadequately to the economic problem at every stage of the Euro zone crisis of past months. They have failed to stake in the required amount of resources given the size of the debt problem which has seized Europe. This creates serious doubts in the minds of the markets as to whether they will ever settle the core reason for several individual European countries’ failure to live within their means. The political determination to act remains vague. No fiscal union is in sight for Europe, whereas this is a needed remedy to signal that coordinated action will be taken to prevent situations getting out of hand. As for America, one wonders whether its politicians who are willing to gamble with the economy on partisan considerations can be trusted to be able to set their sights on enduring economic redress and avoidance of a longer term stagnation which the American economy is otherwise headed for. The spirit of compromise for achieving the country’s superior interest appears to have gone. Will they finally give a chance to its usually talented, relatively young and innovative economy to take up the lead once again in global economic recovery? Doubts persist.

Can we get out of our predicament?

We in Mauritius are living under the distressful conditions resulting from the want of effective economic leadership in developed markets. It is thus not clear when our traditional export markets will get normal once again. Were demand for our goods and services to slump under the pressure of misgovernance as we are seeing it in our principal export markets, we will need to prepare a cushion for the period between the time the rough riding were to begin and when economic growth would resume in those markets and hence in ours. We should be able to set aside enough reserves to meet our essential import requirements and not fritter them away by exaggerating our imports. The price for not disciplining ourselves in this regard will be to have to bear austerities like those that have taken the Greeks to the streets. It is probably not the time to have recourse to costly external borrowings.

We have to sustain the economy in the meantime by venturing out into as many newer segments of activity as possible. We have to go out to specific markets in which we can balance out more fully our exports and imports, even if that were to begin on a small scale. Our regional diplomacy should be having a lot of hard work to do to help us penetrate markets which have this kind of profile. Our entrepreneurs need to make efforts alongside to show the cost and other advantages they can offer over competitors in places our diplomats identify as potential sources of new business. Foreign policy should in this context be able to carve out special tariff and non-tariff regimes in our favour in the target markets. Our economic policies should be proactive towards the extension of our non-traditional export potential via such new markets. This is the hard reality we should reckon with instead of nurturing vague dreams that foreign real estate buyers will keep pumping in foreign exchange for us to keep buying more goods from abroad than we can afford with the foreign exchange we generate from exporting goods and services.

There are structural aspects which have been claiming our attention for years and decades but we have done nothing apart from making pious statements of intention. Countries that have sustainably ventured out into new product markets and leagued up with world class producers into newer production lines have been investing heavily in the scientific and engineering education of their citizens. They have managed to insulate themselves more surely against the vagaries of world economic conditions because they have come to rely on multiple levers of economic production. If one or two of these failed to respond, they can always depend on the rest of them. We have not been as far reaching as they have been. Instead of this type of frequent re-engineering of our production base, we have concentrated on more immediate marginal fiscal redress while our entrepreneurs have preferred to gratify themselves with short term advantages such as currency depreciation and the lowest possible interest rates, only to find themselves hit by every new wave of global economic distress. The new Minister of Finance has to make them cross this customary threshold and make for our longer term viability by helping producers grapple with the real world’s tough new economic challenges.

Mauritius has everything to gain by making the quantum jump whenever the occasion demands. Occasions have been plenty. We managed to miss out on electronics. We missed out on doing light engineering with global partners. We drove our education not to match changing patterns of global demand but to rest on our laurels in textiles and real estate development and rent seeking. We did not quantify the number of technicians we will need to produce annually to get a share of global markets in which demand did not flag despite depressed global economic conditions. It is not too late to start this process and it remains the toughest challenge no doubt for the new Minister of Finance. His father drove us, together with others, into new and plentiful markets for our tourism and textiles. He could earn himself a name as well if he managed to break the sound barrier that keeps his Ministry bogged down dealing with the details and, hence, failing to see the bigger picture and give the necessary orientation therefore.  

* Published in print edition on 19 August 2011