When disequilibrium sets in firmly

Of Inclusiveness of Growth and Shared Prosperity

A recent report on Mauritius by Victor Sulla released by the World Bank In February 2016 (Inclusiveness of Growth and Shared Prosperity) relating to a possible shrinking of Mauritius’ middle class, raised an alarm. The link was immediately made to a possible impoverishment of what we variously call the “middle class”.

Strangely enough, most of the period covered by the report, i.e., the decades following the diversification of the economy from its earlier monocrop situation, has seen sustained positive economic growth rates at the overall level. One would have expected the emerging middle class to have consolidated its economic condition in the circumstances. Possibly so in the beginning, but somehow this élan was arrested due to subsequent unequal sharing of the national income among different groups.

Factors behind inequalities

People fail to catch up economically for various reasons.

The most important of these is the law of supply and demand. It states that scarcity of supply tends to raise earnings of what is in short supply on the market. Conversely, an oversupply, given demand, tends to hold back earning capacity. Workers in over-supplied segments of the market will be under constant pressure of lower earnings in an unbridled free market system.

This explains why large-scale employers have kept down wages of lower-skill workers to quite low levels over a long number of years. It also explains, from the supply side, why the price of real estate, a space dominated by few large owners, has shot up, making the acquisition of a decent residence, for example, unaffordable to modest aspiring up-comers on the labour market.

Monopolistic market-dominant players (e.g. telecoms) tend to accentuate unequal sharing of national incomes. The larger part goes to the owners of dominant businesses while earnings of those dependent on them can be quite easily curtailed, given the market power. Moreover, consumers of services derived from sectors like these pay ever-exorbitant prices under inefficient market conditions, thus eroding further whatever they’ve managed to earn.

Upward adjustments are automatically made periodically without always putting a premium on productivity and efficiency in the public sector. In contrast, the private sector of Mauritius, contrary to the public sector, has restrained the rate of compensation of its employees in past years. The MSPA backed out of regular wage negotiations lately.

In the private sector, there is a closer focus on pay and productivity so that pay stagnates or progresses much more slowly for those below the upper cadre positions. The latter, on their part, even ask for – and are paid – remuneration comparable to what cadres in similar positions are paid by multinational companies, abstracting from the general income distribution structure in Mauritius. Obviously, this has produced enormous disparities among top earners not only within the private sector but also between public and private sectors.

Evolution of the situation

In the beginning, right from colonial days, as the employment space opened up both in the private and public sectors, prospective employees educated and trained themselves up to secure the jobs. This was the main channel for going up the social ladder. Those who could afford it did not stop at school level (e.g. SC or HSC) but launched themselves into university education. The saving habit thus got even more entrenched not solely due to the memory of past days of hardship; it was needed for investment in the education of the next generation in the hope of securing a “good job”.

As the public sector expanded over time, more workers got absorbed. With automatic promotion or due to their increasing skills, public servants secured higher positions in the service. Earnings increased. This became the model for going up socially, unmindful of excess supply so generated eventually and its potential to narrow down opportunities for employment. Economic prosperity from emoluments so received fuelled up additional demand from aspiring social climbers for goods and services, thus enhancing the private sector’s scope.

Somewhere along this process of levelling the gap which existed between the past paltry incomes of the lower paid and the surge in it after economic diversification, maybe from the 1980s, conservatism and ultra-liberalism came in forcefully. Globalisation took up around the same time. Industries and labour could now move to different places, different countries, different jobs, depending on what is called “comparative advantage”. This is how we ourselves got into textile manufacturing for global markets.

The resulting frustration

Under this, it was assumed that market forces of demand and supply would determine who will get how much. And that, eventually, the constant churning of markets will lead to an equilibrium – some sort of a higher optimum for all. The fruits of continuing economic growth, it was thought, would be fairly shared according to the amount of effort put in by each, a sharp departure from feudal society in which the absolute rulers take it nearly all.

But look at today’s global reality of the absolute free market. Actually, a whole lot of disequilibrium has been introduced – not only in Mauritius – but all over the world under this process of free-for-all, in which governments relinquished their distributive role at the demands of institutions like the World Bank. Governments to the right went for the benefits of unbridled free trade; the left trumpeted the idea of international solidarity that it hoped would lift all boats together.

The reality turned out to be quite different. Few would have forgotten how “all the gains were privatised and all the losses were socialized” (Will Hutton) no sooner than 2012 in the aftermath of the banking crisis of 2008.

There has taken place an increasing concentration of wealth in fewer hands while middle classes and others lower down have been squeezed out. Workers in different countries have seen their jobs and, on occasion, whole industries lost to globalisation and offshoring of activities. Low-skill wages have got depressed due to immigration. Fierce competition has repressed middle class demands for better compensation.

This unbridled system, in which corporations have gained the upper hand, has excluded millions over the world from fair sharing the benefits of economic growth – at least, something that would have been considered ‘balanced’. Political elites have kept chasing growth and high incomes, oblivious of the harsh impact of ultra-liberalization on so many left behind to eke out a miserable living side by side with others more richly endowed, swimming in oceans of indecent opulence.

The problem is decision-makers, having now crossed the Rubicon, do not know how to set things back for a more widely embracing growth process. Even central banks are confused: some, like the Federal Reserve Bank of the US and the Bank of England, want to raise interest rates, others, like the ECB and the Bank of Japan, have sent them into negative territory.

But why should we stop at the economic havoc liberal thinking, without the reins, has caused among the different classes of society? It is the same unbridled system of market-driven production, in which countries vie against each other unrelentingly, that has wrought perhaps irreversible damage to the global environment; it has jammed cities; it has unevenly created rich and poorer countries across the globe; the unbridled power game carried on under the view that capitalism would be bringing up the best outcomes, has created an international policy mess and, with the help of chess master Putin, unleashed a huge wave of almost uncontrollable migration now threatening the integrity of Europe. In America, it is launching Donald Trump.

Can we in Mauritius claim that we have not imitated this faulty model? Those who have prospered materially have adopted the same habits that affluent societies were once criticized for. With identical consequences. Spending and consuming have taken over. Obesity has increased. Many have landed into over-indebtedness. Cars have multiplied. Our main cities and even other peripheral roads can now jam up with traffic any time, day or night.

Does not what the World Bank report states amount to acknowledging that we favoured some too much at the expense of others in the process? No one cared when the skewed distribution marched on unfettered by fiscal or other policies. We’ve operated for long without a clear economic plan – perhaps intentionally – on how to reconcile and deal with extreme departures from what is acceptable before it posed as a serious threat to equitable sharing of growth?

There was a time when our governments ensured that we got over the limitations of underdevelopment but also made sure to save those who deserved to be shown the way to prosperity. Let it be said, in the same breath, that the present government could not, in its brief span of 14 months, have created all this imbalance. This phenomenon has been travelling down unquestioned since quite some time. The risk is that it is not easy to restore a more balanced path without shaking up the boat violently. For now, we keep our fingers crossed that we’ll tag on when the world economy lurches up again, hopefully acting on the upswing to restore a better equilibrium.

* Published in print edition on 4 March 2016