What makes the economy tick

The rich will themselves stand t o benefit through increased demand, if economic growth picks up faster thanks to a fairer distribution of the fruits of work in favour of those lower down

A politician in the 1970s famously stated that the economy performs best when the construction sector is booming but that it slows when the level of activity in this sector goes down. Thinking perhaps that this dictum holds true even today, last year’s budget of the government announced a series of construction projects (smart cities, techno-poles and so forth), hoping perhaps that this holds the key to our prospective economic growth.

There was a fundamental flaw in the judgement made about the role of the construction sector in the uplift of the economy. Construction activity is only the tail end of a chain, not the spur which ticks up economic growth. For construction to happen there should be effective demand for it. This demand originates in the growth of the public’s purchasing power and better job opportunities as well as expectations that all this will be sustained.

The current slack in demand for construction is due to the decline in the public’s purchasing power as price of property has shot up way above the means of potential purchasers, notably the middle class which, according to a recent World Bank report, has been shrinking in Mauritius. Income distribution has become skewed enough so as not to support sustained demand for construction.

A persistent slow pace of growth of the economy isn’t helping, either, to generate demand for building up more workplaces, offices, apartments, etc. So, the argument about construction being the driving force of the economy should be turned on its head to explain that the root cause of economic slowdown lies in the slow but steady erosion of buyers’ purchasing power by means of things like inflation, currency depreciation, and sharply rising costs of property.

Data show that at the end of December 2015, 8% of jobs were generated by the Primary sector (agriculture, fishing, mining, etc.), 25.9% by the Secondary sector (manufacturing, construction, etc.) and 66.1% by the Tertiary sector (such as administrative services, wholesale and retail trade, ICT, financial services, etc.). It may well have been the case that the construction sector employed the bulk of the workers at one time as we were transitioning from a primarily agricultural economy to a manufacturing economy. But the situation has changed considerably once we moved towards a more services oriented economy such as the provision of international financial services.

For the past decades since the 1990s, the services sector has been the main purveyor of jobs in Mauritius. Economic growth would have been supported by favouring the provision of better and increasingly adapted services to both the local and international community. Emphasis on world class professional training and education and opening up the space for us to interact effectively with more other countries in the provision of services, such as international finance, would have helped consolidate our services sector and, hence, the purchasing power of those employed in it. This was the way to really grow the economy’s strength.

On the other hand, developing the real estate sector is best when the economy is already picking up in a strong and sustained fashion. In past years, Mauritius enjoyed high inflows of FDI as investors from rich countries bought up local villas and upmarket constructions. At present, this type of FDI appears to be coming down sharply, compared with previous years. This shows that demand from these buyers could be dropping due to fall in their purchasing power as economic growth in their countries becomes increasingly volatile.

So, will we grow our economy better if we keep adding to incentives for real estate development and prioritizing this sector as if it held the key to our future economic prosperity and to jobs growth? As we well know, a spate of incentives was given to large establishments to favour growth from, among others, real estate activities. This having been done, the persistent lack of economic growth and job creation by such establishments is now being attributed to administrative slackness. Is this really so?

No doubt, administrative inefficiency must be tackled head-on by governments which do not want us to slip into the category of global champions of administrative mischief-mongers. Compared to many countries in the immediate neighbourhood, we are not so bad in this regard but that’s no excuse for imposing sterile administrative handicaps which thwart business.

Large establishments keep asking for incentives to, they say, enable them to face international competition and create the additional jobs. The State usually gives way, depreciating the currency, giving all manner of tax exemptions, expediting administrative arrangements and sometimes even helping them market their products in other countries. Taxpayers pay up. But job creation matching the scale of the incentives provided by the State, no, we beg to differ.

In 2011, large establishments employed altogether 310,700 workers while other smaller enterprises (self-employed, SMEs, etc.) employed the rest, that is, 218,200. Four years later, at end 2015, large establishments accounted for 313,500 jobs against 253,100 for the smaller enterprises.

These figures show that, in the span of the last four years, the net additional jobs created by large establishments was a mere 2,800, completely dwarfed by the more than twelvefold 34,900 additional jobs created during the same period by the smaller enterprises.

The Treasury should examine, in the light of the data, whether the fiscal and monetary exemptions/benefits conferred during this period upon large establishments as compared to smaller enterprises was productive and properly matched up in terms of both generation of economic growth and creation of additional employment by the respective two sides.

It may also examine whether all this is contributing to put more disposable incomes in the hands of the middle class (rather than withdrawing from it purchasing power by way of shifting the tax burden to it, introducing inflation-generating currency depreciation, liberalising prices, etc.) which is the real trigger for economic growth by pushing up demand for goods and services, including construction.

Thomas Piketty, French economist, author of Capital in the Twenty-First Century, has made extensive research to establish, on the basis of hard data spanning several past decades, how owners of capital have kept appropriating to themselves ever larger shares of the national income in “free market” economies, impoverishing the middle and lower classes in the process.

We may not be in a position to fully arrest this trend but will it harm if we redistributed (through appropriate taxes) future economic growth more fairly, if only to ward off the adverse unsustaining skewed flows of larger benefits to the selected few? The rich will themselves stand to benefit through increased demand, if economic growth picks up faster thanks to a fairer distribution of the fruits of work in favour of those lower down.

At the same time, economic dynamics will be restored by going out to add ever newer sectors of economic activity amongst a wider cluster of economic operators, large and small.

* Published in print edition on 6 May 2016