Beware the Economic Factor 

Editorial

It is observed that during the past 10 years to 2010, the domestic economy has grown at an annual average rate of 4.4%. Economic growth has not been even however during these years. While the economy grew at 6.3% in 2003, it dipped to as low as 1.6% in 2002; from 5.7% in 2007, it fell to 3.1% in 2009. External factors were responsible for bringing down the rates on each occasion during the past decade and generally for the erratic growth trend. In 2002, there was a drastic international market shift in favour of cheaper producers like China: our manufacturing exports took a temporary blow; in 2009, external demand slumped in the sequel of the recession in our major markets. Situations like this amply illustrate our dependence on external market conditions. Indeed, the scale of production for our internal market itself depends heavily on the extent to which we are able to “sell” to the outside world. Our prosperity is based on that of markets to which we export. The more we reinvent this space, the more we succeed.

The answer to this situation would be to beef up our production structure by diversifying both the range of our export products and the number of external markets we serve.

We have diversified production: sugar, tourism, textiles, seafood, financial services, ICT/BPO, IRS, etc. Not enough, one might say, but by training up the labour force more purposefully than we have done so far and by teaming up with skilled specific labour from overseas, we can move on to meet newer areas of product demand as they come up at the international level. You need a very strong sense of calculated direction for proceeding along this path. It concerns more than mere tinkering with some touch-ups of fiscal policy.

On the side of export markets, we have hardly achieved any much diversification. Our trade pattern has remained stuck for all the past decades to exporting to markets in the west, more particularly to Europe. It is easier to talk about moving on to other markets, notably in Africa and in Asia, but the ground reality is that we remain very much stuck to Europe for our exports, whether it is for goods or services like tourism. Our structure of production does not help to penetrate those emerging markets easily due to insufficient complementarity of structures of production having been built up on our part with the other sides. While it will take time and strategic thinking to break from the given market concentration, we have to face the consequences each time there are signs of unease on our traditional export markets.

A second crisis is profiling itself in the euro zone. It will be recalled that a debt crisis flared up in Greece last year, necessitating a bail-out package of €110 billion by euro zone countries and the IMF, to salvage the situation and to prevent the contagion from spreading out to other European countries. The commotion did not come to an end. It is threatening to spring up again. European heads of state are meeting today at a summit that will decide on a controversy around how to achieve the next round of redress for this ailing economy.

Many banks from across Europe hold Greek government debts; should Greece default on this debt, pan-European banks are likely to face dire consequences and that could involve several EU governments in the wholesale bail-out of their financial institutions, with echoes of the tremors that the financial crisis of 2007 sent out. Euro denominated debt issued by previous Greek governments is likely to shoot up this year to 160% of GDP against a benchmark limit of 60% at best. Greece has seen its debt brought down this week to a ‘C’ rating by Standard & Poor’s, an international rating institution, which is the lowest of any sovereign debt rating in the world. Greece is not alone in this precarious situation; on the lines, we have Portugal and Ireland with debt to GDP ratios between 100 and 112%. Should the situation get out of hands, Spain may become another casualty.

Although Europe as a whole is doing better than America in terms of economic pick-up, this crisis if not solved, is likely to threaten the euro currency itself that was launched as part of a monetary union without putting in place a concurrent strict fiscal union. Taking advantage of this situation, profligate governments in some European countries have been piling up public debt and putting at risk the very continued existence of the euro as a currency. In parallel, factory output has been coming down across the globe; house prices and job growth have remained depressed. Consumers in the west are resuming their cautious attitude to spending. It is coming to light that once again, the recovery in the developed nations, which countries like ours tag on to for exports, is weak and vulnerable.

It is quite relevant on our part, as an export-dependent economy, to seek to diversify our markets to other places where the recovery is not jeopardised as much as it looks like in Europe. There are many miles to run before we reach this objective however. We are still deeply anchored in Europe. The transition requires a strategic re-positioning of our economy and we have done all but this for the past so many years. On the other hand, political brinkmanship in both Europe and America, for reasons of sheer political opportunism, could bring those economies to their knees when everyone has been wishing for a rapid resumption of reasonable growth in those places.

The unfortunate thing is that we do not even know the type of vision, if any, accompanying our economic development. Between 2002 and 2010, our sugar cane plantations have come down from a planted area of 72,000 hectares to 58,000 hectares, a loss of 2000 hectares of planted land per annum to non-agriculture. Were this rate of depletion of our cultivable land to continue, we would have only our kitchen gardens left as agricultural land in a space of not more than 30 years from now. Is this part of a MID concept of a very sophisticated type going above our heads? Is this meant to increase our dependency on food imports? Was this shift of agricultural land to non-agriculture calculated to make us pay for our recurring excess imports of goods and services, as seen in our growing current account deficits, by becoming sellers of real estates to foreigners year-in-year-out? Sugar production has come down from 650-700,000 tonnes a year to 400-420,000 tonnes now; from being a sugar exporter, we have been importing 40-50,000 tonnes of sugar per annum. At this rate, we cannot be sending our sugar to China, India or Africa since our production is barely sufficient to meet our European commitments.

As in the case above, various uncertainties have crept in regarding the direction taken even on the internal market in Mauritius. The provision of international financial services and, more recently, that of BPO services, have sustained our economy because these sectors were relatively unaffected by the international recession. Yet, it was a BPO unit that received the largest bail-out from the so-called stimulus package when other units in the sector were in need of no financial assistance. It is entrepreneurs from the West, not the East, who have kept alive the growth and development of the BPO sector although it was India that brought the seed capital for setting up the infrastructure.

Consider another trouble spot. Some Indian bureaucrats have been adding to the usual uncertainties they breathe down the necks of the international markets from time to time by bringing into question the enduring character of our double tax avoidance treaty with the country. By so doing, they are not only putting at serious risk the credibility of India as a recipient of FDI but they are busy undermining a partner like Mauritius which has worked hard to bring India into the focus of international investors when the going was quite poor for India. Rumours spreading out last week in India about a possible abrogation of the treaty sent tremors on Indian stock exchanges so that the Indian Finance Minister had to step in to calm down the fever of perpetuating uncertainty on the treaty’s fate. This episode shows that economic partners to the East are not cast in iron.

But things are not always easy with economic partners from the west as well. Economic reengineering is a difficult exercise whichever way one looks at it. Consider our telecommunications sector. Users of mobile phones and internet services have been pouring billions of rupees of profits each year for the past several years into the pockets of foreign investors involved in this sector. Bandwidth strength still leaves a lot to be desired in the meantime. Substandard equipment imported by the companies has failed serially each time one of our relatively mild thunderstorms has hit. The cost of this type of equipment is dumped down as expenses in the companies’ accounts so that the substandard equipment is disposed of while the MRA stands deprived. The dominant duopoly in the sector managed to delay lowering of the prohibitive cost of the internet access announced by the authorities over several months after it was announced, recouping the enormous rents in the meantime. They are now delaying the reduction of the exaggerated costs they invoice to users of telephony for using each other’s networks.

The point is that you can diversify and leap on to new markets from a domestic market structure which is strong, highly competitive and broad-based. If you have teamed up with difficult international partners, you will not ever be able to leap across the ocean which separates us from the external opportunities to diversify products and markets. The above gives but a sample of the numerous weaknesses with which our economic system has become fraught. We will have to overcome them in the first place if, as it was stated by Prof Meghnad Desai in his interview with MT last week, we get to be so busy capturing markets that we “will never be able to relax”.

* Published in print edition on 24 June 2011