The Importance of Sound Economic Decisions

By Murli Dhar

The economy of Mauritius is not growing at the brisk pace we would have wished for. The reason for this is simple: we depend on demand from other economies for our goods and services. The more those economies grow, the bigger the demand for our goods and services from external markets. The income so generated feeds into the local economy and helps create demand for local goods and services by a mechanism called the “multiplier effect”. Conversely, the less the external markets grow, the lower their demand for what we produce. This much is a given for us. The world economy is a much interconnected thing. What is true for Mauritius is equally true for other bigger exporting countries: if there is a slow pace of growth in their own export markets, the pace of their economic activity comes down. This is what has been happening in varying degrees in the leading economies of the world ever since the economic downturn came in 2008. Despite a slowdown of economic activity in our export markets, however, we have been doing relatively well: an annual rate of growth of GDP of 4 to 4.5% is not a negligible factor in the circumstances, despite the lop-sidedness of income generation in the economy. This is the rate of growth we have been recording the past few years despite all the ups and downs that have been hitting our external markets.

We should therefore put all our hopes that the external markets on which we depend pull themselves out of the zone of turbulence in which they are finding themselves as quickly as possible. They can do so if they take the correct economic decisions conducive to their future growth. This means that if the economy is threatening to shrink, their policy-makers should adopt measures which will stimulate demand. Normally in such circumstances, both fiscal relief and monetary easing combine to get demand back on track.

What do we see happening in reality? Faced with the economic backlash of the post financial crisis of 2007 and the recession that followed despite fiscal stimuli having been injected, the American administration proposed as a measure of recuperation from the distress that was taking hold again on the economic front, some fiscal relaxation in the near term if only to get the jobs going even if that meant tightening the belt when economic conditions would improve later. On its side, the monetary authority, notably the Federal Reserve of the US, has not only kept the key interest rate in the economy at near zero levels over a prolonged period now to stimulate pick-up of credit demand. It has also injected big swathes of liquidity into the system by buying up bonds in large quantities. We saw the shameful wrangling, surrounding a cloud of trivial political brinkmanship, that followed the fiscal proposal in the course of which one rating agency downgraded US debt from its longstanding AAA status. In moments of great economic uncertainty characterised by a depressed state of internal demand, US legislators thus managed to distil a dose of greater pessimism on the possible uptake of the US economy.

In this multipolar world in which Europe depends for its economic growth on America just as well as America depends on Europe, Europeans did not fare better in terms of economic policy-making. When the crunch of the disparities on the size of the public debt and fiscal policies of individual European governments came into the limelight, European governments started looking at the situation from their individual vantage points, casting serious doubt on the viability of the weak foundation of the European common currency, the Euro. They thought it fit to deal in priority with the profligacy individual governments had been guilty of in the past rather than cobbling together a credible plan to salvage confidence in the economies of the Euro zone altogether. Austerity measures were adopted not only by the governments but also by the European Central Bank which tightened the interest rate to avert inflationary threats. These are surely not good signs for getting out of the depressed demand conditions; they are recipes for stifling any emergent demand that could have been making way despite the economic turmoil.

We must acknowledge that so long as external economies on which we in Mauritius depend do not put themselves back into good shape, we are unlikely to show up a brilliant rate of economic growth of our own in our relative isolation. Our internal market is not sustaining enough for us to stroll ahead irrespective of what is going on in the wider world. Now, for those economies to resume growth, their decision-makers should be apt to take the right decisions to stimulate domestic demand; if they dither in this respect, we fall along with them; if they learn lessons from past economic downturns of the sort and dare adopt policies which make economic (though not necessarily, political) sense, we can all get out of the bush. Mauritius cannot on its own navigate out of the dire conditions prevailing in the world economy; the leading countries have to make an effort to set the stage going again by introducing short term measures to pull up demand without overlooking the need to do away with the global economic gloom in a parallel or in a second step.

Even if the initiative for a pickup of the global economy does not rest upon us, we cannot afford to remain passive waiting for things to happen. Small economies like Mauritius have to be ready to jump up on the train when it comes near the platform at the risk of being left behind. This readiness consists of many things. We have to be cost effective in whatever we want to export. If successive compensations for inflation and insufficient catch-up with productivity enhancing investments dominate our production structure, we are unlikely to be competitive enough on global markets. If we go on producing a limited set of products and services for external markets, our skill range will not prove resilient enough to get on with changing patterns of demand on external markets. Even though the Bank of Mauritius has been doing its lot to keep inflation in the low range by not allowing the rupee to depreciate excessively as it was the case not long back, even if it is keeping monetary policy tight enough not to allow damaging inflationary expectations to set in, domestic prices have gone on increasing. The equation is breaking down somewhere.

There is even a risk of it breaking down further if we allowed ourselves to be swayed by the demands of borrowers who lobby for a lighter interest rate burden across the board on the entire stock of their existing debt at financial institutions. The lobby would have been more productive if the Bank of Mauritius had been urged to ensure instead that credit at the margin is directed to those enterprises that can employ more and expand their businesses by borrowing at lower supportive development rates. This would have had the merit of upholding a new generation of more efficient enterprises while enhancing at the same time the scope of our economic diversification. Such a targeted selective favourable interest rate policy might also have been directed to innovating lines of production past borrowers would be setting up newly if only to help rejuvenate our economic apparatus. One has to be wary when wholesale demands for changing policy to ease debt servicing pressures of economic dinosaurs are amalgamated in one common deal instead of pursuing a directed policy for pushing up start-ups who might take over eventually from those falling out of international competition.

It is seen from the enormous profits certain financial institutions have been making over an uninterrupted string of years and from those equally disproportionate of communications companies, that productive investment activities have at best taken second or even third positions. Governments should have encouraged the flow of surpluses not so much to those service providers but rather to domestic real sector producers who might have contributed to raise private investments. Figures speak for themselves: private sector investment is estimated to increase by a mere 0.6% in 2011 whereas it grew by 0% in 2010. The question then arises: from where do you in such circumstances eke out the productivity growth that might have sustained us on competitive international markets? By asking the public sector to go on with the so-called “reforms”? Look, there is a reasonable minimum that we expect from private enterprise to overhaul this underperforming structure of production. This is not gotten by making public sector decision-makers feel guilty at our lack of success and penetration of markets; it is drawn from a dynamic private sector that does not rest on its past laurels!  

* Published in print edition on 16 September 2011