These series of articles, generating from a partnership between LSL and Rama Sithanen, are a thorough and an informed analysis of the current state of the economy. Dr Rama Sithanen, who is an economist and who was Minister of Finance between 1991 and 1995 and from 2005 to 2010, believes that there should be only two objectives for 2016-17: first to reinvigorate investment so as to reignite the engines of strong, sustained and balanced growth and second, to introduce measures for growth to be inclusive. He recommends a pathway of policies to escape from both low growth and rising poverty and inequality traps.

Reigniting the engines of strong and sustained growth and inclusive development (part 5)

Retooling the CSR and the NEF as instruments of poverty eradication

A vigorous and robust national empowerment programme that targets the poor to ensure that they have the opportunities to be integrated in the mainstream

Actions and programmes to eradicate poverty must focus on the most vulnerable groups such as single member, female headed and one parent households with unmarried children, families with large number of dependent kids, those with very low educational levels, the inactive cohort and the working poor. And we should also allocate resources to the most deserving to move them out of poverty. That was the genesis of the Corporate Social Responsibility (CSR)/National Empowerment Foundation (NEF) programme introduced in 2007. Over the years, it has unfortunately been stripped of its mandate and lost its essence, relevance and central purpose. It has strayed from its core aim of helping vulnerable people break away from the vicious confluence of poor educational attainments, low skills, limited employment prospects and lack of decent housing. To make matters worse, the capacity of the scheme to generate sufficient revenue to fund the various programmes and projects has been hamstrung. If we want to really alleviate poverty and be fair to our less fortunate compatriots, there is an absolute necessity to rethink the CSR/NEF strategy. The CSR/NEF should:

1. focus on poverty alleviation, empowerment and social inclusion as opposed to being all things to all people which it has turned out to be. One great lesson in development is that when resources are scarce, they should be spent on key priorities to deliver the greatest impact;
2. reverse urgently the trend where most of its resources are not deployed to fight poverty;
3. restrict its core interventions and funding to a narrow set of  5 or 6 key areas that will support the poor and facilitate their integration in the socio-economic mainstream.

Focus is key to success

The CSR/NEF must proactively complement the poverty reduction strategy of the government by concentrating its activities and interventions in a few critical areas that will make a huge difference. Investing resources on these areas is better that the current policy of spreading them thin and wide with hardly any perceptible developmental outcome. The CSR/NEF should focus on:

1. education, training, capacity building, skills upgrading and development so as to reduce the importance of socio-economic background in life outcomes;
2. investment in social housing and related basic infrastructure and amenities for the poor;
3. employment access and job opportunities;
4. self-employment and the informal sector which have the potential to create both jobs and wealth. This includes the capacity to help vulnerable youth escape poverty through various pathways including music, sports, arts and culture;
5. entrepreneurship development with an emphasis on small and micro businesses, access to micro-credit facilities for starting businesses, including home-based ones;
6. women and youth empowerment as poverty has both a feminised and young face.

Reintroduce guidelines and set aside the ill-informed measures of last year

1. The CSR/NEF should reintroduce clear guidelines on areas of intervention with qualitative and quantitative outputs and outcomes. This should be based on a good working partnership among policy makers, the private sector and NGOs. The purpose of the guidelines is to ensure focus and results so that resources go to poverty reduction and certainly not stifle initiatives and innovation or unnecessarily bureaucratise the system.
2. The Minister must revisit the two ill-informed measures introduced last year. Neither the privatisation of the CSR fund allowing corporates to do whatever they want nor the policy of sponsorship(parrainage) is the right approach to curb poverty, even if the latter can be helpful in specific cases. Government cannot devolve its main responsibilities to the private sector in this fight. It must ensure that the CSR/NEF has adequate funding, good physical infrastructure, strong institutional capacities, sound policy frameworks, good governance and monitoring to deliver results. It also has a duty to address market, institutional and policy failures that penalise the poor.
3. While the promoters of the Love Bridge project must be commended, it is plain that it cannot be a substitute for an overarching strategy to reduce poverty. Nor can it be an excuse for Government to play a backseat role. It is not obvious that the model can be successfully replicated at the national level. We should also be wary of replacing state bureaucrats by private ones at the expense of investment in education and training, social housing and empowerment. Resources must primarily be spent on the hardware that will directly benefit the poor.
4. While the private sector and NGOs have a key role to play in the fight against poverty, the State cannot renege its overriding role by outsourcing its functions to third parties. Of course, dialogue, consultation, alignment and ownership are important but the primary responsibility to accomplish this task rests with the State and it must unequivocally assume it and be in the driver’s seat. We have to make the difference between policy conceptualisation, design, articulation and evaluation and the implementation of the strategy.

Coordination, alignment and resources

1. There must be greater partnership, cooperation and cohesion among the different stakeholders to have a better chance of winning the battle of poverty reduction. We have a dysfunctional mismatch between resources and needs. While many good projects cannot be funded, there are monies that are returned to the MRA because they have been left unspent.
2. We must also have better coordination among the plethora of Ministries and institutions working on poverty alleviation. The approach is fragmented, with too many entities and agencies that deal with the problem, thus making coordination difficult. We have had almost 10 years of experience and we should draw the necessary lessons and find a better solution to ensure coordination and cohesion to avoid overlaps, gaps and duplications.
3. While dedication is important, there is need to professionalise the work methods of social workers and NGOs so that they fully understand the characteristics and dynamics of poverty and are in a better position to help the poor emerge out of the spiral of poverty. They should also improve their management skills through training and mentoring.
4. We also need many more resources to accomplish the task of poverty reduction. The basis for charging the CSR levy should go back to where it was initially. Minister Pravind Jugnauth was right in 2011 to have kept the contribution on book profit as opposed to chargeable income. It was subsequently modified. The programme has lost a colossal sum by this change of imposition. It was intended to be a contribution and not a tax. It was part of the tax reform and the necessity for the corporate sector to redirect some of its benefits to fight poverty. Corporates that use complicated intermediary layers to control large swathes of the economy with significantly far less than even 40% of equity should not find it burdensome to make a small contribution for such a good cause. If they do not want to make the effort, they should level out the ownership structure and get rid of multi-layered ownership arrangements.

Good policies and sound institutions

Good policies and sound institutions will also help in the fight against poverty and exclusion. For instance, removing labour market imperfections and barriers to employment would enhance equality of job opportunities while a well set minimum wage will provide decent earnings to those in employment. To further support the working poor, we need to assess the costs and benefits of an earned income tax credit as it exists in some countries. Policies that foster skills acquisition, education, training and human development will make growth pro poor and more inclusive. A more judicious use of public funds will allow more scarce resources to be devoted to pro poor investment. Empowering women can be one of the most effective drivers of development and poverty reduction. We must also improve the design and implementation of strategies, policies and programmes destined for the poor.

Overcome the anti–poor bias

It is ironical that poverty and inequality persist when concern for their reduction is the declared priority of all of us. There must be a mismatch between intentions and actions somewhere. That is why politics matters a lot for poverty alleviation. We have a responsibility to move beyond the rhetoric if we want to reduce poverty and curb inequality. It is not easy to embrace effective pro-poor policies since efforts to promote reforms that benefit the poor often encounter considerable difficulties. When those who gain from the system perceive that a change in policy is likely to result in a challenge to established power relations, they have strong incentives to divert or block even the most progressive policies. We have seen it in the past in our country. Worst, even those who support the poor may oppose policies for social development because at times these entail some redistribution from richer to poorer groups. As the poor represent only around 10 % of the population, their bargaining power is limited compared to the sheer might of other components who can influence and capture policy making. We should work to change this bias to make progress on poverty eradication.

<p>&ldquo;A proper policy of national sharing is also crucial for maintaining social peace, a sine qua non condition for sustained economic progress. Therefore, greater sharing will underscore all the main policy decisions in this Budget.&rdquo; (para 3, Budget 2015-16)</p>

<p>Very nice indeed. Yet the actions did not follow. Worse, the then Minister outsourced the responsibility of Government to fight poverty to the private sector and allowed the CSR funds to be used for anything. We can only hope that it will be different this time.</p>

<p>It is encouraging that poverty reduction continues to grab the attention of all policy makers. However progress has been slow even if measures to lift our compatriots out of poverty are affordable. Around 85% of our social assistance programmes go disproportionately to the non&ndash; poor. There are also many resources intended for the poor such as the CSR that are diverted to other causes. We need to change both policies and focus to reverse the poverty and inequality trend.</p>

<p>It is imperative that the country tackles the pockets of poverty and the rising inequalities so as to avoid the emergence of two faces of Mauritius. A prosperous one which is benefiting from globalization, technological progress, market liberalisation, economies of scale, new sources of growth and land leveraging, and a depressing Mauritius of poor and vulnerable compatriots who are left behind. Bridging the gaps between these two faces in terms of education outcomes, employment prospects, housing access, income and capacity to build assets over time will be the development challenge of policy makers for the next decade.</p>

<p>I am cautiously optimistic as the scale of poverty is not high and success is well within our reach in a relatively realistic time frame if we have the political will and the determination to embrace a combination of macroeconomic, structural, social and empowerment policies to promote growth, eradicate poverty and follow up on its implementation. It is not only an ethical, social, political and economic imperative but it is also an indispensable requirement for sustainable progress. The country is better off when thousands of poor people are removed from the poverty trap and enter the mainstream.</p>

<p>Let us hope that the Budget will show the way for an alternative path and revisit the CSR/ NEF strategy so that in 10 to 15 years we can make poverty history and improve the distribution of income.</p>

Reigniting the engines of strong and sustained growth and inclusive development (PART 4)

Rising to the challenges of making poverty history in 10 to 15 years

Progress on absolute poverty but major challenges remain.

Much has been done over the years to reduce absolute poverty and improve the general well-being of the population. However, pockets of deprivation and social exclusion, relative poverty, rising income, asset and wealth inequality remain significant developmental challenges for our country. Poverty is high among the unemployed, those who are outside the labour force and the working poor in low-skilled jobs while families which have moved out of poverty remain vulnerable to falling back into the trap. Two indicators of inequality captured by the Lorenz curve and the Gini coefficient have worsened.

Also, the depth of poverty has increased and we are behind in terms of many shared-prosperity indicators. The human development index that measures life expectancy, education and GDP per capita falls on average by 15% when it is adjusted for inequality. With the body of empirical evidence available from the experience of other countries and our own track record, it has become plain that poverty and social exclusion is a complex, multifaceted and multidimensional phenomenon that can only be tackled by a set of strategies, policies and programmes tailored to different aspects of the problems within a comprehensive framework. We also have to allocate resources to accomplish that task.

The gap between the haves and the have-nots is becoming a cause for concern not only in Mauritius but in many other countries. The more so as market forces on their own seem incapable of alleviating the problems of the poor. The structural transformation of the economy is also worsening inequality as many of our compatriots cannot benefit from the dynamism of growing sectors. In spite of our good intentions and a plethora of measures, little progress has been made in the last decade to eradicate poverty while both inequality and social exclusion have risen. We must recognise this setback, review our strategy and embrace policies and programmes that will make a difference in the next 10 to 15 years. There must be both a change in strategy and less disconnect between nice rhetoric on the one hand and inadequate actions and resources on the other to really help the poor.

The need for a comprehensive approach to fight poverty

Evidence shows that to be effective poverty and inequality reduction must be an integral part of the development strategy and cannot be treated as a residual outcome of the growth equation through selective policy interventions. The poor must be integrated in the growth process as there are institutional, policy and political factors that can both cause poverty and be obstacles to its alleviation.

Winning this battle is important from an intrinsic, an instrumental and an “enlightened self-interest’’ perspective. Intrinsically, we have a moral and an ethical obligation to lift our unfortunate compatriots from the throes of poverty. Instrumentally, the economy will benefit when more people are in gainful employment and have the purchasing power to oil the engine of growth. Enlightened self-interest dictates that rising poverty and inequality are not in favour of the rich and the privileged elite as that could trigger social and political tensions with impact on the sustainability of growth. That could also affect the social cohesion of the country and make necessary reforms more difficult as they are perceived as pro rich and anti poor.

We need a faster and deeper poverty reduction strategy. It must be comprehensive in recognising the multidimensional nature of poverty, focus on outcome that will benefit the poor and based on a partnership to ensure better coordination and alignment of all partners. What is required is a combination of faster growth, investment in human development, redistributive policies and an effective empowerment programme.

A robust, sustained and broad-based growth that creates productive and decent employment opportunities

While strong and sustained growth is not enough on its own to fight poverty and inequality, it is however very important. There is a clear growth-employment-poverty nexus. Growth and structural changes that generate productive employment can decrease poverty and produce greater inclusiveness. The best example is China where rapid growth over a long period has been critical in removing close to 700 million people out of deprivation and improving their quality of life.

Growth in our country has not been sufficiently high or pro poor and this has led to a rise in both inequality and relative poverty. In the absolute approach, growth is defined as pro poor if it reduces absolute poverty while in the relative approach, growth is considered as pro poor if it lowers inequality and relative poverty. It implies that growth must benefit the poor proportionately more than the non-poor. There is thus a strong case to increase both the rate of growth and its pro poorness by generating more and better jobs for the poor and by investing in training, skill upgrading and human capital. The growth must also be broad-based to widen employment prospects.

A rise in investment in education, training and infrastructure that helps the poor

Additional investment is required in physical infrastructure and support that will contribute to socially inclusive development. A strategy that provides greater access of the poor to education, decent housing, water and sanitation, micro-credit, and markets will go a long way in broadening the circle of opportunities and help remove many from the poverty trap. Increased access to education and skills development are crucial to overcome economic and social inequality and very important to prevent the transmission of poverty across generations. They act as catalysts to improve the lives of people in a sustainable way as they positively affect areas such as health and nutrition and create other effective synergies. Equally, support for entrepreneurship is vital to encourage and enable especially young people to have their own micro enterprises. This will improve the life chances of all, irrespective of their socio-economic status.

An improvement of the social safety nets so that benefits accrue more to the poor

While economic growth is necessary, it is not sufficient to reduce poverty and inequality. Redistribution and comprehensive social policies are essential to successfully fight exclusion. We currently have a combination of many universal benefits and very few targeted programmes in our social assistance architecture. The share of universal benefits that disproportionately accrue to the non-poor and favour the well-off accounts for a significant share of close to 85% of the social welfare expenditure, thus leaving very low funding for actions to focus on the poor. As a result, the poor have to shoulder the burden of the social assistance policy as they are being sacrificed to make the benefits universal. The few programmes like social aid that have a significant impact on poverty alleviation are too few and have too little resources. The predicament is worsened by the fragmented approach adopted and the lack of coordination which affects the efficiency and the effectiveness of the poverty reduction strategy.

Targeted social assistance, cash transfers and income support work much better in curbing poverty than universal subsidies. The experience of some Latin American countries is compelling. Equally, a recent comprehensive study shows that universal benefits in Mauritius translate into only marginal improvement in poverty reduction while social aid which targets the poor has a much greater impact. If we want to effectively fight poverty we have to rebalance transfers and subsidies between universal benefits and targeted support in favour of the latter. For instance, a 50-50% allocation (current funding for targeting the poor accounts for probably not more than 10% of total resources for social assistance) with a scaling up of pro poor programmes will be extremely effective to combat poverty as poor people depend more on government social benefits than the non poor.

A review of fiscal policies to lower inequality and for greater redistribution

“It will not be enough to plan for the creation of greater national wealth. We also need to be concerned with better sharing.” (para 3, Budget 2015-16) Even with good macroeconomic performances, re- distribution policy is the key to prevent rising inequality in income and wealth. Growth usually increases the absolute incomes of the poor, but it does not always have a systematic effect on their relative shares in total income. Fiscal policy –taxes and transfers – can have a large, significant impact on lowering inequality and reducing poverty.

There is thus a strong case for policies to alter the unfair distribution of income and wealth. Especially in the light of the huge inequality that has arisen from the globalisation, liberalisation and financialization of the economy, the consequences of technological progress and the structural transformation of the country. Of course, the objective is not to retreat from globalisation and shun technological progress but rather to design the right fiscal policy mix to ensure fairness and lower inequality. It is not always easy to raise tax rates on income while transferring more resources to the poor often poses budgetary challenges. However, there is still room for raising more tax revenue by improved tax ad- ministration, by reducing tax expenditure that mainly benefits some sectors and by considering the merit of imposing taxes on some passive income that are earned principally by the well-off.

It will be difficult to sustain a fiscal model that continues to provide incentives and exemptions to selected sectors even when the headline rate is only 15 % while at the same time not broadening the base to tax other sources of income. Some sectors are not contributing in the fiscal effort proportional to the opportunities that are being unlocked by government policies. This must change to generate revenue to fight poverty and lower inequality. Alternatively, the nation must participate in the downstream developmental benefits subject to a hurdle that provides a fair return on the assets and risks taken. Especially as the leveraging of land asset will probably be the single most important driver of profit in the next two to three decades. With the right policies, measures to address poverty can be both growth-enhancing and inequality reducing

Reigniting the engines of strong and sustained growth and inclusive development

Part 3: Policies and measures to escape the middle income trap

Getting the priorities right

Our country is finding it hard to achieve a high growth momentum with adverse implications on job creation and the material improvement in the quality of life of our compatriots. Also the resilience that we have historically displayed against external disturbances is wearing out. Trade preferences also are being eroded in many sectors. We have therefore no choice than to restructure, to rebalance and to reform to address structural weaknesses and binding constraints that continue to limit the country’s potential for growth, face global changes and new challenges which, left unattended, will threaten our future wealth and prosperity. The factors that differentiate countries that have made the transition to high income status from others are mostly linked to the quality of economic policies.

Sectorally, we must focus on a robust, high-tech manufacturing sector, a competitive export-oriented cluster driven by good inflows of foreign direct investment, a dynamic SME engine, a revitalised domestic-oriented industry with a good footprint in regional markets, an agro-based food security niche and a high-end diversified services platform. Our resources must be directed towards the productive and economic sectors that will leverage existing, emerging and new opportunities. Instead of an overemphasis and overreliance on rent-seeking activities and unproductive or lowly productive investment in real estate and immovable property.

We are also struggling to identify new pillars that will contribute significantly to growth. We are probably running after too many ‘hubs’. From aviation to marine, from petroleum to regional port, from medical to education, from ocean to green, from Smart to Heritage cities and from film to Africa hubs. Some of these ‘hubs’ will likely remain pipedreams while others will take a very long time to crystallise.

We must prioritise as we do not have the financial, human, technical and institutional capacity to work and deliver on all of them, focus is key for success. Some, such as the ocean economy, the regional port, the green economy and making of Mauritius a business and finance hub for Africa, hold prospects to deliver good dividends with the right policies and measures. We should concentrate on what is feasible, practical and in sectors where we could develop competitive advantages, add value, create jobs and earn foreign currencies. However, this should not be done at the expense of the traditional pillars of the economy.

The reform agenda as a base for structural transformation and a high income economy

We need a new generation of deep-rooted and coherent structural reforms that match the seriousness of the challenges besetting the country to reverse the declining trends in competitiveness, productivity and investment. We have to overcome policy paralysis. It is impossible to remain competitive in global and regional markets without massive investments to improve the quality of human resources and the economy’s capacity to innovate. With the ageing population, economic growth will be increasingly spurred by expanding productivity.

In addition to investment in quality physical infrastructure in transport, energy, water and sanitation, port and ICT to remove supply side bottlenecks and a clear, predictable and transparent policy environment, we need major reforms that will

i) raise labour, capital and total factor productivity and sharpen global competitiveness;
ii) increase the labour force participation rate and facilitate the transfer of resources from low to high productivity sectors;
iii) nurture innovation, research and development and encourage industrial upgrading and build STEM (science, technology, engineering, mathematics) competence;
iv) enhance technical and economic efficiency and use scarce resources more effectively ;
v) make education, training and skills fit for the economy by resolving the mismatch in the labour market;
vi) improve the ease of doing business and the investment climate, and reduce inefficient government bureaucracy;
vii) attract foreign skills and talent, technology and capital to accelerate the transition to a high income economy;
viii) reengineer the public sector, parastatals and state-owned enterprises so as to lower their inefficiencies and strengthen their capacity to design, implement and monitor major public infrastructure projects in a timely and a cost efficient manner;
ix) ensure the sustainability and equity of the pension systems;
x) revisit the welfare system to make it fairer to the poor; Some of these are very tough nuts to crack. It would be most unfair to expect the Minister to bite all these bullets at one go as there are political economy implications and even indigestions. However he must establish a time frame to tackle them as they are key to the future prosperity of our country and he should start by addressing some of them as they will pay dividends in the medium to long term. Doing nothing will simply kick the can down the road.

What mix of budgetary, fiscal, monetary and exchange rate policies ?

The Minister faces some tough choices between recurrent and capital spending and among competing demands for infrastructure, education, human capital financing and social expenditures in a context of spiralling public debt. While being responsible fiscally, he must find space to invest in key public infrastructure that is vital to unlock future growth. If he wants to succeed, he has no choice than to both rebalance and contain Government spending, curtail waste, review the worth of some expenditures, raise the efficiency of public entities and defer projects whose contribution to the economic transformation is low.

Government has probably been too generous on the fiscal side with many new tax concessions, allowances and deductions even when the headline tax rate is low at 15 %. There is therefore room for lowering tax expenditures and some space for better tax administration. The Minister must protect the fiscal base as the share of tax revenue to GDP is low for an upper middle income country. He will need the money to invest in the future. Especially as it is always politically tricky to engage in a divestiture strategy even if the proceeds could be used for debt reduction and infrastructure investment.

It appears the currency is already adjusting to mitigate the aftershocks of Brexit. There will be calls from the export sector for the rupee to depreciate. While there is some space for monetary accommodation because of low inflation, the Minister must address the declining savings rate while we are still struggling with the monetary transmission mechanism in a context of excess liquidity in the money market. The gap between the Repo rate and other interest rates is such that monetary policy signals may not yield the expected results.

Taxation, balanced growth and the allocation of resources among competing ends

On the revenue side, almost everybody will ask for tax concessions and rebates, for tax niches and tax elimination even if there is very little fiscal buoyancy in the absence of the growth dividends. The Minister must hold his ground. On the spending side, there will be incalculable requests to grant or raise subsidies and to increase employee and social expenditures. While incentives are clearly important, the Minister must not send the wrong signals to operators and investors in their behaviour as there are significant risks of affecting the fiscal base, distorting allocative efficiency and the fairness of the tax system. There is always a trade-off between high level of taxation and generous allowances, deductions and investment niches. However, even with a low tax rate of 15 %, there has been a tendency to grant additional deductions and allowances and even total tax exemptions to some sectors.

Worst, the fiscal regime has been hugely twisted against the productive sectors in favour of large-scale real estate and immovable property development with dire implications on allocative efficiency. Promoters of such projects are exempted from almost all taxes. They do not pay corporate tax at all for a long time, are totally exempt from land conversion, land transfer and morcellement taxes and registration duties. They also benefit from no VAT and no import duties on all capital inputs and do not pay any dividend tax on profit distribution and there is no capital gains tax. There is also no tax on other passive income.

As a result, it is expected that most FDI and a significant share of gross domestic fixed capital formation will go into real estate and property development at the expense of new investment in manufacturing, high precision and light engineering, export, agro-processing, aquaculture, logistics, life sciences, financial services and other productive sectors of the economy. Why should investors take more risks in productive activities when the returns are significantly higher in land development and related rent- seeking activities? Even companies engaged in the rental and management of large immovable property are now exempted from corporate taxes, while the land transfer tax and the registration duty are avoided simply on the transfer of the land into a special purpose vehicle. Many are being set up for that very purpose.

The predicament is already alarming as illustrated in the table below. The share of FDI in real estate has increased from 40% in 2011 to a staggering 84% in 2015 while there is almost no FDI in the productive sectors of agriculture, manufacturing, ICT and financial and professional services. The same pattern is emerging in the first quarter of 2016. The fiscal incentive framework is probably starting to crowd out the vital sectors that represent the future prosperity and the job reservoir of our country.

Fiscal policy is about both carrot and stick. Unless there are fiscal reforms and a new incentive framework to support the productive sectors and to check the weight of unproductive investment, growth will be both low and uneven while job creation will be marginal and of poor quality. We must encourage productive investment and new growth drivers in the high end of the supply and the revenue chains in both goods and services. This is the only way to raise the share of manufacturing, export and high value added services to GDP.

Concluding note on reigniting growth

The macro economic landscape clearly indicates that we are deep in the middle income trap with a slowdown in economic growth, declining investment and savings, lower productivity, falling manufacturing and export and insufficient job creation. In addition to a new mix of budgetary, fiscal, monetary and exchange rate policies, a second wave of structural reforms combined with consolidation of our achievements is needed for the country to escape the low growth trap and ensure balanced, sustainable and shared growth for the years to come.

Sizeable investment in quality physical infrastructure and human capital, a dynamic and competitive export industry, a sound manufacturing cluster, a vibrant SME sector, a skill, innovative and knowledge-intensive services platform, and commitment to sound economic management will be key drivers of growth and inclusion.

Will the Minister start sowing the seeds of future growth that is balanced and of shared prosperity in the next Budget? While he is expected to dispense some goodies right, left and centre as part of the political economy game, let us hope that he will deliver a transformative budget that ushers in a new paradigm for the greater good of the country. As leader of the most important political party in Government and as Minister of Finance, he seems to have both the political and the economic leverage to do it. The jury is out until 29th July.

Reigniting the engines of strong and sustained growth and inclusive development

Part 2: Missed targets, macroeconomic imbalances and sectoral challenges

Many key economic targets so far missed, some very widely

The Minister must be cautious in his forecasts if he does not want to become the laughing stock as was the case with his predecessor. Most of the quantitative macroeconomic predictions contained in either the government programme, the Budget or the Economic Vision Statement are behind schedule and some by a significant margin:

1. the promise of a consistent and sustained 5.5% GDP growth is unlikely to materialise in the near term; all experts predict at best a 4% annual growth if some reforms are implemented. In the absence of structural adjustments, we will have to settle for around 3.5%;
2. the creation of 20,000 to 25,000 net jobs per annum is impossible. The increase in the number of people employed over the 15-year period to 2015 is not more, on average, than 5,000 per year with a forecast of only 2,200 new net jobs for 2016. The recipe is cruelly simple. No job creation without high growth and no high growth without high investment;
3. it would take a miracle to attain an income per capita of US $ 13,500 in 2018. In fact, the income per capita in US $ fell by 8.5% in 2015 and the 2016 figure is very likely to be below the  US $ 10,020 of 2014. At this rate, the 2018 income per capita may not be materially higher than that of 2014. That hope will further dissipate if the rupee depreciates as is likely to be the case in the wake of Brexit;
4. the expectation of investment as a share of GDP to be higher than 25% in 2017 is very ambitious. The ratio has dropped over the years from a high level of 30% of GDP to its lowest level at 17.8% in 2015 and 2016 will not be  materially different;
5. the target of an FDI of  Rs 28 billion per year is extremely hard to attain. We have struggled to reach Rs 9.6 billion in 2015 and the outlook for 2016 is  not promising;
6. the share of manufacturing to GDP will not reach 25% in 2018. It is the reverse that is happening. The importance of manufacturing has further declined to reach an all time low of 17% of GDP in 2015. It will likely continue its downward trend in 2016;
7. the Minister stated that it will be a herculean task for public debt to reach the statutory target of 50% of GDP in 2018. In fact, it will be impossible. If the current trend is maintained with the erosion of the fiscal base and the surge in recurrent expenditure coupled with the necessity to invest in infrastructure and the depreciation of the rupee, public debt on an IMF basis would be closer to 70% of GDP by  that time.

The seven macro imbalances in the room

The three main drivers of growth – consumption, investment and exports – are showing varying levels of weaknesses. Consumption which was growing at around 5% annually in the mid 2000’s has moderated to less than 3%. Investment as a share of GDP was at an all time low at 17.8% of GDP in 2015, while export-oriented industries are posting  lacklustre expansion.

1. Economic growth is simply too low at around 3.5%. It has been below 4% for six consecutive years. The real challenge is to lift the growth from its subdued 3.1% in 2015 to a sustained 5%. Without bold structural reforms that remove binding constraints, lift productivity, sharpen competitiveness and the right mix of budgetary, fiscal, monetary and exchange rate policies, it will be difficult to reignite the engines of growth.
2. No country can generate high growth without high investment levels. Investment is currently very insufficient to generate higher growth. It has witnessed five years of contraction since 2011 and has plummeted to 17.8% of GDP in 2015. Worse, the share of private sector investment has also declined to a level never seen before while FDI has also tanked. Even portfolio investment has gone south. To make matters worse, the quality of investment is poor with real estate and property development representing a very significant share compared to productive investment that is vital to raise growth and create new jobs. We need a minimum of 25% of good investment as a share of GDP to achieve a sustained 5% growth and we are very far from that threshold.
3. Export of goods and services, which is another driver of growth, is weak. The expansion of export-oriented industries, more particularly manufacturing and textiles/clothing, is inadequate to generate higher growth. Manufacturing grew by only 0.2% in 2015 while textiles/clothing declined by 2.9% and export oriented industries dropped by 1.4%. It is impossible under these circumstances for manufacturing to represent 25% of GDP in 2018. Unless there is a reversal in the fortunes of the export sector, it is unlikely that we can reach a 5% growth per year.
4. Savings is at an all time low at 11% of GDP in 2015 and it means that our resource mobilisation capacity to fund our development is severely impaired. It must be raised to a much higher level as part of the structural transformation. Nevertheless, some are advocating a higher consumption growth to give a fillip to growth at the expense  of savings.
5. Unemployment has risen to almost 8% with significantly higher joblessness among youth, females and graduates. As a result of tepid growth, the economy is generating around 5,000 net jobs per annum, very short of the objective of 20,000 to 25,000 set by Government in its economic vision. This is not enough to absorb the backlog of unemployed people and the newcomers on the labour market. If we include the army of underemployed people, the predicament worsens.
6. Had it not been for the falling prices of oil, gas, coal, of some commodities and food products and lower shipping costs, the current account deficit would have been staggering. And without the contribution of global business through investment income and net financial flows, the balance of payments would
7. have been in the red and the reserves of the country much lower. The viable way to reverse this trend is an expansion in trade in goods and services. As well stated by both the IMF and Moody’s, high growth will be challenging for global business after the change in the tax treaty with India
8. Public debt has risen quite sharply to reach 65.2% of GDP. Worse, the quality of the debt is bad as the increase is mainly attributable to substantial growth in recurrent expenditure and the fallout of the BAI saga. As the treatment appears to have been worse than the disease itself, we have probably not touched the bottom of the BAI pit yet. More public funds may be required to tie the loose ends. The Budget deficit and the borrowing requirements will also affect the pace of the public debt increase.

The eight sectoral challenges

The macroeconomic landscape mirrors what is happening at the sectoral level. The Minister has rightly stated that three of our traditional sectors face headwinds. In fact we have challenges in probably all clusters, save tourism.

First, manufacturing is on an underperforming trend. It has grown by lower than 1% thus leading to a drastic fall in its share to GDP. Its contribution to output, jobs, investment and exports has steadily gone down.

Second, total exports for the first quarter of 2016 has fallen by 5.9% while the exports of Export-Oriented Enterprises have declined by 4.8% compared to 2015. Textile and clothing are also facing challenges and have no choice than to move into the high end of the value chain. There is also a need for technology upgrading and for more diversified and sophisticated export and manufacturing.

Third, both sugar and non-sugar agriculture are struggling through a combination of external factors with the impending end of the quota and the inability to build a resilient agro-based industry to attain a reasonable level of food security and some exports. We must arrest the abandonment of land, improve the yield of small planters, promote the adoption of technology and encourage food security, livestock, fisheries and aquaculture.

Fourth, financial services face the challenges to adapt after the new treaty with both India and South Africa and the risks of contagion from other treaty partners. We should create a new ecosystem to enhance product offering, quicken market diversification and promote higher valueadded services. However, competition is very hot and we have a huge skills gap in the high end space.

Fifth, the ICT sector which used to post an average 10% growth has moderated to around 6 %. More competitive bandwidth costs, better connectivity, skills improvement and openness to foreign talents and technology are key for the industry to adapt, remain competitive and make the transition to the next level with more higher value-added services. We also have to bridge the digital divide and invest in innovation and R & D in that sector.

Sixth, the domestic-oriented industry, which contributes to the growth and resilience of the manufacturing sector, continues to face the effects of competition from abroad and falling tariffs. Not only must they be supported against dumping practices, but they should also be encouraged to penetrate the regional market where there are good prospects. The Minister has rightly abandoned his duty-free island scheme. The arguments he has given to justify his change of heart are the right ones.

Seventh, SME constitute a key pillar of our economic landscape in terms of contribution to GDP, employment and widening the circle of opportunities. Their challenges have not changed in spite of good intention by all policy makers over the years. To survive and progress, they need support in access to markets and finance, to acquire better technology and to leverage the benefits of clustering.

Eighth, construction has been severely hit with hardly any new major projects in the public and the private sectors. It has contracted since 2011 and declined by another 4.3% in 2015. On a cumulative basis it is down by around 25% compared to 2010.

Undoubtedly tourism is the star performer following the opening of the air access, stronger marketing, new destinations served by Air Mauritius, market diversification and a good strategy to even out seasonality. There is a need however to sustain that growth as there could be an element of substitution as we may have benefitted from the instability in some regions. While we have grown by 8.5% in 2015, Seychelles and Sri Lanka, two direct competitors, posted growth rates of 18.7% and 17.8% respectively. The industry is still too reliant on Europe where growth is very weak.

Reigniting the engines of strong and sustained growth and inclusive development 

Part 1 : Setting the context and restoring trust and confidence

Will the context help the text ?

 Pravind Jugnauth returns to the Finance Ministry with considerable hopes and expectations. Context and circumstances seem to be on his side. First, everybody welcomes a full time dedicated Minister at the helm of such a key portfolio at a critical economic crossroad for our country. Second, it is a good sign that the economy is leaving the backburner to occupy the centre stage. Third, it is a relief that we are looking ahead instead of being compulsively glued to the rear view mirror. Fourth, his measured and unflappable character could be an asset in articulating a new economic paradigm which is indispensable for future growth and prosperity. Fifth, many believe he will rely more on hard economic facts, financial figures, export and manufacturing trends and the rigour and cohesiveness of policies to anchor his strategy. Sixth, he comes across as a steadier pair of hands with maturity, experience and judgement than could have been the case with another appointment. Seventh, some expect the Minister as leader of the most important party in office to bring discipline, cohesion, coherence, predictability and a sense of direction and purpose to Government economic actions. Eighth, he has a personal interest to succeed in order to pave the way for the higher office he aspires to; otherwise the odds would be very long as the Ministry would have been a poisoned chalice. His room for manoeuvering is therefore considerable. The key question is how he will leverage it to do what needs to be accomplished for the greater good of the country.

He faces tough challenges but has workable fiscal and other policy spaces.

There are formidable cyclical and structural challenges buffeting the economy. These range from the parlous state of most macroeconomic fundamentals to dealing with the adverse consequences of Brexit on tourism, trade in goods and FDI, from the toxic combination of high youth, female and graduate unemployment, widening income inequality and rising poverty to the volatility, uncertainty and unpredictability of global growth and trade. However this is balanced by some silver lining to the cloud with few favourable winds in the sail. The grant of USD 350 M from India will support the presently asphyxiated capital budget, low interest rates will alleviate debt servicing, muted inflation provides for monetary and exchange rate easing while the significant savings from STC and CEB following collapsing prices of petroleum products, coal and gas and declining shipping costs are a welcome dividend. The very low spending on capital projects and the significant amount in the various extra-budgetary funds should help the Minister to be audacious in his choices while being fiscally responsible. He can further augment this fiscal space if he rebalances public spending towards productive investment, curtails wasteful expenditures, revisits some of the subsidies and grants for both efficiency and equity rea- sons and improve the capability of the public sector to execute large projects in a timely and cost effective manner. And if he steers the economy with bold, decisive, innovative measures and structural reforms and embraces a judicious mix of budgetary, fiscal, monetary and exchange rate policies, he can turn the corner in two years with better economic performance that will mechanically unlock the virtuous circle of the high growth dividends leading to both lower fiscal deficit and public debt.

Political leader or economic steward or how much of each ?

Paragraph 15 of the 2015-16 budget was very clear and loud in what needs to be undertaken.

‘A no policy-change and a business-as-usual approach will condemn the country to low, anaemic growth, high unemployment and a bleak future’.

The analysis was spot on. But unfortunately the actions and the measures needed did not follow, except in rhetorical rhapsodies. We know the results all too well. To be fair, the Minister probably owes his job partly because of the failure of the previous holder to deliver. He will be judged on his economic stewardship, leadership, vision and audacity. Will he act as leader of a political party delivering a business-as-usual budget with inconsequential policy changes that run the risks of being engulfed in ‘confetti economics’ that please some stakeholders for few days but leave the structural weaknesses unattended as was manifestly the case in the last budget ? Or will he rise to the occasion and be economically daring and bold and financially responsible to confront many of our structural deficiencies head on in the hope that he will reap the political dividends of sound economic management two years down the line with robust and balanced growth, substantial job creation, higher living standard and shared prosperity ? Or will he settle for an acceptable compromise between short term and contextual measures to weather the cyclical storm and a dose of structural reforms to transform the economy and deliver on future prosperity ? The overriding question is where he will be on the continuum with ‘scratching wide’ to satisfy some for a short while at one end and ‘digging deep’ to build the base of sustainable development at the other. Will there be continuity in change or change in continuity ? Will he overpromise with his forecasts and face the cruel risks of underdelivery as has been the case up to now or will he be reasonable and realistic ?

One thing is absolutely certain. There is no magical wand and no economic miracle. Policies, good execution, disciplined stewardship, coherence and hard work are crucial. Also there will be no quick fix to the challenges facing the economy and in the absence of a good mix of policies and measures to address macroeconomic imbalances, sectoral weaknesses, eroding competitiveness, rising inequalities and emerging external challenges, there will be no 5 % annual growth, no significant job creation, no GDP per capita of USD 13,500 in 2018 and no shared prosperity. We will reap tomorrow what we sow today.

Tackling the intangibles that are key to economic success.

The Minister must restore trust and confidence,bring back the feel good factor after 18 months of lack of clarity in the design and conduct of economic policies and energise the nation. He should ensure that Government stops shooting itself in the foot. There must be clarity, certainty, predictability and stability of policies. And political cohesion and policy coherence which have been sorely lacking. It is high time to acknowledge that strategy and policies matter and are much more important than projects. We must put an end to the confusion between strategy, policies, programmes and projects. A coherent strategy must be embedded on clear macro-economic policies that give direction and milestones to all participants. This is much more important that an unbecoming emphasis and rush on projects, some of which will probably never materialise or will not add much to GDP. We require a framework of interrelated policy fundamentals each of which embraces a number of important actions which are key to the realisation of the economic strategy. For instance, should we spread our limited resources – financial,human,technical and institutionaal – too thinly on too many projects and hubs or should we focus on few strategic priorities and do our best to implement them.

Restoring trust in forecasts and figures

While some forecasts are bound to undershoot as a result of unforeseen circumstances, it is a serious concern when there is a distinct impression that some figures and predictions are being presented only to grab the headlines for one day. The uninformed quantitative objectives spelt out quickly become empty promises that fail to pass the credibility test. For instance, how does one explain that Statistics Mauritius has changed the growth forecasts for 2015 four times in as many quarters, as illustrated in the table.

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Changes in growth forecast

It started with a forecast of 4.1 % in March 2015. At a time when all dependable institutions such as the World Bank, the IMF, Moody’s and the AfDB were announcing a lower growth.Then, in the four subsequent issues of the national accounts, it has systematically lowered the prediction to finally reach the 3.1 % growth in its March 2016 edition. There is no need to add salt to the wounds with the forecasts of a growth rate of 5.3 % by the former Minister of Finance! There is a similar pattern while estimating investment as a share of GDP and the trend in the construction sector. Exaggerated figures are announced to hit the front pages and then they are downgraded every three months.

There is also a surreal twist of simple facts which does not inspire trust. The latest statistics for the first quarter of 2016 on labour force, employment and unemployment is a case in point. Both the Minister of Finance and that of Labour have stated that they are proud that unemployment has come down to 7.6 % and many jobs created. A very simple analysis of the official statistics shows a completely different picture.

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Decline  in unemployment

a)the number of people in employment over a one year period between the first quarter of 2015 and that of 2016 has in fact declined from 529,100 to 528,200. This is light years from the projection of 20,000 to 25,000 net job creation per year announced in both the budget and the economic agenda of Government last year;

b)the only reason why unemployment has come down both in absolute and in relative terms is the removal or withdrawal of many people from the labour force. It has shrunk by 7,700 over a one year period and by a significant 20,500 over a period of three months. In both cases, the ejection from the labour force is higher than the fall in unemployment;

c)in the same document, Statistics Mauritius predicts that only 2,200 net jobs will be created in 2016, very far from the initial target announced;

d) as people will continue to be removed from the labour force, the unemployment rate is expected to fall from 7.9 % in 2015 to 7.7 % in 2016 . This is clearly not an achievement. We need significant job creation with lower unemployment and not declining joblessness through an exit of people from the labour force.

This is in a context where one of the key reforms required for the structural transformation of the country is a rise in the participation rate of the population, especially that of the female labour force in order to cope with the ageing population. This is essential to successfully run the next lap of development. Yet we are doing exactly the contrary.