It is as hard right now to predict when and by which sparking event will the current economic downturn be reversed. Someone may pull the wrong trigger, such as reversing free trade, which would have second round unforeseeable effects, deepening the crisis. I have the impression that while you can predict microeconomic developments that are closely knit with predictable greater accuracy, global events like what is embracing the world today can at best be predicted only tentatively as you cannot know which economic engineering could intervene later to close the gap or widen it further. 

You sense something is going to be wrong or right ceteris paribus, but you cannot put a number or precise date to it. If your assumptions behind that sensibility are seriously affected on the way by the turn of events you could not have reasonably foreseen, you would have to take back what you said. 

I believe Professor James Meade made the right real prediction on the negative economic impact of a galloping demography in Mauritius, but he did not reckon that the country will enjoy more degrees of freedom by opening up with a (probably unthinkable at the time) diversified economic base as trade would become more accommodating under the Lomé Convention which came much after his prediction. But making that prediction, right or wrong, is worth the while. 

Bank of Mauritius

Mauritius is not an economy with a huge self-contained internal market in which the authorities can compensate for faltering economic growth by simply stimulating internal demand. It is an economy that grows or contracts depending on the strength or weakness of demand for its exports of goods and services in specific foreign markets. 

Current economic forecasts indicate that those foreign markets are not likely to increase their demand from countries like Mauritius so soon. Even China is being buffeted by this factor. This clearly means that we are paying a heavy price to the extent we are (have been) unable so far to broaden our access to other external markets beyond our traditional external markets. 

This lack of pragmatic diversification is showing up in the prevailing poor countries showing on our traditional external markets. For all the talk we hear, we appear to be frozen with regard to such efforts, be it for tourism, textiles, financial services or attracting compensating capital investments. 

We have been treading on this razor’s edge for a number of years. One would recall the warnings we received in 2002-2003 when our textile exports started shrinking due to such external factors like demand from our traditional external markets shifting away to new sources of more efficient, cost-effective supply in south and south-east Asia. 

No lessons were learnt. Rather, classical depreciation of the rupee was advocated and even acted upon. This has no doubt whetted the appetite for more depreciation, when it is not the exchange rate of the currency that is itself being blamed squarely for all the failings. 

We are no doubt facing dire economic circumstances from externally induced slowdown of demand for our exports. This is the reason for the economic contraction being experienced in Mauritius in the prevailing set-up of the economy. It appears to me that an attempt was made to specifically criticizing monetary and exchange rate policies again in 2007 for what was going on at the level of the economy. It was perhaps believed that if interest rates were slashed, that would bring the remedy for falling export order books. Untrue, of course! 

I wonder whether anybody has actually quantified the little benefit such interest rate reduction would have had on the affected export sectors in overturning the falling order book situation. If that was the case, was it correct to impose the full burden of adjustment for the external factors on monetary policy alone? Has not the continuing retreat of portfolio and investments from Mauritius, due to the shortage of liquidity in global markets, made void this kind of policy-making? 

The limits of monetary policy 

As far back as 1936, John Maynard Keynes argued that monetary policy is ineffective under conditions of economic depression but that fiscal policy is the remedy in such circumstances. He basically recommended large-scale deficit spending by the governments. Later, Milton Friedman, on the other hand, postulated that monetary policy could have prevented the Great Depression. 

The current failure of monetary policy to address the problem of depression in the industrialized economies has proved, if it was at all necessary, that Keynes got it right. The remedy for the current recession in the large economies with huge internal markets lies in fiscal policy flogging up demand, preferably in a coordinated manner so as not to make the global economy have to face up to protectionism. 

Mauritius is suffering the consequences of the length of time it will take to make those economies on which we depend for our exports work themselves back to the era of mutual confidence that spurred on so many past years of uninterrupted global growth. We can then tag on once again to the global bandwagon, being neither a market maker nor a market player of any significance at the global level. No magician from over here will deliver this endurable solution for Mauritius until the global economy turns around again. 

No one is against mitigating fiscal actions to keep the pot boiling so long we do not overstep on the side of inflation or bring about excessive public debt. We can of course go some of the way cutting prices of exports to the extent possible, but that will be at the inevitable price of creating social tensions eventually once you have hit the limits of tolerance of the workers and the population. This is incidentally the element on which advocators of currency depreciation are actually taking a bet. 

Monetary policy has single-handedly been made to contribute to its limits in an economy of the Mauritian type. This is an unfair burden. One runs the risk of making blunt and even counterproductive the monetary policy instrument by milking it dry in this manner. Let the other actors play their part instead of over-working the monetary policy instrument which is ineffective in the current situation facing external global markets. 

By Anil Gujadhur

Former First Deputy Governor of the Bank of Mauritius 

First Published in Conjoncture, a  Bilingual Journal of  PluriConseil