With a real GDP growth of around 3.8%, the Mauritian economy is still expanding at a high rate relative to the rest of the world. And it is deservedly the top ranked economy in Africa. However, numbers do not show the complete picture. It tells us about the annual rate of GDP growth but not the quality of such growth. For example, in the short term economic output can be enhanced by government deficit spending at the expense of future taxes.
Economic growth can also be underpinned by population growth with negative consequences on the environment, infrastructure and quality of life. Growth from certain sectors may also be short lived and not lead to creation of any sustainable jobs, i.e. infrastructure and construction industry. Consumption can be encouraged by low interest rates at the expense of debts which have to be repaid in the future.
Another number is roughly USD 16,000 average per capita GDP on a purchasing power parity which makes Mauritius a middle income country. Again the number does not paint the full picture. A country with a large middle class may be regarded as a middle income country. A country with a few super rich and large population in poverty can also average out to be a middle income country.
Rising property prices can further polarise society
Mauritius is not the only country with widening wealth and income disparity. It is a global phenomenon which has been worsened by asset price inflation as a consequence of record low interest rates and quantitative easing. For example, rising property prices benefits existing homeowners and real estate investors. However, as property prices increase, tenants face higher rents. Potential first time buyers are locked out of the market and are forced to become tenants.
High property prices also have a knock-on effect on prices of goods and services. It reduces disposable income as more money goes towards rent or mortgage repayments. Workers demand higher wages in order to compensate for the high cost of living which in turn affects the country's ability to compete internationally. High property prices also increase the cost of doing business in the country and have crowding-out effect on other sectors.
In Australia, some sectors of industry have been entirely shut down, like auto manufacturing. In response to an inquiry by the Australian Parliament into home ownership (2015), I raised concern over the fact that the real estate bubble was creating a two-tier society with a worsening problem of homelessness in major cities. I recommended that artificial demand factors such as foreign buying and favourable tax treatment for property investors be removed or curtailed.Land is even more limited in Mauritius. If artificial demand factors are not contained, land and property prices can easily rise to a point where it can seriously affect the economy and further polarise society. In addition, population growth (including influx of foreign residents) puts pressure on the infrastructure, roads and water supply. It also contributes to the degradation of the environment and quality of life. As more arable land is cleared for property development, there is also the issue of food security. As Mauritius becomes increasingly dependent on outside sources for food, it is more vulnerable to external events which may affect the supply of food products. For example, crop failures due to climate change or shipping disruption due to military conflict.
Populism against crony capitalismThe World Economic Forum has identified inequality and social polarisation as the number one issue in its 2017 report on global risks. In the words of Klaus Schwab, founder and chairman of WEF, “continued slow growth combined with high debt and demographic change creates an environment that favours financial crises and growing inequality. At the same time, pervasive corruption, short-termism and unequal distribution of the benefits of growth suggest that the capitalist economic model may not be delivering for people.”
Capitalism as a concept is not necessarily a failure. I am a firm believer in free enterprise as the ultimate engine of wealth creation. However, capitalism can be twisted in ways that does not work towards the common good. With liberal capitalism, policies are aimed at making the wealthy richer so that they will be encouraged to start new enterprises or expand businesses and thus create jobs for the rest of the population. However, the trickle-down economics of liberal capitalism have failed (notably in the USA) with the rich getting richer, poor getting poorer, and the middle class getting smaller. Regardless of fiscal advantages, the wealthy are not going to invest in business if conditions are not right, i.e. if aggregate demand remains weak or if industry is over-regulated. Instead of going into the real economy (production of goods and services), the money goes into property and other speculative investments.
Another form of capitalism is crony capitalism. A crony is defined as a long time friend or companion. Crony capitalism arises when the relationship between businessmen and politicians form a kind of aristocratic hierarchy. Private businesses or wealthy individuals finance political campaigns, and in return governments grant special favours to these benefactors. These favours may include lowering certain taxes, removing certain regulations, creating barriers to exclude competitors, granting of permits and leaseholds.
Brexit, the election of Trump, the wave of right-wing populism in many other countries reflect the frustration of a vast segment of the population. A 2016 survey by Ipsos of 16,069 adults in 22 countries reveal common themes: distrust of traditional politics, resentment of the rich and powerful, and pessimism about the future. Globally, the majority of respondents believed that their economy was rigged in favour of the elite and that a strong leader was needed to take their country back from the rich and powerful.
Capitalism can be twisted in ways that does not work towards the common good. When money is mingled with politics, democracy is undermined. Despite apparently normal democratic processes (elections, change of government), many countries are drifting towards some form of plutocracy. A plutocracy refers to rule by the moneyed few irrespective of which political party or coalition of parties is in power.
Reform of the democratic process should look into electoral campaign financing and political donations. For instance, there should be limits on amounts that can be donated and also limits on amounts that can be spent on any particular campaign. Only people who are registered to vote should be allowed to make political donations. This would exclude corporations and foreigners.
All donations must be recorded and declared. In order to maintain the traceability of funds, cash and in kind donations should not be allowed (only bank transactions permitted). Mauritius should move on to its next level of economic development which is not necessarily about increasing growth but managing a more balanced, sustainable and socially inclusive growth. However, the path to economic reforms lies in the political domain.
By Siow Ming Li Ting Tung
The author is an independent trader on the Stock Exchange of Australia, was formerly an adviser for the Investment Committee of the National Pension Fund.