We always hear about the economic health of Mauritius from economists and Finance ministers. They are, in government, the witch doctors who probably know their books by heart, but have never analysed where business ideas come from, never felt what is the courage needed to invest and mortgage your property, never realised the 24-hour concentration and the effort needed to produce quality goods and services, and never realised the patience and negotiating power needed to enlist a sizeable customer, especially from overseas. Yet they preside over the destiny of this country, decide on government investments unilaterally, and decide on their own to borrow heavily in the name of our country and its citizens.
The public has always listened passively to their erudite discourses, and only looked at the budget measures which alleviate the burden of the working class. The sacrosanct private sector has never dared to challenge their assumptions and theories and have always paid lip service publicly and with condescension to their budgetary measures, saying “C’est un budget de relance” when they know pertinently that it is not.
But what are the scourges of this country, from the point of view of a private sector CEO and Strategy Consultant with 30 years of experience at the helm of businesses in a dozen of sectors of activity?
1) Public investment in infrastructure. The first one is the budget deficit. Forty years ago, it was considered a sin to live in a situation of budget deficit. Now, this deficit is an economic tool to promote growth provided it is financed by pre-existing savings. A layman would then say that
Mauritius, with its deficit, is actively using this tool to progress and register growth. Except that the deficit is not actively prompted to steer growth, but passively endured. Except also that the budget deficit is financed by inflation-generating borrowings from monetary institutions. There is even worse: since lately, the deficit is being financed by foreign currency loans, with a currency exposure which may explode in future.
The real reason for our budget deficit is not the cost of the functioning of the state. It is not even our welfare state expenses. Welfare has been existing for decades, it is necessary, and it is not a big drag on our finances. The problem is public capital expenditure due to public investment. In normal circumstances, you would think that investments in infrastructure are useful in allowing to produce more. This is sadly not the case because the bulk of public investment lately has gone into building roads. The dim facet of this picture is that building roads only stimulate demand and provide employment as long as the works are going on. Beyond that, we are back to square one.
The alarming facet is that we are investing in advance of development yet to come. True, our tourist industry demands that the country has viable roads to facilitate access to tourist attractions. This is laudable, but we are not Singapore and Dubai, and we simply do not have the means to invest ahead of demand. We simply cannot afford this luxury financed entirely by debts in foreign currency, with its inherent currency risk.
Then why does the government invest so recklessly? (I am not talking of this government, but all the governments which have been in power for the last 20 years. I am an analyst, not a political agent). It is anybody’s guess. You just have to think of how contracts are allotted, why allotted contracts are often challenged by other tenderers, why the terms of the most pharaonic contracts, whose financing binds the whole population by the rising public debt, are kept secret, and what is the utility of the new road leading from Mare d’Albert to the airport, and you will come closer to the implacable reality.
Reduce public investment in infrastructure, except the very necessary like universities, hospitals and industrial parks to house new businesses, and the budget deficit will become more manageable.
2) Unequal distribution of income and wealth. The second scourge is the unequal distribution of wealth which leads to a wide gap between the rich and the poor. But how do we achieve this without brutal economic hegemony, of the Mugabe style, i.e. seizure of property without compensation and distribution to people who have never been producers? My answer to this is simple, and nobody can question its fairness and legitimacy: a wealth tax, not on income, but on property, including bank balances over a certain threshold to be used to finance welfare exclusively. This puts to bed every Finance Minister’s nightmare: how to channel government tax income equitably to poor people, functioning expenses and investment. By using wealth tax money, of course, chargeable on the excess over a threshold which guarantees basic rights to private property, to finance exclusively social security, old age pensions, unemployment allowances, and health care, this nightmare is no longer one.
There is an important corollary to this, i.e. discouraging affluent people from keeping valuable assets like land and money in bank, lying idle. There is no need to compel people to put their idle assets to productive use, as this would interfere with basic human rights in a capitalistic society. The wealth tax will take care of this. It is anybody’s absolute right not to develop his land and keep important bank accounts which earn him a pittance, but paying a wealth tax of, say 2%, thereon yearly will completely wash out the value of this asset in 50 years. Therefore, this tax is in itself a vector of progress by forcing people to put their assets to good use, thereby creating GDP growth, employment and wealth for their own personal account. This is a virtuous circle and it allows the possessor of assets to put them to profitable use and earn benefits, even after having paid the wealth tax, which is his contribution to a more equitable distribution of income and wealth. Politics and vote hunting should not mingle with the economy.
3) The strong rupee. The third scourge is the very scanty use of monetary tools. The essence of government action is purely Keynesian, i.e. using the budget to collect money in taxes, and using the budget to promote growth in certain sectors and stifling development in undesirable sectors. The only monetary measure used is the interest rate and the Central Bank comes up with a public show every quarter to adjust the bank rate supposedly to favour investment or encourage savings. But neither of these two objectives depends on interest rates.
The interest rate fallacy
Investment by the private sector is driven by business acumen, risk taking attitude and expected rate of return. A reduction of 1% in the interest rate is not an incentive to the potential investor if he does not see the opportunity to earn money because of other considerations, namely high cost of labour, low selling prospects or a restricted market, either in size or in volume due to insufficient purchasing power of consumers. Likewise, a hike of 1% in interest rates does not deter smart business men from taking calculated risks if they believe in their projects. Interest only hampers investment when it is at a punitive rate.
As a business driver, I have seen interest rates of 12% and investment continuing to flow in. I am saying this, not as a “behind a desk” business Guru, but as a seasoned, hands-on CEO having taken numerous investment decisions in his career, undeterred by the prevailing interest rate. The clue is to ensure a rapid rotation of the borrowed funds, so that the financial charges become lighter with regards to the profit generated by the business which is financed by bank loans.
Similarly, high interest rates on bank deposits do not promote savings. Money is saved when there is surplus of income over expenditure, and I have never seen an individual cutting on his expenses to save money just because deposit interest rates are high. Savings are made because of the uncertainty of the future, for consumption in old age, to make future investment in time or to pay for children’s university expenses abroad. These motives are vectors of savings even in middle income households. Interest rates in Japan and Switzerland sometimes hit the zero rate, and this does not deter people from saving. Interest rates can however siphon deposit money from banks to the stock exchange and vice versa, but this is without effect on the global magnitude of savings.
The strong rupee fallacy
There is a powerful monetary tool which is not touched, as if it is a taboo. It is the value of the rupee which has been kept artificially high since the folly of Rundheersingh Bheenick. We are an exporting country, we rely on textile companies, sugar companies, hotels and offshore management companies to toil to increase exports, and we keep a strong rupee out of vanity, which keeps their rupee income low, when their expenses are rising and there is a minimum salary rule which is likely to become more and more liberal for the employed, because of political mileage.
A strong currency is a luxury which even China cannot afford, and its currency is always kept undervalued to boost its exports. We are a weak economy with weak fundamentals, and the strong rupee is doing us a disfavour by stifling profitability and investments. Even the mighty United States subsidises its exports, not by having a weaker currency, but by tax concessions and some obscure advantages to exporters.
The pessimists will tell you that a depreciating currency keeps out foreign investment because of the currency risk. This only applies to passive foreign investors, and this country does not need currency, stock exchange and property speculators. It needs daring investors who will engage in active production and will bring in know-how, create employment and give access to overseas markets for local products. Massive investments go to India which has a chronic weak currency.
The Central Bank must be master of its decisions on monetary measures. The clue is to earn enough with smart investment and production and beat the rate of currency depreciation.
Of course, with a sliding rupee, exporting companies will earn more money, and consumers will see the prices of their imported articles rise. We have lived in this regime for decades, and it allowed our economy to grow at a much higher pace than presently, because our entrepreneurs earned more money and wisely invested this excess in their expansion, thereby creating jobs and wealth. Our thriving hotel industry is a product of this monetary policy, which brought enough profits to the sugar industry to diversify into tourism.
In this scenario, there is always an outcry by the population to increase disposable income. This, if the government is wise, can be corrected by selective subsidies of basic necessities and a salary policy which is only reasonably expansive and allows for a surplus in the entrepreneurs’ kitty after the payment of salaries. But everybody, income earners and entrepreneurs hand in hand, will have participated in the growth of our economy. This is the concerted effort which drives growth. Politics and vote hunting should not mingle with the economy and the Central Bank must be master of its decisions on monetary measures, without pressure from politicians. But I may be dreaming!
By Mubarak Sooltangos
The author has just published Business Inside Out, a book inspired by his 40 years hands-on experience in business in a variety of sectors.