The presentation of the ‘state of the economy’ by Finance Minister, Rama Sithanen, soon after he took office was an anti-climax. This was surprising, given the Minister’s great reputation as an economics guru, a rare talent in the country, swamped as we are by moronic politicians only strong on empty rhetoric. What are the potential avenues out of this morass?

Any newly elected politician would take the opportunity to paint a gloomy picture of the previous government’s legacy. But it must be said that Minister Sithanen, as usual, had impressive and objective data to scientifically back his argument. Anyway, most people in the country know how dire the situation is, so he did not have a lot of convincing to do. So let us stop brooding over the past and see what we could do now.

To take the basic economics approach, the easiest way to stimulate an economy is to adopt a Keynesian-style demand-led recovery through public spending. This means spending large amounts of funds in building projects, etc. so that we set up and fuel a virtuous cycle of public investment, consumption, private investment, job creation, further consumption and so on.

There is only one snag: funds are not available. Previous governments have already built more schools than we would ever need. Also, this policy would contribute to inflationary pressure at a time when inflation is again showing its ugly head. Even rich countries cannot afford this policy anymore, struggling as they are with huge public deficits. Middle-East nations, buoyed by windfall gains from oil at US$70 a barrel, can. However, even then, it can be a mixed blessing as it would be an excellent excuse to put off much needed structural economics and political reforms.

This brings us to the other approach, now favoured by many economists, though rarely by politicians as it requires courage: supply-side reform. This is much harder to achieve, is politically unpalatable but ultimately reaps more rewards as it is much more sustainable. It involves starting with microeconomics, as opposed to macroeconomics. It has to do with fundamental organisational reform (both public and private) to transform the way of doing business so that an economy becomes leaner and more flexible.

This policy has its sceptics, as it does not always work. In many cases, this is when it is wrongly implemented or was irrelevant in the first place. Privatisation is one example. In the United Kingdom, the privatisation of British Airways and British Airports Authority is a great success. That of the rail network is a dismal failure. Some areas, such as health care, are probably better off not being privatised at all.

Another lever, within this same microeconomics agenda, is public sector reform. Thatcher, love her or loathe her, has achieved a miracle by reducing the number of public servants (and the budget deficit) while, at the same time, greatly improving value for money for taxpayers. In fact, the so-called Blair-Brown economics miracle is mostly due to the hypocritical resuming of Thatcher’s policy and also due to the leeway offered by a lean government.

They inherited surplus funds from Thatcher’s era to recruit more civil servants and could thus continue promoting growth. True, they recruited more essential frontline staff such as nurses and teachers where the value contribution is clear as compared to the administrative sectors where an army of idle officers only serve to contribute to more to red tape.

These concepts, explained briefly here, would be useless without practical examples that could be useful for Mauritius. First, we have to give credit to what has already been announced by the Minister (‘silent agreement’ principle to fast-track business applications, more competitive air access policy, lower taxes, etc.) but we will not go through all these measures in this paper.

If anything, we need more of these and I am slightly puzzled that the private sector, in its first reaction, seemed quite satisfied. But this was not supposed to be a budget speech. Also, it is easy to be critical but more difficult to be constructive. Here are therefore some potential routes for economic progress when stuck between a rock and a hard place:

● A policy to re-evaluate the Rupee (or at least stop its gradual depreciation) so that both the textile industry and tourism stop relying on windfall currency gains as an excuse to continue with inefficient, high-cost management. They would thus be forced to become leaner. Why is it that Compagnie mauricienne de textile is the flagship of our economy, yet other textile businesses go bankrupt … when they are all competing in the same environment?

● As a corollary, a less weak Rupee would also reduce imported inflation and prevent strong wage increase from collective bargaining, which would re-fuel inflation. A vicious, self-perpetuating circle.

● Training for higher skills: a medical school to train doctors has already been announced but we could also have schools in industrial or textile design, local airline pilot training, etc.; these professionals are also in high demand globally.

● Public sector reform: we can easily achieve more with … less civil servants; this productivity reform should also target major public organisations or government-owned companies such as the Post Office, State Trading Corporation, State Investment Corporation or Air Mauritius, etc.

● Government should get out of the commercial area (eg. imports). However, regulatory bodies should be strong enough to prevent the private sector monopolies from profiteering. A monopoly is not illegal per se; it is the abuse of this dominant position that is illegal. In the case of small markets (like Mauritius) and capital-intensive, large industries (utilities, aviation), a monopoly is sometimes unavoidable – but this can be managed.

● Consumer transactions: in the internet age, it is now a known fact that structural reforms (credit card, internet purchases, etc.) can substantially reduce the costs of transaction (the cost of physical search in time and money, car usage, cash-cheque manipulation, shop floor usage, etc.) whilst streamlining the buying process and promoting growth as lower costs would stimulate demand.

● Measures to reduce our perennial dependency on high cost fossil fuels: domestic solar micro-generation of electricity (in the UK, a household so equipped can actually sell excess green electricity produced to the national grid!), promotion of tele-working as a lateral-thinking approach towards reducing traffic congestion, a holistic ‘cycling to work’ scheme through new cycle lanes and incentives to purchase bicycles, a wind farm in windy offshore regions such as Belle-Mare, etc.

What could seem surprising, in the liberal approach proposed here, is that a potentially powerful tool for efficiency is not advocated: privatisation. This is where we need to use some contextual intelligence. Privatisation would not be directly applicable to Mauritius. This is because the local private sector, held as it is in the hands of a few families, is a very strong cartel. Once they have their monopoly, they would instantly increase price and profit from the situation – unless strong regulatory powers keep them in check.

The measures above are not easy to start, let alone achieve. However, supply-side reform tackles the fundamental, root-cause of problems in an economy. This is what makes it ultimately more sustainable.

<B>Fouad Diouman</B>

<I>Project Manager easyJet Airlines plc, London, UK