Money printing is not generating a lot of growth

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While global inflation is likely to be at least 1% to 1.5% higher over the coming five years when compared to the previous five-year average, shorter term inflation risks should not be dismissed especially as we head closer to 2022.

The post-Covid world (if the vaccines work as advertised and are distributed efficiently) will be one where previous secular trends such as digitalization (e-commerce, Artificial Intelligence, robots), inequality, de-globalization, and a focus on economic sustainability (think ESG) will accelerate. This will be a tougher world where offshore tax jurisdictions will increasingly be targeted by the usual tax authorities and where those who compete and innovate will succeed while the rest will not find it as easy as before. When we think about Mauritius, the solutions for the necessary transformational structural reforms are many and overdue, but the political willingness to engage in such reforms is sadly lacking because of what this could do to the system that got politicians elected in the first place.

The system of patronage will not take this economy to the next level

Before Mauritius can engage in meaningful structural reforms, it must decentralise economic policy taking away from the office of the Prime Minister, and it must revive technocracy and choose meritocracy over loyalty and idol worship of the Prime Minister. To be fair, the system has always been this way because the political system was designed that way at varying degrees, but this system of nominating loyalists irrespective of competence and who are then more than happy to worship and allow their institutions to be remote-controlled from elsewhere has not and will not work anymore.

Slogans that Mauritius was a “high-income economy” may work with too many on the island, but whether you look at the quality of human capital, the lack of productivity and innovation, the depth of the capital markets, the dependence on financial flows and tourist receipts which helped keep skeletons under the carpet, rising debt, subdued private investment especially when excluding bricks and mortar related investments, an increasingly unsustainable tax system given the rising cost of the welfare state, demographic trends and stagnating pre-Covid economic growth, the true picture is much more complicated.

Sure, the system of patronage may win elections but it will not take this economy to the next level. You need independent and competent technocrats in key institutions of this country who act independently but are accountable. You need smart people who can take decisions rather than waiting on orders from elsewhere. Mauritians of course also get the system and the politicians they deserve. Politicians love to be worshipped as demigods on the tiny island nation, but too many like to engage in the worshipping too.

Over the past 40 years, all of us who have lived and worked in Mauritius have been tempted to go on the “if we cannot beat them, let us join them” route and too many have done so. Those who do not play such games typically stagnate or leave the country. Mauritius is a small country with a small reservoir of competent technocrats, and the more it closes the inner circle of those who make decisions, the worse it will be and has been.

A lot can be said about some in the private sector too, of course. This notion that we need diversified “Jack of all trades, master of none” businesses despite poor free cash flow levels and ROCE (Return on Capital Employed) versus WACC (Weighted Average Cost of Capital) metrics, a passive shareholder base, the lack of competitiveness, insular thinking by some captains — “quand la construction va, tout va” approach — and a saturated and small market are all factors which explain why the government has had to step in with massive debt and grant funded public investments which have not always had strong multiplier effects on the economy pre-Covid.

Right now the Bank of Mauritius has provided regulatory forbearance which has pushed the credit risk can down the road a bit further, but the rising number of Zombie companies post-Covid will have longer term implications on private sector investments, job creation and potential output. You can play with rules and make things look better than they are on paper, but reality bites all the same.

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