Economic Sense, a lucid analysis

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Eric Ng’s recently published “Economic Sense” was officially launched on the 12th of April. On that occasion, Sushil Khushiram, independent consultant and former minister of Economic Development, made a review of its content, which he will be sharing with readers in two other parts, in the days to come.


The first section deals with real economy issues and Eric Ng takes on the populist beliefs that often lead to misguided macroeconomic policies. He starts by questioning the effectiveness of state support for SMEs, calling it “state sponsored entrepreneurship”. Promoting SMEs is often held as a panacea for greater employment and growth. But, like economic democratization, SMEs can turn into a mere slogan. 

SMEs have not really been successful over time, despite decades of support by the DBM, which became saddled with sizeable non-performing loans (NPLs). We have not drawn our lessons from the past failures of two cooperative banks, MCCB 1 and 2, and from the defunct Post Office Savings Bank and First City Bank.

As Eric Ng states, “Entrepreneurship is not a question of finance, but of opportunities”. I would add that a genuine SME strategy must put more emphasis on productivity, and on export orientation, so as to create productive employment and raise the country’s long run growth potential. Concessional lending to SMEs is not necessarily a sound approach.

Trade deficit

Eric Ng then denounces the alarmist concerns raised by “modern day mercantilists” about the size of the external trade deficit. Domestic manufacturers want to shift consumption from imports to local products by imposing import duties and tariffs, while exporters view the large trade deficit as evidence of an uncompetitive exchange rate, and press for a depreciation of the rupee.

An external current account deficit cannot however be taken in isolation. It is the converse of a capital account surplus, which basically reflects low domestic savings and therefore a reliance on foreign capital. A lower current account deficit will inevitably be associated with reduced foreign capital flows to finance investment spending and growth. We cannot have our cake and eat it too.

An effective response to an unsustainable current account deficit is to boost the domestic savings rate, both by enhancing private savings and reducing the government deficit. Low real interest rates do not encourage savings. 

Real estate investments

The concentration of our investments in real estate activities is a contentious topic. Eric Ng takes a dim view of malinvestments in the real estate sector that have led to an oversupply of residential and commercial space, while property prices remain beyond the purchasing power of most Mauritians. Banks are faced with a significant amount of non-performing commercial property loans. This “diversion of scarce resources from productive projects to unproductive ones” has been abetted by cheap and loose money. Eric recommends that the housing and property markets be allowed to adjust, and not propped up by a low interest rate policy.

It should be pointed out that opening real estate to foreign investments for creating economic value has never been disputed, including for hotel and tourism-related accommodation, educational institutions and campuses, healthcare facilities, global business and other financial activities.

However, the strategy on real estate development should be better tailored to attract foreign investments in productive activities, along with expatriate talent and expertise, in targeted sectors. Policies should incentivize investments that expand the industrial base, and help producers tap into foreign markets and access new skills and technologies.

Inequality and Taxation Eric Ng downplays the issue of growing economic inequality, arguing that “income inequality is an essential feature of the process of wealth creation”. He takes comfort in the decline in absolute poverty to 6,9% of the population in 2012, while noting that relative poverty and inequality as measured by the Gini index have both risen between 2007 and 2012. 

He does not believe that progressive taxation and other redistributive policies are appropriate for tackling inequality, and instead favours the provision of targeted income support to the most needy. However, his stand on the irrelevance of tax policy for addressing inequality must be regarded with some skepticism.

Even Singapore, which has a low but progressive tax system, is raising its top marginal tax rate, and the tax rate for the top 5% bracket, to fund a sharp rise in healthcare spending, and provide extra support to retirees and low earning workers. The expensive cost of living, rising housing prices, and concerns about worsening inequality are driving these tax changes.

Eric Ng makes an impassioned plea for flat taxation, probably in response to the frequent criticism that its introduction has contributed to widen inequality in Mauritius. Eric claims that because a flat tax is a proportional tax, it is therefore also just. This concept of just taxation is highly controversial.

His contention that a low, certain, and convenient tax regime is conducive to eco- nomic growth is more reasonable. And he does not rule out an increase in tax rates, or a higher top marginal rate, to finance greater capital spending and to stimulate growth.

The relationship between inequality and growth is a complex one. What matters more is the inequality that arises from rent seeking, when wealth buys control of Government and influences policies for narrow and selfish gain. This is the view of Angus Deaton, the 2015 Nobel laureate in economics, expressed in a Financial Times interview last December

To be continued…

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