CEoG initiated a program of writing support to African economic policymakers who have played senior advisory roles at the heart of governments in sub-Saharan Africa. The goal is to gather recollections of key economic events during their tenure as economic advisors. CEoG helps contributing policymakers transcribe and edit their recollections into at least one chapter that will form part of a ‘Handbook for Chief Economic Advisors to Government’.
These chapters will be organized around key economic events and the roles of that the senior economic advisors played in navigating their countries through the events. The chapters will document successes and mistakes, elaborating the practical challenges associated with bridging economic evidence to effective policy making. They will provide a vivid account of what it takes to be an effective advisor to political leaders. At their discretion, contributing authors will be encouraged to share practical lessons and tips for how to organize advisory functions.
Part 1: Policy responses to the Global Financial Crisis of 2007-9
Q: Between 2005 and 2008, Mauritius was facing a triple economic shock, namely the phasing out of trade preferences in textiles and sugar, along with the financial crisis. How did you as an economic advisor tackle the challenge?
As regards the triple shock of 2005-08, Mauritius was very conscious of two of them – the dismantling of the Multi Fiber Agreement and the end of the Sugar Protocol. Mauritius knew from very early on that it would lose these trade preferences - that they will not be there forever. But investors in Mauritius, especially in the textile sector tend to be short-term in their attitude. Very few enterprises prepared themselves to become globally competitive without trade preferences.
Prime ministers, ministers of finance and other ministers have repeatedly warned the private sector of the need to become globally competitive and to stop relying on preferences but to no avail. When the trade preferences expired, the sugar and textile industries were on a declining path, shredding jobs, losing export markets and even experiencing a prolonged drop in output.
As regards the third shock-the great recession- Mauritius was able to ride it out with almost no damage to its economy. The reasons behind such resilience are many, but let me give a couple of examples. Since independence, Mauritius has been experiencing real economic development – as measured by the diversification of its economic base. Just a couple of years before the sub-prime crisis, Mauritius had introduced a major stimulus package and reforms that had strengthened further its growth resilience. When the economy was threatened by the ripples from the great recession, Government came up in December 2008 with an Additional Stimulus Package (ASP) to protect industries, businesses and jobs.
The ASP was, for all practical purposes, a mini-budget offering a five-fold path to ride out the global recession: Path 1-saving jobs; Path 2 -boosting up project realization capacity, Path 3 – launching the largest investment programme in the history of Mauritius; Path 4 – protecting people and Path 5 – maintaining expansionary macroeconomic policies.
The country was able to come out, relatively unscathed, from that global economic crisis. The financial system remained stable and robust as the country’s banks and other financial insitutions were not involved in the sub-prime market. The macroeconomic fundamentals were strong. But the Euro crisis that developed as an aftermath of the great recession with several European economies being driven in recession and many others suffering severe setbacks, turned out to be a major threat to the Mauritian economy. This made Mauritius realise how excessively euro-centric its economy was – with more than 65 percent of tourist arrivals being from European countries and also more than 65 percent of its exports of goods going to Europe. Government was prompt to respond to the Euro crisis threat with policies to restructure the economy and shore up competitiveness – these policies and immediate actions were articulated in the Economic Restructuring and Competitiveness Programme document.
Q: So you were able to foresee these trends. But there was really nothing you could do to convince the private sector to move before it comes urgent?
The trends were very apparent. The writing was on the wall. However, most of the enterprises chose to ignore them. There was no sense of urgency to build up their competitiveness. May be some of them thought they could not become globally competitive anyway because along with the loss of preferential access to markets, there were also the problems of rising wages and the related constraint of labour and skills shortages.
Government policies were supporting the reengineering of export enterprises, encouraging firms to move their labour intensive operations to other low-wage platforms in the region and beyond. There were incentives for investments in machinery, equipment and new technology to facilitate the move to capital intensive production and go up the value chain with higher value added production.
Q: What were you able to do as an economic advisor to push for reforms?
One of my functions as an economic adviser is to draft speeches for the minister and also for the prime minister on matters related to the economy. I never missed an opportunity to include clear messages in the drafts on the need for the enterprises to become globally competitive. I even went further to emphasise on the imperative for all firms to be globally competitive in a world that was fast moving towards free trade, regardless of whether they are exporting or producing for the local markets. Similarly for our labour force. Mauritius needed imperatively to open up to foreign labour, talent and skills. In such an economy, our labour force would be competing with foreigners for jobs. I was therefore stressing on the needs for reforms across all sectors, and mostly labour market reforms as I thought then and as I think now that the weakest link in the country’s development equation is the labour market.
In 2006 Mauritius decided that the focus will be on reforms, reforms, reforms. Some 40 cross cutting reforms were introduced in the 2006 Budget. The focus of the reforms was to shift from an economic model based on trade preferences that had done its time and had become obsolete to a new one centered on global competitiveness. It was a major paradigm shift.
Q: How did your relationship with the finance ministry help move this project forward?
Advisers are very often used as a sounding board for a minister on policy matters. There are other advisers as well and officials of the ministry who are also advisers in their own rights. Most of the reforms were quite straightforward – they were absolutely necessary and we expected little resistance from the population and businesses, especially those concerning the doing business environment and the opening up of the economy and country. But changes in tax policy, in particular the introduction of a tax on property in the rural areas were generally not well received. There were even vociferous reactions from some quarters.
There’s a phrase I’ve heard many times: unintended consequences. Announcing and implementing new policy approaches should not be taken too lightly. A reformer’s job is never ending and also deeply and increasingly complicated. Advisers as well as other officials of the ministry found themselves in a situation where they had to help Government develop a communication strategy on the paradigm shift. This is when I realized the critical importance of a good communication strategy when implementing reforms, especially if their impact on the population are deep and wide reaching.
At the time I learned quite a lot about the political economy of development policies, in particular of reforms. Consensus on the need for change among the advisers, the analysts, and the ministers does not guarantee that a reform will get a pass mark in the population. I have learned that in Mauritius a policy maker should not underestimate the capacity of the population, interest groups and stakeholders generally to resist change that they do not approve. It is a major challenge to push hard reforms in a country like Mauritius where democratic values and freedom of speech and of the press are deeply entrenched in our traditions. Notwithstanding the reversals of a few major reforms I think Mauritius has a successful history of economic reforms, most of which have delivered the desired outcomes.
Q: Do you have advice on how to deal with unintended consequences due to politics?
When making policy prescriptions an adviser should adopt, more or less, the same protocol as a medical doctor.
For example, a doctor would prescribe medicine to a patient and think about the side effects. Economists must do the same. And it is well known that economic policies do have side effects and unintended consequences. For example, some fiscal and monetary policies can easily induce income inequality in a country. A monetary policy focused on controlling the inflation rate as measured by the change in the consumer price index may end up causing asset inflation and may have other unintended consequences.
Too often there is too much focus on attaining the policy goals, which themselves may be very narrowly defined – and not enough considerations are given to the side-effects or unintended consequences of policies.
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