By Sen Narrainen
The headline inflation rate in Mauritius computed from the Consumer Price Index (CPI) was around 25 per cent for the period January 2020 to December 2023. It is forecast that this year it will rise by another 5 per cent. Such surges in inflation and the expectations that the level of prices will continue to rise have triggered a general discomfort and even discontent among the population. There is a sweeping fear that the purchasing power of the rupee will continue to fall. However, the decline in the purchasing power is not the only reason behind the widespread disgruntlement. The bigger culprit is the persistently low and perceptibly declining buying power of the working class.
Distinction between purchasing power and buying power
For the purpose of our analysis, a distinction is being made between purchasing power and buying power. Buying power is defined as the amount of goods and services that a person can procure over a given period of time, whereas purchasing power is associated with what one unit of currency (the Mauritian rupee) can buy. Purchasing power is therefore determined solely by the price level while buying power is determined by the level of prices, the amount of income of the person (including labour and other income sources) and the person’s wealth.
Any attempt to analyse and understand the current dissatisfaction of the population and the seemingly bold policy reactions must centre on the evolution of the buying power of the working class. The latter is perceived as having been contracting over a number of years and is rather low. According to Numbeo’s data, in mid-2024 Mauritius ranked third in buying power in Africa with a score of 43.2, behind South Africa (102.8) and Botswana (64.4). Internationally, Luxemburg ranked first with a score of 182.5. It must however be emphasised that the scores calculated by Numbeo are national averages. For people in the bottom four deciles of the income and wealth distribution in Mauritius, mostly working-class people, the buying power must be far below that average.
Four main factors can be identified as having contributed to the low and dwindling buying power of workers during the past five decades.
Firstly, an enduring wage restraint strategy. Mauritius’s development model and global competitiveness strategy have been relying heavily on wage restraint policies throughout the 1970s and 1980s in order to promote rapid industrialisation and resolve the problem of high unemployment. In the early 1990s when the unemployment rate dropped to around 2 percent resulting in labour shortages and upward pressures on wages, the economic growth model became capital and technology-intensive. It was then logical to expect that wages and salaries would generally increase. However, they remained relatively low for a large segment of the workforce.
The economic context stayed rather unfavourable to wage and salary increases. Pressures on wages and salaries to stay low stemmed mostly from weak bargaining power of workers in a wage determination system that has been programmed to favour restraints. Successive external shocks to the economy have been used as rationale to vindicate the wage restraint strategy. These shocks to the economy included the dismantling of preferential access to markets, the great recession which was followed by the Euro crisis, and other external shocks. More recently, the Covid 19 pandemic and the war in Ukraine have compounded the challenge of global competitiveness and that of maintaining business viability for many enterprises. The increasing influx of expatriate workers must have also played a part in keeping wages and salaries relatively low.
To compensate for low wages and salaries, the State has been supporting the population with direct and indirect government transfers including: universal free education and health care; free transportation for students and the elderly; subsidies on certain food and basic necessities for the needy; and subsidised housing to families with modest income, among others. Without such government transfers, the policy of wage restraint could have been disastrous from a socio-economic perspective.
However, the times are changing. As the saying goes, the chickens are coming home to roost. Workers are now demanding higher wages and salaries to protect the purchasing power of their rupees and most importantly to boost their buying power and standard of living.
Secondly, asset price inflation. Prices of assets, in particular, the costs of residential properties for low and middle-income families have been rising faster than the per capita income of the working class. The advent of the real estate sector, which has been focusing on the construction of luxury villas for very high net-worth individuals, has turned out to be a boon for a few but a blight for thousands of low and middle-income families.
Low nominal and negative real interest rates for a prolonged period of time have also helped to fuel asset price inflation by inducing a shift in the way individuals invest their surplus cash. Most of the shift took the form of investment in land and property and other physical assets. As a result, the real estate market has been characterised by speculative investments for decades, much to the detriment of low and middle-income families.
Thirdly, food price inflation. Food price inflation (calculated from the food components of the CPI basket) has in the past decade been consistently higher than CPI inflation. This means that even in years when CPI inflation was close to zero, families who spend a large share of their budget on food were still suffering from a cut in their buying power as they ended up spending more of their budget on food or having to cut down on the amount of food to fit within their budget.
The real estate market has been characterised by speculative investments for decades.
Fourthly, inflation expectations are well anchored. The expectations that inflation will remain high are well anchored, fuelling the fear that buying power will continue to decline.
As a result of the four forces that have been acting to depress buying power, the working class is now determinedly engaged in a revendication salariale. It is manifestly clear that the era of wage restraint as a source of global competitiveness is now an irrevocable past. The development path of Mauritius is at a turning point. The revendication salariale is here to stay as it springs from a sense of trepidation by workers who are already grappling with severe hardship to make ends meet and who fear that the situation may worsen.
If the policies to increase the income of workers are a long overdue imperative and finally point toward a path to greater social justice, they can nevertheless have nasty side effects on investment and economic growth in the short and medium term. Employers must find ways to adapt while workers must ensure that their demands for higher wages and salaries do not jeopardise their own standard of living in the future. Government must come up with accommodating policies to support both employers and workers in this challenging transition.
Rethinking the country’s development
To conclude, the situation calls for a focus of the country’s development thinking on the following:
(i) Resource repurposing. The use of productive resources in Mauritius is far from optimal and a resource repurposing exercise is an urgency. This will include a rethinking of policies concerning the use of land, labour, and capital. There must also be deep thinking on how to revive entrepreneurship.
(ii) A comprehensive review of trade policies. Mauritius must move away from the mentality of buy all we need (from overseas) and sell all we can (to foreigners) by fostering the following:
a) A second wave of import substitution. The new wave of import-substitution must however be supported by policies to boost local production, productivity and global competitiveness. Trade protectionism and beggar-thy-neighbour approach should not be on the card. That new wave of import substitution should cover products for final consumption as well as inputs including labour, materials, capital and technology.
Both monetary and fiscal policies are favouring a weakening of the exchange rate of the rupee.
b) Greater export competitiveness. This will require a new burst of creativity and innovation. Boosting competitiveness of exports via currency depreciation should become a very last resort policy.
(iii) Fixing the monetary and fiscal policy mix. To curb inflationary pressures requires contractionary macroeconomic policies. Yet it would seem that current monetary policy, which is one leg of macroeconomic policy, is accommodative. This means it is focused more on achieving higher economic growth and a lower level of unemployment than on fighting inflation. The other leg of macroeconomic policy, namely fiscal policy, is unambiguously expansionary and therefore stoking inflation. Both monetary and fiscal policies are favouring a weakening of the exchange rate of the rupee which means higher imported inflation.
Monetary policy should also be more mindful of asset price inflation and food price inflation. They are the unintended consequences of low interest rates which are causing buying power to erode but are not given due consideration in policy decisions.
(iv) Shielding the economy from a wage-price spiral. The formulation of macroeconomic policies must give greater attention to the dynamics of the labour market in order to avoid a potentially very destructive wage-price spiral. This phenomenon must be urgently nipped in the bud.
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