By Sameer Sharma

All large political parties in Mauritius have socialist sounding names, but it is very hard for this author at least to argue that any of these traditional parties and the capitalist loving BMW driving politicians have anything socialist about them. In fact I have never been able to get a straight answer about what is distinct about the political ideologies of any of the large parties. Given the culture of rotating political alliances, ideologies if any appear to have been quite fluid. When it comes to economic ideology, all of these large political parties appear to have little which separates them apart.

when populists decide

In fact many Mauritians who have worked with representatives of the International Monetary Fund in the past would know that the stability of the economic regime and the consistency of economic policy making over the past few decades have often been cited as a positive for Mauritius. These days, the unofficial comments from those working at the Fund would be a bit more nuanced to say the least!

Somehow Mauritius has always managed to maintain a low and attractive tax regime in the past while maintaining a basic but relatively effective social state. What is interesting about the current economic policy making however is not that the core ideology in itself is very different, but that since 2015 at least, it took on an even larger populist tilt.

Vote bank politics

In order to consolidate popular support in the 2014 elections and in order to later on offset any potential disappointment during the 2019 elections, the current government sold the story that it would tackle perceived widening of wealth inequality by increasing the minimum wage, by increasing the level of the Basic Retirement Pension (BRP), by introducing negative income taxation and by engaging in a massive public sector recruitment drive employing thousands especially from areas where it has its vote bank. I have recently been told by many of my former colleagues at the Bank of Mauritius that the tower has become overpopulated with attendants. Experienced economists with quantitative skills are increasingly an endangered species over there.

There is nothing wrong in re-distribution of tax revenues per say, but in order for Mauritius to be able to sustain such populist spending, it needed to also be able to generate levels of growth closer to 5% per year. As we all know, Mauritius has never even got close to 4% levels of growth. When the government took over the reins of power in December 2014, the economy was already growing below its then 4% potential.

Total factor productivity growth was near zero, labour input growth was stuck given the quality of the existing human capital, the degree of labour participation, especially of women and unfavourable demographics. Capital input growth was also stalling given the high debt to free cash flow levels of the private sector (do not look at debt to equity in Mauritius because assets tend to be overvalued and free cash flow tends to be poor for non-financial firms), the saturated market and the simple fact that foreign direct investment and real estate investments and construction in general have low multiplier effects on economic growth.

The slow “deleveraging” process in the private sector and its low free cash flow generation ability overall meant that corporate savings was flattish to declining, and domestic private investment was poor especially if you exclude the low growth multiplier construction sector. The public sector enterprises were as they are now bastions of debt, of low levels of productivity and overstaffed in many areas given vote bank politics.

The public sector enterprises are now bastions of debt, of low levels of productivity and overstaffed.

In order to stimulate growth, the government thought that it could boost consumption with a theory that higher consumption levels were linearly related to higher levels of growth (a crazy concept in an import dependent economy which produces less than it imports and quite the over-simplification of econometrics), keep interest rates low and by pushing even more public construction and offering more sops to stimulate more foreign real estate villa sales (construction again). What Mauritius really needed in 2015 were massive structural reforms which would aim to boost the key factors of production and bring wage growth closer to productivity growth. But there was never any appetite for this and by 2019 growth had decelerated to the low 3% area.

By 2019, the IMF itself believed that the Mauritian Rupee was at least 15% overvalued given the level of the real effective exchange rate and fundamentals. Mauritius was simply not competitive enough. Foreign flows through Mauritius along with real estate villa sales were meant to buy us time to engage in structural reforms and get our act together, but we chose to do nothing about it. Way back in 2014, the IMF had already warned Mauritius that the BRP would need to be reviewed (more targeting or/and indexing) given unfavourable demographics, and what did the Government do? It increased it in a massive way twice. The only way left to finance the higher BRP was to increase taxes, borrow more or engage in this terrible idea to destroy the National Pension Fund (NPF), via the Contribution Sociale Généralisée, rather than modernizing the way in which we manage public money and keep our three-tier system.

Back in 2014, the IMF warned that the NPF could go the way of the dodo by the early 2050s. What many do not realize is that since 2014, interest rates in Mauritius and globally fell and the present value of NPF liabilities increased further. The strategic asset allocation framework and the way we manage NPF money not having evolved for decades (it is still backwards and lacks a modern professional setup and an asset allocation framework that takes these liabilities into account properly), in a low interest rate environment (do not think rates will go higher soon), the NPF would have likely met its end by the late 2030s to very early 2040s.

While growth including potential output trended downwards (savings trending down, ICOR trending up), the government doubled down on populist policies, promising even more BRT increases and public jobs and public sector wage increases. Many seemly educated voters thought that Mauritius could afford free health care, free universal education, free non toll paying roads and other perks while maintaining a 15% tax rate is another story (albeit the levy on the highest income earners was imposed), but what was also clear about the 2019 elections was that most other parties (the Reform Party attempted to balance the books from looking at its manifesto but was a small party) also attempted to outmatch the other when it came to promises of populist spending. There should be no surprise as to why Mauritius had already reached out to the printing press of its central bank by December 2019 and would have dismantled the NPF in order to create a CSG kitty in 2020.

Mauritius has now entered its lost decade

In many ways the guru strategists made a fundamental mistake by not only riding on the wave of populism but also in thinking that they could tame and control it by offering unsustainable freebies, and that in doing so, the people would not care about corruption and unfair outcomes. The reality is that populists care deeply about whether each individual’s economic outcomes occur for fair reasons. Thus citizens turn to populism when they do not get the economic opportunities and outcomes they think they fairly deserve.

As I have previously written, Mauritius may still be a democracy of sorts but it is increasingly an illiberal one. Other developing and even some developed countries that elected populists earlier on, like Turkey and Hungary, have rapidly descended into authoritarianism – a trajectory that is suggestive of the risk populism poses broadly, if not confronted successfully.

Mauritius cannot afford to give out freebies anymore.

In many ways the Mauritian Government which has used populism to gain power is facing a civil war of sorts with other populists who perceive that the system is corrupt, rotten and unfair despite having made use of the money printing press and having borrowed heavily to finance its populist policies. The reaction of the government to protests is one of shock and of labeling the protesters as being an ungrateful lot.

The rise of populism has typically been explained by two main theories.  Firstly immigration and social media pushing ahead with fake news have fermented discontent and secondly that economic pain and growing income inequality leads to populism. The solution to the latter is greater re-distribution while the solution to the former can go as far as to seek to control social media.  What is however increasingly clear about academic studies on the topic is that unfair economic outcomes are more plausibly associated with populism than a number of prominent alternative hypotheses.

So how do we tackle the unchecked growth of populism in Mauritius? We do so by focusing more on measures which promote social mobility by embedding the concept of the equality of opportunity in a new social contract. From a policy making angle, we start by reforming the education system by offering quality education to all, by promoting Mauritian style affirmative action for certain ethnic groups, by better aligning the pay of politicians and technocrats to performance, by eliminating kingly perks to politicians and their nominees that a small island nation cannot afford, by breaking down the nexus between politicians and many in the private sector, by implementing electoral finance reforms, in promoting the decentralization of power away from the Prime Minister, by having an independent police force and a much more efficient justice system, by having stronger independent anti-corruption watchdogs with teeth to bite, by enshrining the concept of meritocracy in both the public and private sectors and by reviewing the tax regime towards one that is less forgiving on the rentier economy and more open to firms which seek to add value.

Mauritius has now entered its lost decade at a time when it is not even ready to face the consequences of an increasingly digitalized world. Covid-19 has worsened corporate and public sector balance sheets further and “deleveraging” will take time to solve. Significant structural reforms are needed. The more the people see corruption, nepotism and favoritism galore, the more they will seek more freebies and the reality is that Mauritius cannot afford to give out freebies anymore.

The economic situation is dire but yet all traditional parties keep on having the same “let us pay them more with money we do not have” reflexes. This path will lead the country to a deeper hole from which it may not be able to come out of for much longer than the tough decade to come. Understanding the roots of contemporary populism is therefore vital to the survival of liberal democracy.

Sameer Sharma
Sameer Sharma is a chartered alternative investment analyst and a certified financial risk manager.