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High-Income economy: Are we on the right track?

High-Income economy:: Are we on the right track? High-Income economy:: Are we on the right track?

The government ambitions to turn Mauritius into a high-income economy by the year 2020.  In the last budget, several measures have been announced to achieve this objective. The question that arises is: Are we really moving towards a high income economy?  

he World Bank in 2015 defines a high income economy as a country with a per capita gross national income above USD 12,475 calculated using the Atlas method. The term “high-income is often used interchangeably with "First World" and "developed country". According to the United Nations, some high-income countries may also be developing countries. The GCC countries, for example, are classified as developing high-income countries. Thus, a high-income country may be classified as either developed or developing. As at 2017, there are 79 countries classified as high income countries. 

Economist Kugan Parapen explains that in order to be recognised as a High Income economy, the threshold as per the World Bank’s criteria is USD 12,475 per year, equivalent to some Rs 36,385 per month. “However, only focusing on the GDP per head to assess a country’s well-being can be grossly misleading; one has to also look at how evenly distributed the national income is to have a better picture of how a society is working for its population. What’s the use of being a high income country if all the wealth is possessed by a select few? The Gini-coefficient does a good job at showing the level of inequality in a society. Inequality in Mauritius is twice as high compared to the likes of France, Norway and other recognised societies with strong social models,” he says. 

Are we becoming a High-Income Economy?

Kugan Parapen adds that “As per a World Bank report published in 2015, Mauritius has a GDP per capita of USD 9,610 per year, which is roughly equivalent to Rs 28,000 per month. Compared to other countries around the world, Mauritius ranks 68th and is close to countries like Brazil, Mexico and Turkey. Monaco is top of the list with a GDP per capita of USD 186,950 per year, equivalent to Rs. 545,000 per month.”

For him, the measures in the budget are geared towards attracting the economic elite in Mauritius and liberalising our economy to attract businesses at all costs. “While the GDP per capita might increase slightly in the coming years, this will come at the expense of soaring inequality – as Mauritians at the bottom of the ladder and those pertaining to be the middle class are priced out of the Mauritian economy. The current housing crisis where Mauritians are unable to have access to affordable housing will worsen and the cost of living will skyrocket, making it very hard for most to make ends meet in Mauritius.”

Economist Eric Ng elaborates on the same line. According to him, Mauritius initially targeted to be a high income country by 2020 but seeing the conditions prevailing in Mauritius, we cannot achieve it so soon. “We are moving towards it but we will reach that position well after 2020. We are currently stagnant. There is need for diversification and bringing about higher value-added activities. For instance, for the BPO sector, we are still at call centre level, we need to add more value and develop the logistics part also. Similarly, for the tourist industry, we must target the high spending tourists. The same applies to the textile and financial services.” 

Arvind Nilmadhu, economist,  states that the objective of the government is to be a high-income economy but he believes that we do not have the right conditions as yet to reach a high revenue country.

Trade Unionist Suttyhudeo Tengur reveals that after careful analysis of the measures announced by Pravind Jugnauth, he believes that this budget should usher in a new cycle of growth for our country and shape a new modern and sophisticated Mauritius. “It should accelerate sustainable economic development. It should boost the productive sectors and stir wealth creation, thus helping our economy to become vibrant. These are enough opportunities for our country to move forward into the league of countries with high revenue.”

Income classifications by World Bank 

The World Bank uses Gross National Income (‘GNI’) per capita to classify countries as low income, middle income (subdivided into lower and upper middle) and high income economies. As of date, the following thresholds have been determined for income classification (expressed in GNI per capita):

  • Low income – USD 1,045 or less;
  • Lower middle income – between USD 1,046 and USD 4,215;
  • Upper middle income – between USD 4,126 and USD 12,745; and
  • High income – more than USD 12,746.

Are the conditions favourable? 

In order to achieve the status of High Revenue, the country must have a favourable economy but as per the views of the experts, Mauritius is still far from such a condition. Suttyhudeo Tengur believes that we should stay away from saying that the global economic environment is not favourable for our country to prosper or that we are too small a country to do miracles. “We should remember that the conditions were the same in the world and locally between 1987 and 1995 when the economic miracle happened. We believe the conditions are always favourable, the opportunities exist, and we have to just to make the right choices.” 

Along the same line, Arvind Nilmadhub argues that with an average economic growth of 3.7% over the last seven years, it is impossible to move to the high income group. “We need to have a sustained annual economic growth of 6% to achieve the objective of moving to the high income group.  As mentioned, this can only be achieved if we have a long-term strategy focused on energy, consumption, development inclusiveness and new market/products.”

Kugan Parapen also agrees with the other experts that there is no single way to achieve High Income status. “The most inclusive way I can think of is through an economy which is able to add value through creation, innovation and a solid education base. Given the policies implemented by recent governments, Mauritius is certainly not heading in that direction. Instead, the master plan of the Mauritian elite, with the collaboration of those at the head of the State, is to make of the country a Millionaires Club. The country will then achieve High Income Revenue but the demography of the country will then be completely changed, with super rich individuals replacing the priced-out population, a process known as ‘gentrification’.”

How does it affect the nation?

The issues that many wonder about are the implications for the population, after achieving the status of a High Revenue country. What will the population achieve? 

For economist Arvind Nilmadhub, a high income economic status implies that the average person in Mauritius is getting higher income and thus will be healthier, and is able to provide better education for his kids, live better and be happier. “However, a high income economic status does not tell anything about how income is distributed in the country.  It may happen that there is huge income inequality in the country.”

Suttyhudeo Tengur states that it is the population that accomplished the economic miracle in the early 90s, without the help of foreign labour. “At that time, very few or no foreigners were running our factories. So, the population has to work hard again to prosper. HIR also means the making of a second economic miracle as promised by this government at the start of its mandate in early 2015.” 

Impact on the economy 

Suttyhudeo Tengur declares that the impact of the High Revenue status will be multi-fold, wealth will be created, growth rate will increase, people will have better opportunities for jobs, and the country will prosper. “The living conditions of the population will improve, poverty will decline and more and more people will enter the middle-income group. Should things move as planned, HIR should, in a few years’ time, make our country the much-dreamt about economy in this part of the world, just like Singapore and Hong-Kong?”

Arvind Nilmadhub stipulates that a high income economic status implies higher consumption in the country, more investment by foreigners and a prosperous economy.  “However, a high income economic status also implies that Mauritius will have to relinquish several facilities it obtains from the EU and AGOA. Developed countries will stop providing assistance to us, such as grants or any other form of contribution. Indirectly, the poor will suffer.”

WB report on Mauritius 

Following research conducted by the World Bank on 215 countries in 2014, Senior Research Analyst Ehiwario Efeyini of the US Trust Bank of America Wealth Management went through the World Bank data to shortlist countries that have the potential to make it to the elite club of high-income economies.

In order to make the selection, three attributes were considered: already a middle to high middle income country; high standards of governance; and improvements to corporate and securities monitoring agencies post the 2008 financial crisis. Based on these attributes, Mauritius was among the 14 countries shortlisted as having the potential to graduate into a high income economy. Efeyini then assessed the potential for each to graduate to high-income by its applicability to any of the five transition models that have helped other nations make this transition in the recent past.

Whatever the timing, Mauritius will eventually reach high income status in the years to come and there will be some implications to be catered for. Lower income countries have access to concessional finance from bilateral and multilateral organisations. On the other side, higher income status will also mark an improvement in credit worthiness and a reduction of investment risk, with the effect that Mauritius will benefit from improved ease and cost of access to capital markets.

Source: Abax Services 

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Are the budget measures really moving us towards a high income status?

In order to reach a HIR status, we need to raise our income per capita substantially. Based on budgetary forecasts, we could reach an income per capita of USD 13,600 by 2023, from a current income per capita of USD 9,740. To achieve this, we need a higher growth rate than the forecasted 4% as well as an investment rate of approximately 25% of GDP (currently at 17%). Bold measures are badly needed to enhance productivity, promote R & D - a key determinant to move towards a knowledge-based economy, streamline the procedures to improve the ease of doing business,   and measures geared towards a more efficient allocation of resources. The budget does contain some positive measures but I believe this is not enough to really shake the economy.

Are the conditions favourable for Mauritius to achieve the HIR?

Today, we face new challenges, while the rules of the game in which we navigate are changing constantly. We now have so many new challenges like the Brexit, the erosion of the tax base and the transfer of profits (BEPS), the complete abolition of protection for sugar with the liberalisation of quotas in Europe for the benefit of the beet, the return to protectionism and the new world order, among other things, are headwinds that will affect our economy in the years to come. Against such a backdrop, it is imperative, that we give ourselves the means to achieve our objective to move Mauritius in the HIR league. The investment in infrastructure as described in the Public Sector Investment Programme, if implemented could indeed provide a significant boost to investment and economic growth in the short term.  However, to achieve a HIR and more importantly avoid getting stuck in the ‘middle income trap’, a sustained growth is required; and for this we need to embark on a more ambitious reform agenda, encourage private investment; greater value addition in the economy through the creation of ‘high value’ sectors, and adapt smartly to changing rules of global tax and regulatory framework.

What does it imply for the population and its impact on the economy?

The major implication of a move towards a HIC status is an improvement of the overall quality of life of the population. A higher income per capita also translates into higher purchasing power and widens consumer choice of goods and services. Similarly, companies’ profits are boosted, thereby enhancing business confidence and driving higher investment. All of which drives higher growth. Besides, as a high-income status country, the credit worthiness is improved, thereby making the economy more attractive to investors whilst enhancing the access to global capital markets. However, it is important to note that, the potential side effects of higher levels of growth such as rising social inequalities.

MCB Focus 

In 2014, the Mauritius Commercial Bank (‘MCB’) has assessed achievability of Mauritius as a high income country by 2020 in its issue of occasional paper 58 of MCB focus (a publication of MCB on economic issues surrounding Mauritius). Accordingly, the MCB wrote that for high income status to be achieved by 2020, Mauritius will have to secure an average annual real GDP growth rate of 5.2%. MCB is of the opinion that if the current below par growth persists, the achievement of high income status will only happen in 2025, assuming an average annual real GDP growth rate of 3.3%.

MCB goes further to provide its recommendations for the 2020 target to be achieved (through occasional papers 54 and 55 of the MCB focus) and points to a national economic transformation plan which should be clear to, well-understood and observed by all stakeholders. Additional recommendations are:

The setting up of a full-fledged and ambitious national investment strategy that charts out the way to attract domestic capital formation and foreign direct investment over the short and longer runs. A marked improvement of the investment ratio from 20% of GDP (which is observed today) to 27% of GDP will be essential in achieving high income graduation within government timelines.

A well-defined national development plan that ensures that socio economic development activities are judiciously extended across geographies and income classes within the country. The overriding objective should be to create a modern, dynamic, innovative, balanced and inclusive economy which should be agile enough to react to changing circumstances and to make the most of emerging opportunities. 

Source: Abax Services

 

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