During the second Competitiveness Foresight exercise that is organising this week, the National Productivity and Competitiveness Council is reflecting upon the current competitiveness status of Mauritius. This comes at an opportune time when private sector lobbies have managed to convince government to take steps to boost exports by currency manipulation.
Not only does the ministry of Finance subsidise exchange rate losses made by exporters of goods, but the Bank of Mauritius has also loosened further its interest rate policy and keeps on buying dollars to artificially weaken the rupee. Alas, tampering with exchange rate can only make things worse, as it brings about misallocation of resources and distorts the production structure. And it goes against what the World Bank Country Partnership Framework for 2017-2021 calls “inclusive competitiveness”.
Tampering with exchange rate can only make things worse, as it brings about misallocation of resources and distorts the production structure.
Participants to this workshop were invited to read “The Competitive Advantage of Nations” of Michael Porter. Although it was published 27 years back, this seminal article is still relevant today for a very small and open economy like Mauritius. At the outset, the author emphasises that national prosperity does not grow out of a country’s currency’s value. It actually “depends on the productivity with which a nation’s labour and capital are employed.” Thus, “the only meaningful concept of competitiveness at the national level is productivity.”
A competitive nation, says the Harvard professor, is not one whose exchange rate makes its goods price competitive in international markets. Advising governments to “avoid intervening in currency markets”, he refutes two sophistries on the concept of competitiveness. First, contrary to the belief of the Mauritius Chamber of Commerce and Industry, “defining national competitiveness as achieving a trade surplus or balanced trade per se is inappropriate.” Expansion of exports due to a weak currency may bring trade into balance but lowers the country’s standard of living. Now, “the principal goal of a nation is to produce a high and rising standard of living for its citizens.”
Second, contrary to claims made by the Mauritius Export Association, “competitiveness does not mean jobs. It’s the type of jobs, not just the ability to employ citizens at low wages, that is decisive for economic prosperity.” The Mexa pretends that exchange rate intervention would create, or at least save, jobs. Empirical evidence, however, clearly shows that our decades-long export-friendly monetary policy has not caused Mauritius to gain manufacturing jobs. Export-oriented enterprises shed more than 40,000 jobs over the last 16 years, with employment down from 93,218 in March 2001 to 51,954 in March 2017.
In 2015, the rupee’s value slid by almost 20% against the dollar, falling to a buying rate of around Rs 36. In November of the same year, the monetary policy committee slashed the key interest rate by 25 basis points, and it cut it by a further 40 basis points in July 2016. In response to this aggressive monetary easing, exporters were supposed to invest, to borrow and to expand their production of goods. Instead, their output contracted by 5.1% in 2016 while the manufacturing sector’s gross fixed capital formation declined by 0.6% in real terms. As regards bank credit to export enterprise certificate holders, it barely increased from July 2016 to July 2017.
Worse, there was no improved competitiveness on account of rupee depreciation. True, the ratio of export price index to import price index rose by 18.5% from the first quarter of 2015 to that of 2016, indicating that the terms of trade moved in favour of Mauritius. However, the terms of trade decreased by 14.0% in the first quarter of 2017 compared to the corresponding quarter of 2016, despite the fact that the US dollar stayed high between these two periods.
The lacklustre performance of the export sector can be attributed to a confluence of factors, notably restrained demand in key external markets, competitive pressures, growing business costs and currency dynamics. It is not a foregone conclusion that a sustained decline in the external value of the rupee can sharpen export competitiveness. Firstly, in spite of better export prices, demand can remain stymied by subdued economic conditions overseas. Secondly, the net effect of rupee depreciation on the demand for Mauritian exports can be insignificant in view of the evolution of the competitors’ currencies.
Thirdly, the import content of exports is substantial for a trading nation. As rupee depreciation triggers higher import prices, they feed directly into higher production costs. As time goes by, the effects of loose monetary policy also filter through a broad spectrum of prices of goods and services and ultimately eat into exporters’ profits. Thus evaporates the gain of cheaper exports. The British Chambers of Commerce is right to point out that the collapse of the pound in the wake of the Brexit vote has done “more harm than good” to the UK economy.
Currency depreciation inflates and redistributes, transferring wealth from the poor middle class to the wealthy owners of export industries. In Mauritius, workers do not have bargaining power to negotiate a nominal wage increase to bring their real wage back up to before the devaluation. The central bank acts as a reverse Robin Hood, taking from the have-nots to give to the haves.
Currency depreciation is unhealthy as it undermines confidence and demoralises. Other economic actors are also hurt, namely consumers who bear the brunt of more expensive foreign products, and firms which import their inputs and sell on the local market. The country gets poor in terms of real wealth, in terms of the goods and services required for maintaining people’s well-being. An economy does not gain in competitiveness by excluding the many for the benefit of a few.