Tuesday, November 05, 2019

Sithanen Statements That Don't Survive A Fact-Check

1. No country invests more than 50% of their reserves in gold. Saying otherwise is pure folly (2009). Really?

2. We’ve been hit by triple external shocks – sugar, textile and oil (end of 2005 or early 2006). Sugar was already a sunset industry in 2005 representing a mere 4% of the economy or half of what it accounted for twelve years earlier. The contraction in the textile industry was reaching its end in 2005 after 22,660 jobs had been lost between 2001 and 2004. The rise in the price of oil was different from those of the oil shocks of 1973 and 1979 in that it was demand-driven while those of the seventies were supply-driven. Furthermore by 2005 the efficiency with which we use oil had increased by quite a bit. The rise in the price of that commodity was in fact a big plus in the sense that it brought in a lot more revenue through VAT and the automatic pricing mechanism (APM).

3. We shouldn’t put someone who doesn’t know how to calculate debt and the link between growth and tax rates in charge of the Ministry of Finance (2009 or 2010). He made this statement when it was looking increasingly likely that he might be replaced as Finance Minister (FM) – perfectly understandable after doing so much damage to the economy. There is definitely a link between taxes and growth but the link is mostly that taxes don't hurt growth if they are below 70%. There's no advantages to be had from lowering taxes from like 25% to 15% flat like he did in the mid-2000s.

4. We should be able to clip growth rates of 7/8% by 2008 (2005). As chart 2 shows we never got these kinds of growth rates. In fact average growth rates have been about half the 8% growth rate promised by the bean-counter with growth rates of the past eight consecutive years below 4%.

5. I am worried about inequality. Ongoing worry. Let's look at how the share of GDP for groups of households changed after each of his stint. The household budget survey, done every five years, which ended in 1997 or year and a half after the end of his first term shows – see chart 3 – that all households except the richest saw their share fall with the poorest being hit the hardest. We have to remember that pensions were doubled by Ramgoolam after his landslide victory in 1995.

The picture for five years of his flat tax that ended in 2012 shows more or less the same kind of pattern. The more vulnerable of the household groups got clobbered the strongest. Talk is cheap. He's worried about inequality. 

6. We created an average of 10,000 jobs thanks to the reforms between 2005 and 2010 (2010 and after). We need to wonder what kind of jobs were created for savings to maintain its freefall and for growth to stay so low for so long. Have another look at chart 2.

7. The stimulus package saved 4,700 jobs. Why do you need a stimulus package if your reforms are creating 10,000 jobs every year or about 5,000 in each six-month interval? You just have to sit on your hands and let the economy solve the problem for you. We know how controversial this stimulus package has been. 

8. We’ll get the high growth rates after the recession ends (2009). The recession has ended ten years ago and still no trace of 8% growth with eight of the last years below 4%. 

9. We reduced oil prices as far as we could (2008). That was after the collapse in oil prices. Given that there was an automatic pricing mechanism in place pump prices should have fallen a lot lower reflecting the sharp drop on the world market. They did not.

10. I have removed subsidies on rice and flour because I don’t want tourists to eat subsidised dalpuris. How many dalpuris are sold to 788,000 tourists who stay on average for like 10 days compared to what 1,200,000 Mauritians that are here for 350 days buy? Besides how many pairs can they stomach once they get rid of their jet lag? Did you also open the floodgates for speculative FDI so tens of thousands of Mauritians are priced out of the real estate market for good?

11. There was a hedging loss of about Rs5 billion at the State Trading Corporation (STC). How can there be a hedging loss when the STC doesn’t even have a risk exposure given that it passes all oil price changes to us through the automatic pricing mechanism? Give us a lot more details about which financial instrument was used and who was involved so that at least it serves us as a five-billion rupee lesson.

12. I'm worried about savings. Ongoing. You are? What did you think removing exemptions that we had used for a long time to build our long term financial plans would do? Along with taxing bank interest, implementing a flat tax and tampering with our basic welfare state?

13. We're facing a food crisis (2006). And your response is to remove subsidies on rice and flour and pour tons of concrete on hectare after hectare of agricultural lands?

14. Reforms worked because they increased government revenue by 20% in the first year (2019). Revenue of government can increase if at least one of four things are increasing: tax rate, GDP, price of goods and number of people/things being taxed. Tax rate went down so it must be the last three factors. As GDP didn't increase by 20% the price and the number of things being taxed must have increased. A good chunk of the increase must have come from skyrocketing oil prices which even hit USD147 per barrel at one point in time. There were also new taxes on bank interest. But the most intriguing part of this statement is why he stopped at the first year. He should tell us for each of the fourteen years since the tax cuts were introduced. As chart 5 shows there has been a government revenue shortfall in each of these years because growth rates never reached 8%. The shortfall for this year alone is Rs68 billion.

14. I expect the LP/MMM alliance to win by 60-0 (2014). That alliance won only 13 seats. That’s an error of more than 500,000 votes. 

15. Ethnicity is by far the biggest factor in general elections (2014). Guess if he left no.18 for no.13 in 2014 the ethnicity was more favorable for him there. And now he has returned to no.18 because the ethnicity is now better here again. But it wasn't as favorable in 2017 for the by-election. Of course he had already left politics at that time. Boolell though has been heard in 2017 saying that Sithanen was campaigning for him since day 1.

16. I’m lucky to know how the economy works (2017). Oh please!

Monday, November 04, 2019

Who Do We Send To Parliament Now?

Houston Mauritius,
We Have a Problem
Because we're in a huge mess and three other parties/alliances are brain dead. It's good to remember that proper political projects are essentially about baking a cake and sharing it – see chart 1 – while not considering nature as an afterthought but as a priority at every stage when solving pressing problems. The cakes we’ve been baking since 2006 have been the smallest of the last thirty years and their sharing the worst. That's before using the value of our currency to further check their quality. In fact the cake baked by the Lepep government is the same size as the one cooked by Ramgoolam in his third mandate after adjusting for term length but while the distribution is slightly better our rupee has lost 16% against the USD over the past five years. Overall the situation has become a lot worse because the idolatrous economy initiated by Navin has metastised. 

Making Nature 
Our Slave?
We haven't shown nature the kind of respect she deserves either. Maybe too many policy-makers think that driving a car in their Havaianas through sugar cane fields to a casino on Mars while smoking a cigar is the ultimate goal (https://youtu.be/79XP5ksqK7M)? Fortunately the majority of us disagree. 

The Current Situation
The flat tax has basically been driving us towards bankruptcy since it was implemented (https://youtu.be/H-4941mkU58). Public debt has increased tremendously, procrastination and creative accounting have become national pillars while urgent problems have either not been solved or the horizon for their resolution extended substantially – the replacement of 1,600km of leaking water pipes will now not be completed by 2023 as initially targeted but more likely in 2032.

And I'm not even talking of issues that have not been recognized as matters requiring our immediate attention. By one conservative estimate, at the end of this year there will be close to Rs1.8 trillion of GDP missing – the infamous Sithanen toohrooh (ST) – and a shortfall of Rs360 billion of government revenue with respect to what these irresponsible tax cuts were supposed to generate since 2006. 

Reforms Have 
Failed Spectacularly
If making the rich pay the tax rate of the poor had worked we wouldn't have seen government go after Bank of Mauritius funds, extend the retirement age to 65, take on a lot more debt and disconnect local pump prices from their international levels. We would certainly not find it trying to sell national assets. On the contrary it would have announced that it's buying more assets, reduced our national debt and upgraded our basic welfare state. 

What You Can Do 
To Make Matters Worse
That's easy. Just vote indiscriminately for one of the parties/alliances that have given us our Prime Ministers so far. They will not do what needs to be done and the ST will technically more than double to Rs4.4 trillion in 2024 bringing the cumulative government revenue shortfall to Rs880 billion. If there's Rs68 billion of government revenue missing for this year alone by 2022 the corresponding figure would have crossed the Rs100 billion mark. Getting to 2024 might not be the smoothest of rides. 

There's Nothing in 
Their Manifestoes
The MMM wants to save the sugar industry because it's been with us for ages and because it believes it's a growth industry. It plans to save it with some really potent measures – read injecting public funds, depreciating our already very weak rupee and probably grant tax waivers to fuel more land speculation. The MMM has obviously not looked at a chart of the weight of sugar in our economy for a long time. It's true that in the past few years this right-wing party has been busy establishing itself as another political dynasty.

Contributing currently only 0.5% to GDP (twenty times less than in 1990) sugar is a sector that cannot be saved. Militants should ask themselves a few simple questions. Since when do we save a growth industry? How many good jobs can that industry create? How will it do if our currency reverts to a very reasonable 25 rupees to a dollar? They might also want to watch The Future of Sugarhttps://youtu.be/Zwu9pCapVS4

Labour Not Any Better
So Ramgoolam wants to perform 'Riptir' with Sithanen? Thanks, but no thanks. He also wants to eliminate municipal tax because it brings ‘only Rs300 million’ per year – that's after promising to cut the flat tax for women to 13%. There's no idea more irresponsible than this given that Mauritius hasn't been able to pay for her own basic things for years now because of other massive tax cuts that occurred on his Rolex. See it's only after the deadly floods of 2013 that we discovered that the weather radar had been broken for years. The PM at the time then went to Japan to ask for a Rs400 million radar or roughly what the municipal tax brings in these days. 

Saving 180 Lives
We shouldn't forget that he has the worst road safety of all of our PMs – Pravind Jugnauth would have about 753 fatalities or three less than him over a five-year period. Every cent is needed to bring down these numbers to as close as possible to zero. A reasonable target over the past five years would have been to lower the fatalities by the fifth year by a third. This would have saved 180 lives. Nothing of the sort happened with fatalities in each year higher than the 137 we clocked in 2014. No progress will be recorded with more tax cuts. Far from the contrary. But it's perfectly fine for Ramgoolam to work hard to leave a legacy that will be sneezed at but nobody is forcing us to have any of it. 

Where's the Second 
'Economic Miracle'?
Lepep won the 2014 elections because of the devastating effects of the flat tax, the other regressive policies and the wicked plan to turn Mauritius into a banana republic (BR). It has maintained them, added more tax cuts and offered more indecent incentives to fuel further real estate speculation. It has also tried to pass its own version of a BR but thank God it didn't have the supermajority to do that. Giving the outgoing PM his first mandate would not get us out of the woods because the status quo is not an option – the ST will grow to levels that see people take to the streets like in France and Chile a lot more often – and because he also plans of selling public assets. 

So, Who Do
We Vote For?
Definitely not for politicians who have switched sides because their only concern seemed to have been which alliance that will bankrupt Mauritius, install a Big Brother and screw up our democracy was more likely to win the elections this time. Shouldn't we consider instead, as Emmanuel Blackburn has asked in his "Elections 'Koupe-Transe': Lalit porte seul les valeurs de la gauche..." on October 29 in Forum, giving our first vote to Lalit on 7.11.19? In fact the list of 62 candidates that would make sense to vote for I had just built before reading his article was, interestingly enough, created by first selecting the 24 candidates of Lalit, then picking a number from Les Verts Fraternels (10), independent candidates (9), Forum des Citoyens Libres (7), Party Malin (4 and congratulations to Malin for pulling that giant crowd in Plaine Verte) and a few more from other parties. 

Why Lalit?
It seems like the obvious choice when we look at how they stack up against the three parties – see chart 2 – on a number of crucially important issues (https://youtu.be/Z-UHV_rUQ-U). For example they're the only party that suggests we don't save the dead sugar industry but instead grow food. This should produce a bigger national cake, a better land use, improve our balance of payments problems and our resilience at the same time. In turn ensuring we all become richer through a stronger currency and making it obvious which industry is strategic. It also scores big points for being for sustainable taxation which would reduce inequality (https://youtu.be/L10wALtIoUs) and the risk that we go bankrupt. 

No to Car/Bus 
Ratio of 100
Lalit also wants a Ministry of Plan back. Another good position given that we've become a planning disaster – the current horrific car/bus ratio of 77 will rise to 97 in 2024 if we do what we did in the past four and a half years adding tremendous pressure on the environment. Bet you Sophia the robot didn't tell you that. Mind you not all is perfect with Lalit. Just like the other three parties they are for a dose of proportional representation which would create two forms of political uncertainty. How big a risk is it voting for them? Probably a million times less risky than voting for the other three. Plus they are strongly for recall elections which will allow us to throw them out of parliament well before 2024 if they do anything stupid like an affermage contract for the CWA or not raising back taxes for the rich. 

Who Should
Vote For Them?
Many people won't find it difficult voting for them. People who like Soldat Lalit Militant given that their positions will reduce social injustices unlike those of the MMM. People who are fans of SSR as they are against stupid privatisation, for a top public health system and for solving problems. People who feel that the three parties have betrayed the values that had initially attracted them. People who don’t want their neighbourhood to morph into a favela. That’s a lot of people. And Malin is likely to bring much-needed dissent to our National Assembly. 

Thursday, October 24, 2019

How Did You Like Ramgoolam's Fourth Term?

The one that’s about to end. But he hasn't been Prime Minister since December 2014 I hear you think. So he has completed three terms. Not four. True. But it would not have been a lot different for a majority of voters in several ways. Given that the 2014 'gros piège à cons' of the Bérenger-Ramgoolam-Sithanen trio was complex enough to generate several dangerous outcomes we'll make a few assumptions to narrow the analysis before looking at how it would have been different and similar.

Three Assumptions
The first one is that the LP/MMM alliance won the elections but fell short of the supermajority needed to transform our political setup into a totally useless semi-Presidential system. The second one is that Ramgoolam, Bérenger, Sithanen and the two Jugnauths are elected. The final assumption is that the LP had more MPs than MMM so that Bérenger is sworn in as Ramgoolam's deputy. After the toss of a coin the Sun Trust decided that SAJ would be the Leader of the Opposition as long as he's healthy enough. 

What Would Have Been Different
BAI would probably have been dealt with differently. If the relevant authorities had given a deadline to the management and shareholders of the conglomerate they would have respected it. Party leaders fondly remembering large political contributions might have helped to avoid causing premature distress to thousands of policyholders. There's no guarantee that the group's situation would have improved but that's an entirely different matter.

No Minimum Wage Or
Negative Income Tax
I don't think Sithanen would have implemented a minimum wage. Instead he would probably have worked hard to remove the little life that was left in the economy by again ripping off the poor and giving to the rich. But he would not have done two of the most stupid things given that he had already made those decisions almost as soon as he got elected in 2005 (killing our savings culture and flattening the tax structure). 

Not a lot of voters would have been surprised to see him try to cancel the school-feeding program anew – which would have been hailed as courageous by some in the mainstream media a bit like when abusive hire/fire labour laws were passed – and shrink our basic welfare state that keeps 20% of Mauritians out of poverty. Interestingly Navin Ramgoolam has said recently that the minimum wage has been set too high and was partly responsible for a few factory closures. I think he should tell voters right away by how much it should be lowered. For riptir's sake. 

Siphoning Off Money From 
the Bank of Mauritius Likely
It is very likely that Sithanen would have forced funds from the Bank of Mauritius to be transferred to the treasury to prop up his giant Ponzi-like scheme: the 15% flat tax. This would have been just another bean-counting moment similar to when he cancelled the rice/flour subsidies before they reappeared at the STC or when he created a galaxy of funds with pompous names that he claimed were funded by an early harvest and a bumper crop but which his successor at the Ministry of Finance told us were in fact created with borrowed funds. In any case what stupid move is not too stupid for a guy who killed our savings culture (missing savings between 2006 and 2018 are Rs753bn while we received only Rs189bn of mostly unproductive FDI) and who cancelled the tiny school-feeding program? There's also the 5-6 billion rupees mysteriously lost at the STC in an hedging.  

Safe City, Ramgoolam–Style
Ramgoolam would no doubt have implemented a 'Safe City' project as it is the second step in setting up a hi-tech and totally unnecessary surveillance state, the first step being the biometric card that happened on his watch. Furthermore we've seen until very recently that about the only problem he had with the Lepep version of Big Brother was its massive cost.

Cake Size Would Have 
Been About the Same
Growth would have been similar if not a bit lower because of some of the really stupid stuff Sithanen would have done like reducing flat taxes to 13% almost immediately and the smart stuff he would have avoided to do (freeze the horrific real estate speculation). In any case it would have stayed around 3-4% for the entirety of the term which is half the required 8% growth to keep the current regressive and ruinous structure. In effect we would have had five more years of proof that making the rich pay the tax rate of the poor is Paglanomics. Incidentally Charts 1 and 2 plots the growth rates of the past ten 10 years. Can you tell which one is the performance of the Lepep government? Keep on reading to find the answer.

Cake-sharing Stays Very Unfair
The absence of a minimum wage would have caused inequality to persist at the record levels registered in 2012 and might have worsened. Stale stories of gato-pima and savat leponz would have made a big comeback but as everyone except the bean-counter is aware these don't reduce inequality. Indeed after Sithanen's first stint the share of GDP for the bottom 90% of Mauritian households – that's over a million citizens – fell in 1996/7 and that too after pensions were doubled by Ramgoolam while 70% of households (about 880,000 Mauritians) saw their share of the national cake shrink in the first five years of his regressive policies in 2012 with the bottom 60% hitting their smallest share in two decades. This conveys a lot more information than the bland Gini coefficient as does the distribution of incremental GDP.

Public Debt Would Have 
Kept on Increasing 
Reaching levels similar to the current situation with Pravind Jugnauth instead of Navin Ramgoolam clamouring that every baby born now has Rs300,000 of debt on her head. Servicing the flat-tax-induced borrowings would have made less money available to maintain let alone enhance service delivery of our welfare infrastructure. This would have, for example, meant that dialysis and cancer-treatment equipment that broke down are not replaced.

More Pressure to 
Privatise National Assets
Given that we would not have seen any growth rates close to the 8% target for fourteen years and the fact that our politicians don't work in our interest, government during the fourth mandate of NR would have given many of our public corporations a bad name, floated the idea of privatising several of them – using bizarre terms like affermage, strategic parnership and other rubbish – with the very controversial World Bank standing by with a noose in the form of dodgy reports. Citizens would of course have taken to the streets and Ministers would have had their Billie Jean moment.

Sliding Rupee
Given that Bheenick would have been sacrificed in the name of the 'gros piège à cons' it's likely that a spineless governor would have been appointed. And this would have meant a rapidly-depreciating currency. Probably as much as we've seen during the past five years that is the dollar gaining 6-7 rupees or more if that governor wanted to send an unambiguous signal that when it came to being a doormat he's second to none. Which would have made 99% of us poorer and Sithanen very happy. 

Persistent Water Problems
We had some pretty acute water problems between 2005 and 2014. They would have lingered on because the flat tax has caused our government to run out cash by not putting us on the right side of compounding. Otherwise we would have paid for our own ENT- and eye-hospitals. And so many more things. 

A Traffic Frankenstein As Mean
As was shown a few weeks ago a crucially-important ratio to gauge the quality of our transport policy is the car/bus ratio. It almost doubled from 31 to 56 in the 2005-14 period and made driving a lot less pleasant. There's no reason to believe that it wouldn't have reached its current catastrophic level of 77. Definitely not after hearing Sithanen put both of his feet in his mouth on this dossier a couple of years ago. This sorry state of affairs would have been accompanied by a multi-billion-rupee road congestion program (building new roads) and a tram on stilts that would not have solved anything but on the contrary deface Mauritius on a big scale. The first chart shows the growth performance of the Lepep government. 

Road Fatalities Would Have Stayed Flat
The point system would not have been scrapped and we might have made some progress as far as road deaths go. Or we might not have. Simply because just having a point system doesn't make our roads less lethal in a sustained manner. There are other boxes we need to check before we solve this problem such as having enough money thrown after this problem. Ask Sweden. 

Still Hostage To 
A Few Centimetres of Rain
Because of a lack of deep-enough drains, too much single-use plastic, haphazard construction and an unchecked car pool. We might not have been so lucky after enough rain poured while a street festival was held after the sun had set. Our friends in Fond du Sac would have lost all their possessions each time rain exceeded a certain threshold. These would have been immediately followed by harsh water cuts.

Substance Abuse
Stays High
Reducing taxes to 13% might have led us to move from like 3 casinos per town/village to 3 casinos per capita. That's how the mind of the bean-counter works. Not good given the drug-gambling nexus. 

Wednesday, September 25, 2019

Bean-Counter Who Broke the Economy Says He Understands How it Works

Tram Will Cut Down
Road Fatalities By 20%. Really?
That was on a radio program in the second quarter of 2017 when Sithanen argued against the Lepep tram while Chung defended it. Chung, a senior advisor at the PMO at the time, predicted that the introduction of the tram would slow down the growth of the car pool and reduce road fatalities by 10%-20% every year (save 20-30 lives) which he claimed happened everywhere in the world. Flyovers and a Bus Rapid Transit (BRT) were not options for him.

Didn't Happen in Sweden
It was kind of surreal to hear a forecast of a big drop in road fatalities in a year when they ended up increasing by 20 compared to 2014 after rising for the previous two years partly because of the scrapping of the point system. Besides we know that rail transportation doesn't automatically reduce road deaths. We can look at Sweden, a road-safety champ, which saw its rate of road fatalities double in the two decades following the 1950 launch of its heavy metro system.

Or in Singapore
In Singapore road deaths increased by 21 or 10.2% in 1988 or one year after the start of its metro and kept going up the following three years. The situation was not a lot different after it rolled out its LRT twelve years later, which we call Metro Express here. Indeed fatalities rose in 6 of the first 10 years of its operations. It's also important to note that the car pool there more than doubled in size between 1987 and 2007 which is the period in which the two rail systems were added. That's about a 20% faster percentage rise compared to the 1967-1987 period. 

Bean-Counter's Solution
For Sithanen, traffic congestion was essentially about getting into the capital. That was a bad start as traffic had become a major headache almost everywhere. He proposed the same three solutions that he says Bodha advocated before June 2016 namely accelerating the road decongestion program (RDP), flexitime and decentralisation. And if these didn't work he suggested going for the Bus Rapid Transit (BRT).  

You Can't Build Your Way
Out of Congestion
More roads are not really a solution because they go against the fundamental truth that "you can't build your way out of congestion". We've experienced this several times. Build new roads, flyovers, other gimmicks and all you get is a little reprieve before the traffic Frankenstein returns with a vengeance. Plus they exact far too heavy a cost on the environment, our national heritage and us. Flexitime should definitely be part of any solution we implement as must decentralisation. He was against the tram because it would be a financial disaster which would saddle future generations with debt – a funny thing for him to say when we know that his flat tax has caused a government revenue shortfall that would have fully paid for at least one tram every year for the past seven years. 

Fek Debarke Ki Sa?
But this immediately begs the question of why he didn't implement flexitime or decentralisation when he was the Finance Minister (FM) on two different occasions fourteen years apart for a total of almost ten years. Especially between 2005 and 2010 when traffic had become a top problem. It's true he was very busy during his last stint pushing public finances over a cliff and killing a savings culture that had survived at least three intense cyclones. It's also true that his three solutions would collectively not have solved the traffic problem while a simple analysis should have made a strong case for the adoption of the BRT. 

BRT Has Been Around
For a Long Time
The first BRT was implemented around the first oil shock and the second a year later in the Brazilian city of Curitiba, the name that springs to mind when you think of this mass transit system (see 1 which doubles up as a legend for 2). Lagos and Jo'burg got theirs a decade ago while as of March of last year 166 cities had one. Even if he hadn't introduced the BRT one well-known fact – the number of people traveling alone in their cars – and keeping an eye on the number of cars and buses would have pointed to a path that's natural for us. Especially if the last two numbers are combined into a ratio that's as important as our fertility ratio used to be sixty years ago. 

Car/Bus Ratio Measures
Our New Malthusian Nightmare
The first thing to note in Chart 2 is that the car/bus ratio stayed within a narrow range for three decades. Worthy of note are the drops in the ratio in response to two oil shocks (OS) – the increase in the number of buses on our roads between 1973 and 1974 was larger than the one over the preceding six years. In fact, we had to wait for 1999 for this ratio to cross 20. Ironically it underwent a significant deterioration during the big contraction in the textile industry in an environment of skyrocketing oil prices — these include the years when Bérenger dubbed our republic the best managed country in the world. 

Triple External Shocks. 
Yeah Right
Even funnier is what happened after July 2005. See, the bean-counter told us we were facing Triple External Shocks (TES) with one of them being high oil prices. The least you would have expected him to do then for consistency sake was to tweak policies so we end up with a ratio that didn't deteriorate. That didn't happen. The same nonsense occured during the 18-month Great Recession shown in grey. Overall, for every bus added to our transportation network during his second stint as FM there were 128 more cars (up from roughly 21 during his first term) causing that ratio to hit 40 by 2009.

Nightmare Gets a Lot Scarier
The ratio has kept rising over the following eight years reaching 74 at the end of 2018 – in effect doubling over one decade and quadrupling over roughly two – and indirectly contributing to the loss of lives in the 2013 floods and directly causing many road fatalities. The deteriorating ratio is not simply the effect of higher incomes. It is mostly a sign of ferocious stupidity because cars stay idle on average about 95% of the time (reinventingparking.org), eats up about 12% of the space of cities, damages our competitiveness and causes a host of other problems. Its growth has been left unchecked for way too long causing a lot of things to go out of sync. Is it a surprise when we didn't have a Ministry of Plan for at least as long as we've mistaken the economy for a golden calf?

What Now?
We'll enjoy the free rides on the Urbos for a month but traffic congestion doesn't really improve everywhere else. The free rides stop and the traffic Frankenstein experiences another growth spurt. We then realise the tram doesn't solve anything – putting it on stilts is no better. Then a harrowing conclusion. Promenade Roland Armand and so many other landmarks were destroyed for absolutely no good reason at all. 

Government will then do something it should have done a long time before the groundbreaking ceremony for this new mode of transport: get radical with the growth of the car pool so as to be more gentle towards the environment. The earlier cars are declared public enemy No. 1 the sooner we'll collectively get to work to bring down the car/bus ratio to a healthier 35 – like by adding 1,000 buses and taking 94,000 cars off the road – and proclaim a first city car-free. This should take us about a decade. To help us avoid concrete "min-Apolo" and other eyesores. And regain our status as an overcrowded barracoon.

Wednesday, September 18, 2019

What Did Trees in Beau-Vallon and Our Saving Culture Have in Common?

Another bleak reality is the decline in national savings rate. It has fallen from an average of 26 percent of GDP in the period 1996-2000 to 24.6 percent in the period 2001-2005. CSO is forecasting a very low savings rate of 19.5 percent for 2005. Here again, we must be utterly concerned. 
Rama Sithanen, 2005

... il a fait beaucoup de tort à la culture d'épargne des Mauriciens en enlevant les exemptions fiscales sur les prêts immobiliers ainsi que les études supérieures de leurs enfants, 
tout en taxant les intérêts bancaires.
Dan Bundhoo, 2014

Simple. They had gone through plenty but survived. There's a word for this and it is resilience. Granted it's a term that has been abused in Mauritius over the past decade. But it's easy to show what it really means. As RAFAL wrote about the resilience of trees recently I will focus on our savings culture. 

Tigers Have High Savings
The first thing to note about our savings (see 1) is that over the past 58 years they were quite volatile until 1981 essentially because of cyclones and our monocrop status. They were quite high and stable between 1985 and 2004. Mind you the average for the whole period covered in chart 1 is a little less than 20%, although a decent number was lower than the 24.8% of that stable 20-year span. What's particularly interesting is what happened to this fundamental determinant of long-term economic growth when we were hit by three intense cyclones.

Meet Danielle, Intense Cyclone
Although in 1964 Danielle drove savings to an absolute low of 9% after GDP fell by 17.6% – in contrast, according to Wikipedia, it took three years for world GDP to reach its maximum contraction of 15% in the Great Depression – savings jumped back to 15% the following year and was already 20% in 1969. So, we were devastated – it probably felt like the end of the world – and then we used our savings to get back on our feet which in turn boosted savings. This is a textbook example of resilience.

And Her Two Sisters
The second big dip in savings occurred in 1980 after another cutie visited us at the end of 1979. Indeed Claudette plunged the economy into a recession and savings collapsed by 47% but we recouped almost half of that drop the following year. Gervaise, a terrifying cyclone in 1975, did not affect savings for that year that much although it checked us out in February. That's probably because it visited us after three consecutive years of double-digit growth – clipped under a system of progressive taxation – that had allowed us to significantly improve our resilience. GDP growth for that year was flat.

Something A Lot Worse
Than An Intense Cyclone
The recent collapse in savings is different. It was caused by the completely dumb decision of one toxic bean-counter in 2006 to tax bank interest and compromise financial plans of literally a whole nation by wiping out the battery of exemptions that they had used to build up their resilience over many years of sacrifice. This was done to partly finance the flattening of tax rates to 15% to build a facade of low-tax jurisdiction and to get average growth rates of 8%. Which technically should have made our public sector debt-free by now but as expected it never did. Even the Pope knows trickle-down economics is snake oil. 

Savings Were Bouncing Back
As shown in chart 1 savings were in the process of bouncing back after the big consolidation in the textile industry when Sithanen implemented that string of regressive measures – in the name of TINA (There Is No Alternative) – which caused savings to go south. He's going to say that his reforms worked because we got record amounts of FDI and these have made up for the savings shortfall. Is that so? Let's find out. 

Estimating the Savings Shortfall
We can estimate how much savings is missing by picking a rate we would consider as normal for the period since the worship of an idolatrous economy began in 2006. We do not want to take the average for the whole 58 years as our economy was a lot more volatile in the 60s and 70s. A much better estimate is 24.8% which is the average between 1985 and 2004. We then compute a normal level of savings by multiplying actual GDP by this estimate. 

Checking the Estimate
Chart 2 confirms that 24.8% appears reasonable. Clearly the Sithanen flat tax, his other massive blunders and the maintaining of these toxic policies till now have caused a huge disconnect – there has also been one between international oil prices and what we pay at the local plumps – the like of which we've never seen before. Again, those in favour of the unsustainable tax structure will say that we've received a lot of FDI so trickle-down does work. And it's all good. While we did receive plenty of FDI we know we didn't get enough of the proper variety as otherwise it would have moved the growth clock in a more decent manner – 2019 will be the ninth consecutive year that growth will be under 4% or half the 8% needed. We also know that the poor growth didn't trickle down. We just have to look at better measures of inequality – the Gini coefficient is not one of them. Or hear accounts of visits to public hospitals. 

Getting More Precise
Chart 3 plots the missing savings for each of the thirteen years of trickle-down against the FDI received. We note that the shortfall in savings has been a lot bigger than the FDI we got for all but one year (2007). For example the FDI for 2016, 2017 and 2018 were 18.2, 21.2 and 17.4 billion rupees while the corresponding saving shortfall were 59.8, 67.5 and 75.6 billion rupees.

The Cumulative Effect
If we add the missing savings from 2006 to 2018 we get Rs569.7bn whereas the total FDI for the same period is Rs188.9bn. That's Rs381bn of net savings missing which could have been used to put Mauritius on higher levels of development by building new fields of activities that are more respectful of the environment and our national heritage. Which is essentially what we did till 2006.

The Mess is Actually Bigger
The shortfall is larger because we used actual GDP growth and not the 8% growth target. But that's easy to adjust. We just need to add 24.8% of the GDP shortfall – the infamous Sithanen toohrooh – at the end of 2018 (Rs1,500bn) which brings the net shortfall in savings to a whopping Rs753bn. It's important to note that this mess happened in global economic conditions that were relatively mundane. Things will get worse even if the world economy doesn't hit a rough patch. Unless we wisen up fast and bring exemptions back. 

Wednesday, September 04, 2019

Pope to Spend Day With Victim of Unbridled Capitalism

He will find a Mauritius that's a lot more vulnerable than when John Paul II visited us thirty years ago. The damage done by an extreme version of trickle-down economics — 'dung of the devil' as Francis quoted a fourth century bishop to his Santa Cruz, Bolivia audience back in 2015 (as reported by The Guardian) and which has been dubbed Shaitanomics here since 2010 — is extensive and captured in chart 1. 

Average GDP growth over the four years preceding the second papal visit is 3.8% which is less than half the 8.5% of the first one or the growth promised for implementing the economy-destroying 15% flat tax. This has resulted in a national cake growing (cake increase) by about a sixth compared to nearly two-fifths for the four years ending in 1989. Something which we can relate to everyday. The value of our rupee, an overall measure of the quality of our policies, has also lost 57% against the USD over the past thirty years. So much for the myth of 'roupie forte'. Savings have collapsed from a healthy 24% to single-digits, an alarming level after bank interest was taxed to build a shaky facade of a low-tax jurisdiction. The only two positives are a weight of sugar in our economy that's now twenty-one times smaller and a lower inflation. 

Progress Stunted
Unemployment is a lot higher that too after eyebrows have been raised several times for the past decade-and-a-half that suggest it's underestimated. Road fatalities for the last four years are up by 23% compared to the corresponding number thirty years ago. No progress has been made in the share of electricity produced by nonrenewables (NR) contrary to what several countries have achieved. In fact we're using more than six times the amount of coal we used to. Another big negative is the proportion of the electricity generated by the CEB, our public utility, which has gone down by more than thirty percentage points. Plus not only have the price we've been paying for electrical power been higher than it should have been because of abusive and unnecessary contracts with private producers there are now plans to privatise the CEB. This has already been met with healthy street protests a few days ago that look to intensify as voters keep getting wiser and understand that trickle-down is also another form of colonialism. 

An Extra Big Heap
One rough estimate of the 'dung of the devil' is the GDP shortfall compared to the average 8% growth we were supposed to get with the flat tax. This reached Rs1,500bn (Sithanen toohrooh) at the end of last year and that's before we add the loss of parts of our national heritage including Promenade Roland Armand, trees at Beau-Vallon and beautiful views to name just a few. In other words trickle-down economics should basically have made our government debt-free by now. 

Not only it has not but a lot of creative accounting has been going on and government has been incapable of functioning normally like achieving reasonable progress in its basic promise of ensuring a 24/7 water supply to all. Wicked plans to privatise our water utility because the very controversial World Bank had recommended it have been thwarted by the population forcing a minister to moonwalk from this destructive path. At least for now. So the Pope will find a messy Mauritius in large part because of the stupid move from a tax structure which was progressive and sustainable (P&S) to one which is flat and unsustainable (F&U). 

Smaller Cake, Worse Distribution
The flat tax was supposed to generate a much higher growth and apparently eliminate poverty. It's not a big surprise that it has failed on both counts. Growth is not only at its lowest in nearly four decades but as chart 2 shows the distribution of the national output has been the most unfair since the regressive policies were implemented thirteen years ago —the two form an essential part in the evaluation of any political project aka 'projet de société’. Indeed the bottom 60% have had their worst share of the national cake in the last two surveys of Statmu (Statistics Mauritius) while the top 30% their best after the flat tax was introduced. The bottom one-fifth of the population had their best share at least seventeen years ago while the adjacent half around the year of the Tiananmen tragedy. So what has been happening is that the flat tax has created record inequality — a topic addressed by the Pope in his November 2013 exhortation or eight months after assuming his current post and which reflects his firsthand experience of misguided austerity policies that reduce the sovereignty of nations — and this has stunted growth and along with a string of stupid decisions have seriously dimmed the future of a sustainable and fair Mauritius. Staying the toxic course any longer is not an option. 

Tuesday, June 04, 2019

Why Tax Policy Should Be Detailed in Affidavits

Charity is a cold grey loveless thing. 
If a rich man wants to help the poor, 
he should pay his taxes gladly, 
not dole out money at a whim.

Clement Atlee, Former British Prime Minister

Which affidavits? The ones candidates and political parties in the forthcoming general election will swear before we shortlist them as worthy of our votes. We’ve seen how irresponsible income and corporate tax cuts implemented since 2006 have extensively damaged the economy and the social fabric under three different PMs. While Navin Ramgoolam’s position on taxes during the past five years has oscillated between lowering them further to 13% for women and not raising them should he return to power. This is kind of worrying because it is the most urgent and important thing to do to avoid a significant degradation of an atmosphere that’s already pretty bad. So until we have recall elections and statute referendums we need affidavits and debates on their contents. Because politicians put something in their manifestos and then do the exact opposite.

Let’s fact-check some of the things that have been thrown at us to justify the implementation and the maintenance of such regressive policies and look at some related issues.

1. We experienced triple external shocks (TES) in 2005 and Sithanen’s response was to lower top tax rates for corporations and individuals. This was supposed to generate 8% growth rates (growth rates are an important component of social contracts aka projet de societe along with how the baked cakes are distributed). But as chart 1 shows we never got close to this target in any of the last 13 years (the distribution not shown here has also been the most unfair we’ve seen in at least 27 years). So it has failed completely. It should be scrapped and tax brackets should be added back at least to 35% next week because the cost of maintaining this losing policy has been enormous and will only worsen.

We could have avoided this disaster if we had looked at how the Reagan and Bush Sr. tax cuts in the 1980s had not generated the higher growth rates Laffer had promised but ended up increasing US public debt by 2.6X and 4X over eight and twelve years. In fact the only three times in the last 42 years that we’ve clipped rates of 8% or higher happened under a regime of progressive taxation. Plus as was demonstrated back in June 2006 before Sithanen started screwing up the economy really badly the TES are fallacious arguments. Ramgoolam was briefed end of April of that year that the guy was misreading the situation but either the then PM didn’t understand or he didn’t give two hoots which is as bad.

2. The flat tax has made us resilient because we were not hit hard by the 18-month Great Recession (GR). Untrue. We didn’t suffer that much from the GR because our banks didn’t have the kind of exposure to toxic assets as their American, British and Icelandic counterparts. Besides in 2008 the Rs5.8bn combined profit that MCB and SBM bagged were at the time record profits. Not exactly what you would call a financial crisis or a collapsing banking system.

Speaking of resilience, it is interesting to consider three episodes after which our economy did rebound (see chart 2). The first one is Claudette which smashed us into a depression (a deep recession) as from the last week of 1979 and wiped out two years of economic progress. Although real GDP collapsed by more than 10% we rebounded the following year with a 5.3% growth. The second is how a lack of planning caused a ‘drought’ to halve growth to 2.6% in 1999 before the economy surged ahead the following year with a growth rate exceeding 8% for the last time - now we don’t even have a ministry of plan and it shows. The third and final episode is when the textile industry rebounded after shedding about twenty thousand jobs in two short years. It is important to note that all three cases happened under a regime of progressive taxation. This is kind of obvious as we know that our welfare state keeps about one-third of us out of poverty and is therefore a very important source of resilience that our progressive taxation system used to make sustainable. Passionately tamper with progressive taxation like Sithanen did and you can kiss resilience goodbye.

3. We’ll get the promised 8% growth rates once the Great Recession ends. This didn’t happen either. As chart 3 illustrates it’s been 10 years since the GR ended and still no trace of average 8% growth. In fact we’ve had eight consecutive years of growth below 4% or half the target. That’s basically an L-shaped growth recession by our standards and at our stage of development. But this was expected after Sithanen killed savings (he’s now worried about low savings), broke the economy, created serious structural problems (he’s been worried about that for ages), hatched double-digit inflation, depreciated our rupee, crafted a controversial stimulus package and created massive inequality (guess what? that’s another of his worries). And because his successors sticked with these trickle-down policies. Please note that we haven’t even spoken about the controversial hire-fire laws and the elimination of the TCSB.

4. Increasing income and corporate taxes will reduce growth. It won’t. On the contrary this will help put the right dynamics back in place especially if they are accompanied by adding progressiveness in the VAT structure. They will for example help prevent Fond du Sac from getting flooded for a fourth consecutive year and hopefully get rid of the rodents in one school there. It’s good to note that in January the suggestion of newly-minted US congresswoman Alexandria Ocasio-Cortez (AOC) to tax annual incomes higher than USD10 million in America at 70% was raised in Davos - they are currently at 37% - and Michael Dell of Dell Technologies responded that he’s more comfortable giving money to his foundation than giving it to government through taxes and that higher tax rates would not help growth. Prompted to explain his point he challenged the moderator to name just one country where taxes this high had ever helped growth. The answer came instantly from fellow panelist MIT’s Erik Brynjolfsson: the United States! He mentioned that between about the 1930s to the 1960s the average tax rate was 70% with a peak of 95% and that these were good years for American economic growth. He could have used Mauritius and Scandinavia too.

Similar fears were raised in 1992 when Bill Clinton campaigned to increase taxes on the rich to reduce the deficit and get out of the growth slump that trickle-down economics had dumped the US economy in. Clinton raised taxes and ended up presiding over the longest economic expansion in US history with a 3.8% average growth - same as us for last ten years but theirs is in US$. You don’t want to compute ours in USD especially not in the first quarter of 2015. Unless you want to feel depressed. What you want check instead is the tax rates in OECD countries. It’s also quite an irony for Ramgoolam to have borrowed the ‘Putting People First’ slogan from the Clinton 1992 campaign playbook in 2005 and then to sponsor very regressive tax cuts which have thrown us into a growth recession.

5. The new normal for us is 4% growth and 3.8% growth is better than what countries like France are getting. People who are now saying that 4% is the new normal should have screamed at the top of their lungs in 2006 that Sithanen’s plan to flatten the tax structure to get 8% growth was completely cuckoo. Do you remember hearing anything like this? Anyway if 4% is the new normal, top tax rates can’t stay at 15% — because these are apparently compatible with 8% growth — and need to go up to at least 35% if we don’t want a major social crisis on our hands soon.

6. We can keep the flat tax if we cut wastage. Cutting wastage whether it’s in the private sector or the public sector is good. For instance back in 2005 a figure of Rs5bn of government wastage was floated after the publication of the government audit report. That was equivalent to 2.6% of GDP. If it has not risen to more than Rs12.8bn in 2018 then its share of GDP has fallen. We can find out by going through the audit report and come up with an aggregate number or as has been suggested to the National Audit Office for them to come up with these kinds of basic and handy totals. But the GDP and government revenue shortfalls are of a different order of magnitude. For instance there was about Rs58bn of government revenue missing in 2018 compared to what the flat tax was supposed to bring in. The corresponding shortfall for the private sector was Rs232bn. These will increase by Rs68bn and Rs271bn this year if PJ doesn’t do what’s right in a few days. By the way, we’ve never seen Sithanen’s estimates of the toohrooh he has hatched eh?

7. We can keep the flat tax if we implement enough targeting. Taxes were slashed by Sithanen to get 8% growth. This 8% growth would have generated an extra Rs115bn of government revenue by 2015 - roughly the size of the NPF at the time - even if we reduce the growth target in the Great Recession and assume that the additional government revenue generated by the higher growth rate had merely kept up with inflation which are very conservative assumptions. This would have allowed more generous pension payments or a game-changing sovereign wealth fund to be established and move us on a more intelligent growth trajectory. 95% or more of the population would also have felt tangible results of the tax cuts. But nothing of the sort happened because the 15% flat tax is economic snake oil. So the joke should end now and top tax rates should increase to 35% or more. We should also consider a 70% tax rate for dividends of Rs200m or more to catch up.

8. Restoring progressiveness in the tax structure is enough. Keeping the maximum tax rate at 15% and adding brackets of 5% and 10% will do the trick. Nope. Just adding progressiveness at a lower level will make matters worse because it would mean even lower government revenue. Instead we need to add more tax brackets all the way to 35% for starters because as chart 4 shows we’re in a deep deep hole aka the Sithanen toohrooh - GDP for 2024 is expected to be only 49% of the level promised by the flat tax.

9. We’re a sovereign country and we’ve decided to set tax rates at 15% flat. We’ve never voted on this. Such an important matter like proportional representation requires a referendum. Sovereignty, what sovereignty? Because the flat tax has broken the economy we don’t even have money to pay for an eye-hospital, the full cost of a weather radar, save at least 75 lives on our roads every year within five years, no 24/7 water for all yet, plenty of national issues remain outstanding while central government budgetary debt has increased by over Rs170bn over the last thirteen years (see chart 5). Public debt would have increased even more if governments did what governments are formed for: solve national problems one after the other.

10. PJ would be crazy to increase taxes in an election year. Not really when we consider two things. First a scan of the relevant comments on social media reveal that a fairly large majority of them are favourable to higher corporate and personal tax rates and the return of tax brackets. It’s no different from the situation of wealthy French citizens and American billionaires asking to be taxed more because they don’t want to live like depressed idiots in gated communities or watch their back each time they go buy milk. The second is that counting on a toohrooh which would have increased by 2.5X to Rs4.4tn (see chart 6) to return to power in 2024 because the next government will have the option to maintain the destructive tax cuts in place is dangerously naive. It’s good to remember that a Rs541 billion Sithanen toohrooh was enough to end impressive electoral winning streaks by Ramgoolam and Boolell in 2014 - Ramgoolam deserved a 60-0 in 2010 for his ultra liberal policies but clever manoeuvering and the presence of the on/off specialist on the political chessboard allowed him to keep his job but nothing could save him from something worse than a 60-0 four years later. PJ will face a toohrooh that’s more than three times bigger this year but he can present a budget a la Clinton on Monday and spell out his tax plans in an affidavit later this year.

Time to Get Rid of
The Economic Snake Oil 
As expected nothing good has trickle down in the last 13 years. Savings are in single-digits and at a 54-year low, Lepep avoided the last by-election and didn’t organise one in January 2017 when power was transferred from father to son. Besides we know after the Parmalat scandal that the use of special purpose vehicles has to raise eyebrows especially when the definition of public debt has been altered, its ceiling has been raised and the horizon to meet it extended. The 15% flat tax was to make available another fund the size of our NPF by 2015 or government debt-free by the end of last year. No trace of such a fund and central government budgetary debt is approaching Rs300bn. For all these reasons PJ should increase top rates for income and corporate taxes with enough brackets to at least 35% if he wants to help avoid political mayhem in a few months as this will be good for pretty much everybody now and absolutely everybody soon enough. It will help prepare our exit from the middle-income trap we’ve been stuck in for almost three decades. Another priority is to come up with measures to drastically slow down the growth of the car pool and send unambiguous signals that the punch bowl fueling real estate speculation will be taken away.