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, 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.

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. 

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.