Why Poverty is Winning

Because so much of it has been created over the past 10 years. Some people have been getting out of poverty for sure but a lot more have been falling into it. Of the pool of 126,200 poor people in 2012 a staggering 33,000 had joined it over the last decade. That's more than one in every four poor Mauritians. This has happened because our economy has not grown fast enough and whatever wealth was created has not been shared properly.

Massive Policy Failure

Which in turn has mostly been caused by dismal policy-making and the lack of dynamism of our economy. External events have certainly played a role but given that they were beyond our control we shouldn't have spent that much time crying over them. We should also acknowledge the fact that there has been a wide variation in the way poverty has expanded. Chart 1 captures that by looking at how it has progressed over a fifteen-year period. Which coincided roughly with three different governments and in one case with major policy changes.

A Neophyte Freezes Poverty

Period 1 is roughly at the end of the first mandate of Navin Ramgoolam. 500 extra people fell into poverty between two Household Budget Surveys (HBS) bringing the total to 93,200. The tiny 0.5% increase in the number of poor people over a five-year period tells us two things. One is that the combination of progressive taxation, the doubling of pensions and a savings rate worthy of a Tiger provided a good base for progress. Even to a neophyte. By the way it's the government with the best growth and best income distribution of the last twenty years. Bheenick and Bunwaree were Finance Ministers. The other is that given that policy-making wasn't exactly brilliant during Ramgoolam's first term we can safely conclude that it was well within our reach to roll back poverty. At least using that thoughtful base.

Economic Apocalypse, Comrade-style

Enter Federation in period 2. Berenger and Pravind Jugnuath were Finance Ministers while SAJ and Berenger were PMs. A cash cow called Mauritius Telecom was partly sold in a hurry but no 'Economic Miracle' to report. Instead we got a big contraction in the textile sector which threw more than 22,000 people in export-oriented enterprises (EOE) out of work. It was economic apocalypse for Cuttaree which got people wondering what he or anybody else from the MMM or the MSM would have said or done had they been in charge of Mauritius from 1968 to 1982. Some targeting begins with pensioners for which Berenger eventually apologises. 11,000 people -- or 22 times more people than in period 1 -- become poor. 11,000 that's also half of the people who lost their jobs in the EOE. Kind of plausible for half of them to become poor. And enough for voters to want Ramgoolam back.

Shock and Awe

When Ramgoolam returns in period 3 the economy is about to rebound. But voters are disappointed fairly quickly when his Finance Minister decides to do away with one of the most important parts of our DNA: progressive taxation. He also makes a long string of impressive policy mistakes. While making time to imagine problems and celebrate their resolution. He hires a friend as Financial Secretary who wastes little time in making all kinds of surprising statements: at least one of his circulars should be compulsory reading before any interplanetary travel.

Extensive Mess Mitigated by Monetary Policy

Unsurprisingly, Statmu reported that a record 22,000 people joined the ranks of the poor. 22,000 is 44 times the increase registered during Ramgoolam's first mandate. We shouldn't forget that this happened while Bheenick imprinted some overdue common sense on our monetary policy with progressive industry captains acknowledging that they would have to focus on genuine sources of competitiveness. Still, how on earth could that many people be thrown into poverty? Two words: policy blunders. Let's look at six.

Meet the Culprits

1. By May 20, 2008 Sithanen had already clobbered the population with the high rate of inflation experienced under the Federation government: they took 1,276 days to produce the 23.90% of inflation, he took 1,051. Which partly explains the speed with which poverty has been created as illustrated in Chart 2: 1,000 people became poor on average every quarter. A scale no NGO can handle.

2. Massive tampering with many components of our welfare state without realising the obvious: many people are middle-class because of them. Remove them and people fall into poverty. Strange that a person who told us on national TV that he didn't go to school for two years because he was too poor would play Russian roulette with the HSC/SC subsidy. Or with the school-feeding program and the rice/flour subsidy for that matter.

The Biggest Blunder of All

3. Taxing interest income at source. A very shocking policy-decision given that until 2006 literally all of the distance we've travelled as a nation had been financed by a healthy level of domestic savings. Surprising too that the guy who abolished capital controls two decades earlier would implement a policy that would seriously compromise the long-term financial plans of a whole nation and would assume savers wouldn't make adjustments. Many didn't do that of course. Nope, they just saw the savings they had accumulated over several years melt away in a few years. More on this later.

4. Proliferation of casinos, gaming outlets of all stripes and the arrival of the lotto. And all the ills that come with it. For some people all they can remember of the Sithanen reforms are three casinos in every town and village. They may have a point here and you should know that taxes on gambling brought in twice as much money in 2014 than it did in 2007.

5. Severing the link between international energy prices and what we pay at the pumps. Energy and savings are the building blocks of GDP. Messing them up is messing up GDP growth.

6. Introduction of a flat tax. Which guarantees that income distribution will be lopsided.

Combined together, these policy blunders have produced the worst economic growth and the worst distribution of the last two decades. As Chart 3 illustrates real disposable income for the poorest 10% Mauritians increased by only 6.7% over the 5 years ending in 2012. The 10% richest saw theirs increase by a hefty 30% over the same period. Compare this to the five years ending in 2002 when the poorest 10% saw their real disposable income increase by almost half and the richest decile by 18%.

How to Reduce Poverty

Our economy has to grow faster and the wealth created has to be distributed better. Can we grow at an average rate of 8%? Not in our current shape because Sithanen has badly messed up the economy -- we already have a Rs927 billion cumulative GDP shortfall with respect to his promised growth trajectory. You can imagine the revenue shortfall for our government. Can we grow at 5-6%? Yes, but only if we reverse a lot of nonsense. Like we need to start by changing the tax mix so that the link between international oil prices and local pump prices is a lot tighter. This will make it easier for everybody -- Government, private sector and individuals -- to create jobs for Mauritians and a lot more units of GDP. Granting exemptions to individuals will help prevent the savings rate from sliding into single digits. Increasing top tax rates will improve income distribution pretty quickly and reduce the idiotic dependence on gambling taxes. Our land use needs to be enhanced: 30% of our land produces barely 1% of GDP. Investments that are compatible with the legitimate aspirations of Mauritians should be welcomed and not those that depend on the cheapest foreign labour available. We need to put more and better buses on the road so that the ten-headed traffic frankenstein is kept in check and flow is improved. We don't need Ministries for Social Integration and other contraptions if our policies are mindful. Let us look back at our short but rich history and see how we lifted tens of thousands out of poverty and provided them with meaningful lives.