An Inquiry into the Wealth of Two Tigers

What If

Let us assume for one second that Singapore had kept the value of her currency against one USD at its average rate of 2.2002 for 1985. Not a bad objective as combined with positive growth rates generated by adjustments in the real economy her people would have felt a lot richer when going abroad for holidays or to grab companies and ideas to move forward as a nation. If she had kept the value of her currency constant at that level then at the end of 2015 her GDP per capita would have been $33,047. Quite a number don't you think?

Better Than South Korea

That's better than the $27,222 of South Korea. You know the country which makes your Samsung smartphone. Better than the $29,867 of the Italy of Massimo Bottura -- the guy who drops a fistful of pasta in a boiling pot with mathematical precision. And just above the land of the rising sun. Yep, the shogunate was pretty zen at position 24 with its $32,479.

But Tiger Had Other Plans

Except that Singapore did not manage to keep her currency fixed at that level. In fact over the 30 years since her currency has appreciated quite a bit against the USD. Indeed the average exchange rate in 2015 was 1.3748 to the dollar. That's a 60% overall appreciation which has enabled the Asian Tiger to clock $52,888 per capita and to hop over an impressive list of countries. Like the Germany of Gauss at rank 18, the UK of Newton at rank 13, the Sweden of Borg at 11 and Denmark -- where people take a lot less sick days because they are on their bikes so often -- at position no. 8. So the appreciating currency has enabled Singapore to overtake fifteen top countries in a thirty-year period. At these levels it's difficult to hop over just one country. But Singapore was jumping over one such country on average every two years. Simply amazing.

What About the Other Tiger? 

Likewise if Mauritius had kept her average exchange rate for 1985 of 15.58 to the dollar till the end of 2015 her GDP per capita would have been $20,608 as illustrated in the first chart. That would have secured us the 36th spot right above Saudi Arabia and below Slovenia. And would have made us join the group of high-income countries. But of course we did not because our rupee lost more than half of its value against the American dollar over three short decades. Which explains why we fell 32 spots to position no. 68 -- that's equivalent to losing one spot every 11 months on average. And placed us between the Maldives and Turkey. Because more than thirty countries like Trinidad and Tobago, Greece, The Seychelles, Argentina, Costa Rica, Malaysia and Russia had better combinations of economic growth and currency movements than we did over these three decades.

A Ridiculous Depreciation Bias

If we had kept the currency rate prevailing at the end of 2014 we would have been seven notches higher. Had we instead retained the average rate at the start of the first stint of Basant Roi as Governor in 1998 our GDP per capita of $13,389 would have been the 54th best in the world -- and would have made us a high-income country by some definitions. Which is quite close to where we landed in maths in the 2009 PISA survey and a bunch of spots lower than how we did in recent Global Competitiveness Reports. 54 is between Latvia and Chile. Just in case you're wondering.

The Heavy Price of the Flat Tax

Of course the numbers for Mauritius would have been better had we not been a prisoner of the flat tax trap for more than a decade now. If we had grown at the average rate of 8% as Mr. Sithanen had promised for slashing top tax rates our GDP per capita would have been $29,612. That 44% increase and how much his forecast was off by 2015 would have lifted us to the 26th position which is better than oil-rich Kuwait and just shy of Italy by two hundred and fifty dollars.

Easy-going Tiger Should Have Been Left Alone

Had the toxic bean-counter not broken our economy and had instead allowed us to keep on growing at a 5.5% rate -- which was a reasonable growth rate for us given all the slack in our economy and our healthy savings rate -- we would have ended 2015 with $23,429 which would have been about 14% better than our baseline number of $20,608. That would have been more than the $22,822 of Cyprus and would have bumped us into the 32nd spot. But given that our rupee lost so much value against the dollar over the last three decades and that we never got anywhere close to the 8% or 5.5% growth trajectories over the last one we wrapped up 2015 at $9,142.

Impact on Size of Economy

At her 1985 exchange rate -- as shown in Chart 2 -- Singapore would have been the 51st biggest economy in the world in 2015. That's larger than Qatar and Kuwait. In fact she would have found herself between the Czech Republic and Kazakhstan. But thanks to her impressive currency appreciation the economy of Singapore in 2015 was larger than that of Pakistan -- which has a population more than thirty times bigger -- and the Philippines. And she was breathing down the neck of Israel and Malaysia. At the end of 2016 she was bigger than the South African economy. This is what happens when you keep on solving the right problems and make the right bets.

As for the Tiger of the Indian Ocean it would have been the 100th biggest economy -- twenty-nine spots higher -- in the world had it kept its currency at its 1985 levels. Yep, at $28.5 billion our economy would have been two-and-a-quarter times bigger than where it was in 2015. But because of the dumb policy of 'competitive depreciation', unproductive investments and too much navel-gazing we are a much smaller economy. At our 1998 exchange rate to the dollar our 2015 economy would have been at position 112. But we didn't manage to keep that either. Indeed using our 2014 exchange rate causes our economy to slip a further ten places. That too despite the sanity brought to our exchange rate by Bheenick. Take the 2015 exchange rate instead and we lose another seven spots and land at the 129th place. We did climb two spots in 2016 though.

And what about if we had grown at 5.5% since 2006 and kept the currency constant since 1985? At $32 billion we'd be looking at the 98th economy in the world. Or one which is bigger than Bahrain. And at 8%? Our economy would have grown to $41 billion. This would have pushed us to the 89th spot, just above the Ghana of Asamoah Gyan.

Tiger Needs to Wake Up

The policy of 'competitive depreciation' carried out over more than two-thirds of the last three decades has been a disaster for Mauritius. It has caused us to be a lot less wealthy than we ought to have been. And it has kept us out of the group of high-income countries. For way too long.

Our international competitiveness has to be based on stronger fundamentals. This means making adjustments to the real economy by for example reviewing pay ratios and corporate bets. Policy-making has also to be seriously upgraded. Fast. To fix an economy broken by the Sithanen flat tax over the last decade. The more so that inequality has reached levels that are unsustainable. And dangerous.