Living in a deterministic world
That the world that we live in can be understood, is the premise I stood on in writing all of this to you. That is why I was able to explain to you how exactly the Kingdom of Mauritius went bankrupt but you must also understand that what I have explained to you is the fate of all countries with a low capital-output ratio. The fate of such a country is that it wins its race to zero growth and once that happens it does not generate enough real savings anymore, so it will start to fail to converge to become an advanced economy because of a perpetual cycle of Debasement, Debasement, Debasement, Debasement, Debasement, Debasement, Debasement.. This means that by explaining to you what happened to the Republic of Mauritius, I simultaneously explained to you what has happened everywhere or is currently happening elsewhere in the world in a country that has a low KY ratio, like Lebanon, Bangladesh, Turkey, Sri-Lanka, Egypt, Argentina, Nigeria (The entirety of Africa actually). On the flipside countries with a high KY ratio like Singapore, China, the US, Japan, Europe, Korea, Australia, the UK and most scandinavian countries can always take their debt to the limit by decreasing rates and preventing the convergence to zero growth by pushing rates lower and lower to get close to zero growth but not zero. They do that with what is called QE (Quantitative Easing). Of course it can fail, We failed with our financial repression and converged to zero growth in 2019. But it was unlikely for us to ever be able to do that kind of thing very long. Advanced economies can do this sustainably. Japan failed and had to let the Yen slide but did this for almost 30 years now, successfully. China will very likely have to do the same thing at some point to boost its competitveness if its RER stays too overvalued.
It should be obvious to you by now that the reason why our country has fully transitioned to a Kingdom is correlated one hundred percent to the fact that we have not had much GDP growth for almost 10 years now. That is the cause of the world we are living in today. Not just here, but in all those countries I mentioned earlier. The standard of living has completely collapsed in all these places. The repression of information, the repression by the police, the torture by the police that goes unpunished, the unspeakable acts that goes unpunished, the extortion of money by the police that goes unpunished, the corruption that goes unpunished, the increased drug proliferation, the increased accidents, increase in infections and deaths from diseases, the decrease in education standards, the increase in stillbirths, the increase in the malnutrition of kids, the increase of botched operations and health malpractices every day, the lack of medicine in hospitals and the increasingly less clean island we have today where all kinds of diseases that were never common, are now routinely diagnosed. Everything stems from no economic growth. Everything will get worse when economic growth disappears. That is just cause and effect. How could our King establish law and order when he himself has been lying to you for ten years now? He cannot do anything about anything, because his hands are tied. When any of his men abuses a citizen, when they do unspeakable things to innocent citizens, when they abuse their power to intimidate innocent citizens. When they extort money from citizens. Your King cannot care about you nor can anybody else in the Republic of Mauritius because his own insecurities about the truth ever being known will get the best of him. Just as it was the case in all the other countries. That is the power of science. To allow you to understand the world better than you ever thought was even possible
The power of cause and effect
Because economics is deterministic we can already predict the near future that our country will be confronted with after the coming elections. As I told you in the last paper, our country is currently financially repressed as if it were a champagne bottle that still has its cork. Unlike a regular champagne bottle however, no matter how much we shake it, the cork will not go off because the government is also applying force to prevent it, in the form of repressing demand for foreign currencies by having quotas, in the availability of foreign currency just like Russia did at the start of its war. But even Russia could not do any magic, just like here too we cannot do anything about the fact that the currency will have to slide sooner or later. We have been installing a dictatorship in capital markets by imposing herculean capital controls so that it will happen later. We are here now. Later is after the elections. Our country will not hold much longer. Rather than the cork popping off, the champagne bottle itself will explode from the fact that while you can slow down currency adjustment, inflation has been wreaking havoc in our country. We are not progressing as it is right now. Do you understand that? We cannot have economic reliable growth unless we give in to the RER adjustment which is a devaluation of our exchange rate. Plus we have to pay back the foreign currency debt we took. The only reason we are not doing it yet, is because of the elections but it does not matter who wins and who comes into power. They will inherit a bankrupt country. So, what do you do when that happens? You need to raise capital. We will need to be bailed out by the IMF. A lot of things in our country is bust, people’s pension funds, state companies, retirement funds, our central bank way too many things for me to list. The important thing is how you save anything from bankruptcy. You introduce fresh capital into the system. That is what the IMF will provide to us as it did in the 1980s. They’ll probably require that devaluation to even consider helping us, so you know, things are very hard ahead. If the government itself wins, or steals, they might keep the illusion up and then we will head towards increasingly more and more inflation but odds are, knowing what our government excels at. You will get some bullshit story that has probably been already cooked and they will also run off to the IMF by passing the buck. Now, keep in mind our country is not Venezeula or Zimbabwe. We are not different from Lebanon or Sri Lanka though. What you need to realise with inflation is that it compounds and get worse over time. For example to have 90% inflation over four years you need around 18% of annual inflation each year for four years
\[ (1+0.18)^{4}=1.938 \]
That would be the equivalent of a monthly inflation of around 1.5% for the past four years for each month that we went through. To become venezeula or zimbabwe you not only need to go to the next level which is rather to have double digit monthly inflation readings but to go even further than that to reach triple digit inflation MoM wise. That only happens when production totally collapses. That did not happen in our country. We are bankrupt sure, we lack around 30,000-50,000 less labor than before sure, but objectively our output should be closing in to our 2019 expenditure peak which is close to where we were in 2012-2015. That is where we are objectively, quasi-stationary for 10 years. Just so you know by the way having 18% inflation every month for a year amounts to how much inflation exactly ? Can you guess how exponential the price rise is ? Its over 700% inflation. We are obviously not at that kind of inflation and we will not get to that.
\[ (1+0.18)^{12} = 7.28 \]
Production is nevertheless where the real problem lies today. Nobody is saying it because no one wants to bother saying the truth. WE ARE COMPLETELY STUCK AS A COUNTRY BECAUSE WE DEINDUSTRIALISED. We need to move up in value chains not down. No offense to anybody but you need to stop living in a world where agriculture will save this country because you have been lied to. I am not saying these things are bad, if you want to do agriculture you need to do the capital-intensive kind. Anything capital-intensive is good but capital-intensive activities are really costly as its name indicates. Odds are you will always do noncapital-intensive activities in agriculture unless the government steps in and does the right thing. Help you transition into capital-intensive agriculture that utilizes space most efficiently. Hold your hand and truly show you how to do it correctly with the right subsidies and education. So that you can also bring your own contribution towards the country’s future as well as secure yours. These are nice and good so that everybody can contribute to economic growth. The government should certainly use some of its budget to do these kinds of things. But these things will not secure the future of this country. There is a reason why, the private sector is conspiring with the government to import foreign labor that they can underpay and overwork. That is because that is what they need today to survive. Our country has given up. Our private sector has given up on you. On me. On us. The government did too because they have no idea how to do what needs to be done. We need economies of scale today if we wish to have not only political stability going into the future but also if we wish to permanently go to a higher level of standard of living. We never earned this lifestyle, that we had for the past ten years. We relied on temporary hot money flows which provided us with adequate real savings to fund it temporarily but its gone now. We imperatively need capital-intensive manufacturing.
This is not a choice we can avoid anymore. Let me real with you so that you can understand this clearly. Inequality is soaring, and will only get worse and worse and worse UNLESS we have strong productivity growth and continue having progress which is what will allow your real wages to increase again to decrease that inequality. I have already showed you that real wages depend on the growth of \(g\) in Macroeconomic Laws 2. The private sector has already found their workaround by just increasing \(n\) which will decrease \(g\) for every worker and work out better for them by decreasing real wages. The private sector has left the chat. It is commited to its plan. If we want this to change, we can only have \(G^{g}>G^{n}\) by exporting a lot more goods and services. Not with villas, not with silly constructions that do not bring a single dollar back here and certainly not with money that comes in only to go somewhere else a week after. If we do not have that minimum wages could be 100,000 Rupees, you will still be dirt poor because government can never give you anything. You need to understand economics and stop living in propaganda. What any government can do is correct a market outcome. If your employer is exploiting by not increasing your real wage even though productivity has been increasing, then government can step in and put a floor on real wages to correct it in the form of minimum wages. That is not without consequence though, unemployment will increase because the cost of labor increased. But if there was no productivity to be had in the first place, all your government’s action will beget is inflation. Meaning, since 2019 there has been no \(g\). Minimum wages have almost doubled and your life is much worse than before.
Now, there are a lot of barriers to us being able to build an industrial base that is capital-intensive. The first and most important one is human capital. I say this with the utmost respect for everyone of course but we are a dumb country, me included of course. That is the only reason why we do not do any capital-intensive manufacturing. If someone knew how to do it, you can bet your sweet ass that they would have done it, given how much money there is in it to be made, but sadly we do not. The government has to legislate around that for us to be able to incentivize a pool of very highly skilled workers to come to live here. Not legislate to facilitate the import of foreign labor to replace local labor in labour intensive jobs. The second most important hurdle in us becoming the core of Africa, is the biggest requirement that a core needs, abundant domestic demand, for economic activities to cluster around it. Now, it is not as bad as you might think given that Reunion and Madagascar are mere hours away. We could very well count them as a reason to cluster economic activity here. So it is not, in fact as hard as you might have thought it should be for us to become the core of Africa. We need to carefully plan for population growth and implement policies that will at least triple the population we have. We need that thing anyway to pay for pensions and to ensure our survival as a country. We then need to lobby France enough with the prospect that Reunion gets to be part of Africa’s core the more they push people to come here which would mean more output meaning more tax for the government of France, if they too would triple their population and we both traded a lot more with Madagascar and each other, our combined demand would be enough to pull a lot of economic activity to cluster here. We are in a region of Africa that is extremely well protected given we have India, the US, the UK and France that technically have our backs at all times. In the increasingly conflict-ridden world that we live in, that can only be a plus. We also need to be serious about education. About not letting kids leave school before 18 or before they can do a rigorous enough mathematics test. We need capital investment into port infrastructure to be able to trade at least 10x more.
Eventually, all of this groundwork would also help us develop the financial side of it after all this is said and done. That is step two though and is a long way ahead. By that point, our current account deficit will have turned into a current account surplus. Manufacturing should be mostly capital intensive and account for atleast a quarter of GDP and ideally around 30%. Intercontinental Exchange will setup a subsidiary here called ICE Africa acknowledging us as Africa’s core. Most biggest banks will have real presence here. We will be a net creditor to the world. The last and perhaps most important thing of all that we need to do is to get rid of our crappy constitution, which is designed to corner our country into perpetual despotism. Of course that is not easy. But it is what we need. Cause and effect wise, this is the only thing we can do as a country to secure our own future. This is about securing not only your future though but the future of your children and their children and their children. What our current constitution has secured for 56 years is the supremacy of some political parties, and the ability of many companies that should have long gone out of business to continue to not only operate but also to thrive. These companies thrive by having their cost of capital subsidized at rates that would make anybody a billionaire. The people’s money has made many men in our country billionaires arbitrarily through not the hard work of those men but through that man being awarded government tender after government tender. Our constitution does not favor competence. It favors communalism. We need to equip ourselves with the tools to be able to secure our future. If the future of the private sector is currently secured via importing foreign workers to practice let us be honest modern slavery, just like your government is practicing regular slavery in the public sector to secure its future, then we as a country if we want these kinds of abuses to stop, we have no choice. We have to impose a new constitution as a country at some point.
I wrote a short but robust one here just to show you how bad our current constitution is.