Day: April 18, 2010

In my last article, I spoke about the seemingly intractable problems that our Maldivian economy faces – most notably the fact that we have spent far too much than is sustainable given our level of economic activity.

The theme here is to talk about how to deal with these problems and the challenges we face in doing so. No doubt explaining the problems – especially with the benefit of hindsight – is much easier than suggesting remedies. Moreover, given the extent of our past excess and misdeeds, the remedies required are likely to be both bitter and painful.

Our immediate problem is how to reduce our fiscal deficit. On a theoretical level – this is quite simple.

Approximately 50 percent of our expenditure is on paying government salaries and allowances – and we can cut down foreign travel, close down our embassies, turn off air conditioners at our offices – but ultimately unless we make some inroads into this important component of public spending – it will be impossible to do anything meaningful.

No doubt, all efforts must be made to reduce waste before we start slashing either incomes or jobs. The higher salary levels must take bigger cuts than the lower paid staff – as the government has already done so.

In reality however, this is both a political and a logistical nightmare. We all know members of family or friends struggling to make ends meet on the current civil service salaries. Laying off a large chunk of the population at a time of an economic crisis seems counterproductive to regenerating the economy.

Logistically, it is complicated because a system of voluntary first-come-first-serve resignations, particularly if the government is willing to forgive their education ‘bonds’, would mean that the most capable civil servants would depart first, leaving us with the least dynamic people actually running government. In an increasingly polarised community, it would be difficult to distinguish between people fired on the basis of professional incompetency or political allegiances.

Difficult though these policies may be, a country that has a third of its total work force working for the government is simply not sustainable. The key therefore becomes how to do this in a manner that has the least negative impact on our economy. For this – three broad initiatives are required.

First and foremost, significant opportunities for retraining must be made available. This must be combined with a public relations campaign on how retraining should be for anyone at any stage of their career. It must also be based on market requirements – with significant impact on developing skills necessary for our economy.

The tourism sector, foreign languages, technical skills, accountancy and business skills are just some of the options. More initiatives can be introduced to both existing and new private providers of training through public-private partnerships.

Other policies that must be pursued include the allocation of reduced rent or free land for private education providers, tax exemptions on educational material, as well as rebates of fees for those who successfully pass courses and find employment.

Secondly, access to credit for starting small businesses must be expanded. The key obstacles to this – particularly the high costs of borrowing from a narrow financial sector – must be addressed. The high costs of borrowing are partly due to the fact that the legal options for banks in the case of non-performance are uncertain.

Furthermore, without a credit information system, there is a significant missing component that makes people more disciplined when paying back their loans.

Last but not least, the fact that we realistically have one-and-a-half banks in the country (BML and to some extent SBI), the market mechanisms forcing these firms to be both efficient and customer orientated is missing. We need to encourage more banks to set up shop in the Maldives – and allow people access to a wide variety of banking products.

Finally, significant incentives must be provided for the private sector to start employing more Maldivians. This must be done first and foremost by revising our labour law. The existing legislation is overly burdensome and expensive for businesses – and more flexibility must be allowed.

With the coming of a new taxation mechanism, significant leeway must exist for the government to provide rebates and other incentives for those who employ more Maldivians. Start-up companies must also be provided with exemptions – particularly in strategic sectors deemed important for long-term growth.

However, even if we can introduce these policies – and this is a big ‘if’ given our intractable inability to get anything done within this political system – let us also not kid ourselves into thinking it would not involve a significant amount of hardship.

Even with countless retraining facilities, or access to credit or even benefits for private sector to employ locals – there will be a group of people simply unable to maintain their existing living conditions and as such their situation will no doubt deteriorate. One must assume that the current ‘pickiness’ of the local population to defer certain kinds of jobs to foreigners must also be revisited.

For those vulnerable groups, basic levels of protection – particularly in terms of access to healthcare and education – must be allowed. The current trajectory of the Government’s Madhanaa (health insurance) policy must therefore continue – and perhaps must be provided at subsidised rate to those unable to find jobs.

On a more fundamental level therefore, what we are looking at is a paradigm shift in the role of the state. If you take a long-term view of the Maldivian economy – it was effectively characterised by a system of subsistence fisheries and small scale agriculture – with the government earning revenue from trading of the excess products generated from these primary industries.

The country therefore had a system of governance that effectively involved a (selectively) benevolent state providing welfare for those that it deemed worthy – especially through jobs. Furthermore, the direct arm of the government – being mostly in Male – was felt on a smaller percentage of the people because the population of the country was more evenly distributed.

With the emergence of tourism however, we saw a dynamic private sector go on to take the driving seat of the economy. The state no longer has, or should have, the resources to provide direct employment to the people on such a large scale. No doubt, a basic level of protection to all must be provided – and what constitutes this basic level will continue to be debated for years to come. The role of the state must now become that of the regulator and the facilitator – allowing jobs, productivity and wealth to originate and be distributed according to forces of a dynamic market system.

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