April 30th, 2006 Dr. the Hon.

Navin Ramgoolam, Prime Minister Republic of Mauritius Port-Louis Dear Navin: Re: The Fallacy of the 6-month old Triple External Shocks argument As per your request, I am sending you this short note to explain why I think that the argument of the Triple External Shocks is an absolute fallacy. 1st shock: Price of sugar to fall by 5% this year and up to 36% within a few years We knew that this was coming for a long time so that there is no element of surprise or shock here. We have been growing sugar for 300 years now and its been the commodity that has financed the development of other pillars of our economy which incidentally have now dwarfed the sugar sector itself. It has served us well. Its size in the economy will keep on shrinking (looks like a manifestation of the Product Life Cycle to me). Yes, the economics of the cane industry look better than that of sugar industry but we need to look even beyond the cane industry. 2nd shock: Multi-Fibre Agreement has been dismantled (MFA) That did not happen overnight. Weve known that this was going to hit us for many years now. The sector has been contracting over the past few years mostly because the entrepreneurs that came to Mauritius 20 to 30 years ago because of the uncertainty of the handing over of Hong Kong to China that was to happen in 1997 and of the facilities that we offered at that time were now leaving Mauritius in droves to go set shop in China for reasons known to all. Those textile companies that have been gearing up for years in anticipation for the end of the MFA (like the CMT) are still standing as are those that manufacture a product that is sufficiently competitive. Our textile industry has simply gone through a consolidation phase, albeit a major one. Our textile industry will probably start to grow again soon. 3rd shock: Oil prices reach record levels Its true that oil prices have been increasing significantly over the past couple of years. But a correct reading of the situation should have prevented anyone from sounding overwhelmingly panicky for six months now. In fact growth forecasts for a number of economies (US, UK and the World Economy) have recently been revised upwards. This is so because the current increase in the global price of oil is quite different from those experienced in the 1970s (1973 and 1979). Indeed, the current increase is demand driven and has been more gradual. Our economy is also less exposed to oil (efficiency in its use has increased while percentage of household budget spent on oil has fallen). The impact of rising oil prices also depend on the amount of slack that we have in the economy (at

10% unemployment, I dont think that our economy is overheating and besides trade unions are not especially powerful). Interestingly enough, the increase in the price of oil will bring additional funds to the government coffers through higher VAT receipts which will help to put the fiscal house in order. Of course, that doesnt mean further increases in the oil prices cannot or will not create havoc in our economy. We definitely need to have a rock-solid National Energy Policy (on which I have a few thoughts just like on a great number of issues that our country will need to grapple now and later). But it was definitely premature to label the recent increase in oil prices as a shock for many months already. I hope this note has been able to explain why I think the argument of Triple External Shocks is misleading. If you need additional information, please do not hesitate to contact me on my mobile at 253-3500 or by fax at 698-7879. Best regards,