rameswurlall basant roi : tackling vulnerabilities and emerging risks in an uncertain external environment address by mr rameswurlall basant roi, governor of the bank of mauritius, at the annual dinner for major economic stakeholders, point aux piments, 25 november 2016. * * * distinguished guests ladies and gentlemen good evening this is the 19th annual dinner being hosted by the bank of mauritius for major economic stakeholders and it ’ s my 11th address to this august gathering of decision makers in the private sector. this evening i will dwell briefly on the state of the external environment the mauritian economy has to interact with and on an area of risk in the mauritian economy that makes it highly vulnerable to a conceivable development that could throw our financial industry out of balance with consequences deleterious to the economy. we have all been seeing in recent times that even those who are exceptionally gifted with horizon - scanning capacity are left flabbergasted and totally disarmed by unexpected twists and turns of events. unexpected outcomes have hit hard the business community at home and abroad. every one of us, whether we are in the business of manufacturing for exports, trading, fund management or macro - economic policy making, faces heightened risks of going utterly wrong, not because of recklessness or incompetence but because of developments beyond our cerebral capacity to foresee. volatility is a phenomenon we have to reckon with. surprises are unusually aplenty. it ’ s a complex external environment – taxing to the brain – that we have to cope with. the convolutions of happenings abroad are characterized by a phenomenon known as “ knightian uncertainty ” : “ there are known knowns ; there are things we know we do know. we also know that there are known unknowns ; that is to say, we know that there are some things we do not know. but there are also unknown unknowns – the ones we don ’ t know that we don ’ t know. ” if there is one thing investors and the market do not like, it is uncertainty. we are in a world fraught with surprises the outcomes of which defy conventional thinking. utterances that sound prophetic are a risky business to get into. it ’ s a fool ’ s game to predict that everything is going to be fine. either it ’ s going to be fine, in which case none of you will ever remember who made the prediction or something painfully

unacceptable happens in which case all of you will remember – without fail. i will try not to make any forecast, projection or prediction. the optimist says, “ the glass is half full. ” the pessimist says, “ the glass is half empty. ” the rationalist says, “ this glass is twice as big as it needs to be. ” i will stick to facts and lay bare the disruptive forces underlying the emerging external economic environment for your appreciation. models from the ricardian comparative advantage to the heckscher - ohlin factor endowment theory tell us that free trade is a win - win game for trading partners. free trade is widely believed to make countries better off. gross domestic product goes up and the standards of living of the trading countries improve as a result. as we know it, free trade is the core constituent of globalisation. in the past three decades, as the pace of globalisation accelerated to a sustainable gait, all over the world, people were made to believe that globalisation will keep on lifting human conditions to heights never seen before. in fact, it did lift hundreds of millions of people out of poverty in developing countries. what proponents of globalisation did not openly admit is that free trade also creates victims. poor people have been elevated at the expense of wealthier nations, thus creating a good deal of resentment. the wealthier nations ’ coloured perceptions of the benefits resulting from globalization have ultimately cracked. built into the trade models is the 1 / 7 bis central bankers'speeches conclusion that free trade will have potentially adverse distributional consequences. in other words, it will have winners and losers. it punishes those who do not have the required skills or do not have appropriate training or are victims of poor macro - economic management that prices them out of the market by the forces of competition stemming from low wage economies. those of us familiar with paul samuelson ’ s factor price equalization theorem in trade theory will better appreciate this point. as is aptly said, “ free markets are not pain - free markets. ” the standard response to this problem is to argue that the gains from free trade are sufficient to more than adequately compensate the losers by way of training that will equip them with new skills. but it has never been clear what kind of training can transform a 50 - year old factory worker into a computer programmer or a web designer. as though factory workers in our export sectors would retool, re - equip and