Mauritius’ Economy: Midlife Crisis?

Mauritius is now a maturing country after 55 years of independence (Editor’s note: this article was published in BIZWEEK last year, at the same period). The country has gone from being a toddler with very uncertain prospects to navigating its teen years followed by increasing success through middle age. However, we may now be facing a Midlife crisis as we move towards our first century.

Before considering where we are and where we might go, it may be useful to debunk some myths.  Mark Twain and James Meade get wrongly quoted regarding Mauritius. Mark Twain did not say that the Garden of Eden was modelled on Mauritius but reported that this is what some Mauritians believed.

James Meade, father of Mauritian industrialization

Similarly, as has been pointed out by Nikhil Treebhoohun and also by Jose Poncini in his autobiography, Meade did not prophesy disaster but outlined the challenges: “The economic future of Mauritius is dominated by its population problem. The review which we have made of this problem has convinced us that unless resolute measures are taken to solve it Mauritius will be faced with a catastrophic situation (Meade 2:89). Far from being a prophet of doom Meade believed that if his recommendations were effectively adopted and applied disaster could be avoided (Meade 2:95).

Meade should be considered the father of Mauritian industrialization as well as laying the foundations for the Mauritius welfare state by building on and supporting the work of Richard Titmus, Brian Abel-Smith and Tony Lynes.  Meade proposes an Industrial Policy built on a social contract to make it possible to keep wages competitive:

“Mauritius has no raw materials, very little technical training, little experience in manufactures, and a limited home market. Her one advantage could be a plentiful supply of inexpensive labor. It is on such a basis that other territories (of which perhaps Hong Kong is the outstanding recent example) have based a flourishing and expanding manufacture. If Mauritius sacrifices this one advantage her prospects will be bleak indeed.”  “But a policy involving wage restraint does not mean that there can be no measures taken over the coming years to improve standards of living. One thing which it does mean is that such measures should, as far as possible, take forms which do not raise the cost of labor to the individual employer. This point is well illustrated by the policies outlined in the Titmuss Report which advocates various extensions of social benefits—family allowances, widows’ benefits, unemployment, and health benefits. To the extent to which such benefits can be financed from general taxation by means which do not raise the cost of labor to the employer, some improvement in the workers’ standard of living can be achieved without so much danger to the expansion of profitable employment for the growing labor force.”

The 1961 Meade report guided two generations of Mauritian policy makers who pragmatically, effectively and flexibly implemented the proposed  industrial policy:

• Protection to infant industries until the mid-eighties;
• the Mauritius Export Processing Zone (MEPZ) in 1970;
• Tax holidays: initially in 1970 complete exemption from corporate tax for 10 years, 50 per cent exemption for years 11 to 15, and 25 per cent exemption for years 16 to 20.
• a social contract based on wage restraint supported by transfers and subsidies since 1960’s;
• Investment in human capital (universal access to primary education since 1958, free secondary education since 1976 and investment in vocational training since 1988);
• Provision of dedicated financing for manufacturing by transforming the Mauritius Agriculture Bank into the Development Bank of Mauritius (DBM) in 1964;
• The building of Industrial Estates by Government starting with Plaine Lauzan from 1967 to 1977; and
• Exploitation of trade preferences (1975 Lome Convention, 1974 Multifiber Agreement and 2000 AGOA).

Initial industrialization in the 1960’s

At the time of the Meade report Mauritius had a modern manufacturing operation in the sugar sector. Meade saw the challenge as extending this to other manufacturing activity.  In the 1960’s Government encouraged import-substituting manufacturing.  The 1964 Development Incentives Act provided for firms manufacturing primarily for the domestic Market to be granted Development Certificates granting them import protection from quantitative restrictions and tariffs.  The Development Certificates also provided fiscal benefits and facilitated financing by the Development Bank of Mauritius (DBM).  About 100 development certificates were issued between 1964 and 1969 covering the production of margarine, chickens, toothpaste, paper, cooking oil, paint, metal furniture and shutters and creating about 7,500 jobs i.e. about 3 percent of the active population and absorbing less than 20 percent of the unemployed.

In view of the small market size, by the time of independence in 1968 it was clear that import substitution had failed.  GDP per capita was about the same in 1967 as in 1957 due to high inflation and an exploding population: between 1962 and 1967 prices increased by 7 percent and population by 13.5 percent.  In 1958 unemployment was estimated at over 15 percent and almost one fifth of households were affected. By independence in 1968 the unemployment problem remained acute with an estimated 40,000 or about 18 percent. (Oodiah Page 221).

Industrial policy shifted to export led growth, taking concrete form in 1970 with the launching of the Mauritius Export Processing Zone. In addition to income tax holidays (see above), dividends were exempted from taxation for the first 10 years, imported inputs were not taxed, more flexible labor laws applied, capital movements would be free, priority access was provided for foreign exchange and credit, subsidies were provided on water and electricity, there were guarantees against nationalization and industrial buildings were provided.

The Mauritius Export Processing Zone (MEPZ) 1970

The MEPZ got off to a good start.  Within 3 months 5 enterprises were producing and had created 550 jobs. Under this export led strategy, between 1977 and 2009, real GDP in Mauritius grew on average by 5.1 percent annually whilst the economy diversified.

Until the end of the eighties, the employment creation soaked up the unemployed and new entrants including women joining the labor force in lieu of household work. To keep purchasing power high whilst keeping wages low, as recommended by Meade, in addition to transfers Government subsidized the price of imported rice and bread and controlled the prices of staples, cooking oil and cooking gas. Margins on pharmaceuticals were also controlled.

Once full employment was reached and imported labor became more prevalent (since the late 1990s) wage restraint became an issue of policy as set by the Government in tri-partite negotiations with the Unions and Employers. In the early phases of development this formula resulted in broadly ensuring wages did not rise above productivity especially in the MEPZ.

Political economy of success

Industrial Policy was successful in East Asia and Mauritius and failed in Africa. Marcus Noland and Howard Pack suggest that where fruitful, Industrial Policy was a mild tonic rather than an elixir.  Success rested more on strong macroeconomic foundations, such as fiscal discipline, controlled inflation and adequate real exchange rate levels than on interventions such as Subsidized loans, variable taxes and differentiated tariffs. More importantly, they point out that for Industrial Policy to deliver results, it needs be implemented by a Government that has the right competencies. This is not just an issue of the appropriate technical skills but the ability to ward off politically well-connected rent seekers.

In a 2017 report, the World Bank recalls the successful path since independence. “At the time of independence in 1968, per capita GDP was US$260 and agriculture (mainly sugar cane production) accounted for more than 22 percent of Gross Domestic Product (GDP). Over the following years industrial policies paved the way for economic diversification and employment creation and by 2013 economic transformation had reduced agriculture’s share of GDP to just 3 percent. Starting as a mono-crop, inward-looking economy, Mauritius moved toward an export oriented and diversified economy producing textiles, tourism, financial and Information and Communication Technology (ICT) services. Meanwhile GDP expanded at an annual average of 5.3 percent or 4.4 percent in per-capita terms. Savings were high and reinvested in diversifying the economy. Per capita income of US$9,780 in 2015 is the 3rd highest in Africa and places it solidly in the upper middle-income category.

As importantly, growth was widely shared. Export-led industries translated into substantial employment creation while subsequent productivity gains supported rising salaries and welfare improvements. Growing household income not only improved the quality of life but also was reinvested into human capital, reinforcing generous public investment in free education and health programs. Responsive institutions ensured that public services expanded for all whilst significant social protection programs supported the most vulnerable. This shared economic growth pulled most of the population out of poverty and created a large middle class.”

Farole points out that most Special Economic Zones, particularly in Africa, have failed and the success stories “primarily China but also Mauritius—used their economic zones expressly as a vehicle for broader economic reform.” Baissac argues that “the true success story of the Mauritius EPZ program was not job creation, investments, or exports per se, but rather the reform process, both economic and (critically) political, that it catalyzed. It is this reform that facilitated the structural transformation in the economy. Several important lessons can be drawn from the Mauritius case. First, it highlights the importance of the political process and the importance of having a specific political champion behind the zones program, a lesson that we also see from cases such as China and Malaysia (especially Penang). Second, not only does the Mauritius case emphasize the importance of domestic investment in the zones program, it shows that integration of the zone program must go beyond the physical and financial—it must also be integrated strategically. Indeed, one of the main differences between zone programs that have been successful and sustainable and those that have either failed to take off or have become stagnant enclaves is the degree to which they have been integrated in the broader economic policy framework of the country.”

In the terms of Peter Evans, Mauritius had a similar Developmental State to that of South Korea. The Industrial Policy recommended by Meade and built upon in subsequent decades was implemented by a relatively honest and competent Civil Service in partnership with civil society, particularly the private sector through the Joint Economic Council and its representative organizations.

In line with the “possibilism” advocated by Cramer, Sender and Oqubay Mauritius pursued a pragmatic approach to policy making underpinned, after 1982, with a sound macro-economic framework and managing the exchange rate to maintain competitiveness. Mauritius pursued a heterodox policy with industrial policy reflecting intensive dialogue between Government and Civil Society, particularly the business sector. It is only in the mid-eighties under the stricture of Bretton Woods structural adjustment programs that import protection began to be significantly reduced.

This developmental state was facilitated by the economic threats highlighted by James Meade in his 1961 report to the Governor, a political system arising from the role of the British colonial authorities as honest brokers in a transition to “one person, one vote” and contested politics where a strong opposition was a credible electoral alternative and, indeed did often win in elections.

Subramanian, A. and D. Roy (2001) in their paper “Who Can Explain the Mauritian Miracle: Meade, Romer, Sachs, or Rodrik?” argue that applying various economic theories of growth still leaves a significant residual.  This residual can be explained by the institutional arrangements left by the British.  As honest brokers, after the Second World War, they guaranteed movement towards “one person, one vote” whilst making this a gradual process culminating in the 1963 elections. The British also imposed coalitions so that there would not be “winner take all”.  This set the stage for institutionalized dialogue between the private sector and Government.

Gulhati and Nallari also emphasize the importance of the institutional and political framework. “Apart from one period, 1972-76, in which an emergency was declared and elections postponed, there was general adherence to the “rules of the game” established by the Westminster type of constitution inherited at the time of independence. No single party ever secured a majority in the assembly to form a government on its own. The compulsion to work together across party lines was ever present.”

The political economy of coalition and consensus led Mauritius to implement from before independence what Professor Porter of the Harvard Business school calls a new model where “Economic development is a collaborative process involving government at multiple levels, companies, educational and research institutions, and private sector organizations.” An example of this “possibilism” is illustrated in Box 1 which considers how the business environment was improved.

The way forward

In addressing these challenges to continue moving forward with its economic development and inclusive growth, Mauritius has some good building blocks. The country is a proximate democracy where policy makers often meet citizens in daily life and are responsive to public opinion. A change in tack would be facilitated if citizens demand it. Hence the importance for academics and opinion makers to flag the unsustainability of populist measures whilst building consensus for reform.

The country has a good reputation with no significant internal or external security concerns,

high human development indicators, good ratings and a diversified and resilient economic base. These assets should facilitate importing required talent, skills and capital. With 4 times the land mass of Singapore and one quarter the population, it should be relatively easy to accommodate any likely labor demands from existing enterprises and new investors. Foreign trade has been largely liberalized and the country is sea-locked which facilitates low-cost access to global value chains.

Reforms can build on this solid base to tackle the challenges we face.  Sviryzenka and Petri set the parameters for continuing success: “Whether or not it will be able to join the high-income countries will depend on its ability to improve the skill set of its labor force, the quality of infrastructure, and the speed of technology adoption. Further improvements in business environment will be essential to attract FDI, generate domestic investment, and maintain and improve on Mauritius’ image as an open, stable, and well-functioning place to do business. Finally, reforms for pensions, public enterprises, social benefits, and the tax system can make the public sector more efficient, while macro-policies to increase public and private savings can create the room for further productive investments.”

A review of the effectiveness of the various programs in supporting growth and exports would be a first step that results in rationalization and more effective interventions.  Such an exercise should be conducted with stakeholders, particularly existing SMEs, those that have recently folded and new entrants. Consultations should include wider Civil Society including Business Mauritius, Trade Unions, SME representative associations and University researchers. The objective of these discussions and reflection should be to have support systems that enable SMEs to increase their contribution to exports close to their contribution to Value Added, say 20 percent of Exports by 2030 and 30 percent of exports by 2035.

More broadly, if we need to select a single indicator to track our success in continuing to move up the per capita income ladder, this has to be export performance in a small island that cannot be self-sufficient and will be ever more dependent on imports to raise standards of living.

Reforms should be enacted and evaluated to achieve the following increase in Exports of Goods & Services:

• from 38 percent of GDP in 2019 to 54 percent in 2027 (this returns us to the 2012 level)
• from US$ 5.6 billion in 2019 to US$ 6.6 billion (this is the 2012 level) by 2027
• and US$ 10 billion by 2031?

In line with the history of Mauritius, areas for reform should be collectively identified based on Government-Civil Society consultation and implementation designed by competent Civils Servants offering advice to policy makers. 

Conclusion

Mauritius is one of a small number of countries that over the last 6 decades has steadily improved its per capita income and shared the benefits of this growth. At the same time, we are now at the crossroads for the most difficult part of the journey: joining the elite countries (Advanced economies in IMF parlance) that keep on delivering growth even as they get wealthier.  Our path to today has been built on consensus and consultations. By re-emphasizing this path and focusing the energy of the nation on boosting exports, Mauritius can complete this journey.  Let us aim to boost our exports from $6 billion to $10 billion. If Government consults with all stakeholders on what is needed to achieve this, the wisdom of the crowds and specialist knowledge will take us where we need to go.