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The Need for a Second Wave of Import Substitution

Tracking a country’s imports is important for a number of reasons. Together with exports, they determine the country’s trade and current account balances.  The latter includes trade (import and export) of goods and services, investment incomes and transfer payments, whereas the former records only trade in goods.   When imports of goods exceed exports, the country registers a trade deficit and will have to somehow pay for it, resulting in pressures on the local currency. These pressures are amplified when the trade and current account deficits are chronic.  

Dr Sen Narrainen, Economist, Former Senior Economic Adviser of the Government of Mauritius

Four major trends, namely, steady growth of imports, chronic trade deficits, chronic current account deficits and high dependence on imports have characterised Mauritian trade for decades. High import dependence has become a conspicuously perturbing characteristic of trade in Mauritius – a country which relies entirely on supply from overseas for its food (close to 100%), energy (above 85%), and medical products (near 100%).  As a result, Mauritius has a very high level of food, energy as well as health insecurity.  A global event that leads to a total cut in supplies from abroad would have disastrous effects on the Mauritian society. A simulation of the impact of such an extreme event, one which cannot be ruled out, would send shivers down the spines.  

 

Even when the supply shocks are not extreme, imports constitute a serious risk because they are highly concentrated on few countries. For example, Mauritius sources some 60 percent of its imported food from only 8 countries, with heavy reliance on only two countries for some of its staple foods. It sources 99 percent of rice from India and Pakistan, 99 percent of wheat from France and Germany, and 90 percent of milk from New Zealand and France.  There are similar high concentrations for the import of fish, edible oil, energy and some other essential products. 

 

It is therefore clear that import-substitution has become an urgent imperative.  

Such a strategy is not new to Mauritius, which actually started its development journey in the early seventies with an inward-looking growth paradigm centered on import-substituting industrialisation, but which was promptly complemented with an export-driven growth strategy. Ever since, that development paradigm, which is commonly referred to as a ‘heterodox mix’, has been dominating the country’s economic policies and development pathways.

 

The heterodox mix model has proven to be the right one, enabling Mauritius to compile an impressive economic record over some five decades, with a somewhat stellar performance among African nations. Gripped by the ideal of free trade in the 1990s, which had then become a global trend, and having to honour its bilateral and multilateral open-trade commitments, Mauritius gradually lowered the barriers to trade. The announcement of the duty-free shopping paradise endeavour in 2005 signalled the end of the era of import-substitution as it was designed and implemented in the seventies.  

Today, Mauritius is in dire need of a second wave of import-substitution. Based on 2022 import data from Statistics Mauritius, a 10 percent reduction in imports would avoid a leakage of some MUR 30 billion from the Mauritian economy, while at the same time possibly balancing the external trade and current accounts. When such a reduction is caused by import-substitution activities, the benefits to the economy and society would obviously be much larger as they would recur annually.  If the import growth trend of the decade ending in 2022 is maintained, a 10 percent lower import bill in 2030 could result in an annual reduction of between MUR 50 billion and MUR 60 billion in leakages from the economy. 

 

The second wave of import substitution would necessarily differ from the first wave in purpose, scope, approach and strategy. 

 

Purposes of a second wave of import-substitution

 

Whereas the primary goal of the first wave of import-substitution policies was to support the development of a manufacturing sector, the second wave should focus on multiple objectives while staying committed to open trade policy, which has become an economic policy in its own right.  The policies of the second wave should aim essentially at (i) reducing the country’s dependence on import of basic necessities by achieving greater self-sufficiency, even full autonomy, in certain products which are essential from an existential perspective; (ii) developing different sectors within the domestic market; (iii) growing local industries in order to expand employment and investment opportunities; (iv) promoting an externally oriented import substitution model by producing local substitutes to replace imported components in the production of goods for exports (e.g.: local renewable energy); and (iv) strengthening macroeconomic fundamentals by braking and eventually reversing the deterioration in the external trade balances to ensure greater macroeconomic soundness and stability. 

 

A wider scope and greater potential for import-substituting production

 

In contrast to the early years following independence, when Mauritius was a low-income country, there is now the critical mass necessary to produce local substitutes for a few products.  Energy and food products are the two most promising areas for import-substitution. The renewable energy industry clearly tops the list of candidates for import-substitution due to its obvious multiple substantial benefits.  The net import of energy products (that is total import less re-export in the form of bunkering) amounted to close to MUR 14.2 billion in 2019, representing around 7 percent of the country’s total import bill. During that year, the average price of Brent crude oil averaged USD 64.30 per barrel.  The surge in the price of Brent oil to above USD 100 per barrel in the wake of the Russia-Ukraine war and the then heightened risk of supply cuts have strengthened the case for greater self-sufficiency in energy. The strongest argument for promoting energy self-sufficiency is the prevalence of adequate domestic demand to justify the necessary investment. On the supply side, Mauritius has the required human resources, capital and raw materials (solar, wind, biomass, and others). Mauritius also has the necessary experience since at some point, it has been producing up to 15 percent of its energy needs from bagasse, hydro, and solar power. Currently, the aim is to produce 60 percent of the country’s energy needs from renewable sources by 2030. Hopefully the entire 60 percent will be from local renewable sources.  A reduced reliance on imported energy can only be achieved if the renewable sources of electricity production are local rather than imported. 

 

A wider scope for import-substitution

 

Over the years, the scope for import-substitution has grown wider and more diverse, extending to pharmaceutical products, education, health care, and human resources. Mauritius spends some MUR 5 billion yearly on the import of pharmaceutical and other health care products. The Knowledge Centre of Excellence project, which is export-oriented by design, can make a significant contribution to the import-substitution strategy by opening up more opportunities for Mauritian students to acquire tertiary education locally rather than from other countries. Greater access to tertiary education locally will also enable Mauritius to scale up its tertiary enrolment ratio. 

 

There is also a strong economic case for reducing the country’s dependence on imported labour.  In 2019, there were around 45,000 expatriate workers, 39,700 unemployed Mauritians and a potential labour force (persons not in employment who express an interest in work but for whom existing conditions limit their active job search and/or their availability) of 2,400  in Mauritius. Obviously, the Mauritian economy would have been operating at full employment level in that year, instead of showing an unemployment rate of 6.7 percent, if the required skills were available locally.  Moreover, in that same year, an estimated MUR 7 billion of income earned by the expatriate workers were sent to their home countries. 

 

New strategies and tactics to support the second wave of import substitution

 

The strategies behind the second wave of import substitution should also be very different from those of the first wave. In line with the ‘Open Trade’ policy, raising barriers to import should not be on the menu bar in the second wave of import substitution. The approach to fostering the second wave should be on leveraging the existence of a critical mass of demand domestically for a number of products.  Such a strategy is far more complex in its implementation as it involves, among others: (i) improving the global competitiveness of the domestic oriented enterprises; (ii) influencing the consumption culture and taste; and (iii) making massive new investments, especially in the energy sector. 

 

A second wave of import substitution can be a major driving force for the next lap of development as it will stimulate creativity, innovation and entrepreneurship. It will above all impart a vision that arches over policies and strategies already being pursued, such as energy self-sufficiency and food security, while providing a framework to measure their outcomes.  The challenge of a second wave of import substitution is enormous, the more so that trade protectionism is ruled out as a strategy. However, the benefits will be equally enormous and impressive enough for Mauritius to take on the challenge.

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