Mauritius: A successful Small Island Developing State

Boopen Seetanah, Raja Sannassee, Robin Nunkoo, Boopen Seetanah, Raja Vinesh Sannassee, Robin Nunkoo

• Publisher: Routledge
• Year: 2019
• ISBN:
  9780429557422
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Volkswirtschaft

The economic upturn and performance of Mauritius is a far cry from predictions made in the 1960s. The island's remarkable economic performance since the 1980s can been attributed to a multitude of factors instrumental to the success of the economy, including structural reforms, outward looking export orientated strategies, diversification in the manufacturing, tourism and financial services sectors amongst others, sound economic governance and institutions, and significant investment in human capital.

This book attempts to provide a detailed analysis of the various key ingredients which have helped to propel Mauritius to its current status. The various chapters provide important readings for both academics and policymakers, with the final chapter providing key policy strategies which the government needs to implement to help Mauritius graduate to the next level of development: namely to that of a high-income economy and, in moving out of the middle-income trap, laying the foundations for future growth and shared prosperity in the light of both domestic challenges and global constraints.

1 Mauritius

Developmental perspectives, 1968–2018

P. Dinan

Introduction

In the literature devoted to the process of economic development, the case of Mauritius is generally referred to as being a success story (Subramanian, 2009; Frankel, 2010; Darga, 2011; Subramanian and Roy, 2003). This is due to the relative rapidity with which the island graduated from being a monoculture based on sugar cane production to a multi-sectoral economy, characterized by light manufacturing industries for export markets and by export services, namely tourism, a freeport, cross-border finance, and information and communication technologies. This begs the question: is the economic development model of Mauritius unique or is it replicable? Are there any lessons to be drawn from the development process which the country experienced during the first 50 years of its existence after achieving independence?

In order to answer this question, one must first recall the characteristics of the economy of Mauritius before it took off, how it achieved that major step, and finally where it is heading now. The answers to these questions will constitute the next three sections of this chapter, and the lessons to be drawn from that experience will make up the conclusion.

Yesterday

When Mauritius became an independent country on 12 March 1968, the population numbered 800,000, resulting in a high population density equivalent to 430 persons per sq km. With an average annual income of only US $200 per head, Mauritius was a poor country, forming part of what in those days used to be termed the ‘third world’. Unemployment was high at 20 per cent.

The newly independent country was characterized by a monocrop economy, with cane sugar accounting for 96.2 per cent of exports. In January and February 1960 two successive violent cyclones struck the island, destroying the cane sugar crop. In the wake of this disaster, the then colonial power sought the advice of international experts about the socio-economic future of Mauritius, particularly because on the political front claims for the granting of sovereignty and independence were becoming more and more vocal.

Professor James Meade (see Meade et al., 1961), who was appointed to study the economic situation and make recommendations, quite rightly emphasized that it was enormously risky for Mauritius to rely on a single export industry. One of his recommendations was that an export tax of 5 per cent should be levied on sugar exports as a disincentive measure, in the hope that economic operators would find other avenues for their activities. However, by the time that independence had been achieved in 1968, the benefits of such recommendations had not filtered through the economy of Mauritius.

Meade also suggested that other industries should be set up, such as the manufacture of soap, jewellery and fabrics made out of artificial fibres, while arguing for the introduction of protective import duties and tax holidays. The establishment of an Industrial Development Board was also recommended. Elements of these recommendations would form part of the strategy of import substitution which Mauritius was to adopt in the 1970s. Another of Meade’s recommendations was not to proceed with the construction of a first-class hotel in the north of the country, because he did not envisage that many people would be attracted ‘to a place so far off the beaten track’ (Meade et al., 1961). On this latter point, subsequent developments would prove him wrong.

Seen through Meade’s eyes the scene was a rather dismal one. It was not desperate, but no one at that particular time could have imagined that, five decades later, Mauritius would, according to the International Monetary Fund (IMF), achieve the status of an upper-middle-income country, which in 2017 had a population of 1.26 million, an average annual per head income of US $10,500, and a low level of unemployment totalling 7 per cent.

In order to capture the socio-economic situation at that time, it is appropriate to take note of a number of facts and figures pertaining to that period. Simultaneously, comparative facts and figures for the present time will be set out, thus giving us an opportunity to assess the progress which the country has made since 1968.

In as far as the structure of the economy is concerned, in 1968 the primary sector, mainly agriculture, accounted for 24 per cent of gross domestic product (GDP), with the secondary sector, mainly manufacturing, at 25 per cent and the tertiary sector, mainly services for the local market, at 51 per cent (Dinan, 1979). Comparative figures for 2018 are 4 per cent, 19 per cent and 77 per cent, respectively. The lion’s share goes to services, particularly the export-oriented ones, such as tourism, cross-border financial services and Information and Communication Technologies (ICT). Such modifications in the respective percentages reflect the extent of the transformation of the economy of Mauritius over the past five decades (see Sannassee et al., 2014).

In 1968 the labour participation rate was 83 per cent for males and 21 per cent for females. The comparative figures for the present time are 74 per cent and 46 per cent, respectively. The increase in the female participation rate is particularly striking and is mainly attributable to the development of tax-free zone enterprises which were based on a model of cheap labour for the transformation of imported raw materials.

In 1968 only 23 per cent of houses had cyclone-resistant concrete walls and roofs; today, the percentage is equal to 92 per cent. Gas is now used for cooking by 98 per cent of households; in 1968 only 1 per cent of households had access to gas. Likewise, only 65 per cent of households had access to electricity in 1969; now all households have electricity. These figures the rate of progress that has has taken place, the economy has been transformed in a relatively short space of time, and the standard of living of the average Mauritian citizen has improved.

How did it all happen? This is the subject-matter of the next section.

The present day

It is convenient to analyse the causes of the transformation of the economy of Mauritius in terms of both external and internal factors. The external factors which contributed to the economic development of Mauritius are as follows:

• The signing of a series of agreements that were beneficial to external trade, such as the Commonwealth Sugar Agreement since 1951, the Yaoundé Convention, the Lomé Convention and the Cotonou Agreement.
• The paramount importance of the Sugar Protocol annexed to the Lomé Convention.
• As a consequence of the above, Mauritius benefited, in its traditional markets in Western Europe (e.g. Britain, France, Germany and Italy), from preferential quotas and prices for sugar, ready-to-wear garments and textiles.
• The consequential ability for Mauritius to pay for its imports. It must be borne in mind that the international trade of Mauritius (i.e. the sum of its imports and exports of goods and services) has been consistently greater than its annual GDP over the years (by more than 30 per cent at times).
• The take-off of manufacturing for exports during the 1980s, facilitated by the preferential environment. This was coupled with significant improvements in terms of trade, due to the depreciation of the US dollar by 25 per cent from 1985 to 1988, the index having jumped from 102 to 143 during that period.
• The contribution of the technical and marketing know-how of the Chinese diaspora towards the launching of manufacturing units for exports.
• The contribution made by foreign specialists from France, South Africa and India. This was facilitated by the use of two international languages, English and French, and by the multicultural profile of Mauritius.

In addition, a number of internal factors were at play throughout this period. They are as follows:

• The observance of democratic principles (except during the state of emergency from 1972 to 1976). Mandatory general elections have been held every five years. The rule of law prevails, and there is an independent judiciary.
• There is a vibrant written press and widespread ownership of private radios.

The operation of those two internal factors has been, and still is, essential for the maintenance of a peaceful climate wherein economic activities can flourish and investments can be fruitful.

In addition, Mauritius has benefited from a successful demographic transition over the past five decades. Population growth has averaged 1.1 per cent per year, while economic growth has averaged 9.3 per cent per year. As a consequence, per head income has increased by 8.1 per cent per year. It is noteworthy that the fertility rate, which in 1968 stood at 4.6 total births per woman of child-bearing age, had fallen to 1.4 in 2018, i.e. it is below the replacement rate of the population (Statistics Mauritius, 2018)

The structural adjustment

While keeping in mind the factors – both internal and external – discussed above, one must acknowledge that one of the main contributions to the transformation of the economy in the 1980s was the structural adjustment programme prescribed by the IMF in the wake of the two devaluations of the local currency in 1979 (to 29.6 per cent) and in 1981 (to 20 per cent). When Mauritius was forced to devalue its currency in September 1979, its FOREX reserves had, in the preceding month, fallen to a mere 1.5 days of import equivalent.

Before the contents of the structural adjustment are examined, it is worth considering why the economy was in such dire straits at the end of the 1970s. This period was marred by a combination of negative factors in Mauritius. On the political front, from 1976 there was a very weak coalition government in power with a slender majority and an opposition party whose popularity was increasing. The government was so weak that it could hardly resist the numerous claims coming from lobbies of all sorts. A good example of such a situation is the increase in the number of public holidays, to twenty-eight per annum, towards the end of the decade. Thankfully, in the early 1980s, the list of public holidays was reviewed by a committee comprising representatives of both the public and private sectors, and the number of annual public holidays has, since then, been fixed at 15.

To make matters worse in the 1970s, the economy suffered two shocks originating from abroad. The first shock had its roots in the exceedingly high world market price for sugar, due to an imbalance between demand and supply. Mauritius benefited greatly from this situation, prompting both the public and private sectors to behave as if Mauritius had achieved prosperity. As should have been realized, supply to the world sugar market was soon to increase in response to the high prices, and by 1976 the sugar boom had petered out.

The second shock originated from the depreciation of the pound sterling to which the Mauritian rupee was still attached at the time. In 1976 there was a severe sterling crisis, which culminated in a request by Britain for a bailout by the IMF. Sterling took a downward path, taking the rupee along with it. This caused an unusual influx of depreciated rupees into the local economy, making it a hard task indeed for the government to resist increasingly vocal demands for populist measures (Dinan, 1979). And, finally, to make matters worse, the island was struck by severe cyclones in 1975, 1979 and 1981.

In such circumstances, the need for two devaluations, and a Structural Adjustment Programme, is not surprising.

The nine IMF policy reform prescriptions

There is a saying that every cloud has a silver lining. That may be said of the obligation, in the early 1980s, for Mauritius to apply the IMF’s nine policy prescriptions of the IMF in return for a foreign currency bailout. Had it not done so, it would have been impossible for Mauritius to transform its economy given the conditions that had prevailed in the country since the 1970s. The Mauritian government and its citizens deserve merit for the way in which they accepted the imposition of these new conditions and for putting them into immediate effect.

The IMF’s prescriptions were as follows:

• reduce the budget deficit (13.7 per cent of GDP in 1980–1981);
• reduce salary compensation (53.5 per cent of GDP in 1980);
• reduce consumption (89.5 per cent of GDP in 1980);
• channel more bank credit to business enterprises as opposed to the public sector;
• liberalize imports and interest rates, and discourage excessive government intervention;
• adopt export promotion policies, as opposed to previous import substitution policies;
• work towards a reduction in the rate of inflation;
• diversify the economy through the promotion of manufacturing in export processing zones (EPZ) and of the tourism industry;
• create jobs in new enterprises.

While each of these prescriptions was worthwhile in themselves in order to place the economy on the right track, it must be emphasized that two of them were of a strategic nature. One called for the adoption of export promotion policies, as opposed to the previous import substitution policies. As mentioned above, there had been a recommendation since the 1960s for a recourse to the levying of protective duties, and indeed during the 1970s such policies had been applicable side by side with the nascent support of the EPZ industries through fiscal incentives. The co-existence of two opposing strategies proved to be ineffective, and this is why the IMF gave a clear indication that the path to be followed was export promotion policies.

The second prescription of a strategic nature concerned the diversification of the economy. This was an obvious path, given the island’s over-reliance, up until then, on a single export industry. The prescription was fully applied; not only was there recourse in the 1980s to diversified export activities in manufacturing and tourism, but in the ensuing decade, the diversification process was extended to the development of a freeport, cross-border financial services and ITC.

The structural adjustment era came to an end before 1990, by which time Mauritius had repaid in full some US $500 million to the IMF and to the World Bank.

Meaningful economic indicators

The following macro-economic indicators reflect the situation in Mauritius during the 1980s.

• Unemployment fell from a high of 20 per cent in 1983 to a low of 2.7 per cent in 1991.
• After falling from US$1,197 in 1980 to $1,014 in 1985, per head income increased throughout the rest of the decade to reach $2,361 in 1990.
• The growth rate of the economy averaged 5.9 per cent per annum between 1981 and 1990.
• Taken together public and private consumption fell from 89.5 per cent of GDP in 1980 to 71.5 per cent in 1986.
• Inflation, which stood at 15 per cent in 1981, fell to a record low of 0.6 per cent in 1987, before rebounding. During the next decade, it hovered at around 5 per cent.
• The budget deficit, which had reached almost 14 per cent of GDP in the financial year 1980–1981, decreased steadily thereafter, reaching a low of just over 1 per cent in 1987–88.
• The share of salary compensation was in free-fall up to 1986 when it stood at 45 per cent, having recorded 53.5 per cent in 1980.
• The share of bank credit to the public sector had averaged some 55 per cent during the first five years of the decade; it then started to fall, hovering at around 25 to 30 per cent for the rest of the decade.
• The local currency, which had been linked to the IMF’s Special Drawing Rights in the early 1970s, was now linked to a unspecified basket of currencies, selected according to the international trade profile of Mauritius.
• Foreign currency reserves moved up gradually in terms of the value of a week of imports of goods and services, reaching 18 weeks in 1990, and 24 weeks in 1992.

These indicators show that sound economic policies were put in place by the government, boosted particularly by proper control over public finances and sound monetary policy. Success would not have been so resounding if the population had not played the game, agreeing, inter alia, to moderation in the share of salary compensation and to a lower appetite for consumption. In return, the population at large was gratified with the creation of thousands of new jobs.

Looking ahead

The first two sections of this chapter have emphasized the success achieved by the economy of Mauritius over the last half century (1968–2018) as it graduated from a poor country deprived of resources into an upper-middle-income country. Is past success a guarantee for future success? This is the subject-matter of the present section. Turning our back on the past, we shall first take stock of the present situation with the help of relevant facts and figures. That exercise should throw light on the challenges the economy of Mauritius has to grapple with and the opportunities it has to seize.

The present situation in a nutshell

In 2018 GDP amounted to around US $13 billion, equivalent to $10,500 per head for a total population of 1.26 million. Unemplo...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• List of boxes
• List of contributors
• Foreword
• 1. Mauritius: Developmental perspectives, 1968–2018
• 2. An analysis of the sources of growth in Mauritius
• 3. Why are institutions key determinants in the development of emerging economies?: The case of Mauritius
• 4. The expansion of export-oriented enterprises and development in Mauritius
• 5. Financial development and economic growth in Mauritius
• 6. Impact of the tourism sector on economic growth in Mauritius
• 7. Harnessing FDI for growth in Mauritius
• 8. Analysing the human capital-economic growth nexus: The case of Mauritius
• 9. Tracing the path towards sustainable development in Mauritius through the GDP-CO2 emission nexus
• 10. Can Africa serve as a trading hub for Mauritius?: An in-depth analysis
• 11. Running the next development lap in Mauritius: Issues, outlooks and policy priorities
• Index