The Mauritian Economy Defied Predictions Of James Meade

The Mauritian Economy Defied Predictions Of James Meade Few Sub-Saharan African countries have managed to achieve high standards of living over the past two decades. Mauritius has been a notable exception. With no natural resources, a small domestic market and vulnerability to external shocks, Mauritius exhibited a series of characteristics very typical to the rest of Africa namely a mono-crop economy, exposure to terms of trade shocks, high population growth rate, ethnic tensions exacerbated by high income and wealth inequality. Defying the predictions of Nobel Prize recipient James Meade, who famously predicted poor development prospects for Mauritius back in 1961 due to its vulnerabilities to both weather and price shocks and lack of job opportunities outside the sugar sector, Mauritius has transformed itself from a poor sugar economy into a country with one of the highest per capita incomes among African countries. Today, the small island nation is one of Africas most prosperous and stable economies and is considered an economic success story. For arguments sake, between 1977 and 2009, real GDP in Mauritius grew on average by 5.1 percent annually, compared with 3.2 percent for sub-Saharan Africa. 3.1 The Mauritian Economy Mauritius is a small island developing state with limited resources and a remote geographical location considered unfavourable. Since its independence in 1968, Mauritius has developed from a low-income mono crop economy to a middle-income relatively diversified export-oriented economy. In the early 1960s, Mauritius embarked on a program of diversification and adopted import substitution policies with the initial emphasis on tax exemptions, long-term loans at favorable rates and protective import duties and quotas. The aim was mainly to combat unemployment, raise standard of living and alleviate poverty. However, import substitution did not bring the benefits expected owing to the small size of the domestic market, limited resource endowments and technical know-how. The enterprises were unable to benefit from economies of scale given the small size of the local market. Furthermore, import substitution policies failed to address unemployment, which reached 20% in the late 60s. In the early 1970s, Mauritius switched to an outward-looking export-oriented strategy. The establishment of the Export Processing Zone scheme, designed to encourage the setting up of labour intensive export oriented manufacturing enterprises, aimed at helping to dampen the growing problem of unemployment, as well as to open up further the economy and benefit from the preferential access to the European markets under the different Lomà © Conventions (and now the Cotonou Agreement). The authorities prudent management of the economy and their outward-oriented policies placed Mauritius on a sustained growth path. Launched with the start-up capital of the sugar sector, the EPZ sector has concentrated mostly on textile and textile-related products. Mauritius seeks to serve as a bridge from Asia to Africa, Europe and the United States: in the 1980s, companies from Taiwan, Hong Kong, and Singapore settled in the countrys economic processing zones (EPZs), and were joined in 2007 and 2008 by companies from mainland China. For the past three decades, the industry have attracted FDI from various countries, created new employment opportunities and strengthened the manufacturing base of the economy. The tourism sector also emerged as a serious economic pillar by contributing to foreign exchange earnings of the country and by being an important generator of employment. A range of investment incentives were provided to boost the development of the tourism sector in terms of fiscal incentives and financial support for hotel development and management services. The labour-intensive export-oriented growth strategy was therefore powered by three main economic sectors, namely sugar, textile products and tourism. The diversification strategy was further expanded in the 1990s with the consolidation of the financial services sector into commercial banking, insurance and global business. In recent years, information and communication technology (ICT), in particular business process outsourcing, and the seafood hub have emerged as important sectors of the economy. From 1991 to 2010, the economy enjoyed an average annual real growth of 4.9%. To further diversify the economic base of the island, the government is actively encouraging development in the following sectors: à ¢Ã¢â€š ¬Ã‚ ¢ the land-based oceanic industry; à ¢Ã¢â€š ¬Ã‚ ¢ hospitality and property development; à ¢Ã¢â€š ¬Ã‚ ¢ the healthcare and biomedical industry; à ¢Ã¢â€š ¬Ã‚ ¢ agro-processing and biotechnology; à ¢Ã¢â€š ¬Ã‚ ¢ the knowledge industry; à ¢Ã¢â€š ¬Ã‚ ¢ renewable energy. Figure 1: Sectorial Breakdown of the Mauritian economy, 2009 Mauritius is a fairly well diversified export oriented economy with agriculture, textile, tourism and financial services as leading sectors. However, a gradual shift from agriculture to the service sectors has been observed. Today, the services sector makes the largest contribution towards GDP and towards total employment. The share of the agricultural, hunting, forestry and fishing sector in GDP which was 6.1% in 1999 went down to 4.3% in 2009. The manufacturing sector also experienced a fall, from 23.9% in 1999 to 19.5% in 2009. On the other hand, Hotels and restaurants, a major component of the Tourism sector, witnessed a rise from 6.9% to 7.3% during the same period. Albeit the successful growth records, there is growing concerns as regards competitiveness and sustainability of growth. The traditional Mauritian labor-intensive exports is being challenged by new competitors. Productivity is not increasing fast enough to keep pace with wages that have been rising as a result of near full employment, thus eroding competitiveness. Government policies are aiming at diversifying towards more capital-intensive production and higher value added goods. The acceleration of the growth rate in the 1980s is the result of the macroeconomic reforms in response to protracted balance of payments and fiscal troubles. Following the reforms, Mauritius experienced steady growth, low inflation, and increased employment. GDP per capita, meanwhile, increased approximately seven-fold between 1976 and 2008, from less than $1,000 to nearly $7,000 (figure 2). At the same time, consumer price inflation in Mauritius has remained in the low single digits through the 1990s and 2000s (figure 3). The steady growth path of the early years of the period under review was due to the sugar boom of the early 1970s and the newly established EPZ attracting foreign investment. During that period, GDP grew at an average of 9% per year. However, the boom was short lived with sugar prices falling by 50% and the first oil shock of 1973-74 starting to impact on isolated Mauritian exporters and the small but promising tourism industry. Year 1979 saw the devaluation of the exchange rate by 30%, a rise in interest rate, reduction in food subsidies and wage increases held below inflation. Between 1979 and March 1980, the island was hit by cyclones, sugar production tumbled and GDP fell by 9%. The only encouraging factor during that period was a fall in inflation. The highest rate of inflation Mauritius witnessed since its independence was in October 1980 at 42%. This was due to the deteriorating economic situation following increasing oil prices in the late 1970s coupled with adverse weather conditions damaging food crops. In the same period, the island adopted its first Structural Adjustment Programme and the rupee was devalued by 22.9 % in October 1979. The direct impact of the devaluation was seen on import prices which sky rocketed. Macroeconomic policies have contributed to containing inflation. On a calendar-year basis, inflation (measured by changes in consumer prices) was maintained at under 6.5% per year till 2006, when it rose to 8.9%. The main contributors to this increase include higher oil prices (resulting from increase in world prices and the introduction of the Automatic Pricing Mechanism, higher prices of alcoholic beverages and cigarettes (resulting from the increase in excise duties) and of some other products (resulting from the reduction of subsidies for rice, flour, and bread), increase in freight costs and depreciation of the Mauritian rupee. During 2007, inflation increased further to reach 10.7% in June (on a yearly basis), the highest in over a decade. According to the BOM, this was due to the second-round effects of high oil and commodity prices, the depreciation of the Rupee, and the increase in excise duties. 3.2 Trade Performance Trade remains an important feature of the Mauritian economy in light of the fact that it has a small domestic market and limited natural resources namely land. The island is known to have been running merchandise trade deficit which has been offset at times by surpluses on the services account. The bulk of Mauritian merchandise exports (namely 70% of the total value) is accountable to manufacturing products. Though decreasing in share, clothing remains the main manufactured export (from 57% in 2001 to 36% in recent years). Sugar has remained the main agricultural export, contributing around 16% to total merchandise trade. Imports as well continued to be dominated by manufactured goods. Leading imports include machinery and transport equipment, radio/television transmission apparatus, textile and chemicals. The share of textiles has decreased from 20% in 2001 to 7% in recent years. Nevertheless, textiles remain an important import item. The European Union is the major destination for most of the Mauritian export. The bulk of Mauritian sugar and a large share of its textiles and clothing are destined to the EU. The UK remains the major single destination followed by France and the US. On import grounds, the EU supplies around one third of the total value of Mauritius merchandise imports. Other major suppliers include China, South Africa, France, India and Germany. The share of Middle East countries (Bahrain, Saudi Arabia, and United Arab Emirates) has considerably increased, reflecting mainly the increase of oil prices. 3.3 Trade Openness Mauritius is an active participant of the multilateral trading system and member of various economic groupings and trade agreements. Participation in regional agreements is crucial for a small island country like Mauritius for the following reasons: Allows the exploitation of its comparative advantages and economies of scale. Improves the islands competitive edge. Allows the diversification of its range of exports. Facilitates its integration into the world economy. However, challenges remains for Mauritius has to ensure consistency between the national reform agenda and participation in a multitude of trade agreements, with different geographical coverage, liberalization agenda, provisions and goals. To Sachs and Warner, the key determinants to a countrys long-run growth is its trade policies. In effect, in the 1970s and 1980s, Mauritius had a fairly protected economy; the average rate of protection being high and dispersed. This is depicted by the rather poor openness ration of the early years of the period under review. When the country started to open to the world, a net amelioration of the ratio was noted. 3.4 Exposure to external shocks and policy responses An integral part of economic policies in Mauritius, trade policies are aimed at improving the living standards of the population and seeking to achieve full employment. This objective is projected to be achieved through the implementation of sound macroeconomic policies, investment in public infrastructures, easing the doing business environment and further opening up the economy. Trade policies have, for over two decades, shaped the countrys industrial development and contributed towards sustained growth. Mauritius was able to join in the ranks of the newly industrialised economies. 3.4.1 Agricultural sector Today, agriculture remains an important sector given its share in exports and revolves mainly around sugar. However, the ever decreasing sugar prices have seen the implementation of actions to restructure the sector and ensure its long-term viability. Those actions seek to promote alternative goods relating to cane production. In fact, much of the sugar cane production in Mauritius has been exported to the EU under the preferential terms of the ACP-EU Sugar Protocol. ACP sugar-producing countries were granted preferred access to the EU market, with annual quotas and guaranteed prices. As part of the transition to the new regime defined by the Economic Partnership Agreements (EPAs), ACP countries experienced a decline in their guaranteed minimum price for sugar to the EU. Over four years to 2009, the price fell by 36 per cent. Mauritius is the most affected by the falling price paid by the EU for sugar. At 507 000 tonnes, Mauritius enjoyed the largest quota under the Sugar Protocol. Sugar exports to the EU alone contributed 17 per cent of the countrys foreign exchange earnings and up to 4.5 per cent of gross domestic product. The losses associated with the new regime are expected to have a significant impact on Mauritius, particularly given that the revenue that had been procured from the Sugar Protocol was important for stimulating economic development, promoting diversification and supporting services throughout the country. It is likely that the economy will go through structural change as the agricultural sector moves away from its almost exclusive dependence on sugar and becomes more diversified. The Multi-Annual Adaptation Strategy (2006-2015) is the Government of Mauritiuss response to the changes in the Sugar Protocol, to aid in the adaptation process and take advantage of the package of accompanying measures offered by the EU to ease the transition to the new trading regime. It seeks to protect the long-term viability and sustainability of the sugar industry and ensure that it can continue to make an important economic and social contribution to Mauritius. There are several elements associated with the MAAS designed to help the industry and its workers adapt to the new trading reality and safeguard a future for the sector. Key among these are a focus on ways to (i) reduce costs of production (through factory closures, centralization, and restructuring of the workforce), (ii) generate additional revenue (such as through increasing value added), (iii) efficiently use by-products (such as for producing renewable energy) and (iv) contribute to poverty alleviation (by establishing voluntary retirement and re-training programmes). By pursuing these policies, the Government hopes to transform the sugar industry into an industry that moves away from producing raw sugar towards producing several types of sugar (raw, special, industrial and white), and also produces electricity from bagasse and ethanol from molasses. Once implemented, the policy should result in higher-value products, sufficient production to meet all of Mauritiuss trade commitments, and reduced dependence on imported fossil fuels by increasing the contribution from sugar cane to national electricity production and increasing the production of ethanol. 3.4.2 Manufacturing sector The development of textile and clothing, the main industry, was favoured in the past by preferences under the Multifibre Arrangement (MFA), and preferential access to key markets such as the EC and the United States. Mauritius textiles and clothing industry has been facing many challenges, such as multilateral liberalization, which has resulted in erosion of trade preferences; rising production costs in Mauritius; and the emergence of low-cost producing countries. In anticipation of the multilateral liberalization of the industry in January 2005, most of the major Hong-Kong-owned enterprises (which dominated the industry in Mauritius) ceased operation: between 2001-06, employment in the industry was reduced by 27,000 jobs. This explains the poor performance of both exports and growth of the EPZ subsector. Several steps have been taken to sustain development of the textile and clothing including restructuring of enterprises; promotion of vertical integration to increase value added, as well as high value products; upgrading skills; improving access to finance; and facilitating business operations. With the phase out of the Multi Fibre Arrangement, Mauritius has to compete with major textiles producers like China. The new LDC scheme proposed by the US to extend the AGOA type benefits to all LDCs pose a major threat to Mauritian exports to the US, particularly for garments. With the application of a coefficient of 8 in a Swiss formula to reduce tariffs in the context of the Doha Development Agenda, the preference margin for garments will fall from an average of 12% on the EU and US markets to below 5%. For canned tuna, which Mauritius exports, the preference margin will drop to around 6% from a high of 24%. 3.4.3 Tourism The Tourism Industry has contribution extensively towards foreign exchange earnings, GDP growth and employment creation. With the impact of the turmoil experienced in the international financial markets in 2008, the sector recorded an increase of only 2.6% in tourist arrival as opposed to a 15.1% growth in arrival in 2007, followed by a negative growth of 6.4% in 2009. As at 2009, the tourism sector contributed to 8.9% of GDP; created 26,922 direct jobs and generated Rs. 35,693 million ($1190 million USD) as tourism receipts. Mauritius has performed well in developing a distinctive form of relatively high-end tourism. Growth in tourist arrivals has outpaced that of many of our competitors. Currently, the aim is to continue that growth with a visitorsà ¢Ã¢â€š ¬Ã… ¸ target of two million tourists a year by 2015. To achieve the set target, the number of hotels and room capacity has evolved considerably over the years to cater for the ever-increasing tourist arrivals. Mauritius has been taking measures since early May 2008 to cushion the economy from the risks of deterioration in the world economy. The main policy measures taken since May 2008 are as summarised in the table below. Date POLICY MEASURES ADOPTED AND IMPLEMENTED May 2008 Allocation of Rs. 6 billion [$200 M] for investment in airport expansion creation of 6 funds to realize the Maurice Ile Durable vision, build food security, boost education and knowledge, eradicate poverty and widen the circle of opportunities, improve local infrastructure, carry social housing commitment and sharpen the competitiveness of domestic oriented industries and SMEs. June 2008 The 2008/2009 Budget voted an amount of Rs. 1.8 billion [$430 M] for contingencies to cater for any additional injection required to support public spending and demand. July 2008 Full implementation of the recommendations of the Pay Research Bureau on review of salaries and conditions of employment in the civil service thus injecting an additional amount of Rs 1.5 billion [$50 M] in the economy. October 2008 Reduction in Repo Rate by 50 basis points from 8.25 to 7.75 Reduction in Cash Reserve Ratio (CRR) from 5% to 4.5 % Reduction in the minimum CRR on any particular day from 4% to 3% Introduction of a Special Foreign Currency Line of Credit by the Bank of Mauritius aggregating $125 M so as to assist banks encountering difficulties due to non-availability or inadequacy of foreign exchange facilities from usual sources. Review of the Automatic Price Mechanism (APM) to enable monthly, instead of quarterly, review of petroleum prices so that local retail price aligned with international prices of petroleum products. December 2008 Presentation of Additional Stimulus Package (ASP) amounting to Rs 10.4 billion [$350 M] to be spent through 2009 and 2010, basically on major capital projects with focus on fast-tracking and frontloading of existing public infrastructure projects, new investments in public infrastructure, accelerating private sector investment, improving business climate, building human resource capacity, and supporting vulnerable sectors such as the SMEs, export oriented manufacturing and tourism. Setting up of Special Committees to fast track implementation of the Additional Stimulus Package and to unlock private investment. Reduction of the Repo Rate by 100 basis points from 7.75 to 6.75 March 2009 Reduction in the Repo Rate by 100 basis points from 6.75 to 5.75 May 2009 Presentation of new budget built on the Additional Stimulus Package to ride out the global crisis. Some measures to enhance competitiveness and focusing on saving jobs, protecting people, and preparing for recovery are as follows: Injecting an additional Rs 2 billion in the Saving Jobs and Recovery Fund (SJR FUND), to provide for a new micro-enterprise financing scheme for women to be operated by the National Empowerment Foundation in collaboration with the Ministry of Women and the Mauritius Post and Cooperative Bank. Rescheduling of loans by the Development Bank of Mauritius for SMEs which were servicing their loans prior to the crisis in September 2008 but then faced cash flow problems. Setting up an Emergency Export Credit Insurance scheme for SMEs as well as large enterprises in all sectors until December 2010. Operating a scheme to assist small hotels and restaurants to improve, and enhance productivity and competitiveness under the SJR Fund. Setting up of the Mauritius Business Growth Scheme (MBGS) to promote business growth in SMEs. Eligible firms will receive financing to support their business growth on a cost-sharing basis Introducing a mentoring service by National Empowerment Foundation to ensure sustainability of small businesses initiated mostly by women Under the Food Security Fund, introduction of a Food Crop Insurance Scheme for small food crop planters, a Seed Potato Purchase Scheme to encourage the production of potatoes by small planters and an Onion Seed Purchase Scheme. Reduction of Ministers salary by Rs 10, 000 per month (July 2009 to Dec 2010) Earmarking Rs 100 million from the MID Fund to co-finance a Rs 280 million programme with the CEB, CWA and WMA (utility agencies) to clean up the social housing estates and rehabilitate the water, electricity and waste-water infrastructure Increase old age, non-contributory pensions and social aid benefits by 5.1 % Payment of compensation of 5.1% for the lowest income band while at the time broadening the band. September 2009 The key Repo Rate was maintained at 5.75 per cent per annum November 2009 The Budget 2010 presented on 18 November 2010 provides for policies for shaping recover, consolidating social progress and sustaining green Mauritius. The measures, inter-alia, include, intensifying efforts to consolidate the traditional and emerging economic pillars, so as to open business opportunities and further stimulate job creation, in particular for women, continue improving the doing business environment to increase investment; investing in human resource development, science, technology and innovation to build the competitive competence that Mauritius needs to be among the fast globalisers; accelerating plan to build the infrastructure of tomorrow. On the social front, the 2010 budget provides for additional effort towards eradication of absolute poverty, provision for every family with a decent dwelling, delivering more and better health care, giving more social protection to our children and women, preparing for the challenges of an ageing population and ramping up support for our seniors and consolidating the progress made in giving greater access to education, from pre-primary to tertiary levels. In regard to the Additional Stimulus Package (ASP), Government policies have been instrumental in dealing with the crisis in terms of saving jobs, preventing closures of firms and protecting people. However, given the current international economic context, the exit strategy needs to be carefully managed. Accordingly government has decided to maintain the Additional Stimulus Measures until December 2010 including the funds committed for a stimulus package for Rodrigues. December 2009 The key Repo Rate was maintained at 5.75 per cent per annum Source: Mauritius Strategy for Implementation National Assessment Report 2010 3.5 Conclusion Trade liberalization has proven to be beneficial to the economy through consistent amelioration of the growth rate over the years. However, increased openness has undermined the economic vulnerability of the island.