From Miracle to Modernity and Beyond

Mauritius’ Economic Journey

With general elections in view, the reforms needed to boost and reorient the economy have, unsurprisingly, been put on the back burner. Only a new government can break away from the shackles of an outdated economic model

By Dr Vinaye Ancharaz

The 70 years of the Mauritius Times are intertwined with Mauritius’ fortunes. And just like the paper has reached a critical juncture today, so has the Mauritian economy. While the past informs the future, the future of both the paper and our economy must demarcate from their respective past. This article briefly surveys the structural transformation of the Mauritian economy since the 1960s, highlighting the role of domestic policies and external factors, and charting a course for the future.

Humble beginnings

As an island with no natural resources and far away from the global centre of gravity, Mauritius started off with unfavourable initial conditions at the time of Independence in 1968. Some notable critics at the time had written off Mauritius as a failure to be. Meade (1961) predicted that “the outlook for peaceful development [was] poor” in a multicultural country with brewing tensions while Naipaul (1972) described Mauritius as “an abandoned imperial barracoon, incapable of economic and cultural autonomy”. In utter defiance of these prophecies of doom, Mauritius emerged as a success story in Africa.

The economic transformation of Mauritius – from a mono-crop island to a modern, diversified economy – was long in the making, but a relatively short period – from 1985 to 1995 – can be credited for the country’s most significant achievements. Propelled by strong growth of apparel exports, Mauritius recorded GDP growth rates averaging 6.2% during this period, earning the country international acclaim as an ‘economic miracle’. Crucially, much of this growth was inclusive, benefiting the masses, including women, who saw their economic emancipation surge as the clothing industry encouraged thousands of women with few alternative employment opportunities to join the formal labour market.

The economic transformation of Mauritius

The industrialization journey of Mauritius can be traced from the import-substitution policies of the 1960s to the export-oriented strategies of the 1980s and beyond. Initially, the Development Certificate (DC) scheme, launched in 1964, incentivized import-substitution industries, leading to a protectionist regime characterized by high tariffs and quotas. The inward-looking strategy of the 1960s facilitated the growth of firms across various industries, transforming several into successful exporters today. However, import substitution had limited success in terms of its contribution to jobs and growth. It soon became clear that the small size of the domestic market offered little scope for import-competing firms to thrive.

The policy shift towards export promotion began with the establishment of the Export Processing Zone (EPZ) in 1970, aimed at attracting foreign investment and boosting exports. However, it was not until the mid-1980s, following the successful conclusion of a structural adjustment program (SAP) negotiated with the IMF, that the EPZ gained momentum. SAP reforms included measures to address macroeconomic imbalances (such as a further devaluation of the rupee in 1982), revenue mobilization through the introduction of a sales tax, restructuring of the sugar sector, adoption of cautious wage policies to maintain export competitiveness, and improvements in the business environment, making Mauritius more attractive to foreign investors. Soon, however, local participation in the EPZ surpassed foreign equity, indicating the EPZ’s success in stimulating domestic entrepreneurship.

In the 1990s, Mauritius witnessed diversification efforts into services, particularly in offshore financial services and business processing outsourcing (BPO), and a reorientation of the tourism product. Simultaneously, manufacturing diversification continued into the new millennium, with a focus on exports, through initiatives such as tuna-canning and the transformation of the sugar industry into a sugarcane industry with an emphasis on sugar by-products (such as rum and ethanol). In 2004, the government introduced the Integrated Resort Scheme, which, along with subsequent innovations, has since become a magnet for foreign direct investment (FDI) in the real estate sector.

Who’s the father of the economic miracle?

In 2001, an IMF working paper probed the causes of the Mauritian economic miracle by critically assessing the alternative explanations offered by four different economists. James Meade emphasized the adverse initial conditions facing the Mauritian economy in the 1960s. Jeffrey Sachs’ analysis highlighted the role of trade policies and openness. Conversely, Dani Rodrik disputed the idea that Mauritius’ trade regime was an open one, pointing to pervasive, high rates of tariff protection across many sectors. However, he suggested that Mauritius leveraged on its preferential access to the EU (for sugar) and to the US (for textiles) to increase its merchandise exports. Finally, Paul Romer’s contributions to endogenous growth theory suggest that ideas, innovation and FDI played a key role in Mauritius’ economic success. Yet the paper concluded that these explanations did not fully account for the economic miracle: the quality of Mauritian institutions was the missing piece of the puzzle.

The IMF paper spawned considerable local interest into a related question: Who is the father of the economic miracle? Some earlier critics, and some political observers even today, attribute the ‘miracle’ to Sir Anerood Jugnauth. However, while the economic miracle coincided with SAJ’s reign, it would be presumptuous to pin it entirely to the late head of state. True, SAJ’s coming to power in 1983 inaugurated a period of political stability that proved key to attracting FDI into the EPZ, mainly from Hong Kong, in the mid-1980s. Several factors, including historical precedence (the presence of a small Chinese community on the island), sheer luck (the spectre of Hong Kong’s retrocession to China) and wit (the ruling government’s diplomacy and foresight), contributed to the EPZ’s success. However, let us not forget that the EPZ was the SSR government’s baby, and the country’s most audacious economic reforms were spearheaded by Paul Berenger when he was Minister of Finance during 1982-1983. Without the right conditions, there would be no economic miracle.

Missed opportunities

Mauritius’ industrial evolution reflects a transition from import-substitution to export-oriented strategies, driven by the need to adapt to changing economic conditions and global market dynamics. This transition was supported by policy reforms, investment incentives, and efforts to capitalize on emerging opportunities, contributing to the country’s economic resilience and diversification.

However, there have been some missed opportunities too. For example, the blue economy never quite took off. In 2003, the Mauritius Research Council floated the idea of a Land-Based Oceanic Industry (LBOI), focusing on exploiting deep-sea water from the country’s exclusive economic zone for various commercial applications. Over several years, the project was researched and refined, culminating in a blueprint, a financial proposition and market research by the then-Board of Investment confirming a high demand for the product. The concept of the LBOI prompted the rebranding of the Ministry of Fisheries as the Ministry of Blue Economy, encompassing related initiatives like the seafood and bunkering hubs. However, the LBOI failed to attract investor interest, arguably due to a skewed incentive regime that favoured real estate investment, and the domestic private sector’s risk aversion. Historically, local firms have waited for government incentives before investing. This has hindered sectoral diversification.

Another example – a more recent one – relates to the government’s intent to establish a biotechnology and pharmaceutical industry in Mauritius following the Covid-19 pandemic, which emphasized the need for greater self-sufficiency in medicines. The government committed seed capital, earmarked a strategic site for the industry, and rolled out an incentive package to attract foreign investors. Three years later, not a single firm has set up, raising doubts about the sector’s viability. The lack of significant investment suggests a continuation of past challenges in industrial development.

What brought us here won’t take us there

The title of Marshall Goldsmith’s 2007 bestseller ‘What Got You Here Won’t Get You There’ carries a crucial message for Mauritius’ development path in the years and decades ahead. Up till now, the country has relied on a labour-intensive, export-oriented model to achieve a commendable level of economic and human development. But this model is running out of steam. Mauritius is now facing the spectre of a declining population due to a combination of ageing, below-replacement birth rates, and youth migration. Beyond their implications for the pension system and healthcare, the current demographic trends mean that the working population will shrink. Growing labour shortages and rising wages are an explosive cocktail for traditional industries, such as clothing, and some service sectors. Imported labour can provide some relief but whether it can be a long-term solution is debatable.

Another challenge to future diversification is a lack of innovation and investment in R&D. Mauritius ranked 57^th among 132 economies on the 2023 Global Innovation Index (GII). However, it has slipped from 45^th place in 2022, and does not compare favourably with peers like Singapore and Ireland. Notably, a breakdown of the 2023 GII score suggests that Mauritius invests little in R&D and advanced skills – only 0.2% of GDP according to a recent IMF report. In fact, a key reason for the country’s failure to move into higher value-added EPZ activities, such as electronics, or to build an ICT hub or a pharmaceutical industry, is the sheer shortage of specialized skills. The same factor will hold back Mauritius’ shift into emerging industries, such as AI, the Internet of Things, fintech and renewable energy, and upgrading along value chains.

Moreover, our development model paid little attention to climate change, which has emerged as a major threat to infrastructure, agriculture and industry. For example, sea-level rise and coastal erosion present important challenges to the model of Mauritian tourism, based on sun, sand and sea. These challenges highlight the urgency for Mauritius to diversify its economy away from climate-vulnerable sectors, such as tourism and low-value agriculture, into modern farming practices and higher value-added services.

Finally, an implicit aspect of our current economic model, and yet a key ingredient of its success, is government leadership and public-private partnership. Traditionally, the government led the way for the private sector to invest in emerging sectors, such as the EPZ, financial services, and ICT. While it worked in the case of the EPZ and financial services, it did not work as well for ICT and the blue economy, where the private sector, lacking specialized skills and know-how and perceiving high risk, was hesitant to invest. Conversely, the IRS and, most recently, the Property Development Scheme (PDS) have distorted the risk-return trade-off so much in favour of investing in luxury villas (significantly higher return for lower risk) that investing in other sectors has become unattractive for foreign investors. This does not augur well for the economic diversification that Mauritius aims for.

What then?

It is high time that Mauritius embraced a new development model. One that emphasizes skill development and innovation, FDI in productive sectors, industrial value-upgrading, a renewed focus on manufacturing (for example, biotechnology), and the relentless promotion of emerging industries, such as the blue economy, and clean energy. Mauritius holds substantial potential in the last two sectors. However, a lack of competence and leadership has stunted their growth. Furthermore, vested interests have impeded investment in the pharmaceutical industry, and distorted policy incentives have caused FDI to be diverted into property development at the expense of other sectors, including agriculture and agro-processing, so critical to our food security.

At a time of foreign exchange shortages, and with the general elections in view, the reforms needed to boost and reorient the economy have, unsurprisingly, been put on the back burner. Only a new government can break away from the shackles of an outdated economic model that has become a burden on the country’s future path of development. The new model should veer from the traditional focus on growth at all costs. It should prioritize green, inclusive and sustainable growth that may mean less, but better, growth.

Vinaye Ancharaz, PhD, FCMI, formerly a principal economist at the African Development Bank and a senior lecturer and Head of Department at the University of Mauritius, is an international economic consultant specializing in trade and development.

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Mauritius Times ePaper Friday 16 August 2024