STRUCTURAL TRANSFORMATION OF THE MAURITIAN ECONOMY: 1960S - BEYOND 2000

Introduction

This exposé covers

First, the past: a quarter of a century of our economic history.

Second, the present: the challenges and opportunities at the dawn of the beckoning millennium.

And last, beyond 2000 will offer some snapshots of our vision and the different pathways and bridges to this vision.

It has been structured into 6 main growth cycles. 

 

The growth cycles 

                       

·    1965 to 1970          Period of slow take-off  with import substitution

             

·     1971 to 1977         Period of rapid growth  starting from a low base

·    1978 to 1983          Period of marked slow down in growth

·    1984 to 1988          Period of rapid growth with export-led industrialisation

·    1989 to present      Period of  consolidation, diversification and modernisation

·    Beyond 2000          A new  competitive strategy in a different  setting

            Let us all time-travel to the mid 50s when the roots of success were planted through 

·      Population control

·      Universal suffrage, and

·      Eradication of malaria

The eminent Harvard economist Prof. Jeffrey Sachs singled out population control and the early eradication of malaria as important factors in the successful transformation of some island economies like Taiwan, Singapore, Hong Kong and Mauritius. This is why the period 1955-65 may be termed as the roots of success decade.  Paradoxically, however, it was malaria control and improved environmental and sanitary conditions that caused the death rate to plunge significantly, throwing the country into the vortex of exploding demography.

James Meade, in an official report on the economic and social structure of the island, has this to say on the economy caught in the Malthusian trap producing more babies than food.

"… the economic future of Mauritius is dominated by its  population problem. …. unless resolute measures are taken to solve it. Mauritius will be faced with a catastrophic situation."  J. E. Meade, 1961.

Students corner

The Malthusian trap

Robert Malthus claimed that: Population tends to grow in a Geometric Progression and food supply in Arithmetic Progression.

Human beings were thus destined to misery and poverty unless population growth was checked.

Yes, the country was rapidly acquiring a "reputation for reckless reproduction".

           

            Between 1945 and 1963, the death rate fell faster than the birth rate leading to a rate of natural increase of 3%. The dramatic decrease in mortality was due to malaria control programs and better public health services. The birth rate fluctuated between 38 and 45 per thousand over the period and it lagged behind the decline in mortality by about 10 years.  The situation was indeed very alarming.

                                                           

But the prophets of doom were to be proved wrong. Mauritius went on to mark a milestone in the history of population control. It succeeded in engineering one of the fastest rates of fertility decline.

1963 - 1973: The birth rate fell more rapidly than the death rate leading to a fall in the rate of natural increase to a low of 1.5 in 1973 as a result of the massive government support to family planning. The population programme was voluntary and non-coercive. The message that "babies had mouths but no hands" gradually seeped in.

Population growth fell from 3% to one an all -time low of 0.7% in 1988 - a remarkable achievement.

                                                                    

So, after successfully winning the battle against those nasty mosquitoes and having learned to control our libidos we were thus mature enough to claim for our freedom.

At the stroke of noon, 1968, as the Union Jack was lowered to make room for independent Mauritius, we had very little to cheer for.  We were gradually coming out of the Malthusian nightmare of exploding demography to find ourselves confronted with an equally grim spectre of hopelessness. The economy was in the doldrums.

At the Dawn of Independence

The Monocrop Economy

The economy was stagnating with a per capita income of only Rs 1,397.  Sugar was the main foreign exchange earner. Relatively low savings and investment.

d) Unemployment

·      Baby boomers were flocking to the labour market in droves.

·      The ranks of the unemployed had swollen to 45,000 from 21,000 in 1962.

·      The level of unemployment was estimated at more than 20%.

·      Most affected were the young, educated, school-leavers.

e) The "Overcrowded Barracoon"

·      Mark's Twain paradise was being berated as the "Overcrowded Barracoon" by V.S Naipaul (1967).

·      Some 100 nursing students leaving for UK made front-page headlines.

·      The only hope for most Mauritians was emigration to greener pastures elsewhere.

Emigration was only a short-term palliative.  It was a nice getaway for those who could leave or those who satisfied the racist overtones of the recipient countries.  But for those  who stayed behind, by choice or by force, it was a question of eking out a living out of this quagmire of poverty and desolation. The racial riots of 1968 were thus a warning to our leaders that they had to deliver fast. 

The First Industrial Policy

• A Development Certificate Scheme which extended a wide range of fiscal benefits to industrial ventures for a selected list of imported substitution manufactures.
  
• Other benefits were tariff and quota protection, duty-free entry of raw materials and tax holidays.
  
• The Development Bank of Mauritius was established in 1964 to support this industrial policy by providing subsidised long-term loans to investors in non-sugar activities.
  
• The policy clearly emphasised import substitution.
  Most of the applicants for Development Certificates also applied for protection from foreign competition in the form of tariff and import quotas. Why this protection? The logic for this protection is based on the famous Infant- industry argument.
  
  
  

Though the import substitution strategy was a failure as:

·      the contribution of the industries to employment creation was modest     

·      the enterprises were capital-intensive and operated under excess capacity

·       the products were of indifferent  quality

·      the enterprises did not offer the economies of scale to compete on the export markets

Yet, it had some positive effects given that

" …….a new breed of domestic entrepreneurs had rapidly emerged to exploit opportunities which had not been available to them earlier.

….The industrial and manufacturing experience...exposed the labour force to an industrial work environment…."

Bheenick,R and Hanoomanjee,E ,1988, "Mauritius: Towards an Industrial Training Strategy".

The Second Growth Cycle - 1971-1977

In our second growth cycle with the coalition government of Labour and PMSD, the Fabian socialism of the Labour Party was twisted more to the right.  It meant:

·      A greater role for the private sector;

·      A greater role to foreign investors;

·      Export promotion strategy; and

·      Reining in the trade Unions.

There were indeed important developments during this period when the foundations were laid to launch Mauritius into two decades of robust economic performance. These important foundations for growth were:

The foundations for growth                                                        

·      The Export Processing Act was passed in 1970.

·      First English-speaking country to adhere to the Yaoundé Convention in   1972 and establish links with the European Community .

·      Education was made free at all levels in Mauritius in 1976, the beginning of our continuous efforts to upgrade our human resource.

·      Diversification into the tourism sector.

This period witnessed one of the fastest growth of our economic history.

THE 1971-1977 GROWTH CYCLE

PERIOD OF RAPID GROWTH

            Average growth of 8.2% annually

Sugar Boom (1973 – 1975)

            Increase in the price of sugar by three-fold

            Sugar production at all-time record (718,500 Ts)

EPZ Growth

Established in 1970

Incentives

                        Tax holidays

                        Exemptions from import duties

                        Preferential credit facilities

                        Preferential access to the European Markets

Performance

                        Number of enterprises increased to 88 in 1977

                        Valued added growth exceeding 10%

                        17,500 new jobs created

                        Exports representing 20% of total exports

Positive Impact of the Boom

            Savings rate at all-time high

            Investment rate at peak for the decade

            Around 32,000 jobs created

Policy orientation of the 2^nd growth Cycle

Two pronged policy strategy:

           

            Import substitution in the home market and expansion of exports.  This simultaneous pursuit of both the import substitution and export promotion strategies led to some policy contradictions.

The high rates of growth were not sustainable as they rested on the shifting sands of commodities boom. The sugar boom was wasted through extravagant public sector projects, generous wage awards, social transfers and subsidies. The crisis was imminent; it was a combination of external and local factors.

The Third Growth Cycle - 1978-1983: The Crisis years                     

Growth averaged 1.7%.

External factors

    

World oil market pressures (1979,1980)

            Weakening of world sugar market

            Rising airfares on account of oil price hikes affecting the tourist industry

            World economic slowdown

Local factors

   

Excess demand: the sugar boom triggered a spending spree -  a surge in  
           consumption and imports

Decelerating growth in industry and tourism

Unfavourable climate conditions

Decline in the rate of domestic and private foreign investment

High and rising debt service obligations

Rising import prices

The Crisis years

Economic Parameters

            A record balance of payments deficit (Rs 932 m in 1981)

    

A budget deficit of Rs 1,160 m in 1982, highest for the decade

    

Unemployment register exceeding the 60,000 level for the first time      
            (73,000 in 1982)

    

An inflation rate of 42% in 1980

    

Current account deficit as % of GDP at record high of 14.4% in  1981.

                                                    The Crisis years

We could not wait any longer. The economy had to be taken to the intensive care unit and the specialists of the Bretton Woods.  The IMF and the World Bank were called in. The 30% devaluation of the rupee in October 1979 marked the opening shot of the structural adjustment programmes.  Since 1979 Mauritius has adopted a consistent programme of reforms and the economic results have been forthcoming.

The main policy measures were:

Fiscal stabilisation

Exchange rate re-alignment

Cautious wage policies

Trade liberalisation

Financial consolidation

Sectoral/supply side policies

Fiscal Stabilisation

¨          Early 1980's, a shift from direct to indirect taxation.

¨          Reduction of the top marginal income tax rate from 70% to 30%, and later to 25%.

¨          A new sales tax introduced in 1982 and indirect taxes were increased.

¨          Reduction in consumer subsidies.

¨          Broadening of the tax base and improvement in tax collection through the setting up of a Unified Revenue Board and Pay As You Earn system.

¨          Introduction of the VAT

Exchange Rate Re-alignment

           

·          Two large devaluations of the rupee

·          Delinking of rupee from SDR and pegged to trade weighted basket of currencies.

·          Managed float /Crawling peg

·          Abolition of exchange control on current and capital transactions

·          Market-determined exchange rate

Incomes Policy

·          Wage restraint and preservation of export competitiveness

·          Nominal wages adjusted to past inflation

·          Tapering compensation

·          Falling real wages

·          Containment of import-led inflationary pressures

Trade Policy Reform

·          Removal of all quantitative restrictions on imports and replaced by tariffs

·          Import liberalisation

·          Rationalisation and reduction of tariff rates

Financial Consolidation

·          Policies geared to reducing pressure on foreign currency reserves

·          Management of credit expansion

·          Liberalisation of control on interest rates and credit

·          Market determined interest rates

·          Financial deepening and widening

·          Regional Offshore Financial Centre

Sectoral /Supply Side Policies

(a)       Export-led Strategy

            ·          Reduction in corporate tax for EPZ and non-EPZ enterprises

            ·          A new Industrial Strategy

            ·          Industrial Expansion Bill to consolidate, modernise and rationalise incentive schemes

            ·          Setting up of an Informatics Park

           

(b)       Restructuring of the Sugar Industry

            ·          Factory centralisation and rehabilitation

            ·          Rationalisation in the use of bagasse

            ·          Expanding labour participation in the ownership of milling
                      companies

            ·          Research and extension facilities

            ·          Removal of export duty on sugar

                                                                                                                                               

(c)       Agricultural Diversification

            ·          Attaining a certain degree of self-sufficiency

            ·          Establishing marketing, research and extension institutions

            ·          Interline cropping

            ·          Increasing domestic livestock production

(d)       Policy Change in Tourism

            ·          Improving air access policy

            ·          Increasing national airline fleet

            ·          New link operations to Europe and the Far East

            ·          Increasing promotional activities

            ·          Hotel Management Incentive Scheme

The Export-led Strategy

            The lukewarm export promotion strategy gave way to a more aggressive export led strategy that comprised a series of measures directly aimed at boosting the flagging performance of the EPZ sector. This strategy enabled Mauritius to capitalise on its potential comparative advantage and obtain substantial gains from trade.


The Student Corner

Two successive currency devaluations were carried out to correct the overvaluation of the Rupee which was impeding export development.  A policy of gradual depreciation of the rupee ensured that Mauritian exports maintain its competitiveness. The real effective exchange rate depreciated by nearly 21% between 1981 and 1988.

            As the inflation rate tumbled to 14% in 1981, the economy was adjusting itself to take advantage of the devaluation of the rupee. The famous J-curve was in operation.

The Fourth Growth Cycle - 1984-1988                                                

The Economic turn-around

Objectives

·      reduce current account deficit

·      reduce budget deficit

·      tame inflation

·      maintain flexible exchange rate

·      limit credit expansion

·      liberalising prices of a number of commodities

The full effect of devaluation and stabilisation programme

Fundamentals

•   average real output growth - 7%

•   investment rate climbed up to 28.2% in 1988

•   savings rate increased substantially to a peak of 28.6% in 1986.

•   balance of payments surplus of around Rs 2.8 billion in 1987

•   foreign exchange reserves cross the Rs 6 billion mark in 1988

•   budget deficit was lowered to 0.9% of GDP on 1987

•   debt service ratio improved considerably to only 9.8%in 1988.

•   unemployment was reduced to 16,000 in 1988.

•   inflation was lowered to 0.6% in 1987.

•   number of EPZ enterprises reached an all-time high of 591

Students corner

            Let us also follow the changes in the world of economics.  As inflation accelerated during the 1970s, economists had begun to doubt the wisdom of the “Keynesian“ economics

Questioning Keynes

·      Increasing government expenditure to reduce unemployment led to inflation

·      The trade-off between inflation and unemployment was questioned.

·      Demand management policies have failed to tackle either inflation or unemployment

            Other notions that were becoming increasingly popular among academic economists and found their way into macroeconomic policymaking in some countries was the so-called supply-side economics.

Supply side economics

·      Lowering of income and corporate taxes to boost work efforts and investment.

·      Acceleration of depreciation to raise the profitability of investment.

·      A lower role for Government.

·      An industrial policy that encourages resources to move into future winners.

           

            In Mauritius, we witnessed such measures in the 1983-88 growth cycle through the successive no-tax budgets. These philosophical currents, reinforced by the public’s worries about inflation and the government’s inability to bring it under control, led to the election of a more conservative group of leaders in several major countries; Margaret Thatcher in Britain (1979), Joe Clack in Canada (1980), Ronald Reagan in the US (1980) and Helmet Kohl in Germany (1981).

In Mauritius too, we have had many converts.  The local adherents were proposing a “level playing field”, a leaner and cost-effective government through privatisation or the “dismantling of the welfare state”.  We have come a long way from SSR 's Fabian socialism to this new economic ideology.

The Fifth Growth Cycle - The Present                        

The present

·            Average economic growth of  5.6% over the past 3 years

·            Fastest growth in the Tourism & Financial Services sectors

·            Budget deficit at 3.6% of GDP

·            Debt service ratio of 6.9%

·            Inflation rate of 8%

The present

Mauritius was ranked 59^th on the HDI basis with:                                           
      life expectancy at birth of 71.4 yrs

      adult literacy rate of 83%

      real per capita income of $ 9,310 (PPP$)

Mauritius topped the list of African countries in competitiveness in the Africa Competitiveness Report of 1998 of the World Economic Form.

Mauritius was ranked 29^th in the World Competitiveness Report of 1999 outperforming some “Asian Tigers” and 1^st among African countries.

             

            If we peel off some of the layers of this success story to uncover the fragile underlying fabric which, for quite some time now, is being gnawed by a typical Mauritian virus - the dodo virus.  Yes the historical dodo virus has caught up with the African cub-tiger.  Like the dodo, the cub-tiger is cosily enjoying the spoils of its success that it has lost its competitive and enterprising drive.  Indeed the tiger needs immediate treatment. The main results of our preliminary diagnosis are as follows:

Constraints and Challenges

¨          A still well-cocooned economy, where the economic agents haven't learnt all the tricks of competitive trade and business practices.

¨          An education system no longer responsive to the needs of the economy.

¨          Excess luggage on board.

               --     Civil service

               --     Parastatals

               --     Social maintenance programmes

¨          A multitude of incentives working at cross-purposes.

¨          Rigidities in the labour and capital markets.

Les Grands Courants

Before proceeding to beyond 2000, let us have an outline of  “les grands courants” of the next millennium that will unleash unprecedented challenges and opportunities.

“Les grands courants” of the next millennium:

§  further liberalisation of trade by WTO;

§  emergence of the information age and high-tech telecommunications network;

§  knowledge-based development - more of brain than brawn;

§  greater integration of markets/national boundaries; and

§  shifting of the manufacturing base from the west to emerging economies – business will become more multinational.

Beyond 2000: The  Vision

·      Mauritius will be a thriving, competitive and modern society, where the population enjoy a standard of living, which compares well with the most successful nations in the world.

·      It is the region's leading centre for international financial services, including banking, insurance and other financial services - secure, efficient, convenient and a pleasant place in which to do business.

·      It has a liberal, well-regulated telecommunications service and world standard information technology infrastructure.

·      Mauritius is an essential node in the variety of international network flows.  These well-established networks enable Mauritius to create its niche in international profit bearing flows.

·      It has an adaptive and flexible education system promoting the concepts of multidiscipline and professionalism.

·      It has preserved its fragile ecological balance through integrated land use and coastal zone management.

·      Its has a supporting physical and social infrastructure-special bus lanes and a network of mass transit system, jobs nearer to residence, well planned towns in the forms of shops, schools, hospitals, cultural centres, and sports facilities.

·      Mauritius frames its aspirations in terms of quality rather than quantity.

While globalisation is in itself a spur to achieving efficiency and improved resource allocation, it also demands that we adopt the right policies to become more productive participants in the world economy to realise this vision

The basic policy ingredients or prescriptions.

An economy characterised  by an extensive use of High-Tech information technology

 

Agriculture

¨    Exploitation of by-products of sugar

¨    Diversification, high-tech research and techniques, and exploitation of Exclusive Economic Zone (EEZ)

Manufacturing

¨    Delocalisation of low-end tasks overseas

¨    New sectors like electronics, light engineering, printing and publishing and jewellery

Tourism

¨    Selective, quality and environment friendly tourism

¨    Diversification of our tourist products, appealing to tele-conferencing, sporting, honeymoon and wedding markets.

Quaternary Sector

¨         Stock Exchange, Freeport and Offshore Businesses to lead the show

¨    High-tech Services like Computer Aided Design (CAD), software services, publishing and voice operations – possibility to export computer services

Human capital Formation

Human capital - the key resource for our future prosperity.

       We have to build up a top quality work force - enterprising, well qualified, highly skilled, productive and remunerated accordingly - which will be crucial for the structural transformation of the economy.

A new competitive strategy in a different setting

The last growth cycle is titled as " A new competitive strategy in a different setting". The new setting is the uni-polar world system where the invisible hand of Adam Smith has developed into the long arm of Globalisation reaching all the contours of our decision making process.  It is also a new mapping of the international economy. The economic boundaries are being redrawn with the emergence of powerful trading blocs. The new economic environment is the trade exchanges which are now controlled by regulations and time frames set by WTO. It means  fiercer competition of Darwinian proportions in which only  the fittest will survive.

           

In such a setting we will need:

A new industrial strategy

It centres around two main axes, namely an intensive development of 

(a)  small and medium enterprises (SMEs); and

(b)  service-oriented industries (SOIs).

It fits in with our overall regional integration strategy,

It develops the linkages with the delocalised firms, and

It builds the necessary business and trade networks in the region.

And more importantly we need a Global state of mind

Global state of mind

Think globally  to acquire competitive rather than comparative advantage.

Our institutions and economic operators will have to think globally

-       in international relations, in diplomacy, in marketing, etc. 

-       a winning globalisation strategy

-       acquiring the crucial market and political knowledge ahead of rivals, building the best contacts and positioning for advantage will be the main elements .