FAO Quotables

"But being right, even morally right, isn't everything. It is also important to be competent, to be consistent, and to be knowledgeable. It's important for your soldiers and diplomats to speak the language of the people you want to influence. It's important to understand the ethnic and tribal divisions of the place you hope to assist."
-Anne Applebaum

Friday, January 11, 2013

Notes on Mauritius- A Case Study by Arvind Subramanian

BONUS LINK:  My entire (so far) grad school notes collection can be found here. 

These are my notes on a very dated (2001) but important study on Mauritius' free trade zone.



     For the past fifteen years, Mauritius has enjoyed a 5.9% rise in GDP.  It’s GINI coefficient has dropped from .5 to .37 and its consumer price inflation is at 7% (excellent compared to the rest of Africa).  Furthermore, it’s unemployment has remained steady at 7%, down from 20% some ten years ago.  Its government is able to provide robust social programs to the general public without levying high taxes due to its demographics (i.e. a large working age population) and strong economic growth.  What has driven this remarkable success?  What factors did it overcome to effect this growth?  What lessons should its underperforming African colleagues take from it?  In this essay I argue that Mauritius overcame substantial barriers through a combination of cultural, political and economic factors.  Its neighbor would be well-served to emulate their behavior and patterns. 

            The political factors prove fundamental to Mauritius’ success.  This could have been stymied by the strong and powerful political and economic elite.  Instead of colluding, however, they delineated their efforts and promoted transparency and cooperation to correct macroeconomic imbalances.  Most remarkably they were able to pursue this economic rectification through three peaceful transfers of power.  This longevity of focus is something not often achieved anywhere in the world. 

            Culturally, Mauritius is a very diverse state.  Notably it has a large Chinese population.  This network has allowed it encourage and bring in large investment from the Hong Kong textile industry.  This investment has had transformative effects on their economy as a whole.  Mauritians as a people further embrace and promote a culture of transparency in which grievances are made and heard—deals and economic decision are made in the open, debated and changed. 

            Economically, the export-processing zone was the largest factor to the nation’s success.  Specifically, the export-processing zone was administered and run with sound policies and freedom from corruption.  These two factors have plagued the export-processing zones in other states.  Within their zone they have encouraged FDI and duty free imports, driving growth and investment.  Furthermore, the nation’s demographics played a crucial role at the beginning on the zone’s implementation.  Because the minimum wage was much lower for women, firms were able to fill their factories with these low wage workers, effectively subsidizing exports.   Some colonial hangover effects have also played a large role for Mauritius.  For 25 years their sole commodity industry (i.e. sugar) has enjoyed a sweetheart deal with the EU by which they receive 90% above the market value for their sugar exports.  Along with this, Mauritius gets preferential trade access for 90% of their exports.  Both of these factors have given the nation stability to ride out fluctuations in aid and the global economy. 

            All of these factors should stand as a roadmap for its sub-saharan neighbors.  First, institutions matters—but they are not everything.  Quality matters most.  States should focus on creating political systems that can not only conduct free and fair elections and transfer power peacefully but that can also plan and execute long term economic policies.  Second, geography does not determine one’s destiny.  Mauritius overcame the barriers of being an island.  Geographically it is 30% more remote than the rest of Africa from the global economy.  It determined how to overcome these barriers with a well-run (i.e. anti-corruption and cronyism) export-processing zone that encouraged FDI and that employed people throughout the country.  Furthermore, it overcame low initial income levels and a macroeconomic imbalance, as well as commodity dependence (sugar) through a strategic economic plan.  

- High Standard of Living.
- 5.9% real GDP a year between 1973-1999
- Gini coefficient from .5 to .37 (1962 to 1987)
- Annual consumer price inflation 7.8% average (25% in SSA)
- Unemployment at 7% (down from 20% in 1983)
- increased life expectance, school enrollment
- Generous social programs without high taxes due to strong growth and large proportion of population of working age.

Initial Sucess contributors:
- Openness ratio increased from 70-100% (African at 45%)
- Well-run and incorrupt export-processing zones (an effective institutional mechanism) that helped to overcomes initially restrictive import obstacles (licensing and tariffs)
            - imported inputs duty-free
            - tax incentives to exp-pro firms subsidized exports
            - favorable labor market conditions (i.e., lower min. wage for women)—subsidizing exports
- Preferential access with trading partners for over 90% of exports (implicit subsidization)
- Preferential textile access through the MFA (Multi-Fiber Arrangement) helped Mauritiuts
- FDI helped by exp-pro zone: transformed economy—productive high employment 26% of GDP
- Sugar export pricing agreement with EU (avg. 90% above market price for 2.5 decades)
- Culture of transparency
- Demographics (large working age population)
- Quality institutions: high scores in ICRGE (international country risk guide), protection against expropriation, democracy and participation index. 
- Ethnic diversity (specifically large Chinese community attracted sizable investment from Hong Kong textile industry)
- Political stability and delineation from economic elite kept corruption and cronyism low
- Free and fair elections—participatory elections. 

Barriers to success:
- initial level of income, geography, commodity dependence—long-term growth drags
- Overall initial conditions outweigh any advantages that it had—slowing growth by 1 and 2% compared to Africa and the fast developing economies of East Asia (respectively). 
- Geography: 25-30% more distant from world markets than average African country
- post-colonial legacy—ethnically diverse population
- powerful economic elite.
- macroeconomic imbalance

Lessons for similar countries:
- Institutions matter—they aren’t all that matter but they are a major role.  The quality of the institutions also matter a great deal.   Consecutive peaceful transfers of power matter (3 different gov’s all implemented the needed macro-economic adjustment policies)
- Geography does not determine destiny
- Tackle economic problems at their early stage
- Strong administrations must run the export-processing zones
- trade and development strategy: openness and embrace of globalization are beneficial
- liberal trade policies are not always required (Mauritius certainly didn’t have them in the 70’s and 80’s—they had a highly restrictive import regime)

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