Notes on Mauritius- A Case Study by Arvind Subramanian
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.
ROUGH NOTES:
-
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)
BUT
ALSO NEEDED THESE:
-
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)
