Mauritius

Mauritius: The African Success Story


By Nikhil Treebhoohun, CEO, Global Finance, Mauritius (01/03/2014)

“Suppose someone were to describe a small country that provided free education through university for all of its citizens, transportation for school children, and free health care – including heart surgery – for all. You might suspect that such a country is either phenomenally rich or on the fast track to fiscal crisis.But Mauritius, a small island nation off the east coast of Africa, is neither particularly rich nor on its way to budgetary ruin. Nonetheless, it has spent the last decades successfully building a diverse economy, a democratic political system, and a strong social safety net. Many countries, not least the US, could learn from its experience.” Joseph E Stiglitz, The Mauritius Miracle, March 2011

The title of this article is borrowed from a paper by Jeffrey A. Frankel (2010) from the National Bureau of Economic Research, published in the context of a project on African Successes. It is more appropriate than the term ‘Mauritius Miracle’, which has been used by various academics and international institutions to describe the economic trajectory of this small island (2,400 square kilometers) of 1.3 million inhabitants off the east coast of Africa – miracle implies that some sort of deus ex machina has been at work  whereas economic success is the result of strategic thinking and planning, elaboration of effective policies, human and institutional capacity building to implement the policies, a governance structure that inspires all segments of the population to strive together towards  a shared objective.

Prior to its independence in 1968 after almost 150 years of British rule (and a little less than 100 years of French rule before 1810) a future full of gloom and doom was predicted for Mauritius by James Meade (Nobel prize winner) as it had all the characteristics of a typical African (colonial) economy:  monocrop, rapid population growth, adverse terms of trade, and susceptible to ethnic tensions.

However, in Stiglitz’s words: “As if to prove Meade wrong, the Mauritians have increased per capita income from less than US$400 around the time of independence to more than US$6,700 today. The country has progressed from the sugar-based monoculture of 50 years ago to a diversified economy that includes tourism, finance, textiles, and, if current plans bear fruit, advanced technology.Mauritius’s GDP has grown faster than five per cent annually for almost 30 years. Surely, this must be some trick. Mauritius must be rich in diamonds, oil, or some other valuable commodity. But Mauritius has no exploitable natural resources.” How did this happen?

Permanent Reinvention

Since Mauritius had no natural endowments (except for its natural beauty) its human capital was recognised very early on as its main asset. Human capital formation has always been considered as a priority to ensure the sustained growth of the economy. Thus, free education was made available up to pre-university level in 1976 and later extended to those admitted at the University of Mauritius. Furthermore, as the founding fathers of Mauritius were inspired by Fabian socialism, free healthcare as well as old age pension is provided to all.

It was clear from the outset that it would not be possible to sustain a welfare state with the proceeds from sugar alone. While there was a guaranteed market at a negotiated price under the Sugar Protocol, the economy was too exposed to the vagaries of the weather.

Manufacturing was encouraged, initially through an import substitution strategy aimed at building local expertise; as the local market was limited Mauritius had to turn to export oriented industrialisation: the Exports Processing Zones Act was passed in 1970 and provided incentives to attract investment (both local and foreign) in terms of tax holidays, industrial estates, free repatriation of profits. Access to European markets was not an issue since Mauritius was a signatory of the Lome Convention. Manufactured exports grew slowly but steadily initially and really took off after a structural adjustment programme (1979-84) was undertaken, which included the devaluation of the currency twice before it was put on a floating regime, and a simplification of the fiscal regime, which saw the top marginalcorporate and personal rates brought down from 70 to 35 per cent while the EPZ sector was eventually taxed at 15 per cent. The fiscal reform of 2006 ended the discrimination between EPZ and non-EPZ and the same rate of 15 per cent applies to all. Thus, within two decades the manufacturing sector overtook sugar as the main foreign exchange earner, employer and contributor to GDP.

The relatively rapid economic growth resulted in near full employment by 1990 leading to an increase in costs of production. At the same time the Multi-Fibre Agreement (MFA) was to be replaced by the General Agreement on Tariffs and Trade (GATT) which would see the erosion of protectionist measures which had benefited Mauritius.

The only sector which had to compete internationally was tourism, the third pillar of the economy in the late 1980s. The need to reinvent itself was again felt acutely. A two-pronged strategy was elaborated: First, consolidation of existing sectors through technological enhancement to improve productivity and quality enabling a movement up the value chain; and second, diversification of the economy. The rapid developments in Information and Communications Technology (ICT) pointed the direction for Mauritius, which is geographically far from its major markets but is in a time zone (+4 GMT) which straddles the West and the East.

It must be pointed out that in the early 1980s, before garment exports took off, different sectors were being touted: printing, light engineering, offshore banking, and jewelry. Only the financial services sector took off in a big way by a quirk of history. Indeed, a Double Taxation Avoidance Agreement with India had been signed in 1983, essentially to protect Indian investment in Mauritius. But it was only as from 1992 (when India was in dire need of foreign capital and was opening up its economy) that this treaty was to be the catalyst for the emergence of the international financial centre, the first such centre in Africa. Mauritius had the essential ingredients in place to become the preferred route for inward investment to India: rule of law where the Privy Council is the ultimate court of appeal, democratic system, business friendly environment, trading and cultural links with India.Unsurprisingly, some 42 per cent of FDI into India came through Mauritius in that period.

The snapshot of the economy in 2012 below gives an idea of the extent to which diversification policies have been successful in the last 40 years:

Mauritius Table 1

Whilst the financial services industry has registered the highest growth rate in the last decade (around five per cent on average) it is now nearing the end of its first cycle of growth (its infant industry phase), where the ease of doing business attracted mainly investment holdings and some funds and regional headquarters. Private wealth management (trusts, foundations, private banking), fund domiciliation (private equity funds, limited partnerships, protected cell companies, collective investment schemes), trading and Freeport, Pan-African revenue recognition (IT-related business, intellectual property) and regional headquarters (shared services –IT,BPO, Finance, Treasury, HR, Compliance, procurement, expat services) are some of the elements of the value proposition for business from Mauritius as it moves ahead. But it will have to overcome some important challenges:

1.       Reputational risk arising mainly from erroneous perception of the jurisdiction as a tax haven.

2.       Policy issues in terms of creating the proper environment for a healthy growth of the industry.

3.       Need for diversification of products and markets to ensure continued growth.

4.       Need to build the right skill set to support the industry.

 

Already new areas of growth are being envisaged. The most ambitious of these and which will redefine the economic architecture of Mauritius in the next 50 years (if successful) was announced in the Budget Speech of November 2013: namely the development of a ’Blue economy’, which refers to the exploitation of the 2.3 million square kilometres of maritime zone of Mauritius. The following clusters have been identified:

 

·         Petroleum & Mineral Exploration;

·         Seafood and Aquaculture;

·         Deep Ocean Water Applications (DOWA);

·         Marine Renewable Energies; and

·         Ocean Knowledge.

 

Linking up with the African Continent

In the meantime, as Mauritius begins to feel the effects of the financial crisis that has gripped the global economy since 2008, it has to review its marketing strategy, which has been too Eurocentric so far even though the natural outlets for Mauritian products and services are in continental Africa.  The sluggish growth in the region did not provide the right setting for this to happen. However, Tables 2 and 3 show the trade pattern with the two regional groupings (SADC and COMESA) has been improving in spite of Mauritius still being a net importer overall.

Mauritius Tables 2 & 3

 

Nonetheless, there has been a long standing collaboration with specific countries as from the early 1980s when Mauritians were recruited as teachers in Zimbabwe and Botswana; Ivory Coast and Tanzania were provided assistance to develop their sugar sector; the EPZ (especially the garment industry) in Madagascar benefited initially from Mauritian investment and know-how; in Mozambique there has been Mauritian investment in sugar, textile, tourism, poultry; several accounting and auditing firms have supplied their services in several francophone as well as Anglophone African states. However, given the chequered economic performance of most of these states in the past Africa did not live up to expectations of it being the natural hinterland of Mauritius! Now that Africa is rising, Mauritius is well placed to finally benefit from regional growth.

The November 2013 Budget mentioned some key measures aimed at ensuring that Mauritius participates fully in the predicted growth of the region. A Mauritius-Africa Fund has been set up to “participate in the equity financing of businesses investing in viable projects in any African country” and to also “offer fee paying consultancy services on the continent to Government and Public Sector entities in fields where [..Mauritius...] has a competitive advantage”. Secondly, it was announced“that Government will provide a subsidy of 25 per cent of the freight cost on containers to selected countries”. Thirdly, 50 scholarships are being offered annually to students from mainland Africa to assist in capacity building and to foster peer-to-peer learning.

Another area where Mauritius is already playing a crucial role is in the mobilisation of financial resources for infrastructure development in several states on the continent.

Many international banks, donor agencies, funds and foundations engaged in charitable work in Africa are based here. It is also slowly developing into a regional treasury centre. Companies are establishing their headquarters in Mauritius from where they are providing services; some examples sourced from Global Finance Mauritius(www.globalfinance.mu) of firms which are using Mauritius as a base to partner development in continental Africa are:  (1) AFGRI which is focused on the revival of the continent’s agricultural sector and aims to enhance food security – among its various projects mention must be made of AFGRI Mauritius Financing that will provide finance to support equipment rental to farmers in countries where AFGRI does not have direct lending capability. (2) ArystaLifeScience, which focuses on the development, marketing and distribution of innovative, high-quality chemical solutions uses Mauritius as a “hub for  all public health businesses in Africa”. To fulfil its mission it has posted the CEO of the Africa Western Europe Business Unit, the Group Purchasing Manager, and the Head of Sugar Technology, in Mauritius. (3) TransCentury Ltd (TCL), a Kenyan infrastructure company, uses Mauritius as a platform for its investments across Africa and Dr Kiuna, the CEO, explains: “Mauritius provides TCL a window to the international capital markets, enabling the company to gain access to vital capital injections”.

The danger facing Mauritius today is that it gets sucked into the middle income trap if it is not able to reinvent itself and to find new engines of growth. At different points in time it has been lucky as external conditions moved in its favour. As the traditional drivers of growth begin to stutter, the ray of hope comes from the predicted economic leaps in its natural hinterland –the rising African continent. It can only be a mutually reinforcing partnership.