Chapter

CHAPTER 3. Sectoral Diversification and Openness

Author(s):
James Yao, Gamal El-Masry, Padamja Khandelwal, and Emilio Sacerdoti
Published Date:
March 2005
Share
  • ShareShare
Show Summary Details

Main Trends in Diversification

Table 3.1 sketches a brief synopsis of the history of industrial transformation in Mauritius, indicating which were the principal growth industries in each period. In the 1970s, the sugar sector, which includes both cane cultivation and sugar milling, accounted for over 26 percent of GDP and formed the largest sector of the economy. The export-processing zone (EPZ), which is dominated by the clothing and textiles industry, took off in the 1980s. The manufacturing share of GDP climbed rapidly from 4.5 percent in 1982 to 11.6 percent in 1986, equivalent to the percentage contribution to GDP made by sugar cultivation. The sugar sector’s contribution to GDP declined, and by the beginning of the 1990s value added in the EPZ was higher than in the agricultural sector. Rapid growth in tourism and financial services during the 1990s further transformed the structure of the economy, and turned Mauritius into a four-pillar economy.

Table 3.1.Principal Growth Industries by Period
Leading SectorKey Sectors
1970sSugarSugar
1980sEPZ (textiles)Sugar, EPZ (textiles)
1990–2002Tourism and financial servicesSugar, EPZ, tourism, and financial services
2003–presentFinancial services, emerging information technology (IT) and freeportSugar, EPZ, tourism, financial services and IT

Arguably the Mauritian growth experience is fundamentally one of structural transformation and diversification, with a sequence of leading sectors, each of which experienced an initial period of explosive growth followed by slower growth. Industrial transformation coupled with the diversification effort has contributed to both enhancing long-term growth and significantly reducing cyclical fluctuations in real output. While this process has led to some structural unemployment, which will be discussed in Chapter 5, industrial transformation and diversification have overall been greatly successful, enabling the country to overcome diminishing returns of scale in capital accumulation at the sectoral level and therefore to maintain a sustained growth rate over an extensive period of time. The process of diversification has also been helped by a careful management of the process of opening up the economy (Box 3.1).

Balance of Payments Developments: The Strengthening of the External Position

The successful diversification of the economy allowed Mauritius to strengthen its external position (Table 3.2). The external current account deficit (excluding the acquisition of aircraft and ships), which averaged about 7¾ percent of GDP during the early 1980s, swung into an average surplus of 1¾ percent of GDP in the second half of the 1980s. This dramatic improvement reflected the authorities’ successful adjustment effort in the first half of the decade (see below). The current account (excluding imports of aircraft and ships) shifted to a modest deficit in the early 1990s (averaging 1.1 percent of GDP), owing to a deterioration in the trade balance, with the increase in imports outpacing that of exports, as domestic demand for investment and consumer goods grew in line with strong economic expansion. However, in the following decade, the current account improved markedly on account of two independent developments. First, the EPZ became increasingly efficient, reducing its reliance on imports and increasing its domestic value added. The import content of EPZ exports thus declined steadily from about 75 percent in the late 1980s to a little over 50 percent by the turn of the century. Second, the tourism sector (see “travel” in Table 3.2), which had started to pick up in the late 1980s, continued its phenomenal expansion and almost doubled its net contribution to the current account from about 4½ percent of GDP in the late 1980s to about 8¾ percent of GDP by the early 2000s.5

Table 3.2.Balance of Payments, 1979/80–2002/03 1(In millions of U.S. dollars unless otherwise indicated)
1979/80–1983/841984/85–1988/891989/90–1993/941994/95–1998/991999/00–2002/03
Current account-87.84.6-63.4-77.4117.4
Goods-73.3-44.6-218.4-354.4-307.0
Exports, f.o.b.374.2741.31,256.91,630.11,649.5
Sugar224.0275.1338.3373.5263.4
Export-processing zone (EPZ)117.2414.9797.71,092.51,140.5
Other33.051.2121.0164.1245.6
Imports, f.o.b-447.5-785.8-1,475.3-1,984.5-1,956.5
Of which: petroleum-87.4-65.4-104.9-127.6-196.3
EPZ-80.3-311.0-491.0-650.9-586.3
(in percent of EPZ exports)-68.5-74.9-61.6-59.6-51.4
Aircraft and ships0.0-30.1-32.5-85.5-25.9
Services (net)-0.832.967.2190.9357.0
Of which: travel25.573.4154.2298.1402.4
Income-37.8-43.7-4.1-23.3-8.1
Current transfers24.160.091.9109.375.4
Capital and Financial Account75.122.021.939.942.0
Capital account0.0-0.2-1.3-0.7-1.2
Financial account70.822.123.340.743.2
Direct investment1.414.57.524.278.8
Portfolio investment0.00.0-1.039.1-50.8
Assets0.00.0-1.0-3.2-9.4
Liabilities0.00.00.042.3-41.4
Other investment73.87.616.8-22.715.2
Assets-1.4-18.0-19.8-67.530.0
Liabilities75.125.636.644.8-14.8
Long-term75.126.732.624.2-48.1
Disbursements68.199.087.6127.6109.1
Amortization-30.4-53.2-66.2-92.5-144.4
Other long-term35.128.2-10.8-12.8
Short-term0.0-1.14.020.633.3
Net errors and omissions10.370.8122.671.654.6
Overall balance-2.497.481.134.2214.0
Reserve assets of the Bank of Mauritius (BOM) (–, increase)2.4-97.4-81.1-34.2-214.0
Memorandum items:
Current account balance, excluding aircraft and ships-87.834.8-30.98.1143.3
Current account (in percent of GDP)-7.70.2-2.3-1.92.5
Excluding aircraft and ships-7.71.7-1.10.13.0
Overall balance (in percent of GDP)-0.25.53.30.84.6
End-of-year official reserves (BOM) 219.7435.2722.3625.41,438.5
(In months of future imports, c.i.f.) 2,30.54.35.23.56.9
Nominal GDP1,116.11,591.22,898.34,167.74,597.4
Sources: Mauritius authorities and IMF staff estimates.

Period averages; unless otherwise indicated. Fiscal year from July to June.

End of period.

Excluding the future imports of aircraft and ships.

Sources: Mauritius authorities and IMF staff estimates.

Period averages; unless otherwise indicated. Fiscal year from July to June.

End of period.

Excluding the future imports of aircraft and ships.

Box 3.1.Openness Strategy

At one level, the Mauritian growth experience can be advanced as a showpiece for openness that is beneficial for economic growth. The figure below illustrates this. Since the mid-1980s, the volume of imports and exports of goods grew quite rapidly, at a rate of 8.7 percent and 5.4 percent per year, respectively; the openness ratio (the ratio of trade of goods to GDP) increased from about 70 percent to 100 percent over this period, compared with an openness ratio for Africa that stagnated at about 45 percent. Particularly strong was the growth in manufacturing exports, originating predominantly from the export-processing zone (EPZ).1

Mauritius, Sub-Saharan Africa, and the Fast-Growing Economies: Openness Ratio, 1973–2000

Source: IMF (2003c).

Mauritius was one of the countries that Sachs and Warner (1997) classified as being open or following liberal trade policies. But this classification of Mauritius as an open economy appears inappropriate. During the 1970s and 1980s, Mauritius maintained a highly protective trade regime: the average rate of protection was high and dispersed. In 1980, the average effective protection exceeded 100 percent. This declined by the end of the 1980s, but, still remained very high (65 percent).

A decline in the rate of trade protection took place only in the 1990s; by 1998, the IMF index gave Mauritius a rating of 7, still among the highest in the world and in Africa (Subramanian and others, 2000). A more recent study by Hinkle and Herrou-Aragon (2001) provides a comprehensive comparison of the stance of trade policy in Mauritius and in the other African countries, showing that on almost every indicator, Mauritius’s trade regime was more restrictive than that of the average African economy.

Another less known aspect of the international trading regime is relevant in analyzing Mauritian trade policies; under the World Trade Organization (WTO), developing countries have generally been exempted from undertaking obligations to rein in protectionist trade policies. This favorable treatment of developing countries was, until the Uruguay Round, extended to export subsidies. The Mauritian regime for encouraging export-oriented manufacturing, particularly the favorable tax treatment of firms in the EPZ sector, could not have flourished had the prohibition of export subsidies by developed countries also been applied to developing countries. The international regime was therefore indulgent toward Mauritius in this respect as well.2

Mauritius had a highly restrictive trade regime. It is easy to forget that a restrictive trade regime can translate into an export tax and hence a tax on all trade. According to Rodrik (1999a), Mauritius effectively segmented the export- and import-competing sectors. Through a policy of heterodox opening, Mauritius ensured that the returns to the export sector were high, specifically in the EPZ, effectively spilling over to, and adversely affecting, this sector. This combination ensured that the returns to the export sector remained high–indeed, high enough to prevent domestic resources from being diverted to its inefficient import-substituting sector.

1 However, Mauritius has been considerably less open than the fast-growing countries of East Asia, whose openness ratio increased from 85 percent to 180 percent between 1973 and 2000.2 Interestingly, the WTO rules do not treat differential labor regulations between the export and other sectors as a subsidy.

The capital and financial accounts were generally supportive of developments affecting the current account. In the early 1980s, Mauritius resorted to significant financial assistance, including assistance from the IMF and the World Bank, in support of its economic reform efforts. These external borrowings also helped finance the large current account deficit. However, by the late 1980s, the acute current account imbalance was overcome, and in the period thereafter, the capital account stabilized at an average surplus of US$20–40 million per year.

Three developments are worth noting:

  • First, direct investment in Mauritius remained moderate through the early 1990s, but experienced a significant increase thereafter, on account of two large foreign direct investments. The first was the purchase in 1997/98 of a minority stake in the State Bank of Mauritius by the South African NedBank for about US$42 million; the second was a much larger acquisition in 2000/01 of a 40 percent stake in Mauritius Telecom by France Telecom for about US$265 million.6
  • Second, in 1995/96, Mauritius succeeded in floating a bond for US$150 million on the international capital markets (see “portfolio investment” in Table 3.2). This five-year floating rate note (FRN) was repaid in two installments of US$33 million in 1998/99 and US$117 million in 2000/01.
  • Third, the purchase of aircraft and ships, which are disproportionately expensive items in relation to the size of the Mauritian economy, has been largely financed through elaborate long-term borrowing arrangements by the respective importers (such as Air Mauritius). These borrowings are reflected in long-term disbursements that have continued at high levels throughout the 1980s and 1990s.

The strong improvement in the current account, combined with a stable capital account, allowed Mauritius to maintain a healthy balance of payments surplus over the past 20 years. This resulted in a significant accumulation of foreign reserves by the Bank of Mauritius, from less than US$20 million (or 0.5 months of prospective imports) at end-June 1984 to US$1.4 billion (or almost seven months of prospective imports) at end-June 2003.

The Sugar Sector

Since 1953, Mauritius has been guaranteed a certain volume of exports of sugar to the United Kingdom and later to the countries of the European Economic Community (EEC, which became in 1992 the European Union). A sugar agreement, known as the Sugar Protocol (SP), was signed with the EEC in 1975. This agreement evolved from the previous arrangement with the United Kingdom under the Commonwealth Sugar Agreement (CSA), which ended when the United Kingdom entered the EEC. All Commonwealth sugar producers were encouraged by the United Kingdom to enter into the SP with the EEC, which would ensure them access to the European market at a guaranteed price equivalent to the domestic price within the European market, on terms similar to what these countries had enjoyed previously in the U.K. market. Because the international sugar price surged in 1974, many sugar-producing countries were not interested in seeking a large allocation of the total access to the European market, which had been fixed at 1.2–1.4 million metric tons, compared with the 1.77 million metric tons under the CSA. Mauritius instead, not trusting that the sugar prices would remain at this high level, requested and obtained an increase in its quota from 386,000 metric tons under the CSA to 480,000 metric tons. Thus Mauritius obtained the largest quota, about 40 percent of the total for 16 nations of the African-Caribbean-Pacific group (ACP) countries.

In July 1995, the European Union (EU) Council of Ministers ratified the Special Preferential Sugar Agreement (SPSA) that was signed a month earlier between the representatives of the EU and 16 ACP states, including Mauritius. The SPSA provided for the import into the EU, during a six-year period ending in mid-2001, of additional quantities of raw cane sugar from the 16 ACP states to meet the cane refiners’ deficit,7 as determined by the EU Commission in its annual assessment. The preferential price accorded under the SPSA was set at 85 percent of the prevailing guaranteed price under the SP. Mauritius’s share under the SPSA in the first delivery year 1995/96 was about 85,000 tons.

Starting in 1976, and with the sole exception of 1980, when international sugar prices experienced a temporary spike, the European preferential price under the SP has been consistently above the international market price for sugar. Indeed, with the passage of time, this spread has grown larger and larger (Figure 3.1).

Figure 3.1.International Sugar Prices, 1970–2000

(In US dollars per metric ton)

Source: IMF, International Financial Statistics.

Table 3.3 shows Mauritius’s sugar exports to the EEC/EU during 1975–2000 under both the SP and SPSA. It is estimated that during 1975–2000, as a direct result of the SP (and to a lesser extent the SPSA), the cumulative benefit to Mauritius from quasi transfers from European consumers (calculated as the difference between the preferential prices under the SP and SPSA, respectively, and the world market price) amounted to about US$3.5 billion, or an average of about 6.1 percent of Mauritius’s GDP on an annual basis, reaching in some years a peak close to 13 percent of GDP. Effectively, this preferential arrangement in the sugar sector increased the return to the export sector and acted like a subsidy to domestic production of sugar. However, unlike a domestic subsidy, subsidies received through the preferential access are a transfer from consumers in the importing country to producers (and taxpayers) in Mauritius.

Table 3.3.Implicit Transfer from European Sugar Consumers, 1975–2000
YearPricePrice SubsidyExports to the EU UnderCalculated Transfers
EU (SP)WorldDifferenceSPSPSAUnder SPUnder SPSA2TotalTotal
(In U.S. dollars per metric ton)(In percent of world price)(In metric tons)(In millions of U.S. dollars)(In percent of GDP)
1975433.9453.2-19.3-4.3394,214-7.6-7.6-1.3
1976295.2254.840.415.8498,22820.120.13.3
1977308.9178.8130.172.8535,60069.769.78.5
1978350.8172.3178.5103.6445,94079.679.67.8
1979425.3212.9212.599.8471,486100.2100.28.3
1980486.9632.0-145.2-23.0603,286-87.6-87.6-7.7
1981417.3372.444.912.0432,24719.419.41.7
1982399.5185.3214.1115.6540,121115.7115.710.7
1983387.2186.6200.6107.5552,018110.7110.710.2
1984353.5114.7238.8208.2501,453119.7119.711.5
1985355.489.4266.0297.7515,406137.1137.112.7
1986410.1133.4276.7207.4488,265135.1135.19.2
1987472.6149.0323.7217.3519,883168.3168.38.9
1988525.0224.7300.3133.6493,284148.1148.16.9
1989501.6282.3219.377.7539,467118.3118.35.4
1990583.2275.8307.4111.4501,282154.1154.15.8
1991612.1197.9414.2209.3523,009216.6216.67.7
1992627.8199.9427.8214.0529,112226.4226.47.1
1993619.5220.9398.6180.4503,428200.7200.76.3
1994621.7266.9354.7132.9489,035173.5173.54.9
1995688.1292.7395.4135.1501,51013,500198.33.9202.25.1
1996686.8263.6423.2160.6511,50045,200216.514.5231.05.4
1997625.7251.4374.3148.9511,80065,900191.618.5210.15.1
1998598.1196.6401.5204.2524,80080,700210.725.2235.95.6
1999591.7138.1453.6328.4368,8000167.30.0167.33.9
2000554.8178.1376.7211.5540,00014,000203.44.1207.54.5
Total for 1975–20003,472.0
Average 1975–2000141.5133.56.1
Sources: Central Statistical Office; and IMF, International Financial Statistics.

Sugar Protocol (SP); Special Prefential Sugar Agreement (SPSA); European Union (EU).

Calculated at 85 percent of the EU price under the Sugar Protocol.

Sources: Central Statistical Office; and IMF, International Financial Statistics.

Sugar Protocol (SP); Special Prefential Sugar Agreement (SPSA); European Union (EU).

Calculated at 85 percent of the EU price under the Sugar Protocol.

Over the course of the last quarter century, these non-debt-creating quasi transfers have in effect provided Mauritius with a pool of foreign exchange and the private sector with additional savings with which to finance the country’s diversification into textile manufacturing and tourism. As a result, the country’s current account deficit has remained moderate, thus limiting the need for large external borrowing. In a study on the welfare benefits of the SP for the participating ACP countries covering the period 1975–92, Herrmann and Weiss (1995) calculated the direct transfer benefits (in both absolute and relative terms) as well as the benefits of stabilizing the ACP sugar export earnings, which would have otherwise been exposed to very volatile international “free” market prices (Table 3.4). They found that on all three measures, Mauritius drew the highest benefits when compared with the other ACP countries, reflecting the large quota allocation that it had secured and the large percentage SP-related exports represented in Mauritius’s total exports of sugar. The strongest reduction in earning volatility was achieved by Mauritius (71 percent), because its exports to the EU under guaranteed prices as a percentage of its total sugar exports were by far the largest among the ACP group. Moreover, Mauritius’s sugar crop insurance scheme has substantially mitigated the adverse impact of weather-related shortfalls on production and consequently on foreign exchange earnings and domestic incomes.

Table 3.4.Welfare Benefits of the Sugar Protocol (SP), 1975–92 1
CountryTotal Transfers (In millions of ECUs)Average Annual Transfers Per Capita (In ECUs)Effect on Reducing Instability of Sugar Export Earnings (In percent)
Barbados13631.47-58.90
Belize11038.56-45.38
Congo, Democratic Republic of260.78-27.83
Côte d’Ivoire210.13-21.78
Fiji45137.75-39.89
Guayana41930.26-20.51
India 2280.02-3.85
Jamaica3308.24-69.53
Kenya20.02-5.29
Madagascar280.16-26.97
Malawi640.52-21.22
Mauritius1,34875.62-70.55
St. Christopher and Nevis4251.36-64.44
Suriname10.4527.44
Swaziland30924.17-42.44
Tanzania280.07-39.35
Trinidad and Tobago1236.10-66.99
Uganda10.28
Zimbabwe730.75-8.99
All countries3,539316.144-33.694
Source: Herrmann and Weiss (1995).

Only actual years of sugar deliveries under the SP were used, namely for Côte d’Ivoire (1983–91); Kenya (1977 and 1979–84); Suriname (1976–80); Uganda (1976–77); and Zimbabwe (1981–91).

Although India is not party to the SP, it has a preferential sugar trade agreement with the European Union that is similar to the SP.

Total.

Unweighted average.

Source: Herrmann and Weiss (1995).

Only actual years of sugar deliveries under the SP were used, namely for Côte d’Ivoire (1983–91); Kenya (1977 and 1979–84); Suriname (1976–80); Uganda (1976–77); and Zimbabwe (1981–91).

Although India is not party to the SP, it has a preferential sugar trade agreement with the European Union that is similar to the SP.

Total.

Unweighted average.

Despite the substantial benefits reaped until now, it has to be noted that, over the medium term, the Mauritian sugar industry faces significant challenges, as the preferential market access that Mauritius currently enjoys will almost certainly eventually come to an end. First, the sugar protocol was included in the new ACP/EU agreements that were signed in Cotonou in 2000, requiring the phaseout of unilateral preferences by end-2007, and the EU is currently reviewing its sugar scheme. Second, Australia, Thailand, and Brazil are challenging the EU’s support of their sugar producers at the World Trade Centre (WTO). While this challenge is not directly aimed at the preferential access of ACP countries (including Mauritius), a successful challenge, by reducing the domestic producer price in Europe, will also reduce the price paid to ACP sugar exporters to Europe. Thus, a very likely outcome will involve some significant gradual reduction in prices over the next few years.

The Mauritian government has been preparing for the loss of preferences through the implementation of the Sugar Sector Strategic Plan. The sugar industry has reduced significantly its average production costs from about US$0.20 per pound in 2000 to US$0.14 per pound in the 2003/04 crop year. Though this is still above world market prices of about US$0.08 per pound, the government is confident that further reductions in production costs to US$0.10–0.12 per pound by 2008 are achievable. The principal reforms being pursued include the consolidation of milling operations and the shedding of excess labor, primarily through a voluntary retirement scheme (VRS). The VRS was recently completed, resulting in a reduction of about 7,900 employees (from an initial 20,000–22,000 employees), and has achieved a significant reduction in salary costs of about 30 percent, although an assessment of its impact on total production costs will have to wait until the sugar strategy is reviewed in late 2004. The government and the industry are also focusing on the development of additional uses for sugar, such as rum and ethanol, to boost the overall return for the sector despite projected declining sugar prices.

The Export-Processing Zone (EPZ)

Determinants of the Successes in the 1980s and 1990s

By any conventional measure, the EPZ experiment in Mauritius has been a resounding success. It has helped literally transform the Mauritian economy. Since 1982, output in the EPZ sector has grown by about 10–11 percent per year on average, employment has grown by 24 percent, and exports have grown by about 11 percent. The EPZ sector, from a base of zero in 1971, accounted in 2001 for 26 percent of GDP, 36 percent of employment, 19 percent of capital stock, and 66 percent of exports. The success of the EPZ raises a number of questions, because EPZs have not in general been successful in Africa and in other developing countries. Why instead was it so successful in Mauritius? Was the openness strategy of Mauritius bolder and better designed than in other countries? Or has it been accompanied by key ingredients that were absent in other countries?

As we shall examine below, Mauritius’s economy through the 1970s and the 1980s was not very open and exhibited a relatively high rate of protection, with a rate of effective protection that declined through the 1980s and the 1990s but was still at 65 percent by 1990, down from 127 percent in 1980 (Table 3.5). This, in principle, was very detrimental to the establishment of a competitive manufacturing export sector. The institutional mechanism for achieving the segregation of the exporting sector from the import-competing sector was the creation of the EPZ, which was characterized by the following specific elements (see Subramanian and Roy, 2001):8

Table 3.5.Estimates of Effective Protection, 1980 and 1990(In percent)
19801990
Beverages and tobacco123182
Textile yarns and fabric7711
Apparel994
Leather products2698
Footwear15888
Wood products19138
Furniture130241
Paper products13157
Printing/publishing757
Chemical products3821
Rubber products12544
Plastic products8959
Nonmetallic products7748
Iron/steel15473
Fabricated metal products15648
Machinery623
Electrical machinery179181
Transport equipment234
Optical goods2669
Average12765
Memorandum item:
Share of imports under
licenses57
  • First, duty-free access were provided to all imported inputs. This avoided an anti-export bias and ensured that the export sector’s competitiveness on world markets was not weakened by import duties, which would have increased the cost of inputs used in export production.
  • Second, a number of tax incentives were provided to firms operating in the EPZ, which had the effect of subsidizing exports.9
  • Third, the labor market for the export sector was separated from the rest of the economy (and in particular the import-competing sector), with different labor market conditions prevailing at least until the late 1980s. Employers were granted greater freedom in discharging workers in the EPZ sector, and terms for overtime work were more flexible. Moreover, since the EPZ sector employed a large number of female workers (about 70 percent of total employment in the sector in 1990), for whom minimum wages were set at a lower level, these labor market measures acted as an implicit subsidy for exports, by keeping costs in the export sector lower than in the import-competing sector.10Figure 3.2 illustrates the wage differential between the EPZ and the rest of the economy in the 1980s and 1990s. EPZ wages were about 36–40 percent lower in the 1980s, with the differential narrowing to about 10 percent in the 1990s.

Figure 3.2.Wages in the EPZ and Non-EPZ Sectors, 1983-2000

(EPZ wages as a percent of non-EPZ manufacturing wages)

Source: Central Statistical Office of Mauritius.

These factors were underlined by Rodrik (1999a) as the main explanation for the EPZ success; however, they are incomplete in an empirical sense. Even allowing for favorable tax breaks, it seems that heterodox opening and intervention (in the form of subsidies to the export sector) did not offset completely the anti-export bias of the restrictive import regime. For example, Table 3.5 indicates that effective protection for the import-competing sector averaged about 127 percent in the 1980s and about 65 percent in the 1990s. At the same time, Figure 3.2 indicates that the de facto subsidization through the labor market was closer to 25–30 percent, even less if EPZ wages are compared with those in the import-competing sector. The impact of the corporate tax incentives on exports could not have been large, because most non-EPZ manufacturing firms also benefited from the similar tax concessions. There is an important additional contributing element, and that is the preferential access to the export markets enjoyed by Mauritius, which has played a key role in the development and profitability of the EPZ. Foreign investment in the clothing sector, which originated largely in Hong Kong SAR, was motivated in part by the need to circumvent the quotas on textiles and clothing that were constraining clothing exports from Hong Kong SAR. The international regime in place—known as the Multi-Fiber Arrangement (MFA)—was an attempt by the United States and the EU to limit imports into their own markets.

These limits were achieved by awarding country-specific quotas to the different textile- and apparel-exporting countries. One of the effects of these quotas was to redistribute production between exporting countries—away from the low-cost and toward the higher-cost sources of production. Thus, high-cost-producing countries gained an advantage relative to low-cost producers, resulting in higher production than would otherwise have taken place.

Subramanian and Roy (2001) estimate that the quota rents for Mauritius in the apparel segment under the MFA were equivalent to about 3 percent of GDP in 1996–99 and corresponded to an export subsidy of about 28 percent (Table 3.6).11 The substantial rents accruing to exports ensured that resources were not diverted away despite the attractiveness of the protected import-competing sector. From a macroeconomic perspective, moreover, these rents played a crucial role in sustaining high levels of investment and explain the fact that during the growth boom in Mauritius, domestic rather than foreign savings have financed domestic investment. While it may have been true that the initial wave of investments that triggered the growth in EPZ output was largely foreign, the Mauritian EPZ sector, unlike that in many countries, had a substantial local presence, as it had provided a flourishing and promising growth opportunity for the surpluses of the sugar industry. For example, in 1984, only 12 percent of the total employment in the EPZ was accounted for by wholly foreign-owned operations, compared with 72 percent, 42 percent, and 64 percent in Korea, the Philippines, and Malaysia, respectively. It is estimated that about 50 percent of the total equity of firms in the EPZ are owned by Mauritian nationals.

Table 3.6.Import Tax and Offsetting Export Subsidies 1(In percent)
PeriodImport Protection2Export Subsidy
From Domestic PolicyFrom Preferential AccessTotal
Case ACase BSugarApparelTotalCase ACase B
1980s127323910815528491
1990s657209828475466
Source: Subramanian and Roy (2001).

Subsidy from domestic policy refers to the difference between the EPZ wage and the wage in the non-EPZ manufacturing sector (Case A) and the wage in the economy (Case B).

To capture the resource allocation effects, protection is measured in effective rather than nominal terms.

Source: Subramanian and Roy (2001).

Subsidy from domestic policy refers to the difference between the EPZ wage and the wage in the non-EPZ manufacturing sector (Case A) and the wage in the economy (Case B).

To capture the resource allocation effects, protection is measured in effective rather than nominal terms.

Preferential access has contributed substantially to offsetting the bias of import policies (Table 3.6). The de facto subsidization of exports in the two export sectors—sugar and apparel in the EPZ—amounted to about 50 percent. When this is added to the export subsidization through domestic policies, the total amounts to about 90 percent, very close to the tax resulting from import restrictiveness.

It could be feared that an EPZ that started under the spur of financial incentives could not be sustained and developed successfully. A growth accounting analysis, carried out by Subramanian and Roy (2001) and presented below in Table 3.7, indicates instead that the economic dynamics of the EPZ has been impressive.

Table 3.7.Total Factor Productivity (TFP) in the EPZ Sector(In percent)
Contribution from Growth in:
PeriodOutput GrowthCapital formationLaborTFPLabor Share
1982–9910.29.55.43.50.69
1982–901924.117.5-0.80.67
1991–995.70.705.40.71

For the period 1983–99, productivity growth in the EPZ has averaged about 3.5 percent compared with 1.4 percent in the economy as a whole. For the 1990s, EPZ productivity growth was spectacular, averaging 5.4 percent a year, a level not matched even in the fast-growing countries of East Asia. As wage costs have risen in Mauritius, firms have economized on their use of inputs and improved their efficiency in order to sustain growth.

Recent Challenges

In the most recent years, the EPZ has encountered new challenges and its growth has stopped, although the enactment of the U.S. African Growth and Opportunity Act (AGOA) in 2000 provided new opportunities for expanding exports to the United States under favorable conditions (Box 3.2). With wage levels in Mauritius’s EPZ considerably higher than in other apparel-exporting countries, the textile sector can remain competitive only if it becomes increasingly capital intensive, highly skilled, and targeted at high-end-product markets. Thus, the Mauritian companies have since the late 1990s opened factories in neighboring countries such as Madagascar to benefit from the lower wage levels there, while focusing their Mauritian plants on higher-value-added products. At the same time, the expiration in January 2005 of the WTO Agreement on Textile and Clothing, which entered into effect in early 1995 and provided for the phasing out over a 10-year period of textile quotas introduced by industrial countries under the 1974 Multi-Fiber Arrangement (see Box 3.2), is putting substantial pressures on Mauritius’s textile industry, leading a number of foreign firms to close or to plan to close their Mauritian operations. Thus it is estimated that employment in the EPZ, which had reached more than 91,000 in 1999, had fallen to about 78,000 by end-2003. Further decline of employment is expected in the period ahead.

The authorities have promoted the restructuring of the EPZ textile firms in order to avoid a major crisis in the sector. To that end, they established in July 2003 the Textile Emergency Support Team (TEST) initiative, under which diagnostic studies of textile firms are conducted by the National Productivity and Competitiveness Council (NPCC), to examine their cost structure and identify areas of improvement. In addition, a corporate debt restructuring committee (CDRC) has been established under the chairmanship of the Managing Director of the Bank of Mauritius to facilitate the restructuring of the debt of viable firms.

The AGOA requirements are also encouraging changes in the structure of the Mauritian textile industry. For Mauritius, as a middle-income country, duty-free access of apparel to the U.S. market is subject to a rule-of-origin requirement, namely that Mauritian companies use inputs (yarn/fabric) from the United States or other sub-Saharan African countries. This has slowed down the expansion of Mauritian exports to the United States compared with those of other African countries that had started at a lower level of exports (Box 3.2). Mauritian textile companies are presently endeavoring to set up spinning mills that would enhance the vertical integration process within the textile industry and are also investing in establishing quality spinning mills in cotton-producing African countries.

Box 3.2.Mauritius: The Future of the EPZ

Mauritius’s export-processing zone (EPZ), for 20 years the country’s driving force in terms of economic growth and employment, is increasingly facing challenging times. The EPZ is dominated by textile manufacturing, which has hitherto benefited from unrestricted access to the European Union (EU) market, while its large competitors, particularly in South and East Asia, faced restrictions in the form of quotas, including those under the Multi-Fiber Arrangement (MFA) of 1974.

Removal of quotas

Under the Uruguay Round Agreement on Textiles and Clothing (ATC), which came into effect on January 1, 1995, member countries agreed to progressively phase out quotas over a 10-year period ending December 31, 2004. The slow progress in eliminating the number of quotas by the EU and the United States during the first nine years of the ATC implies that a major shock wave will reverberate through the international textile industry when the remaining quota restrictions on imports from such large textile producers as India and China are lifted in early 2005.1 Once the quota restrictions are lifted, the more competitive suppliers are expected to quickly gain market share, particularly at the expense of less-efficient producers in low-and middle-income countries.2

On its part, Mauritius’s EPZ sector has already started to feel the impact of the changes in international trade arrangements regarding textiles. The EPZ sector, after having grown at an average annual rate of 19 percent during much of the 1980s and at about 6 percent during the 1990s, experienced a marked decline in its employment numbers after the turn of the century, and its share in Mauritius’s GDP has also fallen steadily. Indeed, in 2002 the EPZ sector has contracted by about 10 percent in terms of value added, and its loss of employment has accelerated (see figure below).

The African Growth and Opportunity Act (AGOA)

Mauritius had pinned high hopes on AGOA to provide a needed boost to its textiles exports. Under AGOA sub-Saharan African countries, including Mauritius, would obtain quota-free access for their exports of apparel to the United States through 2008.3 Moreover, sub-Saharan African countries would be able to export apparel to the United States duty-free until 2008, subject to a rule-of-origin requirement, namely that they use inputs sourced from either the United States or other sub-Saharan countries. AGOA provided a waiver for the rule-of-origin requirement for the least-developed countries through end-2004, allowing them to use third-country yarn and other inputs for their apparel exports to the United States, while still benefiting from quota-free and duty-free access to that market. This waiver, however, does not apply to Mauritius, which is considered a middle-income country.

Handicapped by the rule-of-origin constraint, Mauritius did not succeed in substantially boosting its exports under AGOA, that is, after its enactment in 2000. In terms of value, Mauritius had been in first place among sub-Saharan textile exporters in 2001, but by January 2004, it had dropped to third place after Lesotho and Madagascar. In terms of volume, Mauritius dropped from third place in 2001 to sixth place by end-2003 (see the table). Its export growth to the United States between 2001 and 2003 of just under 10 percent was the lowest among the 24 sub-Saharan countries with approved visa systems under AGOA. One factor that has slowed down export growth for Mauritius was the U.S. authorities’ postponement until mid-2002 of a decision granting preferential access under AGOA to garments that are “knitted to shape.”

U..S. Textile Imports Under AGOA(In millions of square meter equivalents, except where indicated otherwise)
20012003Growth 2001–03 (in percent)
Sub-Saharan Africa213.593397.14285.9
Kenya18.52152.228182.0
Lesotho50.900103.865104.1
Madagascar37.47945.63921.8
Mauritius41.07245.1249.9
South Africa47.60270.25147.6
Swaziland11.43349.164330.0
Others6.58630.871368.7

Looking forward, the future of Mauritius’s EPZ sector will hinge on its ability to dramatically improve its efficiency and productivity; to vertically integrate, including through investing in low-labor-cost countries in the region; and to carve out a high-end niche market that it will be able to defend against low-cost competitors.

Sources: IMF and World Bank (2002); Rumbaugh and Blancher (2004); and Craig and Ryberg (2004).1 In the case of China, which was not party to the Uruguay Round when the ACT was concluded, this effect is likely to be extended over a number of years beyond 2005 because of a special safeguard mechanism that was included in China’s World Trade Organization (WTO) accession protocol, signed on December 11, 2002.2 An example of China’s market penetration power can been seen in the country’s footwear exports, which are not subject to quota restrictions. In just one decade, China’s global market share of footwear exports increased fourfold, from 7 percent in 1990 to 28 percent in 2000.3 However, with the ATC’s removal of all textile quotas on January 1, 2005, Africa’s quota advantage over other countries would in effect end on that date.

The Tourism Sector

The tourism sector is one of Mauritius’s four so-called pillars.12 While most of the discussion of Mauritius’s “economic miracle” has focused on the EPZ and the impressive expansion of the textiles sector, the performance of the tourism sector has enjoyed less attention, although it can be described as truly remarkable. The tourism sector has been a reliable growth engine for the country’s economy, eclipsed only by the EPZ sector during the early 1980s (see Chapter 2). But while the EPZ showed signs of contraction at the turn of the century, tourism continued to grow at a steady pace.

As Table 3.8 illustrates, tourist arrivals increased ninefold between 1975 and 2002. During the same period, gross tourist receipts grew almost 30-fold, from US$22 million to US$612 million. This phenomenal increase in foreign currency receipts is attributable to Mauritius’s success in attracting tourists at the high end of the market. This is reflected in a tripling of average earnings per tourist during the 1975–2002 period, from US$300 to about US$900.

Table 3.8.Key Tourism Indicators, 1980–2002
1975198019851990199520002002
Hotels (numbers)34435575959595
Hotel rooms (numbers)1,4992,2012,6304,6035,9778,6579,623
Tourist arrivals (numbers)74,597115,080148,860294,550422,463656,453681,648
Gross tourism receipts (in millions of Mauritian rupees)1353258453,6307,47214,23418,328
(in millions of U.S. dollars)224255244430542612
Average earnings per tourist (in U.S. dollars)3004103698391,017826897
Hotels and restaurants’ value added (in percent of nominal GDP)1.62.02.03.34.14.95.3
Memorandum item:
Average exchange rate (MUR/US$1)6.0277.68415.44214.86317.38626.25029.962
Sources: Mauritian authorities and IMF staff estimates.
Sources: Mauritian authorities and IMF staff estimates.

The performance of Mauritius’s tourism sector is quite extraordinary when compared to other regional tourist markets, such as Seychelles and Maldives, which are generally viewed as more pristine nature destinations (Table 3.9). Indeed, between 1985 and 2000, the size of Mauritius’s tourism sector, measured by the increase in tourist arrivals, grew by about 340 percent as against 306 percent for Maldives and 78 percent for Seychelles. Measured in terms of tourist nights spent in the country, tourism in Mauritius grew as quickly as in Maldives (about 270 percent), but about 2½ times as quickly as in Seychelles. Another sign of the resilience of Mauritius’s tourism sector is its performance in the wake of the September 11, 2001, terrorist attacks in the United States. Unlike most international tourist destinations, including those in the Indian Ocean, Mauritius’s tourism sector continued to grow in 2001 and 2002 at a healthy pace.

Table 3.9.Tourism Statistics in Comparison with Maldives and Seychelles, 1985–2002
19851990199520002002Change 1985–2000Change 2000–02
(percent)
Tourist arrivals
Maldives115,000179,627314,869467,154484,700306.23.8
Mauritius148,310291,550422,463656,453681,648342.63.8
Seychelles73,000103,770120,716130,046132,30078.11.7
Total tourist nights
Maldives1,053,0001,682,0002,725,0003,937,0004,050,990273.92.9
Mauritius1,735,9603,564,9304,434,8916,412,8766,750,000269.45.3
Seychelles626,0001,048,0001,146,8001,352,0001,336,000116.0-1.2
Sources: World Tourism Organization; various annual yearbooks; and IMF staff estimates.
Sources: World Tourism Organization; various annual yearbooks; and IMF staff estimates.

Mauritius’s tourism sector is largely homegrown, with a number of major luxurious hotel chains based in Mauritius and majority-owned by Mauritian entrepreneurs.13 This further attests to the willingness and foresight of Mauritius’s business community to plow back successfully into the Mauritius economy the significant rents that were earned during the sugar sector’s boom years. The authorities have also played their fair share in promoting Mauritius as an exquisite destination, by avoiding (for example, through selective air access policies) mass tourism of lower value added. The authorities have justified the restrictive air access policy by the need to avoid overcrowding the island, to preserve its relatively limited coastline (however attractive to tourists), and to maintain the delicate ethnic and social balance.14 The result has been the development of a tourism product directed primarily at the high-spending European market.15

The Financial Services Sector

Mauritius has a well-developed and relatively large domestic financial system and a growing offshore sector with an important component of asset management. Mauritius belongs to a select group of developing countries where domestic bank assets represent approximately 100 percent of GDP and contractual savings exceed 40 percent of GDP. A description of the financial system, its contribution to economic growth, and the key challenges ahead are presented in Chapter 7.

Sea Port and Freeport

Quality of key infrastructure is essential to promote export-oriented investments. Slow vessel turnaround time in ports leads to higher ocean shipping costs, longer port-to-port transit time, and low asset utilization. A good road network from factories to ports is also essential. On these counts, the performance of Mauritius is remarkable. The harbor of Port Louis is one of the most efficient in the region, with competitive container handling charges, considerably lower than in Durban, Mombassa, and Dar Es Salaam,16 high speed of container handling, and short vessel turnaround time. Cargo operations at the airport are also efficiently handled. The port authorities are also investing in developing freeport activities to take advantage of Mauritius’s strategic location between Asia and Africa.

Information Technology: The New Growth Sector

The government has given the emerging information and communications technology (ICT) sector its highest priority, and is moving rapidly with an ambitious plan to establish an information technology sector as a fifth pillar that can sustain rapid growth over the medium term. To this end, it is investing heavily in providing the infrastructure for a new technology park and improving the country’s education system to strengthen labor skills (Box 3.3).

The ICT sector could emerge as an important engine of growth and employment creation. The challenge for Mauritius is to carve out a niche for itself in the highly competitive global ICT market. As a small economy with limited resources, Mauritius can hardly afford to build competencies in the entire spectrum of ICT immediately. It has to build in phases, starting with its comparative advantages. World names in the ICT business had already expressed interest even before the first completed cyber tower was ready at end-2003. By mid-2004 the occupancy rate of the cyber tower had already exceeded 70 percent. In addition, a number of business-outsourcing processing centers have recently been established, taking advantage of the language skills in English and French of the local population. Given the availability of qualified professionals in the accounting and legal fields, processing centers have good prospects to branch out in the provision of higher-value-added services.

Box 3.3.Mauritius: ICT Sector Outlook and Its Impact on Medium-Term Growth

The Mauritian authorities are confident of the successful development of the information and communications technology (ICT) sector and its contribution to medium-term growth for the following reasons.

Competitive advantages

Strong political commitment and social consensus. The vision of the government and the public is to transform Mauritius into a “Cyber Island.”

Knowledge spillover from India. The successful experience of the Indian ICT sector is being transferred to Mauritius. The Indian ICT sector is advising the Mauritians on a development strategy and will also be sub-contracting some of its operations to Mauritius and investing in the domestic sector.

Bilingual nature of the labor force. The ability of the Mauritian labor force to speak both English and French is an important competitive advantage.

Infrastructure improvement. The government is embarking on substantial capital outlays to set up the physical and communication infrastructure. As a springboard, the Ebene Cyber City started operating as of December 2003 with much of its space for private investors already taken up by global ICT firms.

Market niche and industrial development strategy

The government believes it has formulated a realistic development strategy. The initial focus of ICT operations will be at the lower end, such as call-centers and data-processing and disaster recovery centers. Given the country’s strength in financial services, back-office services outsourcing is also promising. In the longer term, improvements in the supply of skilled labor through the ongoing education reforms and knowledge accumulation through “learning by doing” would help the sector to move into more sophisticated ICT product lines.

The fifth pillar of the economy

The government does not view the ICT sector as simply the “fifth” pillar of the economy. Rather, it sees the sector as becoming the foundation of the economy. Thus, although the initial contribution of the ICT sector to growth will come from capital deepening, over time, the expectation is that gains from ICT-related investments will lead to increases in overall productivity in the economy. Parallel reforms are taking place in the telecommunications sector, with the termination of Mauritius Telecom’s monopoly in 2003. A range of incentives for private investment is also in place, including full tax exemptions for start-ups until 2008 and generous depreciation allowances on ICT hardware.

Impact on medium-term growth and employment

As ICT production becomes a larger share of total output, the ICT sector would play a greater role in driving Mauritian medium-term growth. The contribution to overall growth might amount to 10 percent starting in 2004/05. However, the job creation of the ICT sector is expected to be limited.

Baseline Projection of the ICT Sector(In percent, unless otherwise indicated)
2002/032003/042004/052005/062006/072007/08
Share of nominal GDP2.12.32.62.93.23.5
ICT real growth10.017.020.016.015.015.0
Overall GDP growth3.35.55.14.94.64.6
Contribution to growth6.47.110.29.510.411.4
Total employment2,0005,0008,0009,00010,00011,000
Total labor force is estimated at 537,400 in 2002/03.
Total labor force is estimated at 537,400 in 2002/03.
5In absolute terms the increase was even more dramatic: from an average US$73.4 million in the late 1980s to more than US$400 million in the early 2000s.
6Also in 2000/01, the South African sugar giant Illovo sold its interest in a sugar estate in Mauritius and repatriated to South Africa the net proceeds of about US$61 million.
7Maximum supplies were defined for the four cane-refining states in the EU, namely the United Kingdom, France, Portugal, and Finland.
8The EPZ is not a geographically delimited zone, but rather a group of companies that operate across Mauritius under certain privileges and manufacture products predominantly for export.
9The main incentives included a 10-year tax holiday on retained earnings; a partial tax holiday for periods beyond that; free repatriation of capital and profits; and preferential interest rates for firms in the EPZ. Duty drawbacks and equivalent schemes do not entail export subsidization, as they merely offset the bias from restrictive import policies.
10For example, in 1984, 79 percent of total employment in the EPZs was female, compared with 31 percent in the rest of the economy.
11The quota rents are actually an upper bound under the assumption of perfectly elastic export supply.
12The others are sugar, textile manufacturing in the export-processing zone (EPZ), and financial services. The authorities are currently investing in infrastructure for a “fifth pillar:” a communications and information technology sector on the island.
13Such as the Beachcomber Group and Sun Resorts.
14Thus, to date, charter airlines are not allowed to land in Mauritius.
15In 2000, in a special supplement on Mauritius, the Financial Times wrote: “Some critics quip Mauritius is a three-star destination with five-star hotels (as opposed to nearby Seychelles, a five-star destination with three-star hotels), but the island has done a remarkable job in marketing itself as the luxury holiday of choice for the high-spending European.”
16Handling charges for 40-foot containers in 2001 were US$110 in Port Louis, compared with a range of US$100– 180 in Mombasa, US$100–150 in Dar Es Salaam, US$300 in Tamatave, and US$135 in Durban.

    Other Resources Citing This Publication