Mauritius has gone from strength to strength. Since its government instituted enterprise based solutions to poverty, it has shot up the Economic Freedom of the World (EFW) report rankings from 22nd in 2000 to 6th place in 2013. South Africa, on the other hand, plummeted from 42nd in 2000 to 96th in 2013.
Is this not enough reason for South Africa to take a long hard look at what is working in Mauritius? It should take a leaf out of the Mauritian book especially in respect of the co-operative relationship that exists between government, business and civil society. Before any big decisions are taken in Mauritius, such as the institution of major reforms, there is wide consultation and consensus-seeking. The result - in the ‘Ease of Doing Business’ category, Mauritius comes in 32nd while South Africa languishes at 73rd place.
In 2006, I accompanied the Enterprise Africa team to study the economic measures that the Mauritian government had begun to introduce. Our overall conclusion was that, in the quest for greatest return on economic investment, FDI would choose Mauritius. Investors would not only go there to enjoy the sun, sea, sand, golf, fishing and low taxes, but also because, on that beautiful island in the Indian Ocean, they would be welcomed and not treated as undesirable aliens.
James Meade, British recipient of the Nobel Prize in economics, reported in 1961 that Mauritius faced a bleak future. After all, the country was reliant on a single crop (sugar), subject to weather and price shocks, threatened by over-population, had no potential alternative job opportunities, was multi-ethnic, had large income inequalities, and had experienced political conflict. Land was scarce, there was very little technical expertise outside the sugar industry, capital was scarce, and the island was not geographically well positioned.
Modern development economists concur with Meade on most of the ‘inheritance’ factors but they disagree with his view of the country’s demographic inheritance.
Mauritius is an island state with 1.34 million inhabitants (1.2 million in 2007). Rapid population growth produced very positive consequences for the economy. Its Gross National Income (GNI) (PPP) per capita in 2013 was US$9,300 compared to South Africa’s US$7,190. Many commentators have described the dramatic improvement in the country’s economic fortunes as a “miracle”, given the gloomy view expressed by James Meade.
Standard development theory does not explain the ‘Mauritian miracle’. Analysts must look at the non-standard responses of the Mauritian people to political and economic crises and events to find an explanation for the country’s outstanding economic performance. After receiving independence from the UK in 1968, the Hindu majority did not expropriate the property of the minority French landowners who owned the majority of the sugar farms. Instead, they jointly negotiated favourable sugar export contracts from the Europeans, and later the EU. The export tax they imposed on sugar as suggested by James Meade to ‘curb over-production’, was later reduced and finally abolished in 1994 when they realised it was choking economic development.
When offered a choice between access to the EU market at the then-ruling high world sugar price and limited quotas, or the lower domestic EU price but higher guaranteed quotas, the shrewd Mauritians took the second option. EU sugar producers subsequently lobbied for and obtained a sugar price that substantially exceeded the world price, providing Mauritian sugar producers with an estimated four billion euro subsidy between 1975 and 2005. Despite this good fortune the Mauritians knew they had to find other contributors to economic growth.
Soon after coming to power, the new democratic government sent a team to study the export-oriented policies of Hong Kong, Jamaica, Puerto Rico, Singapore and Taiwan. It swiftly adopted the team’s recommendations and established Economic Processing Zone (EPZ) legislation. This allowed EPZ firms to import inputs free of tariffs, gave them liberal tax exemptions, and provided a less regulated labour environment, liberating women especially by providing them with new job options. South Africa’s EPZs are virtually unknown because the benefits are not attractive enough to make the news, let alone attract foreign investors.
The 1973 adoption of the Multi-Fibre Agreement (MFA) and 1975 signing of the Lome Convention gave Mauritius preferential access to EU and US markets for the export of clothing and textiles spurring investment in the EPZ. Hong Kong manufacturers established factories in Mauritius to get around the quota limits placed on them by the MFA, transferring know-how and new skills to Mauritians. The number of people employed in the EPZ increased from 21,000 in 1976 to almost 90,000 in 1986. Unemployment declined from 20% in 1970 to 3% in 1991. Other African countries attempted to utilise the EPZ mechanism to increase employment but none had the same success as Mauritius.
The most compelling explanation for this phenomenon is that Mauritius has better institutions than those other countries: a stable democracy, regular changes of government, a good legal system, respect for and protection of private property, monetary discipline, regulation that is not excessive, and low government spending as a percentage of GDP. The kind of conditions that attract investors.
Mauritius then faced a new crisis: the end of the Multi-Fibre Agreement on 1 January 2005; the end of the EU sugar protocol in September 2009 which would cause the export price of sugar to fall by 36%; a GDP growth in 2006 of 3.5% and an unemployment rate of 9.5% in September 2006 spurred the government into action.
In June 2006, the Minister of Finance and Deputy Prime Minister, Ramakrishna Sithanen, announced 40 reform measures during his budget speech, the products of wide consultation with all sectors of the economy. These reforms were aimed at rapidly reducing unemployment, helping the economy ride out the sugar shock, and get back onto the high growth path to which the Mauritians had become accustomed.
Clear rules were established for the conduct of business. Anyone who paid the required fee, registered as a business and followed the rules could commence business – there was no waiting for approvals. Within three years, the tax rate for companies and individuals was reduced to 15% by 2008 with individuals receiving generous general and family exemptions.
The economy was opened to non-citizens by easing entry requirements for investors generating 3 million Rupees (Rs) per annum in annual turnover; professionals earning more than Rs 30,000 per month; self-employed people generating incomes of Rs 600,000 per annum; and retirees bringing in USD 40,000 annually. Immigration laws were changed to give such people residence rights within three days of submission of applications.
Import tariffs were reduced considerably. The mean tariff today is 1.00%. Tourism, ICT, offshore banking and financial services, a free port, high quality medical care, and integrated resorts were among the ‘development pillars’ that were to play a vital role in continued economic development. Non-citizens purchasing residences for at least USD 500,000 in the integrated resort schemes received resident status for themselves and their families along with their properties. These changes are illustrative of the imaginative reforms that Mauritius put in place.
If nothing else should convince the South African government to look more closely to the policies instituted in Mauritius, it should be their decreasing unemployment rate. Their current unemployment rate is 7.9% whereas South Africa’s official rate is a disastrous 24.5%.
The Mauritian government continues to follow growth-producing policies based on maintaining an investment-friendly business environment, and, as long as it does so, the country will continue to prosper.
Author Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s.
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