“Mauritius: A Success Story” Jeffrey Frankel Harvard University

1. Accra, Ghana, July 18, 2010 “Mauritius: A Success Story”Jeffrey FrankelHarvard University NBER Project on African Successes Thanks to Oyebola Olabisi, Jesse Schreger & Diva Singh

2. There is no question that Mauritius has been a great economic success • It ranks at the top in Africa, judged by: • GDP per capita • Growth rate averaged 5.4% over 1970-2010 • >> 1% Africa • Level ≈ $7,000 in 2010 ( > $11,000 in PPP terms) • Or Human Development Index • e.g., life expectancy = 73 years (tied for #1). • Or measures of governance. • Especially WDI, IAG, Heritage’s Economic Freedom…

3. Economic SuccessSource: Ali Mansoor, Ministry of Finance & Ec. Empowerment, Mauritius * Assumes GDP Growth and Inflation of 5% per annum 6/6/2014 3

4. Three island countries have the best institutions, as measured by Index of African Governance Mauritius, Seychelles & Cape Verde by S.Africaare rivaled only & Botswana Ghana Cape Verde Sao Tome & Principle 4

5. Top-performing African Countries

6. “Where is it?”

7. Prospects were poor, as assessedby two Nobel Laureates • James Meade (Report to Government of Mauritius, 1961):“Heavy population pressure must inevitably reduce real income per head…That surely is bad enough in a community that is full of political conflict…the outlook for peaceful development is poor.” • V.S. Naipaul (The Overcrowded Barracoon, 1972):“The disaster has occurred… now given a thing called independence and set adrift, an abandoned imperial barracoon, incapable of economic or cultural autonomy…”

8. Initial conditions were indeed inauspicious at independence (1968) • Geography (small, remote, …) • Volatile monocrop (sugar) • Ethnic tensions (including riots before independence) • Population density / growth ( => outmigration) • Regression to mean (downward) 8

9. Geography • Small size, remoteness & tropical location are usually handicaps in economic performance. • But Seychelles (& Cape Verde) are with Mauritius at the top of the rankings. • Of 4 top performers in Africa, only Botswana is not a small island country. • Of small island countries, only Comoros lacks success. • Coincidence? 9

10. Sugar: Natural Resource Curse? • Engerman & Sokoloff (1997, 2000, 02) version of NRC: • Lands endowed with extractiveindustries & plantationcrops (oil, mining, sugar, cotton…) developed bad institutions:slavery, inequality, hierarchy, rents, & state control, • whereas those suited to fishing & small farms developed institutions based on individualism, egalitarianism, incentives, & capitalism. • In Mauritius, the abolition of slavery (1835) was followed by immigration of indentured Indian workers. • Dutch Disease: sugar booms (1830s, 1919-20, & 1974) • Some other independent African countries have confiscated or otherwise taxed away their agricultural export sectors.

11. Ethnic composition While Botswana is ethnically homogeneous, Mauritius is ethnically diverse, resembles Trinidad or Fiji, in the (high) level of the fragmentation index and in the historical reason for it. Mauritius & Botswana are the only two African countries that have been continuously democratic. Again, can it be a coincidence? 11

12. Governance indicators • Mauritius ranks first by participation & human rights (followed by São Tomé & Principe and, now at 3rd place, Liberia). • It ranks 3rd in rule of law, after Cape Verde & Botswana. • Mauritius ranks 2nd only to Botswana in freedom from corruption. • Transparency International & the Internet Center for Corruption Research • Most of these measures are subjective, subject to “halo effect.” • The Index of African Governance (Rotberg & Gisslequist) • tries to avoid the subjectivity, • but at the possible cost of including outcomes along with institutions. • Correlationbetweentheruleoflaw measures in WGI&IAG = .91.

13. Some cross-country econometrics • Some results for islands • Some results for African countries • Overall conclusion:Some fundamental determinants of growth that can explain lower incomes of Africa don’t work well to explain relative performance within Africa • Small size, remoteness, tropics • A case in point: the high ethnic diversity in Mauritius, which elsewhere would make for dysfunctional politics

14. Table 3: Islands Cross-section * Statistically significant at .10 level **.05 ***.01 (Standard errors in parentheses.)

15. Tables 3 & 4 report cross-section of island countries. Dependent variable: per capita income, 2006 (PPP basis). Some results • A big effect for location in the tropics (6-fold). • The Africa dummy is negative, but not statistically significant when included along with the tropic dummy. • The rule of law variable from World Governance Indicators has a highly significant positive effect. • Its presence takes two-thirds off of the tropic dummy, • confirming the view that tropical lands tend to develop less satisfactory institutions.

16. Tables 3 & 4 cross-section of island countries.More results • Surprisingly, coefficient on size (population) is negative; • perhaps islands can compensate for small markets via trade. • Trade/GDP significant (+). • Remoteness is significant (-) • but subsidiary to trade. • Fragmentation (level & square) is significant, • supports the theory of Collier & Bates • despite critiques of the measure.

17. Table 4a+b: Islands Cross-section Explaining log of 2006 GDP per capita (PPP) * Statistically significant at .10 level ** .05 *** .01(Standard errors in parentheses.)

18. Table 4c: Islands Initial date: 1996 * Statistically significant at .10 level ** .05 *** .01(Standard errors in parentheses.)

19. Table 5a+b: Africa Cross-section * Statistically significant at .10 level ** .05 *** .01(Standard errors in parentheses.)

20. Results from Africa cross-section • As before, trade is highly significant, • as is Rule of Law, • which can drives out # Years of Democracy. • In addition, • population density is significant (-) . • Remoteness is not still significant. • Landlockedness & Length of coastline both significant. • But there is no separate island effect. • Trade dominates.

21. Does geography explain growth? • Tropicalness, remoteness, small size & landlockedness can explain why Africa overall has done less well than other regions; • but these variables do not help much to explain relative success within Africa (except that access to the sea makes a big difference): • Tropicalness doesn’t show up because almost all sub-Saharan countries share it. • Remoteness doesn’t show up, if measured by straight-line distances, • because getting from the interior to the nearest seaport matters more in Africa than elsewhere. • Small African countries do not seem on average to suffer the usual disadvantage relative to larger countries.

22. Questions • Mauritius has followed some good policies • which helped start manufacturing in 1970s, • especially textiles & apparel, • and helped cope with later trade shocks. • What were the policies? • What were the institutions that led to thepolicies? • How did these institutions come about? Policies

23. Policies What were the policies? • Export Processing Zone (1970) • Diplomacy regarding EU trade policy (1975) • Education • Avoiding currency overvaluation (esp. 1979) • Adjustment to trade shocks of 2004-2008

24. Policies Interpretations of Export Success • Openness? -- Sachs view. But rejected by Subramanian: import tariffs were high initially. • EPZ & Heterodox trade policy -- Rodrik view. • Foreign ideas, via Chinese FDI -- Romer view.But: (i) textile & apparels perhaps obvious(ii) success depended on preferential treatment, from US & EU, under MFA. (iii) Mauritius was pro-active, with help of Sino-Mauritians

25. Policies Export Processing Zone • Specific measures: • (i) gave EPZ firms tax advantages, • (ii) eliminated tariffs on the imported inputs used by manufacturers, and • (iii) set lower minimum wage & labor standards for EPZ workers.

26. Policies Export Processing Zone • Rodrik (1997): Mauritius’ success came from a “heterodox” trade policy reminiscent of the Asian tigers, a strategy that created high returns to the export sector, while preventing resources from being diverted into the protected import-competing sector. • Counterarguments (Subramanian): • (i) EPZs failed elsewhere in Africa, • (ii) EPZ subsidy was insufficient to offset anti-trade bias of tariffs.

27. Policies Diplomacy regarding trade quotas: • When the UK joined the EEC, sugar preferences were replaced by the Lomé Convention’s Sugar Protocol. • ACP sugar producers negotiated access terms • in 1974,a time when world prices were high. • Most chose small EEC quotas, to get the world price. • Mauritius negotiated a big quota at the domestic EEC price.

28. Policies Trade quotas, continued: • The EEC price has been well abovethe world sugar price since then. • So the Mauritius strategy turns out to have been brilliant. • Sugar exports to EU produced large rents for years • = 5.4% of GDP; • part went to investment, and • the government used part for social spending. • E.g., education spending.

29. Oil shocks of 1970s • Like others, Mauritius ran up debts. • 5 years of bad trade shocks in 2004-08 • Loss of sugar preferences, 2004 • Loss of MFA preferences in clothing market • => 30 % fall in output and 25 % drop in employment • Rise in world prices of oil & food 2003-08 • Global recession 2008-09 29

30. Policies Adjustment to trade shocks: • Avoiding currency overvaluation • Including large devaluations in 1979 & 1981. • Adjustment to trade shocks of 2004-2008 • by new government in 2005: • Tax reform (flat 15%) • Business Facilitation Act • Results: • Budget deficit down by 2007. Primary deficit ≈ 0. • Mauritius ranks even better on climate for business.

31. Policies Adaptation to the export shocks • Expansion into services • Tourism • Financial center • ICT • Even within the textiles & apparel sector, although employment has shrunken greatly, a reduced subset of the industry is reborn through innovation. • A successful integrated complex: CMT • “Pillars” of the new economy: • seafood hub, an “integrated resorts” scheme… • Platform for investment from Asia into Africa

32. Compagnie Mauricienne de Textiles Rather than closing its clothing factory, CMT • brought in an experienced new manager from India, • opened a textile factory next door, • adopted current Asian technology, • and is now fully integrated. [1] • The textile factory turns raw cotton into yarn & fabric; • the apparel factory turns the fabric into finished garments. • [1] Original motivation for CMT’s integrated production: AGOA

33. Compagnie Mauricienne de Textiles

34. The good policies can in turn be traced togood institutions. They include: • property rights • particularly non-expropriation of sugar plantations; • a parliamentary structure with comprehensive participation • in the form of representation for rural districts • & ethnic minorities (“best loser” system), • (ever-changing) coalition governments, • & power-sharing.

35. Three very specific examples of institutions • The Supreme Court of Mauritius is the UK Privy Council • No army • => no coups • => has freed up government finances • Effective cyclone warning system

36. From where did the good institutions come? Specific decisions at the time of independence • by the de-colonizers and the 1st prime minister • Party of Franco-Mauritians feared “Hindu domination” if country became independent (as did Creoles and other minority groups); but they eventually became reconciled, • essentially trading away political power for assurance that they could keep their sugar plantations. • A UK Commission deliberately set up Parliamentary system to avoid exclusion of any groups. • Is it just personalities, then? Or luck?

37. Possible deep historical determinants of good institution • The de-colonizers were British(1810-1968)but it was the French who had settled (1721-1810) • so the UK could serve as honest broker at independence. • Everyone came from somewhere else • As in Seychelles & Cape Verde • Or compare Mauritius to Fiji • Or Singapore to Sri Lanka • Why does that matter? • Absence of indigenous inhabitants limits resentment, entitlement • Self-selection of immigrants for initiative • Also, Mauritius reaped benefits of ethnic links • to China (clothing) & India (financial center)

38. What do the good-governance island economies have in common? Successful, in Africa Mauritius Seychelles Cape Verde São Tomé & Príncipe Another famous success Singapore Unsuccessful, in Africa Comoros Another less successful ocean economy originally based on sugar, & majority now ethnic Indian Fiji Clue: In each of the successes, the island was uninhabited. 100% of the population came from somewhere else.

40. Economic development history CMT Appendices Mauritius: African success story

41. Mauritius: “African success story?” Regardless, the important questions are: How did Mauritius achieve its success? Are there lessons for other countries? • One might ask: Q: “Is it African?” • A: • Geographically, yes. • Culturally ??

42. Stages of Mauritius’ development First: Globalization at its worst? Immediately, Europeans kill off the dodo bird ! Sugar economy initially based on slavery. Cholera from passing ships. Then: Globalization at its best. Station on the shipping route to India Immigration in 19th century Achieves rapid development through exports

43. The Natural Resource Curseand Dutch Disease Today, Mauritius is not predominantly a commodity economy; but it was, before independence… When Mauritius was a sugar economy, it suffered from periodic Dutch Disease cycles -- due, not just to swings in world price or domestic output, but rather to big changes in rich-country barriers: 1830s, 1919-20, & 1973-74 One branch of the Natural Resource Curse emphasizesthat certain commodities endowments originally give rise to bad institutions, which later impede industrialization.

44. 19th century Island passed to UK (1810-15) => Abolition of slavery (1835-39) Labor shortage on the new sugar plantations 44 Le Morne

45. 19th century • Indentured workers came from India • “The Great Experiment” • Sea of Poppies, by Amitav Ghosh 45

46. 19th century • Indentured workers • Aaprivasi Ghat, the Ellis Island of Mauritius • From 1849 to 1923, 1/2 million indentured laborers from India passed through the Immigration Depot. • Today, 68 % of the population has Indian forbears. 46

47. Which colonial heritage? Dutch? Discovered the island, & named it French? Left the landowning elite, & gave the island its dominant language British? Cars drive on the left The Supreme Court is Britain’s Privy Council. So what languages are on the money? English, Hindi, & Tamil.

48. Traditional 3 stages of development: Commodities (sugar) manufactures (textiles & apparel) services (tourism, financial services,ICT…)

49. How was economic development accomplished? Initial conditions?But conditions were poor at independence (1968). Sugar wealth?But natural resources are often a curse. Openness? -- Sachs view. But rejected by Subramanian: trade policy was not liberal. Export Processing Zone? -- Rodrik view. But EPZs failed elsewhere. Foreign ideas, via Chinese FDI? -- Romer view. But textile & apparel success depended on preferential treatment from US & EU. Good institutions -- Subramanian view. Why here? 49

50. Looking forward • With the loss of preferences for clothing exports, and competition from China…. • the way forward is in “the 3rd sector” • They describe it as banking, ICT, & tourism, • looking to Singapore as a model. (Join the club!) • I would describe the model for Mauritius as a platform for firms from India & China wishing to do business in Africa. • Analogous to • Hong Kong into China (at least until 1997), and • Dubai into the Middle East (at least until 2009) • Cosmopolitan, open, adaptable, stable.