Mauritius: where they don’t kill the geese that lay the golden eggs

by Eustace Davie

Free Market Foundation (FMF) Feature Article

James Meade, British recipient of the Nobel Prize in economics, reported in 1961 that Mauritius faced a bleak future. 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; the country did not possess promising indicators of future economic growth. However, they disagree on the view he had on the country’s demographic inheritance. Rapid population growth produced very positive consequences for the economy. Nevertheless, standard development theory does not explain the ‘Mauritian miracle’.

Mauritius is an island state with 1.2 million inhabitants. Its GDP (PPP) per capita is $12,027 and its average real GDP growth from 1973 to 1999 was 5.9%. Not bad for a country that was considered to have poor prospects in 1961.

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 plucked favourable sugar export contracts from the Europeans, and later the EU. They did impose an export tax on sugar as suggested by James Meade to ‘curb over-production’, which they later reduced and finally abolished in 1994. They had been choking the geese with one hand and feeding them with another.

When offered a choice between access to the EU market at the then-ruling high world sugar price and limited quotas, or at the lower domestic EU price but higher guaranteed quotas, the 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, swiftly adopted the team’s recommendations and established Economic Processing Zone (EPZ) legislation, which 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.

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. In other words, the geese are gently plucked, not killed.

Now Mauritius is in the midst of a new crisis. The Multi-Fibre Agreement ended on 1 January 2005. The EU sugar protocol ends in September 2009 when the export price of sugar will fall by 36%. GDP growth for 2006 was down to 3.5%. Unemployment in September 2006 was 9.5% and this high unemployment rate spurred the government into action.

In June last year 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 are 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 have become accustomed.

Clear rules have been established for the conduct of business. Anyone who pays the required fee, registers as a business and follows the rules can commence business – there is no waiting for approvals. The tax rate for companies and individuals will be reduced to 15% by 2009 with individuals receiving generous general and family exemptions.

The economy has been 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 have been changed to give such people residence rights within three days of submission of applications.

Import tariffs have been slashed and over time will be reduced to zero to make Mauritius the Indian Ocean’s duty-free shopping centre. Tourism, ICT, offshore banking and financial services, a free port, high quality medical care, and integrated resorts are among the ‘development pillars’ that are expected to play a role in future economic development. Non-citizens purchasing residences for at least USD 500,000 in the integrated resort schemes will receive resident status for themselves and their families along with their properties. These changes are illustrative of the imaginative reforms that are already in place.

Governments of other countries should not be surprised to see their plumpest geese go flying off to this beautiful island in the Indian Ocean to enjoy the sun, sea, sand, golf, fishing and low taxes, where they will be gently plucked and not killed.

Author: Eustace Davie is a director of the Free Market Foundation. This article is syndicated by