Mauritius : an export-led economic success

Abstract

In the 1960s and early 1970s, Mauritius had problems of low economic growth, high unemployment and balance of payments deficits. By the late 1980s it had overcome these problems, attained a high level of economic growth and graduated to the World Bank list of middle income countries. The growth of the economy was closely related to the growth of exports. This thesis discusses the development strategies and policies adopted by the government over the last two decades. In the middle of the 1960s, the government adopted an import-substitution strategy to diversify the mono-culture sugar economy by entering manufacturing. This strategy failed to stimulate employment, reduce balance of payments deficits or to improve overall economic growth. In the early 1970s the government began to encourage exports of manufactures to overcome its difficulties. Mauritius then successfully developed labour-intensive, export-oriented manufacturing and tourism. This study identifies the major macro and microeconomic policies associated with the rapid growth of manufactures which led to accelerated growth for the economy as a whole. The study also examines the external factors that facilitated the growth of exports. These were mainly the Sugar Protocol of the Lome Convention and the Multifibre Arrangement (MFA). The Sugar Protocol of the Lome Convention ensured high and stable export earnings from sugar. By restricting imports from competitors to its major export markets, the Multifibre Arrangement allowed Mauritius to sell its clothing exports at higher prices than would otherwise have been the case while rapidly increasing its clothing export volume. The economy-wide effects of changes in external factors are analysed in this study. Conditions within the European Community (EC) and recent international developments point in the direction of sugar trade liberalization. The economy-wide effects of cuts in the export price and quantity of sugar exports to the EC from Mauritius are analyzed using a general equilibrium model. The analysis indicates that the sugar industry would suffer a considerable loss in earnings with sugar trade liberalization. The other losers from the change would be import-substitution and non-traded goods industries. Exporting industries other than sugar would gain. Mauritius could face cuts in clothing export earnings if trade in clothing were liberalized and the Multifibre Arrangement dismantled. Mauritius would require great policy flexibility to meet such challenges. The general equilibrium outcome of a fall in the export price of clothing if the Multifibre Arrangement were liberalized would also be unfavourable if no compensatory action were taken. The magnitude of tariff protection and other forms of industry assistance are estimated. Import-substitution manufacturing industries receive the highest level of protection followed by agriculture (excluding sugar). The service sector is the most disadvantaged by the tariff structure. The scope for raising the competitiveness of the economy by further liberalizing the tariff regime is examined. The impact of tariff reduction on different sectors and on the overall economy is estimated using the general equilibrium model. The analysis indicates that tariff reduction would encourage tourism and discourage import-substituting manufactures. Its effect is small on export-oriented industries as these industries enjoy duty free imports of inputs. The net effect is an overall gain to the economy with reduced inflation and expanded overall output.