Mauritius ‘miracle’ puts Australia in the shade


During a private meeting at April’s Commonwealth summit in London, Australia’s representatives were keen to push the oft-repeated message that the “Lucky Country” has now chalked up a record-beating 26 years without a recession, surpassing the previous tally held by the Netherlands.

Not so, shot back Pravind Jugnauth, prime minister of Mauritius, who pointed out that the Indian Ocean island state has gone an impressive 37 years without a recession and had its eyes on becoming only the second high-income country in Africa.

Annual economic growth has not dipped below 1.6 per cent since the 1980s, as seen in the first chart — in a country with a population growth rate of just 0.6 per cent (albeit this was higher in the 1980s and 1990s).

As a result, real per capita GDP (at purchasing power parity, 2011 dollars) has quadrupled from $4,529 in 1980 to a projected $20,404 this year, according to the IMF, illustrated in the second chart.

This took the nation of 1.3m people from 82nd in the world in terms of income per head to 53rd, based on countries included in the 1980 data (eg not including the post-Soviet or post-Yugoslav states that did not exist in 1980).

Mauritius’ rise has been impressive, considering “it doesn’t have any natural resources apart from its beaches,” in the words of Ian Matthews, head of business development at Bravura, a Mauritius-headquartered boutique investment bank.

Indeed, James Meade, a Nobel Prize-winning economist, wrote in the 1960s that “it is going to be a great achievement if [an independent Mauritius] can find productive employment for its population without a serious reduction in the existing standard of living,” adding that “the outlook for peaceful development is weak”. VS Naipaul, Nobel laureate for literature, was equally dismissive.

“Two Nobel Prize winners said it was going to fail, there is too much ethnic division, they are in the middle of the ocean, they have nothing to offer anybody,” said Charles Robertson, chief economist at Renaissance Capital, an emerging market-focused investment bank.

Yet development has been so strong that Joseph Stiglitz, a left-leaning former chief economist of the World Bank, coined the phrase the “Mauritius miracle” in 2011, writing that it had built “a diverse economy, a democratic political system, and a strong social safety net,” and that 87 per cent of Mauritians own their own homes, pointedly adding that “many countries, not least the US, could learn from its experience”.

Of more relevance might be whether there is anything other emerging countries, particularly those elsewhere in sub-Saharan Africa, can learn from Mauritius’ example.

At independence from the UK in 1968, the mainstay of the economy, as in many poorer countries, was agriculture, specifically the sugar industry.

Mauritius started to industrialise and diversify its economy in the 1970s, abandoning a policy of import-substitution that failed, in part, due to the small size of the domestic market. Instead, it embraced exports, with an ambitious export processing zone act that fast-tracked approvals for export-focused manufacturers, according to analysis by the World Bank.

Mr Robertson noted that many other African states have still not prioritised export industries (which tend to be the most productive) to this extent, an approach that could benefit the likes of Nigeria, although the latter does at least have the benefit of a large domestic market.

Mauritius’ industrialisation and export push was founded on the textile industry, a relatively low-skilled sector that involved converting imported fabrics into finished goods.

“A lot of people talk about the tourism side but the biggest industry is textiles,” said Mr Matthews.

Simultaneously, though, the country embarked on a push to improve its human development indicators, preparing the ground for a move up the skills chain.

School enrolment rates were raised, life expectancy jumped from 62 in 1970 to 74.6 today, infant mortality fell from 64 per 1,000 live births in 1970 to 10 and the Gini coefficient, a measure of income inequality, dropped from 0.50 in 1962 to 0.36 (ie closer to perfect equality of 0), even as this measure has risen in many countries.

This improvement in the quality of its workforce paved the way for Mauritius to move into higher-skilled, higher-value added sectors, such as business process outsourcing and financial services

Mr Robertson, who has extensively researched the links between countries’ literacy rates and their subsequent ability to develop, said: “You need to get to 70 per cent literacy to industrialise. This happened in the 1970s, and [Mauritius] then moved on to financial services in the 1980s and 1990s.

“That has got them to be the third-richest country in Africa,” behind only the Seychelles, another Indian Ocean island state, and Equatorial Guinea, although in the case of the latter so much of the income is grabbed by a kleptocratic elite that the bulk of the population still lives in abject poverty, rendering its high GDP/capita somewhat meaningless.

Mauritius is “an example for Africa of how you can be written off when your literacy rate is sub-70 per cent but it doesn’t take long for things to come together, maybe a decade”, Mr Robertson added.

“They are a good 50 years ahead of some African countries. Ethiopia still hasn’t got the literacy rate Mauritius had in the 1950s. Some countries are three generations behind,” he said.

Mauritius has not rested on its laurels, with its desire to attract foreign businesses, particularly in the financial services sector, evidenced by its standing at 25th, out of 190 countries, in the World Bank’s 2018 Doing Business report, enough to place it highest in Africa.

“South Africa was the gateway to Africa because of its sophisticated financial services industry but we have seen a lot of the international banks opening offices in Mauritius in the last few years. It has made itself a much more attractive jurisdiction [and is] putting pressure on South Africa,” said Mr Matthews.

“It doesn’t have exchange controls, which is a problem most of Africa has. It’s relatively tax benign and is an easy place to do business, so a lot of fiduciary businesses have sprung up. A lot of funds that invest in Africa invest via Mauritius.”

Mr Matthews also praised Mauritius’ strong rule of law. Noting that the Supreme Court has granted permission to the state prosecutor to challenge Mr Jugnauth’s acquittal in a corruption case by appealing to the UK’s Privy Council — retained as the highest court of appeal after independence — Mr Matthews said this was “an exemplary example of how politically important figures are still subject to the rule of law, which I don’t think is the case in the rest of Africa”.

Mauritius still has challenges, of course. One of the issues flagged up in the IMF’s 2017 review of the country is that “lacklustre productivity and rapid real wage growth in recent years have reduced cost competitiveness”, as depicted in the third chart.

To some extent, Mr Robertson sees the nation as being a victim of its own success, with wages being pushed up by a tight labour market.

“The result of [Mauritius’] success is that the labour market has stopped growing. They don’t have many kids and haven’t for some decades and their population is ageing,” he said. “They are possibly the first country in sub-Saharan Africa that is confronting the challenges that China and Europe are facing. They have lost their demographic dividend.”

Mr Robertson argued that the short-term solution was to open up the economy to foreign workers, while in the longer run Mauritius should focus on raising productivity levels by improving education levels still further.

Mr Matthews agreed, saying the country “will lose more of the blue-collar jobs to other places in the world, especially Africa [but] increasingly take on value-added jobs,” mirroring the way China has moved up the skills chain.

Mauritius clearly has some natural advantages some other African countries cannot necessarily replicate, such as its attractions as a tourist destination and large Indian diaspora, which has helped develop links with India’s financial sector.

The latter could prove less fruitful in the future, however, after an amendment to the country’s double taxation avoidance agreement with India means capital gains taxes will, for the first time, be levied on Mauritius-based investments in India.

More broadly, Mauritius has been caught up in a global clampdown on offshore tax havens. The country has, so far, managed to keep on the right side of the OECD, which is leading the crackdown, but only by agreeing to review some of its existing tax treaties.

With the country now on the OECD’s “white list” of tax jurisdictions that co-operate with other countries, Mr Matthews said the Paris-based body “seems to have become comfortable with Mauritius as an investment destination, not as unfair tax competition”.

Mr Robertson argued that many of the steps Mauritius is now taking are not overly relevant for the rest of Africa because its education levels are so far ahead, but that some of the measures it took to get to this stage of development are worth its regional peers studying.

Some have already taken that step, with Ivory Coast, Madagascar, Ghana and Senegal all asking for Mauritius’ help and advice in setting up special economic zones, something than could prove a win-win if Mauritius ends up providing banking services to such projects.

As for Mauritius’ hope of reaching high-income status by 2023, a target that would require raising its GDP per capita from $9,794 last year to more than $12,000 in order to meet the World Bank’s definition, Mr Matthews felt 2023 “might be a bit ambitious,” even if the country can extend its record-breaking recession-free run to an impressive 42 years.


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Mauritius ‘miracle’ puts Australia in the shade

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