Lessons from Mauritius’ Export Processing Zones

Mauritius is one of the few successful African developmental states. Its prospect for growth in the 1960s was, to say the least, slim. It had a feature of all backward and mono-crop dependent economy. The island nation’s success largely depended on sugar export initially, an export-boom in garments to European markets later and an associated investment boom.Its economy constituted a successful Export Processing Zone (EPZ), and a highly protected domestic trade sector with average effective rates of protection for the manufacturing sector reaching at a staggering 89Pct (the maximum average tariff rate was as high as 600Pct before the 1987 reform) making Mauritius a country following a ‘two-track strategy’.
Policy makers faced resistance from import-substituting industrialists in their attempt to relax (liberalize) the trade regime at the eve of the formation of the EPZ policy. Local industrialists were granted tax holidays and protection from imports via tariffs, and quantitative restrictions. The formation of the EPZs was the policy makers’ way of circumventing the resistance. The political advantage of the two-track strategy was that it never took protection away from import-substituting industrialists, while opening opportunities of trade and employment through the EPZ. However, since the 1980s, the country has dismantled most of the quantitative restrictions that have been in place for longer than two decades. Thus, the 1990s saw significant tariff reforms that have contributed to a further boost in export growth.
The early import substitution strategy of Mauritius was followed by an export-led growth strategy. This led to growth of the economy in the 1970s, which was basically fueled by the favourable condition for Mauritian sugar industry in the world market (where sugar price increased three fold during 1972-1975). This led to an increase in proceeds from sugar exports starting from 1973. This increase in liquidity gave additional boost to the plans initially set by the government. One of the lessons for Ethiopia here is that the early import substitution strategy of Mauritius was followed by an export-led growth strategy- so the two strategies are complementary, not competitive.
The EPZ and the tourist industry were further enhanced due to the investment of sugar boom profits by sugar companies in joint ventures with foreign investors – thereby avoiding a possible “Dutch disease syndrome”. The effectiveness of the policies implemented, such as tax holidays, exemptions from import duties and preferential access to European markets, the purchase of new machinery and equipment and hiring consultants, encouraging foreign direct investment (FDI), and the purchase of new technology licenses for domestic production of new products or the use of new processes was reflected by the excellent economic performance that followed this policy.
Thus, the number of enterprises in the EPZ reached to 88 in 1977 from almost nothing few years back. Not only that, the EPZ exports rose to 20Pct of total exports in few years. FDI from Hong Kong, France and Britain contributed a great deal to the development of the EPZs. An international technology transfer took place and local investors joined in the process. Textile and garment firms in the EPZs were largely owned by local investors (55Pct), followed by joint ventures (30Pct), and those fully foreign-owned, 15Pct. The local investment was largely financed from the surpluses of the sugar boom. The average annual real growth of the economy was impressive at about 8.2Pct for the period 1971 to 1977, with the peak real growth rate of 16.6Pct in 1976.
But, the high rates of growth noted were not sustainable as they rested on the windfall gain of the sugar boom. In the post-economic euphoria period (1978-1983), the average real growth of the economy decelerated to 1.7Pct, the balance of payment worsened, and the inflation rate reached 42Pct in 1980, although this was partly fuelled by the world oil crisis in 1979/1980. In addition, labour-intensive exports (mainly sugar and garments) and investment in the export processing zones declined, and most firms also became loss makers. This erosion of competitiveness lies in the inability of productivity growth to catch up to wage growth that has been rising as a result of near full employment the country achieved.
Export successes have been based on a fragmented incentives environment. In addition, the perpetuation of the same situation in an economic environment where capital and labour resources are scarce led to a significant misallocation of resources and checked competitiveness. Mauritian manufacturers had been subject to some quite intense competition from countries that have a competitive advantage in traditional labour-intensive exports too. The incapability of Mauritian manufactures to go up in the technological ladder has meant that productivity was sacrificed. At the beginning of the 1990s, the Mauritian EPZ had a productivity of USD3,247 per person per year compared to a staggering USD12,157 in Singapore’s garment industry. Similarly, the value added content of exports declined from its 1983 level of 42Pct to 36Pct in 1991. These major failures were compounded by a decline in labour costs of only one percentage points during the same period. In fact, some firms began investing in neighboring Madagascar where unit costs were comparatively low and the latter’s quota in EU and US market was higher.
In response to this situation the government took further policy reforms in areas of fiscal stabilization, exchange rate re-alignment, cautious wage policies, trade liberalization, financial consolidation and sectoral/supply side policies. These liberalization measures were made progressively. For instance the maximum tariff rate which averaged about 600Pct before the reform was reduced to 110Pct in 1987 and to 80Pct in mid 1990s. The government was cautious and did not fully submit to the pressure of the World Bank and International Monetary Fund IMF WWWWto aggressively adjust or liberalize. Thus, Mauritius’ liberalization was not a typical liberalization the IMF has been promoting in Africa.
In fact, its import regime in the 1970s, 1980s and 1990s were highly restrictive. Following these measures, the current account of the balance of payment changed from a deficit of 15Pct of gross domestic product (GDP) in 1983 to a surplus of 5Pct in 1987. Inflation dropped to 0.6Pct in 1987, rendering the EPZ sector more competitive. With such favourable conditions, the number of EPZ enterprises also increased to 591 in the year- from 88 in 1977.The lesson for Ethiopia here is that policy making and industrialization policy need to be dynamic and pragmatic that will be gauged by international competitiveness and preferential market access to markets of developed countries.
Mauritius transformed itself from a mono-crop economy, solely dependent on sugar, to a diversified export with a relatively developed manufacturing and services sectors. In 1989, the offshore financial centre was also set up, which has attracted more than USD4 billion of offshore funds. The Stock Exchange of Mauritius (SEM) started to operate in the same period. Stimulated by the EPZ, the Freeport was created in 1992 as part of a strategy to develop a regional trade centre. In 1997, tourism increased by 10Pct, the EPZ by 6Pct, financial services by 5.9Pct and sugar by 5.5Pct. Thus, Mauritius was ranked 29th in the World Competitiveness Report as early as 1999, out-performing some ‘Asian Tigers’ and 1st among African countries.
Over a quarter of a century, Mauritius has managed to quadruple its percapita income and virtually eliminate unemployment. Simon Gray a researcher, currently Chief in the Technical Assistance Division of the IMF’s Monetary and Capital Markets wrote, with a population size of 1.1 million heavily dependent on external trade and a rather slender industrial base, Mauritius seeks to follow through the path of Hong Kong and Singapore built on the foundations of a competitive economy.
The role of quality institutions was central for this success. By mid 1990s, Mauritius had better quality institutions compared even to other fast growing developing countries. Historical factors such as suitability of Mauritius for settler colonizers who brought with them good institutions proved important. Institutions of private property, rule of law, and the British influence on parliamentary democracy were among the motors ones. The interest of France, EU, USA in Africa that gave preference access to its trade as well as Mauritius’ ethnic diversity and hence its link with India and China and its geography were also important.
Subramanian, A and D. Roy in a working paper they produced for IMF entitled ‘Who Can Explain the Mauritian Miracle? argue that the ethnic diversity of the island was a blessing that underpinned Mauritius’ favourable external environment, shared growth policy, participatory democracy, the initial flow of FDI from Hong Kong as well as its India-related off-shore financial sector which were central for its economic success. The politics of consensus, transparency and feedback mechanisms in the government strengthened this positive development. This gave the country competitive democracy that avoided conflict, rent-seeking and corruption. It also encouraged shared growth and informed policy making with well paid and well motivated skilled experts in the bureaucracy and academia. All these, not just EPZ, were behind the success of Mauritius. The other lesson here for Ethiopia is that to get the politics right and growth sustainable, the EPZ based growth should be shared growth.
In conclusion, after examining the comparative experience of Botswana, Mauritius and Uganda, Julius Kiiza, Professor of Political Science and Public Administration, University of Makarere, in his study entitled ‘Institutions and economic performance in Africa: A comparative analysis of Mauritius, Botswana and Uganda’ noted that the key determinants of cross-national variations were the presence of developmental nationalism and Weberian (a developmental bureaucracy characterized by an entrance examination, a hierarchical organization, well paid and with good pension systems, a disciplinary procedure and security of tenure) institutions in Mauritius and Botswana, and their absence in Uganda. This offer a good lesson for Ethiopia, which as of recently is putting a lot of hope on the ongoing industrial parks which will be export processing zones.

5th Year • August 2017 • No. 53


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