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MANAGING THE CHALLENGES OF WTO PARTICIPATION: CASE STUDY 26

Mauritius: Co-operation in an Economy Evolving for the Future

Andrew L. Stoler*

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 Disclaimer:
Opinions expressed in the case studies and any errors or omissions therein are the responsibility of their authors and not of the editors of this volume or of the institutions with which they are affiliated. The authors of the case studies wish to disassociate the institutions with which they are associated from opinions expressed in the case studies and from any errors or omission therein.

Case Studies main page
Introduction

   

ON THIS PAGE: 
I. The problem in context
II. The local and external players and their roles
> III. Challenges faced and outcomes
Overcoming the disadvantages of distance: the tourism sector
Regional relations: positioning Mauritius as a strategic hub
Dealing with distance: the transport sector
The sugar sector: making the most of a changing environment
Textiles and clothing production
Financial services
Alternative agricultural activities
IV. Lessons for others


I. The problem in context    back to top

In 2004 Mauritius, a small island state located thousands of kilometres from its major markets, was facing two major challenges: the probable erosion of preferential treatment for its main export product (sugar) and a serious disruption to its textile and apparel industry, as a result of the impending expiration of the global restraint system that encouraged producers to seek out locations that could benefit from marginal quota allocations. In addition to the likelihood of less favourable access for sugar in the European Communities (EC), the Mauritian sugar industry faced the prospect of stiff competition in the future from Brazil and new-to-market entrants benefiting from the EC’s ‘Everything but Arms’ (EBA) initiatives.

Many of the island nation’s problems could have been anticipated at the time it underwent a WTO trade policy review in 2001. Paragraph 20 of the WTO Secretariat’s Executive Summary put the situation well at that time:

Mauritius’ participation in the multilateral trading system and in various regional agreements reflects its interests as a small, export-oriented economy with advantages in a few products, sugar, textiles and clothing in particular. As part of its economic success is due to preferential market access granted by major trading partners, Mauritius is taking steps to adjust to changes in this international environment.(1)

Notwithstanding its considerable geographic disadvantage and the shocks sustained by the traditional pillars of its economy, Mauritius is a success story. The degree of success achieved is particularly evident when this country is compared to other island states with similar resource limitations.

No less a judge than the Director-General of the WTO, Supachai Panitchpakdi, commented when he visited Mauritius in March 2004, ‘One can quite reasonably ask — why did a small island developing country, heavily dependent on a single commodity, vulnerable to terms of trade shocks, situated at a considerable distance from world markets and faced with a rapidly growing population, succeed — where other better endowed countries have failed?’

This case study of Mauritius, based on background research and interviews conducted in Port Louis in May 2004, attempts to examine the basis for this success and to explore the future direction of the economy.

 
 

II. The local and external players and their roles    back to top

Mauritius is a multi-racial environment where the official language of business, English, is mixed freely by locals with a French-based patois that most appear to use in their day-to-day dealings with friends and colleagues. The differing ethnic backgrounds of the population, which in other parts of the world so often give rise to political strife and economic discrimination, are embraced positively in Mauritius and seem to have been melded into a distinct local culture.

One cannot help but be impressed by the degree to which the business community and government in Mauritius collaborate on projects designed to improve the country’s economic and trade prospects. There is a long-standing tradition in Mauritius of addressing problems and opportunities through institutional arrangements that bring together main players from the private sector and relevant government agencies. The Chamber of Commerce was already established in the mid-nineteenth century and the Mauritius Chamber of Agriculture opened its doors in 1853.

The single most important co-ordinating body for the private sector in Mauritius is the Joint Economic Council (JEC), established in the early 1970s shortly after the country gained independence. Although dialogue between the JEC and the government was hampered initially by mutual suspicion, the body has evolved over time into an ideal forum for sharing new ideas as well as developing shared views of problems and how best to pursue the country’s economic development. According to Jean Noël Humbert, the general secretary of the Mauritius Chamber of Agriculture, it was in the JEC that discussion was first initiated on turning Port Louis into a regional seafood hub (discussed below) and where the government agreed on the need to fast-track both seafood-related investment approvals and fisheries permits in order to remove any practical difficulties to making the vision a reality.

Close government-private-sector co-operation is also reflected in the country’s approach to policy development in areas such as trade negotiations under WTO auspices. In this regard, a standing co-ordinating committee oversees the work of nine different sub-committees where government and the private sector share responsibility for policy development. Humbert, for example, chairs the sub-committee that oversees policy development relating to trade and environment.

Crisis management is another important role of the institutional structures evolved in Mauritius. The Sugar Sector Strategic Plan (2001-5) was developed and discussed through these government-industry groupings. The non-sugar strategic plan was also formulated within these structures, as have been the various initiatives to deal with necessary adjustment in the textiles and clothing sector.

Mahmood Cheeroo, the secretary general of the Mauritius Chamber of Commerce and Industry, says that the Mauritian economy has necessarily been open and export-oriented from the start. After serious difficulties in the late 1970s, when Mauritius was the first to adjust under an IMF standby agreement, a strong government with a political mandate undertook a tough restructuring campaign and, with a structured and co-operative buy-in from the business community, charted a course for strong export-led growth in the 1980s.

Cheeroo was quick to point out that while government-industry collaboration has produced a number of sectoral success stories over the years, there also have been policy failures. An effort to cultivate rice on the island was unsuccessful, as was an attempt to develop the country as a centre for light engineering in the region. Most importantly, however, in Cheeroo’s view is that the people of Mauritius are not afraid to keep experimenting and taking chances on new ideas. Where there have been real problems or failures, the people involved in the project were generally not prepared to make a total commitment to its success.

 
 

III. Challenges faced and outcomes    back to top

Mauritius is situated at a considerable distance from international markets with significant purchasing power. Transportation costs are onerous and market development can be expensive. The country has benefited importantly over the past thirty years from preferential arrangements for sugar purchases by the EC as well as from the fact that the quota restraint system for international trade in textiles and apparel helped to create a significant garment production industry on the island. But the basis for these long-standing arrangements is subject to challenge, and both the Mauritian government and the business community have accepted the fact that eventual change is inevitable and that new routes to economic prosperity need to be explored and developed.

 

Overcoming the disadvantages of distance: the tourism sector    back to top

Supachai pinpointed a major element when he alluded to the problems faced by small developing countries thousands of kilometres away from major markets. It is obvious to anyone who has had the pleasure of visiting Mauritius that it has major potential as a tourist destination. The question is how to develop this potential in a way that yields the maximum benefit for the local economy. Through an interview with Patrick Y.-S. Yip Wang Wing, Director of Fiscal Policies in the Mauritian Ministry of Finance and Economic Development, it was possible for the author to gain an understanding of what has been a successful strategy to develop a high-margin tourism business.

Some considerations pertinent to this strategy are obvious. Mauritius is a relatively small island with a fragile ecology and environment, especially in areas likely to attract tourist investment. Additionally, apart from the South African market, Mauritius is a long way from sources of tourists who are likely to spend significant amounts of money on beach holidays. Yip Wang Wing explained that an analysis of this situation had led to the adoption of what seems to be a very sensible national policy in respect of tourism. The official policy calls for ‘low-impact’, ‘high-end’ tourism, meaning that the ecological/environmental impact of tourist sites will be low and the tourists visiting Mauritius are likely to spend generously while in the country.

Given the cost of travelling the long distance to Mauritius combined with the many other competing destinations between Mauritius and its main cash market (Europe) that are easier and cheaper to reach, Mauritian planners recognized from the outset that the attraction of the facilities provided would need to outweigh the cost of the air tickets. In order to realize its goal, the country needs to be able to attract the investment in the tourism sector that will produce high-quality resorts.

Yip Wang Wing explained the investment strategy along the following lines.

Where the government approves a significant investment in the tourism sector, accelerated investment and amortization allowances form an important part of the package from the start. Approved investors in the sector can amortize the cost of their investment in hotel facilities over just four years and in the case of new investments, 25% of the investment is allowed as a special credit.

In addition to making certain that the right investors put the desired levels of investment into tourism in Mauritius, governmental authorities also concern themselves with the standard of service in approved high-end hotels. Measures are in place to ensure that qualified hotel schools and hotel management certification requirements are met in the sector.

These efforts appear to be paying handsome dividends. Tourism is the third-largest source of foreign exchange earnings for the country and accounts for around 8% of total employment.(2) Mauritius’ international airport has registered a growth in passenger traffic of around 8% a year in recent years.(3)

 

Regional relations: positioning Mauritius as a strategic hub    back to top

At the time of the author’s visit to Mauritius in May 2004, the country’s Prime Minister, Paul Bérenger, was on an official visit to Mozambique. A major impetus for the visit was the Mauritian plan to create a regional ‘seafood hub’ in Port Louis. Both Mauritius and Mozambique possess vast exclusive maritime zones. In the Mauritius controlled zone, tuna fishing has produced good results but many other species are close to exhaustion. Meanwhile, other countries in the region that have greater stocks of other species often lack the technology or infrastructure to process the catch. The notion of co-operating in the development of a rationalized regional ‘hub’ project was laid out by the Prime Minister in his comments to the press in Maputo. ‘Mauritius has the advantage of having a highly developed free port that will facilitate the transformation and processing of fisheries products, with substantial local value added before the products are exported to European and American markets.’(4)

The fisheries sector is not the only area where Mauritian industries are seeking co-operation with Mozambique and other regional neighbours in the development of value-added processing ‘hubs’. Mozambique has abundant and productive land that Mauritius lacks and Mauritian enterprises are busy building productive relationships. One Mauritian company, Happy World, inaugurated a new poultry production facility and abattoir in the course of the Prime Minister’s trade mission. Another firm, the Food and Allied Industries Group, directs an agro-industrial complex in Mozambique focused on the manufacture of wheat flour products and noodles. New opportunities are being sought out constantly. Humbert, who accompanied the Prime Minister on the trade mission, was quoted on his departure for Mozambique as stating that ‘We are leaving with nothing specific in mind. We are going to study the possibilities and see what they have to offer to us. We will see what opportunities present themselves when we get there.’(5)

Working with the neighbours is not free of problems. Among the challenges in Mozambique cited by more than one of those interviewed for this case study are rampant corruption, a serious lack of adequate infrastructure and the need to work in the Portuguese language.

 

Dealing with distance: the transport sector    back to top

The efforts being made by Mauritius to position itself as an economic hub are complicated by serious logistics competition from Johannesburg and Durban, in South Africa. In order to keep the harbour of Port Louis in the market as an effective player, the government and private sector have worked hard to keep down costs. The Mauritius Marine Authority (MMA) has expanded and modernized the port facilities in recent years and periodically studies new ways of cutting costs. A recent study, referred to as the ‘dwell time for cargo’ study, focused on how to remove identified bottlenecks and move vessels in and out of the harbour in as short a period as possible. The MMA periodically revises port tariffs to reflect market conditions. A programme designed to increase the handling level to twenty-five ‘twenty-foot equivalent units’ (TEUs) per hour by 2005 is contributing to an improvement in labour productivity in the port.

 

The sugar sector: making the most of a changing environment    back to top

Historically, sugar has been very important for Mauritius, and there can be no doubt that the country could not have reached its current level of economic development were it not for the many years of preferential sales of sugar to the European Community under special arrangements. Although Mauritius has a more diversified domestic economy than many other developing countries that are also reliant on sugar exports, sugar remains especially important for Mauritius both because it is the largest single beneficiary of EC preferential purchases and because the island is ill-suited to the cultivation of alternative agricultural crops.

The interviews for this case study were conducted prior to the outcome of the recent EC sugar subsidies dispute, but those interviewed were nevertheless already expecting major change to the long-standing regime and considering how to make the best of the situation through the transition. Humbert gave an overview of how the sugar industry was adapting. The overall area of land under sugar cane cultivation was diminishing, in part motivated by a restructuring plan that would allow for more profitable land use, in some circumstances potentially contributing to the industry’s modernization and also cutting one-third of the workforce in the industry. At the same time, an important part of the strategy called for modernizing and preparing the industry for the future. Part of the modernization plan involves the development and marketing of speciality sugars — seventeen different types of these are now produced in Mauritius.

On a one-to-one basis, it is difficult for any sugar-producing country to compete with Brazil, where a combination of ethanol-related investment, cheap labour and suspected cross-subsidies from the government have made the country the most cost-competitive sugar producer. In recognition of this challenge, for Mauritius cutting the cost of production is a major focus of the Sugar Sector Strategic Plan for 2001-5. Among the targets for the plan are:

  • a reduction in the cost of production from 18 cents/lb to 14 cents/lb. In the period from 2006 to 2008, the cost of production is to be further reduced to 10-12 cents/lb;
     
  • a reduction in the number of sugar factories, from fourteen to seven or eight, to be realized in conjunction with a reduction in sugar losses at harvest time and in factory processing;
     
  • the generation of as much electricity as possible from renewable resources, in particular bagasse;(6)
     
  • taking steps to ensure that a substantial proportion of sugar-producing land that can be mechanized is prepared, and that an equivalent proportion of acreage that requires irrigation is provided with irrigation water;
     
  • the development of research and development so as to be able fully to tap the benefits of the expected quantum leaps in respect of biotechnology, biotics and cane biomass.(7)

Dr Rajpati, the executive director of the Mauritius Sugar Authority, outlined a multi-pronged strategy designed to make the best use of the country’s sugar-related resources in the face of changing international competitive positions. In terms of external influences on the sector, Rajpati cited both the expected changes in the EC’s preferential regime and the marketplace power of Brazil. As core elements of its strategy for addressing these challenges, Mauritius had developed speciality sugars for niche marketing, closed inefficient operations and implemented a major programme using bagasse. In Mauritius, power plants are able to burn bagasse in the process of generating electricity, and it has become a major renewable power source. In 1988, some 70 million kw of electricity were generated by burning bagasse; in 2004, bagasse was expected to enable production of some 350 million kw. Until recently ethanol had not been produced in Mauritius, but in 2004 a plant producing 18,000 litres of ethanol from 70,000 tonnes of molasses began operations.

The director of the Mauritius Sugar Syndicate, Mrinal Roy, indicated that in 2004 Mauritius would produce about 70,000 tonnes of speciality sugars which it is able to market very successfully, due to a combination of very specific attention to quality control and customer requirements and the strong image the country has acquired over the years as a supplier of quality product.

Specialization in the production of brown sugars for direct consumption has made the industry in Mauritius famous around the world. Renowned unrefined sugar varieties include ‘dry demerara’, ‘standard demerara’, ‘fine demerara’, ‘brown muscovado’, ‘light muscovado’, ‘golden castor’ and ‘fine golden demerara’ among others. In advertising campaigns for these sugars considerable weight is placed on the intrinsic value of a ‘natural’ versus ‘synthetic’ sweetener in a health-conscious diet. Roy points out that the country’s sugar industry is not neglecting more traditional sugar exports. The syndicate he oversees charters some twenty specialized vessels to carry sugar to market and it has invested heavily in port area machinery designed to load the sugar rapidly on to vessels and to minimize the costs associated with vessels’ time in harbour.

As the traditional sugar industry begins to be phased out on the island, Mauritian sugar experts have turned their attention to moving production offshore, where possibilities exist for more competitiveness. An outstanding example is the Marromeu project that began with an earlier Mauritian government-industry visit to Mozambique in 1996. Three Mauritian companies, Mon Loisir, Espitalier-Noël and FUEL, made the most significant overseas investment ever by the Mauritian private sector in a sugar plantation and refinery that had been made all but defunct by the years of civil war in Mozambique. After benefiting from Mauritian investments totalling Rs 3.6 billion (US$130 million), Marromeu is producing 100,000 tonnes of sugar a year — equivalent to one-sixth of annual Mauritian production in a good year. A considerable amount of the Marromeu output benefits from access to the EC market under the ‘Everything but Arms’ initiative in favour of LDCs.(8)

Sugar will remain a major component in the Mauritian economy. There will be a strong and continuing effort made to develop new speciality sugars that can be marketed as differentiated products, and the industry will continue to cut costs on traditional sugar exports. But Roy emphasizes that even if no sugar could be sold commercially on world markets, it would probably continue to be cultivated in the country if for no other reason than that it has become an important resource in energy production.

 

Textiles and clothing production    back to top

A combination of developments in the late 1970s and early 1980s gave rise to the establishment of a significant textile and clothing industry in Mauritius. Incentives under an export processing zone scheme combined with visa-related enticements to Hong Kong-based entrepreneurs fearful at the time of reintegration with China and the existence of quota allocation possibilities led to rapid development of the export-oriented sector.

As competitive pressures have grown and rising wages in Mauritius have made the sector less viable, a number of initiatives have been undertaken in a government-industry effort to turn the sector around. One programme, TEST (Textile Emergency Support Team), initiated an approach of voluntary benchmarking of the relative productivity of textiles firms with their local counterparts. The export processing zone system was revisited to assess whether it could not be made more attractive to textile firms. Labour-related legislation was changed to make it more flexible in respect of employees working in export processing zones. One observer commented that the government did its part and more, but industry has not focused sufficiently on the need to change.

Four main products account for the bulk of the sectors’ output: knitwear, shirts, trousers and jeans. Local experts say that the knitted sector remains competitive today but that the other, more labour-intensive, sectors are experiencing severe difficulties. Despite the closing at regular intervals of garment factories in anticipation of the end of the global market allocation system that was largely responsible for the creation of this industry in Mauritius, at least one observer commented that this kind of factory job is not what most Mauritians want by way of employment. As relative income and education levels have risen, interest in production-line work has waned. Overall employment in the country’s EPZs has fallen from 91,000 to 77,000 in recent years. Most people anticipate a continuing decline in the prospects for this sector.

 

Financial services    back to top

Recognizing that rising income levels and a more well-educated populace would create a demand for more employment in white-collar services industries, the government and the private sector have collaborated very effectively to create an environment in Mauritius which has allowed the financial services sector to prosper and become a major and growing part of the island’s economy. The concept and supporting legislation for offshore banking were introduced in 1991, supplemented by lower tax rates for particular types of bank. In mid-2004 there were twenty-two authorized banks operating in the country, ten under a category-1 licence and twelve under a category-2 licence. From the start, the local regulatory authorities decided that maintaining a high level of credibility in the sector was important, and only foreign banks with a recognized international reputation have been approved to do business in the country. Among those banks currently holding a category-1 licence are Barclays Bank and HSBC.

 

Alternative agricultural activities    back to top

With sugar in a situation of long-term decline, business and government in Mauritius are discussing and experimenting with alternative agricultural activities. Although agriculture is unlikely to form a major part of the Mauritian economy of the future, a number of initiatives are currently being explored in sectors that seem to offer some promise.

The production of venison is particularly interesting for a number of reasons. Experiments have shown that deer react well to feedlot environments, and the local Hindu population has no difficulties with the farming of deer for food purposes. One problem the Mauritians have encountered in their efforts to commercialize the sector fully is the apparent lack of a relevant EC food safety standard applicable to venison exports from Mauritius.

In addition, and apart from the seafood hub activities recently promoted by the Prime Minister, Mauritian investors are working hard to identify land in neighbouring Madagascar, Mozambique and Tanzania that could be purchased or leased for long-term agro-processing operations where products such as potatoes, tomatoes and maize could be grown in these neighbouring countries and then brought to Mauritius for value-added processing and export to developed country markets.

 
 

IV. Lessons for others    back to top

Many of those interviewed by the author commented that there is in Mauritius today a large level of tolerance prevailing among the populace, notwithstanding the many different religious and ethnic groups present on the island. The first comment from Rajpati, the executive director of the Mauritius Sugar Authority, was that in Mauritius there is a well-established and functioning collaboration between the public and private sectors and that the Mauritian people are accustomed to ‘pulling together’ for the common good.

The stable political environment and absence of ethnic tensions in Mauritius were credited by many of those interviewed with having contributed importantly to the country’s relative success. This, combined with a long-standing tradition of business and government working together to solve problems and take advantage of opportunities, has been a cornerstone of the country’s development.

On the international trade front that is so vital to the country’s well-being, Mauritians are well aware that they have benefited from special preferences and circumstances over the past thirty years, but they are also very conscious that the landscape is changing and that these special features of their international trade cannot be counted on for the future. Their reaction has been to preserve what they can (by, for example, acting to cut costs in sugar production while developing new niche markets for speciality sugars) and, more importantly, experiment with new ideas for the country’s future economic development.

 
 

NOTES:
1.- WTO Secretariat, Trade Policy Review — Mauritius, Document WT/TPR/S/90, 5 Oct. 2001, Geneva: World Trade Organization. back to text
2.- Ibid., p. 71. back to text
3.- Ibid., p. 78. back to text
4.- L’Express, 28 May 2004, p. 3 (author’s translation). back to text
5.- L’Express, 26 May 2004, p. 15 (author’s translation). back to text
6.- Bagasse is the leftover organic material after the cane has been processed for its sugar content. back to text
7.- Ministry of Agriculture, Food Technology and Natural Resources, Sugar Sector Strategic Plan 2001-2005, Port Louis, June 2001, pp. 1-2. back to text
8.- L’Express, 26 May 2004, p. 15. back to text
 

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* Executive Director, Institute for International Business, Economics and Law, University of Adelaide.