11 mars 2004

National Day Celebrations

Port Louis, Mauritius

Before I leave for any visit, my staff always prepare for me a very full file with briefing notes on every possible topic concerning the country that I am visiting. On this occasion, there was, however, one very important aspect about Mauritius that they forgot to include in my file. Amongst all the wonderful facts and figures that they have given me, they forgot to mention how breathtakingly beautiful your country is. It is, indeed, a privilege and honour for me to join you during your National Day celebrations.

In my file, my staff did, however, refer to a 1960 prediction about the future of Mauritius by a Nobel Prize winning economist. In his report to the then Government of Mauritius, the Nobel Laureate James Meade predicted that the island's development prospects would be bleak. Mauritius, as he saw it, was too dependent on one commodity — sugar, too vulnerable to terms of trade shocks, too overpopulated and had too much potential for ethnic tensions. James Meade has long since been proven wrong. He was wrong not because he miscalculated Mauritius's adverse inheritance following independence but because, he overlooked, in his otherwise thorough analysis, the determination of the Mauritian people to succeed.

Meade's prediction reminds me of a “professional secret” closely guarded by economists. As an economist, myself, I have sworn never to reveal it. However, as I am among friends, I feel that I can safely share this secret with you — “An economist is a highly trained professional paid to guess wrong about the economy”.

Mark Twain, despite having the significant handicap of not being an economist, described Mauritius closer to the truth. He said, “You gather the idea that Mauritius was made first, and then heaven, and that heaven was copied after Mauritius.” Being here, in a country where the sun and the people are as generous as the sea is turquoise, it is indeed easy for me to understand and share his sentiments.

Mauritius is, however, more than just a picturesque country. It is a development success story which is nothing less than a miracle. In the short period of about 35 years, the economy of Mauritius has been transformed. In 1968, Mauritius was a low-income agriculturally based economy with a single crop, sugar. Today, Mauritius is a middle-income country, with a diversified economy, boasting of growing service and manufacturing sectors. While agriculture continues to be important, it no longer dominates the Mauritian economy. The share of agriculture in real GDP has declined from around 12% in 1990 to some 6% today. The services sector, heavily composed of tourism and financial services, is now by far the most important pillar in the economy — accounting for around 74% of real GDP.

For over two decades, Mauritius has grown by nearly 6% per year. At independence in 1968, Mauritius had a per capita income of about US $260. Today, it is about US$3,800. Improvements in human development indicators have been equally impressive. Life expectancy at birth has increased from 61 years in 1965 to 71 years in 2001. The infant mortality rate has gone down dramatically from 64 per 1,000 in 1970 to 19 per 1,000 in 2001. Virtually all households now have access to sanitation and water, and more children are being enrolled at school than ever before. The fact that economists today are able to quibble over the causes of the Mauritian miracle is proof of the astounding progress that has been achieved.

These achievements are due, in no small measure, to your determination, your creativity and your confidence to take advantage of all the opportunities offered by the global economy. However, this was not the end of the story. 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.

The answer will come as no surprise to you. The key ingredients to your success have been political and macroeconomic stability, the rule of law, human capital, a coherent economic development strategy, judicious use of preferential access to key markets, a staunch belief in free enterprise and most importantly the ability to adjust and turn adverse conditions into economic assets. Mauritius successfully turned the disadvantage of rapid population growth into the blessing of a dynamic and plentiful workforce. You used your ethnic diversity, which could so easily have led instead to social fragmentation, to gain advantageous business links throughout the world. And you invested heavily in educating your people and in building the institutions needed to support development.

As a small island developing country located 30 per cent further away from world markets than the average developing country, it was not obvious that Mauritius should pursue a strategy of export-led growth. Yet, Mauritius was quick to understand that with limited natural resources and abundant human capital, it had no choice but to rely on international trade. Certainly, Mauritius benefited from preferential access to key markets for its most important exports, sugar and textiles. But instead of resting on its laurels, Mauritius took advantage of these gains to diversify the economy and expanded into other areas of manufacturing, tourism and financial services.

This brings me to the crux of my message which can be summed up in two key points. The first point is this: no economy can sustain economic growth by maintaining the status quo. I fully realize that there is great concern in Mauritius, just as there is in other preference-receiving countries, over the erosion of preferential margins. I can appreciate the anxiety but I also firmly believe that the way to face the future is not to deny that preferential margins will inevitably decline as global liberalization proceeds apace and competition intensifies. The erosion of preferences is without doubt a very important issue in the negotiations and some countries have shown some sympathy to your concerns. But it is not yet clear how far they will be ready to take action and there is stiff opposition from other countries.

How preference erosion might be handled depends on the negotiations but I will not mislead you into believing that preferences can be preserved indefinitely. The time of preferential-margins is coming to an end. The global trading environment has changed and it will continue to change at even greater pace in the future. It has changed not just because of WTO negotiations but also because of the emergence of new low cost producers, and the proliferation of bilateral and regional trading agreements. All countries, small or big, will have to adjust to this new reality and find new sources of competitiveness.

Mauritius is fortunate in that economic adjustment is not new to this island. The Mauritius of the past diversified from sugar into textiles and then into tourism and financial services. The Mauritius of the future is already taking shape with your exciting new vision to transform Mauritius into a diversified, hi-tech and high income services economy. As Mauritius's competitiveness is tested by global competition, there is no viable alternative but to widen economic opportunities and stimulate growth through openness, liberalization and an improved investment climate. Preferential access has often been biased towards primary commodities, making it difficult to develop a processing industry. It can act as a drag on the economy by creating a disincentive to develop other, more promising economic activities. It is time to invest in a new generation of industries that corresponds better to Mauritius's evolving comparative advantage.

The challenge for Mauritius is to remain globally competitive. Your enterprises will need to be innovative, forward-looking and prepared to adjust constantly to rapid developments. If these words sound familiar to you, it is because they come directly from the Budget Speech of Mauritius for 2003/2004. The Mauritian economic miracle did not happen by chance. It happened because you had a well-defined development strategy based on export-led policies. To sustain the Mauritian miracle, new economic drivers will have to be found. The road ahead will not be easy but I believe that Mauritius is up to the challenge of successfully adjusting to an entirely different set of circumstances. After all, your history is one of successful adaptation. I know you have already begun and I commend the Government of Mauritius for embarking early on an ambitious economic programme, the Economic Agenda for the New Millennium.

My second point is this: no country can achieve prosperity without international trade and the multilateral rules provided by the WTO to keep markets open and predictable. This is not to say that trade is the answer to all of Mauritius's concerns but that meaningful solutions are inconceivable without it. This is true for small countries just as it is for big countries. Just a couple of weeks ago, I was in Washington D.C. My message to the US was that as WTO's importance to the world economy increases, so too does the challenge of making it work. Big countries have a responsibility to strengthen the multilateral trading system, but so do small countries, like Mauritius.

The high ratio of merchandise trade to GDP — around 90% on average — indicates the importance of trade to Mauritius. Without a multilateral regime such as the WTO system, this trade will be continually subjected to unilateral decisions in the markets of your trading partners. With its consensus decision making and binding dispute settlement mechanism — the WTO gives smaller countries not just the guarantee of market access but a bigger voice and clout in the trading system. It is for this reason that 24 countries, many of which are relatively small economies, are currently negotiating to join the WTO.

As a small island developing country with a heavy dependence on international trade, it is obvious that Mauritius has great interest in the Doha Round. Mauritius has a stake in all the core areas — agriculture, services and industrial tariffs.

In the agriculture and the industrial tariff negotiations, Mauritius has very commendably remained constructively engaged, despite its concerns on the erosion of preferences. In agriculture, clearly, sugar, which accounts for some 80% of agricultural exports remains a very important sector for Mauritius. However, I would urge you not to lose sight of the opportunities that exist in other areas of the Round. Thanks to the efforts of your government, Mauritius has already begun to prepare for the future by successfully diversifying from sugar production. Three decades ago, sugar accounted for over 90% of the total value of merchandise exports. Today, it accounts for some 14%.

These figures do not deny the importance of agriculture, and sugar in particular, to Mauritius but they do show a long-term shift in the structure of the Mauritian economy. You know, as well as I do, that preferences are under threat from all angles. From MFN liberalization, by EC enlargement and internal domestic reforms, by unilateral trade measures such as Everything-but-Arms, as well as by bilateral and plurilateral trade agreements.

In manufacturing, I hardly need to tell you that Mauritius, a substantial beneficiary from the export of textiles and clothing, is faced with the same challenges now confronting many other exporters in the sector. The imminent termination of the Agreement on Textiles and Clothing (ATC) will sharpen competition as new low cost competitors gain ground. For the same reasons as for sugar, the textiles and clothing sector will increasingly have to face the challenge of preference erosion. However, my message to you is not one of doom and gloom. It is a message of the necessity for continuing reform and adjustment to cope with future challenges.

The outcome on the proposals from Mauritius on the erosion of preferences will depend on overall course of the negotiations. My message to you, however, is not to delay adjustment. While preferences exist, you should use the gains from these preferences to help your industries to diversify and adjust. Mauritius cannot afford to lock itself into an unsustainable economic structure of preference dependency. Leaving aside the issue of preferences, rising wage costs in Mauritius and the emergence of other low cost competitors all point to the need for Mauritius to find new economic niches and to move up the production chain. Mauritius has shown the world that despite being a small island developing country it can compete, and compete very effectively. The World Economic Forum (WEF) has ranked Mauritius among the top 5 countries in Africa, ahead of larger neighbours, for the quality of its business environment. The WEF has also ranked Mauritius as the 35th most competitive economy in its growth competitiveness index, ahead of Greece, Italy, Mexico, Brazil, India and a host of other countries.

I would strongly encourage you not to devote all your efforts to fighting a rearguard action in the Doha Round when significant gains can be made by advancing in other areas. Services is clearly an important “offensive” sector for Mauritius in the negotiations. Today, services account for nearly three quarters of real GDP and more than one-third of total foreign exchange earnings. Mauritius is a net exporter of services. Earnings from services exports have represented more than 50% of the total value of merchandise exports in recent years and it is expected to continue growing. Mauritius has also attracted more than 9,000 offshore entities and investment stock in the banking sector alone has reached over US$ 1 billion. As one of the most active services traders in Africa, it is in the interest of Mauritius to see progress being made in the services negotiations. It is important to bear in mind the “single undertaking” logic of the Doha Round. Progress will only be made in services if there is also progress made in the agriculture and industrial tariff negotiations.

So far, Africa has remained virtually absent in the services negotiations. There are 41 offers on the table, including 28 offers from developing and transition economies. But we do not have a single offer from an African country. Mauritius with its strength in the services sector can lead the way by submitting its initial offer. The services negotiations can help Mauritius to consolidate its programme of domestic reform and to increase its participation in world services trade by gaining access to other markets. I understand that it is sometimes difficult for our smaller members, due to capacity constraints, to participate as fully as they would wish in the negotiations. The WTO Secretariat has been doing its best to provide GATS-specific technical assistance to African countries. But if there is more that we can do in this area, I would urge you to let me know.

At Cancun, we saw the risks that we all face when negotiations break down. But the setback at Cancun, is at times exaggerated. I have said this before. No country today seriously believes that it can afford to turn its back on freer trade, stronger rules and a more effective WTO. No country wants the Doha Round to fail. Our great debate is about the speed and the scope of the multilateral trading system not about its relevance. After a period of introspection, we are now seeing concerted efforts by countries to negotiate amongst themselves and to seek balanced and equitable outcomes. This is a good sign.

It would be tragic if we were now to let the Doha Round drift. To think that the issues before us are too difficult to tackle multilaterally or to think that bilateral or regional agreements could serve as an alternative, would be a serious mistake. Only the multilateral trading system can provide the broad trade-offs that make trade liberalisation possible. Only multilateral negotiations can ensure that poor and vulnerable countries are not left out in the cold.

Your success is often viewed as an isolated case in Africa, a bright anomaly of development in a continent that has otherwise not yet achieved its promise. I hope in the future that we will able to speak of Mauritius not as an unusual case in the African continent but as just one among a countless number of other African miracles.