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					“Mauritius: A Success Story”
               Jeffrey Frankel
                Harvard University

       NBER Project on African Successes
              Accra, Ghana, July 18, 2010

Thanks to Oyebola Olabisi, Jesse Schreger & Diva Singh
 There is no question that Mauritius
has been a great economic success
•   It ranks at the top in Africa, judged by:
    – GDP per capita
      •   Growth rate averaged 5.4% over 1970-2010
          – >> 1% Africa
      •   Level ≈ $7,000 in 2010        ( > $11,000 in PPP terms)

    – Or Human Development Index
      •   e.g., life expectancy = 73 years (tied for #1).

    – Or measures of governance.
      •   Especially WDI, IAG, Heritage’s Economic Freedom…
                                                                    2
    Economic Success
    Source: Ali Mansoor, Ministry of Finance & Ec. Empowerment, Mauritius




                                                                            * Assumes GDP Growth and
                                                                                                   3
8/31/2010                          3                                        Inflation of 5% per annum
     Three island countries have the best
                 institutions,
 as measured by Index of African Governance
                                                 Mauritius,
                                                                              MU
                                           Seychelles
70



                                                                    SC
                            &     Cape Verde       by S.Africa
                            are rivaled only    GA
                                                   & Botswana            ZA
60




                                                                  NA      BW
50




                                 GQ        CG          KE
                                      SZ                          GH     CV
                                            CM
                                                     TZ
                SD     CI               TG        UG ZM      LS
                                                           ST SN
                                                        MW Ghana        Cape
40




                                         NG
                                       ET GM
                                      ZW                MG
                                                 RW CC BJ
                                        MR DJ BI LR MZ                  Verde
                            ER              CF
                            AO GM
                                                        ML
                                                                Sao Tome
30




                                                         BF     & Principle
                                                 SL        NE
         SO    CD           TD
                                                  GW
20




     0        20               40              60                  80
               Average of rule of law and human rights

                                                                                4
              Top-performing African Countries
IAG                     Rule    Human   GDP/cap GDP
rank                   of law  Develop-   $ th. growth
2007                   (WGI) ment Index  (PPP)  1977-
                        2008  (UN) 2007   2008   2008
  1.   Mauritius         1      2       11.4    4.3%
  2.   Seychelles        5      1       19.8    3.8%
  3.   Cape Verde        3      5        3.0      NA

  4.   Botswana          2      6       12.5    7.9%
  5.   Ghana             7      18       1.4    3.5%
  6.   Namibia           4      7        5.9      NA

  7.   South Africa      6      8        9.3    2.4%
  8.   São Tomé & P.    18      9        1.6      NA

…24.   Median: Niger    27      46       0.6    2.1%
                                                   5
“Where
  is it?”




            6
      Prospects were poor, as assessed
           by two Nobel Laureates
• James Meade (Report to Government of Mauritius, 1961):
  “Heavy population pressure must inevitably reduce
  real income per head…That surely is bad enough in
  a community that is full of political conflict…
  the outlook for peaceful development is poor.”
• V.S. Naipaul (The Overcrowded Barracoon, 1972):
  “The disaster has occurred… now given a thing
  called independence and set adrift, an abandoned
  imperial barracoon, incapable of economic
  or cultural autonomy…”
                                                      7
     Initial conditions were indeed
 inauspicious at independence (1968)

• Geography (small, remote, …)
• Volatile monocrop (sugar)
• Ethnic tensions (including riots before independence)
• Population density / growth         ( => outmigration)

• Regression to mean         (downward)



                                                           8
                  Geography
• Small size, remoteness & tropical location are
  usually handicaps in economic performance.
• But Seychelles (& Cape Verde) are
  with Mauritius at the top of the rankings.
• Of 4 top performers in Africa, only
  Botswana is not a small island country.
• Of small island countries,
  only Comoros lacks success.
• Coincidence?

                                                   9
     Sugar: Natural Resource Curse?

• Engerman & Sokoloff            version of NRC:
                             (1997, 2000, 02)


   – Lands endowed with extractive industries & plantation crops
     (oil, mining, sugar, cotton…) developed bad institutions:
     slavery, inequality, hierarchy, rents, & state control,
      • whereas those suited to fishing & small farms developed institutions
        based on individualism, egalitarianism, incentives, & capitalism.

• In Mauritius, the abolition of slavery (1835) was
  followed by immigration of indentured Indian workers.
• Dutch Disease: sugar booms (1830s, 1919-20, & 1974)
• Some other independent African countries have confiscated
  or otherwise taxed away their agricultural export sectors.

                                                                               10
              Ethnic composition
• While Botswana is ethnically homogeneous,
• Mauritius is ethnically diverse,
  – resembles Trinidad or Fiji,
  – in the (high) level of the fragmentation index
  – and in the historical reason for it.

• Mauritius & Botswana are the only two African
  countries that have been continuously
  democratic.
  – Again, can it be a coincidence?

                                                     11
                 Governance indicators
• Mauritius ranks first by participation & human rights
  (followed by São Tomé & Principe and, now at 3rd place, Liberia).
• It ranks 3rd in rule of law, after Cape Verde & Botswana.
• Mauritius ranks 2nd only to Botswana in freedom from corruption.
   – Transparency International & the Internet Center for Corruption Research
   – Most of these measures are subjective, subject to “halo effect.”

• The Index of African Governance (Rotberg & Gisslequist)
   – tries to avoid the subjectivity,
   – but at the possible cost of including
     outcomes along with institutions.

• Correlation between the rule of law measures in WGI & IAG = .91.

                                                                        12
 Some cross-country econometrics

• Some results for islands
• Some results for African countries
• Overall conclusion:
  Some fundamental determinants of growth that
  can explain lower incomes of Africa don’t work
  well to explain relative performance within Africa
  – Small size, remoteness, tropics
  – A case in point: the high ethnic diversity in Mauritius,
    which elsewhere would make for dysfunctional politics


                                                          13
                    Table 3: Islands Cross-section
              Explaining log of 2006 GDP per capita                    (PPP)

Tropics dummy             -1.72***      (0.33)   -0.60*      (0.35)       -0.34        (0.40)

Log pop                   -0.091*      (0.049)    -0.01      (0.04)       0.03         (0.05)

Trade/GDP                .0055*** (.0013)        .0031**     (.0012)

Remoteness                -0.14        (0.48)     -0.34      (0.35)      -0.77**       (0.34)

Africa                    -0.54        (0.46)

WGI                                              0.73***     (0.15)       0.83***      (0.18)

Constant                  12.31***     (3.82)    11.91*** (2.80)         15.02*** (2.77)
R2                             0.59                   0.69                     0.62
Root MSE                        0.83                  0.73                       .78

Observations                    33                     32                      37

* Statistically significant at .10 level **.05 ***.01 (Standard errors in parentheses.)
                                                                                  14
Tables 3 & 4 report cross-section of island countries.

 Dependent variable: per capita income, 2006 (PPP basis).

                       Some results
• A big effect for location in the tropics (6-fold).
• The Africa dummy is negative, but not statistically
  significant when included along with the tropic dummy.
• The rule of law variable from World Governance
  Indicators has a highly significant positive effect.
   – Its presence takes two-thirds off of the tropic dummy,
      • confirming the view that tropical lands tend
        to develop less satisfactory institutions.


                                                              15
   Tables 3 & 4 cross-section of island countries.
                      More results

• Surprisingly, coefficient on size
  (population) is negative;
   – perhaps islands can compensate for small markets via trade.

• Trade/GDP significant (+).
• Remoteness is significant (-)
   – but subsidiary to trade.

• Fragmentation (level & square) is significant,
   – supports the theory of Collier & Bates
   – despite critiques of the measure.
                                                              16
                    Table 4 : Islands Cross-section
                                 a+b




                 Explaining log of 2006 GDP per capita                        (PPP)

                          Initial year: 1968                       Initial year: 1976
Initial
                                                                 0.977***
income/cap            0.956*** (0.103) 0.967*** (0.107)            (0.089)             1.026*** (0.113)
Log Population       -0.004      (0.048)   0.008     (0.041)   0.038         (0.050)   0.040      (0.052)

Remoteness    -0.69**            (0.32)                        -0.80**       (0.28)

Fragmentation                              -9.07**    (3.22)                           -6.06*     (2.99)

Fragmentn. sq.                             11.53**    (5.11)                            8.41*     (4.79)

Constant              7.17** (2.87)        2.55** (0.86)       7.05* (2.46)             0.72    (1.30)

R2                        0.85                 0.88                0.89                     0.88
Root MSE                  .645                 .600                .527                     .566
Observations                20                  20                     24                    24

* Statistically significant at .10 level ** .05 *** .01 (Standard errors in parentheses.)
                                                                                   17
                Table 4c: Islands Initial date: 1996

                              Explaining log of 2006 GDP per capita (PPP)

  Initial log
  income/cap                 1.02*** (0.02)       1.02*** (0.02)           0.94*** (0.05)
  Log population    (1996)
                             0.00        (0.01)     0.01 (0.01)            -0.00        (0.01)

   Trade/GDP (1996-2000)                          .002** (.001)            .001*        (.001)


             WGI (1996)                                                     0.16*       (0.08)

        Remoteness -0.24** (0.11)
             Constant        2.09** (1.03)         -0.35 (0.27)              0.49 (0.48)
                    R2           0.98                 0.98                      0.99
              Root MSE            .197                 .199                      .197
      Observations                  40                 36                        22
* Statistically significant at .10 level ** .05 *** .01                                 18
                                                              (Standard errors in parentheses.)
                  Table 5 : Africa Cross-section
                             a+b




                                     Log of 2006 GDP per capita, PPP
Log population -0.337** (0.155) -0.285* (0.152) -0.293* (0.154) -0.402** (0.150)
                                                                   0.221**
Log area        0.196** (0.087) 0.214** (0.094)       (0.098)                      0.225** (0.092)
Trade/GDP       .0108*** (.0029) .0097*** (.0031) .0091** (.0043)
Landlocked    dummy                               -0.354 (0.228)                   -0.519** (0.233)
Island dummy                                       0.029 (0.516)                   -0.395 (0.446)
Coastline /area                                   0.006 (0.528)                    0.690** (0.341)
Years of
democracy             0.026*       (0.013)   -0.008     (0.017)
(Freedom House)
Rule of Law                                  0.035** (0.013) 0.03*** (0.010) 0.034*** (0.010)
Constant              9.17*** (1.97)          6.71*** (2.11)      7.00*** (2.21)    9.33*** (2.18)
R2                        0.44                    0.54                0.56              0.50
Root MSE                  0.858                   0.785               0.790             0.806
Observations               43                      43                  43                46
                                                                                              19
 * Statistically significant at .10 level ** .05 *** .01            (Standard errors in parentheses.)
Results from Africa cross-section
• As before, trade is highly significant,
• as is Rule of Law,
  – which can drives out # Years of Democracy.
• In addition,
  – population density is significant (-) .
  – Remoteness is not still significant.
  – Landlockedness & Length of coastline both significant.
     • But there is no separate island effect.
     • Trade dominates.

                                                      20
   Does geography explain growth?
• Tropicalness, remoteness, small size & landlockedness
  can explain why Africa overall
  has done less well than other regions;
• but these variables do not help much
  to explain relative success within Africa
  (except that access to the sea makes a big difference):
   – Tropicalness doesn’t show up because
     almost all sub-Saharan countries share it.
   – Remoteness doesn’t show up,
     if measured by straight-line distances,
      • because getting from the interior to the nearest seaport
        matters more in Africa than elsewhere.
   – Small African countries do not seem on average to suffer
     the usual disadvantage relative to larger countries.          21
                        Questions
• Mauritius has followed some good policies
   – which helped start manufacturing in 1970s,
      • especially textiles & apparel,
   – and helped cope with later trade shocks.

• What were the policies?                  Policies

• What were the institutions that led to the policies?

• How did these institutions come about?


                                                         22
  Policies

             What were the policies?

1. Export Processing Zone (1970)
2. Diplomacy regarding EU trade policy (1975)
3. Education
4. Avoiding currency overvaluation   (esp. 1979)

5. Adjustment to trade shocks of 2004-2008


                                                   23
 Policies

            Interpretations of Export Success
• Openness?                                -- Sachs view.
  But rejected by Subramanian: import tariffs were high initially.

• EPZ & Heterodox trade policy -- Rodrik view.
• Foreign ideas, via Chinese FDI -- Romer view.
  But:
  (i) textile & apparels perhaps obvious
  (ii) success depended on preferential treatment,
                                  from US & EU, under MFA.
  (iii) Mauritius was pro-active, with help of Sino-Mauritians


                                                              24
Policies
           Export Processing Zone

  • Specific measures:

      – (i) gave EPZ firms tax advantages,
      – (ii) eliminated tariffs on the imported
        inputs used by manufacturers, and
      – (iii) set lower minimum wage
        & labor standards for EPZ workers.

                                                  25
Policies
            Export Processing Zone
  • Rodrik (1997):
    Mauritius’ success came from a “heterodox”
    trade policy reminiscent of the Asian tigers, a
    strategy that created high returns to the export
    sector, while preventing resources from being
    diverted into the protected import-competing
    sector.

  • Counterarguments (Subramanian):
      – (i) EPZs failed elsewhere in Africa,
      – (ii) EPZ subsidy was insufficient
        to offset anti-trade bias of tariffs.          26
Policies

   Diplomacy regarding trade quotas:
• When the UK joined the EEC, sugar preferences were
  replaced by the Lomé Convention’s Sugar Protocol.

• ACP sugar producers negotiated access terms
   – in 1974, a time when world prices were high.

• Most chose small EEC quotas, to get the world price.

• Mauritius negotiated a big quota
  at the domestic EEC price.

                                                         27
Policies
               Trade quotas, continued:
• The EEC price has been well above
  the world sugar price since then.
• So the Mauritius strategy
  turns out to have been brilliant.
• Sugar exports to EU produced large rents for years
   – = 5.4% of GDP;
   – part went to investment, and
   – the government used part for social spending.

• E.g., education spending.

                                                       28
• Oil shocks of 1970s
  – Like others, Mauritius ran up debts.

• 5 years of bad trade shocks in 2004-08
  – Loss of sugar preferences, 2004
  – Loss of MFA preferences in clothing market
    • => 30 % fall in output and 25 % drop in employment
  – Rise in world prices of oil & food 2003-08
  – Global recession 2008-09

                                                       29
Policies
              Adjustment to trade shocks:

 • Avoiding currency overvaluation
    – Including large devaluations in 1979 & 1981.

 • Adjustment to trade shocks of 2004-2008
    – by new government in 2005:
           • Tax reform (flat 15%)
           • Business Facilitation Act
    – Results:
           • Budget deficit down by 2007. Primary deficit ≈ 0.
           • Mauritius ranks even better on climate for business.
                                                                30
Policies
           Adaptation to the export shocks
• Expansion into services
   – Tourism
   – Financial center
   – ICT
• Even within the textiles & apparel sector, although
  employment has shrunken greatly, a reduced subset
  of the industry is reborn through innovation.
   – A successful integrated complex: CMT
• “Pillars” of the new economy:
      • seafood hub, an “integrated resorts” scheme…
• Platform for investment from Asia into Africa        31
    Compagnie Mauricienne de Textiles

Rather than closing its clothing factory, CMT
•    brought in an experienced new manager from India,
•    opened a textile factory next door,
•    adopted current Asian technology,
•    and is now fully integrated. [1]
     – The textile factory turns raw cotton into yarn & fabric;
     – the apparel factory turns the fabric into finished garments.


     – [1]   Original motivation for CMT’s integrated production: AGOA

                                                                         32
Compagnie Mauricienne de Textiles




                                    33
   The good policies can in turn be traced to
     good institutions. They include:

• property rights
  – particularly non-expropriation of sugar plantations;

• a parliamentary structure
  with comprehensive participation
  – in the form of representation for rural districts
  – & ethnic minorities (“best loser” system),
  – (ever-changing) coalition governments,
  – & power-sharing.
                                                        34
         Three very specific
       examples of institutions

• The Supreme Court of Mauritius
  is the UK Privy Council

• No army
  – => no coups
  – => has freed up government finances

• Effective cyclone warning system
                                          35
                From where did
          the good institutions come?
Specific decisions at the time of independence
• by the de-colonizers and the 1st prime minister
   – Party of Franco-Mauritians feared “Hindu domination”
     if country became independent (as did Creoles and other
     minority groups); but they eventually became reconciled,
   – essentially trading away political power for assurance
     that they could keep their sugar plantations.
   – A UK Commission deliberately set up Parliamentary system
     to avoid exclusion of any groups.

• Is it just personalities, then? Or luck?
                                                            36
  Possible deep historical determinants
         of good institution
• The de-colonizers were British (1810-1968)
  but it was the French who had settled (1721-1810)
   – so the UK could serve as honest broker at independence.
• Everyone came from somewhere else
   – As in Seychelles & Cape Verde
   – Or compare Mauritius to Fiji
   – Or Singapore to Sri Lanka
• Why does that matter?
   – Absence of indigenous inhabitants limits resentment,
     entitlement
   – Self-selection of immigrants for initiative
• Also, Mauritius reaped benefits of ethnic links
   – to China (clothing) & India (financial center)            37
        What do the good-governance island
          economies have in common?
• Successful, in Africa • Unsuccessful, in Africa
    –   Mauritius                     – Comoros
    –   Seychelles
    –   Cape Verde                • Another less successful
    –   São Tomé & Príncipe         ocean economy
                                     originally based on sugar,
• Another famous success             & majority now ethnic Indian
    – Singapore                       – Fiji
Clue: In each of the successes, the island was uninhabited.
     100% of the population came from somewhere else.

                                                               38
39
              Appendices
    Mauritius: African success story

• Economic development history

• CMT




                                       40
Mauritius: “African success story?”
• One might ask:
  Q: “Is it African?”

• A:
  – Geographically, yes.
  – Culturally ??



 • Regardless, the important questions are:
       – How did Mauritius achieve its success?
       – Are there lessons for other countries?
                                                  41
   Stages of Mauritius’ development

• First: Globalization at its worst?
  – Immediately, Europeans kill off the dodo bird !
  – Sugar economy initially based on slavery.
  – Cholera from passing ships.

• Then: Globalization at its best.
  – Station on the shipping route to India
  – Immigration in 19th century
  – Achieves rapid development through exports

                                                      42
        The Natural Resource Curse
            and Dutch Disease
• Today, Mauritius is not predominantly a commodity economy;
• but it was, before independence…

• When Mauritius was a sugar economy,
   – it suffered from periodic Dutch Disease cycles --
   – due, not just to swings in world price or domestic output,
   – but rather to big changes in rich-country barriers:
       • 1830s, 1919-20, & 1973-74

• One branch of the Natural Resource Curse emphasizes
  that certain commodities endowments originally give rise
  to bad institutions, which later impede industrialization.

                                                                  43
    19th   century
• Island passed to UK (1810-15) =>
  Abolition of slavery (1835-39)
  – Labor shortage on the
    new sugar plantations




                    Le Morne
                               44
               19th century

• Indentured workers came from India
 – “The Great Experiment”

 – Sea of Poppies, by Amitav Ghosh




                                     45
                         19th century

• Indentured workers
    – Aaprivasi Ghat,
      the Ellis Island
      of Mauritius
       – From 1849 to 1923,
         1/2 million indentured
         laborers from India
         passed through the
•
         Immigration Depot.
     – Today, 68 % of
       the population
       has Indian forbears.
                                        46
   Which colonial heritage?
• Dutch?
  – Discovered the island, & named it
• French?
  – Left the landowning elite, &
  – gave the island its dominant language
• British?
  – Cars drive on the left
  – The Supreme Court is Britain’s Privy Council.

• So what languages are on the money?
  – English, Hindi, & Tamil.

                                                    47
 Traditional 3 stages of development:


– Commodities (sugar)


– manufactures (textiles & apparel)


– services (tourism,
  financial services,
  ICT…)

                                      48
   How was economic development
          accomplished?
• Initial conditions?
  But conditions were poor at independence (1968).

• Sugar wealth?          But natural resources are often a curse.

• Openness?              -- Sachs view.
  But rejected by Subramanian: trade policy was not liberal.

• Export Processing Zone?
                  -- Rodrik view.         But EPZs failed elsewhere.

• Foreign ideas, via Chinese FDI? -- Romer view.
     But textile & apparel success depended
     on preferential treatment from US & EU.
• Good institutions -- Subramanian view.           Why here?    49
                Looking forward
• With the loss of preferences for clothing exports,
  and competition from China….
• the way forward is in “the 3rd sector”
• They describe it as banking, ICT, & tourism,
   – looking to Singapore as a model. (Join the club!)
• I would describe the model for Mauritius as a
  platform for firms from India & China wishing to
  do business in Africa.
   – Analogous to
      • Hong Kong into China (at least until 1997), and
      • Dubai into the Middle East (at least until 2009)
• Cosmopolitan, open, adaptable, stable.
                                                           50
 Compagnie Mauricienne de Textiles
         is fully integrated,
from raw cotton to finished garments




                                       51
        Compagnie Mauricienne de Textiles.
has adopted current technology from Asia




                                             52
CMT.   The textile plant is automated.




                                     53
54
CMT: Clothing plants still need low-skilled
                 labor.




                                          55
         Compagnie Mauricienne de Textiles.

Clothing plants still need low-skilled labor.




                                              56
        Discussions with leaders,   Jan. 2009


• Prime Minister
• Central Bank Governor
• Finance Minister

• Financial Secretary
• Former Leader
  of the Opposition
• Other business and
  political leaders

                                                57
                               Some sources
• Ancharaz, Vinaye dey, “The effect of trade liberalization on export-oriented
  output and FDI: A case study of the Mauritian EPZ, 1971-1998,” University of
   Mauritius, Réduit, 2004.
• Amitav Ghosh, A Sea of Poppies, 2008.
• Patrik Iman and Cameila Manoiu, “Mauritius: A competitiveness assessment,” IMF
   working paper, Sept. 2008
• Dani Rodrik, “Trade Policy and Economic Performance in Sub-Saharan Africa,”
   Swedish Ministry for Foreign Affairs, 1997.
• Rodrik, Dani, Arvind Subramanian, & Francesco Trebbi, 2003, “Institutions Rule:
  The Primacy of Institutions over Geography and Integration in Economic
  Development,” Journal of Economic Growth.
• Paul Romer, “Two Strategies for Economic Development: Using Ideas and
  Producing Ideas,” ABCDE, World Bank, 1992.
• Jeffrey Sachs, 2003, “Institutions Don’t Rule: Direct Effects of Geography on Per
  Capita Income,” NBER WP 9490.
• Jeffrey Sachs & Andrew Warner, 1997, “Sources of Slow Growth in African
  Economies,” Journal of African Economies.
• Arvind Subramanian, “The Mauritian Success Story & Its Lessons,” 2007
• Arvind Subramanian & Roy Devesh, “Who can Explain the Mauritian Miracle:
  Meade, Romer, Sachs, or Rodrik?” in Rodrik, ed., In Search of Prosperity: Analytic
   Narratives on Economic Growth, Princeton U. Press, 2003.                      58
                        by the author
• “Cocoa in Ghana,” MIT, 1974.
• “Trade & Growth: Cause & Effect?” with D. Romer, AER 1999.
• “National Institutions & the Role of the IMF,”
  IMF Staff Papers, 2003.
• “On the Rand: Determinants of the South African Exchange
  Rate,” South African Journal of Economics, 2007.
• With B.Smit & F.Sturzenegger,
  CID South Africa project, Economics of Transition, 2008.
   – "Fiscal & Monetary Policy in a Commodity Based Economy“
   – “Macroeconomic Challenges after a Decade of Success”
• “The Natural Resource Curse,” May 2010.
                                                               59