Recent reforms help Mauritius dodge global crisis

As the world continues to endure the effects of the worst financial downturn since the 1920s, one country has managed to defy the crisis through the diversification and expansion of its economy.

Mauritius – an island nation in the Indian Ocean and a Commonwealth member state – is among the most successful of small developing countries in diversifying its economy, despite its isolation from major world markets.

A country that was once dependent on sugar exports now has burgeoning growth in the manufacturing, tourism, financial services, and information and communication technology (ICT) sectors.

In an interview with Commonwealth News, the senior economic adviser at the Mauritius Ministry of Finance, Streevarsen Narrainen, explained: “In 2005 the Finance Minister wanted to move away from a development model that was too dependent on trade preferences. Mauritius wanted to embrace globalisation and world trade liberalisation.

“The government thought the current Mauritian economic model could not continue to deliver the growth we’ve had in the past, so reforms would be necessary.”

Tough competition

By the late 1990s, the textile industry in Mauritius was facing stiffer competition from new low-cost producers as well as the erosion of preferential tariff agreements.

So in 2006 the Government of Mauritius embarked on a comprehensive programme of reforms that included:

- Improving the business environment and business facility measures.

- Opening up the economy to make it more attractive for capital, experts, and technology to move in.

- Lowering the income tax rate from a maximum rate of 30 per cent to a flat tax rate of 15 per cent for both corporate and personal income, making Mauritius one of the lowest tax jurisdictions in the world.

- Improving the labour market’s flexibility – moving away from an approach that protected jobs over workers.

- Diversifying the economy further into developing the ICT sector, energy industry, medical tourism, and health and education knowledge centres of excellence, to create an economy based on eight to ten pillars of growth rather than on four.

All of these reforms, and others, were accompanied by a major economic programme to retrain and empower people, especially women. The unemployment rate among women stood at 16.4 per cent while it was 5.8 per cent for men. The reforms therefore encouraged women to take on jobs that traditionally they would not have worked in.

Decrease in unemployment

So far the changes have been very successful. In two years the country has had more foreign direct investment (FDI) than in the previous 20 years put together - and the latest statistics show that there has been a significant decrease in the unemployment rate among women to 12.3 per cent, while the unemployment rate for men has declined to 4.4 per cent.

And importantly, given the recent economic crisis, the robust growth driven by the reforms has made the economy very resilient to external shocks. In 2009, the Mauritian economy grew by 3.1 per cent and growth in 2010 is expected to be between 4.6 per cent and 5 per cent.

“The reduction in tax created significant fiscal space which brought in more revenue. When the G20 and the World Bank said the world needed stimulus packages we already had the fiscal space and we were not constrained by our debt,” said Mr Narrainen.

“When your debt is at a sustainable level you can put aside funds for long-term sustainable development projects such as food security plans and the Maurice Ile Durable vision of the Prime Minister.”

He concluded: “This was a very important policy decision, which gave Mauritius the capacity to resist the impact of the global economic crisis.”

Debt restrictions

The government has also created its first debt law and restricted its debt by having an optimal ratio of long and short term debt. Mauritius was not affected by the 1997 South-East Asia crisis because it did not have any short-term external debt, which holds the biggest risks.

Work still needs to be done on developing a secondary market for government debt in Mauritius.

It’s not been all plain sailing though, recounts Mr Narrainen: “Sometimes there was resistance to change when implementing the reforms.

“Part of the reforms was to lower and simplify tax. But when you did that you removed other things like fiscal incentives. Those who were benefiting from these incentives were obviously not happy about the reforms.

“But because the reforms have been successful and fast, people have realised they were necessary.”

Business bridge

The country has seen the growth of a global business centre holding 28,000 businesses and accounting for 5 per cent of GDP. It is a major contributor to Mauritius diversifying its economy into financial services.

Mauritius has also become a business bridge to Asia and Africa, with India investing in the country and China setting up an economic hub to access the African market - the biggest FDI Mauritius has ever attracted. Mauritius has preferential access to Africa through its membership of the Southern African Development Community, and the Common Market for Eastern and Southern Africa.

But with all this diversification and foreign investment, could Mauritius be putting its culture at risk?

According to Mr Narrainen, the country has always been open to foreign investments, which helped build its textile industry in the first place.

“It’s always been an open economy and we do not see any problem with expanding. It’s part of the economic landscape, it has always been like that.”

Key Links:

• Country Profile: Mauritius
• Economic Development