/ 15 March 2013

Mauritius’ economy ‘miracle’ not all it seems

Mauritius is converting precious farmland into housing estates and shopping malls.
Mauritius is converting precious farmland into housing estates and shopping malls.

If you really want to upset an African trade minister then comparing his economy with that of Mauritius is a good place to start. The simple fact is that the comparison is rarely, if ever, a pleasant one.

For many years Mauritius has been the darling of both World Bank types and the likes of the Nobel laureate Joseph Stiglitz, who for quite different reasons see it as a model that other small developing countries ought to be copying.

But Africa's "miracle economy", which has undergone a transformation from dependence on sugar exports to export of services such as tourism, financial services and information technology in one generation, is starting to look very vulnerable. In Port Louis, there is now a strong scent of Spain in the air.

For those who ever get off the beach in Mauritius and look at what is behind the great economic success story, it is more complicated than the Mauritian political and academic elite would have the world believe. The generosity that the international community has foisted on Mauritius makes it unique among African countries. In part as a result of the pessimistic assessment of another Nobel laureate, James Meade, who, at independence, thought Mauritius would be a hopeless basket case, the European Union gave the country a huge sugar quota, which allowed Mauritius to export sugar at two to three times the world price.

This was offered to several other countries, including Fiji, Jamaica and Guyana, but no one got as big a quota as the 500 000 tonnes offered to Mauritius under the Lomé Convention of 1975. This created huge profits for the country's largely white sugar barons, or Grand Blanc as they are known in Mauritius. This was equivalent to 5% to 6% of the country's gross domestic product (GDP) every year.

Unlike in other countries, such as Jamaica and Fiji, in Mauritius the benefits were accumulated by a few large farmers who then, because of the change in commercial laws ushered in during the 1980s, started investing in tourism and garment factories.

Not benefiting Africa
For years, successive EU ambassadors bleated that the reason they wanted to get rid of the Lomé Convention, and the Cotonou Agreement that followed it, was that they did not benefit Africa at all and should be replaced by the now infamous economic partnership agreements, which are free-trade agreements. In fact, Mauritius is proof that transformation occurred in only one African country — precisely where Europe was most generous and where the local elite was not corrupt and did not squander it and permitted viable business to thrive.

Mauritius also benefited from the United States's Agricultural Growth and Opportunity Act and was able to export garments duty free. This was helped in the 1990s by Hong Kong Chinese who fled the then British territory, which was being reabsorbed into China, and were readily granted Mauritian residence. This increased the number of the local elite and created a very international and cosmopolitan business character. The shift in the 1990s with the development of export processing zones saw Mauritius move from an agricultural to an industrial exporter in a decade.

But what is less known is the crucial role India is now playing in the transformation of Mauritius from an industrial to a service exporter. About 42% of India's foreign direct investment in 2010 came from Mauritius, which is surprising for such a small country. However, this is not all as it appears. Almost all of it is a direct result of a double taxation agreement between India and Mauritius, which exempts Mauritian firms from Indian capital gains tax.

But the cost of this exemption, provided to Mauritius a long time ago when foreign investment in the Mumbai Stock Exchange was practically impossible, is estimated to be worth at least $600-million a year. Others suggest India loses more. The Indian treasury wants out but the Mauritians are fighting tooth and nail to keep the agreement intact, although they are likely to lose the concession soon — and they know it.

Unlike other tax havens that are used simply as a post box, Mauritius took full advantage of the treaty and required those firms investing in India to "treaty shop", as it is called in the tax haven business, and to do certain things before they would get a Mauritian residency certificate. Among the obligations were the inclusion of at least two Mauritian directors, board meetings had to be held annually in Mauritius and the auditors had to be Mauritian residents. In a recent interview in India, the former Mauritian deputy prime minister, Rama Krishna Sithanen, said: "Financial intermediation accounts for 6% of GDP, 25% of tax collections and employs 3% of the population."

According to 2010 statistics, financial intermediation grew to 12.3% of GDP.

Realising just how vulnerable Mauritius is, the government has diversified its economy to take in a host of other sectors. The fastest growing is probably the most risky — the sale and development of real estate for largely foreign buyers, as anyone travelling on Air Mauritius knows from the advertising on board. Former sugar estates and farms are being converted into shopping malls and gated communities at a frenetic pace. It seems fairly obvious to everyone in Mauritius that this is not sustainable and that the country will either run out of good land or prices will collapse. The latter now seems more likely.

Feeling at home
The developments include luxury gated communities where those escaping Johannesburg feel perfectly at home. Speaking to real-estate agents in the luxury resort town of Grand Baie (irreverently dubbed Rand Baie because of all the South African residents and property owners), prices of beachfront land have been skyrocketing for the past few years. Even local property has been rising in the area at double-digit rates for the past few years.

All this is starting to resemble the Spanish real-estate bubble that plunged that country into a long and deep recession in 2007-2008 and from which it has yet to recover.

In Mauritius's transformation from a goods to a service exporter, its balance of payments is starting to look very wobbly and has been worsening steadily as exports decline. The current-account deficit was slightly less than 12% of GDP in 2011, well above what most economists consider to be sustainable in Africa.

Despite the development of new commodity exports such as jewellery and medical devices, the economy has suffered a serious relative decline in its traditional exports of sugar and textiles whereas imports, including oil, have been rising rapidly. The only thing keeping Mauritius afloat has been a capital account surplus and significant exchange reserves. Ultimately, its economy now rests on land and property deals and on the shaky trade agreement with India. It is on a risky path and, although the devaluation of the Mauritian rupee is strongly opposed by some government economists, more and more government ministers are saying openly that it is living beyond its means.

The structural change in its economy from a goods exporter to that of a service exporter has also moved Mauritius from having a relatively balanced current account to unsustainable deficits.

But Mauritius has done what no other country in Africa has succeeded in doing — transforming its economy from being an agricultural exporter into manufacturing and then into service exporter in one generation. It has done this with unprecedented levels of trade assistance from Brussels, Washington and Delhi. Mauritius has been both lucky and clever in taking full advantage of this.

Mauritians are right to be proud of their achievements but the "Mauritian miracle" has given rise to an enormous amount of hubris in Port Louis. But what is needed now is more modesty as the assistance, and probably the luck, runs out.

These are Professor Roman Grynberg's views and not necessarily those of the Botswana Institute for Development Policy Analysis where he is a senior research fellow