Mauritius won and SA lost in the economic freedom stakes

James Meade, British recipient of the Nobel Prize in economics, reported in 1961 that Mauritius faced a bleak future. The country was reliant on a single crop (sugar), subject to weather and price shocks, threatened by over-population, had no potential alternative job opportunities, was multi-ethnic, had large income inequalities, and had experienced political conflict. Land was scarce, there was very little technical expertise outside the sugar industry, capital was scarce, and the island was not geographically well positioned.

This sounds, in many ways like a description of South Africa today. The difference between the economic fate of Mauritius during the past three decades and that of South Africa has been that the island state adopted economic policies that were, in many instances, the opposite of those adopted by South Africa. Adoption of free market policies, which were adhered to by successive Mauritian governments, took their country’s world economic freedom ranking from 42nd in 1990 to 11th in 2019. During the same period South Africa’s ranking slid from 47th to 84th.

In those three decades the Mauritius economy sailed to general prosperity while South Africa remained stuck in the economic doldrums. If we compare the policies that were followed by the two countries during the three decades, we can identify what Mauritius did that set the country on its path to prosperity. We can also identify some of the negative policies implemented by the South African government, that set back their country’s economy.

Modern development economists would concur with Meade that on most of the “inheritance” factors, the country did not possess promising indicators of future economic growth. However, they disagree on the view he had on the country’s demographic inheritance. Rapid population growth produced very positive consequences for the economy. Nevertheless, standard development theory does not explain what became known as the “Mauritian miracle”.

Mauritius is an island state with 1.27 million inhabitants. Its GDP per capita (current USD) is $8,628 (RSA $5,656) and its average real GDP growth from 1973 to 1999 was 5.9%. Not bad for a country that in 1961 was considered to have poor prospects for growth.

Analysts must look at the non-standard responses of the Mauritian people to political and economic crises and events to find an explanation for the country’s outstanding economic performance. After receiving independence from the UK in 1968, the Hindu majority did not expropriate the property of the minority French landowners, who owned most of the sugar farms. Instead, they jointly obtained favourable sugar export contracts from the Europeans, and later the EU. They did impose an export tax on sugar as suggested by James Meade to “curb over-production”, which they later reduced and finally abolished in 1994.

When offered a choice between access to the EU market at the then-ruling high world sugar price and limited quotas, or at the lower domestic EU price but higher guaranteed quotas, the Mauritians took the second option. EU sugar producers subsequently lobbied for and obtained a sugar price that substantially exceeded the world price, providing Mauritian sugar producers with an estimated four billion euro subsidy between 1975 and 2005. Despite this good fortune the Mauritians knew they had to find other contributors to economic growth.

Soon after coming to power the new democratic government sent a team to study the export-oriented policies of Hong Kong, Jamaica, Puerto Rico, Singapore, and Taiwan. They swiftly adopted the team’s recommendations and established Economic Processing Zone (EPZ) legislation, which allowed EPZ firms to import inputs free of tariffs, gave them liberal tax exemptions, and provided a less regulated labour environment, liberating women especially by providing them with new job options.

The 1973 adoption of the Multi-Fibre Agreement (MFA) and 1975 signing of the Lomé Convention gave Mauritius preferential access to EU and US markets for the export of clothing and textiles, spurring investment in the EPZ. Hong Kong manufacturers established factories in Mauritius to get around the quota limits placed on them by the MFA transferring know-how and new skills to Mauritians. The number of people employed in the EPZ increased from 21,000 in 1976 to almost 90,000 in 1986. Unemployment declined from 20% in 1970 to 3% in 1991. Other African countries attempted to utilise the EPZ mechanism to increase employment, but none had the same success as Mauritius.

The most compelling explanation for this phenomenon is that Mauritius has better institutions than those other countries: a stable democracy, regular changes of government, a good legal system, respect for and protection of private property, monetary discipline, regulation that is not excessive, and low government spending as a percentage of GDP.

Mauritius then faced a new crisis. The Multi-Fibre Agreement ended on 1 January 2005. The EU sugar protocol ended in September 2009 when the export price of sugar fell by 36%. GDP growth for 2006 was down to 3.5%. Unemployment in September 2006 was 9.5% and this high unemployment rate spurred the government into action.

The then Minister of Finance and Deputy Prime Minister, Ramakrishna Sithanen, announced 40 reform measures during his budget speech, the products of wide consultation with all sectors of the economy. These reforms were aimed at rapidly reducing unemployment, helping the economy ride out the sugar shock, and get back onto the high growth path to which the Mauritians had become accustomed.

Clear rules were established for the conduct of business. Anyone who paid the required fee, registered as a business, and followed the rules could commence business; there was no waiting for approvals. The tax rate for companies and individuals was reduced to 15% by 2009 with individuals receiving generous general and family exemptions.

The economy was opened to non-citizens by easing entry requirements for investors generating 3 million Rupees (Rs) per annum in annual turnover; professionals earning more than Rs 30,000 per month; self-employed people generating incomes of Rs 600,000 per annum; and retirees bringing in USD 40,000 annually. Immigration laws were changed to give such people residence rights within three days of submission of applications.

Import tariffs were slashed and over time were reduced to zero to make Mauritius the Indian Ocean’s duty-free shopping centre. Tourism, Information Communication Technology (ICT), offshore banking and financial services, a free port, high quality medical care, and integrated resorts were among the “development pillars” introduced to play a role in future economic development. Non-citizens purchasing residences for at least USD 500,000 in the integrated resort schemes, received resident status for themselves and their families along with their properties. These changes are illustrative of the imaginative reforms that were put in place.

Governments of other countries were surely not surprised to see some of their most talented business developers go flying off to this beautiful island in the Indian Ocean to enjoy the sun, sea, sand, golf, fishing and low taxes and be treated better than they had ever been treated back in there previous home environments.