Overcoming Bottlenecks to Economic Growth

For a country modelled on externalisation, we ought to have been chasing all the best opportunities falling within our remit

By Anil Gujadhur

The theme of development economics is to foster a sustainable path of future economic growth. The larger the space of economic activity, the more there are opportunities to generate gainful employment for the people and venturing out into even more diversified economic activities. In development economics, we learn about the linkages to be forged among emerging activities to increase economic scope and make the whole new set of activities viable and resource-efficient. The proposed “ocean economy” referred to in the new government programme 2012-15 of Monday last goes in the direction of creating economic scope.

Observers are asking questions about how such an ambitious project will get implemented. They are right. It requires a lot of preliminary groundwork before such all-embracing projects take shape and start producing results. Consider the evolution of our textile and garment manufacturing sector. It did not exist before the 1970s. It began with an idea proposed by stakeholders. There was a lot of doubt at first as to how a place like Mauritius not having the relevant raw materials and know-how could successfully establish this line of activity. Several actions had to be taken before it became a reality.

Outward Orientation

The Export Processing Zones Act was enacted in 1970: this gave a guarantee to entrepreneurs willing to take risk in the new sector that they will not be taxed at the prohibitive rates applying generally to corporate and personal income taxation in those days in Mauritius. The new enterprises would be operating in restricted ‘zones’ kept separate from the rest and thus under control just in case there were leakages to other areas of activity subject to normal taxation. This tax regime for the EPZ, as it was then known, constituted one of the many signals for investors to come over to set up textile units in our location. The message driven to them was that they would not only pay a much lower rate of corporate tax compared with other companies operating in the country but that their exports would not be subject to any export duty (to which sugar exports were subjected in those days). Exporting companies could also import their raw materials and equipment going into production, free of Customs duties. A comprehensive package was thus provided to trigger this new area of growth.

Europe was identified as the principal market for textiles and garments manufactured in Mauritius as we enjoyed duty-free-quota-free entry for our exports to this market under the Yaoundé Convention signed up with the European Economic Community in 1974. This market access represented a tangible advantage towards doing business in Mauritius. A large pool of unemployed labour was available, ready to be employed in the new activity. The level of education of our workforce was reasonable and there was no uncompetitive wage pressure in the economy as to drive it out of profits. Even if the trade union agitations might at first have acted as a deterrent in this respect for foreign investors to set up in Mauritius on a significant scale in the beginning, all this became something of the past by the 1980s and it was plain-sailing for industry.

Three factors were key to economic expansion from our heretofore narrow economic base: tax breaks, availability of the required skills locally and advantageous openings onto export markets. Had these ingredients not been marshalled in a coordinated manner, Mauritius would not have embarked on one of its most beautiful and rewarding outward oriented adventures. This outward orientation of our economy is a must. We have no choice than to push constantly in this direction and increase its scope from time to time. Constant adaptation to new givens in the economic environment is key to Mauritius’ economic survival.

A New Breath of Life to Financial Services

It was in identical conditions that our financial services sector found the key to its survival. Had we not externalized the provision of financial services in time, many of the international financial institutions operating from Mauritius would have closed down a long time ago. This field of activity would have shrunk literally, given the low sophistication of domestic demand in the area of financial services. The domestic market for financial services was and still is too small to sustain a level of activity compatible with the scale of operation of global international financial institutions based in Mauritius. We had to go beyond this narrow space. We re-invented a wider-embracing and longer-lasting business base for our financial sector.

This is where opening up to the provision of international financial services from Mauritius gave a new lease of life to our financial sector. Laws were amended; restrictions which dominated local financial activity had to be got rid of; accounting and legal skills of our workforce were raised towards the degree of sophistication called for in the provision of international financial services; several double tax avoidance agreements were signed up with existing and potential economic partners, while new openings to international markets were achieved with the help of international operators who based themselves in the local jurisdiction. Actions were taken to bring on a par our competitive edge compared with what obtained in other long-standing offshore jurisdictions. As for textiles, they involved tax breaks, re-orientation of skilled labour and working on external markets with the status of a respected international jurisdiction.

Act before it is too late

Whenever we have looked to adding substance to our economy in the pursuit of economic development, the door to knock has been and still rests upon our ability to extend our outward-orientedness. While this factor is inescapable, success also depends on our ability to act pre-emptively to secure promising markets advantageously before the space for expansion is foreclosed by others.

The mistake we have made in past years has been to remain content with traditional external markets so long as the going is good. Faced with constraints on traditional markets in which we are stuck, we have suddenly realized that we’ve been putting too many eggs in one basket. The transition is proving to be painful. For not having acted promptly enough to change scope in time, Mauritius is currently faced with a situation where too many problems are popping up on our acquired external markets, all at the same time. Forward-thinking has not been as prominent as it should have been in our economic diary, even though, we will, with perseverance, get out of the traps closing up on us.

Consider the benefit-neutralizing actions being taken by the Indian income tax authorities as regards the India-Mauritius Double Taxation Avoidance Treaty (DTA). The discretion to be given shortly under the coming Finance Act of India to Indian tax officials to tax unilaterally under the GAAR specific incomes derived by Mauritius-based operators carrying on business in India has the effect of seriously impairing the effectiveness of the DTA.

This is putting into question the continuation of a major part of our international financial business. This discretionary power has not been sought by the tax officials in vain. Once it starts being exercised to deny tax benefits that have prevailed for decades, investors from Mauritius going into India would see the onus of proof placed upon them to challenge the decisions not to allow tax benefits under the DTA. Normally, investors prefer firm assurances about their revenues rather than having to go into time-consuming and complicated dispute resolution mechanisms. Our job was to get them into this comfort zone well in time.

Neither did we tone down the tensions that had been building up on this chapter for long, nor did we make sufficient efforts to direct investments from Mauritius to alternative international locations as a way of adequate financial market diversification to ward off pressure coming from a particular destination of our investments. We might end up impairing a nice piece of work undertaken for decades now to mutual benefit for having leant extensively and excessively on our power of persuasion vis-à-vis the Indian lawmakers. We should have known that when it is a question of competing economic interests, especially at the level of officials, sentiments and social ties have little play on the international economic chessboard.

All is not lost however if we take the right remedial actions to sift out the wheat from the chaff. Without getting dispirited at this turn of events, we should learn from this tough experience. Our duty is to save all those who have put their trust in us from potential unfairness and arbitrariness that might be inflicted on them. This is the best way to preserve our standing as a jurisdiction of high standing like that of Singapore by proving ourselves relentless on sticking to good international principles and practices no matter what it costs. We will earn the trust of those who have trusted us by sticking to consolidating our reputation before it is unfairly undermined altogether on the basis of a few selective examples of perceived wrong-doing. By the same token, we will give a fillip to our credentials as an international service provider of substance. We should commit ourselves the more to preserve in good shape this space of economic activity that we have raised by dint of hard work.

Why not set our Sights Closer Home?

For a country modelled on externalisation, we ought to have been chasing all the best opportunities falling within our remit.

Take the case of our next door neighbour, East Africa. As far as I am aware, we have been closely associated with Eastern and Southern Africa from at least 1983 when the idea of a preferential trade area clubbing together all the regional economies was high on the common agenda for regional economic integration. Integration of the economies of the region has taken time but there are results to show. Not only did the member countries of this region take us warmly in their fold, holding us in high esteem for our observance of international standards of good governance, they made us beneficiaries of a string of tariff reductions culminating in total elimination of tariff barriers among SADC and COMESA countries eventually. Sticking to Europe, we’ve long neglected and underestimated the potential of such a genuine regional market.

Today, our exports to regional SADC member countries are zero-rated. Thanks to this result from long-standing work, our textile exporters have started exporting to South Africa principally to make good falling demand they have been consistently experiencing from Europe. Prices are as good as what our exporters get from Europe. Demand for garments made in Mauritius is maintained by the key trading houses of South Africa. We are selling to them at competitive prices an edge we have developed by trading extensively with the West for long. That’s why our export growth has managed to rise albeit by a small percentage in this year’s first quarter despite contraction of European demand. We should try other countries in the region and thus expand our market reach. We ought to be adopting a similar attitude vis-à-vis all our exports of goods and services.

It is well known that financial centres like Dubai and Bahrain built themselves up and thrived on petrodollars of the Middle East. With oil price spiking, they should be continuing all the same at the moment. What about us?

We should stop complaining that we don’t have as vast a reach out as those financial centres as we don’t have a vast economic hinterland to serve in our vicinity. We have kept saying that Singapore exploited a similarly growing economic hinterland to become a centre of economic activity to be reckoned with. Yes, all this is true. On top, the financial centres of the Middle East and Singapore built their strength on another factor: a sense of business discipline domestically grown and even imported from Europe and America when the need arose. They went on consolidating their acquired strength and it is this that makes them insuperable in the regions they have come to dominate.

Yet there are similar hopes for us. Not far from our shores, an East African adventure of substance has been beckoning us to position ourselves in a like manner to become the driver of services and, why not, investments to the region. There was oil already in Sudan; Uganda struck oil since 2006 and the Chinese and French are there already; in late March this year, Kenya announced a big oil strike in its north and this find is not going to end there for Kenya; enormous gasfields have been discovered in March this year in Tanzania offshore waters and they are estimated to hold billions of barrels of oil equivalent; Tanzania’s gasfields extend to northern Mozambique which will therefore be the next powerhouse of this expanding East African oil-producing club; it is suspected that Somalia, which is beset by war and piracy currently, may contain the mother-lode of energy of the entire region.

We have not tied up in any significant manner with the economic opportunities that have been springing up in this context in our immediate neighbourhood. This kind of positioning would have required advanced thinking of a different-type beyond the puny umbilical concerns of local power-seeking. This coming energy wealth will spin off our region into markets of unsuspected size and worth. Prosperity is coming next door. It warranted on our part taking up a pioneering position had we foresight enough to get close to where the act is being played and will be played in years to come. Richer households will have sustained demands for all sorts of things. We could have done the strategic thinking to cash on the decades over which we have committed ourselves to the emergence of our region from its economic slack.

How can we pride ourselves as an international service centre of some worth if we allow opportunities arising from the announced prosperity of our own region slip by? Will not others like Rwanda take a strong and well-defined position even before we are there, assuming we want to be there? Would not prospective stakeholders in this forthcoming bonanza for growth have started disciplining themselves to avail of its spin-offs? Would they not have been culling up domestic skills that would give them a role of some worth in the unfolding sea of opportunities?

True, we are thinking of transforming ourselves into an oceanic economy. This is right. It is an option that has been beckoning us since decades past when dozens of Korean and Taiwanese fishing vessels used to be moored side by side in Port Louis harbour for their fishing campaigns in our Indian Ocean. All that successive governments have done in this respect is to sell for a song fishing rights in our territorial waters to Europeans, the very same who have over-fished in their immediate vicinity and who were chased away from Saint Pierre and Miquelon in the past as the Canadians feared they might deplete the fish stocks over there as well.

It is a positive thing if we now decided to take things in our own hands in this regard but, as any economist will tell you, resources will need to be reallocated while pacing and sequencing the project to put all the pieces of this project neatly into place. This industry is a long-haul achiever and part of our compulsive externalization. It is, along with the challenge the oncoming prosperity of East Africa is throwing up to us, the type of substance that has been sorely lacking to compensate for the problems perking up from different sectors of activity we’ve been operating in so far. Its merit will be to put Mauritius once again into the long-term thinking mode once again.

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* Published in print edition on 20 April 2012

Tags:Double Taxation Avoidance Treaty, Export Processing Zones Act, Financial Services, Overcoming Bottlenecks, Programme 2012-15, Sights Closer Home, Yaoundé Convention