Revisiting our Economic model

Recent incidents demonstrate that if we were to depart from the path of good governance, that will put the entire edifice at serious risk

‘Statistics Mauritius’ has published data on the value of production of our manufacturing sector (sugar manufacturing, food processing, Textile Export Oriented Enterprises, Other) for recent years. Data show that the sector’s production was Rs 53.3 billion in 2014, Rs 54.4 billion in 2015, Rs 53.6 billion in 2016 and an estimated Rs 54.5 billion in 2017. The same source states that, in real terms, manufacturing activities in Mauritius grew by 1.8% in 2014, 0.1% in 2015, 0.3% in 2016 and an estimated 1.1% in 2017, in effect, a slowdown.

Manufacturing, as we know, especially manufacturing for exports, has been the mainspring of our economic uplift during past decades. What the data show is that this sector is barely growing, compared with other sectors such as Finance and Insurance (5.7 to 5.5% annual growth during this period), Tourism (11.5 to 5.9% annual growth), ICT (7.1 to 4.6% annual growth) and Real Estate (5.3 to 3.2% pa). One of the major components of the manufacturing sector, textile export manufacturing, has witnessed a sharp deceleration of its pace of annual growth: from +2.5% in 2014 to 0.1% in 2017 after showing negative growth rates of 3.1% and 5.1% in 2015 and 2016.

Signs of exhaustion

It may be recalled that the so-called ‘economic miracle’ was created by the rapid expansion of EPZ activities (textiles and garments) as from the 1970s and 1980s. By opening up the export window in the face of an increasingly lower-performing sugar sector, EPZ activities at once compensated for the sugar loss and, in fact, enhanced our economic scope bringing in productive FDI and valuable foreign exchange earnings into the country.

Through the economic multiplier effect, along with faster growth of other service sectors such as global financial business and tourism, it helped grow demand for a number of other economic activities in the country. It is this framework that is still sustaining our positive real rates of economic growth.

The EPZ-triggered model of economic growth was based on certain factors: the prevailing technology of production of textiles, for instance, wasn’t difficult to absorb in the local production structure; manufacturing jobs didn’t require much skills and the existing unemployed therefore took to factory jobs fairly easily with little additional training; there was an open export market for the textiles and producers didn’t have to depend on local market demand to increase their scope. This is how EPZ manufacturing in particular became the trigger for all-round economic growth.

The situation has been changing however. In 2008, we had 412 EPZ manufacturing units in the country; in 2016, there were 280 remaining, all the intervening years from 2009 onwards having witnessed net closures of factories each year. In 2010 alone, 48 units closed down. Last year, four ceased operations. The number employed in the EPZ were 62, 276 in 2008; in 2016, this had fallen to 53,211. Not only the EPZ, the whole manufacturing sector of Mauritius is estimated to grow by only 1.1% in 2017 after a growth of barely 0.3% in 2016.

All these are clear signs of exhaustion of an area of activity which has been the springhead of our economic success.

Chart for future growth

During the last week, a team from Senegal visited Mauritius with a view to understand the path followed by us towards economic success the past decades. What we also needed to tell them perhaps was that the present model seems to have reached the end of the tether and we need to re-engineer it before long.

If we look at the performance of sub-Saharan Africa in recent years, some countries (Ethiopia, Côte d’Ivoire, Tanzania, Senegal, Burkina Faso, Rwanda) have been showing quite high growth rates above 6% pa. Normally, this kind of growth is sustained by export-oriented manufacturing but there is little indication of rapid industrialisation, as it happened in the phase of our own economic uptake. The higher growth rates of these countries are explained rather by a shift of labour from agriculture to higher-productivity services caused by domestic-driven demand accompanying urbanization and modernisation.

The same has been true of Mauritius. In the face of increasingly difficult export markets facing our industries, there was a shift towards services, which made for high economic growth rates at first but are now showing signs of exhaustion. Fortunately, a good part of our services was directed to external markets, such as global financial business, tourism and ICT rather than to demand from the domestic market whose sustaining scope is necessarily limited.

While our tourism has picked up of late (+11.5% in 2016) due to a favourable external environment, our global finance business seems to be decelerating from a growth rate of 4.4% in 2014 to 1.1% in 2015, 0.8% in 2016 and an estimated 0.6% in 2017. At a rate of growth of 4.6% in 2017, the ICT sector has fallen compared with +7.1% in 2015, but is not that hard-hit.

This situation shows that either we failed to undertake the structural change when it was necessary to go in pace with external markets or we misjudged our trajectory in the light of international developments and harmed ourselves.

Countries which successfully turned around the corner to a sustaining path of economic growth (e.g., South Korea, China) undertook the structural changes called for. For example, as manufacturing became much more skill-intensive than what we had it when we embarked on this activity, countries adapting to the change on global markets removed the emerging barriers to entry by re-skilling their workforce to adapt them to the new technology-driven markets. Capital investment of a higher generation was also introduced. This helped them get into even more sophisticated product lines, heretofore the exclusive preserve of advanced economies.

improving the model

Economic threats and the prevailing disruption at the social level show that we must have failed to attend to improving the model we’ve been working on when it was necessary. We may have no option now but to go back to the drawing board again.

Mauritius progressed the most when it made steady relevant improvements to its human capital. There’s no reason we should take respite from this model if we wish to maintain our growth momentum.

Instead of depending on domestic demand for sustaining our growth, we looked to external markets as the sustaining force for our continued development. There’s every reason to stick to this approach, notwithstanding the tougher barriers to entry which have come in place on global markets.

We cut an edge by sticking to good governance, instilling confidence that we will not swerve from the path of rectitude. Recent incidents demonstrate that if we were to depart from this path to secure short term private gains, that will put the entire edifice at serious risk.

*  Published in print edition on 19 October 2017