It is a matter of some satisfaction that the concept of a “new economic model” has found its way in the recently elected government’s Presidential address. The idea, which has been floated some years ago, seems to have matured after a natural gestation period but also under pressure from developments in the global business environment, which has confirmed most of the basic tenets of the model. It might be useful at this stage to revisit some of these.

Basically, though it was not then expressed in those exact terms, it was all about the transition from preference dependence and protection, to competitiveness in, and opening to, a liberalised global world. The end of the Multi fibre Agreement and the successful challenge of the European Union (EU) Sugar regime at the World Trade Organisation as well as the events of September 11th in the United States, were a few of the momentous events which precipitated the confrontation of Mauritius with the new world order which would significantly impact on the way it would do business in future.

Mauritius and some of the islands of the Caribbean had been among the most successful beneficiaries of the former status quo. Their first reaction was to fight change and, for example, insist on the binding nature of the commitments, which had been taken by the former “colonial masters”.

That was the defensive agenda of “losers” in the big shake up which marked the end of an era and the beginning of another. The positions taken by the African, Caribbean and Pacific countries in the first leg of negotiations with the EU on the post Cotonou arrangement, were predicated on this defensive posture. It would not be an exaggeration to suggest that this has turned out to be a miserable failure as the EU imposed its own interpretation of events on these negotiations.

One enduring lesson to be drawn from this experience is that even the “legality”, let alone the “moral” implications, of texts and documents, are subject to reinterpretation in the light of the new global context and an all pervasive new ideological environment. Whilst there may be justification in trying to salvage some benefits from the “acquis” of the former commitments, it is important to understand that the new thrust of our engagement with our trade and development partners will make sense only if it is set in the context of the new scenario. “This is where the new model of economic development for Mauritius comes in.”

The two catch phrases, “nobody owes us a living” and “there is no such thing as a free lunch” beautifully, if succinctly, sum up the new terms of engagement in the unfolding global world, for countries like Mauritius, which do not qualify as least developed countries. Invoking our status as a small vulnerable island economy may yet be helpful, but only to the extent that we can demonstrate how smallness and vulnerability can be harmful to the efforts deployed in building the new economic model. “What then would be the distinctive features of this new economic model?”

<B>“An essential prerequisite for achieving economic growth in Mauritius is a radical improvement of the production processes and substantial gains in productivity and competitiveness in all existing and future (...) activities.”</B>

● <B>From rent seeking to competitiveness</B>

First and foremost, the new model will be characterised by a shift of focus from rent seeking to entrepreneurial risk taking and market driven allocation of resources. Rent seeking is by definition the search for surplus profits resulting from non-market advantages, of which preferential access and protectionism are the most prominent.

The skills, organisational model and mindset required for maximising rents from such situations are not necessarily the same as those needed for maximising profits from a competitive situation. It is to the credit of business operators that they have capitalised on the favourable policy framework put up by government to make the most of the opportunities offered by a preference driven and protectionist model of development as long as the going was good.

This is indeed what lies at the heart of the “economic miracle” realised by Mauritius over the previous decades. “It is to be feared, however that the patterns of behaviour and the institutional set up inherited from this protracted experience may prove to be the worse enemy of the kind of reengineering of mind sets and processes which is required for survival in the new global environment.”

Under the various Lome Conventions, Mauritius obtained a very high price for its sugar sold to the EU under the Sugar Protocol and enjoyed considerable access preference for its garments exports by selling duty-free to European markets. All the while, our direct competitors were burdened with quotas and customs duties.

The sugar industry for its part, received a price which was about three times that prevailing on the world market. As for industries geared to the local market, they prospered behind very high tariff protection. “One of the consequences of this situation was that it created room for tolerance of substantial levels of inefficiency in our production and management processes with spillover effects into almost all spheres of economic activity.”

The exposure of our local import substituting industries to competition from foreign suppliers following the fall in level of duty protection, the fierce competitive pressure which our garments exports are facing on the global market with the end of the Multi Fibre Agreement (1st January 2005) and the substantial fall in sugar revenue forecasted as a result of the reform of the Common Agricultural Policy of the EU, therefore mean, that in a situation where we have no other growth path than integration into the global economy, “an essential prerequisite for achieving economic growth in Mauritius is a radical improvement of the production processes and substantial gains in productivity and competitiveness in all existing and future economic activities. In other words, we have no other option than production of world-class goods and services under the most competitive conditions.”

Many economists as well as multilateral institutions such as the World Bank and the International Monetary Fund (IMF) have praised the economic miracle of Mauritius. One of the cornerstones of this achievement was the way the surplus funds received from sales of sugar was used to diversify the economic structure of the country by investing, initially in tourism, and then in the garments and textiles sector.

Some of the funds were also used for improving the physical infrastructure of the country. The high rate of economic growth posted by Mauritius during the “miracle” years and the accompanying remarkable situation of near full employment, were the results of these impressive investments. As the sources of “surplus” revenue from sugar threaten to dry up in the wake of the new European sugar regime there is a need to make a distinction between “extensive” growth which is supported by massive mobilisation of resources and “intensive” growth marked by gains in productivity.

While one does not exclude the other, henceforth for Mauritius, “the transition from a preference dependent to a competitive economy must make full use of the prospects offered by the intensive growth which results from improved utilisation of available resources, and this, for the two reasons mentioned above, i.e. the existence of substantial slack in productive processes and the forecasted drastic fall in revenue resulting from the liberalised global economy.”

● <B>Foundations of the new governance </B>

Productivity gains and competitiveness are a function of the right policy framework being provided by the government. “Industrial policy” has been decried as unsustainable in developed countries, but now even the IMF and the World Bank admit that it might still be useful in developing country conditions. Industrial restructuring rarely takes place without significant government assistance. Behind all sorts of non-traditional exports success stories can be found industrial policies, sectoral export subsidies or similar interventions.

D. Rodrik, a professor of economics at the Harvard Kennedy School of Government, who has extensively studied the subject, writes the following: “Market forces and private entrepreneurship would be in the driving seat, but governments would perform a strategic and coordinating role in the productive sphere beyond simply ensuring property rights, contract enforcement and macro-economic stability.”

The central role played by public-private partnership in our existing development process makes this particularly relevant to our situation. The private-public partnership that has characterised Mauritius ever since its independence, has been praised in many quarters. Delegations from many developing countries visit the country from time to time to learn about this trait of our erstwhile successful economic development.

<B>“The new delimitations of the roles of the private sector and the State will define the new model and set the foundation of the future public-private sector partnership.”</B>

Yet, as the shifts in the global environment call for a transformation of the governance structures of Mauritius, the need to review the very foundation of this partnership is becoming very urgent. The existence of pockets of extreme poverty, the breakdown of law and order, and the high levels of corruption are the most glaring evidence of major dysfunctions in our economy and society. Finally, the general stagnation of economic growth has served to confirm, among other things, “that the economy seems to have outgrown its institutional underpinning.”

Concerning public-private partnership, in the wake of the East Asian crisis it “is now considered that close relationships between government and big business can be used productively or can be the source of wasteful corruption. The delicate balance between personal relationships, which foster information flows and create trust, and autonomy that allows the government to pursue a broad based social agenda, is the key to the success of this relationship.”

Achieving this “delicate balance” in the context of the positioning of the recently elected government in favour of “democratisation of the economy” will make things particularly complex, and challenges the capacity of both partners to come up with innovative and imaginative solutions for the future.

Furthermore, reviewing this partnership in a difficult economic context of radical restructuring of the economy will call for an equally radical overhaul of the institutional set up which nurtured the previous model of economic development. “No significant change occurs in society without destabilising some status quo, without decoupling some coalitions and building others, without challenging some interests and promoting different ones.”

From the private sector perspective, improved corporate governance is an essential requirement in this shift, from governance based on informal relationships (relationship based system) to a system founded on transparent rules and regulations (a Rule based system). The corporate sector has a huge responsibility in ensuring that the “delicate balance” that we have mentioned earlier, is attained.

The much-decried concentration of resources in the hands of a minority is a common feature of all capitalist societies. The situation is made even more dramatic when this minority is also identified with a particular racial group in a multiracial society. “This is why transparency and good governance, leading to TRUST and SOCIAL CAPITAL is the only way forward for the corporate sector in the new context of competitiveness and zero tolerance of inefficiency.”

● <B>The role of the developmental State</B>

The transition from protectionism and preferential market access is marked by a greater determination of market forces in the allocation and efficient use of resources in the achievement of greater competitiveness for the nation. This does not mean that the role of the State becomes less critical. Even in the developed Organisation for Economic Co-operation and Development countries, the apparent paradox of the persistent importance of State intervention even after the liberalisation and deregulation spree of the 1980s has had to be reckoned with.

The recent decision of the French government to revert to what is to all intents and purposes an industrial policy approach towards supporting selected industries, is the most recent proof of this. The Washington institutions, for their part, have recently amended their prescriptions and included such notions as poverty reduction, capacity building, good governance and the role of the State in building strong institutions that favour economic development.

In the case of emerging economies, especially a small island economy like Mauritius, there is growing consensus that the country needs “policy space” if it is to pursue its integration into the global economy under optimal conditions. “The recently elected government, with its declared policy of democratisation of the economy, has clearly stated its intention to make full use of this policy space for a developmental State to determine the contours of the new economic model.”

The developmental State is founded on the premise that the sort of one-size fits all prescriptions based on the primacy of the market is not necessarily useful in all circumstances. It also takes cognisance of the fact that in the present circumstances of globalisation and the all-pervasive dominant ideology, there is no question of going back to the State activism of the past, characterised by nationalisation and State control of the economy.

This means that both the State and the market have critical roles to play in economic development. Finally, the developmental State reckons with the fact that “history matters” and the realm of future possibilities cannot be totally divorced from the historically specific circumstances in which policy is formulated.

In making a fresh start, policy-makers reach back to the broad principles of mainstream economics and rediscover the virtues of a mixed economy model with its institutional variants, which make it possible to devise context-specific approaches that take care of the desiderata of government, such as democratisation of the economy while evolving the proper framework which allows the private sector to play its role in dealing with the problems of poverty, inequality and sustainable development.

Within the normative framework described above, the State will have to respond to the demands made on it for setting up the appropriate business climate that will favour the levels of investments and subsequent economic growth which will eradicate poverty, create gainful employment and ensure the smooth integration into the global economy.

Government intervention to stimulate the economy shifts to measures that deal directly with increasing efficiency-competition policy, protection of Intellectual Property Rights and the creation of a business friendly environment generally. Both the State and private operators have to rapidly build up capacity to deal with an environment where Independent Regulatory Authorities are called upon to intervene in the setting up of a level playing field in numerous sectors where there are known “market failures”.

● <B>The implication of good governance</B>

In this article, we have tried to demonstrate that a new development model is likely to emerge as a response to the twin demands of the new global order and the policy options of the present government. The new delimitations of the roles of the private sector and the State will define the new model and set the foundation of the future public-private sector partnership.

It is the responsibility of the corporate sector to engage with government to determine the contours of this new partnership. Since the issue of governance will be a critical factor in the capacity of the corporate sector to influence the outcome of this crucial process, it might be appropriate here to share some views on this.

Corporate governance originally developed in the Anglo-Saxon context of separation of ownership and control of firms. Mechanisms were evolved to ensure that managers run the business in the interests of shareholders rather than their own. In the context of Mauritius, where family owned companies, run mostly by family members, dominates the corporate sector, corporate governance understood in the same vein may not make a lot of sense. “Governance needs to be treated as fundamentally, though admittedly not exclusively, a DISTRIBUTIONAL issue.”

It becomes, not only an instrument in the struggle over who appropriates profits but also encompasses the processes which guarantee “efficiency” by ensuring that firms maximise the value of assets under their control through such practices as transparent financial transactions and open recruitment policies.

<B>Rajiv SERVANSINGH</B>