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The economic development of Mauritius: from gloom to success?
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The economic development of Mauritius: from gloom to success?
At the end of 1979, the country was almost in a bankrupt situation and its future was gloomy. It had “foreign currency reserves amounting to only two weeks of imports.” After unsuccessful borrowings on the Eurocurrency market, the Mauritian government had to turn to the International Monetary Fund (IMF) in order to avoid shipwreck (YeungLamKo, 1998).
After agreement with the IMF and with the help of the World Bank, Mauritius underwent a series of structural adjustment programmes between 1979 and 1986. The aim was to put Mauritius back on the path of sustained economic growth by promoting export-oriented industries, encouraging tourism and diversifying the agricultural sector.
Devaluation of the rupee, liberalisation of exchange rate, increase of the interest rate, introduction of a new sales tax, establishment of a more favourable tax structure for enterprises, reduction of food subsidies, elimination of price controls (except for 8 products) and import restrictions, investment into more productive sectors and a more restrictive wage and monetary policy were among the measures adopted.
In June 1982, a new Prime Minister, Sir Aneerood Jugnauth, was voted in. Yet inAugust 1983, new general elections were held after the split of the main political party in office. Sir Aneerood Jugnauth was re-elected and a new government was formed. The latter pursued the structural adjustment programme and in 1984, it created a new parastatal organisation, the Mauritius Export Development and Investment Authority (MEDIA). The mission of this organisation was to identify new export markets, promote made-in Mauritius products abroad and attract foreign investors.
<I>The 1990s saw the move of the former Isle de France towards a more diversified economy. Indeed, Mauritius entered the 21st century with a four pillar economy</I>
The new government also reviewed and improved the incentives provided to enterprises operating under the Export Processing Zone (EPZ) scheme. In 1985, minimum wages for men were abolished reducing significantly the unemployment of the male workforce. After some discouraging signs in the early 1980s, Mauritius was put back on its path to sustained economic growth between 1983 and 1986. Inflation rate and public deficit fell dramatically.
The EPZ and the tourism sectors were back to business. The number of EPZ enterprises (mainly textile enterprises) was 5.6 times higher in 1990 than in 1980. EPZ export earnings increased thirteen-fold between 1980 and 1990. And the contribution to gross domestic product was 12% in 1990 compared to only 4.3% in 1980.
The 1980s also saw the emergence of the tourism sector and its establishment as the third economic pillar of Mauritius. Between 1984 and 1988, the discounted earning per tourist, that is to say the amount spent per tourist (at constant prices) during their stay in Mauritius, skyrocketed to reach about Rs4,000 in 1988 compared to about Rs2,200 in 1984. The rapid surge of the performance of the tourism sector was due to intensive promotion campaigns in Europe by the Mauritius Government Tourist Office and Air Mauritius.
Other factors such as the opening of new five-stars hotels, upgrading of existing hotels, new direct flights from the Asian countries and economic recovery in the targeted European markets also contributed to the emergence of the tourism sector (Carlsen and Jaufeerally, 2003). Therefore at the end of the 1980s, it can be said that the structural adjustment programmes designed by the IMF and the World Bank proved to be successful for Mauritius.
However, it is to be pointed out that the Mauritian government played a crucial role in the success of the adjustment programmes. Indeed, despite the pressures of the IMF and the World Bank, the reforms were implemented in a smooth and human-faced way, which was not the case in other African countries that underwent adjustment programmes at that time.
Diversification towards the services sectors</B>
With a view to strengthening the services sector, the Mauritius Freeport was created in 1992. It confirmed the will of the Mauritian government to further diversify the economy via an outward-looking approach. The aim was to transform Mauritius into a regional distribution, trans-shipment and marketing hub based on its strategic location between Asia and Africa.
Enterprises operating under the Freeport scheme were to benefit from various incentives such as exemption from corporate tax for trading activities and free repatriation of profits without exchange control.
Between 1993 and 2004, the number of enterprises operating in the Mauritius Freeport increased significantly to reach 350 in 2004 compared to only 10 in 1993. Yet, it cannot be said that the Mauritius Freeport has been a real success. Indeed, some elements have been stifling its development. They are namely the competition of already existing similar facilities such as the Free Zone of Djebel Ali in Dubai, the relatively high facility cost (due mainly to the narrowness of the market and the cost of inputs), the location of Mauritius in a relatively non-dynamic region (OECD, 2005).
In 1992, the Mauritius Offshore Business Activities and the Offshore Trust Acts were also proclaimed. The aim was to boost the development of the financial services sector with the transformation of Mauritius into an offshore centre. To attract foreign investors, a number of financial and legal incentives were offered.
In April 1997, about 5,060 offshore corporate entities were registered compared to only 455 in December 1993.
<B>New challenges</B>
Since its creation, the offshore has indeed known a rapid growth due mainly to the double taxation agreement that Mauritius signed in August 1982 with India. According to this agreement, capital gains made on the sale of shares of Indian companies by investors resident in Mauritius are to be taxed only in Mauritius.
As a matter of fact, foreign investors willing to invest in India routed their investments via Mauritius as there is no capital-gain tax for offshore entities.
In the 1990s, Mauritius confirmed its status as one of the rare economic successes of the African continent. Between 1990 and 2000, the country knew an average economic growth of 5.3% per year.
The 1990s saw the move of the former Isle de France towards a more diversified economy. Indeed, Mauritius entered the 21st century with a four pillar economy (sugar, EPZ sector, tourism sector and financial services sector).
Nevertheless at the dawn of the 21st century, it can be said that new challenges are facing the country and jeopardising its past achievements. New world economic realities and forces are recalling the former Isle de France and its people that economic success is never an “acquis”.
The next chapter of the economic development of the country is yet to be written. Whether it will be made of gloom or success depends only on the Mauritian population and its leaders.
T.A. PATHER</B>
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