9089

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droolkEconomicDevelopmentInstitute
of The WorldBank

Successful
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Stabilization
and Recovery
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in Mauritius
Ravi Gulhati
and
Raj Nallari
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EDI DEVELOPMENT POLICY CASE SERIES

Analytical Case Studies * Number 5
 EDI DEVmoPMNrPoucy CASESRES
* No. 5
ANAL.xcALCASESTUDmms

Successful Stabilization
and Recovery in Mauritius

Ravi Gulhati
Raj Nallari

The World Bank

Washington, D.C.
Copyright 0 1990
The International Bank for Reconstruction and Development / THE WORLD BANK
1818 H Street, N.W.
Washington, D.C. 20433, U.S.A.

All rights reserved

Manufactured in the United States of America
First printing September 1990

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At the time of writing, Ravi Gulhati was senior adviser in the Economic Development
Institute of the World Bank. He is now a consultant and an academic.
Raj Nallari is a consultant in the National Economic Management Division
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Library of Congress Cataloging-in-Publication Data

Gulhati, Ravi.
Successful stabilization and recovery in Mauritius / Ravi Gulhati,
Raj Nallari.
p. cm. -- (EDI development policy case series. Analytical
case studies; no. 5)
Includes bibliographical references.
ISBN 0-8213-1617-6
1. Mauritius--Economic conditions. 2. Economic stabilization--
Mauritius. I. Nallari, Raj, 1955- . II. Title. III. Series.
HC597.5.G84 1990
338.9698'2--dc2O 90-41657
CIP

EDI Catalog No. 400/087 ISSN 1013-333X

 Contents

List of Abbreviations vi
Preface vii
1. Introduction 1
2. Diagnosis 3
Shocks 3
Policy Framework 6
Mismanagement of Aggregate Demand 6
Extent of Market Orientation 8
How Efficient Was the Public Sector? 17
Income Distribution Policies 20
Agricultural Policy 21
Sugar Subsector 21
Diversification within Agriculture 23
Strategy for Manufacturing 27
Import Substitution Policy 27
Export Promotionof Manufacturers 27
Policiesfor Tourism 30

3. Political Factors and Their Impact on Economic

Policy in the 1970s 32
Main Political Trends 32
The Policy-makingProcess 34
Political Parameters and Policy Content 36

id
iv Succesafl StabilizationandRecoveryin Mauritius

4. The Policy Turnaround 38

Search for Stabilization 45
Restructuring of Public Finance 46
Redirectionof Public Expenditure 46
Restructuring of Parastatals 48
Revenue Mobilization and Tax Reform 49
Management of ForeignAid and Debt 49
Policy Change in Agriculture 50
Sugar Sector 50
Nonsugar Agriculture 52
Policy Change in Manufacturing 53
Policy Change in Tourism 55

5. Lessons of Experience 57

References 61

Appendix Tables 67

Figures
2.1 Terms of Trade Index, 1960-80 4
2.2 Sugar Prices in Different Markets, 1968-87 5
2.3 Indicators of National Accounts, 1960-80 7
2.4 Balance of Payments Indicators, 1970-80 9
2.5 Budget Deficit and Its Financing, 1968-80 10
2.6 Nominal and Real Effective Exchange Rates, 1970-86 12
2.7 Average Monthly Earnings by Sector, 1970-86 14
2.8 Nominal and Real Interest Rates on Commercial
Bank Deposits of Six Months, 1970-86 16
2.9 Government Expenditure and Revenue, 1965-80 18
2.10 Sugar Production and Exports, 1963-86 25
4.1 Terms of Trade Index, 1960-86 41
4.2 Indicators of National Accounts, 1980-86 42
4.3 Balance of Payments Indicators, 1980-86 43
4.4 Budget Deficit and Its Financing, 1980-86 44
4.5 Government Expenditure and Revenue, 1980-86 47

Tables
2.1 Growth Rate of Government Expenditures, 1969-86 19
2.2 Export Duty on Sugar, 1979-90 22
2.3 Selected Indicators of Twenty-one Large Estates in Sugar Sector,
Selected Periods 1968-84 23
 Contents v

2.4 Number of Sugar Planters by Size and Holdings 24

2.5 Nonsugar Agriculture: Acreage, Production, and Imports 26
2.6 AverageEffectiveRates of Protection and Value Added, 1983 28
2.7 Selected Indicators of Export ProcessingZone,1971-86 30
3.1 Major Political Parties and Election Outcomes, 1967-87 33
3.2 CoalitionGovernmentsand Leaders, 1968-87 34
4.1 Chronologyof SelectedPolicyEvents, 1978-85 39
4.2 Indicators of Stabilization and Adjustment, 1976-86 39
4.3 Gross Commitments, Net Resource Transfers, and Volume
ofImports, 1978-86 49
4.4 SelectedIndicators of Sugar Sector, 1976-86 52
4.5 Indicatorsof Tourism,1979,1982,1986 56

Appendix Tables
A-1 SelectedEconomicIndicators, SelectedYears 1966-86 69
A-2 SelectedSocial Indicators, SelectedYears 1965-86 70
A-3 Terms ofTrade, 1960-86 71
A-4 Sugar-Prices in Different Markets, 1968-87 72
A-5 EEC Dividendand its Impact on Mauritius's Economy,1968-86 73
A-6 Indicators of National Accounts,1960-86 74
A-7 Balance of Payment Indicators, 1970-86 75
A-8 Budget Deficitand Its Financing, 1968-86 76
A-9 Nominal and Real EffectiveExchange Rates, 1970-86 77
A-10 AverageMonthly Earnings by Sector, 1970-85 78
A-li Nominal and Real Interest Rates on Commercial Bank Deposits of Six
Months,1970-86 79
A-12 GovernmentExpenditure and Revenue, 1965-86 80
A-13 Sugar Productionand Exports, 1963-86 81
A-14 Guaranteed Producer Prices for SelectedFoodCrops, 1977-87 82
 List of Abbreviations

AMB Agricultural Marketing Board

CAM Comite D'Action Musulman
COLA Cost of Living Adjustment
DBM Development Bank of Mauritius
DC Development Certificate
DWC Development Works Corporation
EEC European Economic Community
EPZ Export Processing Zone
GDE Gross Domestic Expenditure
GDP Gross Domestic Product
IBRD International Bank for Reconstruction and Development
IDA International Development Association
IFB Independent Forward Bloc
IMF International Monetary Fund
MEDIA Mauritius Export Development and Investment Authority
MLP Mauritius Labor Party
MMM Mouvement Militant Mauricien
ODA official development assistance
OPEC Organization of Petroleum Exporting Countries
PMSD Parti Mauricien Social et Democrate
RO Remuneration Order
SAP Sugar Action Plan
SDR Special Drawing Rights
SSA Sub-Saharan Africa
TDA Tea Development Authority

vi
 Preface

During three visits to Mauritius during the past decade, Ravi Gulhati (former
Chief Economist of the Eastern and Southern Africa Region of the World Bank) had
a number of opportunities to discuss at length its economic problems and possible
solutions. Raj Nallari visited Mauritius in 1989. The following study is dedicated
to our Mauritian friends, who freely gave their time to talk candidly about the
issues. Both authors wish it had been possible for some Mauritian officials, who had
an "insider's" view of the unfolding economic policy process, to write down their
insights. It is our firm belief that no one analysis of the policy process can capture it
in all its key dimensions. A number of contributions from different vantage
points, therefore, would have been enriching.
A word about the origins of this study will be useful. Parallel studies on Zambia
and Malawi have been published in this series. All three are part of a general
treatment of economic policy change in Sub-Saharan Africa. The entire project is
an effort to reflect on events that have dominated recent economic history in Sub-
Saharan Africa. The authors are very grateful to Christopher Willoughby of the
Economic Development Institute for providing generous support for this project.
Associates in the operational part of the World Bank have cooperated fully. A
substantial part of the analysis is borrowed from their work over a long period.
Notwithstanding all these connections with the World Bank, the project should
be regarded as our own initiative. We have chosen to write about the impact of
politics on economic policy-a sensitive area on which the Bank has no official
views. Our effort to address this difficult topic is an experiment and should be
regarded in that light. Scholars disagree frequently in this field, and we have
reported on some of the controversies. Judgments made in this report are personal
ones, and we alone are responsible for them.
We are grateful to Sofia Mendoza and Dulce Afzal, who assisted in ways too
numerous to spell out. Without the valuable contribution of these two colleagues,
producing this study would not have been possible. Finally, a special word of
thanks to many readers in Mauritius and Washington, D.C., who helped greatly
during the long journey from first draft to final manuscript.
Ravi Gulhati
Raj Nallari

vii
 1

Introduction

James Meade (1967, p. 250) used Mauritius to illustrate the implications of the
population explosion in less developed countries. He wrote,
Heavypopulation pressure must inevitably reduce real income per head below what it
might otherwisebe. That surelyis bad enoughin a communitywhichis full of potential
politicalconflict.But ifin addition,in the absenceof other remedies,it must lead either to
unemployment(exacerbatingthe scramblefor jobs between Indians and Creoles)or to
even greater inequalities (stockingup still more the envy felt by the Indian and Creole
underdog for the Franco-Mauritian top dog),the outlook for peaceful developmentis
poor.
Population was growing at an unusual rate of 3.0 percent during the 1960s and
imposing severe pressure on available resources. Sugar was grown on almost all
cultivable land, and it was the main source of foreign exchange. The economy was
very open and extremely vulnerable to fluctuations in international prices and to
recurring weather disasters. Mauritius imported most of its food, consumer
manufactures, and producer goods. There was little experience on which to build
the manufacturing sector.
History has belied Meade's pessimistic prognosis. Mauritius walked out of the
'Malthusian Trap." Population growth was restrained effectively, thereby
signaling one of the earliest demographic transitions in the Third World. The
economy scored a high rate of growth of production of more than 6 percent per year
during 1968-79. There was a spectacular expansion in the growth of manufactured
exports. Income distribution, which was very skewed at the outset, became less
unequal. These are impressive accomplishments, but our enquiry is not about
them. We focus, instead, on the debacle suffered by Mauritius in the second half of
the 1970s when the sugar boom ended. For a number of years, economic instability
and financial troubles marred the picture. Our aim is to analyze government
policy leading up to this setback and to explore the process that ended with
stabilization and recovery. The reforms appeared to be successful. Not only was
inflation tamed and financial balance restored during 1984-86, but the economy
resumed rapid growth, and unemployment dropped to very low levels. Not all
problems were solved, however. Mauritius remained very exposed to exogenous
shocks and to adverse policy changes in its trading partners.

1
2 Successful Stabilization and Recovery in Mauritius

We do not intend to provide a detailed description of the economy or to trace its

history. Readers in need of such background can consult Simmons (1982). Tables
A-1 and A-2 in the Annex to this study may also be useful in reviewing the structure
of the economy and its main parameters.
A word about Mauritian politics is necessary here since it is difficult to
understand economic policy responses without such background. Apart from one
period, 1972-76, in which an emergency was declared and elections postponed, there
was general adherence to the "rules of the game" established by the Westminster
type of constitution inherited at the time of independence. No single party ever
secured a majority in the assembly to form a government on its own. The
compulsion to work together across party lines was ever present. It put a distinctive
stamp on the economic policy process. Even within a single party it was necessary
to build a consensus since all major parties were loose agglomerations of ethnic
and economic interests.
About 2 percent of the population are Franco-Mauritians who own large sugar
interests, big commercial firms, factories in the export processing zone (EPZ), and
manufacturing concerns catering to the local market. They were linked politically
to the Parti Mauricien Social et Democrate (PMSD) till the early 1970s. This party
had taken a position against political independence and had represented the
interests of affluent groups. In terms of economic policy, it stood for heavy reliance
on private ownership and market processes. Creoles, who are of mixed European
and 'colored" descent, are the second largest ethnic group (27 percent of the total
population). They are skilled artisans, dockers, and fishermen. They too were
traditionally tied to the PMSD till the early 1970s, but some switched to the
Mouvement Militant Mauricien (MMM), a radical party espousing
nationalization and a welfare state. The Chinese are a relatively small
community (3 percent of the population), but they are a key commercial and
industrial group. They were allied to the PMSD in the early 1970s.
Indians (Hindus and Muslims) are the largest ethnic group (68 percent of the
population). A small number of Hindus are wealthy businessmen, professionals,
and politicians. The majority are sugar estate and industrial workers, and small
planters. Traditionally, they were tied to the Mauritius Labour Party (MLP), which
stood for socialism of a moderate variety and for redressal of the exploitation of
workers in the colonial period. Many Hindus crossed over to the Mouvement
Militant Mauricien (MMM) in the early 1970s. Rural Hindus were associated with
the Independent Forward Block (IFB). The Muslims (16 percent of the population)
are mostly traders in urban areas. They were associated with the Comite D'Action
Musulman (CAM) till the early 1970s when some crossed over to the MMM.
We do not pretend to understand all the ramifications of the socioeconomic
stratification in Mauritius or the large number of political parties. This summary
does address, however, the central thrust of political change, which was fairly
clear. There were only two major political parties in 1967: the MLP with 56 percent
of the popular vote (including the vote secured by its electoral partners) and the
PMSD with 44 percent. A decade later the landscape had been transformed. The
MMM obtained 39 percent of the vote at the expense of MLP and PMSD. Chapter 3
spells out the political aspects in greater detail. The second chapter presents a brief
sketch of elements contributing to the economic and financial difficulties that
accumulated in the late 1970s. Chapter 4 examines economic policy responses of
three coalition governments in the 1980s. Finally, Chapter 5 offers lessons of
experience, culled from the reform process aimed at stabilization and recovery.
 2

Diagnosis

The economic and financial difficulties that Mauritius encountered during the
late 1970s were moderate in magnitude compared with those in other SSA countries
(Gulhati 1990). These difficulties were the combined result of exogenous shocks
(such as the decline in the terms of trade and bad weather) and policy weaknesses
(particularly with respect to the public sector and the labor market).

Shocks
Foreign trade is very big in relation to the overall economy and fluctuations in
the terms of trade largely determine the economic outcome in Mauritius. The terms
of trade index (1980 = 100) averaged 89 during 1968-72 and rose sharply to an
average of 155 during 1973-75 (see Figure 2.1 and Table A-3). The deterioration in
the terms of trade between 1976 and 1979 was mainly due to falling sugar prices in
1976-77 and partly due to rising import prices. The index of the terms of trade
averaged 112 during 1976-79. There was a decline of 28 percent when compared with
1973-75, or a loss in gross domestic income (GDY) of 14.1 percent. 1
The impact of this shock would have been greater (in terms of loss in income),
but for the preferential treatment of Mauritian sugar under the EEC Agreement of
1975 (Figure 2.2 and Tables A-4 and A-5). If the free market price is treated as the
export price for sugar, then terms of trade (1980 = 100) would have averaged 55.9
during 1976-79, compared with 176.6 in 1973-75. This would have resulted in a loss
equivalent to 47.5 percent of GDY. This calculation roughly illustrates the impact of
preferential arrangements. The free market price applies only to a small segment
of world trade in sugar (10 to 15 percent), and it is not a good approximation of the
international sugar price in the absence of preferential arrangements.

1. The terms of trade in the 1973-75period was far better than during the preceding decade.
However,expenditurelevels got adjusted to these favorableinternational conditions,and it is to
assess the impact of the subsequentdeteriorationthat we adopt this base.

3
 Figure 2.1
TERMS OF TRADE INDEX, 1960- 80
(Index 1980 = 100)
200 -

0 10-

0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0
ExportPrice Index s

50-
, _ .. L-Eor
-W-.-W Import Prce Index

1960 1962 ~~
. f 1964 ~ 1966
~ ~ 1968~ ~1970~ ~1972. 1974 1976 1978 1980
Year

cak\w4SUUM
 Figure 2.2
SUGAR PRICES IN DIFFERENT MARKETS, 1968 - 87
35 -

s0-
US Price
25-

20-

15 ~~~~~~~~~~~~~~~~~~~Free
Market Price

10-

5-

1968 1970 1972 1974 1976 1978 1980 1982 1984 1986
Year

akw4SW6
6 Succes8ful Stabilization and Recovery in Mauritius

The preferential price for Mauritian sugar is of great significance in its

economic success. The impact of this 'EEC dividend," defined as the value of sugar
exports at EEC prices (in current US$) minus the value of sugar exports at
international free market prices, is shown in Table A-5. For the period 1977-79, the
EEC dividend amounted to US$347 million or 12 percent of gross domestic product
(GDP). Assuming that 25 percent of this sum was saved and that three units of
saving (and investment) yielded one unit of GDP, the EEC dividend added 1
percent to the actual Mauritian growth rate of GDP of 3 percent p.a. during this
period.
Apart from the terms of trade shocks, "weather plays god" here. Mauritius was
visited by cyclones in 1970, late-1975, and early-1980; by drought in 1983; and by a
cyclone in 1984-all of which severely damaged crops. Sugar production was 6
percent, 19 percent, 22 percent, and 7 percent below the trend production in 1971, 1975,
1980, and 1983-84 respectively. Mauritius seems to be affected by weather
disturbances every four to five years.
Another shock affected tourism. 2 After rapid growth of about 25 percent p.a. in
the number of arrivals of visitors during 1970-75, tourism slowed down and grew at
9.1 percent p.a. during 1975-80. This deterioration was due, to some considerable
extent, to rising air fares on account of OPEC oil price hikes. Following the first oil
shock of 1973, fuel prices increased tenfold, and the second oil shock of 1979 had a
fourfold effect on fuel prices. Mauritius was already disadvantaged in attracting
tourists because of its distance from Europe. The rising air fares further reduced its
international competitiveness.

Policy Framework
The economic policy framework of Mauritius in the 1970s was an amalgam of
historical and political factors. The compulsion to build a consensus across
factions and parties within a parliamentary system helped avoid the adoption of
extreme policy positions. Macroeconomic policies were dominated by the terms of
trade cycle during the early 1970s and by the electoral cycle later on in the decade
(see Chapter 3). The government tried to reduce income inequalities and to
generate enough jobs for the growing labor force. These objectives clashed at some
points with the desire to sustain economic growth and efficiency. Notwithstanding
these conflicts, Mauritius's economic policy during the 1970s was far superior to
that of most SSA countries (Gulhati 1990).

Mismanagement of Aggregate Demand

The government did not pursue a strong anticyclical reserve policy throughout
the postindependence period. We will consider the relation between gross domestic
expenditure (GDE) and the terms of trade during three periods: 1968-72, 1973-75, and
1976-79. During the period 1968-72, the terms of trade improved at a rate of 5.1
percent p.a. and real GDP also rose rapidly. Aggregate expenditures remained on
average at about 95 percent of GDP (Figure 2.3), and external reserves increased
from three to five months of imports. Government was not playing a forceful role in
the economy during this period. Not until late 1971 was the first development plan
launched.

2. Although tourism's contributionto GDP was only 4 percent in the 1970s,it accounted for a
sizableshare ofjobs directlyand indirectly.
 Figure 2.3
INDICATORSOF NATIONALACCOUNTS, 1960 - 80
12,000 -
GDE (Gross Domestic Expenditure)

10,000 -

8,000- i'

GDY(Gross DomesticIncome)

a*
# \ I GDP (Gross
* *#[ Domestic Product)
6,000-

4,000-

2,000- /

Investment
0 - I I II I I I I I I I I I I I I I - -I
1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980
Year

oak\w4U8M8C
8 Succe8ssfuStabilis4tion and Recoveir in Mauritius

The 1973-75period was a spectacular boom for Mauritius, notwithstanding the

first oil price increase and the economy'sheavy dependence on imported fuel. The
terms of trade improved at a rate in excess of 28 percent p.a., and real GDP also
expanded appreciably. Aggregate expenditures rose at breakneck speed, and on
average they were 116 percent of GDP (Figure 2.3). The volume of investment
increased at a rate of 26 percent p.a. and real consumption at 23 percent p.a.
External reserves kept up with imports but did not increase any faster. A large part
of the windfall from high sugar prices was spent on imports.
The terms of trade deteriorated very sharply during 1976-79, but aggregate
demand was not curtailed. The volume of consumption continued to rise very
rapidly at 8 percent p.a., and the savings rate fell from 19 percent to 14 percent of
GDP. Even though the volume of investment stagnated, aggregate expenditures
averaged 118 percent of GDP. The current account of the balance of payments
(excluding official development assistance from receipts) showed a deficit of $96
million per year (Figure 2.4). This was financed by a drawdown of reserves
(remaining reserves covered only three months of imports) and borrowing on hard
terms from the Eurodollar market.
The government budget showed a deficit throughout the postindependence period
(Figure 2.5 and Table A-8). The size of the deficit increased during the boom of
1973-75,presumably because government outlays rose substantially under the first
development plan. The second plan, covering the period 1976-80, was even more
ambitious than the first one. The budget deficit widened considerably in the 1976-79
period. It was financed not only by large foreign borrowing but also by very sizable
credits from local banks.
We can conclude that policymakers cast aside caution during the spectacular
boom of the mid-1970s. Prime Minister Seewoosagur Ramgoolam was also in
charge of finance. Although he later turned over the portfolio to Verasamy
Ringadoo, he continued to "call the shots" to a very large extent. Ramgoolam's
knowledge of economics was fairly limited. Sugar prices during this period were
unprecedentedly high, and it was scarcely reasonable to expect that they would
persist for any length of time. Nevertheless, the government did not channel the
windfall into external reserves to any large extent. Instead, there was a dramatic
increase in investment triggered by the first development plan. Even though this
was a period in which government had declared an "internal emergency" and a
policy of wage restraint had been adopted, there occurred a surprising upswing in
consumption. With the inevitable crash in the terms of trade, the political scene was
transformed: the "internal emergency" was relaxed, and populist pressures re-
emerged. The government was unable and unwilling to curtail demand in line
with the relatively constrained resource situation during the late 1970s.

Extent of Market Orientation

We will now examine government policies at the macro level from the
standpoint of their impact on allocative efficiency and economic growth. (Income
distribution will be considered later.) The public sector is active mainly in the field
of infrastructure and social services. Directly productive activities are very
largely the business of the private sector. Government policies have a major impact
on all factor prices, but perhaps the most acute distortion is to be found in the labor
market. These imperfections notwithstanding, Mauritius succeeded in securing a
very impressive record of economic growth throughout the postcolonial period.
 Figure 2.4
BALANCE OF PAYMENTS INDICATORS, 1970 - 80
100 -

Net ODA *

0 -...... E.-.-f
\NotI1SF
] Capital
~~~~~~~~~~~Nel;

-100\I

CurrentAccountBalance /
50- I

;200IIIIII
1970 1972 1974. 1976 1978 1980
Year

Excludesofficialdevelopmentassistance(ODA).
=M}w48568D
 Figure 2.5
BUDGET DEFICIT AND ITS FINANCING, 16 - 80

400 -,

200-

~~ ~Brr_in_---m Loca BanksF Caitl

r ~~~~~~~
cz

140 - 4

400-

I l
-200 -

1968 1970 1972 1974 197B 1978 1980

Year

I*dudes offidAl devebopmmt amisteaM

 Dignosis 11

The market for foreign exchange was managed through a government

determined exchange rate (Figure 2.6 and Table A-9). The nominal effective
exchange rate depreciated sharply during 1972-75 owing to fluctuations in the value
of the pound sterling to which it was linked. The United Kingdom accounted for 75
percent of Mauritius's trade during this period. During this time the real exchange
rate depreciated by about 8 percent. There was a change in policy in January 1976
when the government broke the link of the Mauritian rupee to the pound sterling
and instead pegged it to the basket of currencies underlying the special drawing
rights (SDR). This move followed the negotiation of the Lome Agreement, which
assigned a large sugar quota to Mauritius in the EEC market at preferential prices.
The real exchange rate appreciated by about 4 percent during 1975-78. This was a
period in which Mauritius experienced a sharp deterioration in its terms of trade, a
drawing down of reserves, a build-up of hard debt, and substantial increases in
real wages. There was little justification for letting the exchange rate appreciate
amidst mounting financial pressures and diminishing international
competitiveness. The government resorted in 1978 to limiting imports through
quotas for balance of payment reasons.
The trade regime was unusual in that it was not biased against exports. Such a
bias was typical of Sub-Saharan African (SSA) countries as well as many Latin
American and South Asian countries. The trade regime in Mauritius consisted of
taxing sugar exports, providing strong incentives for exports of manufactured
goods, and giving substantial protection to local firms producing for the home
market. The sugar tax existed in the colonial period at a moderate rate of 5 percent.
It was raised sharply to 12 percent for large estates in 1975 and to nearly 24 percent
in 1979 when the rupee was devalued (see Table 2.2). Small sugar producers were
exempted, and the rate of duty varied with the tonnage exported. Sugar taxation was
very controversial. This is hardly surprising given the major parameters of
Mauritius's political economy. The small group of Franco-Mauritians who control
the bulk of the sugar industry are very powerfull (Simmons 1982, pp. 22-23). One
major issue was whether the sugar tax rate was excessive. Very little information
was available during the 1970s to answer this question, and what little data was put
out by the industry was viewed with considerable skepticism by government.
Another issue was the rate structure that discriminated against the relatively
efficient large estates and provided an incentive to split them up.
The colonial authorities established the development certificate (DC) scheme in
1964 to promote import substitution. Incentives for local manufacturers took the
form of fiscal concessions, tariffs, quotas, and permits. The magnitude of these
incentives increased considerably over time.
In 1970 the government passed the Export Processing Zone Act, which provided
powerful incentives to manufacturers catering exclusively to the foreign market.
Benefits took the form of fiscal, credit, and import duty exemptions. Such EPZ firms
were subject to general labor laws (including minimum wages), but they were free
to fire workers, to demand compulsory overtime work, and to penalize heavily for
absenteeism.
The exchange and trade regime provided strong incentives for tradables as
against nontradables. As we will see, there were many imperfections in the design
of these incentives, but the fundamental balance was not tilted heavily against
 Figure 2.6
NONINAL AND REAL EFFECTIVE EXCHANGE RATES9 1970 -86
160 -

150 -

140 -

120 -

0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1
f~~~~~~~~~~el
Exhne\ae

160
180 - -

90-

80- E X i l l l
1970 1972 1974 1976 1978 19 1982 1984 1986
Year
 Diagwsois 13

exports as it was in many Sub-Saharan and other developing countries. 3 There

was a tax on sugar, but that could be justified in the light of Mauritius's limited
quota in the EEC preferential market and the low demand for sugar in the world
free market. Given these market constraints, it did not make sense to provide
strong incentives to expand sugar production or to allow owners of sugar estates to
retain the rent created by the EEC preferential price.
This exchange rate and trade regime produced an outcome that was a cause for
some concern. On the positive side, manufactured exports from EPZ rose rapidly,
and their share in total exports rose from nothing to 20 percent during the 1970s.
However, these new exports were much more import intensive than sugar, and their
contribution to the net foreign exchange balance was correspondingly much less.
There was a large increase in the imports of intermediate goods and investment
goods. Despite a steep drop in the share of consumer goods in total imports, the
overall ratio of imports to GDP rose from 44 percent in 1970 to 52 percent in 1980. The
real appreciation of the exchange rate at the end of the 1970s was partly responsible
for a considerable deterioration in the balance of payments situation.
Government interventions in the labor market took many forms and were far
from coherent. The history of indentured labor on the sugar estates during the
colonial period and of the passing of political power into the hands of the
descendants of these workers after independence is helpful in understanding the
policy framework. Some labor legislation affecting sugar workers was passed as
early as 1963. It was substantially extended and consolidated under the Labor Act of
1975. Meanwhile, the Industrial Relations Act of 1973 instituted the system of
remuneration orders (ROs) by which the National Remuneration Board
established minimum wages, conditions of employment, and specifications of jobs
for various categories of workers in the private sector. Superimposed on ROs was
the system of cost of living adjustments (COLAs), which was recommended by a
tripartite committee consisting of government, trade unions, and employer
organizations.
We did not have information to trace the impact of labor policies on wage rates
differentiated by skill levels. Nevertheless, the profile and behavior over time of
average monthly earnings (including nonwage benefits) by sector suggests the
likely impact of government interventions (Figure 2.7 and Table A-10).
Compensation levels in the early 1970s were highest in the government sector,
followed by sugar, manufacturing firms catering to the home market, and finally,
at the very bottom of the pyramid, EPZ. It was very unlikely that all these
differentials could be explained in terms of the skill composition of the labor force.
The Sedgwick Report of 1973 justified higher compensation for government
workers in order to facilitate recruitment, but it did not rationalize the magnitude
of the differential. The higher compensation to sugar workers, compared with
manufacturing, was due to large nonwage benefits for sugar workers reflecting the
impact of stronger trade unions in this industry. Relatively low average
compensation in EPZ reflected gender differentials in that a very high proportion of
workers in EPZ were women whose wages were appreciably lower than those for
men doing comparable jobs. The remuneration orders provided for substantially
higher minimum wages for male workers compared with female workers. Apart

3. A more specific evaluation of the incentive structure would require estimates of effective
exchangerates applicableto various branches of manufacturing. Unfortunately, such estimates
were not available. However, the structure of effective protection is discussed later in the
chapter.
 Figure 2.7
AVERAGE MONTHLYEARNINGS BY SECTOR, 1970 86
2,000 -

1,800 -
/ \ ~~~~Government

1,600-

1,400 - ARlSector Average

* 1,200 -

*o 1,000 - /tI;
M -/Textiles
1,000 (EPZ)

800 -/
/ Sugar Sector

600 - /'
Other Manufacturing ' A (
Apparels (EPZ)
400 - l l l l l l l l l
1970 1972 1974 1976 1978 1980 1982 1984 1986
Year

wk\wUMH
 Diagnsi 15

from these anomalies, ROs have not exercised a major impact on the pattern of
wage differentials (ILO 1985). Most workers were paid above the minima set by
ROs.
Average real earnings for all sectors increased in 1971 but then declined
sharply until 1974. The policy of severe wage restraint under a state of emergency
during these years prevented increases in real earnings during the spectacular
sugar boom of the mid-1970s. Average real earnings increased by a moderate 5
percent only in 1975, but there were quantum jumps in the next three years.
Antagonized by government's repressive measures during the early 1970s, many
workers voted for the opposition party (MMM) in December 1976. As mentioned
already, the share of the popular vote of the MLP and the PMSD declined sharply
between 1967 and 1976. However, the next government was again formed by the
MLP and the PMSD. The new government had a razor-thin majority of only one
seat in the assembly. Under these circumstances, the new government was forced to
accept demands for annual COLAs and bonuses, despite the sharp deterioration in
the macroeconomic situation.
Unemployment averaged 20 percent in 1971.4 The Meade Report published in
1961 had generated a great deal of concern about the growing labor force and
limited capacity of the economy to generate jobs. The govemment was committed to
a policy of high employment, and this objective permeated the first and second
development plans. These will be discussed later, including the government's
public works program. As part of the policy to maintain a high level of employment,
the government compels sugar estates to maintain a regular work force throughout
the year, despite large seasonal variations in the demand for labor. Such a measure
is not only a financial burden for the sugar industry, but it also is inefficient from
the standpoint of the national economy.
The government's policy framework vis-a-vis labor during the 1970s was full
of internal contradictions. Legislation aimed at protecting existing sugar workers
on the estates was an incentive for management to mechanize rather than hire
more labor. Trade union pressures, backed by the opposition party (MMM), during
the late 1970s caused wages to rise and manufactured exports to lose international
competitiveness, thereby slowing down job creation in the EPZ. And yet it is the
dynamism of this part of the Mauritian economy that had the potential of
alleviating unemployment pressures.
Government policies for the capital market relied mainly on nonprice policy
instruments. The job of mobilizing savings was largely entrusted to commercial
banks, which increased in number from five to nine during the 1970s. Two of them
(the privately owned Mauritian Commercial Bank and the government-owned
Mauritian State Commercial Bank) held 75 percent of total deposits, however. The
government controlled nominal interest rates. There was considerable
differentiation of these rates for savings instruments of various maturities, but the
average real rate remained negative throughout the period (Figure 2.8 and Table A-
11). The Post Office Savings Bank was established to mobilize small savings. It
did not offer fixed term accounts, however, and its operations did not keep pace with
those of commercial banks. In addition, there were 400 cooperative societies that
raised deposits from rural areas.
Allocation of credit and its overall amount was governed by a series of nonprice
policy instruments such as reserve requirements, overall credit ceilings, and

4. A person is said to be unemployedif he/she is in the 15 to 64 age bracket and is seeking work
but is withouta job.
 Figure 2.8
NOMINAL AND REAL INTEREST RATES
ON COMMERCIAL BANK DEPOSITS OF SIX MONTHS, 1970 - 86
10

Nominal

5~~~~~~~~~~~~~~~~~~~5

O~~~. - 0~~~~~~~~~~~~~~~~* . , ,

-1I

-16 ,,

-20- X , --
1970 1972 1974 1976 1978 1980 1982 1984 1986
Year

mk*485M
 Diagnosis 17

sectoral priorities. The highest priority was assigned to EPZ and to the government
itself, while there were severe limits on credit to importers and other traders.
Commercial banks did not have adequate incentives for lending on a long-term
basis, given the structure of controlled interest rates (World Bank 1978, p. 83). The
government established the Development Bank of Mauritius to lend on a long-term
basis and to make equity investments. Its operations grew slowly at first but then
picked up momentum. Its loans to industry, as a proportion of the total portfolio, rose
from 52 percent in 1972 to 72 percent in 1980. The Mauritius Housing Corporation
was established to provide mortgages to low- and middle-income borrowers.
Despite the creation of these and other specialized lending institutions, the
provision of finance on a medium- or long-term basis remained relatively
underdeveloped.
Altogether, Mauritius's capital market was remarkably well developed for a
country of very small size. The volume of savings and investment rose rapidly
during the period of the sugar boom (Table A-1). The rate of savings fell sharply in
the late 1970s, however, as the terms of trade declined. The government did not
reverse its interest rate policy, and interest rates remained negative in real terms
even during the years of stress. Strong preference was given to the EPZ, and
monetary policy became a handmaiden of the government budget.

How Efficient Was the Public Sector?

Policy was not exclusively aimed at promoting efficiency in the public sector.
The 1970s saw the formulation and implementation of two development plans. The
main objective of both was 'full employment." Achievements were more
impressive during the first plan (1971-75), when GDP in constant prices increased
by 7.4 percent p.a. and employment by 6.2 percent p.a., than in the second plan
(1976-80), when corresponding increases were more modest: 4.2 percent p.a. and 2.7
percent p.a. The expansion in the number of jobs during the two plan periods has to
be compared carefully, however. During the first plan, government agencies
indulged in artificial job creation on a massive scale. This was much less the case
in the second plan. Readers will recall that the spectacular terms of trade boom
occurred during the first plan, while the second plan witnessed a substantial
deterioration in the terms of trade, a nationwide strike of August 1979, and cyclones
in early 1980. In fact, the second plan had to be aborted eighteen months prior to the
scheduled completion date. Mismanagement of aggregate demand during the first
plan was one major factor responsible for the disruption of the second.
Total government expenditures were about 25 percent of GDP in 1968. They did
not increase in real terms, despite the initiation of the first development plan in
1971 (Figure 2.9 and Table 2.1). However, the volume of capital expenditures
increased largely on infrastructure and social service projects. After 1973 there
was a substantial expansion in total government expenditures in real terms and an
explosive increase of current outlays. The latter expansion reflected several hikes
in government salaries, large increases in interest payments on the growing
government debt, growing subsidies, and rapidly rising outlays on social services.
The parastatal sector consisted of twenty-three firms that accounted for 8.7
percent of GDP-a relatively low share compared with that in other Sub-Saharan
countries. Total government capital invested in parastatals yielded an average
return of only 2 percent in 1979, net of depreciation and subsidies. Air Mauritius
yielded a handsome 38 percent and the Mauritius Sugar Terminal Corporation a
considerable 15 percent. On the other side of the spectrum of returns on capital were
 Figure 2.9
GOVERNMENT EXPENDITURE AND REVENUE, 1965-80
3,000 -

2,500 -

2,000- /'

00 1,600 __
1,500 Current Expenditure
1,00
0~~~~~~~~~0

1,000 -_s---0,---
R ) X

Current Revenue
500 -

Capital Outlays
0 - lI l I I
1965 1967 1969 1971 1973 1975 1977 1979
Year

ck\w48868
 Dsagnoss 19

the Mauritius Meat Authority (-95 percent), the Tea Development Authority (-35
percent), and the Development Works Corporation (DWC), the agency managing
the government's public relief works (-29 percent).

Table 2.1 Growth Rate of Government Expenditures, 1969-86

(percent p.a., constant 1980 prices)

Expenditure 1969-73 1973-79 1980-86

Total expenditure 0.4 17.8 2.7

Current expenditure -3.3 13.6 4.2
Capital expenditure 3.7 4.2 -1.5

Wagesand salaries 6.0 16.9 4.5

Subsidies (includingtransfers) 0.1 14.1 -1.1

Social services 3.4 24.7 -1.4

Education -4A 10.1 -1.3
Health 3.8 14.6 -0.1

Economic services 4.3 14.3 -2.1

Source: IMF (various years).

Four factors were responsible for public sector inefficiency. First, the process of
preparing projects and evaluating their costs and benefits was neither systematic
nor comprehensive. Consequently, a number of projects were started during the
1970s whose prospective low returns on investment could have been anticipated.
Second, a number of parastatals were established whose objectives did not place
much emphasis on the efficiency criterion compared with other government
concerns. Examples are the DWC (responsible for creating jobs through public
relief works), the agricultural marketing board (expected to subsidize producer
prices), and the trading corporation (expected to subsidize the consumer price of
imported wheat and rice).
Third, overstaffing characterized most parastatals. Following the end of the
sugar boom, 13,000 people were added to the payroll of the public sector during 1975-
77. A substantial proportion of these appointments were aimed at mobilizing
electoral support during the 1976 elections. 5 The Central Water Authority
estimated that it could shed 50 percent of its employees without reducing its
operations (World Bank 1987, p. 20). Altogether, the public sector provided 25
percent of the total number of jobs in 1975. Fourthly, compensation levels tended to
be high relative to those in the private sector. Pay levels in DWC and the Central
Housing Authority were triple those in the private sector (World Bank 1987a, p. 44).
Some parastatals (for example, Cargo Handling Corporation and Overseas
Telecommunications) maintained compensation scales that were even higher than
in the rest of the public sector, reflecting stronger trade unions.

5. Accordingto Simmons (1982, p. 184),the elections of August 1967 prompted the hiring of
10,600relief workers six months beforethe vote.
20 Successful Stabilization and Recovery in Mauritius

There was considerable potential for improving the efficiency of the public
sector. Compared with the situation in Sub-Saharan Africa, however, the
magnitude of the problem in Mauritius was relatively small. This was largely
because the scope of the public sector did not expand very much in the independence
period. Although the MLP's ideology contained some radical ideas, including
nationalization of key industries (for example, sugar, transport), they were never
put into practice.

Income Distribution Policies

Mauritius started out with a very skewed pattern of asset and income
distribution. Thirty large plantations owned by Franco-Mauritians accounted for
nearly half of the total cultivable area. The Gini ratio of the income distribution
was 0.5 in 1961-62.6 The government was determined to reduce income inequality.
Its emphasis on "full employment" could also be interpreted as part of the
egalitarian thrust. Many instruments were used to achieve these objectives, and
some tolerated considerable inefficiency.
Very little was done to alter the distribution of assets through nationalization,
wealth taxes, or death duties. Land was redistributed to a small extent to small-
holders through the Tea Development Authority. This did not prove to be an effective
program, as we will explain later. A more important program was to build human
capital via government provision of education and health. Although these services
were not provided exclusively to low-income groups, they did substantially raise the
earning capacity of the mass of the population via expanded secondary schooling
and a considerable reduction in mortality and morbidity rates.
Government used sugar duties as a major redistributive instrument in
addition to a progressive personal income tax structure. 7 The yield of sugar duties
contributed nearly 8 percent to total revenues in 1973-75 and 18 percent in 1979. In
this way, a sizable part of the "EEC dividend" was transferred from high-income
owners of large sugar estates to lower income beneficiaries of public expenditures.
About 21 percent of the recurrent government budget subsidized the consumer
price of rice and wheat. In addition, government subsidized water and electricity
rates. These subsidies were not confined to low-income groups, and there were
considerable leakages to middle- and upper-income groups. Apparently,
subsidized foods were also used as animal feed. Notwithstanding these design
deficiencies, a great deal was accomplished through these policies in terms of
nutrition and increased welfare of low-income groups.
Finally, government policies affecting the labor market were a mixed bag in
terms of their impact on equity and efficiency. Measures to promote manufactured
exports from the EPZ and thereby expand job opportunities scored heavily on both
counts. Other measures that created segmentation and wage differentials in the
name of equity impeded intersectoral mobility. Sugar workers, for example, got
their wages during the lean season even though there was not enough work to go
around. The DWC was created in 1971 to create jobs for unemployed youth by
undertaking labor-intensive public works such as village improvement,
preparation of new agricultural land and reforestation, and various relief works.

6. The Gini ratio has a range from zero (perfectlyequal incomedistribution) to one (very skewed
incomedistribution).
7. Tax rates ranged from 3.3 percent on personal incomes of up to 10,000rupees to 58.6 percent
on incomes exceeding250,000rupees.
 Diagnosis 21

Wages in these programs were set 20 percent below that of unskilled government
workers. Over time, anomalies, such as DWC workers getting more than EPZ
workers, emerged. In 1976 DWC had 14,000 relief workers on its payroll.
According to Legum (1978, p. B315), they were perceived by many as workers 'who
spend much of their time sitting by the roadside."
The Gini ratio declined to 0.42 by 1975, signaling that income distribution had
become less unequal. By 1979 only 12 percent of the population was "absolutely poor"
(see Table A-2). The Gini ratio fell further to 0.37 in 1986-87.

Agricultural Policy
The agricultural sector in the colonial period was dominated by sugar, largely
in the hands of Franco-Mauritian planters. Ramgoolam described them as 'the
oligarchy" (Mulloo 1982, p. 118) that enormously influenced the economic policies
of the colonial government. After independence was secured, the government made
a major effort to regulate the sugar sector through labor laws and taxes. However,
since sugar was critical to the generation of foreign exchange, the government also
tried to secure favorable foreign markets and remunerative prices. Sugar was a
very profitable crop as long as Mauritius had access to preferential EEC prices.
However, changes in EEC agricultural policy could endanger sugar's viability.
Consideration of this risk led the government to try to promote nonsugar farm
activities as well as manufacturing and thereby to diversify the structure of
production.
SUGAR SUBSECTOR. Mauritius had 23 percent of the sugar quota under the
Commonwealth Sugar Agreement. When the United Kingdom joined the EEC, it
insisted on a suitable arrangement to safeguard the interests of Commonwealth
sugar producers. Mauritius succeeded in obtaining a very good deal under the
Lome Convention signed in 1975 by the EEC and African, Caribbean, and Pacific
(ACP) countries. Mauritius's share in the EEC quota was 38 percent, and the
quantity of sugar subject to the new arrangement increased by 30 percent compared
with what was eligible under the Commonwealth regime. 8 Furthermore, the price
guaranteed by the EEC to ACP countries was equal to the producer price for
European beet sugar producers. It was much more stable than the world free market
price and for most years its level was much higher (Figure 2.2 and Table A-4). The
EEC quota was roughly 80 percent of production in Mauritius-a much higher
proportion than in most other ACP countries (World Bank 1986a, p. 143). In Chapter
3 we will enquire into political economy considerations underlying this favorable
deal.
Most of Mauritian exports not going to the EEC were absorbed by the United
States at prices well above the free market level in most years. Mauritius had a
quota of 27,000 tonnes under the U.S. Sugar Act until it expired in 1975. Since 1977
Mauritius has secured duty-free access to the American market under the
Generalized Scheme of Preferences (GSP).

8. The free market price rose very sharply, however, during 1974from 15 cents per pound in
January to 57 cents per pound in November. For some months, therefore, the free price
exceededthe EEC price for 1974 of 32 cents per pound. Apparently, this negative differential
led some sugar-producingcountries to be ambivalent about the Lome deal under negotiation
duringthis time. Mauritius,however,was firm about seeking a large EEC quota.
22 Sucesfui Stabilizaion and Recoveryin Mauntius

The tax on sugar was introduced in 1961 at a uniform rate of 5 percent of the
gross value of exports. The initial rationale was mainly fiscal, and in the early
1970s the rate rose to 6 percent (Table 2.2). A subsidiary objective of the sugar tax
was to promote diversification in production by reducing the rate of return of
investment in sugar in relation to other crops. A major change occurred in 1975.
Small planters (exporting less than 20 tonnes) were exempted and the principle of
progression was introduced in the rate structure. The tax acquired a redistributive
rationale. Estates producingmore than 3,000 tonnes had to pay a tax at a 12 percent
rate. In 1979, a surcharge of 75 percent on the basic tax was imposed to mop up the
windfall gains occurring to sugar producers from the devaluation of the rupee.
Furthermore, estates producingmore than 3,000 tonnes now had to pay a tax rate of
23.6 percent. In addition, these estates were subject to the corporate tax (after
payment of dividends) at a rate of 55 percent for publicly owned companies and at 66
percent for private companies.

Table 2.2 ExportDuty on Sugar, 1970-90

(percentage of gross proceeds)
Individual
producer's 1970- 1975- 1979- 1983- 1985- 1989-
exports 72 76 81a 19 8 2 b &4a 88 god
(tonnes)

Below20 6.0 0.0 0.0 0.0 0.0 0.0 0.0

20-75 6.0 6.0 10.5 9.0 0.0 0.0 0.0
75-1,000 6.0 7.0 12.3 10.5 12.3 0.0 0.0
1,000-3,000 6.0 8.0 15.8 13.5 15.8 15.8 0.0
Over3,000 6.0 12.0 23.6 20.3 23.6 23.6 18.8

Note: Allsugar is sold through the Mauritius Sugar Syndicate,whichpays a uniformprice to all
producers based on average export prices, taking account of preferential prices in the EEC and
United States as wellas free world priceselsewhere.
a. Including surcharge of 75 percent on the basic duty.
b. Including surcharge of 50 percent on the basic duty.
c. Up until March 1985a producerexporting6,000tonnes wouldhave had to pay a duty equal
to 23.6 percenton the entire proceeds.After this date, the first 1,000tonnes wouldbe exempt,the
next 2,000tonnes wouldbe taxedat 15.8percent,and the remaining 3,000tonnes at 23.6 percent.
With such a marginal rate structure, the average tax wouldbe about 17 percent.
d. These changes occurred followingthe enactment of the Sugar Industry EfficiencyStudy
Actin July 1989.

Source: WorldBank (1986a).

Large planters claimed that the sharp hike in the rate of the export duty and the
financial burden of government's labor laws had reduced their profitability very
considerably (Table 2.3). The level of wages in the sugar sector was relatively high
(Figure 2.7). Furthermore, as noted already, planters were obliged to maintain a
 Diagnsis 23

regular work force (defined as number of workers in the last slack season before
independence) all year around. In addition, they had to maintain at least 15 percent
of the supplementary labor hired during the harvest season, which had an
attendance record of 55 percent. Wages and salaries constituted over 50 percent of
operating costs.

Table 2.3 Selected Indicators of Twenty-OneLarge Estates in Sugar Sector, Selected

Periods 1968-84
Indicator 1968-70 1972-75 1976-79 1980.83/84

Employment('000) 45 45 46 43
Netprofit(loss)in
millionsof rupeesa
After depreciation - 508 74 (32)
Before depreciation - 558 148 67
Net capital employed - - 1705 2400

Return on net capital

after depreciation (%) 4.3 -1.3

a. After payment of exportduties but beforecorporatetax and distribution of dividends.

Source:WorldBank data.

The structure of taxation and labor legislation generated a powerful incentive

to break up sugar estates. Although the twenty-one large estates remained in tact,
estates with 100 to 500 arpents have diminished in number (Table 2.4). Not only did
small planters (with fewer than twenty-five acres) enjoy exemption (or very low
rates) from the sugar duty, but they were also exempt from the provision of onerous
labor laws. In fact, small planters were a distinctive group whose economic
interests were quite separate from those of large planters.
The trend growth rate of sugar production during 1963-79 was 1.5 percent p.a.
(Figure 2.10). Average yields rose from 7.17 tonnes per hectare in 1970 to 9.12
tonnes in 1979 (98.50 polarization). Only 5 percent of the sugar was consumed at
home at extremely subsidized prices. Nearly 90 percent was sold in the preferential
markets of EEC and the United States.
DIVERSIFICATION WITHINAGRICULTURE. Nonsugar agriculture in Mauritius is
constrained by cyclones and the prevalence of rocks. Inspite of these problems, the
government promoted the production of tea exports and various food crops as
substitutes for imports. Some of the crops could be grown between the rows of sugar
cane (interline cultivation), while others could be grown on land that was
agronomically unsuitable for sugar.
Mauritius had been exporting tea since the 1950s. The government visualized
an ambitious program to expand tea cultivation in 1969. In the middle of 1971, the
government launched a project financed by the International Development
Association (IDA) for planting 5,820 acres on state-owned land that would be leased
to 3,730 smallholders. These smallholders were to be trained by a new
24 Sucoes8fil Stabilization and Recoveryin Mauritius

Organization called the Tea DevelopmentAuthority (TDA),before being settled on

two-acre plots. The project encountered enormous difficulties during
implementation. At its end in the middle of 1980,only 2,675 acres had been planted.
Trainees refused to become settlers, and instead they became employees of TDA.
Production oftea was only 24 percent of the estimate made at the time the project was
launched. Average productivity of TDAlaborers was only about one-third of that in
the private sector. TDA owned three tea factories, and all of them ran at a financial
loss. This was also true of four private factories and one factory owned by the
ministry of cooperatives. Given the prevailing wage structure in Mauritius and
low international tea prices (South Africa withdrew the premium of 10 percent it
paid over London auction prices in 1979), the economic viability of tea became
suspect. Table 2.5 shows a modest increase in overall tea production between 1972
and 1981, even though acreage declined.

Table 2.4 Number of Sugar Planters by Size of Holdings

Size of holdings Average 1966-70 Average 1974-79 1982
Number Arpents Number Arpents Number Arpents
harvested harvested harvested

Fewer than 5 arpents 25,003 28,920 31,322 36,839 32,028 40,996

5 to 100 arpents 2,504 31,358 2,302 27,448 2,603 28,454
100 to 500 arpents 62 17,820 49 15,557 43 12,266
27,569 78,098 33,673 79,844 34,675 81,716
Large mills and
associated estates 21 96,094 21 105,356 21 102,597

27,590 174,192 33,694 185,200 34,696 184,313

Note: An arpent is 1.04 acres

Source: World Bank (1986a, pp. 134,145-146).

The increase in production of selected food crops for the local market was quite
impressive. For example, the output of potatoes almost doubled during 1972-81,
thereby eliminating the need for imports (Table 2.5). Similarly, maize production
almost tripled and there was a large increase in the output of onions and also of
groundnuts.
The economics of these diversification programs was difficult to assess,
however. Sugar estate owners, obliged by labor laws to retain workers through the
slack season, utilized them to grow food crops during this period. The Agricultural
Marketing Board (AMB) guaranteed prices to producers at remunerative levels.
The guaranteed price for potatoes, for example, rose by 55 percent in terms of 1980
rupees (after deflating nominal prices by the consumer price index; see Table A-
14). The corresponding increase for onions was 37 percent. The AMB had a
monopoly on the import of these items and brought in overseas supplies only to the
extent that local production fell short of demand. No study has been made that
 Figure 2.10
SUGAR PRODUCTION AND EXPORTS, 1963 - 86
800-

Production

700- X
Production Trend

I' ~ ~ ~ I

4 00 - ___ _

1963 196f5 1967 1969 1971 1973 1975 1977 1979 1981 1983 19886
Year

eak\w4MR1K
26 SuccessfdlStabiliatwonand Recove in Mawitiiu

compares local and border prices to quantify the extent of protection enjoyed by
farmers.
The government subsidized the consumer price of rice and wheat flour
throughout the 1970s. Each adult was entitled to buy 200 grams per day of basic
quality rice and wheat flour at subsidized prices. Those doing "heavy work" were
entitled to twice the basic entitlement and children to 50 percent. The subsidy
increased from 32 percent of the landed cost of imports in 1975 to 60 percent in 1979
(World Bank 1983, p. 11). The State Trading Corporation, which was responsible
for administering these subsidies, had to rely on heavy support from the budget.
These subsidies rose from 100 million rupees in 1976/77 to 230 million rupees in
1981/82.

Table 2.5 Nonsugar Agriculture: Acreage, Production, and Imports

(crops are listed in descending order of acreage in 1972)

Crop 1972 19810 1986

Tea (leaf)
Acreage (arpents) 14,765 9,000 9,650
Production (tonnes) 23,543 26,577 42,651

potatoes
Acreage (arpents) 1,009 1,500 1,895
Production (tonnes) 7,516 13,500 16,265
Imports (tonnes) 1,569 nil nil

Groundnuts
Acreage (arpents) 1,009 1,310 1,605

Production (tonnes) 1,471 1,900 2,250

Maize
Acreage (arpents) 592 1,285 4,304
Production (tonnss) 470 1,395 7,970
Inports (tonnes) n.a 11,000 16,000

Onions
Acreage (arpents) na. 510 598
Production (tonnes) ns. 2,242 2,995
znports (tonnes) n.. 1,753 2,385

Note: Crops are listed in descending order of acreage in 1972.

a. Average of 1981-82. 1980 was an abnormal year owing to unfavorable weather.

Sources: World Bank (1983); FAO (1986); World Bank (1989a);

Government of Mauritius (1987).
 Dignosis 27

Strategy for Manufacturing

Mauritius adopted a two-pronged industrial strategy to promote import
substitution in the home market and to expand exports. Two entirely separate policy
regimes governed firms catering to the small domestic market and other firms that
produced exclusively for foreign markets. Despite many imperfections in the
design of these policies, the outcome was fairly positive. Value added of the
manufacturing sector rose at an average annual rate of 4.6 percent during 1967-73
and at 6.2 percent in 1973-79. The share of manufacturing in GDP rose from 9.4
percent in 1970to 14 percent in 1979.
IMPORTSUBSTITUTION POLICY.Powerful fiscal incentives and import protection
were provided to manufacturing firms under the Development Certificate (DC)
scheme.9 This scheme was started in 1964,but there was little response initially. In
1969, protection against imports became a key part of the package. Nominal tariff
rates continued to rise over time except on food items. Quotas restricted competing
imports to 20 percent of their value in the base period, according to a 1984 report by
the Center for Development Technology. An import deposit scheme (covering 20
percent of imports) was introduced in 1977 with the aim of raising the rupee cost of
imports. New quotas were introduced in 1978 on imports of textiles, garments and
consumer durables (refrigerators, TVs, cars, motorcycles, etc.) in order to contain
pressures on the balance of payments. In 1981, the government extended import
licensing from about 25 percent to 65 percent of total imports.
Table 2.6 shows average effective rates of protection (EROP) by branch of
manufacturing and the share in value added of each branch. The range of EROPs
was very large. Fortunately, branches of manufacturing with high EROPs had a
small share in total value added in the sector. The one exceptionwas metal products
with an EROP of 113 percent and a share in value added of 19 percent. Food
processing, which was the largest branch, was subjected to negative protection in
order to contain the cost of living. The average EROP for the manufacturing sector
was 89 percent. 10 Newly created firms enjoyed protection against imports on an
indefinite basis. There was little justification for such open-ended and variable
protection. Owners of highly protected firms were subsidized by the rest of society
for a very long time. Accordingto Greenaway and Milner (1989, p. 1007), 'excess
profits were being earned and labor costs were relatively high' in the industries
with the highest levels of effectiveprotection.
OF MANUFACTURERS.The
EXPORTPROMOTION Meade Report of 1961 had advocated
export-led industrialization, but the government did not act on this

9. The benefits were numerous: protective import duties and quotas for infant industries;
suspension of import duties on materials and equipment for industrial use and not locally
available;rebates of import duties on other raw materials and componentsfor specified
industries;d-rawback ofimportdutiesonmaterialsand componentsusedin exportedproducts;
initial depreciationallowanceof 40 percenton plant, 20 percenton industrialbuildings,tax
holidaysof fiveyears, exemptionfromincometax on dividendsup to eight years;long-term
loansat favorableinterestrates fromthe Development Bank;leaseofstandardfactorybuildings
at subsidizedrates;and freerepatriationfacilities.
10. Greenaway and Milner (1989) arrive at an estimate for 1980 of 128 percent. In twelve out of
twenty-twobranches,EROPexceeded100 percent. In descendingorder of EROP, these
brancheswereleatherproducts;watchesand lenses; limeand stone; woodproducts;electrical
machinery;beverages;footwear;fabricatedmetals;basemetals;paperproducts;furniture;and
rubber.
28 Successful Stabilization and Recovery in Mauritius

recommendation until it had discovered for itself the limited scope of import
substitution in a very small domestic market (Bheenick and Schapiro 1989, p. 99).
In 1970, the government established the second prong of its industrial strategy
(namely, export production a la Jamaica and Hong Kong) without, however, giving
up the first prong (that is, import substitution). The Export Processing Zone
established in 1970 was a great success,but it also suffered from some weaknesses.

Table 2.6 Average EffectiveRates of Protection and Valued Added, 1983

(percent)
Industry EROP Valued added

Electrical machinery 824 5

Leather products 330 5
Textiles and apparel 189 3
Metal products 113 19
Paper products and printing 108 5
Beverages and tobacco 79 8
Wood products 59 2
Chemical products 51 20
Nonmetallic mineral products 11 1
Food -24 32

Source: World Bank (1985) and Government of Mauritius (1984a).

Bheenick and Schapiro (1989) provide a thoughtful assessment of the EPZ

experience, and we will followtheir line of argument. Incentives in the form of tax
holidays, exemptions from import duties and from some aspects of the regulatory
regime, as well as preferential credit were provided to foreign and domestic
investors who would wholly specialize in exporting.11 A distinguishing feature of

11. The Export Processing Zone Act of 1970 provides concessions and incentives to export-
oriented industries. The main features are complete exemption from payment of import duty
on capital goods; complete exemption from payment of import and excise duties on raw
materials, components, and semi-finished goods (except spirits, tobacco, and petroleum
products); and corporate income tax holiday for ten to twenty years. Corporate tax was 50
percent of the normal rate during eleven to fifteen years and 75 percent of the nominal rate
during sixteen to twenty years. Dividends were tax free for any consecutive five years
beginning with the first year of dividend payments. EPZ firms were also protected against
double taxation (in both countries) by agreements with France, the United Kingdom, Germany,
and India. Other features of the act include loans at preferential rates for importing raw
materials; electric power at subsidized rates; export finance at lower interest rates; loans up to
50 percent of total building costs for a ten-year period; priority in allocation of investment
capital by Development Bank of Mauritius; provision of reinforced factory buildings at
subsidized rates; free repatriation of capital and remittance abroad of profits and dividends to
companies with an approved status; and guarantee against nationalization. EPZ firms are
subject to general labor laws including minimum wages, etc., but they have greater flexibility in
 Diagnosis 29

the Mauritius EPZ was that it was not geographically restricted. "Bonded
factories," catering exclusively to foreign markets, could locate anywhere on the
island. The Ministry of Commerce and Industry had to be restructured to provide
institutional support for the new export policy by undertaking studies aimed at
attracting foreign investors, scanning overseas markets, evaluating projects, and
monitoring developments. The Development Bank of Mauritius provided long-
and short-term credit to EPZ firms on a priority basis and operated the industrial
estates. These firms enjoyed preferential access to the EEC market on a duty-free
basis under the Yaounde and Lome conventions.
The volume of EPZ activity (employment, exports) expanded rapidly,
particularly in 1971-75 (Table 2.7). High sugar prices during a part of this period
created conditions enabling local investors to invest in the EPZ alongside
foreigners. Ethnic connections between Hong Kong investors and Sino-
Mauritians proved to be invaluable. These investors were concentrated in the
textile and garment industries. Bheenick and Schapiro (1989, p. 117) suggest that
local participation in EPZ equity was roughly half-a much higher ratio than in
free zones in other developing countries. Mauritius was in a better position to take
advantage of EEC preferential arrangements than were other ACP countries,
'because of the relative development of its entrepreneurial class and its educated
and easily trainable labor force" (Bheenick and Shapiro 1989, p. 119). Over 80
percent of EPZ workers in the 1970s were women. Their wages, influenced by
gender differentiated minimum wage levels, were 30 percent lower than for men.
A weakness of the EPZ was its heavy concentration on textiles and garments
and on EEC markets. Knitwear, for example, constituted 44 percent of total exports
in 1976 and 52 percent in 1980. The share of exports going to EEC was about 85
percent throughout the period. Access to EEC markets, on a duty-free basis, is
subject to very elaborate "rules of origin" and the "safeguard clause." During the
late 1970s Mauritius had to exercise "voluntary restraint" in the French and
British markets with respect to a number of product lines. It coped with these
restrictions fairly successfully by hopping from one item to another in various
markets. For example, the share of men's outerwear (not knitted) in total EPZ
exports declined from 14 percent to 6 percent in 1976-80 while the share of women's
outerwear (not knitted) rose from 0 percent to 4 percent. Knitted outerwear's share
also rose from 37 percent to 47 percent during the same period.
The EPZ has had its critics in Mauritius. Dependency theorists such as Alladin
(1987) regarded it as an enclave for international capitalism. This was also the
view of the extreme leftist faction within the MMM. These observers would have
favored an industrialization pattern that gave priority to the development of the
local capital goods industry. This is a dubious argument in our view, given the
very small size of the local market and the lack of a long industrial tradition at this
stage of Mauritius's development. Alladin claimed that EPZ posed a threat to the
sugar industry. It is difficult to understand this argument. Sugar profits helped
finance the EPZ. He also alleged that women workers were exploited in these
activities. They probably were, although gender wage differentials have narrowed
to some extent in recent years.
The momentum of EPZ activity slowed down considerably in 1976-80 (Table
2.7). The volume of investment declined. The rate of growth of exports and

discharging workers. For example,no severance allowanceneed be paid beforefiring workers,

and firms may reduce employmentwithout advancenotificationto the Board of Termination of
Contracts.
30 Successful Stabilization and Recoveiy in Mauritius

employment decelerated. A rising real exchange rate and large wage hikes tended
to reduce considerably Mauritius's international competitiveness. It was clear that
the policy framework had to be altered to restore the earlier EPZ dynamism.

Table 2.7 Selected Indicators of Export Processing Zone, 1971-86

Indicator 1971-75 1976-80 1981-86

Growth rate of value added

(constant prices; % p.a.) 17.0 14.9 16.0
Output as percentage of total
manufacturing outputa 16.6 30.5 53.5
Growth rate of investment
(constant prices;% p.a.) 2.8 -0.7 4.5
Foreigndirect investment
in EPZ (millionRs;current prices) 5.0 15.0 38.9
Growth rate of EPZ exports
(constant prices;% p.a.) 31.2 9.8 31.4
EiPZimports as percentage of
total importsa 8.5 12.3 33.9
Growth Rate of EPZ
employment (% p.a.) 38.1 8.5 21.8
Share of EPZ employmentin
total employmenta 5.3 10.7 30.8
Number of firms in EpZa 48 106 408
Net foreign exchangeearningsa
(US$million;current prices) 8.0 31.1 50.7

a. End of period
Sources: WorldBank (1978,1985).

Policies for Tourism

Foreign tourism involves not only transport over a very long distance to this
remote island in the Indian Ocean but also such elements as hotels, sightseeing,
other recreation, marketing as well as promotion, and the "sale" of holidays in the
form usually of all-inclusive tour packages. Many independent actors are
involved in this interdependent activity. Starting from a very small base, the
number of tourists increased by 25 percent per annum during 1970-75 but slowed
down to 9 percent during 1975-80. Tourism's share of GDP rose from 1.1 percent to
4.0 percent during the 1970s. It became the third largest earner of foreign exchange.
According to Archer and Wanhill (1982), the incremental capital-output ratio
(ICOR) for tourism was only 2.5 compared with 3.3 for agriculture and 3.9 for
manufacturing. The deceleration in the growth of tourism during the late 1970s was
the result of the tenfold rise in fuel costs in 1973 and the fourfold increase in 1979
 Dik4wsaia 31

owing to oil price hikes. Air fares to Mauritius became even more expensive than
before.
Government policy during the 1970s was to attract high-incometourists. There
was considerable concern that indiscriminate development of tourism could
accentuate congestion in the already crowded island and generate negative
cultural and environmental repercussions. The government offered development
certificates to hotel builders that entitled them to tax and other incentives. The
government chose to rely almost totally on scheduled airlines, including Air
Mauritius, to transport tourists. There was a virtual prohibition on chartered flights
and a number of restrictions on foreign airlines aimed at providing support to the
national flag carrier (Air Mauritius). Although these policies saw a substantial
expansion of tourism during the 1970s, they did not facilitate the full exploitation of
the potential (UNDP-IBRD 1982, p. 345). Furthermore, these policies had to be
modified because of important changes in the world economy and in the
international tourist trade. Several tour operators had experienced a sharp
reduction in their profit margins and had dropped or were considering dropping
their Mauritian operations.
It was important for the government to decide whether it should cultivate
'cultural tourists" (those who wish to explore life-styles other than their own) and
'independent tourists" (those who wish to organize their own holidays) in addition
to the high-incometourists. The government also needed to consider ways of easing
factors limiting transport capacity on scheduled airline services, particularly in
the peak winter tourist season.
 3
Political Factors and Their Impact
on Economic Policy in the 1970s

In analyzing the evolution of macro and sectoral policies in the 1970s in Chapter
2, we briefly referred to a number of political determinants. In this chapter we will
spell out the political dynamic, the main political trends and their implications,
particularly for readers who are unfamiliar with Mauritius's recent history. Our
aim is not to write a definitive analysis but rather to provide background for an
understanding of selected economic issues.

Main Political Trends

Mauritius inherited a constitutional system that visualized a parliamentary
democracy following the Westminster tradition. Whether Mauritius should be
independent or should have a "free association" with the United Kingdom was an
issue in the August 1967 election. The PMSD was afraid that independence would
lead to Hindu domination that would hurt Franco-Mauritians and other supporters
of the party. The PMSD lost the election to an alliance of MLP, IFB, and CAM
members. A coalition government headed by Prime Minister Seewoosagur
Ramgoolam was formed (see Tables 3.1 and 3.2).
Soon after independence, Ramgoolam invited Gaetan Duval, the head of PMSD,
to join the government. The IFB left the coalition since it did not wish to be
associated with PMSD. A series of strikes instigated by MMM caused the
government to pass the Public Order Act of 1971 to deal with 'emergency
conditions." Under this act, the government clamped down on the press and
detained MMM leaders. It pursued a policy of wage restraint and postponed
elections scheduled to be held in 1972. Even during the spectacular sugar boom of
1973-75, Mauritians had to live under these extraordinary, somewhat repressive,
political conditions.
The PMSD walked out of the coalition government in December 1973. The
prime minister wished to raise the rates of personal and corporate income taxes by
10 percent and the PMSD opposed this move. The govemment continued till 1976 as
a coalition of MLP and CAM. Ramgoolam decided to lift the state of emergency and
to hold elections in December 1976. This was a turning point in Mauritius's history
in the sense that the government decided to play by the rules of constitutional

32
 PoliticalFactors and TheirImpact on Economic Policy in the 1970. 33

democracy. In many other Sub-Saharan countries, governments did not feel

compelled to play by these rules. One party states were established and elections
ceased to have much significance.

Table 3.1 Major Political Parties and Election Outcomes, 1967-87

Number of parliament seats

Party 1967 1976 1982 1983 1987

Mauritius Labor Party

(MLP)a 26 28 2 14 9
Independent Forward Block
(IFB)b 12 - - - -

Parti Socia]isteMauricien
(PSM)C - 18

Comite D'ActionMusalman
(CAM)d 5 naL la. na. ta.

Parti Mauricien Social

Democrate(PMSD)e 27 8 2 5 6

Mouvement Militant Mauricien

(MMM)f - 34 42 22 24
Mouvement Socialiste Militant
(MSM)g - - - 27 26

Total seatsh 70 70 66i 70 70

n.a. not available

a. A moderate socialist party founded in 1936 by Dr. Maurice Cure.
b. Formed by Bissondoyal in 1954, the IFB represented poor rural Hindus.
c A left-of-center splinter group of MLP formed in 1979 by Harish Boodhoo. In 1983 it
combined with some dissident members of MMM to form MSM. PSM was revived again in
1986, but it did not win any seats in 1987.
d Formed in 1958 to represent the interests of Muslims.
e. Founded in 1954 to represent the interests of Franco-Mauritians and Creoles.
£ A radical party formed in 1969 by Paul Berenger. It cuts across all ethnic groups and
controls major trade unions.
g Formed in 1983 by Aneerood Jugnauth (MMM) and Harish Boodhoo (PSM).
h Include eight 'best losers' as provided by the 1968 Constitution. To ensure adequate
representation of all ethnic groups, defeated party candidates become nominated members
of Parliament.
i Only four "best loser' seats were allocated.

Source: Legum (various years).

34 Successful Stabilization and Recovery in Mauritius

Table 3.2 Coalition Governments and Leaders, 1968-87

Period Coalition parties Prime minister

1968-69 MLP + IFB + CAM S. Ramgoolam

1969-73 MLP + CAM + PMSD S. Ramgoolam
1974-76 MLP + CAM S. Ramgoolam
1976-82 MLP + PMSD S. Ramgoolam
1982-83 MMM+ PSM A.Jugnauth
1983-87 MSM + MLP + PMSD A. Jugnauth

Source: Legum (variousyears).

The posture of the MMM was significant. It had attempted to exercise

considerable pressure by resorting to strikes. However, after the 1971 strike, Paul
Berenger, the prominent MMM leader, said, "We must either stay as we are, protect
our popular and revolutionary image, or dilute our ideological message and stretch
out our hands to the progressive and democratic elements" (quoted in Mannick
1979, p. 41). By 1976, Berenger had answered his own question. During the election
campaign he declared, "The socialism that inspires us is synonymous with liberty,
and rejects the form of society built in East European countries" (quoted in Legum
1977,p. B279).
The political landscape changed with the 1976 elections. The MMM won the
largest number of seats but not enough to form a government on its own (Table 3.1).
The MMM also failed to form a coalition government with support from some other
party. Instead, Ramgoolam came back as prime minister and headed a MLP,
CAM, and PMSD coalition government. To get cooperation from PMSD,
Ramgoolam had to repeal the 10 percent surtax introduced a few years earlier. The
new government had a very thin majority of only one seat in the assembly, but it
stayed in power till 1982.
Three political trends emerged during the 1970s. First, parliamentary
democracy survived intact. Second, no single party was ever able to form a
government. Third, major party leaders collaborated to freeze out MMM. The first
two trends influenced Mauritius's economic policy process. Political power was
widely dispersed, and most policy decisions required consensus building and
mutual accommodation. In terms of the classification used by Haggard and
Kaufman (1989, p. 233), Mauritius is a "consultative democracy" rather than a
"plebiscitary" one. The former are said to be more effective in making economic
policy than the latter. Consultative democracies are also better in the policy sphere
than many authoritarian regimes. All three trends influenced the substance of
economic policy. No agreement could be reached on radical leftist solutions that
formed part of initial political programs of the MLP and MMM.

The Policy-making Process

Considering its small size, Mauritius has a large policy circle. Many
individuals, groups, and agencies play some part in economic decisionmaking.
What role is played by each of them is not at all easy to decipher, but we will
advance a few hypotheses.
 Political Factors and Their Impact on Economic Policy in the 1970s 35

First, Prime Minister Ramgoolam presided over four governments from 1967 to
1982. His role was great even though his power was circumscribed by the
Constitution and the need to cooperate with many parties or pressure groups. He
joined the MLP in 1948 and remained in the limelight until his death in 1985.
Ramgoolam had a distinctive ability to forge a consensus among people with
opposing views. He brought moderation and pragmatism to Mauritian politics. 1 2
Ramgoolam's long tenure at the helm of state contributed greatly to adapting
constitutional democracy to the needs of a society that was stratified in many
different ways. The prime minister became the main instrument of
accommodation and reconciliation. About himself he once said, 'I have been a
Fabian all my life, in my approach to politics, in my tactics and political
philosophy" (quoted in Mulloo 1982, p. 42).
Second, Franco-Mauritians played a considerable policy-making role through
the PMSD and various business organizations such as the Sugar Producers'
Association. The PMSD was a member of the governing coalition in 1969-73 and
again in 1976-82. Duval had excellent connections abroad and used them to good
advantage. Franco-Mauritians were a small group with much wealth and a stake
in many different parts of the economy. Their economic and financial prominence
gave them much direct and indirect influence over the making of economic policy.
Third, workers were represented by trade unions, the MLP, and the MMM. All
labor groups were represented by MLP at independence. After Ramgoolam invited
the PMSD to join the coalition government, many workers became disaffected. The
MMM was born in 1969 and attracted the support of trade unions (grouped under the
General Workers Federation) in the transport, electricity, and sugar industries.
Another twenty trade unions (under the Mauritian Labor Congress) remained tied
to the MLP. The role of trade unions in economic policy was circumscribed during
the emergency period from 1971 to 1975. Government passed the Industrial
Relations Act in 1973 to curb the growing strength of MMM. Under this act, as few
as seven workers could form a trade union. The number of trade unions then
rapidly rose from 89 in 1974 to 283 in 1979. Such proliferation weakened the unions
financially and organizationally. After the emergency was lifted and the MMM
scored heavily in the 1976 elections, the role of worker organizations in economic
decisions was much enhanced. In fact, the government was alarmed by widespread
strikes and the emergence of strong wage pressures. 1 3 Widespread strikes broke
out again in 1979 when the government refused to recognize two new unions.
Two other groups should be noted briefly. The Chinese represent 3 percent of the
population. They own restaurants, retail stores, and EPZ firms. Their strong
ethnic link with Hong Kong investors was a considerable asset. Small planters,
mostly Hindus, are a growing interest group. Most small planters are members of
176 cooperatives, which are associated with the Mauritius Cooperative Agricultural
Federation. Some 31,400 small planters have holdings of fewer than five arpents
and produce on average three to fifteen tonnes of sugar per year. They tended to vote

12. Accordingto Simmons (1982,p. 49), "He was a born politician, sensitive to the feelings of
those around him, intuitivein the art ofcompromise,persuasive and honest."
13. The minister of finance in his budget speech of June 1976 declared, "It is pointless for
government to offer incentives if the climate of industrial relations is such that enterprises
cannot plan for the future. The whole industrialization programme can be wrecked by
irresponsible action by those who use trade unions for their political ends" (Legum 1977, p. B
264).
36 Successfid Stabilization andRecouery in Mauritius

for IFB and MLP. They succeeded in getting important concessions related to the
sugar tax and to labor laws.
A distinctive aspect of the policy process in Mauritius is the role played by the
very active media. They report on interparty and intraparty discussions.
Occasionally, the media highlight a policy issue on their own steam. In 1973, for
example, the press reported on "coolie wages" in the EPZ leading to a vigorous
parliamentary debate. As economic conditions deteriorated after the fall in sugar
prices, the media helped educate the public and contributed to the pressure on the
Ramgoolam government to introduce remedial measures.
It is very difficult to define the precise role played by the bureaucracy in
economic policy decisions. The core economic ministries built up some analytical
capacity for policy work over time, but even at the end of the 1970s there were many
weak areas. Sectoral ministries were particularly deficient, and parts of the
Planning Ministry also suffered from a chronic shortage of professional talent.
Typically, the practice was to hire consultants to undertake policy studies and for
the Planning Ministry and concerned sectoral ministry to supervise jointly. There
was considerable tension between sectoral ministries and the Ministry of Finance.
Relations between civil servants and politicians followed British precedents. The
former have no party affiliations, and their role is to administer policies of
whatever government is in power. The Public Service Commission (an
autonomous body) is responsible, in theory, for civil service appointments and
promotions. Its decisions can be challenged in court. The civil servant, therefore,
has a measure of protection. How this works out in practice is difficult to determine.
Some permanent secretaries have stayed a long time in key posts and their long
experience has given them an inside track in policy making. In the open,
pluralistic environment of Mauritius, however, many economic policies are
decided by polling and party alignments, rather than by technocratic professional
work. It is common practice for civil servants to tailor their ostensibly technical
conclusions to the known or presumed views of the minister in power. There are
exceptions, however.

Political Parameters and Policy Content

Four political parameters influenced the content of economic policy during the
1960s and 1970s. First, Mauritius was a deeply stratified society at independence.
Franco-Mauritians had the economic power, but Hindus, who had come to the
island as indentured laborers, now had political power. Such a schism could have
produced a radical regime that might have tried to redress the exploitation suffered
by Hindu laborers during the colonial period through confiscation of the assets of
the affluent Franco-Mauritians. This did not happen. The commitment to
parliamentary democracy pressured all parties to seek the middle ground. The
MLP's platform during the colonial period contained nationalization proposals, but
these were shelved.1 4 Instead, the labor constituency had to be satisfied with
considerable expansion of government-financed social services and legislation to
improve working conditions. The Franco-Mauritians had to tolerate such

14.Ramgoolam"abandonedMLP'snationalization proposals,encouragedprivate initiative, and

becameincreasingly acceptable to his former adversaries as a fatherly figure and a cementing
forcein the nation" (Riviere 1982,p. 105). Legum(1977, p. B268)quotes Ramgoolamas saying
"I have nothing against nationalizationin principle,but since the private sector was doingsuch a
goodjob, the wholequestionwas irrelevant."
 Political Factors and Their Impact on Economic Policy in the l970e 37

legislation, as well as increased taxation of sugar exports. On the other hand,

government provided them, as well as other investors (including foreign ones),
with strong fiscal and other incentives to develop manufacturing for the home
market and for exports. The Mauritius policy framework was basically a
compromise.
Second, Mauritius enjoyed a large sugar quota and preferential access for
manufactured exports in the EEC. It joined the Yaounde Convention in 1970 and
thereby became the first Commonwealth country to establish formal relations with
the EEC. Ramgoolam described the country's relations with the EEC as 'the most
outstanding success of our foreign policy" (Mulloo 1982, p. 187). Mauritius also
obtained substantial concessional aid from OECD countries despite its middle
income status. Furthermore, it attracted considerable foreign investment and
overseas tourists. A number of writers have argued that these very favorable
conditions were the result of Mauritius having certain geo-political attractions for
major Western powers (Minogue 1983; Cooke 1982; Khan 1983). One attraction is
the strategic location of Diego Garcia in the Indian Ocean and the strong interest of
Western powers to use it as a naval base. Western powers did not want to see
political power in Mauritius go into the hands of a party that was inhospitable to
them. 15 Regardless of how significant the geo-political element is, Mauritius's
open door foreign policy based on pragmatism underpinned the country's economic
initiatives. Its reputation as a stable democracy was and is a considerable factor in
the economic sphere.
Third, to some considerable extent, economic policy was a hostage of the
electoral cycle. To influence voters, the government repeatedly adopted populist
measures on the eve of elections. The desire to win votes and stay in power tended to
dominate professional economic considerations in adopting such measures. For
example, the government promised free education at secondary and higher levels
prior to the 1976 elections. Also, subsidies on rice and wheat were raised. The
implications of these moves had not been analyzed thoroughly before the
announcements.
Finally, the political parameters for economic policy changed very
significantly after 1976. During the 1971-75 period, the government had declared an
emergency and a policy of wage restraint. The policy climate was transformed
when, after the polling, the new government coalition had a very thin majority in
the assembly. Continued pressure by MMM led the government to make a number
of defensive responses in the form of increasing pay, raising subsidies, and
permitting overstaffing in public enterprises. Finance Minister Veerasamy
Ringadoo was unable to balance the budget year after year. In 1979, he lamented,
"We cannot go on living beyond our means, we need some sacrifices" (Legum
1980, p. B233).

15. Legum (1982, p. B273) quotes another writer named Borushka who claimed that the U.S.
DefenseDepartment was interested in DiegoGarcia as a base as early as 1970. Legum(1976,p.
B263) adds that MLP's agreement to lease Diego Garcia to the United Kingdom was a
preconditionfor independence. In the absence of this agreement, the United Kingdommight
have preferred the option of "association"favoredby PMSD. Minogue(1983,p. 75) said, "Much
officialaid and investment from Britain is probably to induce Mauritian leaders to keep quiet
over DiegoGarcia; and much Western anxiety about MMMvictoriesin Mauritius stems from
the naive convictionthat they are "communist"and would,from the Western point ofview,be a
destabilizinginfluencein the Indian Ocean."
 4

The Policy Turnaround

Financial pressures and the setback in the real economy led to dissatisfaction
with Prime Minister Ramgoolam's leadership in 1978. Growing pressure on
foreign exchange reserves belied the hope that "something would turn up' (in the
words of Charles Dickens's famous fictional character Micawber) to provide relief.
Delay in taking policy action to deal with the situation became increasingly
untenable. Three MLP dissidents (called "Contestataires") headed by Harish
Boodhoo insisted on the resignation of two cabinet ministers accused of corruption.
Later these two were found to be guilty. In March 1978, in his speech on the tenth
aniversary of independence, the prime minister admitted that the country was in
serious difficulty. At the end of 1978, Finance Minister Ringadoo and other
"influentials" asked the prime minister to hold general elections-a demand also
being made by PMSD and MMM. In early 1979, fifteen MLP parliamentarians
openly asked Ramgoolam to resign (Legum 1980, p. B267).
Faced with this internal revolt within MLP, the prime minister started to pay
more attention to the views of the Treasury. A number of agreements with the IMF
were negotiated to stabilize the economy (Table 4.1). Furthermore, the Mauritian
government decided to revise its development plan on the advice of the World
Bank, and it signaled its new policy orientation at the first meeting of the
Consultative Group of Aid Donors in October 1980. A structural adjustment loan
was negotiated with the World Bank in 1981. Thus began a process of economic
reform that focused on the supply side, which complemented IMF agreements
focusing on managing demand. In fact, the two multilateral organizations joined
the "policy circle" in Mauritius for the next several years. However, conducting
policy business with Mauritius was quite a different enterprise from similar
exercises elsewhere in Sub-Saharan Africa. Finance Minister Ringadoo was
always in charge. He paid close attention to IMF and Bank views, but he made it
quite clear that proposals for reform had to gain acceptance by the cabinet and later
by parliament, where the government held a very slim majority. Mauritian
officials insisted on getting from IMF and Bank staff a full explanation of all the
implications of proposed policy changes. Ringadoo acquired key importance in the
Vishnu Mauritian policy circle during 1979-82. Later finance ministers continued
this tradition of maintaining a measure of autonomy and self-confidence vis-a-vis

38
 The Policy Turnaround 39

the international organizations. Vishnu Lutchmeenaraidoo (1983), for example,

reported to Parliament that "after arduous negotiations, the IMF and the World
Bank have finally accepted our proposal for a more gradual adjustment
programme, that makes provision for growth and employment creation."

Table 4.1 Chronology of Selected Policy Events, 1978-85

February 1978 Macro policy agreement with IMF; implementation was incomplete
October 1979 Macro policy agreement with IMF; implementation was incomplete.
September 1980 Macro policy agreement with IMF; completed September 1981.
June 1981 First structural adjustment policy agreement with World Bank.
December 1981 Macro policy agreement with IMF; completed December 1982
May 1983 Macro policy agreement with IMF; completed August 1984.
June 1983 Consultative Group of Aid Donors reviewed economic policy.
December 1983 Second structural adjustment policy agreement with World Bank.
March 1985 Macro policy agreement with IMF; implementation was incomplete.
September 1985 Sugar policy agreement with World Bank.

Table 4.2 Indicators of Stabilization and Adjustment, 1976-86

Indicator 1976-79 1979-82 1983-86

As percentage of GDP
Consumption 86 85 79
Investment 32 23 20
Gross domestic expenditure 118 108 99
Imports 56 55 53
Exports 46 47 54
Fiscal deficit 6.1 11.7 5.9
Current account deficita 8.1 11.6 4.3b

1980=100
Gross domestic expenditure
(constant prices) 108 1 ooc 107
Import volume index 113 96 88
Export volume index 83 93 120
Nonsugar farm output volume index 94 104 110

Inflation (percent p.a.) 11.3 20.6 5.4

a Including official transfers.

b 1983-85. In 1986 the current account was in surplus.
c 1980-82.

Sources: World Tables 1987; UNCTAD (various years).

40 Successul Stabilizationand Recoveryin Mauritius

These reforms were eminently successful, but the process was stressful. Bad
weather in 1980 and 1983-84 caused setbacks. The terms of trade deteriorated during
the early 1980s (Figure 4.1). These shocks delayed the restoration of financial
balance; in fact, disequilibrium in the budget and the balance of payments
worsened before it started to get better (Figures 4.2, 4.3, 4.4, and Table 4.2). Gross
domestic expenditure in real terms contracted considerably during 1979-82, largely
at the expense of capital accumulation. The following period, 1983-86, witnessed
some recovery in GDE, as well as a significant reduction in financial imbalances.
GDE in the last year covered by this study, 1986, was 29 percent above the 1980 level.
The current account of the balance of payments was in surplus, and the budget
deficit had diminished in magnitude. A major expansion had taken place in EPZ
exports. Rising local production of food items had reduced the need for imports.
Although supply-side responses were important in securing relief from balance of
payment pressures, a considerable part was played by restraint on expenditures.
Per capita consumption (constant prices) in 1986, for example, remained 11 percent
below the peak reached in 1979.
The stresses of stabilization and adjustment also influenced political events,
although it is far from easy to establish their role vis-a-vis noneconomic factors.
Mauritius had a general election in June 1982, one of the most difficult years in the
reform process when unemployment climbed to 20 percent. The result was a
transformation of the political scene (Tables 3.1 and 3.2). The ruling coalition of
MLP and PMSD was totally defeated by a new left-wing alliance of MMM and
PSM. According to Legum (1984, p. B227), "caste and religious loyalties, so
important in previous elections, were abandoned. The tendency was to move away
from ethnic politics and give the country a new sense of direction under a new
Socialist government with new leaders and new ideas."
The new finance minister, Paul Berenger, took over in the middle of the
implementation of an IMF stand-by. All targets agreed with the previous
government, which reflected conventional IMF medicine, were implemented
despite earlier criticisms leveled by MMM spokespersons. When confronted with
responsibilities of office, Berenger appeared to show a large measure of
openmindedness. He was impressed by the force of the logic inherent in the IMF
recipe and adopted it despite its unpopularity in many quarters. He also broke with
past practice of secrecy by publishing the details of policy agreements between the
government and the IMF/World Bank. His flexibility cost him his job. According
to Legum (1985, p. B209), "Berenger's first budget ... was at the root of the political
crisis of March 1983." The surcharge on the sugar duty was reduced from 75 percent
to 50 percent (Table 2.2). The leader of the PSM took issue with the government's
ongoing austerity policies and campaigned for an alternative economic strategy.
Berenger resigned and was replaced as finance minister by Lutchmeenaraidoo.
Another general election took place in August 1983 in which a new party (MSM)
joined forces with MLP and PMSD to defeat MMM (Tables 3.1 and 3.2). According
to Legum (1985, p. B213), the campaign saw a return of communal tendencies in the
political arena of Mauritius. The new government remained in power and
Finance Minister Lutchmeenaraidoo presided over the economic recovery. Many
dramatic events were played out on Mauritius's political stage during the 1979-86
reform period, but successive governments changed very little their economic
policy orientation. Undoubtedly, this stability and persistence helped the process of
economic revival. Next we will examine in some detail the nature of the
government decisions and the extent to which they were implemented at the macro
and sectoral levels.
 Figure 4.1
TERMS OF TRADE INDEX, 1980 -86
200 -

Import Price Index

160~~~~ - ~~~~~~~~~~~
*94.'

150-O -

lOO -- - -~ Export Price nde

X !/ /,
.. 0

100~~~~~~~~~~~~~~~~1

Terms of Trade

50- I I
1980 1981 1982 1983 1984 1985 1986
Year

cak\w48U58L
 Figure 4.2
INDICATORS OF NATIONAL ACCOUNTS, 1980 - 86
16,000 l

GDY(Gros.Dometc

GDE (GramsDom\e

11,000 - N
_ X osmGDP(Cinc

t~~~~~~~~~ -

1,000 - I II I I
1980 1981 1982 1988 1984 1985 1986
Year

ckw486S
 Figure 4.3
BALANCE OF PAYMENTS INDICATORS, 1980 - 86
150 -

100 -
Net ODA/

50-

0-

i -50
J ~~~~~~Net
Capital * <\ X

-50-
-10 /Net IMF

\ / Current Account Balance

-200- I l l l
1980 1981 1982 1983 1984 1985 1986
Year

* Excludesofficial developmentassistance (ODA).

cak\v458N
 Figure 4.4
BUDGET DEFICIT AND ITS FINANCING, 1980 - 86
1,200-
Borrowing from Local Banks

600 -

Net Foreign Capital * *

0 600

-600-> > > IIadgF Ddldt

-1,200
1980 1981 1982 1983 1984 1985 1986
Year

* Includes officialdevelopment assistance.

oak\4868P
 The Policy Turnaround 45

Search for Stabilization

The Government of Mauritius agreed to a one-year IMF standby in February
1978, but the downward adjustment of demand envisaged in the program did not
materialize. Had it not been a single tranche standby (of SDR 8 million) fully
drawn on approval, the program presumably would have been canceled.
Another standby was negotiated with the IMF in October 1979 for a period of two
years. Although relatively successful at first, it collapsed largely as a result of
severe cyclones. Its aim was to reduce the current account deficit on the balance of
payments. The government depreciated the exchange rate by 23 percent in October
1979. Rice and flour consumer prices were doubled to reduce subsidies. Due to
opposition in the Legislative Assembly, where the government held a majority of
only one, the government had to withdraw its proposal to reduce the per capita flour
ration at subsidized prices. A 75 percent surcharge on the sugar export tax was
imposed to capture the windfall resulting from the depreciation. In November 1979,
average interest rates were increased by 1.5 percent, and the maximum limit on
lending rates was abolished. During the same month, nominal wages were raised
by 5 percent compared with a cost of living increase of 9 percent, thereby reducing
real wages. Between December 1979 and March 1980, four cyclones struck
Mauritius, and the oil price increases were much more than anticipated.
Government spent a sizable sum on rehabilitation following the destruction caused
by the cyclones. Realizing that it would be unable to meet most of the targets of the
IMF program, the government canceled it.
A new stabilization program for 1980-81 was designed that took into account the
impact of the cyclones. Sugar production was expected to decline, leading to a real
GDP decline of 4 percent and a major loss in foreign exchange. The aim was to
limit the balance of payments deficit on the current account to SDR 75 million. The
fiscal deficit was targeted at 15.2 percent of GDP. Revenue was to be raised by a 10
percent surcharge on all taxes and fees. Expenditures were to be kept in check by
cutting real wages and reducing food subsidies. The government complied with all
these policies. In July 1980, it increased consumer prices by 43 percent on rice and
55 percent on flour.1 6 However, the actual balance of payments current account
deficit was higher than the target. The standby projections had underestimated the
shortfall of sugar output.
The stabilization program for 1982 was fairly successful. It expected a
deterioration in the terms of trade of 6.8 percent, real GDP growth of 5 percent, and
inflation of 25 percent. The aim was to keep the external account deficit and the
fiscal deficit under 13 percent of GDP. This was to be achieved by an export growth
of 14.6 percent, and imports were to rise marginally. The government budget
deficit target was to be attained by real cuts in expenditure and increases in
revenues from increased sugar production. Actually, real GDP grew at 5.3 percent,
and inflation was only 13.4 percent. Export growth exceeded the target, and imports
declined by 13.3 percent, leading to an external current account deficit of 5.7
percent of GDP. The government budget deficit was 12.8 percent of GDP.
The 1983 stabilization program also succeeded. The aim was to keep the
external current account deficit (including transfers) at 4.6 percent of GDP.
Inflation was to be brought down to 8.5 percent and the budget deficit to 9 percent of
GDP. This was to be achieved by maintaining flexible exchange rates and a

16. The subsidy on rice and flour was reducedfrom 60 percent to 38 percent followingincreases
in October 1979 and July 1980.
46 Successful Stabilization and Recoueryin Mauritius

restrictive wage policy, limiting credit expansion, and decontrolling prices of a

number of items. The government was successful in fulfilling all policy
agreements with the IMF. The wage award was only 3.5 percent compared with
inflation of 5.6 percent, and price controls were lifted on twelve items in December
1983. The number of items subject to quantitative restrictions was reduced in
January and March 1983. In February 1983, the rupee was pegged to a new, secret
basket of currencies leading to a real depreciation in the average effective
exchange rate of 8.7 percent during the year.
The program for fiscal year 1985-86 consolidated the progress made earlier.
The aim was to bring down the external current account deficit to 1.9 percent of GDP
and the fiscal deficit (including grants) to 5.3 percent of GDP. This was to be
achieved by maintaining a flexible exchange rate policy and restrictive wage
policy, decreasing net domestic credit, eliminating all quantitative restrictions on
imports, and decontrolling prices of all items, except kerosene, edible oils, soap,
and toothpaste. All targets were achieved. Real GDP grew at 6.0 percent p.a., and
the inflation rate was 4.3 percent. The external current account was in surplus at
1.8 percent of GDP for the first time since 1975. This was the result of rapid growth
in EPZ exports and tourism earnings and a fall in oil prices.

Restructuring of Public Finance

The reform process involved four means to reduce the fiscal deficit:
restraining current expenditures, especially on wages and subsidies, and shifting
investment from the social sectors (health, education, and housing) toward
physical infrastructure; making parastatals competitive and financially self-
reliant, thereby stopping the drain on the budget; raising revenues through a tax
reform and an increase in rates; and improving management of aid and debt.
Each of these actions will be discussed in turn.

Redirection of Public Expenditure

The government agreed with the World Bank to curtail current expenditures on
education during 1981-82 to 1983-84 without affecting adversely the quantity or
quality of services. This was to be done by increasing the pupil-teacher ratio, by
closing down substandard schools, and by increasing efficiency in the teaching of
oriental languages. It was also agreed to give priority to maintenance and
rehabilitation of infrastructure and to postpone or cancel major new projects like
the new airport, the oil refinery, and a flour mill. Capital expenditures in activities
with relatively low returns (tea, development works, and housing) were to be
reduced. Further, all projects costing over 100 million rupees were to be reviewed by
the World Bank. The government agreed to specify economic criteria for selection
of major new projects.
Total government expenditures were almost constant in real terms during
1981-84 and increased by only 3.4 percent during 1984-86 (Figure 4.5). However,
current expenditures continued to rise during 1981-83 owing to the increase in debt
service payments. It was only during 1984-86 that current expenditures in real
terms were stabilized. The ratio of most categories of expenditure to GDP were
significantly reduced over the reform period. The share of investment in health,
education, and housing was reduced from 13 percent of total capital outlays in 1982-
83 to 10 percent during 1983-85. Investment in agriculture, tourism, and industry
constituted 20 percent of the total during 1983-85. During 1980-86, infrastructure
 (Miion Rupees - Constnt Pries)

ho~~~~C
P_ _ __°____°o

St~~~~~-
lA l l ll

T 1 T~~~~~~

f ;; ff~~~~~~~~~~~~~~~~~~~~~'

*~~~~~~~~~~~~
48 Successful Stabilization and Recovery in Mauritius

investment was 40 percent of total capital outlays. The MMM and PSM govemment
that came to power in August 1982 abandoned the proposal to construct a new airport,
a high priority of the Ramgoolam government. No major new projects were started
during 1981-83. New guidelines were developed to evaluate public projects, and they
were applied in most cases. Social projects tended to escape scrutiny. The
incremental capital-output ratio (ICOR) of public outlays is estimated to be 5.0
during 1982-86 compared with 6.3 for 1977-82 (World Bank 1987b).
The expenditure on education (capital and current) as a percentage of the
overall government budget steadily declined from 17.8 percent in 1979-80 to 13.4
percent in 1985-86. Four substandard schools were closed. During this period, the
pupil-teacher ratio increased form 27:1 to 32:1 in government primary schools and
from 16:1 to 17:1 in government secondary schools. In primary schools no new
teachers were hired after 1979. In secondary schools only ten new teachers were
recruited in 1982. Recruitment of teachers of oriental languages was stopped.
Existing teachers had to cover more than one school wherever distances permitted
such economies to be made.

Restructuring of Parastatals
Reforms took place in three parastatals. The number of relief workers on the
payroll of the Development Works Corporation was reduced from 14,000 in 1976 to
4,000 in 1982. This was achieved by transferring workers to other agencies and by
attrition. The government tried to transform DWC into a public contractor that
competed with private contractors. However, even by 1986, DWC was not
financially self-reliant and was a substantial burden on the budget.
The reform of the Tea Development Authority focused on improved
management in 1981. The 2,500 person work force was reduced 5 percent. Trainees
and pluckers were converted into smallholders cultivating tea. They paid a
nominal rent on land owned by TDA. After initial progress, political pressures
seemed to prevent further restructuring for some time. The fall of tea prices in 1985
caused a deterioration in TDA's financial situation. A new company, Mauritius
Tea Factories Company, was established in 1986 to manage TDA's tea factories.
TDA's responsibility was reduced to providing training and extension services
only.
The Central Housing Authority was created in 1960 to build low-cost houses for
victims of cyclones. Of the 8,000 units to be built by 1980, CHA was able to build only
2,000 houses at exorbitant costs (World Bank 1987b, p. 26). Since 1981, the
government has gradually increased rents on these housing units to cover costs of
maintenance and provision of utilities. It also sold some of these units to tenants.
CHA diversified its activities by bidding for construction contracts. Its financial
position did not improve, however, and its burden on the budget remained large.
Limited progress was made in parastatal reform. Many major parastatals
continued to be a substantial budgetary burden. The government found it very
difficult politically to reduce overstaffing. The Ramgoolam government appeared
to reverse the reform process in 1982, in the middle of the election campaign, when it
promised jobs to 20,000 unemployed people. Fortunately, the new MMM/PSM
government refused to confirm these promises.
 The Policy Turnaround 49

Revenue Mobilization and Tax Reform

Government made a number of important changes in the taxation of sugar and
of firms entitled to incentives under the EPZ and development certificate schemes.
The rates of personal income tax were reduced. However, no comprehensive tax
reform took place. Measures to raise revenues tended to be ad hoc. Surcharges were
imposed on import duties in 1981-82and again in 1984-85.A sales tax at a rate of 5
percent was introduced in 1982-83;basic goodswere excludedfrom its purview.

Management of ForeignAid and Debt

Because of its strategic location in the Indian Ocean, Mauritius has received
considerable aid from the United States, the United Kingdom, and France. In 1984,
aid per capita (including food aid) was $35.5. During the period of intensive
reforms, the Mauritian government asked the World Bank for help in
coordinating aid. Consultative Group meetings took place in June 1983 and May
1985, but aid coordination efforts did not prevent a substantial decline in net
resources transferred to Mauritius (Table 4.2). Net resource transfers from
commercial banks were negative during 1981-86 and offset the positive resource
flows from other sources.

Table 4.3 Gross Commitments, Net Resource Transfers, and Volume of Imports,
1978-86

1978 1979 1980 1981 1982 1983 1984 1985 1986

Gross commitments(US$ millions)

IDA and IBRD 30 -- 6 30 6 72 0 0 30
IMF 11 -- 46 80 25 30 25 36 35
Bilateral organizations
Official development
assistance 7 49 24 35 24 23 22 22 61
Other 13 5 33 18 55 3 18 22 41
Commercialbanks 6 50 45 0 40 1 48 6 37
Supplierscredit 0 0 0 0 0 0 0 0 0
Total (all sources) 133 114 190 168 179 135 114 98 204
Net resourcetransfers (US$millions)
IDA and IBRD 28 -3 3 18 0 -4 18 16 -7
IMF 11 -. 46 67 25 15 -7 -13 -19
Bilateral organizations
Official development
assistance 44 32 35 65 60 41 36 32 48
Other 8 12 13 26 9 8 9 2 14
Commercial banks 37 44 21 -34 -1 -57 -7 -29 -6
Suppliers credit 5 0 0 0 0 0 0 0 0
Total (all sources) 134 129 119 121 79 -16 22 -19 30
Volume of imports, (1970=100)
Index number 253 236 213 196 170 170 185 209 215

Source: World Debt Tables (variousyears); OECD(variousyears).

50 Successful Stabilization and Recovery in Mauritius

In 1981, the government sought assistance in improving its debt management.

Legislation was passed entrusting only the finance minister with the responsibility
of contracting new loans. The government announced that it would manage
external borrowing so that the debt service ratio in a normal sugar crop year would
not exceed 15 percent of exports (goods and nonfactor services). However, due to
commercial borrowing during 1977-80, the ratio of debt service to exports (gnfs)
increased from 5.8 percent in 1980 to a peak of 16.2 percent in 1983.

Policy Change in Agriculture

Almost 98 percent of cultivable land was already in use in 1980 and there was a
severe land constraint. The aim of reforms was to improve the productivity of the
sugar sector, thereby releasing land for local production of imported food items.
The government agreed with the World Bank that this aim was to be achieved
through the following measures:
* a review of price incentives for nonsugar agriculture;
* a careful review of tea and rice production possibilities; and
* promotion of the development of livestock and fisheries.
The World Bank was in favor of reducing immediately the sugar tax, but the
government insisted on establishing a Commission of Inquiry to examine the
sugar sector's problems and acting upon its recommendations.

Sugar Sector
A preparatory unit for the Sugar Commission was established in September
1981, but controversy over the appointment of the members of the commission
prevented any further action till after the 1982 elections. The commission was
appointed in December 1982 under the chairmanship of Dragoslav Avramovic, a
well-known World Bank and UNCTAD expert with a wealth of development
experience. Other members included Jagadhish Manrakhan, Vice-Chancellor of
the University of Mauritius, and Ramsamy Chedumbarum Pillay, the Director of
Audit, who was replaced on the commission by Ramakrishna Sithanen, a transport
economist, in July 1983. The small size of the commission was a surprise to some
observers, but the government did not envisage a group that would represent all
interested parties. The commission's focus was on establishing a factual base and
on obtaining expert opinion from outside Mauritius.
Two reports (one by Avramovic and a dissenting report by Manrakhan and
Sithanen) were submitted to the government in early 1984. Avramovic concluded
that Mauritius had a strong comparative advantage in sugar, but that the sugar
industry was overtaxed and its productivity was held back by fragmentation of mill
capacity, as well as by submarginal yields in the smallholder sector.1 7 On the tax
issue, Avramovic pointed out that the high rates of export duty were discouraging
investment, thereby putting into question the capacity of Mauritius to maintain
sugar output. He argued that tax rates should be reduced over three years, and then
the export duty should be replaced by an excess profits tax. To calculate a company's
liability under the new tax, it would be necessary to establish a base line valuation
of its assets, compile an index to update the value of assets annually, estimate the
remaining life of assets to calculate depreciation, and establish a "standard" real

17. Avramovic also recommended that Mauritius should sell its expertise in sugar technology to
other sugar-producing countries in Africa.
 The Policy Turnaround 51

return on capital. Avramovic left the determination of the "standard" return to

public policy and suggested that any profits over and above the "standard" should be
taxed at 85 to 90 percent.
Avramovic recognized the need for centralization of sugar mills to take full
advantage of significant economies of scale. For years, this process of
consolidation of capacity occurred naturally, and the number of mills declined
from thirty-eight in 1939 to twenty-one in 1970, when the government prohibited
closures to avoid unemployment. Avramovic recommended that the government
lift this prohibition. He rejected the view that smallholder productivity was held
back by low quality land. He favored the proposal made by sugar estates that they
would provide smallholders (on a cost basis) with technical assistance,
supervision, services for land preparation, and transport to raise productivity. He
also visualized the establishment of a Sugar Authority to undertake policy and
coordination functions.
The dissenting report by Manrakhan and Sithanen concluded that "poor
handling of [the] human factor," and not the deteriorating financial position of the
industry, should be the object of inquiry. It pointed to racial prejudice in
employment, exploitation of smallholders, neglect of workers' welfare,
inappropriate accounting practices, and the lack of full disclosure by estate owners
of assets and of shareholders. Manrakhan and Sithanen preferred the existing
export tax, but they suggested a broadening of the exemption for smallholders.
Their proposals on the Sugar Authority and centralization of mills were not very
different from those of Avramovic. To raise smallholder productivity, the
dissenting commissioners sought government help in the form of credit, inputs,
and extension services instead of intervention by estates.
Based on the recommendations of these two reports, the Mauritius Sugar
Authority was established in July 1984 and was entrusted with the preparation of a
Sugar Action Plan (SAP). The authority invited Mauritius's chamber of
agriculture to prepare a master plan. SAP was published in February 1985, and it
was largely based on the master plan. Furthermore, in September 1985, Mauritius
obtained support from the World Bank for a sugar industry project. The unfolding
of the policy process in the case of the sugar sector illustrates very well Mauritius's
style in policy making on a very sensitive issue. The process was an elaborate one,
and it took a very long time. All relevant parties had an opportunity to express their
views. Much effort was spent on defining a consensus.
The government revised the sugar export duty in March 1985 by broadening the
exemption from 75 tonnes to 1,000 tonnes and by applying progressive tax rates to
incremental rather than to total exports (see note c, Table 2.2). The reform provided
a tax relief of about l00 million rupees or 3.3 percent of total revenue collected in the
previous year. The average tax rate for all sugar producers was reduced from 17.9
percent to 13.9 percent. Even a large estate exporting, say, 6,000 tonnes had its
average tax rate lowered from 23.6 percent to 17 percent. A start was made in
improving the accountability of sugar corporations by establishing separate
accounts for plantations and mills and by adopting standardized accounting
formats. Later on, an accounts manual and asset valuation guidelines were issued
and used. Although these developments occurred after the period we are studying, it
is important to note that the government intended to change the basis for sugar
taxation along the lines proposed by Avramovic. The tax was levied (starting July
1988) on the company's surplus after offsetting all standard costs including
depreciation (on a full replacement basis) and a 1.5 percent rate of return on fixed
assets.
52 Successful Stabilization and Recovery in Ma uritius

The government lifted the ban on mill closures in 1985, and two mills were shut
down. The private industry was asked to provide a list of additional mills that
would be closed. Such a list would permit the government to plan for a gradual
redeployment of redundant labor. The government established four farm service
centers to provide smallholders with inputs and extension services. Over time,
twelve additional centers are to be established.
During the reform period, 1980-86, sugar production continued to fluctuate due to
cyclones and drought. But since 1985, sugar production has been above the long-run
trend (Figure 2.10). The contribution of sugar to GDP, exports and employment
continued to decline, however (Table 4.4). Real wages continued to decline at 1.9
percent p.a. since the late 1970s. The gap between average labor earnings in the
sugar sector and manufacturing was considerably narrowed (Figure 2.7). Milling
costs declined at a rate of 1.5 percent p.a. during the first half of 1980s, and by 1985-
86 the average return on capital (after depreciation) was 5 percent (Government of
Mauritius 1988). Unit cane growing costs on large estates had also declined, but
sugar cultivation on estates remained unprofitable. Financial profitability of the
sugar industry in Mauritius remains low, but this is largely a reflection of onerous
labor costs mandated by current labor laws and the tax regime for sugar. Physical
productivity in Mauritius is high in relation to other sugar-producing countries.
This is true of both cane cultivation and milling (World Bank 1986a, pp. 81, 83).

Table 4.4 Selected Indicators of Sugar Sector, 1976-86

Indicator 1976-79 1980-86

Production (thousand tonnes) 688 643

Sugar exports/totalexports (%) 71 62
Yield (tonnes cane/hectare) 79 73

Employment(thousands) 54 48
Share of sugar in total employment(%) 27 24

Share ofsugar in GDP 17 11

Export earnings (US$million) 220.5 238.0

Share of sugar in total export earnings (%) 69 54

Note: Includes estates and small holdings.

Source: World Bank (1986a).

Nonsugar Agriculture
A major effort was made to review agricultural pricing issues in the 1980s.
Various committees were established and a national seminar was held. However,
in view of approaching general elections in 1982, the government found it very
difficult to finalize its views. The white paper on agricultural diversification and
 The Policy Turnaround 53

food policy did not emerge till February 1983. Despite this seeming ambivalence,
government made significant alterations in guaranteed producer prices. For
example, the potato price was reduced in real terms (after deflation by the cost of
living index) by 36 percent during 1980-83and further by 34 percent during 1983-86
(Table A-14).These declines notwithstanding, potato production continued to rise
(Table 2.5). Having achieved self-sufficiencyby raising potato prices very sharply
during the 1970s, the government reversed its price policy. The guaranteed real
price for onions was also reduced sharply during the 1980s, even though rising local
production had not eliminated imports. Government policy for maize was quite
different, however. The real maize price was raised by 38 percent during 1980-86to
provide strong incentives for import substitution. In the absence of any study
comparing the government controlled prices with border prices, it is difficult to
assess the economicrationale of these policy developments.
The government's attempt to reduce budgetary outlays and to alter the pattern of
food consumption by phasing out consumer price subsidies on rice and wheat proved
to be very sensitive politically. The retail price of wheat flour was raised by 27
percent in real terms during 1980-84 and by 8 percent in the case of rice. The
budgetary subsidy amounted to 111 million rupees in 1978-79,230 million rupees, a
peak, in 1981-82,and 72 million rupees in 1985-86.Both Legum (1984, p. B229)and
Latham-Koenig (1984, p. 168) concluded that reduction of such subsidies was very
difficult politically and was one of the factors leading to the collapse of the MMM
and PSM government in 1983.
The government encouraged meat and milk production by making available
some "crownland" under forest for ranchers. It also set up a National Dairy Board
in 1985 that guaranteed prices to milk producers. Milk production rose from 7,500
tonnes in 1981 to 11,500 tonnes in 1986. Self-sufficiency was achieved in pork,
poultry, and venison. The government approached the World Bank for technical
assistance to develop fishing, but the World Bank regarded the government's
desire to test the feasibility of promoting deep sea fishing as overly ambitious. The
government then requested FAO and the European Development Fund for
assistance. The government succeeded in formulating a development program for
fresh water and marine aquaculture, lagoonal and other artisanal fisheries, bank
fisheries, and commercial tuna fishing. Fish production rose from 3,716 tonnes in
1981to 8,012tonnes in 1986,and Mauritius becamea net exporter.
The government appointed a study group in 1983 to draw up a program to
restructure the Tea Development Authority. It took two years to develop a plan of
action with the help of expatriate experts. Very favorable tea prices in 1984
stimulated considerable interest among TDA employees, and many agreed to
become smallholders. Tea production rose sharply (Table 2.5). However, this
upsurge proved to be temporary, and TDA's problems reemerged as international
tea prices weakened.

Policy Change in Manufacturing

Perhaps the most successful reform involved the manufacturing sector.
Flexible exchange rate and wage restraint introduced very early in the 1980shelped
the EPZ to strengthen its international competitiveness and to transform
Mauritius's overall economic and financial situation. Supporting these new
policies were a number of other measures that elicited a strong supply-side
response.
54 Successfui Stabilization and Recovery in Mauritius

The government focused on attracting foreign investment. Double taxation

agreements were signed with several governments of capital exporting countries.
The Mauritius Export Development and Investment Authority (MEDIA) was
established in 1985 to attract foreign investors and to develop industrial sites. The
Industrial Coordination Unit was created to be a "one-stop shop" where investors
could obtain all government clearances and permits. Furthermore, the
Development Bank of Mauritius (DBM) established an export credit guarantee
scheme to provide collateral support to commercial banks. It covered banks against
the risk of default by exporters on preshipment and postshipment advances. In
addition, the DBM started an export credit insurance scheme that protected
exporters against the risk of default by importers, rejection by importers of goods
supplied, and political or other events delaying payment by importers.
The government agreed in principle (in the context of the second World Bank
structural adjustment loan) to integrate the two separate incentive regimes for the
EPZ and DC enterprises. The first move was to improve the custom duty drawback
system so that non-EPZ enterprises could get timely refunds on import levies paid
by them on intermediate goods used in production for exports. In June 1984, the
corporate income tax was reduced from 66 percent to 35 percent, and non-EPZ
enterprises were allowed corporate tax concessions on their export business. The
corporate tax rate was reduced by 2 percent for each 10 percent of output exported. The
following year saw a major step forward on the tax front. For various sectors
different tax regimes had slowly evolved that were distorting resource
allocation. 18 This was particularly the case for DC and EPZ companies. In June
1985, both types of companies were given the choice of retaining their respective
privileges or paying a corporate tax of 15 percent with dividends exempted for the
first decade of the firm's operations. Most firms chose the latter arrangement,
thereby closing the loophole under earlier law that enabled firms to close shop after
the tax holiday expired and then start anew with a new certificate.
Trade policy reform proved to be a thorny issue for a considerable time,
however. Neither the government nor the World Bank had any clear idea of how the
import protection system had developed during the 1970s. No analysis of this topic
was undertaken till 1983 when two studies were launched in the context of the SAL II
agreement between the government and the Bank. The government decided in
September 1983 not to impose any more quantitative restrictions on imports. It
replaced existing QRs with tariffs in two steps (July 1984 and January 1985). The
new tariff rates were substantially below the tariff equivalent of quotas. The World
Bank had expected the government to prepare an action plan (based on the analysis
in the two SAL studies) for reducing the average level and the variability of import
duties. The government did not take this step, however. It argued that further
liberalization of imports might trigger balance of payment pressures, a loss of

18. "AnEPZ companyenjoyedcompletetax exemptionfor the first 10 years and was taxable at
half the normal rate during years 11 to 15 and a quarter of the rate during years 16 to 20, while
dividends were tax free for any consecutive 5 years during the first 10 years; a company
holding and Export Service Certificate paid corporate tax at a rate of 10 percent and enjoyed the
same dividend concessions as an EPZ company; under the Hotel Management (Incentives)
Schemes..., hotel companies got a partial tax holiday for 15 years, with the rate of corporate tax
for the first 8 years being 10 percent, rising to 15 percent for the subsequent 7 years; and, finally,
a company with a Development Certificate or Agricultural Development Certificate enjoyed a
corporate tax holiday for 5 to 8 years with an exemption from payment of income tax on
dividends similar to that of an EPZ company" (Bheenick and Schapiro 1989, p. 105).
 The Policy Turnaround 55

external reserves and a fall in public revenues. The government was also
concerned about the adverse impact of lower import duties on the financial position
of DC enterprises producing import substitutes. A number of intensive discussions
between the government and the Bank failed to break the impasse. In January 1986
some high tariffs on imports of transport equipment were lowered on average by 25
percent. The government was not ready, however, to agree to a schedule for phased
rationalization of the overall tariff structure. Such an agreement was not reached
till July 1987, which is beyond the time-frame of our study.
The government reduced the number of manufactured products subject to price
controls from forty in 1983 to eight in 1985. The remaining controls were on
essential products such as kerosene, soap, and toothpaste. The government also
reduced items subject to maximum mark-up at the retail stage from forty in 1983 to
eighteen in 1985. Such a ceiling on mark-up continued largely on agriculture
products such as maize, potatoes, rice, beans, onions, garlic, tumeric, and
groundnuts.
The manufacturing sector, particularly EPZ firms, responded vigorously to the
changed policy environment. EPZ value added in constant prices expanded at 16
percent p.a. during 1981-86 (Table 2.7), while the corresponding figure for DC firms
was 3 percent p.a. The share of EPZ in total manufacturing investment increased
from 27 percent in 1979 to 52 percent in 1985. These firms created 30,000 new jobs
during the 1980-86 period and were the major instrument for reducing economy-
wide unemployment from 17 percent to 12 percent. The proportion of males in total
EPZ jobs increased from 18 percent to 31 percent during this time. Mauritius joined
the ranks of the biggest knitwear exporters in the world.
The government is aware of the remarkable success of its EPZ policy and its
riskiness. The degree of concentration on exports of textiles and garments has
increased from 69 percent to 83 percent during 1980-87. The reliance on the EEC and
US market is very heavy, and a recession could hurt the momentum of exports.
Furthermore, the EPZ remains an enclave. It has little connection with the rest of
the economy. Bheenick and Schapiro (1989, p. 119) note that although some
ancillary industries (buttons, braid, trimmings) and backward linkages (thread,
boxes, bags) have developed, there is potential for much more. These authors
recommend providing incentives to encourage subcontracting between EPZ and DC
firms.

Policy Change in Tourism

There was a considerable fall in tourist arrivals during the early 1980s (Table
4.5). This setback was caused by temporary factors such as cyclones, droughts (and
the accompanying bad publicity), as well as policy problems. Government
undertook two studies, as part of SAL I, which identified a number of issues.
First, the government decided to improve air access by introducing chartered
flights for the first time. However, the decision regarding chartered flights could
not be implemented without hurting the operations of Air Mauritius. Some
observers claim that the government received bad advice from foreign experts on
this issue. Instead, Air Mauritius acquired two new planes and expanded its
services by adding a new link to Singapore, by including Paris on its London route,
and by starting a flight to Zurich via Rome.
Second, the government decided to strengthen promotional efforts in Europe by
opening an office in London in October 1985. Promotion focused on independent
tourists and on cultural tourists. Third, the government decided to expand hotel
56 Sucomfi Stabiliation and Recowey in Mauritiu s

capacity. The number of hotel beds increased substantially (Table 4.5). However,
the government encountered difficulties in implementing a scheme that would
license "bungalow" owners to provide rooms to tourists. The government closed
several beaches to the Mauritian public with a view to reserve facilities for tourists.
This move has encountered some hostility. Tourist arrivals increased appreciably
(Table 4.5). There were corresponding increases in gross earnings and in value
added.

Table 4.5 Indicators of Tourism, 1979, 1982, 1986

Indicator 1979 1982 1986

Tourist arrivals (thousands) 128.4 118.4 165.3

Gross earnings (US$ millions) 31.9 41A 88.1
Number of hotel beds (thousands) 4.0 4.5 6.6
Value added/GDP (%) 2.4 2A 2.8
Employment (thousands) 4.0 4.2 4.7

Sources:EconomistIntelligenceUnit (variousyears); Governmentof Mauritius (variousyears).

 5

Lessons of Experience

Is the Mauritius case relevant for Sub-Saharan Africa? Some observers claim
that it is not, because basic conditions in Mauritius are very different from those in
a "typical" African country. This debate is analogous to the one about the
replicability of the spectacular industrialization experience of South Korea. We do
not deny the many special features of Mauritius (or Korea for that matter) that
make it difficult to transfer its experience in specific terms to other countries. All
such transfers have to be adapted to the particular circumstances of the receiving
country. This adaptation is a creative and innovative process, not a mechanical
one. It is useful to question the concept of a "typical" African country since so much
intercountry diversity exists within this region. Behind this diversity, however, the
analyst can discover common patterns, shared problems, and similar policy
responses. It is at this general level that useful comparisons can be made and
replicable lessons of experience identified.
The Mauritian problem in 1979 had three major dimensions. First, aggregate
demand had been mismanaged since 1973. Consumption and investment had been
allowed to expand far too rapidly during the sugar boom, the exchange rate had been
allowed to appreciate in 1975-78, and wage levels had become excessive. Second, the
government had a number of goals (economic growth with efficiency, rapid
expansion of employment, and reduction of inequality), but it had not articulated
clearly the conflicts among these goals and the related trade-offs. A number of
questionable policies resulted. There were elaborate labor laws, large wage
differentials unrelated to productivity, and trade union pressures that impeded the
labor market. The sugar export duty had become excessive, and its rate structure
induced a break up of large estates into relatively inefficient small holdings.
There was open-ended protection for an indefinite period against imports given to
DC enterprises in the manufacturing sector, at the expense of consumers. Third, the
"politics of repression" during 1971-75 was followed by the "politics of
accommodation" during 1976-79. In both periods, but particularly in the second one,
the political imperative of governing a deeply stratified society according to the
rules of parliamentary democracy had reduced economic policy to the lowest
common denominator. The government coalition in the late 1970s, headed by
Prime Minister Ramgoolam, tended to react passively to events. It had a

57
58 SuccessfidStabilixationand Recoveryin Mauritius

diminishing capacity to lead society out of its growing economic and financial
troubles.
The distortions in policy in Mauritius, mentioned above, are hardly peculiar to
this country. They exist everywhere in some form or shape. What was distinctive
about Mauritius in the 1970s was the relative mildness of policy distortions (Gulhati
1990). Aggregate demand had been mismanaged but not to the extent of
precipitating a disastrous financial crisis as in the Sudan or Zambia or Zaire.
Factor prices in Mauritius did get out of alignment, but the extent of disequilibrium
was moderate. The sugar tax became excessive, but it did not lead to a large decline
in sugar exports as happened in Ghana with respect to cocoa exports or in Tanzania
with respect to all exports.
It is remarkable that even the relatively mild disequilibrium in Mauritius at
the end of the 1970s brought about a societal response. Prime Minister Ramgoolam
was pressured and persuaded to change course. The open political system in
Mauritius generated sufficiently strong feedback to party and cabinet members
that government collectively became concerned about the deteriorating economic
and financial situation. The turnaround occurred when the Finance Minister and
the Bank of Mauritius, whose warnings had been ignored during the late 1970s,
began to gain influence vis-a-vis the spending ministries. First, the IMF and then
the World Bank were requested to advise the government on policy and to provide
financial help. Although these international organizations joined the Mauritian
policy circle, their role was defined and orchestrated by the finance minister. The
sequence of policy packages adopted by the government during the 1980s always
went through a detailed process of examination by government officials and of
discussion within the Cabinet. Subsequently, they were debated within the
legislature and even more widely in the media.
The reform program was undertaken in two distinct steps. From 1979 to 1982 the
emphasis was on macroeconomic stabilization, mainly through curtailment of
aggregate demand. This involved quite a painful adjustment consisting of rising
unemployment, declining real wages, and disciplined austerity. The government
persevered with reform even though it meant a considerable loss in the momentum
of economic growth and a perceptible setback in the welfare of low-income groups.
Very little was done to "sweeten the pill" for underprivileged social groups.
Attempts by the World Bank to get the government to tackle key sectoral issues (for
example, sugar) did not make much headway during this period.
The second step in the reform program was taken after the 1982 general
election. A number of issues at the sectoral level were put on the policy agenda
where they remained for quite a long time while studies were commissioned,
reports were analyzed, and policy options were debated. The process for preparing
policy action was elaborate and time consuming. In the case of sugar and the
import protection regime for manufacturing DC enterprises, there was a genuine
need for collecting data and analyzing it. Furthermore, it was necessary to consult
with interested parties and to build a measure of agreement on how and when to
tackle the key issues. Full agreement was not reached, of course, in the case of
sugar restructuring. Two sugar commissioners issued a dissenting report.
Although the government was able to implement fairly quickly the
recommendations of expert studies to abolish QRs on imports, it took quite a long
time to revise the schedule of import tariffs.
Three different governments were involved in carrying out reforms over the
1979-86 period, but the basic thrust of new policies was sustained. This was a
remarkable accomplishment. Even the leftist MMM/PSM government adhered to
 Lessons of Experience 59

the main line of policy developed by the predecessor MLP/PMSD government.

Pragmatism triumphed over ideology. The national mood seemed to be to solve
operational problems in a workman-like manner.
Mauritius can be credited with many achievements. The economy was
stabilized. The international competitiveness of the Export Processing Zone was
restored. Unemployment was reduced from a peak of 22 percent in 1983 to 4 percent
in 1987. Progress was made in improving the fmancial viability of sugar estates,
in raising yield levels of sugar smallholders, and in increasing food production.
The economy's supply response during recent years has been impressive. A
number of problems remain, however. The EPZ is heavily specialized in the exports
of textile and apparel goods and in the markets of the EEC and United States.
Manufactured exports remain vulnerable to non-tariff-barrier restrictions on
imports in developed countries and to a recession in developed countries. Many
development certificate enterprises continue to be sheltered behind high protection,
and their competitiveness and productivity remain low. The budget is still strained
by substantial subsidies to rice and wheat flour, as well as by a number of low-
productivity public enterprises. Labor laws continue to impede smooth functioning
of the labor market.
Three lessons can be drawn from Mauritius's experience of stabilization and
recovery. First, the sharp recovery in the economy would have been much less
likely if reforms had followed an acute and protracted crisis instead of being
triggered by a relatively mild disequilibrium. It is much more difficult to climb out
of a deep hole than to re-establish normalcy after a relatively brief setback. Many
economic processes tend to be cumulative so that once decline sets in, the chances of
further deterioration are enhanced. It is important, therefore, to establish warning
signals and feedback mechanisms that can alert top leaders to emerging policy
problems as early as possible. In Mauritius these mechanisms are part and parcel
of the democratic culture, but workable arrangements in nondemocratic regimes
can also be invented. For example, the feedback mechanisms in South Korea under
the authoritarian rule of President Chung Hee Park were effective.
Second, the sharp recovery would have been less impressive if Mauritius did not
have access to the relatively large EEC sugar quota. During the reform period of
1980-86, the EEC sugar prices averaged 54 percent above the international free
market price. This EEC dividend amounted to $800 million (Table A-5). It
enhanced Mauritius's import capacity by 19 percent. We conclude, therefore, that
the country's geopolitical advantages on the one hand and its own foreign policy on
the other, both of which were responsible for the sugar quota, underpinned the
reform effort. Mauritius had to make net resource transfers to its commercial
creditors during the reform period. Donor assistance proved incapable of offsetting
the negative resource transfer. In the absence of the EEC dividend, a serious
foreign exchange constraint would have circumscribed the expansion of the EPZ.
The lesson here is that reforming countries have to play all their cards well, not just
the economic ones. Links between economic and foreign policy must be recognized.
Third, there is a lesson to be learned from the way in which Mauritius handled
negotiations with the international organizations. Many Sub-Saharan countries
have had to negotiate policy agreements with the IMF and the World Bank under
considerable financial pressure and therefore with their bargaining power
impaired. Under these conditions, agreements have been signed without sufficient
commitment on the part of governments. This eventuality was avoided, by and
large, in Mauritius. Given the general orientation of its economic policy, there was
never much disagreement in principle with the international organizations on the
60 Sucoessfil Stabilization and Revoueryin Mauritius

direction of desired reforms. Judgments differed, however, on detailed issues of

design and on the speed of change of policies. Whenever differences arose, the two
sides would disengage temporarily, reconsider their views, and either reach an
agreement or agree to disagree. The government could afford to maintain this
posture because the initial disequilibrium was relatively moderate, and it
continued to have access to private sources of finance. The advantage to both
Mauritius and the international organizations was that credibility and mutual
respect were maintained throughout the process.
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Economist Intelligence Unit. various years. Mauritius Country Profile. London:

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62 Successfil Stabilizationand Recoveryin Mauritius

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Appendix Tables

67
I I I
 Appendix Table 69

Table A-1 SelectedEconomicIndicators, SelectedYears 1966-86

(percent of GDP)

Comparators1986
Middke
income Developing
Indicator 1966-68 1972-74 1978-801984-86 countries countries

National accounts
Value added in agriculture 22.3 19.9 18.7 15.3 15 19
Value added in industry 19.3 20.1 22.0 23.3 36 36
(of which manufacturing) 11.9 13.5 12.8 14.8 22 21
Resourcebalancea 2.1 -2.8 -14.7 -0.3 1 -1
Exports 572 62.0 47.9 52.7 22 19
Imports 55.1 64.8 62.6 53.0 21 20
Total consumption 80.2 78.1 87.2 77.8 76 76
Gross domesticinvestment 21.0 33.9 27.9 24.0 23 24
Gross domesticsavings 19.8 21.9 12.8 22.2 24 24

Government finance

Current revenue
(excludinggrants) 18.3 15.2 19.7 20.8 24 23
Expenditures
Education 2.9 4.2 4.9 3.5 3 3
General public services 2A 3A 5.4 4.2 2 2
Heslth services 1.7 3.1 4.2 2.2 6 6
Economicservices 4.5 5.0 4.2 3.4 1 1
Wagesand salaries 9.9 14.1 9.9 8.9 - -.
Total expenditure 24.8 19.7 27.9 25.2 28 26
Current 19.6 15.2 22.7 22.2 - -.
Capital 5.2 4.5 5.2 3.0 - --
Actual debt service
(%of exports)a -- 1.0 4.1 11.3 21 20

a. goodsand nonfactorservices.
Sources:World Tables (1987);IMF (variousyears), GovernmentFinance Statistics Yearbook.
70 Successfil Stablization and Reovery in Mauiiue

Table A-2 SelectedSocialIndicators, SelectedYears 1965-86

Comparators 1986
Middle -
income Developing
Indicator 1965 1973 1980 1986 countries countries

Area under agriculture

(% of total) 55 62 62 62 - -
GNP per capita a
(constant 1980 US$) 300 410 1200 1160 1040 530
Total population (thousands) 755 866 957 1032 1268 3761
Urban population (% of total) 37 44 52 52 - -
Population growth rate
(decade ending) 3.0 1.7 1.5 1A 2.3 2.0
Total labor force (thousands) 227 280 331 400 - -
Agriculture (% of total) 37 31 29 28 43 62
Industry (% of total) 25 25 24 24 23 16
Percentage of private income
received by
Highest 20% of households 51 45b 61 -- - -
Lowest 20% of households 5 5 4
Estimated population below
absolute poverty incomec(%):
Urban - - 12d
Rural - - 12 --
Life expectancy at birth (years) 61 63 65 66 67 61
Education: enrollment ratios
Primary total 101 107 106 106 104 101
Male 105 108 105 105 109 110
Female 97 106 106 106 101 92
Secondary total 26 39 51 51 49 39
Male 34 42 53 53 57 45
Female 18 35 49 49 51 33
Tertiary total - 1 2 2 14 8
Pupil-teacher ratio
Primary 34 26 22 -- - -
Secondary 22 30 - --

a. World Bank Atlas method of convertingdata in national currency to US dollars. The conversion
factor for any year is the average exchangerate for that year and the two precedingyears, adjusted for
differences in rates of inflation between the country and United States. The official exchangerate is
usualy used, but when it divergesby an exceptionallylarge margin from the rate effectivelyapplied to
international transactions, then an alternative rate is used. Midyearpopulationis used to arrive at per
capita figures.
b. 1976.
c. US$190per capita for urban and rural areas.
d. 1979.
Sources: World Tables, vol. 2; Social Data, 3d ed., published for the World Bank by Johns Hopkins
University Press, Baltimore, January 1984;and WorldDevelopmentReport (various years).
 Appendix Table 71

Table A-t Terms of Trade, 1960-86

(Index 1980=100)

Tems qf trade Exportprice Import price a

Year N.a UNCTADb Index Index

1960 93.9 13.1 13.9

1961 86A 12.2 14.1
1962 89.0 12.5 14.0
1963 113.2 15.9 14.0
1964 113.8 16.2 14.2
1965 92.2 13.8 14.9
1966 94.8 14.4 15.2
1967 95.8 14.9 15.5
1968 80.1 14.6 18.2
1969 84.3 14.9 17.6
1970 90.5 108.0 15.8 17A
1971 88.9 128.0 17.1 19.3
1972 100.4 128.0 20.3 20.3
1973 90.0 111.0 23.8 26.4
1974 143.9 205.0 59.2 41.1
1975 167.0 228.0 77.8 46.5
1976 124.5 156.0 63.7 51.2
1977 112.0 139.0 62.5 55.8
1978 108.0 133.0 63.9 59.1
1979 105.4 111.0 74.5 70.6
1980 100.0 100.0 100.0 100.0
1981 93.8 99.0 110.6 118.0
1982 87A 94.0 120.1 137.4
1983 93.8 98.0 128.2 136.6
1984 992.5 93.0 144.6 156.1
1985 97.0 74.0 160.9 165.7
1986 104.7 176.2 168.2

a. National Accounts(NA)is definedas the ratio of export (gnfs)price index to import (gnfs)
price index.
b. UNCTADseries is defined as ratio of price index of commodityexports fob. to that of
commodityimports ci.f.

Sources: World Development Report (1987); UNCTAD(1985). This table is based on the
national accountseries.see Figures 2.1and 4.1in this paper.
?2 Suriafed S bWiaftoa and Rmvery iA Maunwiga

Table A..4Sugar Prices in Different Markets, 1968-87

U.aprc
Year EECpnce amt/I& Fre mrket prioe

1968 2.35 1.90

1969 3.62 3.20
1970 4.32 3.69
1971 5.03 4.50
1972 8.12 8.00 7.27
1973 10.89 9.45 9.45
1974 31.90 29.66 29.66
1975 21.85 21.00 20.37
1976 13.39 13.31 11.58
1977 14.01 11.01 8.12
1978 15.93 13.97 7.82
1979 19.29 15.53 9.66
1980 22.09 30.03 28.65
1981 18.93 19.73 16.87
1982 18.12 19.92 8.42
1983 17.57 22.04 8.47
1984 16.45 21.74 5.20
1985 15.89 20.35 4.06
1986 18.61 20.88 6.05
1987 20.94 21.83 6.76

SouroeWorldBank, International CommodityMarkets Division,Washington,D.C.

 Appendix Tables 73

Table AZ EEC Dividend and its Impact on Mauritius's Economy, 1968-86 (US$
millions, current prices)

Year EEC dividendZ

1968 5.9
1969 6.2
1970 8.0
1971 7.3
1972 12.9
1973 22.8
1974 34.0
1975 16.4
1976 27.1
1977 86.3
1978 119.9
1979 140.7
1980 -70.9
1981 26.1
1982 147.1
1983 121.3
1984 142.8
1985 168.4
1986 193.8

a. The difference between value of sugar exported at EEC prices and free market (international)
prices. EEC dividend amounted to US$487.5 million during 1968-80 (of which US$346.7 million
is during 1977-79) and US$799.5 million during 1980-86. The impact of the EEC dividend on the
economy is calculated using the Harrod-Domar framework with the following assumptions:
marginal (and average) propensity to save is 0.25; incremental capital-output ratio is 3.00; and
all savings are invested. Absolute savings (and investment) due to EEC dividend during 1968-80
is US$122 million (of which savings during 1977-79 is US$87 million) and during 1980-86 is
US$200 million. The increase in national income during 1968-80 (i.e., 13 years) is 12213x 13 =
US$529 million.

This is equivalent to 7.0% of total GDP in 1968-80.Similarly, increase in national income during
1977-79 is US$87 million, which is equivalent to 3% of total GDP in 1977-79. Lastly, increase in
national income during 1980-86 is US$467 million, equivalent to 5.7% of total GDP in 1980-86.

Source: World Bank, International Commodity Markets Division.

74 Sccesfidl Stabilization and Recovery in Mauritius

Table A-6 Indicators of National Accounts, 1960-86 (million rupees, 1980 prices)

Year GDP Consumption Investment GDE a GDY b

1960 3725 2924 2005 4929 3629

1961 4576 2763 1576 4339 4190
1962 4613 3247 1457 4704 4324
1963 5254 3134 1516 4650 5698
1964 4892 4592 1121 5713 5240
1965 5048 3833 1428 5261 4824
1966 4868 4103 874 4977 4726
1967 5081 4290 1295 5584 4974
1968 4731 3405 928 4333 4116
1969 4965 3218 1175 4393 4465
1970 4945 3786 801 4587 4629
1971 5146 4053 1215 5268 4807
1972 5564 4073 1389 5461 5577
1973 6260 3734 2297 6030 5845
1974 6858 5316 2751 8067 8435
1975 7050 6261 2858 9120 9006
1976 7919 6844 2669 9513 8840
1977 8565 7470 2655 10125 9078
1978 9070 7887 2882 10769 9410
1979 9586 8158 2983 11141 9823
1980 8697 7786 1803 9589 8697
1981 9118 7714 3132 9846 8861
1982 9596 7596 1782 9378 9018
1983 9673 7752 1764 9515 9386
1984 10138 8090 2090 10181 9780
1985 10859 8436 2458 10893 10573
1986 11772 8951 3399 12350 13014

a. Gross domestic expenditure = total consumption plus investment.

b. Gross domestic income = gross domestic product (GDP) plus/minus gain/loss due to
changes in terms of trade.

Source: World Tables, 1987. See also Figures 2.3 and 4.2 in this paper.
 Appendix Tables 75

Table A-7 Balance of Payment Indicators, 1970-86(US$ millions, current prices)

Current account
Year Balance a Net capitalb Net IIP Net ODAd

1970 7.8 1.0 0 6

1971 -5.4 0.1 0 9
1972 15.5 1.8 0 9
1973 0.4 3.2 0 14
1974 54.4 6.0 0 25
1975 17.7 9.3 0 29
1976 -36.3 9.5 0 29
1977 -78.8 16.6 0 22
1978 -118.8 80.0 11 44
1979 -148.6 67.0 0 32
1980 -118.7 71.6 46 33
1981 -153.3 50.0 67 58
1982 -42.1 49.8 25 48
1983 -22.1 -19.6 15 41
1984 -54.0 41.7 -7 36
1985 -30.3 25.6 -13 29
1986 101.8 29.3 -19 56

a Excludes official capital transfers.

b. Excludes official development assistance.
c. IMF purchases - repurchases.
d. Includes grants and concessional loans.

Sources: For current account balance and net capital, IMF (various years), Balance of
Payments Yearbook; for net IMF, International Finance Statistics Yearbook (various years); and
for next official development assistance, OECD (various years). See also Figures 2.4 and 4.3 in
this paper.
76 Succeful Stabijeation andRecovery inMauritius

Table A-8 Budget Deficit and Its Financing, 1968-86 (million rupees, current
prices)
Net foreign Borrowing Budget
Year Capital a from local banks b deficit c

1968 13 18 -65
1969 24 1 42
1970 22 11 -56
1971 10 59 -75
1972 32 27 -75
1973 11 -15 -72
1974 30 190 -210
1975 41 -9 -145
1976 20 236 -160
1977 70 289 400
1978 284 464 -553
1979 310 490 -718
1980 219 500 -559
1981 721 454 -895
1982 866 594 -1115
1983 -152 946 -780
1984 -88 643 -673
1985 883 -325 -881
1986 119 272 -607

a. Includes grants. Borrowing from foreign governments, international development

institutions, and other foreign borrowing (see line DIII of IMF, Gouernment Finance
StatisticseYearbook).
h Total government borrowing from deposit money banks and monetary authorities of
central government. It is on a net basis.
c. Total expenditure - current revenue (excluding grants).

Source: IMF (various years), Government Finance Statistics Yearbook See also Figures 2.5 and
4.4 of this paper.
 Appendix Tables 77

Table A-9 Nominal and Real Effective Exchange Rates, 1970-86

(index1980 = 100)

Year Nominal exchangerate Real exchangerate

1970 153.0 107.7

1971 153.8 102.5
1972 152.5 100.9
1973 138.4 94.3
1974 134.6 102.1
1975 129.7 98.9
1976 134.1 100.1
1977 135.2 100.2
1978 133.7 103.2
1979 125.7 99.9
1980 100.0 100.0
1981 101.4 103.8
1982 94.9 98.8
1983 96.8 99.3
1984 93.0 96.0
1985 90.0 93.1
1986 88.9 89.9

Note: Effectiveexchange rates have been derivedusing base year (1980)import weights of 123
trading partners. The real exchangerate is arrived at on the basis of the nominal effectiverate
and movementsin consumerpriceindicesin Mauritius and its trading partners. An increase in
the index means an appreciationin the exchangerate and viceversa. SeeFigure 2.6.

Source:IMF, DevelopingCountryStudies Division,Research Department.

78 Successful Stabilization and Recovery in Mauritius

Table A-10 Average Monthly Earnings by Sector, 1970-85

(rupees, constant prices)

Textiles Apparels Sugar Other All sector

Year (EPZ) (EPZ) sector manufacturing average Government

1970 714 1154 1653

1971 811 1189 1660
1972 934 1176 1586
1973 1048 1168 1555
1974 900 676 998 1444
1975 856 702 1050 1489
1976 773 520 1098 798 1258 1886
1977 885 586 1196 919 1363 1868
1978 868 642 1247 985 1423 1846
1979 818 604 1190 895 1363 1687
1980 810 585 994 814 1205 1478
1981 824 592 1075 807 1241 1489
1982 808 542 1088 766 1227 1486
1983 854 555 1101 794 1241 1497
1984 854 618 1116 766 1204 1465
1985 922 618 1080 743 1157 1434

Source: World Bank (1985).

 Appendix Tables 79

Table A-11 Nominal and Real Interest Rates on Commercial Bank Deposits of Six
Months, 1970-86 (annual percentage)

Year Nominal a Realb

1970 5.25 3.6

1971 4.75 4.5
1972 4.75 -0.3
1973 4.75 -6.4
1974 4.75 -14.5
1975 4.75 -7.2
1976 4.75 -6.0
1977 5.00 -3.4
1978 7.00 -0.8
1979 8.00 -4.2
1980 9.50 -15.5
1981 9.50 -2.8
1982 9.50 -0.7
1983 9.50 4.0
1984 9.50 2.5
1985 9.50 3.0
1986 9.50 7.5

Notes:
a. At year end.
h Real interest rates (R) have been arrived at using the formula:
1+i
R= - -1
1
+p
Where i = nominal interest rate
p = percentage change in consumer price index.

Source: World Bank data files. See also Figure 2.8.

80 Successful Stabilization and Recovery in Mauritius

Table A-12 Government Expenditure and Revenue, 1965-86 (million rupees,

constant prices)

Total Current Current Capital

Year expenditure expenditure revenue outlays

1965 1130 869 262 1084

1966 1166 920 246 826
1967 1239 989 281 890
1968 1241 969 272 969
1969 1165 989 176 993
1970 1143 914 229 918
1971 1267 949 318 983
1972 1223 888 335 975
1973 1191 825 366 983
1974 1270 902 309 830
1975 1514 1178 336 1259
1976 2045 1535 810 1776
1977 2468 1846 615 1838
1978 2587 2035 552 1786
1979 2679 2206 474 1778
1980 2370 1972 398 1811
1981 2638 2207 431 1839
1982 2731 2367 363 1818
1983 2716 2443 273 2124
1984 2643 2396 247 2167
1985 2795 2412 382 2219
1986 2821 2466 355 2441

Note: GDP deflator is used to convert data in current prices into series at 1980 prices. Current
revenue excludes grants. See Figures 2.9 and 4.5.

Source: IMF (various years), Government Finance Statistics Yearbook.

 Appendix TabLe 81

Table A-13 Sugar Productionand Exports, 1963-86(thousand tonnes)

Year Production ProductionTrend Eaport.

1963 685.6 602.0

1964 519.0 603.5 560
1965 664.4 605.0 578
1966 561.8 606.5 571
1967 638.3 608.0 531
1968 596.5 609.5 578
1969 668.7 611.0 592
1970 576.2 612.5 582
1971 621.1 614.0 568
1972 686.4 615.5 614
1973 718.5 617.0 698
1974 689.1 618.5 658
1975 501.9 620.0 441
1976 679.2 621.5 658
1977 664.5 623.0 618
1978 670A 624.5 619
1979 662.9 626.0 628
1980 490.8 627.5 617
1981 574.5 629.0 432
1982 687.9 630.5 597
1983 604.7 632.0 608
1984 575.6 633.5 531
1985 645.8 635.0 540
1986 700.0 636.5 625

Notes:Per unit cost of transportation fromfarm to market See Figure2.10.

Source:WorldBank (1986a).
82 Succesfid Stabilization and Recoueryin Mauritius

Table A-14 Guaranteed Producer Prices for Selected Food Crops, 1977-87 (constant
1980 rupees per ton)

Year Maize Potatoes Onions Garlic

1977 2646 1940 3880 5291

1978 2439 1951 4878 9756
1979 2128 2128 4965 11384
1980 2000 3000 5300 8000
1981 2096 2271 4978 6987
1982 2196 2588 4471 6275
1983 2153 1930 4380 5939
1984 2593 1798 4080 8299
1985 2738 1296 3824 7777
1986 2761 1272 3753 7634
1987

Note: Deflated by CPI (1980=100)

Source: Agricultural Marketing Board, Mauritus.

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