More on Mauritian Growth

Mauritius has had one of the fastest growing economies in Africa.

Brian Chernoff and Andrew Warner (C&W) start by explaining how unlikely this fast growth was, in this draft article on Mauritian growth (in preparation for a conference on growth in another small island economy - Iceland)  Sources of Fast Growth in Mauritius: 1960 – 2000 (1st draft, Center for International Development at Harvard University, May 2002):

Mauritius is a small remote tropical island in a forgotten section of the Indian Ocean. From the perspective of current research on the sources of fast economic growth, Mauritius’ endowments would not have seemed particularly favorable for growth back in the 1960’s or early 1970’s. It is geographically remote. Its climate is tropical, with attendant disease burdens and problems with tropical agriculture. The size of the domestic market is tiny, with little scope for exploiting domestic economies of scale. It had rapid population growth in the 1960’s and seemed to be at risk of a Malthusian trap.  And its main export product at the time, sugar, was subject to all the risks of the international sugar market, not only international price risk but also the risk from devastating cyclones. Its export sector in the 1960’s was anything but diversified, with sugar dominating exports. It was thus a natural resource intensive economy subject to the curse of natural resources. Mauritius also had a history of colonial domination by several powers and as a result its population was a mixture of several ethnic groups, with all the social and political risks of ethnic strife.

Mauritian growth has been impressive since 1970.  C&W calculate that annual GDP growth averaged about 1% in the 1960s, about 5% from 1970-1982, and about 6% thereafter.  It was relatively variable up to the mid-eighties, relatively stable after:

 

(Adapted from Chernow and Walters)

The following figure duplicates information from a Table in Chernow and Walters and follows the format of one of their figures. It shows total GDP growth from 1977 to 1997, and provides sectoral growth estimates for agriculture, services, non-manufacturing industry, and EPZ and non-EPZ manufacturing. 

The term "EPZ" refers to the "export processing zone."  The EPZ was set up by legislation in late 1970 to encourage the growth of export oriented industry.  Exporting firms got tariff exemptions for inputs of productive goods and equipment, tax breaks, and a relaxation of some regulations, such as those dealing with employment.  The EPZ turns out to be very important for the growth story.

(Adapted from Chernow and Walters)

First, follow agricultural growth.  This fluctuates a lot, and appears to be responsible for the fluctuations in overall growth through 1982.  Second, follow EPZ manufacturing productivity growth.  It is close to zero up to 1982, then arcs above zero from 1981 to 1989.  After 1989, it averages less than 1%.  Finally, follow services.  Up to 1984 this is rising and falling with movements in agricultural growth.  In 1985, services growth starts to take off, rising to 5% in 1987, and staying around 4% thereafter.

What happened here?

The law establishing the EPZ was passed in late 1970, but it had little apparent impact on growth until the mid-eighties.  At first, the sector was small compared to the overall economy, so even if growth was rapid, it would have little overall affect.  Later in the 1970s various setbacks slowed EPZ growth.

But there were various reforms and investments which became effective in the early to mid-eighties.  These included improved macroeconomic performance, additional EPZ incentives, and investments in industrial park and harbor infrastructure that were completed at this time.

EPZ growth took off, fueled by a movement into EPZ employment by unemployed persons - particularly women.  Mauritian unemployment dropped from 21% to 5% between 1982 and 1988.

C&W calculated indices of employment, capital inputs, and output for key sectors.  Here's the figure for the EPZ sector:

The initial EPZ output growth was driven the influx of workers; capital inputs began to increase shortly after.  Even after labor and capital input growth levels off in the late eighties, output continues to increase.  Output growth was driven first by the employment of unemployed labor, then by increased capital per worker, then, in the 1990s, by increases in factor productivity - better ways of doing things, technological change.

But the big driver in the 1990s was growth in services:

After this initial boom in the EPZ sector, we begin to see growth in Services start in earnest around 1986. After this, most growth in Mauritius (in an accounting sense) can be explained by growth in Services....  There are at least three possible reasons for this growth in Services: one, greater demand for non-traded services due to higher incomes overall; two, linkages from the EPZ boom to service sectors such as transportation and financial services; and three, growth of services such as tourism that are passive beneficiaries of the improved transportation infrastructure that grew up around the EPZ sector.

In summary:

The fact that growth in Mauritius has continued high and uninterrupted since 1982 is attributable to three facts. One is that output growth in exports and in demand driven services has been remarkably smooth. The second is that much of the growth in exports has been due to growth in total factor productivity during the 1990’s and this appears to be a smoothly increasing process. The third is that Mauritius did not experience a major disruption to its Sugar industry during this period as it had in the 1970’s. In fact, Mauritius’s greater integration with the global economy has if anything reduced rather than increased vulnerability and volatility.

I posted on a related article by Subramanian and Roy last week (What made Mauritius grow?). 

Both sets of authors try and explain Mauritian growth.  While the articles complement each other, there are interesting contrasts between them.  S&R pay a lot more attention to sugar and textile tariff breaks given to Mauritius by developed countries, and to the reasons why political corruption and rent seeking didn't subvert Mauritus' interventions in the market place.  C&W get into more sectoral detail and description; services don't loom large in S&R .  C&W focus more on proximate causes of growth, S&R perhaps on deeper underlying causes.

C&W point out that Mauritian success has made its story a prize in the ideological war over whether or not openness to trade is good for growth:

Mauritius’s continued growth means that it is an ever-more-obvious success story in development economics. For this reason there is starting to be an effort to claim the Mauritius example as a vindication for particular schools of development economics.  Subramanian and Roy (2001) flatly classify Mauritius as a closed economy. Rodrik (2001) seizes on this evidence to suggest that Mauritius’ success under protection proves that trade liberalization is an oversold and misguided strategy for developing countries.

They take issue with S&R and argue that it is wrong to classify Mauritius as closed.  They note that the EPZ sector was not closed, and that S&R don't consider the extent to which firms in the high-tariff import-competing sector may have used the EPZ to bypass import taxes and restrictions.  They also note that if you assume the import restrictions in the non-EPZ sector were effective, than you have a free trade "experiment" with an open manufacturing sector and a closed manufacturing sector - clearly growth was better in the open sector.

Revisions: revised report of C&W growth estimate to refer to the period from 1970-1982, instead of "the 1970s".  There was a slight increase in average growth between the two periods, but from the percentages in their table, I'd have rounded annual growth in both periods to 6%.   Jan 4, 2006.