Economic Freedom Pays Dividends in Mauritius

Published on 28th December 2010

Year after year, the worst economic performers in the Economic Freedom of the World Annual Report are developing nations and the top performers are developed countries. This year’s report, however, provides a glimmer of hope as there are now two developing countries in the top ten nations: Chile and Mauritius.

For the very first time, a Sub-Saharan African country is now the ninth freest economy in the world. Mauritius is a remarkable example of economic development induced by an increasing level of economic freedom over the last three decades. The country’s economic freedom rating was 5.16 in 1980 and it is now 7.61 (Gwartney, Hall, and Lawson 2010: 106). When we consider the five components (2) of the economic freedom index since the 1970s, it is clear that Mauritius has improved its economic freedom essentially by reducing the size of its government (from a rating of 6.8 in 1970 to 8.4 in 2008) and by increasing its freedom to trade internationally (from a rating of 4 in 1970 to 7.4 in 2008) (Free the World.com 2010). This has allowed the small Indian Ocean Island to grow much faster than other developing nations. According to the World Bank’s 2009 Country Classification, Mauritius is now considered an upper-middle-income economy – the last step before entering the exclusive, developed countries’ club.

Why is economic freedom good for development?

The low level of economic freedom in developing countries is a problem because numerous studies have shown that countries with more economic freedom grow more rapidly, and achieve higher levels of per capita income than those that are less free (Norton and Gwartney, 2008: 27). Economic freedom not only drives economic growth and prosperity, but also contributes to the emergence of civil liberties and political freedom, both of which are essential to human rights and liberal democracy (Gwartney and Lawson, 2009: 22), (Al Ismaily et al., 2008: 13).

Although, as mentioned by Easterly (2006: 33), economic freedom seems well established as a path to prosperity, people like Dr. Jeffrey Sachs, the author of The End of Poverty, who played a key role in the UN Millennium Project (5), still argue for a significant increase in foreign aid to help poor countries escape the “poverty trap” that he believes prevents poor nations from experiencing economic growth (Easterly, 2006: 33). However, as Dr. William Easterly, Co-Director of the Development Research Institute, an independent and non-partisan organization doing research on the economic development and growth of poor countries, notes, Africa has received $568 billion in aid over the past four decades, and the results have been far from impressive in terms of poverty reduction and economic development (2006: 34). As China has demonstrated over the past two decades – during which time 300 million Chinese people rose out of extreme poverty – raising economic growth by increasing economic freedom is a more efficient and successful way to reduce poverty in developing countries (Norton and Gwartney, 2008: 33).
This is why a higher level of economic freedom in developing countries that liberates people from dependence on government and allows them to make their own economic and political choices is so important.

A brief history of the Mauritian economy Since its independence in 1968, Mauritius has developed from a low-income, agrarian economy dependent on sugar cane, to an upper-middle income country that has carved out niches in the textile industry, in tourism, and in financial services (Ng Ping Cheun, 2007: 1). This success can be attributed mainly to the strategies undertaken by successive governments over the past four decades to bring about economic diversification.

The development of an outward-looking export-oriented strategy in the 1970s, which was spearheaded by textiles and clothing manufacturing, has been a driving force in the take-off of the Mauritian economy (Dabee and Greenaway, 2001). Foreign investors were attracted by the provision of generous incentives such as tax holidays and duty-free imports of raw materials and equipment; free repatriation of capital; the availability of a cheap and docile workforce; a relatively stable political and social climate; and by the preferential trade access to European Union markets. In parallel to the development of the industrial Export Processing Zone (EPZ), the national airline Air Mauritius expanded into new non-stop destinations in Europe, which contributed to boost the tourism industry in the 1980s (Mauritius 2010).

In fact, much of the Mauritian economic growth has been driven by export performance. Exports, which totaled only Rs 1.8 billion in 1976, increased tenfold to Rs 18.1 billion in 1990. Annual real Gross Domestic Product (GDP) growth averaged 5.4% between 1976 and 1990, the main contributor being the EPZ sector, which grew at an average annual rate of 16% between 1976 and 1990, with a peak of 35% in 1986 (Mauritius b).

The diversification strategy was expanded in the 1990s with the consolidation of the financial services sector into commercial banking, insurance and global business, and in the 2000s with the information and communication technology becoming a new economic sector. Over the period 1991 to 2010, the economy enjoyed an average annual real growth of 4.9%.

What explains the Mauritian success?

Because it lacks natural resources, Mauritius’ prosperity is dependent on its people. James Meade, the 1977 Nobel Memorial Prize in Economic Sciences winner, lamented the island’s ethnic diversity as a curse in 1961. However, it turns out that this very diversity creates useful linkages of international trade as well as important networks of foreign direct investment with the former colonial powers and with the countries of origin (Subramanian, 2009).

Mauritius has been a liberal democracy with a sophisticated and impartial legal system since its independence. Both the rule of law and respect for private property play a positive role in making the island an attractive investment location. Instead of nationalizing the sugar sector, guaranteeing the rights of the sugar owners who make up the economic elite has well served the Mauritian economy and contributed to its rapid expansion and diversification. Equally, a free and vibrant press and participatory politics ensure confrontation of ideas, warning of emerging problems and feedback on official decisions, thus bringing out the best in all stakeholders. All these institutions, along with the fillip of preferential trade agreements, have shaped Mauritius’ economic performance (Subramanian and Roy, 2001).

There are, however, some limits to the Mauritius model. We note the great social inequalities within the population and also the government’s interventionism in the economy. The policy of protecting domestic markets while providing incentives for export enterprises strains public finances. Furthermore, there exist non-tariff barriers in the form of a large bureaucracy and import licences on numerous products like circuit breakers and weighing scales. The government is also heavily involved in private companies through majority shareholding. It has a stake in banking, insurance, telecommunication, commercial aviation, housing, real estate, restaurants, and entertainment activities. It also wields a monopoly on public utilities and casinos, and has a long arm through its State Investment Corporation, which holds investments in about ninety companies out of a total of more than 5,000 across all economic sectors (State Investment Corporation Ltd, 2010).

Conclusion

Since their independence, many developing countries have suffered from bad economic and political governance. However, Mauritius has shown that there is an alternative path towards relative economic prosperity, poverty reduction, and liberal democracy. Other developing countries should try to replicate this experience in order to create an institutional and policy environment that is conducive to the smooth operation of markets, the realization of gains from trade and entrepreneurial activities, (Gwartney and Lawson, 2004: 28) and that will enable economic and political freedom to flourish for the benefit of their citizens.

By Jean-François Minardi and Eric Ng Ping Cheun

Jean-François Minardi is Associate Director, Economic Freedom and Development Centre of the Fraser Institute. Eric Ng Ping Cheun is the Director of PluriConseil.

Courtesy: Conjoncture, A Bilingual Journal of PluriConseil


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