How Mauritius Can Become a High Income Country

Published on 5th April 2014

Mauritius has all the ingredients to become a high income economy over the next decade. One way to achieve this transformation is to become the business services hub that bridges Africa and Asia.  Most  of  the  pre - requisites  have  been  met  in  terms  of  business  climate,  infrastructure, judicial  system,  institutional  and  political  systems,  education  and  health  facilities  and  social arrangements. The one major missing ingredient is labour. Unfortunately,  as  one  German  politician  observed, labour  comes  with  people.  This is where the Mauritian society will need to make up its mind if it is prepared to accept the large influx of people required to support its emergence as a world class business hub. Mauritius may prefer the alternative of remaining a middle income country with low or no growth that instead exports its own people.  

A hub bridging Africa and Asia? 

Asia  and  Africa will  develop  rapidly  in  the  coming  decades,  bringing both opportunities and competition  for  Mauritius. A  network of globally  connected  cities  which  are  hubs of  knowledge, innovation and enterprise, will increasingly shape and drive the global economy. Unlikely places like Dubai, Hong Kong and Singapore have emerged to join New York, London, Frankfurt, and Tokyo and Shanghai as such hubs. At the same time, attractive cities such as Paris, Madrid, Barcelona and Rio or important cities such as Moscow, Johannesburg and Brazilia are trying to compete as centres of the globalised economy. 

Against  this  backdrop,  the  key  economic  challenge  is  to  develop  a  sustainable  and  vibrant economy.  To  grow  and  create  good  jobs  with  good  wage  growth  for  Mauritians,  Mauritius  must become the preferred location for companies to tap into Asia as well as Africa’s growth. Mauritius may have had a first mover advantage tied to a good reputation to become a global hub linking Asia and Africa. However, Nairobi, Seychelles, Johannesburg and possibly Addis Ababa could be alternatives that emerge as suddenly as Dubai did. 

The  hub  will  go  to  whichever  country  offers  a  modern  city  with  good  logistics  and  infrastructure that is open and well connected to the region and the world and guarantees political stability and a good business climate. It must also be welcoming to foreigners from all over the world including Africa and Asia. The dominant hub will be the one where businesses and investors see attractive long - term future  prospects  based  on  existing  policies.  It  will  also  be  the  place  which  offers  the most pleasant  living conditions for good work life balance and attractions for family life.   

In  turn,  as  can  be  seen  from  all  the  hubs  that  have  already  emerged,  if  Mauritius  can  become such a hub that attracts global businesses, the country will develop new sectors, and open up a range of good jobs. Such jobs will enable increasingly better - educated Mauritians to pursue their aspirations. 

Access to qualified manpower will increasingly determine where businesses locate their high- value operations. Without qualified manpower, companies could scale down their operations or relocate. If Mauritius loses some existing economic clusters, or fails to attract new ones, its economy could slow down sharply or decline.This economic  stagnation  will  be  accelerated  as  other countries in the region play to their strengths whilst catching up on some of the areas where Mauritius is currently ahead. For  example,  Nairobi  and  Johannesburg  are  already  ahead  with  regional  and  international connectivity which is a strong pull factor for companies to locate their regional headquarters. 

A  good  mix  of  a  resident  workforce  supplemented  with  foreign  workers  is  essential  to  maintain growth  potential  at  a  healthy  level,  and  provide  greater  economic  resilience.  Indeed, some observers point out that from the early 1980s until the early 1990s, Mauritius and Singapore were on the  same  growth  path.  It  is  only  once  both  countries  reached  full  employment  that  Mauritius fell  behind.  In  Singapore,  high  growth  and  movement  to  an  international  hub  and  high  income country  were  driven  by  opening  up  and  for  the  2  million  Singaporeans  to  welcome  3  million foreigners. Meanwhile the decision of Mauritius not to do so has left the country a prisoner of the middle income country trap.  Similarly,  Dubai  could  only  emerge  as  a  global  hub  because  the several hundreds of thousands people in Dubai accepted to welcome over 1 million foreigners. 

For  Mauritius  (and  potential  alternatives),  becoming  a  global  hub  will  rest  on  being  able  and willing  to  accept  many  foreigners.  If  Mauritius  is  not  willing  to  do  this,  then  the  country  should continue preparing both its best educated and its lower skilled citizens for emigration to the hub that will emerge to serve the region as a bridge between Africa and Asia.  

Benefits of foreign labour 

Highly  skilled  foreign  workers  contribute  to  rapid  knowledge  transfer  with  associated  gains  in productivity and hence wages. They support the development of services that the economy would otherwise find difficult to afford, including culture and arts which contribute to raising the quality of life. They bring the purchasing power to enable provision of world class services in education and health,  which  makes  the  country  much  more  attractive  for  all  its  citizens  and  a  more  desirable place for talented foreigners to move to. They finally contribute to enlarging the tax base, which enables the financing of a generous welfare state.  This is why all the hubs are associated with developments  in  science  and  technology,  high  rates  of  education,  low  rates  of  crime,  a  high standard of living together with a high quality of life.    

Whilst some  of  these  benefits  are  intangible, employing  foreign workers can produce a variety of positive multiplier effects  that can more  directly  be  observed. First, job creation.  In 2008, Bill Gates testified that “Microsoft has found that for every H- 1B (Highly skilled foreign workers on employment visa in America) hire we make, we add  on  average  four  additional  employees  to  support  them  in various  capacities.”  Similar ratios have been estimated for other countries and, if applied to Mauritius, would explain the creation of some 20,000 jobs over the period since 2006.  Second, impact on national output. Using the ratio of employees to GDP to estimate the impact on GDP, the increase in high income foreigners (including the indirect effects) might have added some 30 billion rupees to the economy from 2007 to 2013, equivalent to about 20 to 30 percent of the growth in national income registered.   

Access to qualified manpower will increasingly determine where businesses locate their high-value operations.  Employing foreign workers can produce a variety of positive multiplier effects. The  intangible  benefits  may,  however,  be  higher,  especially  if  the  cumulative  effect  over  a  long period  is  considered.  These include:  1) Opportunities for domestic workers to integrate global value chains through new start - up companies. These may offer not only better pay but new work practices with better life - work balance.  2)  Diffusion of knowledge and international business practices that can enhance the competitiveness of local firms.  3)  New skills and expertise from training of local staff that could result in higher labour productivity and hence higher wages. 4) To boost the active, working population as the population ages.  Consequently, this will attenuate pressures to make pensions less generous. 5) Increasing purchasing power, especially for high quality  leisure  services,  thus  making  it  possible  to  bring  world  class  performances.  6)  Boost to real estate and banking activities.  7)  Contributing to tax revenue.  8)  Increased visibility internationally. 8) Boost to tourism as there are more visits from friends and family. 9) Capacity to sustain  world  class  shopping  and  restaurants  on  the  basis  of  expanded  national  purchasing power. 

Can Mauritius accommodate the labour inflows? 

If  labour  flows  are  similar  to  what  Dubai,  Hong  Kong  and  Singapore  experienced  at  a  similar stage, over the next decade Mauritius should be ready and willing to accommodate some 5,000 to  20,000  foreigners  annually  with  a  total  of  100,000  to  200,000  for  the  period.  In the short run such an influx could be accommodated in the various real estate projects that have se en the light of day in the past decade. However, going forward, this offers Mauritius the opportunity to revive the Highlands project and build a world class city. 

Such  an  endeavour  would  not  only  create  jobs  and  offer  homes  to  foreigners  but  would  allow Mauritians  to  enjoy  world  class  services  without  having  to  leave  the  country.  Such a city would also offer the opportunity to allow foreigners to buy property without overly inflating prices in the rest of the country.  Moreover,  it  may  facilitate  integration  if  large  numbers  of  foreigners  were  to gravitate to a new international city.  

Natural endowments and Government policy ensure that Mauritius can cope with a large influx of people without undue pressure on the environment. Fortunately for Mauritius, it   has five times the land mass of Hong Kong, three times that of Singapore and twice that of Dubai. Moreover, most of  the  land  in  Mauritius  is  fertile,  and  rain  is  plentiful.  The country receives twice the amount of rain of the United Kingdom, three times that of France, four times that of Australia and nineteen times that of Dubai.  

The  large  investment  of  Government  in  a  waste  water  system  to  protect  the  lagoons  and  in treating solid waste mean that the country can protect its natural endowments as the population increases. In fact, a higher population would increase the return on the heavy investments made by spreading the costs over a larger base. The one area where more effort would be required is raising the efficiency of water collection and distribution.  Even here, though, a  programme  is being put in place with technical assistance from Singapore. 

Can Mauritius manage without immigration? 

The Economist   magazine once wrote that the question is not if America needs immigration but if it could manage without it.  The same is true for Mauritius.  This is already evident from the large number of foreigners already working in the country at all skill levels. However, there is another reality which we need to grapple with.  Our population is not only ageing but   our workforce is hardly growing.  

Economic  growth  comes  from  a  combination  of more  labour,  more  investment  (capital), productivity  gains  to  labour,  productivity  gains  to  capital  investment,  and  technology  driven productivity gains (which can also come from better institutional arrangements). 

In  the  absence  of  available  labour  with  the  required  skills,  neither  foreigners  nor  Mauritians  will invest to expand the productive base. Moreover, without new investment, especially foreign direct investment (FDI), i t is hard to generate productivity gains from labour (let alone capital). Finally, technology driven productivity gains comes from innovation which is usually associated with FDI in a small developing economy. 

This means that unless there is a readily available labour supply, Mauritius is unlikely to see the capital  investment  that  is  required  to  both  directly  raise  growth  rates  and  indirectly  do  so  by raising productivity in all the possible spheres. This is why the choice for Mauritius is to sustain high   growth  (as  did  Dubai,  Hong  Kong  and  Singapore)  through  making  the  Mauritius  labour market global, or to accept low growth and eventually stagnation as has been observed in a large number of small economies across the world that keep their labour markets insulated. 

By Ali Mansoor  

The author is  the  former  Financial  Secretary  and  currently  an  Assistant  Director  at  the  International Monetary Fund. This paper does not reflect the views of the IMF but only the personal views of the author.

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