Mauritius in the Globalised Economy

Published on 22nd May 2018

The world has become a global village. We all know the story of Princess Diana's death. An English princess with an Egyptian boyfriend crashes in a French tunnel, driving a German car with a Dutch engine, driven by a Belgian who was drunk on Scottish whisky. She was followed closely by Italian Paparazzi in Japanese motorcycles, and she was treated by an American doctor using Brazilian medicines. Does this not describe globalisation in its truest sense?

There are many facets of globalisation, from cultural globalisation to political globalisation, and the French lump them together under the term mondialisation. Economic globalisation is defined as integration of economic activities, via markets, beyond national borders. Globalisation is thus referred to as international economic integration. Amartya Sen, a Nobel-Prize winning economist, rightly said that globalisation “has enriched the world scientifically and culturally, and benefited many people economically as well.” Martin Wolf made a solid defence of globalisation in his book Why Globalization Works (2004), in response to the much-publicised book of Joseph Stiglitz, Globalization and its Discontents (2002).

Globalisation has been attacked by critics of free market economics for encouraging delocalisation that results in job losses. They may have a point: new technology and foreign capital brought in developing countries tend to displace unskilled workers. Here, a civil and constructive debate is possible. On the other hand, consensus will never be reached with antiglobalists who are opposed not just to globalisation but to the very idea of the market and even of economic growth. They favour deglobalisation, that is market disintegration. This culture of protest, underpinned by a strong collectivist instinct and an aversion to free enterprise, is a fact of life with or without globalisation.

The economic history of mankind

“Globalisation” has become the buzzword since the beginning of the 1990s. The world was entering the internet era, and the sudden increase in the exchange of goods, services and capital around the world, driven by technological innovation, thrust the term globalisation into the limelight. In fact, there was nothing new under the sun. The widely cited aspects of globalisation (namely the declining relevance of distance, the falling costs of transport and communications, the greater reliance on market forces) are nearly as old as civilisation. The difference is only one of degree, not of kind.

Globalisation is an essential element of the economic history of mankind. It is difficult to say when it began. Maybe it started with the departure of homo sapiens from Africa some 100,000 years ago. To be more up to date about human interaction across the globe, the German historical economist, Andre Gunder Frank, traced back the commencement of globalisation to the growth of trade between the Sumer and Indus civilisations of the third millennium BC.

In his book The Wealth of Nations (published in 1776), the father of modern economics describes the process of primitive hunter-gathers trading with the next village, which sounds rather like “globalisation”. Although Adam Smith never used the word, globalisation is the main thread of his economic thinking: the underlying principle of economic development is the integration of markets over time. Primitive divisions of labour, among hunters, shepherds, armourers, carpenters and other artisans, increased as trading networks expanded to include wider specialisations.

As villages and countries traded goods, markets became more integrated. The trend eventually led to the globally interconnected societies of the modern world. Trade between China and Europe, which first grew during the Hellenistic Age (the period between the death of Alexander the Great in 323 BC and the emergence of the Roman Empire in 31 BC), was brisk in the Medieval period (from the 5th to the 15th century). The Late Middle Ages saw the emergence of a “world economy.” Medieval Europe advanced economically, like Venice which imported spices, medicines, perfumes and silk from the East. A significant volume of trade transited by the Indian Ocean sea route, via Egypt.

Adam Smith argued that the discovery of America, by Christopher Columbus in 1492, accelerated the process of globalisation. Vasca Da Gama’s discovery of the route to Asia around the Cape of Good Hope in 1497-1499 also played a key role. The most important global exchanges occurred subsequently, with the introduction of Americas’ crops (tomato, potato, tobacco, maize, peanuts) to Eurasia (which includes China), and the introduction of Eurasia’s crops (coffee, wheat) and livestock to the Americas. This was globalisation indeed, and with the European voyages of discovery, it developed into complex webs of global domination and exchange by the 18th century. At that time, it was known as mercantilism, the notion that trade generates wealth through accumulation of gold and silver.

So long-distance commerce was not new. It generated the celebrated Silk Road, an ancient network of trade routes that were central to cultural interaction through regions of the Asian continent, connecting the West and East from China and India to the Mediterranean Sea. Mauritius was a natural extension of the Silk Road. Even before settlers came to Mauritius, this small island strategically located on the maritime routes linking Europe was a stopover of choice for traders on the sea route to and from India and the Far East. During the Dutch colonisation in the 17th century, Mauritius was a trading base. In the middle of the 18th century, when the country was a French colony, it became a busy port by way of entrepôt trade. Without trade, there would have been no Mauritius.

Regional economic integration

For much of its history, the Mauritian economy has been highly dependent on freedom of trade to grow. In the immediate post-colonial decade, import substitution was the main plank of Mauritius’ industrial policy. We managed to develop a domestic-oriented manufacturing, but its scope was limited in a very small market. As from the 1980s, our economy turned firmly export-oriented by taking advantage of preferential trade agreements, namely the Sugar Protocol, the MultiFibre Agreement on textiles and clothing, and since 2000, the African Growth and Opportunity Act.

Under a trade-led development, we successfully develop tourism, which is considered an export service, we become a regional financial hub thanks to various double taxation avoidance agreements, and we export our services in information and communication technologies.

Globalisation is international economic integration. Developing countries can, however, foster regional economic integration before embracing globalisation. Mauritius followed this path. First, it was among the nine member states that launched, on 31 October 2000, a free trade area (FTA) with zero customs tariffs on tradable goods produced within the
Common Market for Eastern and Southern Africa (COMESA). Second, the country participated in the launching of the FTA for the Southern African Development Community (SADC) on 17 August 2008.

The development of Mauritius Freeport helped improve intra-regional trade. Between 1994 and 2017, the value of Mauritius’ external trade increased nearly ten-fold with COMESA countries to Rs 17 billion (6.5 per cent of Mauritius’ total visible trade), or seven-fold with SADC countries to Rs 35 billion (13.4 per cent). The island’s exports to South Africa, worth only Rs 90 million in 1994, stood at Rs 6.5 billion in 2017.

The strategy of opening Mauritius to the winds of international trade has paid off in terms of economic growth, of job creation and of higher purchasing power. Let me quote a former First Deputy Governor of the Bank of Mauritius, Anil Gujadhur, who cannot be suspected of being a “market fundamentalist”: “Mauritius has been one of the beneficiaries of globalisation. Had capital and know-how not come to us in the first instance under this free regime, we would not have seen the take-off of our manufacturing.” (Mauritius Times, 14 October 2016) He said it again in another article: “Had Mauritius not broken from its narrow economic model by taking advantage of international trade openings in goods and services, thanks to globalisation, there was little hope that we would even have come up to the level of a middle-income economy today.”

And he added: “It is clear that, for economies like ours to prosper, we have to tie up with other economies.” (Mauritius Times, 16 June 2017) The Mauritian economy has been highly dependent on freedom of trade to grow.

With presently no customs duty on 97 per cent of its tariff lines, Mauritius is likely to become a Duty-Free Island in the next few decades, which could sound the death knell for the domesticoriented manufacturing. The local industry already paints Mauritius as “the champion of economic freedom”, relentlessly asking for protection against certain imported goods on the ground that its products would be priced out of the market. Some local industrialists approvingly cite the trade war policies of Donald Trump (his now famous tweet of 2 March 2018, “trade wars are good, and easy to win…”). They would be glad to see globalisation fall into disrepute, to see more and more people rejecting it outright as the root of all evils.

It would be naïve to expect business itself to speak up for globalisation. The ultimate objective of businesses is to make profits. This is what they are supposed to do, and it is perfectly legitimate. But it is unacceptable that they act as pressure groups to exercise undue influence over government policy and to dictate its terms such as to obtain subsidies and preferences.
Particularly damaging to the economy, policy capture by private interests is not created by globalisation. On the contrary, it thrives on closed economies, and it can only be fought by opening the economy.

Governments themselves are happy with a rent-seeking economy. They present globalisation to voters as an inescapable constraint on their freedom of action when, in fact, they use it as an excuse to help businesses with taxpayers money, to bail out inefficient firms, to slash interest rates, to devalue the currency. Globalisation does not tie the hands of governments. The latter willingly bow down to businessmen as they seek political support from them, granting privileges to them in return. Globalisation is the only force that can break this vicious circle.

Because there is transfer of wealth, from taxpayers to producers, from importers to exporters,from savers to investors, this problem of state capture creates some sort of conflict in the business community. We must instead create wealth. International trade consists of a voluntary and mutually beneficial exchange, and is therefore a positive sum game, generating jobs and income. Without free trade, poverty on this planet would not have been reduced to the extent it has been over the last decades. The World Bank estimated that globalisation caused a fall in the number of poor people in the world from 1.75 billion in 1990 to 702 million in 2015. At the same time, the proportion of people living in extreme poverty dropped from 37 per cent to 9.6 per cent.

And the world Gini coefficient improved from 0.75 to 0.62, indicating lesser inequality. Still, economic globalisation is accused of perpetuating poverty and inequality. Is it the case of Mauritius? According to Statistics Mauritius, income distribution got fairer between 1980 and 2002 as the Gini coefficient declined from 0.445 to 0.371. However, it increased to 0.413 in 2012, showing a rise in income inequality. It fell slightly to 0.400 in 2017.

Now correlation is not causation. If there is a cause-effect relationship between globalisation and inequality, it is positive for Mauritius. Contrary to popular thinking, globalisation has retreated in the last decade. If we consider the value of international trade as a proxy measure of the level of economic integration in the world economy, it is noteworthy that Mauritius’ exports and imports of goods and services as a percentage of gross domestic product (GDP) increased from 94 per cent in 1983 to 137 per cent in 1990, but decreased to 97 per cent in 2017. Imports of goods only represented 37 per cent of GDP in 2017, compared to 55 per cent in 1990. In sum, there is not too much globalisation, but there exists too little globalisation.

Free Trade Agreements galore

However, openness will remain the hallmark of the Mauritian economy. Mauritius has entered into a number of trade agreements that provide duty and quota free access to its goods. It now has free trade agreements with 20 African countries and with Turkey. Policy capture by private interests thrives on closed economies.

Mauritius also signed the COMESA-East African Community-SADC Free Trade Agreement on 9 October 2017, accelerating its integration process on the African continent. The Tripartite FTA, which encompasses 26 states, stretching from Cairo to Cape of Good Hope, with a total population of 632 million people, has a combined GDP of USD 900 million. As a result of elimination of overlapping trade regimes due to multiple memberships, the cost of doing business will be reduced. Mauritian entrepreneurs should take advantage of this vast market access in the manufacturing and Freeport sectors.

Moreover, in Kigali on 21 March 2018, Mauritius was among the 44 African countries (accounting for 63 per cent of the continent’s GDP) that signed an agreement to create a “Continental Free Trade Area”. The pact will eliminate tariffs on 90 per cent of products, liberalise services and reduce non-tariff barriers. Although his country sat out, the new South African president has put his name to the political statement to support the deal, saying it is “a new dawn”, and that “Africa is a continent of traders.”

Another major development in terms of market access will be the finalisation of a Comprehensive Economic Cooperation and Partnership Agreement with India (to which Mauritius can export some 15 products like beer, rum and textile). It will play a major role in the economic dynamics between the two countries by enhancing trade and enabling collaboration with Indian entities.

Furthermore, Mauritius will conclude a FTA with China by the end of the year. By 2020, it will finalise an Economic Partnership Agreement with the European Union, under which there are already huge opportunities for the export of pharmaceutical products, jewellery and fertilisers.

In a nutshell, all these agreements will significantly expand the economic space of Mauritius and open new market access by eliminating trade barriers. They will position the country as a trade hub in the Asia-Africa corridor and offer substantial business opportunities to the Mauritian economy.

In the next half century, the island will capitalise on its geographic position to consolidate itself as the gateway to Africa for enterprises willing to invest in the continent. As far as its destiny is linked to the landmass closest to it, a continent that will be home to more than half of the world’s population growth in 30 years, Mauritius needs a real African strategy. The island aims to develop special economic zones in Ghana, Ivory Coast and Senegal, just as China is doing in Ethiopia, Kenya, Tanzania and Congo. China’s enthusiastic support of African infrastructure development comes within its Belt and Road Initiative.

As part of the 21st century New Maritime Silk Road, Mauritius will have an important role to play in this process. If it adopts the right African strategy, it will benefit from being the conduit for Chinese investment to Africa. Mauritius can develop a synergistic approach with China at this juncture of history when both countries want to strengthen further their relations.

To conclude, international commercial relations are not having a good time, being stymied under an increasing amount of regulations, tariffs and restrictions. As the United States and China are waging a trade war, the outlook seems bleak. The world is teetering on the brink of a blanket condemnation of globalisation. But it is important to preserve economic  lobalisation with free trade being a natural component. This is because international economic integration not only widens individual choices but also makes affordable policies to empower workers, to relieve poverty and to support the Welfare State.

By Eric Ng Ping Cheun

Author of a new book, Fifty Economic Steps, on sale at Bookcourt, Editions Le Printemps, Librairie Petrusmok and Librairie Le Cygne.

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