|The Courier N° 127 May - June 1991- Dossier 'New' ACP Export Products - Country Reports Cape Verde - Namibia (EC Courier, 1991, 104 p.)|
by Matthew McQUEEN
A small tropical island of approximately 45 km by 35 km in the Indian Ocean, with a total population of just over one million, Mauritius, during the first four years of independence, was almost wholly dependent on sugar for its merchandise exports. Economic growth was slow and unemployment a major problem. Between 1973 and 1978, however, economic growth was rapid but this was reversed with the second oil crisis, so that by early 1980, unemployment probably exceeded 20% and the inflation rate rose to over 30% per annum. A balance of payments crisis forced a 30% devaluation in 1979 with structural adjustments in 1980 and 1986, assisted by credits from the International Monetary Fund.
Since 1984, the economy has been transformed, with GDP at constant prices increasing by an estimated 39% over the 1984-1989 period and employment by 34% between 1984 and 1988. With a per capita GNP of about $1 800 (a 34% increase since 1981), life expectancy of 71 years for women and 64 for men, an infant mortality rate of 22 per thousand live births and a literacy rate of over 90%, Mauritius can be said to have attained the standard of living of a middle income country. Its export base has widened to include a variety of products: textiles, leather, watches, sunglasses, cutflowers, tobacco, tea and canned tuna fish.
There are, of course, many reasons for this successful development, but to quote the 1989 World Bank report there is little doubt that the Lomonvention has been one of the most important catalysts to the growth of manufactured exports in Mauritius, while exports of manufactures have been the fundamental basis for the transformation of the economy.
Although Mauritius is not rich in physical resources, it can, given the small size of its population, be said to be relatively rich in human resources in at least three respects. First, it has a young population, but unlike many, particularly African, developing countries, two-thirds of the population are of working age. Second, a substantial proportion particularly of new entrants to the labour force, have a good general level of education and are fluent in French and have a good knowledge of English. The most important weakness in the educational system, which could inhibit future development, is in the provision and encouragement of technical and commercial training in both the public and private sectors. This has been recognised by the Government and policies are being put into effect which seek to remedy this deficiency. Third, the countrys history and geographical location has enabled it to develop a substantial class of entrepreneurs, knowledgeable about international trade and with close links with Europe (France and UK) and Asia (India, Pakistan, Singapore, Hong Kong, Taiwan and China).
The mainstay of the economy has traditionally been agriculture, based principally on sugar. Sugar production has, however, tended to decline in the 1980s due to a combination of a gradual long-term decline in the area under cultivation and only a small increase in yields (although these of course show significant annual variations depending on climatic conditions). Value added by other agricultural products such as livestock (Rs 233m in 1988), foodcrops (Rs 217m), and fishing (RS 119m) has increased-substantially, but still only accounted for 27% of total agricultural production in 1988 and so total agricultural production has stagnated in the 1980s.
In contrast, the manufacturing sector has grown very rapidly and this has greatly diminished the importance of sugar to the economy. Table I provides details of the changing share of key sectors over the period 1970-89. Whereas agriculture accounted for just under one-quarter of GDP in 1970, this had fallen at constant prices to 10% (sugar 62% of this) by 1989, while value added by manufacturing exceeded that of agriculture by 1982. Manufacturing has increased from just under 16% of GDP in 1970-83 to nearly one-quarter by 1989, reflecting, for the most part, the very rapid growth of the EPZ (Export Processing Zone) since 1983. The latter grew in real terms by 257% between 1983 and 1989 and accounted for just under 60% of value added by manufacturing in 1989.
The increased share of wholesale and retail trades, restaurants and hotels can be explained by the general growth and prosperity of the economy, the increasing urbanisation of the population, and the growth of international tourism where arrivals have increased from 28 000 in 1970 to 124 000 in 1983 and to an estimated 270 000 in 1989.
The sharp decline in the relative importance of sugar in total exports has been due as already noted, to the very rapid growth in exports of manufactured goods by the EPZ - from an 11 % share in 1976,28 % in 1983 to 60% in 1988, and an estimated 63% share in 1989. This share of course exaggerates the net foreign exchange earnings of the EPZ relative to the sugar sector as the former has a much higher import content in production than the latter. EPZ imports in 1988 were equivalent to 72% of gross export earnings so that EPZ net exports were equal to 51 % of gross export earnings of sugar. This, however, underestimates the underlying contribution of the EPZ in that 14% of EPZ imports were machinery and transport equipment reflecting substantial investment for future production and exports.
The other signifiant growth has been tourism, where gross tourism earnings have increased from Rs 184m in 1976 to Rs 630m in 1984 and Rs 2 374m in 1988 (estimated Rs 3 000m in 1989). Net foreign exchange earnings will be substantially less than the gross figure because the import content of tourism expenditure can be expected to be high, while most of the international hotels are foreign-owned, and will, therefore, in the long run, be subject to substantial repatriation of profits and dividends.
The policy environment
Industrial and commercial policy has developed over the past 26 years and covers a wide range of policy instruments, both specific to the industrial sector and through broader policies covering, particularly education and health.
Mauritius has, in common with many developing countries, pursued twin policies of stimulating both import substitution and export diversification. Imports have been subject to high levels of protection. Production for import substitution has been stimulated by the Development Certificate Scheme (started in 1963) and subsequently by the Development Incentive Act of 1974 and Industrial Buildings Incentives Act of 1986. These incentive schemes gave a mix of tax holidays on profits and dividends, investment allowances, preferential financial arrangements and subsidised government-built factory space as well as relief from import duties on capital and intermediate goods used in production. Exports have been promoted through the Investment Incentive Schemes and particularly the Export Processing Zones Acts of 1970 and 1984, which although similar to the general provisions of the import substituting industries, have until recently been different (and in general more generous) in details concerning tax rates and tax relief.
These incentive schemes had, by the early 1980s, produced what were generally considered to be disappointing results. In a small economy such as Mauritius, import substitution cannot be expected to maintain a significant growth in employment and so hopes were pinned on the performance of the EPZ. After rapid growth in EPZ employment from 644 in 1971 to 17 163 in 1976, employment only increased slowly to 27 625 in 1981 and 24 952 in 1984. That is, under 8 000 jobs in 8 years, while unemployment rose to 20% in 1983. One obvious explanation for this situation was the second oil shock in 1979, which induced world recession and ended the 8% per annum growth rate Mauritius had enjoyed since 1973. A further factor, however, appears to have been the results of the complex system of import protection and export subsidies, which, through the price system, produced an incentive structure contrary to policy objectives.
Under a succession of IMF arrangements, backed by the World Bank, Mauritius introduced from 1982 onwards, a package of liberalisation measures. The Mauritian rupee was devalued and its base changed in 1983 from the SDR to a trade weighted basket of currencies. Coming so soon after the 30% devaluation of 1979, these measures alone further increased the profitability of exporting, with the real effective exchange rate depreciating by 21% over the period 1980-88. Quantitative controls on imports have been eliminated and steady progress has been made since 1986 on tariff reform. At the same time, most subsidies and controls on prices were eliminated while wage controls were maintained so that the rate of increase in the consumer price index exceeded the growth in wage rates until late 1987. Supply-side measures were also applied to reducing the budget deficit, and this fell from 10% of GNP in 1980 to just over 2% of GNP in 1987. This change was brought about not by cutting welfare payments but by increasing revenues through the incentive effect of cutting corporation tax from 66% to 35% and income tax from a maximum of 70% to 35%. The tax holiday element in corporation tax was criticised for encouraging short term investment and so in 1985 a new scheme was introduced whereby firms established under the investment incentive schemes were given the option of paying corporation tax at a flat rate of 15% over the whole life of the company, while dividends were made tax free for a period of ten years from production day. Since 1984, the explicit discrimination against exporting by non-EPZ companies has been reformed by reducing corporation tax by 2% for each 10% of output exported.
These products account for 79% of total EPZ exports. Initially, in 1974, woollen knitwear production stimulated by overseas investment, particularly from Hong Kong, was the most important EPZ export. Today, Mauritius is the third largest exporter of wool knitwear and the worlds largest exporter of quality woollen knitwear bearing the International Wool Secretariats Woolmark quality licence (as Mauritius advertising says not bad for a small island without a single sheep!). Most of the wool is imported (value of Rs 438m) from Australia and New Zealand, although some also comes from China and South Korea. France imports 35% of woollen pullovers while Germany imports 43% of cotton pullovers and 24% of woollen pullovers. The relative importance of knitwear in EPZ exports has, however, decreased from almost 100% in 1974 to 60% in the late 1970s, 40% in 1984 and 24% in 1988. Conversely, clothing (excluding knitwear) has increased its share in total EPZ exports from 28% in 1983 to 39% in 1985 and 48% in 1988. Interestingly, in view of the rules of origin governing preferential imports into the EC, imports by Mauritius of woven cotton fabric (a prescribed starting material for obtaining EC preferences) from such non-originating sources as Hong Kong, Taiwan, Japan and South Korea were at Rs 860m in 1988, almost twice the level of imports $467m of cotton yarn (an acceptable starting material for obtaining EC preferences) from India, Pakistan, Singapore and China. An important factor in the evolution of export shares has been the rapid increase in exports to the US in the period 1984-87, (although France has also been an important market) and this fact, together with the rapid increase in imports of cotton fabric (an acceptable starting material for the US), suggests that EC rules of origin may have retarded the growth of clothing exports to the EC.
There are, however, indications that exports of clothing are facing increasing difficulties.
First, with the increase in female participation rates to levels found in the NICs (Newly Industrialised Countries), and unemployment falling to near full employment level, employers are finding it increasingly difficult to obtain staff to increase production. Under EPZ regulations, workers have to work 10 hours overtime per week if required, for which they are paid 1.5 times the basic rates, 11/ 15 hours attracts double time rates and over this level, triple time. However, significant levels of overtime are also associated with absenteeism and so total hours worked may not increase significantly.
Second, competition between employers for staff, coupled with rapidly increasing inflation can be expected to increase wage rates. These are about Rs 50 per day or around one-sixth those of Hong Kong (though labour productivity is lower). In large factories in South East Asias newly industrialised countries, workers can expect to earn Rs 1 500-Rs 2 000 per month, plus further benefits such as paid holidays, sick pay, subsidised meals and free transport to work. These benefits, together with insurance contributions, raise labour costs by about a further 50%. The main competition faced by Mauritius is not, however, from such countries but from the newly emerging industrialised countries such as China and Thailand, and the Mediterranean countries who benefit from preferential access to the EC market.
Third, the US market for clothing is now subject to quotas, and for all clothing except for man-made fibre shirts, blouses and trousers, these quotas are binding (ie Mauritius exports to the full limit of the quota). Expansion of exports to the US is therefore determined by the expansion- of the quota - around 6% in 1990 for most items (slightly more for mens and boys cotton and manmade fibre shirts, not knitted, and 1% for cotton and man-made fibre and silk blended shirts).
Fourth, Mauritius is seen as losing out to the more favourably placed manufacturers in the Caribbean who are able to benefit from CBI (Caribbean Basin Initiative) preferential exports to the US.
Fifth, markets appear to have become more volatile, particularly in the US but increasingly also in the EC. Consumers are now becoming more design and fashion conscious and this (together with bad seasons recently) has made buyers for retailers in the US and Europe unwilling to place orders until absolutely necessary. For example, in knitwear, until two or three years ago, European buyers would place large orders in October/November for delivery in June to August and this order would stand a great chance of being repeated the following year. Product life cycles have now substantially reduced and buyers are much more likely to book machine time in January/February and only subsequently place the precise order for quantities and design, while still requiring delivery in June to August. In general, lead times are shrinking dramatically, (production) runs are becoming shorter and greater levels of service are required both in terms of design and merchandising. Even the more staid, conservative and predictable customer is becoming more design conscious, more demanding and less predictable.
One result of these pressures has been to increase the vertical integration of the clothing industry. For example, imports of cotton yarn usually take around eight weeks from the time of negotiating the order. Since the cost of holding stocks of cotton is considerably less than holding stocks of yarn, firms have integrated backwards into spinning, not, it should be noted, to obtain scale economies, but to achieve the necessary flexibility to service a more volatile market at minimum cost. Pressure on costs has also forced the larger firms to move up market by investing heavily in computerised equipment and developing their own designs and collections. The general strategy of such firms is to ensure that their products cannot be easily compared to the competition from the Far East, particularly in terms of details of design and finish.
Other non-traditional exports
Exports of watches, mainly to France and West Germany, reached Rs 393 m in 1988. Only one company exports complete watches (apart from straps). Three other companies assemble watch movements for final assembly in France or Germany, while one specialises in assembling watch dials. The ratio of value added to exports in watches has significantly increased from 17.3% in 1985 to 24.2% in 1987 (latest available year) and this can be compared to 34.7% for clothing. In terms of value added to gross output, the ratios are 30.6% for watches compared to 33.2% for clothing. The assembly of watches is done by hand throughout the world and since productivity levels are only a little below those of Europe and the end product can be imported back into the EC duty-free because of the cumulative provisions of the rules of origin under the Lomonvention, the attractions of assembly in Mauritius are significant. The companies in Mauritius are wholly-owned affiliates of EC companies and components are imported from specialist manufacturers in France (58%), Switzerland (28%) or West Germany (11 %), with the marketing of the finished product done by the parent company, either for brand names or in their own name. As with other sectors of the economy, expansion is being limited because companies are finding it increasingly difficult to recruit additional employees. This is a particular problem in watch assembly because earnings of around Rs 1200 per month compare unfavourably with Rs 1500 to Rs 2000 per month in the clothing industry. The difference in earnings is explained by the fact that overtime working is currently standard practice in the clothing industry, whereas the exacting nature of watch assembly makes overtime working unproductive as mistakes rapidly increase. Expansion will therefore require substantial increases in wage rates, but despite this, firms appear to be optimistic and envisage an expanding market, especially for quality and fashion watches retailing for around FF 700-800 in France.
The jewellery industry employs 1504 people in five main firms most of whom are engaged in the cubing and polishing of diamonds for re-export back to Belgium (69%) and Israel (16%).
Leather products employ a further 1105 people in 12 enterprises, none of which are large firms (the largest employs 110 people) but some of which have attracted French joint venture capital exporting (Rs 48.3 m) quality leather goods such as handbags, purses, wallets and belts to France (92%), while one company exports quality leather jackets, mostly to Germany. Exports have grown very rapidly and now account for just under half of the EC imports from developing countries. There have not so far been serious difficulties with rules of origin as quality leather is imported from France and Italy. However, one factor possibly inhibiting future expansion is the inability to import leather from Australia and New Zealand and also conform to the rules of origin. There also seem to be doubts as to whether this rapid growth of quality exports can be sustained, as firms are finding it very difficult to obtain skilled workers, such as cutters. Indeed exports of leather handbags to the EC have fallen sharply since 1986. Leather goods, particularly shoes, have been targeted as a potential growth sector for the EPZ and the Government has invited (supported by EDF funding) a small group of Italian firms to investigate possibilities for joint ventures in Mauritius.
Canned tuna fish exports to the EC, almost wholly to the UK, have persistently encountered problems with the rules of origin as the fish are caught by Japanese and South Korean ships. A succession of limited derogations has been obtained but exports have stagnated since 1983. Not all of the problems of exporting can be attributed to rules of origin and better management of the economic zone is being sought in cooperation with the Seychelles.
Exports of cut flowers have rapidly increased in recent years and reached a value of Rs 35.1 m in 1988. These are exclusively Anthuriums and Andreanums and exporters claimed that their success was due to finding a market niche and that Mauritius and Hawaii (the largest exporter) were the only important suppliers in the world of these flowers. The exemption from the 24% Community tariff was regarded as unimportant as there were so few competitors. Exporters had not encountered any EC barriers to entry but rather emphasised differences in tastes as the major problems facing future growth and market diversification. For example, attempts had been made to develop the UK market but these had been unsuccessful. There are 30 growers, most of whom are small enterprises employing 3 to 13 people, while three of the big sugar estates have set aside a small proportion of their land for this high value export, but even these only employ 38 to 75 people. Exporting is organised either through the larger firms exporting their own flowers plus flowers purchased from the small scale growers, or through a few small scale exporters of fruit and horticultural products.
There is a very small amount of export of other foodstuffs, such as green beans and pineapples, but this is not a growth sector for a number of reasons. First, the decision to begin to diversify agricultural production away from a dependence on sugar and into other products in the early 1980s, was aimed solely at import substitution, particularly in potatoes (through inter-cropping with sugar) but also in maize and tomatoes. The objective was to achieve security of food supplies through increased self-sufficiency rather than maximising the rate of return on resources used in production. Second, the increasing shortage of labour and rising costs of production have, in recent years, decreased the area under cultivation of foodcrops. Acreage under cultivation increased from 5308 hectares in 1984 to 6296 in 1986 but fell back to just over 5000 hectares in 1987 and 1988. Adverse climatic conditions such as excessive rainfall in 1987 and drought in 1988, in addition to damage from cyclones, have caused a far greater decrease in production. The frequency of cyclones has also inhibited diversification into crops such as papayas and mangoes. Technical assistance financed by the EDF under the Lomonvention had been provided to develop indigenous production of seeds for vegetable production, cold storage of potatoes, and for a laboratory for the tissue culture of anthuriums to develop new varieties for export.