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AfricaMoney | October 19, 2017

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International Monetary Fund: Can the Mauritius growth ‘miracle’ continue?

International Monetary Fund: Can the Mauritius growth ‘miracle’ continue?

Analyzing the sources of past growth and projecting potential ranges of growth through 2033, the IMF does let out a ray of hope, saying growth could reach 4-5% with strong pro-active policies.(Image: La Balise Marina)

And the answer is most certainly yes, provided the island economy is willing to sit up and implement some strong, pro-active policies.

The International Monetary Fund (IMF) has predicted future growth rates of around 3¼ percent for Mauritius in a recently released working paper, against average growth of 4½ percent over the past 20 years.

In 2012, the government of Mauritius announced an ambitious vision of GDP of one trillion rupees and an income per capita of US$20,000 by the 2020s, which would require real growth of over 6% per year.

The IMF report examine the circumstances under which such growth could be achieved, and what policies might increase growth.

However, the results of the growth accounting exercise suggest that a growth rate of 6%, as targeted by the authorities, might be somewhat ambitious.

Using growth accounting to analyze the sources of past growth and projecting potential ranges of growth through 2033, the IMF does let out a ray of hope nevertheless, saying growth could reach 4-5% with strong pro-active policies.

Suggested policies to improve growth rates include improving investment and savings rates, improving the efficiency of social spending and public enterprise reforms, investment in education and education reforms as well as labor market reforms.

And, with such policies that are capable of generating 5 percent growth, Mauritius could reach high-income status in 2021, 4 years earlier than under the baseline.

Evaluating each policy one by one, the IMF notes that labor market in Mauritius since the 1990s has been characterized by a rising share of foreign workers in the labor force and a rise in female unemployment, driving up the total unemployment rate to over 8 percent in 2013. Also, demand for skilled workers in the financial services, ITC, and tourism sectors has increased, relative to the low-skilled textile and sugar sectors.

Thus, the rise in unemployment indicates the challenge of absorbing unskilled and semi-skilled workers as Mauritius transforms into a more services-oriented economy.

Accordingly, investment in education and education reform are needed to increase secondary and tertiary enrollment rates to address the shortage of skilled labor in the market.

Also, with the labor no longer the driver of growth and with capital formation limited by low investment rates relative to the four Asian tigers, Hong Kong, Singapore, South Korea, and Taiwan, a significant part of future growth would need to come through productivity improvements.

This is where public utilities need to come to the fore, and especially those providing critical services such as water and electricity need to become more efficient and have their infrastructure upgraded.

Delving into the past, the international institution notes that Mauritius’s economic performance has been called “the Mauritian miracle” and the “success of Africa”, as the island started out with the disadvantages of a typical African economy: a low-income mono-crop exporter with a fully tropical climate, high population growth, and ethnic tensions.

Observing the country’s adverse inheritance, James Mead, a Nobel Prize laureate in economics famously predicted that Mauritius “faces ultimate catastrophe.”

Despite these initial disadvantages, Mauritius managed to develop into an upper middle income diversified economy, spurred by open trade, export-processing zones (EPZ), preferential access in textiles and sugar and signing of the tax treaty with India in 1983.

The island generated an average real GDP growth of 5.3 percent between 1969 and 2013 compared to 3.8 percent for Sub-Saharan Africa.

However, the future growth potential is more uncertain. A general growth slowdown in Mauritius’s main trading partners (United States and Europe) following the financial crisis may limit the potential pickup in growth from traditional sources, at least in the short run while Mauritius diversifies its export markets.

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