9089droolk Economic Development Institute

of The World Bank

SuccessfulStabilizationand Recoveryin MauritiusRavi GulhatiandRaj Nallari

EDI DEVELOPMENT POLICY CASE SERIESAnalytical Case Studies * Number 5

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EDI DEVmoPMNr Poucy CASE SRESANAL.xcAL CASE STUDmms * No. 5

Successful Stabilizationand Recovery in Mauritius

Ravi GulhatiRaj Nallari

The World BankWashington, D.C.

Copyright 0 1990The International Bank for Reconstruction and Development / THE WORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing September 1990

The Economic Development Institute (EDI) was established by the World Bank in 1955 to trainofficials concerned with development planning, policymaking, investment analysis, and projectimplementation in member developing countries. At present the substance of the EDrs workemphasizes macroeconomic and sectoral economic policy analysis. Through a variety of courses,seminars, and workshops, most of which are given overseas in cooperation with local institutions,the EDI seeks to sharpen analytical skills used in policy analysis and to broaden understandingof the experience of individual countries with economic development. In addition to furthering theEDI's pedagogical objectives, Policy Seminars provide forums for policymakers, academics, andBank staff to exchange views on current development issues, proposals, and practices. Althoughthe EDrs publications are designed to support its training activities, many are of interest to amuch broader audience. EDI materials, including any findings, interpretations, and conclusions,are entirely those of the authors and should not be attributed in any manner to the World Bank,to its affiliated organizations, or to members of its Board of Executive Directors or the countriesthey represent.

Because of the informality of this series and to make the publication available with the leastpossible delay, the manuscript has notbeen edited as fully as wouldbe the case with amoreformaldocument, and the World Bank accepts no responsibility for errors.

The material in this publication is copyrighted. Requests for permission to reproduce portionsof it should be sent to Director, Publications Department, at the address shown in the copyrightnotice above. The World Bank encourages dissemination of its work and will normally givepermission promptly and, when the reproduction is for noncommercial purposes, without askinga fee. Permission to photocopy portions for classroom use is not required, though notification ofsuch use having been made will be appreciated.

The backlist of publications by the World Bank is shown in the annual Index of Publications,which is available from Publications Sales Unit, The World Bank, 1818 H Street, N.W., Washing-ton, D.C. 20433, U.S.A., or from Publications, Banque mondiale, 66, avenue d'Iena, 75116 Paris,France.

At the time of writing, Ravi Gulhati was senior adviser in the Economic DevelopmentInstitute of the World Bank. He is now a consultant and an academic.Raj Nallari is a consultant in the National Economic Management Divisionof the World Bank's Economic Development Institute.

Library of Congress Cataloging-in-Publication Data

Gulhati, Ravi.Successful stabilization and recovery in Mauritius / Ravi Gulhati,

Raj Nallari.p. cm. -- (EDI development policy case series. Analytical

case studies; no. 5)Includes bibliographical references.ISBN 0-8213-1617-61. Mauritius--Economic conditions. 2. Economic stabilization--

Mauritius. I. Nallari, Raj, 1955- . II. Title. III. Series.HC597.5.G84 1990338.9698'2--dc2O 90-41657

CIP

EDI Catalog No. 400/087 ISSN 1013-333X

Contents

List of Abbreviations vi

Preface vii

1. Introduction 1

2. Diagnosis 3

Shocks 3Policy Framework 6

Mismanagement of Aggregate Demand 6Extent of Market Orientation 8How Efficient Was the Public Sector? 17Income Distribution Policies 20Agricultural Policy 21

Sugar Subsector 21Diversification within Agriculture 23

Strategy for Manufacturing 27Import Substitution Policy 27Export Promotion of Manufacturers 27

Policies for Tourism 30

3. Political Factors and Their Impact on EconomicPolicy in the 1970s 32

Main Political Trends 32The Policy-making Process 34Political Parameters and Policy Content 36

id

iv Succesafl Stabilization and Recovery in Mauritius

4. The Policy Turnaround 38Search for Stabilization 45Restructuring of Public Finance 46

Redirection of Public Expenditure 46Restructuring of Parastatals 48Revenue Mobilization and Tax Reform 49Management of Foreign Aid and Debt 49

Policy Change in Agriculture 50Sugar Sector 50Nonsugar Agriculture 52

Policy Change in Manufacturing 53Policy Change in Tourism 55

5. Lessons of Experience 57

References 61

Appendix Tables 67

Figures2.1 Terms of Trade Index, 1960-80 42.2 Sugar Prices in Different Markets, 1968-87 52.3 Indicators of National Accounts, 1960-80 72.4 Balance of Payments Indicators, 1970-80 92.5 Budget Deficit and Its Financing, 1968-80 102.6 Nominal and Real Effective Exchange Rates, 1970-86 122.7 Average Monthly Earnings by Sector, 1970-86 142.8 Nominal and Real Interest Rates on Commercial

Bank Deposits of Six Months, 1970-86 162.9 Government Expenditure and Revenue, 1965-80 18

2.10 Sugar Production and Exports, 1963-86 254.1 Terms of Trade Index, 1960-86 414.2 Indicators of National Accounts, 1980-86 424.3 Balance of Payments Indicators, 1980-86 434.4 Budget Deficit and Its Financing, 1980-86 444.5 Government Expenditure and Revenue, 1980-86 47

Tables2.1 Growth Rate of Government Expenditures, 1969-86 192.2 Export Duty on Sugar, 1979-90 222.3 Selected Indicators of Twenty-one Large Estates in Sugar Sector,

Selected Periods 1968-84 23

Contents v

2.4 Number of Sugar Planters by Size and Holdings 242.5 Nonsugar Agriculture: Acreage, Production, and Imports 262.6 Average Effective Rates of Protection and Value Added, 1983 282.7 Selected Indicators of Export Processing Zone, 1971-86 303.1 Major Political Parties and Election Outcomes, 1967-87 333.2 Coalition Governments and Leaders, 1968-87 344.1 Chronology of Selected Policy Events, 1978-85 394.2 Indicators of Stabilization and Adjustment, 1976-86 394.3 Gross Commitments, Net Resource Transfers, and Volume

of Imports, 1978-86 494.4 Selected Indicators of Sugar Sector, 1976-86 524.5 Indicators of Tourism, 1979, 1982, 1986 56

Appendix TablesA-1 Selected Economic Indicators, Selected Years 1966-86 69A-2 Selected Social Indicators, Selected Years 1965-86 70A-3 Terms of Trade, 1960-86 71A-4 Sugar-Prices in Different Markets, 1968-87 72A-5 EEC Dividend and its Impact on Mauritius's Economy, 1968-86 73A-6 Indicators of National Accounts, 1960-86 74A-7 Balance of Payment Indicators, 1970-86 75A-8 Budget Deficit and Its Financing, 1968-86 76A-9 Nominal and Real Effective Exchange Rates, 1970-86 77

A-10 Average Monthly Earnings by Sector, 1970-85 78A-li Nominal and Real Interest Rates on Commercial Bank Deposits of Six

Months, 1970-86 79A-12 Government Expenditure and Revenue, 1965-86 80A-13 Sugar Production and Exports, 1963-86 81A-14 Guaranteed Producer Prices for Selected Food Crops, 1977-87 82

List of Abbreviations

AMB Agricultural Marketing BoardCAM Comite D'Action MusulmanCOLA Cost of Living AdjustmentDBM Development Bank of MauritiusDC Development CertificateDWC Development Works CorporationEEC European Economic CommunityEPZ Export Processing ZoneGDE Gross Domestic ExpenditureGDP Gross Domestic ProductIBRD International Bank for Reconstruction and DevelopmentIDA International Development AssociationIFB Independent Forward BlocIMF International Monetary FundMEDIA Mauritius Export Development and Investment AuthorityMLP Mauritius Labor PartyMMM Mouvement Militant MauricienODA official development assistanceOPEC Organization of Petroleum Exporting CountriesPMSD Parti Mauricien Social et DemocrateRO Remuneration OrderSAP Sugar Action PlanSDR Special Drawing RightsSSA Sub-Saharan AfricaTDA Tea Development Authority

vi

Preface

During three visits to Mauritius during the past decade, Ravi Gulhati (formerChief Economist of the Eastern and Southern Africa Region of the World Bank) hada number of opportunities to discuss at length its economic problems and possiblesolutions. Raj Nallari visited Mauritius in 1989. The following study is dedicatedto our Mauritian friends, who freely gave their time to talk candidly about theissues. Both authors wish it had been possible for some Mauritian officials, who hadan "insider's" view of the unfolding economic policy process, to write down theirinsights. It is our firm belief that no one analysis of the policy process can capture itin all its key dimensions. A number of contributions from different vantagepoints, therefore, would have been enriching.

A word about the origins of this study will be useful. Parallel studies on Zambiaand Malawi have been published in this series. All three are part of a generaltreatment of economic policy change in Sub-Saharan Africa. The entire project isan effort to reflect on events that have dominated recent economic history in Sub-Saharan Africa. The authors are very grateful to Christopher Willoughby of theEconomic Development Institute for providing generous support for this project.Associates in the operational part of the World Bank have cooperated fully. Asubstantial part of the analysis is borrowed from their work over a long period.

Notwithstanding all these connections with the World Bank, the project shouldbe regarded as our own initiative. We have chosen to write about the impact ofpolitics on economic policy-a sensitive area on which the Bank has no officialviews. Our effort to address this difficult topic is an experiment and should beregarded in that light. Scholars disagree frequently in this field, and we havereported on some of the controversies. Judgments made in this report are personalones, and we alone are responsible for them.

We are grateful to Sofia Mendoza and Dulce Afzal, who assisted in ways toonumerous to spell out. Without the valuable contribution of these two colleagues,producing this study would not have been possible. Finally, a special word ofthanks to many readers in Mauritius and Washington, D.C., who helped greatlyduring the long journey from first draft to final manuscript.

Ravi GulhatiRaj Nallari

vii

1

Introduction

James Meade (1967, p. 250) used Mauritius to illustrate the implications of thepopulation explosion in less developed countries. He wrote,

Heavy population pressure must inevitably reduce real income per head below what itmight otherwise be. That surely is bad enough in a community which is full of potentialpolitical conflict. But if in addition, in the absence of other remedies, it must lead either tounemployment (exacerbating the scramble for jobs between Indians and Creoles) or toeven greater inequalities (stocking up still more the envy felt by the Indian and Creoleunderdog for the Franco-Mauritian top dog), the outlook for peaceful development ispoor.

Population was growing at an unusual rate of 3.0 percent during the 1960s andimposing severe pressure on available resources. Sugar was grown on almost allcultivable land, and it was the main source of foreign exchange. The economy wasvery open and extremely vulnerable to fluctuations in international prices and torecurring weather disasters. Mauritius imported most of its food, consumermanufactures, and producer goods. There was little experience on which to buildthe manufacturing sector.

History has belied Meade's pessimistic prognosis. Mauritius walked out of the'Malthusian Trap." Population growth was restrained effectively, therebysignaling one of the earliest demographic transitions in the Third World. Theeconomy scored a high rate of growth of production of more than 6 percent per yearduring 1968-79. There was a spectacular expansion in the growth of manufacturedexports. Income distribution, which was very skewed at the outset, became lessunequal. These are impressive accomplishments, but our enquiry is not aboutthem. We focus, instead, on the debacle suffered by Mauritius in the second half ofthe 1970s when the sugar boom ended. For a number of years, economic instabilityand financial troubles marred the picture. Our aim is to analyze governmentpolicy leading up to this setback and to explore the process that ended withstabilization and recovery. The reforms appeared to be successful. Not only wasinflation tamed and financial balance restored during 1984-86, but the economyresumed rapid growth, and unemployment dropped to very low levels. Not allproblems were solved, however. Mauritius remained very exposed to exogenousshocks and to adverse policy changes in its trading partners.

1

2 Successful Stabilization and Recovery in Mauritius

We do not intend to provide a detailed description of the economy or to trace itshistory. Readers in need of such background can consult Simmons (1982). TablesA-1 and A-2 in the Annex to this study may also be useful in reviewing the structureof the economy and its main parameters.

A word about Mauritian politics is necessary here since it is difficult tounderstand economic policy responses without such background. Apart from oneperiod, 1972-76, in which an emergency was declared and elections postponed, therewas general adherence to the "rules of the game" established by the Westminstertype of constitution inherited at the time of independence. No single party eversecured a majority in the assembly to form a government on its own. Thecompulsion to work together across party lines was ever present. It put a distinctivestamp on the economic policy process. Even within a single party it was necessaryto build a consensus since all major parties were loose agglomerations of ethnicand economic interests.

About 2 percent of the population are Franco-Mauritians who own large sugarinterests, big commercial firms, factories in the export processing zone (EPZ), andmanufacturing concerns catering to the local market. They were linked politicallyto the Parti Mauricien Social et Democrate (PMSD) till the early 1970s. This partyhad taken a position against political independence and had represented theinterests of affluent groups. In terms of economic policy, it stood for heavy relianceon private ownership and market processes. Creoles, who are of mixed Europeanand 'colored" descent, are the second largest ethnic group (27 percent of the totalpopulation). They are skilled artisans, dockers, and fishermen. They too weretraditionally tied to the PMSD till the early 1970s, but some switched to theMouvement Militant Mauricien (MMM), a radical party espousingnationalization and a welfare state. The Chinese are a relatively smallcommunity (3 percent of the population), but they are a key commercial andindustrial group. They were allied to the PMSD in the early 1970s.

Indians (Hindus and Muslims) are the largest ethnic group (68 percent of thepopulation). A small number of Hindus are wealthy businessmen, professionals,and politicians. The majority are sugar estate and industrial workers, and smallplanters. Traditionally, they were tied to the Mauritius Labour Party (MLP), whichstood for socialism of a moderate variety and for redressal of the exploitation ofworkers in the colonial period. Many Hindus crossed over to the MouvementMilitant Mauricien (MMM) in the early 1970s. Rural Hindus were associated withthe Independent Forward Block (IFB). The Muslims (16 percent of the population)are mostly traders in urban areas. They were associated with the Comite D'ActionMusulman (CAM) till the early 1970s when some crossed over to the MMM.

We do not pretend to understand all the ramifications of the socioeconomicstratification in Mauritius or the large number of political parties. This summarydoes address, however, the central thrust of political change, which was fairlyclear. There were only two major political parties in 1967: the MLP with 56 percentof the popular vote (including the vote secured by its electoral partners) and thePMSD with 44 percent. A decade later the landscape had been transformed. TheMMM obtained 39 percent of the vote at the expense of MLP and PMSD. Chapter 3spells out the political aspects in greater detail. The second chapter presents a briefsketch of elements contributing to the economic and financial difficulties thataccumulated in the late 1970s. Chapter 4 examines economic policy responses ofthree coalition governments in the 1980s. Finally, Chapter 5 offers lessons ofexperience, culled from the reform process aimed at stabilization and recovery.

2

Diagnosis

The economic and financial difficulties that Mauritius encountered during thelate 1970s were moderate in magnitude compared with those in other SSA countries(Gulhati 1990). These difficulties were the combined result of exogenous shocks(such as the decline in the terms of trade and bad weather) and policy weaknesses(particularly with respect to the public sector and the labor market).

ShocksForeign trade is very big in relation to the overall economy and fluctuations in

the terms of trade largely determine the economic outcome in Mauritius. The termsof trade index (1980 = 100) averaged 89 during 1968-72 and rose sharply to anaverage of 155 during 1973-75 (see Figure 2.1 and Table A-3). The deterioration inthe terms of trade between 1976 and 1979 was mainly due to falling sugar prices in1976-77 and partly due to rising import prices. The index of the terms of tradeaveraged 112 during 1976-79. There was a decline of 28 percent when compared with1973-75, or a loss in gross domestic income (GDY) of 14.1 percent. 1

The impact of this shock would have been greater (in terms of loss in income),but for the preferential treatment of Mauritian sugar under the EEC Agreement of1975 (Figure 2.2 and Tables A-4 and A-5). If the free market price is treated as theexport price for sugar, then terms of trade (1980 = 100) would have averaged 55.9during 1976-79, compared with 176.6 in 1973-75. This would have resulted in a lossequivalent to 47.5 percent of GDY. This calculation roughly illustrates the impact ofpreferential arrangements. The free market price applies only to a small segmentof world trade in sugar (10 to 15 percent), and it is not a good approximation of theinternational sugar price in the absence of preferential arrangements.

1. The terms of trade in the 1973-75 period was far better than during the preceding decade.However, expenditure levels got adjusted to these favorable international conditions, and it is toassess the impact of the subsequent deterioration that we adopt this base.

3

Figure 2.1TERMS OF TRADE INDEX, 1960- 80

(Index 1980 = 100)

200 -

0 10-

ExportPrice Index s 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0

, _ -W-.-W .. L-Eor Import Prce Index

50-

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980

Year

cak\w4SUUM

. f ~ ~ ~ ~ ~ ~ ~ ~ ~ .

Figure 2.2SUGAR PRICES IN DIFFERENT MARKETS, 1968 - 87

35 -

s0-

US Price

25-

20-

15 ~~~~~~~~~~~~~~~~~~~Free Market Price

10-

5-

1968 1970 1972 1974 1976 1978 1980 1982 1984 1986Year

akw4SW6

6 Succes8ful Stabilization and Recovery in Mauritius

The preferential price for Mauritian sugar is of great significance in itseconomic success. The impact of this 'EEC dividend," defined as the value of sugarexports at EEC prices (in current US$) minus the value of sugar exports atinternational free market prices, is shown in Table A-5. For the period 1977-79, theEEC dividend amounted to US$347 million or 12 percent of gross domestic product(GDP). Assuming that 25 percent of this sum was saved and that three units ofsaving (and investment) yielded one unit of GDP, the EEC dividend added 1percent to the actual Mauritian growth rate of GDP of 3 percent p.a. during thisperiod.

Apart from the terms of trade shocks, "weather plays god" here. Mauritius wasvisited by cyclones in 1970, late-1975, and early-1980; by drought in 1983; and by acyclone in 1984-all of which severely damaged crops. Sugar production was 6percent, 19 percent, 22 percent, and 7 percent below the trend production in 1971, 1975,1980, and 1983-84 respectively. Mauritius seems to be affected by weatherdisturbances every four to five years.

Another shock affected tourism. 2 After rapid growth of about 25 percent p.a. inthe number of arrivals of visitors during 1970-75, tourism slowed down and grew at9.1 percent p.a. during 1975-80. This deterioration was due, to some considerableextent, to rising air fares on account of OPEC oil price hikes. Following the first oilshock of 1973, fuel prices increased tenfold, and the second oil shock of 1979 had afourfold effect on fuel prices. Mauritius was already disadvantaged in attractingtourists because of its distance from Europe. The rising air fares further reduced itsinternational competitiveness.

Policy Framework

The economic policy framework of Mauritius in the 1970s was an amalgam ofhistorical and political factors. The compulsion to build a consensus acrossfactions and parties within a parliamentary system helped avoid the adoption ofextreme policy positions. Macroeconomic policies were dominated by the terms oftrade cycle during the early 1970s and by the electoral cycle later on in the decade(see Chapter 3). The government tried to reduce income inequalities and togenerate enough jobs for the growing labor force. These objectives clashed at somepoints with the desire to sustain economic growth and efficiency. Notwithstandingthese conflicts, Mauritius's economic policy during the 1970s was far superior tothat of most SSA countries (Gulhati 1990).

Mismanagement of Aggregate Demand

The government did not pursue a strong anticyclical reserve policy throughoutthe postindependence period. We will consider the relation between gross domesticexpenditure (GDE) and the terms of trade during three periods: 1968-72, 1973-75, and1976-79. During the period 1968-72, the terms of trade improved at a rate of 5.1percent p.a. and real GDP also rose rapidly. Aggregate expenditures remained onaverage at about 95 percent of GDP (Figure 2.3), and external reserves increasedfrom three to five months of imports. Government was not playing a forceful role inthe economy during this period. Not until late 1971 was the first development planlaunched.

2. Although tourism's contribution to GDP was only 4 percent in the 1970s, it accounted for asizable share of jobs directly and indirectly.

Figure 2.3INDICATORS OF NATIONAL ACCOUNTS, 1960 - 80

12,000 -

GDE (Gross Domestic Expenditure)

10,000 -

8,000- i'

GDY (Gross Domestic Income)

a* \ I # GDP (Gross* * #[ Domestic Product)

6,000-

4,000-

2,000- /

Investment

0 - I I II I I I I I I I I I I I I I - -I

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980Year

oak\w4U8M8C

8 Succe8ssfu Stabilis4tion and Recoveir in Mauritius

The 1973-75 period was a spectacular boom for Mauritius, notwithstanding thefirst oil price increase and the economy's heavy dependence on imported fuel. Theterms of trade improved at a rate in excess of 28 percent p.a., and real GDP alsoexpanded appreciably. Aggregate expenditures rose at breakneck speed, and onaverage they were 116 percent of GDP (Figure 2.3). The volume of investmentincreased at a rate of 26 percent p.a. and real consumption at 23 percent p.a.External reserves kept up with imports but did not increase any faster. A large partof the windfall from high sugar prices was spent on imports.

The terms of trade deteriorated very sharply during 1976-79, but aggregatedemand was not curtailed. The volume of consumption continued to rise veryrapidly at 8 percent p.a., and the savings rate fell from 19 percent to 14 percent ofGDP. Even though the volume of investment stagnated, aggregate expendituresaveraged 118 percent of GDP. The current account of the balance of payments(excluding official development assistance from receipts) showed a deficit of $96million per year (Figure 2.4). This was financed by a drawdown of reserves(remaining reserves covered only three months of imports) and borrowing on hardterms from the Eurodollar market.

The government budget showed a deficit throughout the postindependence period(Figure 2.5 and Table A-8). The size of the deficit increased during the boom of1973-75, presumably because government outlays rose substantially under the firstdevelopment plan. The second plan, covering the period 1976-80, was even moreambitious than the first one. The budget deficit widened considerably in the 1976-79period. It was financed not only by large foreign borrowing but also by very sizablecredits from local banks.

We can conclude that policymakers cast aside caution during the spectacularboom of the mid-1970s. Prime Minister Seewoosagur Ramgoolam was also incharge of finance. Although he later turned over the portfolio to VerasamyRingadoo, he continued to "call the shots" to a very large extent. Ramgoolam'sknowledge of economics was fairly limited. Sugar prices during this period wereunprecedentedly high, and it was scarcely reasonable to expect that they wouldpersist for any length of time. Nevertheless, the government did not channel thewindfall into external reserves to any large extent. Instead, there was a dramaticincrease in investment triggered by the first development plan. Even though thiswas a period in which government had declared an "internal emergency" and apolicy of wage restraint had been adopted, there occurred a surprising upswing inconsumption. With the inevitable crash in the terms of trade, the political scene wastransformed: the "internal emergency" was relaxed, and populist pressures re-emerged. The government was unable and unwilling to curtail demand in linewith the relatively constrained resource situation during the late 1970s.

Extent of Market Orientation

We will now examine government policies at the macro level from thestandpoint of their impact on allocative efficiency and economic growth. (Incomedistribution will be considered later.) The public sector is active mainly in the fieldof infrastructure and social services. Directly productive activities are verylargely the business of the private sector. Government policies have a major impacton all factor prices, but perhaps the most acute distortion is to be found in the labormarket. These imperfections notwithstanding, Mauritius succeeded in securing avery impressive record of economic growth throughout the postcolonial period.

Figure 2.4BALANCE OF PAYMENTS INDICATORS, 1970 - 80

100 -

Net ODA *

0 -...... E.-.-f\Not I1SF

] ~~~~~~~~~~~Nel; Capital

-100\I

Current Account Balance /

50- I

;200IIIIII 1970 1972 1974. 1976 1978 1980

Year

Excludes official development assistance (ODA).=M}w48568D

Figure 2.5BUDGET DEFICIT AND ITS FINANCING, 16 - 80

400 -,

r cz ~~~~~~~ ~~ ~Brr_in _---m Loca BanksF Caitl

200-

140 - 4

400-

-20 0 - I l

1968 1970 1972 1974 197B 1978 1980Year

I*dudes offidAl devebopmmt amisteaM

Dignosis 11

The market for foreign exchange was managed through a governmentdetermined exchange rate (Figure 2.6 and Table A-9). The nominal effectiveexchange rate depreciated sharply during 1972-75 owing to fluctuations in the valueof the pound sterling to which it was linked. The United Kingdom accounted for 75percent of Mauritius's trade during this period. During this time the real exchangerate depreciated by about 8 percent. There was a change in policy in January 1976when the government broke the link of the Mauritian rupee to the pound sterlingand instead pegged it to the basket of currencies underlying the special drawingrights (SDR). This move followed the negotiation of the Lome Agreement, whichassigned a large sugar quota to Mauritius in the EEC market at preferential prices.The real exchange rate appreciated by about 4 percent during 1975-78. This was aperiod in which Mauritius experienced a sharp deterioration in its terms of trade, adrawing down of reserves, a build-up of hard debt, and substantial increases inreal wages. There was little justification for letting the exchange rate appreciateamidst mounting financial pressures and diminishing internationalcompetitiveness. The government resorted in 1978 to limiting imports throughquotas for balance of payment reasons.

The trade regime was unusual in that it was not biased against exports. Such abias was typical of Sub-Saharan African (SSA) countries as well as many LatinAmerican and South Asian countries. The trade regime in Mauritius consisted oftaxing sugar exports, providing strong incentives for exports of manufacturedgoods, and giving substantial protection to local firms producing for the homemarket. The sugar tax existed in the colonial period at a moderate rate of 5 percent.It was raised sharply to 12 percent for large estates in 1975 and to nearly 24 percentin 1979 when the rupee was devalued (see Table 2.2). Small sugar producers wereexempted, and the rate of duty varied with the tonnage exported. Sugar taxation wasvery controversial. This is hardly surprising given the major parameters ofMauritius's political economy. The small group of Franco-Mauritians who controlthe bulk of the sugar industry are very powerfull (Simmons 1982, pp. 22-23). Onemajor issue was whether the sugar tax rate was excessive. Very little informationwas available during the 1970s to answer this question, and what little data was putout by the industry was viewed with considerable skepticism by government.Another issue was the rate structure that discriminated against the relativelyefficient large estates and provided an incentive to split them up.

The colonial authorities established the development certificate (DC) scheme in1964 to promote import substitution. Incentives for local manufacturers took theform of fiscal concessions, tariffs, quotas, and permits. The magnitude of theseincentives increased considerably over time.

In 1970 the government passed the Export Processing Zone Act, which providedpowerful incentives to manufacturers catering exclusively to the foreign market.Benefits took the form of fiscal, credit, and import duty exemptions. Such EPZ firmswere subject to general labor laws (including minimum wages), but they were freeto fire workers, to demand compulsory overtime work, and to penalize heavily forabsenteeism.

The exchange and trade regime provided strong incentives for tradables asagainst nontradables. As we will see, there were many imperfections in the designof these incentives, but the fundamental balance was not tilted heavily against

Figure 2.6NONINAL AND REAL EFFECTIVE EXCHANGE RATES9 1970 -86

160 -

150 -

140 -

120 -

f~~~~~~~~~~el Exhne\ae

180 - -

0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1

160

90-

80- E X i l l l 1970 1972 1974 1976 1978 19 1982 1984 1986

Year

Diagwsois 13

exports as it was in many Sub-Saharan and other developing countries. 3 Therewas a tax on sugar, but that could be justified in the light of Mauritius's limitedquota in the EEC preferential market and the low demand for sugar in the worldfree market. Given these market constraints, it did not make sense to providestrong incentives to expand sugar production or to allow owners of sugar estates toretain the rent created by the EEC preferential price.

This exchange rate and trade regime produced an outcome that was a cause forsome concern. On the positive side, manufactured exports from EPZ rose rapidly,and their share in total exports rose from nothing to 20 percent during the 1970s.However, these new exports were much more import intensive than sugar, and theircontribution to the net foreign exchange balance was correspondingly much less.There was a large increase in the imports of intermediate goods and investmentgoods. Despite a steep drop in the share of consumer goods in total imports, theoverall ratio of imports to GDP rose from 44 percent in 1970 to 52 percent in 1980. Thereal appreciation of the exchange rate at the end of the 1970s was partly responsiblefor a considerable deterioration in the balance of payments situation.

Government interventions in the labor market took many forms and were farfrom coherent. The history of indentured labor on the sugar estates during thecolonial period and of the passing of political power into the hands of thedescendants of these workers after independence is helpful in understanding thepolicy framework. Some labor legislation affecting sugar workers was passed asearly as 1963. It was substantially extended and consolidated under the Labor Act of1975. Meanwhile, the Industrial Relations Act of 1973 instituted the system ofremuneration orders (ROs) by which the National Remuneration Boardestablished minimum wages, conditions of employment, and specifications of jobsfor various categories of workers in the private sector. Superimposed on ROs wasthe system of cost of living adjustments (COLAs), which was recommended by atripartite committee consisting of government, trade unions, and employerorganizations.

We did not have information to trace the impact of labor policies on wage ratesdifferentiated by skill levels. Nevertheless, the profile and behavior over time ofaverage monthly earnings (including nonwage benefits) by sector suggests thelikely impact of government interventions (Figure 2.7 and Table A-10).Compensation levels in the early 1970s were highest in the government sector,followed by sugar, manufacturing firms catering to the home market, and finally,at the very bottom of the pyramid, EPZ. It was very unlikely that all thesedifferentials could be explained in terms of the skill composition of the labor force.The Sedgwick Report of 1973 justified higher compensation for governmentworkers in order to facilitate recruitment, but it did not rationalize the magnitudeof the differential. The higher compensation to sugar workers, compared withmanufacturing, was due to large nonwage benefits for sugar workers reflecting theimpact of stronger trade unions in this industry. Relatively low averagecompensation in EPZ reflected gender differentials in that a very high proportion ofworkers in EPZ were women whose wages were appreciably lower than those formen doing comparable jobs. The remuneration orders provided for substantiallyhigher minimum wages for male workers compared with female workers. Apart

3. A more specific evaluation of the incentive structure would require estimates of effectiveexchange rates applicable to various branches of manufacturing. Unfortunately, such estimateswere not available. However, the structure of effective protection is discussed later in thechapter.

Figure 2.7AVERAGE MONTHLY EARNINGS BY SECTOR, 1970 86

2,000 -

1,800 -/ \ ~~~~Government

1,600-

1,400 - ARl Sector Average

* 1,200 -

*o 1,000 - I; /tM 1,000 -/Textiles (EPZ)

800 -// Sugar Sector

600 - /'

Other Manufacturing ' A (Apparels (EPZ)

400 - l l l l l l l l l

1970 1972 1974 1976 1978 1980 1982 1984 1986Year

wk\wUMH

Diagnsi 15

from these anomalies, ROs have not exercised a major impact on the pattern ofwage differentials (ILO 1985). Most workers were paid above the minima set byROs.

Average real earnings for all sectors increased in 1971 but then declinedsharply until 1974. The policy of severe wage restraint under a state of emergencyduring these years prevented increases in real earnings during the spectacularsugar boom of the mid-1970s. Average real earnings increased by a moderate 5percent only in 1975, but there were quantum jumps in the next three years.Antagonized by government's repressive measures during the early 1970s, manyworkers voted for the opposition party (MMM) in December 1976. As mentionedalready, the share of the popular vote of the MLP and the PMSD declined sharplybetween 1967 and 1976. However, the next government was again formed by theMLP and the PMSD. The new government had a razor-thin majority of only oneseat in the assembly. Under these circumstances, the new government was forced toaccept demands for annual COLAs and bonuses, despite the sharp deterioration inthe macroeconomic situation.

Unemployment averaged 20 percent in 1971.4 The Meade Report published in1961 had generated a great deal of concern about the growing labor force andlimited capacity of the economy to generate jobs. The govemment was committed toa policy of high employment, and this objective permeated the first and seconddevelopment plans. These will be discussed later, including the government'spublic works program. As part of the policy to maintain a high level of employment,the government compels sugar estates to maintain a regular work force throughoutthe year, despite large seasonal variations in the demand for labor. Such a measureis not only a financial burden for the sugar industry, but it also is inefficient fromthe standpoint of the national economy.

The government's policy framework vis-a-vis labor during the 1970s was fullof internal contradictions. Legislation aimed at protecting existing sugar workerson the estates was an incentive for management to mechanize rather than hiremore labor. Trade union pressures, backed by the opposition party (MMM), duringthe late 1970s caused wages to rise and manufactured exports to lose internationalcompetitiveness, thereby slowing down job creation in the EPZ. And yet it is thedynamism of this part of the Mauritian economy that had the potential ofalleviating unemployment pressures.

Government policies for the capital market relied mainly on nonprice policyinstruments. The job of mobilizing savings was largely entrusted to commercialbanks, which increased in number from five to nine during the 1970s. Two of them(the privately owned Mauritian Commercial Bank and the government-ownedMauritian State Commercial Bank) held 75 percent of total deposits, however. Thegovernment controlled nominal interest rates. There was considerabledifferentiation of these rates for savings instruments of various maturities, but theaverage real rate remained negative throughout the period (Figure 2.8 and Table A-11). The Post Office Savings Bank was established to mobilize small savings. Itdid not offer fixed term accounts, however, and its operations did not keep pace withthose of commercial banks. In addition, there were 400 cooperative societies thatraised deposits from rural areas.

Allocation of credit and its overall amount was governed by a series of nonpricepolicy instruments such as reserve requirements, overall credit ceilings, and

4. A person is said to be unemployed if he/she is in the 15 to 64 age bracket and is seeking workbut is without a job.

Figure 2.8NOMINAL AND REAL INTEREST RATES

ON COMMERCIAL BANK DEPOSITS OF SIX MONTHS, 1970 - 86

10

Nominal

5~~~~~~~~~~~~~~~~~~~5

O~~~. - . , ,0~~~~~~~~~~~~~~~~*

-1I

-16 ,,

-20- X , -- 1970 1972 1974 1976 1978 1980 1982 1984 1986

Year

mk*485M

Diagnosis 17

sectoral priorities. The highest priority was assigned to EPZ and to the governmentitself, while there were severe limits on credit to importers and other traders.Commercial banks did not have adequate incentives for lending on a long-termbasis, given the structure of controlled interest rates (World Bank 1978, p. 83). Thegovernment established the Development Bank of Mauritius to lend on a long-termbasis and to make equity investments. Its operations grew slowly at first but thenpicked up momentum. Its loans to industry, as a proportion of the total portfolio, rosefrom 52 percent in 1972 to 72 percent in 1980. The Mauritius Housing Corporationwas established to provide mortgages to low- and middle-income borrowers.Despite the creation of these and other specialized lending institutions, theprovision of finance on a medium- or long-term basis remained relativelyunderdeveloped.

Altogether, Mauritius's capital market was remarkably well developed for acountry of very small size. The volume of savings and investment rose rapidlyduring the period of the sugar boom (Table A-1). The rate of savings fell sharply inthe late 1970s, however, as the terms of trade declined. The government did notreverse its interest rate policy, and interest rates remained negative in real termseven during the years of stress. Strong preference was given to the EPZ, andmonetary policy became a handmaiden of the government budget.

How Efficient Was the Public Sector?

Policy was not exclusively aimed at promoting efficiency in the public sector.The 1970s saw the formulation and implementation of two development plans. Themain objective of both was 'full employment." Achievements were moreimpressive during the first plan (1971-75), when GDP in constant prices increasedby 7.4 percent p.a. and employment by 6.2 percent p.a., than in the second plan(1976-80), when corresponding increases were more modest: 4.2 percent p.a. and 2.7percent p.a. The expansion in the number of jobs during the two plan periods has tobe compared carefully, however. During the first plan, government agenciesindulged in artificial job creation on a massive scale. This was much less the casein the second plan. Readers will recall that the spectacular terms of trade boomoccurred during the first plan, while the second plan witnessed a substantialdeterioration in the terms of trade, a nationwide strike of August 1979, and cyclonesin early 1980. In fact, the second plan had to be aborted eighteen months prior to thescheduled completion date. Mismanagement of aggregate demand during the firstplan was one major factor responsible for the disruption of the second.

Total government expenditures were about 25 percent of GDP in 1968. They didnot increase in real terms, despite the initiation of the first development plan in1971 (Figure 2.9 and Table 2.1). However, the volume of capital expendituresincreased largely on infrastructure and social service projects. After 1973 therewas a substantial expansion in total government expenditures in real terms and anexplosive increase of current outlays. The latter expansion reflected several hikesin government salaries, large increases in interest payments on the growinggovernment debt, growing subsidies, and rapidly rising outlays on social services.

The parastatal sector consisted of twenty-three firms that accounted for 8.7percent of GDP-a relatively low share compared with that in other Sub-Saharancountries. Total government capital invested in parastatals yielded an averagereturn of only 2 percent in 1979, net of depreciation and subsidies. Air Mauritiusyielded a handsome 38 percent and the Mauritius Sugar Terminal Corporation aconsiderable 15 percent. On the other side of the spectrum of returns on capital were

Figure 2.9GOVERNMENT EXPENDITURE AND REVENUE, 1965-80

3,000 -

2,500 -

2,000- /'

00 1,600 __

1,500 Current Expenditure

1,000~~~~~~~~~0

R 1,000 -_s---0,--- ) X

Current Revenue

500 -

Capital Outlays

0 - lI I I l

1965 1967 1969 1971 1973 1975 1977 1979Year

ck\w48868

Dsagnoss 19

the Mauritius Meat Authority (-95 percent), the Tea Development Authority (-35percent), and the Development Works Corporation (DWC), the agency managingthe government's public relief works (-29 percent).

Table 2.1 Growth Rate of Government Expenditures, 1969-86(percent p.a., constant 1980 prices)

Expenditure 1969-73 1973-79 1980-86

Total expenditure 0.4 17.8 2.7Current expenditure -3.3 13.6 4.2Capital expenditure 3.7 4.2 -1.5

Wages and salaries 6.0 16.9 4.5Subsidies (including transfers) 0.1 14.1 -1.1

Social services 3.4 24.7 -1.4Education -4A 10.1 -1.3Health 3.8 14.6 -0.1

Economic services 4.3 14.3 -2.1

Source: IMF (various years).

Four factors were responsible for public sector inefficiency. First, the process ofpreparing projects and evaluating their costs and benefits was neither systematicnor comprehensive. Consequently, a number of projects were started during the1970s whose prospective low returns on investment could have been anticipated.Second, a number of parastatals were established whose objectives did not placemuch emphasis on the efficiency criterion compared with other governmentconcerns. Examples are the DWC (responsible for creating jobs through publicrelief works), the agricultural marketing board (expected to subsidize producerprices), and the trading corporation (expected to subsidize the consumer price ofimported wheat and rice).

Third, overstaffing characterized most parastatals. Following the end of thesugar boom, 13,000 people were added to the payroll of the public sector during 1975-77. A substantial proportion of these appointments were aimed at mobilizingelectoral support during the 1976 elections. 5 The Central Water Authorityestimated that it could shed 50 percent of its employees without reducing itsoperations (World Bank 1987, p. 20). Altogether, the public sector provided 25percent of the total number of jobs in 1975. Fourthly, compensation levels tended tobe high relative to those in the private sector. Pay levels in DWC and the CentralHousing Authority were triple those in the private sector (World Bank 1987a, p. 44).Some parastatals (for example, Cargo Handling Corporation and OverseasTelecommunications) maintained compensation scales that were even higher thanin the rest of the public sector, reflecting stronger trade unions.

5. According to Simmons (1982, p. 184), the elections of August 1967 prompted the hiring of10,600 relief workers six months before the vote.

20 Successful Stabilization and Recovery in Mauritius

There was considerable potential for improving the efficiency of the publicsector. Compared with the situation in Sub-Saharan Africa, however, themagnitude of the problem in Mauritius was relatively small. This was largelybecause the scope of the public sector did not expand very much in the independenceperiod. Although the MLP's ideology contained some radical ideas, includingnationalization of key industries (for example, sugar, transport), they were neverput into practice.

Income Distribution Policies

Mauritius started out with a very skewed pattern of asset and incomedistribution. Thirty large plantations owned by Franco-Mauritians accounted fornearly half of the total cultivable area. The Gini ratio of the income distributionwas 0.5 in 1961-62.6 The government was determined to reduce income inequality.Its emphasis on "full employment" could also be interpreted as part of theegalitarian thrust. Many instruments were used to achieve these objectives, andsome tolerated considerable inefficiency.

Very little was done to alter the distribution of assets through nationalization,wealth taxes, or death duties. Land was redistributed to a small extent to small-holders through the Tea Development Authority. This did not prove to be an effectiveprogram, as we will explain later. A more important program was to build humancapital via government provision of education and health. Although these serviceswere not provided exclusively to low-income groups, they did substantially raise theearning capacity of the mass of the population via expanded secondary schoolingand a considerable reduction in mortality and morbidity rates.

Government used sugar duties as a major redistributive instrument inaddition to a progressive personal income tax structure. 7 The yield of sugar dutiescontributed nearly 8 percent to total revenues in 1973-75 and 18 percent in 1979. Inthis way, a sizable part of the "EEC dividend" was transferred from high-incomeowners of large sugar estates to lower income beneficiaries of public expenditures.

About 21 percent of the recurrent government budget subsidized the consumerprice of rice and wheat. In addition, government subsidized water and electricityrates. These subsidies were not confined to low-income groups, and there wereconsiderable leakages to middle- and upper-income groups. Apparently,subsidized foods were also used as animal feed. Notwithstanding these designdeficiencies, a great deal was accomplished through these policies in terms ofnutrition and increased welfare of low-income groups.

Finally, government policies affecting the labor market were a mixed bag interms of their impact on equity and efficiency. Measures to promote manufacturedexports from the EPZ and thereby expand job opportunities scored heavily on bothcounts. Other measures that created segmentation and wage differentials in thename of equity impeded intersectoral mobility. Sugar workers, for example, gottheir wages during the lean season even though there was not enough work to goaround. The DWC was created in 1971 to create jobs for unemployed youth byundertaking labor-intensive public works such as village improvement,preparation of new agricultural land and reforestation, and various relief works.

6. The Gini ratio has a range from zero (perfectly equal income distribution) to one (very skewedincome distribution).7. Tax rates ranged from 3.3 percent on personal incomes of up to 10,000 rupees to 58.6 percenton incomes exceeding 250,000 rupees.

Diagnosis 21

Wages in these programs were set 20 percent below that of unskilled governmentworkers. Over time, anomalies, such as DWC workers getting more than EPZworkers, emerged. In 1976 DWC had 14,000 relief workers on its payroll.According to Legum (1978, p. B315), they were perceived by many as workers 'whospend much of their time sitting by the roadside."

The Gini ratio declined to 0.42 by 1975, signaling that income distribution hadbecome less unequal. By 1979 only 12 percent of the population was "absolutely poor"(see Table A-2). The Gini ratio fell further to 0.37 in 1986-87.

Agricultural Policy

The agricultural sector in the colonial period was dominated by sugar, largelyin the hands of Franco-Mauritian planters. Ramgoolam described them as 'theoligarchy" (Mulloo 1982, p. 118) that enormously influenced the economic policiesof the colonial government. After independence was secured, the government madea major effort to regulate the sugar sector through labor laws and taxes. However,since sugar was critical to the generation of foreign exchange, the government alsotried to secure favorable foreign markets and remunerative prices. Sugar was avery profitable crop as long as Mauritius had access to preferential EEC prices.However, changes in EEC agricultural policy could endanger sugar's viability.Consideration of this risk led the government to try to promote nonsugar farmactivities as well as manufacturing and thereby to diversify the structure ofproduction.

SUGAR SUBSECTOR. Mauritius had 23 percent of the sugar quota under theCommonwealth Sugar Agreement. When the United Kingdom joined the EEC, itinsisted on a suitable arrangement to safeguard the interests of Commonwealthsugar producers. Mauritius succeeded in obtaining a very good deal under theLome Convention signed in 1975 by the EEC and African, Caribbean, and Pacific(ACP) countries. Mauritius's share in the EEC quota was 38 percent, and thequantity of sugar subject to the new arrangement increased by 30 percent comparedwith what was eligible under the Commonwealth regime.8 Furthermore, the priceguaranteed by the EEC to ACP countries was equal to the producer price forEuropean beet sugar producers. It was much more stable than the world free marketprice and for most years its level was much higher (Figure 2.2 and Table A-4). TheEEC quota was roughly 80 percent of production in Mauritius-a much higherproportion than in most other ACP countries (World Bank 1986a, p. 143). In Chapter3 we will enquire into political economy considerations underlying this favorabledeal.

Most of Mauritian exports not going to the EEC were absorbed by the UnitedStates at prices well above the free market level in most years. Mauritius had aquota of 27,000 tonnes under the U.S. Sugar Act until it expired in 1975. Since 1977Mauritius has secured duty-free access to the American market under theGeneralized Scheme of Preferences (GSP).

8. The free market price rose very sharply, however, during 1974 from 15 cents per pound inJanuary to 57 cents per pound in November. For some months, therefore, the free priceexceeded the EEC price for 1974 of 32 cents per pound. Apparently, this negative differentialled some sugar-producing countries to be ambivalent about the Lome deal under negotiationduring this time. Mauritius, however, was firm about seeking a large EEC quota.

22 Sucesfui Stabilizaion and Recovery in Mauntius

The tax on sugar was introduced in 1961 at a uniform rate of 5 percent of thegross value of exports. The initial rationale was mainly fiscal, and in the early1970s the rate rose to 6 percent (Table 2.2). A subsidiary objective of the sugar taxwas to promote diversification in production by reducing the rate of return ofinvestment in sugar in relation to other crops. A major change occurred in 1975.Small planters (exporting less than 20 tonnes) were exempted and the principle ofprogression was introduced in the rate structure. The tax acquired a redistributiverationale. Estates producing more than 3,000 tonnes had to pay a tax at a 12 percentrate. In 1979, a surcharge of 75 percent on the basic tax was imposed to mop up thewindfall gains occurring to sugar producers from the devaluation of the rupee.Furthermore, estates producing more than 3,000 tonnes now had to pay a tax rate of23.6 percent. In addition, these estates were subject to the corporate tax (afterpayment of dividends) at a rate of 55 percent for publicly owned companies and at 66percent for private companies.

Table 2.2 Export Duty on Sugar, 1970-90(percentage of gross proceeds)

Individualproducer's 1970- 1975- 1979- 1983- 1985- 1989-exports 72 76 81a 1982b &4a 88 god(tonnes)

Below 20 6.0 0.0 0.0 0.0 0.0 0.0 0.0

20-75 6.0 6.0 10.5 9.0 0.0 0.0 0.0

75-1,000 6.0 7.0 12.3 10.5 12.3 0.0 0.0

1,000-3,000 6.0 8.0 15.8 13.5 15.8 15.8 0.0

Over 3,000 6.0 12.0 23.6 20.3 23.6 23.6 18.8

Note: All sugar is sold through the Mauritius Sugar Syndicate, which pays a uniform price to allproducers based on average export prices, taking account of preferential prices in the EEC andUnited States as well as free world prices elsewhere.a. Including surcharge of 75 percent on the basic duty.b. Including surcharge of 50 percent on the basic duty.c. Up until March 1985 a producer exporting 6,000 tonnes would have had to pay a duty equalto 23.6 percent on the entire proceeds. After this date, the first 1,000 tonnes would be exempt, thenext 2,000 tonnes would be taxed at 15.8 percent, and the remaining 3,000 tonnes at 23.6 percent.With such a marginal rate structure, the average tax would be about 17 percent.d. These changes occurred following the enactment of the Sugar Industry Efficiency StudyAct in July 1989.

Source: World Bank (1986a).

Large planters claimed that the sharp hike in the rate of the export duty and thefinancial burden of government's labor laws had reduced their profitability veryconsiderably (Table 2.3). The level of wages in the sugar sector was relatively high(Figure 2.7). Furthermore, as noted already, planters were obliged to maintain a

Diagnsis 23

regular work force (defined as number of workers in the last slack season beforeindependence) all year around. In addition, they had to maintain at least 15 percentof the supplementary labor hired during the harvest season, which had anattendance record of 55 percent. Wages and salaries constituted over 50 percent ofoperating costs.

Table 2.3 Selected Indicators of Twenty-One Large Estates in Sugar Sector, SelectedPeriods 1968-84

Indicator 1968-70 1972-75 1976-79 1980.83/84

Employment ('000) 45 45 46 43

Net profit (loss) inmillions of rupeesa

After depreciation - 508 74 (32)Before depreciation - 558 148 67

Net capital employed - - 1705 2400

Return on net capitalafter depreciation (%) 4.3 -1.3

a. After payment of export duties but before corporate tax and distribution of dividends.

Source: World Bank data.

The structure of taxation and labor legislation generated a powerful incentiveto break up sugar estates. Although the twenty-one large estates remained in tact,estates with 100 to 500 arpents have diminished in number (Table 2.4). Not only didsmall planters (with fewer than twenty-five acres) enjoy exemption (or very lowrates) from the sugar duty, but they were also exempt from the provision of onerouslabor laws. In fact, small planters were a distinctive group whose economicinterests were quite separate from those of large planters.

The trend growth rate of sugar production during 1963-79 was 1.5 percent p.a.(Figure 2.10). Average yields rose from 7.17 tonnes per hectare in 1970 to 9.12tonnes in 1979 (98.50 polarization). Only 5 percent of the sugar was consumed athome at extremely subsidized prices. Nearly 90 percent was sold in the preferentialmarkets of EEC and the United States.

DIVERSIFICATION WITHIN AGRICULTURE. Nonsugar agriculture in Mauritius isconstrained by cyclones and the prevalence of rocks. Inspite of these problems, thegovernment promoted the production of tea exports and various food crops assubstitutes for imports. Some of the crops could be grown between the rows of sugarcane (interline cultivation), while others could be grown on land that wasagronomically unsuitable for sugar.

Mauritius had been exporting tea since the 1950s. The government visualizedan ambitious program to expand tea cultivation in 1969. In the middle of 1971, thegovernment launched a project financed by the International DevelopmentAssociation (IDA) for planting 5,820 acres on state-owned land that would be leasedto 3,730 smallholders. These smallholders were to be trained by a new

24 Sucoes8fil Stabilization and Recovery in Mauritius

Organization called the Tea Development Authority (TDA), before being settled ontwo-acre plots. The project encountered enormous difficulties duringimplementation. At its end in the middle of 1980, only 2,675 acres had been planted.Trainees refused to become settlers, and instead they became employees of TDA.Production of tea was only 24 percent of the estimate made at the time the project waslaunched. Average productivity of TDA laborers was only about one-third of that inthe private sector. TDA owned three tea factories, and all of them ran at a financialloss. This was also true of four private factories and one factory owned by theministry of cooperatives. Given the prevailing wage structure in Mauritius andlow international tea prices (South Africa withdrew the premium of 10 percent itpaid over London auction prices in 1979), the economic viability of tea becamesuspect. Table 2.5 shows a modest increase in overall tea production between 1972and 1981, even though acreage declined.

Table 2.4 Number of Sugar Planters by Size of Holdings

Size of holdings Average 1966-70 Average 1974-79 1982

Number Arpents Number Arpents Number Arpentsharvested harvested harvested

Fewer than 5 arpents 25,003 28,920 31,322 36,839 32,028 40,996

5 to 100 arpents 2,504 31,358 2,302 27,448 2,603 28,454

100 to 500 arpents 62 17,820 49 15,557 43 12,266

27,569 78,098 33,673 79,844 34,675 81,716

Large mills and

associated estates 21 96,094 21 105,356 21 102,597

27,590 174,192 33,694 185,200 34,696 184,313

Note: An arpent is 1.04 acres

Source: World Bank (1986a, pp. 134,145-146).

The increase in production of selected food crops for the local market was quiteimpressive. For example, the output of potatoes almost doubled during 1972-81,thereby eliminating the need for imports (Table 2.5). Similarly, maize productionalmost tripled and there was a large increase in the output of onions and also ofgroundnuts.

The economics of these diversification programs was difficult to assess,however. Sugar estate owners, obliged by labor laws to retain workers through theslack season, utilized them to grow food crops during this period. The AgriculturalMarketing Board (AMB) guaranteed prices to producers at remunerative levels.The guaranteed price for potatoes, for example, rose by 55 percent in terms of 1980rupees (after deflating nominal prices by the consumer price index; see Table A-14). The corresponding increase for onions was 37 percent. The AMB had amonopoly on the import of these items and brought in overseas supplies only to theextent that local production fell short of demand. No study has been made that

Figure 2.10SUGAR PRODUCTION AND EXPORTS, 1963 - 86

800-

Production

700- XProduction Trend

I' ~ ~ ~ I

4 00 - ___ _

1963 196f5 1967 1969 1971 1973 1975 1977 1979 1981 1983 19886Year

eak\w4MR1K

26 Successfdl Stabiliatwon and Recove in Mawitiiu

compares local and border prices to quantify the extent of protection enjoyed byfarmers.

The government subsidized the consumer price of rice and wheat flourthroughout the 1970s. Each adult was entitled to buy 200 grams per day of basicquality rice and wheat flour at subsidized prices. Those doing "heavy work" wereentitled to twice the basic entitlement and children to 50 percent. The subsidyincreased from 32 percent of the landed cost of imports in 1975 to 60 percent in 1979(World Bank 1983, p. 11). The State Trading Corporation, which was responsiblefor administering these subsidies, had to rely on heavy support from the budget.These subsidies rose from 100 million rupees in 1976/77 to 230 million rupees in1981/82.

Table 2.5 Nonsugar Agriculture: Acreage, Production, and Imports(crops are listed in descending order of acreage in 1972)

Crop 1972 19810 1986

Tea (leaf)

Acreage (arpents) 14,765 9,000 9,650

Production (tonnes) 23,543 26,577 42,651

potatoes

Acreage (arpents) 1,009 1,500 1,895

Production (tonnes) 7,516 13,500 16,265

Imports (tonnes) 1,569 nil nil

Groundnuts

Acreage (arpents) 1,009 1,310 1,605

Production (tonnes) 1,471 1,900 2,250

Maize

Acreage (arpents) 592 1,285 4,304

Production (tonnss) 470 1,395 7,970

Inports (tonnes) n.a 11,000 16,000

Onions

Acreage (arpents) na. 510 598

Production (tonnes) ns. 2,242 2,995

znports (tonnes) n.. 1,753 2,385

Note: Crops are listed in descending order of acreage in 1972.a. Average of 1981-82. 1980 was an abnormal year owing to unfavorable weather.

Sources: World Bank (1983); FAO (1986); World Bank (1989a);Government of Mauritius (1987).

Dignosis 27

Strategy for ManufacturingMauritius adopted a two-pronged industrial strategy to promote import

substitution in the home market and to expand exports. Two entirely separate policyregimes governed firms catering to the small domestic market and other firms thatproduced exclusively for foreign markets. Despite many imperfections in thedesign of these policies, the outcome was fairly positive. Value added of themanufacturing sector rose at an average annual rate of 4.6 percent during 1967-73and at 6.2 percent in 1973-79. The share of manufacturing in GDP rose from 9.4percent in 1970 to 14 percent in 1979.

IMPORT SUBSTITUTION POLICY. Powerful fiscal incentives and import protectionwere provided to manufacturing firms under the Development Certificate (DC)scheme.9 This scheme was started in 1964, but there was little response initially. In1969, protection against imports became a key part of the package. Nominal tariffrates continued to rise over time except on food items. Quotas restricted competingimports to 20 percent of their value in the base period, according to a 1984 report bythe Center for Development Technology. An import deposit scheme (covering 20percent of imports) was introduced in 1977 with the aim of raising the rupee cost ofimports. New quotas were introduced in 1978 on imports of textiles, garments andconsumer durables (refrigerators, TVs, cars, motorcycles, etc.) in order to containpressures on the balance of payments. In 1981, the government extended importlicensing from about 25 percent to 65 percent of total imports.

Table 2.6 shows average effective rates of protection (EROP) by branch ofmanufacturing and the share in value added of each branch. The range of EROPswas very large. Fortunately, branches of manufacturing with high EROPs had asmall share in total value added in the sector. The one exception was metal productswith an EROP of 113 percent and a share in value added of 19 percent. Foodprocessing, which was the largest branch, was subjected to negative protection inorder to contain the cost of living. The average EROP for the manufacturing sectorwas 89 percent.10 Newly created firms enjoyed protection against imports on anindefinite basis. There was little justification for such open-ended and variableprotection. Owners of highly protected firms were subsidized by the rest of societyfor a very long time. According to Greenaway and Milner (1989, p. 1007), 'excessprofits were being earned and labor costs were relatively high' in the industrieswith the highest levels of effective protection.

EXPORT PROMOTION OF MANUFACTURERS. The Meade Report of 1961 had advocatedexport-led industrialization, but the government did not act on this

9. The benefits were numerous: protective import duties and quotas for infant industries;suspension of import duties on materials and equipment for industrial use and not locallyavailable; rebates of import duties on other raw materials and components for specifiedindustries; d-rawback of import duties on materials and components used in exported products;initial depreciation allowance of 40 percent on plant, 20 percent on industrial buildings, taxholidays of five years, exemption from income tax on dividends up to eight years; long-termloans at favorable interest rates from the Development Bank; lease of standard factory buildingsat subsidized rates; and free repatriation facilities.10. Greenaway and Milner (1989) arrive at an estimate for 1980 of 128 percent. In twelve out oftwenty-two branches, EROP exceeded 100 percent. In descending order of EROP, thesebranches were leather products; watches and lenses; lime and stone; wood products; electricalmachinery; beverages; footwear; fabricated metals; base metals; paper products; furniture; andrubber.

28 Successful Stabilization and Recovery in Mauritius

recommendation until it had discovered for itself the limited scope of importsubstitution in a very small domestic market (Bheenick and Schapiro 1989, p. 99).In 1970, the government established the second prong of its industrial strategy(namely, export production a la Jamaica and Hong Kong) without, however, givingup the first prong (that is, import substitution). The Export Processing Zoneestablished in 1970 was a great success, but it also suffered from some weaknesses.

Table 2.6 Average Effective Rates of Protection and Valued Added, 1983(percent)

Industry EROP Valued added

Electrical machinery 824 5

Leather products 330 5

Textiles and apparel 189 3

Metal products 113 19

Paper products and printing 108 5

Beverages and tobacco 79 8

Wood products 59 2

Chemical products 51 20

Nonmetallic mineral products 11 1

Food -24 32

Source: World Bank (1985) and Government of Mauritius (1984a).

Bheenick and Schapiro (1989) provide a thoughtful assessment of the EPZexperience, and we will follow their line of argument. Incentives in the form of taxholidays, exemptions from import duties and from some aspects of the regulatoryregime, as well as preferential credit were provided to foreign and domesticinvestors who would wholly specialize in exporting.11 A distinguishing feature of

11. The Export Processing Zone Act of 1970 provides concessions and incentives to export-oriented industries. The main features are complete exemption from payment of import dutyon capital goods; complete exemption from payment of import and excise duties on rawmaterials, components, and semi-finished goods (except spirits, tobacco, and petroleumproducts); and corporate income tax holiday for ten to twenty years. Corporate tax was 50percent of the normal rate during eleven to fifteen years and 75 percent of the nominal rateduring sixteen to twenty years. Dividends were tax free for any consecutive five yearsbeginning with the first year of dividend payments. EPZ firms were also protected againstdouble taxation (in both countries) by agreements with France, the United Kingdom, Germany,and India. Other features of the act include loans at preferential rates for importing rawmaterials; electric power at subsidized rates; export finance at lower interest rates; loans up to50 percent of total building costs for a ten-year period; priority in allocation of investmentcapital by Development Bank of Mauritius; provision of reinforced factory buildings atsubsidized rates; free repatriation of capital and remittance abroad of profits and dividends tocompanies with an approved status; and guarantee against nationalization. EPZ firms aresubject to general labor laws including minimum wages, etc., but they have greater flexibility in

Diagnosis 29

the Mauritius EPZ was that it was not geographically restricted. "Bondedfactories," catering exclusively to foreign markets, could locate anywhere on theisland. The Ministry of Commerce and Industry had to be restructured to provideinstitutional support for the new export policy by undertaking studies aimed atattracting foreign investors, scanning overseas markets, evaluating projects, andmonitoring developments. The Development Bank of Mauritius provided long-and short-term credit to EPZ firms on a priority basis and operated the industrialestates. These firms enjoyed preferential access to the EEC market on a duty-freebasis under the Yaounde and Lome conventions.

The volume of EPZ activity (employment, exports) expanded rapidly,particularly in 1971-75 (Table 2.7). High sugar prices during a part of this periodcreated conditions enabling local investors to invest in the EPZ alongsideforeigners. Ethnic connections between Hong Kong investors and Sino-Mauritians proved to be invaluable. These investors were concentrated in thetextile and garment industries. Bheenick and Schapiro (1989, p. 117) suggest thatlocal participation in EPZ equity was roughly half-a much higher ratio than infree zones in other developing countries. Mauritius was in a better position to takeadvantage of EEC preferential arrangements than were other ACP countries,'because of the relative development of its entrepreneurial class and its educatedand easily trainable labor force" (Bheenick and Shapiro 1989, p. 119). Over 80percent of EPZ workers in the 1970s were women. Their wages, influenced bygender differentiated minimum wage levels, were 30 percent lower than for men.

A weakness of the EPZ was its heavy concentration on textiles and garmentsand on EEC markets. Knitwear, for example, constituted 44 percent of total exportsin 1976 and 52 percent in 1980. The share of exports going to EEC was about 85percent throughout the period. Access to EEC markets, on a duty-free basis, issubject to very elaborate "rules of origin" and the "safeguard clause." During thelate 1970s Mauritius had to exercise "voluntary restraint" in the French andBritish markets with respect to a number of product lines. It coped with theserestrictions fairly successfully by hopping from one item to another in variousmarkets. For example, the share of men's outerwear (not knitted) in total EPZexports declined from 14 percent to 6 percent in 1976-80 while the share of women'souterwear (not knitted) rose from 0 percent to 4 percent. Knitted outerwear's sharealso rose from 37 percent to 47 percent during the same period.

The EPZ has had its critics in Mauritius. Dependency theorists such as Alladin(1987) regarded it as an enclave for international capitalism. This was also theview of the extreme leftist faction within the MMM. These observers would havefavored an industrialization pattern that gave priority to the development of thelocal capital goods industry. This is a dubious argument in our view, given thevery small size of the local market and the lack of a long industrial tradition at thisstage of Mauritius's development. Alladin claimed that EPZ posed a threat to thesugar industry. It is difficult to understand this argument. Sugar profits helpedfinance the EPZ. He also alleged that women workers were exploited in theseactivities. They probably were, although gender wage differentials have narrowedto some extent in recent years.

The momentum of EPZ activity slowed down considerably in 1976-80 (Table2.7). The volume of investment declined. The rate of growth of exports and

discharging workers. For example, no severance allowance need be paid before firing workers,and firms may reduce employment without advance notification to the Board of Termination ofContracts.

30 Successful Stabilization and Recoveiy in Mauritius

employment decelerated. A rising real exchange rate and large wage hikes tendedto reduce considerably Mauritius's international competitiveness. It was clear thatthe policy framework had to be altered to restore the earlier EPZ dynamism.

Table 2.7 Selected Indicators of Export Processing Zone, 1971-86

Indicator 1971-75 1976-80 1981-86

Growth rate of value added(constant prices; % p.a.) 17.0 14.9 16.0

Output as percentage of totalmanufacturing outputa 16.6 30.5 53.5

Growth rate of investment(constant prices; % p.a.) 2.8 -0.7 4.5

Foreign direct investmentin EPZ (million Rs; current prices) 5.0 15.0 38.9

Growth rate of EPZ exports(constant prices; % p.a.) 31.2 9.8 31.4

EiPZ imports as percentage oftotal importsa 8.5 12.3 33.9

Growth Rate of EPZemployment (% p.a.) 38.1 8.5 21.8

Share of EPZ employment intotal employmenta 5.3 10.7 30.8

Number of firms in EpZa 48 106 408

Net foreign exchange earningsa(US$ million; current prices) 8.0 31.1 50.7

a. End of periodSources: World Bank (1978,1985).

Policies for Tourism

Foreign tourism involves not only transport over a very long distance to thisremote island in the Indian Ocean but also such elements as hotels, sightseeing,other recreation, marketing as well as promotion, and the "sale" of holidays in theform usually of all-inclusive tour packages. Many independent actors areinvolved in this interdependent activity. Starting from a very small base, thenumber of tourists increased by 25 percent per annum during 1970-75 but sloweddown to 9 percent during 1975-80. Tourism's share of GDP rose from 1.1 percent to4.0 percent during the 1970s. It became the third largest earner of foreign exchange.According to Archer and Wanhill (1982), the incremental capital-output ratio(ICOR) for tourism was only 2.5 compared with 3.3 for agriculture and 3.9 formanufacturing. The deceleration in the growth of tourism during the late 1970s wasthe result of the tenfold rise in fuel costs in 1973 and the fourfold increase in 1979

Dik4wsaia 31

owing to oil price hikes. Air fares to Mauritius became even more expensive thanbefore.

Government policy during the 1970s was to attract high-income tourists. Therewas considerable concern that indiscriminate development of tourism couldaccentuate congestion in the already crowded island and generate negativecultural and environmental repercussions. The government offered developmentcertificates to hotel builders that entitled them to tax and other incentives. Thegovernment chose to rely almost totally on scheduled airlines, including AirMauritius, to transport tourists. There was a virtual prohibition on chartered flightsand a number of restrictions on foreign airlines aimed at providing support to thenational flag carrier (Air Mauritius). Although these policies saw a substantialexpansion of tourism during the 1970s, they did not facilitate the full exploitation ofthe potential (UNDP-IBRD 1982, p. 345). Furthermore, these policies had to bemodified because of important changes in the world economy and in theinternational tourist trade. Several tour operators had experienced a sharpreduction in their profit margins and had dropped or were considering droppingtheir Mauritian operations.

It was important for the government to decide whether it should cultivate'cultural tourists" (those who wish to explore life-styles other than their own) and'independent tourists" (those who wish to organize their own holidays) in additionto the high-income tourists. The government also needed to consider ways of easingfactors limiting transport capacity on scheduled airline services, particularly inthe peak winter tourist season.

3

Political Factors and Their Impacton Economic Policy in the 1970s

In analyzing the evolution of macro and sectoral policies in the 1970s in Chapter2, we briefly referred to a number of political determinants. In this chapter we willspell out the political dynamic, the main political trends and their implications,particularly for readers who are unfamiliar with Mauritius's recent history. Ouraim is not to write a definitive analysis but rather to provide background for anunderstanding of selected economic issues.

Main Political TrendsMauritius inherited a constitutional system that visualized a parliamentary

democracy following the Westminster tradition. Whether Mauritius should beindependent or should have a "free association" with the United Kingdom was anissue in the August 1967 election. The PMSD was afraid that independence wouldlead to Hindu domination that would hurt Franco-Mauritians and other supportersof the party. The PMSD lost the election to an alliance of MLP, IFB, and CAMmembers. A coalition government headed by Prime Minister SeewoosagurRamgoolam was formed (see Tables 3.1 and 3.2).

Soon after independence, Ramgoolam invited Gaetan Duval, the head of PMSD,to join the government. The IFB left the coalition since it did not wish to beassociated with PMSD. A series of strikes instigated by MMM caused thegovernment to pass the Public Order Act of 1971 to deal with 'emergencyconditions." Under this act, the government clamped down on the press anddetained MMM leaders. It pursued a policy of wage restraint and postponedelections scheduled to be held in 1972. Even during the spectacular sugar boom of1973-75, Mauritians had to live under these extraordinary, somewhat repressive,political conditions.

The PMSD walked out of the coalition government in December 1973. Theprime minister wished to raise the rates of personal and corporate income taxes by10 percent and the PMSD opposed this move. The govemment continued till 1976 asa coalition of MLP and CAM. Ramgoolam decided to lift the state of emergency andto hold elections in December 1976. This was a turning point in Mauritius's historyin the sense that the government decided to play by the rules of constitutional

32

PoliticalFactors and TheirImpact on Economic Policy in the 1970. 33

democracy. In many other Sub-Saharan countries, governments did not feelcompelled to play by these rules. One party states were established and electionsceased to have much significance.

Table 3.1 Major Political Parties and Election Outcomes, 1967-87

Number of parliament seatsParty 1967 1976 1982 1983 1987

Mauritius Labor Party

(MLP)a 26 28 2 14 9

Independent Forward Block(IFB)b 12 - - - -

Parti Socia]iste Mauricien(PSM)C - 18

Comite D'Action Musalman

(CAM)d 5 naL la. na. ta.

Parti Mauricien SocialDemocrate(PMSD)e 27 8 2 5 6

Mouvement Militant Mauricien(MMM)f - 34 42 22 24

Mouvement Socialiste Militant(MSM)g - - - 27 26

Total seatsh 70 70 66i 70 70

n.a. not availablea. A moderate socialist party founded in 1936 by Dr. Maurice Cure.b. Formed by Bissondoyal in 1954, the IFB represented poor rural Hindus.c A left-of-center splinter group of MLP formed in 1979 by Harish Boodhoo. In 1983 it

combined with some dissident members of MMM to form MSM. PSM was revived again in1986, but it did not win any seats in 1987.

d Formed in 1958 to represent the interests of Muslims.e. Founded in 1954 to represent the interests of Franco-Mauritians and Creoles.£ A radical party formed in 1969 by Paul Berenger. It cuts across all ethnic groups and

controls major trade unions.

g Formed in 1983 by Aneerood Jugnauth (MMM) and Harish Boodhoo (PSM).h Include eight 'best losers' as provided by the 1968 Constitution. To ensure adequate

representation of all ethnic groups, defeated party candidates become nominated membersof Parliament.

i Only four "best loser' seats were allocated.

Source: Legum (various years).

34 Successful Stabilization and Recovery in Mauritius

Table 3.2 Coalition Governments and Leaders, 1968-87

Period Coalition parties Prime minister

1968-69 MLP + IFB + CAM S. Ramgoolam

1969-73 MLP + CAM + PMSD S. Ramgoolam1974-76 MLP + CAM S. Ramgoolam1976-82 MLP + PMSD S. Ramgoolam1982-83 MMM + PSM A. Jugnauth1983-87 MSM + MLP + PMSD A. Jugnauth

Source: Legum (various years).

The posture of the MMM was significant. It had attempted to exerciseconsiderable pressure by resorting to strikes. However, after the 1971 strike, PaulBerenger, the prominent MMM leader, said, "We must either stay as we are, protectour popular and revolutionary image, or dilute our ideological message and stretchout our hands to the progressive and democratic elements" (quoted in Mannick1979, p. 41). By 1976, Berenger had answered his own question. During the electioncampaign he declared, "The socialism that inspires us is synonymous with liberty,and rejects the form of society built in East European countries" (quoted in Legum1977, p. B279).

The political landscape changed with the 1976 elections. The MMM won thelargest number of seats but not enough to form a government on its own (Table 3.1).The MMM also failed to form a coalition government with support from some otherparty. Instead, Ramgoolam came back as prime minister and headed a MLP,CAM, and PMSD coalition government. To get cooperation from PMSD,Ramgoolam had to repeal the 10 percent surtax introduced a few years earlier. Thenew government had a very thin majority of only one seat in the assembly, but itstayed in power till 1982.

Three political trends emerged during the 1970s. First, parliamentarydemocracy survived intact. Second, no single party was ever able to form agovernment. Third, major party leaders collaborated to freeze out MMM. The firsttwo trends influenced Mauritius's economic policy process. Political power waswidely dispersed, and most policy decisions required consensus building andmutual accommodation. In terms of the classification used by Haggard andKaufman (1989, p. 233), Mauritius is a "consultative democracy" rather than a"plebiscitary" one. The former are said to be more effective in making economicpolicy than the latter. Consultative democracies are also better in the policy spherethan many authoritarian regimes. All three trends influenced the substance ofeconomic policy. No agreement could be reached on radical leftist solutions thatformed part of initial political programs of the MLP and MMM.

The Policy-making ProcessConsidering its small size, Mauritius has a large policy circle. Many

individuals, groups, and agencies play some part in economic decisionmaking.What role is played by each of them is not at all easy to decipher, but we willadvance a few hypotheses.

Political Factors and Their Impact on Economic Policy in the 1970s 35

First, Prime Minister Ramgoolam presided over four governments from 1967 to1982. His role was great even though his power was circumscribed by theConstitution and the need to cooperate with many parties or pressure groups. Hejoined the MLP in 1948 and remained in the limelight until his death in 1985.Ramgoolam had a distinctive ability to forge a consensus among people withopposing views. He brought moderation and pragmatism to Mauritian politics.1 2

Ramgoolam's long tenure at the helm of state contributed greatly to adaptingconstitutional democracy to the needs of a society that was stratified in manydifferent ways. The prime minister became the main instrument ofaccommodation and reconciliation. About himself he once said, 'I have been aFabian all my life, in my approach to politics, in my tactics and politicalphilosophy" (quoted in Mulloo 1982, p. 42).

Second, Franco-Mauritians played a considerable policy-making role throughthe PMSD and various business organizations such as the Sugar Producers'Association. The PMSD was a member of the governing coalition in 1969-73 andagain in 1976-82. Duval had excellent connections abroad and used them to goodadvantage. Franco-Mauritians were a small group with much wealth and a stakein many different parts of the economy. Their economic and financial prominencegave them much direct and indirect influence over the making of economic policy.

Third, workers were represented by trade unions, the MLP, and the MMM. Alllabor groups were represented by MLP at independence. After Ramgoolam invitedthe PMSD to join the coalition government, many workers became disaffected. TheMMM was born in 1969 and attracted the support of trade unions (grouped under theGeneral Workers Federation) in the transport, electricity, and sugar industries.Another twenty trade unions (under the Mauritian Labor Congress) remained tiedto the MLP. The role of trade unions in economic policy was circumscribed duringthe emergency period from 1971 to 1975. Government passed the IndustrialRelations Act in 1973 to curb the growing strength of MMM. Under this act, as fewas seven workers could form a trade union. The number of trade unions thenrapidly rose from 89 in 1974 to 283 in 1979. Such proliferation weakened the unionsfinancially and organizationally. After the emergency was lifted and the MMMscored heavily in the 1976 elections, the role of worker organizations in economicdecisions was much enhanced. In fact, the government was alarmed by widespreadstrikes and the emergence of strong wage pressures. 1 3 Widespread strikes brokeout again in 1979 when the government refused to recognize two new unions.

Two other groups should be noted briefly. The Chinese represent 3 percent of thepopulation. They own restaurants, retail stores, and EPZ firms. Their strongethnic link with Hong Kong investors was a considerable asset. Small planters,mostly Hindus, are a growing interest group. Most small planters are members of176 cooperatives, which are associated with the Mauritius Cooperative AgriculturalFederation. Some 31,400 small planters have holdings of fewer than five arpentsand produce on average three to fifteen tonnes of sugar per year. They tended to vote

12. According to Simmons (1982, p. 49), "He was a born politician, sensitive to the feelings ofthose around him, intuitive in the art of compromise, persuasive and honest."13. The minister of finance in his budget speech of June 1976 declared, "It is pointless forgovernment to offer incentives if the climate of industrial relations is such that enterprisescannot plan for the future. The whole industrialization programme can be wrecked byirresponsible action by those who use trade unions for their political ends" (Legum 1977, p. B264).

36 Successfid Stabilization andRecouery in Mauritius

for IFB and MLP. They succeeded in getting important concessions related to thesugar tax and to labor laws.

A distinctive aspect of the policy process in Mauritius is the role played by thevery active media. They report on interparty and intraparty discussions.Occasionally, the media highlight a policy issue on their own steam. In 1973, forexample, the press reported on "coolie wages" in the EPZ leading to a vigorousparliamentary debate. As economic conditions deteriorated after the fall in sugarprices, the media helped educate the public and contributed to the pressure on theRamgoolam government to introduce remedial measures.

It is very difficult to define the precise role played by the bureaucracy ineconomic policy decisions. The core economic ministries built up some analyticalcapacity for policy work over time, but even at the end of the 1970s there were manyweak areas. Sectoral ministries were particularly deficient, and parts of thePlanning Ministry also suffered from a chronic shortage of professional talent.Typically, the practice was to hire consultants to undertake policy studies and forthe Planning Ministry and concerned sectoral ministry to supervise jointly. Therewas considerable tension between sectoral ministries and the Ministry of Finance.Relations between civil servants and politicians followed British precedents. Theformer have no party affiliations, and their role is to administer policies ofwhatever government is in power. The Public Service Commission (anautonomous body) is responsible, in theory, for civil service appointments andpromotions. Its decisions can be challenged in court. The civil servant, therefore,has a measure of protection. How this works out in practice is difficult to determine.Some permanent secretaries have stayed a long time in key posts and their longexperience has given them an inside track in policy making. In the open,pluralistic environment of Mauritius, however, many economic policies aredecided by polling and party alignments, rather than by technocratic professionalwork. It is common practice for civil servants to tailor their ostensibly technicalconclusions to the known or presumed views of the minister in power. There areexceptions, however.

Political Parameters and Policy Content

Four political parameters influenced the content of economic policy during the1960s and 1970s. First, Mauritius was a deeply stratified society at independence.Franco-Mauritians had the economic power, but Hindus, who had come to theisland as indentured laborers, now had political power. Such a schism could haveproduced a radical regime that might have tried to redress the exploitation sufferedby Hindu laborers during the colonial period through confiscation of the assets ofthe affluent Franco-Mauritians. This did not happen. The commitment toparliamentary democracy pressured all parties to seek the middle ground. TheMLP's platform during the colonial period contained nationalization proposals, butthese were shelved.1 4 Instead, the labor constituency had to be satisfied withconsiderable expansion of government-financed social services and legislation toimprove working conditions. The Franco-Mauritians had to tolerate such

14. Ramgoolam "abandoned MLP's nationalization proposals, encouraged private initiative, andbecame increasingly acceptable to his former adversaries as a fatherly figure and a cementingforce in the nation" (Riviere 1982, p. 105). Legum (1977, p. B268) quotes Ramgoolam as saying"I have nothing against nationalization in principle, but since the private sector was doing such agood job, the whole question was irrelevant."

Political Factors and Their Impact on Economic Policy in the l970e 37

legislation, as well as increased taxation of sugar exports. On the other hand,government provided them, as well as other investors (including foreign ones),with strong fiscal and other incentives to develop manufacturing for the homemarket and for exports. The Mauritius policy framework was basically acompromise.

Second, Mauritius enjoyed a large sugar quota and preferential access formanufactured exports in the EEC. It joined the Yaounde Convention in 1970 andthereby became the first Commonwealth country to establish formal relations withthe EEC. Ramgoolam described the country's relations with the EEC as 'the mostoutstanding success of our foreign policy" (Mulloo 1982, p. 187). Mauritius alsoobtained substantial concessional aid from OECD countries despite its middleincome status. Furthermore, it attracted considerable foreign investment andoverseas tourists. A number of writers have argued that these very favorableconditions were the result of Mauritius having certain geo-political attractions formajor Western powers (Minogue 1983; Cooke 1982; Khan 1983). One attraction isthe strategic location of Diego Garcia in the Indian Ocean and the strong interest ofWestern powers to use it as a naval base. Western powers did not want to seepolitical power in Mauritius go into the hands of a party that was inhospitable tothem. 15 Regardless of how significant the geo-political element is, Mauritius'sopen door foreign policy based on pragmatism underpinned the country's economicinitiatives. Its reputation as a stable democracy was and is a considerable factor inthe economic sphere.

Third, to some considerable extent, economic policy was a hostage of theelectoral cycle. To influence voters, the government repeatedly adopted populistmeasures on the eve of elections. The desire to win votes and stay in power tended todominate professional economic considerations in adopting such measures. Forexample, the government promised free education at secondary and higher levelsprior to the 1976 elections. Also, subsidies on rice and wheat were raised. Theimplications of these moves had not been analyzed thoroughly before theannouncements.

Finally, the political parameters for economic policy changed verysignificantly after 1976. During the 1971-75 period, the government had declared anemergency and a policy of wage restraint. The policy climate was transformedwhen, after the polling, the new government coalition had a very thin majority inthe assembly. Continued pressure by MMM led the government to make a numberof defensive responses in the form of increasing pay, raising subsidies, andpermitting overstaffing in public enterprises. Finance Minister VeerasamyRingadoo was unable to balance the budget year after year. In 1979, he lamented,"We cannot go on living beyond our means, we need some sacrifices" (Legum1980, p. B233).

15. Legum (1982, p. B273) quotes another writer named Borushka who claimed that the U.S.Defense Department was interested in Diego Garcia as a base as early as 1970. Legum (1976, p.B263) adds that MLP's agreement to lease Diego Garcia to the United Kingdom was aprecondition for independence. In the absence of this agreement, the United Kingdom mighthave preferred the option of "association" favored by PMSD. Minogue (1983, p. 75) said, "Muchofficial aid and investment from Britain is probably to induce Mauritian leaders to keep quietover Diego Garcia; and much Western anxiety about MMM victories in Mauritius stems fromthe naive conviction that they are "communist" and would, from the Western point of view, be adestabilizing influence in the Indian Ocean."

4

The Policy Turnaround

Financial pressures and the setback in the real economy led to dissatisfactionwith Prime Minister Ramgoolam's leadership in 1978. Growing pressure onforeign exchange reserves belied the hope that "something would turn up' (in thewords of Charles Dickens's famous fictional character Micawber) to provide relief.Delay in taking policy action to deal with the situation became increasinglyuntenable. Three MLP dissidents (called "Contestataires") headed by HarishBoodhoo insisted on the resignation of two cabinet ministers accused of corruption.Later these two were found to be guilty. In March 1978, in his speech on the tenthaniversary of independence, the prime minister admitted that the country was inserious difficulty. At the end of 1978, Finance Minister Ringadoo and other"influentials" asked the prime minister to hold general elections-a demand alsobeing made by PMSD and MMM. In early 1979, fifteen MLP parliamentariansopenly asked Ramgoolam to resign (Legum 1980, p. B267).

Faced with this internal revolt within MLP, the prime minister started to paymore attention to the views of the Treasury. A number of agreements with the IMFwere negotiated to stabilize the economy (Table 4.1). Furthermore, the Mauritiangovernment decided to revise its development plan on the advice of the WorldBank, and it signaled its new policy orientation at the first meeting of theConsultative Group of Aid Donors in October 1980. A structural adjustment loanwas negotiated with the World Bank in 1981. Thus began a process of economicreform that focused on the supply side, which complemented IMF agreementsfocusing on managing demand. In fact, the two multilateral organizations joinedthe "policy circle" in Mauritius for the next several years. However, conductingpolicy business with Mauritius was quite a different enterprise from similarexercises elsewhere in Sub-Saharan Africa. Finance Minister Ringadoo wasalways in charge. He paid close attention to IMF and Bank views, but he made itquite clear that proposals for reform had to gain acceptance by the cabinet and laterby parliament, where the government held a very slim majority. Mauritianofficials insisted on getting from IMF and Bank staff a full explanation of all theimplications of proposed policy changes. Ringadoo acquired key importance in theVishnu Mauritian policy circle during 1979-82. Later finance ministers continuedthis tradition of maintaining a measure of autonomy and self-confidence vis-a-vis

38

The Policy Turnaround 39

the international organizations. Vishnu Lutchmeenaraidoo (1983), for example,reported to Parliament that "after arduous negotiations, the IMF and the WorldBank have finally accepted our proposal for a more gradual adjustmentprogramme, that makes provision for growth and employment creation."

Table 4.1 Chronology of Selected Policy Events, 1978-85

February 1978 Macro policy agreement with IMF; implementation was incomplete

October 1979 Macro policy agreement with IMF; implementation was incomplete.September 1980 Macro policy agreement with IMF; completed September 1981.June 1981 First structural adjustment policy agreement with World Bank.

December 1981 Macro policy agreement with IMF; completed December 1982

May 1983 Macro policy agreement with IMF; completed August 1984.

June 1983 Consultative Group of Aid Donors reviewed economic policy.December 1983 Second structural adjustment policy agreement with World Bank.March 1985 Macro policy agreement with IMF; implementation was incomplete.

September 1985 Sugar policy agreement with World Bank.

Table 4.2 Indicators of Stabilization and Adjustment, 1976-86

Indicator 1976-79 1979-82 1983-86

As percentage of GDPConsumption 86 85 79Investment 32 23 20Gross domestic expenditure 118 108 99Imports 56 55 53Exports 46 47 54Fiscal deficit 6.1 11.7 5.9

Current account deficita 8.1 11.6 4.3b

1980=100Gross domestic expenditure

(constant prices) 108 1 ooc 107Import volume index 113 96 88Export volume index 83 93 120Nonsugar farm output volume index 94 104 110

Inflation (percent p.a.) 11.3 20.6 5.4

a Including official transfers.b 1983-85. In 1986 the current account was in surplus.c 1980-82.

Sources: World Tables 1987; UNCTAD (various years).

40 Successul Stabilization and Recovery in Mauritius

These reforms were eminently successful, but the process was stressful. Badweather in 1980 and 1983-84 caused setbacks. The terms of trade deteriorated duringthe early 1980s (Figure 4.1). These shocks delayed the restoration of financialbalance; in fact, disequilibrium in the budget and the balance of paymentsworsened before it started to get better (Figures 4.2, 4.3, 4.4, and Table 4.2). Grossdomestic expenditure in real terms contracted considerably during 1979-82, largelyat the expense of capital accumulation. The following period, 1983-86, witnessedsome recovery in GDE, as well as a significant reduction in financial imbalances.GDE in the last year covered by this study, 1986, was 29 percent above the 1980 level.The current account of the balance of payments was in surplus, and the budgetdeficit had diminished in magnitude. A major expansion had taken place in EPZexports. Rising local production of food items had reduced the need for imports.Although supply-side responses were important in securing relief from balance ofpayment pressures, a considerable part was played by restraint on expenditures.Per capita consumption (constant prices) in 1986, for example, remained 11 percentbelow the peak reached in 1979.

The stresses of stabilization and adjustment also influenced political events,although it is far from easy to establish their role vis-a-vis noneconomic factors.Mauritius had a general election in June 1982, one of the most difficult years in thereform process when unemployment climbed to 20 percent. The result was atransformation of the political scene (Tables 3.1 and 3.2). The ruling coalition ofMLP and PMSD was totally defeated by a new left-wing alliance of MMM andPSM. According to Legum (1984, p. B227), "caste and religious loyalties, soimportant in previous elections, were abandoned. The tendency was to move awayfrom ethnic politics and give the country a new sense of direction under a newSocialist government with new leaders and new ideas."

The new finance minister, Paul Berenger, took over in the middle of theimplementation of an IMF stand-by. All targets agreed with the previousgovernment, which reflected conventional IMF medicine, were implementeddespite earlier criticisms leveled by MMM spokespersons. When confronted withresponsibilities of office, Berenger appeared to show a large measure ofopenmindedness. He was impressed by the force of the logic inherent in the IMFrecipe and adopted it despite its unpopularity in many quarters. He also broke withpast practice of secrecy by publishing the details of policy agreements between thegovernment and the IMF/World Bank. His flexibility cost him his job. Accordingto Legum (1985, p. B209), "Berenger's first budget ... was at the root of the politicalcrisis of March 1983." The surcharge on the sugar duty was reduced from 75 percentto 50 percent (Table 2.2). The leader of the PSM took issue with the government'songoing austerity policies and campaigned for an alternative economic strategy.Berenger resigned and was replaced as finance minister by Lutchmeenaraidoo.Another general election took place in August 1983 in which a new party (MSM)joined forces with MLP and PMSD to defeat MMM (Tables 3.1 and 3.2). Accordingto Legum (1985, p. B213), the campaign saw a return of communal tendencies in thepolitical arena of Mauritius. The new government remained in power andFinance Minister Lutchmeenaraidoo presided over the economic recovery. Manydramatic events were played out on Mauritius's political stage during the 1979-86reform period, but successive governments changed very little their economicpolicy orientation. Undoubtedly, this stability and persistence helped the process ofeconomic revival. Next we will examine in some detail the nature of thegovernment decisions and the extent to which they were implemented at the macroand sectoral levels.

Figure 4.1TERMS OF TRADE INDEX, 1980 -86

200 -

Import Price Index

160~~~~ ~~~~~~~~~~~ - *94.'

150-O -

X !/ / , lOO -- - -~ Export Price nde

.. 0

100~~~~~~~~~~~~~~~~1

Terms of Trade

50- I I

1980 1981 1982 1983 1984 1985 1986

Year

cak\w48U58L

Figure 4.2INDICATORS OF NATIONAL ACCOUNTS, 1980 - 86

16,000 l

GDY(Gros.Dometc

GDE (Grams Dom\e

11,000 - N_ X osmGDP (Cinc

t~~~~~~~~~ -

1,000 - I II I I

1980 1981 1982 1988 1984 1985 1986Year

ckw486S

Figure 4.3BALANCE OF PAYMENTS INDICATORS, 1980 - 86

150 -

100 -

Net ODA/

50-

0-

i -50 J ~~~~~~Net Capital * <\ X

-50-

-10 /Net IMF

\ / Current Account Balance

-200- I l l l

1980 1981 1982 1983 1984 1985 1986Year

* Excludes official development assistance (ODA).cak\v458N

Figure 4.4BUDGET DEFICIT AND ITS FINANCING, 1980 - 86

1,200-

Borrowing from Local Banks

600 -

Net Foreign Capital * *

0 600

-600-> > > IIadgF Ddldt

-1,200

1980 1981 1982 1983 1984 1985 1986Year

* Includes official development assistance.oak\4868P

The Policy Turnaround 45

Search for Stabilization

The Government of Mauritius agreed to a one-year IMF standby in February1978, but the downward adjustment of demand envisaged in the program did notmaterialize. Had it not been a single tranche standby (of SDR 8 million) fullydrawn on approval, the program presumably would have been canceled.

Another standby was negotiated with the IMF in October 1979 for a period of twoyears. Although relatively successful at first, it collapsed largely as a result ofsevere cyclones. Its aim was to reduce the current account deficit on the balance ofpayments. The government depreciated the exchange rate by 23 percent in October1979. Rice and flour consumer prices were doubled to reduce subsidies. Due toopposition in the Legislative Assembly, where the government held a majority ofonly one, the government had to withdraw its proposal to reduce the per capita flourration at subsidized prices. A 75 percent surcharge on the sugar export tax wasimposed to capture the windfall resulting from the depreciation. In November 1979,average interest rates were increased by 1.5 percent, and the maximum limit onlending rates was abolished. During the same month, nominal wages were raisedby 5 percent compared with a cost of living increase of 9 percent, thereby reducingreal wages. Between December 1979 and March 1980, four cyclones struckMauritius, and the oil price increases were much more than anticipated.Government spent a sizable sum on rehabilitation following the destruction causedby the cyclones. Realizing that it would be unable to meet most of the targets of theIMF program, the government canceled it.

A new stabilization program for 1980-81 was designed that took into account theimpact of the cyclones. Sugar production was expected to decline, leading to a realGDP decline of 4 percent and a major loss in foreign exchange. The aim was tolimit the balance of payments deficit on the current account to SDR 75 million. Thefiscal deficit was targeted at 15.2 percent of GDP. Revenue was to be raised by a 10percent surcharge on all taxes and fees. Expenditures were to be kept in check bycutting real wages and reducing food subsidies. The government complied with allthese policies. In July 1980, it increased consumer prices by 43 percent on rice and55 percent on flour.16 However, the actual balance of payments current accountdeficit was higher than the target. The standby projections had underestimated theshortfall of sugar output.

The stabilization program for 1982 was fairly successful. It expected adeterioration in the terms of trade of 6.8 percent, real GDP growth of 5 percent, andinflation of 25 percent. The aim was to keep the external account deficit and thefiscal deficit under 13 percent of GDP. This was to be achieved by an export growthof 14.6 percent, and imports were to rise marginally. The government budgetdeficit target was to be attained by real cuts in expenditure and increases inrevenues from increased sugar production. Actually, real GDP grew at 5.3 percent,and inflation was only 13.4 percent. Export growth exceeded the target, and importsdeclined by 13.3 percent, leading to an external current account deficit of 5.7percent of GDP. The government budget deficit was 12.8 percent of GDP.

The 1983 stabilization program also succeeded. The aim was to keep theexternal current account deficit (including transfers) at 4.6 percent of GDP.Inflation was to be brought down to 8.5 percent and the budget deficit to 9 percent ofGDP. This was to be achieved by maintaining flexible exchange rates and a

16. The subsidy on rice and flour was reduced from 60 percent to 38 percent following increasesin October 1979 and July 1980.

46 Successful Stabilization and Recouery in Mauritius

restrictive wage policy, limiting credit expansion, and decontrolling prices of anumber of items. The government was successful in fulfilling all policyagreements with the IMF. The wage award was only 3.5 percent compared withinflation of 5.6 percent, and price controls were lifted on twelve items in December1983. The number of items subject to quantitative restrictions was reduced inJanuary and March 1983. In February 1983, the rupee was pegged to a new, secretbasket of currencies leading to a real depreciation in the average effectiveexchange rate of 8.7 percent during the year.

The program for fiscal year 1985-86 consolidated the progress made earlier.The aim was to bring down the external current account deficit to 1.9 percent of GDPand the fiscal deficit (including grants) to 5.3 percent of GDP. This was to beachieved by maintaining a flexible exchange rate policy and restrictive wagepolicy, decreasing net domestic credit, eliminating all quantitative restrictions onimports, and decontrolling prices of all items, except kerosene, edible oils, soap,and toothpaste. All targets were achieved. Real GDP grew at 6.0 percent p.a., andthe inflation rate was 4.3 percent. The external current account was in surplus at1.8 percent of GDP for the first time since 1975. This was the result of rapid growthin EPZ exports and tourism earnings and a fall in oil prices.

Restructuring of Public FinanceThe reform process involved four means to reduce the fiscal deficit:

restraining current expenditures, especially on wages and subsidies, and shiftinginvestment from the social sectors (health, education, and housing) towardphysical infrastructure; making parastatals competitive and financially self-reliant, thereby stopping the drain on the budget; raising revenues through a taxreform and an increase in rates; and improving management of aid and debt.Each of these actions will be discussed in turn.

Redirection of Public Expenditure

The government agreed with the World Bank to curtail current expenditures oneducation during 1981-82 to 1983-84 without affecting adversely the quantity orquality of services. This was to be done by increasing the pupil-teacher ratio, byclosing down substandard schools, and by increasing efficiency in the teaching oforiental languages. It was also agreed to give priority to maintenance andrehabilitation of infrastructure and to postpone or cancel major new projects likethe new airport, the oil refinery, and a flour mill. Capital expenditures in activitieswith relatively low returns (tea, development works, and housing) were to bereduced. Further, all projects costing over 100 million rupees were to be reviewed bythe World Bank. The government agreed to specify economic criteria for selectionof major new projects.

Total government expenditures were almost constant in real terms during1981-84 and increased by only 3.4 percent during 1984-86 (Figure 4.5). However,current expenditures continued to rise during 1981-83 owing to the increase in debtservice payments. It was only during 1984-86 that current expenditures in realterms were stabilized. The ratio of most categories of expenditure to GDP weresignificantly reduced over the reform period. The share of investment in health,education, and housing was reduced from 13 percent of total capital outlays in 1982-83 to 10 percent during 1983-85. Investment in agriculture, tourism, and industryconstituted 20 percent of the total during 1983-85. During 1980-86, infrastructure

(Miion Rupees - Constnt Pries)

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P_ _ __°____°o

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*~~~~~~~~~~~~

T 1 T~~~~~~

f ;; ff~~~~~~~~~~~~~~~~~~~~~'

48 Successful Stabilization and Recovery in Mauritius

investment was 40 percent of total capital outlays. The MMM and PSM govemmentthat came to power in August 1982 abandoned the proposal to construct a new airport,a high priority of the Ramgoolam government. No major new projects were startedduring 1981-83. New guidelines were developed to evaluate public projects, and theywere applied in most cases. Social projects tended to escape scrutiny. Theincremental capital-output ratio (ICOR) of public outlays is estimated to be 5.0during 1982-86 compared with 6.3 for 1977-82 (World Bank 1987b).

The expenditure on education (capital and current) as a percentage of theoverall government budget steadily declined from 17.8 percent in 1979-80 to 13.4percent in 1985-86. Four substandard schools were closed. During this period, thepupil-teacher ratio increased form 27:1 to 32:1 in government primary schools andfrom 16:1 to 17:1 in government secondary schools. In primary schools no newteachers were hired after 1979. In secondary schools only ten new teachers wererecruited in 1982. Recruitment of teachers of oriental languages was stopped.Existing teachers had to cover more than one school wherever distances permittedsuch economies to be made.

Restructuring of Parastatals

Reforms took place in three parastatals. The number of relief workers on thepayroll of the Development Works Corporation was reduced from 14,000 in 1976 to4,000 in 1982. This was achieved by transferring workers to other agencies and byattrition. The government tried to transform DWC into a public contractor thatcompeted with private contractors. However, even by 1986, DWC was notfinancially self-reliant and was a substantial burden on the budget.

The reform of the Tea Development Authority focused on improvedmanagement in 1981. The 2,500 person work force was reduced 5 percent. Traineesand pluckers were converted into smallholders cultivating tea. They paid anominal rent on land owned by TDA. After initial progress, political pressuresseemed to prevent further restructuring for some time. The fall of tea prices in 1985caused a deterioration in TDA's financial situation. A new company, MauritiusTea Factories Company, was established in 1986 to manage TDA's tea factories.TDA's responsibility was reduced to providing training and extension servicesonly.

The Central Housing Authority was created in 1960 to build low-cost houses forvictims of cyclones. Of the 8,000 units to be built by 1980, CHA was able to build only2,000 houses at exorbitant costs (World Bank 1987b, p. 26). Since 1981, thegovernment has gradually increased rents on these housing units to cover costs ofmaintenance and provision of utilities. It also sold some of these units to tenants.CHA diversified its activities by bidding for construction contracts. Its financialposition did not improve, however, and its burden on the budget remained large.

Limited progress was made in parastatal reform. Many major parastatalscontinued to be a substantial budgetary burden. The government found it verydifficult politically to reduce overstaffing. The Ramgoolam government appearedto reverse the reform process in 1982, in the middle of the election campaign, when itpromised jobs to 20,000 unemployed people. Fortunately, the new MMM/PSMgovernment refused to confirm these promises.

The Policy Turnaround 49

Revenue Mobilization and Tax Reform

Government made a number of important changes in the taxation of sugar andof firms entitled to incentives under the EPZ and development certificate schemes.The rates of personal income tax were reduced. However, no comprehensive taxreform took place. Measures to raise revenues tended to be ad hoc. Surcharges wereimposed on import duties in 1981-82 and again in 1984-85. A sales tax at a rate of 5percent was introduced in 1982-83; basic goods were excluded from its purview.

Management of Foreign Aid and DebtBecause of its strategic location in the Indian Ocean, Mauritius has received

considerable aid from the United States, the United Kingdom, and France. In 1984,aid per capita (including food aid) was $35.5. During the period of intensivereforms, the Mauritian government asked the World Bank for help incoordinating aid. Consultative Group meetings took place in June 1983 and May1985, but aid coordination efforts did not prevent a substantial decline in netresources transferred to Mauritius (Table 4.2). Net resource transfers fromcommercial banks were negative during 1981-86 and offset the positive resourceflows from other sources.

Table 4.3 Gross Commitments, Net Resource Transfers, and Volume of Imports,1978-86

1978 1979 1980 1981 1982 1983 1984 1985 1986

Gross commitments (US$ millions)IDA and IBRD 30 -- 6 30 6 72 0 0 30IMF 11 -- 46 80 25 30 25 36 35

Bilateral organizationsOfficial developmentassistance 7 49 24 35 24 23 22 22 61

Other 13 5 33 18 55 3 18 22 41Commercial banks 6 50 45 0 40 1 48 6 37Suppliers credit 0 0 0 0 0 0 0 0 0Total (all sources) 133 114 190 168 179 135 114 98 204

Net resource transfers (US$ millions)IDA and IBRD 28 -3 3 18 0 -4 18 16 -7IMF 11 -. 46 67 25 15 -7 -13 -19

Bilateral organizations

Official developmentassistance 44 32 35 65 60 41 36 32 48

Other 8 12 13 26 9 8 9 2 14Commercial banks 37 44 21 -34 -1 -57 -7 -29 -6Suppliers credit 5 0 0 0 0 0 0 0 0Total (all sources) 134 129 119 121 79 -16 22 -19 30

Volume of imports, (1970=100)

Index number 253 236 213 196 170 170 185 209 215

Source: World Debt Tables (various years); OECD (various years).

50 Successful Stabilization and Recovery in Mauritius

In 1981, the government sought assistance in improving its debt management.Legislation was passed entrusting only the finance minister with the responsibilityof contracting new loans. The government announced that it would manageexternal borrowing so that the debt service ratio in a normal sugar crop year wouldnot exceed 15 percent of exports (goods and nonfactor services). However, due tocommercial borrowing during 1977-80, the ratio of debt service to exports (gnfs)increased from 5.8 percent in 1980 to a peak of 16.2 percent in 1983.

Policy Change in Agriculture

Almost 98 percent of cultivable land was already in use in 1980 and there was asevere land constraint. The aim of reforms was to improve the productivity of thesugar sector, thereby releasing land for local production of imported food items.The government agreed with the World Bank that this aim was to be achievedthrough the following measures:

* a review of price incentives for nonsugar agriculture;* a careful review of tea and rice production possibilities; and* promotion of the development of livestock and fisheries.

The World Bank was in favor of reducing immediately the sugar tax, but thegovernment insisted on establishing a Commission of Inquiry to examine thesugar sector's problems and acting upon its recommendations.

Sugar Sector

A preparatory unit for the Sugar Commission was established in September1981, but controversy over the appointment of the members of the commissionprevented any further action till after the 1982 elections. The commission wasappointed in December 1982 under the chairmanship of Dragoslav Avramovic, awell-known World Bank and UNCTAD expert with a wealth of developmentexperience. Other members included Jagadhish Manrakhan, Vice-Chancellor ofthe University of Mauritius, and Ramsamy Chedumbarum Pillay, the Director ofAudit, who was replaced on the commission by Ramakrishna Sithanen, a transporteconomist, in July 1983. The small size of the commission was a surprise to someobservers, but the government did not envisage a group that would represent allinterested parties. The commission's focus was on establishing a factual base andon obtaining expert opinion from outside Mauritius.

Two reports (one by Avramovic and a dissenting report by Manrakhan andSithanen) were submitted to the government in early 1984. Avramovic concludedthat Mauritius had a strong comparative advantage in sugar, but that the sugarindustry was overtaxed and its productivity was held back by fragmentation of millcapacity, as well as by submarginal yields in the smallholder sector.1 7 On the taxissue, Avramovic pointed out that the high rates of export duty were discouraginginvestment, thereby putting into question the capacity of Mauritius to maintainsugar output. He argued that tax rates should be reduced over three years, and thenthe export duty should be replaced by an excess profits tax. To calculate a company'sliability under the new tax, it would be necessary to establish a base line valuationof its assets, compile an index to update the value of assets annually, estimate theremaining life of assets to calculate depreciation, and establish a "standard" real

17. Avramovic also recommended that Mauritius should sell its expertise in sugar technology toother sugar-producing countries in Africa.

The Policy Turnaround 51

return on capital. Avramovic left the determination of the "standard" return topublic policy and suggested that any profits over and above the "standard" should betaxed at 85 to 90 percent.

Avramovic recognized the need for centralization of sugar mills to take fulladvantage of significant economies of scale. For years, this process ofconsolidation of capacity occurred naturally, and the number of mills declinedfrom thirty-eight in 1939 to twenty-one in 1970, when the government prohibitedclosures to avoid unemployment. Avramovic recommended that the governmentlift this prohibition. He rejected the view that smallholder productivity was heldback by low quality land. He favored the proposal made by sugar estates that theywould provide smallholders (on a cost basis) with technical assistance,supervision, services for land preparation, and transport to raise productivity. Healso visualized the establishment of a Sugar Authority to undertake policy andcoordination functions.

The dissenting report by Manrakhan and Sithanen concluded that "poorhandling of [the] human factor," and not the deteriorating financial position of theindustry, should be the object of inquiry. It pointed to racial prejudice inemployment, exploitation of smallholders, neglect of workers' welfare,inappropriate accounting practices, and the lack of full disclosure by estate ownersof assets and of shareholders. Manrakhan and Sithanen preferred the existingexport tax, but they suggested a broadening of the exemption for smallholders.Their proposals on the Sugar Authority and centralization of mills were not verydifferent from those of Avramovic. To raise smallholder productivity, thedissenting commissioners sought government help in the form of credit, inputs,and extension services instead of intervention by estates.

Based on the recommendations of these two reports, the Mauritius SugarAuthority was established in July 1984 and was entrusted with the preparation of aSugar Action Plan (SAP). The authority invited Mauritius's chamber ofagriculture to prepare a master plan. SAP was published in February 1985, and itwas largely based on the master plan. Furthermore, in September 1985, Mauritiusobtained support from the World Bank for a sugar industry project. The unfoldingof the policy process in the case of the sugar sector illustrates very well Mauritius'sstyle in policy making on a very sensitive issue. The process was an elaborate one,and it took a very long time. All relevant parties had an opportunity to express theirviews. Much effort was spent on defining a consensus.

The government revised the sugar export duty in March 1985 by broadening theexemption from 75 tonnes to 1,000 tonnes and by applying progressive tax rates toincremental rather than to total exports (see note c, Table 2.2). The reform provideda tax relief of about l00 million rupees or 3.3 percent of total revenue collected in theprevious year. The average tax rate for all sugar producers was reduced from 17.9percent to 13.9 percent. Even a large estate exporting, say, 6,000 tonnes had itsaverage tax rate lowered from 23.6 percent to 17 percent. A start was made inimproving the accountability of sugar corporations by establishing separateaccounts for plantations and mills and by adopting standardized accountingformats. Later on, an accounts manual and asset valuation guidelines were issuedand used. Although these developments occurred after the period we are studying, itis important to note that the government intended to change the basis for sugartaxation along the lines proposed by Avramovic. The tax was levied (starting July1988) on the company's surplus after offsetting all standard costs includingdepreciation (on a full replacement basis) and a 1.5 percent rate of return on fixedassets.

52 Successful Stabilization and Recovery in Ma uritius

The government lifted the ban on mill closures in 1985, and two mills were shutdown. The private industry was asked to provide a list of additional mills thatwould be closed. Such a list would permit the government to plan for a gradualredeployment of redundant labor. The government established four farm servicecenters to provide smallholders with inputs and extension services. Over time,twelve additional centers are to be established.

During the reform period, 1980-86, sugar production continued to fluctuate due tocyclones and drought. But since 1985, sugar production has been above the long-runtrend (Figure 2.10). The contribution of sugar to GDP, exports and employmentcontinued to decline, however (Table 4.4). Real wages continued to decline at 1.9percent p.a. since the late 1970s. The gap between average labor earnings in thesugar sector and manufacturing was considerably narrowed (Figure 2.7). Millingcosts declined at a rate of 1.5 percent p.a. during the first half of 1980s, and by 1985-86 the average return on capital (after depreciation) was 5 percent (Government ofMauritius 1988). Unit cane growing costs on large estates had also declined, butsugar cultivation on estates remained unprofitable. Financial profitability of thesugar industry in Mauritius remains low, but this is largely a reflection of onerouslabor costs mandated by current labor laws and the tax regime for sugar. Physicalproductivity in Mauritius is high in relation to other sugar-producing countries.This is true of both cane cultivation and milling (World Bank 1986a, pp. 81, 83).

Table 4.4 Selected Indicators of Sugar Sector, 1976-86

Indicator 1976-79 1980-86

Production (thousand tonnes) 688 643Sugar exports/total exports (%) 71 62Yield (tonnes cane/hectare) 79 73

Employment (thousands) 54 48Share of sugar in total employment (%) 27 24

Share of sugar in GDP 17 11

Export earnings (US$ million) 220.5 238.0

Share of sugar in total export earnings (%) 69 54

Note: Includes estates and small holdings.Source: World Bank (1986a).

Nonsugar Agriculture

A major effort was made to review agricultural pricing issues in the 1980s.Various committees were established and a national seminar was held. However,in view of approaching general elections in 1982, the government found it verydifficult to finalize its views. The white paper on agricultural diversification and

The Policy Turnaround 53

food policy did not emerge till February 1983. Despite this seeming ambivalence,government made significant alterations in guaranteed producer prices. Forexample, the potato price was reduced in real terms (after deflation by the cost ofliving index) by 36 percent during 1980-83 and further by 34 percent during 1983-86(Table A-14). These declines notwithstanding, potato production continued to rise(Table 2.5). Having achieved self-sufficiency by raising potato prices very sharplyduring the 1970s, the government reversed its price policy. The guaranteed realprice for onions was also reduced sharply during the 1980s, even though rising localproduction had not eliminated imports. Government policy for maize was quitedifferent, however. The real maize price was raised by 38 percent during 1980-86 toprovide strong incentives for import substitution. In the absence of any studycomparing the government controlled prices with border prices, it is difficult toassess the economic rationale of these policy developments.

The government's attempt to reduce budgetary outlays and to alter the pattern offood consumption by phasing out consumer price subsidies on rice and wheat provedto be very sensitive politically. The retail price of wheat flour was raised by 27percent in real terms during 1980-84 and by 8 percent in the case of rice. Thebudgetary subsidy amounted to 111 million rupees in 1978-79, 230 million rupees, apeak, in 1981-82, and 72 million rupees in 1985-86. Both Legum (1984, p. B229) andLatham-Koenig (1984, p. 168) concluded that reduction of such subsidies was verydifficult politically and was one of the factors leading to the collapse of the MMMand PSM government in 1983.

The government encouraged meat and milk production by making availablesome "crown land" under forest for ranchers. It also set up a National Dairy Boardin 1985 that guaranteed prices to milk producers. Milk production rose from 7,500tonnes in 1981 to 11,500 tonnes in 1986. Self-sufficiency was achieved in pork,poultry, and venison. The government approached the World Bank for technicalassistance to develop fishing, but the World Bank regarded the government'sdesire to test the feasibility of promoting deep sea fishing as overly ambitious. Thegovernment then requested FAO and the European Development Fund forassistance. The government succeeded in formulating a development program forfresh water and marine aquaculture, lagoonal and other artisanal fisheries, bankfisheries, and commercial tuna fishing. Fish production rose from 3,716 tonnes in1981 to 8,012 tonnes in 1986, and Mauritius became a net exporter.

The government appointed a study group in 1983 to draw up a program torestructure the Tea Development Authority. It took two years to develop a plan ofaction with the help of expatriate experts. Very favorable tea prices in 1984stimulated considerable interest among TDA employees, and many agreed tobecome smallholders. Tea production rose sharply (Table 2.5). However, thisupsurge proved to be temporary, and TDA's problems reemerged as internationaltea prices weakened.

Policy Change in Manufacturing

Perhaps the most successful reform involved the manufacturing sector.Flexible exchange rate and wage restraint introduced very early in the 1980s helpedthe EPZ to strengthen its international competitiveness and to transformMauritius's overall economic and financial situation. Supporting these newpolicies were a number of other measures that elicited a strong supply-sideresponse.

54 Successfui Stabilization and Recovery in Mauritius

The government focused on attracting foreign investment. Double taxationagreements were signed with several governments of capital exporting countries.The Mauritius Export Development and Investment Authority (MEDIA) wasestablished in 1985 to attract foreign investors and to develop industrial sites. TheIndustrial Coordination Unit was created to be a "one-stop shop" where investorscould obtain all government clearances and permits. Furthermore, theDevelopment Bank of Mauritius (DBM) established an export credit guaranteescheme to provide collateral support to commercial banks. It covered banks againstthe risk of default by exporters on preshipment and postshipment advances. Inaddition, the DBM started an export credit insurance scheme that protectedexporters against the risk of default by importers, rejection by importers of goodssupplied, and political or other events delaying payment by importers.

The government agreed in principle (in the context of the second World Bankstructural adjustment loan) to integrate the two separate incentive regimes for theEPZ and DC enterprises. The first move was to improve the custom duty drawbacksystem so that non-EPZ enterprises could get timely refunds on import levies paidby them on intermediate goods used in production for exports. In June 1984, thecorporate income tax was reduced from 66 percent to 35 percent, and non-EPZenterprises were allowed corporate tax concessions on their export business. Thecorporate tax rate was reduced by 2 percent for each 10 percent of output exported. Thefollowing year saw a major step forward on the tax front. For various sectorsdifferent tax regimes had slowly evolved that were distorting resourceallocation. 18 This was particularly the case for DC and EPZ companies. In June1985, both types of companies were given the choice of retaining their respectiveprivileges or paying a corporate tax of 15 percent with dividends exempted for thefirst decade of the firm's operations. Most firms chose the latter arrangement,thereby closing the loophole under earlier law that enabled firms to close shop afterthe tax holiday expired and then start anew with a new certificate.

Trade policy reform proved to be a thorny issue for a considerable time,however. Neither the government nor the World Bank had any clear idea of how theimport protection system had developed during the 1970s. No analysis of this topicwas undertaken till 1983 when two studies were launched in the context of the SAL IIagreement between the government and the Bank. The government decided inSeptember 1983 not to impose any more quantitative restrictions on imports. Itreplaced existing QRs with tariffs in two steps (July 1984 and January 1985). Thenew tariff rates were substantially below the tariff equivalent of quotas. The WorldBank had expected the government to prepare an action plan (based on the analysisin the two SAL studies) for reducing the average level and the variability of importduties. The government did not take this step, however. It argued that furtherliberalization of imports might trigger balance of payment pressures, a loss of

18. "An EPZ company enjoyed complete tax exemption for the first 10 years and was taxable athalf the normal rate during years 11 to 15 and a quarter of the rate during years 16 to 20, whiledividends were tax free for any consecutive 5 years during the first 10 years; a companyholding and Export Service Certificate paid corporate tax at a rate of 10 percent and enjoyed thesame dividend concessions as an EPZ company; under the Hotel Management (Incentives)Schemes..., hotel companies got a partial tax holiday for 15 years, with the rate of corporate taxfor the first 8 years being 10 percent, rising to 15 percent for the subsequent 7 years; and, finally,a company with a Development Certificate or Agricultural Development Certificate enjoyed acorporate tax holiday for 5 to 8 years with an exemption from payment of income tax ondividends similar to that of an EPZ company" (Bheenick and Schapiro 1989, p. 105).

The Policy Turnaround 55

external reserves and a fall in public revenues. The government was alsoconcerned about the adverse impact of lower import duties on the financial positionof DC enterprises producing import substitutes. A number of intensive discussionsbetween the government and the Bank failed to break the impasse. In January 1986some high tariffs on imports of transport equipment were lowered on average by 25percent. The government was not ready, however, to agree to a schedule for phasedrationalization of the overall tariff structure. Such an agreement was not reachedtill July 1987, which is beyond the time-frame of our study.

The government reduced the number of manufactured products subject to pricecontrols from forty in 1983 to eight in 1985. The remaining controls were onessential products such as kerosene, soap, and toothpaste. The government alsoreduced items subject to maximum mark-up at the retail stage from forty in 1983 toeighteen in 1985. Such a ceiling on mark-up continued largely on agricultureproducts such as maize, potatoes, rice, beans, onions, garlic, tumeric, andgroundnuts.

The manufacturing sector, particularly EPZ firms, responded vigorously to thechanged policy environment. EPZ value added in constant prices expanded at 16percent p.a. during 1981-86 (Table 2.7), while the corresponding figure for DC firmswas 3 percent p.a. The share of EPZ in total manufacturing investment increasedfrom 27 percent in 1979 to 52 percent in 1985. These firms created 30,000 new jobsduring the 1980-86 period and were the major instrument for reducing economy-wide unemployment from 17 percent to 12 percent. The proportion of males in totalEPZ jobs increased from 18 percent to 31 percent during this time. Mauritius joinedthe ranks of the biggest knitwear exporters in the world.

The government is aware of the remarkable success of its EPZ policy and itsriskiness. The degree of concentration on exports of textiles and garments hasincreased from 69 percent to 83 percent during 1980-87. The reliance on the EEC andUS market is very heavy, and a recession could hurt the momentum of exports.Furthermore, the EPZ remains an enclave. It has little connection with the rest ofthe economy. Bheenick and Schapiro (1989, p. 119) note that although someancillary industries (buttons, braid, trimmings) and backward linkages (thread,boxes, bags) have developed, there is potential for much more. These authorsrecommend providing incentives to encourage subcontracting between EPZ and DCfirms.

Policy Change in TourismThere was a considerable fall in tourist arrivals during the early 1980s (Table

4.5). This setback was caused by temporary factors such as cyclones, droughts (andthe accompanying bad publicity), as well as policy problems. Governmentundertook two studies, as part of SAL I, which identified a number of issues.

First, the government decided to improve air access by introducing charteredflights for the first time. However, the decision regarding chartered flights couldnot be implemented without hurting the operations of Air Mauritius. Someobservers claim that the government received bad advice from foreign experts onthis issue. Instead, Air Mauritius acquired two new planes and expanded itsservices by adding a new link to Singapore, by including Paris on its London route,and by starting a flight to Zurich via Rome.

Second, the government decided to strengthen promotional efforts in Europe byopening an office in London in October 1985. Promotion focused on independenttourists and on cultural tourists. Third, the government decided to expand hotel

56 Sucomfi Stabiliation and Recowey in Mauritiu s

capacity. The number of hotel beds increased substantially (Table 4.5). However,the government encountered difficulties in implementing a scheme that wouldlicense "bungalow" owners to provide rooms to tourists. The government closedseveral beaches to the Mauritian public with a view to reserve facilities for tourists.This move has encountered some hostility. Tourist arrivals increased appreciably(Table 4.5). There were corresponding increases in gross earnings and in valueadded.

Table 4.5 Indicators of Tourism, 1979, 1982, 1986

Indicator 1979 1982 1986

Tourist arrivals (thousands) 128.4 118.4 165.3

Gross earnings (US$ millions) 31.9 41A 88.1

Number of hotel beds (thousands) 4.0 4.5 6.6

Value added/GDP (%) 2.4 2A 2.8

Employment (thousands) 4.0 4.2 4.7

Sources: Economist Intelligence Unit (various years); Government of Mauritius (various years).

5

Lessons of Experience

Is the Mauritius case relevant for Sub-Saharan Africa? Some observers claimthat it is not, because basic conditions in Mauritius are very different from those ina "typical" African country. This debate is analogous to the one about thereplicability of the spectacular industrialization experience of South Korea. We donot deny the many special features of Mauritius (or Korea for that matter) thatmake it difficult to transfer its experience in specific terms to other countries. Allsuch transfers have to be adapted to the particular circumstances of the receivingcountry. This adaptation is a creative and innovative process, not a mechanicalone. It is useful to question the concept of a "typical" African country since so muchintercountry diversity exists within this region. Behind this diversity, however, theanalyst can discover common patterns, shared problems, and similar policyresponses. It is at this general level that useful comparisons can be made andreplicable lessons of experience identified.

The Mauritian problem in 1979 had three major dimensions. First, aggregatedemand had been mismanaged since 1973. Consumption and investment had beenallowed to expand far too rapidly during the sugar boom, the exchange rate had beenallowed to appreciate in 1975-78, and wage levels had become excessive. Second, thegovernment had a number of goals (economic growth with efficiency, rapidexpansion of employment, and reduction of inequality), but it had not articulatedclearly the conflicts among these goals and the related trade-offs. A number ofquestionable policies resulted. There were elaborate labor laws, large wagedifferentials unrelated to productivity, and trade union pressures that impeded thelabor market. The sugar export duty had become excessive, and its rate structureinduced a break up of large estates into relatively inefficient small holdings.There was open-ended protection for an indefinite period against imports given toDC enterprises in the manufacturing sector, at the expense of consumers. Third, the"politics of repression" during 1971-75 was followed by the "politics ofaccommodation" during 1976-79. In both periods, but particularly in the second one,the political imperative of governing a deeply stratified society according to therules of parliamentary democracy had reduced economic policy to the lowestcommon denominator. The government coalition in the late 1970s, headed byPrime Minister Ramgoolam, tended to react passively to events. It had a

57

58 Successfid Stabilixation and Recovery in Mauritius

diminishing capacity to lead society out of its growing economic and financialtroubles.

The distortions in policy in Mauritius, mentioned above, are hardly peculiar tothis country. They exist everywhere in some form or shape. What was distinctiveabout Mauritius in the 1970s was the relative mildness of policy distortions (Gulhati1990). Aggregate demand had been mismanaged but not to the extent ofprecipitating a disastrous financial crisis as in the Sudan or Zambia or Zaire.Factor prices in Mauritius did get out of alignment, but the extent of disequilibriumwas moderate. The sugar tax became excessive, but it did not lead to a large declinein sugar exports as happened in Ghana with respect to cocoa exports or in Tanzaniawith respect to all exports.

It is remarkable that even the relatively mild disequilibrium in Mauritius atthe end of the 1970s brought about a societal response. Prime Minister Ramgoolamwas pressured and persuaded to change course. The open political system inMauritius generated sufficiently strong feedback to party and cabinet membersthat government collectively became concerned about the deteriorating economicand financial situation. The turnaround occurred when the Finance Minister andthe Bank of Mauritius, whose warnings had been ignored during the late 1970s,began to gain influence vis-a-vis the spending ministries. First, the IMF and thenthe World Bank were requested to advise the government on policy and to providefinancial help. Although these international organizations joined the Mauritianpolicy circle, their role was defined and orchestrated by the finance minister. Thesequence of policy packages adopted by the government during the 1980s alwayswent through a detailed process of examination by government officials and ofdiscussion within the Cabinet. Subsequently, they were debated within thelegislature and even more widely in the media.

The reform program was undertaken in two distinct steps. From 1979 to 1982 theemphasis was on macroeconomic stabilization, mainly through curtailment ofaggregate demand. This involved quite a painful adjustment consisting of risingunemployment, declining real wages, and disciplined austerity. The governmentpersevered with reform even though it meant a considerable loss in the momentumof economic growth and a perceptible setback in the welfare of low-income groups.Very little was done to "sweeten the pill" for underprivileged social groups.Attempts by the World Bank to get the government to tackle key sectoral issues (forexample, sugar) did not make much headway during this period.

The second step in the reform program was taken after the 1982 generalelection. A number of issues at the sectoral level were put on the policy agendawhere they remained for quite a long time while studies were commissioned,reports were analyzed, and policy options were debated. The process for preparingpolicy action was elaborate and time consuming. In the case of sugar and theimport protection regime for manufacturing DC enterprises, there was a genuineneed for collecting data and analyzing it. Furthermore, it was necessary to consultwith interested parties and to build a measure of agreement on how and when totackle the key issues. Full agreement was not reached, of course, in the case ofsugar restructuring. Two sugar commissioners issued a dissenting report.Although the government was able to implement fairly quickly therecommendations of expert studies to abolish QRs on imports, it took quite a longtime to revise the schedule of import tariffs.

Three different governments were involved in carrying out reforms over the1979-86 period, but the basic thrust of new policies was sustained. This was aremarkable accomplishment. Even the leftist MMM/PSM government adhered to

Lessons of Experience 59

the main line of policy developed by the predecessor MLP/PMSD government.Pragmatism triumphed over ideology. The national mood seemed to be to solveoperational problems in a workman-like manner.

Mauritius can be credited with many achievements. The economy wasstabilized. The international competitiveness of the Export Processing Zone wasrestored. Unemployment was reduced from a peak of 22 percent in 1983 to 4 percentin 1987. Progress was made in improving the fmancial viability of sugar estates,in raising yield levels of sugar smallholders, and in increasing food production.The economy's supply response during recent years has been impressive. Anumber of problems remain, however. The EPZ is heavily specialized in the exportsof textile and apparel goods and in the markets of the EEC and United States.Manufactured exports remain vulnerable to non-tariff-barrier restrictions onimports in developed countries and to a recession in developed countries. Manydevelopment certificate enterprises continue to be sheltered behind high protection,and their competitiveness and productivity remain low. The budget is still strainedby substantial subsidies to rice and wheat flour, as well as by a number of low-productivity public enterprises. Labor laws continue to impede smooth functioningof the labor market.

Three lessons can be drawn from Mauritius's experience of stabilization andrecovery. First, the sharp recovery in the economy would have been much lesslikely if reforms had followed an acute and protracted crisis instead of beingtriggered by a relatively mild disequilibrium. It is much more difficult to climb outof a deep hole than to re-establish normalcy after a relatively brief setback. Manyeconomic processes tend to be cumulative so that once decline sets in, the chances offurther deterioration are enhanced. It is important, therefore, to establish warningsignals and feedback mechanisms that can alert top leaders to emerging policyproblems as early as possible. In Mauritius these mechanisms are part and parcelof the democratic culture, but workable arrangements in nondemocratic regimescan also be invented. For example, the feedback mechanisms in South Korea underthe authoritarian rule of President Chung Hee Park were effective.

Second, the sharp recovery would have been less impressive if Mauritius did nothave access to the relatively large EEC sugar quota. During the reform period of1980-86, the EEC sugar prices averaged 54 percent above the international freemarket price. This EEC dividend amounted to $800 million (Table A-5). Itenhanced Mauritius's import capacity by 19 percent. We conclude, therefore, thatthe country's geopolitical advantages on the one hand and its own foreign policy onthe other, both of which were responsible for the sugar quota, underpinned thereform effort. Mauritius had to make net resource transfers to its commercialcreditors during the reform period. Donor assistance proved incapable of offsettingthe negative resource transfer. In the absence of the EEC dividend, a seriousforeign exchange constraint would have circumscribed the expansion of the EPZ.The lesson here is that reforming countries have to play all their cards well, not justthe economic ones. Links between economic and foreign policy must be recognized.

Third, there is a lesson to be learned from the way in which Mauritius handlednegotiations with the international organizations. Many Sub-Saharan countrieshave had to negotiate policy agreements with the IMF and the World Bank underconsiderable financial pressure and therefore with their bargaining powerimpaired. Under these conditions, agreements have been signed without sufficientcommitment on the part of governments. This eventuality was avoided, by andlarge, in Mauritius. Given the general orientation of its economic policy, there wasnever much disagreement in principle with the international organizations on the

60 Sucoessfil Stabilization and Revouery in Mauritius

direction of desired reforms. Judgments differed, however, on detailed issues ofdesign and on the speed of change of policies. Whenever differences arose, the twosides would disengage temporarily, reconsider their views, and either reach anagreement or agree to disagree. The government could afford to maintain thisposture because the initial disequilibrium was relatively moderate, and itcontinued to have access to private sources of finance. The advantage to bothMauritius and the international organizations was that credibility and mutualrespect were maintained throughout the process.

References

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Archer, Brian, and Stephen Wanhill. 1982. The Value of Tourism to Mauritius.Consultant Study for the World Bank. Processed.

Bheenick, R., and M.O. Schapiro. 1989. 'Mauritius: A Case Study of ExportProcessing Zone." In Successful Development in Africa: Case Studies ofProjects and Policies. EDI Development Policy Case Series, Analytical CaseStudies No. 1. Washington D.C.: World Bank.

Cooke, M.W. 1982. "Strategic Considerations." In Frederica M. Bunge, ed.,Indian Ocean: Five Island Countries. Washington, D.C.: AmericanUniversity.

Economist Intelligence Unit. various years. Mauritius Country Profile. London:EIU Ltd.

FAO (U.N. Food and Agriculture Organization). 1986. Mauritius: AgriculturalDiversification Project, Reconnaissance Mission FAO/World BankCooperative Program Report 75/86 CP-MRI 5 of June 6. Rome.

Findlay, Ronald, and Stanislaw Wellisz. 1988. A Comparative Study of FiveSmall Open Economies. Conference on Political Economy of Poverty,Equity and Growth, New Delhi, January 10, 1987. Processed.

Government of Mauritius. 1984a. Industrial Policy Review. Report by Center forDevelopment Technology, Port Louis, Mauritius. August.

I 1984b. Report of the Commission of Inquiry on the Sugar Industry. PortLouis, Mauritius.

61

62 Successfil Stabilization and Recovery in Mauritius

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* 1986. National Accounts of Mauritius, 1986. Central Statistical Office,

Ministry of Economic Planning and Development, Port Louis, Mauritius.

…----* 1987. Digest of Agricultural Statistics. Central Statistical Office,Ministry of Economic Planning and Development, Port Louis, Mauritius.

* 1988. Sugar Industry Efficiency Study. Study by Food Studies Group,U.K Ministry of Agriculture, Fisheries and Natural Resources, Port Louis,Mauritius. June.

* various years. International Travel and Tourism Statistics. CentralStatistical Office, Ministry of Economic Planning and Development. PortLouis, Mauritius.

Greenaway, D., and C. Milner. 1989. "Nominal and Effective Tariffs in a SmallIndustrializing Economy: The Case of Mauritius." Applied Economics,vol. 21, no. 8

Gulhati, Ravi. 1990. Making of Economic Policy in Africa. Washington, D.C.:Economic Development Institute of the World Bank.

Haggard, Stephen, and Robert Kaufman. 1989. "The Politics of Stabilization andStructural Adjustment." In Jeffrey Sachs, ed., Developing Country Debt andEconomic Performance, vol. 1. Chicago: University of Chicago Press.

Houbert, Jean. 1981. "Mauritius: Independence and Dependence." The Journal ofModern African Studies, vol. 19, no. 1, pp. 75-105.

ILO (International Labor Organization). 1985. Mauritius: Study of GovernmentRegulation of Wages and Industrial Relations in the Private Sector. DraftFinal Report. Geneva.

IMF (International Monetary Fund). various years. Balance of PaymentsYearbook. Washington, D.C.

. various years. Government Finance Statistics Yearbook. Washington,D.C.

Khan, J. 1983. "Diego Garcia: The Militarization of an Indian Ocean Island." InRobin Cohen, ed., African Islands and Enclaves. Beverly Hills, Calif.:Sage Publications.

eference 63

Lamusse, Ronald. 1980. "Labor Policy in the Plantation Islands." WorldDevelopment, vol. 8., pp. 1035-50.

Latham-Koenig, A. 1984. 'Mauritius: Political Volteface in the Star of the IndianOcean." The Round Table No. 290, pp. 166-73.

Legum, Colin, ed. various years. African Contemporary Record. London:Africana Publishing Corp.

Lutchmeenaraidoo, S. 1983. Budget Speech, 1983-84. Port Louis, Mauritius:Government Printer.

Mannick, A.R. 1979. Mauritius: The Development of a Plural Society. London:Spokesman.

Meade, J. E. 1961. Report to the Government of Mauritius: The Economic andSocial Structure of Mauritius. Port Louis: Government of Mauritius.

…____. 1967. "Population Explosion, The Standard of Living and SocialConflict." Economic Journal, vol. 77, no. 306.

Minogue, Martin. 1976. "The Public Administration in Mauritius." Journal ofAdministration Overseas, London: Her Majesty's Stationery Office. pp.160-66.

…____. 1983. "Mauritius: Political, Economic and Social Development in aSmall Island." Manchester Papers on Development 8 (November): 31-76.

Mulloo, A. 1982. Our Struggle: 20th Century Mauritius. New Delhi: Vision Books.

OECD (Organization for Economic Cooperation and Development). various years.Geographical Distribution of Financial Flows to Developing Countries,Paris.

Riviere, Lindsay. 1982. Historical Dictionary of Mauritius. London: TheScarecrow Press.

Selwyn, Percy. 1983. "Mauritius: The Meade Report Twenty Years After." InRobin Cohen, ed., African Islands and Enclaves. London: SagePublications.

Simmons, A.S. 1982. Modern Mauritius: The Politics of Decolonization.Bloomington: Indiana University Press.

UNCTAD. various years. Handbook of International Trade and DevelopmentStatistics. New York.

UNDP-IBRD (United Nations Development Program-International Bank forReconstruction and Development). 1982. Analysis of the Economic Impact ofAlternative Air Access Policies. Prepared by George J. Grundig andAssociates. San Francisco.

64 Successful Stabilization and Recovery in Mauritius

World Bank. 1978. The Economy of Mauritius: A Basic Economic Report. Report1509-MAS. Eastern Africa Region. Washington, D.C. February.

. 1980. Mauritius: Recent Economic Development and Future Prospects.

Report 2962-MAS. Eastern Africa Region. Washington, D.C. September.

…____. 1981. Mauritius: Tea Development Authority Project. ProjectPerformance Audit Report. Operations Evaluation Department.Washington, D.C.

_. 1982. Mauritius: Economic Memorandum, Recent Developments and

Prospects. A World Bank Country Study. Washington, D.C.

1983. Mauritius: Agriculture Sector Memorandum. Eastern AfricaProjects Department. Washington, D.C.

-__ 1984. Social Data, 3d ed. Baltimore, MD: Johns Hopkins UniversityPress for the World Bank.

- - - - -- 1985. Mauritius: Adjustment and Growth, Country EconomicMemorandum. Report 5533-MAS. Eastern and Southern Africa Region.Washington, D.C. April.

-. 1986a. Mauritius: The Sugar Sector, Problems and Prospects. Report5812-MAS. Eastern and Southern Africa Region. Washington, D.C. March.

…____. 1986b. Mauritius: Sugar Industry Project. Report P-4349 MAS.Washington, D.C. June.

. 1986c. Mauritius: Sugar Industry Project. Report 6092-MAS. Eastern

and Southern Africa Region, Washington, D.C. June.

. 1987a. Mauritius: Nonfinancial Public Enterprises. Report 6497-MAS.Eastern and Southern Africa Region. Washington, D.C.

_. 1987b. Program Performance Audit Report. Report 6870. OperationsEvaluation Department. Washington, D.C. June.

…____. 1988. Mauritius: Industrial Finance Project. Report 6708-MAS.Industry and Energy Division, Eastern Africa Department. Washington,D.C. March.

__ _. 1989a. Mauritius: Industrial Finance Project. Industry and EnergyDivision, Eastern Africa Department. Washington, D.C.

… …. 1989b. Mauritius: Managing Success. Africa Regional Office.Washington, D.C.

References 65

. World Debt Tables. various years. Washington, D.C.

…____. World Development Report. various years. New York: Oxford

University Press.

- - - - -- World Tables. various years. Baltimore, MD: Johns Hopkins

University Press.

Appendix Tables

67

I I I

Appendix Table 69

Table A-1 Selected Economic Indicators, Selected Years 1966-86(percent of GDP)

Comparators 1986

Middkeincome Developing

Indicator 1966-68 1972-74 1978-80 1984-86 countries countries

National accounts

Value added in agriculture 22.3 19.9 18.7 15.3 15 19Value added in industry 19.3 20.1 22.0 23.3 36 36

(of which manufacturing) 11.9 13.5 12.8 14.8 22 21

Resource balancea 2.1 -2.8 -14.7 -0.3 1 -1Exports 572 62.0 47.9 52.7 22 19Imports 55.1 64.8 62.6 53.0 21 20

Total consumption 80.2 78.1 87.2 77.8 76 76

Gross domestic investment 21.0 33.9 27.9 24.0 23 24

Gross domestic savings 19.8 21.9 12.8 22.2 24 24

Government finance

Current revenue(excluding grants) 18.3 15.2 19.7 20.8 24 23

ExpendituresEducation 2.9 4.2 4.9 3.5 3 3General public services 2A 3A 5.4 4.2 2 2Heslth services 1.7 3.1 4.2 2.2 6 6Economic services 4.5 5.0 4.2 3.4 1 1Wages and salaries 9.9 14.1 9.9 8.9 - -.

Total expenditure 24.8 19.7 27.9 25.2 28 26Current 19.6 15.2 22.7 22.2 - -.

Capital 5.2 4.5 5.2 3.0 - --

Actual debt service(% of exports)a -- 1.0 4.1 11.3 21 20

a. goods and nonfactor services.Sources: World Tables (1987); IMF (various years), Government Finance Statistics Yearbook.

70 Successfil Stablization and Reovery in Mauiiue

Table A-2 Selected Social Indicators, Selected Years 1965-86

Comparators 1986

Middle -income Developing

Indicator 1965 1973 1980 1986 countries countries

Area under agriculture(% of total) 55 62 62 62 - -

GNP per capita a(constant 1980 US$) 300 410 1200 1160 1040 530

Total population (thousands) 755 866 957 1032 1268 3761Urban population (% of total) 37 44 52 52 - -

Population growth rate(decade ending) 3.0 1.7 1.5 1A 2.3 2.0

Total labor force (thousands) 227 280 331 400 - -

Agriculture (% of total) 37 31 29 28 43 62Industry (% of total) 25 25 24 24 23 16

Percentage of private incomereceived byHighest 20% of households 51 4 5 b 61 -- - -

Lowest 20% of households 5 5 4Estimated population below

absolute poverty incomec(%):Urban - - 12d

Rural - - 12 --

Life expectancy at birth (years) 61 63 65 66 67 61

Education: enrollment ratios

Primary total 101 107 106 106 104 101Male 105 108 105 105 109 110Female 97 106 106 106 101 92

Secondary total 26 39 51 51 49 39Male 34 42 53 53 57 45Female 18 35 49 49 51 33

Tertiary total - 1 2 2 14 8Pupil-teacher ratioPrimary 34 26 22 -- - -Secondary 22 30 - --

a. World Bank Atlas method of converting data in national currency to US dollars. The conversionfactor for any year is the average exchange rate for that year and the two preceding years, adjusted fordifferences in rates of inflation between the country and United States. The official exchange rate isusualy used, but when it diverges by an exceptionally large margin from the rate effectively applied tointernational transactions, then an alternative rate is used. Midyear population is used to arrive at percapita figures.b. 1976.c. US$190 per capita for urban and rural areas.d. 1979.

Sources: World Tables, vol. 2; Social Data, 3d ed., published for the World Bank by Johns HopkinsUniversity Press, Baltimore, January 1984; and World Development Report (various years).

Appendix Table 71

Table A-t Terms of Trade, 1960-86(Index 1980=100)

Tems qf trade Export price Import price aYear N.a UNCTAD b Index Index

1960 93.9 13.1 13.91961 86A 12.2 14.11962 89.0 12.5 14.01963 113.2 15.9 14.01964 113.8 16.2 14.21965 92.2 13.8 14.91966 94.8 14.4 15.21967 95.8 14.9 15.51968 80.1 14.6 18.21969 84.3 14.9 17.61970 90.5 108.0 15.8 17A1971 88.9 128.0 17.1 19.31972 100.4 128.0 20.3 20.31973 90.0 111.0 23.8 26.41974 143.9 205.0 59.2 41.11975 167.0 228.0 77.8 46.51976 124.5 156.0 63.7 51.21977 112.0 139.0 62.5 55.81978 108.0 133.0 63.9 59.11979 105.4 111.0 74.5 70.61980 100.0 100.0 100.0 100.01981 93.8 99.0 110.6 118.01982 87A 94.0 120.1 137.41983 93.8 98.0 128.2 136.61984 992.5 93.0 144.6 156.11985 97.0 74.0 160.9 165.71986 104.7 176.2 168.2

a. National Accounts (NA) is defined as the ratio of export (gnfs) price index to import (gnfs)price index.b. UNCTAD series is defined as ratio of price index of commodity exports fob. to that ofcommodity imports ci.f.

Sources: World Development Report (1987); UNCTAD (1985). This table is based on thenational account series. see Figures 2.1 and 4.1 in this paper.

?2 Suriafed S bWiaftoa and Rmvery iA Maunwiga

Table A..4 Sugar Prices in Different Markets, 1968-87

U. aprcYear EECpnce amt/I& Fre mrket prioe

1968 2.35 1.90

1969 3.62 3.20

1970 4.32 3.69

1971 5.03 4.50

1972 8.12 8.00 7.27

1973 10.89 9.45 9.45

1974 31.90 29.66 29.661975 21.85 21.00 20.37

1976 13.39 13.31 11.58

1977 14.01 11.01 8.12

1978 15.93 13.97 7.82

1979 19.29 15.53 9.66

1980 22.09 30.03 28.651981 18.93 19.73 16.87

1982 18.12 19.92 8.42

1983 17.57 22.04 8.471984 16.45 21.74 5.20

1985 15.89 20.35 4.06

1986 18.61 20.88 6.051987 20.94 21.83 6.76

Souroe World Bank, International Commodity Markets Division, Washington, D.C.

Appendix Tables 73

Table AZ EEC Dividend and its Impact on Mauritius's Economy, 1968-86 (US$millions, current prices)

Year EEC dividendZ

1968 5.91969 6.21970 8.01971 7.31972 12.91973 22.81974 34.01975 16.41976 27.11977 86.31978 119.91979 140.71980 -70.91981 26.11982 147.11983 121.31984 142.81985 168.41986 193.8

a. The difference between value of sugar exported at EEC prices and free market (international)prices. EEC dividend amounted to US$487.5 million during 1968-80 (of which US$346.7 millionis during 1977-79) and US$799.5 million during 1980-86. The impact of the EEC dividend on theeconomy is calculated using the Harrod-Domar framework with the following assumptions:marginal (and average) propensity to save is 0.25; incremental capital-output ratio is 3.00; andall savings are invested. Absolute savings (and investment) due to EEC dividend during 1968-80is US$122 million (of which savings during 1977-79 is US$87 million) and during 1980-86 isUS$200 million. The increase in national income during 1968-80 (i.e., 13 years) is 12213 x 13 =US$529 million.

This is equivalent to 7.0% of total GDP in 1968-80. Similarly, increase in national income during1977-79 is US$87 million, which is equivalent to 3% of total GDP in 1977-79. Lastly, increase innational income during 1980-86 is US$467 million, equivalent to 5.7% of total GDP in 1980-86.

Source: World Bank, International Commodity Markets Division.

74 Sccesfidl Stabilization and Recovery in Mauritius

Table A-6 Indicators of National Accounts, 1960-86 (million rupees, 1980 prices)

Year GDP Consumption Investment GDE a GDY b

1960 3725 2924 2005 4929 36291961 4576 2763 1576 4339 41901962 4613 3247 1457 4704 43241963 5254 3134 1516 4650 56981964 4892 4592 1121 5713 52401965 5048 3833 1428 5261 48241966 4868 4103 874 4977 47261967 5081 4290 1295 5584 49741968 4731 3405 928 4333 41161969 4965 3218 1175 4393 44651970 4945 3786 801 4587 46291971 5146 4053 1215 5268 48071972 5564 4073 1389 5461 55771973 6260 3734 2297 6030 58451974 6858 5316 2751 8067 84351975 7050 6261 2858 9120 90061976 7919 6844 2669 9513 88401977 8565 7470 2655 10125 90781978 9070 7887 2882 10769 94101979 9586 8158 2983 11141 98231980 8697 7786 1803 9589 86971981 9118 7714 3132 9846 88611982 9596 7596 1782 9378 90181983 9673 7752 1764 9515 93861984 10138 8090 2090 10181 97801985 10859 8436 2458 10893 105731986 11772 8951 3399 12350 13014

a. Gross domestic expenditure = total consumption plus investment.b. Gross domestic income = gross domestic product (GDP) plus/minus gain/loss due tochanges in terms of trade.

Source: World Tables, 1987. See also Figures 2.3 and 4.2 in this paper.

Appendix Tables 75

Table A-7 Balance of Payment Indicators, 1970-86 (US$ millions, current prices)

Current accountYear Balance a Net capitalb Net IIP Net ODAd

1970 7.8 1.0 0 61971 -5.4 0.1 0 91972 15.5 1.8 0 91973 0.4 3.2 0 141974 54.4 6.0 0 251975 17.7 9.3 0 291976 -36.3 9.5 0 291977 -78.8 16.6 0 221978 -118.8 80.0 11 441979 -148.6 67.0 0 321980 -118.7 71.6 46 331981 -153.3 50.0 67 581982 -42.1 49.8 25 481983 -22.1 -19.6 15 411984 -54.0 41.7 -7 361985 -30.3 25.6 -13 291986 101.8 29.3 -19 56

a Excludes official capital transfers.b. Excludes official development assistance.c. IMF purchases - repurchases.d. Includes grants and concessional loans.

Sources: For current account balance and net capital, IMF (various years), Balance ofPayments Yearbook; for net IMF, International Finance Statistics Yearbook (various years); andfor next official development assistance, OECD (various years). See also Figures 2.4 and 4.3 inthis paper.

76 Succeful Stabijeation andRecovery inMauritius

Table A-8 Budget Deficit and Its Financing, 1968-86 (million rupees, currentprices)

Net foreign Borrowing BudgetYear Capital a from local banks b deficit c

1968 13 18 -651969 24 1 421970 22 11 -561971 10 59 -751972 32 27 -751973 11 -15 -721974 30 190 -2101975 41 -9 -1451976 20 236 -1601977 70 289 4001978 284 464 -5531979 310 490 -7181980 219 500 -5591981 721 454 -8951982 866 594 -11151983 -152 946 -7801984 -88 643 -6731985 883 -325 -8811986 119 272 -607

a. Includes grants. Borrowing from foreign governments, international developmentinstitutions, and other foreign borrowing (see line DIII of IMF, Gouernment FinanceStatisticseYearbook).h Total government borrowing from deposit money banks and monetary authorities ofcentral government. It is on a net basis.c. Total expenditure - current revenue (excluding grants).

Source: IMF (various years), Government Finance Statistics Yearbook See also Figures 2.5 and4.4 of this paper.

Appendix Tables 77

Table A-9 Nominal and Real Effective Exchange Rates, 1970-86(index 1980 = 100)

Year Nominal exchange rate Real exchange rate

1970 153.0 107.71971 153.8 102.51972 152.5 100.91973 138.4 94.31974 134.6 102.11975 129.7 98.91976 134.1 100.11977 135.2 100.21978 133.7 103.21979 125.7 99.91980 100.0 100.01981 101.4 103.81982 94.9 98.81983 96.8 99.31984 93.0 96.01985 90.0 93.11986 88.9 89.9

Note: Effective exchange rates have been derived using base year (1980) import weights of 123trading partners. The real exchange rate is arrived at on the basis of the nominal effective rateand movements in consumer price indices in Mauritius and its trading partners. An increase inthe index means an appreciation in the exchange rate and vice versa. See Figure 2.6.

Source: IMF, Developing Country Studies Division, Research Department.

78 Successful Stabilization and Recovery in Mauritius

Table A-10 Average Monthly Earnings by Sector, 1970-85(rupees, constant prices)

Textiles Apparels Sugar Other All sectorYear (EPZ) (EPZ) sector manufacturing average Government

1970 714 1154 16531971 811 1189 16601972 934 1176 15861973 1048 1168 15551974 900 676 998 14441975 856 702 1050 14891976 773 520 1098 798 1258 18861977 885 586 1196 919 1363 18681978 868 642 1247 985 1423 18461979 818 604 1190 895 1363 16871980 810 585 994 814 1205 14781981 824 592 1075 807 1241 14891982 808 542 1088 766 1227 14861983 854 555 1101 794 1241 14971984 854 618 1116 766 1204 14651985 922 618 1080 743 1157 1434

Source: World Bank (1985).

Appendix Tables 79

Table A-11 Nominal and Real Interest Rates on Commercial Bank Deposits of SixMonths, 1970-86 (annual percentage)

Year Nominal a Realb

1970 5.25 3.61971 4.75 4.51972 4.75 -0.31973 4.75 -6.41974 4.75 -14.51975 4.75 -7.21976 4.75 -6.01977 5.00 -3.41978 7.00 -0.81979 8.00 -4.21980 9.50 -15.51981 9.50 -2.81982 9.50 -0.71983 9.50 4.01984 9.50 2.51985 9.50 3.01986 9.50 7.5

Notes:a. At year end.h Real interest rates (R) have been arrived at using the formula:

1+iR= - -1

1 +pWhere i = nominal interest rate

p = percentage change in consumer price index.

Source: World Bank data files. See also Figure 2.8.

80 Successful Stabilization and Recovery in Mauritius

Table A-12 Government Expenditure and Revenue, 1965-86 (million rupees,constant prices)

Total Current Current CapitalYear expenditure expenditure revenue outlays

1965 1130 869 262 10841966 1166 920 246 8261967 1239 989 281 8901968 1241 969 272 9691969 1165 989 176 9931970 1143 914 229 9181971 1267 949 318 9831972 1223 888 335 9751973 1191 825 366 9831974 1270 902 309 8301975 1514 1178 336 12591976 2045 1535 810 17761977 2468 1846 615 18381978 2587 2035 552 17861979 2679 2206 474 17781980 2370 1972 398 18111981 2638 2207 431 18391982 2731 2367 363 18181983 2716 2443 273 21241984 2643 2396 247 21671985 2795 2412 382 22191986 2821 2466 355 2441

Note: GDP deflator is used to convert data in current prices into series at 1980 prices. Currentrevenue excludes grants. See Figures 2.9 and 4.5.

Source: IMF (various years), Government Finance Statistics Yearbook.

Appendix TabLe 81

Table A-13 Sugar Production and Exports, 1963-86 (thousand tonnes)

Year Production Production Trend Eaport.

1963 685.6 602.01964 519.0 603.5 5601965 664.4 605.0 5781966 561.8 606.5 5711967 638.3 608.0 5311968 596.5 609.5 5781969 668.7 611.0 5921970 576.2 612.5 5821971 621.1 614.0 5681972 686.4 615.5 6141973 718.5 617.0 6981974 689.1 618.5 6581975 501.9 620.0 4411976 679.2 621.5 6581977 664.5 623.0 6181978 670A 624.5 6191979 662.9 626.0 6281980 490.8 627.5 6171981 574.5 629.0 4321982 687.9 630.5 5971983 604.7 632.0 6081984 575.6 633.5 5311985 645.8 635.0 5401986 700.0 636.5 625

Notes: Per unit cost of transportation from farm to market See Figure 2.10.

Source: World Bank (1986a).

82 Succesfid Stabilization and Recouery in Mauritius

Table A-14 Guaranteed Producer Prices for Selected Food Crops, 1977-87 (constant1980 rupees per ton)

Year Maize Potatoes Onions Garlic

1977 2646 1940 3880 52911978 2439 1951 4878 97561979 2128 2128 4965 113841980 2000 3000 5300 80001981 2096 2271 4978 69871982 2196 2588 4471 62751983 2153 1930 4380 59391984 2593 1798 4080 82991985 2738 1296 3824 77771986 2761 1272 3753 76341987

Note: Deflated by CPI (1980=100)

Source: Agricultural Marketing Board, Mauritus.

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