Report No. 36196-MU Mauritius Country Economic Memorandum Managing Change in a Changing World January 29, 2007 Africa Region Macroeconomies I Document of the World Bank TABLEOFCONTENTS EXECUTIVE SUMMARY ........................................................................................................................... I INTRODUCTION ..................................................... ...................... Chapter I:Mauritius Past, Present and Future.................................................................................... ii Chapter 2: Public sector management in a time offscal consolidation Chapter 3: Increasing labor mobility and quality............................... Chapter 4: Becoming a more innovative, knowledge based economy Managing change in a changing world.............................................................................................. viii CHAPTER 1. MAURITIUSPAST, PRESENTAND FUTURE. ......................................................... 1 A. INTRODUCTION ..................................................................................................................................... 1 B. MAURITIUS PAST: FACTOR-DRIVEN GROWTH ......................................................................................... 5 c.Reaching the limits of factor led growth ............. MAURITIUS PRESENT: ADJUSTINGTO TRADE SHO D. MAURITIUS FUTURE: PRODUCTIVITY BASED GROWTH ......................................................................... 13 Near term prospects ............................................................................................................................ 13 E. LONG TERM GROWTH SCENARIOS ........................................................................................................ 14 20 ANNEX-A FORWARDLOOKINGMODELOFTHECURRENT ACCOUNT........................................................ Policy implications: ............................................................................................................................ 22 CHAPTER 2. THE PUBLIC SECTORINA TIME OF FISCAL CONSOLIDATION ..................24 A. INTRODUCTION ................................................................................................................................... 24 B. FISCALPERFORMANCE ......... .................................... 25 Sustainability andpublic investmen .......................................................................... 26 TheMedium Term Expenditure Fra and budget management .... 29 c.Movingforward with MTEF .................................... 31 THEROLE OFTHE STATE. ...... .................................... 33 Thestate as regulator .................................................................................................................... 33 Thestate as supplier ofpublic goods ................. .................. ................... Efficiency in public goods provision .................. ......................................................................... 35 Public sector employment ............................................................ D. GOVERNANCE ..................................................................................................................................... 39 Government effectiveness. .................................... 41 Movingforward ....................................................................................................... 44 Combating corruption........ ....................................................................................... 45 CHAPTER3. INCREASINGLABORMOBILITY AND QUALITY .............................................. 48 A. INTRODUCTION: ................................................................ LABOR MARKET POLICIES AND OUTCOMES 48 B. SUPPLY AND DEMANDINTHE MAURITIAN LABOR MARKET ................................................................. 49 Demographic trends............................................................................................................................ 49 Labor demand and employment in the 1990s ................. Education in Mauritius ..................................................................................... .................................................................. 64 E. EDUCATIONAND THE LABORMARKET....................... .......................................................................... 66 Economic incentives and the return to education ...... - 1 - Social safety nets .................................................................. . 73 CHAPTER4. HOWMAURITIUSCANBECOMEA MOREINNOVATIVE, KNOWLEDGE BASEDECONOMY ................................................................................................................................... 75 A. INTRODUCTION ............................................................ B. THENATIONAL INNOVATION SYSTEM INMAURITIUS .................................................... Technology transfer in Mauritius.......................................................... Policy options to strengthen the National Innovation System .............................................. 84 C. EXPLOITINGLATECOMER ADVANTAGES ................................................................ A Mauritius Industrial Technology Research Institute .............................................. 87 Operationalizing the concept....................................... How a MITRI would interface with existing Mauritian Suggestedindustrial diversification strategies where a MITRI couldplay a vital role - 2 - LISTOFFIGURES Figure 1: Export composition......................................................................................................... 3 Figure2: GDP and factor inputgrowth .......................................................................................... Figure3: Contributionsto growth................................................................................................... 5 6 Figure4: Sectoral contributions to growth ..................................................................................... 7 Figure 5. in Labor's share national income.................................................................................... 9 Figure6: GDP and import growth intradingpartners .................................................................. 10 Figure7: Export performance ....................................................................................................... 10 Figure8: GDP andthe current account......................................................................................... 12 Figure9: Foreignexchangereserves ............................................................................................ 12 Figure 11: Distribution of average per capita GDP growth, 1984-2004....................................... Figure 10: Real effective exchange rate........................................................................................ 12 20 Figure 12: Savings, investment andthe current account balance ................................................. 22 Figure 13: Actual and predicted current accountbalance............................................................. 23 Figure 14: Central government debt ............................................................................................. 25 Figure 15: Central government balance........................................................................................ 25 Figure 17: Scatter plot ofmonthly earnings v.civil service premiums ...................................... Figure 16: DataEnvelopment ....................................................................................................... 35 39 Figure 19: Employment ................................................................................................................ Figure 18: Change inranking percentile....................................................................................... 41 49 50 Figure21: Fertility and dependency, 1950-2050.......................................................................... Figure 20: Mauritius demographic transition, 1950-2050 ............................................................ 50 Figure 22: Dependencyrates during demographic transitions, 1950-2050 .................................. 51 Figure23: Increaseinthe working age population, 2005-2020.................................................... 51 Figure 24: Unemploymentrate ..................................................................................................... 55 Figure26: Sugar labourers............................................................................................................ Figure25: Labor market flexiblity................................................................................................ 58 60 Figure27: Transport drivers......................................................................................................... 60 Figure28: EPZmachinists............................................................................................................ 60 Figure29: Malenonsugar labourers............................................................................................ 60 Figure 30: Distribution of hotel sector services workers' wages.................................................. 60 Figure32: Education andper capita GNIgrowth.......................................................................... Figure 31: Education and per capita GNI ...................................................................................... 62 Figure33: Education indicators .................................................................................................... 62 Figure 34: Avg. years of education............................................................................................... 65 65 Figure35: Workforce distributionby educational attainment ..................................................... -67 Figure36: R&Dcollaboration ...................................................................................................... 80 Figure 38: Bagasse electricity generation ..................................................................................... Figure 37: PredictedR&D effort .................................................................................................. 82 83 - 3 - LISTOFTABLES Table 1: Development indicators .................................................................................................... 1 Table 2: Composition o f exports..................................................................................................... 4 Table 3: EPZ apparel exports.......................................................................................................... Table 4: Avg. share in growth......................................................................................................... 684 Table 5: Average share in growth, 1992-2003 ................................................................................ Table 7: Short term outlook .......................................................................................................... Table 6: Macroeconomic adjustment............................................................................................ 11 13 15 Table 9: Demographic and labor market outcomes ...................................................................... Table 8: Forecast assumptions ...................................................................................................... 17 Table 10: Middle case, sectoral detail........................................................................................... 18 Table 11: Middlecase, distribution o f output and employment ................................................... 19 Table 12: Fiscal performance, 1993/94 - 2004/05........................................................................ 26 Table 13: Public debt/GDP ratios under various scenarios........................................................... 27 28 Table 15: Infrastructure andpublic investment needs ................................................................. Table 14: Proposed fiscal adjustment measures ........................................................................... -28 Table 16: Public goods supply benchmarks.................................................................................. 34 Table 18: Public sector employment............................................................................................. Table 17: Efficiency scores for public sector outputs................................................................... 36 Table 19: Employment structure inthe public and private sector.,............................................... 37 38 Table 20: Comparative public sector performance, 2004 ............................................................. 40 51 Table 22: Labor market indicators, 1990- 2000 .......................................................................... Table 21: Populationgrowth and shares, 1950-2050.................................................................... 52 Table 23: Employment by industrial sector .................................................................................. 53 Table 24: Employment by sector .................................................................................................. 54 Table 26: Vacancies and unemployment ...................................................................................... Table 25: Education and unemployment ...................................................................................... 55 56 Table 27: Selected Remuneration Orders ..................................................................................... 61 63 Table 29: Education systemperformance, 2000-04...................................................................... Table 28: Cohort analysis, 1990-2002.......................................................................................... 63 Table 30: Gross enrollment rates, 2000 ........................................................................................ Table 31: Educational qualifications o f the labor force, 1990-2000............................................. 65 67 Table 32: Impact of education on earnings ................................................................................... 69 -70 Table 34: Economic performance and technological sophistication............................................. Table 33: Labor shortages inhibitingproductivity improvement ................................................ Table 35: Technology and innovation: expectation v. reality....................................................... 79 81 LISTOFBOxES Box 1: Vision 2020: Mauritius' new development Strategy ...................................................... 2 Box 2: Who has gain from productivity growth?........................................................................ 9 Box 3: The MediumTermExpenditure Framework................................................................. 30 Box 4: Labor market data.......................................................................................................... 55 Box 5: The economics o f education and human capital............................................................ Labor market institutions............................................................................................... 57 Box 6: 62 Box 7: Elementsof the National InnovationSysteminMauritius ............................................ 78 - 4 - ACRONYMS ALMP Active Labor Market Program AREU Agricultural ResearchandExtensionUnit ASTRI Applied Science and TechnologyResearchInstitute BEDP BagasseEnergy DevelopmentProgram BIGKC Biomass IntegratedGasifiedCombined Cycle BO1 Board of Investment BPML BusinessParks ofMauritius Limited BPO BusinessProcessOutsourcing CDM CleanDevelopmentMechanism CEB Central Electricity Board CEM Country Economic Memorandum CGE ComputableGeneralEquilibrium CPE Certificate ofPrimary Education CSIR Council for Scientific and Industrial Research CSIRO Commonwealth Scientific and Industrial ResearchOrganisation cso Central Statistical Office DBM DevelopmentBank ofMauritius DEA Data EnvelopmentAnalysis DECPG DevelopmentEconomicsProspects Group ECO Economic CrimesOffice (Mauritius) EEZ Exclusive Economic Zone EPZ Export ProcessingZone ERC ExpenditureReview Committee FARC Food andAgriculture Research Council FDI ForeignDirect Investment FMRL Fisheries andMarineResourcesLaboratory FSPA Financial Services Promotion Authority GDP Gross Domestic Product GFCF Gross FixedCapital Formation GNI Gross National Income GRICS GovernmentResearchIndicator Country Snapshot (World Bank) HKUST HongKong University of Science and Technology HR HumanResource HSC Higher School Certificate ICAC IndependentCommissionAgainst Corruption (Mauritius) ICT Information and CommunicationTechnology ILO International Labor Organization IMF International Monetary Fund IO Input-Output IPR Intellectual PropertyRights IRA Industrial RelationsAct I S 0 International StandardizationOrganization I T Information Technology ITES Information TechnologyEnabledServices ITRI Industrial TechnologyResearchInstitute IVTB Industrial and Vocational Training Board LIUP Local Industry Upgrading Program MABI Mauritius Agricultural Biotechnology Institute MCSAAR Ministry of Civil Service Affairs and Administrative Reforms MEF Mauritius EmployersFederation MFA Mauritius FreeportAuthority MITI Ministry of International Trade and Industry - 1 - MITRI Mauritius Industrial Technology ResearchInstitute MNE MultinationalEnterprise MOFED Ministry of Financeand Economic Development MOI Mauritius Oceanography Institute MQA Mauritius Qualifications Authority MRC Mauritius ResearchCouncil MSIRI Mauritius Sugar Industry ResearchInstitute MTEF Medium Term ExpenditureFramework MTF MillenniumTechnologyFund NCB National Computer Board NEA New Economic Agenda NGO Non-GovernmentalOrganization NIS National Innovation System NPCC National Productivity and Competitiveness Council (Mauritius) NPV Net PresentValue NRB National RemunerationBoard OECD Organizationfor Economic Co-operation and Development OTEC OceanThermal Energy Conversion PAT PermanentArbitration Tribunal PPP Public-Private Partnership PRB Pay ResearchBureau PRMPS Poverty ReductionandEconomic ManagementPublic Sector (World Bank) R&D Researchand Development RBB ResultsBasedBudgeting RETL RenewableEnergy Technologies Laboratory RO RemunerationOrder SAFE SouthAfrica Far East SAPES Schemeto Attract ProfessionalsinEmerging Sectors sc School Certificate SIDS SmallIslandDeveloping State SITC StandardInternational Trade Classification SME Small and Medium Enterprise SMIDO Small and MediumIndustriesDevelopmentOrganization SSA Sub SaharanAfrica STAG Science and TechnologyAdvisory Group TBT TechnicalBarriers to Trade TDS TechnologyDiffusion Scheme TEC Tertiary EducationCommission TFP Total FactorProductivity TQM Total Quality Management TCSB Termination of Contractsof ServiceBoard UMIC Upper Middle Income Country UNFPA United Nations Fund for Population Analysis UNIDO United Nations Industrial DevelopmentOrganization VAR Vector Auto regression WTO World Trade Organization - 2 - Mauritius:CountryData Area (Sq. Km.) Population Density 2,040 1.25 million (mid 2005) 608 per square km Growth rate: 1.O % (average 1998-2005) MilleniumDevelopmentGoals: Selected Indicators Latest year available Sub-Sahara between 1998-2005 Africa GNIper capita (Atlas method) 4,640 600 Gross primary enrollment (YOo f school-age pop.) 106 95 Ratio o f girls to boys in education 100 83 Under 5 mortality rate (per 1,000 live births) 15 171 Lifeexpectancy at birth(years) 73 46 Access to improve water sources 100 58.2 Gross DomesticProductin 2005 Government Financesas percent of GDP (%) US$ Million - % -- 2005 2002-04 GDPmp 6,403 100.0 Current revenue 19.3 19.3 Investment 1,489 23.3 Current expenditure 21.1 20.8 Gross domestic savings 1,422 22.2 Current balance -1.8 -1.5 Resource balance (67) -1.0 Capital and other Exports o f goods and services 3,617 56.5 expenditures 4.2 4.7 Imports of goods and services 3,684 57.5 Overall balance -5.6 -5.9 (accrual basis) Annual rate of growthof GDP at constant 1997 prices(%) 1998-2000 2001-2003 2004-2005 5.1 4.7 4.1 Moneyand Credit Inbillions ofMauritianRupees 2001 2002 2 0 0 3 2 0 0 4 2005 Net foreign assets 31.7 40.5 48.3 49.1 53.0 Domestic credit 92.8 100.3 107.5 128.8 146.0 Money and Quasi-money 97.7 110.4 123.4 141.1 159.6 Other net liabilities 26.8 30.4 32.5 36.8 39.3 M2iGDP (?h) 78.3 80.7 82.4 85.4 88.0 Inflationand exchange rate 2001 2002 2 0 0 3 2 0 0 4 2005 Periodaverage inflation (%) 4.4 6.3 5.1 3.9 5.6 Rs perUS$ 27.6 30.1 28.6 27.4 28.3 US$ per Rs 0.0362 0.0332 0.0350 0.0365 0.0353 - 1 - Balanceof payments Million US$ 2001 2002 2 0 0 3 -2004 2005 Exports, f.0.b. 1633 1569 1871 2014 2028 Imports, f.0.b. 1913 1799 2162 2385 2733 Services (net) 332 402 351 415 436 Income (net) 12 5 -2 -37 -5 Current transfers (net) 62 71 81 60 58 Capital transfers (net) -1 -1 -2 -1 -1 Current account balance 125 247 137 66 -217 Direct investments (net) 197 48 57 35 -32 Medium- and long-term loans -96 -15 -14 -26 45 Other capital (net, incl. errors and omissions) -41 -37 139 43 95 Overall balance 185 243 319 118 -109 Net international reserves (- increase) -185 -243 -319 -118 109 Exceptional financing 0 0 0 0 0 Merchandiseexports 2005 - - % 2002-04 - % Total 2,028 100.0 1817.8 100.0 Sugar 252 12.4 297.3 16.4 Manufactures (EPZ) 1,066 52.6 1145.6 63.0 Other 710 35.0 375 20.6 ExternalDebt in billionof US$ (end period) Debt service to net export ratio (%) 2005 2005 Total outstanding and disbursed 2.6 4.0 (end June 05) - 2 - Acknowledgements The task team was comprised of both Bank and Government staff. The Bank team was ledby Robert Keyfitz who was also principal author o f the report, and included Guenter Heidenhof (public sector); Mick Riordan and Cristina Savescu (trade performance); Stefan0 Scarpetta (labor markets); Jacob Bregman (education); A1 Watkins (knowledge economy). The short term outlook and the annex were prepared by Maria Teresa Benito- Spinetto using the RMSM-X model. The Government Team consisted o f Rattan Khushiram and Ram Hittoo. Prof. John Mathews, Macquarie Graduate School o f Management(Sydney, Australia) wrote a backgroundpaper for Chapter 5 which detailed latecomer strategies and developed the idea o f a Mauritius Industrial Technology Research Institute. Many people in Mauritius and Washington generously contributed their time and thoughts including Ashok Aubeeluck, Jean-Claude Autrey, Harish Bundhoo, Bert Cunningham, Ravin Dajee, Maurice Vigier de la Tour, Jean Mee Desvaux, Pierre Dinan, Prof. Indur Fagoonee, Ani1 Gujadhur, Krishnanand Guptar, Heerun Ghurburrun, Moira Hart-Poliquin, Jean Noel Humbert, Azad Jeetun, Raj Lutchmeah, Raj Makoond, Linda Mamet, Ali Mansoor, Kemraz Mohee, Yanembal Moorghen, Raj Mudhoo, Sen Narrainen, M. K. Oolun, MohamadOozeer, S. K. Pather, Prof. Roland Lamusse, Tawfik Ramtoolah, Ann Rennie, Somamun Seegolam, Ahmet Soylemezoglu, Arjoon Suddhoo, NikhilTreeboohun, Purusram Ujoodha, Danielle Wong, GuyWong So and Patrick Yip. Apologies for any omissions from the list. The report was prepared under the general guidance and supervision o f Emmanuel Akpa. Peer reviewers were Hans Timmer, Willem van Eeghen and Aristomene Varoudakis. Special thanks are due to the Government of Mauritius, inparticular Krishnanand Guptar and Ram Hittoo for superb logistical support during several missions. Preface This document was researched and written in2005-06. The concept review meeting was heldinMay 2005 and the decision meeting inMarch2006. The Green Cover version was presented to the Government inMay 2006. During preparation, a number o f fact finding missions took place to collect source material and data, and to meet with stakeholders in government and the private sector, development partners, civil servants, academics, business representatives, NGOs, labor leaders and other members of civil society. The extensive dialog and exchange of views during these meetings greatly sharpened the focus and strengthened the analysis. While under preparation, the CEM also helped to coalesce the views within the country team at the Bank. Accordingly, its diagnostic and recommendations contributedto andhavebeen progressively refined by the Government-Bank dialog over the past two years. This particularly applies to the elements o f the CEM which built on previous and/or concurrent work on education, labor markets, MTEF and Aid for Trade. A preliminary version o f the CEM presented to government officers in February 2006 stimulated great interest and in some cases skepticism and close questioning. Later, more specialized presentations were made to smaller groupings in different ministries. The outcomes o f these exchanges were reflected in the May 2006 Green Cover version. The Government agreed to the release o f the Green Cover version without any further changes. Aside from some minor editing, that i s what follows. Of course, nothing is the last word for long. The FY 2006/2007 budget announced bold and sweeping reforms. In light of these, parts o f the CEM may already be out o f date. Indeed, the budget measures curbing tax expenditures, reforming the pension system, simplifying business registration procedures and dismantling the EPZ went far beyond anything envisaged by the CEM. However, many o f the CEM's ideas are still pertinent and in some areas such as education and science and technology policy, the agenda has not yet begunto be addressed. EXECUTIVE SUMMARY INTRODUCTION i. Inthemid1990Mauritiusembarkedonaradicaltransformationfromlowwage ~ ~ sugar-textiles-tourism exporter to high-tech, innovative financial and business services hub. The roadmap was Vision 2020, a thoughtful and imaginative plan prepared in a broad, consultative fashion which became the core development strategy o f every government since. It was subsequently incorporated into two action plans and many steps have been taken to implement it. Today, the basic idea enjoys virtually universal popular support. ii. OnestrengthofVision2020wasthatitidentifiedanumberofactivitiesthatwere potentially well suited to Mauritius, that i s where small size and remote location would not be too much o f a handicap. The list included IT, BPO, biotechnology, financial and medical services and manufacturing activities such as printing and publishing and light engineering. That many o f these have begun to take root i s an encouraging sign that the strategy i s viable. However, progress has been frustratingly slow. New sectors have disappointed in terms o f output and employment, even as traditional ones struggle with increasing competition in their export markets. As a result, trend growth has slowed. Whereas Vision 2020 anticipated seven percent or more average growth, the actual outturn since 2000 has been only 3.1 percent. Compounded over time, the difference i s huge: for instance seven percent growth over the next 20 years would raise average per capita income by 2025 to US$18,000; five percent would bring it to US$12,300; 3.1 percent to just US$8,500. .,. 111. In the view of this Country Economic Memorandum, the premise underlying Vision 2020 was sound - indeed it i s hard to think o f an alternative. A middle income country must increasingly rely on higher value-added, more innovative, knowledge and skill-intensive activities. iv. Yet, reality has failed to live up to expectations raising the question, what can be done to speed up the process? The answer lies in implementation. Too much effort has gone into picking winners from Vision 2020's book o f blueprints and promoting them through special incentives and targeted public investments. The approach worked well in the past with sugar, EPZ manufacturing and financial services, where trade preferences and double tax treaties made government a natural partner to the private sector in promoting exports. But it i s out o f step with current needs and more generally with evolving ideas on the role o f the state. New layers o f special programs and interventions have beenadded to an increasinglyincoherent and unmanageable framework o f industrial regulation. - 1 - v. What Mauritius needs most i s simplification and transparency. When there i s reason to suspect market failure, as there often is, governments can and should play an active role in economic management. Prime examples are education, and science and technology where both public leadership and financing are appropriate to address spillovers and externalities (Chapters 3 and 4). But elsewhere Government's primary responsibility i s to provide competitively priced infrastructure and other public goods, ensure adequate human capital supplies, simplify bureaucracy and red tape, lighten regulatory burdens and maintain high standards o f public sector efficiency and effectiveness. In these areas, hesitant and incomplete reforms have left many obstacles strewn inthe path to new emerging opportunities. vi. The world i s changing quickly. As trade restrictions disappear and new global value chains are formed, first movers are finding opportunities to lock in enduring competitive advantages. Mauritius, too, needs to change quickly. By seizing the opportunity, Mauritius may be able to get its program back on track. N o w there may be an opportunity to do just that, capitalizing on a mood o f anxiety and pessimism. Polls consistently find a majority o f respondents somewhat or very pessimistic about prospects for the economy. But this cloud has a silver lining if it allows policy makers to gain acceptance for difficult and sensitive reforms in areas such as labor regulation, education and social safety nets. vii. Other recent analyses have proposed various regulatory reforms to simplify requirements for permits and licenses, eliminate restrictions on land usage, liberalize air access, rationalize taxes, reduce telecommunications prices, level the playing field for SMEs and revamp social safety nets (World Bank 2006a,b). The IMF has prepared a detailed costing o f tax and expenditure measures and proposed a medium term fiscal consolidation package (IMF 2006). This Country Economic Memorandum subscribes wholeheartedly to overall direction o f the reform program mapped out by this body o f work and it goes deeper inthree important areas: (1) public sector management, (2) labor markets and education and (3) science and technology policy. viii. Chapters 2-4 o f this report, each one largely self-contained, cover these topics in order. First, however, Chapter 1 gives the context for the transition now underway with an overview o f past and present development focusing on the transformation o f the economy from factor-intensive to skill- and knowledge-intensive development. Then a forward-looking section offers a medium term forecast for the economy's emergence from the recent slowdown and discusses prospects for longer term (potential) growth. Chapter 1:Mauritius Past, Present and Future ix. At independence, Mauritius faced daunting challenges. Population growing at an unsustainable three percent per year threatened a Malthusian catastrophe. Nevertheless, Mauritius became arguably Sub Saharan Africa's greatest success story, outpacing not only the region but most other comparators as well. When the strategy o f factor-intensive growth began reaching its limits in the late 1980s, planners found a new vision o f a high value added, knowledge-based services economy. But despite the efforts o f a decade, exports continue to be dominated by traditional commodities which are increasingly - 11.. - under pressure. As argued above, broad ranging structural reforms are needed to unlock the so-far elusive, knowledge-based future. X. What results might an ambitious package o f structural reforms achieve? In the near term, Mauritius will continue to face uncertainty and adjustment to terms o f trade deterioration. The economy has shown enough resilience over the past few years to suggest that even in such a challenging external environment moderate growth in the three to four percent range should continue. xi. Inthe longer term, the outlook is favorable to the extent that Mauritius is able to transition from factor-intensive to skill-based growth, develop a more agile and entrepreneurial economy and build sustainable competitive advantages in emerging sectors with good regional and global prospects. Evidently a wide range o f outcomes can be envisaged. Both discontinuity with the past and the limited modeling tools available make it difficult to explore the impacts o f various policy choices with a high degree o f precision. But three long term scenarios for the period 2006-25 based on various assumptions about exports and productivity suggest a plausible range o f 3.2 percent - 6.8 percent per capita growth. xii. Benchmarking vis-a-vis past international experience indicates that the upper part o f this range i s feasible, but by no means assured. Indeed, such an outcome would be even more remarkable than what Mauritius has achieved to date. For purposes o f comparison, 15 countries had per capita incomes in 1984 near where Mauritius i s today. Twenty years later in 2004, only one of them, Korea, had achieved the sort o f performance that Mauritians want, with an average o f 5.8 percent per capita growth. In three cases, RB de Venezuela, Gabon and South Africa incomes actually fell and for the group as a whole, growth averagedonly 1.6 percent. Chapter 2: Public sector management in a time of fiscal consolidation xiii. Since independence, Mauritius' development strategy has depended on a strong and capable state for economic and social management, and a benchmarking exercise gives comparativelyhighmarks to the public sector's performance. But, there i s room for improvement, too, in terms of the supply and cost effectiveness o f public outputs. Industrial regulation i s complex and cumbersome, but ineffective at the same time because of redundant and inconsistent provisions, a lack o f enforcement and granting o f frequent exemptions. Despite modernization and the e-government initiative, the civil service i s overly bureaucratic and lacks a results culture. Complaints about bureaucracy, red tape and corruption are widespread. xiv. More recently, these problems have increasingly been caught in the spotlight. A decade o f lax fiscal discipline has built up public debt to levels which are beginning to threaten macroeconomic stability, constraining fiscal space at a time when demands for infrastructure, health, education and social security are mounting. There i s pressure to achieve higher efficiency and do more with less. As in other countries in similar situations, Mauritians are reconsidering what role the state should play and how it should play it. - 111- ... xv. Fiscal management: Government's top priority must be to bring deficits and debt under control to lessen vulnerability to shocks and keep financial considerations from unduly influencingthe rest of the reform agenda. An increase o f 3-4 percent of GDP in the primary surplus from the FY 2005/06 level is needed in the medium term. Less than that would leave the macroeconomy vulnerable to external shocks, more than that would impair the quality o f the adjustment. xvi. Interms o f procedure, more effective use should be made o f the Medium-Term Expenditure Framework (MTEF) to strengthen fiscal discipline and align budgetary resources to national priorities. Instead o f forging Cabinet-level consensus on the aggregate fiscal strategy, budget preparation remains an adversarial contest between the Ministry o f Finance and spending ministries. A better strategy would be to develop a more consultative budget culture which would encourage Ministers to take greater ownership o f the fiscal framework and commit to staying within hard call circular ceilings. xvii. Government effectiveness: But, beyond disciplining the budget process, Government needs to review the way it carries out its responsibilities. A simpler, more hands-off approach to economic management could lighten regulatory burdens and level the playing field between domestic and export oriented firms and between large enterprises and SMEs. Moreover, benchmarking the provision o f public goods such as immunization and school enrollment rates against best practice comparators finds that (i) outcomes are relatively low and (ii) efficiency gains o f 30-40 percent or more could be achieved. xviii. One likely source o f inefficiency is human resource management. Though the aggregate wage bill i s reasonable, civil service pay and staffing compared to the private sector suggest government could do better as a producer and employer. The current situation does not appear to be egregiously wasteful, but indications are that economies of around one percent o f GDP could be achieved by aligning civil service wages and to a lesser extent of occupational structures to those prevailing inthe private sector. xix. Civil service reform: According to governance indicators, Mauritius earns high marks for the political process - voice and accountability, political stability and rule o f law - but scores less well on government effectiveness, regulatory quality and control o f corruption. Moreover, despite initiating major reforms such as introducing Citizens Charters and I S 0 certification in the past decade, Mauritius has lost ground in cross- country rankings. Part o f the problem i s an outdated and overly bureaucratic structure o f the civil service. Another is an excessively complicated and burdensome regulatory framework. To address these problems Mauritius needs to simplify existing procedural and institutional arrangements, eliminate unneeded layers o f bureaucracy and provide more training including for managers who need to manage change. xx. Corruption: A perennial complaint about government in survey responses concerns corruption. Clear and vigorous leadership i s essential in dealing with this problem. A zero tolerance policy i s needed. Government should strengthen the capacity of investigative authorities and public institutions perceived to be particularly corrupt - iv - should be targeted first to build credibility. At the same time, regulatory processes should be simplifiedand streamlined to eliminate rent seeking and incentives for corruption Chapter3: Increasinglabor mobilityand quality xxi. The conventional wisdom i s that Mauritius' labor market has performed badly since the early 1990s. Employment growth averaged five percent in the 1980s, but slowed to just 1.4 percent in the 1990s and the unemployment rate rose from 2.7 percent in 1991to over 10percent a decade later. Risingreal wages underminedcompetitiveness and priced workers out o f the market, even while, paradoxically, the EPZ employed increasing numbek o f foreign workers. xxii. T o some degree, a more careful look tempers this pessimistic assessment. Inmany ways, labor market performance in the 1990s was quite good, during a challenging period. Supply dynamics were characterized by the winding down o f a sharp demographic transition accompanied by rising female labor force participation. On the demand side, a major (and ongoing) structural transformation caused thousands o f workers to lose jobs in agriculture and find new ones in emerging manufacturing and services sectors where employment growth was robust. The non-sugar private sector, predominantly SMEs, created a net 82,000 new jobs, an increase o f nearly 30 percent, over the decade. xxiii. But, unemployment doubled, too, from 24,000 to 48,000, disproportionately concentrated in households in the lowest income quintile. Unemployment was particularly severe among the young with an average unemployment rate o f 27.9 percent for the 15-24 year age range compared to just 4.4 percent for 25+. Most o f the unemployed had low educational attainment and a tighter market for better educated workers points to structural unemployment. xxiv. Institutionalreform:Inseeking to improve the performance o f the labor market, attention falls on Mauritius' complex institutional setup, especially the intricate and seemingly inflexible system minimum wage setting which covers 80-90 percent o f the private sector. In principle the system i s restrictive, though comparing Remuneration Orders against actual market wages suggests that inpractice it may be less so. On the one hand, wages often exceed the minimum because o f collective bargaining or market forces, while on the other wages below the minimum indicate widespread noncompliance, especially prevalent in the informal sector. Still, the system constrains some low wage, formal sector employers and complaints about intrusionby the state into human resource management decisions with regard to working conditions, likely have some merit. xxv. Human capital: Institutional reforms can improve workers' mobility and the efficiency and flexibility o f labor contracts. But in the longer run, human capital and the quality o f labor supply are as important as the quantity. Human capital, as proxied by education, explains as much o f cross-country differences in income as does physical capital. Educational attainment correlates with both the level and growth o f income, - v - probably because it not only raises productivity, but enables workers to learn faster and facilitates the adoption and diffusion of new technologies. xxvi. Education is the Achilles heel o f Mauritius' effort to transform itself into a more innovative, knowledge-based economy. Especially beyond the primary cycle, education sector indicators lag far behind the levels o f middle income comparators and certainly behind high income, innovative economies such as Finland, Korea, and the US. In 2000, only 3.6 percent of the labor force had a university degree or equivalent. Recent initiatives to strengthen secondary and tertiary education have had a discernible effect, but fall well short o f the major investmentsmade bycountries such as Finland, Singapore and Taiwan when they were at equivalent stages in their own transformations. Moreover, duringthe past two decades Mauritius has beenpassed bymanycountries, slippingbadly inthe international rankings. There is muchgroundto bemadeup. xxvii. Consistent with the finding o f structural unemployment, employers frequently complain o f shortages o f skilled workers and management and technical personnel. Both supply and demand factors are likely at work. At the bottom o fthe scale, the wage setting mechanism may have compressed the wage schedule and reduced incentives for elementary workers and laborers to incur the cost o f an education. For better educated, more skilled workers returns to education are adequate and in the range o f developed countries. Here, limited capacity and other constraints inthe educational system appear to be responsible for supply shortages. xxviii. A meaningful dialogue is needed with stakeholders to develop a national consensus about reforming the system. Then Mauritius must move quickly to raise both the quantity and quality o f educational outputs and overcome capacity constraints at the secondary and tertiary levels. Charging fees at the University o f Mauritius (with full scholarships for qualified students unable to pay) can help to overcome resource constraints. But, at the same time, there i s an excessive demand for private contributions at the primary and secondary levels due to private tutoring, which represents a serious failing o f the system. Other administrative reforms can also help to improve efficiency and accountability. xxix. Social safety nets and transitional support: Regardless o f the past, the structural transformation now underway will put the labor market under increasing stress. Thus, on the one hand labor market and education reforms may facilitate the transition. On the other, there is a need for transitional support for large numbers o f vulnerable workers - as much as 10 percent o f the work force have lost or will lose their jobs in the downsizing o f the sugar and apparel sectors. More efficient targeting o f existing programs will free up resources to meet these transitional needs. xxx. For workers who have lost their jobs, evidence from other countries.indicates that government provided training i s o f limited value except as a form o f income support. By contrast, training provided by employers seems to increase productivity and speed the transition between jobs. Thus, direct public interventions should be restricted to cash transfers and job search assistance. Innovative approaches such as wage subsidies for - vi - workers who need to be retrained or who take new jobs at lower wages have also been effective. xxxi. Immigration: Finally, it is impossible for Mauritius' education system to produce the skill base required for the new economy quickly. The only solution in the near term i s to ease restrictions on immigration and work permits for those with needed skills. However, easing restrictions i s not enough. In a competitive global labor market, Mauritius must actively seek to attract and welcome those whose contributions to the economy are needed. Chapter 4: Becominga moreinnovative,knowledgebased economy xxxii. Science and technology are essential to Mauritius' vision o f becoming a hub for high value added, knowledge-based activities. Yet, after a decade o f the transformation technological awareness and sophistication remain low and exposure to world class, state-of-the-art foreign technology, design and management practices i s limited, except perhaps for a few leading producers in the textiles and clothing, sugar and tourism sectors. xxxiii. To expedite the transition to a knowledge based economy, Mauritius needs to move on a number o f fronts. First and foremost i s upgrading human capital, especially in science and engineering, and easing restrictions on work permits for expatriate hires. Second, eliminating burdensome regulations and improving the investment climate will have especially beneficial implications for risky and innovative technology based activities. xxxiv. The NationalInnovationSystem: But,beyondthese measures Mauritius needs a more coherent policy framework and institutions to address specific needs o f innovation and technology diffusion. Knowledge i s a risky public good subject to market failures from spillovers, uncertainty and imperfect information. While many elements o f a National Innovation System are present in Mauritius, including a first rate university, publicly funded research institutes, quality infrastructure, financing and a public commitment to promoting a knowledge economy, their output i s low. To address these issues, Mauritius needs a technology strategy which would bring it into line with most other countries inthe world. xxxv. Providing leadership on science and technology policy: To accelerate progress along this central axis o f Mauritius' development strategy, the Government may wish to establish a Ministry o f Science andTechnology Diffusion and Strategy, or at least a unit in the Prime Minister's Office to champion initiatives and coordinate policy on science and technology. The main thrust o f public initiatives should be to strengthen the components o f the National Innovation System and encourage interactions betweenthem, including financial support for collaborative ventures. xxxvi. Attracting FDI: FDI is potentially an important source o f technology transfer and one which Mauritius has had little recourse to since the 1980s. Increasing the effectiveness o f investment promotion, streamlining the approvals process and better - vii - monitoring o f the Board o f Investment's effectiveness are needed. But even so, FDIdoes not automatically result in technology transfer and there i s a role for active public intervention to extract the maximum advantage, including subsidies where appropriate. A collaborative public-private venture with Infosys to provide supplementary training for recent graduates i s a very good example which can generalize. xxxvii. Picking winners: Science and technology initiatives shouldbe primarily cross- cutting - providing skills and support services (financial, legal and consultancy) rather than sector specific incentives or investments which require the Government to pick winners. Where the government places bets, they should be small bets with explicit benchmarks for success and programs should be terminated quickly if they are not succeeding. xxxviii. Exploiting latecomer advantages: Finally, countries which arrive late on the industrial scene can exploit, "latecomer advantages" to leapfrog to the frontier, even putting advanced technologies into production quicker andat lower cost than by the very firms which invented them in the first place. The key to exploiting latecomer advantages i s specialized institutions that facilitate the catch-up process. xxxix. For Mauritius, consolidating existing public research institutes (MSIRI, MOI, Albion, FARC) into a single, publicly funded, Industrial Technology Research Institute (MITRI) would be a valuable complement to the rest o f the National Innovation System. MITRI could be patterned after successful examples from Taiwan, South Africa, Australia, Singapore and many other countries. The idea would be to provide "shared" R&D services, scouring the world for cutting edge technologies which could potentially be exploited successfully in Mauritius, then using its own laboratory facilities building pilot versions to demonstrate to the private sector. Having demonstrated their feasibility, it would be left to the private sector to exploit them. Promising initial areas for research include renewable energy technologies, seafood and ocean resources, and sugarcane basedbiotechnology. Managingchangein a changingworld xl. The remainder o f this report contains of four chapters. The first sets the stage by comparing the factor-accumulation based development o f the past with the productivity and innovation driven approach o f the future and explores the macroeconomics o f the transition now under way. This is followed by three substantive chapters which explore in greater depth the issues summarized above - the role and management o f the public sector, the labor market and education, and transitioning to a more innovative, knowledge based economy. Each chapter reviews current thinking and internationalbest practice and translates these to the Mauritian context. xli. The table beginning on the next page lists the CEM's main policy recommendations. Each one i s cross referenced with the page location o f the discussion in the text. Readers o f the electronic version can click on the page number to be taken there directly. - viii - I.Stimulategrowthwithapackageofnearandlongtermstructuralreforms. u-In the near term, low cost measures, especially if they signal a commitment to investors can stimulate growth; however, policy authorities must also be vigilant over downside risks such as oilprice volatility, rising interest rates, .real exchange rate overvaluation and slower growth. In the longer term, reforms mustfocus on raisingpotential growth and competitiveness and unblocking resourceflows. Better analytical tools can assist Government informulating pro-growth policies. Sect. Objective I I Recommendedactions/policymeasures I. IStimulategrowth I 1. Inthe near term, Government can adopt low cost measures to boost confidence and stimulate investment. Macroeconomic management should remainprudent and attuned to downside risks (p. 14). 2. Accelerate structural reforms aimed at increasing competitiveness and promoting new emerging sectors. (p. 20) 3. Facilitate expansion o f smallholder agriculture (p. 21) 4. Improve modeling tools and analytical capabilities (p. 21) 11.Improvepublicsector management and service delivery II.I-Thetoppriority mustberestoringfiscal sustainability orelsefinancial considerationswillendupdrivingtherestof the reform agenda. Cabinet ownership and consensus needs to be establishedfor a medium termfiscal framework. II.2 - MTEF has sofar been ineffective as a procedural toolfor top down budget management, but renewing MOFED's --Review commitment and rebalancing the implementation strategy will unlock its potential and support the goal of sustainability. 11.3 thefunctioning of the state as a regulator, employer andprovider ofgoods and services to ensure these functions are being carried out efficiently and effectively. zI.4- Continue with civil service reform agenda to streamline institutional structures andprocedures and increase client orientation. II.5-Renew andpursue iero tolerance 'policy on corruption and strengthen regulatory and investigative mechanisms. Recommendedactions/policymeasures 11.1 Restore fiscal 1. Implement fiscal consolidation measures as proposedby IMFto achieve balance sustainability by the time o f the next election. (p. 27) 2. Cost and prioritize public investment program inaccord with objective o f raising growth and Competitiveness. (p. 29) 11.2 Use MTEF to 1. Revitalize MediumTerm Expenditure Framework (MTEF) prioritize spending implementation, emphasizing use as a tool to establish budget discipline and strengthen fiscal through Cabinet consensus on fiscal framework. (p. 31) discipline. 11.3 Clarify the role and 1. Systematically review economic, social regulations and programs, culling functioning o f the those which are redundant or ineffective (regulatory guillotine). (p. 33) state 2. Review public sector's performance as a producer o f goods and services. (P. 35) 3. Gradually align civil service wages and occupational structures to those prevailing inthe private sector. (p. 39 11.4 Strengthen 1. Continue reviewing procedural and institutional arrangements, government streamlining those which are overly bureaucratic and complex. (p. 44) effectiveness 2. Invest strategically intraining with a focus on behavioral change to foster a more customer oriented service culture. (p. 44) 3. Invest inmanagement skills, including change management. (p. 44) 4. Further expand the use o f IT, especially for the e-government initiative. (P. 44) 5. Involve clients (citizens, private sector) inevaluating the quality o f public services and designing reforms. (p. 45) 11.5 Combat corruption 1. Provide clear and vigorous leadership to maintain credibility inthe fight against fraud and corruption. (p. 46) 2. Target public institutions which are perceived to be particularly corrupt first. (p.46) 3. Minimize discretionary powers and red tape to reduce opportunities for - ix - corrupt practices. (p. 46) II4. Require staff in customs and tax administration to declare assets. (p.47) 5. Systematically apply sanctions against non-performing and corrupt staff. (P. 47) 6. Strengthen the capacity o f investigative authorities (ICAC, ECO). (p.47) 111.Increasinglabor mobility and quality [II.1-Improvinglabormarketefficiency andflexibility willsupport theoverallgrowthandcompetitivenessagendaand rtimulate employment creation by lowering hiring andfiring costs and enabling employers to change the skills mix of their labor forces more easily. III.z - Low educational attainment - both quantity and quality - is undermining the knowledge- based economy. Administrative reforms and user chargesfor tertiary education can improve theprocess. In the near term, a more welcoming attitude toward immigrants with needed skills can build up the human capital stock quickly. III.3 - Greater labor market flexibility will lower worker protection at a time when major structural transition is increasing znxiety. Income transfers and insurance schemes can be combined with training incentives and measures to get laid o j workers back into employment. Better targeting of existing social programs will free up resources to be used for these Durposes. 111.1 Improve labor 1. Simplify wage setting mechanism by replacing Remuneration Orders with market efficiency a single national minimumwage. (p. 71) 2. Eliminate TCSB oversight o f layoffs. (p. 71) 3. Establish a tripartite commission to review labor market institutions and industrial relations. (p. 71) 111.2 Improve education 1. Establish national consensus about education policy through dialog with and human capital all stakeholders. (p. 71) formation 2. Raise quantity and quality o f education outputs, especially inmath and science by reducing failure and attrition rates. (p. 72) 3. Increase resources for tertiary education by charging tuition at Uo f M and curtail widespread practice o f private tutoring at primary and secondary levels. (p. 72) 4. Reform administrative procedures to improve efficiency and accountability. (p. 72) 5. Welcome immigrants with needed skills by streamlining procedures and eliminating discretion inthe awarding o f work permits. (p. 72) 6. Improve the investment climate to create employment and ensure adequate returns to education. (p. 73) 111.3 Strengthen social 1. Target social welfare better to free up resources for those inneed. (p. 73) safety nets 2. Provide transitional income support to dislocated workers through contributory unemployment insurance scheme. (p. 74) 3. Provide incentives for workers to find new employment through wage insurance or training subsidies. (p. 74) 4. Offer training only collaboratively through employers. (p. 74) CV. Becominga moreinnovative, knowledgebased economy [v.1-Mauritius has afragmented National Innovation System, a weak entrepreneurial culture and low awareness of lntellectual Property issues. High level leadership is needed and a policy of strengthening the National Innovation System. FDI can be exploitedfor technology transfer purposes. However, to maximize the latecomer advantage, Mauritius might :onsolidate existing research institutes into a Mauritius Industrial Technology Research Institute. IV.1 Accelerate 1. Designate a champion for science and technology policy to promote more development o f a effective use o f science and technology assets. (p. 84) more innovative, 2. Strengthen the National Innovation System. (p. 84) knowledge based 3. Attract more FDIand monitor and benchmark the effectiveness o f BO1 economy programs. (p. 85) 4. Exploit FDIfor technology transfer through training, local R&D spending, and sourcing from local suppliers. (p. 85) 5. Overcome crosscutting constraints o f low awareness, lack o f entrepreneurship and underdevelopedsupport services. (p. 85) - x - 6. Keep industrial policy wagers small when placing bets on the emerging sectors such as IT. (p. 85) 7. Adjust Mauritius Telecom's international connection charges to a competitive rate. (p. 86) 8. Consolidate existing public research institutes into Mauritius Industrial Technology Research Institute (MITRI) to identifyand exploit latecomer advantages inrenewable energy, ocean resources and sugarcane based biotechnology. (p. 87) - xi - CHAPTER 1. MAURITIUS PAST, PRESENTAND FUTURE A. INTRODUCTION 1.1 Mauritians acknowledge, even with a hint o f pride, that their prospects at independence were inauspicious. Theirs was a small and remote island with few natural resources and an ethnically fractious population growing at an unsustainable three percent per year. No less distinguished scholars than Richard Titmuss and James Meade foretold of an impendingMalthusian"catastrophe" (the term from Meade 1961). Instead, the decades which followed saw spectacular achievements as Mauritius became arguably SSA's greatest success. Real per capita GDP grew by 4.1 percent per year from 1970- 2003 and the share of agriculture declined from 23 percent o f GDP to six percent, even though sugar remains an important sector. L i f e expectancy rose from 63 years to 72 years and telephone access increased 15-fold (Table 1). This performance far outstripped not only most other countries in the region, but upper middle income countries and small island developing states as well. Per capita GDP rose four-fold, more than double the increase in either Upper Middle Income Countries (UMICs) or Small Island Developing States (SIDS). Indicator Mauritius SSA U M I C SIDS b' 1970 2003 1970 2003 1970 2003 1970 2003 Per capita GDP (2000 US$) 1,089 4,157 533 524 2,696 4,075 2,546 4,143 Agriculture (% GDP) 22.6 6.1 21.3 16.5 13.2 6.7 Life expectancy (years) 62.9 72.3 45.0 45.6 65.3 68.8 61.4 71.2 Physicians per 1,000 0.24 0.85 0.05 0.15 2.35 0.36 1.04 Telephone mainlines per 1,000 17.3 285.2 6.9 10.7 39.7 211.2 30.6 167.2 1.2 Yet, these facts belie a fragility and vulnerability. By the early 1990s Mauritius was beginning to reach the limits o f labor intensive development which had underpinned this success. Tourism faced looming environmental constraints while the outcome o f the Uruguay Round made it clear that competition inworld markets for sugar and apparel was about to get a lot tougher. Poor logistics and high transport and communications costs were becoming more o f a handicap in a shrinkingglobal economy. 1.3 Ingoodtime, Mauritiusbeganto planandwork toward a moreknowledge and skill intensive future (box 1). Various sectors were identified where Mauritius could potentially be competitive - financial and medical services, IT and BPO, and manufacturing activities such as jewelry, printing and publishing and light engineering where remote location - 1 - and hightransport costs would not be too mucho f a handicap. Over the past decade, encouraging signs have emerged that the vision i s on the right track: 0 Sugar production has diversified into specialty sugars, ethanol and bagasse electricity cogeneration which now supplies nearly a fifth o f the country's power demand. 0 The textiles and apparel sector has downsized, but appears to be stabilizing at a smaller but still significant level around a core o f firms which have invested heavily in sophisticated design and fabrication capabilities. In a familiar pattern, foreign producers attracted by cheap labor have largely departed, leaving a smaller, more skilled, nationally owned industry. Box 1: Vision2020: Mauritius' new developmentstrategy As storm clouds began gathering onthe horizon, a broad, consultative exercise was launchedto plan for Mauritius' future. The outcome was Vision 2020: the national long termperspective study which was researched and written in 1993-95, though not published until 1997. For Vision 2020, the first task was to put existing pillars o fthe economy on a more secure footing by overcoming problems o f underinvestment, inadequate skills andtraining, and poor management and work attitudes. "The key words are technological development, efficiency, buildingup new comparative cost advantages based on skills and creativity." (vol. 2, p. 6.15). The plan envisaged firms delocalizing low value added activities to other countries within the region and clusters o f SMEs forming around shared services ina "beehive model" to make the best use o f scarce resources (vol2. pp. 6.23, 6.33-34). To exploit new opportunities, Vision 2020 recognized the need to upgrade infrastructure, especially telecommunications, strengthen education andtraining, and improve the regulatory environment. Much like the EPZ inthe 1970sand 1980s, a combination o f FDIand domestic investment would supply the capital and entrepreneurial talent. Exploiting science and technology were at the heart o f the strategy. Mauritius had an established, world class competence in sugar cane biotechnology which could be replicated in other areas such as ocean resources, IT, financial and medical services. Major investments inhuman capital and education were planned to support these developments. Vision 2020 anticipated comprehensive measures to increase the use o f science and technology, equip the labor force with new skills and improve transportation and communications infrastructure. Two subsequent action plans were formulated to implement Vision 2020's ideas: Into the 3rd millenium and the New economic agenda. As a result, the sugar and textiles sectors have been restructured; an offshore financial sector established utilizing a network o f double tax treaties; firms upgraded their technologies, some with assistance from the technology diffusion scheme (TDS); the telecommunications system was strengthened and deregulated; new incentive schemes similar to the EPZ were offeredto IT andpioneer firms; a Cyber Park was established, complete with a publicly funded, Rs. 1.5 billion, state o fthe art, fiber optic wired Cyber Tower; state secondary school capacity was doubled; port facilities were modernized and a Freeport established; and more. 1 See Amsden and Cho (2005) on the Taiwanese electonics sector. - 2 - 0 Non-traditional exports (fish, precision instruments,jewelry and precious stones) have grown at double digit rates, albeit from a low base, reaching 15 percent o f EPZ exports in5004. 0 A nascent IT sector has taken root, mostly call centers and BPO, but comprising disaster recovery centers and other high-endactivities too. 0 Upgrading and modernization o f the port attracted so much extra business it quickly overwhelmed the new capacity. 0 The growth o f the offshore financial sector has made Mauritius the largest source of inbound FDIinto India. 1.4 But, the reality is that progress has been much slower than hoped. Indeed, despite the appearance o f a textbook case o f diversification (Figure l), Mauritius has always had a narrow base o f specialization. Between 1982-84 and 2002-04, the share o f agriculture in exports declined from 54 percent to 16 percent, while manufacturing increased from 22 percent to 42 percent and services from 24 percent to 42 percent. But, over 90 percent o f agricultural exports still consist o f sugar and fish, representing just three 4-digit SITC categories. In manufacturing, textiles and clothing continued to dominate exports and the share o f the top five 4-digit SITCs fell only slightly from 66 percent to 62 percent. More than 80 percent of services credits in the balance o f payments comprised travel and transport (tourism) throughout the periode2 Table 2 identifies the main 4-digit SITC and services categories. Figure 1: Export composition 1982-84 2000-04 Manufactures Manufactures 29.0% 43.3% i 1.5 Given the small size of the economy, a lack o f diversification i s not surprising. The problem i s that Mauritius' traditional specialization offers limited scope for productivity growth and hence rising wages and living standards. Indeed, without MFA even the current level was unsustainable, as evidenced by the recent downsizing of the clothing sector. The strategy of identifying specialty niches and targeting the high end o f the market i s clearly the right one. Recent upward trends in apparel prices indicate Though these figures should be treated with caution as they are subject to considerable inaccuracy. See IMF2002 onthe compilation ofMauritianbalance ofpayments statistics. - 3 - some success in that direction (Table 3), but further downsizing o f the traditional economic base and the development of new capabilities seem ~navoidable.~ Table 2: Composition o f exports 1982-84 and 2002- 1 1982-84 2002-04 Agriculture Sugar (88.7%); Frozen and processed Sugar (66.8%); Frozen and processed fish (2.6%) fish (26.1%); Manufactures Dresses; skirts; suits etc.; knitted or Under garments; knitted; o f synthetic (42.7%); Under garments; excl. shirts; o f (29.2%); Dresses; skirts; suits etc.; textile fabrics (10.4%); Jackets; blazers knitted (9.1%); Under garments; excl. o f textile fabrics (4.7%); Y a m containing shirts; o ftextile fabrics (8.1%); Jackets; 85% by weight o f synthetic fibres blazers o f textile fabrics (8.1%); Shirts; (4.4%); Other precious & semi-precious men's; o f textile fabrics (7.4%); stones (3.9%) Services ai Travel and transport (82.6%); business Travel and transport (8 1%); business services (16.4%) services (16.8%) Source: WITS/CC [TRADE and IMF Balance ofpayments Note: ' irst periodfor services data is 1990-92. Table 3: EPZ apparel exports 2000 2001 2002 2003 % change 2004 2nni-n4 Quantity (million units) PulloversKardigans 17.0 17.9 16.7 14.7 11.7 -31.2 Tshirts 94.6 91.0 91.6 95.6 98.2 3.8 Shirts 25.0 21.1 18.5 15.5 18.3 -26.8 Trousers 34.2 35.3 41.4 31.2 19.7 -42.4 Total 170.8 165.3 168.2 157.0 147.9 -13.4 Average price (rupees) PulloversKardigans 203.4 217.5 230.1 245.0 243.4 19.7 Tshirts 82.2 85.8 88.0 93.6 103.0 25.2 Shirts 188.8 191.5 200.8 216.1 240.4 27.4 Trousers 193.2 201.0 203.3 200.4 194.9 0.8 Total 132.1 138.2 142.9 141.1 143.3 8.5 1.6 Ina nutshell, the view of this report is that it is both feasible and desirable to reorient the economy toward higher value added and more productive activities. For Mauritius, the challenge i s to identify the constraints to achieving this goal and accelerate the pace o f the transition. 1.7 T o set the stage for the discussion which follows, this chapter reviews the historic transformation which the country i s now undergoing. It contrasts the surefooted past with the uncertain future and stresses the need for timely reforms to improve the investment climate and restore confidence. The chapter ends by sketching out a range o f outcomes for future growth. Francois Woo predicts a decline inemployment to below 40,000 workers over the next few years, halfthe level o f 2000 (Z'Express xx) - 4 - B. MAURITIUS FACTOR-DRIVEN GROWTH PAST: 1.8 Mauritians remember James Meade primarily for his dire prognosis about their future. But, in truth the 3-prongedstrategy he deviseddeserves much of the credit for the ensuing miracle. Meade's objective was to generate a large increase in employment in the only way possible, by developing export oriented, labor intensive manufacturing. At the same time, recognizingthat for this to happenwages would need to be drivendown to an unacceptablelevel, Meaderecommendedgenerous social welfare provisions: "unemployment benefit, sickness benefit, family allowances, old-age pensions andthe like.... In an overpopulatedunderdevelopedcountry such as Mauritius low wage-rates combined with a social-security system constitutes a very sensible economic framework." (Meade 1961,p. 534.) 1.9 The success of this strategy is legendary as illustrated in Figure 2. Employmentgainedso strongly inthe 1980sthat bythe end ofthe decadeunemployment hadvirtuallybeeneliminatedandMauritiusbeganimportinglabor. Capitalaccumulation lagged as unutilized capacity after the 1980- 81 crash was brought back into production. Figure2: GDP and factor input growth Butbythe mid 1980sbothpublic andprivate annualpercentgrowth investment had picked up and remained I 2 , strong through the 1990s. Private investmentrose as a share of GDP from 11.5 percent in 1982 to nearly 20 percent by the endofthe decade. 1.10 In accordancewith Meade's plan, factor accumulation explains the bulk of Mauritius' growth during the period as 0 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 shown by the decomposition of economy -Capital --Labor--Output1 wide growth into the contributions of labor, Same (SO P m L c z l v i ~ a n d c m p m ~ mndraorr ~ s capital andtotal factor productivity(TFP) inFigure3(a).4By definition, contributionsof labor and capital mimic the growth of factor inputs shown in Figure 2. Meanwhile, productivity exhibiteda relatively short-livedcycle inthe mid 1980s inconjunctionwith rising capacityutilization' andthen a more sustainedincreasethroughthe 1990s, peaking in2000. This is exploredfurther below. 4Thecontributionsto growth are computedby fitting Cobb-Douglasproduction functions to the indexesin the CSO's Productivity and CompetitivenessIndicators. The estimatedcapital share is .53. Thus, the contribution of labor inFigure 3 is .47 times the growth of labor in; the contribution of capital i s .53 times the growthofcapital; and TFP is the residual.The series inFigure 3 havebeensmoothedusing aHodrick- Prescottfilter to revealthe trends more clearly. 5Pro-cyclicalproductivity growth i s a well known"stylized fact" of business cycles. - 5 - Figure3: Contributionsto growth percent (a) - Total economy (b) -EPZ sector 38 28 ............................................. 18 .................................... 8 -2 -2J -12 J 1983 1986 1989 1992 1995 1998 2001 200 1983 1986 1989 1992 1995 1998 2001 200~ 1.11 Figure 3(b) shows a similar accounting for the EPZ sector which experienced explosive growth of 25-30 percent annually in the mid 1980s followed by much slower but relatively steady growth after 1990. Most o f the initial expansionwas due to capital accumulation, with labor making a smaller contribution and the contribution of productivitygrowth negative. By contrast, during the 1990s productivity growth turned stronglypositiveinresponseto labor shortages andrisingreal wages. dl 1.12 Figure 3(a) suggests a structural shift between the 1980s and 1 9 9 0 ~with productivity ~ Table 4: Avg. share ingrowth growth playing a larger role in the second period. ercent Table 4 calculates the proportional contributions o f 1982-90 1990-03 capital, labor and TFP to growth in the two periods. Capital In 1982-90, only nine percent of output growth was Labor attributable to TFP, comparedto 23 percentin 1990- 22.9 2004. In fact, even the nine percent figure gives an Source:Figure 3(a) exaggerated impressionif the 1980s productivity cycle was the result o f rising capacity utilization rather than adoption of more productive technologies and management processes. In the second period, the more sustained contribution of productivity was consistent with a tighter labor market and rising real wages stimulating capital for labor substitution and the adoption of more productive, labor saving technologies. Even so, productivity growth in 1993-04 averaged only a modest 1.4 percent and exceeded two percentinonly two years. 1.13 It is interestingto disaggregate the economywide patternbecauseof strikinglydifferent sectoral patterns.Usingmoredisaggregateddata availablefor the period 1991-2003 yields the resultsshowninTable 5 andFigure4.6 This exercise created sectoral capital stock series from publisheddata on real gross fixed capital formation usinga permanent inventory technique, but constrainingthe aggregate to matchthe growth rate o fthe CSO's total capital stock index. Sectoral production functions were then fitted usingthe Seemingly - 6 - Figure 4: Sectoral contributions to growth trend growth ite (percent) Figure4(a)- Total output Figure 4(b) -Agriculture ..,J I .? 1991 1993 1995 1997 1999 2001 2003 1992 1994 1996 1998 2000 2002 1oTFP ICapital ~atmrI Q",'~,,"flc",m,*,,om/mm ClO""ii~nai"L'O"",, WB d",. Figure4(c) - Sugar manufacturing 8 1 I ............................................... -8 ' -10 I J 1992 1994 1996 1998 2000 2002 1992 1994 1996 1998 2000 2002 Figure4(e) - Other manufacturing Figure4(f) - Construction 10 .. 7 10 8 ............................................ . . . . . . . . . . . . 6 . . . . . . . . . . . . . . . 4 2 0 -2 u -4 -4 ' 1 1992 1994 1996 1998 2000 2002 1992 1994 1996 1998 2000 2002 Figure 4(g) - Electricity, gas and Figure4(h) - Services water 14 i I 8 1 1 ................ -2J I -2 1 1992 1994 1996 1998 2000 2002 S somewhat speculative, though aggregating the sectoral estimates yields results similar to Figure 3. - 7 - Table 5: Average share ingrowth, 1992-2003 '?-cent Capital Labor TFP Agriculture 17.3 -120.9 203.5 Manufacturing -- EPZ 87.8 -0.4 13.7 Sugar -127.9 -47.5 275.3 105.5 -4.7 -0.9 - Other 76.5 12.7 14.0 Construction 50.6 14.9 34.5 Electricity, gas and water 38.6 -6.6 68.0 Services 74.1 11.2 14.6 Source: Data in Figure 4. 1.14 Consistent with the aggregate picture, labor's overall contribution to growth was relatively minor, indeed negative in agriculture, sugar and EPZ manufacturing, and electricity gas and water where employment declined. Elsewhere, employment gains contributed around 10-15 percent o f output growth, with the rest shared between capital and TFP. Inthree sectors - agriculture, sugar manufacturing and electricity gas and water - TFP made a particularly significant contribution. In agriculture and sugar manufacturing, it offset a net decline in factor inputs, hence explained more than 100 percent of growth, much o f it concentrated in a burst in 2000-01 around the time o f the Sugar Sector Restructuring Plan. In electricity gas and water, productivity gained consistently throughout the 1990s, likely in part reflecting the growth o f bagasse electricity co-generation through the BEDP. In the remaining sectors, most o f the growth was contributed by capital, with the exception o f construction where TFP generated around a third. Reachingthe limitsof factor led growth 1.15 Once surplus labor had dried up in the early 1990s, growth began to slow. With the unemployment rate below three percent, labor shortages started to drive up real wages. On the one hand, this represented a threat to competitiveness, but on the other it signaled a successful outcome o f the first phase o f Mauritius' development. Though the writing was on the wall, nevertheless two factors helped to extend the labor-intensive miracle for another decade. First, female labor force participation began increasing rapidly (further discussed below in Chapter 3). Second, risingreal wages gave employers an incentive to increase productivity and economize on the use o f labor (Box 2). Notably, employers did not generally regard risingwages as a problem (World Bank 1995, p. 37). From a macroeconomic standpoint, productivity growth checked the inflationary impacts o f rising real wages, especially in conjunction with the depreciation o f the rupee since foreign-currency denominated labor costs actually declined. 1.16 But, structural pressures were beginning to build, nonetheless. Rising unemployment in conjunction with skill shortages signaled an emerging structural imbalance in the labor market. GDP growth slowed. In retrospect, easing labor market regulations (wage setting, restrictions on hiring seasonal labor in the sugar sector and quasi-judicial review o f layoffs by the TCSB) could have relaxed the constraints for a - 8 - few more years. World Bank 1995 further recommended cutting civil service employment by as much as 20,000-25,000 to free up workers who could be redeployed to the EPZ. Infact, though, little was done inthe way o freform. Box 2: Who has gained from productivity growth? Duringthe 990s, wages increased rapidly, far outstripping productivity growth. From 1992-2003, wages rose 154 percent compared to a 53 percent rise in labor productivity (output per worker). However, these numbers are measuring different things. Wages are a nominal cost to an employer, while productivity is a relationship between real inputs and outputs. To reconcile the concepts, write a typical firm's profit as n: = pY -WL- rK where Y, L and K are respectively real output, employment and capital, and p, w and rare the price o f output, the average wage and the rate o f return on capital. Taking the derivative o f profit with respect to L : pdY/dL-w = 0, or dY/dL =w/p. Inother words, (real) labor productivity, dY/dL, equals the real price o f labor, w/p. To see whether wage increases were excessive, we needto know what happened to prices. Figure 5 -Labor's share innational income From 1992-2003, the GDP deflator added 84 percent percent, which means that real wages (nominal wages deflated by the GDP deflator) rose by 38 percent which was less than the rise in productivity. Ifthe technology i s Cobb- Douglas, which typically fits the facts well, then labor's share o f output will be constant if the real wage equals real marginal product. However, the share o f wages and salaries in national income, shown inthe figure, actually fell. Thus, the evidence does not seem to indicate that labor has received too much o f the 1990 1992 1994 1996 1938 zoo0 2002 productivity pie. source. a0 According to the Mauritius Employers Federation, "wages should not be allowed to increase faster than productivity. This will at least avoid an erosion o f our competitiveness." (Mauritius Employers Federation 2005, p. 8). The statement is true ifit refers to real wages and real wage increases do not appear to have been excessive. However, the MEF also objects to centrally mandated, one-size-fits-all wage increases and here the complaint is on firmer ground. Productivity growth differs across firms and sectors so that some firms will find it difficult to pay the average wage increase, while others could afford to pay more. For instance, Figure 4 shows that productivity grew rapidly inconstruction in2000-03, while it declined inEPZ manufacturing. Relaxingthe constraint that all must pay the same wage would signal more clearly to workers where to look for work and what skills to acquire. At the same time, it would give both workers and firms an incentive to innovate and raise productivity. When prices are allowed to adjust freely, the result is greater allocative efficiency. - 9 - c. MAURITIUSPRESENT:ADJUSTINGTO TRADE SHOCKS 1.17 In step with the rest of the world, Mauritius' economy slowed sharply in 2001-02. Indeed, with Cyclone Dina superimposed over a range o f other global and regional factors, Mauritius slowed more than most. GDP growth dropped from 9.2 percent in 2000 to 2.9 percent in 2001 and 1.6 percent in 2002. A deterioration in the external environment i s apparent in Figure 6 which shows average GDP and import - growth in trading partners weighted Figure.6: GDP and import growth in according to their shares in Mauritius' export^.^ Import growth in theses countries tradingpartners percent more than halved from 8.9 percent in 1997- 2000 to just 4.3 percent in 2001-05. More 14 recently, the run-up in oil prices from an average o f US$25/bbl in 2002 to over US$70/bbl in early 2006 compounded the r\ - 2 0 $ problems by adding nearly four percent o f Q 6 - `v,' \ GDP to the oil import bill. Meanwhile, the 4 - \ -- 1 0 textile and clothing sector beganto downsize 2 - in anticipation of the ending of MFA quotas 0 7 I , , I , I I I , I I r 0 0 1994 1996 1998 2000 2002 2004 in January 2005. Inevitably, confronted by I- -Import powth (Left) -GDP growth (Right)] such headwinds Mauritius' export and Source WU/SrMA (I994 2W2) DECPG(2W3-OJ) growthperformance suffered. 1.18 Tourism and financial services exports closely paralleled economic conditions in their respective export markets (Europe and India).* The growth in tourist arrivals Figure7: Export performance percent growth slowed from 7.8 percent in 1997-2000 and remained flat at 2.3 percent in 2001-04. 25 .` \ Financial services plummeted by 13 percent ,-, I ` 20 -- * `.,* `- in 2001 before rebounding in 2002-04, though average growth in 2001-04 was only 3.1 percent compared to 19.6 percent in 1997-2000.9 By contrast, apparel suffered a more severe retrenchment as growth dropped from an average o f 10 percent in 1997-2000 to -5.7 percent in 2001-04 and the sector has continued in decline up to the present. For Imports growth rates are national accounts goods and services imports. Weights are calculated using2004 values from the IMF's Direction o f Trade database for merchandise exports and country o f origin o f tourists for services exports. I t is unclear how 9111 affected arrivals since while the global sector reflected a sharp decline indemand Mauritius likely benefited from a perception that it was an exceptionally safe destination. Mauritius' share o f world tourist arrivals rose over the period under consideration. Note the figure shows real GDP in `Other financial services (mainly banking including offshore banking)' from the national accounts. Thus, the series also includes production for the domestic market, though it i s hard to imagine this was the source o f the volatility. - 10- sugar, the story i s less clear because o f the idiosyncratic impacts o f the weather, in particular a sharp recovery in production and exports in 2001, followed by an even sharper decline in 2002. Moreover, for sugar much o f the story remains to be written as the export price declines by 36 percent over the next four years. 1.19 A high degree o f co-movement between the curves in Figure 7 (the average correlation between them i s 0.6) indicates clearly the impact o f external shocks, though there are important differences, too, especially the continuing decline o f apparel which began in 2001 as many firms including most foreign owned ones chose an opportune momentto exit. Industrial production data show a more or less steady contraction of the textile sector through 2002-03, followed by a sharply larger decline through 2004 and early 2005. The response to external developments, some anticipated others not, explains much of Mauritius' recent performance. 1.20 While the external sector may have been the culprit in the growth slowdown, from an ex post accounting standpoint, the cause appears as domestic spending. The trade balance actually strengthened marginally, moving from a small negative in 1997- 2000 to a small positive in 2001-05. In particular, the slowdown can be traced to a downturninthe inventory cycle (Table 6). On average, inventory investment contributed 2 percent to GDP growth in 1997-2000, but subtracted 3.1 percent in 2001-05. Other domestic spending showed little movement over the period, at least prior to 2005 when fixed investment fell sharply. The investment rate (Gross Fixed Capital Formation as a percent o f GDP) eased only slightly during the period, though it is much below the mid 1990s when it reached as much as 30 percent. Both public and private investment shared inthe retrenchment, except for a brief spike inpublic investment in2003 associatedwith the New Economic Agenda and construction o f the Cyber Tower. Table 6: Macroeconomic adiustment 1997-00 2001 2002 2003 2004 2005 Real GDP growth (%) 6.0 2.9 1.6 4.4 5.4 2.4 Contributions to growth from: ----- Inventories ai Consumption 2.9 1.9 2.1 3.O 2.9 4.5 Government 0.3 0.5 0.7 0.4 0.5 0.6 GDFCF 1.3 1.1 1.1 2.5 1.1 -0.4 2.0 -8.2 -0.5 -1.2 -0.8 -4.6 Trade balance -0.5 7.5 0.8 -0.4 -0.1 2.4 Gross national savings (% GDP) 26.5 28.4 27.4 25.2 22.7 17.4 GFCF (% GDP) 24.7 22.7 21.8 22.6 21.6 21.2 CPI inflation (%) 6.1 5.4 6.4 3.9 4.7 4.9 Terms o f trade (% change) 0.6 -1.6 5.7 -2.0 -3.7 -9.6 TOT adjustment (YOo f GDP) 0.2 -1.1 4.4 -1.1 -2.2 -6.4 C A balance (% GDP) -1.4 6.1 5.2 1.7 -1.8 -5.4 Real exchange rate (% change) 2.9 -2.3 0.2 -3.7 -3.2 -5.1 FX reserves (months of imports) 4.4 5.2 6.3 6.8 6.4 5.5 Source: CSO, BOM. Notes: a/ 'he individual contributions sum to total GDP growth. E.g. contribution to growth of consumption is calculated as IOO*(C, C,.I)/GDP,.I, - I I - 11- 1.21 At first glance, the adjustment of 1 Figure 8: GDP and the current account percent 10 a 1 A T ' 8-- 7-- accompanied by a current account 1993 1995 1997 1999 2001 2003 2005 deterioration as consumers smooth their I I CA Bal (hght) -GDP at Market Prices(Left)] paradox i s worth deciphering. 1.22 A possible explanation for the savings behavior is that despite the growth slowdown in 2001-02, consumers anticipated the future would bring an even greater slowdown coinciding with the loss o f sugar and textile preferences. An annex to this chapter presents a simple, forward looking model of the current account (due to Sheffrin and Woo 1990) which uses current savings behavior to draw inferences about future growth expectations. Historically, the model fits Mauritian data extremely well (see Figure 13 below in the annex). From the current account surplus in 2001-03 and its reversal in 2005, the model suggests an anticipation o f a cumulative adjustment to trade preference erosion o f 5-10 percent o f GDP. Notably, the figure i s in line with the IMF's estimate o f the adjustment cost. While the model does not predict how the 6 percent adjustment cost would be distributed over time, the sharp growth slowdown and current account reversal in 2005 suggest it may be relatively short and sharp. This i s reflected in the medium and long term growth scenarios mapped out inthe next section below. Figure 9: Foreign exchange reserves Figure 10: Real effective exchangerate months of imports 2000=100 7 , I 101 , 1 6 5 i I 99 2n 6 5 5 97 E 5 95 C L 0 4 5 8 93 3 v1 4 a g 91 3 5 3 89 2 5 87 \ 2 4 , I I , I I I I , I I I I I 85 I I I / I I I 1 8 8 / r I 1992 1994 1996 1998 2000 2002 2004 1992 1994 1996 1998 2000 2002 2004 Source IMF Source: IMF - 12- 10). Thus, foreign exchange reserves, though down significantly from the 2003 level were not far from the long runhistorical average in 2005. Meanwhile, the real effective exchange rate has depreciated sharply since 2000 which would be expected inresponse to a negative trade shock. Analysis by the IMF (IMF 2005) finds that Mauritius' exchange rate has been well managed and appropriately valued over the long term. But, it is striking that the current level is only a few percent below the level o fthe mid 1990s when the trade sector was much stronger than it i s today and some further depreciation i s likely. D. MAURITIUS FUTURE: PRODUCTIVITY BASEDGROWTH Near term prospects 1.24 If expectations are correct the economy is in for a period of below trend performance. Real GDP growth i s anticipated to recover progressively toward longer term potential and given recent macroeconomic dynamics which indicate substantial resilience i s not expected to drop below the 3-4 percent range (Table 7). Further terms o f trade deterioration and slow growth in export partners should continue to weigh on export performance, especially the sugar price cuts to be phased in over the next four years, which i s equivalent to 2.4 percent o f GDP. EPZ industrial production appears to be stabilizing, though some further consolidationintextiles and clothing cannot be ruled out. In the domestic economy, investment will likely remain cautious given persistent uncertainty, while fiscal restraint limits the contribution to growth o f public consumption. As the adjustment works itself out, real growth is forecasted to trend higher, risingfrom 3.5 percent in2005/06 to 4.3 percent in2009/10. Table 7: Short term outlook I 05/06 06107 07/08 08/09 09/10 Real GDP growth (%) 3.5 3.5 3.6 3.8 4.3 Inflation(%) 5.1 8.5 6.0 6.0 5.5 Investment/GDP (%) - Private 23.7 26.6 24.5 24.0 24.3 (%) 15.0 15.8 16.1 16.4 16.5 Gross Domestic Savings (% GDP) 14.8 18.5 19.3 20.1 21.8 Current account balance (% GDP) -5.2 -7.0 -4.8 -3.8 -2.4 Government deficit (% GDP) -5.4 -4.7 -4.2 -4.1 -3.5 Government debt (% GDP) 59.0 58.5 57.9 57.4 55.8 Source: World Bank staff calculations 1.25 Higher oil prices and the pass through o f recent exchange rate depreciation will add to inflationary pressure, though given the relatively subdued medium term prospects and continuing high unemployment, this i s unlikely to trigger any upward spiral. Given persistent export weakness the current account deficit i s not expected to narrow significantly from its present level o f around 4 percent o f GDP. However, this should not present an insurmountable financing problem in light o f Mauritius' low external debt. 1.26 To the extent that slow growth i s the result o f self-fulfilling pessimism, Government may be able to influence the outcome with measures to improve investor - 1 3 - confidence. The macroeconomic stimulus from higher investment inturn would generate multiplier effects on income and consumption. 1.27 I n the near term, Government can adopt low cost measures to boost confidence and stimulate investment. Macroeconomic management should remain prudent and attuned to downside risks. From a short term demand standpoint, getting the economy back on track depends on restoring confidence. Stimulating private investment will induce multiplier effects on spending and growth and help kick start the economy. Current conditions limit the scope for fiscal incentives - indeed, these would send the wrong signal and possiblybe counterproductive - but many low cost measures could be adopted, including reducing regulatory burdens and red tape, limiting discretion in granting work permits, liberalizing land use restrictions, streamlining labor market regulations and opening up air access. Reducing tax expenditures and parastatal subsidies (at negative cost to the budget) would help to allay concerns about macroeconomic stability. Near term measures will be most effective if they credibly signal longer term reformintentions to private investors. E. LONG TERMGROWTH SCENARIOS 1.28 Beyond measures to stimulate a near term macroeconomic response, prospects depend supply side efforts to raise productivity and establish a competitive presence in new areas, build new competencies, attract FDIto access new technologies and respond to market opportunities which may not even exist yet. Given the extent o f discontinuities with the past it is difficult to forecast with confidence how the future will unfold - although one recommendation below i s to develop better modeling tools to improve the quality o f analytical work and reduce the range o f uncertainty. 1.29 Nevertheless, with this caveat in mind, it will be useful to have a notion o f what longterm growth trajectories mightbe achieved interms of output and employment. The intent i s not so much to forecast as to explore the implications o f a range o f export and productivity performance. This section sketches out three scenarios - low, medium and high - by making assumptions about export growth and domestic spending and running them through Mauritius' IO table. Employment impacts are then derived by means o f assumptions about labor productivity. Comparing the results to international experience as well as Mauritius' own past performance suggests the range o f outcomes i s plausible.lo 1.30 Assumptions: Exports are the main drivers o f growth and the scenarios incorporate the following assumptions (summarized inTable 8): A.1. Tourism: Inthe low case, tourist arrivals double to 1.5 million. In the middle and high cases, arrivals rise to 2.0 million per year. Expenditure is distributed according to the Digest of Tourism Statistics (2005, Table 37). The low and middle cases hold per tourist expenditures constant in real terms. Inthe highcase they grow at 2 percent per year. lo point The o f the exercise i s not so much to forecast but rather to draw out the implications o f a range o f assumptions about export performance and productivity growth. - 14- A.2. Air Mauritius' market share, currently around 50 percent on the major European routes, declines proportionately to the increase in arrivals under a liberalized air access policy so that air travel exports remain unchanged. A.3. Sugar exports fall by 25 percent. A.4. Textiles and clothing fall by a further 25 percent. Other EPZ manufacturing, currently around 20 percent o f EPZ output, grows at an average rate o f 2.5 percent, 5 percent and 7.5 percent per year in the low, middle and highcases. AS. Business and financial services exports are assumed currently to be 50 percent o f total output'' in their respective sectors. In the low middle and high cases they grow at an average rate o f 5 percent, 7.5 percent and 10 percent. 1.31 In addition, the scenarios require assumptions about productivity growth, labor force participation, and human capital availability, together with closure rules to determine domestic spending (public and private consumption and investment): A.6. Labor productivity: grows by 3 percent in the low case, 4 percent in the middle case and 5 percent in the high case. Long term past labor productivity growth inMauritius has averaged around 4 percent. A.7. Labor force participation responds endogenously to employment opportunities. Male participation, currently around 80 percent, i s already in the range o f OECD countries and remains fixed. Female participation i s currently around 40 percent which would be low for a high income country. In the low case it remains at 40 percent, yielding an overall labor force participation o f 60 percent. In the middle case it rises to 50 percent for an Table 8: Forecast assumt>tions percent per year Iadditional HSCs Iadditional HSCs Iadditional HSCs l1The export share infinancial services output is negligible inthe 1997IOtable, but must have increased substantially since then. The export share of real estate, R&D and other business and technical services is 50 percent in the IO table. - 15- overall participation rate o f 65 percent. In the high case it rises to 65 percent for an overall rate o f 72.5 percent. A.8. Closure rules on domestic demand maintain public and private consumption and investment at their average shares o f GDP in 2001-05 - household consumption (72 percent), government consumption (15 percent) and gross fixed capital formation (25 percent). A.9. Human capital: The faster growth scenarios incorporate a shift toward more knowledge-based sectors such as financial and business services, education and health. According to 2000 census data, 26 percent o f employees in finance, real estate and business services have a HSC and 14 percent have a university degree (compared to 8.2 percent and 3.6 percent respectively in the workforce as a whole - see Table 31 below). It is assumed that additional employment in these sectors comprises 40 percent HSC holders, but that only 10,000 are supplied locally, with anything above that coming from expatriate workers. 1.32 Methodology: The forecast i s based on a standard Input-Outputapplication usingMauritius' 1997 IO table.12 Inbrief, an IO table consists of a coefficient matrix, A, whose columns show for each sector the intermediate inputs o f other sectors plus value added (labor and operating margins) per unit of gross output. The rows show the per unit distribution o f output across other sectors, together with the distribution o f final demand expenditure (household and government consumption, investment and exports) across sectors. Multiplying the coefficient matrix by an output vector shows the first round impacts on output demand from every sector as well as value added (labor and gross operating surplus). But there will also be second order effects as other sectors increase their output to accommodate the demand for additional intermediate inputs. The combined direct and indirect effects may be calculated by multiplyingthe output vector by a mathematical manipulation o f the coefficient matrix, written (I-A)-',which the CSO convenientlypublishes on its web site. 1.33 To complete the forecast, all that needs to be done i s (i) calibrate output and employment for 2005 to existing or estimated labor market and national accounts data, then (ii) multiply the changes derived from Table 8 by the (I-A)-' matrix to compute the combined direct and indirect impacts, (iii) increment these using the spending rules in assumption A.8, and (iv) compare the overall outcomes to the 2005 base year values. There i s one minor additional wrinkle - because the national accounts figures are value added whereas the IO table values are gross output relating the two sets of data to each other requires scaling them up or down as appropriate using each sector's share o f value addedingross output obtained from the IO table. l2A few judgmental adjustments have been made. (1) Construction comprises around halfo f GFCF inthe IOtable. By contrast inthe national accounts it has averaged 7 percent o f GDP, while GFCF is 25 percent o f GDP, implying a share o f 7/25 = 28 percent. (2) Public administration accounts for 60 percent o f government consumption inthe IO table. The scenario assumes a 30 percent increase inpublic sector efficiency and reallocates some spending to education and health. - 1 6 - 1.34 Results: The outcomes are presented below as long term average growth rates over a 20 year period, 2006-25, at which time according to UNFPA's mediumterm demographic projection, the working age (15-64 years) population will peak at 965,000. (It beginsto decline after that and falls to 916,000 by 2050.) 1.35 Table 9 summarizes the demographic and labor market outcomes for the three scenarios. Over the 2006-25 period, per capita GDP growth ranges from 3.2 percent (low) to 4.8 percent (middle) to 6.5 percent (high). Employment growth i s substantially lower, ranging from 0.6 percent (low) to 1.2 percent (middle) to 2.1 percent (high). Most o f the differences between employment and output growth are explained by labor productivity growth, but the shift in the composition of output toward more knowledge and capital intensive sectors where labor productivity is higher also plays a role. Overall, the low case generates a net increase of 66,200 jobs, the middle case 131,600 and the high case 251,800. Per capita GNI rises from US$5,200 in 2005 to US$9748 (low), US$13,254 (middle) and US$18,419 (high). With regard to human capital, the low case requires an additional 9,000 HSC holders which i s entirely satisfied by local graduates. But the middleand highscenarios employ 7,200 and 19,000 expatriate HSC holders. Table 9: Demogi phic and labor market utcomes Avg 2005 2025 Difference growth Low Population (,OOO) 1,245.0 1,417.0 172.0 0.6 15-64 POP (,OOO) 857.0 965.0 108.0 0.6 Laborforce (,OOO) 543.9 627.3 83.4 0.7 Employment (,OOO) - foreign 492.2 558.4 66.2 0.6 (,OOO) 0.0 Unemployment(,OOO) 51.7 68.8 17.1 1.4 Un.Rate (%I 9.5 11.0 1.5 0.7 PercapitaGNI (2005 US$) 5,200 9,748 4,548 3.2 Mid Population (,OOO) 1,245.0 1,438.5 223.5 0.7 15-64 POP (,OOO) 857.0 979.3 142.3 0.7 Labor force (,OOO) 543.9 706.8 172.9 1.3 Employment (,OOO) 492.2 623.8 131.6 1.2 - foreign (,OOO) 7.2 Unemployment(,OOO) 51.7 93.0 41.3 3.0 Un.Rate (%) 9.5 13.0 3.5 1.6 Per capitaGNI (2005 US$) 5.200 13.254 7.783 4.8 High Population (,OOO) 1,245.0 1,473.9 258.9 0.8 15-64 POP (,OOO) 857.0 1,002.9 165.9 0.8 Labor force (,OOO) 543.9 791.0 257.1 1.9 Employment (,OOO) - foreign 492.2 744.0 251.8 2.1 (,OOO) 19.0 Unemployment(,OOO) 51.7 57.0 5.2 0.5 Un.Rate (%I 9.5 7.1 -2.4 -1.4 Per capitaGNI (2005 US$) 5,200 18,419 13,219 6.5 - 17- 1.36 The sectoral breakdown of employment and output for the middle case (only) i s shown in Table 10. Some of the salient features are: 0 Agriculture exhibits strong growth o f 6.5 percent annually as a decline in sugarcane i s offset by 9.7 percent growth in other agriculture, hunting, forestry and fishing. Net employment in other agriculture increases by 55,700 workers, or an average growth rate of 5.7 percent. Household consumption accounts for almost all o f the demand increase for agricultural output with only a little over 5 percent coming from tourism, though there should be ample scope to increase backward linkages from tourism to agriculture. Since food demand i s relatively inelastic, the fixed-coefficient IO table may well overstate the sector's prospects. Still, an important point which the results highlight i s that downsizing of sugar will free up high quality land for redeployment to other agricultural uses, - potentially creating significant opportunities for relatively low-skill workers in smallholder or commercial amiculture. According to the scenario, 27,300 jobs are lost in sugar and EPZ manufacturing against a 55,700 increase in other agriculture, for a net increase o f 28,400 jobs. The outlook for manufacturing i s pessimistic, with overall growth o f 2.0 percent, comprising an outright decline in sugar offset by small gains inthe EPZ and other manufacturing. The sector sheds 34,500 jobs or 31 percent o f the current level. The outcome i s consistent with a view that without trade preferences Mauritius has little comparative advantage in manufacturing, given its remote location and small size. Table 10: Middle case. sectoral detail Annual growth (%) Employment (,OOO) Employ- GDP ment 2005 Increase boss DomesticProductat basic prices 5.5 1.2 492.2 131.6 Agriculture, hunting, forestry and fishing 6.5 3.7 43.2 45.4' - Sugarcane -1.3 -5.3 15.6 -10.4 - Other 9.7 5.7 27.6 55.7 Miningand quarrying 6.5 2.5 0.3 0.2 Manufacturing -- E.P.Z. 2.0 -0.5 111.2 -34.5 Sugar -1.3 -5.3 2.1 -1.4 Products 2.5 -1.5 58.8 -15.5 - Other 1.9 -2.1 50.3 -17.7 Electricity, gas and water supply 4.7 0.7 3.O 0.5 Construction 3.7 -0.3 47.5 -3.O Wholesale & retail trade, etc. 6.1 2.1 77.7 39.6 Hotels and restaurants 5.9 1.9 29.7 13.9 Transport ,storage and communications 4.7 0.7 36.5 5.7 Financial intermediation 7.1 3.1 8.2 7.0 Real estate, renting and business activities 7.2 3.2 19.5 17.4 Public administration, etc. 4.5 0.5 39.0 4.5 Education 5.9 1.9 27.0 12.7 Health and social work 5.7 1.7 14.8 5.8 Other services 6.0 2.0 34.6 16.6 - 18- Services sector growth rates range from 4.5 percent (public administration) to 7.1 percent (financial intermediation) and 7.2 percent (real estate, renting and business activities), but are mostly in the 5-6 percent range. Overall, the direct impacts o f financial and business services exports represent nearly a quarter of GDP growth and 42,000 jobs, mostly concentrated in financial intermediation, and real estate, renting and business activities which grow at 6.6 percent and 5.8 percent respectively. Tourism contributes another 15 percent o f GDP growth, also concentrated in a few sectors where it accounts for 97 percent of the growth in hotels and restaurants and 67 percent of recreational, cultural and sporting services. Domestic demand makes up the rest of the growth. Distribution o f output and e m d o w e n t gains: Faster growing sectors tend also to enjoy higher productivity. Thus, the growth o f output may not be matched by growth o f employment, as Table 11 indicates. For instance, the share o f financial and business services rises from 20 percent to 27.3 percent o f GDP, but the combined share of employment rises only from 5.7 percent to 8.3 percent. Among other things, the results suggest that the changes anticipated are likely to have a regressive impact on income distribution. Table 11: Middle case, distribution o f output and employment Percent GDP shares Employment shares 2005 2025 2005 2025 Agriculture, hunting, forestry and fishing 5.7 6.8 8.8 14.2 - Sugarcane - Other 2.9 0.8 3.2 0.8 2.8 6.0 5.6 13.4 Miningand quarrying 0.1 0.1 0.1 0.1 Manufacturing -- E.P.Z. 19.7 10.0 22.6 12.3 Sugar 0.9 0.2 0.4 0.1 Products 7.4 4.1 11.9 6.9 - Other 11.4 5.7 10.2 5.2 Electricity, gas and water supply 2.1 1.8 0.6 0.6 Construction 5.5 3.9 9.7 7.1 Wholesale & retail trade, etc. 12.0 13.3 15.8 18.8 Hotels and restaurants 7.6 8.2 6.0 7.0 Transport ,storage and communications 13.7 11.8 7.4 6.8 Financial intermediation 9.9 13.3 1.7 2.4 Real estate, renting and business activities 10.1 14.0 4.0 5.9 Public administration, etc. 7.0 5.8 7.9 7.0 Education 4.8 5.2 5.5 6.4 Health and social work 3.5 3.6 3.0 3.3 Other services 3.8 4.1 7.0 8.2 Benchmarkingexpectations 1.37 Comparing the outcomes depicted in Table 9 and Table 10 with Mauritius' own past experience and that out other countries suggests the scenario outcomes are - 19- within the range o f possibility, although ambitious. First, Figure 11 shows a histogram o f average growth over the period 1984-2004 for two sets o f comparators: (i) a universe o f * 141 countries with data available and (ii) subset o f 14 countries which had per capita a GDP in 1984 near where Mauritius is today. The average in the larger sample is 1.4 Figure 11: Distribution o f average per percent with a standard deviation o f 2.1 capita GDP growth, 1984-2004 percent. In the smaller sample the average i s percent 1.6 percent and the standard deviation 1.7 40 35 percent. As indicated in the figure, all three -s30 scenarios would place Mauritius well in the 25 top half o f either distribution and the high 20 growth scenario would be more than two 8815 standard deviations above the mean. 10 5 Consider the smaller subset. The best 0 performing country was Korea with a growth - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1 0 1 2 3 4 5 6 7 8 rate o f 5.8 percent, while 3 o f the 14 averagegrowth (%) countries (Gabon, RB de Venezuela and South Africa) hadnegative per capita growth over the period. 1.38 On a different tack, the prospective growth rates o f leading sectors may also be compared to past performance. Individual sectors in the scenarios achieve sustained output growth o f as much as 10-12 percent annually, for instance other agriculture (12.2 percent), financial intermediation (9.5 percent), and real estate, renting and business services (9.6 percent). Comparing these figures to Mauritius' past again suggests that the results are optimistic but not out o f line with historical experience. Over the period 1976- 96, EPZ manufacturing averaged 12.3 percent growth and restaurants and hotels (tourism) averaged 9.7 percent growth. Policyimplications: 1.39 While the three scenarios map out a feasible range o f outcomes, it also seems clear that an exceptional effort will be needed to reach the higher end o f the range. "Business as usual" over the past 40 years has consisted o f selling commodities into managed and protected markets. Succeeding in the intensely competitive export markets o f the future, will entail a radical new mindset and a departure from established practice. 1.40 Accelerate structural reforms aimed at increasing competitiveness and promoting new emerging sectors: The analysis o f this report together with other work on `aid for trade' and the investment climate identifies a menu o f structural reforms to improve productivity and competitiveness and mobilize resources to exploit emerging opportunities. Key pro-growth reforms which emerge from this work include: 0 Introduce competition and strengthen regulatory oversight to ensure high quality, cost competitive transport andtelecommunications services. 0 Ease restrictions on obtaining visas and work permits. - 20 - 0 Liberalize land transfer and use regulations. 0 Invest massively in education and training, especially in technical and specialist areas. 0 Support the development o f science and technology and strengthen the National Innovation System. Barring such reforms, the prospects for 6-7 percent growth are remote. 1.41 Facilitate expansion of smallholder agriculture: Non-sugar agriculture, hunting and fishing has the potential to create large numbers o f relatively low skilled jobs, while supplying both domestic consumption and the tourist trade. Smallholder agriculture in particular accords well with Government's intentions on economic democratization. In addition to facilitating land transfer and use, adequate financial and technical support must be provided by expanding AREU and perhaps establishing a special facility with the DBM. Eliminating price controls and subsidies on imported agricultural products would have the twin benefits o f increasing returns to domestic producers and reducing the budget deficit. 1.42 Improve modeling tools and analytical capabilities: Strengthening technical capacity i s essential to raise policy making to the next level. The scenarios presented above necessarily make simplifying assumptions and omit feedback effects o f price and exchange rate changes, budget and current account deficits, credit conditions and so on. More sophisticated (CGE and macroeconomic) modeling tools are needed to provide policy makers with better and faster costing and evaluation o f policy options. Better forecasting, in turn, would increase the accuracy o f fiscal projections and public investment planning, and avoid creating unrealistic expectations on the part o f investors. A good start would be to update the IO table, now 9 years out o f date, which could then serve as a platform for developing a CGE model. -21 - ANNEX-A FORWARDLOOKINGMODEL OFTHE CURRENTACCOUNT 1.43 From a macroeconomic standpoint, 2001-03 presents an unusual confluence o f events - a growth slowdown accompanied by a rise in the savings rate (Figure 12). Economic logic dictates that consumption should be less volatile than income as consumers save and dissave in order to smooth expenditure over cycles in income. Thus, income should be more volatile than consumption, not less volatile as was the case here and slower growth should have current account balance US$millions triggered a fall in the savings rate. Expectations may hold the key to this I seeming paradox. Though growth slowed after 2000, it was well known at the time that the MFA and the EU sugar protocol were coming to an end which might reasonably have led consumers to anticipate a further negative shock to income and hence a motive to increase precautionary savings. Here, we -10 1 1995-99 2000 2001 2002 2003 2004 2005 estimate a model o f (unobservable) 1 I BalCA -Sawn@ --TotalinvestmentI expectations about future growth and show Source CSONorirnolAccounia that historically this has been closely related to savings behavior. Based on this relationship, the very large current account surpluses in 2001-03 imply an expectation o f GDP growth falling 3-5 percent below trend for a period o f 3-4 years. 1.44 Economists explain savings in terms o f consumption smoothing by risk- averse cons~mers.'~ That is, given actual or expected future volatility in income growth, consumers will save or dissave in order to smooth their consumption over time. This notion has given rise to a class o f behavioral models with clear testable implications, which have found resounding empirical validation. For consumers facing a future fall in income, the models would predict a reduction in spending beforehand in order to accumulate savings, followed by dissaving to finance a higher level o f spending than current incomes wouldjustify. Such behavior would be consistent with the facts shown in Figure 12. 1.45 Individuals can save (or lend) by holding bank accounts or other financial assets. For a nation as a whole, net saving i s the difference between domestic savings and investment, or equivalently capital outflows inthe balance o f payments which equals the current account surplus. Domestic savings and investment in the national accounts were very nearly in balance in 1995-2000, but diverged sharply beginning in 2001 when savings rose and investment fell. Likewise, the current account was approximately in l3 "Risk aversion" inthis context refers to an implicationofdiminishing marginal utility, namely that utility maximizing consumers will prefer to smooth consumption over time. That is, a consumer earning 200 this year and 100 next year will be best off by consuming the average o f 150inboth years. The notion originated with Milton Friedman's permanent income hypothesis and was first used to model current account behavior by Sachs 1982 and Svenssonand Razin 1982. - 22 - balance but then began to register a large ~urplus.'~ current account surplus was The US$276 million or nearly 8 percent of GDP in2001andUS$619 million in2001-03. 1.46 Before going any further, we need to ascertain whether or not the current account i s actually informative about expectations o f future growth in Mauritius. To do this, we use a simple, forward looking time series model developed by Sheffrin and Woo 1990. Their model begins by forecasting future income growth at each time, t, based on historical data available to t-1, and then calculates the net present value o f the growth forecast. If consumers are smoothing away expected variations in income, then the current account balance should just offset the variations in the predicted NPV." Technically, the authors use a two equation vector autoregression (VAR) which estimates (i) currentaccountbalanceand(ii)measureofrealoutput, basedonpastvaluesof the a these same two variables. This relationship i s then inverted to predict at each time t the values o f real output at t+l, t+2, t+3, .... Then the net present value o f changes in future real output can be compared to the actual current account balance at time t. Ifthe two are close, the current account arguably reflects rational, forward looking savings behavior. 1.47 Figure 13 shows the results from applying the technique to Mauritian data Figure 13: Actual and predicted current over the period 1976-2004. The solid line i s account balance US$millions the actual current account balance and the dashed line i s the predicted value. Despite _I"" the simplicity o f the model the fit i s 200 - remarkably good. W e take this as justifying 100 - the inference that the current account surplus in 2001-03 was a reflection o f pessimistic 1 expectations. -200 - I 1.48 The cumulative current account surplus o f US$619 million in 2001-03 using 1917 1980 1983 1986 1989 1992 1995 1998 2001 2004 -Current account (S)--Predicted a discount rate o f 8 percent implies a downward revision o f expectations equivalent to a permanent reduction in GDP o f around US$80 million per year, or roughly 1.3 percent. However, the model does not indicate what pattern to expect. Interpreting it as a transitional adjustment effect, the current account surplus would be consistent with a decrease o f 2.5 percent o f GDP for five years, or 4 percent for three years. These figures seem about the right order o f magnitude given the value o f sugar and apparel trade preferences. l4Conceptually the current account surplus equals the difference between domestic savings and investment, even though inpractice they may be different. In2001, the current account balance was US$276.1 million while the excess o f domestic savings over investment inthe national accounts was US$349.6 million. The difference is explained partly by definitions and timing, and partly by measurement errors. Current account errors and omissions in2001 were -US$86.3 million or -1.9 percent of GDP. Inother words, the relations hold within the margin o f error o f the data. 15According to Friedman's permanent income hypothesis, the NPV o f income and consumption should be equal. The issue for Sheffrin and Woo is whether the data are consistent with savings decisions being made by rational consumers. For some countries they findthe relationship works well, while for others it does not. The approach has subsequently beenrefined, but even this simple version gives a remarkably good fit for Mauritius. - 23 - CHAPTER 2. THE PUBLIC SECTORINA TIME OF FISCALCONSOLIDATION A. INTRODUCTION 2.1 Since independence, Mauritius' development strategy has placed heavy demands on the state for economic and social management. The government supplies infrastructure, security, health and education services, and logistical and institutional support- for sugar, the EPZ, tourism, financial services and other export sectors. It directly employs 15 percent o f the labor force. No small measure o f Mauritius' success i s due to the public sector's performance andwhen commentators such as Rodrik 1999 and Subramanian and Roy 2001 admire Mauritius' "institutional strength," they mainly have inmindthe way the government does itsjob. 2.2 As might be expected, international benchmarking awards Mauritius' public sector compaiatively good grades. But, it also finds room for improvement. On some measures, efficiency i s 30 percent or more below best practice in the provision o f public goods. Public expenditure on health and education i s low, which i s reflected in low immunization and educational enrollment. Industrial regulation i s complex and cumbersome, and yet ineffective at the same time because of frequent exemptions and a lack of enforcement. Despite some modernization and the e-government initiative, the basic structure o f the civil service dates from the 1970s and i s overly bureaucratic and lacks a results culture. Survey responses consistently record complaints about bureaucracy, red tape and corruption. 2.3 Recent developments have focused greater attention on these shortcomings. First, and most immediate, a decade o f increasingly lax fiscal discipline has built up public debt to more than 70 percent of GDP, constraining fiscal space and raisingconcern about macroeconomic stability.l6Yet, demands for infrastructure, health, education and social security spending continue to mount. Satisfying these demands with limited resources will require both raising efficiency and redirecting expenditure to higher priority objectives. At the same time, red tape, corruption and poor results - not least the slow pace o f the economic transformation - suggest a reconsideration o f what role the state should play and how best to achieve the country's objectives. 2.4 In recognizing the need to set realistic goals, simplify and streamline procedures, find more efficient ways o f achieving social objectives and intervene, where necessary, in a less burdensome way, Mauritius i s following in the footsteps of the US, Britain, Australia, New Zealand and many other countries in Eastern Europe, Latin l6December2005,Moody`sInvestorsServiceloweredtheoutlookonMauritius'debt ratingsto In negative from stable, "...in light of the unfavorabledirection of governmentfinances over recent years, including high levels of governmentdebt." (Moody`s InvestorsService Press Release, 21December2005). - 24 - America and elsewhere. Like these countries, Mauritius i s moving towards a, "`post- regulatory state', which relies less on direct provision and heavy doses o f government authority and more on lighter, more selective instruments, including a preference for self- regulation and partnerships with non-governmental institutions." (UN2005, p. 13) 2.5 This chapter reviews what has been achieved, identifies needs and options for further change. Section B begins by assessing the current fiscal situation and the need to reestablish balance. The section also evaluates the role played by the Medium Term Expenditure Framework (MTEF) which Mauritius began initiating in 2002. MTEF can play a central role in overall budget and fiscal management, but so far it has failed to do so and there i s a need to rebalance the implementation strategy. Section C turns to the role o f the public sector and benchmarks performance and efficiency in providing public goods. Recent reviews o f the state's performance as regulator and economic manager find a need for regulatory reform. Similarly, benchmarking public sector outputs and efficiency finds scope for changing the output mix and raising efficiency, including through better humanresource management. Finally, Section D turns to governance. As elsewhere, performance here gets a passing grade, but the assessments are relatively less favorable with regard to regulation which i s seen as cumbersome and bureaucratic, and corruption which emerges as a significant issue. Streamlining and simplifying regulations will both lighten the burden and eliminate discretion, hence opportunities for corruption. Inturn, this calls for a continuationo f civil service reforms begun in2001. B. FISCALPERFORMANCE 2.6 Following graduation from structural adjustment in the early 1980s, a decade o f fiscal restraint progressively restored Mauritius' fiscal health and halved the debt burdenfrom 80 percent o f GDP in 1983/84 to 40 percent in 1993/94. But, since then the trend has reversed and the central government debt as a share o f GDP has risen steadily (Figure 14). In2004/05 central government debt was in 57.5 percent o f GDP, o f which 92 percent was borrowed domestically. Domestic credit to central government rose from Rs. 13.6 billion in 2000 to Rs. 41.0 billion in 2005, or from 15.8 percent to 25 percent o f domestic credit. Figure 14: Central government debt Figure 15: Central government balance percent of GDP percent 65 n I I 3 2 1 - 1 60 1 - I a 8 55 L -0 -1 i 6 5 -2 50 -3 0. -4 45 -5 -6 I 1993194 1995196 1997/8 1999100 2001/02 2003/04 1993194 1995/96 199718 1999100 2001/02 2003104 Saurcecso - 2 5 - 2.7 A failure to adjust to slower growth and the erosion of trade taxes explains much of the deterioration in public finances since the mid 1990s (World Bank 2004a). Duringthis period, total revenue plus grants has averaged a little less than 20 percent o f GDP and expenditure around 25 percent o f GDP. In terms of composition, there has been a moderate shift toward current from capital andwithin current toward transfers and subsidies, but neither revenue nor expenditure exhibits any strong trend. Notably, the previous Government's New economic agenda in FY2001/02 laid out an ambitious program o f textile and sugar restructuring, and major public investments in schools, housing, transport and the environment, and carried a price tag of Rs. 50 billion over five years or 6-7 percent o f GDP on average. But, actual spending rose by less than half that amount or 2.9 percent on average and almost all o f that was due to higher net lending (including to parastatals) which was not associated with the NEA (Table 12). Thus, the NEAbears little responsibilityfor the current fiscal situation. Table 12: Fiscalperformance, 1993194 -2004/05 -percent of GDP I93194-96197 97198-00101 01102-04/05 Expenditure 24.2 22.5 25.4 - Current, x interest -- Net 19.8 21.0 20.8 Capital 3.8 3.4 4.2 lending 0.7 -1.8 0.4 - Interest 3.1 3.8 3.8 Revenue --- Grants 19.4 19.6 19.6 Tax 17.0 17.2 17.2 Non-tax 2.1 2.2 2.1 0.2 0.2 0.3 Overall balance -4.8 -2.9 -5.7 -1.7 0.8 -1.9 ICentral governmentdebt I 47.2 48.1 54.1 Source: CSOand IMF 2005 Article IVstaffreport. Note: "/final year value Sustainabilityand publicinvestment 2.8 Recent analyses by the World Bank and IMF have expressed concern about Mauritius' deteriorating fiscal situation and the need for adjustment (World Bank 2004a, Sacerdoti et al. 2005, IMF 2005,2006). With the deficit projected at 6 percent or more of GDP in FY 2005/06 and a growing risk o f slower medium term growth, the need for adjustment becomes even more imperative. Sacerdoti et al. assess medium term vulnerability by estimating the impact o f various shocks on the debt to GDP ratio after three years (Table 13). The scenarios are not necessarily realistic, but rather illustrate potential risks by estimating the impact o f a two standard deviation negative shock in growth and world interest rates. The starting point i s a 2004/05 debt o f 71.8 percent of GDP, not far from the current level. In the baseline outcome, a moderate fiscal consolidation has the debt to GDP ratio falling to 63.9 percent, while with no adjustment it rises moderately to 76.4 percent. But with adverse developments in the external environment, the no-adjustment situation quickly gets out of control and debt rises to - 26 - 112.3 percent o f GDP." By contrast, with adjustment the outcome i s a still manageable 75.7 percent o f GDP. Adjustment No adjustment Baseline 63.9 76.4 Low growth 70.7 86.6 Low growth and high interest rates 75.7 112.3 2.9 Recognizing that the fiscal situation i s worse than expected Government has made adjustment a priority (Government o f Mauritius 2005b). An IMF Fiscal Affairs Department mission in February 2006 estimated that without adjustment and factoring in the impacts o f the "duty-free island" and rising pension liabilities, the central government deficit could rise to 9.2 percent o f GDP by 2008/09 or as much as 10 percent including transfers to parastatals (IMF 2006). In terms o f the adjustment, the mission proposed a target for the primary balance o f a 1.1 percent o f GDP surplus by 2010/11 which would stabilize the debt/GDP ratio at 60 percent. Such a program would maintain the debt at a sustainable level, but limit arbitrary measures which would be less efficient and durable and perhaps impact negatively on the economy. 2.10 The proposed adjustment, summarized in Table 14, comprises revenue and expenditure measures totaling 5.8 percent o f GDP by 2008/09. For the most part, the proposals have the added benefit o f simplifying and streamlining various programs and increase efficiency. The revenue side focuses on eliminating tax expenditures such as income tax, customs duty, excise and VAT exemptions. On the expenditure side, much o f the gain comes from means testing the basic pension and replacing consumer subsidies (rice, flour, electricity) with cash transfers for the most needy. Other measures include partially freezing civil service hiring and introducing user charges for health and education. 2.11 Implement a fiscal adjustment close to the IMF's proposal. Fiscal sustainability is important so that financial considerations do not overtake the entire reform agenda, interfering with expenditure on infrastructure or safety nets which are appropriate. However, the IMF's proposals may be difficult to implement for political reasons, in particular those on the expenditure side pertaining to transfers and subsidies. In this case Government may wish to implement additional revenue measures since Mauritius' revenue effort i s low, for instance with only 60,000 personal income tax payers out o f a work force o f 500,000. However, pension reform and subsidy issues shouldbe reviewed as soon as politically feasible. l7The shocks modeledare atwo standarddeviation fall ingrowth andatwo standarddeviation rise in interestrates for a two year period. - 27 - Table 14: Proposed fiscal adjustment measures nercent of GDP 2006107 2007108 2008109 Totalsaving 3.9 4.9 5.8 Revenue 1.9 2.4 2.8 Remove exemptions on excise duties 0.2 0.2 0.2 Eliminate exemptions on import duties 0.5 0.2 0.0 Unifycorporate income tax rate at 25% 0.0 0.3 0.3 Eliminate annual allowance incorporate income tax 0.4 0.8 1.2 Eliminate VAT exemptions for non-food, non-export goods 0.8 0.9 1.1 Expenditure 2.0 2.5 3.0 Institute means testing for basic pension 1.o 1.3 1.5 Replace consumer subsidies with means-tested cash transfers 0.5 0.5 0.5 Charge user fees for health and education 0.1 0.1 0.1 Partially freeze civil service hiring 0.1 0.1 0.3 Raise civil service retirement age to 65 0.1 0.2 0.3 Reduce transfers to parastatals 0.0 0.0 0.2 Holdpurchases o f goods and services constant inreal terms 0.1 0.1 0.1 Other-measures 0.1 0.1 0.0 Source: IMF 2006, pp. 23-34. 2.12 Apart from near term adjustment, Mauritius also faces major investment demands to support economic restructuring and modernization. Table 15 shows one estimate from the 2004/05 budget. Such demands call for carefully evaluating costs and benefits, and/or finding creative solutions to financing. The opportunity cost o f financing these initiatives out o f government revenues i s either a higher tax effort or significant new borrowing. Under the circumstances, the latter is unlikely to yield much. Of course, the dilemma facing Mauritius is not unique. Many countries are havingto deal with the tradeoff between public investment needs and other objectives, such as increased recurrent spending on education or health, or lower taxes (IMF 2004a, 2005). Sector Proposedexpenditure Transport - Airport --- Mass 25.0 Port 2.0 Roads 9.0 transit 14.0 Decentralization 8.0 Solid waste 3.0 Waste water 8.6 Electricity 6.5 Water 8.0 Tourism Total 84.1 I Memo item: GDP (2004105) 178.5 - 28 - 2.13 Under some circumstances, public-private partnerships (PPPs) may offer an attractive means o f financing infrastructure spending. At a time when fiscal consolidation i s a priority, capital spending i s hard to justify even when social returns are high (Suescun 2005). PPPs attract private funding to activities traditionally regarded as inthe domain o f the state. As well as alleviating financial constraints, the ownership o f assets by the private sector may encourage efficiency gains because o f better management (IMF 2004b). However, a PPP must genuinely transfer risk not simply remove assets and liabilities from the government's balance sheet with no effect on potential losses by the treasury. That is, a PPP will typically earn revenues by selling infrastructure services to the government or directly to users via a concession. But if the government ultimately guarantees the project's success, potential losses will still accrue to the government so there are no implications for fiscal vulnerability or sustainability (although there may still be efficiency gains). PPP programs have begun to appear throughout the EU, and in Central and Eastern Europe and Latin America. Ireland, the UK,Chile andMexico haveusedthem extensively. 2.14 Prioritize public investment needs according to their impacts on growth and competitiveness. Whether financed by borrowing or private investors, the rationale for public investments must be scrutinized carefully. Notably, the Investment Climate survey did not find a strong demand for new infrastructure, and cross-country evidence in general does not find a strong relationship between public investment and growth. However, it is important to approach spending decisions systematically and ensure they are aligned with national priorities. The MediumTerm Expenditure Framework (MTEF) discussed inthe next section, provides a mechanism to carry this out. The MediumTerm ExpenditureFramework(MTEF) and budgetmanagement 2.15 Persistent failures to match revenues and expenditures over the past decade indicate strategic and to a lesser extent technical problems in budget preparation and execution. In this context, "technical" refers to forecasting budget aggregates and monitoring expenditures, tasks which appear to have been performed reasonably accurately, considering the volatility o f growth over the period. However, revenue shortfalls have been made up by delaying capital expenditures at some efficiency cost. '* 2.16 More serious has been a chronic problem o f setting priorities and disciplining the budgeting process. To address this, Mauritius began implementing a Medium Term Expenditure Framework in 2002 (box 3). Since then, significant progress has been achieved, with the establishment, staffing and training o f a central MTEF unit in the Ministryo fFinance and Economic Development; development o fa three year framework o f revenues and spending which i s published as an annex in the Budget Estimates; and preparation o f six pilot MTEFsincorporatingresults based formats. l9 Capital expenditures were cut by around Rs. 1billion or 15 percent in2003/04 and 2004105 to maintain the projected deficit at the targeted level. For education, vocational training, social assistance, health, environment and transport. - 29 - 2.17 But, after getting off to a good start the process appears to have lost momentum. There has been little incentive to utilize MTEF on the part o f senior officials and ministers and implementation i s behind schedule. Even in the pilot ministries which have prepared MTEF documents jointly with MOFED staff there i s little appreciation o f the greater scope to prioritize and control spending within politically agreed hard budget constraints. Elsewhere, MTEF has come to be regarded as something that concerns only the pilot ministries since actual government wide budget documents remain intraditional format and there seems to be no change inthe way the budgeti s administered. 2.18 In brief, the culture o f budgeting has not changed, but rather remains incremental and adversarial, with line ministries fighting to get the most resources out o f MOFED which in turn becomes enmeshed in arguing the fine detail o f budget submissions. The MTEF so far has done little to reduce the overall fiscal deficit, nor has it yet made ministers collectively face the trade-offs between and within sector portfolios in developing new policies. Powerful ministers continue to press for ambitious new programs which collectively cannot be financed. For its part, the Finance Ministry must preparethe annual macroeconomic and fiscal framework ina more transparent way based on explicit assumptions which can be scrutinized and debated. .............. "I " ~ Box 3: The Medium Term ExpenditureFramework Through mostofthe post-independenceperiod, annualbudgetinginMauritiuswas guidedby a FiveYear Planand a rollingthreeyear Public Sector InvestmentProgram. But, in 1993the practiceof preparingfiveyear national planswas droppedafter which it becameapparent that a strongmechanismlinkingpolicy, plans andbudgets inamediumtermperspective was lacking.In 2003, the Governmentwith help fromthe WorldBankbeganto implement an MTEF. *' MTEF is a techniquefor strengtheningbudgetpreparation, executionandmonitoring.Its twin objectivesare to (i)strengthenoverallfiscal controland(ii) usebudgetaryresourcesmore effectivelyto achievethe government's priorities. The maininstrument for the first ofthese is the mediumtermfiscal frameworkwhichprojectsfiscal aggregates(revenue, expenditureand deficit)basedon a macroeconomic forecast andthe government's overallfiscal objectives. The fiscal framework is discussedat the Cabinetlevelto buildunderstandingand consensusaround budgetplanning. The secondobjective, moreefficient use of resources, is achievedthrough ResultsBased Budgeting(RBB). Traditionalbudgetingproduceslineitemexpendituressuch as teachers' salaries or schoolmaintenance. Butwith RBB, costs are moreexplicitlylinkedto outputs or outcomessuchas increasingreadingproficiencyor examinationpassrates. A rolling medium term (3-year)window allows current year capital expendituresto be linkedto subsequent recurrentneeds. Thus, the MTEFfeatures simultaneousexchange oftop-down andbottom-upinformationflows, which allowthe Cabinetto set prioritiesandwhile devolvingimplementationto professionals in *'Basedon designs by Muggeridge2001 andMuggeridgeandWhite 2003. - 3 0 - Moving forward with MTEF 2.19 MTEF can make a valuable contribution to Government efforts to strengthen fiscal management, better align budgetary allocations and strategic priorities, and improve the efficiency o f achieving objectives. A fully operational MTEF i s well within Mauritius' grasp, but because o f flawed implementation, MTEF has failed to realize its potential. 2.20 Revitalize MTEF implementation: Mauritius' MTEF had two components, first to establish top down control o f the fiscal framework, and second to develop performance indicators and institute results based budgeting. The following 7-step program i s intendedto revitalize MTEF implementation21 1. Promote a broader understanding of MTEF: The MTEF Unit needs to continue building awareness o f what MTEF means for policymaking, planning and budgeting. A training and communications strategy for the MTEF should be developed and implemented as proposed by Muggeridge and White 2002. The strategy should include wider distribution o f the Muggridge-White report, which provides a clear diagnosis o f the drawbacks o f present arrangements and sets out the fiscal strategy, allocative and performance management dimensions o f a fully developed MTEF system. But, the MTEF Unit itself has also developed useful materials (see Kokil, Ramdeen and Khushiram 2005). Better networking with other countries in the region implementing MTEFs would be advantageous, especially the South African National Treasury. 2. Change the budget culture: MTEF has failed to change the culture o f budgeting, which remains incremental and adversarial. Critically missing i s collective ownership o f both priorities expressed in the budget circulars and the budget aggregates (and deficit reduction strategy) reflected in the fiscal framework. Top officials must exert leadership, giving a firm commitment to implementing MTEF as a system-wide process. This must be communicated clearly and enforced, with new rules and incentives applied by MOFED during budget preparation and execution. MOFEDmust provide key inputs to the budgetprocess (revenue forecasts) in a more timely and transparent manner and cast the results o f cabinet negotiations inhardcall circular ceilings. For their part, Ministers must accept responsibility for managing their portfolios within a cabinet approved resources envelope. 3. Rebalance MTEF implementation: The thrust o f MTEF implementation has been on developing performance measures for outputs and outcomes and recasting pilot ministry budgets in a program format. This has left other ministries, departments and agencies with the impression o f business as usual. But, performance management i s arguably the least important o f the budget challenges the Government faces. A higher order challenge i s to ensure collective agreement on *' For a more detaileddiscussion, see World Bank2005a. - 3 1 - the aggregate fiscal strategy by the Cabinet and ensure that policy-making i s based on availability o f resources. Implementation needs to open a second front and give at least as much emphasis to top-down setting and management o f ceilings across the whole of government. 4. Align fiscal stratem and the MTEF: The annual budget cycle begins with - MOFED briefing Ministers on economic prospects and the Government's medium term fiscal strategy.22 Currently, Ministers are presented with call circular ceilings and expected to adhere to them. Instead, the outlook should be presented earlier for Cabinet to review and formally adopt. This would build ownership and lead into a consultative process o f collective decision making on spending priorities under the Finance Minister's guidance. Afterward MOFED would issue call circular ceilings which reflect the consensus. The aim would be to change the dynamics o f the budget process, putting the Cabinet in charge o f setting priorities. The recently proposed Expenditure Review Committee (ERC) can be usefully teamed up with MTEF to review spending plans. 5. Link policies, plans and budgets more closelv: Hard ceilings will give greater incentives for Ministers and senior officials to become more engaged inreviewing the efficiency and effectiveness of existing programs. Procedures for submitting new policy proposals to cabinet must ask ministries to estimate costs to existing and prospective MTEF resource envelopes. The process can be further enhanced by creating more space for stakeholder dialogue in sector policy planning and budgeting through sector working groups (SWGs) comprising Government, the private sector and NGOs. 6. Strengthen scrutinv of capital projects: Line ministries (and MOFED) will need better project design and evaluation skills in light o f the flexibility to shift resources between capital and recurrent budgets within an overall allocation. As a first step, outside consultants might be hired to assess project and program design and evaluation, while ministriesbuildin-house capacity through practical training at an appropriate local institution. Where necessary, this could be combined with the traininginresults basedmonitoring and evaluation. 7. Draw UP a new timetable for implementation: After some slippage, a Central MTEF Unit has now been established and MOFED is well placed to move forward. The new Government should reaffirm its commitment by drawing up and disseminating a new schedule for MTEF implementation. It i s probably too late for MTEF to be fully operational for the 2006/07 budget, but some cabinet level discussion should take place, and MTEF should be the basis o f the 2007/08 budget. 22This takes the form of aBudget Information Paper presentedto Cabinet inMarch, also describing progress onthe current year budget, expectations for the coming year and commentaryon major spending programs.The briefingis subsequently reproducedas an annex to the Budget. - 32 - c. THEROLEOF THE STATE The state as regulator 2.21 Mauritius' consensual approach to public administration and policy making i s deeply rooted in its history and ethnicity, with traditions that go back to the early 1800s. Thanks in part to a vibrant democracy, a capable and professional civil service and a fundamental commitment to partnership with the private sector, Mauritius avoided the extremes o f state control which occurred in many other countries in the region. Nevertheless, a hands-on, interventionist style extended over time into practically every aspect o f economic life, building up an intricate web o f regulations which are expensive and burdensome, yet ineffective because o f widespread exemptions and non-compliance. Some examples: 0 Remuneration Orders mandate sector- and occupation-specific minimum wages and working conditions covering around 80 percent o f private sector workers. ROs have likely contributed to the growth o f the informal sector while discriminating against low-wage, low productivity formal sector firms. Yet, wage contracts are observed both above and below stipulated minimum wages because o f market forces and collective bargaining on the one hand and non-compliance on the other, especially inthe informal sector (see Chapter 4 below). 0 A variety o f incentives including tax holidays, allowances and exemptions is offered to different classes o f firms (EPZ, IT, Pioneer, Seafood, etc.). Some o f these overlapping schemes are superfluous or excessively generous and actually subsidize investment. Because o f its complexity, the system discriminates against SMEs (World Bank 2006). 0 An elaborate system o f social aid schemes comprising subsidies and cash transfers i s inefficient and expensive. Many programs are fragmented, poorly targeted and expensive to administer, and have limited welfare impact. In some cases, needy households fall through the cracks, while in others well intentioned transfers and subsidies shed substantial benefits on wealthier households (Subbarao 2006, IMF 2006) 2.22 Initiate systematic review of all economic and social regulations and programs, culling those which are redundant or ineffective (regulatory guillotine). Wholesale, top-down regulatory reviews have resulted in dramatic simplification and streamlining in a growing number o f developed and developing countries. For instance after a 1998 review, Korea eliminated 48.8 percent o f its 11,125 regulations and revised another 21.7 percent; the regulatory burden was lowered by an estimated 4.4 percent o f GDP and employment and FDI rose sharply. Similar results have been achieved in Sweden, Hungary and Mexico. The strategy i s to reverse the incentives, automatically eliminating regulations unless their usefulness can be established (Jacobs 2006, Jacobs and Astrakhan 2006). The process, known as a regulatory guillotine, i s accompanied by an institutional review o f new regulations to keep them from proliferating again. - 33 - The state as supplier of publicgoods 2.23 Table 16 compares a sample o f public sector indicators for Mauritius to average levels for several other groupings - all 227 countries in the sample, 24 high- income OECD countries, 36 upper middle income countries (including Mauritius), and 41 small island developing states. For instance, the first entry in the table shows public expenditure on health in Mauritius was a relatively low 2.1 percent o f GDP, compared to an average o f 3.5 percent o f GDP for all countries, 6.2 percent for high income OECD countries and 2.6 percent for Sub-Saharan Africa. The smaller figures in parentheses beside each column indicate Mauritius' percentile in the d i ~ t r i b u t i o n . ~Thus, for ~ instance, 75 percent of all countries including 100 percent o f high income OECD countries spent a higher percentage o f GDP on health than Mauritius. Table 16: Public goods supplybenchmarks avei e value in 100-2003( S U ~ :t to data avai bility) High Upper income- middle Mauritius All OECD income SSA SIDS Value % Value % Value % Value % Value % Healthexpenditure,public (% of GDP) 2.1 3.5 (25) 6.2 (0) 3.8 (12) 2.6 (38) 4.0 (9) Immunization,DPT 90.0 82.5. (51) 93.6 (20) 92.3 (18) 64.8 (94) 84.8 (47) Immunization,measles 88.0 82.1 (50) 89.1 (36) 92.9 (12) 65.4 (91) 85.6 (38) Public spending on education(% of GDP) 3.9 4.6 (39) 5.4 (13) 5.2 (13) 4.2 (55) 6.1 (20) Pupil-teacherratio,primary 25.4 27.6 (44) 15.5 (10) 20.4 (17) 43.7 (98) 23.6 (37) Trainedprimaryteachers(% oftotal) 100.0 81.8 (99) .. (100) 76.7 (95) 77.8 (97) 79.7 (96) Grossprimaryschool enrollment(%) 106.1 101 (65) 103.4 (76) 104.3 (59) 93.7 (70) 108.8 (38) Netprimaryschool enrollment(%) 92.5 86.2 (57) 98.3 (4) 89.9 (62) 68.6 (91) 93.5 (27) Gross secondaryschool enrollment (%) 78.9 71.8 (52) 115.1 (0) 85.2 (39) 35.2 (92) 75.0 (48) Net secondaryschool enrollment(%) 68.7 64.5 (44) 90.4 (0) 74.5 (33) 30.1 (93) 64.1 (48) Gross tertiaryschool enrollment(%) 12.5 27.5 (34) 58.6 (4) 33.4 (19) 3.8 (93) 13.9 (5x1 Internationaltrade taxes (% o frevenue) 23.3 9.5 (87) 1.0 (94) 7.2 (90) 27.5 (38) 20.1 (38) 2.24 Two indicators o f health service provision (immunization rates) compare ~ more favorably, though still low. Mauritius appears around the mid point o f the overall distribution and in the top 10 percent for to Sub-Saharan Africa, but near the bottom compared to high income OECD and upper middle income countries, and in the bottom half o f the distribution for SIDS. The explanation may be that the incidence o f communicable diseases such as malaria and HIV/AIDS i s low because o f Mauritius' small, remote setting, though as noted Mauritius i s also in the bottom ten percent o f the distribution for Small IslandDeveloping States where the average i s 4.0 percent o f GDP. 2.25 Education indicators compare more favorably, but are also relatively weak. Public spending on education at 3.9 percent o f GDP i s below the average o f 4.6 percent for the entire sample o f 154 countries and 4.2 percent for 30 upper middle income ~~ 23 I t i s convenient to express these as percentiles because there are different numbers o f countries for each comparator group and variable. Since Mauritius i s not inthe OECD, the ranking represents where a country with such a score would appear inthe distribution. - 34 - countries, though such figures need to be interpreted carefully since they don't indicate the contribution o f private financing which, in Mauritius, i s high. Net primary school enrollment at 92.5 percent i s above the 86.2 percent average for all countries and 89.9 percent for upper middle income countries, though not far above the mid-points o f these distributions. However, the high income OECD average i s 98.3 percent and Mauritius i s at the 4thpercentile of this distribution, second from the bottom. The SIDS average i s 93.5 percent with Mauritius at the 27`h percentile. 2.26 Comparing Mauritius' position inthe distributions for primary education with those for secondary and tertiary enrollment reveals an interesting feature. Mauritius ranks higher for secondary and tertiary enrollment vis-a-vis SSA, upper middle income and SIDS comparators, but lower vis-a-vis high income OECD. Thus, in general the share o f spending on primary education i s higher in developing countries than the OECD and Mauritius is somewhere in the middle. However, education financing in Mauritius features an anomalously large private contribution at the primary and secondary levels (in the form of private tuition) so the overall distribution likely resembles those o f other developing countries (see Chapter 4). 2.27 Review public sector's performance as a producer of goods and services. This quick review of a few indicators o f public goods provision suggests a need to carry out a more systematic study o f the activities o f the state, including both Government and parastatals. Benchmarkingperformance against appropriate comparators would highlight deviations from standard practice. Where appropriate, the next step would be to explore opportunities to privatize or establish competitive markets for publicly`produced outputs, inconjunctionwith privatesector. Efficiency inpublic goods provision 2.28 Comparing efficiency across countries i s difficult because o f differences in institutional arrangements, technologies and social preferences. However, a useful technique which has been applied to the problem recently i s to derive an "efficiency frontier" which passes through the best possible observed outcomes. Then, each country's distance from the frontier i s calculated as a measure o f its relative efficiency (Herrera and Pang2005). 2.29 There are various different ways o f Figure 16: Data Envelopment calculating the frontier. Figure 16 illustrates one Analysis known as Data Envelopment Analysis (DEA). The vertical axis measures some public sector 1 - 1 output such as primary enrollment or measles 1.5 immunization, while the horizontal axis measures inputs, typically expenditures. Each country's position i s indicated by a dot and the efficient frontier identifies the points which maximize output for a given level of input, or minimize input for a given level o f output. In 0 1 2 3 4 more complex settings with multiple inputs and Input - 35 - outputs, linear programming techniques can be used to derive the frontier. A given country's efficiency can then be measured by the amount of inputs which could have been saved given the level o f output (A/(A+B)), or the amount o f extra output which could have been obtained given the level o f inputs (D/(D+C)). 2.30 Herrera and Pang apply the technique to nine measures o f education and health outcomes for 140 developing countries. They calculate efficient frontiers using a variety o f different methodologies and then report the input and output for each one. Table 17 summarizes their results by taking an average o f their efficiency estimates. Mauritius' score i s shown inthe first column and then as in the table above various other averages are shown along with Mauritius' percentile in the distribution. For instance, in terms o f gross primaryschool enrollment, Mauritius' score o f .776 indicates that around a 30 percent efficiency gain (=1/.776) could be achieved by replicating the best practice efficiency o f Brazil, the Bahamas, Gabon and Macau, each o f which was on the frontier (hence with efficiency score = 1). Table 17: Efficiency scores for public sector outputs `obal bestpi :tice standard lexed to 1 Mauritius All UpperMI SSA SIDS Value Value % Value % Value % Value % Education Gross primary enrollment 0.776 0.716 (74) 0.675 (72) 0.697 (83) 0.692 (76) Net primaryenrollment 0.860 0.732 (83) 0.727 (82) 0.679 (94) 0.750 (79) Gross secondary enrollment 0.690 0.674 (66) 0.649 (69) 0.651 (80) 0.654 (71) Net secondary enrollment 0.697 0.687 (54) 0.659 (59) 0.644 (63) 0.644 (71) Average years ofschool 0.320 0.285 (74) 0.344 (47) 0.209 (92) 0.300 (67) First levelcomplete 0.320 0.366 (53) 0.447 (12) 0.225 (92) 0.401 (33) Secondlevelcomplete 0.518 0.309 (89) 0.377 (82) 0.222 (96) 0.336 (78) Youth literacv 0.713 0.718 (57) 0.705 (50) 0.658 (84) 0.720 (55) Health Composite 0.936 0.681 (96) 0.709 (94) Source: Herrera and Pang 2005 2.3 1 For education outputs, Mauritius i s easily in the top one-quarter to one-half o f all the distributions for Middle Income, SSA and SIDS comparators. However, potential efficiency gains o f 16 percent-43 percent would seem possible for gross and net primary and secondary enrollment. Moreover, high private spending on primary and secondary education (perhaps as much as 1-1.5 percent o f GDP) suggests that efficiency would be lower using a more comprehensive measure o f (private and public) inputs. Performance i s sharply worse for average years o f schooling and primary and secondary completion, which reflects the drain o f high failure rates and attrition at the CPE level and beyond on internal efficiency. According to Herrera and Pang's estimates, efficiency here could triple. 2.32 Overall efficiency appears very good for health. Herrera and Pang present four health indicators, but due to a lack o f data for Mauritius Table 17 consolidates them - 36 - into a single composite measure. Both in absolute and relative terms, efficiency appears very high. Public sector employment 2.33 According to census data, nearly one employee in five worked for the public sector in 2000, three quarters o f these for general government and one quarter for public sector corporations (Table 18). For the budget year 2003/2004, wages and salaries constituted more than 40 percent o f the recurrent budget.24 Overall, these levels seem appropriate. In 1996-200025the average wage bill for central government services was 8.5 percent o f GDP in middle-income countries and 6.1 percent o f GDP in Sub-Saharan Africa. Over the same period Mauritius had an average wage bill of 8.1 percent.26 Table 18: Public sector employment 2000 Total employment 466,290 I 100.0 Public sector 90,111 19.3 Central government 55,939 12.0 Local government 6,193 1.3 Municipal councils 4,411 0.9 District councils 1,782 0.4 Public enterprises 21,786 4.7 2.34 Micro data suggest efficiency gains might be realized by adjusting the structure o f employment, but the impression is these would likely be modest. Table 19 gives a rough estimate o f what could be achieved by making the civil service look more like the private sector. The first panel shows the occupation structure of employment in the civil service and parastatal sectors, based on employment records in the 2001/02 Household Budget Survey. The second panel is a counterfactual distribution o f employment generated by using the occupational structure o f private sector firms27 to produce the same basket of outputs as the government and parastatal sectors (which consist o f activities such as administration, health, education, transport, water, social services, etc.) 2.35 Ingeneral the patterns of employment are quite similar (p = 0.9) and,some of the differences, e.g. in machinists and craftspersons, likely reflect differences in public and private sector outputs which are too fine for the disaggregation in the data. But, at least one difference i s striking - the private sector would employ more than double the proportion o f teachers actually observed in the public sector. Most o f the difference can be traced to the provision o f education services, where 15 percent o f civil servants are teachers compared to 22 percent o f private sector employees. (The private sector also 24Central Statistical Office, Consolidated General Government Expenditures 2000/2001-2003/2004 25Latest available comparative data. 26DECDG, PRMPS Statistical Data, Public Sector Employment and Wages 21Fromthe non-sugar, non-EPZ, formal sector. - 37 - employs teachers in `health' and `trade' which the civil service does not, though the sample is too small to give any credence to these differences). Table 19: Employment structure inthe public and private sector Employment shares (%) Monthly total earnings Usingprivate sector Actual weights Civil Civil Civil Private service Parastatal service Parastatal service Parastatal sector All 100.0 100.0 100.0 100.0 8,703 9,837 7,170 Machinist 0.7 1.1 4.7 5.3 5,658 8,055 4,266 Laborer 10.2 8.0 8.0 5.3 5,810 7,178 5,123 Elementary worker 16.7 9.7 16.0 11.3 6,199 6,031 4,317 Craftsperson 4.9 12.4 11.3 12.1 6,874 8,360 5,669 Skilled agricultural worker 1.7 0.6 1.5 0.8 6,902 4,823 4,905 Driver 4.4 11.9 6.2 12.6 7,251 7,104 6,209 Clerk 13.8 20.4 11.4 16.4 7,892 9,288 7,306 Services worker 17.0 7.5 13.4 13.2 8,750 8,946 5,863 Associate professional 23.7 17.1 16.1 13.6 10,815 11,369 10,700 Scientist 1.1 2.8 1.1 1.3 13,520 18,068 17,148 Teacher 2.7 4.1 . 5.9 2.8 14,459 15,847 14,388 Manager 1.5 2.8 2.9 3.4 18,231 25,610 22,681 Health worker 1.4 0.3 0.3 0.1 18,582 11,000 11,388 Other professional 0.3 1.4 1.1 2.0 20,131 19,770 16,511 Average wage Civil service pay scale 8,703 9,837 8,677 9,616 private sector pay scale I 7,566 8,063 1 7,658 7,639 structure needed to produce the basket ofpublic sector outputs (administration, construction, transportation, water, etc.) using thepattern of employment in non-sugar, non-EPZ,formal sector privatefirms. 2.36 Two other differences which are likely significant are managers who constitute 1.5 percent of civil servants, compared to the 2.9 percent share the private sector would employ, and `other professionals' who constitute 0.3 percent o f civil servants compared to 1.1 percent using private sector weights. Both these seem consistent with problems o f recruiting and retaining senior and technical staffs (Pay Research Bureau 2003), and may contribute to poor service delivery which i s the subject o f frequent complaints. 2.37 The third panel in the table shows total monthly earnings for various occupational classes in the civil service, parastatals and the private sector. The data show, as is well known, that lower level civil service salaries are higher than in the private sector, while high level salaries are lower. Figure 17 shows a scatter plot o f the premium on civil service wages vis-a-vis private sector counterparts against the logarithm of private sector wage rates.28 For instance, the average salary for a manager in the ~~~~ ~ 28 The graph omits health workers and other professionals which are small employment categories and outliers inthe distribution. The correlation o f the scatter as shown is -0.88. Including these other two categories attenuates it to -0.56. - 38 - private sector i s Rs. 22,681 (log(22,681)=4.36) while a manager in the 17: Scatter plotOf civil service earns 20 percent less. earnings v. civil service premiums 55 - 2.38 The bottom two rows in Table 0 4 5 - 0. 19 calculate average salaries incivil service 3 5 - 0 and parastatal sectors using various g 2 5 - combinations o f private and public salary i15- 0 5 scales and occupational structures. The g 0 0 0 comparisons make clear that differences in -5 - occupational structure have little imuact on -15 ; -25 0 . the wage bill, but that the civil service pay 3 5 3 7 3 9 4 1 4 3 4 5 structure i s costly. According to the rough log(wage rate) estimates in Table 19, aligning civil service Source Cvlculvlionrbawd on tOOl/OZ HBS 2.39 Gradually align civil service wages (and to a lesser extent occupational structures) to thoseprevailing in theprivate sector. The calculations above suggest that inefficient staffing and wage structures are not egregiously wasteful. Nevertheless, they have the potential to achieve measurable cost savings. But a more important contribution would be to improving overall public sector human resource management. PRB 2003 noted that inadequate compensation was creating problems in recruiting and retaining senior and technical staffs. Moreover, too narrow pay differentials across grades diminished incentives for civil servants to work hard and get promoted. In Table 19, the ratio o f monthly earnings o f managers and laborers inthe civil service i s 3.6 compared to 4.4 in the private sector. In general, PRB 2003 recommended a more market oriented approach, "to steer and accelerate the inculcation o f a Performance Management Culture inthe Public Sector." (0 7.13). D. GOVERNANCE 2.40 Governance can be broadly defined as the traditions and institutions by which authority i s exercised, including the processes o f selecting, monitoring and replacing governments, formulating and implementing sound policies, and regulating economic and social interactions. Mauritius achieves high standards o f governance in terms o f political and judicial processes, but does less well in terms o f regulatory quality and corruption. Polls invariably rate these last two at the top of the list o f concerns. 2.41 Since 1996, the World Bank has compiled indicators assessing governance basedon criteria of2' Voice and accountability- various aspects o f the political process, civil liberties and political rights, including freedom o f the media and the ability o f citizens to participate inthe political process. 29See Kaufmann et al. 2005. The indicators can be accessed by the interactive GRICS tool that on the World Bank website at http:llinfo.worldbank.org/governance. - 39 - . Political stability - the likelihood that the government in power will be overthrown by unconstitutionaland/or violent means. Government effectiveness - quality o f service delivery, competence o f the civil service and its independence from political pressure. Regulatory quality - avoidance o f market-unfriendly policies such as price controls and excessive regulation in areas such as foreign trade and business development; adequacy of,bank supervision. a Rule of law - incidence o f crime, effectiveness and-predictabilityof the judiciary, and enforceability o f contracts. Control of corruption - prevention o f the exercise o f public power for private gain. 2.42 The indicators reflect perceptions o f the quality o f governance given by citizens and experts as reported by survey institutes, think tanks, NGOs and international organizations. 2.43 Mauritius scores far ahead o f the regional SSA average in all categories, and above average for upper middle income countries (UMIC) for all but regulatory quality where it i s marginally below average. Table 20 presents comparative rankings for Mauritius and a sample o f other countries and regions for 2004.30 The table shows the ranking for each o f the indicators out o f 200 or more countries, and these rankings are then converted to percentages. Thus, for instance, for voice and accountability, Mauritius was ranked 53'd out of 207 countries which means its score was better than 1-53/207 = 74.4 percent o f the sample. Mauritius' performance was especially strong for political stability and rule o f law which are near the 80th percentile and weakest for regulatory quality (62.3 percentile) and control of corruption (66.7 percentile). However, SSA best- practice comparators South Africa and Botswana led Mauritius in government effectiveness, regulatory quality and control o f corruption, especially Botswana which was out in front by a wide margin. Moreover, Mauritius was far behind high income Table 20: Comparative public sector Performance, 2004 percentile rank Voice and Political Government Regulatory Control o f accountability stability effectiveness quality Rule o f law corruption auritius 74.4 78.3 70.3 62.3 77.9 66.7 60.2 64.5 63.8 62.8 60.7 63.3 31.8 31.3 24.8 22.9 26.8 32.2 South Africa 72.0 38.2 74.2 64.7 60.6 70.6 Botswana 68.6 69.1 76.6 79.4 70.2 80.4 Singapore 43.5 96.1 99.0 98.5 95.2 99.0 Hong Kong 51.7 90.8 91.9 99.0 89.9 90.2 92.3 85.2 91.9 90.3 91.9 91.7 Finland 98.1 98.6 97.1 97.5 98.1 99.5 New Zealand 96.6 96.6 96.7 97.1 97.1 98.0 Australia 95.7 84.5 94.7 93.6 95.7 93.6 30The values o f the indicators themselves are normalized to a mean o f zero and standard deviation o f one, hence the absolute values have no particular meaning. Thus, only the rankings are shown. - 40 - OECD countries and East Asian front runners such as Singapore and Hong Kong in all categories except for voice and accountability where Singapore and Hong Kong scored badly. recent times. The governance indicators data Figure 18: Change inranking percentile set i s relatively new, but it goes back to from 1996-98 to 2002-04 1996. Comparing the average values for 1996-98 and 2002-04 (taking averages to 68 1........................................................................................ ; minimize the effect of random variations) _ ............................................................................................... ~ shows that Mauritius moved down in the rankings in every category except for regulatory quality (where it was weak to start -2 with). Of course, the indicators measure -4 ................................... perceptions rather than reality, but -6 considering the broad range o f initiatives -8 ' launched over the past decade to raise Vore and PobuEal Government Reghtov Rule ofLaw Canmold sccounlsbhrj slsblay ElfecUveness Qwhry C O W " effectiveness and control comption the ~ o u r c r . W ~ ~ ~ ~ ~ / l m l o l l s i o l u b o m ~ ~ ~ P ~ o d u c ~ ~ u i i y ~ n d m n ~ s i i i ~ n a ~ d ~ i ~ Government effectiveness 2.45 The 1980s and 1990s witnessed growing dissatisfaction around the world with public sector performance. Governments came under scrutiny for doing the wrong things or if they were the right things, doing them badly. A wave o f reforms followed, inwhich almost every country in the world began to privatize state owned enterprises, liberalize and deregulate markets and demand greater accountability in the provision o f public services. Initially, there was a move to restructure the public service around competitive market principles. However, as the limitations o f this approach became clear, the focus changed to improving client orientation and service quality while relying on traditional public service values (UN2005). 2.46 InMauritius, as inmost countries, civil service reform has featured elements o f both these approaches. In 2001, the Ministry o f Civil Service Affairs and Administrative Reforms (MCSAAR) put forward a strategy to modernize the public service. The action plan for the years 2001-2003 `Toward the Modernization o f the Public Servicey3'focused on five major areas: 0 Introduction o f a results-oriented performance management system. 0 Modernization o f human resource management aimed at improving conditions o f service and buildingcapacity. 0 Streamlining administrative and institutional structures, and redefining the roles and responsibilities o f the public and the private sectors. 31Ministry of Civil Service Affairs and AdministrativeReforms, August 2001 - 41 - 0 Improving service delivery with a customer-oriented Total Quality Management (TQM) framework and Citizens' Charters. 0 Modernization o f public financial management with improved budget preparation, execution and monitoring utilizing results-based management principles. 2.47 InJune 2004,32a new action plan was introducedfor the years 2004 and 2005 centered on introducing modern technology for delivery o f public services. 2.48 The Government created various task-forces and reform units to coordinate and monitor the implementation o f these reforms. Guided by the action plan an impressiveagendawas developed and implemented: 0 A number o f ministries, departments and agencies developed performance indicators to form the basis for a new Performance Management Framework and a Performance Review System was set up to monitor institutional and individual performance. A Public Service Bill under preparation aims to modernize the legal framework for the public sector and facilitate the development o f a well- functioning, performance-oriented civil service. 0 A Code o f Ethics was put in place focusing on values such as integrity, objectivity, loyalty and standards o f good behavior. The Central Personnel System was computerized to facilitate HR management and an Electronic Attendance System was piloted in a number o f institutions to enforce compliance with working hours and reduce absenteeism. In2003, the Pay Research Bureau issued a report about the conditions o f service, the recommendations o f which are being progressively implemented. 0 Twenty five ministries and departments restructured their administrations using I S 0 standards, revamping overly bureaucratic administrative procedures and improvingthe quality of services. Substantial investments were made in ICT to build capacity. E-government applications, e.g. for scholarship applications, learner's driving licenses, work permits were developed to improve access to and quality o f public services. Email and internet facilities were made available to higher officers to improve communication and access to information. A new government website was developed to increase transparency and improve access to government services and information 0 More than 16 public institutions (including the police, customs and excise, the Cabinet Office, and the National Transport Authorities) developed Citizens' Charters which specify standards o f service and in 36 other institutions this work i s under way. The charters are complemented by training and capacity building to improve customer-orientation and service focus. More than 30 projects have been implementedto improve front-line services. 32Ministry of Civil ServiceAffairs and Administrative Reforms, The Route to Excellence, Action Plan 2004-2005, June 2004. - 42 - 0 The treasury system was upgraded to international standards to modernize public financial management. The financial management manual was updated, asset management and public procurement were modernized and training o f public officers in financial management and procurement have been significantly increased. Six pilot ministries were targeted for introduction o f results-based management utilizing performance plans and indicators (see World Bank 2005a), including the Ministries o f Health, Education, Water and Environment, and the Ministry o f Social Welfare. MTEF budgets have been developed for these ministries. 2.49 Despite these efforts, according to the World Bank's indicators o f government effectiveness Mauritius has actually lost ground compared to other countries (see Figure 18).33 Surveys persistently report criticism o f excessively bureaucratic procedures (e.g. the Investment Climate Assessment, World Competitiveness Report and MEF survey). Several factors could be responsible. Reforms may have been too narrow and "technocratic" and failed to involve key stakeholders. They may have copied best practice reforms without regard for country specific factors or capacity limitations. Too much focus on internal rules and procedures and too little visibility may have failed to empower consumers or build up momentum as they might have done by means o f some quick wins. Finally, the reforms might have been overly ambitious and unrealistic in terms o f the public sector's ability to manage the change process.34 2.50 A fundamental problem, however, is that the changes have not yet gone deep enough. Transforming this environment into a modern, service and client-oriented administration will require further behavioral and organizational changes. The technical cadre, typically the back-bone o f a good civil service, i s relatively small with large numbers o f support staff, reflecting an outdated civil service model oriented toward satisfying demands for low level services. "Organizational structures in the Public Service are generally and traditionally multilayered and pyramidal" and need to be replaced by, "flatter structures as a matter o f policy for improving performance. "In many instances, layers o f bureaucracy exist, "not because of needs but to provide for career ad~ancement."~~ Inmany ministries, departments and agencies, decision-making i s remote and limited to a small number o f managerial staff and the Pay Research Bureau urgedthat decisions be made at no more thanthree removes. 2.5 1 The rules governing the civil service are similarly outdated and not sufficiently performance oriented. A performance appraisal system has been developed but is presently used only for parts o f the administration. A key reason is that such a system would require the existence o f both institutional and individual standards o f 33 From 1996-98 to 2002-04, Mauritius was passed inthe government effectiveness ranking by South Africa, Botswana, the UnitedArab Emirates, Bahrain, Brunei, Estonia, Latvia and Lithuania, though this was partially offset as Mauritius inturn moved ahead o f Poland and Uruguay. 34 Prominent examples include behavioral changes inthe public sector which may take decades. Another more technical example i s that it typically takes about five years to institutionalize a new budgetsystem such as MTEF inthe public administration. 35 Quotations from Pay Research Bureau 2003, 96. -43 - service; such standards, however, have not been systematically developed for all public sector institutions. As a consequence promotion decisions are not made on merit and performance but on seniority. Management and oversight are relatively weak and even where accountability mechanisms exist they are not systematically enforced and monitored. Compliance with existing ethics guidelines i s low and sanctions to address unethical behavior are not systematically applied. Inmany administrations working hours are ignored and in services such as education and health absenteeism i s high- though it i s anticipated that the introduction o f the new Electronic Attendance System will improve the situation. Changes to the existing procedural framework are difficult because of strong influence of public sector unions defending the status quo. Moving forward 2.52 Overall, public service delivery remains too often slow and inefficient, with long delays for routine processing o f permit and license applications - nine months for telephone line, 20 months for a development permit, eight months to arrange a rental contract on an empty building, et^.^^ Such experiences materially slow the process o f structural evolution and contribute to the frustration invariably expressed by the business community. To improve operational efficiency and service delivery Government can move ahead on a number of fronts. Continue the review of existing procedural and institutional arrangements and streamline those which are overly bureaucratic and complex. Functional reviews should involve all stakeholders including customers and not take the form o f internal, technical exercises. Where possible, service standards (e.g. decision criteria and time required for approval) should be established so that processing becomes as transparent and predictable as possible. Invest in training with a focus on behavioral change. Administrative reforms need to be reflected in the day-to-day work o f civil servants. A Citizens' Charter ina government institutionwill only have the intendedimpact on service delivery if its implications are fully understood and accepted. Experience shows that a sustained effort i s needed to foster a more customer-oriented service culture. Invest in management skills. Many reforms fail not because o f poor design, but because they are badly managed and implemented. Managers may have reached their positions because o f technical expertise rather than managerial abilities and they may have particular difficulty in managing change effectively. These skills are critical to the smooth implementation o f reforms, yet often few resources are set aside to develop them. Continue to expand the use of IT,especiallyfor the e-government initiative, to improve service delivery and facilitate interactions between the Government and the public. The National Computer Board already hosts a sophisticated e- government application and launched a new Government Web Portal in M a y 36 "Jeetah s'attaque aux lourdeurs adrninistratives," 1`ExpressFeb.20,2006. - 44 - 2005 (NCB 2005). Customs and Excise has developed its own system for managing customs applications and clearances. But, experience with e- government has grown rapidly elsewhere as well37and Mauritius should attempt to identify additional services that could be transformed into interactive e- government applications. 2.53 In all these areas, clients (citizens, private sector) should be involved in evaluating the quality of public services and designing reforms. Customer evaluations are a powerful tool to lay open mismanagement and service delivery bottlenecks. Instruments that have proven particularly effective include citizens' report cards which were first developed by the Public Affairs Centre in Bangalore India but are now widely used in other countries. Under this approach citizens are asked to rate service access and quality and to report on corruption and general grievances. The ratings are published and are used to inform discussions between the bureaucracy, the media, the political elite and the general public about the improvement of services. A side benefit of the publicationis that public agencies begin to compete to improve their ratings. In other countries, NGOs have been contracted by the government to monitor service delivery o f primary health service^.^' Government may wish to consider how best to make use o f these participatory monitoring mechanisms to improve accountability and delivery o f public services. Combatingcorruption 2.54 A nationwide perception survey commissioned by Independent Commission Against Corruption (ICAC) in September 2003 and completed in January 2004 revealed that corruption i s seen as the most serious problems in Mauritius.39 Twenty-one percent o f the Mauritians viewed corruption as the single most important problem, followed by unemployment (17 percent), and drug abuse (16.8 percent). 2.55 While the majority o f the respondents (83.9 percent) did not have direct experience with corrupt practices almost 51 percent believed that government departments are corrupt, especially customs, the police and the National Transport Authority. In the private sector, banks topped the list o f the most corrupt institutions, mainlyreflecting a major fraud which was uncovered at the Mauritius Commercial Bank in 2003. This scandal has influenced public opinion and reinforced the perception that corruption i s on the rise. More than 70 percent o f Mauritians believe that high level corruption has increased and more than 60 percent believe the same for petty corruption. 2.56 Significant efforts have been made to strengthen the procedural and institutional framework against corruption. In June 2000, Parliament passed the Economic Crime and Anti-Money Laundering Act, and based on this Act an Economic Crime Office was set up. In 2001, the government appointed a joint public and private '*The "Seeforexamplethefollowinglink:http://www.egovlinks.com World Bank World DevelopmentReport2004, Making Service Work for Poor People, summarizes ''theTable experienceswith participatory monitoring mechanisms and subsequentinformatioddata is basedon the Reportpreparedby StraConsult for Independent CommissionAgainst Corruption, National Surveyon Corruption inMauritius, January 2004 - 45 - sector Committee on Corporate Governance. InOctober 2003, Mauritius adopted a Code o f Corporate Governance. In February 2002, Parliament passed the Prevention o f Corruption Act. As part o f this legislation, the ICAC was set up in June 2002 with the power to detect and investigate corruption and money laundering offenses. Over the period 2002 to 2004 the Commission started investigations in 1176 cases and completed the review o f 832. In 804 cases the investigations were inconclusive and no further enquiries were made. Only 24 cases were referred to the justice system for further p r o s e c ~ t i o n . ~ ~ 2.57 The institutional framework also comprises the Ombudsman, the Economic Crime Office (ECO), and the Management Audit Bureau (MAB). The essential task o f the Ombudsman i s to assist citizens in dealing with the government machinery and to examine claims o f injustice and administrative malpractice. In 2003, the Ombudsman received 458 such claims and dealt with 718 pending cases.41The ECO i s charged with the investigation o f fraud and other economic offences and suspicious transactions. Its reference model i s the UK Serious Fraud Office. The MAB operates under the Ministry of Finance; its maintask i s to examine administrative practices and procedures as well as to enquire into cases o f malpractice. 2.58 Clear and vigorous leadership is essential to maintain credibility in thefight againstfraud and corruption and it i s encouraging to see this inthe case o f Customs and Excise reform.42 However, there i s a lot o f debate inMauritius about the effectiveness o f the existing procedural and institutional framework in the fight against fraud and corruption. Many people believe that the ICAC has not yet proven to be an effective instrument to address in particular high-level corruption. The new government has promised to review the legal framework governing the ICAC and to improve impact and results-orientation (Government o f Mauritius 2005a). 2.59 Several steps can be taken to combat corruption: 0 Public institutions which are perceived to be particularly corrupt, such as customs, tax administration, police and the National Transport Authority should be specifically targeted in order to build credibility. Ongoing reforms in these institutions should be reviewed with the objective o f improving transparency and accountability, and rigidly enforcing ethical standards. 0 Discretionary powers and red tape, a main source of corruption, should be reduced to a minimum. Bureaucratic processes should be modernized in conjunction with the progressive use o f ICT and specific (institutional and individual) service standards should be developed. These standards should be monitored on a regular basis. Results o f the evaluations should be made public to initiate further dialogue with the relevant stakeholders about business process improvements. 40ICAC, Annual Report &Audited Accounts2003-2004,December6,2004, pg. 24,26 41Ombudsman, Annual report 2003 42Seeinterview with Prime Minister Ramgoolam, "Apartks," 1'Express, 14October 2005, pp. 8-9. - 46 - Staff in the customs and tax administrations should be required to declare their assets and these declarations should be reviewed and if necessary further investigated by an independent authority. Sanctions against non-performing or corrupt staff should be systematically applied; the Government should in particular review the effectiveness o f administrative sanctions. At present, the rules and regulations governing application and review of these sanctions are considered overly bureaucratic and ineffective. To better address `grand corruption' the Government should strengthen the relevant capacity of investigative auth'orities,in particular o f the ICAC and the ECO. The work o f these institutions could be complemented by independent reviews (e.g. value-for-money audits or independent procurement reviews) in areas that typically affected by `grand corruption' such as large infrastructure programs and projects. - 47 - CHAPTER3. INCREASINGLABORMOBILITYAND QUALITY A. INTRODUCTION: LABORMARKET POLICIESAND OUTCOMES 3.1 Governments everywhere intervene in`labor markets to promote social justice and redress the imbalance o f power between labor and capital - establishing the framework for industrial relations, setting minimum wages and working conditions, regulating hiring and firing, and providing safety nets for workers who lose their jobs. But, increasing pressures from globalization and a world wide trend toward deregulation have put labor market institutions and policies under increasing scrutiny because o f the implications for growth and competitiveness. At the same time, more open societies with transparent political processes are having to recognize the plurality of interests between employed v. unemployed workers, formal sector v. informal sector, skilled v. unskilled, old v. young, etc. (World Bank 2004b, chapter 7). 3.2 Interactions between the labor market and the rest o f the economy are complex and interventions often have unintended consequences. Higher minimumwages benefit low income, formal sector workers, but also drive activities into the informal sector where workers not only earn less, but fail to receive protection from safety and health regulations, or pay taxes or make pension contributions. Employment protection legislation stabilizes workers' incomes, but deters risk-taking and innovation by making it expensive for firms to change the level andor skill composition o f their workforces. Survey results find firms keenly aware o f the burden o f labor regulations and more likely to expand employment where these are lower (World Bank 2004b, p. 148). Moreover, the impacts can be significant. According to World Bank research, reducing Latin America's relatively high employment protection to the level in the U S would raise employment by 6 percent. In countries such as India and Zimbabwe, a 10 percent cut in dismissal costs could reduce long term unemployment by up to 20 percent. 3.3 This chapter reviews Mauritius' labor market performance and the institutions which have shaped it. The common wisdom is that this performance has left much to be desired: Unemployment rose steadily during the 199Os, even while the EPZ employed increasing numbers o f foreign workers. Risingreal wages showed little regard for market realities, undermining competitiveness. A time consuming review process for layoffs created uncertainty and raised firing costs, slowing innovation and structural change. Meanwhile, from the perspective o f employers, micromanagement by the state o f wages and working conditions intruded into human resource management decisions and discouraged investment and productivity growth. 3.4 The next section shows such criticisms need to be tempered because the labor market has actually performed quite well and Mauritius has achieved rapid employment - 48 - growth during a challenging period. But, regardless o f past performance major structural changes now underway are putting the labor market under even greater stress. As much as 10 percent o f the labor force has been or will be displaced as sugar and textiles downsize. These workers must be helped to adjust and find new livelihoods. In the longer term, the labor market needs to support rising productivity and the expansion o f more innovative activities where quality o f labor i s as important as quantity. Broader educational opportunities and multi-skillingwill be required to support the knowledge- based economy. Immigration, too, will have to play a part in supplying needed human capital. 3.5 The remainder o f the chapter i s organized as follows. Section B begins with a review o f labor market performance during the 1990s, characterizing the underlying trends affecting both supply and demand, as well as the determinants and impacts o f unemployment. Section C turns to the policy domain, reviewing the institutional setting o f the labor market, and section D examines the impact which the wage setting mechanismhas had on actual market outcomes. Section E suggests a number o f reforms aimed at improving flexibility and responsiveness. The chapter concludes by looking at the role o f education and human capital in the labor market as well as in the economy more generally. B. SUPPLY AND DEMAND INTHE MAURITIAN MARKET LABOR 3.6 In contrast to the pessimistic views often expressed, Mauritius' labor Figure 19: Employment market has actually performed rather well thousands of workers since the early 1990s. Though unemployment has certainly risen, it i s against a backdrop o f rapid labor supply growth due to increasing female labor force participation. On the demand side, dramatic structural evolution caused thousands of workers to lose their jobs in agriculture and manufacturing, and find new ones inservices 1991 2003 (Figure 19). This section begins by reviewing these two factors inturn. Demographic trends 3.7 Like most o f the developing world, Mauritius has been passing through a dramatic demographic transition. The term refers to a well-defined sequence triggered by improvements inpublic health and nutrition - in Mauritius' case the rapid eradication o f malaria in the 1950s - which cause a decline in mortality. This is followed by a decline in fertility, but with a lag during which population growth accelerates and the age distribution becomes skewed toward the young. Later, the "baby boom" cohort contributes to the labor supply and then retires and dies, leaving a stable population at a new, higher level. - 49 - 3.8 At first, demographic transitions represent a "burden" because dependency rates are high and countries must raise and educate large numbers o f young people. Later, this i s followed by a "gift" phase as the large, youthful cohort reaches working age and raises the per capita labor supply. However, the gift i s only a potential whose realization depends on creating jobs for the new workers. Mauritius i s one o f a relatively small number o f countries which made very good use of its gift.43Albeit after a slow start, Mauritius was able to bring its labor assets into production, achieving virtually full employment by the early 1990s (see also Chapter 2 above, esp. Figure 2). 3.9 A century o f Mauritius' demographic transition, from 1950-2050 is shown in the figures below, with projections based on the U N ' s medium population variant. The difference between crude birth and death rates in Figure 20 indicates a population growth rate o f 3.2 percent in the early 1 9 5 0 ~ but , ~ ~as the two curves converge, population growth slows and eventually stabilizes as just below 1.5 million by the middle o f the century. Figure 21 shows a steep decline intotal fertility from more than six children per woman inthe 1950sto a little over inthe 1980s. With a lago f around 15 years, the youth dependency rate (under 15s as a proportion o f the working age population) followed it down, declining from a staggering 90 percent before independence to 35 percent today.46 Figure 20: Mauritius demographic Figure 21: Fertility and dependency, transition, 1950-2050 1950-2050 percent percent 50 .k-- 4 1 4 W p5 JO 35 1200 18B e 30 F Iwo 25 20 8W 2 15 1: 5 10 6 M 10 5 0 . . . . . . . . . . . . . . . . . . . . 0 1950- 1960- 1970- 1980- 199U- 2000- 2010- 2010- 2030- 2040- 0 , , , , , , , , , , , , , b 4 M 1955 1965 1975 1985 1995 2005 2015 2025 2035 2045 1950 1960 1970 1980 1990 2WO 2010 2020 2030 2040 2050 -+-Tots1 fertility rate (I,)+Youth dependency rate (R) l+Crude birth rate +Crude death rate +Population1 -4- Elderly dependencyrate(R) s0u.i "h Pqulalnn D.llionmO4 Md,"rn*ulrnl s o w LmP.p"l*,o"m""im iw1.Uld,".Y.rn.l 43Comparedto acountry suchas Turkey, for instance, which squanderedthe opportunity and continuesto suffer from sustainedhighunemployment.The terminology is from Bloomand Williamson 1988 who attribute as muchas athird of East Asia's growth during the 1980s and 1990sto efficacious use of the demographic gift. 44The crude birthrate in 1950was 47.3 per thousand and the deathrate was 15.7 per thousand, making for apopulation growthrate of (0473 - .0157) = ,0316 or 3.2 percent. 45A total fertility rate of two producesa stationary population as eachwoman's offspringjust replaceher and her mate inthe next generation.However, the proportion of women o f childbearing age is above the stationary long runlevel during the demographictransition and a fertility rateof two may cause population to grow fbrther for atime. 46Demographic conditionsinthe 1960sare what led to James Meade's dire warning of aMalthusian trap (see Meade 1961). - 5 0 - 3.10 Figure 22 puts Mauritius' I Figure22: Dependencyrates during experience in a comparative perspective. demographic transitions, 1950-2050 The figure shows Mauritius' total percent dependency rate (the sum o f the youth and 100 , elderly dependency rates in Figure 21) 90 along with averages for several other 80 regions. Mauritius closely resembles East * 70 Asia, where the transition began early and r proceededquickly. South-Eastern Asia and 60 Latin America followed with some delay 50 and a somewhat shallower and more 40 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 prolonged trajectory. Finally, Sub-Saharan - t E s d e m A i l a +South Arnirics -.&.Soulhssatern Asis Africa began the process much later and is +Sub-Saharan Africa +Mauritiu# still at a relatively early stage. sourerw PDpvlrllon Drlr,o". Mdl"rn "Wl(*"I 3.11 Looking forward, Mauritius' current demographic structure portends a substantial slowing of growth in the future. According to Table 21, youthful cohorts (0- 14 and 15-24year olds) have been shrinking inabsolute numbers since the 1970s andthe I Figure23: Increase inthe working age growth rate of the working age population population, 2005-2020 has slowed sharply. Over the past two thousands decades, the working age population grew 6 0 4 55 I by 212,000 or 30 percent and it will eventually stabilize at around 13 percent or 108,000 persons above the current level. Figure 23 shows graphically the slowing growth, especially among younger (15-24 year old) workers. The share of younger workers inthe labor force has beendeclining and will continue to do so, from 34 percent 2005-10 2010-15 2015-20 2020-25 in 1985 to 23 percent today to below 20 1015-24 025-641 sourr. LCIPopuhmon O,"",O". Mldl"rn"YI.", percent. Age range 1950-60 1960-70 1970-80 1980-90 1990-0012000-10 2010-20 2020-30 2030-40 2040-5( Growth rate 0-14 3.2 1.7 -0.5 -0.9 -0.3 -0.3 -0.5 -0.4 -0.4 -0.4 15-24 2.7 2.9 2.3 -0.2 0.7 -0.5 -0.3 -0.5 -0.4 -0.3 25-64 2.8 2.7 3.2 2.4 2.0 1.8 0.7 0.1 0.0 -0.3 65+ 1.3 2.1 5.2 5.0 2.6 2.3 4.4 4.2 2.0 1.4 Share 0-14 46.1 46.5 39.7 31.7 27.4 24.6 21.3 19.4 18.2 17.3 15-24 18.7 18.9 20.7 21.6 18.5 15.9 15.4 13.7 12.6 12.2 25-64 32.6 32.1 36.9 42.0 48.2 52.9 54.9 54.4 52.5 51.0 65+ 2.6 2.5 2.7 4.7 6.0 6.6 8.3 12.6 16.6 19.5 - 51 - 3.12 The slowdown in growth means that the pressure to create large numbers of jobs for new entrants to the labor force will begin to ease. Nevertheless, the demand for employment will remain strong for the foreseeable future and unemployment i s likely to remain high. The scenarios in Chapter 2 anticipate that risingfemale participation (which i s currently quite low) will partially offset any slowdown in growth of the working age population (Table 8) so that potential labor force growth will increase by more than the working age population. Labor demand and employmentinthe 1990s 3.13 The 1990s represents a watershed decade in Mauritius' development, when the strategy dating from the 1960s to absorb surplus labor reached its culmination. After full employment was achieved in the late 1980s, employment growth slowed sharply. Less than half as manyjobs were created in 1992-2001 as 1983-91 (61,000 compared to 136,000), while the unemployment rate rose steadily to over 10 percent after falling from 20 percent in 1983 to just 2.7 percent in 1991. But, the record i s hardly a complete failure. Employment growth very nearly kept pace with the 12+ population and so much o f the rise in unemployment was explained by increasing labor force participation, women inparticular (Table 22) On the demand side, manyjobs were created inemerging sectors, especially by SMEs inthe private sector. BothSexes Male Female 1990 2000 Diff. Gr. 1990 2000 Diff Gr. 1990 2000 Diff Gr. Thousands Population12-t 808.3 937.5 129.2 1.5 402.1 461.8 59.7 1.4 406.1 475.7 69.6 1.6 Labor Force 432.0 514.4 82.4 1.8 301.4 341.3 39.9 1.3 130.7 173.1 42.4 2.8 Employed 407.6 466.3 58.7 1.4 283.6 310.8 27.2 0.9 124.0 155.5 31.5 2.3 Unemployed 24.4 48.1 23.7 7.0 17.8 30.5 12.7 5.5 6.6 17.6 11.0 10.3 Percent Activity rate 53.4 54.9 1.4 75.0 73.9 -1.1 32.2 36.4 4.2 Employmentrateb' 50.4 49.7 -0.7 70.5 67.3 -3.2 30.5 32.7 2.2 Unempl. ratec' 5.6 9.4 3.7 5.9 8.9 3.0 5.0 10.1 5.1 3.14 The overview inTable 22 shows that the working age population increasedby 129,200, o f whom 59,700 were male and 69,600 were female. O f this total increase, 82,400 or 64 percent joined the labor force and 58,700 or 46 percent found employment, while unemployment nearly doubled, rising from 24,400 to 48,100. Roughly equal proportions o f the increase in male and female working age populations joined the labor force and found jobs. But, since female labor force participation was much lower at the outset, the proportional increase for women was much larger. Overall, the working age population grew at an average rate o f 1.5 percent compared to 1.8 percent for the labor force, and 2.8 percent for the female labor force. The female activity rate, that i s the - 52 - percentage o f working age women inthe labor force, rose by 4.2 percentage points, while the male activity rate declinedby 1.1percentage points.47 3.15 A review o f the distribution o f employment gains by sector and industry yields important insights into evolving trends in the economy. The net gains in employment were almost exclusively (i)in services and (ii) the private sector outside in o f large enterprises, trends which are highly likely to continue into the future. 3.16 Shijit into services: Disaggregating the totals by industrial sector shows the net gain o f 58,672 jobs comprised a loss o f nearly 15,000 jobs in agriculture, offset by gains o f around 3,000 in manufacturing and 66,000 in various services sectors, especially in Wholesale and Retail Trade, Hotels and Restaurants, and Public Administration and Defense. The shift from agriculture and manufacturing to services was especially pronounced for men, who accounted for 70 percent o f the lostjobs (Table 23). However, inmost sectors, women's share of employment increased. Level in 1990 Change in 1990-2000 w Both Male Female Industry Sector Both Male Female Level % Level % Level % Total 407,618 283,605 124,013 58,672 14.4 27,173 9.6 31,499 25.4 Ag., hunting, forestry and fishing 67,968 50,252 17,716 -14,749 -21.7 -10,671 -21.2 -4,078 -23.0 Mining& quarrying 662 558 104 688 103.9 693 124.2 -5 -4.8 Manufacturing 130,935 69,405 61,530 3,092 2.4 -1,769 -2.5 4,861 7.9 Electricity, gas and water supply 3,581 3,438 143 250 7.0 192 5.6 58 40.6 Construction 40,591 40,262 329 2,969 7.3 2,560 6.4 409 124.3 Wholesale & retail trade 43,983 35,247 8,736 16,290 37.0 8,045 22.8 8,245 94.4 Hotels and restaurants 10,615 8,621 1,994 11,225 105.7 7,755 90.0 3,470 174.0 Transport, storage & comm. 24,758 23,016 1,742 6,310 25.5 4,536 19.1 1,774 101.8 Financial intermediation 5,533 3,671 1,862 1,878 33.9 780 21.2 1,098 59.0 Real est., rent & bus. activities 6,026 4,523 1,503 7,999 132.7 5,726 126.6 2,273 151.2 Public administration & defense 20,044 16,649 3,395 10,051 50.1 7,482 44.9 2,569 75.7 Education & health 30,259 17,250 13,009 6,913 22.8 1,072 6.2 5,841 44.9 Other services 21,939 10,252 11,687 5,821 26.5 329 3.2 1,228 10.5 Source: CSO, 1990and 2000 census. 3.17 Shift into the small enterprise private sector: Table 24 shows the overall gain o f 58,672 jobs was entirely attributable to the private sector. The public sector experienced a small net loss o f around 1,200 jobs as declining parastatal employment more than offset a rise in government. In total, the private sector created a little over 60,000 jobs, or an increase o f around 19 percent. But, setting aside a loss o f 21,724 jobs in sugar, non-sugar private sector employment grew by an impressive 82,000 jobs - nearly 30 percent or 2.7% annually - which was indeed a robust performance. Table 24 also shows that large establishment employment stagnated during the period, so that the 47Mauritius has traditionally used 12 years as the age threshold for defining the working age population. By contrast, the ILOrecommends 15 years. However, the choice makes only a small and relatively stable difference inmeasures o f labor market outcomes. Here, we use 12+ as a basis for the discussion. - 53 - entire increase in employment was due to small enterprises, including informal sector.48 Notably, female employment increased everywhere, inthe public and large establishment sectors as well, but for women, too, the bulk o f job creation was in the small enterprise private sector. Women's employment outside the large establishment sector increasedby 114 percent. Table 24: Emplo ment bv sector IndustrySector Level in 1990 ( iange in 1990-20( Both Male Female Both Male Female Level YO Level % Level % Total 407,618 283,605 124,013 58,672 14.4 27,173 9.6 31,499 25.4 Central Government 53,287 42,566 10,721 2,652 5.0 -1,382 -3.2 4,034 37.6 Local Government 6,336 5,767 569 -143 -2.3 -367 -6.4 224 39.4 Municipal Councils 4,376 4,014 362 35 0.8 -182 -4.5 217 59.9 District Councils 1,960 1,753 207 -178 -9.1 -185 -10.6 7 3.4 Public Enterprises 25,573 22,281 3,292 -3,787 -14.8 -4,641 -20.8 854 25.9 Private Enterprises 308,827 209,829 98,998 58,331 18.9 16.2 24,289 24.5 Sugar 47,766 35,842 11,924 -21,724 -45.5 -34,04218 16,O -44.7 -5,706 -47.9 EPZ 77,314 27,426 49,888 10,598 13.7 2,295 8.4 8,303 16.6 Other & not stated 183,747 146,561 37,186 69,457 37.8 47,765 32.6 21,692 58.3 Household services 12,178 2,103 10,075 1,920 15.8 -233 -11.1 2,153 21.4 Co-operative enterprises 785 666 119 -156 -19.9 -112 -16.8 -44 -37.0 Memo: Large scale 283,500 185,000 98,500 -400 -0.1 -2,800 -1.5 2,400 2.4 Other 124,118 98,605 25,513 59,072 47.6 29,973 30.4 29,099 114.1 Source: CSO, 1990and 2000 ct uses. Unemployment 3.18 Despite the reasonably robust growth in employment, the number o f unemployed nearly doubled from 24,400 to 48,100 and the unemployment rate rose from 5.6 percent to 9.4 percent. Who are the unemployed and why are they unemployed? First, disproportionately they are young. In2000, the 12-24 year age range comprised 21 percent o f the active population, but 62 percent of the unemployed and the youth (less than 25 years old) unemployment rate was 27.9 percent compared to a moderate 4.4 percent for those 25 or older (Table 25). The situation was similar for both males and females, though the youth unemployment rate was slightly lower for women and the 25+ rate was slightly higher, perhaps reflecting women's dropping out o f the labor force to start families and subsequently re-entering. 48 Givendoubts about estimates ofnon-large establishment employment (see box 4), the rows inthe table have been calculated by subtracting large establishment employment reported inthe Digest of Labour Statistics from total employment reported inthe census. - 54 - Box 4: Labor marketdata and censuses. For instance, Figure 24 shows 12 the unemployment rate which riies steadily I O- e * according to the Digest,butrises sharply and ::'+ 8 8 then stays relatively flat after the mid 1990s + according to the censuses and surveys. The + -8 analysis inthis section refers to the 1990 and + - 2000 censuses which avoids methodological + problems and also permits greater sectoral 2 - disaggregation than inthe Digest data. O , # , # , ## , # # # I ## # I ## I # /8 I I I I 3.19 Second, the unemployed predominantly have low educational attainment - 90 percent with less than HSC. But, since 88 percent of the work force overall had less than H S C unemployment rates were similar for different levels of education. Indeed, the lowest rates were for those with less than CPE. Both Male Female All 9.4 8.9 10.1 Bv age -- 25-t 15-24 27.9 28.9 26.4 4.4 3.9 5.6 Bv educational attainment --- At Less than CPE 9.0 9.7 7.6 least CPE but less than HSC 10.0 8.9 12.5 HSC or better 7.9 6.3 10.1 - 55 - available in the labor force and those demanded by employers? Since unemployment appears to be distributed more or less proportionately across different education levels in Table 25, the answer seems to be "no." But the table shows only the supply side o f the market. To complete the picture we also needto look at demand conditions, here proxied by vacancies. Vacancy data reported by the CSO in its large establishment survey are only partial as less than half of total employment is in large establishments. Moreover, the figures count the number o f positions to be filled over a particular time interval rather than the flow into employment throughout the year. Nevertheless, they are the best available source and therefore o f interest, and they usefully provide a breakdown by type o f employment being offered - elementary occupations, craft workers, technicians, managers, etc. Table 26 imputes educational requirements to the vacancies and compares the estimated demands and supplies for different levels o f educational attainment.49 Male Female Vacancies Unemployed Ratio Vacancies Unemployed Ratio No. % No. % UN No. % No. % UN < sc 735 64.2 24792 81.4 33.7 960 80.9 11716 66.8 12.2 SC/HSC 199 17.4 5279 17.3 26.5 109 9.2 5468 31.2 50.2 Degree 210 18.4 402 1.3 1.9 118 9.9 347 2.0 2.9 Total 1144 100.0 30473 100.0 26.6 1187 100.0 17531 100.0 14.8 3.21 Very different supply-demand balances for different skill levels indicate that indeed unemployment has a structural component. Both job seekers and vacancies are weighted toward the low end in terms o f education, but job seekers especially so. For menwith less than School Certificatethere are 34job seekers for eachvacancy, while for women there are 12. The situation i s better for men with at least some secondary education, with 27 applicants for each position, while for women it deteriorates sharply to 50. But for workers with a degree, the labor market i s much tighter -just 1.9 men and 2.9 women for each position. Such figures strongly corroborate employers' frequent complaints they are constrained by skills shortages. The fact that unemployment rates are similar in Table 25 may reflect better educated workers' ability to remain unemployed and search for longer, while the less educated must accept the first job which comes along. c. THEINSTITUTIONAL SETTINGOFTHE MAURITIAN LABORMARKET 3.22 In Mauritius, labor relations are governed by well established laws and institutions (box 5). As might be expected in such a consensual setting the government plays a large role, setting minimum wages and working conditions, and sanctioning 49Table 26 assumes that senior officials, managerial and professionalpositions require post secondary traning; clerks, sales and service workers require secondary education, and craft and related trade, plant and machine operators, assemblers and other elementary occupations accept less than secondary education. See World Bank 2005b for details. - 56 - layoffs. According to the 1973 Industrial Relations Act (IRA), minimum wages and working conditions in the private sector may be subject to Remuneration Orders issued by the Minister of Labor on recommendation from the National Remuneration Board (NRE3). Remuneration Orders generally target specific occupations in a single sector, though they m a y apply across sectors. In addition to minimum wages and working conditions, Remuneration Orders also prescribe increments for years o f experience. Currently, there are 29 Remuneration Orders covering 80-90 percent of private-sector workers. In the public sector, the Pay Research Bureau (PRB) performs an analogous function, setting wages across the civil service and the parastatal sector. Box5: Labormarketinstitutions The labor market is governed by a well developed institutionalframework which includes: PayResearchBureau-Functions under Ministryo f Labor; responsible for setting public sector wages. Labor Advisory Board-tripartite board under the Ministryo fLabor which advises the Minister on labor and employment issues. Advisory Council for Occupational Safety, Health and Welfare - tripartite body in the MinistryofLabourwhich advises the Minister on safety andhealth issues. EPZ LabourWelfareFund-promotes interests andwelfare o fEPZworkers. Trade Union Trust Fund - promotes workers' education and awareness through conferences, workshops, etc. Reinforces trade unions. National Remuneration Board (NRB) - Advises Minister o f Labor on wages and working conditions and recommends minimum wages after consulting with trade unions and employers' representatives. PermanentArbitration Tribunal (PAT) - Arbitrates in labor disputes, makes binding awards and enforces rulings. Industrial Relations Commission (IRC) - Provides independence conciliation services and rules on applications for recognitionof trade unions. Termination of Contracts of Service Board - Examines and rules on applications to reduce workforce. Legal Framework - The framework for labor relations sets out the institutional framework comprising the IRC, PAT, etc.; sets out the rights and obligations o f workers and labor unions; establishes safety and health standards and procedures. Labor relations are governed by: 0 IndustrialRelations Act (amended) 2003 0 Labour Act (amended) 2004 0 Occupational Safety, Health and Welfare Act 0 Additional Remuneration Act 2005 0 Industrial ExpansionA c t 1993 - 57 - 3.23 Unions are legal and unrestricted and there exist more than 300 o f them. Collective bargaining i s allowed as are strikes, though they are subject to very restrictive conditions and as a result they are rare. Industrial disputes must be reported to the Minister o f Labor 21 days in advance o f a strike, and strikes cannot begin while a dispute i s before the Permanent Arbitration Tribunal (PAT). Proposed changes to the IRA will allow workers rather than the governmentto decide whether to refer a dispute to the PAT. Mauritius has recently ratified ILO conventions guaranteeing the right to strike. 3.24 Severance pay for terminations i s reasonable - one week per year o f employment up to three years and two weeks per year after that. However, terminations are subject to review by the industrial court which may determine that an employee was terminated unjustly and order after the fact that the worker be paid six times normal severance. The risk o f a large retroactive adjustment means that the cost of firing workers i s potentially quite high. 3.25 In comparative terms, Mauritius' overall labor market scores Figure 25: Labor market flexibility best = 0, worst = 100 near the average for countries included in the World Bank's 2006 Doing Business survey (Figure 25). The indexes are 50 .............. simple tallies of "yes" and "noy' answers 40 ............... .............. to a set of questions about the labor .................. market arranged so that a higher number indicates lower flexibility. For Mauritius, there are no restrictions on hiring, but significant rigidities in setting hours o f work and firing. Severance costs are not excessive, but the difficulty o f firing i s high because of uncertainty arising from the need to obtain approval. 3.26 The Government runs a number o f active labor market programs (ALMPs) for unemployed workers. However, the scale o f these i s relatively limited. Workers may apply for seed capital (up to Rs. 100,000) to start a business, or be paid a small stipend (Rs. 1,500) to register for an appropriate training program through a skills development program. The IVTB runs training programs in a variety o f areas which are accessible to both companies (75 percent financed by the training levy) and individuals. There have been special retraining programs for retrenched textile workers and a Skills Development Program for unemployed university graduates. 3.27 Inaddition, the MinistryofLabortries to putworkers andemployers intouch with each other by maintaining on-line databases o fjob vacancies and available workers. There i s no unemployment insurance, but the unemployed are eligible for cash transfers under a means tested, low income support program. - 58 - Wage setting-cumbersomeandineffective 3.28 On paper, the wage setting mechanism appears highly restrictive and intrusive. McDonald and Yao 2003 and Porter 2004 argue that Remuneration Orders compress the wage schedule, narrowing the difference between various skill levels and reducing the incentives for workers to invest education. The Mauritius Employers Federation has criticized Remuneration Orders trenchantly because they, "breed rigidity inthe wage structure and give little scope for productivityenhancement, multi-skilling or upwardmobility o f workers." (MEF 2005, p. 16) But, beforejumping to conclusions, it i s useful to examine actual outcomes. World Bank 2005b explored the impact o f ROs using the 2001/02 Household Budget Survey by comparing observed outcomes with those mandated inROs. The exercise finds a somewhat tenuous connection betweenthe two. Figure26 - Figure29 illustrate the following range o f observed marketoutcomes: Wages exceed Remuneration Orders: Remuneration Orders for sugar sector laborers specify a minimum wage of Rs. 4,036 for males and Rs. 2,886 for females. Minor concentrations are apparent around the respective ROs, but in both cases the main weight of the distribution i s well above the mandated floor (Figure 26). The same applies to drivers in the transport sector where wages exhibit at best a minor concentration around the RO range o f Rs 5,100-5,300 and wages are concentrated at a significantly higher level, with major peaks at 6,000 and 6,600 (Figure 27). Because the wage distributions are relatively well defined and concentrated, the outcomes appear to be the result o f collective bargaining. Remuneration Orders set an effective floor: EPZ machine operators are covered by a Remuneration Order at Rs. 1,700-Rs 1,800. With few observations below that range, ROs appear to set an effective floor, especially for women who are heavily concentrated just above that level (Figure 28). The weight of the distribution for men i s significantly higher around Rs. 3,000-5,000. Men may have more seniority because o f lower turnover, or perhaps more supervisory responsibilities. Remuneration Orders have little discernable impact: Male non-sugar laborers are covered by a RO o f Rs. 3,731, but this has been at best a minor factor in actual outcomes. Informal sector workers represent over 60 percent o f the sample (85 out o f 136 observations) and it i s interesting to separate these from the formal sector (Figure 29). In neither case are observed wages clustered near the RO in the range o f Rs. 5,500-5,700. However, as might be expected a proportionately larger share o f informal sector wages fall below the RO compared to the formal sector. - 5 9 - Figure 26: Sugar labourers Figure 27: Transport drivers RS 4,035 (VI 2500 3500 4500 5500 6500 ' - - Females -Males 4000 5500 7000 8500 Source: Cdculutionsbased on HBS Z001/02 Figure 28: EPZmachinists Figure 29: Male non-sugar labourers ___-_ 1000 2500 4000 5500 7000 iL --Female -Male I I - - Informal sector -F O ~ sector I I Sourcc Cvlcuivlionr bored on HBS 200I/U2 Source. Colculonons based on HBS 2001/02 3.29 Though not many o f the sector- Figure 30: Distribution o f hotel sector occupation combinations in the HBS have services workers' wages enough observations to reveal the percent underlying distributions o f wages, the finding o f non-sugar laborers inFigure 29 that informal sector wages are more likely to be below the RO. Figure 30 gives another example for services workers in the hotels sector. Those in the informal sector are far more likely to be earning below the minimum wage. Table 27 summarizes the findings in all sectors that were examined individually. - 60 - Table 27: Selected RemunerationOrders Sector Occupation Remuneration Orders Comments Private Elementary Helper, cook, cleaner, worker (Rs. Little apparent effect o fROs. Households workers 1700-2250); gardener, caretaker, Majority o f workers are informal. garde-malade, watchman (Rs. 2500 -3000). Hotels Elementary Porter, cleaner, gardener, waiter, ROs one o f the main determinants workers laundry attendant (Rs. 3,500- o f wages 3,700); Hotels Service Barman, head waiter, cook (Rs. Rs. Some concentration o f wages workers 4,600-5,000); receptionist, around ROs, but ROs also housekeeper, accounts clerk (Rs. frequently disregarded for both 5,000-5,500); restaurant supervisor formal and informal sector (Rs. 6,000). workers. Sugar Laborer Male (Rs. 4,036), female (Rs. Negligible effect - most wages far 2994). exceed RO. Non-sugar Laborer Male (Rs. 373l), (Rs. 2886) female Minor influence. Most formal sector wages are above the RO, but a substantial proportion o f informal sector wages are below. Construction Crafthrade Entry level stone worker, plumber Some influence, but relatively workers etc. (Rs. 4,400); storekeeper, minor. carpenter, mason, painter, plumber, cabinet maker, foreman (Rs. 5,000- 5,300); chief foreman (Rs. 6,700). Transport Drivers Driver (Rs. 5,000-5,300). Little discernable impact o fROs. EPZ Machinists Unskilledworker (Rs. 1,500- ROs set effective floor for 1,650); factory worker (Rs. 1,700- women, but relatively small 1800). impact on men. D. HUMAN CAPITAL AND THE QUALITY OF THE LABOR SUPPLY 3.30 Increasing labor market efficiency can increase mobility and improve resource allocation in the economy. Finding the right balance between encouragement o f risk taking and safeguarding workers' interests can facilitate the structural transformation Mauritius i s seeking to make. But, in the longer term, labor quality - that is, knowledge and skills - i s as important as quantity and allocative efficiency in underpinning economic growth and rising productivity (box 6). The remainder o f this chapter evaluates Mauritius' education system in light o f the needs o f a knowledge-based economy. EducationinMauritius 3.3 1 Mauritian education i s structured as a 6-5-2 system.50 Six years o f compulsory primary schooling culminate in a Certificate o f Primary Education (CPE), followed by five years o f secondary education and a Cambridge School Certificate (SC), followed by another two years and a Cambridge Higher School Certificate (HSC). Students who fail the CPE twice or reach the age o f twelve are entered into a pre- s' The description in this section i s basedon Government o fMauritius 2004. - 6 1 - vocational stream consisting of a three-year, skills based program. Post-HSC, various options for public and private tertiary education are available locally and overseas. Box 6: The economicsof educationand humancapital A large body o f research points overwhelmingly to the importance o fhuman capital ineconomic development. Pioneering work by Schultz 1960 and Becker 1962 (who coined the term human capital) recognized that knowledge and skills were similar to physical capital and that education was a type o f investment. Empirical work has strongly supported this assertion. For instance, Mankiw, Romer and Weil 1992 found that human capital (proxied by years o f education) explained as much o f the differences in income between countries as physical capital. Figure 31 shows a scatter plot o f average years o f schooling inthe adult populationagainst the logarithm o f per capita income ina sample o f around 150 developed and developing countries. The correlation o f 0.85 indicates the close association between education and average productivity. Butresearchers have also found that education contributes to the growtho f income as well as the level. Figure 32 plots average years o f schooling against income growth in 1990-2000. The connection is weaker than Figure 31, but is still clearly positive with a correlation o f 0.41. Evidently whatever underlies this relationship is very different from the standard notion o f human capital as equivalent to a type o f machine. InFigure 32, the investment not only raises workers' productivity, but causes it to continue growing indefinitel~.~~ A likely explanation is that education not only conveys knowledge, but also the ability to learn and innovate. Thus, human capital accelerates the pace at which new and more productive technologies are developed and put into use (Nelson and Phelps 1966, Romer 1990).52 Not surprisingly, innovative activity as measured bypatents or R&D expenditure tends to cluster around top notch research universities where the quantity and quality o f education are highest (Wu 2005). Ability to learn is especially pertinent to countries such as Mauritius which are relatively far from the technological best practice frontier. According to Nelson and Phelps this situation offers the prospect o fvery highreturns to education. Figure 31: Educationand per capita GNI Figure 32: Education and per capita GNI US$in 2000 growth 4 3 1 -107 ~ 5 'Technically, Figure 31 associates the levels o f two variables, while Figure 32 associates the level o f one variable with the first difference o f another. - 62 - 3.32 In primary education, the entry rate is 100 percent, with a retention rate through the end o f the primary cycle of 98 percent. However, high repetition rates for Standard VI (geared to getting a position in a good secondary school) and major attrition after the CPE eliminates many students from the system, so that only two-thirds o f the cohort reaches FormV and only 36 percent complete a HSC (Table 28). Table 28: Cohort analysis, 1990-2002 Year Number YO Pupils in Std. 1 1990 19,446 100.0 Cohort reachingStdVI 1995 18,985 97.6 1CohortreachingFormV 2000 13,001 66.9 CohortreachingFormVI (HSC) I2002 61937 35.7 Source: MESR, 2003 3.33 Over the past several years, major reforms were introduced at the secondary level aimed at improving throughput. Compulsory education was extended from 9 to 11 years and capacity at the secondary level was increased by doubling the number o f state secondary schools from 34 in 2000 to 67 in 2004 (in addition to 109 private secondary schools). Eliminating the star schools and splitting off Form VI colleges reduced competition for secondary school places reducing the repetition rate for the CPE exam, though it remains high. It i s encouraging to see gross enrollment rates increasing at both the secondary and tertiary levels (Table 29). However, the CPE pass rate has actually trended lower, declining from 66.4 percent in 2000 to 63 percent in 2004. Moreover, it remains to be seen what impact the reunification o f Form I-V and Form VI colleges, announced by the new Government, will have. 2000 2001 2002 2003 2004 Primaw Students 135,237 134,085 132,432 129,616 126,226 Gross Enrollment (%) 104.4 103.0 102.8 102.2 101.9 CPE pass rate 66.4 65.3 64.9 62.6 63.0 Secondaw Students 95,448 97,647 99,687 103,847 105,988 Gross Enrollment (%) 60.4 62.6 64.2 66.0 66.1 SC pass rate 76.6 76.6 74.6 75.5 77.5 HSC pass rate 72.3 73.2 75.8 75.1 76.2 Tertian I Students 17,132 20,488 22,292 25,685 Gross Enrollment (YO) I 13.0 15.7 16.7 Source: CSO, MESR 52According to Schultz 1975, educationallows consumers as well as workers to be more innovative, thus perhaps acceleratingthe growth of demandas well as supply. -63 - 3.34 Tertiary education comprises a wide range o f providers and programs. There are nine public institutions, including the University o f Mauritius, the University o f Technology Mauritius, the Mauritius Institute o f Education, and Mauritius College o f the Air which offer a range o f academic and professional programs. Inaddition, around 30 private institutions and 50 overseas institutions deliver tertiary level programs, many o f which are in niche areas such as information technology, or lead to professional accreditation. The NTB offers numerous technical and vocational training programs of varyingdurations. 3.35 Finally, the education system comprises some oversight bodies, including the Mauritius Qualifications Authority (MQA) whose purpose i s to ensure compliance with internationally recognized standards and to register qualifications and accreditations; and the Tertiary Education Commission (TEC) which provides oversight o f the tertiary sector. Evaluation 3.36 At the primary level, Mauritius has achieved 100 percent entry and nearly as high completion through Standard VI, gender equity and universal adult literacy. But, despite these solid achievements a number o f flaws inthe system have been r e ~ o g n i z e d : ~ ~ 0 Widespread after hours tutoring i s a burden to families in terms o f money and time and constitutes a moral hazard for teachers. 0 High repetition in Standard VI and post-CPE attrition reduce internal efficiency. These two factors combined waste around 10 percent of the recurrent education budget.54 0 Accountability i s low and needs improvedmonitoring and evaluation; one way to achieve this would be greater decentralization to the local or district level. Better trained teachers and a more up-to-date curriculum would help to stimulate greater interest and learning, especially inmath and science. 0 The system is elitist, with among the highest disparities according to socioeconomic status in standardized reading and math test scores in the SACMEQ I1sample o f 14countries inSouthern andEasternAfrica. 3.37 But low enrollment rates at the secondary and tertiary level represent the most serious weaknesses. Recent initiatives are beginning to have an effect, but Mauritius continues to lag behind.s5 Table 30 shows Mauritius with a secondary gross enrollment rate o f 76.5 percent compared to 80.8 percent for all upper middleincome countries. The Czech Republic, a potential rival for FDI and competitor in knowledge-intensive s3 1-3 from World Bank 2004c, 4 from World Bank 2004c andMauritius ResearchCouncil2004, and 5 from SACMEQ I1results (http://www,sacmeq.org/indicate.htm). 54Using a benchmark o f educating each student only once for each year o f schooling (no repetition) and 100percent completion ofthe primary and secondary cycles (no dropouts), World Bank (2004c, p. 40) calculates the internal efficiency o f primary school at 82 percent and o f secondary school at a low 27 percent. s5FiguresinTable 30 differ the CSO's Digest of Education Statistics (e.g. which shows a secondary enrollmentrate of 60 percentin2000) because UNESCOdiffers from national sources to ensure cross- country comparability, inthe age range defining the cohort, etc. - 64 - European export markets, had a secondary enrollment rate nearly 20 percentage points higher than Mauritius. Inhighincome OECD countries where the secondary enrollment rate averages 106.2 percent, secondary completion i s virtually universal. Tertiary enrollment lags even further behind, at 11.2 percent compared to 33.3 percent in upper middle income countries and 60.1 percent in high income OECD. The gap i s especially large with highincome innovative economies such as Finland, Korea and the US. 3.38 Moreover, not only are enrollment rates in higher education low, but so are expenditures - US$2,115 per student in Mauritius compared to US$4,330 in Turkey, US$5,000 inTunisia and US$6,900 in Chile (World Bank 2004). Table 30: Gross enrollment rates, 2000 ercent Primary Secondary Tertiary Mauritius 107.7 76.5 11.2 Upper MiddleIncome -- Malaysia 103.7 80.8 33.3 CzechRepublic 104.3 94.7 29.8 96.9 69.3 27.0 HighIncomeOECD 101.8 106.2 60.1 - Finland - Korea 101.7 125.9 85.3 100.1 94.2 77.6 - UnitedStates 100.3 94.1 70.7 Source: WDI/UNESCO 3.39 Recent initiatives may have begun to reverse the trend. Figure 33 compares Mauritius' percentile in a cross-country distribution in 1998-99 and 2001-03 for a sample o f indicators. Small gains in secondary and tertiary enrollment rates are welcome, despite falling back interms o f expenditure on education as a percent o f GDP. But, over time Mauritius has lost significant ground to other countries which have invested heavily in their education systems. Figure 34 ranks countries according to average years of education and shows Mauritius' percentile in the distribution at five-year intervals from 1980-2000. In 1980, Mauritius was at the 55`h percentile, but had dropped back to the 48th percentile by 2000. For an aspiring high tech services hub, the effort falls Figure 33: Education indicators Figure 34: Avg. years o f education percentile in cross country distribution percentile in 112 country sample .. 56 54 $ 52 $ 50 B 48 46 44 42 Pubhc spendingon Gross emollment Gross emollmenf educ (% GDP) rate, secondary rate, tertiary 40 1980 1985 1990 1995 2000 - 65 - conspicuously short. The efforts o f Singapore and Taiwan at a time when they had prioritized technology upgrading far surpass Mauritius' achievements. Polytechnic enrollment in Singapore achieved more than a ten fold increase from 1966-90 and upper secondary enrollment in science rose from seven percent to 38 percent in 1977-91 (Kong, 2004). 3.40 In addition to raising overall throughput, there is a need also to upgrade and modernize the curriculum. The quality of education i s as important as quantity, for instance as measured by internationally comparable test scores measuring cognitive skills in math and science (Hanushek and Kimko 2000, Barro 2001). By the 199Os, many developed and developing countries around the world were upgrading curricula to give greater emphasis to problem solving and critical thinking skills. Mauritius lags in this regardas well and the curriculumretains an emphasis on memorization and rote learning (World Bank 2004~). 3.41 Math and science education i s particularly important for the skills needed to support knowledge based activities. Yet, according to Mauritius Research Council 2004, less than 30 percent o f pupils take science, while only 20 percent take computer studies at 0 level and 5 percent take computer studies at A level. The MRC makes a number of sensible recommendations to address the situation, including extending compulsory science education to Form V, making the curriculum more engaging and hands-on, and upgrading teachers' qualifications through in-service training. The MRC also notes problems o f too much memorization, poorly trained teachers and inadequate facilities and equipment. E. EDUCATION THE LABORMARKET AND 3.42 As would be expected, Mauritius' labor force qualifications reflect the relatively low educational attainment. Table 31 presents an overview o f the situation in 1990 and 2000, based on census data. The first two columns show the breakdown by highest level of education attained. A preponderance of workers with low levels of education i s apparent at both points in time - 79.3 percent in 1990 and 72.6 percent in 2000 had below School Certificate (lower secondary). Only 2.3 percent had a university degree in 1990, risingto 3.6 percent in2000. - 66 - Table 31: Educational aualifications o f the labor force. 1990-2000 1990census 2000 :nsus Finance, real Highest level of education attained All employees All employees estate and business services Nil+pre-primary 8.6 4.8 0.8 Std I- VIbut not passed CPE 40.4 34.9 10.8 PassedCPE 5.9 5.5 2.0 Forms I- I11 9.7 10.4 6.0 Forms IV - V but not passed SC 14.7 17.0 16.8 Passed SC or equivalent 13.6 15.3 23.3 PassedHSC or equivalent 4.5 8.2 26.0 University degree or equivalent 2.3 3.6 14.2 Memo: CPE pass rate 58.4 66.4 Secondary enrollment rate 48.1 60.4 SC pass rate 26.4 57.9 HSC Dass rate 56.1 72.3 Source: CSO, 1990and 2000 censuses 3.43 A selection o f education indicators in the lower panel of Table 31 reveals a significant improvement inperformance o f the primary and secondary system through the 1990s. Secondary enrollment increased by 12 percentage points, while the SC pass rate more than doubled and the HSC pass rate rose by 16 percent. But the impact on the skills base remains limited - only a 5 percent rise in the share o f the labor force with HSC or better. In other words, even if young Mauritians were currently provided with the educational opportunities they need, it would take decades to bring labor force qualifications to an appropriate level (Hanushek 2002). 3.44 Finally, Table 31 also gives an Figure 35: Workforce distribution by idea of the educational standards which will educational attainment be needed to support more knowledge and percent skillbasedactivities. The rightmost column shows the mix o f educational qualifications o f employees o f the Finance, Insurance, Real Estate and Business Services sector in 2000. Only 36 percent o f employees had less than a SC, compared to 73 percent in the work force overall. At the other end o f the scale, 64 percent o f employees had HSC or better, compared to 27 percent in the All sectors Finance and bus services work force overall (Figure 35). __ @Less than School Certificate 01 CertificaKhhlgLJ sourvcso2ooocm,ui - 67 - Economicincentivesandthe returnto education 3.45 The Tertiary Education Commission (TEC 2004) publishes an indicative list o f skills which are in demand to help students select a field o f study. Undoubtedly this information i s valuable to young people deciding on a career. But, at the same time as educators encourage workers to acquire needed skills, the labor market must allow an adequate return on the cost o f acquiring them. Macdonald and Yao 2003 and Porter 2004 have argued that minimum wage setting in Mauritius has compressed the wage distribution and served as a disincentive to acquire skills. Table 32 finds evidence to support this assertion at the bottom o f the wage scale, though pay differentials for more skilledjobs appear to offer adequate returns. Thus, skill shortages appear predominantly to reflect capacity constraints in the educational system rather than a lack o f interest on the part o f students. 3.46 The first two columns o f Table 32 show average years o f education and average monthly earnings for a number o f different employment categories, based on a sample o f 7,800 wage earners from the 2001-02 Household Budget Survey. Average monthly earnings across the economy are Rs. 8,203 and the average worker has 9.5 years o f schooling. But the variation across categories is substantial. Managers are well educated with an average o f 14.6 years o f schooling and are the best remunerated group with monthly earnings o f Rs. 24,595. Teachers, health workers, scientists and other professionals typically have at least some tertiary education; clerks, craftspersons, elementary workers and machinists have primary or some secondary education; and laborers have primary education. 3.47 The third column headed `Earnings impact' estimates the percentage impact on earnings o f an additional year o f education within each o f the c a t e g o r i e ~ .The ~ ~ results indicate that an extra year o f education would be expected to raise a manager's earnings by 11.2 percent or Rs. 2,755 per month, a laborer's earnings by 3.2 percent or Rs. 204, etc. Evidently the marginal value o f education i s highfor high income earners, but much lower for low income earners (the correlation between `Average monthly earnings' and `Earnings impact' i s 0.8). 56The entries inthe column are the coefficients for years o f education taken from regressions o f the log o f earnings on education together with various other control variables (hours, experience, gender and other factors likely to influence earnings). The equations are known as Mincer regressions, after Jacob Mincer's pioneering work on estimating returns to education. - 68 - Table 32: Impact o f education on earnings Occupation Years o f Avg. monthly Earnings schooling earnings impact' IRR All 9.5 8,203 11.9 .04 Manager 14.6 24,595 11.2 .07 Health 15.7 23,818 15.5 .10 Science 15.6 20,770 14.6 .09 Other professional 14.2 19,076 11.6 .07 Teacher 16.4 17,366 7.8 .03 Associate professional 13.2 12,831 12.3 .06 Clerk 12.4 8,938 10.0 .07 Driver 8.5 8,554 5.3 .03 Services 10.6 7,911 11.5 .08 Craft 8.3 6,727 7.1 .04 Laborer 6.2 6,375 3.2 .oo Skilled agriculture 6.9 6,095 6.5 .03 Elementary 7.3 5,44 1 5.3 .02 Machinists 8.3 5.072 4.5 .01 Source: calculatedfrom 2001-02 HBS data. Note: BiColumn represents percentage impact on earnings of an additional year of education, calculated as the coeficient on years of education in regression of log of total earnings on education and other control variables. 3.48 But the incentive to acquire more education depends on a comparison o f the lifetime benefits and the cost, consisting o f both the direct outlay and income foregone. For this purpose assume the direct outlay for a5 ear o f post secondary education i s Rs. 100,000, and pre-HSC the cost i s Rs.25,000. 7 The indirect cost i s a year's wages foregone, calculated from column 2. To estimate the return, assume a worker will continue to benefit from the wage increase throughout a working life o f 35 years. The formula for calculating the expected return is: Net benejit = -(cost) +( i)(L,*[ (L,')* * l t r 1- l t r (Aearnings) Where r i s a real discount rate and T = 35. 3.49 The final column o f Table 32 shows the internal rate o f return on obtaining an extra year o f education, which i s the discount rate, r, which sets the net benefit to zero. If the internal rate o f return is lower than an individual's rate o f time preference, he or she should not incur the expense. For health and services workers and scientists managers and other professionals, the internal rate o f return o f 7-10 percent suggests an adequate return. But, returns to education for machinists, agricultural and elementary workers, and laborers are quite low. This suggest strongly a need to improve the quality and relevance o f educational offerings at the primary and lower secondary levels. 57 For instance, tuition for a year o f post-graduate study at the University o f Mauritius is Rs.62,500, but students must also buy books and supplies, etc. - 69 - 3.50 Finally, we can validate the conclusions drawn from the analysis by asking whether employers believe labor skills are adequate for the needs o f the economy. Table 33 suggests they are not. The figures show the percentage o f respondents to the Mauritius Employers' Federation survey reporting that labor shortages are impediments to improving productivity. Significant numbers o f firms expressed difficulties finding both labor and management skills. The impression of skill shortages conveyed by the table is consistent with high wage premiums for skilled workers and high returns to education. The problem, then, would seem to be in providing access to education to (potential) workers who would like to acquire those skills. Table 33: Labor shortages inhibitingproductivity improvement vercent Management and technical Skilled workers personnel Agriculture 20.0 20.0 Manufacturing 24.2 4.5 EPZ 38.1 19.0 Construction 57.1 42.9 Wholesale and retail trade 31.6 15.8 Hotels and restaurants 60.0 26.7 Transport and communications 27.3 18.2 Finance, insurance and business services 22.0 24.0 Community, social and personal services 53.8 69.2 Source: MEF 2005 F. IMPROVING LABORMARKET PERFORMANCE 3.51 This chapter has explored both the near term (efficiency, mobility) and longer term (worker quality, humancapital) impediments to labor market performance. In both aspects the Government can implement policy measures to streamline and harmonize incentives and better support the structural reforms which are at the heart of the new economy. Labor market efficiency 3.52 Of course, no measures to improve efficiency and mobility can have much impact if jobs are not being created. Thus, implementing measures to improve the investment climate and raise competitiveness are important components o f labor market policy. Burdensome regulation i s especially costly to SMEs which, as in most other countries in the world, have been the main source o f employment creation since 1990. Likewise, labor market regulations are an important component of the investment climate, especially those which operate on workers' incentives to invest inhuman capital. - 70 - 3.53 Aside from these rather obvious points specific measures to improve labor market efficiency andflexibility include: 3.54 Simpli! the minimum wage setting framework The system o f sector and occupation specific wages i s cumbersome and yet ineffective at the same time because o f collective bargaining on the one hand and non-compliance on the other. The claim that it i s inflationary i s questionable, but there likely are deleterious impacts on firms' incentives to boost productivity and workers' incentives to acquire training and skills. It likely also contributes to drivingproducers into the informal sector where they do not pay taxes and are less likely to observe safety and health requirements. Enterprise level bargaining would be particularly beneficial from the standpoint o f increasing flexibility and allowing firms and workers to tailor employment contracts to their particular needs. Replacing Remuneration Orders with a single, national minimum wage set at an appropriate level (Rs. 3,00O/month?) would bring Mauritius into line with most other countries. 3.55 Simplijj procedures for layoffs. Firing costs are a significant impediment to employment growth, especially in more innovative and risky industries. Though severance costs are low in Mauritius (especially in the EPZ), employers face uncertainty because they need to obtain approval for layoffs from the TCSB. Of course, policy on layoffs should be subject to collective bargaining as with other aspects af the labor contract. As a quid-pro-quo, severance payments which are moderate by international standards, mightbe raised. 3.56 Establish a tripartite commission to review the machinery of wage setting in the economy. In order to build consensus about a new industrial relations framework, stakeholders need to exchange views. A permanent framework for dialog would be useful. Improvingeducationand humancapitalformation 3.57 In the education sector, governments have to carry out effectively their responsibilities for setting relevant curricula, enforcing standards, demanding accountability and aligning resources with national priorities. Policies must mesh with the rest o f the development agenda since if the educational system fails to produce enough o f the right kind o f skills, growth o f skill dependent activities will be thwarted. Incentives must reward workers for investing in human capital or else educated workers will emigrate and the investment in their skills will be lost. Some proposals to achieve these objectives are: 3.58 Develop a national consensus on education policy through meaningful dialog with all stakeholders. Though significant reforms have been introduced over the past decade, the system remains elitist and suffers from low internal efficiency. The quality and relevance o f curricula have not fundamentally changed. Teaching practices are outdated, relying too much on memorization and there i s not enough choice and flexibility. Expenditureneeds to be raised and wastage reduced to bringthe system up to an international standard. This appears to be politically an extremely sensitive area with -71 - the result that progress has been slow and halting where dramatic change i s needed. To build consensus and momentum towards achieving these goals, government should launch a major, high-profile initiative and commit political capital to developing a practical roadmap for the education sector. 3.59 Raise both the quantity and quality of educational outputs. Attrition and failure rates must be reduced and capacity and throughput at the secondary and tertiary levels raised, especially in math, science and technical subjects. N e w curricula must incorporate problem-solving and critical thinking skills along the lines of emergingtrends in OECD countries. Vocational and prevocational streams need to be refocused away from agriculture and manual skills toward technology and IT competency. Lifelong learning opportunities need to be developed, especially in partnership with private firms to ensure relevance to market needs. Undoubtedly some o f these measures will cost money, but the education sector i s not the place to be balancing the budget (but also see next point). 3.60 Rebalance financing and expand the resource envelope especially at the tertiavy level. Resources allocated to education and trainingare inadequate and should be raised as a percentage o f GDP at least to the levels o f emergingmarket countries such as Latvia, Malaysia and Hungary. At the same time, private contributions to primary and secondary education must be curtailed by reducing private tutoring activity. Tertiary education i s particularly starved for funding and here it would be appropriate for private sources to make a larger contribution. Few advanced countries provide free tertiary education for all, though full scholarships should be made available to qualified students who are unable to pay. Annual tuition o f Rs. 30,000 for 3,000 students at the University o f Mauritius would generate Rs. 90 million, around 20 percent of the post secondary education budget o f the Ministry o f Education. 3.61 Reform administrative procedures to improve efficiency and accountability. Administration o f the education sector employs around 20 percent o f civil servants which seems comparatively high. At the same time, the level o f training and remuneration o f teachers i s below what would be expected in an OECD country. Few primary teachers and less than half o f all teachers have a higher education qualification. Average teacher's salaries are comparatively low relative to GDP per capita and the salary structure appears to be compressed, especially at the secondary level (cf. also Table 19 and Table 32 above). Decentralizing monitoring and management of teachers and other resources to the local level would strengthen oversight and accountability. A "teacher code o f conduct" would helpto define fair and effective standards o fperformance. 3.62 Welcome immigrants with needed skills. Mauritius allows entry o f skilled immigrants, but in a grudging fashion. Track One B guidelines allow expatriate managerial or technical employees to work for a period o f five years upon swearing an affidavit not to apply for Mauritian citizenship (Hein 2004, p. 35). The Scheme to Attract Professionals in Emerging Sectors (SAPES) offers professionals permanent resident status, duty exempt import of personal belongings and work permits for spouses. However, the scheme is not well-publicized and take-up has been extremely low since it was instituted in 2002. By contrast, countries such as the UK, Germany and Singapore - 72 - actively seek skilled migrants in priority fields and disseminate information about their programs widely on the internet and elsewhere. Hein 2004 estimates that immigrants constitute nearly a quarter o f Singapore's 4.2 million population. 3.63 Mauritius is competing with countries such as these and many others in the global labor market. Given the length o f time it will take to ramp up the education system it would be appropriate to extend a warmer welcome to potential immigrants, including allowing them eventual citizenship. Government should take the lead in preparingpublic opinion for greater openness. Various programs should be consolidated, perhaps incorporating a points system which would allow potential immigrants to see whether they would qualify for entry. They should then be publicized widely on the government web site as well as in promotional material o f the BOI, Free Port Authority, FSPA and other agencies (Hein). 3.64 Encourage life-long learning. Human capital i s not produced only in formal, structured academic programs. At a time o f rapid technological change and increased longevity, life long learning has become increasingly important. Fiscal incentives have a role to play in encouraging firms, especially SMEs, to invest intheir employees. In2002, corporate spending on training world wide reached US$28 billion (World Bank 2004b, p. 140). Social safety nets 3.65 Many workers will find satisfying, well paid employment in new, emerging sectors. But others - perhaps 50,000 or more, 10 percent o f the work force - will lose their jobs as sugar and apparel downsize. Especially older workers with sector specific experience and skills are unlikely to find new jobs where they are as productive and therefore earn as much as they did previously. Moreover, they may remain unemployed for lengthy periods. Even in much larger economies, where workers can in principle move to find work elsewhere and where they benefit from extensive (and expensive) Active Labor Market Policies, unemployment rates in communities which are dependent on declining sectors are likely to experience prolonged high unemployment (see, e.g. USGAO 2001, Leadbeater and Suschnigg 1997). 3.66 For workers who lose their jobs, the transition means anxiety and declining living standards. Undoubtedly, some households will be thrown into poverty. Nor is this likely to be just a transitional problem. Mauritius i s entering more competitive global markets where the pace o f technical change i s more rapid and less job security will be a fact o f life for many workers. There are implications both for the general social welfare system as well as for programs specifically aimed at dislocated workers. 3.67 Target social welfare better: As demands on the social welfare system intensify, it will become increasingly important to concentrate the social welfare budget on the truly needy. At present there i s a proliferation o f overlapping, categorical schemes for specific groups - widows, orphans, fishermen experiencing bad weather, etc. - which i s arbitrary, non-transparent and inefficient. Often the poorest who are the intended beneficiaries get little benefit from these social protection schemes, while the great - 73 - majority o f the social security budget (80 percent) i s spent on the Basic Retirement Pension, which i s provided to retirees whether they need the money or not (de Neubourg et al. 2002). More efficient allocation o f the social welfare budget i s needed to achieve an acceptable degree o f social protection within the Government's budget constraint. Government should also resist introducing a new facility for downsized workers from declining sectors, instead taking the opportunity to simplify and streamline the existing tangle o f schemes, with transparent means testing to ensure the money goes to the truly needy. 3.68 Provide transitional income support to dislocated workers: A contributory unemployment insurance scheme would provide partial income support to dislocated workers. Building on Mauritians' sense of social consensus, the scheme might be introduced as a special "National Solidarity Program." Like any unemployment insurance scheme, it would provide workers with transitional support, but would also bring significant resources into the system. In accord with common practice, payments would be relatively small and o f set duration (6 - 12 months) so that workers would have an incentive to find new employment. If compensation were set at a third o f lost wages up to a preset ceiling for a maximum o f six months, premiums set at ajust 2-3 percent o f wages could cover the cost of the program. This may also offer a politically acceptable way to take back some o f the income tax reliefgranted recently. 3.69 Provide incentivesfor workers to find new employment. Various schemes have been tried in developed and developing countries to incentivize workers to re-enter the work force quickly. One that has met with broad success i s wage insurance. For a fixed period of, say, two years, wage insurance compensates workers for 50 percent o f the difference in wages betweenthe oldjob and the new`job. This encourages workers to take a lower payingjob than they might otherwise be willing to do. Such a scheme might allow displaced EPZ textile workers to compete for the jobs now being held by foreigners. The wage subsidy might offer a cost competitive solution from the standpoint o f the government as well. 3.70 Offer training in collaboration with employers: Retraining in the context publicly funded programs for unemployed workers has little discernible effect on reemployment prospects (Dar and Gill 1998, Betcherman et al. 2004). There i s little evidence that workers who undergo government sponsored training programs are able to find new jobs more quickly or at higher wages than workers receiving only job search assistance, especially if unemployment i s high. In other words, publicly provided training serves as little more than a form o f income support. On the other hand, research also finds that training provided by employers i s effective in improving reemployment prospects. The explanation i s presumably related to employers' better knowledge o f what skills are useful and relevant (OECD 2004). Trainingmight be facilitated through a variant o f the wage insurance scheme where additional wage subsidies would be provided for workers receiving initial training. While the IVTB should be allowed to compete to provide training services, it should not enjoy a favored status inthis regard. - 74 - CHAPTER 4. HOW MAURITIUS CANBECOMEA MORE INNOVATIVE,KNOWLEDGE BASEDECONOMY A. INTRODUCTION 4.1 Like many countries, Mauritius has recognized that the route to higher productivity lies through science and technology. Vision 2020 saw these as essential to enabling traditional sectors to meet growing competitive challenges and developing new capabilities in IT, renewable energy, biotechnology and exploitation of ocean resources. Opportunities may also exist to increase productivity through better management and elimination o f waste. An instance familiar to Mauritius i s the sugar sector restructuringin 2000 (Figure 4(b) and (c) above) and Maloney 2005 reports similar occurrences from Latin America and Europe. But, Maloney argues that these are inevitably transitory. To sustain productivity growth, "there i s no substitute for investments in science and technology over the longer term." (Maloney 2005, p. 11) 4.2 However, the transition to a more technology intensive, knowledge-based economy i s not straightforward. There are long lead times in buildingup human capital and establishing innovation supply networks o f research institutes and financial, legal and technical support services (Porter and Stern 2003). On the demand side, there i s a needto foster entrepreneurship and a culture o f risk taking and even after that countries needtime to find out what they are good at, a process which Hausman and Rodrik 2003 call "self- discovery." That is, beyond generalities such as "labor intensive" or "resource based," it i s difficult to predict where countries will develop competitive advantages. What idiosyncrasies led Pakistan to specialize in soccer balls and Mauritius in knitwear? Why did Taiwan succeed with flat panel TVs but fail with hard drives? Whatever the eventual outcome, public leadership and funding are part o f the process as are institutions and policies to overcome problems o f complexity and knowledge spillovers. 4.3 It is worth reiterating earlier messages about redressingdeficiencies in human capital and the investment climate, because nowhere i s the payoff greater than in developing innovative, knowledge-based a c t i v i t i e ~ . Whether the knowledge i s ~ ~ homegrown or acquired from abroad, technologies need to be adapted to local conditions and continually modified or replaced as the frontier shifts out. Thus, a local R&D capability, broadly defined, i s essential. Though FDI may afford access to advanced technologies, the benefits in terms o f technology transfer are limited unless the host T country has the capacity to learn and form supply linkages or develop related clusters o f activities (Forbes and Wield 2000). Without spillovers, incentives proffered to "Knowledge-based" is somethingof amisnomer, since it i s the ability to learnrather than possessionof knowledge that keeps countries growing. Educationalcurricula needto incorporatecritical thinking and problem solving skills. - 75 - multinationals, sometimes reachinghundreds o f thousands o f dollars per job, are unlikely to yield significant net benefits for host countries (Blomstromand Kokko 2003). 4.4 But, the argument in this chapter goes beyond these considerations. Knowledge creation and innovation are prone to specific market failures and thus demand non-market interventions to achieve socially desired outcomes. Three different sources o f market failure increating and disseminatingknowledge need to be ~onfronted:~' Spillovers: Knowledge i s expensive to produce but cheap to reproduce, so successful innovations are liable to be copied. An implication i s that innovations are undersuppliedas private returns are less than social returns. 0 Uncertainty andfixed costs; Innovation i s a risky process and incurs up front costs for R&D. Firms and countries need to learn by doing, but competitive market pricing does not cover such outlays. 0 Complementarities: Creating knowledge i s a complex social process which requires coordinating various market and non-market participants endowed with technical, legal and business skills, market intelligence and financial resources. Incentives may not exist to bringthese actors together. 4.5 Virtually all countries inthe world have developed explicit policies to address these issues. In one way or another, overall direction and coordination i s provided at a highlevel; specialized, often public, institutions promote collaboration andrisk sharing; a variety of public and private sources provide financial support. There is no unique best strategy, rather different arrangements have come about in response to circumstances or historical accident (OECD 2005a). For instance, foreign technologies can be accessed through FDI,joint ventures, licensing or outright acquisition. Homegrown R&D may be done by private or public research labs. Governments can subsidize through fiscal incentives to private firms or direct provision o f R&D outputs from publicly funded research institutes. What i s important i s that policies be comprehensive and consistent and tailored to need. 4.6 The remainder o f this chapter assesses the state o f science and technology in Mauritius and proposes a range o f policies and initiatives to speed progress inthis critical area. Section B begins by reviewing what economists have come to call the "National Innovation System." Though many elements o f such a system are in place, they are not functioning well together. Constraints on both the supply and demand sides need to be addressed and the section makes a number o f recommendations to increase the clarity, coherence and overall direction o f Mauritius' technology strategy. Beyond these proposals, low capacity and awareness about technology suggest an opportunity for a more aggressive public intervention. Section C proposes to consolidate and build on existing public research institutes and redefine their strategic mandates. The objective would be to channel resources to areas which seem extremely promising, but where information and coordinationproblems are especially severe. *9 See e.g. de Ferranti et al. 2003, Maloney 2005, UNIDO 2002,2005. - 76 - B. THENATIONAL INNOVATION SYSTEMINMAURITIUS 4.7 Innovative economies or regions depend on networks o f firms, academic institutions, public and private research facilities, and legal, design, consultancy and financial support services. The complexity o f their interactions has given rise to the notion o f a National Innovation System (NIS), reflecting the fact that innovation consists notjust o f inputs and outputs, but "human initiative and creativity.. .deeply influenced by the production activities and the institutional setting." (Lundvall et a1 2002, p. 221). Mauritius has many elements o f aNIS, some o f which are shown in Box 7. 4.8 Many o f the components o f Mauritius' NIS are capable and well managed and carry out their mandates effectively. Some have achieved international renown. Yet, measured in terms of either inputs or outputs, Mauritian knowledge creation and diffusion i s extremely limited. Table 34 presents a selection o f science and technology indicators which show: The World Economic Forum's innovation index, which measures technical capacity and policy support for innovation ranked Mauritius 48`h out o f 78 countries in2003. R&D expenditure as a share of GDP is a tenth or less that in high performing developed and developing economies - 0.3 percent o f GDP in Mauritius compared to 2.8-3.4 percent inthe US, Japan, Finland and Korea. There are just 354 researchers in R&D per million population in Mauritius compared to 4,083 in Singapore and 7,094 inFinland. Not a single patent was registered with the US Patent Office in 2001 - an indication o f the low commercial value o f research outputs.60 Purchase and use o f foreign technologies i s limited. Royalty and license payments werejust US$1.7 per capita compared to US$66.8 inthe US, US$116.2 inFinlandand an astonishing US$2,653 inIreland. Mauritius has just 33 internet hosts per 10,000 population, compared to 644 in Israel and 1,O 16 inJapan. Even compared to other Upper Middle Income developing countries, Mauritius fares badly, ranking near the bottom o f a sample o f up to 20 UMICs (depending on data availability) - 17th out o f 18 in terms o f royalty and license payments, 13th out o f 15 in expenditure on R&D, and 19th out o f 20 in publication o f scientific and technical journal articles. ~~ ~ 6o Porter and Stern 2003 estimate a simple cross country regressiono f internationalpatent registrations ina sample o f 78 countries in2001-02 and compare actual and predicted outcomes. Out o f 78 countries, Mauritius i s inlast place (see Figure 4, p. 98). - 77 - Box 7: Elementsof the NationalInnovationSystem in Mauritius Some of the institutions inthe list below have as their mainpurposethe generationand disseminationof knowledge.Othersconduct or support R&D, but their main purposelies elsewhere, for instanceintraining or investmentpromotion. The list is not complete, but gives an idea ofthe extent ofthe NIS. EnterpriseMauritius- Strengthensinternationalbusinesscapabilities ofMauritiusfirms, amongst other things by enhancingtechnologicalandmarketingcapabilities. Specialfocus ontextile andgarments sector (throughthe Textile and Apparel DevelopmentCentre). MauritiusStandardsBureau-PreparesMauritius firms for compliancewith international technical standards, and involving Mauritius inthe WTO's Technical Barriers to Trade (TBT) deliberations; authorizedto certify I S 0 9000 compliance. Mauritius Sugar IndustryResearchInstitute(MSIRI)-Researchinstitute of international standing, founded 1953 to promote technicalprogress ofthe sugar industry through cane breeding and selection, developmentof strategies for pest and disease control, landmapping and soil analysis. Producedfirst transgeniccane variety in 1999,incorporating new pest control genes. Albion FisheriesResearchCentre-Maintains andbreedsfisheries stocks, and conductsresearchinto new species and aquaculturetechnologies such as cagedfarming with commercialpotential. MauritiusOceanographyInstitute(MOI) -Establishedin2000 to map and evaluatethe oceanresources availableto Mauritius through its Exclusive Economic Zone (EEZ). Boardof Investment(BOI) -promotes FDIinto Mauritius inatargetedmanner and focuses on specific projects such as promotion ofthe fisheries hub and enhancement ofMauritius as a logistics hub (in collaboration with the private-sectorinitiative, the Mauritius FreeportDevelopment); Universityof Mauritius-Offers degreeprogramsinscience, IT andengineering, sometimes working with leadingMNEs such as Infosys, and creatingacross-disciplinaryproblem-focusedresearch environmenton topics suchas medicinal plants and energy technologies;the Consultancyand Contract ResearchCenter (CCRC) performs contractresearch on a cost recoverybasis. MauritiusResearchCouncil(MRC) -Advises the Government on science andtechnology and funds technical and socialresearchundertakenby the universities,parastatals or the private sector. NationalProductivityand CompetitivenessCouncil(NPCC) - Supportsraisingproductivity and competitivenessat both firm and economy-widelevels. Disseminatesinformation on best practice approachesto enhancingproductivity from the rest ofworld. NationalComputer Board(NCB) -promotes computer literacy inschools andthe generalpublic, managesthe government's computer systems andweb site, and runs anI T incubatorprogram. Foodand AgricultureResearchCouncil(FARC) -establishedin 1985 under the Ministry of Agriculture to guide andpromoteresearch on non-sugaragriculture andfood, including biotechnology, fishing and food production. BusinessParks of MauritiusLimited(BPML) -Manages the Ebhe Cyber Parkwith state ofthe art, fiber optic wired facilities for I T investors. One Cyber Tower was completedin2003 and a second is currently under construction. DeveloumentBankof Mauritius-Finances ventures innational priority areas including technology. - 78 - Economic Technological Royalty Research- Sci., tech. GDPper Gross Innovative and license ers in Exp. on Internet journal capita InvestmentTrade as % capacity payments R&D/ R&D as % hosts per articles / (PPP) Rate o f GDP index rank per capita million o f GDP 10,000 milpop. Mauritius 11,258 26.7 117.5 48 1.7 354 0.3 33 13.6 U M I C sample" 11,195 22.3 91.0 8.6 609 0.5 98 338.5 Mauritius' rank 9/20 4/20 5/20 17/18 11/16 13/15 13/20 19/20 23.6 1 66.8 4,048 2.8 5,549 586.8 82.5 12 116.3 2,977 1.9 1,012 645.4 21.0 4 86.6 5,322 3.1 1,016 377.6 68.3 2 116.2 7,094 3.4 2,437 779.3 325.4 6 4,083 2.1 1,155 418.3 181.6 19 2653.0 2,191 1.2 395 329.7 Korea 17,908 31.0 78.6 20 62.6 2,882 3.0 53 143.2 Israel 19,532 23.0 83.0 14 68.2 1,579 5.0 644 823.1 Czech Republic 16,448 30.3 132.7 30 11.7 1,469 1.3 274 195.0 Latvia 9,98 1 22.5 101.5 28 2.6 1,094 0.4 179 64.0 Other middle income comparators Malaysia 9,696 33.3 210.7 35 25.8 276 0.5 43 18.3 South Africa 10,492 16.3 64.5 2 1 2.1 193 0.8 62 47.9 Mexico 9,136 22.4 56.4 51 7.1 226 0.4 129 23.7 Costa Rica 9,490 19.0 89.8 46 13.1 533 0.2 26 18.5 jTunisia I 7,083 26.4 93.9 I 38 0.6 331 0.5 0 25.1 Source: KAMdatabaseNotes: a/Median valuefor sample of up to 20 Upper MiddleIncome Countries available in KAMdatabase (Argentina. Barbados, Botswana. Chile, Costa Rica, Croatia, CzechRepublic, Estonia, Hungaly, Lebanon, Lithuania, Latvia, Mexico. Mauritius. Malaysia, Oman, Poland, Saudi Arabia, Uruguay, RB de Venezuela). 4.9 Micro data lend further support to this impression. A science, technology and innovation audit o f private sector firms in 2000, conducted by the Mauritius Research Council found a low standard of computer literacy; little networking, sharing o f intelligence or reference to the patent literature; or utilization o f external resources such as universities and research institutes. Only 40 percent of technicians and 62 percent o f senior managers had as much as a first degree and only three percent and six percent respectively had graduate degrees, leading the MRC to conclude, ". ..private sector senior managers are themselves in desperate need o f S&T education." (MRC 2000, v. 1p. 18). Moreover, an exceptionally small share o f R&D spending takes place in productive enterprises - less than three percent in Mauritius compared to 50-85 percent in Taiwan, Korea and Singapore (La11 and Wignaraja 1998, p. 91). Beintema et al. 2003 report a similar finding for the agricultural sector: only one firm out o f six in their sample carried out any R&D and 6.5 fte researchers out of a total o f 153.5 in the sector worked for private companies. - 79 - 4.10 What i s likely the case i s that some firms are very good, but most are not. Ina sample o f 40 garment producers, Wignaraja 2002 found one or two large firms with world class technical capacity, but a very different situation for SMEs. "Their capacity to copy, adapt and design new products i s weak. They make a little use o f contractual technology imports and have few relations with foreign technical consultants." (p. 100) 4.11 A recent Intellectual Property assessment (Parahoo 2005) finds the legal and institutional framework in Mauritius i s adequate, but awareness and use o f intellectual property rights (IPRs) are low. This i s especially true in the commercial business sector. Ina survey o f 58 private firms, less than a fifthhadpolicies o f creating, acquiring andor commercializing IP, and only two had bothered to estimate the value their IP assets. Moreover, 60 percent o f IP asset protection consisted of trademarks and copyrights aimed at maintaining brand recognition in the local market, while only 40 percent related to trade secrets, industrial designs and patents. There was little participation in innovation networks. Only 10-15 percent o f companies had contacts with domestic or foreign technology centers, 98 percent funded IP asset development from their own resources and few had any contact with institutional development support programs from national or international intellectualproperty organizations. oriented than private firms - 80 percent o f Figure 36: R&D collaboration them collaborated with industry, 90 , 80 - 70 - E60 - 5 0 - 40 ~ 30 7 20 - 10 0 Private firms using Researchinstitutes domestictechnology collaboratingwith industry centers 4.13 Notably, Mauritius' achievements in science and technology are low not only absolutely but relative to what would be predicted for a country at Mauritius' level o f development. Table 34 also shows a sample o f structural indicators which are in one way or another linked to technological capacity and sophistication: 0 Per capita income: higher per capita income reflects utilization o f more advanced technologies which are a source o f higher output and earnings per worker. - 80 - 0 The investment rate: more investment means more opportunities to incorporate recent vintage technologies in capital stocks, hence higher returns to learning about and usingnew technologies. 0 The trade share: more export oriented firms are engaged in more intense competition in global markets with rivals who are themselves using the latest technologies. 4.14 For Mauritius, there is a clear difference between the status o f the structural/economic indicators on the one hand and technology indicators on the other. While the technology indicators are near the bottom o f the distribution for upper middle income countries, both the investment rate and trade share are in the top 25 percent. Indeed, the structural indicators compare favorably even with much more advanced countries. For instance, Mauritius' gross investmentrate o f 26.7 percent i s higher than the US (19.0 percent), Finland (19.0 percent) and Israel (23.0 percent). The trade share (117.5 percent) i s higher than Korea (78.6 percent), Israel (83 percent) and Costa Rica (89.8 percent). 4.15 To confirm the apparent disconnect, Table 35 regresses a sample o f technology indicators including those in Table 34 against the structural parameters, then uses the fitted equations to predict outcomes for Mauritius.61For each row in the table, the first column shows the actual value for Mauritius, while the second one shows the predicted value. The results are striking: Mauritius i s everywhere below expectations except for computer usage which i s marginally higher (perhaps a testimonial to the success o f the National Computer Board's computer awareness programs). Annual royalty and license fee payments are US$1.7 per capita, compared to a predicted value o f US$59.5; science and engineering students comprise 14 percent o f tertiary students compared to a predicted 31.9 percent, there are 354 researchers in R&D per million population compared to a predicted 1,295; and so on. Table 35: Technolorry and innovation: expectation v. reality Actual Prediction Discrepancy Royalty and license fees payments per capita 1.7 59.5 -57.8 Researchers inR&Dper millionpopulation 354.0 1295.2 -941.2 High tech exports as % o f manufactured exports 2.0 13.4 -11.4 Computers per 1,000 population 149.0 144.0 5.O Internet hosts per 10,000 33.0 158.7 -125.7 Internet users per 10,000 1229.0 1750.5 -521.5 Scientific and technicaljournal articles per mil.pop. 13.6 110.7 -97.1 FDIas %GDP 1.4 6.4 -5.0 Science and engineering students (% tertiary) 14.0 31.9 -17.9 Average years o f schooling 6.0 6.8 -0.8 Source: Estimates based on World Bank's KAMdatabase.Notes: i fiction is from a *oss-countiy regression of each variable on per capita GDP,total GDP,gross investment rate, trade shares. Sample includes up to 128 countries depending on data availability. 61Along with per capita income, the investment rate and the trade share, the regressionequations also included total GDP to allow for scale effects. The regressions are highly significant, inmost cases with R2s above 0.75. - 81 - predicted values, as shown in (Figure 37). Prediction (1) shows the result in Table 35, Figure 37: PredictedR&D effort while Prediction (2) includes the education indicators as explanatory variables. By contrast, educational attainment had little 1400 A 1295.2 effect on the estimated values o f FDI and =02 1200 - high tech exports, or other indicators. A 1000 - likely explanation i s that even low tech 800 - countries can attract high tech, enclave FDI. 36Pe 6oo But without adequate education, there are n 400. 354 few linkages and spillovers are weaker. Only countries with stronger innovative capacity are in a position to participate in the creative Actual Prediction (1) Prediction (2) process. Source Estimaledfrom KAMund WDldvlu Technology transfer inMauritius 4.17 Mauritius i s no stranger to technology transfer. A few examples may be cited to illustrate the range o f experience and motivate some common sense principles for science and technology policy. Most important, initiatives must have a sound economic basis. The public sector can supply some.of the missing institutional or financial details, but the private sector must be capable o f driving the agenda, hence be able to marshal the needed technical and project management skills. The motivation for public involvement should be overcoming market failures arising from lack of information or scale economies and generating information or bringing private and social values into closer alignment. 4.18 Undoubtedly the most successful episode o f technology transfer was the development o f the textiles and clothing sector in the 1970s and 1980s. This was facilitated by settingup the EPZ inthe early 1970s which created a perfect laboratory for the transfer o f technology and managerial know-how. EPZ exports achieved phenomenal growth during the 1980s and early 1990s because o f sound economic fundamentals and fortuitous timing. The idea originated with Sir Edouard LimFat who hadbecome familiar with EPZs from his travels in East Asia. Sir Edouard became first a proponent and subsequently an investor. The timing was propitious as Mauritius was able to tap into growing concern in Hong Kong over MFA quota limits and the eventual transfer o f sovereignty to China. A large pool o f low wage labor was available and this combined with a substantial Chinese community and commercial presence which offered these - 82 - potential investors a degree o f comfort. Meanwhile, capital accumulated during the sugar boom was available to exploit the learning opportunities which the EPZ afforded. For its part, the Government was prepared to put in place the legal and physical infrastructure required (Bowman 1991, Brautigam 2005). and (iii)provide technical assistance and training. Under the BEDP bagasse-based Figure 38: Bagasse electricity generation electricity production expanded rapidly doubled its share from eight percent to 17 20 1 12500 percent in the second half o f the 1990s (Figure 38). Currently, three firm (year- round) and seven continuous (seasonal) IPPS supply around 40 percent o f national electricity consumption from coal and bagasse, 15 to 20 percent from bagasse. 4.20 However, the BEDP only 1991 1993 1995 1997 1999 2001 2003 - - partially achieved its objectives, due in part S h n -Totml -Bsgasw to the lack of a clear economic rationale. First, bagasse was a relatively expensive way o f generating electricity and second there was a large amount o f uncertainty about other trends in the sector, in particular consolidation o f inefficient mills.62As a result, it proved impossible to finance and implement the plan originally envisaged by the Government. 4.21 A final example of a technology transfer initiative is the Technology Diffusion Scheme (TDS) which provided grant financing for up to 50 percent o f the cost o f new technology acquisition by private firms. These subsidies were aimed not only at stimulating technology upgrading in the firms directly affected but promoting diffusion more generally through demonstration effects. Over the four year life o f the project, 224 technology transfer projects were funded in 154 firms, with the size o f the average grant US$9,600. 4.22 Though the economic rational was good and the scheme was well conceived and executed, Biggs 1999 argues that the economic spin offs from the scheme were limited. Many o f the acquisitions would have been undertaken in any case. The firms . options for power development.....It may be that the Governmentis willing to pay more for power from 62Thus, World Bank(1998 p. iii)noted, ". .baseloadbagasse/coalpower stations are not the least-cost bagasse/coalplants consideringthe additional benefitsto the environment and the sugar industry. Inany event, the role ofbagasserequires evaluation." - 83 - which came forward with proposals tended to be larger and have established technological capacities, and they selected projects which yielded private benefits rather than those which might have interested a wide range o f users, many o f which in any case lacked the capacity to learn from the demonstration. Nor did the scheme deepen technology support networks to any significant extent. Policy options to strengthen the National Innovation System 4.23 Technology policy addresses specific market failures due to externalities, spillover effects and especially in Mauritius low technology awareness and capacity in the private sector. This section outlines an approach to build awareness, develop the National Innovation System, and strengthen institutions by reorganizing some o f the existing assets. 4.24 Designate a champion for science and technology policy to promote more effective use of the country's science and technology assets. Technology i s at the heart o f Mauritius' strategy for economic modernization. Yet, the past decade has witnesseda virtually complete failure to achieve science and technology objectives or exploit opportunities effectively. In many countries, science and technology policy i s the responsibility o f a specific ministry which gives public recognition to the prioritization of technology policy. Giving knowledge and innovation a seat at the table in the Cabinet would designate a champion who could be held accountable for the success or failure o f technology policy. Alternatively, a science and technology policy unit might be created inthe PrimeMinister's Office. 4.25 Strengthen the National Innovation System. Both the market and nonmarket components o f the National Innovation System needto be strengthened. Initiatives such as the incubator projects o f the N C B and University o f Mauritius provide useful vehicles to buildawareness and competence regardingtechnology and intellectual property issues. These valuable initiatives should be enhanced. The education system at all levels needs to give greater emphasis to math and science subjects, including through better teacher training at the primary and secondary level, and scholarships, adequately equipped laboratories and research grants. Adequate funding from the Development Bank o f Mauritius andor other technology funds i s needed to support research and build capacity insuch areas as biotechnology, alternate energy andocean resources. 4.26 In addition, however, linkages between the various components of the NIS need to be strengthened. Government might establish a Millennium Technology Fund (MTF) to support multidisciplinary teams from the business sector and academic community leading to the development or adaptation and exploitation of advanced technologies. Proposals would need to be submitted jointly to ensure a genuine collaboration. Awards, say one or two per year up to a limit o f Rs. 10 million, would be competitive and subject to international peer review, with proposals evaluated on the basis o f scientific merit, commercial potential, and value o f demonstration effects and spillovers. Both domestic and foreign firms should be allowed to submit proposals, but (most of) the work would need to be done inMauritius. One outcome o f such a program would be to develop commercially applicable technologies and high-tech exports, but - 84 - another, equally important, would be to strengthen linkages within the National Innovation System. 4.27 Attract more FDI. FDI has proven to be a valuable source o f technology and know how for many countries, both developed and developing. As noted above, FDI from Hong Kong based textile producers in the 1980s helped to establish the EPZ. Yet, FDIhas made only a marginal contribution to the economy since then. The mandate and effectiveness o f the Board o f Investment need to be monitored and its performance benchmarked using appropriate measures such as average cost expended to attract a mission o f potential investors to Mauritius, or the number o f follow-up inquiries after participation intrade fairs. 4.28 Exploit FDIfor technology transfer. Technology benefits from FDI do not automatically accrue to host countries. Multinationals have no particular interest in sharing their secrets, preferring, "to transfer the results o f R&D rather than the process itself." (UNCTAD 2003, p. 11). Given the competitive world environment, Mauritius has limited bargaining strength. But, Singapore's Local Industries Upgrading Program (LIUP) i s an example o f a successful program to persuade MNEs with Government support to `adopt' local suppliers and upgrade them to international standards by transferring technology and skills and even engaging with them in joint product and process R&D (UNCTAD 2005, p. 75). 4.29 There is scope for a creative approach to negotiating mutually beneficial technology transfers. Infosys i s an exemplary case. Unable to find the labor skills it needed in the local market, the company sent 100 new graduates from the University of Mauritius for three months o f training at their facilities in Mysore. Government shared the cost by paying their air fares. Afterward, around 60 were hired by Infosys while the rest were quickly snapped up by other employers. Other than training, Mauritius might negotiate agreements for investors to spend a certain proportion o f revenues on local R&D, or source inputs from local suppliers, bringing them up to an acceptable performance standard as needed. Where appropriate, public subsidies would need to be offered basedon a careful assessment o f the economic value o f the program. 4.30 Focus technology policy primarily on crosscutting issues. Wider use o f more advanced technologies has been held back by shortages o f engineering and science skills, poor market knowledge, low awareness o f IPRs, lack o f a culture o f entrepreneurship, and underdeveloped support services (financial, legal, and consultancy). Training seminars and workshops held under the auspices o f bodies such as the NPCC, Enterprise Mauritius or SMIDO will help to build awareness o f the issues and opportunities. Improving the investment climate generally, including ensuring high quality and competitively priced power and water and telecommunications services is also important as i s ensuring the availability o f needed labor skills through local training opportunities andor immigration. 4.3 1 Keep industrial policy wagers small. As well as addressing such crosscutting constraints, Government may wish to place bets - that is, invest public money and prestige - on sectors such as IT, seafood, entrepot services, education and ocean - 85 - resources. However, "picking winners" should not be the exclusive or even the main thrust o f technology policy. Sector specific initiatives are expensive and risk being ineffective because Governments do not have any special advantage over private firms in identifying the country's comparative advantage. 4.32 Every sectoral policy initiative should have a clear objective and benchmarks and a sunset clause. Innovation, by definition, i s a disequilibrium process which involves trial and error. "If governments make no mistakes, it only means they are not trying hard enough." (Rodrik 2004, p. 25). But, it i s essential to have clear objectives and targets and avoid subsidizing in perpetuity a sector or activity which has limited prospects for developing a sustainable comparative advantage. A case in point i s Government leadership in developing Mauritius as a cyber island. A massive amount o f public money has now been invested and now i s the right time to let the sector sink or swim on its own merits. Many Caribbean states made similar efforts to establish IT and ITES sectors, but few were able to overcome disadvantages similar to Mauritius' - lack of labor skills, high wages and expensive connectivity (InfoDev 2005). The emphasis on export oriented IT development may also have contributed to the low use o f IT by firms in other sectors by monopolizing scarce labor skills. 4.33 Adjust Mauritius Telecom's international connection charges to an internationally competitive rate. High transport and telecommunications costs (and utilities more generally) are a disincentive to domestic and foreign investment. International telecommunications rates as much as 350 percent above a globally competitive level are a deterrent to keenly cost competitive industries such as BPO and call centers, but also limit access to the vast resources of the internet covering both commercial and technological information. Mauritius Telecom's tariffs for accessing the SAFE cable remain as much as 350 percent above a globally competitive level. Top priority needs to be given to lowering them. Not only do excessive tariffs cut into the profitability o f potential investments, but they send a negative and highlyvisible signal. c. EXPLOITING LATECOMER ADVANTAGES 63 4.34 So far, the chapter has focused on providing overall leadership and invigorating the National Innovation System by strengthening the existing components and facilitating linkages between them. But Mauritius should also recognize and develop explicit strategies to benefit from latecomer advantages - opportunities available to countries arriving late on the industrial scene. In the classic formulation o f Alexander Gerschenkron 1962, development i s a process of collective entrepreneurship and learning.64 Less developed firms can leapfrog to the frontier without following the entire trajectory o f trial and error which culminated intoday's advanced technologies. In a 21" century version o f this idea, firms can leverage the efforts o f more advanced rivals by linking to global value chains and utilizing sophisticated new technologies. Sometimes 63 This section is basedon a background paper written for the CEM by Prof. John Mathews. 64 See Gerschenkron 1962 and UNIDO 2002,2005. For hrther application of the concept to latecomer firms, see Hobday 1995,2003 andMathews 2001,2002a, 2004. - 86 - they have been able to put them into use at lower cost and faster than by the very firms that developed them inthe first place. 4.35 Mauritius can model its latecomer strategy after the examples o f Germany and the US in the lgth century, and Japan and the East Asian "tiger economies" o f Korea, Taiwan and Singapore in the 20th. The focus would be on identifying, adopting and adapting products and processes already in use in advanced countries. An institutional innovation - consolidation o f existing government-owned R&D institutes - would facilitate capturing technologies in timely fashion; building capabilities in these technologies and diffusing these capabilities as rapidly as possible to the private sector, often through targeted R&D consortia. This approach was utilized to great effect by Taiwan increating and buildingup its electronics industry. A MauritiusIndustrialTechnology ResearchInstitute 4.36 Consolidate existing public researkh institutes into a single, multi- disciplinary center, the Mauritius Industrial Technology Research Institute. Latecomer advantages are not secured automatically. Market opportunities and technologies have to be identified and adapted to local conditions. InMauritius, a legacy o f high trade protection and uncompetitive domestic markets has created a low sense o f self discovery, so that awareness and demand for advanced technology i s weak. Firms are unaware o f the opportunities and unable to assess whether they could be competitive. Their appetite for risk is low. For Gerschenkron, "special institutions" such as the Deutsche Bank in Germany, the Ministry o f International Trade and Industry (MITI) in Japan and the Industrial Technology Research Institute (ITRI) in Taiwan are the key to overcoming such obstacles and facilitating the catch up process. With increasingly sophisticated technical requirements, phytosanitary and other standards, IPRs and restrictions on industrial policy from WTO rules, the institutional demands are even greater. 4.37 Such an institutional innovation could be developed from the existing MSIRI, Albion Fisheries Research Centre and Mauritius Oceanographic Institute. Taiwan's IndustrialTechnology Research Institute (ITRI) is a world best practice example which MITRI could follow, but it could also replicate the experiences o f public R&D technology capture institutions in South Africa (the CSIR), Australia (the CSIRO) and Hong Kong (ASTRI) and the network o f R&D institutions in Singapore assembled under the umbrella o f A*STAR.65 Indeed, virtually every country in the world including the US, Canada, Finland and Britain conducts priority research in publicly managed laboratories. 4.38 MITRIwould not engage infundamental scientific researchbut insteadwould scour the world for cutting edge technologies and use its own laboratory facilities to build pilot versions to demonstrate them the private sector. Indeed, this i s the main activity o f the R&D department o f every large, established company such as IBM, Toshiba or 65On these technology capability enhancing institutions, see for example La11 1997; and La11and Pietrobelli 2003, as examples from a large literature. - 87 - Samsung. Jovanovic 1997 estimates that in the US, companies spend 30 times more on adapting existing technologies than on cutting edge research. But inMauritius, few firms can afford such activities or even know how to carry them out. Thus, MITRI's role would be to provide "shared" R&D services for existing and emerging industries, testing and evaluating technologies o f potential interest. 4.39 Areas where MITRImight initiallyfocus research efforts include: 0 Renewable energy technologies - synergies exist with sugar sector, including more efficient bagasse electricity cogeneration and ethanol production; other promising avenues include wind and ocean thermal energy conversion (OTEC). The market potential is large and growing at home and abroad due to high oil prices and environmental considerations (University o f Mauritius,MSIRI). 0 Ocean resources and fisheries - a large, unexplored EEZ has immense potential for aquaculture, harvesting biomass and exploiting deep water resources. Established research capability exists at Albion and Mauritius Oceanographic Institute. 0 Suaarcane-basedbiotechnoloav - synergies with sugar can be exploited, building on existingworld-class research capabilities (MSIRI, University o f Mauritius). 4.40 Consider an example o f the role which MITRI could play in alternative energy technologies. The Ministryo f Public Utilities lacks the technical expertise to evaluate the available options in wind, solar, geothermal, ocean thermal and biomass. What technologies are currently available in each o f these areas and how quickly could they be brought up to a commercial scale? What are the patenting and licensing aspects o f such technologies? Which ones would be most cost-effective in Mauritius? What modifications would be needed? MITRI would provide answers to such questions. But, beyond that it would build and demonstrate prototypes, say o f a biomass gasification and gas turbine plant, so that potential investors could observe it in operation in a local setting. MITRI's role would be to overcome the low sense of self discovery and reduce the risk in attempting to exploit such technological opportunities. 4.41 Alternatively, the conversion o f sugar biomass to ethanol i s being widely discussed and could conceivably operate on a very large scale.66 But, what distillation technologies are available? An early venture to establish an ethanol distillery inMauritius did so using Spanish technology that was premised on the waste material, vinasse, being solid and capable o f being disposed o f as fertiliser. But the company found that in Mauritius the vinasse was not solid but liquid and that it emitted a terrible stench. This unexpected difficulty plagued the project. Had MITRI been in operation, it could have constructed a pilot scale ethanol production plant and analyzed its operations prior to building a full-scale plant. This would have identified the problems and put the Lab and the potential investors on the hunt for an alternative, based on other operating 66Of course, the economics o f ethanol ultimately depends on how competitive the agricultural sector is at growing sugar (Kojima and Johnson 2005). But the more efficient the process o f turning sugar into ethanol, the more o f the sugar sector can be sustained . - 88 - experiences. Then arrangements could be made to secure access to this technology and bring it to Mauritius for testing and scaling-up to pilot plant stage. 4.42 What potential investors need i s a shared R&D department that can explore important issues and provide timely and practical answers. This is precisely what a "shared services" MITRI would offer, as a multi-disciplinary research centre available to all Mauritius firms contemplating investment in new industries involving new technologies. Operationalizingthe concept 4.43 Establish MITRI as a statutory body. MITRIwould have a full-time director and a governing board drawn from both the public and private sectors. As with MSIRI, designating a majority o f board members from the private sector would ensure a close liaison between the professional staff and their constituency in industry. Such a governance structure has worked well in existing public R&D institutes in East Asia. The real governance o f a MITRI would consist in the steering committees and peer review committees o f scientists and engineers that would monitor the progress o f projects. Foreign oversight would further strengthen the quality o f supervision. 4.44 Network and learn from similar institutes in other countries. There are a number o f successful models to pattern MITRI after. Soon after being appointed, a senior management team could make a tour o f existing technology institutions such as ITRI in Taiwan, A*STAR in Singapore and ASTRI in Hong Kong. Any one o f these mightbepersuadedto funda mission o ftechnologists and engineers to its headquarters to learn how the process o f technology leverage i s practiced. 4.45 Provide adequate public funding. It i s important that MITRI should not be expected to fund itself from industrial consultancies. Not only would the demand for its services be limited, but this would tie it to the technological status quo whereas its mission i s to upgrade technology and transform the status. A commitment to fund MITRI adequately for a period o f years would facilitate medium term planning and increase the effectiveness o f the research program. 4.46 Overcome human capital limitations by attracting talent from abroad. A MITRI could learn from the experience o f Taiwan in assembling teams o f foreign experts, including the Mauritian diaspora working in advanced industries such as Canada, the US and Europe. With appropriate incentives they could be drawn to Mauritius periodically to offer their advice on the best technologies to pursue and how to access them. Suchperiodical review meetings were organized inthe 1980s and 1990s inTaiwan by the STAG - the Science and Technology Advisory Group. The MITRI Director himself or herself would be instrumental in inviting prominent technologists around the world. International recruitment and brain circulation from Mauritian universities should be encouraged. Indeed initial staff might even be recruited from existing research institutions, as inHong Kong which drew staff from ITRIto its new H K U S T campus and to the more recently established ASTRI. - 89 - 4.47 Make MITRIfully operational over aperiod of years. Capabilities would be established gradually over a period o f years. MITRI would eventually absorb the activities o f the present MSIRI, the Albion Centre and the Mauritius Oceanography Institute, perhaps FARC and AREU. This absorption need not happen overnight to the extent difficulties in creating unified governance and funding structures have to be overcome. But these difficulties should not be allowed to stand in the way o f achieving synergies in a unified MITRI. Initially, two or three divisions might focus on sugar biomass, ocean resources and alternate energy technologies. Should the government proceed with the establishment o f a Ministry o f Science and Technology Policy, MITRI might be set up as an independent body under it. However, in its day-to-dayoperations, MITRI would be independent and under the control of the Director. This governance modelhas worked very well inmany countries, includingTaiwan. How a MITRIwould interface with existingMauritian institutions 4.48 MITRI would complement rather than displace existing institutions. Currently, no institution has a mandate to introduce and diffuse technological capabilities inthe private sector. But, while MSIRI,Albion andMOIwould naturally fit into MITRI, it would not otherwise infringe on components o f the National Innovation System, whose roles would remain important. In particular, the MRC would continue to be responsible for advising the government on science and technology issues and allocating R&D funds to nationally relevant research projects. The NPCC would continue to lead the dialog on competitiveness and the NCB would continue its educational initiatives and management o f the Government's IT needs. Of course, MITRIwould compete in some areas with the university sector and other public and private organizations for MRC funding, much the way this occurs at present. Such competition i s highly desirable. A similar situation obtains in Taiwan, where a national Research Council plays an important role in competitively channeling R&D funds to relevant projects. 4.49 N o r would MITRI infringe on university research, which i s a supplement to the teaching activities o f faculty. Indeed, MITRIwould free up the university to do what universities do best - basic research not driven by short-term commercial considerations (Nelson and Rosenberg 1994, Dunkin2003). At the same time, MITRIwould provide an excellent source o f research projects or work assignments for U o f M students, particularly at the Masters and PhD levels. 4.50 A MITRIwould not infringe on the standardization activities o f the Mauritius Standards Bureau, which should continue as a link between Mauritius and the world trading system. However MITRI might work with M S B in the development o f new industries based on technologies that meet specified and/or emerging international standards. Similarly, regulatory bodies and parastatals such as the National Computer Board would continue to have market-enhancing or regulatory roles. Suggested industrialdiversification strategies where a MITRIcould play a vital role 4.51 MITRI's purpose would be to catalyze the establishment o f viable industries inareas with unrealizedpotential due to a lack o f information, for instance insuch areas - 90 - as renewable energy technologies and acquaculture, demonstrating the feasibility o f innovative technologies, then leaving commercial exploitation to private firms. This would exclude helping to develop technologies whose viability had already been established, or where sufficient knowledge already existed for private producers to make informed decisions. There might be a gray area where exploiting technology-based opportunities would require building up clusters o f SMEs, but MITRI would not be a vehicle for promoting or subsidizing SMEsper se. 4.52 Three areas where MITRIcould focus its activities initially are: 4.53 Renewable energy technologies: High energy prices over the past few years have revived global interest in alternative energy technologies. Like many other tropical and subtropical countries, Mauritius i s endowed with plentiful sources o f renewable energy - with sunshine, with biofuels like sugarcane, with wind, waves and ocean thermal differences that can be tapped for energy. A potential exists both to benefit domestic energy users and to develop an export specialization to the region and beyond.67 MITRI could contribute by learning about and assessing the technological options, including the impact on reliability o f the national grid o f decentralizing power supply, utilizing the Clean Development Mechanism (CDM) under the Kyoto protocol, and the potential for export sales. 4.54 Building on the success of the BEDP, there is a potential to upgrade power generation facilities at sugar mills to more efficient gasification and gas turbine technologies that can extract two or three times the electric power from a given quantity o f bagasse. But such gasification and gas turbine technologies - such as Biomass Integrated GasifierKombined Cycle (BIGKC) turbines - are not yet commercial1 available for biomass and still need to be proven under different operating conditions. 2 This is where a MITRI would enter the picture, with a Renewable Energy Technologies Laboratory (RETL) building and operating a pilot plant utilizing BIGKC turbines. Such pilot plants have been built and operated successfully in Europe, utilizing municipal waste as b i ~ f u e l . ~ 'A pilot plant in Mauritius could conduct feasibility tests for commercial application by sugar mills in Mauritius, providing accurate cost estimates for operating conditions on the island itself rather than extrapolating from data collected from other parts o f the world. The pilot plant would provide a practical demonstration o f what i s feasible and achievable to all sugar mills inMauritius. 4.55 The Renewable Energy Technologies Laboratory o f a MITRI might go on to build pilot operations of other renewable technologies, such as wind power. These are 670f course, it i s also important not to lock Mauritius into an uncompetitive technology which would need indefinite subsidization. For instance, coal-bagasse electricity cogeneration using bagasse i s less efficient than using pure coal burningplants. Dual fuel input (coal and bagasse) plants are attractive inMauritius because bagasse i s essentially a free resource. However, a collapse o f the sugar industry would burden Mauritian power users with an inefficient legacy system ifutilizing only coal. For accounts o f biomass integrated gasifiedcombined cycle (BIGKC) turbine technology, see for example Gabra et a12001; and for applications inBrazil, Rosillo-Calle 1998; and for Cuba, see Larson er a1 2001;and D e Filippis et al. 2004. 69See Stahl et al. 2004 for an account o f the experimental IGCC biomass reactor at Varnamo, Sweden. - 91 - already well developed and utilized widely in countries such as Germany and Denmark. The RETL could explore a technology licensing agreement with one o f the Danish aerogenerator companies such as Vesta (with financial assistance provided by Danish foreign aid?) to build such a demonstration plant, perhaps leasing a small plot o f land from a sugar plantation for the purpose. The pilot plant would then serve the dual purpose of collecting data on costs involved under various operating conditions in Mauritius and demonstrating to sugar planters how they could utilize part o f their landto produce cost-effective energy as well as grow sugarcane. 4.56 It is noteworthy that wind power has taken off in Denmark because the government has established a system where farmers can install two or three aerogenerators on their own land and generate power for themselves, while selling the excess to the central electricity authority, similar to the bagasse program in Mauritius. Jointly with the MRC, MITRI could estimate the structure o f tariffs and incentives necessary to establish the technology if, indeed, it i s viable. A Renewable Energy Technologies laboratory of a MITRI could then go on to build pilot plants for other sources of renewable energy, including photovoltaic cells, direct solar energy heating systems, as well as ocean thermal systems. The point is that none o fthese technologies i s likely to be taken up in any systematic way in Mauritius without an initial public demonstration. 4.57 Ocean resources and fisheries: An island nation like Mauritius has enormous resources in its EEZ, only very few o f which are currently being tapped. A start has been made with the existing seafood and fisheries hub, where foreign-owned fishing fleets are encouraged to land catches at the specialized cold store port facilities in the Freeport and process them for export. This strategy has made most headway with tuna, which i s caught by dedicated fleets from the EU and Japan in great circuits o f the Indian Ocean. 4.58 Buttunaprocessing isjust the tip o f an industrywith vast potential. Again the science o f marineresources favors Mauritius since the world will be turning increasingly to seafood and fish for its protein needs in the 21" century. This gives rise to great possibilities for farmed fish, including local species that could be farmed in new technology open caged systems in the ocean. There i s mixed experience with such systems around the world, with some densely packed systems located close to the shore creating environmental disasters, particularly if combined with use o f exotic species. A Fisheries and Marine Resources Laboratory (FMRL) o f MITRI, based on the present Albion Research Center and Mauritius Oceanographic Institute, could take on the task o f assessing cage technologies for their environmental impact and suitability for Mauritian waters, and developing scientific databases on the best species to cultivate in such systems. Elsewhere, ocean resources could be explored for substances of therapeutic and industrial interest. The FMRL could build on the MOI's current research program using established, relatively low cost technologies such as High-Density Liquid Chromatography and Mass Spectroscopy. - 92 - 4.59 In addition, the FMRL could take the lead in exploiting deep water assets, demonstrating such applications as air conditioning, desalinated mineral water and seaweed cultivation. Biotechnology 4.60 Since the late 1 9 8 0 ~ ~ plant tissue culture expertise has been establishedat the University o f Mauritius, MSIRI, FARC, the Ministry of Agriculture and a private commercial operation (Puchooa, 2004). These employ conventional micropropagation techniques on a commercial scale, while more sophisticated molecular techniques have been applied to sugarcane breedingat MSIRIwhich produced its first transgenic variety in 1999 andtwo varieties ofpotential commercial interest, M3035/66 andM292/70, are ready for field testing after appropriate legislation governing biosafety i s enacted. Research to introduce other herbicide tolerant traits i s underway. 4.61 Government has recognized the potential value o f biotechnology and proposed to establish and fund a Mauritius Agricultural Biotechnology Institute (MABI). Such an institute could be establishedwithin the context of a MITRI, exploiting synergies with Mauritius' agricultural and ocean resources. Sugarcane has the potential to yield more thanjust energy, including various biotechnologies based on the fast-growing cane as a biofactory for plastics, polymers, and medicinal preparations. Incorporating a Biotechology Institute in MITRI would help to secure funding for basic facilities and operating costs, and establish a cadre o f qualified scientific, technical and support staff, shared resources such as databases and libraries, as well as linkages to regional and world wide networks. - 93 - ANNEX Mauritius Key Economic Indicators - ACtUal E s W e d Projected Indicator 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005- 1998 1999 2000 2001 2002 2003 2004 2005 2006 National accounts (as % of GDP) Grossdomestic product' 100 100 100 100 100 100 100 100 100 Agriculture 9 9 6 I I 6 6 6 6 Industry 31 31 32 31 31 30 30 29 29 Services 60 60 63 62 62 63 64 65 65 Total Consumption 75 16 16 14 I 5 75 77 18 I 8 Gross domestic fixed investment 25 25 26 23 22 22 22 21 21 Government investment 3 4 4 4 4 5 4 4 4 Private investment 22 22 22 19 19 18 18 11 11 Exports (GNFS)b 64 65 63 66 61 59 56 56 57 Imports (GNFS) 6 1 6 1 65 63 57 57 56 58 5 1 Gross domestic savings 25 24 24 26 25 25 23 22 22 Gross national savings' 2 1 25 26 28 26 26 24 23 23 Memorandum items Gross domestic product 4,146 4,115 4,424 4,526 4,542 5,241 6,034 6,403 6,825 (US$millionat current prices) GNP per capita (US%, Atlas method) 3,800 3,590 3,540 3,800 3,830 4,090 4,640 4,960 5,360 Real annual growth rates (%, calculated from 1992prices) Gross domestic product at market prices 6.0 5.3 4.0 6.7 4.4 3.1 4.2 4.0 4.0 Gross Domestic Income 7.9 6.6 6.2 6.4 3.4 -0.7 3.6 2.5 3.1 Real annual ner cauita erowth rates (%. calculatedfrom FY 1998 arices) . 1 - . . . I Grossdomestic product at market prices 4.9 4.0 2.9 5.5 3.5 2.1 3.2 3.0 3.0 Total consumption 6.0 1.2 4.5 2.8 2.5 -3.1 4.5 2.2 2.7 Private consumption 6.8 8.0 4.4 2.5 2.2 -4.4 4.9 3.3 2.1 Balance of Payments (US$millions) Exports (GNFS)b 2,464 2,649 2,605 2,161 2,149 3,065 3,401 3,592 3,863 Merchandise FOB 1,599 1,680 1,523 1,633 1,569 1 3 11 2,014 2,028 2,170 Imports (GNFS)b 2,642 2,782 2,735 2,716 2,577 3,005 3,351 3,861 3,902 Merchandise FOB 1,912 2,046 2,006 1,913 1,199 2,162 2,385 2,133 2,834 Resource balance -178 -133 -130 52 172 60 45 -269 -39 Net current transfers 102 91 96 62 61 81 60 73 74 Current account balance before capital grants -103 -65 -69 126 248 139 68 -215 -6 Net private foreign direct investment 20 19 13 197 48 57 35 -32 0 Long-term loans (net) 99 40 -62 -96 -15 -14 -26 45 I O Other capital (net, incl. errors & ommissions) -6 34 202 -42 -38 131 41 93 -40 Change in reservesd -9 -28 -84 -185 -243 -319 -118 109 -24 Memorandum items Resource balance (% o f GDP) -4.3 -3.2 -2.9 1.1 3.8 1.2 0.7 -4.2 -0.6 Real annual growth rates ( FY98 prices) Merchandise exports (FOB) -2.6 8.4 -5.1 11.5 -5.0 10.7 0.6 -2.6 0.6 Merchandise imports (CIF) 4.5 3.6 -0.8 -2.6 -6.8 12.8 -0.2 0.0 2.0 /CnntinuedJ - 94 - Mauritius Key EconomicIndicators - (Continued) ACtUd Estimate Pro]ecied Indicator 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2001- 2005- 1998 1999 2000 2001 2002 2003 2004 2005 2006 Public finance (as % of GDP at market prices)e Current revenuesand grants 19.7 20.1 20.4 18.2 18.5 20.2 20.2 19.6 19.2 Current expenditures 20.6 21.1 20.7 21.5 20.4 21.1 21.0 21.1 21.6 Current accountsurplus (+)or deficit (-) -0.8 -1.0 -0.3 -3.3 -1.9 -0.8 -0.8 -1.5 -2.4 Capital expenditure 3.1 2.9 3.9 2.5 4.2 5.3 4.7 4.2 4.1 Fiscalbalance -3.9 -3.9 -4.3 -5.7 -6.1 -6.2 -5.5 -5.6 -6.5 Foreign financing -0.3 -1.1 -0.5 -2.9 0.8 0.1 0.0 -0.4 0.1 Monetary indicators M2IGDP 75.6 77.4 78.8 78.3 80.7 82.4 85.4 88.0 84.8 Growth ofM2 (%) 17.4 13.2 10.9 9.9 13.0 11.7 14.4 13.1 6.2 Price indices(FY98 =loo) Merchandise export price index 100.0 97.0 92.5 89.0 90.0 96.9 103.7 107.2 114.0 Merchandiseimport price index 100.0 97.5 97.3 95.3 95.5 101.8 113.0 126.3 131.7 Merchandiseterms of trade index 100.0 99.5 95.2 93.4 94.3 95.2 91.8 84.9 86.6 Real exchange rate (US$LCU)f 100.0 97.6 103.1 105.9 103.9 103.8 109.3 114.5 Consumerprice index (%change) 5.4 7.9 5.3 4.4 6.3 5.1 3.9 5.6 6.0 GDP deflator (% change) 5.5 5.0 4.7 3.7 5.0 6.1 6.0 5.4 6.0 a. GDP at factor cost b. "GNFS" denotes "goods and nonfctor services." c. Includesnet unrequitedtransfers excluding official capital grants. d. Includesuse of IMF resources. e. Consolidatedcentralgovernment. f. "LCU" denotes"local currencyunits." AnincreaseinUS$LCUdenotesappreciation. - 95 - Mauritius NationalAccounts - PartA: Current PriceData (In mulionsof local currency units) Atlas GNP per capita:$4,640 (2004) Midvear nonulation (2004): 1.2 million -, r r ~, Actual Estimated Pro]eckd 1997-98 1998-99 1999-00 20wMl 2001-02 2002-03 2003-04 200405 200506 Gross domestic product at market Dr.ces 93,684 103,630 112,861 124,862 136,902 149,696 165.341 181,310 199,876 Net indirecttaxes 11,267 11,515 15,175 14,498 15,724 18,433 21,489 25,443 27,625 GDP at factor cost 82,417 92,115 97,686 110,364 121,178 I31,263 143,852 155,867 l72,25 1 Agriculture 7,220 7,955 5,723 7,337 8,493 8,029 8,756 9,445 10,852 Industry,of which 25,952 28,972 30,869 34,505 37,661 40,001 42,653 45,783 49,743 Manufacturing 19,578 22,201 23,420 25,750 27,799 28,840 30,543 32,264 34,952 Services 49,246 55,189 61,095 68,522 75,024 83,234 92,443 100,639 111,655 Resourcebalance (2,568) (2,297) (2,217) 3,403 5,202 3,180 (1,008) (1,882) (I, 142) Exports(GNFS) a 59,953 67,405 71,470 82,152 83,091 88,509 91,941 102,431 113,133 Imports (GNFS) 62,521 69,702 73,687 78,750 77,889 85,329 92,955 104,313 114,275 Total expenditure 96,252 105,927 115,078 121,460 I 31,700 146,516 166,349 183,192 201,018 Consumptionexpenditures 70,384 78,957 85,587 92,341 102,381 112,351 126,802 141,034 155,090 Government 12,078 13,420 14,887 16,167 17,522 21,063 23,647 24,624 27,l I O Private 58,306 65,537 70,700 76,I74 84,859 91,288 103,155 116,410 127,981 Gross domestic investment 25,868 26,971 29,492 29,119 29,) 19 34,165 39,547 42,158 45,927 Total governmentinvestment b 2,608 3,709 4,264 4,634 5,043 7,015 7,125 6,918 7,853 Total private investmentc 23,260 23,262 25,228 24,485 24,276 27,151 32,422 35,240 38,074 Total fixed investment 23,282 26,379 28,873 28,934 30,583 33,314 36,642 38,464 42,316 Total changes in stocks 2,587 592 619 186 (1,264) 851 2,905 3,694 3,611 Domestic savings 23,300 24,674 27,275 32,522 34,521 37,345 38,539 40,276 44,786 +Net factor income (612) (589) (895) 336 (248) (58) (1,000) (991) (1,214) +Net current transfersd 2,305 2,269 2,449 1,708 2,004 2,307 1,644 1,642 2,180 =National savings 24,993 26,354 28,829 34,566 36,277 39,593 39,183 40,928 45,751 Gross nationalproduct 93.072 103.041 111.966 125.198 136.654 149.638 164.341 180.3 19 198.662 Gross nationaldisposableincome 95,377 105,310 114,415 126,906 138,658 151,944 165,985 181,961 200,842 a. "GNFS" denotes "goods and nonfactorservices." b. Gross domestic fixed capital formationonly. c. Derivedas aresidual; includes increase in stocks. d. Total net unrequitedtransfers excludingofficial capital grants - 96 - Mauritius NationalAccounts(continued) - PartB:Shares of GrossDomesticProduct (percentages calculatedusing current price data) Actual . Esiitnuted Projected 1997-98 1998-99 1999-00 200041 2001-02 2002-03 2003-01 200405 200506 Gross domestic product 1000 1000 1000 1000 1000 1000 1000 1000 1000 Net indirect taxes 12.0 11.1 13.4 11.6 11.5 12.3 13.0 14.0 13.8 Agriculture value added 7.7 7.7 5.1 5.9 6.2 5.4 5.3 5.2 5.4 Industry value added, of which 27.7 28.0 27.4 27.6 27.5 26.7 25.8 25.3 24.9 Manufacturing 20.9 21.4 20.8 20.6 20.3 19.3 18.5 17.8 17.5 Services value added 52.6 53.3 54.1 54.9 54.8 55.6 55.9 55.5 55.9 Resourcebalance(X-M) -2.7 -2.2 -2.0 2.7 3.8 2.1 -0.6 -1.0 -0.6 Exports(GNFS) a 64.0 65.0 63.3 65.8 60.7 59.1 55.6 56.5 56.6 Imports (GNFS) 66.7 67.3 65.3 63.1 56.9 57.0 56.2 57.5 57.2 Total expenditure 102.7 102.2 102.0 97.3 96.2 97.9 100.6 101.0 100.6 Governmentconsumption 12.9 12.9 13.2 12.9 12.8 14.1 14.3 13.6 13.6 Privateconsumption 62.2 63.2 62.6 61.0 62.0 61.0 62.4 64.2 64.0 Governmentinvestment 2.8 3.6 3.8 3.7 3.7 4.7 4.3 3.8 3.9 Privateinvestment 24.8 22.4 22.4 19.6 17.7 18.1 19.6 19.4 19.0 Gross domesticsavings 24.9 23.8 24.2 26.0 25.2 24.9 23.3 22.2 22.4 Grossnationalsavings 26.7 25.4 25.5 27.7 26.5 26.4 23.7 22.6 22.9 Memorandum items GDP deflator 100.0 105.0 110.0 114.1 119.8 127.0 134.7 142.0 150.5 Consumerprice index 100.0 1 0 7 . 9 ' 1 1 3 . 6 118.6 126.1 132.6 137.7 145.5 154.2 Total GDP (million current US%) 4146.3 4175.4 4423.8 4525.6 4542.2 5241.5 6034.3 6402.5 6825.1 Conversionfactor used(LCU/vS%) 22.6 24.8 25.5 27.6 30.1 28.6 27.4 28.3 29.3 Per capita gross nationalproduct 3478.1 3617.7 3710.0 3967.5 4085.9 4176.7 4285.8 4415.9 4544.5 (Atlas method: in2000 US$) a. "GNFS" denotes "goods andnonfactorservices." Mauritius NationalAccounts (continued) - PartC: ConstantPriceData (inmillionslocal currency, constant FY 1998prices) Actual Estimated Projected 1997-98 1998-99 199940 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 GDP at mariet prices 93.684 98,649 102,595 109,469 114,286 117,829 122.777 127.688 132,796 GDPat factor cbst 82,417 86,785 89,389 96,808 101,455 104,600 109,098 114,612 121,905 Agriculture 7,220 7,264 5,570 7,332 7,814 6,594 6,745 7,150 7,472 Industry,of which 25,952 27,255 28,938 30,952 31,855 32,285 32,673 33,261 34,092 Manufacturing 19,578 20,381 21,390 22,823 23,348 23,207 23,416 23,370 23,884 Services 49,246 52,267 54,881 58,524 61,786 65,721 69,680 74,201 80,341 Resourcebalance (2,568) (3,412) (5,497) (449) 2,426 4,762 1,903 3,261 4,432 Exports(GNFS) a 59,953 62,860 61,603 68,195 74,639 79,864 78,506 79,865 82,568 Imports (GNFS) 62,521 66,272 67,100 68,643 72,213 75,101 76,603 76,603 78,136 Total expenditure 96,252 102,061 108,092 109,918 111,860 113,066 120,875 124,427 128,364 Consumption 70,384 76,424 80,713 83,877 86,674 84,818 89,512 92,437 95,894 Government 12,078 12,628 13,392 14,128 14,764 15,413 16,015 15,792 16,402 Private 58,306 63,796 67,321 69,749 71,911 69,404 73,497 76,645 79,492 Gross domestic investment 25,868 25,637 27,380 26,041 25,185 28,249 31,363 3 1,990 32,470 Total governmentinvestment 2,608 2,790 3,003 3,180 3,586 4,260 4,596 4,270 4,516 Total private investment 20,673 22,285 23,814 22,698 22,655 23,319 24,610 25,594 25,764 Total fixed investment 23,282 25,074 26,817 25,878 26,241 27,579 29,206 29,335 30,068 Total changes instocks 2,587 563 563 163 (1,055) 670 2,157 2,655 2,402 Terms-of-trade(TT) effect 1,228 3,478 3,415 2,397 (1,963) (2,733) (4,643) (5,213) Gross domesticincome 93,684 99,877 106,074 112,884 116,683 115,865 120,044 123,045 127,583 Domestic saving(TT adjusted) 23,300 23,453 25,361 29,007 30,008 31,047 30,532 30,608 31,690 Net factor income (612) . , (619) . , (985) . , 383 (211) (45) (727) (673) (777) GNP at marketprices 93,072 98,031 101,611 109,852 114;075' 117,784 122,051' 127,015 132,019 a. "GNFS" denotes "goods and nonfactorservices." - 97 - Mauritius NationalAccounts (continued) - Part D:Annual GrowthRate (calculated from data In constant FY98 prices) Actuul Estimnted Projected 1997-98 1998-99 1999-00 200041 2001-02 2002-03 2003-04 2004-05 200506 GDP at ndrket prices 6 0 5 3 4 0 6 7 4 4 3 1 4 2 4 0 4 0 Agriculture 1.5 0.6 -23.3 31.6 6.6 -15.6 2.3 6.0 4.5 Industry, of which 5.6 5.0 6.2 7.0 2.9 1.4 1.2 1.8 2.5 Manufacturing 6.I 4.1 5.O 6.7 2.3 -0.6 0.9 -0.2 2.2 Services 5.9 6.I 5.0 6.6 5.6 6.4 6.0 6.5 8.3 Exports (GNFS) a 5.9 4.8 -2.0 10.7 9.5 7.0 -1.7 1.7 3.4 Imports(GNFS) 8.5 6.0 1.3 2.3 5.2 4.0 2.0 0.0 2.0 Total expenditure 7.7 6.0 5.9 1.7 1.8 1.1 6.9 2.9 3.2 Consumption 7.1 8.6 5.6 3.9 3.3 -2.1 5.5 3.3 3.7 Investment 9.2 -0.9 6.8 -4.9 -3.3 12.2 11.0 2.0 I.5 Grossdomestic income 7.9 6.6 6.2 6.4 3.4 -0.7 3.6 2.5 3.7 Gross domestic saving 2.7 -4.6 -1.5 17.0 7.9 19.6 0.8 6.0 4.7 Per capitagrowthrates Per capitaGDP (mp) b 4.9 4.0 2.9 5.5 3.5 2. I 3.2 3.0 3.0 Per capitaGNP (mp) 5.0 4.0 2.6 6.9 3.0 2.2 2.6 3.0 2.9 Per capitatotal consumption 6.0 7.2 4.5 2.8 2.5 -3.1 4.5 2.2 2.7 Per capitaprivateconsumption 6.8 8.0 4.4 2.5 2.2 -4.4 4.9 3.3 2.7 a. "GNFS" denotes "goodsand nonfactor services." b. "mp" denotes "market prices" Mauritius Exports and Imports - Actunl Esrlmated Projected 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 200506 A \'alue in current prices(USS millions) Total merchandiseexports (FOB) 1,599 1,680 1,523 1,633 1,569 1,871 2,014 2,028 2,170 Principalprimaryproducts 388 372 213 267 283 274 335 252 380 Sugar 388 372 213 267 283 274 335 252 380 Manufacturedgoods 1,034 1,135 1,171 1,177 1,101 1,138 1,198 1,066 1,209 Other goods a 177 173 138 189 185 459 481 710 581 Total merchandiseimports (CIF) 2,158 2,179 2,158 2,059 1,923 2,313 2,563 2,866 3,048 Food 320 339 299 291 316 345 308 326 325 Other consumergoods 181 188 188 181 108 281 542 620 649 POLb and other energy 159 135 151 236 184 248 271 373 423 Intermediategoods n.e.i.b 950 1,019 866 885 859 980 920 988 1,053 Primarygoods 215 245 179 195 204 Manufacturedgoods 644 735 741 793 849 Capital goods 548 498 653 465 456 459 522 559 599 B. Value inconstant FY-98 prices(US%millions) Total merchandiseexports (FOB) 1,599 1,733 1,645 1,835 1,743 1,930 1,942 1,89I 1,903 Totalmerchandiseimports(CIF) 2,158 2,236 2,2 I 9 2,161 2,014 2,272 2,269 2,269 2,314 Memorandumitems Exportvolume growth rate -2.6 8.4 -5.1 11.5 -5.0 10.7 0.6 -2.6 0.6 Importvolume growthrate 4.5 3.6 -0.8 -2.6 -6.8 12.8 -0.2 0.0 2.0 C. PriceIndices(FY98 = 100) Merchandiseexport 100.0 97.0 92.5 89.0 90.0 96.9 103.7 107.2 114.0 Merchandiseimport 100.0 97.5 97.3 95.3 95.5 101.8 113.0 126.3 131.7 Merchandiseterms of trade 100.0 99.5 95.2 93.4 94.3 95.2 91.8 84.9 86.6 a. includes primaryproductsnot specificallyidentified. b. "n.e.i." denotes "not elsewhereincluded." - 98 - Mauritius Balanceof Payments - (US$millions at current prices) Actuul Esrimrued Projectmi i w - 9 8 1998-99 1999-00 2000-01 2001-of zooz-03 2003-04 2004-0s 2005-06 Total ewom of GYFSa 2,163 6 2,648 6 2,605 5 2,767 4 2,719 I 3,065 0 3,101 0 3,592 0 3,863 I Meichandise (FOB) 1,598.6 1,680.2 1,522.6 1,633.4 1,569.0 1,871.0 2,013.6 2,028.0 2,170.5 Nonfactor services 865.0 968.4 1,082.9 1,134.0 1,180.1 1,194.0 1,387.4 1,564.0 1,692.7 Total Imports of GNFS 2,641.8 2,781.7 2,735.1 2,715.6 2,576.9 3,004.7 3,356.5 3,861.0 3,902.1 Merchandise (FOB) 1,972.0 2,045.7 2,006.5 1,913.3 1,798.9 2,161.7 2,384.5 2,733.0 2,834.3 Nonfactor services 669.8 736.0 728.6 802.3 778.0 843.0 972.0 1,128.0 1,067.8 Resource balance -178.2 -133.0 -129.6 51.8 172.2 60.3 44.5 -269.0 -39.0 Net factor income -27.1 -23.7 -35.1 12.2 4.6 -2.0 -36.5 -4.0 -41.5 Factor receipts 43.3 39.0 30.4 73.1 59.7 62.7 40.1 63.0 44.1 Factor payments 70.4 62.7 65.5 61.0 55.1 64.7 76.6 67.0 85.6 Interest 70.4 62.7 65.5 61.0 55.1 64.7 76.6 37.4 46.0 Net private current transfers 92.5 86.0 89.7 54.7 64.0 59.0 32.0 53.7 58.3 Current receipts, ofwhich 138.4 180.4 187.7 158.0 188.7 166.0 160.1 154.0 186.4 Workers' rermttances 138.4 180.4 187.7 158.0 188.7 166.0 160.1 154.0 186.4 Current payments 45.9 94.4 98.0 103.3 124.7 107.0 128.1 100.3 128.1 Net official current transfers b 9.6 5.4 6.3 7.2 -3.0 21.8 28.0 19.1 16.2 Current account balance -103.2 -65.4 -68.7 125.8 247.8 139.0 68.0 -215.0 -6.0 Official capital grants -0.5 -0.6 -0.5 -1.4 -1.0 -2.0 0.0 -1.0 0.0 Private investment (net) 8.1 47.5 -10.5 175.3 29.5 35.8 8.1 -70.8 -40.0 Direct foreign investment 19.7 18.8 12.7 197.3 48.0 57.0 35.2 -32.0 0.0 Portfolio investments -11.6 28.8 -23.1 -22.0 -18.5 -21.2 -27.1 -38.8 -40.0 Net Official L T borrowng c 98.6 40.2 -61.9 -96.4 -14.9 -14.0 -26.4 45.0 70.0 Disbursements(incl. Gap) 180.2 133.1 77.9 111.4 140.6 152.0 142.5 232.6 256.9 Repayments 82.6 94.1 140.7 207.8 155.5 166.0 168.5 187.0 186.9 Net Private & Other L T inflows 1.0 1.2 1.0 0.0 0.0 0.0 -0.4 -0.6 0.0 a. Goods and non-factor services. b. Some HIPC relief takes the form of grants made againstdebt service paymentspaid. c. "LT'denotes "long-term." OriginalCAS Table includes net private borrowng _-excluded here. Mauritius Balanceof Payments(continued) - (US%millions at current prices) Actual EStimrrted Projestmi 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-0s 2005-06 Adjusm~enisIO schedLled debt s e n i x 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 00 Other capital flows 6.1 6.1 225.4 -18.2 -18.4 160.2 68.0 132.8 0.0 Change in net international reserves (incl. Net IMF) -9.1 -27.8 -83.9 -185.1 -243.0 -319.0 -117.7 109.0 -24.0 (- indicates increasein assets) Memorandum items Total gross reserves,o f wluch 696.2 562.0 688.0 789.6 1,017.8 1,438.0 1,517.5 1,484.8 1,507.3 Total reservesrmnus gold 879.6 893.8 966.0 777.3 1,005.5 1,426.0 1,505.6 1,472.9 1,495.4 Gold (at year-end Londonprice) 11.9 12.3 12.3 12.3 12.3 12.3 11.9 11.9 11.9 Total gross reserves(in months' imports G&Se) 3.1 2.4 2.9 3.4 4.6 5.6 5.3 4.5 4.5 Exchange rates Annual average(LCUAJS%)f 22.6 24.8 25.5 27.6 30.1 28.6 27.4 28.3 29.3 At endyear (LCUAJS$) 24.3 25.2 26.1 29.2 30.0 28.8 28.8 29.5 29.7 Index real average exchangerate (YR92 =loo) 100.0 97.6 103.1 105.9 103.9 103.8 109.3 114.5 Current Account Balance as % GDP -2.5 -1.6 -1.6 2.8 5.5 2.7 1.1 -3.4 -0.1 a. Goods and non-factor services. b. Some HIPC relief takes the form of grantsmade againstdebt service paymentspaid. c. "LT" denotes "long-term." Original CAS Table includes net private borrowng d. "n.e.i." denotes "not elsewhereincluded." Includesprivate capital transfers..,-- excluded here. e. "G & s" denotes "goods and services." f."LCU" denotes "local currency Units." g. The index of the real exchangerate reflects US$/LCU, so an increaseis an appreciation at the real exchangerate - 99 - Mauritius PublicFinance - (at current prices and exchange rates) Total current revenuesand grants 16473.8 18,501 20,829 23,000 22,706 25,270 30,298 33,331 35,511 38,332 Direct taxes 3263.0 3,510 3,909 4,087 4,363 4,793 5,388 6,136 5,985 6,373 Indirect taxes 10738.0 12,176 13,991 16,526 15,826 16.727 20,491 22,678 26,350 28,585 Ondomesticgoods andservices 5168.0 6,019 8,018 9,591 9.477 10.833 13,969 15,413 16,934 18,588 On international trade 5570.0 6,157 5,973 6,935 6,349 5,894 6,523 7,265 9,416 9,996 Nontax receipts 2472.8 2,815 2,929 2,387 2,517 3,751 4,419 4.517 3,176 3,374 Total Current Expenditures 17632.4 19,264 21,847 23,379 26,784 27,881 31,538 34,709 38,270 43,088 Intereston externaldebt 473.3 512 501 453 401 207 189 204 231 278 Intereston domesticdebt 2401.8 2,992 3,125 3,403 5,125 4,334 6,202 6,387 7,686 9,225 Transfers to pnvate sector 0.0 0 (0) - (0) 0 0 Transfers to otherNFPSb 5890.5 6,605 7,834 8,632 9,530 10,762 11,818 12,978 13,984 15,613 Subsidies 838.0 727 751 774 812 796 796 822 907 959 Consumption 8028.8 8,428 9,637 10,117 10,916 11,782 12,534 14,318 15,462 17,013 Wages and salaries 5896.7 6,508 7.457 7,763 8,181 8,854 9,269 10,873 11,742 12,970 Other consumption 2132.1 1,920 2,180 2,354 2,735 2,927 3,265 3,445 3,720 4,042 Budgetary Savings -1158.6 (763) (1,018) (379) (4,078) (2,611) (1,240) (1,378) (2,759) (4,756) Capital Revenues 0.0 500 500 70 70 5 Total Capital Expenditures 5001.4 2,861 3,004 4,431 3,060 5,688 7,995 7,849 7,535 8,225 Capital transfers 2283.6 252 (705) 167 (1,574) 645 980 724 617 372 Budgetaryfixed investment 2717.8 2,608 3,709 4,264 4,634 5,043 7,015 7,125 6,918 7,853 Overall balance(-=deficit) -6160.0 (3,623) (3,522) (4,310) (7,138) (8,299) (9,235) (9,157) (10,224) (12,976) Sourcesof financing (+) 6160.0 3,623 3,522 4,310 7,138 8,299 9,235 9.157 10,224 12,976 Official capital grants 0.0 (0) (0) Net externalborrowing 197.9 (275) (1,170) (510) (3,584) 1,030 87 (55) (768) 292 Net monetarysystem . . 987.7 1,631 (1,571) 2,579 (958) 1,314 2,454 14,034 5,560 6,181 Net other domesticborrowing 4974.4 2,267 6,263 2,241 11,680 5,955 6,694 (4,822) 5,432 6,503 (continued) a. "LCU" denotes "local currency unit." b. "NFPS" denotes"nonfinancial public sector." Mauritius Public Finance(continued) - (at current prices and exchange rater) Acfud Estinwred Projected 1997 1997-98 199699 1999-00 2000-01 2001-02 2002-03 2003-04 200405 2005-06 Shares of GDP (%) Current revenues 19.7 19.7 20.1 20.4 18.2 18.5 20.2 20.2 19.6 19.2 Current expenditures 21.1 20.6 21.1 20.7 21.5 20.4 21.1 21.0 21.1 21.6 Budgetary savings -1.4 -0.8 -1.0 -0.3 -3.3 -1.9 -0.8 -0.8 -1.5 -2.4 Capital revenues 0.0 0.0 0.5 0.4 0.0 0.0 0.0 0.0 0.0 0.0 Capital expenditures 6.0 3.1 2.9 3.9 2.5 4.2 5.3 4.7 4.2 4.1 Overall Balance(- = deficit) -7.4 -3.9 -3.4 -3.8 -5.7 -6.1 -6.2 -5.5 -5.6 -6.5 Official capital grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net externalborrowing 0.2 -0.3 -1.1 -0.5 -2.9 0.8 0.1 0.0 -0.4 0.1 Monetary systemcredit I.2 1.7 -1.5 2.3 -0.8 I.o 1.6 8.5 3.1 3.1 Other domesticfinancing 5.9 2.4 6.0 2.0 9.4 4.3 4.5 -2.9 3.0 3.3 GovernmentDebt (DOD IC at the endof the year, in (millions LCUs, unless noted)) External debt 21295.0 25,748 26,938 25,483 24,848 27,382 26,703 23,666 8,442 8,873 External debt (inUS$millions) 506.1 476 404 3x8 247 291 318 308 286 299 Debt to monetary system 15863.7 17,495 15,924 18,503 17,544 18,858 21,312 35,346 40,906 47,087 Otherdomesticdebt 14377.3 17,124 25,050 28,443 36,201 29,960 47,472 34,435 62,889 69,392 Total governmentdebt 51536.0 60,367 67,912 72,429 18,593 76,200 95,487 93,447 112,237 125,352 Total governmentdebt as percento fGDP 61.5 64.4 65.5 64.2 62.9 55.7 63.8 56.5 61.9 62.7 Tax burdenindicators (Oh) Direct taxes / GDP 3.9 3.7 3.8 3.6 3.5 3.5 3.6 3.7 3.3 3.2 Indirect taxes on domestic G&Sd IGDP 6.2 6.4 7.7 8.5 7.6 7.9 9.3 9.3 9.3 9.3 Indirect taxes on domestic G&S Iprivate CI 9.9 10.3 12.2 13.6 12.4 12.8 15.3 14.9 14.5 14.5 Taxeson internationaltradelmerchandise 14.5 13.8 11.8 13.5 12.0 10.9 10.6 11.1 12.2 12.0 c. "DOD" denotes "debt outstandinganddisbursed." b. "G&S" denotes "goodsand services." - 100- Mauritius -Monetary Survey (In millions of local currency units) Acwal Estimated Projected 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-03 2004-05 2005-06 A Annual Flous Net foreign assets (75) 1,197 2,648 6,544 8,783 7,770 819 3,831 (422) Net international reserves 206 690 2.141 5,107 7,324 9,l II 3,225 (3,087) 702 Other net foreign assets (280) 507 507 1,437 1,459 (1,341) (2,406) 6,918 (1,124) Domestic credit 15,055 9,262 10,587 4,693 7,502 7,194 21,282 17,174 17,667 To government 1,631 (1,571) 2,579 (958) 1,314 2,454 14,034 5,560 6,231 Government budget 1,631 (1,571) 2,579 (958) 1,314 2,454 14,034 5,560 6,181 Other NFPSa 50 To rest of the economy 13,424 10,832 8,008 5,652 6,188 4,740 7,248 11,614 11,436 Pnvate sector 13,424 10,832 8,008 5,652 5,904 3,899 8,040 11,611 11,394 Other financial institutions 284 841 (792) 3 42 Total assets = liabilities 14,980 10,459 13,235 11,238 16,285 14,964 22,101 21,005 17,245 Money and quasimoney 10,493 9,335 8,739 8,810 12,720 12,925 17,767 18,493 9,905 Net other liabilities 4,487 1,123 4,496 2,428 3,565 2,039 4,334 2,512 7,341 B.End of Year Stocks: Net foreign assets 21,359 22,556 25,204 31,748 40,531 48,301 49,120 52,951 52,529 Net international reserves 16,906 14,184 17,951 23,086 30,493 41,343 43,665 43,790 44,743 Other net foreign assets 4,453 8,371 7,253 8,662 10,038 6,959 5,455 9,161 7,786 Domestic credit 68,280 77,541 88,128 92,821 100,323 107,517 128,799 145,973 163,640 To government (NFPS) 17,495 15,924 18,503 17,544 18,858 21,312 35,346 40,906 47,137 To restofthe economy 50,785 61,618 69,626 75,277 81,465 86,205 93,453 105,067 116,503 Total assets = liabilities 89,638 100,097 113,332 124,569 140,854 155318 177,919 198,924 216,169 Monev and auasimonev , . 70.836 80,172 88,910 97,720 110,440 123,365 141,132 159,625 169,530 Netother liabilities 18,802 19,925 24,421 26,849 30,414 32,453 36,787 39,299 46,640 a. "NFPS" denotes "nonfinancial public sector." Mauritius Monetary Survey (continued) - (Inmillions of localcurrency units) Aclual Estimated Rojkcled 1997-98 1998-99 199990 2000-01 200162 2002-03 2003-04 2004-05 2005-06 C Fa:iors accounting for mmetary expansion(as ' 0IrlQVb) Net foreign assets 30.2 28.1 28.3 32.5 36.7 39.2 34.8 33.2 31.0 Credit to government (NFPS) 24.7 19.9 20.8 18.0 17.1 17.3 25.0 25.6 27.8 Credit to restof the economy 71.7 76.9 78.3 77.0 73.8 69.9 66.2 65.8 68.7 Net other liabilities (-) 26.5 24.9 27.5 27.5 27.5 26.3 26.1 24.6 27.5 Total increase in MQM 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 D.Money, credit and pnces M2IGDP 75.6 77.4 78.8 78.3 80.7 82.4 85.4 88.0 84.8 Annual growth rate MQM 17.4 13.2 10.9 9.9 13.0 11.7 14.4 13.1 6.2 Annual growth rate private credit 35.9 21.3 13.0 8.1 7.8 4.8 9.4 12.5 10.9 IncreaseIn private credit as % of increaseII 89.2 117.0 75.6 120.4 78.7 54.2 37.8 67.6 64.5 b. 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