Mauritius Inc. The Challenge of Investing in Growth

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Occasional paper No: 55

Mauritius Inc. – The Challenge of Investing in Growth

October 2013

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Disclaimer

This publication has been prepared by the MCB Ltd. on behalf of itself and its affiliated companies solely for the information of clients of

the MCB Group. While reasonable care has been taken to ensure that the information contained therein is not untrue or misleading, the

MCB Ltd. makes no representation as to its accuracy or completeness. Neither the MCB Ltd. nor any director, officer or employee of the

MCB Ltd. accepts any liability whatsoever for any direct or consequential loss arising from any use of its publication or its contents.

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TABLE OF CONTENTS PAGE

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Figures

Figure 1: GDP & GDFCF indicators 6

Figure 2: GDFCF - Key indicators 11

Figure 3: Public and private investment - Key indicators 15

Figure 4: Mauritius: Competitiveness and productivity-related indicators 19

Figure 5: Ease of Doing Business (DB) rankings 20

Figure 6: Key areas marked by productivity-hampering shortcomings 21

Boxes

Box I: Description and likely implication of the wearing out of the reform impetus in Mauritius 10

Box II: Depiction of the significance of investment for economic growth 12

Box III: Global and regional rankings of Mauritius as per selected indices 18

Box IV: Specific shortcomings related to the country’s productivity and competitiveness levels 24

Box V: Key sequential aspects characterising public investment management 25

Box VI: Case study of Malaysia's New Economic Model 27

Introduction

Depicting and appraising trends in investment

Conclusion

Shedding light on the quality of the domestic business environment

Desired policy orientations for spearheading investment to superior levels

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INTRODUCTION

Investment as an ex-ante conditionality for growth

Sir George Bernard Shaw, the co-founder of the London School of Economics, famously remarked that:

“If all the economists were laid end to end, they'd never reach a conclusion.” Yet, even if the exact

feedback mechanisms differ according to economic rhetoric, there is general consensus worldwide on

the importance of investment as a key determinant of economic growth. This underscores the need for

Mauritius to preserve its “acquis” in relation to its simple, transparent and predictable business

framework, alongside strengthening the scope of the reform agenda to boost business confidence and

re-ignite investment.

Given its relevance for promoting socio-economic progress and recent worrying trends therein, this

paper chooses investment as the central theme for discussion, while also shedding light on the inherent

importance of the country’s microeconomic foundations as a key enabler for stimulating investment.

The Mauritian economy: general economic environment and prospects

After successfully pursuing a notable development trajectory over time and achieving the upper middle-

income country status as per the World Bank classification, the Mauritian economy has found it quite

challenging to uphold the momentum of its socio-economic progress in recent years. Noticeably,

alongside highlighting the generally limitative nature of the country’s idiosyncratic structural

capabilities, the far-reaching and long-lasting global economic shocks as well as the increasingly

competitive economic landscape abroad have seriously put to test the country’s attempts to leverage

avenues for activity growth and preserve the healthiness of its macroeconomic performance, with the

real, fiscal and external sectors being, to varying degrees, subject to non-negligible strains.

Real sector

While persistently undershooting the country’s underlying growth potential, the real GDP expansion

pattern lost noticeable impetus in recent times, thus playing a prominent role in causing the national

unemployment rate to worsen for the fifth consecutive time this year and to land at some way above

8%. In respect of 2013, the expansion of the Mauritian economy should remain in a relatively low gear,

with a rate of 3.2% being currently anticipated. With regard to 2014, preliminary assessments point to a

real GDP growth rate featuring within the 3.5 – 3.9% range, after considering a projected slight

improvement in specific export markets’ economic conditions – albeit remaining soft – and the domestic

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business climate as well as on assuming a relative higher rate of implementation of the Public Sector

Investment Programme, with, however, the execution of sizeable infrastructure projects being

contemplated likely to have a relatively limited impact on economic activity levels next year. As it

stands, the projected growth for next year largely reflects a technical rebound, which is attributable to

the cumulative statistical impact of several years of sub-par national economic expansion. As such, the

country’s economic expansion for 2014 is likely to remain intrinsically fragile and insufficient to make a

significant dent in the elevated unemployment levels.

To a notable extent, the macroeconomic challenges confronting Mauritius can be explained by the

direct and spillover ramifications of the continuously subdued and erratic trends noted in respect of

public and private investment. In fact, the share of national investment (i.e. gross domestic fixed capital

formation) to GDP has boarded onto a sustained downtrend and is estimated at some 21% in 2013,

which is far inferior to the advocated level of around 30% to firmly accomplish our socio-economic

ambitions. The insufficiency of investment, principally by the private sector, is of real concern to

Mauritius since capacity-building and enhanced productivity can be viewed as the most viable and

dependable foundation for securing a high and sustainable growth path, alongside assisting in

unwrapping wide-ranging avenues for resilient job creation.

Against the backdrop of tempered national output evolution and, to some extent, due to the prevalence

of some unfavourable dynamics in financial markets during specific periods, the gross domestic savings

to GDP ratio has gradually wandered away from the 25% mark around which it oscillated during the

early 2000s before landing at an expected rate of some 12% in 2013, with the corresponding ratio for

Evolution of GDP GDFCF as share of GDP

Sources: Statistics Mauritius & MCB staff estimates

(e) estimates (f) forecasts

Figure 1 Real GDP growth & GDFCF indicators

MCB

Stats Mauritius

4.74.2

3.4

0

1

2

3

4

5

6

2005-2007 2008-2010 2011-2013

% (

ave

rage

real

gro

wth

)

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

18

20

22

24

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2005

2006

2007

2008

2009

2010

2011

2012

(e)

2013

(f)

% o

f GD

P

Share of GDFCF of GDP at market prices

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gross national savings declining to reach an expected rate of some 14% this year, after factoring in

positive net primary income and transfers from abroad. In specific, while being adversely impacted by

negative outcomes at the level of households, the drop in the country’s overall savings ratio in recent

years can be largely attributable to the declining ratio at the corporate level amidst the difficult

economic context. All in all, while exacerbating the country’s dependence on capital flows from abroad

that tend to be quite volatile in the current shaky global economic landscape, the low savings ratio

merits attention since it contributes to an elevated resource gap and triggers persisting concerns as

regards support available for the materialisation of investment undertakings.

Fiscal sector

While it was previously anticipated to revolve around a commendable 2% mark, there are indications

that the budget deficit for 2013 would largely overrun initial estimates to stand at above 3.5%. With

lower-than-expected revenue generation amidst subdued economic growth compounding the impact of

higher-than-planned spending stemming mainly from the implementation of the Errors, Omissions and

Anomalies Committee Report on the PRB Report and other supplementary expenditures incurred,

notably linked to land drainage, this fiscal performance is projected to adversely influence the public

sector borrowing requirement, thus marking a departure from the trend that has recently brought us

closer to achieving the target of bringing total public sector debt to 50% of national income by 2018 as

per the Public Debt Management Act. Indeed, this would be at odds with progress hitherto realised in

reducing our debt-servicing burden, which contributed to an upgrade in the foreign and local currency

Government bond ratings by Moody’s in 2012. Therefore, to the extent that strains on the country’s

debt position threaten to reduce the fiscal space for stimulating growth and impair our position on

international financial markets, the soundness of the country’s fiscal position should be well-looked-

after. Especially, while guarding against any reversals in respect of the conduciveness of the current tax

regime for investment and growth, a rigorous control of inefficient and low value-adding recurrent

expenditures should feature as a priority.

External sector

After continuously widening to attain around Rs 81 billion in 2012, the balance of trade deficit would

remain sizeable in 2013, thus contributing to a high current account deficit to GDP ratio, which is,

however, forecast to be offset by large capital inflows. Unfortunately, such dynamics expose the country

to the whims of the international economic climate, and, subsequently, to possible important reversals

in capital flows and exchange rate instabilities if investor sentiments abroad change abruptly.

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Dealing with macroeconomic difficulties given their nature and implications

It is undeniable that recurrent and drawn-out episodes of financial and economic crises on the global

scale have, over time, exerted non-negligible strains on the real and external sectors of Mauritius

through transmission channels such as dampened demand from our major export markets and elevated

market uncertainties. It should, also, be stressed that the idiosyncratic vulnerability of the country to

exogenous shocks has been nurtured by its specificities as a small island developing state, including (i)

narrow geographical size and dispersion, (ii) limited size of internal markets, (iii) some degree of

remoteness from external established markets, (iv) elevated concentration on a relatively few groups of

countries for exports of goods and services, and (iv) exposure to natural disasters.

Yet, despite facing up to dynamics upon which limited control can be exercised, there is wide-ranging

evidence that the economy’s exposure to external disturbances and restraints on its in-built productive

potential have been worsened by the predominance of domestic structural imbalances. For instance,

alongside encumbering physical investments by the public sector, supply-side constraints and inherent

inefficiencies have hampered the quality of the business environment and the capital spending

endeavours of enterprises, hence preventing the Mauritian economy from operating at optimal

capacity. Of concern, the persistence of microeconomic weaknesses can be associated with the fact that

the impetus of the national reform agenda has lost perceptible steam lately. Basically, limitations have

been felt in terms of the extensiveness, depth, clarity, cohesiveness and prompt execution of policies. In

some respects therefore, Mauritius is deemed to have not effectively kept pace with competitor nations

that have uninterruptedly and comprehensively bolstered the conduciveness of their business

environments, thus somewhat adversely impacting the relative attractiveness of our positioning and

value proposition on the increasingly competitive and exigent international markets for goods, services

and resources.

Thus, in view of its constraints as a small island developing state, there is no alternative for Mauritius

other than to come to grips with its deep-rooted structural impediments and to materially boost the

stretch and depth of its reform programme. The latter needs to be backed by postures advocating “the

fierce urgency of now”, to quote Martin Luther King Jr. when referring to the major challenges facing the

United States back in the sixties.

On the reform side, it is deemed primordial that the Mauritian economy allocates due consideration for

re-igniting investment, with pragmatic and pro-growth policies being called for to assist Mauritius in

more effectively weathering external shocks, buttressing its competitiveness internationally, rekindling

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economic growth, and bolstering employment creation. In the first instance, to provide a major boost to

growth and job creation in the country, an overarching and coherent strategy is needed for revitalising

private sector investment, especially by upholding the low and simple corporate tax regime and tackling

hurdles to the smooth operation and functioning of businesses across economic sectors. In the process,

an appropriate policy focus is warranted for encouraging quality foreign direct investment (FDI), notably

flows having a high value added and a perceptible impact on the level of economic activity in the

country. Furthermore, to the extent that some leeway is deemed accessible for underpinning increases

in Government capital outlays – after taking into account the availability of funds – without crowding-

out spending by businesses, a major leap in both the level and quality of public sector investment is

required to shore up the country’s capabilities, duly supported by a gearing up of the ability for dealing

with project implementation bottlenecks and the promotion of Private-Public Partnerships, while

factoring in governance and technical aspects. Specifically, the national road network and transportation

impediments should be diligently addressed, backed by the adoption of a holistic and efficiency-driven

approach that, inter alia, provides for the synchronised and mutually-reinforcing execution of the Road

Decongestion Programme and the earmarked Light Rail system. All in all, to pave the way for the swift

unfolding of public sector investment in areas of strategic importance for the country, proper

circumspection should be exercised to ensure that fiscal indicators are kept into a sound territory.

Especially, alongside reinforcing capacities for diligent tax collection and reining in inefficient recurrent

expenditures, the authorities need to embrace an optimal debt strategy that strikes an adequate

balance between domestic and foreign funding, bearing in mind the observed high liquidity levels

prevailing in the country as well as the nature and scale of economic development imperatives.

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Box I: Description and likely implication of the wearing out of the reform impetus in Mauritius

Ease of Doing Business

Economic Freedom

Sources: World Bank - Doing Business Report 2014; The Heritage Foundation - Index of Economic Freedom 2013; IMF World Economic Outlook database -October 2013

For the sake of comparison with Mauritius, countries with a land

mass of below 20,000 km2 have been considered in the scatter

diagram (with geographical smallness used as a proxy for the lack

of resources and constrained domestic market size). For each

country, the distance to frontier measure – as extracted from the

2014 edition of the Ease of Doing Business survey – has been

plotted against the logarithm of total investment (at current

2012 prices).

Compared to the ranking numbers used to compare economies

in the World Bank Ease of Doing Business Index, aggregate

distance to frontier measure is an appraisal of the country’s

overall absolute performance in respect of the ease of doing

business. It shows the difference from the best country

performance. When comparing it from one year to another, the

measure shows how much the absolute quality of the regulatory

environment for entrepreneurs in an economy is changing over

time, thus showing the extent to which the nation has closed the

gap to the highest score. The frontier is a score derived from the

most efficient practice or highest score achieved by any economy

since 2005. An economy’s distance to frontier is indicated on a

scale of 0 (lowest performance) to 100 (the frontier).

Investment v/s Ease of Doing Business

To some extent, the near-stalling of the reform drive can beillustrated by the tempered evolution of the absoluteperformance scores posted by Mauritius in respect of some keyinternational indices ….

… which is a worrying situation, bearing in mind the strongpositive correlation detected between the quality of businessenvironment and the total investment level of small states

Regrouped under four broad pillars (i.e. rule of law, limited

Government, regulatory efficiency and open markets), each of

the 10 sub-indices used in respect of the Heritage Foundation

Index of Economic Freedom is graded on a scale of 0 (lowest

performance) to 100 (highest performance). The 10 component

scores are then equally weighted and averaged before reaching

an overall economic freedom score for each economy, which

subsequently determines the latter’s global ranking.

Methodological explanations

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60

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DB

06

DB

07

DB

08

DB

09

DB

10

DB

11

DB

12

DB

13

DB

14

Sco

re

Distance to frontier measure

0

2

4

6

8

10

12

20 40 60 80 100

ln in

vest

men

t

Distance to frontier measure

66

68

70

72

74

76

78

2007 2008 2009 2010 2011 2012 2013

Sco

re

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DEPICTING AND APPRAISING TRENDS IN INVESTMENT

Evolution of national investment

Trends and implications

Overall, gross domestic fixed capital formation (GDFCF) evolved at a sluggish pace in recent times. After

registering an average annual real growth rate of virtually zero during the preceding three-year period,

GDFCF is anticipated to register a relatively elevated negative growth outcome in 2013, owing to

inhibited performances at both the public and private sector levels. Subsequently, national investment is

foreseen to remain a serious drag on the country’s economic expansion this year. Indeed, it is estimated

that it could rub off some 70 basis points from the country’s real GDP growth performance in 2013 –

with the shortfall even rising to around 130 basis points after excluding the purchase of marine vessels –

thus wielding a conspicuous influence in drifting the economic expansion of Mauritius to a projected

rate of 3.2%. Moreover, on account principally of tempered output generation, the subdued movements

in investment should contribute in limiting the leeway for job creation in the country, with the national

unemployment rate anticipated to further worsen to reach some way beyond 8% in 2013.

Real growth rate Contribution to real GDP growth

Sources: Statistics Mauritius & MCB staff estimates

(e) estimates (f) forecasts

Figure 2 GDFCF: Key indicators

-8.0

-6.0

-4.0

-2.0

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2.0

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8.0

10.0

2009 2010 2011 2012(e) 2013(f)

%

Real growth rate

Growth rate

Growth rate exclusive of aircraft & marine vessel

-1.5

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2009 2010 2011 2012(e) 2013(f)

in t

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ints

Contribution to real GDP growth

GDFCF

GDFCF excluding aircraft & marine vessel

Share of GDP

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Box II: Depicting the significance of investment for economic growth

General theoretical and empirical references

Basically, capital outlays underpin economic growth by (i) directly raising the productivity of human and physical capital, (ii)

leading to the creation of new productive capacity, and (iii) increasing economies of scale as well as enhancing the efficiency

and competitiveness of the nation. In specific reference to labour, in an environment where nominal wages tend to be rigid

downwards, an enhancement in labour productivity levels is all the more important given that it can, in the medium term, lead

to a rise in real wages without causing an erosion of competitiveness, after reining in the evolution of unit labour costs. At

another level, improvements in technology often enable a country to shift to a higher growth path. However, the effect of

technological advance would be reduced in the absence of knowledge diffusion. Investment can contribute towards technology

advance and diffusion in various ways: (i) embodied technology, whereby firms take advantage of superior technology when

they purchase new capital goods; (ii) technology transfer through FDI, and (iii) research, development and innovation, which

can be enhanced through investment in human capital.

Several endogenous growth models show that productive investment outlays can raise the long-run rate of growth by

permanently increasing the returns to the utilisation of factors of production. For its part, the neoclassical investment theory

suggests that the growth rate of real output is positively related to investment because it indicates changes in aggregate

demand for output that investors seek to meet. More recent studies show how inefficient and corrupt bureaucracies can distort

the provision of public infrastructure services, thus reducing the quality and effectiveness of public capital, firms’ incentives to

invest, and hence economic growth. In reference to private investment, studies found that it is generally significantly and

positively correlated with GDP growth. In fact, capital formation by businesses is, in some quarters, deemed to be the most

efficient and sustainable form of investment, as it creates a virtuous and self-reinforcing feedback loop, while displaying higher

returns than public expenditure, backed notably by strengthened technological assimilation. From an empirical perspective, the

rise, throughout the 1990s, of the East Asian Tigers has been largely anchored on a gross domestic investment ratio of around

30% of GDP, which is a much higher figure than outcomes experienced in other parts of the world at that time.

The case of Mauritius

Through time, several MCB Focus editions have delved on the importance of capital accumulation for the Mauritian economy.

Of note, back in 2002, MCB Focus No. 15 explicated the significance of productive investment as a means to spur economic

activity levels and combat unemployment. The following year, backed by the recourse to econometric modelling exercises, the

19th issue aimed at determining the investment level consistent with the country’s development strategy. The results showed

that a national investment ratio of around 30% was deemed desirable for a sustained growth of at least 6%. This assertion can

generally be corroborated using updated figures, with the results and observations reached explained on the following page.

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Box II: Depicting the significance of investment for economic growth (Cont’d)

Model building on the perpetual inventory method

Using the perpetual inventory method as specified by:

and the stylised fact of growth that the capital-output ratio is constant in steady state, the following equation in steady stateis derived

Where K = capital stock at constant prices; Y = GDP at constant prices; I = GDFCF as constant prices; δ = depreciation rate ofthe capital stock which is assumed to be constant over time; g = real GDP growth

Using data at 2007 prices over the 1990-2012 period, the steady-state depreciation rate and capital-output ratio have beenestimated from the regression results run on a transformed version of equation (1), after which the relationship between thenational investment ratio and steady state growth derived from (2) has been established and is depicted in the diagram belowover a relevant range. Hence, for achieving the economic growth 6% or more advocated to generate meaningful employmentcreation, a national investment ratio of close to 30% is warranted after accounting for statistical error margins. The details andsteps undertaken for the purpose of this exercise are provided in the Annex.

1)1( ttt KIK

(1)

*

1

Y

K

g

g

Y

I

t

t (2)

Cobb-Douglas function

An attempt has also been made to confirm whether the above-mentioned finding holds by applying the Cobb-Douglas

function, which establishes the following relationship between GDP and factor inputs (namely labour and capital):

It was found that the equation was of relevance to the Mauritian economy for the 2000-2012 period with regression thereon

yielding the following significant results.

From there, projections have been made to derive the warranted investment to GDP ratio for the medium term that willsupport a growth of above 6% or more based on the assumption of an annual rise in employment of slightly above 2% – in linewith the objective of resorbing unemployment consistent with the higher growth rate and observed trends in labour force –and using the relevant parameters derived from the perpetual inventory model. The conclusion of the exercise proves to bebroadly consistent with the assertion about the advocated investment ratio as per the previous model.

Coefficients Standard Error t Stat

Intercept 6.8 0.9 7.3

ln (L) 0.5 0.3 1.8

ln (K) 0.7 0.1 9.1

Regression Statistics

Multiple R 0.99

R Square 0.99

Adjusted R Square 0.99

0%

2%

4%

6%

8%

10%

20% 25% 30% 35%

Re

al G

DP

gro

wth

National Investment to GDP ratio

Investment-growth relationship in steady state

)ln()ln()ln()ln( 21 KLAY

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Key apprehensions for the future

Looking ahead and particularly if current trends persist, the relative shortage of capital formation

threatens, per se, to thwart the country’s efforts to uplift its growth achievement. In fact, stifled

investment patterns – notably in terms of infrastructure spending by the Government and further

capacity building by enterprises – should, in all probability, have an adverse bearing on the unfolding of

productive activities since they would tend to delay/limit the harnessing of the following benefits: (i)

gearing up of the productivity of human and physical capital (subsequent notably to the gains resulting

from product and process innovations engineered through investments); (ii) cost and efficiency benefits

accruing to actual and prospective businesses owing to perceptible improvements in the quality of the

business development framework and the ease of doing business; and (iii) satisfactory and protracted

alignment by economic sectors with the competitiveness advances being achieved by other nations on

the regional and international scale. Consequently and from a broader perspective, restrained output

growth would curb the expansion of nationwide wealth creation as measured by GDP at market prices,

with ensuing pressures likely to befall the evolution of household disposable income and revenue

generated by corporates. Subsequently, this situation could exert exacerbating strains on business

investment and employment creation across economic sectors. If unaddressed or ineffectively tackled,

such dynamics could push the Mauritian economy into a self-sustaining low-growth conundrum over the

longer term, with the challenge of quickly and conclusively getting out of such a vicious circle not likely

to be an easy task for both public and private stakeholders.

Evolution of public sector investment

Over the past few years, towards combating supply-side constraints to activity levels as well as achieving

the national economic vision of unlocking productive capacity and enhancing competitiveness levels, the

authorities announced a series of sizeable projects to gear up the public infrastructure set-up. Basically,

in addition to ventures earmarked under the ‘Public-Private Partnership’ scheme, the regular review of

the Public Sector Investment Programme remained high on the agenda, taking into consideration the

strategic objectives of the Government and aggregate resource availability for investment. In such

respects, while a fair deal of scheduled undertakings has been concretely put into train – pertaining

markedly to specific investments in road infrastructure, airport extension and the

construction/renovation of public buildings – a notable share of enunciated projects, in relation

particularly to the Road Decongestion Programme, has not materialised in a prompt and comprehensive

fashion. Basically, this protracted under-spending performance can be attributable to project

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Real growth rate Residential v/s Non-residential

Share of GDP

Sources: Statistics Mauritius, IMF World Economic Outlook database - October 2013 & MCB staff estimates(e) estimates (f) forecasts

International comparisons 2013

Figure 3 Public and private investment: Key indicators

-10

0

10

20

30

40

50

60

70

2009 2010 2011 2012(e) 2013(f)

%

Public investment

Public investment exclusive of aircraft & marine vessel

Real growth rate

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012(e) 2013(f)

in t

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s o

f %

po

ints

Contribution to real GDP Growth

Public investment


Contribution to real GDP growth

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16

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4

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8

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10

2009 2010 2011 2012(e) 2013(f)

%%

Public investment


Private investment (right scale)

Private investment exclusive of aircraft & marine vessel (right scale)

0

10

20

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50

Ma

uri

tiu

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Ma

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sia

Sin

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De

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Asi

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Lati

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Ca

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Su

b-S

ah

ara

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% o

f G

DP

International comparisons of share of GDP (2013)

Public investment

Private investment

Total investment (GDFCF)

-15

-10

-5

0

5

10

15

2009 2010 2011 2012(e) 2013(f)

% r

eal

gro

wth

rate

Residential building

Non-residential investment exclusive of marine vessel

-7

-5

-3

-1

1

3

5

2009 2010 2011 2012(e) 2013(f)

%

Real growth rate

Private investmentPrivate investment exclusive of aircraft & marine vessel

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implementation impediments that stemmed from administrative bottlenecks as well as the prevalence

of legal issues at the tendering/procurement stages of specific projects.

All in all, whereas the evolution of relevant outlays would have been expected to move at a relatively

more rapid speed as a means to somewhat compensate for dimmed movements in private investment

at least, public sector investment evolved at a rather inconsistent pace during the past few years,

despite the fact that it had constantly been hyped to provide importantly positive contributions to the

expansion of the economy given the significant range of sizeable assignments having been lined up.

Such dynamics continued to prevail during 2013. For the year, capital formation by the Government is

foreseen to contract by a noticeable margin due to important project execution delays. Consequently,

the ratio of public investment to GDP is likely to edge down nearer to the 5% threshold in 2013.

Performance of private sector investment

While the relevant figure gyrated around 20% some five years back, the share of private investment to

national output deteriorated at a continuous pace lately and is expected to slip further towards the 16%

threshold in 2013. This is a particularly upsetting outcome to the extent that it is well beneath the ratio

being advocated to materially boost the country’s in-built productive potential and foreign

competitiveness as well as subsequently engender high and sustainable increases in activity growth

amidst a challenging and competitive global economic climate. By and large, though spending on

residential buildings and the unfolding of specific projects in the hospitality and property development

sectors as well as in other segments engaged in capacity building were of a generally favourable

influence thereon, private investment has been wedged into a largely declining or quasi-stagnation

phase during the past few years. In fact, while heightened uncertainty levels across external markets

have detrimentally acted upon the decision to invest, the ramifications of lingering global economic

difficulties have – after being compounded by the impact exerted by internal capacity constraints and

episodes of currency strength – marred the revenue generation ability of enterprises and reduced their

scope to create further productive capacity. Illustratively, private sector investment in 2013 should, for

the second consecutive year and the third time during the last five years, shrink by a perceptible margin

in real terms. Moreover, a couple of telling observations can be formulated to cast a more palpable light

into the disconcerting zone in which private sector investment has ploughed itself into. Firstly, the

contraction in investment could stretch to close to some 6% for the current year after excluding the

purchase of marine vessels, which corresponds to a drag-down impact of more than a percentage point

on real GDP growth. Secondly, after discounting for spending on residential buildings, expenditure on

non-residential buildings as well as machinery and equipment is estimated to have, on overall and in

real terms, declined during each and every year covering the 2009-2013 period.

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SHEDDING LIGHT ON THE QUALITY OF THE DOMESTIC BUSINESS ENVIRONMENT

Overview and general implications for investment

Notwithstanding inroads made in buttressing productive capabilities, escalating difficulties faced by

Mauritius in suitably responding to lingering external economic frailties have underlined the sub-optimal

nature of the country’s microeconomic foundations when juxtaposed against the conditions warranted

to meet its socio-economic aspirations in an exigent global context. In general, structural bottlenecks

and limitations to external competitiveness levels are, to some extent, deemed to have stymied the

smooth, broad and cost-efficient unfolding of private and public sector activities in Mauritius. Such

dynamics are also deemed to have inhibited economic sectors in their quest to judiciously leverage on

openings for sustained activity growth, especially in light of chronic efforts deployed by competitor

economies to unceasingly enhance the appeal of their investment and business environments.

Progress made towards the enhancement of the business climate

During the last decade, the Mauritian economy has made appreciable headway in improving the

inherent quality of its business environment. Indeed and as underscored by the IMF, the main structural

reforms executed in support of private sector activities and the country’s economic development thrust

include: (i) consolidation of fiscal performance and improvement of public sector efficiency (e.g.

implementation of fiscal rules, revamping of the tax system in favour of a flat and more simplified

regime, etc.); (ii) enhancement of external competitiveness (e.g. reduction in tariff duties, some

liberalisation of air access, easing of immigration restrictions, relative improvement in the cost and

reliability of Internet connectivity); and (iii) upgrade in the quality of the business facilitation framework

(e.g. fostering of a more effective institutional framework, enactment of legislations pertaining to the

labour market and the insolvency of enterprises, simplification of business registration procedures, and

speeding up of infrastructure investments, notably in relation to the extension of the road and airport

networks). Building on such advances, Mauritius has, with a commendable degree of success, contended

with various episodes of exogenous shocks surfacing over time, particularly the phasing out of the Multi-

Fibre Agreement and the European Union Sugar Protocol during the mid-2000s as well as the unfolding

of the global financial and economic crisis during the 2008-2010 period. Consequently, the country has,

to some degree, fostered its economic development, alongside increasing its prominence

internationally. Reflecting headway in reinforcing its structural capabilities, Mauritius has lately fared

relatively well on various international performance indices, in the process outperforming several high-

income economies and small island developing states. Indeed, the World Bank’s Doing Business 2014

report ranked Mauritius at an encouraging 20th place out of 189 countries and as the best-performing

country in sub-Saharan Africa, with the country being also identified as the best governed nation in that

18

55

region as per the Mo Ibrahim Foundation. Moreover, Mauritius was placed at a striking 8thposition

among 177 countries in the Index of Economic Freedom 2013 of The Heritage Foundation and at a

relatively satisfactory 45th spot out of 148 countries in the Global Competitiveness Index 2013-2014 of

the World Economic Forum.

Sources: World Bank, World Economic Forum, The Heritage Foundation, World Intellectual Property Organisation

Box III: Global and regional rankings of Mauritius as per selected indices

Note: + /- indicates an improvement /deterioration in rank

Rank

(out of

no. of

countries)

Change

from

previous

Rank Change

from

previous

World Bank

Doing Business

Index 2014

20th

(out of 189)no change* 1st no change

Provides quantitative measures of regulations for starting a business,

dealing with construction permits, getting electricity, registering

property, getting credit, protecting investors, paying taxes, trading

across borders, enforcing contracts and resolving insolvency.

Global

Competitiveness

Index 2013-14

45th

(out of 148)+9 1st +1

Captures the microeconomic and macroeconomic foundations of

national competitiveness, comprising different components such as

institutions, infrastructure, labour market efficiency, technological

readiness, business sophistication and innovation.

Index of

Economic

Freedom 2013

8th

(out of 177)no change 1st no change

Based on measures relating to: Property Rights, Corruption, Fiscal,

Government Spending, Business, Labour, Monetary, Trade, Investment

and Financial.

Human Capital

Index 2013

47th

(out of 122)- 1st -

Captures and tracks the state of human capital development across 4

pillars: Health and Wellness; Education; Workforce and Employment

pillar; and Enabling Environment.

Global

Innovation Index

2013

53rd

(out of 142)-4 1st no change

Captures enablers of innovative activities such as institutions, human

capital and research, infrastructure, market and business

sophistication; as well as actual evidence of innovative outputs.

Networked

Readiness Index

2013

55th


Measures the degree to which economies leverage ICT for enhanced

competitiveness, and comprises sub-indexes measuring the readiness

of a society to use ICT; actual usage of all main stakeholders; and

impacts that ICT generates in the economy and society.

Travel & Tourism

Competitiveness

Index 2013

58th

(out of 140)-5 2nd -1

Measures the factors and policies that make it attractive to develop

the Travel & Tourism sector (T&T) and is based on 3 broad sub-indexes

that facilitate or drive competitiveness: the regulatory framework;

business environment and infrastructure; and the human, cultural, and

natural resources.

Global Enabling

Trade Index 2012

36th


Measures the extent to which economies have developed institutions,

policies, and services facilitating the free flow of goods over borders

and to destination, being composed of 4 sub-indexes, capturing

market access, border administration, transport and communications

infrastructure and the business environment.

Logistics

Performance

Index 2012

72nd

(out of 155)+10 4th +1

Takes into account several dimensions: efficiency of the clearance

process by border control agencies; quality of trade and transport

related infrastructure; ease of arranging competitively priced

shipments; competence and quality of logistics services; ability to

track and trace consignments; and timeliness of shipments in reaching

destination.

* Comparable rankings have been recalculated for DB2013 to capture the effects of factors such as data corrections and the addition of 4 economies to the sample

used for DB 2014.

Indicator

Global rankingRegional ranking in

sub-Saharan Africa

Coverage

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Description of domestic imbalances facing the country

In spite of inroads made in enhancing its microeconomic capabilities, the Mauritian economy has, in

recent times, remained exposed to limits on the quality of its productive and competitive positioning.

Illustratively, while due care is called for when investigating and dissecting such indicators, notably due

to possible time-inconsistency and methodological constraints, the following observations and figures

provide interesting insights on performances depicted by the country during the 2002-2012 period: (i)

exports as a percentage of GDP lost several percentage points during this stint; (ii) labour productivity

registered a restrained average annual growth, whilst capital productivity declined over the period; (iii)

multifactor productivity remained virtually unchanged in 2012 and moved up only meagrely during the

past decade; and (iv) unit labour cost witnessed sustained increases over time, as a result of the

evolution of average compensation of employees consistently exceeding that of labour productivity.

Share of exports Key indicators – Total economy

Labour cost v/s productivity in Manufacturing

Sources: Statistics Mauritius & IMF World Economic Outlook – October 2013

Unit labour cost in Manufacturing ‐ International comparison (in USD terms)

Figure 4 Mauritius: Competitiveness and productivity-related indicators

90

100

110

120

130

140

150

2008 2009 2010 2011 2012

Ind

ex:

200

7=10

0

Average compensation of employees

Labour productivity

0

10

20

30

40

50

60

70

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

% o

f GD

P

Exports of goods Exports of goods and services

Labour

productivity

Capital

productivity

Multifactor

productivity

Unit Labour

Cost

2002 1.4 -3.0 -1.1 5.6

2003 5.1 0.6 2.7 3.0

2004 3.2 -0.8 1.0 4.3

2005 2.1 -1.5 0.0 2.1

2006 3.9 0.2 1.7 3.5

2007 4.0 0.2 1.6 7.6

2008 1.8 0.3 0.8 8.1

2009 2.6 -2.4 -0.6 0.7

2010 1.9 -0.9 0.2 1.8

2011 3.2 -1.3 0.3 4.3

2012 1.6 -0.9 0.0 3.1

Annual average

(2002-2012)2.9 -0.6 0.8 3.8

Growth rate (%)

Year

Annual percent change 2008 2009 2010 2011 2012Average

2008-2012

Unit labour costs

Advanced economies 4.1 6.7 -5.3 0.5 1.0 1.4

United States 3.4 3.3 -3.7 0.4 0.1 0.7

Euro area 5.6 10.5 -6.7 -1.0 2.2 2.1

Germany 6.6 21.5 -14.0 -2.4 4.5 3.2

France 3.8 8.1 -1.6 -1.4 1.1 2.0

Italy 7.0 8.8 -3.2 1.9 3.3 3.6

Spain 6.0 0.1 -9.4 -2.7 -3.4 -1.9

Japan 5.7 16.7 -11.6 3.9 -0.8 2.8

United Kingdom 3.0 7.0 -2.8 -0.5 0.4 1.4

Canada 1.2 6.1 -4.6 2.7 1.9 1.5

Other advanced economies1 2.4 0.8 -3.1 1.4 3.0 0.9

Mauritius 21.5 -11.2 4.8 14.4 -0.6 5.8

1 Refer to advanced economies excluding the G7 and Euro area countries

Note: Unit labour cost measures the remuneration of labour per unit of output. It is

affected by changes in both average compensation of employees and labour productivity.

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Reflecting barriers to its productivity and competitiveness levels, Mauritius has faced up to relatively

unfavourable rankings in respect of some specific international performance indices and sub-indices. In

the first instance and despite improving in reference to its ranking for the ‘getting credit’ sub-index as

per the recently released Doing Business 2014 report of the World Bank, Mauritius witnessed notable

downgrades in relation to ‘starting a business’ and ‘dealing with construction permits’, on account of the

country being outpaced by some other nations making good progress to strengthen their business

environment. Furthermore, the Travel and Tourism Competitiveness Index 2013 of the World Economic

Forum ranked the country at the 58th position on the worldwide scale, which represents downgrades of

5 and 18 places relative to the positions held in 2011 and 2009 respectively. Of note, testifying to

inroads made to improve its positioning, Seychelles has stepped ahead of Mauritius as the region’s most

competitive tourism destination. All in all, such developments warrant attention as they can potentially

embed Mauritius into a vicious circle, with stifled investment resulting from hampered competitiveness

levels retarding improvements in the quality of the business climate and future capital spending.

Overview of productivity-hindering structural inefficiencies

The main areas that are, to varying degrees, deemed to be subject to inefficiencies are (i) physical

infrastructure set-up; (ii) public sector operation and service delivery; and (iii) functioning of the labour

market as described in the following figure.

Source: World Bank - Doing Business Report 2014

Figure 5 Ease of Doing Business (DB) rankings

DB 2013* DB 2014

(out of 189 countries) (out of 189 countries)

Ease of Doing Business (overall) 20 20 no change

Starting a Business 13 19 -6

Dealing with Construction Permits 112 123 -11

Getting Electricity 46 48 -2

Registering Property 61 65 -4

Getting Credit 52 42 +10

Protecting Investors 12 12 no change

Paying Taxes 12 13 -1

Trading Across Borders 12 12 no change

Enforcing Contracts 53 54 -1

Resolving Insolvency 62 61 +1

Note: + /- indicates an improvement/deterioration in rank

* Comparable rankings have been recalculated for DB2013 to capture the effects of factors such as data corrections and the

addition of 4 economies to the sample used for DB 2014.

Change

in rank

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Additional constraints to external competitiveness levels

The impact of productivity-hindering dynamics on the country’s macroeconomic performance has been

compounded by specific competitiveness-related issues. Indeed, despite moves to expand and diversify

markets for exports of goods and services – with some benefits being already yielded across the tourism

and textile industries – the relative competitiveness of Mauritius on international markets for good,

services and resources has been somewhat burdened by inadequacies relating to (i) the range and depth

of the value proposition in response to evolving market exigencies; (ii) supply-chain management in

terms of logistics and market access; and (iii) prolonged periods of rupee strength. Notably, the nation’s

in-built competitiveness level has, in recent years and for extended periods, been compounded by rupee

overvaluation relative to the country’s fundamentals, as estimated from IMF methodologies, and as

compared to the currency movements of our international competitors, even though some relief has

been witnessed in the more recent past on the back of more favourable euro/US dollar dynamics on the

international markets. Coupled with dampened external demand, such circumstances exerted adverse

pressures on the revenue generation ability of firms and their investment endeavours.

Key areas marked by productivity-hampering shortcomings

1. Physical infrastructure set-up

• Quality of the road network and nationwide transportation system

• Arrangements for the capture, storage and distribution of water at the national level

• Reliability of electricity supply capabilities given rising demand by households/businesses

• Cost, speed and affordability of internet connectivity and ICT services in relation to conditions prevailing in advanced economies and other

nations such as India and South Korea; utilisation of ICT for fostering the development of other economic sectors and enhancing the

country’s competitiveness

• Physical arrangements at the seaport in alignment with the ambition of Mauritius to act as a transshipment hub, especially for cargo

transiting between Asia and Africa

• Scope and the tapping into of airline connectivity capabilities, notably given the strategy to diversify tourism markets

2. Public sector operation and service delivery

• Reach and quality of institutional support to facilitate business activity, investment and trade

• Underpinnings (notably at the fiscal level) for the promotion of research and development activities by enterprises, the holistic adoption of

innovative/sophisticated practices by the latter as well as the endorsement of effective frameworks (such as clustering) for fostering the

increased efficiency of operations, furthering market development and diversifying exports

• Capabilities for project implementation at public sector level, bearing in mind the availability and quality of human capital, technical

resources and procedural arrangements

• Factors impacting service delivery levels of public sector entities and, in turn, leading in some respects, to cumbersome

bureaucratic/administrative procedures and other constraints to normal business operations

• Functioning and strategic orientations of parastatal bodies when judged in terms of the clarity, coherence and updated nature of the

underlying features and objectives, bearing in mind national economic realities

3. Functioning of the labour market

• Skills mismatch between requirements of employers and labour availability against the backdrop of the increasingly services-based

orientation of the Mauritian economy, with the latter being notably marked by strong demand for skilled workforce, notably in the financial

services , health care, ICT and tourism sectors

• Labour activity rate – calculated as the share of the labour force out of the population aged above 16 – compares very unfavourably with

countries with broadly similar state of economic development as ours and acts as a restraint on efforts to stimulate economic growth (e.g.

the labour activity rate for Mauritius stood at some 60% in the second quarter of 2013, mainly dragged down by a female participation rate

of around 46%)

• Life-long employability and mobility of employees across economic sectors

• Alignment of wage setting mechanisms with labour productivity improvements

• Enrolment rates achieved at the secondary and tertiary education echelons

Figure 6

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55

Box IV: Specific shortcomings related to the country’s productivity and competitiveness levels


Specific aspects warranting the attention of Mauritius

International indices provide insights into specific performance areas in respect of which the Mauritian economy is deemed to lag behindother nations by a non-negligible margin. For the sake of simple selection, only those sub-indices in respect of which the country’sinternational rankings are at or above the 50th position have been chosen, while indices that are not deemed to perceptibly impact thecountry’s intrinsic capabilities have been disregarded.

Component Global Rank

Source

Macroeconomic climate

Gross national savings 100 Global Competitiveness Index 2013-14

General Government debt 92

Tourism

Marine protected areas 101

Travel & Tourism Competitiveness Index 2013

Ticket taxes and airport charges 88

Purchasing power parity (extent to which goods and services in the country are relatively more or less expensive)

58

Fuel price 83

Hotel price 104

No. of international fairs and exhibitions 107

Institutional, regulatory and market environment

Resolving insolvency 61

Doing Business Index 2014

Dealing with construction permits 123

Registering property 65

Enforcing contracts 54

Getting credit 42

Public trust in politicians 66

Global Competitiveness Index 2013-14

Favoritism in decisions of government officials 66

Diversion of public funds 51

Extent of market dominance 81

Prevalence of foreign ownership 67

Domestic market size 114

Foreign market size 107

Local supplier quality 55

Reliability of police services

54

59 Global Enabling Trade Index 2012

57

Travel & Tourism Competitiveness Index 2013 Enforcement of environmental regulation 73

Openness bilateral Air Services Agreements 73

Openness to multilateral trade rules 53 Global Enabling Trade Index 2012

Press freedom 52 Global Innovation Index 2013

Monetary freedom 89 Economic Freedom Index 2013

Infrastructure set-up

Electricity production 77 Networked Readiness Index 2013

Quality of electricity supply 66 Global Competitiveness Index 2013-14

Quality of roads

52

57 Global Enabling Trade Index 2012

58

Travel & Tourism Competitiveness Index 2013 No. of operating airlines 101

International air transport network 56

Airline seat kms/week 69

72 Global Competitiveness Index 2013-14

Quality of domestic transport 62 Human Capital Index 2013

Quality of air transport infrastructure 52 Global Enabling Trade Index 2012

Transshipment connectivity 87

Logistics

Logistics quality and competence 85

Logistics Performance Index 2012

Customs 72

Tracking and tracing 69

Timeliness (reach destination within scheduled delivery time) 52

International shipments 113

Ease and affordability of shipment 107

Global Enabling Trade Index 2012 Efficiency of customs administration 55

Irregular payments in exports and imports 55

Efficiency of the clearance process 70

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Box IV: Specific shortcomings related to the country’s productivity and competitiveness levels (Cont’d)

(cont’d)Innovation and technological readiness

Capacity for innovation

62 Human Capital Index 2013

112 Networked Readiness Index 2013

72

Global Competitiveness Index 2013-14 Quality of scientific research institutions 92

Company spending on R&D 64

Firm-level technology absorption 52


E-participation 96

99

Global Innovation Index 2013

High-tech imports less re-imports 93

High- & medium-high-tech manufactures 91

High-tech exports less re-exports 88

ICT access 65

ICT use 65

Gross expenditure on R&D 68

State of cluster development 58


University-industry collaboration in R&D 94


Government procurement of advanced tech products 75 Global Competitiveness Index 2013-14

74

Networked Readiness Index 2013 ICT use & government efficiency 56

Patents applications/million pop 103


International Internet bandwidth, kb/s per user 83

76

Networked Readiness Index 2013 Accessibility of digital content 83

Intellectual property protection 54

Individuals using Internet

81



79 Global Enabling Trade index 2012

Households with personal computer 68

Networked Readiness Index 2013 Households with Internet access 60

Broadband Internet subscriptions/100 pop.

60



60 Travel & Tourism Competitiveness Index 2013

Mobile phone subscriptions/100 pop

83





Government Online Service 82


Human capital

Current expenditure on education 82

Global Innovation Index 2013 Public expenditure/pupil 83

Pupil-teacher ratio, secondary 75

Knowledge-intensive employment 91

Primary education enrollment 72 Travel & Tourism Competitiveness Index 2013

Secondary education enrollment





Tertiary education enrollment


72 Global Innovation Index 2013



Adult literacy rate 94

Availability of scientists and engineers 90 Global Innovation Index 2013


Quality of management schools

61


53

Human Capital Index 2013 Labour force participation rate, age 15-64 93

Economic participation gender gap 94

Youth unemployment rate 77

Women in labour force, ratio to men 118

Global Competitiveness Index 2013-14 Flexibility of wage determination 104

Hiring and firing practices 67


Ease of finding skilled employees 74 Human Capital Index 2013

Ease of hiring foreign labour 56 Global Enabling Trade Index 2012

Country capacity to retain talent 77 Human Capital Index 2013

92

Global Competitiveness Index 2013-14 Pay and productivity 65

Availability of specialised training services

63


74 Global Innovation Index 2013


Hospital beds/10,000 pop. 53


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DESIRED POLICY ORIENTATIONS FOR SPEARHEADING INVESTMENT TO SUPERIOR LEVELS

Capital formation in the country can be boosted in a number of ways. The following sections provide

indications of the main routes through which public and private sector investment can be stimulated.

Promoting the comprehensive and speedy execution of public sector investment

Curbing the disconnect between the announcement and materialisation of projects

Alongside ensuring that earmarked undertakings unfold in a widespread and cost-effective mode, the

upgrade of the technical, logistics and human resource capabilities at the level of the Government

should help in bridging the particularly worrying gap existing, for some time now, between the

announcement and realisation of major public sector projects. Importantly, efforts to tackle bottlenecks

to project implementation should inter alia seek to improve the viability of project planning and

engineering design at the conceptualisation phase, while avoiding project plans that are of sub-par

quality and lack attention to detail. Moreover, blockages during the tendering phase of ventures should

be minimised, while the award of projects should, as far as possible, be achieved, as per set targets,

backed by the adoption of effective dispute resolution processes and best-in-class procurement

practices. All in all, the smooth deployment of public sector investment can be supported by adherence

to global norms of risk management in spending as well as a strengthening of the national statistical

capacity so that project execution is founded on enhanced data reporting, management and analysis.

In the same vein, upholding headway already made in that respect, the quality of public investment

management should be further improved to allow for the undisturbed unfolding of sizeable and multiple

capital undertakings within set timeframes and budgets, alongside triggering the required efficiency

levels that would help to generate appreciable returns for businesses and the general public.

Underscoring the need for Governments to “invest in the investment process”, a study conducted by the

IMF titled “Investing in public investment: An Index of Public Investment Efficiency” defined the

proficiency of the process underpinning investment as the “… country capacity to carry out technically

sound and non-politicized project appraisal and selection, appropriate mechanisms for implementation,

oversight, and monitoring of investment projects, and ex-post evaluation”. In fact, the four major

chronological stages of the investment process relate to the following: project appraisal, selection,

implementation and evaluation. Backed by adoption of smart processes/controls and improved

institutional capacity, a strengthening of capabilities to carry out such exercises in an ingenious way

should yield efficient investment decisions.

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55

Crafting out well-structured Public-Private Partnerships (PPPs)

After having been utilised as a tool for economic development in advanced economies for some time

now – e.g. the United Kingdom first established its Private Finance Initiative back in 1992 – Public-

Private Partnerships (PPPs) are increasingly leveraged by emerging and developing counties to bring

about much-needed upgrades in their public infrastructure set-ups due to mounting utilisation backlogs

and as a means to facilitate their integration in the increasingly competitive and globalised world

economy. For Mauritius, building on progress being achieved by the authorities in this respect and

backed by the development of an effective institutional and legislative support, the recourse to PPPs

should be accelerated to ensure that moves to strengthen and modernise the delivery of public

infrastructure and services are embarked on in a cost and time-efficient fashion. In effect, besides

making provision for a wider pool of financial resources, the appeal of a thoughtfully-shaped PPP is that

it enables the public sector to access the project management skills, discipline and expertise of the

private sector, thus assisting in getting projects built to time and budget as well as creating the correct

disciplines and incentives on the private sector to effectively manage risk. On a different note, given that

Box V: Key sequential aspects characterising public investment management

1. Strategic Guidance and Project Appraisal

• Nature of strategic guidance and availability of sector strategies

• Transparency of appraisal standards

• Observed conduct of ex ante appraisals

• Independent review of appraisals conducted

2. Project Selection and Budgeting

• Existence of medium term planning framework and its integration to the budget

• Inclusion in budget (or similar) for donor funded projects

• Integration of recurrent and investment expenditures in budget

• Nature of scrutiny and funding supplied by legislature, including its committees

• Public access to key fiscal information

3. Project Implementation

• Degree of open competition for award of contracts

• Nature of any complaints mechanism relating to procurement

• Funding flows during budget execution

• Existence and effectiveness of internal controls, such as commitment controls

• Effectiveness of system of internal audit

4. Project Evaluation and Audit

• Degree to which ex-post evaluations are conducted

• Degree to which external audits are produced on a timely basis and scrutinised by the legislature

Source: Dabla-Norris, Brumby, Kyobe, Mills & Papageorgiou; Investing in Public Investment: An Index of Public Investment Efficiency; IMFWorking Paper, February 2011

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they are often quite complex and time-consuming, it is important that the design and structuring of

PPPs be undertaken in a competent manner so as to create propitious conditions to reap significant

benefits for the national economy, while upholding satisfactory levels of transparency in respect of the

financial performance of projects and returns made by private investors. In specific,

specialised/proficient contract drafting and monitoring skills should be continuously nurtured on the

part of the Government, while emphasis should be staunchly laid on conducting feasibility studies that

inter alia (i) address the issues of affordability, value for money and risk transfer; (ii) consider the rate of

return on equity acceptable to relevant parties; and (iii) give due allowance to pertinent financing

options before committing to a particular model.

Policies advocated to boost private sector investment

Designing a comprehensive and ambitious blueprint for stimulating investment

The endorsement of a clearly-defined national investment strategy by all stakeholders is deemed

primordial in order to trigger a perceptible rise in domestically-sourced and foreign direct investment in

Mauritius over the medium to long term. The plan should be backed by the formulation of quantitative

and qualitative goals that are supported by a clear and meticulous road-map that explains the nature,

level, focus and schedule of investment being targeted. In general, the major strategic themes that can

be contemplated include: (i) evaluating the orientations and requirements of the global investment

climate, notably in terms of factors and empirical developments impacting the level and location of

capital movements across countries and regions; (ii) appraising internal economic challenges in relation

to the infrastructure set-up, the regulatory environment and the overall business development

framework amongst others; (iii) gauging the strengths and weaknesses characterising the domestic

economy and its activity clusters before ascertaining the appropriate areas of opportunity and potential

where investment can be channelled; (iv) identifying the attractiveness of different types of

international investment (e.g. corporate greenfield investments, expansion of existing FDIs and joint

ventures) for the country, towards determining the proper promotion and management approach to be

embraced; (v) identifying and prioritising the needs for infrastructure upgrades given internal capacity

utilisation excesses and external competitiveness imperatives; and (vi) fostering an adequate

delimitation and coordination of the roles and responsibilities of public and private sector stakeholders

to ensure consistency in approach and purpose through all stages of the investment process.

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Box VI: Case study of Malaysia’s New Economic Model

The benefits of embracing and implementing a new economic paradigm with a view to stimulating investment and growth have

been remarkably highlighted in the case of Malaysia, which provides a good basis for comparison with Mauritius by virtue of it

being an upper middle-income country with elevated exposure to the international scene.

Unveiling of all-inclusive prototype for spurring socio-economic development

In the wake of successive external shocks, the real GDP growth pattern of Malaysia posted a marked deceleration during the early

and mid-2000s, to a notable extent explained by subdued trends in capital formation by the private sector and the sub-optimal

business facilitation framework. As a response, the Government unveiled a New Economic Model (NEM) in 2010. While being

both holistic and coherent in its approach, the NEM provides a conceptual macro-plan and outlines eight broad strategic reform

initiatives (and corresponding policy purposes) for unlocking private and public investment, driving labour and capital

productivity, and boosting market efficiency. The aim is to transform Malaysia into a developed and competitive economy whose

people enjoy a high quality of life and a high level of income resulting from inclusive and sustainable growth. As a landmark plan,

the Economic Transformation Programme (ETP), which is anchored in the NEM, contains ambitious and wide-ranging moves to

assist the country in doubling its per capita income to at least USD 15,000 and in achieving high-income status by 2020.

Key benefits being reaped from rejuvenated economic directions

The execution of the ETP has been viewed as a success so far. Indeed, private investment has, in recent years, been propelled by

the catalytic effects of projects identified under the ETP and a relative upgrade of the business environment, with the country’s

global ranking in the 2014 World Bank Ease of Doing Business Index improving markedly to reach the 6th spot. Consequently,

Malaysia experienced a perceptible and sustained uplift in its economic growth achievement over time. Thus, outpacing

neighbours such as Singapore, South Korea and Taiwan, Malaysia has bucked global trends and posted strong growth of above 5%

in 2012 as per the IMF, supported by noticeable public and private sector investment. In the process, the unemployment rate

remained quite low, while the fiscal position of the Government stayed solid. For 2013, with gross domestic investment being

estimated at just below 30% of GDP, the robust pace of growth is expected to be upheld. Besides, barring major shocks, the

country should also fare commendably well during the medium term, with domestic demand propelling activity levels and

inflation remaining benign.

Key tenets of the New Economic Model

Enabling foundations

Strategic Reform Initiatives

Goals/Expected Outcomes Strong political will

Getting key stakeholders to drive change together

Targets USD 15,000-20,000 per capita by 2020

Enables all communities to

fully benefit from wealth of the

country

Meets present needs without compromising

future generations

High income

InclusivenessSustainability

Quality of life

1. Re-energising private sector

2. Developing quality workforce

3. Competitive domestic economy

4. Strengthening public sector

5. Transparent & market friendly affirmative action

6. Building knowledge base infrastructure

7. Enhancing sources of growth

8. Ensuring sustainability of growth

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Towards maximising dividends stemming from the execution of the national investment strategy, it can

be helpful to consider the creation of a resourceful and clearly-mandated Public Private Dialogue

mechanism. The latter can provide a participative and inclusive platform that can be utilised for (i)

uncovering solutions in respect of factors impending business functioning, and (ii) identifying appealing

activity areas where efforts can be canalised/centralised for boosting capital formation.

Upholding the prevalence of a stable and rewarding macroeconomic environment

Private capital formation and FDI can be spurred by nurturing and entrenching macroeconomic

conditions that offer sufficient comfort to operators insofar as the orderly deployment and viability of

their undertakings are concerned. Notably, while steering away from any inconsistencies and reversals

in respect of the strategies being put into place, the country’s economic management should be

anchored on stable foundations, thus contributing to steady performances as regards the real, fiscal,

financial and external sectors of the economy. Such stances will, in fact, maintain the stability of the

investment climate as well as the predictability, real and perceived, of returns on investment, while

allowing operators to function in an environment that enables better risk management. Beyond,

tangible evidence of the authorities’ commitment to unremittingly strengthen the ability of the country

to endure global shocks and take due competitive advantage of growth-enhancing avenues over time

should help to attract and retain investors, to the extent that the return being anticipated from across

various areas of activity should, in such circumstances, turn out to be quite appealing. As such, an

ambitious medium to long term economic vision should be embraced at the national level. In effect,

backed by specific enablers that include an extension of our seaport and airline connectivity to foreign

markets, the adequate monitoring of exchange rate dynamics and the suitable usage of economic

diplomacy, appropriate attention is warranted for (i) consolidating established sectors and fostering the

emergence of new segments; (ii) accelerating the diversification of our export markets; and (iii)

widening the scope and depth of our regional integration and involvement, while positioning Mauritius

as a competitive regional services pole for business and finance activities.

On another front, a broadening of the nationwide income creation capacity is called for towards

triggering a rise in the national savings ratio and, thus, providing suitable resources for boosting private

capital spending. In fact, policy orientations being traditionally advocated to encourage savings need to

be carefully assessed since, they could, when executed in isolation, not yield the full extent of desired

results insofar as the stock of savings in the economy is made up not only of household savings, but also

of Government savings and corporate savings. Thus, alongside recognising the pertinence of

encouraging savings by households through specific microeconomic measures and incentives, it is

important that a business-friendly and accommodative economic policy stance be endorsed by the

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authorities, which should help to underpin corporate financial performances and promote investment

undertakings. This stance is particularly warranted since, as per our estimates, corporate savings – which

act as the main contributor of total savings in the country – has seen its share of GDP declining by some

six percentage points over the 2007-2012 period, despite national output itself expanding at a

restrained pace, while the corresponding ratio for household savings treaded into slightly negative

territories during this period.

Tackling impediments to total factor productivity and enhancing the business climate

Essentially, the adoption of far-reaching, deep-rooted and coherent structural reforms can contribute to

buttress private investment by reducing inhibitions to the unfolding of productive activities and raising

the return attractiveness of projects. In respect of the public infrastructure network, a more

comprehensive and rapid execution of the Road Decongestion Programme is particularly called for

towards combating transport bottlenecks, with actions undertaken for that effect to be coordinated

with the prospective deployment of the earmarked Light Rail System so as to maximise the efficiency of

expected outcomes for end-users. Besides, further actions to boost the country’s productive capacity

are warranted for: (i) fostering more integrated, extensive and efficient seaport facilities; (ii) reinforcing

water storage, distribution and usage capabilities; (iii) increasing the reliability of electricity supply; (iv)

enhancing the speed and reliability of Internet connectivity, while further reducing the cost of access;

and (v) improving the scope and tapping into of airline connectivity capabilities. Moreover, the reform of

the labour market should remain as a prerequisite for policy-makers in an attempt to increase

nationwide job creation and labour activity rates as well as optimise the productivity of the employment

force. To achieve such objectives, key initiatives include: (i) realising increased enrolment rates and

improved educational attainments at the primary, secondary and tertiary levels as well as in the

vocational sphere; (ii) formalising collaboration between private businesses and educational institutions

towards devising learning sources and formal curricula that are attuned to the current and future

requirements of economic sectors and operators; (iii) increasing women participation rates in particular;

(iv) improving the country’s openness to foreign expertise with respect to highly-skilled jobs as well as

ensuring that sectors recruiting employees from abroad – such as construction and textiles – are not

unduly burdened by excessive regulations and policies; (v) enhancing the national wage-setting policy

and mechanisms to make sure that salary adjustments are based on sound principles, with a key

requirement being productivity growth; and (vi) promoting the movement of labour from low-

productivity sectors into dynamic activities with high-growth potential, by notably ensuring effective

information dissemination and devising adequate re-skilling programmes.

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Upgrading the range and quality of direct public sector support and involvement

At another level, the costs of undertaking investment can be lowered. For instance, towards curtailing

excessive administrative burdens on ventures, the quality of public sector service can, to a noticeable

extent, be increased by catering for a broad-based efficiency-oriented re-engineering of the organisation

and operation of parastatal bodies as well as extending the range of e-services provided to businesses.

Besides, alongside building further capacity in agencies involved in market regulation, contract

enforcement and dispute settlement for example, the range of procedures related to the investment

process (e.g. fees applied, permits required, etc.) can be streamlined by, for example: (i) adopting a full-

fledged rules-based approach to duly enforce existing policies; (ii) creating dedicated authorities to

reduce the number of procedures and regulatory bodies involved in respect of the allocation of

construction permits; and (iii) fostering the enforcement of contracts and dealing with insolvencies.

Furthermore, the incentive framework meant to support enterprises, notably innovation-driven start-

ups and SMEs, needs to be enhanced. As such, dedicated logistics, human capital and export

development incentives can be offered by the authorities to induce business operators to invest across a

wide range of economic sectors, while strengthening their capacities to suitably respond to new

business opportunities, notably those spawned by international trade and the forging of partnerships

with foreign entities. In the same vein, the provision of specific enticements to firms in order to

stimulate their spending on research and development can help to buoy up investment, as such moves

can support the viability of related productive activities, by harnessing their capacity to innovate by

adopting new technologies in respect of their products and processes.

Elsewhere, reinforcing the quality of the institutional set-up is of paramount importance in prompting

capital formation by businesses. In particular, public sector agencies should be fully equipped – in terms

of their financial resources, technical know-how and organisational set-up essentially – to implement a

harmonised and articulate operational framework for coordinating an effective design and

implementation of investment promotion activities. The latter should be well assimilated into national

and sectorial policies put in place for upholding economic growth, while laying due focus on target

sectors, technologies, participant roles as well as essential infrastructure investment priorities.

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CONCLUSION

Mahatma Gandhi once said: “A small body of determined spirits fired by an unquenchable faith in their

mission can alter the course of history.” As such, there is a pressing need for the Mauritian economy to

display the right mix of determination, boldness and assurance to combat its internal shortcomings, go

aboard an assertive recovery path, and achieve continued socio-economic prosperity, particularly at a

juncture when global economic challenges are showing no tangible signs of conclusive healing. On the

international scale, there are even assertions, in some quarters, that the “low-hanging fruit of easy

growth” has already been consumed and that the slowdown in productivity growth observed over the

past few decades has become the “new normal”, thus underscoring the necessity for adopting

comprehensive and innovation-driven policies that are friendly for long-term growth. As per a recent

publication by the McKinsey Global Institute, countries having tackled microeconomic barriers to capital

spending have achieved significant productivity and investment gains. For instance, after Sweden eased

planning laws in retail during the 1990s, the sector posted the strongest productivity growth of any

retail sector in Europe and the US between 1995 and 2005. For its part, the IMF stated that for countries

to achieve higher growth rates, they must enhance their competitiveness by fostering high productivity

levels and business environments that help firms rather than put obstacles on their way.

As for Mauritius, while quality capital outlays by the Government are also sought for, private sector

investment, which can be viewed as the most viable means to achieve long-term growth, should be

revived on a large scale in the country. Fundamentally, the underlying macroeconomic attributes that

contributed to the socio-economic progress of Mauritius in recent years should be maintained. In

particular, the prevailing low, flat-rate, simple, transparent and predictable income tax regime should be

upheld, as a prerequisite for preserving business confidence and spurring investment, notably FDI, which

are central to the realisation of our growth and employment-creation ambitions amidst the persistently

tough global economic climate. Furthermore and as part of a pro-growth strategy, microeconomic

activism, which can be defined as the targeted involvement by the Government to duly address the root

causes of barriers to investment, should be actively promoted. Besides, underpinned by the right level

and quality of partnership between the public and private sectors, actions undertaken for eliminating or

curtailing structural impediments to capital formation should be anchored on solid economic

management. To that end, the real or perceived limitations to policy implementation should be

thoughtfully tackled, which is tantamount to fostering an effective application of the Lagrangian method

of constrained optimisation as economists could put it in their very own intricate way.

J. Gilbert Gnany

Group Chief Strategy Officer and Advisor to the Board

October 30, 2013

http://www.brainyquote.com/quotes/quotes/m/mahatmagan160841.html

http://www.brainyquote.com/quotes/quotes/m/mahatmagan160841.html

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ANNEX

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A model of investment and growth

Definitions and general framework

The model builds on the perpetual inventory method and on stylised facts from the growth literature to

derive a relation between the investment ratio and the growth rate of the economy. The parameters

used in the model are defined as follows:

Y GDP at constant prices

K Capital stock at constant prices

I GDFCF at constant prices

Depreciation rate of the capital stock

g Real GDP growth (in steady state)

In addition, following standard notation, a subscript used in combination with a given parameter is used

to denote the latter's value in the time period represented by the subscript.

The general framework of our model rests on two main principles:

(a) the perpetual inventory method, which is specified in the equation below:

1)1( ttt KIK (1)

According to this approach, the capital stock at a given time period is equal to the capital stock that has

survived from the previous period, that is net of capital that has been depleted, plus any new

investments in capital. The capital depreciation rate is here assumed to be constant over time.

(b) the stylised fact of growth that the capital-output ratio is constant in steady state. Thus in

steady state, we have

*

1

1

Y

K

Y

K

Y

K

t

t

t

t (2)

Where is the steady state value

*

Y

K

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Derivation of the model equation

Dividing equation (1) throughout by Yt, we have

t

t

t

t

t

t

Y

K

Y

I

Y

K 1)1( (3)

Using the growth equation Yt = (1+g) Yt-1 in (3) gives

1

1

)1(

)1(

t

t

t

t

t

t

Y

K

gY

I

Y

K (4)

The steady state relationship (2) comes in handy at this point in that it transforms equation (4) into

**

)1(

)1(

Y

K

gY

I

Y

K

t

t (5)

Hence,

*

1

Y

K

g

g

Y

I

t

t (6)

Given the rate of depreciation and capital output ratio in steady state, we can thus express the rate of

growth of the economy in steady state as a function of the investment ratio. The next step therefore is

to ascertain and

Estimation of

A regression is run on:

1)1( ttt KIK (7)

which is the perpetual inventory method equation (1) augmented with representing white noise.

However, given that only index values for the capital stock are available, some adjustments are required

to effectively run the regression. Given that the capital stock at time t, Kt = KI ,t where KI ,t is the index

value of K at time t and is a constant factor converting the indices into absolute values, (7) can be

rewritten as

1,, )1(

1tIttI KIK (8)

Using time series data at constant 2007 prices for the 1990-2012 period, the following results are

obtained from Ordinary Least Squares (OLS) estimation on (8):

*

Y

K

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1

^

95.00002.0 ttt KIK

The test statistics indicate that the coefficients are statistically significant to above 99.9%, providing

support to our assumption of a constant depreciation rate, which the regression estimates at around

5%.

The capital-output ratio in steady state

The transformed model enables the estimation of the value of the capital stock and thus of the capital-

output ratio at constant 2007 prices. The following chart illustrates the evolution of this ratio over the

period 1990-2012 which provides useful insights on its steady state value, as inferred from the

parametres of the model.

1.5

2.0

2.5

3.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

2012

Capital output ratio

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SOURCES

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55

Bank of Mauritius, Various Publications

Conley & Dukkipati, Leading from behind in public-private partnerships, An Assessment of European

Engagement with the Private Sector in Development, Center for Strategic & International Studies,

February 2012

Dabla-Norris, Brumby, Kyobe, Mills & Papageorgiou; Investing in Public Investment: An Index of Public

Investment Efficiency; IMF Working Paper, February 2011

Farlam P., Assessing Public-Private Partnerships in Africa, The South African Institute of International

Affairs, Nepad Policy Focus Series, February 2005

HM Treasury, A new approach to public private partnerships, December 2012

IMF, Article IV Consultations Reports for Mauritius; World Economic Outlook Online database,

October 2013

Lindsey B., Why Growth Is Getting Harder, Policy Analysis Paper No. 737, Cato Institute, October 2013

MCB Focus, Previous issues: No, 15 and No. 19 & others

McKinsey Global Institute, Investing in Growth: Europe’s Next Challenge, December 2012

OECD, India - Sustaining high and inclusive growth, ‘Better Policies’ Series, October 2012; Promoting

Private Investment for Development –The role of ODA, 2006; Economic Policy Reforms - Going for

Growth issues

Statistics Mauritius, Economic & Social Indicators

Selected Internet and Newspaper Articles

Roxburg, Labaye, Thompson, Tacke & Kauffman, Investing in growth: Europe’s next challenge,

The Heritage Foundation, Index of Economic Freedom 2013

World Bank, Doing Business Report 2014; Logistics Performance Index 2012; World Development

Indicators database; Public-Private Partnerships - Reference Guide

World Economic Forum, The Global Competitiveness Report 2013–2014; The Travel & Tourism

Competitiveness Report 2013; The Global Information Technology Report 2013; The Global Enabling

Trade Report 2012; The Human Capital Report 2013

UNCTAD, Transnational Corporations, Volume 10, No. 1, April 2001; Investment and Innovation Policy

Review of Ethiopia, 2002

World Intellectual Property Organisation, Global Innovation Index 2013; Global Innovation Index

2012, Chapter 2 - The role of public-private partnerships in driving innovation

MCB Strategy, Research & Development, Staff Estimates

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Mauritius Inc. The Challenge of Investing in Growth