Posts Tagged ‘manufacturing’

Notes from Africa 4: Mauritius

June 16, 2022

A series of notes from the world’s developmental frontier

Mauritius is an island roughly 60 kilometres long and averaging just over 30 kilometres wide, located 850 kilometres east of Madagascar in the Indian Ocean. It is also the most complete and equitable economic development success story in Africa.   

Mauritius was uninhabited prior to the arrival of Europeans. Its original connection to the African continent was the importation by the French in the 18th century of slaves from Madagascar and Mozambique to work sugar plantations that dominated the colonial economy. In 1810, the British took Mauritius to prevent it being used as a base for attacks on British shipping. French sugar growers were left to carry on, except that from 1835 slavery was prohibited; over the next 70 years, 450,000 Indian labourers were imported to replace the African slaves, on harsh contracts termed indentures. By the time of independence in 1968, this meant that half the population was Hindu Indian, one sixth was Muslim Indian, 30 percent was Creole (as the descendants of the slave population are known), and small fractions were French and Chinese.

Political tensions were high around independence. Franco-Mauritian sugar barons believed they would be subjected to Hindu political hegemony after the British left and their capital was moved off the island; the Creole population also feared Hindu political dominance.  It was in these circumstances that Mauritius’ first premier, Seewoosagur Ramgoolam, set out to forge a developmental coalition.

Senior political figures representing Franco-Mauritian and Creole interests were invited to join the post-independence cabinet. Ramgoolam, an avowed socialist, embraced several institutions that linked government to the private sector dominated by the Franco-Mauritian elite. The most important was the Joint Economic Council (JEC), a forum in which key political and business leaders met on a regular basis, usually at the prime minister’s office. The tone was set for a developmental state in which government and private sector were partners, albeit with the government as the dominant partner.

A compromise with sugar

The biggest issue between Ramgoolam’s Labour Party and the Franco-Mauritian elite was how the post-independence government would deal with the sugar estates that dominated Mauritius’ economy, exported their profits and did little to address the island’s chronic unemployment. In the 1950s, many in the Labour Party favoured nationalisation of the farms of the so-called ‘sugar barons’. However, in the context of the coalition Ramgoolam found a more subtle but developmentally effective approach. His government created a Mauritius Sugar Syndicate as the sole sugar exporter, repatriating all proceeds which were not permitted to be invested offshore. And a tax on gross sugar receipts was introduced, initially at 5 percent.

Concurrently, incentives were established to encourage the sugar barons to invest in labour-intensive manufacturing. An Export Processing Zone (EPZ) – one without geographic limits – was created. Any approved factory enjoyed duty-free import of equipment and components and extremely generous income tax concessions for 20 years. The right to unionise was denied, unlike in all other parts of the economy, and the minimum wage was set lower than outside the EPZ. The prospect of tax-free earnings from manufacturing was combined with steady increases in the tax on sugar receipts, which rose from the initial 5 percent to a peak of 23.6 percent in the 1980s.

The fiscal environment meant there was no sense in new investment in sugar (except for smallholders who were exempt from the tax). Sugar barons had already dabbled in local non-sugar businesses prior to independence under a tariff protection scheme designed to reduce imports and foster local industry. They therefore confronted the export-oriented manufacturing promoted by the EPZ with a modicum of experience outside the sugar business. The key to the EPZ was Mauritius’ quota-free and duty-free access to European Economic Community (EEC) markets, which the island was granted from June 1973 under the EEC’s Yaoundé (later Lomé) convention for former African colonies.

The Mauritian government’s promotion activities drew a small number of mostly Hong Kong and French garment firms to invest in early EPZ factories. The sugar barons offered themselves as local partners with cash to invest. After the first year of the zone, six factories were operating, with 640 workers.  By the end of 1976, there were 85 EPZ factories with 16,404 workers, representing the beginnings of a revolution in employment fortunes in Mauritius, which experienced unemployment rates in excess of 20 percent. Knitwear was the dominant product.

The dawn of full employment

The Mauritian economy experienced a crisis brought on by excessive government spending and the second global oil shock at the end of the 1970s and start of the 1980s. However, the attraction of the local garment sector to international investors seeking diversification of production operations, plus a local economic elite pushed by government and fiscal incentives to invest in garment factories, kept the manufacturing sector growing. Indeed, the 1980s turned out to be its boom decade.

During the 1980s, the original woollen knitwear business expanded to a point where Mauritius became the third-biggest exporter in the world. Meanwhile, clothing companies responded to rising costs by becoming more capital-intensive and integrating vertically – larger firms began to make and dye their own fabric in Mauritius. The product range expanded to include everything from shirts to fine-knit items like jogging pants.

By the end of 1990, when the population was one million, there were 89,906 workers employed in 568 EPZ firms — nine out of ten of them in apparel and textile factories. Across its economy, Mauritius had the highest share of EPZ employment of any country in the world. One third of Mauritian workers were employed in EPZ businesses, compared with 10 percent in Singapore, 4 percent in South Korea or 2 percent in Malaysia. The EPZ alone accounted for 12 percent of GDP while sugar-dominated agriculture was 10 percent, down from one quarter in 1970. Unemployment was less than 3 percent.

Across the period from the inception of the EPZ in 1970 through 2000, Mauritian GDP rose by an average 5.8 percent a year, increasing from less than US$300 to US$4,000 per capita. Meanwhile, the rise of manufacturing helped Mauritius become a far more equal society than fellow fast-growth story Botswana because it offered opportunities to almost all Mauritians of working age, not least women. The Gini coefficient of income inequality, where one represents perfect inequality and zero perfect equality, decreased from 0.5 in 1962 to 0.42 in 1975 and 0.37 in 2000 — the latter on par with Taiwan, the economy whose development produced the lowest income inequality in East Asia. By 2000, Mauritius had almost no poverty by World Bank measures.

Manufacturing is special

The impulse to greater income equality delivered by the rise of manufacturing was complemented by policies in agriculture to support smallholder famers. In addition to the exemption from the sugar tax for producers of less than one thousand tonnes per year, government required sugar mills to give smallholders an improved share of sugar extracted from canes and sugar estates to provide parcels of land, as well as cash payments, to any workers laid off. The policies contributed to a degree of social mobility among smallholder farmers and estate workers that did not previously exist.

Subsequent to the garment and textile boom, what were once pure sugar businesses expanded into diversified conglomerates, the largest with turnovers of hundreds of millions of dollars a year. Mauritius, although still an island of only 1.3 million persons, offered or created opportunities in hotels, luxury real estate for wealthy foreigners, offshore financial and information and communications technology (ICT) services, and more. Government continued to support diversification efforts. Mauritian GDP per capita maintained its ascent, from less than US$300 in 1970 to US$11,000 in 2019.

The island’s annual GDP growth from 1970 to 2019 averaged 5.2 percent, or 4.4 percent per capita — compared with 1.3 percent per capita across sub-Saharan Africa. Growth with social equity saw Mauritius rise to ‘high-level’ status on the United Nation’s Human Development Index (HDI) as early as 1996. HDI combines GDP growth with progress in education and life expectancy to give a broader measure of human welfare. Today, Mauritius is the only country in Africa – including north Africa – to be ranked at the topmost ‘very high-level’ by HDI score.

Although the share of manufacturing in Mauritian GDP declined rapidly in recent years, falling from a peak of more than 20 percent in the 1980s to just 11 percent in 2020, its role in the rise of Mauritius cannot be overestimated. As the economist Dani Rodrik showed*, manufacturing is the only sector of an economy that provides an automatic ‘escalator’ for increasing productivity levels. Consequently, only those developing economies which built substantial manufacturing sectors exhibited the unconditional convergence with productivity levels of rich countries that orthodox economics assumes will happen in any poor country with access to global technologies.

Mauritius is unique in Africa for having used a manufacturing strategy to lift itself from poverty to rich-world living standards in just two generations. An agricultural policy that supported smallholders while redirecting capital from large sugar estates to garment manufacturing was the necessary precondition. The lesson about the special role of manufacturing in developing countries ought to be clear to every African state. And yet the continent has almost no other examples of governments developing and deploying coherent manufacturing strategies.

*Rodrik, D., 2013, ‘Unconditional convergence in manufacturing’, The Quarterly Journal of Economics128(1).

A good car while it lasted

January 2, 2019

Subaru passing

Parked up and went for a walk on the beach on the Isle of Wight after Christmas. When we came back the car was not quite as we left it. There had been a small fire in the engine, of which there was no sign when we set off. The fire brigade, who kindly turned up while we were walking on the beach and wondering where all the black smoke was coming from, said it is not the first time they have seen this.

I had wanted to get rid of the car for some time, as I almost never use it. My wife is less pleased. Still, when it is time to go it is time to go, and I like to think that the Subaru’s soul is now in car heaven.

This post really isn’t about development, but I am hoping it might encourage me to start blogging again.


Is Indonesia different?

August 2, 2013

Below is a critique of How Asia Works with specific reference to Indonesia. Indeed there is a second part of the critique that you can track down via the Lowy site. I am just posting the first part and, underneath it, rejoinders to the main points it makes.


Indonesia’s development formula

by Stephen Grenville – 25 July 2013 11:10AM

I share Sam Roggeveen’s enthusiasm for the iconoclastic approach of Joe Studwell’s How Asia Works (his previous book on Asian Godfathers was a great read too). I also share Studwell’s scepticism about the ‘magic of the market’, his views on the IMF, and his admiration for the achievements of the South Koreans.

But I’m unconvinced by Studwell’s three-step development prescription, not because it is intrinsically wrong but because it is too hard to implement successfully.

The Koreans might have done so, but the strategy requires a level of sustained administrative competence, single-minded toughness and luck which are rare. Just as important, there are alternative development strategies, less demanding of skilled policy-making and administrative competence. The growth outcome won’t match Korea’s, but will be more feasible for countries like Indonesia (which Studwell sees as a development failure).

Let’s go through the three elements of the Studwell strategy. The first stage requires land reform and a boost to agricultural productivity.

It’s an old and sensible idea that agriculture has to provide the investable surplus which will propel the rest of the economy along the path of development. Fifty years ago, Clifford Geertz (Agricultural Involution) despaired about Indonesia’s failure to follow the example of Japan, which shifted surplus agricultural labour into factory work to create a modern urban/manufacturing sector. This failure would lead the excess population to atrophy, farming progressively more Lilliputian plots.

But things turned out better. With the average size of farms on Java around half a hectare, the opportunity for land reform couldn’t play the key role that Studwell advocates. But Soeharto, with his roots in agriculture, gave rice production high priority (extension services, high-yield seeds, fertilizer, pesticides and attractive terms-of-trade between agriculture and urban consumers via an active price stabilisation authority). Not very free-market, but big yield increases and self-sufficiency were speedily achieved.

What about a vigorous industry policy, the second Studwell requirement? Despite inheriting the usual disaster story of failed prestige projects from Sukarno, Soeharto was ready to have a go at ‘picking winners’.

Cement, fertilizer, textiles, paper production, food processing and petroleum refining all fitted Indonesia’s comparative advantage and made sense. Others were less defensible: Krakatau Steel,Tommy Soeharto’s national car and Ibnu Sutowo’s tankers. Habibie‘s IPTN aeroplane fits the Studwell strategy and might have succeeded if it hadn’t been stopped by the Asian crisis: ex-aeronautical engineer Habibie was well-qualified to lead this project, plane construction is quite labour-intensive (all those rivets) and the Indonesian archipelago needs lots of them (one airline recently ordered several hundred in one hit).

Whether IPTN would have succeeded is not the issue here: the point is that Indonesia, for better or worse, did try the sort of hot-house industrialisation Studwell advocates, and the IMF wasn’t able to stop this, at least until the 1997 crisis. Planning retained a central role, just as Studwell wants, and state-owned enterprises did the government’s bidding. Where Indonesia had comparative advantage, this often worked out well, and where the industry didn’t suit Indonesia’s attributes, generally it was a failure.

Indonesia’s development experience doesn’t fit the Studwell formula. Java’s rice production has done well without relying on his key element of land reform, and industry policy based on domestic entrepreneurship has been tried without much success.

Governments attempting to steer the process of development need effective administrative capacity; in a follow-up post, I’ll expand on the idea that market failure is common enough, but so too is government failure.

Joe Studwell’s response:

1. I doubt, contra Mr Grenville, that there is some arbitrary minimum land holding that makes land reform unworkable. If this were the case, then the micro-plots of a few tens of square metres championed by groups like Landesa would make no sense, when historical evidence around the world shows that privately-held micro-plots produce very high yields.

I am presently up my hill in Italy, and using a very slow Internet connection, and so cannot readily check the average Javan landholding. I assume Mr Grenville means that the average Javan landholding is half a hectare now, and would therefore be less after land reform. (The average land holding in most parts of China, Japan, ROK, and Taiwan after land reform was roughly half a hectare.) If my understanding is correct, my response is that Java has some of the best soil and climate conditions in the whole of east Asia, and so even smaller plots should be more than viable — if indeed size matters at all in a downward direction, a question which I think deserves real scrutiny.

Mr Grenville is correct that yields on Java are high by south-east Asian standards. The rice yield is over five tonnes per hectare. However this is still less than the average in north-east Asia. Given its soil and climate, it would not surprise me if north-east Asian style household farming could produce as much as 9 tonnes per hectare on Java — about as high as has been managed anywhere, because the growing conditions are so favourable.

Mr Grenville is correct that Suharto invested heavily (if patchily) in agricultural extension services and (eventually) used minimum price guarantees to promote higher yields. However he is wrong to say that self-sufficiency was achieved ‘quickly’. Rice self-sufficiency was not achieved until the mid-1980s, 40 years after independence, and wheat self-sufficiency never was. So I maintain my position that Indonesia is a real relative failure in agriculture.

2. On industry, much of my criticism of policy in south-east Asia focuses on politicians’ efforts to ‘pick winners’ rather than run industrial policy that periodically culls losers. I also talk at length about the need for ‘export discipline’ to anchor industrial policy. And I avoid traditional discussions of what is or is not a society’s comparative advantage because, to my mind, development is about changing (within reason) your comparative advantage. Economic development is about investing in a learning process in order to reap higher future returns.

Mr Grenville’s points about industry in Indonesia therefore seem to me to be based on a misreading, or mere scanning, of How Asia Works. He highlights industrial projects that were picked as ‘winners’, were not subjected to sufficient competition or pressure to export, and which consequently produced a poor return on industrial policy investment. His observations are essentially supportive of the policy requisites I highlight.

The one thing I think is truly misplaced in Mr Grenville’s comments is the argument in the third paragraph that, essentially, Indonesians are politically and administratively ‘not up to’ the task of accelerated economic development, particularly compared to people like the Koreans. Is this true? In 1945, South Korea was the rural backwater of a brutally colonised state in which Koreans had been allowed to play perhaps the most restricted administrative and economic role in any east Asian colony. I cannot see that the Koreans had much political, administrative or educational capital. Elite Indonesians, by contrast, held senior civil service positions under the Dutch, could win scholarships to study in Europe, and had much greater (formal) political, administrative and educational resources. The difference was not the endowments, but the change politicians wrought over 60 years of independent government.

Why was the peasant Park Chung Hee able to achieve so much more than the superbly educated Sukarno? Probably, I think, because Park focused on the basics and got them right.