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References

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Data Sources and Definitions

Econometric analysis: The data have been extracted from International Financial Statistics (IFS), Information Notice System (INS), World Economic Outlook (WEO), World Development Indicators (WDI), and Penn World Tables Mark 6.2. Data on the Mauritius 90-day average T-bill yield have been drawn from the Bank of Mauritius Monthly Statistical Bulletin (1994 to 2007).

Trading partners: Mauritius’s trading partners for purposes of calculating the REER are, in descending order of importance, France, Germany, the US, the UK, Japan, South Africa, Italy, Belgium, Singapore, the Netherlands, Taiwan Province of China, Hong Kong SAR, Spain, Switzerland, India, Korea, Canada, China, and Thailand. Trade weights have been obtained from the INS.

Comparator countries: Regional and income country groupings have been obtained from the WDI.

  • Small island economies: Comoros, Madagascar, Maldives, and Seychelles

  • High-growth Asian economies: Hong Kong, SAR, Singapore, South Korea, Taiwan Province of China, Malaysia, Thailand, and Indonesia

Structural competitiveness indicators:

Appendix

Table 1.

Summary Statistics for FEER-MB Approach

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Note: Financial centers are Belgium, Luxembourg, the Netherlands, Singapore, Switzerland, and Hong Kong. Offshore financial centers are St. Vincent & Grenadines, Dominica, St. Lucia, Grenada, St. Kitts & Nevis, Antigua and Barbuda, Barbados, the Bahamas, and Mauritius. To account for the large current account deficits up to the East Asian crisis and the surpluses thereafter, the East Asian crisis dummy takes value 1 for the following countries starting in 1998: Thailand, Indonesia, Korea, Malaysia, Laos, the Philippines, and Hong Kong. The Euro zone dummy takes value 1 for the countries that have adopted the Euro (in 1999 except for Greece, which adopted it in 2001). Fuel-exporting economies are Algeria, Angola, Bolivia, Cameroon, Ecuador, Egypt, Gabon, Indonesia, Iran, Iraq, Libya, Mexico, Oman, Syria, Trinidad & Tobago, and Venezuela, RB. To minimize the impact of outliers and measurement errors, outliers for the CA and overall government balance to GDP ratios are trimmed asymmetrically (around the 95th percentile). NFA/GDP is trimmed symmetrically at the 99th percentile. All variables are expressed as three-year moving averages to eliminate short-term fluctuations.Source: Authors’ calculations.
Table 2.

Correlates of the Current Account Balance—Panel Estimates (1980–2005)

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Robust standard errors in parentheses; * significant at 10%; ** significant at 5%;*** significant at 1%Note: The dependent variable current account to GDP ratio. The old-age dependency ratio (defined as the ratio of population over 65 years of age to population between 15 and 64 years of age) as well as a measure of financial deepening (M2/GDP) were insignificant in most specifications and thus excluded from the model. Middle income countries were identified using the World Bank Atlas method and have a per capita gross national income in 2007 between $936 and $11,455.Source: Authors’ estimates.
Table 3.

Unit Root Tests for the FEER-SE Approach

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Note: All variables in logs. Constant and trend included. Openness is defined as total trade to GDP. Government consumption is expressed in ratio to GDP. The null hypothesis for the Augmented Dickey-Fuller is of a unit root.Source: Authors’ estimates.
Table 4.

Unit Root Tests for the CHEER Approach

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Note: All variables except interest rates are in logs. The null hypothesis for both tests is that of a unit root. The number of autoregressive lags is based on the Akaike Information Criterion (AIC). For the VAR, the likelihood-ratio test and the AIC indicate that the optimal lag length is 12. To secure valid statistical inference, we include in the VAR dummy variables for large outlier observations (and seasonal dummies).Source: Authors’ estimates.
Table 5.

Johansen Cointegration Test for the CHEER Approach

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denotes rejection of the hypothesis at the 0.01 level

MacKinnon-Haug-Michelis (1999) p-values

denotes rejection of the hypothesis at the 0.01 level

MacKinnon-Haug-Michelis (1999) p-values

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Critical values based on MacKinnon-Haug-Michelis (1999)

Note: The results of the trace and maximum eigenvalue tests, and the number of cointegrating vectors corresponding to different deterministics are highlighted in yellow.Source: Authors’ estimates.
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*Critical values based on MacKinnon-Haug-Michelis (1999)Note: The results of the trace and maximum eigenvalue tests, and the number of cointegrating vectors corresponding to different deterministics are highlighted in yellow.Source: Authors’ estimates.
Table 6.

The Relative Performance of Mauritius on Trade Costs

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Cost to export and import measures the fees levied on a 20-foot container in US$ (including costs for documents, administrative fees for customs clearance and technical control, terminal handling charges, and inland transport; it does not include tariffs or trade taxes).Source: World Bank Doing Business Indicators and authors’ estimates.
Table 7.

The Relative Performance of the Mauritius ICT Sector

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Source: World Bank ICT at a Glance Tables.
1

We are grateful for helpful comments from Abdul Abiad, Hugh Bredenkamp, Philippe Callier, Hamid Davoodi, Luc Eyraud, Norbert Funke, Markus Haacker, Arend Kouwenaar, Paul Mathieu, Pritha Mitra, and Mahvash Qureshi. The paper benefited from useful discussions with seminar participants at the Bank of Mauritius and at the IMF African Department. Editorial help was provided by Anne Grant. Any errors are our own.

2

Both authors are in the African Department, International Monetary Fund.

3

On the relationship between exchange rate misalignment and economic performance, see, e.g., Cottani, Cavallo, and Khan (1990), Dollar (1992), Razin and Collins (1997), Fosu (2000), Easterly (2001), and Gala and Lucinda (2006). Case studies on exchange rate misalignment followed by currency crises has been presented by, e.g., Kemme and Roy (1995), Kruger, Osakwe, and Page (2002), and Rajan, Sen and Siregar (2004). See Dornbusch (1982) for a review of theoretical contributions to exchange rate theory and empirical evidence.

4

This section draws on Reinhard and Rogoff (2004); IMF, Annual Reports on Exchange Arrangements and Exchange Restrictions (AREAER); and IMF, Mauritius Staff Reports going back to the late 1960s.

5

We use the terms “real depreciation” and “competitiveness” interchangeably. However, as the experience of Germany and Japan in the 1970s demonstrates, it is possible for the REER to appreciate even when competitiveness is rising. This happens, for instance, when productivity growth outpaces appreciation.

6

While we do not make the correction in our analysis, “this correction should be very small. In past CGER assessments, this correction has amounted to some 1-4 percentage points.” (Lee et al., 2008, p. 7)

7

It is noteworthy that all methods considered have a medium-term horizon, which means that they do not impose stock-flow equilibrium.

8

See Driver and Wren-Lewis (1999) for a sensitivity analysis of the FEER estimates of the US dollar, Japanese yen, and German mark to different assumptions.

9

Summary statistics for all variables used in this analysis are shown in Appendix Table 1.

10

Our underlying CA balance is based on a projected real appreciation of 2 percent per year that reflects the traditional Balassa-Samuelson effect and capital inflows. It is derived on the premise of continuation of established policies in Mauritius (see the 2007 Surveillance Decision for details) including an exchange rate policy of intervention in the market to manage short-term volatility but not affect the trend. This assumption should be borne in mind when assessing any RER adjustment that may be required to close the gap between the CA norm and the underlying CA.

11

We restrict the analysis to 1980–2005 to obtain as large a sample of countries as possible. The panel analysis helps improve the precision of coefficient estimates by using both within- and between-country variation. Earlier data are also omitted because for most countries they are sparse.

12

We use fiscal years in the projection to keep in line with the budget cycle in Mauritius. Standard errors for the estimates are not reported in Equation 2 but are shown in Table 1.

13

Due to statistical uncertainty, confidence intervals for the CA norms and the FEER itself would indeed be more reliable than point estimates.

14

We estimated trade elasticities using single-equation error correction models for exports and imports (not shown for brevity). We obtained an export elasticity of 1.6 and an import elasticity of –1.1 over the longest period for which we have complete data (1977–2006). Using the formula (export elasticity) × (EXP/GDP)-(import elasticity) × (IMP/GDP) and average trade ratios over the same period (of 57 and 60 percent), we found that the CA elasticity with respect to the exchange rate is 1.6. Barkbu (2006) presents an alternative set of estimates (3.5 for exports and –0.8 for imports) based on a vector error correction model with two vectors estimated on a shorter sample (1980–2004).

15

Estimating a BEER was also hindered by the lack of data on the interest rate differential for the earlier years of the sample.

16

This framework allows testing for cointegration when it is not known with certainty whether regressors are stationary, integrated of order 1, or mutually cointegrated.

17

The estimation was undertaken using the ARDL program developed by Chudik and Mongardini (2007) with a lag structure given by ARDL(1,0,0,0). The SBC (Schwartz Bayesian Criterion) is the information criterion that helped select the model. Linear interpolation was used to fill in short gaps in the data series. According to the bounds test for the existence of a level relationship, the null hypothesis of no such relationship is comfortably rejected at the 1 percent level for all models. Augmented Dickey-Fuller (ADF) tests for unit roots are shown in Appendix Table 3.

18

In the ES approach, the level of the CA that stabilizes the NFA/GDP position is calculated as cas=g+π(1+g)(1+π)bs where cas is the stabilizing level of the CA/GDP ratio, g is the growth rate of real GDP, π is the inflation level and bs is the benchmark NFA/GDP level.

19

A caution is in order when using the Doing Business indicators as a basis for policy advice related to labor markets. According to the recent report of the World Bank’s Independent Evaluation Group (World Bank, 2008), the Doing Business indicator on Employing Workers tends to give lower scores to countries that have chosen policies for greater job protection and should therefore not be seen as a benchmark of labor regulation performance.

Mauritius: A Competitiveness Assessment
Author: Ms. Camelia Minoiu and Patrick A. Imam