Selected Issues

Abstract

Selected Issues

Boosting International Competitiveness1

A. Introduction

1. Boosting international competitiveness is an integral component of the Mauritian authorities’ ‘Vision 2030’, which foresees Mauritius joining the ranks of higher-income countries before 2030. The authorities’ ambitious economic development strategy seeks to transform Mauritius into an inclusive high-income economy by 2030. The plan involves a fundamental transformation of the economy and a move up the economic value chain to boost growth and position Mauritius as a services and investment hub for mainland Africa. Boosting Mauritius’ international competitiveness and business environment to attract new high value-added industries is a key component of this strategy.

2. In this light, this paper analyses three key issues. First, we present recent developments pertaining to Mauritius’ international competitiveness, in a regional and global context. Secondly, we highlight the competitiveness challenges facing Mauritius. Thirdly, we propose policies that may be adopted to boost Mauritius’ international competitiveness and help the country graduate to the next level of economic development.

B. Recent Competitiveness Developments

3. The latest available international benchmark data on international competitiveness show that Mauritius is the most competitive economy in SSA. Per the latest edition of the World Economic Forum’s Global Competitiveness Report (2016-2017), Mauritius ranked 45th out of 138 economies in terms of overall competitiveness, two places ahead of South Africa. The aspects of competitiveness on which Mauritius tops the region are the provision of infrastructure, health and primary education and training, higher education and training, and goods markets efficiency.

4. Much progress with respect to competitiveness has been made over the last decade to bring Mauritius to the top of SSA’s competitiveness rankings (Figure 1). A suite of reforms was put in place over the last decade, which have accompanied and facilitated Mauritius’ structural economic transition, allowing the country to climb 15 places on the competitiveness ranking within a decade. Apart from rapid improvements in the areas in which Mauritius currently leads the SSA region, Mauritius’ overall competitiveness position has also benefited from improvements in the macroeconomic environment and the readiness to adopt new technologies, particularly the more widespread usage of internet and mobile-broadband. Although the offshore financial sector is of large economic significance, Mauritius has regressed in the competitiveness rankings on certain aspects of financial market development, chiefly related to trustworthiness and confidence.

Figure 1.
Figure 1.

Mauritius: Global Competitiveness Index, 2007 vs. 2016 1-7 (best)

Citation: IMF Staff Country Reports 2017, 363; 10.5089/9781484331576.002.A003

Sources: World Economic Forum; and IMF staff calculations.

5. Despite the impressive gains of the last decade, competitiveness gaps vis-à-vis comparators remain in several areas (Figure 2). Although Mauritius is streets ahead of the SSA region in the competitiveness rankings, the country is lagging in certain areas vis-à-vis emerging market peer countries.2 Competitiveness gaps are especially apparent in relation to innovation, institutions, infrastructure, higher education and training, labor market efficiency and technological readiness.

Figure 2.
Figure 2.

Mauritius: Global Competitiveness Index, 2016 1-7 (best)

Citation: IMF Staff Country Reports 2017, 363; 10.5089/9781484331576.002.A003

Sources: World Economic Forum; and IMF staff calculations.Note: Comparator countries include Singapore, Panama, Malta, Hong Kong, and Iceland.

6. Symptomatic of emerging competitiveness gaps is the recent stagnation in productivity across sectors, which may undermine the hard-won competitiveness gains of the last decade (Figure 3). For the overall economy, growth in average labor productivity declined in the second half of the last decade. This trend was evident both in the manufacturing sector, as well as by firms operating in the Export Processing Zone sector. While at the same time capital productivity in manufacturing picked up, export oriented enterprises (EOEs) experienced declines in both capital and multifactor productivity (even negative in the case of non-textile EOEs).

Figure 3.
Figure 3.

Mauritius: Trends in Average Productivity Growth

(Percent)

Citation: IMF Staff Country Reports 2017, 363; 10.5089/9781484331576.002.A003

Source: Statistics Mauritius and IMF staff estimates.

7. The above unfavorable productivity trends have, alongside rising wages, induced increases in economy-wide unit labor costs (Figure 4). Data show an increasing disconnect between pay and productivity outcomes. Average compensation exceeded productivity, especially in the latter half of the last decade, leading to increased unit labor costs.3 This is especially the case for export-oriented enterprises in the non-textile sector.

Figure 4.
Figure 4.

Mauritius: Wages, Labor Productivity and Unit Labor Costs

(Average Index, 2007=100)

Citation: IMF Staff Country Reports 2017, 363; 10.5089/9781484331576.002.A003

Source: Statistics Mauritius and IMF staff estimates.

8. A contributing factor to the unfavorable trends in productivity and unit labor costs may be inefficiencies in the labor market resulting from the complex wage-setting mechanism (Box 1). The wage-setting mechanism is complex, consisting of several competing systems that review wages and conditions in the public and private sectors. While productivity considerations do to some extent figure in wage negotiations, recent trends in unit labor costs reflect the importance of a tighter linkage between pay and productivity outcomes.

The Wage-Setting Mechanism in Mauritius

The complex wage-setting mechanism for the private and public sectors in Mauritius is characterized by several competing processes. In the private sector, enterprise-level collective bargaining applies to a small fraction (about 6 percent) of the workforce. This is due to structural economic shifts reducing the relative share of unionized jobs in the total, and a relative absence of collective-bargaining practices in firms in the large Export Processing Zone sector. Minimum pay and conditions for non-unionized and lower-paid workers in certain industries (currently about 30, covering about 70 percent of the private sector workforce) are covered by so-called Remuneration Orders (ROs). These are ministerial orders made on the recommendation of a quasi-judicial wage-fixing body called the National Remuneration Board (NRB). The NRB undertakes extensive consultations with government, unions, employers and the public regarding potential wage increases.

In the public sector, a government agency (Pay Research Bureau) reviews the ceiling on salaries and working conditions every 5 years. Finally, wages in both the public and private sector are subject to annual cost of living adjustments by the so-called Tripartite Committee, which is composed of high-level representatives of government, trade unions and employers. Such adjustments are usually triggered when the average inflation rate exceeded 5 percent in the previous year, although the threshold has not been strictly adhered to in the past.

Although productivity considerations form part of wage-setting negotiations, some sectors of society e.g. labor unions have argued that wage increases are not granted solely on economic and social merits (Fashoyin 2010). Indeed, data suggest that in recent years, real wage increases in Mauritius have run well ahead of productivity (Box Figure 1). Simplifying the wage-setting mechanism and more explicitly linking wages to productivity may alleviate Mauritius’ competitiveness concerns. Lessons drawn from similar economies may help in this respect. For example, in Singapore, the tripartite National Wage Council (NWC) –comprising representatives of labor, employers and the government– issues wage guidelines. These wage guidelines are not sector-specific and are only mandatory for the public sector.

Box Figure 1.
Box Figure 1.

Wages and Productivity

(percent)

Citation: IMF Staff Country Reports 2017, 363; 10.5089/9781484331576.002.A003

The pending introduction of the national minimum wage in 2018 may play an important role in labor market reform in Mauritius. The national minimum wage aims to provide a living wage to lower-paid workers in both the public and private sectors and will be set by the National Wage Consultative Council (NWCC). Indications are that competitiveness, along with other socio-economic considerations, will be a key consideration in setting the minimum wage.

C. Competitiveness Challenges

9. Part of Mauritius’ competitiveness challenge is to address the most problematic aspects for doing business in the country (Figure 5). Per the 2016 Executive Opinion Survey, the most pervasive problems for doing business in Mauritius are an inefficient government bureaucracy (about 17 percent of respondents), followed by insufficient capital to innovate (16.1 percent), an inadequately educated workforce (13.7 percent), followed by corruption (11.1 percent). Recent reforms introduced in the Business Facilitation Act of 2017 are a step in the right direction and may address some of these concerns, through eliminating regulatory and administrative bottlenecks.

Figure 5.
Figure 5.

Mauritius: Aspects of Competitiveness

Citation: IMF Staff Country Reports 2017, 363; 10.5089/9781484331576.002.A003

10. That an inadequately educated workforce is an important hindrance for business in Mauritius reflects concerns surrounding the ‘skills mismatch’ problem. Mauritius rates well in international comparison regarding secondary education enrollment rates (Figure 5). However, it is not clear that the fragmented technical and vocational education and training (TVET) system, characterized by a range of private providers, produces the right skills for the economy (World Bank 2015). At the tertiary level, enrollment rates are comparatively low, and the proportion of students enrolled in science and technology related degrees forms a relatively small share of the total. The share of graduates in industries associated with the offshore financial sector (e.g. accounting, law) is comparatively high.

11. There also appears to be a negative correlation between corruption perceptions and competitiveness (Figure 5). Data suggest that perceptions of corruption are strongly negatively correlated with a country’s overall competitiveness ranking. It has been shown that depending on its pervasiveness, corruption affects factors such as total factor productivity, public and private investment, and human capital accumulation (IMF 2016a). These factors tend to also be associated with competitiveness outcomes.

12. Female participation in the labor force is also comparatively low (Figure 5). Mauritius ranks poorly in international comparison on female participation in the labor force (108th out of 138 economies). Closing the gender gap in labor force participation is not only an important factor for boosting growth in Mauritius (IMF 2016b), but also an efficient mechanism to optimize deployment of the economy’s labor resources necessary to boost the country’s global competitiveness.

13. Foreign Direct Investment (FDI) in Mauritius has been skewed towards real estate, rather than more productive investments (Figure 5). Over time, FDI has been concentrated in the real estate sector, rather than in research and development and innovation. This trend has limited the opportunities for technological transfer, and helps explain Mauritius’ challenges related to a weak capacity for innovation. Moreover, the above-mentioned labor market rigidities and skills mismatches may also have kept investors in more productive sectors at bay and skewed investment away from more productive sectors and into those sectors where qualified talent is available (e.g. the financial sector).

D. Policies to Boost International Competitiveness

14. A new wave of economic reforms is necessary to meet the key economic task of graduating to a higher level of economic development. Boosting competitiveness and moving up the economic value chain are key economic tasks currently faced by Mauritius. Some sectors, for example the offshore financial sector, are being remodeled to deal with external challenges, with for example a greater emphasis on encouraging companies to put down concrete roots (creating ‘substance’) in the country through tax incentives (see Annex on BEPS).

15. Recent reforms aimed at enhancing the business climate contained in the Business Facilitation Act of 2017 are an important welcome step in the right direction. The reform package contained in the Business Facilitation Act (2017) is designed to create a more hospitable business climate, through for example streamlining official procedures and tax administration via a one-stop e-licensing platform, and facilitating international trade and commerce.

16. Moreover, creating the National Economic Development Board (NEDB) and adopting the draft Financial Sector Services Blueprint will help coordinate the strategic vision needed to guide Mauritius’ economic transformation. The NEDB has three core functions: i) export marketing and business development, ii) coordinate licensing and regulatory activities, and iii) guide the future strategic economic direction. In addition, the draft Financial Sector Services blueprint will guide the transition of the GBC sector from a system based largely on tax incentives to one that provides higher value added services.

17. However, further action is also needed to address bottlenecks in areas where Mauritius is lagging compared to higher income peers in the global competitiveness rankings (Figure 6). Areas in which further reforms are required are the relatively rigid labor market (57th place in labor market efficiency); skills mismatch (a relatively low tertiary education enrollment rate of 38.7 percent, or 73rd rank); and a relatively weak capacity for innovation.

Figure 6.
Figure 6.

Mauritius: Aspects of Competitiveness

Citation: IMF Staff Country Reports 2017, 363; 10.5089/9781484331576.002.A003

18. Making progress on reforms to the labor market and wage-setting mechanism. To arrest the unfavorable trends in productivity and unit labor costs that are negatively affecting Mauritius’ cost competitiveness, attention needs to be paid to reforming Mauritius’ labor market and wage-setting mechanism (Figure 6). Currently, Mauritius’ labor market is characterized by, amongst other things, a lack of flexibility in wage determination by companies (102th rank). Care should be taken to avoid backsliding on previous reform efforts. Moreover, the wage-setting mechanism could be altered to more tightly link wages to productivity outcomes in individual sectors, for example by increasing the coverage of collective agreements in the total workforce.

19. The pending introduction of the National Minimum Wage in 2018 should be carefully managed and form part of a holistic approach to labor market reform. Implementation of the National Minimum Wage, which will be calculated as a proportion of the median wage, is scheduled for 2018. It is not yet clear whether the minimum wage would lead to an overall simplification of the already complex wage-setting mechanism. Also, while negotiations regarding the minimum-wage level are still underway, caution should be taken to ensure that its introduction does not adversely affect enterprise competitiveness, job creation, and induce sectoral wage spill overs by distorting wage relativities. Introducing the minimum wage may also provide a window of opportunity to streamline the labor market architecture and ensure that the wage-setting process contributes to enhanced competitiveness outcomes. At the same time, it is important that the new scheme also safeguard social objectives. In this context, current efforts to close gender gaps and reduce inequality by boosting the labor supply of youth and women could be bolstered.

20. Addressing the skills mismatch. Both the quality and quantity of education need to be improved to better serve the industries of today and encourage the development of those of the future (Figure 5). While overall secondary education enrollment rates are high, the portion of TVET enrollments in the total is small (World Bank 2015). A more active and comprehensive approach by government to the delivery, monitoring and evaluation of technical training programs could ensure that market demands for skills are better fulfilled. Furthermore, encouraging tertiary enrollment in STEM subjects, and encouraging foreign skilled labor where necessary, will help to develop a pipeline of human capital suited to working in higher value-added sectors in the future, also complementing innovation policy (see below).

21. A comprehensive innovation policy, which could follow comparator country experiences in the area, would promote economic diversification and enhance growth over the medium-to longer term (Figure 6). A more active innovation policy could, in concert with higher education reforms, boost the availability of scientists and engineers, while also allocating more tertiary education funds towards the development of research. To boost technology absorption in the economy and facilitate the growth of new industries, greater incentives for R&D could be offered to companies, while government could also foster greater collaboration between universities and industry on R&D. A revamped innovation policy could for example adopt the approach of Singapore, which promotes technology transfer through attracting multinational corporations, and has an emphasis on building domestic R&D capacity, also with strong government support for promoting venture capital.

E. Conclusions

22. Mauritius’ progress in improving competitiveness over the last decade has been nothing short of remarkable, however some areas of concern have emerged. During the last decade, Mauritius has jumped 15 places in the international competitiveness rankings, and is now the most competitive economy in SSA. However, stagnating productivity in some sectors and recent associated increases in unit labor costs have signaled growing cost competitiveness concerns.

23. To propel Mauritius to the next level of economic development, further reforms are necessary to address the competitiveness gaps emerging vis-a-vis emerging market comparator countries. While Mauritius is leading the pack in SSA on international competitiveness, data also suggest that competitiveness gaps are opening vis-à-vis emerging market comparator countries (Singapore, Panama, Hong Kong, Iceland, and Malta).

24. Areas to be urgently addressed are the labor market, skill mismatches, and innovation policy. Chief concerns of labor market reform are to tighten the linkage between pay and productivity through simplifying the complex wage-setting mechanism, and closing the gender gap in labor market participation. The current mismatch between demand and supply of skills in the economy could be addressed through unifying the TVET system and encouraging tertiary enrolment in STEM subjects. The latter would also contribute to the implementation of a more comprehensive innovation policy, that would focus on leveraging collaboration between university and industry on R&D and technology adoption to facilitate development of new generation growth sectors.

25. A bold strategic vision is required to achieve Mauritius’ ambitious development agenda; initial reform steps, as well as Mauritius’ strong track record of reform implementation, both bode well for the future. Mauritius’ transformation from an agriculture to a services-based economy is nothing short of remarkable. This shift was facilitated by, among other things, a suite of economic reforms that catapulted the country to the top of the competitiveness rankings in SSA. Attaining the next level of economic development will not be easy and will require enhanced efforts to overcome the variety of policy challenges outlined above. Considering Mauritius’ track record of reinventing its economic model, there are grounds for optimism that the country will successfully manage the reform process.

References

  • Fashoyin, T. (2010), ‘Tripartite Institutions, Collective Bargaining and Employment Relations in the Mauritian Labor Market’, ILO Working Paper No. 18, ILO, Geneva, December

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  • IMF (2016a), Corruption: Costs and Mitigating Strategies, Staff Discussion Note 16/05, Washington, May.

  • IMF (2016b), Staff Report for the 2015 Article IV Consultation, IMF Country Report No. 16/89, Washington, March.

  • World Bank (2015), Mauritius Systematic Country Diagnostic, Report No. 92703-MU, Washington, June

1

Prepared by Cameron McLoughlin and Mounir Bari.

2

Comparator countries are Singapore, Panama, Malta, Hong Kong and Iceland.

3

The increase in unit labor costs is less pronounced in some sectors when they are expressed in $US.

Mauritius: Selected Issues
Author: International Monetary Fund. African Dept.