The development trajectory of Mauritius has been one of the most successful in Africa. A poor, remote island economy at independence in 1968 and heavily dependent on traditional exports of sugar, it now boasts a sophisticated services sector and briefly became a high-income country in 2020 – before the devastating effects of Covid-19. Building on its strong sugar, textiles, tourism, and financial services sectors, the Mauritian economy has stood out in sub-Saharan African for its strength and stability. GDP per capita on a purchasing power parity basis has increased more than five-fold since 1990.

Development success stories of this kind are rare in Africa, and Mauritius’ experience in escaping from a poverty trap which seemed so intractable at independence has been much studied. One of the elements that is commonly cited is the tradition of strong economic management and political stability. Mauritius has been the top performer in Africa by many policy metrics. The island is often considered a model of social development, particularly its social protection system and its efforts to promote social equality and reduce poverty. Other longstanding elements include macroeconomic stability, even in the face of external shocks, and cultural diversity and its link with inclusive politics and the diaspora. But if these elements provided the fuel for take-off, preferential access to major markets combined with the Export Processing Zone Scheme provided the spark. They were supplemented by an abundant pool of labour and foreign direct investment (FDI) inflows at critical times to help jumpstart industries.

Despite its successful performance over decades, Mauritius is confronted with several long-standing structural challenges. In spite of an improved performance recently, annual GDP growth has generally been below average for an upper middle income country since the early 2000s. Mauritius is facing declining competitiveness in its traditional export sectors, a lack of economic diversification, declining investment and value added in manufacturing as a share of GDP, poor productivity growth, together with a brain drain of skilled employees and a rising dependency ratio.

Mauritius has had some success at upgrading and diversification. The textile and apparel industry has increased manufacturing of yarn and fabrics and moved towards greater vertical integration within the industry. Similarly, a restructuring of the sugar sector moved the sector away from the manufacture and exports of raw sugar to that of refined and special sugar. In addition, new sectors have been developed such as the tourism industry, the ocean economy, financial services, healthcare, education and renewable energy. But continuing structural transformation and within sector productivity improvements have not been sufficient to address the productivity challenge. Some sectors face skills shortages, and local firms are not sufficiently innovative and engage in very little research and development in Mauritius.

Mauritius has an enviable track record of reform successes when faced with existential threats, such as the elimination of preferential access in garments or sugar or recovery from the ravages of Covid-19 on the tourism sector. Many of the challenges it faces now are characteristic of a more mature economy, calling for a different order of response than in the past. The low hanging fruit has already been picked, and these second-generation reforms will require a more strategic, whole-of-government approach across the range of policy areas affecting the dynamism of the private sector. This includes ensuring that markets are competitive and contestable, allowing for new entry by foreign or domestic firms, even greater openness to FDI and an active competition policy. Any government support for existing firms needs to avoid simply perpetuating the status quo.

Mauritius excels at many areas of investment policy, as one of the world’s most business-friendly jurisdictions. And yet this begs the question of why more foreign investors are not coming, outside of the global business and real estate sectors. FDI inflows have rarely represented an important share of GDP in Mauritius (excluding global businesses), and that share has been declining for much of the past decade, except for an increase in 2022. Excluding the global business sector, half of all “traditional” FDI has gone into real estate which was gradually opened in the 2000s. The development impact of this type of investment is likely to be less than into other sectors, although the government expects a boost to consumption and ultimately investment from this sector.

Foreign investors have played a critical role at key times in Mauritius’ development, including investors from Hong Kong, China in the take-off of the garments sector and Indian investors behind the ICT sector. Besides providing a source for financing, they have contributed more broadly to productivity, innovation and skills development, as well as to the green transition. With the right policy mix in place, local firms could benefit from knowledge, technology and skills transfers from foreign firms.

To enable broad-based reforms, the government needs to rethink the way it goes about its business. Despite a justified reputation for effectiveness and efficiency, steps could be taken to improve governance further. Recent work with the OECD on regulatory impact analysis is one area, along with improved coordination across ministries and coherence across policies, broader stakeholder engagement and more strategic thinking. Another area concerns monitoring and evaluation. Assessments of investment promotion and facilitation and the use of investment incentives in this Review both point to the need for more complete evaluation of targeting and support policies for foreign and domestic firms, including a broader assessment of the impact of this support, going beyond the usual key performance indicators to include sustainability outcomes.

A key element to ensure positive outcomes from investment is the promotion of responsible business conduct (RBC). Efforts in this direction in Mauritius have largely been confined to corporate philanthropy through the Corporate Social Responsibility (CSR) Tax and the inclusion of CSR in the Code of Corporate Governance. Mauritius has ample opportunity to move beyond CSR, and a philanthropical approach, towards RBC, and an approach aimed at enhancing businesses’ contribution to sustainable development and the management of their adverse impacts on people, the planet and society. This can contribute to support Mauritius’ development strategy, as a remote small island heavily reliant on trade and investment for growth. Companies, investors, and customers worldwide are increasingly paying attention to environmental, social and governance matters. In addition, a growing number of countries, including some of Mauritius’ main trade and investment partners, are adopting legislation requiring businesses to observe RBC principles and standards. Mauritian firms are also becoming outward investors, such as in Africa, and have a role to play in the dissemination of responsible business practices.

Going forward, the government can take further action to drive and support responsible business practices by creating an enabling environment for RBC and resorting to specific policy areas to promote and exemplify RBC. This will be facilitated by the fact that Mauritius has a developed legal, regulatory, and policy framework in the areas covered by the OECD Guidelines for Multinational Enterprises on RBC. It has adhered to the main international legal instruments in these fields and developed relevant laws, regulations, and policies. Reports of RBC issues seem rather limited, but existing ones deserve attention as they can trigger adverse impacts on people and the environment and undermine the attractiveness of the island as a place to trade with, or source from, and as an investment destination. This is notably the case of the risks of adverse impacts on the rights of low-skilled migrant workers. The creation of a National Contact Point for RBC will help to promote and enable RBC and address cases of alleged non observance by companies of the OECD Guidelines for Multinational Enterprises on RBC as they arise.