This chapter examines the factors behind the tremendous success of the first three decades of independence in terms of inclusive and sustainable development. It then looks at the challenge currently faced by Mauritius in terms of raising productivity and fostering innovation.
OECD Investment Policy Reviews: Mauritius 2024
OECD Investment Policy Reviews
Abstract
Mauritius has been an economic success story in many ways, standing out from many of its peers in Africa for its performance in export-led development. Many academic studies have sought to understand the root causes of that success, highlighting the importance of strong institutions, macroeconomic stability, cultural diversity combined with the lack of an indigenous population, and inclusive politics. While these elements provided the foundation for take-off, the Export Processing Zone scheme, combined with preferential access to many OECD markets, a pool of labour and inflows of foreign direct investment (FDI) provided the spark.
The foundation remains in place, but what is required at early stages of development is not necessarily what is required now. Mauritius’ impressive economic growth risks slowing without the adoption of policies supporting a new development path. New economic development strategies are needed, which do not rely on past drivers of growth, such as favourable demographics, structural transformation, and capital accumulation. Comprehensive approaches are needed in creating a more productive and innovative economy. Enhancing productivity is essential in raising per capita income. Beyond enhancing institutional capacities, priorities should include attracting and better leveraging FDI, further enhancing competition in the business environment, supporting small and medium-sized enterprises (SMEs), creating a strong foundation for innovation and improving workers’ skills to help foster inclusive and stable growth.
A supportive business environment that minimises unnecessary barriers to firm establishment and growth should encourage investments that enhance productivity and innovation. Although FDI already contributes to capital accumulation and other aspects of economic development in Mauritius, inflows could be increased and better leveraged to introduce new knowledge and technologies, serving as a foundation for productivity growth and innovation. To achieve this, Mauritius must attract more investment in productive sectors with strong absorptive capacities and facilitate partnerships between foreign firms and local counterparts.
Implementing solutions to productivity growth will require strengthening policymaking and institutional capacities. Improvements to planning and policy coordination would help to ensure the development and implementation of comprehensive solutions to continuing productivity challenges. Broad-based growth requires inclusive policy dialogue that engages the private sector, including SMEs, and other affected groups. The effectiveness of SME assistance programmes could benefit from implementing a more rigorous system of consultation and of monitoring and evaluation, to assist in designing more effective programmes in future.
To provide useful services for the business community, business support organisations must possess adequate resources and internal capabilities. They should also function as a coordinated and collaborative system. Possible measures encouraging this include implementing reforms in the internal management of these organisations, capacity development programmes, the generation of new resources to enhance transparency and accessibility, and embracing a systemic approach to support provision.
Mauritius is in many ways a poster child for economic development. Against significant odds, it managed to reach high income status before the pandemic. For this reason, its development trajectory has been well studied by prominent economists. Why did Mauritius succeed when so many countries in Africa and elsewhere have not? While policies and practices in the last century might seem peripheral to the challenges currently faced by Mauritius, they can help to shed light on the nature of those challenges. What appear as strengths at one point in time might not be so later. This section summarises the literature on Mauritian development in the early decades of independence.
Heavy population pressure [in Mauritius] must inevitably reduce real income per head below what it might otherwise be. That surely is bad enough in a community that is full of political conflict. But if in addition, in the absence of other remedies, it must lead either to unemployment (exacerbating the scramble for jobs between Indians and Creoles) or to even greater inequalities (stocking up still more the envy felt by the Indian and Creole underdog for the Franco-Mauritian top dog), the outlook for peaceful development is poor (Meade, 1961[1])
This oft-cited quote by the Nobel prize-winning economist, James Meade, captures the inauspicious beginnings of Mauritius prior to independence in 1968: remoteness; ethnic tensions culminating in occasional ethnic riots and with power concentrated in a small elite; with sugar accounting for almost all cultivated land and most exports; a burgeoning population coupled with high unemployment; and declining terms of trade (Overseas Development Institute, 2011[2]). Poverty was also widespread. Given these initial conditions, it is perhaps not fully surprising that 44% of the population, including most of the minority ethnic groups, voted against independence (Subramanian, 2009[3]).
Rather than succumbing to Meade’s Malthusian vision, Mauritius turned these potential flaws into a source of strength, spawning one of the most successful development trajectories in Africa. Academics differ on the root causes of this success, but they generally list several inter-related factors discussed below.
Strong institutions. Mauritius ranks very highly across global measures of governance. Many studies have linked its success to this aspect (Gulhati and Nallari, 1990[4]; Subramanian and Roy, 2001[5]). The role of institutions is widely seen to be a driver of successful development trajectories (Acemoglu, Johnson and Robinson, 2001[6]) and to greater inflows of FDI (OECD, 2002[7]). Within Africa, measures of the rule of law are associated with higher levels of income (Frankel, 2010[8]).
Macroeconomic stability. A small, open economy heavily dependent on a few sectors in the past has naturally been susceptible to external shocks, whether related to commodity price fluctuations, including for sugar, to the loss of preferential access to major markets or, most recently, to covid. Despite this vulnerability, inflation has remained relatively low by African standards, despite a spike in the early 1980s, and economic growth was high throughout much of the first few decades of independence. Mauritius also maintained a competitive exchange rate, avoiding currency overvaluation, with recourse to devaluations during periods of economic crisis, such as in the early 1980s.
Cultural diversity and the lack of an indigenous population. Cultural diversity can make reforms more difficult, as suggested by Meade above, as different groups fight over economic rents. Ethnic riots by the Creole population in Mauritius erupted in both the mid-1960s and again in 1999. Somewhat paradoxically, this diversity may have served as an anchor for reforms in Mauritius. Although two thirds of the population are Indo-Mauritians, this group is in turn divided by caste, religion and origin in India. Many were brought in as indentured labourers by the British once they took control of Mauritius after the Napoleonic wars, particularly in the period 1849-1923. The rest of the population is mostly Afro-Mauritians or Creoles, brought in by the French in the 18th century (and the Dutch even earlier) as slaves for the sugar plantations. The remaining 5% of the population comprises ethnic Chinese and the Franco-Mauritians who are often descended from the land-owning oligarchy that was left in place by the British colonial administration. Subramanian and Roy (2001[5]) argue that the number of different constituencies and the fact that no ethnic group was native to the island may have facilitated a more inclusive approach to development, as well as the fact that political power was held by the majority Indo-Mauritian population while economic power at independence still resided in the Franco-Mauritian minority.
Cultural diversity and a legacy of immigration also implies the potential to tap into an overseas diaspora. Subramanian (2009[3]) argues that the small ethnic Chinese community facilitated the investments from Hong Kong, China in the textile industry, a claim supported by Hein (1988[9]): “a few Sino-Mauritians with strong business and family links in the Far East played a leading role in the early 1970s in attracting businessmen and were themselves prominent investors”. The same role of the diaspora can be seen in later Indian investments in information and communication technology (ICT) and financial services. The same could perhaps be said for the many French investments on the island and the role of the Franco-Mauritians.
Inclusive politics. The response in Mauritius to cultural diversity was an inclusive approach to politics. Subramanian (2009[3]) argues that economic performance was sustained by “OECD-type social protection”, together with large and active trade unions with centralised wage bargaining. Another contributing element was the “best loser” system introduced by the British in which an independent electoral commission appoints up to eight losing candidates to each new National Assembly to represent under-represented ethnic groups (Overseas Development Institute, 2011[2]). Furthermore, coalition governments have been common in Mauritius, along with parliamentary democracy and smooth transitions of power.
Export processing zone. Compared to the disappointing performance of many such zones across Africa, the EPZ scheme started in 1971 in Mauritius is widely considered a success. By the early 2000s, the EPZ represented 26% of GDP, 36% of employment, 19% of the capital stock and 66% of exports, and within 15 years, employment in the EPZ exceeded that in the sugar industry and its contribution to GDP grew from 2.6% in 1976 to 13% by 1990 (Subramanian, 2009[3]).
The EPZ was a system of bonded warehouses rather than a fixed zone, as the overall quality of infrastructure across the island meant that there were few benefits from dedicated zones. Most foreign investors were from Hong Kong (China) or France, although roughly half of the equity capital was estimated to come from local investors (Frankel, 2010[8]). Firms in the EPZ could import all inputs duty free, benefit from a tax holiday for 10 years, followed by 50% exemption for five years and then 25% for another five years, the exemption of dividends from income tax for a five-year period, tax rebates on salaries for foreigners and loans at preferential rates, as well as guarantees against expropriation and protection against double taxation (Hein, 1988[9]).
The EPZ allowed for the development of an export-oriented sector at a time when Mauritius still relied on import substitution for the local market. Beyond duty-free inputs, these two sectors could co-exist in part because the labour market was also effectively segmented. Labour market regulations and wages differed between the EPZ and the rest of the economy, and most of the employees in the EPZ were young women who were new to the workforce. The minimum wage for women was also set lower than for men. Hence there was little mobility between the two sectors, and the success of the EPZ did not crowd out import-competing industries through the labour market. Subramanian and Roy (2001[5]) estimate that EPZ wages were 36-40% lower in the 1980s, narrowing to 7-20% in the 1990s.
Preferential access to OECD markets. Like many countries in Africa, Mauritius benefitted in its take-off years from preferential access to the European and American markets. This was particularly the case for sugar and clothing exports, with the Lomé Convention (later the Cotonou Agreement) and the Africa, Caribbean and Pacific (ACP)/EU Sugar Protocol. In textiles and clothing it also benefited from access to the US market subject to strict rules of origin requirements under the African Growth and Opportunity Act (AGOA) after 2000, as well as the Multi-Fibre Arrangement until 2005. Subramanian and Roy (2001[5]) estimate that preferential access in these two sectors represented 7% of GDP in the 1980s and 4.5% in the 1990s.
Mauritius made a judicious decision in the 1970s when asked to choose between a limited quota at the then high world price for sugar or a higher quota at the EU domestic price. As many other African countries decided to forgo a larger quota, Mauritius benefited both from over one third of the quota and the increases in the EU prices for sugar, thereby also insulating itself to some extent from the eventual fall in world sugar prices (Subramanian, 2009[3]).
FDI inflows. Mauritius has not attracted large amounts of FDI even by African standards, with FDI inflows representing only 2.6% of GDP on average over the past 20 years by World Bank figures. Unlike in many other countries, the EPZ was not dominated by fully foreign-owned firms but included many local ones, as well as many joint ventures. Nevertheless, at key points in time, foreign investors have played a leading role, such as with investment from Hong Kong, China in causing the take-off of the garment sector, even though FDI by textile producers from Hong Kong, China never exceeded 6% of domestic investment (Svirydzenka and Petri, 2014[10]). According to the World Bank (1983[11]), “some of the success of the knitwear industry can be related to a demonstration effect of one or two early firms which were set up with the participation of foreign capital”.
Abundant labour. At independence, Mauritius also possessed a pool of unemployed, educated and flexible labour which was essential to attract footloose investors (Overseas Development Institute, 2011[2]).
While Mauritius has experienced impressive economic development, some of the past drivers of growth described above, including favourable demographics, structural transformation, and capital accumulation may be more difficult to rely upon in the future. The so-called middle-income trap – which has been experienced by many countries that struggle to sustain the kind of growth previously experienced as they approach high income status – requires the adoption of new approaches to growth and development (Box 3.1). Higher productivity will be needed to continue to raise incomes.
Although stagnating growth rates in middle-income countries had been discussed earlier, the “middle-income trap” was first defined in a 2007 report as the difficult position facing a number of economies that have outgrown the low labour costs enabling their specialisation in labour-intensive activities but that have not yet reached the innovative stage of advanced, knowledge-based economies (Gill and Kharas, 2007[12]). Indeed, the record of global economic convergence has been unconvincing, as few poorer countries have succeeded in reaching high-income status. Many economies in East Asia, Latin America, and the Middle East have been considered to be in middle-income traps, unable to maintain or restart previous periods of rapid growth (Pruchnik and Zowczak, 2017[13]). The existence of the trap remains debated, however, as several empirical studies have found little evidence of its existence (Im and Rosenblatt, 2013[14]; Bulman, Eden and Nguyen, 2017[15]; Felipe, Kumar and Galope, 2014[16]); protracted growth slowdowns are not unique to particular income levels (Han and Wei, 2015[17]), and middle-income countries may actually have better growth prospects (Gönenç, 2017[18]). This results partly from differing definitions. Among six common definitions of a middle-income trap, Mauritius qualifies based on three of these definitions (Pruchnik and Zowczak, 2017[13]).
Regardless of the validity of the income trap concept, different strategies are called for at different stages of development (Larson, Loyza and Woolcock, 2016[19]). Improving productivity is critical for sustaining growth in economies such as Mauritius that have already exploited the growth opportunities arising from shifting from lower-productivity to higher-productivity sectors and adopting more accessible technologies. Rising wages without increases in value added per worker can threaten competitiveness in these cases. Within-sector productivity improvements (as opposed to productivity gains arising from the reallocation of labour to higher-productivity sectors) seem to have played a role in the success of countries that avoided or overcame the middle-income trap (Yılmaz, 2016[20]). Innovation and the adoption of new technologies may also play a particularly important role in increasing efficiencies in production by allowing more value to be created without proportional increases in the use of labour and other inputs (Paus, 2017[21]).
Continuing economic growth thus depends on creating dynamic firms, skilled workers, investment in innovation and new technologies, and other drivers of improved productivity. These can be challenging to foster. Reforms to product, labour and international trade and investment markets appear to have a greater impact on per capita incomes in emerging economies (Égert, 2017[22]). At the same time, these countries are likely to face greater political economy barriers to implementing institutional and policy reforms (Gönenç, 2017[18]).
Building on its strong sugar, textiles, tourism, and financial services sectors, Mauritius has stood out among sub-Saharan African economies for its strength and stability. GDP increased in real terms by an average 4.4% per year over 1990-2019 before the significant setback during the COVID-19 pandemic and associated travel restrictions. Productivity growth accounted for much of this long-term improvement, but potential output growth has been declining for decades. Annual GDP growth has generally been below average for upper middle income countries since the early 2000s, though the recovery from a steep decline during the pandemic led to relatively strong growth in 2022 (Figure 3.1). Future economic growth risks slowing if it continues to rely on past drivers (IMF, 2022[23]).
Source: World Bank
Mauritius is facing a closing demographic window of opportunity. While labour utilisation rates have been relatively stable in the recent past (with a gradual increase in the labour force participation rate of women over recent decades), economic growth has been bolstered by the expanding working age population. Between 1960 and 2015, its age dependency ratio1 declined from 94.1% to 40.5% (Figure 3.2). The boost to growth that this demographic transition provides will be short-lived, however. The median age has been steadily increasing for several decades and the dependency ratio has recently begun to rise again.2 Falling labour utilisation and savings rates in an ageing population will depress growth prospects. (Munozmoreno et al., 2014[24])
(The ratio of the economically dependent - children and elderly - to the working-age population)
Source: UN DESA (2022) World Population Prospects 2022.
Structural transformation – the relative growth of higher-productivity sectors – has been another factor behind Mauritian growth over past decades. Economic diversification and investment in higher value-added activities have meant that traditional sectors have declined in importance. Shares of both value added and employment in agriculture, forestry, and fishing have been declining for decades: between 1976 and 2022, value added declined from 19.9% to 3.4% as a result of the growth of other sectors of the economy.3 Beginning in the early 1980s, manufacturing rapidly increased in importance as a share of GDP, but this share has been declining since the late 1990s, partly as a result of the impact of the phasing out of the Multifibre Arrangement and the end of the successor Agreement on Textiles and Clothing. The services sector now accounts for around two-thirds of GDP.
Structural transformation is a diminished but continued source of productivity growth in Mauritius. The shift in the share of workers in sectors with lower productivity to sectors with higher average productivity was responsible for an average 2.9% annual growth in labour productivity over 2007-22, exceeding the average 1.4% due to within-sector growth (Figure 3.3). Indeed, there is likely continued space for the shift of workers to more productive sectors and within-sector productivity growth. The top sectors in terms of value added per worker do not overlap with the top sectors in terms of employment, with only limited overlap between the sectors with the highest and fastest-growing labour productivity (Table 3.1). Potential productivity growth through structural change faces inevitable limits, however, as opportunities for resource reallocation to higher-productivity sectors diminish (McMillan and Rodrik, 2014[25]).
Alongside labour accumulation related to demographic change and structural transformation, capital accumulation has been another important growth driver in Mauritius, although its contribution has declined (IMF, 2022[23]). As a percentage of GDP, gross fixed capital formation has been declining since the mid-1990s, from 31.8% in 1994 to 19.6% in 2021 (See Chapter 2 on FDI Trends and Impact). It has been lower in Mauritius than in upper middle-income countries in every year since 2000 and the gap is widening. It has also been below the average for sub-Saharan Africa for the past decade. Domestic savings have slowed investment (Moreno, Seetanah and Tandrayen-Ragoobu, 2019[26]). The contribution to growth from new investment is expected to remain low in future (IMF, 2022[23]).
(Shift-share decomposition of labour productivity growth, 2008-21)
Note: : The within-sector effect measures growth in value added per worker without considering the effects of worker movement between sectors; the shift effect measures productivity growth due to workers moving into higher productivity sectors; and the residual, the interaction effect, is positive when sectors with growing productivity grow in employment share and negative when sectors with growing productivity decline in employment share. This decomposition was calculated using total employment and gross value added at constant prices in MUR across 19 economic sectors.
Source: Authors' calculations using Statistics Mauritius' National Accounts and Labour Statistics
(Top five sectors by productivity and employment measures)
Source: Authors’ calculations using Statistics Mauritius’ National Accounts and Labour Statistics
Higher rates of productivity growth will be needed to support continued increases in income in Mauritius. Value added per worker is just a quarter that of the OECD average. Mauritian labour productivity, measured as GDP per person employed, is well below the average for OECD member countries, but well above its regional average and also above the average for its income group (Figure 3.4, A). Total factor productivity, which measures output unexplained by capital or labour inputs, is also between that of upper middle- and high-income countries in key sectors such as food and textiles, but below both in the garments sector (World Bank, 2021[27]). Labour productivity growth has been declining. Between 2000 and 2019 (excluding the effects of the pandemic), value added per worker grew by 3.3%, but annual productivity growth slowed over this period (Figure 3.4, B).
Source: World Bank, authors' calculations.
Although smaller firms have the potential to contribute to economic growth and dynamism, most face challenges in innovating or improving productive efficiency. Productivity levels vary considerably across firms: close to a quarter of all firms (24.1%) have a value added per worker at least double the national median (Figure 3.5). SMEs tend to be among the least productive firms, with below-average value added per worker and with just 6.6% of total export value despite accounting for close to half (45.4%) of total employment.4 Productivity levels increase with firm size, as the median productivity level of large firms (with 250 and more employees) is more than three times that of micro-sized firms (1-9 employees).5
The need to adopt new approaches to pursuing growth is recognised in Mauritius. The Government Programme 2020-2024 and the Industrial Policy and Strategic Plan for Mauritius 2020-2025 (Office of the President of the Republic of Mauritius, 2020[28]) (Ministry of Industrial Development, SMEs and Cooperatives and UNCTAD, 2020[29]) both stress the importance of boosting productivity growth. In support of these plans, the National Productivity and Competitiveness Council’s Strategic Plan 2021-2025 outlines objectives to develop a productivity mindset through skill development and building productive and competitive enterprises through e.g. technological upgrading and capacity development (NPCC, 2021[30]).
Improving productivity growth will require that Mauritius further build upon its established strengths regarding foreign investment, innovation and skills, and inclusiveness. It will be important to diversify the sources of FDI inflows and better leverage the opportunities they present for local businesses, including in improving export prospects. Greater emphasis on innovation and skill development will also support the expansion of new areas of economic activity and greater competitiveness for local firms. Alongside these efforts, more attention will need to be paid to fostering stronger growth that addresses inequality, including through the expansion of opportunities for SMEs.
(y-axis: share of firms ; x-axis: valued added per worker in MUR thousand)
Note: Excludes the top and bottom 2.5% of firms.
Source: Authors' calculations based on Statistics Mauritius (2018[31]).
International investment has the potential to boost productivity. Investment inflows are a major source of capital accumulation in Mauritius, as inward FDI represented 11.2% of gross fixed capital formation in 2022.6 These inflows support the private sector’s increasing share of total investment, as foreign-owned firms in Mauritius tend to invest at higher rate than domestic firms (World Bank, 2021[27]). But opportunities to leverage these FDI inflows as drivers of growth have not been fully realised. Openness to foreign investment and targeting inflows with the greatest potential to support growth and development are needed. Linkages between domestic and foreign-owned firms can create channels for productivity-enhancing spillovers. Supplying advanced foreign firms can provide opportunities for SMEs to access international product and service quality standards, knowledge, technology and finance (OECD, 2023[32]).
Much of the investment in Mauritius is poorly suited to fostering productivity spillovers. Foreign investors have typically shown the greatest interest in the real estate, accommodation, and construction sectors. They have been less active in manufacturing and other sectors that are stronger conduits for technology transfer with greater potential for innovation (World Bank, 2021[27]). In 2022, real estate activities alone attracted MUR 15.4 billion in FDI, accounting for 55.8% of all FDI inflows (see Chapter 2).
Connections between foreign-owned and domestic firms can be encouraged by establishing openly accessible databases containing information on local firms that could serve as suppliers, organising events to showcase local SMEs, and implementing initiatives to promote collaboration between foreign firms and local research institutions (ITC and DIE, n.d.[33]).
Beyond supporting capital accumulation and the upgrading of domestic firms, diversified foreign investment in productive sectors with export potential will strengthen the basis for trade-led growth. Improvements in productivity can make exports more competitive, as well as providing growth opportunities for the most productive firms, as Mauritian exporters are considerably more productive than their peers. The median value added per worker among exporting firms is more than twice that of firms with zero exports (Figure 3.6). In addition, FDI also facilitates trade through other channels, as foreign firms are often themselves engaged in trade (World Bank, 2021[27]). Engagement with these firms can help to prepare local businesses for involvement in global value chains (GVCs) as well as in building connections with international markets (OECD, 2023[32]).
(Value added per worker by exporting status, 2018, MUR thousand)
Source: Authors' calculations using Statistics Mauritius (2018[31]).
Trade is already a major contributor to the economy – exports of goods and services account for more than half of GDP – but untapped potential remains. While being relatively diversified for an African economy, Mauritian exports are relatively undiversified by product, though Mauritius has the potential to increase the complexity of its trade (IMF, 2022[23]). About two-thirds of the value of goods exports in 2022 came from just five product categories: seafood (HS 16), knitted or crocheted clothing (HS 61), sugar (HS 17), apparel (HS 62), and knitted or crocheted fabrics (HS 60) (ITC, n.d.[34]) (see Chapter 2 for more information on Mauritian trade). Recognising the continued importance of trade-led growth, improvements to trade infrastructure and administration are helping to lower costs. Trade facilitation measures implemented by the Mauritius Revenue Authority, including automated filtering of declarations, have improved efficiency and reduced delays in trade, for example (World Bank, 2021[27]).
Trade can create opportunities for adopting new products and processes by domestic firms, thereby facilitating access to foreign technologies, serving as a foundation for domestic innovation. Innovation is further supported through other trade-related channels, including the direct exchange of technology, heightened competition fostering innovation, and opportunities for learning effects that ultimately contribute to the growth of innovative firms (Kiriyama, 2012[35]). Participation in GVCs may be particularly beneficial in driving cross-border knowledge and technology flows, such as where lead firms share these with their suppliers (Gereffi, Humphrey and Sturgeon, 2005[36]). Assisting firms in beginning to export and diversifying their exporting is the focus of several government initiatives, including NPCC’s Enterprise Transformation Programme, which offers support and capacity building for local firms (NPCC, 2021[30]). Strategies should be developed to fully realise the benefits of the various agreements signed with emerging economies (Chapter 4).
Innovation and skill development will become essential growth drivers for Mauritius as it reaches a high-income level. Developing domestic capacities for innovation is critical in overcoming the middle-income trap and reinvigorating economic growth (Paus, 2017[37]). The need for improvements to innovation and skills is further highlighted by local firms’ labour cost shares, which are relatively high given income and productivity levels. The ratio of sales to total labour costs in Mauritius (4.4) is below the average of high-income countries (World Bank, 2021[27]). The expansion of innovation-, technology-, and knowledge-intensive areas of the economy will allow Mauritius to remain competitive while increasing incomes.
While foreign investment can contribute to these goals through value chain linkages and other spillovers (see Chapter 2), domestic capacities also need to be improved upon. Even local firms that do not do business directly with new entrants may benefit from imitating those with more productive and innovative operations or hiring workers that have gained new knowledge and skills with these businesses (OECD, 2023[32]). FDI can boost productivity and innovation in host economies through supply chain linkages and strategic partnerships. Foreign investment is easiest to leverage when there is less of a technological gap between foreign and domestic businesses. Developing the absorptive capacities of local firms is therefore a necessary precondition to benefit from productivity spillovers (OECD, 2023[32]).
Specific funds dedicated to strategic sectors may be used to support innovation and upgrading (UNCTAD, 2021[38]). This could build on existing programmes; Mauritius already allocates funds for innovation and research to academic institutions and industry, including the Mauritius Research and Innovation Council’s National SME Incubator Scheme, which focused on supporting innovative startups. Policymakers also need to consider how intellectual property rights, rules on FDI, restrictions on the employment of foreigners with management and technical skills in some sectors, and fiscal incentives, and other rules affect lead firms’ decisions on investment and technology transfer (World Bank & WTO, n.d.[39]).
Innovation and technological upgrading are central to economic diversification and development. The importance of digitalisation and potential of the country’s ICT sector have been recognised by the government (Ministry of Information Technology, Communication and Innovation, n.d.[40]). While Mauritius is home to a number of firms introducing new products and services to their markets – especially among larger businesses and those with an outward orientation – investment in innovation is limited overall (World Bank, 2021[27]). Investments in research and development have not growth much faster than GDP – rising from 0.3% to 0.4% of GDP over 2000-20 – and are well behind those of upper middle-income countries (1.8% of GDP in 2020) and OECD member countries (2.9% of GDP in 2020) (Figure 3.7). The number of researchers relative to population is also far lower than among these other country groups.
Government policy and planning pay significant attention to innovation. The need for faster progress on innovation is acknowledged in the Industrial Policy and Strategic Plan for Mauritius (2020-2025), which calls for increased high-value R&D activities in the manufacturing sector. The Ministry of Technology, Communication and Innovation’s National Innovation Framework (2018-2023) outlines plans to establish a system of innovation bringing together capacity building, infrastructure, incentives, and major research and innovation measures. Several programmes, including the National Research and Innovation Fund, National SME Incubator Scheme, and Technology and Innovation Fund, offer financing and assistance for small businesses to foster R&D and the adoption of new technologies. Policies aiming to better attract and leverage innovation flows from international investment include the intellectual property rights elements of the Industrial Property Bill 2019, R&D tax incentives introduced in 2017, and the Regulatory Sandbox Licence introduced in the 2018/19 budget (Madhou, Moosun and Modi-Nagowah, 2022[41]).
(percentage of GDP)
Source: World Bank
The impact of these measures is limited by barriers to commercialisation and investment in innovation. The private sector is not sufficiently involved in the innovation system. Mauritius’ ranking in the 2023 Global Innovation Index is lowest in the business sophistication pillar, comprising measures of knowledge workers, innovation linkages, and knowledge absorption (WIPO, 2023[42]). Fiscal incentives, incubators and other startup assistance programmes, support for collaborative innovation, and the development of complementary skills could all be improved upon to facilitate greater private sector involvement in innovation (Madhou, Moosun and Modi-Nagowah, 2022[41]).
Beyond this support, effective innovation systems rely on institutional capacities and relationships. While innovation is influenced by numerous factors, a crucial element is cultivating a business environment that facilitates knowledge creation and dissemination. Cross-sector collaboration plays a pivotal role in translating fundamental research into commercial opportunities (OECD, 2015[43]). To promote cooperation among the various stakeholders involved in innovation, well-coordinated efforts among institutions are needed. The significant delays between investment in R&D and the realisation of gains from innovation mean that national innovation plans are useful in setting common goals to direct policymaking (Cantwell and Vertova, 2004[44]). Such plans should be designed through inclusive processes and should incorporate measurable targets for tracking progress.
Improved skills are needed as well. Worker skills are a direct driver of productivity growth, and they also affect firms’ capacities to develop and use new technologies and practices that improve efficiency and the production of novel products and services. Investment in education and education outcomes in Mauritius is generally in line with peer countries. Large and growing shares of the adult population have completed secondary and post-secondary education. Total government spending on education (4.7% of GDP in 2021) is above the upper middle income country average (3.7%) and close to the average of OECD countries (5.0%).7 Skills are generally adequate, though insufficient skills do seriously constrain some businesses. While most firms do not identify an inadequately educated workforce to be an obstacle to their current operations, 17% of firms say that it is a major obstacle (World Bank, 2021[27]).
These skill gaps affect the performance of local firms. Many businesses face challenges in recruiting workers with required skills, which can be particularly relevant in innovation- and technology-intensive sectors. For example, skill demands are particularly high in the ICT sector (World Bank, 2021[27]). Although many do not have high levels of demand for advanced skills, SMEs are likely to be particularly affected as well. Investment in worker training is relatively limited among small firms (World Bank, 2021[27]). This can have widespread effects, as the movement of skilled workers between firms and between sectors is a key means of diffusion for formal and tacit knowledge (OECD, 2001[45]).
Some evidence suggests the importance of skills to firm productivity in Mauritius. Wages, which are at least partly determined by workers’ skills (OECD, 2021[46]), are closely related to labour productivity at the firm level (Figure 3.8). Similarly, skills may be associated with greater capacities for innovation and international competitiveness; average compensation per worker among exporting firms is more than twice that among non-exporters.
(Value added and compensation per worker among Mauritian firms, 2018)
Source: Authors' calculations using Statistics Mauritius (2018[31]).
The technical and vocational education and training (TVET) system will play an important role in addressing these skills gaps. Established under the Ministry of Education and Human Resources, Tertiary Education and Scientific Research in the Mauritius Qualifications Authority Act 2001, the Mauritius Qualifications Authority is tasked with ensuring that education and training aligns with the demands of employers and is responsible for the national qualifications framework. It is also responsible for the TVET system, which consists of nine technical institutes and more than 500 other registered providers operated by various ministries, public sector agencies, and private sector providers (UNESCO, n.d.[47]).
The ongoing reforms of education and training programmes are needed in response to structural and technological change, which affect how firms operate and thus the nature of skills demanded (ILO, 2015[48]). Recent improvements to higher education should help to prepare workers with the skills demanded in a more knowledge-based economy. Mauritius has ten public higher education institutions, of which four are universities, and several private providers of higher education. Enrolment in tertiary education is growing faster in Mauritius than in any other sub-Saharan African country. This is partly the result of expanded access to higher education with the introduction in 2019 of publicly funded tertiary education for citizens pursuing a first certificate, diploma, or degree (UNESCO, 2022[49]). The government is also investing in improving education quality. Following the Higher Education Act 2017, the Higher Education Commission (HEC) and the Quality Assurance Authority were established to regulate higher education and conduct quality audits respectively. The HEC also funds research projects to improve the standing of local universities and creating economic, environmental, social, cultural and other impacts.
The benefits of education and training will be limited if skill development is not aligned with the needs of firms. Engagement with the private sector is therefore needed in addressing skill gaps and preparing for future labour demand. Curriculum reform should also include analysis of the nature of skills gaps or mismatches perceived by businesses and what this means for the reform of education and training systems (Branka, 2016[50]). Planning regarding the design and content of TVET may similarly benefit from regular consultation with affected actors.
A greater emphasis on digital skills, which are complementary to technological upgrading and growth, may also be needed and could be integrated into TVET programmes and schools – including the introduction of foundational skills in primary education – to better prepare workers for a more innovative and digitalised economy. Digital skills and digital literacy will allow for wider firm-level ICT adoption, e-commerce and the implementation of e-government services. This should include prioritising education programmes and enhancing access for marginalised groups. Successful initiatives that integrate digital skill development into formal education are broad and encompassing. In other areas, skill development programmes geared towards enhancing digital user skills frequently highlight the importance of improving access for excluded groups. Relatedly, national broadband strategies could be useful in setting priorities for advancing digitalisation in Mauritius through future improvements in connectivity (World Bank, 2014[51]).
Expanded on-the-job training and other forms of continuous learning are needed to drive growth, particularly during periods of structural transformation and in less favourable demographic contexts (ILO, 2021[52]).8 Effective continuous learning systems should be relevant for both individuals seeking employment and employees aspiring to advance in their careers, including those undergoing retraining for transitioning into new sectors. To effectively meet individual needs, programmes should demonstrate flexibility while giving priority to hands-on learning (OECD, 2019[53]). The use of modular training programmes is on the rise, which appear to be most effective when integrated into a broader and well-established learning framework (OECD, 2003[54]). In environments with robust job protections and limited support for the unemployed, there is generally a preference for firm-specific training. This approach aims to retain workers within the same company, retraining them for new tasks or additional responsibilities. Conversely, systems that prioritise more general training and place greater individual responsibility on workers are more suitable in contexts where job mobility is higher (OECD, 2021[55]), as has often been perceived to be the case in Mauritius (HRDC, 2012[56]).
Additional education and training will not do much to support growth without efficient labour markets that connect workers with work to which they are well-suited. According to the ILO, many workers in Mauritius are poorly matched to their jobs, representing wasted potential. Addressing the skill mismatch will require different approaches for different demographic groups, including strengthening continuous learning and employment services. Since undereducated workers tend to be older, targeted training and retraining programmes are needed to help these workers adjust to working with newer technologies or to move to jobs in new sectors (ILO, 2019[57]). For younger workers who are often overqualified for their jobs, assistance with job search and protections for the unemployed, along with reforms to education and training programmes, could help in reducing skill mismatches. Greater use of active labour market policies (ALMPs) – including employer subsidies, job creation schemes and training, counselling and job search assistance – may help to boost employment opportunities and improve matching between jobs and workers (Lucifora and Origo, 2002[58]). ALMP systems that are decentralised and adaptable are typically most effective in handling crises and adapting to evolving situations, as was seen in countries' responses to the COVID-19 pandemic. The coverage of active labour market policies could be expanded by relaxing conditions on participation (ILO, 2019[59]).
Economic growth has raised incomes across the country but has not addressed inequalities. Between 1996/97 and 2017, the share of households in relative poverty – defined as those with incomes below half of the median monthly household income per adult equivalent – increased from 8.7% to 9.6% (Statistics Mauritius, 2020[60]). Wage inequalities arising from skill shortages have driven increases in inequality, which were somewhat mitigated by public transfers (World Bank, 2018[61]). In addition to its impact on disadvantaged groups, uneven growth can hinder economic development by raising barriers to education and skill development (OECD, 2014[62]). Given this, improvements to worker skills and productivity levels will need to be broad-based to produce more inclusive and stronger growth. Improvements to SMEs are also needed for a more balanced economy.
Gender differences in labour market outcomes contribute significantly to inequality. While the ratio of the working-age female labour force participation rate to that of males is increasing, it is lower in Mauritius (0.75) than it is in sub-Saharan Africa (0.85) or upper-middle income countries (0.87) (Figure 3.9).9 This trend is largely due to the increase in young women joining the labour force. On the other hand, rising income levels in future may lead to more women withdrawing from the labour market in favour of taking on domestic responsibilities (IMF, 2017[63]). In addition to differences in access to education and training, a lack of access to appropriate childcare holds back greater labour force participation rates for women (World Bank, 2021[27]). These factors have also produced an income gap, with women’s average earnings just 76.1% of men’s in 2021 (Statistics Mauritius, 2020[64]). Chapter 2 looks at the contribution of foreign investors to gender equality.
Source: (Statistics Mauritius, 2023[65]).
Labour market policies addressing the needs of women will be needed to lessen inequalities by gender in Mauritius. This may include increasing assistance on care for children and the elderly that is traditionally provided by women10, fostering more flexible modes of work, or extending paternity leave, to reduce gender gaps in employment (World Bank, 2017[66]).
Young Mauritians also face significant challenges in labour markets. The unemployment rate for people aged 16 to 24 in the labour force in the third quarter of 2023 was 17.8%, declining from 20.0% in the first quarter. Young people from poorer families are particularly likely not to be in education, employment, or training, contributing to the perpetuation of existing inequalities (World Bank, 2018[61]). Furthermore, youth and women are overrepresented among those in jobs not matching their skill levels. Skill mismatches are a growing issue in the Mauritian labour market. In particular, the share of workers overeducated for their jobs increased between 2006 and 2015 (World Bank, 2018[61]). Along with lower rates of employment, this can negatively affect individuals’ incomes and earning potential, as well as the prospects for growth and productivity improvements across the economy.
Active labour market policy measures run by the Ministry of Labour and others provide some help to improve employment outcomes for women and youth by addressing labour market inefficiencies. The Women Back to Work Programme provides special training programmes for women re-entering the workforce after a period of absence, while the Youth Employment Programme provides stipends to young workers during their first year of placement or training. The unemployment benefit Workfare Programme provides training, assistance in job placement, and startup support for both formal and informal workers. Started in 2009, the Programme is implemented by the Ministry of Labour, Industrial Relations, Employment and Training in coordination with the Ministry of Social Security, National Solidarity, and Environment and Sustainable Development and other public agencies. It has been shown to be an effective measure for supporting worker income and employability (ILO, 2019[67]).
SMEs can be drivers of inclusive growth for employees, and entrepreneurship can be an important source of upward economic mobility (OECD, 2019[68]). Many new firms are also drivers of competitive pressure and innovation, but the potential of younger and smaller firms is often underexploited. Significant labour costs and low productivity hold back the competitiveness of local SMEs, meaning that a supportive business environment is needed to strengthen these firms’ capacities to compete and expand. Access to finance is a particularly common concern among smaller and lower-productivity firms, leading most to rely on internal resources for working capital and long-term investment (World Bank, 2021[27]). More balanced competition is needed as well. While the scale of the informal economy is estimated to be relatively small in comparison with other countries in sub-Saharan Africa, informal competition is a major concern to some smaller formal firms, particularly in the construction, transport, and food sectors (World Bank, 2021[27]).
Supportive policies and institutions are key to solving these challenges and the potential of SMEs and their need for support is recognised in government planning and policy. The 10-Year Master Plan for the SME Sector in Mauritius targets significant increases in SMEs’ shares of employment, value added, and exporting through improvements to skills and firm competitiveness, growth potential, and performance (Ministry of Business, Enterprise and Cooperatives, n.d.[69]). Various programmes directly offering or supporting access to finance for SMEs are offered by the Bank of Mauritius, Development Bank of Mauritius, Investment Support Programme, and SME Equity Fund, along with loans from commercial bank targeting small businesses. Most small businesses are aware of the support programmes available to them (Larson, Loyza and Woolcock, 2016[19]), even if they are not widely used. Among small manufacturing, trade, and services firms, 73.5% of businesses were aware of the existence of support schemes, but only 15.4% said that they had made use of them, according to the 2018 Census of Economic Activities.
The limited use of these assistance programmes targeting SMEs on finance and innovation suggests that either greater promotional efforts are needed or that alternative approaches would be more useful in addressing the challenges faced by these firms. These programmes could focus on fostering linkages between SMEs and larger domestic or foreign firms to support technology transfer and other productivity spillovers.
Particular attention may need to be paid to developing new and small businesses, including increasing the support available to startups and working to establish a stronger culture of entrepreneurship. This has already started, such as through recent reforms to the national curriculum to integrate entrepreneurship education.
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← 1. The ratio of the economically dependent (children and elderly) to the working-age population.
← 2. Authors’ calculations, using UN DESA. (n.d.). Data Portal. https://population.un.org/dataportal/data/indicators/70,67/locations/480/start/1950/end/2101/table/pivotbylocation.
← 3. Data on value added were not available from before 1976. World Bank. (n.d.). World Development Indicators. https://databank.worldbank.org/source/world-development-indicators.
← 4. Statistics Mauritius. (n.d.). Small and Medium Enterprises. https://statsmauritius.govmu.org/Pages/Statistics/By_Subject/SME/SB_SME.aspx.
← 5. Authors’ calculations, using Statistics Mauritius (2018[31]).
← 6. UNCTAD. (n.d.). UNCTADstat. https://unctadstat.unctad.org.
← 7. World Bank. (n.d.). World Development Indicators.
← 8. According to the government, provisions for dual apprenticeship in legislation (for MITD) exist, but effective implementation is sometimes hindered by various factors: lack of students to launch a particular course by the MITD, lack of infrastructural facilities and equipment (and therefore collaboration with enterprises is required.)
← 9. Authors’ calculations, using World Bank. (n.d.). World Development Indicators.
← 10. The budget for 2023/24 calls on firms employing more than 200 people to provide childcare facilities to employees.