In the 1970s, Mauritius was a classic mono-crop economy with sugar production being its only notable activity. Isolated in the Indian Ocean, the island, with a (current) population of 1.3 million people, did not look like a good bet in the economic growth stakes.

Indeed, it didn’t take a cynic to predict hard times ahead as its dominant activity, growing and processing sugar, was seemingly sustained only by preferential access to the European market in terms of the Lomé Convention. Yet by 2012, the World Bank had billed Mauritius as the African economy where it is easiest to do business. According to the annual Doing Business report, the country was ranked 32nd globally at June 2015 – 30 places ahead of Africa’s second-best performer, Rwanda (at 62). Mauritius has deliberately sought to position itself as ‘the Singapore of the Indian Ocean’ and the signs indicate that it’s succeeding.

The nation’s GDP per person experienced impressive growth between 1980 and 2015, going from US$1 855 to US$19 500.

Mauritius has moved from ‘poor’ to ‘middle income’ status. By comparison, South Africa’s GDP per capita is US$13 200. The difference is in the trend line. The country has been steadily moving upward since 1980, while South Africa has been stagnant since 2007. All of this has been achieved despite the trade quota for sugar and textiles – which became an important component of the economy in the 1980s – being reduced.

In fact, in 2016, Mauritius is no longer a mono-crop economy. Manufacturing, financial services, tourism and property are all strong sectors that have been developed over the past 30 years. It has achieved this on the back of smart policies that have consistently built on its geographical position and competitive advantages. The rise of Mauritius is the result of a deliberate policy of economic openness, low taxation, good government and continuity.

Mauritius’ first step away from resource dependence was into tourism, in the 1970s. The industry’s representative body, the Association des Hôteliers et Restaurateurs de l’île Maurice was set up in 1973. The government pursued a policy of deliberately seeking to attract tourism investment through tax breaks and general support (including a national airline), and a hotel school was established in 1971. The big expansion came in the 1980s when companies such as the South African hotel group Sun International began a major investment phase and offered packaged beach holidays.

Tourism continues to be a critical part of the Mauritian economy – in 2014, its total contribution to the island’s GDP was MUR100.4 billion. According to the World Travel and Tourism Council’s 2015 report, the sector accounted for 24.2% of total employment (including indirect employment) on the island, a total of 134 000 jobs.

Although the point is seldom spelled out, there is little doubt that the service ethic of a high-end tourism economy has spilled over into governance and economic services more generally. It is an essential part of the tapestry of Mauritius’ deliberate positioning.

The tiny size of its domestic market makes Mauritius a ‘microstate’ by some reckonings, and such economies are hardly enough to attract major industries for their own sake. But decision-makers recognised that by keeping its economy open, the island could be a stepping stone for trade between big markets, and thus set what has turned out to be an extremely viable development strategy.

All taxes in Mauritius are pegged at a ‘harmonised rate’ of 15%, with massive rebates available to companies that do business offshore. With access to the booming markets of East Africa (Mauritius is a member of COMESA) and India, this truly capitalises on the island’s location. It also compares favourably with South Africa’s marginal tax rate of 28% and has the advantage of being far easier to administer. There is no tax on inheritance or capital gains, and no withholding tax on the payment of dividends.

Mauritius has no exchange controls, and businesses are not subjected to cross-examination and red tape every time they want to spend overseas. The comparison with South Africa’s arguably over-regulated regime is dramatic and thus highly attractive to Johannesburg-based companies wanting to trade more easily with both sub-Saharan Africa and India. Companies that have a substantial presence in Mauritius include Investec, MTN, Standard Chartered bank, KPMG, and pharmaceutical manufacturer Aspen Pharmacare.

Exchange controls are a massive disincentive to investment – and one of the reasons Mauritius has become so attractive to South African investors. Wealthier South Africans are second only to the French when it comes to relocating to the island. It was reported that in 2015, the once poverty-stricken country had 3 200 US dollar millionaires in residence – up some 300% since 2000.

However, it’s not only corporate investors who are attracted by the open-trade regime and relaxed lifestyle. A number of consultants in the engineering and IT industries have relocated in the past two years, attracted by the easier prospect of selling their services into the East African and Indian Ocean Rim markets.

Poverty and inequality do not appear to be threatening this new paradise. According to Richard Robinson, president of the South African Chamber of Commerce in Mauritius, the fact that the government describes its policies as ‘innovative socialism’ should deter investors. The only socialism, he says, is a strong social upliftment programme.

Mauritians receive free education and healthcare, and the workforce – known for their productivity – is well educated, with a 90.6% literacy rate.

The country’s multi-party democracy is well established and stable. It has frequently been ruled by coalition governments, which demonstrates the considerable social consensus behind its open-trade stance.

Mauritius is now reaping the benefits of three decades of good governance, clever strategy and consistent policy. The island economy has cracked the hardest nut of all in development economics – achieving the structural transformation necessary to put it on a path of high-value-added growth. Structural transformation is, in essence, the shift from primary production (agriculture and mining) to the value-adding activities of manufacturing and services.

Reflecting exactly the sort of shift that developed economies have experienced at some time in the past, Mauritius’ secondary sector (including manufacturing and construction) grew from 23% to 28% between 1976 and 2010, while the tertiary sector (which encompasses tourism and financial services) leapt from 50% to nearly 70%. Sugar’s contribution fell from more than 20% of the economy to about 4% in the same period.

Mauritius continues to be famous for its crystal-blue waters and beach holidays. Those, however, look increasingly less like the core of its economy than a bonus to be enjoyed by the professional class it hosts. The island has proven that openness to trade can deliver a big developmental bonus.

By David Christianson
Image: Gallo/GettyImages