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Friday, 25 March 2011

The Mauritius Miracle

Stiglitz highlights three key lessons from Mauritius growth experience - pursuit of social cohesion; minimal military expenditure; and investment in human capital. We have previously touched on this as part of "country success" series - see  Why is Mauritius so successful? Empirical evidence appear to caution against extrapolating too much from the Mauritian experience.  

Suppose someone were to describe a small country that provided free education through university for all of its citizens, transportation for school children, and free health care – including heart surgery – for all. You might suspect that such a country is either phenomenally rich or on the fast track to fiscal crisis.

After all, rich countries in Europe have increasingly found that they cannot pay for university education, and are asking young people and their families to bear the costs. For its part, the United States has never attempted to give free college for all, and it took a bitter battle just to ensure that America’s poor get access to health care – a guarantee that the Republican Party is now working hard to repeal, claiming that the country cannot afford it.

But Mauritius, a small island nation off the east coast of Africa, is neither particularly rich nor on its way to budgetary ruin. Nonetheless, it has spent the last decades successfully building a diverse economy, a democratic political system, and a strong social safety net. Many countries, not least the US, could learn from its experience.

In a recent visit to this tropical archipelago of 1.3 million people, I had a chance to see some of the leaps Mauritius has taken – accomplishments that can seem bewildering in light of the debate in the US and elsewhere. Consider home ownership: while American conservatives say that the government’s attempt to extend home ownership to 70% of the US population was responsible for the financial meltdown, 87% of Mauritians own their own homes – without fueling a housing bubble.

Now comes the painful number: Mauritius’s GDP has grown faster than 5% annually for almost 30 years. Surely, this must be some “trick.” Mauritius must be rich in diamonds, oil, or some other valuable commodity. But Mauritius has no exploitable natural resources. Indeed, so dismal were its prospects as it approached independence from Britain, which came in 1968, that the Nobel Prize-winning economist James Meade wrote in 1961: “It is going to be a great achievement if [the country] can find productive employment for its population without a serious reduction in the existing standard of living….[T]he outlook for peaceful development is weak.”

As if to prove Meade wrong, the Mauritians have increased per capita income from less than $400 around the time of independence to more than $6,700 today. The country has progressed from the sugar-based monoculture of 50 years ago to a diversified economy that includes tourism, finance, textiles, and, if current plans bear fruit, advanced technology.

During my visit, my interest was to understand better what had led to what some have called the Mauritius Miracle, and what others might learn from it. There are, in fact, many lessons, some of which should be borne in mind by politicians in the US and elsewhere as they fight their budget battles.

First, the question is not whether we can afford to provide health care or education for all, or ensure widespread home ownership. If Mauritius can afford these things, America and Europe – which are several orders of magnitude richer – can, too. The question, rather, is how to organize society. Mauritians have chosen a path that leads to higher levels of social cohesion, welfare, and economic growth – and to a lower level of inequality.

Second, unlike many other small countries, Mauritius has decided that most military spending is a waste. The US need not go as far: just a fraction of the money that America spends on weapons that don’t work against enemies that don’t exist would go a long way toward creating a more humane society, including provision of health care and education to those who cannot afford them.

Third, Mauritius recognized that without natural resources, its people were its only asset. Maybe that appreciation for its human resources is also what led Mauritius to realize that, particularly given the country’s potential religious, ethnic, and political differences – which some tried to exploit in order to induce it to remain a British colony – education for all was crucial to social unity. So was a strong commitment to democratic institutions and cooperation between workers, government, and employers – precisely the opposite of the kind of dissension and division being engendered by conservatives in the US today.

This is not to say that Mauritius is without problems. Like many other successful emerging-market countries, Mauritius is confronting a loss of exchange-rate competitiveness. And, as more and more countries intervene to weaken their exchange rates in response to America’s attempt at competitive devaluation through quantitative easing, the problem is becoming worse. Almost surely, Mauritius, too, will have to intervene.

Moreover, like many other countries around the world, Mauritius worries today about imported food and energy inflation. To respond to inflation by increasing interest rates would simply compound the difficulties of high prices with high unemployment and an even less competitive exchange rate. Direct interventions, restrictions on short-term capital inflows, capital-gains taxes, and stabilizing prudential banking regulations will all have to be considered.

The Mauritius Miracle dates to independence. But the country still struggles with some of its colonial legacies: inequality in land and wealth, as well as vulnerability to high-stakes global politics. The US occupies one of Mauritius’s offshore islands, Diego Garcia, as a naval base without compensation, officially leasing it from the United Kingdom, which not only retained the Chagos

The US should now do right by this peaceful and democratic country: recognize Mauritius’ rightful ownership of Diego Garcia, renegotiate the lease, and redeem past sins by paying a fair amount for land that it has illegally occupied for decades.

2 comments:

  1. I am not sure if Mauritius is the main character of this story or the US? Either way, it's important to remember that managing a country of 1.2mm is meaningfully different than managing a country of 300mm. This takes nothing away from the success of Mauritius or the lessons that can be learned. Put another way, any money manager knows that when you have fewer assets under management alpha is easier to come by. Mauritius is only half the land mass of the smallest state in the United States (rhode island), and has just about the same population. there is much to be learned from Mauritius, particularly for Zambia. Zambia currently spends almost twice as much money, as a percentage of GDP, on millitary as we do on education!!! This is a tragedy considering we have never had a foreign or domestic war since independence. I suppose we will need a strong military if we fail to educate our people. Hopefully the rock throwing that happened in Lusaka last week isn't a sign that we are regressing to the stone age.
    Great article. Let us not be stiff necked, give us teachable spirits, that we might glean from the success of Mauritius all that is worthy to be emulated in Zambia.

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  2. After all, rich countries in Europe have increasingly found that they cannot pay for university education, and are asking young people and their families to bear the costs.

    After being thoroughly indoctrinated by oligarchic thinktanks, funded by the Koch brothers and Rockefellers, like the American Enterprise Institute, the Manhattan Institute, the Brookings Institute, the Cato Institute, etc.

    It has been a remarkable spectacle. You watch the European Union's presidents, finance and foreign ministers fly in a beeline to the US, and when they get back, every country in Europe 'sees the need' to raise the retirement age.

    ReplyDelete

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