How economic freedom gave Mauritius success against all odds

While South Africa battles when it comes to economic freedom – which impacts transport companies and indeed every single business and individual in the country – Mauritius is a shining light. EUSTACE DAVIE examines what South Africa needs to do to achieve the same.

James Meade, the British recipient of the Nobel Prize in economics, reported in 1961 that Mauritius faced a bleak future. The country was reliant on a single crop (sugar), subject to weather and price shocks, threatened by overpopulation, had no potential alternative job opportunities, was multi-ethnic, had large income inequalities, and had experienced political conflict. Land was limited, there was very little technical expertise outside the sugar industry, capital was scarce, and the island was not geographically well-positioned.

Half a century later, Mauritius announced reforms that counteracted the bleak outlook sketched by James Meade. The following list describes some of the reforms that the island state announced in 2006 and subsequently carried out:

• The ethnic groups made peace and decided to work together for the benefit of all
• The business community was consulted on political and economic matters
• A free port was established
• Offshore banking was instituted
• Duty-free export processing zones (EPZ)s were created, with tax exemptions, a less regulated labour environment and special options for women
• Foreign investment was encouraged; and
• High-income foreign immigrants were encouraged to settle in the country.

These and other reforms were a great success and transformed the country’s economy.

The bleak outlook that Meade described for Mauritius, sounds, in many ways, like a description of South Africa today, except that if a modern James Meade were to evaluate South Africa, his report in some respects would be a great deal more pessimistic than his report on Mauritius was 60 years ago. In the meantime, Mauritius has sailed to general prosperity while South Africa is stuck in the economic doldrums.

In comparing the two countries from an economic freedom perspective, data from the latest Economic Freedom of the World (EFW) Report, produced by the Fraser Institute, is useful. It contains analyses of the economies of 162 countries, and can be used to track some of the successes and failures of Mauritius and South Africa over the 40 years from 1980 to 2019.

It will be instructive to compare the EFW factors, or differences between the economies of Mauritius and South Africa between 1980 and 2019, to consider whether the changes made by the Mauritius government to turn its economy around could perhaps be useful to South Africa. In 1980 Mauritius was ranked 64^th on the EFW list and South Africa slightly better at 56^th. In 2019 Mauritius ranked 11^th and South Africa at 84^th. Mauritius gained 53 places in the ranking in 40 years while South Africa lost 28 places.

The reasons for the rise and fall of the two countries on the EFW lists can be identified by examining the differing results in the 42 data points that are used to measure economic freedom in five broad areas used to construct the EFW summary index. The data points are given values out of ten and there are significant differences between the figures for Mauritius and South Africa.

Of the 42 data points, Mauritius scored below five (50%) on only one of the measures, which was capital controls.

The 12 measures on which South Africa scored less than five (50%) were:

• Government consumption
• Top marginal income and payroll tax rate
• Legal enforcement of contracts
• Reliability of police
• Standard deviation of tariff rates
• Controls on the movement of capital and people
• Compliance cost of importing and exporting
• Hiring and firing regulations
• Centralised collective bargaining
• Administrative requirements
• Bureaucracy costs

In other words, South Africa was found to have 12 institutions and policy areas in which the country scored less than 50% from an economic freedom perspective, whereas Mauritius had one.

The question that then arises is, does it matter whether a country’s economic policies and institutions are consistent with economic freedom? The EFW annual reports show that it certainly does. The higher the score of a country on the economic freedom list, the better the economy of the country performs.

The top four countries on the 2019 list were Hong Kong, Singapore, New Zealand and Switzerland. The bottom four were Algeria, Libya, Sudan and Venezuela. The people of Hong Kong, who have had the good fortune of enjoying the freest economy in the world for decades, are threatened with the loss of many of their freedoms. At the other end of the scale, Venezuelans, who enjoyed the benefit in 1980 of living in the 15^th freest economy, have their country rated at 162^nd and as a result, citizens of the country are suffering terrible deprivation.

Mauritius has 1,7 million inhabitants. Its GDP (PPP) per capita was $7 990 in 1990, which grew to $22 870 in 2019 (World Bank, constant 2017 US$) and converts to per capita growth of 5,1% per annum. During the same period, South Africa’s GDP (PPP) per capita grew from $10 296 to
$12 492, which converts to average per capita growth of 0,76% per annum and the lower level of economic freedom and economic growth is starkly visible in South Africa’s mass unemployment rate of 44,4% (expanded rate, including “disillusioned workers”).

South Africa urgently needs to carry out the kind of evaluations and reforms that were conducted by the Mauritians to reform their country for the benefit of all. Because of the differences in history, cultures, geography and other factors, the reforms required in South Africa will be different. However, the Mauritians looked at the factors that had brought positive results in other countries and used the information to construct their reforms. It would be a great gift to current and future South Africans if similarly successful reforms were to be carried out in this country.