Mauritius and the middle-income trap

“Mauritius’s future innovation depends on the answer to the ultimate question: Do we have a high-quality human capital and productivity?” - Seeram Ramakrishna, Professor and Director of Center for Nanobres and Nanotechnology. 

In its 44 years as an independent nation, Mauritius has striven to build a credible, globally connected middle-income economy on an ostensibly unpromising craggy, poorly endowed, geographically remote if eye-wateringly beautiful island.

When reflecting on the more attractive aspects of their national character, Mauritians like to use words such as, “resourceful” and “resilient” and the country has indeed displayed an ability to reinvent its self. Yet the traffic-clogged streets and harbour of their capital city of Port Louis, whilst an outward sign of an economy that has continued to expand and modernize, signal not only dynamism but some underlying infrastructural problems that need to be addressed.

Mauritius faces more uphill battles with insufficient skills, an ageing population, low productivity and perhaps the inability, thus far, to escape the “middle-income trap” – the predicament of countries to lose their low-income status, but who then find it much harder to become a high-income economy.

“We must improve our productivity and competitiveness,” says the Governor of Bank of Mauritius Rameswurlall Basant Roi. “The country’s demographic profile, which used to be a pyramid, now looks like a tower block.” Mauritius needs to overhaul its education system, which he claims focuses too much on rote learning and is not producing graduates with the right skills.   

While the country has, in the past, displayed an ability to reinvent itself as required, it is the Mauritian talent, not capital, which will be the key factor linking innovation, competitiveness and growth. The nation’s human capital endowment - the skills and capacities that reside in Mauritian people and that are put to productive use - a more important determinant of its long-term economic success than virtually any other resource.

It is this resource that must be invested in and leveraged off efficiently in order for it to generate returns both for the individual Mauritians as well as the Mauritian economy as a whole.

Historically, Mauritian human capital development was achieved through sustained, high and consistent investment in education, which allowed it to exploit international market opportunities and maintain high socio-economic growth with their consistent investment in human capital, generating a stream of benefits to the economy.

Avoiding the disruptions of many of its African peers, Mauritius has an enviable political stability, relative harmony with their private sector, unusually strong social services offering free education and healthcare, and an ethnic mix with a legacy of French as well as British rule, and the Indian and European settlers alongside Africans and Chinese giving the country a strong international outlook.

While a close public-private partnership facilitated private sector-led growth in a stable macroeconomic and institutional environment, and Mauritius moving towards an export orientated and diversified “four-pillar” economy producing textiles, tourism, financial and ICT services.

As a result, growth was more equitably shared amongst the population at large, with export-led industries translating into substantial employment creation with the subsequent productivity gains supporting rising salaries, which were then substantially reinvested into their human capital. This shared economic growth pulled the majority of the population out of poverty and created a vast middle class.

Yet today the advantages of past decades are waning. A recent World Bank report warned that growth in Mauritius had slowed, while inequality has increased. Highlighting the “disappointment” for the bottom 40% of the population and calling for a “restructured education system to be at the core of change.”

The main areas that are holding back the potential of the economy to accelerate economic growth are limited and inadequate skills, the limitations of technology absorption and inadequate trade facilitation.

Exporting sophisticated products with higher added value rests on the capability of the Mauritian labour force to adopt new technologies and embrace new processes. Yet many firms across multiple sectors in Mauritius note the constraint of a limited pool of workers with adequate qualifications and skills. 

“There is an unprecedented gap between the quality of human resources we have at our disposal and the quality of human capital needed to escape the middle-income trap we find ourselves in. The quality of our human capital needs to be improved and we need more rigorous training, as well as more foreigners,” says Basant Roi.

However, the country of 1.3 million does not make it easy for expats with work visas typically restricted to two years and while they are generally renewed, there is no guarantee.

“A substantially weakened world economy has made the future more uncertain. A small island state like Mauritius has only one sure way of making it a robust economy: improve the quality of its human capital stock,” he says.

Thus one of the key planks of the Government Program for 2015-2019 is to transform Mauritius by focusing on knowledge-based goods and services and high-value manufacturing sectors as potential growth poles, while simultaneously catalysing the vast potential of the ocean economy, which requires the development of high skills, technology, research and development, innovation and enterprise as fundamental enablers.  

Mauritius’s small population means that many Mauritians do not have the necessary knowledge, training and skills in the sectors considered vital to grow the economy and compete with other regional investment hubs such as Singapore or Dubai.

Business leaders across the island have voiced their concerns over the lack of quality human capital on the island. “There are definitely certain difficulties in finding certain skills,” says Craig McKenzie CEO of Investec Bank Mauritius. “The markets that we work in are not present here; therefore we try to hire Mauritians who have worked overseas and gained experience in those markets.”

He adds that, “if the Government is serious about wanting Mauritius to become a major international finance hub that can compete with Singapore, Dubai and Hong Kong, one needs to be able to attract the best human capital and then provide them with the mechanism of staying permanently. We cannot expect to be highly competitive when we do not have enough people with the requisite skills.” 

According to Ravin Dajee, CEO of Barclays Bank Mauritius, finding human capital in Mauritius is indeed a challenge: “Over the past ten years in the Mauritian financial services industry there has been wage inflation precisely because of a lack of talent.”

Although other business leaders paint a more encouraging picture, according to Tej Gujadhur, founder and CEO of GFin Corporate Services, finding high standard human capital in Mauritius is not a challenge. “Those looking for a London style “off-the-shelf product” in Mauritius should stop looking. All of our employees are Mauritian and 80 percent female. They are fantastic and doing a great job servicing a global client network. Our people have the willpower and hunger necessary to service our clients to a global standard.”

Despite these conflicting accounts, it is an undeniable fact that as the technological gap between Mauritius and the advanced economies narrows, the need for education and skills at all levels will grow and according to many Mauritian employers many employees may have the necessary qualifications but lack the appropriate skills. The high-value ICT and Financial sectors especially reporting large labour shortages. 

According to Basant Roi, without enhanced performance, an escape from the middle-income trap is almost unimaginable, “In a very resource-scarce country like ours, aggregate income levels can only meaningfully rise only if our exports of goods and services go up, therefore quality of products, whether are goods or services is a quintessential element in achieving and sustaining the competitiveness of our economy. While several other factors, including the quality of our human capital, innovative capacity and resourcefulness are without a doubt critical to our economy.” 

The key, therefore, to making Mauritius a successful, inclusive high-income economy will, as ever, lie in raising the quality of its education system and better-aligning skills with labour market needs. This will help Mauritians reap the benefits of expanded employment opportunities, boosting employment in higher value sectors and absorbing the losses in declining sectors such as agriculture and textiles.

Tertiary education in particular needs to focus on weak collaboration between Universities, R&D, and industry and the low availability of scientists and engineers. Furthermore, the internationalisation of the universities needs to be increased, as it is fundamental for small knowledge economies to be associated with international student and academic mobility.

Closer links with international firms are also important, and while there has been a growing emphasis on the provision of science and engineering courses, the educational system in Mauritius still has a bias towards humanities. Often failing to equip young Mauritians with adequate skills. This is repeatedly mentioned by the private sector as one of the major constraints to creating additional employment.  

Education institutions like the University of Technology (UTM) are tackling this head-on by taking steps to improve the employability of their graduates and thus the skills of the workforce: “Our aim is to put technology at the service of society through our courses and research and development projects,” says Dr. Sharmila Seetulsingh-Goora Director General of UTM. “Innovative technologies can help create wealth for the nation as well as being useful in the promotion of Mauritius with input from international investors.”

Mauritius has always been forced to live on its wits, anticipating and aggressively tackling change. Its transition into the high-middle income country was underpinned by creating a well-managed Export Processing Zone, conducting diplomacy fostering trade preferences, spending lavishly on education, avoiding currency overvaluation, and facilitating business.

The question of when it will finally be able to enjoy high-income country status will depend on its ability to improve the skill set of its labour force, the quality of infrastructure, and the speed of technology adoption. Whilst further improvements in the business environment will be essential to attract FDI, generate domestic investment, and maintain and improve on Mauritius’ image as an open, stable, and well-functioning place to do business. For the longer term, policies to both train and attract high skilled labour should be paramount.