Mauritius and the middle-income trap

Mauritius's Human Capital Challenge

"Mauritius's future innovation depends on the answer to the ultimate question: Do we have high-quality human capital and productivity?" asks Seeram Ramakrishna, professor and director of the Centre for Nanofibres and Nanotechnology.

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

Mauritians like to describe themselves as "resourceful" and "resilient", and the country has indeed displayed an ability to reinvent itself. Yet the traffic-clogged streets and harbour of Port Louis, whilst outward signs of an economy that has continued to expand and modernise, signal not only dynamism but underlying infrastructural problems.

The middle-income trap

Mauritius faces uphill battles: insufficient skills, an ageing population, low productivity and perhaps the inability to escape the "middle-income trap"—the predicament of countries that lose their low-income status but then struggle to become high-income economies.

"We must improve our productivity and competitiveness," says Rameswurlall Basant Roi, governor of the Bank of Mauritius. "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 focuses too much on rote learning and fails to produce graduates with the right skills.

While the country has previously displayed an ability to reinvent itself, it is Mauritian talent, not capital, that 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 are put to productive use—is a more important determinant of long-term economic success than virtually any other resource.

Past successes

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, generating substantial benefits to the economy.

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

Close public-private partnership facilitated private-sector-led growth in a stable macroeconomic and institutional environment, with Mauritius moving towards an export-oriented and diversified "four-pillar" economy producing textiles, tourism, financial and ICT services.

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

Present challenges

Yet the advantages of past decades are waning. A recent World Bank report warned that growth in Mauritius had slowed whilst 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 constraints holding back the economy 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 note 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," says Mr Basant Roi. "The quality of our human capital needs to be improved and we need more rigorous training, as well as more foreigners."

However, the country of 1.3m does not make it easy for expatriates: work visas are typically restricted to two years and, whilst generally renewed, offer 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 creating a robust economy: improve the quality of its human capital stock," he says.

Skills shortage

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

Mauritius's small population means that many Mauritians lack the necessary knowledge, training and skills in 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 concerns over the lack of quality human capital. "There are definitely difficulties in finding certain skills," says Craig McKenzie, chief executive 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, chief executive 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."

Other business leaders paint a more encouraging picture. According to Tej Gujadhur, founder and chief executive 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% 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."

The way forward

Despite these conflicting accounts, it is undeniable that as the technological gap between Mauritius and the advanced economies narrows, the need for education and skills at all levels will grow. 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 report large labour shortages.

According to Mr 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 if our exports of goods and services go up. Therefore quality of products, whether goods or services, is a quintessential element in achieving and sustaining the competitiveness of our economy. Several other factors, including the quality of our human capital, innovative capacity and resourcefulness are without 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 losses in declining sectors such as agriculture and textiles.

Tertiary education in particular needs to address weak collaboration between universities, R&D and industry, and the low availability of scientists and engineers. Furthermore, the internationalisation of 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. Whilst there has been 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 Mauritius (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."

Conclusion

Mauritius has always been forced to live on its wits, anticipating and aggressively tackling change. Its transition into the upper-middle-income bracket was underpinned by creating a well-managed Export Processing Zone, conducting diplomacy to foster 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. Further improvements in the business environment will be essential to attract FDI, generate domestic investment and maintain Mauritius's 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.