9089 droolkEconomic Development Institute of The World Bank Public Disclosure Authorized Successful Stabilization Public Disclosure Authorized and Recovery in Mauritius Ravi Gulhati Public Disclosure Authorized and Raj Nallari Public Disclosure Authorized EDI DEVELOPMENT POLICY CASE SERIES Analytical Case Studies * Number 5 EDI DEVmoPMNrPoucy CASESRES ANAL.xcALCASE STUDmms * No. 5 Successful Stabilization and Recovery in Mauritius Ravi Gulhati Raj Nallari The World Bank Washington, D.C. Copyright 0 1990 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 1990 The Economic Development Institute (EDI) was established by the World Bank in 1955 to train officials concerned with development planning, policymaking, investment analysis, and project implementation in member developing countries. At present the substance of the EDrs work emphasizes macroeconomic and sectoral economic policy analysis. Through a variety of courses, seminars, and workshops, most of which are given overseas in cooperation with local institutions, the EDI seeks to sharpen analytical skills used in policy analysis and to broaden understanding of the experience of individual countries with economic development. In addition to furthering the EDI's pedagogical objectives, Policy Seminars provide forums for policymakers, academics, and Bank staff to exchange views on current development issues, proposals, and practices. Although the EDrs publications are designed to support its training activities, many are of interest to a much broader audience. EDI materials, including any findings, interpretations, and conclusions, are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Because of the informality of this series and to make the publication available with the least possible delay, the manuscript has notbeen edited as fully as wouldbe the case with amoreformal document, and the World Bank accepts no responsibility for errors. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Publications Department, at the address shown in the copyright notice above. The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to photocopy portions for classroom use is not required, though notification of such use having been made will be appreciated. The backlist of publications by the World Bank is shown in the annual Index of Publications, which is available from Publications Sales Unit, The World Bank, 1818 H Street, N.W., Washing- ton, D.C. 20433, U.S.A., or from Publications, Banque mondiale, 66, avenue d'Iena, 75116 Paris, France. At the time of writing, Ravi Gulhati was senior adviser in the Economic Development Institute of the World Bank. He is now a consultant and an academic. Raj Nallari is a consultant in the National Economic Management Division of the World Bank's Economic Development Institute. Library of Congress Cataloging-in-Publication Data Gulhati, Ravi. Successful stabilization and recovery in Mauritius / Ravi Gulhati, Raj Nallari. p. cm. -- (EDI development policy case series. Analytical case studies; no. 5) Includes bibliographical references. ISBN 0-8213-1617-6 1. Mauritius--Economic conditions. 2. Economic stabilization-- Mauritius. I. Nallari, Raj, 1955- . II. Title. III. Series. HC597.5.G84 1990 338.9698'2--dc2O 90-41657 CIP EDI Catalog No. 400/087 ISSN 1013-333X Contents List of Abbreviations vi Preface vii 1. Introduction 1 2. Diagnosis 3 Shocks 3 Policy Framework 6 Mismanagement of Aggregate Demand 6 Extent of Market Orientation 8 How Efficient Was the Public Sector? 17 Income Distribution Policies 20 Agricultural Policy 21 Sugar Subsector 21 Diversification within Agriculture 23 Strategy for Manufacturing 27 Import Substitution Policy 27 Export Promotion of Manufacturers 27 Policies for Tourism 30 3. Political Factors and Their Impact on Economic Policy in the 1970s 32 Main Political Trends 32 The Policy-makingProcess 34 Political Parameters and Policy Content 36 id iv Succesafl Stabilizationand Recoveryin Mauritius 4. The Policy Turnaround 38 Search for Stabilization 45 Restructuring of Public Finance 46 Redirection of Public Expenditure 46 Restructuring of Parastatals 48 Revenue Mobilization and Tax Reform 49 Management of ForeignAid and Debt 49 Policy Change in Agriculture 50 Sugar Sector 50 Nonsugar Agriculture 52 Policy Change in Manufacturing 53 Policy Change in Tourism 55 5. Lessons of Experience 57 References 61 Appendix Tables 67 Figures 2.1 Terms of Trade Index, 1960-80 4 2.2 Sugar Prices in Different Markets, 1968-87 5 2.3 Indicators of National Accounts, 1960-80 7 2.4 Balance of Payments Indicators, 1970-80 9 2.5 Budget Deficit and Its Financing, 1968-80 10 2.6 Nominal and Real Effective Exchange Rates, 1970-86 12 2.7 Average Monthly Earnings by Sector, 1970-86 14 2.8 Nominal and Real Interest Rates on Commercial Bank Deposits of Six Months, 1970-86 16 2.9 Government Expenditure and Revenue, 1965-80 18 2.10 Sugar Production and Exports, 1963-86 25 4.1 Terms of Trade Index, 1960-86 41 4.2 Indicators of National Accounts, 1980-86 42 4.3 Balance of Payments Indicators, 1980-86 43 4.4 Budget Deficit and Its Financing, 1980-86 44 4.5 Government Expenditure and Revenue, 1980-86 47 Tables 2.1 Growth Rate of Government Expenditures, 1969-86 19 2.2 Export Duty on Sugar, 1979-90 22 2.3 Selected Indicators of Twenty-one Large Estates in Sugar Sector, Selected Periods 1968-84 23 Contents v 2.4 Number of Sugar Planters by Size and Holdings 24 2.5 Nonsugar Agriculture: Acreage, Production, and Imports 26 2.6 Average Effective Rates of Protection and Value Added, 1983 28 2.7 Selected Indicators of Export ProcessingZone, 1971-86 30 3.1 Major Political Parties and Election Outcomes, 1967-87 33 3.2 Coalition Governments and Leaders, 1968-87 34 4.1 Chronologyof Selected PolicyEvents, 1978-85 39 4.2 Indicators of Stabilization and Adjustment, 1976-86 39 4.3 Gross Commitments, Net Resource Transfers, and Volume of Imports, 1978-86 49 4.4 SelectedIndicators of Sugar Sector, 1976-86 52 4.5 Indicators of Tourism, 1979, 1982, 1986 56 Appendix Tables A-1 Selected EconomicIndicators, Selected Years 1966-86 69 A-2 Selected Social Indicators, SelectedYears 1965-86 70 A-3 Terms ofTrade, 1960-86 71 A-4 Sugar-Prices in Different Markets, 1968-87 72 A-5 EEC Dividend and its Impact on Mauritius's Economy,1968-86 73 A-6 Indicators of National Accounts,1960-86 74 A-7 Balance of Payment Indicators, 1970-86 75 A-8 Budget Deficitand Its Financing, 1968-86 76 A-9 Nominal and Real Effective Exchange Rates, 1970-86 77 A-10 Average Monthly Earnings by Sector, 1970-85 78 A-li Nominal and Real Interest Rates on Commercial Bank Deposits of Six Months, 1970-86 79 A-12 Government Expenditure and Revenue, 1965-86 80 A-13 Sugar Productionand Exports, 1963-86 81 A-14 Guaranteed Producer Prices for Selected Food Crops, 1977-87 82 List of Abbreviations AMB Agricultural Marketing Board CAM Comite D'Action Musulman COLA Cost of Living Adjustment DBM Development Bank of Mauritius DC Development Certificate DWC Development Works Corporation EEC European Economic Community EPZ Export Processing Zone GDE Gross Domestic Expenditure GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development IDA International Development Association IFB Independent Forward Bloc IMF International Monetary Fund MEDIA Mauritius Export Development and Investment Authority MLP Mauritius Labor Party MMM Mouvement Militant Mauricien ODA official development assistance OPEC Organization of Petroleum Exporting Countries PMSD Parti Mauricien Social et Democrate RO Remuneration Order SAP Sugar Action Plan SDR Special Drawing Rights SSA Sub-Saharan Africa TDA Tea Development Authority vi Preface During three visits to Mauritius during the past decade, Ravi Gulhati (former Chief Economist of the Eastern and Southern Africa Region of the World Bank) had a number of opportunities to discuss at length its economic problems and possible solutions. Raj Nallari visited Mauritius in 1989. The following study is dedicated to our Mauritian friends, who freely gave their time to talk candidly about the issues. Both authors wish it had been possible for some Mauritian officials, who had an "insider's" view of the unfolding economic policy process, to write down their insights. It is our firm belief that no one analysis of the policy process can capture it in all its key dimensions. A number of contributions from different vantage points, therefore, would have been enriching. A word about the origins of this study will be useful. Parallel studies on Zambia and Malawi have been published in this series. All three are part of a general treatment of economic policy change in Sub-Saharan Africa. The entire project is an effort to reflect on events that have dominated recent economic history in Sub- Saharan Africa. The authors are very grateful to Christopher Willoughby of the Economic Development Institute for providing generous support for this project. Associates in the operational part of the World Bank have cooperated fully. A substantial part of the analysis is borrowed from their work over a long period. Notwithstanding all these connections with the World Bank, the project should be regarded as our own initiative. We have chosen to write about the impact of politics on economic policy-a sensitive area on which the Bank has no official views. Our effort to address this difficult topic is an experiment and should be regarded in that light. Scholars disagree frequently in this field, and we have reported on some of the controversies.