Erik Von Uexküll (World Bank Senior Country Economist): "There is an urgent need to unlock more productive private investment"

In its Country Economic Memorandum released on Wednesday (26th May 2021), the World Bank makes a series of recommendations to correct the structural problems facing the Mauritian economy that predate the pandemic. In an exclusive interview with Business Magazine, the World Bank's Senior Country Economist and Country Representative for Mauritius and Seychelles, Erik Von Uexküll, gives the recipe to get out of the current crisis: it is necessary to combine short-term recovery with structural reforms aimed at unlocking private sector investment, restoring competitiveness and fostering inclusion.

The World Bank is releasing its new Country Economic Memorandum for Mauritius on Wednesday (26th May 2021). A report that was prepared during the pandemic. As Senior Country Economist of the World Bank, what is your assessment of the impact of the crisis on the Mauritian economy?

First of all, I think Mauritians deserve to be congratulated for the management of the Covid-19 health emergency. Every life lost to this disease is one life too many. Mauritius coped with the pandemic better than most other countries in the world. It was impressive to witness this first-hand over the past year. Unfortunately, in economic terms, the country has been hit very hard. Comparing the pre-pandemic GDP growth forecast for 2020 (between 3% and 4% depending on the source) with the actual result, a recession of almost 15%, no other country in Africa has lost so much in economic terms to the pandemic.
This is due to the economy's heavy reliance on tourism and travel - including business travel - as well as containment measures. The government responded with a strong support program, one of the largest in the world as a share of GDP. This prevented a secondary crisis in the financial sector and massive layoffs. But we see that unemployment has picked up again and stood at 10.4% at the end of 2020. Perhaps most worryingly, the effect of the pandemic seems to have been more pronounced on those who were already vulnerable before. 69% of the self-employed reported income losses, compared to 20% of employees, according to Statistics Mauritius data.

Can the country rebound?

Absolutely! Our report argues that Mauritius can come back even stronger than before. But this will only happen if the crisis serves as a wake-up call to address long-standing challenges to achieve inclusive growth: unlocking more productive investment, restoring competitiveness, maintaining inclusiveness, and doing more with less public money. Mauritius is already doing many things right and most of the first-generation, wide-ranging economic reforms that could be discussed in other countries have already been implemented here over the past decades. The tricky part now is to fine-tune the functioning of these many, mostly successful, institutions and to improve policy coordination to address complex, multi-sectoral challenges in areas such as skills development, natural resource management, innovation, and investment promotion. And let us not forget that as a high-income country, Mauritius must necessarily change its benchmarks to compete with global best practices in these areas.

The success of the vaccination campaign in the United States should accelerate the recovery of the US economy. How will Mauritius benefit from this improvement in the global economic environment?

In the short term, the recovery of the tourism sector will of course be the key factor in the economic recovery. Hopefully, the progress in vaccination and lower infection rates will give people the confidence to come back to holiday here once the borders reopen. The Seychelles experience is quite encouraging in that it shows the potential for a rapid rebound in tourism after reopening, but it also highlights the importance of keeping close surveillance and health monitoring in place when tourists return.
But let's also think about the medium term. As a small open economy, Mauritius benefits from its interaction with the global economy like few other countries. While exports have already largely recovered, the reopening of borders and improved global economic conditions will hopefully give a boost to cross-border investment and exchanges of ideas, technology, and - very importantly - people.

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Even before the pandemic, the Mauritian economy was facing structural problems such as the fact that the foreign capital we attract is a mainly non-productive investment or our loss of competitiveness in exports. How can these structural problems be addressed?

Unlocking more productive private investment - whether foreign or domestic - is an urgent priority. In recent years, the share of GDP invested has been much lower than it used to be, and about a third of that share is spent on real estate.
To remedy this situation, several cross-sectoral constraints need to be addressed, including stepping up efforts to fill skills gaps where they appear; encouraging competition, especially in key upstream industries; managing natural resources in a way that combines sustainability with predictability for investors, and opening up more space for public-private partnerships in areas such as solid waste management or the port. An important question also arises about the role of the state in promoting investment. Many subsidies and fiscal incentives are mainly provided to sectors that are already well developed. Other measures, including most tax holidays, are too targeted in the sense that they favour specific sectors or activities. We believe that a more neutral approach, where public money supports discovery and innovation wherever it occurs, would yield better results. In general, innovators already know where they want to go. They may need help to overcome the first obstacles on their way. The loss of export competitiveness is certainly a matter of concern. Between 2009 and 2019, exports fell from 57% to 40% of GDP. Over the same period, Mauritius has lost market share in its six main export sectors. This includes tourism, where before Covid-19 there was solid growth, but not as fast as the global market and regional competitors. In the clothing and business services sector, Mauritian export growth was negative in absolute terms. Mauritius has gained market share in some non-traditional manufacturing activities, notably fertilisers, medical devices, and optical glasses, which represent success stories of individual companies or small groups, but which are too small to reverse the trend. Mauritius is overtaking its competitiveness in low-tech, labour-intensive products. The good news is that there is scope for upgrading within and between industries, as well as regionalisation of production chains. But this will require additional efforts to develop new products or improve existing ones. Foreign investment can be a powerful tool to drive this change, both in terms of technology and access to key-value chains.

Should a weak rupee policy be preferred to improve the competitiveness of the export sector?

Based on the trends before Covid-19, including the widening trade deficit, and the recent fluctuations, I would say that the rupee is still somewhat overvalued concerning the objective of export competitiveness. This is because of the large financial flows in and out of the country which is linked to the global trade sector. While most of these flows enter and exit within a relatively short time, some remain in the country temporarily and generate net surpluses in portfolios and direct investment. This has allowed the Bank of Mauritius to accumulate large external reserves, but it has also created upward pressure on the exchange rate that disadvantages the real export-oriented economy. In the current situation where the Bank of Mauritius has been steadily intervening to stabilise the rupee over the past year, it would be desirable to allow for further depreciation while focusing on managing short-term foreign exchange liquidity constraints to support the recovery of the export sector.

New trade opportunities are opening up with Africa following the creation of the Continental Free Trade Area and with India and China with which Mauritius has recently signed agreements. Should we advocate a South-South development model?

I don't think we should choose between a South-North or South-South model, but Mauritius can pursue both at the same time. Cultivating existing trade relations with Europe and the United States remains important, but at the same time, there are very interesting opportunities opening up through these new agreements with China, India, and the African Continental Free Trade Area. Our analysis has identified several product groups for which Mauritius enjoys substantial margins of preference in these markets which could encourage sophisticated new exports. Most of the products identified are in the categories of light machinery, electrical appliances, and plastic products. We are working with the Economic Development Board (EDB) to provide local producers with information on these opportunities. Preferential market access can also be used to attract potential investors who want to set up export-oriented businesses in Mauritius. These agreements also enhance the attractiveness of Mauritius as a regional service centre for investors, including those from third world countries, wishing to take advantage of improved access to the African, Indian or Chinese markets.

Reshaping the Mauritian economy will require innovation. But how much of public policy should be devoted to innovation?

Indeed, innovation and discovery are key drivers of business productivity and long-term economic growth. These activities generate important positive externalities, as they do not only benefit the firm undertaking them, but produce demonstration effects throughout the economy. So pure market outcomes tend to lead to under-investment in innovation and discovery and most countries, including Mauritius, rightly adopt a variety of measures to encourage them. I would argue that if we look at all the forms of state support in Mauritius - tax incentives, subsidies, indirect support through parastatals, among others - much of it supports the status quo by reducing the costs of existing firms in established sectors. These measures could be reviewed to see how they can focus more on encouraging firms to innovate. At the same time, there are a large number of innovation support programmes, and most of them are well designed and managed. There may even be a problem of fragmentation, with institutions such as the Mauritius Research and Innovation Council (MRIC), SME Mauritius, the EDB, the Higher Education Commission, and the National Productivity and Competitiveness Council (NPCC) each running their programmes. Some consolidation of measures and a focus on monitoring and evaluation to determine what generates the best value for money could greatly improve the effectiveness of innovation support.

"Our report argues that Mauritius can even come back stronger than it was before”

Speaking of disparities: while Mauritius openly states its ambition to become a more inclusive economy, unemployment among women and youth remains high. How can this problem be addressed?

At present, only one in three Mauritian women who have completed primary education participate in the labour market, compared to more than two in three women who have completed upper secondary education. About 2 in 10 young Mauritians are neither in education, employment nor training. And about 2 out of 3 in this group are young women. Their integration into the labour market is essential to make growth more inclusive and offer everyone the prospect of productive working life, but this requires targeted support. This requires more effective and comprehensive support programmes, combined with measures to address the structural disadvantages faced by these groups. I would like to stress the importance of increasing and subsidising the provision of childcare and strengthening early childhood education. This would be a double win for inclusion by encouraging more women to work while supporting children from disadvantaged households in the crucial early years to better prepare them for primary school.
Reforming maternity and paternity leave policies could lead to a more equitable distribution of childcare between mothers and fathers. Similarly, shifting individual responsibility for maternity leave from companies to a public scheme based on employer contributions would avoid bias against hiring young women. Educational programmes to challenge the social norms that prevent women from succeeding in the labour market, including a society-wide effort against gender-based violence, and better enforcement of existing laws to prevent gender discrimination in the labour market, are also important elements of the solution. There is also a clear link to education. About 55% of young people who are not in the labour force have not obtained the School Certificate. Reducing the wide disparities in learning outcomes by socioeconomic status, allowing lagging schools to improve their efficiency by giving early school leavers a second chance could tackle the main sources of exclusion.

"The shortage of skills at various levels remains one of the main obstacles to doing business in Mauritius"

What about our public education system? Is it enabling the country to build up a sufficient pool of skills to meet the challenges of tomorrow?

Mauritius is rightly regarded as an education performer. It tops the World Bank's African Human Capital Index 2020 for effective years of schooling per child. However, this indicator also shows that there is still significant room for improvement. On average, Mauritian children can expect to spend 12.4 years in school. However, their actual learning outcomes, as measured by standardised tests, corresponding to only 9.4 years of schooling in the top-performing schools. The shortage of skills at different levels remains one of the main obstacles to doing business in Mauritius. Fragmentation of responsibilities at the governance level results in misalignment and lack of consultation with the private sector at many education and training institutions. We conducted a survey which revealed that less than half of them consult industry experts when designing a new programme and even base their programmes on private-sector standards. Establishing more effective institutional leadership to implement the National Skills Development Strategy with all stakeholders, especially the private sector, would be an important first step. This could be done by strengthening the mandate and capacity of the Human Resource Development Council. The National Training Fund also needs to be reformed to better address the needs of SMEs, which hardly benefit from its support. The technical and vocational education and training (TVET) system is too focused on TVET for simple trades, with limited placement results, while the private sector expresses a need for 'higher' TVET graduates whose programmes emphasise on-the-job learning. There is also a need for more emphasis on socio-emotional skills.

The 2021-2022 Budget will be presented shortly (11th June 2021). The Minister of Finance has announced that it will have two main components: the recovery of the economy and the adoption of key reforms. Given the deterioration of public finances, does he have the means to achieve our short- and long-term objectives?

Combining short-term recovery with structural reforms in the areas we have discussed - unlocking private sector investment, strengthening competitiveness, maintaining inclusion - is the right approach to get out of the current crisis. It is interesting to note that many of the measures we propose in the report - for example, reorienting state support towards innovation, opening up space for public-private partnerships, focusing social protection on those who need it most, converting maternity leave benefits from an individual employer responsibility to a collective one - do not entail additional costs for the government, but a reallocation of resources. I firmly believe that Mauritius can do more with less by making the best use of its limited public financial resources.

"Mauritius can do more with less by making the best use of its limited public financial resources"

How can this be achieved?

This will require an extraordinary degree of policy coherence to ensure that the resources of different sectors and agencies are aligned with strategic objectives. The report identifies several areas where policy coherence could be improved. But this does not happen by itself; it requires an institutional framework and appropriate capacity. A new generation of agile national development planning systems is showing promising results in improving policy coherence in several countries. In the past, planning was often seen as a relic of command economies and state-led development, but this new generation of planning is different, more agile, more flexible, and fully consistent with a modern approach to industrial policy that supports rather than directs the private sector. The creation of the new Economic Research and Planning Bureau is a first step in the right direction, but it needs to be made operational and linked to a wider planning system in government agencies. Another key priority is to improve monitoring and evaluation in all areas so that decision-makers receive rapid feedback on which programmes are working and which are not. In this way, resources can be reallocated to the most effective programmes, and problems that undermine the effectiveness of public policies can be addressed as soon as they emerge. Finally, a very close dialogue with the private sector and civil society is essential.

While the level of public debt (about 92% of GDP) is a concern, the government will have no choice but to borrow from countries or multilateral institutions to finance the Budget. How much debt can we take on?

Mauritius is fortunate to have a well-developed financial market and, before Covid-19, the government was able to rely mainly on domestic liquidity for funding. During the pandemic, external borrowing increased, but much of the budget deficit was also financed by the Central Bank. Putting public debt on a sustainable path is not a matter of setting a particular target figure, but of ensuring that spending is progressively reduced as the economy recovers while making the right decisions now to address medium-term spending pressures. In the medium term, one of the main areas of expenditure is the old-age pension (OAP) due to future increases and demographic trends. Decisions taken today will have long-term consequences. Efforts to raise additional revenue could also be supported by looking at tax holidays and other exemptions that reduce the amount of revenue raised. And as I mentioned earlier, there is scope for improving the efficiency of public spending.

"The rising cost of Basic Retirement Pension (BRP) could reduce fiscal space for more targeted measures that support the poor"

Indeed, the World Bank has always been a supporter of pension reform, which is a politically sensitive issue. Does Mauritius have to embark on such a reform sooner or later?

Currently, the universal old-age pension accounts for more than 50% of total social expenditure. It is increasingly expensive, poorly targeted, and encourages people to retire too early as it is paid from the age of 60. The level of the BRP has been increased considerably since its inception, and today the remaining life expectancy at age 60 is 20.6 years, compared to 12.6 years when the BRP was introduced. If the current trend continues, the share of the population aged 60 and over, currently 16.8%, is expected to reach almost 25% in 2030, 30% in 2045, and 35% in 2058. The BRP is not the right instrument to eradicate poverty because it benefits everyone, rich or poor. The risk I see is that its rising cost could reduce the fiscal space for more targeted measures that support the poor, such as the Marshall Plan or social assistance, programmes that are very effective in reducing poverty and inequality in Mauritius. The pandemic has made this risk even more acute by further reducing fiscal space and adding to the need for targeted social protection. Last year's reform, with the introduction of the CSG (Contribution Sociale Généralisée), capped any further increase in the BRP. The BRP retirement age remains at 60, but the CSG benefits only kick in at 65, which is positive. My concern is that pensioners who are no longer in receipt of the National Pension Fund will continue to claim increases in CSG. It will therefore be essential to put in place a clear rules-based system for future increases. One solution would be to limit the level of the benefit to what can be funded from the CSG receipts to avoid an additional budget subsidy. We calculate that this would be the case if the benefit were set at around Rs 2,500.

Interview published by the Business Magazine in French and translated into English by Wwwdotgotodotmu - Consulting 

Related to the above interview, read also: World Bank Not Shutting Down Yet, Publishes Another Sloppy Report Instead