David V. Goliath: Mauritius Facing Up to China*

1. David V. Goliath: Mauritius Facing Up to China* Vinaye Ancharaz University of Mauritius Presented at the African Economic Conference 2009, Addis Ababa, November 11, 2009 *This paper was supported by grants from the AERC. Published in the European Journal of Development Research , vol. 21 (Aug. 2009)

2. Plan of Presentation • Introduction • Mauritius: A Case of Differential Impact • Assessing the Impact of China on the Mauritian economy • Impact on Trade • Impact on FDI • Impact on Aid • Policy Response to the China Phenomenon • Summary and Conclusion

3. Introduction • Growing interest in trying to assess the impact of China on SSA – Why? • China’s emergence as an economic power triggered by accession to WTO in Dec. 2001 and the phasing out of the MFA by end-2004. • Impact on SSA predicted to be devastating. For example, Kaplinsky and Morris (2006) for SSA; Rojid and Ancharaz (forthcoming) for Mauritius. • Limitation of empirical studies: National policy response to China ignored.

4. Mauritius is ‘different’ (1) • Small island economy, with no natural resources. • Economic survival rests on openness strategy. Trade/GDP = 128% (SSA average: 68%); low average tariffs • Lessons from Dutch disease and structural adjustment (1979-1985) • Building economic resilience through industrial diversification.  Early shift to export-oriented strategy  Manufacturing share of GDP in 2006: Mauritius 20% SSA 14%  Mauritius: a services-oriented economy

5. Mauritius is ‘different’ (2)

6. Mauritius is ‘different’ (3) • Long history of economic and cultural cooperation with China.  Mauritius’ support for “One China Policy”. • China eager to use Mauritius as a platform to penetrate SSA. • Therefore, this study rests on the premise that Mauritius stands to gain from China’s economic prosperity.

7. Assessing the impact of China Methodology – followsJenkins and Edwards (2005), Kaplinsky and Morris (2006) • Vectors of impact: • Trade • FDI • Aid • Dimensions of effects: • Direct v. indirect • Competitive v. complementary

8. Trade: Direct impacts – Exports • Exports, marginal to begin with, have declined by a cumulative 55% between 2002 and 2007.

9. Mauritius’ Main Export Markets, 2007 China’s share of exports in 2007: 0.24%

10. Low potential to export to China... • Exports significant in only a few, basic products such as fish and fish preparations, tobacco, and TV and radio transmitters. • China displays revealed comparative advantages (RCA) in a broader range of products than Mauritius does. • Moreover, there is high export similarity and low trade complementarity between Mauritius and China.

11. Low potential to export to China/2

12. Trade: Direct impact – Imports Imports from China have soared since 2000 Imports from China, 1995-2007 (US$ millions)

13. Main Sources of Imports, 2007

14. Trade: Direct impacts(2) • China – 3rd largest exporter to Mauritius after EU (France) and India. • Imports of T&C and of machinery and transport equipment make up over 75% of imports from China since 2000.  Wearing apparel represents 5% of imports but has posted the highest rate of growth (48%) between 2001 and 2007  Significant decline in textile imports (from 54.6% of total imports in 2002 to 19.0% in 2008 ) as Mauritius has invested in local spinning capacity.  Imports of machinery and transport equipment displaced textile imports in 2005 as the single most important import category from China.

15. Trade: Direct impacts(3) Falling exports and mounting imports have widened the trade deficit in favour of China…  China alone accounts for 30% of overall trade deficit of Mauritius. Imports Deficit

16. Trade: Indirect impacts Main indirect impact: On Mauritius’ exports of T&C into MFA-protected third markets • Benefits of the MFA/ATC: • Boost to clothing exports • Significant increase in export-oriented FDI • Sustained period of export-led growth • Mass job creation, especially for women.

17. Trade: Indirect impacts (2) End of MFA  Rise of China  Contraction of EPZ (–12.4% between 2001 and 2005) Impact on Employment  More than 20,000 jobs lost (–24%) in the EPZ between 2001 and 2005  Women particularly hit  ‘Feminisation’ of poverty  Other socio-economic effects of EPZ redundancies

18. Trade: Indirect impacts (3) Impact on Exports MFA expiry and the prophecy of doom:  USITC (2004): China “expected to become the ‘supplier of choice’ for most U.S. importers…” Mattoo, Roy and Subramanian (2002): SSA apparel exports would fall by over 30% Naumann (2005): AGOA would offer little protection against the onslaught of Chinese exports

19. Trade: Indirect impacts (4) Impact on Exports (cont.) • Mauritius started to experience the effects of MFA phase-out long before Jan. 1, 2005 and continued to suffer from its sequels till the end of 2005. • Total EPZ exports declined 14% between 2001 and 2005 • Since exports to EU generally increased over this period, the decline is attributed mainly to changes on the US market. • A number of Asian companies exited the EPZ en masse during 2003-05 following US refusal to extend the third-country fabric derogation beyond Sept. 2005.

20. Trade: Indirect impacts (5) Impact on Exports (cont.) • Significant reversal in trend since 2006 until onset of effects of the 2008 financial crisis

21. Trade: Indirect impacts (6) Impact on Exports (cont.) Explanations • As the US market waned, Mauritian apparel manufacturers have shifted exports towards the EU. • Between 2005 and 2007, EPZ exports to the EU increased 23% • Regional markets are gaining prominence. • Exports to South Africa increased 10-fold between 2002 and 2007. • The non-renewal of the AGOA third-country fabrics derogation in September 2003 rather than China is to be blamed for the temporary decline in clothing exports.

22. Trade: Indirect impacts (7) Can Mauritius compete with China? • Mauritius is not cost competitive relative to China  Hourly labour cost = $1.25 in Mauritius compared to an avg. $0.78 in China (EIU, 2004) • Tagg (2002): Labour productivity in the apparel industry measured in terms of pieces per operator per day lower in Mauritius (18) than in China (20) • Low labour productivity + High labour cost  High unit cost of producing garments • Little chance for Mauritius to measure up to China • Mauritius ranks low relative to China on UNIDO’s Competitive Industry Performance Index (2003)

23. Trade: Indirect impacts (8) Can Mauritius compete with China? (cont.) • However, cost is not the only factor. • Clothing is a differentiated product; so, firms need not compete on price. • Non-price factors such as lead times, service and quality, reliability and flexibility, knowledge of specific markets, etc. also determine the competitive advantage of firms. • Clothing retailers prefer to source from countries that can supply a critical mass and a wide range of products in a timely manner.

24. Trade: Indirect impacts (9) Can Mauritius compete with China? (cont.) • The Mauritian clothing industry has used its 35 years of experience to strategically position itself as a reliable supplier of quality clothing. • Over the years, Mauritian apparel companies have moved up-market where competition is less keen. Those that failed to make this transition are out of business. • Vertically integrated T&C industry that encompasses all the stages of the value chain – from product design to the final product, including services such as design assistance and logistical solutions. • While Mauritius has lost (revealed) comparative advantage to China in some product categories, it is still strong in others (T-shirts) and is nurturing a RCA in others (e.g., ladies’ undergarments)

25. Trade: Indirect impacts (10) Challenges • Erosion of EU tariff preference due to NAMA proposals • EPAs • Rules of origin • Need for further consolidation of the T&C industry through investment in capital-intensive spinning (and weaving) activities.

26. Impact on Investment • The role of FDI in growth: Mauritian experience • UK – the biggest investor in Mauritius • Banking and tourism – main beneficiaries of FDI • Chinese investment – very small to date – notably in spinning. • Some evidence that Chinese investment has increased after 2000. • China’s strategy: to use Mauritius as a platform to penetrate the African market augurs well for Chinese investment in the future. • March 2007: Agreement with the Tianli (now Jin Fei) Group for the setting up of an economic and trade cooperation zone with investments of $500 million over the next 5 years

27. Impact on Investment (2)

28. Impact on Aid • China has altered the direction and configuration of global aid flows. • China’s pledge to double assistance to Africa by 2009 • China’s financial assistance to Africa estimated at $19 billion in 2006. • Various types of Chinese aid: technical assistance, grants, interest-free loans, preferential loans, debt relief • Aid mainly for infrastructure projects in energy, telecommunications and transportation • China has also helped build houses, schools, hospitals and sports centres. • Biggest beneficiaries in Africa: Oil-rich countries like Angola, Equatorial Guinea, Gabon, Congo and Nigeria

29. Impact on Aid (2) • Long history of Chinese aid to Mauritius • Chinese aid has been project-based and irregular. • Many projects in the areas of construction and social services financed. • Chinese technical assistance for agricultural projects, customs upgrading and HRD • Most of the loans provided on preferential terms • Most construction and infrastructure projects on a turnkey basis. • Virtually no conditions attached to Chinese aid

30. Policy Response to China • Government policy response to end of apparel quotas and rise of China critical to the survival of the T&C industry • Government concerned about this industry since it employs huge numbers of female workers. • Feb. 2006: Meeting of key stakeholders to reflect on the future of the clothing industry and chart out a survival strategy. • This strategy centred on restructuring to address factory and ex-factory competitiveness factors. • Enterprise Mauritius given a boost through budgetary support

31. Policy Response to China (2) • Use of value chain models and benchmarking tools to identify structural weaknesses and propose appropriate remedial measures • To deal with Chinese competition, Mauritian enterprises had to adopt China’s own strategy • Need for clothing industry to achieve ‘full-package’ supply capacity • 2006/07 Budget: • Further measures to encourage vertical integration • Business Facilitation Act promulgated • Empowerment Fund set up • Further trade liberalization • Additional Stimulus Package to address the financial crisis

32. Conclusion • Negative economic impact of China on Mauritius cushioned by  Economy’s resilience to globalization  Structural upgrading in the clothing industry  Export market diversification • On the other hand, Mauritius stands to gain from Chinese FDI and aid; potential gains in the tourism sector • Government policy’s role in sustaining exports • The role of macroeconomic reforms and trade liberalization in facing up the challenges of globalization and in standing up to China

33. Thank you!Merci!Asante!