Transcript 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)
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
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.
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
SSA
20%
14%
 Mauritius: a services-oriented economy
Mauritius is ‘different’ (2)
GDP per capita
Description / Unit
Constant 2000 US$
Mauritius
4700.03
SSA
598.30
Trade Openness
Trade as a % of GDP
132.74
68.89
Share of Manufactured
exports in Total Exports
% of merchandise
exports
68.78 1
n/a
Share of value added in
Agriculture
% of GDP
4.97
15.11
Share of value added in
Manufacturing
% of GDP
18.01
14.61
Source: WDI Online (2007).
Note: 1 Relates to year 2006.
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.
Assessing the impact of China
Methodology – follows Jenkins and Edwards (2005),
Kaplinsky and Morris (2006)
 Vectors of impact:



Trade
FDI
Aid
 Dimensions of effects:


Direct v. indirect
Competitive v. complementary
Trade: Direct impacts – Exports
 Exports, marginal to begin with, have declined
by a cumulative 55% between 2002 and 2007.
Mauritius' Exports to China, 1995-2007
(US$ millions)
10
9
8
7
6
5
4
3
2
1
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Mauritius’ Main Export Markets, 2007
China’s share of exports in 2007: 0.24%
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.
Low potential to export to China/2
Trade: Direct impact – Imports
Imports from China have soared since 2000
Imports from China, 1995-2007 (US$ millions)
Main Sources of Imports, 2007
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.
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.
Mauritius-China Trade, 1996-2006
10,000
Imports
Rs. million
5,000
0
1996
1998
-5,000
Deficit
-10,000
2000
2002
2004
2006
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.
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
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
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 thirdcountry fabric derogation beyond Sept. 2005.
Trade: Indirect impacts (5)
Impact on Exports (cont.)
 Significant reversal in trend since 2006 until onset
of effects of the 2008 financial crisis
Mauritius Textile and Clothing Exports by Main
Destination (1991-2007)
1200
Madagascar
US$ million
1000
Others
SA
800
USA
600
400
200
0
European Union
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.
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)
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.
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)
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.
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 $500
million over the next 5 years
Impact on Investment (2)
FDI Inflows in Mauritius by country of origin, 1990-2007 (US$ Million)
1990 1995 2000 2001 2002 2003 2004 2005
Total
40.98 18.69 10.54 32.13 32.68 70.47 65.31 95.15
Of which:
China
1.14
..
..
..
0.60
1.18
..
0.20
France
5.05
0.98 274.8 0.86 7.74
5.63 17.89 14.47
2
Hong Kong 3.70
1.09
..
..
0.30
..
0.15
0.24
India
5.25
9.03
..
..
0.07
5.13 5.45 22.71
South Africa 0.13
..
0.04 20.60 11.11 36.63 0.69
0.88
Switzerland 3.03
0.69 0.19 9.41
..
0.07 1.53
5.02
UK
0.54
1.67
..
..
5.24
6.16 5.20 19.59
USA
7.67
..
0.11 0.10 0.97
1.33 18.84 2.54
Memo item:
China’s share 2.80%
1.80% 1.70%
0.20%
Source: Bank of Mauritius (2008)
2006 2007
227.75 408.06
..
16.49
2.76
41.68
0.95
5.05
1.20
18.42
120.50
5.14
0.64
21.62
17.65
45.61
99.30
84.35
-
0.68%
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
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
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
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
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