8/2/2018 Steven Van den Bossche International Economics

Example of a developing country that has been successful in diversifying its economy

Mauritius is very good example of an economic diversification story. The biggest economic
activity was that of sugar plantations, based on cheap labor. They had trouble to attract
foreign investors into the labor-intensive industries. During the 1970s and 1980s Mauritius’
trade policy was highly protective. During the 1970s and 1980s, there were extensive
quantitative restrictions in the form of import licensing. In the clothing, footwear, furniture,
and rubber sectors, tariffs above 50 percent were normal. Around the 1990’s import
licensing was eliminated for most products.

By removing taxes on profits, dividends, capital gains, exports and raw material imports the
government was able to increase foreign investment. They used trade policy as a means to
protect domestic industry and to launch export growth. Mauritius is a small, open economy
with a high ratio of trade of goods and services to GDP. Ratio of more than 50% of GDP on
average between 1970-2010. Therefore, the country has chosen to take the path of
globalization.

By this policy export got encouraged and the labor force got strengthened. Because of the
rise in FDI Mauritius was able to diversify its economy to a wider range of products and
services besides sugar. Tourism, textiles and textile-related products, financial services,
luxury goods and other services now take up most part of the economy. Sugar-based
economy dropped from 98% to only 5% of the exports now.

A group of visionary policy makers in Mauritius came up with the idea that the country’s
small economic size and distance from large developed markets presented a potential
opportunity to develop an export-oriented textile industry. They based this idea on the
success of export processing zones (EPZs) in East Asia. Thanks to these policy makers, by
1980 the EPZs accounted for more than 60 percent of Mauritius’ gross export earnings and
employed one-third of the Mauritian labor force. Most of the goods produced in EPZs were
exported to the EU under a preferential regime. The sugar sector and the textile sector
provided capital accumulation that allowed Mauritius to decrease reliance on foreign capital
and start down the path to becoming a middle-income economy.

The textile and sugar economies have had some troubles in the last years. Both sectors are
constantly adjusting in order to remain globally competitive. The textile sector tries to adapt
by fully integrating its activities (for example, spinning and weaving). Higher end
manufacturing and the sugar sector are increasing its focus on refined sugars.

In conclusion, the government acted as a facilitator of private sector expansion. The

government has been successful in formulating and implementing policies in the different
sectors to stimulate the private sector. In the case of sugar, protocols were signed and
activated the private sector.

Source : https://siteresources.worldbank.org/AFRICAEXT/Resources/Mauritius_success.pdf