Thursday, January 15, 2009

Mauritius: New AGOA amendment gives textile sector a breather

The third-country fabric derogation granted by the USA to Mauritius is not only excellent news for enterprises and employees in the export sector but also for government and the country as a whole. It is also an opportunity to review the history of our EPZ especially in the current crisis.

Our export-oriented enterprises – especially textile and clothing – will become increasingly vulnerable to fierce international competition.


The textile and clothing industry has over the years been inextricably linked to our economic success and despite the difficult times of late, it still represents a major pillar of the Mauritian economy, contributing significantly to employment, export earnings and growth. The new development in the African Growth and Opportunity Act (AGOA) with the granting of third-country fabric derogation to Mauritius by the USA has been described as a ‘new lease of life for the industry’ and ‘a victory for economic diplomacy’. Given the pressing challenges posed by globalisation, it undoubtedly marks a turning point in the long and rich economic history of our export industry.

The birth of EPZ

In the post-independence era, unemployment emerged as a major concern for government. It called for a re-examination of the prevailing development strategy, given that both agriculture and manufacturing for import substitution had failed to bring about any noteworthy improvement in employment creation and economic growth. Consequently, as from 1970 an outward looking strategy was adopted with the promotion of the Export Processing Zone (EPZ), especially textile and clothing. EPZ enterprises benefited from many advantages, for example, a ten-year tax holiday on profits with the possibility of a further 10 years’ exemption, a five-year tax-free treatment of dividends, duty-free entry of raw materials and capital goods and free repatriation of capital, profits and dividends. The availability of abundant cheap labour represented a major comparative advantage and attracted foreign investors from Hong Kong, France and South Africa, among others. Foreign Direct Investment (FDI), through capital formation and technology transfer, was at the heart of the expansion of EPZ in Mauritius and played a crucial role in the structural transformation of the economy. Being labour intensive, EPZ became a major source of employment. More than 20,000 jobs were created during the 1970s. It also contributed substantially to export earnings and economic growth. In actual fact, a combination of factors accounted for the success of the EPZ sector, namely: preferential access to European and US markets, an efficient institutional framework to deal with applications for EPZ certificates, loans and infrastructure facilities, the availability of skilled, low wage labour, a conducive investment climate, an experienced pool of local entrepreneurs, openness to foreign investment, and availability of domestic investment capital following the sugar boom.

Trade preferences

Trade preferences have been central to the remarkable transformation of Mauritius from a low income mono-crop country to an upper middle income and diversified economy. Under the Sugar Protocol, Mauritius has benefited from sugar export quotas to the EU at preferential guaranteed prices which, to a large extent, have served to provide resources for diversification of the agricultural sector and more importantly, the much needed start up capital for the development of the Export Processing Zone and Tourism industries. Moreover, exports of EPZ textiles and clothing to the US and EU markets have for long been protected under the Multi-Fibre Agreement (MFA) and the ACP-EU Trade Agreement respectively. These have been critical in establishing the EPZ sector as the main driving force of the Mauritian economy.

The 1980s and 1990s

The successful implementation of the stabilisation and structural adjustment programme in the 1980s created conducive macroeconomic conditions mainly through trade liberalisation, improved resource allocation, strengthened institutional capability and fiscal, monetary and wage restraints. With EPZ providing the main engine of growth, Mauritius experienced a sustained period of increased production, exports and employment creation. The objective of full employment was duly achieved and per capita income in dollar terms trebled between the short period of 1984 to 1990. The exceptional economic turnaround earned Mauritius global acclaim for the success of its outward oriented development strategy and prompted comparisons with the Asian tigers, Hong Kong, Singapore, Taiwan and South Korea.

During the 1990s, EPZ continued to provide the main thrust to economic growth with the emphasis on diversification of the product-mix in favour of high value added goods, the search of new markets and promotion of vertical integration within the sector. But the signs of a loss in the sector’s competitive edge started to show as employment in large EPZ establishments fell continuously between 1992 and 1997. The decline in job creation also reflected the shift toward capital intensive methods of production and a more efficient use of labour resources to counteract the rise in labour costs unmatched by productivity gains domestically and the threat of competition on our main exports markets from low cost producers in Asia and Eastern Europe.

The New Millennium: growing international competition

The turn of the century spelt the end of the safety net provided by trade preferences. The MFA ended in 2005 and following the EU Sugar sector reforms, the Sugar Protocol has been dismantled and a drastic cut in the guaranteed price of sugar by 36 percent over four years, starting in 2006, imposed. The EU has also reviewed its non-reciprocal preferential treatment of the ACP bloc of countries to be compatible with the World Trade Organisation (WTO) international trade regulations. As a consequence, trade between Mauritius and the EU will in the future be based on new arrangements under an Economic Partnership Agreement (EPA).

Furthermore, with globalisation, on top of the phasing out of trade preferences there is also the gradual removal of restraints on the exports of low-cost producers like China to the EU and US markets to contend with. It follows that our export-oriented enterprises will become increasingly vulnerable to fierce international competition. Adapting to the erosion of trade preferences hence represents the biggest challenge that Mauritius will face in the foreseeable future. The AGOA derogation could not have come at a better time. It provides for duty-free and quota free access of apparel products on the US market until 2015. This is an excellent opportunity to further diversify our export market and buys us enough time to pursue the upgrading our domestic enterprises with regards to improving the quality of products and services, innovation and enhancing productivity and competitiveness.

Dr Vishal RAGOOBUR