David V' Goliath: Mauritius Facing Up to China

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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)

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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

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Introduction

• Growing interest in trying to assess the impact
  of China on SSA Why?
• Chinas 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.

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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

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Mauritius is different (2)
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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 Chinas economic
  prosperity.

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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

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Trade Direct impacts Exports

• Exports, marginal to begin with, have declined by
  a cumulative 55 between 2002 and 2007.

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Mauritius Main Export Markets, 2007
Chinas share of exports in 2007 0.24
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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.

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Low potential to export to China/2
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Trade Direct impact Imports
Imports from China have soared since 2000
Imports from China, 1995-2007 (US millions)
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Main Sources of Imports, 2007
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Trade Direct impacts (2)

• China 3rd largest exporter to Mauritius after
  EU (France) and India.
• Imports of TC 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.

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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
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Trade Indirect impacts

• Main indirect impact
• On Mauritius exports of TC 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.

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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

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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

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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.

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Trade Indirect impacts (5)

• Impact on Exports (cont.)
• Significant reversal in trend since 2006 until
  onset of effects of the 2008 financial crisis

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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.

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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 UNIDOs
  Competitive Industry Performance Index (2003)

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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.

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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 TC 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)

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Trade Indirect impacts (10)

• Challenges
• Erosion of EU tariff preference due to NAMA
  proposals
• EPAs
• Rules of origin
• Need for further consolidation of the TC
  industry through investment in capital-intensive
  spinning (and weaving) activities.

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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.
• Chinas 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

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Impact on Investment (2)
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Impact on Aid

• China has altered the direction and configuration
  of global aid flows.
• Chinas pledge to double assistance to Africa by
  2009
• Chinas 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

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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

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Policy Response to China

• Government policy response to end of apparel
  quotas and rise of China critical to the survival
  of the TC 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

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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 Chinas 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

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Conclusion

• Negative economic impact of China on Mauritius
  cushioned by
• ? Economys 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 policys 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

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Thank you!Merci!Asante!