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David V. Goliath: Mauritius Facing Up to China

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David V. Goliath: Mauritius Facing Up to China

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    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 – follows Jenkins 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

    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

    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.

    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!

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