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The Dissertation Unemployment And Economic Growth Economics Essay
Introduction of Mauritius
MAURITIUS is an independent country whose whole inhabitants have familial birth elsewhere such as, Africa, India, China and Europe. The country's economy was existing by the production and export of sugar. Following to World War II, economic and social conditions contributed to the political conflicts. The expectations for the Mauritians began to rise as the provision of pension, health, education and other public welfare services extended. In 1940s and 1950s diseases like malaria was decreasing resulting in an increase in the life expectancy of poor people, hence the population was increasing by 3 percent per year. But however there was a decrease in population growth rate between 1960s and 1970s as the Mauritians was taking family planning measures but labor force continued to increase rapidly. There were a rapid growth in the tourism and the manufacturing sector after the independence in 1968, the government was diversifying the economy resources in the tourism and manufacturing sector. Despite many differences, the major political parties have worked successfully toward the country's economic welfare.
Mauritius has moved from a first and foremost agricultural monocrop economy dominated by high unemployment, low salaries, and boom-or-bust cycles to one marked by manufacturing, tourism, and expanding financial services. Mauritius is established democracy with positive human rights record and regular free elections. The country has attracted considerable foreign investment and has earned one of Africa's highest per capita incomes. As Mauritius faces the future, it can look back on its dazzling economic performance in the 1980s and attempt to build on that success by continuing its tradition of political stability, foresight, and prudent development planning. To examine the health or strength of an economy, economists naturally look at its growth rate, unemployment rate, inflation rate, balance of payment, currency exchange rate. The welfare of an economy is not only the concern of economists and politicians but for the population also, that is, the state of the country's performance affects its entire population. Mauritius has recorded very high economic growth rate and constant increases inhuman development indicators due to a good mixture of fine macroeconomic policies and strong institutions as from the year the 1970s.
Economic Growth of Mauritius
In general terms, economic growth is defined as a positive change in the level of production of goods and services by a country over a certain period of time. Whereas, Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. Economic growth is usually brought about by technological innovation and positive external forces. Gross Domestic Product (GDP) is the measure most often used to assess the economic well-being of a country. Economic growth is measured as a percentage change in the Gross Domestic Product (GDP).The graph below is the GDP growth rate on an annual basis adjusted for inflation and expressed as a percentage for Mauritius.
As shown in the diagram above, in the year 1980 the GDP growth was at its highest level that is around 11%. But the during the following year the GDP growth fell by around 18% reaching to its lowest level. The GDP growth was fluctuating by large proportion during the year 1980 to 1998. The GDP growth rate was quite stabilised since the year 2006. In general the GDP growth rate has decline from approximately 11% in 1980 to around 4% in the year 2011.
For further analysis the graph have been divied into 3 decades. As you can see below, the first decade is the year 1980s that is year 1980 to 1989. The second one is the 1990s, that is year 1990 to year 1999. And the final decade is the year 2000 to the year 2011.
Four cyclones strike on island between December 1979 and March 1980, sugar production plummeted resulting in a decrease in GDP rate by approximately 9 percent.
Trying to reform the country with a third IMF program, by the government of Mauritius followed by its first structural adjustment loan from the World Bank in 1981, but the immediate results were disappointing. The economy of Mauritius experienced stable growth, declining inflation, high employment, and increased domestic savings thanks to an extensive political consensus on broad policy measures.
The development of the industrial sector has expanded quickly after the year 1971 since the government has established the EPZs. The owners of the EPZ enterprises have accepted to export all their products in exchange for duty-free imports of raw materials, tax benefits and other reasons. The Export processing zone (EPZ) have surpassed sugar as the principal export-earning sector and employed more workers than the sugar industry. Export processing zone is a type of free trade zone (FTZ), set up generally in developing countries by their governments to promote industrial and commercial exports. The creation of EPZ was characterized by tax holiday. Tax holiday is a transitory period, during the government eliminates certain taxes on certain items so as to promote the consumption or purchase of these stuff. The main tax incentives were a 10 year tax holiday on retained earnings.
During the mid- 1980s Foreign Direct Investment (FDI) started entering Mauritius typically in the EPZ and in tourism sector. The FDI came along with capital inflows and also new technologies.
FDI to Gross Domestic Investment (GDI) were quite low during the 1980s, it was around 6 percent of GDI. The tourism and the EPZ sector became the leading sector of the economy through the capital inflows and technologies that came along the FDI. The GDI is the capital of private businesses which is invested in domestic production. In addition to providing the benefits of a FTZ, these zones offer other incentives such as exemptions from certain taxes and business regulations. In 1986 Mauritius had its first trade surplus in twelve years. Tourism also boomed, with a concomitant expansion in the number of hotel beds and air flights.
During 1990s, the growth rate was above 5 percent in the first half of the decade after which it fell for 2 consecutive years reaching around 0.2 percent to pick up thereafter for the next 2 years.
In the second decade, the value of EPZ exports in 1993 was approximately Rs15.8 billion. Since the year 1975 Mauritius has had an export quota of about 500,000 tons per year under the Sugar Protocol of the Lomé Convention, the largest share of all nineteen signatories. The guaranteed price in 1991 was nearly twice the world free market price. In 1992 Mauritius exported 597,970 tons of sugar. The GDP rate was approximately 10.2 percent in the year 1992. Mauritius has been largely dependent on trade taxes for revenue hence import duties have continuously been an important source of revenue. By 1993 however, all export taxes were abolished.
In the long run, spanning over the years 1994-2001, a series of tariff reforms have emerged: import levy was abolished, the maximum customs duty shrank from 600% to 100%, discriminatory tariff regime against “non-scheduled” countries (minor trading partners of Mauritius) trade was eliminated, and duties were minimized on more than 4000 items. Resulting to increase imports in Mauritius for the 1990s.
In order to reduce imports the government of Mauritius decided to diversity the agricultural sector. The main incentives were to produce crops and livestock that were not being produced like mainly rice, flour, pulses, chicken, beef, onions and milk products and secondly to produce the most important crops and domestic animals in larger quantities.
It can be said that Mauritius has succeeded in a certain measure in its diversification program in the 1990s. The diversification program has derived many advantages:-
Foreign currencies saved by reducing imports
Creation of employment
Dependence on sugar has been reduced
The country has become self-sufficient in certain commodities
New crops help to earn additional foreign currencies.
So as to develop and modernize the financial sector Mauritius was marked by Liberalization and market deregulation in the early 1990s. This was also an attempt to make Mauritius as a regional financial centre.
The MOBAA (Mauritius Offshore Business Activities Authority) was set up by the Government in the year 1992 to maintain its economic growth and expand the economy. So as to maintain the reputation of Mauritius as a dependable business centre, the authority has to check if the activities are carried out within the legal framework set by the government. But in 2001 it changed its name to Financial Services Commission. Its main activities are: offshore funds management, international financial services, offshore insurance, international consultancy services and so on. Albeit of the large number of registered companies, the offshore business sector employs only about 500 persons and in spite of in high paying jobs the contribution to GDP was still very small.
In the beginning of 1993 and 1994, tourism appeared as the second most significant source of foreign currency, behind the EPZ sector. The gross earnings are estimated to have risen to nearly MAU RS 801 billion in the year 1995 and 1996. The arrivals tourists in the year 1992 were more than 11 percent and moreover it had increased by another 26 percent for the following year.
New challenges have been facing Mauritius and its economic performance has quite deteriorated since the year 2000, resulting from its loss of favored access to the European Union (EU) sugar and textile markets. In the textile sector, Mauritius is facing increased competition from cheaper Chinese and other East Asian country exports. The GDP growth rate was approximately 1.9 percent. The unexpected low growth rate is due to the poorer performance of the four main economic sectors. First of all, sugar production in the year 2005 was expected to be around 520 000 tonnes, instead of 550 000 tonnes, this decrease was because of the excessive rainfall in September 2005.
Secondly, due to the end of the textile trade quotas in January 2005, the export processing zone (EPZ) has contracted by approximately 13 percent, coupled with competition from low-cost textile producing countries. Thirdly, the construction sector contracted by 3.7 percent in 2005, this was mainly because of delays in or the non-execution of several projects. Fourth one is because, the non-EPZ manufacturing sector grew by only 2.5 percent as a result of increased competition from imported goods faced by the domestic-oriented manufacturing industries.
A 5-year Sugar Sector Strategic Plan (2001-05) was implemented to reorganize and rationalize the sugar industry. The goal was to decrease the number of sugar mills from 14 to 7 or 8, so as to benefit from any increasing returns to scale, to reduce by up to 7 000 the current labour force of 30 000.
The government seized the bull by the horns in the 2006/7 budget and raised the prices on price controlled items such as medicines, petrol, and food items and has also announced its intention to liberalize the markets by abolishing price fixing entirely. To further reduce the budget deficit import and excise duties were raised or added and measures were taken to improve revenue collection and reduce tax avoidance. In 2006/7 further cuts in current government spending were made. The economy proved to be remarkably resilient, for real GDP growth, which had barely averaged 3.5 percent between 2001 and 2005, quickened from 3.1 percent in 2005 to 3.6 percent in 2006 and then to 4.5 percent and 4.8 percent in 2007 and 2008 respectively.
In the year 2004, banking was divided into two separate banking regimes – offshore and onshore and all banks were now governed by one single bank license. Global Business to Mauritius were maintain by several tax incentives available to foreign investors and business infrastructure services. The Banking Act 2004 was amended in August 2008m, such that banks in Mauritius are now allowed to provide Islamic Banking services. The introduction of Islamic finance, Mauritius has a great opportunity to provide new services in the fields of banking and diversify its financial sector.
Mauritius needs to diversify its exports as Mauritian exporters have been too dependable on the European market. According to Bretton Wood institutions the unemployment should be reduce in Mauritius so as to attain a 4 percent growth rate. Mauritius is planning to improve its services in public sector and try to control its scarce resources mainly water more efficiently. In order to increase productivity in Mauritius, the government needs to improve human resource and have a good structural reform. At present the Government is trying to protect the local tea industry by imposing an import license fee of Rs 5,000/- per consignment for any type of tea imported, an import levy of 17% of CIF value landed Mauritius and a customs duty of 40%.
Unemployment Rate of Mauritius
Even with a strong economic growth, a "U"-curve unemployment trend can be observed in Mauritius. The economy continued to stagnate when Mauritius became independent from Great Britain in 1968 and the unemployment problem remained sensitive. The years which followed since the independence were extremely difficult and were marked by a high unemployment rate reaching 27 percent at times. Unemployment is defined as a state where someone of working age is not able to get a job but would like to be in full time employment. That is, it is an economic condition marked by the fact that individuals actively seeking jobs remain unhired. Unemployment is expressed as a percentage of the total available work force. The level of unemployment varies with economic conditions and other circumstances. In the Mauritian context unemployment refers to the share of the labor force that is without work but available for and seeking employment, according to International Labour Organization (ILO). Definitions of labor force and unemployment differ by country.
The diagram below shows the unemployment rate from the year 1980 to 2011. Unemployment Rate (% of Labour Force) for Mauritius in year 2010 is 7.453 percent. Mauritius was listed No. 55 in world rankings according to Unemployment Rate in year 2010. The world's average Unemployment Rate value is 4.82 % hence; Mauritius is 2.63 more than the average. In the previous year, that is 2009, Unemployment Rate for Mauritius was 7.33 percent. Unemployment decreased from 21 percent to less than 4 percent between the 1980s and the 1990s, however this phenomenon was reversed and the rate augmented to around 10 percent in the 2000s.
As you can see above, from the year 1983 the unemployment rate have been decreasing drastically until the year 1992. During the year 1994 to the year 2008 the highest level of unemployment rate recorded was around 9.5 percent in the year 2005. Since then the unemployment rate of Mauritius have been fluctuating by small percentages and was approximately 11.8 percent in 2011.
The diagram below is the graph of unemployment rate in Mauritius divided into 3 decade. As mentioned earlier first decade represent the year 1980 to 1989, decade 2 represent the year 1990 to 1999 and finally the decade 3 will be representing the year 2000s, that is, year 2000 to 2011.
In the first decade, with a high unemployment rate in 1980s, the increased entry of women into the labour force is a major reason for this rapid labour force growth. Unemployment rate of Mauritius was approximately 19% in the year 1983. Female labour force participation has increased from 25 percent in 1983 to 36 percent in 1995, due in part to the demand of EPZ textile enterprises which prefer women workers. In 1970, the government issued a policy paper for 1971-1980 decade, prioritizing job creation measures.
In the year 1990s, that is, the second decade, the unemployment rate increases from approximately 2.8 percent to 7.6 percent. The high unemployment rate in recent years along with high inflation rate has contributed to a loss of purchasing power and in particular with respect to women as indicated by unemployment trends.
Since the early 1990s, the financial services and tourism industries have emerged as new growth sectors, requiring higher skilled workers. In 1999, the unemployment rate was 11.3 percent for female workers and 4.0 percent for male workers compared to 2.2 percent for females and 3.0 percent for males in 1991.
The Central Statistical Office estimates indicate that unemployment was surging around 8 percent at June 2000, the highest recorded since 1986. While the male unemployment rate has increased from 3.1 percent in 1990 to 5.7 percent in 2000, the rate for women jumped from 2.3 percent in 1990 to 12.3 percent in 2000. In periods of recession women are among the first employees to lose their job. There were two new pillars were developed during the 1990s in Mauritius, that is, the financial services and high tourism sectors, reflecting to a large extent deliberate government industrial policy. These new pillars were mainly sponsored through a redirection of domestic savings that were accumulated in the traditional sectors. The government supported the new pillars by providing their basic infrastructure and incentives to investors.
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