World Bank unveils its recipe to boost growth and reduce poverty

The World Bank recently launched a report assessing the inclusiveness of growth and shared prosperity in Mauritius. Several hurdles need to be overcome before the country graduates to a high-income economy.

After three years of intensive preparation, the World Bank’s report titled ‘Mauritius: Inclusiveness of Growth and Shared Prosperity’ is out and provides an in-depth analysis of the issues surrounding growth in the country. Poverty, inequality, social protection, the ambitious graduation from a middle-income into a high-income economy and the skills mismatch in the labour market are some of the topics brainstormed in the report.

Despite its general success story in the early 2000s, the Mauritian economy has reached its long-term potential and labour market indicators have started to deteriorate while the Gross Domestic Product (GDP) rate is stagnant, points out Victor Sulla, task team leader of the report. Productivity is slowing down in Mauritius, he observes. Mauritius is facing challenges on several fronts. GDP growth is losing steam as the positive impact of reform wanes. Job creation remains slow, income inequality is increasing and economic vulnerability is not falling, reads the report.

Poverty remains low

Poverty is low in Mauritius by international standards. The headcount poverty level was 6.9 percent in 2012; measured by the international standard of US$2 per day, poverty was less than 1 percent. However, the comparison is bitterer when it comes to shared prosperity. “Growth inequality impedes poverty reduction,” he states. According to the World Bank’s analysis, the reduction of absolute poverty in Mauritius would be almost twice as large if growth was better shared and inequality would not have worsened (from 0.36 to 0.93 measured by the Gini coefficient).

Targeted policy interventions could be the solution to boost poverty reduction. Three scenarios are proposed by the World Bank but with none of them being the ideal one that could fully res-pond to the challenges of the increase in inequality that the Mauritian economy is currently facing. They are: a 30 percent gradual expansion of social protection without improvements in targeting efficiency, a 20 percent reduction in the unemployment rate and an increase in the primary and secondary sectors’ labour productivity.

Social assistance, highlights the report, has paid off in terms of poverty reduction. The poverty-reducing effect could however be significantly higher for the amount of financial resources spent (Rs 13.9 billion/3.8 percent of GDP).

Furthermore, since 2010, reforms have faltered and relatively accommodative monetary and fiscal policies have been difficult to rein in. Implementation of reforms has slowed substantially, further accelerating the decline in gross national saving to below 15 percent of GDP and leading to a stagnation of private investment at around 18 percent of GDP. “As a result, economic growth has been on a slowly declining trajectory, from 4.1 percent in 2010 to 3.2 percent in 2013,” the report states.

Skills mismatch up 30%

Skills mismatches are associated with rising levels of unemployment and weak job creation in Mauritius. Between 2001 and 2010, skills mismatches increased by almost 30%. Lack of inter-generational mobility has potentially very adverse effects on the overall economy’s growth potential, highlights the report.

Another cause for concern is the substantially low levels of unemployment among the fairer sex, in spite of girls outshining boys academically. Women are becoming more educated, on average, than men but this is not translating into better wages. For Loga Virahsawmy, director of Gender Links Mauritius, addressing this issue means delving deeper and addressing parallel problems such as gender violence.

It is imperative to find jobs for women, highlights economist Pierre Dinan. Harnessing our yet untapped resources such as the Ocean economy could mean developing sectors where women would be employed, he states. The report highlights the fact that the gender wage gap is severe and, unlike the gaps related to labour force status, shows no sign of decreasing, with women still earning significantly less than men while being on the same competency level. This gap is showing no signs of decreasing and has in fact widened over the years.

The World Bank further examines what it considers to be a puzzling sign for the local economy: a disproportionate increase in real wages in the public sector. The public sector, during the period under review, had a 23.5% increase in wages, compared to 7% in the private sector, where tradable goods are produced.

Young people are also affected by substantially worse labour market outcomes than the rest of the population. Youth unemployment is slightly higher in Mauritius than in other countries but the rates are not extraordinary. In general, individuals aged between 14 to 24 experience worse labour-market outcomes in terms of employment, unemployment and inactivity rates.

Where do the solutions lie? Productivity is a big option, and a complex one at that. “The country growth model should be changed to boost productivity,” states the report.

Aside from that, dedicated efforts will be needed to raise the quality of the entire education system, including a vocational stream responsive to private sector demands. Policies with the potential to activate female labour market participation need to be implemented, such as a special fiscal regime favouring women’s labour, affirmative action measures to discriminate in favour of women in the labour market and public provision of child care. Also, employment policies for the youth deserve further support. These are but a few insightful solutions chalked out by the World Bank in order to catalyse some of the country’s most fervent growth ambitions.

Labour markets needs to reward higher productivity

Addressing the rigidity of labour regulations, the report states that the labour market needs to reward higher productivity. The salary compensation and Remuneration orders (the two complementary minimum-wage support systems in Mauritius) are designed to reduce disparities, but they hardly impact wage determination in the intended way. The thresholds are set at very low levels by the international standards – on average, 22% of the way. “In addition, the national tripartite negotiations set up in 2010 make it more difficult to maintain competitiveness. In the longer term, an appropriate balance between work protection and labour market flexibility has to be found in Mauritius,” the report recommends.

Real mean wages surged by more than 8%

The World Bank also analyses wages and earnings in the country; taking note that since 2001, real mean wages in Mauritius have surged by more than 8%. The tourism and tertiary sectors paid around 40% more than agriculture in 2012, while manufacturing salaries were 30 percent more and workers in the services sector earned the highest salaries.