FIE COPY DOCUMENT OF INTERNATIONAL BANK FOR R"-STRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. AE- 30a MAURITIUS: 4-YEAR DEVELOPMENT PLAN - AN ASSESSMENT (in three volumes) VOLUME I SUMMARY PLAN ANALYSIS, POLICY MEASURES AND CONCLUSIONS October 24, 1972 Eastern Africa - Country Programs Department II This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. EQUIVALENTS Currency: Until November 1967 - Since October 1967 November 1971 December 1971 Rs 1 = $0.21 Rs 1 = $0.18 Rs 1 = $0.20 $1 - Rs h.76 $1 - Rs 5.5 $1 = Rs 5.12 Area: 1 Arpent = 1.03 acres Tons are metric tons unless otherwise stated. PREFACE Volume I is intended to be self contained giving a summary of the analysis, policy options and the main conclusions. Volume II details the analysis and how the mission reached its conclusions, but does not include the general discussion of the Plan ob- jectives, naras. 1-8, an examination of the country's absorptive capacity, paras. 84-93, and recommendations for contingency planning and priorities, paras. 94-106, all of which are found only in Volume I. The annexes are also included in Volume II and detail the basis for the mission's assessment of some sections. Annex IV discusses the com- puter model used for analyzing the financial implications of the Plan. As the computer run-off, including runs of some equations tested but not used in the report, are of a technical nature and would be of an interest to a limited number of people, they are not included here. However, they are available on request. This report is based on the work of a mission which visited Mauritius in November/December, 1971. The mission consisted of Mr. Joseph H1ilmy (Chief of mission), Mr. Martin Wolf, Mr. Stahis Panagides (from IBRD) and Mr. Emile Costa (a consultant from ILO).  MAURITIUS: 4-YEAR DEVELOPMENT PLAN - AN ASSESSMENT VOLUME I: SUMMARY PLAN ANALYSIS, POLICY MEASURES AND CONCLUSIONS Basic Data Map Summary and Conclusions I. Employment, Growth and Plan Objectives II. Structure of the Economy & Plan Strategy III. Feasibility of the Plan IV. Conclusions - Contingency Planning & Priorities VOLUME II: THE ANALYSIS AND IMPLICATIONS Ch. I Employment Creation Ch. II Sector Strategy Ch. III The Financial Implications of the Plan - Experience of the Recent Past Ch. IV The Financial Implications of the Plan - Requirements and Financing Ch. V Mobilization of Private Resources ANNEXES I. Travail Pour Tous (TPT) Program II. Agriculture and Related Activities - Assessment and Potential for Employment Creation, Development of Various Crops and Their Profitability III. Savings Behavior of Public Corporations and Parastatal Institutions IV. The Methods Used in Projection of Government Finance, National Savings and the Balance of Payments VOLUME III: STATISTICAL APPENDIX  VOLUME I SU1MMARY PLAN ANALYSIS, POLICY MEASURES AND CONCLUSIONS TABLE OF CONTENTS Page No BASIC DATA MAP SUMMARY AND CONCLUSIONS ........................ I. EMPLOYMENT, GROWTH AND PLAN OBJECTIVES ......... 1 Introduction ................................... 1 Objectives of the Plan ........................ 1 Observation on Plan Objectives ................. 2 II. STRUCTURE OF THE ECONOMY AND PLAN STRATEGY ..... 4 The Economy .................4.................4 Plan Strategy and Investment Allocations ....... 6 Sectoral Employment ......................... 8 Observations on the Plan Methodology ........... 9 Observation on the Plan Strategy and Investment Allocations ............ ......... 10 III. FEASIBILITY OF THE PLAN ........................ 12 Introduction .... ............................. 12 Domestic Financial Implications of the Plan .... 12 External Financial Resources for the Plan ...... 18 Capital Inflow and Debt Servicing .............. 19 Policy Aspects of the Plan ................... 21 Agricultural Development ....................... 22 Industrial Development ......................... 23 Interest Rates and the Availability of Loan Capital ......................... ....... 24 Absorptive Capacity ................. ......... 24 IV. CONCLUSIONS - CONTINGENCY PLANNING AND PRIORITIES .................................... 28  f｀』州•＇戶網j■、f、 0 r.o、州 取邵不紫眾 !;；〕！〕！〔；〕〕〕！！〕〕〕〕〔〕  - 2  SUMMARY AND CONCLUSIONS 1. Mauritius is a small island, densely populated and heavily depend- ent on one crop, sugar. Literacy levels are high and the proportion of skilled persons is higher than in many other developing countries. The main economic problems facing Mauritius are the pressure of population and the stagnation of the economy. During the last two decades there has been hard- ly any rise in per capita income in real terms. The annual rate of popula- tion growth has declined from 3.2 percent in the fifties to 2.4 in the sixties (and about 1.7 percent during the last three years). The previous high rate of growth, however, will lead to a large and increasing number of people entering the labor force for many years to come. The annual rate of increase of the labor force was 5,000 - 6,000 in the last three years and is expected to exceed 9,000 in the next ten years. On the other hand, there has been little growth in the number of new jobs created; over 20 percent of the labor force is currently unemployed. Avenues of escape from unemploy- ment are largely limited by a situation in which land is almost completely utilized and there are almost no raw materials which could be used for in- dustry. 2. The current economic Development Plan, 1972-75, focuses on employ- ment creation, with a target of full employment by 1980. It aims at creat- ing about 8,800 new jobs a year over the Plan period against 2,400 created annually during the last three years, at reducing the population gross re- production rate from 1.86 at present to 1.71 for the period 1970-75 (and eventually to 1.20 in 1980-85), at raising GDP by about 7 percent a year against 2 percent annual growth during the previous three years, and at improving labor productivity by 2.4 percent a year compared with no in- crease during recent years. 3. While the Plan's primary objective is employment creation, it also stresses that employment should be a "productive employment". This is a re- flection of the view that more employment is not an end in itself, but is only desirable to the extent that it increases output and therefore total income. These two approaches to the employment problem are consistent with each other to the extent that output growth does not suffer as a consequence of the attempt to relieve unemployment. A major conclusion of the mission is, in fact, that the two objectives -- GNP growth and higher employment - not only do not conflict, but are in practice, complementary. Specifically, the mission believes that it will be impossible for the Government to achieve its employment objectives unless it can simultaneously achieve a higher rate of GNP growth, because in the absence of growth, the internal financial re- sources which the employment policy will require are unlikely to be generated. 4. To produce a high rate of growth of GDP, in contrast to the stagna- tion in the sixties, the Plan envisages a major structural change in the econ- omy. The share of agriculture, at present, about 25 percent of GDP, is pro- jected to decline to about 17 percent by the end of this decade. In contrast the share of manufacture would rise from 15 percent to 23 percent of GDP. Tourism is projected to grow rapidly and to reach 3 percent of GDP at the end of the decade. - ii - 5. Mauritius has a great asset in its labor force which is capable of carrying out precision work. Furthermore, wages are generally about one-third of those in Hong Kong and Singapore. In 1970, the Goverment therefore established an Export Processing Zone where imports of raw mate- rials and semi-finished goods could be further processed. A number of tax incentives and concessions are provided. The aim is to follow the example set by Hong Kong, Singapore or Taiwan. Some of these incentives may en- courage more intensive use of capital, e.g. the exemption of capital goods imports from import duties and the generous capital depreciation allowances. To encourage the use of more labor intensive techniques, the mission suggests a change in the composition of the "package" of incentives in order to re- flect the true value of the relative factor prices (particularly the abund- ance of labor), for example by awarding a lump sum labor subsidy for every- one employed. This would offset the effect of minimum wage regulations and job security which appear to raise wages above the social opportunity cost of labor. The resources required for such a subsidy could be obtained by a change in the corporation tax. 6. The proposed transformation of the economy so as to increase the share of manufacturing in the gross domestic product and employment is an appropriate goal in the Mauritian conditions. However, it is likely to take a long time for the benefits to reach a large number of people. Agriculture will continue to be the main contributor to GDP and employment in the near future. Greater emphasis is needed on increasing the productivity of small- holders in agriculture. Small farm development increases productivity and incomes where the need is greatest and contributes directly to improving the distribution of income. This is particularly important because about 85 per- cent of the population earn incomes lower than the average per capita income. Furthermore, about 90 percent of the farmers own only 19 percent of the land, in holdings averaging only about 1.4 acres, and their yields are notably lower than those achieved on the large estates. Overhead irrigation, more credit and better agricultural practices could raise their yields and in- comes. 7. The Plan projects an increase in sugar cane production of about 2 percent a year. Sugar occupies about 95 percent of the arable land and contributes over 90 percent to exports. Current sugar production in Mauritius is roughly equivalent to the sum of the quotas set by the Com- monwealth Sugar Agreement (CSA), the U.S. Sugar Act and the International Sugar Agreement in addition to domestic consumption. Prices under the first two agreements generally exceed the "free" market price. Recently there was a rise of about 22 percent in the price of sugar sold under the CSA quota and a doubling of the Mauritian quota under the U.S. Sugar Act. With world con- sumption of sugar expected to rise faster than production in the near future, Mauritius' target for sugar production seems reasonable. The main increase would come by introducing on small farmers land a new high yield variety at the time of replanting. As almost all arable land is under cultivation, further increases in agricultural output must come from crops other than sugar, produced on land released from growing sugar. Progress so far has been very slow and measures to diversify agriculture are yet to be worked out. - iii - 8. Perhaps the most significant aspect of the Development Plan is its emphasis on the creation of enployment using labor intensive techniques through the program of "Travail Pour Tous" (TPT) which is planned and im- plemented by the Development Works Corporation (DWC), a public organization established last July. The aim is to provide worthwhile employment for some of the 32,000 registered unemployed in addition to some 17,000 relief workers. The relief workers are usually engaged in activities with very low produc- tivity, e.g. weeding at edges of roads. The objective is to provide these relief workers with more productive work such as construction of minor roads, building schools, clearing land for agriculture, laying pipes and replanting sugar with new higher yield varieties. 9. The target is to create 20,000 full-time jobs. By the end of 1971, about 4,000 persons were employed by the Development Works Corporation. It has competent management and seems, at this stage, to be working effectively. Its viability depends particularly on its ability to supervise workers in the field, to maintain, while using labor intensive methods, a quality of work which is not inferior to that maintained by traditional methods and to ensure that supplies are available in the right amounts at the right time so that the flow of work will not slow down. At the present time, the DWC appears to have good control over workers and the quality of work in buildings and roads appears to be satisfactory, although there is need for improvement in land clearing works. According to preliminary figures, the labor intensive methods used resulted in lower unit costs than under traditional methods, particularly in construction of roads and schools, without sacrificing quality. However, while the Corporation is accepting at the moment any project presented to it, it would be beneficial to sub- ject such projects to a test of economic viability, particularly where al- ternatives are available. The Corporation will, however, have to be strength- ened and expanded to handle the much larger force of 20,000 workers as en- visaged in the Plan. 10. Total investment over the 4 years of the Plan is expected to reach Rs 1,208 million. Rs 693 million would be in the public sector and Rs 515 million in the private sector. To finance this investment, the Plan pro- jects a gross public capital inflow of Rs 412 million compared with Rs 95 million during the previous 4 years which would require an average savings rate of 18 percent of GDP (compared with 16 percent in the latter part of the sixties) assuming that the growth in national income of 7 percent as projected in the Plan is materialized. If, however, gross capital inflow were to be lower - say Rs 250 million - the savings rate would then have to be 22 percent. These rates of savings would be higher if the Plan growth rates were not achieved. In the extreme, for instance, if the economy were to stagnate over the Plan period, then the required average rates of savings would rise to 22 percent and 27 percent for the two as- sumptions of a high and a low capital inflow respectively. Providing the growth of the economy can be increased and sustained at the 7 percent rate projected in the Plan, then domestic savings should be adequate with the higher level of capital inflow and only slightly below requirements even with the lower capital inflow. - iv - 11. The execution of the Plan is dependent on a substantial volume of private savings and as large a contribution as possible from public savings. In the past, most of the savings were provided by the private sector. Despite an average current Government revenue to GNP of 27 percent, Government saving is insignificant. The explanation lies in the heavy budgetary expenditure on social services and transfers. Mauritius has almost universal attendance at primary schools, a comprehensive free national health system, as well as family allowances, old age pensions and various relief payments. The Govern- ment has taken serious measures in the last t.ree years to curb the growth of these expenditures and an improvement in the budgetary situation resulted. Some suggestions for increasing revenue further have been suggested in a recent study. They include a reduction in the depreciation allowance on investment, a rise in the sugar export tax and certain excise duties, in- troducing a system of contributory social security benefits and imposing some sort of a land tax. 12. The economic justification for the large capital inflow envisaged in the Plan is that it is necessary in order that the economy can move from stagnation to growth. Such a large volume of external assistance could not be sustained without raising debt service problems unless the debt were to be incurred as grants or loans on very advantageous terms. Service payments on external public debt were about 4 percent of foreign exchange earnings in 1971. If the planned volume of capital inflow is incurred on conventional terms, the debt service ratio in the early eighties would rise to about 15 percent on the basis of the Plan's export growth assumption of 4.4 percent, but would reach between 20 and 25 percent if the higher capital inflow were to continue beyond the Plan period or export growth rates were to be lower, say 3 percent per annum. Furthermore, in addition, future export earnings are subject to uncertainty as they depend in part on the continuation of preferential sugar marketing agreements. It is therefore necessary that Mauritius should borrow on concessionary terms in the next few years. If such capital inflow is successful in its pump-priming role, the need for concessionary financing on the scale projected would be reduced by the latter part of the seventies. 13. The most important factor upon which the success of the Plan de- pends, is the country's capacity to increase investment; gross investment is to be almost double and public capital formation to be almost treble the level achieved in recent years. For an important part of the investment program - that in large-scale industry - the inflow of capital will have to be accompanied by the necessary managerial and technical skills. The major absorptive capacity problem in agriculture is not organizational or managerial at the farm level, but concerns the dissemination of technical agronomic skills, marketing, crop insurance etc. These depend upon Govern- ment action. The progress made in the DWC, which depends to a large extent on unskilled and semi-skilled labor, is undoubtedly rapid. The DWC is well organized and well administered. There is therefore a notable capacity to make use of investment funds, although some changes are needed in agricul- ture. However, there are indications of limited absorptive capacity in certain areas, particularly in the public works sector. There has been consistent underspending of public capital expenditure which has averaged - v - about 70 percent of budget estimates although this might reflect the fact that estimates are in fact targets. A shortage of design and engineering capacity in the Ministry of Works and slow disbursement from available loans in the recent past are further indications of constraints to project prepara- tion and implementation. Most of the projects in the Plan are yet to be prepared. There is scarcity of skilled manpower to carry out investment programs particularly at the level of engineers and middle grade technicians. 14. The Government recognizes these constraints and is requesting a substantial increase in external technical assistance. A Civil Service Commission is expected to recommend ways and means to make the Government administration more efficient and development oriented. However, the effect of these measures will not be felt for some time and the constraints on ab- sorptive capacity will affect both the volume of foreign capital inflow and the rate of investment in the next four years. 15. Both the end of employment creation and the emphasis in the Plan on the use of labor intensive techniques to achieve that end are sensible. In general, the sectoral strategy stressing particularly manufacturing is also in the right direction. By and large, the Plan recognizes the changes required to achieve its objectives. Nevertheless, it is possible that the Plan's objectives cannot be completely achieved either because of lack of financial resources or of administrative, organizational and technical ca- pacity. In these circumstances, it would be desirable to continue as much as possible of the program in manufacturing and agriculture and to establish the precise projects in other sector which should be eliminated as whose implementation should be delayed.  I. EMPLOYMENT, GROWTH AND PLAN OBJECTIVES Introduction 1. Mauritius was described by James Meade in 1961 as "a case in Malthusian economics". A decade later the description is even more appro- priate. The pressure on land has further increased and the augmentation of the capital stock and the diversification of output to reflect the prim- ary factor proportions has been insufficient to offset the deteriorating labor-land balance. Indeed, total output has virtually stagnated and, as a consequence, per capita incomes have been falling, and unemployment has been rising. 2. The long-run corrective to this problem is clearly in the direc- tion of restricting population growth: in fact, distinct and encouraging movements in this direction can already be seen. There has been a marked expansion in the use of family planning and as a consequence fertility rates have rapidly declined since the mid sixties. The gross reproduction rate has fallen from 2.72 in 1965 to 1.92 in 1969 while specific birth rates amongst younger women (15-24) have fallen by almost 30 percent. Furthermore, the Government is fully conscious of the need to extend the impact of family planning and to this end envisages increasing the efficiency of the institu- tions involved. For instance, it is intending to amalgamate the Family Plan- ning Association with the maternal and child health centers of the Ministry of Health and to disseminate birth control material through an expanded sys- tem of post-natal clinics. However, owing to previous demographic develop- ments, the number of women in the child bearing age would rise in the seven- ties at a rate double that of population increase. Even on optimistic as- sumptions, it will be difficult to reduce the population growth rate from the average level in the sixties of 2.4 percent per annum to a Government target level of 1.8 percent in the 1980-85 period. 3. Moreover, regardless of what happens to fertility and to the longer- run changes in total population size, the population of working age will in- exorably increase during the seventies at 3.2 percent per annum as against 2.3 percent in the late sixties. People already born have been entering the labor force at an annual rate of 5,000 - 6,000 per annum in recent years and will enter at a rate of 9,000 later in the decade. Open unemployment already stands at 20 percent of the labor force and in addition, underemployment is extensive. 4. It is to this medium-term problem that the Mauritian "Four-Year Plan for Social and Economic Development" is directed. While, however, the Plan concentrates predominantly upon the 4-year period 1972-75, it also em- braces a longer-term perspective extending to the end of the decade ahd some- times beyond. The Plan, therefore, recognizes the need for policies which have relevance over varying time horizons. The Objectives of the Plan 5. The Plan document states explicitly that "employment creation is the primary objective of the economic development strategy". The target is the elimination of unemployment by 1980. This objective is a reflection of - 2 - the socio-political judgment of Government that unemployment is undesirable per se. But apart from the adverse social and psychological effects of un- employment, the distribution of income problen can, it is judged, be eased only by the avoidance of widespread and growing unemployment. At the same time the Plan document also asserts that employment should be "productive employment". This latter assertion is a reflection of the view that more employment is not desirable in itself but only desirable to the extent that it increases output and therefore total incomes. 6. These two approaches to the employment problem are consistent with each other to the extent that output growth does not suffer as a consequence of the attempt to relieve unemployment and to improve thereby the distribu- tion of income. To the extent that output growth is likely to suffer then the familiar problem arises of a Government having to trade-off growth against distribution. This is the fundamental question implicitly raised by the Mauritian Plan. In brief the Plan's answer to the question is that no serious trade-off problem arises. 7. The Plan comprises, in effect, two independent elements. First, a traditional type economic plan with overall and sectoral growth rates and required investment plans but including the achievement of higher employment as one of the means by which patterns of output and rates of growth are to be determined. Thus this part of the Plan visualizes the employment strategy not as an independent or secondary strategy but as a joint growth-employment strategy. The second element in the Plan is the "Travail Pour Tous" program (TPT) which can be regarded as a secondary employment strategy required to provide employment to those who are not absorbed by the developments in the economy resulting from the first element of the Plan. It is expected that the TPT program "will wither away after a few years through the creation of more remunerative employment opportunities". How short this transitional period will be is, of course, dependent on the speed with which and extent to which the first element of the Plan can be implemented. Given the grow- ing magnitude of the unemployment problem, the Government must act quickly and boldly to implement the first part of the Plan if it is to have any hope of realizing its expectation that the TPT should simply meet a transitional need. Observations on Plan Objectives S. The Bank's mission has examined the Economic Development Plan in the light of the objectives defined by the Government of Mauritius. The consistency of these objectives and, more specifically, the conditions under which they are likely to be consistent, were major concerns of the Bank mis- sion. The major conclusion is that the two objectives - GNP growth and higher employment - should be seen not as independent, but as casually inter-related objectives. In particular, the mission believes that it will be impossible for the Government to achieve its employment objectives unless it can simul- taneously achieve a high rate of GNP growth, because in the absence of the latter, the internal financing resources which the employment policy will -3- require are unlikely to be generated. For priorities within the Plan in- vestment program to be rationally determined, recognition of this fact is essential. The absence of such priorities is cause for some concern. How- ever, before the analysis from which these conclusions have emerged is presented, the Plan itself must first be described. II. STRUCTURE OF THE ECONOMY AND PLAN STRATEGY The Economy 9. The Mauritian economy stagnated in the sixties; there was little increase in national income, per capita income fell, and little modifica- tion took place in the structure of the economy. The nominal rate of growth from 1961 to 1970 was 3.1 percent per annum, and using the cost of living index as deflator (the best available), the rate of growth of output was only 0.3 percent, while the growth per capita was -2 percent per annum. Output composition remained essentially unchanged with a slight decline in the contribution of agriculture to GDP from 25.9 percent in 1961-62 to 24.3 percent in 1967-69. Particularly notable is the constancy of the share of manufacturing at approximately 15 percent of GDP. Import substi- tution industries, established during the early part of the sixties, had a negligible effect on the composition of industrial output. The sugar in- dustry (milling and production of by-products, e.g., molasses) has remained close to 60 percent of the industrial output. 10. The dependence on external trade continues to be high and imports have fluctuated around 46 percent of GDP. This is a natural consequence of the factor endowment of Mauritius. The island is small and economies of scale are limited. Raw materials are not available and production of in- termediate goods is limited by the size of the domestic market. An increase of the share of wages in GNP from 53.6 in 1958 to 58.7 in 1968, largely ex- plains the rise in the proportion of imported consumer goods to total im- ports from 45 percent in 1960-61 to 52 percent in 1968-69. Furthermore, the share of food in total imports showed a similar upward trend from 27 percent in 1960-62 to 32 percent in 1969-70. 11. Two fundamental characteristics have affected the development of the economy. The first is the great dependence on sugar. I/ The sugar sec- tor (sugar cane production plus milling) not only contributed about 33 per- cent directly to GDP in the 1967-69 period, but it has a pervasive general impact on the economy and on society. It accounts for over 90 percent of exports and just under 40 percent of total employment. Most arable land is under cultivation in Mauritius, and land under sugar accounts for about 95 percent of the total, a figure which hardly changed in the sixties. Yields of sugar cane have shown no improvement. 2/ Currently, 60 percent of Mauritius'crops is sold in the U.K. under the Commonwealth Sugar Agreement I/ Mauritius is more dependent on sugar (relative value of sugar exports to total exports) than such countries as Cuba, Fiji, Barbados, Dominican Republic or Jamaica. 2/ Average annual production of the sugar crop in 1966-69 in Mauritius was 613,000 metric tons. In a cyclone-free year, the size of the crop can be expected to be 835,000 tons. -5- (CSA) at prices which, since 1969, have been set at Rs 630 per metric ton, f.o.b. Port Louis. Thirty percent is sold in other markets, principally Canada, at unregulated prices but averaging Rs 400 per metric ton; 5 percent is sold domestically. The U.S. quota is now 30,150 metric tons (less than 5 percent of total output) and sells at Rs 800 per metric tons, f.o.b. Port Louis. The average f.o.b. value of exports to all destinations over the last four years has been about Rs 550 per metric ton but should increase considerably if the higher world sugar price prevailing in recent months persists. 12. The second characteristic is the very uneven distribution of land- holdings in Mauritius.. Twenty one sugar estates cultivate 52 percent of the arable land in holdings ranging between 1,000 and 11,000 arpents each, while over 25,000 smallholders cultivate about 20 percent of the area under crops in holdings of around 1.5 arpents and less, many of which are further fragmented. In between, about 2,500 medium-size farmers with holdings ranging from 5 arpents upwards cultivate a further 20 percent (approximately) of the arable land. In the past, improvements in yields accrued mainly to the large farmers and proved to be out of reach for the vast majority of the small farmers. While the average yield of sugar cane for the estates was 31.5 metric tons per arpent in 1970, it was only 22.1 metric tons for the small farmers (and reaches 17.3 metric tons for some 1,700 tenant planters). 13. One of the most striking features of the Mauritian economy in the sixties was the negligible growth rate of GNP despite high rates of gross investment, averaging 19.1 percent of GDP between 1963 and 1966, and 16.7 percent between 1967 and 1970. This phenomenon must be explained because the Plan expects that a marked rise in fixed investment over its past high levels will nevertheless lead to a substantial improvement in growth per- formance. 14. There are several reasons for the slow growth. It is clear, though not very precisely quantifiable, that the discrepancy between gross and net investment has been considerable. Evidence from the power and sugar milling sectors, for instance, indicates high rates of depreciation. It is thus quite possible that net investment has been running at no more than two-thirds of the gross figure. 15. The sectoral composition of investment has also been such that little of it produced large increments in GDP. Agriculture and manufactur- ing, which are the major productive sectors, have only received 23.1 percent of all fixed investment since 1961. Moreover, the volume of investment in manufacturing shows a marked decline from the levels of the early sixties and capacity has been under-utilized. At the same time, there has been a considerable investment in economic and social infrastructure, in the form of housing, transportation, energy, water and social services. While these investments have produced a considerable base for growth, they have not en- couraged much growth in the short run. Furthermore, investment in sugar milling has probably had only a very small effect on GNP, since the price - 6 - of processed sugar is given by the world situation, the production is deter- 7ined by the quantity of cane grown, and the reduced costs of the milling stage result largely in increasing the incomes of the millers rather than in an increase in national product. 16. Since the growth of CDP in Mauritius is very dependent on the output of sugar, the volume of investment is only one of the determinants of the rate of growth. Variations in weather produce major changes in sugar output. Thus, during the sixties output varied from 2,393,000 tons of cane in 1960 to 5,984,000 in 1965, which was the peak prior to 1970. Although it appears that there is a certain upward trend over the decade, due to investment and improved varieties, this trend is difficult to dis- cern due to the major fluctuations. More fundamentally it is questionable to what extent the mere application of capital, unassociated with other in- puts, can in any case be expected to raise the rate of growth. 17. '4oreover, tax incentives, such as accelerated depreciation pro- visions, and import duty concession for machinery, may well have encouraged some wasteful investment. This seems to have been especially important in agriculture, although it may also apply to some industries receiving devel- opment certificates, as well as the sugar mills. 13. These elements together would seem to explain why such a high level of gross investment has not produced a higher rate of growth of GDP. With population growing since 1961 at a compound rate of 2.3 percent, the stagnation or probable fall in per capita GNP is readily explained. Thus, if one assumes that net investment has indeed been two-thirds of gross in- vestment, which has averaged 18.6 percent of GDP since 1961, then net in- vestnent was 12.4 percent and, if the i-ncremental capital-output ratio were as low as five, 11.5 percent would have been required to keep income per head constant. Plan Strategy and Investment Allocations 19. The Plan aims at moving the economy from its present state of ris- ing unemployment and stagnating output, where GDP in real terms showed vir- tually no growth during the sixties, to a more dynamic economy growing at about 7 percent a year. To achieve this, the Plan aims at a major shift in the allocation of investment in order to bring about major structural changes in the sectoral contributions to GDP and in the level and distrib- ution of employment. 20. The share of agricultural output is projected to decline from 24.3 percent in the pre-Plan period to 17.3 percent and that of manufacturing is expected to rise from 15 percent to 23.4 percent by the end of this decade. The change in the share of manufacturing is more pronounced since the share of sugar production to total manufacturing output is expected to decline from 59 percent to 26.5 percent in the same period. The direct contribution of the sugar sector (sugar cane production and milling) to GDP would also show a marked drop from 26 percent at present to 20 percent by 1975. Tourism is expected to grow by more than 20 percent annually and would contribute over 3 percent to GDP by 1980 compared with under 1 percent at the moment. - 7 - 21. These developments call for a massive volume of investment amount- ing to Rs 1,208 million over the Four-Year Plan period, more than doubling total gross domestic capital formation from the already high but almost un- changed levels prevailing during the sixties. The volume of public invest- ment would be three times as great as in the pre-Plan period. It is planned that both agriculture and industry should obtain a large share of total in- vestment, the former receiving 25 percent during the Plan period compared with 13 percent in 1967-69 and the latter moving from a share of 9 percent to 23 percent. 22. Agricultural investment is planned to reach an annual average level four times higher than that expended in the 1967-69 period. A large part of this represents intended major expansions in three irrigation schemes (costing Rs 94 million). The Northern Plain and Western Coastal Region irrigation schemes are estimated to cost Rs 77.2 million. In addi- tion, Rs 17 million is to be invested for small-scale irrigation development. 23. Industrial investment would display a five-fold rise over the annual level during the 1967-69 period. It is estimated at Rs 278 million during the Plan period. The Government objective is to stimulate industrial development which would attract mainly private initiative and capital. Direct public investment in manufacturing is small, estimated at about Rs 13 million for the Four-Year Plan period. The emphasis is on large- scale export processing operations. The Government is offering substantial financial and fiscal incentives through Development Certificates and (since 1970) through the Export Processing Zone Act. 24. The share of investments in energy and water in total investment would rise from 9.7 percent in 1967-69 to 11.6 percent in the Plan period. Improvement in water supply to meet the needs of industrialization and the expansion of tourism and extending its availability to the rural areas, would absorb 43 percent of investment in this sector, while power would take 30 percent for improving transmission capacity. 25. Transportation is to receive a lower share of total investment during the Plan as compared to the past. This is a reflection of the gen- erally adequate transportation network of Mauritius. The two basic elements here are the plan to build a new airport and improvements in some roads, particularly the extension of the motorway past the city of Curepipe to the airport. 26. With the exception of tourism, the investment share of other sec- tors declines substantially as compared to the past. Investment in tourism is expected to reach Rs 31.5 million during the Plan, of which more than 90 percent is to be undertaken by the private sector. 27. The analytical framework of the Plan is almost entirely derived from the production side. The explicit rationale is a given desired level of employment in 1980 with sectoral targets derived firstly from estimates of the absorption of labor by agriculture, and secondly, from judgments relating to the capacity of other sectors to increase their employment of - 8 - labor. There is no explicit statement of the way in which investment re- quirements and sectoral and aggregate rates of growth of output were deter- mined, though implicit capital-labor ratios and capital-output ratios can be derived. Sectoral Employment 28. The Plan assumes that agriculture can grow 4 percent per year over the decade while productivity per person grows by 0.7 percent leaving 3.3 percent as the yearly growth of agricultural employment. This would mean that employment in agriculture would rise from 76,100 in 1969 to 109,000 in 1980. Total working population in the economy in 1980 is pro- jected at 325,000 and the balance between this and the 109,000 in agricul- ture is distributed in the Plan to other sectors. The largest of these other increases in sectoral employment, both absolutely and relatively, is manufacturing - a rise from 25,000 employees in 1969 to 67,000 in 1980 which would mean that manufacturing would absorb 21 percent of total employ- ment in 1980 compared with 12 percent at present, an annual growth rate of over 10 percent. 29. The Plan's target for employment in the infrastructure sectors was related to the requirements in the directly productive sectors using ratios, taken from comparable countries, of employment in infrastructure to total employment. This share was therefore increased from 14 percent at present of total employment to 16 percent in 1980. The rapid increase is expected to be in the construction of public works rising by 8 percent a year in contrast to a slow growth rate for transport and communications (4 percent annually). The balance of the total employment target was dis- tributed among sectors in services and Government employment. The result is that the ratio of employment in services to total employment would, in fact, decrease from 34 percent at present to about 28 percent in 1980, ex- cept in the tourism sector and this does not seem unreasonable since the rapid increase in employment in services during the sixties reflected a growing underemployment. - 9 - Table A: MAURITIUS -DIPLOYMENT, GROSS DOMESTIC PRCDUCT, AM PLAN TARGETS FOR 1980 GDP (at factor cost) SECT(RS BePIDYENIT , R ilon) 1969 1980 Growth 1969 1 1980 Growth Rate Rate 1. Agriculture 76,100 109,000 3.1% 206 317 4.0% 2. Mining and Quarrying b00 1,000 8.7% 1 3 10.5% 3. Manufacturing 25,000 67,000 9.4% 132 h30 11.3% Processing agricultural crops for export (6,600) (6,600) - (78) (11) (3.5%) Other manufacturing industries (18,bo0) (60,oo) (11.4%) (54) (316) (17.h%) h. Construction 13,000 30,000 7.9% 51 133 9.2% 5. Power & Water 1,00 3,000 7.9% 30 69 7.9% 6. Transport & Communications 13,400 20,000 3.7% 102 220 7.2% 7. Services 65,800 95,000 3.4% 328 663 6.6% TOTAL 195,0 325,0 .7% 80 1,835 7.3% 1/ Average 1967-69 Source: Government of Mauritius, Four-Year Plan for Social and Economic Development 1971-75, General Analysis and Policies, Port Louis, 1971. Observations on the Plan Methodology 30. While this methodological approach is a sound one, there are obvious difficulties in estimating the important numbers. Aggregate and sectoral capital-output ratios can be misleading when net investment fig- ures are not available. Furthermore, figures of capital formation are based on capital imports and information from the sugar estates, so that small farm capital improvements are not properly incorporated into the estimates. It can also be questioned whether in an economy dominated so strongly by the fluctuations in the output of one crop - sugar - which is subject to the vagaries of weather, any meaningful relationship can be captured between capital and output except by employing very long time series and a more articulated formulation of the relationship. Indeed, the average incremental output-capital ratio for the sixties is negative in a regression with a constant term. 1/ 1/ i.e. GDP = a + b1 - 10 - 31. More important, there is a danger that the emphasis given to the capital-output ratio, whatever its methodological justification, will be inappropriately interpreted as suggesting that capital is the limiting fac- tor to output growth. In fact, as will be emphasized later, this is highly questionable for important sectors of the Mauritian economy in which improve- ments in farm organization, rotational practices and nutrition are the prim- ary constraints. 32. One further observation on the Plan methodology is that its con- centration on employment, has meant that there is virtually no analysis of the savings implications beyond consideration of public finance. There is also very little discussion of the balance of payments. Moreover, in analyzing the allocation of investment resources (both internal and external) the Plan assumes that they are completely fungible, particularly between the agricultural and manufacturing sectors and between the public and the private sectors. This assumption has some validity particularly in an economy such as Mauritius with a well developed financial structure. However, it is clear- ly not entirely valid. For instance, manufacturing development of the type envisaged in the Plan will depend more on private foreign capital for which rural development is not a competing alternative. 33. In summary, both the restrictive assumptions and the quantifica- tion problems inherent in the Plan methodology must be recognized as impor- tant limitations. Ideally, of course, the Plan needs to be supported by project analysis in which not only the cost and benefits of investment are quantified but where the employment implications, technical assistance re- quirements and patterns of finance (e.g. foreign and domestic) are examined. In fact, most of the projects in the Plan have yet to be prepared. Observation on the Plan Strategy and Investment Allocations 34. The Plan correctly emphasizes the need for structural transforma- tion of the Mauritian economy over time. As part of this process, the Plan's targets in industry and particularly the promotion of export-oriented manu- facturing are sensible. However, the problems involved in developing an ap- propriate industrial policy to reflect these aims should not deflect atten- tion from agriculture and rural development. Initial conditions in Mauritius are such that the agricultural sector will continue to be the major source of employment for the rest of the century. It is as well to remember that in Taiwan, for instance, which has experienced very successful industrializa- tion in recent years so that this sector now accounts for 24 percent of na- tional income, the sector still only accounts for 12 percent of total em- ployment. 35. A greater emphasis should therefore be given to the diversification of agricultural output and particularly to the development of the smallholder sector. Small-farm development permits an increase in productivity, employ- ment and incomes where the need is greatest. Furthermore, non-sugar produc- tion seems particularly suited to the non-estate sector of agriculture. Op- portunities for diversification appear to exist into a range of crops and - 11 - livestock - tea, rice, groundnuts, pasture (beef and milk), fruit, ginger, garlic, onions, maize, beans, tobacco and root crops. There is considerable scope for intercropping. The evidence as to the economic benefit of such policies in promoting agricultural diversification is rather favorable. For the Northern Plain Overhead diversified irrigation scheme, additional profits of Rs 190 per acre per year were estimated for small sugar producers. 1/ Under this scheme, 46.4 percent of the small planter's land can be released for food crop production while sugar production will be held constant. 36. Finally, of course, it will remain true for many years that regard- less of the development strategy which is pursued, the future of Mauritius is dependent on sugar. The Plan also recognizes this. World exports of sugar are expected to grow from 17.1 million tons in 1968-70 to 19 million tons in 1975 and 21.4 million tons in 1980. Developing countries (excluding Cuba) are expected to increase their exports by 2.4 million tons between 1968-70 and 1980. CSA prices are forecast to increase from the post-1969 level of Rs 630 per metric ton f.o.b. Port Louis to about Rs 770 per metric ton for the period 1972-74. There is, however, uncertainty about what will happen after the expiration of the CSA, since U.K. would become a member and Mauritius, an associate member of the EEC. There is a good prospect that a favorable price, to replace the CSA negotiated price, would probably be offered to Mauritius for sugar exports to the Common Market. Whilst the un- regulated price is expected to be lower than its level in recent months, it is nevertheless expected that it will continue to be favorable to exporting nations. The target of sugar production growth is 2 percent per annum and this would seem quite feasible. The main increase would result from intro- ducing on small farmers land a new high-yield variety at the time of replant- ing, which usually occurs once up to twenty years. Yields on the estates are generally more than 50 percent higher than on small farms but there is no inherent reason for this disparity if assistance in, for instance, the form of rock-clearing and more frequent replanting were made available to small farmers. It is certainly desirable that the diversification of agricultural output be achieved at the same time as sugar production is augmented by an increase in yields per acre. The economic and social objectives of diversi- fication should not divert attention from the fact that sugar production must be fully supported in order that the benefit be obtained, both of the production advantages enjoyed by Mauritius and by the favorable international market opportunities available to the country. I/ FAO/UNDP, Land and Water Resources Survey, Mauritius (Rome 1970), p. 92. - 12 - III. FEASIBILITY OF THE PLAN Introduction 37. Whilst reservations can be expressed regarding specific aspects of the Plan's methodology, strategy, sector investment pattern, etc., it must still be emphasized that the Plan's objectives, its analysis and the general thrust of its conclusions are not to be disputed. However, the usefulness of the Plan as an operational document must obviously depend on its realism. Certainly the major objectives for the seventies of zero un- employment by 1980, a 7 percent rate of growth of GNP and major structural changes in the composition of total output, stand in great contrast with the experience of the sixties - rising unemployment, stagnant GNP and minor structural changes in output. The starkness of the contrast must in itself demand caution. Clearly the changes which are envisaged are only likely to come about if there are major changes in policies. 38. There are three aspects of the Plan's feasibility which are of particular importance. (a) Will the resources, both domestic and external, be available to finance the Plan? (b) What changes in policies relating to the allocation of re- sources are required in order to ensure that the Plan's objectives are achieved? (c) Does the economy have the organizational, administrative and managerial capacity not only to implement the invest- ment program but, in addition, to ensure the projected flow of output from the enlarged productive capacity? Domestic Financial Implications of the Plan 39. It has already been emphasized that the Plan was drawn up from the employment-production side and contains little analysis of overall re- source requirements or their availability. The closing of this gap in the analysis is essential if the consistency of the Plan is to be demonstrated and before an evaluation of the feasibility of the resource requirements can be made. The problem has been analyzed by the mission in the light of an analysis of past experience which is presented in detail in Volume II of this Report. 40. Investment during the four years, 1972-75, is planned to be RS 1,208 million, a level more than double that achieved in the previous four years of Rs 575 million. The public sector's share is expected to be Rs 693 million leaving Rs 515 million as the private sector share. The phas- ing of the investment outlays is presented in Table B. - 13 - Table B: MAURITIUS - KEY VARIABLES, PAST EXPERIENCE AND PLAN REQUIREMENTS - 1966-1975 (Rs million) 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 Gross Domestic Product 792 841 827 887 894 970 1035 1106 1181 1263 Gross Domestic Capital Forma- tion 133 145 141 144 145 252 299 326 334 Gross National I 1/ 168 205 217 214 Saving 102 116 101 206 16611 2/ 201 243 260 262 Net Capital 31 29 40 -62 -21 I 1/ 84 94 109 120 Inflow II 1/ 51 56 66 72 1/ Plan assumption. 2/ Alternative assumption for analytical purposes. Source: Central Statistical Office, and Appendix Tables 2.1 and 2.7. 41. The domestic savings requirements are dependent upon the assump- tions made with respect to net capital inflow. For this purpose two sets of assumptions are used. The first of these (I in the above table) reflects the assumptions of the Plan document. This projects a gross public inflow of Rs 412 million during the Plan period compared with Rs 95 million during the previous four years. This level of gross public inflow would permit a total net inflow of capital of Rs 407 million after allowing for private capital inflow (assumed to continue at the 1970 level, of Rs 10 million) and for capital outflow. In fact capital outflow is assumed to arise only from the amortization of existing public debt. This is because the amor- tization of newly negotiated public debt can be expected to be negligible during the Plan period and there is very little outstanding private debt. A 34 percent stamp duty acts as an effective disincentive to private capi- tal outflow which is in any case extremely small. The second set of assump- tions (II in the above table) assumes a gross public inflow of only Rs 250 million which, when adjusted as above for private inflow and for total capi- tal outflow, produces an aggregate net inflow of capital of Rs 245 million. 42. The domestic savings requirements under assumptions I and II are presented in the above Table. Under assumptions I, 66 percent of aggregate investment is projected to be financed out of domestic savings and under as- sumptions II the proportion would rise to 80 percent. For the financing of the public share of investment the change in assumptions regarding capital inflow, is, of course, much more marked - a change from 41 percent under assumptions I to 64 percent under assumptions II having to be internally financed. - 14 - 43. Whether either of these levels of domestic saving is reasonable can only be judged in relation to further assumptions regarding the levels of income out of which the savings will have to be generated. If the rate of growth of gross national income is 7 percent per annum as is assumed in the Plan then the average savings rates which would be required are 18 per- cent and 22 percent (respectively for capital inflow assumptions I and II) against 16 percent in the latter part of the sixties. These would corres- pond with marginal rates of saving of 15 percent and 29 percent under as- sumptions I and II respectively. If, of course, the Plan growth rates are not achieved (and they are quite different from the experience of Mauritius over the past decade), the required rates of saving will be correspondingly higher. In the extreme, for instance, if the economy were to stagnate over the Plan period at its 1970 level of GDP, then the required average rates of saving would rise to 22 percent and 27 percent. The implicit marginal rates would be infinite as the denominator in the formulation is zero. In the analysis which is summarized in Table C below, a third and intermediate assumption is made based on an assumed incremental capital-output ratio of 4 which, given the planned investment level, implies a rate of growth of GNP of 4.7 percent. 44. In evaluating the feasibility of these savings requirements of the Plan, a systematic historical analysis of savings behavior has been undertaken and is presented in Volume II of this Report. Two separate es- timates of savings rates were determined. The first was a simple estimate of the average savings rate over the period 1965 to 1970. This gives a rate of 16.4 percent which can then be applied to the various assumptions regard- ing the level of GDP during the Plan period. The projected savings rates are presented as the first of the estimated series in Table B. 45. It is, however, strongly established in the economic literature on savings behavior that the rate of savings is markedly affected by the rate of growth of income. An attempt has been made, therefore, to isolate through regression analysis the effect of rising incomes on savings during the sixties. The outcome gives a very high marginal rate of savings (about 0.6) and thus leads to much more optimistic projections of savings during the Plan period except in the case where GDP is assumed to remain stagnant. The results of this estimation procedure are presented as the second set of savings projections in the following Table C. - 15 - Table C: MAURITIUS - REQUIRED AND ESTIMATED GROSS NATIONAL SAVINGS (Rs million) Assumptions Relating to GDP Growth Rate 1971-75 (a) (b) (c) Stagnation at Plan Target ICOR of 4 1970 level Gross Domestic Product 4585 4156 3576 Required Savings Savings Target I (capital inflow Rs,, 407 million) 804 804 804 Savings Target II (capital inflow Rs, 245 million) 966 966 966 Estimated Gross Saving Projection of 1965-70 Average Saving Rate of 16.4% 730 639 588 Projection from Regression Equation 1073 788 416 Mission Assumption 900 700 500 46. Clearly projecting past behavior into the future is particularly difficult in the case of Mauritian savings experience. This is mainly be- cause it is necessary to project a growing economy from a stagnant one and therefore the only guide to determing the effect of income change on savings is by observing the effect of short-run increases in income on savings. For this reason the projections from the regression analysis are probably too optimistic. At the same time, it would be much too pessimistic to assume that more rapidly growing income would have no effect on the savings rate. It can, therefore, be assumed that the most realistic projection of savings would be somewhere between the two estimates. The third estimate in the table is, therefore, a best judgment by the mission representing a rounded average of the other two. 47. This analysis demonstrates the overwhelming importance of the growth rate of GDP for generating an adequate volume of savings. Providing the growth of the economy can be increased and sustained at the 7 percent rate projected in the Plan, then domestic savings should be adequate with the higher level of capital inflow and only slightly below requirements even with the lower capital inflow. - 16 - 48. Once it is assumed that the planned rate of growth of the economy is too optimistic, a savings problem begins to emerge even on the assumption of the higher level of capital inflow. Stagnation of the economy makes the savings problem insurmountable with a projection of savings little more than half what would be required on either capital inflow assumption. 49. What this examination shows, therefore, is the complementarity of the growth and the employment objectives for without a high rate of growth it would be unrealistic to expect that the resources for financing the employment-oriented investment program could be generated. It follows that the investment program must be geared both to creating employment and generating incremental real output. Furthermore, the savings analysis also confirms the realism of the projected capital inflow required to support the Plan particularly if allowance is made for a more steady rise to the 7 per- cent growth rate than is assumed in the Plan. This capital inflow is, of course, required not only to supplement domestic savings but also to augment foreign exchange availability. The balance of payments analysis is presented later. 50. Within the total flow of domestic savings, from 60 to 80 percent, is typically generated by public and private corporations combined, and with- in this share the private corporations account for the bulk of the savings (about 80 percent). Furthermore, the sugar estates account for about one- half of private corporate saving. A marked characteristic of the savings behavior of the whole corporate sector is that it fluctuates very greatly. Analysis on 1958-69 data indicates a marginal propensity to save out of gross profits of 72 percent. It is the quantitative importance and fluc- tuations of this element in total savings which gives rise to the high ag- gregate marginal propensity to save already noted. The nature of these fluctuations is most clearly seen in the behavior of the Cyclone and Drought Insurance Board which has accounted on average for more than half of public sector corporate saving. Being an "accident" fund it dis-saves in disaster years and saves in others. Over time it has been a net saver. 51. One fundamental question which arises from the importance of cor- porate saving in total saving in the Mauritian economy, is whether the Plan strategy with its emphasis on employment is in danger of reducing aggregate savings. In other words whilst there might be no trade-offs between employ- ment and growth on the output side, there might be such a trade-off on the side of resource mobilization - a frequent assertion in the general discus- sion of this matter. 52. It is clear that reduction in the share of profits in GNP in Mauritius is likely to lead to a reduction in the savings rate because the corporate sector is responsible for such a high proportion of total savings, and has such a high marginal propensity to save (approximately 70 percent). However, the Plan's strategy need not produce this result. Increased employment within a sector counter-balanced by both increased efficiency of factor use and capital accumulation need not result in a shift in the distribution of income towards labor. This is so even if - 17 - the real wage were to remain the same. Moreover, the basic strategy in- volves a shift in sectoral shares in GNP from agriculture, which has a relatively low share of profits in value added, to industry, which has a higher share. For these reasons, it is not necessary, or perhaps even likely that the Plan's strategy will imply falling shares of profits in GNP. However, on the other hand, the rising share of profits in value added in industry would go to entrepreneurs in the EPZ where repatriation of profits (and capital) is permitted. To the extent that such profits may not be mobilized for reinvestment in Mauritius, it may adversely affect the future availability of savings. 53. Nevertheless, maintaining the level and rate of savings, which is required by the Plan, in the context of rising employment, will denand some curbs on the growth of real wages at least in the short-tern. There is, therefore, a trade-off between rising real wages and savings. 54. In principle, the Government could in any case generate the re- quired savings to compensate for any shortfall in private corporate (and household) saving. In Mauritius despite an average Government current rev- enue to GNP ratio of 27 percent, Government saving is insignificant. Sur- pluses on current account in the past three years simply followed roughly equivalent deficits in the previous three years and over the long run, the Government's contribution has been small. 55. The basic problem is the very heavy budgetary expenditure on social services and transfers. Mauritius has almost universal attendance at primary schools, a comprehensive free national health system, as well as family allowances, old age pensions and various relief payments. The Government has taken serious measures since 1967168 1/ to curb the growth of these expenditures through cuts in social security benefits especially family allowances. However, these have been inadequate to offset in any major way the rising cost of debt service and of general administration. 56. Revenues are clearly very high by any standards even allowing for the openness of the economy. An IMF fiscal advisor is currently making recommendations to the Government on measures to raise additional revenues but no quantification of these is available. Of course if the planned GNP growth rate is indeed achieved then revenues can be expected to respond more rapidly than current expenditures and by the final two years of the Plan period Government savings could be considerable (see Volume II). This pros- pect, however, would be undermined if it proved imposstble to control the growth of real incomes of Government employees and there are already signs of problems in this regard. If there were sizeable increases in real Gov- erment wages and salaries, it would require any additional tax measures which might be possible simply to keep the Government's current account in balance. 1/ Fiscal years: July 1 to June 30. - 18 - 57. The financial feasibility of the Plan depends not only on generat- ing an adequate flow of domestic savings but also on ensuring that this flow is mobilized for priority purposes. Within the public sector this is a matter of budgetary policy. Mauritius also has a well developed financial structure so that both public sector borrowing from private savers and public sector lending for financing private sector investment can be readily under- taken. The latter is particularly important in the case of the specialized industrial and agricultural lending institutions which receive budgetary funds. 58. It is apparent, however, that important problems are raised if the mobilization of private savings for priority investment purposes within the private sector, as set out in the Plan, are to be achieved. There is in particular a need to ensure that large flows of private savings mobilized by the commercial banking system are channeled into the financing of devel- opment in the private industrial and agricultural sectors rather than being used almost exclusively for short-term financing. Furthermore, policy and institutional changes are essential if private savings are to flow into the small- and medium-scale agricultural sector. Interest rate policy is of particular importance in this connection. Both the level and structure of interest rates on the borrowing and lending sides need to be examined in order to ensure that private savings are more effectively mobilized in the economy. Further analysis of this matter is presented later. External Financial Resources for the Plan 59. There is no detailed balance of payments analysis in the Plan document. The only projection is for 1975 - the final year of the Plan. This is drawn up on an assumption that exports will expand at an average annual rate of about 4 percent and imports at about 7.5 percent. The latter particularly reflects the growth of capital goods and intermediate goods. Consumption goods imports are projected to increase at only 1.7 percent per annum which allows for no increase in their per capita level. 60. On the basis of these assumptions and others relating to net pay- ments for services and factor income flows, the Plan projects a balance of payments deficit in 1975 of Rs 67 million as against an assumed capital in- flow of Rs 120 million thus implying an accumulation in foreign exchange reserves. 61. The mission's own balance of payments analysis projected for each Plan year is presented in Volume II. The analysis assumes that the volume of capital goods required to support the investment program and of inter- mediate goods to support the growth of manufacturing industry will be higher than that contained in the Plan. It suggests that the whole of the capital inflow assumed in the Plan (i.e. the higher of the two assumptions I and II in Table B) will be required to cover the balance of payments deficit, thus allowing for no increase in reserves. In fact for 1975 a deficit of Rs 147 million is forecast against the capital inflow of Rs 120 million though in earlier years of the Plan the two are closer in balance. - 19 - 62. This conclusion of the balance of payments analysis is arrived at on the basis of the Plan's own projction of exports (Rs 480 million). How- ever, on the mission's assumption of a higher free market price of sugar, namely, $0.0525 per lb on the New York market (as against $0.0385 per lb assumed in the Plan), then export earnings could rise to at least Rs 530 million by 1975. In this case the overall deficit would be less than Rs 100 million and therefore within the bounds of the assumed capital inflow. 63. It seems, therefore, that the Plan's estimate of required gross capital inflow will be essential to meet the needs of the Plan. This is the case whether the analysis is undertaken from the side of the potential savings gap or the potential foreign exchange gap. 64. An alternative to capital inflow is, of course, the use of for- eign exchange reserves which represent more than one-half of annual imports and since 1965 have not fallen below one-third. However, Mauritius is sub- ject to major fluctuations in its export earnings so that a high level of reserves is required. The mission's analysis suggests that some small use of reserves - perhaps Rs 20 million per annum - for financing the Plan could be regarded as prudent. Reserves would still be adequate to ensure that investment and consumption could remain on trend during a bad year unless two bad years were to follow each other and this seems unlikely from his- torical experience. 65. The need for the level of foreign capital inflow of Rs 407 million projected in the Plan appears to be established on both the savings and balance of payments side. The remaining dimension of the problem is whether such a level of capital inflow can be serviced by the economy and on what terms. Capital Inflow and Debt Servicing 66. The first and obvious point to make regarding the level of capi- tal inflow assumed in the Plan is its magnitude. An assumed inflow of Rs 407 million over the Four-Year Plan period represents an average annual inflow of $25 per capita. This can be compared with an average official aid inflow for 92 developing countries of $3.56 per capita during the pe- riod 1967-69 and of $9.61 for Mauritius during this same period. Even if there were to be some slippage in the implementation of the Plan, the in- flow is still by any standard very high. 67. The economic justification for such a large capital inflow must be that it is necessary in order that the economy can move from stagnation to growth. In effect, the Plan can be conceived as a dynamic pump-priming operation. For this reason a large flow of external resources is required for a few years in order to move the economy to a new growth path. Once it is experiencing a new and more rapid rate of growth, savings generation and changes in exports and imports would provide resources for supporting the higher rate of growth at a much lower level of capital inflow. - 20 - 68. Essentially, therefore, the economic justification for the capi- tal inflow depends on Government policies to achieve the objectives of higher growth, higher savings and an improved balance of payments. In the past few years, the Government has both recognized its problems and taken major actions to bring about changes in these directions. However, because the problem facing Mauritius is so great, major changes still remain to be made. Those which appear to be of greatest importance are: (a) undertaking the institutional and other changes needed to improve the yields of sugar to diversify agriculture; (b) determining the necessary public services required to sup- port the directly productive sectors; (c) providing the training facilities and ultimately more appro- priate educational facilities; (d) ensuring that taxes, subsidies, interest rates, and other elements of financial policy provide appropriate price signals to industry and agriculture; (e) maintaining control over the real consumption of the employed part of the population and over the growth of social welfare expenditure; and (f) pursuing policies for the management of the balance of payments which do not undermine the growth of the economy. 69. The large volume of external assistance could not be sustained without raising debt servicing problems unless the debt were to be incurred as grants or loans on very advantageous terms. Debt service payments on external debt contracted up to December 31, 1971 amounted to only about Rs 27 million ($4.8 million) or about 4 percent of export earnings. The Plan projection of a level of capital inflow of Rs 407 million would, if it were incurred on Bank-type terms, raise the debt service ratio in the early eighties to about 15 percent on the basis of the Plan's export growth assumption of 4.4 percent. If the higher capital inflow were to continue beyond the Plan period, the debt service ratio in the early eighties would rise to about 20 percent and to about 25 percent if the export growth rate were to be only, say, 3 percent per annum. The domestic financial problem of meeting such obligations would be particularly worrying in an economy in which export earnings are 60 percent of GNP and where, therefore, a given debt service ratio represents a much higher resource mobilization problem than in a less export-oriented economy. The rising cost of debt service (both internal and external) has already been noted in reference to the Mauritian budgetary problem and difficult problems would be raised if the whole capital inflow had to be serviced on hard terms. 70. There are, therefore, both balance of payments and budgetary rea- sons why Mauritius should continue to receive external resources on conces- sionary terms. This is also true of the "hump" in external resources pro- jected in the Plan. The risks inherent in the Plan arise primarily because - 21 - its success is dependent upon the Government being able to carry out changes in policy which would bring about a transformation of the economic structure. If, for some reason, the obstacles for success were not overcome and the Plan objectives were not achieved, then concessionary financing now will lessen the need for debt relief operations later. On the other hand, if the economic transformation does occur and the Mauritian economy rises out of its stagnation and rising unemployment, then the fruits of such an effort should, to the maximum extent possible, be retained by the economy. 71. It should also be emphasized that if the policy changes are made so that the Plan's growth and employment targets become feasible, then it is better that the external funds be made available on terms which are, for instance, less concessionary than at present rather than permit the imple- mentation of the Plan to be held back through inadequate resources. It would be a great misfortune if the country were to discipline itself to take hard policy decisions only to find the benefits frustrated by an in- adequate level of external resources in the adjustment period. Furthermore, the debt service obligations at present and as projected are sufficiently low that some increase is possible without raising major problems. 72. At the same time it is questionable whether concessionary finan- cing at this "hump" level would be necessary on economic grounds much beyond the next few years. If it had been successful in its pump-priming role and particularly in supporting major policy changes, the need for concessionary financing on the scale projected would be reduced by the latter part of the seventies. Policy Aspects of the Plan 73. Achieving the changes in employment levels, growth rate and struc- tural composition of the economy, will necessitate far-reaching policy meas- ures, particularly those required to diversify agriculture, to encourage the growth of industry, and to expand the absorptive capacity of the econ- omy in the longer run. Some policy measures have already been taken by the Government and the Plan should therefore be taken as a realistic operational document. However, the economic transformation which is required is so great that the policies required for its achievement can be said to have only just begun. 74. The necessary measures fall into two categories. The first con- sists of those direct actions by Government which are necessary if the Plan is to be implemented. For instance, the provision of an extension service for small-scale farmers, the provision of public services for industrial development, the development of appropriate education and training facili- ties, etc. The second category consists of indirect actions by Government which are necessary if the private sector is to be induced to do the things which are needed for the Plan's success. In particular, action is required to ensure that input and output prices, including taxes, are providing ap- propriate signals to farmers, industrialists, etc. At several points, the Plan expresses concern that the objectives of the Plan are in some respects in conflict with the justified profit objectives of the private sector. It - 22 - is apparent that unless this conflict is removed the Government cannot ex- pect to be able to implement its Plan. To do so would require a system of administrative controls which neither exists nor is desirable. Foremost amongst the prices which are important in this regard are the rate of in- terest, the effective price of labor, and the relative net of tax prices of agricultural commodities. Agricultural Development 75. Whilst it is recognized both in the Plan and in previous sections of this Report that an increase in sugar production must be an essential part of Mauritian economic policy, the need and possibilities for agricul- tural diversification are essential for the achievement of the growth and employment objectives of the Plan. No single policy change can achieve this diversification. 76. The first question is whether the relative producer prices of sugar and other crops are appropriate. The profitability of alternative crops to sugar and especially the more intensive use of land by inter-row planting are more fully discussed in Volume II where it is emphasized that at present relative profitability overwhelmingly favors cultivation of crops other than sugar for small farmers. It is apparent, however, that this is not a sufficient condition for diversification. It is how the small farmer perceives the relative profitability of alternative crops as compared to sugar that matters for his decision-making. The combined ef- fect of risk, tradition, marketing and institutional arrangements which presently favor sugar, influences the farmer's decisions. Sugar cane is an activity with considerable initial overhead investment while the efforts required for diversification can very easily be understated. For instance, there are the indivisibilities of effort and investment in operations such as de-rocking. Furthermore, the small producer has limited access to credit and technical know-how. 77. A reduction in the producer price for sugar might appear to be an obvious way in which to reduce its relative profitability possibly through the imposition of a higher export tax. This is particularly important if, as expected, the average producer price becomes much more favorable in the seventies. Alternatively the same objective could be achieved through a se- lective tax on sugar land. However, in approaching the problem of diversi- fication in this way by making sugar less profitable in absolute terms, the danger of reducing overall sugar production must be avoided. The problem is to ensure that a rising output of sugar is produced on a smaller area of land thus setting land free for other labor-using crops. 78. For this reason a more positive approach to the problem of diver- sification is required and this clearly cannot ignore the pattern of land ownership where one percent of the rural establishments farm 67 percent of the land and 40 percent of the rural households are landless. 79. However, neither land reform nor a pattern of land taxation which reduced the relative profitability of sugar production will induce diver- sification in agriculture, unless it is combined with the provision of mar- - 23 - keting and storage opportunities, of agronomic advice through a better ex- tension service, and of credit for meeting the needs of both planting-to- harvest-time and of longer-term investment in land clearance, etc. The needs and possibilities in this direction are developed more extensively in Volume II of this Report. The potential for success through the devel- opment of these institutions and policies is demonstrated by recent expe- rience with potato cultivation. In 1964, the marketing of potatoes was developed through the creation of the Agricultural Marketing Board. Since then, potato production has doubled over a three-year period from about 4,000 tons so that in 1972 Mauritius is expecting to be self-sufficient. Industrial Development 80. Within the industrial sector, relatively small increases in tea factory employment and in small-scale industry are being planned. However, the major industrial development will take place in large manufacturing establishments and particularly in new export manufacturing. This indus- trial policy makes obvious good sense in Mauritius. It would continue, but at a more rapid pace, the policy which was introduced with the crea- tion in November 1970 of the Export Processing Zone (EPZ) where imports of raw materials and semi-finished goods could be further processed. This policy supplemented but did not supplant the policy of the early sixties which had stimulated the growth of import substituting industrial develop- ment which clearly has little future in an economy the size of Mauritius. The EPZ policy has got off to a good start and with the advantages of cheap but educated and skilled labor available, it has considerable potential. 81. In the choice of industries to be established, particular prefer- ence is already being shown for industries producing goods and employing techniques which are labor-intensive. However, amongst the large number of incentives provided to firms established in the Export Processing Zone and also to those which have been and continue to be established under the system of Development Certificates, are some that encourage capital inten- sity. These include - e.g. - complete exemption from payment of import duty on capital goods, generous depreciation allowances, and a tax holiday of ten to twenty years (ten years in practice). There are strong arguments for abolishing such distortions which work against the attraction which labor-using industries receive through tax concessions. This is the mini- mum set of policy changes which need to be made without reducing the overall profitability of industry in the country. However, if the Government wishes to go much further in this direction, it could consider introducing a lump sum labor subsidy for every person employed. The subsidy would offset the effect of minimum wage regulation and job security which appear to raise wages above the social opportunity cost of labor. This offsetting is best achieved in the most direct manner possible rather than through more in- direct and less effective methods. A subsidy of the type which is envisaged should be much easier to administer in Mauritius than in many other countries in view of the importance of corporate employment. Furthermore, the budget- ary cost could be met through the reimposition of taxation of profits which at present is not levied under the tax holiday provisions. The tax holiday in many instances benefits the revenues of foreign Governments rather than - 24 - the companies it is intended to benefit. A proposal along these lines is developed in Volume II of this Report. Interest Rates and the Availability of Loan Capital 82. The tax changes and the labor subsidy referred to in the previous section represent one set of policy changes which are required if prices are to encourage a growth-employment strategy. The rate of interest is another. There is reason to believe, despite the efforts of the authorities to appraise applicants for loans in a way that will avoid capital-intensive investments, that these efforts are only partially successful. A low price for capital (as with a high price for labor) will alter the nature and the composition of the projects actually proposed. 83. Moreover closely related to interest rate policy is the question of the institutional pattern of lending operations. A large sector of the population is unable to obtain appropriate long-term finance and can only obtain short-term finance at very high interest rates from the unorganized market. Of particular importance is the small farmer sector where there is reason to believe that funds can be used very productively and to provide employment and higher incomes to a very needy group. It is apparent, of course, that major problems of inheritance laws, of size of holding, etc., arise in this matter, but without a major change in financial institutional policy the Plan objectives in agriculture are unlikely to be achieved. Once again, a higher interest rate policy is of central importance so that the financial institutions can cover the higher costs and possibly higher risks of such lending. However, these higher rates would still be much lower than those charged by the unorganized market. Furthermore, as suggested earlier, the higher rates would make it possible for the specialized lending institu- tions to attract private savings in larger amounts and would be a step to- wards bringing together the organized and unorganized financial sectors. Absorptive Capacity 84. Undoubtedly the single most important factor affecting the feasi- bility of the Plan is the "absorptive capacity" of the country. In its widest sense this means: can the economy spend the foreign and domestic resources at the annual levels required by the Plan so as to create the additional capital capacity which is projected and to utilize this addi- tional capacity to generate the projected rate of output growth of 7 per- cent and the rise in employment? The question is of key importance partic- ularly in regard to the level of foreign capital that it is desirable in its own interest for Mauritius to obtain, for if the rate of growth of income would be unaffected by a smaller investment program, it is not wise for additional external future debt service to be incurred. 85. The planned approximate doubling of total investment and trebling of public investment must certainly raise serious questions though the an- swers to such questions are extremely difficult to determine. Clearly if the investment program were the aggregation of individual projects for which a cost-benefit analysis had been undertaken, the examination of the - 25 - feasibility of the program could begin with these analyses. In fact the project content in the investment plans has not been subject to cost-benefit analysis except in a few instances. Inevitably, therefore, the analysis of absorptive capacity is pushed back into more general considerations and to the examination of scattered evidence rather than by any comprehensive and systematic review. 86. To begin with, an important part of the investment program - that in large-scale manufacturing industry - will have the complementary inputs of managerial and technical skills directly associated with it. These will be "imported", to the extent required, along with the import of the private capital. 87. Secondly, another very large part of the investment program is in agriculture, particularly small-scale farming. The major absorptive capacity problem in this sector is not organizational or managerial at the farm level but relates to the dissemination of technical agronomic know-how, marketing, crop insurance, etc., to which reference has already been made. The absorptive capacity in agriculture is, therefore, immedi- ately dependent upon Government action in these policy and institutional areas; it: is, in other words, a policy variable not a datum. 88. A third major part of the investment program is the TPT program. This is to be operated by the Development Work Corporation (DWC) established in July 1971. The DWC is a well-led and well-administered organization. Its effectiveness will depend on its ability to supervise workers in the field, to maintain a quality of work which is not inferior through labor- intensive methods to that achieved by traditional methods, and to ensure that supplies are available in the right amounts at the right time so that the flow of work is maintained. Control over field workers seems to be good and certainly the quality of work appears to be maintained particularly on buildings and roads. Moreover according to preliminary figures the labor- intensive methods which have been used have resulted in reductions in unit costs wit:hout sacrificing quality as compared with traditional methods. 89. The TPT program is conceived as a temporary solution to the im- mediate problem of providing employment. In the long run, economic growth can provide sufficient employment for the whole population, provided that the increase in the population can itself be held down. But in the mean- time, something has to be done to provide some employment which is, in a sense, additional to that which the normal processes of growth in Mauritius would create. This is the purpose of the TPT program. While, therefore, the creation of employment is the program's major goal, it is obviously important, both for economic and social reasons, that the employment pro- vided should be as productive as possible; if the program comes to be seen as a "make work" arrangement, it will have failed in its major purpose. The degree to which the employment provided by the program results in out- put which has high economic priority will depend partly on the efficiency of the DWC itself and its ability to select the most appropriate projects to carry out, but it will also depend very directly on the amount of money which the Corporation can obtain. Labor alone can produce very little; the - 26 - greater the amount of capital with which it can work, the more productive its output will be. While the Government can and will provide some of the necessary funds, the task of the D1C will obviously be greatly eased the more it can obtain external assistance for its operations. 90. It appears, therefore, that there is considerable capacity to utilize investment funds, although some policy changes may be needed in agriculture. Of course, the capacity in any one organizational unit might already be fully or nearly fully extended. Certainly in the public works sector this could be a real constraint in the short run. There is some evidence that this is already a problem. There has been a consistent under- spending of public capital expenditure which has averaged about 70 percent of budget estimates although this might reflect the fact that estimates are in fact targets. Furthermore, a shortage of design and engineering skill in the Ministry of Works, delays in construction compared with expectations, and the slow disbursement of foreign credits in recent years, are further indicators of constraints on project preparation and implementation. For instance, British credits which have accounted for about 90 percent of Mauritian aid have only been partly disbursed by the closing date for with- drawal. In the case of the most recent one, only Rs 10.7 million of a total loan of Rs 66.7 million had been disbursed by December 1971 and the closing date for withdrawal is September 1972. A further illustration of this prob- lem is the IDA Tea Project which, it is now estimated, will take four years to complete as against the three years envisaged during the appraisal. 91. The authorities recognize these constraints and are intending to request a substantial increase in technical assistance. Various bilateral donors are already responding favorably. Canada, for instance, has agreed to provide a special team with the responsibility of assisting in the prep- aration of projects in the Plan. 92. In the medium and longer run, of course, many of the constraints on absorptive capacity can and should be eased through Government action directed to the improvement of the educational and training systems. Whilst Mauritius has both an educated and skilled population, the educational sys- tem is very academic in its bias, and considerable on-the-job training of semi-skilled industrial workers and of agricultural workers, both extension workers and planters, is required. This is also true of the skilled workers required for the development of tourism. Moreover, it is recognized that the most important single bottleneck in absorptive capacity is the lack of trained engineers. This will affect both the public and the private sectors. In the short run foreign advisors can meet the need but in the longer run a cadre of Mauritian experts needs to be built up. This will necessitate en- suring that those Mauritians trained overseas are encouraged to return and, perhaps, in the future forced to return through the development of a bonding system. 93. It is difficult to know what all these pieces of evidence mean in terms of the capacity of the economy to absorb investment at the level pro- jected in the Plan. In any event, specific constraints on the effective - 27 - use of investment funds should be identified and, as far as possible, mitigated through technical assistance as a complement to foreign capital inflow. In anything other than the short run, however, in a country with the level and comprehensiveness of education existing in Mauritius, the easing of the constraints on absorptive capacity is predominantly within the power of the Government. Training of industrial workers, development of agricultural extension services, development of marketing facilities, etc., are all matters subject to Government action. The forthright manner in which the Government has acted in regard to the development of the EPZ and the establishment of the DWC are favorable omens. However, the magnitude of the turnabout in the economy from the stagnation and rising unemployment of the sixties to the projections of the Plan, requires further changes in agricultural, industrial, educational, financial and taxation policy in the directions indicated in this Report. Only then is it likely that the in- vestment resources visualized in the Plan can be effectively utilized for extending the country's capital stock and that this capital stock can be fully utilized to increase the flow of output and of employment. - 28 - TV. CONCLUSIONS - CONTINGENCY PLANING AN) PRIORITIES 94. The Plan's objectives are reasonable and, by and large, it rec- ognizes the changes required to achieve them. Nevertheless, it is possible that the Plan cannot be completely achieved, either because of lack of fi- nancial resources or of administrative, organizational, and technical capac- ity. The entire Plan can in fact be regarded as an exercise in dynamic pump-priming, which depends on two central elements, namely, the development of manufacturing industry, especially through the Export Processing Zone, and the diversification program in agriculture. 95. It follows from this that if the level of investment has to be reduced the government should ensure that priority is given to those com- ponents which are directly related to these two central elements of the Plan. The corollary of this is, of course, the need to determine which proj- ects can be retained, delayed or dropped entirely from the investment program. 96. As far as increasing the availability of domestic financial re- sources is concerned, in a situation of inadequate domestic saving, the authorities would, in effect, only be able to operate through the budget. Private saving is already projected at a high level, and would be extremely difficult to augment. This means that the Government's recurrent budget would be the only vehicle for increased saving. Any attempt to increase revenue, or reduce expenditure, would be extremely difficult. However, a few possibilities seem to exist. 97. A thorough discussion of the possibilities for increasing Govern- ment revenues is contained in a forthcoming document prepared by an Advisor appointed by the International Monetary Fund. This suggests inter alia that revenue could be raised by reducing the depreciation allowances on invest- ment, by raising the sugar export tax in the context of rising sugar revenues, by increasing the levels of certain excise duties, by introducinp a system of contributory social security benefits, by imposing some kind of land tax, and by increasing the general tariff level. 98. It must be emphasized that, if the increased revenues were to be needed to raise the level of savings, additional taxation would have to bear heavily on consumption rather than savings. Further taxation of profits would therefore be of little value, for it would have a marked effect on corporate savings. Furthermore, since the recurrent budget is already under considerable pressure, as a result of a 12 percent wage and salary increase which was awarded in the fall of 1971, the measures recommended by the IMP may be necessary simply to generate the level of Government savings projected in the financial resources anlaysis of the Plan. 99. Reductions in expenditures, if they were to be significant, would have to affect the social security and educational systems. The proportion of the budget devoted to economic services is too important for the success of the Plan for it to be sensible to save money by cutting it and it is in any case small. Also, cutting the number of Government employees would be unlikely to produce much saving before reductions in efficiency occur. Expenditure - 29 - reduction would definitely require cuts in the social security or education budgets. Clearly, the authorities would be faced with a difficult choice between the Plan with its growth, development and employment objectives and current welfare expenditure. In this situation, it would clearly be neces- sary to examine whether the objectives of social welfare policy could not be achieved at a lower budgetary cost. 100. If the resource gap were to occur on the side of foreign exchange rather than domestic savings, the major question is the extent of substitut- ability of domestic for foreign resources. Since exports are largely sugar which cannot be increased by additional saving, such substitutability must be on the side of imports. An increased level of domestic saving will, especially if multiplier effects are considered, reduce the level of imports for con- sumption, and thus increase the availability of foreign exchange. However, it is possible that, before sufficient foreign exchange is made available, a major reduction in the domestic level of activity would be required, in which case, direct policy to change the relative prices of consumer goods imports would be appropriate. Increased tariff levels or devaluation would be the policy alternatives. Evidence from the past indicates that relative prices do appear to have a substantial effect in reducing the demand for con- sumer goods imports. At what point these expenditure-switching measures would be required depends on the circumstances, but it would clearly be undesirable t.o finance a Plan, directed at creating employment, through the generation of foreign exchange by action on expenditure levels which itself raised unemployment. 101. The other major contingency is on the side of absorptive capac- ity. Here the authorities would have to make a decision about the alloca- tion of scarce manpower to the priority sectors set out above. If the prob- lem was a failure to carry out the planned level of investment then the financial problem would, of course, be eased providing the rate of growth was not adversely affected. The most disastrous of all possibilities is that the investment outlays were achieved without securing the growth in output. Not only would this produce an extremely serious problem on the financial resources side, but it would mean that the attempt to break out of the vicious circle of stagnation was not succeeding. It has been em- phasized previously that the demand for foreign capital which the Plan requires would only be justified if such a breakout does occur. Mauritius cannot expect to raise this amount of resources on a continuing basis. Be- cause it is so important that the Plan's investment does bring about the required basis for growth, whether it takes four or six years to implement, it is more necessary that the two really high priority investment sectors of agriculture and industry be given the manpower and financial resources they require. It is not important if some of the investment program is cut, or if it takes somewhat longer to implement than envisaged. What would be a danger sign would be for the investment to occur without growth following from it. For this reason, a clear sense of priorities is necessary, and a willingness to take the measures required to put them into practice.