The capitalist system is founded on growth. While growth has stalled in developed countries and a new economic paradigm may be in the embryonic stages of gestation, growth is undeniably good for developing nations. How good it is depends on how inclusive it is – does it benefit the many or just the lucky few? Inclusive, sustainable growth requires two things: education and health, necessities that we take for granted but which are luxuries for those living in poverty. Education is an investment, it was championed by the Father of our nation and was key to our own successful and sustained development. This investment is wasted if the workforce has a low life expectancy – especially for children and mothers during pregnancy and childbirth. Hence, education and healthcare go hand in hand. We were lucky in that the British, the Catholic Church and others laid the foundations of what became our free and universal public education and health systems. Many African nations were not bequeathed this legacy by their colonial masters.
Growth requires investment and where a country is poor, either due to geography, lack of natural resources or because the profits of those resources have been stolen by their political elites and hidden in tax havens, this investment must come from overseas. Investors look for a return on their investment and least developed nations are attractive because they have the greatest potential for growth – a genuine win-win situation. What inhibits investment is risk, particularly political risk, and this is why South East Asia and then India (with Mauritius fortunately squeezed in between) received it before continental Africa.
Mauritius’ offshore sector was founded on a fortuitous tax avoidance treaty and became the favoured route for foreign investment into India through the establishment of Mauritian shell companies. As India has advanced, it has realised that minimally taxed foreign investments do not yield the level of inclusive growth and infrastructure development that countries like China have enjoyed and is now seeking to close tax avoidance loopholes. In consequence, the investment route through Mauritius is rapidly losing market share to Singapore which has attracted investors to establish a substantial local presence rather than basic shell companies.
In response, Mauritius is applying the same old tax-avoidance formula to African countries and taking advantage of short-sighted competition between African leaders to attract investment at any cost. Africa is the final frontier. It is the continent richest in natural resources, it has the youngest and lowest cost workforce. With ever more global capital to invest and fewer least developed nations left to invest in, are additional tax avoidance incentives really necessary?
African countries will eventually eliminate tax avoidance loopholes and then Mauritius’ offshore sector will be truly sunk unless it reinvents itself. Why not do so now? Rather than focusing exclusively on serving the needs of foreign investors in the game of tax avoidance with ever dimishing returns, shouldn’t we be helping African countries achieve and even exceed our own level of development? In the long term, Maurtius needs Africa much more than Africa needs Mauritius.
There are two basic types of investment: passive and active. Most passive investments are through financial instruments: bonds, shares, derivatives etc.. Mauritius can establish competitive advantage in fund management by gaining detailed knowledge of African business sectors and listed companies. We can also expand our trading platforms to include more of these instruments and, where local stock markets are insufficiently developed, enable African companies to list on our own, thus reducing their cost of capital.
Active investors establish actual operations in African countries. Where appropriate, we can encourage them to have regional headquarters in Mauritius. This will necessitate expanding direct air access to African states, as part of the Air Corridor, in parallel with increasing tourist arrivals from continental Africa. We can offer the services of our accountants and auditors to all companies based in continental Africa, in collaboration or even competition with the big global accounting firms. We can then move up the value chain by cross-selling a full spectrum of consultancy services and create an array of employment opportunities for our graduates, provided they are prepared to expand their horizons and travel to clients.
We can help ensure Africa’s development is inclusive by utilising our knowledge of tax avoidance to actually stop it. We can lock out our competitors in Caribbean and OECD tax havens by helping African countries introduce anti-avoidance legislation. We can ensure it is implemented by sharing the competences of our world-class institutions. Eventually there will be tax harmonisation across the world. We can take the lead and the encourage the whole African community to become a fair tax zone. Or we can futilely maintain our low tax jurisdiction until the bitter end. Is it really in our long term interests to do so?
In OECD countries, tax revenues average 30% of GDP. In Mauritius they are only 20% – one of the highest in Africa. If we want to become high income nations then we need to act like them. This means investing in our own development and not relying on foreign sources seeking to profit from our natural and human resources. We need to spend more on health, education, R&D and environmental protection across the continent. Development is only sustainable when it is self-sufficient. No, we cannot achieve this alone as Mauritius, but as part of Africa, yes we can.
Published in Le Maurcien on 12th May 2016