Essay: Gross domestic product

Chapter 1, Introduction

In the past, the sugar industry was the backbone of the Mauritian economy, but since a few years, the republic of Mauritius has been witnessing a change concerning the importance of the different industries contributing to the Gross Domestic Product or GDP.

In 1998, the economy of Mauritius was dominated by the tertiary sector but the main income came from the production of sugar. From 1998 to 2008, the GDP at current basic price raised from 63.3% gradually to reach 73.3%.The main reason for that rise was the expansion of the listed industries during the preceding ten years;

• Real estate
• Renting and increasing business activities
• Hotel and restaurant
• Financial intermediation

Furthermore, both the secondary and primary sector’s involvement to total output have been declining, from 30.7% to 28.4% and 9.3% to 4.3% respectively.

As it can be noted clearly, the Mauritian economy is mostly benefitting from the revenue of the tertiary industry and not from the primary one, but it is only because ‘raw materials’ coming from the primary industry are not highly priced compared to services and finished goods. Thus subnormal profits are responsible for the decline of the primary sector.

Sectoral Contribution to GDP at basic prices (%)	2005	2006	2007	2008
Agriculture (incl. sugar milling)	7	6.4	5.5	5.0
Sugar	4.2	3.7	2.9	2.4
Non Sugar	2.8	2.7	2.6	2.5

Additionally, we can also see from the table that the percentage of the sectoral contribution of GDP at basic prices regarding the agriculture and sugar industry more precisely has been decreasing. Thus over four years, the percentage contribution of the agriculture sector to the GDP has fallen from 7% to 5% and that of Sugar has been falling from 4.2% to 2.4%.

The Issue

Industrial Production	2005	2006	2007	2008
Sugar (Tonnes)	519,816	504,857	435,972	452,062
Molasses (Tonnes)	145,425	139,621	130,917	141,347

The production of sugar cane has been increasing after a drastic fall in 2007 as shown below. But generally, we can see that the production of sugar is inferior compared 2005. This is the same situation regarding the production of molasses, a derived product of the production of sugar.

The sugar industry has been affected locally by strong trade unions who gain progressively more power, thus further influencing the respective firms regarding the production and processing of sugar through the factories. But there are other reasons for the declining of the sugar industry, such as the increase in global competitiveness of the sugar markets, thus the reason being the local industries specializing in different varieties of processed sugars. For example brown sugar, flavored sugar and so on primarily exported to other markets.

The major trade unions of the sugar industry found in Mauritius are the following:

1. Plantation Workers Union
2. Sugar Industry Workers Association (SIWA)
3. Sugar Industry Labourers’ Union
4. Sugar Industry Labourers’ Union (SILU)
5. Mauritius Sugar Producers Association (MSPA)

Moreover, the sugar industry has also been facing problems concerning the precedent preferential benefits that had been agreed for the Mauritian Republic at the LOME (IV) convention as it has been disregarded unfortunately. Thus, the price of sugar has and is still falling, it is expected to fall by 36%from mid 2006 to the year 2010

Due to the trade Unions of the sugar industry, the firms have been losing in competitive cost advantages. More precisely, because of the trade Unions, the cost of labour has been increasing respectively depending on the different firms, thus adding to the total cost of production that in its turn increased the prices of the sugar products which finally lead to the lost in competitive advantage of the Mauritian Sugar products compared to the competitors.

Labour laws have been recently changed to reduce the power of trade unions so as to increase labour market flexibility. This was done so as to remove the rigidities of the labour market.

My aim is to look into whether these changes in the labour law will help to power economic development in Mauritius.

RESEARCH QUESTION:

How have the recent changes in the labour law affected the sugar industry In the Republic of Mauritius?

The aim is to look into how the new labour law makes it easier for the sugar industry to reduce its cost of labour as we have seen that they are suffering from fall in sales due to the review of the European price of sugar.

Significance of the issue

If the trade unions act as a barrier to the restructuring of the sugar industry then the later will continue to decline. It will not be able to lower its average cost of production and this can cause a lot of problems to the industry. On the other hand if the trade unions lose power in face to a monopsonist employer then it is likely that the workers will lose benefits. They will suffer from fall the in their real wages and this can lead to fall in economic development.

Objective:

1. To summarise the major changes in the new labour law concerning the sugar industry.
2. To interview a trade Union person to obtain his opinion about the new labour law and the sugar industry.
3. Interview a resource person in the sugar industry to find out about his opinion about the change in labour law and the sugar industry.
4. Carry out a survey with the labourers of the sugar industry.
5. Collect more secondary data about the current situation of the sugar industry.
6. Analyse the data to assess the impact of the change in labour law on the sugar industry.

Chapter 2

The changes in the labour law and its economic implications in theory.

Hours of work, including overtime payments.

In the past, work on Sundays was considered to be overtime and was paid 2 times the basic rate. In addition, after 8 hours of daily work, extra hours was counted as overtime and paid 1.5 the wage rate.

According to the new law “EMPLOYMENT RIGHTS ACT 2008”, any worker gets overtime pay only after having completed 90 hours of work in a fortnight (two weeks). And the normal working hours being 8 hours a day. That makes at least 12 days out of 14 must be worked as a normal working day for the normal pay.

Thus this increase in the amount of work required to work to earn the normal salary results in an increase in quantity of work done by the labour force. Subsequently is an advantage for the sugar industry in general. They can plan their tasks in such a way that they reduce the amount of overtime workers are expected to get.

COSTS:

Fixed costs: They are costs to a firm that do not vary with the level of output, for example rent. They are associated with fixed factors of production which cannot be changed in the short run.

Variable costs: They are costs to a firm that do vary with the level of output such as costs of purchasing raw materials and labour

For the sugar industry the labour cost account for 50% of sugar cane production ** and about one third of factory operating costs. However, we must distinguish between wages paid to manual workers from those paid to the mid-managers and the managers. Too often the salary and benefits of the management is englobed into this figure to inflate it. There are generous fringe benefits which add an additional 65% to wage costs.

Never the less the major issue is still that labour costs represent a big % of total labour costs and should be minimized to keep cost advantages.

COST ADVANTAGE:

A country is said to have absolute cost advantage if it can produce a product at a lower cost compared to other countries.

In the past Mauritius has benefited enormously from a generous EU-ACP sugar agreements.

In the past , this has not been a problem for Mauritius since most of its exports went to European Union at nearly triple the world market price ( about $32/lb in recent years) (world Bank,year, pg 32)

The cost of labour has not been a problem in the past as the country was getting preferential price for its sugar. However, due to its sugar reforms, the EU announced that the price of sugar swill fall by 36% over four years beginning mid 2006***

The diagram below shows how this fall in price of sugar will impact on the sugar industry in Mauritius.

Initial expenses (Q2-Q1)

After fall in price (Q4-Q3)

After restructuring (Q5-Q3)

There is a need to restructure the sugar industry to regain cost advantages and maintain the level of exports.

The international position of Mauritius as far as costs are concerned is shown below:

Casual sick leaves

In accordance with the new employment rights act 2008, the number of casual sick leaves has decreased to 20 over a year compared to 27. Moreover, the number of sick leaves also has drop down, from 17 to only 15 in a year.

As a policy

• Health and safety issues
• Firing of workers

Previously, the firms could not fire workers without paying adequate compensation based on the years of service of the worker. Therefore the firms operating in the sugar industry could not hire or fire workers readily.

“Because labor laws require severance payments for sugar workers that are particularly generous – an average of $10,000 per worker for severance payments plus an equivalent amount in improved land- downsizing industry to free up labor and land for more productive uses could cost upwards of US$80 million in payments to excess labor alone”(Mauritius, from preferences to global competitiveness. Report of the aid for trade mission)

This is what is known by the monetarists as the labour market rigidity. Despite the fact that the demand for labour falls, firms could not reduce the number of workers as they had to pay compensations which were at exaggerated costs. The diagram below illustrates the situation described.

The diagram above depicts the situation that firms faced in the past. Whenever the demand fell for a product such as sugar, the demand for labour being a derived demand fell as well.

Derived demand;

As shown in the diagram the demand for labour has fallen from (Dn Dn) to (Dn1 Dn1). At the original real wage rate, there was a supply of labour (N0 N2). Due to the fall in quantity demanded for the product produced by the firm employing those workers, the supply of labour falls to (Dn1 Dn1). The firms will therefore have to reduce real wages to (W1) from (W0) and fire some workers. However, due to the previous law, they had to pay a huge compensation (severance) to the workers who were fired.

The new labour law stipulates that:

“Any employer who –

(a)intends to reduce any number of workers or to close down his enterprise for reasons of an economic, technological, structural or similar nature; or

(b) terminates the employment of a worker for any other reason,

shall give written notice thereof to the Minister.”

Thus it can be seen that the new labour law allows the labour market to become more flexible. It allows firms to terminate the contract of employment of the workers without having to pay important severances allowances. Still, they need to pay a contribution of 1month salary of the worker as a recycling fee to the government for its workfare programme.

Employment in Agriculture (Large Establishments), 2004 – 2008

March

	2004	2005	2006	2007	2008
Sugar cane	14,822	13,803	13,797	13,996	11,885
Sugar milling	2,282	2,234	2,008	1,997	1,636

As seen from the above table, the number of labour has been falling especially due to the change in labour law in 2008. Thus is also shows how the change in labour law enabled the sugar industry to liberate the excess labour which would have been too expensive in relation to the previous labour law.

Wages of daily paid male workers in the sugar industry vs. the CPI.

Year	Rs per day	Index	CPI
1962	4.10	100	100
1972	7.00	171	125
1982	36.48	890	591
1992	94.07	2294	1143
2002	242.00	5902	2186

(Mauritius, from preferences to global competitiveness. Report of the aid for trade mission)

We can see from the above table that from 1962 to 2002, the workers have benefitted from an increase in real wages. The nominal wages have increased by 59.2% compared to price increase of 218.6%. obviously there has been an increase in the purchasing power of the workers. However it is worthwhile noting that the workers were getting very low wages in 1962 and were being exploited. Even if the wages have increased by 50.2%, it is still lower than the wages in many other sectors in Mauritius.

The table below shows the average earning in different sectors compared to the sugar sector.

	2000	2007	2008
Average monthly earnings(Rs)	8,178	13,397	14,438
Average monthly earnings(Rs) Sugar	6,154	9,453	9,926
Average monthly earnings(Rs) Other primary sector	6,585	10,382	10,927
Average monthly earnings(Rs) Tertiary sector	10,328	15,691	16,907

It can be clearly seen from the above table that the wage rise in the sugar sector is still smaller compared to the other sectors.

With the inflation, the real wages of the people tends to fall. That is the purchasing power of the citizens decreases as they cannot afford buying as many products as before or buy the same previous quantities. The table presented below shows the rate of inflation and the wage rate increases in the in the sugar industry over the past few years.

Consumer Price Index	2005	2006	2007	2008
CPI yearly average1	87.6	95.4	103.8	113.9
Headline inflation (%)	4.9	8.9	8.8	9.7
CORE 12 (%)	4.4	7.4	5	8.7
CORE 2 3 (%)	3.4	7.2	5.7	6.1

Therefore, from the table above, we can observe that the headline inflation rate kept on increasing, thus the reason being there so much pressure imposed on the employers by the different trade unions to rise the wages due to fall of the purchasing power of the citizens seeing the inflation of prices.

Since year 2000, the wage rates are increasing very slowly in the sugar sector. The table below presents the %increase in the wage and the rate of inflation in 2008.

	2008
Rate of inflation	9.7%
%increase in wages	5.0%

As a result, it can be clearly seen that real wages of the workers in the sugar industry id falling. This is de to the fact that the trade unions have low power to negotiate higher wages. But still labour costs account for 32% of the production process of the sugar sector which is high.

Chapter 4

Data presentation and analysis of survey

Main reason for that; “improve working condition and increase wages”

Toshan GunesseePage 1

Gross Domestic Product measures the total value of goods and services produced in an economy over a period of time, namely one year.

Subnormal profits refers to the level of accounting profits which are lower than the amount of products resources can generate in their next best alternative.

trade union (or labor union ) is an organization of workers who have banded together to achieve common goals in key areas, such as working conditions. The trade union, through its leadership, bargains with the employer on behalf of union members (rank and file members) and negotiates labor contracts (Collective bargaining) with employers. This may include the negotiation of wages, work rules, complaint procedures, rules governing hiring, firing and promotion of workers, benefits, workplace safety and policies. The agreements negotiated by the union leaders are binding on the rank and file members and the employer and in some cases on other non-member workers.”

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