Was the Offshore Sector Built on the Back of an Exit Route for EPZ Profits?

The standard account of Mauritius's 1990s financial services pivot is tidy: the EPZ matured, wages rose, and a pragmatic government found a new pillar.

It might also be incomplete if we do not consider all incentives then at play.

This proposition aims to dig a little deeper: the shift from EPZ manufacturing to offshore financial services was not merely a policy response to economic maturity.

What if a tax-advantaged exit by the class that had accumulated wealth inside the EPZ needed to convert industrial profits into financial holdings? What if that class mirrored a regulatory architecture, drawing from low-tax gateways of the early 1990s, i.e, Luxembourg, Switzerland, and Hong Kong, to make that exit frictionless If that regulatory architecture was made possible, then the alternative, genuine productive upgrading, was just comparatively unattractive.

The Accumulation Phase

The EPZ boom of the 1970s and 1980s was a genuine structural transformation. Manufacturing employment rose significantly. Unemployment fell from above 20% to under 5%.¹ A generation of domestic entrepreneurs and foreign investors built substantial industrial wealth behind a closed capital account.²

That last point matters. Under exchange controls, EPZ profits were trapped in Mauritius. The constraint was limiting, but it forced reinvestment into the same economy that generated the wealth.

The Escape Architecture

Between 1988 and 1994, that constraint was dismantled. New company legislation arrived in 1988. The Mauritius Offshore Business Activities Act (MOBAA) followed in 1992. In 1994, the government abolished foreign exchange controls entirely, enabling free capital repatriation for the first time.³

Simultaneously, a tax architecture made the offshore route irresistible. The 1996 deemed foreign tax credit reduced the effective corporate rate on offshore income to 3%.⁴ Global Business Licences allowed companies based elsewhere to claim Mauritius tax residency. The dormant 1982 DTAA with India was fully activated by India's 1991 liberalisation, opening a vast arbitrage window precisely as Mauritian capital gained the freedom to move.⁵

The result was a perfectly timed convergence: accumulated industrial wealth, freed from capital controls, flowing into a ready-made offshore structure taxed at 3%.

The Road Not Taken

This is where the critique cuts deepest, not in what was done, but in what was abandoned.

UNCTAD had identified the "flying geese" model as Mauritius's natural forward path.

The logic is straightforward: as labour costs rise in a maturing economy, manufacturers move labour-intensive production to cheaper-labour neighbours while retaining design, logistics and higher value-add functions at home. Production migrates; capability stays and deepens.⁶

For Mauritius, the model was ready-made. Madagascar and Mozambique sat within reach. Lower wages, available labour, complementary geography. EPZ manufacturers should have relocated cut-and-sew operations to those neighbours, reinvested profits into higher-value knitwear and technical textiles, and built the regional supply chain management that would have made Mauritius a permanent hub rather than a temporary assembly point.

Some did, but what about the others?

The offshore sector offered what the flying geese model could not: profit without operational risk.Converting a textile factory into a Global Business Company holding structure required no new machinery, no new markets, no new skills. It required lawyers, accountants and a registered address somewhere in Port Louis.

The zero capital gains tax, the 3% effective rate on offshore income, and the free repatriation provisions created a frictionless path for Mauritian industrialists to convert manufacturing profits into financial holdings, and to do so without the messy, risky work of genuinely upgrading the economy.

The offshore system did not stand neutral between productive investment and financial arbitrage.

It actively favoured the latter.⁷

The Consequence

This is the mechanism through which rent-seeking diversification replaced productive transformation.

It was neither conspiracy nor deliberate betrayal.

It was a response to an incentive structure that priced arbitrage below upgrading.

Was the political-economic elite that had built wealth in EPZ manufacturing incentivised to move their capital accordingly?

The productive trajectory that upgrading would have created, i.e., industrial complexity, regional supply chain leadership, a manufacturing base capable of surviving the end of trade preferences, was never built.

When India amended the DTAA in 2016, FDI flows from Mauritius collapsed from USD 15.72 billion to USD 6.13 billion within six years.⁸ Stripped of its arbitrage, the offshore sector had nothing underneath. No upgraded supply chains. No technology. No deeper manufacturing. Just the treaty.

This is indicative of rent-seeking diversification, not productive transformation.

In 2026, the University of Manchester's analysis concluded: "The financial sector has not transformed beyond providing basic services like fund administration. This is unlike other more diversified financial sectors like Singapore, which specialises in capital markets, foreign exchange, commodity trading and corporate banking, aside from fund administration."¹⁰

Singapore chose productive depth. Mauritius chose the conduit.

The Mauritian government's own State of the Economy report, December 2024, provided the verdict: "There is a definite lack of investment in productive sectors which explains the sluggish growth of emerging sectors and very low job creation."⁹

That deficit was not an accident. The flying geese never flew. The conduit was built instead.

Mauritius is still paying the price.

The Path Forward: What Productive Transformation Actually Looks Like

The irony is that the assets required for genuine transformation are already in place.

Mauritius has a credible regulatory framework, a dense treaty network, bilingual professional talent, and a strategic position between Africa and Asia.

The raw material is there.

What has been missing is the will to use it productively rather than extractively.

The parallel with the EPZ is instructive. The EPZ worked because it forced capital into productive activity, i.e., building factories, employing workers, creating real output.

The task now is to recreate that productive constraint within financial services: not through capital controls, but through incentive structures that reward capability-building over arbitrage.

Three interventions:

1. Replace the blunt low-tax pitch with targeted incentives for activities that create genuine local value, for example, Africa-focused private equity managers who employ qualified investment professionals in Mauritius, wealth management firms that develop Mauritian talent, fintech companies that export technology rather than merely administer it.

2. Build the capital markets infrastructure the sector has always lacked: derivatives, a functioning debt market, listed Africa-focused vehicles. Financial services that price risk and allocate capital productively are not the same as financial services that route it through for a fee.

3. Use the treaty network offensively rather than defensively, not as a tax shelter to protect existing capital, but as a gateway to deploy Mauritian-managed capital into African infrastructure, private equity and climate finance.

The flying geese model failed once because arbitrage was cheaper.

Make productive transformation cheaper than arbitrage, and the capital will follow.

References

¹ Unemployment and manufacturing employment figures IMF, Mauritius: Challenges of Sustained Development, Chapter 5 — "Labor Market and Educational System in Mauritius" (2003).

² EPZ capital accumulation and the business elite Bräutigam, D., Rakner, L. and Taylor, S., "Business associations and growth coalitions in Sub-Saharan Africa", Journal of Modern African Studies (2002). See also: Tandfonline / Review of International Political Economy (2022).

³ Legislative chronology of the offshore sector's construction Mauritius IFC official history, mauritiusifc.mu/our-ecosystem/history. IMF, Mauritius: Challenges of Sustained Development, Chapter 7 — "Financial System and Institutions" (2003). Review of International Political Economy (2022), "The political economy of a tax haven: the case of Mauritius."

⁴ Tax architecture: the 3% effective rate and deemed foreign tax credit Mauritius IFC official history (mauritiusifc.mu).

⁵ The 1982 India DTAA and its activation post-1991 NTU-SBF Centre for African Studies, "Tax treaty changes to impact India investments via Mauritius" (April 2024).

⁶ The flying geese model applied to Mauritius UNCTAD, Investment Policy Review: Mauritius, document reference UNCTAD/ITE/IPC/MISC.1 (2001).

⁷ The offshore system as active favour to arbitrage over productive investment Review of International Political Economy (2022).

⁸ The DTAA amendment and collapse in FDI flows Lexology, "India-Mauritius DTAA — the amending protocol and what lies in the fine print" (May 2024).

⁹ Government of Mauritius admission on productive investment deficit Government of Mauritius, State of the Economy, Ministry of Finance (December 2024). "There is, therefore, a definite lack of investment in productive sectors which explains the sluggish growth of the emerging sectors and very low job creation."

¹⁰ The capital markets gap and the Singapore comparison University of Manchester / The Conversation, "Mauritius' next growth phase: a new plan is needed as the tax haven era fades" (February 2026).

This article is produced for research and informational purposes. It does not constitute financial, legal or investment advice. The views expressed represent the analytical position of Intelitegen Limited and are grounded in publicly available sources cited above.