Why Some Indian Ocean Economies Thrived While Others Fell Behind: New IMF Study Explains

An IMF study finds that stronger institutions, education, trade openness and productive investment helped Mauritius and Seychelles achieve far stronger income growth than Madagascar and Comoros since 1980. The findings urge governments and development partners to strengthen governance and human capital while managing debt carefully, creating a more stable environment for sustainable growth and private investment.

An International Monetary Fund (IMF) Working Paper by Andrew Esparon, Aissatou Diallo and Mahamoud Islam provides a revealing account of why Mauritius and Seychelles have moved far ahead of Madagascar and Comoros despite sharing many geographical and historical challenges. Drawing on data from the IMF, the World Bank's World Development Indicators, and the Varieties of Democracy (V-Dem) project, the study finds that institutions, education, investment, trade openness, and sound economic management have played a major role in shaping income differences. Since 1980, real GDP per capita has increased by about 354 percent in Mauritius and 138 percent in Seychelles, compared with a 35 percent decline in Madagascar and growth of only around 17 percent in Comoros.

The comparison matters because all four countries face the disadvantages common to island economies, including exposure to climate shocks, dependence on international markets and relatively limited domestic economic opportunities. They also began with strong dependence on agriculture. Mauritius relied heavily on sugar, Seychelles on agriculture and fishing, Comoros on products such as vanilla, cloves and ylang-ylang, while agriculture dominated Madagascar's economy. Their subsequent experiences show that difficult geography does not automatically determine a country's economic future.

Institutions emerge as a powerful economic advantage

One of the clearest differences identified by the study is the quality and stability of institutions. Mauritius maintained comparatively stable democratic institutions and continuity in economic policymaking. Seychelles followed a different political model but developed substantial state capacity and maintained greater political continuity.

Madagascar and Comoros experienced much greater disruption. Madagascar went through repeated political crises, including major instability between 2009 and 2012, while Comoros experienced coups, attempted coups and secessionist tensions following independence in 1975.

The statistical analysis reinforces this institutional story. The political-corruption indicator has a strongly negative relationship with income, with estimated coefficients of roughly -1.9 to -2.0 in key specifications. Other indicators, including equality before the law, individual liberty, respect for constitutional rules and performance-based government legitimacy, are positively associated with income.

For governments, the message is straightforward: governance reform is also economic reform. Predictable regulations, effective public administration, rule of law and political stability can improve the environment for investment and long-term economic planning.

Education, investment and trade drive transformation

Human capital is another major dividing line. Mauritius progressively expanded free education across primary, secondary and tertiary levels, while Seychelles invested heavily in education and healthcare. The study finds a consistently positive relationship between equality in education and GDP per capita. Estimated coefficients for education equality are around 0.49 to 0.58 in the baseline models and approximately 0.38 to 0.64 across alternative estimations.

Economic diversification also proved critical. Mauritius moved from sugar into textile manufacturing through its Export Processing Zone and later expanded tourism, finance, ICT and business services. Seychelles developed tourism, fisheries and other services. By 2022, the tertiary sector contributed 10.8 percentage points to economic growth in Seychelles.

Trade openness is positively associated with income, with baseline estimates of about 0.20 and alternative estimates generally around 0.19–0.21. For small economies with limited domestic markets, better ports, customs systems, digital connectivity and access to international markets can therefore become powerful development tools.

For development partners, this suggests that financing infrastructure alone may not be enough. Investments in roads, ports or energy are likely to generate stronger returns when accompanied by education, institutional capacity, trade facilitation and improvements in public administration.

Debt can support growth, but it carries limits

The study offers an important warning on public borrowing. Debt initially shows a positive relationship with income, suggesting that borrowing can support development when governments invest resources productively. But when the researchers examine higher debt levels, the relationship changes: the positive effect weakens as debt increases.

This means debt should be judged not simply by how much a country borrows, but by what the borrowed money produces. Financing infrastructure, education and productive investment can strengthen long-term capacity, while excessive borrowing can reduce fiscal space and increase economic vulnerability.

The study also finds that debt performs better alongside stronger educational conditions. This has implications for the IMF, development banks, bilateral lenders and other development partners. Project financing should increasingly consider government implementation capacity, human capital and expected economic returns alongside conventional debt indicators.

Private investors can find opportunity amid the risks

For businesses and investors, the experiences of Mauritius and Seychelles show the commercial benefits created by stable institutions, skilled workers, infrastructure and international market access. Tourism, ICT, financial services, fisheries, manufacturing and business services demonstrate how diversification can create new investment opportunities in small island economies.

Madagascar and Comoros present greater risks linked to political instability, infrastructure gaps, weaker administrative capacity and slower human-capital development. But these weaknesses can also reveal future opportunities. Improvements in energy, connectivity, digital services, skills, logistics, and trade infrastructure could create significant room for private investment.

The study cautions that its findings are based on only four countries and demonstrate long-term associations rather than definitive causation. Future research should therefore include more small island developing states and examine climate vulnerability, external shocks, poverty, inequality and economic resilience.

For policymakers, development partners and businesses, however, the central lesson is already clear. Geography creates constraints, but it does not dictate economic destiny. Mauritius and Seychelles show how stronger institutions, education, investment and international integration can reinforce one another over decades. The challenge for Madagascar, Comoros and other developing economies is to create the same virtuous cycle while managing debt, political risks and growing exposure to global and climate shocks.