Doing Business in Africa: Madagascar

Doing Business in Africa: Madagascar

Situated just off southern Africa’s eastern coast, this nation of just over 20 million people inhabits the fourth largest island in the world. As a result of this relative geographic isolation Madagascar was colonized late in the great European scramble for Africa during the nineteenth century, with the native Kingdom of Merina falling to French forces in 1897. Thereafter the country was ruled as a constituent part of the French colonial empire until the island’s independence in 1960.

Since then, the island’s political and economic fortunes have fluctuated greatly. Under the First Republic, 1960 – 1975, the country was led by the French-appointed President Philibert Tsiranana who ruled the country as a neo-colonial client of the French for twelve years. Though ostensibly democratic and ruling in a steady, quasi-liberal manner that  led to consistent, if moderate, levels of economic growth, the increasingly authoritarian nature of Tsiranana’s rule led to a political crisis in the early 1970s that ultimately led to the collapse of his regime.

In its place emerged the Democratic Republic of Madagascar, 1975 – 1992, that was initially run along Marxist lines by Didier Ratsiraka, the country’s fourth president. While the turn to socialism and the Soviet Union that resulted was perhaps a triumph for anti-colonialist sentiment in Madagascar, the resulting economic chaos was calamitous and forced Ratsiraka to later seek out aid from the International Monetary Fund.

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Ratsiraka was able to hold together his rickety regime until 1992 when popular demonstrations forced him to accede to democratization demands from increasingly vocal opposition parties. This, in turn, led to the creation of the Third Republic and the institution of free-and-fair democratic elections. For a time, prosperity returned and under President Marc Ravalomanana, 2002 – 2009 the island experienced several years of high growth that placed the country amongst the most quickly growing in all of Africa. Coupled with tough new anti-corruption measures and a dedication to environmental stewardship, the future looked bright.

Political instability, however, returned when the increasingly unpopular Ravalomanana, whose election in 2001 was not without controversy, was removed from office in a popular uprising after he was accused of corruption, authoritarian tendencies, and selling out Madagascar to foreign corporations. Naturally, economic growth suffered accordingly and the country has been struggling to recoup its losses as the political system, for the time being, remains in limbo.

Ease of Doing Business

Given all this, what are business conditions like in Madagascar? According to the World Bank, Madagascar currently ranks 140 out of 183 countries on its Ease of Doing Business Index – a measure created by the bank to gauge the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the United States ranks 4th on ease of doing business, right after Singapore, Hong Kong, and New Zealand.

What does this ranking mean? Take, for instance, the bank’s measure of how easy it is to start a business, which is depicted in Figure 1 below. From the figure one can see that the bank defines business-creation costs as consisting of the time and money outlays involved in the series of legal steps necessary for the entrepreneur must take in order to legally establish an in-country firm. Using this framework, the bank then tasks researchers to go through this process in order to establish in-country averages.

When this metric is applied to Madagascar, the bank finds that Madagascar ranks as 70th out of 183 in ease of starting a business, making Madagascar a relatively difficult country to start a legal commercial enterprise. To start a business in Madagascar, one has to complete two bureaucratic procedures that take a total of seven days at a total cost of nearly $53. Additionally, Madagascar requires startups to possess a minimum of $1,021 in operating capital before they can commence operations.

Figure 1:

How the World Bank Measures Ease of Starting a Business

            Fig 2 Ease of Business Graphic WB

Using similar metrics for other aspects of business operations, the bank has ranked Madagascar in a number of other areas. To obtain a construction permit, for instance, Madagascar ranks at 110th out of 183 as it takes the completion of 16 procedures, which takes on average 178 days at a cost of $2,698, or about 6.5 times Madagascar’s per capita income.  Clearly, obtaining construction permits is a significant obstacle for most Madagascans when it comes to business creation and expansion.

Continuing in its assessment, the World Bank has determined that in order to obtain and register property, Madagascar does even worse by ranking 162nd out of, again, 183 countries measured. To register property in Madagascar, the bank finds it takes the completion of seven bureaucratic procedures that takes, on average, 74 days and costs 9.8-percent of the property’s financial value in fees and other costs to complete.

Madagascar also does very poorly when it comes to obtaining credit, where it ranks 176th out of 183 – making the country one of the more difficult places in the world to obtain credit. Here, as depicted in Figure 2, the bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges.