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.
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
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.
When lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the bank, the more available credit will be. When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong. In Madagascar this veritable lack of information on potential debtors is compounded by very weak legal rights for creditors.
Figure 2:
How the World Banks Conceptualizes Credit Acquisition
When it comes to protecting investors and minority shareholders Madagascar does much better. Here, the country jumps up the rankings to ranks 59th out of 183 countries – making the country a poor one for shareholders. Madagascar received this score because it has moderately strong disclosure requirements for corporate officials, is strong on holding directors liable, and is a moderately easy play to bring shareholder lawsuits.
Madagascar also does better when it comes to paying taxes. The World Bank estimates that pleasing the tax man in Madagascar requires a total of 23 payments over the course of a year which, in turn, takes up to 201 hours to complete and can consume up to 37.7-percent of a company’s profits. Accordingly, Madagascar’s tax burden is ranked 72nd out of 183 nations – one of the worst in the world in this category.
Unfortunately, when it comes to engaging in cross-border trade Madagascar does less well. In Madagascar, to import goods into the country one is required to have nine documents for customs officials to inspect. On average, it takes a total of 24 days to import goods into Madagascar with the cost amounting to $1,555 (excluding tariffs) per container shipped into the country.
The cost to export goods is somewhat lower as Madagascar requires four documents to be inspected by customs’ officials, while the total cost (excluding tariffs) is $1,197 per container, with delivery taking up to 21 days from point of origin. Compared to global averages this nets Madagascar a ranking of 106th out of 183 on ease of engaging in cross-border trade.
Madagascar does even worse when it comes to contract enforcement, where it ranks a dismal 153rd out of 183 countries ranked on this issue by the bank. On average, reports World Bank analysts, it takes a total of 38 legal procedures to take a contract from dispute to resolution, at the cost of 871 days, or 2.4 years, spent in court or otherwise attending to legal issues. The financial cost of pursing a contract claim, says the bank, typically accounts for 42.4-percent of the value of the claim.
Finally, in terms of closing or liquidating a business, Madagascar ranks at the bottom of the pack by coming in at 183rd out of 183 countries, largely due to the fact there is no history of the practice in the country.
Table 1 presents a summary of these rankings as well as Madagascar’s overall ease-of-doing business rating. Madagascar is clearly not an easy place to do business as it ranks near the bottom in most of the categories the World Bank measures. It does best, however, in the area of investor protection, tax, and cross-border trade.
Table 1:
World Bank Ease of Doing Business
Assessment and Rankings: Madagascar
Prospects
For the investor, Madagascar today presents one with that classic tradeoff between risk and reward. On the one hand, the country clearly has the capability to grow at a much higher rate than it is currently. As one can see from the chart below, the years of the Ravalomanana administration saw steady, sustained growth premised on sound macroeconomic stewardship of the economy, close government coordination with external funders such as the IMF, and a real openness to foreign investment in nearly every area of the country’s economy. Indeed, there is no reason that should not, in theory, continue.
Figure 3:
Madagascar Economic Growth,
Percent Increase, 2003 – 2013
The problem, of course, is the political fallout such growth has had and the view by many in Madagascar that it has been unevenly distributed and biased towards foreigners and the rich. The violent protests against Ravalomanana, for instance, were instigated after it was learned that a South Korean conglomerate allegedly bribed the president in order to receive long-term agricultural leases to large swathes of the country’s most fertile and productive land. Given that Madagascar remains a desperately poor, mostly agricultural country such a deal was obviously politically explosive.
Madagascar has yet to come to terms with that explosion and while the country has a new president – Hery Rajaonarimampianina – that took office in January of this year, he, too, is not without controversy. The opposition claims the 2013 elections that propelled the new president into power was rigged and Rajaonarimampianina’s close association with the camp that drove President Ravalomanana from power in 2009 means many on this divided island view him with mistrust and suspicion. Certainly, if economic growth does not return soon, the prospects for political stability going forward are most likely quite dim.
That being said, the prospects for a resumption of economic growth are not unwarranted. The country continues to have huge agricultural potential and the country’s diverse climatological conditions allow it to grow a variety of crops. Though coffee is the most obviously valuable of these products, potential exists for a wide variety of exports to global markets if, that is, the country’s backwards agricultural sector can be modernized and infrastructure improved.
What’s more, two additional sources of growth are also on the horizon – ecotourism and oil and gas. In terms of the first, Madagascar’s tropical, island geography has made it a biodiversity hotspot. Combine that with the fact that much of the country’s animal and plant life is found nowhere else on Earth and you have the makings of a potential tourism nirvana that could draw in well-heeled travelers from around the world.
Offshore, the prospect for riches are even greater as Madagascar is potentially well-positioned to play a role in the ongoing oil and gas exploration boom currently taking place in Eastern Africa. Waters just off of nearby Mozambique and Tanzania, for instance, were recently discovered to hold tremendous amounts of natural gas with prospectors predicting that oil, too, will soon be discovered in commercially-valuable amounts.
International oil firms have, in turn, stepped up exploration in the waters off Madagascar and, onshore, the country is suspected to have huge deposits – perhaps 10 billion barrels worth – of heavy oil not unlike that found at in the Athabasca oil sands deposits in Alberta, Canada.
So, as always, politics remains the deciding factor when looking at long-term prospects in Africa. If you believe that ultimately Madagascar will overcome its current political impasse and return to the path of economic reform and liberalization, then Madagascar’s prospects are rather bright. If you don’t, and see political instability continuing into the future, then the risks may outweigh the rewards.