Entrepreneurs in Africa: Hopes and Mirages

Madagascar is an island located off the Eastern coast of Africa.  The island is heavily exposed to tropical cyclones, which bring torrential rains and destructive floods increasing their need for aid. With a population of around 21 million, Madagascar ranks among the poorest countries in the world.  The World Bank has estimated that 70% of Malagasy live on less than $1 per day.

In 2009, Madagascar’s democratically elected President, Marc Ravalomanana, stepped down under pressure from the military and purported to transfer his authority to a senior military figure.  The United States of America, once a country that offered assistance to Madagascar, suspended direct assistance to Madagascar’s governmental authorities as well as all non-humanitarian activities following the 2009 coup d’état.  Since then, economic activity has declined, unemployment has increased, and government revenue has dropped, undermining the political, social, and economic stability of the country.  Though economic concerns exist, the United States is continuing to support international efforts led by the Southern African Development Community and the African Union to ensure a credible electoral process takes place as soon as possible to strengthen Madagascar’s economy.  Furthermore, over the years certain areas of the business environment, specifically regulations on conducting a business, has improved significantly giving local entrepreneurs better prospects and opportunities to open and run a small to medium-size business in Madagascar.

Entrepreneurial opportunities in Madagascar

According to data collected by Doing Business, starting a business in Madagascar is relatively easy.  It takes eight days, costs 10.8% of income per capita, and requires 0% of paid-in minimum capital to complete two procedures, as detailed below.

*USD equivalent is converted using the FX rate at the time of research, and may not reflect the true value as of today.

Globally, Madagascar ranks 17 out of 185 economies on the ease of starting a business.  It ranks well above the regional average (Sub-Saharan Africa), which stands at 123, and is keeping up with comparator economies such as Mauritius, which stands at 14.  The data reflects it is easier for entrepreneurs to start a business in Madagascar relative to most countries and/or regions in similar economic situations.  The relative easiness is from improvements in the process involved in starting a business.  From 2004 to 2013, the number of procedures required to start a business has reduced from 15 to 2.  Similarly, the amount of capital required to be deposited in a bank or with a notary before registration has reduced from 27.8% of income per capita to 0%.  The greatest improvements are through the lowering of costs in starting a business and the number of days it takes to complete each procedure, which has dropped from 59% of income per capita to 10.8%, and from 67 days to 8 days, respectively.

Madagascar has implemented a number of reforms, as detailed below, that contributed to the significant improvements over the years.

Through the reform program, Madagascar has over time surpassed the regional average (Sub-Saharan Africa), and is keeping up with global and regional best performance benchmarks when it comes to the ease of starting a business involving the procedures, days, costs, and required paid-in capital.  As Madagascar continues to improve on these areas, there will be greater firm satisfaction and savings, and more registered businesses, financial resources, and job opportunities.  Governments will continue to support making registration easy through more flexible and simplified regulations because as more entrepreneurs start businesses in the formal (taxed, regulated, and monitored) sectors, more jobs will be created and more revenues will be generated for the governments.

Taxes are essential as they fund public amenities, infrastructures, and services that are crucial for a properly functioning economy.  On average, firms’ make 23 tax payments, spends 201 hours completing a tax return, and pay total taxes of 36.0% of profit a year.  Globally, Madagascar ranks 68 out of 185 economies on the ease of paying taxes.  It ranks well above the regional average (Sub-Saharan Africa), which stands at 123, and is keeping up with comparator economies such as Mauritius and South Africa, which stands at 12 and 32, respectively.  The data reflects tax compliances for businesses in Madagascar are much stronger relative to most countries and/or regions in similar economic situations.  The relative easiness is from improvements in the process involved in paying taxes.  From 2006 to 2013, the number of tax payments reduced from 27 to 23.  Similarly, the tax rate reduced from 46.9% of profit to 36.0%.  The greatest improvement is from the cutback on hours needed to complete a tax return, from 400 hours a year to 201 hours.

The country has implemented a number of reforms, as detailed below, that contributed to the significant improvements over the years.

Through the reform program, Madagascar has over time surpassed the regional average (Sub-Saharan Africa) when it comes to the ease of paying taxes involving the number of payments, hours, and tax rate.  However, the country is continuing to fall behind global and regional best performance benchmarks indicating there is room for improvement in these three areas.  One area of concern for Malagasy entrepreneurs’ lies in labor tax and contributions as it is currently taxed at a rate of 20.3% compared to the lower 13.3% regional average.  A higher tax rate has the tendency of reducing disposable income for an individual, which subsequently reduces their purchasing power, reduces their saving ability, and acts as a disincentive for them to invest into the economy deterring economic growth.  Nevertheless, changes have brought concrete results over the years.  A lower tax rate has increased a firm’s after-tax return on investment, and increased returns provide incentives for investment and leave firms with more money to reinvest.  As Madagascar continues to simplify tax payments and reduce tax rates, tax revenues will increase, as seen over the years in other economies.  The increase tax revenues provide a more economically stable environment for local entrepreneurs to operate in.

In order for a company to raise the capital they need to grow, innovate, diversify, and compete, investor protection is essential.  If the laws do not provide such protection, investors may be reluctant to invest, which will affect the economic growth of the country as a whole.  Globally, Madagascar ranks 70 out of 185 economies on the strength of protecting investors.  It ranks above the regional average (Sub-Saharan Africa), which stands at 115, but is trailing behind some comparator economies such as South Africa, Mauritius, and Mozambique, which stands at 10, 13, and 49, respectively.  The data reflects Madagascar’s economic regulations offer stronger investor protections relative to some countries and/or regions in similar economic situations.

Three indices are used to measure the strength of investor protection, as detailed below.

Madagascar has a moderate level of disclosure requirements available for investors.  In relation to other comparator economies, 34% have poorer disclosure requirements, 13% have the same, and 53% have more clearer and efficient disclosure requirements.  Madagascar has a moderate level of available legal actions and remedies available, and has a probable chance of holding interested parties and members liable in a case.  In relation to other comparator economies, 63% of the economies have shareholders with more difficulty carrying out the actions, 14% have the same difficulty, and 23% have better chances at carrying out the actions.  Madagascar has a moderate level of access to internal corporate documents.  In relation to other comparator economies, 42% of the economies have shareholders with more difficulty accessing the documents, 19% have the same, and 39% have easier access.  The weighted average of these three indices gives us the Strength of Investor Protection Index.  The economy has a score of 5.7 out of 10 on this index.

Although the index has over time surpassed the regional average (Sub-Saharan Africa), it is still far behind the global and regional best performance benchmarks indicating there is room for improvement in the three indices.  Madagascar has not implemented any type of reform programs over the years to increase investor protection causing the three indices to remain stagnant from 2006-2013.  Opportunities exist for entrepreneurs to attract investors in raising capital for their company to promote economic growth once disclosures, duties, rulings, and procedures become more available.  Given the vast room for improvement and technological advances in society, requesting for more disclosure, defining clearer duties for directors/owners, maintaining up-to-date procedural rules, obtaining judgment within a reasonable time, and introducing new or amending company laws or civil procedure rules can be made possible in Madagascar.

In today’s globalized world, making trade between economies easier is increasingly important for business.  Research shows that exporters in developing countries gain more from a 10% drop in their trading costs than from a similar reduction in the tariffs applied to their products in global markets.  Exporting a standard container of goods requires 4 documents, takes 21 days, and costs $1,197.  Importing the same standard container of goods requires 9 documents, takes 24 days, and costs $1,555.  Globally, Madagascar ranks 112 out of 185 economies on the ease of trading across borders.  It ranks above the regional average (Sub-Saharan Africa), which stands at 123, and is above comparator economies such as South Africa and Mozambique, which stands at 115 and 134, respectively.  The data reflects it is easier for a business in Madagascar to import and export goods relative to businesses in other countries and/or regions in similar economic situations.  The relative easiness is from improvements in the costs and processes involved in exporting and importing goods.

From 2006 to 2013, the number of documents required to export and import has reduced from 8 to 4, and 11 to 9, respectively.  Similarly, the number of days required to export and import has reduced from 48 to 21, and 48 to 24, respectively.  However, the costs required to export and import has increased from $1,182 to $1,197, and $1,282 to $1,555, respectively.  Although the cost of exporting and importing has increased, it is only a slight increase given the 7-year time frame.

Madagascar has implemented a number of reforms, as detailed below, to make trading across borders easier over the years.

Through the reform program, Madagascar has over time surpassed the regional average (Sub-Saharan Africa) with respect to improving the number of documents, the number of days, and the costs to export and import.  It is keeping up with regional best performance benchmarks when it comes to reducing the number of documents required to export.  Unfortunately, for all other indicators, the country is continuing to fall behind global and regional best performance benchmarks indicating there is room for improvement in those areas.  As governments continue to introduce new tools and amend old ones to facilitate better trading, the changes will help greatly improve the trading environment and boost the firms’ international competitiveness.

Economic Outlook

Out of the 10 areas in the life cycle of starting a business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency, four areas are becoming easier for entrepreneurs to open and run a small to medium-size business.  Statistically speaking, the numbers does not bring the situation into light, as there appear to be six areas that still require attention.  However, Madagascar is ranked better relative to most comparator economies and/or regions in most of the categories with a more significant weighting.  Additionally, between the years of 2005 to 2012, Madagascar has moved toward more efficient practices and stronger regulations in 7 out of the 10 areas of the business cycle; only 1 remained the same, and 2 worsened.  This reflects newly arising prospects and opportunities exist, and will continue to do so in the future as technological advances move forward allowing developing countries to adopt older and less expensive innovations from developed nations.  Although there are areas that require improvement, entrepreneurs should continue to have faith in the business environment as one need to remember the pace of change varies widely across the areas measured.  Madagascar has grown and made significant improvements over the years, and its economic outlook looks promising for future entrepreneurs

References

American Embassy, Antananarivo (Madagascar). 2012. Doing Business in Madagascar: 2012 Country Commercial Guide for U.S. Companies. Washington, DC: Department of Commerce.

BBC Monitoring. (2013, May 8). Madagascar Profile. BBC News. Retrieved June 24, 2013, from http://www.bbc.co.uk/news/world-africa-13861843.

Bureau of African Affairs. (2012, December 19). U.S. Relations With Madagascar. U.S. Department of State. Retrieved June 24, 2013, from http://www.state.gov/r/pa/ei/bgn/5460.htm.

World Bank. 2013. Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group.