Overview

“Entrepreneurship needs to be stimulated in Africa to strengthen job creation”

African Economic Outlook, 2012

Madagascar is a developing island nation off the east coast of Africa with a population of around 20 million.  An independent republic with a history of French colonisation, the legal system is a civil law system based on the old French civil code and customary law in matters of marriage, family, and obligation. The primary language is Malagasy, with French also an official language due to colonial roots.

The position on English as an official language is mixed – while it was removed as an official language in the 2010 referendum this act was apparently not recognized by the ‘international community’ due to the transitional nature of the current government. The nation is organized into regions (faritra), departments (departamanta) and communes, although this system has also seen numerous changes due to the political situation.

Madagascar is currently facing significant political instability, with issues over leadership beginning 2009 ending in what has been termed as a military coup d’état and replacement of the government with a High Transitional Authority. This is the nation’s biggest challenge, now entering its fourth year without resolution, which has caused declining economic and civil standards of living, and creates significant uncertainty for entrepreneurial investment.

Despite these political circumstances, areas with the potential for opportunity exist, including mining, ecotourism, technology innovation and energy. The low cost but skilled labor pool is also considered an attractive option for potential investors.

Political Climate

While the current political system has historically been one of free elections, leadership disputes since 2009 have led to an ongoing political gridlock that is yet to be resolved. In 2009, increasing opposition and actions by Andry Rajoelina and supporters escalated to a military-backed takeover, forcing then president, Marc Ravalomanana, to resign and hand power over to the military, who then instilled Rajoelina as acting leader of the High Transitional Authority. The action was widely condemned and declared unconstitutional by the international community^[1]. Furthermore, despite the official purpose of the interim government to organise another election, various political acts by Rajoelina have been seen as efforts to legitimize his government, such as the 2010 referendum^[2]. The country’s corruption perceptions index is 32 (out of 100), which indicates a high level of corruption^[3], a possible reflection of uncertainty about the interim government’s goals. The UN, the Southern African Development Community (SADC), the African Union and the state’s electoral commission are working together to hold another election, however it has been subject to many delays. At the time of writing it is scheduled for 23 August 2013^[4].

This situation has had significant negative effects including a major drop in tourism, a sharp drop in the formerly booming garment industry and continual slow growth. According to the United States Mission to Madagascar, the Economic Development Board of Madagascar (EDBM) and the World Bank, the political situation in Madagascar has stalled the economy, crippled tourism by 50% and led to few investors showing interest in the country. The US Department of State reports that a downtown Antananarivo demonstration in November 2011 turned into a violent crowd of over 6,000 people, compelling security forces to disperse the crowd with tear gas^[5]. As such it is clear the political environment is unstable and uncertain.

Due to the significance of the political situation and potential impact of upcoming elections, there is a high level of unpredictability as to what values and regulatory and economic policy will lead the nation’s future, resulting in an uncertain investment environment.

Economy

Economic Overview

Source: CIA World Factbook, currency in $USD.

According to the CIA World Factbook^[6], Madagascar is a heavily agricultural nation, with agriculture employing some 80% of its population and providing over one quarter of the GDP. The South African Development Community (SADC) describes Madagascar as a key producer of fish, crabs, prawns, mussels and other seafood^[7]. Due to abundant natural resources, mining is also considered an ‘untapped’ sector^[8].

With the introduction of the African Growth and Opportunity Act 2000 (AGOA)^[9], the apparel industry boomed. The end of the Multi Fibre Arrangement (WTO Agreement on Textiles and Clothing)^[10] led to increased exposure to competition from other cheap labor countries such as Bangladesh^[11] and China (Ernst, Ferrer and Daan Zult, 2005). Despite this, Madagascar remained relatively strong, reaching the highest export value in 2007, with prospective growth seemingly promising (Fukunishi, 2010). However, due to the political climate, Madagascar has failed to meet the requirements of the AGOA act since 2010, leading to a massive drop in US exports (about 70%), causing retraction of the industry and many job losses.

Investment Climate

Prior to the beginning of the political crisis, several initiatives were established to facilitate foreign direct investment. The Economic Development Board of Madagascar^[12] (EDBM) was one such body established to facilitate domestic and foreign direct investment in Madagascar. However, the website is light on content, with many pages empty or information now outdated (i.e. before 2010), which may be a result of the political turmoil stalling activity.

Despite the political instability, the US Mission to Madagascar^[13] notes that the nation has maintained a relatively open position on foreign investment with few to no restrictions on areas such as company ownership, foreign exchange or capital flow, and there has been no expropriation in recent history.

The US Department of State reports a very open position towards foreign investment:

“There is no law or regulation authorizing private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation or control. Furthermore, there is no official or private practice to restrict foreign investment, participation, or control of domestic enterprises. There is no mandatory screening of foreign investment, and there is no discrimination against foreign investors at the time of the initial investment or after the investment is made, such as through special tax treatment, access to licenses, approvals, or procurement. There are no sectors/matters in which foreign investors are denied national treatment. There is no legal requirement that nationals own shares of foreign investment.”

Regardless, political uncertainty brings fear of dangers such as policy change or nationalisation of investments (particularly mining or telecommunications).

Trade and bilateral agreements

Membership: WTO (World Trade Organisation), COI (Indian Ocean Commission), COMESA (Common Market for Eastern and Southern Africa), SADC (Southern african Development Community), CBI (Cross Border Initiative), IOR-ARC (Indian Ocean Rim association for Regional Cooperation), ACP-EU Cotonou agreement.

Labor

Madagascar has a significant pool of available labor, due to the combined impacts of unemployment and underemployment. The minimum wage for 2011 was approximately 91,000 Ariary ($45 USD) per month, below that in most competitor countries. This combined with a purported high quality of labor^[14], provides a strong attraction to the country for foreign investors^[15].

Opportunities

Mining

According to the African Economic Outlook In Depth report, Africa has a strong comparative advantage in natural resources^[16]. Madagascar has sizable available natural resources. According to the SADC, Madagascar’s “mineral potential is underexploited”, and is considered a key sector that will influence the development of the country^[17].

However, as stated previously, political instability is a critical hindrance to investment. The risk of contract cancellation is a primary risk facing operators in Africa^[18]. Another barrier is a lack of infrastructure, meaning mining companies would need to sizably invest in infrastructure. This makes the uncertain political environment and risk of nationalisation more significant for infrastructure investment heavy industries like mining. It may be recommended for mining enterprises to leverage these risks by diversifying operations across a number of countries^[19].

Community harmony is another key area for mining projects to acknowledge^[20] (but arguably also to any project). Companies can also invest in local development projects to contribute to an improvement in the lives of local populations^[21].

Ecotourism

According to the SADC, Madagascar is world famous for its natural beauty, richness in biodiversity and preserved cultural heritage. Among its most notable examples of biodiversity are the lemur family of primates, bird families and its famous baobab trees^[22]. Nosy Be Island is one of the most appreciated touristic zones of the country^[23].

Tourism has suffered since the political crisis, dropping by 50%^[24]. A lack of proper energy, roads and transportation also offer a barrier to tourism, especially in areas outside of the major cities. The African Development Bank is however helping projects that are establishing roads between parts of the island^[25]. Meanwhile a renewable energy project in Nosy Be Island is estimated to generate new businesses and up to 300 jobs per year for the tourism and hospitality sector due to additional electricity supplied by the project^[26].

Technology

Several projects exist that will improve Madagascar’s connectivity. The Regional Communications Infrastructure Programme (RCIP)^[27] hopes to increase traffic by at least 36% a year and cut bandwidth costs by a tenth. Madagascar is part of the first phase of the RCIP, involving USD $164.5 million. SEACOM is another project, which is privately owned with a 76.25 per cent African ownership, constructing a 1.28 Tbps capacity undersea cable linking South and East Africa to Europe and Asia.

Technology hubs are growing across Africa, primarily thanks to initiatives such as AfriLabs, which aim to promote community spaces to growth and development in the African technology sector^[28]. AfriLabs worked together with the US Department of State, the World Bank and other notaries to run the “Apps4Africa” program^[29], funding African innovators who sought to solve difficult local problems using technology, with a Madagascar startup winning a grant in 2011. A Madagascar hub has been established in Antaravino (http://www.i-hub.mg/^[30], French langage).

These developments show promise that Madagascar will see growth in connectivity, which combined with community spaces and its large and affordable labor pool, may create potential in the technological innovation sector.

Energy

The Energy Options for Madagascar conference was held in Antananarivo in last December, where Madagascar’s electricity needs were said to be expected to reach 700MW by 2030 (from 428MW in 2012).

According to The Africa Competitiveness Report 2013 by the World Economic Forum^[31], Africa has more than half of the world’s renewable energy potential, stating wind, geothermal, and hydropower is “barely tapped”, and identifies Madagascar as a good opportunity for wind power. The interim government announced a wind farm project and planned to attract private sector involvement by halving taxes in the 2012/13 financial year on imported equipment^[32]. Meanwhile the Sustainable Energy Fund for Africa (SEFA) has approved a US $1 million grant to finalize pre-investment activities for a hybrid renewable energy project in Nosy Be Island in Madagascar, for a combination of hydro, wind and solar technologies^[33].

However not all are in agreement on wind power, as reported on Sci Dev Net^[34], local energy experts had mixed opinions on the viability of wind power and problems such as suitability of location, a requirement for more preliminary groundwork and lack of local skill in creating a wind farm project of larger size and output. Energie Technologie, an Antananarivo-based company that supplies renewable energy equipment stated there is the greatest potential for wind power in the south, while other experts said small-scale wind power projects have been successful in northern Madagascar. Others say that the greatest potential is in hydropower, followed by tidal energy, biomass, biogas and geothermal energy, with wind as the “last option”; stating that only 1.6 per cent of hydropower capacity is being exploited, the potential output estimated at 8 gigawatts.

Conclusion

Madagascar is a country facing political strife. From a coup change of power to four years of disputes over control and elections, this lack of resolution creates a political environment that is highly uncertain. Despite this, the government has traditionally been open towards foreign investment, and the interim government appears to have maintained this position, having open policies on foreign investment such as no laws limiting investment or requiring part-national ownership of foreign enterprises. Regardless, the unstable political environment is an impediment to investment due to fears such as policy change or nationalisation of investments. In addition, a lack of infrastructure such as roads between many rural areas creates difficulties in accessing these parts of the country, and as such remote operations such as mining or ecotourism may require significant additional investment to establish.

Natural resources and energy are two major areas that are considered to have great, untapped potential in Madagascar. Mining however involves a significant investment and risk due to the lack of infrastructure and political uncertainty. Energy projects are already taking the interest of the government and other organisations, but mixed opinions suggest thorough preliminary research should be undertaken before initiating such kinds of projects.

Ecotourism is another area that Madagascar provides an opportunity for due to abundant and vast ecological biodiversity and wildlife. Again, lack of infrastructure to remote areas is a primary challenge to ecotourism projects.

Finally, there are some signs of potential for growth in technological innovation and entrepreneurship in Madagascar, thanks to initiatives such as AfriLabs and as evidenced by Madagascar entrepreneurs winning a grant in 2012.

In short, Madagascar is a land with untapped potential in several areas, but enterprises must be careful to do solid research, preliminary investigation and carefully consider some significant risks before investing. It is also worth noting that if the election should lead to a more stable political situation it will enable investment and development to go ahead with a higher level of certainty.

Appendix A: References

Academic References

Ernst, C., Ferrer A. H., and Zult D. (2005) “The end of the Multi-Fibre Arrangement and its implication for trade and employment“. Employment Strategy Papers

Fukunishi, T. (2010) “Impact of the Political Turmoil on Madagascar’s Garment Workers: Preliminary Study Based on the Firm Dataset 2008–2010”. Institute of Developing Economies

Professional/Industry References

Africa Growth and Opportunity Act. URL: http://www.agoa.gov/ last access: 15 July 2013

African Economic Outlook 2012. In: African Economic Outlook. URL: http://www.africaneconomicoutlook.org/en/ last access: 15 July 2013

African Economic Outlook In Depth: Structural Transformation and Natural Resources. In: African Economic Outlook. URL: http://www.africaneconomicoutlook.org/en/in-depth/structural-transformation-and-natural-resources/ last access: 15 July 2013

CIA World Factbook: Madagascar. 10 July 2013. URL: https://www.cia.gov/library/publications/the-world-factbook/geos/ma.html last access: 15 July 2013

Madagascar Investment Climate Statement 2013 Openness To, and Restrictions Upon, Foreign Investment. In: US Mission to Madagascar. URL: http://www.antananarivo.usembassy.gov/root/english/business/investing-in-madagascar.html last access: 15 July 2013

Southern African Development Community: Madagascar. URL: http://www.sadc.int/member-states/madagascar/ last access: 15 July 2013

The Africa Competitiveness Report 2013. In: World Economic Forum. URL:  http://www.weforum.org/reports/africa-competitiveness-report-2013 last access: 15 July 2013

The Agreement on Textiles and Clothing. In: World Trade Organisation Textiles Monitoring Body. URL: http://www.wto.org/english/tratop_e/texti_e/texintro_e.htm last access: 15 July 2013

World Economic Forum. URL: http://www.weforum.org/ last access: 15 July 2013

News References

Haider, Mahtab: Defying predictions, Bangladesh’s garment factories thrive. In: Christian Science Monitor. 7 Feb 2006. URL: http://www.csmonitor.com/2006/0207/p04s02-wosc.html last access: 15 July 2013

Hersman, Erik: From Kenya to Madagascar: The African tech-hub boom. In: BBC News. 19 July 2012. URL:  http://www.bbc.co.uk/news/business-18878585, last access: 15 July 2013

Iloniaina, Alain: Madagascar postpones presidential election again. 6 Jun 2013. URL: http://uk.reuters.com/article/2013/06/06/uk-madagascar-election-idUKBRE9550P520130606 last access: July 15th 2013

In Madagascar, Natural Resource Management is a Community Affair. In: World Bank News. 1 May 2013. URL: http://www.worldbank.org/en/news/feature/2013/05/01/in-madagascar-natural-resource-management-is-a-community-affair last access: 15 July 2013

Madagascar Aims for Major Investment in Wind Energy. In: Reve Wind Energy and Electric Vehicle Review. 24 Feb 2012. URL: http://www.evwind.es/2012/02/24/madagascar-aims-for-major-investment-in-wind-energy/16820 last access: 15 July 2013

Malone, Barry: African Union warns Madagascar opposition leader. In: Reuters. Feb 1 2009. URL: http://uk.reuters.com/article/2009/02/01/madagascar-protests-idUKL104503420090201 last access: July 15th 2013

Mining in Africa: Opportunities and Challenges. In: Frontier Market Network. 30 Jan 2013 http://www.frontiermarketnetwork.com/article/1354-mining-in-africa-opportunities-and-challenges (requires membership) last access:15 July 2013

Razafison, Rivonala: Experts question Madagascar’s bid to tap wind energy. In: Sci Dev Net. 21 Feb 2012. URL: http://www.scidev.net/america-latina/not-found.html last access: 15 July 2013

Tendi, Blessing-Miles: Madagascar referendum could deepen political crisis. In: The Guardian. 18 Nov 2012. URL: http://www.guardian.co.uk/commentisfree/2010/nov/17/madagascar-referendum-political-crisis last access: 15 July 2013

US $1 Million SEFA Grant to Provide Reliable Energy Services in Madagascar In: African Development Bank Group News & Events. 6 Feb 2013. URL: http://www.afdb.org/en/news-and-events/article/us-1-million-sefa-grant-to-provide-reliable-energy-services-in-madagascar-10269/ last access: 15 July 2013

Appendix B: Contact Details of Relevant Bodies

AfriLabs Malagasy i-Hub

Website: http://www.i-hub.mg/

Economic Development Board of Madagascar

Tel: (+261) 2022 67040

Fax: (+261) 2022 66105

Website : www.edbm.gov.mg

Email : edbm@edbm.mg

Madagascar SADC National Focal Point

Tel: (+ 261) 34 66 635 44

Fax: (+261) 20 2234484

Website: http://www.sadc.int/