Toward an Inclusive Recovery in Madagascar

On Tuesday, March 18, President Hery Rajaonarimampianina, the newly elected leader of Madagascar, will be in Washington, D.C. to meet with senior officials from the Obama administration as well as the heads of the International Monetary Fund and the World Bank.  The president’s visit should be the prelude to the end of a four-year period of economic sanctions during which the donor community froze all but emergency assistance to the aid-dependent Malagasy economy.  From a diplomatic standpoint, the mere fact that these meetings are taking place is a significant achievement for the new authorities. However, it is safe to assume that the president’s plan to launch the Malagasy economy onto a sustainable growth trajectory and the role of the international community in helping achieve this objective will certainly be high on the agenda. 

President Rajaonarimampianina is facing daunting challenges in his new role, starting with a very toxic political environment. A lot of resentment remains from the successive political crises, and progress towards a national reconciliation is uneven.  The Malagasy political system has been described as dysfunctional and the current status quo is a very unstable equilibrium that could unravel at any time.  While playing a balancing act, the new president will need to both challenge and resist the temptation of the “winner-takes-all-and-keeps-all” political mentality that is prevalent in Madagascar.  In this type of environment, support from the international community will be crucial for the president to govern and formulate a plan for economic recovery. 

Assuming that the president manages to put the political house in order (which we hope he will), Madagascar seems poised to stage a strong recovery.  The country has already demonstrated the potential to attain a high growth path many times before (at least in the short term). The main challenge for Malagasy policymakers and their development partners is to ensure that the economy not only reaches a cruising altitude but remains on that high growth path for a sustained period of time.  There may be many recipes for this goal but the key ingredient remains the same: jobs.  A jobless recovery will not yield a prosperity that is widely shared among Malagasy citizens.  People need (well-paid and secure) jobs as their ladder to climb out of poverty. And as long as growth is not inclusive, the chances of a repeat of the “Madagascar cycle” of political and economic booms and busts remain high.

Removing economic sanctions would go a long way towards attaining a high growth path.  But perhaps more important would be the resumption of foreign investment, especially foreign direct investment (FDI).  Investors are eager to come back to the country—there are a lot of profits to be made, but these investors need strong signals from Madagascar’s leaders: They are looking for political stability, rule of law, transparency and better governance.  President Rajaonarimampianina needs to show resolve and leadership in all of those areas. 

While FDI can lead to higher growth, they may or may not create jobs at the scale needed in Madagascar—a scale that would make growth more inclusive and sustainable.  The bulk of FDI that has been coming to Madagascar in the recent past were in the extractive industry (especially mining) sector, which is, in general, capital (as opposed to labor) intensive and, unfortunately, has limited potential for substantial job creation. The jobs that are created are often highly specialized, skilled ones for which not enough Malagasy citizens are qualified.  This skills gap suggests the need to train more Malagasy technicians to take advantage of these job opportunities. Integrating more local small and medium enterprises in the value chain of foreign firms investing in Madagascar would also help create jobs.

Before the crisis, a large amount of FDI came to Madagascar’s export-processing zones in order to take advantage of the preferential access to the American market under the African Growth and Opportunity Act (AGOA).  These investments tended to be in labor-intensive manufacturing sectors (especially in textiles and garments) and generated a lot of good quality jobs, as many as 200,000 of which were unfortunately lost due to Madagascar’s suspension from AGOA.  The process of reversing this suspension will surely be brought up during President Rajaonarimampianina’s meeting with U.S. policymakers.  Now is a good time to welcome Madagascar back into the AGOA fold.  At a stroke of the pen, U.S. policymakers can significantly help improve the prospects for a sustainable and inclusive recovery in Madagascar.

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