Madagascar - Beyond stabilization to sustainable growth

! 1 ' (',i 'M d ' Report No. 9101-MAG Madagascar Beyond Stabilization to Sustainable Growth June 1991 Country Operations Division South Central and Indian Ocean Department Africa Region FOR OFFICIAL USE ONLY U Dlocument of the World Bank This document has a restricted distribution and may be used by recipients only in the perforrffance of their official duties. Its contents may not otherwise be disclosed without World Ranik authorization.  CURRENCY EQUIVALENTS Currency Unit: Malagasy Franc (FMG) Average Exchange Rates (FMG/$) 1/ FMG/FF 1975: 214 50 1980: 272 50 1985: 622 74 1986: 676 98 1987: 1,069 177 1988: 1,407 236 1989: 1,603 251 1990: 1,494 274 May 1991: 1,880 313 Fiscal Year: January 1 - December 31 Metric system ACRONYMS AND ABBREVIATIONS ADB/ADF African Development Bank/African Development Fund ANP National Popular Assembly ASAC Agricultural Sector Adjustment Credit BCRDM Central Bank of the Democratic Republic of Madagascar Co Consultative Group DOP General Planning Directorate EDF Europe.n Development Fund EIB European Investment Bank EMSAP Economic Management and Social Action Project EPI Expanded Program on Immunization ESAF Enhanced Structural Adjustment Facility FNDE National Economic Development Fund FNUP State Stabilization Fund ICOR Incremental Capital Output Ratio IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund ISAC Industrial Adjustment Credit ITPAC Industrial and Trade Policy Adjustment Credit JIRAMA National Electricit,y Company MINAGRI Ministry of Agriculture MINESEB Ministry of Basic and Secondary Education MINESUP Ministry of Higher Education MINFIN Ministry of Finance MINEP Ministry of Economy and Planning MOH Ministry of Health MTP Ministry of Public Works MTMT Ministry of Transport, Meteorology and Tourism NGO Non-Governmental Organization NTP National Transport Plan OGL Open General License PEP Public Expenditure Program PER Public Expenditure Review PFP Policy Framework Paper PHC Primary Health Care PIP Public Investment Program PPI Small Irrigation Perimeters Project PSAC Public Sector Adjustment Credit RNCFM Madagascar Railway SAF Structural Adjustment Facility SEPT Port of Tamatave SOLIMA National Petroleum Company UNDP United Nations Development Proaramme WHO World Health Organization rhroughout this report, $ denotes U.S. dollars.  PA I OF 3 Mid-1989 kPaqatimn Cilts.) 11.3 196 Par Capita P fn Ms: 20 A. 3ras of Gross Omatl pwnj, U. Growt latuCi per en.) (fen current prfee data) wfer cmatmt price Cbts) l1 193 00 19 U 1989 1990 100Io 5-731973801004 198G 90 1990 Gross 0satf c PrctAt M.P. 100.0 100.0 100.0 100.0 100.0 100.0 3.6 1.2 1.1 4.1 3.S Not IvdIrect Tomn 9.6 10.8 11.2 11.3 10.3 . . . Agricult"w 23 .9 26.7 29.7 30.3 29.2 .. 0. 2.4, 5.2 1.6 InCdAtrY 16.0 14.3 11.7 11.5 11.6 .. 1.6 1.2 1.2 6.2 SWArCs, .. 49.3 47.8 47.3 47.9 II.1. 0.3 4.1 4.1 Rssgace Salaice 46.8 .4.6 -16.4 -6.7 -4.5 -.?. . . Ev~art& of GNFS 13.2 14.2 13.3 16.3 15.2 15.3 -1.4 1.9 1.3 28.0 0.7 IMorts of SF5S 20.0 18.9 29.7 23.0 22.7 24.0 0.6 2.7 -3.9 0.9 20.0 Total EVuiditurr 106.8 104.6 116.4 106.7 104J 108.7 3.4 1.5 -0.2 0.2 7. Totat Casumptian 100.3 95.5 101.4 93.4 90.9 91.8 3.3 1.3 -O.? *0.4 4.4 Private cowaptlcn 84.3 83.3 89.3 85.2 82. a3.2 3.3 1.1 -0.9 -1.4 4.9 Osurarlt Govwuilrt 16.0 12.2 12.1 6.1 8.9 6.6 3.3 4.3 0.9 9.0 0.4 Gross COntf Invessen 6.5 9.1 15.0 13.3 13.5 16.9 4.2 3.2 4.8 4.8 25.8 Fixed IuwAsson .. .4 14.4 . . . . . Owamss in Stocks .. 0.7 0.6 . . . . . Gross Omatic Savisg -0.3 4.5 -1.4 6.6 9.1 8.2 .. . . 34.4 -13.4 Net Factor 1o -3.3 -1.8 -1.1 -7.0 -7.6 -5.2 . . Not Current Treufas 0.0 -1.4 -0.5 1.5 1.9 2.2 . . Gross MatfosuL Swisr -3.6 1.3 -3.1 1.2 3.3 5.1 .. . . 79.6 39.1 in bitLlie of LCUS 1988 1973 1000 19O 1909 199 (at acontent 196 prices) ... .. ... .. ... .. Grcss Oasmtic Proiat 288 2619 289' 2836 295 3056 3.6 1.2 1.1 4.1 3.5 Capaity to IMport 6"O 74 516 406 44 442 1.4 -4.7 0.4 14.3 -4.7 Turn of Trade Adjusit 1 149 275 -43 -6 -M -89 . . Grass Dosutic Ioam 25 8' 85 89 20 .9 -0.3 1.0 2.1 2.7 Gross Matfamt Prod.t 2015 2569 2843 266 2726 289 3.7 1.3 0.5 3.0 6.3 Grasw Mactiat mnmu 21646 = 2814 2660 2663 2509 4.0 -0.1 0.4 0.9 5.5 ...(1987...CI a 100) ........ ....inftatfian Rates(% p.a.).---- C. Price Irdices 1980 1985 106 1008 W98 1990 1965-73 1973-80 1980-90 1989 1990 Caisima Pricem CIFS 64) 30.5 76.0 87.0 126.8 136.3 154.6 3.4 9.0 17.1 9.0 11.6 UioL.sate Prices CIFS 63) . . .. .. . ImpLicit GDP Doft (tar 29.5 71.2 81.- 121.2 134.3 151.4 4. 10.0 17.1 10.8 1z.8 IRAlici t Exup.Witis Deft. 28.5 69.2 786 122.4 137.9 156.3 4.0 11.3 17.8 12.7 13.3 0. Other lIndieatoss: 1965.73 19m-00l 1a0.9 Growth Rates(X P.s.):2. 27 29 Population23 . 29 I.*ar Force 2.0 2.2 2.0 Gross Matt. bnarn, p.c. 1.7 -2.8 -2.5 Private CnsAwPtfiOn P.C. 1.0 -1.5 *3.7 Impots (GAFO! / G6PCsp) 0.2 2.3 -3.5 Insrift Savfrs ftte: Gross Matoi uvSwrg 19.4 -1IW.6 -274.9 Gras OmstiC Saving 22.6 1555.6 W5.5 [M (pa-:cd MWmgi)3 Share of Totat 1IN5 1973 1989 1990 Labor Force fni... ..... .. AFricuLture 85.1 82.8 L. indatry 4.3 5.2 6.0 Services 10.5 12.0 13.2 Total, 100.0 100.0 100.0 100.0 100 [EC 06/19 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ~~~~~-m NAGASCM - ECOIWIC INDICATORS ................................ PACE 2 OF 3 .-*-.......,-_. --.-.-.--.... -... ...... ... .... .. .... _. ....... .......... ....................................................... Volws I1dx Value st Curnt Prices (miltions US) ~~~~~~~~~~....................... ............................... ........................ .. E. Nehuwdwls Exqpots 1980 195 1987 1988 1989 1990 1980 19 1967 19e8 1989 19BD _............................... ....... ........ . _._..... ........ ......... ....... ....... ....... ..... ._. .... ..... ............ ......................._ Coffee 134.2 66.3 100.0 91.0 129.7 119.3 214 104 98 76 76 42 Clow 61.7 163.1 100.0 181.5 544.5 352.8 S1 36 10 16 32 20 Vanills 35.5 54.5 100.0 49.8 51.6 67.9 19 44 80 45 42 5T Other .. .. .. .. .. .. 153 98 122 143 169 183 Total Eports FOB 85.5 90.1 100.0 89.7 120.2 114.8 437 282 310 2e0 319 302 F. Nwrdwmse Impot . ... .. . ................. . .. Food 95.8 115.1 100.0 31.4 76.1 86.6 89 50 49 17 39 40 Fuet mnd eergy 78.1 105.6 100.0 131.7 101.8 135.4 159 85 S5 66 51 91 Oth. con mumr good 215.1 114.0 100.0 95.7 106.0 145.1 104 52 59 60 65 98 other intert gsod 315.5 98.7 100.0 80.8 76.0 100.7 254 109 114 9B 91 132 Capital goods 219.3 128.5 100.0 123.9 120.8 160.5 333 99 105 138 135 195 Total Irports CIF 257.1 109.0 100.0 96.1 96.9 127.5 939 395 382 379 381 556 G. Nerhudlse Teros of Trade 1980 1955 1967 1988 1989 1990 Nedi. Exports Price Index 164.3 100.6 100.0 95.8 81.4 80.9 Mamch. Id>port Price Index 60.9 94.9 100.0 103.5 103.2 114.5 Merch. Trm of Tradr 269.9 106.1 100.0 92.6 78.9 70.7 USS mllita (at aurrnt priee): .................. .................................. H. BUamar of Paits 1980 1985 1987 1988 1989 1990 .................. .... .... ... ... .... ... Eos of CGodc & NFS 515 350 406 398 451 471 Nechdw es (FOB) 436 291 310 200 319 302 NonFactor Sercs 79 59 96 118 132 169 lports of Good & NFS 1109 503 541 561 560 742 Nerdiaf # CF)B) 764 336 315 312 314 458 Nn-Factor Srvces 345 167 226 249 246 284 Resuse Bale -594 -153 -135 -163 -109 -271 Net Factor Inr -44 -129 -175 -169 -189 -159 (Interat per DRS) 57 72 118 90 128 129 Net current Traufers 4 24 55 69 81 68 (workers resAttances) 0 5 3 3 3 Curr A/C Bet Before Off. Grats -3U -258 -255 -263 -217 -362 mlet Official Trmfers 77 74 102 136 129 170 COwr A/C Bat After Off. Grants -557 -184 -153 -127 -88 -192 La-Tem Capital Inflow 375 150 241 209 179 101 Direct Inestment .. .. 6 22 Net LT Loom (DRS data) 345 125 246 157 101 79 Odw LT Inflow CNet) 30 26 -5 52 72 0 Total Other Item (Crt) S 9 -45 -11 -55 -47 Net Short Ter Capital 398 -1 -47 -42 -61 .. Cap'tal Floes N.E.I. 0 0 0 0 0 0 Erro..s adG NWo as -73 10 2 31 6 aile In Net R_mervs -143 24 -43 -71 -36 138 Not Crdlt fra thr IW 4a 13 39 -41 -28 -27 Ohr Raseiws aChe -185 10 -82 -30 -8 165 As Shere of CDP: Resourc Balane -14.7 -5.4 -5.3 -6.7 -4.4 -8.8 Intest Pa)mts 1.4 2.5 4.6 3.7 5.2 4.2 Cwrent Accomt Blane -15.7 -9.0 -9.9 -10.8 -8.8 -11.7 Nom AIt_es: Reservs axct. Gold (Ol. USS) 9 48 185 224 245 74 Reseslnctl. Gold (mll. US) 9 48 185 224 245 74 Official X-Rate (CLUS S) 211.28 662.48 1069.21 1407.11 1603.44 1494.15 Index Reel Eff. X-R Oe 1980 100.00 92.08 59.20 51.26 49.03 51.78 (P (.l 11am of currnt USO 4042 2857 25M6 2442 2472 3085 IEC 06/3/91  - MMMAASCAR - ECiM1C INDICATOR PAGE 3 OF 3 .................... ............................................... ............................. ae o P UP tX) Groh Rates Gwaninkt Firmioe 19J0 1986 1907 1908 1909 1990 1980-86 1907 1908 1909 1990 Curr nt R eeIpts 15.1 12.7 15.3 13.8 13.0 13.3 16.6 50.0 12.6 9.1 18.8 OCrrent Expuidtlus 16.6 10.8 11.7 10.4 10.1 9.1 10.1 35.3 9.1 13.9 4.9 Orrent 6udqt Eltnce *1.6 1.9 3.6 3.4 2.9 4.2 .. .. Capitat Recipts 0.0 0.9 1.4 2.0 2.7 2.9 80.4 82.0 57.7 25.1 Capital Eafnditures 11.3 6.4 8.4 8.9 9.8 7.9 8.i 63.3 33.4 26.8 -5.9 Croall ODfiect -12.8 -3.5 -3.4 -3.5 -4.2 -0.9 .. .. Officfl Capital Grants 0.0 0.9 1.4 2.0 2.7 2.9 .. 80.4 82.0 57.7 25.1 Extewml Borrcwifr (net) 5.6 2.3 3.6 3.9 4.7 2.1 .. .. Doqtic Mc*aB* Borrodliw 0.1 0.2 0.3 0.2 0.3 0.0 . 114.3 1.3 31.6 -90.0 DoSstic Bau* Firimci, 9.2 o.a -0.4 -0.6 -0.7 *1.2 -20.9 .. Net Disbrexmnts (USS sdlltfon) Debt Outstardirg & Disbirod CUSS mltions) J. Extern l Capital Flow. Debt nd Debt Burdn Ratios 1900 1... 197 1908 1909 1990 1900 1985 1987 19t8 1989 1990 ..................... .... .............. ......... .............. ......... Pthlic & Ptbticly Guar. LT 345 125 246 157 101 79 926 2161 3308 3290 3345 3490 Official Creditors 214 131 257 167 117 100 519 17f 2902 2945 3044 3235 fultilateraL 46 71 159 121 92 76 187 478 851 931 1023 1266 of which 1RD I -1 -2 2 -3 -3 30 28 36 30 27 26 oft hih IDA 25 57 91 79 7D 61 122 316 550 607 670 804 Blateral 168 59 98 46 25 25 392 1318 2051 2014 2021 1969 Private Craditors 131 *6 -12 -10 -16 -22 347 365 406 345 300 255 -pliers 72 14 1 -4 -6 -5 180 120 121 108 90 81 Finr fial Markets 59 -20 -13 -6 -10 -17 167 245 285 237 211 174 Private Mon-prsnteed 0 0 0 0 0 0 0 0 0 0 0 0 Total LT 345 125 246 157 101 79 926 2161 3308 3290 3345 3490 IMF Credit 68 -7 3 -36 -20 -49 87 184 238 190 165 144 Not Short-Ten Capitat 398 -1 -47 *42 -61 .. 244 115 182 158 97 250 Total fnct. IMf L Net ST 811 117 2D1 79 21 .. 1257 2460 3728 3638 3607 3804 B'k and IDA Ratios 1980 1905 1907 1908 1909 1990 ............ ....................... .. ........... . .... .... ---- . ---- ..... .... Share of Total Larn-Tem DOD 1. IND as of Total 3.22 1.29 1.07 0.92 0.82 0.72 2. ID as X of Total 13.17 14.61 16.0 18.44 20.03 21.91 3. IRD+IDA as X of Total 16.38 15.89 17.70 19.36 20.85 22.63 Shre of LT Debt Service 1. 18 X sof Total 4.87 3.36 2.66 3.04 2.62 2.69 2. IDA as X of Total 1.91 3.16 4.03 4.63 4.07 4.21 3. I8RD9tDA es X of Total 6.78 6.52 6.69 7.67 6.69 6.90 DOD-to-Exports Ratios ..................... 1. Lau-Term Debt/Emxrts 178.49 602.20 760.21 784.28 723.05 755.43 2. IMF Credit/Exports 16.77 51.33 54.19 45.37 35.74 29.57 3. Short-Ten Debt/Exports 47.06 32.08 41.83 37.60 20.97 51.47 4. LT+IMPST OD/Exports 242.31 615.61 856.83 867.25 779.76 836.46 DOD-to-DP Ratios . ........... 1. LaU-Twu Debt/GDP 22.91 74.69 127.70 131.52 131.75 118.48 2. INF Credit/UGP 2.15 6.37 9.20 7.61 6.51 4.64 3. Short-Ten DObt/UDP 6.04 3.98 7.03 6.31 3.82 8.07 4. LT*IMF+ST DOO/DP 31.10 85.03 143.93 145.43 142.09 131.19 Debt Service /Exports ...... ....... . .. 1. PUAife A Bweateod LT 11.08 27.34 33.67 34.52 37.18 39.10 2. Private Man-gureteed LT 03.00 0.00 0.00 0.00 0.00 0.00 3. Total Long-Tem Debt Servic 11.08 27.34 33.67 34.52 37.18 39.10 4. IMF RqiurdtaaawSev. Chgs. 0.66 13.54 12.46 14.04 14.03 12.48 5. Interest only on ST Debt 5.49 1.90 0.80 0.29 0.76 0.23 6. Totol CLT+IfMFT Int.) 17.23 42.86 46.93 48.85 51.97 51.80 IEC 06/3/91  PREFACE The previo Worid Bank economic repcrt on Madagascar was issued in March 1988. This Coontry Economic Memaoandum reviews policy developmwft and economic results since 1985, develops a macroeconomic scenario through the year 2000, and formulates poicy recommendations for the 19908 and beyond. It Is based on Bank missions In November 1989, and In Marni and July 1990. The report was discussed with the Government hi April 1991. Statistics are from direct Government sources and estimates by Bank staff. The report has been written by Ssivk ure Schiavo.(ampo (mission leader), with major contributions by Benoit Blarel (agriculture), Paul Blay (education), Bengt Bostrom (transport). Edmond de Gaifflier (health and population), Louis de Merode (civil service), Orville Grimes (urban sector), QaLser Khan (food security), PhDippe Le Houerou (external sector; money, credit and price; telecommunications); Govindan Nair (financiai Intermediation); Saeed Ordoubadi (information; environment; macroeconomic framework; Informal sector); and Viay Souiatha (national accounts). The following also contributed to the analysis and to the formulation of the conclusions, either during the mission or in the course of preparing the report: Jose Bronfman, Pierre Demangel, Pisel Eap, Friedrich Peloechek, Kenneth Sigrist; Mohammed Gharbi of the African Development Bank; and consultant Helen Updike. Donald B. Keesing was the extermal advisor. Ginette Francois processed the various drafts and designed the layouL  TABLE OF CONTNTS Executive Summarv I Mahgasy Economy and Socity A. The overall approach ............ ................................. 2 B. Economy and society .............................. 3 1. The economy ............ .................................. 3 2. A historical perspective ....................................... 3 3. The society . ................................................ 4 2 Adjustment Polbies ano Reslts in the iges A. The overall adjustment effort and results ............................... 7 1. 1984: A bird's eye view ..................................., 7 2. 1985-89: The policies ........................................ 7 3. 1985-89: The results ......................................... 9 B. The external sector ............ .................................. 16 1. From stabilization to adjustment ................................. 16 2. Merchandise trade ..................................8........ i 3. Services, transfers, and the current account .......... .............. 23 4. Capital account and the overall balance ............. .............. 24 5. Exteral debt ........... ........................ 24 C. The public sector ................................... 27 1. Public finance ............ ....................... 27 2. Public enterprises . ................................... 34 D. Money, credit and prces ................................... 36 1. Developments In money and dk . .............................. 36 2. Structural reforms . ................................... 38 3. Prices ............... ........................... 39 E. Developments in 190 ..41 F. Looking ahead ..43 3 Enablig Growth: lhe Key Factors A. Redefining the role of the state ............................ 48 B. Improving incentives ..................... ........................ 47 1. Exchange rate and macromanagement ............................ 47 2. Fiscal distortions and incentives ................................. 47 3. The regulatory environment .................................... 48 C. Reducing economic distance ..50 1. The development of markets .50 2. Transport. 51 3. Telecommunications .53 4. Information .55 D. Mobilizing domestic savings ...................8..................... S 1. Public saving ............ .................................. 58 2. Private saving and financial intermediation ......................... 58 E. Stengthening institutional capacity , ........................... . 61 1. Technical assistance ......................................... 61 2. The civil service ............................................ 62 F. The need for a long-term perspective ................................. es  4 Sutat*i Mwh: II* Lag4rrm Co_en A. Population ..................................................... 69 1. Demographi characterstics ................................... 69 2. Population prjections ........................................ 69 3. Population policy ............................................ 70 4. Issues and recommendations ........ ........................... 71 B. Human resource development .... . . ......... 74 1. Health . .................................................. 74 2. Education ............................... 79 3. Food security and nutrition ................................ 85 C. The environment ............... ............... 91 1. Issues and concerns .......... .................... 91 2. Policies and perspeives ................................ 93 D. Decentralization and thf regional dimension .............. 95 1. Decentralization: Theory and reaity .............................. 95 2. Regional comparative advantage ............................... 97 5 A policy agenda for the 1iG0O A. A perspective for the year 2000 ........ .............................. 99 1. The prospects ............ .................................. 99 2. Beyond 2000 ............ .................................. 104 B. The policies .16.................................................... 1. A recapitulation ............ ................................. 106 2. A closing word ............... io ENDNOMES .............................. ...... ...1.1 ANNEXES 1. The Rural Sector . ...116 II. The Urban Sector ............................... ...................... . 127 111. The Informal Sector ............................ . 136 IV. Guidelines for public Administration ............................ 143 SelctJe Apoed Seiected Bibikoomnh CounW zn  TEXT TABlES 2.1 Key policy developments, 1985-90 ................................... ......... 2.2 Selected economic indicators, 1965-90 .12 2.3 Summary balance of payments, 1980 and 1985-90 .20 2.4 Exports and Imports by major categcry, 1980 and 1985.90 .21 2.5 External debt by type of creditora, 1975, 1980, 1985-90 .25 2.6 Govemment revenue and expenditure, 1980 and 1985-90 .28 2.7 Monetary survey, 1980 and 1985-90 .38 2.8 Consumer price developments, 1980 and 1965-90 .40 3.1 Public sector pay and employment policy: Three cases .............................. 85 4.1 Population by age group, 19852025 .71 4.2 Food Insecurity, 1989 and 2000 .8 4.3 Economic characteristics of main regIons, 1989. 97 5.1 Selected Indicators of economic performance, 1991-93, 1994-2000 .100 5.2 Projected oalance of payments and financing requirements .102 5.3 Adjustment, and extemal dependence, main scenario, 1985, 1989. 2000 .103 5.4 Central govemment operations, 1990-92, 1993-2000 .103 5.5 Major policy recommendatons. 108 TEXT FIGURES 1. GDP and private consumption per capita, 1960-88 .13 2. Composition of final demand, 1960-89 .14 3. Saving and Investment, 1960-89 .15 4. Real and nominal exchange rates, 1982-89 .17 5. Imports of consumer and producer goods, 197589 .22 6. Traditional and nontraditional exports, 1975-89 .22 7. Extemal debt outstanding, 1978, 1980, 989 .26 8. Broad fiscal trends, 1975-88 .29 9. Public investment program by source of foreign financing, 1989-91 ..... .............. 30 10. Structure of public expenditure, 1989 ......................................... . 33 11. Agricultural production and prices, 1973-1989. 120  Exflutime SmLary The bst five years 1. As described In the previous Country Economic Memorandum, (Report No. 5996, March 1986), In 1985 Madagascar was still grappling with the tasks of external and domestic financlal stabilizatlon. It had just come out of the economic crisis of the early 1 980s, the fiscal deficit and the Inflatlon rate--although st.1l high--had been reduced to more manageable levels; the sharp economic deterloration of 1981-82 had been arrested, and some growth had resumoed. However, GDP growth was at a sluggish pace of around one percent, which entailed continuing declines In per capita Income for the already very poor population, and the economy was starved for producer goods. Tha kejy policy concerns at that time were large currency overvaluatlon, widaspread price, Imports and forelgn exchange controls, a large and inefficlent parastatal sector and state-owned banking system, and pervasive government Interference In virtually all aspects of economic life. Except for some Increases In administered producer Prices In 1983 and 1984, particularly for paddy and traditional export crops, adjustment on the supply side was still a thing of the future. II. By contrast to 1985, a snapshot of the situation In 1990 shows a competitive exchange rate, after the large cumulative devaluations of the Intervening years; aln automatic system of allocatlon of foreign exchange for Imports; the ellmination of Import quotas; the simplificatlon of the structure of tariffs; the aboliltion of most export taxes, of all administrative export restrictlons and of all but one of the state export monopolies; a free-trade-zone regkme and a llberal new Investment code; the virtual disappearance of state controls on both producer and consumer prices as well as on profit margins; a drastic reduction of the drain of pubilc resources Into inefficient parastatals; an open banking system; and substantlal Improvements In the efficiency of public expenditure, with a significant reallocatlon toward basic social services. (The key measures implemented In 1985-90 are llsted In I-able 2.1 of the report.) Ill. The economic results since 1987 have begun to valldate thesa years cf sustained policy effort. On the economic growth front, In 1988, for the fIrst time In a decade, GDP grew faster than populatlon; per capita growth continued In 1989 and 1990 and Is expected to remain positive In the coming years; some genuine export diversification began In 1989, with garments, shellfish, and tourism the leading products; producer goods Imports have begun to recoup some of the heavy losses of the 1 980s; and private Investment Is picking up rapidly, Including In the lively Informal sector. On the stabilization front, the decade of the 1980s showed the following developments. Partly as a result of the decrease In; .ation to an annual rate of about 10% (compared to Its peak of 30% In 1982), the external current account deficit (including transfers) dropped to just 4% of GDP In 1989 (from 14% In 1980); total government expenditure was contained to 19% of GDP (from 36% In 1980); and the fiscal deficit shrunk to 4% of GDP (from Its peak of 1 8% In 1981). All of these Indicators compare favorably with sub-Saharan Africa and other low-Income countries. Furthermore, the structure of financing Improved, owing to the replacement of commercial borrowing with aid loans at highly concesslonal terms. Helped by the rise In current budgetary savings, external ald has enabled the government to reduce Its stock of domestic debt by some 10% per year. Iv. In 1990, although the real sector continued to do well, wlth non-agricultural growth accelerating to 4.3% and export diversificatlon continulng, these achievements were put at rlsk by a foreign exchange liquidity crisis associated with a combination of events. The external environment for coffee, cloves and vanilla deteriorated further and these traditlonal exports continued their decline. A large and uncontrolled expansion of private sector borrowing to finance Imports (entirely through the BTM, the remalning fully state-owned bank) produced hlgher Inflation, which In turn fueled devaluation expectations and ratcheted up short-term Import demand. Total Imports In 1990 rose by an unsustainable 37%. These events coincided with a substantial shortfall In balance-of-payments support, llnked with the delays and difficulties of  ii Implementing certaln agrb 'd policy reforms supported by the donors. Overall, the result was a dramatic decline In reserves to a dangerously low level by the year end. Those developments could have been prevented If the government had monitored closely reserve, Inflation, and credit developments with a vlew to taking timely corrective action. Instead, day-to-day financlal management was lax and complacent, and no actlon was taken until late in the year, when Government was forced by the aceolerating draln In reserves to severely restrict domestic credit to all sectors. On the exchange rate front, an Initial adjustment of 3% In October proved too llttle, too late, and It wasn't until January that major corrective actVon was taken, with a 1 3% devaluatlon which more than reversed the loas In competitiveness suffered since mid-1989. v. Based on Indications for the first months of 1991, the financlal crisis of 1990 appears to have been weathered without lasting adverse repercusslons for the adjustment and growth process. Taken together, developments over the two-year period 1990-91 should correspond fairly closely to what had been envisaged. However, there are Important lessons In the 1990 episode. Not learning, and applying, those lessons may well lead the next time around to lasting and severe economic damage. These lessons are not novel In developing countries' experlence, but have been confirmed with special clarity In Madagascar In 1990. vI. First, durable economlc liberalization requires a comfortable reserve cushion. In the absence of Its substantlal end-1989 reserves, the government might have been forced to backtrack on key Import and foreign exchange allocation policies. This Indeed would have compromised confidence and Jeopard;zed longer-term growth prospects. Second, one cannot clean up a system (whether banking, c!vii service payrolls, or others) wlthout putt-ng In place at tha same time the Institutional and administrative safeguards that will prevent a reoccurrence of the problem, In a short ten months, the BTM "hole" put at rlsk the banking system rehabilitation that had been accomplished over the previous three years. Third, the private sector Is fully capable of reading economic statistics and drawing the correct Implications. The rlse In Inflation led to a speculative wave of Imports, which could have been prevented by timely exchange rate adjustments. When the adjustment belatedly came, It was of necessity larger than might have been necessary wlth a proactive rather than reactive pollcy. Fourth, without close and efficient day-to-day financial management, even the soundest economic policy framework and growth process are In chronic jeopardy. Flnally, prudent credit policy Is the principal effective brake In an expanding system, and entails lower economic cost than other pollcy Instruments. vil. On balance, despite delays In pollcy Implementation In some areas, the Malagasy pollcy effort over the past five years has been large and sustained, and the results are encouraging. But the damage of protracted economic decline will take years to remedy, the diversificatlon of the productive base and of exports needs to be acceleraged, and the genulne development potential of the country Is yet to be exploited. Long ahad vill. The liberalization at the center needs to be complemented by facilitating the expansion of rural commerce, through the active promotlon of competitlon and Infrastructural Improvements. In Industry and commerce, the task of state disengagement from directly productive activltles Is far from complete. In the financlal sector, the open iing and fInancial rehabilitatlon of the banking system accomplished In 1988 and 1989 have been jeopardized by the re-emergence of serlous problems In the BTM bank, which must be resolved; also, these reforms should be followed by effective Improvements In banking competitlon and In the efficency of financlal Intermediation, Including non-bank institutlons (for example, Insurance companies). In pubilc finance, progress In the monitoring and execution of expenditure programs  - Ili - has been slow and wlthout It the substantial hprovnemat In the programming ot expenditure will accomplish little. Accelerating the move to an Improved budgetary system Is therefore essential. In the external sector, It Is Important foi the government to assour maintenance of the competitive exchunge rate, by actively proven ting any real appreclation. In turn, this requires prudent credit pollcy to contaln Inflation to single dlgit levels. The burden of external debt, although substantlally alleviated by recent cancellatlons by France and other donors, will continue to be very heavy; additlonal debt r"'llef and write-offs will be needed to permanently improve the structure of the balance of payments. Moreover, export dIverseIfcatlon, which Is the koy to long-term sustainabUlity, requires among other things greater and easelr access to foreign exchange for Malagasy producers as well as an Inflow of private forelgn Investment, with Its attendant advantages In terms of marketing contacts and transfer of know-how. Without liberail:ation of business--related service payments, a stable and predictable economic climate, a streamlining of the regulatory framework and a systematic effort to attract foreign private Investment, scarce foreign investment funds will not materialize In large amounts &nd cxport diversification may be halted in Its tracks. Ix. In general, the key objective Is to keea Un the Momentum and the direotin of reform. This should be made possible by the broad popular consensus currently existing In favor of the adjustment program. However, this broad support Is unlikely to last unless five conditions are met. First, the growth process must continue - to enlarge the soze of the overall economy and to enable diversification Into new activities. The growth of non-traditional exports Is particularly inportant. Next, It Is urgent to create favorable conditions for private Investment, including forelgn Investment as well as the participation of the Malagasy private sector In the opportunItles opened by liberalization and growth. Third, as a related factor of sustainability, some attention nesds to be pald to consideration3 of reglonal balance within the country. Fourth, It Is knportant to continue the positive evol.tion In systemic accountability, and In the freedom of public expression and of the flow of Information an. dialogue between the Drivate and the public sector. Flnally, It Is crltcal for Madagascar to establish ani enforce uniform. clear, and transparent rules of the game governing public and private economic behavior. x. In the wake of the sharp fiscal contractions of the 19808, government expenditure and fiscal revenue In Madagascar are significantly lower, relativo to GDP, than the average for sub-Saharan Africa or for all low-income developing countries. Yet, the country Is particularly large and diverse. With the large cuts In publ!c expenditure already effected In the 1980s, the private sector and the economy as a whole need not smaller but more efficient govey met More officlent government means a further disengagement from dli actly-productive and conamerclal activities, and a stronger and more effective role In other actIvitles -mainly h the provision of economic and social Infrastructure, such as roads, health care centers, and the like. The success of the adjustment process hI the 1985-90 phase of adjustment has been achleved primarily by eliminating or lessening state Interventlon, policy Impediments, and disincentives to domestic and external trade. The retrenchment of the state, away from unproductive interventions In areas where It did not and does not have a comparative advantage, remains to be completed and must bo pursued. However. In the coming phase cr adjustment, It will be necessary also to focus on the activities that government must perform, and perform well, In order to enable profitable private actIvity and sustained growth. These Include the more efficient performance of the simplest, most basic administ-ative GUA 3" and services. In the absence of this, private sector officlency Is badly hampored and the logitimate authority of the state Is eroded, with advarse repercusslons for long-term soclal objectives, from environmental protectlon to public safety.  - iv - xi. in Madagascar, the first order of business Is to Improve further the structure of private Incentives In the exchange and trade system, the fiscal system, and the regulatory environment. With due regard to the need to strengthen legitimate regulatory functions (for example, In banking), an underbrush of obsolete or harmful restrictlons and distortions remalns to be cleared. Also, over time, It Is important to move from special exceptions regimes such as the Investment Code to generalized Incentives for all. Second, the Malagasy Government has a clear and cortinulng responsibillity to help reduce the costs of transferring goods, services, and Inputs within the country. Transport, communicatlons, and Informatlon have a pervasive and significant infiuence on the efficiency with which markets operate and on their very existence. In turn, unless markets are in place and operative, price signals are not transmitted to the private sector, market-oriented activity does not emerge, Investment Incentives are not created, and broad-based growth cannot be generated. Third, the state has a responsibility to improve over time the officlency of mobilization of domestic resources, through appropriate revenue mechanisms for pubilc savings and through facilltating the development of financial markets for private savings. An Increase In the low saving rate would permit Increased iocal funding of the needed expansion of Investment. Fourth, Malagasy pubilc sector Institutions must become much more effectIvo providers of baslc pubilc services. The severe current Inadequacy of infrastructure and services Is due In part to institutlonal weaknesses. Finally, beyond the broad strategic choices concerning the role of the state, there lies the simple Issue of the day-to-day failings of baslc public administration, from lax enforcement of regulations (e.g., on load linits for trucks) to extreme Inefficiency In the provision of essential documents (e.g., birth certificates). Accountability and openess should Increase throughout the system. xii. This reorientation of the role of the state has Important Implications for public expenditure policy. As noted, foliowing the success of the stabilization program, In 1988 the government began to shift Its focus from reduction to restructuring of expenditure. The general aim of this restructurlng Is to maximizo the complementarity between broader and more efficient provision of public services and the profitability of private Investment and economic activity. Within an approximately constant expenditure envelope In relation to GDP, this calls for restructuring publ;c expenditure toward activities which support rather than replace private economic efforts; toward shifting resources from obsolete functions (such as price control) to essential functions (such as proJect formulation and monitoring); toward Improving the quallty of publlc services across the board, and expanding access to essential social services for the most vulnerable groups; toward reallocating, retralning, and remotivatling the civil service; and toward longer-term concerns and priorities. atast.s haw xill. Most of the themes hlghlighted for the continent as a whole by the World Bank report on long-term perspectives for sub-Saharan Africa (From Crilsis to Sustainable Growth November 1989; hereafter OLTPS") are applicable to Madagascar. However, owing to Madagascar's specific geographic, historical and social characteristics, this report singles out from among the LTPS themes four long-range concerns of speclal relevance to this country: population, human resource development, the environment, and decentralizatlon. xlv. Average gaoulatlon density Is comparatively low In Madagascar. Populatlon growth ought to be a paramount long-term concern. This Is because the pattern of settlement results In localized areas of Intense population pressure. Also, although mobility Is high among certaln groups, generally It Is constralned by geographic and social factors. At the current 3% annual growth rate, Madagascar's populatlon would rise from the current 12 millIon to 20 million by the year 2005 and over 50 mililon by the year 2030. In additlon to eating up most of the gains In production, such an Increase would put heavy strains on the system's capacity to provide basic  .V. social services and, In all probability, would doom Madagascar's already-endangered unique environment. In a significant attitude shift, since 1985 the Covernment has Increasingly recognized the reality of the population-agriculture-onvironment nexus, and a law enacting a National Population Policy has been approved In December 1990. The two key features of the populatlon policy are a target for reducing the rate of fertility (from 6.4 to 3.2 by the year 2010), and the recognition of the right of all to receive nformation on modem contraception and practice It on an entirely voluntary basis. The National Populatlon Pollcy Is Just a beginning. As In all countries, fertility reduction In Madagascar will be a iong-haut task, facilltated by economic growth Itself but heavily constralned by Institutional and resource considerations. Fortunately, the social climate Is generally not hostile to the notion of family planning. This Is, In part, due to the traditionally strong role of women In Malagasy socelty. xv. To be sustainable over the iong term, Madagascar's policies must also give pririty to human resource develonment. The country Is comparatively fortunate In that a fairly extensive network of trained people Is In place. On the other hand, soclal conditions are grlevous and the needs are great. Child mortality rates are high (around 20% of live births); endemic and communicable diseases are prevalent; the basic education system Is crippled by funding and institutional problems; chronic malnutrition affects some 40% of the population; one-third of households are food Insecure, with insufficlent access to achleve a minimum level of food consumption, despite reasonably good overall food availability; the primary health care system Is virtually Inoperative owing mainly to lack of supplies; the basic education system needs a thorough revitalization; and so on. Without relieving the extreme shortage of basic supplies and strengthenin Institutions at both the central and local levels (coupled, of course, with sustained growth), soclal Inprovements will be a chimera. Specific Interventions In baslc health and nutritlon, by Government with assistance by donors, should also be envisaged to address the plight of the most vulnerable segments of society, albeit on a very careful and well-targeted basis. To do this within a reallstic aggregate public expenditure envelope win require slgnlifcant improvements In the administration and In the efficiency of service delivery. In turn, this calls for a creative now partnershlp between the government and other economic agents, particularly at the iocal loveL xvi. The population and human development Issues are common to most developing countries. Two other long-range concerns are, on the other hand, particularly acute In Madagascar. First, the country Is one of the ecologically richest In the world, but Is caugtit In a spiral of fnvirormment degradation that threatens not only the unique heritage of biodiversity, but sustainable economic growth Itself. Largely from demographic pressure, burning of pasture, cultivation of unprotected hill siopes, and slash-and-burn practices have led to soil erosion, deforestatlon,decliningagriculturalproductivity,andinfrastructuraldeterioration-particularly silting up of west coast ports. Second, Madagascar's great size and difficult topography elevate the Issue of appropriate decentralizaion to the top of the iong-term pollcy agenda. Neither the efficlent delivery of public services nor the transmission of market-oriented economIc pollcy from the center can occur In the absence of an effective network of local institutions. In theory, the local public entities In Madagascar have a great deal of power and autonomy. In practice, because each layer of local government Is supposed to do everything, It has usually been unable to accomplish much of anything. It Is time to define the respective roles of central and local government bodles, and the resources required by each level to perform Its responsibilltles. This reassignment of responsibllVes and financial resources Is particularly Important for revitalizing the management and conditlons of cities and towns, which In Madagascar function as key production and distribution centers. Revitalizatlon of the officlal decentralized system Is possible and desirable, although It should proceed mR VA= with Improvements In Internal communicatlons In order to avoid the risk of economic disintegration. Even more desirable would be closer cooperation between the official decentralized institutions  ..A'- and the local voluntary associations, Including traditional groupings, of which there are many. Indeed, It appears that none of the other long-range concerns of populatlon, onvironment, and human resource devoWment can be addressed effectively except through a better division of labor between the center and the periphery, and between the public institutlons and the spontaneous voluntary associatlons. xvil. The report articulates the above general definition of policy prioritles In a set of more concrete recommendations for action. Although knprovements In sectoral pollcy are of course also knportant (several have been enacted by the government In the past few years, and others are under consideration), the report focusses on recommendations with a cross-sectoral or macroeconomic knpact. Five general priorities apply throughout: maintaining coherent and predictable macroeconomic policles, Including a competitive exchange rate, a sound fiscal program, and a prudent credit policy; assuring an enabling business environment, Including the state disengagement from directly-productive activitles; knproving further the efficiency of pubfc expenditure; protecting the onvironment; and reducing population growth. Other policies, Instead, are specifc to the tkne horizon chosen. (A detailed listing of policy recommendations for knplementatlon In 1990-92,1993-2000, and the long term Is shown In the policy matrix at the end of Chapter 5.) xvill. The pollcy recommendations are grouped on the basis of a conventional classification. Nevertheless, the report's deliberate focus on long-term perspectives entalls that four key themes run through the entire policy package and affect virtually each and every recommendation advanced: fostering an enablng environment for human effort, human resource development, capacity buliding, and sustalnabillty of growth. Concerning the latter, It Is essential to underline that Madagascar Is one of a handful of countrles where a major adjustment effort has been accompanied by hlgh degree of popular support as evidenced, among other things, by the results of the open elections of 1989. Political sustainabillty-In this particular sense of national lnternalizamion of the reform process-must be preserved and nurtured, for It Is the sole guarantee of lasting benefit from structural adjustment. The outlook for Ut year 2000 xlx. Among the varlous possible scenarios of the economy's future, realistic forecasts of resources, world market prospects and external assistance lead to formulating two scenarios through the year 2000. The main scenario assumes a consolidation and an expanslon of the policy progress of the last five years, via the knplementation of the pollcy agenda sketched out In this report. The alternative, "muddling-through", scenario assumes neither further pollcy knprovements nor policy slippages. This alternative scenario shows a listless economy, progressing at Just over the rate of population growth, with continuing low private Investment, an amost knperceptible rlse In private consumption, sluggish external trade, unabated social problems, and little prospect for long-term sustalnabillty. xx. The maln scenario (which, to repeat, Is based on prudent forecasts of resources, opportunitles and world prices, but assumes an acceleration of policy progress) produces a different picture of developments In the 19908. GDP growth would accelerate gradually to a peak of 7% In 1997 and Inch down slightly to around 6% from 1998 onward. In parallel, the belnning of an effective population pollcy would gradually lower birth rates and reduce annual population growth from 3% to 2.6%. Barring a further sharp deterioratlon In the terms of trade, real per capita Income would experlence a moderate but steady Increase of about 3% per year,  . v1i - rilsing by almost one third, from about $235 in 1990 to $314 In 2000, and per capita private consumptlon would rlse by about 1% per year. The key enabling mechanisms would be a rise In overall Investment to 25% of GDP (the LTPS target), with private Investment growing from 8.5% of GDP In 1990 to 16% In 2000. more efficlent public Investment concentrated on economic and social Infrastructure, and diversification In both domestic and external trade. Because world market prospects for traditlonal exports remaln poor, traditional exports would account only for 3% of GDP by year 2000. By contrast, exports of non-traditional goods and non-factor services (paced by garments and tourism) would show a healthy and sustalned Increase, from 12% of GDP In 1990 to 22% In 2000. xxi. More Importantly, prospects for long-term sustainability beyond the year 2000 would be so'id. Internal sustalnability would be nourished by the overall rise In confidence stemming from market-oriented policies and an open political clinate, by the Improvement In social conditions permittea by the rise In per capita private consumption accompanied by sound pubilc expenditure programs, and by arresting environmental deterloratlon. External sustainability would be fostered by the prospects for eventual full convertibillty, the Improvement In the debt profile, the regalnIng of access to Internatlonal capital markets, and the sharp decrease In relative dependence on external ald. Under the maln scenario, Madagascar's total external fInancing requirements would plummet from 20.4% of GDP In 1989 to about 5% of GDP In the year 2000 (and taper down some more In subsequent years.) Linkages. A ea_on releaned xxii. It Is a truism that In economic development every policy action Is linked to all others. But among the myriad possible llnkages, the country's history, specific characterlstics, and adjustment experlence In the 1980s demonstrate that certaln complementaritles are particularly strong In Madagascar: - Public and private Investment are complementary, provided that public Investment Is In activitles that support rather than replace private efforts, on economically-sound projects, and Is well executed. (E.g., the major Improvement of the port of Tamatave has fostered a minI- renaissance of the private sector In the reglon.) -- Expansion of domestic trade Is complementary with expansion of exports, provided that tariffs and other commerclal barriers are low and predictable. As a corollary, rural and urban economic activity are complementary also--town and country will rise or fall together. -- Greater openness to the world econo,ny Is complementary with promotlon of Malagasy entrepreneurship and allevlatlon of ethnic tensions, provided that there Is effective competition among foreign Investors and among Importers. (E.g., through the experience and contacts gained by employment In the foreign-owned BMOI bank, many Malagasy professlonals will soon be In a stronger competitive positlon vis-a-vis expatriate minorities.) -- Privatizatlon and deregulatlon are complementary with alleviation of social and poverty problems, provided that there Is effective competition In domestic markets and progressive Increases In labor mobility. (Eg., the abolition of the state agrlcAltural export monopolles, by shrinking the commerclallzat on margin, has ralsed farmers' Incomes and lowered real consumer prices.) -- Most Importantly, openness and accountability are complementary wlth economic vitality. (E.g., the suspension of press consorship In early 1 989 Is considered by the private sector to have contributed greatly to revival of confidence and consequently to economic growth.)  viii - xxiii. The long-run linkage among these pollcy aims and measures Is genuine, but It must not be misunderstood to justify taking massive government actlon and on broad fronts. Quite the contrary: integrated, large-scale, "big push" programs, have had disastrous consequences In Madagascar (as In so many other countries). The all-out (a outrancg ) economic approach of the past Is being replaced by a strategy that Is equally vlgorous but more deliberate and less risky: enacting and implementing sequential actions that consolidate earlier progress and expand It. The Initial results of this strategy In Madagascar over the last three years speak for themselves; the main economic payoff of staying the course Is Just ahead. A clonig km xxiv. The Malagasy economy has only three years ago begun to clkmb up from depression and extreme poverty. The engine Is good--varled natural resources, a high-quality labor force, and an Inclusive national culture give cause to think that the climb can succeed. However, the road ahead Is lonEi, steep and hazardous. To continue Its climb, the Malagasy economy will need to be steered well: the pollcy course of liberalization, competitiveness and market-orientatlon must be maintalned. It will need fuel: adequate external assistance must continue In the right mix and on a timely basis. It will need oil: without improved Infrastructure and efficient public services the recovery will grind to a halt. It will need a dependable brake: financial and credit prudence Is no less important for sustaining growth than It Is to resolve an ongolng crlsis. It will need sound tires: stronger Institutions and expansion of local capacity are a must. And, It will need to bring along the majority of the passengers: persistent and acute Interpersonal or Interreglonal Inequities will drag the economy down again. xxv. Early explorers called Madagascar "the great Island at the end of the world". If these delicate and difficult challenges are met, this country can In the foreseeable future accelerate growth with equity even beyond the pace of recent years--still a great Island but no longer "at the end of the world".  Chapter 1 Malagasy economy and society  A. THE OVERALL APPROACH 1. The major objectives of this Country Economic 3. This retrospective look Is needed also to give Memorandum are to take stock of the current propercontexttothelong-rangepersoective adopted economic situation after almost a decade of here. Building on the recent long-term perspectives adjustment, and to lay the basis for setting the policy study by the World Bank on sub-Saharan Africa agenda for the next phase of adjustment and for the (LTPS), this report places the evaluation of the longer term. It also serves to bring together the adjustment effort of recent years within a setting of findings and conclusions of other recent analyses. longer-range growth possibilit;es and constraints'. 2. The unifying thread of this report is the notion 4. Thus, the report is structured around three of economic distance, which Is particularly relevant to basic questions: the impact of adjustment, the key Madagascar. Its rugged topography and large size constraints ahead, and the long-range concerns. (almost twice that of Italy) make intemal transfer of Insofar as practical, it focuses on three themes: goods, Inputs, and knowledge costly; to a large openness to the wold economy, domestic economic extent, the country's economic development depends integration, and the ensuing redefinition of the role of on reducing those costs. The Island's peripheral the state. And, as noted above, the report attempts location Imposes high costs on external exchanges; to view these Issues through three prisms: the Madagascar's development depends also on historical, the geographic, and the social. bringing the country closer to the rest of the world. Accordingly, Chapter 2 recapitulates policies and It is important to diminish Madagascar's iwsation developments since 1985, with special attention to from the rest of the world's economy, and the basic the speed and nature of the supply response. thrust of this report Is on the need for trade Chapter 3 discusses how to relieve the main expansion and diversfflcation. Accordingly, the focus constraints operative In Madagascar today: the of policy is on reducing the costs of transfer of incentive framework, Infrasuctr, Iormation, goods, services, and Inputs - rather than the direct savings, and institutional capacity. Chapter 4 reviews production costs themselves, which are already the situation, problems, and possible solutions to the comparatively low. Thus, the results of adjustment long-range concerns of population, the social policies, and the objectives of the Importarnt dimension of development, and the environmental adjustment effort yet to come, can be described as and regional dimensions. Finally, Chapter 5 sets out reducina economic distance - within the Island and a policy agenda for the 19908, Including the definition between the island and the rest of the world. of altemative growth scenarios under different policy Madagascar's recent experience points to a strong assumptions. complementarity between these two objectives: greater Integration with the world economy facilitates S. The main focus of the report Is macroeconomic and requires greater domestic economic integration. and long term. Nevertheless the largest economic Of course, economic distance is a function not only and social sectors are covered: Transport and of geographic distance and physical barriers, but also communications (Chapter 3), health and education of policy, historical inertia, and social and ethnic (Chapter 4), the rural sector, the urban sector, and diversity. Hence, Section B contains a very brief the Informal sector (Annexes 1, 11 and 111). The recapitulation of the main themes In the country's Statistical Appendix covers thoroughly the period history and features of its social structure. 1984-1980 and, in keeping with the long-range focus of the report, Includes a thirty-year historical series on macroeconomic aggregates.  B. ECONOMY AND SOCIETY 1. The potential for signiflcant direct foreign investment and further tourism expansion. 6. Many developing countries have a rich precolonial history as an independent political entity within the present borders; several are linguistically and culturally homogeneous; and some are 2. A hitoricaleecie geographically quite large. Madagascar Is one of the few developing countries to possess all three 9. After centuries of political fragmentation, characteristics. These characteristics condition the sophisticated central government evolved following country's prospects for the future as much as they the progressive unifcation of Madagascar In the late have influenced economic developments in the past. 18th century by the great king Andrianampoinimerina. Sice then, aside from the 7. With a population of about 11.5 million colonial interlude, three interrelated cors emerge growing at three percent annually, and a per capita from Madagascar's history. First, there Is the drive income of about US$ 220 in 1989, Madagascar is for preservation and consolidation of natkonl unity, one of the poorest countries In the world. manifested most dearly both through the exercise of Furthermore, income distribution is very unequal, and central authority and through the accent on severe poverty is widespread. It is the world's fourth interregional equity. Second the strong Malagasy largest Island, with wide variations In soils and sense of nationhood has been tempered by the climate, a diverse mineral endowment, and unique governing eite's equally strong interest in flora and fauna. Rice Is the country's main staple, modernization. Third, there has traditionally been a and the major traditional exports are coffee, vanilla dose relationship between the availabiitiy of basic and cloves. Its economic record Is one of modest staples (mainly, rice) and the legitimacy and stablity growth from independence in 1960 to 1970, of political power.2 stagnation from 1970 to 1980, sharp deterioration between 1980 and 1982, financial stabilization with 10. These themes have produced a variety of sluggish economic growth from 1983 through 1987, tensions and dilemmas which have surfaced andencouragingeconomicdevelopmentssincethen. throughout Madagascars history and to a large extent remain unresolved today. Thus, the goal of 8. The country has significant economic national unity has been used to justNy both the potential. In the long run, this stems from an exercise of strong central authoriy, and the industrious labor force and a variety of natural ostensible encouragement of decentralization and resources. Madagascars unique environment Is, local empowerment. (The dearest contemporary however, threatened, and a sustained policy effort In manifestation of this dilemma is the ambiguous role this respect is needed as well as efforts to slow down of the decentralized public entitles.) The Interaction population growth. In the short and medium term, of nationalism with the drive for modernization has considerable economic growth can arise from greater produced a seesaw between Insularity and openness efficiency in the allocation and utilization of resources. to the world economy. (During periods when the There are promising possibilities for substantial seesaw has tilted toward openness, In order to expansion of non-traditional exports, particularly minimize the risk of exclusive dependence on a garments, textiles, leather goods, and fishing. Also, single source, the central government has often tried given a more open economic climate, there Is a to attract competing foreign Interests. This appears to  -4- be the case today.) And the political urgency of power in Madagascar. Therefore, in light of the goal providing essential staples has drawn resources away of consolidating national unity, interregbnai (as from the investments required for the longer term distinct from interethnic) balance rernains a crcal objective of national integration. (This is evident in consideration for economic policy. As in earlier the current overemphasis on rice and Irrigation In history, the Govemment in the coming yeams will public investment, compared with activities with much need to steer a middle course between the Scylla of higher long-term retums - such as hnfrastructural permitting regional and local interests to abort maintenance and primary education.) national economic growth, and the Charybdis of ignoring these interests altogether and so II. The policy stance of successive Malagasy compromise the sustainability of the growth regimes can largely be explained in terms of their process.3 approach to managing these tensions among equally potent goals. Different regimes have had different degree of success in this task - and different b. The social tradition durability to match - but they all have had to contend with it. Of course, adjustment programs 13. It is sometimes alleged that market-orented and external assistance must take these realities into policies are Inapplicable to developing countries account. However, to give too much weight to because of the links between social pattems and recognition of certain realities leads to reinforcing economic behavior. These links are authentic, but them, or, at best, becomes a recipe for immobility. their strength is Invariably overestimated (particularly Furthermore, as we shall see, in the 1980s the during economically dynamic times). Moreover, in Govemment of Madagascar has shown an the case of Madagascar, basic socia and cultural uncommon capacity to adapt its economic policy to values are demonstrably consistent with lively the evolving circumstances and to the ensuing individual initiative. Market-oriented economic change in the relative weights assigned to the various policies are readily applicable to Madagascar.4 national goals. 14. Underneath the apparent extreme complexity of Malagasy society, the orYirative organizational principles are relatively simple. There are two basic 3. The societv social principles: differentiation (or hierarchy), and harmonious cohabitation. Ihere emerges from these a. The regional and ethnic factors a shared consensus on the need to place individuals according to a certain hierarchy while at the same 12. Regional dffferences notwithstanding, the time enabling their personal fuWfillment and initiative. Malagasy are a relatively homogeneous people, with Individuals and groups are "distinct but of like kind". a common language (and a fertile literary tradition), The notion of comparative advantage is more readily and shared cultural values. The use of the term accepted in Madagascar than in many other ethnic groups, although common, is a misnomner In countries. Madagascar, where it connotes regional or clan differentiation rather than true ethnic differentiation. 15. In parallel, two intertwined values animate The only ethnic groups other than the Malagasy are Malagasy society. First, there is the belief In the the Indo-Pakistanis, whose economic Influence is presence and influence of the spirit of the ancestors much greater than suggested by their small number (razana . The family tomb is the center of the family (about 25,000), an even smaller Chinese community, world, around which the unity of the descendants is and, of course, Europeans. There are, however, continuously reaffirmed. Second, there is a serene genuine differences between the people of the belief in a life principle that flows equally through the highlands and the coastal people, collectively known natural world and the spirit of every human being as "cotiers". The highlanders are generally better (although it is not equally distributed among educated and economically active, and have individuals). Thus, the metaphysical is ever-prasent controlled the lion's share of political and economic in Madagascar, but coexists easily with an interest in  worldly pursuits, including Individual economic 17. There are Important economic implications success. from all this, some conducive to economic dynamism, some constraining it. The Inviolability of 16. In the Malagasy paradigm, It follows that the basic individual rights encourages Initiative and Individual is the irreducible social atom wnose personal choice (including In birth control); the goal prerogatives are inviolable, while the group, of group solidarity calls for smooth human relations understood as the 'union of those who are different and the avoidance of intragroup competition. The but complementary" is the vehicle for Integrating consensus approach to decision-making enhances Individuals with one another and with nature. Within ownership and thus the durability of the decision, but each of the various layers of traditional associations slows down the process and may rcsult in lost (household, extended family, and common-ancestor opportunities ,li times of rapid change. The belief In clusters of families), the individual members share the life principle promotes respect for the customs and prohibitions (fady) specific to the group, environment, but reduces the receptiveness to new and they have, of course, reciprocal responsibilities. technologies. The cult of the ancestors motivates However, the association is voluntary, and the economic cooperation and striving by the group, but Individual's responsibilities to the group are balanced Is a major obstacle to factor mobility - especially of with his or her rights of choice of lifestyle and labor. More lmportantly, the profound attachment to expression of opinion. As one consequence, the the ancestors reinforces ethnic identity. Thus, drive for consensus dominates decision-making at alliances wih foreigners, economically Influential but almost every level. Totaiitarian (as opposed to alien and hence socially safe, are often seen as authoritarian) modes of control are alien to the preferable to cooperation with other Malagasy, Malagasy social tradition. This ethos has been especially those from different ethnic groups. extended to non-traditional territorial groupings and Paradoxically, the presence of external economic to the understanding of individual rights and agents (so long as they are not dominant) contributes responsibilities vis-&-vis the national state. to defusing particularistic and cenrfugal tendencies and thus can strengthen a truly national Malagasy identity.  Adjustment policies and results in the 1980s  -7- A. l THE OVERALL ADJUSTMENT EFFORT AND RESULTS 1. 1984: A birds eveview support of the Bank and otherdonors. The structural adjustment effort was launched in 1985 wth the first 18. The previous Country Economic significant decontrol of Industrial prices. This initiated Memorandum (CEM) on Madagascar was Issued In what was to become years later a heavy and fruitful March 1986, based largely on data through 1984. emphasis on the quality of public Investments. In The report concluded that Madagascar was still 198, the govemment moved beyond adjustments In grappling with the pressing tasks of financial administered paddy prices to a full liberalization of stabilization; both external and domestic. production and marketing of rice, Madagasas main Madagascar had just come out of the deep staple. economic crisis of the early 1980s. The fiscal deficit and the inflation rate - although still too high - had 20. Pending direct Bank Inolvement, the IMF been reduced to more manageable levels; the programs In 1983.65 did recognize the Importance of economic deterioration of 1981-82 had been arrested; supply-side considerations, and they were primarly and some growth had resumed. However, growth responsible for the Increases In producer prices of was at a sluggish pace of around one percent, which major commodities. The accent on supply-side and entailed continuing declinis in per capita Income for structural reform elements hI Fund programs the already desperately poor population; the foreign strengthened further In 1988 and 1989. with the exchange shortage was extreme; the economy was Intensiication of Bank-Fund collaboration through the starved for productive imports; and public Policy Framework Paper (PFP) process. expenditure had been cut with a broad axe, affecting essential public services as well as unproductive 21. Theflrstlarge-scalemacroeconomicstrctural spending. The key policy concems were large adjustment program was launched In 1987. A large currency overvaluation, widespread price controls, a devaluation of the FMG In mid-1987 brought the real bloated and inefficient parastatal sector and state- effective exchange rate to less than half of the 1978 owned banking system, and pervasive government level (when the balance of payments was In interference ir virtually all aspects of economic life. equilibrium); protectiveImportquotaswere.replaced Except for some increases in administered producer by tariffs In January 1988; and a step-by-step freeing- prices in 1983 and 1984. particularly for paddy and up of foreign exchange allocation culmira1wd in July traditional export crops, adjustment on the supply 1988 In the full Introduction of the non-cdi6retionary side was still a thing of the future. This chapter first "open general license" s,tem of foreign exchange reviews development in 1985-89, and then provides allocation for merchandis- imports. In the next a separate account of developments in 1990, which phase of adjustmrent, from 19B;, the grave problems was in many ways an anomalous year. of the public sector began to be addrdsmd In a coordinated manner, admirnatrative export restrictions and state agricultral export rcmnopolies were eliminated, remainlng price ioontr.4b Aere lifted, 2. 1985-9: The poliles and a far-reaching program was lairr' 4 for the reform of the financial system, the raticr'cilization of 19. Since 1985, four IMF standby arrangements the public enterprise sectwor, and the strengthening of have been successfully completed (which permitted the public investment and budgetary formulation the replacement In May 1989 of standby resources process. Also, some concerted attni:s. began to be with the Enhanced Structural Adjustment Facility), given to the social asnects of development (Table and the govemment has turned its attention to 2.1 summarizes the major reforms ena0A d and adjustment efforts on the supply side, with the Implemented since 1985.)5  - ' - Table 2 1: Key DoI te doveloDments. 1985-n POLICY AREA POLICY MEASURE DATE Extornal Major exchange rate devaluation (SSX) Jun 1987 oector Replacement of Import quotas and licensoe with ad valorem tarlffs Jan 1988 Progress toward simplified and reduced structuro of tariffs 1988, 1989 Replacent of discretionary systew of foroign exchange allocation with automatic O