Malagasy Republic - Recent economic position and prospects

RESTRICTED FILE COP Report No. AE- l la This report was prepared for use within the Bank and its affiliated orgonizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION RECENT ECONOMIC POSITION AND PROSPECTS OF THE MALAGASY REPUBLIC January 8, 1971 Eastern Africa Department  CURRENCY EQUIVALENTS Currency Unit Malagasy Franc (FM) Before August 10, 1969 US $1.00 = FM 247 US $4.o5 million = FG 1.0 billion Since Augist US $1.0 = FM3 278 US $3.60 million a FMG 1.0 billion  Foreword This report uses as general frames of reference the First Five-Year Plan period, 1964 to 1968, and the prospects for the Second Plan period, 1970-1974. It broadly evaluates achievements during the first period and offers suggestions regarding the possible scale and content of the Second Plan, which is not yet drafted, in the hope that they may be helpful to the responsible authorities as an initial "agenda". The report was prepared by an economic mission which visited Madagascar in November/December 1969. The mission consisted of Messrs. Th. Halbe, A. Van Nimmen, C. Brochu (FAO), J. Datas-Panero, A. Elsaas and E. Haker (Cons.)   TABLE OF CONTENTS Page No. BASIC DATA SUMMARY AND CONCLUSIONS ............... ................ i I. THE COUNTRY ........... ................................ 1 A. Geography .......... .............................. l B. Population ......... .............................. I C. Political Situation .............................. 2 II. STRUCTURE OF THE ECONOMY ...... ........... . 3 III. RECENT EVOLUTIONI ............................ 5 A. Trends in Economic Development ..... .............. 5 B. The Five-Year Development Plan (1964-68) .... ..... 9 C. Sectoral Developments ............................ 12 (a) Agriculture ................................. 12 (b) Transport ................................... 14 (c) Industry .................................... 15 D. Public Finance ................................... 16 (a) Central Government Budget ..... .............. 16 (b) Annexed Budgets ............................. 21 (c) The Provincial Budgets ...................... 22 (d) Treasury Financing Operations .... ........... 23 E. Foreign Aid Flows ................................ 26 IV. THE NEXT FIVE YEARS ................................... 28 A. Introduction ........ ............................. 28 B. The Outlook for Investment Finance .... ........... 29 (a) Current Budget .............................. 29 (b) Total Government Savings ..... ............... 31 (c) Foreign Assistance .......................... 31 (d) Total Investment ............................ 32  -2- Page No. C. Development Prospects ........... ................. 33 D. Balance of Payments ................................ 35 E. External Debt .................................... 36 V. LONGER-TERM PROBLEMS .................................. 36 A. Population .................................... 36 B. Education ..................................... 37 C. Economic Planning ................................ 38 D. The Role of Foreign Aid .......... ................ 40 STATISTICAL APPENDIX ANNEX - An Illustrative Economic Model for the Malagasy Republic MAPS  BASIC DATA Area: 590,000 square kilometers Population: (1970) 6.8 million Rate of growth: 2.2% per annum Political Status: Independent since June 1960 GDP (market prices) 1969: FMG 217 billion growth 1965-1969: about 4.5 percent per capita, 1969: US $120 Central Government (actuals, 1968, FMG billions) Current revenues 31.9 Current expenditures 28.5 Current surplus 3.4 Investment expenditures 9.1 Deficit -5.7 Balance of Payments 1969 (FMG billions) Export (f.o.b.) 29.1 Imports (f.o.b.) -40. 3 Net services -7.1 Factor payments -7.( Current transfers 10.7 Current balance -14.6 Aid Disbursements 1969 (US$ million) Grants 41 .6 Loans 8.9 External Public Debt December 1969 (US$ million) Total (including undisbursed)120.O Debt service, 1969 5.7 Debt service ratio, 1969 5.2 percent   SUMMARY AND CONCLUSIONS i. Not only does Madagascar have an isolated geographic location, it is also geographically divided into a number of regions with different climatic conditions and often deficient transport connections. The ex- treme North, a very fertile region, is virtually cut off from the rest of the country. The East coast is hot and humid, and suited for the production of coffee and bananas; the West coast consists of a number of plains ideally suited for the development of cotton cultivation and cattle raising; the South, on the other hand, has a very hot and dry climate and is still a virtual desert. Although this great climatic variety permits a diversified agricultural. production, a number of handicaps have hindered agricultural development. Among these handicaps are the periodic cyclones which cause considerable damage along the East coast, the traditional custom of forest-burning and the sacrificial value attached by the Malagasy population to cattle. iL. The population of Madagascar is of varied ethnic background. Part of the population is of Malayo-Polynesian origin and has brought with it techniques of fishing and of cultivating rice; others are of African descent and have brought Arab and Negroid influences to the island. One common language, however, is spoken. iii. Madagascar as th,e fourth largest island in the world, covering an area of 590,000 km . With less than 7 million inhabitants in 1969, the country's density is thus hardly over 11 people per km2, or only slightly more than the density of the entire African continent (9 inh./km2). Never- theless, Madagascar has a population problem. First, the rapid increase in population has required considerable investment in the production of rice, the country's main staple and, secondly, the population is unevenly distributed over the island, with some regions, particularly in the center of the island, soon to become overpopulated. Internal migration to the less densely populated areas is impeded by existing ethnic differences, but needs encouragement. iv. Madagascar is a poor country. Its GDP in 1969 is estimated at FMG 217 billion ($780 million), with a per capita GDP in the neighborhood of 120 dollars. The economy remains basically agricultural. Over 85 percent of the population are rural; the agricultural sector accounts for 70 percent of commodity production. More than half of this production is, however, in the subsistence sector; monetary income from agricultural activities is around 20 percent of total monetized income. The main pro- ducts for local consumption are rice, manioc and meat. The main export crops are coffee (accounting for nearly one third of export earnings), vanilla, rice and sugar. In 1968, agricultural products as a whole accounted for 85 percent of the country's exports.  - isi - v. Since indepenidenlce the CGoverLment lias beeni pursuing a policy of industrializationi by settinig up a number of development institutions which can lend to or take participaitions in Covernment-owned industries and by promulgating an Investment Code intended to attract foreign invest- ment. By 1968, the share of manufactturing in CGI represented approximately 16 percent, but thie sector is still mostly conceived on a small-scale basis and heavily dependent on foreign imlports of equipment, raw materials and management. Most industry is of tlhe inport-substitution kind and under- utilization of capacity is frequent. 'he shiare of services, including trade, transport and government admini:;tration is very high, representing as much as 47 percenLt of GDP and 60 percent of nioney income. vi. The Malagasy economy remains heavily dependent on France, both for foreign aid and technical assistance. There are some 34,000 Frenchmen living on the island, playing a significant role in the economy, in civil administration as well as in industry, agriculture and trade. They are mostly concentrated in Tananarive. Their consumption pattern has to a large extent been adopted by the country's higher classes and to some extent accounts for the high market shlare of imports. The country has a large university (3,900 students) wihich relies heavily on French fi- nancial and techinical support. Madagascar is also a member of the Franc Zone, thereby benefiting from free convertibility of its intra-zone ex- port earnings into foreign exchange and from overdraft facilities with the French Treasury. In general, however, Madagascar's trade with coun- tries outside the Franc Zone has been in balance, primarily thanks to its important coffee and vanilla exports to the U. S., and so far the Central Bank has not had to use its overdraft facilities with the French Treasury. vii. In 1964, Madagascar formulated an ambitious economic development plan (1964-1968), based on a set of general aspirations and priorities rather than on individual projects. Total investment forecast for the 5-year plan period amounted to FMC 150 billion or FMG 30 billion a year. However, by 1967, it was clear that the output figures and overall invest- ment levels, bothi in the public and private sectors (amounting to FMG 11 billion and FMG 6 billion a year respectively), were well below targets for the first three years. The Government decided to take remedial action, both to increase the output of rice and to boost the production of export crops. An interim program, called "les grandes operations" and consisting of a number of investment projects mainly in the agricultural field was drawn up. As a result of this more active approach, public sector invest- ments increased to FMC 13 billion in 1967 and FMG 17 billion in 1968. viii. Altogether, public investment in the first plan period amounted to approximately FMG 63 billion. If one adds to this an estimated private investment of approximately FMG 32 billion, total investment in the 5-year period of the first development plan amounted to FMG 95 billion, or FMG 19 billion per year, compared to the original annual target of FMG 30  - iii - billion. The shortfall in private investment was larger than that for investment in the public sector; private investment was only 55 percent of the target while public investment reached almost 70 percent. This is not, altogether, a bad record. Unfortunately, the investments undertaken were often costly or badly coordinated. Furthermore, some of the more recent programs are still in their gestation period and have not yet affected output levels. The total inpact on economic development of the efforts made in the recent past will only be felt over the next few years. ix. Central Government revenue increased from FMC 24.6 billion in 1964 to FMC 31.9 billion in 1968, i.e. at an annual rate of 6.7 percent. The growth of current expenditures in the same period was approximately of the same magnitude and permitted the generation of total Central Govern- ment savings amounting to F7MG 10.5 billion in the five year period. This accounted for the financing of nearly one sixth of public sector investment. In addition some FMG 4 billion of savings were generated by semi-autonomous Government institutions under the direct supervision of the Ministry of Finance. x. In Madagascar, as in many other countries oF francoplhone Africa, the Treasury functions as a banker and is able to use the savings of a large number of public and semi-public institutions to finance the Govern- ment's investment expenditures. Until 1967 the country's public finance policy had been relatively conservative. The Government had refrained from drawing down the Treasury deposits and lhad in fact increased them somewhat. In 1967, however, there was some dissatisfaction with the development effort because development had fallen short of the expectations of the Plan and the Government decided to pursue a more active investment policy. As a result, there was a sharp increase in investment, the liquid balances of the Treasury declined rapidly and Madagascar's international reserves were drawn down considerably. xi. Apart from the use of public se.tor savings and accumulated liquid reserves of the Treasury, additional resources for the financing of public sector investment have been founid in budgetary support from France, in grant aid from FAC and EDF and in long-term borrowing from the French Caisse Centrale de Cooperation Economique (CCCE) and the German Kreditanstalt. xii. Total foreign aid disbursements to Madagascar, including the financing of technical assistance, have average(d $50-55 million a year in the 1964-68 period. The total amount of aid has remained stable (in current prices) only because the faLl in grant aid from France has been compensated by an increase in lending by the CCCE and the World Bank Group. Consequently, aidl terms have somewhat hardened, and the share of grants has fallen from 92 to 81 percent. The largest single foreign aid giver remains France, alth-iough Its contribution has dropped from 64 percent in 1964 to 54 percent int 1969.  - iv - xiii. Preparation of the country's second development plan, which was to rtn from 1970 to 1974, has fallen considerably behind sche(dule. The main reason for the delay is the difficulty whiclh the Covernment is en- countering in its attempt to produce a plan which is supported by good specific projects. The various spending ministries have submitted a large number of proposals, many of which will need a great deal of pre- paratory work before tlhey are ready for financing. The total investment represented by these proposals would amount to FMC 240 billion, which greatly exceeds the resources which can reasonably be expected to be available. IHowever, selection by thie Government is rendered difficult by the desire to keep a balance between the regions as well as by the lack of sufficiently prepared projects. The problem is not helped by the absence of any generally accepted development strategy to indicate agreed broad priorities. xiv. There are, of course, financial constraints on the over-all size of public investment. Public savings in the last two years have been con- siderable, amounting to 10 percent of Government revenues in 1968 and 15 percent in 1969. Nevertheless, the Ministry of Finance is alarmed by the rapid increase in current expenditures in recent years and by the sharp reduction in the liquid assets of tihe Treasury following the drastic in- crease in central Government investment expenditures since 1967, and has decided to adopt an austerity budget for 1970. This budget limits the increase in current expenditures for 1970 to 5.2 percent above the level attained in 1969, comparedl to ani average annual increase of 11 percent in the 1966-1969 period. If this auisterLty program is carried out - and there is reason to think that it will be - theni the Government would be in a position to continue investing at present levels witlhout drawing down existing Treasury balances much further and without considerably increas- ing its debt burden. xv. In the view of the economic mission total Government savings, including the savings of a number of semi-public institutions, could amount to FMG 31.5 billion in the five year period 1970--1974. These savings, to- gether with a continued French budget support, amotnting to about FMG 4.5 billion in the same period, and expected foreign aid disbursements totalling FMG 48.8 billion, would permit a total public -.nvestment pro- gram of nearly FMG 85 billion. Assumiiiing that private in-,estment would maintain its level of 1968 (FMG 10 billion) total i,nvestment in Madagas- car in the next five years could att;Lin FMG 130 billion. It is difficult to estimate what rate of growtlh such investment miglht produce but it is unlikely to exceed 3.5 percent whiclh would give an annual increase in per capita income of about 1.5 percent. xvi. An important problem will *ontinue to be the evolution of the balance of payments. On the basis oi information received from the Mala- gasy authorities, the mission has ma(re a projection of the likely export earnings up to 1974. The result of :he projection is that earnings from  the export of goods can be expected to reach FMG 34 billion in 1974, as against FMG 29.1 billion in 1969. This represents an annual rate of growth of 3 percent, compared with a trend of about 3.8 percent in the preceding ten years. Assu.ming that exports of services expand at the same rate, total earnings from the export of goods and services in 1974 may amount to FMG 38 billion. xvii. In the light of the existing foreign aid pipeline and in view of expected new commitments on the part of the major donors, it appears like- ly that official capital flows will remain approximately at their present level. Assuming, furthermore, that no major changes occur in the other elements of the balance of payments, Madagascar would have to prevent the balance-of-payments deficit on goods and services from rising significant- ly above present levels (FMG 19 billion). Therefore, the expansion of im- ports will have to be kept. within 2 percent a year, which is less than the growth of exports and significantly smaller than the expansion of imports in the last five years. If, however, our prognosis is correct that absolute investment levels in the next five years will not rise significantly above those attained in 1969, the expansion in imports could be almost entirely absorbed by the growth in consumer good imports. To prevent the demand for imported consumer goods from rising faster than the rate of growth of population may be difficult but not impossible. With a continued policy of gradual import-substitution, possibly combined with a selective increase on the taxation of imported luxury goods, it should be feasible to keep the increase in total imports within the desired limits. xviii. According to Bank estimates the share of loans in aid disburse- ments will rise from 18 percent in 1969 to 40 percent in 1974. But Mada- gascar's foreign debt burden is at present very light and should not, at this stage, present any serious limitation on the amount of additional conventional debt that can be contracted. As of December 1969, the total external public debt outstanding amounted to $120 million, with service payments of $6 million or slightly over 5 percent of export earnings in that year. Service on the existing debt reaches a peak of $8.4 million in 1973, but starts declining thereafter, and in 1975 falls back to $7.6 million. xix. To a large extent the size and nature of Madagascar's economic growth in the period of the second development plan will depend - as it has in the past - on the decisions taken and criteria applied by her major aid-givers. Furthermore, a large share of the investments to be undertaken in the next five years will be directed to projects which are already underway or which are presently being studied, so that there is little room left for a drastic change in resource allocation. To be sure, the Government should refrain from carrying out without further study a number of investments, lik.e the excessive slaughterhouse program, which seem ill-advised or improperly timed; but longer-term policy decisions whose impact will only be felt in the period of the third plan - or even beyond - deserve equal attention.  - vi - xx. Among thosc policy decisions one migl-at single out the problems relating to populatio0 and education. Witlh respect to population, settle-- ment of the less-densely populated areas of the country will become a major issue in the next ten to fifteen years. As of now thie Covernmenlt should determinie to what extent it wishes to pursito the agricultural diversification in the Ilauts-Plateaux or whetther It would not be more advisable to outline a policy of resettlement, especially of young people, in some of the more promising unctultivated areas. The implementation of limited settlement projects has already demonstrated that the construction of adequate infrastructure is ab]e to speed up this internal migration process. As for education, recent data show that the increase in school enrollment has been taking alarming proportions i-n tbe last few years. Among other things tihe rapid expainsion of private secondary schools, where fees are often high for italagasy standards (nearly 20 dollars a month) and output levels often very low, should be carefully studied and, if necessary, checked by the Government authorities. Especially the ex- pansion of general secondary schools of tihe first cycle seems unwarranted in view of the limited needs for young school--leavers with a general. educa- tion. If the expansion continues beyond the capacity required by manpower needs this might entail social problems. Above all., it would be an in- efficient allocation of scarce financial resources. xxi. In recent months a s:t.gnificant step has been taken in Madagascar wlhiclh might improve the country's planning mechanism. An Interministerial Council, under the Chaintanship of the Vice President and assisted by a Technical Advisory Board, has been set up to study and approve investment projects submitted to it. Ilowever, the task of this cotuncil and of tile Planning Commission would be greatly facilitated if the technical minis- tries would themselves present projects the financial and economic justi- fication of which has been more clearly established. The '-inistry of Public Works sets a good pattern in that respect. Likewise, it wotuld be extremely desirable to strength the study group in the Ministry of Agri- culture, if need be with expatriate personnel, and at the same time to endow it with sufficient authority to influence the programming activities of the various departments in tile Ministry. Not only would this permit a more thorough evaluation of agricultural development projects, but it would somewhat reduce the imbalance presently existing between investment in infrastructure and in more directly productive activities.  I. THE COUNTRY A. Geography 1. At first sight Madagascar offers considerable development promise. Lying between latitudes 12 degrees south and 26 degrees south, with consi- derable variations in altitude, the island has great physical and climatic diversity. The extreme north is very fertile. The hot and humid east coast is well suited for the production of coffee and bananas. In the north-east there is timber and vanilla, while the low-lying plains on the west are suitable for cotton and cattle raising. Only the south is virtual desert. Yet these various regions are cut off from each other by unnavigable rivers and mountain ranges. Inland transport is consequently extremely difficult and highway construction expensive. Coastal navigation around the more populous north and western coasts is interrupted at certain periods of the year by cyclones, which every few years cause extensive damage further inland. Madagascar also lies off the main shipping lanes, which burdens foreign trade with high international freight costs. B. Population 2. The recent evolution of Madagascar's population is typical of the population explosion in the developing world. The first systematic popula- tionI census in the country dates from 1900. It shows that Madagascar's population at that time must have been about 2.5 million. In spite of high fertility rates the population growth was held down by internal strife, plague and malaria. In 1936 the population had risen to 3.8 million, at an annual rate of slightly over 1 percent. After the Second World War in- creased efforts were undertaken to reduce mortality by introducing methods of preventive medicine. Public health services were improved and marshlands were spread with DDT to eradicate mosquitoes. As a result Madagascar's population increased rapidly. In 1966 a sampling count was taken which estimated the population at 6.0 - 6.4 million. Knowledge on present popu- lation growth rates is very scanty. Nevertheless, it is generally believed that population now expands at a yearly rate of at least: 2.2 percent. If this is so, Madagascar's population in 1969 would have been in the order of 6.6 million and would reach 7.5 million by 1975. 3. In spite of this rapid increase in population Madagascar is by no means a densely populated country. It is the fourth largest island in the world, covering a total area of 590,000 square kilometers. The average density is thus hardly over 11 people per km2, or only slightly more than the density for the entire African continent (9 inh./km2). Nevertheless, Madagascar does have a population problem. First, the rapid increase in population has necessitated considerable investments to increase the produc- tion of rice, the main consumption staple. In 1965, when climatic conditions caused rice production to fall below the level of 1964 and 78,000 tons of rice had to be imported, the Government put increased emphasis on rice pro- ductivity schemes. Even in the record year 1964, total rice output was only 24 percent above the output reached in 1954 and hardly above that of 1960.  -2- It became evidenit t1hat the exp.-insion of rice production had lagged consider- ably helhirnd the growth of population. The Government tliexi stressed what han been calle(i the ''politi ' tie du venltre , a pollcy intended to make the i l;iiid self-suifficdent in the production of r.icc and evenLt al1y to permirn. ttic ( ,xport of better qua] Ltv rice. The inplernentati on of tiiis PO0 LCY 11h1S, hoWeVer, required the mobilizationi of consdlerable finrancial. resources, both fronl the Government, FAC and thie EDF. Secondl.y, the populat.Lon of the Madagasca r is not evenly spread over tlhe islandi anid certain areas, primarily tlie central hlauts-Plateaux and parts of the East coast, may soon become ovterpopulated (see Map 1). Although Madagascar has historically been chiar;cterized by numerous internal mig,rations 1/, internal population movements are now some- what impeded by the existing ethinic differences. Unfortunately, the most densely populated area of the Hants-Plateaux is also the region wilere most of the irrigated rice is cultivated and where, because of extensive utiliza- tion of the valleys and lakes, agricultural production may have to be extended to the more marginal hill-slopes (see Map 2). This extension of agriculture in the Hauts--Plateaux will probably entail an increase in the unit cost of production. Whether thiis increasing pressure on the land will suffice to induce emigration is uncertain, but sooner or later the Government will have to face the necessity of encouraging internal population movements through the development of less densely populated areas. 4. The population of Madagas:car remains essentially rural, with only 12 percent of the total living in 24 agglomerations of over 5,000 inhabitants. Over 40 percent of the urban population is concentrate(d in the capital, Tananarive (340,000 inhabitants). It is now generally accepted that tlie population of Tananarive will double in fifteen years and that by 1975-80 it will amount to 500,000. C. Political Situation 5. Prior to colonization by ]'rance the dominant group on the island were Merinas of Soutlheast Asian origin who occupied thie Hauts-Plateaux and made up about 40 percent of the population. During the colonial period the inhabitants of thie llauts-Plateaux took advantage of educational opportunities in France and occupied the bulk of the positions in tle civil service held by Malagasies. The main force behind the independence m..-;ement and the main political beneficiaries of independence were the coastal people. 6. The personal prestige of President T'siranana and his skill at maintaining political balance have resulted in, so far, unbroken political stability, and tolerance for the admittedly small opposition parties. 7. Both economically and culturally Madagascar's ties with France remain strong. The country is a member of the Franc Zone and most of its international trade is with other members of the area. Of the 61,000 1/ See H. Descharmps, Les migrations interieures passees et presentes a Madagascar, Berger-Levrault, l95).  - 3 - foreigners on the island, 34,000 are French, who play a significant role in civil administration as well as in industry, agriculture, and trade. They are concentrated in Tananarive. The university (3,900 students) relies heavily on French financial and technical support. France also provi(les substantial technical assistance to secondary education. 8. Althouglh belonging to tlhe French-speaking African common insti- tutions, Madagascar's working relations witli African countries are higlhly selective, conservative, and pragmatic. Considerable effort is going into developing trade with and attracting tourists from the neighboring countries. As noted above, ties to France remain close. Nevertheless serious efforts have been made in recent vears to widen the range of con- tacts with other countries. The approach to the Bank is itself in part a move to open tup new sources of development aid. II. STRUCTURE OF TIE ECONOMY 9. Madagascar is a poor country. The country's GDP in 1969 is estimated at FMG 217 billion ($780 million). Per capita GDP in that year was in the neighborhood of US$118. This average is, of course, somewhat misleading since there is a large discrepency between urban and rural income"s. In 1966, the latest year for which detailed national accotnts are available, average per capita GDP amounted to US$110. For the Malagasy population alone this figure amounted to US$90, with urban incomes averaging US$160 per capita while rural incomes were only US$80. Thus the average income in the rural milieu is half that of the urban areas. However, if the subsistence income of the farmers is evaluated at urban market prices rather than at farm gate prices, the average rural income is 74 percent of the average urban income, instead of 50 percent (see Statistical Appendix, Table I). 10. Madagascar still. remains basically an agricultural economy. Over 85 percent of the population are rural; the agricultural sector accounts for 70 percent of commodity production, while more than half of agricultural output is in the subsistence sector. Rice, manioc, potatoes and green vege- tables account in value for 62 percent of subsistence consumption, meat and dairy products for anotlher 20 percent. Rice is, however, the main staple and per capita rice consumption on the island (126 kg) approaches the level of Asian consumption greatly exceeding per capita rice consumption in most African countries. 11. Money income from agricultural activities is only 20 percent of total monetized income. About 45 percent of farners' cash income is derived from the production of export crops, and the remaining 55 percent from sales on the local market. Madagascar is largely dependent on the export of primary commodities and semi-manufactured agricultural products for foreign exclhange earnings; in 1968, agricultural products accounted for 85 percent of exports. In terms of value the major export crops were coffee (nearly one-third of exports), vanilla, rice and sugar.  - 4-- Table 1: GRO!S DOMESTIC PRODUCT - 1966 (in lillions of FMC) Commercial Non-Commercial Activities Activities Total- Value added 130.3 37.3 167.t6 Agriculture 25.8 29.6 55.4 Industry 22.1 - 22.1 Building & Construction 4.5 2.0 6.5 Services (private sector) 49.4 5.7 55.1 Services (Government) 26.4 - 26.4 Services (households) 2.1 2.1 Indirect taxes on imports 10.4 - 10.4 Total 140.7 37.3 178.0 12. Up to about 1950 the country's requirements in manufactures were imported mainly from France by a small number of French import-export com- panies. After 1950 a manufacturing sector began to emerge and by 1958 there were about 160 small and medium-size manufacturing enterprises, mostly in food-stuffs. 13. After independence the Government pursued a more active policy of industrialization by setting up a number of development institutions (BNM, SNI) which could lend to or take participation in Government-owned industries, and by promulgating an investment code intended to attract foreign investment. By 1968 the share of manufacturing in GDP was approximately 16 percent, al- though industry is still mostly small-scale (most firms employing less than 20 people) and heavily dependent on foreign inputs of equipment, raw materials and management. 14. On the other hand, the share of services in Madagascar's economy is very large. They probably amount to as much as 60 percent of money incomes, of which 13 percent represents education and healtlh, 25 percent trade and transport and 22 percent government adninistration, including French technical assistance. Close to 50 percent of money incomes are earned in the adminis- tration, togetler with non-profit organizations such as religious missions. 15. The large share of services in GDP underlines Madagascar's weak commodity base. This aspect of the economy is also reflected in a high dependency on imports. The c.i.f. import value amounts to 26 percent of  - 5 - the total supply of goods and services 1/ for final use in the monetized sector. The market value of these imports - including internal transport costs, trade margins and indirect taxes - amounts to 42 percent of the supply. For commodities only, the market share of imported goods for final use is as high as 51 percent. 16. The large share of imports is to some extent influenced by the consumption pattern of the foreign community in Madagascar. According to estimates in the First Plan, close to 20 percent of monetary consumption expenditures in 1960 were spent by 50,000 foreigners with a per capita expen- diture about 20 times the average for the Malagasy population. However, even if the market share of imports were as high as 80 percent in the total ex- penditure of foreigners, Malagasy consumption of imported goods and services would, nevertheless, be 32.5 percent at market prices and 17 percent at import prices. This is still high, but shows a higher degree of self-suffi- ciency in the monetized sector than the total figures would indicate. III. RECENT EVOLUTION A. Trends in Economic Development 17. Because of the lack of production indices and national accounts in fixed prices, it is difficult to assess with certainty recent development trends. The indicators given in Table 2 .and Diagram I are partly in current prices and partly estimates at fixed prices, derived by a crude deflation by price indices. In spite of the uncertainty of the data, it is evident that economic growth has been very modest over the last 6-8 years. Real CDP indicates a decline in per capita income from 1962 to 1965, followed by an increase in the subsequent years to slightly above the 1962 level by 1969. Imports of consumer goods follow a similar pattern, as does the adjusted value of currency in circulation. Production has apparently increased on the average 2.7 percent per annum since 1962, but population growth is estimated at 2.2 percent, leaving only a very small per capita increase. 18. It is possible that these indicators give too pessimistic a picture of recent development. While growth for the period as a whole has been modest, there were two different phases: stagnating production and falling per capi- ta income up to 1965, followed by an average real growth rate of perhaps 4.5 to 5 percent from 1965 to 1969. Public sector investment at current prices nearly doubled during this latter period, and, according to some estimates, private investment lhas had an even greater relative growth, although from a low level. Imports of investment goods and raw materials increased by 70 percent, or by as much as 14 percent per annum, while imports of consumers goods more or less followed the rate of growth of population of 2.2 percent. Total import volume increased on the average by 6 percent per annum; import value increased by approximately 8 percent. 1/ Excluding the services of government administration which simply con- sist of the wage bill.  Table 2: ECONOMIC INDICATORS (birdexe,;, 1962 = 100) Av(.rage Rat-a of Crowtlh .1962 1965 196 (8 1969 1.965 - 1969 Percunt Gross Domestic Product, Deflated 100.0 100.4 113.4 119.1 4.5 Per Capita Incon,e in Constant Prices 100.() 93.7 99.0 101.5 2.0 Export Volume 100.( 99.1 111.7 90.5 /1 Import Volume 100.( .110.5 117.3 139.3 6.0 a) Raw materials 100.( 99.3 1.38.5 165.8 13.7 b) Investment goods 100.0 123.4 173.4 216.7 15.1 c) Non-foodl consumer goods 100.0 94.9 107.5 103.3 2.1 d) Food 100.0 157.5 72.2 140.3 /1 GDP at Current Prices 100.0 112.2 134.7 147.8 7.2 Currency in Circulation 100.0 107.1 131.2 139.7 6.9 Money Supply 100.0 112.5 143.6 151.7 7.7 Consumer Prices 100.0 111.8 118.8 126.5 3.1 Bank Credit to Private Sector 100.0 117.0 163.5 184.9 12.1 Current Government Expenditures 100.0 128.6 147.7 163.8 6.2 Total Government Expenditures 100.0 133.0 173.0 196.0 10.2 Current Government Revenues in Percent of Monetized GDP 25.4 27.1 27.8 27.3 - /1 Has strong annual variations with crops.  DIAGRAM I: ECONOMIC INDICATORS (1962 100) 220 -_ _ _ _ _ /22 -IMPORT OF INVESTMENT GOODS 200 - / TOTAL GOVERNMENT EXPENDITURE 180-4 / /; BANK CREDIT TO PRIVATE SECTOR 180 - _ _ _ _ _ _ _ _ /,