Madagascar - Urban sector review

Report No. 8835-MAG Madagascar Urban Sector Review June 191 Infrastructure Operations Division South-Central and Indian Ocean Department Africa Region FOR OFFICIAL USE ONLY ..~~~~~~~~~~~~~~~~~~~~V ocumment of. e wodr B-. '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 $islos%iwithout World Bank authorization. .5  Currg!ncX Units Malagasy Franc Conversions Based on Exchange Rate (PMGIUS$), 1989: 1,560 FMG 10,000 - US$ 6.40 FMG 1 million = US$ 640 US$ 1 = FMG 1,560 US$ 100 - FMG 156,000 US$ 1 million - FMG 1.56 billion Exchange Rate (FMG/US$), 1991: 1,850 Weights and Measures: Metric System ACRONYMS AND ABBREVIATIONS APU Land Development Agency (Agence fonciere urbaine) ANTAFITA Bus company owned by city of Antananarivo BCT Transport and Traffic Bureau (Bureau de circulation et de transports) BDE National Data Bank (Banque des donnees de l'Etat) BFV Commercial bank (commerce) BNI Commercial bank (industry) BPU Urban Projects Bureau (Bureau des projets urbains) BTM Commercial bank (agriculture) CD Local Government (Collectivite decentralisee) CNAPS National savings fund (Caisse nationale de prevoyance sociale) CNC National Coordinating Committee (Comite national de coordination) CTNDU National Technical Committee for Urban Development (Comite technique national pour le developpement urbain) CTTUS Technical Committee on Urban and Suburban Transport (Comite technique pour le transport urbain et suburbain) DAUH Directorate of Architecture, Urban Planning, and Housing (Direction de l'architecture, de l'urbanisme, et de l'habitat) DEPCT Directorate of Studies, Programming, and Coordination of Transport (Direction des etudes, de la programmation, et de la coordination des transports) DP Property Directorate (Direction du patrimoine) EDF European Development Fund EEM Eau et electricite de Madagascar (former Antananarivo municipal corporation) FAC French aid agency (Fonds d'aide et de cooperation) FAR Fivondronana of Antananarivo-Renivohitra (Municipality of Antananarivo) FIBATA Bus company, Antananarivo  FOR OFFICLAL US ONLY FIHU Fund for Infrastructure and Urban Housing (Fonds d'infra- structure pour l'habitat urbain) FIMA Bus company, Antananarivo FMG Malagasy Franc (Franc malgache) FNDE National Economic Development Fund (Fonds national de developpement economique) GDP Gross Domestic Product IDA International Development Association (World Bank) IFL Local-purpose investments (Investissements a fonction locale) IMF International Monetary Fund JIRAMA Malagasy Water and Electricity Authority (Jiro sy Rano Malagasy) Kwh Kilowatt-hours LTIM Long-Term Image of Madagascar LTPS Long-Term Perspectives Study Ml Ministry of Interior (Ministere de l'interieur) MIEL Mutual savings society (Mutuelle inter-epargnants pour le logement) MIEM Ministry of Industry, Energy, and Mines (Ministare de l'industrie, de l'energie, et des mines) MINEP Ministry of Economy and Planning (Ministere de l'economie et du plan) MPAPF Ministry of Agricultural Production and Land Resources (Ministare de la production agricole et du patrimoine foncier) MTMT Ministry of Transport, Meteorology, and Tourism (Ministere des transports, de la metorologie, et du tourisme) MTP Ministry of Public Works (Ministere des travaux publics) Mwh Megawatt-hours PCE President of Executive CommitteelPrsident du comite ex&eutif (Mayor) PDUM Firat Urban Project, Madagascar (Projet de developpement urbain, Madagascar) PEP Public Expinditure Program PER Public Expenditure Review PME Small and medium-scale enterprises (Petites et moyennes entreprises) PUF Urban Project in the Faritany (Projet urbain dans les Faritany) SAM Social Accounting Matrix SCD Direct Tax Bureau (Service des contributions directes) SD Land Registry Bureau (Service des domaines) SE.TMAD National Housing Authority (Societe d'equipement immobilier de Madagascar) SP MIEL Firm for promotion of mutual savings (Societe de promotion MIEL) SRPCH Regional Bureau for Roads and Bridges (Service regional des ponts et chaussees) SSA Sub-Saharan Africa TAFB Additional Tax on Built Property (Taxe annexe a l'impot foncier sur la propriete batie) TUr Transactions Tax (Taxe unique sur les transactions) UNDP United Nations Development Programme This document biss a restricted distribution and may be used by recipients only in tho performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorIzation.  This report is based on the findings of a mission to Madagascar In October 1989, and of subsequent visits by several tea members. The study was undertaken at th request of the Ministry of Economy and Planni (HINEP), which ensured the coordiation of its activities. The issues of special focus during the mission were proposed by the National Technical Committee for Urban Development (CTNDU), which, together with HINEP, supervised the mission's work. The mission was composed of Orville Grtimes (mission chief), Michel Arnaud (urban specialist, consultant), Mohammed Benouahi (financial analyst), Jean-Marie Cour (urban economistIdemographic specialist), Gilles Horoenfold (housing finance specialist, consultant), and Tidjane Thiam (local finance specialist). Contributions to the report wero prepared by Michel Arnaud, Jean-Marie Cour, Catherine Farvacque, Orville Grimes, Gilles Norenfeld, and Tidjan. Thiam with Mohammed Benouahi. Peter Hasell provided helpful advice on findings of the SAM model. The report wa discussed with the Governmt authorities concerned in February 1991. Report processing and presentation were the responsibility of Catherine utie, Marie-Marthe J;rsmr, Armelle Nau, Connie Kok Shun, and Orville Grimes.  MADAGASCAR URBAN SECTOR REVIEW Table of Contents Pame No. SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . I PART I: THE ECONOMIC SETTING OF URBANIZATION Chapter I: The Real Econoum of Madagascar In an Urban-Rural Perspective .......... . . . . 1 A. Introduction . . . . . . . . . # .. * . . .. . * 1 B. National Resources and Expenditures in 1988 . . . . . . . 2 Social Accounting Matrix (SAM) of the National Economy . 8 C. The Rural Economy and the Agricultural Sector . . . , . . 8 D. The Urban Economy . . .. ........ . . . . 10 E. Urban-Rural Exchanges . . . . . . . .......... 11 F. The Case of Antananarivo . . . . . ...... ... 17 Chapter IIs Urban Policies in the 1980s 9 . . . . . . . . . . . 21 A. Characteristics of Urban Growth . . . . . . . . . . . . 21 Squatter Settlements . . . . . 25 Water and Electricity Networks ............ 26 B. Sector Performances Battling the Odds . . . . . . . . . 27 Housing * a . . 9 9 . 9 9 . . 9 . 9 . 9 9 . . . a . 28 Urban Planning . . . . 9 9 . . . . . . . . . . 29 Operations . . . . . . . . . . . . . . . . . . . . . . 29 Urban Land Management . . . . . . . . . . . . . . . . . 31 Water and Electricity . . . . . . . . . . . . . . . . 31 MunicipalServices 99. 999.999.99.32 PART II: A GROWTH-ORIENTED URBAN STRATEGY Chapter IIIs Medium-Term Scenarios of Growth and Urbanization . . . 33 A. Introduction . . . . . * . . . . . . . . . . . . 33 B. Internal Migration and Urbanization Policies . . . . . . 33 C. The Sustainability of Urbanization . . . . . . . . . . . 34 D. Medium-Term Scenarios of Urbanization and Economic Growth . . . . . a * * 9 9 9 9 9 9 9 * . 35  Chapter V: Urban Expenditure Programs ... 3.9.... ... 59 A. Urban Expenditure Programing In the 19809 . . . . . . . 39 Public Expenditures in the Urban Sector . . . . . . . . 39 S. Tovard an Urban Investment Program . ... .. ... . 41 A Consistency Framvork for Planning ......... 41 Elements of a 1991-1995 PEP for Urban Areas . . . . . . 43 PART IIIs STRATEGY IMPLEMENTATION Chapter Vs Strenzthenina Urban Institutions . . . . . . . . . . . . 47 A. National Technical Committee for Urban Development (CTNDU) . . . . . . . . . . . . . . . . . . . . . . . . 47 B. Decentralization and Local Government . . . . . . . . . 48 Legal Status and Organization. . * * ........... * . 48 Personnel and Staffing .44.4.. 4* 44* 44* 49 Financial Resoures for CDs . . . . . .. . .. . .. . SO Building the City. . .............. . . . 50 C. The Nanag.ment of Antananarivo . . . . . . . . . . . . . 51 D. Ministry of Public Works (MTP) . . . . . . . .*. . . . . 53 Organization . . . . 4 . . . . . . . . . . 53 Project Coordination and Management . . . . . . . . . . 54 E. Ministry of Interior ... ............... 55 F. Selmad S * . . * 4 4 4 4 4 56 G. Jirama S* . . . . . . 4 4 57 H. TrainingRequirements .,44.... 44 . . 57 Chapter VTs Local Government Finance and Financial Manaatement . . 59 Local Governent Finance .... . . ... 59 A. Central Government Transfers . . . . . . . . . . . . . . 61 B. Local Taxes 6 * * . . . * * o . 4 4 * * * * * 63 Department of Taxation 4*44*4444 64 1. Tax base determination . . . . . . . . . . . . . . . 64 2. Tax computation 65 35 Tax registers 66 Treasury Department. . . . . . . . . . . . . . . . . 67 1. Tax collection . . . . . . . . . . . * * * 67 2. Bad debts . . . . . . . . . . . . . . . . . . . . . 68 3. Treasury department budgets 4 . . . . . . . . . . 4 69 C. Other Revenues . . .. . . . . . . . . . . . . . . . . 69 1. Revenues from Goods and Services . .. o... . . . . . 69 2. Parafiscal Revenues . . . . . . . .. a. . . . ... . 70 Financial Management . . . . . 4 * 4 * * * * . . . .71 A. Legal Framework and Budgetary Procedures . . . . . . . . 71 B. Expenditure Programming and Control . . . . . . . . . .72 1. Current Expenditures os......... . 73 2. Capital Expenditures. .4. 94444444 77  Chapter VIIs Urban Land Manaaeunt . . . . . . . . . . . . . . . . 80 A. tand for Urban Growths Concept and Reality . . . . . . . 80 Setting . . . . . . . . . . . . . . . . . so ...8 Land Rights and the Registration System . . . . . . . . 81 Development Control and Guidance . . . . . . . . . . . 82 Settlement of Urban Land . . . . . . . . . . ... 83 B. Options for Improvement . . . . . . . . . . . . . . . . 84 Objectives . . . . . . . . . . . . . . . . * . . . . . 84 Improving Land Development Procedures . . . . . . . . . 84 Iacreasing the Supply of Developable Land . . . . . . . 86 C. ImplemntationIssues ................. 86 Chapter Vllls Housint and Housin.PinFance. . . . . . . . . . . . . . 90 A. The Foundations of Housing Policies . . . . . . . . . . 90 Urbanization, Public Investment, and Housing Finance . 90 Savings and Investment in Rousing . . . . . . . . . . . 91 Access to Property and Rental Housing . . . . . . . . . 92 B. Savings Mobilisstin and the Financing of Housing . . . 94 Mutual Associations and Cooperatives . . . . . . . . . 95 The Banking System and Rousing Finance . . . . . . . . 96 Savings-for-Housing Programs . . . . . . .. . . . . . 98 Other Resources of the Banking System . . . . . . . . . 99 A HousingFinance Institution? . . . . . . . . . . . .101 Employee and Civil Servant Housing . . . . . . .. .. 101 C. Summary of Recomendations . . . .. . ... . . . . 102 Chapter IXs Urban Transport . . . . . . . . . . . . . . . * . . 104 A., Introduction . . . . . . . . . . . . . * * . . . * . . .104 B. The Public Trnsport Crisis In Antananarivo . . . . . . 104 Transport Operators . . . . . . . . . . . . . . . . . 104 Users . . . . . * . 9 . . . . 105 Fares . . . . . . . 106 Road Network . . . . . . . . . .. . . . . . . . . . 106 Sector Organzdation and Management . . . . . . . . . . 107 C. Recovery Measures for Public Transport . . . . . . . . . O107  List of Table. Table 1.1 Distribution of Total Population in 1988 . . . . . . . . . 4 Table 1.2 Gross Domestic Product by Sector . . . . . . . . . . . . . 5 Table 1.3 Urban and Rural Contributions to GDP . . . . . . . . . . . 6 Table 1.4 Total Househol -,xpenditure in 1988 . . . . . . . . . . . 7 Table 1.5 Household Expen .:.;ure on Imported Goods, Year 1988 . . . . 7 Table 1.6 Social Accounting Matric of the Malagasy Economy in 1988 . . 00. *0e*000. *t0*. .................................. 9 Table 1.7 Social Accounting Matrix of the Urban Economy of Madagascar In 1988t Intra-Urban Transactions, and Transactions between Urban Areas, Rural Areas and the Rest of the World .. . .. .. .. . ,..... 13 Table 1.8 Social Accounting Matrix of the Urban Economy of Madagascar in 1988: Detail of Receipts from the Rural Areas and from the Rest of the World. ......... 14 Table 1.9 Macro Aggregates of Urban and Rural Areas, Year 1988 . . 17 Table 1.10 Macro Aggregates of the Antananarivo Region, Year 1988 . 18 Table 1.11 Household Expenditure of the Antananarivo Region, Year 1988 . . . . . . . . . . . . . . . . . . . . . 20 Table 2.1 Urban Population Growth . . . . . . . . . . . . . . . . 24 Table 3.1 Madagascar: Two Scenarios of Population Redistribution and Economic G!-Ywth . . . . . . . . . . . . . . . . . . 36 Table 4.1 Projection of Local-Purpose Investment ('IFL") for 1993 45 Table 4.2 Projection of "IFL' Investment for 1993: Allocation for Expansion of Urban Areas and for Rehabilitation . . 46 List of Annexes Annex 1.1 An Accounting Framework for the Real Economy (SAM)s Main Features. . . . . * . * . a . . . . . . . . . . . . 110 Annex 2.1 Population of Former Urban Communes of Fivondronana and Firsisana . . . . . . . . . . . . . . . . . . . . . . . 115 Annex 4.1 Preliminary Ideas on Preparation of a Long-Term Image for Madagascar . . . . . . . . . . . . . . . . . . . . 116 Annex 5.1 List of Former Urban Communes . . . . . . . . . . . . . 121 Annex 6.1 Local Governments . . . . . . . . . . . . . . . . . . . 124 Annex 6.2 Accounts and Budgets . . . . . .......... . . . 126 Annex 6.3 Finances of Former Urban Communes . . . . . . . . . . . 127 Annex 6.4 Analysis of Budgets of Faritany . . . . . . . . . . . . 130 Annex 6.5 Analysis of Budgets of Fivondronana which are former urban communes . . . . . . . . . . . . .,. .*. . 143  Annex 6.6 Analysis of Budgets of Flralsona which are former urban communes . . . . . . . . . . . . . . . . . . . . .. 150 Annex 6.7 Greater Antananarivot Size Distribution of Land Plots . 157 Annex 6.8 FIHU Decree (Decret No. 87-287 portant creation du Fonds de l'infrastructure pour lVhabitat urbain (F.I.H.U.)) . 158 Annex 8.1 The Urban Housing Market . . . . . . . . . . . . . . . . 160 Annex 8.2 Contractual Savings for Housings Illustrations . . . . . 165 Annex 8.3 The MIEL Projects Evolution and current status . . . . . 166 M NP IBRD No. 20035R  SULMfY OF CONC2LUSIONS AND RECOMNDATIONS 1. The 1980. seemed to confirm to the Malagasy authorities that they had Irretrievably lost the struggle to manage urbanisation. The growth of the urban population, although moderate by standards both of other countries and of Madagascar In the 19609 and early 1970., was hardly matched by any Investment in infrastructure or services. Buildable land, credits for housing, and transport were available to the top Income groups of cities and towns, but to almost no others. Local governments were charged with wide-ranging responsibilities but had few resources with which to discharge them. The capital of cities was bSing drawn down without rehabilitation or replacement. 2. Two parallel events of the late 1980s began to alter this outlook. The first was the increaseJ awareness that, in addition to the external sector, the domestic economy had the potential to contribute significantly to growth. Urban->e.sed activities are responsible for 45X of the GDP, and can contribute even -,. re to growth through the Intensification of rural-urban exchanges. This in tern requires more effective management of urban areas, by local authorities, the central government, and the private sector in partnershlp. 3. Second, practical experience was gained with policies that had previously been understood only at the co.nceptual level. The city of Toamasina, especially, demonstrated that the restructuring of rather disorderly squatter settlements was technically possible, that land tenure problems can be solved despite their complexity, that costs can be recovered In large measure, and that such operations are socially and politically worth pursuing. 4. This report first describes the economic setting which has led to a re-examination of the contribution of cities and towns to economic development. From this analysis, a medium-term growth scenario is derived. The medium-term outlook places amphais on rural-urban exchanges, and on establishment in cities of a proper enabling environment for private Initiative. In this growth-oriented urban strategy, both rural and urban areas would respond more quickly to signals from domestic as vell as from external markets. Finally, specific measures are recommended to Improve revenue generation and financtal management at the local level, the management of urban land, housing finance, and urban transport so that resources in the sector can be spent more effectively. Actions are also proposed to strengthen sector institutions, so that the Improvements realized cam be sustained over the longer term.  - iI - A. The Economic Setting of Urbanization S. In all developing economies, long-term economic growth at&d urbanization are interrelated processes. Sustained growth fosters urbanization and the division of labor between urban and rural areas. Conversely, a prolonged recession restrains internal migration and may eventually shrink the size of the domestic market relative to the subsistence economy. 6. The experience of Madagascar from the late 1970s until very recently has been one of prolorned economic recession, high unemployment, and low and diminishing household incomes. A Social Accounting Matrix (SAM) provides a useful portrait of this situation, for both rural and urban areas, as of 1988. The analysis is undertaken In the context of what the report calls the real economy, which encompasses all activities and transactions whether monetized or noia-monetized, recorded or unrecorded, formal or informal. A SAM shows how the incomings, or resources, of each economic agent or account are balanced by the corresponding outgoings, or expenditures. 7. From this analysis, the rural economy in 1988 is one in which, for the average farmer, the main source of money income derived from farming is his production for the domestic market, beyond his own food needs. The growth of urban areas, which account for most of the domestic market, is a necessary (though not sufficient) condition for the growth of agricultural productivity and rural incomes. In the urban economy, about half of construction, housing, and other activities takes place in the informal sector. .The informal sector has a vital role to play in filling the gaps and exploiting the niches left by the modern sector. For this to occur, however, the modern sector itself should expand, in ;rder to provide infrastructure, markets, and other parts of the enabling environment within which the informal sector can develop. Goods and services exchanged between urban and rural a -as are of about the same order of magnitude as goods exported, attesting further to the importance of the domestic market. 8. In this context, the total urban population increased from 0.7 million in 1960 to 1.8 million by 1984. This growth was at least 6% per year in most cities in the 1960s, but with the economic recession slowed considerably afterward. Antananarivo grew at 6.72 in the 1960s and early 1970s but at only about 4% by 1988. For provincial (Faritany) capitals and smaller townt the rate was slightly higher. When the growth in Antananarivo slowed, expansion of its urbanized area slowed even further, leading to higher densities and overcroNwding. One result was the growth of squatter settlements, in both Antananarivo and some Faritany capitals, as one of the few alternatives to overcrowding. 9. Local authorities, public enterprises, and the central government all struggled during the 1980s to bring direction and management to urban growth. However, few tangible results were achieved. Public expenditures for urban development by all levels of government have been extremely small since 1980, except those made under the first Urban  - IIi _ Development Preject (PDUM) launched In 1985 with IDA assistance. Neither local governments nor the National Economic Development Fund (FNDE) has devoted much resources to urban development. Under these conditions, urban population growth has had to be accommodated through increased densities in existing neighborhoods, and to a small extent by private construction on penr-urban egricultu:al land near road and utility networks. 10. Viewed from a wider perspective, however, the 1980. were less of a disaster for ur-an policy. Important lessons were learned, both at the policy level and from the practical experience of operations. Despite an unfavorable economic environment and some false starts, the 1980s saw the introduction of several key elements of a consistent urban policy. The main challenge for the 1990s is to develop these elements further and combine them in a more effective partnership between the central gover: .Jent, local author'ties, and the private sector. B. A Growth-Oriented Urban Strategy 11. Resumption of sustainable economic growth, with a manageable balance of payments and relative price stability, is the main strat'egic objective of the Malagasy Government. The program of stabilization and macro-economic adjustment implemented by the Government with the support of the World Bank and the IMF is expected to help achieve positive per capita income growth of the order of 2S per year over the long term. Up to the present, the adjustment program has emphasized the need to promote the growth and diversification of exports. In addition to external trade, however, a revival of domestic trade is critically important for sustained economic growth. Domestic trade is best promoted through the intensification of rural-urban exchanges, and by investments in the necessary Infrastructure and services. 12. The elements of the SAM analysis for 1988 were projected to 1998 under assumptions of low and high urbanization. The high urbanization scenario, believed to be the more likely outcome, is associated with a revival of both foreign and domestic trade. Per capita agricultural and rural incomes, not just those in urban areas, are higher in the high urbanization scenario. Rural incomes grow at about 1.42 per year, compared with 0.22 in the low urbanization scenario. The difference is wholly accounted for by the domestic market, since both scenarios assume the same growth of export crops. Rural areas that are connected to growing urban markets can increase their commercial production, which generates cash income, new patterns of expenditure, and a market for related activities. 13. In interpreting these results, it should be remembered that the SAM model does not provide an explanation of growth, but instead gives a view of economic interactions at a given time. A full model of economic growth would include these relationships, but also others such as relative prices and production coefficients in the different sectors of the economy. Calculation of a SAM, especially at two points in time, can however be useful in providing Insight into the behavior of economic agents. This  - IV - behavior underlies the model and explains the difference between the 1988 base situation and that pro.pectod for 1998. 14. In the model, between these two time periods people continue to come to cities, In search of better opportunities and an improvement In their standard of living. In the city, they are not the same economic agents as they were before. They are no longer able to produce food for self-consumption, so must purchase It on the market. They need a higher income to sustain the necessary increases in expenditure. At least initially, migrants would not have this Income and would therefore draw on the family's earlier savings or from transfers from other urban dwellers and from the village (remittances). Nowever, there Is no evidence of a continuous Increase in inter-household transfers over time, so it is likely that this call for transfers Is transitory. Over time, income Is earned in the city. from a variety of production activitiess street vending, repair services, caretaking, and the like. Such activities could not successfully be launchod In rural areas. Pushed by the need for cash, the newcomers take advantage of opportunities, make use of new Inputs, and benefit from economies of scale, mainly because they have no alternative. 25. However, there is nothing automatic about these changes. The results generated by the SAM model are only possible if the physical and economic environment, created by past Investment, is favorable. If this Is not the case, few people would take the risk of moving to cities which offer no opportunities. Nor are the changes without cost. New migrants increase the pressure on the existing stock of Infrastructure and services. If private investment stagnates, and If the expenditures of central and local governments do not inerease, everyone becomes worse off through overcrowding and congestion. 16. Public expenditures in the urban sector need to increase, in order to acconmodate migration In ctties which at the same time make the maximut coatribution to growta. In this regard it is useful to separate the expenditures that primarily benefit the city from those that primarily benefit the nation as a whole and are carried out in the city. Expenditures primarily benefiting the city are termed Local-Purpose Investments (Investissements i fonction locale, InL). 17. From the analysis of the current public expendituro program, it Le clear that the pace of Identification and preparation of new projefts, and of effective Implementation, is much less than is required in the sector. Opportunities for growth continue to be missed. More effective prograSuing of public expenditure would consist first of preparation of a long-term indicative plan, that would provide a vision of the future to which Malagasy societ*y is tending. This effort could be incorporated Into a national strategy for implementation of recommendations of the Long-Term Perspectives Study (LTPS) particularly applicable to Madagascar. Medium- torm objectiver supporting this future vision could be contained in a devolopment plan, that wvuld translate and adapt the long-term vision to the present macro-economic environment and to existing constraints and opportunities. The development plan would be indicative, largely for the purpose of urban and related planning, and focused on geographic and spatial distribution, and should not be confused with centralized planning of the entire economy. Within this framework, the review of the three-year Public  m v - Expenditure Program (PEP) would be conducted to verify that the cost of the program can be met with the resources avai' 'le, and to monitor their lmplementation. 18. rFr. expenditures in urban areas would be devoted both to rehabilitat'^n of existing infrastructure and services and to accommodation of new mas.. tc Based on plausible assumptions about IFL expenditures, it ts conclu4 . that about one-third of asuh expenditures should be devoted to expansion oz 4.ban areas, whils fully two-thirds would be required for renovation c' existing facilities. C. Strateatv Imnlementation 19. For urban expenditure programs to be successfully carried out, sound strategies and strengthened institutions are required in the most Important sub-sectors of urban development. Approaches and recommendations are proposed in the report to achieve this progress in local finance, urban land management, housing finance, and urban transport, as well as in the strengthening of urban institutions. These conclusions are briefly described below. Many of the specific recommendations are summarized in an Immediate Action Program, which proposes the short-term operational measures to be taken in support of the recomendations. Strenathenlna Urban Institutions 20. In order to promote an enabling environment for urban growth, central and local authorities will each need to be strengthened. At the central level, creation In 1988 of the National Technical Committee for Urban Development (CTNDU) has filled a critical gap in the institutional framework for urban development. It should be possible for the CTNDU to expand its consultative role, without interfering with the prerogatives of its member ministries. As supervising ministry for urban development, the Public Works Ministry (MTP) is responsible for urban policies applied by all central and local authorities. However, the internal organization and operations of MTP do not yet reflect the importance of urban issues. The Di&ectorate of Architecture. Urban Planning. and Housint (DAUR), in a restructured MIP, should be given important responsibilities that it would discharge upstream of program Implementation: identification of strategies; collection and analysis of urban datat assistance in management to local governments; urban planning provisions and guidelines; promotion of the domestic construction industry; and, at a later stage, post-appraisal of operations. A Directorate of Urban Operations (DUO), assuming the functions performed up to the present by the Urban Project Unit (BPU), would promote more efficient management and coordination of operations In the sector. Although its organization is satisfactory for the present, the Ministry of Interlor (MI) should similarly be strengthened in order to ensure that local authorities are properly organised, equipped, and staffed to make an effective contribution to urban development.  - vI - 21. The various levels of local povernment (Collectivites decentralisies, CDs) have wide responsibilities, which, however, have not been clarified by defining the specific roles and powers of the different echelons of government within a given area. A reassignment of responsibilities is therefore an urgent priority, mainly to enable the mandate of city administrations to correspond more closely to the functional importance of the city. All towns of a given category would have the same responsibilities and resources, whether their governing CD is a Fivondronana ("municipality") or a Firaissna ("urban district"). There are also many cases where the city is spreading over two or more jurisdictions, and a single authority needs to be established. 22. This need for a single urban administration is most evident in Antananarivo. A two-phase approach is recommended to determine the most suitable legal and administrative framework for the capital. The first phase would focus on improved methods of municipal management, and on the creAtion of new area-wide structures to deal with specific problems such as flood control and urban transport. In this way, the city will gain experience with new methods of urban management on a regional scale, which it so far has lacked. In the second phase, the actual legislation would be considered and, if approved, the application of the new structure would begin. Local Government Finance and Financial Management 23. Urban management in cities and towns of Madagascar is first and foremost a financial issue, revenues being totally inadequate to cover even the most basic needs. Resources of local governments consist of central government transfers, local taxes, and other revenues. For central government transfers, the key principle should be transparency. The Ministry of Finance should commit itself to transferring the amounts to which the CDs are entitled, publish and adhere to a schedule for making the transfers, and consider a new allocation system based on fiscal performance and infrastructure needs. To increase the yield from local taxes, the tax base should be enlarged to reach people who presently escape taxation, and the effectiveness and efficiency of tax collection improved. Other revenues controlled directly by CDs, including revenues from goods and services and parafiscal revenues, have a good potential even though CDs do not rely heavily on them today. 24. Efforts devoted to securing more resources for local governments will have been wasted unless financial management at the local level is significantly Improved. Existing legislation and guidelines should be assembled in a "Code of Local Governments," and "Financial Management Guide," made available to CDs by the central government. Publication of a yearly note giving directions and targets is one of many relatively simple measures that would improve the quality of budgetary procedures. Improved expenditure programming and control will require that CDs make more realistic expenditure forecasts, meet all recurrent costs of operations, and, in a later phase, devote resources to investment using the Fund for Infrastructure and Urban Housing (FIHU), banks, and other external financing.  - vil - 25. An expansion of trainint is required for local governments to become more self-reliant. More generally, training which emphasizes the transfer of knowledge, by means of manuals of procedures guidelines, and information, should be a critical element of any urban development program. Training by the Ministry of Interior for elected officials and central staff seconded to cities and towns should be strengthened. The Public Works Ministry should continue to organize workshops on urban development Issues, aad or. urban finance and management. In this regard, courses in municipal management should be added to the programs of the new public administration training institution (ENFAR). For each community, specific training programs based on an assessment of training needs should bo prepared following the Identification of investments to be undertaken. Urban Land Manaaement 26. Even though the rate of urban population growth is moderate, cities and towns have been unable to provide buildable sites in the numbers required. One Important reason is that only a small fraction of plots have fully legal tenure. In the vast majority of cities over the last 40 years, people have built houses on land that is either of uncertain ownership or registered to someone else. Subdivision controls and building permits are rarely applied. Moreover, families may feel they may occupy virtually any land without prior authorization, especially private State land which is highly vulnerable to squatting. 27. Future actions in urban land management should be taken in support of three main objectives. First, centralization should be reduced and treater involvement of local governments -romoted in the administration and management of both private and State lands. Seconds intermediate procedures toward the legalization of traditional land practices should be identified. The third objective is to introduce Incentives to facilitato the adogtion of these intermediate 2rocedures by both land occupants and local administrators. Reform measures should be introduced in three phases, of 4-5 years each. Actions in the first phase would Include a general cleaning of existing texts, mainly to eliminate inconsistencies and duplication. Drafts of the Settlement Permit, zone plan, and other new intermediate land-use instruments would be prepared for discussion. In the second phase, the new system would be introduced in more cities and towns that show commitment and lnterest. In parallel, a considerable effort would be devoted to resolution of uncertainties over who precisely is the owner or occupier of land (especially private State land) subject to squatter occupation. In the case of Antananarivo, responsibility for land registry, settlement permits, and urban plans would be transferred to the city administration. The third phase would consist of further transfer of responsibilitiy for land and urban planning to Fivondronana or Firaisana of major urban centers, with guidance from the Property Directorate (Direction du patrtmoine, DP) and other central agencies.  - vill - Ron.in and Bous rt Finance 28. As part of efforts to revive the domestic market, there are good reasons to encourage investment in housing, both to make a positive contribution to overall growth and to alleviate the social impacts of the liberalization program. However, financial programs based on Improved mobilization of private savings are essential in order for urban housing to escape its current stagnation. Several programs of this type have been prepared over the past decade, b-it have not been carried out. Realistically, one should think not in terms of a single financing system but of a number of systems. In the near term, the quality of service and the ability to expand steadily while maintaining financial balance, rather than the number of dwellings financed, should be the goals of housing finance programs. 29. The most important element of the housing finance strategy is to increase the production of serviced lots, since this Is likely to be effective in increasing the number of savers and builders. The encouraaement of rental housina should consist first of allowing rent increases to follow the market, and next of granting temporary tax exemptions for new rentals. A policy favoring home ownership would have two main features. It would first assist in the establishment and operation of mutual or cooperative societies and associations for savings and credit. Second, con4ractual savings programs would be introduced on a competitive basis among institutions. Central Bank regulations should establish the guidelines, but not the details, for banks and other financial institutions to launch effective housing finance programs. Urban Transport 30. Low fares, poor roads, congested streets, and inadequate service have considerably reduced the supply of transport, especially in Antananarivo. A six-part program for the recovery of public passenger transport includes action to address issues of organization and management, fares, transport operators, and users. First, the management audits recently completed for the transport companies FIBATA and FDIM should be disseminated and their results subject to a detailed review. In addition, the idea of transwort plans is sound, but should be applied flexibly. As the capacity to prepare such plans is built up, scarce resources could be focused on the preparation of investment projects and their evaluation in the annual reviews of the Public Expenditure Program (PEP). Fares must also be raised, but discretion can be exercised over the speed at which tariffs covering recurrent expenses are reached, and measures taken to mitigate the social impacts. Fourth, the highest-priority improvements to the road and street network of Antananarivo have been identified, and should be considered in preparing PEPs. Fifth, studies and project planning on the scale of the Antananarivo metropolitan area shou'd be expanded, with the Traffic and Transport Bureau (Bureau de circula-on et de transport, BCT) likely to play a major role. Finally, to further encourage private initiativet, the 1988-89 legislation setting out the revised organizational framework for transport, and which allows independent operators as well as  - ix m cooperatives and tiansport companies to be granted routes, should be given wid, practical applilation as rapidly as possible. D. IXqEpdlata Action Program 31. The actions outlined above constituto a medium-term program dsigned to revitalize Malagasy cities and the contributions they should make to economic development. Within this program are measures which should logically precede others, which facilitate reforms In related areas, or which for other reasons have highest priority and should be carried out first. These measures make up an I_ediate Action Program, and are summarized below according to the level of decision-making responsibility for them. At the national level: a. Reassign responsibilities among CDs and reclassify cit.ias and towns according to their economic lmportance (para. 5.6). b. Clarify and strengthen procedures for central government transfers to CDns and of the role of public accountantsl disseminate a Code of Local Governments, Financial Management Guide, and note on budgetary procedures. Impl_emnt a comprehensive program of strengthoning local finances in collaboration with selected CDs (paras. 6.10, 6.31, 6.44, 6.46). C. Implement first phase of urban land management program (pars". 7.28- 7.30). d. Launch process of preparation of long-term Image of Malagasy economy, as a first step in the process of preparation of a national development plan with PEP for urban areas (paras. 4.10-4.27). e. Take final measures to settle question of compensation to Antananarivo for "ssets of municipal corporation (EEN) (pars. 2.13). f. Establish mutual or cooperative savings associations and contractual savings programs, vith appropriate Central Bank regulations (para. 8.50-8.52). g. Reorganize NTP to give more focus to assistance from DAUR to CDs, and establish a Directorate of Urban Operations (DUO), assuming the tasks previously assigned to BPU, to coordinate and monitor project Implementation (para. 5.20-5.25). h. Carry out assessments of training requirements for CDs, national ministries, and specialized agencies, and design training programs in municipal management (paras. 5.33-5.311.  In Antananarivo: i. Carry out the first phase of effort to agree on a new legal and admnlistrative status for the capital, including Improved management methods particularly by the Fivondronans of Antananarlvo-Renivohitra and creation of area-wide entities for flood control, transport, and other specific concerns (paras. 5.14-5.16). J. Establish a Technical Study and Coordination Unit for the Antananarivo metropolitan area (pars. 5.16). k. Following agreement with JIRAMA on amounts to be billed and other outstnding issues, achieve full cost recovery for water and electricity services (pare. 6.55). 1. Increase revenues from goods and services and market stall fees, and streamline parafiscal revenues (para. 6.36-6.41). In Faritanv capitals ind smaller townes m. Multiply urban operations of the Toamasina type, combining physical environmental Improvements and new housing sites with reforms in local finance and financial management, and the introduction of intermediate land tenure en urban planning instruments (para. 2.22 and 8.48). n. Conclude Program-Contracts with central government defining yearly objectives and the means of achieving them (para. 6.68). O. Increase revenues from goods and services and market-stall fees, and streamline parafiscal revenues (pare. 6.36-6.41). p. Followtng agreement with JIRAMA on amounts to be billed and other outstanding issues, achieve full cost recovery for water and electricity services (para. 6.55).  PB"I. THE ECONOMIC SEIMN5 OF URBANIZATION  CHAPTER I THE REAL ECONOMY OF MADAGASC' 4 AN VRBAN-RURAL PERSPECTIVE A. Introduction 1.1 In all developing economies, long-term economic growth and urbanization are Interrelated processes. An uninterrupted period of economic growth fosters urbanization and the division of labor between urban and rural areas. Conversely, a prolonged recession restrains internal migration and may eventually reduce the size of domestic markets relative to the subsistence economy. 1.2 Since the late 1970s, Madagascar has experienced a prolonged economic recession, as shown by per capita GDP which has shrunk by 50X in ten years. During this long process of economic decline, the modern sector, which is mostly urban,. and the urban economy as a whole have been strongly affected. High unemployment, low and diminishing household incomes, and Inadequate public services have considerably reduced the level of activity of enterprises serving the domestic market. 1.3 This economic decline affected urban areas in two important respects. First, it induced a significant abatement in the pace of urbanization and of inter-regional migration. For example, recent surveys of the Antananarivo metropolitan area 11 show that the 1988 growth rate of Antananarivo was slightly below 42, which, by the standards of African countries, is low. Smaller towns live Tsiroanomanididy, located outside the main centers of activity, have growth rates which are probably below natural population growth, turning them into centers of outmigration. Coastal cities and towns, however, seem to have maintained higher growth rates, in the range of 5 to 6%. Because of their connections with the rest of the world, they may have been less severely hurt by the crisis. Overall, the 1980-88 urban population growth rate is estimated at only 4S, compared with 62 during the 1960s and 1970s. 1.4 The second major effect is in the form of missed opportunities. Urban-based activities are responsible for 45% of the GDP. This apparent reduction in the pace of population redistribution can be seen as one form of adjustment to the economic recession. One might believe that low urbanization would help the economy by reducing urban poverty and unemployment and allowing local governments to improve their financial situation. In reality, however, an abatement in the process of population I/ In addition to the Fivondronana of Antananarivo-Renivohitra, the Fivondronana of Ambohidratrimo, Atsimondrano, Avaradrano, and a portion of Arivonimamo are included in most statistical and policy definitions of the Antananarivo metropolitan area.  2- redistribution between regions, and between rural and urban areas of Madagascar, represents opportunities missed to take advantage of the changing economic potential of different regions. Better management of the domestic market would have allowed some of these benefits to be realized. 1.5 Liberalization has placed Nadagascar on the threshold of a new phase of growth. If this growth is sustained through _he 1990s, urban areas will be called upon to generate as much as S5% of the overall GDP and to be responsible for 702 of the total GDP izs4rease during the decade. This would also imply that fully four-fifths of total capital accumulation would occur in cities and towns. The implementation of adjustment programs suggests that this formidable task would be carried out in an increasingly sound macroeconomic environment. However, the 1990s will also be a decade of severe financial constraints and difficult choices to be made among pressing needs in all sectors. It is therefore critically important to have a clear understanding of the present situation of the urban economy, of its present and potential future role, and of the costs and benefits of urbanization. 1.6 The purpose of this chapter is to analyze the contribution of Malagasy cities and towns to the overall economy. The analysis is undertaken in the context of what this report calls the real economy. The real economy encompasses all activities and transactions, non-monetized as well as monetized, unrecorded as well as recorded, informal as well as formal. Therefore, the aggregates of production, income, and expenditure generated by this type of analysis will be broader than the usual macro- aggregates compiled in national accounts. This also means that such figures, foL the time being, are not immediately accessible from existing information systems and require special analysis. The extra effort, however, is justified since only by taking account of all economic transactions can supply and demand in the domestic market be reliably estimated. 1.7 Section B below briefly presents the overall situation of the economy in the base year 1988. Sections C and D are devoted to the rural and urban portions of the national economy, respectively, for the base year. In Section D especially, attention is called to the critical weaknesses of the current urban economy, such as the low productivity of urban-based activities and the inefficiency of the transfers that cities receive from the rest of the country and from the rest of the world. The concluding section of this chapter reviews the components of rural-urban exchanges and explores the relationships among population redistribution, urban-rural exchanges, and economic development. B. National Resources and Exnsnditures in 1988 1.8 As a benchmark for the analysis, a matrix of population distribution (shown in Table 1.1 below) shows the urban vs. rural distribution of the population according to socio-economic categories,  togethe- with the corresponding growth rates. These particular socio- economic categories are adopted because they show important differences In consumption and investment behavior, and therefore would react,differently to policy changes affecting the urban sector. The primary population is mostly engaged in agriculture. The mixed population, although also engaged in agriculture, hAs other productive activities such as trade. The informal non-agricultural population is the difference, in both urban and rural areas, between those cl"ssified in other categories and the total population. Employees of the central ard local governments (except the top levels, included in the elite, and employees of public enterprises, in the 'other modern v :tor" category) msas up the civil servants category. In the other modern sector are those deriving most of their income from (non- agricultural) wages and profits or ownership of firms or enterprises. Finally, the upper level of ths society is identified as the elite, which plays a major role in overall expenditure patterns and in the decision- making process. 2/ As discussed further in Annex 1.1, the level and pattern of expenditure of each category of the urban and rural population is quite different, especially regarding their sensitivity to changes in the macroeconomic environment. 1.9 Table 1.1 indicates that the urban population, defined as the population of the 100 cities and towns with more than 5,000 inhabitants in 1988, represents 26Z of the total population. The urban modern sector broadly defined, including civil servants and the elite, comprises 362 of the urban population and its present growth rate is of the order of 32. at 2/ Expatriates from developed countries are considered as part of the elite category. at This growth was probably negative through the 1980s, during the worst of the economic recession, until about 1987.  - 4 - Table 1.1 DISTRISTION OF TOTAL POPULATION IN 1988 ('tw URBAN RURAL TOT.POP. GROWTH RATES 88-" X POPUL. I POPUL. s POPUL. U R P AGRICULTURAL 7 2W 68 4,601.6 46 6,862 2.0 2.? 2.7 mIXED 10 460 80 8,000 81 8,450 4.0 8.0 8.1 INFORMAL 42 1,200 4 s0e 18 1,600 6.2 2.0 4.0 CIVIL SERVANTS 11 8a0 2 140 4 470 8.0 2.0 2.7 OTHER MODERN SECTOR 22 041 1 so 0 701 8.0 2.0 2.0 ELITE 2 680 a 4.2 1 57.2 2.6 2.0 2.0 TOTAL MODERN 80 1,024 2 204.2 11 1,226 TOT.NON AGRICULTURAL 77 2,224 0 604.2 24 2,726 TOTAL 100 2,674 1in 6,3BO 189 11,240 4.0 2.8 8.1 X TOTAL POPULATION 25.6 74.4 108.0 Source: Total population: World Bank projections based on 1985 Census. Urban population: Mission estimates. 1.10 GDP, calculated to include non-monetized as well as monetized and recorded as well as unrecorded transactions, may be termed 'real GDP.' Table 1.2 shows the sectoral distribution of "real GDP.' The estimates of the table use the broader concept of the real economy, and therefore differ (often considerably) from official national accounts. For example, Madagascar's 1988 GDP at market prices as conventionally estimated sounted to FMG 2,650 billion 41, while the SAM estimate Is 162 higher. The share of- construction and public works in GDP is 1.8% as assessed by the Bancue des donnees de l'Etat (BDE), but 6.62 when, all transactions in the real economy are accounted for. 1.11 The larger estimates given by the SAM for the value added of some sectors and for GDP as a whole do not, however, support the conclusion that the Malagasy economy is in relatively good shape. The larger per capita GDP estimate for Madagascar of US$196 (see Table 1.2) can be compared with estimates for Zaire and Cate d'Ivoire, using the same real economy approach, of US$359 and $1,165 respectively. Moreover, the estimate for the share of construction and public works, although five times higher than the BDE estimate and 2.5 times the World Bank proje tion for 1988 in the revised national accounts, is less than one-sixth the corresponding figure for Cote d'Ivoire, which has roughly the same population. The over-valuation of the CFA Franc undoubtedly explains part of this difference. The rest, however, reflects the relative weakness of Madagascar's construction sector, which is a good indicator of the real welfare of households and a strong influence on their productivity. The low levels of private and public investment are illustrated f- Antananarivo, where more than two-thirds of the population 41 World Tables, 1989-1990 edition.  increase is accommodated in existing housing units. The floor space per inhabitant in Antananarivo is 3 m2, very low by African standards. Table 1.2 GRDSSOMC PROC BY SECTO (IN US$ MILLION) YEAR 16 NON MONIYZE MONETIZED TOTAL RA GOP MARKET PRICES FCT.COSTIIT PRICES FOOD SELF CONWTION 414 410 416 OTR AGRICULTU 448 401 448 MINING METALJRGY 14 8 14 MAIUFACTURIN 214 192 214 CNSTRUTION PUSLIC WORKS 48 16 186 140 UTILTIT so 27 80 TRANSPORT AN TRADE 859 $10 8C9 PRIVATE SERVICES 186 281 $82 see ADMINISTRATION 116 115 116 IMPORT TAXES IS66 GROSS DOMST.PRODUCT US MILLION 691 161 169C 2208 GDP PER CAPITA USS PER INHABITANT 68 144 174 196 ROSS DOMST.PRODUCT mG MILLION 844191 23094 2791066 81S226S Source: Mission estimates 1.12 Table 1.3 shows the relative contributions of urban and rural areas to sectoral value added, and to GDP. Average value added per capita is US$342 in urban areas and US$146 In rural areas. The comparable figures for Cote d'Ivoire are US$1,717 and US$723 res lctively, or five times higher In both cases. Interestingly, the urban-rural disparities are the same In both csses. If the analysis were taken further, and comparisons made at different points in time, the impact of development strategies on urban- rural income differences could be traced. A premise In this respect suggested by the present analysis is that the actions undertaken In agriculture to promote the development of Madagascar have had little impact on the relative productivity of rural and urban areas. 5/ 51 A corresponding premise c,n be advanced for Cote d'Ivoire, that the "urban bias,, allegedly very strong, has not in fact Induced a larger urban-rural difference in productivity than is found In Madagascar.  - 6 - Table 1.3 URBAN AND RURAL CONTRIBUTIONS TO CDP (IN US$ MILLION) YEAR 1988 ORANC# CONTRIBUTION TO VALUE ADDED URBAN RURAL TOTAL URB/TOTAL FOOD SELF CONSUWMPTON 57 859 416 0.187 OTHER AGRICULTURE 79 864 448 0.179 MINING METALLURGY 12 2 14 0.806 MANUFACTURINO 121 9J 214 0.667 CONSTRUCTION PUBLIC WORKS 76 71 146 0.614 UTILITIES 28 2 80 0.930 TRANSPORT AND TRADE 220 181 869 0.685 PRIVATE SERVICES 222 144 806 0.666 ADMINISTRATION 86 20 116 0.764 IMPORT TAXES 76 28 105 0.729 TOTAL REGIONAL PRODUCT 984 1222 2208 0.448 VALUE ADDED PER CAPITA 842 148 198 U/R : 2.84 Source Mission estimates. 1.13 The pattern of expenditure of urban and rural households, although rather similar to that observed in most countries of Sub-Saharan Africa (SSA), reveals that the standard of living of the modern sector is depressed (see Tables 1.4 and 1.5). This can be seun by comparing per capita consumption (including non-monetized consumption) for the different population groups, and locations. Taking this figure for the more remote rural areas as an index of 100 (corresponding in 1988 to US$90 per capita), other averages range from 130 for the agricultural population as a whole, to 200 for the urban informal group, 460 for civil servants and the other modern sector, and 3,500 and above for the elite. As Table 1.5 shows, urban areas, which account for 47% of total household expenditure, are responsible for fully 852 of total imports for final consumption.  -7- Table 1.4 TOTAL HOUSEHOLD EXPENDITURE IN 1988 (IN US$ PER INH BITANT AND USS MILLION) URBAN RURAL TOT. POPULATION PER INN. TOTAL PER INN. TOTAL PER INN. TOTAL AGRICULTURAL 128 26 117 570 118 S9$ MIXED 174 78 1" 402 189 481 INFORAL 188 220 1in 40 174 261 CIVIL SERVANTS 480 142 3a4 48 a9s 185 OTHEIR OERN SECTR 449 284 851 21 486 W8 ELMTE 8848 264 188T 0 a88 210 TOTAL MODERN 01s 086 840 09 669 09 TOT.NQ4 AGRICULUML 882 880 218 110 852 800 TOTAL. POPULATION 882 054 120 1082 181 2to X OF TOTAL WEND. 47 68 160 Sources Mission setimtes Table 1.5 HOUSOLD EXPENDITURE ON IMPORTED GOODS IN 1988 URBAN RURAL TOT. POPUTION PER INN. TOTAL PER INN. TOTAL PER INH. TOTAL AGRICULTURAL 8 2 2 11 J is MIXED 14 0 4 11 6 10 INFORMAL 19 22 7 2 10 24 CIVIL SERVANTS 78 24 29 4 eo 28 OTHER MODERN SECTOR 91 58 49 S 87 S1 ELITE 1887 1 1267 72 TOTAL MODERN 16 158 42 8 132 162 TOT.NON AGRICULTURAL 79 176 21 11 08 186 TOTAL POPULATION 04 188 4 88 19 210 SHARE OF IMPORT IN EXPEND. 22 S 15 X OF HOUSEHOLD IMPORTS of 1S 160 Sources Mission estfLates  - 8 - Social Accountint Matrix (SAM) of the Nationdi Economg 1.14 With an urban-rural breakdown of the population, and a suitable accounting framework, It is possible to show the Incomings and outgoings of resources both for the nation and for the population that is specifically urban. Such an accounting framework is provided by the Soctse. Accounting Matrix (SAM). Table 1.6 presents an aggregated version of the SAM for 1988 covering the whole country. In essence, a SAM shows how ths incomings, or resources, of each agent or account are balanced by the corresponding outgoings, or expenditures. For a fuller description of the mechanics of this approach, see Annex 1.1. 1.15 The results of the SAM will now be examined in more detail so that implications can be drawn for the behavior of the rural economy, the urban economy, and urban-rural exchanges. A profile of the economy of AntAnAnarivo, and of its exchanges with the surrounding region, is presented In the concluding section. C. The Rural Economy and the Agricultural Sector 1.16 In rural areas, agriculture is the mainstay of 94X of the population. It generates 672 of total household income, and 902 of the private expenditurea are made by farmers. These figures demonstrate that agriculture Is the driving force of the rural ecorzmy. They do not, however, indicate the locations of markets for agricultural production. This question is addressed below as rural productivity, income, and growth ere discussed in the framework of the real economy. 1.17 Table 1.6 sbows that, at farm gate prices, export crops (including export taxes) at US$174 million represent about 172 of the total agricultural output of US$1.03 billion, a proportion comparable to those found ln other SSA countries. 6/ Par more important is the production of food and other primary commodities, such as fuelwood, for the di.mestic market. However, it is critically important to note that nearly half of the total production for the domestic market is not monetized. It is consumed locally, with little or no effect on other sectors or on the monetized economy. For that portion which Is monetized, the domestic market accounts for 672, and export crops the remaining 332. The domestic market is shared roughly equally between rural areas (452) and the cities and towns (552). 61 Defined from Table 1.6 as agricultural commodities which are exchanged with the exterior (283) divided by total agricultural commodities (1682).  TADLe 1.6 uci A**nlM NUtM O TM ,W.Dt GiN7 IF 1FE WMI*N 666 MIN.. Aifl FRIC I 2 a 4 6 9 10 1it 1 is 14 is to 6 to9 t OASIoS W oSleTS vman 6046176 A?vtT CDm.L tClUWE MAL octet mzm tWlS NA*L LoC.O IItl.0WTD &CO.OH "M. USIC. -l A.6lu1m ST 011r06c 16MA. ".C.<6Dfc9.aw Cum NW aW CWITAL TTAL A I_l Hn S go 2 2 o 184 72 66 a# -0 9S a SAL I_usLIS 6 6 a a 6" as 34 low 4 am C t- 0_6S 1is I 6 4 7 0 0 1 6? I a 0 6066t. 406 as 2 li 12 18 * U gm 1? so E _QS1 FO s. OM.m * 511t 2 p vau c .m"on6 si 191 go 126 - 62 a WAMIS D _1366 1a 6 115 so 0 H W.IC. 120 to a U 29 140 2 low t 6.Om 6I Ua1n1 ea 497 1i to 176 J AC.Mv.uIaA. io o 16 am K A11v.0IS1UIcTm 0 - - L IV.01 I1 a? 16 N CW.A=.HJWN U 2 45 SW 0 17 N CW.L.LCA QM# 6 0 a 6 0 CAP.AC.W4ul 65? am U 7? l15 P TMAL C0UR< 9w 106E 8 200 66 as 1 10 106 28 1a" 1V 6 I1 R 9TASR.CI 1N 0 a4 so 41 * 0C!60.CAML O tt 7 T 0TL 964 I0 U so J 2 1260 6n N09 166 1 16 5 2 16? 6 i1t 477 7  - 10 - 1.18 For the average farmer, therefore, the main source of money income derived from farming is his production for the domestic market, beyond his own food needs. In constant prices, the growth rate of the urban market for food and other agricultural products is of the same order of magnitude as the growth rate of the urban population. With a high urban population growth rate, for example, the growth of the average farmer's income generated by the sale of food to urban consumers is likely to be greater than what can be expected from the sale of export crops. 1.19 Non-agricultural sources of Income in rural areas, which account for 332 of rural income, are also linked to the dynamics of the agricultural sector. Over time, non-agricultural income per person can grow only if agricultural income itself is growing. Artisan or small-enterprise activity for the rural market should be developed as one element of a rural strategy, but by itself would have limited effects because of weak purchasing power and markets for the products, and (in areas of low population density, with poor infrastructure and services) low productivity. The growth of urban areas supplements the rural markets with additional consumers, further enhancing agricultural productivity and rural incomes. 1.20 Many of these features of the rural-urban economy are illustrated in the Antananarivo region. The periphery of the capital city consists largely of plains of the Ikopa, Mambs, and Sisaony rivers and their tributaries. where irrigation has been established for more than a century. Although i. _gation implies a rather well-developed form of land tenure and agriculture, tl'e management of local governments in these areas has been poor. This has forced many residents to retreat from the market economy to a pattern of activities having more to do with immediate survival and local self-sufficiency. The rural periphery of Antananarivo is crowded with candidates for urban in-migration which the city is unable to accommodate. There is consequently the paradox of a low development of commercial agriculture, very small family farms, and low money incomes on the outskirts of a major city. D. The Urban Economp 1.21 At first glance, urban areas, which contribute 45X of total GDP, 50S of total savings, and 662 of total investment, appear in better shape than the rest of the Malagasy economy. However, a more detailed analysis by type of household and by activity reveals the precarity of the socioeconomic situation in cities and towns, especially those of the central plateau and the smaller towns. The rapid deterioration of infrastructure and public services, combined with inappropriate macroeconomic policies, have led to the decline of construction and public works, private services, household goods, and other urban-based activities directed mainly at the domestic market. Equally as important has been the resulting contraction in urban- rural exchanges.  - 11 - 1.22 The disparity of per capita expenditure between urban and rural areas noted earlier (see para. 1.12) is the result of several complementary factors. The distribution of the urban population by social category differs significantly from that in rural areas. Cities also typically require higher expenditures for the satisfaction of basic needs, such as housing. There may also emerge a different perception in cities of the desirable level of consumption: by offering a larger variety of goods and services, the cities generally increase the willingness of residents to buy and, consequently, their willingness to earn cash income. Examples of these effects observed in urban areas are the larger share of services In the prices of consumer goods such as food, higher perceived needs in public infrastructure and services, a higher share of monetized consumption in total consumption, and a higher share of consumption imported from abroad and from other regions of the country. In Madagascar, however, these effects are only beginning to be felt. Incomes of most urban households are so modest that food expenditures still make up 59X of total expenditure in the modern sector, and reach 74Z in the informal sector. Little purchasing power is left for other goods and services which generally form the basis of the urban economy. 1.23 In cities and towns of Madagascar, three main sub-sectors of specialized activity explain a large share of total urban output as well as the extent of urban-rural exchanges. First, agroindustries, which are mostly devoted to feeding the cities, account for some 402 of urban output. Second, construction and housing, devoted to building the cities and sheltering inhabitants and their activities, makes up about 202 of the total urban output, even though this sub-sector i.s depressed and should be contributing much more to output. Finally, administration, devoted to governing the entire territory through the urban network, accounts for about 102 of urban output. 1.24 About half of these activities take place in the informal sector. Although cities and towns will rely heavily on the informal sector to become revitalized, its potential contribution should not be overestimated. At present, it accounts for only about 202 of urban value added. Over the long term, the informal sector has a vital role to play in filling the gaps and exploiting the niches left by the modern sector. For this to occur, however, the modern sector itself needs to expand, in order to provide infrastructure, markets, and other portions of the enabling environment within which the informal sector can develop. E. Urban-Rural Exchanges 1.25 The exchanges between urban and rural areas form one major part of the long-distance exchanges which take place inside a developing economy. These exchanges involve movements of population and labor, transactions of goods and services, and transfers of revenue and capital.  - 12 - 1.26 Exchanaes of Population. As mentioned earlier, population redistribution, involving net migratory flows from rural to urban areas, is the main determineant of the division of labor and of urban-rural exchanges in SSA. Urban population growth, however, is one among many complex movements of populatior.. The same urban growth rate may correspond to different stages or paces of the division of labor. In Madagascar, the decline of the Image of cities as poles of modernity and their difficulty :n accommodating new migrants has promoted a sort of Iruralization" of the urban peripheries, in which commercial agriculture tends to be replaced by low-productivity farming for food self-sufficiency. 1.27 Exchanges of Goods._Services, and Income. Transactions between urban areas and rural areas of Madagascar appear in the urban SAW presented in Table 1.7 below. The upper left portion of this urban SMH shows the transactions taking place within and between urban areas themselves. The lower left part reflects the payments made by urban areas to rural areas and to the rest of the world. The upper right poraton summarizes the incomings (receipts) In urban areas from rural areas and from the rest of the world. Transactions of urban areas with rural areas and with the rest of the world are categorized in the second table of the urban SAM (Table 1.8).  Table 1.7 SKIM. _cnI o K%nUO e wow _, IWLs ,arc iw ie "S=M~ ~mri. NO 1RRMSATflJ UOIg iMO Md.m PAW MMSN IE MM OF 1TM VWb waia Pe we meum. RN 0~n MMI weuws LOCIL mOM. FMr we.CMs.#oUeW. MIC. siwe ANUM..asMm suM ,uMw.. c.GMrWi.OW am. AMU M ma am "Wmui OMAL OM femaOS s * in so as we a n we OCLX _M.1 is 4 0 S O 0 A as * a so 0Km. fIN.W u 1, 54 4 4 05 M4 47 1J t t M M. Me 2 onWI WNW$ ma.m1M Ma as S' 4w marsIUU lit 6 at M0 0 c...iAWM. on as a a as as as lae Me W :a oWI Sto uo "MW a cc..MM 0 4 " U N 1"FIV.Co umww jl " JO #1 I t40 M 104 t COP.M.ISM. 10 5 1 0 U CnaC.Lc & imra as TWAP.. vapw a mese a e e w e u e aaas ee h aar urs To M.L MaS a lte lit M .3 ass ONw pAWOS To a.m OF110 UND is 40 4? we 8k as. ALOte CAIMA. IeGWe I n aso mPI MoAIL we se us8 am 429 we Mer u. Ws 1e to" lit a se e as" in  - 14 - ji aRI8I!r I; l J S 5a 30 313e aE t. 000