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This chapter investigates the link between informality and growth in Madagascar and aims for a better understanding of the informal sector. It provides an analysis of the characteristics of informal production units and informal employment. Findings suggest that informality is a key feature of economic activity in Madagascar, and that informal production units are the main driver of employment with a deep concentration around self-employment. Overall, informality is associated with a lack of awareness of administrative procedures and the complexity and cost of tax and regulatory measures. The informal sector's Total Factor of Productivity (TFP) growth is more stable and higher on average than formal sector TFP.
1. The COVID-19 pandemic and multiple climate shocks have aggravated Madagascar's fragility. The 2020 recession was about three times deeper than in the rest of Sub-Saharan Africa (SSA). Real per capita income fell back to historical lows in 2020, following two decades of quasi-stagnation reflecting deep political, social, economic, and structural deficiencies.1 The estimated poverty rate,2 which had fallen modestly before the pandemic, increased to 81.5 percent in 2021, almost twice as high as the average of SSA countries. The lack of adequate infrastructure and several years of droughts have worsened food insecurity with more than one million people relying on food assistance from the World Food Program. Internal migration to northern districts has increased as people search for better livelihood opportunities and income sources. Growth remains constrained by weak physical and human capital, high informality and self-subsistence, weak governance and corruption, and exposure to climate disasters.
Education, health, and social assistance spending in Madagascar is among the lowest worldwide and social outcomes such as education quality, malnutrition, basic immunization coverage, and poverty have deteriorated over the last decade. In a context of social fragility and vulnerability to exogenous shocks, Madagascar faces significant constraints to execute and deliver social spending and services. Looking ahead, sustained efforts are needed to implement the authorities' development agenda in the “Plan Emergence Madagascar” and support the needed investments in human capital. This includes creating fiscal space for higher social spending combined with institutional reforms to ensure a more efficient use of resources.