Madagascar: Recent Economic Developments and Selected Issues

This paper describes economic developments in Madagascar during the 1990s. The paper highlights that Madagascar achieved financial stabilization in 1996 owing to the stepwise implementation of sweeping reforms that started in 1994 with the establishment of an interbank foreign exchange market. The paper focuses on selected aspects of Madagascar’s medium-term economic strategy, deals with poverty issues in Madagascar, and provides an analysis of the Malagasy civil service and a strategy for its reform. The paper also examines Madagascar’s trade regime and export processing zone.

Abstract

This paper describes economic developments in Madagascar during the 1990s. The paper highlights that Madagascar achieved financial stabilization in 1996 owing to the stepwise implementation of sweeping reforms that started in 1994 with the establishment of an interbank foreign exchange market. The paper focuses on selected aspects of Madagascar’s medium-term economic strategy, deals with poverty issues in Madagascar, and provides an analysis of the Malagasy civil service and a strategy for its reform. The paper also examines Madagascar’s trade regime and export processing zone.

III. Toward a Strategy for Civil Service Reform

A. Main Characteristics of the Current Civil Service

A qualitative assessment of Malagasy civil service

69. There seems to be no doubt among observers that the civil service in Madagascar is not performing well. It is reported to be inefficient and unable to carry out its essential tasks. Civil servants’ motivation seems to be adversely affected by low and declining real pay, inefficient job and career management, lack of material resources, insufficient control, and political interference in recruitment and promotions. As a result, the civil service is allegedly lacking credibility with the population and with the government and donors. It is described to be held in low esteem by its customers and taxpayers. In selected areas, such as education, health, environment, and communications services, the civil service has been complemented by a parallel administration financed by donors.

70. The reported ineffectiveness of the civil service has been a hindrance to a faster pace of development and, more specifically, the absence of clear objectives, incentives, and controls has made it difficult to implement decisive changes in policies. Discretionary powers of civil servants are large because regulations are often unclear and because conflicts of interest are ignored. Experience has shown that poor salaries, discretionary powers, and insufficient controls are prone to lead to widespread corruption.

71. The main objective of civil service reform in Madagascar therefore should be to build a civil service that can deliver valuable services to customers and taxpayers. Since civil servants will retire in large numbers in the next decade, owing to the age structure, there is an immediate challenge to start recruiting and training a new generation of civil servants, in particular at the higher echelons.

Statistical overview of the Malagasy civil service

Overall size

72. The size of the civil service in Madagascar is not accurately known, owing to severe shortcomings in the management and statistical monitoring of the civil service. The 1990 census of civil service was not fully processed as a result of civil disturbances and political instability in the early 1990s, and it is by now largely outdated. Moreover, no centralized database on government employment is maintained. The Ministry of Civil Service estimated the total number of civil servants at about 125,000 in 1996 (including short-term contractual employees, as well as about 22,000 military staff). By contrast, payroll data from the Statistical Office (INSTAT) suggest a size of about 121,000 in 1996. It appears that the overall size of the civil service (including military) has remained broadly constant over the last ten years.

73. Both databases have shortcomings. Data from the Ministry of Civil Service are incomplete and poorly maintained, while INSTAT data are reported to include “ghost” workers while excluding off-payroll employees, who are paid on nonwage budgetary credits. Under the assumption that the overreporting (ghosts) and the underreporting (off-payroll workers) roughly balance, the current number of government employees would be about 120,000. However, a higher number cannot be ruled out. In particular, the actual number of contractual employees (on short-term contracts and including some categories of teachers) is very uncertain, with estimates ranging from about 10,000 to 20,000.

74. As a result, the wage bill included in the budget, and the actual wage cash payment, are not based on reliable data. In these circumstances, personnel policies in Madagascar are lacking transparency.40

75. Nevertheless, the available estimates show that the Malagasy civil service does not stand out as oversized. The ratio of civil service to population in 1996 was estimated at about 0.78 percent (0.95 percent including the military), which is broadly in line with sub-Saharan countries at a similar level of development (e.g., Guinea’s ratio is 0.79 and Tanzania’s is 1.00).

Distribution by ministry at end-1996

76. Data by ministry, although most likely inaccurate, show that social ministries account for the largest part of public employment. As a proportion of total civil service, excluding the military, the ministries that deal with education accounted for 51 percent in 1996, while the ministries in the health sector accounted for 12 percent (Figure 12). Next in importance were the ministries in charge of the agricultural sector (7.7 percent) and of finance and economy (6.6 percent).

Figure 12.
Figure 12.

Madagascar Distribution of Civil Service by Sector 1/

(In percent)

Citation: IMF Staff Country Reports 1997, 106; 10.5089/9781451825220.002.A003

Distribution by gender and age

77. The breakdown of the civil service by gender and age illustrates the deficiencies of the statistical database, as the gender and the birth date of a large number of the civil servants are not reported in the files. Available payroll data for early 1997 indicate that 68 percent of civil servants are male and 32 percent are female. The age distribution shows that the majority of civil servants are older than 40 years of age. The skewed distribution reflects the low level of recruitment over the past decade. Skewness is reported to be particularly pronounced in the higher echelons because it is difficult to attract and retain skilled manpower (see section on wages below).

Geographical distribution

78. The distribution of civil service across regions in 1997 (Table 16) shows that the province of Antananarivo, the capital city, has a higher share of civil servants (42 percent) than its share in total population (29 percent). This ratio has been fairly constant over time, reflecting the concentration of the general administration in the capital city. According to other sources of information, including anecdotal evidence at the micro level, human resources are not distributed rationally so as to meet local needs. Based on the 1990 census, more than 40 percent of the civil service is concentrated in the largest cities, which account for only 15 percent of total population. Ministries are reported to be overstaffed in large cities, particularly in the capital city, owing to a number of factors, including security problems in rural areas and statutory provisions that grant married couples of civil servants the right to be assigned in the same locality.

Table 16.

Madagascar: Distribution (in percent) of Population and Civil Service

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Source: Ministry of Finance.
Wage level and structure

79. Wages of civil servants have not kept pace with inflation. Since 1990, the real minimum wage in the public sector has decreased by 16 percent (Table 17). The wage structure of civil service that was compressed in the second half of the 1980s was further compressed between 1990 and 1996. During that period, midpoint salaries were raised by 152 percent in the lowest category, but lifted by only 68 percent for the higher echelons (Table 18). However, the positive wage drift brought about by the aging of the civil service appears to have compensated for the wage compression at the middle and higher echelons. As a result, since 1990, the implicit average salary in the civil service, adjusted for inflation, has decreased by about 16 percent (Appendix III, Table 19).

Table 17.

Madagascar: Minimum Monthly Wage, 1990-96

(In Malagasy francs)

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Sources: Ministry of Finance; and Ministry of Civil Service and Labor.
Table 18.

Madagascar: Structure and Adjustment of Public Sector Salaries, 1989-96

(Index: July 1985-September 1986=100)

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Source: Ministry of Finance

80. During 1990-96, the minimum wage in the private sector, adjusted for inflation, was reduced by about 3 percent. Although the level of the minimum wage in civil service remained higher than in the private sector, the competitiveness of entry-level salaries in the Malagasy civil service was gradually eroded for the lower echelons between 1990 and 1996 (Figure 13).

Figure 13.
Figure 13.

Madagascar Minimum Monthly Wage, 1990-96

(In thousands of Malagasy francs at 1990 prices)

Citation: IMF Staff Country Reports 1997, 106; 10.5089/9781451825220.002.A003

Sources: Ministry of Finance; Ministry of Service and Labor.1/ Minimum wage in the public sector (Category I, minimum).

81. Analysis of wage developments for skilled manpower is hampered by data deficiencies. The available evidence shows that wages are more attractive in the private sector than in the public sector for highly skilled manpower, while the reverse is true for unskilled labor (Box 5).

Madagascar: Average Monthly Income in 1996

(In thousands of current Malagasy francs)

The data below is based on household surveys. It gives an estimate of income by sector and skill level in 1996.

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Source: MADIO project.

B. Experience in Civil Service Reform: Lessons from the Literature

Scope of civil service reform

82. In democratic, free market societies, the civil service is expected to work loyally for the government of the day, irrespective of the government’s orientation. It should aim to provide the best possible management performance and to deliver government services of the highest quality in a cost-effective way, for the benefit of taxpayers. An attitude of service for the public—as opposed to the traditional attitude of control—as well as openness and accountability, should prevail. Strict rules forbidding conflicts of interest are to be enforced. Integrity should be maintained and corruption punished. Civil service reform, obviously, is geared toward reinforcing these desirable characteristics.

83. Reforming the civil service may or may not be part of an effort to redesign government. In recent years, some industrialized countries (Anglo-Saxon and Scandinavian countries, among others) have embarked on government reform agendas, which emphasize agency autonomy, the downsizing of central ministries, and private-sector-type management practices. Civil service reform in these countries is largely a consequence of government reform, focusing on decentralized personnel policies and salary setting. As far as developing countries are concerned, the prevailing view seems to be that decentralizing personnel management would require too intensive a use of skilled manpower to be successfully implemented. In the least-developed economies, upgrading the existing civil service in the framework of centralized personnel management appears to be a prerequisite to wider government reform, and should therefore be viewed as a goal in itself.

84. Civil service reform in developing countries, in particular in Africa, is often associated with large retrenchments at the initial stage when the civil service is overstaffed. Reducing the number of civil servants is probably the component of civil service reform that is implemented at an early stage, especially if retrenchment costs are foreign financed. However, reallocating the remaining workforce among ministries and regions is usually far more difficult, as it deals with the qualitative core of civil service reform, that is, allocating human resources where they are most needed and improving the performance of civil servants on a lasting basis. Preventing retrenched workers from returning through the “back door” appears to be difficult as well. Policy persistence and political support at the highest level have proven to be essential for the successful outcome of civil service reform.

Mapping civil service reform: a survey of the literature

85. Designing the qualitative core of civil service reform, whether in industrialized countries or in developing economies, entails making a number of strategic choices with regard to a wide array of issues: sequencing of actions (whether to take early but partial action, or to delay the start until the overall detailed plan of action is completed); speed of reform (“big bang” or gradual reform); desirability of top-down approach (starting with the top of the hierarchy, and gradually going down to the lower echelons); mix of horizontal and vertical action (all ministries together, or ministry by ministry); emphasis on health and education; role of donor-supported enclaves (whether to support them or phase them out); statutory regulations (lifetime employment versus contractual relations); usefulness of end-user consultation; structure of audit and control systems; and design of motivation and incentive system.

86. The issues listed above are complex. The literature on experience with civil service reform, a large part of which originates in the World Bank’s effort to assess its portfolio of civil service reform projects in developing countries, underscores the complexity as well as the limited success of many reform efforts. The World Bank’s overall assessment identifies the main difficulties of civil service reform programs as flawed project design, weak domestic reform consensus, and lack of government ownership.

87. A survey of the recent literature suggests that the best-practice approaches to the issues in project design listed above, are as follows (see bibliography):

  • Sequencing. Improving the pay structure of civil service, which means in most cases decompressing wages, is considered a necessary, albeit insufficient, condition for upgrading overall performance. Reform in this area should be put in place at an early stage. Moreover, the introduction of performance-related pay systems and the improvement of personnel management appear to be crucial to the lasting success of reform. As progress in these areas is reported to take considerable time, these aspects of reform should be initiated early. Some countries have put in place transitory schemes aimed at readily attracting qualified professionals to the civil service by way of topping up their salaries, sometimes with donor financing (e.g., Bolivia and Ghana).

  • Speed. Reforming the civil service is increasingly viewed as a long-term effort, in particular in Africa, where government institutions are weak. Reform entails, among other aspects, fundamental changes in work practices and work ethics, as well as reforms in the organization of pay and personnel management, that take years to come to fruition. Complex, integrated civil service reform projects should therefore be avoided, so that delays in implementing one particular component do not spill over to the entire project. However, there seem to be large long-term gains from spending sufficient time to ensure a wide domestic consensus for reform among the parties involved, including the civil servants.

  • Top-down approach. Experience appears to support the view that reform should start with the top echelons of civil service. Besides topping up salaries, techniques include the setting up of a category of contractual managers along the lines of U.S. senior executives. These techniques aim at decompressing wages, introducing a customer-oriented service attitude and ethics, and recruiting skilled managers. Although the industrialized countries’ experience with this approach seems to be mixed, the literature appears to support it in developing economies, where the lack of skilled manpower at top echelons is severe.

  • Horizontal versus vertical approach. Selecting key ministries, or subunits, for thorough reform, appears to be the preferred route. A number of functions that are crucial to the reform itself should be part of the priority batch of units to be reformed, in particular the units in charge of the pay and personnel systems. The Ministries of Finance and of Budget, or selected subunits thereof, such as the treasury, budget, tax and customs administration units, as well as the Justice Department and the judiciary, are also prime candidates for reform. Reform should be tested on these units and possibly on a few others, before being implemented throughout the government.

  • Health and Education. Because of the characteristics of the social sector mentioned in the literature, including the size of its manpower, its specialized skills, and the tradable services that it produces, health and education is a special case for civil service reform that deserves a custom-tailored approach.

  • Enclave approach: An enclave typically is a subunit of a ministry or an ad hoc unit outside the regular government that has been set up with donor technical and financial support, to deliver immediate improvement in a selected area. The experience with enclaves appears to be mixed. On the one hand, enclaves usually yield fast results (for instance, improvements in tax administration in several African and Latin American countries). On the other hand, it is well established that enclaves attract the hostility of other departments, as they deprive them of their best civil servants and create a privileged class, which, in turn, may develop a vested interest in slowing overall reform in order to retain priority access to scarce resources. Thus, enclaves seem to be useful in specific circumstances but may have adverse side effects that should be minimized to the extent possible. In particular, when salaries of enclave employees are topped up, advantages should be awarded in a transparent and performance-related manner.

  • Statutory regulations. The literature seems to give little guidance as to which statutory framework is most conducive to improving the civil service. Industrialized countries are reported to have been increasing the share of contractual civil servants, but there does not seem to be a set of well-substantiated views either in favor or against applying a similar policy in developing countries.

  • End-user consultation. Involving the end users, as well as other interested parties, including representatives of civil servants, is a new trend in reform design. Experiments with consulting the users of administrative services in order to gain the customers’ views on the working of the civil service seem to have had a favorable effect on the design of reform projects and on the local ownership of reform (e.g., Zambia, Ghana).

  • Audit and Control systems. The literature strongly emphasizes the need to put in place efficient procedures for controlling, as a matter of priority, personnel (recruitment, promotion, and retirement policies) and pay management.

  • Motivation and incentives. It appears to be well established that excessive wage compression, together with declining average real wages, has acted as a powerful disincentive for the managerial echelons in the public service in developing countries. In many cases, however, the apparent compression of wages brought about under political pressure was to some extent softened by the extension of nontransparent, nonwage benefits. Most civil service reforms include the monetization of benefits and the decompression of wages. However, it appears to be particularly difficult to decompress wages because it is resented by the lowest echelons and viewed by public opinion as a largesse granted to political appointees.

88. All in all, the outcome of reforming the incentive system along the lines above is reported to be generally disappointing, as there appears to be little convincing evidence that increased pay by itself leads to improved performance in the civil service. The higher rate of success with enclaves is reported to reflect a combination of performance-enhancing factors, in particular better pay, better working conditions, good management, training, work satisfaction, and political support; nevertheless, relating pay to performance, however desirable, is reported to be difficult to design and to implement.

C. Toward a Full-Fledged Strategy of Reform in Madagascar

89. In July 1997, a Malagasy task force completed a policy paper on key features and sequencing of a reform program for Madagascar’s civil service, which will guide policy implementation in the next few years. While a long-term comprehensive strategy remains to be defined in light of the experience with initial reform steps, the policy paper lays out the broad objectives of reform and draws a road map for the phases of reform. Implementation of the reform will be coordinated with the decentralization of the public service envisaged under the medium-term fiscal strategy.

90. The adopted strategy features a number of choices consistent with best-practice. The approved strategy provides for the selection of pilot ministries, thus clearly endorsing a vertical approach, which experience has shown to be the most workable solution. With regard to sequencing, improved pay and personnel management systems are included in the short-term list of tasks. No temporary scheme for topping up managers’ salaries is envisaged. However, wage decompression in the pilot ministries is programmed to be achieved by December 1998 at the latest as part of an overall reform of pay and incentives that is scheduled to take place in 1998, in parallel with improvements in other working conditions, in particular better training. The status of existing enclave-type units within the selected pilot ministries will be examined, starting as a matter of priority by integrating the large-taxpayer unit with the organizational structure of the budget ministry. End-user consultation, together with consultation of civil servants in 1997, is viewed as an essential element of the creation of a constituency supporting broad reforms.

Main characteristics of the reform program

Main objectives

91. The overall goal of the reform is to build a competent and motivated civil service able to deliver public services in a cost-effective way within a market-oriented economic framework. The tasks are organized around four main objectives.

  • - Streamlining ministries. This encompasses updating civil service rosters, putting in place efficient systems of pay and personnel management, improving working conditions, and decentralizing duties and responsibilities.

  • - Amending the wage structure, including ensuring transparency in wage determination, monetizing allowances, decompressing the wage structure, and introducing performance-related pay ratings.

  • - Improving human resources management, notably by setting clear rules for recruitment and career progression, as well as by raising the overall level of competency and providing training in the civil service.

  • - Implementing a code of conduct, with a view toward fostering work ethics, facilitating control, and eliminating conflicts of interest. Rules governing the disclosure of assets of civil servants will be set. Civil servants will be informed about the reform so as to elicit their active support.

Selection of pilot ministries

92. Although some objectives will have a horizontal impact across all ministries (in particular the implementation of the Code of Conduct), the reform program calls for the selection of three key ministries in which implementation will start first. Moreover, some subunits within the selected ministries are expected to adopt a faster pace of reforms. For example, at the tax and customs directorate, actions are already being taken as part of an effort to improve efficiency of government revenue collection. A criterion for the selection of the three ministries is their role in advancing policy reforms under the government’s economic adjustment strategy.

Time frame

93. The reform of the Malagasy civil service is scheduled to be completed by the year 2002, with the reforms implemented in three phases. In the short-term, that is before end-1997, a detailed analysis of, and data gathering on, essential issues in the three selected ministries will be emphasized. Concurrently, steps will be taken to update the pay and personnel management systems, streamline basic regulations, inform the civil servants about the reform, and foster civil service ethics. In the medium-term, that is before end-1998, comprehensive reforms will be implemented in the selected ministries to reorganize their structures, decompress wages, improve qualifications, set performance standards, and strengthen controls. In the longer run (1999-2002), an evaluation of results obtained in the selected ministries in the second half of 1998 will be used to extend the reforms to all ministries. Within budgetary constraints, the overall level of real wages is to be raised, working conditions are to be improved, and training efforts are to be stepped up.

Immediate steps

94. A ministerial committee in charge of steering the reform process has been appointed. Its role is to ensure that the task force on civil service reform develops an action plan for implementing the short-term reform guidelines, and to engage in consultations with donors with a view toward identifying areas of reform where donor support would contribute in the most efficient way.

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40

Efforts to update the payroll database are under way at the budget ministry. Following the completion of the update before end-1997, the budgetary projections and the management of the wage bill are expected to improve significantly in 1998.

Madagascar: Recent Economic Developments and Selected Issues
Author: International Monetary Fund