Republic of Madagascar: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix analyzes the relationship among prices, income, and money in Madagascar over the period 1982–2004. It finds that a stable long-run relationship for the price level exists, but that the adjustment toward this long-term equilibrium is quite slow. The paper presents an assessment of the real effective exchange rate. It also presents some qualitative competitiveness indicators and examines the performance of exports in Madagascar at an aggregate and product level.

Abstract

This Selected Issues paper and Statistical Appendix analyzes the relationship among prices, income, and money in Madagascar over the period 1982–2004. It finds that a stable long-run relationship for the price level exists, but that the adjustment toward this long-term equilibrium is quite slow. The paper presents an assessment of the real effective exchange rate. It also presents some qualitative competitiveness indicators and examines the performance of exports in Madagascar at an aggregate and product level.

IV. Competitiveness and Export Performance in Madagascar11

A. Introduction

1. This section presents information on some competitiveness indicators other than the exchange rate and then provides a more detailed analysis of the evolution of Madagascar’s exports in terms of the structure and performance of exports, at the aggregate and product levels. The role played by export processing zones (EPZs) and by special factors such as textile exports driven by the African Growth and Opportunity Act (AGOA) will be discussed, as well as the implications of the termination of the Agreement on Textiles and Clothing (ATC) in 2005 and the expected termination of the third party provision under AGOA (AGOA III) in 2007. Based on qualitative information gleaned from interviews with exporters in Madagascar and on survey questionnaire responses, this chapter will discuss some underlying factors, which will determine the impact of these shocks. The results of these questionnaires are summarized in an appendix.

2. To summarize, Madagascar’s performance has been relatively weak with respect to some qualitative indicators, and the signals provided by micro-based indicators are mixed in that they indicate competitive wages but also relatively low productivity and high nonlabor costs for certain exports. The analysis of export performance indicates that the relatively strong aggregate export performance masks some vulnerabilities. Exports from Madagascar have indeed increased as a share of GDP from about 14 percent in 1991 to about 20 percent in 2004. Since 2000, the increase in nontraditional exports, especially from the EPZ which comprise mostly of manufacturing goods, has been significant. However, diversity in the value of products exported and in terms of partner countries appears to have declined, and exports have become more concentrated in a few sectors and products. Moreover, a large part of the strength appears to have been driven by changes in external trade policies such as the preferential trade treatments, including that with the United States. The possible termination of such treatment in the coming years presents some significant challenges as well as some opportunities for Madagascar.

B. Some Indicators of Competitiveness

3. External competitiveness has several facets that may not be adequately captured by the consumer price index (CPI)-based real effective exchange rate. These variables include nominal wages, costs of doing business, including infrastructure costs, and the overall quality of the business environment. These are discussed further below.

4. Competitiveness in Madagascar owing to low nominal wages is partly eroded by low productivity and high nonlabor costs. Nominal wages are low in Madagascar relative to several low-income countries. International Labor Organization (ILO) data on wages for example indicates that the average monthly wage in Madagascar is low relative to China, Kenya, and Mauritius (Figure 1).

Chapter III. Figure 1.
Chapter III. Figure 1.

Monthly Manufacturing Wages

(In U.S. dollars)

Citation: IMF Staff Country Reports 2005, 321; 10.5089/9781451938616.002.A004

Sources: International Labor Organization data and staff estimates.

These are competitor countries for textile exports, but it is unclear if this advantage continues to prevail on a productivity adjusted basis. Aggregate productivity data are not available to examine this issue. Sector-specific information on productivity, wages, and nonwage costs provides useful insight. In this regard, in terms of the clothing sector (which now represents a significant share of Madagascar’s exports, as will be shown below), nominal wages are low and competitive in Madagascar relative to several countries (Table 1). Wages in Madagascar, for example, are less than half those in China. However, the labor cost per shirt is not correspondingly lower, reflecting lower productivity (for example, as measured by the number of shirts per day produced by a worker) or the lower number of working hours per week. Moreover, nonwage costs are significantly higher and substantially reduce the competitive wage cost advantage. This suggests that Madagascar will face strong competition from exporting countries in the clothing and textiles sector in the near future.

Chapter III. Table 1.

Some Wage and Non-Wage Competitiveness Indicators

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Source: Cadot and Nasir (2001), Madagascar, Diagnostic Trade Integration Study

5. Some qualitative indicators of Madagascar’s competitiveness are not very positive. While the real effective exchange rate is a sound measure of macroeconomic aspects of competitiveness, it does not capture some other critical elements of competitiveness are conducive to enhancing investment, exports, and economic growth. These include such factors as institutions, technology, rule of law, and corruption, which are important aspects of the cost of doing business. The Growth Competitiveness Index (GCI) and the Business Competitiveness Index (BCI) computed by the World Economic Forum capture some of these aspects that could have an importantlinfluence on foreign direct investment and associated exports.

6. The World Economic Forum competitiveness report ranks Madagascar low in the GCI. The Growth Competitiveness Index (Table 2) is composed of three pillars which are considered to be critical to economic growth: the quality of the macroeconomic environment, the state of the country’s public institutions, and country’s technological readiness.12 Madagascar ranks lowest amongst its Comesa partners except for Ethiopia.

Chapter III. Table 2.

Growth Competitiveness Index (GCI) 2004 Comparison with Comesa Partners

(Among 104 countries)

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Source: World Economic Forum

7. The Business Competitiveness Index (BCI) (Table 3) also published by the World Economic Forum serves as a complement to the more macroeconomic approach of the GCI. Here again Madagascar scores a poor ranking.13

Chapter III. Table 3.

Business Competitiveness Index (BCI) 2004 Comparison with Comesa Partners

(Among 104 countries)

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Source: World Economic Forum

C. Export Performance in Madagascar

8. The performance of exports in aggregate has generally been strong. Since 1990, aggregate exports have shown fairly robust growth, despite some disruptive factors associated with the exchange rate liberalization (1994) and the political crises (2002) (Table 4). As a percentage of GDP exports have increased since 1990 from around 14 percent to over 20 percent of GDP in 2004. At sector level, the strength in aggregate exports has been mainly driven by manufacturing sectors including the EPZ.

Chapter III. Table 4.

Madagascar Structure of Exports 1/

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Nominal exports measured in terms of SDRs.

Notes: Traditional exports are vanilla, cloves, pepper and coffeeNon-traditional exports: cotton cloth, pertroleum products, exports from EPZs and other.

9. While growth in aggregate exports was strong, performance in traditional exports was uneven. The reasons for the weak performance in traditional (agricultural) exports particularly from 1996 to 2000 (Table 4), are not entirely clear. Some of the weaknesses in the growth of the value of traditional agricultural exports for the period as a whole may be due to the long term decline in many agricultural commodity prices (vanilla being an exception) that are exported from Madagascar but volumes have also been weak. The value of coffee exports was weak for much of this period reflecting weak world prices but could also reflect a volume response to long term decline in coffee prices. Exports of cloves were also weak. The high growth rates of over 30 percent registered in later years in traditional exports were in large part due to increases in the price of vanilla. The volume increases in vanilla were variable and reflecting volatile production conditions due to natural factors. Indeed for most of the period Madagascar was a major supplier of vanilla and viewed as a price maker in the world markets.

10. Madagascar’s exports have in large part been driven by manufacturing exports from the EPZs. The strong growth in this sector is a positive sign of competitiveness but special factors were also at play (see below). In the initial years, the extremely high growth rates represented increases from a very small base when EPZ exports represented a small but growing share of total exports. The EPZ sector has continued to grow rapidly with important contributions from the garment sector, such that exports from EPZs now represents almost half of the value of total exports (Table 4).

11. Export performance at the product level confirms the uneven performance at the sector level, and points to weak export performance of certain products. Export performance in aggregate can often be better assessed by an examination of the products being exported. At the product level, the value of exports of many major products (shellfish, vanilla, nonmetallic minerals, and clothing and garments) in Madagascar grew robustly at over 10 percent on an annual average basis since 1990 (Table 5) and indeed exports of these products have been particularly strong since the mid-nineties despite the appreciating real effective exchange rate at that time. Exceptions have been the textiles and yarns category (which actually declined), crude materials, and to a lesser extent vegetables and fruits. Weaker performance in these categories, which include wood products, may have been due to supply constraints or structural factors. Note that domestic agricultural production was weak for much of the period. The decline in the exports of textiles and yarns could in part be attributed to increased domestic use of these products given the increase in clothing exports, although structural factors (viz. weak performance of state owned enterprises which manufactured and exported these products) may also have played a role.

Chapter III. Table 5.

Selected Products: Export Performance

(In millions of U.S. dollars)

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Source: COMTRADE

12. A result of these developments is greater concentration in the value of exports, particularly in clothing. It is clear that increases in clothing have been driving aggregate exports and this product now accounts for a significant share of the exports. On the other hand, fruits and vegetables, textiles and yarns, crude materials and nonmetallic mineral products which represented more than 20 percent of total exports in 1990, currently accounts only for a little over 10 percent of total exports (Table 6).

Chapter III. Table 6.

Exports of Selected Products

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Source: ComtradeA=share of total exportsB=share of the selected exports

13. The share of exports to a few partner countries has remained high(Table 7 and 8). The tables below present the major export products noted above classified by importing countries for the years 2003 and 1990. In 2003, the United States and France accounted for about 68 percent of Madagascar’s exports in the selected products, while these countries accounted for less than 50 percent of the same products in 1990. This shift may in part reflect shifts in demand conditions in partner countries. For example, exporters of shrimps indicate that the shift of shrimp exports to Europe (France in particular) reflected in part higher demand in France for the special variety of shrimps exports from Madagascar. Another important reason for the increased partner country concentration is the spectacular increase in the exports of garments to the United States.

Chapter III. Table 7.

Madagascar: Geographical Distribution of Exports 2003

(In percent of relevant export category)

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Source: COMTRADE
Chapter III. Table 8.

Madagascar: Geographical Distribution of Exports 1990.

(In percent of relevant export category)

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Source: COMTRADE

14. Exports of traditional agricultural products have been relatively weak. Madagascar has gained market share in one product category (i.e., shrimp), but lost market share in terms of its more traditional exports. Madagascar has lost world market share in cloves and, to a lesser extent, in vanilla. Some of the latter may have been due to a switch to lower-quality vanilla by the final consumer and purchasers of vanilla. On the other hand, Madagascar has gained a significant market share in shellfish especially in OECD markets (Table 9).

Chapter III. Table 9.

World Market Shares

(vanilla, cloves, shellfish)

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Source: COMTRADE

15. Despite increasing concentration in garments, Madagascar’s export base continues to be diverse. Measures of concentration, for example, a Herfindahl-Hirschman index confirms that there has been an increase in concentration in terms of products and country partners, but also that there is diversity in terms of the export base.14 Diversity is also indicated in terms of the numberof products exported and this presents a good base for future growth. For example, the number of products exported from Madagascar has remained large and stable (Table 10). To illustrate, there have been no major changes with respect to the number of products exported (measured at the 3 digit SITC product classification level for those which are greater than US$1 million). At this level of classification, the number of types of products exported has ranged between 25 to 33 over the years with no sharp declines over the period (see Table 10). The product base also remains relatively dynamic. Some products such as live animals are no longer exported but new industries and exports have developed, e.g., watches.

Chapter III. Table 10.

Product Diversification in Madagascar

(Products with exports greater than US$1 million)

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Source: COMTRADE

16. The above developments, that is, increased concentration of products in garments within a broad and diverse export base, present challenges and opportunities. The export base has remained diverse but export performance has been uneven due to weak performance in some sectors with spectacular performance in others, particularly in garments. Consequently, exports in terms of value have become concentrated with a high share of garment exports. This is not in itself an adverse development. To the extent export growth of the high growth sector is sustainable, it points to specialization and a move towards areas of comparative advantage reflecting the underlying competitive conditions for Madagascar’s exports. However, it poses risks when the increases in exports are due in part to preferential arrangements of partner countries, especially when such arrangements are due to expire, as well as when they are due in part to domestic preferential tax treatments as evidenced by EPZs. These aspects of Madagascar’s export growth in the context of EPZs and regional preferential trading arrangements are examined below.

17. EPZs show a wide range of products, but textiles and clothing have been dominant. EPZs were introduced on the basis of a special regime in 1990 following the decision to encourage an export-led strategy.15 Exports from EPZs currently represent about 50 percent of total exports. A vast majority of the EPZ firms from the start of the EPZ regime have been concentrated in textiles, in terms of the number of firms, investment and employment (Table 11). As at end-2004, more than half the firms operating in the EPZs and accounting for about 80 percent of the employment were in the clothing and textile sector.

Chapter III. Table 11.

Enterprises Operating in EPZs

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Source: Export Processing Zones Association and Partners.

18. Despite a favorable tax treatment, products other than textiles and shellfish have not shown sustained or strong growth in the EPZ sector. While EPZs operate in a wide range of products, growth of exports in the EPZ sector has been concentrated in shellfish, and in textiles and clothing. A range of other products are exported from this sector but they continue to be small in total values. Some of these sectors are itemized in the table below (Table 12). The products other than those itemized (shown as “other” in Table 12 below) represent a range of exported products exported often in very small quantities. In addition to some sectors indicated in the table, the “other” sector comprises of sectors that have been highly variable with no sustained export performance. In the absence of any systematic pattern across time, it is not clear whether this development is related to exchange rate competitiveness or some other structural factors.

Chapter III. Table 12.

Exports from the Export Processing Zones (EPZs): By Product

(By Product)

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Source: INSTAT

19. Textiles and clothing, which were from the start in the early 1990s a significant share of the EPZ exports almost doubled in value in 2000 and growth has continued since then, except for the sharp drop in 2002 due to the political crises. This jump in 2000 was most likely related to partial relocation of the activities of textile firms from quota restricted countries and was buttressed in later years by the special features of AGOA. These aspects or special factors which facilitated the growth of exports are examined further below.

Textiles exports and preferential treatment

20. Madagascar enjoys a number of preferential treatment agreements. With respect to Europe it is a beneficiary of the Cotonou Agreement and is currently also eligible for EU’s Everything but Arms Initiative launched in 2001. Madagascar was declared AGOA eligible in October 2000 and was declared eligible for the apparel provision in March 2001, and it is eligible for the “third party fabric provision” (AGOA III) under which exports of garments made from imported fabrics from any country to the United States get preferred status.

21. Madagascar was quick to take advantage of the AGOA provisions. The garment industry took off in 2000 and became the second largest AGOA exporter after Lesotho. Madagascar’s utilization rate of the AGOA provisions was fast. However it suffered a major setback in 2002 when exports declined due to the political crises. In 2003, Madagascar appears to gained some ground and regained market share. Madagascar’s market share of AGOA exports even as at November 2004 was still under the peak in 2001 (Table 13). The quick recovery is a positive development and consistent with the earlier indicators that point to Madagascar’s competitiveness.16

Chapter III. Table 13.

AGOA Imports

(In millions of U.S. dollars)

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Source: United States Commerce Dept. website on AGOA Trade Statistics

22. The success story with respect to garment exports under AGOA coexists with an element of vulnerability. A very high proportion of clothing and garments exports to the United States is under AGOA and under the third party provision which is due to expire in 2007 (Table 14).

Chapter III. Table 14.

United States: Clothing Imports from Madagascar

(In millions of U.S. dollars)

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Source: COMTRADE, United States Commerce Dept. website on AGOA Trade Statistics

23. The high share of AGOA exports of garments under the third party provision has the potential of substantial negative impact on exports due to the upcoming AGOA III shock i.e., when the third party provision is expected to terminate in 2007. The extent of the impact of the termination of this provision will depend on whether the industry can continue to export at a competitive price when the garments made with fabric imported from any country will not longer qualify for preferential treatment. The negative impact would of course be mitigated if the companies switch to and are successful in exporting without the benefit of this provision. This would be a challenge without significant productivity enhancements and reductions in costs, particularly nonwage costs. The impact will also depend on the extent of backward integration that can be quickly developed in the sector. This is because under AGO A I, which continues until 2015, the preferential treatment will extend to exports of clothing that use yarn or fabric produced domestically or in the Sub-Saharan African (SSA) countries.

24. Interviews with exporters presented a mixed picture. A few indicated that they would continue to export using regional fabric but more have noted that they cannot be competitive as regional fabric costs are higher and the lead times are long for obtaining regional fabric, which is in short supply. The extent of the impact would also depend on the ability of Madagascar firms to switch to new higher value added or niche markets in terms of garments and also the ability to switch to other markets such as in Europe. With respect to the latter, exporters were of the view that, while they do have a niche market in terms of some value added products, they also face strong competition from low cost exporters, particularly China (See Appendix I).

25. It is also noteworthy that despite the preferential treatment accorded to Madagascar and that continues under the Cotonou Agreement, exports to Europe have been decelerating. Part of this deceleration could reflect the loss of markets due to the termination of the ATC. Indeed, the deceleration in exports has been occurring since 2001, the year that marks the beginning of the Phase III of the ATC, when quotas were being gradually removed (Table 15).

Chapter III. Table 15.

OECD Country Imports of Clothing from Madagascar

(In thousands of U.S. dollars)

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Source: COMTRADE

26. The extent of the ATC shock is particularly difficult to quantify for Madagascar because of the impact of the 2002 political crisis. Madagascar is vulnerable to the expiry of the ATC given that about 87 percent of its clothing exports have been to the restricted markets. Industry surveys indicate that several African countries, including Madagascar, will experience a decline in exports to the U.S. and the EU. While Madagascar is competitive in terms of wages, it is disadvantaged in terms of other indicators such as transportation costs. In the textile market, factors such as speed of delivery are increasing in importance. More precise quantification of the impact for Madagascar is difficult but the weak performance in several EU countries noted above could be an indication of the impact of the expiry of the ATC. However, a complicating factor in assessing the ATC impact in Madagascar is the political crisis in 2002 which resulted in a drop in production. Industry experts have noted that several large buyers left Madagascar at this time and have yet to return. Thus, it would not be appropriate to attribute the entire deceleration or even a large part of the deceleration between 2001 and 2003 to the ATC shock and as being all due to lower competitiveness. Indeed, in 2003 exports picked up outside the United States and even in nonquota constrained countries such as Japan.

27. Although textile exports remained strong in 2004, preliminary data suggests that the weakness in Europe has continued in 2004. While detailed information by importing country is not available for 2004, preliminary data suggest that garment exports have registered strong growth particularly to the United States. Many exporters that participated in the staff survey and in interviews (see Appendix for summary of results), noted that exports were strong in 2004. They noted that 2005 and 2006 would be more indicative of the effects of the termination of the ATC and the AGOA third party provision termination, respectively.

28. Interviews with exporters and the results of a small sample survey show optimism in the near term, but longer term prospects are uncertain (appendix attached). Staff conducted interviews and a survey based on a questionnaire with a number of exporters of garments and textiles. The purpose was to gauge the view of the industry on the impact of the ATC termination and the upcoming termination of AGOA III. Another objective was to gain a better understanding of the obstacles for future export growth. Based on orders received in the first half of 2005, a little under half of the companies expected sales in 2005 to be higher than in 2004. On the whole, exporters did not expect a sharp decline in exports of clothing in 2005 but were less optimistic about the following years as the competition from low cost producers intensifies and the termination of AGOA III comes into effect. Exporters were concerned that the Madagascar’s competitiveness due to low wages was being eroded due to increasing nonwage costs. In this regard, they cited infrastructure, communication, and electricity costs as factors which limit competitiveness.

D. Concluding Comments

29. Madagascar’s strong export performance to date has become vulnerable. Madagascar’s export performance has been strong, particularly since 2000 and although the export base continues to be diverse in terms of the number of different products exported, the value of exports has become more concentrated over time, in terms of partner countries and products. Exports of clothing to the United States, particularly under AGOA III, now represent a fairly large share of total exports. At the same time, there are indications that Madagascar’s exports especially to Europe and France in particular (Madagascar’s largest market in Europe) are being impacted by termination of the ATC. Against this background, policy measures assume greater importance and a judicious mix of macroeconomic and structural policies will be key. In the near term, short term impediments to exports that increase costs, such as delays in customs clearance procedures, could be removed. Moreover, market participants in the clothing industry could also lay the ground work for mitigating the impact of the termination of AGOA III in 2007. AGOA III was intended to provide space for the SSA countries to develop a better backward and forward integration of the industry to increase efficiency and competitiveness of the sector. Finally, while the recent exchange rate depreciation in 2004 has improved competitiveness significantly, the authorities need to be more cognizant that this could be eroded in Madagascar by high nonwage costs and because of weak institutions. Creating an environment that favors investment will be key. Reforms will need to be geared towards improving governance and transparency of institutions.

Chapter III. Appendix I: Results of the Survey on Export Processing Zones (EPZs) on the Outlook for Garment Exports

Staff conducted interviews and a survey based on a questionnaire with a number of exporters of garments and textiles17. This appendix summarizes the results of these interviews and survey responses. This approach was used to better understand the current market conditions in the garment sector and to the main obstacles for its improved performance. The findings are based on responses from 20 companies that represent about 40 percent of total employment.

The textile market has a relatively long history in Madagascar. First, it is made up of a number of firms which have been operating in the industry before the emergence of special trade treatments such as AGO A; second, the industry is fairly diversified in both the U.S. and the European markets and third, its exports comprise basic garments and knitwear as well as exports, albeit limited, of somewhat higher value added items and some exports to “niche” markets, particularly to Europe. The survey covered companies in all of these sectors and included large (more than 1,000 employees), medium sized companies (between 500 and 1,000 employees) and smaller companies with less than 500 employees.

Sales and orders: 2004, 2005, and longer term

Almost all of the respondents reported that sales in 2004 were higher than in the earlier year, a result which is line with the preliminary data for the sector based on the latest customs data. Some of the respondents noted that this was mostly due to good performance in the first half of 2004. In any event, the good sales performance in 2004 is encouraging, as it represents a period in which the effect of the termination of the Agreement on Textiles and Clothing (ATC) would have impacted the sector. This suggests that, notwithstanding the effects of the termination of the ATC, exporters were continuing to, at least in part, hold on to their market share.

Based on orders received in the first half of 2005, a little under half of the companies expected sales in 2005 to be higher than in 2004. Most of the others indicated that they did not expect the strong performance of 2004 to continue and that sales would be flat, and a few expected sales to be lower. There is indication of a further slowing that is yet to come, as most exporters expected the competition due to the lifting of quotas (i.e., the termination of the ATC) to intensify in the coming years.

Indeed, the general slowing in the market is underscored by the fact that the majority of respondents (includingthose that were experiencing higher sales orders ) were operating at less than full capacity. Some large companies that specialized in large volumes of basic garments noted that they need high capacity utilization (“about 85 percent”) to remain profitable. A risk therefore exists that if orders do not pick up, there may be no growth or very modest growth in the EPZ garment sector for 2005 as a whole and under these circumstances, some firms may have to exit the industry. Interestingly, most of those that had expectations for higher sales for 2005 were more diversified in terms of operating in both Europe and the U.S. or had established strategies to diversify into the European markets.

The market structure in Madagascar with a number of firms exporting to both Europe and the U.S. and some firms exporting into niche and somewhat higher end-markets may serve to mitigates the extent of the ATC shock in the near term and result in the adjustments being a more drawn out process. There was no noticeable difference between the nature of the responses between large and medium size firms with respect to sales expectations for 2005.

The actual and expected loss in orders to date was attributed by most respondents to China. Whether this is based on fact or perception is unclear, but most probably this is based on the number of bids for orders which were lost to China.18 Bangladesh, India, and Vietnam were also mentioned albeit less frequently. One exporter noted a loss of market to Lesotho, which has been specializing in jeans and increasingly relying on domestic content due to some investment from Taiwanese firms. This could reduce lead times considerably a valuable feature for product market competitiveness.

China was the supplier of raw materials to a majority of firms and the sole supplier to a few respondents which were operating only under the AGOA regime. Apart from these firms, the supply of raw material was drawn from Mauritius, other Asian countries (India) and domestic sources. That some firms operate at least in part using domestic textiles is encouraging. This would allow firms to continue to export to the US under the original AGOA which will continue until 2015 and which allows the use of regional or domestic fabric. On the other hand, AGOA III, under which the fabric can be supplied by any country, expires in 2007. One producer who exports only to the U.S. under AGOA III has indicated its intention to continue production along these lines although concerns were expressed about the quality and cost of domestic textiles and the lead time taken by the few domestic firms to deliver the raw material.

Almost all of the respondents were not very optimistic about sales beyond 2005 and in the medium term.

Factors for locating in Madagascar

Low wages and the availability of tax exemptions were cited most frequently as factors for locating in Madagascar. Interestingly, lack of external demand was cited very frequently as an obstacle to immediate growth in exports. Other factors noted as obstacles to higher export performance were infrastructure costs, communication and electricity costs, and exchange rate volatility. The closing down of tax exemptions for EPZs was cited as the most important factor which would trigger relocation.

Other information

Textiles and clothing represent a price sensitive and highly competitive sector, although there is room for some niche and high quality markets which are less price sensitive. But in the current conjuncture, respondents noted that price competition was fierce and that all buyers were becoming very sensitive to prices. Madagascar is competitive in terms of wages and the quality of labor is also good or easily trained. But exporters noted that labor laws (that are more stringent relative to other countries including China) regarding the number of hours that workers can work without overtime pay, cuts into the wage competitiveness. Other costs were also going up and reaching the point where they erode the wage competitiveness. These were rents, electricity, port charges, and other “hidden costs”. The quality of service with respect to electricity and port and transportation was also cited as being poor. In the last year, these factors and weak prices for output had cut into profits of firms, making their continued operations vulnerable. In terms of relative competitiveness, costs could on the whole be lower in China mainly because of lower non-wage costs.

Respondents were mixed about the prospects beyond 2007 when AGOA III terminates. One large firm said that the large firms could “survive” the termination of ATC impact, but not the expiry of AGOA III as many companies located plants to Madagascar precisely to take advantage of this provision. On the other hand, one other large firm noted its intention to continue after AGOA III, using regional or domestic fabric. It is unclear however whether the supply of regional and domestic fabric will be adequate or cost effective.

Madagascar: Summary of the Malagasy Tax System

(General Tax Code)

Including the 2005 Budget

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