2009 Index of Economic Freedom

Quick Facts

Population:

• 19.2 million

GDP (PPP):

• $16.8 billion
• 5.0% growth
• 2.3% 5-year compound annual growth
• $878 per capita

Unemployment:

• 4.5%

Inflation (CPI):

• 10.3%

FDI Inflow:

• $230.2 million

Madagascar's economic freedom score is 62.2, making its economy the 73rd freest in the 2009 Index. Its score has decreased by 0.2 point from last year, reflecting modest declines in four economic freedoms. Madagascar is ranked 6th out of 46 countries in the Sub-Saharan Africa region, and its overall score is slightly above the world average.

Madagascar scores relatively well in government size, fiscal freedom, and investment freedom. Income and corporate tax rates are high, but the government has made changes in the 2008 budget to simplify the tax code and widen the tax base. Foreign investment is generally welcome, and there is no screening process.

Economic development is still hindered by a lack of business freedom and rigid labor regulations. Trade freedom suffered a setback with a rise in the average tariff rate. Freedom from corruption is also weak. As in many other Sub-Saharan African nations, the judiciary is underdeveloped, and convoluted administrative procedures provide ample opportunities for corruption. Public projects are funded primarily by outside donors, who are demanding more effective expenditure management focused on welfare services and road infrastructure.

Background Back to the top

Madagascar, an island nation of almost 230,000 square miles off the east coast of Africa, has a population of mixed African and Asian origin. Cyclones and poor weather threaten the livelihood of the 80 percent of the population that is engaged in agriculture. Years of socialism and centralized state planning have hindered economic growth, and poor infrastructure and onerous bureaucracy remain serious problems. Restrictions on the press and political opposition were eased in the late 1980s. Both former President Didier Ratsiraka and opposition candidate Marc Ravalomanana claimed victory in the 2001 presidential elections, and the resulting violence and economic disruption ended only when Ratsiraka fled into exile in 2002. Ethnic tensions between Ratsiraka's Betsimisarka tribe and Ravalomanana's Merina tribe persist.

Business Freedom 60.5 Back to the top

The overall freedom to conduct a business is limited by Madagascar's regulatory environment. Starting a business takes seven days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 225 days, but fees are costly. Despite efforts to streamline the regulatory process, red tape and lack of transparency still impede business activity. Madagascar lacks modern and efficient bankruptcy procedures.

Trade Freedom 72.6 Back to the top

Madagascar's weighted average tariff rate was 8.7 percent in 2006. Import bans and restrictions, import taxes, sanitary and phytosanitary regulations, inadequate infrastructure to support trade, and a customs process that is susceptible to corruption add to the cost of trade. Ten points were deducted from Madagascar's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 80.9 Back to the top

Madagascar has high tax rates. Both the top income tax rate and the top corporate tax rate are 30 percent. Other taxes include a value-added tax (VAT) and a capital gains tax. In the most recent year, overall tax revenue as a percentage of GDP was 10.7 percent. Fiscal reforms in the 2008 budget resulted in a simpler tax code, a wider tax base, and improved fiscal administration.

Government Size 86.3 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 21.4 percent of GDP. Privatization has progressed significantly, but the struggling national water and power utility remains in state hands. The government is considering transferring control to a concession operator.

Monetary Freedom73.9 Back to the top

Inflation is high, averaging 11.1 percent between 2005 and 2007. Most prices are determined in the market, but the government influences certain prices through state-owned enterprises and utilities, such as electricity, although this influence is diminishing as privatization advances. Five points were deducted from Madagascar's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom70.0 Back to the top

Foreign and domestic investors alike face a heavy bureaucratic burden, but the government has taken measures to improve the investment climate. There is no screening of foreign investment. Hindrances to investment include poor infrastructure, weak governance, a slow commercial legal system, and limited financing mechanisms. Residents and non-residents may open foreign exchange accounts, subject to certain restrictions and government approval. There are no restrictions on payments or transfers. Most international capital movements require government authorization. Foreign investors may own land, subject to a number of restrictions.

Financial Freedom50.0 Back to the top

Madagascar's well-capitalized banking sector dominates the financial sector. The relatively high costs of financing and scarce access to credit pose barriers to more dynamic entrepreneurial activity. The government has been pursuing banking reform, and all of the major commercial banks are now partially privatized, often with French capital. There are five major commercial banks, and the central bank controls over a third of financial-sector assets. Credit is allocated at market rates. An extensive network of savings and loan associations extends deposit functions more broadly. Non-performing loans remain a problem. The insurance sector was liberalized in late 2005, and eight companies, including two state-owned and several foreign-owned companies, were operating in 2007. Capital markets remain insignificant, and there is no stock market.

Property Rights50.0 Back to the top

The judiciary is influenced by the executive and subject to corruption. Investors face a legal and judicial environment in which neither the security of private property nor the enforcement of contracts can be guaranteed. The land titling process is very bureaucratic. Pirated copies of VHS movie tapes, music CDs, DVDs, and software are sold openly. Foreign and domestic private entities may establish and own businesses, and foreigners may now own land.

Freedom From Corruption32.0 Back to the top

Corruption is perceived as widespread. Madagascar ranks 94th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Complicated administrative procedures introduce delays and uncertainties and multiply the opportunities for corruption. The Independent Anti-Corruption Bureau initially targeted 10 key sectors including justice, customs, and the police. The next sectors to be targeted are tourism, mining, and industry.

Labor Freedom46.0 Back to the top

Restrictive labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is high, and dismissing a redundant employee is not easy. Regulations on the number of work hours remain rigid.