Summary

An analysis of Madagascar’s economic competitiveness provides an important insight into its business environment. From the World Economic Forum’s Global Competitiveness Index, it is clear that Madagascar needs to improve in a number of ways in order to become more competitive, particularly regarding its institutions and infrastructure. However, the country still presents a good opportunity for entrepreneurs due to the ease of starting a business there.

The competitiveness of a national economy provides a good way to assess the business environment in a country, and can be measured in various ways. One of them is provided by the World Economic Forum (WEF), which creates national competitiveness analyses using the Global Competitiveness Index (GCI). This index takes into account several institutions, policies, and other factors that determine the productivity of a country. Given that business activity in a country is strongly related to its level of productivity, it is obviously important to improve the factors that contribute to the GCI in order to encourage business activities and entrepreneurships in a country.

In the WEF’s Global Competitiveness Report for 2010-2011, Madagascar is classified as a factor-driven economy, which means the country still relies on its factor endowments (unskilled labor and natural resources) to compete. Thus institutions, infrastructure, macroeconomic environment, health and primary education play major roles in determining its competitiveness. Some other African countries in this development stage are Benin, Burkina Faso, Burundi, Chad, Cameroon, Cote d’Ivoire, Ethiopia, Gambia, Ghana, Kenya, Lesotho, Malawi, Mali, Mauritania, Mozambique, Nigeria, Rwanda, Senegal, Tanzania, Uganda, Zambia and Zimbabwe.

Although Madagascar’s GCI score has increased slightly this year to 3.5, up from 3.4 last year, its ranking in relation to other countries has slipped from 121st out of 133 countries or economies last year to 124th out of 139 countries or economies this year. The major factors that need to be improved are institutions and infrastructure. Madagascar’s infrastructure score is the lower of the two at just 2.4 (129th rank), whereas its institutions score is 3.0 (120th rank). Other factors that are inhibiting Madagascar’s competitiveness include higher education and training (2.8/128th rank), financial market development (2.9/131st rank), technological readiness (2.7/123rd rank), market size (2.7/110th rank), and innovation (2.8/102nd rank).

Infrastructure in Madagascar tends to constrain business activity in the country. Its ranking for various factors affecting the quality of its infrastructure lies between 96th and 127th. Electricity supply (121st rank), fixed telephone lines (128thrank), and mobile telephone subscriptions (127th rank) have the worst ranks in infrastructure. Improving the quality of and access to infrastructure is a necessity in order to promote entrepreneurships and investment.

In its institutional aspects, Madagascar has several weaknesses, particularly in property rights (126th rank), intellectual property protection (134th rank), public trust (135th rank), judicial independence (126th rank), transparency of government policymaking (128th rank), reliability of police services (127th rank), ethical behavior of firms (126th rank), and strength of auditing and reporting standards (136th rank). However, Madagascar does rank strongly on investor protection, at 45th out of 139 countries or economies.

In terms of its macroeconomic environment, Madagascar shows good performance in maintaining government budget balance (36th rank), government debt (39th rank), and national saving rate (14th rank), despite bad conditions of inflation (117th rank), poor interest rate spread (135th rank), and low country credit rating (124th rank).

The WEF report for 2011 also presents some more encouraging indicators of Madagascar’s commercial advantages. The country has a relatively small number of procedures required to start a business (3rd rank) and little time is required to set up a business locally (21st rank). Both indicators suggest some strong advantages for investors looking to establish new companies in the country.

From the GCI analysis, it is clear that Madagascar should improve several aspects of its economy to become more competitive, particularly around institutions and infrastructure. The ease of starting a business in the country does provide some advantages for entrepreneurs, but the government needs to take action – to address institutional and infrastructure problems and to stabilize the macroeconomic environment – in order to further support entrepreneurships and investment. [/premium_content]

By Budiono Budiono

References:

  1. Schwab, Klaus. The Global Competitiveness Report 2010-2011. Geneva: World Economic Forum, 2010.
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