Madagascar : Incentives and Obstacles to Trade - Lessons from Manufacturing Case Studies

Abstract

Despite fiscal and administrative reforms pursued by the Government of Madagascar since the mid 1980s, to prod economic and financial liberalization, contributing to steady GDP growth rates, manufacturing production however, still represents a relatively small share of value added. And, the development of import-substituting (IS) firms has been considerably slower, showing stagnating signs as these firms are unprepared for competition from imports unleashed by recent liberalization. The note looks at the present market structure which has created distortions, identifying several incentives by the Government, to firms located in the Export Processing Zones (EPZs), including a grace period on corporate taxes for the first 2-15 years of operations, exemption from customs duties and taxes on imported equipment; taxation of dividends at only 10 percent, and, 99-year leases for investment in land. The note further looks at the Common Law sector, i.e., those firms operating outside of EPZs, namely the IS firms, and the non-tradables sector, since most of the recent growth in the country's economy has come from non-tradables (construction, transport, beverages, and tobacco). Cross-cutting issues are identified by a survey of representative industries, showing a variety of factors affecting productivity, and reducing competitiveness. Recommendations include lower protection to make markets more contestable, but within lower, and more uniform taxation, to ease the fiscal burden on imported inputs, in an effort to encourage entry into the banking system, and improve the regulatory framework.