Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings

Antananarivo, March 21, 2017 - Weathering two political crises, disruptions in access to markets for textiles and manufacturing exports, severe climatic shocks, and global food price spikes, Madagascar made very little progress in improving the well-being of its population over recent years, as gains achieved after 2001 were reversed between 2005 and 2012, according to a new report.

The report – Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings – shows that Madagascar’s economy faces an array of challenges in reducing poverty, including severe infrastructure deficits, severe climatic events, poor transport links, tenuous access to markets, and in some cases counter-productive policy responses to external shocks.  It also notes that micro-enterprises are unable to increase their productivity and profits due to conditions related to generalized poverty, low demand for non-agricultural goods and services, and difficulties with performance of hired workers and repaying credit.  These enterprises, which employ the vast majority of off-farm workers, therefore, cannot grow, create more jobs, and bid up wages.  As a result of these and other constraints, Madagascar’s poverty rate has remained exceedingly high, at 70.7 percent (estimated for 2012.)

The report’s other key findings are as follows:

• Madagascar’s poorest people experienced a substantial welfare loss between 2005 and 2012, after gaining ground between 2001 and 2005.  Between 2005 and 2010, consumption for the poorest households declined an average 3.1 percent.
• The depth of poverty in Madagascar is also of great concern.  On average the poor consume only 70 percent of the national poverty line, and this gap has only widened since 2005 after falling between 2001 and 2005; the increase in incomes needed to bring over 70 percent of the population out of poverty remains enormous.
• Between 2001 and 2012, the population responded to economic fluctuations and climatic shocks by shifting more heavily into agriculture and then in 2010 into off-farm activities, with a significant increase in secondary employment in services that year.  This shift was partially reversed by 2012, and these strategies were only partially successful in offsetting adverse influences on the poor’s livelihoods.  Demand for off farm labor remained weak, and business opportunities limited.
• One important driver of the post-2005 trend has been a decline in the profitability of agriculture.  Despite having accumulated more “assets” – more education, means of transport, and having experienced fewer adverse climatic events – the poor rural population was unable to fully offset a decline in the profitability of cultivating land between 2005 and 2010 by pursuing off-farm work.
• Domestic policies to counter spikes in world rice price combined with deteriorating transport conditions reduced agricultural incomes in 2010. A series of government measures kept the price of rice relatively stable for consumers, yet producers’ profits fell as they faced higher input costs yet remained unable to benefit from rising world prices.  The costs to transport a 50-kilogram bag of rice increased 42 percent and the time required to reach a main urban center doubled to almost 12 hours, while distances to markets, schools, and health centers became more strongly related to poverty. 
• Improving road connectivity for the poor and providing electricity in those communities where it can help stimulate more productive off-farm enterprises are essential for poverty reduction.  In addition to educational attainment in urban areas and higher rice prices in rural zones, shorter distances to markets and higher rates of local electrification are powerful predictors of higher welfare, taking account of other household and community characteristics.
• Men earn significantly higher wages and business profits than women.  Although female-headed households are not consistently poorer than male-headed ones, men earned 37 percent more than women in the labor market in 2012 after taking into account education, age, region, and urban conditions.  In addition, female entrepreneurs are less likely to own an enterprise operating at the scale and profitability level that males do.  Thus, male-headed households were more successful in offsetting the losses resulting from more severe climatic shocks and adverse trends in agricultural profits in 2010 through off-farm employment than female-headed ones. 
• The generation of more productive off-farm employment can move people out of poverty, but accelerating such a process would require the creation of larger, more profitable enterprises that employ more workers.  The prevalence of extremely small micro-enterprises in Madagascar results in a large misallocation of resources, and results in major productivity and income losses for both entrepreneurs and workers. 
• The predominance of microenterprises that are relatively unprofitable points to market failures that are difficult to escape in a poor economy with relatively little ability to “enforce” agreements.  A restructuring of the economy into larger enterprises is needed to raise productivity and incomes.  Profitability levels are lower at the smallest scale, where the poorest entrepreneurs with the least capacity to reinvest, produce.  Given increasing returns to capital, if owner-operated micro enterprises could increase their profitability by expanding gradually, productivity could rise even in the absence of investment by larger, more efficient, formal firms, which would trigger a restructuring of the market.  However, in an economy characterized by poor entrepreneurs, firm owners are constrained to devote all of their income to household consumption and lack sufficient external financing to grow into higher profitability levels.  At the same time, they hire too little outside labor, with almost 70 percent of owner-operated micro-enterprises employing only the owner.
• Labor markets in Madagascar, where households are the primary employers, are subject to considerable frictions, resulting in low labor demand and low wages.  While agricultural laborers can be easily substituted for each other, their efforts are nonetheless difficult to monitor.  Non-farm enterprises also face risks and costs in adjusting labor inputs, which appear to deter them from hiring more workers:  Non-farm micro-entrepreneurs in both rural and urban settings prefer to accept lower expected profits than to incur the costs to find, screen, train, and supervise non-family labor.