1 June 2014

Madagascar: Weaving Its Way Back in

With internationally approved elections last December, the island nation of Madagascar may regain membership into an important trade club

Madagascar's capital, Antananarivo, is teeming with entrepreneurs. The official market stalls are overcrowded and hand-painted rickety wooden stalls spill into the streets. Even in off-limits areas around government buildings, vendors still hawk their goods aggressively.

On a recent trip, a man approached me while I was walking. He was carrying a baby car seat under his arm. "Would you like to buy this car seat?" he asked. "I don't have a car," I replied. "That's okay," he assured me, "you could use it in your house."

"Well, I'm afraid I don't have a baby either." He paused. Then, with a hopeful smile, he asked: "Do you have a small girlfriend?"

Such comical persistence is common in Madagascar, where entrepreneurship is a way of carving out a living in a devastatingly impoverished environment.

Antananarivo's markets are overrun with sellers. But this is not a sign of a booming economy. Instead, it is exactly the opposite. Madagascar's economy is in shambles, forged partly by the loss of a vital trade programme: the United States' African Growth and Opportunity Act, or AGOA.

Vendors who previously exported their goods to the US through this programme have lost access to that market. They are now flooding the domestic market with their wares, driving competition up and prices and profits down.

In May 2000 the United States Congress enacted AGOA, which gave preferential trade status to participating countries in sub-Saharan Africa.

This legislation completely changed the playing field for African entrepreneurs trying to break into the American market. Suddenly, tariffs (that in some cases approached 40%) completely disappeared for thousands of products.

To become AGOA participants, countries "must demonstrate progress towards developing a market-based economy, protection of human and labour rights, and efforts to combat corruption and enhance rule of law", according to the US State Department.

Almost overnight, it became profitable for even small producers throughout eligible countries in sub-Saharan Africa to sell to the United States. Today, 39 countries on the continent participate in AGOA.

The programme has spurred African trade development. Since 2001 total trade between the United States and participating countries has tripled, reaching a peak in 2008 when total trade flows were valued at nearly $100 billion, according to the Trade Law Centre, a South African-based trade group.

While critics point out that much of the increase has come from natural resource exports, no one denies that the programme has had a massive impact on other important industries, notably in textile and apparel production.

Madagascar had been an exemplar of this effect, with a meteoric ascent in earnings owing to the programme. By 2008, Madagascar's textile industry was the second-largest beneficiary of the AGOA programme, trailing only Lesotho's.

With that boost, Madagascar became one of the fastest-growing economies in the world, reaching a peak of 7.1% annual GDP growth in 2008, according to the World Bank.

Yet just as a pen stroke in Washington created hundreds of thousands of new jobs in Madagascar with AGOA's adoption, strongman politics in Antananarivo eliminated those jobs just as fast.

In early January and February 2009 President Marc Ravalomanana - an entrepreneur who had risen from selling yogurt from a cart to building a national dairy empire and being elected president twice - was under political fire. Corruption allegations swirled through the capital, followed by bloody protests that saw tens of thousands take to the streets and a government-led massacre of about 50 protestors. The military staged a coup in mid-March and transferred the presidency to Andry Rajoelina, a former disc jockey who was then mayor of Antananarivo.

The coup brought an immediate and biting backlash to Madagascar. The international community united against the non-democratic transfer of power and cut off foreign aid, slashing 40% of Madagascar's government budget.

In December 2009, the US suspended Madagascar from the AGOA programme, forcing any entrepreneurs hoping to sell their products in the United States to cope with high tariffs. In effect, this barred Malagasy textiles from entering American markets.

The suspension was devastating. The island's textile industry had grown into a $600m-a-year behemoth by 2008, according to the Integrated Regional Information Networks, a UN humanitarian news project.

Right before the coup, roughly half of all Malagasy textile production, $278.8m worth, was bound for the United States, according to the Madagascar Export Processing Zone Association, a public-private partnership.

Annual GDP growth in 2008 pre-coup was 7.1% but post-coup it plummeted to -4.1% in 2009 and grew an anemic to 0.5% in 2010. Today, nine out of ten of the island's 22m people subsist on less than $2 per day.

Washington's decision to suspend Madagascar from AGOA effectively eliminated 50,000 jobs directly, and prompted a further 100,000 layoffs indirectly, according to a January 2013 report by Chatham House, a London-based think-tank.

Most of the island's factories supplied American stores such as Wal-Mart and Bloomingdale's, or sports brands like Puma and Adidas. But by early 2010 those companies needed to seek new suppliers, and Madagascar's entrepreneurs needed to seek new markets.

Madagascar's AGOA suspension had knock-on effects in the region, affecting raw materials providers to Malagasy factories. In particular, regional suppliers such as Lesotho, Mauritius, South Africa and Swaziland suddenly lost an important market and saw their profits plunge. This is the price of government takeovers in Africa.

The US government and international community adopted a seemingly admirable stance: coup governments will not be rewarded with aid and preferential trade deals. However, the human cost for those already struggling to make ends meet in Madagascar was severe.

For five long years, stagnation has dominated Antananarivo's markets under the shadow of international isolation. Mr Rajoelina's transitional regime scheduled, re-scheduled, and cancelled elections repeatedly between 2009 and December 2013, when they finally took place.

Today, in the wake of elections that transferred power to a new president, Hery Rajaonarimampianina, the international community is slowly threading Madagascar back into its fold. Many donors, notably the IMF and World Bank, have announced that they are once again disbursing aid.

Yet Madagascar's suspension from AGOA persists. It may continue for some time, as an annual review of AGOA eligibility typically takes place in December each year.

Its return to AGOA membership will depend on Madagascar's success with reinstating the rule of law and securing post-election national reconciliation, according to press reports quoting Samantha Power, America's ambassador to the UN. She reassured Mr Rajaonarimampianina that readmission would be considered this year.

If Madagscar is swiftly reinstated into AGOA, the Malagasy entrepreneurial spirit will be ready to pick up the pieces; and that persistent baby car seat vendor will at least have the choice to sell his goods in the aisles of Wal-Mart instead of wandering the streets of Antananarivo.

Madagascar's last five years teach a simultaneously uplifting and sobering lesson about the role of sub-Saharan African entrepreneurs in international markets.

On the one hand, avid entrepreneurs and workers throughout the continent are eager and ready to work hard, produce quality goods and lift their economies to high levels of growth.

On the other hand, a simple rule change in Washington can collapse an entire industry a world away, devastating hundreds of thousands of entrepreneurs with just a signature.

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