Socio-economic impact of Malagasy political crisis analysed

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afrol News, 9 January - Madagascar's political battles during the first half of 2002 were fought at a high price. The substantial gains in reducing poverty between 1997 and 2001 have been more than reversed. Real GDP declined by an estimated 12 percent last year, especially hurting the poorest Malagasies, a new study shows. 

In a new study published this week by the International Monetary Fund (IMF), Cemile Sancak has researched the economic and social impact of the political crisis in Madagascar last year. The impact turned out to have been harder and of a more durable nature than most observers had expected. 

Following the fraudulent December 2001 elections and the subsequent power struggle between ex-President Didier Ratsiraka and new President Marc Ravalomanana, in particular one fatal move hurt the Malagasy economy: In end-February, after Mr Ratsiraka had set up his rival seat of government in Tamatave, his supporters blockaded all roads from the coastal areas to the central plateau and began blowing up bridges.

The political crisis thus "engendered a sharp downturn in economic activity," Sancak observes. The economic embargo on a large part of the central plateau and the resulting disruption of transportation "led to a significant reduction in domestic and external trade." Output losses due to the crisis were especially concentrated in the transport, export processing zone (EPZ) and tourism sectors. 

Real GDP is projected by the government statistical agency (INSTAT) to have declined by 12 percent in 2002. Further, the consumer price index had increased by 21 percent in the first five months of 2002, mainly as a result of shortages of fuel and other necessities, such as food products and soap. Income poverty is estimated to have risen as much as 6 percent, up from 69 percent of the population in 2001 to 75 percent.

The political crisis finally ended when Mr Ratsiraka left Tamatave for France in July, with Mr Ravalomanana in control of the whole country. Road blockades were dismantled and the free flow of people and goods through the country was re-established.

By then, as the numbers show, the damages had literally eaten up all the gains made in the 1997-2001 period - the first period in decades Madagascar had experienced real growth. In these years, the growth rate of real GDP averaged 4.6 percent, while the incidence of poverty declined from 73 percent to 69 percent of the population, with most gains occurring through a reduction of urban income poverty. Substantial foreign investments had further been made, in particular in the export processing zone (EPZ).

Rural farmers' crisis
Although the political crisis, at a first glimpse, seems to have had a relatively mild adverse impact on primary sector production, rural communities were severely hit. "The expected decline in primary sector output in 2002 results from a decline in forestry output, partially offset by agriculture output growth of 0.8 percent," Sancak informs. 

While the volume of agricultural production had "remained relatively stable in real terms" during the crisis, farmers were unable to market their products. "Producer prices for some food crops, such as rice, declined by up to 50 percent in isolated communities as a result of the sharp increase in transport costs and difficulties in delivering products to markets," Sancak's study reveals.

At the same time, the prices rural communities had to pay for imported staple goods, such as salt, sugar, vegetable oil and lamp oil, increased sharply until May. Consumer prices only started to decline from June to September, after the free movement of people and goods had been re-established. 

The social impact on rural communities, especially those isolated from the markets, was adverse. Farmers experienced a decline of up to 50 percent in household income, as a result of a significant drop in regular prices and a dramatic increase in fuel and transport costs. Agriculture employs more than 80 percent of Madagascar's economically active population.

Industry paralysed
According to Sancak's research, the political crisis had its largest impact on the secondary sector, where "output is expected to plummet by 25.1 percent in 2002." Road blockades had prevented the supply of essential inputs - including fuel and raw materials - for most manufacturing industries located in the central plateau. In addition, companies producing for the domestic market faced weaker demand, prompting them to curtail production and lay off workers. 

- It is estimated that, for EPZ companies, which are mainly involved in apparel production for export markets, output will fall about 70 percent in 2002, following a 40 percent increase in 2001. Sancak notes. EPZ firms, unable to meet foreign orders, had shut down operations. Since a number of foreign orders had been lost, by mid-October 2002, only 49 of about 150 EPZ companies had partially resumed operations. The EPZ companies were expected "to operate at significantly reduced (35 percent or less) capacity until spring 2003, when foreign orders and production are expected to pick up." 

Also agro-business suffered a parallel decline due to disruptions to harvesting due to the unavailability of transportation and lack of credit to pay field labourers. In addition, several agro-business enterprises, such as the cotton company, HASYMA, ceased operations owing to cash constraints.

Most EPZ companies shut down their plants, temporarily laying off an estimated 100,000 employees - of which only some 20,000 workers had been re-employed by October. In urban areas, reduced production and the temporary shutdown of companies additionally resulted in loss of jobs for about 150,000 mostly low-skilled workers in the formal sector, the study shows.

The urban poor
Soaring prices and less money in circulation led to a crisis among the poorest segments of the Malagasy population. "The loss of income in the urban formal sector income also led to a drop in demand for informal sector operators. Consequently, the extremely poor, who are primarily involved in informal sector activities, such as petty trade and day work in the construction industry, were particularly affected by the crisis," Sancak observes.

In addition to the loss of income, the sharp increase in the prices of a number of essential goods further was reducing the purchasing power of these poor groups. A study made by the UN development agency UNDP estimated that income poverty increased by as much as 6 percent since 2001 and now affects 75 percent of the population. 

In addition, the World Bank reports that, in the February-August period, school dropout rates increased significantly, reaching 14 percent, while visits to health care centres declined by 36 percent in rural areas and 14 percent in urban areas. Both rural and urban families had reported decreased food consumption, which is likely to further increase malnutrition rates for children under 5 years of age, Sancak writes. 

Service sector hard hit
The service sector had also been "hard hit by the political crisis," with an expected decline in output of 12.5 percent for the year as a whole, compared with an increase of 6.1 percent in 2001. Transportation of course was one of the most affected sectors, as 90 percent of the trucking fleet virtually had been immobilised by the roadblocks, damaged bridges, and fuel shortages. In addition to the economic embargo, Cyclone Kesiny in February caused hundreds of landslides that blocked key roads and damaged several bridges in the eastern parts of the country.

The severe shortage of fuel led to a sharp increase in petroleum prices on the black market of as much as 500 percent across the country. The official posted prices did not change during the crisis, but there was no petroleum to sell at these prices. 

Commercial activity also declined substantially following the decline in secondary and tertiary sector output. "Since about 55 percent of Madagascar's electricity output is utilised by industries and businesses, electricity output fell during the crisis as economic activity slowed," Sancak writes. In the electricity sector, two acts of sabotage also had cut power to Antananarivo on two occasions. The public electricity company, JIRAMA, also had collection difficulties as local governments and universities could not pay their electricity and water bills. 

Tourism was brought to a halt during the crisis; international travel to Madagascar for tourism is estimated to have declined by 95 percent. Air Madagascar stopped most internal and external flights, as did most foreign carriers for security reasons. 

Only the banking sector had continued operations throughout the crisis and thus "ensured the continuity of the payment system." However, the sector was also affected by the crisis. The share of non-performing loans had risen from 10.3 percent at en-2001 to 14.0 percent at end-August 2002. 

In early March, Mr Ratsiraka's government appointed a new governor of the central bank based in the Tamatave branch. With the central bank management split, foreign depositories froze the external reserves of the central bank, preventing the payment of external obligations, as well as the functioning of the interbank foreign exchange market. The foreign market exchange was only reopened in late July.

All in all, the political crisis in 2002 seems to have set the Malagasy society back for several years. The damages due to employment loss, increase in poverty and decrease in foreign investments will not be repaired in years. As in most conflicts and crises, the principal victims have been those that had the least from the beginning, the IMF study clearly shows. 

Sources: Based on IMF and afrol archives 

afrol News.

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