Despite fiscal and administrativereforms pursued by the Government of Madagascar since themid 1980s, to prod economic and financial liberalization,contributing to steady GDP growth rates, manufacturingproduction however, still represents a relatively smallshare of value added. And, the development ofimport-substituting (IS) firms has been considerably slower,showing stagnating signs as these firms are unprepared forcompetition from imports unleashed by recent liberalization.The note looks at the present market structure which hascreated distortions, identifying several incentives by theGovernment, to firms located in the Export Processing Zones(EPZs), including a grace period on corporate taxes for thefirst 2-15 years of operations, exemption from customsduties and taxes on imported equipment; taxation ofdividends at only 10 percent, and, 99-year leases forinvestment in land. The note further looks at the Common Lawsector, i.e., those firms operating outside of EPZs, namelythe IS firms, and the non-tradables sector, since most ofthe recent growth in the country's economy has comefrom non-tradables (construction, transport, beverages, andtobacco). Cross-cutting issues are identified by a survey ofrepresentative industries, showing a variety of factorsaffecting productivity, and reducing competitiveness.Recommendations include lower protection to make marketsmore contestable, but within lower, and more uniformtaxation, to ease the fiscal burden on imported inputs, inan effort to encourage entry into the banking system, andimprove the regulatory framework.
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