Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings EXECUTIVE SUMMARY Photos Front cover: Gudkov Andrey/Shutterstock; p. iv: Agota Kadar/Shutterstock; p. 1: Anton Ivanov/Shutterstock; p. 2: Dennis van de Water/Shutterstock; p. 4: Dudarev Mikhail/Shutterstock; p. 6: Damien Ryszawy/Shutterstock; p. 8: Dudarev Mikhail/Shutterstock; p. 10: danm12/Shutterstock; p. 11: Stock photo/Shutterstock; p. 12: Olivier S/ Shutterstock; p. 14: Dennis van de Water/Shutterstock; p. 15: Damien Ryszawy/Shutterstock; p. 16: Milosk50/ Shutterstock; p. 17: Artush; p. 18: Dennis van de Water/Shutterstock; p. 20: Pierre Jean Durieu/Shutterstock; p. 22: Muriel Lasure/Shutterstock; p. 23: Vladislav T. Jirousek/Shutterstock; p. 24: YuG/Shutterstock; p. 25: Andrea/Flickr © All rights reserved; pp. 26–27: Anton Ivanov/Shutterstock; p. 28: Anton_Ivanov/Shutterstock; p. 29: Danm12/Shutterstock; Back cover: Dietmar Temps/Shutterstock  iii Acknowledgements T he series of papers comprising the report “Shifting Fortunes and Enduring Poverty in Madagascar” is summarized here, and was produced under the World Bank’s Poverty Global Practice, Africa Region. Theresa Osborne and Nadia Belghith led this work under the super- vision of Pablo Fajnzylber, Practice Manager. The support and guidance of Mark Lundell, Country Director, and Coralie Gevers, Country Manager, are gratefully acknowledged. The report also benefited from consultations with various Ministries of the Government of Madagascar as well as private, donor, and non-governmental stakeholders. The data utilized were collected by the national statistical institute (INSTAT), with support from the United Nations, the African Development Bank, and the World Bank. We also thank Christopher Barrett of Cornell University, who provided technical input on two of the papers, as well as Francis Vella and peer reviewers Dominique van de Walle, Caterina Ruggeri Laderchi, and Kathleen Beegle, for their valuable comments. Venkat Ganeshan Gopalakrishnan and Carolin Geginat provided helpful editorial comments. Chuqiao Bi, Alessia Thiebaud provided superb research assistance and analytical inputs, and Patrick Leon Randiankolona provided essential data diagnostics and core elements of the analysis, without which much of the report would not have been possible. © 2016 This report summarizes the main findings of the following chapters and highlights some of the most important determinants of the dynamics – as well as the persistence – of poverty in Madagascar over recent years. Belghith, Nadia, Patrick Randriankolona, and Theresa Osborne (2016). “Madagascar Poverty and Inequality Update: Recent Trends in Welfare, Employment, and Vulnerability.” (henceforth BR&O) Thiebaud, Alessia, T. Osborne, and N. Belghith (2016). “Isolation, Crisis, and Vulnerability: A Decomposition Analysis of Inequality and Deepening Poverty in Madagascar (2005-2010). (TO&B) McBride, Linden. and T. Osborne (2016). “Flexible Poverty Profiling and Prediction of the Severity of Poverty in Madagascar.” (M&O) Jodlowski, Margaret (2016). “Labor Demand Estimation in Rural Madagascar: Shadow Wages and Allocative Inefficiency.” (J) Bi, Chuqiao. and T. Osborne (2016). “Transactions Costs, Poverty, and Low Productivity Traps: Evidence from Madagascar’s Informal Micro-Enterprise Sector.” (B&O) The full report can be found at http://www.worldbank.org/en/country/madagascar/publication/ shifting-fortunes-and-enduring-poverty-in-madagascar-recent-findings  v Acronyms ENEMPSI Enquête nationale sur l’emploi et le secteur informel (National employment and informal sector survey) ENSOMD Enquête nationale sur les objectifs millenaire du développement (National Survey on the Millennium Development Goals) EPM Enquête périodique auprès des ménages (Periodic Household Survey) GDP Gross Domestic Product NFE Non-farm enterprise NPK Nitrogen phosphorus and potassium (fertilizer) OOME Owner-operated microenterprise Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 1 Madagascar made very little progress in improving the welfare of the poor in recent years, as gains achieved after 2001 were reversed between 2005 and 2012. Since 2001, Madagascar has seen two political crises in addition to disruptions in access to markets for textiles and manufacturing exports, severe climatic shocks, and global food price spikes. Real per capita GDP declined between 2001 and 2012, and despite post-crisis stabiliza- tion, has increased only one percent in the ensuing four years. Against this backdrop, the headcount poverty rate declined slightly over the 2001-2012 period, but it remains exceedingly high at 70.7 percent (2012) (figure 1). Given Madagascar’s persistently high poverty rates, perhaps a more meaningful indicator of welfare is the poverty gap index, which measures the severity of poverty. Based on this measure, the average poor Malagasy consumed 32.2 percent less than a person living at the poverty line in 2012. This gap has stayed relatively flat, falling from 35.9 in 2001 and then increa- sing just slightly over the period 2005-2012 from 31.3 (BR&O) 2 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 3 Inequality fell between 2001 and 2005 then rose again by 2012, but remains modest relative to other African countries. The Gini coefficient, a measure used to monitor inequal- of consumption for the top decile to that of the bottom ity, has fallen since 2001 from 46.9 to 41, and is now decile (P90/P10) ranged from 5 to 8 over the 12 year below the Sub-Saharan African average of 43.8 (figure period – a low level relative to the 13.4 average for low 1). 1 Moreover, Madagascar’s level of inequality is gener- income countries (BR&O). ally not characterized by extremes of wealth: The ratio FIGURE 1: Poverty Gap Index, Headcount Poverty Rate, and Gini Coefficient 2001-2012 80 60 40 20 0 2001 2005 2010 2012 Poverty Gap Index Headcount Poverty Rate Gini Coefficient Source: EPM 2001, 2005, 2010, and ENSOMD 2012. Note: Calculations use the national poverty line estimated using 2010 EPM data. 1 The Gini coefficient measaures the degree of dispersion from perfect equality, and ranges from 0 (no inequality) to 100 (maximum inequality.) 4 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 5 Climatic shocks have been a major determinant of welfare fluctuations, intensifying poverty and inequality in some years, such as 2010, when real incomes fell for the poorest households. A high percentage of Malagasy households typically Mechanisms to help households insure against climatic reports being adversely affected by drought, cyclone, shocks would reduce transient inequality, while also hel- and late rains, especially among the poorest households ping the poor avoid coping strategies that deplete their (figure 2). In fact, between 2005 and 2010, the increased assets and compromise their investments in health and severity of weather shocks was the most important cause education (TO&B). of declines in well-being for those falling in the bottom of the consumption distribution (figure 3). FIGURE 2: Percentage of Households Having Stated FIGURE 3: The Effects of Climatic Shocks on the Shock (top three reported shocks), by Consumption Change in Consumption of Rural Households by Quintile, 2012 Quintile, 2005-2010 30.00% 2% Counterfactual Change in Consumption 1% Drought 25.00% 0% –1% 20.00% Cyclone Cyclone –2% Drought 15.00% –3% Sécheresse Cyclone –4% Cyclone 10.00% Sécheresse loss of livestock –5% Illness of Adult Cyclone Sécheresse Maladie Late Rain –6% Late Rain Illness or 5.00% –7% 0.00% –8% Poorest Second Third Fourth Richest 20 40 60 80 Quintile Quintile Quintile Quintile Quintile Quintiles Source: ENSOMD 2012 Source: EPM 2005, EPM 2010 6 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 7 Although between 2005 and 2010 the poor accumulated more “endowments” – productive assets and favorable household and community characteristics – and experienced fewer adverse shocks. However, the benefits derived from these factors was lower in 2010 than in 2005. At the same time, incomes associated with the economic activities of the poor declined. For the poorest households, consumption declined climatic shocks – fell by 6.9 percent (figure 4). For rural an average of 3.1 percent between 2005 and 2010, as households, the association between the amount of land the relationship between their consumption and their cultivated and consumption fell by approximately 6 “endowments” – in particular, greater education, pos- percent for all quintiles of the consumption distribution session of a means of transport, higher community level except the top one (TO&B). electrification, and fewer adverse health, security, and FIGURE 4: Changes in Consumption, Endowments and Returns Components 2005-2010 by Quintile 5% Change in Consumption 0% –5% –10% 20 40 60 80 Quintiles Net Consumption Change (2005-2010) Endowment Component Returns Component Source: EPM 2005, EPM 2010 8 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 9 For rural households, a decline in profits from agriculture, combined with more damaging climatic events, explain the reduction in welfare for the bottom two quintiles between 2005 and 2010 (figure 5). Health shocks compounded these effects, at least par- Two key factors help explain the decline in agricultural tially offsetting them was the availability of profitable profits: off farm sources of income for male-headed households (TO&B). FIGURE 5: Main Negative Determinants of Change in Consumption, Rural Households, 2005-2010 (Significant Factors Only) 2% Counterfactual Change in Consumption 1% 0% –1% –2% –3% –4% –5% –6% –7% –8% 20 40 60 80 Quintiles Effects of Climate Shocks Returns to Cultivated Land Effects of Health Shocks Source: EPM 2005, EPM 2010 10 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 11 First, between 2005 and 2010 the poor became more isolated from markets and services as transport conditions worsened. The average real price to transport goods such as a bag of rice rose 42 percent. Fuel costs rose along with food prices (with oil prices rising approximately 48 percent). The average time to reach markets also increased, particularly for the bottom quintile – from 1.9 to 2.4 hours (figure 6). The time to reach a main urban center doubled to almost 12 hours as distances to markets, schools, and health centers became more strongly related to poverty. The lack of funding for road maintenance following the 2009 political crisis is an important partial FIGURE 6: Average Time to Food Market by Quintile explanation for the changes in travel time seen, but this (Hours) also followed years of under-investment. Richest Road and transport infrastructure is crucial for poverty Fourth reduction in Madagascar. Implementation of a sector Third strategy informed by an analysis of the returns to various investments is of utmost importance, given the country’s Second acute transport infrastructure deficits coupled with Poorest stringent public financing constraints. 0 1 2 3 2005 2010 Source: EPM 2005, EPM 2010 12 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 13 The second key factor reducing agricultural incomes was a set of policies designed to insulate the country from rising world rice prices, which diminished the producer price disproportionately post-2005 and intensified rural poverty. In the face of sharply rising world prices for rice – jumped from 2.2 to 5.7 between the two years for the Madagascar’s dominant crop and staple food – begin- poorest producers (figure 8) ning in 2007 the Government progressively implemented measures that kept the price of rice relatively stable for Interventions in rice and other food markets can have urban-based consumers. However, producers, who were unanticipated effects which depend upon the perfor- increasingly cut off from demand centers, were unable to mance of input markets and transport linkages. benefit from rising world prices. The average producer price fell 9 percent (figure 7) while input prices rose, Food market policies need to balance carefully the posi- and the ratio of fertilizer (NPK) prices to paddy prices tive effect of high producer prices on the welfare of the poor producer. FIGURE 7: Average nominal price (mean) of 1 kg FIGURE 8: Median Ratio Price of Fertilizer to Price paddy, by consumption quintile (Ariary) Received for Rice Paddy, by Consumption Quintile 1000 8 800 600 6 400 4 200 0 2 2005 2010 Poorest Second 0 Poorest Second Third Fourth Richest Third Fourth Richest Community Mean 2005 NPK/Paddy 2010 NPK/Paddy 2005 Urea/Paddy 2010 Urea/Paddy Source: EPM 2005, 2010 Source: EPM 2005, EPM 2010 14 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 15 In response to adverse shocks and changing economic circumstances, households shifted their efforts between farm and off-farm activities, but doing so in 2010 was only partially successful in shoring up household consumption. Just as people had moved into agriculture in 2005 when employment in urban based sectors fell, they transferred to non-farm enterprises, particularly secondary employ- ment in services, as returns in agriculture tumbled in 2010 (figure 9). However, such strategies could not fully offset the weak demand for labor. While secondary employment increased, so did the number of those seeking but unable to find secondary work. Wages increased just slightly in 2010, but only for male workers, and then returned to their former (2005) levels by 2012. FIGURE 9: Sector of Secondary Employment of Household Head (%) 100 Poorest Second Third Fourth Richest 80 60 40 20 0 2001 2005 2010 2012 2001 2005 2010 2012 Agriculture Services Source: EPM 2001–2010 – ENSOMD 2012 16 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 17 Of all household and community-level factors, those that are the most predictive of higher welfare are higher community-level electrification, proximity to urban areas, and greater employment by the household off-farm (M&O). In urban areas, having an education is also predictive of higher welfare; and in rural zones, greater land areas and higher paddy prices are important predictors. In particu- lar, in order of importance, the best predictors (among the many measured characteristics and events) of higher consumption nationally are: 1. Living in a community with high levels of electri- fication (with more than 27 percent of households having electricity); 2. Having a university-educated household head. 3. Having a literate head of household. 4. Proximity to the nearest major urban center. 5. Higher prices for paddy rice; and 3. Living in a community with higher levels of 6. Higher livestock holdings. electrification; 4. A lower percentage of household revenues from For agricultural households only, the best predictors in agriculture; and order of importance are: 5. A higher price of paddy rice. 1. Greater cultivated land; 2. Proximity to the nearest major urban center; These predictors can be used for targetting of programs to the poorest of the poor or for guiding causal analysis of the drivers of poverty. 18 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 19 In areas with business opportunities, access to electricity can have a significant positive effect on incomes. The evidence is not direct, but it is suggestive: First, of electrification may also be more affluent and able to microenterprises that utilize electricity are more prof- support more productive NFE’s. Nonetheless, there is itable, taking into account other firm characteristics no evidence available that access to electricity can raise (B&O, J). In addition, while the percentage of house- incomes in the remotest and poorest areas. holds with electricity increased only slightly from 15 percent to 17 percent between 2005 and 2010, the corre- More data and analysis – including rigorous impact lation between electrification and consumption increased evaluation – are needed on the potential benefits of more as non-farm enterprise (NFE) income became more widespread electrification. important (TO&B). Communities with higher levels 20 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 21 The structure of the country’s non-agricultural sectors – in particular, the predominance of tiny owner-operated firms – involves major economic losses: these enterprises are too small to be efficient, employing too little capital and labor. Although profitability would increase with greater capi- A restructuring of the Malagasy economy into larger tal investment, overwhelmingly firms remain at a scale enterprises is needed to raise productivity and incomes. of operation associated with low profitability (see figure 10). Moreover, almost 70 percent of owner-operated micro-enterprises (OOMEs) employ only the owner, even FIGURE 10: Effect on Profits of Greater Capital though the average return to capital in such an enter- Invested in OOME’s, by Percentile of Capital prise (at 12 pecent per annum) is only one-third that of Invested. enterprises employing at least one additional individual 0.9 (B&O). 0.8 0.7 0.6 The continuing predominance of tiny, inefficient firms 0.5 0.4 may be due to the risks and difficulties associated with 0.3 providing credit or making sizeable enough equity 0.2 investments to achieve economies of scale. If so, this 0.1 0 would be more difficult in a context where entrepreneurs 10th 25th 50th 75th 90th 95th are poor (B&O). While microenterprise loans may help All Single-worker Multi-worker to provide employment for the poor, if the amounts available are too small, they would have little impact Source: Bi and Osborne 2016 using ENEMPSI Notes: Shown are elasticities of profits with respect to capital invested, on overall productivity, employment, and wage growth with all positive values indicating foregone profits. (B&O). “Single-worker” enterprises are those employing only the owner, and “multi-worker” are those employing at least one additional family or paid worker part time. 22 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 23 The current structure of firms depresses labor income as well. For the 70 percent of microenterprises that employ only their owners, the income generated by the entrepreneur’s own time is only 60 percent of the average wage in the economy, even when one takes into account individual differences in skill and ability. Owners of multi-wor- ker microenterprises, however, earn a 68 percent wage premium (B&O). Micro-enterprises are also unable to generate sufficient employment opportunities. At present, multi-worker firms employ on average .47 paid workers and 81 paid hours per month, much less than the 760 hours or 4.4 full-time workers needed to maximize profit levels. 24 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 25 Labor market frictions depress employment levels and wages offered by both agricultural and off-farm enterprises (J, B&O). The gap between actual and optimal labor employment suggests an important barrier to hiring workers, even informally. This may be due to the costs of identifying good workers, as well as monitoring and incentivizing workers once hired. Investigation into the underlying issues, possibly through pilot programs to reduce these barriers, could point to cost-effective measures for stimulating job creation and wage and productivity growth. 26 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 27 Women in Madagascar earn lower wages than men; they also face greater difficulties in coping with shocks and finding productive employment. In 2010, women had more difficulty than men in securing employment off farm when agricultural conditions worsened, thus experiencing higher rates of under-employment (BR&O). Although female-headed households are not consistently worse off, when taking into account educational attainment, age, and location (region and urban versus rural milieu), men earned 37 percent more than women in the labor market in 2012 (B&O). Female entrepreneurs are also less likely to own and operate a micro-enterprise that employs other work- ers, and more likely to be self-employed in a smaller microenterprise than men, with the consequence that they earn lower profits and labor income. Moreover, even accounting for size, male-operated firms earn higher profits, all else equal (B&O). This disparity in access to opportunities widened substantially in 2010: Male- headed households were able to offset much of the losses from climatic shocks and declining returns to agriculture through off farm work in that year (TO&B). 28 Shifting Fortunes and Enduring Poverty in Madagascar: Recent Findings Executive Summary 29 The poverty of the Malagasy economy, in combination with high transport costs and frictions in capital and labor markets, may create a low productivity trap. Poverty itself results in low demand for non-agricultural goods and services and may, in combination with capital and labor market frictions, result in a low-income low-productivity trap. Microenterprise owners rate the lack of demand for their goods and services as the most important constraint. Moreover, firms that serve larger customers that are involved in exports are more profit- able, even after accounting for scale and characteristics of the entrepreneur (B&O). This suggests that demand-side stimulus, if sustainable and accompanied by productive investments, could be part of a broader strategy to reduce poverty.