Narrow and Broad Perspectives on Trade Policy and Trade Costs: How to Facilitate Trade in Madagascar

• Date: 01 December 2016
• Author: Salamat Ali,Chris Milner
• Published date: 01 December 2016
• DOI: http://doi.org/10.1111/twec.12473

Narrow and Broad Perspectives on Trade

Policy and Trade Costs: How to Facilitate

Trade in Madagascar

Salamat Ali and Chris Milner

School of Economics and GEP, University of Nottingham, Nottingham, UK

1. INTRODUCTION AND CONTEXT

ONE of the key conclusions of the latest Trade Policy Review (TPR) for Madagascar

(WTO, 2015) is that any reform of trade policy in the country will be ineffective if

not combined with improvements in the country’s sociopolitical system and with the

avoidance of political crises. The last political crisis in Madagascar began in 2009 and

was only brought to an end by the presidential election in December 2013. The promotion

of trade and increased trade openness is most unlikely to be achieved in the context of

sociopolitical conditions that create insecurity and uncertainty and thus weaken the invest-

ment climate and undermine macro-economic stability. It is an argument made by many

commentators on trade policy, including in the case of other countries in the Africa region

(see Milner, 2004). It is certainly not an argument in general or a specific conclusion in

the present context that we would wish to challenge. We take the need for greater politi-

cal stability, strengthening of the rule of law, better protection for individual and property

rights and improved governance as fundamental and given, but do not dwell further on

the issue of political stability in this paper. Rather we focus here on the need for a broad

view of what should constitute trade policy, especially in the context of a developing

country such as Madagascar.

Indeed, we seek to provide a broader focus than the WTO’s Trade Policy Review Mecha-

nism (TPRM) typically allows. The TPRM seeks to review members’ adherence to the rules,

disciplines and commitments of the WTO’s multilateral and other trade agreements. This

means that a TPR concentrates on the nature and changes in a country’s trade and investment

policy regimes and trade policy measures and practices as set out or defined by the WTO

rules and agreements. It is fair to point out that this focus has broadened somewhat in recent

years and in particular since the WTO members concluded the Trade Facilitation Agreement

(TFA) in 2013. The recent TPR for Madagascar (2015) gives some attention to the country’ s

efforts to improve its custom procedures over the last decade and to aspects of logistics per-

formance in an African context. In this latter area, however, the attention is as much on the

scope for exporting transport services as it is on the effect that these services have on the

costs that Madagascar’s firms incur to trade internationally (when both importing and export-

ing).

A narrow focus or perspective to trade policy on the part of the WTO is understandable,

and perhaps appropriate, given the remit and nature of the organisation. Any criticism implied

by or associated with the use of the term, ‘narrow focus’, is equally or more applicable to

other institutions and trade policy analysts. Indeed, it is only in recent years that the academic

discipline has broadened its focus and recognised (or in fact rerecognised) more than

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The World Economy (2016)

doi: 10.1111/twec.12473

The World Economy

border-related sources of trade costs.

1

Indeed, one of the authors of this paper might himself

be criticised with hindsight for investigating the incentive effects of only traditi onal border

measures for Madagascar itself in the 1980s (Greenaway and Milner, 1990). We now have

much evidence and research on the nature, determinants and extent of trade costs broadly

defined (Milner, 1996; Anderson and van Wincoop, 2004; Arvis et al., 2016). So whereas the

Madagascar TPR (WTO, 2015) reports that the average, applied tariff on Madagascar’s

imports is 12.2 per cent, we know from the UNESCAP-World Bank Trade Cost Database that

Madagascar’s (average) bilateral trade costs with its actual trade partners are still in excess of

300 per cent ad valorem. Non-tariff, trade policy measures play some role in explaining this

difference, but the vast bulk of the difference between the average tariff and total trade cost

wedge is explained by the costs (time delays, charges, etc.) involved in moving goods through

customs and ports, of transporting goods to and between home and foreign ports and by the

additional costs (communication, information, etc.) of conducting business across national

frontiers. Given that Madagascar is a relatively high cost trade country compared with the

Africa region (which is itself a relatively high trade cost region compared with the rest of the

world), then it is clear that the scope for affecting incentives to import-substitute and to

export is likely to be much greater through broad-based strategies of trade cost reduction than

through trade policy reform narrowly and traditionally viewed.

We seek in this paper to adopt both a ‘narrow’ and ‘broad’ perspective to reviewing Mada-

gascar’s trade policies and the TPR. The remainder of the paper is organised as follows. Sec-

tion 2 briefly summarises the key features of Madagascar’s economy and its recent,

comparative economic performance. Section 3 offers an assessment of the current trade policy

regime and incentive structure (narrowly defined), again providing some comparison with the

regimes of other regional trading partners. Section 4 explains the nature and drivers of the

total trade cost measures referred to above and considers the scope for countries to fashion

(i.e. avoid) some of these costs. Section 5 provides some detailed information on Madagas-

car’s bilateral trade costs (in total and by sector) and in its trade with different regions of the

world. By comparing these trade costs with some of other African countries and reviewing

other information on comparative logistics performance and on the costs of doing business,

we offer a basis for evaluating the scope for reducing Madagascar’s trade costs. Finally, an

overall assessment of Madagascar’s trade policy and trade costs and the paper’s conclusions

is set out in Section 6.

2. ECONOMIC FEATURES AND RECENT PERFORMANCE

Madagascar is the fourth largest island in the world, situated in the Indian Ocean off the

south-east coast of Africa (see Figure 1), closer to many eastern and southern African coun-

tries than many north and west African countries are (and closer to Africa than Maur itius). It

is subject therefore to some remoteness from Africa and the rest of the world arising from its

location, but not to a unique extent and is not subject also to the constraints of traditional

land-lockedness experienced by many African countries. Unlike many island economies, how-

ever, economic activity and the population of Madagascar are concentrated away from coastal

1

There is an earlier literature on other than trade policy sources of protection (e.g. Yeats and Finger,

1976) which received little attention by the academic and policy community during the era of structural

adjustment policy reform in developing countries from the 1980s onwards.

©2016 John Wiley & Sons Ltd

1918 S. ALI AND C. MILNER