Trade impacts of the AfCFTA in Madagascar: An analysis of trade in goods and services

Calabrese, Linda; Abudu, Derrick; Ayele, Yohannes; Lemma, Alberto; Mendez Parra, Maximiliano Research Report Trade impacts of the AfCFTA in Madagascar: An analysis of trade in goods and services ODI Report Provided in Cooperation with: ODI Global, London Suggested Citation: Calabrese, Linda; Abudu, Derrick; Ayele, Yohannes; Lemma, Alberto; Mendez Parra, Maximiliano (2024) : Trade impacts of the AfCFTA in Madagascar: An analysis of trade in goods and services, ODI Report, Overseas Development Institute (ODI), London This Version is available at: https://hdl.handle.net/10419/313874 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/ Trade impacts of the AfCFTA in Madagascar An analysis of trade in goods and services Linda Calabrese, Derrick Abudu, Yohannes Ayele, Alberto Lemma and Maximiliano Mendez-Parra May 2024 Key messages As a party to the African Continental Free Trade Area (AfCFTA), Madagascar could see some increases in imports from and exports to African countries. On balance, the increase in exports is likely to offset the increase in imports. Madagascar is likely to see increased opportunities for trade in services, in particular in transport and logistics (a priority area for the AfCFTA) and tourism. Madagascar could be promoted to other African countries as a tourism destination. Madagascar’s digital trade sector is growing but, if it is to profit from opportunities available under the AfCFTA, the country will need to strengthen its hard and soft infrastructure and decrease costs related to digital services. Opening up trade and investment could result in an increase in work opportunities that could benefit women and youth and reduce poverty. However, some of these activities (forestry, fisheries) may have negative environmental and climate impacts that need to be addressed at the sector level. Report ODI Report 2 Readers are encouraged to reproduce material for their own publications, as long as they are not being sold commercially. ODI requests due acknowledgement and a copy of the publication. For online use, we ask readers to link to the original resource on the ODI website. The views presented in this paper are those of the author(s) and do not necessarily represent the views of ODI or our partners. This work is licensed under CC BY-NC-ND 4.0. How to cite: Calabrese, L., Abudu, D., Ayele, Y., Lemma, A. and Mendez-Parra, M. (2024) Trade impacts of the AfCFTA in Madagascar: An analysis of trade in goods and services. ODI Report. London: ODI (https://odi.org/en/publications/trade-impacts-ofthe-afcfta-in-madagascar-an-analysis-of-trade-in-goods-and-services) ODI Report 3 Acknowledgements About this publication This report is part of the Supporting Trade and Investment in Africa programme, which is funded by the UK Foreign, Commonwealth & Development Office (FCDO). It does not necessarily reflect the views or positions of FCDO or ODI. The authors wish to thank Sheila Page for her peer review. Any errors remain our own. About the authors Linda Calabrese is a Research Fellow at ODI. Derrick Abudu is a Senior Research Officer at ODI. Yohannes Ayele is a Senior Research Officer at ODI. Alberto Lemma is a Research Fellow at ODI. Maximiliano Mendez-Parra is a Principal Research Fellow at ODI. ODI Report 4 Contents Acknowledgements .................................................................................................................... 3 Contents ................................................................................................................................. 4 Acronyms ................................................................................................................................. 6 Executive summary .................................................................................................................... 8 1 Introduction ................................................................................................................... 11 2 Background on Madagascar’s current trade context ..................................................... 12 Patterns of trade in goods with African countries .......................................................... 12 2.1.1 General trends .............................................................................................................. 12 2.1.2 Madagascar’s trading partners ...................................................................................... 13 2.1.3 Sectors and product traded ........................................................................................... 13 Tariff structure ............................................................................................................... 14 Madagascar’s membership of regional economic communities .................................... 15 Patterns of trade in services with African countries ...................................................... 17 Focus on digital: infrastructure and e-commerce .......................................................... 20 2.5.1 Digital penetration and literacy ...................................................................................... 20 2.5.2 Hard and soft digital infrastructure ................................................................................ 20 2.5.3 Digital commerce .......................................................................................................... 22 2.5.4 Other trade agreements with digital provisions ............................................................. 23 Investment to and from other African countries ............................................................ 23 3 How will the AfCFTA affect Madagascar’s trade? ......................................................... 25 Brief description of the AfCFTA’s provisions ................................................................. 25 Analysis of the AfCFTA’s impact on Madagascar’s trade using a partial equilibrium model ............................................................................................................................... 27 3.2.1 Impacts on goods imports and tariff revenues .............................................................. 27 3.2.2 Impacts on exports ........................................................................................................ 28 Assessing potential trade diversion, trade creation and competitiveness losses ......... 29 Potential impacts on trade in services with a focus on e-commerce ............................. 29 4 Social and environmental impacts of the AfCFTA ......................................................... 32 Impacts on poverty ........................................................................................................ 32 Impacts on women and youth ....................................................................................... 33 Impacts on climate and the environment ...................................................................... 34 5 Policy recommendations ............................................................................................... 36 Trade and investment ................................................................................................... 36 Recommendations for digital trade and e-commerce development .............................. 37 Recommendations on how to mitigate adverse social and environmental impacts ...... 38 References ............................................................................................................................... 39 ODI Report 5 Appendix 1 Review of existing studies on the impacts of the AfCFTA on Madagascar ...... 42 Appendix 2 Market access .................................................................................................. 43 Appendix 3 Trade in goods with African partners ................................................................ 44 Appendix 4 Trade in goods by product ................................................................................ 46 Appendix 5 Detailed import tariffs ....................................................................................... 48 Appendix 6 Trade in services with African countries ........................................................... 50 Appendix 7 Overview of e-commerce in major African markets .......................................... 51 Appendix 8 Partial equilibrium model .................................................................................. 52 Appendix 9 Results of the partial equilibrium model ........................................................... 54 ODI Report 6 Acronyms AfCFTA African Continental Free Trade Area AGOA African Growth and Opportunity Act BaTiS Balanced Trade in Services BPO business process outsourcing CAGR compound annual growth rate COMESA Common Market for Southern and Eastern Africa DCTS Developing Countries Trading Scheme EAC East African Community EBA Everything But Arms EDBM Economic Development Board of Madagascar EPA Economic Partnership Agreement EU European Union FDI foreign direct investment GATS General Agreement on Trade in Services GDP gross domestic product GHG greenhouse gas GNI gross national income GNIpc gross national income per capita GSP Generalised System of Preferences ICT information and communication technology IMF International Monetary Fund INSTAT Institut national de la statistique ISDS investor–state dispute settlement IT information technology ITU International Telecommunication Union LDC least developed country MFN most favoured nation n.e.s. not elsewhere specified NTB non-tariff barrier OECD Organisation for Economic Co-operation and Development PEM Plan Emérgence Madagascar PIC2 Pôles Intégrés de Croissance et Corridors PPP purchasing power parity PPP$ purchasing power parity dollars REC regional economic community RoO rules of origin SADC Southern African Development Community SITC Standard International Trade Classification SMEs small and medium-sized enterprises TAPED Trade Agreement Provisions on Electronic-commerce and Data TMEA TradeMark East Africa TRAINS Trade Analysis Information System UK United Kingdom UNCTAD United Nations Conference on Trade and Development UNECA United Nations Economic Commission for Africa ODI Report 7 US United States USD US dollars USITC United States International Trade Commission VAT value-added tax WDI World Development Indicators WITS World Integrated Trade Solution WTO World Trade Organization ODI Report 8 Executive summary The African Continental Free Trade Area (AfCFTA) is a critical instrument for African countries in use in diversifying and transforming their economies. It will reduce barriers between African Union Member States within the aim of increasing intra-African trade in goods and services, and investment. Madagascar is one of the 54 signatories to the AfCFTA but, at the time of writing, is among the seven countries that have not ratified the Agreement (tralac, 2023a). The country’s government and the private sector are considering the implications of joining the free trade area. The purpose of this report is to summarise some of the evidence on possible effects from joining and to indicate how membership could benefit Madagascar. In the past two decades, Madagascar’s trade with other African countries has increased in volume, in terms of both imports and exports, but it has remained relatively stable as a share of total trade. Madagascar trades with many African countries but the majority of its trade is with two partners, South Africa and Mauritius. Madagascar is already part of free trade areas with these countries under the Southern African Development Community (SADC) and the Common Market for Southern and Eastern Africa (COMESA). In trade in services, most of the country’s trade is again with South Africa and Mauritius, and to a minor extent with Angola and Egypt, reflecting the importance of trade within SADC and COMESA. The main services exports are transport and travel. One area of particular interest is digital trade. Madagascar’s digital trade is growing, and this is a priority area for the government. However, hard and soft digital infrastructure is still under development, and the high costs of data and devices mean the country still sees a marked digital divide. As a signatory to the AfCFTA, the government of Madagascar has participated in its negotiations on digital trade. This study conducted a partial equilibrium analysis to assess the potential impacts of joining the AfCFTA on trade in goods. It should be noted that any changes do not affect tariffs on Madagascar’s trade with SADC and COMESA countries, which are its major trading partners. The analysis found that: • The AfCFTA would generate an increase in total Madagascar imports of 0.1%, or around $4.4 million. The corresponding reduction in tariff revenues is estimated at $1.5 million. These changes are dominated by a single product (preserved sardines). • In terms of exports, the changes will affect only exports to Morocco and Nigeria, which will increase by $3.8 million and $9.7 million, respectively (or 58% and 36% of total trade with these countries). These increases constitute a large expansion of the value exported to these African countries, greater than the expansion of imports generated by the AfCFTA. ODI Report 15 Table 2 Madagascar’s import tariffs, 2022 Summary Total Agricultural products Non-agricultural products Simple average final bound 27.4 30.0 25.3 Most favoured nation applied Simple average 11.8 14.8 11.3 Trade-weighted average 8.3 6.5 8.8 Source: WTO Looking at broad product groups, fish and fish products have high applied tariff rates, at 19.7%, followed by beverages and tobacco, at 19.4%. For non-agricultural goods, the category with the highest tariffs in Madagascar is clothing products, subject to an average tariff of 19.9%. Appendix 5 provides details on tariffs on main imports. Madagascar imposes tariffs of above 10% on average on the other AfCFTA countries. Importantly, Madagascar, being a member of regional agreements such as the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC), benefits from tariff exemptions in its exports to fellow member states like South Africa, provided these exports adhere to rules of origin requirements. When considering Madagascar’s many trade partners in Africa, we can see that applied tariffs vary considerably. South Africa, a significant export destination partner of Madagascar, maintains a most favoured nation (MFN) applied tariff of 7.6%. Morocco and Kenya levy tariffs of 14% each. Ethiopia imposes a tariff of 17%. Sudan imposes a higher tariff but accounts for just 0.3% of trade. Appendix 5 provides details for other countries. Madagascar’s membership of regional economic communities Madagascar participates in various regional economic communities (RECs). Within the Africa regional context, Madagascar has been a member of the COMESA free trade area since 2000. COMESA, as a regional organisation for East Africa comprising 21 member states, facilitates economic cooperation and integration, with a population of over 520 million and total trade in goods worth $235 billion. COMESA provides tarifffree access among member states. Figures 6 and 7 show Madagascar’s exports to and imports from COMESA and non-COMESA African countries over the past two decades. The share of exports going to COMESA countries has been substantial but is declining. In 2022, only 34% of Madagascar’s exports to Africa went to COMESA member states, down from 59% in 2009. Madagascar’s imports from COMESA member states are substantial, amounting to 48% of its African imports in 2022. Additionally, Madagascar joined SADC in 2005. Membership of SADC provides Madagascar with substantial commercial advantages, offering access to a market boasting over 200 million consumers and preferential tariff treatment among its member states. In 2022, 77% of Madagascar’s exports went to SADC countries, even though this had declined compared with 89% in 2002 and 81% in 2009. Similarly, the share of Madagascar’s imports from SADC member states declined from 85% in 2002 and 88% in 2009 to 79% in 2022. An important thing to note is that there is an overlap between COMESA and SADC memberships, as Figure 5 shows. Figure 5 illustrates that, in addition to Madagascar, seven countries are members of both COMESA and SADC. Because of this, it is useful to provide an overview of Madagascar’s trade with both COMESA and SADC, vis-à-vis that with the rest of Africa. Madagascar’s exports to COMESA and SADC ODI Report 16 averaged $105 million/year in 2002–2023, equivalent to 89% of Madagascar’s total trade with Africa (Figure 6). Similarly, Madagascar’s imports from COMESA and SADC averaged $382 million/year in 2002–2023, equivalent to 98% of Madagascar’s total imports from Africa (Figure 7). Figure 5 Overlapping COMESA and SADC memberships Source: Authors Figure 6 Madagascar’s exports to COMESA and SADC vis-à-vis exports to the rest of Africa Source: Authors’ calculations using data from WITS - 50 100 150 200 250 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 US$ million Exports to COMESA/SADC countries Exports to rest of Africa ODI Report 17 Figure 7 Madagascar’s imports from COMESA and SADC vis-à-vis imports from the rest of Africa Source: Authors’ calculations using data from WITS Patterns of trade in services with African countries Madagascar’s services exports to Africa increased marginally from $76 million in 2012 to $79 million in 2019. However, services exports have plummeted since 2019, primarily because of restrictions imposed to control the COVID-19 pandemic. They were at $32 million in 2021, reflecting a 58% decline since 2012. The export stagnation and subsequent plummeting post-COVID led to the country’s already small African share of its total services exports declining from 6% in 2012 to 5% in 2021. Figure 8 Services exports to Africa (volume and share of total exports) Source: Authors’ calculations using data from OECD and WTO BaTiS Madagascar’s services exports are concentrated in a few sectors. In general, services exports can be classified as: • traditional services – transport; travel; maintenance and repair services • knowledge-intensive services – manufacturing; construction; insurance and pension services; financial services; telecommunications, computers and information services; personal, cultural and recreational services; charges for use of intellectual property; other business services • non-market services – government goods and services - 200 400 600 800 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 US$ million Imports from COMESA/SADC countries Imports from rest of Africa 1 2 3 4 5 6 0 10 20 30 40 50 60 70 80 90 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 % US$ million Total services exports to Africa African share of global services exports ODI Report 18 Of the three categories of services, the highly knowledge-intensive ones have relatively high linkages with other sectors of the economy. Transport and tourism services yield other benefits, in particular with regard to their employment creation potential. In Madagascar, on average, traditional services such as transport and tourism dominate. These services accounted for 84% of Madagascar’s exports to Africa from 2012 to 2019 before their share dropped to 51% in 2021. Nonetheless, impressively, financial services and telecommunications and computer and information services witnessed compound annual growth rates (CAGRs) of 36% and 15%, respectively, in the period under review. With the potential to ease regulatory requirements and immigration policies, the AfCFTA Protocol on Trade in Services could be a conduit for Madagascar to increase its exports of services, especially knowledge-intensive services, to African markets. Figure 9 Sectoral breakdown of services exports to Africa Source: Authors’ calculations using data from OECD and WTO BaTiS Madagascar’s imports from Africa, which have been consistently higher than its exports, were effectively unchanged from 2012 ($106 million) to 2019 ($108 million) before declining to $93 million in 2021. As for Madagascar’s African export share, imports from Africa pale compared with its total imports. On average, Africa accounted for 8% of Madagascan imports of services in 2012–2021. Additionally, at the sectoral level, traditional services dominated Madagascar’s imports from the African continent. 010 20 30 40 50 60 70 80 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 US$ million Charges for use of intellectual property not included elsewhere Construction Financial services Government goods and services not included elsewhere Insurance and pension services Maintenance and repair services not included elsewhere Manufacturing services on physical inputs owned by others Other business services Personal, cultural and recreational services Telecommunications, computer and information services Transport Travel ODI Report 19 Figure 10 Total services imports from Africa and global share Source: Authors’ calculations using data from OECD and WTO BaTiS Figure 11 Sectoral breakdown of services imports from Africa Source: Authors’ calculations using data from OECD and WTO BaTiS Regarding services trade partners, countries in the Southern African region (South Africa, Mauritius and Angola) are the leading destinations for Madagascar’s services exports in Africa. This partly reflects the trade benefits associated with the country’s membership of COMESA and SADC, to which South Africa, Mauritius and Angola also belong. Both COMESA and SADC have made efforts to liberalise trade in services. The COMESA Regulations on Trade in Services were established in 2009 but work here is still ongoing, as not all countries have identified sectors to be liberalised first. The SADC Protocol on Trade in Services, which entered into force in January 2022, sets out general trade rules governing trade in services among the member states, and prioritises communication, construction, energy, financial, tourism and transport services for trade liberalisation. 1 2 3 4 5 6 7 8 9 10 0 20 40 60 80 100 120 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 % US$ million Total services imoprts from Africa African share of global services imports 020 40 60 80 100 120 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 US$ million Charges for use of intellectual property not included elsewhere Construction Financial services Government goods and services not included elsewhere Insurance and pension services Maintenance and repair services not included elsewhere Manufacturing services on physical inputs owned by others Other business services Personal, cultural and recreational services Telecommunications, computer and information services Transport Travel ODI Report 20 Overall, at least 75% of Madagascan services exports to Africa have been destined for 10 countries on the continent. As for exports, the leading three importing countries from Africa for Madagascar’s services are Mauritius, Egypt and South Africa, which all belong to COMESA; the remaining top import sources are spread across the continent. Appendix 6 provides a detailed breakdown. Regarding its commitments under the General Agreement on Trade in Services (GATS), Madagascar is still in the early stages of commitments and has sought to expand those in professional, communication, financial and tourism services. The government has identified these sectors, together with transport, as priority sectors, and it has planned to develop schedules of specific commitments to conform with the GATS. Before 2015, apart from in professional and business services, even without commitments under the GATS, restrictions on foreign participation in or competition for tourism, transport and financial services were eased (WTO, 2015). Focus on digital: infrastructure and e-commerce 2.5.1 Digital penetration and literacy The government of Madagascar wants to promote the digital sector as an engine of growth for the economy. It has included information and communication technology (ICT) at the centre of the Initiative Emérgence Madagascar, its development strategy, published in 2018. This has ICT as one of its six priority sectors. In line with this, the Plan Emérgence Madagascar (PEM) 2019–2023 looks at the creation of a dynamic ICT sector that can support the creation of more than 20,000 private jobs and the development of human capital through digital technologies. Madagascar's ICT landscape presents a peculiar picture. The island nation reported 5.9 million internet users at the start of 2023, translating to an internet penetration rate of 19.7% (Kemp, 2023). This figure, while significant, falls below the more substantial rates observed in the rest of sub-Saharan Africa, which had a penetration rate of 43% in terms of unique mobile subscribers and 25% in terms of mobile internet users in 2023 (GSMA, 2023). Key barriers to the adoption of mobile health interventions in Madagascar include limited phone ownership and low digital literacy (Lacroze et al., 2023). Furthermore, the broader context of literacy in Madagascar also presents challenges. With 75% of its population living below the poverty line, the country faces significant challenges in its education system. The literacy rate stands at 65%, placing Madagascar at 182 out of 194 countries globally. The integration of digital technologies in education is seen as vital to reversing educational decline (Oyebamiji, 2021). 2.5.2 Hard and soft digital infrastructure Madagascar is well served in terms of international connectivity, with three operational submarine cables and three landing stations (and a fourth planned). However, the middle mile, which is the core network of the country, managed mainly by Telma, the incumbent operator, has only around 10,000 km of fibre cables. As a result, the backbone network of the country is still costly, partly because of Telma's monopoly in this sector for a long time and its current dominant position (World Bank, 2023b). ODI Report 21 Regarding the last mile, only 67% of the population had access to a 4G mobile signal in 2022. Infrastructure deployment and maintenance in rural areas is expensive, and lower incomes and weak consumer demand make the investment less profitable, and thus less appealing, for private operators. Significant financial investments are needed to improve connectivity in rural and remote areas (World Bank, 2023b). In addition to the gap in coverage, there remains a significant gap in usage even among those who are covered. In particular, 72% of those who can access broadband (15.5 million people) do not do so. This is because of the cost of services and devices, as well as low incomes, for most of the population. The cost of mobile internet in connectivity is a barrier to widespread adoption of internet services. Madagascar’s position in terms of mobile data pricing is notable. It ranks 106th globally, with an average cost of 1GB of mobile data at $1.12. Given that many people in the country have a low income, this cost is high for them, contributing to the digital divide. Figure 12 presents a comparison between the costs of fixed broadband (5GB) and data-only mobile broadband (2GB) for Madagascar and the entirety of Africa in three different price metrics: US dollars (USD), purchasing power parity dollars (PPP$) and as a percentage of gross national income per capita (GNIpc). In Madagascar, the cost for fixed broadband (5GB) is notably higher than that for dataonly mobile broadband (2GB) across all three metrics. When measured in USD, the fixed broadband cost is around four times higher than the mobile broadband cost. The disparity is even greater when comparing the costs in PPP$, with fixed broadband costing more than six times the price of mobile broadband. The difference is most stark when looking at the cost as a percentage of GNIpc, where fixed broadband takes up nearly the entire GNIpc while mobile broadband is only a fraction of it. For Africa as a whole, the pattern is similar, although the relative costs are lower. The fixed broadband cost in USD and PPP$ remains higher than the mobile broadband cost but the difference is less pronounced than in Madagascar. However, when comparing costs as a percentage of GNIpc, the difference becomes more noticeable, with fixed broadband requiring a significantly larger portion of the average income compared with mobile broadband. Overall, the chart illustrates that accessing internet in Madagascar is more expensive than in the rest of the African continent; and that in Madagascar, and to a lesser extent in Africa overall, fixed broadband is considerably more expensive than mobile broadband, both in absolute terms and relative to income. ODI Report 22 Figure 12 Comparison of internet costs, Madagascar and Africa, 2022 Source: ITU ICT Price Baskets dataset Another challenge is the cost of devices. The World Bank estimates that the cheapest smartphone costs 87% of the average monthly income. As a result, only around a third of households in Madagascar have a mobile phone, and less than 40% of these phones are smartphones. The high cost of devices is influenced by the imposition of high taxes and duties on ICT equipment (World Bank, 2023b). Overall, while factors such as low income, demographics and limited coverage contribute to Madagascar's underperformance in absolute terms, the main reason for its shortcomings compared with similar countries in the region is the lack of affordability. While this is a result of low incomes, policy also plays a part. Promoting competition in the sector and reducing taxes on devices and data, for instance, could contribute to reducing prices and improving affordability. In terms of soft digital infrastructure, the government of Madagascar is committed to improving the policy and regulatory environment for digital activities. To this end, it has put in place several pieces of legislation and regulations, including laws on telecommunications and ICT, electronic transactions, electronic signatures, cybersecurity, protection of personal data and digital currency. However, these laws lack implementation, which hinders the development of the digital sector in the country (Astove Conseil, 2022). 2.5.3 Digital commerce E-commerce is a growing sector in Madagascar. As of 2023, the e-commerce market in Madagascar is projected to achieve a significant value, estimated at around $89 million. Predictions suggest a steady CAGR of 7.9% over the period from 2023 to 2027, pointing towards a projected market volume of $120.8 million by 2027. The growth of the sector is part of a broader trend across Africa, driven by factors such as increased internet and smartphone penetration; the availability of affordable data packages; and a young, tech-savvy population. The African e-commerce market reached $241.6 billion in 2022 and is expected to reach $567.6 billion by 2028, growing at a CAGR of 15.3% in 2023–2028 (IMARC Group, 2023), reaching an overall faster growth than that of Madagascar. 0 20 40 60 80 100 120 140 160 USD PPP$ GNIpc USD PPP$ GNIpc Madagascar Africa Fixed broadband basket (5GB) Data-only mobile broadband basket (2GB) ODI Report 23 Madagascar's e-commerce market, while growing, is smaller than some of the leading African nations (see Appendix 7 for a discussion on the e-commerce market in other African countries). However, there is a noticeable disconnect between customer needs and expectations and the current operational approaches of e-commerce businesses in Madagascar. This gap is potentially attributable to various factors, including the quality of products, pricing, delivery services and customer support (Rapanoel et al., 2020). In the future, if more individuals in Madagascar gain internet access, the volume of online shopping could escalate, making e-commerce a notable component of the nation's retail trade (Smyrnova, 2021). To promote the e-commerce sector, the government has created the Steering Committee for the Development of Electronic Commerce. Nevertheless, a certain number of obstacles remain in terms of enabling a real boom in e-commerce, including those related to infrastructure; structuring of the environment and e-commerce players in particular to facilitate last-mile delivery; or even the democratisation of means (Astove Conseil, 2022). 2.5.4 Other trade agreements with digital provisions Lastly, it should be noted that Madagascar is part of a number of trade agreements, some of which include provisions related to digital trade. The Trade Agreement Provisions on Electronic-commerce and Data (TAPED) indicates that Madagascar is part of two such agreements: the SADC–COMESA–EAC (East African Community) Tripartite Free Trade Area and the Interim Economic Partnership Agreement between the European Community and Eastern and Southern Africa States (Interim EPA) (Burri et al., nd). These agreements have limited provisions on digital trade. For instance, the Tripartite Free Trade Area refers to electronic data processing systems to be used for trade facilitation. Investment to and from other African countries Madagascar’s overall net foreign direct investment (FDI) inflows declined over 2012– 2022, reflecting a drop from $778 million to $396 million. In previous decades, the country’s natural resources, chiefly nickel, cobalt and agribusiness goods like seafood and vanilla, were crucial attractive factors for natural resources foreign investors. However, the country has seen a change in sectoral attractiveness from resourceseeking to efficiency investments. In particular, according to the World Bank (2020), Madagascar’s IT and business process outsourcing (BPO) sectors have seen a rise in FDI inflows, contributing to a rapid increase in the exports of these services. Figure 13 Value of net FDI inflows Source: Authors’ calculations using UNCTAD FDI data 778 551 314 436 451 358 353 474 358 358 396 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 US$ million ODI Report 24 Madagascar’s FDI stock rose by a CAGR of 5% to reach $9.09 billion in 2022. Putting Madagascar’s CAGR of FDI stock into context, apart from Comoros (5%), it is lower than that of some of its peers – Ethiopia (21%), Mozambique (15%), Rwanda (19%) and Uganda (9%). Nonetheless, Madagascar still has vast potential to increase net inflows of services FDI to grow its FDI stock. In particular, the country’s download speed, featuring in the global top 25, affordable labour fluent in French and natural resources (World Bank Group, 2020) can be leveraged more to attract increasing values of FDI and numbers of investors into the services sector, especially IT and BPO. Figure 14 Value of FDI stock: Madagascar and peer countries Source: Authors’ calculations using UNCTAD FDI data It should be noted that few African countries invest in Madagascar. Up until at least 2014, Mauritius was the largest foreign investor in Madagascar in terms of FDI inflows but no other African country was among the top 10 investors (INSTAT, 2015). In 2019, China became the main foreign investor in terms of number of enterprises created, and Mauritius was the fourth – but, again, no other African nation featured in the top 10 (EDBM, 2019).2 2 It should be noted that the two figures used to compare foreign investment inflows in 2014 and 2019 refer to different units: FDI inflows for 2014 and number of enterprises created in 2019. While these are not immediately comparable, they offer a sense of the magnitude of foreign investment in the country. 0 10,000 20,000 30,000 40,000 50,000 60,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 US$ million Comoros Ethiopia Madagascar Mozambique Rwanda Uganda ODI Report 31 This might involve adapting to best practices in global bilateral agreements and addressing challenges such as logistical issues and limited internet penetration (ibid.). For Madagascar, joining the AfCFTA and aligning with its Protocol on Digital Trade could mean several things. First, it may necessitate the development of policies that manage and govern data effectively, contributing to the growth of the digital economy under the AfCFTA framework. Additionally, Madagascar could benefit from the proposed Protocol, which is expected to address issues including cybersecurity, consumer protection and empowering youth and women in digital trade (ITU, nd). Given Madagascar’s current situation in digital trade development, adoption of AfCFTA provisions could accelerate its integration into the digital economy. This could lead to an enhanced digital commerce sector, leveraging the country’s growing internet access and mobile device usage. However, the success of such integration would depend on the effective implementation of policies that address existing challenges in digital literacy, internet penetration and the alignment of e-commerce business operations with customer needs and market demands (Rapanoel et al., 2020). In summary, the AfCFTA’s provisions for digital trade offer an opportunity for Madagascar to integrate more fully into the digital economy. However, this integration requires significant improvements in internet infrastructure, digital literacy and policy frameworks to ensure the benefits of digital trade under AfCFTA can be fully realised in the Malagasy context. ODI Report 32 4 Social and environmental impacts of the AfCFTA Impacts on poverty As Madagascar is a country with high incidence of poverty (80% of the population living under the $2.15 poverty line in 2022) (World Bank, 2023a), poverty reduction is a priority. Trade has been recognised as an engine for growth and poverty reduction. Trade liberalisation can improve livelihoods and reduce poverty through the following channels (Winters et al., 2004; World Bank, 2018): • Trade spurs economic growth and leads to macroeconomic stability. This affects the distribution of income and can reduce associated inequalities, as well as raise the standard of living. • It affects relative prices. Since the poor are both consumers and producers, trade can reduce the price of what the poor consume and increase the price of what they sell. It can increase access to the materials, markets, inputs and technology that raise productivity. Relative prices can also affect wages and employment. • It may increase foreign exchange reserves and government revenue, which can support better and inclusive policies. Trade liberalisation reduces tariffs, which may lead to a decline in customs revenues, but, by increasing trade and stimulating production, it may lead to an increase in the collection of other taxes, such as excise duties, consumption or VAT on imports. However, not all people living in poverty are affected equally by, and benefit equally from, trade; this depends on where they live, what they consume, what they produce, their gender, their skill level and where they work. It also depends on whether trade increases import competition through improved market access. Trade alone cannot end poverty. It must be supported by direct policy actions that redistribute the gains from trade. These may include: • lowering costs for goods and services that are critical to poverty reduction • promoting production (i.e. increasing the variety and quantity of goods produced in the country, and that can be traded) • raising investment in public infrastructure • supporting those who ‘lose out’ from increased trade competition • improving the education and skill level (including digital skills) of the poor, especially women ODI Report 33 • connecting small and medium-sized enterprises (SMEs) to markets • improving access to finance and resources at low costs and developing safety nets in the event of price volatility. A specific mention in terms of trade and poverty needs to be made about trade in agricultural goods. Madagascar has a large share of the population employed in agriculture (74% of total labour; WDI). Therefore, the agriculture sector is key to poverty reduction. Trade in commodities and agricultural goods, two categories produced by rural households, is susceptible to priceand weather-related volatility (Andriamparany et al., 2021; Celio et al., 2023). This leaves the poor vulnerable to price fluctuations, which can be addressed by diversifying exports (chiefly in terms of products but also of markets). Under the AfCFTA, Madagascar’s exporters will have tariff-free access to a large African market. Increased sales of traditional exports, as well as re-exports6 of consumer and capital goods, will lead to growth in gross domestic product (GDP). Evidence suggests that re-exports have a multiplier effect on ancillary services such as transport, logistics, packaging and storage and thus contribute to their growth – in addition to spurring overall economic growth (Prakash and Chand, 2022; Prohorovs, 2023). Re-exports are often underestimated – and yet they can contribute to increased benefits from integration. The partial equilibrium analysis conducted in Section 3 suggests that, upon entering the AfCFTA, Madagascar will import more from other African countries. The main item to see an increase in imports would be sardines (prepared or preserved). This would amount to a corresponding loss of tariff revenues of around $1.5 million. Sardines being a food item, this increased import could benefit the poor, who will be able to buy sardines at a lower price. On the other hand, the loss of tariff revenues may mean that the government has less finance to allocate to services, thus penalising the poor. The analysis also shows that the AfCFTA is likely to increase Madagascar’s exports of tuna and of textiles and garments to Morocco and of leather and wood products to Nigeria. As these sectors expand, employment may also grow, benefiting the poor. Joining the AfCFTA will also allow Madagascar to boost its services trade, in particular the export of transport and tourism services. These sectors employ many workers, including those with lower incomes, and therefore their expansion may have a positive impact on poverty reduction. Impacts on women and youth The impacts of the AfCFTA on gender shed light on the impact of the free trade area on the Malagasy economy and society. Trade liberalisation can have implications for women and youth. Trade can create jobs and business opportunities, allowing them to increase their income. An expansion of trade and production can allow young people to enter the labour market, which is a way to exit poverty (Fox and Gandhi, 2021). Women’s empowerment is associated 6 Re-exports are exports of foreign goods in the same state as previously imported; they are to be included in a country’s exports. Madagascar re-exports goods such as machinery, packaging, and textile and clothing-related goods to the United Arab Emirates, France, China, Mauritius and other countries. ODI Report 34 with better nutrition and education outcomes for children, which can lead to higher productivity and poverty reduction in the long term (Abreha and Zereyesus, 2021). The AfCFTA has the potential to increase women’s participation in trade, which could contribute to a rise in continental GDP by 40%. The Agreement can help address challenges facing women and reduce gender disparities. At present, women-led SMEs account for 60% of Africa’s GDP and generate more than 450 million jobs (UNECA et al., 2022). Madagascar has high participation of women in the labour market. In 2022, almost 84% of women aged 15+ were either working or in search of employment (WDI). But women’s working conditions are generally worse than those of men, with higher unemployment rates, higher presence in the informal sector (21% of the female workforce vs 16% of the male workforce) and a lower share among wage workers (13% of the male workforce vs 8% of the female workforce) (INSTAT, 2013). Overall, women occupy the most vulnerable and least remunerated jobs (ibid.). In 2021, women were employed in agriculture less often than men (over 71% of women vs 76% of men) but more often in industry and services (WDI). Moreover, in 2012, women made up the majority (62.4%) of workers in Madagascar’s special economic zones at all wage and skills levels (ibid.). Madagascar has a young population: half of the Malagasy people are younger than 20. Youth also face a difficult economic situation: those between 20 and 24 years of age are overrepresented among the unemployed and the underemployed. Youth, in particular those with more years of education, face the biggest challenges in entering the labour market (INSTAT, 2013). The AfCFTA could bring about changes for women and youth, which depend largely on the industries affected. For instance, the manufacturing sector, of which garment production is a prominent part, employs more women than men in Madagascar (Muller and Kalle, 2023). Therefore, an expansion of the sector as a result of an increase in exports of clothing to Nigeria could benefit women. Conversely, more men than women work in agriculture, fisheries and transport (ibid.). An expansion of these sectors is likely to exacerbate gender inequality. Youth are likely to be employed in all sectors, thus an expansion of the economy is likely to provide more job opportunities, lowering entry barriers to the labour market. Impacts on climate and the environment Madagascar is one of the low-income countries most vulnerable to climate change. The vulnerability comes from extreme weather, sea level rise and agricultural productivity losses (Wheeler, 2011). Moreover, Madagascar is rich in biodiversity, which is important not only per se but also for sectors such as tourism. Africa accounts for less than 4% of total greenhouse gas (GHG) emissions but stands to be affected negatively by climate change (Mold, 2022). The AfCFTA may have mixed impacts on Africa’s emissions. On the one hand, boosting trade is likely to increase GHG emissions; on the other hand, trading within Africa could shorten supply chains, making trade less damaging to the climate. Similarly, on the one hand, African integration is expected to boost industrialisation, which may increase emissions (Coulibaly et al., 2022); it will also provide the continent with an opportunity to ODI Report 35 challenge the threats posed by climate change by shifting domestic production away from mining activity and dependence on commodities (Songwe and Adam, 2023). Madagascar is a relatively small emitter, accounting for 0.1% of global GHG emissions. However, compared with countries at similar levels of development, it has higher emissions per capita, owing to deforestation. Of the historical GHG emissions, 81% come from two sectors: agriculture (39%) and land use, land use change and forestry (42%). As such, land degradation and deforestation are major challenges for Madagascar, caused and exacerbated by small-scale agriculture, energy production (firewood and charcoal), illicit logging, mining and livestock practices that further deplete the country’s forest resources (IMF, 2022). All these challenges could further affect the agriculture sector, already affected by declining productivity (productivity per worker has already fallen by $95 per worker over the past 20 years; ibid.). Some of the changes brought about by the AfCFTA may have a negative impact on the climate and the environment. For instance, the forecast increased in exports of tuna may increase the negative impact of fisheries on biodiversity; increased exports of wood products may promote further deforestation; and the transport sector, which could expand under the AfCFTA, is notoriously hard to abate. The government of Madagascar Is taking several steps to combat climate change: • A landmark agreement with the World Bank: Madagascar’s Ministry of Environment and Sustainable Development has signed a landmark agreement with the World Bank’s Forest Carbon Partnership Facility, unlocking up to $50 million to reduce carbon emissions from deforestation and forest degradation between 2020 and 2024. This agreement will help alleviate poverty among forest-dependent communities, while reducing carbon emissions. • Regreening the island: The Agreement will allow Madagascar to sustainably finance its current policy of regreening the island and the restoration of forest landscapes. The current programme builds on the country’s integrated agriculture landscape approach, which aims to address the direct and indirect causes of deforestation and degradation and protect important watersheds. • Conservation measures: Proposed measures using conservation in Madagascar include expanding protected areas and generating income by selling carbon offsets for reducing emissions from deforestation and forest degradation. The initiative to include a climate-conscious economic transformation agenda under the AfCFTA will help Madagascar reduce GHG emissions and adapt to the impacts of climate change. ODI Report 36 5 Policy recommendations Trade and investment The analysis presented in this study shows that the increase in Madagascar’s trade with the rest of Africa will be limited, given that the country’s main trading partners within Africa are SADC and COMESA countries, with which it is already in free trade agreements. This is in line with the results of other studies (e.g. see Astove Conseil, 2022). In terms of imports, the increases of imports from African countries are unlikely to be very high, except for a specific food product (preserved sardines, 160413). Should the government wish to keep the domestic fisheries industry protected, it could include this product on the sensitive lists. This would also protect tariff revenues. However, as this is a food product, increasing imports may lower its price, improving food security. Should the government allow the import of this product, it should be noted that the projected revenue loss may be offset by other revenues, for example VAT and excise on imported goods. The AfCFTA Adjustment Fund, set up by Afreximbank and the AfCFTA Secretariat to support the transition to the new trade regime, can also contribute to addressing tariff revenue loss. Under the Adjustment Fund, the Base Fund is specifically mandated to address tariff revenue losses by using contributions from AfCFTA state parties as well as grants and technical assistance. In terms of exports, the AfCFTA may promote the export of certain products – namely, tuna and garments to Morocco and leather and wood products to Nigeria. This is certainly desirable and would strengthen Madagascar’s position in these industries. To further improve the competitiveness of these products, Madagascar should consider horizontal interventions such as improved trade facilitation and transport infrastructure. In terms of trade in services, Madagascar could expand its exports to Africa countries. While knowledge-intensive services are likely to yield the highest benefits, in the short to medium term Madagascar is likely to expand its exports of traditional services such as transport and tourism. The transport and logistics value chain is important to boost trade in the AfCFTA, and it is one of the sectors prioritised within the free trade area, and one where Madagascar could benefit from continental initiatives. Regarding tourism, Madagascar is a destination of global fame, but it does not attract many African tourists. This is an underexplored sector that not many countries are considering under the AfCFTA, and could therefore become a valuable niche for Madagascar. Among the potential measures, Madagascar could explore granting visafree access to all African nationals (only some countries are so entitled at the moment) and promote its tourism sector in other African countries. ODI Report 37 Regarding investment, Section 2 noted that there is very limited African investment into Madagascar except for from Mauritius. Mauritian capital has been pivotal in developing the Malagasy garment sector (Balchin and Calabrese, 2019), which is now one of the sectors likely to expand under the AfCFTA. Learning from this story, the government could try to assess whether investment from other African markets could support specific sectors of interest (e.g. South African investment in forestry, as the country has developed forestry for paper and wood industry; see Calabrese, 2021). Recommendations for digital trade and e-commerce development While Madagasca’'s e-commerce sector is experiencing rapid growth and shows great promise, there is a critical need for businesses in this space to adapt and align their operations more effectively with customer needs and expectations. The surge in e-commerce underlines the urgent need for a tailored legal framework that specifically governs online trading activities. Such a framework is vital for addressing a range of emerging issues pertinent to the digital marketplace, including consumer protection, data privacy, cybersecurity and the complexities surrounding digital payment systems. Looking ahead, as Madagascar continues to advance its internet infrastructure and digital capabilities, the e-commerce sector is poised for further expansion. This growth brings with it the responsibility for all involved parties to foster a well-regulated digital marketplace. Such an environment not only supports technological innovation and economic growth but also ensures consumer protection and overall market stability. Given the current digital landscape and e-commerce sector in Madagascar, the country’s integration into the AfCFTA presents both opportunities and challenges. To maximise the benefits and mitigate the risks associated with this integration, especially in the digital trade sector, the following policy recommendations can be considered: • Strengthening hard digital infrastructure: Madagascar’s internet penetration rate is below the sub-Saharan African and continental averages. To enhance digital trade, it is essential to invest in and expand digital infrastructure. Development partners such as the World Bank are already active in this space. • Enhancing digital literacy and skills development: Given the challenges in digital literacy and the low literacy rate, Madagascar should focus on educational reforms and programmes to improve digital literacy across all age groups. • Adapting legal frameworks for digital trade: To sustain the growth of the ecommerce sector, Madagascar needs to develop and implement a legal framework tailored to digital trade. This framework should address consumer protection, data privacy, cybersecurity and digital payment systems. This work has already started, and the government needs to prioritise implementation. • Developing policies for affordable connectivity: Efforts should be made to make digital connectivity more accessible to a broader segment of the population. This includes keeping connection costs low by encouraging competition among service providers and reducing the costs of devices, for example by reducing tariffs on the lower-cost handsets. ODI Report 38 • Leveraging the Protocol on Digital Trade: Madagascar is already engaging in the negotiations on the AfCFTA’s Protocol on Digital Trade. Participating in the continental market will help the country integrate into the digital economy of the continent, enabling businesses to access larger markets. • Fostering innovation and entrepreneurship: Encourage innovation and entrepreneurship in the digital sector by providing support to start-ups and small businesses engaged in digital trade. This could involve financial incentives, tax breaks and access to funding. Recommendations on how to mitigate adverse social and environmental impacts Regarding poverty, Section 4.1 noted how the AfCFTA is likely to have a small positive impact in Madagascar. Increased imports of food products, combined with increased exports of agricultural products and of services in sectors that employ the poor, are likely to positively affect the lower-income segment of the population. Specifically, regarding agriculture, export diversification under the AfCFTA framework can lower volatility and help poorer communities build resilience to shocks. This can be supplemented with ‘trade plus one’ policies to improve access to electricity for rural households, connectivity, irrigation facilities and links to exporting markets for small traders, farmers and SMEs. One potential challenge is related to a reduction in tariff revenues. These revenues are currently used (among others) to provide services to the poor, including health care and education. A reduction in tariff revenues may, therefore, lead in the short term to negative outcomes for the poor. However, these may be offset by the increase in other revenues (such as excise and VAT) as well as in the employment and income opportunities created by the growth of exports. Regarding women and youth, the considerations for these vulnerable groups are the same as those above. The expansion in exports could generate growth in sectors that would then create work opportunities for women and youth. For women in particular, increased exports of textiles and clothing may contribute to economic empowerment, as women are often employed in this sector. However, it should be noted that increased work opportunities may not necessarily benefit women. Taking up employment may lead to an increase in income but may also be unsustainable for women with care responsibilities. In particular, factory employment in manufacturing, with its strict and regulated schedule, may be unfeasible or very challenging for women with young children or the elderly to take care of. Therefore, an expansion of job opportunities for women should be accompanied by a similar expansion in support in their care responsibilities, through the provision of services that help them manage their work and care commitments. Finally, regarding environment and climate impacts, the sectors that the AfCFTA could promote could all have negative environmental and climate outcomes. 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UNECA – United Nations Economic Commission for Africa, African Union, African Development Bank and UNCTAD – United Nations Conference on Trade and Development (2019) Next steps for the African Continental Free Trade Area: assessing regional integration in Africa. Addis Ababa: UNECA. UNECA, United Nations Population Fund and International Trade Centre (2022) ‘Finalised report on ARFSD side event on ACFTA and gender equality’. Africa Regional Forum for Sustainable Development, Kigali, 3–5 March. Wheeler, D. (2011) ‘Quantifying vulnerability to climate change: implications for adaptation assistance’. Working Paper 240. Washington, DC: CGD. ODI Report 47 Looking at detailed product level, Table 6 reports the top imported products, which are bituminous coal (9%), knitted fabrics (7%) and motor vehicles (3%). Table 6 Madagascar’s top import products from Africa (US$ million) HS6 Name 2018 2019 2020 2021 2022 270112 Bituminous coal 47 43 18 62 126 600622 Knitted or crocheted fabrics of cotton (dyed) 13 16 32 46 47 870421 Motor vehicles, not exceeding 5 tonnes 13 12 9 18 17 271019 Petroleum oils and oils obtained from bituminous minerals, not crude 34 21 21 13 16 230990 Dog or cat food, other than put up for retail sale, used in animal feeding 1 2 2 10 15 170111 Raw cane sugar 1 0 0 0 14 110100 Wheat or meslin flour 40 47 39 42 13 220710 Undenatured ethyl alcohol 24 24 14 9 12 392330 Carboys, bottles, flasks and similar 8 10 6 7 11 510610 Yarn of wool or animal hair, containing 85% or more by weight of wool 9 8 6 9 10 600632 Dyed knitted or crocheted fabrics of synthetic fibres 1 3 2 4 7 701090 Carboys, bottles, flasks, jars, pots, vials 10 6 1 2 7 190219 Pasta, uncooked and not stuffed or otherwise prepared 16 8 8 11 7 481840 Sanitary towels and tampons, napkins and napkin liners 3 5 6 6 7 731700 Nails, tacks, drawing pins, corrugated nails 4 4 6 6 6 520849 Woven fabrics of cotton, 85% or more of cotton 17 17 16 13 6 390210 Polypropylene 9 6 5 5 6 252329 Portland cement, etc.: other 5 5 7 8 5 Rest of products 349 329 291 403 225 Source: Authors’ calculations using data from WITS ODI Report 48 Appendix 5 Detailed import tariffs Table 7 Madagascar import tariffs by product group, 2022 (%) MFN applied duties Imports Product group Average Duty-free Max. Share Duty-free Animal products 18.4 8.0 20 0.1 61.6 Dairy products 18.6 0 20 0.5 8.5 Fruit, vegetables, plants 17.9 0.6 20 0.4 0 Coffee, tea 18.0 0 20 0.1 0 Cereals & preparations 12.2 15.7 20 11.5 68.6 Oilseeds, fats & oils 9.3 7.4 20 4.8 0.0 Sugars & confectionery 11.8 0 20 2.2 0 Beverages & tobacco 19.4 0 20 0.5 0 Cotton 6.5 0 10 0.0 0 Other agricultural products 9.6 12.9 20 1.2 86.5 Fish & fish products 19.7 0.7 20 0.8 1.2 Minerals & metals 11.0 3.6 20 12.8 7.6 Petroleum 6.4 27.8 20 13.8 96.3 Chemicals 7.3 7.8 20 11.3 41.0 Wood, paper, etc. 12.6 3.1 20 3.0 4.2 Textiles 15.5 2.5 20 14.4 10.0 Clothing 19.9 0 20 1.0 0 Leather, footwear, etc. 13.2 2.2 20 1.5 3.4 Non-electrical machinery 6.6 8.3 20 7.9 9.8 Electrical machinery 10.6 5.1 20 5.0 25.7 Transport equipment 10.2 10.7 20 5.0 18.5 Manufactures, n.e.s. 12.1 10.4 20 2.4 36.5 Source: WTO Table 8 shows the average applied tariffs imposed by Madagascar's key export partners. South Africa, a significant export destination partner of Madagascar, maintains an MFN applied tariff of 7.6%. Morocco and Kenya levy tariffs of 14% each. Ethiopia imposes a tariff of 17%. Sudan imposes a higher tariff but accounts for just 0.3%. Importantly, Madagascar, being a member of regional agreements such as COMESA and SADC, benefits from tariff exemptions in its exports to fellow member states like South Africa and Kenya, provided they adhere to RoO requirements. ODI Report 49 Table 8 MFN tariffs on Madagascar exports for its major trading partners Country Exports MFN applied (%) ($ ‘000s) (%) Agricultural products Non-agricultural products Total South Africa 89,066 47.7 8.7 7.4 7.6 Mauritius 37,663 20.2 1.6 0.7 0.8 Morocco 14,771 7.9 29.2 11.6 14.0 Kenya 13,692 7.3 24.5 12.7 14.3 Comoros 7,954 4.3 14.3 4.6 5.8 Ethiopia 4,551 2.4 22.5 16.1 17.0 Tanzania 3,966 2.1 26.0 12.0 13.9 Seychelles 2,746 1.5 7.4 1.7 2.5 Mozambique 2,174 1.2 14.0 9.7 10.3 Egypt 1,499 0.8 Zimbabwe 1,236 0.7 27.0 16.5 18.0 Algeria 851 0.5 23.7 18.1 18.9 Sudan 603 0.3 30.7 20.2 21.6 Uganda 548 0.3 28.0 16.9 18.4 Malawi 542 0.3 17.4 11.3 12.2 Ghana 529 0.3 15.9 11.4 12.0 Nigeria 466 0.2 15.9 11.4 12.0 Tunisia 374 0.2 30.3 17.8 19.5 Senegal 363 0.2 0.1 0.0 0.0 Rwanda 343 0.2 24.1 11.4 13.2 Sierra Leone 340 0.2 15.9 11.4 12.0 Côte d'Ivoire 308 0.2 15.8 11.5 12.1 Chad 305 0.2 22.4 17.4 18.1 Source: WTO ODI Report 50 Appendix 6 Trade in services with African countries Table 9 Top trade partners, trade in services, 2019–2021 Exports (US$ million) 2019 2020 2021 South Africa 15.79 6.64 7.19 Mauritius 9.17 3.30 3.24 Angola 8.00 3.04 3.05 Nigeria 7.45 3.28 2.97 Algeria 6.04 2.51 2.37 Morocco 5.38 2.26 1.70 Kenya 3.76 1.69 1.39 Côte d'Ivoire 3.28 1.51 1.43 Democratic Republic of the Congo 1.86 0.82 0.79 Seychelles 1.80 0.62 0.88 Total of the top 10 countries 60.7 25.1 24.1 As a % of the total 77.2% 76.3% 75.0% Total Africa services exports 78.7 32.8 32.1 Imports (US$ million) Mauritius 26.23 17.44 21.56 Egypt 21.43 15.52 21.45 South Africa 14.14 9.04 11.66 Morocco 6.92 4.76 5.12 Seychelles 6.00 3.29 6.19 Liberia 4.55 3.27 4.05 Tanzania 3.20 1.42 1.68 Kenya 3.19 1.54 1.61 Tunisia 2.97 3.55 4.44 Comoros 2.21 1.15 0.28 Total of the top 10 countries 90.8 61.0 78.0 As a % of the total 84.3% 81.4% 84.0% Total Africa services imports 108 75 93 Source: Authors using data from OECD and WTO BaTiS ODI Report 51 Appendix 7 Overview of ecommerce in major African markets When considering the e-commerce market in Madagascar within the context of the AfCFTA, it is important to understand the situation of other African countries. We consider in particular the main markets (Olenrewaju, 2023): • Nigeria has a significantly larger e-commerce user base, with 90.9 million ecommerce users. The Nigerian e-commerce market is expected to grow at a CAGR of 12.24% from 2022 to 2027, driven by advanced infrastructure, high internet penetration and a growing number of card-based payment systems. • Egypt has 55.7 million e-commerce users, and this number is growing rapidly. The country’s e-commerce revenue is predicted to reach about $7,909.9 million by the end of 2023 and to grow at a CAGR of 14.7% to reach approximately $13,677.5 million by 2027. • Kenya has 22.6 million e-commerce users and is known for its active e-commerce systems. The Kenyan e-commerce market is expected to increase to an approximate volume of $2 billion by 2024. • South Africa has 27.4 million e-commerce users. The market saw a 66% increase between 2019 and 2020, reaching over $1.8 billion. • Morocco, with 14.7 million e-commerce users, has seen a significant shift in online commercial activities, especially since the COVID-19 pandemic. ODI Report 52 Appendix 8 Partial equilibrium model This research uses partial equilibrium analysis to assess the impact of the AfCFTA on trade (exports and imports) and tariff revenue. In contrast with general equilibrium, where all markets clear consistently and simultaneously, in a partial equilibrium model markets are balanced independently. This implies that, for example, the impact of a tariff reduction in the market of wheat will be limited to that market. There will not be any impact on a substitutable product and/or in the market for the factors used in its production (e.g. labour). The advantage of partial equilibrium lies in its simplicity, the level of disaggregation and the accessibility of the data needed. Its simplicity gives a great sense of intuition to its results, which facilitates its interpretation. Moreover, from the operation point of view, a partial equilibrium model requires little and widely accessible data. A partial equilibrium model can be run with highly disaggregated data at the tariff line level. As a result, it is possible to differentiate results between varieties of products and avoid making inferences from very general results about the effects on the products that effectively matter – as would be the case in general equilibrium analysis. This allows results to be obtained that have concrete practical implications for policymaking. The data required to perform the analysis is simple and readily available. To run a simple import demand partial equilibrium model, it is only necessary to access data on trade by partner, tariffs and elasticities. Such data is widely available to any analyst and, more importantly, the results obtained can be easily related to actual figures. We used the SMART model (Laird and Yeats, 1986), which is available from the World Bank’s World Integrated Trade Solution (WITS). This partial equilibrium model characterises the import behaviour of a country, allowing researchers to simulate the impact of reducing the tariff applied on the product imported from a particular source. The demand structure of the model uses a nested approach. At the top, consumers demand a composite product comprising a combination of import sources. This composite follows a standard demand function whose sensibility is governed by an import demand elasticity. The integration of the composite product follows the imperfect substitutability between sources approach (Armington, 1969). This approach avoids corner solutions and implies that a reduction in tariff from country A will not decrease to zero the imports from other sources but will reduce them based on the level of substitutability assumed. As this is a demand-driven model, supply adjusts based on a predefined elasticity of supply of imports. A highly elastic supply function will tend to generate pure quantity adjustment. On the contrary, in the case of an inelastic function, prices, rather than quantity imported, will tend to adjust. Finally, exports are derived by simulating the imports of partners. ODI Report 53 In this particular exercise, we used Comtrade data, tariffs from the Trade Analysis Information System (TRAINS) (Ghodsi et al., 2016) and import demand elasticities at the tariff line level. The SMART model does not allow researchers to differentiate between different elasticities of substitution and supply elasticities. For this exercise, we adopted a simple approach assuming a slightly higher substitution (e.g. 1.5) and a fully elastic supply function (99). We assumed that Madagascar reduced all its tariffs across all AfCFTA member states and left unchanged its MFN tariffs for the rest of its partners (in this case, aggregated into one group). However, baseline tariffs took into consideration existent trade agreements such as COMESA and SADC. Therefore, there was no reduction of tariffs on the imports from South Africa, for example, as these were already zero. Therefore, a trade and revenue effect was only expected whenever there was positive trade with an AfCFTA partner, and the tariff applied was non-zero. Of course, when the MFN tariff was already zero, there was no simulation to make. Madagascar imports will change as a result of two effects. First, the reduction of the tariffs from other AfCFTA partners generates a reorientation of imports in favour of the members of the Agreement. The elasticity of substitution determines the degree through which this substitution is made. Second, total Madagascar imports grow because the tariff reduction has reduced the general price of imported products. The difference between these two effects is considered trade creation and welfareenhancing. The impact on Madagascar exports is captured by simulating the effect of the tariff reduction generated by the AfCFTA in Malagasy export partners. In this sense, Malagasy exports grow as a result of the reduction of the import duty applied by its partner on the imports from Madagascar (and other AfCFTA partners). The model assumes a perfectly elastic supply function in Nigeria. This approach involves simulating each export partner separately. ODI Report 54 Appendix 9 Results of the partial equilibrium model Table 10 Impacts on imports and tariff revenue, top 20 affected products (US$ ‘000s) HS code Product description Imports Import change Import change (%) Tariff revenue Change in tariff revenue Change in tariff revenue (%) 160413 Prepared or preserved sardines, sardinella, brisling or sprats 2,757 1,679 60.9 516 -490 -95.0 900912 Electrostatic photo-copying apparatus 1,887 300 15.9 132 -132 -100.0 090111 Coffee, not roasted or decaffeinated 2,081 279 13.4 84 -75 -89.0 691010 Ceramic sinks, wash basins etc. 1,315 260 19.8 262 -19 -7.3 330499 Beauty, make-up, skin-care (including suntan), n.e.s. 2,184 251 11.5 412 -160 -38.9 621010 Garments, made-up of fabrics of felts and non-wovens 1,359 169 12.4 271 -57 -20.9 841869 Refrigerating or freezing equipment n.e.s. 708 152 21.5 77 -39 -50.2 761290 Aluminium casks, drums, cans and boxes, <300L, lined or heated 2,421 147 6.1 436 -51 -11.8 854449 Insulated electric conductors 12,375 124 1.0 839 -46 -5.5 481910 Cartons, boxes and cases of corrugated paper 6,697 83 1.2 319 -29 -9.0 854290 Parts of electronic integrated circuits and microassemblies 3,722 70 1.9 256 -17 -6.7 870431 Gas powered trucks with a GVW not exceeding 3,039 58 1.9 182 -16 -8.8 970110 Paintings, drawings and pastels executed by hand 1,472 56 3.8 183 -25 -13.6 940510 Chandeliers & other electric ceiling or wall lighting fittings 1,302 41 3.1 202 -15 -7.5 870323 Automobiles with reciprocating piston engine 11,700 35 0.3 1903 -13 -0.7 681310 Asbestos brake linings and pads 454 29 6.4 82 -18 -21.6 071339 Dried beans, shelled, n.e.s. 303 28 9.2 61 -11 -18.6 392590 Builders' ware of plastics, n.e.s. 1,345 28 2.1 263 -20 -7.5 853669 Electrical plugs and sockets, for a voltage not >1.000V 1,299 27 2.1 128 -19 -14.6 320910 Paints and varnishes based on acrylic or vinyl polymers 1,235 25 2.0 105 -7 -6.8 Rest of products 5,381,003 526 0.0 420,889 -256 -0.1 Total 5,440,657 4,367 0.1 427,604 -1,515 -0.4 Source: Authors based on partial equilibrium results ODI Report 55 Table 11 Impacts on exports of Madagascar to Morocco by product, top 20 products (US$ ‘000s) HS code Product description Exports Change in exports Change in exports (%) 160414 Prepared or preserved tuna, skipjack and bonito 1,659.8 2,127.5 128.2 530599 Processed ramie, etc., n.e.s.; tow, noils and waste 3,421.7 519.2 15.2 090700 Cloves (whole fruit, cloves and stems) 511.2 380.5 74.4 090500 Vanilla 126.0 107.1 85.0 460210 Basketwork, wickerwork and other articles of vegetable materials 35.6 95.0 267.0 611010 Jerseys, pullovers, etc., of wool or fine animal hair, knitted or crocheted 43.4 93.0 214.2 611020 Jerseys, pullovers, etc., of cotton, knitted or crocheted 40.8 85.7 209.8 091099 Spices, mixtures of two of same heading 137.1 43.2 31.5 620520 Men's or boys' shirts of cotton 15.9 35.9 226.7 620630 Women's or girls' blouses, shirts, etc. of cotton 16.4 34.4 209.3 160520 Shrimps and prawns, prepared or preserved 17.8 30.8 173.4 620610 Women's or girls' blouses, shirts, etc. of silk 14.2 30.6 215.2 620442 Dresses of cotton 9.3 18.9 202.5 330129 Essential oils (including concretes and absolutes) 10.2 17.8 175.0 140190 Vegetable materials for plaiting (excluding bamboo) 300.3 15.4 5.1 611030 Jerseys, pullovers, etc. of man-made fibres, knitted or crocheted 6.0 12.5 209.3 620640 Women's or girls' blouses, shirts, etc. of man-made fibres, knitted or crocheted 5.6 11.7 210.4 611090 Jerseys, pullovers, etc. of other textiles, knitted or crocheted 4.9 11.0 222.3 620449 Dresses of other textiles, n.e.s. 4.6 9.6 210.7 620462 Women's or girls' trousers, breeches, etc, of cotton 4.7 9.5 203.1 Rest of products 217.4 160.3 73.7 Total 6,603.0 3,849.6 58.3 Source: Authors based on partial equilibrium analysis ODI Report 56 Table 12 Impacts on exports of Madagascar to Nigeria by product (US$ ‘000s) HS code Product description Exports Change in exports Change in exports (%) 410422 Bovine leather, non-vegetable pre-tanned (excluding 4108 4109) 15,575.1 6,502.7 41.8 440320 Untreated coniferous wood in the rough 9,570.4 2,243.9 23.4 071339 Dried beans, shelled, n.e.s. 1,235.6 829.5 67.1 410390 Other hides and skins, fresh or preserved 485.0 112.0 23.1 482090 Blotting pads, book covers and other articles o 20.9 26.3 125.4 852390 Prepared unrecorded media for sound recording 6.0 5.1 85.8 610910 T-shirts, singlets and other vests of cotton 0.9 0.9 104.0 560750 Twine, cordage, ropes and cables of synthetic fibres 1.3 0.5 41.7 843790 Machines, parts for cleaning/sorting seed/grain 2.0 0.5 24.0 842199 Machinery, parts for filtering or purifying liquids or gases 1.5 0.4 27.3 842139 Machinery; for filtering or purifying gases, other than intake air filters for internal combustion engines 1.2 0.3 27.6 732399 Iron or steel, table, kitchen or other household articles and parts thereof 0.5 0.3 64.2 842191 Centrifuges and parts thereof 0.8 0.2 27.4 330129 Essential oils (including concretes and absolutes) 0.4 0.2 48.5 870892 Mufflers and exhaust pipes for motor vehicles 0.2 0.1 53.8 610120 Men's or boys' coats, etc. of cotton, knitted or crocheted 0.1 0.1 80.0 Total 26,901.9 9,723.2 36.1 Source: Authors based on partial equilibrium analysis