MALAGASY REPUBLIC: GROWING ECONOMIC INDEPENDENCE FROM FRANCE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700020078-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: May 19, 2010
• Sequence Number: 78
• Publication Date: December 1, 1971
• Content Type: IM

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DIRECTORATE. OF
INTELLIGENCE
Intelligence Memorandum
Malagasy Republic: Growing Economic Independence from France
OUGFUZ
ER IM 71-225
December 1971
y
Copy ~,
No. 4 u
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WARNING
This document contains informatic,. affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 1
Culuded f,cn. avlon,nlic
dewngrodinq and
dedanifcolion
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
December 1971
INTELLIGENCE MEMORANDUM
MALAGASY REPUBLIC:
GROWING ECONOMIC INDEPENDENCE
FROM FRANCE
Introduction
1. In recent years, the Malagasy Republic has been attempting to
reduce its almost complete dependence on France for economic assistance.
A variety of non-French undertakings are already underway, and despite
continued preferential trade agreements with France, other trading partners
are becomir , increasingly more important. Priority also has been assigned
to obtaining foreign investment that would diversify the island's primarily
agricultural economy, generate new exports, and promote import
substitution. This memorandum presents the background and progress of
the Malagasy program to date and considers the prospects for further foreign
investment in light of the prevailing economic situation.
Discussion
Background
2. Following independence in 1960, the Malagasy government
retained its strong economic ties with France. Like most former French
colonies, the Malagasy Republic(') is a member of the franc zone, and
France guarantees full convertibility of local currency into French francs
at the existing exchange rate. Fiscal and monetary policy is closely
monitored by Paris, some 1,400 French advisers occupy key government
positions, and French companies control most of the banking, trade,
services, local industry, and plantation agriculture. France contributes about
one-half of the foreign aid received annually, provides teachers and technical
advisers, and covers the government's budget deficits.
1. The country's name is "Malagasy Republic", but it also may be referred to properly
as "Madagascar." "Malagasy" is used correctly alone to refer to the people or language
or as an adjective. For general location, see the map.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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3. Economic progress has been slow despite sizable French assistance.
The real gross domestic product (GDP) has barely kept ahead of the
expanding population. Per capita GDP in 1970 was about $125, slightly
lower than the all-Africa average, excluding the Union of South Africa.
Agriculture, which accounts for about 85% of total exports, has been
relatively stagnant, and most of the island's seven million people live a rural,
traditional life, producing the bare essentials for subsistence by primitive
means.
4. Since independence, the government has tried to further
industrialization by setting up development institutions to either lend to
or participate in government-owned industries and by promulgating an
Investment Code designed to attract foreign investment. Manufacturing
represents about 12% of GDP, but the sector still is conceived mostly on
a small-scale basis and is heavily dependent on foreign imports of equipment,
raw materials, and management. Most industry is of the import substitution
type, and underutilization of capacity is frequent.
5. The substantial French presence has not been without its
drawbacks in the minds of Malagasy leaders. The extent of French
investment and partial control of the economy and the high proportion
of Fre1ich aid combine to inhibit other foreign investors and restrict the
options of Madagascar's economic planners. In addition, the preferential
treatment accorded to French products creates problems for local industry.
Commodities originating in France are duty-free in Madagascar and are not
subject to import licenses as are goods from other countries.
6. In the past, Madagascar's insularity has prevented participation
in regional economic projects with other African states. Its membership
in the French-oriented Afro-Malagasy Common Organization (OCAM) has
proven more useful as a vehicle for political rather than economic
cooperation with other French speaking African nations. Madagascar also
has remained aloof from the Organization for African Unity (OAU).
Madagascar has no links with the nearby East African common market,
which, as part of the sterling bloc, is oriented toward London and Asia.
Actually, sisal from Tanzania, coffee from Kenya, and cloves and vanilla
from Zanzibar all compete heavily with Malagasy exports.
Moves to Reduce French Dependency
7. The most significant development in reducing the French role has
been the growth of Madagascar's ties with South Africa, a country that
is both a potentially important market and less expensive supplier than
France. South Africa, in turn, is very much interested in establishing
relations with Madagascar as pare of its "outward looking policy" in Africa.
These ties, initiated in 1968 through exploratory missions and informal
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contacts. via private businessmen, have since been reinforced by visits from
South African planning missions and industrial experts.
8. Increased trade and South African participation in Malagasy
enterprises already is reflecting the newly found friendly relations between
the two countries. Although still small, imports from South Africa in 1969
reached $1.5 million, compared with only $70,000 in 1966. Under a
November 1970 protocol, the Scuth African government and private
businessmen will provide abL.. t $6.3 million to develop tourist facilities --
including an airstrip, roads, and a major tourist hotel - on the, offshore
island of Nosy Be. South Africa also has expressed interest in mining
minerals, including graphite, mica, chromite, and bauxite, heretofore
under-exploited by unchallenged French concessionary firms.
9. Increasing economic relations with other countries also are
underway. In May 1969, Canada signed a technical and cultural cooperation
agreement, which specifically included services of Canadian industrial
experts. Japanese financiers are interested in establishing automobile
assembly plants and expanding their interests in Malagasy mineral resources
and fisheries. Madagascar has discussed with both Portugal and South Africa
the coordinated development of Madagascar's French-managed project for
a completely new deep water port at Narinda, on the island's northwest
coast. Madagascar's commercial contacts with other Indian Ocean countries
are numerous, and these territories have undertaken common action to form
the Indian Ocean Tourist. Alliance, designed to promote the tourist trade
of Madagascar, Mauritius, Reunion, and the Comoros Islands.
Diversification of Trade and Aid
10. Although Madagascar's relationship with France continues to be
of primary economic importance, French influence, and consequently
Malagasy dependence on 'France, gradually is lessening. In foreign aid,
France's contribution dropped from 64% in 1964 to 43% in 1970 (see Table
1). In addition, the 1967 Suez closure and the June 1968 riots in France,
which brought communications (air travel, mail, and business exchanges)
to a standstill and virtually isolated Madagascar from the outside world,
weakened considerably the Malagasy acceptance of French dependency.
Moreover, de Gaulle's departure portended, to many leading Malagasy
officials, a decline or even an ultimate end to France's paternalism and
generosity toward its former territories.
11. The other five European Community countries have expanded
their trade with Madagascar. Since 1968, the Malagasy government has
e>:tended to them the same trade preferences long accorded to France. In
1969 and 1970, when imports from France declined from the level of 1968,
those from the other EC countries increased by about 50% and 75%,
respectively (s : a Table 2).
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Malagasy Republic:
Foreign Aid Receipts
Million US $
1967
1968
1969
1970
46.1
42.0
40.0
41.5
30.8
24.8
20.8
21.1
FAC 1
8.0
4.3
2.3
2.4
Budget contribution
6.6
5.8
4.5
3.7
Technical assistance
11.7
9.6
8.7
10.7
Other
4.5
5.1
5.3
4.3
European Development
Fund
10.9
10.7
12.6
11.9
United Nations and
other
4.4
6.5
6.6
8.5
Loans
4.6
2.0
9.0
8.0
France
3.2
--
1.3
--
World Bank group
0.4
1.6
3.1
6.4
United States
--
0.4
1.7
0.9
West Germany
1.0
--
1.9
0.6
Israel
--
--
1.0
0.1
Total
50.7
44.0
49.0
49.5
a. Fund for A,4d and Cooperation.
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Malagasy Republic:
Foreign Trade
Million US $
1967
1968
1969
1970
Exports, f.o.b.
92.8
103.2
105.2
145.1
To United States
22.8
23.2
24.9
32.9
To France
34.0
34.6
38.1
50.0
To other EC countries
4.6
6.9
8.0
9.9
Other
31.4
38.5
34.2
52.3
Imports, c.i.f.
129.5
151.6
170.0
170.1
From United States
8.9
7.6
14.3
9.7
From France
83.8
95.3
86.4
93.4
From other EC
countries
14.9
20.2
30.6
35.4
Other
21.9
28.5
38.7
31.6
12. To some extent, the non-French EC countries also have invested
in Madagascar. The Italian firm AGIP has invested in oil exploration, gasoline
stations, and a tourist motel; the West German firm SIDITEX has interests
in the new Sotema textile factory; and the Italian National Bank of Lavoro
has equity participation in the Malagasy Bank of Commerce and Credit.
In addition, Italy signed a $5.4 million agreeme,,t for the development of
a 37,000 acre farm in the Antanetibe area, and West Germany has granted
a, loan to build a spinning mill using locally grown cotton.
13. Madagascar also has obtained many advantages through its EC
association. The French Fund for Aid and Cooperation (FAC) and the
European Development Fund (EDF) of the EC, to which France makes
a substantial contribution, are two of the largest sources of Malagasy
external financing. Of the 18 African nations associated with the EC,
Madagascar has benefited most heavily from EDF credits. During 1959-67,
EDF credit commitments to Madagascar totaled about $100 million, an
average of about $11 million annually. Some 70 EDF-assisted development
projects have been completed or are in progress.
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14. Madagascar has further diversified its trade and aid. In recent years
there have been relatively substantial export gains with the United Kingdom,
Senegal, Ivory Coast, Reunion Island, Malaysia, and Japan and small import
gains with such African and Middle Eastern trading partners as Senegal,
Kenya, and Saudi Arabia. Madagascar also has signed commercial agreements
with Czechoslovakia, Hungary, the USSR, and Romania. A May 1970 accord
with Romania includes provisions for technical assistance and educational
and cultural exchange as well as trade. Trade with Eastern Europe and the
USSR, however, accounts for only 2% of Madagascar's exports and I % of
imports. No trade takes place with mainland China.
US Involvement
15. Diversification has meant both increasing opportunities and
increasing competition for US exports to Madagascar. Because of the
preferential import privileges (quota-free entry and exemption from customs
duty) accorded the EC and its overseas African associates, direct US exports
are at a disadvantage, and most US companies with manufacturing
subsidiaries located in the EC prefer to ship from Europe. Nevertheless,
US technology is highly regarded in Madagascar, and Malagasy end-users
increasingly are willing to pay a premium for American equipment and other
goods where quality is an important factor. In some cases, the ability of
US companies to provide advantageous export financing is a deciding
element in the transaction.
16. Reversing a previous decline, US exports to Madagascar increased
in 1969 and 1970 over the 1967-68 levels. Electrical and other machinery,
earth moving and construction equipment, tractors, petroleum products, and
aircraft account for most of Madagascar's imports from the United States.
Coffee and vanilla constitute almost three-fourths of Madagascar's exports
to the United States, with clove oil, cinnamon, sugar, and graphite
accounting for the balance.
17. The US AID program, begun in 1961, is designed to supplement
French aid. US aid amounted to almost $13 million during' 1961-69. No
new bilateral US aid has been programmed since Madagascar is not a
"concentration country." The present program includes a planned
multi-donor livestock project in the Majunga area on the northwest coast
totaling more than $4 million and bringing together American, French, and
Malagasy private and governmental interests. A railroad project and a project
for telephone lines and equipment - involving development loans totaling
$5 million - are now under construction. AID Self-Help funds have averaged
about $100,000 annually over the past three years. In addition, AID
contributes about $500,000 per year in PL-480 supplies to school feeding
programs by Catholic Relief Services and participates in other programs
operated by Church World Services and the United Nations' World Food
Program.
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18. An increasing amount of aid and investment is being provided
by US private groups and individuals. Exploration for oil, led by American
companies, is proceeding rapidly. Madagascar already has an oil refinery
under multinational control. American investors also have shown growing
interest in Madagascar's minerals, agriculture, and hotel industry. Recent
Malagasy charges of US interference in the internal affairs of the country,
and the consequent strain in US - Malagasy relations, might have an adverse
effect on US private investment considerations, however.(2)
19. The US s.rategic interest in the island derives from the presence
of aF_
station. Established in 1964, the tracking station is approximately
25 miles southwest of Tananarive on land provided by the Malagasy
government. The authorized personnel complement is slightly more than
a hundred Americans and about 135 Malagasy. Capital investment in
buildings and equipment is more than $17 million. Annual operating costs
are about $2.5 million, including $1.5 million for local expenditures and
$380,000 for two international telephone circuits.
Outlook
20. Although its economic ties with France remain strong, the
Malagasy government clearly is determined to strive for greater
self-sufficiency and diversification of trade and aid. Its reh:tions with France
reflect not only the gradual diminution of French economic aid in recent
years but also the Malagasy uncertainty that significant French support will
continue indefinitely. South Africa eventually is likely to become a principal
trade and aid source, and American, Canadian, and Japanese participation
in the economy is expanding. Under present Malagasy political conditions,
Communist states are a very last resort for aid and investment.
21. Continuing obstacles within the economy, however, are likely to
deter large inflows of non-French foreign investment. The basic impediments
to outside investments still prevail, namely the smallness of the internal
market and extremely low per capita income, and development of domestic
industry is inhibited by the preferential trade treatment and monopoly
investment still accorded France and other Common Market countries. In
addition, Madagascar's position as an island apart from Africa, with little
historical or cultural ties to the continent, virtually precludes any meaningful
Malagasy participation in regional economic alliances with other African
countries.
2. On 1 June 1971, following unsupported accusations of US complicity with former
vice-president M. Andre Resampa in a plot to overthrow the government, the US
Ambassador and five US embassy staff members were required to leave Madagascar.
The Malagasy government has since appeared to retreat somewhat from its initially strong
anti-US positron in this matter, but its basic decision has not been altered.
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