Can Regional Integration Accelerate Development in Africa? CGE Model Simulations of the Impact of the SADC FTA on the Republic of Madagascar

IMF Working Papers, March 1, 2007

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Madagascar plans to start phasing out its customs tariffs on imports from the Southern African Development Community in 2007.
The paper uses a CGE model to evaluate the impact of the SADC FTA on the Madagascar economy.
Main conclusion: the SADC FTA would have only a limited impact on Madagascar's real GDP because the liberalization affects only a small share of its total imports.
The textile and clothing sector would benefit from changes in Madagascar's trade and production pattern.
Removing rigidities in the labor and capital market would increase the gains, but they would remain limited.
Gains from the SADC FTA become substantial only when the regional liberalization is accompanied by a multilateral liberalization.

Limited impact on real GDP due to the small share of total imports affected by SADC FTA liberalization.
Structural shifts in trade and production:
- Beneficiaries: textile and clothing sector.
Role of factor market reforms:
- Removing labor and capital market rigidities increases gains, but gains remain limited under regional liberalization alone.
Interaction with broader liberalization:
- Substantial gains occur only when regional liberalization is accompanied by multilateral liberalization.

Regional trade agreements with limited import coverage may yield modest aggregate GDP gains.
Targeted reforms to factor markets (labor and capital) can amplify benefits from trade agreements, though may not be sufficient alone.
Complementing regional integration with multilateral liberalization can produce substantially larger gains for Madagascar.