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CHAPTER ONE Introduction 1

January 31, 2019 0 Comment

CHAPTER ONE Introduction
1.1) Background
International trade takes an important place in the economy of Madagascar. According to the World Bank Group data (2017), the amount of import and export of goods and services together represent more than sixty percent of the country’s GDP. The country has many natural resources but the technology and industry sector is not yet well developed and the economy still relies on international trade. Consequently, a change in the trade has a rapid impact on the development of the economy of the country. For instance, according to the United Nations (2017), after the political crisis in 2009 in Madagascar, there was a sharp decrease in the amount of goods and services in international trade and a rise in the inflation rate so there was a negative growth of GDP. Indeed, when there is a political crisis in the country, there is always a quick decrease in the international trade because of the rebellions and the destruction of many infrastructures.
Moreover, Houck (nd) stated that the inflation rate is linked to the international trade because when the inflation increases there will also be a change in the level and distribution of real income within the country and across the national boundaries; change in the exchange rates and the international balance of payment. Besides, the inflation rate and the purchasing power are negatively related. It will impact the industrial sector and the demand for imported goods and services. But it will also have influence the exportation in two different ways, the exportation of the goods that do not need any transformations like from agriculture will increase because they will gain from the difference of the currencies. And the demand for goods that are needed as raw materials for the industries in the country before the exportation such as mines will decrease because the cost of production will increase due to the inflation.
The case of Madagascar is useful for a study of the relationship between the inflation rate and international trade because those last 10 years the country faced various economic changes. Following the data on Trading Economics (2017), we can say that there was a high peek in the inflation level in the country. Before every political crisis in the country, the inflation rate is always close to 10. For instance, the country has always faced a positive economic growth until 2009, when there was a political crisis. During that year the amount of imported and exported goods and services has drop considerably and the inflation has sharply increased according to the data from IMF (2017). Actually, the country’s inflation rate has started to increase again so studying this relationship may help to better understand the problem in the economic growth of the country. A better understanding of the two key words: inflation and international trade may also help the country to develop because the other sectors, such as FDI and the e-commerce, are still not yet well develope
1.2) Aim of the study
Firstly, the purposes of this study are to analyze the changes in inflation in Madagascar, to evaluate the importance of the international trade in economic growth of the country, and to understand how the international trade varies according to the inflation rate. Indeed, based on different papers and data, we know that the economy of the country relies on international trade, and to develop the country we need to improve this field. Some basic improvements are needed such as diminution of corruption, briberies and decrease in the illegal exportation. In this paper we will also discuss that there are others suggestions that the government could do to make that sector more efficient for the development of the country.
Besides, it is also aimed to develop the different causes and socio-economic effects of the important changes of inflation rate in the country. To understand those causes, we need to relate the theories with the real economic situations. We explain that inflation has socio-economic impacts on the country so it is also a barrier for the development of the country.
In sum, Madagascar is a developing country with a comparative advantage in agriculture and natural resources such as mines… It also relies on importation because of the low aggregate domestic supply. Theoretically, inflation affects the international trade by the exchange rate and the domestic productivity. This paper studies if the sharp increase in the inflation few years ago was the main reason of the fluctuation of the amount of goods and services in international trade or not. Through the results we can interpret if the changes in inflation are the only major contributor in the changes international trade or there are also other important variables. Then, we can give some suggestions for decreasing the inflation rate by solving some limitations that also face the international trade in the country.

1.3) Literature review:
Many researchers have confirmed that there is a relationship between the inflation, the exchange rate and the inflations rate. According to Houck (nd), for a country like Madagascar with a flexible exchange rate, if a time lag exists in the rate at which exchange values adjust in response to differential inflation, then the nation with the more rapid inflation will face a drop in the exportation and a rise in importation. Because the value of its currency will not be falling fast enough to maintain equal commodity price relatives. So the impact of the inflation on the international trade is considerable between when the currency exchange markets is still very fixed until it is fully flexible. His theory explains the reasons why the inflation was suddenly high on one year and there was a great change in the trade but after the two variables begins to stabilize.
Stockman (1981) stated on his report that a rise in the inflation rate generally reduces the value of domestic output and alters the composition of domestic production. So it will affect the pattern of international comparative advantage of the country and trade flows. Then the currency of the country will depreciate followed by a trade surplus and capital outflow. However, there will be a trade deficit as consequences.

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1.4) Content of paper
This thesis contains five parts such as the introduction, the inflation in Madagascar, the international trade in Madagascar, analysis of the effect of the inflation rate on the international trade and the conclusion. Because before analyzing the relationship, we need to understand the inflation rate and international trade in Madagascar separately.
The second chapter explains the theory of inflation. Firstly, it concerns about the concept of inflation such as definition, reasons and effects. Those theories will be based on the explanations of Case, Fair, Oster (nd) and Mankiw (nd) on their books. Then, we talk about the case of Madagascar. Using history and data of the country, we discuss the causes of the inflation through the years. In that part we will understand that the causes of the inflation in this country may not only from the changes in trade but also be from the central bank that print too much money due to the political crisis, and the illegal exportation that influence the exchange rate. Finally, we focus on the socio-economic consequences of those changes in the society and the economic growth of the country. Increase of inflation also influences the employment, FDI and the purchasing power of the population. This part will be mostly based on the theories found on the books of Pugel (nd) and Mankiw (nd)For a country that relies on international trade like Madagascar, having a high inflation will have a huge impact on the economic growth.
The third chapter develops the international trade in Madagascar. The first two parts details the components and the data of the exportation and importation in the country. We also discuss the relationship between the changes in the volume of international trade with the political crisis in 2009. Then, we evaluate the importance of the international trade in the economic growth. For instance, they have how many percentages in the Gross Domestic Products, their amount will influence the exchange rate, what components can be more improved to help the country to develop and how.
In the fourth chapter, we will analyze the effect of the inflation on the international trade. At the first part, we discuss the effects of the changes in inflation on the international trade using theories. Indeed, the changes in inflation have both positive and negative effect on the trade. After, we do the empirical study of the relationship using the correlation and regression model. First, we gather all the data needed for the study. Then, interpret all the results and graphs. After the interpretations we can conclude if for Madagascar those two variables are tightly linked or there are other factors that should be considered to study the changes in volume of trade in this country.
At the conclusion, we give some personal interpretations of the relationship and suggestions to better manipulate the inflation for a stable economic growth of the country.

1.5) Research method
In this paper, data from 2007 to 2017 will be used to interpret the relationship between the inflation rate and the international trade. Using the theory learned in statistics and econometrics, following the books of Wooldrige (nd) and Larson and Farber (nd), we can find the linear regression equation that will explain the relationship between the two variables and the graphs that can better explain the relationship. The IBM SPSS statistics and the DDXL on Microsoft Excel are useful to find the equation and the graphs that show the variations of the variables through the years.
The dependent variable is the inflation and the independent variables are amount imports and the exports in Madagascar. After finding the equation we can give a conclusion if the changes in import and export are positively or negatively related on the change of the inflation rate. We can give interpretations of the relationship between those three variables such as if one point increase in the inflation, how much the volume of imports and exports will increase or decrease. Besides, we can also understand if we need other variables to interpret the changes in the inflation rate or the volume of trade can only explain it. Moreover, the graphs are also useful for the interpretation because we can easily find the changes through the years.

CHAPTER TWO: The theory of inflation
2.1) The concept of inflation
2.1.1) Definition
From the ten principles of economics, the principle 9 stated that “prices rise when the government prints too much money”. In fact, the inflation is the increase of the overall price level of goods and services and the cost of living in a country during a period of time. It usually happens when the supply of goods and services cannot satisfy the demand. For instance, if the price of kilo of rice is US Dollar 2, after one year with an inflation rate of 10% it will become US Dollar 2.2. However, it last for a long period of time, it becomes a monetary problem because there is a decrease in the purchasing power of the country’s currency.
Moreover, Piana (2001) noted that the inflation rate is high when it is between 5 to 10% depending on the country’s case. The worst case is the hyperinflation. When it occurs the inflation rate is more than 50%. It is often due to the government trying to remedy their budget deficit during a short period of time. For example, in Zimbabwe in 2007, their inflation rate was 50%. When the inflation is negative it is called deflation. It is the opposite of inflation.

2.1.2) Measurement:
The central bank uses the consumer price index to measure it. This price index is the sum of the weighted prices of the items in a large basket of representative goods and services of a specific country. Oner explained that they need to set the basket of items that are usually consumed by households and calculate the average cost of purchasing them over a period of time. The weighted price is calculated by multiplying the unit price of an item by the average number consumed by the customers. It measures the impact of individual unit price changes on the economy’s overall inflation.
The Consumer Price Index (CPI) is the cost of the basket at a given period of time according to the base year. The basket is always the same year after year unless there is a new trend in the consumption of the households. For example, the price to buy the basket of goods is now US Dollar 150 but before it was US Dollar 100. It means that the CPI is 150. The Consumer Price Inflation, which is the measurement of the inflation, is the percentage change of the CPI over a period of time.
In sum, Oner stated the inflation is the representation of how much is the increase in the price of the set of goods over a period of time, usually a year.

2.2) The types of inflation
There are three types of inflation as Robert J. Gordon calls the “triangle model”. First, the “demand pull”, which is caused by the increase in aggregate demand? It is due to the rise in private and government spending. However, it encourages the economic growth since the excess demand and favorable market conditions will stimulate investment and expansion.
Second, the “cost-push inflation” or “supply shock inflation” is caused by the decrease in aggregate supply (potential output). In this case the price of goods or the cost of production becomes high. This drop in supply is often the consequences of natural disasters or the increase of inputs price like oil.
Third, the” built-in inflation” is when the workers ask for a higher wage which is not related to the price of the goods or services. So the firm is forced to sell at a high price too leading to a vicious circle.

2.3) The reasons
According to Mankiw, the inflation is the result of the high spending of the government so they print too much money. This is called the “inflation tax”, the gain of the government from creating money. No one pays it directly but it affects the value of the money. Effectively, from Guerrien and Gun, sometimes it is caused by the new government itself. As they are new, they want to spend more to follow their programs so they will do credits to the banks that are force to print money. Oner pointed out that it is called the quantity theory of money, the relationship between the money supply and the size of the economy of one country. In sum, when the money supply rise rapidly than the size of the economy the value of the money of the country decreases.
On one hand, this can also be due to the increase in demand of one good or service or in one sector of production. It is called the demand shocks. Consequently, some buyer will buy and some others will exit to the market. Oner affirms that it happens when the countries follows expansionary policies. For this case, the central bank lowers the interest rates or the government raises their spending. In short term, it improves the overall demand and the economic growth. But in long term if the demand is greater than the supply, there will be a demand pull inflation. However, this increase in demand is not from natural disasters or war,…
On the other hand, Oner explained that this can also be due to a supply shocks. When a country has faced natural disasters or a war or a rise in the cost of production such as an sudden increase in oil’s price, those will disturb the supply.
Finally, it can be caused by the expectations. Oner explained that when the firms or households are anticipating a rise in the overall price in the near future, they use that expectation in the settlement of their contract like wages or rent. After it takes effect, the inflation rate follows it. It is called inflation inertia.

2.4) The socio-economic consequences
Inflation affects the economy growth positively if it is well controlled by the central bank. It influences the spending of the consumers. It also creates employments and investments because the households will be more attracted to increase their money instead of saving. As the investments increase, the amount of exportation will increase too. It also has an effect in wealth because the households will be more willing to buy goods that always have an increasing value such as gold or real estate. To sum up, the Gross Domestic Product (GDP) is used to measure the economic evolution of a country during a period of time. To calculate in using the expenditure approach, we get it by adding the consumption, investment, government spending and net exports. However, those composants such as the consumption or the investment are influenced by inflation so the moderate inflation rate can have a positive effect in the GDP.
In add, Guerrien and Gun explained that there is a link between the inflation and the economic growth because concluding from the past experience when the economic growth was high there was a high level of inflation. The central banks had conclude that the inflation near 2% were good because this influenced the consumers to buy more quickly and the producers to produce more. But after the crisis of 2007-2008, which was similar to the crisis on 1930, the IMF has suggested that an inflation of 4% is better to avoid the deflation. In fact, the deflation is worse than the inflation. In that case, the households will reschedule their purchase as they know that the price will fall so it increases the rate of unemployment, and private and public debts. In contrast, the inflation helps to deal with those debts slowly but surely. The more the rate of the inflation is close to zero the more probable there will be a deflation. Indeed, Oner reinforce that statement by explaining that most economists agreed that low and stable inflation rate help the economy of a country to grow because the consumers are more willing to purchase more in the near future. It is also easy to catch the price adjustment and the interest rate, and reduce to impact on the consumption. This is the primary goal of most of the central banks which is called inflation targeting.
Furthermore, they stated that the inflation makes the firms who borrow better off because as the interest rate has already been set, the value of the amount will decrease with the time. According to Mankiw, in short term, this will increase the production of the firms followed by the rise in demand of workers and wages. This attracts the investors too. In sum, the unemployment decreases. In the opposite, the households who have savings are worse-off because the value of their money will decrease. They will be less willing to lend but will want to spend their money on investment or on goods and services to face the inflation. For example, following the “real estate bubble” of 2000 in Europe, there was an increase in the number of buyers of real estate in the US and Spain.
Moreover, Oner clarifies that when there is a rising inflation rate, the nominal income or the real inflation adjusted income falls. The households will purchase less because their standard of living decreases. As the prices change at a different pace during a given period of time, the wage cannot follow it because it is set at a fixed time within the period of time. This is the biggest effect of a sudden increase in the inflation rate.

2.5) The case of Madagascar:
Before explaining the situation of inflation in Madagascar, we need to know the fluctuation of it during those last years.
Table 2.5.1: The fluctuation of the inflation in Madagascar between 2007 and 2016. Source: IMF World Economic Outlook Database
Years 2007 2008 2009 2010 2011 2012 2013 2014
Inflation rate 10.288
9.297
8.954
9.247
9.483
5.714
5.826
6.08

Years 2015 2016
Inflation rate 7.404 6.6

From the table above, we have this following graph.

Figure 2.5.1: The inflation rate between 2007 and 2016 in Madagascar
Firstly, the inflation in Madagascar is caused by the “supply shocks”. We can say that this is caused by a supply shocks because the rise in price level happens mostly after the natural disasters occurred. Indeed, Madagascar always faces at least one natural disaster every year, such as cyclone or drought. Consequently, the areas touched by them always faces a sudden increase in price level, especially after the coup d’etat of 2009 because there are less aids from foreign donors. Guerrien and Gun stated that the increase in price most of the times affect only one sector in the country. For instance, “the internet bubble” at the end of 1990 or “real estate bubble” at the beginning of 2000 in US and some countries in Europe. In Madagascar, this rise generally affects the price of inferior goods such as rice, vegetables,…The roads in the country are not well maintained so after each passage of a cyclone some villages are hardly accessible during a period of time. This problem with the transportation and destruction of the crops are the main reasons of the dramatically increase in price each year. For instance, in Antalaha, after the passage of the cyclone ENOWA on March 2017, the price of the kilos of banana has been seven times higher than the normal price reported the journalist Tetaud (2017).
Secondly, when the central bank issues a new higher value of the paper money, it means that the inflation rate in the country is high for a long period of time. On one hand, if the country cannot make the aggregate supply higher than the supply of money within a period of time after the issuance, the economic situation of the country will deteriorate. On the other hand, it means that there is a growing black market and money laundering in the country. However, the increase of those markets will influence the exchange rate, the value of the currency, especially for the country that has a flexible exchange rate. Indeed, at the end of July 2017, the central bank decided to issue a new paper money of 20,000Ariary. Ratobisaona (2017) explained that the issuance of this new paper money is a sign of the existence of the high inflation in the country. However, he said that, in short term, this will not affect the actual economic situation of the country which is already distorted by the inflation. In long term, this will worsen the economic situation if the real wages do not change. Moreover, the production of the country is still low. If the money supply is always higher than the aggregate supply, the inflation rate will still rise unless the central bank decides to reduce the interest rate. He also pointed out that this new paper money will lose its face value in the near future as the inflation does not stop to rise.
Thirdly, there is also a problem of money supply in the central bank. As there are new governments in 2009 and 2013, they tend to print money for their government plans and to solve the problem of budget deficit and the spending from the natural disasters and political crisis. There was a budget deficit because the expenditures were higher than the revenue. Rahaga (2017) reported that the Malagasy economist Johnny Ranaivoarison illustrated the case of inflation in Madagascar by explaining the real reason behind it. As the country has been in recession starting 2009, the inflation rate will continue to rise. The first reason of the low revenue of the government is the corruption in the tariffs and taxes. The taxes are already low added by the high corruption within the government. Moreover, he stipulated that the increase in the interest rate of the central bank also stimulated the rise in the price level. Form the data of the website trading economics, which is from the data of the central bank of Madagascar, the interest rate was 8.3 in the period of 2017 and 9.5 in 2018. The commercial banks are forced to raise their interest rate too. Higher interest rate affects the capital investment in the near future in general. Finally, the value of exportation is always lower than the value of importation. This will be aggravated by the importation of 500,000tons of rice imported by the government in 2017 for regulating the domestic price of rice. This important amount of rice importation will affect the exchange rate as the country has a flexible exchange rate politics. The diminishing reserves of the central bank will surely affect the value of the currency and the price level in the country.

CHAPTER THREE The international trade in Madagascar:
The reason why a country decides to enter at the international trade is based on comparative advantage. Indeed, Mankiw explained that if the country has a comparative advantage in producing one goods or services, it will be better-off in exporting that good and selling it at the world price. Because having a comparative advantage means that the world price of the good is higher than the domestic price. The importation is the opposite, which is when the country does not have the comparative advantage. Madagascar has a great climate conditions, it has a comparative advantage in producing raw materials. But it is among the poorest country in the world so there is less firms so the population relies on importation of goods which need transformation such as foods or clothing.

3.1) The exportation in the country:
As Madagascar is an island, it has many natural resources, such as gems, spices, coffee, sea foods… that can be exported. According to the Central Intelligence Agency’s World Factbook, Madagascar has exported goods and services about US$2.8 billion in 2017. It has increased by 24% related to 2016. According to Pugel (2012) the amount of exportation depends on foreign countries’ income. The scarcity in resources, the increase of the competition in international trade, the global consumption as the population grows very fast, and the evolution of technologies push foreign countries to buy raw materials in Madagascar.
Furthermore, Madagascar has a comparative advantage in agriculture, especially in production of spices and vanilla, because it is a tropical island. For instance, Madagascar is the first producer of vanilla in the world. However, since the coup d’etat on 2009, this market has been distorted by the illegal exploitation and the black market.
To understand the reason behind the fluctuation of the exportation of the country, we need to know first what are the foreign countries buyers and their market share. Then we enumerate the main group of products exported and to classify them to see the evolution of the market through given years.

Table 3.1.1: The market share of the foreign countries in exportation in 2017. Source: Custom of Madagascar
Countries or agreements with few countries Value in Ariary (billions)
ALENA 1863.6
ASEAN 562.8
CHINA 700.7
India – Pakistan 290.9
Japan –Korea 594.3
Middle- west 302.0
SADEC 551.2
UE 3706.9
Others 292.4
From the table above, we have this exploded pie below.

Figure 3.1.1:The market share of the foreign countries in exportation in 2017

The graph above proves that the country main partner in exporation is the Union European that has 42% of the market share. To better understand the evolution of the amount of the exportation in the country, we need to illustrate the data about the exportation from the Custom of Madagascar. To summarize the data, they classify it into eight groups: cereals, spices, fruits, vegetables (product from agriculture); sea food, essential oils (domestically produced from the agriculture); Nickel, cobalt (new foreign companies has started to exploit them since 2012); food industry products (such as dairy products); mineral products; textile; others (such as refined oil which still has a small part in the market share). The next table represents the group of products that the country has exported during the last 9 years, 2007 until 2016.

Table 3.1.2: Value of the exportation per type of products (in billion Ariary) . Source: Custom of Madagascar
Group of products 2007 2008 2009 2010 2011
Cereals, spices, fruits, vegetables 333.1 260.3 285.7 332.6 591.0
Sea food 263.9 216.0 177.4 186.3 226.8
Essential oils 29.8 27.0 39.7 68.8 95.0
Nickel, cobalt ? ? ? ? ?
Food industry products 107.7 94.1 105.9 143.1 160.2
Mineral products 150.1 196.8 123.9 264.7 397.6
Textile 956.7 937.6 583.9 683.6 769.0
Others 282.3 357.6 345.0 638.6 595.7

Group of products 2012 2013 2014 2015 2016
Cereals, spices, fruits, vegetables 754.3 673.9 837.9 1417.1 2151.8
Sea food 217.5 244.6 266.4 261.4 372.4
Essential oils 60.8 103.1 100.9 98.9 166.3
Nickel, cobalt 195.6 945.9 1644.8 1863.8 1522.9
Food industry products 246.7 245.2 211.7 212.8 216.9
Mineral products 516.6 456.8 426.7 392.7 405.8
Textile 892.7 980.5 1186.8 1280.6 1568.2
Others 395.5 443.9 448.9 486.6 536.6
From the table, we have this graph below.

Figure 3.1.2: Fluctuation of the value of the exportation per group of goods between 2007 and 2016

From the graph, we can tell that it is only the market of Cereals, spices, fruits, vegetables; nickel, cobalt; and textile which have faced a sharp rise.
Firstly, the market of fruits, vegetables, and beans is always increasing because the producers in the country want more and more to expand their market share internationally. They know that the domestically price is lower than the price in the other countries. For example, the beans in great quality are exported in China; the vegetables are mostly exported to Mauritius and Dubai. Nevertheless, the production of vanilla has faced some issues during those last years. On one hand, this sector is distorted by the black market. Iloniaina (2017) stipulated that Vanilla is cultivated on the rose woods so the illegal exploitation of the woods affects the production. The local price is also affected by the new exploitants of the rose woods for their laundering money. They are willing to buy the vanilla immediately at a high price. On the other hand, due to the rising insecurities the farmers are forced to collect them earlier. This affects the quality of the products.
Secondly, the nickel and cobalt are exploited by the foreign company called Ambatovy. This is the biggest foreign investment in the country, with a value of US Dollar eight billions. According to their website, they have an important place in the economic development of the country. The changes in the productions depend on the world price only.
Finally, the World Fact Book (2018) explained that after the coup d’etat of 2009, the country has faced some problems concerning the exportation of textile. Such as, there was the suspension of the African Growth an Opportunity Act (AGOA) on 2010. It was caused by the failure to follow the requirements which led to the end of the country’s duty free access; fortunately it was restarted on 2015. Indeed, the exportation of apparels to the US has increased dramatically since the duty free access agreement in 2000. The textile has an important share in the exportation. However, after 2010, the suspension has created a slight drop in the textile production which led to a fall of about 11% of the GDP of the country and more than 100,000 people have lost their jobs.

3.2) The importation in the country
Pugel (2012) stated that the volume of a nation’s imports is positively related to the level of real national income or production. Sometimes imported goods are used to produce local goods and services. For instance, in Madagascar, a company that sells noodles imports the noodles, and the spices from Mauritius then put them together in Madagascar before selling them. The national expenditures and the national incomes are statistically correlated because the more we spend the more we are tempted to spend on foreigner’s goods and services too. This is called to marginal propensity to import, the increase in our amount of imports as the income goes up one dollar.
To make easier to understand the reasons behind the evolution of the market of importation in the country, the Customs of Madagascar has classified the products into 5 groups: alimentation (rice, flour…), energy (oil,…), equipment, raw materials (used to produce domestic products), others (clothes, shoes,…).
Table 3.2.1 : The total importation per type of group of products between 2007 and 2016(in billions Ariary). Source: Custom of Madagascar
Group of economic uses 2007 2008 2009 2010 2011 2012
Alimentation 384 317.7 379.6 464.6 644.6 773.4
Energy 734.6 937.5 626.4 903.4 1329.6 1689.7
Equipment 1252.6 2432.2 1976.2 1797.9 1249.2 1400.5
Raw materials 1166 1474.6 1104.2 1245.3 1500.2 1699.9
Others 1074.5 1121.2 915.5 1008.5 1156.1 1387.9

Group of economic uses 2013 2014 2015 2016
Alimentation 1133.1 1051.3 953.4 1148
Energy 1667.4 1751 1441.8 1505.5
Equipment 1268.8 1421.8 1728 1740.6
Raw materials 1739.3 2045.8 2407.4 2560.5
Others 1532.7 1669.3 1890.2 2337.8
From those data we have this graph below.

Figure 3.2.1: Fluctuation of the value of the importation per group of products between 2007 and 2016
Firstly, the group of product the others, which is composed by the clothing, stationery, and so on, is moderately increasing because as the country is more open to international trade the consumers are attracted to the cheap goods from Asia. The economical crisis also pushes the consumers into those imported goods. They are cheaper and the consumers have many choices. For example, Madagascar is an under developing countries with only twenty six millions people so there is not many local firms who wants to target the local demand of clothing.
Secondly, we can see that the raw materials and equipment take a big part in the market share. There are more and more investors in the country. This is great for the development but to always stimulate this sector the government needs to take some action to protect those new local producers. Indeed, the president of the association of the firms in the country, Rajaonary (2017) explained that the importation affects the small and medium sized firms in the country. The government does not intervene to protect the infant industries and the taxes levied on them high even if they are only a start-up. He also stated that the consumers are also started to prefer the foreigners’ culture which affect the value of the locally produced goods. Moreover, there is also an increase in the construction of real estate as the economy is growing and the presence of a high inflation.
Table 3.2.2: The market share value of the foreign countries partner in importation in Ariary (billions) in 2017. Source: Customs of Madagascar
Name of the country or trade agreement Value in Ariary (billions)
ALENA 390.0
ASEAN 874.2
CHINA 2469.7
India – Pakistan 1306.1
Japan –Korea 506.3
Middle- west 2090.3
SADEC 1010.7
UE 2358.4
Others 450.4
From this table we have this graph to better understand the division of the market.

Figure 3.2.2: The percentage of market share of the foreign countries partner in percentage
As we can see, China has the biggest market share. It is because the Renminbi is very cheaper than Euro, and it is also the biggest producers of apparels, clothing, and so on… It is followed by the union European. Madagascar was colonized by France for years before 1959 so they still have a great influence in the country economically and culturally.

3.3) The importance of the international trade in the economic growth
Theoretically, from the Keynesians theories, trade makes a country wealthier. Everyone gains from the trade. It allows the country to expand their consumers which generate their revenues. Especially for a poor country, the population can have choices in price and quality if the trade is liberalized. More and more countries are trying to eliminate their trade barriers with the other countries that produce the produce that they are scarce of by using trade agreements. For example, the US uses the AGOA to facilitate the exportation of textile in the US so some of their firms can create a branch in the country. Madagascar can produce them at a lower cost because of the exchange rate and the low cost of production. Moreover, it creates employments. It also improves the access in technology from the others so that will increase the efficiency and the productivity. Even if some of the population does not have a high diploma, they can worker in a firm at low costs or produce goods for the exportation. Trade allows a country to consume what they are scarce of from the foreign country cheaply, and to produce goods that they have comparative advantage. Furthermore, it makes the national currency to circulate internationally. It increases the value of the currency. Indeed, when the currency has a high value the population are more attracted into travelling in the other countries or rising their investment in the country as they can buy more foreign goods with lower price.
Technically, the economic growth is measured by the GDP as we explained above. One of the elements of the GDP is the net exports. It is calculated by deducting the gross exports by the gross import. It means that the exportation and the importation have an effect on the economy growth. The higher the exportation is, the higher the economy growth will be.

CHAPTER FOUR: the effect of the inflation on the international trade
4.1) Using theories
The inflation has two effects on the international trade. There are positive effects such as the depreciation of the currency, which lead to an economy growth, and negative effects like the increase in the cost of production for the local producers.

4.1.1) Positive effect:
The exchange rate is affected by the inflation rate. The currency is losing its face value nationally and internationally. When there is a depreciation of the local currency, the cost of the exported goods decreases because we can gain more on selling them externally. It means that the export sales increase. More and more producers are willing to sell their products overseas. This will improve the trade balance. The unemployment rate decreases because the demand for domestics’ workers increases. In sum, the high inflation affects the domestics’ production.

4.1.2) Negative effects:
If the inflation rate is high, the price of imported goods is also high. That will decrease the demand for imported goods in the country. The low income households are worse-off because they will have less choice, and their real income is also decreasing. On one hand this is good for the local producers, but in other hand this means that the cost of production is also high. This leads to a cost-push inflationary pressure. For instance, in Madagascar the price of liter of oil is slowly increasing during those few years. This raises the price of transportation of goods, and the productions also. However, on the other hand the exportation will rise which will improve the net exports on the GDP.
4.2) Empirical study
4.2.1) Methodology:
In this paper, we use the linear regression for determining the relationship between the inflation and the international trade in Madagascar. A linear regression calculation method will give a linear equation that explains the relationship between the dependent variable or Y and the independent variables or explanatory X. Wooldridge (2008) stated that this linear equation is called econometric model. It illustrates the relationship between the two variables based on the data. For this calculation, we use time series data between 2009 and 2017. In this book, we will only have simple linear regression model because we only use two variables. To have the linear equation, we need to use the IBM SPSS Statistical Software. We will calculate the effect of the inflation in the imports based on the amount imports in billion Ariary and the inflation rate. From this calculation, we can estimate the changes in value in billion Ariary of the imports based on one percent change in inflation rate. Then, we will calculate the effect of inflation in the exports following the methods. Finally, based on the two simple linear regressions, we can estimate the changes in the international trade from the value of the inflation rate in Madagascar.

4.2.2) The changes in amount of imports:
Table 4.2.2.1: The inflation rate, the volume of imports in billion Ariary and the volume of exports in billion Ariary between 2009 and 2017. Source: Customs of Madagascar
Years Inflation rate Amount of exports (in billion Ariary) Amount of imports (in billion Ariary)
2009 8.954 1661.6 5001.9
2010 9.247 2317.7 5419.7
2011 9.483 2835.3 5879.6
2012 5.714 3279.7 6951.4
2013 5.826 4094.0 7341.4
2014 6.08 5124.1 7939.1
2015 7.404 6013.9 8421.0
2016 6.737 6944.9 9301.2
2017 6.912 8864.8 11456.1

From the calculation of regression using the SPSS IBM Statistical Software, we have the following tables:
Table 4.2.2.2: Variables entered/ Removed
Model Variables Entered Variables Removed Method
1 Inflation rateb . Enter
a. Dependent Variable: Amount of imports (in billion Ariary)
b. All requested variables entered.

This table explains that the dependent variable is the amount of imports in billion Ariary and the independent variable is the inflation rate.
Table 4.2.2.3: Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .763a .582 .530 1058.7267
a. Predictors: (Constant), Inflation rate

The adjusted R square is 0.763 which shows that 76.3 % changes in the imports amount is due to the inflation rate.
Table 4.2.2.4: ANOVA
Model Sum of Squares df Mean Square F Sig.
1
Regression 12499060.746 1 12499060.746 11.151 .010b
Residual 8967217.410 8 1120902.176
Total 21466278.156 9
a. Dependent Variable: Amount of imports (in billion Ariary)
b. Predictors: (Constant), Inflation rate

This table gives the information about the good fitness of the model. The regression results show that the significance level is 0.10. It is higher than 0.05 so the model is not a good fit.
Table 4.2.2.5: Coefficients
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 12084.543 1642.466 7.358 .000
Inflation rate -679.428 203.465 -.763 -3.339 .010
a. Dependent Variable: Amount of imports (in billion Ariary)

This table shows which if the inflation is important in the determination of the amount of imports. As shown above, the significance level of the inflation rate is 0.010. It means that they are important because it is less than 0.05.
This table also gives the linear equation of the amount of imports and the inflation rate.
Imports = f (inflation)
Y= f (X1)
Y= 12084.543 – 679.428 X1 (1)
With, Y= the volume of imports of goods and services in billion of Ariary
X1= the inflation rate

4.2.3) Changes in the amount of export:
Using the application of IBM SPSS Statistical Software, we have those following tables.
Table 4.2.3.1: Variables Entered/ Removed
Model Variables Entered Variables Removed Method
1 Inflation rateb . Enter
a. Dependent Variable: Amount of exports (in billion Ariary)
b. All requested variables entered.
This first table shows as that the dependent variable is the amount of exports and the independent variable is the inflation rate.
This table explains that the dependent variable is the inflation rate and the independent variables are the amount of imports in billion Ariary and the amount of exports in billion Ariary.

Table 4.2.3.2: Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .659a .434 .363 1459.9041
a. Predictors: (Constant), Inflation rate

The adjusted R square is 0.659 which shows that 65.9% changes in the exports amount is explained by the inflation rate.
Table 4.2.3.3: ANOVA
Model Sum of Squares df Mean Square F Sig.
1 Regression 13058897.584 1 13058897.584 6.127 .038b
Residual 17050558.832 8 2131319.854
Total 30109456.416 9
a. Dependent Variable: Amount of exports (in billion Ariary)
b. Predictors: (Constant), Inflation rate

This table gives the information about the good fitness of the model. The regression results show that the significance level is 0.038. It is less than 0.05 so the model is a good fit.
Table 4.2.3.4: Coefficients
Model Unstandardized Coefficients Standardized Coefficients t Sig.
B Std. Error Beta
1 (Constant) 9136.878 2264.836 4.034 .004
Inflation rate -694.478 280.562 -.659 -2.475 .038
a. Dependent Variable: Amount of exports (in billion Ariary)
The significant level of the inflation rate is less than 0.05. it means that it is an important variables to consider when we study the changes in export in Madagascar. From those results above about the inflation rate and the exports, using the IBM SPSS Statistical Software, we have this economic model that illustrates the effect of inflation in the exports::
Exports = f (Inflation)
Y= f (X2)
Y= b0 +b1X2
With b0 and b1 are two constants
At the end,
Y = 9136.878 – 694.478X2 (2)
With, Y= the inflation rate
X2= the amount of exports of goods and services

4.3) The interpretations of the results
The empirical theory uses data to test relationship between at least two variables. After loading the data in the IBM SPSS Statistical Software, we have constructed two economic models. Both of the results have high R squared. Consequently, inflation rate is one important determinant of the fluctuation of the exports and imports. Indeed, Wooldridge (2008) explained that a R squared close to zero means that only a little variation of the Y is due to the variation of X.
First, the calculation of the effect of the inflation on the imports gives us this linear equation:
Y= 12084.543 – 679.428 X1 (1)
This equation means that the change in volume of imports is negatively correlated to the inflation rates. As the inflation rate increases the volume of imports will decrease.
For example, if the inflation rate is 2%, the amount of import in billion Ariary is:
Y= 13133.948 – 760.947 (2%)
Amount of imports = 13,118. 73 billion Ariary
Moreover, all the significance levels are less than 0.05 which is good for our estimation. It means that the three variables are correlated and inflation rate is an important independent variable for the international trade in Madagascar.
To better understand easily the relationship between those two variables in reality, we illustrate the data on a graph below. We use the same table as in the calculation of the changes in imports as above but the data of the amount of imports has been changed into thousands billions Ariary to better show the two data into one graph.

Figure 4.3.1: The fluctuation of the inflation rate and the amount of imports (in thousand billion Ariary) between 2007 and 2016
On the graph, it is easy to see when the inflation rate is decreasing the amount of imports increases such as between 2007 and 2008. In 2011 and 2012, there was a sudden decrease in inflation rate because the country has started to grow after the political crisis in 2009. We can see that the country has started to stabilize. However, between 2014 and 2016 there was a fluctuation on the inflation rate because of the new government. There was a new government at the end of 2013. In sum, the amount of importation is closely related to the amount of imports in reality as the calculation has estimated it.
Second, the calculation of the effect of the inflation on the exports gives us this linear equation:
Y = 9136.878 – 694.478X2 (2)
From this result, we can say that the amount of exportation is negatively correlated to the changes in inflation rate. When the inflation rate increases, the amount of exports will decrease in Madagascar.
For example, the inflation rate is 2%. We will have;
Y = 9136.878 – 694.478 (2%)
The amount of exportation= 9122.988 billion Ariary.
Furthermore, the econometrics model is good for our estimation because all the significance levels are less than 0.05 and the R squared of this model is far from 0. Indeed, to easily understand the variation in reality we use the graph below. The graph is based on the same data as for the calculation of the changes in exports but we have changed the value of the amount of exports into thousand billion Ariary to better show the changes in the two variables on the same graph.

Figure 4.3.2: The fluctuation of the inflation rate and the amounts of exports (in thousand billion Ariary) between 2007 and 2016
We can see that between 2007 and 2011, the change in exports follows the change in inflation rate. But after 2011, the amounts of exports always raised but the percentage change depends on the inflation rate. This is may be due to the creation of new sectors like the reopen of the agreement with the US for the textile and the exploitation of mines.

CHAPTER FIVE: Conclusion
Madagascar is a developing country in Africa and does not have easy access in the evolution of the technologies for the production of goods and services. The cost of production in the country is still high compared to the other competitors. From different papers and news, we know that the education has also problems. For the countryside areas, most of the children have to walk for kilometers to go to school. Many of them will leave school before the high school completion. So the value of the human capital, based on the level of education, is also low in the country. It means that most of the population relies on natural resources to survive. The country has a comparative advantage in the raw materials. That is one reason why the international trade is important for the country.
Furthermore, the cost of production of goods and services is high. The country always faces different natural disasters because it is a tropical island. Those have a great impact on the local agriculture. So the population relies on importations too. Even for the staples, such as rice, the country still need to import because the local production cannot satisfy all the population for a year. Indeed, even for the agriculture, the cost of the production is high. The inputs are the land, capital. The biggest problem is the capital because there is the hard access to technology for the production and the expensiveness of transportation. The local farmers cannot afford to buy new machines to optimize the exploitation of their fields. The road is also important especially during the season of rain. Many of the countryside are hard to access during it but the period of the harvest is at the end of that season. For the industries, the cost of products is also high because of the taxes, the increasing price of oil, the low level of the education and the technologies. They also face the competition with the import prices. The government does not elaborate a policy to protect the infant industries. This is another point to show that the country relies on international trade.
Moreover, on this book we can sum up by telling that the inflation rate has a great effect on the international trade in Madagascar. However, the R squared is still not close to 1. It means that there are other variables that we also need to consider to estimate the fluctuation of the international trade in the country. For example, the level and the quality of education or the income of the household can also be used for the estimation. We suggest the income because most of the population is farmers in the countryside so their production also depends on their income. If they have high income they can produce more and in good quality so the exports will be boosted. The level and the quality of the education also depends on the income because when the parents have high income their children can stay longer in school and study in a non public school. Those children increase the level of human capital for the production in firms. This helps for the development of the industries and the international trade.
In my opinion, the government policies should be based on how to develop the international trade of the country. They should focus on finding what should be the inflation rate that there will be an economic growth in the country without hurting the population. Indeed, when the inflation rate is high, like in 2007 and 2008, there was always a political crisis because the population makes strikes and civil wars to change the government. The development of the country relies on the stable inflation rate and the development of international trade. The central banks should decrease the interest rate so the commercial banks decrease theirs also. The population will start saving or borrowing money on the banks to increase their productivity. The government should also focus on the optimization of the local productions. It increases the amounts of exportation which will help the value of the currency in the exchange rate. Indeed, the exchange rate is also important for the fluctuation of the inflation. The government should subsidize the infant industries like the startups or have a great policy to decrease the corruption to protect them. They should protect the farmers by decreasing the illegal exploitation in the country. For example, the exploitation of rose woods which affects the production of vanilla. Moreover, when the inflation rate is stabilized, the population is more attracted into those institutions that lend money. With easy access to borrowings, the population can increase their lands and capitals. In sum, the raising amounts of the international trade will lead to a more stable inflation rate with a little help of the central bank. This will also stabilize the socio- political situation in the country. The international trade is the key of the development of the country. But this opinion can only be confirmed with more researches and studies on other data.

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