Policy Memo on Elevation of Poverty in Madagascar using Neoclassical Growth Model

Policy Memo on Elevation of Poverty in Madagascar using Neoclassical Growth Model Policy Memo on Elevation of Poverty in Madagascar using Neoclassical Growth Model Problem Definition While most African countries are making significant progress towards elevating poverty, the level of poverty in Madagascar has continued to persist. A recent survey shows that 70 percent of Malagasy live below the national poverty line (World Bank, 2017). This memo proposes some of the initiatives World Bank can take to reduce the poverty level in Madagascar guided by the neoclassical growth model.

Issue Analysis and Recommendation Training on Better Methods of Farming The neoclassical growth model is one of the economic models that explain the longrun economic growth by focusing on capital accumulation, technological advancement, and supply of labor. The model was developed by Robert Solow and Trevor Swan in 1956.

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According to this model addition of capital in an economy can have a very little effect on economic output if there is no technological change. Addition of capital in the fixed supply of labor is subject to diminishing returns. By the law of diminishing return, as more capital is added to the constant supply of labor, the marginal product of capital reduces. The first step towards lifting Madagascar out of poverty is through developing its technological capability.

Given that agriculture is the most common economic activity for almost 70 percent of Madagascar population (World Bank Group, 2015), empowering farmers to increase their output at low cost will elevate the levels of poverty in the country. While Madagascar has vast tracks of land for agriculture, poor methods of farming and dependent on seasonal rain have hindered economic development of rural farmers. World Bank need to empower farmers through training in irrigation, better methods of farming and the provision of an improved breed of seeds to boast their harvest per acreage.

Funding Programs That Increase Output in Agriculture Another important facet of the neoclassical growth model is that an increase of capital into the economy without technological advancement that increases output may lead to stagnation of the economy. This happens when new investments are set up using the old inefficient methods of production. Since there is an increase in capital, workers begin to demand an increase in wages against a low output. Consequently, investors are discouraged to invest since the return on investment is falling, leading to economic stagnation (Berg & Lewer, 2010). Following these discoveries, the model asserts that pursuing technological changes in the economy can eliminate economic stagnation. Apart from training, funding projects that increase economic output is another way that can be used to elevate poverty in

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Madagascar. A partnership that enables Madagascar smallholder farmers to access agricultural field services such as soil testing enabling them to match the right type of crops and soil can significantly increase their economic output. Provision of farm machinery can also enable farmers to increase their output in a year. One farmer in Southern Madagascar benefiting from the UN World Food Program local purchase initiative stated that they plant twice a year instead of once due to the availability of machinery (Rarivoson, 2015).

Encourage Large Scale Farming and Provide Ready Market for Surplus Farm Produce Technological change involves the improvement of production processes and the adoption of new management techniques to increase efficiency and output. According to the neoclassical growth model, change in management philosophy is also important to increasing output. Farming can also be profitable especially to rural farmers if it is done on a large scale.

Provision of a ready market for farm produce is another initiative World Bank can institute to help farmers increase their output. For instance, in Southern Madagascar, the United Nations World Food Program is motivating small scale farmers to increase their produce by buying the surplus maize they produce as part of its purchase for progress global initiative. World Bank should develop initiatives that will transform farmers from subsistence farming to large agribusiness farming. Without changing this mentality, it may be difficult to sustain in poverty elevation programs in the country.

Encourage and Fund Off-Farm Economic Activities The World Bank can also elevate poverty by encouraging the diversification of Madagascar’s economy, according to the neoclassical growth model argument on technological advancement. Improving output, according to the neoclassical model requires investment in economic activities that maximize return on investment. Madagascar should be encouraged to try other non-farming economic activities. The World Bank should invest in programs that enable the country to pursue off-farm economic activities such as the

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establishment of small business enterprises. Provision of grants as start-up capital may not be sufficient to incentivize people to try other economic activities. Long-term projects such as the development of Madagascar infrastructure and connection of electricity in various parts of the country will encourage off-farm economic activities. The poor road network in Madagascar is a major hindrance to the success of small and medium enterprises. Accessing major markets and transporting merchandise is time consuming and very costly.

Secondly, lack of electricity in most of the country has prevented investment in other economic activities in the country. Only 22.2 percent of Madagascar population has access to electricity (Trading Economics, 2018). The World Bank should increase the connectivity of electricity in the country to encourage investment in other activities that relay on electric power such as carpentry and welding among other economic activities. Countries such as Ghana have been able to elevate poverty by increasing the connectivity of electricity throughout the country. A study by World Bank Group (2015) showed that 70 percent of Ghana is connected to electricity.

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References Berg, H. & Lewer, J. J. (2010). International trade and economic growth. London, UK: M.E. Sharpe.

Rarivoson, V. (2015). Empowering farmers in drought-hit southern Madagascar. Retrieved from https://www.wfp.org/stories/empowering-farmers-drought-hit-southernmadagascar The World Bank (2015). Ending poverty in a rising Africa. Retrieved from http://www.worldbank.org/en/news/feature/2015/10/16/ending-poverty-in-a-risingafrica Trading Economics. (2018). Madagascar: Poverty headcount ratio at national poverty line (% of population). Retrieved from https://tradingeconomics.com/madagascar/povertyheadcount-ratio-at-national-poverty-line-percent-of-population-wb-data.html