Background

    Both by area and population, Haiti is the third largest Caribbean nation (after Cuba and the Dominican Republic), with 27,750 square kilometers and an estimated population of 10.4 million people.

    PART ONE: PREAMBLE
    Haiti’s geography, resources, and history provide it with opportunities. Haiti occupies the western, smaller portion of the island of Hispaniola, which it shares with the Dominican Republic. Both by area and population, Haiti is the third largest Caribbean nation (after Cuba and the Dominican Republic), with 27,750 square kilometers and an estimated population of 10.4 million people. The country has comparative advantages, including its proximity and access to major markets; a young labor force and a dynamic diaspora; and substantial geographic, historical, and cultural assets.

    There is a pent-up demand and many untapped markets that the private sector can explore. Areas of economic opportunity for Haiti include in agribusiness, light manufacturing and tourism. Furthermore, Haiti possesses mineral potential. Haiti’s economic fundamentals could allow the country to become a vibrant economy and grow by 6-8 percent a year. However the Earthquake and the storm have devastated the Haitian economy. Haiti needs relief from the crushing National Debt and urgently needs vast investments in infrastructure and economic activity.

    Building on these opportunities, the country has a vision to become an emerging economy by 2030. In May 2012, the Government of Haiti issued a Strategic Development Plan (PSDH), building on the Action Plan for the Recovery and Development of Haiti (PARDH) prepared following the 2010 earthquake.

    The PSDH details the PARDH’s vision and strategic plan for the country’s long-term development, and four major areas of work for the recovery and development of Haiti:

    • Territorial reform
    • Economic reform
    • Social reform and
    • Institutional reform

    The Plan aims at building a new modern, diversified, resilient, competitive and inclusive economy, respectful of its environment and in which people’s basic needs are met. This objective would require ambitious double digit growth rates, a significant break from the past, based on an expansion of agriculture, construction, manufacturing, and tourism.

    PART TWO: ANALYSIS
    Overall, Haiti’s growth performance in the last four decades has been disappointing and poverty remains endemic. A history of vested interests, political instability, and natural disasters has prevented the country from realizing up to now its aspirations, trapping it in a low equilibrium and keeping it as one of the poorest and most unequal countries in the world. Gross Domestic Product (GDP) per capita fell by 0.7 percent per year on average between 1971 and 2013. As a result, the overall poverty headcount amounts to about 59 percent and extreme poverty to 24 percent in 2012, indicating that almost 6.3 million Haitians cannot meet their basic needs and 2.5 million cannot even cover their food needs.

    While overall income growth is a necessary condition for increasing shared prosperity, it is not sufficient. Growth is not a cure-all, but it is essential to allow Haitians to escape poverty. Unfortunately, Haiti has yet to achieve a sufficiently strong growth momentum. However, even the modest resources the country has generated in the past have not been distributed in an inclusive manner. Growth that is inclusive of the poor requires additional mechanisms such as a pro-poor fiscal regime, as well as targeted social programs and expenditures, not only to redistribute resources towards the poor but also more importantly to ensure that the less well-off are an integral part of the process and that opportunities improve for all.

    Haiti has traditionally enjoyed substantial preferential market access to the United States and Canada, but has not succeeded in fully exploiting this advantage. For example, the country has not been able to fill its quota for exports to the United States under the Hemispheric Opportunities through Partnership Encouragement II (HOPE II) initiative or under the Haiti Economic Lift Program (HELP) Act. These laws allow Haiti to assemble textiles, whatever the origin of the imported fabrics, and to export them to the United States duty free and tax free but are due to end in 2020, unless renewed.

    Of course, the current Haitian development situation is still rife with challenges. Prominent among them are the following:

    • Lack of regional land use planning and organization
    • Deterioration of the country’s natural resources and cultural heritage
    • Towns that still need to be rebuilt or restructured since the earthquake
    • Precarious housing conditions
    • Networks of productive infrastructure covering only parts of the country
    • A widespread situation of under-employment and unemployment
    • Weak economic growth in a situation of strong population growth
    • Virtually constant food insecurity
    • Underinvestment in the job- and wealth-creating sectors of the future
    • An insufficient supply of social and recreational services to meet the need
    • An under-valuation of cultural creativity
    • Strong social inequalities
    • Fragile democratic institutions
    • Weak government of the regions and communities

    PART THREE: HAMPERED UP TO NOW BY A BROKEN SOCIAL CONTRACT
    A social contract is missing between the State and its citizens. Haiti is not very inclusive. Haiti has never had a tradition of governance aimed at providing services to the population or creating an environment conducive to sustainable growth. A number of Haitian and international observers broadly agree that the Haitian State remains ineffective and delivers little to its population. To a large extent, this results from the particular winner-takes-it-all nature of Haitian politics and economics which creates little incentive for broad-based coalition building.

    “Haitian institutions have never provided justice, education or healthcare to the majority of the population” (Lockhart and Forman, 2013).

    Instead, a small economic elite has supported a state that makes only negligible investments in human resources and basic infrastructure. “Governance and state capacity to effectively formulate and implement sound policies, and to deliver core public services to the population, are weak. The state is present largely in the major urban centers and has been unable to provide basic services or infrastructure to large portions of the population”.

    PART FOUR: INADEQUATE TAX SYSTEM
    Haiti’s tax system generates limited resources for the government and tends to be regressive. Despite recent improvements in tax collection, Haiti collects fewer domestic revenues in terms of GDP than comparable countries in the Latin America and Caribbean region (LAC). Furthermore, Haiti’s tax revenues rely heavily on indirect taxes which affect consumers independently of their income level. The ratio of direct to indirect taxes stood at about 30 percent in 2011, a level inferior to that of most countries in LAC and to the average of Low-Income Countries (LIC): a fact largely explained by the sizable share of Haiti’s revenues coming from international trade. Tax systems relying relatively more on direct taxes tend to be more progressive because in such systems the burden of taxes weighs differently on economic agents of varying income levels.

    PART FIVE: INADEQUATE SOCIAL SPENDING
    Social spending remains limited and the delivery of basic services strongly inequitable. Public spending in health, education, and social protection amounts to 5 percent of GDP, limiting the government’s ability to offer equal opportunities to its citizens. At the same time, many large spending items such as fuel subsidies clearly favor the rich. In this regard, the rise in fuel prices in October 2014, as well as the recent decline in international oil prices, could be conducive to more inclusiveness in public spending. In the absence of government, basic services such as health and education are mainly provided by non-government institutions. Eighty to ninety percent of primary school students attend non-public schools, placing a substantial financial burden on households and delivering achievements closely linked with household income. Outcomes are equally unfavorable to the poor in the health sector.

    PART SIX: PRIVATE SOCIAL SPENDING
    In the absence of public services, non-State service providers have stepped in. In response to limited government services, foreign assistance – as well as a growing number of international Non Governmental Organizations (NGO’s) since the 1950s – has provided a broad range of dispersed public services. In many remote rural areas, the State has extremely limited delivery capacity, and NGOs provide services to the population. Their services are also important among the urban poor. In health, about 50 percent of total health expenditure is provided by NGOs, which for the most part deliver primary health care services.

    NGOs or private, for-profit institutions run over 80 percent of all primary and secondary schools. In water and sanitation, while the National Water and Sanitation Directorate (DINEPA) has greatly improved its presence in remote rural areas by creating, training and supporting local water committees, interventions are often funded through NGOs. These non-state Organizations are largely disconnected from the state system and fragmented among themselves, leading to highly uneven service provision.

    The reliance on non-State Organizations, particularly donors, has also weakened public investment management. Haiti’s public investment management exhibits a number of distinctive features and practices common to countries that are aid-dependent, including weak appraisal capacity and reliance on donors to design good projects. These hamper the effectiveness of public investments. While the government’s Strategic Development Plan (PSDH) provides broad guidance on government priorities, sectoral strategies to guide the prioritization of projects are lacking. This leads to a Public Investment Program (PIP) composed of projects that are neither fully assessed nor prioritized.

    There is no effective control on disbursements based on projects’ physical progress against plans. More importantly, although progress in fiscal reporting is being made by rolling out the use of a single treasury account, domestically-funded capital expenditures are not yet properly accounted for, tracked and reported, creating an environment conducive to a lack of transparency and accountability, as well as to mismanagement of scarce public resources. Finally, even though the existing legal framework is acceptable for the management of public investments, its requirements are rarely respected, with numerous processes and procedures that, when not redundant, are excessively elaborate.

    PART SEVEN: HISTORICAL BACKGROUND
    Haiti is reported to have been one of the richest colonies. At the end of the eighteenth century, on the eve of its independence, Saint-Domingue – as the territory was then known – was considered the world’s richest and most productive colony. It was also reputed to be the most violent, with the majority of its population working as slaves in plantations. Brutal punishments were common, and slaves died at staggering rates. In 1804, Haiti emerged from 13 years of revolution as the second nation in the Western Hemisphere to attain independence from a European colonial power (after the United States).

    Independence did not lead, however, to the development of inclusive institutions. The country’s successful revolt left the new republic isolated on the international stage, as evidenced by the early lack of diplomatic recognition from Europe and the United States. This had a negative impact on willingness of foreigners to invest in Haiti.

    It is also argued that there were insufficient checks and balances on the power of post-independence leaders who set themselves up as a new elite, exploiting Haiti’s people through the very means used by the French earlier. Furthermore, to gain recognition, Haiti had to agree to compensate France for the property losses faced by colonial planters during Haiti’s revolution (1791-1804). Payments began in 1825 and only stopped 122 years later, in 1947, draining the economy of much needed capital.

    A new elite class, often of foreign descent, built important economic interests. Beginning in the mid- nineteenth century, Haiti’s economy had grown increasingly dependent on imports, and wealth was accumulating in the families of importers. With looser restrictions on foreign merchants in the mid- 1840s, migrants primarily from Britain, France and Germany began to establish themselves on the island to meet the demand for European goods.

    The migrants typically stayed in Haiti as resident aliens to maintain the protection of foreign governments, but often married into elite Haitian society to circumvent restrictions on foreign ownership of Haitian property. These families of mixed Haitian and European descent were followed beginning in the 1890s by Syrian and Lebanese immigrants. By the early turn of last century, these immigrants owned the major trading houses, as well as transportation and communication systems.

    From the beginning of the twentieth century, autocratic leaders in Haiti have traded political support from the elite for economic advantages to this elite. During the 1910s, presidents began floating domestic loans that were largely subscribed by the foreign commercial community. Merchant-bankers had to cooperate with official requests for funds if they wished to continue conducting business unhindered, but they were frequently rewarded for their pains by favors at the customhouses.

    François Duvalier (‘Papa Doc’) continued this tradition of cutting deals with the economic elite. In 1958, for instance, following a first abortive coup attempt, Duvalier demanded “displays of loyalty — especially from wealthy businessmen, who made the first of many special contributions to the defense of the realm”. The practice was continued in the early 1960s, when Haiti was simultaneously hit by an economic slump and cut off from U.S. aid. “Foreign-owned companies and men of wealth with important stakes in the country shared the burden: they were encouraged to contribute to the stability of the regime by subscribing to national bonds, government lotteries”.

    In return, statutory monopolies and exclusivities were usually granted for cooperative economic elites. A long list of industries became monopolies by presidential decree during the 1950s and 1960s: “mineral and petroleum exploration and exploitation, the construction and operation of television stations, the planting and processing of sesame, the processing of guano, the manufacture of chocolate, a fertilizer industry, the development of casinos and hotels, the construction of a sugar factory, the improvement of the telephone system…”.

    By 1985, some 19 families held almost exclusive rights to import many of the most commonly consumed products in Haiti. Another twenty to thirty families held import licenses for another 92 items. Though publicly available information on privately held businesses is limited and import quotas has been dismantled, many of the same elite families who dominated the Haitian economy during the era of Duvalier in the 1970s remain in control of large segments of the economy today.

    Against this backdrop, the structure of the private sector shows signs of high degrees of concentration, hampering the entry of new enterpreneurs. The established private sector is dominated by a number of families, resulting in high concentration in a number of key industries, distorted competition, and non-transparent business practices in many instances. In practice, this translates into limited opportunities for a substantial expansion of the formal private sector across most sectors. Few of Haiti’s established private firms have modern capital and governance structures with professional management, limiting their access to long-term financing.

    The open institutions needed to create a level playing field for all Haitians and underpin a rule of law based on impersonal exchanges have not emerged. To prosper, economies need institutional arrangements to resolve disputes among firms, citizens, and governments, to clarify ambiguities in laws and regulations, and to enforce compliance. A State needs to use its coercive power to enforce property rights at low cost without abusing it and exploiting its citizens in order to develop mechanisms to enforce effectively impersonal agreements

    In such agreements, an economic operator’s decision to transact is independent of his partner’s personal past history. It is made without knowledge of that partner’s past conduct, or the expectation of future transaction with him or her, or the ability to report misconduct to future trading partners. In particular, mechanisms of arbitration are required to settle possible disputes between traders and ensure contract enforcement. The inability of the Haitian State to manage its power appropriately has not allowed the emergence of these mechanisms and the established private sector had little incentive to create a level playing field that would have primarily favored new entrants.

    In the absence of effective contract enforcement, economic operators tend to remain within their family or social networks. Without effective legal systems making low cost enforcement of contracts possible, operators have to rely on personal knowledge, reputation, or the possibility of some form of retaliation in selecting their business partners. Family, ethnic or social networks have been shown to be able to impose effective informal sanctions and enforce contracts in weak institutional environments, and thereby foster economic transactions that would otherwise not take place.

    Empirically, the presence of migrant networks, for instance, has been shown to compensate for the lack of good institutions and is associated with greater international trade. While these relationships are useful, they are not conducive to greater inclusion. This social organization tends to undermine collective action by providing alternative, non-collective avenues for ensuring individual and family survival.

    As a result, competition is perceived as low in Haiti. According to the Global Competitiveness Report of 2014-2015, Haiti ranks low in terms of competition: Haiti ranks 140th out of 148 countries in terms of intensity of local competition and ranks 140th in terms of extent of market dominance (a high rank indicates few firms dominate key markets). This suggests that in Haiti, prices, availability and quality of goods and services are perceived to be determined by a small number of firms rather than by market mechanisms and that these incumbent firms appear to face little competitive pressure from new entrants or smaller domestic firms. This situation could be the result of high legal or behavioral entry barriers in the market that prevent new competitors from participating in key markets. These market structures could facilitate tacit agreements among families/groups to allocate markets among themselves, which may harm productivity and incentive to innovate.

    Weak competition contributes to a high degree of operational business risk. Investors in Haiti perceive that the risks associated with discriminatory policies favoring incumbents and unfair business practices are higher than in other countries in the Caribbean region and only comparable to those in Guatemala, Honduras, and Nicaragua. The sources of these risks are mainly related to:

    • price control and the control of other market variables that both limit the benefits that firms could obtain by competing effectively and harm the incentives to invest;
    • vested interest and discrimination against foreign firms that appear to play the most important role in generating distortions of the level-playing field, hinder innovation, and preclude more efficient firms from competitively gaining market shares.

    Trade data seem to confirm these perceptions about limited competition. According to a product market concentration analysis based on available import data, Haiti imports most of its final products and most of the imported goods sold in Haiti are provided by few large firms. About 70 percent of total imports in value are in goods whose markets are either highly or moderately concentrated according to common thresholds used by the U.S. Department of Justice and Federal Trade Commission.

    While market concentration is not unusual given the size of the economy, high and stable market shares (above 40-50 percent of the market) may increase the potential risks of firm abusive behavior with negative impact on consumers. Highly concentrated product markets include petroleum, food and consumer goods markets (telephone sets, motorcycles). Imported goods in moderately concentrated markets include food, consumer goods (electric generating sets, motor vehicles) and cement.

    The concentrated nature of the Haitian market may be leading to higher consumer prices. The market analysis aims at detecting the market characteristics that favor the existence of market power and its potential risks in terms of abusive practices. For instance, the risk of potential anticompetitive behavior given high market concentration may translate into high prices for consumers, which may be particularly damaging in Haiti where more than half of the population lives on less than US$2 per day. Several of the most important food products in the Haitian consumption basket are sold in concentrated markets. A preliminary analysis over time of prices for such products seems to suggest that on average, prices in Haiti are approximately 30 to 60 percent higher than in other countries from the LAC region, even taking into account differences in income levels and purchasing power of the population, as well as the cost to import containers and import tariff levels