This note reviews the effects of dollarization on the ability of the Bank of the Republic of Haiti (BRH) to conduct monetary policy and the risks to macroeconomic stability and the banking system. Haiti's external indebtedness has been compared with that of countries eligible for debt relief under the Initiative for Highly Indebted Poor Countries (HIPCs). Haiti's accession to the Caribbean Common Market and the impact of trade liberalization measures on the strategic rice sector is discussed. The causes of poverty in Haiti are also analyzed.

Abstract

This note reviews the effects of dollarization on the ability of the Bank of the Republic of Haiti (BRH) to conduct monetary policy and the risks to macroeconomic stability and the banking system. Haiti's external indebtedness has been compared with that of countries eligible for debt relief under the Initiative for Highly Indebted Poor Countries (HIPCs). Haiti's accession to the Caribbean Common Market and the impact of trade liberalization measures on the strategic rice sector is discussed. The causes of poverty in Haiti are also analyzed.

IV. Trade Liberalization in Haiti38

Abstract

This chapter describes the two main stages of Haiti’s trade liberalization (1986/87, 1994/95), that have resulted in the country ranking among the most open economies in the Western Hemisphere. It argues that an important objective of trade liberalization was lowering the cost of food and basic commodities to the poorest segments of population. Evidence from the rice sector suggests that this policy put downward pressure on the domestic price of rice, as well as on domestic rice output. The government is currently seeking to consolidate the liberal trade regime through membership in the CARICOM and further tariff reduction. However, other crucial structural reforms have lagged behind trade liberalization. A sustained improvement in living conditions of the poor will require more determined pro-growth structural reforms in these other areas, as well as the maintenance of macroeconomic stability.

A. Introduction

70. Since the restoration of democracy in 1986, the Haitian authorities have persevered in establishing and maintaining a liberal trade regime, under difficult political and economic circumstances. Starting in 1986/87, Haiti boldly dismantled the protectionist trade system that was in place at the time. It liberalized its trade regime by eliminating nontariff barriers (NTB’s), including import and export licensing restrictions, and dramatically lowering customs tariffs. Haiti has actively sought membership in the African Caribbean Pacific Countries (ACP) group under the Lome convention; it became a member of the WTO in 1996, and acceded in July 1999 to the Caribbean Community and Common Market (CARICOM). 39 Haiti’s actual accession to the CARICOM will take place once parliament ratifies the treaty. As a result of its liberal trade policy, Haiti, albeit the poorest country in the Western Hemisphere, currently ranks among the most open economies worldwide.

71. The boldness of Haiti’s trade policies stands in sharp contrast with the slow pace of structural reforms in other crucial areas, in particular the privatization of public enterprises, thereby depriving the population of some of the benefits of the liberal trade policy. The swift opening up of the economy to competing imports has been effected in the absence of a strong domestic private sector free-trade constituency and would seem to have been mainly motivated by domestic politics, in particular in regard to reducing food prices. After years of embargoes, the drastic reduction in customs tariff rates in early 1995 was designed to benefit consumers, making imports of basic commodities and food staples, in particular of food products, more affordable. Another objective was to reduce the incentive for fraud. While the relative prices of rice seems to have declined since 1995, there is no strong evidence that overall the tradable-goods component of the CPI has become relatively cheaper in the aftermath of trade liberalization.

72. Output in some sectors was displaced by imports, notably lower grade rice, which attracted criticism. The latter, however, does not appear to take into account the broader policy perspective. The prolonged political crisis since end-1996, and the associated uncertainty, have depressed investment and growth, while the postponement of essential structural reforms, in particular the privatization of the main utilities, has led to a substantial deterioration of infrastructure. Moreover, in FY 1999/2000, excessive budget deficits have imposed a toll on the poor through higher inflation. The unfinished reform agenda has not permitted Haiti to fully benefit from its bold trade liberalization policy.

73. The remainder of this chapter is organized as follows. Sections B and C describe the two-stage trade liberalization that occurred in 1986-87 and 1994-95. Section D discusses Haiti’s recent accession to the Caribbean Common Market. Discussion of issues related to the rice sector is enclosed in the Text Box, Section E summarizes the chapter’s conclusions.

B. Trade Liberalization 1986-87

74. As in many Latin American countries pursuing an import-substitution industrial policy, the pervading import restrictions in Haiti during the 1970’s and early 1980’s adversely affected agricultural exports and led to inefficient industries developing behind protective barriers. By contrast, the unprotected export assembly industry grew rapidly. Import restrictions on rice and an export tax on coffee resulted in high domestic prices for rice and low prices for coffee, encouraging inefficient rice production on hillsides.

75. The administration that came to power in Haiti in 1986 undertook to dismantle domestic private monopolies, and spur competition through trade liberalization. By December 1986, quantitative import restrictions had been removed for all but seven agricultural products, which remained subject to import licensing, including rice, sugar and pork. In March 1987, a new 13-band tariff structure was introduced with ad valorem rates mostly between zero and 40 percent (exceptions were 50 percent for rice and 57.8 percent for gasoline), with an average of around 16-20 percent. This trade regime was maintained until embargoes on most external transactions were imposed on Haiti, following the military coup that ousted President Aristide in September 1990.

C. Trade Policies 1994-95

76. Following the return to constitutional rule in October 1994, and the lifting of the embargoes imposed on most trade and financial transactions in 1991-94, the government of Haiti embarked on an economic recovery program, supported by the international community, as well as on a medium-term structural adjustment strategy. The latter included sweeping trade liberalization measures.

77. In FY 1994/95, all remaining import restrictions on agricultural commodities were eliminated. Under the tariff reform, approved in February 1995, imports were to be valued using the market exchange rate, as opposed to the fixed preferential rate of G 6.5 per U.S. dollar in effect since August 1989. The resulting large valuation increase was broadly offset by a reduction in tariffs rates. The tariff schedule adopted in February 1995, that is still in effect, reduced the maximum tariff rates from 40-50 percent to 15 percent and consolidated the 13-band rate structure into a four-band tariff structure (0, 5, 10, 15 percent). Specific rates (0–3 percent) were stipulated for certain basic products (rice, sugar, flour, cement). As rice and flour were previously subject to a rate of 50 percent, the reform entailed an actual lowering of the tax incidence on these basic products. However, gasoline remained taxed at 57.8 percent. Under the current tariff structure, the simple average tariff rate is 5 percent, and over half of the close to 1,600 tariff lines bear a zero rate. The tariff structure was notified as binding to the WTO, making it difficult to increase rates. In addition to customs duties, an import verification fee of 4 percent is applied on non-exempt imports, as well as a 2 percent advance income tax payment. The latter is deductible from income tax for registered businesses, and is final for businesses that do not file income tax returns, for example, small or informal businesses.

78. Including the numerous exemptions on imports by public sector entities, donor-funded projects and NGO’s, the average total custom duty is currently around 8 percent. 40 The relatively low customs duties, the elimination of NTB’s and of all economically relevant import and export licensing requirements, have put Haiti in the category of countries with the most liberal trade regime. In the Western Hemisphere, only Chile and Panama, countries that have a much larger GDP per capita, have a similarly liberal trade regime. 41 A further lowering of custom tariffs to a maximum of 10 percent was to be implemented by end-1996 (some tariffs that are currently less than 10 percent, such as those for rice and sugar, would be raised somewhat). However, following the onset of the prolonged political crisis, this lowering has not been implemented to date pending parliamentary approval. It remains however on the government’s agenda.

Table 1:

Index of Trade Restrictiveness

(as of end-1999)

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Source: IMF.See IMF: “Trade Liberalization in IMF-Supported Programs, Appendix 1,” February 1998, for a description of the methodology used to build the index.

79. Export industries, mainly in the agricultural sector, were unable to seize the opportunities provided by the liberalized trade regime. 42 While the new trade regime offered lower cost inputs and better market access abroad, export industries could not fully benefit from the trade liberalization effort due to the widespread structural impediments in the Haitian economy. The main impediments to increased export activity continued to be the poor road and port infrastructure and the severe supply bottlenecks in the utility sectors. In addition, some industries operating inefficiently under the previous protected regime faced increased competition from lower cost imports (see box below).

Trade Liberalization in The Rice Sector

The opening up of the agricultural sector to imports has benefited consumers through lower relative prices for rice. Domestic rice output has declined. However, high-quality domestic production has not been displaced by lower-grade imports. In the early eighties, Haitian agricultural production was highly protected from imports. Custom tariffs on food products were on the order of 40-50 percent, and NIB’s included prohibition of imports, licensing requirements, and quotas. While NTB’s on seven sensitive food products were retained after 1986/87, in February 1995 under the Aristide-Michel government, import restrictions were lifted and customs tariffs on food products were lowered dramatically, as part of the overall reduction in custom tariffs. Custom tariffs on most food imports went from 40-50 percent to 0-5 percent; the tariff on rice, a major component of Haitians’ diet, was lowered from 50 percent to 3 percent.

Trade liberalization has contributed to a large increase in imports of rice. (Table 2). At the same time, domestic production has gone down substantially (from around 180,000 tons of paddy rice in 1986-89 to 105,000 tons in 1997-99). Imports of rice, are currently estimated to account for about two-thirds of domestic consumption. Between 1994 and 1999 whereas the CPI rose by about 125 percent, the domestic price of rice increased by around 65 percent, entailing a 25 percent decrease in the relative price of rice. Partial evidence tends to show that margins of traders has increased. The downward pressure on domestic price of rice has stemmed from competition from U.S. imports. Competition from imports notwithstanding, domestic production remains significant, as Haitian rice producers have tended to specialize in higher grade varieties (Gougousse, la Crete) that sell at a premium over lower-quality imported rice.

The authorities’ policy of securing access to relatively cheap rice imports by the majority of the population, in particular the poorest, as opposed to maintaining more remunerative producers prices, has attracted criticism. It has been argued that competition is unfair, as U.S. rice producers receive income support; that it has benefited traders more than consumers; and that it has led to displacement of local rice. Some donors involved in agricultural projects have recommended raising tariffs to the 20-25 percent range, in order to secure higher producer prices. The Haitian government has consistently favored a low-tariff policy, arguing that the supply response of rice producers to higher prices is long and uncertain. In the authorities’ view, the loss of production reflects impediments to growth other than prices, in particular inadequate irrigation, low investment in hulling machines by traders, and land tenure issues.

Table 2:

Rice Production and Imports, 1986-99

(in tons)

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Sources: Ministere de l’Agriculture, des Resources naturelles et du developpement Rural; and Administration Generale des Douanes.

Paddy rice. The transformation coefficient in Haiti is low owing to the obsolescence of hulling machines (60 percent on average).

Harbor of Port-au-Prince only. Docs not include unrecorded imports.

D. Haiti’s Accession to the CARICOM

80. Haiti was admitted to the Caribbean Common Market in July 1999 with the special status of a less developed country. This enabled it to negotiate numerous suspensions to the common external tariff In addition to trade-related issues, Haiti has become part of the agreement on free capital flows that is intended to facilitate direct investment from member countries. The main impetus to joining the CARICOM has been a desire to put an end to political isolation within the region and expand economic ties, by integrating into the main Caribbean regional organization. Haiti also wishes to be in a position to participate in the Free Trade Zone of the Americas by 2005.

81. Tariffs applied by other members of the CARICOM are generally higher than in Haiti. The common external tariff (CET) of the CARICOM was introduced in the community in January 1991. Customs tariffs initially ranged between 5 percent and 35 percent (40 percent for agricultural products). They were to be gradually reduced to a range of 5—20 percent by 1998, but were to remain at 40 percent for agricultural products. Member countries were allowed to conform with the CET tariffs at their own pace. The implementation of the CET has been slower than anticipated, and some member countries still maintain tariffs in excess of 20 percent. Moreover, members countries have generally retained NTB’s.

82. Haiti’s trade with CARICOM countries is very small (less than 2 percent of Haitian imports and less than 1 percent of exports). Implementing the CET without suspensions or temporary waivers would entail a large increase in Haiti’s average tariff rate, as the higher rates on non-CARICOM imports would not be compensated by zero rates on intra-community trade. In negotiating the terms of Haiti’s accession to the CARICOM, the authorities have taken considerable care in preventing a rate increase on the bulk of imports, including on food imports (Table 3). Haiti negotiated therefore suspensions of the implementation of the CET for about 500 products. With a view to safeguarding custom revenues, it also negotiated waivers (“dérogations”) to the implementation of the intra-CARICOM free trade policy on a number of important products, including rice, pork, and gasoline, that could potentially be supplied in part by partner countries. The negotiated tariff, a five-band structure (0, 5, 10, 15, 20 percent) may enter into force after a transitional period following ratification. Estimates of the impact of the negotiated tariffs show an increase of about 2 percentage points in the average rate, as rates on many products, accounting for about one-third of the value of imports, will go up. With regard to the application of the full CET, CARICOM members have agreed to grant Haiti an adjustment period of five years after parliamentary ratification, postponing it until 2005 at the earliest. The adjustment period is renewable.

Table 3.

Custom Duties on Selected Basic Food Items

(in percent)

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Source: Haitian authorities.

Common external tariff of the CARICOM, at the time of negotiations (early 1999).

Rate negotiated by Haiti for membership into CARICOM, valid for live years.

“A” list: member stares can set the custom duty rate, subject to a ceiling.

83. In parallel to CARICOM negotiations, technical work has been completed in the ministry of finance to update the 1996 draft revised custom tariff law that will provide for a maximum rate of 10 percent. Once the current macroeconomic instability subsides the draft law will be submitted to parliament. There is an apparent contradiction between the draft customs law and the tariff structure negotiated with CARICOM, which implies rates above 10 percent for some products. The authorities are well aware of the possible conflict between the two tariff schedules. It is however the stated goal of the authorities to implement the lowest possible tariff over the medium-term. In this respect, the authorities are hopeful that the CET will have been lowered by the time it becomes binding, to avoid tariff increases in Haiti.

E. Conclusion

84. The swift liberalization of Haiti’s external trade mainly benefited consumers and traders, at some cost to inward-looking agricultural and industrial sectors. However, the slow pace of structural reforms in other areas has so far prevented Haiti from reaping the full benefit of this policy in the areas of efficiency and growth. Trade reform in Haiti was implemented in two bold steps, that each coincided with historical breaks with past economic and political environments: the fall of the dictatorship in 1986 and the lifting of the embargoes after the return to constitutional rule in 1994. As a result, Haiti, ranks among the most open economies. The liberalization of the trade regime was carried out without a strong free-trade constituency within the private sector. One of the policy’s main goal was securing access to affordable imports for consumers, in particular of food and basic commodities consumed by the poorest segments of the population. In the medium-term, a further reduction in custom tariff rates is envisaged, in parallel with Haiti’s integration in the CARICOM.

85. Through effectively liberalizing trade, Haiti has put itself in a position to exploit its comparative advantages and reallocate its resources efficiently. However, important structural impediments remain, in the utilities sector, infrastructure, education and health, and the judiciary, that constrain growth and investment. Moreover, recently, rising inflation is taking a toll on the poorest elements of the population. The remaining impediments to growth will have to be removed and macroeconomic stability restored, for Haiti to be able to reap the full benefit of its liberal trade regime.

List of References

  • International Monetary Fund, 1998, “Trade liberalization in IMF-Supported Programs.”

  • Centre pour la Libre Entreprise et la Démocratic (CLED),

  • - Zone de libre échange des Amériques; quel positionnement pour Haiti?, 1998, Bulletin d’ Information, No.4.”

  • - Haïti et la CARICOM, 1999, “Une Integration Difficile mais Possible,” “Bulletin d’ Information, No.5.”

  • Groupe Croissance S.A.,

  • “Libé;ralisation des échages: Position et Recommandations des Industriels Travaillant pour le Marché local”, May 1996.

  • - (in collaboration with IRAM), 1998, “La Tarification des Principaux Produits Agricoles en République d’Haïti.”

  • Pierre Bans, “Consultation Relative à l’ Assistance Technique Ponctuelle d’Appui aux Negociations d’Haiti a la CARICOM.”

  • Bureau de coordination et de suivi des dossiers CARICOM/OMC/ZLEA,

  • -“Report of the Technical Working Group on the Terms and Conditions of Haiti’s Membership in the Caribbean Community.” 1999.

  • - September 2000, “La Communaute de la Caraïbe (CARICOM), Adhesion d’Haïti”

  • Jeffrey Metzel, 1999, “The Economic Context for Investment in Agricultural Intensification in Haiti.”

  • Caribbean Community Secretariat, 1993, “The Common External Tariff of the Caribbean Common Market.”

38

Prepared by Eric Verreydt.

39

Haiti was admitted to the Caribbean Community in 1997.

40

Including the verification fee. An important exemption is gas oil supplied to the electricity company EDH.

41

According to the 1999 IMF’s trade restrictiveness rating (Table 1).

42

See “Libéralisation des échanges: Positions et recommandations des industriels travaillant pour le marche local,” Groupe Corissance, May 1996.