Haiti: Selected Issues

This Selected Issues paper reviews key trends in Haiti’s fiscal performance over the past decade and discusses various options for strengthening the fiscal system. It suggests that a key challenge will be to generate adequate resources to support development, which requires an increase in outlays on social programs, security, and infrastructure investment to at least the levels observed in other low-income countries. The paper reviews revenue trends and key features of the tax system. It also illustrates that Haiti’s public sector employment is far smaller than in other countries.

Abstract

This Selected Issues paper reviews key trends in Haiti’s fiscal performance over the past decade and discusses various options for strengthening the fiscal system. It suggests that a key challenge will be to generate adequate resources to support development, which requires an increase in outlays on social programs, security, and infrastructure investment to at least the levels observed in other low-income countries. The paper reviews revenue trends and key features of the tax system. It also illustrates that Haiti’s public sector employment is far smaller than in other countries.

V. Haiti— Assembly Sector Exports1

A. Introduction

1. Haiti’s apparel sector has benefited significantly from U.S. trade preferences. Since the 1980s, the United States enacted a series of measures providing Mexico and countries in the Caribbean basin preferential access to the U.S. market.2 While much of the capital-intensive stages of textile production were maintained in the United States, these preferences helped stimulate basic assembly operations (cutting and sewing of material sent from U.S. plants) abroad, by allowing the final product to be exported to the United States under tariff and quota preferences.

2. As a result, Haiti’s exports have become highly concentrated on apparel assembly products for the U.S.market. In 2004, Haiti’s total exports were 14 percent of GDP, and nearly 90 percent of these was accounted for by apparel assembly exports, compared with only 5 percent in 1960. During the 1960–2004 period, the share of exports to the U.S. market in total exports increased from 52 percent to 84 percent, with exports of apparel products now dominating Haiti’s trade with the United States (Table 1). As a result, Haiti’s exports have become highly dependent on one market and one industry (Figure 1).

Table 1.

Haiti: Exports to Most Important Trading Partners

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Source: IMF Direction of Trade Statistics.

Value of exports deflated by U.S. consumer price inflation, using 1950 as base year.

Figure 1.
Figure 1.

Haiti: Export Base Concentration

Citation: IMF Staff Country Reports 2005, 205; 10.5089/9781451817607.002.A005

Source: USITC trade statistics and Fund staff estimates.1/ Measured at 8-digit HTS level.2/ Measures the concentration of product shares in total exports. A higher value indicates higher concentration.

3. In coming years, the expiration of quotas under the Agreement on Textiles and Clothing (ATC) will create important challenges to Haiti’s apparel export sector. While low labor costs and proximity to the U.S. market may help to sustain the sector, key structural constraints, such as inadequate infrastructure, the high cost of financing, and shortages of qualified personnel will need to be addressed to maintain competitiveness.

4. The following sections describe the main characteristics of the Haitian apparel sector, challenges and opportunities for the industry, and the final section provides conclusions.

B. Characteristics of the Haitian Assembly Industry3

5. The Haitian assembly industry is highly concentrated in the garments sector. At the end of the 1980s, Haiti assembled a wide variety of light manufactures, such as baseballs and electrical switches, together with apparel products. After economic sanctions were imposed in 1991, the assembly industry collapsed, and following the lifting of sanctions in 1994, only the garment sector reestablished itself and other assembly exports have virtually disappeared (Figure 2).

Figure 2.
Figure 2.

Haiti: Exports by Sector

(In millions of U.S. dollars)

Citation: IMF Staff Country Reports 2005, 205; 10.5089/9781451817607.002.A005

Source: BRH and Fund staff estimates.

6. Haiti’s apparel exports consist of only a few low-value added items. Haiti assembles mostly basic garments, such as knit tops (e.g., T-shirts), sweaters, leisure wear, pants and shorts, underwear, and nightwear. In fact, the two most important export products, defined at the 8-digit Harmonized Tariff Schedule (HTS) level, accounted for 46 percent of Haiti’s total exports to the United States in 2003. These basic garments are characterized by long and standardized production runs, low labor content, and few styling changes. The textile assembly sector imports 85 percent of its inputs from overseas, especially from the United States. The goods assembled from those inputs are shipped back almost exclusively to the United States, and the industry does not produce for the local market.

7. The apparel sector is an important source of formal employment in Haiti.In 2004, the industry employed about 32,000 workers, up from 5,000 in 1995.4 Nearly three-quarters of employees are women. The total assembly sector accounts for just under 2 percent of total formal employment in Haiti (20 percent of total industrial employment), and generates above average incomes.5 Each worker typically supports up to five dependants, and it is estimated that for every job that is created within the assembly sector, an additional 1½ jobs are generated in related areas such as construction and food services.6

8. The ownership of the textile assembly business in Haiti is highly concentrated. In 2002, out of 46 companies that operated in the apparel sector, two represented about 65 percent of the total market.7 A 2002 survey of 26 firms showed that 33 percent of companies operated on the basis of contracts with a single foreign firm, and the majority of companies were contractors to a small number of U.S. firms.

C. Challenges for the Textile Assembly Sector

9. The lifting of quotas under the Agreement on Textiles and Clothing (ATC) will increase competitive pressures on Haiti’s textile assembly sector.The previous experience illustrates the effects may be severe—two and a half years after quotas were reduced in 2002, China’s share of the U.S. market increased from 9 percent to 72 percent in the 29 affected categories, and prices of textile goods fell by nearly 50 percent.8 During this period, the value of Haiti’s exports to the United States in these product categories also declined by roughly 50 percent.9 The 2005 elimination of ATC quotas will mean that quotas will be lifted on roughly 80 percent of U.S. textile imports, in categories that affect virtually the entirety of Haiti’s textile exports. Simulations by Kyvik Nordas (2004) suggest that the lifting of quotas may raise China and India’s combined market share of U.S. clothing and apparel imports from 20 percent in 2004 to 65 percent. Assuming that all countries are displaced proportionally, Haiti’s exports could fall by 45 percent.

10. Haiti’s exports will also be affected when the benefits established under the Caribbean Basin Trade Partnership Act (CBTPA) expire in 2008. Even though the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) that is awaiting ratification only marginally improves the privileges granted to CBTPA countries, it makes duty-free market access benefits permanent, whereas the CBTPA is set to expire in 2008. The DR-CAFTA would further provide duty-free access to apparel made from fabrics formed in the United States or in the region, together with additional favorable treatment on rules of origin with respect to Canada and Mexico. The treaty also provides each country with a limited quota for products using fabric or thread of any origin to enter the U.S. market duty free. As Haiti is the only large CBTPA country excluded from the DR-CAFTA preferences, it may loose competitiveness relative to DR-CAFTA countries when the CBTPA expires.

The HERO and HOPE Acts

11. The Haitian Economic Recovery Opportunity (HERO) Act was submitted in 2004 to the U.S. Congress and would have granted limited duty free access to apparel articles assembled in Haiti, but made from third country fabric.The bill sought to provide Haiti the preferences accorded to the Least Developed Countries covered by the African Growth Opportunity Act, passed in 2000, conditional on the Haitian government making market, political, and social reforms.10 Duty-free access for apparel imports from Haiti, without restrictions on the rules of origin of apparel components, would be capped at 1.5 percent of total U.S. apparel imports, and grow over time to a maximum of 3.5 percent.11 The bill’s sponsor stated that the bill would generate over 100,000 jobs in Haiti by more than tripling Haiti’s current assembly exports. However, the bill was not passed owing to the concern that it would give unfair advantage to third-country producers.

12. The Haitian Hemispheric Opportunity through Partnership Encouragement (HOPE) Act, a less ambitious alternative to the HERO Act, is currently under consideration by the U.S. Congress. The draft bill includes a more restrictive rule of origin than the HERO Act, requiring some components to originate in the United States or countries receiving U.S. trade preferences.

Labor costs and other factors affecting competitiveness

13. Haiti’s assembly sector benefits from low labor costs.Wages typically account for about 15 percent of total costs of assembly operations. Given Haiti’s wage costs stand at about one third of the average for DR-CAFTA countries, Haitian Producers may thus gain a competitive margin of about 10 percent on total costs.12 Also, Haiti’s labor market is flexible, imposing few restrictions on hiring and firing, as compared with neighboring and competitor countries (Table 2).

Table 2.

Haiti: Rigidity of Employment, 2004 1/

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Source: http://www.doingbusiness.org.

The International Finance Corportation measures labor regulations and their enforcement, and makes indices comparable across countries.

Average of the difficulty of hiring, rigidity of hours, and difficulty of firing indices.

Index based on the cost of firing in weeks of wages.

Figure 3.
Figure 3.

Haiti: Assembly Sector Wage Costs, 2002

(In U.S. dollars per hour)

Citation: IMF Staff Country Reports 2005, 205; 10.5089/9781451817607.002.A005

Source: USITC (2004).

14. Haiti’s investment code of 2002 offers ample incentives to the export industry.It provides several incentives: (i) duty free import of durable goods and materials necessary for the installation and operation of the enterprise; (ii) temporary admission of primary and packaging goods to be re-exported and exemption of the guarantee deposit in relation to the temporary admission of these goods; (iii) exemption on wage taxes and other internal direct taxes for a period of no more than 15 years; and (iv) exemption from verification fees.

15. Proximity to the U.S. market has also benefited Haitian producers by allowing them to respond quickly to changes in market conditions.13 However, to some extent this advantage is offset by high transportation and insurance costs, due to the country’s poor transportation infrastructure.

16. Low quality road and communications infrastructure increases costs of doing business in Haiti.14 For example, the port of Port-au-Prince is counted as the highest-cost port in the Caribbean.15 Also, Haiti’s network of roads is only a third of that in the Dominican Republic, and only 24 percent of all roads are paved. The cost of Haiti’s internet service, at US$130 dollars per 20 hours of use, is more than three times the average for DRCAFTA countries.

17. Port-au-Prince suffers from severe traffic and infrastructure congestion. Most of the existing assembly plants are concentrated around Port-au-Prince, and the shortage of high-quality industrial units has driven up the purchase and rental price of these facilities. This problem is being addressed by creating free trade zones and industrial parks that include on-site customs clearance and provide security and refuse collection services.

18. Energy costs are very high.For many years, electricity supply has been unreliable, forcing entrepreneurs to invest in costly local generating facilities. As a result, the cost of electricity is one of the highest in the region, averaging US$0.15 per kWh (Figure 4). According to the Global Competitiveness Report, Haiti ranks 101st out of 102 countries in an index measuring the quality of electricity.

Figure 4.
Figure 4.

Haiti: Cost of Electricity 1/

(In U.S. dollar cent per KWh)

Citation: IMF Staff Country Reports 2005, 205; 10.5089/9781451817607.002.A005

Source: Condo et. al (2004) and BRH.1/ Data for 2003 or latest available.

19. Financing costs are steep. Most entrepreneurs rely on financing by local banks or their own sources, and only a minority of entrepreneurs can obtain loans abroad.16 Long-term credit is not available, and lending rates are high, in part reflecting significant intermediation margins (Figure 5). As a result, total local financing to the sector in 2004 only amounted to 2.4 percent of total credit to the private sector.17

Figure 5.
Figure 5.

Haiti: Bank intermediation margins, 2004 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 205; 10.5089/9781451817607.002.A005

Source: IFS and Fund staff estimates.1/ Intermediation margin defined as lending minus deposit rate.

20. Qualified personnel is scarce.Although Haiti’s rate of unemployment remains high, technical and middle-management positions are hard to fill and firms must assume the cost of training unskilled staff. The problem is exacerbated by outward migration, especially by higher skilled workers.

21. Corruption and red-tape undermine competitiveness of Haiti’s firms.In 2004, out of 145 countries, Haiti was ranked as the country with the highest degree of corruption as perceived by business people and country analysts.18 Also, bureaucratic procedures slow the processing of imports—e.g., imports of machinery and equipment require involvement of five different government offices.

D. Conclusion

22. The survival of the Haitian assembly sector will depend on its ability to obtain preferential access to the U.S. market, and on reducing its production costs. Haiti’s apparel firms benefit from low wage costs, proximity to the U.S. market, and generous tax incentives. However, deep structural constraints will need to be addressed to draw on these advantages, including through investment in infrastructure and by reducing corruption.

Table 1.

Haiti: National Accounts at Current Prices 1/

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.

Based on the new national accounts published by the IHSI in April 2001. The national accounts have benefited from technical assistance by the Statistics Department.

Fund staff estimates for 2001-04

Table 2.

Haiti: National Accounts at Constant Prices 1/

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.

Based on the new national accounts published by the IHSI in April 2001. The national accounts have benefited from technical assistance from the STA department.

Table 3.

Haiti : Origin of Gross Domestic Product 1/

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.

There are serious problems with national accounts in Haiti including incomplete coverage, outdated activity surveys, and poor quality of raw data.

Table 4.

Haiti: Agricultural Production

(In thousands of metric tons)

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Source: Food and Agricultural Organization (FAO).
Table 5.

Haiti: Savings and Investment

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.

Fund staff estimates for 2001-2004.

Including grants.

Includes trust fund, publicly guaranteed capital, SDR allocation, and other unrequited earnings.

Includes monetary capital and net errors and omissions.

Table 6.

Haiti: Monthly Changes in the Consumer Price Index

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Sources: Statistics Department; Bank of the Republic of Haiti; and Fund staff estimates.
Table 7.

Haiti: Consumer Price Index

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.
Table 8.

Haiti: Changes in Consumer Prices by Category

(Percentage change in annual average index)

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Sources: Haitian Institute of Statistics; Bank of the Republic of Haiti; and Fund staff estimates.
Table 9.

Haiti: Prices of Selected Items

(In gourdes per unit)

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Sources: Haitian Institute of Statistics; and Bank of the Republic of Haiti.
Table 10.

Haiti: Selected Price Indicators

(Average for year ended September 30; base year, FY 1975/76 = 100)

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Sources: Haitian Institute of Statistics; and Fund staff estimates.

Data before 1980 were obtained by splitting the old consumer price index based on 1948. Before 1991 the index covered only the Port-au-Prince area and since 1992 the whole country.

Estimate based on calendar year data from the IMF World Economic Outlook.

IMF Information Notice System data rebased to FY 1990 = 100.

Table 11.

Haiti: Minimum Wage Rates

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Sources: Ministry of Social Affairs; Haitian Institute of Statistics; and Bank of the Republic of Haiti.

Last quarter of 1981=100. Deflated by consumer price index for Port-au-Prince until 1991. Deflated by an index covering the whole country beginning in 1992.

Table 12.

Haiti: Central Government Operations

(In millions of gourdes)

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Sources: Ministry of Finance and Economy; and Fund staff estimates

Includes statistical discrepancy.

Table 13.

Haiti: Central Government Operations

(In percent of GDP)

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Sources: Ministry of Finance and Economy; and Fund staff estimates

Includes statistical discrepancy.