Ayiti—Ann Pale Konsèy: Yon Revizyon Kout sou Kondisyon Mache yo

TRADE AND COMPETITIVENESS GLOBAL PRACTICE Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized BACKGROUND PAPER Systematic Country Diagnostic Haiti: Toward a New Narrative Haiti—Let’s Talk Competition Public Disclosure Authorized A Brief Review of Market Conditions Georgiana Pop Trade and Competitiveness Global Practice Haiti—Let’s Talk Competition A Brief Review of Market Conditions Georgiana Pop © 2016 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 19 18 17 16 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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All queries on rights and licenses should be addressed to the Publishing and Knowledge Division, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: © World Bank. Further permission required for reuse. Cover design: Bill Pragluski, Critical Stages, LLC. Contents Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2. Snapshot of Haiti’s Competition Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3. Analyzing Market Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Appendix: Price Comparison Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Boxes 2.1 The Impact of Competition on Growth, Productivity, and Job Creation. . . . . . . . . . 6 3.1 Herfindahl-Hirschman Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.2 Price Comparison Analysis: Are Prices Higher in Haiti?. . . . . . . . . . . . . . . . . . . . . . 14 3.3 Empirical Analysis of the Links Between Ownership Concentration and Economic Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figures 2.1 Business Risks Related to Weak Competition Policies (by component). . . . . . . . . . . 7 2.2 Competition Intensity and Extent of Market Dominance. . . . . . . . . . . . . . . . . . . . . . 8 2.3 GDP and Intensity of Local Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.1 Concentration Levels (HHI) in the 20 Most Important Haitian Product Markets (Based on Their Share of Total Import Value), 2011–2012. . . . . . . . . . . . . 12 3.2 Concentration Levels (HHI) of the Most Important Food Products in the Consumption Basket (Based on Their Share of Consumption Basket and Available Import Data), 2011–2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.3 Distribution of Groups and Associated Companies in the Highly Concentrated Markets, 2011–2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Tables 3.1 Customs Duty Treatment of Main Importing Groups. . . . . . . . . . . . . . . . . . . . . . . . . 18 A1 Products Included in Cross-Country Price Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . 21 A2 Fixed Effect Regression Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 A3 Regression Results Using Numbeo Data for 2010–2013, Including Two African Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 A4 Regression Results Using Numbeo Data for 2014 for 10 Products. . . . . . . . . . . . . . 25 A5 Regression Results Using Numbeo Data for 2014 for 7 Products. . . . . . . . . . . . . . . 25 A6 Regression Results Using Numbeo Data for 2014, Including Two African Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 iii A7 Fixed Effect Regression Results on Rice Price Analysis from GIEWS. . . . . . . . . . . . 27 A8 Fixed Effect Regression Results on Rice Price Analysis from GIEWS-Ministry of Economy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 A9 Regression Results on Rice Price Analysis from GIEWS, Including Two African Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 iv Haiti—Let’s Talk Competition Acknowledgments Georgiana Pop (Senior Economist, Competition Policy Specialist) led the preparation of this publication for the Haiti Systematic Country Diagnostic. The team consists of Tanja Goodwin (Private Sector Development Specialist) and Joaquin Zentner (Consultant). This note benefit ted from valuable guidance from Martha Martinez Licetti, Lead Economist and Global Lead for Competition Policy. Osongo Lenga (Program Assistant) provided support for the prepara tion of this document. The preparation of the Systematic Country Diagnostic was performed under the leadership of Raju Singh, Lead Economist and Project Leader, Haiti, Latin America and Caribbean. The report was co-authored by a team consisting of Edouard Nsimba, Principal Advisor on macroeconomic policies and economic modeling at the Ministry of Economy and Finance (MEF), Reginald Surin, Clifford Reginald Nau, Dominique des Hommes, Jimy Dorsainvil all Economists at MEF who provided valuable contributions and support to obtaining the required data used in this analysis. The team extends the appreciation to Assistant Professor Suresh Naidu, Columbia University (Department of Economics), Professor James A. Robinson, Harvard University (Department of Government), and Lauren E. Young, Columbia University (Department of Political Science) who provided data from three databases of contemporary firm ownership used in this note. v Abbreviations ACT Australian Capital Territory Branch of the Economic Society of Australia BEEPS Business Environment and Enterprise Performance Survey CEPR Centre for Economic Policy Research CIA Central Intelligence Agency CPI Consumer price index DFID Department for International Development FAO Food and Agriculture Organization (UN) GDP Gross domestic product GIEWS Global Information and Early Warning System (on Food and Agriculture) HELP Haitian Economic Lift Program HHI Herfindahl-Hirschman Index HOPE II Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2008 US Law HS Harmonized Coding System HTG Haitian Gourde (National currency) ICT Information and communication technology IFC International Finances Corporation IIP Infant industry protection LAC Latin American and Caribbean Countries MEF Ministry of Economy and Finance OECD Organisation for Economic Cooperation and Development PPP Purchasing power parity PSD Private Sector Development TEU Twenty-Foot Equivalent Unit UNCTAD United Nations Conference on Trade and Development WCO World Customs Organization WEF World Economic Forum vi Executive Summary This report presents an analysis of market conditions and market concentration in Haiti. Based on available import data (Ministry of Economy and Finance 2014) and available information on economic group1 connections, it also presents a limited analysis of the economic groups and companies that operate in Haiti, with a focus on highly concentrated markets. This analy sis found that Haitian markets are constrained by a mix of factors, including operational busi ness risks related to weak competitive conditions; highly concentrated markets which likely result in higher consumer prices; and a concentration of ownership in the most powerful firms, which seem to benefit from preferential treatment such as reduced customs duties. This report does not provide a comprehensive competition assessment of the Haitian markets, which would include analysis of other market structure elements such as barriers to entry, capacity constraints, vertical structure, and product differentiation. In particular, two elements of a comprehensive analysis are lacking: information regarding consumer welfare losses due to concentrated markets; and data describing the extent to which a small group of elites hold a significant share of Haiti’s wealth. Furthermore, the lack of detailed information about the persons and economic groups in Haiti receiving certain economic incentives or benefits; the tax instruments that provide reductions/exemptions; and yearly data on the tax revenue of the largest tax payers does not allow for a more comprehensive analysis of the main beneficia ries of preferential tax treatment, including an analysis of revenues, profits and net margins for the connected groups and firms. More detailed information about the groups’ and firms’ own ership beyond the data included in this paper would enrich the analysis herein and reveal whether a small number of powerful firms and individuals hold a disproportionate share of the country’s wealth. Effective competition is a key part of the development agenda: it encourages businesses to operate efficiently, ensures that firms can interact on a level playing field and fosters entrepre neurship activity. Reforms that open markets and remove anticompetitive regulation, such as the elimination of restrictions to the number of firms, statutory monopolies, price controls and discriminatory treatment against certain firms, lead to significant productivity gains. Weak competitive conditions and competition policies are perceived to contribute to a high degree of operational business risk for firms in Haiti. According to the Economist Intelligence Unit (2015), investors in Haiti perceive that they face one of the highest risks in doing business among other countries from the Caribbean region. These perceived risks are mainly related to a weak competitive environment, particularly: a) price controls and the control of other mar ket variables that limit the benefits that firms could obtain by competing effectively; and b) vested interests and discrimination against foreign firms that hinder innovation and preclude more efficient firms from gaining market share. According to other competition perception indicators, such as the Global Competitiveness Report of 2015–2016, countries with compara ble gross domestic product (GDP) per capita also rank better in terms of competition—even countries such as Sierra Leone and Myanmar. Based on available import data, the value of imported goods in highly and moderately concentrated markets represent roughly 70 percent of total imports. While highly Haiti—Let’s Talk Competition 1 concentrated markets2 are not unusual, given the size of Haiti’s economy, high market shares (above 40–50 percent of the market) may create risks of firm abusive behavior with a negative impact on consumers. Highly concentrated product markets (representing around 40 percent of the imports and with an Herfindahl-Hirschman Index (HHI) exceeding 2,500) include petroleum, food and consumer goods markets (telephone sets, motorcycles). The share of imported goods in moderately concentrated markets (with an HHI between 1,500 and 2,500) in the total imports, including food, consumer goods (electric generating sets, motor vehicles) and cement markets is also non negligible, reaching about 30 percent of total imports. Given that food and beverages represent around 50 percent of the consumption basket in Haiti, it is essential to closely monitor the effects that highly concentrated markets and associated challenges may have on consumer welfare. An analysis over time of prices for several food products in highly concentrated market suggests average prices in Haiti are approximately 35–77 percent higher than in other countries from the Latin American and Caribbean Countries (LAC) region, even taking into account differences in income levels, the cost to import containers, and import tariff levels.3 When some African countries4 are also included, prices for selected food products in Haiti are 35–50 percent higher than in other countries. Few groups and businessmen appear to operate in the highly concentrated markets with sig nificant market shares. According to a preliminary analysis, out of the 100 largest tax payers, 23 companies pertaining to the large Haitian groups operate in the financial sector—11 banks, 7 insurance companies and 4 micro finance institutions. It also appears that there may be a tacit agreement among families/groups to allocate markets among themselves. From a compe tition standpoint, these types of arrangements likely harm productivity and incentives to inno vate, given the lack of competitive pressure, while raising barriers for other firms to enter. In addition, estimations based on import data suggest that some groups benefit from reduced customs duty treatment for a large number of imported products. While many governments often provide a variety of subsidies and direct support to both public and private firms, specific measures that recurrently target certain firms may result in significant distortions to market competition. In Haiti, five economic groups operating in highly concentrated markets bene fited from 13 percent lower custom duties on average, with reductions ranging from 5 up to 22 percent (2011–2012). Companies that operate in highly concentrated markets and pay lower customs duties have on average 45.2 family links against an average for the elite families of 23.7 (Naidu, Robinson, and Young 2015). These companies belong to some of the most important Haitian economic groups.5 It is worth stressing that privileges for specific types of firms can damage long-term private sector development (PSD). They grant a comparative advantage only to certain firms, which is not necessarily associated with their efficiency. Additional research is warranted to complete the overview of market concentration and help understand the factors underlying existing market competition. 2 Haiti—Let’s Talk Competition Notes 1. In this paper, a group is understood as a group of companies with parent and subsidiary corpora tions that function as a single economic entity through a common source of control. Due to limited information, a formal definition of the group cannot be provided in such a way to include informa tion on actual ownership and direct or indirect control over these groups. In addition, the connec tion among groups through family links is not readily available for the purpose of this note. 2. The Herfindahl-Hirschman Index (HHI) is calculated based on the imports data provided by the Ministry of Economy and Finance of Haiti. In order to group the goods with similar character istics, the headings (4 digits) of the Harmonized Coding System were used. Based on the HHI, the concentration levels are classified as follows: 1) Unconcentrated Markets: HHI below 1,500, 2) Moderately Concentrated Markets: HHI between 1,500 and 2,500, 3) Highly Concentrated Markets: HHI above 2,500 (Horizontal Merger Guidelines 2010; U.S. Department of Justice and Federal Trade Commission). 3. Different methods and data sources were used in the analysis. The following products were selected for the cross section empirical analysis: chicken, eggs, bread, cheese, orange, potato, rice, apple, water, lettuce. Comparator countries from the LAC region where price data were available for the same products include: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Guatemala, Guyana, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay. In the panel data analysis, a subset of products were used as follows: chicken, eggs, bread, cheese, orange, potato, rice. These were the products that were available in Numbeo database and in the Ministry of Economy database. Comparator countries from the LAC region where price data were available for the same products include: Brazil, Chile, Colombia, the Dominican Republic, Guatemala, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, República Bolivariana de Venezuela. 4. Comparator countries from the Africa region where price data were available for the same products include: Kenya and Mauritius. 5. The links from families to firms were made based on: a commercial dataset called Orbis produced by the Bureau van Dijk corporation (https://orbis.bvdinfo.com/version-2014812/home.serv?product =orbisneo.); a database of Haitian firms assembled by a nonprofit organization called Haiti Building Markets after the 2010 earthquake (http://haiti.buildingmarkets.org/en_af/supplier-search); and an online database of firms registered with the Haitian Minister of Commerce and Industry (http:// registre.mci.gouv.ht/). Haiti—Let’s Talk Competition 3 1. Introduction Haiti is the poorest country in Latin America and one of the poorest countries in the world. After the earthquake in 2010, the GDP per capita rose from US$669 in 2010 to US$820 in 2013. However, the country still has the lowest GDP per capita in Latin America and Caribbean region, far from Nicaragua who had more than twice Haiti´s GDP per capita (US$1851) in 2013. In Haiti, half of its population (roughly 5 million) lives on less than US$1 per day, and approximately 80 percent live on less than US$2 per day. In addition, less than 30 percent of the households have access to electricity overall and only about 5 percent in the rural areas (World Bank Indicators 2014). More than half of the Haitian economy is based on the services sectors. In 2013, the service sector represented roughly 56 percent of the GDP (banking, electricity, telecom), agriculture (coffee, mangoes, cocoa, sugarcane, rice, corn, sorghum, wood, vetiver) represented 24.1 percent, and the industrial sector (textiles, sugar refining, flour milling, cement, light assembly using imported parts) represented 20 percent (2013 CIA World Factbook). The growth of agricultural production has been stagnant. Production of rice, maize, and chick ens has remained constant over the past 50 years despite population growth, leading to large imports of these three products. On the other hand, Haiti’s exports of cocoa beans have regis tered consistent growth—compounded annual growth rate of 9 percent between 2003 and 2009. Mango, mangosteen, and guava exports occupied third place in the exports commodity rank. Rice production (80 percent of rice consumed is imported) has been compromised by production difficulties and poor trade policies. Many factors have contributed to the decline of the agricultural sector, including continuing fragmentation of landholdings, low levels of agri cultural technology, migration out of rural areas, insecure land tenure, a lack of capital invest ment, high commodity taxes, low productivity of undernourished farmers, animal and plant diseases, and inadequate infrastructure (Malik 1989). The manufacturing sector, primarily based on textiles, plays a key role as the country’s single largest economic sector. Haiti has over 30 textile factories and employs over 30,000 workers. Haiti benefits from privileged access to the U.S. market through the HOPE and HELP laws. 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. In 2012, the HOPE II/HELP Acts related exports constituted 42 percent of all Haitian exports (US$ 303 million). There has also been an increase in the assembly of electronic products (Center for Facilitation of Investments 2013; World Bank Group 2013). The markets in the service sector have been developing at different paces. The Haitian banking system is still vulnerable to systemic credit risk as well as restrictions on the availability of capital. According to the US Department of State, three major banking institutions hold 83 percent of the total banking sector assets, valued at HTG 170 billion in September 2012 (nearly US$4 billion—more than one third of the GDP). In the telecom sector, the launch of services by Natcom in late 2011 introduced a competitive boost, though this has been set back to some degree by the Digicel Group’s acquisition of the number two player Voilà, and the integration of the latter’s mobile network in late 2012. The collapse of the third operator HaiTel 4 Haiti—Let’s Talk Competition in mid-2013 left Digicel with about 85 percent market share of subscribers. Haiti’s structure of cost of transport by sea is not competitive compared to similar services in the Caribbean region—the costs of loading and unloading a standard container at Port-au-Prince are by far the highest of the Caribbean ports. According to TranSystem, the total cost by TEU was US$595 by Haitian private operators at Public Berths, and US$445 in Haiti Terminal Varreux, compared to US$121 in Puerto Rico, US$109 in the Dominican Republic, US$109in Port the Point Lisas in Trinidad and Tobago, US$156 in port of Spain in Trinidad and Tobago, and US$154 in Miami (World Bank 2013).At the same time, high airport taxes are levied with the aim of obtaining resources for developing air transport infrastructures. The roads network is in poor condition—the density of Haiti’s road network (4,000 km in 2000) and the small percent age of asphalted roads (24 percent of the network) are among the lowest of the region. Haiti suffers from a lack of services and infrastructure in the field of information and communication technologies (ICTs). There are 60 telephone subscribers per 100 inhabitants, a much lower rate than the average figure of 106 percent for Latin America and the Caribbean. Internet users represent only about 8.5 percent of the population (World Bank 2013). Finally, the cost of elec tricity is among the highest in the region—US$ 0.32/KwH in 2011 compared to US$0.18 in Nicaragua, US$0.17 in the Dominican Republic and US$0.06 in Bangladesh (IFC 2011), and the supply of electricity covers only a small proportion of the country, with rural areas partic ularly underserved (World Bank 2013). Haiti—Let’s Talk Competition 5 2. Snapshot of Haiti’s Competition Conditions Effective competition is a key part of the development agenda: it encourages businesses to operate efficiently, ensures that firms can interact on a level playing field, and fosters entrepre neurship activity (World Bank Group 2012). Effects of opening markets to competition are positive. Although government intervention is warranted in some industries that exhibit substantial market failures, experiences from many developing countries show that the benefits of competition, at a national level, are significant and overwhelming in terms of economic efficiency and productivity gains. Firms typically acquire many of their inputs—transport, energy, telecommunications, financial services—in local markets. If these upstream markets lack competition, goods and services needed for production are not priced competitively. As a result, firms in countries that lack competition may be less competitive than their foreign rivals and domestic GDP growth may suffer. Reforms that open markets and remove anticompetitive regulations, such as the elimination of restrictions on the number of firms, statutory monopolies, price controls and discriminatory treatment against certain firms, lead to significant productivity gains (see box 2.1). Box 2.1 The Impact of Competition on Growth, Productivity, and Job Creation The economic benefits from competition are well documented. Firms operating in a competitive environment are more likely to innovate (Bassanini and Ernst 2002; Bloom et al. 2011) and to increase their productivity (Aghion and Griffith 2005 or Acemoglu et al. 2006). Competition boosts investment (Alesina et al. 2005), generates employment and ultimately speeds up eco nomic growth and improves overall welfare. Competition in input (upstream) markets, such as transportation, financial services, energy, telecommunication and construction services, is a key driver of efficiency and productivity growth in downstream sectors—the users of these inputs. Empirical evidence strongly supports the positive effects of competition policy enforcement on productivity growth (Buccirossi et al. 2009 or Voigt 2009). Tough enforcement against the practices of cartels, based on well-designed anti-cartel laws, for example, constitutes an effec tive tool to reduce negative impact of anticompetitive behavior (Alexander 1994; Symeonidis 2008). Increased international competitiveness—and therefore more favorable terms of trade—is another important and positive effect associated with increased competition in domestic markets. Finally, consumers benefit from lower prices, direct savings and improvements in the variety and quality of goods and services. Consumers also find enhanced job opportunities and additional income as investors. Anti-competitive practices also result in welfare losses for the economy as a whole. Price-fixing agreements among competitors impose significant costs on society. Connor (2010) examines studies and judicial decisions on 381 cartelized markets worldwide and estimates a long-run median overcharge of 23.3 percent of prices above competitive levels. Estimations from the European Commission (2008) suggest that average productivity would fall by 13 percent in the presence of market sharing cartel agreements among member states. A recent study of the 6 Haiti—Let’s Talk Competition Box 2.1 The Impact of Competition on Growth, Productivity and Job Creation (continued) international market for coffee beans finds that the cartel’s breakdown explains 49 percentage points of the 75 percent drop in the real coffee price between 1988 and 2001 (Igami 2015). Apart from increasing the cost of goods and services to conduct business, cartels are also associated with low labor productivity and reduced incentives to innovate (Broadberry and Crafts 2001; Evenett, Levenstein, and Suslow 2001; Symeonidis 2003). International experience shows that the intro duction of comprehensive national competition policies can bring substantial economic gains. Estimates suggest that competition policy reforms boosted Australia’s GDP by at least 2.5 percent or $20 billion due to their effect on increased productivity and lower prices during the 1990s. FIGURE 2.1 Business Risks Related to Weak Competition Policies (by Component) 12 10 8 6 4 2 0 Jamaica Dominican Republic Panama Trinidad and Tabago Paraguay Haiti Guatemala Honduras Nicaragua Price controls Discrimination against foreign companies Source: Economist Intelligence Unit 2015. Unfair competitive practices Vested interests/cronyism The Haitian markets remain constrained by a mix of factors that limit private sector expansion and competitiveness, including the emergence of quasi monopolies (World Bank 2013).1 Weak competitive conditions may contribute to a high degree of operational business risk for firms in Haiti. This is likely detrimental to the Haitian economy. According to the Economist Intelligence Unit’s operational risk model 2015, investors in Haiti perceive that the risks in doing business related to competitive conditions and competition policies are higher than the risks in other countries from the Caribbean region and only comparable to those in Guatemala, Honduras, and Nicaragua (figure 2.1). These risks are mainly related to: a) 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; and b) vested interests and discrimi nation against foreign firms that hinder innovation and preclude more efficient firms from gaining market share. Haiti—Let’s Talk Competition 7 Other competition perception indicators also rank Haiti below a group of countries with a similar GDP per capita. For instance, according to the Global Competitiveness Report of 2015–2016,2 when compared with other countries, Haiti ranks low in terms of competition: Haiti ranks 137th out of 148 countries in terms of intensity of local competition, ranks 139th in terms of extent of market dominance (figure 2.2), and ranks 139th in terms of effectiveness of competition policy (a high rank indicates poor performance). In addition, there is a high correlation between the intensity of local competition and the level of income. For example, countries such as Sierra Leone or Myanmar have better competition indicators in terms of intensity of local competition than Haiti. (figure 2.3). FIGURE 2.2 Competition Intensity and Extent of Market Dominance a. b. 6 5 4 3 2 1 0 Honduras Jamaica 6 5 4 3 2 1 0 Honduras Jamaica Nicaragua Panama Dominican Guatemala Nicaragua Panama Dominican Guatemala Haiti Paraguay Trinidad and Tobago Republic Haiti Paraguay Trinidad and Tobago Republic Intensity of Local Competition [1 = not intense at all; 7 = extremely intense] Source: WEF, Global Competitiveness Report 2015–2016. Extent of Market Dominance [1 = dominated by few business groups; 7 = spread among many firms] FIGURE 2.3 GDP and Intensity of Local Competition GDP per capita (thousand USD) 120 120 100 100 GDP (billion USD) 80 80 60 60 Haiti 40 40 Haiti 20 20 0 0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 Intensity of local competition (7 = Highly competitive market) 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 Intensity of local competition (7 = Highly competitive market) Source: WEF, Global Competitiveness Report 2015–2016. 8 Haiti—Let’s Talk Competition Notes 1. An analysis by the IFC (“Economic Integrated Zone, Market Analysis ”, 2011) lists other factors having a negative impact on Haiti’s business climate: (a) Cumbersome procedures for setting up and registering firms; (b) The lack of a formal system of land titles and property registration; (c) Over-complex customs administration; (d) The prohibitive cost and limited availability of ser viced land, and lack of public infrastructure and services; (e) Absence of a modern construction code; (f) Lack of efficient mechanisms for international arbitration and mediation; (g) Insufficient guarantees for the protection of investors’ private property rights; and (h) Fragmented and dysfunc tional legal, regulatory and institutional frameworks for free zones, industrial parks and investment in Haiti. 2. http://www.weforum.org/reports/global-competitiveness-report-2015-2016. The ranking is based on surveys of investors’ perceptions of business environment features. Haiti—Let’s Talk Competition 9 3. Analyzing Market Structure The market analysis aims at detecting market characteristics that favor the existence of market power and its potential risks in terms of abusive practices. As such, the market concentration analysis provides a first screening to detect the existence of market power. For example, if the market is not concentrated, the existence of market power is less likely. However, highly con centrated markets do not necessarily imply the existence of market power. This is true espe cially in the case of small economies, although there may be several challenges that need to be taken into account. Therefore, the market concentration analysis should be complemented with an analysis of market characteristics and market dynamics (such as barriers to entry, capacity constraints, vertical structure, demand elasticity, switching costs, product differentiation) that establish whether firms can or cannot exercise market power in a specific market. Due to limited availability of data and considering the limited time frame available, this report focuses only on analyzing market concentration. It is complemented by an analysis of the role of economic elites in the relevant markets. Method The analysis of product market concentration is conducted using the Herfindahl-Hirschman index (HHI). The HHI is a commonly accepted measure of market concentration and requires market share estimates for each firm in the market. It is calculated by squaring the market share of each firm competing in a market, and then summing the resulting numbers. The HHI is preferred to other concentration measures (such as concentration ratio) because it accounts for the heterogeneity in the size of the firms in the market, giving more weight to larger firms (box 3.1). The HHI is calculated using the import data from the Harmonized System (HS) provided by the Ministry of Economy and Finance of Haiti. The HHI calculations are based on headings that group imports of related products under the Harmonized Coding System (HS), disaggre gated at four-digit level.1 The HS is a multipurpose international product nomenclature devel oped by the World Customs Organization (WCO). The system is used by more than 200 countries and economies as a basis for their Customs tariffs and for the collection of interna tional trade statistics. It comprises about 5,000 commodity groups, each identified by a six digit code, arranged in a legal and logical structure, and supported by well-defined rules to achieve uniform classification. In order to focus on the most important product markets, goods are grouped by HS headings, taking into account their share of total customs value. In addition, the HHI was estimated for roughly 70 percent of the food products included in the consumption basket (as presented in the 2004 CPI), selected based on their share (more than 1 percent) in the basket, and data availability. This provides a more detailed overview of which product markets are highly concentrated in order to demonstrate the potential welfare impli cations for consumers, especially the poorest ones. Further, a mapping of the economic groups2 operating in the highly concentrated markets is based on an analysis of the owners of the hundred largest firms.3 The analysis of the links from families to firms was made using three databases of contemporary firm ownership provided by 10 Haiti—Let’s Talk Competition Box 3.1 Herfindahl-Hirschman Index The Herfindahl-Hirschman index (HHI) is calculated as follows: HHI = s12 + s22 + s32 + ... + sn2 (where si is the market share of firm i, and i ranges from 1 to n). The HHI index can range from close to zero to 10,000. The closer a market is to being a monopoly the higher the HHI index. If, for example, there was only one firm in an industry (a monopolist), that firm would have 100 percent market share, and the HHI index would be equal to 10,000 (1002). Conversely, if there were thousands of firms competing in an industry, each firm would have nearly 0 percent market share, and the HH index would be close to zero. Thus, a near to zero HHI index indicates nearly perfect competition. For the purpose of this analysis, the concentration levels based on the Horizontal Merger Guidelines (U.S. Department of Justice and Federal Trade Commission) were used. As such, three HHI levels help identify the characteristics of product market concentration, as follows: • Unconcentrated Markets: HHI below 1,500. • Moderately Concentrated Markets: HHI between 1,500 and 2,500. • Highly Concentrated Markets: HHI above 2,500. Source: Horizontal Merger Guidelines 2010. U.S. Department of Justice and Federal Trade Commission. a team of researchers from the Columbia and Harvard Universities. The first, a commercial dataset—Orbis, produced by the Bureau van Dijk corporation—has information on 626 unique families that own 345 Haitian corporations; however, the majority of these corporations are not importing firms.4 The second is a database of Haitian firms assembled by a nonprofit organization called Haiti Building Markets after the 2010 earthquake to encourage aid agen cies to buy goods and services from local firms.5 This data includes information on more than 3,400 firms owned by 1,951 unique families. The third database is an online database of firms registered with the Haitian Minister of Commerce and Industry.6 Analytical Findings According to available information, Haiti imports more than 70 percent of all the goods sold in the domestic market (U.S. Department of State 2013).7 Haiti’s imports mainly include petroleum, cereals, telecommunications equipment and electrical machinery, sound record ers, television recorders, motor vehicles, cement, iron and steel, oils and waxes, computers, plastic products, edible preparations, dairy, eggs, honey, sugars and sugar confectionery, wood and articles of wood, beverages, and preparations of cereals, flour, starch, milk, etc. Based on available import data, the value of imported goods in highly and moderately concen trated markets represents roughly 70 percent of total imports. Considering the most impor tant product markets based on their share of total import value, highly concentrated product markets (representing around 38 percent of the import value and with an HHI exceeding Haiti—Let’s Talk Competition 11 FIGURE 3.1 Concentration Levels (HHI) in the 20 Most Important Haitian Product Markets (Based on Their Share of Total Import Value), 2011–2012 Unconcentrated HHI<1500 Moderately concentrated 2500>HHI>1500 Hightly concentrated HHI>2500 Articles for the conveyance or packing of goods New pneumatic tyres, of rubber Motor cars Motor vehicles for the transport of goods Cane or beet sugar and chemically pure sucrose Food preparations not elsewhere specified or included. Electric generating sets and rotary converters Wheat or meslin flour 2011 Motorcycles 2011 Meat and edible offal Rice Cement Petroleum oils and oils obtained from bituminous minerals Motorcycles 2012 Wheat or meslin flour 2012 Soups and broths and preparations Bread, pastry, cakes, biscuits and other bakers’ wares Pasta, couscous, whether or not prepared Milk and cream, concentrated Palm oil and its fractions Animal or vegetable fats and oils and their fractions Telephone set 1.8% 0.8% 1.7% 1.5% 0.7% 1.% 0.8% 1.8% 0.8% 2.5% 7.8% 3.9% Product imports value as a share of total imports value 24% 1.4% 1% 0.7% 2.3% 2.9% 0.8% 2.6% 0 1,000 2,000 3,000 4,000 5,000 6,000 HHI Source: Ministry of Economy and Finance 2014, Haiti’s Import Database. Note: Each product is identified by a four-digit Harmonized System (HS); darker shade is 2011 and lighter shade is 2012. 2,500) include petroleum, food and consumer goods markets (telephone sets, motorcycles). The share of imported goods in moderately concentrated markets (with an HHI between 1,500 and 2,500), including food, consumer goods (electric generating sets, motor vehicles) and cement markets, represents about 28 percent of the total import value (figure 3.1). While the concentrated nature of the Haitian domestic market may not appear problematic per se, it nevertheless creates several challenges. Apart from difficulties in competing interna tionally with buyers and investors due to limited opportunities for economies of scale, power ful firms and Government regulations could distort market development and generate barriers to entry. Typically, the existence of a dominant player with market share close to a monopoly position (100 percent of the market) entails a risk of abusive behavior, such as exclusionary business practices, particularly in markets where the possibility of entry is limited either by structural or regulatory barriers.8 For example, a strengthened dominant position in the mar ket, through increased market share above 40–50 percent of market over several years com bined with increased financial power could allow a dominant firm to block entry of another company, prevent or delay the development of products/services over a period of time, and/or drive efficient competitors out of the market through anticompetitive business practices. On the other hand, in the absence of regulatory or legislative barriers, the threat of entry is likely to be real and constant. It is also likely to be effective in disciplining abusive market behavior. This is because the stakes for the incumbent operators are very high. One consequence of con centration is that successful new entry may not mean that incumbents simply lose market share; it may mean they are forced to abandon the market altogether, if they do not become 12 Haiti—Let’s Talk Competition more efficient and adjust their services or products. This is particularly relevant in Haiti, where the groups belonging to the economic elite seem to have preferred to invest in markets that offered opportunities for gaining monopoly positions. These, together with difficulties related to company registration, created delays for some companies to enter the Haitian market—for example, it took Digicel almost a year to become fully operational. Given that food and beverages represent around 50 percent of the consumption basket,9 it is important to closely monitor the effects that highly concentrated product markets may have on consumer welfare. The risk of potential anticompetitive behavior given high market con centration may translate into high prices for consumers, which may be particularly damaging for the half of the Haitian population that lives on less than US$2 per day. An alternative esti mation of the HHI based on the most important food and beverages basket included in the 2004 consumption basket indicates that 45.5 percent of the most important food product mar kets included therein are highly concentrated (edible oil, bread, goat meat, beef, fresh fish, banana, corn, milk), 45.5 percent are moderately concentrated (rice, chicken, refined and raw sugar, cola), and 9 percent are not concentrated (dry peas, corn) (figure 3.2). FIGURE 3.2 Concentration Levels (HHI) of the Most Important Food Products in the Consumption Basket (Based on Their Share of Consumption Basket and Available Import Data10), 2011–2012 Unconcentrated HHI<1500 Moderately concentrated 2500>HHI>1500 Dry peas 2012 Ground corn in 2011 Refined sugar Raw sugar Cola 3.89% 1.79% 1.04% 1.41% Percentage of the CPI 1.34% Hightly concentrated HHI>2500 Chicken Rice Dry peas 2011 Bread Goat meat Ground corn 2012 Edible oil Unsweetened evaporated milk Banana Fresh fish Beef 1.83% 7.53% 3.89% 2.34% 2.31% 1.79% 2.35% 1.43% 1.84% 1.92% 2.13% 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 HHI 8,000 9,000 10,000 Source: Ministry of Economy and Finance 2014, Haiti’s Import Database and Haiti’s CPI 2004. Note: Each product is identified by a four-digit Harmonized System (HS); darker shade is 2011 and lighter shade is 2012. Haiti—Let’s Talk Competition 13 Analysis suggests that the concentrated nature of the Haitian market is leading to higher consumer prices. An analysis over time of prices for several food products in highly concentrated market seems to suggest that on average, prices in Haiti are approximately 35–77 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 (see box 3.2). When some African countries11 are also included, prices in Haiti are approximately 35–50 percent higher than in other countries (see the appendix for the detailed empirical analysis). Box 3.2 Price Comparison Analysis: Are Prices Higher in Haiti? The price comparison analysis uses three data sources to explore whether food prices in Haiti are higher than other countries from Latin America and the Caribbean region (as well as North America): (a) “Numbeo,” an online database of user contributed data on cost of living, (b) Ministry of Economy and Finance of Haiti and (c) FAO GIEWS Food Price Data. The first database applies a common methodology in gathering price data across countries, thus strengthening the comparability of price information used in this analysis. However, since price data for Haiti is only available for 2014 at “Numbeo,” this only allows for cross-section analysis.a Data provided by the Haitian Ministry of Economy and Haiti on Haitian prices for 2010–2013 is combined with “Numbeo” data for the panel data analysis.b Finally, for additional robustness, the analysis is replicated with prices from the FAO GIEWS database for the available food product (rice). The baseline empirical specification for the price comparison analysis follows the equation: Ln(Priceijt) = β1GDPit + β2Ln(Xit) + β3Haiti + ηj + δt + εijt where: i = country; j = product; t = year; Xit = GDP per capita, cost of imports, and duties imports (as control variables); and ηj = product fixed effects. The Haiti dummy variable captures the rel ative price levels in Haiti compared to the average across other countries after adjusting for the differences in per capita GDP PPP, import costs, customs duties, and product type as well as time-specific effects. The food products were selected based on availability across databases, the relevance in the Haitians consumption basket and product characteristics. For example, products were selected that are relatively similar (or homogeneous) across countries in order to minimize the differences associated with product differentiation. a. The analysis used the following products: chicken, eggs, bread, cheese, orange, potato, rice, apple, water, lettuce. Comparator countries from the LAC region where price data were available for the same products include: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Guatemala, Guyana, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay. Comparator countries from the Africa region where price data were available for the same products include: Kenya and Mauritius. b. The following products were selected for the panel data analysis: chicken, eggs, bread, cheese, orange, potato, rice. These are the products that are available in Numbeo database and in the Ministry of Economy database. Comparator countries from the LAC region where price data were available for the same products