Etid debaz sou Ekonomi Enfòmèl nan rejyon Afrik, Karayib, ak Pasifik yo - Ka Ayiti

BASELINE STUDY OF INFORMAL ECONOMY IN THE AFRICAN, CARIBBEAN, AND PACIFIC REGIONS The case of Haiti December 2022 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti 1 2 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti Baseline Study of Informal Economy in the African, Caribbean, and Pacific Regions The case of Haiti Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti 3 CONTENTS Acronyms 5 Executive Summary 6 Chapter One: Background and Context 11 1.1 Introduction 11 1.2 Baseline Study Objectives 12 1.3 Methodology 12 1.4 Limitation of the Report and Data Gaps 13 Chapter Two: Status of the Informal Enterprises in Haiti 14 2.1 Informal Sector Scope and Contributions to the Economy 14 2.2 Assessment of Informal Enterprise and Key Drivers 16 2.3 Landscape of Current and Past Efforts to Support Informal Enterprises Formalization 21 Chapter Three: A Case Study of Informal Sub-sector 29 3.1 Information, Communication and Technology (ICT) 29 3.2. SWOT Analysis of the ICT Sub-sector 30 3.3 ICT and Implications for Enterprise Formalization in Haiti 31 3.4 The Garment Industry as a Pilot Case Sector 33 Chapter Four: Possible Areas of Interventions 41 4.1 Introduction 41 4.2 Possible interventions to support enterprises transition towards sustainable growth and formalization 44 4.3 Multi-year Work Plan 45 4.4 Conclusions 45 References 46 Annexes 48 Boxes Box 1: The operating environment is very challenging for Microfinance in Haiti 19 Box 2: EU’s Project on Binational Cooperation in favour of Haitian-Dominican Relations 27 4 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti ACRONYMS ACME Association for Micro-Enterprise Corporations ADIH Association of Industries of Haiti AGOA African Growth and Opportunity Act ANIMH National Association of Microfinance Institutions of Haiti ATH Haitian Tourism Association BNC Banque Nationale De Crédit BRH Bank of the Republic of Haiti BTI Business Technology Innovation CAD Computer Aided Design CAM Computer Aided Management CBRH Central Bank of the Republic of Haiti CIF Centre for Investment Facilitation DGI Direct General of Taxes EBA Everything But Arms EPAC Economic Policy Analysis Centre ESC Enterprise Service Centres EU European Union FDI Industrial Development Fund FGDs Focus Group Discussions FINCA Foundation for International Community Assistance GDP Gross Domestic Product HDI Human Development Index HELP Haiti Economic Lift Program Act HOPE Hemispheric Opportunity through Partnership Encouragement IADB Inter-American Development Bank ICT Information, Communication and Technology IDB Inter-Development Bank IFC International Finance Corporation ILO International Labour Organization IMF International Monetary Fund LAC Latin America and Caribbean Region MCI Ministry of Commerce and Industry MEDA Mennonite Economic Development Associates MIMIC Multiple Indicators Multiple Causes MINUSTAH United Nations Stabilization Mission in Haiti MSMEs Micro Small and Medium Enterprises NBER National Bureau of Economic Research NE2P Northeast Second Partnership NGO Non-Governmental Organization OACPS Organization of African, Caribbean and Pacific States OGITH General Independent Organization of Haitian Workers ONA Organizational Network Analysis PITAG Programme d’Innovation Technologique pour l’Agriculture PPP Public Private Partnership PSME Micro Enterprise Support Programme SEEP Small Enterprise Education and Promotion Network SLGP Small Loans Guarantee Programme SONAPI “Société Nationale des Parcs Industriels” SWOT Strengths, Weaknesses, Opportunities, and Threats UNDP United Nations Development Programme USA United States of America USAID United States Agency for International Development VSLA Village Savings and Loan Associations WRAP World Responsible Apparel Production Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti 5 EXECUTIVE SUMMARY Haiti’s informal sector constitutes the hub around which the economy’s future growth path rotates given the primacy of the sector for employment creation, poverty reduction and economic growth. The sector currently accounts for over 90 per cent of national employment. Haiti has a large, vibrant and heterogeneous informal sector traversing the primary, manufacturing and service sectors. The informal sector consists of tens of thousands of individuals and micro, small and medium scale enterprises (MSMEs). The size of the informal sector in Haiti is estimated at US$33 billion, which is about 55.1 per cent of the nation’s GDP. Specific objectives of the study: CARIBBEAN HAITI Port au Prince Examine the factors propagating informal enterprises Study methods: Assess the performance of past government efforts Offer practical solutions to effectively transform informal enterprises Develop a four-year action plan to support the transformation and formalization efforts in the country A qualitative research method was adopted for the study. First, an in-depth interview of individuals spread across the informal sector ecosystem was undertaken using well-structured interview guide. Second, Focus Group Discussions were adopted across select groups operating in the informal sector. Third, based on the responses from the interviews and Focus Group discussions, we used a case study methodology to identify a key informal sector for the purpose of intervention by the UNDP/ILO. Finally, a detailed multi-year, budgeted work plan (actions plan) for the implementation of the transformation of the chosen informal sector activity in the country over a period of four years was prepared as guide to the proposed intervention. 6 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti Main findings: The SWOT analysis of the informal sector reveals a sector that is characterized by strengths ranging from a young digitally motivated labour force to an economy that is adequately connected to external markets. The main weaknesses include the low level of capacity development, low level of digital penetration, lack of access to credit by informal enterprises and lack of inclusive safety nets. The main opportunities consist of the vast potentials for exploitation of the opportunities in agriculture and the fishing industry, tourism, financial technology and trade. The major threat remains political and macroeconomic instability. Drivers of informaility The drivers of informality in the economy are classified as macro, micro and sectoral issues for the purpose of this study. LEVELS Macro Micro Sectoral The macro issues include conflicts, climate disasters, unemployment, poverty, lack of training for economic actors in the informal sector, an economy that is biased towards primary production, and low level of economic and social development. Specific intervention areas The micro drivers are the overall lack of information and access to information, which feeds into and weakens the formalization efforts, complexity of the registration procedure for enterprises to formalize and stifling bureaucratic interference with the formalization process that breeds corruption. The lack of supervision of economic actors, lack of incentives from government and high-handedness of public officials in dealing with informal sector operators in the informal sector tend to reinforce the apathy towards formalization by enterprises in the sector. To shed light on why most attempts at formalization failed in the past, we summarized our findings under specific outputs for ease of analysis. Intervention area 1: Regulation, regulatory incentives & advocacy. Some of the recent regulatory activities by the Ministry of Trade and Industry (MCI) in recent times include the reduction of the business registration period to less than or equal to three days for a sole proprietorship, the operationalization of the one-stop shop within the MCI, and the establishment of an information platform on social networks. The MCI also offers some technical and financial assistance to MSMEs. Government has established some initiatives in conjunction with other stakeholders. These include the Entrepreneurship Support Programme (PAPEJ), the Graduate Support Programme, and the Microenterprise Support Programme (PSME) covering three areas: formalization, technical assistance and financial assistance and the Women's Entrepreneurship Support Programme. These programmes have met with varying degrees of success. Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti 7 Intervention area 2: Financial Sector and Innovation. Most informal sector actors do not have access to loans for business take-off and expansion. Microfinance remains the major player, as small firms cannot access loans from banks because they are not formalized and cannot afford to meet the loan terms and requirements. Some of the interventions in the financial sector that have proved helpful include the HAITI MSME USAID initiative aimed at supporting Haiti’s microfinance and SME sector, the IFC /IDA-PSW Small Loan Guarantee Programme (SLGP), and the new Act by the Central Bank of Haiti which enables it to supervise and regulate microfinance institutions. Recently, the Leasing Haiti project has also come on board paving the way for small firms that cannot afford loans to buy equipment. Implementing new financial products, such as Nano and digital loans, digital repayment of microloans, or e-payment of salaries could be a commercial success in a context of high-unmet financial demand. Intervention area 3: Capacity Building and Promotion of Technology. Capacity building for the informal sector in Haiti focuses mainly on three areas – building the capacity of the staff of MCI who handles MSME issues, the operators (incubators, aggregators and others) in the informal sector, and owners and employees of informal enterprises who carry out daily operations. Some of the interventions in this area in the past include, the MINUSTAH project aimed at advancing employment opportunities and economic initiatives in Haiti, the BEL Initiative programme, which provides training in entrepreneurship and The Centre for Entrepreneurship and Leadership in Haiti (CEDEL), which provides services such as incubation, acceleration, access to investments and business consulting. Others include the Banj which, as incubator, rents out space for start-ups to generate revenue, the Haiti start up Talent that promotes Haitian entrepreneurship and funding for SMEs and the Caseli programme which supports SMEs and connects them with funding, training, and business education. Intervention area 4: Sector Specific Collective Action. The Constitution of Haiti guarantees the freedom to associate. So, technically, the government supports unionization. However, the percentage of the labour force in the formal sector in Haiti is about 13 per cent. Understandably, the ITUC and its union partners tend to focus their labour movement efforts on activities in the formal sector. Other associations such as the Haitian Manufacturers Association (ADIH), Haitian Tourism Association (ATH), Association for Micro-Enterprise Corporations (ACME), and the Centre for Investment Facilitation (CIF) offer channels to identify business partners and engender collaboration. NE2P has facilitated micro-enterprise grants to small businesses in Little Haiti and undertaken a number of technical assistance initiatives in the microenterprise sector. Better Work Haiti (BWH) is an ILO endeavour jointly hosted with the IFC. Its employment intensive investment programme attempts to strengthen local technical capacity, address employment creation and income generation for the most vulnerable who are mostly in the informal sector. Overall, past efforts at formalization failed because they were grossly insufficient. Most stakeholders are of the view that the state security apparatus failed to protect the sector while decision makers and political actors have vested interest in selected informal enterprises. Decision outcomes in favour of the wealthy who control the state prevents any form of change. Policy pronouncements are not often accompanied by concrete actions. The process of creating a formal business exists in the Haitian commercial code but lack of awareness by economic agents operating in the Haitian informal economic landscape slows down all forms of formalization. Tax regimes pose problems to newly formalized businesses and prevent new businesses from formalizing. Majority of participants in the baseline study on the informal sector argue that in spite 8 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti of recent efforts by government and development partners, the sector is still largely neglected. There is no incentive for newly formalized enterprises. There is no funding or subsidy programme for newly formalized enterprises. Security climate is precarious and worsens business climate, which prevents microenterprises to thrive and grow. Some of the practical solutions emerging from stakeholders include the following. First, the starting point of the transformation and formalization of the Haitian informal sector is improving the security climate, promoting transparent and accountable governance, building ability of informal enterprises to respond and adapt to shocks in crisis times, and enlarging the social safety nets of informal sector operators. Second, facilitating informal enterprises access to finance including introducing new financial products and services that meet the needs of informal enterprises. Third, there should be intensive campaigns to create awareness on the advantages of formalization and how they outweigh the narrow benefits of informality while specific capacity building programmes targeted at financial literacy as well as technical and managerial skills remain critical for success. Fourth, building strategic partnerships between government institutions and informal sector aggregators and incubators should be strengthened. Such partnerships should be focused at creating awareness about the benefits derived from formalization, identifying the needs of the various constituents of the informal sector (including specific training programmes, tax incentives newly formalized enterprises, and provision of loan guarantees to informal sector operators). Most participants advanced the choice of applying digitization to the garment industry because ICT enjoys a great transversality and it helps to modernize economic activities and makes the garment sector more attractive to youth. When fully functional, ICT serves not only as a hub for economic growth but also enhances the efficiency of households, firms, government, and trade, thereby promoting overall welfare. The role of ICT in the financial services, garments and agricultural sector is quite revealing for transformation. The adoption of digital financial services (DFS) offers a transformational solution to financial exclusion driven by informality. It simplifies processes (reduces direct and indirect costs of formalities) and introduces new financial technologies (FinTech for enterprises). The garments industry is a rapidly growing technology savvy sector. Digitization will go a long way to help firms to keep pace with the rapidly evolving production processes in the industry. All levels of the textile industry now use simulation-based engineering. Stakeholders deliberated on the application of ICT to four sectors (governance, financial inclusion, agriculture and garment industry) before they finally chose the garment industry as the most appealing sector. Stakeholders believe the garments industry is a rapidly growing technology-savvy sector and digitization will go a long way to help firms to keep pace with the rapidly evolving production processes in the industry. All levels of the textile industry now use simulation-based engineering, which would be popularized through digitalization. Organizing the garment industry operators in clusters and shells could accelerate the use of digitalization among informal operators. The project outlined four critical outputs: framework for formalization of informal enterprises, development and promotion of financial services and broadening of avenues for the capitalization of financial intermediaries, building capacities of informal sector intermediaries (e.g., Village Savings and Loan Associations -VSLA), Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti 9 aggregators (e.g. Association for Micro-Enterprise Corporations – ACME) and government (e.g., Centre for Investment Facilitation – CIF) and strengthening the use of digital technology, and finally, establishing sectoral collective action platforms. Under each output, activities that feed into the realization of the output are identified. Each activity comes with a measurable indicator. An implementing agency and a country focal agency are also suggested for validation. In conclusion, the formalization of the informal sector in Haiti requires careful balancing of the strategic interventions. The absorption of the target beneficiaries into the formal sector has implications for government scrutiny, licensing, and vulnerability for taxation. This must be balanced against the benefits of better market information and opportunities, access to bank credit, training programmes, and greater visibility to informal enterprises. Establishing microenterprises shells for the garment industry or dedicating the existing under-utilized factory shells in the Northern part of the country could offer these opportunities. Charting a path for the transformation of the informal sector in Haiti will go a long way towards the achievement of key national goals while improving the standard of living of the people. Our study has identified the garment industry as the key sector with ICT as a cross cutting instrument that could be targeted to catalyse transformation in the informal sector. Apart from creating jobs on its own, it has the power to bring about a change when bundled with core economic sectors such as financial services and tourism. It can also stimulate growth and create jobs in other sectors such as tourism and arts and crafts. 10 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti CHAPTER ONE Background and Context 1.1 INTRODUCTION Haiti, the oldest independent State in the world and and a part of the French colony, is geographically, resourcefully, culturally and historically endowed. Among its peers, Haiti’s comparative advantages include its proximity and access to global markets (USA, Dominican Republic and Mexico), youthful population and labour force, dynamic diaspora population, craftsmanship and tourism assets. However, these assets and opportunities are yet to be converted into development outcomes. About 22 per cent of Haitians live in the capital city, Port-au-Prince, driving urban unemployment, urban poverty and urban informality. Unemployment rate is estimated at about 15.7 per cent (percentage of total labour force) and the poverty rate at 24.5 per cent (poverty head count ratio atUS$1.90 a day-2011 PPP). While still relatively high, extreme poverty stands at less than US$1.25 per day and declined from 31 per cent in 2000 to 24 per cent in 2018 (UNDP 2021). The observed national decline in poverty was driven by rising labour income, especially in non-agricultural enterprises, private transfers and aid. However, Haiti remains one of the poorest countries in the Latin American and Caribbean region (LAC). Rural poverty continues to be severe in Haiti. Nearly 75 per cent of the inhabitants in the rural areas are poor and close to 37 per cent are extremely poor (UNDP, 2021). Haiti is one of the poorest, most unequal, politically unstable and climate-change prone countries in the world. Its level of underdevelopment, explained by the foregoing factors, tend to perpetuate endemic informality (both legal and illegal) and the rising trend of informal enterprises in Haiti. Informality is a serious development challenge facing Haiti and several of the Latin America and the Caribbean economies. Informal enterprises, as defined by ILO (2020), refers to all economic activities (by workers and economic units) that are, in law and in practice, not supported or inadequately supported by formal provisions or arrangements. In terms of composition, the sector is very diverse. Many of its constituents are survivalists (very poor people who work part-time in various non-farm income-generating activities), self-employed people who produce goods for resale, or offer services, and very small businesses (microenterprises) that usually operate from a fixed location with more or less regular hours. Thus, the informal participants include very poor, marginal people as well as members of the working class. Informal economy is more endemic in Haiti than any other country in the region in terms of its intensity, drivers, and impact on overall development (Aspilaire, 2017). In fact, Haiti is a special case of paradox of equity or extreme business inequality with just about 15 families controlling a bulky share of the private sector (almost all the major imports and over 70 per cent of private credits) in contrast to the ubiquitous micro, small and medium enterprises with limited or no access to formal credit but accounting for 55 per cent of GDP and about 87 per cent of employment (Aspilaire, 2017; ECLAC, 2020; UNDP, 2021). Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti 11 Informal enterprises have been a long-standing feature of the country’s economy. Haitian informal sector is very resilient based on its ability to bounce back after several shocks (either economic crisis, natural disasters, or political conflicts) (Aspilaire, 2017). The informal enterprises have been a better absorber of economic and labour supply shocks, thereby making them an important coping strategy in periods of crisis in the formal sector, and and through the formal-informal linkages they help smoothen the supply chains for the formal economy by providing certain goods and services to the formal enterprises (ILO, 2018 and UNDP, 2021). Haiti’s informal sector is small and highly regulated in some areas (e.g. taxes and tariffs) and unregulated in other activities like the absence of workers protections and rights as well as the lack of uniform wages and workers conditions of service. The sector had long been ignored and has not been fully acknowledged in development policies. Rather, informal enterprise operators are viewed as a problem or in a pejorative manner, which makes it difficult for Haiti to leverage its complimentary advantage of being very close to major international markets. Changing the narratives of the informal sector in Haiti requires having a very clear understanding of the dynamics, characteristics, drivers and root causes as well as engaging the stakeholders in offering solutions to transform and formalize the informal enterprises in the country. 1.2. BASELINE STUDY OBJECTIVES The overall objective of this exercise is to conduct a baseline study on the informal sector in Haiti. The specific objectives are to: Examine the factors propagating informal enterprises 1.3. METHODOLOGY Assess the performance of past government efforts Offer practical solutions to effectively transform informal enterprises Develop a four-year action plan to support the transformation and formalization efforts in the country The approach adopted for this study is a mix of methods, the primary goal being the accomplishment of the tasks enumerated above. Desk reviews of relevant publications. 12 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti Qualitative approaches. Individual depth interviews with individuals representing 16 organizations from the formal and informal sector. Semi-structured face-to-face interviews (following an interview guide with open-ended questions). The face-to-face interviews gave the benefit of being able to observe and record non-verbal as well as verbal behaviour. Eight focus group interviews were conducted. The groups were composed of 6-8 participants from 56 different organizations. A case study approach was adopted to identify a leading informal sector with strong backward and forward integration with other sectors. The choice of this sector is based mainly on the outcome of the in-depth interviews and group discussions. A detailed multi-year, budgeted work plan (actions plan) was prepared for the implementation of the transformation of the chosen informal sector activity in the country over a period of four years. Plans are under way to organize a validation workshop consisting of key stakeholders. This workshop will be used to validate the findings and conclusions generated from the above mentioned study methods. Collectively, the primary survey elicited information and used in-depth interviews and eight focus group discussions with individuals from about 56 organizations across the various stakeholders (regulators, informal enterprises, newly formalized enterprises, financial institutions, incubators, and aggregators). The analysis below provides some practical illuminations to this process. 1.4 LIMITATIONS OF THE REPORT AND DATA GAPS The country has been embroiled in political crises for a while now. The insecurity posed by the crisis has also been a big challenge, particularly for the focus group discussions where the gatherings of crowd is frowned at. In view of the above, it was very difficult to speak to people either individually or in groups. However, with the support of government officials and stakeholders, we were able to organize interviews with ecosystem stakeholders to elicit the needed information for the baseline study. Other than the inability to go to rural areas, the insecurity context did not affect the quality of the assessment. Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti 13 CHAPTER TWO Status of Informal Enterprises in Haiti 2.1 INFORMAL SECTOR SCOPE AND CONTRIBUTIONS TO THE ECONOMY Informal enterprises dominate formal economic activities in several dimensions. The informal sector is composed of individuals and enterprises, accounting for 91.5 per cent of total employment in Haiti (Elgin et al (2021). About nine out of ten jobs in Haiti are provided by the informal sector, comprising 47 per cent from informal private, 39 per cent from agriculture and 1.0 per cent from household. The private formal sector accounts for 7.5 per cent and the government (including State-Owned Enterprises) accounts for 4.4 per cent, while the NGOs employ 1.2 per cent (World Bank, 2015). Activities in the metropolitan areas are also dominated by informal enterprises accounting for about 81 per cent of total enterprises (Aspilaire, 2017). The low contribution of the formal private sector to total employment (7.5 per cent) explains the dominance of informal enterprises (World Bank, 2015) with only about 15 families dominating the formal sector (Aspilaire, 2017). The share of the informal sector in the overall economy is high. The size of the informal sector in Haiti is estimated at US$33 billion, which is about 55.1 per cent of the nation’s GDP (Elgin et al, 2021).1 The high share of the economy with no support from the formal sector including public sector and the organized private sector calls for immediate attention. Agriculture is the largest sector of the economy, employing about two-thirds of the labour force but accounting for only 21.9 per cent of GDP. This is closely followed by manufacturing, 20.8 per cent, and services about 57.3 per cent (Author’s compilation from the World Bank’s World Development Indicators – accessed in October 2022). Agriculture is majorly for production of subsistence crops, including cassava (manioc), plantains and bananas. Arabica coffee and sugarcane are the main cash crops. Haiti has a large, vibrant and heterogeneous informal sector traversing the primary, manufacturing and service sectors centred around food production and beverages; textiles, wearing apparel and leather; auto supplies and wood products mainly wood and cork; iron work, artisanal, carpentry, masonry, paper and paper products; publishing, electronics, chemicals, rubber and plastics. Other non-metallic mineral products include basic metals and fabricated metal products. 1 Computing informal sector contribution to GDP has been very challenging in Haiti. For instance, Schneider, et al (2010) estimated the sector to contribute 56.4 per cent of GDP during 1999-2007 and later rose to 64.17 per cent during 2008-2010 (Aspilaire, 2017). Recent estimates, using the MIMIC (multiple indicators and multiple causes) approach, put it at US$35 billion - about 59.1 per cent of GDP.” 14 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti The small size of the domestic economy, internal instability and the wave of trade liberalization have all constrained the performance of the manufacturing sector in Haiti. The informal sector is a major source of migrants’ absorption in the country. This is more so with internal migration where the capital city, Port-au-Prince, remains a focal point of attraction. The dynamic diaspora system in Haiti and the international development partners have been supporting this neglected sector over the years. Diaspora’s remittances in Haiti (accounting for about 20 per cent of GDP) is one of the highest in the Caribbean region, and households receiving remittances (domestic or foreign) rose from 42 per cent in 2000 to 69 per cent in 2012 (World Bank, 2015). Without the support from domestic and international transfers, it would have been extremely difficult for the informal sector to serve as a shock absorbing sector to the economy in periods of economic instability. In Haiti, the formal sector is also contributing to the growth of informal employment, accounting for 7.3 per cent of total employment, especially through sub-contracting or outsourcing mechanisms (Aspilaire, 2017). Despite these challenges, a consensus from ecosystem stakeholders reveal that informal enterprises potential growth could be maximized through sectors such as agribusiness, light manufacturing, tourism heritage, and artisanal mineral mining. The contribution of Haiti’s informal sector goes beyond employment and value added to GDP. They include: Building the resilience of the economy to shocks (economic, political or natural disasters). Supporting value chain development in Haiti through the formal informal linkages. Ensuring low-cost contract enforcement through the use of reliable social networks (friends, family, and ethnics) in the absence of an effective formal legal enforcement system from the public sector. Effective support to the transformation and formalization of MSMEs offers potential to broaden tax base, reduce the unemployment rate, deepen food sufficiency (through bio-organic agriculture, agro-business and fishing), promote exports, and curb external migration. As a result of its contributions, the informal sector should not be seen as a problem but as a solution in Haiti. Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti 15 2.2 ASSESSMENT OF INFORMAL ENTERPRISE AND KEY DRIVERS The stakeholders’ characterization of the main features of informal enterprises in Haiti aligns with existing studies. The informal sector in Haiti is characterized by ease of entry, low resource base, family ownership, temporary street vendors and casual retailers as well as low level of technology, low capital requirements and limited differentiation of the ownership of the mean of production (Garcia-Bolivar, 2006). World Bank and IFC (2021) also argued that informal enterprises are not only characterized by their smallness but by low productivity because of internal factors like limited entrepreneurial experience, low education and external factors like limited access to finance and electricity. It is also the sector where demand for loans is fulfilled largely by informal means and partially by microfinance institutions. Understanding the factors and causes of informality is a useful approach for addressing the challenges and forging strategies to support formalization of MSMEs. An analysis of each of these factors is provided below:” 2.2.1 The Regulatory Environment for Informal Enterprises Weak regulatory frameworks and Inadequate legal and regulatory frameworks The country is characterized by fragmented and dysfunctional judicial system, lack of international mediation and arbitration, absence of official contract enforcement, ineffective land cadastre and registry, lack of formal contract enforcement and limited protection of minority investor interests. This is further complicated by a judicial system that is corrupt, slow, unprofessional and unpredictable (World Bank, 2015). This leads to lack of information on the process of legalization, benefits from the formal economy, the slowness of the formalization process, the complexity of formalization, which deters formalization. Over regulation and over concentration The burdensome government regulations mostly associated with government ineffectiveness, non-inclusive policies, winner-takes-all politics, and oligopolistic structure where 15 families control the private sector and three families control 70 per cent of loans. In the context of bad governance, the informal sector actors view the taxes and social security contributions to be too high to the extent that it consumes their profit margins (Schneider and Enste, 2000; BTI, 2022). One major limitation to starting a business in Haiti is the complicated administrative procedure required to register an enterprise. For instance, as argued by the World Bank (2020), registering with the Commerce and Industry to obtain the authorization of operations alone takes 78 days. This is in addition to 7 days to notarize company deeds, 10 days to prepare memorandum of association and 15 days to obtain tax ID. Currently, the vast majority of enterprises are small and do not consider official registration a priority due to lack of incentives to register, lack of information about the registration process. Yet they form the core of the economy. The formal sector is small and highly regulated in some areas such as taxes and tariffs. The findings from García-Bolívar (2006) that operating in formal sector in Haiti reduces profits as a share of gross incomes of informal enterprises from 19.0 percent to 12.5 percent further confirms the concerns from stakeholders about the burden of taxes on microenterprises. 16 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti Some of the interviewees were not very enthusiastic about the notion of transformation given the benefits presented by informality including low or no taxes, locational advantages that confer ease of access to clients, nearness to markets etc., which they considered to be higher than the intended benefits of formalization. Political instability The country is historically known for spiral political conflicts, short-lived governments, and violent street protests, as well as social and economic chaos since the overthrow of Jean Claude Duvalier’s Government in 1986. For instance, between 1986 and 2014, there have been 18 changes of the Presidents and top government leaders. The spiral of political conflicts has undermined all state institutions including the parliament, judiciary and public administration, and most of these institutions are derelict, leading to government failures. Since 2018, Haiti has experienced a rising trend of kidnappings, summary killings, and massacres. In 2019, the country witnessed serious socio-political unrests, with armed gangs wrecking havocs on people and causing a partial halt in economic activities for several months, including the assassination of President Jovenel Moise on 7th July, 2021. The ongoing political and governance situation demotivate people, more so entrepreneurs, to think of short-term investment as opposed to long-term investment, thereby accelerating the formation and operations of informal enterprises. As argued by Garcia-Bolivar (2006), informal enterprises have their own customary ways of organizing and managing their business; hence subjecting them to processes of an unstable government becomes a disincentive. Mistrust between informal enterprises, formal enterprises and government Inaccessibility to public services, inefficient inspection service for informal enterprises, lack of organization of the state system, complete absence of the State in certain areas (especially rural areas), and opacity of public services led to mistrust between informal enterprise operators and the government, which discourages formalization and encourages tax evasion (Garcia-Bolivar, 2006; World Bank, 2015; BTI, 2022). Regional macroeconomic crises drive the growth of informal enterprises The regional dimension of informality, starting with the debt crisis of the 1980s and the associated adoption of the structural adjustment programmes through intensive liberalization and privatization, coupled with the onslaught of globalization leading to deindustrialization makes informality inevitable. Low Productivity as a binding constraint to formalization The country’s economy is characterized by low productivity, low incomes, and poor working conditions. On the other hand, agricultural workers earn less than 20 per cent of incomes in the formal sector, and the non-farm informal workers earn less than 50 per cent of what their counterparts in formal sector earn. This has been linked to low productivity, skills, education, poor occupational safety and limited access to social protection coverage. Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti 17 Poor business operating environment The over-concentration and overregulation of the private sector makes doing business very challenging to entrepreneurs in Haiti as manifested in Ease of Doing Business that deteriorated from 177 (out of 190 counties assessed) in 2012 to 182 in 2018, but marginally improved to 179 in 2019. This is the worst in the Caribbean region. The World Bank Ease of Doing Business, Garcia-Bolivar (2006) and BTI (2022) argued that high cost of doing business is promoting informality in Haiti by citing the following examples: Profit margins of newly formalized enterprises reduced by at least 6.5 per cent. The burdensome renewal of business license or registration process cost about 5.8 per cent of small enterprise gross incomes. The lack of integration among 24 institutions responsible for processing of business registration makes registration to take 97 days compared to 16.5 days in the Dominican Republic. The World Bank Ease of Doing Business 2020 estimated the cost of business registration in Haiti to be 179.7 per cent of GNI per capita (compared to 13.5 per cent in the Dominican Republic). This constitutes a huge and overly burdensome cost to newly formalized enterprises. Poor governance This takes the form of poor control of corruption (e.g., the mismanagement of the Petrocaribe Fund), rule of law, government effectiveness, lack of voice and accountability. For instance, the country’s performance on the corruption perception index has been generally low, with a score ranging between 17 and 22 out 100 points (2012-2021), which ranked the country 164 out of 180 countries in 2021 – an improvement from 170 in 2020. Haiti is worse than the Latin America and the Caribbean average in control of corruption, rule of law, government effectiveness and voice and accountability. Corruption is a hidden cost to formalization. 2.2.2 Access to Finance Low financial inclusion and limited digital services Based on the World Bank’s 2017 FINDEX, Haiti has one of the lowest financial inclusions in Latin America, with only 33 per cent owning bank accounts and about 28 per cent of farmers have bank accounts (World Bank and IFC, 2021; IFC, 2021). Without the support from rural microfinance institutions and financial cooperatives, entrepreneurs have been left out of the financial system completely, resulting in limited growth of MSMEs Limited access to finance Lack of clear regulatory frameworks and weak institutional supervisory capacity makes the financial sector operations operations predatory. Digital financial services are at its early stage to enhance access to financial services. 18 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti Financial structure is weak with inadequate credit information system constraining lending to microenterprises. Microfinance remains the major player, as small firms cannot access loans from banks because they are not formalized, and cannot afford the lending rates ranging between 17.0 per cent and 27.0 per cent between 2019 and 2022, and the high collateral requirements. However, non-deposit taking microfinance institutions face constrains of funding issues. The MSME credit gap in Haiti is estimated at about US$2.5 billion (IFC, 2021). In the absence of formal finance, use of own funds, borrowing from relatives and friends as well as from loan sharks are the available financing alternatives (commonly called Ponya), which are too expensive and not easily accessed. The limited spread of bank branches where one branch caters to an average of 15,748 people accounts for low usage of financial institutions and services. Compared to 45 per cent of adult population using banking services in Latin America and the Caribbean, only 27 per cent makes use of formal financial services in Haiti. And lending to agriculture, a sector contributing 22.0 percent of GDP and employs about 50 percent of the labour force, is almost non-existent (World Bank, 2015 and IFC, 2021). It is only 0.2 per cent of the banking sector credit to the private sector in 2014 (World Bank, 2015). The low share of credit to the agricultural sector is because of the absence of collateral (BTI, 2022). The empirical evidence from Jacob (2021) on Haiti reveals that access to finance, higher profit margins, stability, and perception of success are factors that motivate informal sector operators to formalize. The microfinance institutions that could bridge the financing gap for informal enterprises are facing excruciating operational environments in Haiti (Box 1). Supporting microfinance and banks both financially, technically and institutionally through policies remain crucial. There is an urgent need to improve existing financial products and services, and design and/or adopt new financial products and services to meet the needs of the enterprises. This will provide entrepreneurs in this sector with more choices in terms of financial services and products. Participants from the different study methods expressed the need for credit guarantee schemes and micro-insurance. Box 1: The operating environment is very challenging for Microfinance in Haiti The unstable political environment, recurring natural disasters that destroyed business and their owners, the complex business environment, including services delivery and infrastructure make the operational environment of microfinance institutions very complex and challenging – and much more for small businesses. To compensate for these challenges, microfinance banks interest rates (ranging from 30 per cent to 55 per cent a year) are higher than those of the traditional banks. The experience of some microfinance banks (most of whom are non-profit) further illuminates the complex working environment because of the recurring natural disaster alone. The default rate after the earthquake was 18 per cent as opposed to the acceptable 2-3 per cent international standards. Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti 19 Box 1: The operating environment is very challenging for Microfinance in Haiti (continued) In 2010 alone, 600 of the 1,800 microfinance banks employees living in Port-au-Prince alone lost their homes to earthquake – an indication of the seriousness of the issue. For instance, Finca Haiti (one of the largest microcredit in Haiti) wrote off almost a third of its portfolio after many clients died in the earthquake or lost their homes and businesses. FINCA incurred US$2.0 million losses three years before the earthquake and had considered closing its for-profit bank in 2008 after the earthquake. ACME (another Haitian microbank) also raised additional capital after 53 per cent of its borrowers were late on their payments. Surviving such write-offs and additional capital injection without the support of international organization would have been impossible. While appropriate levels of interest are important, high rates make informal and small businesses lose their profit margins, which makes them highly uncompetitive. Supporting and evolving a manageable interest rate that promotes business growth, keep microfinance in business, and promote national development remain critical for government and other stakeholders to ensure that access to financial services by the informal sector actors is realized. A new development model for Haiti’s microfinance should be promoted that can facilitate access to financial services. Consolidation of existing microfinance banks to be more self-sustaining could be one of the options for consideration. Source: Author’s analytics from https://www.nytimes.com/2010/11/14/business/global/14haiti.html 2.2.3 Low and Sub-standard Education Capacity among Financial Intermediaries and Informal Enterprises Development Low educational level Haiti’s educational system is substandard and has impaired the skill development of the labour force. The literacy rate stood at 61.7 per cent (63.5 per cent for men and 58.3 per cent for women) in 2016. Currently, less than 25 per cent of students who sit the national examination pass every year. In Haiti, only 10,000 out of the 150,000 sitting the national examination are admitted to higher institutions, leaving 93.3 per cent of the youths without requisite skills every year with women and girls facing greater obstacles (BTI, 2022). Low labour absorptive capacity of the formal economy The growth rate of the labour pool far outpaces the absorptive capacity of the formal sector. Thus, the rate of growth of formal jobs is unlikely to keep up with the growth of the working-age population complicated by the rising rural-to-urban migration (Aspilaire, 2012; World Bank, 2015). 2.2.4 Collective Action Platform and Innovation Limited access to reliable infrastructure The country experiences low access to information and technology, low level of digital penetration (many actors do not own a cell phone for personal use), and poor infrastructural base (including factory space, regular water supply, poor electricity supply), and unreliable electricity supply with high cost of electricity discourages business formalization (Aspilaire, 2017; ECLAC, 2020). For instance, only 35 per cent of Haitians have access to electricity at the national level and 11 per cent in rural areas. 20 Baseline Study of Informal Economy in the African, Caribbean, and Pacific regions - The Case of Haiti Low level of competition stifles innovation The endemic oligopolistic private sector makes competition very difficult. For instance, Haiti ranks 140th out of 148 countries in the global competitiveness index 2014-2015. The country was ranked the least in the intensity of local competition and extent of market dominance in the Caribbean region (World Bank, 2015). High level of poverty With a GDP per capita of US$ 1,272.4, Haiti is the poorest country in the LAC region and ranks among the poorest, globally. Majority of individuals working in the informal sector are among the 58.5 per cent of the population living under the national poverty line. Poverty is more endemic among informal sector operators in the urban areas and in the agricultural sector in the rural areas. While less than 10 per cent of formal workers are poor, over 70 per cent in agriculture and urban inform sector grapple with poverty (World Bank, 2015). Counter cyclicality between informality and GDP growth Evidence from several scholars has proved that the fall in GDP, the rise in taxes and government expe