Haïti: Propositions de politiques pour la croissance

-6 n N Haiti:PolicyProposals for Growth Jlue 10,1985 LatinAmerica and the Caribbean Regional Office FOR OFFICIAL USE ONLY Docunmen of theWorldBank Thisdoo.menthasa restricted distrbuton and mfay be usedby recipients onlyin theperwfofmance of theirofficialdutie& Its contents may nototherwise be discdosed without World Bankauthoriation. :: .,.. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized CURE r EQMAUENrS Currency Unit = Gourde (G) G I = US$0.20 US$1 = -G 5 The Gourde has been pegged to the U.S. Dollar since 1919 at the rate of G 5 = USMI. WEI(.m AND MEASKS Metric System 1 carreau = 1.29 hectares 1 hectare = 0.78 carreau FISCAL YEAR October 1 - September 30 This report uses FV for fiscal year. Thus FY84 refers to the period from October 1, 1983 to September 30, 1984. ABLEVIAIIONS AAPN Autorite Aeroportuaire Nationale (National Airport Authority) AJDIR Association des Industries d'Halti (Haitian industries association) APN Autorite Portuaire Nationale (National Port Authority) BCA Bureau de Credit Agricole (Agricultural Credit Bank) BCI Banque de Credit Immobilier (Mortgage Bank) BNC Banque Nationale de Credit (National Credit Bank) BNDAI Banque Nationale de Developpement Agricole et Industriel (National Agricultural and Industrial Development Bank) BRH Banque de la Republique d'Halti (Bank of the Republic of Haiti - Central Bank) CAM,EP Centrale Autonome Metropolitaine d'Eau Potable (Metropolitan Water Authority) CBI Caribbean Basin Initiative (U.S.A.) CCCE Caisse Centrale de Cooperation Economique (French aid agency) CIDA Canadian International Development Agency CONATRA Compagnie Nationale de Transport (National bus company) EdH Electricite d'Halti (Electricity company) EEC European Economic Community ENAOL Entreprise Nationale des Oleagineux (edible oil company) FAC Fonds d'Aide et de Coopetation (French aid agency) FDI Fonds de Developpement Industriel (Industrial Development Fund) FY Fiscal Year GSP Generalized System of Preferences (U.S.A.) ha hectare HDF Haitian Development Fund FM OFFmIA Ue ONLY IDB Inter-American Development Bank IRSI Iastitut Hattien de Statistique et d'Inforiatique (Haitian Institute of Statistics and Data Processing) ILO International Labor Organization IMF International Monetary Fund MABDDR Ministare de l'Agriculture. des Ressources Naturelles et du Developpement Rural (Ministry of Agriculture, Natural Resources and Rural Development) MEFI Ministare de 1lEconomie, des Finances et de l'Industrie (Ministry of Economy, Finance and Industry) Minoterie (Flour mill) OCEAR Office de Commercialisation des Essences Aromatiques d'Harti (Haitian Essential Oils Export Agency) OECD Organization for Economic Cooperation and Development OFArMA Office d'Assurance--Accidents du Travail, Maladie et Maternit6 (Workers' compensation, sickness and maternity insurance agency) ONA Office National d'Assurance (Social Security Agency) ONTRP Office National du Tourisme et des Relations Publiques (National Tourism and Public Relations Office) OPRODEX Office de Promotion des Denrges Exportables (Comodity Export Promotion Agency) SDR Special Drawing Right SEN Societe d 'Equipement National (construction) SEPPRN Service d'Entretien Permaneat du Resseau Routier National (National Road Maintenance Organization) SGS Societe Generale de Surveillance (Swiss company verifying trade) SNEP Service National d Eau Potable (National Water Service) SODEXOL Societe d'Exploitation d'Oleagineux S.A.M. (edible oil company) SOFIHDES Societe Financiere Haftienne de D6veloppement S. A. (Haitian Development Finance Company) SONAPI Societe Nationale des Parcs Industriels (National Industrial Park Company) TCA Taxe sur le Chiffre d'Affaires (value added tax) TELECO Telecommnunications d'Haiti S. A. (Haiti Telecommnnications Company) UNIDO United Nations Industrial Development Organization USAID United States Agency for International Development USDA United States Department of Agriculture USN Usine Sucriare du Nord (NationalSugar Refinery at Citadelle) USND Usine Sucriare Nationale de Darbonne (National Sugar Refinery at Darbonne) TABLES Totals in tables do not always equal the sum of their components due to rounding. not available - zero or insignificant IThis document has a resticted distributionand may be used by repients only in the poformance of their offci duisL Its coontents may not otherwisebe disclosedwithout World Dank audn iUOf SYNOPSIS Haiti 's economy has suffered from stagnation and disequilibrium in recent years, despite considerable structural change. This report concentrates on the productive sectors. Economic growth has been well below its potential because of population pressure and inappropriate policy in agriculture; protection in industry; and insufficient tax revenues for expanding current public expenditures resulting in public savings inadequate to finance the development effort. The short term priority for public policy must be financial and economic stabilization. Illustrative macroeconomic projections show that thereafter sustained growth can only come from shifting resources toward production, especially that for export. Detailed macroeconomic, agricultural and industrial policy proposals are made for growth. At the macroeconomic level, the report proposes new tax objectives; tighter control of public expenditure; refocusing the public development program toward production; strengthening the exchange and trade systems; continued flexibility in labor markets; development of long-term financial institutions and instruments; and modernization of price regulations. In agriculture, it proposes a concentration on farm enterprises in irrigated and rainfed zones of high production potential, achieved through changes in price, trade and fiscal policy; the continued reform of the Ministry of AgricultureS.and its investment program; and the establishmentof a strong credit institution. In industry, it proposes elimination of the anti-export bias, principally through the systematic reduction of protection and also through export promotion; restructuring public industrial enterprises; and the better provision of industry's infrastructure and training needs. Even with all these changes, Haiti will still have to rely on substantial external financial assistance for its economic recovery. HAI: POLICY POPOSAS FM GILwM TABLE OF CONTENTS Page No. SYNOPSIS TABLE OF CONTENTS COUNTRY DATA SUMKARLY OF MAJOR CONCLUSIONS ................. ......... ..... i CHAPTER I: The Potential ....... ................................... 1 CHAPTER II: The Past: Change with Less and Less Growth .......... .. 4 A. Structural and Social Change, 1950-84 ................... ..... 4 B. Production and Productivity, FY76-84 ......................... 10 C. Population Pressure in Agriculture ..... ...................... 11 D. Protection in Industry ....................................... 14 E. Inadequate Public Savings ...... .............................. 18 F. Stagnation and External Disequilibrium, FY80-84 .............. 24 CHAPTER III: The Way Forward: General Policy Proposals for Growth . 33 A. The Short-Term: Increase Public Savings and International Reserves ..................................................... 33 B. Long-Term Prospects: A Quantitative Exploration .. ............ 35 C. New Objectives for Tax Policy ... ............................. 39 D. Tighten Control of Public Expenditure ........................ 42 E. Refocus the Government's Development Effort .. ................ 45 F. Strengthen the Exchange and Trade Systems .................... 48 G. Maintain Flexible Labor Market Regulations ................... 50 H. Develop Long Term Financial Institutions and Instruments ..... 53 i. Modernize Price Regulations and Policies ......... ............ 55 CHAPTER IV: An End to Rural Stagnation: Policy Proposals for Growth in Agriculture ............ ............................ 57 A. The Potential ............ .................................... 57 B. The Current Reality .... ...................................... 59 C. New Objectives and a New Strategy ..... ....................... 60 D. Reform Price, Trade, and Fiscal Policy ................... .... 61 E. Reform MARNIR ............... ................................. 66 F. Refocus the Public Investment Program .... 68 G. Establish a Strong Credit Institution ........................ 69 H. Supporting Measures .................................... 70 This report is based on the findings of an economic mission to Haiti in January 1985 led by Christian Merat and consisting of Nicholas Burnett (country economist), Ralph Hanan (agricultural economist) and consultants Daniel Arbour (industry's urban infrastructure needs), Bernard Decaux (industry), Richard Lacroix (agro-industry and public enterprises), Martial Laurent (national accounts and projections) and Pablo Pinera (public finance). Margarita Ortiz was responsible for the report's production. A draft was discussed with the Haitian authorities in May-June 1985. Table of Contents - (Cont'd) Page No. CHAPTER V: Finding Haiti's Place in the World: Policy Proposals for Growth in Industry ..................................... 71 A. The Potential ....... ........................................ 71 B. The Reality of the Current Incentive System ................. 73 C. A New Strategy ................ ......... 76 D. Reduce the Anti-Export Bias ..... ... .... .............. ...... . 77 E. Restructure the Public Industrial Enterprises ........ o....... 81 F. Overhaul Technical and Vocational Training ........... o...... 92 G. Meet Infrastructure Needs on Time ............................ 93 ANNEX: Macroeconomic Projection, FY86-91 ..................... 98 A. Principal Assumptions .. . o ............ 98 B. Overall Results... ..... ........ .. .. . 99 C. Detailed Description of Methodology and Quantitative Assumptions .................. ....... 100 STATISTICAL APPENDIX ...................... 108 MAP: IBRD 17094 LIST OF TEXT TABLES CHAPTER II: 1I.1 Urban and Rural Population, 1950-82 ...................... 5 II.2 Urban and Rural Population Characteristics,1971-82 ...... 6 II.3 Haitians Abroad by Country of Residence, 1980 .....o...... 6 II.4 Sectoral Distribution of GDP and Exports, FY52-84 ........ 7 II.5 Employment by Sector, 1950-82 ... o ...................... 8 11.6 Selected Economic Structural Indicators, FY56-84 ........ o 8 II.7 Changing Consumption Patterns, FY72-84 ... o . .............. 9 II.8 Production and ProductivityTrends, FY76-84 .10 11.9 Growth of Manufacturing,FY76-84.14 11.10 Assembly Industry Exports to the United States, 1980-84 16 I1.11 Pnblic Sector Operations, FY76-84 .19 11.12 Composition of Treasury Revenue, FY80-84 .20 II.13 Government Employment, FY80-84 .. .22 II.14 Public Sector Capital Expenditure,FY80-84 .23 II.15 Annual Development Budget and Actual Expenditures, FY81-85 . ... 23 II.16 Changes in Gross Domestic Product, FY80-84 .... ........... 25 II.17 Summary National Accounts, FY79-84 ......... ............. 26 II.18 Financing of Public Sector Deficit, FY80-84 .27 Table of Contents - (Cont'd) Page No. I1.19 Summary Monetary Statistics, FY80-84 ................. . .. 28 11.20 Summary Balance of Payments, FY80-84 ..................... 29 II.21 External Grant and Loan Commitments, FY80-84 ............. 30 11.22 External Public Debt, FY80-83 ............................ 31 II.23 Use of IMF Resources, FY80-84 ............................. 31 II.24 Net International Reserves, FY80-84 ........ . .............. 32 CHAPTER III: III. 1 Summary Macroeconomic Projections, FY86-91 ............... 37 III. 2 Projected External Capital CommitmentRequirements, FY86-91 ..... w ..... .......... o . .. 38 III. 3 Real Wage Index, FY72-84 ......................... . ....... 51 CHAPTER IV: IV. I Comparative Advantage Indicators in Agriculture.58 IV. 2 Real Retail Cereal and Export Coffee Price Indices, FY70-83 ........ ..... .. .. ... 62 IV. 3 Domestic and Border Parity Prices for Selected Agricultural Products, FY82.... 63 CHAPTER V: V. 1 ComparativeMonthly IndustrialWages, 1984 . . 73 V. 2 Industrial Establishments and Employment, Early 1980s .... 76 V. 3 Public and Mixed Enterprises, January 1985 ... .. 81 V. 4 Edible Oil Refiners' ProcessingMargins, 1981-84 83 V. 5 Sodexol: Operating Losses, FY82-84 ..... 85 V. 6 Flour Production Costs and Import Prices, FY80-83 86 V. 7 Flour Price Structure, 1969-84 ..... 87 V. 8 Demand and Supply Estimates for Qualified Manpower, FY81-91 ... o ......... 92 LIST OF TEXT FIGURES CHAPTER V: V. 1 Edible Oil Prices .. 84 V. 2 USN: Costs and Revenue at Differing Sugar Content in Cane ....... 89 WAITI - ECON0OltCOFTA a/ G6N per capita: U5S320 (1985) b, GROSS OWHESTIC PRODLCT IN FYB4 ANNUALRATE OF WTH (S In Constant Prices) USS Mllons % FY76-80 FY80484 GOP at Market Prices 1,821.4 100.0 5.0 -0.9 Gros Domestic Investment 2B8.0 15.8 8.3 0.9 Gros Nstlonal Savinqs 193.1 10.6 -1.0 4.3 Current Account Balance -94.9 -5.2 Exports of Goods and WFSC 433.4 23.8 8.2 -1.6 Iimorts of Goods and WIISC 644.8 55.4 11.1 -3.6 VALUEAE0 (tN 1985 (Constant FY76 Prices) USS Mill ions % FY76-80 FY80-B4 AgrIculture 527.6 33.3 0.7 -1.5 Industry d, 238.2 24.2 9.1 -2.2 Services 417.4 42.5 7.1 0.8 Total 983.2 100.0 5.0 -0.9 PtWLIC FINANCE Public Sector Central Covernment G Mlllon oft P G 141 Ion % of GOP FY84 FY75 FYBI FY84 FY84 FY75 FY81 FY84 Current Recipts 1,760.2 13.1 15.9 19.3 914.8 9.3 9.0 10.0 Current Expenditures 1,655.8 11.7 16.7 18.2 1,075.1 8.2 11.1 11.8 Current SurolusC+) or Deficit(-) 104.4 1.4 -0.8 1.1 -160.3 1.1 -2.2 -1.8 Capital Expenditures 922.5 7.5 12.8 10.2 671.4 5.5 10.8 7.4 External Assistance (Inlt)e/ 605.1 5.2 10.1 6.6 517.4 4.5 9.1 5.7 MONEY,CREDIT AND PRICES FY79 FY80 FY8I FY82 FY83 FY84 (Million G Outstading atEnd of Perid) Money and Quasi-money 1.347.5 1,601.0 1,803.3 1,974.2 2,084.3 2,337.4 Net Bank Credit to Publ Ic Sector 538.4 592.0 83.2 1,079.1 1,555.1 1,741.0 Not Bank Credit to Private Sector 988.2 1,010.4 1,118.4 1,102.8 1,027.7 1,114.0 (Percentages or Index Numbers) Money and Quasi-Money as S of GOP 24.0 21.9 24.6 26.8 25.6 25.7 Consumer Price Index (Base FY8O-100) ,. 100.0 111.3 119.0 131.2 137.4 Annual Percentaqe Changes In .. .. 113 6.9 10.3 4.7 Consumer Price Index Nwt Bank Credit to PublIc Sector .. 10.0 41.6 28.7 42.3 3.4 Net Bank Credit to Private Sector . 2.2 10.7 -1.4 6.8 +8.4 WAGES FY79 FYBO FY81 FY82 FY83 FY04 Standard Mlnimum Wage Rate (Gourde per day) Reel Wag Indx ' 77.6 90.4 100.4 92.4 85.2 79.1 Note: All conversions to dollars In this table are at the exchange rate of G 5 USS1 that has prevalled since 1919. a/ Data refer to FY ending September 30. bl World Bank Atlas methodology. c Asseonly Industry treated on a gross basis. dL Mining, menufacturlng, pubilc utilItles and consTruction. O/ Net disbursements of loans and grants. E/ Last quarter of FY71 * 100. HAITI- TRADE. PAYMENTS AND CAPITAL FLOWS BALANCEOF PAYMENTS NIERCAIUISE EXPORTS (Avrage FY8D-84) CUSS Nillons) FY79 FY80 FY85 FY82 FY83 FY84 USS M4Il1ions Exports of Goods and NFS 212.9 303.7 241.5 274.S 289.8 319.0 Cottfe 53.2 27.4 Iworts of Goods and NFS 330.2 483.8 519.8 473.8 500.1 526.9 Cocoa 3.9 2.0 Resource Balance (deficit * - -117.2 -178.1 -278.3 -198.9 -210.3 -207.9 Essential 011s 5.9 3.0 Assably Industry (Net) 53.9 27.J Net Factor Income -13.4 -14.3 -13.0 -14.0 -14.2 -18.1 Small Industry and Handicraft 31.6 15.3 Net Current Transfers 75.9 94.1 131.5 128.7 124.1 131.0 All Other CommditIes 45.4 23.5 Balance on Current Account -54.7 -98.4 -159.8 -04.3 -100.4 -94.9 Total 193.9 100.0 Net Direct Investmnt 12.0 13.0 8.3 7.1 15.3 4.5 Net N & LT Borrowing (CRS) 41.7 39.8 102.2 57.3 37.4 47.1 Dlsburs_mn1 50.3 55.1 117.3 65.9 45.3 58.4 Amortization 8.6 15.3 15.1 8.5 7.9 11.4 Other N A LT Inflows (Net) 13.8 28.3 -2.3 6.0 21.2 26.7 Net Short-Term Capital 3.5 8.1 18.6 3.1 3.5 3.1 Change In Net Reserves af -16.8 9.2 33.0 10.7 22.9 13.7 Not Reserves . 29.5 -3.8 -14.5 -37.3 -51.0 EXTERNAL TRADE EXTERNAL DEBT, SEPTlAER 30. 1984 tUSS Mii Ions CUSS NI 111ons) FY8O FY81 FY82 FY83 FY04 Public Debt, Including Guaranteed 493.9 Merchandise Exports 225.7 155.1 181.3 188.7 219.4 Non-Guaranteed Private Debt Primary 129.6 61.9 75.8 103.6 112.9 Total Outstanding and Disbursed Manutactures 96.1 93.2 105.5 85.1 106.8 DEBT SERVICE RATIO FOR FY84 Merchandise Imports 354.2 447.9 387.3 440.3 474.1 Food Products 61.9 81.9 72.8 82.2 88.7 Public Debt, Including Guaranteed 5.5 Petrolesm 48.5 53.9 45.6 56.4 60.8 Non-Guaranteed Private Debt Machiney and Equipment 64.0 105.4 89.1 85.5 92.2 Toral Outstanding and Disbursed Manufactures 162.5 186.9 161.9 192.1 207.2 Others 17.3 19.8 17.9 24.1 25.2 IDA LENDiNG, MARCH 31, 1985 RATE OF EXCHANGE Outstanding end Disbursed 159.1 Undisbursed 72.9 Since 1919 Outstanding, including Undisbursad 232.0 USS1.O0 - G 5.00 G 1.00 - USSO.20 a/ Increase Is minus - i - SUnKRY OF MALJI CONCLUSIONS i. Haiti is a very poor country. In the recent past, considerable attention has been devoted to the direct alleviation of poverty. These important initiatives have, however, led to a relative ignoring of economic growth. Disguised and open unemployment - in both rural and urban areas - has not been ameliorated. Recognizing this, the current development strategy of the Government of Haiti is to increase production and employment through short-term industrialization for export; the development of an integrated industrial base; the far-reachingreorganizationof agriculture; the mobilization of domestic savings; and attracting foreign investment. In line with this Government emphasis on the productive sectors, the World Bank mission examined policies to stimulate sustained economic growth, in the context of long-term development trends and the current stagnation of the Haitian economy. Once sustained growth is achieved, it should again be possible for the Government to pay attention to the social sectors; at present, the productive base is too small to support fully the significant social investments made in the last decade. Long-Term Development Trends ii. Haiti's economy has changed significantlyin recent decades. Output and employment have shifted toward urban, non-agriculturalactivity. Agriculture now accounts for only one third of GDP compared to one half in the early 1950s and its share in total exports has fallen from 90 to 43%. Employment in agriculture has declined. That in other sectors has grown rapidly, but not enough to absorb all those leaving rural Haiti. As a result, some 25,000 Haitians (0.5% of the population) leave their native country each year to seek work in North America and the Dominican Republic. The propensities to invest, export and import have all risen markedly in the last fifteen years. While consumption has not increased much in real terms, its composition is today very different, with greater reliance on imported goods, especially foodstuffs, and on public goods and services, like electricity, education and health. iii. Structural change lifted Haiti's annual output and labor productivity growth rates to respectable international levels of 5 and 4.6% by the late 1970s. Both have since declined, however, reflecting two factors. First, agricultural output and productivityhave fallen from their already stagnating levels of the late 1970s. Second, a new phenomenonhas emerged with profound consequencesfor future growth and employment creation: labor productivityoutside agriculture has declined since FY80. Though real GDP per capita did grow in FY84, for the first time in four years, it was still 9% below its FY80 level. iv. Since about 1980, the growth of output and productivityhas been too slow to create enough jobs or resources to meet minimum needs more adequately. Structural change has occurred but growth rates have declined, reflecting compound problems -- in agriculture, industry and the public sector. - ii - V. Most peasants -- most Haitians -- live on steep hillsides. Their cash needs are high compared to their low incomes, which are declining as population pressure on the land increases. To counter their falling purchasing power, peasants plant and sell more crops at the expense of their own subsistence, overexploitingin the short-term the cultivated hillside areas. The result is worsening erosion and malnutrition. Incomes are so low and the cash crisis so severe that there is virtually no peasant savings or investment. As a result, the overall productivity of agriculture has not kept pace with population growth. Migration away from the countrysidehas become the only solution. vi. Certain Government policies have worsened this situation. A million people on the hillsides depend for their cash needs and livelihood on coffee, the major cash crop. Yet coffee is subject to an export tax that represents half the producer price, reducing the incentive to grow coffee. The public agricultural investment and credit programs have been diffuse and unfocused, targetted more to social relief for the peasants than to stimulating growth in productivity, output and employment. vii. AgriculLure has slowly and inexorably deteriorated for thirty years and per capita agricultural productionhas declined regularly. The compound problem in industry, by contrast, is much more recent. Manufacturing output grew at a very rapid 10% per year in real terms throughout the 1970s. However, it has since declined sharply, in part because of the global recession of FY81-83 but more fundamentallybecause of the consequences of protection. While there was a modest improvement in FY84, Haitian industry is still characterisedby stagnant protected import substitution industries and a growing export assembly subsector; only the latter was responsible for possible growth in FY84. viii. Protection afforded by import quotas and tariffs enabled many new import substitution industries to start up and prosper in the early 1970s. The Haitian economy is very small, however, and production for the domestic market can never be low cost; expansion of employment and increases in productivity can only come from exporting. Since the turn of the decade the import substitution industries have exhausted the initial advantage that protection provided and now suffer from its negative consequences. High production costs make much of Haitian industry uncompetitive internationally, precluding expansion through exporting or selling to other exporting industries. These circumstancesled the Government to attempt to stimulate industrial growth with tax and tariff exemptions for investors and exporters. These latter measures have been complemented by preferential United States trade regimes, including moat recently the Caribbean Basin Initiative. The result has been the successful establishmentof what is today the fastest growing offshore assembly industry in the Caribbean Basin. Dynamic as it is, this subsector is not well integrated into the Haitian economy. Aside from foreign exchange earnings, its main contributionis unskilled wages for the 40,000 workers it now employs. It buys few inputs on the local market, largely because protection has led to overpriced products of inferior quality. The fiscal exemptions it enjoys result in a considerable loss of revenue for the State. The incentive structure in industry therefore results in a domestic industry that cannot grow and in an offshore subsector that is expanding rapidly but is little integratedwith the rest of the sector. - iii - ix. As in agriculture, the situation in industry is compounded by other Government policies. The public sector has in recent years acquired five major industrial enterprises that would not be competitive were they in the private sector and exposed to prevailingworld prices. It has only recently begun to pay attention to the provision of vocational and technical training to overcome the severe shortage of middle managers, supervisors and technicians that represents a major bottleneck to industrialexpansion. Infrastructureand public services, while broadly satisfactory,have nut always been provided as and when needed. Finally, the granting of incentives was until recently perceived as arbitrary and unpredictable. The new Investment Code of 1985 is intended to deal with this. It is a slight paradox that, while the general business climate in Haiti is liLeral and very much pro-investment,there seems to be a perception that individual firms do not face a stable policy environment. This tends to drive potential entrepreneurs toward trade, rather than production. x. The third impediment to economic growth is the public sector. This is also a relatively new phenomenon; it is only since FY80 that Haiti's tradition of fiscal discipline has broken down. Current revenues have remained around 10% of GDP, inadequate to meet growing current expenditures and the needs of the public development program. Public savings, which averaged over 2% of GDP in the late 1970s, have since averaged about 0.4% and indeed have only been positive because of the growth of the public enterprises' operating surplus. Public savings have been slowly growing as a percentage of GDP since FY81, however, to reach 1.1% in FY84. Public investment has suffered both from lower public savings, limiting its level, and from the inclusion of the five uneconomic public industrial enterprises that the State has set up or taken over, most notably the new sugar mill at Darbonne. xi. Revenues stagnated through FY84. The tax base has grown slowly and unevenly, largely because of increasingexemptions. Excises, fees and charges at specific rates have remained important, though they depress buoyancy. Many tax rates are too high, encouraging evasion. Revenue collection is inefficient and evasion and fraud are widespread. xii. Meanwhile, public expenditure on defense and security, economic infrastructure,the social sectors and public industrial enterpriseshas steadily expanded, including significant unchecked extrabudgetaryspending. Not all of these are appropriate for development. Current expenditure growth has outstripped that of current revenue. Public savings have thus been squeezed between sluggish current revenues and accelerating current expenditures. This has made the financing of the public investment program more difficult, as evidenced by the Government's frequent inability to meet its counterpart funding obligations for projects financed by external aid agencies. The public investment program has also become too diffuse (some 300 projects in FY85), and too little information is available about the economic impact and physical and financial progress of its component projects. The individual projects do not, moreover, represent the detailed articulation of a clearly defined set of development priorities. Their composition has changed from an initial concentrationon economic infrastructureto include social sectors and, more recently, several major public industrial enterprises. - iv - The Current Financial Squeeze xiii. These three compound problems - the pressure of population on the land, the effect of protection on domestic industry, and the inadequacy and poor allocation of public resources - are the root causes of Haiti's economic stagnation and of its current economic and financial disequilibrium. The latter also reflects, of course, the impact of the world economy on the small, open economy of Haiti and the repeated failure to adjust public expenditure to the reality of public receipts, first in FY81-82 and again in FY84. xiv. A stabilizationprogram adopted in FY82 with IMF support was relatively successful but too short to return the economy to full equilibrium. It led to a second program for FY84-85. The performance under this program has been disappointinglargely because extrabudgetary expenditures (in part in reaction to sociopoliticaldifficultiesin the north) have resulted in a public sector deficit larger than targeted by one percent of GDP. The Government has financed the deficit principally through monetary creation which has spilled over into the balance of payments and worsened Haiti's reserve position, despite the extensive use of IMF resources and an increased inflow of external aid grants and concessional loans. By the end of FY84, net international reserves were deeply negative at minus US$51 million. In FY85 the Government has decided to reverse this deteriorating trend. It has introduced new tax measures designed to reduce the public sector deficit. Stabilization; the Short-Term Priority xv. Stabilization is essential before any steps can be taken to achieve sustained economic growth. The Government's top priority mist therefore be a renewed program to increase public savings and rebuild international reserves. This is essential also to permit the Government to run the risks that are necessarily attached to longer-term measures to promote growth. B3th increased freedom to maneuver and short-term balance of payments assistance would return with a successful stabilizationprogram. xvi. Fundamental policy changes to set the Haitian economy onto a sustained growth path are proposed in three chapters, dealing with broad policy measures, agriculture and industry. Their implementation cannot proceed until the economy is stabilized. During this essential period of short-term stabilization, several complementary measures could be adopted to pave the way for longer-term change: (a) every tax reduction, even those to promote exports like a proposed cut in the coffee export tax, should be fully offset with measures that permanently increase revenue or reduce expenditure. External aid is unsuitable for this because it is not permanent; (b) tax collection should be improved and fraud and evasion reduced; (c) the extension of the new value added tax (TCA) over its potential base (includingall imports) should proceed as quickly as technically feasible and with no further rate increase; (d) rents for the lease of public lands in both rural and urban areas should be raised to market levels; (e) the rapid expansion of the civil service payroll and the wage bills of public enterprises should be arrested. Where possible, civil servants and other public employees should be redeployed towards services rendered to private productive enterprises and to run unused physical facilities that have recently been built in the education and health sectors; (f) extrabudgetary expenditure should stop and that on defense and security should be reviewed; (g) essential increases in current expenditure, such as for road maintenance and basic education, should be offset by cuts in that part of the budget not allocated to either supplying services to the productive sectors or by revenue measures. This could, for example, include reallocations within the overall education budget and the adoption of user fees for university education and for admission to cultural institutions. It could also include reallocations from other parts of the budget to education; (h) capital expenditure not essential to increasing output - especially that on public industrial enterprises - should temporarily be reduced and should be stabilized in the case of health and the social components within rural development projects. Capital spending should also be made more efficient, especially in the social sectors; (i) part of the resources earned or saved through the preceding measures could be allocated to complete the physical infrastructure which export-oriented businesses need to operate efficiently and competitively; (j) further collaboration between private industry and the Government should be strongly promoted to accelerate the elimination of regulations and practices that impede output expansion and the preparation of longer-term changes; (k) the consideration and preparation of long-term reforms could begin now in order to draw up an agenda of policy changes as soon as possible. Potential for the Long-Ter& Xvii. Once public savings and reserves have increased and the Government has regained some freedom of maneuver, it can begin to implement the new policies needed if the economy is to achieve the sustained growth of output and employment of which it is potentially capable. Haiti's potential is much greater than is often thought. It could enjoy a better place in the world economy than its 1983 per capita GNP of US$320 would indicate. - vi - xviii. Haiti is close to the North American market, especially attractive since the advent of the Caribbean Basin Initiative. It has large untapped agricultural possibilitiesthat could result from concentratingon farm enterprises with high productive potential. Haiti has a comparative advantage in a number of crops like bananas, coffee, rice, maize and sugarcane if they are grown with modern techniques. Agro-industry presents sizeable opportunities that could be exploited by the emerging combination of traditional landowners and the new entrepreneurial class's managerial skills. Industry as a whole can take advantage of the factors that have so attracted the largely foreign assembly firms: productive low cost labor, proximity to the United States, functioning basic infrastructure, liberal economic outlook and political stability. Tourism could be more aggressively developed. xix. The realization of Haiti's agricultural,agro-industrial, industrial and tourism potential -- the growth of the Haitian economy - requires the adoption by the people and Government alike of a future-oriented approach based on more efficient private and public sectors. Broad consensus must be obtained on a dynamic developmeat strategy, capable of accelerating output growth and employment rather than sheltering selected local markets from outside competition. If this strategy is not followed, the gloomy alternative is ever more sluggish production with increasingmalnutrition, unemployment,and emigration. If it is followed, sustained growth can be achieved. A Growth-OrientedDevelop=ent Strategy xx. In exploring feasible growth paths, the report finds that restrictive domestic demand managementwill be necessary. Because of the initial economic imbalance, the development strategy will have few degrees of freedom. It must be export-oriented. Investmentmust favor the productive sectors and yield high and quick returns. Consumption,especially of the public seccor, will have to be markedly restrained in order to shift the required share of output increases into exports. This strategy is essential to achieving the export-led growth needed to rebalance the economy and thereby lay a solid foundation for future consumptiongains. xxi. The allocation of public development expenditures,which include some current expendituresand foreign-aidedprojects, will have to reflect revised investment priorities. More emphasis will have to be put on development projects that support the expansion of private enterprises in agriculture, industry and services. Private projects with high economic returns should be strongly supportedwith accordingly less relative emphasis on public expenditures in the social sectors. Within the social sectors, least cost solutions should be sought more systematically,togetherwith private participation,to reduce their costs to the Government. Less emphasis should also be placed on public industrial enterprises. More specific comments on the implicationsof these priorities for the development programs in agriculture,industry and tourism are spelled out in the main report. The shift in emphasis will require substantial redeploymentof expenditures and staff, which could be extremely difficult under the current distribution of administrativeresponsibilities. A more appropriate distribution is called for, togetherwith improvementsin public planning, budgeting and project evaluation. - vii - xxii. Even with the most determined strategy, Haiti will have to rely on substantial inflows of external financial assistance, both grants and concessional loans. Haiti is a poor country. The scope for increasing savings, particularly in the public sector, is significant but nonetheless limited. Over the FY86-91 period, the report estimates average annual commitment requirementsat US$111 million for grants and US$80 million for soft loans, with nonconcessionalloans limited to US$40 million per year. xxiii. External assistance should be directed in accordance with the new development priorities. It should favor infrastructure to support private production. It should support the export orientation. Technical assistance will be essential since the capacity to identify and prepare projects, as well as policy changes, is still weak in Haiti. Fiscal Policies xxiv. The national tax effort needs to be increased, to permit the Government to provide and run the economic and social infrastructureneeded to support the expansion of private enterprise and employment. In addition, the tax system, including collection,has to be improved to overcome the so far largely successful resistance of taxpayers. xxv. Tax policy should have clear and stable long-term objectives. Chapter III offers a series of considerationsto, help guide them. The most important is to continue the trend toward raising tax revenues from internal sources rather than through taxes on external trade, particularlyexports, so that taxes on income and value added eventually become the main source of revenue. xxvi. Inadequate control of public expenditures has been at the root of Haiti's current fiscal problems. The short- and medium-term prospects imply the need for their continued restraint. Aware of this, the Ministry of Finance has recently taken significant steps to subject the commitment and payment of Treasury funds to prior authorizations. But other important measures are needed. Paramount among them is the centralizing of annual budgeting and accounting of all development expenditures in the Ministry of Finance. The Government could also take steps to develop a better capacity to project the future implications for the current budget of its investment plans. Other steps for the longer term are the establishmentof an appropriate mechanism to coordinate and control all public wages and salaries, and the clarification of relations between the public enterprises and the Government. Positive steps have been taken recently with the abolition of the Rggie du Tabac et des Allumettes, management improvements in some public enterprises, and reforms in the Ministry of Finance's Direction du Tresor. Other 6eneral Policies xxvii. With fiscal and monetary restraint, the fixed parity and free exchange system could continue to provide a sound basis for the expansion of output and trade. Trade policies, however, distort both trade and development priorities. The most important anti-export policies - import quotas, customs tariffs and export taxes - are discussed elsewhere. Less important aspects also deserve attention. Excessive and lengthy formalilties - viii - at points of eatry or exit constitute an inconvenience which may in certain cases cause serious business losses. They could be expedited more efficiently; the new customs house will help. Promotion of both merchandise exports and tourism must become more aggressive. The benefits of emigration might be increased through concerted action with host countries;a study of possible measures could be carried out based on experience in other countries. xxviii. The 1961 Labor Code as updated in 1984 sets the rules governing wages and working conditions on the labor market. Wages are flexible and the cost of unskilled labor is comparatively low - the two main factors behind Haiti's competitivenesson world markets. Wages of technicians,supervisors and mid-level managers are, on the other hand, comparativelyhigh, reflecting the very limited supply of these skills in Haiti. Yet modern economic development can only take off when there is an abundance of these skills. Importing them is but a temporary means of relieving the shortage. The Government must address this problem, assessing carefully the future roles of the public and private sectors in providing training. xxix. The financial sector is fairly diversified and meets the economy's short-term financing needs fairly well. However, the free exchange system results in a comparativelyhigh level of interest rates in Haiti in order to prevent capital flight; there are also some (mostly legal) difficultiesin obtaining appropriate security. Institutions specializing in long-term financing are not yet self sustaining, despite considerable external financial and technical support. There is a surprisingly large number of development banks and some consolidation may be in order. Certainly, no new ones are necessary. There is a need for strong long-term financial institutions,especially in agriculture and also in industry. Finally, there is a need to develop long-term Haitian savings instruments;a study of the possibilitiesis desirable. xxx. The Government regulates the prices of public monopolies, public industrial enterprises and a wide range of private sector products. The technical basis of Government price controls could be improved. Responsibility for them has been split among several ministries since the transfer of responsibilityfor industry from the Ministry of Commerce to the Ministry of Finance. It should be consolidated. Price controls on tradeables would probably be unnecessary were there no import quotas. Realizing the Agricultural Potential xxxi. Contrary to common belief outside the country, Haiti has considerable agriculturalpotential. It is critical that agriculture expand. It is the sector in which most employment must be created. However rapidly industry grows, it will take some time before it can supply enough jobs to absorb those now leaving the rural areas. Job creation in agriculture must come from output and export expansion as a result of a whole series of linked policy changes. Two are of paramount importance. First, incentives should be set correctly. Second, policy should focus in the short- to medium-term on developing those farm enterprises with the greatest potential for productivity and output gains. - ix - xxxii. With regard to incentives, the Government has recently cut the coffee export tax by 15% for the 1985 crop on top of a 10Z cut in 1984. The impact of these cuts on farmgate prices are to be closely monitored. If it is established that producer prices and incomes do indeed benefit, then further reductions in the coffee export tax are called for as offsetting revenues are raised or expenditures are cut. The Government has also eliminated the export tax on essential oils. xxxiii. A second major policy change required in agriculture is to concentrate on those farm enterprises with the greatest potential for productivity,output and employment growth. They are more likely to be found on the 350,000 ha of cultivated land on the plains, where irrigation and modern farming techniques can be applied most effectively, than on the hillsides. There are also rainfed zones with high potential, though less is known about them. Some 180,000 ha of irrigable land have been identified on the plains. Only 45,000 are irrigated for single cropping. Another 40,000 require substantial rehabilitationof their irrigation infrastructure. The public agricultural investment program should concentrate on those projects which will yield the highest returns at the lowest cost: irrigation rehabilitation,the completion of current projects with major productive impact, and the provision of essential infrastructure,like rural roads, in high potential irrigated and rainfed areas. The excessively long list of current and planned projects should be pruned against these criteria. More farm enterprises with potential in the rainfed zones could be identified and strategies developed to increase their productivity. xxxiv. The focus on productivity and increased output must not be interpreted as meaning a reduction of emphasis on measures to rehabilitate the hillsides. On the contrary, reforestation and erosion control measures must be intensified to arrest the ever more alarming loss of soils. This is a challenging and urgent task, but success in these activities is indispensable to the longer-term viability of the agriculttvral sector. In the short- to medium-term, rehabilitation of irrigation systems must include stabilization of the watersheds that feed such systems. xxxv. The Ministry of Agriculture has begun to reorganize and streamline its operations. This must be continued forcefully to enable it to plan, execute and monitor projects more effectively, provide extension services in the high potential zones, and conduct applied research. The development of the high potential zones will also require more investment and working capital than has hitherto been available. The existing credit institutions are weak. Their operations should be strengthenedconsiderably,and possibly consolidated. xxxvi. Other measures that should be taken to promote growth in agriculture are: the elimination of all export taxes other than the tax on coffee discussed above (taxes on agriculturalexports other than coffee account for only 0.6% of all Treasury revenues); a reduction in the sugar excise tax and the introduction of a system to pay farmers at the sugar mills according to the sucrose content of their cane; an increase to the equivalent of import parity in the producer price of seed cotton; a series of fiscal measures to improve land utilization;a study of the possibilitiesfor diversifying sugarcane land into the production of other crops; land tenure reforms where necessary; reforestation and soil conservation; marketing improvements; and the establishment of a better agricultural information base. These are discussed in Chapter IV of the report. Increasing Industrial Competitiveness xxxvii. The compound problem in industry can be resolved by adopting a strategy based on three key elements. First, the anti-export bias of the industrial incentive structure should be reduced, principally through lowering protection and also through the efficient implementation of all administrative procedures for investment, exports and export-related transactions. Second, the major public industrial enterprises should be restructured. Third, industry's needs should be met through the timely provision of infrastructure and an overhaul of the operation and financing of the vocational and technical education system. xxxviii. The protection system is complex, and consists of both import quotas and a highly differential tariff system. The mission did not examine its detailed implementation,in either theory or practice. Its results are evident, however. Protection has distorted the structure of prices. Distortions have led to inefficient high cost production that cannot supply either the assembly industry or foreign export markets. In agro-based industries, such as cotton textiles, it also depresses farmgate prices and production of the raw materials. The new InvestmentCode of early 1985 promotes coa#petition and puts all firms on an equal footing with regard to tax incentives. It is a step forward and marks the successful initiation of a constructivedialogue between Governmentand private industry. The code does not reduce protection but the Government is committed to this goal. xxxix. The decision to follow through on this commitment rests with the entire Government but implementation could be the responsibility of the Minister of Finance. A small study unit would be useful to develop a necessary information base, recommend a new tariff structure, and advise the Minister. The first step could be the replacement of import quotas by customs tariffs. All tariffs could then be progressivelylowered. xf. The Government will have to assure exporters access to very low duty raw materials and intermediate goods imports throughout the process of adjustment to the world price structure. Medium-term credit may be necessary to support industrial restructuring. Finally the Government should take steps to implement incentives consistently and transparently while removing administrative obstacles to exports and export-oriented investment. First steps to improve the efficiency of the Customs have been taken, for example, but other improvementsare needed. Over time, the reduction of protection should lead to an expansion of exports, increased backward Linkages from the assembly industry to local industries and from industry to agriculture,and improved fiscal revenues as the long-term tax policy objectives discussed earlier are attained. xli. The State has either purchased or established five major industrial enterprises in recent years: an edible oil refinery (SODEXOL), the flour