(2010-06) CRS - Ekonomi Ayiti ak Lwa HOPE la

The Haitian Economy and the HOPE Act -name redacted- Specialist in International Trade and Finance June 24, 2010 Congressional Research Service 7-.... www.crs.gov RL34687 CRS Report for Congress Prepared for Members and Committees of Congress The Haitian Economy and the HOPE Act Summary In December 2006, the 109th Congress passed the Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2006 (HOPE I), which included special trade rules that give preferential access to U.S. imports of Haitian apparel. These rules were intended to promote investment in the apparel industry as one element of a broader economic growth and development plan. HOPE I allowed for the duty-free treatment of select apparel imports from Haiti made from less expensive third-country inputs (e.g., non-regional yarns, fabrics, and components), provided Haiti met rules of origin and eligibility criteria that required making progress on worker rights, poverty reduction, and anti-corruption measures. Early assessments of the effectiveness of HOPE I, however, were disappointing. The 110th Congress responded by amending HOPE I with the Hemispheric Opportunity through Partnership Encouragement Act of 2008 (HOPE II). HOPE II extended the preferences for 10 years, expanded coverage of duty-free treatment to more apparel products, particularly knit articles, and simplified the rules, making them easier to use. Early evidence suggests that apparel production and exports are responding to these changes. HOPE II also amended the eligibility requirements by requiring Haiti to create a new independent Labor Ombudsman’s Office and establish the Technical Assistance Improvement and Compliance Needs Assessment and Remediation (TAICNAR) Program. The TAICNAR program provides for the United Nations International Labor Organization (ILO) to operate a firm-level inspection and monitoring program to help Haitian apparel factories comply with meeting core labor standards, Haitian labor laws, and occupational health and safety rules. It would apply to those firms that agree to register for the program as a prerequisite for utilizing the tariff preferences. The TAICNAR program is also designed to help Haiti develop its own capacity to monitor compliance of apparel producers in meeting core labor standards. The earthquake that rocked Haiti on January 12, 2010 caused considerable damage to the apparel sector, although much has been done to return capacity to pre-earthquake levels. Rebuilding costs for the industry are estimated at $38 million to refurbish damaged buildings, replace machinery, and train new employees. The U.S. Congress responded to the apparel industry’s needs by amending the HOPE Act with the Haiti Economic Lift Program (HELP) Act of 2010 (P.L. 111- 171), which improves U.S. market access for Haitian apparel exports. Two important considerations guided congressional action in addition to a broad-based concern over Haiti’s economic and social problems. First, legislation appeared to focus on enhancing those preference rules that have so far shown the most promise for promoting investment, production, and apparel exports. Second, Congress factored in the possibility of negative effects on U.S. producers and workers, and in so doing sought a policy coherence that attempts to balance domestic and foreign policy considerations. The HELP Act made a number of major changes to the trade preferences including extending the Caribbean Basin Trade Partnership Act (CBTPA) and the HOPE Act through September 30, 2020; allowing the value-added rule to remain at 50% through 2015; increasing the woven tariff preference level (TPL) to 200 million square meter equivalents (SMEs), with many exclusions to accommodate U.S. industry; expanding the knit TPL similarly; reducing the 3-for-1 earned import credit to 2-for-1; and expanding the list of products eligible for duty-free treatment under special assembly rules. The HELP Act requires U.S. Customs and Border Protection (CBP) to verify that apparel articles imported under the TPLs are not transshipped illegally into the United States, and to develop a plan to evaluate and improve Haiti’s customs capabilities. Congressional Research Service The Haitian Economy and the HOPE Act Contents Political and Social Challenges to Haitian Development..............................................................2 Economic Background................................................................................................................4 Macroeconomic Performance and Policy Responses..............................................................4 Sector Issues.........................................................................................................................8 Foreign Trade and Investment...............................................................................................8 Apparel Production in Haiti.......................................................................................................10 Evaluating Haiti’s Competitiveness.....................................................................................13 Effects and Implications of the 2010 Earthquake.................................................................14 The Haiti HOPE Act.................................................................................................................15 HOPE I...............................................................................................................................16 HOPE II..............................................................................................................................17 Tariff Preferences and Rules of Origin...........................................................................17 Labor Provisions...........................................................................................................18 The HELP Act...........................................................................................................................20 Legislative Changes............................................................................................................21 CBTPA and HOPE Act Extended..................................................................................21 Value-Added Rule Softened..........................................................................................21 Woven TPL Rule Increased...........................................................................................22 Knit TPL Rule Increased...............................................................................................22 3-for-1 Earned Import Credit Reduced..........................................................................22 Apparel Subject to Certain Assembly Rules and Wire Harnesses...................................23 Transshipment and Customs Provisions Amended.........................................................23 Outlook.....................................................................................................................................23 Figures Figure 1. Map of Haiti.................................................................................................................2 Figure 2. Growth in GDP, 1998-2009..........................................................................................6 Figure 3. Haiti Direction of Trade, 2008......................................................................................9 Figure 4. U.S. Imports of Haitian Apparel, 1989-2009...............................................................12 Tables Table 1. U.S. Market Share of Haitian Top Five Apparel Exports, 2009.....................................13 Table 2. U.S. Imports of Apparel from Haiti by Preference Program and Rule...........................21 Appendixes Appendix. Haiti: Selected Economic Indicators.........................................................................24 Congressional Research Service The Haitian Economy and the HOPE Act Contacts Author Contact Information......................................................................................................24 Congressional Research Service The Haitian Economy and the HOPE Act H aiti’s economic, political, and social development has been on a slow track since the transition from dictatorship to democracy began in the mid-1980s. The devastating earthquake of January 12, 2010, was a major setback to what little progress had already been made. Haiti struggled with providing basic needs even prior to the catastrophe, but currently is without the physical, political, and economic infrastructure to provide adequately for its citizens. As the massive humanitarian relief effort continues, planning for Haiti’s economic reconstruction and development is also underway.1 The transition from disaster relief to a national redevelopment strategy is essential, and by all accounts, must be comprehensive, directed at all sectors of the economy, and guided by the Haitian government in cooperation with the United Nations and other international assistance organizations. The U.S. Congress has long taken a comprehensive view of aid to Haiti, annually appropriating funds in support of security, humanitarian relief, and development assistance. Yet, the Haitian economy even before the earthquake had experienced extremely slow growth in output, employment, and productivity. One important step that reflects the nexus of congressional interest and Haitian need is the HOPE Act. In December 2006, the 109th Congress passed the Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2006 (HOPE I)2 to assist Haiti with expanding its apparel trade as a way to help stimulate economic growth and employment. The act included special rules for the duty-free treatment of select U.S. apparel imports from Haiti, particularly those made from less expensive third-country inputs, provided Haiti met rules of origin and eligibility criteria that require making progress on worker rights, poverty reduction, and anti-corruption measures. Early assessments of the effectiveness of HOPE I, however, were disappointing and the 110th Congress responded in 2008 by amending it with HOPE II.3 HOPE II extended the preferences for 10 years, expanded coverage of duty-free treatment to more apparel products, and simplified the rules of origin to make them easier to use. The act also included a new requirement to ensure that participating apparel firms comply with internationally recognized core labor standards and submit to regular inspection by the United Nations International Labor Organization (ILO). In the aftermath of the earthquake, congressional interest again turned to amending the HOPE Act to increase incentives for investors. The Haiti Economic Lift Program (HELP) Act of 2010 (P.L. 111-171) was introduced in the House and Senate on April 28, 2010.4 It passed in the House on May 5, 2010 and in the Senate the following day with strong bipartisan support. The HELP Act extended the Caribbean Basin Trade Partnership Act (CBTPA) and the HOPE Act through September 30, 2020. It further enhanced those HOPE Act trade preferences that appeared to have demonstrated the greatest effect in promoting Haitian apparel exports, particularly the least restrictive of those that allow use of lower-cost apparel inputs sourced from anywhere in the world. These provisions give Haitian firms a competitive advantage in the U.S. market, which is intended to attract long-term investment to Haiti’s primary export industry. This report analyzes the evolution of the HOPE Act as it relates to U.S. trade policy, the Haitian economy, and post- earthquake reconstruction efforts. 1 For details and updates on relief efforts, see CRS Report R41023, Haiti Earthquake: Crisis and Response, by (name redacted) and (name redacted) 2 Title V of the Tax Relief and Health Care Act of 2006 (H.R. 6111/P.L. 109-432). Technically an amendment to the Caribbean Basin Economic Recovery Act (CBERA) of 1983 (P.L. 98-67). 3 Title XV of the Food, Conservation, and Energy Act of 2008 (H.R. 6124/P.L. 110-246)—the “Farm Bill.” 4 H.R. 5160 and S. 3275, respectively. Congressional Research Service 1 The Haitian Economy and the HOPE Act Political and Social Challenges to Haitian Development A discussion of Haiti’s current social and political situation is now clouded by the massive destruction caused by the January 2010 earthquake. By all accounts Haiti struggles to provide basic services and is in need of massive amounts of international aid. President Préval continues to govern, meeting with his cabinet ministers and helping to coordinate international relief efforts, but the extension of emergency presidential powers and delays in holding local and national elections have emboldened political opposition. This situation exacerbates Haiti’s social and political problems deeply rooted in the country’s historical development patterns. Figure 1. Map of Haiti Source: Map Resources. Adapted by CRS. Haiti occupies the western third of Hispaniola, a Caribbean island it shares with the Dominican Republic (see Figure 1). Haiti has endured a long post-colonial history of poverty, political repression, and underdevelopment, a trend that continues to challenge the sustainability of Haiti’s fragile political stability. Since the end of the Duvalier dictatorship in 1986, Haiti has struggled to institutionalize democracy, and so far has been unable to overcome a legacy of weak governance, economic inequality, and social unrest. The presidency has alternated largely between Jean- Bertrand Aristide and René Préval, both of whom struggled to establish a broadly accepted government, in part for the lack of progress in changing the legacy of inequality in Haitian society. President Préval’s second administration, begun in 2006, initially sparked a ray of hope Congressional Research Service 2 The Haitian Economy and the HOPE Act among the masses, but his government has since been marred by decisions that have weakened his support and raised doubts about fledgling institutional democracy. The earthquake has worsened an already difficult political situation.5 The post-dictatorial political system is new, fragile, and in many ways, susceptible to criticism that it has failed to establish a fully functioning government. After four years into his second non- consecutive term, Préval’s leadership, vision, and strategy to address long-standing poverty and unemployment have come under question. The transitory terms of his prime ministers, along with delays in holding Senate elections, and in initiating widely supported constitutional reform (particularly to amend a repetitive, expensive, and so far unworkable electoral system) have compromised the government’s legitimacy. The multiparty system, rather than consolidating politics, may be slipping further into factional partisanship, leading to low voter turnout, evidence for some of the failure to promote a “political culture of participation.”6 Multiple observers note that the government bureaucracy suffers from a historic endemic corruption, acting to enrich itself while failing to delivery basic services to the Haitian people.7 Political tensions emerged once again during the Senate runoff elections that took place on June 21, 2009. The dominant party of President Préval gained 5 of the 11 seats, but the numbers mask a broader discontent within Haitian society. Turnout was exceedingly poor, estimated at 10% or less of registered voters, and scattered violence marred any overall sense of a society exercising its democratic privileges, not to mention the cancellation of voting in one province. The elections took place amid serious protests by medical students after classes failed to resume, and by society as a whole over an emotional debate on raising the minimum wage, which congress eventually passed and President Préval signed into law. Some constituents have questioned Préval’s commitment to the populist platform that helped bring him to power as he pursues a pragmatic middle path to governance.8 In the wake of the current disaster, Préval’s leadership is being fully tested, in part by electoral politics. Elections have been interrupted by the earthquake and as of May 8, 2010, terms for the National Assembly and one-third of the Senate have expired, but not before parliament extended Préval’s mandate until May 11, 2011. It also appears as though the presidential and parliamentary elections scheduled for November 2010 may be delayed, in part from lack of presidential action. Taken together, these actions have caused additional friction in an already highly stressed society and have also led to congressional calls for President Préval to expedite efforts to set a firm election date.9 Haiti’s uneven social structure lies at the heart of its state of recurring crisis. Haitian society has small middle and working classes, and is dominated by the chasm between a tiny minority of wealthy elite and the impoverished masses, the latter of which have little power or participation in 5 For an analysis of Haiti’s authoritarian tradition and obstacles to democratization, see Fatton, Robert Jr. Haiti’s Predatory Republic: The Unending Transition to Democracy. Boulder: Lynne Reinier Publishers. 2002. 6 Perito, Robert M. Haiti: Hope for the Future. United States Institute of Peace. Special Report 188. June 2007. p. 6. 7 Fatton, Haiti’s Predatory Republic, pp. 10, 14 and 112-17; Transparency International. Corruption Perceptions Index, 2008 (Haiti ranked 177 out of 180) and; U.S. Department of State. Haiti: Country Report on Human Rights Practices, 2007. March 2008. pp. 1 and 8. 8 Jonathan M. Katz, “Many Haitians Say Away from Polls, Senate Seats Contested in Runoff Elections,” South Florida Sun-Sentinel, June 22, 2009, p. 10A. 9 U.S. Congress, Senate Committee on Foreign Relations, Haiti: No Leadership--No Elections, committee print, 111th Cong., 2nd sess., June 10, 2010, S.Prt. 111-50, pp. 4-5. Congressional Research Service 3 The Haitian Economy and the HOPE Act governing. Politics since the transition to democracy in 1986 has not altered this precarious relationship. The highly skewed distribution of power and resources, and the underlying fear it generates, have made the transition to democracy difficult. Haiti’s political future appears tenuous as long as entrenched economic and social patterns remain unchanged.10 Research on the sustainability of young democracies suggests that Haiti occupies the category of highly vulnerable countries. Initial conditions that correlate with a reversal of democracy include poor economic performance overall, low per capita income, highly skewed income and asset distribution, and weak political institutions that have difficulty enforcing checks and balances on executive power.11 The Préval government is feeling the pressures that poor economic performance places on governments, compounded by the effects of the earthquake. Strong support from the international community will need to be effective in alleviating suffering and providing hope to help rebuild political as well as economic momentum. Prior to the earthquake, security was reportedly improving, although it remained a persistent problem, rooted in the history of violence stemming from political and economic inequality.12 It manifested in the often random violence of gangs and paramilitary groups. Security is currently being enforced by the United Nations Stabilization Mission in Haiti (MINUSTAH), but relief efforts also include the addition of U.S. and U.N. troops. Despite some concerns with sovereignty issues, there is no doubt that the current situation requires a strong foreign military presence for the foreseeable future. The ability of MINUSTAH to handle a possible escalation of social upheaval is an important question given the country’s desperate situation, although the temporary deployment of U.S. forces has helped maintain stability. Economic Background Even prior to the earthquake, economic growth and development was hindered within this often marginally functional political and social landscape. Internally, many doubted that the Haitian government could deliver on changing the day-to-day conditions of a population immersed in poverty. Externally, vast amounts of foreign aid expose the challenge of development in a country devoid of the basic cornerstones of growth. The restoration of growth remains the primary economic goal and is a necessary condition for development. The post-earthquake challenge involves nearly the wholesale reconstruction of an economy. Even if Haiti can emerge from the earthquake’s devastation and policies can be designed and resources brought to bear, igniting a sustainable growth trend will not provide the foundation for long-term political and social stability if it cannot begin to address the underlying extreme social inequality. Macroeconomic Performance and Policy Responses Haiti’s dismal economic growth trend epitomizes its long-term development paralysis. From 1960 to 2000, annual average per capita income growth was actually -0.7%, by far the worst performance in the Western Hemisphere. Growth was achieved briefly in the 1970s, led by 10 Fatton, Haiti’s Predatory Republic, pp. 197-205 and Perito, Haiti: Hope for the Future, pp. 2-7. 11 Ethan B. Kapstein and Nathan Converse, "Why Democracies Fail," Journal of Democracy, vol. 19, no. 4 (October 2008), pp. 57-68. 12 United Nations. Security Council Report. Haiti. April 2006. Available at http://www.securitycouncil.org. Congressional Research Service 4 The Haitian Economy and the HOPE Act export-oriented assembly industries, but Haiti experienced a prolonged economic downturn in the 1980s, as did most countries in the region, leading to social and political unrest that ultimately contributed to the overthrow of the Duvalier dictatorship in 1986. In 1991, following an interim government, Aristide emerged briefly as the first elected president, only to be deposed by a military coup within a few months. To force the return of the democratically elected government, the United States and other countries responded with a trade embargo under the auspices of the Organization of the American States (OAS) and the United Nations (UN). Although its success in changing political behavior has been questioned, its economic effects were concrete and devastating. Haiti was already experiencing a decline in output, employment, and income, but the trend mushroomed during the 1991-1994 embargo. The embargo targeted fuel imports (not food, but supplies were delayed), and all exports. Overall, by 1994, per capita income had fallen by 30% in three years and unemployment peaked at 75%.13 Sector effects were highly pronounced. Employment in the assembly manufacturing industry (e.g., apparel, electronics, sporting goods), centered in Port-au-Prince, fell by over 80%, shedding 32,000 jobs. One estimate of the multiplier effect suggests that the embargo eliminated some 200,000 jobs in the formal sector.14 Most assembly plants closed permanently, with only apparel rebounding slightly in the aftermath of the embargo. The inability to import agricultural inputs such as fertilizers and seeds, or to export agricultural goods, had similarly devastating effects on that sector’s production. In addition, because oil imports were blocked, there was a sudden increase in the use of charcoal, accelerating the ecologically destructive trends in deforestation and soil erosion, further damaging agricultural production.15 Trade was renewed in 1995, but economic growth oscillated for the next decade, hampered by recession, flooding, and ongoing political turmoil. In the post-embargo period, annual GDP growth for the decade ending 2006 averaged only 1.1%, lower than Haiti’s 1.4% average population growth rate. This trend is a recipe for perpetuating chronic unemployment, poverty, and emigration pressures in a country like Haiti that cannot absorb most new entrants into the work force. As seen in Figure 2, Haiti’s economic growth has generally lagged badly compared to Latin America and the Caribbean (LAC) as a whole, a region that is itself known for its poor long-term growth record. Growth has been positive since 2005, but averaged only slightly more than 2.0% per year.16 There are many domestic and international issues facing Haiti, but sustainability of its long-term growth is at the core of its development challenge (see data in Appendix). Haiti is the poorest country in the region. Over 70% of the population lives on less than $2 per day. Inequality is extreme; Haiti has the most highly skewed income patterns in the Americas, with nearly half of the nation’s earnings going to the top 10% of the income distribution, while the bottom 10% earns less than 1% of national income.17 Inflation has made matters worse, 13 Gibbons, Elizabeth D. Sanctions in Haiti: Human Rights and Democracy under Assault. Westport: Praeger Publishers. 1999. pp. 13 and 18. 14 Ibid., p. 11, citing United Nations data. 15 Ibid., pp. 10-14 and The World Bank. Haiti: Options and Opportunities for Inclusive Growth. Washington, D.C. June 1, 2006. pp. 1-5. 16 United Nations Economic Commission on Latin America and the Caribbean. Statistical Yearbook for Latin America and the Caribbean, 2009. Santiago, January 2010. p. 77. 17 This is one measure of poverty. Compare with neighboring Dominican Republic with 16% of the population living on less than $2 per day. World Bank. World Development Indicators 2009, pp. 67 and 72. Congressional Research Service 5 The Haitian Economy and the HOPE Act causing real wages to fall by half from 2000 to 2008, despite a major adjustment in 2003 (see data in Appendix). The 2009 global recession although painful, helped arrest inflation, allowing real interest rates to fall along with food and energy prices. Employment opportunities are few, with 80% of workers operating in the informal sector. Figure 2. Growth in GDP, 1998-2009 (in percent) 7 6 5 4 3 2 1 0 -1 -2 -3 -4 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Haiti Latin America and the Caribbean Source: United Nations. Economic Commission on Latin America and the Caribbean. Statistical Yearbook for Latin America and the Caribbean 2009. January 2010. p. 77. The 2009 debate over increasing the minimum wage produced protests and political conflagration, an outrage that attests to the importance that the Haitian people place on the need for policy responses to address persistent poverty. There is little doubt that failure to adjust the minimum wage in line with inflation had deeply eroded the purchasing power of most Haitians. The Haitian Congress proposed to more than double the minimum wage across the board from the equivalent of $1.80 to $5.00 per day. There was disagreement among President Préval’s advisors on supporting this level of increase because employers argued that such large cost increases could force worker layoffs and potentially bankrupt some firms, particularly small and medium-sized businesses.18 As a compromise, President Préval agreed to a minimum wage of $5.00 per day for workers in all sectors except apparel, who received an adjustment to $3.25, with the law requiring parity within a few years. Apparel manufacturers argued that fully trained and efficient apparel sewers already earned in excess of the new minimum wage in any case. The real marginal cost of the raise was 18 Mo Wang, Haiti’s Minimum Wage Battle, Council on Hemispheric Affairs, August 19, 2009 and author’s interviews in Port-au-Prince, November 5-11, 2009. Congressional Research Service 6 The Haitian Economy and the HOPE Act associated with increased expenses for training, vacation, and other paid absences. Shortly after the wage increase took effect, there were reported employment responses. Two prominent employment sectors, retail gasoline and private security, both reported employment decreases as adjustments to high wage costs. Gasoline stations, for example, reduced or eliminated afternoon- evening shifts, a time when retail sales tended to diminish.19 Whether this employment trend will continue over the long run is unknown and perhaps irrelevant in the short run given current conditions. To address the need for a strategic industrial development plan, President Préval established a Presidential Commission on Competitiveness in 2009. Its primary goal was to enact a development strategy based on improving productivity, diversifying the economy, and creating new employment opportunities in the short term. This ambitious plan envisioned the creation of 500,000 jobs within three years by targeting key industries in agriculture, services, and manufacturing sectors that could be started up or expanded relatively quickly. Specifically, the plan calls for investment in five “growth clusters” (fruits and tubers, animal husbandry, tourism, garment production, and business process outsourcing), with additional resources committed to “support sectors” such as infrastructure, finance, information technology, education, and enhanced business climate.20 While the plan is bold, history suggests it will not be easy to achieve. It does, nonetheless, reflect a serious effort to present a comprehensive analytical approach that covers both short-term and long-term development goals. Success in the short term is critical if any progress is to be made in reducing poverty and related social unrest. It will be an important plan to monitor, not only as a gauge of Haiti’s economic success, but because it will likely raise expectations that problems can begin to be addressed in the near future, which may entail a higher degree of political risk. Most importantly, it may provide the basis for Haiti’s emergence from the economic catastrophe it currently faces, including an assessment of the Haitian government’s role in planning and bringing about redevelopment. Despite these plans, Haiti’s growth trend has suffered from the global downturn, which reduced remittances, exports, and public revenue, presenting a risk to Haiti’s economic recovery program. Projections of average annual rates of growth are only between 1% and 2%. To consolidate what little gains have been made in reinvigorating growth, Haiti will have to address a core area of domestic policy, the lack of productivity growth. Persistently low or negative productivity is the result of negligible investment in private enterprise, as well as human and social capital such as education, health care, and infrastructure. It is pronounced in the agricultural sector, where primitive methods and ancient equipment perpetuate low yields, lack of growth in cultivated land, and inadequate food supplies, much of this because of the sector’s “decapitalization” during the 1991-1994 trade embargo. Investment in manufacturing has also been sparse, jeopardizing prospects for longer-term growth.21 Improvements in public administration, especially those that might address widely perceived 19 Author’s interviews in Port-au-Prince, November 5-11, 2009. 20 Presidential Commission on Competitiveness—Groupe de Travail sur la Competitivite (GC), Shared Vision for an Inclusive and Prosperous Haiti, Draft Report, Port-au-Prince, July 2009, pp. 33-46. 21 See United Nations. Economic Commission on Latin America and the Caribbean. Economic Survey of Latin America and the Caribbean, 2006-2007. Santiago, July 2007. pp. 256-259; Global Insight. Haiti. May 29, 2007; The World Bank, Haiti: Options and Opportunities for Inclusive Growth, pp. 5-6; and Gibbons, Sanctions in Haiti, pp. 15-16. Congressional Research Service 7 The Haitian Economy and the HOPE Act problems of crime, corruption, and bureaucratic efficiency, along with private sector gains, could provide the basis for progress under the Préval development plan.22 A critical reconstruction question for both the public and private sectors is whether to rebuild as quickly as possible to meet immediate needs, or invest the additional time and money to rebuild at higher standards. Sector Issues Slow growth is also an obvious constraint at the sector level. Agricultural production represents 30% of GDP and employs up to 70% of the work force, mostly dedicated to subsistence farming. Output has stagnated for decades and declined for five years in a row until expanding by 3.0% in 2007. Agricultural growth is limited by the small amount of arable land, overuse of soil, and poor irrigation. It is also constrained by poor rural infrastructure, destructive agricultural practices, and frequent hurricanes and other natural disasters. Rice, sugar, and coffee are produced at a fraction of levels achieved decades earlier. Haiti currently produces little of these traditional exports, and output of staples has long been insufficient to meet domestic food needs. Haiti, therefore, must import large amounts of food stuffs. Rising international prices of basic foods exposed Haiti’s vulnerability to price shocks and its limited ability to feed itself, as seen in the food riots that occurred in April 2008.23 The subsequent collapse in commodity prices, although a problem for much of the region, helped alleviate some of Haiti’s import bill, at least in the short run. Manufacturing constitutes only 7.6% of GDP and has shown no growth over the past decade until recently. It, nonetheless, is the major foreign exchange earner and holds out some promise for employment growth. Manufacturing is dominated by food processing (47.2%) and apparel assembly (21.1%). Construction and public works account for another 7.7% of GDP and grew by 6.3% over the last two years. These trends reflect recent, new public sector investment and provide one option for employment growth of low-skilled workers. The services sector constitutes 51% of GDP and is led by restaurant and hotel industries, which together account for 27% of GDP. It grew by nearly 6% in 2007. Tourism is not a major factor, but core ingredients of a tourist industry are present in Haiti, should confidence return in Haiti’s ability to maintain political and economic stability.24 Foreign Trade and Investment Haiti has a historically unhealthy dependence on foreign commerce and finance, from the colonial days of the sugar trade to the current assistance provided by developed countries. Total trade (exports plus imports) equals 60% of GDP, but the trade imbalance is large with a deficit equal to 33% of GDP. Haiti is in a difficult position because slow growth in output and exports means that it must rely on foreign sources for basic commodities such as food and oil, as well as manufactured and capital goods. The problem is often made worse by deteriorating terms of trade, when prices of oil and other commodity imports rise relative to prices of Haiti’s exports. 22 Presidential Commission on Competitiveness, Shared Vision for an Inclusive and Prosperous Haiti, pp. 18 and 22. 23 République d’Haiti. Minitere de l’Economie et des Finances. Institut Haitien de Statistique et d’Informatique. Les Comptes Economiques en 2007 and Banque de la République D’Haiti. Produit Interieur Brut Par Secteur; ECLAC, Statistical Yearbook for Latin America and the Caribbean 2007. IHS Global Insight, Haiti, February 23, 2009. 24 Ibid. Congressional Research Service 8 The Haitian Economy and the HOPE Act Haiti’s trade relationship with the world is dominated by the United States, with which it ran a $494 million deficit in 2008. Haiti exports primarily apparel, which accounts for 75%-80% of foreign exchange earnings and for 92% of total exports to the United States. Cacao, mangoes, and coffee compose the small basket (4%) of agricultural exports.25 In 2008, the United States accounted for 78.2% of Haiti’s exports followed in order of magnitude by the European Union (7.4%), Thailand (3.6%), and Canada (3.3%)—see Figure 3. The United States also accounted for 53.5% of Haiti’s imports followed by Latin America (11.6%), the European Union (8.8%), and China (7.1%). Figure 3. Haiti Direction of Trade, 2008 Data Source: Global Trade Atlas. A return to economic growth is critical to finance the trade deficit in the long run. In the near term, however, there is no alternative to relying on foreign sources of income, principally remittances, foreign aid, and grants. Transfers finance Haiti’s fiscal and current account deficits, but they are a poor substitute for production and export-driven financing. They promote long- term dependency and create technical problems, such as exchange rate appreciation that exacerbates Haiti’s structural trade deficit, with no concomitant growth in productivity or output that is typically associated with an export-driven exchange rate appreciation. These transfers, so necessary for Haiti’s short-term survival, are dependent on the fortunes of expatriate citizens and the generosity of foreign governments, diminishing Haiti’s control over the future of its economic well-being.26 Haiti has a poorly diversified export sector, overly dependent on one type of product and a single foreign market, a strategy that has so far shown little lasting positive effect on long-term development.27 The risk to this export structure became increasingly clear with the U.S. economic downturn, which reduced demand for Haitian goods (falling 7.5% year-over-year). As the Commission on Competitiveness notes, reliance on U.S. trade preferences for apparel exports 25 U.S. Department of Commerce data reported in the World Trade Atlas. 26 This point is made by the IMF, which speaks to the need for Haiti eventually to return to a more normal pattern of investment and export-led growth rather than rely on international donors indefinitely. International Monetary Fund. Haiti: Selected Issues and Statistical Appendix. IMF Country Report No. 07/292. August 2007. p. 17. 27 Dupuy, Alex. Globalization, the World Bank, and the Haitian Economy. In: Knight, Franklin W. And Teresita Martínez-Vergne, eds. Contemporary Caribbean Cultures and Societies in a Global Context. Chapel Hill: University of North Carolina Press. 2005. pp. 51-52. Congressional Research Service 9 The Haitian Economy and the HOPE Act represents a long-term opportunity, but only if the sector can be expanded into greater value- added activities and other sectors of the economy begin to contribute more to growth in output and exports.28 Haiti’s trade dependence is most pronounced on the import side. Haiti imports manufactured goods, machinery, transportation equipment, raw materials, energy, and food. It is unable to produce most of these needs and will be a large net importer for the indefinite future. Haiti’s vulnerability became acute over the last decade with the rise in food and energy prices, which had a huge budgetary effect. From 2002 to 2007, the value of food and energy imports rose 57% and 159% respectively, even as volume declined slightly. In 2008, petroleum accounted for 25%-30% of total imports. This trend points to two fundamental problems. First, higher commodity prices make food and energy imports more expensive, decreasing Haitian purchasing power. Second, to compensate, there is a compounding substitution effect, in which other goods must be given up to spend more on food and energy. This effect may be seen in the decline of imports of manufactured goods, which fell by 37% from 2002 to 2007.29 Foreign direct investment (FDI) in Haiti has been historically very low. Net FDI inflows ranged from $4 million in 2000 to $14 million in 2004, and then spiked to $160 million in 2006, before falling to $30 million in 2008. The large increase appears to be related to an investment boost in construction and tourist industries, which seems to be limited in duration. Construction activity in the public and private sector has expanded briskly, but FDI inflows were not expected to continue at this recent higher level.30 One approach to attracting FDI to Haiti rests on reinvigorating the apparel industry, a strategy that the U.S. Congress supports with the HOPE Act. Apparel Production in Haiti Although agriculture is the single most important sector of the Haitian economy for both jobs and output, apparel assembly is the core export industry and one promising source of employment growth in the formal sector. Apparel production is a globally competitive industry that often relies on a multi-country chain of production. Fiber, yarn, and fabric production is capital intensive and provides the opportunity for the greatest value added. Garment assembly, by contrast, is highly labor intensive, offering thinner profit margins. Assembly factories are far less expensive to build than textile mills and location of production is often a secondary consideration to levels of vertical integration and global networks, use of technology, ability to demonstrate socially responsible production, and overall cost containment. The attraction of apparel assembly is the relatively low levels of investment and skills required to operate this entry-level segment of the industry. It not only provides opportunity for quick job growth, but also for advancement into the higher value-added work as investment, experience, contacts, and labor skills progress.31 Haiti is a prime candidate for redeveloping the apparel exporting industry because assembly requires an abundance of low-skill labor, but relies on relatively simple technology and small 28 Presidential Commission on Competitiveness, Shared Vision for an Inclusive and Prosperous Haiti, pp. 44. 29 Ibid., Importations d’ Haiti, February 2008. 30 Ibid., Résumé de la Balance des Paiements d’Haiti, February 2008 and Economic Commission on Latin America and the Caribbean, Economic Survey of Latin America and the Caribbean, 2006-2007, p. 259. 31 CARANA Corporation, Garment Manufacturing in Haiti: An Economic Analysis of the Cost Structure and Recommendations for the Way Forward, Prepared for CHF International Haiti, June 14, 2009, pp. 5-7. Congressional Research Service 10 The Haitian Economy and the HOPE Act capital investment. Therefore, production naturally gravitates toward locations with low labor costs. Although Haiti’s labor costs are not as low as those in some Asian countries, they are the lowest in the region, allowing Haiti to niche into apparel assembly. As shall be discussed, at the margin, U.S. trade preferences and relatively relaxed rules of origin can provide a critical benefit.32 The fortunes of the apparel sector to date, however, have paralleled the broader trends of the economy, which have been subject to tremendous social and political turbulence. Historically, the apparel heyday in Haiti lasted from the 1960s through the end of the Duvalier dictatorship in 1986. The troubled transition to democracy, including the 1991 military coup and trade embargo that followed, caused a massive downturn in production for years. Since 1994, the Haiti apparel industry has entered into a slow and tentative period of rebuilding. At its peak in the 1980s, Haitian apparel industry sources estimate that the number of jobs ranged upward of 100,000. The 1991-1994 trade embargo effectively closed apparel operations, causing employment to fall to near zero for a short time, as many apparel manufacturers apparently left Haiti for Honduras and other sites in the region. In its rebuilding, Haitian apparel firms estimate that employment more than doubled to 27,000 since the original HOPE legislation passed in 2006.33 Firm-level apparel output data are not readily available, but because over 90% of apparel production is exported to the United States, U.S. import data can serve as a reasonable proxy for production trends. Figure 4 shows the trend of U.S. imports of Haitian apparel by volume. Note that imports were falling in the tumultuous aftermath of the Duvalier dictatorship, hitting bottom during the 1991-1994 trade embargo. With a temporary return to relative political calm, U.S. imports (again as a reflection of output) rose, but declined again after 2000 as production was lost to competition and continuing political uncertainty kept investors at bay. Growth renewed after 2002 with industry restructuring. By 2006, a new downturn is noticeable, likely related to two events that occurred at that time: the end of global textile quotas put in place under the World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC), and implementation of the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), which shifted regional U.S. tariff preferences for apparel in favor of Central America.34 The downturn continued into 2008, likely reflecting the effects of the global financial crisis, but returned to growth in 2009. Haiti’s apparel industry faces many challenges. Domestically, the lack of industrial space, the high cost of capital and utilities, and poor infrastructure top the list. Externally, highly efficient competitors both in the region and in Asia will continue to challenge Haiti’s low-cost export strategy. The required use of higher-cost U.S. inputs (e.g., yarns, fabrics, components) for duty- tree entry into the United States has also been a problem, much of it addressed in the HOPE II and HELP Acts (see “HOPE II” and “The HELP Act”). To improve its competitiveness, the industry underwent major restructuring after 2000. Where it once had been a relatively diversified 32 Paul Brenton and Mombert Hoppe, Clothing and Export Diversification: Still a Route to Growth for Low-Income Countries?, The World Bank, Policy Research Working Paper 4343, Washington, D.C., September 2007, pp. 2-10. 33 Correspondence with Haitian apparel representatives, February 2010, and prepared statement by Haitian apparel representatives before the USITC and United States International Trade Commission. Textiles and Apparel Effects of Special Rules for Haiti on Trade Markets and Industries. Investigation No. TR-5003-1. November 8, 2007. p. 2-1. 34 Ibid. Congressional Research Service 11 The Haitian Economy and the HOPE Act producer, the industry as a whole adopted a leaner, low-cost business model based on high- volume production that could take advantage of Haiti’s low-skill labor pool. Haiti was able to rebuild the industry based on this strategy and can compete at the low end of the U.S. apparel market based on its low wages, quality products, and proximity to the United States, consistent with Haiti’s stage of development. Figure 4. U.S. Imports of Haitian Apparel, 1989-2009 Source: U.S. Department of Commerce. International Trade Administration. Office of Textiles and Apparel. http://otexa.ita.doc.gov/ For the most part, Haiti’s production is still limited mostly to simple knits and some woven products. The mix is shifting, however, toward greater production of more complicated woven goods (e.g., khaki pants), which rose from 12.6% of apparel exports to the United States in 2007 to 18.6% in 2009. Knits (e.g., t-shirts and sweatshirts) fell from 87.4% of apparel exports to the United States, to 74.4% over the same two years. Haiti’s top five apparel products account for 90% of U.S. apparel imports from the country. As may be seen in Table 1, for these articles, Haiti’s primary competition is Central America, the Dominican Republic, and Southeast Asia (ASEAN),35 even more so than China, with the exception of articles produced from man-made fibers. Mexico, Bangladesh, and other countries are also important competitors for some items. Rejuvenating Haiti’s apparel assembly industry has been criticized as a growth strategy for its lack of development potential and vulnerability to rapidly changing market conditions. Nonetheless, it has survived as a niche production strategy in a highly competitive industry, even diversifying its product line. Supporters of the sector argue that given Haiti’s limited options for rebuilding its economy in the short term, the apparel sector offers one relatively quick response to chronically high unemployment. Apparel assembly has also allowed manufacturing to remain in Haiti that might otherwise have migrated to Asia or Central America, and the industry has 35 The Association of Southeast Asian Nations: Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Lao PDR, Myanmar, and Cambodia. Congressional Research Service 12 The Haitian Economy and the HOPE Act recently begun to diversity production.36 Haiti’s apparel industry relies entirely on foreign producers for yarns and fabrics. Fabric is sourced primarily from the United States, the Dominican Republic, and Asia, in approximately equal proportions. Apparel factories produce for a wide variety of firms including Hanes (U.S.), Gildan (Canadian), Wilbes (South Korean), and Grupo M (Dominican), who contract for many well-known U.S. brand names. Table 1. U.S. Market Share of Haitian Top Five Apparel Exports, 20