Current Economic Position and Prospects of Haiti

FIE 'CRY Report No. 1243-HA Current Economic Position and Prospects of Haiti (In Two Volumes) Volume l: Main Report flU L1A & fILE December 7, 1976 Latin America and the Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Fank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Currency Equivalents Currency Unit = Gourde (G) US$1 = G5.00 Gl = US$0.20 GI million = US$200,000 Fiscal Year October 1 -September 30 FOR OFFICIAL USE ONLY CURRENT ECONOMIC POSITION AND PROSPECTS OF HAITI. Latin America and the Caribbean Regional Office This Report is based on the findings of an economic mission which visited Haiti in April 1976. The mission was led by Alexandre Nowicki and included the following members: Alberto Eguren (Economist), Jean-Paul Pinard (Economist), Laszlo Garamfalvi (IMF -Public Finance) and Michael Zuntz (OAS -Balance of Payments). The mission also benefitted from the brief assistance of Gerardo Soto (Agriculture). TPA docwnSnt has a utricted diWibution UM may be wed by recipents only in the performance of their official duties. Its contents may not otlwise be diuciced without World bank authorization. CURRENT ECONOMIC POSITION AND PROSPECTS OF HAITI Table of Contents VOLUME I: MAIN REPORT Page No. COUNTRY DATA MAP SUMMARY AND CONCLUSIONS ................................ i-v I. INVENTORY OF RESOURCES FOR GROWTH ...................... 1 II. LONG-TERM TRENDS ....................................... 5 Fconomic fTLends ...................... , 5 Social Trends ..................... 7 III. RECENT DEVELOPMENTS .................................... 11 Growth ...................... ...................... 14 Foreign Trade ..................................... 14 Private Consumnption and its Social and Economic Implications ..... ...................... 15 International Comparisons .......... .. ............. 16 IV. MANAGEMENT OF TIhE ECONOMY ......................... .... 19 Institutions .. ............ 19 Money and Prices ....... .......... ................. 26 Public Finance .................. .................. 30 Balance of Payments .................. 45 V. STRUCf[JRE,(DF TfIE ElCONOMY ................................ 63 Agriculture ................... .................... 63 Manufacturing .. 69 infrastructure .. ........... 72 Transport .. ....................................... 72 Telecommunications ................ ................ 73 Water Supply and Sewerage . . 74 Social Sectors ....... ........... .................. 75 Education .................... ..................... 77 VI. FUTURE PROSPECTS ....................... 81 Reorganization of Public Finance Management ... .... 81 Inivestment Requirements ........................... 82 Financing of Public Investment .................... 86 TABLE OF CONTENTS (Continued) TEXT TABLES (Continued) Page No. Table 22 Expenditures on Health 42 Table 23 Health Expenditures per capita 42 Table 24 Financing of Public Sector Development Expenditures 43 Table 25 Financing of the Public Sector Deficit 44 Table 26 Summary Balance of Payments 46 Table 27 Gross and Net Exports, 1970-75 47 Table 28 Small Industry Exports Including Assembled Components 52 Table 29 Tourism: Some Indicators of Trends, 1973-75 54 Table 30 Merchandise Imports 55 Table 31 Imports of Large Groups of Products 56 Table 32 Capital Goods Imports 57 Table 33 Estimate of Non-essential Imports 59 Table 34 Capital Movements and Reserve Position of the Banking System of Haiti 61 Table 35 Health Indicators in Selected Countries 75 Table 36 Public Investment 86 Table 37 Public Sector Finance, 1976-80 88 Table 38 Financing of Development Expenditures of the Public Sector: 1976-80 89 Table 39 Public Savings Requirements 89 VOLUME II: STATISTICAL APPENDIX TABLE OF CONTENTS (Continued) TEXT TABLES Page No. Table 1 Basic Aggregates of Haitian Development 13 Table 2 Financing of Private Consumption 16 Table 3 Basic Economic Indicators Compared with Expected Values 18 Table 4 Public Revenue Collection in Haiti 21 Table 5 Role of the Public Institutions In the Collection and Expenditure of Public Funds 22 Table 6 Execution of Investment Plans 24 Table 7 Money and Price Movements 28 Table 8 Transactions Demand for Money 29 Table 9 Sources of Financing of Net Domestic Credit of the Banking System 29 Table 10 Source of Expenditure Growth 31 Table 11 Public Finance Deficit and its Financing 31 Table 12 Consolidated Public Sector Savings 1974-75 32 Table 13 Revenues in Percentages of GDP 33 Table 14 Growth of Central Government Revenue, 1971-75, in Percentages Per Annum 34 Table 15 Composition of Tax Revenues 35 Table 16 Customs Duty Collections 36 Table 17 Central Government Revenue and Deficit 37 Table 18 Central Government Budgetary Current Expenditures by Function 38 Table 19 Central Government Extrabudgetary Expenditures - Development and Current 39 Table 20 Expenditures on Education 40 Table 21 Current Expenditures on Primary Education 41 Page 1 of 2pages ECONOMIC INDICATORS 11 GROSS NATIONAL PRODUCT IN 1975 ANNUAL RATE OF GROW1H (%, constant prices) US$ Mln. S 1960 -67 1967 -72 1972-1975 GNP at Market Prices 870.5 100.0 0.1 2.9 3.0 Gross Domestic Investment 98.0 11.3 .3.0 18.5 12.5 Gross National Saving 55.1 6.3 -16.5 44.2 -23.0 Current Account Balance -2.8 -0.3 Exports of Goods, NFS 118. 3 13.6 -2.2 9.2 -1.2 Imports of Goods, NFS 154.4 17.7 0.2 7.0 11.0 OUTPUT, LABOR FORCE AND PRODUCTIVIITY IN 1975 Value Added Labor Force V. A. Per Worker US$ EIn. . % U Agriculture 398.3 45.4 ,, Industry 150.0 17.1 Services 329.0 37.5 * Unallocated Total/Average 877.3 100.0 ,. .. 100.0 GOVERET FINANCE General Goverrment 2/ Central Government G Mln.) __ of GDP ( G ln.) % of GDP 1 1975 197475 1-97 1975 1974- 75 Current Receipts 489.4 3/ 11.2 10.5 3/ 475.4 10.8 10.2 Current Expenditure 456.4 / 10.4 9.8 4/ 452.6 10.3 9.8 Current Surplus 33.0 O.o7 2 ob7 Capital Expenditures./ 288.4 6.6 5.7 213.9 4.9 L.1 External Assistance (net) 4 t 206.3 4.7 3.1 182.0 4.1 2.8 MONEY, CREDIT and PRICES 1970 1971 1972 1973 1974 l975 (Mllion G outstanding end periodT Money and Quasi Money 198.2 251.2 321.1 408.4 530.7 595.5 Bank credit to Public Sectorl/ 189.2 202.5 215.3 244.7 331.6 415.6 Bank Credit to Private Sector 6s.3 78.5 92.1 170.6 310.6 451.3 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 1 9.7 11.3 13.8 14.4 14.8 13.6 General Price Index (1965 -100) - 109.8 112.8 116.2 145.8 164.3 201.6 Annual percentage changes ins General Price Index 3.3 2.8 3.0 25.5 12.7 22.7 Bank credit to Public Sector 7/ -2.1 7.0 5.4 13.7 35.5 25.3 Bank credit to Private Sector 9.9 20.2 19.6 85.2 82.0 45.3 NOTEt All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 1/ Data refers to fiscal years ending September 30 2/ Consolidated 4ccounts of.the-2entral Government and Puiblic Enterprises 3/ Includes net operating surpluses of public corporations / Includes net operating deficits of public corpcrations 5/ Includes technical assistance expenditures 6/ Net loans and grants 7/ Includes IDB and ID: credits to the nublic seeto' channeled through the National Bank 8/ GDP deflator not available not applicable TRADE PAYMENTS AND CAPITAL FL0WS BALANCE OF PAYMENTS MERCHANDISE EXPORTS '-AGE 1 Liyj 197 4 197 5 US $ Mln % (Millions US $) Exports of Goods, NFS 7.-0 115.2 118.3 Coffee 21.0 25.8 Imports of Goods, NFS 95.7 134.9 154.4 Sugar 4.7 5.8 Rsr GP(fi= -) - 7 Essential Oils 5.0 6.1 Resource Gap (deficit -17.7 -19.7 3 Sisal 3.0 3.7 Interest Payments (net) -o.6 -o.6 -0.5 Bauxite 7.9 9-7 Small Industries 37.9 46.5 Other Factor Payments (net) -3.c -5.3 -6.3 Net Transfers 19.1 26.9 40.1 All other comnmodities 2.0 2 4 Balance on Current Account -3.o 1.3 - Total .5 _ 00.0 Direct Foreign Investment 7.0 7.9 2.6 EXTERNAL DEBT DECEMER 31, 1975 Net MLT Borrowing Disbursements .2 8.4 22.4 US Mln Amortization -6.1 -4.8 -6,9 Subtotal -2.9 3- 1.2 Public Debt, incl. guaranteed 62.0 Non-Guaranteed Private Debt Total outstanding & Disbursed 62.0 Other items n.e.i -2.2 -2-7 -39.5 3/ Increase in Reserves (+) 1.1 -19.9 -23.5 DEBT SERVICE RATIO for 1975- Gross Reserves 2 20.1 14.7 12.8 Net Reserves 4 19.5 -0.b -24.1 Public Debt, incl. guaranteed 5-7 Non-Guaranteed Private Debt Fuel and Related Materials Total outstanding & Disbursed 5.7 Imports 4.3 12.4 11.2 Exports - - - IBRD/IDA LENDING, (I C -,157s (Million US $): IBRD IDA RATE OF EXCHANGE _ Outstanding & Disbursed - 1'.3 Throth -1971 Since -1971Unibre US $ 1.00-Undisbursed US 1.00 US = 1.00 G5.0 Outstanding incl. Undisbursed - 51.6 G 1.00 = TJS $ 0.20 G 1.00 = IJS $ 0.20 1/ Data refers to fiscal years ending September 50. 2' September 50 Ratio of Debt Service to Exports of Goods and Non-Factor Services. not available not applicable Country Programs I Latin America and the Caribbean Regional Office r'.tober 26, 19 76 73' 7; 7 72 ~~~~~~~~~~~~~~~~~~~~~~~~~~~IBRD 10955 s S A I' } A < rD ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7772' i t ,, v ~~~~~~~~~~~~~~~~~~A T Z A N T C ot- _ OC A 2 r,: ~~~~~~~~A 7 I A N) t / O ¢C FA I Ch > nf 2 .oh o Posnt ]wQn ;v!eS t~~~~~~~~~~~~~~~~~~~~~~~~ORT.DE-?AIX , (_ > E , ' Xl</ X < ~~~~~~~~~~~.6E Te ., FlLEr~~~~~ A R 78 /# E A I S IF A  zt_Ae8/) : TRANSPORTATION AND RELIEF 4 ' >,- ; '- > o C7c 05 i' MAJOR ROAD PROJECTS 1, T7':'. l 4--noLV'-s.;l N 5 f TH E RlN RO A D (R EC O 7N STR U C T IO N ) ; : l o 5 | X x J x ? ASPHALT, s f ' MUNTAIN RANGES . bwsqei ,;! xr° ~~~~~PILATEAU 'V rep. , ,r>el > > a 0;; DEPAvRTMENT BOUNDARIES __° " :*,1 INTERNATIONAL BOUNDARIES e ,i .r.M .. .-1: 0 ~--~RIVERS t+'i.>If e.eSA: Ip e r7 A9 7|0 __ _, 1 < < t $ / Sentul,# W , Si 7->+-< < < $ r ZL E7;E C KILO.ETERS ed < X f> z '~~~~~~7 , = NCW . P~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-\:aIe.r fbvn0Svd &L) C ,4~~~~~~~~~~~T k'; / sSEf FAAs ir e1LS 7r30 '~~~~~~~~~~ i- 33 X 713 1 >iQy SUMMARY AND CONCLUSIONS 1. Haiti is at present among the thirty or so poorest countries in the world -overpopulated, with limited arable land, scant proven and commercially exploitable mineral resources and largely illiterate population. The rift between the cities and the rural areas, resistance to technical progress and to the need to modernize administration, long periods of insecurity and the existence of an elitist system of education are factors which explain the country's inadequate development. 2. During the last five years of the new Haitian adanirlistrAtion, some major positive departures from the practices of the recent past have taken place. In particular the country became open to foreign expertise and direct foreign investment and sought to obtain substantial concessionary financing for new and important projects. 3. In spite of these favorable indicators, a number of constraints to economic and social development persist. Chief among these constraints is the slow growth in agriculture, which contributes almost one-half of Haiti's GDP and provides a livelihood to 80 percent of its population. The growth of the sector, which was negative during the decade of the sixties partly because of natural disasters, has somewhat accelerated in the seventies, reaching 1.2 percent per annum in 1971-75. As population growth in rural areas was on the order of 1.1 percent per annum there was practically no increase in per capita income in rural areas for a long time. The average income of about 90 percent of the population of rural areas was not more than US$45 in 1970, a level considered as below the threshold of absolute poverty in HaitL. While this level is calculated to have attained presently about US$80, this increase could be attributed almost exclusively to the price inflation. 4. The growth dynamics of sectors located in the urban areas provides more reasons for optimism. In particular, the manufacturing and construction sectors while still in their infancy, grew at more impressive rates. The manufacturing sector which presently accounts for only 12 percent of GDP, grew at 6.8 percent per annum since 1971. Besides a few medium-sized plants producing simple goods for the domestic market, it also consisted of about 150 export-oriented small plants assembling imported inputs and largely owned by foreign capital. The construction industry was buoyant. It grew by some 18 percent per annum and catered in the last year or so to the new large infra- structure projects financed to a large extent by foreign assistance agencies, and otherwise to the middle and high income population of Port-au-Prince, who were the first beneficiaries of the urban centered growth of the last few years. 5. Haiti has an open economy. There are no controls on foreign capital flows and on foreign exchange movements. Its domestic currency is fully convertible. With the international community's revived interest in Haiti, the movements of private and public capital accelerated and began to have an impact on the country's economy and social life. Thus, firstly, the net current transfers into the country attained by 1975, a record level of US$40 million, equal to 4.6 percent of GDP and were sufficient to fill the wide -ii - foreign resource gap of that year. These transfers consisted partly of capital repatriated by returning Haitian residents and partly of grants received from official agencies and private organizations. Secondly, net disbursements of medium and long-term capital, mostly official, amounted to US$21 million in 1975 and compare favorably with hardly US$3 million annually during the preceding four years. Thirdly, the borr6wing abroad by the Haitian banking system has also been substantial. The net foreign liabilities of the banking system increased by some US$20 million annually during the last three years. Most of it was used to finance increases in domestic credit, predo- minantly to the private sector and exclusively on short-term. Fourthly, private direct investment started to establish itself in the country. The amounts were relatively small, never exceeding a total of US$8 million annually but this investment was widely distributed over low cost equipment installed in many small enterprises. 6. Effects of these capital movements were widely divergent. In the broad sense they substantially increased the resource availability of the country. Thus while the GDP in Haiti grew, according to Mission estimates, by only 2.5 percent annually during 1971-1975, its resource availability grew by 5.2 percent during the same period. This helped to step up the public invest- ment effort and public investment began to grow at 32 percent per annum since 1971. A part of the resources contributed by the foreign sector was also chan- nelled into an increase of consumption, reflecting, no doubt, the fact that some private transfers were destined originally for this purpose. Overall consump- tion was growing by more than 4 percent annually, and private consumption was growing by more than 5 percent, while at the same time public consumption underwent a steady decline. In turn, practically the entire increase in private consumption accrued to the population of Port-au-Prince, where the per capita annual growth of consumption reached about 10 percent per annum. 7. This contributed to a further polarization of differences between the city and the rural areas. While per capita consumption in Port-au-Prince was twice that of rural areas in 1970, this ratio had increased to 3.2 times by 1975. The number of jobs in productive sectors in the metropolitan area increased since 1971 by some 9,000 in the manufacturing industry and by 12,000 in the construction industry, compared to an increase of about 80,000 in the metropolitan area's labor force during the same period of which over two thirds came from the rural areas. While, outside the above sectors, additional employment outlets were found in the quickly growing services and in marginal activities, the level of open unemployment in the Port-au-Prince area was estimated to be in excess of 16 percent. As much as 60 percent of the city's population resides in quarters where the living space per person does not exceed 8 square meters and where per capita consumption of electricity is limited to 0.4 kw/h per month. 8. The difference between per capita incomes in the lowest and highest income groups in Port-au-Prince is 1:27, with 2.5 percent of the population receiving almost 20 percent of income and 54 percent of population receiving only 15 percent of income. The middle income group, which in Haitian condi- tions represented income brackets of US$240 per capita per annum in 1970, was -iii - growing quickly. It is composed to a large extent of middlemen and employees in various services in the capital city. A rapid injection of wealth into the Port-au-Prince area and its unequal distribution spilled over in the import bill and the highest and middle income groups accounted for substantial imports of non-essential consumer goods. 9. WThile the difference between the lowest and highest incomes is considerable, unlike in other developing countries, the number of those who receive annual average incomes from labor of about US$1,200 (1970) is small -- about 4,000 persons in all, of whom three-quarters are in the capital city. As they get a relatively small fraction of the entire income of the country, policies aiming to redistribute incomes could alleviate the lot of the poor only if the revenue from increased taxation of luxury consumption is used to assist the rural sector in increasing agricultural production. 10. The balance of payments situation is precarious. Firstly, the net current transfers consist of temporary components, such as donations of private organizations and repatriation of Haitian capital from abroad, and it cannot be expected in future that these components could be maintained at the high level of the last year. Secondly, the growth of profits in industrial and construction activity and the increasingly divergent domestic and foreign price trends, make it both possible and profitable for Haitians to place their capital earnings abroad. The balance of payments residual item of unrecorded transactions, while a rather imperfect measure of this phenomenon, might be considered as an indicator of this trend. They in- creased markedly from around US$9 million annually in the early 70's to over US$40 million annualy in the mid-70's. 11. Recent trade trends make the balance of payments situation even more vulnerable. Haiti's volume of exports of traditional goods--coffee, sugar, cocoa and sisal--was declining or, at best, remained stagnant. The parallel increase in industrial exports contributed only to slow down the decline in overall exports to some two percent annually in real terms since 1971. Exports of light manufactures, assembled from imported inputs, grew from US$13 million in 1971 to US$38 million in 1975, but only one half of these exports could be considered as domestic value added, of which a part of the profit was also often transferred abroad. Conversely, Haiti's imports grew quickly, at 9.1 percent per annum in real terms during 1971-75, and the elasticity of imports to GDP reached a high level of 3.6. A substantial part of these imports, about one half of the total, were consumer goods, of which about 45 percent were of non-essential type. Imports of non-essential goods, equal to US$30 million in 1975 and destined predominantly for consumption in Port-au-Prince, exceeded imports of capital goods by a wide margin. 12. Generally, the country's economic administration needs to be strengthened if the important economic problems accumulated over a long period of time are to be solved. This required improvement of public ad- ministration cannot be achieved unless the recent decline in the salaries of public servants is arrested and reversed so that the public sector can attract and retain qualified personnel. The influence of the public institutions -iv - in their respective areas of economic activity is unclear, whether because it has not been redefined for a long time or because centrally-taken decisions cut across these areas, or, finally because of inadequate flows of information available at the highest levels of economic decision-making. There were only 200 civil servants in Haiti receiving salaries in excess of US$400 per month in 1972 and incomes of the preponderant majority of civil servants were about 40 percent below the average labor income in Port-au-Prince. The Ministry of Finance holds accounts of and exerts control over only 47 percent of revenues collected by its agencies and over 32 percent of total public current and development expenditures. The Planning Agency (CONADEP) directly controls about one-tenth only of total public investment expenditures; not unrelated to this is the fact that investment targets set by it for the key goods-producing sectors, mainly for agriculture, were achieved only to an extent of 52 percent during 1971-75. 13. The key to Haiti's immediate future lies in the development of agriculture. This development should help the Haitian economy along the way toward. regaining an equilibrium between imports and exports at first by halting the tendency of increasing food imports and later by providing addi- tional agricultural products for exports. It should also help in restoring a proper balance between urban and rural incomes and consequently between urban and rural consumption levels. If these objectives are to be achieved, development expenditures in agriculture must increase substantially from their low 9 percent share of total development expenditures during the 1973-75 period. The Government declared in mid-1975 its intention of raising the share of agriculture to an average of 20 percent of development expenditures during the 1976-81 period. 14. An equally important task for Haiti is to restore the leading role and effectiveness of public administration. At present about US$48 million or more than one-third of total public expenditures is made outside the system subject to official recording and accounting. It is desirable that a large part of this expenditure return to the official budget during the forthcoming period, so that it be at least partly utilized to increase public servants' salaries and to provide adequate funds for investment maintenance, the absence of which provoked disrepair of major irrigation and road networks of the country. 15. The international agencies have already committed or are about to commit substantial credit funds to Haiti. These funds are expected to amount to US$60 million annually -US$41 million in credits and US$18 million in grants -contributing the major part of US$87 million necessary for the public sector to finance investment, technical assistance and to provide transfers to private agriculture and industry. To assure that savings of the public sector reach an annual average of US$28 million during 1976-80 up from the level of about US$7 million attained during the last two years, a substantial effort will have to be undertaken by the Haitian administra- tion to increase custom duties, the imposition and collection of which are lagging behind the trend of quickly growing imports. -v - 16. A Joint Commission representing the Haitian Government and foreign aid agencies was created last year to coordinate implementation of foreign assistance to Haiti. The Haitian authorities attach considerable importance to the operation of this Commission and in turn, the participating foreign agencies maintain a close contact between one another. Also, the highest authorities of the Haitian Government seem to be increasingly aware of the country's urgent priorities and may decide to undertake necessary action aimed at designing and implementing new policies, hopefully along the lines suggested above. CHAPTER I INVENTORY OF RESOURCES FOR GROWTH 1. Haiti is the poorest country of the Americas and one of the thirty poorest countries in the world. It is also an overpopulated country. With a total area of only 27,750 square kilometers and a population of about 4.6 mil- lion inhabitants in 1975, the average population density is about 170 persons per square kilometer, comparable to that of the most densely populated countries in the world. The scarcity of arable land worsens the situation of Haiti's population. Arable land hardly accounts for one-third of total land and, if this is taken into account, the average density of Haitian population would amount to about 515 inhabitants per square kilometer, com- pared to 445 persons per square kilometer of arable land in El Salvador, the second most densely populated country in the Western Hemisphere. 2. The country's proven mineral wealth is limited both in scope and extent. Bauxite, the most plentiful mineral, has been mined since 1957. About 700,000 tons of bauxite are exported annually. Copper ore--sedimentary and in veins and usually found in Haiti associated with gold and molibdene-- has been mined since the early 1960's and exported in small quantities. Further copper exploration by two major international copper mining concerns is being carried out at present as well as off-shore oil prospecting. Commercial exploitation of these resources would most probably begin at the end of this decade. In various parts of the country moderate quantities of limestone, sand, gravel, clay, building stone and salt are intermittently extracted for local consumption. Lignite deposits are extensive and there are some manganese deposits, but both remain undeveloped. 3. Agriculture was and remains the exclusive source of livelihood of four-fifths of the Haitian population. The principal food crops are rice and corn, which account, together, for 40 percent of the value of agricultural production. The main export products, coffee and sugar cane, account for another 30 percent of production. Agricultural yields are strikingly low. The soil suffered much from erosion, as trees were cut down to be used for charcoal. Agricultural methods used are those of the past century. With the average farm size estimated at no more than 1.4 hectares and with 88 percent of the peasants still illiterate, there was hitherto little inducement nor, indeed, possibility for modernization of agriculture. The average value of annual crops is about US$290 per hectare at present, and with two-thirds of the rural population holding on average 0.64 hectares per family, average annual income per capita on these small holdings is about US$45 (in 1975 prices) or about one-fourth of the country's GNP. 4. The existing productive capital in Haiti and the country's infra- structure are both scant and underutilized. During the last two decades, 1955-75, the incremental capital output ratio for the entire period amounted to 5.2. Given the length of time, for which this ratio has been calculated, the integral capital-output ratio may be very close to the incremental one. This compares rather unfavorably with the capital-output of 3.2, calculated for developing countries for the 1950-64 period. 1/ 5. The country has about 2,300 miles of roads, of which only 350 miles are paved. Of these, the main highway linking Port-au-Prince with Cap Haitien -the northernmost port -accounts for 170 miles. To travel this short distance, a seven hours' trip is necessary. There was no major highway construction since the mid-1950's until 1974 and in the meantime the road network has deteriorated badly because of an almost complete lack of maintenance. The country's inventory of transport equipment is low. There are, for instance, three passenger cars per 1,000 inhabitants. Of a number of Haitian ports, which in the past assured coastal and international connections, only the port of Port-au-Prince is, at present, being expanded. Despite the increase in the number of cruise ships which might call at Haitian ports and even though coastal shipping accounts for 18 percent of all freight, Cap lHaitien, the second largest port and the principal tourist attraction, can harbor only one ship at a time. 6. Fixed capital in the manufacturing industry is distributed among a few medium sized plants--a cement plant, a flour mill, one large and two small sugar refineries, and a cotton ginning mill. Some amounts of fixed capital were invested in numerous small-size enterprises producing consumer goods (soap, footwear, clothing) and in assembly shops, assembling export goods from imported inputs. 7. Electrical energy capacity is still at its inception, about 70 MW in all. This includes 47 MW of installed hydroenergy, with the remainder distributed among old diesel plants. National average of per capita elec- tricity consumption is at present 32 kwh, about one-third of the consumption level in India. The telecommunication network is scant, with only 14,500 telephone lines, of which all but 500 are situated in the metropolitan area. 1/ The incremental capital-output ratio for 1960-70, calculated for 37 LDC's was 3.2, according to Hollis B. Chenery and Nicholas C. Carter in the "Internal and External Aspects of Development Plans and Performance, "1960-70, Table 6, Development Policy Staff Working Paper No. 141, World Bank, Washington, D.C., February 1973. While it is clear that the marginal capital-output ratio depends on the rate of growth of the economy, and while the latter does not depend exclusively on capital but on such exogenous factors as influence of weather on crops or influence of international market situation on a country's exports, it is also true that the capital-output ratio calculated for the group of 13 countries showing the slowest growth rates was still as low as 4.0, far more favorable than the Haitian ratio. Of all 37 countries only two (Ghana and Argentina) show a capital-output ratio comparable to that of Haiti. [... middle sections omitted for long document ...] -85 - 250. Improvements in agricultural production can be obtained both through the aggregative approach, consisting of the development of integraged rural projects, to rehabilitate ill-functioning irrigation, and through disaggre- gated programs such as rehabilitation of coffee cultivations now sponsored by USAID. Dependence of the rate of growth of agriculture on the volume of investment is based on a crude evaluation of outcomes of these two alterna- tives. It is based on yields which are expected from the adoption of improved cultivation techniques, 1/ and on estimates of fixed investment costs, 2/ additional development expenditures, 3/ and expected increase of production per unit of land (Table 10.2). This was used to calculate the amount of capital resources needed to attain a 3 percent growth rate in agriculture by 1980, 4/ which would call for a 51 percent annual increase in public investment in agriculture (Table 10.3). In absence of any savings in the rural areas, all additional (mainly current) expenditures will have to be financed from credit which would have to increase to about US$11 million by 1980 compared to US$0.7 million in 1975. 251. Total financial requirements calculated above are of a magnitude (at least until 1978) similar to that which is presently intended to be financed by foreign assistance agencies. This suggests that such program is financially feasible. An important but inevitable drawback of such investment program is the strong concentration of its benefits. Thus, rehabilitation of irrigation systems which are at present in a state of disrepair is the most efficient way to achieve substantial gains in agricultural production; how- ever, benefits from these systems are reaped by farmers situated within a limited geographical area and are likely to favor comparatively well-to-do farmers and to cause a redistribution of land holdings pattern toward large holdings. This would unavoidably be accompanied by land price speculation. In the absence of a land cadaster, the Government may not be able to control this undesirable phenomenon. By way of contrast, the coffee program should, by enhancing production of coffee on small land holdings, encourage a more equal spread of resources and consequently, a more equal income distribution. 1/ Possible yields have been estimated by the 1973 FAO/BID agricultural mission in Haiti--see "Possibilites d'investissement et developpement du secteur rural en Haiti," BID, Washington, D.C. February 1974. 2/ Irrigation costs for the aggregated approach and planting of new coffee trees for the disaggregated one. 3/ Mostly fertilizer, pesticides, tools, water and seeds. 4/ Food crop production grew in the past at the annual rate of 1.1 percent, i.e., at the growth rate of the rural population. This is taken as a "natural" growth rate of agricultural production which apparently can be achieved, thanks to minor increases in labor productivity and without any additional investment. Investment requirements are geared to closing the gap between the target growth rate of 3 percent per annum and the "inatural" growth rate of 1.1 percent. -86 - 252. General Investment: Public investment in industry is likely to remain minimal. The remaining development expenditures will therefore be dis- tributed among the non-productive sectors with the largest share going to in- frastructure (Table 10.5). This distribution is predicated on the first prior- ity being attached to agriculture and on the fact that financing for a number of infrastructure projects has been already committed by international aid agencies. The allocation to the social sectors will remain unchanged com- pared with the preceding period, unless the international agencies step up their commitments. It was argued before that, for the proper operation of these sectors, it is crucial to increase firstly and foremostly their current expenditures. This increase, by 6 percent per annum in real terms, has been built into the financial program outlined in this Report. Table 36: PUBLIC INVESTMENT (in millions of 1975 gourdes) Annual Averages 1973-1975 1976-1980 Goods Producing Sectors 20.2 54.8 Infrastructure Sectors 95.9 166.7 Social Sectors 49.6 52.6 Total 165.7 274.1 253. Of the non-productive sectors, infrastructure may be expected to receive the larger share of total development expenditures averaging 62 per- cent during the next five years. Most of the projected outlays are already part of ongoing or committed projects (roads, Port-au-Prince thermal power project, Port-au-Prince harbor, etc.). However, some other investment require- ments are still to be met. Sufficient water supply to Port-au-Prince and to provincial towns is certainly one of the more urgent needs. Also, rehabil- itation of coastal harbors should prove beneficial. 254. In addition to investment expenditures, public contribution includes cost of technical assistance and credit to the private sector. Inclusive of these two components, average public investment requirements amount to US$87.3 million annually during the next five years. The recently prepared Five-Year Plan, which was completed after the Mission's departure and which has not yet been made available, is reported to have set the average annual investment requirements at US$104 million. Comparison between Mission's proposals and Government's targets is not possible in the absence of the knowledge of the analytical method underlying the Government target. Financing of Public Investment 255. The public investment program necessary to meet the target of 4 per- cent annual growth and of a 3 percent annual growth of agriculture during 1976/80 was calculated at US$87 million annually, of which fixed investment represents US$66 million and technical assistance and credit US$21 million, -87 - all in current prices. This compares with annual overall development expen- ditures of US$58 million in 1975, also in current prices. Calculated in current prices, average annual public Tnvestment will have to double in 1976/80, compared with the 1971-75 period. However, an inflation index of 7.5 percent per annum is built into the forecast, and the annual average investment during 1976/80, calculated in 1975 prices, would amount therefore to some US$72 million, an increase of only 24 percent above the public invest- ment carried out during 1975. 256. Public investment in 1975 was financed in 30.5 percent by net dis- bursements from abroad, which were US$17.6 million in that year (see Table 24). These net disbursements are expected to reach US$42.3 million annually during 1976/80, and will therefore finance about 48 percent of public devel- opment expenditures. Approximately, 94 percent of the expected net disburse- ments would come from TDB, IDA and AID, with, respectively, 47 percent, 31 percent and 16 percent shares in the total (see Table 10.16 of Statistical Appendix). 1 257. Of the remaining 52 percent of financing requirements, current grants are expected to finance two-fifths while the remaining, three-fifths (US$28.1 million annually, or 32 percent of total financing) would have to come from public savings. This calculation rules out borrowing abroad on commercial terms and the expansion of domestic banking credit to the public sector. It is also calculated that surpluses of public enterprise (EDH and the Port Administration) could constitute 24 percent of public savings during the period 1976/80. 258. During 1974-75, current expenditures of the Central Government increased by about 37.8 percent. Extrabudgetary current expenditures in- creased at an even faster rate of 63.7 percent. Since there is no evidence that this increase in extra-budgetary expenditures corresponded to increases in operating expenditures of the public administration and of the autonomous agencies, it was assumed that the latter remained constant in real terms at their 1970 level. Secondly, about US$4.7 million (G.23.5 million) of non- identified development expenditures were imputed to extra-budetary accounts. On this basis, a balance of about US$21 million of extra-budgetary expendi- tures in 1975 could be considered as non-essential outlays which would not recur in the future. These expenditures would have to be drawn back into the circuit of normally scrutinized public expenditures, and ultimately would have to be included in the budget. 259. Both budgetary and extrabudgetary expenditures are estimated to increase at 6.0 percent in real terms during the next five years, with the budgetary expenditures regaining their 1970 real terms level by 1979. If tax revenues during 1976-80 continue their past trend, they are calculated to attain for the entire period only US$595 million, in which case the tax burden would decline from 10.8 percent in 1975 to 9.2 percent by 1980. But, consider- ing the necessary increase in current expenditures, a decline of the tax burden below 10.5 percent during 1976-80 would be inconsistent with Haiti's minimal development needs. New tax measures will therefore be required. -88 - 260. As indicated in the concluding paragraphs of the section on public finance, import duties constitute a potential source of additional tax revenues. Through strict enforcement of ad valorem rates, reduction of import duty exemp- tions and a selective increase of import duty rates, about US$15.0 million of revenues could have been additionally collected during 1975. If such measures are taken promptly and are implemented during 1977, at least US$60.0 million of additional revenues could be obtained during 1977-80 to finance public sector expenditures and the possibility of running a current deficit will be largely reduced. 261. Table 37 below shows the amount of public sector savings for the period 1976-80 under two different assumptions. If no additional tax measures were taken to increase tax returns, public savings would attain about US$94 million during those years. If such tax measures were taken they would amount to approximately US$141 million. Table 37: PUBLIC SECTOR FINANCE, 1976-80 (in US$ million) Additional Tax Measures Not Taken Taken Central Government current revenues 595.4 642.4 Central Government current expenditures 524.6 524.6 Central Government savings 70.8 117.8 Savings of public corporations 33.5 33.5 Minus interest payments on external debt 10.8 10.8 Public sector savings 93.5 140.5 262. If the additional tax measures are not taken, public sector borrow- ing of about US$47 million over and above the borrowing from foreign assistance agencies and grants from abroad would be required as shown in Table 38 below. While one could easily envisage a possibility of an internal borrowing of this amount, the Mission has considered that recourse to internal borrowing to finance public expenditures should be avoided. The reason for this is mainly the need for stepping up considerably credit to the private sector. The latter's investment has been markedly lagging in the past and it may lay claims on the entire amount of internal credit which would be prudent to release in the coming few years without increasing the foreign indebtedness of private banks. -89 - Table 38: FINANCING OF DEVELOPMENT EXPENDITURES OF THE PUBLIC SECTOR: 1976-1980 (in US$ million) Additional Tax Measures Not Taken Taken Development expenditures 436.7 436.7 Financing: 436.7 436.7 Net foreign disbursements and grants 296.2 296.2 Remains to be financed by the Government 140.5 140.5 Public sector saving 93.5 140.5 Residual borrowing requirements 47.0 - 263. Counterpart funds requirement for projects financed by official external agencies during the 1976-80 period would amount to approximately US$60.0 million (Table 10.11). Usually in Haiti the availability of counter- part funds is taken for granted when they can be financed from tax revenues earmarked for such purpose. This, however, becomes less apparent when public savings are considered as their legitimate source, instead of tax revenue. In- deed, earmarking procedures should not conceal the fact that domestic financing (including counterpart funds) of past investment did not entirely originate from public savings but also from external grants and internal borrowing. Hence, aggregate public savings--and these could be calculated in various ways, as shown in text Table 12 and on para 78--should be considered as the true measure of domestic effort rather than the availability of counterpart funds. Table 39: Public Savings Req,~,irer.ents -(ir. US$J nxwllcn) Axnnunl PercentagXe lV$76-c0O average _hzxe Public investme-t 357.7J/ 71.5 81.9 Technical Assistance i l5s 18.' Total Development Expenditures 436.7 87.3 100.0 Financing: 436.7 87.3 100.0 1. Net Disbursements 207.2 41.4 47.5 (Gross Disbursements) (223.0) (44.6) (51.1) (Amortization of External Debt) * ( 15.8) ( 3.2) (13.6) 2. Grants 89.0 17.8 2C.3 3. Sawings Requirements 14Q.5 28. 32.2 1/ Of which L'S$330 million £ixzed inventment, US$21.6 million fcr agr cultural credit and U-S$6.1 million for ird'strial credit Source: AD, IDB, CI-ADEP and .nission estimates.