(2016) Haïti—Parlons Concurrence : Un Bref Examen des Conditions du Marché

Haiti—Let’s Talk Competition A Brief Review of Market Conditions Georgiana Pop BACKGROUND PAPER Systematic Country Diagnostic Haiti: Toward a New Narrative TRADE AND COMPETITIVENESS GLOBAL PRACTICE Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Haiti—Let’s Talk Competition A Brief Review of Market Conditions Georgiana Pop Trade and Competitiveness Global Practice © 2016 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 19 18 17 16 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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All queries on rights and licenses should be addressed to the Publishing and Knowledge Division,  The  World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: © World Bank. Further permission required for reuse. Cover design: Bill Pragluski, Critical Stages, LLC. iii Contents Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Abbrevia tions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi Executi ve Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2. Snapshot of Haiti’s Competition Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 3. Analyzing Market Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Appendix: Price C omparison Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Bibliograph y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Boxes 2.1 The Impact of Competition on Growth, Productivity, and Job Creation. . . . . . . . . .6 3.1 Herfindahl-Hirschman Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 3.2 Price Comparison Analysis: Are Prices Higher in Haiti?. . . . . . . . . . . . . . . . . . . . . .14 3.3 Empirical Analysis of the Links Between Ownership Concentration and Economic Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Figures 2.1 Business Risks Related to Weak Competition Policies (by component). . . . . . . . . . .7 2.2 Competition Intensity and Extent of Market Dominance. . . . . . . . . . . . . . . . . . . . . .8 2.3 GDP and Intensity of Local Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 3.1 Concentration Levels (HHI) in the 20 Most Important Haitian Product Markets (Based on Their Share of Total Import Value), 2011–2012. . . . . . . . . . . . .12 3.2 Concentration Levels (HHI) of the Most Important Food Products in the Consumption Basket (Based on Their Share of Consumption Basket and Available Import Data), 2011–2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 3.3 Distribution of Groups and Associated Companies in the Highly Concentrated Markets, 2011–2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Tables 3.1 Customs Duty Treatment of Main Importing Groups. . . . . . . . . . . . . . . . . . . . . . . . .18 A1 Products Included in Cross-Country Price Analysis. . . . . . . . . . . . . . . . . . . . . . . . . .21 A2 Fixed Effect Regression Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 A3 Regression Results Using Numbeo Data for 2010–2013, Including Two African Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 A4 Regression Results Using Numbeo Data for 2014 for 10 Products. . . . . . . . . . . . . .25 A5 Regression Results Using Numbeo Data for 2014 for 7 Products. . . . . . . . . . . . . . .25 A6 Regression Results Using Numbeo Data for 2014, Including Two African Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 iv Haiti—Let’s Talk Competition A7 Fixed Effect Regression Results on Rice Price Analysis from GIEWS. . . . . . . . . . . .27 A8 Fixed Effect Regression Results on Rice Price Analysis from GIEWS-Ministry of Economy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 A9 Regression Results on Rice Price Analysis from GIEWS, Including Two African Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 v Acknowledgments Georgiana Pop (Senior Economist, Competition Policy Specialist) led the preparation of this publication for the Haiti Systematic Country Diagnostic. The team consists of Tanja Goodwin (Private Sector Development Specialist) and Joaquin Zentner (Consultant). This note benefit- ted from valuable guidance from Martha Martinez Licetti, Lead Economist and Global Lead for Competition Policy. Osongo Lenga (Program Assistant) provided support for the prepara- tion of this document. The preparation of the Systematic Country Diagnostic was performed under the leadership of Raju Singh, Lead Economist and Project Leader, Haiti, Latin America and Caribbean. The report was co-authored by a team consisting of Edouard Nsimba, Principal Advisor on macroeconomic policies and economic modeling at the Ministry of Economy and Finance (MEF), Reginald Surin, Clifford Reginald Nau, Dominique des Hommes, Jimy Dorsainvil all Economists at MEF who provided valuable contributions and support to obtaining the required data used in this analysis. The team extends the appreciation to Assistant Professor Suresh Naidu, Columbia University (Department of Economics), Professor James A. Robinson, Harvard University (Department of Government), and Lauren E. Young, Columbia University (Department of Political Science) who provided data from three databases of contemporary firm ownership used in this note. vi Abbreviations ACT  Australian Capital Territory Branch of the Economic Society of Australia BEEPS Business Environment and Enterprise Performance Survey CEPR Centre for Economic Policy Research CIA Central Intelligence Agency CPI Consumer price index DFID Department for International Development FAO Food and Agriculture Organization (UN) GDP Gross domestic product GIEWS Global Information and Early Warning System (on Food and Agriculture) HELP Haitian Economic Lift Program HHI Herfindahl-Hirschman Index HOPE II  Haitian Hemispheric Opportunity through Partnership Encouragement Act of 2008 US Law HS Harmonized Coding System HTG Haitian Gourde (National currency) ICT Information and communication technology IFC International Finances Corporation IIP Infant industry protection LAC Latin American and Caribbean Countries MEF Ministry of Economy and Finance OECD Organisation for Economic Cooperation and Development PPP Purchasing power parity PSD Private Sector Development TEU Twenty-Foot Equivalent Unit UNCTAD United Nations Conference on Trade and Development WCO World Customs Organization WEF World Economic Forum Haiti—Let’s Talk Competition 1 Executive Summary This report presents an analysis of market conditions and market concentration in Haiti. Based on available import data (Ministry of Economy and Finance 2014) and available information on economic group 1 connections, it also presents a limited analysis of the economic groups and companies that operate in Haiti, with a focus on highly concentrated markets. This analy- sis found that Haitian markets are constrained by a mix of factors, including operational busi- ness risks related to weak competitive conditions; highly concentrated markets which likely result in higher consumer prices; and a concentration of ownership in the most powerful firms, which seem to benefit from preferential treatment such as reduced customs duties. This report does not provide a comprehensive competition assessment of the Haitian markets, which would include analysis of other market structure elements such as barriers to entry, capacity constraints, vertical structure, and product differentiation. In particular, two elements of a comprehensive analysis are lacking: information regarding consumer welfare losses due to concentrated markets; and data describing the extent to which a small group of elites hold a significant share of Haiti’s wealth. Furthermore, the lack of detailed information about the persons and economic groups in Haiti receiving certain economic incentives or benefits; the tax instruments that provide reductions/exemptions; and yearly data on the tax revenue of the largest tax payers does not allow for a more comprehensive analysis of the main beneficia- ries of preferential tax treatment, including an analysis of revenues, profits and net margins for the connected groups and firms. More detailed information about the groups’ and firms’ own- ership beyond the data included in this paper would enrich the analysis herein and reveal whether a small number of powerful firms and individuals hold a disproportionate share of the country’s wealth. Effective competition is a key part of the development agenda: it encourages businesses to operate efficiently, ensures that firms can interact on a level playing field and fosters entrepre- neurship activity. Reforms that open markets and remove anticompetitive regulation, such as the elimination of restrictions to the number of firms, statutory monopolies, price controls and discriminatory treatment against certain firms, lead to significant productivity gains. Weak competitive conditions and competition policies are perceived to contribute to a high degree of operational business risk for firms in Haiti. According to the Economist Intelligence Unit (2015), investors in Haiti perceive that they face one of the highest risks in doing business among other countries from the Caribbean region. These perceived risks are mainly related to a weak competitive environment, particularly: a) price controls and the ­control of other mar- ket variables that limit the benefits that firms could obtain by competing effectively; and b) vested interests and discrimination against foreign firms that hinder ­innovation and preclude more efficient firms from gaining market share. According to other competition perception indicators, such as the Global Competitiveness Report of 2015–2016, countries with compara- ble gross domestic product (GDP) per capita also rank better in terms of competition—even countries such as Sierra Leone and Myanmar. Based on available import data, the value of imported goods in highly and moderately ­concentrated markets represent roughly 70 percent of total imports. While highly 2 Haiti—Let’s Talk Competition concentrated markets 2 are not unusual, given the size of Haiti’s economy, high market shares (above 40–50 percent of the market) may create risks of firm abusive behavior with a negative impact on consumers. Highly concentrated product markets (representing around 40 percent of the imports and with an Herfindahl-Hirschman Index (HHI) exceeding 2,500) include petroleum, food and consumer goods markets (telephone sets, motorcycles). The share of imported goods in moderately ­concentrated markets (with an HHI between 1,500 and 2,500) in the total imports, including food, consumer goods (electric generating sets, motor vehicles) and cement markets is also non negligible, reaching about 30 percent of total imports. Given that food and beverages represent around 50 percent of the consumption basket in Haiti, it is essential to closely monitor the effects that highly concentrated markets and associated ­challenges may have on consumer welfare. An analysis over time of prices for several food products in highly concentrated market suggests average prices in Haiti are approximately 35–77 percent higher than in other countries from the Latin American and Caribbean Countries (LAC) region, even taking into account ­differences in income levels, the cost to import containers, and import tariff levels. 3 When some African countries 4 are also included, prices for selected food products in Haiti are 35–50 percent higher than in other countries. Few groups and businessmen appear to operate in the highly concentrated markets with sig- nificant market shares. According to a preliminary analysis, out of the 100 largest tax payers, 23 companies pertaining to the large Haitian groups operate in the financial sector—11 banks, 7 insurance companies and 4 micro finance institutions. It also appears that there may be a tacit agreement among families/groups to allocate markets among themselves. From a compe- tition standpoint, these types of arrangements likely harm productivity and incentives to inno- vate, given the lack of competitive pressure, while raising barriers for other firms to enter. In addition, estimations based on import data suggest that some groups benefit from reduced customs duty treatment for a large number of imported products. While many governments often provide a variety of subsidies and direct support to both public and private firms, specific measures that recurrently target certain firms may result in significant distortions to market competition. In Haiti, five economic groups operating in highly concentrated markets bene- fited from 13 percent lower custom duties on average, with reductions ranging from 5 up to 22  percent (2011–2012). Companies that operate in highly concentrated markets and pay lower customs duties have on average 45.2 family links against an average for the elite families of 23.7 (Naidu, Robinson, and Young 2015). These companies belong to some of the most important Haitian economic groups. 5 It is worth stressing that privileges for specific types of firms can damage long-term private sector development (PSD). They grant a comparative advantage only to certain firms, which is not necessarily associated with their efficiency. Additional research is warranted to complete the overview of market concentration and help understand the factors underlying existing market competition. Haiti—Let’s Talk Competition 3 Notes 1. In this paper, a group is understood as a group of companies with parent and subsidiary corpora- tions tha t function as a single economic entity through a common source of control. Due to limited information, a formal definition of the group cannot be provided in such a way to include informa- tion on actual ownership and direct or indirect control over these groups. In addition, the connec- tion among groups through family links is not readily available for the purpose of this note. 2. The Herfindahl-Hirschman Index (HHI) is calculated based on the imports data provided by the Ministry of Economy and Finance of Haiti. In order to group the goods with similar character- istics, the headings (4 digits) of the Harmonized Coding System were used. Based on the HHI, the concentration levels are classified as follows: 1) Unconcentrated Markets: HHI below 1,500, 2) Moderately Concentrated Markets: HHI between 1,500 and 2,500, 3) Highly Concentrated Markets: HHI above 2,500 (Horizontal Merger Guidelines 2010; U.S. Department of Justice and Federal Trade Commission). 3. Different methods and data sources were used in the analysis. The following products were selected for the cross section empirical analysis: chicken, eggs, bread, cheese, orange, potato, rice, apple, water, lettuce. Comparator countries from the LAC region where price data were available for the same products include: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, Guatemala, Guyana, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay. In the panel data analysis, a subset of products were used as follows: chicken, eggs, bread, cheese, orange, potato, rice. These were the products that were available in Numbeo database and in the Ministry of Economy database. Comparator countries from the LAC region where price data were available for the same products include: Brazil, Chile, Colombia, the Dominican Republic, Guatemala, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay, República Bolivariana de Venezuela. 4. Comparator countries from the Africa region where price data were available for the same products include: Kenya and Mauritius. 5. The links from families to firms were made based on: a commercial dataset called Orbis produced by the Bureau van Dijk corporation (https://orbis.bvdinfo.com/version-2014812/home.serv?product =orbisneo.); a database of Haitian firms assembled by a nonprofit organization called Haiti Building Markets after the 2010 earthquake (http://haiti.buildingmarkets.org/en_af/supplier-search); and an online database of firms registered with the Haitian Minister of Commerce and Industry (http:// registre.mci.gouv.ht/). 4 Haiti—Let’s Talk Competition 1. Introduction Haiti is the poorest country in Latin America and one of the poorest countries in the world. After the earthquake in 2010, the GDP per capita rose from US$669 in 2010 to US$820 in 2013. However, the country still has the lowest GDP per capita in Latin America and Caribbean region, far from Nicaragua who had more than twice Haiti´s GDP per capita (US$1851) in 2013. In Haiti, half of its population (roughly 5 million) lives on less than US$1 per day, and approximately 80 percent live on less than US$2 per day. In addition, less than 30 percent of the households have access to electricity overall and only about 5 percent in the rural areas (World Bank Indicators 2014). More than half of the Haitian economy is based on the services sectors. In 2013, the service sector represented roughly 56 percent of the GDP (banking, electricity, telecom), agriculture (coffee, mangoes, cocoa, sugarcane, rice, corn, sorghum, wood, vetiver) represented 24.1  ­percent, and the industrial sector (textiles, sugar refining, flour milling, cement, light assembly using imported parts) represented 20 percent (2013 CIA World Factbook). The growth of agricultural production has been stagnant. Production of rice, maize, and chick- ens has remained constant over the past 50 years despite population growth, leading to large imports of these three products. On the other hand, Haiti’s exports of cocoa beans have regis- tered consistent growth—compounded annual growth rate of 9 percent between 2003 and 2009. Mango, mangosteen, and guava exports occupied third place in the exports commodity rank. Rice production (80 percent of rice consumed is imported) has been compromised by production difficulties and poor trade policies. Many factors have contributed to the decline of the ­agricultural sector, including continuing fragmentation of landholdings, low levels of agri- cultural technology, migration out of rural areas, insecure land tenure, a lack of capital invest- ment, high commodity taxes, low productivity of undernourished farmers, animal and plant diseases, and inadequate infrastructure (Malik 1989). The manufacturing sector, primarily based on textiles, plays a key role as the country’s single largest economic sector. Haiti has over 30 textile factories and employs over 30,000 workers. Haiti benefits from privileged access to the U.S. market through the HOPE and HELP laws. These laws allow Haiti to assemble textiles, whatever the origin of the imported fabrics, and to export them to the United States duty free and tax free. In 2012, the HOPE II/HELP Acts- related exports constituted 42 percent of all Haitian exports (US$ 303 million). There has also been an increase in the assembly of electronic products (Center for Facilitation of Investments 2013; World Bank Group 2013). The markets in the service sector have been developing at different paces. The Haitian banking system is still vulnerable to systemic credit risk as well as restrictions on the availability of ­capital. According to the US Department of State, three major banking institutions hold 83 percent of the total banking sector assets, valued at HTG 170 billion in September 2012 (nearly US$4 billion—more than one third of the GDP). In the telecom sector, the launch of services by Natcom in late 2011 introduced a competitive boost, though this has been set back to some degree by the Digicel Group’s acquisition of the number two player Voilà, and the integration of the latter’s mobile network in late 2012. The collapse of the third operator HaiTel Haiti—Let’s Talk Competition 5 in mid-2013 left Digicel with about 85 percent market share of subscribers. Haiti’s structure of cost of transport by sea is not competitive compared to similar services in the Caribbean region—the costs of loading and unloading a standard container at Port-au-Prince are by far the highest of the Caribbean ports. According to TranSystem, the total cost by TEU was US$595 by Haitian private operators at Public Berths, and US$445 in Haiti Terminal Varreux, compared to US$121 in Puerto Rico, US$109 in the Dominican Republic, US$109in Port the Point Lisas in Trinidad and Tobago, US$156 in port of Spain in Trinidad and Tobago, and US$154 in Miami (World Bank 2013).At the same time, high airport taxes are levied with the aim of obtaining resources for developing air transport infrastructures. The roads network is in poor ­condition—the density of Haiti’s road network (4,000 km in 2000) and the small percent- age of asphalted roads (24 percent of the network) are among the lowest of the region. Haiti suffers from a lack of services and infrastructure in the field of information and communication technologies (ICTs). There are 60 telephone subscribers per 100 inhabitants, a much lower rate than the average figure of 106 percent for Latin America and the Caribbean. Internet users represent only about 8.5 percent of the population (World Bank 2013). Finally, the cost of elec- tricity is among the highest in the region—US$ 0.32/KwH in 2011 compared to US$0.18 in Nicaragua, US$0.17 in the Dominican Republic and US$0.06 in Bangladesh (IFC 2011), and the supply of electricity covers only a small proportion of the country, with rural areas partic- ularly underserved (World Bank 2013). 6 Haiti—Let’s Talk Competition 2. Snapshot of Haiti’s Competition Conditions Effective competition is a key part of the development agenda: it encourages businesses to operate efficiently, ensures that firms can interact on a level playing field, and fosters entrepre- neurship activity (World Bank Group 2012). Effects of opening markets to competition are positive. Although government intervention is warranted in some industries that exhibit substantial market failures, experiences from many developing countries show that the benefits of competition, at a national level, are significant and overwhelming in terms of economic efficiency and productivity gains. Firms typically acquire many of their inputs—transport, energy, telecommunications, financial services—in local markets. If these upstream markets lack competition, goods and services needed for ­production are not priced competitively. As a result, firms in countries that lack competition may be less competitive than their foreign rivals and domestic GDP growth may suffer. Reforms that open markets and remove anticompetitive regulations, such as the elimination of restrictions on the number of firms, statutory monopolies, price controls and discriminatory treatment against certain firms, lead to significant productivity gains (see box 2.1). Box 2.1 The Impact of Competition on Growth, Productivity, and Job Creation The economic benefits from competition are well documented. Firms operating in a competitive environment are more likely to innovate (Bassanini and Ernst 2002; Bloom et al. 2011) and to increase their productivity (Aghion and Griffith 2005 or Acemoglu et al. 2006). Competition boosts investment (Alesina et al. 2005), generates employment and ultimately speeds up eco- nomic growth and improves overall welfare. Competition in input (upstream) markets, such as transportation, financial services, energy, telecommunication and construction services, is a key driver of efficiency and productivity growth in downstream sectors—the users of these inputs. Empirical evidence strongly supports the positive effects of competition policy enforcement on productivity growth (Buccirossi et al. 2009 or Voigt 2009). Tough enforcement against the practices of cartels, based on well-designed anti-cartel laws, for example, constitutes an effec- tive tool to reduce negative impact of anticompetitive behavior (Alexander 1994; Symeonidis 2008). Increased international competitiveness—and therefore more favorable terms of trade—is another important and positive effect associated with increased competition in domestic markets. Finally, consumers benefit from lower prices, direct savings and improvements in the variety and quality of goods and services. Consumers also find enhanced job opportunities and additional income as investors. Anti-competitive practices also result in welfare losses for the economy as a whole. Price-fixing agreements among competitors impose significant costs on society. Connor (2010) examines studies and judicial decisions on 381 cartelized markets worldwide and estimates a long-run median overcharge of 23.3 percent of prices above competitive levels. Estimations from the European Commission (2008) suggest that average productivity would fall by 13 percent in the presence of market sharing cartel agreements among member states. A recent study of the Haiti—Let’s Talk Competition 7 international market for coffee beans finds that the cartel’s breakdown explains 49 percentage points of the 75 ­percent drop in the real coffee price between 1988 and 2001 (Igami 2015). Apart from increasing the cost of goods and services to conduct business, cartels are also associated with low labor productivity and reduced incentives to innovate (Broadberry and Crafts 2001; Evenett, Levenstein, and Suslow 2001; Symeonidis 2003). International experience shows that the intro- duction of comprehensive national competition policies can bring substantial economic gains. Estimates suggest that ­competition policy reforms boosted Australia’s GDP by at least 2.5 percent or $20 billion due to their effect on increased productivity and lower prices during the 1990s. Box 2.1 The Impact of Competition on Growth, Productivity and Job Creation (continued) The Haitian markets remain constrained by a mix of factors that limit private sector expansion and competitiveness, including the emergence of quasi monopolies (World Bank 2013). 1 Weak competitive conditions may contribute to a high degree of operational business risk for firms in Haiti. This is likely detrimental to the Haitian economy. According to the Economist Intelligence Unit’s operational risk model 2015, investors in Haiti perceive that the risks in doing business related to competitive conditions and competition policies are higher than the risks in other countries from the Caribbean region and only comparable to those in Guatemala, Honduras, and Nicaragua (figure 2.1). These risks are mainly related to: a) price control and the control of other market variables that both limit the benefits that firms could obtain by competing effectively and harm the incentives to invest; and b) vested interests and discrimi- nation against foreign firms that hinder innovation and preclude more efficient firms from gaining market share. FIGURE 2.1  Business Risks Related to Weak Competition Policies (by Component) Source: Economist Intelligence Unit 2015. 12 10 8 6 4 2 0 Jmic Dominicn Rpublic Pnm Trinidd nd ffbo ff ffu HaitiGutmlHondur