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US plan for economic recovery depends heavily on private sector reactivation

By Matthew Creelman,
in Chronicle of Latin American Economic Affairs,
Vol. 10, no. 18, 4 May 1995

In late March, US Deputy Secretary of State Strobe Talbott led a delegation of US business executives to Haiti to meet with the Haitian private sector and the government to discuss business opportunities and to set up a US-Haitian Business Development Council. The 26 private-sector participants represented banks, apparel importers, the telecommunications sector, toy manufacturers, and tourism, among others. They lunched with President Jean Bertrand Aristide, and met at length with private sector and government leaders to discuss investment possibilities.

The US Department of Commerce, in a document titled Prospects for US Exports, which was distributed to the delegation, made it clear that the most attractive short-term opportunities will result from financial aid from multilateral and bilateral donors, particularly those funds targeted for infrastructure development (electrical generating capacity, potable water systems, sewage disposal facilities, communication facilities, roads and highways, etc).

Only later, following the gradual reactivation of Haiti's assembly sector (garments, electronics, and sporting goods) will a demand be created for imported inputs. Most of the remainder of the list of prospects are linked to international assistance:

At the bottom of the list is the promise that when incomes improve, sales of consumer products, such as consumer electronics and personal-care products, should increase.

The US has been Haiti's most important trading partner. In 1991, the US accounted for 61% of Haiti's imports and absorbed 87% of its exports. US exports to Haiti from 1988- 1990 averaged US$500 million per year, falling to an average of US$200 million per year during the embargo years of 1992- 1994. During the embargo, the US continued to export basic food commodities, inputs for the assembly sector, and humanitarian goods.

US imports from Haiti fell from US$342 million in 1990 to US$59 million in 1994, as assembly plants abandoned production in the country and coffee exports fell as a result of blights, lack of maintenance, and the economic sanctions. Haitians complain that the same countries that supported the international trade embargo sent delegations to Haiti to lobby export assembly plants to transfer their production to neighboring countries. Of the 250 export assembly plants functioning in Haiti in the late 1980s, less than 50 remain. Most of the rest have moved to Jamaica and the Dominican Republic.

During the peak of Haiti's assembly manufacturing boom, between 50,000 and 60,000 workers were employed in the sector. Both Haitian and US businesspersons have noted a wait and see attitude on the part of export producers. Most investors are reluctant to commit their capital in Haiti until early in 1996, after the Artistide government leaves office, and after the UN mandate in Haiti comes to an end in February 1996.

Many investors want guarantees that the next government will continue the market-promoting policies that the Aristide government has begun. There are also concerns regarding political stability once the international forces pull out.

Although the current government has begun economic reforms, few will be completed before next February. Privatization, trade liberalization, and decentralization are all programs requiring at least several years to carry out.

A third issue affecting economic recovery is related to the changes in the world economy since 1991. The creation of the North American Free Trade Agreement (NAFTA) has extended to Mexico the trade advantages that Caribbean Basin countries had enjoyed under the Caribbean Basin Initiative, and in general export assembly factories in Caribbean Basin nations outside of Haiti have increased production. While Haitian apparel exports to the US fell by 65% between January- September of 1993 and January-September of 1994, Caribbean Basin exports overall increased by 10%, led by 60% growth in El Salvador, 27% in Honduras, and 14% growth in Jamaica.

Although Haitian labor remains the lowest cost work force in the hemisphere (minimum wage is about US$1.00 a day), wages are only one of the factors looked at by investors. Political stability, proximity of markets, infrastructure such as ports and roads, government incentives, and access rules all weigh heavily in such decisions. As a result, producing countries today are locked into severe competition with each other to provide the best terms for foreign investors.

On the positive side, although one representative of the US toy industry said that NAFTA will clearly have an adverse effect on the Caribbean and Central America, Haitian workers are still considered among the best in the region. Moreover, recent political and financial instability in Mexico may yet slow the arrival of new investment to that country in favor of other nations in the Caribbean Basin.

But even if export assembly production were to be restored to 1980s levels, only 1% of the Haitian population, or about 3% of the work force, would find employment in this sector. During the 1980s, with the growth of assembly production in Port-au-Prince, the city's population grew by nearly 8% annually. Deforestation, soil erosion, and the negative impact of food aid on prices for locally produced foods has contributed to this urban migration.

The overpopulation of Port-au-Prince and the lack of jobs in turn contributed to emigration abroad. According to some estimates, one in four Haitians lives outside the country, and family remittances come to US$400 million a year, far exceeding earnings from all exports combined. US analysts expect this emigration to continue, despite tougher US immigration controls.

The Haitian private sector involved in the formal economy is extremely reduced, and its fate has been closely linked to political favoritism, government corruption, and contraband. During the embargo years, fortunes were made in smuggling gasoline and diesel from the Dominican Republic, as well as in contraband purchases of consumer goods prohibited by the embargo.

In general, as political risks rule out the viability of long-term investment, the private sector tends to turn toward commerce.

In Haiti there is not a private sector, there are only speculators, complained one Haitian professional. Indeed, partly as a result of speculation, consumer prices increased by over 50% last year.

As the private sector is weaned away from the lucrative but nonproductive businesses of contraband, clientelism, and speculation, the new magnet appears to be opportunities linked to internationally financed development, infrastructure projects, and export assembly plants.

The Haitian government has offered the visiting businesspeople reduced tariffs on imports, tax incentives, and a 50% reduction in customs fees, with special incentives for businesses that arrive before July 1, 1995. In addition, the government eliminated the requirement that 40% of export earnings be returned to Haiti, and it has eliminated entry visas for foreign visitors.

Much of the US's private-sector promotion programs are aimed at increasing the availability of capital to businesses. The Overseas Private Investment Corporation (OPIC) has provided political and financial risk insurance for up to US$65 million in loans to Haitian businesses through the Port- au-Prince branch of the Bank of Boston.

A Bank of Boston executive says that he has already received 15 requests for loans to expand operations, of which at least 12 came from what he considers viable projects. Among the businesses requesting funds are soft-drink firms, US- and Haitian-run assembly plants, and apparel and textile manufacturers. The bank official expects that the lending program will result in tens of thousands of new jobs.

UN development experts say that, during the crisis of the past three years, the private sector has sent huge sums of capital abroad--perhaps US$100 million--and has not begun to repatriate the funds. One UN official says that the private sector has yet to be convinced that the Aristide government is sincere in its recent efforts to win over the business community.

While the Aristide government is trying to make love with the private sector, the private sector continues to spit in their face, said the official.

One reason the Haitian private sector might be a reluctant partner for the government is the recent decision by government economic officials to seek foreign investment for the purchase of privatized state enterprises. Government officials have expressed concern that should Haitian capital control key services such as telephones and energy, the potential for excessive price hikes is great.

Of the US$162 million in US assistance to Haiti scheduled for 1995, US$58 million will go toward economic stabilization and productive programs. These include balance of payments support, payment of overdue foreign debt, and programs in agriculture, education, environment, and private-sector development.

The US Agency for International Development expects to spend US$9 million in private-sector development activities during 1995, and it has scheduled five sector-specific development missions to Haiti during the next five months. These delegations will focus on telecommunications, power generation, light assembly manufacturing, and arts and handicrafts.