Help For Haiti

The situation in Haiti continues to go from bad to worse. For over a full year now, the country has been locked in the grip of a political controversy that has torn the country apart and caused the focus of those in the poorest nation in the Americas to be aimed at electoral discrepancies when it should be turned on the resolution of the country's vast economic woes.

A few months back we sent out a private communication regarding Haiti to Black opinion leaders, members of Congress, economists and journalists in the Black and mainstream press. Our focus was on how the country's policy makers could immediately address endemic economic problems, if only they could get past the looming shadow of last May's elections.

Today we make public that communication in the hopes that many in our viewing audience - including a growing group of international opinion leaders, journalists and economists - will consider our suggestions as Haiti continues to work out its political dispute(s).

Here it is:

Black Electorate Communications : African And Caribbean Watch

March 22, 2001

Help For Haiti

The current political tensions and social unrest in Haiti are the latest episode in the tragic history of the nation of almost 7 million, with a 95% Black population. The most recent political problems stem from controversy over last May's parliamentary elections, which were marred by a dispute over ballot tabulations.

International observers believe that election officials miscalculated votes, resulting in outright victories for President Jean-Bertrand Aristide's ruling Lavalas Family party in 10 senate seats. Haitian authorities have repeatedly refused to recalculate the results.

Sound familiar?

The situation in Haiti, in many respects - not just ballot counting controversies - is not unlike that in many of America's impoverished urban and rural areas. Haiti, like its US counterparts, is faced with a dilemma - its citizens, of course, have a desire to earn an honest living like anyone else, but with an economy underdeveloped, inflation high, capital scarce and living conditions so difficult, many decide to turn to crime, the underground economy; or informal sector - whatever one chooses to call it.

As a symbol, like in so many cities in America, an unofficial "free market" has developed, with Haiti's urban areas filled with street vendors - hawking their goods, services, talents and skills. And, unfortunately, drugs - which not only serve to generate profits for dealers but which also alleviate the pain of poverty and despair - if only for seconds at a time.

The result is that an estimated 80% of Haitians live below the poverty line and 70% are unemployed.

Regardless to who is recognized as the duly elected political leadership of the country, the critical unresolved issue for Haiti's leaders to address is the economy. And more than the hat-in-hand, in front of the international community approach, currently being displayed by Prime Minister Jean-Marie Cherestal and Aristide, is needed.

Of course pure international assistance is welcome but, as Haiti's leaders should know by now, such "assistance" comes with a hefty price. If Haiti is to move from dire poverty to economic development and growth it will have to take the bull by the horns and independently institute policies that invite and encourage Haitians to produce and invest.

Haiti's first challenge is to efficiently use the revenue generated from its export-led economy to satisfy the basic needs of its people. Such action would alleviate, to a degree, poverty and disease. Corruption and waste must be minimized and eliminated so that every drop of revenue currently generated by the Haitian economy is used in a manner that addresses a staggering infant mortality and life expectancy rates. In addition, basic needs like infrastructure must be addressed.

It is amazing how the government found money to pave roads right before last year's elections. It is always interesting to see how a short-term political interest unleashes previously unknown powers and resources.

All of the government spending in the world won't solve Haiti's problems but we do recognize that more can be done with what the government has to work with.

While the government is maximizing the use of existing revenue, the proper mixture of fiscal and monetary policy must be formulated and implemented.

Fiscal policy is the area where Haiti needs the most help. A quick look at Haiti's marginal tax rates makes this clear. Marginal tax rates are simply too high in Haiti.

Income tax rates are as follows:

Income (in Haitian gourde) Percentage

20,001 - 100,000 Tax Rate: 10%

100,001-250,000 Tax Rate: 15%

250,001-750,000 Tax Rate: 25%

Over 750,000 Tax Rate: 30%

In dollar terms, the equivalent in America, as an example, would be a person making $10,416 dollars having 25 % of their income taxed away. Income tax rates are not indexed for inflation and this is devastating as inflation in Haiti is measured as high as 13% annually.

So, not only does inflation erode purchasing power, it also causes tax bracket creep, where people move up into higher tax brackets with more of their earnings taxed away. Sadly, the government knows what is going on and has actually told the International Monetary Fund (IMF) that they are looking forward to increased tax revenue as a direct result of inflation.

Simultaneously, as part of their agreement with the IMF, the government is placing a ceiling on wages. So, in Haiti, it is OK for citizens to have their wages eroded because of inflation but not OK for them to get a pay raise just to compensate them for a loss of purchasing power that is out of their control.

It is no mystery why many Haitians opt out of such an arrangement.

Marginal rates should be cut across the board and indexed for inflation. This can be done easily without a huge loss of revenue, in part due to Haiti's dependence upon excise duties for much of its tax revenue.

But Haiti has to restructure its fiscal policy in a manner that reflects the structure of the economy and which recognizes the concerns of the country's agricultural sector.

Property taxes currently as high as 15% should be cut and the Value Added Tax (VAT) of 10% should be eliminated. Possibly, the VAT could be retained or slightly reduced if income taxes were cut significantly enough.

And excise duties, which exist in abundance, should be reduced, across the board.

Haiti should also cut its corporate tax rates, which currently range from 10% to 35%, by at least 5% across the board.

And the capital gains tax, like it currently is in South Africa (but not for much longer), should be eliminated.

The purpose of cutting taxes like this is not to produce budget deficits. In fact so little taxes are already paid, that a surprisingly small amount of revenue would be lost through the decision.

The goal of cutting taxes is to pull laborers, entrepreneurs, farmers, and corporations out of the underground economy and into the formal sector. Tax cutting on production and income leads to economic growth and increased tax revenues, especially if inflation can be eliminated - which brings us to our next point.

Monetary policy in Haiti is a nightmare. Like we have in the case of South Africa, we would recommend a currency board in Haiti, but pull back from such a recommendation in light of the fact that Haiti's holding of dollars is just too miniscule to withstand a speculative attack that a Haitian currency board is sure to receive.

At present, Haiti only has $170 million in foreign currency reserves or just under 2 months of imports of goods and services. Also, because Haiti imports all of its petroleum, it sends a substantial portion of its dollar holdings overseas. Just last year Haiti spent some $16 million on oil imports. This makes instituting a currency board almost impossible.

Yet and still, something has to be done in order to stop the continued depreciation of the Haitian currency, the gourde, and the loss of purchasing power that comes with it. The gourde is presently exchanging at the rate of 24 to 1 against the US dollar. This represents a loss of 50% in the gourde's value since 1996.

In light of that, Haiti should consider dollarizing its economy, but in a way that gives it an "out" if the dollar goes haywire. Dollarizing would be a fairly easy sell considering the enormous popularity of the greenback among Haitians. Such a move would boost the country's dollar holdings, setting the stage for the country to either move toward a currency board down the road or plug into an eventual Caribbean monetary union.

As insurance, Haiti should mandate that if the U.S. dollar inflates or deflates dramatically, relative to gold, the country could dump the dollar in favor of another currency, like the euro.

Hopefully, by that time, Haiti would be strong enough to move to a currency board and/or the Caribbean would be in a position to unite, economically.

The immediate benefits, if Haiti were to dollarize, would be dramatically reduced interest rates and inflation - both necessary to economic development and growth.

Wise monetary and fiscal policy initiatives in Haiti would not only result in a transfer of activity from the informal sector to the official economy but they also lay the base for capital formation to take place inside of the country. It also sets the stage for more foreign investment to flow into the country.

And when we say "foreign" we don't only have the usual Americans and Europeans in mind, we also envision capital - financial and intellectual - flowing into the country from the loving Haitian community that currently resides in many of America's impoverished inner cities and who are concerned about home.

Cedric Muhammad

Monday, June 18, 2001