Lugar Calls for Business Reform; Proposes Haitian-American Enterprise Fund By Stanley Lucas

Summary

On July 22, Senator Lugar released a report, authored by senior staff members, entitled, “Without Reform, No Return on Investment in Haiti” (see http://lugar.senate.gov/issues/foreign/lac/haiti/pdf/investment.pdf ). The report summarizes the limited impact of US and foreign investment in Haiti over the past two decades and the serious hurdles to setting up a business. In order to jumpstart the private sector, Lugar has proposed the establishment of a Haitian American Enterprise Fund. The bill was introduced on April 14 and is pending review in the Committee on Foreign Affairs (see http://www.thomas.gov/cgi-bin/query/z?c111:S.3202: ). The Fund would be modeled on the successful models of the enterprise funds created in the 1990s for Poland, Hungary, and other European countries after the fall of the Berlin Wall.

Analysis

Lugar’s team hit the nail on the head by pinpointing the reform of the business sector as the key to sustainable economic growth. In the immediate aftermath of the earthquake, former President Bush economist Glen Hubbard wrote a similar piece (see http://solutionshaiti.blogspot.com/2010/02/true-marshall-plan-for-haiti-by-glenn.html ) arguing that the success of the Marshall Plan in post-WWII Europe was based on the vibrant private sector, which was lacking in Haiti. To be sure, Haiti needs business reform and to formalize the private sector. The Haitian American Enterprise Fund is an interesting approach, but must be structured in a way that allows all Haitians access to the Fund. As the Fund is currently outlined, it will do nothing more than further strengthen Haiti’s elite business cartel and the current discredited leadership.

The report misses a critical element of why the business sector is in such disarray, and why there is almost no political will to make the necessary reforms. Haiti’s economy is controlled by a business cartel known as the “Groupe de Bourdon”, named after an affluent neighborhood. This cartel controls about 95% of the economy – and contributes a mere 4% of the income taxes collected. In the private sector they control food importation, the agriculture sector, banks, transportation, etc. They essentially monopolize all sectors, including the informal sector. For example, many people in the informal sector will buy bags of rice or other consumer products and then sell these items in the market for a slight mark up. They buy these products from the Groupe at an extremely high interest rate. It is feudalism at its best.

They do this with the support and participation of the Preval Administration. They financed Preval’s campaign, and in return, they gained control of the public and private sector. In the public sector, they leveraged their access to the President, they put in place the ministers of finance, commerce, public works, the directors generals of the tax offices and office to acquire state lands, the port and customs, the governor of the central bank, and economic advisors to the president. They also secured a monopoly of oil (via Petro Caraibe) and grains through PL480, a USAID program for Haiti. It is also the Groupe that is responsible for the incredible interest rates of 48-60% on small business loans and the limited access to credit. With this access they were able to acquire profitable state institutions for pennies on the dollar under the guise of privatization.

This Groupe also has the means to access the US Government, Congress and international aid. Several members of the cartel briefed the senate staffers. Unfortunately, the Lugar staff did not take the opportunity to meet with the local chambers of commerce and entrepreneurs that have been dedicated to bringing opportunity to all Haitians. This powerful group has effectively lobbied US codels, international delegations, Clinton, UN, IADB, and the World Bank. With the support of the Haitian government they have secured international aid funds to finance pet projects that do not at all benefit the Haitian people as a whole. For example, they are trying to secure an $80 million grant to build their own private university rather than modernizing and rebuilding the affordable state university. These loans and grant are taken on behalf of the Haitian people but finance their own end.

The report also misses the reason why there is a “dearth” of political will to make business reforms. The report states that President Preval is “resistant to overtures by the World Bank and other international partners to make difficult decisions, ostensibly because he fears being labeled a dictator by political adversaries if he makes certain reforms by decree.” First, it is unclear why these reforms would need to be made by decree. There is a legislature that is motivated to show some progress on important issues in advance of elections. But more fundamentally questionable is the assessment of Preval’s motives. He was unafraid of illegally extending his term in office and unafraid of passing the Emergency and Reform Act nullifying Haitian civil liberties. It is doubtful that he would be afraid to pass business reform measures that would make access to credit more possible and streamline regulatory procedures. President Preval is “resistant to international overtures” because the current system benefits him personally and his associates in the business cartel.

Finally, it is also somewhat confusing as to why the Dominican Republic factors so prominently into the report. Staff members met with as many representatives of the DR private sector as the Haitian private sector. As noted, the relationship between the two countries has been strained due to poor treatment of Haitian workers and a host of other issues. It is unclear why the DR private sector is bemoaning the fact that Haitian leaders are not looking at “island wide” recovery. The DR did not sustain the damage that Haiti did, and has likely only benefitted from the disaster with the increased numbers of aid workers and aid importation through their airports and ports.

Recommendations

The Haitian-American Enterprise Fund is an excellent idea, but there are additional efforts that could be undertaken to ensure that the private sector is bolstered:

· The Fund should be structured in a way that takes into account an entrenched business cartel and allows all Haitians access to the opportunities the Fund presents.

· While the Fund idea is strong and proven, it would be better as part of a more robust and comprehensive plan that includes technical assistance for legislative and regulatory reform to Haiti’s cumbersome business codes, training the judiciary and professionalization of government staff.

· Considering their past two decades performance, US AID Haiti’s capability to implement such a Fund should be reviewed. The US AID Haiti mission among the highest funded missions worldwide, but has not demonstrated a proven track record of results for the level of funding they have received.

· The report neglects to discuss the role of the Haitian Diaspora’s role as a key resource in supporting the building of the business sector. Unfortunately, the Lugar staff did not meet with prominent Haitian Diaspora business leaders in the US. This has been an issue for the Diaspora with the Administration and Congress throughout the rebuilding process and has left the Diaspora community wondering why they have been so seriously marginalized from the process.

· The regional and departmental Chambers of Commerce have also been neglected these organizations which have proven more representative of Haitian interests. They could use capacity building and professionalization programs. In addition, they are an excellent and more balanced source of information.

· In light of Preval’s resistance to implement private sector reforms, the Congress could consider working directly with Haiti’s legislature, which is highly motivated to undertake meaningful reform, especially with upcoming elections. Congress could consider establishing an interparliamentary exchange program with the Haitian legislature.

· Finally, the report mentions that critical lack of infrastructure is a primary obstacle to doing business in Haiti. This is an excellent area for US aid as it provides immediate job opportunities for Haitians, opportunities for US companies and tangible results. Most importantly, investing in infrastructure skirts the complicated political issues, such as FDI and the DR.