The Booming Sector of Haiti’s Economy That Produces Nothing
How the country’s institutions help discourage value-adding production
Talk about contraband and smuggling in Haiti probably concerns cocaine more often than it does bedroom furniture. But mattresses imported informally from Miami are part of a trade that does more to hold back the local economy than drugs from Columbia do.
Tom Adamson, CEO of a Haitian company that manufactures mattresses for the local market, says that his biggest competition comes from importers of U.S. mattresses, who pay relatively low duties, and from contraband brought over the land border with the Dominican Republic. Products imported through informal channels offer affordable and decent-quality purchasing options for Haitian consumers. But the informal, loosely regulated, and untaxed sector is largely about moving products from one place to another – a valuable and essential part of the economy, but one that produces no goods itself.
“Every time you add a regulation, every time you add a tax,” says Adamson, who is also treasurer of the Association of Industries of Haiti, “these are things that aren’t helping the formal sector but don’t affect the informal sector,” which provides about 90 percent of the country’s employment. “Why would you want to be formal?”
In practice, the two sectors operate under different sets of rules, with damaging consequences. Formal businesses not only pay taxes but are also responsible for most of the country’s value-adding economic activity – transforming raw materials into finished products. Informal activities add relatively little value in-country and operate outside the bounds of most regulations and taxes. The incentives funnel people toward lower-value activity.
Goods that come into the country informally are generally cheaper than locally-made alternatives – if local alternatives exist at all – and those lower prices are good news for 10 million Haitian consumers. One example is pèpè, secondhand clothes imported from the United States. “Of course it was helpful to those who can’t afford clothes,” says Haitian social entrepreneur Hans Garoute, who works with networks of tailors in the country. But he also decries the rise of pèpè as a “job killer” because of how it helped displace Haitian tailors and seamstresses who sewed for the local market decades ago.
Until 1986, domestic manufacturers were protected from foreign competition and produced a host of goods, including “paper, matches, cardboard, footwear, leather, food products, beverages, rubber, plastics, metals, building materials, textiles, cigarettes, soap, beer,” according to a Library of Congress country study. After the fall of the Duvalier dictatorship, Haiti abolished import protections, and local factories suddenly had to compete internationally. “As a consequence,” the study notes, “domestic manufacturing, already hampered by competition with lower-priced goods smuggled into Haiti from the Dominican Republic, experienced a painful transition in the late 1980s.” Uncompetitive factories that had been allowed to tread water under government protection shut down, and the informal trade in consumer goods has since won out over most local manufacturing.
“A good rule of thumb is that when you tax something, you get less of it,” Harvard economist Greg Mankiw has written. “That means that taxes on hard work, saving and entrepreneurial risk-taking impede these fundamental drivers of economic growth.” If productive economic activity is about the only type of activity you tax, then you’ll get less of it.
The informal trade does give Haitians more purchasing power to spend on things like education. And countless Haitian ti machann, or small merchants, scratch out livings by reselling foodstuffs and consumer goods brought into the country duty-free, often through border crossings or ports in the countryside that aren’t tightly regulated. But the system handicaps only formal producers and manufacturers, acting as a sort-of implicit subsidy for the informal sector.
The problem isn’t unique to Haiti. Low literacy rates, lack of finance and accounting capacities, and low levels of technology make it difficult to collect taxes in many developing countries, where revenue collection often becomes “the art of the possible rather than the pursuit of the optimal,” as one IMF paper described it. It’s much easier to tax formal businesses than informal merchants, which is one reason that a relatively small number of large companies make up 70 percent of the tax base in Haiti.
Haitian officials have been vocal about these underlying problems, but they focus, naturally, on foregone tax revenues. Millions of dollars in duty collections that Haiti fails to charge for Dominican imports are at the heart of an ongoing trade fiasco between the countries. “We cannot afford to keep losing over $300 million on the border and want an agreement at the highest level to tackle this problem,” Prime Minister Laurent Lamothe recently told The Miami Herald.
Recent government efforts to address contraband include stepping up customs collections by border officials and a finance law to bring tariff rates in line with those of other Caribbean Community nations. (Haiti has had some of the lowest rates in the region.) The government’s aim, as noted by the daily Le Nouvelliste, is to protect national production and support the growth of formal businesses. But increasing tax and duty collection threatens commerce and livelihoods, traders at the border recently told the Associated Press. As Haitian economist Thomas Lalime notes, higher tariffs may help encourage domestic production, but they will definitely increase the cost of living for Haiti’s already cash-strapped masses.
Adamson, CEO of the mattress manufacturer, is a Canadian who came to Haiti in 1978 to work on a feasibility study for an engineering project. He married a local woman and never left. For the past 25 years, he’s worked for Haitian manufacturing and trading company Safico.
Safico began in 1952 as an exporter of raw sisal, the plant fiber traditionally used in products like baler twine, coffee sacks, and mattress pads. It has manufactured mattresses for the Haitian market under the name Micama since 1990. Sisal pads made at the factory cover steel springs imported from the Dominican Republic. Wood for the mattress boxes comes pre-milled from Canada. The company set up its own adjoining foam-making operation in 1996, where workers mix three chemical ingredients in just the right proportions to make them expand into polyurethane foam blocks. Micama’s mattress-manufacturing provides well-paying jobs for about 120 people.
Adamson says that, in all, the company pays 20 to 25 percent in duties and taxes on the raw materials it imports to make mattresses. Those materials come through the seaport in Port-au-Prince, where “the formal sector imports,” he says. The capital’s port has long been seen as a cesspool of inefficiency and corruption, where shipping costs are nearly two-thirds higher than in neighboring countries.
Many people who import goods sold on informal markets bring them through ports in Haiti’s provinces, where customs and tax officials have a weak presence. A 2007 IMF study reported that 90 percent of customs revenues were collected in Port-au-Prince, and 97 percent of tax revenues came from the capital’s metropolitan area. “The high degree of revenue concentration,” the report noted, “reflects the importance of the Port-au-Prince area for the economy and weak tax administration and customs enforcement capacities outside of the capital city.” Adamson references another local study he recalls from recent years, which he says estimated that importers pay an average of 25 percent fees in Port-au-Prince compared to just 4 percent in the provinces.
“It’s precisely this kind of problem” that the recent finance law is meant to address, Lalime, the Haitian economist, writes in an email, in French. “This remains a big fight that will take time and political will.”
But passing legislation doesn’t automatically mean it will be enforced. And even if the weak Haitian state can get contraband under control, the transition from informal to formal will probably prove to be a tough one for Haitians who have subsisted on duty-free smuggled goods for years.
