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8157: Durban cites IMF Res Rep on Economic Policy (fwd)




From: Lance Durban <lpdurban@yahoo.com>

Hello Corbetters:

Reference to the early May inquiry by Jean-Claude Casimir on how
to strengthen the gourde, I invited a banker friend who happens
to be the local IMF representative in Haiti to respond.  He is
not a member of the Corbett Forum, but kindly forwarded a copy
of a speech he delivered in Haiti a few months ago.  This goes
well beyond the question, but offers a solid prescription for
improvement of the public sector in Haiti.  What is most
striking is that the suggestions are all very do-able, requiring
only an administration with the will to bring it about.  Well
worth reading, and I look forward to feedback from some of our
"resident economists" on this list:

QUOTE:

 .....  the prescription for a stable gourde is pretty 
simple: a fiscal adjustment --a combination of revenue increases
or expenditure decreases--sufficient in magnitude to
substantially eliminate treasury borrowing from the BRH.  There
are some other problems that should be addressed simultaneously.
 I'm attaching something I wrote up a 
couple of months ago that I may not have sent you and that goes
further into the fiscal situation and its links to Haiti's
economic problems.

                   MY REMARKS AT NOAH

Introduction
------------
How can it be that a country that
 *  is 700 miles from the largest, most open importing
       nation in the  world;
 *  has the Caribbean Sea to provide a free highway to that
       country's ports
 *  has labor costs that are only US$ 3.00 per day; 
 *  has a plentiful supply of able and willing workers who
       lack employment 

isnít inundated by private investment,  foreign and domestic? 
What is wrong?  Iíd like to share with you my thinking on what
the problems are and where the solutions lie.  

Deficiencies in Public Sector Enterprises and Infrastructure
------------------------------------------------------------
 In most successful countries, the physical and institutional
infrastructure attracts and helps  make private investment
profitable.  In Haiti, this is not true:

 * the road system makes it expensive to transport goods to and
from markets within Haiti
 * the public port is the most expensive in the region and makes
it expensive to transport goods to and from Haiti to other
countries
 * the public electricity generation and distribution system is
unreliable and deficient
 * the public telecommunication system is costly and unreliable
 * property rights are insecure because of unclear  laws and
unpredictable interpretation by the judicial system.

Each of these items are major impediments to private investment.
 They are also major burdens on the quality of everyday life. 
Why are things the way they are?  It is naÔve to say the problem
is a lack of budget resources. Existing resources are not well
spent and that, in the case of the public enterprises, is
because public sector monopolies  donít provide good services
because they donít have to.

Opening up the sectors that have been monopolized by the public
sector to the private sector would  go a long way towards
improving the situation.  It is not necessary to rely on
theoretical arguments to make this point.  The answer is here in
Haiti.  Has the competition provided by HAITEL and COMCEL
improved telecommunications in Haiti or not?  Which community
has electricity 24 x 7, Jacmel or Port au Prince?  Which of
these communities has a privately-managed electricity generation
and distribution system?  In which of these communities is over
80 percent of electricity production billed and in which is the
figure less than 50 percent.  In which of these communities do
people and businesses have to make substantial investments  in
generators and inverters?

Macroeconomic Imbalances 
------------------------
In most successful countries,  there is a stable macroeconomic
climate described by low inflation, a stable exchange rate and
low and stable interest rates.  That climate is very conducive
to private investment because it provides for predictability and
stability in the key variables that will determine the
profitability of private investment. It is naÔve to suppose that
the private sector  will risk its capital in an unstable
macroeconomic environment when it has plenty of more stable
macroeconomic environments from  which to choose.  I don't have
to tell you that the macroeconomic climate in Haiti is not
stable.   A glance at the statistics is enough.

The key to macroeconomic stability in Haiti -- the key to low
inflation, a stable exchange rate and low interest rates -- is a
fiscal deficit that is low and prudently financed.  If the
fiscal deficit is low, there won't be much government borrowing.
 That will reduce pressures on interest rates.  It will enable
the Central Bank to concentrate its attention on keeping
inflation low rather than abetting inflation by having to
finance the central government.  If the fiscal deficit and
inflation are low, it will mean that,  if the exchange rate does
depreciate, it won't be because of poor monetary and fiscal
policy.  Rather it will be because of some external event beyond
Haiti's control --e.g., a large increase in the world price of
petroleum, a sharp fall in the world price of coffee or a
recession in the United States -- is going to force the exchange
rate downwards and that is exactly what should happen.  

I probably don't have to tell you that Haiti's central
government fiscal deficit is not low and that it is not
prudently financed.  In fact, the largest part of the fiscal
deficit is financed by the BRH.  None of the options facing the
BRH to cope with this situation are good.  It can revise its
inflation target upwards but that will force the BRH to exceed
its initial inflation target and probably result in downward
pressure on the exchange rate.  It can try to prevent a
resulting depreciation of the gourde by selling its dollar
foreign exchange reserves, but these are limited in amount and
already lower than prudence would dictate. It can try to hold to
its initial inflation target by selling its own bonds or by
raising legal reserve requirements on bank deposits.  But both
of these options are costly too.  Both will raise interest
rates.  The option of selling its own bonds will simply shift
the problem of financing the central government  fiscal deficit
to the problem of financing a BRH deficit.  The option of
raising legal reserve requirements will tax financial
intermediation and thereby weaken the financial system and 
reduce it's ability to finance the private sector. 

Obviously, strengthening the public finances will go a long way
towards creating in Haiti the kind of stable macroeconomic
climate that will facilitate private investment. The real issue
is how to achieve that strengthening in the public finances. 
There are two choices: you can do it on the expenditure side and
you can do it on the revenue side.  I am going to concentrate on
the expenditure side because there are some very special
problems here.


Deficiencies in Fiscal Expenditure Management, Accountability
and Transparency
-------------------------------------------------------------
In most successful countries, the Ministry of Finance plays the
key role in the management of public sector expenditures.  The
role proceeds from budget preparation to budget implementation
and then onward to budget follow-up.  As part of these
responsibilities, the Ministry publishes tables that classify
expenditures by what the expenditures were or will be for (e.g.,
wages and salaries, purchases of goods and services, interest
payments, transfers, capital investment).  The classification is
done at the level of each Ministry and is done at the level of
each program within each Ministry.  The information encompasses
the prices paid  for the goods and services purchased and the
physical quantities of these goods and services. The purpose of
all this is quite simple:  to permit an analysis of whether the
government is getting value for money; to know what the
government is spending and what it is getting for it and to
provide that information to the public at large so that all this
information will be readily available and available on a timely
basis.  

In Haiti, there is enormous room for improvement in central
government expenditure management, accountability and
transparency.  The classification system is  too aggregative to
permit an effective analysis of what the expenditures were for,
are for or what they were intended to be for.  It is, for
example,  not possible to separate price from volume and thus to
determine if the government is paying too much or buying too
much.  The wage bill illustrates the point.  It cannot be
separated into the component explained by the level of
employment and the component explained by the wage and salary
scale.  The same is true for government purchases of  everything
else: vehicles, gasoline, computer services, medicines,
textbooks, roads, hospitals, schools, contracts of all sorts and
so on.  Moreover,  a quite substantial proportion of
expenditures is financed out of extra budgetary accounts
(special accounts and compte courants) that escape even the
deficient classification system that now exists.  The only thing
that is known is to whom the check is made out or to whom the
payment is made.  

The existing system for managing the public finances is no way
to run a business and it is equally no way to run a government. 
It hobbles the management and oversight functions of the
Ministry of Finance. It hides the information from the public at
large.  It is an invitation to waste, corruption and
incompetence and the anecdotal evidence strongly points to
widespread acceptance of that invitation. 

Implementing an appropriately detailed  expenditure
classification system would  be a critical first step towards
creating effective public sector management, accountability and
transparency.   The mere fact that this information would become
available for public oversight and scrutiny would close off some
important existing avenues to waste and corruption. By doing so,
this would reduce the fiscal deficit without the need to raise
taxes and would also ensure that, if it were necessary to raise
tax revenue, waste wouldn't absorb a substantial portion of the
revenue increase. 

Why is all this important?

In their inaugural addresses, President Aristide and Prime
Minister Cherestal made some important  promises and laid out
some important goals:

   Lower the unemployment rate
   Reduce inflation to below 10%
   Raise the growth rate to 4%
   Major improvements in roads
   Major improvements in electricity generation and distribution
   Major improvements in access to education and health services
   Major improvements in personal security 
   Elimination of waste, corruption and incompetence

These goals are attainable.  But, attaining them will require
substantial fiscal and private sector resources and those
resources will not be forthcoming without some important policy
changes and an equally courageous demonstration of political
will of the government to move forward.  

One need is substantial private sector  resources.  The goals
for growth and employment are simply not going to be achieved
without substantial private sector investment in plant,
equipment and working capital.  The path to these resources  was
outlined above:

 ** Open up sectors that have been monopolized by the public
    sector to private sector competition;

 ** Attack the fiscal deficit in order to create a stable
    macroeconomic environment for private sector investment;

 ** Create the physical and institutional infrastructure 
    that will lower the cost and reduce the risk of investing 
    in Haiti

The other need is substantial fiscal resources ---  even as the
fiscal deficit is being reduced.  A key element in the path to
these resources lies in introducing an effective expenditure
management and control system in the Ministry of Finance. The
way to jump start this process is with the immediate
implementation of an appropriately detailed expenditure
classification system.  The reasons are clear and compelling. 

First, such a system can be introduced by the Executive Branch
alone.   Neither submission of legislation to the Parliament;
nor passage of legislation would be  required.

Second, the implementation of such a  system is not "rocket
science".  Most of the necessary expertise already exists in
Haiti.

Third, part of the "increase" in fiscal expenditures can come
from a rise in expenditure productivity that will result from
the system. 

Fourth,  the implementation of this system would be proof
positive to the international community that the
Aristide/Cherestal government is tackling the long standing and
politically difficult problems that have made a substantial
amount of past aid ineffective.  This proof positive should
enable to government to count on more of the fiscal resources
coming from external aid and less from revenue measures.  

UNQUOTE

There you have it, and I have promised the writer to forward any
Corbett origin comment on his speech.

Regards,
Lance Durban









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