Economic Misalignment: The Problem

2 August 2016 Development

Let’s be blunt about the situation in Haiti: the reasons why mothers can’t feed their children, young people can’t afford educations, and fathers don’t have jobs are vast.

Corruption is one plague, for instance. The national debt to Petrocaribe, Venezuela’s energy-based diplomatic program that supplies oil to the Haitian government with deferred payments, grew from 200 million to 2 billion USD in 5 years. However, there is little new infrastructure to show for the saved government revenue, and the government now has a very long-term debt to pay off. Road projects that have been funded have never seen the light of day.

Further, few repercussions stand in the way of corruption, which then causes a ripple effect of outcomes, such as political instability. Because of this instability, unfair elections are contested from the start, breeding chaos in Haitian society. That chaos and lack of long-term vision contributes to environmental degradation and low rates of education.

The ill-conceived policies from Haiti’s leaders represent a tremendous opportunity cost. The ripple effects only continue. When money allocated for development evaporates in payoffs and corruption, as generations grow up without receiving adequate educations, when roads and infrastructure aren’t maintained, they create a heavy loss for the nation and its citizens. This opportunity cost maintains poverty and instability. Money is raised, allocated, and spent—but little is achieved.

However, even amidst these ongoing and systemic effects nationwide, nothing compares to the opportunity cost of foreign aid. Because foreign aid is the most powerful force in the Haitian economy—more powerful than the government or any economic sector—its failures represent the greatest loss.

In 2015, Propublica reported that “the Red Cross raised half a billion dollars for Haiti and built 6 homes.” The failure to meet housing needs five years after the earthquake not only represents a huge cost to Haiti’s construction sector, but it also contributes to Haiti’s poor image in the world, further reducing the chance to capture the desperately needed foreign investment—rather than foreign aid—needed to boost its economy in the long-term.

These missed opportunities enhance poverty. The majority of the 12 billion dollars in foreign government assistance pledged after the earthquake have been disbursed, but there isn’t much to show for it, despite its size relative to Haitian GDP, 8.9 billion USD in 2015. Add to that the cost of private foundations and NGOs raising and spending vast sums, but procuring goods and services abroad instead of transacting locally with Haitian entrepreneurs and companies within the private sector.

Case in point: At the end of 2010, one year following the earthquake, the Associated Press reported that out of every 100 dollars spent by US government-funded contracts, a mere 1.60 USD was won by Haitian contractors. That’s right: less than two cents out of every dollar. When more than 98 percent of foreign aid is spent outside the country that is meant to receive the assistance, that doesn’t leave much opportunity for local enterprises in the existing market.

Further, the non-profit sector, composed of thousands of foreign NGOs and ministries conducting post-disaster response in Haiti, imported and distributed goods worth millions of US dollars in food, medicine, clothing, school items, and construction supplies that they could have purchased in Haiti. In many cases, this misaligned usage of both public and nonprofit funds wiped out Haitian businesses—and Haitian jobs—at a time when people were in dire need of work to move forward after the chaos.

This parallel, donation-based economy hurts Haiti’s market-based economy, creating an opportunity cost called economic misalignment. When aid isn’t aligned with the Haitian market, sustainable growth just isn’t possible.

So, on top of government corruption, environmental degradation, and lack of infrastructure, economic misalignment in Haiti is as responsible for preserving poverty as any other factor—if not more. This is the situation that Haiti faces today. This is why mothers can’t feed their children and unemployment stands at more than 70 percent for decades.

Finally, consider the contrast presented by the Dominican Republic, which shares the island of Hispaniola as well as much of Haiti’s history, from slavery to dictatorships and military occupations. The DR’s gross domestic product is 5 percent higher than Haiti’s. However, the two countries were around the same level in 1960.

A massive trade deficit now stands between the Dominican Republic and Haiti, which buys most everything from the DR, from vegetables and eggs, to household items like soap and toilet paper, to building materials like piping and cement. From 2012 to 2016, imports from the DR to Haiti have grown more than 22 percent. Haiti’s total imports average 271 million USD, whereas exports are only 71 million. Notice the sharp contrast?

Only a productive economy will lift Haiti out of poverty and into sustainable development. A local market that provides jobs, wages, taxes, goods, services, and innovation is the only solution. Aid and development initiatives must align themselves with the growth of that market-based economy if they believe in Haiti’s future.

Having identified the problem, the next four posts will identify our four main proposals in From Aid to Trade. These proposals are the result of extensive research, dozens of interviews, and over 1,200 surveys. Please stay tuned and send us your comments.

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