Written by COHA
July 21, 2011
By Jennifer Nerby
Haiti, along with the greater Caribbean, has experienced a substantial decline in remittances following the 2008 global economic crisis. Fortunately, remittance flows to Haiti increased significantly in the aftermath of January 2010’s earthquake. That year, Haiti received USD 1 billion in relief funds, with a significant portion coming from the Haitian diaspora. While these contributions helped many individual Haitian families to recover from the devastation, it is demonstrably clear that remittances do not pose a long-term solution for the country’s economic woes. In spite of relatively high remittance rates, Haiti suffers from pervasive unemployment. Many small island specialists seem to feel that only growth in small businesses and microlending operations can stimulate an independent and self-sufficient Haitian economy.
On January 12, 2010, a 7.0 magnitude earthquake struck ten miles west of the Haitian capital, Port-au-Prince, leaving over three million people in need of emergency assistance. The earthquake displaced at least 1.3 million people, and as of January 1, 2011, an estimated 810,000 remained in the 1,150 refugee camps still in operation., That same month, Nigel Fisher, the United Nations Humanitarian Coordinator for Haiti, commented, “In retrospect I think we can say that by and large the initial response to the earthquake was a success.” Remittances were a critical component of the total relief efforts; more than one million members of the Haitian diaspora increased the amount of money they send to relatives in Haiti after the calamity, resulting in a USD 360 million surge in remittances during 2010. World Bank economist and remittance expert Dilip Ratha explains that, “Financial help in the form of remittances from family members is always the first to arrive in times of distress.” Though remittances provided much needed support to the earthquake’s survivors, it is unclear if these funds will permanently reduce poverty and bring about necessary infrastructural change.
Like many Caribbean nations, Haiti depends on remittances as a fundamental component of its national GDP ratings. According to the World Bank, migrants hailing from Latin American and Caribbean nations (LAC) sent a total of USD 48.3 billion to their home nations in 2005, and remittances represented 70 percent of all foreign direct investment to the region in 2004. In Central American and Caribbean nations, remittances typically account for 10 to 20 percent of each nation’s GDP. Haiti, however, is a special case; it dramatically surpasses the average ratio, with remittances accounting for 52.7 percent of the nation’s GDP in 2004.
Remittances do not necessarily solve pressing economic, political, or social issues in the Caribbean. In a 2007 paper entitled “Close to Home: The Development Impact of Remittances in Latin America,” World Bank senior economists Humberto López and Pablo Fajnzylber examine the positive and negative effects of remittances. Although the authors acknowledge that remittances often stimulate growth and investment, improve access to health care and education, and increase macroeconomic stability and individual savings, they question the effectiveness of remittances in decreasing poverty and instability in recipient nations. These contributions are subject to the financial standing of individual immigrants in developed countries and often prove inconsistent, as evidenced by the stagnation of remittance flows following the inception of the global financial crisis of 2008.
The global economic crisis of 2008 caused an abrupt decline in remittances worldwide, doing grave damage to many Caribbean economies. Looking forward, a variety of sources anticipate substantial increases in remittances to the Caribbean during 2011 and 2012 as developed economies recover from the 2008 crisis. Nine of fifteen Caribbean countries were expected to grow in 2010, but Haiti, along with five other nations, was predicted to contract significantly. This regression is largely related to a 12 percent decline in remittance rates during 2009, as Haiti was found to lack the domestic industries required to recover without international aid. The Outlook for Remittance Flows report anticipated that a two percent growth in remittances to Latin America and the Caribbean should be expected in 2010, and the World Bank reported that a “healthy recovery” was underway from the slump of 2009. Furthermore, the Outlook anticipated 7.6 percent growth for 2011 and 10 percent growth in 2012, totaling USD 69 billion in remittances allocated to the Caribbean. Haiti is scheduled to be one of the top three recipients of such funds.
While high remittance rates have at times accounted for legitimate economic benefits, local business development in Haiti has been dwindling as a result of the nation’s dependency on international donations. Much of Haiti’s reliance on remittances can be attributed to the nation’s high rates of unemployment, which reached an astronomical 40.6 percent in 2010. The CIA World Factbook noted that two-thirds of the population did not hold a formal job and ascribed the lack of foreign investment in industry to Haiti’s “limited infrastructure and a lack of security.” As a result, remittances have been found to create a vicious cycle of dependency on international donations coming from abroad. The escalating presence of microbanks as a major financial tool has led to the growth of small businesses and local industries, conceivably replacing remittances as the backbone of the Haitian economy.
Unlike remittances, microlending initiatives retain the potential to tackle Haiti’s weak infrastructure and unemployment. Fonkoze, one of Haiti’s most prominent for-profit microbanks, has forgiven more than ten thousand loans after the earthquake and continues to play a crucial role in the recovery process. The bank also expanded the “Ti Kredi,” or “Little Credit,” loan program to offer small loans of USD 25 to poor families who did not qualify for the bank’s larger USD 125 loans. “Ti Kredi” includes shorter repayment periods as well as health care and educational services. Fonkoze’s programs present borrowers with the economic opportunity to open small businesses, along with the critical skills to manage them successfully.
Thus far, microbanks have been one of the most effective relief agencies in Haiti and have been found to have the potential to enact enduring and progressive change in the region. Greta Greathouse of the United States Agency for International Development (USAID) believes that Haitian microbanks “need to get stronger on a permanent basis so they can offset the operational risks that come with Haiti because of the earthquake and the inherent risks that are unfortunately a way of life for the country and its people.” A debilitating lack of infrastructure prevents many microbanks from becoming self-supporting and for-profit, as international contributions are often needed to cover losses from missing and delayed loan payments. Strengthening the Haitian banking industry will require improved regulation and a gradual shift toward for-profit banking.
Most microbanks in Haiti remain non-profit and consequently require international assistance to recompense for unpaid loans. Non-profit banking, while more sustainable and autonomous than remittances, lacks the financial transparency of for-profit institutions. Fonkoze is one of the few for-profit institutions in Haiti and had to operate at a loss for nearly three years before it was able to turn a profit. The microbank eventually stabilized thanks to USD 15 million in foreign donations. Though the bank initially depended on international contributions, Fonkoze is now en route to self-sufficiency and provides many Haitian borrowers with the opportunity to open and operate independent businesses.
The microlending climate in Haiti is far from ideal. Fonkoze nearly closed in 2008 due to losses from a destructive hurricane season, and more than 50 percent of borrowers with the major microcredit group Finca Haiti missed payments after the 2010 earthquake. The impoverished Caribbean nation is no stranger to natural disasters, and its dependence on foreign aid automatically entails a delay in relief efforts. The development of sound local emergency relief programs will enable Haiti to respond quickly and efficiently to crises without having to wait for foreign assistance. As more Haitians turn to microbanks for loans, the need to secure and regulate the banking industry grows ever more pressing. While some regulation efforts have been undertaken, it is still necessary to guarantee that Haitian microbanks are able to survive natural disasters and economic downturns like that of 2008.
Both remittances and microbanks have been vital to Haiti’s recovery since January 2010. Remittances offer a temporary solution to a greater economic problem. With improved regulation and security, microbanks can revolutionize the Haitian infrastructure and employ millions of jobless citizens. As in Fonkoze’s case, initial international investment will be necessary to financially secure Haitian microbanks, but the eventual autonomy of these institutions could be a remarkable game-changer for the Haitian economy.
The references for this article can be found here.