Freddy´s Guide- The Dominican Republic, Business Enviroment 2008

The Dominican Republic:
Business Environment 2008.

Copyrights: Freddy Miranda Severino, Attorney At Law.
Researcher: Orlando Alcántara-Fernández (Cristorly).

The Dominican Republic is the second largest island in the Caribbean after Cuba. Some sources like The World Factbook (CIA, 2008), the Country Profile by the U. S. Department of State (2007) and the Guide for Foreigners Living in the Dominican Republic of the Organization of American States (OAS, 1993) provide an overview of the historical, social, political, and cultural aspects of the country. The Library of Congress (2006) has published a useful list of resources, especially about its business system and its economic situation. A Trade Policy Review by the World Trade Organization (2002) states the following about the country:

“Since its previous Trade Policy Review in 1996, the Dominican Republic has sustained a fast pace of economic growth driven in good part by continued efforts to open and restructure its economy. Its trade and investment regimes are largely liberal although issues remain in areas such as customs valuation, export subsidies, privatization, and domestic competition. Participation in the global economy is intense, and is reflected in high levels of trade in goods and services, investment flows, and remittances from nationals living abroad. Under the Free Trade Zone (FTZ) regime most merchandise trade is exempt from the general trade regime, in order to deal with its anti-export bias regime. Liberalization has been largely autonomous; preferential trade agreements and multilateral commitments have played complementary roles.” (2002).


Recently The Heritage Foundation (2008), sponsored by The Wall Street Journal, in the Index of Economic Freedom analyses the Dominican Republic economic environment as follows:
“The Dominican Republic's economy is 58.5 percent free, according to our 2008 assessment, which makes it the world's 87th freest economy. Its overall score is 0.9 percentage point higher than last year, partially reflecting improved business freedom, labor freedom, and monetary freedom. The Dominican Republic is ranked 20th out of 29 countries in the Americas, and its overall score is slightly lower than the regional average.

“The Dominican Republic is generally below average in half of the 10 economic freedoms. However, it does stand out in one area: government size, where its score is 21 percentage points above the world average because of relatively limited government expenditures. In addition, personal and corporate tax rates are moderate, and overall tax revenue is not particularly high as a percentage of GDP.

“The Dominican Republic scores poorly in financial freedom, property rights, and freedom from corruption. Failure to recover from scandals in the financial sector reflects the rudimentary level of banking operations. The weak application of commercial law means that private property is subject to adjudication based on political interference and corruption.

“Background:
“The Dominican Republic has held regular competitive elections since 1996. An economic boom in the 1990s, led by tourism and maquiladora manufacturing, slowed to negative growth by 2003. Elected in 2004, President Leonel Fernandez promised to reduce inflation, stabilize the exchange rate, and restore investor confidence. In 2007, the country ratified the Central America–Dominican Republic–United States Free Trade Agreement (CAFTA–DR), which the government hopes will revive sagging textile exports. The country's infrastructure has deteriorated, and its weak judicial system, starved of resources and personnel, lacks the ability to confront widespread corruption. Additionally the electricity sector is plagued by corruption, theft, seasonal drought, high oil prices, and frequent outages.

“Business Freedom - 62.2%
“The overall freedom to start, operate, and close a business is limited by the Dominican Republic's national regulatory environment. Starting a business takes an average of 22 days, compared to the world average of 43 days. Obtaining a business license requires less than the world average of 19 procedures and 234 days. Despite some improvement in the transparency and enforcement of commercial laws, regulations are burdensome, and interpretation of the commercial code is often arbitrary. Closing a business can be difficult.

“Trade Freedom - 73%
“The Dominican Republic's weighted average tariff rate was 8.5 percent in 2005. Customs valuation that is subject to reference pricing for many products, cumbersome and restrictive standards, frequent delays in clearing customs, corruption and a lack of transparency in most of the trade process, and problems involving the protection of intellectual property rights add to the cost of trade. An additional 10 percentage points is deducted from the Dominican Republic's trade freedom score to account for non-tariff barriers.

“Fiscal Freedom - 80.4%
“The Dominican Republic has moderate tax rates. Both the top income tax rate and the top corporate tax rate were reduced to 29 percent from 30 percent, effective in 2007. Other taxes include a value-added tax (VAT) and a tax on dividends. In the most recent year, overall tax revenue as a percentage of GDP was 16.8 percent.

“Freedom from Government - 88.8%
“Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 19.3 percent of GDP. The government has been reviewing the system of transfers to local governments to ensure that the transfer of resources is consistent with expenditure responsibility.

“Monetary Freedom - 69.3%
“Inflation is high, averaging 10.7 percent between 2004 and 2006. Relatively unstable prices explain most of the monetary freedom score. The government applies price controls to electricity and fuel and subsidizes some agricultural products and electricity generation. An additional 10 percentage points is deducted from the Dominican Republic's monetary freedom score to account for policies that distort domestic prices.

“Investment Freedom - 50%
“Foreign investment is generally welcomed, but some laws discriminate between domestic and foreign investments. Investments must be registered with the Central Bank of the Dominican Republic. Foreign direct investment is not permitted in sectors involving the treatment of hazardous waste, public health, and national security. A weak legal and enforcement system, lack of contract sanctity, disregard of official rulings, and corruption deter investment. The law mandates that 80 percent of a company's non-management labor force must be Dominican. Residents and non-residents may hold foreign exchange accounts. Payments and transfers are subject to documentation requirements. Some capital transactions are subject to approval, documentation, or reporting requirements.

“Financial Freedom - 40%
“The small financial sector is poorly supervised and regulated. Confidence has been shaky since the crisis spurred by the 2003 collapse of Banco Intercontinental (Baninter), the country's second-largest bank. An attempt to create a new financial regulatory network was circumvented by a government bailout of several banks later in 2003. Skepticism was fueled by a 2005 revelation that the head of the fifth-largest bank's board of directors had misappropriated funds. Structural reforms suggested by the International Monetary Fund have been met with postponements of official reviews, though the IMF recognized Dominican financial policy as sound in 2006. Financial-sector assets are largely controlled by the 13 multiple service banks, including three foreign-owned banks, and five state-owned banks. Offshore banking is growing. Capital markets are small and underdeveloped.

“Property Rights - 30%
“The court system is inefficient, and red tape is common. The government can expropriate property arbitrarily. Most confiscated property has been used for infrastructure or commercial development. Although the government has slowly improved its patent and trademark laws, the enforcement of intellectual property rights remains poor.

“Freedom from Corruption - 28%
“Corruption is perceived as significant. The Dominican Republic ranks 99th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. Official corruption is pervasive. Despite recent reforms, Dominican and foreign business leaders complain that judicial and administrative corruption affects the settlement of business disputes.

“Labor Freedom - 63.6%
“Relatively flexible employment regulations could be improved to enhance employment opportunities and productivity growth. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee can be costly. Restrictions on working hours remain relatively rigid. Dominican Republic
• Rank: 87
• Regional Rank: 20 of 29” (2008).




The real picture can be slightly different taking the perspective of any Dominican citizen living in the country. For example, according to The Heritage Foundation previous report electrical energy outages persist in the country, but its report doesn’t state that there has been a significant improvement in this area due to the fact of the implementation of 24-hour electrical circuits all along the country. At the present time many communities don’t experience any electrical energy outages, or at least they have been reduced to a minimum. Regarding the business system there have been meaningful improvements as it can be seen in the present report.
A very useful source of information online about doing business in the Dominican Republic is the website of the Cámara de Comercio y Producción de Santo Domingo (CCPSD) (Santo Domingo Chamber of Commerce and Production). It is not updated regarding the new procedure for constituting a company and the economic situation of the country at the present time, but it still remains as a valuable source of business information (CCPSD, 2006a, 2006b, 2006d, 2006e, 2006f, 2006g, 2006h, 2006j, 2006k, 2006m, 2006p, 2006q, 2006s). Some of the valid information deals with the frequent asked questions (CCPSDn), the Labour guide (CCPSDl), business laws (CCPSDi), and the regulations on Social Security (CCPSDr).
The official organisation for informing interested parties how to do business in the Dominican Republic is the Secretaría de Estado de Industria y Comercio (SEIC) (State Secretariat for Industry and Commerce) (SEIC, 2008), but foreign organisations like the World Bank (DoingBusiness.Org, 2008a, 2008b, 2008c, 2008d) and the U.S. Commercial Service (2001-2008) have valuable information about the business environment of the Dominican Republic.
It is very important to note that a new system for starting a company has been launched over the Internet (El Nuevo Diario, 2008), making the process faster and one of the best worldwide (Observatorio Competitividad, 2008). CreaTuEmpresa.Gob (2008a, 2008b, 2008c, 2008d) is the website where a new company can be constituted in a record time. One new feature for a Dominican company is related to the number of members required for creating a company. Dayana Acosta reporte on the newspaper El Nuevo Diario that Andrés Van Der Horst, Director of Consejo Nacional de Competitividad, is asking for a new law requiring only two or three persons to constitute a company instead of the seven persons required now (Acosta, 2008).
Regarding the issues of taxes the official organisation is the Dirección General de Impuestos Internos (DGII) (General Directorate of Internal Taxes) where the Tax Code (Law No. 11-92) can be found (DGII, 2007a) and all the information about the new system of tax vouchers (Comprobantes Fiscales) (DGII, 2007b). These tax vouchers are used for most of the business transactions (parchase and sale). It is important to note that the international company Deloitte (2008) also provides tax and business information about the Dominican Republic. There is also an agreement between DGII and Consejo Nacional de Seguridad Social/Tesorería de la Seguridad Social (CNSS/TSS) about social security that can be accessed at the website of the State Secretariat of Labour (SET, 2006a).
An essential source for financial information is the Banco Central de la República Dominicana (Central Bank of the Dominican Republic) where an executive summary of the Dominican economic performance can be found (Banco Central, 2008a), as well as a regular report about the Labour market (Banco Central, 2008b). Regarding Business Law in the Dominican Republic the website of Guzmán Ariza, Atroneys At Law (1996-2008) provides a wide array of relevant information about doing business in the Dominican Republic.
The Dominican Labour Code (Law No. 16-92) is published online at the Secretaría de Estado de Trabajo) (SET) (State Secretariat of Labour) website (1992), as well as different laws like the law on domestic workers (SET, 1999) and the regulations on minimum wages (SET, 2007). When it comes to Labour issues there are reliable sources of data at ILO/NATLEX (2008), OIT/CINTERFOR (1996-2008), and Organización Internacional del Trabajo (ILO for its initials in English) (2007).
It is important to note that there was an extremely financial crisis during the ex – president Hipólito Mejía-Domínguez due mainly to several bank frauds and the inaccurate handling of those frauds by the governement officials in 2004. As a result of that enormous economic crisis in an election year Dr. Leonel A. Fernández-Reyna won overwhelmingly the elections bringing an immediate recovery of trust thanks to the much better governmental administration. Since then there has been a significant recovery of the Dominican economy and there has been a meaningful stabilisation process. The successful handling of the financial crisis has improved considerably the business climate, which has attracted a relevant flow of foreign investing. National and international organisations like CEPAL and the International Monetary Fund (IMF) have expressed their favourable opinions after the surprising economic recovery of the nation (El Caribe, 2007, 2008a, 2008b, 2008c; Listín Diario, 2007, 2008).
Regarding the subject of foreign investing and exports the official organisation is Centro de Exportación e Inversión de la República Dominicana (CEI) (Center for Exports and Investment of the Dominican Republic), which has a section about the most frequently asked questions online (CEI, 2004). On the other hand, ASIEX.Org provides timely information about foreing investment issues on its regularly updated website with frequent investment reports (ASIEX.Org, 2008).
In general, SEIC (2008b) has a section on foreign commerce dealing mainly with the international trade agreements and treaties of the Dominican Republic with other nations like the CAFTA-DR (USTR, 2007), among others. It is important to note that CCPSD also deals with the international trade agreements like CARICOM, CAFTA-DR, Central America and the Dominican Republic Free Trade Treaty, COTONOU Treaty, and Panamá and the Dominican Republic Treaty (2006c, 2006o, 2006t, 2006u, 2006v). It also gives information about the Consejo de Conciliación y Arbitraje (CCA) (Council of Conciliation and Arbitrage) (CCPSD, 2006e). A very important agreement is the Área de Libre Comercio de las Américas-Free Trade Area of the Americas (ALCA-FTAA) (ALCA-FTAA, 2008a, 2008b). SET (2006b) provides useful information about the international treaties and agreements related to labour and employment regulations and laws.

About the economic developments the WTO review remarks the following facts:

“SUMMARY OBSERVATIONS.
“(I) INTRODUCTION.
“1. Since its previous Trade Policy Review in 1996, the Dominican Republic has sustained a fast pace of economic growth driven in good part by continued efforts to open and restructure its economy. Its trade and investment regimes are largely liberal although issues remain in areas such as customs valuation, export subsidies, privatization, and domestic competition. Participation in the global economy is intense, and is reflected in high levels of trade in goods and services, investment flows, and remittances from nationals living abroad. Under the Free Trade Zone (FTZ) regime most merchandise trade is exempt from the general trade regime, in order to deal with its anti-export bias regime. Liberalization has been largely autonomous; preferential trade agreements and multilateral commitments have played complementary roles.

“2. The Dominican Republic is approaching a juncture where the duality and enclave features of its economy may have to be addressed. Activities in FTZs and tourism are responsible for the lion's share of Dominican exports, and are important generators of employment and investment, but their backward linkages to the rest of the economy remain weak. Moreover, the benefits granted in FTZs have made it more difficult for "domestic" sectors to attract resources, and several of these have stagnated, at best. The distortions associated with a narrowly focused, export-led growth strategy, and persistent inefficiencies in sectors like electricity, may well become obstacles for the further improvements in living standards coveted by the Dominican Republic.

“(2) ECONOMIC DEVELOPMENTS

“3. With a per capita GDP of some US$2,400 and a population of about 9 million, the Dominican Republic is the largest economy in the Central American-Caribbean region. Since the beginning of the 1990s, it has also been one of the world's fastest growing economies; its average real growth rate between 1996 and 2000 was 7.6%. Economic activity was particularly sustained by a boom in private investment. GDP growth dropped in 2001, to 2.7%, but picked up again in the first half of 2002. Despite the economy's strong growth performance, about a quarter of the Dominican population still lives below the national poverty line.

“4. Since 1995, the Dominican Republic has posted a fiscal deficit only twice. Fiscal reforms in 2000 have led to significantly reduced reliance on customs duties for government income and less distortionary resource allocation. As a result of the reform package, the share of customs duties in total government revenue decreased from about 26% in 2000 to 16% in 2001; reduced fiscal revenue from lower tariffs was compensated by increased income from internal taxes.

“5. The Dominican Republic has three principal foreign exchange markets (an official, market-based rate, a free exchange-house market, and a free commercial bank rate); the spread between the markets is very narrow. It maintains no controls on foreign exchange transactions but purchases of foreign exchange are subject to a fee set at 4.75%, which is under review. Real interest rates remain relatively high, having ranged between 13% and 21% since 1996. Inflation has been moderate; the average increase of the consumer price index is estimated at 6.9% during 1996-01.

“6. The Dominican Republic's current account has registered considerable deficits in recent years, due mainly to persistent and growing trade deficits. They have been financed largely by current transfers, most of which are remittances by Dominicans living abroad, and inflow of foreign investment capital. In contrast to merchandise trade, services have shown successive surpluses, largely due to income from the tourism sector.

“7. The Dominican Republic's main export products are clothing and electronic goods produced in the FTZs, agricultural goods and their related manufactures, and ferro-nickel. Despite a relatively limited contribution to GDP, FTZs remain crucial for the Dominican Republic's export performance. The United States is by far the Dominican Republic's most important trading partner, with an estimated share of 95% in FTZ trade and about 52% in "domestic" trade. Intermediate and capital goods dominate Dominican imports.

“(3) INSTITUTIONAL ENVIRONMENT

“8. The Ministry of Foreign Affairs is the lead agency for all issues related to foreign trade. The Dominican Republic became a WTO Member in March 1995; it has been active in the extended negotiations on telecommunications and financial services. As an international treaty, the WTO Agreements take precedence over domestic legislation.

“9. The Dominican Republic has increasingly sought to foster regional economic integration; in 1998 it concluded its first free-trade agreements, with the Caribbean Community (CARICOM) and the Central American Common Market (CACM). The Dominican Republic has formally asked to be part of the proposed U.S.-Central America Free Trade Agreement and attaches great importance to the ongoing negotiation for the Free Trade Area of the Americas.

“10. The Foreign Investment Law of 1995 accords national treatment to foreign investors. A privatization programme, initiated by the Public Enterprise Reform Law of 1997, has significantly reduced government involvement in economic activities. The principal mode of privatization chosen involves at least 50% of the newly created companies remaining government-owned but management control passing to private investors. State enterprises continue to operate in electricity generation and transmission, financial services, and maritime ports.

“(4) MARKET ACCESS FOR GOODS

“11. The Dominican Republic grants at least MFN treatment to all its trading partners. Tariffs are the Dominican Republic's main instrument of border protection; the average applied MFN tariff is 8.6%. Agricultural goods (WTO definition) are levied an average tariff of 12.9%, while non-agricultural products excluding petroleum face an average tariff of 7.9%. The Dominican Republic maintains tariff quotas on a number of agricultural products, with current out-of-quota rates of up to 118%.

“12. A wide gap exists between applied and bound rates, which somewhat undermines the predictability of market access conditions. In the Uruguay Round, the Dominican Republic bound all its tariffs. While non-agricultural goods were bound at a general ceiling rate of 40%, final bound rates for agricultural products, some of which were subject to renegotiations, range from 5% to 99%.

“13. Tariff reductions under preferential agreements have contributed to improved access to the Dominican market for some trading partners. Duty-free access is offered to most imports from the Central American Common Market and from CARICOM.

“14. The Dominican Republic obtained an extension until July 2001 on the application of the WTO Agreement on Customs Valuation. Since then, the Dominican Republic has been applying the Agreement with the exception of a list of 24 tariff subheadings, including used vehicles and sound reproducers, for which it obtained permission to use reference prices until July 2003. The provisions of the WTO Agreement on Customs Valuation are already applied for preferential imports.

“15. Irrespective of their origin and in accordance with the national treatment principle, imports are subject to domestic taxes, most notably a 12% tax on the transfer of industrialized goods and services. In addition, various goods such as alcoholic beverages, electric household goods, tobacco products, and vehicles are subject to specific consumption taxes ranging from 15% to 80%.

“16. The use of non-tariff trade barriers appears limited. The Dominican Republic maintains various import restrictions and prohibitions, which apply equally to all trading partners, for reasons of security, health, and environmental protection. The Dominican Republic has not made recourse to contingency measures. The Dominican Republic is not a party to the Plurilateral Agreement on Government Procurement; its regulations on public procurement grant preferences to local suppliers.

“(5) OTHER MEASURES AFFECTING TRADE IN GOODS

“17. The Dominican Republic has placed great emphasis on export promotion; FTZs constitute the most important instrument to this end. The Free-trade Zones Law of 1990 provides for substantial benefits to exporting enterprises located in FTZs, most notably wide-ranging tax and tariff exemptions. In 2001, more than 85% of the Dominican Republic's total exports came from FTZs, up from 52% in 1990. Since 1996, FTZs have also been increasingly used as an instrument of sectoral and regional policy. In 2001, the Dominican Republic notified the WTO that its FTZ regime provided export subsidies, and subsequently requested an extension of the transition period to eliminate them.

“18. Dominican exports benefit from preferential access to foreign markets under various unilateral schemes such as GSP schemes, the Lomé IV Convention, and the U.S. Caribbean Basin Initiative (CBI). The CBI, enhanced by the Caribbean Basin Trade Partnership Act, is by far the most important preferential scheme granted to the Dominican Republic; it covered Dominican exports valued at US$2.4 billion in 2001.

“19. Since 1996, efforts have been undertaken to streamline export procedures through the introduction of a single export form and the creation of a one-stop office for exporters, but certain procedures still appear cumbersome. To promote exports of non-traditional goods, two official export finance programmes were instituted in 1999; no government-supported export insurance programme is in place. As an additional tool for export promotion, a duty-drawback scheme for enterprises located outside FTZs was established in 1999, however, it has been used only to a limited extent. Other than the free-trade zone and rebate regimes, no fiscal incentives linked to export performance are in place. Export taxes are maintained for certain mineral products, live fish, and crustaceans.

“20. The Dominican Republic does not yet have a legal framework for competition policy, apart from sector-specific regulations. However, the authorities indicated that comprehensive legal provisions for competition policy were under preparation. In 2000, the Dominican Republic adopted new legislation to improve the protection of intellectual property rights; it has also strengthened enforcement measures.

“(6) SECTORAL POLICIES

“21. The economic importance of agriculture has been decreasing in recent years, although the sector still contributes about 11% to GDP, employs about 15% of the labour force and generates 10% of merchandise export earnings. The sector benefits from above-average border protection, but may have been penalized in relative terms by privileges granted to other producers, notably in FTZs. The Dominican Republic's main agricultural exports, sugar and coffee, have also come under considerable pressure in recent years from low world market prices and damage caused by Hurricane George in 1998.

“22. Manufacturing production, which contributes about 16% to GDP, has a strongly dual nature, defined by whether firms are located in FTZs or elsewhere. Investment in FTZs is largely made up of foreign firms producing textiles, jewellery or electronics for export, whereas non-FTZ enterprises, comprising mostly Dominican firms, engage mainly in food processing to supply the domestic market. The manufacturing sector, largely FTZ firms, generates the lion's share of Dominican exports. However, high reliance on imported inputs and weak backward linkages limit the sector's contribution to net exports and domestic welfare and make it highly dependent on foreign business cycles and, potentially, unilateral policy changes in trading partners.

“23. The services sector is the cornerstone of the Dominican economy, both in terms of value added and of employment. Since 1996, growth rates have been particularly high in communication and tourism-related services, such as transport and the hotel and restaurant industry. With international arrivals approaching three million, tourism also plays a key role for foreign earnings. However, inefficiencies and lack of competition persist in certain services activities; for example, chronic problems in the electricity industry are a handicap for the rest of the economy, and the cost of supplying financial services appears high.

“24. Since 1996, the legal and institutional framework for services has been reformed and the State has reduced its involvement in the sector to certain basic infrastructure, notably maritime ports; this infrastructure is being upgraded by granting concessions to private operators. Pursuant to the Foreign Investment Law, market access to most services is guaranteed to foreign investors on a non-discriminatory basis. Although market access in banking may be subject to a public interest test, access appears not to have been impaired in practice.

“25. The Dominican Republic made commitments in seven of the twelve categories of services of the GATS. Policy changes since the end of the Uruguay Round have made conditions for foreign participation in Dominican services far more liberal than those implied by its GATS commitments. The Dominican Republic ratified the Fourth Protocol to the GATS (on telecommunications) but is still in the process of ratifying the Fifth Protocol (on financial services).



“I. ECONOMIC ENVIRONMENT

“(1) INTRODUCTION

“1. The Dominican Republic is the largest economy in the Central American-Caribbean region; its per capita GDP is some US$2,400 and its population about 9 million. Since its last Review, in 1996, the Dominican economy has experienced one of the fastest rates of growth in the world. This has been accompanied by macroeconomic stability, increased economic openness, including of the foreign trade regime, and a gradual shift towards private sector participation. Enabled by prudent macroeconomic management, high real growth rates were achieved with inflation averaging less than 7% a year, an increase of international reserves, and a relatively stable exchange rate. In line with the global economic downturn, the growth rate dropped sharply, to 2.7%, in 2001 but is expected to pick up again in 2002. Activities that contributed particularly to the high growth rates include construction, commerce, and communications, whereas the share of free-trade zones in GDP has declined, despite their continuing importance for the generation of export earnings.

“2. The Dominican Republic's current account balance posted a deficit with a widening trend between 1996 and 2000, mainly caused by an increasing deficit in the merchandise trade balance. The slowdown of economic activity led to a narrowing of the deficit in 2001. The current account deficits have been financed in part by inflows of foreign direct investment. In contrast to merchandise trade, services have shown successive surpluses, largely due to income from the booming tourism sector. Current transfers from Dominicans living abroad have also been rising and contributed to keeping the current account deficit under control. The Dominican Republic's main trading and investment partner is the United States.

“3. Per capita income has increased at a real annual average of 4.4% since 1996. This reflects the dampening effect on otherwise high GDP growth of the 1.8% average annual population growth although this has been falling. Although all living standards indicators have similarly improved, about 25% of the Dominican population remains below the poverty line, with resilient pockets of poverty concentrated mainly in rural areas, urban slums, and western border areas.

“(2) MAIN ECONOMIC DEVELOPMENTS

“(i) Output and employment

“4. Over the second half of the 1990s, the Dominican Republic has been one of the world's fastest growing economies, with an average growth rate of 7.6% between 1996 and 2000 (Table I.1). Economic activity was sustained by a boom in private investment spending, while the share of consumption and public expenditure in GDP have remained relatively stable since 1995. Preliminary figures for 2001 indicate a sharp deceleration in GDP growth, to 2.7%, as the boost in demand from a programme of public investment only partly offset the slowdown in tourism and the free-trade zones, and in remittances from family members living abroad. According to Central Bank estimates, Dominican GDP grew by 4.3% in the first quarter of 2002, indicating a continuation of the recovery process initiated in the second quarter of 2001.
(…)
“5. According to Central Bank statistics, agriculture contributes just over 11% to GDP, but in nominal value terms export earnings from agricultural goods, including their related manufactured products, have decreased significantly since 1996. Due to falling prices and shrinking quantities, traditional agricultural exports (coffee, sugar, tobacco and cacao,) fell to 3.2% of total exports in 2001. The services sector, contributing about 55% to GDP, constitutes the main pillar of the Dominican economy, with tourism being a major generator of foreign exchange.1 Construction, commerce, and communications have grown particularly fast and have thus contributed to the Dominican Republic's rapid growth since 1996. The share of manufacturing in GDP, despite growth in absolute terms, has been declining, amounting to 16% in 2001. Encouraged by a trade policy regime that grants extensive advantages to enterprises located in free-trade zones, the manufacturing sector continues to be characterized by a dual structure: while the domestically oriented sector concentrates on the processing and packaging of agricultural products, enterprises located in free-trade zones engage mostly in the production of textiles, electronic goods, and jewellery for export markets (see also Chapter IV).

“6. Against the background of high GDP growth rates and a rapidly growing labour force, total employment increased by more than 26% between 1996 and 2001 (Table I.2). Employment growth went hand in hand with a strong increase of female labour market participation. However, unemployment fell only slightly during the corresponding period. The authorities estimated that broad unemployment stood at 15.6% in 2001 while open unemployment, which they suggested was a better indicator for international comparisons, stood at 6.5%. While employment shifted away from agriculture and mining, growth was particularly high in activities such as commerce, transport, and communications. Some 175,000 jobs were located in the free-trade zones in 2001, up from 166,000 in 1995.

“7. As noted in the Secretariat Report for the Dominican Republic's previous Review, the informal sector is large: Central Bank estimates indicate that it accounts for just over half of total employment. In 2001, 70% or more of total employment was informal in agriculture, construction, and transport and communications.2

(…)
“8. Trade has an important role in the Dominican Republic's economy. Data provided by the Central Bank show that Dominican merchandise exports amounted to slightly over US$5.3 billion in 2001, whereas merchandise imports reached almost US$8.8 billion. According to the same source, the share of exports of goods and services in GDP (in current U.S. dollars) fell from 54.6% in 1996 to 39.4% in 2001, while the equivalent share of imports decreased from 60.4% to 47.6%.

“(ii) Fiscal policy

“9. The share of government spending in GDP increased from 13.3% in 1995 to 14.2% in 2001. While public investment showed a decreasing trend, public consumption has been constantly rising since 1996. The Government's Budget for 2002, approved in December 2001, provides for expenses of RD$74 billion.

“10. Between 1995 and 2001, the Dominican Republic posted a fiscal deficit only twice, in 1996 and 1999 (Table I.3). This reflects not only disciplined expenditure but also considerable efforts to boost public revenue. Between 1996 and 2001, particularly swift increases were recorded for income tax revenue, with significant growth also registered for indirect taxes; customs duty revenue also rose annually, but only until 2000. It should be taken into account, however, that quasi-fiscal losses of the Central Bank averaged about 0.39% of GDP during 1995 to 2001. These losses arise from several of the Bank's functions that fall outside the purview of a traditional central bank and include activities like developing and funding tourism projects as well as promoting technology and research. The authorities indicated that the relocation of these activities to other public institutions was under study.

“11. The formulation of fiscal policy is mainly under the responsibility of the Ministry of the Presidency. It has been noted in this context that an increase of transparency, especially of the execution and control of government expenditure, is crucial to enhance fiscal credibility and permit a comprehensive assessment of the Government's financial position.3 The authorities noted that, by law, the budget must be in balance and any deficit should be linked to priority projects financed by foreign loans.

“12. A set of laws to reform fiscal revenue, enacted in 2000, led to significantly reduced reliance on customs duties for government income and less distortionary resource allocation. As a result of the reforms, the share of customs duties in total government revenue decreased from more than 26% in 2000 to below 16% in 2001. The authorities noted that reduced fiscal revenue from lower tariffs has been compensated by increased internal taxes (ITBIS and ISC, see also Chapter III(2)(v)). The foreign exchange fee, which the authorities noted was the main charge affecting the final value of imports, should be eliminated with the adoption of the Monetary and Financial Law (section (iii) below).

“13. The Customs Reform Law (Law No. 146-00) of 27 December 2000 cut tariff peaks and substantially reduced MFN tariffs. The Tax Reform Law (Law No. 147-00) of 27 December 2000 raised the value-added tax (ITBIS) from 8% to 12% and enlarged its base to a number of services that had previously been subject to specific taxes; in addition, excise taxes on alcoholic beverages and cigarettes were increased and income tax brackets were adjusted (see also Chapter III(2)(v)).

“14. In September 2001, the Dominican Government issued a US$500 million international bond in order to expand expenditure for physical and social infrastructure. The bond resources are to be disbursed at the rate of around US$50 million per month in order to control the expansionary impact on the domestic economy. Transport infrastructure projects have so far been among the main beneficiaries of bond-related resources. The authorities indicated that, as at July 2002, US$120 million of bond resources had been spent.” (WTO, 2002).


On the other hand, there are relevant organisations in the business system in the Dominican Republic. The most influential is Consejo Nacional de la Empresa (CONEP) (National Council for the Enterprise) (2008). There is a new organisation online related to consumers’ affairs at the website ConsumidorDom.Com (2008). Regarding the trade unions, non-governmental organisations, and the like, Pimentel (1997) provides a comprehensive study. His research report deals with the organisations of the civil society, but it is not updated yet.

A step forward taken by the government of Dr. Leonel A. Fernández-Reyna has been the emphasis on integrating the country into the global economic scene. As a result of his vision, the Consejo Nacional de Competitividad (CNC) (National Council for Competitiveness), created in 2001 and ratified in 2006, has launched many valuable initiatives and has helped significantly in the process of creating new business legislation. (CNCa). The most important law in this context is the Law on Competitiveness, which has been received with a lot of optimism in the business sector (Hoy, 2007). CNC provides useful information and resources about the business climate and the benefits of doing business in the Dominican Republic (CNCb, CNCd, CNCe). CNC has launched an agressive initiative called Plan Nacional de la Competitividad Sistémica (CNC, 2007) (National Plan of Systemic Competitiveness). As a joint initiative between CNC and the Development Programme of the United Nations (PNUD) to reinforce the National Plan of Systemic Competitiveness, it was established the Observatorio de Competitividad de la República Dominicana (OCRD) (Competitiveness Observatory of the Dominican Republic), which has been praised by Mauricio Ramírez (CNC, 2008a), Representative of the PNUD in the Dominican Republic as a helpful information and competitiveness monitoring program. (CNCc). The Inter-American Development Bank (IBD) has been involved in the funding of the National Plan of Systemic Competitiveness (Listín Diario, 2007).
Dealing with the issue of the future of the Dominican business environment, many factors should be considered in order to have a realistic perspective. The topic of changing the economic model of the country has been reported on Listín Diario (2008a). Lately there have been published news about the growing trend of the services sector (Listín Diario, 2008b). At the same time there is no doubt of the immense potential of the tourism sector. Even the World Tourism Organization reported that the Dominican Republic achieved the highest rate of performance during 2007 in the Caribbean, and it also stated that the country has the best potential in the tourism business in the Caribbean basin (El Caribe, 2008a). In the area of Free Zones, Rodríguez (2004) considers that the Dominican Republica has also a great competitive edge compared with other countries in the present and in the future in order to compete in a global market.
On the other hand, Montás-Domínguez (2007a), the State Secretary of Economy, Planning and Development, holds an optimistic perspective about the business environment of the Dominican Republic. On a luncheon meeting at the American Chamber of Commerce, Montás-Domínguez (2007b) gave a speech entitled “República Dominicana: Construcción de un País Próspero, Equitativo y Gobernable” (“Dominican Republic: Construction of a Prosperous, Equitative, and Governable Country”).
Fundación Global Democracia y Desarrollo (FUNGLODE) (Global Foundation for Democracy and Development) (GFDD) (2005) in collaboration with Grupo de Tecnologías de Información (Information Technology Group) of Centro para el Desarrollo Internacional de la Universidad Harvard (Center for the International Development of Harvard University) published a book entitled “La República Dominicana: Preparación para el Mundo Interconectado” (The Dominican Republic: Preparation for an Interconnected World”) that reflects the vision of the President of the Dominican Republic, Dr. Leonel Antonio Fernández-Reyna, about the economic integration process of globalisation for the Dominican Republic. The same can be said about the book “República Dominicana: Estrategias Nacionales de Desarrollo y Competitividad” (“The Dominican Republic: National Strategies of Development and Competitiveness”) with a prologue by J. Sachs (2004), Director of the Earth Institute of Harvard University.
The Dominican Republic has been led by an international acknowledged president, Dr. Fernández-Reyna (2007), who presented the candidacy of the Dominican Republic for non-permanent member to the United Nations Security Council last October. Dr. Fernández-Reyna also achieved a tremendous success at the XX Summit of the Group of Río that took part in the Dominican Republic recently after solving peacefully a conflict among the nations of Ecuador, Colombia, Venezuela and Nicaragua. At that historic conciliation effort the city of Santo Domingo was nicknamed “The Capital of Peace”. Due to this fact, Raptapar (2008) asked at Yahoo! Answers if the President of the Dominican Republic should be considered to be awarded the Nobel Peace Prize. Currently, there is an election process in the nation, but there is no doubt that the business environment of the Dominican Republic is stable and its economic strength can be appraised as an emerging economy in the developing world with a lot of business potential now and in the near future.


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