Wayzata World Factbook 1996

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U.S. DEPARTMENT OF STATE DOMINICAN REPUBLIC: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES BUREAU OF ECONOMIC AND BUSINESS AFFAIRS DOMINICAN REPUBLIC Key Economic Indicators (Millions of U.S. dollars unless otherwise noted) 1992 1993 1994 1/ Income, Production and Employment: Real GDP (1970 prices) 4,104.9 4,228.7 4,333.75 Real GDP Growth (pct.) 7.8 3.0 2.5 GDP (current prices) 7,828 8,689 9,172 By Sector: Agriculture 1,174 1,304 1,376 Energy/Water 157 174 183 Manufacturing 1,252 1,390 1,467 Construction 548 608 642 New Housing Investment 548 608 642 Financial Services 470 521 550 Other Services 783 869 917 Government/Health/Education 783 869 917 Others 2,113 2,346 2,476 Net Exports of Goods & Services -824.0 -749.5 N/A Real Per Capita GDP (1985 prices in DR pesos) 2/ 2,202 2,209 2,211 Labor Force (000s) 3/ 3,240 3,370 N/A Unemployment Rate (pct.) 4/ 30 30 30 Money and Prices: (annual percentage growth) Money Supply (M2) 32 28 8 Base Interest Rate 5/ 30 29 27 Personal Saving Rate N/A N/A N/A Retail Inflation 7 8 12 Wholesale Inflation N/A N/A N/A Consumer Price Index 6/ 779 800 896 Exchange Rate (DR peso/U.S dollar) Official 12.75 12.75 12.87 Parallel 12.74 12.60 14.00 Balance of Payments and Trade: National Exports (FOB) 7/ 561.9 530.4 530.9 Trade Zone Exports (value added) 287.4 368.5 N/A Exports to U.S. 8/ 2,095.0 2,349.5 2,584.5 National Imports (CIF) 7/ 2,178.1 2,118.4 2,224.3 Imports from U.S. 8/ 2,098.1 2,671.5 2,938.7 Aid from U.S. 9/ 22.5 24.6 N/A Aid from Other Countries N/A N/A N/A External Public Debt 4,582.3 4,685.4 3,900.0 Debt Service Payments (paid) 480.9 N/A N/A Gold and FOREX Reserves 10/ 580.8 714.2 250.0 Trade Balance (National) 7/ -1,616.2 -1,588.0 -1,693.4 Trade Balance with U.S. 8/ -3.1 -322.0 -354.2 N/A--Not available. 1/ U.S. Embassy projections for 1994 calendar year. 2/ Source: The Dominican National Statistic Office is the source of population figures used to calculate per capita GDP. 3/ Source: Dominican National Planning Office. 4/ Source: U.S. Embassy Economic Section estimates. 5/ The 1994 figure is as of July 1994. Short term (90 day) credit costs (prime rate). 6/ May 1976-April 1977 equals 100. 7/ "National exports" means all exports other than from free trade zones. "National imports" means all imports other than those bound for free trade zones. 8/ Source: U.S. Department of Commerce. This data includes all items exported to or imported from the Dominican Republic by the United States, including Dominican free trade zone activity. 9/ Calculation based on U.S. Government fiscal year. 10/ Embassy estimate for December 1994. Source: Economic Studies Department, Central Bank of the Dominican Republic, unless otherwise indicated. 1. General Policy Framework During 1994, the Dominican Republic began to show signs of macroeconomic instability. While inflation had stayed in the single digit range during 1991-1993, by the end of 1994 the consumer price index is expected to register a jump of some 12 percent (over December 1993). Similarly, exchange rate stability began to deteriorate; during early October 1994 the buy rate for U.S. Dollars in Santo Domingo's informal foreign exchange market reached 14.70 pesos per dollar - a 15 percent decline from the peso's October 1993 value. Because of the Dominican Republic's very high propensity to import, changes in the exchange rate inevitably have a significant impact on consumer prices. The reasons for this deviation from macroeconomic stability are clear: national elections were held on May 16, 1994 and government spending increased during the period prior to the elections. Much of the increased spending was - in essence - financed via money creation. By July 1994, cash in the hands of the public (m0) had increased by 24 percent over its July 1993 level. This increase in the money supply caused a big increase in aggregate demand for goods and services, putting pressure on both the exchange rate and the consumer price index. Significant reductions in the Dominican Central Bank's dollar reserves left the government with a greatly reduced capacity to intervene in the foreign exchange market: beginning the year with dollar reserves of some 736 million dollars by late August reserves were down to approximately 150 million dollars. The reserves were diminished as a result of Central Bank efforts to bolster the peso in the face of election-related nervousness. The Central Bank also used a significant portion of its reserves to settle the Dominican government's long-standing commercial debt problem (see below). Starting in early September 1994, the Dominican government initiated efforts to recover macroeconomic stability. A seasoned finance professional was given the position of Central Bank Governor and steps were immediately announced to reign in the monetary expansion mentioned above. President Balaguer pledged his support for the Central Bank's stabilization program. As of late October 1994, it appears that the government was having some success in these efforts. 2. Exchange Rate Policy In effect there are three different sets of exchange rates in the Dominican Republic: the official Central Bank rates, the rates used by the commercial banking system and the rates used by the semi-legal "informal" foreign exchange market. Some sectors of the Dominican economy are still required by law to buy and sell foreign exchange at the Central Bank, but most businesses and individuals are free to carry out foreign exchange transactions through the commercial bank system. In practice the Central Bank works to prevent the commercial bank rates from deviating too widely from the official rates, but when dollars are in short supply the informal market exchange rate will begin to rise and dominicans seeking to buy or sell dollars will make increasing use of this market. In its attempts to influence the exchange rate, the Central Bank buys or sells dollars and attempts to influence overall demand for dollars by manipulating the reserve requirements of the commercial banks. To a limited extent the Central Bank also eng short-term notes). While the peso price of U.S. Dollars has increased, as of October 1994 there was no indication that business activity was being seriously affected by any shortage of foreign exchange. Businesses here do, however, worry that the government might respond with exchange rate controls should the value of the peso continue to decline. 3. Structural Policies Starting in 1990, the government began to eliminate many of the distorting price control and subsidy programs that had contributed to the crisis of the late 1980's. Today, the vast majority of prices are determined by market forces. Of particular interest to U.S. exporters are reforms in the customs and tariffs area. In September, 1990 the Dominican government enacted a major tariff reform by presidential decree. The decree reduced and simplified the tariff schedule to six categories with seven tariff rates ranging from 3 to 35 percent. It also replaced some quantitative import restrictions with tariffs and transformed all tariffs to ad valorem rates. While it marked an improvement over the previous tariff regime, the 1990 decree still left the Dominican Republic with trade barriers significantly higher than many similar countries in the region. In August 1993, the Dominican president signed into law a bill that was essentially a codification of the 1990 decree (with some modifications designed to increase rates of effective protection for Dominican firms.) This new tariff law was bitterly opposed by free trade advocates - it leaves the Dominican Republic with a maximum tariff of 35 percent while many other countries in the region are moving toward much lower maximum tariffs. (There are additional taxes on imports - see below.) The Dominican government has also implemented changes in its tax system aimed at increasing revenues. The concept of taxable income has been enlarged, marginal tax rates on individuals and companies were reduced and capital gains are no longer considered exempted income. In May, 1992 a new labor code was promulgated. Provisions of this new code increase a variety of employee benefits and may result in increased labor costs. The banking and finance system is also in need of reform. The goal is a healthier, more competitive and transparent finance system with closer compliance to clearly understood "rules of the game." Unfortunately a new financial monetary code that was expected to be enacted in late 1992 has not been put into effect. Some bank reforms are being carried out by decree, but bank supervision remains very weak and there is uneasiness about the health of the banking system. Government policy prohibits new foreign investment in a number of areas including public utilities, communications and media, national defense production, forest exploitation and domestic air, surface and water transportation. It is widely recognized that there is a pressing need for investment climate reform. A draft foreign investment law is currently in the hands of the Congress, but progress in this area has been very slow. 4. Debt Management Policies The total external debt of the Dominican government is now approximately 3.9 billion dollars. A significant portion of the official debt was rescheduled under the terms of a Paris Club negotiation concluded in November, 1991. In August 1994 the Dominican government successfully concluded debt settlement negotiations with its commercial bank creditors. The deal involved a combination of buy-back schemes and U.S. Treasury backed rescheduling. The Dominican Republic's debt burden is fairly typical for a lower middle income country. Total external debt as a percentage of GNP is approximately 48 percent. 5. Significant Barriers to U.S. Exports Trade Barriers: Tariffs on most products fall within a 5 to 35 percent range. In addition, the government of the Dominican Republic imposes a 5 to 80 percent selective consumption tax on "non-essential" imports such as home appliances, alcohol, perfumes, jewelry, automobiles and auto parts. Due to the way in which this selective consumption tax was assessed, U.S. made automobiles were prohibitively expensive in the Dominican market. In response to inquiries from the U.S. Embassy, the Dominican government corrected this situation and the number of U.S. made automobiles increased significantly. The Dominican Republic continues to require a consular invoice and "legalization" of documents, which must be performed by a Dominican consulate in the United States. Moreover, importers are frequently queried to obtain licenses from the Dominican customs service. There are food and drug testing and certification requirements, but these are not burdensome. Customs Procedures: Many businesspersons have complained that bringing goods through Dominican customs is a slow and arduous process, but there are indications that this situation improved during 1994. Customs department interpretation of exonerated materials being brought into the country still provokes many complaints and businessmen here must spend considerable time and money to get items through customs. Arbitrary customs clearance procedures sometimes cause problems for businessmen. The use of "negotiated fee" practices to gain faster customs clearance continues to put some U.S. Firms at a competitive disadvantage in the Dominican market. U.S. firms must comply with the provisions of the U.S. Foreign Corrupt Practices Act. Government Procurement Practices: The government of the Dominican Republic has a centralized government procurement office, but the procurement activities of this office are basically limited to expendable supply items for the government's general office work. In practice, each public sector entity has its own procurement office, both for transactions in the domestic market and for imports. Provisions of the U.S. Foreign Corrupt Practices Act often put U.S. bidders on government contracts at a serious disadvantage. Prohibitions on Land Ownership: For foreigners, ownership of more than approximately one-half acre (2,000 square meters) needs presidential approval. Investment Barriers: As indicated above, legislation designed to improve the investment climate is being discussed, but as of October 1994, no significant changes in the investment climate had been put into effect. Foreign investment must receive approval from the foreign investment directorate of the Central Bank in order to qualify for repatriation of profits. The granting of such approval sometimes is time-consuming and the procedures are unclear, making approval sometimes difficult. As per Law 861, Article 16, of July, 1978 companies registered under the foreign investment law are limited in remitting profits or dividends abroad to 25 percent of registered capital per year. Unregistered investment has no right to transfer profits. Capital gains have the right to be remitted only up to two percent annually and, cumulatively, to 20 percent of the original investment. Invested (and registered) capital may be remitted, but only upon the sale or liquidation of the enterprise. Royalties (payments made for technology transfers, licensing contracts and for use of patents and trademarks) may only be paid based on a percentage of sales. Further, each such contract must be individually approved by the foreign investment directorate. Reinvestment of profits is highly restricted. The enterprise must be in the agribusiness or tourism sectors, must export at least 80 percent of its sales, and must remain at least 70 percent domestically owned. All contracts with foreigners for the use of trademarks, or for the use of specialized technical knowledge, must be submitted to the foreign investment directorate for registration. The directorate is permitted to delay or even to disapprove them. Financial institutions doing business in the Dominican Republic must be at least 50 percent Dominican owned, as per Law 861, Article 23 of July, 1978. Exceptions to this law are Citibank and the Bank of Nova Scotia, which were grandfathered in because they were here prior to passage of this law. A new finance and monetary code (and the foreign investment law mentioned above) could bring changes to this local ownership requirement. Foreign companies cannot obtain internal credit for a period greater than one year without prior approval from the Central Bank, as per Law 861, Article 28 of July, 1978. Sectors reserved by other provisions of Law 861 for Domestic Investment are: Public utilities, communications and media, national defense production, forest exploitation, and domestic air, surface and water transport. (Some foreign businesses operate in these sectors because they have been "grandfathered in.") Foreign investors can participate in joint ventures (defined as having 51 to 70 percent Dominican capital and management control) in fishing, insurance, farming, animal husbandry, and commercial and investment banking. The electricity sector continues to be a weak link in the Dominican economy. Businesses operating in the DR cannot depend on the power utility to be a reliable source of electricity. While the government has been exploring the privatization of portions of the electric power system, little progress has been made. Foreign employees may not exceed 20 percent of a firm's work force. This is not applicable when foreign employees only perform managerial or administrative functions. Dominican expropriation standards (e.g., in the "public interest") do not appear to be consistent with international law standards; several investors have outstanding disputes concerning expropriated property. The Dominican Republic has not recognized the general right of investors to binding international arbitration. All mineral resources belong to the state, which controls all rights to explore or exploit them. Although private investment has been permitted in selected sites, the process of choosing and contracting such areas has not been clear or transparent. Investors operating in the Dominican Republic's free trade zones experience far fewer problems than do investors working outside the zones. For example, materials coming into or being shipped out of the zones are reported to move very quickly, without the kinds of bureaucratic difficulties mentioned above and the onerous restrictions on profit remittances do not apply to free trade zone businesses. 6. Export Subsidies Policies The Dominican Republic has two sets of legislation for export promotion: the free trade zone law (Law no. 8-90, passed in 1990) and the export incentive law (Law no. 69, passed in 1979). The free trade zone law provides 100 percent exemption on all taxes, duties, and charges affecting the productive and trade operations at free trade zones. These incentives are provided to specific beneficiaries for up to 20 years, depending on the location of the zone. This legislation is managed jointly by the foreign trade zone national council and by the Dominican customs service. The export incentive law provides for tax and duty free treatment of inputs from overseas that are to be processed and re-exported as final products. This legislation is managed by the Dominican export promotion center and the Dominican customs service. In practice, use of the export incentive law to import raw materials for process and re-export is cumbersome and delays in clearing customs can take anywhere from 20-60 days. This customs clearance process has made completion of production contracts with specific deadlines very difficult. As a result, non-free trade zone exporters rarely take advantage of the export incentive law. Most prefer to import raw materials using the normal customs procedures which, although more costly, are more rapid and predictable. There is no preferential financing for local exporters nor is there a government fund for export promotion. 7. Protection of U.S. Intellectual Property In general, copyright laws are adequate, but enforcement is weak, resulting in widespread piracy. Although the Dominican Republic is a signatory to the Paris Convention and the Universal Copyright Convention, and in 1991 became a member of the World Intellectual Property Organization, the lack of a strong regulatory environment results in inadequate protection of intellectual property rights. In 1992, the Dominican Republic was the subject of a petition by the Motion Picture Export Association of America (MPEAA) before the United States Trade Representative, alleging piracy of satellite television signals and unauthorized use of videos in Dominican theaters. In response to this complaint, the Dominican government took effective action against cable television pirates and most of the television piracy was halted. Patents (product and process): In a local pharmaceutical market of approximately 110 million dollars a year, Dominican manufacturers supply about 70 percent of the total. Of that, about seven per cent is believed to be counterfeit. Trademarks and Copyrights: Many apparel brands are counterfeited and sold in the local market. In addition to the MPEAA complaint, problems have arisen with illegally copied videos, software and books. Impact of IPR Policies on U.S. Trade: Non- protection of intellectual property rights is so widespread that it is virtually impossible to quantify its impact on U.S.-Dominican Republic trade. The U.S. Motion Picture Exporters' Association had estimated that losses to its members due to theft of satellite-carried programming were more than one million dollars per year. Losses due to other counterfeiting cost U.S. companies millions more. 8. Worker Rights a. The Right of Association The constitution provides for the freedom to organize labor unions and also for the rights of workers to strike and for the private sector to lock out. All workers, except military and police, are free to organize, and strikes are legal except in sectors which are considered essential services. Organized labor in the Dominican Republic represents about 10-15 percent of the work force and is divided among three large confederations, three minor confederations, and a number of independent unions. Labor unions can and do freely affiliate regionally and internationally. b. The Right to Organize and Bargain Collectively Collective bargaining is permitted and can take place in firms in which a union has gained the support of an absolute majority of the workers of a firm. According to law workers cannot be dismissed because of union activities or membership. There has been a history of labor conflict in the free trade zones, with companies firing workers for engaging in union organizing activities. The 1992 Labor Code protects from layoffs up to 20 members of a union in formation and between 5 to 10 members of a union executive council, depending on the size of the work force. The 1990 firings of unionized workers by the Dominican Electric Corporation led to management/labor disputes which have yet to be fully resolved. The free trade zones have also been the scene of some management/labor disputes (see Section 8.F.). c. Prohibition of Forced or Compulsory Labor Forced or compulsory labor is prohibited by law. The Dominican government has been criticized for its treatment of Haitian workers employed by the State Sugar Council (CEA). Alleged abuses have included forced recruitment, compulsory labor, and restrictions on freedom of movement. Instances of forced labor and restrictions on movement occurred in only isolated instances on CEA plantations in 1993. Forced labor has not been a problem in other areas. d. Minimum Age for Employment of Children The labor code prohibits employment of youths under 14 years of age and places various restrictions on the employment of youths under the age of 16. In practice, there are large numbers of minors working illegally, primarily in the informal sector. The high level of unemployment and the lack of a social safety net create pressures on families to allow children to generate supplemental income. Instances of child labor in CEA sugar plantations have diminished greatly and most observers note that such practice is no longer a serious problem. e. Acceptable Conditions of Work The Labor Code establishes a standard work period of eight hours per day and 44 hours per week, with an uninterrupted rest period of 36 hours each week. In practice, a typical workweek is Monday through Friday plus half day on Saturday, but longer hours are not unusual, especially for agricultural and informal sector workers. Workers are entitled to a 35 percent wage differential when working between 44 and 68 hours per week and a 100 percent differential for any hours above 68 per week. The vast majority of workers receive only the minimum wage (which varies by law in accordance with the type of activity and the size of the company). Safety and health conditions at places of work do not always meet legal standards. The existing social security system does not apply to all workers and is under funded. f. Rights in Sectors with U.S. Investments U.S.-based multinationals active in the free trade zones represent one of the principal sources of U.S. investment in the Dominican Republic. The free trade zone sector's compliance with the right to organize and bargain collectively has been a matter of controversy, but during 1994 some progress was made. Some companies in the free trade zones adhere to significantly higher worker safety and health standards than do non-free trade zone companies. In other categories of worker rights, conditions in sectors with U.S. investment do not differ significantly from conditions in sectors lacking U.S. investment. Extent of U.S. Investment in Selected Industries.--U.S. Direct Investment Position Abroad on an Historical Cost Basis--1993 (Millions of U.S. dollars) Category Amount Petroleum (1) Total Manufacturing 237 Food & Kindred Products 4 Chemicals and Allied Products (1) Metals, Primary & Fabricated (1) Machinery, except Electrical 0 Electric & Electronic Equipment 5 Transportation Equipment 0 Other Manufacturing 210 Wholesale Trade 5 Banking (1) Finance/Insurance/Real Estate 3 Services (1) Other Industries (1) TOTAL ALL INDUSTRIES 1,020 (1) Suppressed to avoid disclosing data of individual companies Source: U.S. Department of Commerce, Bureau of Economic Analysis (###)