An open challenge in the heart of the caribbean

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The Dominican Republic has obtained the highest growth rate in all of Latin America for the past decade, averaging 8% annually, while sustaining one of the lowest levels of inflation. Despite the cooling down of the world economy and the United States sinking into a recession, this nation of over eight million consumers in the heart of the Caribbean is not anywhere close to losing the vision it holds towards becoming the giant of the Antilles Sea. This year the Dominican Republic is expecting an average growth rate of over 3.5%, the highest on the continent. With unemployment in single digits and Direct Foreign Investments adding up to more than 1.2 billion dollars in 2000 the economy of the Dominican Republic stays buoyant amidst a flux of change towards development. "This government is here to help out and build bridges for future growth," President Hipolito Mejia announces proudly.

Rate of inflation and Growth of GPD

International markets also believe in the DR's future. Just a week after the attacks of September 11th in New York City the Dominican Republic was the first nation to tap international credit markets issuing for the first time sovereign bonds worth 500 million dollars. The bonds stayed no more than two days on shelf, selling like freshly baked bread, for markets hungry for safe investments. What better proof of international markets' faith in the Dominican Republic? So far, the new cash flow into the Dominican Republic has been conscientiously used, financing highways connecting resorts to major cities, promoting tourism, and filling out Central Bank reserves. "We have been able to place the sovereign bonds in international markets -at 9.5%- at a very confusing time, and this has directly motivated more Foreign Direct Investment into the Dominican Republic," comments Rafael Calderon, the Technical Minister for the Presidency (the president's right arm), to which he adds, "to avoid any misunderstanding a law has been passed that clearly states how and where the bond money will be invested, and only in projects that will generate wealth in the long run."

President Hipolito Mejia's Government took office in August 2000 and he has stated clearly his objectives since then: education, in which he has allocated 19 percent of his budget; Social Security reforms, which have finally been approved after 37 years of dwelling over the subject; and agriculture, an issue President Mejia considers a top priority being himself an agronomist. The country currently imports over 400 million dollars annually in food products and Hipolito Mejia is focused on making the island not only self sufficient in basic staple foods, such as rice, but on making the island a prime exporter of tropical fruits, a delicacy in high demand in health oriented societies of the First World and which can be produced cheaply here. Foreign Direct Investment is among the top priority of the president's agenda. President Mejia has personally taken charge of seeking out businessmen inclined to investment incursions into the Dominican Republic in all of his 17 travels abroad. Despite giving social policies priority on the party agenda, when it comes down to doing business "the government's role is to be that of a facilitator, not a regulator that restricts people's freedom and work," assures President Mejia.

The Dominican Republic is a textbook case of a small economy with limited natural resources, which has been able to turn its economy around by opening itself up to trade and financial flows. This remarkable turnaround from the 1980's import substitution policies lies in impressive and wide ranging economic reforms launched in the early 1990's that featured liberalization and greater integration into the world economy. Whereas in the early 1980's growth had averaged less than 2 percent a year, by the end of the 1990's this average had climbed to nearly 8 percent a year.

The impetus for this dramatic growth has come largely from three independent and sturdy pillars: tourism, telecommunications and industrial free-trade-zones (FTZ). This part of the economy is characterized by strong competition, close links to the world economy, and special administrative arrangements that often shield it from state intervention. Yet despite continuous growth in these sectors new opportunities are opening up in what is not going to be for much longer the state intervened sector of the economy: agriculture, mining, industry, transportation, etc.
None of these remarkable growth experiences could have taken place if it were not for the macroeconomic stability that has accompanied the Dominican Republic over the last decade and the social peace that has prevailed for over 20 years. Dominicans themselves are aware that progress does not come without social tranquility and are keen on keeping it that way. When observed from a regional perspective the Dominican Republic surely ranks high in this category, especially when compared to its neighbors (Haiti, Cuba, Jamaica, Venezuela, Colombia, Honduras, Guatemala, Nicaragua, southern Mexico, etc). Foreign Direct Investment flows into safe ports and the Dominican Republic has definitely taken advantage of its social peace to attract investors. And the government intends to keep it this way.

"This is one of the few countries around the world that has grown more than 7% in the last decade, and we will continue to grow", boasts President Mejía. "We have a healthy economy with defined macroeconomic policies and clear laws that stand up for freedom of speech, religion, property and other rights that are fundamental to any democracy. This is a country in which it is safe to invest. I have a lot of faith in the Dominican Republic's dynamism and growth. The facts show this country has taken off and we are now investing as much as we can in education to continue this path."

In the financial field, the Dominican Republic actually has one of the highest interest rates in Latin America. This hampers consumers from taking out loans, of course, but it also works to the benefit of foreign investment. For those eager for safe profits but reluctant to invest in real estate, simply putting money into Dominican bank accounts where it earns anywhere between 13 and 22% interest rate annually might sound like a tempting option. Until very recently (November 2001), the government had indirectly tagged the Dominican peso to the dollar and the exchange rate has remained among the least fluctuating of the continent. Furthermore, with a population practically leaping up to middle class, the dizzyingly high interest rates charged by banks have engendered a sky rocketing growth of the credit card business, which happens to be charging just under 3%. According to the United Nations the Dominican Republic ranks as the eighth poorest nation in the American Continent but certainly not to VISA international and MasterCard. For them, the Dominican Republic ranks as their eighth best customer.

According to Mr. Frank Guerrero Prats, Governor of the Central Bank of the Dominican Republic this can be explained due to the fact that during the second half of the 1990's the central bank used the exchange rate as a nominal anchor against inflation, indirectly pegging it to the American dollar. This policy took its toll in extremely high interest rates, reaching 32%, and an appreciation of the currency that had to be corrected on several occasions, Prats admits. Thus, the Dominican Republic still has one of the highest costs of living in all of Latin America but only modest salaries. The good side to this policy was a greater influx of direct foreign investment, that was aided not only by high interest rates but by low inflation and the Law of Foreign Investment (Ley de inversión extranjera 16-95), which was approved November 20, 1995 and which judicially states that 100% of profits can be sent out of the country, thus guaranteeing a safe and secure investment.

"However, after the 1999-2000 oil shock and clear indications that the world economy was heading towards a slowdown, changing monetary policy was imperative to protect the economy from external shock waves," Mr. Prats justifies. A new government also took office. The current objectives of the new officers of the Central Bank are now oriented toward accumulating reserves to reestablish liquidity with the final objective of reducing interest rates and the appreciation of the Dominican peso in world markets. This, they hope, will fuel dynamism into the productive sectors of society (i.e. exporters) that were hurt by past policies. Still, interest rates are almost at 30%. Inflation, measured on a twelve-month period, remained barely under 10%, at 9.55% in October 2001.

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© World INvestment NEws, 2002.
This is the electronic edition of the special country report on Dominican Republic published in Forbes Global .
April 15th, 2002 Issue.
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