Trade transition

To say that trade is important to the Dominican Republic is something of an understatement. In 2005, the country exported goods worth $5.7bn, while imports amounted to $7.8bn; together these represent a whopping 61% of gross domestic product, yet this is a level that has been unremarkable over the past decade. In great part, the figures are a reflection of the attractiveness of the Dominican Republic, and especially its free zones, to foreign investors and the privileges conferred on Dominican products by the US under the Caribbean Basin Initiative.

With the country on the brink of implementing the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA), these established trade and investment patterns are set to change, yet the business community is optimistic that a newly competitive environment with greater potential lies ahead, even if transition is tricky.

Free trade prospects

Miguel Guerrero, a seasoned Dominican news broadcaster who has covered political and economic affairs in the country for many years, is among the optimists. DR-CAFTA, he says, will be a great opportunity for Dominicans. “It’s going to give us transparency [of transactions] at home and a window to penetrate the most important market in the world.”

But financial consultant John Schroder demurs. “DR-CAFTA is not the boon it is marketed as being. The only beneficiaries are large US-based multinationals,” he says. On the other hand, argues Mr Schroder, most companies see the potential in the Dominican Republic in any case, with or without DR-CAFTA, and he grants that the treaty might make companies slightly more comfortable doing business in the country.

After some delays, the agreement is now expected to come into effect early this year. The reason for the delay is unclear but some observers suggest that the government has been seeking special exemptions or concessions from the US in order to meet objections from Dominican companies. “It’s not going to be a cake-walk to finally implement this,” observes Mr Schroder.

Small business owner Frank Perez is unsure how DR-CAFTA will affect his interior construction partnership. Based in the thriving Villa Juana district of Santo Domingo – where the handful of streets crammed with tyre shops, reconditioned engines and exchange bureaux are said to turnover in excess of $1m daily – Mr Perez’s company buys all of its high-quality building materials from US-based distributors. He should, therefore, stand to profit substantially from the scrapping of import tariffs. But, having watched his successful business brought low by government ineptitude four years ago, he is in no mood to believe government promises of benefits. “I have to see it. This is something that has to be seen,” he says emphatically. “Imports are our Achilles heel. Price-wise I’m going to go to China, though the quality’s a little less and it takes four months for a shipment to arrive.”

Free zones

Since the first one was established in 1969, free zones have been the engine of the republic’s export success. Leading US and international firms in a wide variety of manufacturing and service sectors, including Tyco, Abbott and Johnson & Johnson (medical supplies), Pfizer and Merck (pharmaceuticals), Gildan and Haynes (apparel), Power One and Corning Cable (electronics) and Timberland (shoes), have long been established in the zones.

But the free zones face an uncertain future. In particular, since the international multi-fibre agreement ended in 2005, textiles firms – many of which are based in the free zones – have watched more or less helplessly as Asian competitors have conquered the US market. “Even though they pay tariffs [importing into the US], their lower labour costs and vertical integration, including manufacturing cloth domestically, gives Asian firms a competitive edge over us,” says José Torres, executive vice-president of the Free Zones Association. “We’ve lost 40,000 jobs in apparel production in the last year alone.”

Jesús de los Santos of the National Competitiveness Council agrees: “It’s going to be tough”, he says. “But we feel we still have competitive advantages we can use, like closeness to our major market.”

The free zones are nevertheless rising to the new challenges. With government backing, they have drawn up a plan to relaunch the sector. This envisages the creation of industry clusters, changes in the law to allow greater convergence between free zones and local industry, an investment drive using CEO forums and a streamlining of freight-forwarding and customs procedures.

IT expertise

With a decline in textiles manufacturing seemingly inevitable, information technology (IT) has risen to become the manufacturing flagship of the government’s strategy of maintaining a diversified economy. Beside the main highway, a few minutes from Santo Domingo’s airport and close to the new container port at Caucedo, lies Cyberpark, a gleaming new vision representing the country’s aspiration to become a centre of IT expertise in the region and beyond. The venture has excellent political connections: Eddy Martínez, minister for exports and investment, is its CEO and president.

Work on the project fell off during the Mejía administration but has continued with a vengeance since Leonel Fernández resumed presidential office. “We are very oriented towards the IT industry in order to attract international investment,” says José Tavárez, executive director of Las Americas Institute of Technology (ITLA), the higher education and training arm of the project. Next door sits a business incubator designed to capitalise on innovative ideas generated at ITLA and boost entrepreneurial talent. Plans for expansion on the campus include office, training and manufacturing buildings to cater for IT-based companies, as well as leisure facilities and a hotel to accommodate visitors and conference participants.

A swathe of foreign and domestic investors have already pumped about $250m into microelectronics, internet technology, telecommunications and robotics at the site. Because the Dominican Republic does not have a stock market, ITLA has limited access to private capital. But Mr Tavárez says: “We have set up the first private equity fund in the country for domestic investment. The government has put in $10m and another $10m has come from the government of Taiwan.”

New investment

After a dip in the wake of the economic downturn of 2002-03, foreign direct investment in other sectors is also regaining buoyancy. A Saudi Arabian investor is considering building a new oil refinery or expanding the existing one, with the aim of exporting refined products around the Caribbean basin. In the minerals sector, the Pueblo Viejo gold mine will be developed by Canadian firm Placer Dome at a cost of $1.5bn. The project is expected to run for 20 years, yielding 370 tonnes of gold at about $75,000 per tonne.

And US tobacco company Phillip Morris has recently agreed to buy out all of the tobacco interests of its Dominican partner, Empresas León Jimenes. It seems confident that the competitive advantage enjoyed by Dominican cigars over their embargoed Cuban counterparts in the US market is unlikely to be cut away overnight, whatever international political developments take place.

Public sector finance

In the public sector, the World Bank has been active in supporting the Dominican government’s efforts to achieve economic reform and promote social equity. More than half of the bank’s $300m of current commitments is to the energy sector, with a further 40% committed to education and health projects. Future projects will be aimed at fostering competitiveness and social equity through financial and technical support for public sector modernisation, water and sanitation, rural development and social protection.

Similarly, the International Finance Corporation (IFC) has more than $400m invested in various Dominican projects. The Dominican subsidiary of telecommunications giant Orange has been the principal beneficiary, with $100m invested in infrastructure improvements. Small businesses are also receiving assistance: the IFC has provided $20m to Banco BHD for onlending to small and medium-sized enterprises and has a one-fifth stake in Banco Adopem, a microfinance lender that is expanding its branch network across the country.

A further $60m from the IFC has been sunk in Aerodom, operator of six of the country’s airports, to effect infrastructure improvements, while another $25m has gone towards establishing the Dominican Republic’s first wind farm.