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Dominican economy thrives on tourism and free-zone exports
Seis Continentes / June 2002

By Larry Luxner

SANTO DOMINGO -- As merengue music blasts from loudspeakers high above the factory floor, 20-year-old Gavinia Cruz Morillo and her 900 co-workers at the Cutler-Hammer electronics plant in Santo Domingo's Itabo Industrial Park assemble residential circuit breakers for export to Home Depot and other top U.S. clients.

Julio César Aquino, the plant's manufacturing manager, says his 77,000-square-foot complex has been in production since 1992, when Cutler-Hammer, a division of Eaton Industries, bought the operations from Westinghouse.

"Until three years ago, this was functioning as a twin plant," said Aquino. "We received plastic injection-molding components from a factory in Puerto Rico, while another Puerto Rican factory supplied our metal products. We assembled the breakers here and sent them back to Puerto Rico for packaging and distribution to clients in the United States, Costa Rica, Venezuela and Canada.

"Now, we receive the raw materials, assemble the breakers, package them and send them directly to the client," he said. "It's just easier to do everything here."

While neighboring Puerto Rico may view the Cutler-Hammer factory as competition for scarce manufacturing jobs, the Dominican Republic -- a poor country plagued by low per-capita income, high unemployment and increasing political unrest -- hopes to attract more of them as quickly as possible.

"We have a privileged geographical position, a government that respects private investment and clear laws that allow investors to repatriate their money overseas whenever they want," says Danilo del Rosario, executive director of the Dominican Republic's Office of Investment Promotion. "This is why the country is so competitive, and has become one of the most desired locations to invest in."

According to Rosario, the apparel industry alone is responsible for 142,000 direct jobs and another 100,000 indirect jobs. That industry dominates the country's 54 free zones, which contain 562 factories employing 240,000 people, 58% of them women. Ten more industrial parks are under construction, and U.S. multinationals already comprise the lion's share of companies operating in such free zones.

"We have a president [Hipólito Mejía] who has studied in the United States and knows how Americans think," said Rosario, noting that last year, U.S.-Dominican bilateral trade came to $7 billion -- exceeding U.S. commerce with India, South Africa or Sweden. The Dominican Republic currently ranks as the seventh-largest export market in the Western Hemisphere for U.S. goods, and ships more to the United States than Argentina, Chile or Peru.

At present, the overwhelming majority of Dominican free-zone exports consist not of high-value electronic components but low-tech apparel and textiles. But that's slowly changing as Mexico -- where wages are even lower -- siphons off apparel jobs from the Dominicans.

That's why the Dominicans lobbied to hard to win passage in 2000 of the Caribbean Basin Trade Partnership Act (CBTPA), an extension of the Caribbean Basin Initiative (CBI), which was first passed in 1984.

"It's very important for us to fulfill all our requirements in order to continue to be eligible under the CBI and the CBTPA, which gives us the same trade benefits as Mexico in apparel exports," says Roberto B. Saladín-Selín, the Dominican Republic's ambassador to the United States. "We have a special relationship with the United States, not only because 65% of our trade is with the U.S. and Puerto Rico, but also because of the presence of 1.5 million Dominicans in this country."

Although the D.R. is a relatively small country, because of enduring poverty there are more Dominicans in the United States relative to its total population of 8.4 million than any country in the world except El Salvador. Together, they send home $1.6 billion a year in remittances -- the second-largest source of foreign exchange after tourism.

What really has boosted the Dominican economy, though, is the rise of the maquila, or industrial park. While many Latin American countries including Mexico, Honduras, El Salvador and Guatemala have maquilas, the Dominicans have turned the concept into a major economic success. Together, those 54 industrial parks account for over $1 billion in foreign-exchange earnings.

At present, the overwhelming majority of Dominican maquila exports consist not of high-value electronic components but low-tech apparel and textiles. But that's slowly changing as Mexico -- where wages are even lower -- siphons off apparel jobs from the Dominicans. 542 2020

José Tomás Contreras, general manager of the Itabo Industrial Park, says his free zone opened in 1986 and is considered one of the most modern in the entire Caribbean.

"Apparel is classified as the bottom of the barrel as far as technology. You can teach just about anybody to sew a pair of blue jeans," he says. "You can't say that about electronics or medical devices."

Manufacturing wages here average only $5 a day, less than what a typical factory worker earns in one hour in neighboring Puerto Rico, a U.S. commonwealth.

Even so, Contreras says the country isn't ready for certain manufacturing operations. For instance, the sophisticated processes associated with pharmaceutical production cannot sustain the power blackouts that still occasionally plague Santo Domingo; also, garments and other items sold to the U.S. military must be assembled in the United States, and the country's literacy rate is still well below that of Jamaica, Barbados, Puerto Rico or Trinidad.

"I don't think we can seriously expect to get a biotechnology or pharmaceutical R&D firm over here," says William Malamud, executive director of the American Chamber of Commerce of the Dominican Republic. "You need much higher levels of infrastructure and a workforce flooded with Ph.D's."

At the moment, the Dominican Republic's GDP stands at $22.5 billion (up from $17.4 billion last year), which translates into annual per-capita income of $2,400. While that might not sound like much, it's a dramatic jump from the $1,750 recorded in 1999 and a wretched $700 only a decade ago.

While all that wealth has yet to filter down to the poorest sectors of society, there's no question that the country -- whose GDP has been expanding by 7-8% annually for years -- enjoys one of the fastest-growing economies anywhere in Latin America and the Caribbean. Fancy new shopping malls, auto dealerships and fast-food outlets are springing up all over Santo Domingo, and cellular phones are a common sight in a country that 10 years ago was suffering from power blackouts lasting up to 12 hours a day.

In 2001, however, the Dominican economy grew by only 2.7%. Unemployment also edged up as some 64,000 jobs were lost as a result of tax reform, the slowdown in the U.S. economy and the Sept. 11 terrorist attacks.

According to the Central Bank, unemployment now stands at 15.6% -- up from 13.9% a year ago -- with the manufacturing sector losing 35,700 jobs alone.

On the other hand, employment in the transport and telecommunications sector rose from 196,000 to 241,000 jobs. Likewise, the government and its defense sector also went on a hiring spree, boosting payrolls by 13.6% from 136,000 to 152,000. Employment in the restaurant and hotel sector went up by 8%, and construction employment rose by 5%.

Frederic Emam-Zade, director of economic development at the Fundación Global Democracia y Desarrollo (Global Foundation for Democracy and Development) in Santo Domingo, says the Dominican economy under President Mejía has improved, though not as much as in past years.

"His monetary policy has been great, but the fiscal policy is wrong," Emam-Zade told Seis Continentes. "Mejía's first big mistake was raising the tax burden on the people from 15% to 20% in January 2001, which very quickly brought about a recession in the DR. By the time we were starting to getting out of that, along came Sept. 11, which prolonged the slowdown."

This year, says the economist, the economy will grow by 3.5% to 5%.

"I've had to revise my projections downward from 6-7% because the government won't be able to get all the resources it needs for its investment program," he said.

One bright spot is tourism, which generates roughly $2 billion a year for the economy.

In 2001, the Dominican Republic received just under two million tourists. That was down 3.4% from the 2.06 million who came in 2000, though the 2000 figure represented a 15% jump over 1999 arrivals. Few doubt that last year's drop has more to do with the terrorist attacks of Sept. 11 than with the Dominican Republic itself.

"A lot of U.S. tourists know Casa de Campo in La Romana or Punta Cana, but we also want to present a positive cultural image, based on the role we played during colonial times," said Ambassador Saladín. "Santo Domingo, for example, has a lot of tourist attractions for people who wish to see the first city, the first cathedral, the first hospital and the first university in the New World."

Ramón E. Prieto, president of Asonohores (Asociación Nacional de Hoteles y Restaurantes), says that of the two million tourists who visited last year, 81.6% were leisure tourists, 9.7% came for business and 6.7% traveled there for meetings and conventions. In Santo Domingo alone, business visitors accounted for 70.3% of the total, followed by leisure tourists (16.3%), and those attending meetings and conventions (9.7%).

As to where the tourists are flying in from, 48% come from Europe, 42% from North America, and 10% from Latin America and the Caribbean. The busiest of the country's five international airports is Punta Cana (717,689 passenger arrivals in 2001), followed by Santo Domingo's José Francisco Peña Gomez International Airport (577,128) and Puerto Plata (535,585).

According to Prieto, the Dominican Republic has 54,000 hotel rooms -- more than any other Caribbean destination. At least 20,000 of those rooms are in the Punta Cana/Bavaro area. That may be too much of a good thing, however.

"We have been growing 6-8% every year, but I think we have grown too fast," says Prieto. "There has been a lack of planning. Our offer of rooms is very homogenous. They are all the same. What we have to do is develop new products in order to attract a new niche of the market."

Part of the problem is a huge dependence on all-inclusive resorts, which currently represent 72.8% of the Dominican Republic's total hotel-room inventory. The all-inclusives generally attract low-budget tourists from Canada, Western Europe and the northeastern United States. According to Prieto, these all-inclusives sell for a range of $40-125 a day, but the average is only around $55.

"I think we should be selling around 30% higher than we are now. This is our goal," he says. "After Sept. 11, all our competitors came out with very aggressive advertising. We did too, but we were late."

Now, he says, "we have to promote a good image. The government has to put more money in advertising. They're doing a better job now than in the past."

As to improving the Dominican Republic's tourism product, Prieto says his organization supports a moratorium on the construction of new hotels in the low-end sector.

"We think the major tourist destinations are saturated," he said. "That doesn't mean we cannot permit more hotel rooms. We welcome new investment, but we should be sure that this new investment is diverted to segments which we need, like five-star hotels."

To that end, Prieto and other industry officials are closely watching Cap Cana -- touted as the largest tourism project not only in the Dominican Republic but in the entire Caribbean.

The project, which foresees $3 billion in investments over the next 10 to 15 years, will spread over 29,000 acres of pristine oceanfront land in the eastern part of the country. Planned are condominiums, luxury villas, a 1,000-slip marina, a Jack Nicklaus-designed golf course and between four and five hotels. Cap Cana is 70% owned by Grupo del Caribe, a Dominican construction conglomerate; another 15% is owned by Puerto Rican investor Tomás Torres, and the remaining 15% by Dominican investors including Alex Rood, Leo Pérez and Eulogio Santaella.

"So far, we've invested $200 million, including the land," says Dr. Ricardo Hazoury, president of Grupo del Caribe. "The Dominican Republic has the potential to develop a high-quality tourism product, and this is what we're looking for."

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