“The difficulty is he cannot deny we still have a high external debt, which will take a long time to resolve with the IMF.”
AIRD is lobbying the government for a more business-friendly environment that is conducive to growing local industry. It wants the government to strengthen competition and make customs duty less bureaucratic and more efficient, among other things. “We’re trying to achieve better conditions so the Dominican Republic can compete internationally,” Ms Almanzar says.
The tax system is a good place to start: one of industry’s biggest gripes is the high taxation on imports. There is a basic import tax ranging from 0%-20%, plus a 10% exchange surcharge on all imports into the country, a luxury tax of 15%-60%, and a 12% tax on processed agricultural goods and all non-agricultural goods and services applied on cost insurance and freight plus duties already paid.
To the consternation of the business community, a temporary 2% additional tax on imports, which was phased out late last year, was quickly replaced with a 3% increase in the already 10% exchange commission tax, amounting to a 13% tax on the dollars used to import goods.
Relief for resources
AIRD wants the elimination of taxes on raw materials coming into the country and it would like to see domestic industry placed on par with foreign companies in the free zones which pay no customs duties on exports.
Ms Almanzar says the tax on exchange is actually illegal. “But,” she acknowledges, “it is difficult to eliminate this because it is how the government sustains itself… This illegal tax represents 20% of the government’s income, much of which is dedicated to servicing external debt.” Also, the Dominican Republic’s agreement with the IMF stipulates how much tax revenue it needs to be bringing in, leaving little leeway for the government to reduce taxes, although it has said it would remove the tax on machinery imports.
Ms Almanzar recognises the tough position the administration is in but points out lower taxes would attract more investment, bring in jobs, improve the economy and in turn compensate for the temporary loss in tax revenue.
However, taxation is likely to take a back seat to the issue now dominating the attention of both government and business leaders – the US-Dominican Republic-Central America Free Trade Agreement (DR-CAFTA). “The most important topic is the free trade agreement with the US,” Ms Almanzar agrees. The Dominican Republic has a great deal riding on the successful conclusion of this agreement and the anticipation is palpable.
The US first offered duty-free access to its market through the Caribbean Basin Initiative in 1983. Though the trade deal applied to most countries in the region, it was particularly positive for the Dominican Republic. “It drew attention to the Dominican Republic, and showed that we are industrious and had a good labour pool, so we benefited the most,” says Luis Heredia Bonetti, a partner at Santo Domingo commercial law firm Russin, Vecchi & Heredia Bonetti.
There is a feeling that DR-CAFTA could bring even bigger dividends to the country. The deal was originally signed in May 2004 by the US, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. The Dominican Republic was added three months later after completing its own separate negotiations with the US.
The agreement would allow 100% of non-textile and non-agricultural goods from the signatory countries to enter the US duty free immediately, while tariffs on other goods would fade out over time. This is obviously a boon for Dominican exporters, although the US Chamber of Commerce says 80% of Central American and Dominican products already enter the US market duty free anyway.
One of the biggest benefits of the free trade agreement is that it would act as a driver for transparency. For local companies to compete, they will need to partner with foreign companies, which should help curb corruption. DR-CAFTA will liberalise services such as telecoms, insurance and express shipments as well as offer added legal protection for copyrights, patents, and trademarks, and foster transparency in government procurement.
Yet there is no guarantee DR-CAFTA will ever come to fruition. All eyes are on Washington, where the US Congress is soon to vote on the agreement at a time when protectionist sentiments are running high. It did not help when the Dominican Republic drew the ire of the US within weeks of being added to the agreement by passing a bill levying 25% tax on beverages containing high-fructose corn syrup – this was in clear breach of the terms of the DR-CAFTA.
President Fernández is not taking any chances: he embarked on a lobbying tour of the US in early May, speaking to the media, drumming up support among US businesses and even recruiting former US president (and champion of the North American Free Trade Agreement) Bill Clinton to help the cause.
If it takes effect, the trade deal will be an important marker on the Dominican Republic’s road to development and prosperity. Industrialisation and all the trappings first came to the Dominican Republic in the 1960s once the country cast off the shackles of dictatorship. In the latter part of the decade Law 299 encouraged import substitution. The Dominican Republic was behind the curve compared to its Latin American neighbours, most of whom went through this process in the 1950s, but it did its best to catch up.
In 1969 the country set up its first free zone to support this newfound industrialisation, in La Romana. The second appeared in Santiago in 1973. Originally focused on textiles, cigars and leather (still some of the country’s primary exports), it is now the Dominican Republic’s largest free zone and the largest employer in Santiago with 65,000 staff.
In 1984 Law 145, part of the Industrial Incentive Law, offered appealing incentives for free zone investment and the concept took off. Today some 55 Dominican free zones are producing such products as electronics for export and hosting sophisticated computer design operations where once they only carried out manufacturing. Textiles remain the number one export but are decreasing as a percentage of the whole.
“High-tech investment is a priority,” says Francisco Javier García, minister of industry and commerce. “Twenty-five companies in that sector have set up in the free zones. We are trying to convert manufacturing into IT investment in the free zones.” In fact, in 2000 they created an industrial zone just for that purpose, called Cyberpark.
To some extent the Dominican Republic’s industrial policy has been a success; over the past few decades the private sector has grown and the public sector has shrunk. There is now state investment of 20% into industry, with 75% private.
That there has been progress is undeniable, but most people involved in business in the Dominican Republic seem to be holding their breath for the moment. “Until the Dominican Republic settles a deal with the IMF and completes the free trade treaty with the US, we will have to wait and see,” Mr Heredia Bonetti says. One down, two to go.