56513 Dominican Republic FROM THE INTERNATIONAL FINANCIAL CRISIS TOWARDS INCLUSIVE GROWTH IN THE DOMINICAN REPUBLIC Policy Notes Roby Senderowitsch World Bank Yvonne M. Tsikata Dominican Republic Editors TABLE OF CONTENTS Abbreviations....................................................................................................................................................................................... vii Charts, Tables and Maps...................................................................................................................................................................... xi Acknowledgements................................................................................................................................................................................ xv Preface....................................................................................................................................................................................................xvii Introduction ........................................................................................................................................................................................... 3 Dominican Republic - Policy Notes Chapter I: From the International Financial Crisis Towards Inclusive Growth in the Dominican Republic Copyright © 2010 - World Bank, Dominican Republic 1. Introduction...............................................................................................................................................................................17 Calle Virgilio Díaz Ordoñez #36, Edificio Mezzo Tempo, Suite 401. 2. Diagnosis: Origin of economic growth and social development results................................................................................ 18 2.1 Long run growth performance.......................................................................................................................................... 18 Phone: 809-566-6815 2.2 Growth, Distribution and Welfare................................................................................................................................... 20 Web: www.bancomundial.org.do 2.3 Growth attributes.............................................................................................................................................................. 22 3. Prospection: How to combine Economic growth and social development........................................................................... 27 All rights reserved 3.1 Growth prospets................................................................................................................................................................ 27 3.2 Convergence between growth and social indicators......................................................................................................... 29 4. Conclusion................................................................................................................................................................................. 32 This volume is a product of the staff of the International Bank for Reconstruction and Development / World Bank. The findings, interpretations and conclusions expressed in this volume do not necessarily reflect the views of the Chapter II: Ease of Doing Business Executive Directors of the World Bank Group or the governments they represent. The Bank does not guarantee the accuracy of the data included in this work. 1. Introduction.............................................................................................................................................................................. 35 2. Diagnosis and policy options.................................................................................................................................................... 36 Rights and Permissions 2.1 Opportunities for reform ................................................................................................................................................. 36 The content of this book is property of the World Bank, Dominican Republic and may not be reproduced, 2.1.1. Starting a Business................................................................................................................................................. 36 2.1.2. Construction permits............................................................................................................................................ 38 transmitted or distributed in any form without prior written consent of the World Bank in the Dominican 2.1.3. Registering Property.............................................................................................................................................. 40 Republic. The reproduction, duplication, transmission or commercial exploitation of these materials, copyrighted, 2.1.4. Getting credit..........................................................................................................................................................41 is protected by international laws and treaties of copyright. This book does not, in any way, license, either by 2.1.5. Protecting investors............................................................................................................................................... 42 implication or otherwise, to use, copy, distribute or publicly perform or display the content of this book for any 2.1.6. Paying taxes............................................................................................................................................................ 44 purpose. 2.1.7. Trading across borders........................................................................................................................................... 44 Notas de Política / indice 2.1.8. Enforcing contracts............................................................................................................................................... 45 For permission to use any of the content in any way, please send an email to adelapaz@worldbank.org for the 2.1.9. Closing a business................................................................................................................................................. 47 attention of Alejandra De La Paz. 3. Conclusions.. ............................................................................................................................................................................ 48 Editorial coordination: Chapter III: Logistics for Competitiveness Alejandra De La Paz, Jordi �lvarez 1. Introduction...............................................................................................................................................................................51 Photos: 2. Diagnosis.................................................................................................................................................................................... 52 Valerie Hermann, Davide Zucchini 2.1 Logistics Performance....................................................................................................................................................... 52 2.1.1. Logistics Performance Indicators.......................................................................................................................... 52 2.1.2. Impact of Logisitics Costs...................................................................................................................................... 55 Design and publication of catalog: 3. Policy Alternatives..................................................................................................................................................................... 56 Amigo del Hogar - 2010-06-15 Dominican Republic 3.1 Agenda to improve logistical performance and competitiveness..................................................................................... 56 4. Conclusions.. ............................................................................................................................................................................ 59 iii Chapter IV: Access to Financial Services: Financing for Micro, Small and Medium Enterprises (MSMEs) Chapter VII: The Health Setor 1. Introduction .............................................................................................................................................................................61 1. Introduction.............................................................................................................................................................................. 97 2. Diagnosis.................................................................................................................................................................................... 62 2. Diagnosis................................................................................................................................................................................... 98 2.1 Offer of Financial Services............................................................................................................................................... 62 2.1 Current Situation............................................................................................................................................................. 98 2.1.1. The Financial System............................................................................................................................................ 62 2.2 Health expenditure and provision of services.................................................................................................................. 99 2.1.2. MSMEs Financing................................................................................................................................................. 64 2.3 Provision of health services............................................................................................................................................. 100 2.2 Demand for financial services: MSMEs characteristics and reported obstacles.............................................................. 66 2.4 The health sector reform: legal and financial framework...............................................................................................101 2.3 Governmental Framework Support.................................................................................................................................. 68 2.5 The implementation of the health reform..................................................................................................................... 102 3. The Financial Sector................................................................................................................................................................. 69 2.6 Health sector financing .................................................................................................................................................. 103 3.1 Offer of Financial Services............................................................................................................................................... 69 2.7 Main health sector challenges and priorities.................................................................................................................. 104 3.2 Demand for financial services.......................................................................................................................................... 70 3. Policy Alternatives................................................................................................................................................................... 105 3.3 Government Programs and Elements regarding Financial Infrastructure....................................................................... 70 3.3.1 Governmental Programs....................................................................................................................................... 70 Chapter VIII: Territorial Development: Convergence Policies in a Divergent Country 3.3.2 Elements of Financial Infrastructure.................................................................................................................... 70 4. Policy Alternatives......................................................................................................................................................................71 1. Introduction.............................................................................................................................................................................111 4.1 Offer for financial services................................................................................................................................................ 72 2. Diagnosis..................................................................................................................................................................................112 4.2 Demand for financial services.......................................................................................................................................... 72 2.1 Growth without development.........................................................................................................................................112 4.3 Governmental Support Framework and Financial Infrastructure................................................................................... 72 2.2 Territorial imbalances......................................................................................................................................................112 5. Conclusions............................................................................................................................................................................... 73 2.3 Social territorial imbalances............................................................................................................................................113 2.4 Spatial inequalities in access to services..........................................................................................................................114 Chapter V: The Electricity Sector 3. Territorial policies and their Institutionalization..................................................................................................................115 3.1 Planning and programming.............................................................................................................................................115 1. Introduction ............................................................................................................................................................................ 77 3.2 Regionalization and zonification of the territory............................................................................................................116 2. Diagnosis................................................................................................................................................................................... 77 3.3 Decentralization and the municipal model.....................................................................................................................116 2.1 Background on the sector................................................................................................................................................. 77 3.4 Territorial development policies......................................................................................................................................116 2.2 Structure of the Sector...................................................................................................................................................... 78 3.5 International Experience.................................................................................................................................................117 2.3 Current State.................................................................................................................................................................... 79 3.6 Institutional Arrangements.............................................................................................................................................117 3. Challenges.................................................................................................................................................................................. 80 3.7 Role of financing.............................................................................................................................................................118 3.1 Institutional Strengthening.............................................................................................................................................. 80 4. Policy Alternatives....................................................................................................................................................................119 3.2 Tariff Rationalization.........................................................................................................................................................81 4.1 Territorial Strategy and Planning.....................................................................................................................................119 3.3 Technical and Commercial Losses.....................................................................................................................................81 4.2 Institutional mechanisms................................................................................................................................................119 3.4 Operational Costs............................................................................................................................................................. 82 4.3 Sequence of institutionalization of mechanisms for territorial development................................................................ 120 3.5 Energy sources Diversification.......................................................................................................................................... 83 5. Conclusions............................................................................................................................................................................. 122 4. Policy Alternatives..................................................................................................................................................................... 84 4.1 Tariff scheme rationalization............................................................................................................................................ 84 Chapter IX: Towards an accountability and Performance System in the Dominican Republic 4.2 Loss reduction in distribution and transmission............................................................................................................. 84 4.3 Operational costs reduction............................................................................................................................................. 84 1. Introduction............................................................................................................................................................................ 125 4.4 Energy diversification politics........................................................................................................................................... 85 2. The Reform: Objetives and State of Play............................................................................................................................... 125 4.5 Rehabilitation of generation plants.................................................................................................................................. 85 2.1 Bases, Attributes and Requirements............................................................................................................................... 125 Notas de Política / indice Notas de Política / indice 4.6 Sector Institutionalism to Reduce Transaction Costs...................................................................................................... 85 2.2 Analytical Framework for the Reform............................................................................................................................ 126 4.7 Focalization of subsidies on the poorest population........................................................................................................ 85 2.3 The Experience with the Establishment of a Results-Based Budget...............................................................................127 5. Conclusions.. ............................................................................................................................................................................ 85 2.3.1 Variety of Models to Improve Budgetary Systems................................................................................................127 2.3.2 Requirements for a Performance-informed budgeting........................................................................................ 128 Chapter VI: Climate Change and the Dominican Republic 3. Diagnosis: Advances and Challenges in the Implementation of Reforms............................................................................131 3.1 Status of Results-Based Budgeting precursors.................................................................................................................131 1. Introduction ............................................................................................................................................................................ 89 3.2 Articulation between Planning and Budget................................................................................................................... 132 2. Diagnosis.................................................................................................................................................................................... 90 3.3 Key Actors in the Budget Cycle...................................................................................................................................... 133 2.1 Vulnerability to Climate Change..................................................................................................................................... 90 4. Policy Alternatives.................................................................................................................................................................... 134 2.2 Carbon footprint of the Dominican Republic..................................................................................................................91 5. Conclusions............................................................................................................................................................................. 136 2.3 Climate Change impacts................................................................................................................................................... 92 3. Policy Alternatives..................................................................................................................................................................... 94 Annexes........................................................................................................................................................................................... 139 4. Conclusions.. ............................................................................................................................................................................ 95 iv v abbreviations and acronyms AHP Asociaciones de Ahorro y Préstamo AIRAC Asociación de Instituciones Rurales de Ahorro y Crédito APORDOM Autoridad Portuaria Dominicana ARS Administradoras de Riesgos de Salud N o t a s d e Po l í t i c a / a b r e v i at u r a s y a c r ó n i m o s BAC Bancos de Ahorro y Crédito BC Bancos Comerciales BHD Banco Hipotecario Dominicano BNV Banco Nacional de Fomento de la Vivienda y la Producción CAC Cooperativas de Ahorro y Crédito CAF Common Assessment Framework CAIT Climate Analysis Indicators Tool CBI Caribbean Basin Inititiative CC Corporaciones de Crédito CCPSD Cámara de Comercio y Producción de Santo Domingo CDD Centro Dominicano de Desarrollo CDE Corporación Dominicana de Electricidad CDEEE Corporación Dominicana de Empresas Eléctricas Estatales CEPAL Comisión Económica para América Latina y el Caribe CEPP Compañía de Electricidad de Puerto Plata CFI Corporación de Fomento Industrial CNE Comisión Nacional de Energía COFIDE Corporación Financiera de Desarrollo CORFO Corporación de Fomento a la Producción CPACC Caribbean Planning for Adaptation to Climate Change CRI Cash Recovery Index vii CRI Climate Decadal Risk Index PROTECOM Oficina de Protección al Consumidor DGA Dirección General de Aduanas PSSG Programa de Servicios de Salud Gratuitos DGII Dirección General de Impuestos Internos REDP Renewable Energy Development Project DR-CAFTA Dominican Republic – Central America Free Trade Agreement SEAP Secretaría de Estado de Administración Pública DUA Declaración Única Aduanera SEEPyD Secretaría de Estado de Economía, Planificación y Desarrollo ECLOF Ecumenical Church Loan Fund SEH Secretaría de Estado de Hacienda EDE Empresas Distribuidoras de Electricidad SEMARENA Secretaría de Estado de Medio Ambiente y Recursos Naturales EGEHID Empresa de Generación Hidroeléctrica Dominicana SeNaSa Seguro Nacional de Salud ENDESA Encuesta Demográfica y de Salud SESPAS Secretaría de Estado de Salud Pública y Asistencia Social ENHOGAR Encuesta Nacional de Hogares de Propósitos Múltiples SIAFE Sistema Integrado de Administración Financiera del Estado ETED Empresa de Transmisión Eléctrica Dominicana SIE Superintendencia de Electricidad ETI* Enabling Trade Index SIGEF Sistema Integrado de Gestión Financiera FDD Fundación Dominicana de Desarrollo SPS Seguro Popular de Salud FEDOMU Federación Dominicana de Municipios SRES Special Reports on Emission Scenario FET Fondo de Estabilización de la Tarifa SRS Servicios Regionales de Salud FONDESA Fondo para el Desarrollo SV Sistemas fotovoltaicos GEF Global Environmental Facility UERS Unidad de Electrificación Rural y Suburbana GHG* Greenhouse Gas UNCTAD United Nations Conference on Trade and Development I&D Investigación y Desarrollo UNFPA United Nations Fund for Population Activities ICPARD Instituto de Contadores Públicos Autorizados de la República Dominicana UNICEF United Nations Children’s Fund IDDI Instituto Dominicano de Desarrollo Integral WEF World Economic Forum IDECOOP Instituto de Desarrollo y Crédito Cooperativo ZAL Zona de Actividades Logísticas IDSS Instituto Dominicano de Seguridad Social IFC International Finance Corporation IFRS* International Financial Reporting Standards IIBI Instituto de Innovación en Biotecnología e Industria INFOTEP Instituto Nacional de Formación Técnico Profesional IPCC* Intergovernmental Panel on Climate Change IPP Independent Power Producer ITBIS Impuesto a las Transferencias de Bienes Industrializados y Servicios N o t a s d e Po l í t i c a / a b r e v i at u r a s y a c r ó n i m o s N o t a s d e Po l í t i c a / a b r e v i at u r a s y a c r ó n i m o s LNG Liquefied Natural Gas LPI Logistics Perception Index LSCI Liner Shipping Connectivity Index MAMS Maquette for Millennium Development Goals Simulation MFA Multifibre Arrangement MFN Most Favored Nation MPMPs Marcos Presupuestarios de Mediano Plazo MW Megawatt ONAPI Oficina Nacional de Propiedad Intelectual PAEF Programa Nacional de Apoyo a la Eliminación del Fraude Eléctrico PEA Población Económicamente Activa PIEGE Plan Indicativo de Expansión de Generación Eléctrica PLANAN Plan Nacional de Alimentación y Nutrición PNOT Plan Nacional de Ordenación del Territorio de República Dominicana PNPSP Plan Nacional Plurianual del Sector Público PPAs Power Purchase Agreement PPP Public Private Partnership PRA Programa de Reducción de Apagones PROEMPRESA Programa de Apoyo a las Pequeñas Empresas Privadas Dominicanas PROMESE/CAL Programa de Medicamentos Esenciales/Central de Apoyo Logístico viii PROMIPYME Consejo Nacional de Promoción y Apoyo a la Micro, Pequeña y Mediana Empresa ix CHARTS, TABLES AND MAPS Chapter I GRAPH 1. Distribution of total GDP by economic activity in the Dominican Republic............................................................ 19 GRAPH 2. Capital Formation as share of aggregate demand in the Dominican Republic.......................................................... 19 GRAPH 3. Exports of goods and services as share of aggregate demand in the Dominican Republic........................................ 20 GRAPH 4. Distribution of total employment by economic activity in the Dominican Republic................................................ 23 GRAPH 5. Labor productivity (GDP/worker) in largest job creation activities in the Dominican Republic.............................. 23 GRAPH 6. Social Public Expenditure per Head in the Dominican Republic.............................................................................. 24 GRAPH 7. Components of Social Public Expenditure per Head in the Dominican Republic................................................... 25 GRAPH 8. Sectoral growth impact and GDP elasticity. Shock of 1% of aggregate GDP............................................................. 27 GRAPH 9. Weighted Backward and Forward Linkages, Dominican Republic............................................................................ 28 GRAPH 10. Investing more in growth may require sacrifices in Humand Development progress................................................ 30 GRAPH 11. Human Development achievements and Consumption trade-offs for different budgetary pressure.........................31 Chapter III GRAPH 1. Relationship between Logistics Performance and GDP per capita in Latin America................................................ 53 Notas de Política / G r á f i c a s , Ta b l a s y m a pa s GRAPH 2. Time (cost) average dispatch of containers (sample size in brackets).......................................................................... 55 GRAPH 3. Average Structure of Logisital Costs............................................................................................................................ 56 TABLE 1. Logistics Perception Index and its sub-indexes............................................................................................................ 52 TABLE 2. Global Enabling Trade Report.................................................................................................................................... 54 TABLE 3. Shipping Route Connectivity Index............................................................................................................................ 54 TABLE 4. Business facilitation indicators.................................................................................................................................... 55 Chapter IV GRAPH 1. Financial Intermediation (Credit to the Private Sector / GDP)................................................................................. 62 GRAPH 2. Proportion of Demand and Savings Deposits as the Total of Deposits (%)............................................................... 64 GRAPH 3. Monthly Sales of Companies by Sector (% of Total Sales - US$)............................................................................... 67 TABLE 1. Structure of the Financial System................................................................................................................................ 63 TABLE 2. Evolution of Loan Portfolio of Savings and Credit Banks.......................................................................................... 65 TABLE 3. Loan Portfolio of the Micro Financing NGOs............................................................................................................66 TABLE 4. Classification of Dominican MSMEs.......................................................................................................................... 66 TABLE 5. MSMEs in Latin America............................................................................................................................................ 67 TABLE 6. Public Institutions Linked to MSMEs......................................................................................................................... 68 xi Chapter V GRAPH 1. Total Losses of distributors (CDEEE)..........................................................................................................................81 GRAPH 2. Efficiency Indicator Comparison MwH / Worker...................................................................................................... 82 GRAPH 3. Efficiency Indicator Comparison - Number of Customers / Worker......................................................................... 83 Chapter VI GRAPH 1. Greenhouse Gas Trends (GHG)...................................................................................................................................91 GRAPH 2. GHG Emissions per Sector..........................................................................................................................................91 TABLE 1. Climate Decadal Risk Index - CRI......................................................................................................................................... 90 Chapter VII GRAPH 1. Institutional births and baternal mortality in selected countries in Latin America and the Caribbean................... 98 GRAPH 2. National health expenditure by type of expenditures in selected Latin American and Caribbean Countries.......... 99 GRAPH 3. Household Expenditures on Medicines as a percentage of Total Health out-of-pocket Expenditures.................... 100 GRAPH 4. Percentage of out-of-pocket expenses of individuals who reported health expenditures in the last months by income quintile and type of expenditure. Dominican Republic, 2007................................................................................. 100 GRAPH 5. Use of ambulatory services according to the institution where these services were provided..................................101 GRAPH 6. Enrollment rate growth for the subsidized regime over the past five years............................................................... 102 GRAPH 7. Financing for the subsidized regime.......................................................................................................................... 103 GRAPH 8. Total public expenditure on health and total public expenditure for the subsidized regime as % fo GDP............. 104 TABLE 1. Selected health outcome indicators for the Dominican Republic - 2007............................................................................. 98 Chapter VIII MAP 1. Poor household by province.......................................................................................................................................113 MAP 2. Geographic location of poor households...................................................................................................................114 Notas de Política / G r á f i c a s , Ta b l a s y m a pa s Chapter IX FIGURE 1. International experience with medium-term budget frameworks..............................................................................127 FIGURE 2. International experiences with incentives to results managment............................................................................. 128 FIGURE 3. Consolidation of mechanisms and functions in the acountability process ..............................................................131 TABLE 1. Long, medium and short-term planning instruments............................................................................................... 124 TABLE 2. Types of performance indicators............................................................................................................................... 125 TABLE 3. Relation between allocation of resources and performance information................................................................. 126 xii ACKNOWLEDGMENTS T he World Bank acknowledges the close cooperation of the Dominican authorities in the elaboration of this Policy Notes.. Especially valuable were the contributions and suggestions of the Minister Juan Temístocles Montás, Dr. Magdalena Lizardo and Dr. Guarocuya Félix. The present study is the work of the World Bank Team in charge of the Dominican Republic led by Roby Senderowitsch under the overall guidance of Yvonne Tsikata. The nine notes that make up the study are the work of Maurizio Bussolo, Senior Economist, Economic Policy; Samuel Freije-Rodriguez, Senior Economist, Poverty Reduction; Carolina Diaz-Bonilla, Economist, Poverty Reduction and Calvin Zebaze Djiofack, Consultant . Jean Michel Lobet, Private Sector Development Specialist, under the supervision of Sylvia Solf, Program Manager, and Marialisa Motta, Sector Manager for Private Sector Development. José Luis Guasch, Senior Regional Adviser in Regulation and Competitiveness, Latin America and the Caribbean; Marco Arena, Economist, Financial Sector; and Denika Torres. David Reinstein, Energy Sector Senior Specialist, and Juan Miguel Cayo, Energy Sector Senior Specialist. Walter Vergara, Climate Change Specialist, and Seraphine Haeussling, Climate Change Consultant. Notas de Política / agradecimientos Fernando Torres Montenegro, Senior Economist, Health Sector. Roberto Martinez Nogueira, Consultant; David Tuchschneider, Rural Development Senior Specialist, and Mark Austin, Senior Operations Officer, Agriculture and Rural Development. Ana Bellver, Public Sector and Governance Senior Specialist; Pedro Arizti, Public Sector and Governance Specialist; Maria Poli, Governance and Accountability Specialist and Theo Thomas, Public Sector and Governance Senior Specialist. The team would like to especially thank Yvonne Tsikata, World Bank Director for the Caribbean Region, and Rodrigo Chaves, Sector Manager for Economic Policy, for their strategic guidance and advice; David Rosenblatt, Economic Counsellor and Omar Arias, Human Development Sector Leader; José Ghillerme Reis, Lead Economist in Trade, for his comments and revisions, and Eduardo Somensatto, Country Manager for Colombia, Christina Malmberg Calvo, Sector Leader, Sustainable Development for the Caribbean, Miguel Ceara Operations Officer for the Dominican Republic, Christian Contin, Valeriano Garcia, Roberto Martinez Nogueira, Andrea Gallina, Davide Zucchini and Jordi Alvarez (Consultants) for their invaluable contribution to this publication. xv Preface “R epública Dominicana: de la crisis financiera internacional al crecimiento para todos� is a compilation of nine policy notes requested by the Dominican Government an input into the country’s National Development Strategy. The notes included in this volume are the result of an in-depth series of conversations with government counterparts combined with lessons of experience from the Dominican Republic and other countries of the world. I am pleased with the very productive collaboration between government and World Bank technical teams that underpinned the production of these notes. These notes were drafted during a very special period for the Dominican Republic and other countries around the globe, as the world experienced the worst financial and economic crisis in decades. This crisis provided the opportunity to address creatively long standing development challenges in the Dominican Republic, a country that despite having high levels of economic growth faces multiple challenges to reduce poverty and inequality. I hope that the readers will find these notes interesting and that through this humble contribution we can contribute to the national public debate among actors in government, civil society, and the private sector. I hope that the innovative ideas included in this volume will help the Dominicans build a better society, continue the fight against poverty and provide Notas de Política / p r e fac i o opportunities for all.“ Yvonne M. Tsikata World Bank Country Director for the Caribbean Region xvii introduction From the International Financial Crisis Towards Inclusive Growth in the Dominican Republic roby senderowitsch(a) Davide Zucchini(b) D uring the second half of the year 2008, the world experienced the worst worldwide economic crisis in over 70 years. The effects deriving from this crisis In this regard, the Dominican Republic asked the World Bank to prepare nine policy notes which are presented in this volume. These notes focus on the can still be felt over most of the planet. Low or nega- following topics: (i) long run economic growth in the tive economic growth in developed nations and emer- Dominican Republic; (ii) ease of doing business; (iii) ging economies, high levels of unemployment and mi- logistics for competitiveness; (iv) access to financial ser- llions of persons below the poverty line, are some of vices with emphasis on financing for micro, small and the most stark examples. In the Dominican Republic, medium enterprises (MSMEs) ; (v) the electricity sector; Notas de Política / INTRODUCCIÓN the effects of this international crisis are manifested (vi) climate change and the Dominican Republic, (vii) in the reduction in international trade, the drop in the health sector, (viii) territorial development, and (ix) tourism and in remittances, and an economic growth accountability and performance system. rate lower than expected. In this context, within the framework of a strategic During this same period, the Government of the Domini- planning exercise at the highest level with the parti- can Republic undertook the task of preparing a long-term cipation of broad sectors of Dominican society – and National Development Strategy, with a time horizon of 20 during one of the worst worldwide economic crises, years. As part of this process, Dominican authorities re- the World Bank undertook the task of contributing quested the support of several international development with a set of policy alternatives for the country’s deve- agencies via the production of a series of policy notes that lopment. The papers presented here are backed by an could shed light on the main challenges the country faces. ongoing dialogue with government counterparts and (a) Country Manager for the Dominican Republic. (b) World Bank Consultant 3 with information provided by the private sector and The policy notes presented here argue that an inclusive de- Exports of goods and services as a percentage of aggregate demand civil society. The ideas shared in this volume must be velopment is possible in the Dominican Republic. Howe- understood as policy alternatives, based on significant ver, great challenges must be faced to meet this goal. From Exports / (Consumtion + investment + exports) 5 per. Mov. Avg. accumulation of international experiences, and not as the analysis presented in this volume four challenges emer- 40.0% mere recipes. ge which must be faced head-on in order to achieve sustai- nable and inclusive development. Among other things, the international crisis highlighted 30.0% the need to have more spaces for reflection about di- The first challenge is the need to promote growth with equity fferent models for economic growth and development to incorporate broad sectors of Dominican society. The se- – on the global as well as the local level. The crisis, cond challenge is to raise the country’s levels of competitive- 20.0% together with the ongoing process of defining the Na- ness, taking full advantage of its endowment of resources, in- tional Development Strategy, set forth the need to pro- cluding its privileged geographic position in the world. The mote inclusive growth as a strategy to generate oppor- third challenges focuses on facing the institutional hurdles 10.0% tunities for all Dominicans, men and women, and to that block the solution of a series of problems in diverse sec- achieve lower poverty levels and higher levels of social tors of public policy. Finally, the fourth challenge evidences justice. the need to continue the strengthening of democratic gover- 0.0% nance by producing concrete tangible results for the citizens. 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: Chapter I, page 19 1. The Dominican Republic can begin the journey of growth with equity From the 90’s, job creation has been focused in activi- to other services and, finally, 11% to transportation and ties related mainly to tourism. Thus, between 1991 and communications (Page 18). Paradoxically, as presented It is well-known that economic growth is a necessary but The growing economic integration of the country has 2005, nearly a million new jobs have been created, 40% in the following graph, the sectors that most contribute insufficient condition for the development of a coun- been characterized by deep changes in the structure of of which correspond to services in commerce, restau- to GDP and jobs growth are those which have been less try. Development, understood in its many dimensions, GDP. While in the 70’s and early 80’s, the Dominican rants and hotels, 11% to the construction sector, 26% characterized by their contributions to productivity. requires inclusive economic growth which allows the Republic was primarily an exporter of agricultural and involvement of broad sectors of society with the produc- manufactured products, during the mid 80’s the country tive system and be able to sustain public investment in changed its economic structure to become a provider of human capital. services and tourism. Labor productivity (GDP per worker) for the highest job creating activities As presented in Chapter I of this volume, during the last As shown in the following graph, these changes in the Agriculture Manufacturing Construction Trade, rest. and hotels five decades, the Dominican Republic experimented a hig- structure and composition of GDP are associated with 180.0% her than average economic growth compared with the rest an increase in the share of exports in aggregate demand of the Latin American and Caribbean region (5.3% versus and have resulted in significant consequences for the Notas de Política / INTRODUCCIÓN Notas de Política / INTRODUCCIÓN 3.8% on average in terms of GDP). labor market. 160.0% 140.0% 120.0% 100.0% 80.0% 1991 1992 1993 1994 1995 1996 1998 1999 2001 2002 2003 2004 2005 Source: Chapter I, page 23 4 5 This duality in the Dominican economy explains, at According to the data presented in Chapter I, during the pe- The most recent information on both health care cove- creates new challenges in the health system as data on least in part, the reason why economic growth has not riod 1997-2002, poverty remained around 27 percent despite rage and outcomes suggests that the Dominican Repu- institutional births and estimates of maternal mortality translated into a significant reduction in poverty and continued growth (GDP per capita reached US$ 5,100 in blic has had significant improvements as reflected in the suggest. As shown in the following graph, despite the fact inequalities. 2002). During the 2003 crisis, GDP per capita dropped only increase in life expectancy and in the decrease of mor- that over 95% of women give birth in hospitals, maternal 4%, but poverty jumped to 42 percent. After the crisis, GDP tality due to infections. Even so, quality in providing mortality presents alarming data – it is ranked far above Product expansion in the past decades was not accom- per capita re-assumed its vigorous growth (over 7% annually) services has not grown in proportion to access, which expectation in countries with this level of coverage. panied by a substantial reduction in poverty and inequa- reducing poverty to 37.8% (according to preliminary data). lity, nor has it produced the expected improvements in While this reflects a significant improvement with respect to other welfare dimensions such as health and education. the levels attained during the crisis, poverty remains at levels In the case of the Dominican Republic, the empirical similar to those of 1986 and far higher than the levels expe- Maternal Mortality Rate evidence suggests there is an asymmetric relationship rienced towards the end of the century. between economic growth and poverty. In periods of po- 25 sitive economic growth, poverty reduction is small and In addition to income, it is also important to take into perú slow, but in periods of stagnation or economic crisis the consideration the role of public expenditures, particularly 20 increase in poverty is large and fast. Between 1986 and social expenditures as an instrument for attaining greater paraguay Rep. Dominicana 1998, poverty dropped by almost 9 percentage points, levels of social equity in a society. As shown in the following el salvador 15 going from 37.5% to 28.6%. This drop coincides with graph, between 1973 and 1996, the social expenditures of Colombia ecuador Brazil strong economic growth, from US$ 3,243 to US$ 4,384 the Dominican Republic have been low, around 3,000 pe- 10 GDP per capita, which constitutes an increase of more sos per person per year, increasing to 4,000 pesos in 1999 argentina jamaica méxico than 35%. and reaching nearly 10,000 pesos in 2008. costa rica 5 chile uruguay 0 100 95 90 85 80 75 70 65 Public expenditure per person Percentage of births handled by authorized personnel Constant Pesos of 2008 Constant US dollars of 2000 10,000 500 Source: Chapter VII, page 98 7,500 375 Real pesos Real US$ 5,000 250 A rigorous analysis of the health sector requires taking ces, making up the bulk of out-of-pocket expenditures into account, in addition to the quantity of public (58%) for national financing in health, far exceeding Notas de Política / INTRODUCCIÓN Notas de Política / INTRODUCCIÓN spending, the quality and composition of the expen- the overall public expenditure (36%). It is now well- 2,500 125 diture. In the Dominican Republic the percentage of known that out-of-pocket expenditures are regressive: out-of-pocket expenditure is one of the highest in the although lower income householdsspend less in abso- region. As shown in the following figure, private spen- lute terms, in relative terms this expense turns out to be 0 0 ding is one of the main sources to finance health servi- very costly (Page 93). 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Source: Chapter I, page 24 Although it must be acknowledged that social expen- ownership, must be constructed on the Equal Oppor- diture has grown significantly, further steps have to be tunities Principle. In this regard, investment in human taken to increase the amount as well as the quality of capital is a key element, and access to quality health care public spending. Any vision of development intended is a primary factor. Chapter VII of this volume analyzes to generate inclusion, social cohesion and a sense of health expenditures in the Dominican Republic. 6 7 Number of poor households per province Composition of national health expenditures in several LAC countries by type of expenditure Public Private, non out-of-pocket Out-of-pocket expense 100% 10 18 90% 7 23 31 33 27 34 26 46 35 80% 40 45 42 42 48 57 52 52 5 70% 56 55 1 8 60% 19 28 16 53 19 10 50% 7 7 3 7 83 3 3 18 40% 8 7 7 72 47 30% 60 65 50 50 51 57 46 45 45 43 49 20% 36 45 36 39 38 29 10% 0% Source: Chapter VIII, page 114 a ia il ile ití as a ico ua á y ú RB a y a or r ala . ep do ua ua as in am bi aic Ric r liv Ha ur ad Pe Ch g em éx nt m la, nR Br lva g ug ra m Bo nd n ta u ra lo ge M ue Pa ca Ec Ja at ica Ur Sa s Pa Ho Co Co Ar ez Ni Gu in El n m Ve Do By analyzing the data nationwide, some clear important rrent export-driven production model, to increase internal Source: Chapter VII, page 99 regional differences come out. The gap among provin- demand for quality goods and services in order to generate ces poverty levels increased by 7 percentage points bet- productive jobs with a high content of human capital. ween 1981 and 2002, going from 15% to 22%. Breaking the vicious circle of poverty, geo-economic periphery One of the pre-conditions to be able to carry out these An inclusive growth should also take into account te- areas in the East, leaving the other regions in a secon- and low access to services are some of the challenges the changes successfully is to expand and improve social rritorial differences and, in particular, the need for ha- dary position. The network of secondary roads and, in Dominican Republic has to face in order to create the expenditures, which means creating the conditions for ving public policies that promote territorial cohesion. many cases, main roads, is found to be in precarious conditions to allow growth with more territorial cohe- the citizens to be able to fully participate in economic, As presented in Chapter VIII, the country’s communi- conditions, reinforcing the isolation of entire provin- sion, i.e., a development model that benefits all. social and cultural life, which at the same time, increa- cation and physical infrastructure has intensified eco- ces and hinder their dynamic integration into the ge- ses the possibilities for a country’s development. nomic and demographic concentration in the regions neral economy. As shown in the following figure, there In order to continue maintaining the current growth rate of Santo Domingo, the North (Cibao) and the tourism is a link between poverty and this situation (Page 105). and attain the sustainable and inclusive development Attention to territorial development is a priority when Notas de Política / INTRODUCCIÓN Notas de Política / INTRODUCCIÓN goals which have been set in the National Development it comes to creating a development model that promo- Strategy, the Dominican Republic must re-think its cu- tes economic growth with equality. 2. The Dominican Republic has a privileged geographical position which can be enhanced with improved levels of competitiveness One of the main comparative advantages of the Domini- Among other elements, this implies strengthening the can Republic is its geographical position, since it is at a re- levels of coordination among public institutions, raising latively short distance to the largest market of the world. the quality of investment in human capital, improving the Taking advantage of this privileged geographical location country’s logistical services and promoting coordination requires increasing the levels of the country’s competitive- between the private and public sectors. These elements are ness and improving the business climate. taken into account in chapters II, III and VIII. 8 9 Just as presented in Chapter I, the Dominican eco- In Chapter III, the logistic for competitiveness is examined. Relationship between logistic performance and GDP per capita in Latin America nomy possesses a relatively small internal market and Several indicators measuring the logistical performance of 3.4 its development considerably depends on resources the countries show that the Dominican Republic achieves coming from exports of goods and services. In this sce- results well below the international average. For example, Chile nario, poverty reduction and quality job creation are as evidenced in the following table, the Logistics Percep- 3.2 closely related to the development and performance of tion Index – LPI places the Dominican Republic in the the export sectors. Services to facilitate exports there- 96th position among 150 countries. This index is based fore become an important policy towards development on the perception of international cargo operators over 3 Argentina and, via the creation of productive opportunities, to seven key indicators which are combined into a sole indi- Panamá reduce poverty. cator. According to the indicators, the most serious pro- México blems are related to the organization of services (Page 50). 2.8 Perú Basil Logistics perception score El Salvador Ecuador Venezuela 2.6 Paraguay Costa Rica Guatemala Colombia Uruguay Honduras �ndice de percepción logística y sus sub-índices 2.4 Dominican Republic Haití Bolivia Countries Ranking -lpi Customs Infraestructure Ease Logistics Ease Internal logistics Timelines Jamaica Nicaragua of Dispatch Services of follow-up costs 2.2 Argentina 45 51 47 49 44 46 93 46 Guyana Panamá 54 48 48 58 61 49 26 49 2 México 56 60 53 53 57 48 101 51 0 2000 4000 6000 8000 10000 12000 14000 El Salvador 66 75 68 61 78 61 74 73 Costa Rica 72 64 67 82 89 78 48 90 GDP per capitaita (PPP) Honduras 80 65 79 93 91 91 86 93 Guatemala 75 87 104 73 79 90 65 64 Source: Chapter II, pág. 53 Dominican Rep. 96 82 97 107 108 107 54 91 Source: Chapter I, page 19 In order to take advantage of the great potentials offered municipalities, with simultaneous processes of concentra- by international trade, Chapter III concludes that the work tion and de-population. Territorial development is the result agenda must be built around modification of the services of historical processes that have created an undesirable pat- As reflected in the following graph, the logistic performance of the Dominican Republic is below expected, taking into structures, expansion of the participation of the private sec- tern of concentration of income and wealth, closely linked to account GDP per capita. tor, strengthening the public agencies related to internatio- geographic location and natural resources. nal trade and improving the ease of doing business. Internal geography and the location of infrastructures pose Notas de Política / INTRODUCCIÓN Notas de Política / INTRODUCCIÓN Improvement in logistical services must take into account in- significant challenges for the competitiveness of the country. tegration of the national territory, becoming a true “logistical Physical communications in the Dominican Republic all hub�, a “springboard� for exports. This includes elements radiate from the hub of the capital city towards the main such as internal connectivity, the existence of efficient ports geographical areas: the North (Cibao), the South and the and strategically located merchandise collection centers and East. On the other hand, there is little intercommunication both infrastructure and human capital investments nation- between these zones, and it is particularly difficult in the ru- wide. gged mountainous areas. In this regard, the focus must be ideally maintained on the As set forth in Chapter VI, converging and improving coor- local level while the national level is planned for insertion in dination between public institutions is another key policy as- international markets. Chapter VIII provides the analytical pect for reducing the vulnerabilities and the effects of climate framework for territorial development. In the case of the Do- change. The same chapter presents the principal challenges minican Republic, the main challenge for public policy is to of the Dominican Republic, which is the fourth most affec- generate convergence in a divergent country. Nowadays, the- ted country by climate change according to the Climate Risk 10 re are enormous differences within regions, provinces and Index (Page 83). 11 possible to advance rapidly when there is political will and is also significant (36.2% of the economically active popu- Climate Decadal Risk Index - CRI the actions of the actors involved are coordinated. lation). Paradoxically, only one out of ten MIPYMES has CRI 1998-227 Country CRI Score Average Average deaths Average Average access to formal financial services (Page 57). To solve this death toll per 100,000 total losses losses Chapter IV presents a diagnostic for the access to financial problem, a set of public institutions have been created to inhabitants (in million US$ PPP) per GDP in % services for Micro, Small and Medium sizes companies (MI- support MIPYMES: National Council for the Promotion 1 Honduras 6.75 579 8.50 1,166 5.15 PYMES). As for other sectors, there is ample knowledge and Support of Micro, Small and Medium-Sized Compa- 2 Bangladesh 10.92 1,093 0.70 4,426 3.02 about the technical problems of access to credit and, in order nies (PROMIPYME), the Corporation for the Promotion 3 Nicaragua 11.62 308 5.70 528 4.30 to address the problem, major efforts have been undertaken, of Industry (CFI-PROINDUSTRIA), the Center for Ex- 4 Dominican Republic 14.83 414 5.00 503 0.98 especially to reduce the gap between credit demand and port and Investment of the Dominican Republic (CEI- 5 Haití 15.75 402 5.10 232 2.42 supply. The study reveals that institutional organization of the RD), the National Institute of Technical Studies (INFO- 6 Vietnam 18.33 406 0.50 2,152 1.47 7 India 18.83 4,532 0.40 12,047 0.62 sector, especially the coordination and collaboration mecha- TEP), the Institute for Innovation in Biotechnology and 8 Mozambique 24.75 121 0.60 228 1.98 nisms among institutions, should be reviewed and improved Industry (IIBI) and PROEMPRESA. 9 Venezuela 24.75 3.012 11.9 433 0.18 to achieve more effectiveness. 10 Philippines 25.83 472 0.60 698 0.33 The MIPYMES in the Dominican Republic represent The following table presents the main public programs 23% of the GDP and their contribution to employment and institutions as well as the activities carried out. Source: Chapter VI, page 90 The impact of climate change on the geography of the diseases such as dengue and malaria (Page 87). Dominican Republic and therefore on its development Instituciones Públicas Vínculadas a las MIPYMES potential highlights the need to adopt a set of policies to In conclusion, according to that set forth above, to Entity Activities improve water resources management (Page 86), to en- exploit the comparative advantages offered by its pri- PROMIPYME Provide both first-tier lending (commercial loans for working capital, acquisition, installation, and modernization hance the quality of infrastructure and services to main- vileged position, the Dominican Republic will need to of machinery and equipment) and second- tier lending. In addition, provide free technical assistance in tain the tourism supply, to reduce the contamination improve the country’s logistics services, increase its level coordination with the Taiwan Mission, based on the bilateral agreement of industrial cooperation between the Dominican Republic and Taiwan. impact of overpopulation, sedimentation and sewage of competitiveness and improve business climate, foster system as well as in other forms of pollution (Page 87) territorial integration and reduce vulnerabilities to cli- PROINDUSTRIA Establishment of Industrial Districts in order to promote MSMEs development. and to prepare for changes in the patterns of infectious mate change. INFOTEP Development of workers and entrepreneurs-training programs.. IIBI Develop scientific research, provide technological transfer and foster innovation, and provide technical assistance in key areas for national development in order to improve national competitiveness. 3. Providing concrete solutions to the challenges of the Dominican Republic must take into account a deep institutional and political analysis CEI-RD Export and Investment promotion in order to improve the competitiveness of Dominican enterprises in International markets of goods and services. Support Program Using resources from the European Union, this program looks to promote technical assistance, firms for Private Enterprises clustering and the improvement of the business climate of the Dominican enterprises. An inclusive growth that generate prosperity for the ma- blic institutions in the country, especially those linked to (PROEMPRESA) Notas de Política / INTRODUCCIÓN Notas de Política / INTRODUCCIÓN jority of the citizens, capable of reducing gaps in access the business climate. to services and between territories needs to be built on Source: Chapter IV, page 68 effective and transparent public institutions and social According to the report Doing Business 2010, the Domini- actors, and strengthen confidence in the State. can Republic ranks 86th among the 183 economies the report covers, which represents an advance of 16 places As evidenced in many of the examples contained in with respect to the 2009 report. Ranked 17th among 32 these policy notes, the challenges of the Dominican Re- countries, the Dominican Republic ranks in “the midd- public are not based on any lack of technical solutions. le of the table� with respect to the economies of Latin There is a great deal of knowledge about what needs to America and the Caribbean. In the past two years, the be done and examples of how to do it. However, the lack country experienced significant improvements in five of attention to the institutional and political dimensions areas of Doing Business: Starting a Business, Registering seems to work against the success of technical solutions. Property, Protecting Investors, Paying Taxes and Trading Across Border (Page 35). In Chapter II on the ease of doing business, different in- dicators are presented that reflect the quality of the pu- The advances obtained in the past years show that it is 12 13 Challenges are mostly institutional. In a context of In 2008, the sector had a strong impact on the fiscal limited resources to promote MIPYMES and in face budget. The oil price shock increased generation costs 4. Democratic governance in the Dominican Republic can be strengthened with the of the challenges to close the gap in financing these dramatically and the need for transfers to cover the ta- production of more concrete tangible results for the citizens companies, coordination and the jointly-provision of riff-cost gap. Price volatility resulted in a growing tariff services becomes a fundamental need. As highlighted gap and higher costs, causing that treasury resources in several policy notes, it is necessary to establish a designated to the electricity sector to reach 3% of the The democratic transition in the Dominican Republic framework for improving transparency, fiscal discipline transparent institutional framework, with clear rules GDP (Page 73). has yielded important fruits in guaranteeing the civic and accountability via better controls and institutional for participating, and to design a series of incentives rights and expanding coverage of public services to the balances based on performance by results (Page 115). to improve articulation among public institutions and There seems to be an agreement on the technical so- population. However, this democratic development between these and the private sector. lutions necessary to improve the effectiveness and added to the considerable sustained level of economic The spirit of the reform rests on the need to create a efficiency of the sector. According to the analysis con- growth has still not finished generating concrete tangi- system that allows the public policy articulation in the The analysis contained in Chapter V on the electricity tained in this volume, the institutional dimension is ble results for broad sectors of the population. territory and the coordination and participation of ac- sector is perhaps the best example of how important is a key issue. In order to consolidate the great advances tors at the local level. to understand the relation between development and achieved in the legislative area, it is necessary to streng- In recent years, and as part of the debate over how to institutions. then institutions and improve managerial skills. These improve public management, more and more emphasis As can be observed throughout these policy papers, an actions should allow recovering the credibility of inves- has been made on results as the central goal– beyond important part of the success of public policies is based The Dominican Republic electricity sector has gone tors and encourage consumers to pay for the service. the necessary inputs and products. In other words, the on having strong institutions and the capability of the through several legal reforms during the 90’s and still focus of policy making is on desired results and only public sector to generate processes for coordination, continues to be one of the principal challenges the One of the lessons contained in this volume refers then on processes and necessary inputs. trust and transparency. These processes are what enable country faces. After the privatization of the generation to the importance of understanding the role of insti- public policies to yield results and those results to pro- companies and the creation of three private distribu- tutions and the political nature of the challenges the The focus on the generation of results, in addition to mote higher levels of social and territorial cohesion tion companies, which took place between 1998 and country is facing in the road towards development. The improving the quality of public expenditures, has posi- and, therefore, opportunities for everyone. 1999, an Electricity Law was passed in 2001 inspired behavior expected from institutions should be credibi- tive effects on trust in State institutions and therefore, by other reforms carried out in several Latin American lity and with that, results. on the strengthening of democratic governance. When The recent financial crisis has brought to light the vul- countries (Page 72). citizens perceive that public interventions generate tan- nerabilities the Dominican Republic faces in social and gible results, they are more inclined to pay taxes, which economic terms, as well as the need to find a develop- naturally are reflected in higher tax collections – that is ment model that can respond to the aspirations of all key for the Government to be able to implement qua- Dominicans. The country is not starting from zero and lity public policies, greater accountability and a more it is necessary to create this dialogue starting from suc- participatory democracy. This changes the relationship cesses and errors of the past in the light of international between the State and the citizens into a virtuous circle experience. The recent crisis has marked a tipping point and is the basis of electoral accountability. on this path and has made evident the need for the Dominican Republic to achieve a significant reduction Chapter IX of this volume addresses these issues, pre- in poverty levels and an increase in the levels of social Notas de Política / INTRODUCCIÓN Notas de Política / INTRODUCCIÓN senting the main advances and challenges in accoun- justice so that the current and future positive results tability and results-based administration in the Do- can sustain a long-term change in the socio-economic minican Republic. With the reform of the planning, structure of the country and create the conditions for investment and budgeting processes that took place du- sustainable and inclusive growth. ring the 2006, the Dominican Republic has adopted a 14 15 Chapter I Economic Growth and Social Development in the Dominican Republic Maurizio Bussolo(a) Samuel Freije-Rodríguez(b) Carolina Díaz-Bonilla(c) Calvin Zebaze Djiofack(d) Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I 1. INTRODUCTION T he objective of this Policy Note is to evaluate the long-term economic performance of the Domini- can Republic and derive, from its past experience, les- This Policy Note is organized in four sections. The next sec- tion describes the sources of the remarkably strong long-term growth in the Dominican Republic and the puzzle of a high sons useful to inform the debate on economic policy growth associated with low poverty reduction. This descrip- and to prepare the country for its future challenges. tion is then followed, in section 3, by a brief exploration of The recent development of the Dominican Republic the potential causes of this performance. The descriptive cha- (DR) can be considered a success in terms of economic racter of the note changes in section 4 where two analytical growth, especially when compared to other countries exercises are done. First, an analysis of forward and backward in the Latin American and Caribbean region. However, linkages of economic activities is used to identify some of the in contrast to the progress registered in this region, in most promising, in terms of broad growth potential, sectors the DR some welfare indicators still lag behind. How of the Dominican economy. Second, a general equilibrium and why this happened, and which can be the future exercise highlights the trade-offs that the country will face in development trends in this country are the questions its attempt to pursue an agenda of high growth, equity and this note addresses. social development. Section 5 concludes with a summary of the lessons from the past and the challenges of the future1. (a) Senior Economist in Economic Policy. (b) Senior Economist in Poverty Reduction. (c) Economist in Poverty Reduction. (d) World Bank Consultant. 1 The tables referred to throughout the text are enclosed at the end of the document. 17 GRAPH 1: distribution of total gdp by economic activity in the dr 2. Diagnosis: Origin of the results of economic growth and social development Agriculture Construction and utilities Mining and manufacturing Trade, restaurants and hotels Government and other services Transportation and communications Finance 100.0% 2.1 Long run growth performance the mid eightiesmid-eighties. This process is reflected in: 23.5% 25.2% 24.3% 23.5% 20.4% 18% 23% a) the changing weight of these various production acti- 3.8% During the period 1961-2007 the Dominican Republic 75.0% 1.7% 2.4% 4.5% vities in the sectoral composition of GDP, b) these acti- 2.4% 4.4% 5.5% 11.2% 15.8% GDP has expanded at the annual rate of 5.3%, faster 7.8% 8.1% 7.9% 8.0% vities’ contribution to the growth of the overall economy 9.2% than the Latin American and Caribbean region’s ave- 7.4% 8.1% 8.2% 9.4% 13.5% and c) the shifts in the demand composition of the GDP. 10.6% 13.9% rage of 3.8%. In per capita terms, the expansion in DR 16.6% 50.0% 16.8% 17.7% has been of 3.0% versus a regional average of 1.7. This 17.7% 16.6% During the last 35 years, agriculture, manufacturing 18.8% 19.1% very strong performance has allowed the Dominican Re- and general services (finance, real estate, health, edu- public to move from its 1961 position of third poorest 22.0% cation, and other services) have reduced their share of 23.9% 22.0% 25.0% 21.5% 21.2% country in the region (in GPD per capita terms) to the 19.6% total GDP. In the early seventies, agriculture represented 17.3% current (2007) middle rank position just below Brazil and 21 percent of total output, while manufacturing and gene- 20.8% above Colombia and Peru. If the DR maintains its long 17.3% 16.7% 14.9% 13.3% 12.1% 11.6% ral services accounted for 22 and 24 percent, respectively. term growth rate of about 5% per annum, it will reach 0.0% Cumulatively, these three sectors represented more than 1970-1974 1975-1979 1980-1984 1985-1989 1990-1994 1995-1999 2000-2005 Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I the threshold of 11,500 USD, and thus become a high two thirds of total production and, by 2005, they account Source: Central Bank of the Dominican Republic. income country, by around the year 2040. for less than half of total output. The opposite trend is ob- The relevance of outward-oriented sectors in the Domi- gate demand. During the seventies, investment expansion served for construction, transport and communications, The source of this important turnaround of the Domi- nican development is confirmed when growth of GDP is made the share of capital formation to grow to more than commerce and hotels-restaurants (see Figure 1). Construc- nican economy was a larger than average factor accumu- observed from the perspective of the growth of its aggre- 20 percent of aggregate demand, and it has remained in tion doubled its share of GDP from 7 percent in the early lation in the period 1960-1980, complemented by strong gate demand components. In the seventies, consumption the 20-25 percent range since the early eighties (see Figure seventies to 14 in the first half of the 2000s. Transport and total factor productivity growth during the 1990s. This represented more than sixty percent of total aggregate de- 2). Exports of goods and services fluctuated around 15 telecommunications have had a more recent expansion: higher accumulation was associated to political stability mand, but its share declined first due to: a) an expansion percent of aggregate demand during the sixties, seventies from the 9 percent of GDP in the early nineties to the and basic structural reforms adopted by the country since of capital formation in the mid seventies and b) the growth and early eighties. In the early eighties this component actual 15.8%. In the early seventies, manufacturing was the early seventies complemented by those of the eighties of exports in the mid eighties. In fact, in the sixties, due started its growth so that, in recent years, it accounts for the main engine of growth, however, it place as leading and early nineties2. in part to the political instability of those years, capital more than a quarter of total aggregate demand (Graph 3). sector of growth has been taken by transport, construc- formation represented less than 15 percent of total aggre- tion and communications. In summary, tradable goods The long term – the last three and a half decades – were the main engine of growth in the seventies, but since GRAPH 2: CAPITAL FORMATION AS SHARE OF AGGREGATE DEMAND IN THE DR growth process of the Dominican Republic has been the early nineties infrastructure has become one of the Investment / (consumption+investment+exports) 5 per. Mov. Avg. mainly driven and characterized by the country’s in- leading sectors. It can be argued that growth in infrastruc- 30.0% creasing integration in the global economy and by its ture is somehow linked to the ‘new’ tradables, especially changing export specialization. The country has shifted tourism whose growth demands additional infrastructure from being an exporter of agricultural and manufactu- in both construction and communication3. 25.0% ring products in the seventies and early eighties, to a ma- jor provider of tourism and other tradable services since 20.0% 15.0% 10.0% 5.0% 2 See Jaramillo and Sancak (2007) as well as Loayza, N,P. Fajnzylber and C. Calderon (2004). 3 UA further discussion on forward and backward linkages of different sectors of the Dominican economy will be presented in section3.1. 0.0% The section also discussed whether the current growth pattern will be maintained in the future or other sectors will emerge as new engines 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 18 of growth. 19 GrAPH 3: EXPORTS OF GOODS AND SERVICES AS SHARE OF AGGREGATE DEMAND IN THE DR elasticity of poverty – i.e. how much poverty is reduced by a recession than the people who have been able to escape one percent increase in the growth rate – and the second is poverty during the earlier decade of economic expansion. Exports / (consumption+investment+exports) 5 per. Mov. Avg. a straightforward decomposition of changes of poverty into The analysis above shows that this asymmetry is due to a growth component and a distribution component. For the small changes in the income distribution which, given the 40.0% periods 1986-1992 and 1992-19987, growth elasticity of po- initial high levels of inequality , can have large impacts verty is estimated equal to -2.7 and -0.4 respectively. In other on poverty incidence. Unfortunately, the evolution of words, an increase of one percentage point in GDP growth inequality, shown in Table 3 for the period under study, 30.0% resulted in a decline of 2.7 points in poverty for the period does not point towards a clear decreasing trend. From the 1986-1992 and of only 0.4 points in the period 1992-1998. World Development Indicators dataset the Gini coeffi- Similar estimates for the period 2002-2004 – a period when cient9 record a rise from 47.8 to 52.1 between 1986 and 20.0% the economy was contracting and poverty was increasing – 2000, followed by a decline to 49.9 in 200510. Figures show a much larger elasticity with an approximate value of from the Ministry of Planning, show a stable inequality -8.0. Although not directly comparable, these estimates sup- between 2000 and 2004 at 54.6 followed by a small decli- 10.0% port the view that the impact of growth on poverty has been ne to 52.1 by 2007. In any case, the Gini coefficient hovers much stronger in recessions than in expansions8. around the mark of 50 for most of the period for every study, which indicates a high level of inequality compared 0.0% The second type of analysis highlighting this view is a de- to other countries of the region. 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I composition of poverty into its growth and distribution components and it is shown in Table 2. The growth com- Source: Authors’ calculation using World Bank, World Development Indicators, several years. ponent accounts for changes in poverty due to changes Although income inequality measures are known for in average incomes maintaining the same initial income changing very slowly, there is some evidence of reduc- distribution. The distribution component accounts for tions in inequality during the nineties and early 2000s 2.2 Growth, Distribution and Welfare GDP per head declined by only 4 percentage points, but the residual change in poverty that is due to distributio- in Mexico and in Brazil. The source of these reductions poverty jumped to 42 percent. After the crisis, GDP per nal shifts. This decomposition shows that periods of fast in inequality is difficult to ascertain and may be due to The large economic expansion over the last three deca- head growth resumed vigorously at an annual rate above economic growth reduce poverty a great deal, but periods a combination of economic growth, better distribution des has not been accompanied by substantial reductions 7 percent, and poverty has declined but has remained at of recession increase poverty even more. For the period of productive assets (i.e. health, education, land) and to in poverty and inequality nor has it produced the ex- around 36 percent, a level close to that it had achieved in 1986-1992, a reduction of 6.7 percentage points in pover- effective social assistance programs. The fact that inequa- pected improvements in other welfare dimensions such 2003 when the crisis started5. ty can be attributed to economic growth; for the period lity has remained stable in the Dominican Republic su- as health and education. In fact, empirical evidence su- 1992-1998, growth contributes a further reduction of 3.3 ggests that more needs to be done to increase the access to ggests that there may be an asymmetric relationship bet- Extreme and moderate poverty, as well as their rural and percentage points in poverty. There is a residual poverty education, health and other human development services ween economic growth and poverty reduction. In periods urban components, follow a similar trend. The main in- reduction during these two periods and this residual part for the poorer and to expand social protection and impro- of positive economic growth, poverty reduction is small sight of this poverty decomposition is that it highlights is accounted for by the narrowing of income inequality, ve its targeting to the bottom portion of the distribution. and slow, but in periods of stagnation or economic crisis the ‘urbanization’ of extreme poverty. The most recent a positive contribution of the distribution component. the increase in poverty is large and fast. Between 1986 and figures for extreme urban poverty display a sharp increase Growth benefits everybody but, thanks to the improve- It is now well-known that, for example, increased access 1998, poverty declined from 38 percent to around 29 per- from the incidence levels at the beginning of the decade ments in income distribution, the final outcome is that to education and health services for the poor, as well as cent and, as shown in Table 1, this poverty reduction took which, together with the increase in the urban popula- the poorer experience larger income increases than the faster attainment of the other Millennium Development place during a period of strong economic growth4. In this tion, implies that extreme urban poverty is becoming a rest of the population. However, during the recession Goals (MDGs), leads to a more equal distribution of op- period, GDP per head went from US$ 3,200 to 4,400, larger share of total poverty6. period of 2002-2004 the (negative) growth component is portunities and an increased and more inclusive long a more than 35 percent increase in twelve years. For the responsible for a rise of 13.9 percentage points in poverty, term growth. When compared to other Latin American period 1997-2002, poverty remained around 27 percent Two simple analyses can provide some additional insight slightly more than the observed total increase in pover- countries, the Dominican Republic fares relatively well despite continued growth (GDP per head reached US$ about the asymmetric relationship between growth and po- ty. The bleak statistical result is that more people have in some indicators and worse in others (see Table 4). For 5,100 in 2002). Then, during the crisis of 2003 and 2004, verty reduction: the first consists of estimating the growth been pushed below the poverty line in a short two-year instance, by year 2005, the Dominican Republic has lower 4 In constant, year 2005, PPP US$, according to World Bank’s World Economic Indicators. 5 It should be adviced that poverty figures come from diverse sources and, thus, are subject to different calculations with different methodo- 7 These figures come from World Bank (2001), Dominican Republic Poverty Assessment, Report No.21306. logies. See “Dominican Republic Poverty Assessment Report� for a discussion on different methodologies, World Bank (2006). 8 See, for instance, growth-elasticity measures in SEEPYD (2008). In fact, the headcount ratio for moderate poverty increased in nearly 8 6 It can be proved that a change in poverty headcount can be decomposed into three components: i) change in poverty incidence in rural percentage points between 2002 and 2003, while GDP fell nearly 1percent. Since no control is done in this calculation for changes in areas, ii) change in poverty incidence in urban areas and iii) change in relative size of urban and rural areas (which may be due to migration income distribution, this figure is not fully comparable to previous measures of elasticity. and/or to different demographic growth rates). In the case of the Dominican Republic, 2.4 percentage points out of a total growth of 3.3 9 Aa usual measure of inequality that ranges from 0, no inequality, to 100, maximum inequality when all income accrues to only one indivi- percentage points in extreme poverty between 2000 and 2007, are due to higher incidence of extreme poverty in urban areas. Migration and dual. other demographic factors represent only 0.5 percentage points of the total. In other words, migration and other demographic forces are a 10 World Development Indicators. minor component of the recent increase in extreme poverty in the Dominican Republic. 20 21 primary completion rates, both for males and females, than (but Mexico); tuberculosis incidence at 88.8 per 100,000 GrAPH 4: DistribuTION OF TOTAL EMPLOYMENT BY ECONOMIC ACTIVITY IN THE DR other countries in the region. Expenditure per student is is the highest among comparison countries (with the excep- Agriculture Comerce, rest., hotels Manufacturing Transport Utilities Finance Construction Private and soc. serv also much slower. With regard to promotion of gender tion of Peru) and HIV at 1.1 is also the highest (with the 100.0% equality – an important source of overall income inequa- exception of Jamaica). 90% 0.22 0.22 0.27 0.27 0.27 0.28 0.27 0.27 0.25 lity – the country boasts the highest female/male ratio of 0.27 0.27 0.27 0.26 80% secondary enrollment among the countries under compa- Finally, the two target indicators of environmental sus- 0.07 0.07 0.08 0.07 0.07 0.07 rison. However, in other aspects of gender equality – such tainability (CO2 emissions and improved water sources) 70% 0.06 0.06 0.06 0.07 0.07 0.08 0.08 as the female/male ratio for primary enrollment, the share show an intermediate position when compared to other 0.26 0.27 60% of women employed in the non-agricultural sector and ma- countries. The Dominican Republic reports 2.1 metric 0.22 0.24 0.27 0.27 0.26 0.26 0.27 0.23 0.23 0.23 0.23 ternal mortality rates – the country reports lower levels that tons of CO2 emissions per head, above 1.2 tons in Colom- 50% the comparison countries. bia and Peru but below the 4.0 tons in Jamaica. Improved 40% 0.04 0.04 0.04 0.07 0.07 0.04 0.05 0.07 0.07 water sources are available to 95 percent of the Domini- 0.05 0.06 0.07 0.07 30% 0.18 0.18 0.18 Gender issues deserve some additional explanation. In cans, well above the 84 percent in Peru and the 93 percent 0.19 0.18 0.18 0.18 0.17 0.15 0.14 0.15 0.15 0.15 the Dominican Republic the probability of school atten- in Colombia but still below the 98 in Costa Rica. 20% dance for ages between 3 and 16 is equal for boys and girls. 10% 0.20 0.18 0.19 0.17 0.14 0.15 0.15 0.17 0.15 0.16 0.14 0.15 0.15 Besides, middle and high school inscription indicators are 2.3 Growth attributes 0.0% currently higher for girls than boys. Therefore, educational 1991 1992 1993 1994 1995 1996 1998 1999 2001 2002 2003 2004 2005 Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I attainment is slightly higher for girls than for boys: the ave- Three main reasons can be put forward as explanations Source: Central Bank of the Dominican Republic (authors’s calculations) rage school years is 12 for girls and 11 for boys, similar levels of why this strong economic growth has not been able to for comparable countries among the region. Another pers- reduce poverty and inequality, or improve other welfare pective of interest with regards to health refers to violen- indicators, in a more substantial way; employment crea- Graph 5: LABOR PRODUCTIVITY (GDP / Worker) in largest job creation activities in ce. A usual indicator is homicides rate which are reported tion, social expenditures and tax and transfers regime the dr between 10 and 12 for the decade of the nineties (which is above the worldwide average of 9.2), and some sources Agriculture Manufacturing Construction Trade, rest. and hotels Employment creation. Since the early nineties, has been report a significant increase in recent years. concentrated in few areas, somehow related to the expan- 180.0% sion of the tourism industry in the country. Out of one Gender issues deserve some additional explanation. In the million new jobs created between 1991 and 2005, 40% are Dominican Republic the probability of school attendan- 160.0% in the commerce-restaurants-hotels services and another ce for ages between 3 and 16 is equal for boys and girls. 11% in construction; sectors linked to the expansion in Besides, middle and high school inscription indicators are tourism activities (see Table 5). Other services represent 140.0% currently higher for girls than boys. Therefore, educational 26 percent of employment creation and transport and attainment is slightly higher for girls than for boys: the ave- communications (the fastest growing sector of the Domi- rage school years is 12 for girls and 11 for boys, similar levels nican economy in recent years) an additional 11 percent. 120.0% for comparable countries among the region. Another pers- These trends of job creation have altered the composition pective of interest with regards to health refers to violence. of employment which has registered an increase in the A usual indicator is homicides rate which are reported bet- 100.0% share of commerce-restaurants-hotels services and of cons- ween 10 and 12 for the decade of the nineties (which is abo- truction of 5 and 3 percentage points, respectively; whe- ve the worldwide average of 9.2), and some sources report a reas the share of agriculture and of manufacturing have 80.0% significant increase in recent years. declined also in 5 and 3 percentage points, respectively 1991 1992 1993 1994 1995 1996 1998 1999 2001 2002 2003 2004 2005 (see Figure 4). In contrast with its growing importance In terms of MDG’s health indicators, infant mortality ra- in terms of total employment, the sector of commerce- Source: Central Bank of the Dominican Republic (authors’s calculations) tes, incidence of tuberculosis and prevalence of HIV are restaurants-hotels services has had the lowest increase in reported above most comparison countries. At 29.2 per labor productivity (see Figure 5). This pattern of employment creation is one reason 1991 and 2005 is due to increases in productivity per 1000, infant mortality is above all comparison countries for the low growth elasticity of poverty reduction in worker (146.6 DR pesos out of an increase of 230.7 DR the country. A decomposition exercise shows that the pesos, at constant prices)12. Productivity gains in Trans- largest share of the change in output per head between port and communication represent 49 out of the 230.7 12 Changes in output per head can be decomposed into changes in output per worker, changes in worker per working age population and working age population per total population. The former two are related to labor productivity and labor supply while the latter is associated to demographic forces. For an explanation of the formulas and procedures for this decomposition see Gutiérrez, Paci and Ranzani (2008). 22 23 pesos per capita growth in the period. (more than 20%). and reallocates workers from low-productivity to high- Graph 7: components of social expenditure per head in the dr Agriculture and Manufacturing contribute nearly 30 pe- productivity activities. Government exp / GDP Social exp / government exp Real GDP per head sos each (a further 25 percent). However, these sectors 1.00 175,000 do not have large increases in employment, in fact some Social expenditure. Social expenditures remained sta- have declines in employment contributions to output ble for long time at very low levels and have increased growth (agriculture and manufacturing). On the other noticeably only in the recent period. Figure 6 shows the 0.80 140,000 Real Dominican pesos (base 2008) hand, the sectors that contribute the most through em- evolution of social expenditures per head in the Domi- ployment growth (construction and trade, restaurants, nican Republic since 1973. For more than two decades, Ratio hotels) do not have sizeable contributions to producti- between 1973 and 1996, social expenditures in real terms 0.60 105,000 vity growth.. In general, to increase the returns to labor have oscillated around 3,000 pesos per person (55 in cons- (and indirectly augment the growth elasticity of poverty tant 2000 US$). In 1999, social expenditure passed, for 0.40 70,000 reduction), the country should pursue a development the first time, 4000 pesos, reaching in 2008 nearly 10.000 path that boosts productivity in low-productivity sectors pesos per person13. 0.20 35,000 Graph 6: social public expenditure per head in the dr Constant 2007 pesos Constant 2000 US$ 10,000 500 – – Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 7,500 375 Source: author’s calculations using IMF Interntional Financial Statistis. Note: Central Bank of the Dominican Republic for data from 1995. Real pesos Real US$ 5,000 250 Consequently, for the 1975-1995 period, the low level of so- other Latin American countries (most of which rely more cial expenditures per head in the Dominican Republic is on taxes on goods and services rather than on international due to lower income levels, lower fiscal priority and pres- trade taxes) and OECD countries (which rely more on inco- 2,500 125 sure. By 2003, GDP/head in the Dominican Republic was me taxes and social security contributions). almost double than that of 1988 and budgetary pressure has increased to the levels of countries at comparable inco- However, the structure of tax collection has changed ra- me levels. Fiscal priority, however, continues to be the lowest pidly in recent years. By 2007, the share of international 0 0 among comparison countries, as was the case in 1975. These trade taxes has declined to less than 10% of total revenues. 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 figures indicate that additional social/expenditures per head At the same time, the share of government revenues derived Source: authors’s calculations using IMF (various years) International Financial Statistics; WB (various years), World Development Indicators. can be provided by continued growth and by increased fiscal from goods and services has risen to more than 50%. Taxes priority15. on income, profits and capital gains have come to represent The trend of social expenditures per head can be traced head increased from 58,000 to 90,600 real pesos between another 30% of total revenues. The current tax structure is through the evolution of three components: GDP per 1973-1996, but budgetary pressure declined from 17.6 to now more similar to that of the rest of Latin American coun- Tax and transfers regimes. In the DR, tax collection amou- capita, government outlays as a percentage of GDP (also 11.8% (a 33% decline) while fiscal priority fluctuated bet- tries.The evolution of the Dominican tax structure is due to nts to around 17% of GDP in 2007, an increase from the known as budgetary pressure) and the share of social ex- ween 22.3% and 34.7%. In other words, each component various factors: a) the growth pattern of its economy, where early nineties’ level of 13%, but still below the level of penditures within total government expenditures (also moved in a direction that compensated the others making exports have been a main source of growth and b) the cha- other Latin American countries (e.g., Panama 26%, Costa known as fiscal priority)14. Figure 7 shows the evolution of the social expenditure remain at a low level. Since 1996, racteristics of its labor market, where 40% of informal em- Rica 22%, Uruguay 24%) and well below the OECD ave- these three components and illustrates the reasons behind however, the pattern has changed. Budgetary pressure has ployment makes collecting income taxes and social security rage (around 35%). The increasing trend in tax collection the recent increase in social expenditures. In fact, during increased by almost 20 percentage points, output per ca- contributions very difficult. Recent administrative measures has been accompanied by a change in the composition of the seventies, eighties and early nineties, social expenditu- pita has continued to grow and fiscal priority has remai- have increased the collection capacity for some consumption revenue sources. Around 2000, the tax structure was bia- res per head remained more or less stable because, despite ned stable. The latter has leveled off at around 29 percent; and property taxes, and compensated for the drastic fall in sed with a large contribution of international trade taxes rising standards of living and output, budgetary pressure although it had reached a much higher level just before the trade taxes. The introduction of DR-CAFTA will further (nearly 40% of total revenues) and taxes on goods and ser- declined, while fiscal priority fluctuated. Indeed, GDP per crisis of 2003. reduce international trade tax collection and the needs for vices (around 30%), and just a smaller share of tax collec- 13 A narrow definition of social expenditures is adopted here. It includes expenditures in education, health and social security and welfare tion coming from income taxes and social security contri- social development will call for more income taxes and social by the consolidated central government. It does not include, neither other social expenditures such as housing and utilities or cultural and recreational activities, nor social expenditures executed by non-central government agencies. butions. This pattern contrasted with the tax structure of security contributions. 14 In formal terms, if SX/POP stands for social expenditure per head, GDP/POP stands for GDP per head, SX/TX stands for fiscal priority and TX/GDP stands for budgetary pressure, then an identity relating these terms can be written as follows: 15 A discussion of the tradeoff between increasing fiscal pressure versus fiscal priority as ways of financing larger social expenditures will be SX = SX TX GDP presented in the following section. That section will also assess the short term effects on growth – and on poverty reduction – of a more 24 POP TX GDP POP pro active policy of public spending in human development. 25 3. Prospection: How to combine Economic growth and social development Transfer programs have proliferated and have received a poverty of 1.1 million people, these two basic programs still 3.1 Growth prospects other sectors: Hotels and Restaurants and Food products. growing resource allocation; however, they are still relatively have a large way to go in order to cover all the population in In terms of shares of total GDP, the first, accounting for fragmented and poorly targeted. Coverage of the subsidized need. Some social programs have limited relative and abso- Using recent data and a simple methodology, this sub- 12.2% of total value added, is slightly larger than the se- Family Health Insurance has increased from 37 thousand lute incidence and others, like the electricity subsidies, lack section assesses the growth potential of these and other cond and that is part of the reason why their percentage people in 2002 to more than 700 thousand in 2007. Simi- complete analyses of their distributive impact16. All these sectors17. As shown in figure 8, Other Services displays effects on GDP is different: Hotels and Restaurants gene- larly, the Solidaridad Program (a CCT program) has more limitations in the structure of taxes and transfers call for po- the highest percent change on GDP and highest GDP rate an impact of 1.75% of GDP, whereas Food products 200 thousand beneficiaries. Given a population in extreme licy changes that enhance poverty and inequality reduction. elasticity. A one percent of aggregate GDP positive shock generate an impact of 1.14% of GDP. However, when the to Other Services produces, via the multiplier effects due initial shock is proportional to their own sectoral output, to its inter-sectoral linkages, an increase of aggregate GDP their multiplier effects are very close: the GDP elasticity of equal to about 2 percent. And for each one percent increa- Hotels and Restaurants is 0.29 and that of Food products se in the sector’s own output the effect on aggregate GDP is 0.26 (see Figure 9). Note that, although their similar is almost half a percentage point. At the opposite end, GDP elasticity’s, these two sectors influence the Domi- Growth and Poverty in the short term: economic cycle, pro-cyclical policies and upon receiving positive demand shocks the mining sector nican economy through quite different transmission inflation generates the smallest effects on the economy. This sector channels. Food products rely more heavily on imports clearly leaks most of its exogenous injections by increa- with 10% of their total demand (final and intermediate The analysis in the text has focused on the long term trends of low employment creation, low social expenditures, and sing imports rather than by demanding additional inputs combined) satisfied by imports and, thus, their backward tax and transfer regime as the main explanations for the puzzle of high growth associated with low poverty reduction. from domestic industries. It is interesting to compare two linkages are less strong18. Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I However, complementary explanations for this puzzle may be found by considering short term macro imbalances, such as exchange rate misalignments, fiscal and external accounts imbalances, high inflation. In this short term context, it may be particularly instructive to consider the recent 2002-3 economic crisis in the DR and to compare it, when possible, with Graph 8: sectoral growth impact and gdp elasticity. showck of 1% of aggregate the 2008-9 one. As already mentioned, the 2003 crisis had dire costs in terms of poverty pushing more than a million gdp, dr 2005. people below the poverty line and thus increasing poverty rate by close to 15 percentage points, as shown in Figure 1. The right panel of this figure also reveals that not only the Dominican Republic expenditures on human development (health, 2.50 0.45 education, water and sanitation and other social expenditures) is about half of the regional average rate, but also that this Percentage change of GDP GDP elasticity 0.40 type of expenditure tends to be pro-cyclical. As shown in the figure, during the 2003 crisis, social expenditures underwent 2.00 0.35 a dramatic cut. For certain specific spending categories, such as health expenditure, the 2003 crisis and subsequent cuts Percentage change of GDP 0.30 were equivalent to erasing six years of cumulative progress. This reduction in investments in human development may be 1.50 related to lower poverty reduction once growth pick up again after the crisis. 0.25 0.20 1.00 Another key feature of the 2003 crisis was the high inflation. In the aftermath of the 2003 banking crisis, inflation was 0.15 driven by excess liquidity following the banking collapse and subsequent bailout, and it was exacerbated by the deprecia- 0.10 0.50 tion of the peso due to currency substitution; in 2004, average annual inflation reached a peak of 52.4 percent. It is well 0.05 known that inflation tend to act as a regressive tax given that richer people, by being less dependent on cash earnings and by diversifying their portfolios, can protect themselves against inflation more effectively than poor people. However, it is 0.00 0.00 s ce s st. m ies er. tin t. ts lt s f . ng uf u ice ice ile ul icu also important to consider that inflation rates for the basket of goods consumed by the poor may be quite different from uc om an Re er at an i er uc ric in xt v v od W m gr M h rM er er str M Te nd .C Ag Fis m rA ity Pr y s rS sp n la av he Co v. p. Co ck ric he od he those for the goods consumed by the rich. In fact accounting for their more ‘food-intensive’ consumption baskets, the n Go te He Ex Ot Tra sto ct Ot Ot Fo Ho Ele e Liv poor faced an average annual inflation of 57.7 in 2004, more than 5 percentage points higher that the CPI inflation. As Source: Authors’ calculations. for social expenditures, inflation seems, at least for the 2003 crisis, to be acting pro-cyclically and thus exacerbating poverty. Although final figures are not yet available, in terms of the two variables analyzed here, the crisis of 2008-9 presents impor- 17 The results discussed above should be taken with a grain of salt given the strong assumptions that underpin the SAM model. In particular, no behavioral response is taken into account into this model. In other words, the economy is assumed to be operating below its production tant differences from the 2003-4 one. Social expenditures have been partially protected and, with the help of IFI funding, possibilities frontier, or equivalently, excess capacity and unused resources are assumed so that any exogenous increase in demand can be the government is attempting a fiscal counter-cyclical maneuver. Secondly, after a rapid increase of international prices of satisfied by a corresponding increase in supply. For these reasons exogenous changes in demand do not to influence prices and these models food and other commodities that pushed up inflation in 2008, domestic prices have been on a downward trend during are in fact also called fixed-price models (see Thorbecke 2000). 18 Given that the multiplier model behind these calculations is a linear model, these two measurements have a strict algebraic relationship. As most of 2009. Poverty is expected to increase in 2009, but there are preliminary indications that the increase will not be mentioned in the main text, the two shocks differ in their size, but the way in which they exert their effect, through the inter-sectoral linkages, as severe as before. is exactly the same. The first shock, equivalent to 1% of aggregate GDP (of the year 2005), is equal to about 10 billions of current (2005) pesos. The second shock, equivalent to 1% of the Other Services’ sectoral value added, is equal to about 3 billions of current pesos. 16 For a complete discussion of the distributive impact taxation and of some social programs see World Bank (2006). 26 27 A graphical summary of the inter-sectoral linkages19 is ger forward linkages, whereas Hotels and Restaurants headcount, experience the same rate of increase as that Costs of attaining the MDGs depend not only on the offered by Figure 9 . According to this analysis, Other have higher effects on their upstream industries, i.e. of households resident in the capital. In the second case, specific sector (health, education, etc.) costs, but also on Services, Hotels and Restaurants, Food products and stronger backward linkages. Weak sectors, in terms of rural incomes expand less than urban incomes. the availability of necessary resources (labor, capital, and Transport and communication are the four key sectors intersectoral linkages, include the manufacturing of the intermediate inputs), complementary policies (e.g., pro- of the Dominican economy. Note also that, consistently free trade zone, mining, construction, energy, export vision of public infrastructure), and the overall growth with the above discussion, Food products exhibit stron- agriculture and heavy manufacturing. 3.2 Growth and social indicators environment of the country. Costs of reaching the convergence MDGs are likely to be lower when demand for services is higher, the contribution of the private sector is larger, and Graph 9: Weighted backward and forward linkages, dominican republic 2005. The analysis that evaluates the tradeoff between a more the requisite infrastructure is in place and of sufficient HD-oriented type of development versus a more growth- quality. Faster growth in the private sector is likely to drive 2.50 oriented one uses the MAMS (Maquette for MDG Simu- up wages throughout the economy, therefore raising the Forward Oriented Key costs of providing both HD and other public services for lations) modeling framework20. the government. The causality also runs the other way, as Table 7 presents data for the Dominican Republic’s key good MDG performance has important positive spillover 2.00 MDG indicators in 1990 and 2007 (the base year for the effects on growth. For example, improvements in schoo- MAMS simulations), as well as the 2015 target values. As ling increase the share of skilled and tertiary-skilled wor- Food Prod. shown, MDG 7b (access to improved sanitation) has al- kers in total employment, which in turn leads to higher Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I ready been achieved. None of the remaining MDGs, even average labor productivity21. 1.50 Transp.Communic Forward Linkages with an optimistic growth performance for the DR, is likely to be reached in the baseline, or business as usual, While the previous discussion highlights the many com- scenario. In this scenario assuming that past trends con- plementarities between MDG achievement strategies and 1.00 Hotel Restaur. tinue, MDGs 4 (under-five mortality rate) and 5 (mater- growth, there also exist important trade-offs between HD- nal mortality rate) show solid progress, with 57 and 64 and growth-targeted activities. Faced with a fixed budget Heavy Manufact. percent of the distance to the target covered (see the last envelope, the DR government may not be able to raise Livestock Fishery column of Table 11). Although MDG 7a (access to im- sufficient resources to finance a full set of MDG activities 0.50 Energy Water and maintain adequate investments in infrastructure. In Other Manuf. Zonas Francas proved water source) covers a smaller percentage of the Textiles Zonas Fr. Govern. Services distance, it is close in levels to its target. On the other this case, one may broadly distinguish between investing in Const. Export Agric. Commerce Mining Other Agric. hand, full achievement of the education goal (MDG 2) activities that are beneficial to growth in the short and long Food Prod. Zonas Fr. Weak Sectors Textiles Backward Oriented is the most difficult to accomplish. The education MDG term (such as infrastructure) or investing in activities that 0.00 0.64 0.74 0.84 0.94 1.04 1.14 1.24 1.34 1.44 in this case corresponds to a strict definition of the com- improve human development but that do not have imme- Backward Linkages pletion rate since full achievement of this MDG would diate feedbacks on growth. Source: Authors’ calculations require that all students of the correct age cohort enter first grade in 2008 and successfully complete the 8 year In order to quantify this HD-growth trade-off, we undertake primary cycle through 2015. Progress is more positive a series of simulations where the overall public budget is fi- A final thought experiment can clarify further the stark ce strong additional demand for labor inputs and thus, when one highlights only the increases in, for example, xed at baseline levels, but the allocation of government resou- difference between the four mentioned key sectors and once their general equilibrium direct and indirect effects the graduation rate in primary school (from around 90% rces varies from infrastructure-intensive to HD-intensive. The the weak ones. Consider an experiment where a positive are accounted for, the final boost on incomes is quite in 2007 to 98% in 2015) or the entry rate into first grade results of each simulation in terms of consumption growth shock – equivalent to about 5 per cent of total GDP – is low. This has also repercussions for poverty reduction. (from around 78% in 2007 to 98% in 2015). In terms of and the average level of achievement of the non-poverty firstly concentrated only on the key sectors, and then, An injection into key sectors reduces overall poverty moderate poverty, a high and sustained pace of growth is MDGs are then represented as points of a trade-off curve in in a second stage, only on the weak sectors. The results headcount by almost 1 percentage point, in contrast needed to cover 44% of the distance to the target. Figure 10. are reported in Table 10. The same shock produces an with 0.3 percentage points reduction when the injection increase in households’ incomes of 2.2 percent when is directed to weak sectors. Notice also that the growth key sectors are stimulated, and only of 0.8 percent when effects of the first type of shock are more pro-poor than 20 MAMS is used for the empirical assessment of the costs and benefits of various MDG strategies and has been developed at the World Bank. weak sectors receive the injection. Weak sectors do not those of the second one. In the first case, incomes for To date, MAMS has been applied in about 35 countries in Latin America and the Caribbean, Middle East, Africa, and Asia. It is a flexible interact much with the rest of the economy, nor produ- rural households, the group with the highest poverty analytical tool that can accommodate a wide variety of datasets and country-specific circumstances. The main advantages of MAMS include: explicit “production� of various MDG indicators, numerous links from HD service provision to the rest of the economy through labor market and government budget constraints, and the recognition of potential positive spillovers when multiple MDGs are targeted at the same time. 19 This graph reports on the vertical axis the strength (expressed as elasticity) of a sector’s forward linkages and, on the horizontal one, that of 21 There exist other potential spillovers, such as higher labor productivity due to improved health of workers and higher survival rates of children its backward linkages. The graph is then divided into four quadrants with the bottom left block grouping sectors whose linkages’ strength is who then go on to join the labor force. However, this possibility is not considered in the simulations presented in this paper due to the time below 1, and with the top right corner grouping the key sectors, i.e. those with higher than 1 forward and backward linkages. scope of the analysis: improvements in child health are likely to translate into larger and healthier workforce with a time lag greater than the endpoint of our simulations (2015). 28 29 GrAPH 10: consumption growth and human development trade-offs (mams simula- GrAPH 11: HD achievements and CONSUMPTION TRADE-OFFS FOR DIFFERENT BUDGETARY tion for the dominican republic, 2005) PRESSURE 60 70 50 60 D % HD target achieved in 2015 40 C 50 % of HD target achieved in 2015 B 30 40 A 20 30 10 20 0 10 Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I 126 127 128 129 130 131 132 0 Per capita consumption in 2015 (2007 = 100) 12. 124 125 126 127 128 129 130 131 Source: Authors’s calculations. Per Capita consumption in 2015 (2007 = 100) Source: Authors’s calculations. The trade-off curve is concave, implying that additio- pressure. With the same initial combination of expen- nal investment in either HD or infrastructure servi- ditures on social sectors and infrastructure, point A ces results in progressively smaller improvements in corresponds to a budget pressure of 10.8%, B to 11.9 the relevant indicators. It has been suggested that this percent, C to 13.1 percent, and D to 14.4 percent. The trade-off between human development and growth ty- negative slope of a line connecting points A, B, C and pically becomes flatter as a country comes closer to D indicates that higher HD attainments can be reached achieving its HD targets22. In other words, because with larger budgets but at the cost of lower per-capita the unit costs of reaching the most remote parts of consumption (and, in the short term lower poverty re- the population (both economically and socially) are duction). likely to rise as a country comes closer to the MDG targets, making the final steps towards the MDGs is Figure 11 also shows two concaves curves representing the much more costly in terms of foregone growth than HD-growth trade-off for two specific levels of expenditures. when the MDG strategies were initially implemented. Movements between points A and D correspond to shifts of the overall level of total expenditure, whereas movements Removing the constraint of a fixed budget envelope along the concave curves corresponds to shifts in the com- and increasing overall spending is another way to acce- position of a fixed amount of expenditure. The different lerate the achievement of HD targets. As mentioned in shape of these two curves suggests that the overall level of section 4.2, one option of financing larger social expen- the budget influences the HD-growth trade off. More im- ditures may be through increasing budgetary pressure. portantly, observing that these two curves intersect, this However, raising taxation (or debt) has general equili- analysis demonstrates that it is possible to increase HD brium effects that influence growth and poverty reduc- achievements through a redirection of investments towards tion via lower private consumption (or lower savings). human development for a given budget envelope, but this Figure 12 shows the trade-off between HD targets and has a limit and further increases in HD require additional per capita consumption for different levels of budgetary budgetary resources. 30 22 See Bourguignon y Sundberg (2006) 31 4. Conclusion The Dominican Republic has performed very well in crises and recessions, inevitable in a very open economy terms of aggregate growth in the last three decades. In such as the Dominican, seem to be very regressive. Pover- the most recent years, potential output growth has re- ty, income distribution, and growth are all endogenous to ached very high rates of around 7 percent per annum. the process of development: unbalanced growth that does So why worrying about growth in this country? This not benefit large sections of a society ends up not being policy note has shown that at least two issues, if not tac- sustainable in the long run. Policy makers in the country kled, may limit future growth. The first is that, due to its are well aware of this social issue but will nevertheless face small domestic market, the Dominican growth model has some tough decisions to address the problem. essentially been an export-led one. However, repeatedly outward oriented sectors have quickly reached maturity or In this regard, this policy note conveys three main mes- have found difficulties in expanding their market shares sages. First, the Dominican Republic has been able to sus- in an increasingly competitive global economy. Besides, tain rapid growth in the long term but with relatively slow most of the new jobs created in the export-oriented sec- advances in poverty and inequality reduction. Second, in tors (tourism for example) are not paying very high wages, order to combine accelerated growth with enhanced hu- Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I Crecimiento Económico y Desarrollo Social en la República Dominicana / capítulo I an indication of their lower productivity. The recent ex- man welfare the country has to find a pattern of develop- References pansion of these sectors has generated strong growth and ment that encourages growth in areas with large backward job creation, but is it sustainable in the long run? and forward linkages so that productive employment creation is more abundant. Third, a renewed system of The second concerning feature of the growth process in taxes and transfers has to be designed both for collecting the DR is that it tends to be non-inclusive. Recent sustai- enough funding and for progressive allocation of resour- ned growth does not seem to be very progressive and the ces towards economic and social development. Bourguignon, François, and Mark Sundberg (2006). “Constraints Loayza, N, P. Fajnzylber and C. Calderon (2004) “ Economic Growth to Achieving the MDGs with Scaled-Up Aid,� UN Department of in Latin America and the Caribbean: Stylized Facts, Explanations and Economic and Social Affairs Working Paper No. 15. Forecasts �. Banco Central de Chile, working Paper 265 Chenery, Hollis B, Tsunehiko Watanabe, 1958, “International Paes de Barros, R.; F.H.G. Ferreira, J. Molinas and J. Saavedra (2008) Comparisons of the Structure of Production,� Econométrica, 26, pp. “Measuring Inequality of Opportunities in Latin America and the 487-251. Caribbean�. Palgrave MacMillan - The World Bank De Ferranti, David, Guillermo E. Perry, Francisco H. G. Ferreira,and Secretaría de Estado de Economía, Planificación y Desarrollo (SEEPYD) Michael Walton. 2004. Inequality in Latin America: Breaking with (2008), Análisis del Desempeño Económico y Social de la República History? Washington, DC:World Bank. Dominicana. Enero-Junio 2007. Gutiérrez, Catalina, Pierella Paci and Marco Ranzani (2008) Making Thorbecke, Erik. 2000. “The Use of Social Accounting Matrices in Work Pay in Nicaragua. Employment, Growth and Poverty Reduction. Modeling.� Paper prepared for the 26th General Conference of the Washington, DC:World Bank. International Association for Research in Income and Wealth, Cracow, Poland, August 27–September 2. Hirschmann, A.O., 1958, The Strategy of Economic Development, New Haven: Yale University Press. Vos, R., E. Ganuza, H. Lofgren, M.V. Sánchez, and C. Díaz-Bonilla (2008) Políticas Públicas para el Desarrollo Humano ¿Cómo Lograr los Jaramillo and Sancak (2007) “Growth in the Dominican Republic and Objetivos de Desarrollo del Milenio en América Latina y El Caribe? Haiti: Why has the grass been greener on one side of Hispaniola?� , UNDP, UN-DESA; IMF Working Paper 07/63 The World Bank. Krugman, P. (1994). The Fall and Rise of Development Economics. World Bank (2001) Dominican Republic Poverty Assessment. Report In “Rethinking the Development Experience: Essays Provoked by the No. 21306-DO Work of Albert O. Hirschman.� Lloyd Rodwin and Donald Schön (Eds.) Washington: Brookings Institution. p. 40. World Bank (2006) Dominican Republic Poverty Assessment. Achieving More Pro-Poor Growth. Report No. 32422-DO 32 33 chapter II Ease of Doing Business Jean Michel Lobet(a) 1. INTRODUCTION D escribed in this Policy Note1 are the reforms that the Dominican Republic could implement in order to facilitate the ease of doing business. These of the 32 Latin American and Caribbean economies. In the last two years, the country presented significant improvements in five areas of Doing Business: Starting important measures will certainly improve the business a Business, Registering Property, Protecting Investors, environment and the Doing Business2 indicators. The obs- Paying Taxes and Trading Across Borders. La Facilitación de Negocios / c a p í t u lo I I tacles that local entrepreneurs face in their day to day activities have an important impact in investments and It is important to note that the reform recommen- therefore, in poverty. Due to the diversity of the issues dations presented in this note are preliminary and involved, the following policy suggestions are presented subject to be refined and adjusted following subse- with a brief explanation of each of them. quent follow-up visits by the Doing Business Project and Reform Unit teams. Furthermore, the reforms to In the 2010 Doing Business Report, the Dominican Re- be undertaken should be adequately advertised and su- public ranked 86th out of 183 economies covered in pervised. In particular, the follow-up on changes in the the report, 16 spots higher than in 2009, and 17th out business environment will allow identifying successes (a) Private Sector Development Specialist. 1 This policy note was prepared by Jean Michel Lobet, under the supervision of Sylvia Solf from the Doing Business Project team, and Marialisa Motta, from the Doing Business/FIAS Reforms Unit. For this work there were also contributions from Alejandro �lvarez de la Campa, Melissa Johns, Andrei Mikhnev, Lars Nikolajs Grava, and Justin Yap, all of them from FIAS; Ernesto Martin Montero, and Alvaro Quijandria from IFC LAC Advisory; Frederic Bustelo, Cesar Chaparro Yedro, Roger Coma-Cunill, Santiago Croci, Allen Dennis, Carolin Otonglo, Yara Salem, Umar Shavurov, Justin Yap and Lior Ziv from the Doing Business Project team; and Adolfo Rouillon, and Rachel (Raha) Shahidsaless from the World Bank Legal Vicepresidency. Additional comments were expressed by Salem Rohana, IFC Representative for the Dominican Republic; and Miguel Eduardo Ceara Asuad, World Bank Dominican Republic. 2 Particularly, the considered areas are Starting a business, Dealing with construction permits, Registering Property, Protecting Investors, Enforcing Contracts, Getting Credit, Trading Across Borders, Paying Taxes and Closing a Business. Doing Business’ methodology has its 35 and needs for greater efforts3. illustrate obstacles that can turn out to be negative for Obtaining a certificate for commercial or trade name and notarize the declaration of subscription of shares In Doing Business, high indicators do not necessarily growth; in other words, these last ones involve high tran- from the National Office of Industrial Property (ONA- indicating that 10% of authorized capital has been subs- indicate an outstanding performance, but low ones saction costs and probably, lack of legal security. PI) demands just a few days. However, this certificate cribed. The notary simply authenticates the declaration. represents 16% of the total cost of starting a business It is important to note that notary professional fees re- (RD$3,607.00), the publication would add another main one of the most costly procedures of business start- RD$971.00 to this cost. The point of the formalities is to up in the Dominican Republic. It is recommended to 2. Diagnosis and policy options guarantee that the commercial or trade name is univocal eliminate this procedural requirement or replace it with and to avoid conflicts. In most countries the entrepre- an affidavit form to be deposited at the registry at time neur can prove the inexistence of a commercial name of incorporation. same as his/hers before the registration but should not These measures would contribute to the familiariza- obtain a certificate or publish the name. For example, Integrate the process of registration of employees with 2.1 Opportunities for reform tion with the system and its use, avoiding the negative the Mauritius Islands just eliminated the requirement responses generated by the encountered difficulties the Department of Labor and Social Security Office for a commercial name permit. If the entrepreneurs with the online registration system for company incor- 1. Starting a Business during the first attempts. would prefer the certificate and publication of the com- poration. In order to make the start-up process more pany name, the requirement could become optional. expedited, the online portal for company registration Doing Business measures the procedures, time and costs For the medium-term In addition, based on the valuation of the current cost could integrate into the same system as the registration to start and formally operate a limited liability company. of administrative formalities, a fee reduction could be of employees with the Department of Labor and the So- In June 2009, 8 procedures, 19 days and an equivalent Speed up the registration process for companies analyzed. cial Security. This integration requires coordination bet- of 17.3% of the domestic per capita income were neces- through e-signature and allow e-registration of the ween the different authorities involved in the process. sary. On February 18, 2008, the National Competitive- company. Although it is already possible to submit Introduce a flat registration fee for company incorpo- ness Council (CNC) launched a virtual facility. Anyone the documents electronically for its registration, the ration at the registry. Instead of charging based on the Facilitate the registration process with all relevant agen- who registers on the website can check the availability of a definite certificate of registration must be signed by total authorized capital, the Registry could introduce a cies by assigning unique company identification num- possible company name and register it (in ONAPI), regis- the registrar, or its delegate, and stamped. When re- fixed fee for registering the business, regardless of the bers for company, social security, tax and other registra- ter the company in the Chamber of Commerce (CCPSD) gistering the business, the applicant must also present capital. Numerous countries like Egypt, Mozambique or tions. Currently, each time that an entrepreneur registers and pay taxes (in DGII). A new Company Law was also the original documents to be stamped. The Santo Sri Lanka have introduced this reform. There, due to a its company with different agencies like the registry, tax adopted with eventual impacts on this indicator (see An- Domingo Registry plans to speed up the process by rise in the number of registrations resulting from the authority, labor department or social security, its com- nex I). To further improve the process, the government granting powers to the registrar to implement the e- reforms, the public institution collections increased des- pany will be assigned a different identification number. of the Dominican Republic could introduce reforms to signature before the end of 2010. The process could pite lowering the registration fees. A fixed fee also avoids This makes the process more complicated for the entre- cut the number of steps, the time and the cost to start a be improved even more if the applicants are allowed the risk of a sub-declaration of the authorized capital. preneur and the government. The Dominican Republic business in Santo Domingo. to use the e-signature, thus subtracting the need to can consider the harmonization of the company identi- provide the original documents for the definite regis- Eliminate the Incorporation Tax. Currently, entrepre- fication number by assigning a unique number to com- a. Suggestions tration. neurs when incorporating their company have to pay a panies at the moment of registration that will be applica- La Facilitación de Negocios / c a p í t u lo I I La Facilitación de Negocios / c a p í t u lo I I 1% tax to the Dirección General de Impuestos. The tax ble across agencies. This will streamline the registration For the short-term Make the use of the company name certificate optio- represents about half of the total cost to start a business process, and permits a better coordination among various nal and consider reducing the cost. The Dominican as measured in Doing Business. In effect, the entrepre- agencies. Promote and facilitate the use of the virtual applica- Republic has a requirement that is unique in the world neur has to pay a tax for the company without having tion for starting a business. In February 2008 an on- by which entrepreneurs have to obtain a certificate of a commercial or trade name and have to publish it started to make any profits. This also induces entre- a. Benefits and experiences of other line system was implemented to submit applications. in a monthly publication in case there are objections preneurs to under-declare their authorized capital. It is countries Its use is still relatively low due to users’ scarce fami- recommended to eliminate such tax to encourage com- liarity with the system. For that reason, it is important from third parties. These formalities do not require pany formation. Simple start-up procedures encourage creation of busi- to continue promoting the use of the on-line system much time but are expensive, because a publication nesses. The government of Senegal reformed the company through means beyond the current media campaigns. in a national circulation newspaper demands around ten days, thereby the entrepreneurs can comply with For the long-term registry in July of 2007 and by May 2008, 3,060 new busi- For example, computers may be installed for the use nesses have been registered, an 80% increase compared to of the system when the applicants go to Registry and ulterior formalities once the certificate of publication Eliminate the need of declaration of subscription of the previous year. Studies in Mexico, India, Brazil and the set up phone lines for solving problems or concerns. is obtained 4. shares before a notary (applicable to Sociedad Anónima Russian Federation found that a simplified access regime (S.A.)). When incorporating a SA, the founding part- is associated to a higher number of registered businesses. limitations. Other important areas for businesses, like the country’s closeness to the large markets, the quality of its infrastructure (exclu- ners, or their representatives, must go to a notary to sign The Mexican study analyzed the effect of simplification ding those of cross-border trading), property security from thefts and looting, the transparency of the State-owned Body, macroeconomic conditions or underlying strength of the institutions, are not object of direct study by the Doing Business Project. 3 Annex II includes comments concerning the referred laws for the ease of business and charts with the Dominican Republic’s rank in Doing 4 Kaplan, David, Eduardo Piedra y Enrique Seira. 2008. “Entry Regulation and Business Start-Ups: Evidence from Mexico�. Documento de 36 Business. trabajo, Unidad de Análisis Empresarial, Banco Mundial, Washington, DC. 37 of obtaining municipal licenses concluded that this step the construction proposal or incomplete documenta- tion by the Councils is different to the one assigned highway, and water supplies, among other elements. increased the number of registered companies nearly 4%.4 tion. This has created an important backlog in both at the Ministry. This prevents the applicants from fo- Both procedures would be superfluous if clear zoning agencies. It is recommended to introduce and publish llowing up their application with the number assigned regulations were in place and published. The lack of it, The establishment of simple start-up procedures is also clear guidelines for project and documentation requi- at the Councils, having to go to the Ministry to obtain on the other hand, not only adds formalities but can correlated with a greater productivity in already exis- rements to mitigate this problem. In addition, a first the new assigned code. lead to confusion on part of the applicants and excessi- ting businesses. A recent analysis in 97 countries reveals review for completeness of documentation at the recep- ve discretion on part of the authorities. With a clear zo- that cutting the cost of creating companies in an 80% tion desk in the Municipality is recommended. As a first step for improving the coordination between the ning plan, applicants and the municipality would know of the per capita income produces an estimated increase two institutions, it’s recommended that each application the parameters of constructions per zone. This would of 22% in the total productivity factor. By analyzing 157 Introduce an electronic applications management sys- is assigned with a unique number. Project applications and eliminate the need of a separate use of land certificate countries, the finding is that the same cut in creation tem at the Municipal Councils. The Municipal Coun- documentation should be forwarded between the agencies and the pre-permit inspection and would speed up the costs increases the production of each worker by 29%5. cils are introducing an automated system for projects without the need of follow-up by the applicant. A single construction permit approval process. A possible reason to explain these important increases authorization that can contribute improving their effi- project file would also reduce duplications in documenta- can be that the reduction of registration costs encoura- ciency in authorizing construction permits. New appli- tion requirements. An automatic notification and tracking Consider transferring the supervision of the projects ges the creation of new businesses, which generates grea- cations will be distributed to municipal officials in re- service is recommended so that applicants can verify the to qualified professionals during the construction ter competition and ends up taking less productive firms gard to their workload. The system will also help the status of the project approval at any time. Ultimately, appli- phase. In many countries, the responsibility for the out of the market. In fact, a study on creation of busi- supervision of areas with longer delays in the approval cants should be able to deposit and retrieve the building quality of the building is transferred to qualified profes- nesses in Mexico found that the competition generated process, and allow better distribution of human resou- permit with approvals from all necessary agencies through sionals. Singapore – one of the world’s best performers by new more efficient firms generated a 1% fall in prices rces at the Municipal Councils. A fast introduction of one authority, such as the Municipality within a predictable in Dealing with construction permits – is one example. All and an income reduction of less productive businesses the system is recommended in order to speed up the time frame. inspections and project supervision are delegated to by 3.5%.6 authorization process. construction professionals (architects and engineers). For the medium-term Authorities do not inspect at any stage except when is- 2. Construction permits Introduce approval processes at the Ministry of Public suing the occupancy permit after project completion. Works based on the “risk level.� On average, project Connect the Councils and the Ministry of Public Works This reduces the administrative burden for both the Doing Business measures the procedures, time and cost authorizations at this Ministry require many months. with the cadastral registry (Office of Cadastral Measure- authorities and the builder. At the same time building necessary to build a commercial warehouse and connect The process can be sped up by reducing the administra- ment). Before issuing the construction permit, the Coun- quality of ensured as the qualified expert has to certify to utilities7. With 17 procedures, 214 days and a cost of tive load and introducing approval processes based on cils and the Ministry for Public Works and Communi- that the building is compliant with all safety standards 131.6% of the Domestic per capita Income, the Domi- the projects’ risk. Low risk projects would require a sim- cations inspect the land separately in order to guarantee necessary for use. nican Republic was 92nd out of 183 ranked countries plified and fluent process, with fewer requirements, and compliance with all urban development regulations, ob- in the indicator. The following suggestions for short, for those more complex a greater scrutiny at the moment tain a valuation of the project, and/or measure the plot. For the long-term medium and long term improvements may speed up the of assessment. According to the before mentioned, clarifying the regu- concession processes for the necessary permits to build, in lations on urban development planning and publishing Introduce on-line application and electronic proces- this example, a warehouse in Santo Domingo. Streamline and coordinate approval for construction the plan can eliminate the need of inspections. Also, both sing of documents. Permitting online application and La Facilitación de Negocios / c a p í t u lo I I La Facilitación de Negocios / c a p í t u lo I I permits at the Municipal Councils and the Ministry institutions should be linked to the Property Registry to electronic submission of documents saves time for both a. Suggestions of Public Works. The applicants spend several months avoid duplicity of tasks or what are worse, ambiguous title builders and government officials. In other countries, obtaining the necessary authorizations from the Muni- deeds because of differences in the boundaries establis- for example Kuwait, a new automated system was in- For the short-term cipal Councils and the Ministry of Public Works. The hed by the different public entities. These steps would troduced to all government agencies responsible for application is presented to the Municipal Council and eliminate the need of both institutions doing an in situ issuing technical approvals for the installation of uti- Establish clear guidelines and consistent building submitted to a first revision by the Municipal Council’s inspection in order to make decisions on the project. In lities. The reform resulted in a total time reduction of norms at the Municipality and at the Ministry of Pu- Department from City Planning of the corresponding most countries with efficient systems for construction per- almost two weeks. Singaporean construction professio- blic Works for project requirements. Most of the ti- jurisdiction. Subsequently, the application is sent to mits concession, like Singapore, Denmark and Mexico, nals submit all their applications through CORENET mes, applicants after presenting their projects, both at the Map Processing Department of the Ministry of Pu- the construction permit is issued without previous inspec- system that saves them both time and money. In 2009, the Municipality and at the Ministry of Public Works, blic Works. The applicants must go to this Ministry tion of the site. Singaporean Building and Construction Authority is have to amend several times their project. The reasons to prove that this application was actually sent by the planning to introduce a 3D system of approval. If pro- cited by the authorities include technical problems in Councils, the follow-up code assigned to the applica- Create and publish zoning and planning standards at jects require amendments, applicants do not need to the Councils. At the moment, one of the first steps for re-submit plans and drawings. It is done on-line and the applicant is to obtain a certificate of land use to ensu- in a synchronized mode. Portugal and Costa Rica are 5 Barseghyan, Levon. 2008. “Entry Costs and Cross-Country Differences in Productivity and Output�. Journal of Economic Growth 13 (2): 145–67. re that the project complies with zoning regulations. In working on implementing their on-line application 6 Bruhn, Miriam. 2008. “License to Sell: The Effect of Business Registration Reform on Entrepreneurial Activity in Mexico�. Policy Research addition, the municipality sends inspectors to assess the systems. This reform is undoubtedly a long-term com- Working Paper 4538, World Bank, Washington, DC. 7 Besides the process for obtaining construction permits, the procedures for obtaining other types of operation licenses from the local councils land plot with regard to altitude, proximity to airport, mitment and requires considerable resources. 38 can be expensive and not very clear. 39 b. Benefits and experiences of other Law on Electronic Signature has been in place since 2002. b. Benefits and experiences of other and the credit bureau coverage is 35.0%. countries Since the registrar and the sub-registrar are the only autho- countries rities allowed to sign the above-mentioned documents, the a. Suggestions Top performing economies in the Dealing with cons- process can also be expedited by authorizing more staff of Eliminate the existing hurdles to register and transfer truction permits indicator tend to have rigorous conces- the registry to sign the documents. Furthermore, it will be properties. Formal title deeds encourage land transfers, sti- For the short-term sion processes, but, at the same time, clear and transpa- important for the time limits to register a property to be mulate investment and provide entrepreneurs access to the rent. The speed is important: a recent study in the United enforced. The correct implementation of these recommen- formal credit markets9. However, and enormous fraction of Increase the coverage. The private credit bureau has States shows that, in a 22 month project, speeding up the dations will reduce the time to transfer a property in the the properties in developing countries are not formally re- data of 2.2 million individuals from an adult popula- concession of permits in three months increases the pro- Dominican Republic. gistered. Informal title deeds cannot be used as collateral to tion of 6.5 million, and a total population of 9.7 million perty tax collection by 16.15%; and the expense in cons- obtain loans, limiting opportunities of financing for busi- for a relatively low coverage of 35%. The bureau should truction from local governments by 5.7%.8 For the long-term nesses. Many governments have acknowledged the problem keep on incorporating additional information providers and have started intensive programs for the regularization to increase that coverage. These measures should be sus- 3. Registering Property Create a database and on-line system to allow customers of title deeds. All in all, attracting real state to the formal tained and also guarantee the incorporation of more re- to search property titles and encumbrances electroni- sector is just a part of the structure. The more complicated tail companies, public service providers, micro-financing This indicator measures the procedures, time and cost cally. According to the authorities, the registry of Santo and expensive the formal transfer of a property becomes, the institutions or credit card providers that can provide in- of transferring a property from a domestic company to Domingo has completed the digitalization of property more possible it will be for formalized title deeds to return formation, allowing more people and medium sized busi- another in Santo Domingo. The Dominican Republic titles. An online database with all relevant information to informality. nesses to build their credit history and have easier access has introduced positive reforms in this field. In 2007, due on property ownership and encumbrances should now be to credit in the future. As far as the legal rights index, the to the coming in force of Law 108-5 for modernization of implemented to facilitate searches and verification of non- 4. Getting credit legal provisions that encourage loan and credit are due the Registry, the time to register a property was reduced encumbrances9. for a greater reinforcement on the part of borrowers and from 107 to 60 days. This reform has also facilitated the The Dominican Republic is among the first third of coun- lenders. automation of the Registry. In 2008, due to Law 173-07 Make notarization of the sale-purchase contract optio- tries in this indicator that measures the strength of legal “Ley de Eficiencia Recaudatoria�, the transfer tax was re- nal. The parties to a property transaction must present rights of borrowers and lenders, and the availability of cre- For the long-term duced to 3%. Currently, 7 procedures, 60 days and a cost the sale-purchase contract to a notary public for notari- dit information. This indicator has two main components: of 3.7% of the property value are necessary to transfer real zation, according to the law. The parties then submit the the first one is availability, depth and quality of the credit Making changes in such provisions would require legislative state. The Registry modernization program has entered its contract for registration at the registry. Dominican Repu- information, aspects evaluated by the depth of credit infor- reforms. Some changes that would improve the rights of bo- second phase that, along with concluding the digitizing blic is one of only 40 countries (out of 181) which requi- mation index, the public registry coverage (or private bureau rrowers and lenders, within the broad context of the law for process of all the title deeds, has the objective of creating re this double verification — one by a legal professional, coverage) and the protection of the legal rights of borrowers guaranteed transactions would be the following: a database that will simplify the Registry queries. The and another by land registry officials. Other countries and lenders; while the second component is the easiness to following reforms may improve the property registration successfully made notary involvement optional for com- use movable property as collateral in accordance to collateral Eliminate restrictions on the types of assets eligible to process. panies wishing to transfer property; parties only need to and bankruptcy laws, realms gathered in the strength of legal be used as collateral. Currently, there is no legal me- sign the agreement in person at the registry. Some larger rights index (ranked 68th in the world, 16th in the region, chanism that would allow a business to grant a non-pos- La Facilitación de Negocios / c a p í t u lo I I La Facilitación de Negocios / c a p í t u lo I I a. Suggestions companies may still resort to professional consultation, primarily due to a low strength of legal rights index (3 of 10)). sessory security right in all, or substantially all, of the but that would be by their own choice. Such reform would As far as credit information, the Dominican Republic shows assets and future and after-acquired assets of the busi- For the medium-term eliminate one step, 1 day and a cost of about 1,000 USD very good results, with a depth of credit information index ness. These restrictions make it more difficult to give a from the property registration process. of 6 out of 6. range of assets as collateral. China released an estimated Shorten time to register a property at the Registry. It takes US$2 trillion in “dead capital� by expanding the range approximately 30 days to register a property at the Registry Complete electronic property mapping and update the ca- The country has a public credit registry and numerous of permissible collateral—assets that could not be used in Santo Domingo. Several measures could be taken to ex- dastre. Currently, a reform is ongoing to electronically map private credit bureaus. The credit bureau law, no. 288-05, previously because of such restrictions. pedite the process based on an analysis of the internal pro- all properties on the island. With an updated cadastre and which regulates the Credit Information and Information cesses at the registry. For example, currently, the registrar of property registry, the cadastre will not need to send surveyors Holder Protection Companies, came into force in 2005. The Allow general description of collateral and debt in colla- Santo Domingo has to sign several hundreds of documents each time that a transfer of property takes place and the tax private bureau distributes historical credit information on in- teral agreements. Currently, parties to a collateral agree- per day manually (including title transfers, non encumbran- administration will not need to inspect the land in order to dividuals and businesses. The information it provides inclu- ment need to provide a full detailed description of the ce certificates or modifications). Other registries on the evaluate the property. This will also allow the tax administra- des positive information (for example, loan installments and assets used as collateral both in the agreement and at the island already have experience in expediting the process tion to calculate the taxes in a much more efficient manner. punctuality of payments) as well as negative information (de- registry. The reviewed law should allow more flexibility by allowing the use of electronic signatures. The necessary lays in payments and non-payments). Also, the credit bureaus regarding these types of agreements and in the registra- gather information not only from financial institutions, but tion process. For example, parties to a security agreement 8 PricewaterhouseCoopers. 2005. “The Economic Impact of Accelerating Permit Processes on Local Development and Government Revenues�. Brief prepa- also from services, like mobile phone companies and retail granting a security interest in the debtor’s inventory could red for the American Institute of Architects, Washington, DC. sales, which allows for a broad spectrum of information. The be allowed to describe the collateral using the term: “all 40 9 Miceli, Thomas, y Joseph Kieyah. 2003. “The Economics of Land Title Reform�. Journal of Comparative Economics 31 (2): 246–56. public register coverage is 33.9% of the adult population, inventories�. The reviewed legislation should allow gene- 41 ral descriptions of debt and obligations, for example, such has used the assets as collateral in Santiago unless he/ and 8 in the ease of shareholder suits index. the authorization of the transaction by the board of direc- parties can use a particular asset to secure “all debts and she travels to the registry in Santiago and conducts a tors. The auditor’s report should evaluate the main terms obligations� between them. search there. With a registry that is linked and electro- To increase minority investor protections, the Domini- of the transaction and present an opinion on whether the nic, the creditor in Santo Domingo will be able to search can Republic could amend the Commercial Companies transaction is being concluded at market terms. To increa- Give secured creditors priority in receiving proceeds the registry in Santiago and find out whether there are Law, as well as Law 19-00 on Stock Markets. In order to se disclosure, such review should be mandatory. from their collateral. Secured creditors should have prio- security interests registered over the assets of the busi- improve the protection of Dominican Republic investors, rity when the debtor is the subject of a collective procedu- ness. Many countries have undertaken these kinds of the following reforms are relevant. Allow the courts to void abusive related-party transac- re or bankruptcy. Currently, in the Dominican Republic reforms, including France, India and Micronesia. tions. The law does not allow the rescission of related-party fiscal administration and labor claims have priority over a. Suggestions transactions. In case that a related-party transaction was secured creditors in case of bankruptcy. b. Benefits and experiences of other harmful to the company (meaning, without limiting to countries For the short-term fraud or bad faith cases), the law should offer the possibility If the secured creditors could foresee their relative of voiding the transaction to help undo the harm caused to priority to other creditors (including State Institu- Both the protection for the lender through the legal sys- State clearly in the law the directors’ duties to act ap- the company. tions) with certain reliability, they would make the tem and for the credit registers are associated to greater propriately when operating the company. Currently, the credits available with more ease and a lesser cost. The credit percentages to the private sector over the GDP. Commercial Companies Law does not contain any pro- For the long-term priority of the secured creditors should not be extended For example, an increase of 1 point in the creditor rights visions regarding the duties of the companies’ directors. to the judicial costs, the attorney fees or the liquidation index is associated to a growth of 6.5% of the annual rate The law should require that directors exercise appropria- Require categories of documents from the defendant, expenses. Also, claims from buyers that had acquired of average growth of the private credit to GDP ratio du- te diligence and make decisions that are informed when without identifying specific ones. Currently, the Civil secured assets in good faith (bona fide buyers) and claims ring the three years after the reform, in comparison to running the company. They should also avoid conflicts of Procedure Code requires specific identification of the evi- for loans granted to the company to acquire the owner- the three previous years10. The studies show that imple- interest, and should always put the interest of the corpo- dence during the trial (i.e. identify date, title, file number ship of the secured asset (like the real rights of guaran- menting a credit registry produces a rise of 4.2 percentage ration before those of the individual directors or others. of the document, etc). For an easier access to corporate tee of payment of the sales price) should have a priority points in the use of credit by the businesses11. This is In case of prejudicial related-party transactions, directors documentation during the trial, the civil procedure rules over the secured creditor. partly due to the fact that the creation of credits drives the should pay the damages caused to the company and dis- could allow parties to request categories of documents increase of the repayment rate: the borrowers are more gorge the profit made in violation of their duties to the without identifying specific ones. Allow the parties to agree on the methods for enforce- reluctant to leave debts unpaid because that may hinder corporation. ment of the collateral agreement. Giving such flexibi- them from getting new credits in the future. In developing b. Benefits and experiences of other lity paves the way for out-of-court enforcement of debts. economies the repayment rate can be increased up to 80% Increase immediate disclosure requirements of large countries When creditors know that they will not have to bear the when a credit registry becomes operational. Small busi- related-party transactions to the public and market regu- cost and delays related to court procedures in case of de- nesses are the ones that obtain greater benefits: in tran- lators. The securities law does not require immediate dis- Strong minority shareholder protections are associated to fault, they may be more likely to lend. France adopted sitional economies that established new credit registries, closure of large related-party transactions. Therefore, the re- larger and more active stock markets. Companies grow by a similar reform in 2006. India, Peru and Serbia have their credit access grew twice as fast with respect to large viewed law should require detailed disclosure of the nature raising capital, either through a bank loan or by attracting also recently made out-of-court enforcement of collateral businesses12. and the extent of the conflict of interest, the key terms and equity investors. Selling shares allows companies to expand La Facilitación de Negocios / c a p í t u lo I I La Facilitación de Negocios / c a p í t u lo I I agreements possible. conditions of the transaction and all the relevant informa- without the need to provide collateral and repay bank loans. 5. Protecting investors tion regarding the transaction. This information can idea- However, investors worry about their money, and look for Establish a unified movable collateral registry. Cu- lly be posted on the website of the company (if one exists) laws that protect them. A recent study finds that the presen- rrently, the president of the first instance tribunal acts as In late 2008, the National Congress of the Dominican and also on the website of the Dominican Republic Stock ce of legal and regulatory protections for investors explains registrar. The registry is neither linked across the coun- Republic adopted the new Commercial Companies Law. Exchange13. It is also important that the code or the draft up to 73% of the decision to invest. In contrast, company try nor electronic. As a result, should a business use its Thanks to this reform, the Dominican Republic obtained a law require recording the same information in the annual characteristics explain only between 4% and 22% of those movable assets as collateral in Santiago and should the score of 5.7 in the strength of minority investor protection report of companies. decisions14. Thus both governments and businesses have in- security interest over these assets be registered in Santia- index, ranking 57th in the world in this indicator. Doing Bu- terest in reforms strengthening investor protection. Without go, since the registries are not linked across the country, siness measures the strength of minority shareholder protec- Require an external auditor’s report before the approval this safeguard for investors, the stock markets would not de- the same business will be able to use the same movable tion against director’s misuse of corporate assets for personal of transactions between interested parties. The Commer- velop and banks become the only source of financing. Subse- assets as collateral in Santo Domingo and have the secu- benefit. In a range from 0 to 10, the score obtained by the cial Companies Law does not require the review of the quently, businesses cannot reach an efficient volume for lack rity interest over those assets registered there. The credi- Dominican Republic in this indicator was 5 in the extent of terms of a related-party transaction by an auditor before of financing, and the economic growth weakens. A study in tor in Santo Domingo will not know that the business disclosure index, 4 in the extent of director liability index 13 The modification of the securities law will have an impact on the protecting investors indicator only if the stock exchange were to have more than 10 Djankov, Simeon, Caralee McLiesh y Andrei Shleifer. 2007. “Private Credit in 129 Countries�. Journal of Financial Economics 84 (2): 299–329. 10 listed companies. Currently, there are no listed companies in the Dominican Republic’s Stock Exchange. 11 Brown, Martin, Tullio Jappelli y Marco Pagano. 2008. “Information Sharing and Credit: Firm-Level Evidence from Transition Countries�. Documento 14 Doidge, Craig, Andrew Karolyi y René M. Stulz. 2007. “Why Do Countries Matter So Much for Corporate Governance?�. Journal of Financial Económico de Trabajo 201, Instituto Europeo de Gobernanza Corporativa, Bruselas. Economics 86 (1): 1–39.. 12 Brown, Martin, y Christian Zehnder. 2007. “Credit Registries, Relationship Banking, and Loan Repayment�. Journal of Money, Credit and Banking 39 15 Dahya, Jay, Orlin Dimitrov y John McConnell. 2008. “Dominant Shareholders, Corporate Boards, and Corporate Value: A Cross- Country Analysis�. 42 (8): 1883–918. Journal of Financial Economics 87 (1): 73–100. 43 22 economies of emerging markets found that when inves- 7. Trading across borders (DGA), security agents, port authorities in Santo Do- de with the United States (under the African Law and tors have little resources against activities that are harmful to mingo and Caucedo, sanitary, technical control and Opportunity Act) and the European Union (according the company, they invest in the few companies in which they The trading across borders index measures the necessary bank authorities in a common electronic platform. Gi- to the Cotonou Agreement) are being significantly was- can have majority shares15. time, cost and documents to import and export a stan- ven that most of these institutions need similar informa- ted19. Delays and excessively expensive import procedu- dardized cargo by ocean transport. On average, nine days tion on the goods that they wish to pass through customs res also harm economies in general. Many exports are 6. Paying taxes are necessary for exporting and ten days to import, with an as a requirement prior to clearance, creating a platform part of the global supply chains. To participate in these associated cost of US$916.00 to export and US$1150.00 to to improve information transmission between these insti- chains, manufacturers depend on punctual supply of im- a. Suggestions import. Currently, six documents are required to export, tutions would be a great help in facilitating the customs port products. For example, imported materials make up On average, in the Dominican Republic, 9 payments and seven to import. The Dominican Republic reformed declaration. Singapore, through its TradeNet system, pro- one third of China’s export value in electronic products. and 324 hours are needed annually to comply with tax this area by introducing the Single Customs Declaration cesses between 20 and 30,000 customs declarations daily Likewise, they represent up to 55% of Ireland’s and 65% regulations. Doing Business records the taxes and manda- Form. The online submitting of documents and online and connects 35 government control units. of Thailand’s export value20. tory contributions that a medium-size company must pay payments are fully introduced. However, there are aspects or withhold in a given year, as well as measures of the within this area where reforming efforts can continue. Implement risk based inspections. Customs is at its early sta- 8. Enforcing contracts administrative burden in paying taxes and contributions. ges of implementing risk based inspections, and this process The total tax rate is 35.7% of the commercial profit. This a. Suggestions should be accelerated. Clearance for imports and exports cu- In Doing Business 2010, the Dominican Republic was ranks the Dominican Republic 72nd on the Doing Busi- rrently takes 2 days on average. Inspections should be limited ranked 86th in efficiency of enforcing contracts. 460 ness in the paying taxes index. For the long-term to only the most risky cargo. And customs should aim to days are necessary from the moment the plaintiff files a have a 5 to 10 % inspection rate as is the case in Denmark. lawsuit until the debtor makes the payment, and the cost It is suggested that the authorities continue implemen- Reduce the number of necessary documents for cross-bor- This will allow the majority of harmless cargo to be cleared rises to 40.9% of the claim’s value. Even though the courts ting the new legislation and also continue public infor- der trade. For cross-border trade six documents are needed more speedily. are relatively fast (460 days) in solving cases compared to mation campaigns to increase the use of online filing and to export and seven to import goods. Reducing the number the average in the Latin American and Caribbean regions payment of taxes. Reforms referring to the paying taxes of necessary documents to complete customs declaration Proceed to integrate the prior actions to those suggested (710 days), they still present a delay of 300 days in respect indicator have been adopted. An online system for inco- transactions will contribute in speeding up international for border and port matters in the respective Policies Note. to the indicator’s ten most efficient countries. It is also me tax declaration and tax payment, which started as a goods traffic. In France, only two documents are necessary very expensive to solve commercial disputes through the pilot project in 2006, is now fully operational. Also, the for declaring goods in customs. The creation of the Single b. Benefits and experiences of other courts: costs 40.9% of the claimed amount in attorney and corporate income tax rate was reduced from 29% to 25%. Customs Declaration Form (DUA) has already expedited countries court fees. This is higher than the regional average of 31% In this report, no other reforms are suggested on the tax the documents preparation time. The efforts to improve the and the top ten average of 11.7%. Dominican Republic system because the law is in implementation phase. electronic data interface system and enable the admission of A recent study of 126 economies has calculated that has great potential to make the process of contract enforce- all customs documents would contribute in facilitating the each day of delay on the exports is equivalent to a 1% ment swifter and less burdensome. b. Benefits and experiences of other customs declaration process in international trade. of the cost. For perishable agricultural products the cost countries is nearly 3% of the volume of trade for each day’s de- a. Suggestions Create a “single virtual window� for cross-border tra- lay17. Some non-agricultural products can also be affec- La Facilitación de Negocios / c a p í t u lo I I La Facilitación de Negocios / c a p í t u lo I I Businesses prefer reduced tax rates that are applied in a de. The current system allows electronic submission of ted by delays, like fashion clothing and electronic items. For the short-term clear and direct manner; or, if the rates are elevated, then the DUA between the traders and customs services. The Another study shows that for each new authorization have good public services. In countries where taxes are online portal can automatically detect if the form is in- that a company needs to obtain, international trade expe- Evaluate map processes at the courts and track case high and on the other hand, profits are limited, many bu- complete and notifies the traders instantly, speeding up riences a reduction of 4.2%. load to identify points of delay and formulate solu- sinesses choose to operate informally. A recent study finds the customs process. Another improvement has been to tions. Frequently, the source of bottlenecks is not found that elevated tax rates are associated to a smaller private allow payments to be made through the online system. Economies that shorten delays can be integrated more in the courtrooms, in the clerk’s office. A mapping exer- investing, to a lower number of formal businesses per capita This channel was approved by the General Directorate of rapidly into global trade. For differentiated products the cise could be useful to pinpoint specific causes of delay. and to inferior business opening rates. For example, the Government Accounting with No. 003-07, increasing effi- reduction is close to 5%18. Elevated costs in cross-border When mapping, a team follows the steps necessary to study suggests that a 10% increase in the effective tax rate ciency in customs. trade restrict the participation of many countries in the take a commercial case through the courts and records for corporate tax reduces the private investment/GDP ratio global market, especially Africa. A study has found that the time associated with each step. This type of study is by two percentage points.16 The electronic data exchange can also be improved in established preferences in a duty-free treatment for tra- used to identify the points of the process where obstacles the future connecting public institutions like customs 17 Djankov, Simeon, Caroline Freund y Cong Pham. Próxima edición. “Trading on Time�. Review of Economics and Statistics. 18 Sadikov, Azim. 2007. “Border and Behindthe- Border Trade Barriers and Country Exports�. Documento de trabajo 7/292 del FMI, Fondo Monetario Internacional, Washington, DC. 19 Bureau, Jean-Christophe, Raja Chakir y Jacques Gallezot. 2007. “The Utilization of EU and US Trade Preferences for Developing Countries in the Agri-Food Sector�. Documento de trabajo, Trinity College, Dublín. 16 Djankov, Simeon, Tim Ganser, Caralee McLiesh, Rita Ramalho y Andrei Shleifer. 2008. The Effect of Corporate Taxes on Investment and 20 Nordas, Hildegunn, Enrico Pinali and Massimo Geloso-Grosso. 2006. “Logistics and Time as a Trade Barrier�. OECD Trade Policy Wor- Entrepreneurship. Documento de trabajo 13756 de la NBER. Cambridge, MA: Oficina Nacional de Investigación Económica (NBER). king Paper No. 35, Organization for Economic Co-operation and Economic Development (OECD), Paris. 44 45 to commercial cases are produced, and think of strate- time to implement. of a bankruptcy process related to domestic businesses. In a. Long-term improvement suggestions gies to eliminate them. At the request of the Govern- this indicator, the Dominican Republic is ranked 146th ment, it would be possible to do a study of the judicial Establish a specialized commercial court/division. Stan- out of 183 analyzed economies. The most common proce- Improve the efficiency of the judicial system by shor- process in the Dominican Republic. dard commercial disputes are usually handled by the Cá- dure for the Closing a Business standardized case study is tening the time to complete insolvency procedures. mara Civil y Comercial del Juzgado de Primera Instancia del foreclosure. The process takes longer than in the OECD In the section on “Enforcing Contracts� and in Prin- Introduce simplified rules for small claims. Currently, Distrito Nacional. However, this Court/Chamber also deals region (1.3 years) and the amount on the dollar recovered ciple A5 of the Principles for Effective Insolvency and the “Juzgado de Paz� has jurisdiction over small claims with other civil disputes, there being no specialized judi- by the creditors is lower than in the OECD (74.1 cents). Creditor Rights Systems24 recommendations are found and provides for simplified procedures. However, the cial staff and track for commercial disputes. A specialized Creditors need to get their money back and it is better if on how to improve the efficiency of the courts. The threshold of the monetary value of the claim in order to commercial division demands an adequate number of jud- the process is swift and inexpensive. benefits of an efficient regulation of the insolvency pro- present a case before the “Juzgado de Paz� is very low. The ges specifically trained and dealing only with commercial cesses are particularly expressed while observing the ri- threshold can be increased to claims of a monetary value matters, adequate auxiliary staff and adjusted rules so that Since “Ley de Reestructuración Mercantil� is under discus- chest economies. A series of recent studies in Europe representing 200% of the GNI per capita (approximately commercial matters are disposed of swiftly. Instituting a sion at the Parliament, we recommend the insolvency argue that the effective return rates for creditors rise to USD 6,000.00). Introducing a “fast track� for cases with specialized commercial court or chamber would allow legislation be amended to allow the efficient liquidation 92% of the loan amount in the UK, 80% in Holland, low financial value or uncontested cases would enhance judges from those courts to acquire more knowledge on of non-viable businesses and the recovery of viable ones 67% in Germany and 56% in France25. An effectively the efficiency of the Dominican courts. First, it would specific commercial issues, thereby increasing the quality for the maximization of the value for creditors. Also, re- functional reorganization or bankruptcy process facili- decongest the normal track, speeding up the time to en- and the quantity of their output. As a result, the time to forms similar to the ones related to the contract enforce- tates credit access. In those economies where the insol- force both smaller and greater claims. Second, it would dispose of simple commercial cases could be reduced. ment process could also address the current bottlenecks vency laws are more effective, the creditors trust that provide simpler rules for small claims such as a standard of the bankruptcy process in the Dominican Republic, they can recover their credits and are more prone to form for the complaint and simpler evidence rules. Also, since insolvency cases are seen by the same court - Juzga- granting loans26. this could lower the average attorney fees. do Civil y Comercial de Primera Instancia. b. Benefits and experiences of other countries For the medium term Inefficient courts can carry considerable costs. A Develop performance measurements for judges. The recent study in Eastern Europe finds that inefficient case management system could be used to collect and courts produce a smaller bank financing for corporate process data on judges’ individual performance. This investments. Reforms in other areas like creditor rights would allow better distribution of the caseload and in- only contribute to an increase in bank loans if they creased productivity. A performance management sys- can guarantee the existence of efficient procedures to tem could help to identify and reduce bottlenecks within enforce contracts before the courts21. A second study the court system. Dominican Republic has started wor- in 41 developing countries establishes that an impro- king on the development of the system. We encourage vement of 10% in the efficiency to solve commercial La Facilitación de Negocios / c a p í t u lo I I La Facilitación de Negocios / c a p í t u lo I I the government to pursue this reform effort. disputes reduces the informal sector’s participation in 2.3% of the overall economic activity22. The courts ease For the long term the business climate if they are efficient, accessible and fair. In the world, only 35% of the businesses analyzed Establish e-court systems. Technology is used by a num- by the World Bank Business Surveys believe that their ber of top performing courts (examples include Hong countries’ courts are fair, unbiased and transparent23. Kong, Austria and Singapore). Computerized systems sim- plify, amongst other things: procedural steps such as filing 9. Closing a business of complaints by allowing for e-filing, case management by for example allowing on-line access to files, communi- This process requires 3.5 years, costs 38% of the estate cation channels between parties, attorneys and the court. property and debtors recover 8.9 cents for each dollar, 24 A functional credit system should be supported by mechanisms and procedures that provide efficient, transparent, and reliable This reform does demand appropriate investment in equi- all this through bankruptcy or insolvency procedures. methods of satisfying creditors’ rights by means of court proceedings or non-judicial dispute resolution procedures. To the extent possible, a country’s legal system should provide executive or abbreviated procedures for debt collection. Enforcement systems should pment as well as training of staff and consequently takes The indicator measures the time, cost and recovery rate provide efficient, cost-effective, transparent, and reliable methods (both non-judicial and judicial) for enforcing a security interest over assets. Enforcement proceedings should provide for prompt realization of the rights obtained in secured assets, designed to enable maximum recovery according to market-based asset values. 21 Safavian, Mehnaz, y Siddharth Sharma. 2007. “When Do Creditor Rights Work?�.Journal of Comparative Economics 35 (3): 484–508. 25 Davydenko, Sergei, y Julian Franks. 2008. “Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany and the UK�. Journal of Finance 63 22 Dabla-Norris, Era, Mark Gradstein y Gabriela Inchauste. 2008. “What Causes Firms to Hide Output? The Determinants of Informality�. Journal of (2): 565–608.. Development Economics 85 (1): 1–27. 26 Djankov, Simeon, Oliver Hart, Caralee McLiesh y Andrei Shleifer. 2006. Debt Enforcement around the World. 23 Enterprise Surveys, World Bank Group (http://www.enterprisesurveys.org). 46 Document 12807 de la NBER. Cambridge, MA: National Bureau of Economic Research (NBER). 47 3. Conclusions A fundamental element for success in this task is to how to attack difficulties and improve them. These tasks have a centralized coordination with the support from need the systematic support on behalf of all the service different institutions involved in the different proces- providing institutions. The challenge when looking at the ses (National Competitiveness Council and Center for future of trade and caring for its investment environment Export and Investment of the Dominican Republic). consists on doing a follow-up and a systematic assessment As it can be seen in this document, there are multi- of these identified processes, introducing the necessary ple considerations that a country must take into con- measures to comply with international best practices. sideration in order to facilitate the flow of investment. This multiplicity of problems increases the complexity of La Facilitación de Negocios / c a p í t u lo I I La Facilitación de Negocios / c a p í t u lo I I 48 49 Chapter III Logistics for Competitiveness José Luis Guasch(a) 1. INTRODUCtion O n a large scale, economic growth, the poverty reduc- tion and employment in the Dominican Republic for the countries that can be inserted into regional and global supply1. In this document, logistics is defined as “… La Logística para la Competitividad / capítulo III depend on the development and performance of its ex- part of the supply chain process that plans, implements and con- port sectors and services, such as tourism. At the same trols efficiency and the effective flow and storage of goods, servi- time, the performance of these sectors is influenced by qua- ces and information from their point of origin until consumption, lity and nature of capacities and logistics facilities in the in a way that satisfies clients’ requirements�2. country. In this Policy Note, the relevance and attributes of the theme are analyzed taking into account the comparati- The country is currently facing important challenges re- ve advantages derived from the geographic location of the garding the sustainability of its exportation model. Out Dominican Republic in the center of a transactions market of the total number of resources obtained from external with enormous potential, suggesting a framework and effec- transactions, 70% come from Free Trade Zones3, 20% tive performance that reproduces and adapts best practices. from tourism and 10% from other goods, with major risks for exports from free trade areas. There are a series Logistics is a central factor to determine economic com- of problems that generate loss of productivity, high costs petitiveness. Its importance is growing given that the glo- and excessive inventories, goods that do not arrive to the balization of commerce has opened up new opportunities market and little integration of PYMES in the value and (a) Senior Regional Advisor in Regulation and Competitiveness in Latin America and the Caribbean 1 Studies recently carried out by the World Bank conclude that “empirical analysis suggests that means assigned to improving logistical performance and to improve logistical performance and to facilitate commerce are probably those who have a greater positive effect on the expansion of commerce in developing countries, increasing the impact of the reduction of the remaining barriers to commerce by a factor of two or more.� 2 Adopted by Simchi-Levi et al., 2008 3 Free Trade Zones are exempt from Income Tax from 1.5% of gross income and 30% of net utilities and 16% of value added tax. 4 51 export chain. These problems also create an obstacle for ribbean Basin Initiative (CBI) have the same effect. Graph 1: Relationship between Logistics Performance and GDP per capita in Latin the development of new projects. Logistics is in the government’s agenda and it is taking America measures to improve performance, some examples are: There were many ups and downs in the incentives sche- the Customs Initiative (electronic processes and risk pro- 3.4 me; the elimination of subsidies in Free Trade Zones alters files) and Law No. 392-07 on Competitiveness and In- Chile incentives that have been established and creates greater dustrial Innovation from April 2007, Title III, Chapter I 3.2 uncertainty and insecurity. At the same time, within the (from Commercial Facilitation and Logistics). It is howe- framework of DR-CAFTA relations, the fading of the Multi- ver a great challenge to achieve improved practices that are Fiber Arrangement – MFA and the disappearance of the Ca- anywhere close to international standards. 3 Argentina Panamá México 2. Diagnosis 2.8 Perú Basil Logistics perception score El Salvador Ecuador Venezuela 2.6 Paraguay Costa Rica 2.1 Logistics Performance opinions of international freight operators on seven key Guatemala Colombia Uruguay aspects (sub-indexes) that are combined in one indicator Honduras (Table 1). In accordance with the sub-indexes, the most 2.4 2.1.1 Logistics Performance Indicators Dominican Republic serious problems are linked to the organization of servi- Haití Bolivia The diverse indicators used to measure logistics per- ces. The position of the Dominican Republic is far below Nicaragua Jamaica 2.2 formance show results that are way below the inter- than other countries in Central and South America and national average. The Logistics Perception Index (LPI) according to income per capita the regression of the Index Guyana places the Dominican Republic in the 96th place out indicates that its performance should be considerably hig- 2 of 150 countries. This index is estimated based on the her (a score 15% higher, inferior to that of Colombia’s). 0 2000 4000 6000 8000 10000 12000 14000 GDP per capitaita (PPP) Source: World Bank 2008 Table 1: Logistics Perception Index and its sub-indexes La Logística para la Competitividad / capítulo III La Logística para la Competitividad / capítulo III Another indicator, the Global Enabling Trade Report Business Report calculated in 2008 for 181 countries, Countries Ranking -lpi Customs Infraestructure Ease Logistics Ease Internal logistics Timelines of Dispatch Services of follow-up costs (Table 2), with dimensions referred to transport ser- places the DR 94th in the index known as “Foreign vices and commercial provision, places the Domini- Business� made up of relevant indicators for exterior Argentina 45 51 47 49 44 46 93 46 Panamá 54 48 48 58 61 49 26 49 can Republic 63rd out of 118 countries. The Doing business logistics 4. México 56 60 53 53 57 48 101 51 El Salvador 66 75 68 61 78 61 74 73 Costa Rica 72 64 67 82 89 78 48 90 Honduras 80 65 79 93 91 91 86 93 Guatemala 75 87 104 73 79 90 65 64 Dominican Rep. 96 82 97 107 108 107 54 91 Source: Connecting to Compete – The World Bank. 4 The Global Enabling Trade Report, from the World Economic Forum (WEF), took into account 10 pillars that allowed for four sub-indexes to be created. This was finally summed up in one indicator known as the Enabling Trade Index 2008 (ETI 08). The base information combines interview (perception) and some available data. The sub-indexes that show major weaknesses are the transport services (109), transport infrastructure (73) and customs transparency and efficiency (78). Doing Business, carried out by the World Bank Group, is based on periodic surveys to companies 52 with the objective of analyzing regulations and investment climate. 53 Table 2: Global Enabling Trade Report GRAPH 2: Time (Cost) Average Dispatch of Containers (Sample size in brackets) Country ETI-08 Customs Efficiency Efficiency Customs Transparency Transport Transport Infrastructure Services CHILE 27 17 30 18 45 38 Dom. Rep COSTA RICA 44 65 53 42 68 88 PANAM� 46 41 20 67 26 57 GUATEMALA 54 19 81 63 84 84 Southeast Asia EL SALVADOR 55 72 64 49 94 68 DOMINICAN REP. 63 50 47 78 73 109 HONDURAS 64 77 77 74 70 105 Africa (5) MEXICO 65 63 76 57 87 55 NICARAGUA 67 85 65 73 96 107 LAC (4) NOTe: The World Economic Forum considered ten pillars that allowed four sub-indexes to be elaborated which were finally resumed in one indicator, the Enabling Trade Index 2008 (ETI 08). This covered 118 countries. The base information combines interviews (perception) and some available data. East Asia (9) The Liner Shipping Connectivity Index (LSCI) (Table 3) is another shows that the Dominican Republic was in 47th place in 2007 OECD (7) of the international measuring indicators that reflects the out of 163 countries, having improved slightly in relation to its amount and dimension of shipping lines that access a country, position in 2004.5. 0 2 4 6 8 10 12 14 Days Table 3: Shipping Route Connectivity Index (LCSI) Source: International Exhibitions Logistics Associates website, World Bank (2004). Investment Climate Survey 2005. Country Position 2004 Position 2007 Finally, the World Bank Doing Business facilitation indicators in the Dominican Republic are fairly worrying (see Brasil 28 24 Table 4). México 30 25 Panamá 22 27 La Logística para la Competitividad / capítulo III La Logística para la Competitividad / capítulo III Colombia 39 30 TablE 4: Business Facilitation Indicators Jamaica 33 37 Dominican Republic 59 47 Total Ranking 32 Guatemala 60 59 Documents to export 6 Costa Rica 57 60 Time to export 9 days Honduras 80 84 Cost to export US$916 El Salvador 101 91 Documents to import 7 Source: UNCTAD. It is important to consider the amount of ships, container freight capacity, the amount of shipping companies, the number of shipping routes and the dimension Time to import 10 días of the largest tanker that reaches the country’s ports. Cost of importing US$1150 Source: Doing Business 2009. In terms of time management indicators (Graph 2), the the average time for container dispatch is 13 days, while the Dominican Republic also shows evidence of a backlog: average in Latin America is 9 days and 5 in Eastern Asia. 2.1.2 Impact of Logistics Costs the investment recuperation period, for example, a cutback in shipping by one day is equivalent to 0.8 of the value of Logistics costs are equivalent to duties that have an im- the valorem tariff (Hummels, 2001), or to 1% of business pact on final prices. On average, the cost of transport is or a reduction in distance of 70km (Djankov, Freund and greater than 31.8% of the logistics costs, while the admi- Pham, 2006). It is estimated that by eliminating the mar- nistrative costs of logistics operation and the cost of storage ket power of shipping, commerce could increase between 5 5 The Liner Shipping Connectivity Index was carried out by the United Nations Conference on Trade and Development (UNCTAD), and its value comes from considering the amount of ship liners that arrive at the port of a country, their container freight capacity, the amount of shipping are next in importance. Timing has also consequences on and 15% (Hummels, Lugovskyy and Skiba, 2009). 54 companies, the number of shipping routes and the dimension of larger vessels so that they can access the country’s ports. 55 GrAPH 3: Average Structure of Logistical Costs nstitutional Reforms The Port Component Administrative Storage 19.0% Costs • The creation of a Commercial and Logistics Assistance • Implementation of the “Single Window� initiative. Legend 20.5% Board: this would involve an environment that demands • Paperwork leadership and encourages and monitors the agenda. Its • Reform/strengthen the Dominican Port Authority - - Customs, phytosanitaries apply, among others Inventories Paperwork tasks could be: a) the elaboration of a National Master APORDOM. • Administrative Costs (Financial cost) 10.1% and Associated Logistics Plan, b) the development of a - Overhead of the logistical area 18.7% - Insurance logistics costs observatory with monitoring of the com- • Improve port safety and surrounding areas. - Safety Transport Transport mercial sector’s most important value chains, c) active roads and/or rails Port facilities • Storage 14.0% 17.8% participation in decisions to do with ports, due to its • Reduce/eliminate dependence on port beaches. - Used storage costs - Cost of reductions, deteriorations and/or losses generated for impact on the entire logistics chain, d) monitoring to warehouses used check that benefits of the measures are transmitted to • Develop an effective information system based on the Transport cost = 31.8% • Inventories every level of the value chain and that they contribute to Port Community. - Financial cost improve competitiveness. • The modernization of customs processes, including the • Institutional Port Reform: this would consist in desig- introduction of an electronic data exchange system and ning and promoting an organizational port efficiency also the implementation of “risk-based inspections� or model that is competition-based in a way to reduce inspections based on profiles and reputation. International experience yields important learning. Singapore, Korea, Taiwan, Chile, South Africa, Slovenia, Latvia, Croa- costs for users. Port development should not be solely tia, Malaysia can all be pinpointed as cases of interest. Some recommendations demonstrate: the need to rely on a state poli- seen as a physical and financial planning problem but as • Redesign the structure and location of port processes cy to promote competitiveness, with a National Council that may either be for Competitiveness and/or Logistics, to develop a lever to modify the organization of the logistics services and movements. a strategic infrastructure plan, to select and analyze performance and bottlenecks in a series of chain value criteria for the market, promoting competitiveness at all levels. country, to modernize the port services model and to attract the private sector through concessions and/or Public-Private • Expand and improve port logistics services. Associations (Public Private Partnership – PPP), to separate functions from the Porting Authority for planning, regulation and • The new organization should overcome current frag- the operation of services, to create a supervisory body, to eliminate unnecessary procedures and paperwork, to cut proces- mentation and achieve economies of scale. Financial • Consider the use of dedicated lines for example for peris- sing times and introduce single windows; to introduce reforms to the transport carts; to elaborate multimodal laws and a solvency should be re-established in the Port Authority hable goods. framework for the performance of multimodal operators and to establish logistical and information platforms. by rationalization and by carrying out capital investments and infrastructure maintenance including port accesses • Improve port access and the offer of port services such as and a general restructuration. A reform could comprise the cold treatment and storage. La Logística para la Competitividad / capítulo III La Logística para la Competitividad / capítulo III the separation of regulatory function of port operations. This could clarify and establish clear jurisdictions and • Establish a logistics platform/terminal at the port. 3. Policy Alternatives incentives associated with port services (cold chain, sto- rage, inspections and certifications), equipment, conso- The Business Facilitation lidation, tracking, an information system and coordina- Component beyond the Port 3.1 Agenda to improve logistical and “charter� prices of fleets have had massive reductions tion with customs. between June and December 2008, reflecting immedia- • Improve activities needed for DR-CAFTA’s effectiveness, performance and competitiveness tely the world financial crisis. The transport container • The strengthening of public bodies and the improve- in particular customs procedures, certification and con- fleets have decreased by a quarter on main routes and ment of their coordination. There is no proportion trol of rules of origin, offer, use and certification of quality The new world economic scene will generate greater the charter of fleets carrying containers is estimated at between the importance of logistics problems and the standards and procurement policies. competition in foreign business, highlighting the need less than half and bulk fleets by a fifth. Fleets between assignation of resources for its management. This is par- for logistical performance. The economy in the Domi- China and North America and between China and Eu- ticularly evident in what is referred to performance in • Implement an effective duty drawback system for both ty- nican Republic is strongly linked to North America, Eu- rope have also decreased which has reduced the geogra- terms of port policy functions. pes of companies: those who make part of the Free Trade rope and East Asia, which is why is to expect that the phical/location advantage the Dominican Republic held Zones and those that do not. strong rates of growth in foreign business will be repla- in both markets. ced by stability or an eventual reduction in volumes. In light of this, an agenda is suggested to improve logis- With a reduction in maritime fleets, internal logistics tical performance incorporating the causes of the main will have greater relevance. This scenario will probably problems and pointing to modify structures of services bring out the sensitive issue regarding the importance to increase private participation in order to strengthen of logistical costs as a factor of competitiveness. Fleets public bodies and to improve business. 56 57 • Improve business facilitation costs by; a) reducing the per- terials, reducing logistics costs, adopting the model centage of inspected containers (there have already been implemented in Mexico, accompanied by a training 4. Conclusions improvements); b) improving port services, separating program. An evaluation for the introduction of a Lo- Port Authority regulatory functions from the operation of gistics Activities Zone (LAZ) is therefore proposed for As we have seen in this section, the challenges that the mercial facilitators and complementary aspects that act the port; c) strengthening customs procedures through in- the port area which attends to the overall impact not Dominican Republic is facing in terms of logistics are as support for matters involving ports and logistics in tegrated and automated information systems (there have only on general competitiveness but also for PYMES very important. Opportunities for success are present general. These are fundamental in order to establish an been advances in this area); and d) improving safety to exporters and the development of local market of lo- in this field. The Dominican Republic has been lucky efficient logistics system so that a business professional, meet norms and requirements demanded by the US. gistics operators. to be “floating� in the center of one of the world’s lar- both national and international, can be assured that gest markets, a distinct advantage within the ensemble his/her products will reach their final destination in • Eliminate discrepancies in administrative procedures and • Put urban logistics in order in the Metropolitan Area of tools needed in order to be competitive in this en- the time required, under the conditions required, with access to infrastructure between companies that are part of Santo Domingo. We propose that a heavy vehi- vironment. Nonetheless, the remaining tools must to the necessary level of quality and at a competitive cost. of Free Trade Zones and those that are not. cle circulation network be defined and that logistics be perfected such as port components as well as com- parks are created as a way of organizing heavy vehicle • Facilitate backward linkages via: a) the introduction of a circulation and to reduce travel times and improve low and uniform import tax based on the Most Favored pre-visibility. We also propose the analysis for the de- Nation (MFN) scheme and applicable to all companies velopment of a freight terminal at the airport that in the Dominican Republic without the minimum ex- could act as a concession. port requirement; b) gradually increase to corporative tax rate to Free Trade Companies and extend the Tax on the • Support the professionalization of highway freight Transfer of Industrialized Goods and Services (ITIBIS) to transport: we propose human resources training Free Trade companies to ensure homogenous treatment courses (drivers, auxiliaries, business professionals) in accordance with the World Trade Organization’s regu- and on fleet management. There are models that can lations (WTO). be adopted with the support of the business sector. Training to the business sector can be extensive as • Establish a profile risks database. part of the PYMES development program. • Establish a framework or logistics corridors. • Improve the efficiency and processes on the border with Haiti. • Develop an export services market, particularly in the area La Logística para la Competitividad / capítulo III La Logística para la Competitividad / capítulo III of commercial logistics, distribution and merchandise and • Facilitate coproduction in areas that have fallen behind packaging. economically on the border with Haiti. • Improve the cold chain offer. • Improve and approve the new draft of a concessions law and PPP and its regulation. The Complementary Component • Facilitate innovative productive activities to improve com- • Support for PYMES in organizing supply chains: petitiveness, to achieve niches in the market and stimulate support program for the reengineering of flow ma- investment in Investigation and Development (I&D). 58 59 Chapter IV Access to Financial Services: Financing for Micro, Small and Medium Enterprises (MSMEs) Marco Arena(a) with the collaboration of Denika Torres 1. INTRODUCtion M icro, Small and Medium Enterprises (MSMEs) support related to MSMEs. A comprehensive approach Acceso a Servicios Finacieros (MIPYMES) / capítulo IV have a significant impact on GDP and emplo- is used for this task, which takes into account the offer yment. They provide approximately 23% of the GDP and demand for financing to analyze and offer policy and employ over 36.2% of the economically active suggestions. population. Nonetheless, only one out of every ten MSMEs has access to formal financial services. There- The Note has four additional sections. The second fore, this Policy Note aims to identify restrictions that one, presents an analysis of the offer and demand for can arise from the offer (provision) of financing ser- financing services and the institutional framework of vices and the demand for such services, as well as the support for MSMEs. The third section presents policy institutional regulatory environment or framework of issues and the fourth discusses policy alternatives. (a) Financial Sector Economist. 61 Table 1: Structure of the Financial System - December 2008 2. Diagnosis Activos the region with one of the lowest levels of intermediation. Number Billions Billions % % 2.1 Offer of Financial Services The banking sector assets to GDP ratio is around 38%. The of institutions RD$ US$ GDP Total Shares 1 financial intermediation, measured by the private sector Institutions Under the Monetary and Financial Law 2.1.1. The Financial System credit to GDP ratio, is at around 21%, a level similar to Commercial Banks 12 486.7 13.9 30.3 78.6 that of Peru and Mexico, but one of the lowest in the region Local 10 447.7 12.8 27.9 72.3 The Dominican financial system is one of the smallest in (Graph 1). Public 1 138.0 3.9 8.5 22.3 Private 9 309.7 8.8 19.2 50.0 Foreign Property (wholesale) 2 39.0 1.1 2.4 6.3 Graph 1: Financial Intermediation (Credit to the Private Sector/GDP) Savings and Credit Associations 16 77.9 2.2 4.8 12.6 80 Savings and Credit Banks 26 18.1 0.5 1.1 2.9 Credit Corporations 15 1.9 0.1 0.1 0.3 73 Public Financial Intermediaries 70 (BNV, Banco Agrícola) 2 22.5 0.6 1.4 3.5 60 Institutions not Regulated by the Monetary and Financial Law 52 Savings and Credit Cooperatives (SCCs) 151/1 11.0 0.3 0.7 1.8 50 NGOs 9 1.04 /2 /4 0.0 0.1 0.2 43 44 46 Fondesa 0.5 0.1 40 40 Remaining NGOs/3 0.5 0.1 34 35 36 30 Source: Superintendence of Banks, Dominican Republic Microfinance Network. 25 25 20 21 21 21 20 1/ Includes 14 institutions under the Rural Savings and Credit Institutions (AIRAC) and the ADEPE cooperative. 16 2/ Members of the Dominican Republic Microfinance Network. 14 3/ Remaining NGOs include: ADOPEM, ASPIRE, FDD, ADEPE, MUDE, CDD, ECLOF, e IDDI. 10 Acceso a Servicios Finacieros (MIPYMES) / capítulo IV Acceso a Servicios Finacieros (MIPYMES) / capítulo IV 4/ Information as of Dec. 2007. 0 65% of deposits in the banking sector are made up of re within one to three years and the remaining third a la y ú ico y or ia ala a r il a as ile . e ep do ua ua as in bi Ric ag r liv ue ad ur Pe Ch em éx nt m nR Br lva g ug er Bo nd ez u ta ra lo ge M demand deposits and short-term savings 2. This is not are for longer than three years. Given the structure of Av Ec at ica Ur Sa n s Pa Ho Co Co Ar Ve Gu C in El LA m a specific characteristic of the Dominican Republic as the deposits base, a significant proportion of loans are Do several countries in the region share this feature, inclu- for a short term period. Hence, a smaller proportion Source: International Financial Statistics, IMF ding at higher levels (Figure 2). According to financial of long-term loans would not only pose a potential pro- information for the largest banks in the country, 1/3 blem to the MSMEs, but would also represent a trans- This system is highly concentrated and dominated by corporations. It also includes two public financial inter- of loans are short-term (less than one year), 1/3 matu- versal problem for business as a whole in the country. the commercial banking sector. Commercial banks re- mediaries (The BNV and the Agricultural Bank) (See Ta- present 83% of total assets (the three largest commer- ble 1). The “Reserve Bank� Banreservas is the only pu- cial banks represent 62% of total assets) of financial in- blic commercial or state-owenedbank, which represents termediaries regulated by the Monetary and Financial 24% of the total assets of the financial system. There Law (Ley Monetaria y Financiera – LMF). The financial are only two foreign-owned banks (Scotiabank and Ci- intermediaries regulated by this law include twelve com- tibank) which represent less than 10% of assets in the mercial banks and twenty-six savings and credit banks, financial system and a local bank (BHD) with foreign sixteen savings and loans associations and fifteen credit involvement. 1 These numbers include non-regulated savings and loans from Cooperatives and Non-Governmental Organizations. 2 According to data from the Superintendence, 65 per cent of deposits are checking and saving deposits. This calculation does not consider values in circulation for the total of deposits. Nonetheless, taking into account data from the Central Bank, the proportion of checking and 62 savings is fifty per cent 63 Graph 2: Proportion of demand and savings deposits as the total of deposits (%) Table 2: Evolution of Loans Portfolio of Savings and Credit Banks 100 Saving Year operation Existing Existing Variation Variation Number Number Variation 92 and credit commenced loan portfolio loan portfolio of existing of existing of current of current of number 90 banks 2005 2008 loan portfolio loan portfolio clients clients of current 86 (RD$ millon) (RD$ millon) 2008/2007 2007/2006 2007 2005 clients 2007/2005 80 73 75 76 % % % 70 69 66 66 66 67 ADEMI 1998 2,676 4,881 20 32 33,145 47,598 44 61 63 60 Pyme BHD 2004 238 261 6 -9 5,000 5,333 7 55 ADOPEM 2004 382 1,303 48 35 30,374 61,897 104 52 52 52 50 Sub-Total 3,296 6,445 24 30 114,828 68,519 68 48 49 46 41 Total of Savings 40 and Loan Banks 7,977 13,607 33 25 n.d. n.d. Source: Banks Superintendence, Micro Finance Network 30 20 20 Public finance intermediaries also provide financing MSMEs in rural zones. In December 2007, the lending services directed at MSMEs. The Banco Nacional de la portfolio of these cooperatives was over DR$ 11,000 10 Vivienda (BNV) offers second-tier lending aimed at the million, almost the same as the amount of loans from 0 MSMEs sector. Until December 2008, approximately the Savings and Credit Banks. These cooperatives have 4% of the existing loans portfolio (DR$155 million) over 81 offices and more than 290,000 members (7% ile nt ú r vis a a ía á a il as ala ua or y ití a la ico . ep do ua az Ric in m bi aic r uc ue Ha ur Pe ad ce Ch g Ne em éx was second-tier lending for micro finances. The main of the EAP). The financing given for these cooperatives nt lom nR na Br lva g ra m .L nd ez in u ta ra ge M Pa ca Ec nd Ja at St .V ica Sa n s Pa Ho Co Co Ar Ve Ni Gu St sa in El receptors of the financing are Savings and Credit Coo- is growing rapidly and in 2008 was 15% higher than m itt Do .K St peratives and NGOs that specialize in microfinancing. the previous year. Source: Central Banks and Superintendence of Banks. The data for the Dominican Republic comes from the Superintendence of Banks. The total of deposits does not take into account As regards to the Agricultural Bank, 50% of its loans values in circulation. This takes into account values in circulation as part of the total deposits; the ratio of demand deposits and savings would be 50%. portfolio (approximately DR$ 3000 million) could re- There are non-governmental organizations that also offer Acceso a Servicios Finacieros (MIPYMES) / capítulo IV Acceso a Servicios Finacieros (MIPYMES) / capítulo IV present credit to small producers. financing to MSMEs, in particular to micro and small companies. Until December 2007, the existing loan port- Outside the statutory framework of the Financial folio from NGOs rose to DR$ 1,012 million and had more 2.1.2 MSMEs Financing The lending portfolio growth rate for these organizations for 2006, 2007 and 2008 has been at 24%, 30% and 21% and Monetary Law, Credit and Savings Cooperati- than 54,000 clients. NGOs receive funds through commer- respectively, with 115,000 clients (2.7% of the EAP; eco- ves (CAC, in Spanish) provide financial services to cial bank loans, the Banco Nacional de la Vivienda (BNV), The Savings and Credit Banks (BAC in Spanish) and nomically active population) and a growth rate of 68% MSMEs in rural zones, in particular to micro and PROMIPYME (first and second-tier governmental len- to a lesser extent Commercial Banks are the main fun- compared to 2004. Regarding to commercial banks and small companies. 15 cooperatives (14 belong to the ding program to the MSME sector) and FONDOMICRO ders to MSMEs. This type of financing is growing rapidly. according to interviews, the banks Banreservas, Popular Association of Rural Institutions of Savings and Cre- (NGO that offers second-tier lending aimed at the MSMEs Until December 2008, its available lending portfolio rea- and Scotiabank3 (69% of commercial bank assets) could dit – AIRAC) offer services (deposits and loans) to sector) (See Table 3). ched DR$ 13.6 billons (0.85 % of the GDP). The lending portfolio for the banks ADEMI, ADOPEM and SMES have, on average, 4% of their credit portfolio in the SME B.H.D., which belong to the micro financing network and sector (approximately DR$ 7 billons, 0.4% of the GDP). represent 44% of the banks’ total shares and reaches the Nonetheless, private commercial banks would attend to amount of DR$ 6.4 billion (0.4 % of the GDP) (Table 2). the higher segment of SMEs in terms of assets and sales. 1/ Remaining NGOs include: ADOPEM, ASPIRE, FDD, ADEPE, MUDE, CDD, ECLOF, e IDDI. 3 El Banco BHD separó la atención al segmento PYME a través de la compra del Banco de la Pequeña Empresa para constituir PYME BHD. 2/ The reduction is mainly due to the transfer of clients from ADOPEM NGO to ADOPEM Bank. 64 El Banco BHD es el tercer banco comercial en términos de activos (14 por ciento del total de activos de bancos comerciales). 65 Table 3: Loan Portfolio of the Micro financing NGOs In 2005, this sector generated a total of 1,455,162 jobs. Santo Domingo and provincial cities. The importance According to the last FONDOMICRO census, 77.3% of MSMEs in the business network and GDP in the Do- NGOs Existing loan Existing loan Variation (%) Number of Number of Variation (%) of MSMEs are located in urban areas and only 22.7% minican Republic is similar to that of other countries in portfolio 2005 portfolio 2007 Existing loan current clients current clients Number of in rural areas. Over half a million jobs were created in the region (Table 5). (DR$ millIon) (DR$ millIon) portfolio 2005 2007 current cliens 2007/2005 2007/2005 Table 5: MSMEs in Latin America FONDESA 190 491 158 6,452 16,791 160 Remaining NGOs1/ 397 521 31 44,187 37,3982/ -15 Countries Proportion of MSMEs Jobs generated GDP Generated by over Total Enterprises by MSMEs MSMEs Total 587 1,012 72 58,229 54,189 -7 (%) (% of total) (% of total) Source: Micro financing Network. Argentina 99,5 39 45,1 Brasil 99,7 57 30 Chile 98,7 50 n.d. Colombia 96,0 63 25 The governmental program PROMIPYME (National ratio with relation to the GDP could be close to that of Costa Rica 97,9 48 28 Council for the Promotion and Support of MSMEs) El Salvador and Honduras (1.4 and 1.6% respectively), but El Salvador 96,9 50 24 a 36 offers direct and second-tier financing aimed at the sector. less than that of Nicaragua (9%).5 Honduras 98,0 45 18 The PROMIPYME fund is administrated by the Reservas Nicaragua 80,0 60,0 n.d. Bank and is made up of State resources and international Panamá 36,0 12,0 11 donations. Until December 2009, the loan portfolio rose 2.2 Demand for financial services: Perú 98,3 88,0 n.d. to DR$ 1,979 million. More than 90% of the portfolio is MSMEs characteristics and Dominican Rep. 96,0 29,0 23 comprised of direct loans and, to a lesser degree, by second- reported obstacles Venezuela 92,5 41,5 4,9 tier lending. Source: Small and medium-sized company financing in Latin America. The loan portfolio to MSMEs represents 1% of the GDP MSMEs have increased by 71% in the last five years. in the Dominican Republic, rising to US$ 474 million (ta- In 2000 there were 359,304, rising to 616,215 by the The majority of MSMEs are concentrated in commercial Services and commercial companies report the highest vo- king into account the Savings and Credit Banks portfolio, end of 2005. Approximately 96% of the companies (44.6%) and services sectors (31.6%). A total of 287,156 lume of sales. One out of four MSMEs reported monthly non-governmental organizations and PROMIPYME)4. In were micro companies. This estimate was carried out are commercial companies, 194,724 services companies sales below DR$ 3000. In the same way, 21% relied on using the classification detailed in Table 4.6 Acceso a Servicios Finacieros (MIPYMES) / capítulo IV Acceso a Servicios Finacieros (MIPYMES) / capítulo IV comparison with other countries in Central American, the and 134,335 are manufacturers. Between 2000 and 2005, monthly sales between DR$ 3000 and DR$10000 pesos, business participation rose by 5% in the service sector and while only one out of ten companies earned over DR$ 3.7 in the commercial sector. In contrast, the number of 100,000 pesos in one month. 11,4% of service enterprises companies in the manufacturing sector decreased from and 13.3% of commercial enterprises have sales of more Table 4: Classification of Dominican MSMEs 31% to 22% during the same period. than RD$ 100,000 (See Figure 3). Type of Company Number of Workers Assets Sales Micro 1 to 10 to US$ 30,000 to US$ 60,000 Graph 3: Monthly Sales of Companies by Sector (% of total sales - US$) Small 11 to 50 to US$ 300,000 to US$ 1,200,000 100% Medium 51 to 150 to US$ 1,200,000 to US$ 5,000,000 90% Large over 150 over US$ 1,200,000 over US$ 5,000,000 80% More than 500,000 Source: Study on market financing of small and medium companies in the Dominican Republic. FONDOMICRO (Fund for Small Company Financing). 70% From 100,001 to 500,000 60% From 50,001 to 100,000 50% From 20,001 to 50,000 40% From 10,001 to 20,000 30% From 3,000 to 10,000 Less than 3,000 4 If we take into account the credit portfolio of the commercial and cooperative banks, the ratio could rise to 1.3 per cent of the GDP. 20% 5 The credit portfolio information to MISMES from the countries mentioned comes from Mix market 10% 6 The recently approved MSMES law defines official criteria to classify these companies: 1) micro company: 1 to 15 workers, assets to 0% US$88,000 and a gross income of up to US$176,000 per year. 2) Small: 16 to 60 workers, assets from US$88,001 to US$353,000 and a Manufacturing Commerce Services Total gross income from US$176,001 to 1,180,000 per year. 3) Medium: 61 to 200 workers, assets from US$353,001 to 1,180,000 and with a gross income from 1,180,001 to 4,412,000 per year. Source: Authors - Central Bank of the Dominican Republic 66 67 Even when the number of MSMEs with access to 2.3 Governmental Framework Support 3. The Financial Sector formal financing sources has increased from 5.4% in 2000 to 10.3% in 2005, this access continues to There are public institutions that provide support to The Monetary and Financial Law should include Savings be one of the main obstacles for development. In MSMEs but with a lack of coordination. Among them are 3.1. Offer of financial services 2005, 29.3% of companies received cash from formal and Credit Cooperatives (SCCs). They positively contri- the National Council for the Promotion and Support of Mi- bute to financial consolidation through the provision of and informal sources during the 12 months prece- Regarding evaluations of assets, an asymmetry could cro, Small and Medium-Sized Companies (PROMIPYME), financial services, particularly in rural zones. Nonetheless, ding the survey. Close to 30% of businesses of up to exist in the Superintendence of Banks regulations con- the Corporation for the Promotion of Industry (CFI- they do not include financial regulation and supervision. 10 employees obtained money in cash, of which 9.8% cerning the treatment of commercial banks and other PROINDUSTRIA), the Center for Export and Investment Even when the volume of CAC assets is approximately 2% resort to formal institutions. Only 22% of busines- recognized credit institutions in the Finance and Mo- of the Dominican Republic (CEI-RD), the National Institu- of the total of assets in the financial system, the growth rate ses with more than 11 employees managed to secure netary Law. Savings and Credit Banks (BAC in Spanish), te of Technical Studies (INFOTEP), the Institute for Inno- of loans in the last three years has oscillated between 15 and financing: 14.8% achieved this through a bank or a Loan and Saving Organizations (AHP) and Credit Cor- vation in Biotechnology and Industry (IIBI) and PROEM- 20%, a reflection of the growing dynamic and significant financial institution while 7.1% obtained credit from porations (CC), also regulated by law, fulfill the same PRESA. Coordination will be important to develop joint expansion. In this context, it is necessary to implement a moneylenders. Family and friends are another im- prudential regulations as commercial banks. The latter is programs and to achieve a greater scale effect, considering regulatory and supervision framework for the cooperatives. portant source of credit for 9.8% of micro entrepre- important in order to avoid regulatory arbitration among in particular their limited resources. Close articulation and Currently, the Institute for Development and Cooperative neurs. NGOs with micro-financing programs operate different types of financing bodies. However, in the re- cooperation between the public bodies and organizations in Credit (IDECOOP) verifies that SCCs behave as coopera- with 3.3% of companies. gulation of asset evaluation, Savings and Credit Banks the private sector aimed at MSMEs is not observed. tives but not perform financial supervision and regulation. and Credit Corporations are treated in a different way to Commercial Banks and Loan and Savings Organizations that could introduce differentiated competition condi- Direct financing for MSMEs by PROMIPYME could be Table 6: Public Institutions linked to MSMEs tions in the market. causing distortion in the market. Over 90% of PROMI- PYME resources are directly channeled and with subsidi- The modification of asset evaluation at the beginning zed interest rates between 12 and 15%, far below market Entity Activities of 2009 is a positive element to increase the amount of rates (between 25 and 38 %). In this context, it is com- PROMIPYME Provide both first-tier lending (commercial loans for working capital, acquisition, installation, and modernization peting with specialized institutions to offer financing to of machinery and equipment) and second- tier lending. In addition, provide free technical assistance in loans to MSMEs through the upper limit of the �minor de- coordination with the Taiwan Mission, based on the bilateral agreement of industrial cooperation between the Dominican btor�. However not everything is resolved. For example, in MSMEs, including Banreservas. This competency could be Republic and Taiwan. accordance with current regulation, for Commercial Banks creating a distortion in the market, far beyond obvious and Loan and Saving Organizations, a �minor debtor� is demand excesses for resources. On the other hand, the PROINDUSTRIA Establishment of Industrial Districts in order to promote MSMEs development. someone whose consolidated obligations are lesser or equal Banco Nacional de la Vivienda (BNV) is offering second- Acceso a Servicios Finacieros (MIPYMES) / capítulo IV Acceso a Servicios Finacieros (MIPYMES) / capítulo IV INFOTEP Development of workers and entrepreneurs-training programs.. to DR$ 15 million. Nonetheless, the limit is DR$ 10 million tier lending to MSMEs, setting the possibility to directly for Savings and Credit Banks and Credit Corporations. operate with this segment. If so, it would also be directly IIBI Develop scientific research, provide technological transfer and foster innovation, and provide technical assistance in key areas for national development in order to improve national competitiveness. competing with micro-financing bodies and even manage The ceiling should be increased by DR$ 10 million that to crowd them out. CEI-RD Export and Investment promotion in order to improve the competitiveness of the Savings and Credit Bank has, which specializes in the Dominican enterprises in International markets of goods and services. SMES sector, and to put them on equal standing with 3.2 Demand for financial services Support Program Using resources from the European Union, this program looks to promote technical assistance, firms commercial banks. However, it may be true that commer- for Private Enterprises clustering and the improvement of the business climate of the Dominican enterprises. cial banks and Savings and Credit Banks have different Access to financing is an important obstacle for the deve- (PROEMPRESA) minimum paid-in capital, this does not mean that they lopment of MSMEs even when access to formal financial do not have the capacity to financially evaluate loads bet- services has increased lately. Greater access to financial ween DR$10 and 15 million under late payment criteria. services in relation to five years ago is mainly due to a grea- In the “minor debtor� category, financial evaluation is ba- ter incursion of NGOs with credit technology according The MSMEs Law creates the National PROMIPYMES ascertains that the Executive Power will consign 0.4% to the sector characteristics and a credit recovery rate of sed mainly on a client’s credit history (morosidad). However, Council with administrative and financial autonomy of fiscal collections for the Council. From these resou- over 97%. Private commercial banks aim to develop similar the financial evaluation of a “large debtor� client requires as an organization responsible for the administration, rces, 30% will be used for the creation of a Guaran- credit technology which differs from technologies used for more documented information such as audited financial control and implementation of the Law. The Coun- tees Fund, 6% for educational and business develop- consumption and corporate banking to venture into the statements. This differentiated ceiling affects the credit ex- cil is in charge of the design, formulation and imple- ment activities and 50% will go towards financing the sector in a more aggressive way. Nonetheless, the factor that pansion to SMEs given that specialized micro-finance insti- mentation of public promotion and support policies MSMEs Fund whose objective is to promote MSMEs will allow a greater strengthening of financing services is a tutions’ clients financial evaluation is mostly based on credit to MSMEs. It will also be responsible for coordinating financing. Out of the resources administrated by the better adjustment of the banking legislation or regulation history and not by their payment capacity through audited with other public and private institutions regarding the Fund, 90 % will go to first-tier lending operations and with the characteristics or nature of the business. statements.7 development of MSMEs support programs. The Law the rest for second-tier operations. 7 According to the information obtained, the credit recovery rate for the MSMEs is higher than 96%. 68 69 MSMEs do not only need financing services. Even though cessary to perform a technical study during the regula- Bankruptcy legislation is hardly used because it neither densome for small and medium-sized entities (SMEs), both access to financing is identified as an important obstacle tion period of the law in order to design a guarantee provides a reorganization mechanism nor an efficient in terms of financial reporting obligations and audit require- for the development of companies, it is not the only one scheme created by the MSMEs law. The scheme involves liquidation process. Most of the substantive legal provi- ment. The new Company Law of December 2008, which did that exists. MSMEs demand integral support. This support an assessment for the percentage coverage, the cost or Pre- sions applicable in insolvency cases are antiquated and not introduce substantial changes in terms of accounting and includes business development programs (management mium and the criteria to be able to apply the guarantee. inefficient. Currently Congress is debating the Business auditing requirements, has not significantly relaxed the regula- and managerial training), technical and financial assistance This study should determine the potential demand for Restructuring Draft that represents an important step tory regime for SMEs. (development of a financial culture) and technological and the guarantee to evaluate if the funds will be sufficient towards the modernization of bankruptcy legislation. innovation development programs. SMES also need pro- or not. The latter requires a dialogue with other finan- In financial reports, all commercial companies9 should grams that can assist their access to new markets (domestic cial bodies though which the guarantee will come into Accounting and Auditing Norms apply the standards promulgated by the Public Accoun- and external), to offer strategic information and to generate effect. Finally, the study should present basic principles tants’ Institute (ICPARD) that are more stringent than business partnership. and guidelines through which the Guarantee Fund will The depth of financing services involved not only generates their peers in Central America, the United States and the be self-sustained without implying costs or fiscal charges adequate financial regulation for MSMEs, it also creates re- European Union; which as it is unrealistic is not observed 3.3 Government Programs and to the government. gulations that permit businesses to be formed more easily. in practice. With relation to auditory requirements, the Elements regarding Financial In other words, a legal framework that takes into account the Commerce Code noted that all companies with a capital Infrastructure 3.3.2. Elements of Financial Infrastructure particular characteristics of the different types of businesses in equal to or higher than DR$ 50,000 should be audited. order to provide greater incentives for business formalization8. However, this limit has been replaced by a potentially hig- Creditors’ Rights and The statutory framework does not differentiate between lar- her limit which could serve as a positive element regarding 3.3.1. Governmental Programs Insolvency Norms ge, medium-sized and small enterprises and is excessively bur- the formalization of MSMEs. Government support to MSMEs has been atomized and Deficiencies in financial infrastructure result in finan- not well coordinated among the institutions. In the past, cing access restrictions for all the firms, not only MSMEs. the absence of a government body centralizing and coor- Significant progress has been made in modernizing some dinating the development of an integral support policy to 4. Policy alternatives elements of its financial infrastructure, in particular in the MSMEs generated that different public bodies developed payments and credit report system. Nonetheless, insolvency their own activities thereby reducing their total impact, even regulations and creditors’ rights show deficiencies. On the more considering the fact that the resources used are fairly 4.1. Offer for financial services Within amendments carried out as part of the Financial one hand there are a limited number of assets that can be limited. and Monetary Law, cooperatives are included as part used as collateral and mechanisms, to ensure the complian- ce of norms related to claiming of these assets, are not effec- • The Banks Superintendence could consider the im- of the statutory framework. This represents a positive Acceso a Servicios Finacieros (MIPYMES) / capítulo IV Acceso a Servicios Finacieros (MIPYMES) / capítulo IV The MSMEs Law creates the PROMIPYME to develop plementation of a homogenous asset evaluation re- component, nonetheless, and given that cooperatives tive. On the other hand, insolvency procedures are rarely the sector. This body has concentrated on direct finan- gulation across banks and other credit entities under are urrently self-regulated, the Banks Superintendence used and the perception of the need of a legal reform still cing. Even so, it will have to expand company develo- the Monetary and Finance Law10. Given that credit could first opt for an initial statutory framework that exists. pment policies and programs, encourage exports and organizations meet the same stringent regulations, a takes into consideration cooperative characteristics access to new markets, strategic information, cluster acti- homogenous agreement could also be reached for re- to later make a regulatory transition or convergence A limited number of property assets can be used as co- vity (productive articulation) and technological assistan- gulation in order to avoid different competitive con- towards the Finance and Monetary Law. llateral. Only security on automobiles and machinery ce and transfer. For this, it will have to raise its ability to ditions in the market. Even if it is true that credit are accepted property assets and, in any case, an institu- instrument support programs. Law regulation should be organizations have different minimum levels of paid • The Institute for Development and Cooperative Cre- tionalized register does not exist for them. The Register carried out in four months but institutional strengthe- capital, this does not imply that they do not have the dit (IDECOOP) does not currently have the institutio- for property guarantees is perceived as expensive (has a ning will demand a much greater period making this a same capacity to develop the financial evaluation of nal capacity that is necessary to perform the financial register tax of 2 per cent) and time consuming (the regis- condition for successful implementation. clients. supervision of the cooperatives. Therefore, it would be ter is not completely computerized). An easily affordable computerized consulting mechanism does not exist for • It would be important to implement a financial su- ideal that its supervision is carried out by the Banks Su- Under the PROMIPYME law, direct financing will con- pervision and regulation scheme for cooperatives. perintendence so that the most is made out of synergies, the public. Only five commercial banks would have access tinue. 90% of the fund will be dedicated to this. Direct The consolidation of financial services cannot be se- coordinated work, ensure a complete flow of informa- to any kind of information regarding a real estate registry. intervention by subsidized tariffs would generate unleve- parated from system financial stability. Cooperatives tion and the credibility of the institution. led competences with micro-financing organizations and, contribute significantly to this. Land property titles do not always ensure total property in this way, would continue to introduce market distor- rights. Real estate assets that can serve as collateral could 8 This discussion assumes the existence of homogenous criteria to define a productive unit such as a micro, small and medium-sized company tion. Authorities could receive the proposal to technically expand significantly if uncertainties regarding titles are clari- as much as on a public as a private level. While it may be true that the new MISMES law presents a homogenous definition, it is surprising evaluate the implementation of a second-tier strategy to that this is different to the one that was being worked on in previous versions of the draft (August 2008). It is not yet clear what the technical fied. An important step, the still in its initial stages, to clari- transfer resources. criteria was to develop this new classification. fy demarcation limits for real estate property is the deslinde. 9 The law takes into account five types of commercial companies (corporations, companies with limited responsibility and societies). It also Likewise, limitation of the use of certification letters is being introduces individual companies with limited responsibility for which, nonetheless, accounting and auditory requirements are not clearly According to the law, 30% of fiscal income assigned to defined. implemented for this and can become an important measure. 70 the Council will go to the creation of that fund. It is ne- 10 Technical evaluation is important to determine the potential risks that could be introduced to the overall stability of the financial system. 71 • It would be convenient that the government financial In order to develop this, recommendations suggested mercial companies11 should apply standards promul- Enterprises are expected to observe much more stringent support for MSMEs sector be channeled exclusively as by the National Plan for Systematic Competitiveness, gated by the Public Accountants’ Institute (ICPARD), reporting obligations than their peers in Central America, second-tier. Resources would be channeled in a more elaborated by the National Competitiveness Council, which at the same time has adopted the International US, the European Union, etc., which is unrealistic and transparent and competitive way to specialized bodies could be taken into consideration. The experience of Financial Report Standards (IFRS) for listed compa- not observed in practice.. Among the countries who apply in the MSMEs sector, eliminating distortions and ex- CORFO could be also observed in the implementation nies, without differentiating between size or whether accounting norms that are differentiated by company size cesses of demand generated by subsidizes interest rates. of business programs (management and business deve- they are listed or not. This means that Dominican are South Africa, England and El Salvador (in progress). This model would allow for institutional strengthe- lopment, partnership, innovation and access to inter- ning of the specialized bodies given that they would national markets) including MSMEs. have to compete for resources. The second-tier body would need to have a clear mandate and should intro- • Before developing additional guarantee schemes 5. Conclusions duce market mechanisms that allow the mobilization established by the MSMEs law, should first look at of resources from the private sector to the agricultural how the Guarantees Fund, mentioned in the law, sector. Examples of this model in other countries are works. After developing technically the design of the The consolidation of financial services to MSMEs and generate business partnership. the Development Financial Corporation (COFIDE) Guarantees Fund scheme, as mentioned previously, its is a wide issue that should not only be reduced to in Peru, the Production Development Corporation in functioning and use should be observed before inclu- areas such as interest rates and guarantee funds, Based on international experiences, it is recommen- Chile, which also relies on guidelines and programs for ding additional schemes such as the reciprocal guaran- as obstacles and/or restrictions of MSMEs from de- ded to start a dialogue process that allows modifying SMES. Both institutions energize and develop a loan tees proposed by the Central Bank; even more so when mand and supply for financial services should be and/or adopting banking, accounting and auditing market to MSMEs through financial intermediaries. taking into account that guarantees funds need initial taken into account as well as potential restrictions regulations, taking into consideration the characteris- resources from the State that are scarce and cannot be and/or obstacles that may come from governmental, tics of the MSMEs. In the financial field we suggest the multiplied simultaneously for diverse guarantees sche- 4.2 Demand for financial services mes. organizational and normative actions (regulation). evaluation of second-tier lending programs that allow for loan markets to be developed for this sector. These • The public support policy for MSMEs should develop An integral public support policy for MSMEs may become solutions that contribute to a more po- • Deeper consolidation of MSMEs financing services should develop broad support that would go beyond an integral support bracket, more than just financing. sitive impact for the sector than the current first-tier would require that policies and regulations fit more the financial field. Integral support involves the de- Integral support should include business development lending programs. to their characteristics. Norms and financial regula- velopment and coordination, with the private sector, programs (management and managerial training), te- tions should take into account the nature of the busi- of business development programs (management and chnical and financial assistance (the development of a It is suggested that the regulatory authority places ness and not necessarily the type of financial institution managerial training), technical and financial assis- financial culture), technological and innovation deve- special emphasis on the control of banks with a rapid that offers the loan. For this reason, credit limit ceilings Acceso a Servicios Finacieros (MIPYMES) / capítulo IV Acceso a Servicios Finacieros (MIPYMES) / capítulo IV lopment programs and programs that help MSMEs to tances (development of a financial culture), techno- growth portfolio. The strong growth of loans to the should be modified so that non banking organizations logical and innovation programs and development access new markets that offer strategic information and sector can generate past-due portfolios and, eventua- are on equal footing with commercial banks; even more programs that help MSMEs to access new markets that generate business partnership. lly, solvency problems if the analysis of capacity of the considering that savings and credit banks are aimed at (domestic and external), offer strategic information banks does not grow at the same rate. the MSMEs sector with different and specialized credit • There are questions regarding the availability of bud- technology to the sector. geted resources. A technical study should be carried out that allows for an estimate if the resources to be • Regulations related to the collateral used in finan- assigned to the Council created by the MSMEs Law cial transactions should be updated. A comprehen- would be enough to meet the demand of all services. sive revision of the legal framework would allow to increase the number of movable assets that can be 4.3 Governmental Support Framework used as collateral as well as organizing a register. At and Financial Infrastructure present automobiles and machinery are the most commonly accepted types of active property. Likewise • Institutional strengthening is recommended for the benefits should be technically studied to reduce the organization responsible for developing the integral costs of the assets registry. public support policy to MSMEs. The Council needs an institutional strengthening to improve its capacity • Authorities should technically evaluate the bene- for the design and implementation of MSMEs sup- fits of a statutory framework of accounting norms port programs beyond the financing scope only. This that introduce a difference between small, medium institutional strengthening is needed given that PRO- and large companies, as much in terms of financial MIPYMES has mainly focused on financing services. reporting obligations as auditing requirements. Com- 11 The law takes into account five types of commercial companies (corporations, companies with limited responsibilities and societies). It also introduces individual companies with limited responsibilities for which accounting and auditing requirements are not clearly defined. 72 73 74 Acceso a Servicios Finacieros (MIPYMES) / capítulo IV CHAPTER V The Electricity Sector David Reinstein(a) Juan Miguel Cayo(b) 1. INTRODUCtion E nergy policies play an important role in the Dominican government’s agenda. Despite the fact that the country has a growing and stable economy, with a GDP per capita of needs to be reformed in order to improve competitiveness, to achieve a reduction in poverty and to consolidate sustainable economic growth. This Policy Note aims to provide a balan- US$ 4406.4 (2007), and a relatively high purchasing power ced perspective on relevant electricity sector issues. (PPP) for Latin America, the electricity sector is an area that 2. Diagnosis 2.1 Background on the sector rate of 7.5% between 1992-2001 and GDP growth was at 5.9%. As generation capacity was not sufficient to co- El Sector Eléctrico / capítulo V Before the reform in the 90s, the electricity sector was ver peak demand, with constant supply restrictions and in the hands of the Dominican Electricity Corpora- massive blackouts, the government encouraged Inde- tion (Corporación Dominicana de Electricidad - CDE), pendent Power Producers (IPP) to sign Power Purchase which was state-owned and vertically integrated. Its ope- Agreements (PPA) with the CDE. These agreements led rations were characterized by large energy losses, low bill to high electricity prices. payments, bad operation and deficient maintenance, with a service that suffered frequent power cuts and rationing, In 1998-99 the sector disintegrated and five compa- all of which were the grounds for the sector reform. nies were created (two generation and three distribu- tion companies), successfully selling 50% of the latter The rapid expansion of the sector was a reflection three. In order to resolve the permanent and continual of the high level of growth the country was going problems regarding the lack of installed capacity and through. Total demand for electricity rose to an annual constant blackouts, a Public Enterprise Reform Law (a) Senior Energy Sector Specialist (b) Senior Energy Sector Specialist 77 was promulgated which provided the framework for deficit capacity to meet demand fell from 30% to 16%. Companies Generation Capacity (MW) Participation (%) Geographical areas (North, South, East) the privatization and restructuring of the sector. Between The worst electricity crisis hit in 2002, with up to 20 1998 and 1999, under the first government of Leonel hours of rationing and the PPAs were re-negotiated Haina (private) 663,3 19,5% N, S, E Itabo (private) 630,5 18,6% N, S, E Fernández, the Dominican Electricity Corporation mo- through the “Madrid Agreement� with an extension Hidroelectricidad (public) 469,3 13,8% N, S nopoly was dissolved into a series of generation compa- until 2016. Faced with the rise in fuel prices, the govern- Productores de energía independientes (IPP) (private) 515 15,2% N, S, E nies. EGE Haina and EGE Itabo, which operated thermal ment froze tariffs and agreed to make up for costs to the Unión Fenosa Unión Fenosa (private) 194,5 5,7% N generation plants, were privatized and three distribution generators with resources from the Treasury (up to US$ CEPP (private) 76,8 2,3% N companies were created: EdeNorte (North Distribution 20 million per month). The government did not have the Transcontinental Capital Corp. (private) 116 3,4% S Company), EdeSur (South Distribution Company) and resources to compensate the IPPs and accumulated a debt Monte Río (private) 100 2,9% S EdeEste (East Distribution Company). of US$ 179 billion (Sept. 2002), not managing to fulfill AES (private) 555 16,4% E commitments caused by freezing the tariff. The EDEs Metaldom (private) 42 1,2% S The 2001 Electricity Law, inspired by reforms carried were not able to solve the fuel shock. In 2003, unfavora- Laesa (private) 31,4 0,9% N out in other countries in the region, established an inte- ble conditions and constant political pressure led to the TOTAL 3.394,1 gral regulatory framework. The private sector was awar- government reacquiring shares from Unión Fenosa in the Source: Statistics from the Electricity Superintendence ded with the generation and distribution while transmis- privatized distribution companies EdeNorte and EdeSur. sion and Hydroelectric generation was given to the State. Since the re-nationalization these companies have expe- The operative presence of the State in the sector consisted rienced deterioration in operative efficiency. of the following bodies: the formally integrated public 2.3 Current State and iii) to increase the percentage of the population with services corporation CDE (that held contracts with inde- 2.2 Structure of the Sector access to electricity. pendent energy producers IPP), the Dominican Electrici- The CDEEE, the CNE and the SIE designed the afore- ty Transmission Company (ETED) and the Dominican The CDEEE is an important agent in the sector, brin- The sector is currently facing a very complicated situa- mentioned plan in an attempt to gain self-sufficiency. Hydroelectricity Generation Company (EGEHID). ging together all the government’s generation, distribu- tion due to an array of factors such as the lack of availa- Their main objectives are to: (i) make the sector financially tion and transmission companies and officially associa- bility of various generation plants, a lack of money to pay sustainable, (ii) reduce tariffs for final customers, and (iii) A new conglomerate of companies was also established, ted programs: the generators the agreed commitments, a climb in oil promote efficient energy use. For the mid-term, the plan the Dominican Corporation of State Electricity Compa- prices and structural problems such as electricity theft recommends the renegotiation of the generators’ contracts, nies (CDEEE), to take on the ownership of ETED and • The Dominican Hydroelectricity Generation Company and non-payment of the services by customers, which ag- the construction of coal-fuelled plants, the development of EGEHID as a substitute for the CDE. Initially, the gover- (EGEHID). gravates the outlook for efficient electricity distribution transmission plans, an increase in hydroelectricity capacity, nment considered transferring its shares to administer the • The Dominican Electricity Transmission Company company management. This assortment of factors nega- the promotion of renewable energy sources, a revision of companies as an investment under a trust fund indepen- (ETED). tively impacts the sustainability of the sector. cross-subsidies and the strengthening of the Electricity Su- dent from the sector regulatory bodies, instead of using • The Rural and Suburban Electrification Unit (UERS). perintendence (SIE). its ownership as a potential instrument for sector policies. In 2008, the sector had a strong impact on the fiscal budget. Nonetheless, this change did not occur. The law and its • The Blackout Reduction Program (PRA). The oil price shock increased generation costs dramatically There is currently a US$ 11 million technical assistan- complementary norms from 2002 included the creation • 50% of the North Distribution Company (EdeNorte). ce project for the electricity sector for 2004-2010 with and the need for transfers to cover the tariff-cost gap. Price of an autonomous regulatory agency, the Electricity Su- • 50% of the South Distribution Company (EdeSur). US$ 7.3 million in funds from the World Bank. The volatility resulted in a growing tariff gap and higher costs, perintendence (SIE)1. The National Energy Commission causing that treasury resources designated to the electricity • 50% of the government holding of the East Distribu- project’s aims are to: (i) strengthen the government as a El Sector Eléctrico / capítulo V El Sector Eléctrico / capítulo V (CNE) was also created as the coordinating organism for sector to reach 3% of the GDP. tion Company (EdeEste). regulator and for customer protection, (ii) to improve the energy policy and a wholesale market under the respon- formulation and implementation of policies, (iii) design sibility of a Coordinating Body (Organismo Coordinador - Tariffs are among the highest in Latin America and The National Energy Commission (CNE) is in charge of a transmission network and the wholesale electricity mar- OC). the Caribbean, which represents challenges in terms of defining energy policies. One of its main responsibilities ket, (iv) raise the quality and amount of electricity for the is the elaboration of a National Energy Plan. In 2004, the poor and (v) to protect the environment. There have also competitiveness and social equity. There are a variety of Due to new investments, between late 2000 and mid factors responsible for high tariffs such as: dependence plan was presented for the period from 2004-2015 as well been several second-generation electricity sector reforms 2003, effective generation capacity experienced a rise of on imported fuels, a fragile institutional environment, as the Indicative Plan of Electricity Generation (PIEGE) executed through a US$ 150 million fund program finan- 43%. Improvements were also registered in the distribu- difficulties to sue large debtors, the high prices initially for 2006-2020. The distribution is in the hands of the ced by the World Bank for the period 2005/2008. This tion network, with a provisional reduction in blackouts negotiated for energy purchase agreements with genera- companies through the CDEEE and the Companies’ Pa- program, which consisted of two policy-based loans and and distribution losses and an increase in operative effi- tors, elevated risks for the generators (such as unpaid or trimonial Fund. 86% of generation capacity is privatized a distribution investment loan, supported the strategy for ciency. The undelivered energy supply fell to 11% of the delayed payments from the distribution companies and/ (excluding self-generation) and 14% is public property. the recuperation of the electricity sector. Aimed at: i) re- potential demand in 2002, far below its earlier amount of or the government), a low cash recovery index (CRI) and Generation capacity is shared between different companies ducing losses and improving the service quality, especia- 40% in 1991. During this period, it is estimated that the high operative costs in distribution. as it follows: lly through the reduction of mass blackouts, ii) establish conditions for the sustainable financing of companies, 78 1 Under the scope of the SIE, the Office for the Protection of the Consumer (PROTECOM) was also established. 79 The policy to cross-subsidize residential tariffs with dis- reassign subsidies to the poor according to their geographic profitability. However, these formulas provided no relief electricity theft, increased consistently from 10.7% in proportionate raises in tariffs to the commercial and distribution and carry out timetabled blackouts in a more mechanisms for customers once fuel prices diminished. 1990 to 21.6% in the year 2000 (Graph 1). Since then, industrial sectors result in much higher prices for the- organized manner. Currently the subsidy has a limit of 700 they have gradually been reduced as a result of methods se consumers compared to residential consumption. In Kwh/month, which unnecessarily incentivizes consump- Improving billing also represents important and funda- to improve measuring and the recovery of company 2007 the average residential tariff was US$ 0.160 per Kwh tion and has a negative effect on companies’ balance sheets. mental challenges as does the matter of focalizing subsidies portfolios which include measuring outsourcing and (the average for Latin America and the Caribbean was US$ Close to 80% of residential users outside PRA areas fall (evaluation of the Blackout Reduction Program – PRA). bill payment with incentives to prevent fraud, the deve- 0.115 in 2005), while the industrial average was US$ 0.230 into this category. The consumption of the actual poor po- lopment of remote measuring systems and quality im- (the assumed average in the same region was US$ 0,107 per pulation is far lower than this level (100-120 Kwh/month). 3.3 Technical and Commercial Losses provement of subscription, measurement, billing and Kwh in 2005). Furthermore, the average commercial tariff The geographic criteria, used to apply the subsidies, has in- collection of payments (for example, using commercial It is important to continue efforts to gradually redu- rose to US$ 0,290 per Kwh at this time. centivized many customers to move to other areas, raising banks to facilitate payments), and remote connection ce technical and commercial losses. These, including energy delivered with a very negative effect on distribution and disconnection of customers once fraud is detected. It is estimated that subsidies exceeded one billion US$ companies’ operational balances. in 2008. The need for subsidies has grown due to the rise in oil prices with constant tariffs. Subsidies are channeled Since 2002, the sector has remained in a sustained state through two main mechanisms: the Blackout Reduction of crisis and as such the planning, strategy and policies Program (PRA) and the Tariff Stabilization Fund (FET), should aim to resolve these issues to achieve sustainability. Graph 1: Total Losses of Distributors (CDEEE) designed to reduce the impact of oil prices. The financial Crises have shown to be (a) cyclical in aspects related with burden is transferred to distribution companies, whom fuel prices and high fiscal costs, and (b) permanent, such as 50% 45% 46% found it impossible to cover their costs because of the ri- low service quality, and plagued by inefficient and impro- 45% sing fuel rate, low efficiency and a limited customer base visational business practices. A retrospective look from the 41% 43% 38% 39% 40% that could be charged to finance the cross-subsidy. 80s and careful planning of the sector suggests that strategy 36% and policies should respond to: a) achieving consolidation 35% 30% PRA was established in 2001, initially designed for a of reforms introduced in previous years, b) achieve sustaina- 30% 29% 27% period of two years, but it was extended to make up for bility in the sector to respond to future demands in a timely 25% the absence of an alternative to resolve blackouts and the and efficient manner, c) raise generation investment. 20% subsidy for a low-income population. Its objective was to 15% 10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 (1Q) 3. Challenges 3.1 Institutional Strengthening The private sector seems to have lost confidence in sec- tor institutions and is looking to guarantee investments One example of loss reduction is Codensa in Bogotá, Colombia. In 1997, technical and commercial losses were at 24%. The The key challenge is the consolidation of the current through direct contracts with the State because of lack of company reduced its losses to 10% in three years and they are currently at 8.6%. Codensa began by concentrating its strategy in El Sector Eléctrico / capítulo V El Sector Eléctrico / capítulo V reform scheme to strengthen and recover the credi- credibility in the regulatory and control bodies This in low-income neighborhoods where most unmetered customers or those with illegal connections (approximately 400,000) were bility of the sector. The Dominican Republic appro- turn leads to non-fulfillment of the compromises made by based. Work was carried out with the population to explain the nature of the work and the benefits that this would bring (im- ved the laws and created the necessary institutions to sector agents, as in the case of the CDEEE on the issue of proved connections, better service and public lighting in the streets) reaching written and signed agreements regarding customers’ improve efficiency and performance within the sector, payments to electricity generators. rights and obligations. Only communities that were willing to cooperate benefited from the program. After three years 349,000 as for example the possibility of introducing private customers at a cost of US$76.4 million were legalized (an average of approximately US$220 per customer). Additionally, programs capital. These reforms have still not been able to de- 3.2 Tariff Rationalization were established to normalize the service and to control fraud in selected neighborhoods (369,000 customers at a cost of US$ 35 monstrate the expected results due to decisions that million, US$ 95 million per customer), and for larger customers (8000 users at a cost of US$ 2.8 million, $350 per customer). were at times contradictory to the philosophy on which The current financial crisis and lack of sector sustaina- Additional income for the reduction of losses was equivalent to gross income in 2000, a year in which the program was completed. the introduction of these reforms was based. In order bility can be confronted by reducing the vulnerability Codensa continues to anticipate losses by creating incentives that generate loyalty, such as providing credits to purchase electrical to consolidate the scheme and the enormous advances to the highly volatile fuel prices. Since it was necessary appliances or information regarding energy saving. As a result, low-income customers prefer to use Codensa’s services to other achieved in legislation, these decisions should streng- to sign various contracts at the time of the crisis, this re- companies. Another example is Albania. There inefficiencies were reduced in electricity use and the sector’s income was increased. then management and institutional actions so that in- sulted in agreements or remuneration formulas that not The program consisted in three components: a) an Action Plan to reduce losses through better management in measuring supply, vestors’ credibility is recovered and so that customers only began with very high fuel prices and that also remai- disconnecting and reconnecting customers; b) technical and educational assistance, and c) support for institutional reform and assume responsibility and maturity with electricity sec- ned indexed with adjustment formulas or mechanisms 80 tor lenders. that encourage a rise in prices to improve generator 81 grAPH 3: Efficiency Indicator Comparison – Number of Customers/Worker sector strengthening. The Action Plan included various elements, some of which are being applied in the Dominican Republic, such as: (1) Raising the number of inspectors and reorganizing them; (2) Updating and improving measuring equipment; (3) Improving customer service management (including contracts) and the development of trustworthy customer databases; (4) A 2500 publicity campaign; (5) Introduction of an incentives scheme among distributors, and (6) The setting-up of a new financial and 2270 accounting scheme. Sustainability of the scheme is supported by educating communities and customers as to electricity costs and 2000 self-organization to receive better service and to carry out payments in accordance with economic capacity. 1711 1500 1486 1327 3.4. Operational Costs 1000 934 Reducing operational costs is a challenge. The following graphs illustrate the problem. 500 396 221 0 hidrandina Chilectra EdeLnor Electropaz Edenor EEQ EDEs (Norte Perú) (Santiago) (Lima) (La Paz) (BsAs) (Quito) (RD) grAPH 2: Efficiency Indicator Comparison MWh/Worker 3.5. Energy sources Diversification 14000 Most electricity generation comes from thermal sou- ration, it is 9%. The EGEHID expansion plan consi- 12438 rces. Only 14% of installed capacity is hydroelectric 12000 ders a 762 MW increase in hydroelectric capacity from and, when taking into account all thermal self-gene- 2006-2012 2 . 10000 8000 The Renewable Energy Development Project (REDP) from China began in 2001 and has had successful results in the photovoltaic 6204 6000 5651 technology market. Until June 2007, installation was supported with 374,000 photovoltaic systems (FV) with a total capacity of 9 MW, benefiting more than two million people and the creation of more than 30 companies that commercialize this equipment 4000 3806 in north eastern provinces. The FV systems costs were reduced by 50%. The program introduced two innovations: (i) competitive 2270 funds and (ii) a quick response facility for quality issues regarding existing FV components. Its design is based on the Dutch FV 2000 1535 1105 Investigation Program (NOZ-PV), which existed between 1997 and 2001. Around 200 proposals were received for a total of ap- 0 proximately US$ 3.3 million, with a significant impact in the market to introduce testing centers and quality Chinese FV products Chilena edelnor Edenor Electropaz Hidroandina EEQ EDEs and innovation in international markets. As an objective for 2020, China aims to generate 15% of its total energy with renewable (Santiago) (Lima) (BsAs) (La Paz) (North of Perú) (Quito) (DR) El Sector Eléctrico / capítulo V El Sector Eléctrico / capítulo V sources. The government promulgated the Renewable Energy Law, supported by a World Bank technical assistance project, which also supported Renewable Energy Expansion through a US$ 174 million loan and GEF financing for US$ 40 million. Similarly, the IFC lent a local Zhongda Sanchuan hydroelectric company US$ 22 million for the development of three hydroelectric plants passing along the White river of the Yunnan province. Additionally, the World Bank’s Carbon Finance Unit buys carbon emis- sions per 100 MW from the wind park in Huitingxile. 2 According to the CDEEE, the first in a new series of dams and hydroelectric plants (Pinalito) is an “environmental administration model� 82 as to date only 12 families were relocated and sufficient reforestation has taken place. 83 4. Policy Alternatives • Financial planning that allows payments to current eliminate transaction costs and would facilitate decision- generators to be regularized and at the same time making and strategic planning of the energy grid. This Consolidation implies actions in four areas that are mented for the administrative, financial and technical take on commitments with new investors. could require: mutually interrelated and can contribute to achie- management of these firms. • A redefinition of roles and responsibilities in each of ve mid-term sector sustainability: (i) tariff rationali- 4.4. Energy diversification politics the factors that are part of the energy policy definition zation; (ii) a reduction in losses; (iii) a reduction in It is also necessary to put into effect the anti theft law process, sector planning, implementation of policies, operational costs; and (iv) subsidy targeting on the in order to increase electricity payment by large com- The adoption of national energy efficient and diver- materialization of investments and a control and vigi- poorest population. mercial and industrial customers. In 2002, with Decree sification policies should be considered for the ener- lance process of actions of sector agents. No. 748, the government created the National Program gy grid to reduce current dependence on fuel and fuel • Horizontal dialogue between sector bodies for coordi- 4.1 Tariff scheme rationalization to Support the Eradication of Electricity Fraud (PAEF). derivatives, to reduce costs and a more intense use of nation and cooperation. Its main objective was to help distribution companies renewable energies and rural electrification. Tariff rationalization would reduce the crisis and di- in their efforts to eliminate fraud. To date, results have • Vertical dialogue among the national and regional go- minish the fiscal deficit, sending signals to customers. been modest. The main progress took place in 2007 with 4.5 Rehabilitation of generation plants the modification in the Electricity Law, making electrical vernments. A freezing of the tariffs means that the State assumes the deficit or the remaining deficit with a high impact theft a crime (illegal connections, non-payment, etc.) and The Dominican Republic is home to the major LNG penalizing with fines and/or prison terms those who do operational terminal in the area. Quick negotiation to • Explicit incorporation of public policies that relate to in macroeconomic sustainability. Tariff rationaliza- energy, natural resources and environment3. tion would result in a substantial improvement in the not comply. The law has not been implemented and theft make the most of the investment carried out by the ow- sector’s finances. This rationalization should improve continues at a high rate, even among the population that ner of this terminal would, in the short term, incentivize cost coverage throughout the whole of the electricity has the capacity to pay. higher use of natural gas. This would facilitate a rehabi- 4.7 Focalization of subsidies on the production chain. This would allow for new generation litation plan to be brought forward for some generation poorest population to be contracted through competitive mechanisms and 4.3. Operational costs reduction plants that are obsolete today and for which the mainte- to use new technologies such as making the most of a nance is very costly. It is necessary to reform the Blackout Reduction Pro- larger volume of natural gas in generation and adequa- It is necessary to enhance efficiency in companies by gram (PRA) so that subsidies are directed to the poorest te remuneration for transmission and distribution. adopting improvement policies related to management 4.6 Sector Institutionalism to Reduce population. Thus, it is necessary to redesign the subsidies and rationing system, continuing with the current task of capacity: Transaction Costs The tariff backlog could be tackled with an immedia- gradually reducing cross-subsidies with the final objective te decision to increase tariffs to a feasible or acceptable • Management professionalization, overcoming political Greater institutionalism would give the sector more of limiting the subsidies to only homes with a monthly level. With the current low level of liquid fuel prices, an and organizational factors. electricity consumption that is substantially less than the clarity and would make it more operable. This would increase in tariffs would allow the sector to attain a situa- current amount. • Reduction in administrative and operational costs and tion of relative solvency in the short term, with payments expenses, monitored through indicators for continued to generation companies in accordance with an agreed 5. Conclusions improvement (number of employees per customer, effi- upon Adjustment Plan, establishing an efficient payment ciency of the payment system, disconnections for fraud, scheme. The latter would facilitate the implementation of etc.). To conclude, this Policy Note on energy for the Domi- energy policy. In the long term, it would be favorable to a new tariff in order to tackle to the problem in the long term. nican Republic can be summarized by a need in the prioritize efforts to achieve the sustainability of the sec- El Sector Eléctrico / capítulo V El Sector Eléctrico / capítulo V • Precision in coordination between all management and short and mid-term to bring forth actions that aim tor and to respond in a timely and efficient manner to administrative levels in institutions, eliminating the du- to achieve the consolidation and implementation of 4.2 Loss reduction in distribution and plication of roles and overlapping of responsibilities. future electricity demand. In addition, to be able to pro- reforms introduced in previous years, building better mote equity in the sector once reforms are made, and to transmission and more efficient institutional framework for the for- attend the needs of the poorest consumers, the current • Investment in crucial areas such as maintenance of mulation, implementation, regulation and evaluation of subsidy schemes should also be revised. It is necessary to improve operative efficiency in the distribution networks, improvements in companies’ bi- sector. There are various investment projects to im- lling and administration systems. prove the level of electricity measuring that is delive- red to the market, such as repayment from the distri- • Implementation of schemes for a competitive energy bution companies. It is also necessary to introduce an supply by the current and new generators, avoiding efficiency improvement plan so that an increase in the transactions at the moment of crisis that result in 3 In 2005, the National Energy Commission (CNE) and the Secretary of State for the Environment and Natural Resources (SEMARN) signed a CRI is not absorbed by administration inefficiencies. major costs and require exceptions to acquiring assets mutual cooperation agreement to implement an environmental strategy based on the active participation of the private sector. The CNE and The Electricity Superintendence should define com- and services that guarantee competitive and transpa- SEMARN, through the formation of environmental audits certified by an international signature, of those who will be responsible for checking pany management indicators and at the same time rent processes. energy company performance regarding environmental regulations and certifying those who are subject to environmental management plans defined in the license awarded by SEMARN. The CNE will verify that the development projects in the sector respond to the Plan defined by control and follow-up mechanisms should be imple- 84 the body. 85 Bibliography Eds. Aline Coudel, Anis A. Dani, Stefano Paternostro. 2006. Informe Sobre el Desempeño del Sector Eléctrico, Monitoreo del Sector “Evaluating the Fiscal and Social Cost of Fuel Subsidies�. Poverty and Eléctrico, Unidad de Análisis Financiero-Administrativo, Unidad de Social Impact Analysis (PSIA) Group, Fiscal Affairs Department, The Análisis de Distribución, Unidad de Análisis de Generación, CDEEE- World Bank, Washington DC. SIE, Santo Domingo, República Dominicana, Diciembre 2008. Eds. Kristin Komives, Vivien Foster, Jonathan Halpern, y Quentin Jehan Arulpragasam, 2007. “Indonesia Fuel Subsidy Reallocation Wodon. 2006. “Water, Electricity, and the Poor: Who Benefits from - Moving to Targeted Cash Transfers to the Poor: UCT and CCT�, Utility Subsidies?� World Bank, Washington D.C. May 22, 2007 at http://web.worldbank.org/WBSITE/EXTERNAL/ TOPICS/EXTPOVERTY/0,,contentMDK:20479154~pagePK:210058 Dominican Republic CAS – Completion Report, Norman Hicks, ~piPK:210062~theSitePK:336992,00.html. Consultant, December 2008. El Sector Eléctrico / capítulo V El Sector Eléctrico / capítulo V Ley General de Electricidad No. 125-01, Modificada por la ley 186-07 Dominican Republic Electricity Sector Monitoring Committee, del 6 de Agosto, 2007, Santo Domingo, República Dominicana, 2007. Report, Six Months to June 2008. Monitor Energético, Unidad Asesora de Análisis Económico y Social, Dominican Republic Electricity Sector Monitoring Committee, Secretaría de Estado de Economía, Planificación y Desarrollo, No. 5, Report, Six Months to December 2008. Santo Domingo, República Dominicana, Octubre 2008. 86 87 Chapter VI Climate Change and the Dominican Republic Walter Vergara(a) Seraphine Haeussling(b) 1. INTRODUCTION T he effects of climate change, already felt all over the world , might become very intense in Latin America and the Caribbean, where many eco-regions are very sensi- extreme climate events2,3. Some of the sectors that are most vulnerable to climate change are water resources and tourism. Important changes are expected in the quality tive to the climate. While the long-term effects of climate and quantity of water and in the state of the watersheds. change remain in the realm of speculation, there is sufficient The impact on the tourism sector (which represents 13% information available on the pace at which several climate of GDP) might have important economic repercussions. parameters are changing; for instance, the change in tempe- Other vulnerable sectors that were identified are: forestry, rature of the surface waters in the Caribbean Sea, the rate agriculture, health, and the coastal-marine ecosystems. of retreat of glaciers in the tropical Andes, and the rising sea El Cambio Climático / capítulo VI level, among many others. This Policy Note considers the main challenges that the country will have to face, as well as the critical decisions it These changes constitute major risks for the Dominican will have to make. Republic. According to the climate risk index (for 1998- 2007), the DR is the fourth country most affected by Climate Change Specialist. (a) Climate Change Consultant. (b) 1 Global CO2 emissions already exceed the worst emissions scenarios (SRES) of the IPCC, as average global emissions till 2007 have exceeded those projected under the worst-case scenario known as AR4 A1FI, as observed in Graph 1. Thus, the current trend may lead to a situation that is worse than the expected consequences. Although there is a degree of uncertainty as to the exact consequences, it is feared that even under scenarios of far less emissions, the operation and integrity of the key ecosystems might be affected. To these impacts one should add the pressure exerted by local anthropogenic effects (Evaluation of Ecosystems of the Millennium, 2007), a combination that constitutes an unprecedented challenge for socioeconomic development and for the world’s biosphere. 2 The Global Climate Risk Index analyzes the extent to which the countries have been affected by the impacts of climate-related events, such as hurricanes and floods, and takes into consideration the following indicators: total number of deaths, deaths per 100,000 inhabitants, absolute losses in millions of US$ (at Purchasing Power Parity - PPP) and losses per GDP units in %. 3 http://www.preventionweb.net/files/8658_cri2009.pdf. 89 2. Diagnosis of global emissions. On the other hand, carbon intensity is not low: 0.5 Kg. CO2e /$GDP PPP. Per capita emissions amount to 3.2 t CO2e5. Graphs 1 and 2 show both the 2.1. Vulnerability to Climate Change trends of emissions and the distribution of GHG per sectors. The climate risk index points to the situation of vulnerability of the country. Table 1 presents specific indicators for the ten countries most affected by extreme climate events between 1998 y 2007. Graph 1: Greenhouse Gas Trends (GHG) Table 1: Climate Decadal Risk Index - CRI 160% National CO2 emissions (does not 140% inculde changes in land use) CRI 1998-227 Country CRI Score Average Average deaths Average Average death toll per 100,000 total losses losses 120% inhabitants (in million US$ PPP) per GDP in % 100% PPP 1 Honduras 6.75 579 8.50 1,166 5.15 2 Bangladesh 10.92 1,093 0.70 4,426 3.02 80% Per capita CO2 emissions (does not 3 Nicaragua 11.62 308 5.70 528 4.30 60% inculde changes in land use) 4 Dominican Republic 14.83 414 5.00 503 0.98 40% 5 Haití 15.75 402 5.10 232 2.42 PPP / person 6 Vietnam 18.33 406 0.50 2,152 1.47 20% 7 India 18.83 4,532 0.40 12,047 0.62 0% Population 8 Mozambique 24.75 121 0.60 228 1.98 9 Venezuela 24.75 3.012 11.9 433 0.18 -20% 1990 1992 1994 1996 1998 2000 2002 2004 10 Philippines 25.83 472 0.60 698 0.33 Source: Climate Analysis Indicators Tool (CAIT). Source: Global Climate Risk Index; Weather-related Loss Events and their Impacts on Countries in 2007 and in a Long-term Comparison; Sven Harmeling. According to the scenarios developed in the First Natio- evapotranspiration and, consequently, to a water deficit GrAPH 2: GHG Emissions per Sector in 2000 nal Communication to the United Nations Framework with a runoff reduction of up to 95% by the year 2100, Convention on Climate Change prepared in 2003, the under the assumption of the most pessimistic scenario. Dominican Republic following changes are expected: Also, it is expected that humid zones will become much Sectors MtCO2 % drier, and that the currently most arid zones will expand.4 • Rise in temperatures: it is expected that temperatures Energy 17.4 93.1 will reach an average of 26.2 º C in the year 2010, 26.9 Some of the main vulnerabilities are: i) exposure to ex- Electricity & Heating 6.5 34.7 º in 2030, 27.7 º in 2050, and 29.6 º in 2100. treme events; ii) the impact of the rising sea temperature, with implications for the coral reefs, which in turn has an Manufacturing & Construction 1.5 7.8 • Reduction of rainfall: for 2010 the level of rainfall impact on the protection of the coastlines, tourism and El Cambio Climático / capítulo VI El Cambio Climático / capítulo VI Transport 6.6 35.5 expected is 1,277 mm; 1,137 mm for the year 2030 (a fishing; iii) the rising sea level with its impact on coastline reduction of 11% in comparison with the year 2010); infrastructure and communities, and iv) the changes in Other Fuels [1] 2.8 15.1 976 mm in 2050, and 543 mm in 2100, which repre- rainfall cycles. Fugitive Emissions [1] -- -- sents a reduction of 57% in comparison to 2010. 2.2 Carbon footprint of the Dominican Industrial Processes [1] 1.3 6.9 • Sea levels rises: sea levels are expected to rise between Republic Agriculture -- -- 1.47 to 13.55 cm in the year 2010, between 3.77 to 26.73 by the year 2050, and 12.71 to 105.67 by the year The effects of Greenhouse Gas (GHG) Emissions are rela- Land-Use Changes and Forestry -- -- 2100, depending on the scenarios. tively minor. In 2000, the country emitted 27.7 Mt CO2, Waste -- -- including emissions due to land-use changes. The country The projected temperature rises, together with the ex- ranks 110th in terms of GHG emissions, representing 0.07% Total 18.7 pected reduction in rainfall, will lead to an increase of Source: Climate Analysis Indicators Tool (CAIT) Version 6.0. (Washington, DC: World Resources Institute, 2009). 90 4 World Bank; Climate Change Aspects in Agriculture; Dominican Republic Country Note. 5 Cait.wri.org. 91 The Dominican Republic has been developing a pro- safety of drinking water, clean beaches, healthy coral to study more in-depth the impact of climate change on reover, the country is very vulnerable to extreme events gram to respond to the problems caused by climate reefs and well-managed protected areas. Nonetheless, forest eco-systems, and the contribution of reforestation such as storms and floods that have a direct impact on change. The First National Communication was pre- the sector is being affected by a lack of water supply and and restoration measures to the increase of resilience to the sector. Consequently, it is essential to reduce this sented in the year 2003 and included the first inventory wastewater treatment services. The quality decrease of expected impacts. vulnerability in order to preserve food security and live- of greenhouse gases and studies of the impact of clima- coastal waters and the health risks posed by unfavora- lihood of the rural populations.10 te change on the sectors of agriculture, human health, ble environmental conditions threaten the existing tou- The increase of population, sedimentation, sewerage water resources and marine coastal resources. At pre- rism destinations. and other forms of contamination produced by agricul- • Health sent, the Draft for the Second National Communication ture, mining, industry, shipping activity and tourism, is being prepared. The development of tourism operations exerts pressure exerts a lot of pressure on the beaches, coral reefs and There exists a clear relation between changes of cli- on the coastal ecosystems and it takes place in naturally fishing zones. Climate change will exacerbate these pro- mate variations and the changes in the behavioral 2.3. Climate Change impacts fragile environments. Broad coastal areas have suffered blems, particularly because of the rising sea levels and patterns of diseases such as dengue and malaria. The the impact of unsustainable activities such as the develop- the increase in temperature and extreme events, causing importance of this is expressed in the increased num- • Water Resources ment of beaches, which in turn has caused damage through additional impacts on the already weakened coastal and ber of sick people, and in the fact that these diseases sedimentation. Other effects include: disposal of untreated marine ecosystems. occur in months and seasons that are different from The Dominican Republic faces challenges in the manage- wastewater and solid waste along the coastline, overexploi- their normal behavior. The projections of the study ment of its water resources. Water scarcity is a regional pro- tation of groundwater, destruction of forest cover and over- • Agriculture and Food Security are validated by the current behavior of the disease blem caused by poor water management, by the urban areas fishing of corals and marine species. Those impacts reduce patterns and by certain trends in their manifestations. water supply, and by the existence of tourism infrastructures the resilience of the ecosystems increasing the vulnerability The contribution of the agricultural sector to green- The impact attributable to the climatic stress, caused by in the most arid regions of the country. The contamination to the impact of climate change. house gas (GHG) emissions is fairly low in the coun- variations, is not negligible and, in combination with and degradation of the upper water basins shelf significantly try. According to the First National Communication, the hygiene and sanitary conditions of each region, this contribute to the degradation of the coastal basins, adding The changes in intensity of extreme climate events will the agricultural sector was responsible for 1% of such could lead to major public health emergencies. The to the local pressures of the tourism industry in these areas. have an impact on tourism infrastructure and coastal emissions in 1994. Out of the total emissions of metha- results show that dengue, and malaria to a lesser extent, The mismanagement of watersheds has led to soil erosion erosion. The state of the coral reefs is of particular ne and nitrous oxide, 38% and 86%, respectively, are are diseases that are very vulnerable to climate change, and has worsened the frequency and damage caused by concern. Along the east and northeast coasts exist attributable to agricultural activities. Nevertheless, the and the tendency is to rise in such cases. In addition, floods. Erosion rates have quadrupled since 1980, and the broad shallow shelfs, but the muddiness caused by se- sector is highly vulnerable to climate variability, parti- there are other risk factors that might aggravate or mi- increased muddiness of the water, caused by earth sedimen- diment from the mainland prevents the formation of cularly in the southwest and in the northwest, where tigate these impacts, such as the age groups, degrees of tation, affects the formation of coastal reefs.6 coral reefs along the remaining coastline. Moreover, drought has a considerable impact on harvests. Mo- urbanization, migrations, among others.11 the rising temperature of the sea water causes white- According to a study of the vulnerability and adaptation ning of the corals, with impacts on the availability of of water resources, the reserves of groundwater are se- sand, on diving tourism suffers, and on its role as a riously affected by their physical and chemical deterio- natural protection barrier of the coastline.8 ration and by the rainfall deficit. The expected rise of the sea level and changes in rainfall patterns might affect • Forest and Coastal-Marine Ecosystems groundwater basins, mainly in the south of the country. In 1994, a World Bank environmental evaluation iden- El Cambio Climático / capítulo VI El Cambio Climático / capítulo VI The study concludes that the most likely scenarios would be a significant reduction of the country´s water resour- tified deforestation as the main environmental priority. ces, both surface and ground water, and a deterioration of Since then, an aggressive policy against deforestation, sub- the chemical and biological quality of the water. Regar- sidies to liquefied petroleum gas (LPG) as a substitute for ding groundwater, the rising sea level might cause saline firewood in rural areas, migration to urban areas, and re- intrusion7. forestation efforts, seem to have reduced or even stopped net deforestation. However, the consequences of past de- • Tourism forestations are still felt: large areas remain vulnerable to erosion due to the lack of forest cover destroyed, also, by The growth of the important tourism sector will de- hurricanes. And, the increased intensity and frequency of pend on the quality of the environment, including the latter might worsen this impact. It would be advisable 6 World Bank, “Prioridades Ambientales y Opciones Estratégicas, Análisis ambiental del país, 2004�. 7 National Action Plan for climate change adaptation in the DR., Pana DR. 10 Climate Change Aspects in Agriculture; Dominican Republic Country Note. 8, 9 Banco Mundial, “Prioridades Ambientales y Opciones Estratégicas, Análisis ambiental del país, 2004� . 11 National Action Plan for climate change adaptation in the DR., Pana DR. 92 93 • Institutional Capabilities Lucia, and the regeneration of corals affected by thermal whitening in Belize. Regarding this latter pilot, the establis- 3. Policy Alternatives At the same time as developing the pilots, it is essential hment of protected marine areas is a policy that takes into to strengthen local institutional capabilities to analyze account both local and global threats against the ecosys- • Studies ronmental Analysis of the Country� supported by the World Bank14. All these measures will benefit the plan- the climate change scenarios and their impacts on the tems. The creation of non-fishing zones in protected areas ning and implementation process, with more detailed different sectors, and to define responses through the is a good strategy to reduce stress on the coral reefs and to The DR should adopt an anticipatory strategy against data on scenarios for the impact of climate change on design of pilots and policies. In this regard, the training maintain a healthy equilibrium16. Experience with restora- climate change, with emphasis on the sectors identified water resources. This integration of climate change con- of local scientists in the application of high-resolution cli- tion of corals has proven to be more effective in non-fishing as the most vulnerable ones (water, tourism, agricultu- siderations will contribute to more sustainable measures mate models in areas and zones of interest has been very zones than in reefs affected by over-fishing17. re, infrastructure, energy, etc.). This requires a deeper analysis of the vulnerability of each sector. For instance, and more resilience of the water resource. These consi- useful to define longer-term adaptation programs. The derations are based on the projections of the majority of active participation of local communities has been funda- In summary, the adaptation program in the Caribbean consideration should be given to the impact scenarios the models applied within the framework of the Natio- mental for the successful implementation of local actions. started in 1997 with the CPACC project and support based on the framework of the National Communica- nal Communication that suggest a worsening scarcity of of the GEF that have contributed to increasing aware- tions and the National Action Plan for Adaptation to water resources in the future. • Experimentation Pilots ness of climate change among decision-makers. This Climate Change prepared by the Secretariat of State for project was followed by the MACC project that suppor- the Environment and Natural Resources (SEMARENA). Several adaptation pilots are already generating data on ted the introduction of climate change considerations in This effort should include the analysis and systematiza- • Sectoral Policies the costs and benefits of adaptation15. Examples inclu- sectoral programs and policies. Finally, the third stage, tion of climatic variables such as rainfall, temperature, de desalinization of coastal aquifers using wind energy and that still under implementation, consists in implemen- water balance, sea level and temperature forecasts and Sectoral strategies should be considered in order to con- reverse osmosis on the island of Bequia, the strengthening ting specific adaptation measures to learn about their the occurrence of intense and frequent hydro meteoro- solidate the necessary capacity to respond to the expec- of coastal infrastructure to resist hurricane winds in Saint costs and benefits. logical events under different scenarios of climate chan- ted impacts of climate change. These strategies should ge (for instance, the SRES scenarios elaborated by the improve the capacity of adaptation to these impacts, with IPCC)12. emphasis on the most vulnerable sectors, and at the same time, integrate climate change issues into sectoral policies In the water sector it will be necessary to develop tools and development plans. to apply to the watershed level (entry data for rainfall- 4. Conclusions runoff models) the information contained in the clima- The policies should consider the results of the vulnera- te change scenarios. In this sector, support should be bility studies and of the climate change scenarios gene- As the country is highly vulnerable to the impact of cli- specific measures and institutional strengthening. Experien- given to pilot projects geared towards a more efficient rated for each sector, with economic evaluations of the mate change, it is crucial to start an intensive adaptation ce has shown that the eco-systemic approach is very useful management of existing water resources (e.g. adoption of expected impacts and a cost-benefit analysis of adaptation program. It is expected that the impact of climate change and comprehensive. It allows tackling several problems and drip irrigation) and the development of alternative water measures. This process will allow to draw lessons from adds stress to the economic sectors, particularly tourism sectors simultaneously and strengthens the resource base of sources, such as the treatment and use of rainwater and the implementation of adaptation pilots, which would and agriculture. Consequently, it is important to consider economic activities. A stronger ecosystem is more resistant desalinization of sea water with renewable energy sour- generate data and feed into the policy design process. climate change in the sectoral policies and to strengthen lo- to the impact of climate change and is likely continuing to ces. Moreover, studies should be conducted to analyze cal capabilities in order to confront those challenges. The benefit fishing, tourism, coastal protection, biodiversity, the impact of climate change on the availability of water It is suggested to adopt a coherent framework for the Latin American region is leader in the implementation of water supply, and others. El Cambio Climático / capítulo VI El Cambio Climático / capítulo VI resources and to estimate the opportunity costs for di- management of water resources that also focuses on sus- fferent users. This would help to better plan the mana- tainable demand, considering among other things, the gement of water resources and to create incentives for a possibilities of reducing water demand for irrigation, as more efficient use13. well as incentive programs for irrigation management, water supply in urban areas, reforestation and reduction • Policy Strategy of erosion, management of coastal aquifers and waters- hed management. Likewise, future hydroelectric genera- It is suggested to adopt the measures of the study “En- tion should take into account the forecasts derived from vironmental Priorities and Strategic Options – Envi- studies on climate change and its impact on watersheds. 12 The projections of these variables should be based on available models of General and Regional Atmospheric Circulation. For instance, among others, the results could be considered of the Earth Simulator model of the MRI of Japan, with a high resolution (currently, of 20 km x 20 km, but in the future of 5 x 5 km). 13 In this regard, the experience accumulated in the region is very useful both for the implementation of adaptation pilots and for conducting studies to analyze the impacts as specifically as possible (e.g. in Peru a study is being conducted to analyze the impacts of climate change on 15 The Caribbean region has been working for more than ten years on the topic of adaptation. the water resources affected by the retreat of glaciers). 16 Marshall and Schuttenberg 2006, Grimsditch and Salm 2006. 94 14 World Bank. Environmental Priorities and Strategic Options. Environmental Analysis of the Country. 2004. 17 International’s Coral Gardens-Living Reefs Initiative. www.counterpart.org; Bowden-Kerby et al, 2005. 95 CHAPTER VII The Health Sector Fernando Montenegro Torres(a) 1. INTRODUCTION I n the last five years progress has been made on key re- forms aimed at improving the health system’s respon- siveness and efficiency. Key steps for the expansion of uni- the provision of health services through a decentralized and autonomous public network; and, (iii) the reorganiza- tion of the health system, separation of functions: finan- versal insurance, decentralization and strengthening of regional cing, risk pooling, strategic purchasing, and provision of networks have been achieved. Nonetheless there are still pending health services. This, in turn, implies the strengthening issues that need to be tackled to attain adequate levels of resource the capacity of the Ministry of Health (MOH) to provide allocation in an efficient way. Public spending on health in the stewardship to the health sector. Dominican Republic is lower than the average compared to other countries with the same income level and even with lower income Organizations established by Law 87-01 has already been countries. Increases in public expenditures for the health sector created and the Subsidized Regime that covers the poor requires to be carried out along with the adoption of policies population’s health insurance has begun to be imple- El Sector Salud / capítulo VII and interventions oriented to improve the sector capacity to im- mented. MOH has developed the envisioned decentra- plement results-based budgeting, particularly considering current lized health care through Regional Health Services (Ser- fiscal space. vicios Regionales de Salud - SRS). SRSs are public health care provider networks organized within the framework of In 2001, the General Health Law (42-01) and Dominican WHO’s primary health care approach. SRSs have annual Social Security System Law (87-01) were passed. The key management agreement with MOH central authorities objectives of these laws were to improve health system’s that are monitored with performance indicators. The first performance and efficiency: (i) to improve public expendi- annual management agreements between the central level ture equity for health through universal health insurance of MOH and the two first regional health systems (regions coverage comprehending three health insurance regimes VI and VIII) have already been signed in 2009 and the one of which was fully subsidized for coverage of the poor rest of the regions have begun to prepare to sign in the and other vulnerable populations; (ii) decentralization of short and mid-term. (a) Economista Senior del Sector Salud. 97 The greatest three challenges of the health sector are: (i) im- through the expansion of health insurance coverage (espe- 2.2. Health expenditure and provision of services proving equity in health financing; (ii) improving the level cially in the Subsidized Regime) and (iii) introduction of of public health spending (one of the lowest in the region) results-based financing mechanisms. The Dominican Republic is financing the total national health expenditures with one of the highest percentages of out-of-pocket expenditure in the region, as indicated in Graphs 2 and 3. 2.Diagnosis graph 2: National Health Expenditure by type of expenditures in selected Latin American and Caribbean 2.1. Current Situation However, in the same way as other countries in the region, the country has a double challenge: a) to overcome an un- Public Private, Non out-of-pocket expenditue Out-of-pocket expenditure The latest information regarding services coverage and finished agenda of solving diseases typical for countries of health outcomes suggests that there have been impor- low development (common infectious disease, maternal- 100% tant improvements reflected in the increase of life expec- 10 infant health, etc.) and b) the prevention and treatment 90% 18 tancy and the reduction in deaths caused by infections. 7 23 needed to respond to the rapid growth of chronic diseases. 31 33 35 27 34 26 46 80% 40 45 42 42 48 57 52 52 5 70% 56 55 1 8 Table 1: Selected Health Outcome Indicators for the Dominican Republic - 2007 60% 28 16 19 53 19 10 50% 7 7 3 7 Life Expectancy Infant Mortality Maternal Mortality % with a medical % with a medical 3 3 83 diagnosis of a diagnosis of 18 40% 8 7 7 chronic condition hypertensionn 72 47 30% 60 65 Men: 66 1996: 47 1992-2002: 178 Urban areas: 15.0% Urban areas: 7.7% 50 50 51 57 Women: 74 2007: 32 1997-2007: 159 Rural areas: 13.4% Rural areas: 6.5% 46 45 45 43 49 20% 36 45 36 39 38 Source: WHO, UNICEF, UNFPA and Health and Demographics Survey (ENDESA) Dominican Republic 2007. 29 10% Nonetheless, the quality in the provision of services has and maternal mortality data. Despite the large number 0% not increased at the same pace as coverage exacerba- of institutional deliveries (over 95%), maternal mortality a ia il ile ua á y ú a a or r ala ití as a ico y la . ep do ua ua as in aic am bi Ric r liv ue Ha ur ad Pe Ch g em éx nt m nR Br lva g ug ra m Bo nd n ez ta u ra lo ge M Pa ca Ec Ja at ica Ur ting existing health system challenges. One example of Sa levels are as high as that of countries with lower institu- s n Pa Ho Co Co Ar Ve Ni Gu in El m Do this is reflected in the analysis of institutional deliveries tional delivery rates and comparable income levels. Source: World Development Indicators database. graph 1: Institutional births and maternal mortality in selected countries in Latin America and the Caribbean. Private expenditure is the main source of income to in absolute terms, in relative terms is high. The sur- finance health services, making up out-of-pocket ex- vey analysis also shows that expenditures in medicines Maternal Mortality Rate penditures the bulk of national health financing, far constitute the main part of the total out-of-pocket ex- 25 exceeding the overall public expenditure, as indicated penditure, and constitute a larger share for households El Sector Salud / capítulo VII El Sector Salud / capítulo VII perú in Figure 1. Out-of-pocket expenditure is regressive; of the poorest quintiles. 20 although lower income households may spend less paraguay Rep. Dominicana el salvador 15 Colombia ecuador Brazil 10 argentina jamaica méxico 5 costa rica chile uruguay 0 100 95 90 85 80 75 70 65 % of births attended by autorized personel Source: World Health Organization, 2007. 98 99 graph 3: Household expenditures on medicines as share of total health out-of- majority of the population. . Improvements introduced cially for the poorest households (Graph 5). pocket expenditures for the provision of these services will have a direct po- sitive impact on the majority of the population1, espe- Percentage distribution of the average out-of-pocket health expenses by category of expense Dominican Republic 2007 50.0% graph 5: Use of ambulatory services2 according to the institution where these ser- 46.2% 45.0% vices were provided. Dominican Republic, 2007. 40.0% 35.0% 35.0% Other FAA/PN No n Public 30.0% Private 1% 4% Sector 23.6% 29% 25.0% IDSS No Info 20.0% 12.6% 5% 4% 9.8% 10.0% 7.8% 5.0% 0.0% Consultation Medicines Lab Test X-ray/Others Others/No Categ. SESPAS 57% Graph 4 presents previous data by income quintile. graph 4: Percentage of out-of-pocket expenses of individuals who reported health expenditures in the last months by income quintile and type of expenditure. Dominican Republic, 2007. Source: ENDENSA Demographic and Health Survey, 2007 60.0% 9.6% The survey shows a high percentage of individuals see- measurable results. Nor was an explicit list of guaranteed 50.0% 47.8% 48.5% 49.9% 47.7% king medical care for ill health (98.4%). Nonetheless, health care. These factors made efforts to develop and 45.0% 50.5% 39.9% 5% of the rural population does not seek medical care maintain effective access and quality systems that allowed 30.0% due to a lack of resources for the consultation or trans- for results to be monitored more complicated, both by the 27.5% 22.4% 20.3% 22.3% 20.3% 9.6% 20.0% 18.1% port, and 2.5% does not for perceiving the quality of care government as for the beneficiary population. 15.1% 10.0% received as bad, due to a lack of medicines, absence of 10.0% 9.6% 9.6% 9.4% 8.3% doctors or due to other failings in health units. Reform laws from the sector in 2001 provided the regulatory 0.0% framework for a radical change in health financing, oriented El Sector Salud / capítulo VII El Sector Salud / capítulo VII Quintile 1 (Poorest) Quintile 2 Quintile 3 Quintile 4 Quintile 5 (Richest) 2.4 The health sector reform: legal and to be a more efficient, equitable and sustainable sector in Medical Consultation Other/No Info Exams and Diagnostics Medicies financial framework the long term. These laws sought to achieve a better quality of financing that would allow reducing gaps in access and quality Source: ENDENSA Demographic and Health Survey, 2007 The public health sector had two institutions (MOH of services without increasing or deepen poverty of the lower and IDSS) that maintained their own services and provi- income strata. ders network. Both organizations acted as a vertical inte- grated health subsystem, with no separation between the The new legal framework creates a universal health pro- 2.3. The provision of health services to the Demographic and Health Survey (ENDESA) of financial and the provision of services. This meant that 2007, less than 12% of the population had health in- tection system with three regimes; a) a Subsidized Regime The largest provider of health care services is MOH surance coverage provided by the Subsidized Regime there was no contractual or quasi-contractual relationship (for the poorest and most vulnerable groups of the popu- through the SRS providing ambulatory and hospital for whom MOH is the mandatory provider. That is to that allowed management based on financing linked to lation outside the formal sector employment), b) a Con- services to over half of individuals who reported nee- say that even when the Subsidized Regime has still not ding and seeking medical care. The private sector pro- reached the whole population objective (1.2 million of 1 And according to figures from the latest survey of ENDESA, it remains as the leading provider for populations in the poorest and most vulnerable strata. vides services to 1/3 of the population in ambulatory the total estimated of 3.4 million), the SRS from the 2 The figures for the use of placement services are similar but increase the use of the private sector. The reported distribution is: MOH 55.5%; 100 services and a few more in hospital services. According Ministry are the main providers of health care for the Private Sector 36.6%; Dominican Institute of Social Security 3.4%,; Army 2.1%, Other non-public 1.6% and not reported 0.7%.MOH 101 tributory Regime (for households whose heads of family allocation of financial resources, set aside for the pro- From 2004, it was decided to focus more on social pro- enrolled, which represents approximately 26% of the belong to the formal sector employment) and finally, c) the vision of health services for poor and vulnerable hou- tection for the poorest strata of the population. The target population. In 2007, after a long negotiation Contributory-Subsidized Regime for individuals who do seholds, have a specific contractual framework. These enrollment rate rose notably, in particular over the last process, the contributory regime finally began to be im- not belong to the latter-mentioned groups. new contractual rules create conditions to monitor the three years, as shown in Graph 7. At the end of 2008 plemented and the enrolled figures are approaching 2 provision of services aligning financial incentives with over 1.2 million individuals from poor households were million people for the end of 2009. In the subsidized regime, the government finances 100% of an improvement in the population’s access to higher health care costs for enrollees. In addition, insurance must quality services. offer a benefit package with an explicit list health services graph 7: Financing for the Subsidized Regime covered. The legal framework stipulates that the Universal 2.5. The implementation of the health Health Insurance System Treasury is the only entity autho- Fiscal financing for the Subsidized Regime reform rized to pool the financial resources. Health Risks Managers 2500 (ARS – Administradores de Riesgos de Salud) were also established RD$ Millones and are endowed with the responsibility of managing the poo- Since the laws were passed, the implementation of sector 2000 led financial resources collected from different sources accor- reform has advanced at a substantially slower rate than 1500 ding to each regimes: employer and employee contributions in planned. Laws provided a term of ten years to conclude the 1000 the case of the Contributory Regime; contributions from the establishment of three regimes and the enrollment of the 500 state for the Subsidized Regime; and contributions from en- whole population in the Family Health Insurance. Over 0.0% rolled and the State for the Contributory-Subsidized Regime. the first few years some of the key institutions responsible 2003 2004 2005 2006 2007 2008 for the financial and administrational management of the social health protection system were established; neverthe- Source: Ministry of Economics, Planning and Development, 2008 The establishment of National Health Insurance (SE- NASA) as Health Risks Manager and as the organiza- less, enrollment was extremely slow. It does not currently tion responsible for receiving and managing the re- appear very probable that the total coverage goal will be met for the year 2011. 2.6. Health sector financing medicines for primary health care. Funds are mainly sources for the Subsidized Health Regime, allows that defined according to past budgetary amounts with mar- The main challenge is to improve targeting and quality ginal increases or decreases. The increase in financing of public spending while increasing spending on health through capitations for the subsidized regime opens concomitantly with the introduction of accountabili- the possibility of increasing financing to the health sec- ty and results monitoring mechanisms. As the fiscal tor through more equitable and efficient mechanisms. graph 6: Enrollment rate Growth for the Subsidized Regime over the past five space permits, it is also essential to increase funding for years. the provision of services to the poorest strata. Economic The introduction of strategic purchasing mechanisms, health literature suggests that when there are high ra- both for services and goods and medicines would allow November 2003 to November 2008 tes of out-of-pocket expenses for individuals to finance improving allocation of expenditure for agreed goals with health services, this founding is regressive and has a di- public providers, both through MOH and the Subsidiary rect negative impact on the family budget of the poorest Regime. The Ministry explores mechanisms to strengthen 35.0% households of the population3 but it also diminishes the its rectory capacity, to improve the incentives framework 30.0% resources available for other types of investment in hu- and to exploit synergies with SENASA to improve efficien- man capital. cy of the allocation of resources in the health sector inclu- El Sector Salud / capítulo VII El Sector Salud / capítulo VII 25.0% ding the development of information systems that allow for 20.0% Apart from the need to prioritize and protect health monitoring to improve the provision of services. The agree- 10.0% expenditure, it is a major challenge to introduce tar- ment reached between PROMESE/CAL and SENASA will 5.0% geted financing mechanisms that allow the generation allow for health sector financing to be increased through 0.0% of incentives for a more efficient and better provi- the expansion of a more transparent and effective subsi- sion of health services with an emphasis on primary dized regime coverage. On the other hand, although ma- 3 5 8 00 00 00 2 2 2 health care. Currently the bulk of resources are allo- nagement consolidation for the effective and transparent v. v. v. No No No cated trough non-optimal mechanisms for expenditure use of resources designated to the purchase of medicines 5 year period targeting and to align incentives to improve the quality and other consumables has meant very important progress of health services. An example is the financing for the through the Essential Medicines Program - PROMESE/ Source: Ministry of Economics, Planning and Development, 2008. provision of health services from the MOH to the re- CAL-, an institution that has yet to expand the medicines gional public providers’ network and the financing for supply management across the public sector. 102 3 Baeza y Packard “Beyond Survival: Protecting Households from Health Shocks in Latin America�. The World Bank, 2006. 103 Public expenditure designated to the Subsidized Re- dividuals have been enrolled to the Subsidized Regime. information systems that allow decentralized manage- on a large scale for the public sector (MOH and SENA- gime grew in the past two years. Nonetheless, the his- This represents approximately one third of the total ment and monitoring of results. SA), it is required to introduce monitoring and infor- toric expenditure is still predominant as can be seen target population estimated as of 2007 to be about 3.7 mation systems at the SRS level allowing PROMESE/ in Graph 8. At present a total of 1,226,142 eligible in- million individuals. Additionally, the situation needs to consolidate more CAL to acquire and distribute medicines based on real effective and transparent management in the purchase usage and not merely to replace inventories. The main of health services and inputs such as medicines (priori- challenge is the design and quality control of the input tizing primary health care). The expansion of synchro- information for each of the health units that is used at nized and more perfect planning mechanisms for needs different managerial levels. The eventual automation graph 8: Total public expenditure on health and total public expenditure for and purchases, would allow for resources to be allocated of the system can facilitate more efficient management the Subsidized Regime as GDP %. Dominican Republic 1995 – 2009. according to the real needs of the population and depen- whenever it has been tested that the information system ding on agreed results with public providers. In order to can work with clear responsibilities of recollection, flow implement more efficiently the purchase of medicines and quality control. 1.80% 1.60% 1.40% 1.20% 3. Policy Alternatives 1.00% 0.80% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* 2009** Consolidation and expansion of the Subsidized Regime Coverage is approximately 1.2 million enrolled indivi- Helth Expense Health Expense + SFS-RS enrollment and its respective financing; duals to the subsidized regime which represents and annual total amount of DR$ 2.6 billion (approxima- * Planned budget. ** Estimated preliminary budget • To prioritize and protect poorest groups through the tely US$75 million). The financing of approximately Subsidized Regime, channeling finance with mecha- 2.2 million of additional beneficiaries (assuming that Source: Ministry of Economics, Planning and Development, 2008. nisms that improve expenditure efficiency. If the per the estimated target population is 3.4 million) would capita amount were to remain fixed over the next five require an additional annual budget of DR$4.7 billion years, the total annual amount increase, required to fi- (approximately US$137 million). To achieve this goal, nance the whole eligible population for the Subsidized would be advisable to coordinate a multi-sectoral and Regime, would be approximately US$150 million an- multi-institutional agreement with the participation If the level of enrollment is maintained, on average 500,000 lative percentage allocated through historical financing. nually. In fact, the total annual amount per individual of key actors in the health and social protection sector individuals annually, the whole targeted population of the The majority of resources are allocated through imperfect of the Family Health Insurance for the Subsidized Regi- to ensure realistic multiannual planning that advances Subsidized Regime, basically poor population, could be co- mechanisms regarding targeting and the lack of incenti- me is at DR$2,176 (approximately 61 dollars per year). towards the right direction. vered by 2013. However, if the average enrollment annual ves to improve quality. Some examples are financings for rate halves to 250,000 individuals, the enrollment goal of all the provision of services to the regional public providers’ the target population would be reached in ten years, which network and of essential medicines needed for primary would represent a seven year delay regarding the mandate health care, which are allocated according to historical El Sector Salud / capítulo VII El Sector Salud / capítulo VII of laws from 2001 and the loss of opportunities for a more criteria. The allocation of resources to regional providers efficient investment in human capital given that health inves- is in the process of decentralization and the government tments, in particular maternal-infantile health, have a long will begin to explore the potential benefits of introducing term impact on the life of individuals enhancing the results new results-based mechanisms of allocation within the fra- of public investments in education and social protection and mework of management agreements. also labor competitiveness. The management capacity of the Ministry should be 2.7. Main Health Sector Challenges and strengthened both for individual medical care and for Priorities collective prevention, through a refining of management agreements with services providers and information and The priority is to increase financial protection in health evaluation systems that allow for monitoring of the fulfill- for the poorest groups of the population through the ment and progress of goals. In the same way, incentives financing of the mandatory health insurance regime should be improved and synergies acquired with the expan- (Subsidized Regime) and, to progressively reduce the re- sion of the Family Health Insurance. Should also develop 104 4 Estimated Exchange rate of DR$35 per 1 U.S. dollar 105 contracts with public providers. This approach also organizational agreements between purchasing (in Examples of welfare in health protecting the Spending on Health Insurance: budgetary priorities, targeting and progressive but requires the development and implementation of an the RS carried out by SENASA) and in the provision sustained expansion of universal insurance. information system for the management and purcha- of services (public providers.) SENASA uses capita- se that links several actors at a central and regional tion for primary health care, and direct purchasing Taiwan and the Republic of Korea have successful strategies for universal health insurance. In Korea, a growth context and the level. This requires investment and coordination. for the rest of the services. Financing by capitation expansion of the labor market were important factors in its success, but several analyses have shown that budget planning and mechanisms (allocation of per capita resources), protection for the already enrolled population allowed for goals to be combined and to advance progressively but sustainably in • RS contractual mechanisms can be strengthened with payments in two stretches6, can be used to ge- universal health insurance coverage. with monitoring and information instruments to nerate incentives based on improving the quality of capture data on the demand and offer of health ser- first level services using simple payment formulas. In Taiwan, compulsory membership of health insurance came at the end of a reform process that took more than a decade. One vices. Three insurance regimes have generated new factor for the success was the introduction of partial programs with progressively more complex packages and a rigorous evaluation to learn lessons from the implementation. Taiwan began with the poorest and rural population (farmers) to make efficient use of fiscal resources to protect the most disadvantaged groups. After various cycles of expansion to diverse groups, the universal insurance law incorporated lesson learned and the results of progressive implementation with persistent financial resources. Once a group from the population was incorporated, fiscal resources were the first priority in each cycle of planning and implementation of the governmental Popular Health Insurance in Mexico prioritized the consolidation of a targeted services package designed to solve to the bulk of health budget. Only two years after the universal insurance laws were passed, the whole population had medical insurance. problems for the poorest population later developing the financing to insure catastrophic events through a common fund. In Korea the assurance process was the convergence of several programs for the population in both formal and informal sector. The Popular Health Insurance (Seguro Popular de Salud - SPS) began its pilot phase in 2001 which lasted for three years. The SPS began with first program that took priority in Korea was the Free Health Services Program (Programa de Servicios de Salud Gratuitos - PSSG) that a 100% subsidy for populations from the two poorest percentiles of the population. Preliminary studies suggested the benefits from was subsidized for the low-income population. The selection of health services and its improvement to ensure that the PSSG would commencing with a health services package that responded to the epidemiological needs of these populations. The original package respond to the needs of the poor population outside the formal sector. At the beginning of the program, in the late seventies, only 9% had 78 primary health care interventions but also included second level health care. Some studies showed that in order for beneficiary of the population had some kind of medical insurance; nevertheless, ten years later almost 80% already had a package of health ser- households to improve access to quality services because of the timely and complete availability of medicines, it acts as a powerful vices that had gradually progressed from the most simple to the most complex. The priority for the government was to first guarantee incentive for the continued demand of services. In 2004, the package increased from 78 to 91 interventions, with equal emphasis on coverage for the poorest part of the population in rural or small urban areas so that the allocation of fiscal resources was prioritized. primary and secondary level of health care. The last group incorporated into a medical insurance program, at the end of the eighties, was limited to self-employed workers from urban areas. At the beginning of the nineties the entire Korean population, over forty-two million people, had health insurance. The analysis of results for the application of the program showed that there had been an important demand for services as it was believed that the package would reduce access barriers, in particular financially, as it does not only consist of prevention, diagnosis and sickness care but it also provides patients with medicines. In final stages, the acceptance of the program and the growing demand for services, have allowed for the creation of protection mechanisms for diseases that require third level health care and highly specia- lized medical care (including catastrophic illnesses). The management of the services package for more complex and costly illnesses is mary health care and infant-maternal health with fis- carried out by bringing together funds for resources from several origins. • It is important to refine the portfolio of health ser- vices to ensure meeting the priority needs of the cal impact monitoring. population giving priority to the weight of the ill- ness of the poorer and more vulnerable groups and • Consolidate the pace of expansion and develop- it also needs to be sustainable. Adopting a unique ment of regional public decentralized networks for healthcare package that covers services for all disea- providers (SRSs). Results-based financing within the • To explore the development of payment mechanisms puts the sustainability of the social protection system El Sector Salud / capítulo VII El Sector Salud / capítulo VII ses (complex and not complex), can become not only framework of management agreements (in this case for specialized services that allow cost control as the at risk. Exploring the introduction of other payment a serious challenge for the sustainable finance of the MOH) or contracts (in the case of SENASA) with covered population and the demand increase, specia- mechanisms for some hospital and specialized servi- universal health insurance but could not guarantee regional providers, would allow for resources to be lly for high specialized hospital services. At present, ces that are suitable for the reality of the Dominican the satisfaction of the needs of services that meet the placed with report accountability and the promotion the predominant pay mechanism for second and third Republic and that contribute to strengthening a cost bulk of the disease burden of the poorest groups. An of incentives. All this requires the capacity to priori- level of medical care is the payment of loan services restrain policy that would allow for the expansion of alternative is to commence a progressive financing tize and institutional capacity in regions that can be (also known as the fee-for-service). This practice could demand without the cost of highly specialized services transition process to a results-based prospective one, progressively constructed learning from their imple- be useful for the expansion and monitoring of finan- eventually limiting investment capacity in key primary prioritizing prevention interventions, promotion and mentation5. However, regions are already managing cing in the initial stages of health insurance; nonethe- health care interventions. healing strengthening a primary health care strategy health resources in a decentralized manner, for the less, it can generate an eventual increase in costs that in a gradual process that begins by strengthening pri- provision of health services SENASA already have 5 In the case of the Argentina’s Plan Nacer program (see the box in this section) instead of beginning a new infant-maternal insurance package 6 During training with two stretch payments, the first stretch is paid by the certification of a list of enrolled to an insurer; or from the population in provinces with greater institutional capacity, they began in areas with lesser capacity. The government decided to use the framework of appointed to a coverage and quality improvement program (in order to avoid dual enrolment or to facilitate compensations between diverse a budgetary support loan for public policy reforms (“Development Policy Loam - DPL�) and in a parallel manner in an adaptable lending coverage areas). The second stretch in paid by periodically completing indicators goals usually annually. 106 program (“Adaptable Lending Program – APL�) to overcome this obstacle. 107 • Exploit opportunities to make a qualitative jump prove budgetary planning and results- based finan- In conclusion, the Dominican Republic should con- ze the improvement of the quality of primary health in inter-sectoral coordination in order to recognize cing, which would allow for the strengthening of the centrate its efforts in three areas: a) developing a plan care public spending, accountability and results; and synergies orientated to improve the quality of servi- offer to be consistent with the increase in services to maintain the expansion of the subsidized regime c) in consolidating achievements in the purchase and ces faced with a rise in the demand of primary care required for the expansion and consolidation of a prioritizing beneficiaries of the Solidaridad Program; supply chain of medicines with an emphasis on medi- services. The work, in coordination with other social national welfare system, including a national “Progra- b) introducing financing mechanisms that incentivi- cines for primary health care. protection policies and with interventions from the ma Solidaridad� program of conditioned monetary Ministry of Economy and Planning aiming to im- transfers. Argentina’s Plan Nacer program and the consolidation of results-based information mechanisms for financing through a de- centralized system for the provision of services Argentina’s Plan Nacer is an infant-maternal insurance program for mothers and children without any kind of insurance coverage and a joint effort between the Federal and the Provincial Government. This insurance program began in the provinces with the poorest population groups and where the experience and institutional capacity of the provincial governments was less in relative terms compared with other provinces. The Plan Nacer program generated infant-maternal insurance in each province with finan- cing from the Federal and Provincial Government. Each Provincial Insurance program establishes contracts with public health services providers whereby financing is results-based on an information system that is generated by the providers, but is audited by an external company. The payment captured estimated by the average cost per capita from an interventions packet in the chosen provinces to begin the insurance payment in two parts. The first on the basis of a list of recipients audited by an external firm and the second in terms of fulfillment of goals annually agreed between the infant-maternal insurance authorities and health providers. The generation and management of indicators information in fulfillment of negotiated goals between the infant-maternal provincial health insurance and providers (known in Argentina as “trazadoras�) allows for greater transparency and efficiency in resources allocation to generate incentives for a conti- nual process of improved access and quality for the provision of infant-maternal services. • In order to improve performance and results in the organization models, it is a key not to neglect the or- health sector, the separation of functions in the pu- ganization of the provision of services oriented to the blic health system requires the strengthening of the protection of public health goods. rector role of MOH to ensure that the transition between models does not negatively impact main • Advances in purchase and supply chain of medici- interventions of public health. Advancement in the El Sector Salud / capítulo VII El Sector Salud / capítulo VII nes from PROMESE/CAL can be of service to the implementation of a health strategy centered on a pri- consolidation of a primary health care approach mary health care approach requires for the strategic with the development of a strategic four year plan institutional reorganization of MOH to contempla- with clear goals that allow the availability of medici- te the development of organizational arrangements, nes in hospitals and health units, with an emphasis information systems, allocation of human resources on primary health care in all areas of health. The needed to strengthen the prevention and promotion addition of the demand, the rise in purchasing of health as well as a monitoring system of collecti- power, acquiring more competitive prices for medi- ve health interventions. The separation of functions cines and reducing discretional purchases would be should be implemented with a system that allows for a consequence of this harmonization. A medicines close monitoring of public health to reduce the risk purchasing system, at the same time, allows increa- of adverse effects on the organization of preventative sing the guarantee of a more efficient supply chain areas such as child vaccination, the vector control, etc. and encourages the demand aggregation. The experience of other countries in the region indi- 108 cates that, in the transition of public health system 109 Chapter VIII Territorial Development: Convergence Policies in a Divergent Country Roberto Martínez Nogueira(a) con la colaboración de David Tuchschneider(b) y Mark Austin(c) 1. INTRODUCTION T his notes’ objective is to provide elements of jud- gment that can contribute to the debate regarding and formulation of social cohesion and territorial policies a higher impact on growth and equity1. This note conclu- des with recommendations to achieve greater coherency between sector and territorial issues in a framework of a while providing a framework to territorialize sector poli- national strategy that includes local participation. cies. First, it presents the errors and inequalities between spatial ambits . Next, it discusses the progress that has been The fact that insufficient information is available re- D e s a r r o l l o Te r r i t o r i a l / c a p í t u lo V I I I made and the opportunities that exist. Lastly, it describes garding the spatial distribution of economic activity, the experiences that can shed light on policy options and public spending, natural resource reserves and transpor- help define priorities to strengthen the joint impact of pu- tation and communications infrastructure impedes an blic policies. in-depth analysis of territorial imbalances. The country is very heterogeneous in terms of regional development The transformation process toward a convergence model and national estimates fail to reflect the true situation of that promotes social and territorial cohesion requires a extreme disparities. This note uses the data available to long-term vision and a new political culture. Institutional characterize some of the primary aspects of a policy for and organizational reforms are needed to formulate and im- territorial cohesion but does not examine issues such as plement policies that ensure governability while achieving environmental conservation and land use planning. (a) Consultant (b) Senior Rural Development Specialist (c) Senior Agricultural and Rural Development Operations Officer. 1 The focus used in this policy note is backed by the analysis and conclusions of the World Bank World Development Report 2009: Reshaping Eco- nomic Geography (2008) 111 2. Diagnosis The number of companies and employees per activity is 2.3. Social territorial imbalances highly concentrated in three areas (Distrito Nacional, the Province of Santo Domingo and Santiago), which Poverty reflects the country’s fragmentation. Map 1 2.1. Growth without development 2.2. Territorial imbalances account for 77% of the total number of establishments shows the number of poor households in each provin- There are enormous differences inside the regions, and 80% of all jobs7. The number of businesses and ce. Income disparities are more accentuated between Over the last few decades, the Dominican Republic has provinces and municipalities, where processes of con- employees per activity is highly concentrated in three the municipalities of each province than between pro- performed relatively well. Despite a number of crises, it centration and depopulation coincide. Territorial deve- areas (Distrito Nacional, the Santo Domingo Province vinces. This adds levels of complexity to policy making has been one of Latin America’s top economic perfor- lopment is the result of historic processes that have led and Santiago)8. Inequalities are also evident in unemplo- and leads to uneven impact. These differences mean mers. The country’s economy has experienced periods of to an undesirable pattern of income and wealth concen- yment levels: three regions have relatively low levels of that efforts must be made to understand the specifics sustained growth and low inflation with GDP growth rates tration that is closely linked with geographic location unemployment while others have very high rates9. Tou- of each territorial situation and programs have to be that topped 5% in 1995-2000 but fell to 0.3% in 2003-4 due and natural resources2. rist areas and free trade zones experienced population executed in a disaggregated and decentralized fashion. to a severe crisis. After this period, the country recovered growth even when, in the case of the latter, employment This scenario is replicated between municipalities, its growth levels (9.3% in 2005, 10.7 in 2006 and 8.5% in The concentration of political-administrative functions declined over the past few years particularly in Santiago, neighborhoods and sections throughout the provinces. 2007). and economic-productive activities in the main cities, La Romana, San Pedro de Macorís and La Vega. The Dominican Republic has shown an inability to trans- particularly Santo Domingo, is associated with popula- More than half the households and poor individuals, tion density. Urban growth has been disorderly and the- Road networks in the Dominican Republic were de- and 40% of those living in extreme poverty, live in urban late growth into improvement in the population’s well re are large pockets of informality and exclusion . Much signed with a strong hub and spike pattern. The main areas10. A correlation exists between poverty, living in the being and social indicators, which are out of sync with in- of the territory is virtually unpopulated and/or contains roads link the capital city to large geographic areas: periphery of urban areas and access to services. This co- come levels. The country’s elevated poverty levels declined disperse populations, particularly in mountain areas in Cibao, the South and the East. However, inter-commu- rrelation is higher if we include services such as education somewhat during the 1997-2000 period. The subsequent the South East (particularly to Central Cordillera) and nication between these areas is very limited, particularly and electricity and particularly sanitation. The correlation crisis caused a significant increase in poverty, a trend that along the border with Haiti4. in rugged mountain locations. Physical and communi- drops, however, when more basic services such as health was partially reversed once growth resumed. In 2007, 44.5% cations infrastructure has exacerbated economic and and drinking water supplies are considered. The UNDP’s of the population was poor and 21% was indigent in com- Rural areas did not benefit from the prosperity of demographic concentration (in Santo Domingo, Cibao Human Health and Development Report for 2008 con- parison to 47.1% and 20.7% respectively in 2002. The si- the second half of the nineties and were the primary and tourist areas in the East) given that it was not de- cluded that the gap between provinces increased between tuation in rural areas is even worse given that poverty and sources of migration. Areas with lower levels of well signed with regional balance in mind. The secondary 1981 and 2002, which caused the inter-provincial variation indigence levels were 15% and 8% higher respectively than being, which were also bereft of expectations for chan- network of highways, and in many cases the primary net- coefficient of poverty to go from 15% to 22%. In some the corresponding levels in urban areas. Inequality is also ge, saw their populations dwindle as people moved work, is in a poor state of repair and further isolates enti- sectors such as education, the convergence process has been part of this scenario: in 2004, 20% of the wealthiest families to the country’s cities or abroad5. Migration to other re provinces, making it difficult for them to be included positive11. The same problems appear with spatial distribu- concentrated 56% of the country’s income while 20% of countries, with a net index of 2.4, has contributed to a in the national economic mainstream.9 tion in the areas of health and sanitation. the poorest population received only 4%. In 2005, the hu- man development index ranked the Dominican Republic decline in population growth while internal migration 79th out of 177 countries. helped smooth out income. According to the 2002 Cen- sus, during the five-year period of 1998-2002, the Metro- Despite the fact that the Dominican Republic invests a lar- politan region continued to be the primary recipient of D e s a r r o l l o Te r r i t o r i a l / c a p í t u lo V I I I D e s a r r o l l o Te r r i t o r i a l / c a p í t u lo V I I I ge quantity of public resources in subsidies and transfers, migrants (34.4% of the total). Migrants were primarily the impact on poverty and human development has decli- from the Southwest, although the numbers declined ned due to errors in design and management. In this con- considerably in comparison to other periods such as the text, new initiatives coexist with traditional programs with 1986/89 period, when the region received 46%6. similar objectives. The rationale behind these programs is unclear and there are errors in design and execution. 7 Industrial Board of Directors for the year 2004, Central Bank of the Dominican Republic. 8 The main areas are Cibao Noroeste, El Valle and Cibao Norcentral. The second most important group includes the Distrito Nacional, Valdesia and Esquillo. 9 The Human Development Report 2008 found extreme disparities among provinces in terms of access to telecommunications services. The num- 2 Of the areas that make up the National Territory, 17 are on the coast, including the Distrito Nacional, and the primary economic activities are ber of internet accounts went from 82,518, in 2002, to 264,284 in 2007 (of this amount 143,400 DSL). According to ENDESA 2007, 26% of the fishing and tourism. Five of these areas border with Haiti. The rest of the provinces, which are found inland, have fertile valleys for agricultural and households in the Distrito Nacional have a computer (18.7 according to Census 2002) but the national figure is only 12%. livestock activities and the topography and climate in mountainous areas are home to forest development and ecotourism. 10 The province with the highest percentage of poor people in 2002 was Elías Piña (82.9%) and 47.3% living in extreme poverty. The provinces 3 Las principales conurbaciones distribuidas en los entornos de las provincias Distrito Nacional, Santo Domingo, Santiago y San Cristóbal, that have poverty rates above 70% include the border provinces of Bahoruco and Independencia and also San Juan. El Seibo, San José de Ocoa concentran el 48.8% de la población. En la capital, Santo Domingo, reside una cuarta parte del total de la población. and Monte Plata all have percentages above 65%. The Distrito Nacional, the municipality and urban area with the highest per capita income 4 The three Western regions (Noroeste, El Valle and Enriquillo) have 15% of the population and the five border provinces only 3.6%. report the highest concentrations and densities of poor households and individuals. These concentrations reach densities of approximately 5 The recepient provinces were Altagracia, San Pedro de Macorís, La Romana, Independencia y Santiago. 20,000 poor/Km2 in neighborhoods in Circunscripción 3 (Domingo Savio, La Zurza, Gualey, Ensanche Capotillo, Simón Bolívar). Map 1 6 This lag in the power of attraction of the Metropolitan region is due to hypertrophy and urbanistic chaos. This has caused migrants to shows the poorest households per province according to data from 2002.datos de 2002. choose other areas that have benefited from industrial free trade zones and tourism development. After the Metropolitan area, the primary 11 Los estudios realizados por el Centro de Estudios Padre Montalvo en los barrios más pobres de la Circunscripción 3 del Distrito Nacional así lo recipients of migrants are the provinces of Santiago (10’1%), San Cristóbal (6’2%) y La Altagracia (4’4%). ponen de relieve. 112 113 Map 1: Poor Households by Province 2.4. Spatial inequalities in access to in Latin America and the Caribbean. Efforts have been made to improve coverage (particularly in secondary services given that the progress that has already been made in primary) but questions remain regarding desertion and There are significant territorial inequalities in access repetition rates, quality, infrastructure, overcrowding to infrastructure and basic services such as education, and double and triple shifts. health, water supply, sanitation, electric energy and tele- communications. A correlation can be observed between Access to basic services and housing has improved but poverty, living in the periphery of urban areas and access significant gaps remain between population groups and to services12. The most complex and specialized services service quality. Despite progress in supplying electricity to have lower diffusion levels throughout the territory and rural areas, service remains inconsistent and unreliable. the lowest coverage is evident in peripheral provinces that Although 86% of families have at least nominal access have higher poverty levels (particularly the South East). to drinking water, the average household with water pipe In terms of access to health services and water supply, the connections receives the equivalent of 3 full days of water territorial reach is wider and extends to peripheral provin- supply a week. Access to sanitary services is also below ces with high levels of poverty 13. the average reported for Latin America and the Caribbean and remains unequal: only 54.2% of the households have According to human development indicators, the Do- lavatories (private 43.9% and shared 10.3%)14. minican Republic’s education indicators for coverage and assistance are higher than the rest of the countries Inequities at the interprovincial level in access to basic services are evident in the most dynamic urban areas. Overcrowding, 3.Territorial policies and their institutionalization low levels of healthiness, deficient basic services and a lack of access to these services as well as exclusion are generalized pro- blems . Map 2 shows the geographic location of the poorest neighborhoods. It is important to remember that information 3.1. Planning and programming Environment and Natural Resources and Public Ad- on a per province basis is insufficient to draw a clear picture of the situation in territorial terms. The territorial distribution ministration and budget and fiscal systems16. Law No. of rural poverty also indicates territorial disparities, which are shown in Table 4 for the year 2002. The Dominican Republic has a history of institutional 170-07 of the Municipal Participative Budget System es- deficiencies and weaknesses and the system is highly tablishes citizen participation mechanisms, and 40% of Map 2: Geographic location of poor households centralized. At the end of the 1990’s, a process was ini- the transfers that Municipalities receive are reserved for tiated to modify norms to modernize the state and fine- investment purposes. Law 176-0717 , which applies to the tune the central government and public administration Distrito Nacional and the Municipalities, assigns autho- structure15. The changes created the Secretariats of Trea- rity and defines accountabilities and the role of social sury, Economy, Planning and Development (SEEPYD), participation18. D e s a r r o l l o Te r r i t o r i a l / c a p í t u lo V I I I D e s a r r o l l o Te r r i t o r i a l / c a p í t u lo V I I I 12 The province with the lowest percentage of poor households, the Distrito Nacional, has the highest level of access to services. On the con- trary, three provinces of the group that has the highest percentages of poor households (Elías Piña, Bahoruco and Pedernales) are repeatedly ranked among the five provinces with the lowest levels of access to services. To analyze the territorial inequalities we have used the indicators and maps published in the Informe Nacional de Desarrollo Humano República Dominicana 2008 and ENDESA 2007 as bases. 13 An example is the Independencia province (sixth poorest country according to the World Bank), which is included in the fire best ranked provinces at a national level in terms of access to health and water supply indicators. 14 According to ENDESA, 95.7% of all households had electricity. The ENHOGA 2006 survey indicated that 53% of the poorest quintile of the population uses vegetable-based fuels, which are not frequently used in other social groups. 15 The General Education Law, the General Health Law, the Law to create the Dominican System of Social Security, the Municipalities Law, the Non-Governmental Organization Law, the General Law of the Environment and Natural resources and the Penal Process Code among others. 16 Planning and Public Investment Law, the Organic Law for the Public Sector Budget regarding Insurance and Bonds, the Treasury Law, The Public Credit Law, the Integrated Financial Administration Law, the law of the Accounts Department, law on Internal Control and Auditing and regarding Purchases and Contracts for Goods, Services, Works and Concessions. 17 This law recognizes the communities’ right to form a “union� to jointly execute the goods and services within their competencies. The law explains that it is not necessary for municipalities belong to the same province to form this union and no territorial continuity need exist. 18 National Planning Office. Strategy to begin formulating the National Plan to Order the Territory of the Dominican Republic (PNOT) (2005) Indicates that: “The DR does not possess an ideal framework to define two basic instruments of the TO, which are: 1) a territorial policy; 2) national plan to order territory. It also lacks complementary legal instruments: 1) land use law; 2) base law for the local regimen. Although the municipal legislation in effect is obsolete, the Law that is currently being debated in Congress adapts acceptably to PNOT’s objectives. 114 115 Several initiatives have put together development plans to raise taxes is limited by the competencies assigned to the budget level23. The results of this process in terms mize impact. to reduce social gaps and increase cohesion19. Law 498- national bodies and the legislation governing the same. of municipal service provision have not been satisfactory. 06 created the System of Planning and Public Inves- The value capture process, compensation processes and Local governments have not been truly empowered. There International experience shows that the regional and tment and mandates that a National Development the allotment of costs and benefits relative to land deve- is minimal transparency and State bodies do not exercise territorial development strategy should concentrate on Strategy be developed20. Budget Law 423-06 stipulates lopment to land owners and the State are not rigorously effective control at the municipal level. Decentralization allotting resources to promote potential development that public entities should develop 3-year budgets based defined. These instruments are of particular interest to has led to a number of proposals that have had an impact rather than merely compensating for disparities. This stra- on institutional strategic plans. The State Secretariat local governments, which could use them to finance on institutional and organizational norms. Currently, tegy should be multi-sector and spatial and strategies for te- of Economy, Planning and Development is in the pro- local investment in infrastructure and services, protect however, there is no political consensus regarding the scope rritories should be disaggregated by specific areas (regions, cess of developing this Strategy and pluri-annual plan. ownership rights and encourage investment. and results sought by these initiatives despite a concerted groups of municipalities and municipalities). The Global Although the pluri-annual plan takes precedence over belief that centralism and fragmentation must be effectively Development Report 2008 of the World Bank provides evi- strategy development, both are being developed simulta- 3.3. Decentralization and the municipal addressed. dence for this point. All territorial development processes neously to speed up the process. Although progress has model generate imbalances. As such, strategies must contemplate been made at a normative level, policies have yet to con- Public administration reforms are moving in the direc- the fact that poor, excluded areas with disperse populations verge adequately within a national development strategy tion of deconcentration. The municipalities have also and scant possibilities to build infrastructure and supply The traditional model provides services through cen- that has significant impacts on territorial development. implemented policies to strengthen their capacities. The services will co-exist with other areas that have higher po- tralized entities that belong to the Executive Branch. Dominican Republic has some experience with participa- pulations and access to services. It should also create con- This arrangement is not designed to distribute capa- 3.2. Regionalization and zonification of cities among government levels and is instead institu- tive planning at the local level24. Some territorial ordering ditions for competitive and promising activities and forego the territory tionally based. This has concentrated decision making initiatives, which utilized cartography and municipal self- activities that have little potential and large investments in diagnostics, were initiated with international assistance un- infrastructure. power and resources in the Central Executive Branch. There is no national legislation regarding zonification der the ONAPLAN framework years back but were never This has, in turn, meant that the relations between or land use. The Dominican Republic has many gover- concluded. These efforts were never duly considered or A number of successful experiences have shown that re- actors and social practices have been characterized by nment levels and a complex planning system21. Neither utilized by national or local planning institutions. Some gional and municipal governments should be responsible, dependence on the central nucleus as well as segmen- of these elements permits the government to articulate progress has been made, however disorganized and frag- within the national policy framework, for formulating tation and institutional and territorial fragmentation. actions or address territorial specificities. Regionaliza- mented, in basing public investment efforts on municipal territorial strategies as well as plans and programs. Local One of the main impediments that municipal gover- tion, although normatively defined, only applies to the agreements with civil society. The lack of territorial plan- actors must participate at this level and emphasis should nments face is a lack of capacities. Formalization at organization of some services. In general, the situation ning in rural and urban ambits has generated more com- be placed on creating consensus and coordinating actions. this level is low, professionalism is lacking, personnel is chaotic and there has been scarce impact on territo- patibility conflicts regarding its use. The risk management The territorial strategy is based on identifying the principal turnover is high and management technologies are ob- rial policy convergence. Sector policies and execution system prioritizes emergencies and pays little attention to problems, determining potential, recognizing heterogeneity solete. All of the aforementioned reduce efficiency and bodies use different criteria to guide their actions at na- inter-institutional planning or the National Information and addressing the specific aspects of each territory. efficacy. tional level. The absence of shared classification systems System. has compromised deconcentration and decentralization The model goes beyond norms and municipal capacities, The decentralization process was initiated in respon- efforts, which has caused further fragmentation in the although both are considered. This model instead expands se to demands for more democratization and citizen provision of state services. Zoning in the rural and ur- participation but the debate has focused on providing 3.4. Territorial development policies the focus to include issues such as planning, scheduling and budgeting, determining areas of responsibility and deci- D e s a r r o l l o Te r r i t o r i a l / c a p í t u lo V I I I D e s a r r o l l o Te r r i t o r i a l / c a p í t u lo V I I I ban ambits has generated conflicts given that efforts are better services to the communities22. According to a Territorial development policies are complex; they imply sion-making competencies, providing efficient services and either completely inexistent or ambiguous. The Judicial World Bank Study in 2002, the main restrictions on the major challenges and enormous obstacles. The desire to coverage based on populations and territories, ensuring Branch has made some progress in terms of real estate decentralization process are: a) lack of an adequate fiscal overcome imbalances between regions and zones by imple- the availability and allotment of resources, guaranteeing jurisdiction although property titling remain slow and and administrative focus, b) lack of a final vision of the menting policies to discourage urban growth, rapidly re- transparency with regard to transfers and the development lacks transparency. National legislation lacks modern process and c) prioritizes the political and ideological. duce income disparities between rural and urban areas, or of organizational and management capacities, etc. This instruments for land management. Although the Dis- These restrictions explain why the decentralization pro- creating employment in areas that have lagged behind can model’s design requires concerted analytical, political trito Nacional and the Municipalities give local gover- cess has been more formal than effective. It lacks a clear have a counter-productive impact if they are not addressed and social efforts. nments the power to define these instruments, there is idea of how it can contribute to an integral development through appropriate policies. The strategy should focus on little experience in this area. The municipalities’ ability strategy that contemplates municipal participation at identifying intervention priorities based on criteria to maxi- 19 These initiatives include: a) producing the document known as República Dominicana 2030, with the support of CEPAL, b) producing 23 90% of municipal income comes from central government transfers, which reflects the inability of the majority of municipalities to collect taxes. the Strategic Plan of the State Secretariat of Economy, Planning and Development and c) the design and approval of the Regional, Local The maximum transfer is 6.8% of the 10% legal. The Dominican Federation of Municipalities (FEDOMU) claims that the full 10% is transfe- and Community Development Project, with the support of the World Bank. Social and territorial cohesion is addressed in the National rred but the municipal governments do not even provide minimum municipal services and fail to comply with the 25% destined for salaries. Development Strategy. 24 More than 70 municipalities have some method for participation in budget formulation or have a strategic plan for local development. This par- 20 This law should be approved in June 2009. It also mandates the formulation of the Pluri-annual Plan for the public sector. ticipation has generated different expectations and evaluations of its contributions, which focus on identifying projects that respond to perceptions 21 World Bank: A strategic view of decentralization in the Dominican Republic, Draft, may 2002. of local needs and demands and generates local empowerment. Forty percent of the municipal budget should be allotted for investment, which 22 In the year 2002, the World Bank produced a profile of decentralization in DR. This report contained background information and defines reduces the municipal authorities’ budget discretionality. These decisions have lacked a territorial framework that gives coherency to investment 116 the situation, difficulties and risks. It also makes a series of policy recommendations. plans and different state interventions. 117 cipal governments in particular. The basic principle is diate, mid-term and long-term goals. These mechanisms to clarify responsibilities by defining provisions stan- should vary in complexity and should progressively take dards, budget allotments as well as results’ monitoring on increasingly demanding functions: throughout the territory. • Regional delegates of SEEPYD to ensure relevancy and • The aforementioned requires that a system of informa- follow up. A similar arrangement is currently in effect. tion on territorial economic and social statistics needs to be developed to determine each municipality’s • SEEPYD officials at the regional level with the power GDP and identify the most relevant activities. This to convene representatives for the sectors and munici- will help guide spending and investment. As part of palities with oversight and follow up functions to align this effort, it is important to strengthen cadastral in- policies and projects with regional and sector priorities. formation and drive the implementation of geo-refe- renced information systems, including protocols for • Create Regional Councils that, in addition to the afo- information access. rementioned integration process, are participatory and References ensure the presence of civil society. To do this, it will 4.3. Sequence of institutionalization be necessary to define territorial ambits that share a of mechanisms for territorial degree of homogeneity in terms of problematic and re- sources. 1) Programa Mundial de Alimentos. Atlas del Hambre y la descentralización en República Dominicana. Delegación de la development Desnutrición en la República Dominicana�. 2007. Comisión Europea en la República Dominicana y Cuba. •Create territorial development agencies; these agencies’ 2) Banco Mundial. “Informe Sobre la Pobreza en la República 22) Montalvo F, Gustavo. Proyecto de Desarrollo Comunitario. 2006. • The process to institutionalize mechanisms for territo- Dominicana: Logrando un Crecimiento Económico que 23) Montás, Juan T. Cohesión social: la experiencia dominicana. functions still need to be defined but this can be done Beneficie a los Pobres�. 2006. Secretariado Técnico de la Presidencia (2006). rial development should follow a sequence with imme- progressively. 3) Banco Mundial. A strategic view of decentralization in 24) Oficina Nacional de Planificación. Estrategia para iniciar la the Dominican Republic: advances, obstacles, risks and formulación del Plan Nacional de Ordenación del Territorio de opportunities, and recommendations. May, 2002. República Dominicana (PNOT) (2005). 4) Banco Mundial, Geography in Motion. 2009, WDR 20009. 25) Oficina Nacional de Planificación. Secretariado Técnico de 5) CESDEM. Encuesta Demográfica y de Salud. 2007. la Presidencia “Focalización de la Pobreza en la República 5. Conclusions 6) CONAU. Política Nacional de Desarrollo Urbano para los Dominicana. 2005�. asentamientos humanos, 2000. 26) ONE. “Encuesta de Hogares de Propósitos Múltiples ENHOGAR 7) CONAU. Política Nacional de Desarrollo y ordenamiento 2006�. 2007. territorial urbano, 2002. 27) ONE. “VIII Censo de Población y Vivienda 2002�. 2005 The Dominican Republic is facing a major challenge: The systematic incorporation of the territorial dimension 8) CONAU. Lineamientos de Políticas de Desarrollo Urbano. 1998- 28) Organización Mundial de la Salud (OMS). “Informe sobre la generating convergence policies in a divergent country. in state planning and the rigorous search for alternatives 2008. salud en el mundo. Colaboremos por la salud�. 2006. This policy note has described the current situation and to achieve greater decentralization and regionalization- 9) Consejo Nacional de Reforma del Estado – CONARE-. Procesos 29) PNUD. “Informe sobre Desarrollo Humano. República the tensions that it generates. Institutional challenges which should take into account different territorial, so- de Reforma y Modernización Institucional en República Dominicana 2008�. Dominicana. Santo Domingo, República Dominicana. 2006. 30) Secretaría de Estado de Educación Superior y Tecnología make it highly unlikely that short-term actions will have cial and productive realities while ensuring the legitimacy 10) Comité de recuperación del sector eléctrico, Dirección Ejecutiva. (SEESCYT). “Informe General. Estadísticas de Educación a significant impact. Nevertheless, a coherent strategy can and effectiveness of the agreements- can be coupled with D e s a r r o l l o Te r r i t o r i a l / c a p í t u lo V I I I D e s a r r o l l o Te r r i t o r i a l / c a p í t u lo V I I I “Plan de Acción para la Recuperación del sector Eléctrico 2008�. Superior 2004 y 2005�. be progressively designed to build the institutional, legal, efforts to ensure more territorial connectivity. All of this 11) Corral, Julio. Diagnóstico de la situación municipal en relación 31) Secretaría de Estado de Salud Pública y Asistencia Social policy and organizational bases to help the country rise to will help jump-start development and bridge current so- con el ordenamiento territorial y la gestión ambiental. FEDOMU (SESPAS). “Indicadores Básicos de Salud 2008�. this challenge. cial and territorial gaps. 2007. 32) Secretaría de Estado de Salud Pública y Asistencia Social 12) Espitia, Gonzalo. Lineamientos para una Ley Tributaria (SESPAS) “Anuario Estadístico 2007�. Municipal. Editora Amigo del Hogar. Santo Domingo, República 33) Secretariado Técnico de la Presidencia. Comentarios al Informe Dominicana. 2001. Nacional De Pobreza. 2005. 13) Montalvo, Gustavo. La descentralización en la REPÚBLICA 34) SEEPyD, SSEPLAN, DGODT. Proyecto de Desarrollo Regional, DOMINICANA. Notas de Política .2008 Local y Comunitario. Santo Domingo, República Dominicana. 14) Gobierno de la República Dominicana. Reforma del Estado y sus Abril 2008. Instituciones. Plan de Acción de Gobierno 2004-2008 35) World Bank. LAC Spatial Study 9-28-08. 15) Instituto Agustín Codazzi. Guía Metodológica para la formulación 36) Banco Central de la República Dominicana. http:// www. del plan de ordenamiento territorial municipal. Bogotá, 1997. bancentral.gov.do . 16) Ley 64-00, 2000 SEMARRNN. 37) INDOTEL (http:// www.indotel.gov.do). 17) Ley 496-06, 2006 SEESPyD. 38) Superintendencia de Electricidad, datos extraídos de http:// 18) Ley 498-06, 2006 SNPeIP. www.sie.gov.do/estadisticas.php. 19) Ley 202-04, 2006 SINAP. 39) Informe del Desarrollo Mundial (World Bank World Development 20) Ley 147-02, sobre Gestión de riesgos. Report 2009: Reshaping Economic Geography). 2008. 21) Matías H, Domingo y Castillo, Juan. Diagnóstico sobre la 122 123 CHAPTER IX Towards an accountability and Performance System in the Dominican Republic Ana Bellver(a) Pedro Arizti(b) Theo Thomas(c) 1. INTRODUCtion I n recent years, the Dominican Republic has reformed the legal framework for planning, investment and bud- the implementation of reforms. First, we describe the in- tentions of the reform and the model of “results-based ma- Rendición de Cuentas y Desempeño / capítulo IX geting processes. These reforms aim at improving trans- nagement� to be implemented. Secondly, we identify the parency, fiscal discipline and accountability through better progress already made and confronted challenges of the past, controls and institutional equilibrium. and thirdly, on the basis of the experience of the OECD countries, we suggest policies to consolidate the reform. The purpose of this Policy Note is to offer suggestions for 2. The reform: objectives and state of play 2.1. Bases, Attributes and Requirements explicit policy goals. Although these reforms do not include the technical adoption of a Results-Based The reforms are based on two pillars: a) a govern- Budget, they set the bases for achieving such Budget. mental financial administration and b) a system of This is why this Note pays particular attention to the policy planning with long-, medium- and short-term requirements that have to be met to reach this pur- objectives. These pillars aim to build a management pose. model focused on compliance and accountability by (a) Senior Public Sector Management Specialist. (b) Public Sector Management Specialist. (c) Senior Public Sector Management Specialist. 125 2.2. Analytical Framework for the c) resource management, and d) control management Public institutions: National Internal Control System establish the bases for (monitoring and evaluation)2. The interaction among the development of a control strategy that ensures the tran- Reform these subsystems occurs at the macro level (between the • Explain, for the medium- and long-term, the results they sition from ex-ante to ex-post controls, with delegation of National Development Strategy and the Macroeconomic commit themselves to achieve, as well as the mechanisms autonomy towards the institutions, and focused on perfor- According to the new legal framework, “results-based ma- Planning), the sectoral level (between the Sectoral Plans to do so. mance rather than administrative or financial aspects. nagement� is the model that proposes the administration of public resources in compliance with the strategic ac- and the Multi-annual Budget) and the institutional level • Annually define both their goals and processes and re- tions established in a plan over a certain period of time1 . (between the Institutional Strategic Plans, the Preliminary sources that will be inputs towards these goals. 2.3 The Experience with the It is a model that seeks to administer public institutions in Annual Programming and the Institutional Budgets). The • Formulate indicators for performance, monitoring, Establishment of a Results-Based such a way that the expected results are achieved with the different phases of these processes are linked and require evaluation and accountability. Budget budgeted resources. For this system to be successful, it is coordination between the governing bodies (Ministry of • Establish agreements among themselves to obtain re- essential to assign clear responsibilities for achieving results. Economy, Planning and Development (MEPYD) and the sults and other commitments. 2.3.1. Variety of Models to Improve Budgetary Ministry of Finance (MH)), which is the main challenge • Manage the resources to obtain the products and re- Systems for establishing the system. The next Table shows the di- sults that had been committed to. This model is based on tightly linked subsystems: a) public planning, b) policy priorities oriented budget, fferent instruments. • Emphasize on transparency. Ensure that independent For many years, efforts are being made in several third parties evaluate their performance. countries, both of the OECD and in Latin America, • Report the evaluations to the society and explain the rea- to introduce improvements in the budgetary systems, sons why gaps still remaining between goals and results. such as the establishment of program budgeting and table 1: Long, Medium and Short-Term Planning Instruments the initiatives to work with results-based budgets. Pro- The governing bodies shall strengthen their follow-up gram budgeting is geared towards products and their and evaluation capacity. The Ministry of Economy, Plan- relation with economic/financial resources, while Re- L o n g a n d M e d i u m t e r m Short Term ning and Development has defined in its Institutional sults-Based-budgeting links resource allocation to mea- • National Development Strategy Strategic Plan the development of follow-up systems for surable results5. policies, and the gradual structuring of the follow-up of • Medium-Term Macroeconomic Programming • Annual Macroeconomic Programming institutional commitments and management of incentives The following Table indicates the types of performance Macro Level . In conformity with the model, the modifications to the indicators most frequently used. Medium-Term Fiscal Framework • Annual Budgetary Policy • Multi-annual Plan for the Public Sector • Revenue Budget and Public Spending Law • Multi-annual Budget for the Public Sector table 2: TYPES OF PERFORMANCE INDICATORS Rendición de Cuentas y Desempeño / capítulo IX Rendición de Cuentas y Desempeño / capítulo IX • Sectoral Plans • Preliminary Annual Programming Performance and time indicators Institutional Level • Institutional Sectoral Plans • Institutional Budgets Outputs produced Quantity, quality, cost and timeliness of products and services Efficiency Output/costs • Results- and Performance-Based Contracts Productivity Output/input Policy goals achieved Intermediate outcomes (direct consequences of the output) These instruments will allow public institutions and go- • Compliance of goals and policies that can be verified These outcome-based measures Final outcomes (significantly attributable to output) are valid for performance only verning bodies to sign Results-and Performance-Based through well-defined indicators. to the extent that there is a clear Effectiveness Contribution of the output to the desiderate outcome (intermediate or final) casual relationship to individual or Contracts as established in the Public Spending Law. agency’s outputs. These contracts may be entered between MEPYD, MH, • Type and amount of budgetary incentives granted by the Cost-effectiveness Outcome / costs (intermediate or final) MAP, the highest authority of a body, and the Ministry to governing bodies3 to agencies and/or officials during the Source: Ketelaar, Manning y otros OECD, 2007. which the organization is affiliated. These contracts shall period of contract. establish the following commitments: It is possible to distinguish three categories of results-based budgeting (See Table 3)6 . 1 See “Gestión orientada a Resultados y Contratos por Resultado y Desempeño� (Results-based Management and Results- and Performance-based Con- tracts). MEPYD, 2008. 4 SEEPYD, Plan Estratégico Institucional 2008-2012, Santo Domingo,2008. http://stp.gov.do/Uploads/2008120421393_Plan_Estrategico_ 2 For instance, the laws that establish the National Planning System and the Budget System (No. 423-06 and No. 498-06) and their regulatory SEEPYD.pdf. decrees prescribe a modality with strong links and interdependence between the budget process and the planning process. 5 OECD, Modernizing Government: The Way Forward, OECD Publishing, Paris, 2005. 126 3 See Article 14 of Act 423-06 and “Gestión Orientada a Resultados y Contratos por Resultados y Desempeño�, MEPYD, 2008. 6 Performance Budgeting at OECD Countries, OECD, Paris, 2007. 127 table 3: Relation between Allocation of Resources and Performance Informa- FIGURE 1: International Experience with Medium-Term Budget Frameworks tion Tight Loose In the majority of OECD countries, budget processes have been reoriented in order to cover the fiscal frameworks period. Although Direct/formula performance budgeting Performance-informed budgeting specific formats vary, most Medium-Term Budget Frameworks (MTBF) include clear fiscal policies assumptions, medium- and long- Grado de Institucionalización Ad Hoc High term macro-economic projections and establish expected trends for aggregated revenue figures and deficits for the next 3 to 5 years. (Use limited to few OCDE countries and very (Most extented in the OECD countries) specific sectors) In general, it is required for the line ministries to stay within their budget allocations for the fiscal year, and explicitly calculate the impact on expenditures of other medium-term measures. Presentational use of performance information The objectives of the MTBF include: No cases (Use limited to few OCDE countries) • Improvement of fiscal discipline and predictability by establishing “top-down� fiscal objectives and sectoral strategies, and an integrated series of macroeconomic and fiscal objectives, as well as projections consistent with fiscal sustainability and ma- Source: WORLD BANK, 2008, Performance formed Budgeting in Lat American Experience and Opportunitie. croeconomic stability. • Improvement of planning, allocation and execution of resources towards strategic priorities. The structure offers better plan- • The presentational use of performance information uses • Program budgeting reflecting policy priorities, ac- ning of programs and expenditures for investments during the coming years. performance is presented as background information in cording to the productive processes of the public ad- budgeting documents for accountability. This budget is ministration, with identification of its products and • An increase in efficiency of public expenditures offering more certainty, to those who handle the resources, about the availa- complementary and does not play any role in resources determination of input-product relations. bility of future resources, at the same time providing a mechanism for accountability regarding assigned resources. allocation. Its purpose is to ensure accountability and to enrich the dialogue with legislators and citizens. • Annual budget with multi-annual macroeconomic The design of MTBFs is crucial for their success. In the European Union, the majority are flexible multi-annual frameworks, with projections, fiscal objectives and ceilings within an fiscal objectives that preferably cover the totality of the central government in order to cover the whole impact of public policies. • The direct / formula performance budgeting proposes Integrated Financial Management Information Sys- The studies also point out “the relation between the quality of the medium-term budget planning institutions and the capacity to a stronger relation between resource allocation and re- tem, with inputs to budget formulation, execution achieve expenditure objectives� (EC, 2007). The lessons drawn from the MTBFs in the OECD include: sults. The link between allocation and performance unit and evaluation. – generally, products – is direct and may be based on • Broad political support is necessary to have a credible commitment towards sustainable fiscal policies. a formula/contract associated with the results achieved. • Monitoring and Evaluation, with identification of This type of budget is used in a small number of OECD goals and indicators for the results of sectoral pro- • MTBFs are based on solid, consolidated and integrated financial management systems (i.e. budget, treasury, procurement, re- Rendición de Cuentas y Desempeño / capítulo IX Rendición de Cuentas y Desempeño / capítulo IX countries and is applied to very specific sectors. jects, programs and sectoral policies that facilitate porting, etc.) that generate credible and transparent annual budgets. Also, there should exist a strong link between the MTBF the analysis of effectiveness and efficiency7. and the annual budget. • The performance informed budgeting uses performance data for budgetary decision-making, but this data does • Control management, with a systematic internal • The central budget agencies, like the Ministries of Finances and Planning, play a fundamental role in enforcing the “game not determine resource allocation. This information is and external audit plan for the control bodies that rules� and in coordinating the actions of the public agencies at all levels of government. However, only when there is enough considered together with data on fiscal restrictions. fully includes the performance dimension. capacity and installed system at the Line Ministries, the “bottom-up� detailed projections will be useful. 2.3.2. Requirements for a Performance-informed • Performance Information with indicators that pro- • In general, there exists a dilemma between the period to be covered and the level of detail of the Medium-Term Budget Fra- budgeting gressively include all performance dimensions. meworks, for instance, in countries where the MTBFs are not revised every year, these tend to only include aggregate levels for revenues and expenditures. According to international experience, the implementation of a performance performance-informed budgeting requi- • Frequently, moderate revenue and growth projections are used combined with budget reserves, in order to introduce a certain res progress in the following fields: degree of flexibility in the MTBF. Source: European Economy, No 3, Public Finances, 2007, EC y OECD Economic Outlook, No. 81, June 2007 y World Bank. 7 As a complement to these �vertical� or sectoral systems in the OECD countries, an effort has been made to conduct cross-cutting or “hori- zontal� evaluations that analyze scenarios with different levels of financing, and contribute with valuable information to the establishment 128 of priorities for the programs and resources of the whole budget, beyond a strictly sectoral vision. 129 Figure 2: International Experiences with Incentives to Results Management 3. Diagnosis: advances and challenges in the implementation of reforms 3.1. Status of Results-Based Budgeting being developed. The experience in the OECD countries confirms that an incentive structure to support results management and results budgeting is precursors essential. These incentives fall in agencies and in senior managers who are in charge of producing and achieving goals and aligning The integrated financial information system has had them with the government objectives. Besides, managerial reforms should be accompanied by measures that lead to a results-based an important development: Article 14 of Act 5-07 has Program-Based Budgeting: By Decree No. 492-07, which budgeting, without anticipating it since if the budget is prepared independently from the budget process reforms, these tend to be created an Integrated Financial Administration System approves the Implementing Rules of the Public Spending more limited in scope. Consequently, the introduction of performance-based management agreements generally focused on the of the State (SIGEF) to support the Integrated Financial Law for the Public Sector, the Program-Budgeting techni- most senior civil service – only has a limited scope, based on “the quality of the products of the agencies and not on the capacity to Administration System of the State (SIAFE). SIGEF has que was adopted. Article 8 establishes: respond to the changing priorities of the government�. developed considerably, but: a) it still does not contain “The annual budgets of public agencies shall be prepared, executed and information on all the expenditures of the public sector, To establish performance based management agreements within the context of a results budget could link the incentives of officials evaluated in conformity with the budgetary principles established in the b) it has weaknesses in the registration of the time of to policy priorities in the broadest sense of the word, as in the United States, France and the United Kingdom, where the perfor- Law, and shall apply the program-budgeting technique, which shall clearly expenditures, especially of commitments and accrued mance agreements of the agencies lead directly to performance “agreements� for management. This is why it is important to have a express the strategic plans and the input-product relations, emphasize in expenditure, c) it still has no functionalities that allow clear vision through governmental labyrinth of performance objectives and goals, and bear in mind that the most productive use of methodological development and the application of results indicators and to give an account of the programming and execution of performance measurements is the dialogue and not the control. ensure that those in charge of the budget programs rigorously define the the goals and work volumes. products, revise and update them, and establish the corresponding indi- The OECD countries have given their ministers and managers more discretion to choose the combination of inputs that helps the cators to allow an evaluation of the execution and to provide detailed The Public Spending Law establishes the physical and efficiency of the services they render, but more delegation also requires a solid accountability system. In the United Kingdom, many information on the achievements and difficulties� 8. financial evaluation of budget execution. However, as ministries have the liberty to use the funds allotted for each program as they wish, only under two minimal conditions: first, that the budget does not contain information on institutional there is no increase in the amount of money for staff recruitment and, secondly, that the money cannot be transferred from the production, and as there are important gaps in the infor- capital account to current expenditures. mation systems of the public institutions about generated In spite of the reform, there is still a gap between the law goods and services, the evaluation is limited to the finan- But, the simple delegation of authority to expenditure agencies without strengthening accountability mechanisms for the use of and the implementation. This is because, for budgetary cial aspects and does not consider any dimension linked resources increases the opportunities for embezzlement. To prevent this, the nature of expenditure controls should be changed and purposes, there is not an exact definition of what a “pro- to performance. formal mechanisms should be introduced to ensure that accountability is based on program results, while maintaining or strengthe- gram� is. On the other hand, the “products� are not well ning financial authority and accountability at the level of expenditure agencies to assure an effective execution of budgets. France defined either, and consequently, it is difficult to define The new legal framework modernizes the control manage- has a system where administrators are clearly identified with each program, both at the national and local levels, thus creating a the inputs. Moreover, there exists confusion in the use of ment system by shifting the focus of control actions from chain of responsibility. the programmatic category of project, including in certain ex ante to ex post. However, ex ante control by the Comp- Rendición de Cuentas y Desempeño / capítulo IX Rendición de Cuentas y Desempeño / capítulo IX cases, the difference between capital expenditures and cu- troller General of the Republic, continues to prevail focused But, how to change this control culture? In the first place, the systems that formally emphasize financial control, with centralized rrent expenditures. Until fiscal year 2008, the budget did on the administrative, financial and legal aspects, particularly financial ministries, as in France, Spain and many countries of Latin America, should be prepared to delegate funds and responsi- not include information on physical production neither in terms of intervention prior to orders of payment. On the bilities to the executing agents. Moreover, the management agencies should have the capacity, incentives and willingness to adopt during the formulation nor during the execution phase. other hand, the external control body, the Accounts Cham- change and to accept responsibility. All this takes time and perseverance. In the OECD, performance measurement and goals are ber of the Republic, has included in its strategic plan the de- often used between structured agreements such as contracts or quasi-contracts, and these contracts are interpreted in a flexible way, In terms of planning and budgeting, multi-annual ins- velopment of management audits according to the principles in fact more for information purposes than for mechanically determine the consequences on resources and programs. Besides, truments have been approved, as well as the first Natio- of efficacy, results, and impact of the application of public contracts do not guarantee that programs will be protected against political interference when the risks are high. nal Development Strategy (END) and the first National resources. Nevertheless, in practice, it mainly conducts finan- Multi-annual Plan of the Public Sector (PNPSP), which cial-type audits. In Latin America, there are few possibilities to increase delegation and to prepare contracts aimed at achieving results. Major ad- are the beginning of the development of the Medium- ministrative reforms would be required in several centralized administrations of Latin America to implement delegation systems. Term Macroeconomic Programming and of the Multi- The Ministry of Public Administration has launched an The solution could be the introduction of a formalized informality approach – i.e. formal agreements between the line agencies and annual Fiscal and Financial Framework. ambitious quality management administration program ministries of finances and presidencies, in order to explicitly recognize that performance information is the basis for a continuous In the development of the medium-term instruments, that includes obtaining certifications for public organiza- dialogue and not the trigger for actions related to budget management. These contracts will need a framework of norms to ensure the participatory processes have not been defined. In tions according to quality management models, and the compliance, quality and contrast with reality. some cases, the regulation of the new legal framework9 is establishment of staff performance evaluations according still to be completed and there is no medium-term fiscal to the goals of the institutions concerned. This program framework to support the planning instruments that are is still in a preliminary stage and it is an initiative aiming Source: Source: Ketelaar, A., N. Manning and E. Turkisch (2007), “Performance-based Arrangements for Senior Civil Servants OECD and other Country Experiences�, OECD 8 Article 8 of Decree No. 492-07, Implementing Rules of the Act on the Budget of the Public Sector. Working Papers on Public Governance, 2007/5, OECD Publishing. doi:10.1787/160726630750; World Bank, Public Sector and Governance Unit, Latin America and the Caribbean 9 For instance, the Rules for the Preparation of the Multi-annual Financial Framework, as well as for the design of follow-up and evaluation Region (2008), “Performance-Informed Budgeting in Latin America, Experiences and Opportunities� of the execution 130 131 to correct weaknesses in the quality of information of ins- that signed performance and results based contracts, indicators and of financial information, as well as access to particularly, of both Chambers of Congress and citizens. titutional performance. through “Agreement Acts� to initiate the experiment SIGEF by stakeholders outside the Executive Branch and, with four line Ministries (Ministries of Education, Pu- A system is required to implement all the initiatives men- blic Health, Agriculture and Labor). tioned above offering timely information on performance. To this end, the participation of the National Statistics MEPYD has advanced in the elaboration of a manual Office is important, as well as the improvement of the ad- on results-based management and application of con- TABLE 3: Consolidation of Mechanisms and Functions in the Accountability Process ministrative records of the institutions, all this in accor- tracts12 that establishes six phases: 1) incorporation of dance with the Access to Public Information Act. institutions, 2) evaluation of basic conditions, 3) technical assistance for institutional capacity-building, 4) establish- Recent experience in the OECD countries confirms the importance of establishing as early as possible in the process of mechanism 3.2 Articulation between Planning and ment and management of commitments, 5) monitoring reform, functions and/or institutions that strengthen the users’ capacities of performance information, as well as the improvement of Budget and application of incentives and sanctions, and 6) eva- the quality of such information and of the systems that generate it. The recent report of the Highest Auditing Authority of New Zealand luation. (General-Auditor) that informs about the weaknesses of performance information in that administration, is quite revealing for two rea- The process to formulate the Multi-annual National sons: the function performed by a body traditionally dedicated to auditing in the revision of (non financial) performance information, Plan for the Public Sector and the Multi-annual Public The proposed contract model establishes commitments and the weaknesses observed by this body in an traditionally pioneer administration in these tasks. Sector Budget are still in their beginning stages and, for indicators on results of intermediate and final produc- consequently, does not allow to verify the degree of con- tion. The purpose is to sign contracts at the end of the year In order to try and prevent or correct this problem, many OECD countries are making extensive use of bodies and units for the conso- sistency between instruments. Although MEPYD and 2009 with incidence on the 2010 budget. Commitments lidation of mechanisms and functions that allow to increase the quality and truthfulness of performance information and a more reliable MH have made progress in harmonizing processes and are also envisaged on other performance indicators such use of the same by the different players in the budget process, including the Legislative Branch, the different parts of the Executive, and consulting on methodological documents, an effective as: efficiency, economy, resources and quality. These ex- the citizens themselves. coordination is still lacking to satisfy the requirements of periences pose several challenges: a) the need to strengthen the adopted model, i.e. strong relation and interdepen- the institutions in their processes of planning, budgeting, In the United Kingdom a Performance Information Panel (PIP) has been created that includes key actors in the generation and use dence. information and monitoring management, b) selection of of Performance Information, such as the Department of the Treasury, the Office of the Cabinet of the Prime Minister, the National relevant and simple indicators, c) an ad hoc system to fo- Audit Office, the Audit Commission, and the National Statistics Office. These new links among the actors create common practices to Diverse public institutions have been developing strate- llow up on these first experiences of application, and d) ensure the quality and truthfulness of performance information, thus strengthening the capacities of the users to handle performance gic sectoral plans10, but the institutional budgets do not definition of an institutional incentives scheme, defined in information. For instance, the National Audit Office has a Directorate of Performance Measurement that coordinates the measurement reflect such plans, for the following reasons: a) they do coordination with MEPYD, MH and MAP. of performance as part of the financial audits, the revisions of the governance of the bodies of the central government, and the studies on not express the production of goods and services for the the efficiency of use of public resources. The Audit Commission has a center for performance measurement whose purpose is practical yearly exercise, b) the programmatic structure is not con- 3.3. Key Actors in the Budget Cycle learning, liaising with local and national administrators, and the development of strong links with academia and with the public and Rendición de Cuentas y Desempeño / capítulo IX Rendición de Cuentas y Desempeño / capítulo IX sistent with the plans, and c) resource allocation is done private sectors. The National Statistics Office has a central unit that gives support on methodology and certification of the quality of on the basis of historical criteria. In some cases, products The public bodies and civil society may and should use the the information used and its sources. are expressed in a vague way and cannot be translated in obtained results to improve their participation in the diffe- budgetary terms. rent phases of the budget process. However, the role that In Spain, the National Agency for Evaluation of Public Policy and Quality of Services (AEVAL) was created to use evaluations in the these actors can play is conditioned by: a) serious doubts quality improvement of public services, to increase accountability of government agencies towards the general public, and to promote The different existing institutional plans were not for- about the quality of administrative records and the characte- better use of public funds. Its creation was based on the recommendations of a panel of academic experts, distinguished professionals mulated according to common methodological guide- ristics of the existing information systems, b) the capacities and public administrators. The Agency, dependent from the Ministry of Public Administration, evaluates programs and policies that lines. The production of common methodological do- of the actors involved in the production, management and are selected every year by the Spanish Cabinet for presentation to Parliament in an annual report on the efforts that develops the central cuments that contribute to the articulation between the utilization of performance information, c) accessibility to agencies of the Government to improve the quality of the services provided to the public. A management contract regulates the activities plan and budget at the institutional level is still lacking in information that stimulates its utilization by key actors, and of the Agency and its relations with the Government, who finances these activities. The Board of the Agency includes representatives the MEPYD and MH. d) system of positive and negative incentives linked to per- of the Ministry of Public Administration, the Ministry of Finances, the Ministry of the Presidency, the Ministry of Foreign Affairs and formance information that stimulates its utilization. In this Cooperation, and the trade unions, as well as distinguished independent professionals. Progress has been made at MEPYD, MH and MAP11 regard, it is essential to improve the quality of performance 10 Some examples worth mentioning: Ten-Year Education Plan 2008-2018, Ten-Year Health Plan 2006-2015, National Food and Health Plan Source: Controller and Auditor-General, “The observations on the quality of performance reporting�, ISBN 978-0-478-32609-3, New Zealand, 2008; HM Treasury, Cabinet Office, (PLANAN) 2000-2010, Strategic Plan for the Eradication of the Worst Forms of Child Labor, Strategic Plan for the Housing Sector 2004- National Audit Office, Audit Commission, and Office for National Statistics, “Choosing the right fabric, A Framework for Performance Information�, . Feinstein, Osvaldo and Pedro 2008, Strategic Plan for Science and Technology 2008-2018, National Plan for Gender Equality and Equity 2006-2016, National Strategy for Arizti, “Policy and Program Evaluation in Spain, The Case of the Spanish Evaluation Agency (AEVAL), (2008), “Budget for results in Spain: Lessons learned after two decades of reforms� the Information Society, Strategy for Energy Efficiency of the Dominican Republic, among others. Eduardo Zapico-Goñi, OECD; “The impact of joining the European Union on the evaluation of public policy: the case of Spain�, Veronica Viñas, Universidad Carlos III de Madrid; “La 11 The Ministry of Public Administration - MAP has been the signatory steering body since its constitution as Ministry of State. The functions agencia de evaluación y calidad y la necesidad de evaluar las intervenciones públicas�, Inés Pérez-Durantez Bayona, Presupuesto y Gasto Público, Instituto de Estudio Fiscales, 51- (2/2008). of MAP, at the moment of enactment of the Public Spending Law, were performed by the National Office of Public Administration (ONAP) under the umbrella of the Technical Ministry to the Presidency (current MEPYD). 12 Gestión Orientada a Resultados y Contratos por Resultados y Desempeño (Results-Oriented Management and Results- and Performance- 132 Based Contracts), MEPYD, 2008. 133 4. Policy Alternatives • Administrative flexibilities based on the achievement • Articulation of institutional goals and performance of results in budget execution (budget modifications, evaluations. Improve predictability of the annual budget To consolidate the development process of a programming of execution and budget surpluses), trea- and strengthen controls and information on medium-term strategy of the multi-annual plan sury, procurement and contracts, human resource ma- To strengthen the role in the accountability expenditures. and the medium-term budget. nagement and organizational design. cycle of actors external to the Executive Branch It is essential to continue to strengthen SIGEF in the short It is important to support and to strengthen the me- • A diversified incentive plan for staff. In order to ensure that the reform process leads to better term, for which is recommend the following: dium-term planning and budgeting instruments that quality in public expenditure, it is fundamental to enhan- are being developed. Figure 1 summarizes some of the It is also essential to expand the evaluation function. ce the role of the Congress of the Republic, the Cham- • To ensure sustained expansion of SIGEF until the who- lessons learnt from international experience. In order Evaluation is a key factor in policy design, decision-making ber of Auditors and civil society. These actors play a key le public sector has been covered. to advance in the processes already initiated in the linked to resource allocation and for the establishment of role in ensuring that the accountability system offers the country, the following is recommended: a results-based management model. Consequently, the necessary incentives for the reforms to be translated into • To improve recording of accruals and to achieve a clear following is important: better quality of expenditure. differentiation from commitments. • Institutionalization of the consultation process, its scope and procedures, as well as the design of the mechanism • To define a model for follow-up and evaluation of pro- Some of the objectives of strengthening the role of Congress • To incorporate information on the programming and exe- to update the National Development Strategy. grams that takes into account and commits the efforts of is to increase the quality of the budget discussion, to include cution of goals and work volumes. the different governing bodies and line Ministries. the logics of fiscal discipline, and to enhance the capacity of • Elaboration of the Methodological Manual for the For- the Congress to analyze the Draft Revenues Budget (and the • To pursue the establishment of a Single Treasury Account. mulation and Evaluation of the Multi-annual National • To identify results and impact indicators that express Public Expenditures Act) while increasing the quality of the Plan for the Public Sector. the policy priorities defined in the planning instru- accountability process. Lastly, the citizens and users of public Another major action is the strengthening of Program ments and to establish assumptions for linkage with services play a fundamental role in monitoring the allocation Budgeting. In this regard, the following is important: • Preparation of the Methodological Guidelines for Me- public production. and execution of the budget, and requiring accountability of dium-Term Macroeconomic Planning. public administrators and service providers’. • To include information on physical production. Co- Improve the management of Public rrect identification and measurement of the latter, both • Definition of the methodology for the formulation of Administration in order to support to the shift In order to strengthen the role of the external actors, it is in terms of budget formulation and execution, are the the Multi-annual Budget of the Public Sector. towards results-based management. suggested: first steps in the elaboration of performance indicators. • Formulation of the Rules for the Preparation of the Mul- In the short term it is recommended to support the efforts • Allow access to SIGEF to the Congress, the Accounts • To revise the programmatic structure of the budget: a Rendición de Cuentas y Desempeño / capítulo IX Rendición de Cuentas y Desempeño / capítulo IX ti-annual Financial Framework, as well as the design of undertaken by the Ministry of Public Administration in Chamber of the Republic, and the general public, and correct identification of end and intermediate products the follow-up and evaluation of its execution. the following fields: to organize workshops on the information provided by sets the basis for a revision of the programmatic structu- the system. res of institutional budgets. Thus, it is important to do To continue with the process of elaboration and appli- • Implementation and utilization of total quality mana- the following with the public institutions: a) an analy- cation of Results- and Performance-Based Contracts at gement techniques such as the CAF model (Common • To promote and enforce the law on access to public in- sis of policy priorities and institutional missions, b) the Ministries of State, and to strengthen, with them, Assessment Framework) used in the European Union13. formation. an analysis of productive processes and organizational structures, and c) determination of input-product rela- monitoring and evaluation programs. • International certification of certain key management pro- • To present the Results- and Performance-Based Con- tions. On this basis, it is suggested to launch a gradual The regulation of the Article 14 of the Public Spending cesses such as contracting and staff evaluation. tracts socialization workshops, and to publish on the process of adjustment in the institutional programmatic Law is appropriate to determine the operational characte- webpage of the Ministry of Economy, Planning and De- networks. ristics of these contracts, the conditions to be fulfilled by • Management quality evaluation as part of an institutio- velopment, monitor performance indicators system, so the agencies that will be part of this regime, and the fre- nal diagnosis prior to the development of Results- and that citizens and users of public services can monitor • To evaluate comprehensively the budget, particularly quency and mechanisms of the evaluations that will verify Performance-Based Contracts that include indicators to compliance. its non-financial aspects. As the determination and compliance. In particular, for the definition of an incenti- measure progress in each management area, including measurement of the institutional products improves, ves plan that should be prepared jointly by MEPYD, MH personnel management. it becomes indispensable that the budget evaluation effectively includes its physical dimension, and enlarges and MAP, with differentiated treatment for those institu- its ratio to the different aspects of performance. tions that sign contracts, including: 13 The Common Evaluation Framework (CAF), developed by the Group for Innovative Public Services of the European Union, is a self- evaluation tool expressly created for public organizations and includes the main characteristics of several excellence models. It is a common regime of evaluation of public organizations that is simple and compatible with other models, and hence, adequate for application to natio- nal administrations. For a Spanish version of the document “CAF 2006, el Marco Común de Evaluación� see www.aeval.es. 134 135 5. Conclusions The reforms launched in the budget and planning • To improve predictability of the annual budget and to areas, and for planning and investment, are crucial to strengthen the controls and information on expenditu- advance towards performance based management that res. improves the quality of public expenditure. Their im- plementation requires a cultural and institutional chan- • To consolidate the process of formulating a medium- ge at all levels. The most important challenge will be term development strategy, the multi-annual plan and to manage this change and to overcome resistance to the medium-term budget. reforms. The other major challenge will be to design a gradual reform process that starts by setting the institu- • To continue with the process of elaboration and appli- tional bases for the reform, generating tangible results cation of the Agreements for “Results and Performance� in the short term while advancing towards medium-term at the key Ministries, and to strengthen the systems for structural reforms. monitoring and evaluation of the results. This Note has presented a series of recommendations • To improve the management of Public Administration whose purpose is to support this process of gradual re- in order to give support to the shift towards results based form, taking into account the Dominican context and management. the experience of some OECD countries that have gone through a similar process. The following five areas • To strengthen the capacity of key actors in the budget should be priorities in the short term: process to manage results and performance information. annexes Rendición de Cuentas y Desempeño / capítulo IX 136 ANNEX I TablE 1: MODERATE POVERTY IN THE DOMINICAN REPUBLIC National Urban Rural World Bank World Bank SEEPYD World Bank World Bank SEEPYD World Bank World Bank SEEPYD (1) (2) (3) (1) (2) (3) (1) (2) (3) 1986 37.5 28.5 47.3 1992 33.9 19.3 49.0 Apr-97 26.7 17.7 38.1 1998 28.6 20.5 42.1 Apr-00 25.8 27.2 16.8 17.7 42.5 44.6 Oct-00 27.7 28.2 18.2 18.3 45.3 46.7 Apr-01 27.7 28.1 18.1 18.2 45.5 46.4 Oct-01 27.4 27.8 18.5 18.5 44.0 45.1 Apr-02 26.6 27.6 18.0 18.9 42.4 43.6 Oct-02 27.7 29.1 18.2 19.9 45.4 46.1 Apr-03 34.7 35.3 24.0 24.3 54.6 55.6 Oct-03 35.3 36.0 27.2 27.8 49.8 50.7 Apr-04 42.1 42.5 34.5 34.4 56.1 57.3 Oct-04 42.2 43.4 34.7 35.4 55.7 58.0 Apr-05 40.9 33.6 54.3 Oct-05 40.1 33.0 53.2 Apr-06 37.6 30.7 50.1 Oct-06 36.3 28.4 50.8 Apr-07 35.8 Oct-07 (*) 35.8 Apr-08 (*) 35.2 Oct-08 (*) 37.8 Sources: (1) World Bank (2001), Dominican Republic Poverty Assessment, Report No. 21306-DR (2) World Bank (2006), Dominican Republic Poverty Assessment, Report No. 32422-DR (3) SEEPYD (2008), Análisis del Desempeño Económico y Social de la República Dominicana, Enero-Junio 2007 (*) Cifras preliminares Table 2: decomposition of changes in poverty Notas de Política / ANEXO I Growth effect Distribution effect Residual Total change in moderate poverty 1986-1992 -6.70 4.60 -1.50 -360 1992-1998(1) -3.30 -1.50 -0.50 -5.30 1997-2002 0.60 -0.74 0.00 -0.14 2002-2004 (2) 13.94 -0.19 0.00 13.75 Sources: (1) World Bank (2001), Dominican Republic Poverty Assessment, Report No. 21306-DR (2) World Bank (2006), Dominican Republic Poverty Assessment, Report No. 32422-DR 139 TablE 4: STATUS OF MILENIUM DEVELOPMENT GOALS BY TARGET (C. 2005) Millenium Goal Target Variable Dominican Republic Colombia Peru Brazil Cuba Achieving Primary completion rate, female Univesal Primary (% of relevant age group) 86.6 107.1 101.2 111.2 91.2 Education Primary completion rate, male (% of relevant age group) 79.9 103.4 100.9 109.8 91.9 Table 3: GINI COEFFICIENT IN THE DOMINICAN REPUBLIC Expenditure per student, primay (% of GDP per capita) 8.2 16.2 7.2 12.8 33.8 World Bank (1) World Bank (2) SEEPYD (3) Promoting Ratio of female to male Gender Equality primary enrollment 95.1 98.5 100.7 94.2 97.5 1986 47.8 1989 50.5 Ratio of female to male 1992 51.4 secondary enrollment 120.1 110.9 102.8 110.1 101.7 Share of women employed in the 1996 48.7 nonagricultural sector (% of total 1997 49.6 nonagricultural employment) 38.3 48.3 37.5 41.0 42.6 Apr-00 53.3 55.3 Reducing Child Mortality rate, under-5 (Per 1,000) 29.2 20.7 25.2 20.0 6.7 Oct-00 51.1 54.6 Mortality 2000 52.1 Immunization, measles (% of children Abr-01 51.2 53.1 ages 12-23 months) 99.0 88.0 99.0 99.0 96.0 Oct-01 50.4 52.5 Apr-02 51.0 53.0 Improving Maternal mortality ratio (Modeled Oct-02 50.8 52.0 Maternal Health estimate, per 100,000 live births) 150.0 130.0 240.0 110.0 45.0 Apr-03 50.9 53.5 Maternal mortality ratio (Nacional Oct-03 50.8 54.1 estimate, per 100,000 live births) 91.7 75.9 37.3 2003 51.9 Births attended by skilled health staff (% of total) 95.5 96.4 86.9 96.6 99.9 Apr-04 49.7 53.8 Oct-04 50.1 54.6 Combating Invidence of tuberculosis 2004 51.6 Disease (Per 100,000 people) 88.8 45.0 162.4 49.4 9.0 Apr-05 53.7 Prevalence of HIV, total (% of population ages 15-49) 1.1 0.6 0.5 0.6 0.1 Oct-05 53.7 2005 49.9 Ensuring CO2 emissions 2.1 1.2 1.2 1.8 2.3 Apr-06 53.0 Environmental (Metric tons per capita) Sustainability Oct-06 54.1 Improved water source Apr-07 52.1 (% of population with access) 95.0 93.0 84.0 91.0 91.0 Oct-07 Notas de Política / ANEXO I Notas de Política / ANEXO I Sources: Sources: (1) World Bank (Various years), world Development Indicators (1) World Bank (Various Years), World Development Indicators (2) World Bank (2006), Dominican Republic Poverty Assessment, Report No. 32422-DR (3) SEEP YD (2008), análisis del Desempeño Económico y Social de la República Domincana, Enero-Junio 2007 140 141 Table 6: key sector vs. weak sectors, income and poverty effects Private and Social Services 26.3% 270.4 596.1 652.4 652.6 667.3 650.9 671.9 640.4 651.8 807.6 890.9 848.4 873.9 866.5 Households group Income Povert rate after income change Absolute differences with respect Change % to the initial poverty levels 58.8 69.5 86.1 63.7 Moderate Extreme Moderate Extreme 3.5 67.3 88.5 94.7 36.5 37.9 56.4 66.6 55.7 62.3 Poverty Poverty Poverty Poverty Finance Cant (pers.) P1 P2 Cant (pers.) P1 P2 Cant (pers.) P1 P2 Cant (pers.) P1 P2 0.3% Shock: 5% GDP equivalent demand increase for key sectors only National District 2.3 20.0 7.6 4.3 5.8 2.7 1.9 0.6 0.3 0.1 0.3 0.1 0.0 135.7 144.2 175.7 239.4 Transp. and communications Other Urban 12. 102.8 140.7 161.2 186.0 198.2 218.4 241.1 245.5 232.8 238.5 2.2 31.0 5 7.2 10.9 4.3 2.6 1.0 0.4 0.2 0.6 0.1 0.1 TablE 5: DISTRIBUTION OF EMPLOYMENT BY ECONOMIC ACTIVITY IN THE DOMINICAN REPUBLIC 10.0% 17. 10. Rural 2.3 41.6 8 2 15.1 6.1 3.6 1.1 0.5 0.3 0.6 0.2 0.1 13. Aggregate 2.2 31.8 1 7.5 11.0 4.5 2.8 0.9 0.4 0.3 0.5 0.1 0.1 Shock: 5% GDP equivalent demand increase for weak sectors only National District 0.8 20.5 7.8 4.4 6.0 2.7 1.9 0.1 0.1 0.1 0.0 0.0 0.0 483.6 546.1 559.1 811.0 Trade, Rest. and hotels 415.5 Other Urban 12. 567.6 558.0 572.9 765.5 794.8 866.0 885.8 832.3 899.1 0.8 31.6 8 7.3 11.3 4.4 2.7 0.4 0.1 0.1 0.1 0.1 0.0 40.4% 17. 10. Rural 0.7 42.3 2 5 15.5 6.2 3.6 0.3 0.2 0.1 0.3 0.1 0.0 13. Aggregate 0.8 32.4 4 7.7 11.4 4.6 2.8 0.3 0.1 0.1 0.1 0.1 0.0 93.2 96.2 113.8 220.2 120.2 104.4 107.0 127.1 199.7 214.1 209.8 195.2 213.2 213.4 Source: Authors’ calculations Construction 11.7% 7.4 406.8 8.2 7.9 423.8 8.3 10.4 436.4 15.0 7.34 456.0 26.4 18.0 17.0 17.3 13.7 14.9 13.2 28.8 26.0 26.1 26.2 Table 7: current MDG situation and baseline performance: dominican republic Utilities 1.8% 79.9 448.4 443.2 433.0 531.8 519.0 486.7 471.5 494.1 486.7 Manufacturing dominican republic 7.8% 1990 2007 2015 (Objective) Distance covered in ‘base’ MDG 1: People living below the national poverty line (% of population) 29 38 14 44% (2005-1991) 1028.9 20.1 -1.5 Notas de Política / ANEXO I Notas de Política / ANEXO I 1993 2413.3 407.3 8.1 1994 2397.4 345.6 9.3 1996 2465.8 357.6 8.8 1998 2888.9 493.8 8.2 1999 2979.5 522.7 7.6 2001 3176.5 474.3 5.8 2002 3315.0 526.0 7.6 2004 3209.9 476.3 4.9 2005 3276.4 477.8 5.9 MDG 2: Primary completion rate (% of relevant age group) 22 27 100 35% Source: ILO (2005) Key iIndicators of Labor Market, 5th edition Mining MDG 4: Under-five mortality rate (per 1,000 births)) 58 35 19 64% -0.2% 457.7 451.0 351.2 426.0 MDG 5: Maternal mortality rate (per 100,000 live births) 229 81 57 57% MDG 7a: Access to an improved water source (% of poluation) 83 76 92 39% Agriculture MDG 7b: Access to improved sanitation facilities (% of population) 60 97 80 100% 1.9% 2247.5 2399.6 2398.6 3098.4 Source: Sistema de Indicadores Sociales de la UIS; SEE; ENDESA; and OPS/OMS UNICEF. 100.0% Total 1991 1992 1995 2003 NOTe: Latest available year if data is not available for 1990 or 2007; Relative to the values for 1990, the 2015 targets are: cut MDG1 by half, MDG 4 by 2/3, and MDG 5 by ¾; cut by half the shares of the population without access to water and sanitation (MDGs 7a and 7b); and achieve 100% completion for MDG 2; The poverty rate in 1990 column is for 1998; The 1990 and 2007 MDG 2 values correspond to the (strict) definition of the completion rate: the proportion of students of the correct age cohort (i.e., no out-of-cohort del Total Cambio older students) that enter first grade and successfully complete on-time (i.e., without repeating) all 8 grades of primary school. Total % 142 143 ANNEX II Model Catalog of Duties and Responsibilities of Corporate Directors for future reform of the New Ease of Doing Business Company Act Comments on the new Companies Act: Opening of new business indicator NOTE: The language for the formulation of the articles below has been inspired by the Securities Exchange Act of Mexico (2006). Mexico is the country with the highest position Latin America and the Caribbean under the Protection for Investors’ ranking of Doing Business.. DUE DILIGENCE aforementioned entities. Artícle x1.- The board members, in the diligent exercise of Artícle x3.- The members of company’s board of direc- the functions that this Act and the bylaws confer to the social tors will fail in the due diligence duty and will be sub- At the time of writing this note, the National Congress of prior enrollment. The countries that introduced these body, should act in good faith and in the best interest of the ject to responsibility when causing financial damage to the Dominican Republic was on the approval process of requirements first (UK and France) have already deleted company and entities it controls, for which they could: society or legal person under their control or in which the new Commercial Societies and Limited Responsibili- them. has significant influence under the updated of one of ty Individual Enterprises Law. The new legislation intro- Paragraph I. Request reasonably necessary information, the following cases: duces a new corporate structure of limited responsibility Mandatory notarization of the certificate of deposit. The about the company and the entities it controls, for de- (Limited Responsibility Society or LRS) that undertakes new law requires that, once the social capital has been de- cision-making. In effect, the company board of directors Paragraph I. Not to attend, except for just cause in the a significant improvement given that it offers a major fle- posited in the bank, employers should take the certificate may establish, with the prior opinion of the audit commit- opinion of the shareholders meeting, the board mee- xibility when starting a business to entrepreneurs. When of deposit to a notary to verify its authenticity. The notary tee, guidelines setting how these applications will be made tings and, where appropriate, committees, and that due compared to the most frequent society figure (Limited does not check if the funds were actually deposited. This and, where appropriate, the scope of the information re- to their absence cannot legally sit on the correspondent Liability Company) the new L.R.S. does not need a mini- requirement, for employers to deposit funds in the bank, quests from the administrators. organ. mum of 7 shareholders, which was frequently identified obtain a certificate and, at the same time, authenticate it as an obstacle. This law will impact the “creation of new before a notary, could be replaced by a process by which Paragraph II. Require the presence of senior officers and Paragraph II. Do not disclose to the board of directors business� indicator. This Doing Business indicator could employers would have to prove before the Registry that others, including accounts commissioner, which may con- or, where appropriate, the committees that form, known turn to be based according to the new society figure, the have sufficient funds at the time of registration. tribute or provide input for decision making during cou- and relevant information necessary for proper decision- L.R.S. According to this, the new law would have a poten- ncil meetings. making in these bodies, unless they are legally or contrac- tial influence in the existing process to create and operate Time to complete company registration at the Registry. tually obligated to keep secrecy or confidentiality in this a business. It is possible that the enactment of the new law requires a Paragraph III. Postpone board meetings when a director regard. new registration of existing companies based on the capital. has not been called, when it has not been on time or, Mandatory authorized capital deposit in the bank. The Minimum and maximum limits of authorized capital have where appropriate, for not providing him the informa- Artícle x4.- Consistent liability compensation for damages new law requires the employer to deposit the entire initial been established according to the type of society (at least 30 tion given to other administrators. Such deferral will be caused to society or legal persons under its control or in capital in a bank account at the time of registration. This million of Dominican pesos -DR$- for SA, a maximum of up to three calendar days; the council may hold meetings which has significant influence, lack of diligence of the would add an additional requirement to the opening pro- DR$ 60 million to the LRS). This will influence the number without reconvening, if the deficiency is remedied. company’s board members, derived from acts done or cess. The purpose and effectiveness of this requirement of records and the workload of business registers. To avoid decisions taken by the council or those decisions no lon- are questionable since all the funds can be withdrawn im- potential delays caused by overwork or delayed records, ne- Paragraph IV. Deliberate and vote, requesting presence, ger taken due to inability for the social organ to legally mediately after the registration of the company. In this cessary human and material resources should be ensured. if desired, of only board members. hold meetings, will be among the culprits who would have sense, there is no protection of investors or creditors, taken the decision or caused the mentioned corporate which often is cited as the rationale for such deposit requi- Artícle x2.- Board of directors, executive officers and body could not sit. Such compensation may be limited in rements. Across the globe, countries are phasing out the other person holding representation power of the corpo- the terms and conditions expressly indicated by the social Notas de Política / ANEXO II Notas de Política / ANEXO II minimum capital requirements or deposit requirements ration, must provide everything necessary to ensure Act statutes or by shareholders general assembly resolution, compliance. The information presented to the company’s provided that such acts are not willful or in bad faith, or council Directors by executive officers and other emplo- illegal acts according to this or other laws. yees, both from the company and the entities it controls, shall be signed by the person responsible for their content Corporations may agree compensations and contract, and elaboration. for the board insurance members, bonds or surety ships to cover the compensation amount for the damage their Members of the board of directors and other persons who actions may cause to the society or legal persons under hold an employment, position or commission in any legal its control or in which it has significant influence, unless person that controls a corporation or in which it has sig- such acts are willful or in bad faith, or illegal acts accor- nificant influence, will not lack discretion and confiden- ding to this or other laws. tiality established in this or other laws, when providing 144 information to the company’s council Directors on the 145 TORTS AND LOYALTY DUTY Paragraph III. Favor, knowingly, a shareholder or group company that help in obtaining, without legitimate cau- of shareholders the company or legal persons under its se, the benefits referred to in the first paragraph of this Paragraph VI. Alter active or passive accounts or con- Artícle x5.- The board members must maintain confiden- control or on which it has significant influence, to the article. tract terms, make or order registration of non-existent tiality regarding information and issues on which they detriment or prejudice of other shareholders. operations or expenditures, exaggerate the real ones might have knowledge through their position in the com- Artícle x7.- The members of the board of directors of cor- or intentionally perform any illegal act or transaction, pany, when such information or matters are non-public. Paragraph IV. Approval of transactions which the com- porations should refrain from any conduct that set out resulting in any such alleged a violation or injury in pany or legal person under its control or on which it has below: the company’s assets or the legal persons it controls, The board members, who have a conflict of interest on significant influence, with related parties, without com- for their economic benefit, either directly or through any issue, should not participate or be present in the de- plying the requirements established by this Law. Paragraph I. Generate, disseminate, publish or provide a third party. liberation and vote on such issue, without affecting the information to the public of the company or legal person required quorum for the establishment of the aforemen- Paragraph V. Take advantage or approve for third par- under its control or which has significant influence, or The provisions of this Article shall also apply to per- tioned board. ties, the use or enjoyment of heritage property of the the securities of any of them, knowing that is false or mis- sons exercising power control in the society. company or legal person it controls, in contravention of leading, or order that takes out some of these behaviors. The directors shall be jointly responsible with those that the policies approved by the board. Artícle x8.- The responsibility consisting in compensation have preceded them in office, for the irregularities in that Paragraph II. Request or cause to skip the registration of of damage or loss incurred by reason of acts or omissions they have incurred if, knowing them, not communicate in Paragraph VI. Misuse of relevant non-public informa- transactions and the company and the entities it controls, referred in Articles x5, x6 and x7 of this Act, shall be joint writing to the audit committee and external auditor. Fur- tion, related to the company or legal person under its as well as altering or order altering records to conceal the among the guilty who have taken the decision and will thermore, these managers are obliged to inform the audit control or in which it has significant influence. true nature of the transactions entered into, affecting any payable as a result of damage or injury. The appropriate committee and external auditor all those irregularities concept of the financial statements. compensation should cover the damage caused to society that, during their tenure, they are aware and are related Paragraph VII. Take advantage or exploit for their own or legal persons under its control or in which it has sig- to the company or legal persons under its control or on benefit or for third parties, without the waiver of the Paragraph III. Hiding, omitting or causing to be hidden nificant influence and, in any case, there will be removal which it has significant influence. board, business opportunities that apply to the company or fail to disclose relevant information in terms of this from office of those responsible. or legal person under its control or on which it has sig- legal system must be disclosed to the public, shareholders Artícle x6.- The board members will incur in disloyalty to nificant influence. or security holders, unless this Act provides for the possi- The company affected, in no case, may agree contradictorily, the society and, therefore, be responsible for damages cau- bility of deferral. or provide in its bylaws, allowances, benefits or exclusion of sed to it or legal persons under its control or on which it Thereto, shall be consider, unless proven otherwise, that obligations, that restrict, release, replace or compensate the has significant influence when, without lawful cause, by is being used or exploit a business opportunity that co- Paragraph IV. Request or accept inscription of false obligations referred to statutory provisions mentioned in virtue of their employment, office or commission, obtain rresponds to the society or legal person under its control information in the company’s accounting or legal per- the previous paragraph, or hire, for any person, insurance, economic benefits for themselves or seek to third parties, or on which it has significant influence, when the adviser sons under its control. It will be presumed, unless pro- bonds or bails covering the amount of compensation for the including a shareholder or a group of shareholders. directly or indirectly performs activities that: ved otherwise, that the data included in the accoun- damages caused. tancy are false when the authorities, in exercising their Also, board members will incur in disloyalty to the com- • Are the ordinary or usual society itself or the entities it discretion, require information relating to the accou- pany or legal persons under its control or on which it has controls or in which it has significant influence. nting records and the company or entities it controls significant influence, being responsible for damages cau- do not have it, and cannot prove the information that sed to them or that, when performing any of the following • Involve the conclusion of a transaction or a business supports the accounting records. behaviors: opportunity that is originally addressed to the company or legal person referred to in the preceding paragraph. Paragraph V. Destroy, alter or cause to be destroyed or al- Notas de Política / ANEXO II Notas de Política / ANEXO II Paragraph I. Vote at board meetings or take decisions tered, in whole or in part, systems and accounting records related to the company’s heritage or legal persons under • Involve or intended to engage in business or commer- or documents that give rise to the accounts of a company its control or on which it has significant influence, with cial projects to be developed by the company or legal or legal person it controls, prior to the expiration of sta- conflict of interest. person referred to in paragraph a) above, provided that tutory conservation deadlines and with the purpose of the director has prior knowledge of it. hiding its record or evidence. Paragraph II. Do not disclose, in the matters dealt at the board or committees meetings, the conflict of interest The provisions in the first paragraph of this Article and in with respect to the company or legal persons under its paragraphs V to VII of the same also applies to people who control or on which it has significant influence. In effect, exercise power control in society. managers should specify the conflict of interest details, unless they are legally or contractually obligated to main- In the case of legal entities in which a corporation has tain secrecy or confidentiality in this regard. significant influence, liability for breach of trust shall be payable to members of the board of directors of that 146 147 ment (workouts). These economic and accelerated reso- In brief: the decision to reform the Dominican insolvency lution mechanisms of certain corporate insolvency are legislation is timely and important, and the Proposed Act now a fundamental component of modern insolvency could be a good step in the right direction. However, in systems. Its importance can be crucial in cases of general such proposal can be seen as notable weaknesses in the or systematic economic crisis. The Proposed Act also con- formal restructuring process as factors that would discou- tains provisions that would conflict with the possibility of rage the use of informal restructuring mechanisms. That negotiating that kind of settlement agreements (for exam- finding makes advisable a thorough evaluation and the ple, the extent of revocable actions in insolvency proces- eventual reconsideration of the current design of the Pro- ses or sanctions that are set by delaying the presentation posed Act. of the debtor in such processes). Comments on the Proposed Act on Commercial Bankruptcy The initiative of the Dominican Republic to modernize be carried out in the ICR ROSC exercise (Insolvency and its commercial insolvency law is timely and commenda- Creditor Rights Report on the Observance of Standards ble. Effective systems of corporate insolvency resolution and Codes). The following assessments should be taken as are of great importance for financial system stability and preliminary and tentative. for the economic development. An efficient insolvency Table 1: PERFORMANCE OF THE DOMINICAN REPUBLIC IN DOING BUSINESS REPORT process helps to stabilize trade relations and to create a re- The Proposed Act generally adheres to the objectives asonable credit culture as well as encouraging responsible and policies of modern insolvency procedures, but in corporate behavior. the design of these processes major defects, that could Doing Business 2008 Doing Business 2009 Global Best Practice (2008) conspire against the effective operation of the planned Insolvency systems provide an efficient exit mechanism system, are observed. The main system weaknesses, that Starting a Business for unprofitable enterprises and help reorganizing via- are observed at first glance, are: Rank 89 84 Australia ble companies. Insolvency procedures represent a way of Procedures (#) 9 8 treating victims of competition in the market. When com- • The system would hardly attract insolvent debtors to Time (days) 22 19 panies are unable to compete profitably, the logical thing use the projected insolvency mechanisms since, even Cost (% of income per capita) 31,1 19,4 is to provide means for its dissolution or voluntary de- in the restructuring, the debtor would be exposed, too Paid-in minimum capital (% of income per capita) 0 0 parture from the market. When a distressed or insolvent easily, to lose the company’s administration by simple Dealing with Construction Permits company cannot enforce trade agreements, market confi- decision of the Creditors Committee, without the Pro- Rank 75 77 San Vincent and y the Grenadines dence falls. This situation should be resolved through a posed Act contemplates the determining causes of this collective procedure which ensures prompt resolution and management loss. In addition, in the restructuration Procedures (#) 17 17 maximum recovery for creditors. This procedure should the debtor is virtually oblivious to the formulation and Time (days) 214 214 be flexible enough to provide a variety of options, inclu- negotiation of the Plan and, eventually, to the imple- Cost (% of income per-capita) 116,12 93,2 ding reorganization to viable enterprises and liquidation mentation of the Plan. Emplying workers for non-viable. Rank 110 97 Marshall Islands • From the creditor’s point of view, they could not in- Difficulty of hiring index 56 44 Singapore The Proposal for Restructuring Corporate Law or Ju- dividually approve or reject the restructuring plan. Notas de Política / ANEXO II Notas de Política / ANEXO II Rigidity of hours index 40 40 United States dicial Settlement Companies (January 2006 draft, from The negotiation and adoption of the Plan would be Redundancy Index 0 0 now on, the Proposed Act), involves two different insol- exclusively made with Creditors Committee members. vency procedures, commercial restructuring and judicial Moreover, the members of this Committee would vote Rigidity of employment index 32 28 liquidation. The proposed regulation is very detailed and promiscuously, without establishing differences in vo- Redundancy cost (weeks of salary) 88 88 extensive, making the definitive evaluation of the Propo- ting power of creditors with real guarantees. Nor would Registering Property sed Act to require a thorough study. It will also be neces- there be safeguards to preserve credit priority with such Rank 112 106 New Zealand sary to analyze the integration of standards projected with guarantees. Thus, through the Plan the system of prio- Procedures (number) 7 7 the rest of the laws with which the insolvency law should rities among credits would be undermined. This could Time (days) 86 60 be harmonized. It will also be crucial to value the adequa- have serious effects on the overall credit supply and the Cost (% of the property value) 5,11 3,8 cy of the institutional framework expected for insolvency credit cost. procedures (the judiciary, the Corporate Restructuring Getting Credit Center of the Chamber of Commerce and insolvency pro- • The draft Law does not provide elements that contribu- Rank 61 68 UK fessionals). An evaluation with these characteristics will te to the informal or extrajudicial restructuring develop- Strength of legal rights index 3 3 148 149 150 Notas de Política / ANEXO II Rank Rank Cont. Time (days) Time (years) Time (hours) Cost (% of debt) Total Tax Rate (%) Cost (% of goods) Procedures (days) Transparency Index Time to export (days) Time to import (days) Documents to export (#) Documents to import (#) Ease of shareholder suits index Extent of director liability index Rank Recovery Rate (cents per dollar) Rank Import Cost (US$ per container) Rank Depth of credit information index Export Cost (US$ por contenedor) Strength of investor protection index Global Rank in Ease of Doing Business Payments recalculated, taking into account these developments. 7 6 7 0 5 6 38 34 82 13 12 8,4 3,5 4,0 110 460 815 286 125 1015 40,09 40,02 Closing a Business 7 9 6 7 0 5 6 97 38 34 10 8,9 3,5 4,0 460 916 40,9 35,7 1150 Enforcing Contracts Trading Across Borders Paying Taxes Protecting Investors 74 9 Irland 145 144 Japan 139 72 Maldivas Singapur 37 32 Singapur 480 New Zeland 126 New Zeland 83 Hong Kong, China since they have added two new countries to the study group and in one area the methodology was improved: Getting Credit (legal rights). The ratings shown here have been Source: Doing Business Database, www.doingbusiness.org. Note that the classifications published in Doing Business 2008 are not comparable with those of Doing Business 2009, Table II: Ease of Doing Business in the Dominican Republic: suggestions for reform in the short and long term Indicators (2009 DB Report) Improvements suggestions in the Short Term Improvements suggestions in the Medium/Long Term Starting a Business Procedures: 8 • Promote and facilitate the use of the virtual application to start a • Accelerate the register process of a company through the use of business. electronic signatures and enable the electronic registration. Days: 19 • Make optional the company name certificate requirement and consider cost reduction. Cost (%INB): 19.4% • Introduce a fixed rate for business registration in the registry. • Eliminate the constitution tax. Global Rank: 84 • Eliminate the need to declare share subscription before notary (applicable to corporations). • Integrate the employee registration process with the Labor Department and the Social Security Bureau to the virtual portal of company’s registration. • Facilitate the registration process with all agencies involved (Register, Social Security, Directorate General of Taxes). Dealing with Construction Permits Procedures: 17 • Establish clear and consistent standards for construction projects in • Link Councils and the Ministry of Public Works with cadastre (Directorate the City Councils and in the Ministry of Public Works. of Cadastral Surveying). Days: 214 • Implement management addresses applications systems in the City • Create and publish standards of zoning and planning in the City Councils. Councils. Cost (%INB): 93.2% • Implement approval processes based on the “risk level� in the • Consider the transfer of projects during construction supervision to Ministry of Public Works. qualified professionals. Global Rank: 77 • Streamline and coordinate approvals of construction permits in the • Introduce electronic processes for construction permits applications. City Councils and in the Ministry of Public Works. Registering Property Procedures: 7 • Reduce time to register property in the registry. • Create a database with online access to allow users to search titles and Days: 60 pledged properties electronically. • Make optional the notarization of the sales contract of a property. Cost (%INB): 3.8% • Complete the electronic map and updated cadastre (Directorate of Cadastral Surveying). Global Rank: 106 Getting Credit Strength of legal rights index: 3/10 Increase the information available in the credit bureaus • Remove restrictions on the type of goods that can be used as collateral • o Increasing coverage (measured without impact in the for a loan. indicators). • Allow a general description of the security and debt in the guarantee Depth of credit information index: contracts and registration documents. 6/6 • Grant priority status to secured creditors within and outside the bankruptcy processes. Global Rank: 68 Notas de Política / ANEXO II 151 152 Notas de Política / ANEXO II Indicators (2009 DB Report) Improvements suggestions in the short term Improvements suggestions in the medium-long term Protecting Investors Increase protection of minority shareholders by reforming the • Modify the Civil Procedure Code to provide demandants: Transparency Index: 5/10 Commercial Code / Corporate Law and Securities Law for: • The right to request evidence in general terms (without identifying • Establish clear rights and duties of directors to act appropriately specific evidence) to the defendant. Extent of director liability index: during their tenure at the company. 0/10 • Require the immediate disclosure of information on conflict of interest transactions to the public and market regulators. Ease of shareholder suits index: • Require an external auditor report on related party transactions 7/10 before they take place. • Allow the court to void transactions between related parties Strength of investor protection that have caused damage to the company. index: 4.0/ Global Rank: 126 Trading Across Borders Days to import: 10 • Evaluate court processes to identify delay points and formulate • Reduce the number of documents required for border trade. solutions. • Create a “unique virtual window� for cross-border. Days to export: 9 • Introduce simplified regulations for small-amount cases. • Implement system of risk-based inspection of goods. Global Rank: 32 Enforcing Contracts Time (Days): 460 • Continue with the successful implementation of the “Efficient • Develop measures for evaluating the efficiency of judges. Collection Law� • Establish electronic courts systems. Cost (% of demand): 40.9 • Establish a court or a specialized commercial section. Global Rank: 83 Paying Taxes Number of payments: 9 Timr (hours): 480 Global Rank: 72 Closing a Business Time: 3.5 años • Implement the recommended reforms for the contract compliance indicator. Recovery Rate: 8.9 cents per 1 US$ Global Rank: 144 Progress in the Paying Taxes indicators will also be reflected in the Doing Business report 2010 (see methodology in the Doing Business report). Policy Notes World Bank, Dominican Republic