EXECUTIVE SUMMARY
i. This Country Assistance Strategy (CAS) for the Dominican Republic has been prepared as the country continues to adjust to an important political and economic transition. A generational change is taking place from the traditional political leadership that guided the country since the inception of democracy in the early 1960s (including seven-time President Joaquín Balaguer, now 93) to a younger generation of leaders seeking a workable meaning for concepts such as global competition, public sector accountability, and decentralization —already facts of life in most other Latin American countries. As this happens, the country has been experiencing one of the fastest rates of economic growth in the world, owing to the continued macroeconomic stability and a gradual shift toward private sector participation in the economy. Adding to this picture are the internal pressures that characterize a highly dual society. At one end, successful entrepreneurs in tourism and "maquila," are stepping up their calls for a more liberal and transparent policy and regulatory environment that would further stimulate domestic and foreign investment. At the other end, resilient pockets of poverty —concentrated mainly in rural and the Haitian border areas— with illiteracy and infant mortality rates that surpass those of comparator countries, represent a silent but nevertheless mounting cry for more efficient and effective distribution of resources. While these varied pressures have fuelled public debate among the political leadership over the past few months, they have also inspired the development of an articulate civil society, whose proposals for short-term conciliation and long-term development are starting to have a favorable impact.
ii. In this fluid environment, the challenge for the Dominican Republic is to maintain a firm direction toward the long-term goal of reducing poverty. Among leading sectors of society, there is a general agreement on the key steps to achieve this goal. The continuation of rapid growth —assisted by trade and agriculture liberalization, financial sector reform, and a regulatory environment that would allow the private sector to maximize its contribution to economic development— is widely recognized as a requirement for sustained poverty reduction. Investing in social development —to ensure that the poor gain access to good quality health, education services, and social infrastructure— is also understood as crucial to ensure that economic growth will translate into substantial poverty reduction —as well as being an enabling factor for the development of higher value-added tourism and manufacturing activities. The appropriate targeting and cost-effectiveness of social and other public investments, as well as the establishment of an appropriate environment for growth, requires in turn a modern, efficient, and accountable public sector. And because water pollution, solid waste and natural disasters affect the poor disproportionately and impact the country's dynamic advantage in tourism, appropriate environmental policies would need to be part of this long-term package. This CAS summarizes a ten-year development framework for the Dominican Republic that rests on these four pillars of sustainable poverty reduction, highlighting specific areas that are on the critical path or have not yet received adequate attention.
iii. Recent experience demonstrates that agreement on general principles is not sufficient to guarantee fast progress on such an agenda. The Dominican society will need to continue to work together to develop and adopt action plans that, while adjusted to the realities of the political cycle, can engage the political leadership productively and take advantage of excellent technical advice. One of the purposes of the FY00-02 CAS is to help Dominicans in their aim to strengthen the consensus around the next steps needed to implement the unfinished reform agenda. Consequently, the FY00-02 CAS makes Bank Group support available for a participatory and well-focused consultation process on long-term development issues that would inform (and improve the quality of) the debate leading to the May 2000 presidential elections. The groundwork has already been laid by Dominicans themselves, with the full support of the Government, the concurrence of all political parties and segments of civil society, and under the administrative leadership of a highly reputed local university. The Bank's support to this effort would constitute the starting point of the Comprehensive Development Framework pilot for the Dominican Republic. As a result of this effort, not only should a more positive environment for debate on social and economic issues emerge, but also a few concrete agreements would be readied for immediate action by the current Government or when the new administration starts in August 2000.
iv. As this process unfolds, the Bank is proposing a selective assistance program for FY00-02, to match the pace of development of local implementation capacity, and to stay within Bank administrative budget parameters. Studies and interventions will fall squarely within the above-mentioned long-term agenda: a much needed Poverty Assessment, including a thorough review of public expenditures on the social sectors, a review of governance and the public investment program, and sector/thematic reviews for the financial sector (jointly with the IMF and the Inter-American Development Bank), rural development, and urban infrastructure. New lending commitments will remain at $100-120 million per year (or approximately $12-14 per inhabitant) and the operations portfolio will plateau at no more than twelve projects under implementation per year, focusing on the unfinished agenda of privatization and reform (telecommunications, water and sanitation, power sector, environmental institutions) and on health and education. On the other hand, supervision and economic and sector work efforts are being accelerated, to improve implementation capacity, fill information gaps and feed into the ongoing consultation process. The Bank Group expects that this cautious but solid approach toward consensus building, portfolio management and lending will provide valuable and timely assistance to the Dominican society while ensuring prudential management of the political and implementation risks facing the Bank's program in the Dominican Republic in the medium term. At the same time, the Bank Group stands ready to accelerate program deployment should implementation and policy conditions warrant enhanced administrative budget allocations to this country program.
v. Issues for Executive Directors' Discussion: The following issues are suggested for Board discussion:
· Are the proposed gradual approach to the implementation of the Comprehensive Development pilot in the Dominican Republic, and the fact that it leads to a relatively higher emphasis on non-lending services than observed in the recent past, appropriate?
· Are the Bank Group's selectivity criteria adequate? Does the resulting lending program for the next three years —focusing on consolidating the unfinished reform agenda and supporting the social sectors— represent the most appropriate next steps to support the Government's development efforts?
· Are the country and implementation risks realistic and acceptable, and are they adequately reflected in the Bank's lending program triggers?
I. SOCIAL, ECONOMIC AND POLITICAL CONTEXT
A. Poverty and Social Issues
1. The standard of living of the average Dominican has improved over the past forty years, mainly as a result of solid per capita GDP growth of over 2.0 per cent per year and the positive impact of remittances from abroad. From 1960 to 1997, life expectancy increased from 52 years to 71 years, and the infant mortality rate, now at 38 per thousand live births, was reduced by a factor of three. Although consistent definitions and regular measurements of poverty are not available (see Box 1), the most reliable studies conducted in the country and by the World Bank point to a gradual decline in the incidence of poverty.
2. A host of other social indicators reveal, however, that poverty remains a problem. The illiteracy rate remains high at 16 percent; 16 percent of the households still do not have access to safe water; and infant mortality compares unfavorably to countries with similar income levels. Income distribution, although gradually improving over the past few years, remains highly skewed: in 1998 the wealthiest 20 percent of the population accounted for 47 percent of total income, while the poorest 20 percent accounted for 7 percent of the income. There are clear geographic patterns to poverty: poverty incidence in the rural areas is three times higher than in urban areas, and it reaches extreme levels in the border area with Haiti. With regard to gender, although available statistics indicate that female-headed households are not more likely to be poor than men, their poverty tends to be relatively more severe.
3. Sustaining strong economic growth and continuing the current pattern of increased resources devoted to human development and modernization of social service delivery will all be critical to address poverty. However, in the medium term, pockets of poverty may not be successfully reached by these general measures. In such a context, improving the local knowledge of the incidence, patterns and causes of poverty would help to enhance the efficiency and effectiveness of required targeted interventions.
B. Economic Issues
4. Industrial free trade zones (FTZs), and the tourism, telecommunications, and construction sectors have been the Dominican Republic's engines of growth for most of the last three decades. Largely, FTZs and tourism developed in isolation of the country's overall business environment: special legislation has protected foreign investor's rights, special tax structures have provided a level-playing field to all potential local and foreign industry entrants, and a competitive environment has favored innovation. By contrast, traditional industry and agricultural production have continued to operate within a framework of strong state intervention that limits competition, while the improvement of efficiency in critical sectors such as electricity and petroleum has been hampered by the presence of state-owned monopolies.
Box No. 1: Measuring, Analyzing, and Acting on Poverty in the Dominican RepublicSince the 1980s, there have been several studies to assess poverty in the Dominican Republic. In the absence of a government organization with enough resources and a clear mandate to monitor poverty, these studies have been carried out often by private institutions in an isolated and ad-hoc fashion. As a result, the poverty assessments have not been carried out regularly, they have used different methodologies that make it difficult to assess the evolution of poverty incidence over time, and more importantly, these studies have not been designed so as to feed into the policy formulation process.
Notwithstanding these problems, the emerging poverty profile of the Dominican Republic has been quite consistent with poverty incidence at about 25 percent, and with poverty being more severe in rural areas, especially in border provinces, as cited in the main body of this FY00-02 Dominican Republic CAS. The 1986 estimate based on Tufts University's Income-Consumption Survey yielded an estimated 33 percent poverty incidence. The World Bank estimate of 1993, based on a Central Bank 1989 Social Expenditure Survey, estimated the total poverty incidence at 24.1 percent. The 1994 estimate based on Fundación Economía y Desarrollo's 1992 Income and Expenditure Survey yielded an incidence of poverty of 20.6 percent. Finally, the Central Bank has announced preliminary results based on its 1997 Income and Expenditure Survey, placing the poverty incidence at roughly 25 percent.
The 1997 Income and Expenditure Survey now constitutes an excellent base on which to build future poverty-related work. Both the size of the sample and the breadth of the questionnaire would allow, for the first time, to have a solid data base on which to start designing public policies to reduce poverty. The challenge for the future is to continue with systematic follow-ups of this survey and to establish a strong link between the providers of the information (in the case of the 1997 Survey, the Central Bank) and the main potential user in the policy-making process (the Secretaría Técnica de la Presidencia and its National Planning Office, ONAPLAN). The proposed FY00 Poverty Assessment would aim to contribute to Government's efforts to develop more systematic poverty assessment in the Dominican Republic, as well as to identifying ways in which institutional capacity can be developed at the Secretaría Técnica and other offices to ensure adequate policy and program follow up.
5. The result has been the evolution of an economy which is highly polarized, with dynamic services and FTZ manufacturing on one side and traditional, protected agriculture and manufacturing on the other. To sustain high economic growth and reduce poverty, it is critical that the productivity growth experienced by the most competitive sectors be expanded to the economy at large. The very successful economic stabilization program of 1991 has paved the way, but trade liberalization and the dismantling or unbundling of state-owned monopolies —both cornerstones of President Fernández's original economic program—are needed to complement macroeconomic stability.
6. The private sector furnishes at present four-fifths of total investment, which stands at a healthy 25 percent of GDP. Very important privatization breakthroughs are taking place —including the very successful capitalization of the national electric company, CDE, and the concession of the country's airports. CDE's capitalization is not only expected to increase efficiency and reliability of service, but will also imply significant government savings. In the last two years, the annual transfers to cover CDE's operational losses were around 1.2 percent of GDP; net public savings associated with the capitalization may reach $600 million per year, more than half the public budgets for either health or education. Continued adaptation to changing international conditions —including intensified competition— would require addressing specific constraints so as to encourage foreign investment and broaden the domestic economic base. These measures would include: strengthening the institutional framework (customs administration, mechanisms for contract enforcement and dispute resolution, reliable titling and registry, and certification of quality and standards); addressing infrastructure bottlenecks and maintenance; and the continued development of the financial sector. Banking prudential norms and supervision progressed substantially after the crisis of the early 1990s; the pending approval of a new Financial and Monetary Code —among other measures— would help to bring the Dominican financial system closer to world standards.
C. Public Sector Management and Governance Issues
7. Budget management practices inherited from past administrations hamper effective public resource allocation. Traditionally, roughly 50 percent of all government expenditures were implemented by the Office of the President, although its approved share in the annual national budget was on the range of 10 to 13 per cent. This is a result of the current budget law, which allows the Presidency to use budget surpluses at its discretion and to tax line Ministries and Agencies, transferring parts of their budgets to the Presidency. The current Government has made progress in reducing the share of the total budget executed by the Presidency, driving it down to 22 percent in 1998. Nevertheless, this still high discretion hampers efficient resource management to the extent that budget allocations are not prioritized in a systematic way ex-ante. In addition, a significant portion of Government procurement is still made under non-competitive practices, the Independent Auditor's Office function is weak and the Government's General Accounting Office faces practical difficulties in auditing the Office of the President. Dominicans are well aware of the need for radical changes in the area of budget allocation, management and auditing, but need to continue to make efforts to bring critical legal reforms to fruition— as it would be exemplified by Congress approval of a new Public Sector Procurement Law and a program of public sector financial management integration, supported by an IDB loan.