Dominican Republic - Main problems in economic development (Vol. 1 of 2) : Main text

Report No. 1705-DO ~ A) 5/L Main Problems in the FILE COPY Economic Development of the Dominican Republic RETURN TO LA. & C. (In Two Volumes) Volume 1: Main Text November 23, 1977 Latin America and the Caribbean Regional Office Country Programs Department I FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Dominican Peso (DR$) US$ 1.00 = DR$ 1.00 FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY This Report is based on the findings of an economic mission that visited the Dominican Republic in October/November, 1976. The mission consisted of: Luis Landau (Chief); Rene Monserrat, Consultant (Balance of Payments and Financial Policies); Manuel Lasaga (Quantitative and Macro- economic Aspects, Statistical Appendix); David Hughart (Water Resource Management); David Hodgkinson (Rural and Urban Poverty, Social Sectors); Hugo Gonzalez Cano, OAS Consultant (Public Sector Finances); Hernando Gomez Otalora, Consultant (Promotion of Industrial and Non-Traditional Exports); Arturo Cornejo (Irrigation); Choeng Chung (Sugar Sector Policies and Prospects), and Elena Gavidia (Secretary and Administrative Assistant to the Mission). The mission benefitted from the findings of a previous short visit to the country by Messrs. Darrel Fallen-Bailey (Energy-Related Issues) and John D. Carver (Electric Power). A Central Projects Research Group Team, composed of Messrs. Basil Coukis, Transport Economist, and Norbert Kleiver, Engineer-consultant, analyzed the scope for.applying more labor intensive techniques in public sector investment projects, parti- cularly as regards roads and irrigation works. Mr. Ulrich Thumm, who was not a member of the mission, contributed to the Report, particularly to the analysis of growth prospects. A report summarizing the mission's preliminary findings was discussed with the authorities in February 1977, and an earlier draft of this report was discussed in October, 1977. This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be discloesed without World Bank authoriuation.   MAIN PROBLEMS IN THE ECONOMIIC DEVELOPMENT OF THE DOMINICAN REPUBLIC Volume I: Main Report Table of Contents Page No. COUNTRY DATA MAP SUMMARY AND CONCLUSIONS I. INTRODUCTION ..1....................................... II. RECENT ECONOMIC GROWTH ............................... 2 A. Aggregate Trends ...... .......................... 2 B. Key Development Problems ..... ................... 12 1. Agriculture and Rural Development .......... 12 Background ............... .. ................ 12 Main Issues ................................ 15 i. Organization .......................... 15 ii. Land Tenure and Use .... ............... 16 iii. Pricing, Marketing and Competitiveness. 18 iv. Agricultural Credit ..... .............. 23 v. Public Expenditures ..... .............. 26 2. Management of Water Resources .... .......... 28 i. Resource Base ...... ................... 29 ii. Irrigated Area ..... ................... 29 iii. Production Pattern ..... ............... 31 iv. Level of Efficiency ..... .............. 32 a. Sector Planning and Project Evaluation ...... .................. 32 b. Construction and Maintenance of Canals ...... ...................... 33 c. Water Use Charges Based on Area Rather than Volume .... ............ 33 d. Lack of Technical Support and Training for Water Users .... ...... 33 e. Failure to Optimize Cropping Patterns in Irrigated Areas ....... 33  Table of Contents (Continued) Pa!ge No. V. Institutional Framework ............... 33 a. Management Responsibility .33 b. Inter-agency Coordination .34 c. Organizational Effectiveness 35 3. Sugar ..36 Structure and Performance .36 i. Production ................,.,. 36 ii. Cost of Production .38 iii. Domestic Consumption .39 iv. Exports .39 Main Issues .40 i. Improving Competitiveness .40 a. Reducing Unit Costs .40 b. Short-Term Management Perspective and Cost Effectiveness .41 ii. Final Processing of Sugar By-Products 42 iii. Reducing Market Instability .42 iv. Pricing and Marketing Policy . ,.43 v. Diversification from Sugarcane .44 Long-Term Program for CEA .44 4. Electric Power ..... 46 Background .46 Financial Issues. 49 Hydroelectric Power l.5 5. Other Energy Sources. _52 6. Fuel Conservation. 52 7. Industrial Growth and the Promotion of New Exports .53 i. Recent Trends .53 ii. Free Trade Zones .57 iii. Non-Traditional Industrial Exports 58 iv. Principal Problems .58  Table of Contents (Continued) Page No. 8. Tourism Development ......................... 61 Background ........ .......................... 61 Problems and Progress ..... .................. 63 III. ROLE OF THE PUBLIC SECTOR IN DOMINICAN DEVELOPMENT .... 66 A. Objectives of Public Policy ...................... 66 B. Issues in Public Expenditures ..... ............... 66 1. Inter Agency Coordination ................... 66 2. Economic Appraisal of Projects .... .......... 67 3. Need for Operating Outlays .... .............. 67 4. Civil Service Salaries ...................... 68 5. Construction Techniques in Public Works ..... 69 C. Financing Public Expenditures .................. 71 1. Recent Trends ............. . .................. 71 2. Issues in Central Government Operations ..... 72 i. Tax Structure .......................... 72 ii. Proposals for Tax Reform .... ........... 76 iii. The Government Budget as a Planning Tool ................................... 80 3. Selected Issues in Decentralized Agencies ... 80 IV. SHORT-TERM ECONOMIC OUTLOOK ..... ...................... 82 A. Effects of the Drought ........... .. .............. 82 B. Changes in Commodity Prices ......... .. ........... 82 C. Balance of Payments Prospects .................... 83 D. Public Finance Prospects .......... .. ............. 84 E. Prospects for Growth, Employment and Prices ...... 85 V. GROWTH PROSPECTS AND THE BALANCE OF PAYMENTS CONSTRAINTS ........................................... 86 A. Export Promotion ................................. 86 B. Improving the Productivity of Investment .... ..... 90 C. Incentives for Private Investment .... ............ 90  Table of Contents (Continued) Page No. D. Medium-Term Growth Prospects ..................... 91 1. Case 1 ....... ............................... 2. Case 2 ...................................... 3. "High" Sugar Prices: Cases 3 and 4 ......... 9 E. Creditworthiness ......................... 91)  Page 1 of 2 pages _C1UTFY DA'5,> -~ D01.iINICATN FET~;I)TLC AREA 2 POPULATION DENSITY = - kM-1 4 million (mid- 1975) 99 per km/ Rate of Growth: 3.0 (from. 1970 te 175) .t per b 1of arable land POPULATION CHARACTERISTICS ( c) HEALTH (1975) Crude Birth Rate (per 1,000) 45- Population per physician 0',9JO Crude Death Rate (per 1,000) 13Jn Population per hospital bed 350 Infant 4ortai'.y (per 1,000 live births) or4. INCOME DISTRIBUTION 010'G) DISTRIBUTION OF LAND WHERSHIP _97