Dominican Republic - Performance and prospects of the manufacturing sector

Report No. 2486-DO Dominican Republic Performance and Prospects of the Manufacturing Sector FILE COPY July 26, 1979 Projects Department Latin America and the Caribbean Regional Office 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 Official Rate US$1.00 = RD$1.00 During 1978 the parallel market rate for the Dominican peso (RD$) fluctuated around: US$1.00 = RD$1.25 RD$1.00 = US$0.80 LIST OF ACRONYMS ADOEXPO Asociaci6n Dominicana de Exportadores (Association of Dominican Exporters) CEDOPEX Centro Dominicano de Promocion de Exportaciones (Export Promotion Center) CDE Companiia Dominicana de Electricidad (National Electric Company) CFI Corporacion de Fomento Industrial (Industrial Development Corporation) CORDE Corporacion Dominicana de Empresas Estatales (Corporation of Public Enterprises) DFCs Development Finance Companies EPZ Export Processing Zones FIDE Fondo de Inversiones para el Desarrollo Economico (Investment Development Fund) INESPRE Instituto Nacional de Estabilizacion de Precios (Price Stabilization Agency) ISIC International Standard Industry Classification SFZ Special Free Zones  FOR OFFICIAL USE ONLY DOMINICAN REPUBLIC PERFORMANCE AND PROSPECTS OF THE MANUFACTURING SECTOR Table of Contents Page No. SUMMARY AND CONCLUSIONS .................................... i I. INDUSTRIAL STRUCTURE AND RECENT DEVELOPMENTS .... ...... 1 Introduction .......... ................................ 1 Structure of Manufacturing ............................ 3 Manufactured Exports .................................. 4 Employment ........... ................................. 5 Investment ........... ................................. 6 Industrial Location ................................... 6 Infrastructure ......... ............................... 7 Direct Public Sector Participation in Manufacturing ... 7 II. MAIN ELEMENTS OF INDUSTRIAL POLICY .................... 9 Fiscal Incentives ..................................... 9 (a) The Industrial Incentives Law .... .............. 9 (b) Other Fiscal Incentives .......... .. ............ 12 Tariff Protection ...... ............. .................. 13 Exchange Rate Policy ............... .. ................. 15 Financial Incentives ............... .. ................. 16 Other Industrial Policy Measures ......... .. ........... 17 The Impact of Industrial Policy .......... .. ........... 17 III. THE FINANCIAL SYSTEM . ................................. 19 Background ...................... ...................... 19 Monetary System .................... * .................. 19 Interest Rates .................... .................... 22 Financial Institutions .............. .. ................ 23 Trends and Prospects in Industrial Lending .... ........ 26 This report is based on the findings of a mission which visited Dominican Republic from October 18 to November 8, 1978. Participating in the mission were Messrs. Penalver and Stoller (LCPIl), Bolte (UNIDO/ IBRD Cooperative Program) and Guisinger (Consultant). 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.  Table of Contents (Continued) Page No. IV. MANUFACTURED EXPORTS ................................... 28 Overall Export Trend ............... .. ................. 28 Manufactured Export Performance .......... .. ........... 29 Structure of Manufactured Exports ......... .. .......... 30 Destination of Exports .............. .. ................ 32 Issues and Constraints of Manufactured Exports ........ 35 Export Processing Zones .............. .. ............... 37 V. PROSPECTS FOR INDUSTRIAL GROWTH ................ ....... 41 Sources of Industrial Growth, 1968-1977 ............... 41 Industrial Growth in the Short- and Medium-Term ....... 44 Policy Implications and Government Measures . .......... 45 Policy Issues and Recommendations ......... .. .......... 46 ANNEX I. Export Processing Zones and Special Free Zone Enterprises STATISTICAL APPENDIX  SUMMARY AND CONCLUSIONS The Manufacturing Sector i. The Dominican Republic, with per capita GNP of US$840 and a population of about 4.9 million in 1977, has a largely inward oriented manufacturing sector which accounts for about 18% of GDP (including sugar). After a very unstable period during the early 1960s manufacturing acti- vity started to grow very rapidly after 1968 fueled by high sugar prices and export volumes, rising incomes, and the government's industrial incen- tives legislation. The period of very high growth (with manufacturing value added growing at an average rate above 12% p.a. in real terms) ended in 1974 as a result of the slowdown in general economic activity, and after a temporary recovery in 1975, manufacturing output and value added have experienced low growth, particularly in 1978. ii. Excluding sugar, processed food, beverages and tobacco accounted for more than half of the sector's value added in 1977 (down from two thirds in 1968) whereas the shares of non-metallic minerals (particularly cement) and chemical products increased during recent years. Manufac- tured exports including those from three Export Processing Zones (EPZ) are a very small proportion of total manufacturing output (about 8% in 1977), and consist mainly of electrical components, clothing and leather goods from the EPZ, canned fruits and vegetables and some chemical fer- tilizers. Total employment in non-sugar manufacturing (including EPZ) is estimated at about 56,000 jobs, or about 4-4.5% of the country's economically active population. While no detailed estimates of industrial unemployment are available, preliminary results from a recent survey indi- cate that unemployment in Santo Domingo is about 24%. iii. The EPZ have been successful in attracting an increasing number of foreign enterprises in recent years. Currently they provide employment to about 12,500 workers and surrender foreign exchange at an annual rate of about RD$25 million to the Central Bank. In all EPZ locations the avail- able labor force is far in excess of employment possibilities. Although there are several domestic constraints to the expansion of EPZ, parti- cularly power supply and transport facilities, there is substantial po- tential for further expansion of EPZ exports. Further expansion of the existing EPZ is in progress, a fourth EPZ will soon be established in Puerto Plata, and legislation for the establishment of a number of new EPZ has been passed. The government faces the issues of increasing the benefits derived from the EPZ while minimizing the possible risks of concentrating all export expansion in the EPZ, particularly competition from other countries and other possible external constraints, (e.g., possible changes in the U.S. trade legislation). Thus, expansion of EPZ output and exports should emphasize diversification of output and of market destination. iv. Manufacturing enterprises are heavily concentrated in the Santo Domingo area, with a second concentration in and around Santiago de los Caballeros, the country's second largest city. Of the total number of firms included in the industrial census, the National District  - ii - of Santo Domingo accounts for nearly 41%, whereas the province of Santiago accounts for 17%. Other important areas are Puerto Plata and La Vega, with about 5% each, San Pedro de Macoris and San Cristobal. Of the three operating EPZ, the largest one (La Romana) is located in an area which had previously no industrial activity except for a large sugar mill, whereas the other two are in Santiago and San Pedro de Macoris. v. Lack of adequate infrastructure, particularly electricity, is a major deterrent to industrial development in Dominican Republic. Electricity supplies from the government-owned Compania Dominicana de Electricidad (CDE) have been insufficient and unreliable, with frequent power cuts which create production losses. The unreliability of CDE's power supplies during the early 1970s induced many industrial firms to acquire and install expensive oil-operated generating plants to be used on a stand-by basis or even as a primary source of energy, and in 1976 the government required all new firms above a certain size to install electricity generating plants. Total cost of electricity generating equipment acquired by industrial firms between 1973 and 1977 reached RD$14.2 million. vi. Public sector direct participation in manufacturing takes place through the Corporacion Dominicana de Empresas Estatales (CORDE), a holding company established in 1966 to manage a number of enterprises owned by the Government. CORDE had total assets of about RD$93 million in 1977 and owns fully or in part manufacturing firms accounting for about 20% of total manufacturing output as well as commercial and transportation enterprises. Several CORDE-owned enterprises have a long history of financial diffi- culties, whereas employment in CORDE's headquarters and in its firms has been often influenced by political factors. The government is currently evaluating the financial condition and market position and prospects of each of CORDE's corporate holdings and preparing an in-depth reorganization including reducing its corporate headquarters staff, divesting itself of commercial and other enterprises, delegating greater responsibility to the divisions and operating units and focussing its efforts on financial manage- ment and corporate planning. vii. Term financing for industrial investment has been provided mainly by the Investment Development Fund (FIDE), a Central Bank fund channeling resources to the industrial and agricultural sector through the country's financial intermediaries. FIDE's total industrial lending amounts to RD$77.7 million for projects with total costs of about RD$150 million. FIDE interest rate to the final borrowers is 9% for industrial loans, sub- stantially below the legal ceiling of 12% charged by commercial banks on their own funds. The difference between the FIDE rate and the normal commercial bank rates is further increased by closing fees, interest payments made in advance and other requirements which result in effective rates for commercial bank lending of about 12-14%. The lower FIDE rate, which has been negative in real terms during most of the 1968-1977 period, has encouraged the use of capital-intensive techniques and reduced the employment generating capacity of industrial development. Also, FIDE's low interest rate could encourage capital flight by making it profitable to increase the industrial firms' leverage through FIDE loans while channeling the firms' internally generated resources abroad.  - iii - viii. Industrial credit outstanding increased from RD$80 million in 1970 to about RD$300 million in 1978, with about 90% of this increase occurring between 1970 and 1975. The 12 commercial banks account for about 86% of total lending, but their share has been declining, whereas 16 private development finance companies (DFCs) organized mostly after 1974 account for 11% and the government-owned Industrial Development Corporation (CFI) accounts for less than 3%. Total resources of DFCs have grown at a rate of 20% p.a. since 1974, but their self-generated resources are only about 30% of the total. The growth of DFCs resources has been mainly dependent upon FIDE allocations and Central Bank rediscount resources, indicating that they have not fulfilled original expectations regarding increased domestic resource mobilization. ix. CFI was established in 1962 to manage the large number of government- owned manufacturing, mining and commercial institutions. Following the transfer of this function to CORDE in 1966, CFI was intended to serve primarily as the national industrial development bank and industrial promotion agency. During the last five years, CFI's assets (RD$26 million in 1977) and industrial loan portfolio (about RD$8.5 million) have remained approximately constant. A large portion of CFI's resources are invested in two industrial parks and one EPZ (San Pedro de Macoris). CFI had a past reputation as in- efficient and prone to political influence, accounting for a declining share of the financial system's total industrial lending. While the government wants to give CFI a leading role in promoting industrial development, major rebuilding programs to improve its policies, operations and staff will be required for CFI to assume successfully such a role. Main Elements of Industrial Policy x. The major elements of the Dominican Republic's current industrial policy framework were established between 1966 and 1970. High priority was given to industrial development and a number of policy measures were taken in the period, particularly the adoption of the Industrial Incentives Law (Law 299) passed in 1968, the establishment of foreign exchange quotas on some imports and the creation of a 'parallel' market for foreign exchange in 1967, the creation of FIDE in 1966, and the consolidation of the tariff system in 1971 (Law 170/71). xi. Law 299 established three categories of firms to be supported ('A' for firms exporting their total production, 'B' for import substituting firms producing new goods and 'C' for import substituting firms producing goods for which there was insufficient installed capacity) and granted a number of fiscal incentives, including income tax exemptions or exoneration for reinvestment, a low tariff on capital goods and generous tariff exonera- tions on imports of raw materials and intermediate products. 'A' type firms were to be located in the EPZ, but some of them were allowed to operate in individual locations and were designated Special Free Zones (SFZ). Between 1968 and 1977, 348 new firms were classified under Law 299, reporting a total investment of RD$320 million and the creation of more than 26,000 jobs. Category 'A' firms accounted for 31% of total investment and 67% of employ- ment generation. The higher labor-intensity of 'A' firms was particularly  - iv - apparent in the 1973-1977 period, when they generated with a lower volume of investment, a total of employment more than three times higher than employment generated by 'B' and 'C' firms together. xii. Tariffs and other import duties are established by a large number of uncoordinated laws. Revenues arising from the General Tariff Law (Law 170/71) account for about one third of total tariff collections. The low uniform tariff rate on capital goods (only recently increased to 20%) and widespread tariff exonerations on industrial inputs granted by Law 299, together with very high tariffs on final goods, produced a pattern of very high average effective protection to industry (estimated at almost 200% in 1971) and wide differences among specific industries, from -48% for dis- tilleries to 874% for electrical appliances. xiii. The foreign exchange policy followed after 1967 reinforced the effects of the system of tariffs and exonerations through the operation of the 'parallel' foreign exchange market. During the last decade, the parallel market has provided foreign exchange required for imports of goods competing with domestic production, at a premium of between 10-25% above the 'official' exchange rate applicable for imports of capital goods, raw materials and intermediate inputs. Also, the requirement to exchange all export proceeds at the overvalued official rate, discouraged exports of manufactured goods and strengthened the inward orientation of the manufacturing sector. xiv. In addition to a legal ceiling of 12% on commercial bank lending rates which resulted in negative real interest rates during most of the 1968- 1977 period, a combination of limitations on the financial system's borrow- ing rates, high legal reserve requirements for commercial banks and a low structure of Central Bank rediscount rates has not encouraged the financial system's resource mobilization efforts. Continuation of the present structure of lending and borrowing interest rates, and of FIDE resources at a 9% interest rate, may discourage financial institutions from intensifying their resource mobilization efforts whereas low deposit rates have a negative effect on domestic savings. In those circumstances, the expansion of term industrial credit could become dependent upon the willingness of international institutions to lend to FIDE on concessionary terms, and on the Central Bank's contribution to private industrial development financing, which is likely to decrease as a result of the country's difficult fiscal and foreign exchange position. xv. Price controls and export prohibitions, quotas and other regula- tions have played an important role in the overall industrial policy framework. Price controls by the National Institute for Price Stabiliza- tion (INESPRE) have been mainly directed to agricultural products but in several cases have also affected industrial products of agroindustrial origin (e.g. milk, tomato paste) as well as other manufactured products (cement). In several cases, price controls have discouraged production and exports, and in at least one case (tomato paste), price controls coupled with export quotas resulted in the loss of exports and the closing down of one of two major plants.  xvi. Regulation of important product markets through price controls and supplementary imports performed by INESPRE is complemented by regula- tions on a number of export products by the Dominican Export Promotion Center (CEDOPEX). CEDOPEX was founded in 1971 to promote non-traditional exports but during its early years of operation it was charged also with the task of regulating exports (by issuing export permits) to maintain equilibrium and price stability in the domestic market. As a result, in the past CEDOPEX may have been reducing as well as promoting non-traditional exports. xvii. As of July 1978, 65 product categories had been submitted to export control; exports of 27 product categories were prohibited and 38 were subject to export permits. Products subject to export permits include a number of important industrial goods--cement, fertilizer, several canned fruits and vegetables, meat, tomato paste. In 1977 exports were temporarily suspended for onions and meat on the basis of demand/supply analyses; similar studies served to determine export quotas for tomato paste and cement. Export permits for the large number of other products were apparently issued on the basis of past quotas or of a more intuitive evalua- tion of the domestic demand/supply situation. Implementation of export restrictions at short notice, based on ad-hoc decisions and frequently insufficient analysis has contributed to the extremely unstable trend of major industrial exports. Manufacturers have sometimes been prevented from exporting products ready for shipment and they have been discouraged from establishing foreign market contacts and accept longer-term supply contracts. Dominican exporters have recently complained about the system of export regulations, indicating that their efforts are frustrated if exports may be suspended or established quotas be changed at any time without notice. xviii. The combined result of the policy measures affecting the Dominican manufacturing sector during the last decade has been a sub- stantial increase of domestically oriented manufacturing production, particularly between 1968 and 1973-74, and, after 1972, a relatively rapid increase of production and exports by firms operating in the EPZ. Industrial firms have thus specialized by type of market (domestic and foreign) and there have been very few cases of firms operating in the two markets. xix. Firms producing for the domestic market have operated in an environment characterized by a number of distortions in the product and factor markets. The use of capital-intensive technology has been promoted by low tariffs on capital goods, availability of foreign exchange at the cheaper official rate for imports of such products, subsidized medium- and long-term credit (from FIDE) at a rate 25% below nominal commercial bank rates and generous income tax exemptions for reinvestment (limited to fixed capital). The use of imported inputs has been encouraged by widespread exonerations on tariffs and other import duties on such inputs, provided by Law 299, and by providing foreign exchange at the official exchange rate for such imports. In the product markets, very high tariffs for consumer products, the need to obtain foreign exchange  - vi - for such imports in the more costly parallel market and the distortions affecting the cost of imported inputs have produced high levels of effective protection for a number of consumer products and encouraged firms to operate solely within the protected domestic market. The attractiveness of exports for firms in categories 'B' and 'C' has been further decreased by the require- ment to exchange the proceeds of exports at the official rate. xx. Firms producing exclusively for the foreign market (firms in EPZ and SFZ), while also affected by the exchange rate policy (as they make payments at the Central Bank in foreign exchange to obtain the local currency necessary to pay wages, rent, utilities and inputs purchased domestically), have operated in an environment less affected by distortions and have benefitted from income tax exemptions, low rental rates and minimum wages below the country-wide minimum wage. Output and exports from such firms have been growing very rapidly, and the average investment cost per job has been significantly lower (by a ratio of more than 3:1) than in firms producing for the domestic market. Prospects for Industrial Growth xxi. The Dominican Republic's manufactured output increased by more than 250% in real terms between 1968 and 1977, and total employment increased by a similar factor during the same period. Manufactured exports contributed about 12.5% to the total increase in output, with the EPZ accounting for about one half of the total export contribution. The export industries' contribution to the growth of manufacturing employment has been much higher. Between 1971 and 1977, employment generation in the EPZ accounted for about 39% of total employment generation in manufacturing, and if employment in SFZ and export-related employment in other firms is added, the total contri- bution is likely to be about 50% of the total. xxii. Domestic demand expansion and import substitution combined contributed about 87.5% of total output increase between 1968 and 1977. The share of imports in the total supply of manufactured products increased between 1968 and 1977, incdicating a small negative import substitution effect of about 2%. However, overall import substitution between 1968 and 1972 was positive (about 11%) before becoming negative for every year thereafter. These results, fully consistent with the experience of most countries at similar stages of development, are also consistent with active positive import substitution in several industries. In fact, at the disaggregate level, 9 out of 12 industrial subsectors show positive import substitution for the overall period. xxiii. Given its current economic structure, strong dependence on exports of a limited number of commodities and expected price trends for such com- modities, the Dominican Republic's overall growth in the early 1980's will be limited. As a result, the growth of domestic demand for industrial products will also be constrained, not exceeding 4-4.5% p.a. during the next four or five years, and limiting manufactured output and employment  - vii - growth unless a new orientation is adopted. Moreover, in spite of a policy framework which favored an inward-oriented development strategy, there was negative import substitution at the aggregate level during the last decade and this is likely to be the case also during the next few years. Therefore, reorienting the manufacturing sector towards export demand will be a major task for the future. Not only will it provide a better growth and employment potential, but it can also assist the Government in reducing the country's foreign exchange constraint. Given the small percentage of exports in total manufacturing output (about 8% in 1977) high growth rates of manufactured exports will be required to achieve the desired impact on the sector's growth rate. Thus, to achieve an annual growth rate of manufactured output of 8.5% over the next four years, with production for the domestic market growing at about 4% p.a., manufactured exports would have to grow by 40% p.a. in real terms. xxiv. The new government elected in May and installed in August 1978 aims at achieving a high level of industrial growth, improved resource allocation and reduced market distortions, and has started the preparation of legislation to address some of the major issues. The legislation under preparation includes (a) an Agroindustries Incentives Law which proposes to establish a number of incentives for the development of agroindustrial activities, (b) an Export Promotion Law which would grant access to the parallel market to all exporters of non traditional products, (c) modifi- cations to the Monetary and Finance Law to allow commercial banks to deal in the parallel market, (d) lists of imported inputs for agroindustries, as well as for the overall industrial sector, to be subject to simplified and uniform tariff rates, and (e) other complementary measures, including the preparation of operating rules (Reglamento) for Law 299 and modifica- tions to the Foreign Investment Law. Changes in some incentives provided by Law 299, while desirable, do not appear feasible at this time. Policy Issues and Recommendations xxv. As indicated above, manufactured exports have generated during the last five years about 50% of total new industrial employment, and during the next four years their performance will largely determine the industrial sector's overall performance both in terms of output and employment. Therefore, achieving a sound and sustained increase in manu- factured exports should be one of the major objectives of the industrial strategy. Other major objectives should be to gradually improve the efficiency of the manufacturing sector, incentivate the use of labor- intensive techniques and increase utilization of installed capacity, increase the flow of financial resources to the industrial sector, en- courage financial savings and domestic resource mobilization efforts by financial institutions, and remove all other constraints to industrial development. xxvi. In order to achieve the above objectives, a number of policy actions could be taken by the Government, including (a) expansion of the parallel foreign exchange market to include exports of non-traditional products (already under preparation), (b) elimination of all barriers to  - viii - exports including price controls, export prohibitions and quotas as well as other administrative barriers to exports and adoption of export promotion activities by CEDOPEX (c) establishment of a FIDE interest rate for industrial loans in line with commercial banks lending rates, (d) establishment of a sound structure of lending and borrowing interest rates to ensure efficient allocation of resources, adequate financial savings and domestic resource mobilization, (e) preparation and application of appropriate operating regula- tions for Law 299, relating the size of tariff and tax exemptions granted to the firms' employment generaticn and export capabilities, (f) continuation of the process of tariff reform started in 1971 to rationalize and reduce tariff protection, (g) improvements in CORDE's financial and overall management, (h) redefinition of CFI's role in the country's industrial development and alloca- tion of the human and other resources necessary to fulfill such role and (i) elimination of all infrastructure limitations to industrial development, particularly the unreliability of power supply. While all actions are impor- tant to achieve the sector objectives, items (a) through (e) may be considered of higher priority as they refer to the elimination of the major stumbling blocks in the process of the country's industrial development.  I. INDUSTRIAL STRUCTURE AND RECENT DEVELOPMENTS Introduction 1.01 The Dominican Republic, with per capita GNP of US$840 and a popula- tion of about 4.9 million in 1977, has a largely inward oriented manufacturing sector which accounts for about 18% of GDP 1/ and a much smaller share of economically active population. Other major contributions to GDP are those of agriculture and livestock (18%) and commerce (17.7%) whereas mining accounts for about 6.2% of GDP. 1.02 Until 1961, domestic and foreign private investment in manufac- turing was very limited, mainly as a result of the political situation. After the end of the Trujillo regime, the manufacturing sector started to grow very rapidly helped by high sugar prices, particularly between 1961 and 1963, but as political instability appeared manufactured output and value added started to decline. In 1965, the increasing political unrest and subsequent foreign military intervention, and the drop in world sugar prices resulted in a substantial decline in manufacturing as well as general economic activity. A period of very slow recovery followed until 1968, when manufactured value added was only about 8% above its 1962 level (Table 1.1). 1.03 After 1968, political stability and some other factors combined to generate substantial growth of industrial output. Good weather in several years and favorable export prices resulted in rapidly rising incomes in the agricultural sector and generated an increased demand for industrial products, as well as high levels of private and public sector savings. Also, the govern- ment made major changes in its industrial policy in 1968, passing a new Industrial Incentives Law (Law 299), and took a number of other promotional measures to increase industrial investment, including the preparation of several industrial project profiles and feasibility studies. Between 1968 and 1974, manufactured value added grew at an average rate of more than 12% p.a. in real terms, above the high rate of growth of GDP which averaged 10.4% p.a. during the same period, and the share of manufacturing in GDP increased from 12.7% in 1968 to 14% in 1974. 1.04 The Dominican Republic's period of very high growth ended in 1974-75 as a result of a combination of internal and external factors which reflected the economy's strong dependence on world demand for a very small number of commodities, particularly sugar. The manufacturing sector, largely oriented to the domestic market, started to slowdown in 1974 as a result of the reduced level of economic activity and, after a temporary recovery in 1975 partly fueled by high world sugar prices, experienced very small growth in 1976 and 1977. In 1978, economic growth continued to be slow, partly as a result of weak world demand for the country's major export products and partly because of political uncertainties associated with the general elections, and the transitional period until the newly elected government took office in August 1978. 1/ Including sugar refining. If sugar is excluded, the share of manufacturing in GDP would be about 14.5% in 1977 (in 1970 prices). For the purposes of this report, sugar production will not be included in the figures related to the manufacturing sector unless specifically mentioned.  Table 1.1: MAJOR ECONOMIC INDICATORS (values in RDS million. 1970 prices) 1962 1968 1979 1973 1974 1975 1976" 19771/ A) Values GDP 1027.68 1201.20 1831.80 2052.70 2175.95 2288.93 2436.21 2544.24 Manufactured VA 141.11 152.96 247.35 292.91 305.05 341.05 355.59 372.75 Manufactured Output 272.90 352.60 561.10 672.40 737.90 799.60 844.10 888.70 Employment in Manuf. n.a. 21099 29716 34545 36973 41033 43655 n.a. (number of employees) B) Shares Manuf VA/GDP 13.73 12.73 13.50 14.27 14.02 14.90 14.60 14.65 Manuf VA/Manuf Output 51.71 43.38 44.08 43.56 41.34 42.65 42.13 41.94 C) Growth Rates 1962-68 1968-72 1968-73 1968-74 1974-75 1975-76 1976-77 GDP 2.63 11.13 11.31 10.41 5.19 6.43 4.43 Manufactured VA 1.35 12.77 13.88 12.19 11.80 4.26 4.83 Manufactured Output 4.36 12.32 13.78 13.10 8.36 5.57 5.28 Employment in Manufacturing n.a. 8.94 10.36 9.80 10.98 6.37 n.a. 1/ Preliminary figures Source: GDP, Manufactured Output and Value Added, Central Bank; Employment from National Statistical Office (ONE)  -3- Structure of Manufacturing 1.05 The Dominican Republic's manufacturing sector is highly concentrated in the production of light, non-durable consumer goods for the domestic market. In 1977, processed food, beverages and tobacco accounted for more than 52% of total manufacturing value added (and nearly 56% of output) with textiles, clothing, leather and footwear accounting for another 9% (Table 1.2). The increase in manufacturing output and value added experienced during the last decade was accompanied by some changes in the structure of production. The share of processed food, beverages and tobacco fell from more than 2/3 to about one half of the total, whereas the shares of non-metallic minerals, metal products and chemicals increased from 18% to 31%, and that of textiles, clothing, leather and footwear also increased. Table 1.2: STRUCTURE OF MANUFACTURING (1970 prices) ISIC Gross Output Value Added Code Subsectors 1962 1968 1974 1977 1962 1968 1974 1977 31 Food, beverages and tobacco 1/ 73.03 72.97 59.40 55.97 69.69 67.39 56.56 52.34 32 Textiles, clothing, leather and footwear 7.55 5.53 6.66 7.02 7.36 6.46 7.96 9.24 33 Wood prods. & Furn. 3.11 0.88 1.48 1.28 4.08 1.03 2.34 1.69 34 Paper prods. printing and publ. 4.07 4.88 4.48 3.58 3.46 6.36 3.36 3.59 35 Chemicals and oil refining 7.62 9.13 14.58 15.04 10.50 10.35 13.24 12.53 36 Non-metallic minerals 3.33 4.11 6.65 8.04 4.00 5.86 10.60 13.34 37 Basic metals - 0.11 1.28 2.94 - 0.22 1.18 1.59 38 Machinery & Met. Prods. 1.25 2.36 5.20 5.87 0.85 2.30 4.45 5.37 39 Other manufacturing 0.04 0.03 0.27 0.26 0.06 0.03 0.31 0.31 Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 1/ Excluding ISIC 3118, sugar refining. Source: Statistical Appendix, Tables A.3 and A.5.  - 4 - 1.06 Processed food continues to be the major industrial subsector, accounting for about 27% of total value added in 1977. Major products are husked rice, vegetable oils (mostly peanut, soya and coconut), roasted coffee, canned vegetables and vegetable preparations (particularly tomato paste), milk and milk products, and bakery products. Beverages constitute the second largest subsector (more than 21% of manufactured value added in 1977). Nearly half of the subsector's total output in rum, followed by beer and soft beverages which account for most of the balance. Other major traditional subsectors are textiles, with more than 5% of manufacturing value added in 1977, and tobacco (mostly cigaretts) accounting for about 4%. 1.07 Production of non-metallic minerals (building materials) increased substantially between 1968 and 1977 as a result of the expansion of the construction industry during the last decade, becoming the third largest industrial subsector and accounting for more than 13% of total value added. About 50% of the subsector's output is cement, produced by three firms, two of which started production very recently. Domestic shortages of cement led to the establishment of export quotas in 1974 but the slowdown in construction activity resulted in substantial excess capacity in 1977. 1.08 The share of chemical products in manufacturing value added has also increased in recent years, reaching 12.5% in 1977. Fertilizers account for nearly 60% of total industrial chemicals whereas about two thirds of all consumer chemicals are soaps, detergents and cosmetics. 1.09 Production of metal products has also increased substantially over the last decade, to more than 3% of manufacturing value added in 1977. Nearly one third of the subsector's output corresponds to the production of tin cans (mostly from imported tin plate). Other important products are metal structures for the construction industry (metal doors, windows and other), metal furniture, barbed wire, galvanized zinc and kitchen equipment. Manufactured Exports 1.10 Manufactured exports are a very small proportion of total manu- facturing output. Total manufactured exports including semi-processed food products were about RD$56 million or 4.3% of manufactured output (and 7.2% of total commodity exports) in 1977. 1/ However, nearly one half of the exports value consists of roasted coffee (RD$25.3 million). Thus, if roasted coffee is excluded from both exports and output, the share is a low 2.4%. Other major manufactured export products include leather goods, canned peas, canned coconut emulsion, cocoa butter, chemical fertilizers and other canned fruits and vegetables. In addition to the exports above, 1/ Statistical Appendix Table A.1.  - 5 - three Export Processing Zones (EPZ) the oldest and largest of which started operations in 1971, generated a gross export value of RD$58.7 million (with a local content of 30%) in 1977. The EPZs concentrate on the assembly of electrical components, clothing, tobacco and leather products. Employment 1.11 Employment in manufacturing represents a very small proportion of the economically active population. In 1970, the population census indicated an economically active population of 1.1 million, and total manufacturing employment in firms with 5 or more employees was estimated at 23,862, or 2.15% of the total. While available industrial employment data indicates an average growth rate of employment in manufacturing of 9.15% p.a. between 1968 and 1976, this is likely to include the effects of improved statistical coverage as well as growth in the size of firms, thus under- estimating the 1970 figures and overestimating the growth. Assuming an annual growth rate of the economically active population of between 2.8 - 3.2% p.a., the estimated employment in manufacturing in 1976 (43,655 jobs) would account for less than 3.5% of the economically active population 1/. 1.12 Employment in the EPZs should be added to the above figures on manu- facturing employment. In September 1978, total employment in the three EPZ reached an estimated 12,500 jobs (of which more than half were at the La Romana Free Zone) increasing by about 25% the total volume of employment in manufac- turing. 1.13 Overall levels of unemployment and underemployment in the country were estimated by an ILO mission in 1973 2/ and the statistical office has recently completed a new employment survey. According to the ILO report, unemployment in Santo Domingo was estimated at 20% of the economically active population and underemployment was estimated to be 60%. The same study indicated that agricultural underemployment among the rural popu- lation was about 40%. Preliminary results from the new survey indicate that, as of early 1978, unemployment in Santo Domingo was about 24% 3/. While no detailed estimates are available on industrial unemployment, the slowdown in the industrial sector during the last three years suggests that the situation is likely to have worsened. 1.14 Industrial wages and fringe benefits in Dominican Republic are below the average in the Caribbean region. Minimum wage legislation currently establishes a minimum of RD$0.50 per hour but special legislation for EPZ 1/ As a comparison, employment in sugar mills accounts for an additional 6.5 - 7% of the economically active population. 2/ Generacion de Empleo Productivo y Crecimiento Economico, I.L.O. Geneva 1975 (ISBN 92-2-301068-3). 3/ Countrywide results are not yet available.  - 6 - allows a minimum of RD$0.40 per hour. Therefore, low wages combined with an abundant labor force, constitute one of the country's major comparative advantages in the manufacturing sector. The rapid growth of output and exports in the three existing EPZ and the large volume of employment generated show the possibilities of an industrial strategy based on high labor-intensity activities in the Dominican Republic. Investment 1.15 New firms applying for industrial classification under the Indus- trial Incentives Law (a total of 348, including firms in the EPZ) reported total investment of about RD$320 million between 1968 and 1977. During the period above, reinvestment by industrial firms benefitting from income tax exemptions reached a total of RD$153.5 million, most of which went to capacity expansions. In 1977, new investment planned by firms applying for industrial classification was RD$25.4 million, whereas reinvestment under the income tax exemption system was RD$34.3 million (of which only RD$6.4 million went to new product lines). 1.16 Between 1966 and May 1978 a total of 451 industrial projects received resources from the Central Bank's Investment Development Fund (FIDE). Total project costs were an estimated RD$147.6 million, of which FIDE contributed RD$77.7 million or 53%. In 1977, FIDE's industrial lending was RD$6.6 million going to 33 industrial projects with total investment costs of about RD$19 million, whereas the financial system's total industrial credit outstanding (including FIDE resources) increased by only RD$8 million in 1977. While there are no direct estimates of the total amount of indus- trial investment in 1977, all figures above point to a very low level of investment with a further decline during the first half of 1978. Industrial Location 1.17 Manufacturing enterprises are heavily concentrated in the Santo Domingo area, with a second concentration in and around Santiago de los Caballeros, the country's second largest city. Of the total number of firms included in the Industrial Census, the National District of Santo Domingo accounts for nearly 41%, whereas the province of Santiago accounts for 17%. Other important areas are Puerto Plata and La Vega, with about 5% each, San Pedro de Macoris and San Cristobal. Of the three operating EPZ, the largest one (La Romana) is located in an area which had previously no industrial activity except for a large sugar mill, whereas the other two are in Santiago and San Pedro de Macoris. Industrial concentration in the two major areas has been stimulated by market considerations, easier access to services and better infrastructure. To compensate for the disadvan- tages of industrial location outside the major urban areas and stimulate industrial activity and employment in other areas of the country, the benefits under the Government's industrial legislation were granted for longer periods of time to firms outside Santo Domingo and Santiago. However, during the first four years of application of such benefits, 84% of the firms receiving the benefits were located in Santo Domingo.  -7- Infrastructure 1.18 Lack of adequate infrastructure, particularly electricity, is a major deterrent to industrial development in Dominican Republic. Elec- tricity supplies from the Government-owned Compania Dominicana de Electricidad (CDE) have been insufficient and unreliable, with frequent power cuts which create production losses. While CDE's power sales to the manufacturing sector increased very little between 1973 and 1976, the situation seems to have improved after 1977, when CDE's industrial sales increased by 25%. The increasing unreliability of CDE's power supplies during the early 1970s induced many industrial firms to acquire and install expensive oil-operated generating plants to be used on a stand-by basis or even as a primary source of energy, and this practice became official policy in 1976 when the Govern- ment required all new firms above a certain size to install electricity generating plants. In addition, Government regulations prohibiting elect- ricity sales (except for CDE) have required each firm in the La Romana EPZ to install its own generating equipment and prevented the potential savings and increased efficiency of a single plant to generate electricity for all firms in the EPZ. Total cost of electricity generating equipment acquired by industrial firms between 1973 and 1977 reached RD$14.2 million (Table 1.3). Table 1.3: ELECTRICITY GENERATING EQUIPMENT ACQUIRED BY INDUSTRIAL FIRMS Value Year No. of Plants Capacity (KW) (RD$ million) 1973 31 2,546 0.2 1974 75 9,993 0.9 1975 169 22,667 2.8 1976 447 64,834 6.8 1977 79 25,040 3.5 TOTAL 801 125,625 14.2 Source: Economia Dominicana, 1977. 1.19 Lack of adequate tranport facilities is also a limitation to industrial growth and to increasing exports of manufactures. Sea trans- portation to North and South America is slow and irregular and the country has very limited port facilities. Practically all exports of manufactures originated in the EPZ use air transportation, which limits the types of products to be processed in the country. Direct Public Sector Participation in Manufacturing 1.20 The Corporacion Dominicana de Empresas Estatales (CORDE), a government-owned holding company established in 1966 to manage a number of enterprises owned by the government since the end of the Trujillo  - 8 - regime, had total assets of about RD$93 million as of December 31, 1977. CORDE owns in whole or in part a substantial number of the country's manufacturing firms accounting for about 20 - 25% of total manufacturing output. CORDE's assets consist of: (i) investments in 30 manufacturing, mining, tourism, transport and commercial companies in which it owns controlling interest and 20 companies in which it holds minority positions for a total amount of RD$54 million; and (ii) short and long-term loans to its various companies valued at RD$35 million. CORDE's operations in manu- facturing are extraordinarily diverse, including cement, tobacco, vegetable oils, footwear, batteries, metal products, glass, paper, alcoholic beverages, paints, flour, salt, rubber products and textiles. In addition, its non- manufacturing activities include mining operations, an insurance company, car dealerships, a drug wholesaler and transportation enterprises. 1.21 Several CORDE-owned enterprises have a long history of financial difficulties, and employment in CORDE's headquarters and in its firms has been often influenced by political factors. The Government is currently evaluating the financial condition and market position and prospects of each of CORDE's corporate holdings and completing a consolidated balance sheet and capital program budget as a first step towards an in-depth reorgani- zation. Based upon studies currently underway, the Government intends to: (i) reorganize CORDE into a small holding company (reducing its corporate headquarters staff from 600 at present to 150 mainly professional and tech- nical staff); (ii) focus its efforts upon overall financial management, cor- porate planning, and detailed evaluation of each firm's plans for expansion or development of new business activities; (iii) delegate greater operating authority and profit responsibility to its major 5 divisions and 30 operating units; and (iv) in the short-term selectively divest itself of the wholesale and retail enterprises, among others, while seeking to improve sales and profitability of ongoing operations.  - 9 - II. MAIN ELEMENTS OF INDUSTRIAL POLICY 2.01 Most major elements of the Dominican Republic's current frame- work of industrial policies were established between 1966 and 1970, when the country was emerging from a period of political instability. High priority was given to industrial development and a number of policy measures were taken in the period, particularly the adoption of the Industrial Incentives Law (Law 299) passed in 1968, the establishment of foreign ex- change quotas on some imports and the creation of a 'parallel' market for foreign exchange in 1967, the creation of the Fondo de Invesiones para el Desarrollo Economico (FIDE), a Central Bank fund to channel resources to the industrial and agricultural sector which started operations in 1966, and the consolidation of the tariff system in 1971 (Law 170/71). 2.02 The combined effect of the policy measures above, and of a period of high domestic demand was a wave of import-substitution industrialization between 1968 and 1973-74 that focussed on the production of a narrow group of consumer products, basically processed food and beverages, textiles and clothing, and consumer chemicals such as cosmetics, soap and detergents. Fiscal Incentives 2.03 (a) The Industrial Incentives Law. Fiscal incentives to industry have been granted during the last 10 years by the Secretariats of Industry and Finance under the general provisions of Law 299 and the ad hoc admini- strative criteria of the Secretariat of Industry's Technical Directorate, as the necessary operating procedures (Reglamento) for Law 299 were never prepared. Law 299 established three categories of industrial firms to be protected ("A" for firms exporting their total production, "B" for import substituting firms producing goods for which there was no domestic production, and "C" for import substituting firms producing goods for which there was already domestic production, but with 'insufficient installed capacity') and granted a number of fiscal incentives, similar to those available in several other countries in the region, which can be summarized as follows:  - 10 - Mtajor Incentives Under Law 299/68 Incentives/Firm Categories A B C Exoneration of import tariffs on Capital Goods 100% - - Exoneration of import tariffs on intermediates and raw materials 100% 95% up to 90% Exonerations of import tariffs on oils and combustibles (excl. gasoline) 100% 90% 90% Income tax exemption or exoneration 100%* up to 50% up to 50% for reinvestment exemption only for only for reinvestment reinvestment * Foreign firms only. Domestic firms have a 75% exemption over the first 5 years and 50% exemption in the remaining period, plus the exoneration of up to 50% of net income for reinvestment. 2.04 While income tax exonerations for reinvestment can be granted for an amount equal to 100% of the reinvested amount (excluding land acquisitions and working capital) subject to a limitation of 50% of net income in any single year, in recent years (starting in 1975) the government has reduced the maximum amount exempted to 35% of net income. 1/ The impact of income tax exonerations for reinvestment has been considerable in the last decade. Between 1969 and 1977, a total of RD$153.3 million was invested under these provisions, whereas in 1977 the amount was RD$34.3 million. With a marginal income tax rate of 40%, the reinvestment tax exoneration provides a strong incentive to seek new investment opportunities, but as only investment in fixed capital is eligible for the exoneration, there is also an incentive to use more capital intensive technologies than would be appropriate given the country's ample supply of labor. To encourage greater employment creation and higher utilization of installed capacity, the percentage of income tax exemption should be related instead to the amount of additional employment created by the firm. 2.05 The benefits granted under Law 299 were to be extended for 8 years to firms established in Santo Domingo, 12 years to firms in Santiago, 20 years to firms in border zones and 15 years to all others. In practice, as the first classified firms in the Santo Domingo area started to run out of the concession period, they applied for, and obtained, an extension of all benefits. This was justified on the grounds that other competing firms would be receiving the same benefits for still some time, but it could generate a situation in which all incentives are granted to all firms for an indefinite period of time. 1/ In addition, when as a result of reinvestment of profits, the firm dis- tributes additional shares instead of cash dividends to the shareholders, the later are also exempted from Personal Income Tax on the new shares.  2.06 Law 299 established a flat tariff rate of 5% on imports of machinery and spare parts by firms classified in the 'B' and 'C' categories. The tariff rate on machinery and spare parts was increased to 10% in 1972, and to 20% in 1977. After the latest increase, the tariff rate on imports of capital goods approximately compensates for the premium between the official exchange rate used for these imports and the parallel market exchange rate (paras. 2.19 to 2.21), thus resulting in a situation equiva- lent to duty-free machinery imports, but eliminating the virtual subsidy implied by the previous lower tariff rates. 2.07 Firms included in the 'A' category are only allowed to sell up to 20% of total output in the domestic market (such sales are then subject to 90% of the applicable import tariffs), and have to be located in the EPZ. However, the Law indicates that as an exception, firms in category 'A' could also be established outside the EPZ. Several such firms were actually created and currently there are some 15 firms operating in 'Special Free Zones' (SFZ). 2.08 The success of Law 299 in stimulating industrial investment is indicated by the fact that, between 1968 and 1977, some 348 new firms were classified under Law 299, with a reported investment of DR$ 320 million (Table 2.1). Category A firms accounted for 31% of total investment and 67% of employment. In addition, 206 existing firms were also classified under Law 299 during the same period. Table 2.1: NEW FIRMS CLASSIFIED UNDER LAW 299 (1968-1977) Investment Employment Type of Firm No of Firms (RD$ Million) (No. of Jobs) A 130 99.3 17,593 B 6) ) 220.7 8,644 C 212) Total 348 320.0 26,237 Source: Statistical Appendix Tables A.9 and A.10. 2.09 During the first four years of operation of Law 299, the bulk of classified new firms corresponded to Category C, i.e. production for the domestic market of goods already being produced domestically. Between 1968 and 1971, 85 firms were classified in this category with only 3 new firms being classified in Category B (two firms producing condensed milk and  - 12 - one producing metal moulds for plastic and rubber products). Only 25 firms were classified under Category 'A' during the same period, of which 23 were new and 2 had been in existence before 1968. One of the major reasons for the small number of exporting firms created during the period was that the first EPZ (La Romana) only started operations in 1971. Thus, most of the 25 'A' firms classified during the period were SFZ, 11 of which -- accounting for about half of investment and more than half of employment generation -- were food processing plants, exporting canned fruits and vegetables. 2.10 Firms classified between 1972 and 1977 followed a different distribution. 105 new firms were classified under Category 'A', most of them to operate in the three EPZ, only 3 more firms were classified as 'B', and 127 firms in Category 'C'. During the period, employment generated by 'A' firms was estimated to be more than three times higher than employment generated by 'B' and 'C' firms together, whereas the volume of investment was significantly lower (Table 2.2). However, a large part of the employ- ment generated by 'A' firms corresponds to second income earners whereas another part is seasonal. Table 2.2 EMPLOYMENT GENERATION AND LABOR INTENSITY OF CLASSIFIED NEW FIRMS, 1973-1977 1/ Investment Employment Investment per Type of Firm (RD$ million) (No. of Jobs) Employee (RD$) A 55.1 13,676 4,029 B and C 70.5 4,477 15,748 1/ 1972 data have been excluded to eliminate the impact of the oil refinery on B and C data. Source: Statistical Appendix Table A.10. 2.11 (b) Other Fiscal Incentives. The system of fiscal incentives to industry in the Dominican Republic includes, in addition to Law 299, several other measures. Among them are special contracts between the Government and individual firms, most of which were signed before the adoption of Law 299, establishing the specific set of fiscal incentives to be granted to the firm. Such contracts which in 1966 included fertilizers, glass and flour mills, were generally granted for a period of 10 years. However, when the original contracts expired in 1976 they were renewed for an additional 10 year period.  - 13 - 2.12 The possibility of accelerated depreciation was also established by the Income Tax Law, but it has not been further regulated. Authority to grant the benefit was left to the discretion of the Secretary of Finance, subject to approval by the Secretary of Industry and Commerce. While no statistical data are available on the extent of industrial firms' utilization of accelerated depreciation, information from individual firms seems to indicate that it is widely used. 2.13 Fiscal incentives to exports of manufactured goods by firms not classified under Category 'A' by Law 299 are limited to rebates of tariffs and other import duties paid on inputs used in the production of export goods (Law 295). Moreover, the high percentage of tariff exonera- tions on all imported inputs by classified firms, and administrative diffi- culties in the implementation of Law 295 have made the incentive inoperative. An increasingly important disincentive to exports of manufactured goods has been the obligation to surrender the foreign exchange proceeds to the Central Bank at the official exchange rate. Tariff Protection 2.14 Tariffs and other import duties constitute a major element of the system of industrial protection in the Dominican Republic, as well as one of the major sources of fiscal revenues. 1/ The tariff system includes a large number of cumulative tariff laws, which result in very high levels of nominal legal tariffs for practically all products, plus the widespread use of tariff exonerations on raw materials and intermediate goods granted under the system of industrial classifications. The result is a system of nominal adjusted tariffs (legal tariffs minus exonerations) with very high tariff levels for most final products and very low levels for raw materials and intermediates, which creates high effective protection for firms producing final products for the domestic market, encourage the use of imported inputs and discourages exports and production of intermediate and capital goods. 2.15 Tariff reform and the establishment of a new tariff system were among the objectives of industrial and fiscal policy in the late 1960s, but the only step taken was the adoption of the Brussels Tariff Nomenclature (BTN) in 1971. The Tariff Law (Arancel de Aduanas) established in Law 170/71 incorporated all tariff rates from the previous Arancel without modification and simply adopted the new nomenclature, noting that the next two stages in the process of tariff reform would be: (i) to consolidate all other import duties and taxes into the Arancel; and (ii) to establish a new structure on tariff rates appropriate to the developmental needs of the country. These two stages never took place and Law 170/71 is still the applicable Arancel, together with a number of other tariff laws which preceded and followed it. The relative importance of the tariffs in Law 170/71 has been decreasing over time, as most rates are specific. By 1977 tariff collections from Law 1970/71 were less than 34% of total tariffs and other import taxes (Table A.14). 1/ In 1977, tariffs and other import duties accounted for one third of total ordinary public revenues (Statistical Appendix Table A.14).  - 14 - 2.16 The major components of the tariff system (in addition to Law 170/71) are a Law unifying a number of different tariff and other import duties (Law 173 of 1964) and Law 361 of 1964 which added a uniform rate of 20% ad valorem to all other duties. Laws 173 and 361 account for nearly 49% of total tariffs revenues in 1977. The complicated system of import tariffs includes also an additional 4% surcharge on all import duties (Law 136), a flat 20% tariff rate on all industrial machinery and equipment (10% from 1972 to 1977), import duties on oil, combustibles and lubricants and other special duties. Total revenues from tariffs and other import duties were about 24% of total commodity imports in 1977, down from 29% in 1973. 2.17 The summary ad valorem equivalent of all tariff rates applying to each product was estimated for a large sample of products in 1967 in a study published by the Central Bank and a similar exercise is currently in progress also at the Central Bank. Calculations of effective protection for 1971 based on the nominal tariff structure indicated in the 1967 study 1/ show a wide range of protection levels from - 48% (ISIC 3131, Distillery) to 874% (ISIC 3839, Electrical Appliances), and an arithmetic average of 196.5% (Table 2.3 and Statistical Appendix Table A.15). The same study further indicates that more than 35% of manufacturing value added originated in industries with effective protection rates above 100%. Table 2.3: EFFECTIVE PROTECTION AT THE 4-DIGIT ISIC LEVEL(1971) Effective Rate No. of Subsectors Share of Manufactured/Value Added Less than 10% 6 23.8 10% to 49% 9 24.1 50% to 100% 8 17.0 More than 100% 24 35.1 47 100.0 Source: Sergio de la Cuadra, Op. cit. 2.18 While the estimates above suffer from a number of problems, notably the aggregation of inputs (and of exemptions), the computation of ad-valorem equivalents of specific duties, and the assumption that world prices for com- parable products are always equal to domestic prices minus tariffs (thus 1/ Sergio de la Cuadra: Estructura de los Gravamenes a la Importacion y Efecto de las Exoneraciones. In 'Simposio Nacional sobre Politica Tributaria como Instrumento para el Desarrollo', Secretaria de Estado de Finanzas/Secretariado Tecnico de la Presidencia. Sto Domingo, 1974.  - 1 5 - disregarding the possibility of unutilized protection or 'water' in the tariffs), they provide a reasonably good indication of the wide dispersion and high average level of protection in the Dominican industry. The relationship between average nominal tariffs for inputs and outputs in the same industrial subsector, with tariffs on inputs (before the exonerations) above tariffs on outputs in 20 out of 47 subsectors (Table A.15) is an additional proof of the inadequacy of the tariff system and provided support to the idea of granting widespread exonerations to imports of industrial inputs. Another element affect- ing the level of industrial protection (not included in the calculations above) is the operation of the dual foreign exchange market, with imports of most inputs through the 'official market' (at the official exchange rate of US$1 = RD$l) and imports of a substantial number of final goods (most of those for which there is domestic production) through the 'parallel market', at a premium which is currently above 20%. Therefore, the structure of foreign exchange allocation has reinforced the pattern of industrial protection outlined above. Exchange Rate Policy 2.19 A dual foreign exchange market has been legally in operation in Dominican Republic since 1967 (although it already existed in some form since 1961). The Foreign Exchange Control Law (Law 251 of 1964) established that all revenues in foreign exchange should be surrendered to the Central Bank, to be exchanged at the official exchange rate of US$1 = RD$l, and until July 1967, the Central Bank provided foreign exchange (at the same rate) to most importers. In July 1967, the Monetary Board published a list of import prohibitions, and established import quotas for another list of products. Two days later, Decree 1482 established that while products in the two lists above would not be eligible to receive foreign exchange from the Central Bank, they could be imported with 'own foreign exchange' thus institutionalizing the parallel market. The measure was supposed to encourage the repatriation of balances kept abroad as these were the only legal sources of 'own foreign exchange' (Law 251 had required surrender of foreign exchange revenues but said nothing about foreign exchange balances). However, since its creation in 1967, the basic sources of foreign exchange to the parallel market have been: (i) remittances of Dominican citizens living abroad; (ii) tourism revenues; (iii) undervalua- tion of exports; and (iv) overvaluation of imports in the official market. It is believed that the amounts of capital kept abroad by Dominican citizens have not constituted any substantial part of the flow of resources going into the parallel market, but they have played an important reserve role, which has reduced fluctuations in the parallel rate, absorbing sudden increases in demand or supply. 2.20 The impact of the Dominican foreign exchange system on the country's manufacturing sector arises from the types of products which are imported under each of the two foreign exchange markets. Foreign exchange resources from the Central Bank (at the official exchange rate) are available to finance imports of capital goods, raw materials and intermediate products for industry, pharmaceutical products, basic foods and, to a small extent, some consumer  - 16 - goods. On the other hand, most consumer products (particularly those produced domestically) can only be imported with resources from the parallel market. The result is to encourage the use of capital intensive technologies and a high percentage of imported inputs, and to increase effective protection to domestic producers of consumer goods, as the nominal protection on their output increases by the amount of the excess of the parallel rate over the official rate, without a corresponding increase in protection to inputs. The system has also discouraged production of raw materials and intermediate products for industry, and exports of manufactured goods the proceeds of which must be surrendered to the Central Bank at the official rate. 1/ 2.21 After experiencing wide fluctuations during the 1968-1971 period, the parallel market rate has shown a steady upward trend (except for a few short-lived fluctuations generally because of political reasons) during the last several years. From an average of about 12.5% above the official rate in 1969, the parallel rate increased to 16% in 1970, falling to less than 10% at the end of 1971 and increasing thereafter to an average of about 22% above the official rate in 1977. In the first part of 1978, the parallel rate increased markedly as a result of political uncertainties during the electoral period, reaching a level of US$1 = RD$1.35, but at the end of 1978 it was about 25% above the official rate. The increase in the parallel market rate does not fully compensate for the decrease in the price-adjusted exchange rate obtained by considering the differential rates of price increase in the Dominican Republic and its main trading partner, the U.S. (Statistical Appendix Table A.16). While the parallel market rate increased by only 10% between 1969 and 1978, the differential inflation was more than 15% during the same period. Financial Incentives 2.22 Financial incentives to the manufacturing sector have been provided mainly by the Fondo de Inversion para el Desarrollo (FIDE), a Central Bank fund which lends through the country's financial intermediaries. Since its creation in 1966, FIDE has approved loans to the manufacturing sector for a total amount of RD$77.7 million, for projects with total costs of about RD$150 million (up to June 1978) 2/. FIDE resources, used mainly to finance industrial machinery and equipment as well as other fixed assets and permanent working capital only to a smaller extent, have provided the bulk of medium- and long-term credit available to the manufacturing sector, with the commercial banks concentrating their own resources in short-term credit whereas the private financieras have played a very limited role in the past. 1/ Firms located in the EPZ and other SFZ firms are required to exchange at the Central Bank (at the official rate) the foreign currency equiva- lent of their expenditures in local currency. 2/ A detailed analysis of FIDE's operations, including loan sizes, industrial subsectors and other appears in Chapter III of this report.  - 17 - 2.23 FIDE's interest rate to the final borrowers is 9% for industrial loans, substantially below the legal ceiling of 12% on commercial lending. The difference between the FIDE rate and normal commercial bank rates is further increased by the commercial banks' requirements of compensating balances in current accounts, interest payments made quarterly in advance, and closing fees, which result in average effective interest rates for commercial bank short-term credit of about 12 - 14% while the nominal rates range between 10.5 - 12%. The lower FIDE rate on industrial loans, applied mainly to fixed capital financing, further encouraged the use of capital adding to the effect of the low tariffs on capital goods, access to the official foreign exchange market for imports of such goods, provisions for accelerated depreciation and income tax exemptions for reinvestment, which have dominated the industrial policy field in the past ten years. 2.24 While the special FIDE rate constitutes the most obvious distortion within the financial system, the overall structure of interest rates is not without problems. The legal ceiling of 12% on the lending rate of the country's financial system has often been below the domestic rate of inflation, particularly in recent years (1973 - 1975 and again in 1977) (Table A.16). Also, legal ceilings on borrowing rates and high levels of legal reserve re- quirements (30% of savings and time deposits and 50% of demand deposits) for which commercial banks receive only a 2% rate if deposited at the Central Bank (para. 3.03) have limited commercial banks' interest in domestic resource mobilization. FIDE's interest rate might have also been instrumental in encouraging capital flight by making it profitable to increase the firms' leverage through low cost FIDE loans while channeling the firms' internally generated resources abroad. Other Industrial Policy Measures 2.25 Price controls have played an important role in the overall indus- trial policy framework. Price controls by the National Institute for Price Stabilization (INESPRE) have been mainly directed to agricultural products but in several cases have affected industrial products of agricultural origin (e.g. milk, tomato paste) as well as other manufactured products (cement). In several cases, price controls have discouraged production and exports and in at least one case (tomato paste), price controls coupled with export quotas 1/ resulted in the loss of exports (from RD$3 million in 1975, to RD$0.36 million in 1976) and the closing down of one of two major plants. The Impact of Industrial Policy 2.26 The combined result of the policy measures affecting the Dominican manufacturing sector during the last decade has been a substantial increase 1/ A more detailed analysis of the export quotas and other administrative barriers to exports is included in chapter IV of this report.  - 18 - of manufacturing production directed to the domestic market, particularly between 1968 and 1973-74, and, after 1972, a relatively rapid increase of manufactured exports originating in the newly created EPZ as well as in other firms classified under category 'A' by Law 299. After 1975, production for the domestic market has been characterized by low growth rates whereas exports by "A" firms have continued to increase although from a very low base. Industrial firms have thus specialized by type of market (domestic and foreign) and there have been very few cases of firms operating in the two markets. 2.27 Firms producing for the domestic market (those classified as 'B' and 'C' in addition to firms benefitting from special contracts) have operated in an environment characterized by a number of distortions in the product and factor markets. The use of capital-intensive technology has been promoted by low tariffs on capital goods (only recently increased to 20%), availability of foreign exchange at the cheaper official rate for imports of such products, subsidized industrial medium- and long-term credit (from FIDE) at a rate 25% below nominal commercial market rates and generous income tax exemptions for reinvestment which have been limited to fixed capital. The use of imported inputs has been encouraged by widespread exonerations on tariffs and other import duties on such inputs provided by Law 299, granted in an administratively ad hoc manner, and by providing foreign exchange at the official rate for such imports. In the product markets, very high tariffs for consumer products, the need to obtain foreign exchange in the more costly parallel market and the distortions affecting the cost of imported inputs have produced high levels of effective protection for a number of consumer products and encouraged firms to operate solely within the protected domestic market. The attractiveness of exports for firms in categories 'B' and 'C' has been further decreased by the lack of an adequate drawback mechanism for import tariffs on inputs used for exports, a number of administrative barriers to exports in some specific products, and, more importantly, by the requirement to exchange the proceeds of exports at the official rate. 2.28 Firms producing exclusively for the foreign market (Category 'A' firms) have operated in an environment less affected by policy-originated distortions. Output from such firms has been growing very rapidly, although it represents still a small fraction of total manufactured output (about 5.5% in 1977). Also, the average investment cost per job in export oriented firms has been much lower and the absolute contributions to total employment significantly higher from those of domestically oriented firms (para. 2.10 and Table 2.2).  - 19 - III. THE FINANCIAL SYSTEM Background 3.01 During the 1968-1977 decade the Dominican Republic's financial sector grew substantially in size, diversity and maturity. Prior to 1968 there were only seven commercial, one housing and two government development banks. Since then six new commercial banks, 16 private financieras, and a large number of savings and loan associations and insurance companies (about 50) have been chartered by the National Monetary Council. Supporting the sharp growth in numbers of financial intermediaries during 1968-77 was an average 12% p.a. real growth rate of private sector borrowing made possible by the almost 400% growth in total private deposits in the financial system. The highest growth took place in commercial banks' time and savings deposits which grew eight fold from RD$72 to RD$581 million, while the Central Bank expanded its rediscount facility from RD$40 to RD$150 million and somewhat reduced its overall legal reserve requirements. While economic growth moderated in the last few years and private deposits started to grow more slowly after 1975 and stagnated during 1977-78, the overall growth for the decade was striking. The overall liquidity coefficient ratio (deposits/GNP) grew from below one fifth to over 30% or about 6% p.a. during the decade. Industrial credit outstanding increased from RD$80 million in 1970 to slightly over RD$300 million in 1978 with about 90% of this increase occurring between 1970 and 1975. This chapter briefly describes the country's financial sector, focusing on its institutional and policy framework, and its impact on industrial growth. Monetary System 3.02 The Banco Central de la Republica Dominicana (Central Bank) was established in October 1947 as the institution responsible for implementing monetary and overall credit policy 1/, maintaining the liquidity of the banking system and administering the country's international monetary reserves as well as selected lending programs. In addition to its role in regulating interest rates and money supply through currency emissions, rediscount policies and legal reserve requirements, the Central Bank operates two development funds 2/ that are major sources of term financing. 3.03 The three main regulatory tools used by the monetary authorities to establish the level of resources available for credit, allocate resources by sector and set limits on loan terms have been: 1/ The Monetary Council is the Central Bank's board and the country's main monetary policy making body. In addition to the Governor of the Central Bank its membership include the Secretaries of State for Finance and for Industry and Commerce and seven other members represent- ing the agricultural, industrial, commercial and academic communities. 2/ FIDE and INFRATUR which lend through the country's financial inter- mediaries. FIDE lends for industrial and agricultural growth whereas INFRATUR finances tourism projects.  - 20 - (a) Legal Reserve Requirements: 30% of savings and time deposits and 50% of demand deposits in commercial banks 1/ are part of the reserve system. Portions of these reserves may be kept as bank vault cash and the balance deposited in a 2% interest bearing account with the Central Bank. In the third quarter of 1978 these resources amounted to RD$287 million (of which RD$39 million in vault cash), almost 20% of total commercial bank assets. Because time and savings accounts have grown from 52% to almost 69% of total commercial bank deposits during 1970-78, the reserve deposits have declined from 29% to 20% of total assets without changing reserve requirements. (b) Guidelines for Sector Allocation. The Monetary Board has legal authority to issue directives to commercial banks altering sectoral distribu- tion of lending to reflect changing development priorities. However, it has not done so after 1973, when it established that 45% of time deposits and 25% of demand deposits available for lending should be directed to loans to the productive sectors (industry, agriculture, construction and export financing) with the balance allocated mainly to commerce and import financing. To further encourage commercial bank lending to agriculture, commercial banks have been permitted, since 1974, to deduct the amount of agricultural loans from savings deposits for the calculation of legal reserves requirements. (c) Regulations on Loan Maturities. To ensure a minimum amount of medium- and long-term credit from commercial banks, banking regulations require that 10% of time and 5% of demand deposits be allocated to term lending. 3.04 In addition to regulating the financial institutions' liquidity, legal reserve requirements provide monetary authorities with resources (RD$248 million in 3rd quarter of 1978) which they, in turn may lend through rediscount or other mechanisms. The monetary authorities control and allocate about 30% of total deposits in the commercial banking system through its monetary mechanisms and the sale of bonds to the banking system. These resources have as of mid-1978 been reallocated mainly through the Central Bank rediscount facility (RD$164 million), FIDE (RD$70 million) and direct Central Bank operations with government-owned enterprises. 3.05 During the past five years rediscount policy has been the key instrument for credit expansion. Since 1973 the Central Bank expanded its advances and rediscount operations from RD$48.8 to RD$164 million. Given the added incentives for agricultural, non-traditional exports and industrial credit (Table 3.1), these resources have been used mainly for the expansion of productive lending activity. 1/ The Government-owned Banco de Reservas (BR) is not included in these regulations and its reserves are equal to 8.3% of assets compared with an average of 27% for the four largest banks in the system. BR experienced serious liquidity problems in 1978 due to the withdrawal of large amounts of its deposits by the prior government during the first half of the year.  - 21 - Table 3.1 CENTRAL BANK REDISCOUNT RATES Type of Loan Rates Terms (Maximum in months) Agriculture 5.5% 12 Non-traditional Exports 5.5% 12 Tobacco Purchases 6.0% 6 Industrial Credits 6.5% 12 Misc. Commercial 7.5% 6 Deficiencies in Legal Reserves 7.5% 6 3.06 Interest rates paid by commercial banks on time and savings deposits range between 4% and 7.5% resulting in costs to commercial banks of 5.2% to 10.1% with an 8.1% average (given the 30% reserve requirements on such deposits). Because of the low discount rates and high costs of resource mobilization there is substantial incentive for financial intermediaries to use the advance and rediscount facility, rather than expand their private resource mobilization efforts, and as a result, the rediscount facility is generally fully utilized. Monetary authorities have in the past used this facility largely in support of agricultural loans through the Banco Agricola and Banco de Reservas.l/ More recently, monetary authorities have changed this policy, reducing the share of the two publicly owned institutions and providing financieras and commercial banks with relatively larger shares of total advances and rediscount (Table 3.2). The effect has been to sharply reduce the liquidity of the Banco de Reservas and its lending to public sector institutions. Table 3.2 CURRENT ADVANCES AND DISCOUNTS (January to June, 1978) (RD$ million) Amount Percent Banco Agricola 7.7 11 Banco de Reservas 18.2 25 Commercial Banks 30.5 42 Financieras 16.5 23 Total 72.8 100 1/ As of June 1, 1978 about 52% of the facility's discounts were in arrears. Banco Agricola and Banco de Reservas accounted for 91% of the overdue accounts.  - 22 - 3.07 Interest rates. By executive order No. 312 of July 1919, a maximum interest rate of 1% per month was set on loans through the banking system, and this 12% ceiling on the lending rate has remained ever since. Nominal interest rates charged by the banking system for industrial credits vary between 6% and 12%. At the low end are public sector resources from special development funds for industrial loans (borrowed at 5% by the banks and onlent at 9%) and for the agricultural and agroindustrial sectors, made available at 4% and onlent at 6% by the government-owned Industrial Development Corporation (CFI). A recent Central Bank study on interest earned by the commercial banking system (including Banco de Reservas) on loan port- folios shows that during the 1974-77 period commercial banks received an average of 8.9%, ranging from 9.2% in 1975 and 1976 to 8.3% in 1974.1/ During the same period, inflation ranged from 13% in 1974 to 7.6% in 1976 and interest rates were substantially negative in all years, except 1976. Table 3.3 INTEREST RATES CHARGED BY SELECTED FINANCIAL INSTITUTIONS Institution Interest Rate Commercial Banks (private) 9.0 - 12.0 Banco de Reservas (Government) 8.0 - 12.0 Financieras (private) 9.0 - 12.0 CFI (Government) 6.0 - 12.0 CEDOPEX (Export Credit) 9.0 - 10.5 3.08 Parallel to the limitations on lending rates, borrowing rates are maintained at a low level. Interest rates paid by commercial banks for private resources range from 4.0% on savings accounts to 9% on Certificates of Deposit (Table A.17). While high reserve requirements raise the financial cost of 7.5% fixed time deposits to about 11% limiting commercial banks' interest in mobilization of such resources, low borrowing rates combined with rising interest rates abroad have undoubtedly aggravated in 1978 the already sluggish growth of financial savings. Thus, expansion of the financial system's resource base may be expected to remain slow unless more flexible interest policies are introduced. 3.09 While the very moderate rate of price increase in 1978 (estimated at about 4%) indicates that the maximum lending rate of 12% was again positive in real terms, higher expected inflation in 1979 (about 8-10%) and the sharp rise in public sector domestic borrowing requirements are likely to have negative effects on resource availability to the private sector if expansion of commercial bank liabilities continues to be constrained by low borrowing rates. In addition, the present structure of interest rates 1/ A study of the financial results of the largest private banks indicated that these institutions earned higher interest rates on average than Banco de Reservas and the smaller commercial banks. The fees and commissions which add to effective interest rates were not considered in the Central Bank study.  - 23 - introduces several distortions in the resource allocation mechanism, as (i) low rates charged on FIDE loans as compared with commercial bank loans for working capital tend to encourage use of capital rather than labor intensive processes; (ii) large use of borrowed concessionary term re- sources rather than retained earnings or new equity, may encourage capital flight abroad and increase leverage of industrial firms; and (iii) tighter liquidity in the banking system results in allocation of lower priced resources to the larger and overall more profitable clients at the expense of small scale industrial firms. Financial Institutions 3.10 The Central Bank's Investment Development Fund (FIDE). A special fund established within the Central Bank, FIDE is the principal source of term financing for industrial and agricultural development. FIDE's resources include foreign currency loans from AID, IDB, IBRD (for livestock development) and, most recently, KfW. As of July 31, 1978 these loans constituted about one-third of FIDE's total resources of RD$104 million with the balance provided by the Central Bank and the Government. Since its creation in 1966, FIDE has made 1,916 loans for a total of RD$152.4 million, of which RD$77 million went to about 450 industrial credits. These funds were relent through 11 commercial banks, 9 financieras 1/ and 3 government development agencies with the financial intermediaries carrying the primary credit risks. 3.11 From 1966 through 1972 FIDE's industrial sector lending showed slow growth (about RD$3.8 million per year) accelerating in 1974 when it reached a peak of RD$18 million (Statistical Appendix Table A.18). In 1975 FIDE's industrial lending fell to RD$1.9 million as international and Central Bank resources dried up. FIDE's industrial operations increased again in 1976, but they declined sharply in 1977 (RD$6.1 million) as industrial sector investment fell in the face of an overall decline in business activity. FIDE's industrial sector lending has been mainly to the food industry (21% of total). Other important subsectors have been mineral, non-metallic products used in the construction industry (18.8%), chemicals (such as fertilizer and paints) (13.8%), metal products (12.9%) and footwear and clothing (9.4%). 3.12 FIDE has financed on average about 53% of total project costs up to a normal maximum industrial loan of RD$650,000 (exceptionally RD$1.5 million), with the intermediary and entrepreneur providing the remainder in approximately equal portions (Table A.19). The total value of manufactur- ing projects in which FIDE has participated since 1966 equals an estimated RD$148 million. About half of FIDE's industrial credit has been directed toward machinery and equipment, financing a high percentage of capital goods and construction costs (80% and 72% respectively) and a smaller share of working capital (37%). The maximum terms for FIDE loans are 12 years includ- ing 2 years of grace. 1/ Among which the Compania Financiera Dominicana is the largest borrower with a current balance of RD$8 million.  - 24 - 3.13 To encourage development of new private finance companies oriented towards term lending, FIDE recently increased the proportion of its resources lent through these institutions. During 1966-1976 only about 19% of FIDE resources was channeled through financieras whereas in the 18 month period between 1977 and mid-1978 about 45% of FIDE loans were made to subprojects developed by financieras. At the same time, the private commercial banks' share of FIDE loans declined from 41% to 25% and the Banco de Reservas share went from about 24% to 6%. Because of the inability of financieras to capture private savings and the tightening of Central Bank rediscount facilities, financieras are becoming highly dependent upon FIDE resources. 3.14 Commercial banks: There are 12 commercial banks operating in the Dominican Republic with 125 branches and agencies around the country, accounting for about 80% of the total resources of the financial system. The commercial banking system includes (i) the Banco de Reservas, an autono- mous government-owned institution holding about 38% of total commercial bank assets and serving also as fiscal agent for the government; (ii) four large private banks with assets ranging between RD$125 and RD$250 million and accounting for about 45% of commercial bank assets 1/; and (iii) seven smaller banks, most of which are relatively new and rapidly growing institu- tions currently accounting for 17% of commercial bank assets. 3.15 Commercial bank resources (equity, deposits and other liabilities) equalled RD$1,443 million on September 30, 1978 (Table A.20). With an expanding economy, commercial bank resources grew during 1970-74 at a rapid 30% rate, slowing to a 12% rate during 1975-77 as overall economic activity slowed. Demand deposits decreased as a percentage of commercial bank resources, from 30% in 1970 to 23% in 1976 whereas time deposits increased during the same period. Because of the lower reserve requirements on time deposits compared with demand deposits, this resulted in greater overall efficiency in use of bank resources. Thus, the commercial banks' total loan portfolio in 1976 reached 73% of total assets compared with only 62% in 1970 (Table A.22). 3.16 Average interest on portfolio for the four largest commercial banks was 10.9% in 1977 ranging from 9.7% to almost 14%, while the similar ratio for the Banco de Reservas was a low 9%. Profitability of the private banks is satisfactory, with an average 1.8% return on assets and about 21% return on capital. 2/ High profit rates are partly due to substantial use of Central Bank low cost resources, closing fees amounting to 1.2% - 2.5% of total assets and other commercial practices such as requesting compensatory balances and anticipated payment of interests which raise effective rates above the nominal legal maximum. 1/ Royal Bank of Canada, Banco Popular Dominicano, Citibank and Chase Manhattan. 2/ With the exception of one major bank engaged in a rapid expansion program and showing personnel expenses that are three fold higher as a percentage of income than other banks.  - 25 - 3.17 Commercial bank lending to the private sector grew from about 44% to 57% of total assets during 1970-77 as public sector lending declined from almost 19% to 14%. In 1978, however, the government sharply increased public sector domestic borrowing to about 15.6% of commercial bank assets. Within the private sector, the productive sectors accounted for 56% of total credit up to 1976 declining to 52% in 1978. Credits to the commercial sector account for most of the relative gain. About 77% of commercial bank loans in 1977 were short-term, about 7% for terms of 1 to 3 years and 16% were term loans of more than 3 years. 3.18 Industrial lending by commercial banks since 1973 has accounted for about 90% of total lending to the sector which in the 1970-77 period grew from RD$72 to RD$292 million. 1/ The manufacturing and mining component of industrial lending expanded substantially during 1973-75, from 28% to 33% of total commercial bank portfolio but it decreased again in recent years (to 26.6% in 1978). 3.19 Private Development Finance Companies (DFCs). DFCs were authorized in 1966 to mobilize private domestic resources through sales of financial instruments (including equity, bonds and special Certificates of Deposit) and to seek international loans to finance the productive sectors (industry, agriculture, construction and export financing). Initial growth of DFCs was slow, with only 4 institutions in operation until 1974. Since then 11 more DFCs have been organized, mainly by commercial banks. Total resources of DFCs have grown at a 20% p.a. rate since 1974, reaching RD$98 million (about 7% of commercial bank resources) of which self-generated resources were less than RD$30 million (Table A.25). DFCs' liabilities to the public sector (mostly FIDE) have grown from RD$7.5 million in 1973 to RD$45.8 million in 1978, currently accounting for 46% of total resources. Interna- tional borrowing accounts for about 20%, whereas equity sales account for 22% and proceeds from DFCs' sales of general obligation bonds add only 8% to total resources, indicating that DFC have not fulfilled original expectations with respect to their capabilities for raising funds through sale of equity and debt instruments. 3.20 The main reasons for the small volume of domestic private resource mobilization achieved by DFCs include the availability of low cost FIDE resources and the DFCs disadvantage with respect to housing banks in the bonds market. Institutional buyers prefer the greater assurances of the specific mortgage guarantees associated with housing bank bonds, compared with DFCs bonds, which are general obligation instruments. Moreover, efforts to test the private market for term resources have been restricted by the monetary authorities, who refused to alter the official interest rate schedule when a DFC recently proposed to sell 8 year bonds designed to yield 9.5% to attract fixed term resources. 1/ Includes Sugar RD$11.8 million, Manufacturing RD$243.1 million and Mining RD$9.7 million.  - 26 - 3.21 About 90% of DFCs' resources are used for loans to the private sector, of which one-third are agricultural credits and about 40% industrial lending. Since 1973 industrial credit from DFCs has expanded from RD$6 million to about RD$32 million while agricultural credits grew from about RD$4 million to RD$26 million. While DFC activity was low in 1978 by lack of demand for credits, major DFCs reported a pipeline of potential projects waiting for an improved investment climate. 3.22 Industrial Development Corporation (CFI). The government's industrial development finance company was established in 1962 to manage the large number of government-owned manufacturing, mining and commercial institutions. Following the transfer of this function to CORDE in 1966, CFI was intended to serve primarily as the national industrial development bank and promotion agency with authority to (i) grant industrial loans; (ii) raise funds through sale of bonds, certificates of deposit and other securities; (iii) discount or rediscount financial instruments; (iv) serve as agent in the sale of financial instruments; and (v) advance the develop- ment of the industrial sector. To accomplish these broad objectives CFI received almost RD$7 million in initial capital which has since been expanded to RD$13.7 million of paid-in capital (and an authorized capital of RD$25 million). 3.23 In the period between 1972-77 CFI's position as an industrial development institution has deteriorated. Assets have remained approximately constant (RD$23 million in 1972 and RD$26 million in 1977) and its industrial loan portfolio of about RD$8.5 million has also remained unchanged. The remaining resources are invested in two industrial parks and one EPZ (San Pedro de Macoris). CFI's industrial park projects have had operating losses for several years, but they have been offset in 1977 by sales of land and industrial buildings in the EPZ. Major sources of funds for industrial credit are FIDE (RD$6 million) and the commercial banks (RD$2.7 million). CFI's financial income from loans averaged 9.2% of its portfolio and financial expenses were 3.5% of the portfolio in 1977. However, operating expenses reached a high 5% of the portfolio. CFI's past reputation as an inefficient and politically oriented lending institution has reduced its share in indus- trial financing to less than 3% of the financial system total industrial lending. While the Government wants to give CFI a leading role in promoting industrial development, major rebuilding programs to improve its policies, operations and staff will be required for CFI to assume successfully such a role. Trends and Prospects in Industrial Lending 3.24 The major change in industrial lending in recent years (since 1974) has been the growth of private DFCs which more than doubled their share of sector lending reaching about 11% of the total, whereas the share of commercial banks declined slightly to 86% and that of CFI was reduced to less than 3%. Growth of financieras has been mainly dependent upon FIDE allocations and Central Bank rediscount resources, but future growth may be more dependent upon their capability to capture domestic savings. Given the current interest rate structure and alternative financial instruments available to investors, DFCs would need to sell bonds at interest rates  - 27 - of 9.5-10% which would require lending rates of about 13.5-14%. This could still be accomplished with the 12% nominal interest rate limit and 1-2% annual commission fees. However, continued availability of FIDE resources at 9% may discourage financial institutions from intensifying their resource mobilization efforts and low deposit rates also have a negative effect on domestic savings. In those circumstances, term industrial credit could become dependent upon the willingness of international institutions to lend to FIDE on concessionary terms and on the Central Bank's contribution to private industrial development financing which is likely to decrease as a result of the country's difficult fiscal and foreign exchange position.  - 28 - IV. MANUFACTURED EXPORTS Overall Export Trend 4.01 Growth of the country's total commodity exports has been variable. Between 1960 and 1977 total exports grew from RD$174.4 million to RD$834.8 million at somewhat below 10% per year in nominal terms, or an estimated 6% annually in real terms. Medium-term export performance was strongly influ- enced by domestic political events and world price fluctuations of the country's main export commodities. Export growth accelerated during the period 1971-1977 when the average annual growth rate was 23% of which, however, a substantial share of about 10 percentage points reflects infla- tion. Growth in the export volumes of major products during the period 1971-1977 indicate a less favorable overall performance than the data on export values. Export quantities of sugar and sugar products stagnated whereas the exported volumes of cocoa, tobacco, meat and fertilizer dropped substantially. On the other hand, export volumes of coffee and mineral products experienced a sharp increase in quantity terms (in spite of a drop of 45% in bauxite exports, production of ferronickel and dore, a gold and silver concentrate, started after 1971 and currently form aboutt 20% of the total exports). Finally, exports of industrial products, particularly by EPZ and SFZ firms, have grown rapidly in volume as well as in value terms. 4.02 The overall export performance of the Dominican Republic during the 1970s appears favorable when compared with the 1960s. However, the country experienced two exceptional developments during 1971-1977 which will not easily be repeated in the future: the exploitation of two new major mineral resources (ferronickel and dore) and the major price increases of sugar in 1975/76 and coffee and cocoa in 1976/77. The mineral resource base of the country appears to be quite developed, prospects for a higher mineral export volume are limited, and the four traditional export products (sugar, coffee, cocoa and tobacco) also face limitations in terms of increases of export volume 1/ and medium-term price expectations. Thus, while the export values of individual major items may be less volatile in the future than during 1971-1977, traditional and mineral products which formed 83% of exports in 1977, can no longer be expected to provide the country with sufficient foreign exchange or the needed impetus for economic growth. 1/ There is some expectation of increased tobacco production for exports in the Santiago area.  - 29 - Table 4.1: STRUCTURE OF EXPORTS 1971-1977 Product Category 1971 1972 1973 1974 1975 1976 1977 A) Amounts (RD$ million) Traditional Exports 1/ 200.8 245.3 294.1 468.6 686.9 463.6 531.3 Minerals 17.4 62.7 102.1 112.4 149.8 181.6 169.7 Manufactured Products 2/ 8.2 14.5 23.5 47.3 57.6 65.5 86.1 Other Products 3/ 14.3 29.6 38.8 46.3 59.7 44.0 47.7 Total Exports 240.7 352.1 458.5 674.6 954.0 754.7 834.8 B) Shares (%) Traditional Exports 1/ 83.4 69.7 64.1 69.5 72.0 61.4 63.6 Minerals 7.2 17.8 22.3 16.7 15.7 24.1 20.3 Manufactured Products 2/ 3.4 4.1 5.1 7.0 6.0 8.8 10.3 Other Products 3/ 6.0 8.4 8.5 6.8 6.3 5.8 5.7 Total Exports 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1/ Sugar, Coffee, Cocoa and Tobacco. 2/ ISIC 32 to 39, excluding Sugar, Meat and Roasted Coffee. Includes EPZ. 3/ Includes Meat and Roasted Coffee. Source: CEDOPEX and Mission Estimates Manufactured Export Performance 4.03 During the period 1971-1977, manufactured exports increased at an average annual rate of 48% in nominal terms, faster than all other export categories. Manufactured exports originate in three subsectors operating under separate organizational and legal frameworks: (1) The three EPZ in La Romana, San Pedro de Macoris and Santiago; (ii) some 15 industrial enterprises, classified as SFZ, also producing exclusively for exports and operating under similar legal conditions as the enterprises in the EPZ but in individual  - 30 - locations, and (iii) the group of all other non-EPZ industrial enterprises, which do not fall under Category A of Law 299, and export only part of their production. The EPZ concentrate on the assembly of electrical components and '.iles which in the past have been free of export market constraints. The non-EPZ export industry basically processes agricultural products and has freqerently faced raw material supply limitations and export controls. As a result, exports from the three EPZ have been the most dynamic factor in the industrial export development, whereas exports by SFZ and other firms appear to have levelled-off in recent years, and in real terms, may not have grown at all since 1974 (Table 4.2). Table 4.2: INDUSTRIAL EXPORTS BY ORIGIN, 1971-1977 (RD$ million) Annual Origin 1971 1972 1973 1974 1975 1976 1977 Growth Rate (%) EPZ - 4.1 7.6 23.8 33.5 41.3 58.7 70 1/ SFZ and other 8.2 10.4 15.9 23.5 24.1 24.2 27.4 22 Total 8.2 14.5 23.5 47.3 57.6 65.5 86.1 48 1/ Average annual growth rate for 1972-1977. Source: CEDOPEX, Central Bank, Mission estimates Structure of Manufactured Exports 4.04 The composition of manufactured exports changed considerably between 1971 and 1977 (Table 4.3). Canned fruits and vegetables accounted for nearly 30% of manufactured exports in 1971, but their share dropped to less than 10% in 1977 whereas those of processed tobacco, and textiles and leather products rose to about 31% and 29% respectively in the same year. Electrical and electronical components and metal products - assembled in the EPZ - are ranked in sixth and seventh place in 1977, but did not appear in the ranking list for 1971 whereas chemicals (fertilizer), and cocoa products which were important export items in 1971-disappeared from the 1977 list.  - 31 - Table 4.3: MAJOR INDUSTRIAL EXPORTS IN 1977 1/ (RD$ million) Export Product 1971 1977 Value % Share Value % Share Processed Tobacco 0.9 11.0 26.5 30.8 Textiles, Garments 0.1 1.2 16.2 18.8 Footwear, Leather 0.1 1.2 8.3 9.6 Products Canned Fruits, 2.4 29.3 8.1 9.4 Vegetables Electrical, Electronical - - 7.9 9.2 Components Metal Products - - 5.8 6.7 Other Products 4.7 57.3 13.3 15.5 Total 8.2 100.0 86.1 100.0 1/ Excluding Sugar, Meat and Roasted Coffee. Source: CEDOPEX, Central Bank 4.05 About 75% of the 1971-1977 growth in value of manufactured exports originated in EPZ, and only one quarter in enterprises registered as "Special Free Zones" and other enterprises in non-bonded areas. This demonstrates that the EPZ provided the major dynamic factor in industrial exports, while non-EPZ exports stagnated. While in 1971 about three quarters of manufactured exports were processed food and tobacco products involving simple processing of agricultural inputs, in 1977 their share was only 43%, which indicates that the importance of non-agro-based manufactured exports has increased during the period. 4.06 Available 1971-1977 non-EPZ exports data, (Statistical Appendix Table A.7) 1/, indicate that during this period all major product categories had positive growth trends with strong variations around these trends 1/ A breakdown by product for EPZ exports is only available for 1977.  - 32 - resulting from the fact that a few major manufactured exports, such as cacao products, undergo little industrial processing and their prices and export values fluctuate in accordance with the world market prices of their unprocessed raw materials, whereas other agro-based (and locally consumed) food products are price regulated and have periodically been unprofitable to produce or to process. Also, in an effort to guarantee domestic supplies and avoid price increases, the Government has frequently controlled exports of several products like fertilizer, cement and several food products - tomato paste, meat, marmalade, some canned vegetables - and licenses for their exports have been periodically suspended or export quotas changed. Finally, several less important non-EPZ manufactured exports -- paper products, furniture, metal products -- have fluctuated, since only changing marginal quantities are available for exports, depending on domestic demand conditions and incidental export opportunities. 4.07 During the first half of 1978 total commodity exports decreased by about 7% compared to the first half of 1977. Exports of sugar, coffee, cacao and minerals were lower, mostly due to reduced world market prices. Exports of tobacco, dore 1/ and non-traditional agro-products were higher than in 1977. Manufactured exports grew less than during the first half of 1977 mainly because of lower growth of EPZ exports. The EPZ went through a period of consolidation during 1977, and EPZ exports during January - August 1978 increased at an annual rate of 20%, far below the past annual average of 70%. Pre-election uncertainties may have affected exports of other manufactured products which, in difference to previous years, did not show compensatory increases. Destination of Exports 4.08 Over 90% of non-EPZ manufactured and roasted coffee exports in 1977 went to the US and Puerto Rico, and EPZ exports go nearly exclusively to the US market. Thus, the total percentage of manufactured exports going to the US market is over 95% (Table 4.4). Neighbouring Puerto Rico received in 1977 nearly all exports of roasted coffee (RD$24 million) and a sub- stantial share of exports of canned fruits and vegetables (about RD$6 million). The US market is also the destination of most SFZ exports. European, neighbouring Caribbean and Latin American countries as well as Japan are neglected as markets for manufactured products. 2/ 2/ Gold and silver alloy. 1/ Haiti is an exception; exports to Haiti in 1977 were RD$3.5 million. Fertilizer (RD$1.0 million) and Kraft paper bags (RD$0.5 million) were the major industrial exports.  - 33 - Table 4.4: DIRECTION OF EXPORTS (RD$ million) Export Area 1973 1977 Amount x Amount Total Non-EPZ Exports 450.9 100.0 776.1 100.0 USA 267.7 59.4 526.0 67.8 Puerto Rico 31.2 6.9 49.9 6.4 Western Europe 84.9 18.8 122.2 15.7 Other countries 67.1 14.9 78.0 10.1 Manufactured and Semi-Processed 32.8 100.0 53.9 100.0 Non-EPZ Exports USA 9.1 27.7 13.9 25.8 Puerto Rico 19.3 58.8 35.1 65.1 Other countries 4.4 13.5 4.9 9.1 Source: CEDOPEX, Mission estimates 4.09 Manufactured non-EPZ exports have played a small role in the economy and the manufacturing sector, and in recent years this role has been further declining. When all processed food and tobacco products are excluded, the average manufacturing export/output ratio for 1977 is a low 2.3% and if the former categories (including roasted coffee but excluding sugar) are taken into account, the ratio increases only to 4.3%. Exports from EPZ raise the ratio to 8.2% in 1977. However, there are a small number of manufactured and semi-processed products for which exports are an import- ant percentage of output. In the canning, footwear and leather goods, and coffee roasting industries, exports in 1977 accounted for 30% or more of total sales. 1/ (Table 4.5). Cocoa products also belong to the group with high export orientation; the comparatively low ratio for 1977 is due to the abrupt drop of exports in that year, which was probably temporary, whereas meat exports had a comparatively high ratio until 1976 and can be expected to regain their importance if suspension of exports is lifted. 1/ The export/output ratio for roasted coffee is estimated to be above 80% but it does not appear in Table 4.5 since industrial production statistics do not list this product separately. Also a substantial part of footwear and leather exports included in Table 4.5 originate in the EPZ.  - 34 - Table 4.5: EXPORT ORIENTATION OF MAJOR INDUSTRIAL PRODUCT CATEGORIES (RD$ million) Change in Change in Marginal Average Average Average Non-EPZ Domestic Export/ Export/ Export/ Export/ Product Group Exports Non-EPZ Output Output Output Output 1973-1977 Production Ratio Ratio Ratio Ratio 1973-1977 (%) 1973 1977 1977 inc. (%) (%) EPZ (%) Meat (8.9) 19.3 (46.1) 17.7 1.6 1.6 Canned Fruits, Vegetables 5.2 15.1 34.4 23.2 29.5 29.5 Cacao Products (2.8) 8.9 (31.5) 46.6 10.2 10.2 Processed Tobacco 1.3 20.0 6.5 1.7 3.2 29.2 Textiles, Garments 1.1 20.6 5.3 0.4 3.0 26.5 Footwear, Leather Products 5.9 8.6 68.6 10.5 36.3 40.4 Wood Products, Furniture 0.2 5.7 3.5 0.4 1.4 1.4 Paper, Paper Products 0.7 20.2 3.5 0.7 1.6 1.6 Chemicals 0.1 186.6 - 2.1 0.8 0.8 Metal Products, Machinery 2.4 68.9 3.5 0.8 2.5 10.9 Total Industrial Production 23.4 565.0 4.1 4.4 4.3 8.2 Source: CEDOPEX, Central Bank, Mission calculations 4.10 Four out of five products with high export orientation - roasted coffee, canned fruits and vegetables, cocoa products and meat - are ag- ricultural based involving simple processing or packaging of domestic ag- ricultural raw materials, little domestic manufacturing value added, and highly seasonal employment generation. One export oriented industry -- footwear and leather goods -- involves labor intensive processing of mostly imported raw materials. Also, the leather goods and footwear enterprises with highest export orientation moved to the EPZ in recent years. The remaining products in Table 4.5 had a low average export/output ratio of 3% and less in 1977. Nevertheless, during the period 1973-1977 a small but significant increase took place in the degree of export orienta- tion of six out of seven product categories 1/, with the tobacco and textile industries achieving comparatively high marginal export/output ratios. The growth of textile exports is due to the expansion of two enterprises which are registered as "Special Free Zones" and enjoy the same benefits as firms in the EPZ, whereas it appears that cigars manu- factured in the Dominican Republic are establishing an export market. 1/ The seventh product --chemicals--would show an increase of the average export/output ratio after exclusion of the refinery production which went on stream in 1973.  - 35 - Issues and Constraints of Manufactured Exports 4.11 The industrialization process that has taken place in the Dominican Republic during the last decade has not resulted in manufactured exports that could reduce the country's dependence on exports of a small number of commodities. Also, export oriented industry has so far not acted as the major force in the industrialization process--a role which it has performed successfully in a number of developing countries and its contribu- tion to the solution of the country's severe and growing unemployment problem has been relatively small. Finally, the country's cyclical foreign exchange problems have not received much help from increasing manufactured exports. The basic reason for the unimportant role of export industry in the country's economic development lies in the orientation of industrial policy toward import substitution, which has encouraged capital intensive, high cost industries which are not competitive in foreign markets. While this policy framework has been discussed in Chapter II, manufactured exports face a number of additional constraints, particularly price regulations of a large number of agricultural products and export regulations for several non- traditional products, which are discussed below. 4.12 The Instituto Nacional de Establizacion de Precios (INESPRE) regulates the internal markets for a number of important food and other agricultural products. INESPRE stipulates prices at different stages of processing and determines quantities of complementary imports necessary to satisfy the needs of the population at comparatively low prices. Prices stipulated at the producer level are supposed to provide an incentive to produce and stable incomes to the farmers; intermediate product prices, expecially of important staples, are supposed to reflect the needs of the low income urban population. This process of price determination has not always been consistent, and regulated prices for several important export products have been insufficient to provide incentive to produce -- e.g. for meat during 1977 and 1978 --or to process -- e.g. for tomato paste since 1976. Exports of these price regulated products have fluctuated widely, and in several cases farmers have apparently abandoned the cultivation of price regulated crops. In the case of SFZ enterprises, exporters of canned fruits and vegetables reported unfulfilled export orders and idle processing capacity which cannot be utilized for lack of raw material supply. 4.13 Regulation of important product markets through price fixation and supplementary imports performed by INESPRE is complemented by regulations on a number of export products by the Centro de Promocion de Exportaciones (CEDOPEX) 1/. CEDOPEX, founded in 1971 to promote non-traditional exports, 1/ The coordination of export regulation with price fixation and imports, was apparently performed on an informal and probably sporadic basis until September 1977 when a formal agreement was made on promotion of exports and production and regulation of agricultural products between major institutions involved (CEDOPEX, INESPRE, Ministry of Agriculture, Banco Agricola, Instituto Agrario Dominicano).  - 36 - has offices in New York, Miami, Puerto Rico and Haiti to establish contacts for Dominican exporters in the country's main foreign markets, and its head- quarters are well staffed to perform the original task of the institution. However, during its early years of operation, the Government also put CEDOPEX in charge of regulating exports of a number of products by issuing export permits. 1/. Export regulation to maintain equilibrium and price stability in the domestic market has been CEDOPEX' most important task and as a result, it has been more effective in reducing than in promoting non- traditional exports. 4.14 As of July 1978, 65 product categories had been submitted to export control; exports of 27 product categories were prohibited and 38 were subject to export permits. Products under export prohibition include a number of basic food staples with supplementary import needs (vegetable oils, rice, corn, milk and potatoes) and several products where further domestic processing is desired (e.g. amber and leather). Products subject to export permits include a number of important industrial commodities -- meat, cement, fertilizer, several canned fruits and vegetables, tomato paste. CEDOPEX prepares annual demand/supply studies for a small number of products as a basis for determining the size of an export quota or for recommending temporary or permanent suspension of exports 2/. During 1977, exports were temporarily suspended for onions and meat on the basis of demand/supply analyses; similar studies served to determine export quotas for tomato paste and cement. Export permits for the large number of other products subject to export regulation were apparently issued on the basis of past quotas, or based on a more intuitive evaluation of the domestic demand/supply situation. 4.15 The implementation of export restrictions at short notice on the basis of governmental ad-hoc decisions and frequently insufficient analysis has contributed to the extremely unstable trend and the slow growth of major industrial exports. Manufacturers have sometimes been prevented from exporting products ready for shipment, and have been discouraged to establish foreign market contacts and accept longer-term supply contracts, which would not have been fulfilled due to export regulations. Exports of cement, fertilizer and tomato paste, which were among the largest industrial export products in the early 1970s, were suddenly suspended in 1974; exports under quotas were re-established for fertilizer in 1975, for tomato paste in 1976, and for cement in 1977. In the case of cement, CEDOPEX prepared a market study in early 1977, found that there was substantial idle production capacity and recommended establishment of an export quota of 5,000 tons per month. However, the industry had in the meantime lost contact with foreign markets, and indicated that exports could only be resumed at a profit with government subsidies. Dominican exporters have recently complained 3/ about 1/ In 1972, Law 137 establishing CEDOPEX was amended by Decree 2368 to include regulation of exports, excluding sugar and green coffee, for which export permits are issued by INAZUCAR and the Ministry of Agri- culture. 2/ These separate studies also form the basis for determining minimum export prices to reduce the extent of underinvoicing of exports. 3/ Exportador Dominicano, April 1978, p. 8.  - 37 - the system of export regulations, indicating that sustained export efforts are frustrated if exports may be suspended or established quotas be changed at any time without notice. The Association of Dominican Exporters (ADOEXPO) also indicated that the current system has led to illegal exports by "pirate exporters" who apparently export regulated products without permit. 4.16 While an aggressive export promotion strategy may carry some costs in terms of temporary shortages and higher prices for some products in the domestic market (reflecting world market conditions), the attempt to protect domestic consumers through export limitations and price controls creates output and export losses that also hurt the domestic consumers through reduced employment and output growth, and a worsening of the balance of payments situation. On the other hand, when domestic producers are able to respond to increased export opportunities, the resulting increase in output and employment and the improvement in the foreign exchange constraint will be able to more than compensate for any temporary shortages and/or higher prices. If income distribution issues are also involved, the Govern- ment could intervene through measures that do not reduce the incentive to increase output, employment and exports. 1/ Export Processing Zones (EPZ) 4.17 The three Export Processing Zones in La Romana, San Pedro de Macoris and Santiago have successfully attracted an increasing number of foreign enterprises in recent years. Currently they provide employment to about 12,500 workers and surrender foreign exchange at an annual rate of about RD$25 million to the Central Bank 2/. Further expansion of the exist- ing EPZ is in progress, a fourth EPZ will soon be established in Puerto Plata, and legislation for the establishment of a number of new EPZ has been passed. In all EPZ locations, available labor force is far in excess of employment possibilities. Although there are several domestic constraints to the expansion of the EPZ, particularly power supply and transport facilities, there is substantial potential for further expansion of EPZ exports. However, the government faces the issues of increasing the benefits derived by the country from the EPZ operation and of minimizing the possible risks of an export promotion policy which concentrates only on expansion of the EPZ, including competition from other countries in the region and .other external constraints to export growth faced by the EPZ (e.g., possible changes in the US trade legislation). Therefore, further expansion of EPZ exports should emphasize diversification of output and of market destination. 1/ In addition to the tax system and other general instruments to influence income distribution, the Government may also intervene (when the fiscal situation allows it) through direct subsidies to reduce the domestic retail price of specific products without altering the prices received by producers. While such subsidies do not create distortions in the production side, they artificially increase domestic demand and reduce exports, resulting in foreign exchange losses (in addition to the fiscal cost) that should be weighed against the income distribution benefits. 2/ Details of EPZ operations are presented in Annex I.  - 38 - 4.18 The government established the legal framework for the operation of the EPZ in Law 299 and other specific legal measures 1/ but left the actual operation to autonomous - private and public-entities. The laws grant tax and duty exemption to the enterprises, exemption from most foreign currency restrictions -- except the obligation to pay in foreign exchangg, for all goods and services purchased domestically -- and an exception from national labor legislation as workers of EPZ enterprises may be paid up to RD$0.10 less (currently about 20%) than the minimum wage level. Operation and management of the EPZ is carried out by three organizations: La Romana is owned and operated by the US Gulf and Western corporation; San Pedro de Macoris is owned by the government and operated by CFI and the Santiago EPZ is also government owned, but operated by a group of local businessmen. Each of the three EPZ has established its own operating rules, including the level of rents for factory buildings and selection of enterprises. 4.19 Gulf and Western has managed the EPZ of La Romana basically as a non-profit unit, whose operation is subordinated to the corporation's main business interests at La Romana (sugar, real estate and tourism). Gulf and Western has shown some reluctance to further expand the EPZ although a large land area is available for expansion. However, developed space is still available and several new firms will shortly start production at La Romana. The EPZ of San Pedro de Macoris has had difficulties in competing with the close-by La Romana which has a more pleasant location, better transport facilities and--through Gulf and Western--closer ties to potential US customers. Also, a suspicion may have existed that an EPZ run by a government institution would involve more "red tape" than an EPZ operated by a private firm. Currently, CFI's policy seems to be more aggressive than in the past, and empty factory space will soon be filled. The Santiago EPZ is well managed, moderately profitable and currently expanding at a high rate, in spite of its disadvantageous location compared to La Romana and San Pedro de Macoris 2/. The EPZ of Santiago also tries to establish backward linkages to the regional economy. During the last four years, a major tobacco classifying and cigar making company has co-operated with the Dominican Instituto del Tabaco in the cultivation of high quality tobacco in the Santiago region, which will serve as raw material input for the company's operation in the EPZ at an estimated annual rate of RD$30 to 40 million during the 1980s. 4.20 Currently, the EPZ of Santiago makes a small profit while La Romana breaks even and San Pedro de Macoris probably makes a loss. Rental charges for factory space could be gradually increased and the return on investment could, in the long run, approach a reasonable level of 10% (it is about 2% for the EPZ of Santiago). Similarly, tariff levels 1/ Law 4315 of 1955 which created the institution of Free Zones ("Zonas Francas"), was amended by Law 432 of 1969 which specifies rights and obligations of firms operating in the EPZ ("Zonas Francas Industriales"). 2/ The latter two EPZ have scheduled air freight connection (at La Romana) with the US. Products from the Santiago EPZ are trucked over 300 km. to Santo Domingo for shipment to the US.  - 39 - of utilities supplied to the EPZ could be raised to cover cost while guaran- teeing adequate supplies 1/. The most important cost factor in the EPZ is labor (about 80% of domestic value added). To increase the attractiveness of the EPZ during the initial period, the Government allowed firms operating in the EPZ to pay wages below the legal minima 2/. The competitive position of the EPZ in the Dominican Republic has improved compared to the EPZ in other Caribbean Basin countries, and there may be little need now to exempt the EPZ from national minimum wage laws. 4.21 Gross foreign exchange revenues of the Central Bank from the EPZ (i.e. payments of enterprises in the EPZ in foreign exchange for wages, rent, utilities and inputs purchased domestically);are about 30% of declared exports of the EPZ which is on the low side. Further, the income tax exemption is in some cases an ineffective incentive to the enterprises operat- ing in the EPZ and involves an unnecessary loss of foreign exchange as most enterprises operating in the EPZ are affiliations of US corporations, which may deduct tax payments of foreign subsidiaries. In this case, tax exemption may not benefit the enterprises in the EPZ but the US Treasury 3/. Con- sidering the attractive situation of the EPZ in the Dominican Republic there seems to exist substantial leeway to increase foreign exchange earnings without damaging their relative attractiveness. Discussions with EPZ rep- resentatives of other Caribbean Basin countries would help to establish the competitive limits. 4.22 A reassessment of the role of EPZ within the overall strategy of industrialization and diversification of exports may be in order. Up to now, the EPZ have developed few backward linkages with the domestic economy 4/. Also, other positive effects of the industrialization process attributed to foreign enterprises operating in developing countries -- e.g. training of an industrial work force, formation of local managerial capability, transfer of technical know-how to the country-- have not yet been realized by the EPZ, due to their enclave character, and the very simple assembly operations performed 5/. One way to strengthen the linkages 1/ The problem of power supply to the EPZ is discussed in Annex 1. 2/ Resolution No. 1 - 73 of March 1973 allows a reduction of RD$0.10 per hour, which represented a reduction of about 30%, currently 20%, below the national minima. "Special Free Zones" have to pay according to minimum wage levels. 3/ Nevertheless, US companies operating in the EPZ are strongly in favour of tax exemption, as it minimizes Dominican control over EPZ operation and avoids "red tape". 4/ Apart from the tobacco growing activity of a firm in the EPZ of Santiago, two other firms producing hand bags and leather clothing buy leather from local tanneries; the raw hides, however, have to be imported. 5/ About 80% of the workers in the EPZ are young women who obtain a few weeks of "training by doing".  - 40 - with the domestic economy would be through intensified and selective promo- tion of the EPZ, concentrating on attracting enterprises able to generate high domestic value added and intensified industrial training. Such promo- tion would best be conducted by a specialized export promotion agency, such as CEDOPEX, on behalf of all EPZ. 4.23 The dependence of EPZ exports on the US market and special tariff provisions involves a number of external contraints. Most exports of the EPZ enter the US market under the Generalized System of Preferences (GSP) or the special assembly provision of US tariff items 806.30 and 807.00. Exports under the GSP enter the US duty free, but are subject to annually fixed quotas. To avoid this limitation of the GSP, US manufacturers engaged in off-shore production prefer the use of tariff items 806.30 and 807.00 1/ under which import duty is paid on the value added in the assembling country and transportation cost. Legislation has been introduced to the US Congress to repeal the provision of items 806.30 and 807.00, as low cost imports would damage US industry. While there may be only limited prospects that this motion will be successful, restrictions on textile exports of Dominican EPZ to the US under item 807.00 could be imposed in the future. The US has already indicated that it intends to negotiate bilaterally with the Dominican Republic the establishment of import quotas for textiles in accordance with the international Multi-Fiber Agreement (MFA) 2/. However, total US imports under tariff items 806.30 and 807.00 are expected to continue increasing at a high rate as are other developed countries' imports from 'off-shore' enterprises. Therefore, the Dominican EPZ should be able to attract new firms and to diversify output and market destination. 1/ Item 806.30 refers to metal goods, item 807.00 to any material. Certain operations, like cutting of clothing parts from exported sheets cannot be carried out on goods eligible for 807.00, while no such restrictions exist for goods under item 806.30. Also, goods under item 806.30 must be imported by or on the account of the original US exporter; this requirement does not exist for item 807.00. 2/ Currently such agreements on textile quotas within the MFA between the US and Caribbean Basin countries exist for Colombia, Haiti and Mexico. The US usual'y negotiates quotas with countries whose exports to the US have increased rapidly.  - 41 - V. PROSPECTS FOR INDUSTRIAL GROWTH Sources of Industrial Growth 1968-1977 5.01 The Dominican Republic's manufactured output (including EPZ) 1/ increased by more than 250% in real terms between 1968 and 1977, and total employment in manufacturing increased by a similar factor during the same period. Domestic demand expansion, import substitution and the increase in manufactured exports have all contributed to industrial growth but their relative contributions have been different over time as well as across industries. In addition, their relative contributions to the growth of output have been very different from their contributions to employment generation. 5.02 Manufactured exports contributed about 12.5% of the total increase in manufactured output during the last decade (Table 5.1) with the EPZ accounting for about one half of the total exports contribution. Most of the increase in manufactured exports took place during the 1972-77 period, when the contribution of manufactured exports was about 14.5% of the total growth. During the second half of the decade, exports from EPZ accounted for two thirds of the total increase in manufactured exports, and when the SFZ are added to the EPZ, their contribution increases to about 75% of the total export growth. Table 5.1: SOURCES OF INDUSTRIAL GROWTH (Percentage of output growth) 1968-77 1968-72 1972-77 Export Expansion 12.53 7.64 14.56 Import Substitution -1.96 11.33 -12.88 Domestic Demand Expansion 89.43 81.03 98.32 100.00 100.00 100.00 Source: Statistical Annex and Mission calculations. 1/ Throughout this Chapter, the manufacturing sector is defined, for internal consistency, as groups 31 to 39 of the International Standard Industrial Classification (ISIC) excluding ISIC 3118 (Refined Sugar). In the sources of growth calculations, ISIC 353 (Oil Refining) has also been excluded to eliminate the strong impact of the oil refinery which started production in 1973. Manufactured exports figures include the semi-processed goods considered separately in Chapter IV (meat and roasted coffee) which currently account for about one half of non-EPZ manufactured exports.  - 42 - 5.03 The export industries' contribution to the growth of manufacturing employment has been higher than their contribution to the growth of output. Between 1971 and 1977, employment generation in the EPZ alone (about 12,500 jobs) accounted for about 39% of total employment generation in manufacturing. Adding the employment generated by SFZ firms (with an output of 25% that of the EPZ) and the small amounts of export-related employment increases in other firms, the total contribution of manufactured exports to the growth of manufacturing employment is likely to have been about 50% of the total during the 1971-77 period. 5.04 Domestic demand expansion and import substitution combined con- tributed about 87.5% of the total increase in manufactured output between 1968 and 1977 but their share was larger in the first half of the decade. The relative contributions of demand expansion and import substitution also seem to be quite different between the first and second half of the 1968-77 period. For the manufacturing sector as a whole, the share of imports in total supply 1/ increased between 1968 and 1977 (Table 5.2) indicating a small negative import substitution effect of about 2% of the output increase 2/. However, overall import substitution between 1968 and 1972 appears to be positive, accounting for about 11.3% of the output growth during the period. After 1972, the share of manufactured imports in the total supply increases every year showing negative import substitution. 5.05 While the data from which the observations above have been made are of questionable accuracy (particularly imports data 3/) the findings of overall slightly negative import substitution every year after 1972 and for the whole of the 1968-77 period are fully consistent with the experience of most countries at similar stages of development and may have taken place together with very active import substitution processes in several industries. 1/ Excluding oil from both imports and output. 2/ Absolute import substitution is here defined as the difference between the volume of imports that would have prevailed in 1977 at the 1968 ratio of imports to total supply and actual imports in 1977. 3/ The Bank's latest Economic Report on Dominican Republic (Report No. 1705-DO of November 23, 1977) found that no official statistics were available on the structure of imports after 1971, and that Central Bank estimates of their global value were substantially below the amounts obtained from data on exports to Dominican Republic in the U.N. Trade statistics and the Direction of Trade published by the IMF (part of the difference was due to different treatment of EPZ data). New detailed import statistics have been recently published in Dominican Republic and they have been used for the calculations above. While the new statistics are still likely to underestimate the total value of imports, the trends in the import shares should not be significantly affected by such underestimation.  - 43 - 5.06 The import shares of individual industrial subsectors (at the available level of disaggregation) do not follow closely the trend in the overall share. Of the 12 industrial subsectors considered, only 3 show negative import substitution during the overall period (processed food, beverages and tobacco and non-metallic minerals) but when the years 1968-72 and 1972-77 are separately considered the behavior of individual industries is closer to that of the manufacturing sector. There are 6 industries (processed food, textiles, clothing, leather and footwear, wood and wood products, paper printing and publishing and chemicals) with first positive and then negative import substitution, four subsectors showing constantly positive import substitution (metal, metal products, machinery and equipment and 'other') and two subsectors (beverages and tobacco and non-metallic minerals) for which import substitution has been constantly negative. Table 5.2: MANUFACTURED IMPORTS AS A SHARE OF TOTAL SUPPLY 1968 1972 1973 1974 1976 1977 Food 10.01 6.78 9.24 5.50 9.35 10.87 Beverages and tobacco 3.58 4.10 3.07 3.37 2.55 4.34 Textiles 46.82 25.10 37.62 34.96 34.62 35.51 Clothing, leather and foot- wear 30.50 18.40 19.39 20.88 18.77 21.83 Wood and products 60.58 28.17 56.69 57.13 56.23 54.02 Paper, printing and publishing 34.37 27.29 28.24 33.76 32.33 32.74 chemicals 1/ 46.66 40.92 59.59 52.80 42.87 44.83 Non-metalic minerals 10.53 14.16 15.41 14.56 16.66 20.11 Metals 94.48 72.86 74.55 74.35 66.08 65.23 Metal products 67.10 21.80 20.41 19.35 16.87 17.74 Machinery and equipment 93.91 94.08 92.30 94.34 90.37 90.68 Other 96.65 90.03 82.49 77.00 82.40 84.65 Total 1/ 31.86 28.43 29.98 31.47 31.48 32.80 1/ Excluding oil and products. Source: Statistical Appendix Tables A.3 and A.6.  - 44 - 5.07 The different behavior of import substitution at the aggregate and disaggregate levels shown by the Dominican manufacturing sector is indicative of the process of industrial development, particularly in small countries. Thus, while import substitvFion at the industry or at the product level was strong during most of the period considered and an increasing number of products were being manufactured in the country as demand reached sufficient volumes, the derived demands for imports arising from the new industrial processes, (particularly in the presence of strong incentives to import raw materials and intermediates), the changes in the structure of demand and of the product mix, and the rapid growth of the country's demand for manufactured products resulted in overall negative import substitution for the whole decade after the very special conditions of the years 1968-72 ceased to exist. Industrial Growth in the Short- and Medium-Term 5.08 Given the Dominican Republic's current economic structure, its strong dependence on exports of a limited number of commodities and the expected price trends for such commodities, the country's overall economic growth in the early 1980s will be limited. As a result, domestic demand for industrial products, a largely exogenous factor from the viewpoint of the industrial sector and policies, is expected to grow at an average of 4-5% p.a. during the next four or five years, limiting the growth of manufacturing output and employment to very moderate rates unless a new orientation is adopted. 5.09 In spite of a policy framework which favored strongly an inward- oriented industrial development strategy, the sources of growth calculations above reveal negative import substitution (at the aggregate level) during the last decade. This result, which is consistent with active import substitution activities at a more disaggregate level in a number of products and industries, is not surprising in a small economy in the middle income range going through a period of industrial development, and is likely to remain valid during the next few years, as industrial diversification continues to take place. Therefore, growth of manufactured output generated by increased domestic market opportunities will be limited to an average rate below that of domestic demand growth and is not likely to exceed 4% p.a. even if the industrial policy encourages efficient import substitution in those areas where economic and social profitability can be clearly demonstrated (i.e. in projects with high economic and social rate of return to investment and low domestic resource cost of foreign exchange saved). 5.10 Reorienting the manufacturing sector towards export demand will thus be a major task for the future. Manufacturing growth over and above the low rates supported by the domestic market will depend on the growth of manufactured exports and, given the country's size, will only be marginally constrained by demand in the major world markets. Therefore, industrial policy in the Dominican Republic will be most effective in achieving a sustained increase in manufacturing output and employment by focussing on increasing manufactured exports. The relatively small percentage of exports in total manufacturing output (about 8.2% in 1977, including EPZ) implies  - 45 - that high growth rates of manufactured exports will be needed to achieve a substantial impact in the sector's aggregate growth rate. Over the next four years, with a combined effect of (slightly negative) import substitu- tion and domestic expansion generating an annual growth rate of manufactured output of about 4% in real terms, an annual increase of 20% in manufactured exports would increase the average annual growth rate of manufactured output to 5.6%. Alternatively, to achieve a sectoral growth rate of 8.5% p.a. during the next four years (still about one third below the average annual growth in the 1968-1972 period) with the above trends in domestic demand, it would be necessary to maintain an annual growth rate of manufactured exports of 40% in real terms. 5.11 Industrial and particularly export promotion policy measures should therefore encourage a fast increase in manufactured exports. These policies should be designed not only to contribute to high growth rates of manufacturing output and employment, but also to achieve a positive impact in the overall process of industrial development, by promoting more efficient use of domestic resources, contributing to the transfer of tech- nology and know how, generating the types of employment opportunities appropriate to the structure of the labor force, increasing the labor force levels of skills and developing linkages within the manufacturing sector and with other sectors of the economy. Policy Implications and Government Measures 5.12 In order to realize the country's full potential for industrial growth, it will be necessary to focus on expansion of manufactured exports and to encourage selective and efficient import substitution. Such strategy would require a number of changes in the industrial policy framework. As indicated in Chapter II, the existing system of industrial incentives and other policy measures affecting the performance of the manufacturing sector generated distortions in the product and factor markets resulting in misallocation of resources and suboptimal rates of savings and invest- ment. The major factors creating such distortions include low tariff levels on capital goods, overvalued foreign exchange rate for imports of capital goods and industrial inputs, subsidized industrial credit from FIDE and interest rate ceilings often resulting in negative market rates in real terms, generous income tax exemptions for reinvestment in fixed assets, widespread exonerations on tariffs on industrial inputs, high tariffs for consumer products, prohibitions and quotas on some manufactured exports as well as other administrative barriers to exports, and the need to surrender to the Central Bank the foreign exchange proceeds of exports at the overvalued official exchange rate. 5.13 The new Government--elected in May and inaugurated in August 1978--has indicated its interest in achieving a high level of industrial growth, improving resource allocation and reducing market distortions, and has started preparation of legislation addressing some of the above issues. The legislation currently under preparation includes (i) an Agro- industries Incentives Law, which proposes to establish a number of incen- tives for the development of agroindustrial activities; (ii) an Export Promotion Law which would grant access to the parallel foreign exchange  - 46 - market to all exporters of non-traditional products, (iii) modifications to the Monetary and Finance Law to allow commercial banks to deal in the parallel market; (iv) lists of imported inputs for agroindustries, as well as tor the overall industrial sector, to be subject to simplified and uniform tariff rates; and (v) other complementary policy measures, including thte preparation of operating rules (Reglamento) for Law 299, and modifica- tions to the Foreign Investment Law. Changes in some incentives provided by Law 299, while recognized as desirable, do not appear feasible at this time. 5.14 The draft Agroindustries Incentives Law would grant several fiscal incentives, notably parcial income tax exemption for 10 years, as well as other incentives to agroindustrial firms using a minimum of 80% of domestic raw materials. However, the law would do little to remove what are likely to be the major obstacles for a rapid expansion of agroindustrial production resulting from uncertainties on the future of agrarian reform, pricing policies for agricultural products, lack of promotion and administrative constraints to exports. The major provision in the draft Export Promotion Law would be to eliminate the need to surrender the foreign exchange proceeds from non- traditional exports at the official rate of exchange to reduce the existing disincentives for manufactured exports outside the EPZ. Policy Issues and Recommendations 5.15 While several of the policy measures currently under study would help achieve increased growth and efficiency in the manufacturing sector, the Government has not yet fully defined a comprehensive industrial develop- ment strategy. The rest of this section attempts to review the major features of a possible strategy based on the implications of the analysis in this report, to raise a number of major issues to be faced by the Government's industrial policy and to outline specific policy recommendations. 5.16 As indicated above, manufactured exports have generated during the last five years about 50% of total new industrial employment and during the next four years their performance will very largely determine the over- all industrial sector performance both in terms of output and employment. Therefore, achieving a sound and sustained increase in manufactured exports should be one of the major objectives of the industrial strategy. The EPZ have proven in the recent past to be a powerful instrument to promote export growth and they should continue to increase in size and number to accommodate an increasing number of firms. The success of the EPZ has taken place in spite of several infrastructure limitations such as lack of adequate power supply and limited transport facilities as well as in the absence of a coordinated development policy for EPZ in the country. These limitations should be removed if growth of EPZ output and exports is to continue in- creasing at the recent rates, and better policy coordination among the existing EPZ and the new ones to be created, as well as up to date informa- tion on other EPZ in the Caribbean region would also be necessary. This task would probably be best carried out by CEDOPEX after it shifts from being an export control and regulatory agency into a real export promotion agency.  - 47 - 5.17 Industrial enterprises classified as SFZ have also been a dynamic factor in terms of output and exports and should continue to be given serious attention. SFZ enterprises, mainly fruit and vegetables processors and canners, process domestic agricultural raw materials and are among the major exporting agroindustries. They have strong backward linkages and indirect employment creation effects as well as some potential forward linkage effects (printing labels, packaging materials, etc.). While the new government has already indicated its intention to pay special attention to the agroindustrial subsector, the relatively small fruit and vegetable canning subsector has already encountered supply limitations of agricultural raw materials and substantial export orders have been lost. This emphasizes the need for a detailed evaluation of the country's agricultural poten- tial on which to develop an integrated agroindustrial sector, and to eli- minate supply bottlenecks that may limit the agroindustries' contribution to industrial growth in the short- and medium-term. The success of an agro- industrial development strategy will thus depend on the adoption of appro- priate industrial, export and agricultural policies including elimination of price control mechanisms and other disincentives to production. 5.18 Firms producing basically for the domestic market could also contribute to increase manufactured exports if the proper mix of incentives is provided. In the past, their contribution to exports has been very small, and in recent years it has stagnated or decreased, but in a period of a low growing domestic demand it is in the interest of the firms as well as of the economy as a whole to have access to export markets. The major limitations faced by such firms to increase exports include their levels of efficiency, the overvaluation of the official foreign exchange rate and the lack of market information concerning possible buyers, specific product characteristics demanded, and others. If the exchange rate limitation is removed through the expansion of the parallel market, growth of exports by firms now concentrating on the domestic market will also require a number of government actions in the area of export promotion, particularly technical assistance to be provided by CEDOPEX. 5.19 Production for the domestic market will continue to account for 75-85% of total manufactured output during the next 5 years. Therefore, the Government should continue to pay special attention to this section of the manufacturing sector, with measures to increase employment and achieve full utilization of the sector's installed capacity. Industrial policy should also encourage the efficient allocation of resources in the additional invest- ment undertaken as a result of increasing domestic demand and new import substi- tution opportunities. This would be facilitated by a more systematic approach to the application of incentives under Law 299 (through the preparation and application of appropriate operating regulations) linking the percentage of tariff and income tax exemptions to the amount of additional employment created by the firms and their export capabilities, a reassessment of the corporate tax structure, the establishment of a sound structure of interest rates (including the interest rate on FIDE funds) and the completion of the process of tariff reform, started in 1971 to reduce and rationalize effective protection.  - 48 - 5.20 Adoption of the industrial strategy outlined above, and of the policy measures necessary for its implementation would allow the Dominican Republic's manufacturing sector to continue its growth at rates above those achieved during the last two years while increasing its levels of efficiency, improving its competitive position in world markets and making it less dependent on domestic demand which, in the short- and medium-term, will continue to be largely influenced by the world market situation in a small number of commodi- ties. Such growth, and particularly the increase in export industries would not only reduce the economy's overall dependence on world commodity markets but would also support the necessary increase in the volume of employment, one of the country's major economic and social goals.  - 49 - ANNEX I Page 1 EXPORT PROCESSING ZONES AND SPECIAL FREE ZONE ENTERPRISES General Export Processing Zones (EPZ) have been established in developing countries to provide employment opportunities and foreign exchange earnings at low investment expenditures to the host country. Several of the small countries in the Caribbean have successfully used EPZ to attract assembly industries to supply the neighboring US market mostly with textile and elec- tronics products. Several features of EPZ have made them an attractive instrument of industrial policy in Caribbean countries like the Dominican Republic. Government investment in EPZ creates a "leverage" effect, where a comparatively small investment in factory buildings and common facilities (power and water supply facilities, roads) may generate industrial employment production and export earnings which are substantially larger than for a corresponding direct investment in industrial production capacity. Also, EPZ have proved to be an effective means of decentralizing industry, promoting labor intensive manufacturing, and attracting foreign enterprises. Export Processing Zones in the Dominican Republic fall in two different categories: Three EPZ operate in the towns of La Romana, San Pedro de Macoris and Santiago as bonded industrial estates containing each 16 to 22 industrial enterprises. In addition to these three "typical" EPZ, there exists a free zone arrangement for individual industrial enterprises which is specific to the Dominican Republic. Currently about 15 manufacturing enter- prises, mostly located in Santo Domingo, operate as bonded free zones. These enterprises operate individually like the three industrial estate-type free zones in terms of duty-free imports, tax exonerations, etc., but do not enjoy the common facilities of industrial estates. On the other hand, Special Free Zone Enterprises (SFZ) are basically free in their choice of location within the country and not confined to the three EPZ designated areas. Legal Arrangements Basic legislation for the EPZ and SFZ was initiated in 1955 with Law 4315 which created the institution of the Free Zones ("Zonas Francas"), and a number of commercial free zones were subsequently established. Law 4315 of 1955 was amended in 1969 by Law 432 which specified operations of manufac- turing enterprises located in EPZ ("Zonas Francas Industriales"). However, preparations for the first EPZ in La Romana and establishment of a number of SFZ had been initiated already in 1968 on the basis of Law 299 which details the incentives to be obtained by different categories of industrial enterprises. Enterprises operating in EPZ and SFZ, exclusively oriented to export produc- tion, are listed as Category A in Law 299 and obtain the maximum of incentives provided by Law 299.  - 50 - ANNEX I Page 2 Category A enterprises enjoy tax and duty exonerations. Specific- ally, the enterprises do not pay customs duties on imported raw materials, semip-ocessed goods and packaging materials used in the production process; import of machinery and equipment is also duty free. Foreign enterprises are completely exonerated of income, capital, as well as other taxes (patent tax, municipal tax, corporate tax); domestic firms have a 75% exoneration of income tax during the first five years and 50% thereafter. Duty and tax exonerations are granted for 8 to 20 years depending on location. Firms in Santo Domingo receive the shortest period of exoneration, enterprises in "border areas" the longest. In practice, however, the time limitations of benefits under Law 299 are handled flexibly, and enterprises in Santo Domingo have obtained renewals after expiration of their licenses. Category A enterprises may sell up to 20% of their production on the domestic market, after paying 90% of regular import duties. Mostly due to the administrative difficulties involved, no Category A enterprise is currently making use of this possibility. The legal basis for the SFZ was apparently not operational for a number of years, and several enterprises operated under Category A conditions outside of the EPZ without license. 1/ Currently all licenses are granted even to enterprises whose products are already manufactured in the country in spite of provisions to the contrary in Law 299. It is not clear to what extent this flexible licensing system is informally related to additional requirements which are not listed in Law 299, e.g., the SFZ in the canning industry purchase packaging materials domestically in spite of higher cost; firms in the EPZ, on the other hand, import all production inputs. Also, at least one SFZ surrenders more foreign exchange to the Central Bank than required under Law 299. Administrative Arrangements The SFZ operate as individual bonded factories controlled by a permanently assigned customs officer. Enterprises in the EPZ are located in bonded industrial estates, and the whole estate is customs controlled. 2/ The arrangement of a free zone in the form of an industrial estate has organiza- tional and cost advantages over the regionally dispersed Special Free Zone enterprises. The enterprises in the EPZ are housed in standardized factory buildings, and utilities are usually supplied in bulk. Also, foreigners fre- quently prefer the relative isolation of an enterprise in an EPZ to a full integration with the domestic economy. Investment which is only for machinery and working capital can be kept at low level; government "red tape" connected 1/ A textile manufacturer operating under Category A reported to the mission that he obtained an "oral government permission" in 1972 which was formalized only in 1975. 2/ A number of SFZ are located on the industrial estates of Haina (near Santo Domingo) and Santiago (close to the EPZ). These enterprises enjoy the benefits of Law 299 as well as the common facilities of an industrial estate.  - 51 - ANNEX I Page 3 with acquisition of property by foreigners and operation of an enterprise submitted to national laws and regulations can be reduced; plant operations are largely undisturbed by domestic political events. The rapid expansion of the EPZ in the Dominican Republic and the substantial number of applications for establishment of enterprises in EPZ indicate that foreign enterprises recognize these advantages. However, power supply still presents an important and costly problem in EPZ. Since supply from the public power company has been traditionally unreliable, industrial enterprises located in the EPZ have acquired costly stand-by generating units. The cost saving installation of a common large-scale stand-by unit for all enterprises in an EPZ was prevented due to the public power company's exclu- sive right to supply to individual customers, and as a result, each enterprise in the EPZ operates its own power station. Organization and operation of the EPZ are decentralized, and the government has little influence on operating conditions and development of the EPZ. Government policies grant tax and duty exemption to the enterprises, exemption from most foreign currency restrictions--except the obligation to pay in foreign exchange for all goods and services purchased domestically-- and provide an important exception from national labor legislation, as workers of EPZ enterprises may be paid up to RD$0.10 (currently about 20%) below the minimum wage level. Thus, the government's on-going involvement with the EPZ is limited to the issuance of licenses under Category A of Law 299 to firms qualifying for operation in the EPZ, and to the control of the monthly payments of foreign exchange to the Central Bank. Operation and management of the EPZ corresponds to three different organizations: La Romana is owned and operated by the US corporation Gulf and Western; San Pedro de Macoris is owned by the Government and operated by CFI; Santiago is also government owned, but operated by a group of local businessmen. Each of the three EPZ has established its own rules with respect to operations and management, especially with respect to the level of rents for factory buildings and selection of enterprises. Government control over the SFZ is similarly limited. After issuance of a Category A license on the basis of a comparatively detailed study, the enterprises only face the continuous control of an in-house customs officer and regular checks by the Central Bank on matters related to foreign exchange payments for purchases of domestic production inputs. Operations In 1969, the Government and Gulf and Western of the USA signed a contract on the establishment of the EPZ in La Romana. Gulf and Western initiated the establishment of the EPZ with the intention to create more employment opportunities in the La Romana area, where it already had other important investments (sugar, real estate and tourism). The EPZ of San Pedro de Macoris and Santiago were initiated by the Government several years later, when it was apparent that the EPZ of La Romana would be successful. Again, the main purpose was to create employment opportunities outside of Santo Domingo.  - 52 - ANNEX I Page 4 Gulf and Western has managed the EPZ of La Romana basically as a non-profit unit, whose operation is subordinated to the corporation's main business interest at La Romana. This policy may have led to a sub-optimal expansion of the EPZ in La Romana. The EPZ of San Pedro de Macoris has had difficulties in competing with the close-by EPZ of La Romana which has a more pleasant location, better transport facilities and--through Gulf and Western-- close ties with potential US customers. Also, a suspicion may have existed that an EPZ run by a government institution would involve more "red tape" than an EPZ operated by a private firm. Currently, CFI's policy seems to be more aggressive than in the past, and empty factory space will soon be filled. It is not quite clear to what extent CFI offers conditions which do not cover operating costs or which may attract "footloose" enterprises. The EPZ of Santiago is well managed, moderately profitable and currently expanding at a high rate, in spite of its disadvantageous loction compared to La Romana and San Pedro de Macoris. The EPZ of Santiago also tries to establish backward linkages to the regional economy. During the last four years, a major tobacco classifying and cigar making company has cooperated with the Dominican Instituto del Tabaco in the cultivation of high quality tobacco in the Santiago region, which will serve as raw material input for the company's operation in the EPZ at an estimated annual rate of RD$ 30 to 40 million during the 1980s. Basic statistical data on the three Dominican EPZ are presented in the table below: Table 1: Data on Export Processing Zones (1978) San Pedro La Romana de Macoris Santiago Total 1. Built-up Area (sq. foot) 718,000 642,000 610,000 1,970,000 2. Number of Firms 18 16 22 56 3. Investment by EPZ (RD$ million) 6.6 4.4 5.1 16.1 4. Investment by Firms (RD$ million) 17.6 8.9 8.2 34.7 5. Direct Employment 6,400 2,600 3,500 12,500 6. Foreign Exchange Surrendered Annually (RD$ million) 12.8 4.4 7.3 24.5 7. Payment for Rent (Annual) 0.86 0.32 0.40 1.58 8. Salaries Paid (Annual) (RD$ million) 10.80 3.61 5.57 19.98 Note: Data in Table 1 are partly annual rates calculated from information on the fourth quarter of 1978. Built-up Area includes buildings under construction during the second half of 1978. Source: EPZ Administrations, CFI, Central Bank, Mission estimates.  - 53 - ANNEX I Page 5 Total built-up area, number of firms, and total investment by the EPZ in factory buildings and infrastructure are quite evenly distributed among the three EPZ. La Romana, the EPZ with the longest period of operation, is somewhat larger than the other EPZ and accounts for roughly half of total EPZ private investment, employment, foreign exchange earnings, and payments of firms for wages and rent of factory space. Enterprises located at La Romana (including two affiliates of Gulf and Western) have been willing to make substantial investments of their own, accept long-term leasing contracts at comparatively high rent, and pay above average wages to their workers. Nevertheless, total EPZ and enterprise investment per worker is lower in La Romana and Santiago (both RD$3,800) than in San Pedro de Macoris (RD$5,100); enterprise investment per worker alone is RD$2,750 in La Romana, RD$3,400 in San Pedro de Macoris and RD$2,350 in Santiago. Average annual rental payments are substantially higher in La Romana at RD$1.20 per square foot, compared to RD$0.50 in San Pedro de Macoris and RD$0.66 in Santiago; this difference will be somewhat reduced in the future as rental charges for new leasing contracts have been raised to RD$ 1.20 per square foot in San Pedro de Macoris and Santiago. 1/ Average annual wage per worker, including fringe benefits and social security payments, is also higher in La Romana at RD$1,700 than in San Pedro de Macoris (RD$1,400) and Santiago (RD$1,600). These structural differences between the three EPZ are to some extent due to the fact that the EPZ of San Pedro de Macoris and Santiago currently are expanding at a high rate and have a much larger built-up area under construction than La Romana. In addition, the EPZ of San Pedro de Macoris has followed a policy of over-building, keeping two to four factory buildings unoccupied. However, a more important reason for the structural differences appears to result from the selection of enterprises. The EPZ of La Romana has carefully avoided to attract weak and "footloose" enterprises which tend to fail easily or leave quickly when better opportunities arise in other locations. This type of enterprise seems to be relatively frequent in the textile and garment industry. Less than half of the enterprises oper- ating in La Romana are textile firms, but they account for about 75% of total firms in San Pedro de Macoris and Santiago. Also in order to increase its attractiveness, the EPZ of San Pedro de Macoris offers lower rental charges and contract periods of only two years; the minimum period in La Romana is five years. On the other hand, San Pedro de Macoris charges a downpayment of 18 months' rent, while La Romana relies on careful selection of enterprises as security. Firms in the EPZ are concentrated in the textile and garment sector (Table 2). This concentration will further increase since all applications of enterprises for establishment in the EPZ currently under consideration are for manufacturing of textile products. Also, the rate of withdrawals of firms 1/ In La Romana rents for new firms vary between RD$1.10 and RD$2.27 per square foot depending on type of building and length of contract.  - 54 - ANNEX I Page 6 from the EPZ is quite high: During the period 1974-1977, on average 15% of the operating enterprises withdrew each year. Most of them were in "Other Industries" (which included, e.g., toys, casings, foods, brushes, hair parts, flower pots), but withdrawals in the textile industry were also high. Table 2: Structure and Stability of EPZ and SFZ Enterprises Number of Firms Operating in Industrial Sector 1974 1977 Additions Withdrawals EPZ 34 48 30 18 Processed Tobacco, Cigars 2 4 2 - Leather Products 2 4 3 1 Footwear 1 4 1 - Textiles, Garments 14 26 18 6 Machinery 1 1 1 1 Electric, Electronic Products 6 4 1 3 Other 8 5 4 7 SFZ 16 12 7 11 Food Products 12 9 5 8 Leather Products - 1 2 1 Textiles, Garments 4 2 _ 2 Source: Central Bank, EPZ Administrations. SFZ had an even higher rate of withdrawals during 1974-1977 than the EPZ. The number of SFZ in operation was lower in 1977 than in 1974. It appears that not only solid enterprises were successful in obtaining the exceptional permission to operate under category A of Law 299 outside of the EPZ. A number of locally based SFZ had to close due to insufficient export marketing capability. Lack of raw materials supply may also have caused closure of some enterprises in the fruit and vegetable canning industry. Processed tobacco and cigars form the largest group of products from EPZ, followed by clothing and textiles, and electronic products (Table 3). Footwear and leather products have been recently gaining importance but prac- tically all new enterprises scheduled to start production in the near future will produce garments.  - 55 - ANNEX I Page 7 Table 3: Composition of Exports from EPZ (RD$ '000) January- 1977 August 1978 Product Amount % Share Amount % Share Processed Tobacco 22,606 38.5 16,088 34.4 Cigars 1,797 3.1 437 0.9 Leather Products 2,305 3.9 2,500 5.3 Footwear 1,265 2.2 2,284 4.9 Clothing and Textiles 16,070 27.4 13,070 28.0 Machinery 3,076 5.2 839 1.8 Electric and Electronic Products 7,036 12.0 7,925 17.0 Other 4,530 7.7 3,583 7.7 Total 58,685 100.0 46,726 100.0 Source: Central Bank. Total gross output and exports from EPZ have been growing rapidly, from RD$4.1 million in 1971 to RD$58.7 million in 1977 and an estimated RD$70 million in 1978. However, export data from EPZ enterprises should be viewed with caution. Export as well as import prices indicated by EPZ firms are subject to transfer pricing procedures of inter-company trade and may differ considerably from world market prices. This exercise which is performed, among other reasons, to minimize total tax payments of internationally oper- ating corporations, is probably one of the reasons for the differences between trade data with the Dominican Republic from OECD countries, and Dominican trade data. An indication of apparent underpricing of exports and/or overpricing of imports is provided by 1977 data from the Santiago EPZ. Total exports were reported to be RD$15.7 million and total imports RD$15.5 million. During the year, the firms surrendered RD$5 million in foreign exchange to the Central Bank. Thus, the enterprises must have increased their investment by nearly RD$5 million, which is unlikely when compared with the total cumula- tive investment reported by the enterprises of only RD$8.2 million in 1978. Economic Benefits As indicated, the EPZ in the Dominican Republic do not currently operate as financially profitable ventures. The Santiago EPZ made a nominal profit in 1977, La Romana made a small loss and San Pedro de Macoris probably  - 56 - ANNEX I Page 8 made a substantial loss during this period. 1/ However, there are indications that, from an economic point of view, the EPZ are quite beneficial to the country. Economic benefits due to the operation of the EPZ are accruing to the country in the form of employment and foreign exchange earnings. Other possible economic benefits which can be derived from EPZ--e.g., industrial training of the labor force, profits to nationals, tax revenues to the government--are negligible. 2/ Economic benefits of employment arise from the difference between the wage rates actually paid and the economic (shadow) wage rates. Unemploy- ment is high and probably growing in the Dominican Republic, especially in the areas of the country where the EPZ are located; all indications are that the shadow wage rate is substantially below the actual wage rates. About RD$20 million per year are currently paid for wages by the enterprises operating in the EPZ. At a shadow wage rate of, e.g., 75% of the actual wages, the economic benefit of the country from employment would be RD$5 million per year. Also, foreign exchange benefits are due to the difference between the official and the shadow rate. While EPZ enterprises surrender currently to the Central Bank about RD$25 million of foreign exchange per year at the official exchange rate, the parallel market rate, which is currently about 25% above the official rate, may be considered as a proxy for the shadow exchange rate. Therefore, foreign exchange benefits would be of the order of RD$6 million per year. Under the above assumptions, the total economic benefit derived from the EPZ would be over RD$10 million per year. These benefits would compare favorably with the total cumulative government investment in EPZ of about RD$9.5 million up to 1978; or probably less than RD$15 million at current prices. 3/ Therefore, the EPZ would repre- sent economic investments for the Dominican Republic. 1/ For the period April 1977 to March 1978 Santiago shows a profit of RD$85,000; La Romana would have had a profit of about RD$60,000, except for unforeseen building repair expenditures which may be recovered from the construction firm. 2/ The labor force of the EPZ consists of young women mostly drawn from surrounding rural areas. The training provided in performing the assembly and categorization activities is not transferable to other industrial activities. However, there is a useful experience of industrial working discipline. 3/ Current building costs at La Romana are RD$7.24 per sq. foot for factory buildings alone. This would indicate that revalued total assets would be about 30-40% above values in balance sheets. The development cost of the EPZ at La Romana are excluded from the above data, since they were borne by Gulf and Western.  DOMINICAN REPUBLIC: MAJOR ECONOMIC INDICATORS (RD$ million. current Drices) 1962 1968 1972 1973 1974 1975 1976 1977 A. Values GDP 1/ 887.30 1162.0 1987.40 2344.79 2922.6 3599.15 3935.15 4466.59 Commodity Imports 1/ 129.08 196.85 286.01 459.14 586.74 779.39 763.59 847.63 Commodity Exports 2/ n.a. 163.5 348.0 450.9 650.8 920.5 714.7 778.4 Manufactured Output 1/ 232.53 337.23 584.35 750.15 1015.46 1134.81 1245.12 1312.02 Manufactured Value Added 1/ 93.63 132.10 252.93 282.37 331.68 370.58 405.52 425.95 Manufactured Imports 1/ 107.48 157.70 232.15 342.36 419.36 n.a. 514.47 575.92 Manufactured Exports 3/ n.a. n.a. 21.80 32.80 39.20 37.40 44.90 56.22 Employment in Manufacturing 4/ n.a. 210 99 297 16 343 63 368 17 408 10 436 55 n.a. B. Shares Imports/GDP 14.55 16.94 14.39 19.58 20.08 21.65 19.40 18.98 Exports/GDP n.a. 14.07 17.51 19.23 22.27 25.58 18.16 17.43 Manuf. VA/GDP 10.55 11.37 12.73 12.04 11.35 10.30 10.31 9.54 Manuf. VA.Manuf. Output 40.27 39.29 43.28 37.70 32.66 32.66 32.57 32.47 Manuf. Imports/Manuf. Output 46.22 46.75 39.73 46.28 41.30 n.a. 41.32 43.90 Manuf. Exports/Manuf. Output na. n.a. 3.73 4.37 3.86 3.30 3.60 4.28 1/ Source: Central Bank 2/ Source: CEDOPEX and Economia Dominicana 3/ Source: CEDOPEX, Central Bank and Mission estimates 4/ Source: Oficina Nacional de Estadistica. *Excluding petroleum and oil products.  Table A.2 - 58 - DOMINICAN REPUBLIC: MANUFACTURING OUTPUT (RD$ million, 1970 prices) ISIC Subsector 1962 1968 1972 1973 1974 1975 1976-/ 19771/ 311-12 Proc. Food (exc. sugar) 131.0 171.0 239.4 274.4 288.9 293.2 306.0 321.8 313 Beverages 43.5 52.4 82.3 88.9 100.6 103.8 110.5 116.4 314 Tobacco 24.8 33.9 38.3 42.8 48.7 53.1 56.2 59.2 321 Textiles 9.3 10.0 16.6 16.7 23.7 26.2 28.0 29.5 322 Clothing 5.8 4.9 9.0 12.7 13.3 15.1 16.1 17.0 323 Leather products 2.4 2.1 3.8 4.1 4.9 6.4 6.8 7.2 324 Footwear 3.1 2.5 4.4 5.8 7.3 7.8 8.4 8.8 331 Wood products 5.5 1.3 1.0 1.0 1.1 1.0 1.0 1.0 332 Furniture 3.0 1.8 7.2 8.5 9.9 9.6 9.8 10.3 341 Paper and products 6.6 11.4 17.7 20.7 24.1 19.8 21.0 22.1 342 Printing and publishing 4.5 5.8 7.6 9.0 9.0 8.6 9.1 9.6 351 Industrial chemicals 8.0 7.8 20.5 22.7 20.8 23.0 24.3 25.6 352 Other chemicals 10.5 17.4 28.2 31.9 36.2 37.1 39.5 41.6 353 Oil refining - - - 26.9 31.2 37.5 39.8 42.0 354 Petroleum and coal pro- ducts 355 Rubber 1.6 3.8 7.2 8.8 7.4 7.6 8.0 8.5 356 Plastic products 0.7 3.2 7.7 11.2 12.0 14.4 15.2 16.0 361 Ceramic and porcelain - - - - - - - - 362 Glass and products 1.1 2.0 3.3 5.3 4.9 4.9 5.2 5.5 369 Non-metallic minerals 8.0 12.5 28.5 36.6 44.2 58.8 62.6 66.0 371 Iron and steel - - 8.0 9.1 9.0 23.1 24.4 25.7 372 Other metals - 0.4 0.4 0.4 0.4 0.4 0.4 0.4 381 Metal products 3.0 4.7 21.3 24.1 28.6 29.6 31.6 33.3 382 Non-elect. machinery * 1.2 3.4 4.6 5.6 7.3 7.8 8.2 383 Elect. machinery 0.4 2.4 4.2 4.9 3.5 8.3 8.8 9.3 384 Transport equipment - - - 0.2 * 0.1 0.1 * 385 Scientific equipment - * 0.3 0.4 0.6 1.2 1.3 1.4 390 Other manufacturing 0.1 0.1 0.8 0.7 2.0 1.7 2.2 2.3 Total 272.9 352.6 561.1 672.4 737.9 799.6 844.1 888.7 1/ Preliminary figures * Less than RD$50,000 Source : Central Bank  - 59 - Table A.3 DOMINICAN REPUBLIC: MANUFACTURING OUTPUT (RD$ million, current prices) ISIC Subsector 1962 1968 1972 1973 1974 1975 1976- 19771' 311-12 Processed food (exc. sugar) 110.94 155.13 257.73 327.47 397.34 419.79 462.72 487.63 313 Beverages 38.57 51.83 83.25 94.58 121.27 129.12 138.93 146.38 314 Tobacco 14.67 30.82 41.49 46.17 53.31 58.26 62.78 66.15 321 Textiles 9.42 10.05 16.74 16.55 26.55 26.33 28.80 30.35 322 Clothing 5.60 5.22 8.17 11.97 13.07 16.31 17.85 18.81 323 Leather products 2.45 2.10 4.31 5.55 7.47 9.25 10.10 10.64 324 Footwear 2.36 2.48 3.71 5.35 6.70 7.67 8.41 8.86 331 Wood products 3.14 0.90 1.15 1.37 1.55 1.81 2.16 2.28 332 Furniture 2.12 1.95 6.04 7.02 9.04 9.42 11.26 11.86 341 Paper and prods. 5.90 11.06 19.44 27.01 37.20 35.29 39.41 41.52 342 Printing and publishing 3.86 5.55 8.48 11.40 13.35 14.50 16.17 17.04 351 Industrial chemicals 7.24 8.05 20.06 27.59 34.05 54.80 60.44 63.68 352 Other chemicals 10.35 17.74 29.58 34.44 45.74 53.80 59.32 62.50 353 Oil refining - - - 26.92 102.30 113.82 125.36 132.08 354 Petroleum and coal products - - - - - - - - 355 Rubber 2.09 4.41 6.77 7.97 7.90 10.26 11.19 11.79 356 Plastic products 0.60 2.99 7.49 10.87 15.57 21.47 23.50 24.76 361 Ceramic and porcelain - - - - - - - - 362 Glass and prods. 2.58 3.86 3.50 6.05 7.06 6.44 7.08 7.46 369 Non-metallic minerals 6.79 12.80 28.08 32.97 48.47 51.26 56.16 59.18 371 Iron and steel - 0.10 8.18 12.43 19.10 27.97 30.02 31.63 372 Other metals - 0.37 0.39 0.39 0.65 0.61 0.64 0.68 381 Metal products 3.43 6.12 22.74 25.65 36.72 45.42 49.71 52.38 382 Non-elect. machinery * 1.28 2.03 3.87 5.09 7.49 8.22 8.67 383 Elect. machinery 0.33 2.23 4.23 5.12 2.89 10.88 11.91 12.55 384 Transport equipment - - - 0.16 0.02 0.07 0.07 0.07 385 Scientific equipment - 0.09 0.33 0.48 0.78 0.92 0.99 1.05 390 Other manufacturing 0.09 0.10 0.46 0.80 2.27 1.85 1.92 2.02 Total 232.53 337.23 584.35 750.15 1015.46 1134.81 1245.12 1312.02 1/ Preliminary figures. * Less than RD$5000. Source: Central Bank  DOMINICAN REPUBLIC: MANUFACTURING VALUE ADDED (RD$ million, current prices) ISIC Subsector 1962 1968 1972 1973 1974 1975 1976 1977 311-12 Processed food (exc. sugar) 28.74 30.25 77.23 86.61 80.55 80.90 89.23 95.26 313 Beverages 21.61 28.69 48.65 56.69 68.69 71.51 76.91 78.05 314 Tobacco 10.61 22.20 27.86 24.52 31.52 34.26 36.92 37.90 321 Textiles 5.52 5.95 8.51 7.32 15.76 12.46 13.64 14.16 322 Clothing 1.95 1.79 3.30 5.91 4.07 5.02 5.50 5.59 323 Leather products 0.97 1.12 1.54 2.21 2.73 5.62 6.13 6.45 324 Footwear 0.96 1.42 1.89 2.82 3.48 3.94 4.33 4.46 331 Wood products 2.34 0.75 0.95 1.16 1.33 1.52 1.82 1.90 332 Furniture 0.59 0.76 2.86 3.36 4.36 3.88 4.64 4.98 341 Paper and prods. 1.71 3.74 9.53 7.51 8.20 11.09 12.40 13.16 342 Printing and publishing 2.21 4.24 5.93 7.48 7.85 8.05 8.97 9.36 1 351 Industrial chemicals 3.27 2.91 6.94 6.55 8.21 22.09 24.35 25.86 o 352 Other chemicals 4.50 8.84 13.49 15.17 18.02 20.57 22.66 25.13 353 Oil refining - - - 0.26 13.02 15.07 16.55 17.44 354 Petroleum and coal products - - - - - - - - 355 Rubber 1.20 2.26 3.41 3.66 3.30 4.35 4.74 5.19 356 Plastic products 0.02 2.07 4.64 7.23 9.66 13.81 15.11 16.17 361 Ceramic and Porcelain * - - - - - - - 362 Glass and prods. 1.85 2.13 1.98 3.73 3.98 2.96 3.26 3.49 369 Non-metallic minerals 3.74 7.82 17.68 20.09 26.95 24.99 27.38 29.38 371 Iron and steel - 0.08 4.18 7.96 4.38 6.72 7.20 7.20 372 Other metals - 0.30 0.07 0.07 0.22 0.04 0.05 0.06 381 Metal products 1.56 2.79 10.26 8.81 12.41 15.96 17.47 17.24 382 Non-elect. machinery * 0.66 0.25 1.15 0.47 2.87 3.15 3.32 383 Elect. machinery 0.16 1.23 1.36 1.19 0.99 1.91 2.09 3.20 384 Transport equipment - - - 0.06 0.02 0.03 0.03 0.04 385 Scientific equipment - 0.05 0.07 0.24 0.41 0.48 0.52 0.45 390 Other manufacturing 0.08 0.04 0.33 0.59 1.09 0.46 0.48 0.51 Total 93.59 132.09 252.91 282.35 331.67 370.56 405.53 425.95 1/ Preliminary figures * Less than RD$5000 m Source: Central Bank.  DOMINICAN REPUBLIC: MANUFACTURING VALUE ADDED (RD$ million, 1970 prices) ISIC Subsector 1962 1968 1972 1973 1974 1975 19761 1977-1 311-12 Processed food (exc. sugar) 42.37 39.70 69.88 80.31 81.40 87.41 97.69 100.32 313 Beverages 34.47 39.71 52.16 55.68 56.54 63.02 75.14 79.69 314 Tobacco 21.49 23.66 24.52 28.34 34.59 32.01 14.28 15.10 321 Textiles 5.54 5.72 8.27 8.91 15.89 17.11 18.23 19.20 322 Clothing 2.06 1.40 4.96 8.19 4.84 4.58 4.89 5.23 323 Leather products 1.27 1.43 1.08 0.79 1.10 3.64 3.90 4.12 324 Footwear 1.52 1.33 2.66 3.10 2.46 5.19 5.56 5.88 331 Wood products 4.16 1.16 0.78 0.83 0.88 0.79 0.81 0.85 332 Furniture 1.60 0.42 4.01 5.18 6.26 5.53 5.50 5.46 341 Paper and products 2.24 5.10 5.50 6.08 5.37 7.23 7.68 8.12 342 Printing and publishing 2.64 4.63 5.34 6.43 4.87 4.67 4.95 5.25 351 Industrial chemicals 9.24 4.11 8.13 8.04 6.97 7.53 7.97 8.42 352 Other chemicals 4.78 8.07 13.17 16.37 19.17 17.33 18.47 19.50 353 Oil refining - - - 0.26 1.40 2.80 2.94 3.19 354 Petroleum and coal products - - - - - - - - 355 Rubber 0.78 1.78 3.80 5.12 4.04 3.83 4.03 4.25 F 356 Plastic products 0.02 1.87 4.68 8.24 8.81 10.16 10.75 11.35 361 Ceramic and porcelain - - - - - 362 Glass and products 0.51 0.98 1.90 3.59 2.96 2.84 3.02 3.18 369 Non-metallic minerals 5.14 7.98 18.65 26.74 29.36 41.44 44.12 46.55 371 Iron and steel - 0.03 4.26 5.01 3.39 5.21 5.55 5.88 372 Other metals - 0.31 0.07 0.08 0.20 0.04 0.04 0.04 381 Metal products 0.96 1.36 9.61 10.40 9.23 10.37 11.06 11.66 382 Non-elect. machinery - 0.67 1.86 2.49 2.15 5.09 5.43 5.72 383 Elect. machinery 0.24 1.48 1.32 2.02 1.94 1.52 1.61 1.71 384 Transport equipment - - - 0.06 0.02 0.03 0.02 0.02 385 Scientific equipment - 0.01 0.05 0.19 0.27 0.80 0.86 0.91 390 Other manufacturing 0.08 0.05 0.69 0.46 0.94 0.88 1.09 1.15 Total 141.11 152.96 247.35 292.91 305.05 341.05 355.59 372.75 1/ Preliminary figures. Source: Central Bank  l/ DOMINICAN REPUBLIC: MANUFACTURED IMPORTS (RD$ millior., current prices) 1962 1968 1972 1973 1974 1976 1977 Food 2/ 9.20 17.25 18.75 33.37 23.12 47.84 59.46 Beverages 1.71 1.16 1.48 1.53 3.34 2.81 3.90 Tobacco 1.46 1.91 3.85 2.94 2.76 2.47 5.75 Textiles 19.10 8.85 5.61 9.98 14.27 15.25 16.71 Clothing 0.68 3.91 3.02 4.82 6.07 6.58 7.59 Leather 0.65 0.22 0.37 0.40 0.55 1.41 2.57 Footwear 0.72 0.17 0.26 0.28 0.57 0.41 0.54 Wood and products 0.73 4.38 2.82 10.98 14.12 17.24 16.61 Paper and products 5.53 7.90 8.32 12.71 19.88 24.13 23.56 Printing and publishing 0.29 0.80 2.16 2.41 5.89 2.42 4.95 Chemicals 11.71 22.79 32.79 45.44 79.59 74.89 81.70 Rubber 4.34 3.47 5.50 8.08 10.60 12.70 15.50 Plastic 1.73 2.77 5.96 10.23 19.51 20.57 24.23 1 Non-metallic minerals 0.73 0.75 3.03 4.46 5.80 7.75 10.80 Glass 1.58 1.21 2.18 2.65 3.66 4.89 5.97 Iron and steel -3.99 5.07 18.94 30.05 46.96 47.75 48.17 Other metals 2.41 2.98 4.07 7.13 10.30 11.98 12.44 Metal products 7.73 12.48 6.34 6.58 8.81 10.09 11.30 Non-electrical machinery 9.40 26.95 50.75 50.54 64.23 85.50 95.58 Electrical machinery 6.73 11.95 18.01 20.02 27.89 37.06 34.95 Transport equipment 13.78 15.24 30.80 39.06 41.23 67.11 76.70 Scientific equipment 0.59 0.59 3.53 1.22 4.05 5.96 8.54 Other manufacturers 2.69 26.93 4.90 4.81 6.16 7.66 8.40 Total 107.48 157.70 232.15 309.60 419.36 514.47 575.02 1/ Excluding petroleum and oil products 2/ Excludes milk products Source: Central Bank and Mission calculations a.'  DOMINICAN REPUBLIC: MANUFACTURED NON-EPZ EXPORTS 1970-1977 (RD$ 000) Product 1971 1972 1973 1974 1975 1976 1977 Roasted Coffee 1,163 4,644 6,796 6,387 8,613 11,443 25,327 Meat 3,010 6,733 10,099 9,273 4,733 8,234 1,212 Canned Fruits and Vegetables 2,351 3,524 2,880 8,515 8,905 6,473 8,105 Cacao Products 454 2,322 4,754 3,268 4,256 5,594 1,950 Other Food Products 2,384 1,684 1,242 526 613 385 143 Tabacco Products 891 298 792 1,519 2,439 2,415 2,122 Total Food, Tobacco Products 10,253 19,195 26,563 29,488 29,560 34,544 38,859 Textiles and Clothing 133 87 112 225 400 432 1,166 Footwear and Leather Products- 51 293 1,146 1,650 1,691 4,046 7,082 1 Wood Products and Furniture 58 12 35 50 50 188 195 w Paper and Paper Product 205 217 265 633 789 1,185 926 Chemicals 1,181 1,309 2,250 1,975 624 927 2,347 Metal Products - 136 324 1,323 607 1,806 2,725 Other Products 510 532 2,089 3,844 3,646 1,818 2,922 Total- 12,391 21,805 32,784 39,188 37,367 44,946 56,222 */ Including Production of Leather Goods of EPZ Source: CEDOPEX, Central Bank 0m  - 64 - Table A.8 DOMINICAN REPUBLIC: GROWTH RATES OF MANUFACTURED EXPORTS, 1971-77 (RD$ million) Export Product 1971-1977 Average Annual Increment % of Increment Growth Rate (M) 1. Tobacco Products 25.6 25.5 76 2. Toasted Coffee 24.2 24.1 66 3. Textiles, Garments 16.1 16.1 120 4. Footwear, Leather Products 8.3 8.3 135 5. Electrica, Electronical 7.9 7.9 NA Components 6. Metal Products 5.9 5.9 NA 7. Canned Fruits, Vegetables 5.8 5.8 25 8. Cacao Products 1.5 1.5 28 9. Chemicals 1.2 1.2 12 10. Paper, Paper Products 0.7 0.7 29 11. Wood Products, Furniture 0.1 0.1 22 12. Meat (1.8) (0.8) ( 8) 13. Other Non-Food Products 6.9 6.9 56 14. Other Food Products (2.2) (2.2) (11) Total 100.2 100.0 44 Source: CEDOPEX, Central Bank  DOMINICAN REPUBLIC: FIRMS CLASSIFI-D UNDER LAW 299, 1968-77 NEW FIRMS EXISTING FIRMS Year Investment Employment Salaries No. of Investment Employment Salaries No. of Year (RD$ million) (No. of employees)(RD$million) Firms (RD$ million) (No. of employees)(RD$ million) Firms 1968 10.64 798 2,30 12 5,66 888 1,48 22 1969 17.45 1973 2.87 34 24,14 3,362 5,98 70 1970 6,88 1746 1,66 28 10,71 740 1,43 17 1971 12,61 1807 2,83 35 45.84 5202 4,62 30 1972 156,17 1843 2,89 29 9,42 1108 1,85 10 1973 18.72 4797 4.68 46 6,74 421 0.17 16 1974 27.57 5999 8.63 44 7.58 950 1,50 15 1976 19,02 2651 5,3 42 3,18 444 0.91 7 1977 22,89 2355 4.36 40 10,67 1149 4,95 15 TOTAL 320,04 26237 39,78 345 126,42 14,518 23,41 206 Source: Secretariat of Industry and Commerce 0I CY, (V  DO4INICAN REPUBLIC: NEW FIRMS CLASSIFIED UNDER LAW 299 BY TYPE OF CLASSIFICATTnON Q68-1977 "A" FIRMS "B" AND "C" FIRMS No. of Investment Investment No. of Investment Investment Year Firms (RD$ million) Employment per Employee Year Firms (RD$ million) Employment per Em loyee 1968 3 0.3 170 1765 1968 12 12.4 788 15736 1969 8 3.4 1117 3044 1969 30 16.3 1493 10917 1970 9 1.9 704 2699 1970 17 4.5 375 12000 1971 9 2.1 1190 1765 1971 36 13.0 1330 9774 1972 11 0.9 736 1222 19721! 18 155.3 1107 140289 1973 26 7.0 3229 2168 1973 13 5.6 766 7211 1974 26 14.2 5250 20628 1974 13 20.5 509 20628 1975 16 18.4 1884 9766 1975 28 17.8 1193 14920 1976 12 6.2 1356 4573 1976 23 10.5 775 13494 1977 10 9.3 1957 4752 1977 28 16.1 1234 13034 1/1972 data for "B" and "C" firms was obtained by difference between total 1972 data from Table A.9 and 1972 data for "A" firms. The amount of investment is substantially above all other years as it includes the oil refinery, classified in 1972. Source: Economia Dominicana, 1977 CD 0  - 67 - Table A.ll DOMINICAN REPUBLIC: FIRMS CLASSIFIED IN CATEGORIES 'A' AND 'B' UNDER LAW 299 - 1968-1971 Category 'A' No. of Firms Investment Employment Investment per Employee Processed food 11 1/ 3.55 1361 2610 Tobacco 1 0.13 102 1270 Clothing 6 0.61 531 1150 Footwear 1 0.25 70 3570 Electrical products 2 0.19 119 1600 Other manufacturers 4 2.31 233 990 TOTAL 25 7.04 2416 2910 Category 'B' Processed food 2/ 2 6.84 220 31090 Metal products 3/ 1 0.12 18 6670 TOTAL 3 6.96 238 29240 1/ Of which 2 were established prior to 1968 2/ Condensed milk 3/ Metal moulds for plastic and rubber products Source: Bernardo Vega, Evaluaci6n de la Politica de Industrializaci6n de la Republica Dominicana, Santo Domingo, D.N. 1973  - 68 - Table A.12 DOMINICAN REPUBLIC: NEW FIRMS CLASSIFIED IN CATEGORY 'C' IJNDER LAW 299 - 1968-1971 Investment Investment per Employee No. of Firms (RD$ million) Employment (RD$) Processed food 9 3.12 458 6810 Textiles 1 0.22 7 31430 Clothing 3 1.00 162 6170 3 0.29 57 5090 Furniture (incl. metal and other) 7 1.70 283 6010 Paper and products 9 7.95 285 27890 Rubber products 3 0.33 60 5500 Cosmetics 7 1.10 239 4600 Other chemicals 8 1.75 288 6080 Plastic products 6 3.86 410 9420 Electrical machinery and appliances 13 3.97 465 8540 Transport equipment (spare parts) 2 0.49 72 6810 Other manufactures 6 1.61 139 11580 TOTAL 85 32.40 3193 11150 Source: Bernardo Vega, Op. Cit.  - 69 - Table A.13 DOMINICAN REPUBLIC: ESTABLISHED FIRKS CLASSIFIED IN CATEGORY 'C' UNDER LAW 299 1968 - 1971 Investment No. of Investment per Ebaployee Firm (RD$ million) Employment (RD$) Processed food 36 40.95 4981 8220 Textiles 3 5.62 976 5760 Clothing 12 6.37 789 8070 Leather and products 10 2.67 338 7900 Furniture (inc. metal and other) 12 4.15 468 8870 Paper and products 16 5.88 638 9210 Cosmetics 28 6.61 913 7240 Other chemicals 6 1.87 98 19080 Non metallic minerals 4 3.24 592 5470 Metal products 3 0.70 155 4520 Elect. machinery and applicances 5 1.79 229 7830 Other 10 1.58 175 9050 TOTAL 145 81.43 10352 7870 Source: Bernardo Vega, Op. cit.  DOMINICAN REPUBLIC: PUBLIC REVENUES FROM TARIFFS AND OTHER IMPORT DUTIES (RD$ million) 1972 1973 1974 1975 1976 1977 1978 (Jan. to August) Tariff Law 170/71 (Arancel) 40.71 40.54 47.71 57.88 59.16 69.81 44.21 Unified Import Taxes (Law 173) 45.11 50.52 65.22 67.12 70.30 77.77 50.76 Additional 20% Tax (Law 361) 13.10 15.27 19.42 19.38 20.13 22.35 14.50 Additional 4% on Import Duties (Law 136) 3.12 3.62 4.64 4.73 4.97 5.37 3.73 Import Duties onMachinery and Other 4.57 9.92 15.08 16.24 16.35 14.35 12.32 Petroleum and oil taxes 5.60 4.84 5.84 6.58 6.80 7.28 5.13 Other import duties 6.35 9.00 7.i9 6.99 9.11 8.99 5.89 TOTAL Tariffs and Import duties 118.56 133.71 165.30 178.92 186.82 205.92 136.54 TOTAL Fiscal Revenues 285.50 327.50 434.70 591.90 538.10 589.30 Source: Central Bank .  Table A.15 - 71 - DOMINICAN REPUBLIC: NOMINAL AND EFFECTIVE PROTECTION IN MANUFACTURING Nominal Nominal ISIC Protection Protection Exonerations Effective Code Subsector On Inputs On Output (M) Protection 3111 Meat products 2.8 5.5 63 36.4 3112 Milk products 28.4 27.7 65 36.9 3113 Processed fruits & vegetables 26.5 20.2 70 21.9 3115 Fats and Oils 37.1 46.9 83 87.5 3116 Flour 6.3 6.1 0 5.7 3117 Bakery products 104.7 107.4 60 112.3 3118 Sugar refining 5.6 0.8 0 -3.5 3119 Cocoa, chocolate & confectionery 32.9 50.3 60 201.9 3121 Other processed food -8.6 -14.1 80 -30.8 3122 Animal feedstuff 44.3 43.5 90 119.6 3131 Distilleries 47.2 2.7 0 -47.7 3132 Wine industries 38.6 189.1 0 1067.4 3133 Malt beverages 61.1 137.0 0 337.8 3134 Non-alcoholic beverages 50.8 56.5 0 65.8 3140 Tobacco 109.1 71.7 0 38.6 3213 Knitwear 81.4 150.6 90 379.0 3215 Rope 25.3 59.6 90 187.9 3219 Textiles, n.e.s. 53.8 109.6 70 491.9 3231 Tanneries and leather finishing 38.7 61.8 72 258.0 3233 Leather products 53.7 79.9 63 121.5 3240 Footwear 75.4 220.5 0 7.4 3320 Furniture 69.7 115.2 74 441.1 3411 Paper, pulp and cardboard 56.0 46.8 78 158.8 3419 Paper, pulp & cardboard products 42.3 37.3 0 31.4 3420 Printing & Publishing 34.5 37.1 90 49.3 3511 Industrial chemicals 39.3 3.7 79 -1.6 3512 Fertilizers 29.1 10.7 80 -7.0 3513 Plastic and synthetic fibers 38.0 44.4 70 63.3 3521 Paints 46.5 115.3 0 283.3 3522 Pharmaceutical products 32.0 32.1 90 43.6 3529 Other chemicals 63.0 171.1 60 497.1 3551 Tires 91.0 95.1 0 105.6 3560 Plastic products 28.8 71.3 0 103.9 3620 Glass and products 100.2 65.9 0 50.6 3691 Building materials 129.9 91.2 90 200.0 3692 Cement 86.1 89.3 90 134.7 3699 Non-metallic minerals 81.1 40.3 90 26.1 3710 Iron and steel 39.5 25.4 0 11.2 3720 Other metals 57.5 58.6 0 63.0 3811 Cuttery, tools and others 53.5 61.7 60 125.2 3812 Metal furniture 62.8 74.3 70 240.1 3813 Metal structures 96.2 54.7 59 93.4 3819 Other metal products 37.3 52.9 56 238.3 3832 Radio & TV sets 29.2 80.0 0 138.1 3839 Other elec. appliances 32.0 44.7 71 874.0 3851 Professional & scientist equipment 39.0 38.6 90 57.1 3909 Other manufacturers 36.6 48.6 71 53.8 Arithmetic Average 51.23 68.78 165.2 Source: Sergio de la Cuadra, Op. Cit.  Table A.16 - 72 - DOMINICAN REPUBLIC: NOMINAL AND PRICE-ADJUSTED EXCHANGE RATE Santo us Nominal Price-adjusted Domingo Wholesale Exchange Exchange Rate Year Consumer Goods Price Rate (Index) Price Index Index 1969 100 100 1 100 1970 n.a. 103.6 1 n.a. 1971 n.a. 107.0 1 n.a. 1972 n.a. 111.8 1 n.a. 1973 135.5 126.4 1 93.3 1974 161.1 150.3 1 93.3 1975 188.9 164.1 1 87.1 1976 199.4 171.6 1 86.1 1977 225.3 182.2 1 80.9 1978 January 235.3 187.6 1 79.7 June 230.3 196.6 1 85.4 Oct. 238.1 201.7 1 84.7 Source: Central Bank, IMF International Financial Statistics and Mission calculations.  Table A.17 - 73 - DOMINICAN REPUBLIC: INTEREST RATES ON DEPOSITS IN FINANCIAL INTEPREDIARIES (As of December 31, 1978) Type of Deposit Intermediary Interest Rate Demand Deposits Commercial Banks None Savings Accounts Commercial Banks 4.0 Savings & Loan Associations 5.0 Workers Banks 5.5 Fixed Time Deposits Commercial Banks 7.5 Mortgage Banks 7.5 Time Deposits Commercial Banks 6.5 Savings & Loan Association 5.5 Certificates of Deposits for Limited Use Commercial Banks 5.0-9.0 Agricultural Bank 2.0-4.0 National Housing Bank 0-8.0 Savings & Loan Association 3.0 Financieras 2.5-8.0 Industrial Development Bank 5.0- .0 Source: Central Bank  DOMINICAN REPUBLIC: FIDE INDUSTRIAL LENDIHG 1966-1977 (RD$ thousand) 1.1( 'Y7 131.39 1313) 1970 19Y71 19712 1973 1971 1W97 196 10977 TOTAI % ~~~~~~~ ~~~~~~~~~~~ ~~~~~99I,*( 862.7 1,302.(6 _1_31(52 116 2. 2,73.5 2,P71.P *3~ .(07 -1301 1,0. 10 31,1.0 246.8 37.2 - 4.9.c 75.0 175.0 972.6 725.4 588.3 453.1 3,663 7 - 'dUb Products 100~~~~~~~~~~~~l(.0 - - 1,123.2 10.0 393.1 566.6 - 335.5 -37.4 340.0o 2,938.1 F-uit and eg.tuble P-oduct. 200. 0 192.9 363.0 - 375.6 350.0 575.0 12,37.0 1,223.2 30.0 800.0 300.0 s,86s5.9 ruinlin 303.6 .- - - - - - - 256.7 560.3 - Baki.g - - 97.3 374.0 --95.3 2210.2 4 5.0 - 822.8 - ,.oo,.onate and ,.annoctionatte. - ~~~~~~ ~ ~~~130.0 20.0 - .-78.0 16.1 350.0 - 4o.o -859. - ?)iscellaneono - ~ ~ ~~~~~~ ~~~~~~ ~ ~~~- 785.1 4668.0o 17.0 222.5 26.1i - 1,518.7 - Deaurage Products ~~~~~~~~~~~~~~47173 2-50.0 - - 362.9 289.7 560.0 2440.0 __8'69 2 120.0 2_66. 3.48 Liq.-or 17.1 i -- - -- -6. wi-o --80.0 7.0 - 87.o1 on, Halt 250.0 -.- . . 7 -0 - 250.0 - inn-Alcrdrnlic - - - - ~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~~~~~282.9 282.7 563.0 240.0 816.9 .120.0 - 2,302.5 - Tobacco ----- - 100.0 ____296_ _L ____6__6__ T-ntilns 9. 35.1 45. 200.0 - 244.0 234.2 ~ 1 - - 600.0 __ _,28 1.07 O.r-d -nd Yarn 99.4 12.0 --.- 133.0 1,100.0 Wm 60. 2,244.4 - Kninttd Fabric . 101.0 - 101.0 - T.atile- (ne) 23.1 450.0 200.0 i 21.0 - -.797.4 rjotlt~~~~~r ~18.0 58.5 38. 185.0 257.7 - 1,o22.4 9... 1..... 2,059.5 -2063 651 ~ 91 Fooccoar - - ~~~~~~~~~~~ ~ ~ ~ ~ ~~~~~~~~~~12.0 185.0 - 4 78.1 178.1 300.0 - 1,220.0 31.5 2,407.7 - Clorhiog 1~~~ ~~~~~ ~~~~~~~ ~~8.o 58.5 26.0 - 257.7 .511.3 763.6 1,759.5 -8011.3 660.9 1,872.8 - Wood Products 44 -6.6 5i.6 .- 80.0 .100.0 -276.2 0. Pur-)t,-r -d Accea.r.. - 1 7.2 -- -- 271.0 20.0 .....51- 2 1_____ 422.2 625.9 .232.2 . 1,706.0 2.1 Pan- -an Pare Prod-nt 100.0 i818.(, 13. 120.1 14,2.2 1,285.5 29. 517..6a. __L02.0 . 00.0 __ 92?.o _- . 5.18 In-r-o and Hide- Lim0. i 51.6 60.0 .150 --1,00.0 99 1.2 L-ah-r Products 41.1 147.4 49.0 37.0 _ ___ 68.7 --268.2 .65.0 525.3 j _201j7 1. Ot-.a,n urrd-ts c'snn 581.0 7--51.0 102.1 _.224.0 635.0 447.6 i,8. 811.1 1,6 2 974_6_______ ___6___13__ Fati.Oli-- ud Padutn ila P d-1664.0 9.3 4 160.0 635.0 .1,181.0 639.1 1,093.5 -1,185.1 625.8 6,201.1 - F.L., Oil. ..d P.I.t. 144.o 357.7 544.i 66.0 200. 0 667.6 300.0 202.0 871.7 -1,689.5 363.0 6,493.6 Perlcnad C-rbon Pr-d-cta - . - . . . - Miucruin, Non-Metallic ~~~~~~ ~~~~~126.0 693.o 7182.2 7o6,5 301.1 ..2792 252.0 4.275~.9 3,8.4 60.0 3,005.0 94. -10,616.5 13.83 C-i.oc and Clay Pnoducts 321.1 268.9 7o6.5 199.5 - 77.0 335.1 8 6.0 -300.0 2,297.1, Vit-rnnu P-odants - - 23.0 . 25.0 - -.551.7 602.7 - --n -ad related .126.0c 13.3 -78.9 279.0 197.0 110.8 3,5 08.6 . 3,005.0 88.1 7,756.1 )4oalu Baum - L- - 4-____ ____ _____ 133.5 - _ ___ 165.2 578.... .7.1O 0.70 aural Prudicts 67....7.a 243.7 01142.0 308.3 653.i 1,6. 115.1 1.7(0. 1 2I773.3 1,500.0 1.1(8.5 - Q ~.n87 lo.6 2-05~~ PI.r-lo r -d,ta 87.1 . -z -150.6 80 0 . 200.0 .aPoO.o 555...S2c _____ .30 2. .3,038.5. 3.91 0 T-- arano .-Ven _____ 30.0 _____ 2. .4 P