2. Elements for a forward-looking policy agenda in the Dominican Republic

Government and private sector commitment are key to transform the economy

Fostering industrial development, competitiveness and innovation in the Dominican Republic fall under the responsibility of several institutions (Figure ‎2.2):

• Created in 1935 as the State Secretary for Industry and Tourism, the MICM was granted ministerial rank in the constitutional reform of 2010. The reform of 2017 reinforced its mandate to also promote the development of micro, small and medium enterprises (MSMEs). In 2019, it employs around 2 500 professionals and has a total budget of USD 120 million in 2019 (0.7% of total national budget).1 Currently, the MICM manages two main overlapping agendas that depart from the NDS: the Strategic Sectoral Plan for Industry and Trade 2018-2030 (Plan Estratégico Sectorial de Industria y Comercio – PESIC) and the Institutional Strategic Plan 2018-2021 (Plan Estratégico Institucional 2018 – 2021- PEI-MICM). At present, the MICM counts with five vice-ministries: domestic and foreign trade, industrial development, MSMEs and Free Trade Zones (FTZs). Thirteen implementation and regulatory bodies fall under the MICM, including:

  • The National Council of Free Trade Zones (CNZFE). Created in 1978, it is the independent authority under the MICM that regulates the functioning of FTZs and approves the applications for firms willing to operate within their boundaries and rules.

  • Proindustria, set up in 2007 as the successor of the Industrial Development Corporation (CFI), is in charge of developing the local manufacturing industry, hosts the business register and is in charge of granting the incentives for the local industrial sector.

  • The Export and Investments Centre of the Dominican Republic (CEI-RD), created in 2003, merged the Export Promotion (CEDOPEX) and the Office of Promotion of Investments of the Dominican Republic (OPI-RD) and today is responsible for attracting investment and export promotion.

  • The National Council for the Promotion and Support of Micro, Small and Medium Enterprises (PROMIPYME), created in 1997, provide financing and technical assistance to MSMEs.

  • The National Office for Industrial Property (ONAPI), created in 2000, is responsible for intellectual property in the country.

• MESCyT was set up in 2010 in the constitutional reform as an upgrade to the Secretariat for Higher Education, Science and Technology. In 2019, it had a budget of USD 290 million (1.8% of total national budget). The ministry includes an affiliated research institute, the National Institute for Biotechnology and Industry (IIBI). In 2007, to strengthen the institutional framework for science, technology, and innovation and to support the research and education agenda, the government created the National System for Higher Education, Science and Technology (SNESCYT), and the National System of Innovation and Technological Development (SNIDT). These co-ordinating bodies, chaired by the MESCyT, have similar, overlapping organisation structures that limit their autonomy, their budgetary decisions and implementation capacity, especially in the area of technology and innovation.

• The Ministry of Agriculture is one of the oldest institutions in the country, founded in 1945. The ministry manages the Agricultural Development Bank (Banco Agricola) and oversees the National System of Agricultural and Forestry Research (SINIAF).

• The Ministry of Labour, in addition to promoting and implementing employment-related policies and programmes, similarly to other countries in Latin America, oversees the National Institute of Vocational Technical Training (INFOTEP). This institute operates as an autonomous agency that provides on-the-job training to almost one million people annually through its network of six regional training centres. INFOTEP is mainly financed through a 1% earmark on monthly salaries of all formal workers, and through a 0.5% deductible from annual earnings that employees receive from the company.

In the Dominican Republic, the private sector plays an important advocacy role for public policies. Besides contributing to the strategic decision of the CNC as well as seating in several councils such as CNFZE and ProIndustria, it stimulates the public policy debate by proposing reforms and discussions within the business convention. The National Council of Private Enterprise (CONEP), created in 1962, is the biggest business association in the country that gathers both single enterprises or sectoral business associations with high advocacy power. Other relevant associations are the Dominican Republic Industries Association (AIRD), ProIndustria, and the Dominican Association of SEZs (ADOZONA), which supports stakeholders involved in the development of SEZs such as operators, firms and investors.

The institution in charge of facilitating public and private dialogue is the National Council for Competitiveness (CNC). The CNC is chaired by the President of Republic and composed of eight ministries and eight representatives of the private sector. It was created in 2001 to manage the Competitiveness Fund (FONDEC). The FONDEC, financed by the IADB, provided resources that required private matching funds to set up industrial clusters. From its inception until 2012, the fund co-financed the creation of 45 clusters for a total of USD 13.5 million (16 clusters in agro-food, 15 in tourism, and 14 in manufacturing). The co-financing from the private sector was 14% of the total investment, lower than expected. The IADB’s evaluation stressed that the most successful clusters (mangos, organic coffee) were those that emerged in response to private-sector demand and supported by the international technical assistance of the United States Agency for International Development (USDA) (IADB, 2010[2]). Once exhausted its mission of managing the FONDEC, the CNC remained and evolved into a strategic body. In 2018, it formulated an agenda, Competitive Dominican Republic (Dominicana Competitiva), pointing to specific reforms needed to diversify domestic production and increase local value-added. The agenda has identified five priority areas and industries for the country, and includes 37 priority actions with an estimated budget of USD 542 million (0.7% of GDP), of which 63% is devoted to implementing actions in agro-food, 28% in tourism and 8% in manufacturing.

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Figure ‎2.2. Dominican Republic’s governance for production transformation, 2019

Note: CIAT: The International Advisory Commission of Science and Technology; FONDEC: National Competitiveness Fund; FONDOCYT: National Fund for Innovation and Scientific and Technological Development; FONIAF: National Agricultural and Forestry Research Fund; PROMIPYME: National Council for the Promotion and Support of Micro, Small and Medium-sized Enterprises; CEI-RD: Export and Investment Centre of the Dominican Republic; INFOTEP: National Institute of Vocational Technical Training; CNZFE: National Council of Free Trade Zones; INDOCAL: Dominican Institute of Quality; ONAPI: National Office for Industrial Property; DIGENOR: General Office for Norms and Quality System; IIBI: Institute for Innovation in Biotechnology and Industry; IDIAF: Dominican Institute for Agricultural and Forestry Research. The figure does not include all institutions in the Dominican Republic, only the principal ones linked to policies for production development and innovation.

Source: Authors’ illustration based on questionnaire replies during the field missions of the PTPR process, July and December 2019.

Special economic regimes play a prominent role in the policy mix in the Dominican Republic

Creating an effective policy mix for development is not an easy task. It requires a multi-ministerial and multi-agency co-ordination, and in the Dominican Republic, as in other countries, there is not a comprehensive and consolidated official budget. Primary sources of information such as the national budget and tax revenues data along with a survey carried out during the PTPR process, allowed to tackle this task. In 2019, the country had 109 instruments, managed by different institutions, for a total estimated cost of USD 2.4 billion which amounts to 2.9% of GDP (Figure ‎2.3).

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Figure ‎2.3. Estimated government expenditure for production transformation, by type of instrument, 2019

Note: Indirect financial support are estimated figures and do not consider exemption on personal income taxes.

Source: Authors’ research based on questionnaire replies during the PTPR process, General Directorate for National Budget https://www.digepres.gob.do/estadisticas/gastos/, and General Directorate of Internal Taxes (DGII), Estimate for the General Government Budget, https://dgii.gov.do/publicacionesOficiales/estudios/Documents/2019, 2019.

The distinctiveness of the policy mix in the Dominican Republic stems from the prominence of indirect financial support in the form of special fiscal regimes. The emergence of these special regimes dates back to the 1960s. The Industrial Incentive Law (299) of 1968 is the first attempt to spur the industrialisation process of the country by creating the first special regime to attract FDI in sectors where capital and local knowledge was limited. The fiscal incentive packages favoured imports of capital and intermediate goods such as machinery and equipment and led to the creation of the first Free Trade Zone (FTZ) in la Romana in 1969 (Pons, 1990[3]; AIRD, 2012[4]). In 2019, the country had 13 special regimes that accounted for more than 71% of the total budget, or roughly 2.1% of GDP (Table ‎2.2). Each regime offers differentiated tax rates to firms depending on their size, economic sector, geographical location, and main destination of their production.

Among special regimes, the FTZs are the most relevant with 695 beneficiaries – 0.8% of total firms – for a total of roughly USD 500 million in tax expenditures, or 21% of total budget for production development. Another 10% of total budget is linked to special economic regimes for specific industries, including tourism, local manufacturing, and creative industries whereas simplified income tax for micro and SMEs account for roughly USD 500 million (20% of total budget (DIGEPRES, 2019[5]).

Specific institutions are in charge of granting the targeted special regimes. The National Free Zones Council, created in 1978 as an independent authority under the ministry of industry, is the public agency that approves the requests of investments in the FTZs and the creation of new ones. Similarly, in the case of tourism, it is the Tourism Promotion Council (CONFOTUR) affiliated with the Ministry of Tourism that approves and administers the tax incentives.

The remaining 29% of the total budget allocated to the policy mix are in the form of direct financial support, services, and integrated support (Figure ‎2.4). More specifically:

• Direct financial support is mainly driven by the agricultural credit lines of the Bancoagricola, which in 2019 had a portfolio of credit lines worth USD 480 million and is responsible for 55% of the total credit to agriculture. Its beneficiaries are mostly medium and small producers, and agricultural co-operatives. It is followed by the credit lines from Banca Solidaria. Established in 2012, is a second-tier institution managed by PROMIPYME under the MICM that dispenses preferential credit between USD 100 and 10 000 for MSMEs at a subsidised rate of 8%. In 2019, the total credit lines of the bank amounted to USD 123 million. Other direct support includes specific programmes of the MESCyT such as the National and International Scholarship Programme, with a total budget of USD 49 million, followed by the English Immersion Programme with USD 9.5 million and National fund for Innovation, Scientific and Technological Development (FONDOCyT) with USD 5.6 million. Created in 2001, the FONDOCYT is currently the national fund for fostering research. It financed 432 projects between 2005 and 2018 for a total of USD 57 million. The top three beneficiaries accounted for 50% of total disbursed funds: the Autonomous University of Santo Domingo (UASD) with 110 projects for 26% of the total budget, the Pontifical Catholic University (PUCMM) with 15% and the Santo Domingo Institute of Technology (INTEC) with 9%. The main areas of investigation are biotechnology and food safety (30%) and basic science (27%).

• Services and integrated support account only for 3% of the total budget, scattered among the 72 exiting policy tools. The country spent USD 40 million on skill and human capital development, led by the vocational training provided by INFOTEP. However, the majority of instruments have little budget and overlap in terms of actions and objectives. For example, there are 11 ad-hoc instruments for both knowledge and technology transfer, and trade promotion. The bulk of these instruments provide training and mentoring services managed by either the MICM or associated agencies and focus mainly on MSMEs. For example, the CEI-RD as well as the vice minister for MSMEs of the MICM are managing parallel instruments to foster export promotion through the establishment of ad-hoc programmes aimed at new export opportunities. The MICM in 2011-19 inaugurated 24 MSMEs Centres (Centros Mipymes) in 14 regions. Each centre, developed in partnership with local universities, provide ad-hoc services and technical support for MSMEs in areas such as formalisation, financing options, internationalisation, and digital technologies. The programme, built on the US experience with support for SMEs with the Small Business Development Center (SBDC) had a total budget of USD 2.4 million in 2018. In 2011-19, the centres supported 3 218 MSMEs firms, or 4% of total MSMEs enterprises in the country. Of those, 41% of firms were in services activities, 17% in commercial activities, and 11% in manufacturing (MICM, 2019[6]). Finally, support for research and innovation and for investment attraction is limited to only three instruments, with a total budget of USD 100 000 and USD 400 000 respectively.

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Figure ‎2.4. Policy tools by budget and objective, 2019

Source: Authors’ tabulations based on questionnaire replies during the PTPR process, General Directorate for National budget https://www.digepres.gob.do/estadisticas/gastos/, and General Directorate of Internal Taxes (DGII), Estimate for the General Government Budget, https://dgii.gov.do/publicacionesOficiales/estudios/Documents/2019, 2019.

Strengthening and modernising planning

The fast-changing global landscape requires a capacity to think and plan long-term and to look at national options and challenges from many perspectives. As citizens and the global market broaden their definition of progress and prosperity and start to value sustainability and inclusiveness more fully, planning becomes crucial. Planning is not only deciding what to do and how do to it. Planning is strategic and forward-looking thinking, matched with consensus-building capacity. It is increasingly linked to the capacity to identify possible futures, clarify what is desirable and what is risky, and having back-up plans to act in case of sudden and unexpected changes.

The Dominican Republic has a well-established process for defining a multi-year national development plan supported by bodies for multi-stakeholder co-ordination. However, it would benefit from an updated planning process so it can identify major game-changers for the economy and the society. Different countries manage this prospective and planning function in different ways. In some cases, there is an office within the Presidency taking charge; in other cases, it is the Ministry of Planning. In the case of the Dominican Republic, multiple solutions are possible: The Ministry of Economy, Planning and Development could host a new division, which could be responsible for forecasting and developing scenarios in co-operation with public-private bodies, like the CNC, and with the participation of civil society. These institutional arrangements can all work, provided that the scenario-setting capacity is included among the priority actions for national development planning and that some good principles are applied. Among them, it is important to take into account the following principles:

• National leadership needs to value prospective work. In Finland, for example, the Parliament requests scenario planning from the government. In the United States, each new President receives a file with potential scenarios from the National Intelligence Council (NIC).

• A dedicated unit needs to be in charge. There is no unique model and each country needs to identify the solution that best fits its institutional governance and culture. But someone needs to be in charge and accountable for scenarios and foresight.

• An open process for scenario elaboration. The unit in charge needs to set up a consultation mechanism with different stakeholders. The perception of risks and opportunities is highly heterogeneous among the different constituencies of a country. The process needs to be open to be relevant.

• A mechanism to update scenarios and transform them in policy guidance needs to be in place. Demanding prospective analyses and tasking a team to do them are only preliminary steps. It is important to define a mechanism through which these prospective analyses can shape the process of strategy definition and policy implementation. Co-ordination with all ministries and agencies and at all levels of government is needed.

• Informing and training government staff and citizens. To make scenarios relevant in public policy management, leaders must include elements of scenarios and foresight in the overall training for government officials.

Strengthening planning would also require shifting towards a place-based approach to policy making. Apart from the special economic regimes for firms operating at the border zone with Haiti, the country lacks a place-based approach to policy making. Integrating regional and territorial development in the planning process is a fundamental priority for the country to effectively update its economic model and make it more inclusive and sustainable. Identifying how to address regional and territorial development issues in national strategies will be key in delivering results to all citizens and identifying new sources of growth.

Filling operational gaps

Over the decades, the country has developed an economic model based on granting special fiscal regimes to areas of priority and peculiar interest, including manufacturing, tourism, and creative industries. While this approach has enabled the development of new activities in the economy, the country would benefit from an update in the approach to achieve the national vision of inclusive and sustainable development. To do so, the country would need to:

Fostering innovation

• Innovation is the weakest pillar in the national strategy for economic transformation. While there is a generalised consensus that innovation matters for development, the country falls short in terms of institutions, funding mechanisms, and overall policy mix to foster start-up development and innovation. The research and training side showed a certain degree of improvement over the years, especially in the agro-food area and in FTZs. However, for industrial development and technological innovation in firms, several gaps need to be addressed by fostering a pro-innovation attitude in the private sector. Scaling up co-operation with regional partners and foreign investors would also be important in going forward.

• Filling the institutional gap. There is no implementing agency in charge of innovation. The Dominican Republic needs to identify a funding mechanism for innovation. In parallel, the country needs a targeted body in charge of managing the innovation budget (UNCTAD, Forthcoming[13]). There is no unique model, but some countries identified in a dedicated agency an effective way to channel innovation funds, as for example the Innovation Agency in Uruguay (OECD, 2015[14]) and in Switzerland (see Box ‎2.2).

• Ensuring long-term financing. The country does not have a development bank that plays this role. There are some initiatives which the Dominican Republic could leverage. Banca Solidaria, established in 2012 as the second-tier bank for MSMEs and the export development bank Bandex. Bandex was, set up in 2015 as a result of the restructuring of the National Housing and Production Bank (BNV). Bandex could be scaled up to assume the function of financing production development and innovation, including exports, therefore filling the gap in the current financing chain of the country. This, however, would require careful due diligence and institutional design and a clear clarification of the division of labour with existing commercial banks.

• Improving innovation-related evidence. In parallel with strengthening support for innovation, the country would benefit from better statistical capacities in the innovation area (UNCTAD, Forthcoming[13]). The national statistical office is planning to carry out an innovation survey in co-operation with the MESCyT.

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Box ‎2.2. The Swiss Innovation Promotion Agency (Innosuisse)

Switzerland is recognised as one of the most innovative countries in the world. It invests 3% of GDP in R&D activities and the private sector is responsible for 70% of it.

Innosuisse is the autonomous Swiss Innovation Promotion Agency. Its role is to promote science-based innovation in the interests of industry and society in Switzerland. Innosuisse promotes partnerships between academia and the private sector with innovation projects, networking, training and coaching, laying the groundwork for successful Swiss start-ups, products and services. Innosuisse has a budget of roughly USD 200 million per year.

Innosuisse provides support following the subsidiarity principle. That is, it only supports projects if public funding is essential to the implementation and market potential of a particular innovation.

Innosuisse is an entity under public law with a separate legal identity, composed of three expert bodies and audited by the Swiss Federal Audit Office. The Board is the strategic body of Innosuisse. It comprises seven members and manages Innosuisse in line with the government’s strategic objectives. Members of the Board, including its President, are elected for four years. The Innovation Council is the specialist body that takes decisions on funding applications and supports the execution of the funded activities in an academic and innovative sense. It also develops the funding strategy and instruments to be approved by the Board. To carry out its work, the Innovation Council relies on the support of a pool of experts. The Management team, composed of five members and led by its Director, forms the Secretariat of Innosuisse (Figure ‎2.6).

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Figure ‎2.6. Institutional setting of Innosuisse

Source: Martin Peter, Director for Economic Development in Peru, Swiss State Secretariat for Economic Affairs (SECO), Swiss Innovation Strategy, presentation at the PTPR Peer Learning Group (PLG) of the Dominican Republic, Lima, 1 April 2019.