Perhaps nothing has been quite so important to the Dominican Republic’s economy over the past two decades as its ever increasing number of free zones – industrial parks where anything from shoes to cigars is manufactured or assembled for export under a highly favorable tax regime.
The country’s 46 free zones, now joined by another opened in mid-October by President Hipólito Mejía, produced exports worth almost $4.8 billion last year, up from $3.1 billion in 1996. That represents 83% of total exports, far outstripping traditional mainstays such as sugar or metals.
Around 500 businesses operate from the free zones: half are US-owned and most of the rest are owned by Dominicans.
The range of free zone production has increased markedly since the zones’ inception more than 30 years ago, when they were highly concentrated in textiles and clothing assembly. Last year, for example, there were electronics exports worth $570 million and another $460 million from exports of jewelry. Sales of medical products were worth $320 million. Even tobacco products such as cigars brought their free zone manufacturers almost $330 million in export sales.
Data also show that more value is now being added to these exports within the Dominican Republic. The free zone trade balance – obtained by subtracting the value of materials imported into the zones from the final value of their exports – was $961 million in 1996. Last year it had risen to $1.7 billion.
Nevertheless, more than half of the exports from the country’s free zones are still in textiles, especially assembly of clothing. Prospects in this sector improved substantially last year when the Dominican Republic and other Caribbean Basin nations won a trade concession from the US that gives parity with competitors in Mexico. After losing US-destined trade to Mexican suppliers post NAFTA, Caribbean countries including the Dominican Republic have begun to win back market share.
But competition remains tough, especially as the Dominican Republic’s expanding economy is driving up wages, the single biggest cost in clothing assembly. Honduras has now passed the Dominican Republic as the Caribbean Basin’s biggest exporter of clothing, according to José Torres, executive director of the Dominican Association of Free Zones (Adozona).
And because free zone exports go overwhelmingly to the US, there is concern about the effect of the current US economic downturn on the entire sector, which has created 200,000 direct jobs.
As a result President Mejía announced a fresh stimulus package for free zones in October. It includes concessions allowing free zones to negotiate energy supplies directly with generators – which should lower costs – and the streamlining of customs procedures.
More free zones are also to be set up in the most depressed areas of the country, where manufacturers and assemblers will be able to set lower salaries than in the established free zones. The country hopes thereby to claw back some of the business lost to countries such as Honduras where wages are lower.
“These are new free zone measures in order to provide some incentives to the sort of enterprises we have lost in the past,” says Hugo Guiliani, secretary of state for industry and commerce.
However those in the sector believe not all is doom and gloom after the 11 September attacks in the US: the plan is for the Dominican Republic to improve its chances of weathering the economic storm by attracting free zone business from countries that are even more exposed to the current political uncertainty.
Specifically, executives and officials in the Dominican Republic are already talking about some US clothing manufacturers shifting their assembly lines away from places like Pakistan and Bangladesh and into the Caribbean basin, to avoid shipment delays from Asia that might be inevitable in present circumstances.
“We already had some visits from some big companies,” says Guiliani. “We can produce extra here quite quickly.” And to facilitate further the arrival of new business, the government is scrambling to throw up extra industrial buildings in the free zones.
In the longer term, José Torres welcomes plans under way for new container ports that should make exports easier. He says also that the Dominican Republic knows it must continue to improve educational standards to attract the cream of foreign investment. Many countries have cast envious glances at Costa Rica, where a huge Intel microchip plant – an investment partly reflecting the company’s satisfaction with educational levels there – quickly became the leading exporter and sparked interest from other hi-tech investors.
“The difference with Costa Rica is basically in education,” says Torres, while insisting the Dominican Republic is highly competitive in areas such as quality of work and telecommunications.
There appears to be little concern yet about the likely effect of World Trade Organization commitments to end the subsidies granted in the form of tax breaks to free zones. According to officials in the Dominican Republic this type of favorable regime will have to end by 2005, but there is widespread expectation that it will be renegotiated and extended.
Soundings are already being taken of the WTO and in the US, whose views could sway the decision. Guiliani says: “I think this problem is so big that [the plan] will have to be postponed or changed, for Central America and ourselves. Without the free zone exemptions there would be a big economic downturn here.”
Torres feels the WTO itself is looking for ways to revise the agreement so as to preserve advantages for small economies like the Dominican Republic’s. “How can you eliminate a measure that allows us to generate employment and income, when there are still so many asymmetries and inequalities in the world? It makes no sense,” Torres says.
“For towns that used to live from sugar, where the sugar industry has disappeared, free zones have replaced it and become the biggest source of jobs. What would happen to those towns without the free zones? It would be devastating.”