dominican republic: country strategy with the idb (2001-2003) by IDB

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK REGIONAL OPERATIONS DEPARTMENT II

DOMINICAN REPUBLIC COUNTRY PAPER

APPROVED: JULY 25, 2001

CONTENTS

GENERAL CONTEXT ........................................................................................................... 1 A. Background ............................................................................................................... 1 1. Economic trends................................................................................................ 1 2. The social situation............................................................................................ 2 B. Principal development challenges ............................................................................ 3

II.

BANK OBJECTIVES AND STRATEGY ................................................................................... 7 A. The former strategy and its results............................................................................ 7 1. Successes........................................................................................................... 7 2. Difficulties: its causes and consequences ......................................................... 8 B. Strategy 2001-2003................................................................................................. 11 1. Objectives........................................................................................................ 11 2. Priority areas.................................................................................................... 11 3. Action instruments .......................................................................................... 24 4. Operating scenarios......................................................................................... 26 5. Implementing the strategy............................................................................... 27

III. AGENDA FOR DIALOGUE WITH THE COUNTRY ................................................................ 28 A. Policy aspects .......................................................................................................... 28 B. Portfolio performance aspects ................................................................................ 29

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ANNEXES

Annex I

The Social Legacy of the 1990s

Annex II

Strategy Matrix

Annex III

Bank Actions

Annex IV

Operations Program 2001-2003

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The following documentation is found on the Country Paper file: 1.

Policy dialogue document, August 2000

Technical notes on:

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Quality and sustainability of economic growth. The fiscal environment and public expenditure management. Poverty and social expenditure. Institutional operating framework for the conduct of monetary policy. Monetary and financial sector. Key issues. Governance and political and administrative institutions. Environmental vulnerability of the population and productive sectors. The agricultural sector and foreign competition. Bottlenecks affecting private sector productivity and competitiveness. Environmental vulnerability

Sector notes on:

(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k)

Housing. Health. Education. Agricultural sector. Natural disasters. Decentralization. Governance. Basic infrastructure. Financial sector. Monetary code. Commercial integration

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ACRONYMS AND ABBREVIATIONS

ADN BCRD BNV CDE CGR CONAU CSO EDE GDP GDR IAD IIC INESPRE INVI ISR ITBIS MIF NFPS ONAPLAN PDD PRI SEF WTO

Ayuntamiento del Distrito Nacional [Municipal Government for the National District] Central Bank of the Dominican Republic National Housing Bank Dominican Electric Corporation Office of the Comptroller General of the Republic National Council on Urban Affairs Civil society organization Empresa Distribuidora de Electricidad [Electricity Distribution Co.] Gross domestic product Government of the Dominican Republic Dominican Agrarian Institute Inter-American Investment Corporation National Price Stabilization Institute National Housing Institute Income tax Impuesto Transferencia de Bienes Industrializados [tax on transfer of industrial goods] Multilateral Investment Fund Nonfinancial Public Sector National Planning Office Policy Dialogue Document, IDB, August 2000 IDB Private Sector Department Office of the Secretary of State for Finance World Trade Organization

Page 1 of 5

EXECUTIVE SUMMARY Background:

The Dominican Republic made impressive progress during the 1990s in terms of quantitative economic growth. However, the quality of that growth is more questionable, when measured in terms of its impact on the mass of the population and its ability to satisfy rising expectations. Output grew steadily over the decade, at an average annual rate of 5.7%, except for a severe downturn in 1990, and this was achieved with relative stability in prices and exchange rates. Institutional and policy reforms, such as those needed to improve income distribution, to make growth sustainable over the longer-term, to overcome the weaknesses threatening macroeconomic stability and to consolidate the rule of law, however, failed to keep pace with this growth. Growth did not produce sufficient development, in terms of generating new jobs and incomes for broad sectors of the population. Open unemployment declined, but this reflected primarily a reduction in the participation rate, rather than an increase in employment. Nine years of steady growth merely returned income distribution indices to the levels that had existed in the 1980s, before the crisis of 1990. Significant efforts were made in the social expenditure field, but the country’s social indicators remained below the average for Latin America. As a result, at the end of the 1990s poverty remained at the levels of the 1980s.

Development challenges:

Poverty remains a fundamental problem that growth has not resolved, despite the recent and unprecedented stress on social expenditure. This suggests that the underlying causes go beyond the sphere of social policy itself, and must be sought in the deeper structural limitations that, in practice, have neutralized the effectiveness of such policies. According to the IDB diagnosis, the central challenge facing the country’s development is not the absence of social policy (although this can and should be further strengthened), but rather the severe distortions and constraints in the institutional environment that have frustrated sector policies and limited the effectiveness and sustainability of government-led development efforts in general. According to the Policy Dialogue Document: Towards a Development Strategy for the Dominican Republic, submitted to the new authorities in August 2000, the following challenges will have to be met if the country is to pull itself out of its current predicament: •

Overcome the persistent macroeconomic and financial weaknesses that make the economy vulnerable to internal and external shocks and pose a threat to stability.

•

Eliminate current fiscal weaknesses, both on the revenue side and on the expenditure side, so as to ensure that resources are

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available to deal with the social deficit, to promote productive sectors and to contribute to a structural solution to poverty. •

Dismantle the restrictions that now cloud the business environment and hamstring the country’s productive sectors, making them vulnerable to foreign competition and limiting the potential for diversified economic growth.

•

Enhance the capacity to prevent, mitigate and respond to natural disasters and deal with the environmental degradation that is undermining the country’s potential for sustainable development.

•

Expand the capacity of institutions to respond to social demands and enhance democratic governance

Government objectives:

The action program of the new government, led by Hipólito Mejía, is aimed primarily at strengthening the country’s social stability, which remains vulnerable at present, given the persistent and pressing problem of poverty that economic growth has failed to resolve. The new government team is also aware that if the current challenges are not met they could destabilize the economy, and this would not only compromise further growth (the primary condition for combating the structural causes of poverty) but would in effect close the current window of opportunity for completing the pending institutional reforms in what is a relatively favorable climate, without the adverse social and political conditions that an economic decline would inevitably being with it. Experience elsewhere in the region shows how difficult it is to attempt structural changes during downturns in the economic cycle, and the authorities realize that they must therefore exercise maximum caution on the macroeconomic front in order to preserve stability and growth while accelerating reforms. Intensive efforts will be made, taking advantage of progress to date, to abandon procyclical policies that, through inconsistent and untimely application, have tended to exaggerate upswings and accentuate recessions. As the new century begins, the administration has an opportunity, such as few other countries enjoy, to press ahead with the necessary reforms while the political and social costs are still relatively low.

Bank objectives:

The principal goal of the Bank’s strategy for the period 2001-2003 is to support and complement the efforts of the government and of Dominican society to develop the economic, social and institutional defenses that the country needs to overcome its present social vulnerability, preserving the growth and stability achieved during the past decade of prosperity while at the same time responding to the accumulated social deficit.

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Priority action areas:

In accordance with the action priorities agreed with the National Executive, and on the basis of the general and sector-specific strategies that the government has adopted, the Bank’s efforts over the period 2001-2003 will be focused on helping to: •

Remove the economic and financial policy distortions that make the economy vulnerable to potential revenue shocks, domestic and external.

•

Redress revenue shortfalls and distortions in public expenditure, which now threaten the availability of fiscal resources to attack the challenges of development and the social deficit.

•

Dismantle restrictions on the business climate, in terms both of infrastructure bottlenecks and of policy distortions that limit the potential for diversified growth.

•

Increase the capacity to prevent, mitigate and respond to natural disasters, and halt environmental degradation.

•

Improve the capacity of institutions to respond to people’s needs and aspirations.

Operations program:

The Bank’s portfolio doubled in size and became much more diversified during the 1990s: the Bank’s strategy in support of government action during the new decade therefore places special emphasis on the appropriate use of funds already approved and available to the country. Lending scenarios for the period 2001-2003 call for a pace of new approvals that will depend on the extent to which policy and operating criteria are fulfilled. Policy criteria have to do with the authorities’ commitment to move ahead with the agenda of pending reforms, and with the achievement of positive results in the primary fiscal balance. Operating criteria have to do with showing significant progress in executing the current portfolio, and with the liquidity restrictions inherent in the various fiscal adjustment scenarios, which could affect local counterpart contributions. On the basis of these criteria, the minimum scenario for new lending over the period is US$465 million, a level that will in any case be subject to satisfactory progress in executing the current portfolio; the maximum scenario is US$835 million over the three-year period, provided that the reform process is pursued and that a primary surplus is achieved.

Country dialogue issues:

The current strategy is closely linked to a set of specific government actions and policies that were justified and discussed fully in the Policy Dialogue Document, and that are summarized in a matrix of specific recommendations. The purpose of these recommendations is

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to suggest ways in which the national authorities can attack the problems identified in the situation diagnosis, in which various sectors of national life, civil society, political forces and the private sector were involved. In the Bank’s opinion, a decisive step forward in the general direction of the policy recommendations is essential for the success of the present strategy. One particularly important recommendation, because of its impact on the current macroeconomic and fiscal situation, is that relating to the current distortions in the energy sector. These represent obstacles to preserving economic stability and growth, both because of their distorting effect on domestic fuel prices, and because of the severe deficit in electric services and the inconsistencies in sector policies, which continue to have a sharp impact on economic performance and social well-being. Nevertheless, the Bank is not proposing to act in all areas covered by the recommendations, but rather, in coordination with the authorities and other development agencies, to focus its efforts on a set of priorities that are key to the country’s general context. The Bank’s current portfolio contains programs that respond to many of the recommendations offered, including operations that have long been awaiting congressional ratification, and others where execution by the authorities betrays significant shortcomings. Given both the size of this portfolio and its slow movement, the Bank hopes that the government will make a concerted effort to speed up execution; the pace of new approvals will depend, in part, on progress in executing the current portfolio. Implementation of the strategy:

To implement the current strategy, the Bank will make synergistic use of its various tools and windows, and will seek to coordinate its efforts with those of other multilateral and bilateral development agencies active in the Dominican Republic. This strategy nevertheless faces a number of significant risks. The first is the country’s chronically poor record in absorbing resources, which threatens to delay the achievement of development objectives and to compromise the development impact of those resources. Problems with the portfolio are due primarily to: (i) weaknesses in the national planning and budgeting mechanism, in terms of articulating government objectives with expenditure and financing decisions; (ii) the lack of a sound operating framework and of global and sectoral policies that would help the authorities to identify and prioritize public investments from the viewpoint of an articulated, long-term vision of development; and (iii) limitations in terms of management, administrative capacity and day-to-day programming. In light of these risks, the Country Office in the Dominican Republic submitted, together with the Policy Dialogue Document, an integrated Action

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Plan for addressing both specific and general problems threatening the performance of the portfolio. The second risk to implementation of the strategy has to do with potential liquidity problems in providing counterpart funding to the loans, problems that could be made worse by weaknesses in budgetary management and by the sharp fiscal adjustments that will soon have to be made. Given this risk, the Bank has conditioned its new-approvals scenarios to success in achieving a primary fiscal surplus. The third risk is closely linked to execution difficulties, and refers to shortcomings in the governmentâ&#x20AC;&#x2122;s coordination of external assistance, and particularly of non-reimbursable assistance, where there is frequently little consistency with multilateral financing, and where there is no leveraging of counterpart funds. The authorities have been passive in terms of articulating an overall vision of the activities of international agencies, and coordination is frequently impeded by the lack of institutional continuity, communication and a tradition of strategic thinking. One consequence has been that the Integral Development Framework launched by the World Bank in 1999 as a pilot undertaking in the Dominican Republic has yet to produce any concrete results. This initiative sought to build consensus and forge alliances on common strategic priorities for development, eliminate waste and duplication of effort and stress the achievement of concrete results. Yet, despite a significant, open and participatory debate on key national issues, the process has not yielded any specific coordination matrix, because of constant election-induced changes in players and priorities. In its dialogue with the authorities, the Bank will stress the importance of addressing this lack of coordination, which takes on particular importance given the fiscal situation and the projected needs for counterpart funding, and the countryâ&#x20AC;&#x2122;s financial obligations under the current portfolio.

GENERAL CONTEXT

Background

1.1

On August 16, 2000, a new government took office, headed by President Hipólito Mejía and Vice President Milagros Ortiz Bosch, who were elected during the first round of voting in May 2000. As part of the transition process, a high-level IDB mission, led by President Iglesias, met with the President-elect’s team on August 5 to present its diagnosis and recommendations on the country’s situation.1 Subsequently, sector-specific meetings were held between the IDB and the government to examine future priorities. This strategy document includes the general conclusions from that consultation process. 1. Economic trends

1.2

The Policy Years 91 92 93 94 95 96 97 98 99 2000 Dialogue Document (PDD) examined Population, mill. 7.32 7.47 7.62 8.33 8.4 7.77 7.71 7.83 7.97 8.10 the country’s GDP, $ billions 7.6 9.0 9.7 10.8 12.2 13.6 15.2 16.0 17.5 19.0 economic and % change in GDP 1.0 8.0 3.0 4.3 4.8 7.3 8.2 7.3 8.3 7.8 social performance Unenployment % of econ. 19.6 20.3 19.9 16.0 15.8 16.7 15.9 14.3 13.9 12.0 active popul. during the 1990s, Aver. Inflation rate 47.1 4.3 5.3 8.3 12.5 5.4 8.3 4.8 6.5 7.7 and found that Aver. Official exchange rate 12.5 12.5 12.5 12.6 12.9 12.9 14 14.7 15.8 16.5 economic growth Gross reserves (months of 1.9 1.4 1.7 0.7 1.0 0.8 0.8 0.9 1.0 0.9 imports) for the decade was Bal. of payments current -3.1 -6.5 -2.2 -2.6 -1.5 -1.6 -1.1 -2.1 -2.5 5.2 account as percentage of GDP significant, Fiscal revenues as % of GDP 13.6 15.0 15.5 14.6 15.0 14.4 16.2 15.9 15.6 15.3 sustained and Consol. Public sector bal. as 0.1 1.3 -0.8 -4.1 -1.0 -2.9 -2.0 -2.1 -2.8 -2.8 % of GDP compatible with External public debt as % of 59.9 49.1 46.8 36.6 32.9 28.1 23.5 22.1 20.9 17.8 GDP relative price and Table 1: Dominican Republic: principal macroeconomic indicators exchange rate stability, as shown in Table 1. Nevertheless, this enviable performance masked serious limitations. First, economic growth, which was fed by the leading-edge export sectors, tended to reinforce the dualistic pattern of development that emerged in the 1970s. This duality is based on the coexistence of (i) highly dynamic sectors that produce most of the growth, such as tourism, telecommunications and industrial free trade zones, and which operate in a highly competitive environment, are closely linked to the world economy and are frequently protected by excessive and counterproductive State interventionism through special administrative rules; and (ii) the more traditional economic sectors, such as agriculture and industry, which continue to operate under heavy State interventionism, ranging from excessive protectionism, price regulations and lack of protection for property rights, to innumerable and

The diagnosis and recommendations are summarized in the Policy Dialogue Document: "Towards a Development Strategy for the Dominican Republic", which can be found on the Country Paper file.

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complex bureaucratic procedures. In this context, although the more competitive sectors of the economy experienced rapid growth, the more protected sectors, which constitute a major source of employment and fiscal revenues for the country, have continued to lag behind. 1.3

Secondly, the economic growth recorded in the past decade was not accompanied by similar progress with the institutional and policy reforms needed to ensure the sustainability of growth, to improve its distributional quality, and to consolidate the rule of law. It is true that there were welfare improvements, as a result of higher per capita incomes and the maintenance of purchasing power, thanks to the moderate level of inflation over the decade. But a detailed evaluation of this impact on the countryâ&#x20AC;&#x2122;s various social strata and on employment generation, income distribution and the incidence of poverty raises serious questions. 2. The social situation

1.4

Growth did not produce sufficient %, 100s US$ development, in terms of 14 generating new jobs and incomes 12 for broad sectors of the population, as discussed in detail 10 Dominican Rep. in Annex I of this document. 8 LA average Open unemployment declined, but this reflected primarily a reduction 6 in the participation rate, rather 4 than an increase in employment. The significant decline in labor 2 participation was a reflection of the situation of women workers 0 Per capita % of GDP as discussed in Annex I. The Figure 1: Dominican Rep. and LA social improvement in terms of equity expenditure is undeniable, but relative, since it went only partway towards restoring the income distribution profile achieved in the previous decade. Another problem was the presence of persistent pockets of poverty coupled with the lag effect of low-income quintiles as mentioned in Annex I that continued to afflict low-income women and children in particular. Significant efforts were made in the social expenditure field, but they were insufficient to bring the country up to Latin American standards. The countryâ&#x20AC;&#x2122;s social indicators therefore remained below the average for the region. Thus, the relative stability and prosperity resulting from the recent economic performance must be regarded as fragile, and poverty persists as a key problem that has yet to be resolved. Table 2 shows the relative lag in social welfare levels, which can be seen to adversely affect women in particular, whose illiteracy rate is higher than that of the general population within the country and across the hemisphere.

1.5

These results in terms of poverty and social indicators must be viewed against a backdrop of nine years of sustained economic growth. In addition, they exist in a

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context where Dominican LA&C Health and education levels there has been a Republic visible shift in Infant mortality rate (per thousand live births). 40 32 Mortality rate for children under 5 years. 47 41 government Life expectancy at birth (years). 71 70 policies towards Life expectancy for women. 73 73 the social Measles vaccinations (percent of children under 12). 80 93 DPT vaccinations. 80 82 sectors: in recent Access to safe drinking water (percent of population) 73 75 years social Primary school enrollment (percent of age group). 103 113 expenditure as a Secondary school enrollment. 41 52 Student-teacher ratio in primary school. 35 25 proportion of Illiteracy (percent of population 15 years and older). 17 13 GDP has more Illiteracy rate among women (percent of women 15 years and 18 14 than doubled, older). and has included social investment Table 2: Comparative social indicators (source: World Bank) programs in part financed by the Bank, since the first half of the decade. Yet these efforts have merely served to return poverty to the levels of the 1980s, which suggests that there are deeper structural limitations that tend to neutralize State efforts. This realization has led the Bank to conclude that the problem lies, not in the absence of social policy as such, but rather in the severe distortions and restrictions in the institutional environment that have frustrated sector policies across the board and have limited the effectiveness and sustainability of development efforts. According to the IDB diagnosis, the principal factors explaining the current situation are persistent distortions in: (i) the macroeconomic and financial environment; (ii) fiscal and public expenditure management; (iii) the business climate in the productive sectors; (iv) preventing threats to the natural environment; and (v) the efficiency of democratic government. Overcoming these distortions is essential to the countryâ&#x20AC;&#x2122;s development. B.

Principal development challenges

1.6

The macroeconomic and financial setting. The combination of macroeconomic weakness and the vulnerability of the financial system pose risks that threaten to destabilize the economy and retard growth. The threats to stability arise primarily from political manipulation of fuel prices; the cumulative imbalances of the BCRD, which generate quasi-fiscal deficits; and the lack of coordination of fiscal and monetary policy, reflecting the current modus operandi of the GDRâ&#x20AC;&#x2122;s financial management. The consequences are: (i) high domestic interest rates, despite economic stability and low rates abroad; (ii) BCRD intervention in the financial market, where it sets the interest rate floor as marginal borrower; (iii) rising quasi-fiscal deficits, reflecting the growing gap between income from the BCRDâ&#x20AC;&#x2122;s assets and the cost of its liabilities; and (iv) resort to monetary controls through legal reserve requirements, portfolio caps, lagging adjustments to the official exchange rate, and foreign currency deposit requirements.

1.7

The high level of domestic interest rates does not seem to have affected the dynamism of the economy, but this is only because sectors such as tourism and free

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trade zones have access to cheap external credit, something not available to those who must borrow on the high-cost domestic market. High interest rates affect the quality, liquidity and solvency of the banking systemâ&#x20AC;&#x2122;s portfolio, and make the system vulnerable to external shocks that can affect stability and growth. The financial sector is not living up to its potential, in the absence of an appropriate legal framework. This encourages direct monetary control, undermines regulation and promotes legal ambiguity that hinders financial activity. Behind the apparent soundness of the system lurk structural weaknesses, such as shallow financial depth and excessive intermediation margins, which create risks of insolvency for the financial sector, and of instability and harm for the productive sectors. 1.8

Fiscal management. The reform of the public finances during the 90s failed to eliminate taxation distortions, bring the tax burden to levels comparable with the regional average, or eliminate the fiscal deficit, which ended the decade at nearly 2% of GDP. If to this is added the impact of eliminating distortive charges such as the exchange transactions commission (1.5% of GDP) and others, it is estimated that the public finances face a revenue shortfall of about 3.5% of GDP, assuming that the WTO-mandated tariff reductions will be fiscally neutral, and that lower customs revenues will be offset by higher internal taxes. On the expenditure side, the makeup is inadequate, the level of public services is insufficient, and their management is inefficient, because of the precarious nature of fiscal, social and infrastructure institutions. Public investment, traditionally subject to political discretion, remains highly influenced by the electoral cycle, and during the â&#x20AC;&#x2DC;90s it frequently failed to perform its function of supplementing private activity through the funding of infrastructure and basic social and productive services. The lack of an organic approach to budgetary management creates the risk of revenue shortfalls in the event of an income shock, because of the organizational dispersion of: (i) planning, and the consequent inability to set clear expenditure policies; and (ii) expenditure management and control, where the approach is haphazard and accountability for the use of scarce public resources is diluted. This affects budgeting, both at the central level and in the sectoral institutions, especially the social and infrastructure sectors.

1.9

The country needs to continue investing in basic productive infrastructure, and the process of market opening will require direct support to agricultural producers to help them adapt to the new environment. It is estimated that in the coming years the State will have to maintain infrastructure investment at least at current levels (5% of GDP), and that the additional cost of farm support will be 0.5% of GDP. As well, if social expenditure is assumed to move towards the regional average, this would imply an increase of 4% of GDP. In short, there is pressure for the State to increase public spending by 4.5% of GDP. If in addition to the shortfall in fiscal revenues, estimated at 3.5% of GDP, account is taken of the need for additional expenditure to redress the social deficit, improve income distribution, expand physical infrastructure and strengthen competitiveness, the unmet revenue needs of the government would equal 8% of GDP, and would have to be found through a combination of higher fiscal revenues and rationalization of expenditure components.

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1.10

The business environment. The dynamism of the emerging sectors is declining, and bottlenecks persist in the performance of other sectors that could contribute to more diversified and sustainable growth. These constraints relate both to public policies and to the structural limitations affecting industry and farming, sectors which have suffered stagnation and a decline in their relative importance. Interventionist economic policies are responsible for many of the countryâ&#x20AC;&#x2122;s market distortions. Political interference in key decisions affecting not only the fuel and money markets but also foreign exchange, energy and food prices have continued during the 1990s to send signals to economic agents that distort the allocation of resources and limit the growth of sectors that have a high potential for creating jobs and incomes. The political interest in maintaining a more stable exchange rate than that consistent with market trends produces distortions in relative prices and penalizes exports. The disruption of objective links between internal and external prices, through the tariff wall, also constitutes sub-optimal allocation of resources. In the agricultural sector, the government continues to control activities from the cost side, through reduced tariffs on imported inputs, prohibition of imports, use of quotas and non-tariff barriers, and subsidies for services and interest rates, while on the income side it conducts procurement at prices higher than those at the border. This encourages behavior inconsistent with efficiency, and leads to perennial demands for State support and protection, while instilling in consumers unfounded expectations of cheap food.

1.11

In addition to distortive policies, industry and agriculture suffer from the fragmentation of productive units and from infrastructure and servicing constraints. Given the small scale at which most units operate, there is imperfect access to technological, business and market information of the kind that would allow businesses to incorporate modern productivity patterns. Instead of providing guidance in these areas, support programs for small and medium-scale businesses have relied on subsidized credit, which distorts factor yields. The infrastructure investment shortfall is another factor constraining diversified development. Despite progress in generating capacity, there is still an electricity deficit, and blackouts persist. The countryâ&#x20AC;&#x2122;s highway network does not have the capacity to cope with growth in the economy, and shortcomings in export infrastructure continue to hamper competitiveness. If the legal, regulatory and institutional reforms now pending in transport, energy, water and telecommunications could be brought to a conclusion, this would enhance competition and attract foreign investment: yet these reforms are currently stalled.

1.12

To spur local production to higher levels of competitiveness, while expanding access to foreign market, successive administrations have been actively involved in negotiating trade agreements, some with preferred nation status. The Dominican Republic is a member of the World Trade Organization (WTO) and the Association of Caribbean States. Moreover, the Dominican Republic has signed free trade agreements with CARICOM and the Central American Common Market, has played an active role in negotiations on the Free Trade Agreement of the Americas (FTAA) and is a beneficiary under the Cotonou Agreement (post-LomĂŠ IV), the San Jose Agreement, the Caribbean Basin Initiative, and the General System of

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Preferences. Although in negotiating, signing, and ratifying these agreements, the country showed clearly that it was politically committed to trade integration, the institutional setup in the Dominican Republic for trade matters is still widely dispersed and it has limited technical capacity to negotiate and administer trade agreements and treaties, a factor that prevents the country from deriving as much benefit as it might from the opportunities laid before it. 1.13

Environmental risk prevention. The country’s natural resources-soil, water, coastlines and biodiversity-are being lost through improper use and natural disasters, and government regulatory and preventive action appears inadequate to offset the damage, prevent further deterioration and clean up pollution. Disaster-induced harm to environmental quality is amplified by the improper use of resources associated with chronic poverty, lack of discipline and absence of regulation and authority. The meteorological threat receives the most attention, since the country lies in the path of Caribbean hurricanes, but the island is also earthquake-prone, and in this case user habits and preventive controls, such as construction codes and building inspections, are even more deficient. The cyclical phenomenon of droughts also exacerbates poverty by reducing food production. If the current shortcomings in the country’s hazard prevention capacity are not corrected, the country runs the risk of worsening the vicious cycle of poverty and disasters. The challenges to sustainable and equitable development include: (i) rapid and haphazard urban sprawl, (ii) improper use of space for productive infrastructure, and (iii) deterioration of the environment and natural resources. These challenges will become more severe unless action is taken to reduce vulnerability, anticipate risks, prepare for emergencies, and develop systems to protect the public finances from catastrophic shocks.

1.14

Effective democratic government. The principal holdover from the country’s authoritarian political tradition is excessive centralization and the institutional and managerial weaknesses of State agencies when it comes to meeting social demands and aspirations. In the face of public pressure, the authoritarian and patronage-dominated model is becoming increasingly unviable, as the political system supporting it gradually loses the confidence of the citizenry. The resulting vacuum is coming to be filled by organizations of civil society (CSOs), which are now occupying ground that the traditional political players have overlooked. The country faces the challenge of giving these organizations more scope and promoting government at the sub-national level by fostering greater professionalism: this is not only a question of reinforcing the legitimacy of democracy, but of enhancing the State’s capacity to meet peoples’ needs, and to combat poverty more effectively.

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II. BANK OBJECTIVES AND STRATEGY A.

The former strategy and its results

2.1

5 The strategy set forth in the Loans approved country paper for the period 4 1997-1999 envisioned four central thrusts for Bank efforts, 3 namely: (i) integrated fiscal management; (ii) stimulating 2 the private economy; (iii) reducing poverty; and (iv) 1 institution building. Over the 0 past four years, 11 loans were 1992 1993 1994 1995 1996 1997 1998 1999 2000 approved for a total of US$449.3 million, an amount Figure 2: Dom. Rep. IDB loans in the 1990s higher than what was approved for the entire first half of the decade (see figure 2). With this pace of approvals, the Bank has doubled its portfolio and has taken the lead among international agencies active in the country. The IDB portfolio in the country, including investment programs, has not only increased and diversified during the second half of the decade but has placed greater emphasis on supporting reforms and modernizing State institutions.

1. Successes 2.2

Integrated fiscal management. Funding approvals under this heading have included US$10.3 million in loans and US$1.2 million in technical-cooperation (TC). High-level advisory services financed by the Bank have contributed to a better orientation of macroeconomic management and have helped the government to preserve price and exchange rate stability with high levels of output growth, even in the midst of sudden disruptions such as those caused by hurricane Georges in 1998. Short-term technical cooperation has helped to clarify and expand the agenda for modernizing the public finances and reforming fiscal institutions, especially on the expenditure side, so important for preserving stability and enabling future growth. Further progress with this agenda would complement achievements on the tax front, which the IDB has also supported, and which have allowed the GDR to increase its revenues and reduce tax evasion, as a contribution to preserving the fiscal balance. Nevertheless, the principal expenditure-side operation on this agenda, the â&#x20AC;&#x153;Integrated State Financial Administration Programâ&#x20AC;?, approved in 1998, is not yet at the execution stage.

2.3

Stimulating the private economy. Under this strategic thrust, US$119 million in loans and US$4.58 million in TC were approved, providing both direct and indirect support to private productive investment in the country. In addition to the leveraging of private investment in the electricity sector, through the PRI power

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generation program at San Pedro de MacorĂs, and programs to improve the operation and maintenance of infrastructure to support rural economic activity, such as the third local road maintenance operation approved in 1999, the IDB has taken a number of steps under the MIF to support the privatization process and to enhance the efficiency of the productive apparatus in such areas as agricultural competitiveness, the reform of public enterprises, including the energy sector, and support to rural and urban microenterprise. Support has also been provided in the areas of labor mediation and legal and institutional reform of water and sanitation services, to place them on a self-sustaining, market-oriented basis. 2.4

Poverty reduction. Under this heading US$139 million was approved in loans and US$2.1 million in TC. A targeted operation was undertaken in the Northeast region, one of the countryâ&#x20AC;&#x2122;s poorest areas, for combating and alleviating poverty directly, based on a social investment approach with participatory control. Technical-cooperation funding was used to support social development and local planning efforts, with a special focus on low-income women and youth. Programs were launched in the areas of basic education and health sector reform, as a more structural approach to combating poverty and investing in human capital. Despite the difficulties discussed below, the previously approved Community Initiatives program was completed and additional funding was approved for intermediate education, social spending and support for poor communities under the hurricane Georges reconstruction program.

2.5

Institution building. Under this heading, US$75.8 million was approved in loans and US$4 million in TC. In addition to the above-mentioned operations in support of modernization of the State and public management (including the water and sanitation sector and public enterprises), and support for the technical Secretariat of the Office of the President (STP), an operation for Modernization of the Executive Branch was approved in 1999, and further progress was made in institutional reform of the irrigation sector, through the user-managed irrigation systems program.

2.6

Millions of US$

2. Difficulties: its causes and consequences

200

a. Nature of the portfolio

160

Approvals

140

Disbursements

The new portfolio profile, which is heavily oriented towards institutional reform activities, has imposed new demands in terms of consensus building and political will that go well beyond those of the traditional investmentfinancing approach, and implies a greater risk that operations will stagnate unless

180

120 100 80 60 40 20 0 1992

1993

1994

1995

1996 Years

1997

1998

1999

2000

Figure 3: Dom. Rep. Loan absorption capacity

-9-

the conditions for social and political viability are in place. In recent years these conditions have been much less in evidence than was anticipated during the design of the operations. Experience seems to show that in a country with deep political divisions, shared powers and a weak institutional framework, operations with a high reform component and conditionality project execution tends to encounter serious problems with the result that financing is disbursed slowly. Despite the progress that has been made, therefore, the outcome must be considered disappointing when measured in terms of the speed of execution of operations, the pace and timeliness of reforms, the consensus and political will required for modernization efforts, and the capacity to establish priorities and carry out programs effectively. Of the total funding approved since 1997, only 6.7% has been disbursed, indicating that the country has failed to take full advantage of the financial resources available to it. b. Institutional setting 2.7

Steady IDB support for project executors with resources from the plan for the C and D countries has helped to resolve ad hoc execution difficulties, but given the complex, reform-oriented design of Bank operations, the lack of determination and consistency on the part of the authorities in overcoming the institutional constraints affecting the progress of operations has prevented the country from making full and timely use of portfolio resources, as shown in Figure 3. Consequently, structural constraints affect both the planning and the execution of operations.

2.8

Planning. Operations involving reforms have proven difficult to execute, in part because the conditions of consensus, political will and social viability necessary for their execution, and anticipated in the original design, have frequently failed to materialize. Programs with less ambitious objectives in terms of reform, although their scope would be reduced and their benefits deferred, could helped to speed up disbursement and execution. The performance of the IDB portfolio has also been affected by the virtual absence of any national planning and budgeting mechanism that would articulate government objectives with spending and financing decisions. The dispersal of spending and borrowing decisions has led to inefficient and disorganized management. The country still does not have an overall and sectorspecific operational and policy framework that would helped the GDR to identify and prioritize public investments from a comprehensive, long-term development viewpoint. Efforts by the IDB since the early 1990s to foster such a framework have not been implemented in practice, because the necessary conditions were lacking; in some cases they have yet to begin, as with the TC project for a Public Investment Project Inventory and Monitoring System, intended as part of the Integrated State Financial Administration operation, which has been awaiting congressional approval since 1998.

2.9

Execution. Planning problems are compounded by shortcomings in managerial and administrative capacity, an area that is of particular importance for multilateral financing, where disbursements are subject to higher standards than those regularly applied to the bulk of public spending. It is here that most of the technical and

- 10 -

procedural difficulties holding up operations are to be found. The structural factors that give rise to these recurrent execution problems and that affect the performance of the portfolio can be grouped under four categories: (i) constraints in terms of knowledgeable and experienced personnel at the middle-management levels of State institutions; (ii) weak links between this middle-management level and the governmentâ&#x20AC;&#x2122;s senior leadership, reflected in the virtual absence of delegated decision-making authority; (iii) the inefficiency of institutions responsible for dayto-day administrative procedures; and (iv) limited use of planning and management tools and mechanisms for monitoring government activities. c. Consequences 2.10

The portfolioâ&#x20AC;&#x2122;s slow rate (US$ millions) of progress has 1992 1993 1994 1995 1996 1997 1998 1999 2000 compromised the efforts of the IDB and postponed a. Undisbursed 245.0 352.0 334.0 328.0 257.0 307.0 435.0 440.0 439.0 their development impact portfolio during the late 1990s. b. Disbursements 23.0 43.0 48.0 110.0 71.6 43.0 57.4 77.9 60.2 Because reforms have been delayed, the c. Repayments 55.0 56.2 58.5 57.6 60.2 65.0 63.9 70.7 78.4 governmentâ&#x20AC;&#x2122;s level of institutional development d. Net flow of -32.0 -13.2 -10.5 52.4 11.4 -22.0 -6.5 7.2 -18.2 funds (b-c) is still inadequate. There is a significant Table 3. Dominican Republic. IDB disbursements and net flowof funds. organizational lag in justice institutions, public management supervision, fiscal and budgetary management, and the conduct of economic policy; these last two areas are especially serious because of the accumulated social deficit and the risk of destabilization that fiscal weakness implies. Despite public statements, little progress has been made in reforming and promoting the sub-national level of government, which would add to the legitimacy of the State. The lack of progress in terms of achieving transparency, reducing impunity and strengthening legal security impedes sound governance and, together with macroeconomic policy distortions, heightens the country risk and holds back the investment needed to sustain growth and stability.

2.11

Even less desirable than the postponement of anticipated development objectives has been the frequent reappearance during the 1990s of negative funding flows from the IDB. The strategy for supporting GDR efforts in the new decade will place particular emphasis on the appropriate use of funds already approved, and the pace of new approvals will in future depend in large part on significant progress in executing the existing portfolio, the bulk of which is consistent with the priorities of the new strategy presented below.

- 11 -

Strategy 2001-2003 1. Objectives

2.12

The Bankâ&#x20AC;&#x2122;s strategy is intended primarily to support efforts of the new authorities and of Dominican society to bolster the countryâ&#x20AC;&#x2122;s economic, social and institutional structures so as to preserve the growth and stability achieved in the past decade, while at the same time dealing with the persistent challenge of the cumulative social deficit. Consistent with the assessment summed up in paragraph 1.5, in addition to efforts to relief poverty through traditional social policies, this underlying objective of social deficit reduction involved a coordinated assault on deeper constraints within the national institutional framework that underline social policies across the board and undo any favorable efforts by the State to fight poverty. The present strategy implies a comprehensive poverty reduction effort based on expanding specific programs that target education, health, housing, water supply, sanitation, and community social investment as well as mainly promoting conditions conducive to (1) sustainable growth, (2) generation and efficient use of government resources, (3) creation of productive and diversified employment, (4) reduced vulnerability to the poverty producing effects of natural disasters, and (5) government capacity to respond to pubic demands. All of these conditions must be addressed in a comprehensive assault on poverty. Specifically, the strategy will seek to: (i) overcome the macroeconomic and financial weaknesses that make the economy vulnerable to internal and external shocks, and threaten its stability; (ii) eliminate fiscal weakness on both the revenue and the expenditure side, in order to provide the resources necessary for dealing with the social deficit, to promote the productive sectors, and to make a structural attack on poverty; (iii) remove the structural and policy bottlenecks that now make the productive sectors vulnerable to foreign competition and limit the potential for diversified economic growth; (iv) reinforce the capacity of the government and of society to prevent, mitigate and respond to natural threats and the degradation of the countryâ&#x20AC;&#x2122;s environment; and (v) expand the capacity of political and administrative institutions to respond to social demands and to enhance governance under democratic conditions. 2. Priority areas

2.13

As summarized in Annexes II and III of this paper, which include the startup of operations already approved and acceleration of those now in execution, IDB activities over the coming years will focus on attacking the development challenges identified above in the following areas: (i) macroeconomic and financial; (ii) fiscal; (iii) the business climate; (iv) disaster prevention and environmental protection; and (v) the efficiency of democratic governance. Annex II sums up the government's actions, which the Bank will support by means of new and existing operations in these give strategic areas, as well as the actions of the other major donors actively involved in the country and the amounts of their contributions by strategic areas. In keeping with a strategic planning approach, the following sections emphasize high specificity of goals (GDR targets) and flexibility of means (Bank actions) to achieve those goals. Therefore, only a menu of possible lines of Bank action is laid

- 12 -

out in the different areas. Actual operations and components to be included in operations will depend on the advances achieved by the country in each particular area of concern, at the time of analysis, and on the comparative advantages and value added of the Bank action vis-à-vis those of other donors and financiers. a. The vulnerability of the macroeconomic and financial setting 2.14

In coordination with other development agencies, the Bank will support the country’s efforts to correct policy distortions in the areas of oil and gas, public credit, monetary and exchange rate policy, banking regulation, interest rates and financial intermediation. (i)

GDR targets

2.15

Oil and gas: (a) dismantle the State monopoly on the import, refining and sale of fuels; (b) introduce a new legal framework for the sector and create a regulatory entity; and (c) reform the fuel taxation system, replacing the oil differential with a fixed-rate customs duty on the import price, applicable to all fuels, and applying specific taxes and the ITBIS [tax on transfer of industrial goods] to domestic consumption of petroleum products.

2.16

Public credit: (a) cancel the automatic growth of BCRD credit; (b) eliminate the quasi-fiscal deficit and restructure the BCRD financially, so that, within the framework set by the Monetary and Financial Code (CMF), it can replace the direct monetary controls now in use with market instruments; c) replace BCRD loans to the NFPS [nonfinancial public sector] by a portfolio of government securities, paying market interest rates, to be placed under repurchase agreements; and (d) make the central government responsible for servicing the external debt assumed by the BCRD, on behalf of the NFPS.

2.17

Monetary and exchange rate policy: (a) combine the financial restructuring of the BCRD and elimination of the quasi-fiscal deficit with a financial reordering of the GDR’s budgetary management, in order to improve coordination of fiscal and monetary policy; and (b) once the tax and exchange rate regime governing fuels has been dismantled, make provisions so that BCRD transactions on the exchange market, and the purchase of foreign exchange on behalf of the NFPS, will be done through the Bank’s trading counter, receiving the respective counterpart in pesos.

2.18

Banking regulation: (a) update prudential regulation to bring it more closely into line with international standards, specifically the basic technical criteria accepted by the OECD; and (b) legislate autonomy for the BCRD.

2.19

Interest rates: (a) prohibit non-financial public sector entities from borrowing directly or indirectly from the BCRD, even for short-term liquidity reasons, thereby eliminating the possibility of free financing from the Bank, which sends distorting signals to public managers; (b) develop a deposit insurance mechanism for the financial system that will not rely on a simple second-tier bank, as occurs today with the Savings and Loan associations and the National Housing Bank;

- 13 -

(c) establish permanent and strict banking and financial supervision to enforce the rules, based on: (i) ensuring that the supervisory body and its personnel are independent of political and interest group pressures; and (ii) providing officials with technical training commensurate with their tasks. 2.20

Financial intermediation: (a) promote competition, by avoiding related lending, simplifying regulations and introducing information mechanisms that will give savers and borrowers a clear understanding of the conditions offered by the various intermediaries, and their financial soundness; and (b) dismantle and rationalize quasi-fiscal burdens, and in particular the high reserve levels, in ways that will not undermine the soundness of financial institutions. Other macroeconomic vulnerabilities relating to fiscal policies are addressed in section b, next. (ii)

2.21

The Bank will support these efforts by completing execution of ATN/SF-6056-DR, Support for Macroeconomic Stabilization; ATN/MT-5522-DR, Restructuring the Energy Sector, as it relates to oil and gas policy; and by disbursing the third tranche of the Financial Sector Adjustment Program 773/OC-DR, pending approval of the Monetary and Financial Code. A possible Second Financial Sector Adjustment operation, for US$100 million, will be considered. Finishing the technical cooperation projects under way will help the government reach its targets in the areas of hydrocarbon and public credit policy. Completing operation 773/OC-DR and the new financial sector adjustment program will help attain the targets in monetary and exchange rate policy, bank regulation, interest rates, and financial intermediation. New bank actions in the area of financial sector adjustment would support next generation reforms both in public banking and in the private financial system, possibly to include: consolidating strict regulatory and supervision systems; mitigating the practices of interlocked loan portfolios and of credit expansion based on inadequate risk evaluation, including moral hazzards; stgrengthening the role of new, freer financial instruments and institutions such as private pensions funds, insurance companies, mutual funds, investment banks, capital markets, etc.; as well as restructuring public banks and strengthening the Central Bank both technically and financially, with measures such as eliminating its cuasi-fiscal deficit and improving the quality of its assets. (iii)

2.22

Bank actions

Actions of other donors

The IBRD is considering an operation to support financial reform in an unspecified amount. b. Fiscal and expenditure weaknesses

2.23

In coordination with other entities, the Bank will support the countryâ&#x20AC;&#x2122;s efforts to resolve the current weaknesses in the areas of tax policy and administration; social and productive expenditure and investment; financial policy; social security; and budgetary policy.

- 14 -

(i)

GDR targets

2.24

Taxation policy and administration: (a) aim for a tax burden of at least 17% of GDP, and amend those taxes that most severely distort economic agents’ decisions; (b) amend the ITBIS taxes on “vices” and on fuels; (c) reform the real estate property tax; (d) establish a tax on assets or gross revenues, to be paid in advance and deducted from subsequent income taxes, with a provision that will prevent businesses from using the full credit generated by that tax to evade taxation by reducing their taxable income; (e) make further efforts to improve the efficiency of tax administration, by eliminating low-yield taxes or transferring them to the municipalities, while improving local government administration; (f) increase the budget for the tax administration, gearing it in part to success in reducing evasion and encouraging voluntary compliance with tax obligations, while upgrading the quality of tax officials and ensuring that they are promoted on the basis of merit.

2.25

Social expenditure and investment: (a) increase social spending by 2.5% of GDP, to bring it up to the regional average, including both regular social services and poverty alleviation; (b) bring social investment programs together within a single, specialized mechanism that will observe the principles of efficiency, targeting at the poorest groups, and participation by the public and by sub-national levels of government in decision-making. In education and health: (a) provide a new stimulus to basic education; (b) strengthen intermediate education and occupational training, in partnership with the business sector; (c) carry out reforms now pending in the health sector, to make it more efficient, and modernize health services with private participation. In housing: a) remove government from construction and direct financing activities, while strengthening its standard-setting role and its ability to facilitate performance in the sector; (b) redefine the roles of the INVI [National Housing Institute] and the CONAU [National Council on Urban Affairs] in a manner consistent with this goal; (c) establish a system of direct demand subsidies, transparent and supplementary to beneficiaries’ own contributions and that of regular lenders, in order to encourage neighborhood improvements and give low-income groups access to new housing; (d) supplement housing subsidies with efforts to expand the supply of microcredit and resolve the problems with illegal landholding; (e) encourage the domestic mobilization of long-term resources for housing finance; and (f) assess the feasibility of a multi-sectoral, second-tier bank for channeling external resources. In water and sanitation: (a) approve framework legislation for the sector; (b) strengthen institutional operators so that they can attract investment from private entities as concessionaires or shareholders; and (c) facilitate the provision of services by the private sector in areas where tourism is important.

2.26

Productive expenditure and investment: (a) invest no less than 5% of GDP, in coming years, in basic infrastructure for the productive sectors in general, and an additional 0.5% of GDP for the agriculture sector; (b) develop a basic infrastructure investment program, limiting public involvement to areas where private investment cannot be justified, such as highways, roads and urban streets; and (c) create a public electricity transmission enterprise under private management.

- 15 -

2.27

Financing policy: (a) establish an annual financing policy at the time revenues and expenditure are determined, so as to identify the sources of borrowing to which the NFPS may turn, and the precautions to be taken to amortize the public debt in a manner consistent with economic policy guidelines; (b) provide that multilateral financing should be administered in an integrated manner with the rest of the budget; (c) consolidate the administrative debt in order to remove roadblocks to budgetary management and reduce the rates paid by the government; (d) issue bonds based on this consolidation, so as to foster the development of the capital market; and (e) strengthen the SEF so that it can play a more active role in defining and administering financing policy.

2.28

Social security: (a) reform the social security mechanism through a financially viable pension system, preferably based on individual capitalization, that will relate contributions to the pension received, and will discourage evasion; (b) allow workers to take advantage of compound interest and economies of scale in financial investments, so as to provide a decent pension while raising domestic savings over the longer-term; (c) modernize the health regime, by allowing private competition and the use of modern management techniques immune to political considerations; (d) since the capital market is too thin for early resort to individual capitalization, separate pension reform from modernization of the health system, so that the cost of the reform can be more readily borne, by placing most of the resources in offshore investments until the domestic market is sufficiently developed; and (e) take advantage of the improvement in the public finances to guarantee the governmentâ&#x20AC;&#x2122;s contribution to the new social security system as an employer under the health regime, while providing financial support to those whose pension falls short of the required minimum level.

2.29

Budgetary policy: (a) unify budgetary management within a single government entity, eliminating the current dispersal that undermines fiscal accountability; (b) establish integrated financial management for the public sector, so that the authorities and society can verify that policies are being funded with due regard to efficiency and economy; (c) meanwhile, establish a rational budgetary programming and management system so that executing agencies will have accurate knowledge of the amount and timing of the resources they are to receive, and so that they can make their payments on time and maintain steady cash balances, replacing the arbitrary and haphazard allocations by the Budget Office (ONAPRES) with a system of revolving funds and petty cash; (d) create a Human Resources Management System and establish a salary policy for the public service, with a proper public employment regime or statute that will define conflicts of interest, duties and responsibilities, admission competitions and disciplinary rules, and will identify the tasks and requirements for each public office; (e) create a central database on human resources in the public sector, and their financial consequences, as a step toward improving the efficiency and quality of expenditure under this heading; and (f) reform the system of public procurement and works contracting, and the rules governing planning, projects and financial management, in order to eliminate discretionality, make government contracts more transparent, and place the administration of government assets on a sounder footing.

- 16 -

(ii)

Bank actions

2.30

In support of fiscal and expenditure management reform, the Integrated Government Financial Administration program (1093/OC-DR) approved in 1998, will help achieve the targets in financing and budgetary policy, particularly by making fresh government funding resulting from higher tax rates available for use in targeting structural poverty reduction more efficiently. The Bank will also complete execution of 10 TCs totaling US$2.72 million, and two MIF operations already approved in support of a wide variety of activities in this area, including social and productive expenditure and investment, occupational training and water and sanitation reform. Continued support will be provided for reforms to public investment in the productive sectors, by completing execution of the MIF operations in support of Public Enterprise Reform approved in 1998. Social expenditure will be targeted under programs for Strengthening the Northern Provinces, 1124/OC-DR; Basic Education II, 897/OC-DR; Health Sector Modernization and Restructuring, 1047/OC-DR, and programs will be launched under the Water and Sanitation Sector Reform and Modernization loan, 1198/OCDR; Feeder Roads II, 1114/OC-DR; Occupational Training, 1183/OC-DR, and Intermediate Education, approved during 1998-2000.Completing these existing operations will make it possible to attain the targets in social and productive investment and expenditure. Operations for education, worker training, health, and water supply and sanitation are specifically aimed at rooting out the structural causes of poverty, particularly those causes that affect women's education and their entry into the labor market.

2.31

Also planned is a new TC for tax and customs administration that will contribute to attaining the tax policy and administration targets. In the social spending area, a US$200,0 million operation is being considered to support the Institutional Reform of the Social Sector. The operation will promote increases in the level of public expenditure in education and health, to nudge such level closer to the regional average, and help decentralize the financial and operational management of public resources. Also measures would be included to modernize the financial administration of public expenditures in general, and of social expenditures in particular, and to help launch the sector institutions and capacities to properly formulate and execute a coherent poverty reduction strategy. In the education sector the Bank actions would promote measures to improve expenditures in the sector, as well as the quality of education in general, and to strengthen basic and intermediate education. Possible actions would include: help to increase expenditures on educational material; better align basic educationâ&#x20AC;&#x2122;s expenditures per student with that of intermediate education; expand direct financing of schools; improve the salary incentives system; support production of teaching material and curriculum development; strengthen teacher training and promote in-school pedagogy innovation. Specifically in basic education, the new operation of the Bank would try to expand on the achievements on the current program, with particular emphasis in rural areas, including financing to increase coverage up to grade 8; financing and technical assistance to promote better school attendance; and help in developing specific pedagogical models. On intermediate education the new operation would

- 17 -

include actions to: promote reducing repetition at grade 9; enact scholarship programs for low income students; reduce night schools by expanding regular schools; and promote descentralization of finances, management and pedagogy to the level of the school. In this context, operations would include a Basic Education III program, for US$70 million; an Intermediate Education II program, for US$90 million, supplemented with TCs for the Teachersâ&#x20AC;&#x2122; Pension Fund, for a pilot program in educational technology and for strengthening links between the private sector and the SEC in the area of vocational education; . In the housing sector, the Bank contemplates a loan for US$30 million, and a TC for institutional strengthening of the INVI. Specific actions in the sector may include: reforming the sectorâ&#x20AC;&#x2122;s legal framework and policies; modernize the housing authority (INVI); widening the role and eficiency of the financial sector to provide mortgage financing at market rates for low income housing; improving the current system of direct demand subsidies for housing acquisition and improvement, with stronger focus on low income groups; strengthening land tenure security; and improving the quality of urban infrastructure for low income settlements.The Bank will continue to support efforts to alleviate poverty through a social development operation for US$30 million, and with TCs for developing poverty indicators and a national child support program. In terms of productive investment, PRI operations are planned in Airport Privatization, for US$150 million, and for EDE Norte and Sur [electric utilities], for US$75 million, as well as a program of feeder roads for US$50 million. TCs will be prepared for rehabilitating the Colonial Center of Santo Domingo, and a transportation plan for the city. These operations will make it easier to reach the targets in the area of productive and social investment and expenditure. Apart from moving forward with the assault on the basic causes of poverty with social sector reform, spurring educating and investment in housing, the new operations in social development and support for childhood will include actions calculated to bring about better conditions for women and children in the country's pockets of poverty. (iii) 2.32

Actions of other donors

This strategic vector will also be supported by other donors in the following areas: (i) IBRD (US$ million): health reform (30.0), support for basic education (37.0), improving early education. Water and sanitation reform. Highway reconstruction (75.0), solid waste and sewage disposal at tourist centers (5.0), financial reform of social security (ii) Multilateral cooperation UE (millions of Euros): health sector reform (12.0), water supply and sanitation in low-income neighborhoods (22.6), Upgrading the delivery of health services, development of the northeast line, geological and mining development, school rehabilitation (7.2), technical and vocational education reform (13.25), UNDP (US$ million): sustainable human development in depressed areas, worker training and education, support for national HIV/AIDS program (0.37), evaluation of the ten-year education plan (0.7), access to social and productive community infrastructure (0.96), and (iii) bilateral cooperation (US$ millions): USAID: educational policy reform. HIV prevention. Reproductive health. Decentralization of health services (22.2). Improvements in energy services, Japan: support for technical training. Support for immunization

- 18 -

(7.7), school construction (18.6), treatment plant rehabilitation, expansion of capacity at vocational training centers (4.7), Germany (DM millions): GTZ: modernization of the tax system, reproductive health (3.5), KfW: construction of primary schools in AzĂşa and Barahona, hydroelectric plants and CDE transmission programs (16.0), community social investment, economic development and job creation (3.0); Spain (millions of pesetas): health infrastructure program (999.0), education infrastructure program (561.0), vocational training and employment (386.0); Taiwan (US$ millions): hospital retrofitting (15.0), school construction, literacy (10.0), technical assistance for production sectors; Colombia: social program (43.0); Korea: rural school construction (12.0). c. The business climate 2.33

In coordination with other entities, the Bank will support government efforts to eliminate policy and institutional distortions now holding back the productive sectors or prevent them from achieving their potential, as well as infrastructure bottlenecks in transportation, electricity, telecommunications and other constraints on the development of industrial and agricultural activities. (i)

GDR targets

2.34

The institutional and policy setting: (a) eliminate monetary and exchange policies that distort markets and discourage productive investment; (b) dismantle tariff and non-tariff barriers to international trade; (c) avoid subsidizing interest rates for productive investment of any kind, and strengthen support for microenterprises and small farming operations, not by providing credit but rather by facilitating training, stronger management and a technical and market-oriented approach; (d) introduce supplementary legislation on competition and foreign investment to create a climate favorable to private investment and productive infrastructure concessions; and (e) improve inter-agency coordination in trade treaty administration and negotiation, by also boosting technical capacity in these areas in the public and private sectors.

2.35

Transportation, energy and telecommunications: (a) undertake modernization of the transport regulatory body and approve the legal framework for the Highways Fund; (b) establish a comprehensive reform program for the port sector, with an institutional framework appropriate to the public and private investments needed to modernize and expand port capacity; (c) complete the institutional reform and rationalization of the airport sector, establishing a technical unit that will supervise a concession contract; (d) consolidate modernization of the electricity sector in order to enhance the efficiency and reliability of service, by approving the General Electricity Law and its regulations governing the legal framework and the regulatory and policy entities for the sector; (e) create a body responsible for electricity policy and provide the required independence and autonomy to the regulatory body; (f) encourage private projects that will increase the number of players in the electricity market, without excluding those now active, and promote competition in the market through â&#x20AC;&#x153;merchant plantsâ&#x20AC;?; (g) strengthen the

- 19 -

telecommunications regulatory body and ensure proper implementation of the framework legislation already approved. 2.36

Agri-food sector: (a) eliminate nontariff barriers and the discretionality that still persist in external agricultural trade, abolishing artificial rents and encouraging competition; (b) remove the government from direct participation in agricultural trade, and dissolve the INESPRE [National Price Stabilization Institute]; (c) gradually replace pricing subsidies with direct support to farmers, and redirect fiscal resources towards non-distorting forms of support; (d) reduce fragmentation in the land market through an ad hoc program for delivery of freehold title to settlers under the agrarian reform and dissolving the IAD [Dominican Agrarian Institute] once this process is complete; (e) amend or repeal law 289-72, which obstructs leasing and sharecropping and restricts the access of landless farmers to land; (f) repeal the quota-share law and encourage private investment in irrigation; (g) replace the surface-based water rate with a marginal volume pricing scheme; (h) introduce wholesale water sales, with freedom to resell, including usersâ&#x20AC;&#x2122; associations; (i) expand and strengthen the self-management of irrigation systems by these usersâ&#x20AC;&#x2122; associations; (j) restructure and reduce the public agriculture sector, while reinforcing its standard-setting and regulatory functions and its role in providing public services (health, technology, etc.), and eliminate public activities that compete with the private sector; (k) include unincorporated public agricultural enterprises (silos, mechanization, seeds) in the public enterprise reform process.

2.37

Industrial sector: (a) adopt legislation to encourage inter-firm cooperation and the development of clusters; (b) adopt measures over time to diversify activities in the free trade zones and expand the market for their products, redefining competition in those zones in light of open, rather than protected, world markets; (c) develop targeted market-entry support programs for small-scale industrial units and farming operations, and help them assimilate organizational practices that will enhance their productivity; and (d) create information channels on markets and technologies that will minimize the costs of productive restructuring in order to enhance competitiveness, with an emphasis on those activities that have the greatest potential in terms of foreign trade. (ii)

2.38

Bank actions

The IDB will supplement government efforts by completing two TC operations and an MIF transaction for US$1.5 million, now underway, to support modernization of external trade, restructure agricultural policy and reform the energy sector, respectively. It will continue executing the User-Managed Irrigation Systems program, 905/OC-DR. Completing these existing operations will help bring about the attainment of the policy-setting targets for production including decentralization of farm irrigation. The latter operation is designed to broaden nationwide selfmanagement of irrigation based on successful organization models developed in the country with the help of rural women, including those engaged in agricultural irrigation and other productive activities in this field. It will consider a future operation for External Trade Modernization for US$10 million; and a loan for Agri-

- 20 -

Food Sector Modernization, for US$50 million, aimed at eliminating the barriers and discrecionalities that still pervade the sectorâ&#x20AC;&#x2122;s foreign trade and helping achieve greater efficiency of expenditures, with emphasis on applying resources to public goods and services in the sector. Measures may include the elimination of cuotas and rationalization of import permits that currently hurt competitiveness, as well as consolidation and phasing out of import duties. The operation would also include: actions to improve provision of technological, sanitary and food security services, from private providers; enactment of a system of direct supports not associated with production; and strengthening the organization of the sector, its policies, financial management and information systems. Also included is a global microcredit loan for US$20 million; a possible hybrid Energy Sector Reform operation for US$100 million; and a TC for Tourism and Free Trade Zones. In what concerns energy, the Bank actions would be aimed at implementing a strategy to restore the electricity sector to a sound financial footing, including restructuring the electric authority (CDE) and creating a public enterprise for transmision, as well as a public enterprise for hydroelectric generation. The operation may also include actions aimed at eliminating the state monopoly on import, refining and sales of fuels, as well as implementing an adequate legal framework for the hydrocarbon sector and develop its regulatory entity. These operations will make it easier to reach the targets mentioned in electricity, agri-food, and small business and microenterprise manufacturing. These operations will have a significant impact on poverty and the development of women entrepreneurs, heads of household in low- income parts of the country. (iii) 2.39

Actions by other donors

This strategic vector will also be supported by other donors in the following areas: (i) IBRD (US$ million): electricity market development (90.6), telecommunications sector reform (12.3), Multilateral cooperation (US$ million) UE: support for private sector development (8.28), banana sector diversification and competitiveness (1.28), vocational and technical education reform (11.25), support for SME financing (16.5); UNDP: support for small business and microenterprise (US$1.12 million); bilateral cooperation (US$ million): USAID: promoting economic competitiveness (5.0); Japan: improvements in irrigation (12.9), rehabilitation of waters treatment plants in low-income communities (9.1), maintenance equipment for agricultural land (7.7), agricultural development in mountainous areas (27 million yen); Germany (DM millions): community works (15.0), sanitation system for San Juan de la Maguana (1.5), small electric power plants (12.0), CDE transmission (30.5); Spain (millions of pesetas): water and sanitation (285.0), development of production, agriculture, and the environment (1,086.0), support for small business and microenterprise (1,713.0); France (millions of francs): modernization of CDE electric power transmission (39.4), private sector credit lines (US$47 million), Banco ADEMI (30.0), microcredit for women in development (12.0), specialty coffee farming (0.7), cacao production and marketing (0.9), Sierra integrated development plan (20.3), NE regional

- 21 -

development (3.2), Taiwan (US$ millions): agricultural and rural development (5.0), support for Sierra Plan (7.0), Support for SD cybernetic plant (2.5). d. Disaster prevention and environmental protection 2.40

In coordination with other entities, the Bank will support the countryâ&#x20AC;&#x2122;s efforts to enhance its capacity to anticipate and evaluate natural threats, prevent disasters and environmental degradation, and protect against catastrophic risks to the public finances. (i)

GDR targets

2.41

Natural hazard evaluation: (a) undertake a national evaluation of infrastructure to determine its exposure to natural hazards, compiling this information in a national geo-information center that will serve as a basis for taking decisions on the national risk management strategy and the levels and mechanisms for financing it; (b) strengthen the encouragement and support given to the building code and to supervising and controlling the quality of buildings, during the construction and operating phase; (c) continue to strengthen the technical and operational capacity of institutions responsible for emergency response, using a multisector, systemic and decentralized model.

2.42

Disaster prevention: (a) develop a national program for strengthening the capacity to prevent, mitigate and respond to natural disasters and environmental degradation; (b) improve land use rules and regulations; (c) design mechanisms for local land management and decentralized budgeting; (d) strengthen local land management institutions; (e) identify priority rehabilitation needs; and (f) develop a decentralized preventive environmental management model.

2.43

Risk protection: (a) assess financial schemes to protect the public finances from catastrophic shocks and encourage better distribution of risks over time and among players, both in the public and private sectors; (b) encourage the internalizing of prevention costs in public utility investments, and use of the insurance and reinsurance market; (c) approve framework legislation on the environment and natural resources, reflecting the results of national dialogue on this issue. (ii)

2.44

Bank actions

The Bank will supplement government efforts in this strategic area by completing a TC now underway to support natural disaster prevention, as well as the Hurricane Georges Reconstruction program, 1152/OC-DR. A new line of activity is planned for the future, for strengthening the National Disaster Prevention, Mitigation and Response Capacity, for US$5 million, and a Watershed Management Program (DR-0019), for US$50 million. New actions in disaster prevention will build upon the achievements of the current operation and may include: evaluating the exposure of national infrastructure to natural threats as basis for a coherent country-wide risk management strategy; keep strengthening building codes and supervision; exploring mechanisms to protect public finances from catastrophic shocks; and promoting

- 22 -

measures to make the cost of prevention endogenous in public investments. The Bank may also launch actions to help authorities define a watershed management policy, including: a system of incentives for a more sustainable, environmentally sound use of natural resources; consolidation of the institutional and legal framework for watershed protection; and investments in recuperation and preventative repairs in the national watersheds. Completing these existing operations and undertaking the new ones under consideration will make it possible to attain the targets set for natural disaster assessment, prevention, and protection, by bringing a special component of added value to efforts to break the vicious circle of poverty- vulnerability-disaster-poverty, that wreaks havoc mainly on the lower income quintiles and especially women and children in poverty. (iii) 2.45

Actions by other donors

This strategic vector will also be supported by other donors in the following areas: (i) IBRD (US$ million): environmental policy reform (3.6), irrigated land and basin management (28.0), post George emergency program (110.0); (ii) Multilateral cooperation UE (Euros millions): water supply and environmental sanitation (22.6), post Georges recovery (9.0), UNDP: strengthening of environmental sector, training in environmental protection and regeneration, environmental management and development (US$0.69 million), and (iii) bilateral cooperation (US$ millions): USAID: support for environmental policy, disaster mitigation; Germany (DM millions): natural resource management (4.0), Upper Yaque del Norte river basin (10.0), TC primary education in environment (3.0), Spain: Araucaria en Pedernales program (Pesetas $400 million); France: study on the greenhouse effect (80.8 million French francs); Taiwan: Nizaito river basin reforestation (US$ 8.75 millions). e. Government efficiency and democratic governance

2.46

In coordination with other entities, the Bank will support the lines of action now underway in the country to improve public management capacity; proceed with government decentralization, improve the administration of justice; and enhance the transparency of public affairs. (i)

2.47

GDR targets

Public management: (a) implement the Civil Service and Administrative Career Act, and negotiate an agreement among political parties on stabilizing staffing levels and professionalizing the State administration in a manner beneficial to all; (b) strengthen management training programs in public administration, with special emphasis on social management, by enlisting the support of universities and of personnel training centers within the public service; (c) provide training for political party executives in â&#x20AC;&#x153;policy managementâ&#x20AC;?, and for senior government officials in articulating policies and strategies, with an emphasis on strengthening the relationship between government executives and middle-level management, and delegating policy implementation responsibilities; and (d) modernize the executive

- 23 -

branch in a manner consistent with implementation of an integrated public finance administration system. 2.48

Decentralization: (a) develop a comprehensive national strategy for decentralizing government over the medium-term, including a clear institutional framework for local development and its financing; (b) promote administrative decentralization by reinforcing the municipal offices of priority ministries and agencies, as an intermediate step towards deconcentrating services and transferring responsibilities to the municipalities; (c) at the same time, develop a broad training program in the area of municipal management; (d) establish a government mechanism that will function properly at the local level; (e) promote ways for engaging civil society and government officials in constructive debate over decentralization.

2.49

Justice: (a) strengthen managerial capacities within the judiciary, so that judges can devote themselves to their jurisdictional functions, and to streamlining the administration of justice; (b) modernize and streamline the property holding jurisdiction, which now poses a critical bottleneck to national social and economic activity; (c) establish an ombudsman or Public Defender as a recourse for citizens against administrative decisions and actions, streamline the administration of justice, and guarantee individual rights.

2.50

Transparency: (a) strengthen the Tribunal of Accounts [Cรกmara de Cuentas] and give it the resources to upgrade its professional staff and to procure the equipment and technology needed to perform its constitutional rule independent of political interference, in keeping with public expectations; (b) provide the Office of the National Comptroller General [CGP] with sufficient autonomy to carry out its duty of supervising the legality and efficiency of management by the executive branch, in accordance with its constitutional mandate; (c) eliminate the unworkable prior control role now played by the CGP and, in its place, institute substantive internal controls for evaluating government financial management; (d) promote the concept of social auditing, whereby persons in public office must render accounts, starting by enforcing existing legislation in this area; (e) adopt supplementary legislation that will extend the concept of accountability beyond public officials to civil society organizations and political parties that handle State funds; (f) give the Legislature the power and the wherewithal to perform its important tasks, by encouraging reform of the Congress and providing training for its members; and (g) strengthen the managerial capacity of the Central Elections Board and enhance its legal power to settle disputes. (ii)

2.51

Bank actions

The Bank will support government efforts in this strategic area by completing execution of 12 TCs for a total of US$3.3 million, aimed at improving public management, promoting decentralization, strengthening the administration of justice and promoting transparency in government administration. Completing these actions will help to achieve the targets in the area of public administration and decentralization. As well, a start will be made on executing the Executive Branch

- 24 -

Modernization Program, 1176/OC-DR, approved in 1999; the program for Modernizing Land Holding Jurisdiction, 1079/OC-DR, approved in 1997; and the Program for Modernizing the National Congress, 1258/OC-DR, approved in 2000, operations that contributed to achieving the targets outlined in justice and transparency. Modernization of land jurisdiction will strengthen the conditions for judicial security, including the security of small landowners and women in rural areas, who have traditionally been excluded from land ownership. Further support will be provided to achieve the objectives of decentralization through approval of a program for municipal development, DR-0127, for US$30 million, as well as TC operations to support management of the ADN; to strengthen CSOs; and to promote community-government coordination, for a total of US$1 million. Bank actions in descentralization may include: help clarify the institutional framework for local development and its financing, promoting the further transfering of resources and responsabilities for local development to the local powers and communities, as well as open ways and strengthen capabilities to formulate and execute projects with synergistic participation of civil society and authorities at the local level; and strengthen the magerial capabilities of municipalities. These operations will contribute to moving ahead with the agenda for strengthening the role of civil society, the organized communities and local power in terms of government, thus ensuring that the actions to fight poverty will be added in increasingly larger amounts to consulting, participation, and social audits. (iii) 2.52

Actions by other donors

This strategic vector will also be supported by other donors in the following areas: (i) IBRD (US$ million): financial management reform of the State (80.0), judicial reform (20.0), (ii) Multilateral cooperation: UE (millions of Euros): reform and modernization of the State: justice reform, public sector reform and support for decentralization (29.5); UNDP: reform and modernization of the State (final phase) (US$2.4 million), support for technical cooperation management (US$0.33 million); and bilateral cooperation (US$ million): USAID: strengthening of democracy (21.0); Germany (DM millions): government advisory assistance for decentralization development (6.5); Spain (millions of pesetas): strengthening and modernization of the State (283.0), decentralization (400); France (millions of francs): study on public transport in Santo Domingo and technical assistance (2.8). 3. Action instruments

2.53

For implementing the strategy, the operating program summarized in Annex IV includes regular Bank operations as well as new operations that will seek to foster synergy with the various private sector windows of the IDB group. The Bank will also seek to coordinate its efforts with those of other development agencies active in the Dominican Republic.

- 25 -

a. Coordination with the private sector portions of the IDB group 2.54

Private Sector Department. Consistent with the strategy defined here, the PRI operating program includes two operations, totaling US$175 million, to support airport privatization and the development of electricity distribution. The PRI is planning to monitor reforms as they relate to ports, highways, energy, and water and sanitation, and will collaborate in developing the appropriate institutional and regulatory frameworks and in evaluating the potential interest of private investors in those sectors. In the specific area of water and sanitation, the PRI will cooperate in preparing concession contracts that could attract private capital to the sector.

2.55

Multilateral Investment Fund. The MIF will contribute to the strategy by completing execution of six of the eight operations approved since 1997 in the Dominican Republic. The current portfolio will be devoted largely to supporting the strategy in the areas of public enterprise reform, vocational training, institutional strengthening for small-scale producersâ&#x20AC;&#x2122; associations, water and sanitation reform, and institutional transformation of associations for the promotion of small and medium-scale enterprise. The MIF will undertake an operation to strengthen links between the private sector and the Office of the Secretary of State for Education in the area of technical and vocational education, and will also work with the new authorities and with the private sector to explore special activities targeted at improving the cost structure and competitiveness of micro and small-scale enterprise. This could lead to projects for improving the regulatory environment for market functioning and for financing operations with the private sector, in the areas of integrating productive chains, access to external markets, and development of the services sector.

2.56

Inter-American Investment Corporation. During 2001-2003, the Corporation will continue its search for investment opportunities in export-oriented small and medium-scale companies and projects. Special emphasis will be placed on investment in tourism, minor infrastructure, such as small-scale thermoelectric power generation, and other value-added sectors. For the smaller projects, where economies of scale prevent the IIC from participating, it will continue to provide financial and institutional support to local intermediaries for developing new products. The IIC will explore the possibility of negotiating agency status with a local bank to undertake joint financing for small-scale projects. b. Coordination with other agencies

2.57

The Integral Development Framework initiative launched in 1999 by the World Bank as a pilot project in the Dominican Republic has yet to produce concrete results. That initiative sought to build consensus and forge alliances on common strategic priorities for development, eliminate waste and duplication of effort and stress the achievement of concrete results. Yet, despite a significant, open and participatory debate on key national issues, the process has not yielded any specific coordination matrix, because of constant election-induced changes in players and priorities. Despite this, the Bankâ&#x20AC;&#x2122;s Strategic Matrix (Annex II) identifies actions by

- 26 -

other development agencies with which the Bank could coordinate its efforts, with a special focus on the World Bank, the European Union, USAID and the Japanese government, which hold the largest portfolios in the country after the IDB. Given the importance of the macroeconomic measures identified, the Bank will consider cooperation with the International Monetary Fund, in which case it would adapt its efforts to any agreement signed with the Fund. 4. Operating scenarios 2.58

The assumptions with respect to new funding approvals for implementing the strategy were calculated in terms of progress with the existing portfolio and the degree of commitment on the part of the new government to the process of economic and institutional reform initiated over the past decade. The base scenario includes projects for up to US$465 million. The principal IDB contributions under the scenario would be: US$200 million (quick disbursing) for social sector reform, US$160 million for education, US$50 million for feeder roads, US$20 million for microcredit, and US$5 million for disaster prevention. This scenario also calls for PRI operations to support airport modernization (US$100 million) and the energy programs of EDE Norte and EDE Sur (US$75 million), although they are not included here because they do not constitute public borrowing. The high scenario assumes strong government support for economic and institutional modernization, as demonstrated by concrete progress with reforms not only in the fiscal, monetary and financial areas but also in the agriculture and energy fields. This scenario would include further projects for US$370 million, in addition to those in the base scenario. The loans will be supplemented with TCs that will include studies where necessary.

2.59

The base scenario includes projects that are of priority for the Bank and the country, or where execution of the portfolio has shown significant improvement over the last year. This minimum scenario should not be regarded, however, as implying automatic approval. Consideration for this scenario would be subject to satisfactory execution, beginning in 2001, of the projects that now make up the Bank's pipeline in the country, reflecting an increase in total disbursements for regular operations in each quarter over the preceding year thus contributing to an improvement in net financing flows. In addition to conditions relating to portfolio execution, consideration of the country for the high financing scenario would be predicated on specific progress being made in the area of reform in sectors that are crucial for national development and administration of public finances, including fiscal management on the income and expenditure side. Progress would need to be demonstrated in (i) approval of a suitable policy framework for the electricity sector including (a) a policy statement for the sector that is satisfactory and consistent with the Electric Power Act passed by the Senate; and (b) adoption of a proper financing strategy for the sector; (ii) approval and enactment of a tax reform package that includes: (a) introduction of a fuel tax system that will yield annual revenues of about 2% of GDP; (b) gradual elimination of the foreign exchange commission; and (c) necessary adjustments to domestic taxes in order to offset the loss of fiscal revenues through deregulation); and (iii) progress in implementing the integrated

- 27 -

public sector financial administration program, including enactment of decrees to regulate (a) the financial programming system for budgetary execution at the central level to be used on a trial basis in the education and health sectors, and b) the use of the nonbudgetary fund. 2.60

During the first quarter of 2001, accumulated disbursements for the projects under way increased from the same quarter the year before. The second quarter showed a similar improvement over the same quarter in 2000, a trend that gives every reason to anticipate an improvement in the net flow of funds from the Bank this year. Given the foregoing, the country is considered to have fulfilled the conditions for access to the base scenario for financing in 2001. As to access to the high scenario, the new administration has now fulfilled the conditions pertaining to (i) approval of new hydrocarbon legislation making it possible to change the fuel tax arrangement, and (ii) approval of the tax reform package including adjustment to domestic taxes. The authorities are working to fulfill the remaining conditions. 5. Implementing the strategy a. Implementation risks

2.61

The success of the proposed strategy is subject to a number of major risks. The first has to do with the countryâ&#x20AC;&#x2122;s chronically weak record in absorbing resources, which threatens to delay the achievement of development objectives and to compromise the development impact of these resources. Problems with the portfolio are due primarily to: (i) weaknesses in the national planning and budgeting mechanism, in terms of articulating government objectives with expenditure and financing decisions; (ii) the lack of a sound operating framework and of global and sectoral policies that would help the authorities to identify and prioritize public investments from the viewpoint of an articulated, long-term vision of development; and (iii) limitations in terms of management, administrative capacity and programming. The second risk to implementation of the strategy has to do with potential liquidity problems in providing counterpart funding to the loans, problems that could be made worse by weaknesses in budgetary management and by the sharp fiscal adjustments that will soon have to be made. The third risk is closely linked to execution difficulties, and refers to shortcomings in the governmentâ&#x20AC;&#x2122;s coordination of external assistance, and particularly of nonreimbursable assistance, where there is frequently little consistency with multilateral financing, and where there is no leveraging of counterpart funds. The authorities have been passive in terms of articulating an overall vision of the activities of international agencies, and coordination is frequently impeded by the lack of institutional continuity, communication and a tradition of strategic thinking. The Integral Development Framework launched by the World Bank in 1999 as a pilot undertaking in the Dominican Republic was intended, in part, to build consensus and forge alliances among key individuals and institutions in the country on common strategic priorities for development, to eliminate waste and duplication of effort, and to stress the achievement of concrete results. That process, in which the IDB participated locally, led to the identification of central issues that were

- 28 -

debated in roundtables involving various sectors, civil society organizations and political parties, during the months immediately preceding the 2000 election campaign. During the campaign, efforts to build a comprehensive matrix of actions, as a practical guide to coordination, were suspended, and as a result of electioninduced changes in personal and priorities agreement on such a matrix was impossible. During the transition period, and since the new government took office, dialogue has tended to focus on specific sectors, and progress has been made in some areas such as education and health, where efforts are being coordinated under the aegis of the IDB and the sector authorities. b. Monitoring implementation 2.62

In light of the risks identified above, the Country Office in the Dominican Republic submitted, together with the Policy Dialogue Document, an integrated Action Plan for addressing both specific and general problems threatening the performance of the portfolio. This action plan will be monitored closely. The Bank also plans to condition new approvals on clear progress with economic and institutional reform. Monitoring of the strategy will also stress actions to address the risks flowing from lack of coordination among international agencies, which takes on particular importance given the fiscal situation and the projected needs for counterpart funding, and the countryâ&#x20AC;&#x2122;s financial obligations under the current portfolio.

2.63

The impact of the strategy will be measured using the indicators established in the Strategic Matrix in Annex II of this paper. Compliance with the criteria in the lending scenarios will be measured by the level of disbursements and net flow of funds from the Bank, and against objective indicators of activities in the sectors involved, and in each of the areas of institutional reform (social policy, public enterprises, foreign trade, and municipal development and decentralization). III. AGENDA FOR DIALOGUE WITH THE COUNTRY

Policy aspects

3.1

There exists a set of specific government actions and policies closely associated with the Bankâ&#x20AC;&#x2122;s strategy that were justified and discussed fully in the Policy Dialogue Document, cited above, including a detailed matrix of specific recommendations. These recommendations are intended to attack the problems identified in the situation diagnosis, in which various sectors of national life, civil society, political forces and the private sector were involved. In the Bankâ&#x20AC;&#x2122;s opinion, a decisive step forward in the general direction of these policy recommendations is essential for the success of the present strategy.

3.2

The Bank places particular importance, because of the current macroeconomic and fiscal situation, on the recommendation relating to the distortions in the energy sector. These represent obstacles to preserving economic stability and growth, both because of their distorting effect on domestic fuel prices, and because of the severe

- 29 -

deficit in electricity services and the inconsistencies in sector policies, which continue to have a sharp impact on economic performance and social well-being. B.

Portfolio performance aspects

3.3

The Bankâ&#x20AC;&#x2122;s current portfolio contains programs that respond to many of the recommendations offered, including operations that have long been awaiting congressional ratification, and others where execution by the authorities betrays significant shortcomings. Given both the size of this portfolio and its slow movement, the Bank hopes that the government will make a concerted effort to speed up execution; the pace of new approvals will depend, in part, on progress in executing the current portfolio.

Annex I Page 1 of 5

THE SOCIAL LEGACY OF THE 1990S 1.

INTRODUCTION

1.1

The past decade opened with the worst economic downturn in the country's modern history. Yet performance subsequent to the 1990 crisis produced a general consensus that, if this negative experience served any purpose, it was to persuade the political leadership of the need to preserve macroeconomic balance, whatever the political orientation of the government in power. In fact, the recession ended in 1991 and by 1992 inflation had been brought under control, launching the present era of vigorous growth. There is also consensus on the general welfare effect that has been produced, both through the undoubted increase in per capita incomes and through the improvement in purchasing power that the moderating of inflation has implied during the past decade. But a detailed evaluation of this impact on the country's various social strata and on employment generation, income distribution and the incidence of poverty raises serious questions.

EMPLOYMENT

2.1

From 1992 to 1999, open Inactive unemployment declined from Employed 42% 46% 20.7% to 13.8% of the labor force. The figures show, however, that 1992 this decline was due not so much 12% to rising employment as to a Unemployed shrinking of the labor force, or the number of persons willing and Inactive Employed able to work. The employment 47% 47% rate rose from 46.6% to 47.2% of 1999 persons of working age, which is not enough to explain the decline 6% Unemployed in unemployment. On the other hand, surveys suggest that, while Figure 5 . Dominican Republic. Population of working age. the economy absorbed 559,000 new workers in seven years, a further 780,000 opted out of the labor market. GDP rose by 51.8% over the period, but the number of persons employed rose by only 23.2%, suggesting that the unemployment rate would have been higher had it not been for a decline in the participation rate from 58.4% of the working-age population in 1992 to 53.4% in 1999. Due allowance must be made here for possible errors of measurement, and for the possibility that persons who appear to be outside the labor market are in reality unemployed, but have been discouraged from seeking employment because of distortions in the labor market. There is evidence to suggest, however,

Annex I Page 2 of 5

that the low participation rate has to do with migration and the competitiveness of real wages. 2.2

The female participation rate, which rose during the 1980s, declined in the 1990s. Calculations by CESDEM-ONAPLAN show a negative balance (-1.4 per thousand) between immigrating Haitians and emigrating Dominicans. The fact that more people have been leaving the country than entering it also has an impact on the labor market through family remittances. These amounted to 7.9% of household income in 1998, and when added to current government transfers to families (18.5% of income) would help to explain why fewer people are prepared to work at the going wage.

INCOME

3.1

There is also evidence that the $RD, thousand of inhabitants distribution of incomes 30,000 improved somewhat since the beginning of the decade. The 25,000 Gini coefficient, according to Population GDP per capita which income distribution is 20,000 more equitable as its value approaches zero, confirms this 15,000 assessment. Various surveys 10,000 have shown that in 1984 the coefficient stood at 0.423, but 5,000 that it rose to 0.519 in 1992, showing that economic 0 Years: 90 instability worsened income 91 92 93 94 95 96 97 distribution patterns. Figure 6. Dominican Republic. Per-capita income trend Independent calculations show that the Gini began to decline again in the 1990s, reaching 0.476 in 1998. BCRD surveys show a similar downward trend, from 0.460 in 1993 to 0.430 in 1997. Here again, the data suggest recovery to 1980 levels. With nominal income per capita improving steadily as a result of economic growth, it would be expected that relative price stability has helped to improve the purchasing power of wages. Nevertheless, it should be noted that extensive segments of the population do not feel that they have benefited from growth. This fact may be due in part to unsatisfied expectations aroused by an expansion that, despite its strength, managed only to return social indicators to the levels of the 1980s. This perception is surely reinforced by the existence of pockets of poverty and gaps in the lower income deciles, which the Gini does not measure. In effect, real income per capita appears to have grown more quickly for society as a whole than for the poorest 20%, revealing a clear effect of social slippage.

Annex I Page 3 of 5

3.2

Although the macroeconomic indicators withstood the battering of hurricane Georges, the weak capacity for prevention and mitigation in the face of the disaster failed to contain or reverse its impoverishing effect on already disadvantaged groups, and the devastation of rural infrastructure. The situation served to highlight the vulnerability of the country's productive sectors in the face of such threats, and the precarious ability to respond to their impact. Rigidities are also apparent in access for certain groups, such as women, to the labor market, education, health and social security, and these confirm the limitations of purely economic growth in improving social indicators through the â&#x20AC;&#x153;trickle-down effectâ&#x20AC;?, in the absence of social policies and targeted public spending strategies. As well, as discussed below, despite the emphasis on specific social spending policies, structural constraints in the country's institutional environment prevent those policies from having the expected impact on public welfare, as demonstrated by the persistence of poverty in a country where social spending has doubled as a percentage of GDP in recent years.

POVERTY

4.1

The absence of any official program of regular household surveys, and of any official methodology for measuring poverty, means that there is great controversy over the issue. Estimates have been made since the mid-1980s, but the measurement criteria have changed to such a degree that any attempt to construct a historical series would produce questionable results. The last two official measurements (ONAPLAN, ENDESA 1996, and Central Bank, ENGIH 1998) dramatize this disparity. The first places poverty at 56%, the same as a private measurement for the period (ESU 1996, 56.7%). The second places poverty at 21.5%, two years later.

4.2

This latter figure appears counterintuitive at first glance, and other results have shed further doubt on it. Using standard inter-country comparison methods accepted by ECLAC and the World Bank, 1988 poverty calculations turned out to be much higher in countries with per capita incomes and social spending traditionally greater than those in the Dominican Republic, such as Brazil, Mexico and Venezuela. On the other hand, when the sample used in the BCRD survey was expanded, distortions were discovered that point to measurement problems. Nevertheless, and despite the methodological controversy, it seems undeniable that poverty has declined since the early 1990s. Recent measurements by the World Bank place poverty, including that of the Haitian population, at around 30% in 1998. Regardless of the method, all measurements are consistent in pointing to a downward trend, especially from the 70% level measured in 1991.

4.3

There is further, indirect evidence to confirm this trend. Repeated studies in Latin American countries show a marked correlation between economic growth and poverty reduction. Nominal GDP per capita improved considerably, as Figure 6 shows, and once inflation was brought under control at the beginning of the decade, the practice of regular salary adjustments allowed real wages to rise by

Annex I Page 4 of 5

21.4% from 1992 to 1999. Despite statistical shortcomings, it is clear that growth produced benefits (although not perhaps in the same proportion) for all social groups, and that many households must have succeeded in moving above the poverty line. This progress, nevertheless, succeeded merely in restoring poverty levels to those existing in the 1980s, which the BCRD, EGSF 89 calculated at 57.3%. 5.

SOCIAL INDICATORS

5.1

Public social spending improved 14 % , 100s U S $ appreciably during the 1990s, 12 from 3.8% of GDP in 1991 to D om . R ep. 10 6.6% in 1999. This improvement L A a v e ra g e occurred essentially in the last 8 four years, which saw a 6 substantial shift in social spending 4 policy. But this did not eliminate 2 the country's long-term backlog in social investment, which is still far 0 P e r c a p it a % of G D P below the standard for the hemisphere as a whole, where Figure 7. Dom. Rep. Vs. LA: Social expenditure 14% of GDP is devoted to social expenditure. Inadequate social spending levels are compounded by limitations on quality and management effectiveness, which accentuates the shortfall in meeting real needs. The institutional apparatus for providing public services has historically been deficient, and institutional uncertainty makes it difficult to apply social policies effectively. Resources are dissipated on swollen payrolls for personnel with little preparation, and the portion that reaches the end-user in the form of services is generally of poor quality. Despite recent progress, there is still a long way to grow in incorporating local government and civil society into covering social needs. Until recently the government administered 98.5% of public funds, transferring only 1.5% to municipalities. In 1997 this allocation rose to 4%, but decentralization remains little more than a pious wish. Public management is still concentrated and social services are still provided through vast bureaucracies that are incapable of assigning funding priorities and reaching the neediest groups.

5.2

It is not surprising, therefore, that the country consistently compares unfavorably with the rest of the hemisphere in key social indicators relating to welfare and human capital development, such as health, education, sanitation and housing. This points to a major social deficit that, far from being resolved, is growing and accumulating.

Annex I Page 5 of 5

Selected social indicators Population:

Health:

Education:

Annual growth rate (%) Urban population growth rate (%) Urban population (% of population) Female labor force (% of total) Infant mortality rate (per thousand live births) Mortality rate for children under 5 years Life expectancy at birth (years) Life expectancy for women Measles vaccinations (% of children under 12 years) DPT Access to drinking water (% of population) Primary school enrolment (% of school age group) Secondary school enrolment Student-teacher ratio in primary school Illiteracy (% of population over 15 years) Female illiteracy (% of women over 15 years)

Dominican Republic

LA and Caribbean

2 3 63 30 40 47 71 73 80 80 73 103 41 35 17 18

2 2 74 34 32 41 70 73 93 82 75 113 52 25 13 14

5.3

It is the low-income population that suffers most from the housing deficit, which is for the most part qualitative, urban and aggravated by irregular settlement. Of the 1.4 million housing units in the country, 35% need improvement and 11% are unserviceable. The situation is compounded by overcrowding, with occupancy rates of as much as 1,000 inhabitants per square meter; infrastructure is inadequate, and dwellings are frequently located in high-risk squatter zones where access to services is limited. The need for housing is growing by 40,000 units per year, and it is estimated that hurricane Georges damaged 123,000 units. This deficit reflects not only accelerating urban growth but also an inadequate supply. The formal public and private sectors account for 15% to 25% of annual construction, but government intervention has traditionally produced distortions: it has focused on middle and high-income groups, costs are higher than those of private builders, supervision is inadequate and allocation criteria are influenced by political considerations.

5.4

The strong but unproductive public presence in construction and financing, and the weak regulatory and facilitating role played by government, has restricted private sector participation. Except for the efforts made since 1996, public financing has been subsidized through below-market prices and interest rates, and risk assessment and portfolio management have been weak, and this has generated the notion that it is acceptable to default on financial obligations to the State. Low-income groups have no access to formal financing, and must turn to specialized microcredit institutions, which in recent years have diversified their portfolios to include housing upgrade loans. Even so, funding is inadequate to meet the demand of low-income groups, and the informal sector covers the gap primarily through self-construction, accounting for between 75% and 85% of total production, or between 25,000 and 35,000 units per year.

Annex II Page 1 of 5

STRATEGY MATRIX FOR THE DOMINICAN REPUBLIC Strategic objective

Government action

Actions in support of the strategy

Results indicators

IDB

Other major donors

The challenge of overcoming persistent macroeconomic and financial weaknesses • Eliminate policy

distortions that make the economy vulnerable to internal and external shocks

• Public credit. Stop the automatic growth of CB credit and restructure its balance sheet.

• The quasi-fiscal deficit is reduced to 0.2% of GDP by 2003

In Execution:

• TC Macroeconomic Support and stabilization II;

• Oil and gas policy. Create a new legal framework and

regulatory entity; change the fuel taxation regime to a single tax on the import price

• Financial Sector (third tranche) In pipeline:

• TC support for macroeconomic stabilization (phase II)

• TC program in support of Banking supervision;

• Financial Sector Program II • Monetary policy. Replace the BCRD credit to the NFPS by

GDR portfolio; replace direct monetary controls with market instruments; coordinate budgetary and monetary policy management.

• New public credit from the BCRD is reduced to zero by 2001

• Exchange rate policy. Abolish the dual exchange market; purchase foreign exchange on behalf of the NFPS only through the BCRD exchange counter.

• Banking regulation. Legislate the BCRD's autonomy; update prudential standards.

• Interest rates. Prohibit NFPS entities from borrowing

directly from the BCRD; create deposit insurance schemes not dependent on a simple second-tier bank; strengthen banking supervision and independent financing.

• Financial intermediation. Encourage competition by

prohibiting related lending and allowing the entry of new banks

• Cost of raising funds is reduced to 13% for the year 2002

• World Bank: financial sector reform

Annex II Page 2 of 5

Strategic objective

Government action

Actions in support of the strategy

Results indicators

IDB

Other major donors

The challenge of eliminating current fiscal weaknesses both in revenues and in social spending and infrastructure • Eliminate revenue

weaknesses and expenditure distortions that threaten the availability of fiscal resources for meeting social and economic needs

• Taxation: change tariffs and ITBIS taxes on alcohol and

cigarettes; reform the real estate property tax; create an asset or gross revenues tax deductible against income taxes; eliminate/decentralize low-yield taxes; increase the tax administration budget, and gear it in part to success in reducing evasion.

• Social expenditure and investment. Unify social

investment in a single mechanism; targeted, with subnational participation; revive investment in basic and intermediate education and in occupational training, with business participation; remove the GDR from the direct construction and financing of housing; promote housing microcredit; create direct demand subsidies; submit the draft Water and Sanitation Framework Law; encourage the private provision of water and sanitation services in tourist areas.

• Productive expenditure and investment: basic

infrastructure investment program, limit public spending to areas where private investment cannot be justified; make use of infrastructure concessions where justified; direct support for farmers through market opening; create a public but privately administered electricity transmission enterprise.

• Tax burden rises to 17% of GDP by 2003

In execution:

• Implementation of the Integrated

Government Financial Administration Program 1093/OC-DR

• Labor reform and training program • Social spending rises by 2.5% of GDP in 2002

• Feeder roads II • Basic education improvement II • User-managed irrigation systems • Modernization and restructuring of the health sector

• Reform and modernization of water and sanitation

• San Pedro de Macoris power plant • Public investment in productive

infrastructure and agriculture is maintained at 5.5% of GDP as of 2001

• Nine TCs for US$2.93 million • MIF operations for US$4.24 million In pipeline:

• Social Spending Reform • TC for Strengthening Taxation and Customs Administration

• Expenditure financing: establish annual financing policies

at the time revenues and expenditures are budgeted; consolidate administrative debt; integrate the management of multilateral financing with other budgetary management; reform social security through a pension system based on individual capitalization.

• Budgeting: unify budgetary management responsibilities in

a single government unit; establish integrated financial administration for the public sector; create a budgetary management programming system with revolving funds and petty cash, to replace the "allocations" system run by ONAPRES; create a Human Resources Administrator and establish a public sector salary policy; reform the government procurement and contracting system.

• Total external debt is held at 18.5% of GDP

• PRI Support for Airport Privatization, DR-0133

• EDE Norte and Sur energy program, PRI, DR-0137 and TC support program

• Basic Education Program III • Public spending budgeted and

executed 95% consistent for the year 2002

• Intermediate Education Program, DR-0112 • TC for a diagnostic assessment of primary education

• Germany: reproductive health;

primary school construction; economic development and job creation (DM 23 million)

• World Bank: health sector reform;

basic and secondary education improvement; water and sanitation reform; road reconstruction and improvement; solid waste disposal in tourist areas (US$152 million)

• Spain: water and sanitation

infrastructure; health infrastructure; education infrastructure; vocational training and employment (Pesetas 2,231 million)

• Japan: technical training support; immunization program; school construction; treatment plant rehabilitation (US$31 million)

• UNDP: support for national

HIV/AIDS program; evaluation of ten-year education program; access to productive social and community infrastructure works (US$3 million)

• Taiwan: hospital reequipping;

school construction; literacy (US$33 million)

• European Union: strengthening the health services system; water and sanitation; rehabilitation of schools; reform of technical and vocational education system; improvement in energy services (Euros 56 million)

• USAID: educational policy

improvement; HIV prevention; reproductive health; improving basic health services; improving energy services (US$58 million)

Annex II Page 3 of 5

Strategic objective

Government action

Actions in support of the strategy

Results indicators

IDB

Other major donors

The challenge of dismantling constraints on the business climate • Contribute to dismantling structural distortions and policies that limit the potential for diversified growth

• General policy framework: dismantle tariffs and nontariff

barriers; supplementary legislation on competition and foreign investment, create a climate conducive to private investment, and infrastructure concessions; Port reform plan; complete the airport institutional reform, establishing a technical unit to supervise the concession contract; create an electricity sector policy body and give autonomy to the regulatory body.

• Agricultural policy. Eliminate nontariff barriers and their

associated discretionality; proceed with ad hoc freehold titles for settlers under the agrarian reform; eliminate legal barriers to leasing and sharecropping; introduces wholesale water sales, with freedom to resell; strengthen self-management of irrigation.

• Customs tariff reform in place for 2002

In execution:

• TC, external trade modernization. • Agri-food policy restructuring • MIF operation: energy sector restructuring In pipeline:

• Forty percent of irrigation under selfmanagement by 2003

• Public enterprise reform • Foreign trade modernization • Hybrid agri-food reform • Science and technology innovation loan • MIF operation, private sector-SEC links • TC, support for tourism and free trade zones

• TC Trade Center Rehabilitation • Industrial policy. Encourage inter-firm cooperation and

development of clusters; diversify free trade zone activities and product markets; replace subsidized credit to SMEs with market information and competitiveness-oriented technology services.

• Subsidized credit to SMEs replaced by support for clusters, access to information and technology, by 2002

• MIF operation for institutional reform of ADOPEN

• MIF operation for institutional reform FONDESA

• Germany: pocommunity; sanitation; small electric power plants; CDE electric power transmission (DM59 million)

• World Bank: telecommunications sector reform; energy market development (US$103 million)

• Spain : development of production, agriculture, and environment; support for SMEs and microenterprise (Pesetas 2,799 million)

• France: modernization of electric

power transmission; credit lines and support for private business; ADEMI, microcredit for women in development; coffee production; cacao production and marketing; Sierra integrated development plan; irrigation development in NE region (US$66 million)

• Japan: irrigation improvements; maintenance of agricultural land (US$21 million)

• Taiwan: agriculture and rural

development; support for Sierra Plan; support for cybernetic park (US$14.5 million)

• UNDP: support for microenterprise and small-business (US$1 million)

• EU: private sector development;

banana production; vocational and technical education; financing for SMEs (US$37 million)

• USAID: promoting a more

competitive economy (US$5 million)

Annex II Page 4 of 5

Strategic objective

Government action

Actions in support of the strategy

Results indicators

IDB

Other major donors

The challenge of increasing the natural disaster prevention, mitigation and response capacity • Help improve the capacity

to prevent, mitigate and respond to natural disasters and environmental degradation

• Environmental policy: adopt environmental and natural

resources framework legislation; strengthen the decisionmaking system/national environmental hazards management strategy; support enforcement, supervision and control of the building code

• Environmental and natural resources framework legislation in place for 2002

In execution:

• Hurricane Georges reconstruction program • TC natural disaster prevention program In pipeline:

• Action Line: National Disaster Prevention • Disaster prevention: seek financing schemes that will

protect the public finances from catastrophic shocks; encourage internalizing of prevention costs in public investments and use the insurance market; strengthen the capacity to prevent, mitigate and respond to natural disasters and environmental degradation

• Disaster prevention and response

capacity improved by 80% in 2003 over the level achieved under 1152/OC in 2001

Program

• Watershed Management Program

• Germany: natural resource

management; Yaque del Norte river basin; primary education (DM17 million)

• World Bank: environmental policy;

watershed management; post hurricane Georges recovery (US$151 million)

• Spain: Araucaria program (Pesetas 400 million)

• France: study of greenhouse effect (Francs 0.8 million)

• UNDP: environmental management and development (US$0.7 million)

• European Union: water supply and environmental sanitation SD; post hurricane Georges emergency program (Euros 32 million)

• USAID. environmental policy support; disaster mitigation

• Taiwan: reforestation in the Rio Nizaito basin (US$9 million)

Annex II Page 5 of 5

Strategic objective

Government action

Actions in support of the strategy

Results indicators

IDB

Other major donors

The challenge of expanding the institutional capacity to meet social demands • Help improve the capacity

of institutions to respond to social needs and aspirations

• Public Management: promote stability and professionalism

in the public service, by building a political consensus; strengthen managerial training in public administration, with special emphasis on social and economic management.

• Decentralization: develop a national decentralization strategy; establish a functional mechanism of local government; deconcentrate services and transfer responsibility to municipalities; promote training in municipal management.

• Administration of justice: strengthen the management

capacity of the judiciary; streamline landholding jurisdiction; Institute a Public Defender.

• Transparency: strengthen the Tribunal of Accounts, give

the Comptroller General autonomy in his functions; give the Legislature the wherewithal to perform its tasks properly; improve the management capacity of the Central Elections Board.

• Civil Service and Administrative

Careers Act functioning as of 2002

In execution:

• Northeast community development program

• Ten percent of public expenditure

controlled by municipalities in 2002

• Landholding jurisdiction modernization • Reform and modernization of the executive branch

• Modernization of the national Congress • Spurious litigation cases reduced by 10% in 2003

• Substantial technical capacity within Congress for reviewing the public expenditure budget, by 2003

• 11 TCs for US$2.73 million In pipeline:

• Municipal development • TC ADN financial management • TC for AND strategy • TC for project coordination and implementation

• TC for OSC strengthening program

• Germany: advisory assistance for decentralization development (DM6.5 million)

• World Bank: government financial administration reform; judicial services; procurement (US$100 million)

• Spain: modernization of the State; decentralization (Pesetas 400 million)

• France: study on public transport for Santo Domingo and technical assistance (Francs 2.8 million)

• UNDP: reform and modernization of the State, final phase, TC management support (US$3 million)

• European Union: justice reform;

public sector reform and support for decentralization (Euros 29.5 million)

• USAID: strengthening democracy (US$21 million)

Annex III Page 1 of 5 Dominican Republic â&#x20AC;&#x201C; Pipeline of IDB actions IDB-financed loans (US$ millions) Number

Amount

Year

773/OC-DR

102.0

In progress

DRXXX

100.0

2002

The challenge of overcoming persistent macroeconomic and financial weaknesses Financial sector Financial sector II

The challenge of eliminating current fiscal weaknesses both in revenues and in social spending and infrastructure Basic education improvement program II

897/OC-DR

52.0

In progress

Self-management of irrigation systems

905/OC-DR

52.0

In progress

Health sector modernization and restructuring

1047/OC-DR

61.2

In progress

Integrated financial management program

1093/OC-DR

10.3

In progress

Country road program II

1114/OC-DR

48.0

In progress

Worker training and labor reform program

1183/OC-DR

16.9

In progress

Potable water and sanitation sector reform and modernization

1198/OC-DR

71.0

In progress

San Pedro de MacorĂs power plant (Guarantee)

1234/OC-DR

150.0

In progress

Secondary education program I

1289/OC-DR

52.0

In progress

Basic education III

DR0125

70.0

2002

Airport modernization program (Guarantee)

DR0136

150.0

2001

EDE Norte and EDE Sur energy program (Loan)

DR0137

75.0

2001

Social sector reform program

DR0140

200.0

2001

Housing sector modernization program

DR0141

30.0

2001

Secondary education program II

DRXXXX

90.0

2003

Hybrid energy sector reform program

DRXXXX

100.0

2003

Multiphase country road program

DRXXXX

50.0

2003

DR0138

50.0

2001

Foreign trade modernization

DRXXXX

10.0

2003

Global microcredit program

DRXXXX

20.0

2002

The challenge of dismantling constraints on the business climate Agrifood sector development program

The challenge of increasing the natural disaster prevention, mitigation and response capacity Hurricane Georges reconstruction and development

1152/OC

105.0

In progress

Line of activity for disaster prevention

DRXXX

5.0

2001

Watershed management

DRXXX

50.0

2003

Annex III Page 2 of 5 The challenge of expanding the institutional capacity to meet social demands Land jurisdiction modernization

1079/OC-DR

32.0

In progress

Northeast region community development I

1124/OC-DR

8.96

In progress

Modernization of the executive branch

1176/OC-DR

21.5

In progress

Modernization of the National Congress

1258/OC-DR

22.3

In progress

Social development program

DR0076

30.0

2002

Municipal development

DR0127

30.0

2002

Annex III Page 3 of 5

Dominican Republic â&#x20AC;&#x201C; Pipeline of IDB actions, 2000 - 2003 IDB-financed technical cooperation funding (US$ millions) Number

Amount

Year

0.15

In progress

The challenge of overcoming persistent macroeconomic and financial weaknesses Macroeconomic stabilization policy support II

ATN/SF-6056-DR

The challenge of eliminating current fiscal weaknesses both in revenues and in social spending Domestic violence against women

ATN/SF-5426-DR

0.325

In progress

Institutional framework for MIRH in DR

ATN/NE-6332-DR

0.090

In progress

Social infrastructure and physical capacity project

ATN/JF-6391-DR

0.749

In progress

Teacher training and selection mechanism

ATN/NS-6560-DR

0.088

In progress

SEEC decentralization mechanism

ATN/SF-6643-DR

0.078

In progress

Support for secondary education I

ATN/JF-6781-DR

0.423

In progress

Strengthening of Secretariat of Women's Affairs

ATN/SF-6796-DR

0.150

In progress

Support for conflict resolution center

ATN/SF-6825-DR

0.340

In progress

Post secondary education modernization and reform

ATN/SF-6899-DR

0.149

In progress

Development of teachers' pension fund

TC0011001

0.150

2001

Education technology pilot program

TC0012013

0.150

2001

National childhood strengthening program

TC0012021

0.150

2001

Action plan for Santo Domingo urban transport

TC0102001

0.113

2001

Modernization of foreign trade

ATN/SF-5937-DR

0.149

In progress

Restructuring of agrofood policy

ATN/SF-6557-DR

0.110

In progress

Preparation of colonial city rehabilitation program

TC9911189

0.200

2001

Support for tourism and free-trade zones

TC0002085

0.150

2001

TCXXXXXXXX

0.750

2002

0.750

In progress

The challenge of dismantling constraints on the business climate

Strengthening of the tax and customs administration

The challenge of increasing the natural disaster prevention, mitigation and response capacity Support for natural disaster prevention program

ATN/SF-6272-DR

The challenge of expanding the institutional capacity to meet social demands Support for modernization of the National Congress

ATN/SF-5313-DR

0.490

In progress

Support for Attorney General's Office

ATN/SF-5768-DR

0.148

In progress

Project inventory and monitoring

ATN/JF-5893-DR

0.750

In progress

Local development program

ATN/SF-5973-DR

0.150

In progress

Strengthening of civil society organizations

ATN/SF-6142-DR

0.300

In progress

Administration of justice for minors

ATN/SF-6325-DR

0.100

In progress

Rationalization of executive branch

ATN/SF-6740-DR

0.145

In progress

Annex III Page 4 of 5 Fiscal and institutional reform

ATN/SF-6758-DR

0.150

In progress

Support for bicameral commission

ATN/SF-6778-DR

0.149

In progress

Strengthening of financial administration II

ATN/SF-6997-DR

0.350

In progress

CSO strengthening program

ATN/SF-7247-DR

0.150

In progress

Enabling partnerships between businesses and NGOs

ATN/SF-7266-DR

0.300

In progress

Support for execution of ADN's strategy

ATN/SG-7169-DR

0.075

In progress

Support for project coordination and execution

ATN/SF-7281-DR

0.150

In progress

Support for preparation of a national development agenda

ATN/SF-7293-DR

0.085

In progress

Social management support program

ATN/SF-7294-DR

0.150

In progress

Support for AND financial and administrative management III

TC9903035

0.750

2001

Institutional strengthening program for INVI

TC0012011

0.714

2001

Strengthening of civil society organizations

TC0012019

0.250

2001

Program to strengthen coordination between community and government

TC0012021

0.100

2001

Developing poverty indicators

TC0101058

0.500

2001

Annex III Page 5 of 5

Dominican Republic – Pipeline of IDB actions, 2000 – 2003 MIF operations (US$ millions) Number

Amount

Year

1.300

In progress

The challenge of overcoming persistent macroeconomic and financial weaknesses Banking supervision support program

ATN/MT-7252-DR

The challenge of eliminating current fiscal weaknesses both in revenues and in social spending Worker training program

ATN/MT-5521-DR

0.663

In progress

Support for public enterprise reform

ATN/MT-5910-DR

2.500

In progress

Potable water and sanitation reform

ATN/MT-6661-DR

1.08

In progress

TC0101066

2.000

2001

Restructuring of the energy sector

ATN/MT-5522-DR

1.220

In progress

Support for ADOPEM institutional restructuring

ATN/ME-6947-DR

0.300

In progress

Support for FONDESA institutional restructuring

ATN/ME-6948-DR

0.300

In progress

The challenge of dismantling constraints on the business climate Private sector linkages– SEE for technical and vocational education

The challenge of increasing the natural disaster prevention, mitigation and response capacity The challenge of expanding the institutional capacity to meet social demands

Annex IV Page 1 of 2

Dominican Republic – Operations Program 2001 – 2003 IDB-Financed loans (US$ millions) Project

Base scenario

High scenario

5.0

200.0

Housing sector modernization program

0.0

30.0

Agrifood sector development program

0.0

50.0

205.0

285.0

Basic education program III (DR-01250

70.0

Global microcredit program

20.0

Social development program (DR-0076)

30.0

Municipal development program (DR-0127)

0.0

30.0

Financial sector program II

0.0

100.0

120.0

250.0

Secondary education program II

90.0

Multiphase country road program

50.0

Foreign trade modernization program

0.0

10.0

Watershed management program

0.0

50.0

Hybrid energy sector reform program

0.0

100.0

140.0

300.0

465.0

835.0

2001 Line of activity for disaster prevention Social sector reform program (DR-0140)

Sub-total: 2002

Sub-total: 2003

Sub-total: Total PRI operations (US$ millions)

Number

Amount

Year

Airport modernization program (Guarantee)

DR-0136

150.0

2001

EDE Norte – EDE Sur energy program (Loan)

DR-0137

75.0

2001

Total:

225.0

IDB-financed technical cooperation funding (US$ millions) Number

Amount

Year

Developing poverty indicators

TC-0101058

0.500

2001

Preparation of colonial city rehabilitation program

TC-9911189

0.200

2001

Support for tourism and free-trade zones

TC0002085

0.150

2001

Support for ADN administrative and financial management III

TC9903035

0.750

2001

Program to strengthen community -government coordination

TC-0012021

0.100

2001

National childhood strengthening program

TC-0012020

0.150

2001

Civil society organization strengthening program

TC-0012019

0.250

2001

Development of teachers' pension fund

TC-0011001

0.150

2001

Strengthening of the tax and customs administration

TCXXXXXX

0.750

2002

Total:

3,000

Annex IV Page 2 of 2

MIF operations (US$ millions) Private sector linkagesâ&#x20AC;&#x201C; SEE for technical and vocational education

TC0101066

2,000

2001

Action plan for Santo Domingo urban transport

TC-0102001

0.113

2001

Education technology pilot program

TC-0012013

0.150

2001

Institutional strengthening program for INVI

TC-0012011

0.714

2001

Trust funds (US$ millions)

Total:

0.977