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service. In practice, use of the export incentive law to import raw materials for process and re-export is cumbersome and delays in clearing customs can take anywhere from 20-60 days. This customs clearance process has made completion of production contracts with specific deadlines very difficult. As a result, non-free trade zone exporters rarely take advantage of the export incentive law. Most prefer to import raw materials using the normal customs procedures which, although more costly, are more rapid and predictable.
There is no preferential financing for local exporters nor is there a government fund for export promotion.
7. Protection of U.S. Intellectual Property
In general, copyright laws are adequate, but enforcement is weak, resulting in widespread piracy. Although the Dominican Republic is a signatory to the Paris Convention and the Universal Copyright Convention, and in 1991 became a member of the World Intellectual Property Organization, the lack of a strong regulatory environment results in inadequate protection of intellectual property rights. In 1992, the Dominican Republic was the subject of a petition by the Motion Picture Export Association of America (MPEAA) before the United States Trade Representative, alleging piracy of satellite television signals and unauthorized use of videos in Dominican theaters. In response to this complaint, the Dominican government took effective action against cable television pirates and most of the television piracy was halted. Patents (product and process): In a local pharmaceutical market of approximately 110 million dollars a year, Dominican manufacturers supply about 70 percent of the total. Of that, about seven per cent is believed to be counterfeit.
Trademarks and Copyrights: Many apparel brands are counterfeited and sold in the local market. In addition to the MPEAA complaint, problems have arisen with illegally copied videos, software and books.
Impact of IPR Policies on U.S. Trade: Non- protection of intellectual property rights is so widespread that it is virtually impossible to quantify its impact on U.S.Dominican Republic trade. The U.S. Motion Picture Exporters' Association had estimated that losses to its members due to theft of satellite-carried programming were more than one million dollars per year. Losses due to other counterfeiting cost U.S. companies millions more.
8. Worker Rights
a. The Right of Association.-The constitution provides for the freedom to organize labor unions and also for the rights of workers to strike and for the private sector to lock out. All workers, except military and police, are free to organize, and strikes are legal except in sectors which are considered essential services. Organized labor in the Dominican Republic represents about 10-15 percent of the work force and is divided among three large confederations, three minor confederations, and a number of independent unions. Labor unions can and do freely affiliate regionally and internationally.
b. The Right to Organize and Bargain Collectively.-Collective bargaining is permitted and can take place in firms in which a union has gained the support of an absolute majority of the workers of a firm. According to law workers cannot be dismissed because of union activities or membership. There has been a history of labor conflict in the free trade zones, with companies firing workers for engaging in union organizing activities. The 1992 Labor Code protects from layoffs up to 20 members of a union in formation and between 5 to 10 members of a union executive council, depending on the size of the work force. The 1990 firings of unionized workers by the Dominican Electric Corporation led to managementЛlabor disputes which have yet to be fully resolved. The free trade zones have also been the scene of some management/labor disputes (see Section 8.F.).
c. Prohibition of Forced or Compulsory Labor.-Forced or compulsory labor is prohibited by law. The Dominican government has been criticized for its treatment of Haitian workers employed by the State Sugar Council (CEA). Alleged abuses have included forced recruitment, compulsory labor, and restrictions on freedom of movement. Instances of forced labor and restrictions on movement occurred in only isolated instances on CEA plantations in 1993. Forced labor has not been a problem in other areas.
d. Minimum Age for Employment of Children.-The labor code prohibits employment of youths under 14 years of age and places various restrictions on the employment of youths under the age of 16. In practice, there are large numbers of minors working illegally, primarily in the informal sector. The high level of unemployment and the lack of a social safety net create pressures on families to allow children to generate supplemental income. Instances of child labor in CEA sugar plantations
have diminished greatly and most observers note that such practice is no longer a serious problem.
e. Acceptable Conditions of Work.-The Labor Code establishes a standard work period of eight hours per day and 44 hours per week, with an uninterrupted rest period of 36 hours each week. In practice, a typical workweek is Monday through Friday plus half day on Saturday, but longer hours are not unusual, especially for agricultural and informal sector workers. Workers are entitled to a 35 percent wage differential when working between 44 and 68 hours per week and a 100 percent differential for any hours above 68 per week. The vast majority of workers receive only the minimum wage (which varies by law in accordance with the type of activity and the size of the company). Safety and health conditions at places of work do not always meet legal standards. The existing social security system does not apply to all workers and is under funded.
f. Rights in Sectors with U.S. Investments.-U.S.-based multinationals active in the free trade zones represent one of the principal sources of U.S. investment in the Dominican Republic. The free trade zone sector's compliance with the right to orga nize and bargain collectively has been a matter of controversy, but during 1994 some progress was made. Some companies in the free trade zones adhere to significantly higher worker safety and health standards than do non-free trade zone companies. In other categories of worker rights, conditions in sectors with U.S. investment do not differ significantly from conditions in sectors lacking U.S. investment.
Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993
[Millions of U.S. dollars]
Suppressed to avoid disclosing data of individual companies.
Income, Production and Employment:
Real GDP Growth (pct.)
GDP (at current prices)
Key Economic Indicators
[Millions of current U.S. dollars unless otherwise noted]
87-414 O - 95
11994 estimates are based on data available in October 1994. GDP sector figures are based on sector shares of 1993 GDP.
2 Average annual interest rate for 90-day bank deposits.
Average annual free market exchange rate.
1994 debt stock, excluding interest on interest, as of June 30. Debt service includes public and private scheduled payments, including arrears, but not refinanced payments.
Reserves as of September 30, 1994.
1. General Policy Framework
The Ecuadorian economy is based on petroleum production, along with exports of agricultural commodities (chiefly bananas) and seafood (particularly shrimp). Industry is largely oriented to servicing the domestic market, but is becoming more export-oriented. During the oil boom of the 1970's, the Ecuadorian government borrowed heavily from abroad, increased subsidies to consumers and producers, and expanded the state's role in economic production. In the 1980's, such policies became less financially sustainable, leading to chronic macroeconomic instability. The resulting fiscal deficits were financed by accumulation of arrears to suppliers and foreign banks, along with monetary emissions by the Central Bank. Nevertheless, a functioning democracy and partial reform measures kept Ecuador's economic problems within manageable limits. In 1992 the electorate turned away social democratic and populist presidential candidates to choose a conservative advocate of economic liberalization. President Sixto Duran Ballen took office in August 1992 promising to stabilize the economy, modernize the state, and expand the role of the free market. While the macroeconomic program has been successful, the fundamental structural reforms required to improve the investment climate and prospects for long-term growth has proven more difficult to achieve.
Two rounds of economic stabilization measures in 1992 and 1994, including large fuel and public utility price hikes, all but eliminated the public sector budget deficit, reduced chronic inflation, slowed the depreciation of the currency, and built up Ecuador's foreign currency reserves. The 1992 budget reform law should help unify the central government budget, curtail the earmarking of revenues for unrelated expenditures, and give the Ministry of Finance greater control over spending by public agencies. The elimination of the Central Bank's role in subsidizing credit earlier in 1992 has also helped curb the deficit. Since February 1994, the government has set
domestic gasoline prices according to world market factors, thereby_stabilizing an important source of government revenue. Finally, the tax reform of December 1993 and the March 1994 customs law, if fully implemented, should increase the government's non-oil revenues.
After failing to close an agreement with the IMF in mid-1993, the government concluded a two-year stand-by arrangement in March 1994 and has applied strict fiscal discipline to date. Deferral of capital projects has helped keep the 1994 consolidated public sector deficit to below 0.5 percent of GDP. Government revenue from oil exports and domestic sales of fuel will account for about 7.5 percent of GDP in 1994, while sales and income taxes will only contribute 6.2 percent of GDP. Public sector expenditures (including the state enterprises, but excluding the military's capital budget funded by a direct allocation of oil revenues) will account for about 26 percent of GDP in 1994. Debt service is the largest area of government spending, followed by education and defense. For 1995, the government plans to increase real spending on debt service, road building, public health, and the military, and cut spending on housing, welfare, agriculture, and general administration.
As a result of the stabilization program and weaker demand for Ecuadorian exports, economic growth slowed to 2 percent in 1993, down from 3.6 percent in 1992. Greater oil and banana production volumes in 1994 may result in GDP growth of over 3 percent in 1994. The government hopes that reform measures will finally produce a general economic recovery and 4 percent growth in 1995. Gross domestic product for 1994 should reach about $16.6 billion, producing a GDP per capita of $1,479. In 1993, Ecuador ran a $578 million merchandise trade surplus and a current account deficit of $360 million due to a services deficit of $1,068 million. Ecuador's trade surplus will fall further to around $300 million in 1994, with oil and banana prices remaining below the levels of previous years.
After experiencing general price rises of 60 percent in 1992 and 31 percent in 1993, Ecuador's inflation rate is slowing to about 25 percent for 1994. The government hopes to reduce inflation to 15 percent in 1995 and single digits in 1996. Driven by capital inflows, the money supply (M2 or bank liquidity) increased by 54 percent in 1993 and as of the end of September 1994 was up 70 percent over the previous 12 months. M2 has risen to 21 percent of GDP. Since late 1992 the Central Bank has tried to smooth out fluctuations in liquidity through weekly bond auctions and interventions in the secondary market. The government has attempted to compensate for the inflationary effect of the foreign exchange influx by increasing its sucre deposits at the Central Bank. In July 1994, the Central Bank abandoned the use of reserve requirements as a monetary policy tool when it unified the requirement for checking and savings deposits, then lowered it to 10 percent. From late 1992 to early 1994, free market sucre interest rates swung sharply in response to alternating periods of declining inflationary expectations and renewed uncertainty over the direction of government economic policy. Declining liquidity produced a slower climb in rates from April to July 1994 to peak at 41 percent for 90-day CD's. During the second half of 1994, 90-day CD rates eased to about 35 percent. The spread between savings and lending rates has narrowed from an average of 11 points in 1993 to 8 points for 1994.
2. Exchange Rate Policy
In September 1992, the government devalued the currency by 35 percent, set an intervention rate of 2,000 sucres to the dollar and embarked on a controlled float. Since December 1992 exporters have no longer had to surrender their foreign_exchange earnings to the Central Bank. The intervention rate was abandoned in September 1993. Foreign currency is readily available on the free market, trading at about 2,275 sucres to the dollar in October 1994, a 12 percent nominal depreciation since the beginning of the year. There are no restrictions on the movement of foreign currencies into or out of Ecuador. A partially-controlled exchange rate structure remains in effect for the public sector. The state oil company and other public entities currently receive about 11 percent less for dollars earned from exports than the free market rate for buying dollars. The spread, which the government plans to eliminate, serves to finance the Central Bank and force savings by the public sector enterprises.
A high interest rate differential between Ecuador and the United States has attracted net capital inflows of around $700 million since late 1992, slowing the nominal depreciation of the sucre. Relative exchange rate stability contributed to a real inflation-adjusted appreciation of the sucre of 16.7 percent in 1993, a pattern that has continued in 1994. The overvalued currency and earlier trade liberalization measures have made imports more competitive and served as a partial anchor against inflation, but Ecuadorian exporters are increasingly caught between rising sucre costs and stagnant sucre earnings. The Central Bank has intervened in the
exchange market on occasion to keep the currency from appreciating by selling sucres, leading to an increase in foreign reserves, but creating upward pressure on the money supply. By the end of September 1994, foreign exchange reserves had risen to $1.58 billion, enough to cover imports for about 6 months. During 1995, increased inflows of multilateral development resources should be offset by renewed debt service payments.
3. Structural Policies
The Duran Ballen administration has had only partial success with its structural reform program designed to promote investment and economic growth. In the administration's first year, progress was made on budget reform and promoting the development of capital markets. The government's staffing level, particularly for contractors, was significantly reduced. Many unnecessary and market-distorting reg. ulations were eliminated. With a few exceptions for pharmaceuticals and some foodstuffs, all prices are now set by the free market. During the second year, the state development banks began selling their equity shares in commercial enterprises to the private sector, although there have been no sales of shares owned by the military. The government hopes to move forward during its final two years with the partial privatization of some of the major state enterprises, while continuing the effort to implement earlier government modernization legislation and combat corrup
The version of the state modernization law finally passed by Congress in late 1993 allows private sector participation in "strategic sectors" of the economy, including petroleum, electricity, and telecommunications, but only on a concession basis. Legislation to promote private sector involvement in telephone service and electricity generation may be enacted in 1995. Meanwhile, the government is proceeding with the sale of Ecuatoriana, the bankrupt state airline. Since April 1994, new leaders at the National Modernization Council (CONAM) have given direction and purpose to the government's structural reform program. In addition to the plans for the major state enterprises, CONAM is developing concession programs for public works, the civil registry, airports, and ports and customs administration. Postal and railroad services will be left more to the private sector. Efforts will also be made to modernize higher education and the social security system's troubled pension and health systems. The Ministry of Education is introducing a modern curriculum in the public schools designed to emphasize reasoning over memorization.
The May 1993 capital markets law provided a mechanism for privatizing state enterprises by establishing the legal basis for turning the Quito and Guayaquil stock exchanges into true equity markets. During the first year of operations under the new law, monthly trading volume of equity shares grew from practically nothing to $53 million in July 1994. The markets should expand further in the wake of social security pension reform, privatizations of state firms, and greater private sector interest in the markets' capital-raising potential. Meanwhile, Congress enacted a new financial institutions law in May 1994 that substantially deregulates the financial sector, while providing greater safeguards against bank failures.
Investment liberalization measures in 1991 and 1993 provided foreign investors with full national treatment and eliminating prior authorization requirements for investment in most industries, including finance and the media. Specific restrictions, most applicable to Ecuadorian as well as foreign investors, remain for petroleum, mining, electricity, telecommunications, and fishing investments. A bilateral investment treaty that provides free transfers and a binding arbitration dispute settlement procedure was signed with the United States in August 1993 and ratified by Ecuador's Congress in September 1994. The capital markets law equalized income tax rates on foreign and domestic companies at 25 percent. A value-added tax of 10 percent applies to sales of imports of goods and services in the formal sector. Utilizing the more investor-friendly procedures of the November 1993 hydrocarbons law, the goverment generated considerable foreign interest in the 1994 seventh petroleum exploration licensing round and a project to construct and manage a second oil pipeline across the Andes. In July 1994, Congress approved an agrarian development law that will improve the security of agricultural land tenure for both peasants and agrobusiness.
4. Debt Management Policies
At the end of the first half of 1994, Ecuador's external debt, including past-due interest, exceeded $13.3 billion. Over half of the debt, about $4.5 billion in principal and $2.8 billion in interest arrears, was owed to foreign commercial banks and secondary market investors in bank paper. Total debt service owed in 1993 amounted to 36 percent of goods and services exports and 9 percent of GDP. Ecuador stopped paying debt service to the commercial banks in 1987, resumed paying 30 percent