VZCZCXYZ0015
RR RUEHWEB

DE RUEHDG #1936/01 2281924
ZNR UUUUU ZZH
R 161924Z AUG 07
FM AMEMBASSY SANTO DOMINGO
TO RUEHC/SECSTATE WASHDC 8979
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE

UNCLAS SANTO DOMINGO 001936 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT PLEASE PASS TO WHA/CAR ALAIN NORMAN, USTR CAROYL 
MILLER, EEB/TPP/ABT GARY A. CLEMENTS, AND COMMERCE 
ITA/OTEXA MARIA D'ANDREA 
 
E.O. 12958: N/A 
TAGS: ECON ETRD OTRA PGOV PREL DR
SUBJECT: FREE TRADE ZONES CONFRONT CRISIS 
 
REF: SECSTATE 114799 
 
¶1.  (SBU) Summary: The free trade zones (FTZ) of the 
Dominican Republic are experiencing a period of sharp 
decline.  This decline has meant the loss of over 60,000 jobs 
since late 2004, concentrated almost exclusively in the 
textile and apparel industries, with additional job losses on 
the horizon if no action is taken over the next 6 to 12 
months.  The ruling Dominican Liberation Party (PLD) is 
worried about the political implications of the downturn. 
The Dominican government, private sector, labor unions and 
outside experts tend to agree broadly that the contributing 
factors in the weakening of the FTZ sector are the high 
production costs (e.g., energy, transportation, customs, 
labor costs and exchange rate pressures), international 
competition from Asia and Central America, and a lack of 
sufficient modernization of the business models employed by 
FTZ companies.  However, they differ greatly on the relative 
importance of these factors, a fact reflected in the varying 
solutions preferred by the government (i.e., modernization) 
versus those preferred by the private sector (i.e., 
short-term costs savings).  End Summary. 
 
Synopsis of the Current Crisis 
------------------------------ 
 
¶2. (U) With the Dominican economy growing at a steady pace 
(over 10 percent in 2006), the only sector of the economy 
that is in decline is the FTZ sector, which fell by over 12 
percent last year.   The FTZ sector is made up of a range of 
manufacturing businesses, including medical equipment, 
jewelry, call centers, electronics, pharmaceuticals and 
textiles and apparel.  Approximately 90 percent of the goods 
produced in the FTZs are bound for export to the U.S., and 
many of the goods produced, including in the textile and 
apparel industries, rely on U.S. inputs for their operations. 
 Yet since the late 1990s, the sector's share of GDP has 
fallen from 3.5 percent to 1.9 percent. 
 
¶3. (U) The Dominican government's National Council on Free 
Trade Zones (CNZFE) estimates that over 60,000 jobs have been 
lost in the FTZ sector since late 2004.  According to figures 
presented to EconOff by the Santiago Association of Free 
Trade Zone Companies, the City of Santiago alone, which 
accounts for roughly 35 percent of FTZ activity, has lost 
over 21,000 jobs, dropping from 51,655 to 30,187 in the last 
two years.  According to figures published by the Dominican 
government the textile and apparel industries employ over 50 
percent of the people working in the FTZs.  When asked if the 
job losses have been spread across industries in the FTZ 
sector, Vilma Arbaje, the Director of International Trade at 
the Ministry of Industry and Commerce, told EconOff that 
close to 100 percent of the job losses in the FTZs in the 
past couple of years have been in the textile and apparel 
industries.  Statistics published by the CNZFE for 2006 show 
that the vast majority of company closures have also been 
concentrated in the textile and apparel industries. 
 
¶4. (U) Fernando Capellan, the President of Grupo M, the 
largest textile and apparel manufacturer in the Dominican 
Republic, told EconOff that "the situation in the FTZs is 
critical.  If nothing is done, we will have to shut down by 
next year."  This perspective was echoed by a group of 
companies in a meeting with EmbOffs on August 8 in Santiago. 
These business owners, all members of the Santiago 
Association of Free Trade Zone Companies, said that if no 
action is taken in the next six to twelve months their 
companies would have to shut down resulting in massive 
layoffs. 
 
¶5. (SBU) The job losses have had social and economic 
consequences that are getting the attention of political 
leaders.  The Mayor of Santiago, Jose Enrique Sued, who is a 
leader of the minor opposition Social Christian Reform Party, 
told EmbOffs that the job losses have led to a rise in 
delinquency in Santiago.  He also emphasized that the 21,000 
job losses in Santiago, a city of only 800,000 residents, 
impacts a much broader group of people in terms of both the 
businesses that provide services to the FTZs and the extended 
families that relied on that lost income.  Sued estimated 
that as many as 80,000 people have been affected by the job 
losses.  And he mentioned the loss of transportation and food 
service jobs, in particular, saying that most of the 
unemployed have turned to the informal economy or 
construction in short-term projects.  Sued said that while he 
cannot promote public disturbances, he believes significant 
demonstrations are on the horizon. 
Differences Exist Over the Contributing Factors and Solutions 
--------------------------------------------- ---------------- 
 
¶6. (U) The government and the private sector differ 
considerably on both the relative importance of the various 
factors contributing to the decline of the FTZ sector as well 
as on the preferred solutions to the problems.  The Dominican 
private sector has focused its complaints regarding current 
circumstances on the high cost of doing business in the 
Dominican Republic, including electricity costs, a 
transportation sector that is monopolized by the powerful 
Transport Workers Union, customs problems, labor costs and an 
overvalued exchange rate.  Although they acknowledge 
increasing competition from Asia and Central America as an 
important factor, the companies allege that the government is 
biased against the export sector and are seeking short-term 
costs savings to keep their textile and apparel businesses 
afloat.  As evidence of the government's supposed bias, they 
point to the exchange rate, which they claim is overvalued by 
roughly 10 percent and should be at 37 pesos to one dollar as 
opposed to the 33 or 32 pesos to one dollar rate the Ministry 
of Finance has maintained for the past couple of years. 
Minister of Finance Vicente Bengoa admitted to EconOffs in a 
meeting last month that the exchange is being kept 
artificially high in order to stem inflation in a country 
highly dependent on imports. 
 
¶7. (SBU) The labor unions, at least in the Santiago region, 
appear to be adopting a business-friendly attitude to ensure 
the survival of the textile and apparel industries.  Savino 
Reyes from the National Federation of Free Trade Zone 
Workers, known as Fedotrazonas, and Carlos Gonzalez from the 
Free Trade Zone Workers Union (Unatrazonas) cited the closure 
of the InterAmericana company earlier this year, which shed 
11,000 jobs and closed its doors in a matter of a couple of 
months.  They expressed fear at the prospect of additional 
closures, including Grupo M, which is now the largest 
employer in the sector. 
 
¶8. (SBU) Reyes and Gonzalez both noted that the unions hope 
to hold a tripartite meeting with the Dominican government 
and the business leaders to design solutions to the problems 
they face.  The unions reiterated most of the company owners' 
evaluation of the sector's problems citing energy, 
transportation, infrastructure and international competition. 
 And similar to the opinions voiced by the companies, Savino 
said, "The government hasn't had the vision to create 
diversification in job creation.  (And that) insufficient 
attention has been given to the sector by the government." 
 
¶9. (U) While the companies are focused on securing short-term 
cost saving measures, including securing additional 
preferences from the U.S. under CAFTA-DR for the purchase of 
fabrics from Asia, international observers believe the 
principal problem impacting the sector is cheaper competition 
from Asia.  This competition, which is directly linked to the 
end of the Multi-fiber Agreement in January 2005 that lifted 
quotas on Asian textile and apparel imports to the U.S., 
coincides exactly with the initial decline of the textile and 
apparel industries in the Dominican Republic.   A March 2007 
study commissioned by USAID concludes that the "Dominican FTZ 
garment sector, in its current state, is in an irreversible 
decline."  While the study reiterated many of the complaints 
of the Dominican private sector concerning the high cost of 
labor in comparison to the region, electricity costs, 
transportation costs, inadequate access to credit, customs 
delays and the exchange rate, it ultimately concluded that 
"the sector's internal problems limit its competitiveness." 
 
¶10. (U) This view, that modernization and reform of the 
sector are the keys to its survival, has also been the public 
view adopted by the Dominican government.  In his speech on 
Dominican Independence Day in February 2007, President 
Fernandez addressed the issue of the decline in the FTZ 
sector by linking the ill fortune of the industry to 
international competition and the lack of investment in 
modernizing to improve its competitiveness.  Fernandez 
specifically emphasized the need for more value added 
production.  His analysis has sparked anxiety among companies 
and unions that the government is not focused enough on 
solving the immediate structural problems in the sector. 
 
¶11. (SBU) Another government official, Washington Gonzalez, 
the Director General for Labor at the Ministry of Labor, told 
EmbOffs that the problems in the sector are a direct result 
of the companies' failure to invest in their businesses.  He 
even alleged that the job losses in the sector are probably 
only about 20,000 in total, despite the fact that the 
government body (CNZFE) charged with overseeing the sector 
published statistics citing the over 60,000 job loss figure. 
 
¶12. (U) Jeannette Dominguez, a former director of the 
government National Council on Free Trade Zones under the 
Mejia Administration and the current owner-manager of a 
private FTZ park, also alleged that the textile and apparel 
industries have failed to modernize or adapt to changing 
global circumstances.  While she didn't discount the cost 
problems that exist, she sounded a much less alarmist view of 
the future of the FTZ sector for non-apparel or textile 
companies.  In a tour of her facilities, EmbOffs witnessed a 
vibrant FTZ park with businesses ranging from cigar 
production to medical equipment manufacturing.  There 
appeared to be very few, if any, businesses that had closed 
their doors and Dominguez showed EmbOffs her draft plans for 
expansion of the park if circumstances improve. 
 
FTZ Crisis Creates Political Problems 
------------------------------------- 
 
¶13. (SBU) The collapse of the textile and apparel industries 
and the resultant job losses is putting political pressure on 
the PLD party.  The PLD Governor of Santiago Province, Jose 
Izquierdo, confided to EmbOffs that the President is poised 
to announce a form of unemployment insurance or trade 
displacement assistance for individuals who have lost their 
jobs in the FTZs.  According to Izquierdo the PLD will 
announce within the next couple of weeks a monthly stipend 
for the unemployed of up to 2,000 pesos per month (US$61), a 
little less than half the national minimum wage of 4,100 
pesos per month (US$124).  Such a move demonstrates that 
despite the belief that the long-term solution to the 
sector's problem lies in transformation of the sector, the 
government cannot ignore the immediate social, economic and 
political consequences of the job losses. 
 
¶14. (SBU) Izquierdo also informed EmbOffs that the regional 
government is currently financing 99 public works projects 
that are putting people to work at least in the short-term. 
The PRSC Mayor, Sued, pointed to the political problems the 
job losses have created for the PLD and said that while the 
PLD still leads the polls in Santiago, the race there would 
be close in next year's presidential election. 
 
Are there solutions to the Problem? 
----------------------------------- 
 
¶15.  President Fernandez has recently offered some specific 
short-term solutions to the FTZ crisis, including a small 
reduction in electricity rates, the approval of a line of 
credit for the industry totaling as much as 1,200 million 
pesos (approx. US$37 million), the extension of FTZ 
incentives through 2009, and a break on customs fees for 
exporters.  In addition, there is the expected announcement 
of monthly cash payments to those individuals who have lost 
their jobs in the FTZs.  But so far these solutions have been 
met with little enthusiasm by the business sector and the 
labor unions, which have focused instead on securing 
additional preferences from the U.S. and on pressuring the 
government to loosen its exchange rate policy. 
 
¶16. (SBU) Comment:  While the Dominican government and 
private sector have been quibbling over how to respond to 
this crisis for some time, the political pressures of May's 
presidential election appear to be spurring the government to 
take action.  Whether these measures will be enough to 
satisfy the industry is unclear since the government seems to 
be committed to maintaining its exchange rate policy, which 
many consider to be overvalued, thus imposing an indirect tax 
on exports.  A stronger exchange rate policy insulates the 
broader population (i.e., more voters) from price increases. 
Most experts agree that the long-term solution to the problem 
lies in the modernization and diversification of the textile 
industry in order to increase competitivenes in the global 
market.  However, the local industry seems more interested in 
placing blame on the government to gain short-term 
concessions during the campaign season.  The PLD in turn is 
doing what it can to provide economic relief to those who 
have lost their jobs in the form of small cash payments and 
short-term job creation programs showing that it is 
responding to the industry and addressing its concerns.  End 
Comment. 
BULLEN