BUILDING A BETTER FUTURE TOGETHER DOMINICAN REPUBLIC POLICY NOTES H October 2016 BUILDING A BETTER FUTURE TOGETHER DOMINICAN REPUBLIC POLICY NOTES Contents Acknowledgements 11 Foreword 13 Chapter One: Overview 15 Introduction 15 The Diagnostic: High Growth, Not as Inclusive 16 Why Has Growth Not Led To Better Equity Outcomes? 16 Puzzling Labor Market Outcomes: Rising productivity and stagnant real wages 17 A Domestic Economy with Weak Inter-Sectoral Linkages 19 Insufficient and Inefficient Public Spending on Social and Infrastructure Services 20 Factors that May Affect the Sustainability of Growth and Shared Prosperity 24 Chapter Two: Toward More Evenly Shared Prosperity in the Dominican Republic 31 Introduction 31 Country context 31 Challenges 34 Policy Directions 44 Chapter Three: Challenges and Opportunities to Improve the Quality and Efficiency of Social Services 47 Introduction 47 Education 48 Context: Main Achievements 48 Challenges 49 Policy Directions 51 Health 53 Context 53 Challenges 54 Policy Directions 57 Social Protection 58 Context 58 Challenges 60 Policy Directions 61 Chapter Four: Policy Directions for Improving the Quality and Availability of Basic Infrastructure Services 67 Introduction 67 Water and Sanitation 68 Country Context 68 Challenges 70 Policy Directions 74 Electricity Sector 75 Country Context 75 Challenges 76 Policy Directions 82 Information and Communication Technologies 84 Country Context 84 Challenges 85 Policy Directions 86 Chapter Five: Policy Directions for Sustainable and Inclusive Growth in the Dominican Republic 91 Introduction 91 Macro-fiscal Sustainability 92 Country Context 92 Challenges 96 Policy Directions 97 Competitiveness and Inclusive Growth 98 Country Context 98 Challenges 101 Policy Directions 106 Environmental Sustainability and Resilience to Climate Change 109 Country Context 109 Challenges 110 Policy Directions 111 List of Figures 1.1 Fast growth in income per capita versus slowly declining poverty and inequality 17 1.2 Rising productivity and declining real earnings per hour in two sectors: 1996-2013 18 1.3 Output per person employed in the DR and LAC: 2001-2014 19 1.4 Technological composition of exports 19 1.5 Tax revenues as percentage of GDP in LAC in 2012 21 1.6 Composition of taxes and GNI per capita across countries 21 1.7 Social spending as a share of GDP across countries 21 1.8 How progressive are the DR’s social programs? 23 2.1 Annualized growth incidence curve, the Dominican Republic, 2005-2013 32 2.2 Ratio of the average income of the richest 10% and poorest 10%, 2005 and 2013 33 2.3 Contribution of circumstances to inequality of opportunities in the Dominican Republic, 2015 33 2.4 Socioeconomic breakdown of the population, the Dominican Republic and LAC, 2005 and 2013 34 2.5 Asset-based conceptual framework for the generation of household income 35 2.6 Contribution to the change in moderate poverty in the DR, by component, 2005-2010 and 2010-2015 35 2.7 Median wages per hour for the bottom 40 and the top 60 (in Dominican pesos of 2007) 38 2.8 Sources of income by quintile in the Dominican Republic, 2013 39 2.9 Concentration shares of direct transfers by decile, various countries 39 2.10 Climate change vulnerability index (IVACC) and the quality of life index (ICV) 40 2.11 Policy areas that affect household income-generating capacity 41 2.12 Rates of moderate poverty in urban and rural areas in the Dominican Republic 43 2.13 Percentage of households categorized as extreme poor (ICV1) and Human Development Index (HDI) by province 44 2.14 Share of public investment and population, and poverty rate by province 45 3.1 Education outcomes in the DR 51 3.2 Overage and School Failure, 2013-2014 51 3.3 Maternal Health Care & Mortality Rates: DR, LAC, and UMIC 2014 (%) 55 3.4 Trends in per capita public spending on health (PPP) from 2000 to 2014: DR relative to LAC and UMIC 56 3.5 Evolution of coverage of Progresando con Solidaridad components 59 3.6 Coverage of health insurance by scheme and gender 59 4.1 Comparison of water access rates to improved water sources for urban and rural areas 69 4.2 Comparison of sanitation access rates to improved facilities for urban and rural areas 69 4.3 Access to water inside the house and poverty rates in all provinces of the DR 71 4.4 Open defecation and poverty rates in all provinces of the DR 71 4.5 Sewerage lag index comparing sewerage and piped water by service provider 71 4.6 Proportion of current expenses financed by the Central Government for different service providers (%) 73 4.7 Proportion of income coming from water and sewerage services (%) by service provider 73 4.8 Evolution of Electricity Generation by Source 76 4.9 System Average Interruption Frequency Index (SAIFI) for Comparable Countries in 2015 77 4.10 System Average Interruption Duration Index (SAIDI) for Comparable Countries in 2015 77 4.11 EDES Commercial Data 79 4.12 Total Power System Losses in Comparable Countries (2014) 80 4.13 Residential Electricity Prices in Comparable Countries in 2014 (US$/kWh) 80 4.14 Monetary Transfer to the Electricity Sector 2009 - 2015 81 4.15 Electricity Subsidies Pre-tax in Comparable Countries (% of GDP, average 2011-13) 81 4.16 Submarine Cable Map for the DR 84 4.17 Internet Penetration (%) 86 4.18 Broadband prices versus income 86 5.1 Factors that Can Affect the Sustainability of Growth 92 5.2 Dominican Republic Fiscal Accounts, 2012-2017 94 5.3 Dominican Republic Debt Structure, Various Years 95 5.4 GDP Composition 2008 -2015 - Contribution to Real GDP Growth 99 5.5 Growth accounting decomposition (Solow model) 100 5.6 Restrictiveness of Product Market Regulation (PMR) for the Dominican Republic 101 5.7 Real earnings index and productivity (output per worker) index, 2002=100, 1991-2013 102 5.8 Actual and benchmarked index of market concentration in 17 non-tradable industries in selected countries 104 5.9 Restrictiveness of Product Market Regulations by components/sub-components for the Dominican Republic 105 List of Tables 1.1 Summary of Policy Directions 25 2.1 Loss of purchasing power of wages by quintile, Sept. 2000 – Sept. 2015 40 3.1 Percentage of students in the lowest level of performance in reading and math in latest regional assessment (2013) 50 3.2 DR Health Insurance Coverage: 2007 and 2016 by Insurance Regime 54 4.1 Central government allocations and external resources spent in the WSS sector (1990-2014) 70 4.2 Average tariff for metered water supply and sewerage service, based on a 15 m3 water consumption 72 4.3 Contributions GoRD to EDEs 79 4.4 Country Incomes and Expenses 81 List of Boxes 1 The ‘Cuba Effect’ on Tourism 103 Annexes Annex I: Education and “Ninis” in the DR 64 Annex II: Education and Gender 65 Annex III: Health: Extending Insurance to Include the Informal Sector: Examples from Other Countries 66 Annex IV: Access levels of households to WSS and poverty rates by province 88 Annex V: Targeted water metering programs to become more efficient and increase revenues 89 Building a Better Future Together Acronyms ADESS Administrator for Social Subsidies AECID Spanish Agency for International Development Cooperation ASOCARES Rural Water Community Associations BAR Rural Broadband Connectivity Project BIT Bilateral Investment Treaties CAASD Corporation of Aqueduct and Sewage System of Santo Domingo CAFTA-DR Dominican Republic-Central America Free Trade Agreement CAIPI Comprehensive Early Childhood Care Centers CARIFORUM-EU Economic Partnership Agreement between the Caribbean Forum and the European Community CC Climate Change 7 CCRIF Caribbean Catastrophe Risk Insurance Facility CCSS Costa Rica Social Security CCT Conditional Cash Transfers CDEEE Corporation of State-Owned Electricity Companies CEDLAS Center for Distributive, Labor and Social Studies CEI-RD Export and Import Center of the Dominican Republic CEPM Energy Consortium Punta Cana-Macao CEQ Commitment to Equity Assessment CIAT Inter-American Center of Tax Administrations CNE National Energy Commission COAAROM Water and Sewer Corporation of La Romana CODIREyMAPS Board for the Reform and Modernization of APS Sector and Water Table CONARE National Board for State Reform CORAA Water and Sewer Corporations CORAABO Water and Sewer Corporation of Boca Chica CORAAMOCA Water and Sewer Corporation of Moca CORAAPLATA Water and Sewer Corporation of Puerto Plata CORAASAN Water and Sewer Corporation of Santiago CORAAVEGA Water and Sewer Corporation of La Vega CPC PROSOLI Training Center CR Contributory Regime CRC Community Report Cards CSA Climate-Smart Agriculture CSR Contributory-Subsidized Regime Building a Better Future Together CTC Community Technology Centers CTP Technical Committee on Poverty DGII General Directorate of Internal Revenue DIGEPEP Directorate of Special Programs for the President’s Office DIGEPRES General Directorate of Budget DRM Disaster-Risk Management DRR Disaster Risk Reduction DWPE Detention Without Physical Examination ECD Early Childhood Development ECLAC Economic Commission for Latin America and the Caribbean EDEs Electricity Distribution Companies EMBIG Emerging Market Bond Index Global EMS Upper Secondary Education END National Development Strategy 2030 ENDESA National Demographic and Health Survey ENFT National Labor Force Survey ENIGH National Survey of Household Incomes and Expenditures EPA Economic Partnership Agreement EPA Export Promotion Agency ETED Dominican Electricity Transmission Company FDA Food and Drug Administration FDI Foreign Direct Investment FDT Telecommunication Development Fund GCPS Social Cabinet 8 GDP Gross Domestic Product GHG Greenhouse Gas GNI Gross National Income GNP Gross National Product GoDR Government of the Dominican Republic Hacienda Ministry of Finance HDI Human Development Index HIV Human Immunodeficiency Virus HOI Human Opportunity Index HR Human Resources IADB Inter-American Development Bank ICT Information and Communication Technologies ICV Quality of Life Index IDEC Dominican Initiative for Quality Education IMF International Monetary Fund INAFOCAM National Institute for Formation and Teacher Training INAIPI National Institute for Early Childhood Comprehensive Care INAPA National Institute of Potable Water and Sewers INDC Intended Nationally Determined Contribution INDOTEL Dominican Institute of Telecommunications INFOTEP National Institute of Technical and Vocational Training ISFODOSU Salomé Ureña Teacher Training Institute IT-ITES Information Technology and Information Technology-Enabled Services IVACC Climate Change Vulnerability Index IZA Institute for the Study of Labor Building a Better Future Together LAC Latin America and the Caribbean M&E Monitoring and Evaluation MEM Ministry of Energy and Mines MEPyD Ministry of Economy, Planning and Development MESCyT Ministry of Superior Education, Science and Technology MFA Multifibre Arrangement MIC Ministry of Industry and Commerce MINERD Ministry of Education MMR Maternal Mortality Rate MOH Ministry of Public Health MOPC Ministry of Works MSME Micro, Small and Medium Enterprises NAP Network Access Point NEC National Education Council NEP National Education Pact NHI / SENASA National Health Insurance NHS National Health Services Nini Neither studying nor working NPLs Non-Performing Loans NSPD New Dominican Budgeting System OCDE Organization for Economic Co-operation and Development PAHO/WHO Pan American Health Organization- World Health Organization PASCT Water and Sanitation in Tourist Areas Project PEFAs Public Expenditure and Financial Accountability Assessments PIB Gross Domestic Product 9 PISA Program for International Student Assessment PMR Product Market Regulation POS Point of Sale pp Percentage Points PPAs Power Purchase Agreements PPP Purchasing Power Parity PPP Public Private Partnership PROMESE/CAL Program of Essential Medicines/Center for Logistical Support PROSOLI Integrated Project for Social Protection and Promotion (Progressing with Solidarity) RBF Results Based Financing RHS Regional Health Services ROA Returns on Assets ROE Returns on Equity ROSC Report on the Observance of Standards and Codes SEDLAC Socio-Economic Database for Latin America and the Caribbean SENI National Interconnection Electricity System SEZ Special Economic Zones SIASAR Rual Water and Sanitation Information System SIE Superintendence of Electricity SIGEF Intergrated System of Financial Management SIME Integrated Monitoring and Evaluation System SISALRIL Superintendence of Health and Labor Risks SISDOM System of Social Indicators SISKLOR Residual Chlorine Monitoring System Building a Better Future Together SISMOPA Water Potability Monitoring System SISVICA Water Quality Monitoring System SIUBEN Single Beneficiary Selection System SME Smal and Medium-Sized Enterprises SN-PMR National System for Disaster Prevention, Mitigation and Response SOE State-owned Enterprises SP Social Protection SPS Sanitary and Phytosanitary Measures SR Subsidized Regime 10 TADAT Tax Administration Diagnostic Assessment Tool TB Tuberculosis TERCE Third Regional Comparative and Explanatory Study TFP Total-Factor Productivity UMIC Upper Middle Income Countries UNFCCC United Nations Framework Convention on Climate Change VAT Value-Added Tax (ITBIS) WDI World Development Indicators WSS Water Supply and Sanitation WTO World Trade Organization Acknowledgements This set of policy notes for the Dominican Republic (DR) is an initiative of the Caribbean Country Management Unit at the World Bank Group and aims to provide the incoming Administration with a selective diagnostic of the country’s current challenges and an independent set of policy recommendations to contribute to the nation’s development process. The policy notes were written by a team led by Francisco Carneiro, Lead Economist and Program Leader for Macro- fiscal Sustainability and Resilience, and Cecile Niang, Program Leader for Growth, both from the Caribbean Country Management Unit. The core team included Gianluca Mele, Christine Lao Pena, Mark Lambrides, Laura Berman, Juan Carlos Parra Osorio, and Jean-Martin Brault. The Overview was prepared by Francisco Carneiro, Cecile Niang, and Gianluca Mele with inputs from Leyla Castillo, 11 Onur Erdem, Alejandro Espinosa-Wang, Andrea Gallina, Jennifer Keller, Jonna Maria Lundvall, Luiz Edgard Oliveira, José- Daniel Reyes and McDonald Benjamin. Policy Note 2 (Toward more evenly shared prosperity in the Dominican Republic), was prepared by Juan Carlos Parra Osorio with research assistance from Giselle del Carmen and inputs from José- Daniel Reyes, John Daniel Pollner, Oscar Calvo, McDonald Benjamin, Miguel Sánchez, Juan Barón, Lucía Solbes and Hugo Brousset. Policy Note 3 (Challenges and Opportunities to Improve the Quality and Efficiency of Social Services), was prepared by Christine Lao Pena, Juan Barón, Axelle Latortue, Hugo Brousset, Carine Clert, Miriam Montenegro, Lucia Solbes, with inputs from Rafael de Hoyos, Jonna Maria Lundwall, Carmen Carpio, Alfredo Perazzo, Natalia Santiago-Bench and McDonald Benjamin. Policy Note 4 (Policy Options for Improving the Quality and Availability of Basic Infrastructure Services) was prepared by Mark Lambrides, Laura Berman, Jean-Martin Brault, Gabriel Pinto and McDonald Benjamin, with inputs from Oscar Alvarado, Elena Gasol Ramos, Doyle Gallegos, and Rocío Sánchez Vigueras. Policy Note 5 (Policy Options for Sustainable and Inclusive Growth), was prepared by Francisco Carneiro, Cecile Niang, and Gianluca Mele with inputs from Graciela Miralles Murciego, Tanja K. Goodwin, Paul Maximilian Bisca, Jean-Martin Brault, Leyla Castillo, Alejandro Espinosa-Wang, Oscar A. Ishizawa, Jennifer Keller, Jonna Maria Lundvall, Marialisa Motta, Luiz Edgard Oliveira, Miria Pigato, Daniel Reyes, Maritza A. Rodriguez, Gerardo Segura, Raha Shahidsaless, Remi Trier, Rafael Van der Borght, Eli Weiss and McDonald Benjamin. The team is grateful to McDonald Benjamin, Country Manager for the Dominican Republic at the time of writing, and the peer reviewers Miguel Sánchez (Senior Economist, GMFDR), and John Anderson (Economist, GTCDR) for insightful advice. Inputs received from Alessandro Legrottaglie, Marialisa Motta, Miria Pigato, Sabine Hader, Laurent Mselatti and other members of the Dominican Republic Country Team at the World Bank during the preparation of the policy notes are also gratefully acknowledged. Building a Better Future Together The team is especially grateful for the valuable feedback received from the Authorities at an initial workshop on the policy notes in February 2016, attended by high-level officials from the Ministry of the Presidency; the Ministry of Economy, Planning and Development (MEPYD); the Ministry of Finance; the Ministry of Energy and Mines; the Ministry of Industry and Commerce: the Ministry of Education; the Ministry of Higher Education, Science and Technology; the Social Cabinet; the Central Bank of the Dominican Republic; the Superintendency for Electricity; the National Social Security Council; the National Council on Climate Change; the National Health Insurance Service; the National Institute for Professional Technical Training; the Social Subsidies Administration Unit; the Progressing with Solidarity (PROSOLI) Program, and the Single Beneficiary Selection System (SIUBEN). The team would like to express particular thanks to Mr. Juan Monegro, 12 Vice Minister for Planning in MEPYD at the time of writing, and to Dr. Magdalena Lizardo, Director of the Advisory Unit for Economic and Social Analysis in MEPYD, who coordinated the Authorities’ feedback and suggestions to the team. The work was carried out under the overall supervision of Marialisa Motta, Practice Manager, Trade and Competitiveness Global Practice, and Miria Pigato, Practice Manager, Macroeconomics and Fiscal Management Global Practice. Sophie Sirtaine, Country Director for the Caribbean Region, provided strategic guidance and advice to the team. McDonald Benjamin, Country Manager for the Dominican Republic at the time of writing, and Alessandro Legrottaglie, Country Manager for the Dominican Republic from September 2016, supported the team and guided the process of consultations with the country authorities. Mohammed Edreess Sahak formatted the final version of the report. Elisabeth Mekonnen, María Hermann, Virginia Ricart, Omar Jiménez and Carla Bordas Portela provided logistical support to the team. Building a Better Future Together Foreword The Dominican Republic has enjoyed one of the strongest growth rates in Latin America and the Caribbean over the past 25 years, averaging over six percent in the 1990s and over 5 percent since 2000. Growth has accelerated again since 2014, to 7 percent per annum, raising the country’s income per capita to 92 percent of the regional average, versus 57 percent in 1992. Yet, in spite of this remarkable economic performance, economic growth in the Dominican Republic has not been as inclusive as in the rest of the region; one in three Dominicans remains below the poverty line. We believe that the key challenge that the Dominican economy faces at this time is to understand this conundrum of rapid growth with limited poverty reduction and to address it through policies that both sustain economic growth while making it more inclusive. These Policy Notes are designed to support this process. They point to a unique combination 13 of factors in the Dominican Republic, notably the country’s labor market dynamics, the structure of its economy, the distributive impact of its fiscal policies, and its vulnerability to external shocks, that help to explain why poverty has not fallen faster in spite of rapid growth. The start of a new Administration is invariably a time at which plans with respect to development are reviewed for the medium term. Thus these Policy Notes have been prepared at this time with a view to supporting the new Administration for 2016-20 by analyzing areas in which policies and programs can potentially have a greater and better impact in achieving inclusive and sustained growth. We believe that there are four areas of particular interest moving forward. First, we argue that the inclusiveness of growth can be enhanced by cross-cutting policies aimed at increasing competitiveness and productivity, with a focus on the sectors that generate most of the jobs and employ workers from poorer households. There is a spectrum of cross-cutting policy options for enhancing shared prosperity that relate to creating and promoting economic linkages between special economic zones and the rest of the economy, equipping the labor force with the skills needed in the labor market, expanding financial access for small and micro enterprises, improving the prospects for exports, increasing cohesion and territorial planning to reduce the persistent regional differences, and reducing gender gaps in the labor market. Building a Better Future Together Second, we believe it will be important to continue strengthening the quality and efficiency of social services. For example, in education there are a range of policy options related to expanding early childhood services, increasing student retention, upgrading pedagogical instruction and sharpening the focus on learning outcomes. Priorities in the area of health relate to institutional strengthening for sector management as well as increasing public resources for health to achieve universal coverage while also enhancing the results orientation and efficiency of public spending on health. In the area of social protection there are various policy options that can serve to reinforce inter-sectoral coordination, for a more efficient and integrated social service delivery, enhance targeting and ensure full coverage of the extreme poor. The third key area is improving the quality and availability of basic infrastructure services, notably water supply and sanitation as well as electricity services and, in a modern economy also information, communication and technology services. These are all essential to ensure inclusive and sustained growth. There are important policy options that relate to strengthening sector institutions and governance, as well as ensuring affordable, high-quality coverage in all three areas, while reducing subsidies and improving financial performance. Finally, the fourth key area relates to policy choices to ensure that development is sustainable, whether in relation to macro-fiscal sustainability, competitiveness in a global economy, or to environmental sustainability in a context of 14 climate change and vulnerability to natural disasters. The Dominican Republic is well placed to build on its successes and advance on an inclusive growth agenda. A number of interventions are highlighted in the Policy Notes that are already proving successful. In other cases, relatively small but persistent adjustments in policy can mean the difference between achieving impact and remaining in the status quo. With these Policy Notes, the World Bank hopes to inform the national policy dialogue on how to advance on the most pressing challenge that the Dominican Republic faces at this time, namely to sustain its exemplary growth while ensuring that this growth is inclusive and brings greater prosperity to all its citizens. It is our sincere hope that the analysis and policy options presented in these Policy Notes can contribute to breaking the cycles of poverty and achieving a more prosperous future for all the people of the Dominican Republic. Jorge Familiar Calderon Vice President, Latin America and the Caribbean Building a Better Future Together Chapter 1. Overview Introduction promotion of shared prosperity in the DR by improving the quality of public service delivery, increasing the I n preparing these policy notes, the World Bank competitiveness of the economy, improving resilience intends to provide the incoming administration to economic and climate shocks, and making growth with some considerations and recommendations more inclusive. In line with those objectives, the sectors 15 on key development policy issues. The World Bank has and thematic areas covered in the policy notes include: been a long-time partner of the Dominican Republic (DR), (i) recent trends in poverty and shared prosperity; (ii) the supporting its development process through a fruitful quality and coverage of public spending on the social engagement that involves budget support, investment sectors (education, health, and social protection); (iii) an projects and advisory services. For years, World Bank assessment of the factors that could affect the quality and experts have studied the Dominican economy and efficiency of infrastructure services in the sectors of water provided diagnosis that have helped in many instances and sanitation, and electricity; and (iv) the factors that to inform important reforms. The start of a new could affect the sustainability of growth from an economic, administration is invariably a time at which plans with social, and environmental and climate resilience points of respect to development are reviewed for the medium view. Each policy note describes succinctly the current term.  The inauguration of the new administration for country context, what the existing main challenges are 2016-20 is, therefore, the occasion for a new set of in each sector, and what the focus of policy should be to policy notes that will offer the Dominican Government secure sustainable and inclusive growth. and stakeholders the World Bank’s perspectives on the country context and recent advances in key areas, as This overview section sets the stage for the individual well as some of the key remaining challenges and policy policy notes and highlights some of the topics that options for how to address them.  help explain current economic and social outcomes in the Dominican Republic. In order to place the policy The focus of these policy notes is on the challenges notes into context, this section reviews the Dominican that need to be overcome and the policy options that Republic’s recent economic performance and its social and could be pursued to keep the Dominican Republic poverty outcomes. It starts with a brief diagnostic of why, on a path of sustainable and inclusive growth. The in spite of remarkably high economic growth rates, the DR assessment in this new set of policy notes is based on the has not seen faster improvements in living standards and insights of World Bank experts on which policies could better equity outcomes. The main factors that contribute support the eradication of extreme poverty and the to this general state of affairs are highlighted, including Building a Better Future Together those that are associated with the performance of the DR’s index falling from 0.507 to 0.455). There is also evidence labor markets, the degree of inter-sectoral linkages in the that income growth in the lower quintiles has been faster domestic economy and how this could be a factor that than in the richer strata of the population between 2005 affects growth and poverty outcomes, and the efficiency and 2015; yet, this has been insufficient to compensate of public spending in the social and infrastructure sectors. for the effects of the 2003 crisis, which disproportionately Finally, this overview lists the factors that may affect the affected the poor. Another important characteristic of the sustainability of growth and shared prosperity and that DR is the limited upward economic mobility. Over the past should deserve the authorities’ attention. decade and a half, just under 7% of the population in the DR moved up in the income ranks (e.g., from vulnerable to The Diagnostic: High Growth, middle class), vis-à-vis 41% in the LAC Region, which is a Not as Inclusive striking fact in light of the rapid increase in the country’s GNI per capita. The Dominican Republic has enjoyed one of the strongest growth rates in Latin America and the Over the last two years, poverty declined substantially Caribbean over the past 25 years. Between 1992 and for the first time since 2000. The Policy Note on Poverty the year 2000, the Dominican Republic economy grew and Shared Prosperity highlights that, after remaining at an average rate of 6.7% per annum, making it the top above 40% since the crisis observed in 2003 in the DR, performer in the region. In the period 2001-2013, growth poverty calculations for 2014 point to a sizeable one-year remained high at an average rate of 5.1%, placing the reduction and data for 2015 suggest a continued reduction Dominican economy in 4th place in the group of top in poverty. According to the latest official data available, growth performers (after Panama, Argentina and Peru). monetary poverty declined to 36.4% in 2014, dropping This good performance got even better more recently further to 32.3% in 2015. Extreme poverty declined less, when economic growth rates averaged 7% in 2014-15 moving from 8.4% in 2014 to 7% in 2015. Factors cited to 16 fueled by strong domestic demand. This overall dynamic explain the sizable drop in the overall poverty rate include growth has enabled a convergence of the DR’s GNI per the highest rate of economic growth in the country capita (US$6,198 in 2015)with that of the region,1 from among LAC countries during these two years,4 inflation 57% in 1992 to 90% of the regional average in 2015. In below the target range of the Central Bank, a favorable fact, estimates show that if the pace of growth observed external scenario with low oil prices (which boosted during the past five years continues, the gap would disposal income), high public investment in construction disappear by 2020. and remodeling of schools (which contributed to job creation), and school meal programs. This confluence of In spite of this remarkable economic performance, factors seems to have led to changes in labor and non- growth has not been inclusive. In 2000 the poverty labor income and coincided with demographic shifts, all incidence in the Dominican Republic was 32%. In the wake contributing to a decrease in poverty for the first time of the banking crisis of 2003-04, the country’s GDP that since 2000. had grown by 6% in 2002 contracted by 0.3% in 2003. As a result, almost one million people moved into poverty and Why Has Growth Not Led To Better the poverty rate reached 50% of the population in 2004. Equity Outcomes? When the economy recovered after the crisis, poverty rates began to fall slowly and have only returned to the The combination of high economic growth and pre-crisis level in 2015 (see Figure 1.1),2 but above the stubborn poverty rates can be attributed to a average for LAC.3 At the same time, it is worth noticing that combination of factors that are unique to the DR. Many inequality improved between 2000 and 2015 (with the Gini emerging economies actually display a behavior that is similar to what is currently observed in the Dominican 1  GNI per capita, Atlas Method. World Development Indicators. Republic where the elasticity of poverty with respect to 2  World Bank, 2014a. “When Prosperity is not Shared: the Puzzle of the Weak Links between Growth and Equity in the Dominican Republic”. Equity Assessment, The World Bank, Washington, DC. 4  According to the Central Bank of the Dominican Republic, this 3  See SEDLAC. http://sedlac.econo.unlp.edu.ar/eng/statistics- remarkable growth performance has been above the country’s detalle.php?idE=34 potential growth since the last quarter of 2014. Building a Better Future Together Figure 1.1: Fast growth in income per capita versus slowly declining poverty and inequality Gini index, Poverty headcount (% of population) 60 10000 9000 50 8000 GNI per capita (real US$) 40 7000 6000 30 5000 4000 20 3000 10 2000 1000 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Extreme poverty (% o cial) Moderate poverty (% o cial) Gini index (o cial) GNI per capita (constant 2010 US$) rha LAC GNI per capita (constant 2010 US$) rha Source: Comité Técnico Interinstitucional de Medición de la Pobreza (CTP) and World Development Indicators. Note: Poverty line used for the calculation is the level of $4 PPP per capita per day. Figure 1.2: Rising productivity and declining real earnings per hour in two sectors: 1996-2013 Hotels, bars & restaurants Manufacturing 150 20 170 20 130 150 15 15 17 130 110 10 110 10 90 90 5 5 70 70 50 0 50 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 1996 1998 2000 2002 2004 2006 2008 2010 2012 Real earnings index (2002=100) Productivity index (output per worker, 2002=100) % of employment (RHS) Source: World Bank sta estimations based on Central Bank of the Dominican Republic. economic growth is low. The reasons for that are varied Puzzling Labor Market Outcomes: and country-specific. In the case of the DR, there are three Rising productivity and stagnant real wages major distinguishing features of the Dominican economy that help explain why poverty has not fallen faster in spite Real earnings declined after the financial crisis of of rapid growth: (i) a labor market that does not seem 2003-04 and have not returned to their pre-crisis to fully reward workers for their rising productivity; (ii) a level, despite significant productivity gains. Figure 1.2 domestic economy that does not enjoy enough inter- illustrates this trend for, hospitality and manufacturing, two sectoral linkages; and (iii) a public sector that does not of the sectors that employ the most number of workers in spend enough nor particularly well to reduce poverty. the country. Real earnings per hour fell to RD$10.3 in 2004 In addition, the DR remains highly exposed to natural and only recovered nine years later to reach RD$12 in 2013, disasters and exogenous shocks that, if not mitigated compared with an average of RD$16 over the 2001-2002 properly with the right policy choices, may affect the period. In fact, real earnings fell and/or remained stagnant sustainability of growth and shared prosperity in the in all sectors, including manufacturing as well as transport medium and longer terms. and communications, where productivity has grown since Building a Better Future Together 2002.5 Over the last fifteen years, the DR has completely it burdensome and costly, in particular those that do not filled the gap in terms of output per person employed that plan to expand their businesses in the future. This may used to exist vis-à-vis the LAC average (see Figure 1.3). negatively impact productivity, as business fragmentation due to informality may prevent the attainment of The stagnation of real wages has prevented the lower economies of scale. strata of the population from getting out of poverty. One of the possible reasons for this disconnect between High levels of informality push people outside of productivity growth and real wage levels may include the the social security safety nets, strip the state from reconversion of Special Economic Zones toward more potential tax resources and limit their participation capital-intensive industries. It can also be attributed to in organized workers unions. The historical weakness rising informality in the labor market, at least in the most of labor unions in the Dominican Republic may partly low-skilled and labor-intensive sectors. Informality levels explain the observed decrease in the real return to labor, have increased slightly between 2004 (54%) and 2013 despite the rising productivity, as they do not enjoy a (56%), in spite of the effective establishment of the social strong bargaining position vis-à-vis entrepreneurs when security system. This may have to do with the fact that a negotiating minimum wages. On the other hand, in a large proportion of the new jobs have been created in low context of rising real exchange rates in the aftermath of value added services (housekeeping, petty commerce), the crisis of 2003, keeping wages down may have been often as a result of self-employment. Informal workers the only way to continue attracting FDI and preserving in the DR are a very diverse group, and informality is external competitiveness. widespread across sectors.6 Some of the workers are forced to accept informal contracts, while some small business The significant inflow of Haitian migrants to the owners do not register their businesses because they find DR over the past 15 years has fed a perception that migration might be affecting negatively wage 18 Figure 1.3: Output per person employed in the DR levels and employment opportunities of Dominican and LAC: 2001-2014 citizens. The empirical evidence that Haitian migrants Output per person employed are driving down real wages in the DR, however, is weak. 35000 (constant 2011 PPP $) The Sustainability Policy Note highlights that Haitian immigrant labor is largely limited to unskilled and informal 30000 employment in agriculture and construction, and that Haitian immigrants are more likely to be complements than substitutes to both capital as well as the relatively 25000 more skilled Dominican workers. In fact, simulations show that a “do no harm” approach to migration (with all 20000 migrants fully regularized to work in the DR) would have positive impacts on growth and wages, particularly for 15000 urban and low-skilled workers. On the other hand, if the 2001 2003 2005 2007 2009 2011 2013 DR were to close its borders altogether for migrants, the Dominican Republic Latin America & Caribbean economy would suffer severe losses in export volume and Source: World Bank sta estimations based on World Development Indicators (WDI) data. consequently in terms of GDP growth. 5  See Abdullaev and Estevão (2013), “Growth and Employment in A Domestic Economy with Weak Inter-Sectoral the Dominican Republic: Options for a Job-Rich Growth.” IMF Working Linkages Paper WP/13/40. Washington, DC. It needs to be underlined that measuring productivity as output per worker (as in the charts above) or as output per hour (as done by Abdullaev and Estevão) leads to The disconnection between high value-added sectors similar results. The public sector is the only sector in which real wages (with limited job generation) and low value-added rose modestly, and at the same time it is the only sector in which sectors (with informality and high employment productivity stagnated and indeed declined. 6  See Guzman (2007), La informalidad en el Mercado laboral growth) is a symptom of a segmented economy, urbano de la Republica Dominicana. Banco Central de la Republica evident also in the structure of exports. Firms Dominicana. Santo Domingo. Building a Better Future Together Figure 1.4: Technological composition of exports SEZ exports Non-SEZ Exports 70 50 60.5 60 40.1 38.1 40 50 34.7 41.7 40 30 25.8 29.3 30 20 15.6 18.2 20.7 20 15.7 14.8 8.2 10 7.9 10 8.1 7.2 3.2 2.5 1.8 6.1 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 High Tech Low Tech Medium Tech Primary Products Resource Based Note: These gures show the evolution of the technological content of the Dominican Republic’s exports. Source: World Bank (2014b), a Trade Competitiveness Diagnostic for the Dominican Republic. operating under Special Economic Zones (SEZ) produce (2014b) finds that Dominican FDI enterprises (most of and export higher value-added products when compared them located in SEZs) import almost 70% of their inputs, to exporters that are subject to the national regime. The compared to 49% in the Caribbean, 58% in Central former group specializes in sectors such as clothing, America, and 43% in South America and Mexico.8 SEZs footwear, medical devices, and jewelry whereas the latter are not buying inputs from domestic suppliers, which 19 group specializes mostly in resource-based products, limits the potential for knowledge transmission, learning such as minerals (gold, ferronickel) and agricultural by doing processes and efficiency gains. Another products (Figure 1.4). On the surface, the Dominican tentative interpretation is that the lack of linkages with export basket looks well diversified in terms of products, the rest of the economy may also indicate that most of but only a handful of goods are really meaningful in the wealth generated in the export process remains in terms of export value. Manufactured products that SEZ companies that are usually foreign owned. require some level of industrial transformation typically come from SEZs: medical instruments, cigars, electrical Above and beyond issues of inter-sectoral linkages circuit breakers, and T-shirts. in the domestic economy, the Dominican Republic faces challenges to improve its competitiveness in an Most of the activities in SEZs happen in isolation increasingly globalized world. While Dominican exports from the rest of the economy, reducing the potential of goods and services have been increasing in value, for positive externalities and spillovers. The literature their share of GDP has been eroding, from 35.8% in 1995 on SEZs in the Dominican Republic discusses at length to 24.6% in 2015. Despite recent progress on the Doing the lack of backward linkages,7 although direct evidence Business rankings, the DR still has complex and expensive is scant. Employing enterprise surveys, the World Bank regulatory procedures, and weak legal institutions when compared to other countries in the region. For example, 7  See Burgaud and Farole (2011), “When Trade Preferences and Tax according to the 2017 Doing Business Report, in Santo Breaks Are No Longer Enough: The Challenge of Adjustment in the Domingo the average cost to complete a procedure to Dominican Republic’s Free Zones”. Chapter 7 in Farole and Akinci, enforce a contract is 40.9% of the demand, compared to Special Economic Zones: Progress, Emerging Challenges, and Future Directions. The World Bank. ISBN: 978-0-8213-8763-4; Sánchez- Ancochea (2012), “A Fast Herd and a Slow Tortoise? The Challenge 8  The authors look at the Dominican FDI companies (defined as of Upgrading in the Dominican Republic.” Studies in Comparative those with a percentage of foreign ownership above 10% of social International Development, 47, pp. 208–230; and World Bank (2016): capital) by using World Bank-IFC Enterprise Surveys. The Dominican “Special Economic Zones, Global Value Chains, and Domestic survey sample consists of only 57 observations; hence, the results Linkages in the Dominican Republic”. should be interpreted with caution. Building a Better Future Together the 31.3% in the Latin America and the Caribbean region, modest roles played by personal income taxes (featuring a and 21.3% in the OCDE. Other example is the average relatively high exemption threshold) and corporate income cost to complete a contract enforcement procedure. taxes (with many companies in Special Economic Zones At the subnational level, the time to obtain the same benefiting from exemptions). Large existing exemptions permit from the Ministry of Works in four different cities result in low effective tax rates. Tax revenues oscillate varies from 52 to 158 days.9  A number of challenges to around 14% of GDP. The tax effort is considered low relative achieve more open markets persist, both in relation to to lower-middle-income countries.11 The Dominican the regulatory framework to promote competition and its Republic’s revenue gap, measured as the difference implementation. The sustainability policy note presents between the current level of tax collections and the level policy directions to increase competitiveness and unleash that would result from achieving the tax effort prevailing inclusive growth. in countries with the same income, moves around 7% of GDP. As depicted in Figure 1.6, a simple comparison with Insufficient and Inefficient Public Spending on other countries shows that the Dominican Republic has Social and Infrastructure Services lower indirect and direct tax revenues than some other countries with lower GNI per cap. With limited fiscal space the Dominican Republic has faced difficulties to conduct equity-enhancing public On the expenditure side, a series of challenges limit policies. On the tax side, for example, the Dominican the fiscal space to conduct redistributive policies. Republic is characterized by limited revenue generation First, the crisis of 2003 had a large fiscal cost, associated and underperforms in relation to other countries in to the bailout of one of the main financial entities of the Latin America and the Caribbean in terms of revenue country, and the State has been devoting since 2007 generation (Figure 1.5). Tax revenues have declined from around 1% of GDP to the recapitalization of the Central an average of 15.1% of GDP in 2005-2008 to an average Bank. Second, while the Dominican Republic non-financial 20 of 13.3% of GDP in 2009-2013.This is mostly explained public sector debt stock declined from around 29% of by the dismantling of tariffs and duties in the context of GDP in 2003 (following the crisis) to 18% in 2007, it has the DR-CAFTA agreement. The Government has adopted been expanding again recently, reaching 34.4% of GDP a total of six tax reforms between 2004 and 2012, which in 2015. A third challenge is represented by inefficiencies however have not translated into significant tax collection in the electricity sector, which have entailed government gains. One of the most significant measures (in terms of transfers averaging 1.3% of GDP between 2009 and revenue collection capacity) introduced was the increase 2015. While the amount of transfers have fallen in recent in VAT rates from 12% to 16% (law 288-04) and then 18% years, due largely to the drop in electricity generation (law 253-12), which is slightly progressive but any further costs brought on largely by falling oil prices, transfers, increase would likely produce regressive effects.10 continue to be a large fiscal drain for the Government of Dominican Republic. Furthermore, due to the poor quality The Dominican Republic relies heavily on indirect and limited availability of electricity service, businesses taxation, which is by nature a more regressive form and residents resort to investing in backup generators of taxation. Indirect taxes accounted for 63% of total tax and inverters if they can afford them, which increases revenues in 2013, compared to 71% in 2010. However, costs, posing a serious burden for the competitiveness the VAT tax’s productivity, measured as the percentage of Dominican companies and wellbeing of households. points of GDP collected for each percentage point of VAT Finally, fiscal space has also been eroded by increasing rate, is dramatically low at 0.26, especially considering current expenditure, on account of an upward wage bill the high consumption to GDP ratio, averaging 93.3% in and rising interest payments. 2008-12. Reliance on indirect taxation is partly due to the Social spending in the Dominican Republic is low 9  Doing Business in Central America and the Dominican Republic compared with regional standards, although it has 2015. Dajabón: 158 days; Santo Domingo: 90 days; Higuey: 90 days; increased relative to other sectors, in a context of Santiago de los Caballeros: 52 days 10  According to micro-simulation exercises conducted by the Ministry of Economy, Planning and Development, with the support 11  Tax effort is defined as the ratio of the actual revenue that a of the World Bank, in January 2013. country collects to its tax capacity. Building a Better Future Together Figure 1.5: Tax revenues as percentage of GDP in LAC in 2012 25 20 15 10 5 0 Colombia Brazil El Salvador Honduras Costa Rica Dominican R. Chile Guatemala Nicaragua Mexico Bolivia Uruguay Peru Ecuador Venezuela Haiti Argentina Source: CEPALStat. Figure 1.6: Composition of taxes and GNI per capita Figure 1.7: Social spending as a share of GDP across countries across countries 30 20000 16 20000 14 25 15000 12 15000 20 Share of GDP (%) Share of GDP (%) 10 21 GNI per capita GNI per capita 15 10000 8 10000 6 10 5000 4 5000 5 2 0 0 0 0 09 en 2011 Arm dor 10 ate ia 1 Ind S ri 011 Me l 2 0 Uru xico 09 El S m a 2 0 0 9 n er 12 Co frica 013 ay 0 uth R. 09 Ric 010 Ur xico 09 9 Ric 010 Ind ador 11 Arm ala 0 9 El eni 010 nic eru 2 Co frica 13 Me zil 20 0 ua 10 uth . 9 Gu liv 11 esi 11 esi ka G u liv 201 Bra 201 gu 201 00 Bra a 201 mi P a 201 S o an R 200 20 a 0 0 mi P a 20 S o ic an u 20 ug 20 lv 0 Bo ia 20 on 20 m 0 A 20 on Lan alv la 2 2 sta 2 y2 2 Sa a 2 sta 2 ate ia 2 A 2 ia ia a z i iop iop o Eth Eth B Do Do Direct Tax 1/ Indirect Tax GNI per capita (2011 PPP rha) Direct Transfer Education Health Subsidies GNI per capita (2011 PPP rha) Source: Authors’ estimates and Lustig et al. (2013), Commitment to Equity (CEQ) Source: CEQ working papers (http://www.commitmentoequity.org), Tulane Universi- Standard Indicators. ty and World Bank sta calculations. relatively limited revenue generation. In 2007-11, primary education. On the other hand, economic spending public expenditures averaged 2.3% of GDP on education (especially for transportation infrastructure) declined in and 1.6% of GDP on health, compared to regional averages 2013, partly reversing an upsurge in public spending that of around 4.5% in each of these sectors. Starting in 2013, expanded the central government deficit to 6.6% of GDP the Dominican Republic raised its budget allocations for 2012, prompting fiscal consolidation. education in response to popular demand to achieve the spending levels mandated by Education Law 66-97. Public The country has seen notable improvements in the expenditure in education increased from 2% of GDP in coverage and provision of public education, as well 2011 to 3.8% in 2013, a year in which around 60% of the as student learning; however, there is still a long additional resources were used to improve and expand way to go to improve education quality that delivers infrastructure (Figure 1.7). Most of the funding went to the student learning. The Policy Note on Social Service Building a Better Future Together Delivery describes a number of areas where progress has Social assistance has moved in the right direction been achieved on the provision of social services and the and experienced significant progress over the last gaps that remain to be addressed. For example, the net decade. At the time of the banking crisis of 2004 and enrollment rate at the basic education level (6-13 year its resulting sharp economic slowdown that plunged olds) was 95.5%, while at the secondary level (14-17 year around 1.7 million Dominicans into poverty, most existing olds) it increased from 49.8% to 64.4% between 2005 social-transfer programs were untargeted and unable to and 2015. However, the low level of resources for public shield the vulnerable population from major shocks. The education in the past as well and weaknesses in teacher episode triggered a social safety net reform. The so-called training have led to an inadequate supply of high quality Solidaridad program was established as a targeted cash- teachers and challenges for initial education coverage, transfer scheme in 2005. The Government also introduced among others. On the quality side, despite substantial the Single Beneficiary Selection System (SIUBEN) as progress in learning by Dominican students between a targeting mechanism based on a life-quality index, 2006 and 2013 as captured by regional assessments, created an independent Administrator for Social Subsidies Dominican students continue to perform poorly and lag (ADESS), and eliminated some existing untargeted behind the other LAC countries, reflecting the weakness programs. Over time, noncontributory programs of the system in helping students develop basic cognitive expanded coverage significantly, with a particular skills (e.g. reading and math), in particular in early grades. focus on reaching the poorest in the last triennium. The food support component of the cash transfer program Despite low health expenditures by international has progressively increased coverage while other new standards, the Dominican Republic has made programs have been introduced and increased coverage important progress in expanding health-insurance like the Progress by Studying Bonus. Since 2012, the main coverage but certain key health outcomes remain conditional incentive for food support (Comer es Primero) low relative to its income level. At 2.9% of GDP in added approximately 200,000 new households, reaching a 22 2014, public expenditures in health were lower in total of 747,760 households by 2014. the Dominican Republic than in other countries with similar income levels (Figure 1.7). According to SISALRIL While coverage of social programs has increased, reports,12 health insurance coverage increased from the main objective going forward should be on 9% in 2007 to almost 64% in June 2016. Since 2007, making existing programs more progressive. Figure the number of persons covered by the Contributory 1.8 illustrates how regressive or progressive each social Regime (CR) increased from 739,850 to 3,500,714 program in the Dominican Republic is. A progressive social while the Subsidized Regime (SR) coverage for the poor program has a negative coefficient, which means that they increased from 35,706 to 3,308,606. The SR currently contribute to increase the disposable income per capita covers all the eligible poor registered in the Unique of the poor more than they benefit the wealthier. While a Beneficiary Information System (SIUBEN). However, large number of social programs in the DR appear to be there is significant scope to improve health outcomes progressive in absolute terms, with a coefficient below -0.1, in the country. For example, under age 5 mortality rates a few others remain largely regressive. On the progressive remain relatively high for a middle-income country—at side, one can find most components of education 31 per 1,000 people as of 2015. Although the percentage expenditures—except for tertiary education, which is of births attended by skilled personnel is higher than highly regressive, as in most countries—and all health- the regional average, according to data from the 2016 spending components. The most progressive cash transfer World Development Indicators, the DR’s maternal is the Incentivo a la Asistencia Escolar, followed by Bonogas mortality rate is significantly higher (93 per 100,000 live Chofer and Comer es Primero. Bonogas Hogar and Bono Luz births) than the regional average (71 per 100,000 live are practically neutral in terms of redistribution; Incentivo a births). Various assessments indicate that the majority of la Marina is regressive. Both the indirect electricity subsidy maternal deaths are preventable and that the quality of and tax expenditures are highly regressive in the sense health services remains a major concern. that they contribute to increasing the disposable income per capita of the wealthier proportionately more than they benefit the poor. This is concerning not only because 12  SISALRIL: Superintendent of Health and Labor Risks Building a Better Future Together of the regressive nature of these subsidies but mostly sustainability. In general terms, the current situation has because long-standing electricity-sector inefficiencies negative impacts on the citizens’ living standards and have been a major drag on other public spending that the productivity of workers and firms. Deficiencies in the could benefit the poor; for example, the electricity quality and reliability of water and electricity services sector deficit in 2012 (1.54% of GDP) represented three can affect negatively the main engines of growth in the times the amount spent on social subsidies and CCTs, country, including tourism, agriculture, manufacturing, the entire health budget (excluding social security), and drive away foreign direct investment. and two-thirds of the amount devoted to education. Overall, there are a number of common challenges In the infrastructure sectors, there are major gaps in in the provision of public social and infrastructure terms of quality and reliability. While access to water services. Despite improvements in living conditions of the and sanitation services and electricity is considered to be population there is a strong demand to improve social and high in the country, there is a widespread perception that infrastructure service delivery. The Policy Notes on Social the efficiency, quality and reliability of the largely publicly Service Delivery and on Infrastructure Services emphasize provided service is generally poor. There are a number of the areas that need the most attention. Enhancing reasons for this state of affairs in the infrastructure sector, the quality of services would require corresponding ranging from institutional and governance weaknesses, improvements in (i) the efficiency of both resource commercial and financial management, price setting and allocation and public spending; (ii) institutional capacity cost recovery issues, and the provision of transfers and and coordination to improve synergies within and across subsidies. The sub-optimal quality of these infrastructure sectors, as well as among public and private stakeholders; services and lack of reliability, together with the high cost and (iii) cost recovery, especially in water and sanitation, of largely privately provided internet access represent and electricity. Strengthening governance of the sectors a tremendous burden on households and businesses could also benefit from increasing the strategic use of alike representing a major drag on the country’s long- various citizen participation tools to increase transparency 23 term growth potential and environmental quality and and strengthen accountability. Figure 1.8: How progressive are the DR’s social programs? Incentivo a la Asistencia Escolar -0.50 Primary Education Spending -0.33 School supplies -0.33 School Food Program -0.33 Bono Gas Choferes -0.33 Pre-school Education Spending -0.30 Salud no contributiva Ambulatoria -0.27 Salud no contributiva Hospitales -0.26 Health Spending -0.26 Regimen Subsidiado Senasa -0.25 Comer es primero -0.24 All Cash Transfers -0.19 Lower Secondary Education Spending -0.19 Suplemento alimienticio envejecientes -0.19 Education (all levels) -0.17 Quisqueya Aprende -0.12 Total CEQ Social Spending -0.12 Promese -0.04 Bono Gas Hogares -0.02 Bono Luz -0.01 Upper Secondary Education Spending 0.05 Electricity Subsidy 0.29 Tertiary Education Spending 0.30 Incentivo a la Marina 0.44 Total Contributory Pensions 0.46 Tax Expenditures 0.47 Gini (Market Income) 0.51 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 Source: Authors’ estimates based in ENIGH 2007. Note: Concentration coe cients are calculated in the same manner as the Gini; when the concentration coe cient is above the diagonal, the di erence between the triangle of perfect equality and the area under the curve is negative, and spending is progressive in absolute terms. As the gure shows, both the indirect electricity subsidy and tax expendi- tures are highly regressive. Building a Better Future Together Factors that May Affect the Sustainability of Growth and Shared Prosperity The Dominican Republic remains vulnerable to the so-called “middle-income trap”. Despite significant structural changes in the Dominican economy, growth has not been inclusive over the last two decades or so. Many countries in the world with a similar trajectory of that of the DR have fallen victim of the so-called “middle-income trap”—a situation in which a country fails to achieve a high-income status due the lack of structural reforms that end up stifling growth. To be sure, of 101 economies that were middle income in 1960 only 13 escaped this middle-income trap and became high-income economies in 2008—Equatorial Guinea; Greece; Hong Kong, China; Ireland; Israel; Japan; Mauritius; Portugal; Puerto Rico; Republic of Korea; Singapore; Spain; and Taiwan, China. A faster improvement in equity and shared prosperity will require sustaining high growth through structural reforms in four critical areas. The Policy Note on Sustainability argues that there are four inter-related areas that could have self-reinforcing effects on long- 24 term inclusive growth in the DR: (a) macro and fiscal management; (b) the competitiveness of the economy (including several factors, such as, for example the quality of infrastructure, the business environment, the soundness of the financial sector, among others); (c) factors that affect social sustainability (including the quality of public service delivery in core sectors such as education, health, water and sanitation, and electricity); and (d) environmental sustainability and resilience to climate change. In the case of ICT, the DR authorities are advised to focus on a three- pillar approach. First, it would be necessary to improve the institutional framework and sector governance, which would pave the way to improve competition in the sector. Second, efforts to improve institutions and sector regulation, coverage and affordability would need to improve. Third, it would be necessary to invest in skills and to address demand-side factors. While there has been progress in all of these four areas over the last few years, there are a number of reforms that could boost growth and make it more equitable and inclusive. The main policy directions suggested in each of the policy notes are summarized in Table 1.1. Building a Better Future Together Table 1.1: Summary of Policy Directions Cross-cutting policy options for enhanced shared prosperity Increase the supply and quality of skills and human capital • Continue building on the recent improvements in the quality of education by increasing student learning and retention in the school system, and continue expanding access to early childhood development services. • Increase access to job training and internships to facilitate the transition from school to labor force and improve job matching. • Strengthen the connection between employers and the school system so that relevant skills are included in the curriculum and students have better information about labor demand. Incentivize job creation • Invest in productivity-enhancing technologies and financial access for small and micro enterprises, where the majority of the jobs are created. • Simplify regulatory procedures and strengthen legal institutions to improve the business environment. • Explore opportunities to promote exports in under-trading sectors that already employ workers from poorer households. Support policies to enhance skills adapted to the structural change in sectoral specialization in SEZs • Introduce social assistance programs designed to accelerate worker employment transitions to lower labor-intensity industries, including vocational training in new skills demanded by SEZ firms, job search assistance, and transitional income support. Increase cohesion and territorial planning to reduce the persistent regional differences • Consolidate the efforts to build capacity of local governments to formulate development plans and investment projects that reflect local needs expressed through participatory processes. • Consider adding needs-based criteria to the formula to transfer resources to municipal governments. Reduce gender gaps • Elaboration of labor policies that give women sufficient flexibility to find a balance between work and family demands. • Continue expanding access to affordable childcare and pre-school. 25 • In order to reduce teenage pregnancy, find innovative ways of outreach and of providing relevant audience-friendly information on issues such as reproductive health and rights, using behavioral change methods and engaging schools and community level organizations. Improving the quality and efficiency of social services Education Continue efforts to expand early childhood development services and develop solid strategies to increase student retention • Expedite INAIPI’s institutional strengthening to enable it to more effectively and rapidly increase service provision. • Regarding secondary school, it is recommended that MINERD develop systems and strategies to more directly tackle low enrollment in what would soon be secondary education. • Adopt early warning systems that are gender-informed to prevent dropouts and teacher trainings that cater to different learning levels within each grade and that address gender-specific issues. • Consolidate the curriculum for upper secondary on technical-vocational education to provide the skills for employment and give more alternatives for youth–in particular for young men who drop out of school without employment-relevant skills. Prioritize initiatives that matter the most for pedagogical instruction, and that have direct classroom impact • Strengthen teacher evaluations, and make use of available data in the system to feed into the design and implementation of teacher training programs, improving the teacher entry exam, the accreditation of teacher training programs (capitalizing on new regulations), and teacher accreditation, among others. • Continue improving components related to teachers’ careers, including salaries, evaluations, and incentives. • Strengthen M&E systems, implement student assessments and teacher evaluations, strengthen supervision and data at the school level, and increase the use of data for decision-making at all levels of the system. • Empower and support schools, and school principals, to improve their management in order to improve learning conditions and outcomes, as has been done in Brazil, Colombia, and Mexico. Deepen the implementation of reforms, sharpen the focus on learning outcomes, and improve coordination of programs and initiatives as agreed in the NEP. • Improve coordination–both internally within MINERD and its institutes, externally with other ministries (MESCYT and Ministry of the Presidency), and also with partners–to avoid duplication, exploit synergies of joint work, and improve service delivery in a faster way. Building a Better Future Together Table 1.1: Continue Improving the quality and efficiency of social services Health Continue to improve the quality of public spending on health and overall sector management and allocate more resources to health to address gaps in service delivery and insurance coverage. • At 2.9% of GDP in 2014, the DR’s health public expenditures’ share of GDP is below the country’s Ten Year Health Plan target of 4%. More funds are needed to (a) invest in health personnel, equipment and other inputs to improve quality of care and address service gaps in rural areas and for the poor and (b) expand financial protection coverage, to reach the poorest who remain unregistered in SIUBEN; to expand access to non-formal workers, as well as to eventually integrate health insurance packages and provide a single health benefits package for all citizens. • In terms of improving cost effectiveness of spending, more resources would also need to be allocated to prevention and promotion and public/collective health. • Actions can also be taken to improve spending by building on lessons learnt from the results-based financing (RBF) primary care pilots, and expanding RBF to hospitals. • The Government could also consider applying RBF to improve health care worker performance (competencies, absenteeism) and provide incentives for health workers especially doctors to serve in rural areas. • Use a combination of incentives and sanctions to promote the functioning of the referral-counter-referral system and to encourage adherence to the policy designating primary care as the gatekeeper for people to accessing the health services network. • Expanding the use of RBF would require further improvements in health information systems and training staff in information management system and monitoring and evaluation. • Undertake additional analysis and allocate more resources to cover the target population of the Contributory Subsidized Regime (CSR). Continue to strengthen the MOH’s capacity to coordinate and regulate the sector and ensure the timely provision of essential public health services while also enhancing the institutional capacity of the National Health Services (NHS) and National Health Insurance (NHI). • Adopt a structured and costed action plan to strengthen both the MOH and the NHS, and move forward with the 26 identified capacity strengthening actions for the NHI. These institutions would also need to coordinate regularly to avoid duplication of efforts and maximize synergies. Assess which functions would be best decentralized and which ones would be best remain centralized, and build capacity at all administrative levels. • Strengthen RHS capacity to function more independently under the coordination of the NHS with the Minister of Healty exercising its stewardship and regulatory functions. Social Protection Enhance the quality of health and education services with PROSOLI interventions. • PROSOLI could reduce the gap between affiliates and eligible population, and reinforce incentives to reduce dropouts at the basic level of education. • Ensure that the training plans of the Education and Health sectors include building capacities of personnel located in prioritized territories according to PROSOLI, ensuring that a percentage of the trainees come from poor and extreme poor areas. Ensure access to social protection services to all extreme poor in the country. • Enhance access to identity schemes, by implementing incentive mechanisms for the supply side, reducing administrative barriers for timely registrations (Declaraciones Oportunas), expediting procedures for late registrations (Declaraciones Tardias) and improving processes for registering Dominicans at birth, including those who have only one parent with Dominican nationality. • Continue to update the information of all poor households in the country through SIUBEN and, in turn, to expand PROSOLI’s coverage to all extremely poor households. Expand SIUBEN’s role to become the entry door of the social protection system. • Reinforce the institutional foundation of SIUBEN, strengthening its legal and regulatory framework. • Ensure that the targeting system is increasingly exploited, designing incentive mechanisms to encourage its use by different programs, local governments and beneficiaries (to request to be incorporated or recertified). • Assess strategies to secure enough funding and human resources to respond to clients’ requests Building a Better Future Together Table 1.1: Continue Improving the quality and efficiency of social services Social Protection Develop policies to link the contributory and non-contributory pillars, as well as interventions in the labor market. • Develop strategies in the medium-term with a view to adopt non-contributory pensions, and in the long-term with a view to expand the management system of subsidies to the co-pillar, ensure the exchange of information between the two pillars, and prioritize vulnerable sectors with limited ability to contribute to respond with targeted policy interventions. • Ensure that exit strategies from social assistance programs to labor market policies are consistent with the continuity of protection toward securing access to employment. • Make sure that social assistance interventions delivered through the GCPS are consistent with those territorially prioritized by the strategy Quisqueya Sin Miseria. Reinforce inter-sectoral coordination. • Further improve intersectoral coordination and prevent leakages and duplication of roles, by establishing databases that are interoperable to allow more effective management of the sector. • Strengthen the institutional capacities and links with the Ministry of Economy (MEPyD). Document and carry out assessments of interventions that have a major impact on poverty reduction. • Carry out assessments or evaluations on the impacts of both (vertical and horizontal approaches), including an analysis of available resources. Policy Options for Improving the Quality and Availability of Basic Infrastructure Services Water and Sanitation Continue efforts to establish and consolidate the sector’s institutional framework. • This requires the passing of the WSS Law and continued efforts with the associated decrees, as well as other activities related to its implementation, once the Law is approved. 27 Take incremental steps to improve service provision in a more efficient and targeted manner, in order to put the sector on a more sustainable path. • Establish a sector investment strategy with a long-term vision and a short-term program informed by the sanitation strategy under preparation, and adding priority water supply investments, strategically designed to maximize improvements in service quality and efficiency. Prepare a Sector Financing Policy covering government financing for both investment and operational expenses. • Establish sector-specific review and monitoring mechanisms for national public investments (including external sources). • Explore linking operational subsidies to performance agreements with service providers. Electricity Sector Improve the institutional framework and electricity sector governance. • Institutions and Governance. Clearly define the different roles of the sector actors to achieve a more efficient sector. This would mean that the MEM should absorb the functions of the CNE and those of CDEEE. Until this change is effectively made, sector governance needs to improve, and it will be important to have effective coordination between the CDEEE and the EDEs to achieve an efficient administration. It is also important that the government grant SIE the authority and autonomy established in the law with regard to setting tariffs, ensuring healthy competition among the sector agents, and monitoring and supervising compliance with laws and regulations, including service quality. • Transparency and Accountability. In the short to medium-term improving the MEM, SIE, Hacienda, and CDEEE’s ability to monitor the operations of the EDEs is vital to enhance accountability and eliminate the operational deficit. Afterwards it will be important that the CDEEE begins operating within its legal boundaries. The EDEs in particular should carry out annual audits of their financial statements, by independent and reputable audit firms based on international financial reporting standards and practices no later than six months after the close of the fiscal year. • Electricity Pact. It is important to maintain an open dialogue and to broadly disclose all information related to the sector in order to infuse the needed trust and empowerment of all stakeholders. The solution to sector issues should be systematic and will require commitment from all sector actors to achieve an efficient, competitive, and sustainable electric service. Building a Better Future Together Table 1.1: Continue Policy Options for Improving the Quality and Availability of Basic Infrastructure Services Electricity Sector Enhance the quality of service provision. • Improved service quality. All final end-users should be able to have continuous, high-quality, reliable, transparent and affordable electricity service. The programmed electricity blackouts should be reduced to diminish the need for investments in alternative energy sources and help promote economic growth and shared prosperity. Over the medium-term the sector should strive to ensure that all clients pay their bills on time and are provided constant electricity service, with appropriate voltage levels and no fluctuations. A solid social outreach program will be needed to complement the technical improvements to enhance awareness and willingness to pay for service and to regularize customers to achieve this goal. Restore the efficiency and financial sustainability of the electricity sector. • Generation. It is essential to have clear rules of the game and greater transparency in the generation sector, both for conventional and renewable energy. It is also important that the state better defines its participation in the sector. It is also vital that the EDEs carry out a call for tenders to power producers to cover their power capacity and energy needs given that the existing contracts will be closing at the end of August 2016. The country could also benefit from the low prices of natural gas to help bring down generation costs. Various barriers related to expanding access to natural gas supply and securing finance would need to be addressed to exploit this potential. • Transmission. It is important to ensure the operational and financial autonomy of ETED and allow it to collect transmission fees to provide sufficient resources for it to fulfill its functions under the law. This would require effectively passing these costs onto customers in bills and then having the EDEs pay ETED for these services from payment collections. ETED will also have to ensure that transmission fees are collected from the electricity market participants that use the transmission network to exchange power. • Distribution. To eliminate the operational deficit of the EDEs, it will be important to implement an integrated loss reduction program to reach the goal of 15% total losses. The loss reduction program should incorporate a social management strategy aimed at restoring trust between end-users and EDEs, raising payment levels, and educating customers on the use of electricity in a more efficient and safe way. Making this happen will also require improved 28 sector governance, transparency, and oversight. • Electricity tariff. SIE should publish the procedures and formulas used for the automatic adjustment of electricity tariffs based on costs as required by the law. SIE could take advantage of the currently low international oil prices and apply the technical tariff in the short run so that the transition will be more viable since it would not require major adjustments. To protect the poorest consumers, subsidies could be targeted and provided to those low-income users that qualify for the targeted cash transfer program Bonoluz. This would imply that Bonoluz coverage should be expanded so that it covers all low-income electricity users that are eligible for the Government’s Sistema Único de Beneficiarios (SIUBEN) programs. • Climate Change. Good planning and design and investments to strengthen and reinforce electricity infrastructure so that it can withstand future climate events would help improve its resiliency. The preparation of a solid emergency preparedness and response plan for how to respond to and recover from these types of events is also essential for reducing the vulnerability of the Dominican electricity system and ensuring continuity of the service even after these types of events occur. Information and Communications Technology Improve the institutional framework and sector governance. This requires strengthening regulations to promote competition that will ensure equitable access to the international gateway and cable landing stations and open access to incumbents’ networks, ensuring all major infrastructure (e.g. roads, pipelines, transmission lines) have provisions for an optical fiber link, promoting intermodal competition (e.g. between cable and telecommunications providers), mandating incumbents to make local access lines available to competitors at wholesale prices (local loop unbundling), and focusing INDOTEL on enhanced sector regulation. Enhance coverage and affordability. This will require investments to increase the national coverage of the broadband backbone. To complement the existing coverage in wealthier urban centers and future private investments to expand the network, government can undertake public investments that ensure inter-nodal connections between existing unconnected private (e.g. cable) providers and expand the backbone to poor, remote municipalities to ensure full coverage, and thereby reach the National Development Strategy goal of 80% internet coverage by 2030. Address demand-side and related factors. This demand investing in skills and policies for the future. It will be necessary to create an Open Innovation Hub to improve digital literacy; connect knowledge with investors, and keeping up with the state of the art via policy analysis and reform. Building a Better Future Together Table 1.1: Continue Policy Choices for Sustainable and Inclusive Growth Macro-fiscal Sustainability Reforming tax policy should be a priority. Widen the tax base by reforming the VAT and other current tax exemptions that are found to be highly regressive. The impact of the removal of VAT exemptions on electricity for the poorest could be mitigated through transfer programs (such as Bonoluz). Undertaking a thorough cost-benefit analysis of the incentives on corporate income taxations would also be advisable. Improve the efficiency of the tax administration system. Undertake a full-fledged diagnostic to identify strengths and weakness of the DR’s revenue administration system. Continue to pro-actively seeking opportunities to reduce debt. Avoid future primary deficits in order to prevent additional pressure on the debt path. Putting the debt on a downward trajectory would require a fiscal effort equivalent to -2.5% of GDP over the next 3 years. Adopt a medium-term fiscal framework with a clear counter-cyclical orientation. Establish binding fiscal targets and budgetary performance indicators to complement the current medium-term expenditure framework. Adopt a rules- based fiscal framework with a more clearly defined counter-cyclical orientation. Develop a comprehensive framework for Monitoring and Evaluation (M&E) and auditing. The MEPyD, the Ministry of Finance and the Ministry of Public Administration should develop a comprehensive framework for M&E and auditing. This framework could be piloted on a small number of key public programs before being extended across the public sector. Competitiveness and Inclusive Growth Competitiveness and Inclusive Growth Prioritize policies aimed at forging domestic linkages between SEZs and the domestic economy. • Continue to remove ineffective policies such as harmful local content requirements and protectionist non-tariff 29 measures that restrict the ability of domestic firms to import and transform key inputs. • Connect domestic suppliers by designing targeted programs for local suppliers, developing a supplier database, creating matchmaking services, and introducing incentives to encourage local sourcing from SEZ firms. • Attract competitive international suppliers and support the upgrading of domestic suppliers through non-equity modes of investment (e.g. franchising). • Delineate an overarching national policy for export promotion and FDI attraction that leverage SEZs as an engine of an inclusive economic growth. • Foster the competitiveness of national industries which do not have easy access to up-to-date information on existing opportunities by revamping the role of the Export Promotion Agency (EPA). Continue working on the implementation of legal reforms on competition and business regulations, particularly: • Launch the enforcement of the existing competition law in order to prevent and punish anticompetitive behavior; appoint Executive Director for Competition Authority, Procompetencia • Develop a strategy to review and remove regulatory restrictions in key product markets, especially those that risk to enable anticompetitive behavior of market players; • Finalize the implementation of the new insolvency law by developing accompanying rules and regulations; • Finalize the draft law on secured transactions for parliamentary approval; • Remove barriers to open new business from the Commercial Code (such as minimum capital requirements); Improve regulations and encourage greater transparency related to financing of MSMEs while also creating additional instruments. • Increase volumes and sources of private sector finance beyond banks, such as angel investors, venture capital funds, and leasing; • Increase the use of financial services to support productive activities while reducing transaction costs; • Increase the scope and depth of non-financial services to address key constraints to credit; • Further develop private capital markets to help alleviate market concentration. Industry-specific reforms Integrate new segments of market by fostering the development of non-all-inclusive tourism niches. In order to ensure that more firms are able to comply with international standards, it is important to strengthen national systems for quality inspection and verification. Building a Better Future Together Table 1.1: Continue Competitiveness and Inclusive Growth Industry-specific reforms Increase the relatively low marginal productivity and limited access to information and markets of smallholder farms. Integrate Producers into Domestic and Global Value Chains. The competitiveness of producer groups could be fostered through strategic alliances between the public and private sectors and would require: • Technological innovation to raise productivity; • Targeted market intelligence to enhance market access; • Financial capital to boost access to productive assets; and • Capacity-building and technical assistance to be able to meet the market demands. Environmental Sustainability and Resilience to Climate Change Integrate disaster risk management tools in core administrative processes. • Integrate disaster risk management into public investment and territorial planning processes by introducing screening mechanisms and disaster-risk considerations. • Develop hazard and risk information tools (e.g. safe school or safe hospital index). • Create a dedicated risk-analysis unit to update DRM disaster plans, develop DRR tools for public institutions, identify and analyze high-risk areas, and develop and disseminate risk maps and information in coordination with relevant authorities and local communities. • Include risks resulting from climate change into fiscal risk management strategies. Strengthen the Growth Potential of the Agri-food Sector • Make producers more productive and resilient, while lowering their carbon footprint, through climate smart agriculture; • Integrate producers into domestic and global value chains; • Strengthen institutions and the provision of public goods; 30 • Promote the sustainable use and management of natural resources at the watershed level; • Encourage good agricultural practices on pastures, land grazing and rain-fed agriculture in the upper and middle sections of the watershed • Adopt modern and efficient irrigated agriculture in the middle and lower sections of the watershed. Promote the Conservation of Natural Resources Assets • Continue to implement the strategy for Integrated Water Resources Management at Watershed level • Implement the Payment and Compensation for Ecosystem Services strategy • Ensure continued commitment in the REDD+ program. Building a Better Future Together Chapter 2. Toward More Evenly Shared Prosperity in the Dominican Republic Introduction labor force. The concept of inclusiveness encompasses equity, equality of opportunity, and protection in market A key element in the Dominican Republic’s and employment transitions.14 31 long-term vision, as set forth in the National Development Strategy 2030 (END), is that The note is structured in three sections covering: a) the of a prosperous country that promotes equity and country context; b) the challenges faced by households equal opportunity, and develops in a sustainable, to generate income, the policies that affect the capacity geographically balanced, and integrated manner. This of households to generate income, and the high and note describes the progress achieved in some of these persistent regional differences in the country; and d) areas and suggests a number of important elements to selected policy directions. ensure its sustainability and achieve the goals proposed in the END. In fact, the policy directions discussed in this Country context note should be seen as cross-cutting actions that would have a complementary effect on the recommendations of The Dominican Republic (DR) is one of the countries the sectoral policy notes in this volume. in Latin America and the Caribbean (LAC) that has experienced the highest economic growth in the past One of the biggest policy challenges for governments 20 years and has closed the gap with the regional around the world is how to translate economic average. In 1990 the country’s GNP was only 57% of the growth into improved living standards of broad regional average, climbing to 92% in 2014.15 Estimates segments of their populations, and the DR is no show that if the pace of growth observed in the last five exception.13 Inclusive growth has been defined as years continue, the gap would disappear by 2020.16 output growth that is sustained over time, broad- based across economic sectors, and creates productive 14  Ianchovichina, E., and S. Lundstrom (2009), “Inclusive Growth employment opportunities for large parts of a country’s Analytics: Framework and Application”, Policy Research Working Paper WPS4851, World Bank. 15  In dollars, 2011 PPP. World Development Indicators. 13  World Economic Forum (2015), The Inclusive Growth and 16  World Bank (2014), When Prosperity is Not Shared: The Weak Development Report 2015. Links between Growth and Equity in the Dominican Republic. Building a Better Future Together Figure 2.1: Annualized growth incidence curve, the Dominican Republic, 2005-2015 7 6 Annualized percentage change 4.7% 5 4 3 2.6% 2 1 0 -1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Quantile Labor income Non-labor income Source: Author’s calculations using data from the National Labor Force Survey (ENFT). An analysis of the growth incidence suggests that the attendance, especially in rural areas, where the share of country’s economic growth between 2005 and 2015 the population with no access to sanitation was reduced was pro-poor. Per-capita income for individuals in the by 29 percentage points and the share of households with bottom 40% grew at an annual rate of 4.7%, while the at least one school-age child (7-17) not attending school growth rate for the top 60% was 2.6% (Figure 2.1). Changes regularly was reduced by 34 pp.18 in labor income explain most of the growth in total income 32 which changes in non-labor income are greater. Despite significant gains in coverage, a few characteristics (family income level, education of The DR has also achieved a sustained reduction in parents, and living in urban areas) explain a large share inequality of income distribution, with a 5-point of the inequality of opportunities for children at birth. decrease in the Gini coefficient, from 50.7 in 2005 to Viewed in isolation, parents’ education accounts for more 45.5 in 2015, at all times below the inequality levels for than 35% of the inequality of opportunities in 2015, and the region. If we compare the average income in the nearly 60% of the inequality of opportunities to complete extreme deciles of the distribution, known as the 90/10 sixth grade on time (Figure 2.3). These circumstances make ratio, all countries in the region experienced reductions intergenerational mobility difficult. in inequality between 2005 and 2013. In the Dominican Republic an average household in the richest 10% earned The Dominican Republic is the fourth most unequal 9.8 times more than an average household in the poorest country in LAC in terms of gender equality and the 10% in 2005, while in 2013 it earned 7.7 times more third most unequal among the countries with a high (Figure 2.2). level of human development. Inequality between women and men is measured in three areas: reproductive Nonmonetary poverty—defined as lack of access health, empowerment, and access to the labor market. to essential services—has decreased steadily since Human development in the country was reduced by 48% 2000. The share of the population with no access to two in 2015 due to gender inequality.19 services decreased from 44% in 2000 to 28% in 2015, while the share lacking access to four services declined from 16% to 7% in the same period.17 Between 2000 and 18  Access to sanitation is defined as connection to the public 2015 there were notable increases in sanitation and school sewage system or septic tanks. 19  United Nations Development Program (2015), Human Development Report 2015. The only Latin American countries below 17  Indicators of access to services include school attendance, the Dominican Republic are Honduras, Guatemala, and Haiti, and in level of schooling, drinking water, sanitation, quality of housing, the group of countries with high human development only Iran and overcrowding, and ownership of assets. Tonga have lower indexes. Building a Better Future Together Figure 2.2: Ratio of the average income of the richest 10% and poorest 10%, 2005 and 2013 2005 2013 25 15 20 12 15 9 10 6 5 3 0 0 S a an a - an rag . Arg ugua pub a mi Chi r B o ras nd il an car or la El u r b a nic le Co xico en y - lic o M e ay tin P ia a - e ru Gu L r ate AC ia M e an Ecu ile Gu ragu r ate ay la ru z il Bo AC Co livia nd a s Ecu ban Pa an R do o Pa ado ura Ur Re agu y- u Ho mbi Ho Braz xic ma b liv ma nic Ni lvad ad Pe Bra u Ch tin urb ua rag urb L u lom lva ur lo ug ca Sa Ur Ni El Do en Arg mi Source: LAC Equity Lab, World Bank. Do After eight years of small decreases in the monetary Figure 2.3: Contribution of circumstances to inequality poverty rate,20 in the past two years official data of opportunities in the Dominican Republic, 2015 indicate that poverty declined unexpectedly by more than 10 percentage points. Factors cited to explain this 100 drop include the highest rate of economic growth in the country among LAC countries during these two years,21 80 Contribution to the HOI (%) inflation below the target range of the Central Bank, a 33 60 favorable external scenario with low oil prices, high public investment in construction and remodeling of schools, and 40 school meal programs. This confluence of factors seems to have led to changes in labor and non-labor income and 20 coincided with demographic shifts, all contributing to a decrease in poverty for the first time since 2000. 0 Enrollment 6th Grade Water Sanitation Asset Good quality on Time Ownership of Dwelling The decline in poverty in the past two years is Urban or rural Education of household head Family income impressive, especially considering that the structural Gender of household head Number of Siblings Presence of Parents Gender of child problems constraining the links between growth and Source: Author’s calculations using data from the ENFT. 20  Two different but complementary concepts are used to poverty reduction have not been resolved. However, measure poverty in the DR. Monetary poverty is defined as the lack the confluence of factors that caused the poverty decline is of monetary resources to purchase a basic consumption basket that most likely transitory, and the situation could be reversed is socially accepted. Non-monetary poverty is measured both using the concept of unmet basic needs –lack of access to 3 or more basic in the short term unless measures are taken to ensure that services in a list of 15– and the concept of a quality of life index (ICV economic growth brings greater benefits to the bottom in Spanish) –combining different variables and dimensions that 40% of the population. According to an analysis done by define the quality of life of a household. See Ministry of Economy, Planning and Development - MEPyD (2014), El Mapa de la Pobreza the World Bank and presented to the Technical Committee en la República Dominicana [The Poverty Map in the Dominican on Poverty (CTP), roughly 20% of the change in poverty Republic], and Ministry of Economy, Planning and Development – MEPyD, and National Statistics Office – ONE (2012), Metodología between 2013 and 2015 can be explained by an atypical para el Cálculo de la Medición Oficial de la Pobreza Monetaria en high reduction in the average size of households surveyed la República Dominicana [Methodology for the Calculation of the in the National Labor Force Survey (ENFT). Even allowing Official Monetary Poverty Measure in the Dominican Republic]. 21  And above the potential growth since the last quarter of 2014, for this factor, the poverty reductions between 2013 and according to the Central Bank of the Dominican Republic. 2015 are the largest in the past 15 years. Building a Better Future Together The very high economic growth has brought reductions vulnerable population increased 2 pp in LAC and 5.5 pp in of poverty and inequality that are sustained but the DR, while the size of the middle class increased by 11.2 smaller than expected. This fact is recognized in the pp in LAC and only by 7 pp in the DR. National Development Strategy of the DR 2030 (END) and the diagnostic assessment of non-inclusive economic However, although upward economic mobility has growth dates from at least the end of the 1990s.22 Although improved in recent years, it is very limited in the DR, the LAC region’s poverty rate declined steadily from 37.4% in contrast to the higher mobility in the LAC region. to 23.4% between 2005 and 2014,23 in the DR it decreased Between 2000 and 2015 only 7% of the population in more slowly from 40.5% to 28.6% –well above the regional the DR moved up to a higher socioeconomic group, 8% average– in the same period. By way of illustration, if moved to a lower group, and the remaining 85% remained poverty in the Dominican Republic had responded to in the same group. In the region, 41% of the population GDP growth as it did in the LAC region during the period had upward mobility, 2% moved downward, and 57% 2006-2014, there would have been 1.1 million fewer poor remained in the same group between 2000 and 2011.25 people in the country in 2014. Challenges During the period 2005-2014 and compared to LAC, the DR poverty reduction rates were lower, the Households’ capacity to generate income vulnerable population increased at a faster rate, and growth of the middle class was slower (Figure 2.4).24A key ingredient of more inclusive growth is the enhanced capacity of households, especially those During that period, poverty decreased by 14 percentage in the bottom 40%, to generate income to emerge points (pp) in LAC and by 11.9 pp in the DR, the share of from poverty and avoid the risk of downward Figure 2.4: Socioeconomic breakdown of the population, mobility. To explain household income we must take 34 the Dominican Republic and LAC, 2005 and 2014 into account the interaction of macroeconomic and microeconomic variables in order to achieve and sustain 100 the goals of reducing poverty and promoting shared 23.8 19.2 +7.0 26.2 prosperity from a social, economic, and environmental 80 +11.2 35.0 standpoint. Household income depends on four main Share of the population (%) components (Figure 2.5): (1) the capacity of households 60 39.2 36.9 +5.5 44.7 to generate income based on the assets they own; (2) the +2.0 38.9 transfers they receive, which may include domestic and 40 16.3 19.4 international remittances and private and public transfers 20 12.6 17.0 in cash or kind; (3) the aggregate prices of the basket of -14 -11.9 21.1 21.1 goods and services they consume; and (4) the effects 10.8 11.6 0 of negative or positive shocks (health, natural disasters, LAC 2005 LAC 2014 DR 2005 DR 2014 violence, job loss).26 Extreme poor Poor but not extreme poor Vulnerable Middle class Source: LAC Equity Lab, World Bank. A household’s capacity to generate income based on its assets can be disaggregated into three elements: (i) the stock of income-generating assets owned by each 22  World Bank (2001), Dominican Republic Poverty Assessment: Poverty in a High-growth Economy (1986-2000). member of the household, which includes human capital 23  The poverty line is US$4/day, 2005 PPP. Comparable data (e.g., educational level and years of experience in the labor are used from SEDLAC (World Bank and CEDLAS) for a group of 17 market), financial and physical assets (e.g., ownership of countries. This permits comparison between countries and the calculation of regional statistics, but is not necessarily comparable with each country’s official statistics. 24  Using comparable data from SEDLAC (World Bank and CEDLAS). 25  World Bank (2014), op. cit. Individuals are considered vulnerable if their daily income is between 26  For a more detailed explanation of the conceptual framework, US$4 and US$10, and in the middle class if their daily income is see Cord, L., Genoni, M.E., and C. Rodríguez-Castelán, editors (2015), between US$10 and US$50. All amounts are expressed in 2005 PPP Shared Prosperity and Poverty Eradication in Latin America and the dollars. Caribbean, World Bank, Washington, DC. Building a Better Future Together Figure 2.5 : Asset-based conceptual framework for the generation of household income Growth Returns Transfers to assets Household market income = Assets x Intensity of use x + x External shocks Prices Prices Distribution Source: Cord, Genoni, and Rodríguez-Castelán (2015). machinery or financial assets such as stocks and bonds), Figure 2.6: Contribution to the change in moderate social capital (e.g., the set of standards and social networks poverty in the DR, by component, 2005-10 and 2010-15 that facilitate collective action), and natural capital (e.g., land, soil, forests, and water); (ii) the rate at which these 10 Contribution to the change in poverty (%) assets are used by each member of the household to 0 generate income, which includes participation in the labor -10 35 market, the use of machinery, and the exploitation of land for agricultural production; and (iii) the returns to assets -20 (e.g., the cost of factors of production, including wages -30 and interest rates). -40 -50 Labor income (employment plus earnings) was responsible for a 44% reduction in poverty between -60 Share of adults Employment level Labor income Non-labor income 2005 and 2015, with a negligible contribution in the period 2005-2010 when poverty declined 4.3 percentage 2005 - 2010 2010 - 2015 points, and a contribution of 64% of the 11.5 percentage Source: Author’s calculations using data from the ENFT. points of poverty reduction in the period 2010-2015 (Figure 2.6). In the DR, as in all LAC countries, labor income work is needed to understand the impact on poverty of accounts for most of the income of households in both the different policies and programs. The rest of this section bottom 40 and top 60% on the income distribution. From analyzes each of the components of household income 2000 to 2015 labor income in the DR remained at about using the proposed conceptual framework and discusses 63% of total income of the bottom 40 and about 70% of how public policies can affect household income- the total income of the top 60. generating capacity. Given the importance of labor income in the income Assets: human capital of the poorest households, an analysis of how the capacity to generate labor income has changed can Human capital is defined as the set of skills and help us understand the country’s progress in poverty knowledge that accounts for an individual’s productive reduction and the promotion of more evenly shared capacity, and can be measured using variables such as prosperity. While there is a good understanding of the labor experience, educational attainment, and quality of decomposition of changes in poverty in the DR, more education. Building a Better Future Together In the past 15 years there have been significant gains in University enrollment shows occupation segregation access to education at all levels.27 The gap in educational by gender, associated with traditionally assigned achievement between the bottom 40% and the top 60% social roles. Women tend to be underrepresented has been closed in the past 15 years. The average number in technical career pathways, but outnumber men in of years of schooling for heads of household in the bottom careers such as social services, social sciences, education, 40% of the population increased by 35%, from 4.6 years in medicine, humanities and personal services.30 Moreover, 2000 to 6.2 years in 2015, while for the top 60% it increased young women (ages 15-24) are more than twice as likely as by 13%, from 7.7 to 8.7 years in the period. young men to be neither employed nor enrolled in school (referred to as ‘ni-nis’).31 However, low levels of learning and high dropout rates are the biggest challenge facing the DR education Assets: financial assets system, which affect not only access to employment but also wages. According to the results of the Third Regional Access to financial services has improved over the Comparative and Explanatory Study (TERCE) of 2013,28 last years, however increasing volume and sources of despite showing the largest improvement, students in private sector finance and accompanying access to the DR had the worst results in the LAC region in six of the credit with non-financial services are key challenges seven areas evaluated (reading and mathematics for the to support shared prosperity. According to the latest third and sixth grades, natural sciences for the sixth grade, Findex data, 54% of adults have an account at a formal and writing for the third grade) and the second lowest financial institution. This represents a significant increase scores in the remaining area (writing for the third grade). from the previously reported 38.2% and is well above the The World Economic Forum rates the Dominican Republic median for the region, which stands at 40.7%. However, 138th among 144 countries with respect to the quality of overall credit to micro, small, and medium enterprises primary education. In terms of school dropouts, of every (MSME) is low. In terms of access to finance for enterprises, 36 100 students who begin school, only 75 of those who around 57% of firms held a line of credit. When classified begin in the first grade finish the fourth grade, 63 finish by size, this figure decreases to 49.8% of small firms the sixth grade, and only 52 complete the eight-year basic having a credit line, and increases to 64.6% for medium- education program in time. sized and to 76.5% for large firms. Commercial loans have increased from around 12% of GDP in 2007 to 17% in The Government has demonstrated its commitment to 2015, with MSME finance representing 3% of GDP and 5%, addressing these challenges through a broad agenda respectively. of reforms in the education sector, starting with doubling the budget for pre-university education to 4% of GDP Despite high FDI inflows, longer-term access to since 2013, developing new curricula and a solid teacher finance in the economy is scarce, particularly for career framework, and improving the organization and small productive operators. Access to finance is a major regulation of the education system. Despite the increase constraint faced by informal firms in the DR. Commercial in the average education level of the economically active loans to SMEs increased from around 12% of GDP in population, entrepreneurs in the DR complain about the 2007 to 17% in 2015, but average loan amounts remain limited availability of skilled labor.29 low and maturities are typically short. Private credit was equal to 25.4% of GDP in 2014, almost half of what would be expected given the level of financial sector 27  The recent and ambitious school construction and upgrading policy has contributed to these gains. This policy includes the development in the country, and well below the regional construction of 11,873 new classrooms, 967 more rehabilitated, and median of 43%. 86 early childhood development centers which are expected to be completed soon. 28  Produced by the Latin American Laboratory for Assessment of the Quality of Education, includes 15 countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, and Uruguay. 30  Using information from the 2010 Population Census. 29  Cited as the third greatest problem for doing business in World 31  Sistema de Indicadores Sociales de la República Dominicana Economic Forum (2016), The Global Competitiveness Report 2015- (SISDOM), 2014. In 2014, 27.2% of women are neither employed nor 2016. in school compared to 12.7% of young men. Building a Better Future Together Intensity of use: labor force participation and women with university education. The main reasons for demand for labor inactivity in women are household responsibilities (39.1% –a responsibility almost exclusively of women– and studies To transform human capital into income, people need (38.6%), while by far the main reason for men is studies to participate in the labor market and there must be (65.1%).36 The importance of household responsibilities enough demand for their knowledge and skills. The to explain inactivity might hint at barriers women face in participation of adults in the labor market in the DR was the DR to balance work and family. More generally, the the lowest in the entire LAC region in 2014. Despite small lower participation and high inactivity rates for women increases in the participation of both groups since 2000, indicate the existence of barriers or fewer opportunities the bottom 40 participate less in the labor market than the and incentives. These issues should be studied in greater top 60 (57.3% vs. 69.6% in 2015). detail because an influx of women into the labor force has the potential to contribute significantly to poverty The problem of low labor force participation in reduction and more evenly shared prosperity in the DR, the Dominican Republic is primarily a gender and it will be important to design and implement policies issue. Although women account for 65% of university to address this gap. enrollment and 80% of those who graduate with honors, only 52% of working-age women participate in the labor High and sustained economic growth has not led to market while 78% of men do. The participation rate of a robust demand for labor. The number of jobs created women in the Dominican Republic is lower than the between 2000 and 2015 (about 1.3 million) is less than average for the LAC region, and the unemployment rate what is expected in one of the economies with the highest for women in the country (23%) is almost three times growth in the region. Productivity per worker has been higher than for men (7.9%).32 the main engine of economic growth, with job creation playing a limited role.37 Domestic violence and teenage pregnancy might 37 be contributing to lower participation rates. These The potential of Special Economic Zones to keep phenomena usually constraint women’s ability to make generating low-skill jobs is likely to be reduced. their own choices and reach their goals.33 Gender-based Industries operating in the zones have historically relied violence is one of the main mortality causes in the DR on maquiladoras, demanding mostly low-skilled labor.38 for women aged 15-49, and around 30% of women in The end of the Multi-Fiber Agreement (MFA) in 2005 and this age group that have ever been in a relationship have the signature of the CAFTA-DR agreement generated a experienced some form of violence perpetrated by their structural shift from clothing manufacturing to medium/ partners in the last 5 years. The DR has the third highest high skilled manufacturing –the latter less employment rate of teenage pregnancy in LAC.34 Different studies have intensive– that has reduced the potential of SEZs to found a significant correlation between teenage pregnancy generate low-skill jobs at a high pace. The total number and childbearing, lower educational achievement, and of jobs created by SEZs is 21% lower in 2014 than in 2000. poorer labor market outcomes for women.35 More than 50,000 jobs for female workers were lost in SEZs between 2009 and 2000 as a result of the decline in the Women represent around 70% of the inactive textile sector due to the expiration of the MFA. Female population and almost half of the working-age women employment in SEZs has since recovered and increased by are inactive. The latter share decreases sharply with the 31.1% between 2009 and 2014 due to increased activity in level of education, with 71% of working-age women with footwear, services, and medical equipment. no education in 2015 being inactive, compared to 25% for 32  Central Bank of the Dominican Republic. 36  SISDOM (2014), op. cit. 33  World Bank (2012), Teenage Pregnancy and Opportunities in 37  World Bank (2016a), Do Labor Markets Limit the Inclusiveness Latin America and the Caribbean: On Teenage Fertility Decisions, of Growth in the Dominican Republic? World Bank Latin America and Poverty and Development. Caribbean Region. Processed. 34  United Nations Development Program - UNDP (2013), Human 38  World Bank (2016c), Special Economic Zones, Global Value Development Map of the Dominican Republic. Chains, and the Degree of Domestic Linkages in the Dominican 35  World Bank (2012), op. cit. Republic. Processed. Building a Better Future Together Figure 2.7 : Median wages per hour for the bo om affected all groups of workers, regardless of their skills 40 and the top 60 (in Dominican pesos of 2007) or years of education, and all sectors except for public administration and defense.42 The sectors that have 160 contributed most to economic growth have experienced 140 a declining share of employment, resulting in a reduction 120 of the percentage of total output allocated to labor Median hourly wage 100 payments relative to that of capital.43 The multiplicity of minimum wages and the historical weakness of labor 80 unions may partly explain the decrease in real wages 60 despite the rising productivity.44 40 20 While more workers currently have access to formal 0 jobs, the poor are concentrated in informal jobs with 2000 2002 2004 2006 2008 2010 2012 2014 lower wages. The increasing concentration of low-skilled Poorest 40% Richest 60% workers in low-quality jobs and in unproductive sectors Source: Author’s calculations using data from the ENFT. limits the impact of employment on poverty reduction. There has also been a change in the sectors that hire the poor, with a shift from manufacturing to the service sectors, On the other hand, the emergence of medium-high trade, and construction. Productivity and real wages in skill manufacturing in the SEZs might contribute these sectors has grown more slowly or has stagnated, in to increase the insufficient demand for skilled the context of a sustained increase in productivity at the labor. High-skill workers in the DR have much higher aggregate level. A decomposition analysis reveals that unemployment rates than unskilled workers,39 and despite changes in the sector employing low-skilled workers— 38 government’s efforts to improve the quality of education, most of whom receive low income—contributed to an an inadequately educated workforce was cited as the increase in poverty between 2003 and 2013.45 third most problematic factor for doing business in the DR, suggesting that educated workers do not possess the Transfers skills that firms need.40 Transfers are an important source of income for Returns to assets: wages the poorest households in the DR. In 2013, transfers accounted for 22% of the income of the first quintile, and Real wages in the DR are lower than before the their share in total income decreased for higher income banking crisis of 2003 with the top 60% earning about groups to 8% in the richest quintile (Figure 2.8). 2.5 times the wages of the bottom 40 in 2015. Between 2000 and 2015 real wages for the bottom 40 decreased 8% In terms of public sector transfers, the Dominican and 16.3% for the top 60. Overall, real wages decreased Republic has made substantial progress in the more than 30% between 2000 and 2004 partly due to an establishment of a social protection system in the inflation rate of 42.7% in 2003 and 28.7% in 2004, to then past 10 years, including rationalization of spending in increase 34% between 2004 and 2015 for the bottom 40 social welfare by reducing the dispersion of programs and and 25% for the top 60 in the same period (Figure 2.7). strengthening the design of programs such as Progresando con Solidaridad (PROSOLI).46 Cash transfers in the country Between 2000 and 2013 labor productivity in real terms increased by 39% while remuneration for labor 42  Abdullaev, U., and M. Estevão (2013), “Growth and Employment in the Dominican Republic: Options for a Job-Rich Growth”, IMF decreased by 26%.41 The decline in real wages has Working Paper, WP/13/40. 43  World Bank (2016a), op. cit. 39  World Bank (2016a), op. cit. 44  There are at least 9 different minimum wages depending on the 40  World Economic Forum (2016), Global Competitiveness Report type and size of the firm, not including minimum wages for different 2015-2016. types of construction workers. 41  Labor productivity is measured by output per hours worked for 45  Ibid. total employment. 46  See note on service delivery. Building a Better Future Together Figure 2.8: Sources of income by quintile in the Dominican Republic, 2013 Distribution of Labor income by income quintile Poorest has 5% of the 63% 22% 20% total income Poorest 20% 4% 2nd has 9% of the 70% 3rd Quintile Quintile total income 13% 3rd has 13% of the 71% 13% Richest 20% Quintile total income 13% 54% 4th Quintile 4th has 20% of the 73% 13% 20% Quintile total income 11% Richest has 53% of the 72% 15% 8% 3% 20% total income Labor income Income from pensions Other non labor income Income from transfers Income from capital Source: LAC Equity Lab using data from SEDLAC (CEDLAS and World Bank). Figure 2.9: Concentration shares of direct transfers by decile, various countries 60% 4.5% 4.0% 50% 3.5% 39 40% 3.0% Share of Bene ts Share of GDP 2.5% 30% 2.0% 20% 1.5% 1.0% 10% 0.5% 0% 0.0% Argentina Armenia Bolivia Brazil DR Ethiopia Indonesia Jordan Mexico Peru SouthAfrica Sri Lanka Uruguay Poorest decile Richest decile Share of GDP (right axis) Source: World Bank (2016b). are generally well focused and proportionally do more to and Uruguay not only devote a greater percentage help the poor and at-risk population.47 of transfers to the poorest households (decile 1) than the DR, but this percentage declines more rapidly as However, in comparison with other countries, direct household income increases (Figure 2.9). Despite great transfers in the DR have the potential to generate advances in coverage in the past eight years, individual greater redistribution of income considering transfer amounts are relatively small and a portion of that the rate by which the share of total benefits the spending on transfers does not go to the poor.49 decreases by decile is lower than that observed in other countries.48 Countries such as Argentina, Peru, (see Lustig, N., and S. Higgins (2013), “Commitment to Equity Assessment (CEQ): Estimating the Incidence of Social Spending, Subsidies and Taxes. Handbook.” CEQ Working Paper No. 1, July 2011; 47  World Bank (2016b), Fiscal Policy and Redistribution in the revised September 2013). However, the results should be interpreted Dominican Republic. Processed. with caution because of the countries’ different taxes and exemptions. 48  These country comparisons are based on the same methodology 49  World Bank (2016b), op. cit. Building a Better Future Together Table 2.1: Loss of purchasing power of wages by quintile, Sept. 2000 – Sept. 2015 Quintile Inflation (%) Wage increase (%) Loss of purchasing power of wages (%) 1 292.0 158.2 45.8 2 283.7 144.7 49.0 3 278.5 132.3 52.5 4 272.7 108.0 60.4 5 261.6 91.9 64.9 Source: Author’s calculations using data from the Central Bank of the Dominican Republic and the ENFT. Figure 2.10: Climate change vulnerability index (IVACC) External shocks and the quality of life index (ICV) Depending on their nature, external shocks can affect Index of Vulnerability to Climate Shocks (IVACC) 0.7 health and education indicators and one or more 0.6 components of household income, and rich and poor households in different ways. 0.5 0.4 The shock that had the greatest impact on the 0.3 bottom 40% of the population in the past 15 years is the banking crisis of 2003. Between 2002 and 2004, 0.2 40 as a result of a cumulative inflation of 93%, real wages 0.1 decreased by 33%, resulting in a 25% loss in the purchasing 0.0 power of household income. Between September 2002 ICV1 ICV2 ICV3 ICV4 and September 2004, about 600,000 individuals fell into IVACC National average extreme poverty, and the number of persons living in Source: Single System of Bene ciaries - SIUBEN (2013), Análisis de los datos moderate poverty grew by one million. It was not until resultantes de IVACC [Analysis of data from the IVACC]. Mimeo. 2015 that poverty rates returned to their pre-crisis levels, while real wages continued below their 2002 level: real Prices wages for the bottom 40 in 2015 were 10.5% lower than 2002 levels and 16.1% lower for the top 60. The purchasing power of household income is determined by the prices of goods and services they use. Household income and well-being are affected not only by the shocks themselves but also by the uncertainty Between 2000 and 2015, the inflation of the basic about their magnitude and effects. For example, the basket has been greater for the poorest groups of the poorest households are hardest hit by climate shocks not population but this has been partly offset by higher only because they are more exposed, but also because wage increases. While the cost of the basket for quintile they have fewer resources and receive less support from 1 increased 2.9 times, the cost for quintile 5 increased relatives, the community, the financial system, and even 2.6 times (Table 2.1). The higher inflation for the poorest the social protection networks to avert the disaster, cope quintiles was partially offset by higher wage increases in with it, and adapt.50 the same period. Inflation was 1.8 times greater than the wage increases for quintile 1, and 2.8 times greater for 50  Hallegatte, S., Bangalore, M., Bonzanigo, L., Fay, M., Kane, T., quintile 5. As a result, wages for higher quintiles lost more Narloch, U., Rozenberg, J., Treguer, D., and A. Vogt-Schilb (2016), Shock Waves: Managing the Impacts of Climate Change on Poverty. purchasing power (64.9% for quintile 5) between 2000 Climate Change and Development Series. World Bank, Washington, and 2015 than for lower quintiles (45.8% for quintile 1). DC; and Báez, J., de la Fuente, A., and I. Santos (2010). “Do Natural Disasters Affect Human Capital? An Assessment Based on Existing Building a Better Future Together Figure 2.11: Policy areas that affect household income-generating capacity Equitable scal Fair and policy and macro stability transparent institutions Returns Transfers to assets Household market income = Assets x Intensity of use x + x External shocks Prices Prices Well-functioning Risk markets management Source: Cord, Genoni, and Rodríguez-Castelán (2015). In the DR vulnerability to climate shocks is higher Fiscal and macro policy for the poorest households. The climate change vulnerability index (IVACC in Spanish)—which measures Fiscal policy affects income-generating capacity the likelihood that a household is vulnerable to the through taxes and public spending. Direct taxes affect occurrence of hurricanes, storms, and flooding, given the returns to assets and influence the intensity of their certain socioeconomic and geographical characteristics— use. Indirect taxes can affect price levels, and public 41 is higher for the poorest households and decreases as the transfers not only have a direct impact on income but standard of living increases (Figure 2.10).51 also incentivize the accumulation of human capital if they are tied to conditions such as school attendance or Having talked about challenges in the capacity of medical checkups. households to generate income, we now turn to challenges in policies that affect that capacity. In comparison with LAC countries, the DR has low levels of tax collection.52 In 2015 tax collections Policies that affect households’ capacity accounted for 13.7% of GDP, a rate only higher than to generate income Haiti, Guatemala, and Paraguay, and well below the LAC average of 21%. The low levels of tax collection limit the We will now supplement the conceptual framework levels of public social spending that are needed to close outlined above to organize the analysis of the links the gaps in the coverage and quality of basic services, between policies and income growth of the bottom 40. and reach the goals set forth in the END. Budgetary The framework identifies four fundamental policy areas that have a direct impact on the capacity of households 52  Some of the reasons for the low collection rate include the to generate income in an economy: (1) equitable, efficient, increase in tax expenditures and special regimes, high levels of and sustainable fiscal policies and macroeconomic tax evasion, and a relatively small tax base (see Salim, J. A. (2011), Elaboración de la Metodología para el Cálculo para la Evasión del stability; (2) fair and transparent institutions capable of ISR [Preparation of the Methodology for Calculating Income Tax providing high-quality basic services; (3) well-functioning Evasion], processed; and OECD (2013), Fiscal Policy for Development markets; and (4) adequate risk management at the in the Dominican Republic). In this context it is noteworthy that tax incentives are established outside the tax code through entities macroeconomic and household levels (Figure 2.11). other than the Ministry of Finance and that the private sector plays a deliberative role in designing special tax regimes for certain sectors Empirical Evidence.” IZA discussion paper 5164, Institute for the Study (see Daude, C., Gutiérrez, H., and Á. Melguizo (2014), “Doctoring the of Labor, Bonn, Germany. Ball: The Political Economy of Tax Incentives for Investment in the 51  This index takes values between 0 (least vulnerable) and 1 (most Dominican Republic,” OECD Development Center Working Papers vulnerable). No. 322). Building a Better Future Together rigidities in excess of 10% of GDP—which is higher than framework of the public sector is one of the sector’s main the total collected from the ITBIS (tax on the transfer of challenges. Duplication of functions, low coordination, and industrialized goods and services), income taxes, and high institutional dispersion contribute to the delivery of property taxes—also limit the resources available for the low-quality of services and inefficient public spending. For social sectors. In 2013-2014, the DR had the lowest level instance, the Ministry of Health faces capacity constraints of social spending as a percentage of GDP in all of Latin to coordinate the sector, and there is weak coordination America, with under half the regional average.53 of interventions between the contributory and non- contributory social assistance schemes.56 An analysis of fiscal incidence using the commitment to equity (CEQ) methodology shows that in 2013 the Well-functioning markets country’s fiscal policy was progressive. In comparison with other countries and using the same methodology, Well-functioning markets, with more connectivity and the DR fiscal system is at the mid-range in terms of competition, are important for reducing barriers to reducing income inequality through direct and indirect the efficient use of household assets and for increasing taxes, transfers, and subsidies.54 their return. Markets with low levels of competition limit the growth of productivity, the creation of good jobs, and Fair and transparent institutions therefore the capacity of the labor market to translate economic growth into more income for the poorest The presence of fair and transparent institutions households. Several studies have found that the existence influences decisions for asset accumulation by of monopolies and imperfect competition results in households through various channels. One of these greater losses in well-being for low-income households channels is the provision of high-quality basic services than for high-income households.57 A recent study by the that affect the accumulation and use of human capital. In General Directorate of Internal Revenue (DGII) found that 42 the DR, increases in the coverage of services have been 35% of the country’s markets are highly concentrated, 8% accompanied by improvements in equity of access. The are moderately concentrated, and the remaining 57% are human opportunity index (HOI), a measure of equitable not concentrated.58 coverage of goods and basic services critical to economic advancement in life, increased from 65 in 2000 to 78 in Risk management 2015.55 Not all of the opportunities included in the index have evolved in the same way during the period. There Proper risk management can attenuate the negative were major improvements in the area of completion of effects of shocks on households, especially for the sixth grade on time (from 43 in 2000 to 71 in 2015) the poor and vulnerable, which are more prone to and in sanitation (37 in 2000 and 64 in 2015), but very little risks. The social protection networks, such as flexible progress with regard to the index for drinking water (from transfer programs—which can be expanded during 61 to 65 in the period). times of crisis and reduced during recovery—can be important tools for temporarily supplementing the Institutional arrangements can be another barrier income of households affected by external shocks. The to the provision of quality services. The institutional 56  For a more detailed treatment of these institutional issues see 53  Economic Commission for Latin America and the Caribbean - policy note “Challenges and Opportunities to Improve the Quality ECLAC (2016), Social Panorama of Latin America and the Caribbean and Efficiency of Social Services”. 2015. Social spending is defined in the publication as resources 57  See Urzúa, C. M. (2013), “Distributive and Regional Effects of allocated to plans, programs, and projects in education, health, social Monopoly Power.” Economía Mexicana NUEVA EPOCA, 22(2): 279- protection, protection of the environment, housing, and community 295; Creedy, J. and R. Dixon (1998), “The Relative Burden of Monopoly services. on Households with Different Incomes.” Economica, 65(258): 285-293; 54  World Bank (2016b), op. cit. and Argent, J., and T. Begazo (2015), “Competition in Kenyan Markets 55  The HOI takes values between 0 (no coverage) and 100 (total and its Impact on Income and Poverty: A Case Study on Sugar and coverage), and takes into account coverage of basic services that offer Maize.” World Bank Policy Research Working Paper, (7179). opportunities (e.g., school enrollment and access to drinking water) 58  General Directorate of Internal Revenue (2015a). Concentración and differences in the rate of coverage of groups formed based on de Mercado en la República Dominicana [Market Concentration in characteristics that are beyond the individuals’ control (e.g, gender, the Dominican Republic], 2015. The study uses tax declarations filed race, and place of birth). in 2014 for FY 2013. Building a Better Future Together Figure 2.12: Rates of moderate poverty in urban and rural poverty, and has hovered between 10 and 15 points rural areas in the Dominican Republic since then (Figure 2.12). 70 The greatest concentration of poverty in the border areas with Haiti has not changed in at least 15 years, 60 nor has the fact that the National District and North Share of the population Central regions have the lowest poverty rates. The 50 second survey of the Single Beneficiary System (SIUBEN) in 2012 identified major disparities in terms of extreme 40 poverty rates and unmet basic needs between provinces. 30 For example, 46% of the population in the Elías Piña province was considered extremely poor (category ICV1), 20 but only 3.5% in Monseñor Nouel (Figure 2.13, panel A). 2000 2002 2004 2006 2008 2010 2012 2014 In terms of human development measured by the Human Urban Rural Development Index, the differences are even greater with Source: Author’s calculations using data from the ENFT. the Elías Piña province on the Haitian border having an index of 0.11 while the National District has an index of 0.73 (Figure 2.13, panel B).59 development of the climate change vulnerability index (IVACC) by SIUBEN will enable the Government to design The highest poverty rates are concentrated on the disaster prevention and management mechanisms to border with Haiti, particularly in the mountainous protect the most vulnerable households, which tend also areas where less productive farming systems (slash and to be the poorest. To enhance the efficacy of prevention burn for raising basic crops such as beans and corn) have measures, these should be broader and mainstreamed been developed, which exert unsustainable pressure on 43 in public planning. the natural resources (soil, water and forests). Poverty is also concentrated in the low valleys where there are many Insurance penetration remains quite low at around bateys (sugar workers’ towns), occupied by extremely 1.5% of GDP. In a country such as DR with high exposure to poor Dominican Republic citizens of Haitian origin and natural disasters, this presents a risks both for households temporary workers from Haiti who work in the larger and businesses. With the DR’s expected joining of the Dominican sugar cane plantations. The Dominicans of Caribbean Catastrophe Risk Insurance Facility (CCRIF), this Haitian origin are particularly vulnerable, as they not only will provide an opportunity not only to obtain sovereign receive low incomes, but must also contend with poor risk protection but also to extend insurance to the living conditions and social exclusion.60 enterprise and household sectors of the economy. To address poverty and exclusion in the border region, We finally turn to challenges the country faces in terms a border development law granting tax exemptions to of large and persistent regional and geographical companies that operate in any of the seven provinces differences. specified in the law was enacted in 2001. This law has been criticized for not having the desired impact on local Persistent regional and geographical employment -or at a very high cost per job created- and differences on the quality of life of the residents of these provinces. There are large and persistent inequalities between 59  United Nations Development Program - UNDP (2013), rural and urban areas and between the different Human Development Map of the Dominican Republic. The Human regions of the country. Monetary poverty in rural areas Development Index for 2010 at the provincial level considers the was 25 percentage points above poverty levels in urban accomplishments of the population in the country’s provinces in three dimensions: a long and healthy life, education, and income areas in 2000. This difference fell to 15 points during the level. banking crisis when urban poverty increased more than 60 IFAD (http://www.ruralpovertyportal.org/country/home/tags/ dominican_republic). Building a Better Future Together Figure 2.13: Percentage of households categorized as extreme poor (ICV1) and Human Development Index (HDI) by province Panel A. Households categorized as ICV1 Panel B. Human Development Index 9.4% 0.558 25.5% 0.387 18.5% 8% 0.381 0.409 13.9% 9.9% 0.421 0.471 14.8% 9.9% 8.5% 0.274 0.402 0.487 6.7% 9.1% 0.524 0.362 46% 0.112 6.1% 10% 0.485 0.465 23.6% 3.5% 24.3% 22.6% 36.5% 0.349 3.0.521 0.204 0.417 0.316 32.6% 20.2% 25.1% 11.1% 0.252 0.302 0.473 0.419 0.487 0.488 8.1% 9% 12.1% 9.9% 0.322 0.419 Distrito Nacional 25.4% 13.1% 0.190 0.413 0.734 23.1% 0.271 27.5% 0.145 0.0% - 3.5% 3.6% - 14.8% Alto Medio alto 14.9% - 27.5% 27.6% - 46.0% Medio bajo Bajo Source: Single System of Bene ciaries - SIUBEN (2013), Calidad de Vida: Estudio Source: United Nations Development Program - UNDP (2013), Human Development Socioeconómico de Hogares en la República Dominicana [Quality of Life: Map of the Dominican Republic. Socioeconomic Study of Households in the Dominican Republic]. Some of the companies that benefited have been accused Increase the supply and quality of skills and human of unfair competition. capital. Continue building on the recent improvements in the quality of education by increasing student learning, Public investment is highly concentrated, with 75% of increase retention in the school system, and continue the investment in the period 2012-2015 concentrated expanding access to early childhood development 44 in nine provinces that represent 54% of the country’s services. Increase access to job training and internships population. Investment is also concentrated in provinces to facilitate the transition from school to labor force with relatively low poverty rates (Figure 2.14) and in only and improve job matching, especially for young people. a few sectors. Around 70% of the investment in the period Strengthen the connection between employers and 2012-2015 was in the transportation sector, while only the school system so that relevant skills are included in 3.8% went to the health sector, and 0.8% to the water the curriculum and students have better information sector.61 The latter two sectors face enormous challenges about labor demand. These initiatives would improve with respect to coverage and quality of service. The transfer employability and provide the necessary skills to enter of 10% of the central government’s revenues to municipal and perform in the labor market. governments based only on their population –and fulfilled only partially– exacerbates regional inequalities. Incentivize job creation. More research is needed to identify both constraints –bottlenecks, market failures– and opportunities for job generation in different Policy Directions economic sectors. Implement policies and provide incentives to increase competitiveness and productivity, The policy directions highlighted in this note are especially in sectors that generate most of the jobs. complementary and cut across those discussed in Simplify regulatory procedures and strengthen legal the other policy notes in this volume. They focus on institutions to improve the business environment. measures that can improve the wellbeing of the most Invest in productivity-enhancing technologies and disadvantaged groups in the DR and are therefore financial access for small and micro enterprises, where priorities to improve shared prosperity in the country. the majority of the jobs are created. Strengthen the quality of regulations to promote competition. Explore opportunities to promote exports in under-trading 61  Ministry of Economy, Planning and Development - MEPyD sectors that already employ workers from poorer (2016), Informe de Rendición de Cuentas de la Inversión Pública 2012- households. 2015 [Report on Accountability of the Public Investment 2012-2015]. Building a Better Future Together Figure 2.14: Share of public investment and population, and poverty rate by province Panel A Panel B 20 25 18 Santo Domingo 16 20 14 Share of investment Share of investment Monseñor Nouel Santo Domingo 12 La Altagracia 15 Monseñor Nouel Santiago 10 La Altagracia San Pedro 8 10 de Macoris San Pedro 6 de Macoris 4 5 Distrito Nacional 2 0 0 20 30 40 50 60 70 80 90 0 5 10 15 20 25 Poverty rate Population Share Sources: Public investment data from the MEPyD (2016). Information regarding the share of the total population is taken from the 2010 Census and the poverty rates by province are from the MEPyD (2014). Support policies to ameliorate labor adjustment to formulate plans and projects at a local level, their costs accrued by the structural change in sectoral monitoring and evaluation; and iii) specify measurable specialization in SEZs. Social assistance programs goals that can be monitored and evaluated to assess designed to accelerate worker employment transitions implementation and impacts of the law. to lower labor-intensity industries should be considered. These programs include vocational training in new Reduce gender gaps. Female workers hold the greatest 45 skills demanded by SEZ firms, job search assistance, potential to increase labor force participation in the and transitional income support. Since open-ended DR. This would require formulating labor policies that financing for skills upgrading that is not targeted may provide women enough flexibility to find an equilibrium have little if any financial returns, training programs need among competing demands from work and family. to be carefully designed, targeted, and incentivized, for Continue expanding access to affordable childcare example, through cost sharing by the worker. and pre-school. In order to reduce teenage pregnancy, find innovative ways of outreach and of providing Increase cohesion and territorial planning to reduce relevant audience-friendly information on issues such the persistent regional differences. Consolidate as reproductive health and rights, using behavioral the efforts to build capacity of local governments to change methods and engaging schools and community formulate development plans and investment projects level organizations. Initiatives like the extended shift that reflect local needs expressed through participatory (‘jornada extendida’) that increase school attendance processes. This would enhance the impact of the and retention have been proven effective to reduce resources transferred to local governments by the Central teenage pregnancy in similar settings. Violence against government as established by law. Consider adding women is a complex problem that requires not only needs-based criteria to the formula to transfer resources laws and programs including psychological and social to municipal governments. A draft bill on land use assistance, but also actions to transform the culture and planning is currently being discussed by Congress and conditions in which social relationships are established intends to provide a unifying framework to address many and consolidated. The challenge is to implement a of the issues identified in this note. Some key elements model which complements sectoral and institutional the bill include: i) clear definition of responsibilities at the actions for the protection of the rights of women to different planning levels in a way that is consistent with prevention, detection, care and punishment of violence building institutional capacity; ii) provide mechanisms in the judicial, health and education areas, in cultural and resources to build capacity in local governments institutions and the media. Building a Better Future Together Increase financial access for MSMEs and extend insurance availability. Non-financial services can remove critical barriers, such as access to markets and networks that prevent MSMEs from accessing credit. These can include more effective use of electronic networks, e-money and electronic ID systems. Development of collective investment schemes could also help to indirectly channel financing to MSMEs. While there is reluctance by banks to directly finance what they see as high-risk small enterprises with scant documentation, development of an investor market willing to invest in pooled assets (or liabilities) of MSMEs could help diversify some risk and bring in additional funding as well as prudent risk takers including guarantee facilities to reduce a portion of portfolio downside risk. Such schemes would need to be developed as a partnership between financial authorities and the local and foreign investor community. With the DR’s expected joining of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), this will provide an opportunity not only to obtain sovereign risk protection but also to extend insurance to the enterprise and household sectors of the economy. The authorities should consider leveraging their intent to use sovereign/budget insurance 46 as a potential mechanism to fund catastrophe coverage schemes for the underserved segments, particularly poorer households and small and micro enterprises. Building a Better Future Together Chapter 3. Challenges and Opportunities to Improve the Quality and Efficiency of Social Services Introduction roll-out of the Conditional Cash Transfers (CCT) Program contributed to increasing household consumption T his Note covers the Dominican Republic’s (DR) and improving education and health outcomes. 47 social sectors (education, health and social Overall, service coverage improvements together with protection). In the context section, it emphasizes sustained growth and reduction in poverty contributed progress made since the last Policy Note jointly prepared to improvements in living conditions and outcomes by the World Bank and the Inter-American Development (for example, reduced repetition and drop-out rates in Bank (IADB) in 2012.62 It also discusses the main challenges schools, reductions in infant and child mortality rates), ahead for the Government team in the new Administration, increasing the DR’s Human Development Index (HDI) and proposes a set of potential policy directions in key from 0.70 in 2012 to 0.71 in 2014.63 areas to enhance coverage and quality and, ultimately, outcomes. The social sectors also advanced with regard to certain institutional aspects. The noteworthy reforms in the Since 2012, the Government made notable progress education sector include changes in teachers’ policies and in improving coverage in the three social sectors regulation covering teacher training, career development, (education, health and social protection). In particular, remuneration, and performance evaluation, as well as it expanded the public supply of education facilities by increasing the share of GDP allocated to pre-university building and rehabilitating schools and Early Childhood education from an annual average allocation of 2% to Development (ECD) centers. In the health sector - where 4% since 2013. In the health sector, the establishment coverage for health services had already been generally of the National Health Services (NHS), paved the way for high - the country made the most significant progress the health sector to move forward with the separation of in expanding health insurance coverage, particularly for functions of health service provision under the NHS and the poor. In the case of social protection, the successful stewardship and provision of collective health services 62  Banco Mundial y Banco Interamericano de Desarrollo, 2013. “El 63  The Human Development Index (HDI) is a composite statistic sector educación en la República Dominicana” en Notas de Política of life expectancy, education, and income per capita indicators. A República Dominicana: Día del Diálogo, 9 de marzo de 2013, páginas country scores higher HDI when the life expectancy at birth is longer, 88-201, Washington, D.C. the education period is longer, and the income per capita is higher. Building a Better Future Together under the Ministry of Health that was envisioned in the system-level changes. Evidence of these changes 2001 Health Sector Reform. Also, the MOH expanded include the allocation of 4.0% of GDP to the pre-university its results-based financing pilots in primary health care education sector annually from 2013-2015 (up from an facilities to more regions. The Government also made average allocation of 2.0% of GDP during 2008-2012). In good progress with regard to strengthening the Social addition, the commitment to transform the education Protection System, including improvements of the sector has achieved results that will impact the entire Conditional Cash Transfers (CCT) Program and other system over the next ten years: i) by 2015, 882,558 strategies to link benefits (Progresando Unidos). students—representing 46% of students enrolled in the public system—had attended one of the new 3,418 full- However, the Government faces a number of common time public schools; ii) the system’s internal efficiency challenges in the social sectors. While the DR’s has improved, particularly in grades 1 to 8 (e.g. repetition indicators have generally improved, several tend to be decreased from 9.1% to 8.1%, and dropouts decreased lower compared to their peers. For example, although from 3.4% to 3.0%); iii) beneficiaries of early childhood the DR’s HDI increased to .714 in 2014, it is lower than development services have more than doubled (from the averages for the LAC region (.748) and High Human 18.000 in 2013 to 42,549 in 2015); and iv) Dominican Development Countries (.744). Also, although Dominican students showed the greatest improvement in regional students showed the greatest improvement in regional assessments among 3rd and 6th grade students from assessments among 3rd and 6th grade students from 15 countries in the region between 2006 and 2013.65 15 countries in the region between 2006 and 2013, they In terms of expansion of the public supply of education continue to lag behind other LAC countries. In the health services which was one of the biggest commitments of sector, DR’s maternal health care coverage tends to be the current administration, achievements include 11,873 higher than averages for LAC and Upper Middle Income new classroom, 967 more rehabilitated, and 86 early Countries (UMIC), yet maternal and child mortality rates childhood development centers which are expected to be 48 remain significantly higher than LAC and UMIC averages. completed soon.66 67 Furthermore, learning results from As can be gleaned from the following sections, the three the DR’s standardized assessments indicate that students sectors share three main cross-cutting challenges related in full-time schools are slightly more likely than students with: (i) quality of services and coverage gaps, (ii) public not attending fulltime schools to pass 8th and 12th grade spending efficiency and performance accountability; and assessments. A larger proportion of full time students than (iii) institutional capacity and coordination to improve part-time students are also represented in the technical synergies within and across sectors. and professional stream.68 EDUCATION Educación de Calidad (IDEC), a Government led process involving a Context: Main Achievements series of meetings with civil society, the private sector, universities, NGOs, and all active donors in the education sector – transcending political parties- to provide education policy recommendations. The current administration made education a 65  The regional assessments compared are the Segundo Estudio prominent priority in the national agenda, and has Regional Comparativo y Explicativo (SERCE) and the Tercer Estudio Regional Comparativo y Explicativo (TERCE) carried out by UNESCO made progress in the implementation of ambitious in 2006 and 2013, respectively. TERCE assesses competencies in plans agreed under the National Education Pact reading, math in 3rd grade and reading, math and science in 6th (NEP),64 and other regulations, leading to substantial grade, in 15 countries in LAC. TERCER Results will mark the baseline of the ambitious DR education reform and would allow the tracking of progress in student learning. 64  The NEP’s final document, signed in April 2014, includes i) 66  Specifically, at the end of December 2015, 25 Centros de Atencion teaching career reform by revising pre-service and in-service training Integral a la Primera Infancia (CAIPI) are open, 17 are nearly finished, programs and implementing an induction exam (i.e. capacity and 34 have a high chance of being finished by the end of 2016. to recruit and train); ii) adopting an evaluation culture across all 67  Although the Government objectives have not been achieved in sectors and actors in the education system; iii) increasing quality these fronts due to the time it took to set up programs and process of early childhood education; and iv) modernizing management of and identify land for construction, the results are substantial and the system, with a focus on decentralization. The NEP is valid until significant for the system. In terms of classrooms, for example, the 2030 and its strategies are aligned with the National Development number of classrooms increased by 40% in the last four years. Strategy 2010-2030 and the 10-Year Education Plan. The NEP 68 See Informe de resultados: Pruebas nacionales 2015—Primera priorities have been informed by the Iniciativa Dominicana por una convocatoria, MINERD, Dominican Republic. Building a Better Future Together As part of these system-level changes, the Government teacher-training institutes to change the way teacher has significantly expanded its efforts to improve are trained, for example, by changing the curricula and education by simultaneously tackling system classroom learning time. Several of these initiatives were weaknesses on multiple fronts. On the pedagogical only beginning or about to begin their implementation at front it has developed new curricula for initial, primary, the time of writing this note—for example, the induction and secondary (general) education, while the technical- program for new teachers launched in 2015. Nonetheless professional, secondary, and upper secondary curricula are all these initiatives have the potential to change the quality expected to be finalized during school year 2016-2017. On of pedagogical instruction in classrooms in the medium- the learning measurement front, the country has applied to longer-term. In addition to these reforms, MINERD’s the Program for International Student Assessment/PISA decentralized institutes are piloting and implementing (results of which are expected to be available in December important changes in the way they recruit and train 2018), and has developed a solid proposal for student teachers, both pre-service and in-service.70 assessment in 3rd, 6th, and 9th grades with a certification assessment at the end of 12th grade (the proposal is Challenges pending approval by the Nation Education Council, NEC). To modernize the functioning of the Ministry of Looking beyond the achievement of allocating Education (MINERD), the Government hired the services 4% of GDP for pre-university education, and the of an international consultancy firm to identify activities implementation of launched reforms, increasing aimed at transforming MINERD’s most critical processes to student learning is the biggest challenge the move ahead with the ambitious reform. At the same time education system faces the next decade. Until new it also advanced in the design of a new monitoring and teachers are trained, reforms initiated fully take effect, evaluation system, and in the development of operation and new students advance through the system, system- manuals for regional and school districts to move ahead level challenges in increasing student learning will persist. with quality certification of their processes. Despite substantial progress in learning by Dominican 49 students between 2006 and 2013 as captured by regional More importantly, major steps to improve pedagogical assessments, Dominican students continue to perform instruction in classrooms have been taken, by poorly and lag behind other LAC countries, reflecting the advancing on critical reforms on teachers’ career weakness of the system in helping students develop basic and policies. In order to make the teaching profession cognitive skills (e.g. reading and math), particularly in more attractive, real salaries for public-school teachers early grades. In the latest regional assessment conducted significantly increased between 30% and 40% from 2012 in 2013, 74.1% and 84.8% of third graders performed at to 2014.69 This increase widened the salary gap between the lowest level. These results are substantially worse teachers and other university professionals from 23% to than those of comparable countries, and represent the 56%, making the teaching profession more financially highest proportion of such results in the region. Poor attractive. At the same time, the number of applicants performance in international assessments is observed for who took the teacher entry exam to become public school all socio-economic levels, although students from high teachers increased from 6,575 applicants in 2012 to 36,884 socio-economic backgrounds obtained better results than in 2015. In addition, teacher related policies and regulation students from disadvantaged households. In addition, have improved. In particular, MINERD has: i) published students from the poorest backgrounds in the region professional standards for teachers performance as part performed better, on average, than Dominican students of teachers certification, ii) developed a solid teacher from the most advantaged background. Moreover the DR’s career framework (including induction, recruitment, own standardized assessments in 8th and 12th grades also evaluation, certification), and iii) under the leadership highlight system-level inefficiencies that affect student of the Ministry of Superior Education and Technology (MESCyT), developed regulations for universities and 70  The Instituto Nacional de Formación y Capacitación del Magisterio (INAFOCAM) is piloting improved in-service training courses and evaluating the impact of existing programs, while the Salomé Ureña 69  EDUCA estimates based on the report: Informe Evolución de Teacher Training Institute (ISFODOSU) is developing a more stringent Recursos Humanos, 1990-2013, Planning Office; MINERD, 2014. See: approach in recruiting students and already started implementing EDUCA’s República Dominicana: Informe de progreso educativo. training on a full-time basis. Building a Better Future Together Table 3.1: Percentage of students in the lowest level of performance in reading and math in latest regional assessment (2013) Country 3rd grade 6th grade Reading Math Reading Math Costa Rica 17.6 23.1 4.5 29.9 Ecuador 38.1 47.8 20.8 44.8 Guatemala 46.1 60.2 20.5 56.4 Nicaragua 56.2 68.0 25.6 71.0 Panama 48.9 60.1 25.8 67.5 DR 74.1 84.8 37.8 80.1 LAC 39.5 47.2 18.4 46.9 Note: The numbers refers to the percentage of students in each country whose performance is in the lowest level out of four levels. Source: TERCE, 2013. learning. In 2015, 15 of every 100 students that reached 2.9% in 2013-14. Both indicators improved compared to the 8th grade, failed national assessments and were 2009-2010 when they were 87.7% and 3.4%, respectively. immediately held back by the system, which substantially However, school failure is very high at the end of the increased the risk of: i) being overage in later grades and, eighth grade (which is the end of the basic education more importantly, ii) dropping out (as shown below). The cycle), in particular, in each grade of upper secondary 50 same worrying situation happened in the 12th grade, (equivalent), with rates that range between 11. 5% and where 32 of every 100 students that reached that grade 18.3% depending on the grade. Moreover, overage, could not finish their studies, creating an educational school failure, and low enrollment get reinforced by dead-end for students, which is costly for households and the still-limited access to early childhood development the education system. In terms of equity, boys, students in services that could promote children’s cognitive and public schools, and rural areas underperformed compared socio-emotional development, school readiness, and to girls, those in private schools and in urban areas.71 Figure 3.1: Education outcomes in the DR The education system’s weak capacity to generate The DR’s performance in learning tests is well below the learning in students, and the obstacles that the expected level in relation to its level of economic development. system imposes for students to progress through the system, affect the rates of school failure, overage 6.70 and low enrollment in upper secondary (equivalent). 6.65 Low reading comprehension and the lack of capacity 6.60 LN(TERCE 2013) to perform basic math in the first grades create major challenges that students must overcome in order to 6.55 perform in other subjects, as their capacity to learn by 6.50 reading is limited. These, and other weaknesses of the system, produce high rates of school failure in the first 6.45 Dominican grades and continue the trend of failure in higher grades, Republic 6.40 including those who make it to upper secondary (or 8.0 8.5 9.0 9.5 10.0 10.5 its equivalent). On average, promotion rates in basic LN(PIB per Capita PPP 2013) education reached 90.5% and the dropout rate was Source: TERCE, 2013. Note: This graph uses the average of the results in the di erent areas and grades to get a single value per country. Each circle represents a country in 71  See Informe de resultados: Pruebas nacionales 2015—Primera the region that participated in the TERCE. GDP per capita information from the World convocatoria, MINERD, Dominican Republic. Bank databases. Building a Better Future Together Figure 3.2: Overage and School Failure, 2013-2014 50% Cycle Grade School Failure (Dropout + not promoted %) 40% Basic 1 8.0% 31 Education 2 9.0% 25 26 25 24 20 28 24 23 3 13.4% 30% 21 4 10.2% 15 5 9.5% 20% 6 8.2% 10 7 9.6% 20 20 22 21 20 21 21 8 7.7% 10% 16 17 19 19 11 Upper 1 18.3% 0% Secondary 2 13.8% 1 2 3 4 5 6 7 8 1 2 3 4 (equivalent) 3 11.5% Basic Medium 4 17.9% One year overaged 2+ years overaged Source: Authors calculations with information from the Sistema de Gestión de Centros Educativos, MINERD, DR. reduce overage in the first grades, improve learning, the labor market (Annex I provides more information). The and reduce the risk of dropout. ECD could also benefit general path to become a nini, in particular for men, is to disadvantaged populations which have a harder time drop out from school and join the unstable, informal labor accessing these type of services. 72 market (as they do not have the skills to find formal sector employment) and then transition into unemployment. The quality of education, its relevance, and Once informal jobs are lost, young men do not return to 51 the efficiency of the system contributes to the school. The LAC region also faces a similar problem with phenomenon of youth “neither in work nor in school” nearly 40% of youth between 15 and 19 years old leaving (Nini).73 The percentage of the population between 15 the education system. and 24 years old who are “neither in work nor in school” (nini) in the Dominican Republic is 21.4%, slightly higher Governance of the system and lack of sufficient than the regional average. The total number of ninis coordination of the reform agenda, particularly with increased from 356,000 in 1995 to 434,000 in 2013. This respect to teacher policies present challenges. MINERD, trend was driven by the increase in number of young including its decentralized institutions (e.g. INAFOCAM men out of the education system who are not working. In and ISFODOSU), and MESCyT have made a substantial addition, the nini phenomenon has an important gender effort to coordinate activities to give structure to teacher dimension as 3 out of every 5 ninis are females, reflecting policies (e.g. regulation on standards for teachers and new adolescent fertility rates in the Dominican Republic that curriculum for teacher training); however, the challenge to are above the regional average (72 for 100,000 adolescent coordinate all teaching career related actions remains as women). From the equity aspect, the nini phenomenon different institutions progress in the implementations of in the Dominican Republic is not concentrated in the their plans. There is also room for improvement in terms of poorest populations; which could indicate challenges in coordination with international partners. Finally, from the the quality of education or the pertinence of education for governance side, MINERD’s capacity has been affected by the lack of sufficient definition of roles, staff competencies, and processes that require attention and strong 72  Banco Mundial y Banco Interamericano de Desarrollo, 2013. “El sector educación en la República Dominicana” en Notas de Política leadership. Use of available data to feed a coordinated República Dominicana: Día del Diálogo, 9 de marzo de 2013, páginas effort for decision making process at all levels (central 88-201, Washington, D.C regional, and schools). For example, induction, teacher 73  De Hoyos, R. 2016. “Ninis” en la República Dominicana. Note based on De Hoyos, R., Rogers, H. and M. Szekely (2015), “Ninis en entry exam, certification, teacher evaluation, and student América Latina: 20 millones de jóvenes en busca de oportunidades,” assessment data are still not commonly used to develop Banco Mundial, Washington, D.C. Building a Better Future Together targeted teacher training programs by INAFOCAM and Teachers and directors of centers are key to improving other institutions; nor are data utilized well by school access and quality and it would be important management committees to improve accountability and, to prioritize initiatives that matter the most for empower school directors to make better decisions. pedagogical instruction, and that have direct classroom impact. The teacher is the most important Policy Directions factor to improve learning outcomes. DR’s progress on teacher policies has been substantial, but many Access to quality services: Continue efforts to expand important initiatives are yet to be carried out. These early childhood development services and develop include teacher evaluations, the use of available data in solid strategies to increase student retention. There is a the system to feed into the design and implementation need to quickly develop INAIPI’s institutional arrangements of teacher training programs, improving the teacher to enable it to more effectively and rapidly increase entry exam, the accreditation of teacher training service provision. Of equal importance, INAIPI would need programs (capitalizing on new regulations), and teacher to develop a comprehensive approach to monitor and accreditation, among others. In this regard, it is also support quality of service; international experience shows important to continue improving components related that the only viable path for early childhood development to teachers’ careers, including salaries, evaluations, and is to increase access and quality simultaneously. Regarding incentives. These initiatives will only work if they are well secondary school, it is recommended that MINERD articulated and if the different actors—such as MINERD develop systems and strategies to more directly tackle and its institutes and directorates, MESCyT, teacher low enrollment and dropouts in what would soon be training universities and institutes, unions, civil society— secondary education (or beyond 8th grade). Early warning work together and continue to build on the regulations systems that are gender-informed to prevent dropouts that have already been put in place. and teacher trainings that cater to different learning levels 52 within each grade and that address gender-specific issues, Increasing both learning and system efficiency to as well as other demographic variables, coupled with the retain students would also require a continuous opportunities created by the full-time model, place the DR effort to ensure coordination of the reform agenda, in an advantageous position to both increase retention particularly with respect to teacher policies. MINERD, and improve the relevance of education for youth.74 On this including its decentralized institutions (e.g. INAFOCAM last point, it is important to consolidate the curriculum for and ISFODOSU), and MESCyT have made a substantial upper secondary on technical-vocational education. This effort to coordinate activities to give structure to teacher will ultimately provide the skills for employment and give policies (e.g. regulation on standards for teachers and more alternatives for youth—in particular for young men new curriculum for teacher training); however, the who drop out of school without employment-relevant challenge to coordinate would continue as different skills. All interventions aimed at keeping youth in school institutions progress in the implementations of their have been proven to pay off, including: early warning plans. Coordination with partners, via IDEC and other indicators for dropouts, scholarships, programs aimed to coordination groups, is important to avoid duplication reduce teenage pregnancy, training for employment— and exploit synergies. Recent developments such as the including socio-emotional skills (perhaps as part of the Teacher Entrance Exam (Concurso de Oposicion) and the full-time program)—and eliminating system impediments new regulation for teacher training programs show that for children to continue school.75 coordination can result in substantial improvements. Modernize MINERD’s processes, improve monitoring and evaluation systems, and use data for 74  For a gender analysis in the education sector, see Annex II communication, leadership, and decision-making at all 75  For example, most countries in the region as well as the OECD levels. MINERD has started to work on modernizing roles, and Asia have transformed high-stake student assessments into competencies, processes and leadership; aligning current diagnostic assessment at the end of primary or basic education to avoid the detrimental effect of assessment on retention). These activities to these initiatives will determine the speed of would increase the relevance of education for youth and create a change of the education agenda for the next few years. more direct link to the ultimate education outcome goals. Building a Better Future Together MINERD’s modernization and in particular, the definition of the future education agenda points towards a sharp focus roles, staff competencies, and processes require particular on learning outcomes; the DR is in a privileged position attention and strong leadership to (i) define a realistic, to make the shift from focusing on expanding access, time-bound implementation plan and follow it through to improving children’s learning outcomes. Initiatives and (ii) avoid duplicating efforts within the MINERD to improve learning also include the education chapter (e.g. on different aspects teacher training initiatives, on within the program República Digital which is focused student assessment, on support to schools). MINERD’s on integrating ICTs for the improvement of learning in an functioning will certainly impact all other activities and effective way. determine the success of many sector initiatives. As part of this process, it is important to strengthen M&E systems, Finally, there are many important questions for policy implement student assessments and teacher evaluations, makers to address in the near future. These include: strengthen supervision and data at the school level, and What have been the effects of the full-time model on the increase the use of data for decision-making at all levels balance between public and non-public education? How of the system (e.g. empower and support schools, and to advance the implementation of the basic curriculum school principals, to improve their management in order based on competencies and its understanding by the to improve learning conditions and outcomes, as has been actors in the system (for example, teachers, personnel done in Brazil, Colombia, Mexico, and other countries).76 of ministries, etc.)? Is the extra time being optimized for Importantly, system decentralization could be deepened learning? How cost-effective is the full-time model? What as participatory processes are strengthened, promoting is, and should be, the role of the education system in ownership and accountability at the local and regional tackling youth issues (such as teenage pregnancy)? How levels. Finally, this modernization process should aim to promote parental behaviors toward supporting the to improve physical resources, pedagogical materials, development of reading and writing skills in Dominican administration, and system governance by reviewing children? How to effectively use technology to improve and adjusting processes and developing systems to more learning in the classroom and in training teachers? How to 53 closely monitor results, while at the same time supporting monitor and evaluate progress toward the implementation schools to be the drivers of change in the classrooms. of the NEP? These questions and others are left for further analysis and discussion. Initiatives to improve learning It would also be important to deepen the also include the education chapter within the program implementation of reforms, sharpen the focus on República Digital, which is focused on integrating ICTs for learning outcomes, and improve coordination of the improvement of learning in an effective way. programs and initiatives as agreed in the NEP. Since 2012 the GoDR has embarked on a substantial reform of HEALTH the education sector, which has included the expansion of services such as early childhood development and a Context full-time school model, among others. The reform should continue consolidating the gains that the system has High health services coverage rates have generally started reaping. As part of the process ahead, improving yielded positive results. National Demographic and coordination—both internally within MINERD and its Health Survey (ENDESA) data collected over time show institutes, externally with other ministries (MESCYT and improvements in national-level coverage rates in the Ministry of the Presidency), and also with partners— Dominican Republic (DR),77 as well as reduced coverage would avoid duplication, exploit synergies of joint work, gaps between income quintiles and urban and rural areas. and improve service delivery in a faster way. In addition, For example, the percentage of pregnant women who received prenatal care by a qualified health professional 76  Also, induction, teacher entry exam, certification, teacher reached 99.3% in 2013, with the percentage of women in evaluation, and student assessment data can be used to develop the poorest quintile who received this type of prenatal care targeted teacher training programs by INAFOCAM and other increasing from 87% in 2007 to 98.5% in 2013, significantly institutions; school management committees can be fed data on student learning and managerial indicators to improve accountability and, at the same time, empower school director to make better 77  CESDEM in coordination with the Ministry of Health. 2013. decisions. Encuesta Demográfica y de Salud: Republica Dominicana. Building a Better Future Together Table 3.2: DR Health Insurance Coverage: 2007 and 2016 by Insurance Regime Insurance Regime 2007 2007 2016* 2016 % of total population # of persons % of total population Contributory 793,850 8.3 3,500,714 32.8 Subsidized 35,706 0.4 3,308,606 31.0 Subsidized-Contributory 0 0 0 0 Total 829,556 8.7 6,647,407 63.8 Source: SISALRIL Website. *Note: as of June 2016. narrowing the coverage gap with women in the richest Since 2011, it has expanded its results based financing quintile (98.7%).78 Also, the percentage of births assisted (RBF) mechanism pilots from three regions (VI to VIII) to by skilled professionals increased from 97.5% in 2007 to six more regions (0 to V). With the focus on results, the 98.5% of births in 2013, with professionally assisted births use of the Clinical Management System to register and for women in the poorest 20% of households increasing monitor adherence to protocols during consultations in from 89% in 2007 to 97.2% in 2013, just slightly less than primary level care facilities has increased in all the RBF 97.8% of mothers in the richest income quintile in 2013. regions. In addition, since 2012, the Program of Essential Between 2010 and 2014, life expectancy increased from Medicines/Center for Logistical Support (PROMESE/CAL) 73 to 74 years, while infant mortality and under-five has been officially designated as the sole public purchaser mortality rates decreased from 28 to 26 per 1,000 live for medicines in order to achieve economies of scale and 54 births and from 34 to 32 per 1,000 live births, respectively. improve the affordability of medicines. Moreover, in the same period, tuberculosis (TB) incidence decreased from 67 to 60 while Human Immunodeficiency The Government took a major step in implementing Virus (HIV) prevalence in the 15-49 age group declined the separation of key health sector functions as from 1.2 to 1.0.79 Challenges remain with certain indicators envisioned in the 2001 Health Sector Reform.80 In 2015, such as maternal mortality which will be discussed in the the Government established the National Health Services following section. (NHS) as the coordinating entity for the public network of health services while the MOH retains its functions of Health insurance coverage significantly increased stewardship and management of collective/public health from 9% in 2007 to almost 64% in June 2016. Since services and the NHI remains the main public purchaser of 2007, Contributory Regime (CR) coverage for formal sector health services to improve financial protection and quality employees more than quadrupled while the Subsidized of services especially for the poor under the Subsidized Regime (SR) coverage for the poor increased almost a Insurance Regime. The NHS is also responsible for (a) hundredfold (Table 3.2). In March 2016, the National Health promoting the strengthening of regional health services Insurance (NHI) announced that the SR already covers (RHS), progressively facilitating their administrative and all the eligible poor registered in the Unique Beneficiary financial autonomy and (b) for assessing RHS compliance Information System (SIUBEN). with MOH requirements. The Government increased its efforts to improve the quality of health sector spending. The MOH has been 80  In 2001, the Government passed two key laws as part of a progressively moving away from historical budgeting major health sector reform program: the General Health Law (42- toward using results-based allocation of resources. 01) and the Dominican Social Security System Law (87-01). Aside from the establishment of a universal health insurance system, key provisions of these laws include changes in institutional and financial 78  In 2013, 95.6% of women in rural areas and 95.3% in urban areas arrangements such as restructuring public provision of health had at least 4 prenatal consultations (ENDESA). services, together with progressively decentralizing regional health 79  World Bank. 2016. World Development Indicators. networks. Building a Better Future Together Figure 3.3: Maternal Health Care Coverage Rates and Maternal Mortality Ratios: DR, LAC, and UMIC 2014 (%) 56 Maternal Mortality Ratio 71 98 98 Births Attended by Skilled Sta 93 98 96 Pregnant women with prenatal care 97 98 0 20 40 60 80 100 UMIC LAC DR Source: WDI. Challenges Quality of care remains a major health sector concern. As noted above, despite very high maternal care coverage Most health outcomes have improved; yet several rates,83 maternal mortality in the DR remains high. Various remain lower than regional averages; a few indicators assessments indicate that majority of maternal deaths in have worsened and some diseases have emerged as the DR could have been prevented with improvements in major causes of deaths. While DR’s infant and under- a combination of factors: adherence to norms, protocols, five mortality decreased to 26 and 32 per 1000 live births, and quality standards by properly trained personnel, 55 respectively in 2014, they both remain much higher than access to required equipment and inputs which also the averages for Latin America and the Caribbean (LAC) depend on having sufficient funding;84 and enforcement of of 16 and 19 per 1000 live births, respectively and the monitoring and supervision and regulatory arrangements averages for Upper Middle Income Countries (UMIC) of under the overall stewardship of the MOH (discussed 16 and 20 per 1000 live births, respectively. In addition, below).85 Another reflection of the quality of public while DR’s maternal care coverage rates tend to be services is the large share of the population using private higher than averages for LAC and UMIC (Figure 3.3), its facilities. While majority of the population went to public Maternal Mortality Ratio/MMR (98 per 100,000 live births) facilities for outpatient consultations (59%) and inpatient is significantly higher than averages for both LAC (71) services (51%),86 these numbers are significantly lower and Upper Middle Income countries (56) in 2014. Even El than the share of the population who use public facilities Salvador, a lower middle country with a GDP per capita that in other upper middle income LAC countries such as Costa is two-thirds of the DR’s GDP per capita has a much lower Rica (at least 80%) and Panama (at least 70%).87 MMR (56 per 100,000 live births). Also, the percentage of children 18-29 months of age who received all their 83  A gynecologist/obstetrician attends to deliveries of 78.6% of required vaccinations decreased from 48.7 to 47.4% women in urban areas and 69.7% of women in rural areas while a general practitioner attends to deliveries of 22.9% of women in urban between 2007 and 2013.81 In recent years, cardiovascular areas and 28.8% of women in rural areas. diseases, diabetes and cancers have increasingly become 84  Project Hope 2010; Hoy Digital, July 8, 2016. La RD registra 1,176 the main causes of death, followed by communicable, muertes maternas en centros de salud. A. Castro. 2016. The Unresolved Problem of Maternal Mortality in the Dominican Republic. Draft Case Study. maternal, perinatal and nutritional conditions.82 85  Some studies note that medical interns and residents are not sufficiently supervised by specialized doctors throughout the 81  ENDESA uses information provided in immunization cards. delivery process. According to ENDESA (2013), the DR also has a 82  Institute for Health Metrics and Evaluation, University of high cesarean rate (56%) which is much higher than the international Washington and Human Development Network, World Bank. 2013. recommended rate (10%). Global Burden of Disease: Generating Evidence, Guiding Policy. Latin 86  ENDESA 2013. America and Caribbean Regional Edition; World Health Organization 87  WB. 2015. Social Sector Expenditure and Institutional Reviews website. for Costa Rica and Panama. Building a Better Future Together Figure 3.4: Trends in per capita public spending on health expenditures decreased from 43% to 21%, the latter was (PPP) from 2000 to 2014: DR relative to LAC and UMIC lower than the average out of pocket health spending shares (both 32%) in UMIC and LAC. While the DR’s public 600 567 spending on health’s share of GDP increased from 2.2% in 488 509 2000 to 2.9% in 2014, it remained lower than UMIC and 500 LAC averages of 3.4% and 3.7%, respectively. The DR’s 400 373 389 per capita public spending on health was also lower than the UMIC and LAC averages (Figure 3.4). In 2000, DR’s per 300 251 250 capita public spending on health in purchasing power 200 139 125 parity (PPP) terms was higher than the UMIC average and lower than the LAC average. After 2000, both UMIC 100 and LAC’s average per capita public spending on health 0 increased more significantly. As a result, in 2014, DR’s per 2000 2010 2014 capita public spending on health in PPP terms was less DR UMIC LAC than a quarter of the UMIC average and almost less than Source: WDI. a third of the LAC average.90 Lack of sufficient funding is often cited as a major constraint to investments in health sector inputs and in expanding insurance coverage. Despite significantly increasing overall health insurance coverage, the government has not yet While more public resources are needed in the health attained its 2011 goal of universal health insurance sector to continue to improve the quality of services and significant differences exist between per capita and expand financial protection, there is room to spending between the Subsidized and Contributory improve efficiency and cost-effectiveness of sector 56 Regimes.88 Approximately 30% of the population do not spending. Despite expanding RBF pilots in primary level have access to health insurance. The Government’s SR care in more regions, health sector financing remains now covers all the poor registered in SIUBEN. However the largely based on historical budgeting. Other indicators poorest who remain unregistered, do not have access to that point to inefficiencies in the health sector relate to: health insurance. In addition, the Government has neither (a) people tending to bypass primary care centers and implemented the Contributory-Subsidized Regime (CSR) use hospitals for basic care. For example, tertiary care for the informal sector nor does it have a well-defined hospitals have been reported to manage uncomplicated operational plan to launch it. Also, estimates based on dengue cases which could be handled in primary care available data indicate that the CR’s per capita spending facilities.91 Bypassing could also result from weaknesses was at least 2.5 times higher than the SR per capita in the referral and counter-referral system, as well as the spending.89 organization of services which emphasize curative care, resulting in insufficient resources at the primary level to Public spending’s share of total health spending has adequately respond to patients’ needs without going to increased, leading to a significant reduction in the hospitals. For instance a study estimates that the MOH share of out of pocket spending, but both the DR’s spent 62% of its recurrent budget on curative services share of public spending on health relative to its GDP and only 5.7% on primary care and health promotion in and per capita public spending on health remain low 2014.92 In addition, the Contributory Health Insurance relative to its income level. From 2000 to 2014, DR’s and Subsidized Health Insurance Regimes spent only public share of total health spending increased from 37% less than 1% and 10% of their respective budgets to 67% while out of pocket spending’s share of total health 90  Purchasing Power Parity (PPP) or international dollars refers to currencies adjusted across countries to make the value of purchased 88  The government set a goal of achieving universal health goods and services comparable. insurance coverage as part of health sectors reforms initiated in 2001. 91  PAHO cited in OPS Alerta Salud maneja casos dengue de forma 89  WB team’s preliminary estimates based on available date insostenible. Hoy.com. November 4, 2015. from SISALRIL. Memoria 2015; SISALRIL. 2014. Ocho Años Gestión 92  Rathe and Hernandez. 2014. Gasto Nacional en Salud en la Institucional and MOH data. Republica Dominicana. Building a Better Future Together for prevention and promotion activities.93 Inefficient benefits package for all citizens. Actions can also be taken allocation of human resources also impacts on quality of to improve spending by building on lessons learnt from services. Although the country’s overall health worker to the results-based financing (RBF) primary care pilots, and 10,000 population ratio increased from 19 in 2011 to 25 expanding RBF pilot to hospitals. The Government could in 2015, thereby meeting the WHO’s recommended ratio, also consider applying RBF to improve health care worker there continues to be a wide gap between health worker performance (competencies, absenteeism) and provide to population ratios between urban and rural areas. The incentives for health workers especially doctors to serve DR only reduced the urban-rural health worker gap from in rural areas. User feedback and independent audits 17% in 2011 to 23% in 2015, reaching less than half of its could complement efforts to improve service delivery. 2015 goal of 50%.94 A combination of incentives and sanctions could also be implemented to promote both the implementation Key sector institutions face capacity constraints of the new model of care which designated primary in fulfilling their key functions. Various institutional care as the gatekeeper for people to access the health assessments note that the MOH faces capacity constraints services network, and the functioning of the referral- to sufficiently monitor, regulate and enforce health counter-referral system. Expanding the use of RBF would sector norms and coordinate the entire sector which require further improvements in health information includes public and private entities. In addition, the NHS systems and training staff in management information - established in mid-2015 - acknowledged that it would system and monitoring and evaluation. Mechanisms for need to build its technical and operational capacity so rewards and sanctions would also need to transparent. In it could effectively oversee the public network of health terms of improving cost effectiveness of spending, more services. While the NHI has taken steps to train its staff to resources would also need to be allocated to prevention improve their capacity to undertake technical and financial and promotion and public/collective health. assessments of service providers, it also recognizes that it needs to improve its management information system and Undertake additional analysis and allocate more 57 strengthen its monitoring and supervision mechanisms to resources to cover the target population of the be able to effectively fulfill its function as the main public Contributory Subsidized Regime (CSR). Based on an purchaser of health services. evidence-based assessment which would need to include a labor market study on the link between employment Policy Directions status on insurance affiliation, the Government may wish to consider three options for the CSR: (i) implement it as Continue to improve the quality of public spending on envisioned in the 2001 Health Reforms; or (ii) pilot it and health and overall sector management and allocate then assess whether and how to scale up. In Taiwan, for more resources to health to address gaps in service example, insurance was piloted in well-organized farmer delivery and insurance coverage. At 2.9% of GDP in associations and then evaluated before expanding; or (iii) 2014, the DR’s health public expenditures’ share of GDP amend the Social Security Law to absorb the CSR’s target is below the country’s Ten Year Health Plan target of 4%. population in either the Subsidized or the Contributory More funds are needed to (a) invest in health personnel, Regimes, using criteria such as income, type, and size medicines, equipment and other inputs to improve of business, progressively including self-employed quality of care and address service gaps in rural areas individuals similar to what has been done in Costa Rica and for the poor and (b) expand financial protection and Korea. Different countries have taken different coverage, to reach the poorest who remain unregistered approaches to cover the nonformal sector (Annex III in SIUBEN; to expand access to non-formal workers presents examples). (discussed below), as well as to eventually integrate health insurance packages and provide a single health Continue to strengthen the MOH’s capacity to coordinate and regulate the sector and ensure the timely provision of essential public health services 93  SENASA. 2014. Boletín Estadístico de SeNaSa. 94  DR. 2015. Observatorio de Recursos Humanos en Salud de la while also enhancing the institutional capacity of the Republica Dominicana: Medición y monitoreo de metas de Republica National Health Services (NHS) and National Health Dominicana. Building a Better Future Together Insurance (NHI). The MOH has already undertaken inequities across regions/provinces and benefit from various assessments related to its organizational structure economies of scale and efficiencies derived, for example, and resources and has been undergoing an institutional from a better organization of integrated service networks reorganization, mainly as a result of the recent that cover more areas in lieu of each area having its own establishment of the NHS. What would be needed would hospital even it is sparsely populated.97 be a more structured and costed action plan to strengthen both the MOH and the NHS, and to move forward with the SOCIAL PROTECTION identified capacity strengthening actions for the NHI.95 These institutions would also need to coordinate regularly Context to avoid duplication of efforts and maximize synergies. Social Protection has contributed to the reduction of Assess which functions would be best decentralized poverty, specifically through public transfers such and which ones would best remain centralized, and as the Conditional Cash Transfer program (CCT), build capacity at all administrative levels. The 2001 which helped boost household consumption. An Health Reforms envisioned a stronger autonomous role impact evaluation carried out by the IADB shows that for the regional health services (RHS). Moving toward households beneficiaries of the CCT were positively decentralization would have important administrative, associated with less risk of incurring in catastrophic out- financial, and decision-making implications including of-pocket expenditures in health, increased height for age issues related to human resources and the distribution of children older than three years old, presented less risk of health facilities. It would also require strengthening of pregnancy adolescence and lower risks of repeating RHS capacity to function more independently under grades in high school, among other positive impacts. the coordination of the NHS with the MOH exercising its stewardship and regulatory functions. A clear definition Social assistance in Dominican Republic has 58 of which functions would be best decentralized to the experienced significant advances in the last decade. RHS and which ones would be best retained by the MOH After the 2003 macroeconomic and banking crisis, the together with a costed plan would be needed to realize 2004-2009 period was characterized by the provision of this objective. In this regard the DR could review the monetary transfers to promote the access to education, experiences of other countries. Colombia’s experience, for health and nutrition services. Also, the first pillars were example, underscores the importance of strengthening put in place to make the sector more efficient and the capacity of key actors (e.g., hospital staff and municipal transparent, through the creation of two institutions for mayors) to assume new roles and responsibilities, and targeting (SIUBEN, Sistema Único de Beneficiarios) and ensure appropriate use of information systems.96 Costa’s payment of social subsidies (ADESS, Administradora de Rica’s case emphasizes the importance of: (i) having Subsidios Sociales). From 2009 to 2012, the main progress reliable information systems to analyze sources and achieved was in terms of intersectorial coordination distribution of health expenditures and (ii) a prospective to effectively make transfers conditional, improving health professionals’ supply and demand model to verification of co-responsibilities and ensuring closing improve coordination between the MOH and training gaps in the supply of health and education services. The institutes. Countries like New Zealand benefitted from change of administration in 2012 started a new era for having standardized and transparent mechanisms for social assistance by merging the CCT with social support monitoring and assessing performance. Some European interventions (acompañamiento sociofamiliar) into countries (e.g., Denmark, the UK, and Croatia) are in the Progresando con Solidaridad (PROSOLI), a CCT program process of re-centralizing certain functions to reduce that promotes households’ empowerment and take up of other human development and social opportunities. 95  The NHI identified areas for strengthening that include its The establishment of SIUBEN (targeting), and ADESS management information system, its actuarial management capacity, (delivery of subsidies) in 2004-09 and PROSOLI (affiliation and its capacity to manage contracts with its health service providers. Based on discussions during Health Sector Reform APL2 Supervision Mission. 97  Saltman, R. 2008. Decentralization, Re-centralization,and Future 96  Schmunis. 2001. Draft Summary Note on Separation of Functions European Health Policy, European Journal of Public Health. Vol. 18. No. in the Health Sector in Costa Rica, New Zealand, and Colombia. 2, 104-106. Building a Better Future Together Figure 3.5: Evolution of coverage of Progresando Figure 3.6: Coverage of health insurance by scheme con Solidaridad components and gender 1000000 2000000 800000 1500000 600000 1000000 400000 500000 200000 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Comer es Primero Incentivo a la Asistencia Escolar Men in Subsidized Women in Subsidized Bonogas Hogar Bonoluz Bono Escolar Estudiando Progreso Men in Contributory Women in Contributory Source: ADESS. Source: SISALRIL. and planning) after 2012 has effectively separated roles 3.6). More than 60% of the population has health and functions, providing greater specialization to the SP insurance coverage. The SENASA (Seguro Nacional de system and making it more accountable. Salud or National Health Insurance) has made a significant effort to reach the poorest segments of the population In the past decade, noncontributory programs have using SIUBEN 2012 updated information; a process that expanded coverage significantly, with a particular encountered challenges given the generally isolated 59 focus on reaching the poorest in the last three years. location of most of these households, and the lack of The food support component of the cash transfer program documentation.99 progressively increased coverage; other components such as the incentive for school attendance were more stable Traditionally social expenditure focused on wealthier while other new components have been appearing and urban areas, yet recently, several initiatives have increasing coverage like the Progress by Studying Bonus been increasing with a territorial approach to (see figure 3.5 for more detail on CCT components and serve hard-to-reach populations. Progresando con their coverage over time). Since 2012, the main conditional Solidaridad has enhanced its decentralized operative incentive for food support (Comer es Primero) added structure by strengthening the capacity of both the approximately 200,000 new households, reaching a total operational structure (through the family liaison or of 747,760 households by 2014. Despite the increased pro- enlaces comunitarios) the coordinating structures poor coverage using the SIUBEN targeting mechanism, (regional and municipal committees), along with an there are gaps (particularly those related to lack of increase in institutional presence through regional documentation) that need to be addressed in order to offices. To respond to the multidimensional nature of reach the entire population, as will be discussed later. For extreme poverty, the Government recently launched example, the percentage of extremely poor households the Progresando Unidos strategy, targeted to extreme (classified as ICV1 and ICV2 by SIUBEN) covered by poor households that will have an area-based approach PROSOLI reached 86% in 2014.98 prioritizing 14 of the poorest provinces. Besides continuing with the utilization of SIUBEN as a targeting The Government has been expanding health family mechanism to reach this population, this initiative insurance to its population, particularly for the would provide the poorest with a combination of poorest, in the form of subsidized schemes (Figure services including technical-vocational training, self- 98  World Bank. Implementation Completion and Results Report for 99  More information on the different health insurance regimes is Social Protection Investment Project (P090010). provided in this Note’s Health Section. Building a Better Future Together entrepreneurship opportunities, financial inclusion investments in the short run in order to align medium services and housing improvements. Progresando Unidos and long term results for national policy. Based on this is complemented by other initiatives undertaken using a new approach, sectorial institutions such as Progresando territorial approach like the Quisqueya Somos Todos, an con Solidaridad and SIUBEN have received the ISO effort that aims to promote local integral development 9001-2008 certification for normalizing their processes and which is developed and coordinated by the General according to quality standards. Moreover, practices to Directorate of Special Programs for the President’s Office promote transparent payments have also been fostered (DIGEPEP), as part of the Quisqueya Sin Miseria strategy. and the proportion of targeted spending has increased. This strategy presents significant advances especially For instance, in 2016, expenditures on targeted social in early childhood care by implementing childcare protection programs which use SIUBEN represent facilities (Estancias Infantiles), community centers approximately 65% of total social assistance.100 SIUBEN (Centros Comunitarios) and literacy centers (Núcleos de has also initiated a process to identify multidimensional Alfabetización) nationwide, having reduced the illiteracy poor adding new variables to the Life Quality Index rate from 14% to 7%. (Indice de Calidad de Vida – ICV). The Social Cabinet (Gabinete Coordinador de Políticas CCT social accountability mechanisms have been key Sociales- GCPS) has begun to build links across tools to improve service delivery in education, health social protection pillars. In particular, the GCPS has care and other social services at the local level. Starting begun supporting graduation schemes through certain as a pilot in 2010, the CCT Community Report Cards (CRC, CCT Program components and ensuring that these Reportes Comunitarios) is a community monitoring scheme CCT beneficiaries are connected to income generation for both beneficiaries and providers, to identify problems initiatives such as vocational training and entrepreneurship in the delivery of services to CCT households, facilitating developments, along with financial inclusion and labor the implementation of joint action plans to solve issues. 60 intermediation services, and vocational training initiatives. This mechanism allows problems to be addressed at The GCPS has prioritized a demand-based approach for the community level. However, if required, they can be vocational training initiatives, following good practices directed to the provincial and regional-level committees. of the Youth and Employment program (Programa While the results of the CRC impact evaluation are yet to Juventud y Empleo). Specifically, Progresando Unidos is come, the baseline survey showed that CRCs helped solve coordinating with INFOTEP to provide training alternatives inherent problems in the community related to public to young people between 18-29 years in the 14 prioritized service delivery, encouraging beneficiaries to express their provinces, to improve their technical and cognitive skills. opinions and suggest solutions. Complementing the CRCs, These packages also include “pasantías”, if the youngsters since 2013 the program put in place the Puntos Solidarios are interested in immediate employment alternatives, or as one-stop direct service points where beneficiaries technical advice for business initiatives including training can present grievances regarding administrative aspects courses on technical topics, savings and cooperatives, handled by the program, ADESS and/or SIUBEN. Puntos among others. Solidarios allow households to make requests such as including household members, changing the household In the last years, the government placed significant head, reevaluating the ICV and the registration of emphasis on improving social sector efficiency. community organizations, among others. The use of these A reform process was put in place to shift towards a strategies ensures greater inclusion and accessibility of results-oriented management at the different stages the poor to social protection services. of the project cycle (planning, design, financing, implementation, monitoring and evaluation). This new The Government defined a roadmap to promote phase was supported by two major planning documents the long-awaited institutional reform of the Social that go beyond one administration period: the National Protection sector. This effort is based on collaborations Strategy for Development (2010-2030) and the Public with ECLAC, the IADB and the World Bank. As a first task, Sector Multiannual Plan, which has been updated several times since 2010. These two documents have guided 100  World Bank. 2016. Implementation Completion and Results Report for Social Protection Investment Project P090010. Draft. Building a Better Future Together the sector aims to ensure a conceptual definition of the Despite an increase in coverage of noncontributory SP sector in four stages: (i) defining the scope of the programs targeting the poor and vulnerable, social non-contributory pillar under a human rights and life assistance transfers could improve redistribution by cycle approach to incorporate risks associated with each further prioritizing attention to the extreme poor and stage of life; (ii) adopting a regulatory framework for the enhancing linkages to productive inclusion initiatives. social assistance system sub-systems; (iii) defining the Transfers to poor households remain small in terms of institutional architecture of the Social Protection sector, share of GDP and do not always target the poorest.102 to address inefficiency and dispersion issues in the supply To this end, Progresando con Solidaridad has launched a of programs. Furthermore, this approach could be linked territorial approach, boosting local operational capacities; to an analysis of demand and lessons learned from the improving coordinating structures; and securing an Results-based financing pilots implemented; (iv) ensuring institutional presence in the territory. Moreover, the management tools to strengthen the System of Social Progresando Unidos strategy, working under an area-based Indicators (Sistema de Indicadores Sociales - SISDOM) and approach, provides a package of services to extreme poor the Integrated Monitoring and Evaluation System (Sistema households contributing to ensure an efficient pro-poor Integrado de Monitoreo y Evaluacion -SIME), and integrating targeting. To guarantee greater impact in implementing a system to monitor the implementation of national these strategies, two major challenges would need to social sector policies. Finally, ensuring the consolidation be addressed. First, lack of lack of formal documentation of the institutional structure could be combined with for extreme poor Dominicans is associated with reduced strengthening of plans to secure funding through a “fiscal access to food security, credit and social protection pact” to protect resource allocation to social priorities, programs, emphasizing the need to enhance access to assessing at the same time the expected impacts of the identity schemes, implement supply-side incentives last tax reform. This is a particularly important issue in a mechanisms, and reduce bureaucracy. This would help context of fiscal constraint. reduce access gaps to the subsidized health insurance regime that persist in rural areas. Second, there is still 61 Challenges room for deepening a territorial approach to reach these populations with a broader package of services not Given the evolving situation of poverty and included under Progresando Unidos. This requires the vulnerability in the DR, social interventions are facing establishment of strategic alliances and joint planning the challenge of adapting to new social requirements, with ministries and municipalities to provide water while continuing to provide key basic services to and sanitation, improve infrastructure and foster the protect consumption and promote human capital of development of public roads, etc. the poorest. In a country where 44% of the population is considered vulnerable (in March 2015: household income Formulation of exit strategies for the CCT still require per capita between US$4 and US$10 in PPP terms), the consolidation and the adoption of a comprehensive supply of SP services should develop to provide increased socio-productive approach to advance in their mitigation strategies for households not to fall back implementation. These exit strategies are aimed at into poverty and improve their living conditions on a families categorized as ICV 3 who receive technical sustainable basis. Service provision is still lagging behind training utilizing the CTC and CPC platforms, ensuring in terms of building income generation capacities, which capacity building in financial inclusion, civic values include professional training and promoting productive and management of domestic conflict, “cooperativism”, entrepreneurship, cooperatives and access to financial technical training, and agricultural extension services, opportunities.101 Moreover, in a context of more frequent etc. Efforts to ensure sustainability of the achievements and intensive shocks, whether in the form of natural made so far shall include updating the registry of PROSOLI disasters or economic crises, interventions must become beneficiaries to regularly collate this data with SIUBEN more responsive and improve their delivery at post- results. Likewise, while there is an Operational Plan for this disaster stages. strategy, which includes agreements to be signed with 102  More information provided in the Poverty and equity Policy 101  More information provided in the Inclusive Growth Note. note. Building a Better Future Together technical training institutions, and the development of a the gap between affiliates and eligible population, and job skills map including the demand for technical careers reinforce incentives to reduce dropouts at the basic level of in the Dominican labor market, full implementation of the education. In addition, the training plans of the Education strategy is yet to happen. and Health sectors could include building capacities of personnel located in prioritized territories according to Certain social assistance interventions remain PROSOLI, ensuring that a percentage of the trainees come fragmented within the sector and coordination from poor and extreme poor areas. among institutions and sectors could be furthered improved. The Dominican Republic has made significant Ensure access to social protection services to all advances establishing inter-sectoral coordination, both extreme poor in the country. This would imply enhancing from the initial efforts to adopt a Results-based financing access to identity schemes, by implementing incentive approach, and through synergies established between mechanisms for the supply side, reducing administrative PROSOLI, INFOTEP, the Ministries of Health, Agriculture, barriers for timely registrations (Declaraciones Oportunas), etc. However, some social assistance interventions remain expediting procedures for late registrations (Declaraciones fragmented: only about 65% of social spending is targeted Tardias) and improving processes for registering through SIUBEN. Interventions implemented through Dominicans at birth, including those who have only PROSOLI with targeting by SIUBEN include coordination one parent with Dominican nationality. The Social of service delivery to promote the development of Cabinet, through PROSOLI, with the Central Electoral labor skills. However, there is still weak coordination Board have implemented a mainstreamed mechanism of interventions between the contributory and non- for documenting the poorest through an active search contributory schemes, partly due to the lack of exchange scheme that have yield positive results in the last 9 years of administrative information across the two pillars. There documenting close to 250,000 individuals.103 In addition, is also no single system for recording information that links efforts should continue to update the information of all 62 these two pillars. Moreover, there is no comprehensive poor households in the country through SIUBEN and, in social security policy to protect people who, because of turn, to expand PROSOLI’s coverage to all extremely poor their level of vulnerability, could not make payments households. While this recommendation might merit to the contributory system. A number of programs are further economic analysis, it seems economically feasible being implemented by different agencies, constituting based on recent poverty numbers. a challenge in terms of increasing cost-effectiveness and harmonizing targeting of the social assistance sector. Also Expand SIUBEN’s role to become the entry door of the measures taken in the Economy sector such as the 2012 social protection system. SIUBEN is placing great emphasis tax reform, could have an impact on social sector results. on improving the quality of procedures for gathering However, the two sectors (Economy and Social) have not yet information, optimizing the production chain to include institutionalized a space to review and discuss these effects. a multidimensional criteria to categorize the families according to their level of deprivation and insecurity. It Policy Directions would be important to reinforce the institutional foundation of SIUBEN, strengthening its legal and regulatory Continue enhancing the quality of health and education framework. It would also be important to ensure that services with PROSOLI interventions. With regards to the targeting system is increasingly exploited, designing PROSOLI, progress has been accomplished in terms of incentive mechanisms to encourage its use by different ensuring the conditions for giving assistance to households programs, local governments and beneficiaries (to request through social coaching interventions (acompañamiento to be incorporated or recertified). Finally, it is important to familiar) implemented by the community links (enlaces assess strategies to secure enough funding and human comunitarios). Similarly, verification of co-responsibilities resources to respond to clients’ requests; for instance, processes have significantly improved, especially in approximately 139,000 requests made through the Puntos education where data can be exchanged between the Solidarios have not been addressed due to lack of personnel. CCT and the sector; however, a similar development has not been achieved yet with Health. PROSOLI could reduce 103  WB. Implementation Completion and Results Report for Social Protection Investment Project P090010. Building a Better Future Together Develop policies to link the contributory and non- Finally, in order to make better informed decisions contributory pillars, as well as interventions in the regarding the direction of social policy in the coming labor market. The country could develop strategies years, the Government could start documenting and in the medium-term (non-contributory pensions) and carrying out assessments of interventions that have long-term (expand the management system of subsidies a major impact on poverty reduction. Based on these to the contributory co pillar, ensure the exchange of assessments, the sector could prioritize a “vertical” or information between the two pillars, and prioritize “horizontal” expansion of protection mechanisms, i.e., vulnerable sectors with limited ability to contribute to choose to cover all the population eligible for the current respond with targeted policy interventions). In addition, package of interventions provided that they are currently exit strategies from social assistance programs to labor not included; or implement contingency interventions for market policies could ensure the continuity of protection risks not covered in the current package (people living toward securing access to employment. It would be with disabilities, for instance). To do so, it is recommended important to articulate social assistance interventions to carry out assessments or evaluations on the impacts of delivered through the GCPS with those territorially both (vertical and horizontal approaches), including an prioritized by the strategy Quisqueya Sin Miseria. analysis of available resources. Reinforce inter-sectoral coordination. The Dominican Republic could further improve intersectoral coordination and prevent leakages and duplication of roles; for example, by establishing databases that are interoperable to allow more effective management of the sector. The interoperability of systems should be considered as part of the new institutional architecture of the sector. Progresando Unidos is on the right 63 track to connect the poor with productive inclusion interventions; however, it could articulate these efforts under a comprehensive strategic framework that would address regional particularities and include services that respond to the requirements of urban and rural dwellers, and those living in border areas. Strengthen the institutional capacities and links with the Ministry of Economy (MEPyD). Better communication channels could be fostered between the Social Protection and Economy sectors. This would require adoption of social indicators with a national scope, clearly defined, and properly supported and funded. It would be important to promote and maintain coordination between both sectors, providing appropriate instruments and mechanisms to periodically review progress achieved. It is recommended that the SP sector consider institutionalizing good practices since 2012, set policy goals for the sectoral reform, and increase transparency and accountability. In the coming years it would be important to keep allocating resources to the sector within a context of fiscal constraint, ensuring the adoption of tools that strengthen management and enhance efficiency. Building a Better Future Together ANNEX I: Education and “Ninis” in the DR In 2013, the percentage of the population between 15 and 24 years of age who neither worked nor studied in the Dominican Republic was 21.4%, slightly higher than the regional average. Despite the fact that the percentage of ninis has remained virtually constant since the late 1990s, the total number of ninis shows an increasing trend going from 356,000 in 1995 to 434,000 in 2013, an increase of 22%. The increase in ninis is almost entirely explained by the increase in men who were excluded from the educational system and who did not work which went from 88,000 in 1995 up to 164,000 in 2013. In 2013, the Northwest and Northeast regions showed the highest incidence of ninis in the Dominican Republic. Regions that display both a high prevalence and a general increase of male ninis are particularly concerning, since according to De Hoyos, Gutiérrez and Vargas (2015), a higher incidence of male ninis, in a weak institutional context, is related to an increase in criminality. Three out of five ninis in the DR are women, a percentage lower than that of the rest of the region. For Latin American women, the most important factors behind the probability of being nini are marriage and pregnancy during adolescence. According to a World Bank report, between 2010 and 2013 the fertility rate amongst Dominican teenagers fell from 103 to 98 per 1,000 women between the ages of 15 and 19. Although there is a downward trend, the fertility rate among teenagers in the Dominican Republic remains substantially higher than the regional average of 72 per 1,000 adolescent females. In Latin America, the incidence of ninis varies significantly by income decile, being higher among poor households, systematically decreasing as income increases. This is not the case in the DR. The highest rate of male ninis is found in households in the 3rd decile of the income distribution with 26%, where the percentage of female ninis is very close with 29%. This suggests that the ninis phenomenon in the Dominican Republic is not necessarily determined by the lack of 64 income and could be linked to restrictions in the educational provision, such as low quality of school services or little relevance to meet the needs of the labor market. One of the highlights with regards to youths between 15 and 25 years of age, is that at the age of 15 the vast majority of the youths are within the educational system. The ninis problem arises between the ages of 15 and 19, when about 40% of youths leave the educational system and only a fraction of them find opportunities in the labor market. This suggests that to address the problem of ninis in the Dominican Republic, it is necessary to implement interventions to reduce the school drop out in upper secondary education or EMS (grades 10, 11 and 12). There is relevant evidence to design educational policies capable of reducing school drop-outs and interventions to reduce youth unemployment. Given the characteristics behind the problem of ninis in the Dominican Republic, we suggest three interventions: • Scholarships: scholarship programs with transfers only at the end of each year can reduce school drop out in EMS. The effect can be enhanced if there are information systems that can detect, youth at risk during the basic cycle. • Program to reduce teen pregnancy: awareness campaigns coupled with free access to contraceptives can reduce teenage pregnancy. • Skills training for work: programs such as “Youth and Employment” that provide technical-vocational skills or social- emotional skills help generate the necessary human capital to increase ninis’ labor productivity and increase their employability. Source: Note based on De Hoyos, Rogers y Székely (2015), “Out of School and Out of Work: Risk and Opportunities for Latin America’s Ninis”, World Bank, Washington, D.C. Building a Better Future Together ANNEX II: Education and Gender In the Dominican Republic (DR), there are gender disparities in enrollment and graduation rates, with the gap growing the higher the level of education, and with boys being at disadvantage. This gender gap is significantly larger in the DR as compared to the LAC regional averages: in secondary school the ratio of female to male enrolled students is 1.12 in the DR, compared to 1.06 for LAC; and in tertiary education the ratio is 1.62 and 1.28, respectively.104 In addition, urban areas have a gender parity index of 1.00,while rural areas have an index of 0.88.105 This trend continues into graduation ratios, with boys and young men falling behind girls and young women. Overall, total expected years of schooling is slightly lower for both men (12.7) and women (13.7) in the DR than LAC region on average (13.3 and 14.1, respectively).106 In 2014, 62% of students enrolled in tertiary education were female. The high enrollment and graduation rates of women in secondary and teriary education translates into a female labor force in which 65% has secondary or tertiary education; compared to 50% of the male labor force.107 Women are over-represented as graduates in social and humanities careers, while men outnumber women in technical fields careers. The field of study at university impacts occupational segregation where women generally are concentrated in lower productivity and lower pay occupations. Women and men have different driving factors behind decisions related to education; many of these are based on ideas of how men and women should behave., Young pregnant women and young mothers feel judged and young men feel “controlled” in schools.108 Existing stereotypes and prejudice influence youth decision-making with regard to schooling, affecting their future educational l and economic outcomes.109 To be effective, education policies and programs should consider social and gender norms that constrain choices and influence behaviors within the education system for administrators, teachers and students alike. Research shows that school-based programs provide an opportunity to shape gender norms before they become deeply engrained within 65 children and adolescents.110 Specific policy may consider: • Analyzing dropout patterns and designing school dropout prevention strategies with a gender perspective. Strategies could incorporate mentoring; after-school programs and opportunities; support pregnant teens and teen mothers remain in school; improve learning environments; and adjust teacher training and curriculum to include gender-sensitive aspects (next bullet provides more details). • As part of teacher training, ensuring better understanding of gender socialization and response to issues related to stereotypes regarding gender roles and behaviors, bullying, and sexual and reproductive health. • Implementing classroom activities and content that incorporate socio-emotional skills training and critical reflection about gender norms. Consider additional modules within the curricula. • Implementing campaigns against teenage pregnancy, with specific focus on poorer and rural areas. Including socio- emotional skills training, as these skills are likely to improve school attendence and completion. 104  WB. World Development Indicators (WDI), 2013 data. 105  Department of Statistics, MINERD, 2013-2014. Data retrieved from one.gob.do, May 2016. 106  WDI, 2014 data. 107  WDI, 2013 data. 108  ONE, 2016. 109  See, for example, World Bank. 2012. World Development Report: Gender Equality and Development. Washington DC.; Ricardo and Fonseca 2008, Cunningham et al 2008 110  Behavioral change through school-based programs has been studied related to, for example, violence prevention in Bott S, Morrison A, and Ellsberg M. 2005. Preventing and responding to gender-based violence in middle and low income countries: a global review and analysis. World Bank Policy Research Working Paper 3618, June 2005. Washington DC; UNICEF. 2014. Ending Violence Against Children: Six Strategies for Action. New York. Building a Better Future Together ANNEX III: Health: Extending Insurance to Include the Informal Sector: Examples from Other Countries Process in Costa Rica • 1950. The Costa Rica Social Security (CCSS) covered 8% of the population (limited to those earning less than 400 colones in national and provincial capitals). • 1961. After extending CCSS to rural workers and raising salary limit to 1000 colones, it covered 18% of population. Established Universal Coverage Amendment Act which aimed for universal coverage in 10 years. First step: removed salary limit for contributors so all salaried workers contributed. Workers’ dependents were also covered. Self-employed could voluntarily join for a small contribution. Government supported the poor, handicapped, and elderly. • 1971 (target date of universal coverage). Only reached 45% of population • 2000. Reached 90%. Process in Korea • 1976. Progressively increased coverage to all workers and their families in the formal and informal sectors. Introduced medical insurance program for individuals working in enterprises with more than 500 workers and their immediate families. • 1977. Established Free and Subsidized Medical Aid Program for people below certain income level. • 1988. Started programs in rural areas for self-employed. • 1989. Included urban self-employed and firms with more than 5 workers. 66 Other countries Other countries have taken different approaches to cover persons not employed in the formal sector. • The Philippines and Vietnam allow them to contribute to the formal sector scheme • Colombia requires those with sufficient means to contribute to the formal-sector scheme but in practice, this has been difficult to implement and informal sector workers have been incorporated in the SR • China and Mexico have a separate voluntary contributory scheme. • Another possible option is to progressively move toward a common health insurance plan for the entire population that would be financed by taxes similar to what is being done in Brazil Sources: Gottrett, P. and G. Schieber.2006. Health Financing Revisited. The World Bank; Jowett, M and W. Hsiao. 2007. “The Philippines: Extending Coverage beyond the Formal Sector” in Social Health Insurance for Developing Nations edited by W. Hsia and R.P. Shaw; Gottret, P., G. Schieber, and H. Waters.2008. Good Practice in Health Financing: Lessons from Reforms in Low and Middle Income Countries. The World Bank Building a Better Future Together Chapter 4. Policy Directions for Improving the Quality and Availability of Basic Infrastructure Services Introduction challenges ahead for the Government, and proposes a set of potential policy directions in key areas to enhance W ater supply and sanitation, electricity service quality and efficiency, governance, and ultimately, 67 and ICT services are basic services that outcomes. are central to alleviating poverty and stimulating economic growth and development. Good In recent years the country has taken concrete measures quality, adequate, and reliable water supply and sanitation to improve the performance of the water supply and (WSS) and electricity services are essential not only for sanitation (WSS) and electricity sectors. In the WSS ensuring human health and wellbeing, but together sector, this has comprised the renewed momentum built in with information and communications technology (ICT) modernizing the sector’s legal and institutional framework, are also key inputs for the agricultural, industrial, and and the significant progress achieved in expanding access commercial sectors of the economy. Nonetheless, the to WSS services over the past two decades, with 85% and sub-optimal quality of these infrastructure services in 84% of Dominicans with access to an improved source of the Dominican Republic, together with unequal access water and sanitation facilities in 2015, respectively. In the at lower income levels, are a burden to households and electricity sector this has included several electricity sector businesses alike. The lack of continuity and poor quality reforms, preparation and implementation of a strategic of largely publicly provided WSS and electricity services, plan, a reduction in power system losses from 36.2% in together with the high cost of largely privately provided 2009 to 31.4% in 2015, and significant efforts to build internet access, constitute significant burdens for consensus to implement the remaining reforms through households and businesses, affecting their quality of life, the Electricity Pact discussions. productivity, and competitiveness. These constraints also limit their opportunities for economic growth and shared However, the Government continues to face a number prosperity. of common challenges in the WSS and electricity.111 The This Note covers the Dominican Republic’s (DR) 111  It is to be noted that the part of this Note dedicated to the WSS sector is drawn from the recently finalized “Water and Sanitation infrastructure delivery sectors (water supply and Sector Finance and Service Efficiency Review and Recommendations” sanitation, electricity and ICT). It discusses the main by the World Bank and which was shared with the MEPyD in May 2016. Building a Better Future Together two sectors share 5 main cross-cutting challenges related • Fiscal Transfers and Subsidies: service providers in to: (i) institutions and governance, (ii) service quality and both sectors remain highly subsidized for operational reliability, (iii) commercial and financial management, expenses and investment, and public transfers are not (iv) tariffs and cost recovery, and (v) fiscal transfers and linked to performance. This represents a fiscal burden subsidies. for the Central Government that could be addressed by progressively improving the performance and • Institutions and Governance: both sectors are efficiency of service providers. characterized by weak regulatory frameworks, and by often ambiguous, overlapping and incompatible The ICT sector, which is largely privately provided, roles among its respective actors (as well as actors faces a different set of challenges than the from other sectors) which ultimately affect the WSS and electricity sectors. Liberalization of the sectors’ performance in sustaining improvements telecommunications market has allowed the ICT sector to in service quality. The roles of policy-making and experience tremendous growth in the last decade, and the service provision are not clearly separated, and country has ample mobile phone and mobile broadband service providers are not managed in an environment penetration. However fixed broadband coverage and conducive to efficiency and financial autonomy or internet usage are limited, due to three key factors: (i) which encourages resource allocation based on sound institutions and governance; (ii) coverage and affordability, planning; and (iii) demand-side and related factors. • Service Quality and Reliability: while access to WSS and electricity is considered relatively high, service quality • Institutions and Governance: The Instituto and efficiency are generally poor. Both sectors are Dominicano de las Telecomunicaciones (INDOTEL), characterized by poor continuity of service throughout the state’s independent regulatory authority for the day, as well as by deficient service quality and telecommunications, combines policy, regulatory and 68 monitoring. These have negative consequences on service provider functions, and its regulatory capacity productivity, and influence investment in the DR (for warrants strengthening. For example, in most areas, example, tourism) and have dire consequences on except in the main cities, only one provider offers the population’s health (in the case of deficiencies retail fixed broadband services and although an in water quality monitoring or electricity failures in interconnection policy is in place, wholesale prices are medical centers); not regulated. • Commercial and Financial Management: both • Coverage and Affordability: The Dominican Republic sectors are characterized by low efficiency and has connectivity statistics below the regional average sustainability, as well as by poor commercial indicators for Latin America. Only 18% of households practices. Low coverage in metering for water and have internet, one in six municipalities in the country electricity consumption, as well as low revenue has no registered fixed internet accounts, and for the collection levels and high administrative overheads poorest households, fixed internet connectivity prices lead to a growing dependence of service providers equal an unaffordable 79% of the household’s earnings. on central government transfers, a situation which • Demand-side and Related Factors: The Government does not create incentives for them to improve their has announced plans under the banner of República commercial, financial and operational performance; Digital to achieve national broadband coverage. It will • Tariffs and Cost Recovery: tariffs for both water/ be important to complement these investments with sewerage and electricity are typically inadequate investments in digital literacy and skills building, in and not established based on the cost of the services digital enablers such as digital identification and digital provided or according to cost-recovery criteria. finance, and in developing policy and practices for next- This further hinders improvements in commercial generation issues such as privacy and cybersecurity. and financial management of service providers. Furthermore, tariff subsidies are often captured more The structure of this policy note is as follows. The first by middle and upper income consumers than the half covers the water and sanitation sector, starting with poor; a description of the country context, then the challenges, Building a Better Future Together Figure 4.1: Comparison of water access rates Figure 4.2: Comparison of sanitation access rates to improved water sources for urban and rural areas to improved facilities for urban and rural areas 100 100 8582 86 80 80 76 60 60 Access (%) Access (%) 40 40 20 20 0 0 a a ia or R. ia bia ru a o a o a ia ia bia or nic u R. a aic Ric ny c aic ny Ric c r org c org c ad Pe roc ad Pe roc Lu an Lu lom an lom Ke Ke Jam Jam Ecu sta Ecu sta Ge St- Mo Ge St- Mo nic Co Co Co Co mi mi Do Do Urban Rural Urban Rural Source: WHO-UNICEF Joint Monitoring Programme for Water Supply and Sanitation (2015). Progress on Sanitation and Drinking Water. 2015 Update and MDG Assessment. Available at http://www.wssinfo.org/ leadmin/user_upload/resources/JMP-Update-report-2015_English.pdf and finally proposing potential policy directions for The proposed WSS Law is in line with all diagnostics tackling these challenges. Afterwards the note covers the and proposals made for the sector, and its passing and electricity sector, beginning with the country context, implementation would likely represent a formidable then presenting the main challenges and closing with step forward in modernizing and reforming the a set of proposed policy directions for addressing the WSS sector in the DR. Several attempts to carry out a 69 challenges identified. It is our hope that this policy note sector reform have been made since 1999, but the lack will provide decision-makers with valuable information on of consensus and effective leadership at the highest the key challenges and policy options for tackling them. political level in the country have delayed its approval and execution. Key functions and institutions in place within a WATER AND SANITATION modern legal framework are essential to sustained sector development, but in the absence of a WSS Law, other legal Country Context documents, such as the 2010 Constitution, and the National Development Strategy for 2030 have helped define a The Dominican Republic (DR)’s exceptional economic general framework of public policies for the WSS sector. growth has contributed to expanding access to water The Constitution promotes principles of equity, quality of supply and sanitation (WSS) services over the past two services, universality, efficiency and transparency, while decades. As of 2015, 85% of Dominicans had access to an the 2010-2030 National Development Strategy developed improved source of water (85% in urban and 82% in rural by MEPyD and the National Board for State Reform areas), and 84% to improved sanitation facilities (86% in (CONARE) includes such goals as guaranteeing universal urban and 76% in rural areas), which compare relatively access to high-quality, efficient drinking water and well with countries in the Region with similar GDP per sanitation services, as well as reform proposals consistent capita figures and countries with similar structural features with the above-mentioned principles. (see figures 4.1 and 4.2).112 A recent series of reforms has been promoting 112  Countries with similar GDP per capita in the Region were St- improved efficiency and transparency in public Lucia, Jamaica, Ecuador, Colombia and Peru, and countries with spending. In recent years, the DR has been vying to similar structural features were Morocco, Georgia, Costa Rica and modernize its public administration and improve efficacy, Kenya. The structural features used for this comparison were: (i) high growth, (ii) low share of income for the bottom 40%, (iii) oil importer, efficiency, transparency and accountability in public (iv) high tourism revenues, as well as (v) low government revenues spending. One of these efforts led by DIGEPRES in 2014 and total expenditures. Building a Better Future Together Table 4.1: Central government allocations and external resources spent in the WSS sector (1990-2014) Annual average (US$ million) Central government Period External resources Total Current expenses Capital Sub-total 1990-2000 2.7 90.1 92.8 0.6 93.3 2001-2010 27.6 78.1 105.7 39.2 144.9 2011-2014 79.9 75.8 153.5 65.5 219.0 Source: Data from the Treasury’s General Budget Directorate (DIGEPRES), Santo Domingo, Dominican Republic. was the development of the New Dominican Budgeting Challenges System (Nuevo Sistema Presupuestario Dominicano, NSPD) which introduced a number of measures to improve the Institutional framework/Sector governance quality of public spending by better articulating planning and budgeting, and to promote a cultural change within The WSS sector in the DR does not yet count on an the public administration: multi-year budgeting, results- apex sector agency as well as a regulatory framework oriented budgeting, as well as adequate monitoring and to allow it to sustain its improvements in access and evaluation mechanisms. Even though the non-financial services. In the current framework, the roles of regulation public institutions such as the water and sewerage and service provision are not clearly separated, and service service providers have yet to make the transition to providers are not created and managed in an environment results-oriented budgeting, DIGEPRES continues to share conducive to efficiency and financial autonomy or which 70 information on their approved budgets, as well as the encourages resource allocation based on sound planning. execution of the latter. Finally, the recent creation of the These shortcomings can have heavy consequences Consejo Directivo para la Reforma y Modernización del on sector performance and deeply affect its ability to Sector APS y la Mesa de Agua (CODIREyMAPS) to serve as prioritize, to design and implement sector policies, and to a coordination mechanism to renew the momentum provide critical technical assistance to service providers. towards reforming and modernizing the WSS sector is a In addition, the absence of mechanisms to promote and laudable step forward. enforce the use of planning tools in the WSS sector has also contributed to creating service gaps in terms of geography, Central Government allocations to the sector, poverty, the urban-rural divide and between the weights of including external resources, have increased over investments in water supply versus sanitation as well as of time, indicating the growing needs for the WSS sector. new investments versus maintenance of existing systems. Table 4.1 summarizes the Government allocations and the Even though uncertainty continues to exist around the external resources received by the sector between 1990 adoption of the proposed Water and Sanitation and Water and 2014, and shows that there was a 55% increase in Resources laws, these remain a priority element for sector average annual investments in the sector in the 2001-2010 modernization and reform. period, compared with the previous ten years. This trend continued with a 51% increase for the 2011-2014 period, Coverage of WSS services as compared to 2001-2010, highlighting the need for continued investment in the sector. This Note will further Access rates to WSS are unequal across the country highlight the underlying trends, most notably related to and are lowest in the poorest regions. Urban areas have transfers to service providers and their effect on service access to a much higher level of water service with 54% provision and efficiency. of households with a water connection inside the house, compared to 24 in rural areas. Open defecation is also the practice for 3% of the urban whereas 14% of households in rural areas still defecate in the open. In addition, Building a Better Future Together Figure 4.3: Open defecation and poverty rates Figure 4.4: Access to water inside the house in all provinces of the DR and poverty rates in all provinces of the DR 100 90 90 80 80 70 70 60 Poverty rate (%) Poverty rate (%) 60 50 50 40 40 30 30 20 20 10 10 0 0 0 5 10 15 20 25 30 35 40 45 0 10 20 30 40 50 60 70 80 Open defecation rate (% of households) Access to water inside the house (% of households) Source: Data from the National Statistics O ce (ONE)'s 2010 Household and Population Survey, and the Ministry of Economy, Planning and Development (MEPyD)'s 2010 Poverty Atlas (Economic and Social Analyst Unit, UAES). according to data from the SIASAR Rural WSS Information Figure 4.5: Sewerage lag index comparing sewerage System (http://www.siasar.org), levels of WSS coverage are and piped water by service provider incomplete within the DR’s rural communities reporting through the information system, with only about 20% 100 of them with adequate coverage. Nearly 40% of these communities report serious deficits in WSS coverage. 80 71 A closer look at WSS access levels also shows significant 60 gaps between provinces, with the lowest levels of access 100 to water inside the house and to improved sanitation 40 generally found in areas where poverty levels are the 71 54 56 56 61 highest, particularly in the provinces along the border with 20 39 Haiti (see figures 4.3 and 4.4, as well as Annex I). Higher 20 levels of open defecation also are strongly correlated with 0 ge N GA CA TA D PA higher poverty levels. It is also worth noting that provinces M AS SA RO LA ra INA MO VE CA AA ve AA PP AA AA lA R AA CO where poverty levels are the lowest are generally served R CO R na CO CO R CO tio by CORAAs. Na Source: Abreu, R.U. Informe Diagnóstico y Propuestas Estratégicas Sector Agua Potable y Saneamiento. MEPyD, Proyecto Agua y Saneamiento en Centros Turísticos While access rates to WSS in the DR remain relatively (PASCT). Santo Domingo, September 2012. high, the state of the infrastructure is threatened by the general lack of a maintenance culture, and wastewater water treatment plants and 26% of the fully-functioning collection and treatment continue to lag behind water wastewater treatment plants were estimated to be at supply. In terms of the existing sector infrastructure, an adequate operating level. Many cities do not have a while it is relatively well developed for water production, it collection system and only around 20% of the wastewater shows limitations for water distribution – many networks collected is effectively treated across the country. Figure need rehabilitation, as well as for wastewater collection 4.5 illustrates the gap between sewerage and water and treatment. Moreover, the sector is challenged by supply services, as calculated by the sewerage lag index in limited resources and emphasis put on maintenance, several service providers. For example, it can be seen that which causes large infrastructure to become obsolete in 2011, on average, 56% of the national service providers’ within a short period of time and leads to subsequent high clients receiving water were not connected to a sewerage investment costs to replace them: only 53% of the DR’s network. In addition, CORAASAN had managed in 2011 Building a Better Future Together to provide sewerage services to 80% of its water clients, Efficiency and sustainability of WSS services while COAAROM had yet to invest in wastewater collection and treatment. This illustrates the fact that not only is The WSS sector does not count on a solid commercial service coverage lagging behind, but also investments policy aimed at collecting revenues by means of an in sewerage, both by the service providers themselves as effective micro-metering and tariff system and, the well as the Government. principle of paying for water by the volume consumed has yet to be accepted across the country. As for Quality and efficiency of services service quality, there is generally very little quality data on commercial aspects, as well as on efficiency, but the Despite increasing (albeit unequal) coverage levels information obtained points to rather concerning trends. and efforts to consolidate the institutional framework, Revenue collection levels, labor productivity and metering the quality of service delivery has been deteriorating. coverage are typically low across service providers and the The aforementioned figures of access to WSS services significant state subsidies for current expenses and capital hide the fact that public networks are failing to provide have created a growing dependence of WSS service quality services and customers need to turn to often providers on central transfers, a situation which does not more costly alternatives. For example, 78% of households create incentives for them to improve their commercial consume processed water (botellones), while only 11% of and financial performance. households drink the water from the public network. This latter figure increases to 21% in rural areas.113 In addition, Besides being considered generally low, tariffs are while there is little current data on the quality of services, typically not established based on the costs of the anecdotal information indicates that water losses are at services provided and vary widely across service a high level and that customers have to deal with poor providers. As shown in Table 4.2, recent data obtained continuity of service throughout the day and week. For from CORAAMOCA and COAAROM indicate that the 72 example, CORAAMOCA reported in 2012 non-revenue 2016 tariffs for both water and sewerage were very low water levels of 82%, as well as water service continuity compared with regional averages, particularly when levels of 6.6 hours per day. The same year, CORAAPPLATA compared with other Caribbean countries, as well as with reported a non-revenue water level of 75%. countries with similar GDP per capita or similar structural features. In rural areas, according to the SIASAR information Water quality monitoring is also deficient, with less than system, only 32% of service providers had a tariff in place 50% of the water supply systems controlling water quality (98% as a flat rate regardless of consumption), and only (25% in rural areas), and it was found that only 14% of the 32% of these providers recovered their operating costs inventoried water systems practiced chlorination. This through that tariff.114 has significant potential health impacts, especially for the poor, and notably in relation to water- and excreta-related Sector financing diseases such as cholera. To respond to this water quality issue, INAPA developed the SISMOPA system (http://sismo. Despite recent improvements, the DR budgeting inapa.gob.do), developed with technical support from system still largely aims for products and outputs PAHO/WHO, and based on the SISKLOR model developed rather than outcomes and results.115 To increase the in Haiti after the 2010 earthquake. To this date, the system investment capacity of the sector, it is crucial to ensure is in operation in four provinces, and two other service that water agencies have the technical capacity to providers are receiving technical assistance in order to formulate sound projects, which are well adapted to the adapt and implement SISMOPA in their areas of service. specific requirements of the sector. There is currently In parallel, the MSP has developed another system to no institutional mechanism to prioritize and vet WSS monitor water quality called SISVICA, but it is has yet to projects from a sectoral perspective (technical, financial, become operational. 114  http://www.siasar.org, consulted on May 29, 2016. 115 World Bank, 2015. Dominican Republic Strengthening Management of Public Finances Development Policy Loan. Program 113  Demographic and Health Survey (ENDESA), 2013. Document. Washington, DC. Building a Better Future Together Table 4.2: Average tariff for metered water supply and sewerage service, based on a 15 m3 water consumption Metered water tariff Corresponding sewerage Average sewerage/ Service provider ($/m3) tariff ($/m3) water tariff (%) CORAAMOCA* 0.21 0.06 33 COAAROM* 0.17 0.09 60 CAASD* 0.13 0.03 20 Average LAC Region** 0.83 0.30 45 Average Caribbean** 1.44 0.52 34 Average Central America** 0.39 0.10 30 Average South America** 0.60 0.33 59 Average countries in LAC with 0.96 0.35 39 similar GDP per capita (PPP) † Average countries with similar 0.53 0.23 39 structural features ‡ * Data from service providers; 1$US = 45 Dominican pesos. ** Data from http://tariffs.ib-net.org . † St-Vincent and Grenadines, Grenada, Jamaica, Ecuador, Colombia and Peru. Data from http://tariffs.ib-net.org. ‡ Morocco, Georgia, Costa Rica and Kenya. Data from http://tariffs.ib-net.org economic, institutional) or to follow-up on their results. well as a predicted increase of 6% between 2014 and In the absence of guidelines or availability of guidance, 2015. It could also be a short-term trend not necessarily 73 water and sewerage service providers formulate representative of the sector’s financial health, since projects following their own criteria and with unequal data from 2007 to 2012 show that the average level of quality, mainly consisting of engineering designs and dependency of service providers on government transfers environmental studies. Externally-funded projects, for current expenses maintained itself between 50 and however, are the exception, as they usually need to follow 60% (although this included energy costs) throughout that the corresponding financier guidelines and processes. period. In addition, a deeper dive into the improvements shown particularly by CORAABO and CORAAVEGA in the WSS service providers remain highly subsidized, even recent years could provide valuable lessons for other though recent years are showing positive trends.116 service providers. As for capital expenditures, transfers to While it can be seen in Figure 4.6 that the proportion of cover them remain high at 90 to 100%, and this is likely non-energy current expenses covered by transfers from to endure over the short and medium terms. Current the Central Government is projected to remain high in expenses and capital subsidies represented an average of 2015 with an average of 41%, there seems to be a general 0.3% of the GDP from 2013 to 2015. trend towards depending less on transfers to cover these expenses. This could be due to the general increase in the Water supply remains the funding priority for the proportion of income coming from water and sewerage Central Government, and service providers often services, as illustrated in Figure 4.6, and to the general need to turn to their own funds to finance sewerage increase in revenues, as illustrated by a 12% increase projects. Data from the executed budgets of 2014, in service-related revenues between 2013 and 2014, as as well as approved budgets of 2015 show that of the resources allocated to water supply, averages of 51 and 116  Information extracted and calculated from the 2013 and 2014 66%, respectively, came from the Central Government, annual DIGEPRES reports on the execution of non-financial public while 38 and 29%, respectively, came from the service institutions’ approved budgets, as well as from the 2015 DIGEPRES compilation of non-financial public institutions budgets (not providers’ own funds. In contrast, resources allocated to executed). The calculations involving current expenses do not include sewerage came from the Central Government with nearly the costs associated with energy consumption by public institutions. Building a Better Future Together Figure 4.6: Proportion of current expenses financed by the Figure 4.7: Proportion of income coming from water Central Government for different service providers (%) and sewerage services (%) by service provider Average 2015 23 Average 2014 45 4 CORAASAN 19 Average 2013 CORAASAN 71 21 65 82 53 CORAAVEGA 27 CORAAVEGA 59 13 80 42 13 28 25 5 CORAAMOCA 29 CORAABO 61 81 30 CORAABO 62 CORAAMOCA 52 35 59 58 28 2 47 38 3 COAAROM 51 COAAROM 47 4 53 20 52 34 CAASD 40 CORAAPPLATA 38 3 54 31 CORAAPPLATA 71 CAASD 28 2 Average 2015 60 29 77 9 Average 2014 INAPA 67 INAPA 9 Average 2013 79 7 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 2013 2014 2015 2013 2014 2015 Source: data was extracted and calculated from the 2013 and 2014 annual reports from the Treasury’s General Budget Directorate (DIGEPRES) on the execution of non- nancial public institutions' approved budgets, as well as from the 2015 DIGEPRES compilation of non- nancial public institutions budgets (not executed). 74 52% in 2014 and 24 in 2015, while 43% in 2014 and 68% in delivery. While reform materializes and financing and 2015 came from the providers’ own funds. Few providers provision of WSS services continues, there is a need for actually have resources allocated to sewerage and many strategic incremental steps to improve service delivery. depend on their own funds to attend to a minimum of This Note thus proposes three pillars on which this service level. Resources allocated specifically to water improvement could rest: (i) continuing and deepening supply in the sector as a whole (including infrastructure, ongoing efforts to establish the proposed institutional administration, operation and maintenance, etc.) framework at the national level; (ii) strengthening the represented 32 and 38% of the 2014 and 2015 budgets water and sewerage service providers and establishing a respectively, while sewerage received 21 and 22% in 2014 corresponding high impact investment and rehabilitation and 2015, a significant difference considering the gap in plan; and (iii) establishing a revised and comprehensive sewerage services faced by many of the municipalities of financing policy for the WSS sector. the DR. Pillar I - Continue all efforts to establish and Policy Directions consolidate the sector’s institutional framework. This requires the passing of the WSS Law and continued efforts The development of an institutional framework, with the associated decrees, as well as other activities the strengthening of service providers, and the related to its implementation, once the Law is approved. establishment of a financing policy can lead the WSS Part of this effort is currently being undertaken by a sector to a more sustainable future. In addition to the sector development program financed by the Spanish importance of establishing a WSS sector institutional Cooperation (AECID), and further detailed work would framework to formulate sector policies, strategies and be needed with regards to the strengthening of sector champion their implementation, multiple options can institutions, with the corresponding tools and systems to be considered to improve the sector and put it on a support them. The sanitation strategy under development sustainable path to achieving universal and quality service is also a sound initiative that should be continued. Building a Better Future Together Pillar II - In the short term, take incremental steps to of CORAAMOCA and COAAROM have already provided improve service provision in a more efficient and interesting results: the installation of a commercial targeted manner, in order to put the sector on a more management system, as well as staff training, has sustainable path. A sector investment strategy with contributed to increasing billing in both CORAAMOCA and a long-term vision and a short-term program should COAAROM by 35 and 50% respectively over the course of be established, using the sanitation strategy under the last year. While these are preliminary results, it is worth preparation, and adding priority water supply investments, noting that these positive results were obtained without strategically designed to maximize improvements increasing the number of customers or tariffs. The latter in service quality and efficiency. This would focus on is particularly important, as this indicates that a gradual strengthening the capacity of the water and sewerage increase in tariff to match the costs of providing services service providers, as well as on improving the institutional could further enhance their commercial and financial framework to support them, and would consist in the performance of these. elaboration of “Short-Term High Impact Programs” for all service providers, particularly the CORAAs. These Pillar III - Establish sector financing review and follow- programs, similar to business plans, could be geared at up mechanisms. With limited resources available, improving service provision with increased efficiency and efficiency in budget allocations for WSS projects at identifying strategic investments. Based on the World and programs becomes imperative. This pillar would Bank’s experience with three CORAAs under the Water and focus on the preparation of a Sector Financing Policy Sanitation in Tourist Areas Project (PASCT under its Spanish covering government financing for both investment and acronym), it is likely that the majority of these programs operational expenses. Main elements of the financial would focus on the rehabilitation of water distribution policy would include: systems, improvements in commercial management, the development of information and planning systems, as • Establishing sector-specific review and monitoring well as on sanitation infrastructure and services. These mechanisms for national public investments (including 75 programs would be associated with higher-level sector external sources). The idea would be to create a plans and managed by performance agreements with the mechanism that would add a WSS-specific dimension CORAAs. to the allocation process established by DIGEPRES, so that new investments are vetted from technical, These programs would be associated with higher-level economic and institutional angles, and progress and sector plans and managed by performance agreements results linked to these investments are systematically with the CORAAs. As these strategic investments would monitored and evaluated; most likely impact CORAAs’ urban clients, and since most • Exploring linking operational subsidies to performance financing and sector improvement activities focus on agreements with service providers, in order to provide urban areas, a Rural Investment Program could also be incentives to improve their performance. While developed, exploring amongst other approaches, the the general idea is to decrease and eventually potential involvement of the local private sector to support stop subsidies overtime, such a mechanism can be municipalities and rural water community associations designed and used to incentivize improvements (ASOCARES) and sustainably operate and maintain water in performance among the service providers in supply systems in rural areas and small towns of the DR. the meantime. These performance agreements are consistent with the National Development Strategy Improvements in commercial management can and are already in place in other sectors. rapidly increase billing at a low cost. In addition, despite the challenges described in this Note regarding Finally, to bring the above-mentioned three pillars service provision in the DR, it is estimated that significant into action, sound formulation and implementation gains can be reached with minimal efforts in commercial arrangements would be required, particularly in the management improvements (see pilot with three CORAAs form of a champion agency. In the current institutional in Annex 2). On top of the benefits described in Annex environment, the CODIREyMAPS could be used or a 2, current efforts to upgrade the commercial systems new unit – as a special purpose vehicle – within MEPyD, Building a Better Future Together could be created. These champion agencies would liaise and was successful in increasing investment in with other sector institutions, including participating generation capacity, improving operation of the National multilaterals and bilaterals. Interconnection Electricity System (SENI), strengthening the technical capacity of sector agencies and improving ELECTRICITY SECTOR commercial practices. As seen in Figure 4.8, this investment has assisted in diversifying the generation matrix of the Country Context country, transitioning from a matrix supported mainly by fuel oil and hydropower to a more diversified one that To improve the reliability and continuity of electricity also includes natural gas, coal, and other renewables service, the Dominican Republic (DR) began a series of (wind and solar). structural electricity sector reforms at the end of the 1990s. This included allowing private sector participation However, these reforms were not sufficient to achieve in the generation and distribution sectors to expand the electricity sector financial sustainability. Monetary sector and improve the efficiency of service provision. In transfers from the Government to cover the electricity 2001 an Electricity Law was passed that created a modern sector deficit increased from US$471 million in 2009 to legal and regulatory framework, including the creation US$1.3 million in 2013, although they have since declined of a new policy making institution, the National Energy due to lower oil prices. Similarly, the three electricity Commission (CNE), and an energy sector regulatory distribution companies (EDEs) had a negative net worth of institution, the Superintendence of Energy (SIE). Three US$2.1 billion at the end of 2014 due to cumulative annual regional distribution companies (EdeNorte, EdeSur and losses. The main reasons for these deficits are the failure to EdeEste) were also created to supply electricity service. transfer the full costs of electricity supply to end-users, poor These companies were initially privatized but later sold management and commercial practices by the distribution back to the State between 2003 and 2009. The Dominican companies, high electricity theft, and political interference 76 Corporation of State-Owned Electricity Companies in the regulation of the sector, among other factors. (CDEEE) was set up to control and coordinate all of the country’s state-owned electricity companies. In recent years the country has taken concrete measures to improve sector performance, but there This first wave of electricity sector reforms led is still significant work to be done. The DR has made to increased investment, technical capacity, and progress to improve sector performance, including: i) the improved systems operations. The Dominican preparation of the 2013-2016 Strategic Plan which it has experience with opening the electricity sector resulted started to implement; ii) the implementation of a program in increased competition and private sector participation to reduce electricity losses with support from international financial institutions, which has resulted in loss reduction Figure 4.8: Evolution of Electricity Generation by Source from 36.2% in 2009 to 31.4% in 2015; and iii) significant efforts to build consensus to implement the necessary reforms for the recuperation of the sector through the 100% 12 15 14 14 Electricity Pact discussions. Although the country is on the 4 15 80% right track, much work remains to restore the financial and 19 30 operational sustainability of the sector and improve the 55 31 29 28 60% quality of the service for the entire population. 5 4 40% 54 Challenges 36 36 40 45 50 20% Institutional framework/Sector governance 9 12 13 13 9 6 0% Pre- 2004 2012 2013 2014 2015 While the past electricity reforms created a modern Capitalization legal and regulatory framework, implementation of Hydro Fuel Oil Gas Oil Natural Gas Coal Wind this framework has been less effective. The sector Source: Asociación Dominicana de la Industria Eléctrica (ADIE). Building a Better Future Together continues to suffer from a duplicity of functions among the law of establishing and adjusting electricity tariffs. As a main institutions. There is a duplication of functions among public entity, with a Superintendent appointed by the the newly established Ministry of Energy and Mines (MEM), President, SIE is ultimately responsible for following the CNE, and CDEEE with regard to the design of policies and Government’s policy. Thus while SIE does calculate the planning for the electricity sector. There is no a single entity cost-recovery level tariff (tarifa indexada) as mandated by responsible for developing a long-term integrated strategic law, tariff adjustments to these levels have been delayed plan for the sector. Moreover, there is little continuity in due to a lack of political will within Government given its the execution of the plans when there are changes in concerns about the potential social backlash. Hence tariffs the administration. There is also ambiguity regarding the are often established below the levels of cost recovery for roles of the public versus private sector. The Electricity Law political rather than technical reasons. SIE also has limited promotes private sector participation in the generation actual authority to enforce service quality standards or segment of the electricity sector, and since capitalization of to fine the EDEs accountable for failing to meet these the sector there are currently 14 private power generators. standards as there is no political mandate to do so given The role assigned to the State is normative, supervisory, the poor financial situation of the EDEs. disciplinary, and a promoter of private investments, however in practice the State goes far beyond these Quality of Service Provision roles including recently by undertaking new investments in power generation. This multiplicity and ambiguity of Electricity service is central for stimulating economic roles has caused distortions which hinders investment growth and enhancing shared prosperity, but service in the sector and effective and independent regulation. quality and reliability in the DR continues to be lacking. High quality electric service is essential to economic There is also limited transparency and accountability development and country competitiveness. Electricity is around the use of Government transfers to the sector an important input for productivity, transversally affecting and the financial performance of the Electricity the residential, industrial, and commercial sectors of the 77 Distribution Companies (EDEs). The Ministry of Finance economy. However, it is one of the main bottlenecks for and Public Credit and the Ministry of Economics, Planning doing business in the DR – the country was ranked 128th and Development have limited information about the use out of 144 countries in the Global Competitiveness Report by sector agencies of the large transfers provided to cover issued by the World Economic Forum, in particular due to the recurring electricity sector deficit. In addition they have the low quality of its electricity supply. While the electricity not tied these transfers to improved performance. CDEEE access rate in the DR is 98%, higher than the average for Latin also has limited control over the EDEs to ensure their America, it is estimated that only 52% of electric consumers efficient functioning and good commercial management have 24-hour service and there are also frequent voltage as CDEEE’s executive vice-president and the managers fluctuations. These interruptions affect the population’s of the EDEs who are all appointed by Presidential quality of life, productivity, safety and increases spending Decree, effectively have the same level of authority and on alternative sources of energy. As seen in Figures there is also no integrated data platform to access real 4.9 and 4.10, the DR has the second highest frequency time information about commercial and operational and duration of power system interruptions among performance. Furthermore, there is a lack of transparency comparable countries in LAC,117 over twice the average for about the actual financial situation of the EDEs, with the these countries. last audited financial statements being published back in 2012 with numerous qualifications from the auditors that Due to frequent service interruptions, businesses have are yet to be resolved. Thus, the EDEs are not supervised to make large investments in back-up equipment, or managed in a manner that promotes transparency, to be able to carry out their day-to-day activities. A efficiency, and financial autonomy. recent research paper titled “Impact of the Crisis in the Electric Sector in the Dominican Economy” carried out by In addition, there are political factors that prevent effective regulation of the sector. SIE has little 117  Comparable countries were selected based the following autonomy to comply with its functions established in criteria: 1) size of population, 2) GNI per capita, and 3) composition of the electricity generation matrix. Building a Better Future Together Figure 4.9: System Average Interruption Frequency Figure 4.10: System Average Interruption Duration Index (SAIFI) for Comparable Countries in 2015 Index (SAIDI) for Comparable Countries in 2015 45 300 40 38.4 38.1 257 250 35 30 200 25 19.4 150 129.1 20 15 12 average 100 15.6 72.7 10 7.5 6.0 average 2.9 50 61.6 5 0.7 14.5 8.1 5.0 4.1 2.0 0 0 r r la la a s ia a or a s ia or a R. R. do do ura ura gu gu aic aic ma ma liv liv ad ad an an lva lva ara ara Jam Jam Bo Bo nd nd Ecu Ecu ate ate nic nic Sa Sa Ho Ho Nic Nic mi mi Gu Gu El El Do Do Source: World Bank, Doing Business, 2016. The indicators refer to the largest city for doing business in each economy. INTEC points out that 96% of large industries have electric expansion of the generation sector has been payment generators as well as 78% of small businesses. In 2013 the uncertainties. Since the inception of the SENI there monthly spending on back up generation ranged-for the has been a significant debt owed by the distribution small business around RD$ 16,800, mid-sized ones RD$ companies to the generation companies, in large part 86,540 and large ones over RD$ 100,000. These additional due to the gap between the applied and cost recovery 78 costs are a large financial burden, especially for small tariff level as well as the high distribution losses. When businesses. This situation increases the cost of production the arrears owed to generators reach excessive levels, of goods and services provision and undermines business then the generators stop generating (or threaten to do competitiveness. so) until receiving payment. At the end of 2010 the debt represented around US$418 million, rising to US$781 The poor quality and continuity of service also million in 2014 prior to the fall in oil prices after which negatively affects households, especially the poor. It is levels fell to US$202 million in 2015. These payment estimated that 18% of households have their own inverter delays limit the cash flow of generators and their ability to or generator, representing a private spending of US$150- generate electricity, and limits competition by deterring US$200 million (CNE, 2005). This situation is even more the entry of new companies. Consequently, Government serious for the poor, who receive less hours of electricity transfers to cover the overall electricity sector deficit service and spend more in relation to their incomes on (including the arrears owed to generators) also rose from alternative energy sources. While 45% or more of families 7.6% of the national budget in 2010 to 12% in 2014, with middle to high income levels own a generator, only before declining to 8.6% in 2015. 10% or less of poor families own one. Those who do not have sufficient resources to purchase this back-up The government and CDEEE identified the high cost equipment have to make do without electricity during the of electricity generation as one of the main causes of recurrent programmed blackouts, which are even more the sector’s financial deficit. The Government, aiming frequent in poor neighborhoods. to reduce generation costs has begun constructing the Punta Catalina 720MW coal-fired power plant complex in Efficiency and Sustainability of the Electricity Bani. While its operation can help lower generation costs Sector should oil prices rise again and help meet the country’s power capacity needs, it has also created uncertainty Generation – One of the principal impediments about the role of the public sector versus private sector to the efficient operation, competitiveness, and in the generation segment since the Electricity Law Building a Better Future Together promotes private sector participation in new generation Distribution – The continuous cash deficits of the EDEs investments and the Government undertaking these compromise the financial stability and viability of the investments on its own could crowd-out future private entire sector and represents a large fiscal burden for investment. the Government. There are numerous factors behind the high financial deficit, including poor administration and The contracts with many private generators will end commercial management, a tariff scheme that does not this year and there is a need to secure electricity at reflect the costs of delivering the service, and high technical affordable prices to meet demand moving forward. and non-technical losses (due mainly to the poor condition Existing power purchase agreements (PPAs) between of distribution networks, un-metered supply, theft, fraud, the generation and distribution companies will come to and other inefficiencies). The EDEs also have much higher an end in August 2016. According to the law, distribution staffing levels relative to the number of clients served companies need to maintain contracts with generators than many other countries in the region and this situation for at least the following 18 months. However, direct has been worsening in recent years which further adds to procurement of new generation capacity or negotiation operational costs. The combination of these factors led to of new contracts without using public tenders reduces deficits that had to be covered by the central government. competition and could increase costs as it creates As seen in Table 4.3, the value of transfers from 2010 and uncertainty that can deter new investors. Furthermore, 2015 to the EDEs exceeded US$5 billion. uncertainty about the rules of the game hinders new investment in the sector. This has particularly been the While progress has been made to reduce electricity case for renewable energy companies that are struggling system losses, the pace of these improvements has to obtain definitive concessions and PPAs to allow them been slow and losses are still well above efficient to operate under SENI despite the existence of renewable levels. As seen in Figure 4.11, the EDEs have made some energy legislation. improvements in the amount of energy billed, collections, and loss reduction since 2009. Between 2012 and 79 Transmission – Like the generation companies, the 2015 losses were reduced from 35.5% to 31.4%, which Dominican Electricity Transmission Company (ETED) represents 1% per year. Nevertheless, this rhythm of non- also suffers from not receiving timely payments for technical loss reduction is insufficient given that the high its services. Delays in the payment of transmission tolls losses contribute to the financial deficits which have to be limits the resources ETED has to maintain the transmission covered by transfers from the national budget. network to ensure good reliable service and expand the grid when required to meet growing demand. These As seen in Figure 4.12, the DR’s power system losses delays result in the postponement of network expansion of 32% are still higher than those of comparable Latin and maintenance plans which could undermine the American and Caribbean (LAC) countries, nearly twice reliability of the electricity transmission system and the regional average of about 17%. For this reason loss ultimately service quality. reduction was included as one of the three pillars of the Table 4.3: Contributions GoRD to EDEs Government Contributions US$MM 2010 2011 2012 2013 2014 2015 EDESUR 165 245 157 452 264 150 EDENORTE 136 285 166 415 287 191 EDEESTE 85 202 141 394 257 209 CDEEE 222 246 141 242 194 135 Total 608 978 606 1,504 1,002 685 Source: CDEEE, doesn’t include the contributions through the Reserve Bank. Building a Better Future Together Figure 4.11: EDES Commercial Data 15000 12000 9000 6000 3000 0 2009 2010 2011 2012 2013 2014 2015 Purchase of Energy (GWh) Billable Energy (GWh) Billed Energy (GWh) Losses (GWh) Source: CDEEE. Figure 4.12: Total Power System Losses in Comparable Figure 4.13: Residential Electricity Prices in Comparable Countries (2014) Countries in 2014 (US$/kWh) 35% 32.1 0.35 31.3 0.31 0.31 30% 26.8 0.30 25% 23.3 0.25 0.22 80 LAC average 0.17 20% 0.20 and comparable 16.3 0.16 0 16 0.16 15% 14 0.15 0.14 countries 0.19 12.3 12 0.10 0.10 10% 0.10 5% 0.05 0% 0.00 r s la la a a ia a a ia R. s or r R. or do do ura ura aic gu aic gu ma ma liv liv ad ad an an lva lva ara ara Jam Jam Bo Bo nd nd Ecu Ecu ate ate nic nic Sa Sa Ho Ho Nic Nic Gu Gu mi mi El El Do Do Source: CEPAL: "Centroamérica: estadísticas del subsector eléctrico, 2014"; CREES for Source: CIER: "Tarifas Eléctricas en Distribución para clientes Regulados"; CEPAL: DR, MER for Ecuador; MSET for Jamaica; and IDB: "Electricidad Perdida" for Bolivia. "Centroamérica: estadísticas del subsector eléctrico, 2014" for Honduras and Nicaragua, CARILEC for Jamaica. CDEEE’s Strategic Plan 2013-16, which establishes a goal according to the recent study from INTEC. Households of reducing non-technical losses by 3% per year until spend a higher share of resources on telecommunications the target of 15% is reached, a goal which has also been than on electricity. incorporated into the Electricity Pact. However, this masks the fact that electricity prices Tariffs – Despite the high costs of production, residential charged in the DR were heavily subsidized. Electricity electricity prices charged in the DR are below the tariffs for regulated clients have not been adjusted since LAC average and that of comparable countries of the 2011, and the difference just between the indexed tariff Region. As depicted in Figure 4.13, residential electricity based on costs and the tariff actually applied during the prices applied in the DR are below the LAC average and past 4 years has cost around US$1.3 billion (cumulative), lower than prices in many of the comparable countries in which had to be covered by government subsidies. Over the region. Electricity bill payments represent, on average, the last few years’ oil prices have declined enough for between 4.9 and 6.8% of the monthly household expenses tariffs to recover costs. This has allowed the Government Building a Better Future Together to recuperate some of the costs of providing subsidies in could be taken to enhance the resiliency of the previous years as tariffs have not been adjusted downwards. electricity sector. The nation has gained experience However, if oil prices rise again as international forecasts in prevention and management of climate events, has suggest without corresponding tariff adjustments, this designed plans to mitigate their effects, and the SENI would again result in large subsidies. Recent studies networks are designed for high-speed winds, but this does by the Ministry of Finance show that in the past these not exempt them from the risk of future impacts. Tropical untargeted subsidies benefited higher income end-users storms Olga and Noel damaged several hydro dams, more than the poor end-users that need them the most. generation plants, and transmission and distribution lines In a particular study done in 2014 using ENIGH survey data in the DR and that had to be rehabilitated as part of the showed that 94% of residential electricity subsidies were Emergency Recovery and Disaster Management Project actually captured by non-poor households due to their financed by the World Bank, which cost the country over significantly higher electricity consumption. US$30 million. While the project helped to increase the capacity of the electricity sector to respond to emergencies Climate Change Vulnerability – The DR’s power system caused by natural disasters and strengthened the is vulnerable to the impacts of climate change given resilience of the rehabilitated infrastructure, there are still the country’s geographic location and electricity opportunities to improve the resilience and adaptation generation mix. Climate change is contributing to more of the sector to the potential future impacts of climate frequent and severe storms and natural disasters, higher change. sea levels, and more precipitation at a global level. These impacts lead to high wind speeds, floods, and landslides Sector Financing which may damage power infrastructure. They also result in more hydrologic variability which affects hydropower The recurring electricity sector deficit has brought generation and the continuity of the service. DR is located about a severe fiscal problem in the DR. The electricity in the hurricane belt of the Atlantic and therefore is sector deficit has been financed by government transfers, 81 vulnerable to the impacts of climate change. Moreover which represented on average over 7% of the country’s it has already been impacted by droughts that reduce total expenditures between 2010 and 2015 as seen in hydropower production, which may become more severe Table 4.4. in the future due to climate change and need to be factored into the cost-benefit calculations for future investments. Public transfers to the electricity sector to cover the deficit also represent a significant portion of the The DR has experience with emergency preparedness country’s gross domestic product (GDP). Public transfers and adaptation to climate change, but further actions to cover the electricity sector deficit exceeded 1% of GDP Table 4.4: Country Incomes and Expenses 2010 2011 2012 2013 2014 2015 Total Revenues (RD$MM)* 255,085 280,457 318,559 369,413 417,390 441,862 Total Spending (RD$MM) 313,239 340,383 475,233 451,277 498,135 534,293 Current transfer to the Electricity 23,837 26,162 35,489 34,606 40,234 24,575 Sector (RD$MM) Electricity sector transfers as a 7.6% 7.7% 7.5% 7.7% 8.1% 4.6% percentage of total spending (%) Current transfer to the Electricity 647 687 903 828 924 545 Sector (US$MM) GDP (RD$MM) 1,978,852 2,218,429 2,377,504 2,558,586 2,786,230 3,023,116 Exchange Rate (RD$/US$) 37 38 39 42 44 45 *Excludes donations. Source: Central Bank. Building a Better Future Together Figure 4.14: Monetary Transfer to the Electricity Sector Figure 4.15: Electricity Subsidies Pre-tax in Comparable 2009 - 2015 Countries (% of GDP, average 2011-13) 1400 2.17 2.5% Nicaragua 2.1% 1200 2.0% Dominican Rep. 1.9% 1000 1.54 1.5% 1.49 El Salvador 1.25 1.5% 800 1.23 Honduras 0.9% 0.98 0.92 600 1329 Guatemala 0.4% 1.0% 400 933 Ecuador 0.4% 868 798 664 620 0.5% 471 Jamaica 0.1% LAC average 0.8% and 200 Bolivia 0.0% for comparators 0.9% 0 0.0% 2009 2010 2011 2012 2013 2014 2015* 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Transfer Sector (US$ MM) % Transfer in the GDP ( 2007 basis) Source: CDEEE 2015. The participation of the Transfer to the sector in the GDP was Source: IMF: "Energy Subsidies in Latin America and the Caribbean: Stocktaking and calculated for all years on the new 2007 basis. The 2015 GDP was calculated based on Policy Challenges", February 2015. The data does not inlcude fuel subsidies, which in a growth of 5.5%, according to IMF’s “2015 Economic Outlook - Americas”. some cases lowers electricity costs (such as in Bolivia). between 2009 and 2014. In 2013 these transfers reached several policy options that the Government of the DR and over 2% of GDP as can be seen in Figure 4.14. Although the different sector players could consider to contribute transfers to the sector have declined recently due to to achieving sector sustainability in the medium term. the reduction in international oil prices, they are still These policy options are underpinned by three main significant given the technical and non-technical losses of pillars: (i) improving the institutional framework and 82 the EDEs and other sector inefficiencies. Historical prices electricity sector governance; (ii) enhancing the quality of and future projections suggest that low oil prices are service provision; and (iii) achieving the efficiency and the likely a temporary phenomenon and could rise again to financial sustainability of the electricity sector. US$70/barrel or more by 2020, which would result again in high transfers to the sector if its structural problems Pillar I - Improving the institutional framework and are not fixed. It could also result in the reemergence of electricity sector governance. untargeted electricity price subsidies, which benefits higher income end-users the most given their higher • Institutions and Governance. It is important to electricity consumption than the poor. clearly define the different roles of the sector actors to achieve a more efficient sector. As announced by Furthermore, from 2011 to 2013, electricity subsidies President Medina’s during his inaugural speech, the as a percentage of GDP in the DR were more than MEM should become the institution responsible for all double the LAC average. They were also over twice the electricity sector policies in the Dominican Republic in average of comparable countries in the region as seen the near term. This would mean that the MEM should in Figure 4.15. The use of these resources burdens the absorb the functions of the CNE and those of CDEEE. national budget and reduces the available resources However, until this change is effectively made, sector to invest in other priority sectors such as education and governance needs to improve, and it will be important health, with significant public benefits. have effective coordination between the CDEEE and the EDEs to achieve an efficient administration. It Policy Directions is also important that the government grant SIE the authority and autonomy established in the law with The electricity sector needs to transition from the regard to setting tariffs, ensuring healthy competition current vicious cycle to a virtuous cycle that promotes among the sector agents, and monitoring and financial sustainability and enables good quality supervising compliance with laws and regulations, service for households and businesses alike. There are including service quality. Building a Better Future Together • Transparency and Accountability. In the short to transparent and affordable electricity service. The medium-term improving the MEM, SIE, Hacienda, programmed electricity blackouts should be reduced and CDEEE’s ability to monitor the operations of the to diminish the need for investments in alternative EDEs is vital to enhance accountability and eliminate energy sources and help promote economic growth the operational deficit. Afterwards it will be important and shared prosperity. With this goal in mind, it is that the CDEEE begins operating within its legal crucial to adopt measures to deliver continuous boundaries. Improving transparency and ensuring electricity service to all the clients. Currently there the quality of information provided by the sectoral are technical means to transfer many clients to 24- agents, in particular state-owned companies, could hour circuits. Over the medium-term the sector also have a broad impact on the electricity sector should strive to ensure that all clients pay their bills and contribute to the enhanced sector credibility at on time and are provided constant electricity service, the international level. The EDEs in particular should with appropriate voltage levels and no fluctuations. carry out annual audits of their financial statements, A solid social outreach program will be needed to by independent and reputable audit firms based complement the technical improvements to enhance on international financial reporting standards and awareness and willingness to pay for service and practices no later than six months after the close of to regularize customers to achieve this goal so that the fiscal year. Capacity building to assist the EDEs to increased service availability does not translate into do so could be initially supported by the World Bank even higher losses that need to be covered by the financed Distribution Grid Modernization and Loss Central Government transfers. Reduction Project. To further increase transparency and accountability, these financial reports could be Pillar III - Restoring the efficiency and financial published in a national newspaper, and on the EDEs sustainability of the electricity sector. webpages. Publication of generation procurement (plans or transactions) by CDEEE and the EDEs as • Generation. It is essential to have clear rules of the 83 well as staffing and other operational and financial game and greater transparency in the generation performance data would go a long way to improving sector, both for conventional and renewable energy. transparency and also enabling civil society oversight It is also important that the state better defines of the electricity sector. The way in which the its participation in the sector. This would provide Board members and managers of the public-sector clearer signals that could increase transparency and electricity companies are hired could also be improved competition and enable the entry of new market so that these are professional or performance based participants. More certainty and clarity on the appointments to hold these institutions more market rules for renewable energy investments in accountable for performance. particular is needed to increase competition and • Electricity Pact. The Electricity Pact discussions supply from these generation sources. It is also vital provide a unique opportunity to generate political that the EDEs carry out a call for tenders to power consensus among all stakeholders to accomplish real producers to cover their power capacity and energy and sustained reforms. It is important to maintain an needs given that the existing contracts will be open dialogue and to broadly disclose all information closing at the end of August 2016. The country could related to the sector in order to infuse the needed trust also benefit from the low prices of natural gas to help and empowerment of all stakeholders. The solution to bring down generation costs. SENI has the potential sector issues should be systematic and will require of converting around 1,000 MW of the existing commitment from all sector actors to achieve an plants into gas plants, with an investment worth efficient, competitive, and sustainable electric service. of approximately US$200 million. Various barriers related to expanding access to natural gas supply Pillar II - Enhancing the quality of service provision. and securing finance would need to be addressed to exploit this potential. • Improved service quality. All final end-users should • Transmission. It is important to ensure the be able to have continuous, high-quality, reliable, operational and financial autonomy of ETED and allow Building a Better Future Together it to collect transmission fees to provide sufficient to those low-income users that qualify for the targeted resources for it to fulfill its functions under the law. cash transfer program Bonoluz. This would imply that This would require effectively passing these costs Bonoluz coverage should be expanded so that it covers onto customers in bills and then having the EDEs pay all low-income electricity users that are eligible for the ETED for these services from payment collections. Government’s Sistema Único de Beneficiarios (SIUBEN) ETED will also have to ensure that transmission fees programs. are collected from the electricity market participants • Climate Change. Electricity infrastructure resiliency that use the transmission network to exchange power. is critical to address and recover from emergencies In order to maintain the networks in good condition caused by natural disasters, which will become more and expand it when needed to satisfy the growing serious and frequent due to climate change. Good demand, ETED’s operational and financial autonomy planning and design and investments to strengthen needs to be guaranteed. and reinforce electricity infrastructure so that it can • Distribution. To eliminate the operational deficit withstand future climate events would help improve of the EDEs, it will be important to implement an its resiliency. The preparation of a solid emergency integrated loss reduction program to reach the goal preparedness and response plan for how to respond to of 15% total losses. With support from the Dominican and recover from these types of events is also essential Government and international financial institutions, for reducing the vulnerability of the Dominican this program should focus on: technical and non- electricity system and ensuring continuity of the technical losses, efficient administration, service service even after these types of events occur. continuity, installation of meters and improved meter reading, registration and billing of customers The country has made significant strides to reform the in a timely manner, and collection of payments. The electricity sector and to reduce distribution losses, but loss reduction program should also incorporate a there is still much work to be done to improve service 84 social management strategy aimed at restoring trust availability and quality in the DR. The policy directions between end-users and EDEs, raising payment levels, mentioned above are intended to mitigate the need for and educating customers on the use of electricity in large government transfers to the sector in the future, a more efficient and safe way. Making this happen generalized subsidies, high losses, frequent blackouts and will also require improved sector governance, overall poor service quality by improving the performance transparency, and oversight. The EDEs are the cashbox and financial viability of the different sector actors. The for the sector who purchase the energy produced by World Bank is committed continuing to support the the generation companies and transported by ETED Dominican Republic to move down this path toward and thus the financial health of the sector depends on achieving a more sustainable sector and improved service their recuperation of these costs. quality for all. • Electricity tariff. Application of a technical tariff represents one of the key reforms needed to restore INFORMATION AND COMMUNICATIONS the financial sustainability of the EDEs and to TECHNOLOGY eliminate the power sector deficit. SIE should publish the procedures and formulas used for the automatic Country Context adjustment of electricity tariffs based on costs as required by the law. SIE could take advantage of the Liberalization of the telecommunications market currently low international oil prices and apply the has allowed the Dominican Republic’s ICT sector to technical tariff in the short run so that the transition experience tremendous growth in the last decade. will be more viable since it would not require major The General Telecommunications Law in 1998 created adjustments. If needed a glide path could also be used Instituto Dominicano de las Telecomunicaciones to gradually make needed adjustments since cross- (INDOTEL), the state’s independent regulatory authority subsidies and generalized subsidies for all consumers for telecommunications, and opened the market to would be eliminated. To protect the poorest competition. The ICT sector has since grown significantly, consumers, subsidies could be targeted and provided with mobile phone subscriptions surpassing 89% in Building a Better Future Together December 2013, compared to 58% in 2007,118 and prices Figure 4.16: Submarine Cable Map for the DR have fallen as well. Mobile internet coverage has also expanded significantly, with INDOTEL’s Rural Broadband America Movil-1 Fibralink Network Project (2007) installing 3G broadband internet access in most municipalities. The mobile phone market is ARCOS undergoing restructuring, with two secondary operators being taken over by a foreign group of investors, however it remains dominated by Claro, the former state-owned monopolistic operator (Codetel), which has about half of the market share in most of the main retail services. The DR has excellent mobile and international broadband connectivity and coverage, but it lacks an integrated and complete national fixed broadband Antillas 1 backbone. One of the best examples is mobile phone East-West penetration, as of 2014, 90.9% of the households had Source: www.submarinecablemap.com, accessed on September 15, 2016. at least one mobile phone.119 The DR also has ample excess capacity in terms of international broadband connectivity through the Network Access Point (NAP) facilitates the financing of projects in areas with low of the Caribbean (see Figure 4.16).120,121 It also has fairly income and of areas of targeted social interest, and the strong broadband coverage along the Puerto Plata– Rural Broadband (Banda Ancha Rural – BAR) project, Santiago–Santo Domingo–La Romana–Punta Cana which has connected more than 500 communities that axes via telecommunications operators like Claro and cover all the provinces in the country. The Government has TRICOM, and via electricity transmission companies like announced plans under the banner of República Digital 85 ETED (Empresa de Transmisión Eléctrica Dominicana) and to achieve national broadband coverage, and to make CEPM (Consorcio Energético Punta Cana-Macao). There one computer available to each schoolchild and teacher. are also several cable television operators that could offer While international experience is mixed on the merits of fixed broadband access services if they were connected one laptop per child programs, what has been confirmed to international connectivity points at affordable prices, as critical is to ensure adequate skills building and digital but the DR lacks intermodal connections between these literacy to complement investments in infrastructure. For providers, and it has inadequate coverage in poorer, more example, high digital literacy among internet users in Hong remote parts of the country. Kong means they contribute more entries to Wikipedia than all of Africa combined, although Africa has 50 times The Government has made a commendable effort more internet users.122 Technology can make workers more to complement investments in ICT infrastructure productive but only if they know how to use it, and it can in with outreach, connecting the country through fact displace workers unless mechanisms are put in place different programs and initiatives. Among them, to enhance and rapidly adjust skills in an environment of the Telecommunication Development Fund (Fondo de increasing technology. Women are also less likely to use or Desarrollo de las Telecomunicaciones – FDT), which own digital technologies than men,123 so efforts to engage women early in ICT programs are warranted, as are efforts 118  INDOTEL Statistics, March 2014. to incorporate people with disabilities into the labor force 119  ENHOGAR-MICS, 2014 through digital technologies. 120  The lit capacity is less than one-tenth of the maximum bandwidth and the usage is a mere fraction of the lit capacity. Source: Telegeography, January 2013. 121  Network Access Point (NAP) of the Caribbean. It offers Data Center, Disaster Recovery and Business Continuity Solutions. The main broadband suppliers in the DR offer their connectivity services in the 122  See World Development Report: Digital Dividends. The World NAP of the Caribbean (Tricom, Wind Telecom, CEPM, Orange, Viva, Bank, 2016. Claro, Columbus Network, Estrela Telecom, Unified Communications 123  See World Development Report: Digital Dividends. The World y OneMax). Bank, 2016. Building a Better Future Together Challenges Broadband infrastructure does not only facilitate transparency or the delivery of government services, such Institutional framework/Sector governance as education or health, but also simplifies citizen’s access to information. At the national level, various studies have The key institutional and governance challenge estimated increases of between 0.24 and 3.2 percentage to ensure ample coverage at affordable prices is points of GDP associated with a 10% increase in fixed to strengthen regulation so as to promote greater broadband penetration, as well as between 1.5-4.5 indirect competition. In most areas, except in the main cities, jobs for every job created.125 At the local level, access only one provider offers retail fixed broadband services to internet coverage can, for example, improve market and although an interconnection policy is in place, price information for farmers and allow them to shift to wholesale prices are not regulated. Thus when the NAP more perishable but high return cash crops. And a strong of the Caribbean offered wholesale high speed internet internet backbone can contribute to better citizen security at US$125 for each Mbps of symmetrical (uploading and (e.g. via extension of the 911 service), more accountable downloading)speed, in most municipalities there is no government (e.g. via the Municipal SIGEF), and increased competition and a single provider offers the service for opportunities for SMEs through ICT usage in business about US$500.124 INDOTEL, faces a conflict of interest in throughout the country. regulating this, as it is both regulator and service provider. Demand-side and Related Factors Coverage and Affordability Investing in and continuously upgrading digital The cost of broadband access in the DR is high, enablers is essential. The DR has in place Law 126-02 on contributing to broadband ICT usage statistics that Electronic Commerce, Documents and Digital Signatures, are well below the regional average indicators for as well as Law 53-07 on High Technology Crimes. Internet 86 Latin America. Only 4% of the population subscribes to banking services are widely available among banks in the the broadband internet, compared to 7.5% in LCR and DR and mobile banking is on the rise. However, the state 10% in other Upper Middle-Income Countries. One in of the art is in continuous evolution in these areas and on six municipalities in the country has no registered fixed next-generation issues such as privacy and cybersecurity, internet accounts (see Figure 4.17). Usage is relatively as well as internet governance and creating a global digital low in part due to network coverage and in part due market,126 warranting further analysis and subsequent to prices. In order to ensure affordability, households policy adjustments. should dedicate no more than 5% of their incomes to internet usage fees, but at current prices, this rules out the Policy Directions poorest 40% of the population. At 4.5% of GNI per capita, broadband costs are almost twice as high as in Panama The DR can usefully adopt a three-pillar approach to and four times higher than in Trinidad and Tobago. For the catch up with LCR and with other Upper Middle-Income poorest 10%, internet fees are equivalent to almost 80% Countries on internet coverage and affordability. of their incomes, making affordability a key consideration (see Figure 4.18). Even for public services, only 30% of Pillar I - Improving the institutional framework and schools have some internet access and medical facilities sector governance. face similar shortfalls, although health and education pay a combined $6 million for their limited services. • Strengthening regulations to promote Usage of ICTs is also low in MSMEs and they can be direct competition. This involves ensuring equitable beneficiaries of the installed broadband. 125  See Katz et al. (2010), Qiang and Rossotto, IC4D: Extending Reach The national benefits of improved internet coverage and Increasing Impact, Chapter 3: Economic Impacts of Broadband, The World Bank (2009), and García-Zaballos and López-Rivas, Control are significant but are not currently being reaped. gubernamental sobre el impacto socioeconómico de la banda ancha en los países ALC. The Inter-American Development Bank (2012). 124  See the Project Appraisal Document for the DR Caribbean 126  See World Development Report: Digital Dividends. The World Regional Connectivity Improvement Project (Report No. 1061). Bank, 2016. Building a Better Future Together Figure 4.17: Internet Penetration (%) Figure 4.18: Broadband prices versus income 80 Cost of broadband per month (in US$) 79.1 70 % of monthly income per decile (in US$) 60 50 40 30 19.0 20 10 3.9 0 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 0 - 2.5 2.6 - 5 5.1 - 10 10.1 - 20 21.1 - 40 +40 Decile Source: INDOTEL (2013). Source: Elaborated by World Bank sta based on data from World Development Indicators, World Bank Open Data, and ITU, 2010. access to the international gateway and cable landing authorities, academia, etc.); connecting knowledge stations and open access to incumbents’ networks, with investors, and keeping up with the state of the ensuring all major infrastructure (e.g. roads, pipelines, art via policy analysis and reform. It is important transmission lines) have provisions for an optical fiber to introduce ICT skills from primary education to link, promoting intermodal competition (e.g. between help break the digital divide on future generations, cable and telecommunications providers), mandating by implementing programs both for teachers and incumbents to make local access lines available students, and not only developing policies that 87 to competitors at wholesale prices (local loop concentrate efforts on the distribution of computers unbundling), and focusing INDOTEL on enhanced to children/teachers. Companies and MESCyT have sector regulation. already identified a set of ICT skills needed in order to increase competitiveness of existing firms and create Pillar II – Enhancing coverage and affordability jobs in knowledge-based industries,127 as employment is currently moving to sectors where productivity is • Investing in ensuring national coverage of the lower. The IT-ITES industry frequently hires young broadband backbone. To complement the existing people, whose ICT skills are greatly appreciated.128 coverage in wealthier urban centers and future private Furthermore, young people, even those without any investments to expand the network, government can specific educational background, can be trained in undertake public investments that ensure inter-nodal a matter of months in coding, digital animation or connections between existing unconnected private design for the creative industries, among others. This is (e.g. cable) providers and expand the backbone to particularly beneficial as it can target youth with risky- poor, remote municipalities to ensure full coverage, behaviors and school drop-outs, and the trainings can and thereby reach the National Development Strategy be delivered in partnership with the private sector. goal of 80% internet coverage by 2030. Pillar III – Addressing demand-side and related factors • Investing in skills and policies for the future. This involves enhancing broadband use by creating an Open Innovation Hub to improve digital literacy 127  Ministerio de Educación Superior, Ciencia y Tecnología through training and promote an ICT-enabled open (Ministry of Higher Education, Science and Technology) innovation ecosystem in the DR (with citizens, public 128  Information Technology and Information Technology-Enabled Services Building a Better Future Together ANNEX IV: Access levels of households to WSS and poverty rates by province Province Access to piped water (%) * Access to sanitation (%) * Poverty rate (%) ** Inside the Inside the house Improved Open house or in courtyard sanitation defecation Elías Piña 18.3 52.3 65.8 24.3 83.2 Pedernales 22.9 65.8 60.6 24.8 74.6 Baoruco 22.3 65.2 46.4 42.8 74.5 Independencia 25.3 71.4 63.8 19.9 72.9 El Seibo 27.4 51.6 57.7 22.4 70.7 Monte Plata 17.2 39.7 70.7 15.8 70.1 Azua 27.1 74.3 68.0 15.9 65.2 Barahona 29.1 75.9 67.9 14.3 65.2 San Juan 30.6 73.6 71.9 15.0 63.0 Hato Mayor 22.5 40.3 73.2 13.5 62.4 San José de Ocoa 35.3 81.2 74.7 9.4 61.7 Monte Cristi 41.2 80.9 73.5 9.7 61.3 Valverde 48.6 82.8 75.0 6.3 56.3 Dajabón 53.1 87.2 82.8 6.3 53.9 La Altagracia 8.7 14.8 69.5 5.0 51.8 Samaná 31.8 54.3 71.2 10.9 48.9 88 Santiago Rodríguez 56.0 73.7 85.5 5.4 48.3 San Pedro de Macorís 30.8 60.8 70.7 10.1 47.5 Peravia 36.6 68.2 75.5 6.0 46.7 Sánchez Ramírez 30.0 51.1 78.8 8.9 46.2 La Romana 41.3 74.9 70.3 4.9 45.3 Duarte 39.4 54.7 82.6 6.6 42.6 María Trinidad Sánchez 36.4 62.0 78.2 9.1 42.0 Puerto Plata 47.1 63.2 83.4 5.1 37.2 Hermanas Mirabal 20.5 31.7 85.6 3.4 36.8 San Cristóbal 37.4 66.8 74.6 6.0 36.2 Espaillat 49.5 63.9 81.6 5.0 34.0 Santo Domingo 51.5 69.8 86.1 3.5 33.6 La Vega 37.4 47.6 81.8 4.8 31.4 Santiago 75.2 84.4 89.2 2.5 30.8 Monseñor Nouel 58.9 70.3 87.9 3.9 27.3 Distrito Nacional 63.5 79.6 86.1 1.2 26.7 National total 46.3 67.2 80.6 6.0 40.4 National urban 53.8 74.2 84.0 3.4 38.5 National rural 24.4 46.9 70.7 13.6 46.1 * Data from the National Statistics Office’s 2010 Household and Population Survey. Improved sanitation is here estimated by individual flush toilets and latrines, even though the household survey does not differentiate between improved and unimproved individual solutions. ** Data from MEPyD’s 2010 Poverty Atlas (Economic and Social Analysis Unit, UAAES). Includes extreme poverty. Building a Better Future Together ANNEX V: Targeted water metering programs to become more efficient and increase revenues As part of its institutional strengthening component, the World Bank-financed “Water and Sanitation in Tourist Areas Project” (Proyecto de Agua y Saneamiento en Centros Turísticos, PASCT) supported the implementation of metering pilots with three CORAAs, namely CORAAPPLATA, CORAAMOCA and COAAROM, to help address efficiency challenges these regional companies were facing. Between 2012 and 2014, the PASCT financed the development of business plans for these CORAAs, with particular emphasis on improving commercial and financial management, and, as a result of the diagnosis and recommendations produced, the installation of 11,500 micro-meters was initiated in January of 2015. The results presented in Table A2.1 indicate that for the cost of increasing the number of metered clients by approximately 10%, monthly revenues can be increased by 16 to 28%. Besides these results, the metering pilot generated other positive outcomes, as presented below. CORAAPPLATA. Institutional strengthening activities financed by the PASCT, as well as the positive outcomes resulting from the implementation of the metering pilot, contributed to CORAAPPLATA’s decision to enter into a delegation contract with the private sector for commercial management-related aspects such as client cadaster, installation of meters, customer relations and billing. Under this contract, it is estimated that an additional 21,000 macro- and micro- meters will be installed, with the potential to further contribute to increased revenues and efficiency gains. CORAAMOCA. In addition to the increased revenues, CORAAMOCA reported improvements in both non-revenue water (from 82 to 76%) and payment collection efficiency (from 83.5 to 87.5%), as a result of the metering pilot. Payment collection efficiency was even found to increase to 91% for the metered customers, as opposed to 86% for non-metered customers. To achieve these positive results, CORAAMOCA also engaged very closely with the neighborhood groups 89 (juntas de vecinos) in areas where the meters would be installed and designed a communication strategy which was implemented with their collaboration. The strategy included information about the pilot, but also awareness with regards to the importance of reducing intra-domiciliary water losses, as well as benefits of water conservation, a particularly critical theme given the fact the country is facing its worst drought of the last two decades. According to CORAAMOCA officials, the pilot allowed the company to create tighter links with the community, a valuable asset for future interventions. COAAROM. In La Romana, the pilot was put in place in four of COAAROM’s sectors, one of which already had had meters installed in the past, but these now required to be replaced. COAAROM reported that in this sector, a 23% increase in revenues was recorded after the installation, whereas in the other sectors where households had never before been metered, revenues increased by 47%. Table A2.1. Results of the metering pilot with three CORAAs CORAAPPLATA CORAAMOCA COAAROM Number of micro-meters installed 4,000 4,500 3,000 Proportion of metered clients - before pilot (%)* 1.9 5.1 8.6 Proportion of metered clients - after pilot (%)* 12.0 13.0 17.4 Increase in revenues (%) 16.1 21.7 27.8 * with functioning meters. Building a Better Future Together Chapter 5. Policy Directions for Sustainable and Inclusive Growth in the Dominican Republic Introduction inter-related areas that could have self-reinforcing effects on long-term growth: (a) macro and fiscal management; T he strong pace of economic expansion in the (b) competitiveness of the economy for inclusive growth 91 Dominican Republic has been underpinned by (including several factors, such as, for example the quality a favorable external environment and sound of infrastructure, the business environment, the soundness policies. Growth levels in the country have been among of the financial sector, among others); (c) factors that affect the highest in the Western Hemisphere averaging 7% in social sustainability (including the quality of public service 2014-15, fueled by strong domestic demand. The drop delivery in core sectors such as education, health, water in oil prices has contributed to boost disposable income and sanitation, and electricity); and (d) environmental along with the recovery in the U.S., which has helped sustainability and resilience to climate change. While there through higher tourist arrivals and higher remittances. are sector-specific challenges and policy choices that could Over the last two years, poverty rates declined by more affect outcomes in each of these four areas in isolation, than 10 percentage points and the income per capita of spillovers from one sector to the other could impact trend those in the bottom 40% of the income distribution grew growth and have an effect on the long-term growth rate. at an annual rate of 2.5%, which is more than twice the rate For example, maintaining an adequate macroeconomic of growth for those in the top 60%. The authorities have and fiscal management framework could help improve leveraged this overall benevolent external environment the competitiveness of the economy and attract foreign with sound policies that have underpinned the country’s direct investments. Strengthened competitiveness could strong economic performance. On the macro side, for help the authorities improve tax collections, which have example, monetary policy has been able to keep inflation been historically low in the DR, and contribute to generate at low levels through an effective inflation targeting a higher fiscal space. The additional fiscal space could then mechanism, and fiscal consolidation efforts have be used to strengthen the resilience to climate change and prevented further increases in public debt levels. natural disasters and help create positive virtuous cycle by reducing the pressure on the budget and freeing space for To sustain high economic growth rates and address improving the quality of public service delivery. remaining poverty and equity challenges, the DR needs a concerted reform effort. Figure 5.1 illustrates four This note focuses on policy directions that could help the DR to sustain the high economic growth rates that Building a Better Future Together Figure 5.1: Factors that Can Affect the Sustainability MACRO-FISCAL SUSTAINABILITY of Growth Country Context The Fiscal Position and Debt Levels Ma ss ene Over the last fifteen years, the DR has managed to cro itiv and reduce substantially its overall consolidated fiscal pet Fisc Com Social a deficit. During this period, the consolidated fiscal deficit l –including one-off tax receipts, capital grants, and tax amnesty collections– has varied widely between 1.3 and 8.0% of GDP, experiencing separate periods of improvement and deterioration alternately. Following the Environment 2012 tax-reform package, significant fiscal consolidation Source: World Bank (2016). has helped improve macroeconomic balances, by reducing the consolidated overall fiscal deficit from 7.7% of GDP (2012) to 1.3% of GDP (2015), including a central will be required to generate faster improvements government primary fiscal surplus of over 3% of GDP (see in living standards and making the country more Figure 5.2, Panels A and C).129 Structural reforms that have equitable. Because previous notes have focused explicitly supported the governments’ consolidation efforts include on aspects associated with the quality of public service (i) tax administration improvements to reduce fraud delivery, including in the social sectors (health, education, and evasion; (ii) public financial management reforms and social protection) and in the infrastructure sectors covering transparency of public accounts; and (iii) tighter 92 (water and electricity), this note focuses exclusively public debt management focused on extending the on aspects associated with macroeconomic and fiscal overall maturity of public debt obligations and reducing management, competitiveness, and environmental their servicing cost. sustainability. For each of these three topics, the note presents the respective country context, identifies current A key feature of the DR’s overall fiscal framework is challenges, and suggests policy directions that will need its limited revenue mobilization capacity. With tax to be addressed that could help the DR maintain high revenues at 13.7% of GDP in 2015, one of the lowest in the growth and make it more inclusive. world, the DR has found it difficult to mobilize additional tax revenues. Revenue generation compares poorly with While several downside risks to the macroeconomic the average levels for the LAC region, Central America and outlook could affect the growth performance of the the Caribbean small states (see Figure 48, Panel B). The economy in the short and medium terms, the focus tax system of the DR continues to rely mainly on indirect of the note is broader and oriented toward those taxation which represents 64% of all taxes (see Figure 5.2, challenges that could affect the long-term performance Panel D) but that remain at around 8.7% of GDP, a modest of the economy. On the macro and fiscal front, for amount relative to other lower-middle-income countries. example, attention was given to structural challenges such The government attempted to compensate for the lower as the historic low tax revenue ratio in the country. On the tariff rates mandated by the CAFTA-DR regional free trade competitiveness side, the note focuses on horizontal and agreement by increasing the value-added tax (VAT) rate vertical bottlenecks that need to be addressed to increase from 16% in 2004 to 18% in 2012. This, together with the domestic linkages in the economy, create more and better introduction of selective taxes on telecommunication jobs, and reduce their risk of a decline in the country’s services, and the introduction of income tax on interest growth potential. On the environmental front, the note earning, have been the most far-reaching reforms. emphasizes the reforms that could make the DR economy more resilient to climate change and natural hazards. 129  Includes capital grant of 3.1% of GDP resulting from the PetroCaribe debt buyback operation of Jan. 2015. Building a Better Future Together Revenue collection capacity is further hampered by for emerging markets,130 and particularly in the case of an high levels of informality and existing tax exemptions. island economy. Interest payments have increased from Tax evasion is a major contributor to low collection rates, 1.8% of GDP in 2010 to 2.9% in 2015, and are expected but given its informal nature it is rather difficult to measure to reach 3.4% of GDP in 2020. In line with this trend, it with any precision. Nevertheless, the General Directorate government debt service has increased from 5.5% of GDP for Internal Revenue (Dirección General de Impuestos in 2010 to 11.2% in 2015,131 and is expected to exceed 7% Internos, DGII) estimates the ITBIS evasion rate at close to of GDP by 2020. Public gross financing needs have hovered 30%, representing roughly US$840 million in lost public between 10 and 15% of GDP in recent years, depending on revenue. On the other hand, tax expenditures represented whether only central government debt is accounted or the an estimated 6.6% of GDP in 2014 (including 3.2% of GDP consolidated public sector debt. Also in this case, this level in VAT exemptions) and appear to be generally regressive. of exposure is approaching the indicative 15% threshold Meanwhile, 15-year corporate income tax holidays for that requires higher scrutiny, for emerging markets. companies established in Special Economic Zones further Indicators like the external financing requirements and the increased tax expenditures, and there is a relatively high EMBIG appear to be moving in a relatively safe zone (see minimum threshold for personal income tax liability. Figure 5.3),132 as the government does not face constraints in mobilizing resources in the short or medium term, Public expenditures in the DR are also low by through a combination of domestic and external issuance. international standards with current expenditures On the other hand, as the debt burden is set to increase, greatly surpassing capital expenditures. Total the room for additional external borrowing is narrowing. expenditures (relative to GDP) have been recently contained to an average of 17.5% of GDP for 2014 and 2015, Public Financial Management down from 20% in 2012. However, current expenditures have increased from 12% of GDP in 2010-11 to 14.6% Since 2007, the government has made important in 2015, driven by an increasing wage bill (currently at strides to strengthen its public financial management 93 4.9% of GDP), increasing interest payments, and sizeable and procurement systems. The government’s progress current transfers – equivalent to 5.4% of GDP on average in institutional governance was acknowledged in the between 2010 and 2015. This is low if compared with the 2007, 2010 and 2012 Public Expenditure and Financial average for LAC, Central America, and the Caribbean Small Accountability assessments (PEFAs), as well as in the 2009 States (see Figure 5.2, Panel E). And while this is usually Report on the Observance of Standards and Codes (ROSC) good news, the fact is that in recent years, the composition for Accounting and Auditing. The government’s 2013-16 of government expenditures has shifted in favor of current Multiannual Plan for the Public Sector aims to strengthen expenditures and in detriment of capital expenditures. The the ability of public institutions to improve expenditure ratio of capital expenditures over current expenditures has management and service delivery. It introduces medium- decreased from 0.32 during the period 2007-10 to 0.22 term, results-based planning and budget execution during 2013-15. In other words, current expenditures have practices, especially in the health sector, where results- significantly increased its relative importance in the overall based financing mechanisms have started to produce public expenditure envelope. While current expenditures promising results. The implementing regulations for the have increased, investment decreased from an average of 2012 Law on Public Procurement expanded disclosure roughly 4% as a share of GDP in 2007-10 to 3.2% in 2013- requirements, introduced procedures for promoting 15, and is expected to decrease further to 2.5 by 2016-17. engagement with small and medium enterprises, and mandated the publication of annual procurement plans. Debt levels are at a sustainable level but there are Since then there has been a dramatic increase in the signs of a worsening trend over time. The consolidated public debt ratio is currently at moderate levels (at 49% of 130  See IMF (2003), Public Debt in Emerging Markets: Is It Too GDP), and is expected to increase to about 53% by 2020. High?, IMF World Economic Outlook, 2003. Debt levels are expected to move over time closer to the 131  The peak registered in 2015 was a one-off largely due to the exceptional repayment of the PetroCaribe debt. indicative threshold of 50-60% requiring higher scrutiny 132  The “Emerging Market Bond Index Global” (EMBIG) is a benchmark index for measuring the total return performance of international government bonds issued by emerging economies. Building a Better Future Together Figure 5.2: Dominican Republic Fiscal Accounts, 2012-2017 A. Consolidated Public Sector Primary Balance B. Fiscal Revenues – Benchmarking DR authorities have strengthened scal discipline, …however, revenue generation remains very low, as shown by an improving trend of the primary balance… among the lowest of the LAC region. 5 40 4 35 3 30 2 25 Percent of GDP Percent of GDP 1 0 20 -1 15 -2 10 -3 -4 5 -5 0 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Central Government Other Non- nancial Public Sector Dominican Republic Latin Am. & Carib. Central Bank (quasi- scal balance) Consolidated Public Sector Central America Caribbean Small States C. Public Expenditure – Benchmarking D. Fiscal Revenues – Composition Thus, public spending is also low if compared with regional peers. The lion’s share of revenues lies on indirect taxation, and especially on VAT. 40 20 35 30 15 94 Percent of GDP Percent of GDP 25 20 10 15 10 5 5 0 0 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Dominican Republic Latin Am. & Carib. Taxes on Goods and Services Other Tax Revenue Central America Caribbean Small States Non-tax Revenues Grants E. Public Expenditure – Composition F. Central Government Interest Expense Current transfers and interests represent important Interest repayment has increased substantially expenditure items, thus increasing the rigidity of scal space as a percentage of scal revenues 25 40 Percent of scal revenues excluding grants 35 20 30 25 Percent of GDP 15 20 10 15 10 5 5 0 0 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017 Wages and Salaries Goods and Services Interest Current Transfers Capital Expenditures Source: Central Bank of the Dominican Republic, Dominican Republic’s Public Credit O ce, IMF, Bloomberg, World Bank World Development Indicators, World Bank World Governance Indicators, and World Bank sta estimates. Building a Better Future Together number of public procurement processes that have procurement reform, budget reform, and financial been published online, more and more institutions commitments to non-state actors. This process offers an have published annual procurement plans, and an unprecedented opportunity for constructive dialogue and e-procurement portal has been developed and piloted. engagement between the public sector, the private sector and civil society. Meanwhile, the online “citizens’ budget” Collaborative processes between citizens and public initiative has successfully enhanced public awareness institutions are helping design new reform initiatives. regarding the budget. The citizens’ budget, which Examples include the Participatory Anti-Corruption includes a simple illustrated version, has encouraged Initiative, the Dominican Initiative for Quality Education, public participation in the budget process, greatly and the Caribbean Growth Forum. More recently, the improved access to budgetary information and increased Government launched a nationwide dialogue to design transparency and accountability. As the participatory reform agendas for the education sector, the energy governance agenda has gained traction, the authorities sector and the PFM system. Parallel efforts are underway have created more structured spaces for building in other policy areas, including municipal administration, consensus around the national development agenda. Figure 5.3: Dominican Republic Debt Structure, Various Years A. Consolidated Public Debt – Benchmarking B. Consolidated Public Debt - Composition The stock of debt has been on an upward trend… …especially if the Central Bank debt is included. 90 60 80 50 70 60 40 95 Percent of GDP Percent of GDP 50 30 40 30 20 20 10 10 0 0 2002 2004 2006 2008 2010 2012 2014 2016 2012 2013 2014 2015 2016 2017 Dominican Republic Latin Am. & Carib. External Public Debt Internal Public Debt Central Bank Debt Central America Caribbean Small States C. Central Government Debt - Composition D. Fiscal Expenditures – Composition The exposure on bilateral and multilateral debt …as markets demonstrated improved con dence has signi cantly decreased over time, in favor of bond issuance… in the DR’s institutional capacity and debt management. 800 4% 2007 700 6% 13% 2011 600 12% 2015 25% 25% 500 Percent of Total Debt 18% 400 19% 12% Basis Points 18% 11% 300 4% 2% 3% 200 100 6% 15% 36% 29% 0 2% -100 40% -200 -300 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 External - Multilateral External - Bilateral External - Commercial External - Outstanding Bonds Domestic - Commercial LAC - EMBIG Sovereign Bond Index DR - EMBIG Sovereign Bond Index Domestic - Outstanding Bonds Domestic - CB Recaptalization Spread - EMBIG Sovereign Bond Index Source: Central Bank of the Dominican Republic, Dominican Republic’s Public Credit O ce, IMF, Bloomberg, World Bank’s World Development Indicators, World Bank’s World Governance Indicators, and World Bank sta estimates. Building a Better Future Together Challenges as critical functions that require improvements: (i) audit and enforcement (enforcement-led collection stands Challenges on Fiscal position and Debt Levels only at about 0.9% of total collection, against the 2% that international best practice suggests); (ii) collection A fundamental challenge for the DR remains associated operations (only 60% of overall payment compliance rate with the need to improve revenue mobilization. Tax against a minimum of 75% suggested by international revenues as a share of GDP stand among the lowest levels best practice); and (iii) management of large taxpayers for countries with similar income per capita levels and (lack of point-to-point process oversight and inaccurate are also one of the lowest in the world.133,134 A fragile and data sets). inefficient electricity sector is the recipient of significant transfers from the Government, which heightens The growing weight of current expenditures in the pressures on an already inelastic fiscal envelope. A major budget could have negative impacts on long-term challenge for medium-term fiscal sustainability, therefore, growth. While it is laudable that public expenditures are is to address long-standing inefficiencies in the electricity low as a share of GDP, the fact that a higher share of total sector. The opportunity-cost to provide significant public expenditures are spent with consumption raises questions transfers to the electrical sector is very high, as it feeds a about the ability of the government to focus its spending fundamentally inefficient sector while limiting available on productive investments that could spur growth in resources to social policies or investment in productive the long term. In a context of increasing debt exposure forms of capital.135 In addition, the rampant informality it is critical to direct enough public resources towards observed in the country typically results in a loss in budget investments that can help boost productivity and growth, revenues by reducing total taxes and contributions paid so as to enhance the repayment capacity necessary to to the State. As roughly one-half of the country’s total service the public debt incurred. employment (including self-employed, family workers, 96 and other informal workers) is estimated to be in the The Dominican Republic is among a group of countries informal sector,136 significant untapped gains in fiscal that tends to have a pro-cyclical fiscal stance during collection are possible, which are relevant not only in boom and downturn years.137 The implication of that terms of overall revenue mobilization, but also in terms of behavior is that the country tends to exacerbate the progressivity of the fiscal regime. volatility of output and misses an opportunity to behave in a counter-cyclical way to drive the economy out of a There are several sources of inefficiencies in tax downturn. administration that limit the ability of the authorities to improve tax collections. Lower than expected revenue The debt profile shows vulnerabilities to potential collection trends (estimated at about 0.5% of GDP) signal exchange-rate shocks. Further to the PetroCaribe debt the need to strengthen DGII’s collection functions, which buyback and the increased dollar-denominated bonds currently operate under an overall weak institutional and in 2015, external public debt financial stocks currently operational setting. Preliminary assessments suggest represent more than half of the total external debt (their that the DGII needs to revamp its current organizational share was only about a quarter in 2008). A number of structure, business operations, and HR management to international conditions have favored this buildup of overcome critical performance gaps that contribute to dollar-denominated securities, including low interest rates inadequate tax compliance and revenue collection levels. and stronger global appetite to fund emerging markets’ In particular, the following areas have been highlighted debt. While this has caused a public external debt shift into an overall longer maturity profile,138 the increasing share of foreign-currency-denominated (mostly in USD) debt 133  Countries with an income per capita level similar to the DR tend to have tax revenues ranging between 13 and 44% of GDP. 134  Tax revenues, globally, tend to range between 11 and 68% of GDP. Intervals estimated using WEO data. 137  See Carneiro and Garrido (2015), New Evidence on the 135  Please see the dedicated note on the electricity sector, for a Cyclicality of Fiscal Policy, Policy Research Working Paper No. more in-depth view. WPS7293, The World Bank. 136  “La informalidad en el mercado Laboral Urbano de la Republica 138  The portion of short-term public debt has fallen from about 1/3 Dominicana”, Central Bank of the Dominican Republic, 2007. to an estimated 1/10 between 2008 and 2015. Building a Better Future Together has amplified potential exchange-rate risks, stressing the education services.139 Other exemptions, especially those need to maintain reserves at adequate levels. Authorities that are regressive, could be removed, potentially granting appear to be well aware of this, as reserves have increased up to 0.5% of GDP in additional revenue collection. The to all-time highs over the last months, hovering around impact of the removal of VAT exemptions on electricity USD 5.5 billion (roughly 3.5 months of imports). According for the poorest could be mitigated through transfer to the IMF’s risk-weighted metric assessment however, programs (such as Bonoluz, for example). These measures current levels are still not fully adequate against long-term have the potential of opening fiscal space for needed external debt risks, and represent roughly 60% (in 2015) of infrastructure and social spending, as well as reducing the IMF’s suggested adequacy range. distortions in the tax system. Efforts should focus initially on eliminating exemptions for upper-income taxpayers, Challenges on Public Financial Management while maintaining exemptions aimed at protecting socially vulnerable groups, or eliminating exemption on a Important challenges remain in multiannual planning larger scale while compensating the most vulnerable with and budgeting processes and in implementing PFM equivalent transfers. Undertaking a thorough cost-benefit reforms. There are still variations between budgeted analysis of the incentives on corporate income taxations revenues and expenditures. Expenditure control and would also be advisable. procurement systems are fragmented, enforcement is weak, and financial reporting and external auditing There is much to be gained by improving the efficiency – while strengthened in recent years – require further of the tax administration system, and the authorities improvement, notably in terms of follow-up on audit should consider starting with a gap analysis and findings. Poor coordination between the planning, benchmarking exercise that could guide reform monitoring, and evaluation functions of agencies in efforts in that direction. To facilitate the adoption of a different government institutions disrupts the alignment commonly accepted baseline and assessment among key between the END and the national budget. The lack of stakeholders, the authorities (particularly in DGII) should 97 a consistent performance-monitoring approach makes consider undertaking a full-fledged diagnostic using the it difficult to track progress on national development Tax Administration Diagnostic Assessment Tool (TADAT). objectives and increases the reporting burden on TADAT is an internationally recognized, PEFA-like initiative institutions that are already overwhelmed with multiple for measuring tax administration performance, which was reporting requirements. Together, these issues represent launched in 2016 with the support of the G20, international a critical challenge to the strategic management of organizations (including the IMF and the World Bank) and the public finances. In addition, weak monitoring and regional tax administration centers (including CIAT), with evaluation (M&E) mechanisms contribute to inefficiency the objective to provide governments with a generally in public spending and can encourage corruption and accepted assessment framework to identify strengths and waste. weakness of countries’ revenue administration systems. The World Bank can assist the Dominican authorities with Policy Directions a TADAT assessment at their request. Reforming tax policy should be a priority. The Additional tax revenues could finance additional pro- forthcoming Fiscal Pact offers a unique opportunity to poor spending. Ending extreme poverty and ensuring the address reforms to strengthen fiscal sustainability. The poor have access to public education and health would widening of the tax base, particularly, should be given require an increase in public resources to social services high precedence, together with a reform of VAT and equivalent to 1.3% of GDP, other things remaining equal.140 exemption schemes. The pillar of any tax reform should In addition to reforming the indirect (ITBIS) taxation be the VAT. The ITBIS exemptions represent close to 3% regime, some gains could also come from Personal of GDP and the majority of these exemptions is related to Income Taxes, which make up the lion’s share of direct tax the consumption of middle and upper class households. One option could be for goods in the basic consumption 139  The consumption basket is based on the national poverty basket to remain taxed at a zero rate, along with health and measurement methodology. 140  Defined under the international poverty line of US$2.50 PPP a day. Building a Better Future Together collections. According to recent WB analysis, effective rates the Ministry of Public Administration should develop a (3.5%) among upper-class earners (i.e. more than US$40 a comprehensive framework for M&E and auditing. This day PPP) are far from the statutory rates (15%) called for in framework could be piloted on a small number of key the tax schedule. A positive impact on personal income tax public programs before being extended across the public revenue would come from tax administration measures sector. For instance, DIGEPRES could empower institutions to reduce evasion by the upper class and measures to like the Department of Economic Studies, which may offer decrease informality among independent workers. this kind of detailed and up-to-dated fiscal data, to achieve an exhaustive oversight of planning, budgeting, execution The rising debt trends should not be overlooked. The of public spending, with a view of highlighting slippages improving trend of fiscal balances, and in particular the and support the decision-making process. recent surplus of the primary fiscal balance demonstrated the Government’s commitment to improve fiscal COMPETITIVENESS AND INCLUSIVE sustainability, however this is not sufficient to curb the GROWTH debt trajectory. Some fiscal adjustments are needed to curb debt down to lower levels and preserve long-term Country Context sustainability. Such a goal will require further efforts, and in particular it will be critical that authorities remain Structural Transformation and Growth Engines focused on avoiding future primary deficits, in order to prevent additional pressure on the debt path. Under the Over the last three decades, the structure of the current baseline, an adjustment of around 1.5% of GDP Dominican Republic’s economy has changed away over one year would be needed to stabilize debt at current from agriculture and resource extraction and levels. Putting the debt on a downward trajectory would toward a more diversified production base. Historical require fiscal consolidation efforts equivalent to a 2-2.5% preferential market access to the U.S. underpinned 98 of GDP adjustment over the next 3 years.141 this structural transformation. Beginning in the late 1960s, the Dominican Republic started to diversify its A medium-term fiscal framework with a clear counter- economy, bringing to an end centuries of dependence on cyclical orientation should be adopted. The government agriculture, especially sugar production. By the 1980s, the has already begun moving in the direction of a medium- country’s economic focus had shifted to mining, tourism, term expenditure framework, and establishing binding and manufacturing. The country’s manufacturing sector fiscal targets and budgetary performance indicators was strengthened by the creation of Special Economic would facilitate this process. Authorities should leverage Zones (SEZs), which offered tariff exemptions and a the favorable momentum of public debate and appetite series of tax concessions to foreign companies. The main for reforms – achieved in the aftermath of the May 2016 activity in the SEZs was garment assembly for export elections – to strengthen the fiscal policy framework, to the U.S. in the context of fixed import quotas under including the evaluation of approaching a rules-based the Multi-Fiber Arrangement (MFA). The phasing-out fiscal framework with a more clearly defined counter- of the MFA, completed at the beginning of 2005, along cyclical orientation. Adopting a medium-term fiscal policy with the signature of the CAFTA-DR agreement and the with clear objectives may not only facilitate improving extensive use of SEZs to generate job opportunities, the fiscal position but could also contribute to further created the conditions necessary to attract investment strengthen the overall credibility of macro-fiscal policies. from multinational companies that produce relatively sophisticated goods to serve the U.S. market. A comprehensive framework for Monitoring and Evaluation (M&E) and auditing should be developed. While the sources of growth in the DR have been fairly Gradually adopting results-based budgeting principles diversified, the main propellers in recent years have could greatly strengthen public oversight and been private consumption and overall investment accountability. The MEPyD, the Ministry of Finance and and services. The primary sector has grown by 4% a year, between 2010 and 2015, largely sustained by agricultural production. The services sector has benefitted from a 141  Estimates based on IMF and World Bank staff calculations. Building a Better Future Together Figure 5.4: GDP Composition 2008 -2015 - Contribution to Real GDP Growth Expenditure side Supply side 12 12 10 10 8 8 Crecimiento porcentual anual Annual percent growth 6 6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 -8 -8 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 Private consumption Government consumption Agriculture Mining Industry (excl. mining) Services Investment Net trade Real Growth Net taxes and subsidies Real GDP Growth Statistical discrepancy Source: Authors’ own calculations based on data from the World Development Indicators. resurgent U.S. economy: tourism alone has grown at an The Dominican Republic has secured preferential average rate of 5% a year since 2010, on an upward trend. market access for its exports in key regional and Low oil prices reduced imports, and a gradual nominal international markets as well as implemented depreciation of the Dominican peso (RD$) against the regulatory reforms to align its Special Economic USD boosted exports. Private consumption has been Zones regimen with WTO commitments. The CAFTA- consistently strong, supported by steady job creation and DR agreement, which entered into force in 2007, 99 improvements in the availability of credit to the private provides preferential access to Central America and the sector. Gross fixed capital formation has been strong, and US and has been a driver of the transformation of the especially in its private component (83% of total, in the period production composition of SEZ zones. The CARIFORUM- 2005-2015), mostly in the form of construction projects. EDU Economic Partnership Agreement (EPA), signed in 2008, provides preferential treatment to the EU. The Foreign direct investment (FDI) inflows to the DR expiration of the deadline to make the SEZ program have consistently exceeded the Latin America and compatible with the WTO Agreement on Subsidies and Caribbean average, at 5.6 of GDP in 2012, 2.6% in Countervailing Measures led to the elimination of the 2013 and 3.7 in 2014. Most of this investment has been export share requirements to receive fiscal incentives– directed to tourism, mining and special economic zones firstly for producers of leather, textiles and apparel and (SEZs). Foreign Direct Investment has been a catalyzer leather, sectors designated as ‘national priority’ in 2007, for economic activity in SEZs that are mainly used as an and afterwards for all SEZs producers in 2011. The current export platform to assemble products to be sold in the U.S. SEZ framework is believed to be compliant with WTO market. The CAFTA and the EPA agreement, both of which requirements. have investment provisions, have been also fundamental in attracting this so-called efficiency-seeking Foreign Rapid productivity growth has driven the Dominican Direct Investment (FDI).142 Additionally, the country has Republic’s good economic performance. TFP growth 11 Bilateral Investment Treaties (BITs) in force mostly with has been consistently positive for most of the past two developed countries.143 decades, the only exceptions being the national banking crisis in the early 2000s and the global financial crisis in 142  Efficiency-seeking investment refers to the type of investment 2008-09. Moreover, the rate of TFP growth in the DR has in which the investor chooses a host country in order to take been significantly higher than both the LAC average and advantage of some competitive factor, such as a cheap/productive, knowledgeable or efficient labor force, utilities, services etc. 143  The BITS currently in force (with the associated date on entry (2003), Switzerland (2006), Panama (2006), Morocco (2007), Finland into force) are with Spain (1996), Taiwan (2001), Chile (2002), France (2007), Netherlands (2007), Korea (2008), and Italy (2009). Building a Better Future Together Figure 5.5: Growth accounting decomposition (Solow model) 12 10 Growth rate (percentage points) 8 6 4 2 0 -2 -4 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total Factor Productivity (gA) Labor ( (1-α) * gL ) Capital Stock (α * gK) Real GDP (gY) Period 2 Source: Authors calculations based on World Development Indicators data. the rates of the DR’s closest regional comparators. Positive the Formalizate program) and the passing of the insolvency changes in TFP in the early nineties could be attributed to law. In terms of promoting competition economy- the expansion of an initially successful Special Economic wide, a Competition Law was approved in 2008 and an Zones (SEZs) model, with foreign firms establishing independent Competition Authority (ProCompetencia) subsidiaries. Paradoxically, improvements in productivity set up in 2011. In addition, a number of efforts to remove after 2004 (the year in which trade preferences in sector-specific barriers to competition have enabled the 100 textile expired) are likely to be related to the need of country to catch up with regional peers. New data on reconversion in these SEZs; this implied a reduction in Product Market Regulations (PMR) in the DR measures the the number of workers employed and the introduction extent to which public policies promote or inhibit market of more sophisticated machinery to keep productivity up forces in key sectors in the economy and shows that the and diversify into products with higher value added in a country is aligned with the Latin American and Caribbean context of increasing global competition. regional average.145 Strong participation of the private sector in network industries, notably telecommunications, Business environment and competition the unbundling of different market segments in electricity, the establishment of independent sectoral regulators, Over the past few years, the Dominican Republic has relatively open access to professional services markets,146 taken a number of relevant steps to improve its business environment and promote competition, as a tool to 145  Each of the areas addressed within the PMR methodology foster productivity growth and competitiveness.144 sheds light on specific restrictions of the regulatory framework both economy-wide and in key sectors of the economy on twelve topics: electricity; gas; telecom; post; transport; water; retail distribution; While the 2017 Doing Business report ranks the Dominican professional services; other sectors; administrative requirements Republic in the middle range of countries surveyed for business start-ups; treatment of foreign parties; other, such as at position 103 out of 190 economies in terms of the governance of public-controlled enterprises or antitrust exclusions and exemptions. The information for the DR was collected by the WBG ease of doing business, the country has launched major in 2013 as part of a regional initiative to calculate these indicators business environment reforms. These have included the in collaboration with the OECD for 16 LAC countries (between simplification of business start-up registration (through 2012-2013 Argentina, Colombia, Costa Rica, Dominican Republic, El Salvador, Honduras, Jamaica, Nicaragua and Peru; in 2014-2015 Uruguay; and between 2015-2016 Ecuador, Bolivia, Guatemala, Paraguay, Panama and Venezuela). For details on the methodology 144  Competition drives productivity growth through two key of the PMR data please see Nicoletti et al. (2000), Summary Indicators mechanisms: it shifts market share toward more efficient producers, of Product Market Regulation with an Extension to Employment and it induces firms to become more efficient to ensure their survival, Protection Legislation, Economics Department Working Papers No. generating employment, and ultimately speeding up economic 226, Organization for Economic Co-operation and Development. growth and improving overall welfare. 146  The PMR data analyzes four regulated professions: lawyers, Building a Better Future Together and the lack of restrictions to FDI in most sectors are some Migration and Growth of the areas that reflect notable progress in implementing an effective competition policy in the DR. Strong commercial ties between Haiti and the Dominican Republic create opportunities for both The financial sector, while dominated by a concentrated countries. Trade relationships between Haiti and the DR banking sector, is robust and stable. Overall, key financial are mutually very important, as both countries are the sector indicators show robust capitalization, provisioning, second largest trade partner for each other, after the U.S. liquidity, and profitability ratios. Profitability has been In that context, migration from Haiti and other countries stable and above the regional median. By 2015, returns represents an important factor that contribute to growth on assets (ROA) stood at 1.9% and returns on equity (ROE) outcomes in the DR. Haitian migrants in the DR provide at 16.4%, above the regional median (1.4% and 13.7%, in roughly 22% of remittances to Haiti (i.e. the second 2014, respectively). In terms of capitalization, the capital largest source of remittances after the United States of adequacy ratio (regulatory capital to risk weighted assets) America). These remittances have an important impact stood at 16% by the end of 2015 well above the 10% on the poverty levels in Haiti; if remittances from the DR requirement, with a proportion of liquid assets to short were to stop, extreme poverty in Haiti would increase by term liabilities above 400%. Portfolio quality and provisions 3 percentage points, for example. Besides the migration are at good levels and above regional benchmarks as well. flows, trade relationships between Haiti and the DR are At the end of 2014, non-performing loans (NPLs) to total mutually very important, as both countries are the second gross loans represent only 1.5% and loan loss provisions largest trade partner for each other, after the USA. Haiti are above 200%. The system held assets equivalent to migrants to the DR contribute to the economic activity 45% of GDP at end-2015, and is among the smallest in the with young workers who are willing to take on the jobs region. It comprises 65 financial institutions of which the that the Dominican citizens do not want to fill. 17 commercial banks account for 85.3% of the total assets of the financial system. 147 Challenges 101 Figure 5.6: Restrictiveness of Product Market Regulation Insufficient Linkages and Spillovers in the (PMR) for the Dominican Republic Domestic Economy OECD Product Market Regulator Indicator - Absolute values from 0 to 6. Higher values are associated with regulations While the economy has exhibited strong productivity more restrictive to competition growth in the past decade, little of the productivity 2.5 gains have been passed through to workers in the 2.0 form of wages. Since 2003, real earnings growth has 24.7% 38.4% increasingly diverged from productivity growth. Indeed, 1.5 between 2000 and 2013, productivity increased in real 38.9% terms by 39% while labor compensation fell by 26% 1.0 11.1% 27.7% (Figure 5.7). Real earnings fell and/or remained stagnant 37.7% in all sectors, including manufacturing as well as transport 0.5 and communications, where productivity has grown since 36.4% 33.9% 51.1% 2002. 0.0 OCDE TOP 5 a/ LAC Average b/ Dominican Rep. State Control Barriers to entrepreneurship A key factor underlying this development is the labor Barriers to trade and investment implications of the structural shift in the composition Source: WBG/OECD PMR data 2013-2016. a/ Top 5 OECD countries include: of production in SEZs from garment assembly to Netherlands, United Kingdom, Austria, Denmark and New Zealand. b/ LAC countries medium-high skill manufacturing industries, such include: Argentina, Brazil, Chile, Colombia, Costa Rica, El Salvador, Honduras, Jamaica, Mexico, Nicaragua and Peru. as medical devices, footwear, pharmaceuticals, and electrical products. The potential of SEZ zones to continue accountants, engineers and architects. generating jobs at the same pace as before is likely to be 147  17 commercial banks, 10 saving and credit associations, 19 reduced because the employment intensity in these more saving and credit banks, 17 credit corporations, 2 public institutions. Building a Better Future Together Figure 5.7: Real earnings index and productivity compliant with multilateral commitments upheld by the (output per worker) index, 2002=100, 1991-2013 WTO, there is a need to continue leveling the playing field between firms operating within the special regulatory 130 Crisis of 2003 regimen and the rest of the economy.150 110 The tourism sector has been an important source of growth and employment in the DR but, similarly to the SEZs, it generates few spillovers with the rest of 90 the economy. In 2014, the tourism sector contributed 16% to GDP and 35% to exports accounting for 4.4% of 70 direct employment and 15% of indirect jobs. Despite increasing competition from other Caribbean countries, 50 including Cuba (see Box 1), tourist arrivals have grown 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 rapidly in recent years, reaching a total of 5.6 million non- Real earnings index (2002=100) Productivity index (2002=100) resident air arrivals in 2015: the largest of any Caribbean Source: The Conference Board Total Economy Database and authors calculation based on the Central Bank of the DR. destination. Meanwhile, cruise ship arrivals doubled between 2014 and 2015. At the same time, little of this growth spills over to the rest of the economy. All- complex processes is lower than in the apparel sector. inclusive resorts represent about 75% of the DR’s tourism This situation may be particularly detrimental for women sector. A key feature of this type of tourism is that tourist as they filled the bulk of jobs available in the garment activities remain concentrated in small geographic areas sector. On the other hand, the emergence of medium- of the country and do not benefit to a large extent other high skill manufacturing is correlated with higher wages sectors of the domestic economy. When compared to 102 as the demand for more skill workers increases. The recent other types of tourism such as independent adventure rebound of the textile sector may alleviate the negative tourism, the average spending on an entire trip in the pressure on job creation in SEZs.148 DR compares poorly (with a total amount of US$1,096 per person based on 2014 data) against the average The emergence of more sophisticated manufacturing spending on an independent adventure trip (US$2,710 processes in SEZs has increased the domestic value per person according to the annual Adventure Travel addition that is generated in the country but the lack Trade Association Industry Snapshot, 2013). For each of domestic linkages is a pressing challenge to foster US$100 spent on an all-inclusive tour, only around US$5 positive spillovers into the local economy. The more actually remains in a destination’s economy, a far lower sophisticated nature of the manufacturing production share than that of independent tourists and adventure- taking place in the zones nowadays entails that many package tourists. inputs are imported because products are unavailable domestically or do not meet required standards. As the One of the challenges for non-SEZ firms is the quality Dominican Republic connects with longer and more of agricultural products, which is perceived to be sophisticated global value chains, it is paramount for the lower than that offered by regional competitors. government to support the ability of domestic firms to This perceived lack of competitiveness hampers the meet the scale and technological requirements of SEZ likelihood that demand for domestic products will firms. As of 2012, Dominican companies in SEZs were increase without a proactive strategy to revert the acquiring 81% of their inputs abroad.149 In addition, while current situation. For small and medium size farmers, it is the current SEZ regulatory framework appears to be difficult to meet the quantities and qualities of products requested by the market, as scale and consistency of 148  World Bank (2016): “Special Economic Zones, Global Value Chains, and Domestic Linkages in the Dominican Republic”. 150  Defever, F., Daniel Reyes, A. Riaño and M. E. Sánchez-Martín 149  Engel, J., Daniel Reyes and M. E. Sánchez-Martín (2016): “The (2016): “Does the Elimination of Export Requirements in Special evolution of backward linkages in a dual economy: the case of the Economic Zones affect Export Performance? Evidence from the Dominican Republic, 1993-2010,” Working Paper, forthcoming. Dominican Republic,” Working Paper, forthcoming. Building a Better Future Together Box 1: The ‘Cuba Effect’ on Tourism While the DR’s tourism sector has competed with Cuba’s for many years in European and global source markets, the prospective normalization of US-Cuba relations is expected to divert a substantial number of US tourists toward Cuba. The size and duration of this impact is hard to estimate, and it would likely take time to materialize, as Cuba has a limited capacity to absorb new tourists. However, the resumption of US- Cuba tourism could create new opportunities for the DR by intensifying incentives to access high-income consumers or exploit niche markets. Moreover, the strengthening US dollar will likely bolster overall US tourism demand, at least partially offsetting the diversionary effect. production are often limited. In addition, the perceived Business Environment and Competition quality of Dominican agro-exports is low, and rejection rates at the US border are higher for Dominican fruits In spite of recent progress on the ease of Doing and vegetables than those from other countries of the Business, the Dominican Republic still has complex Central America Free Trade Agreement (CAFTA). The and expensive regulatory procedures, and its legal Dominican Republic has historically received favorable institutions remain weak when compared to other US market access due to strong economic ties and countries in the region. Even with notable reforms, favorable CAFTA-DR trading rules. However, its ability challenges remain to further facilitate business entry/ to comply with US Sanitary and Phytosanitary (SPS) operation procedures and strengthen regulations on regulation is low. For example, as of August 2016, all protecting minority investors, enforcing contracts and 103 raw agricultural products as well as processed foods and access to credit. For example, according to the 2017 Doing seafood products were under the U.S. FDA alert’s red Business Report, in Santo Domingo the average cost to list.151 Red-listed products are automatically detained at complete a procedure to enforce a contract is 40.9% of the port of entry until the exporter proves compliance the demand, compared to the 31.3% in the Latin America with US regulations. This process increases the time and and the Caribbean region, and 21.3% in the OCDE. Other the cost to enter the US market for Dominican exporters. example is the average cost to complete a contract Rejections of Dominican products are mainly due to enforcement procedure. In Santo Domingo it costs 40.9 problems related to: (i)  inappropriate use of pesticides; (% of the claim) compared to 30.8 in Latin America and (ii) Salmonella contamination; and (iii) problems the Caribbean, and 21.1 in OECD-high income economies. with permits or registrations as well as with non-SPS The Doing Business Subnational survey in the Dominican compliant shipments. The high levels of rejection faced Republic also showed wide geographic variations in by Dominican agrarian exports call for a revision of the regulatory compliance. For example, the time to obtain the national quality infrastructure to meet international same permit from the Ministry of Works in four different standards, including improvements in physical and cities varies from 52 to 158 days.152  institutional infrastructure, better coordination between international bodies and the private sector, and increased Despite progress in promoting competition, transparency along the value chain. continuously high market concentration in the DR may be conducive to the formation and stability of harmful cartel agreements. A recent study by the 151  The red list is an automatic process known as Detention General Directorate of Internal Revenue (DGII) found Without Physical Examination (DWPE), which entails the automatic that 35% of the DR’s markets are highly concentrated, detainment of all shipments at the point of entry until the exporter shows compliance with U.S. regulations. Additionally, the Dominican Republic faces, on average, around 5 rejections per $10 million of 152  Doing Business in Central America and the Dominican Republic exports of agricultural products, which is higher than in other CAFTA 2015. Dajabón: 158 days; Santo Domingo: 90 days; Higuey: 90 days; countries. Santiago de los Caballeros: 52 days Building a Better Future Together Figure 5.8: Actual and benchmarked index 8% are moderately concentrated, and the remaining of market concentration in 17 non-tradable industries 57% are not concentrated.153 This is in line with other in selected countries studies that have identified high market concentration in United States LAC countries manufacturing as well as in non-tradable industries in DR Bulgaria Romania Other countries (see Figure 5.8).154 In general, high market concentration Poland or economies Canada does not necessarily imply lack of competition per se. In a Hungary Benchmark Russian Federation small economies, market are naturally more concentrated Lithuania Czech Republic and a situation with few firms will often be the efficient Norway Colombia outcome in light of fixed costs and economies of scale. Lavia Korea Rep. However, in this context, ensuring that markets remain Japan Portugal contestable becomes even more crucial since cartels United Kindom (on prices, production quantities or market sharing) Switzerland Macedonia, FYR are easier to sustain in markets with fewer players. To China Italy that end, anticompetitive behavior, especially cartels, Ireland Germany should be effectively punished. In addition, regulatory Croatia Serbia restrictions that enable anticompetitive practices in the Belarus Thailand first place should also be eliminated. While the DR has Spain Sweden a competition regulatory and institutional framework Austria Finland in place, the competition authority, ProCompetencia, Netherlands Argentina does not have an Executive Director; as a result, no Greece Denmark investigations into anticompetitive behavior have been Brazil Bosnia and Herzegovina launched yet.155 singapore Australia 104 Belgium Turkey In addition, PMR data also identifies persisting Mexico France anti-competitive restrictions in network industries Philipines Malaysia and input markets that may be limiting the Moldova Israel competitiveness of downstream firms in the country New Zeland Kuwait (see Figure 5.9). In network industries, potential Hong Kong SAR, China competitors face incumbents, either public or private, that Ecuador Kazakhstan appear to benefit from regulatory protection resulting in Indonesia Chile an unleveled playing field. For instance, in air transport, Peru Albani authorities can deny (ex-ante or at any later time) foreign Saudi Arabia India airlines the right to operate on international routes based Uruguay Dominican Republic on the sufficiency of existing supply.156 In electricity, while Oman Guatemala the regulatory conditions seem to foster open markets in Bolivia Jamaica the sector, entry (in those segments where competition United Arab Emirates Paraguay would be economically viable and efficient) seems to Venezuela, RB Trinidad and Tobago have been discouraged by low prices subsidized by the Nicaragua El Salvador Costa Rica Honduras 0.0 0.2 0.4 0.6 0.8 153  General Directorate of Internal Revenue (2015a). Concentración de Mercado en la República Dominicana [Market Concentration in Her ndahl index the Dominican Republic], 2015. The study uses tax declarations filed Source: World Bank Group (2014) “Latin American Entrepreneurs: Many Firms but Little in 2014 for FY 2013. Innovation”, based on data from World Development Indicators and rm-level data from Orbis. Note: Bars show the average Her ndahl index of concentration of revenues across a 154  Concentración de Mercado en República Dominicana, 2015, selection of two-digit non nancial services sectors for which data were available for more Departamento de Estudios Económicos y Tributarios, Dirección than 80 countries. A value of 1 represents a market captured entirely by a single rm (the General de Impuestos Internos de la Republica Dominicana. highest level of concentration); lower values indicate less concentration. Revenues were 155  The DR regulatory framework states that the Executive averaged across 2007–10. Dots represent a benchmark predicted value from a regression for each sector with (log of) population and GDP (adjusted for purchasing power parity) as Director will head the Investigation Department in charge of antitrust explanatory variables. The regression model was estimated for each of 17 sectors separate- investigations. See Article 33-34 of the Competition Law of the ly; the dots are the averages of all sectors. The regression used all available countries. The Dominican Republic. gure presents only comparator countries. LAC = Latin America and the Caribbean. 156  Law 491-06 of Civil Aviation at Article 246 points a and b. Building a Better Future Together Figure 5.9: Restrictiveness of Product Market Regulations by components/sub-components for the Dominican Republic Higher values are associated with regulations more restrictive to competition 3.0 3.0 2.5 2.5 Administrative 20% burdens on Barriers to trade Involvement startups 2.0 28% 2.0 33% in business and investment Regulatory operation 30% protection 1.5 1.5 Other of incumbents Barriers to 38% entrepreneurship 64% barriers 1.0 1.0 Public Complexity 67% ownership 50% of regulatory 0.5 34% State Control 0.5 36% Explict procedures barriers 0.0 0.0 Dominican Rep State Control Barriers to trade Barriers to and investment entrepreneurship Source: WBG/OECD PMR data 2013-2016. state,157 further resulting in suboptimal investments in payment system and digital payments indicators: despite the sector and recurrent blackouts (an average of 3h/ some recent increase, the presence of POSs and ATMs day per household is reported by the Superintendencia are among the lowest in LAC region. Credit card usage is de Electricidad).158 Moreover, as captured by PMR sub- low by the standards of LAC and upper-middle-income indicators, issues with the governance of SOEs may further countries worldwide, and less than 40% of adults report insulate public operators from market forces. using ATMs, versus a LAC average of over 70%. 105 Longer-term access to finance in the economy is Migration and Labor Market Outcomes scarce, particularly to small productive operators. New forms of exclusion have been emerging worldwide The Dominican Republic has experienced significant as digital technology advances and risk profiling becomes immigration over the past 15 years and there are increasingly sophisticated. In addition, access to finance is concerns associated with the effects of this rapid inflow a major constraint faced by (the many) informal firms in of migrants in the local economy. Strong migration flows the DR – which makes it harder for them to integrate in the into the DR have led to an increase in the working-age economic system and grow. Commercial loans to SMEs population of 4.6% between 2002 and 2010 and accounted increased from around 12% of GDP in 2007 to 17% in 2015, for just over 5% of the country’s population in 2012.159 but average loan amounts remain low and maturities are Due to historical and circumstantial reasons, about 9 out typically short. Financial intermediation remains low and of 10 immigrants in the DR are from neighboring Haiti. At net interest margins are high, reaching 9.1% in 2014, the same time, despite being one of the fastest growing compared to a LAC median of 5.6%. Private credit was economies in Latin America, real wages in the DR have equal to 25.4% of GDP as of 2014, almost half of what remained fairly stagnant following the country’s recovery would be expected given the DR’s level of financial sector from the banking crisis of 2003/04. As in other immigrant- development, and well below the regional median of 43%. receiving countries, continued challenges in the labor The country also lags behind the region with regard to market have resulted in local concerns that immigration may be leading to decreased employment opportunities 157  There are no legal monopolies or limitations to access the for local workers—and thus contributing to the stagnant different market segments, there is separation between generation/ wages and low poverty reduction. transmission/distribution, and the sector is overseen by an independent regulator- 158  See Superintendencia de Electricidad, Statistics for quality service of consumer supply for year 2016 available at http://sie.gob. 159  Due to data limitations in the 2010 census, only individuals do/mercado-minorista/estadisticas of market operators: EDESTE, born outside of the Dominican Republic are considered immigrants EDENORTE and EDESUR. for the purpose of this report. Building a Better Future Together The evidence that Haitian migrants are driving down for firms outside the few establishments and firms that real wages in the DR, however, is weak. The extent to currently constitute the bulk of economic growth. which immigration affects wages in local labor markets Leveling the playing field between firms will involve is in large part determined by whether immigrants’ fixing the current asymmetries across each sector in skills are substitutes or complements to those of local terms of access to information, markets, regulation, and workers. If they are substitutes, this can result in increased finance. competition for jobs while complementary skills can lead to increased productivity for local workers. Recent Horizontal reforms research by the World Bank finds that Haitian workers are highly clustered – in unskilled work,160 in specific Policies aimed at forging domestic linkages between sectors, and geographically - in the Dominican Republic. SEZs and the domestic economy should be prioritized. In particular, given the relatively low levels of schooling A comprehensive strategy to support and develop among Haitian immigrants and the low levels of linkages includes actions around three areas. First, a employment among Haitian immigrant women, it would regulatory review to remove ineffective policies such as be expected that competition for jobs with Haitian labor harmful local content requirements and protectionist non- would be primarily felt by Dominican men with low levels tariff measures that restrict the ability of domestic firms to of schooling. However, the evidence suggests that there import and transform key inputs. In this context, formal is no negative relationship between the proportion of and informal barriers for supplying SEZ firm from national the local labor force that is Haitian-born and the wages territory should also be removed. Second, connect of local labor once individual characteristics are taken domestic suppliers by designing targeted programs for into account. Therefore, there does not seem to be strong local suppliers, developing a supplier database, creating empirical evidence supporting the hypothesis that Haitian matchmaking services, and introducing incentives to labor in the Dominican Republic has led to stagnating encourage local sourcing from SEZ firms. Third, attract 106 wages for local workers. Instead, it suggests that since competitive international suppliers and support the Haitian immigrant labor is largely limited to unskilled and upgrading of domestic suppliers through non-equity informal employment in agriculture and construction, modes of investment (e.g. franchising). A program aimed Haitian immigrants are more likely to be complements at improving the ability of selected domestic value chains than substitutes to both capital as well as the relatively to internationalize, either directly or indirectly by being more skilled Dominican workers. connected to SEZ firms, would be an important step to forge domestic linkages and internalize the positive Policy Directions spillover effects of FDI. Tackle Market Distortions That Favor Only An overarching national policy is needed for export Specific Economic Agents promotion and FDI attraction that leverage SEZs as an engine of an inclusive economic growth. This strategy Ensuring sustained economic growth and improving should improve the institutional coordination across inclusive growth in the Dominican Republic depends multiple actors working on the overall support framework on economy-wide horizontal reforms, on reforms to for trade and FDI competitiveness. The continued focus strengthen links between firms located inside and of the SEZ regime on specific industries, especially outside SEZs, and on vertical interventions in the textiles, footwear and leather goods, could entrench key sectors underpinning the Dominican economy. economic distortions and perpetuate the country’s dual An important objective of public policy to share growth export structure. The country already phased out export dividends will be to improve the environment for growth performance-based subsidies in SEZs, which is a positive first step. Over the medium-to-long term, harmonizing the 160  See Sousa, Liliana; Diana Sanchez; and Javier Baez (2016), Wage regulatory system will require progressively reducing the Effects of Haitian Migration in the Dominican Republic; and Kone, number of “strategic sectors” and eventually eliminating Zovanga and Caglar Ozden (2016), Labor Market Implications of Immigration and Emigration in the Dominican Republic, in Carneiro, them altogether. Finally, a robust cost-benefit analysis F. and S. Sirtaine (eds), When Growth is not Enough, The World Bank, of the role of SEZs in terms of economic outcomes (jobs, forthcoming. Building a Better Future Together domestic linkages, etc.) and forgone tax revenue would efficiency-seeking investments to maintain FDI inflows help to inform the policy debate. The design of support into the country. policies aimed at ameliorating the labor adjustment costs accrued by the change in sectoral specialization of SEZ Efforts should be made to improve regulations and is also important (see Poverty and Equity policy note). encourage greater transparency related to financing The Government has been strengthening the regulatory of MSMEs while also creating additional instruments. framework to facilitate PPPs, and the launch of the Iniciativa Strengthening financial infrastructure would further por la Productividad y la Competitividad exemplifies some contribute to increasing access to finance. The current of the recent efforts made to leverage on public-private legal framework does not adequately support the dialogue,161 with a view to bolster infrastructure upgrading development of financing instruments that can rely on and, ultimately, competitiveness. movable collateral such as leasing and factoring. A legal reform should be considered to solve the inefficiencies The competitiveness of national industries which of the secured transactions and insolvency systems, do not have easy access to up-to-date information including registration, enforcement and recovery of on existing opportunities should be fostered, by collateral, as well as corresponding amendments to the revamping the role of the Export Promotion Agency prudential lending regulations. The main priorities to (EPA). The international experience has shown that EPAs improving access to finance among small establishments can help exporters reach new markets and become relate to: i) increasing volumes and sources of private better integrated. EPAs are more effective when they sector finance beyond banks, such as angel investors, offer bundled services and tailored approaches. A well- venture capital funds, and leasing; ii) increasing the use designed and effectively managed EPA could introduce of financial services to support productive activities while firms to new export opportunities, thus diversifying the reducing transaction costs; iii) increasing the scope and DR’s export markets. This could be done by, first, clarifying depth of non-financial services to address key constraints of the roles of all existing institutions involved in export to credit, iv) further developing private capital markets 107 promotion; and second, balancing the EPA budget so would help alleviate market concentration. that payroll is not a burden limiting resources available to support export promotion activities. Industry-specific reforms Further legal reforms on competition and business The development of non-all-inclusive tourism niches regulations are needed. The authorities should should be fostered. The focus of the DR’s tourism sector particularly focus on the following areas that are expected on all-inclusive beach resorts has largely ignored the to yield immediate results: i) launch the enforcement of country’s enormous potential for cultural, environmental, the existing competition law in order to prevent and historical and adventure tourism. Refocusing the country’s punish anticompetitive behavior by strengthening brand identity to encompass these features would enable the Competition Authority, Procompetencia, especially it to both leverage its price advantage in its existing through the appointment of an Executive Director; ii) source markets and exploit emerging opportunities in develop a strategy to review and remove regulatory nontraditional source markets. restrictions in key Product Markets, especially those that risk to enable anticompetitive behavior of market players; In order to ensure that more firms are able to comply iii) finalize the implementation of the new insolvency with international standards, it is important to law by developing accompanying rules and regulations; strengthen national systems for quality inspection iv) finalize the draft law on secured transactions for and verification. The objective is to ensure that the DR parliamentary approval; iv) remove barriers to open new can strengthen existing institutions and improve its track business from the Commercial Code (such as minimum record of compliance with international standards and key capital requirements); and v) enhance the regulatory trading partners’ specific requirements to (i) guarantee framework to promote the attraction and retention of a higher level of protection of the domestic population, (ii) contribute to (sanitary) disaster risk mitigation, as well 161  Iniciativa por la Productividad y la Competitividad Nacional as (iii) increase and maintain access to high value export was launched by President Medina in August 2015 Building a Better Future Together markets. Enhanced oversight will require improvements and (iv) capacity-building and technical assistance to be in physical and institutional infrastructure, better able to meet the market demands. Using differentiated coordination between international bodies and the incentives under a transparent and market-driven scheme private sector, and increased transparency and traceability would allow relevant stakeholders to build mutual along value chains. New standardization agencies credibility, which would thereby provide incentives to the and certification systems will need to be created, and commercial and private financial sectors to share risks in capacity building will be required in existing institutions. the rural productive investments. Enhancing quality verification will be especially important in the agricultural, livestock and fisheries sectors, and The inclusion of smaller industries in the agricultural the Dominican authorities should work closely with the cluster should be facilitated, by improving services WTO’s sanitary and phytosanitary standards committee on sanitary and phytosanitary (SPS) compliance. The to expand the range of agricultural exports that meet principal objective would be to upgrade SPS national international requirements. A recent project meant to capacities, building in particular on recommendations increase the competitiveness of the banana industry, of independent evaluations (e.g. OIE PVS Pathway for made up of several components (e.g. technical assistance, Veterinary Services). Veterinary, phytosanitary and food institutional strengthening, funds to finance producers) safety (national) authorities should be able to comply with with the support of the UE, proved particularly successful international standards and key trading partners’ specific and should serve as a model for other industrial clusters. requirements, with a view to (i) guarantee a higher level of protection to the domestic population, (ii) contribute to Efforts are needed to increase the relatively low (sanitary) disaster risk mitigation, as well as to (iii) increase marginal productivity and limited access to information and maintain access to high value export markets. Policy and markets of smallholder farms. Smallholder farmers actions on this front would include institutional and represent the majority of farmers in the DR and face a legislative reforms, including those meant to deepen 108 range of obstacles, including heightened vulnerability to the coordination and synergy with the private sector. shocks and a diminished capacity to respond to shifting Other actions include: 1) improving capacity to carry market demands. Producer associations can help expand out essential functions of risk analysis, surveillance, access to input and output markets, negotiate bulk prices, prevention, preparedness and response to sanitary and facilitate investments in post-harvest handling, crisis, cost-benefit analysis, sanitary information, quality aggregation and processing. Yet many producer groups assurance (in particular for laboratories), communication, in the DR lack the skills and financial resources necessary and certification; 2) upgrading physical infrastructure to implement key investments and effectively market including refurbishing some laboratories to enhance their goods. Firms operating on a small scale would analytical testing capabilities and possibly creating new also benefit from greater access to information about inspection warehouses at several border points. climate conditions, soil quality, extreme weather events and improved crop varieties. The Ministry of Agriculture Dealing with Haitian Migration should finalize the National System for Agricultural Information (under preparation). This, together with the Regarding migration, while more analytical work is existing meteorological information system could serve needed to inform future policy decisions, a “do no as the basis for a more ambitious and comprehensive harm” approach seems to be the most appropriate for information platform. the moment. This could take the form of an orderly effort to document and regularize migrants who currently live Producers should be integrated into domestic and and work in the DR. Haitian migrants to the DR play a global value chains. The competitiveness of producer non-negligible role in the economy and restricting their groups could be fostered through strategic alliances ability to work in the country could have severe impacts between the public and private sectors and would on the ability of the DR economy to sustain the high require: (i) technological innovation to raise productivity; growth rates observed today. Estimates from the World (ii) targeted market intelligence to enhance market access; Bank suggest that an “open policy scenario”, in which (iii) financial capital to boost access to productive assets; the DR opts for a fully open migration policy from Haiti, Building a Better Future Together toward both current and future migrants, would increase million per year, from 1961 to 2014.163 In 1979 alone, the level of wages between 2-3%, over the next 8 years, hurricane-inflicted damages reached 16% of GDP.164 and particularly the unskilled urban wages (4%). On the Losses from earthquakes and tropical cyclones have been other hand, a “deportation” policy (i.e., where all migrants estimated at US$683 million per year.165 Disasters also are deported and no new migrants are allowed to enter) have negative effects at the household level, and poorer would translate into a decrease of 3-5% of wages. The households are especially vulnerable. Lack of resources trend can be explained by the fact that Haitian migrants can force poor households to adopt coping strategies with do not compete with Dominicans on the same type of deeply negative long-term effects, such as withdrawing jobs, and therefore a decrease of Haitians would shift children from school so they can contribute to household a portion of Dominicans into lower skilled jobs, and labor. In that context, a poor households’ recovery from a translate into lower average wages. On the growth single disaster can take an entire generation. side, the openness policy would translate into a 0.35% additional GDP growth by 2022, while a deportation The development of the agri-food sector, which is one policy would cause GDP to stand 5.7% below the baseline of the engines of growth in the DR, creates important scenario, by 2022. Trade would also be affected, as global environmental sustainability concerns. The sector exports from the DR would decrease by 5% vis-à-vis the (agriculture, livestock, forestry, fisheries and agroindustry) baseline, by 2022, while the bilateral exports to Haiti contributes 16% to the national GDP.166 Primary agricultural would shrink by over 6%. production has been contributing a relatively constant 6 to 7% to the national GDP over the past 10 years. Agri-food ENVIRONMENTAL SUSTAINABILITY AND exports (animal, vegetable and foodstuff ) accounted for RESILIENCE TO CLIMATE CHANGE 20% of total value of official exports in 2012. Nevertheless, three quarters of the agricultural production is transformed Country Context downstream the value chain by the agroindustry sector,167 adding value and creating jobs in the country. The main 109 Like many other countries in the Caribbean, the DR agricultural products (by value of production) are chicken, is extremely vulnerable to natural disasters and the cattle, banana, rice, papaya, avocados, milk, sugarcane, overall impacts of climate change. The DR is highly pigs, and pineapples. On the flip side, agriculture puts exposed to rapid weather related disasters (tropical storms, pressure on natural resources, including forests, soil, water hurricanes, cyclones, floods and landslides), slow climate management and biodiversity. Slash-and-burn farming, change processes (sea-level rise and desertification) for example, continues to contribute to deforestation, and seismic events such as earthquakes and landslides. soil erosion, watershed pollution and the destruction of Roughly 92% of its economic production and 97% of its habitats for the DR’s many endemic species. population are located in areas vulnerable to two or more types of natural disaster.162 Geographic location plays a Amid rapid economic growth rates, forest coverage has large role in explaining this high degree of exposure to increased over the last decade. While many countries weather events, but so do structural weaknesses such as in the world that have sustained high rates of economic unplanned urban growth, land degradation, and weak growth have not been successful in maintaining their forest enforcement of building codes and zoning regulations. coverage, the DR stands out as a fast-growing economy that has managed to effectively protect its forests. The The incidence of disasters affects economic activity and livelihoods, especially for the most vulnerable 163  This estimate is in 2010 US$. This represents a conservative segments of the population. Disasters have slowed assessment, as no major earthquakes occurred during this period. annual GDP growth by an estimated 0.69%, or US$420 164  See “República Dominicana: Repercusiones de los Huracanes David y Federico sobre la Economía y las Condiciones Sociales”, CEPAL México, 1979. 165  This evaluation was performed using the Caribbean Catastrophe Risk Insurance Facility’s MPRES platform. 162  See World Bank, 2005, Natural disaster hotspots: A global risk 166  See Junta Agroempresarial Dominicana (2009): Estrategia para analysis. Washington, DC: World Bank: el Desarrollo Agropecuario y Agroindustrial Sostenible para la RD. http://documents.worldbank.org/curated/en/2005/04/6433734/ 167  See Ministerio de Agricultura (2011): Plan Estratégico Sectorial natural-disaster-hotspots-global-risk-analysis de Desarrollo Agropecuario 2010-2002. Building a Better Future Together country’s total forest cover increased from 32% in 2003 largest prospective downgrade among the 48 countries to almost 40% in 2011, due to increased environmental assessed.169 Low rates of private insurance (1.2% of GDP) protection and the successful control of forest fires. In exacerbate risk exposure, especially in the agricultural addition, the country is firmly committed to reducing sector, where insurance rates are especially low and carbon emissions. In fact, Article 194 of the Constitution where almost a third of disaster damages have historically specifically references the need for adaptation to climate occurred.170 Without a comprehensive financial strategy change. The country has also ratified the UNFCCC in 1998 to manage these risks, disasters can impose a very high and the Kyoto Protocol in 2002. opportunity cost, as resources previously allocated to development projects may have to be diverted to cover Challenges disaster-related losses. Reallocating these resources through ad-hoc budgetary processes can also delay Vulnerability to Climate Change and Disaster emergency response and recovery efforts, diminishing the Risk Management Capacity efficiency of reconstruction. The lack of high-level coordination mechanisms In addition, DRM and climate change adaptation are hampers the effectiveness of the country’s disaster insufficiently integrated into national development risk management capacity. Disaster-risk management planning and decision making. The Ministry of Economy, (DRM) and adaptation to climate change are priority Planning and Development (MEPyD) has progressively objectives of the END. In September 2002, the government incorporated DRM into its public investment system.171 established the National System for Disaster Prevention, However, the information available at the sector level (risk Mitigation and Response (Sistema Nacional para la maps, vulnerability assessments, etc.) is not sufficient for Prevención, Mitigación y Respuesta ante Desastre, SN-PMR), thorough risk assessments of public investment projects. which defined the general principles of a risk-reduction Meanwhile, weaknesses in the institutional framework 110 policy for all levels of government. However, the SN-PMR for land-use planning result in unplanned urban growth lacks the high-level coordination mechanisms necessary in risk-prone areas. While the national construction code to harmonize the operations of all line ministries and was updated to incorporate seismic resistance in 2010, its technical institutions responsible for managing disaster enforcement remains uneven, and few structures have risk. The SN-PMR receives a small budget allocation,168 and been retrofitted since the new regulations came into limited institutional ownership weakens the link between effect. disaster-risk analysis and risk-reduction policies. The current national DRM policy will expire in 2016, and the Competitiveness and Sustainability of Agri-food Ministry of the Presidency has been leading a review of the Systems relevant legislation in an effort to strengthen the legal and institutional framework for DRM. The agri-food sector of the Dominican Republic faces important structural, biophysical, and climatic The DR lacks a clear financial strategy for disaster vulnerabilities: responses. Although the government is required by law to earmark 1% of anticipated fiscal revenues for use Climatic Vulnerability: The country faces an unprecedented in the event of a ‘public calamity’, contingent financing number of adverse weather events (droughts and floods). for disaster response is insufficient. Standard & Poor’s Reflecting a second consecutive year of drought, imports estimates that a major disaster in the DR could trigger a downgrade in the sovereign credit rating of 3 notches, the 169  See Standard & Poor’s, “Storm Alert: Natural Disasters Can Damage Sovereign Creditworthiness”, 2015. 170  See MEPyD-WB, Ministerio de Economía Planificación y 168  In 2012 only US$12.9 million was assigned to the SN-PMR, or Desarrollo de la República Dominicana (MEPyD), y Banco Mundial, 0.1% of the annual budget. See Ministerio de Economía Planificación 2015, “Gestión Financiera y Aseguramiento del Riesgo de desastres en y Desarrollo de la República Dominicana (MEPyD), 2012, “Análisis de la Republica Dominicana”: http://imagebank.worldbank.org/servlet/ recursos necesarios de funcionamiento para operación básica del WDSContentServer/IW3P/IB/2015/11/24/090224b083393dc4/1_0/ sistema nacional de prevención, mitigación y respuesta”, Programa Rendered/PDF/Gesti0n0financ0Rep0blica0Dominicana.pdf de Prevención de Desastres y Gestión de Riesgos, MEPYD/ DGODT/ 171  In 2013 a basic risk analysis was mandated for all projects BID. above US$10 million. Building a Better Future Together of cereals in 2015/16 are forecasted to remain above should be integrated into public investment and territorial the country’s five-year average. Imports of maize are planning processes by introducing screening mechanisms expected to increase almost 7% to 1.2 million tons, in line and disaster-risk considerations. Further actions to with this year’s lower production, while wheat imports promote disaster risk reduction in priority sectors through are forecasted to remain relatively stable at above 500 the development of hazard and risk information tools million tons. This adversity is likely to worsen in the near (e.g. safe school or safe hospital index) may also be future. According the National Strategy for Adaptation to considered. The creation of a dedicated risk-analysis unit Climate Change in Agriculture 2014-2020,172 total annual is also recommended. It would update DRM disaster rainfall may decrease to 1,137 mm in 2030 (11% decrease plans, develop DRR tools for public institutions, identify from 2010). Climate scenarios project an increase of and analyze high-risk areas, and develop and disseminate temperature of 0.5 to 1°C by 2030 and by1 to 2.5°C by risk maps and information in coordination with relevant 2050. Areas currently subject to drought could become authorities and local communities. permanently arid with climate change. Include risks resulting from climate change into fiscal Biophysical Vulnerability: Agriculture is a source of pressure risk management strategies. on natural resources. Despite encouraging progress in reversing deforestation trends, additional efforts are It will be crucial to better understand and quantify the needed to reduce ecosystem degradation in specific contingent liabilities associated with disasters in order regions of the country as a result of intense agricultural to develop an optimal combination of risk-retention activity. This sector is contributing to deforestation in and risk-transfer instruments to reduce the fiscal impact upper watersheds, soil erosion, and pollution of water of disasters. Contingent loans in case of disasters would sources that are threatening the landscapes, the country’s allow the Government to increase its budgetary capacity economic development and the health of its population. in the aftermath of disasters. Promoting the expansion The majority of deforestation (60%) continues to be of insurance, particularly in the agricultural and housing 111 caused by the expansion of slash and burn agriculture and sectors, could reduce the indirect contingent liabilities poor extensive livestock production practices in protected borne by the government. Protection against large areas on the borders with Haiti. Other direct causes disasters, would warrant internationally pooled risk of deforestation/degradation include illegal logging, insurance. unsustainable cattle grazing, natural disasters, forest fires, and infrastructure projects for mining, energy and tourism. Strengthen the Growth Potential of the Agri-food The regions most affected by deforestation and ecosystem Sector degradation, including soil erosion and consequently lower water availability in the watersheds, are the south Adopt an integrated approach to boost the growth side of Cordillera Central, the highest mountain range potential of the agri-food sector. Sustainable growth in the country; Sierra de Neyba; and along the country’s in the countries’ agri-food sector can be achieved with an border with Haiti. integrated approach that aims at tackling limitations to competitiveness, linking farmers to markets and providing Policy Directions an improved access to climate-resilient innovations. The World Bank proposes an integrated approach for the sector Increase Resilience to Climate Change and with the following four entry points: (i) making producers Natural Disasters more productive and resilient, while lowering their carbon footprint, through climate smart agriculture;173 Integrate disaster risk management tools in core (ii) integrating producers into domestic and global value administrative processes. Disaster risk management 173  Climate-smart agriculture (CSA) is an approach that seeks to increase productivity in an environmentally and socially sustainable 172  Estrategia Nacional de Adaptación al Cambio Climático en el way, strengthen farmers’ resilience to climate change, and reduce sector Agropecuario de la RD 2014-2020, prepared by the National agriculture’s contribution to climate change by reducing greenhouse Council for CC and Clean Development Mechanism (Consejo Nacional gas emissions and increasing carbon storage on farmland. CSA is para el CC y el Mecanismo de Desarrollo Limpio). therefore about adaptation and mitigation of the agricultural sector. Building a Better Future Together chains; (iii) strengthening institutions and the provision of public goods; and (iv) promoting the sustainable use and management of natural resources at the watershed level. • Encourage Climate Smart-Agriculture: This could be achieved through a comprehensive landscape approach that encompassed: (i) promotion of good agricultural practices on pastures, land grazing and rain-fed agriculture in the upper and middle sections of the watershed and; (ii) promotion of modern and efficient irrigated agriculture in the middle and lower sections of the watershed. The promotion of CSA can also support the GoDR to fulfill its commitments to the COP21 on the mitigation agenda and reach its goal of adaptation to CC. In its Intended Nationally Determined Contribution (INDC), the proposal of the Government for mitigation is to reduce the GHG emission by 25% in 2030, in relation to the 2010 baseline (3.6t of CO2 equivalent) and the agricultural sector can play an important role in achieving this objective. • Promote the Conservation of Natural Resources Assets: Under the Ministry of Environment’s mandate, 112 the promotion of Integrated Water Resources Management at Watershed level, the implementation of Payment and Compensation for Ecosystem Services,174 the participation of REDD+ are among the most important activities to be carried out to guarantee a sustainable conservation of natural resources.175 174  One pilot project has been carried out in Yaque del Norte. 175  The World Bank is assisting the country to design and carry out the Readiness Preparation Activities for REDD+.