President Leonel Fernández: Friend or Foe of Reform?

October 4, 2004 COHA

The Dominican Republic saw China-like growth during President Leonel Fernández’s first term and the nation was fiscally secure with low interest rates and a stable 17 Dominican pesos to the U.S. dollar—but was it all a matter of luck?
Solid corruption manifestations are already beginning to plague the new Fernández administration as the man accused of stealing millions from a fund created to help poor Dominicans is appointed to a major cabinet post.
The Dominican Republic will be seeing an administration whose neoliberal goals and campaign promises inexorably will increase the divide between the country’s rich and poor and between the Caribbean country and its neighbor.

From 1996 to 2000, the Dominican Republic, under President Leonel Fernández, experienced an annual 7.7 percent economic growth, a drop in unemployment to 14 percent and stable exchange and inflation rates. The successes were short-lived, however, as the country soon enough dissolved into economic decline and increased poverty beginning toward the end of Fernández’s term. Economic indicators then plummeted with the advent of Hipólito Mejía’s presidential term from 2000-2004. By 2004, Mejía faced a failing economy that was largely out of his control, especially considering how closely linked to the Dominican economy is to the United States’—American goods comprised over 85 percent of the Dominican Republic’s imports and the United States imported over 50 percent of all goods manufactured in the Dominican Republic. As the economic situation in the United States in 2001 worsened, so did the Dominican economy which was largely dependent on it, and worsening conditions in that country were compounded by a 2003 bank scandal in the Dominican Republic that cost its treasury a devastating $2.2 billion. With a depressed economy as well as the burgeoning corruption scandals wracking his administration, Mejía could not make the improvements Dominicans desperately desired and lost his re-election bid.

By turning once again to the former conservative president Leonel Fernández in May 2004, the island voters demonstrated their support for reinstating his successful economic policies but exhibited a fading memory about his vices of corruption and cronyism. The correlation of economic growth and decline to the records of the two different presidents begs one to ask whether the nation’s success from 1996-2000 was attributable entirely to Fernández’s policies, and were Mejía’s failures pre-destined. Not surprisingly, during Fernández’s term, the United States also experienced significant improvements in its economy, but many of these turned out to be short-lived and faltered in the normal cyclical readjustment of its performance. Declines were later amplified by a drastic reduction in tourism and decline in buying power following September 2001. The current upswing in the U.S. economy makes it likely that the Dominican economy will once again improve and Fernández will once again reap the benefits from this upswing without any particularly brilliant strategy on his part.

At the start of his second term, Fernández already is displaying well-known traits that he is not necessarily interested in putting the interests of average Dominicans first as much as he is to prove generous and tolerant of the ethical weaknesses of his political colleagues. If his past failings and his questionable first month in office are any indication, the Caribbean nation will once again be ravaged by government corruption and deteriorating conditions for its working poor and lower middle class.

Cabinet Positions Open: Only friends need inquire
The end of Fernández’s first term in office in 2000 was marred by an embezzlement scandal in which four cabinet members were accused of stealing $100 million from the Temporary and Minimal Employment Fund (PEME), a monetary fund that aids the poorest of Dominicans who find themselves caught between jobs or underpaid. All four are currently awaiting trial, but Fernández and his rightist party, the Dominican Liberation Party (PLD), stand by their claim that the officials are innocent, citing that the cases have been politicized without merit.

Fernández has now had the temerity of appointing all four of the aforementioned men to positions in his new cabinet, including Luis Inchausti—allegedly the main culprit of the notorious embezzlement scandal—as the Secretary of State, a job for which he is brings no experience and for which he is woefully under qualified. Previously, Inchausti served as the head of the PEME. As for the others accused of embezzlement, Simón Lizardo, the former Administrative Secretary, has been appointed to serve as the top auditor; Naivanjoe Ng Cortina, formerly an auditor, will now regulate the stock exchange; and Diandino Peña, the former Public Works Secretary, was chosen to head a new subway construction project. In addition to the controversial appointments—a den of foxes to guard the chicken coop—one must also question the logic behind allocating $500 million to build a subway in a country that only has 190 doctors for every 100,000 people, where a third of all children receive no education past the fifth grade and where the government only spends 2.4 percent of its GDP on education—compared to 5.6 percent that the United States allocates. Critics insist that surely this $500 million could be better spent.

These appointments contradict a main commitment made during the president’s election campaign, which was to curb government corruption. Given their past behavior, it is doubtful that Fernández and his colleagues will be overly concerned about the impact that these insulting appointments will have upon Dominicans as these rogues inevitably move to repeat their past derelictions. Fernández’s economic team is also laced with cronyism as he brings in a tidal wave of tainted former government officials and untalented party loyalists. The head of the team is Vicente Bengoa, the former banking superintendent, who is being joined by Miguel Cocco, former head of the customs service who also served on Fernández’s governing team during the latter’s first term. Other reappointments include Héctor Valdéz Albizu, the governor of the central bank, and Temistiocles Montás, the technical advisor to the presidency. Fernández has also appointed Daniel Toribio, the former finance minister, to the position of the chief executive of a new quasi-central bank, the Banco de Reservas. With his team of advisors and ministers—some of whom are world-class crooks—Fernández’s appointees are otherwise technocrats, party loyalists and close personal friends. The new president has given political positions to veritable hacks that he wanted to reward, rather than seek out the most qualified for the job. Obviously Fernández does not even begin to comprehend the concept of meritocracy.

Campaign Promises
While campaigning, Fernández also promised to reduce spending, stabilize the economy and possibly further privatize the energy sector, but in order to implement these neoliberal goals, the government must cut spending on “non-essential” sectors, which traditionally help the impoverished but are generally expensive to maintain. In an interview that COHA had with Hector Santos, an outgoing executive director of the Inter-American Development Bank and a member of the Dominican Revolutionary Party (PRD), the official noted that in order to reduce spending, Fernández will have to eliminate the gas subsidy to the poor and lower the number of governmental workers. Were these actions to be implemented, the chasm between the rich and the poor will greatly increase.

Chasm or not, Fernández has already begun to initiate so-called tax reforms. The first plan, recently passed by both the Senate and the Chamber of Deputies and signed by the President, is actually a holdover from the Mejía administration and seeks to satisfy an agreement the Dominican Republic made with the International Monetary Fund (IMF) to generate more revenue. It aims to raise $500 million a year in new taxes, cut the tax rate on house rentals from 20 percent to 10, grant a tax break to the middle class by increasing the threshold for tax on luxury properties from a value of $66,000 to over $100,000, and deliver a 30 percent increase in wages. In addition, the tax reform contains a 25 percent levy on corn syrup imported from the United States. On September 13, the U.S. Deputy Trade Representative Peter Allgeier told Hugo Guiliani, the Dominican Ambassador to the United States, that if the Dominican Republic actually implemented the 25 percent tax, the United States would discard the Central American Free Trade Agreement (CAFTA) signed on August 5, shortly before Mejía left office. After just a month, Washington’s probe proves that, until the United States offers a better plan, Fernández is trying to demonstrate that his loyalties lie with his people; however, the Dominican President did concede that he is still considering introducing another measure to end the corn syrup tariff.

The final element of the Fernández election platform proposed the privatization of energy as a quick-fix for the country’s pitifully inadequate power electrical grid and as a means to attract foreign investment to help to pay off the government’s enormous foreign debt. However, it is most likely that privatization will create a large economic burden on the government. In other Caribbean nations with privatized energy, successor foreign companies that are involved usually have no vested interest in serving the welfare of the local inhabitants and will gingerly mark up energy prices to unreasonable levels in order to turn a huge profit. In the Dominican Republic, the slightest drop in the economy could lead to colossal energy bills and compound an already weak economy.

What can Fernández do for you?
In the upcoming months, foreign observers will be anxiously waiting to see how the Fernández government handles the country’s current economic problems: a $6 billion debt, a 32 percent inflation rate and a 33 percent unemployment rate; national blackouts that can last 20 hours a day; and the 2003 bank scandal from which the Dominican Republic’s GDP is still reeling. If his first term is any indicator for what is to come, Fernández’s administration will flounder and his governance will worsen until it can ride an adventitious economic upswing in the U.S. that will bring about a substantiate improvement at home. If Fernández is unable to revive the economy, Dominicans can only hope that the country can be spared the corruption and cronyism which are the traditional hallmarks of his service to the nation, and that his ineptitude does not permanently injure their country.