The Next Haiti?
By Alan Stoga*

Leonel Fernandez has one of the toughest jobs in the Americas. He is the newly inaugurated President of the Dominican Republic, a country that went from fabulous boom to bankrupt bust practically overnight, driven by a mix of corruption, fraud, and mismanagement that would have seemed fantastic if invented by Hollywood.

A few years ago, the country was growing in excess of 7% per year, jobs were being created, inflation was under control, and investment capital was flowing into tourism, manufacturing, and privatizations. Today, the economy is in its second year of actual decline, unemployment is at least 17%, and inflation is above 50%. The electricity sector is insolvent and the banking sector is barely functioning. Capital is flowing out of the country even faster than boat people desperately seeking better lives in Puerto Rico or the United States.

Every day, the Dominican Republic, which one of the real success stories of the nineties, looks more and more like neighboring Haiti, the usual source of boat people in the Caribbean — and things could get much worse before they get better.

There is little mystery about the cause of the collapse: ex-president Hipolito Mejia. Having inherited — from Fernandez who was president in 1996-2000 — a country that was on a fast track to prosperity based on increasing competitiveness and integration into the world economy, Mejia shifted gears towards an inward looking populism. The country might have survived four years of his wrong-headed policies, but for three disastrous decisions.

First, the Mejia government spent the equivalent of 15% of the country's GDP to bail out the depositors of a fraud-wracked failed bank, Baninter. The main beneficiaries of the $2.2 billion bailout were 80 large depositors whose deposits accounted for three-quarters of the total. Second, the government compounded the problem by trying to finance the bailout with a dramatic increase in money creation, generating a vicious circle of inflation, devaluation, and capital flight. Third, the government allowed the electricity sector to all but collapse through a combination of inadequate regulation, non-payment of bills, partial pass through of increased costs, and a bizarre rescue of Union Fenosa, the Spanish utility. The result is the worst of all worlds: blackouts range up to 20 hours per day, most consumers cannot afford what little electricity is available, non-payment and electricity theft are skyrocketing, and the distributors have stopped making needed new investments — further weakening the system.

President Fernandez comes into office with little room to maneuver. He has to negotiate an agreement with the IMF, which was suspended because of Mejia's out-of-control policies, without accepting too much of the Fund's usual austerity medicine. He has to turn the lights back on, somehow injecting capital and rationality into the electricity sector. He has to persuade international investors and creditors to take another chance on his country, despite a near-certain debt rescheduling and disappointed privatization investors. Perhaps most importantly, he needs to convince Dominicans that their country's rapid slide into economic disaster can be just as rapidly reversed in order to gain their support for a badly needed new round of economic reforms. And he has to do all this with a Congress controlled by Mejia's political cronies.

To succeed, Fernandez will need good policies, money, and allies. On the policy side, the country needs a truly independent central bank, tax reform, elimination of price controls, reorganization of the electricity sector with targeted subsidies for low income consumers and establishment of a coherent regulatory structure, and a firm commitment to a stable exchange rate.

Money and allies go together. If Haiti is what the Dominican Republic could become, then, even with the distractions of an election and a Middle East war that refuses to go away, Washington should understand that supporting Fernandez is in the U.S. national interest.

In the first instance, this means working to produce a quick IMF agreement that is more about providing immediate financial support than about imposing onerous tax increases.
In the second instance, the United States should organize a safety net that would underpin a return to solvency for the electricity sector. This should be at least partly financed by the multinational companies who own the assets, whose investments will otherwise continue to erode. Other creditor countries and the multilateral organizations could participate, directly or with loan guarantees, and the United State should provide funding through the much hyped, but little used Millennium Challenge Accounts.

President Chavez's oil diplomacy could also make a significant contribution to stabilizing the Dominican Republic. Fernandez would have to find a way to keep both Washington and Caracas happy, but that would be a small price to pay for reliable electricity.

The good news is that President Fernandez has assets on which to build: a competitive tourism sector, strong remittance flows from the United States, a track record of successful management during his first term, and the political momentum of a cleanly won election. The bad news is that the clock is already ticking.

*Alan Stoga is president, Zemi Communications.