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Alessandro Legrottaglie

DOMINICAN REPUBLIC - Economy

The Big Picture

Country Manager, the World Bank

Bio

Alessandro Legrottaglie, an Italian national, joined the World Bank in 1997 as Advisor to the Executive Director for the constituency representing Albania, Greece, Italy, Malta, Portugal, San Marino, and Timor-Leste. He has since held various senior positions in the World Bank. Prior to joining the bank he worked at the Italian Ministry of the Economy as Deputy Division Chief of the Multilateral Development Banks Unit. He has provided policy advice, participated in complex negotiations and various technical groups, and gained substantial experience in relations with different stakeholders, including donors and representatives of the private sector and of civil society. He holds master’s degrees in Political Sciences and Public Administration and a Post-Graduate Diploma with honors in European Studies, as well as a Post-Graduate Certificate in International Cooperation.

“Thanks to growth in other countries, we have had high levels of remittances and FDI.“

What factors contribute to high levels of growth year after year in the Dominican Republic?

This is one of the fastest growing economies in all of Latin America and that has been true for the past two decades. This is due to two main factors. One is the generally positive external environment, and the other is sound government policy. Between 1992 and 2000, annual average growth was 6.7%, the best annual performance in the region, and between 2001 and 2013 it remained positive at 5.1%, despite the banking crisis. From 2014-15, growth has been even higher, reaching an average of 7%. The reasons for this high growth are a substantial increase in productivity and strong domestic demand, both of which are driven by factors such as tourism, factory production, and construction. There is also a strong private construction market, particularly thanks to a low inflation environment that remained under 1% in 2015. Thanks to growth in other countries, we have had a high level of remittances and FDI. Foreign investment has been historically quite high in the Dominican Republic. In 2012, it was USD5.6 billion, in 2013 USD2.6 billion, and in 2014 it reached USD3.7 billion. These numbers have been very important for job creation in the country. In general, there has been substantial improvement of GNI per capita in the Dominican Republic. In 1992, the average per capita income was 57% of the regional average. In 2015, it was 90%. According to some projections, if this growth continues the gap will be closed in 2020.

How is the USD120 million Electricity Distribution Grid Modernization and Loss Reduction project progressing?

This is an important project because the electricity sector is one of the most challenging issues in the country. It is critical, first of all, from a fiscal point of view, as the government spends about 1.3% of GDP on providing subsidies to the electricity sector. Our project aims to reduce the loss of electricity and improve the supply. Through this project approximately 200,000 consumers across 18 circuits will benefit from improved service quality and availability as a result of the grid modernization, loss reduction, and social outreach work. The project will support ‘social compacts’ between the distribution companies and consumers to help increase customer payments and reduce power outages. The program will contribute to increased cost recovery and reducing the need for subsidies to the distribution companies. This project will certainly have an impact on the poorest, but will also improve private development in the region. One of the things that is keeping potential investors out of the country is the lack of electricity. Thus, the government is committed to improving this and has launched an Electricity Pact to try and find a consensus among all the players on how the sector can best structure the system.

What impact have the huge inflows of FDI from multinational companies had on the local economy?

FDI is critical. One of the issues the World Bank is focusing on is trying to help the country improve its investment climate. FDI is critical for many reasons. First of all, it helps offset the balance of payments, but more importantly, it helps generate growth. When you generate job growth, it becomes easier to generate revenue for the country. This can then be redistributed and invested in public service, which is critical. Keeping a high level of FDI is challenging, but is also important in a country where reducing poverty is still an issue.

What does the World Bank see as the biggest obstacles in terms of equality and inclusive growth for the entire population?

This is the main challenge for the country and the main focus of the activities of the World Bank. The high growth of the past has not corresponded to similar levels of poverty reduction. Over the last 15 years, the percentage of people who moved from the vulnerable class to the middle class has only been 7%, compared to a regional average of 41%, while 85% remained in the vulnerable class and 8% actually moved to a lower class. It is clear that there is a disconnection between growth and the capacity to escape poverty in the Dominican Republic, which the government urgently needs to address. A lot of effort has been made by the government to combat poverty, particularly over the past two years. Poverty was reduced by about 10% between 2014 and 2015. The average per capita income of the bottom 40% has increased on average by 2.5%, while the top 60% has grown lower. Therefore, today, there are some trends that are indeed very positive in terms of poverty reduction and shared prosperity, but there is still a lot that needs to be done. Some of the remaining problems are related to the lack of elasticity in the labor market. There has been a huge growth in productivity, but this has not corresponded at the level of real wages that have allowed the poorest segments of the population to escape poverty. Another related issue is the fragmentation of the economy and the lack of links between different economic zones. One important part of DR’s economy are the special economic zones, which allows us to develop high value-added sectors. The problem is that these don’t spill over as they should into other sectors of the economy. The lack of quality in the provision of public services is another piece of this puzzle and is an issue where the World Bank is focused. Therefore, education, healthcare, and social protection need more attention from the government, especially with regard to quality improvements. The World Bank focuses on many activities in these fields. For example a USD75 million social protection and promotion project focuses on the 14 poorest provinces of the country. A USD50 million education project aims at improving the quality of the sector by focusing on improving the quality of pre-university education through the National Pact for Education.

Is the large informal economy a hindrance to growth?

This is a big problem and a fiscal issue because when you have a lot of people in the informal sector then the state loses revenue. It is important from both ours and the government’s perspective to see what can be done to improve the fiscal situation. The government has committed to creating incentives for the private sector to make employment more formal, but this is a challenge that cannot be overcome in a short time. We certainly need to continue working with the Government on horizontal interventions aimed at improving the business climate without which the private sector becomes weaker. We want to be sure that the private sector environment is conducive to generating growth and business. Then, we need to look at some vertical interventions, meaning by focusing on some of the leading sectors of the economy.

What sectors will hold the most potential for job creation in the next five years?

The current leading sectors of the economy have the potential to continue to be engines for creating jobs and pushing inclusive growth. There is still potential in tourism and agribusiness, including eco-tourism and adventure tourism. However, it is important to focus on improving the environment for private sector activities, including making efforts to lower electricity prices. In addition, the provision of social services, as well as water and sanitation, are critical for the whole economy and making growth more inclusive.

What is your outlook for the Dominican economy in 2017?

The Dominican Republic remains the country with the highest growth levels in the Americas. Annual GDP growth is projected to be around 4.6% on average between 2017 and 2018, much higher than the average of the LAC region projected at around 1.7%. At the same time, the fiscal deficit is around 3.5 percent of GDP. The fiscal deficit of the non-financial public sector is projected to be around -3.5% in 2017-18. The primary balance, despite indications of improvement, is expected to be negative in the same period, which will contribute to an increase in debt. Meanwhile, the strong growth and improved economic and financial reputation that the government has built in recent years is allowing the country to diversify its funding resources and allow it to enjoy comfortable refinancing options.

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