Tropical Paradox

By Ken Stier/ Santo Domingo

It's pretty clear that Leonel Fernandez, 53, and now midway through his second, nonconsecutive term as President of the Dominican Republic, has the vision thing. When developers proposed the country's first modern port during his first term, "he got it right away--'We can be the Singapore of the Caribbean'--his words," recalls Dominican businessman Samuel A. Conde, who is looking to set up a regional logistics center.

More recently Fernandez has been pitching his island as a site for movie productions. He hired a Florida firm to act as the country's national film commission, and he had Robert De Niro over for lunch at the Presidential Palace.

Perhaps even more audacious, for a country still rebounding from a colossal banking scandal, the D.R. is trying to germinate a new $800 million regional financial center. "Leonel Fernandez is very much a vision man ... This is exactly the sort of visionary project he absolutely loves," says Gaetan Bucher, a Swiss-Dominican banker and the lead investor in what will essentially be an offshore entity, first trading Latin American debt and later offering a safe haven for private wealth and corporate banking.

There are many other parts to Fernandez's vision of how to win a better place in a globalized world. Making the rest of the country's economy as competitive as its beaches requires enhancing current strengths as an assembly export platform (more than 500 companies operate from its free-trade zones) and retaining a bigger share of its foreign-investor-dominated tourism industry, which accounts for 12% of the country's $29.1 billion GDP. It also means diversification. The challenge is an urgent one: 80% of the country's 9 million inhabitants are under 40, and 42% live in poverty. More than 12% of them have already left, mostly for the U.S. They send back almost $3 billion in yearly remittances.

Fernandez has a record of delivering. During his first term (1996-2000), the D.R. enjoyed the highest growth rate in the Latin American region. His successor and predecessor, Hipolito Mejia, presided over a banking scandal in 2003 that triggered an economic nosedive that wiped out 20% of GDP (imagine $2.8 trillion disappearing in the U.S.) and plunged an additional 1 million Dominicans into poverty. Since retaking the top job 20 months ago, Fernandez has put the country back on the mend, restoring macroeconomic stability and business confidence. Last year's growth soared 9.2%, with single-digit inflation, down from 28.7% in 2004.

That is not to say all is well. "The country trusts him with the economy, but he does not seem to pay that much attention to social issues," says Jose Oviedo, a sociologist at a local Catholic university. That's just what soured voters on his first term: prosperity that did not seem to reach enough people. The problem is a trickle-down economic and political system that is still evolving from the dark, authoritarian past of the Rafael Trujillo era that left mere crumbs for social expenditures. Forty-five years later, the economy has dramatically diversified from its plantation foundations of sugar and coffee.

Still, the system is riddled with privileges for the politically well connected, leaving the majority of Dominicans eking out a living in the underpaid informal sector. Spending on health and education is anemic, even by regional standards, and the rule of law is a work in progress. An unusually candid recent United Nations Development Program report torched the country's elites for being out for themselves with no sense of the commonweal.

It is unclear just how much Fernandez means to challenge this, even though his Dominican Liberation Party (PLD) is slightly left (but pro-business) and his upbringing quite modest. His mother fled the island to work as a seamstress in a New York City garment factory, which afforded Leonel some formative years in New York City's Upper West Side. To many, Fernandez seems more fixated on consolidating power than on advancing his government's ambitious agenda. His government, for example, is spending almost as much building a subway line--$700 million--as it does on education and health together. And despite his rhetorical intolerance of corruption, Fernandez hasn't seriously challenged the country's long-standing culture of impunity enjoyed by thieving elites. "Leonel is the most capable politician we have, and he understands very well what the country needs to do to modernize, but politically he is proving to be very traditional, indulging in the most perverse forms of Dominican politics, paternalism and corruption," says Pedro Catrain, a deeply disappointed friend from law school. Fernandez, for his part, has said fighting corruption is a hallmark of his administration.

It's probably too early for unequivocal verdicts, but it seems fair to say that Fernandez often appears to be trying to have it both ways. Take the recently concluded free-trade agreement with the U.S. Fernandez gets points for pushing the Dominican Congress to go along, but with nearly 90% of its exports going to the U.S., the country really had little choice. And Fernandez's party delayed implementation, which allowed a pipeline of infrastructure projects to go to favored contractors without the fuss of open bidding required by the new accord. That includes the subway contract, which went to Diandino Pena, who is Fernandez's biggest financial supporter. "Transparency is an evil word here," says Kevin P. Manning, president of the local American Chamber of Commerce. Fernandez has likened the subway to Paris' Eiffel Tower, which also faced opposition.

The country's economic troubles have conveniently handed international donors--who ponied up more than $1 billion to see it through the banking scandal--more leverage to drive reform. Most critical for business is the debilitated electricity sector: 45% of the national utility's receivables go unpaid, requiring a government subsidy of $620 million last year. Such is the bitter fruit of decades of political favoritism, and donors such as the World Bank say they want to see an aggressive--and unprecedented--crackdown on delinquent customers, no matter how, uh, connected they are. "If you don't address the issue of the large consumers who don't pay, you have no chance of resolving the energy-sector crisis, except on the backs of the poor," says Caroline Anstey, the World Bank's Caribbean regional director.

The D.R. is going to need dependable power to fulfill Fernandez's vision of deploying information technology to leapfrog the country into future-friendly industries. It could not come soon enough. China's hot dragon breath vaporized 20,000 low-skilled jobs in recent years--about 10% of the total in the free-trade zone, necessitating a move up-market. Good telecommunications could make the country suitable for outsourcing, including call centers, but the D.R. is just beginning to train the legions of computer-savvy English speakers it needs to make a dent in swelling youth unemployment. Only 10% of students finish high school.

One key barometer of where the D.R. is headed: the upcoming trial of the six alleged masterminds of the so-called BANINTER (Banco Intercontinental) scandal, in which $2.5 billion was looted. For the first time, scions of some of the most elite families will be in the dock. It's a case expected to go to the D.R. Supreme Court, which has been the focus of recent U.S. efforts at judicial reform. The trial may be just as symbolic of the Dominican Republic's future as the new subway is. If the court's justice isn't perceived as fair, the D.R. will have a hard time slipping its banana-republic reputation, even though it will still have lovely beaches--and a subway.