It's not a free ride for Zona Franca
golo said:
Get this....Hippo already started making exemptions to specific groups. For instance, he says that The Free Trade Zones will not have to pay the 2% import tax for the raw materials they use.
What a dandy!!! Here is a group that is the #1 "beneficiary" of the peso fall, making great profits at our expense and on top of that Hippo now gives them a 2% gift. Just think. The Free Traders are saving more than 50% in empoyee salaries with the dollars they get from income abroad for their goods. If they were paying and employee the equivalent of $200 dollars a month before, they can do it now with $100 dollars, because their employees get paid in pesos with miserable salaries. They were also selling their dollars without restrictions and buying them again at the next Hippo-induced dollar fall.
TW
As a Zonas Francas employee since 1999, I have the following to say:
1. Zonas Francas can be called Zonas Francas precisely because it imposes no tax on importation of raw material or on exportation of finished products. This the raison d'etre for foreign investors to come and invest in Zona Francas.
2. The tax-free incentives have nothing to do with exchange rate.
Be US$1= RD$1 (in the late 1970's) or US$1=RD35.
3. All foregin companies pay local employees in local currency while paying top executes in either home currency or US$. Ths is a standard compensation practice worldwide and not unique to any sector or country. For example, Microsoft will send an American to head its Asian regional headquarter and pay him in US dollars while paying his local managers and submanagers in local currency.
4. Companies do not increase/decrease local wages simply due to exchange rate fluctuations. Microsoft will neither increase its Dominican employees' wages to reflect falling pesos nor will it decrease those of its French employees due to rising Euros.
5. Regardless of the exchange rate, the fact remains that there have been far more Zona Franca factory closings than openings in the past few years due to a variety of reasons. Why ? Mostly because DR is losing its competitive edge on world stage and the simple guarantee of import-export tax exemption no longer promises profitability. In San Pedro de Macoris' Nueva Zona Franca, where it has enough land to house dozens of factories, the total number of tenants never exceeded 20 even at its height. And guess how many are still actively producing ? 3 !! Yes, three, tres, trois !
A few have already sent all its manual workers home while keeping a handful of administrative staff to man phone/fax. Why ? Because many in US and Europe are not buying due to economy slumps. Even if US$1=RD$1,000 thus making labor cost practically zero, if no orders come in, companies have to close.
6. Most ex-Zona Franca factory owners who left in recent years have moved to lower-cost countries such as China and other Central American countries, if they did not decide already to exit the business together. And mind you, there is no "Zona Franca" in China ! They are not coming back to DR even if peso falls further.
7. Factories have to import raw material and pay for them either in US$ or Euro. Many petrochemical and general plastics raw material have skyrocketed in pricing due to shortage of natural gas, acetone..etc. Factor in higher costs in marine shipment and insurance, it is no breeze running a company in Zona Franca despite the tax advantages.
8. Companies initially came to Zona Franca in DR because of tax advantages and political/economic stability. The latter is gone down the drain, as we all know. If the former also goes, there is no reason for current foreigner owners to stay. Even less reason for new ones to come.
9. The falling peso might give current Zona Franca factories a temporary cost respite, but trouble lies ahead. If DR economy deteriorate further and crime rises as a result and kidnapping becomes a cottage industry as in Mexico and Colombia, you can be sure more foreign companies will flee. There is already a rising tide of Dominican crimials being sent back from the US. Earning more US$ is not going to be more appealing to foreigners in DR if personal security is at stake.
As much "lios" as His Baldness has got into, his decision not to temper with existing Zona Franca parameter is a sensible and sane one. After all, DR needs more US$ income, not less. The three primary bringers of foreign income are "remesas" from Dominicans abroad, tourism and Zona Franca. Nobody in his sane mind would implement policies alienating any of the three.
Just my two (and depreciating) centavos !