US embassy cable - 04SANTODOMINGO4006

UNCLAS SECTION 01 OF 03 SANTO DOMINGO 004006 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CAR, WHA/EPSC AND DRL; NSC FOR SHANNON AND 
MADISON;LABOR FOR ILAB;TREASURY FOR LAMONICA AND OASIA; 
USDOC FOR 4322/ITA/MAC/WH/CARIBBEAN BASIN DIVISION 
USDOC FOR 3134/ITA/USFCS/RD/WH 
DHS FOR CIS-CARLOS ITURREGUI 
 
E.O. 12958: N/A 
TAGS: DR, EFIN, PGOV, PINR, ELAB 
SUBJECT: DOMINICAN TRANSITION #6: POLITICS DRIVES WAGE 
DEMANDS 
 
 
1. (SBU) This is no. 6 in our series on the transition to a 
new presidential administration in the Dominican Republic. 
 
POLITICS DRIVES WAGE DEMANDS 
 
 
The grim joke in recent months is that the supermarket has 
become the "house of horrors," especially for the middle 
class.  The double sting of inflation and peso depreciation 
played a central role in the defeat of President Mejia.  Now 
he and the outgoing government are using them to play salary 
politics against the incoming Fernandez administration. 
 
During the campaign, President Mejia promised a modest wage 
and salary hike of 20-25 percent to take effect in January 
2005.  On April 28, less than three weeks before the 
presidential vote, Mejia declared before the American Chamber 
of Commerce that as soon as the tax reform package went into 
effect, the government would raise all wages amd salaries by 
30 percent, with another increase six months later to restore 
the purchasing power of workers. 
 
Now, even as his outgoing administration cooperates on the 
technical level with the PLD drafters of a tax reform 
proposal, Mejia and his supporters are insisting that the 
reform must be accompanied by a 30 percent wage raise. Though 
Mejia promises "not to change a jot" in the PLD tax proposal, 
the PRD is likely to put forward legislation at the same time 
on salary levels. 
 
Deciding Wages 
 
Currently, minimum wages are set by negotiation in a salary 
council; public sector wages are published by decree; and 
other private sector salaries are generally adjusted in 
reference to the minimum wage, or not adjusted at all, or, in 
rare cases, through union negotiations. PLD senior advisor 
Temistocles Montas commented to the press last week that 
there are no funds available to finance public sector wage 
increases, and he confirmed that view to us in a private 
meeting June 26.  The president's PPH faction of the PRD, 
scenting PLD blood, could legislate a general wage hike as 
the price for approving the Fernandez tax proposal. 
 
Mejia advisor Andy Dauhajre, Jr. asserts that such a wage 
bill could cost the government up to 1 percent of GDP, 
nullifying much of the paltry 2 percent projected yield from 
the PLD's current draft tax package. Dauhajre's Foundation 
used its weekly page in Listin Diario several weeks ago to 
trumpet "A Wage Increase is Inevitable."  A Congressional 
committee is studying a proposal by the National Committee of 
Labor Unions (CNUS), the country's largest labor union, for a 
general 60 percent salary increase. 
 
Salaries and the Slippery Slope 
 
The past year has seen a steady erosion of the purchasing 
power of most Dominican workers and their families.  The cost 
of a basic basket of household goods rose 65 percent in 
nominal pesos in the 12 months to May 2004.  Salaries have 
fallen 40 - 60 percent in real terms during the same period 
(depending on whether the constant unit is pesos or dollars). 
 A negotiated increase of 25 percent in the private sector 
minimum wage in third quarter 2003 was insufficient to offset 
these trends. Mejia allowed government workers only 9 percent 
last December, a tactic that IMF staffers then considered to 
be "unsustainable" expenditure restraint. 
 
As the transition teams debate fiscal reform, popular 
pressure for wage increases is building.  The Mejia 
administration, which enjoys strong ties to labor, has not 
faced frequent or prolonged strikes, aside from chronic work 
stoppages by doctors in the public health sector. November 
and January national-wide work stoppages were expressions of 
popular discontent with general economic conditions, not tied 
to any demonstrations or to articulated wage demands. 
Preparations in April for a job action by air traffic 
controllers were forestalled when the government sent in 
military personnel as substitutes for several days. 
 
In contrast, although President-elect Fernandez presided over 
a period of relative economic prosperity during his first 
administration, some 500 localized strikes took place. 
 
How and When? 
 
Legislators and Secretariat of Labor officials agree that 
wages need to be adjusted. They disagree, however, about the 
proper timing, size, and funding of a general increase. 
Fernandez and the PLD have been careful not to make any 
pledges.  A leading PLD-affiliated economist commented in 
private that the peso had become overvalued before the 2003 
crisis and that a smaller adjustment, perhaps of 5 percent, 
would suffice for salaries to return to their trend-line 
level.  Few Dominicans would grasp this macroeconomic 
argument. 
 
Given Dominicans' strong preference for imported goods, the 
weak peso hurts pocketbooks directly. It is indicative that 
economic commentators and journalists focus on the U.S. 
dollar equivalent of local wages in pesos -- not as an 
indicator of improving national competitiveness but rather to 
emphasize further Dominican nations' shrinking acquisitive 
power for imports. For the moment, the prospect of a new 
administration has helped stabilize the exchange rate.  If 
confidence in the economy falters for any reason at all, the 
demand for dollars will rise, spurring inflation and 
intensifying the political pressure for an adjustment even as 
the inauguration approaches. 
 
The Challenge to Fernandez 
 
When asked about the need for wage increases, the 
President-elect has suggested that his first priority is 
achieving macroeconomic stability so that the peso can 
recover its value. In a June meeting with the influential 
National Council of Private Enterprise (CONEP), Msgr. Nunez 
is said to have warned against inordinate, excessive wage 
hikes as a danger to recovery, and Fernandez reportedly 
endorsed that view. Private business groups acknowledge the 
pressure to offset purchasing power losses, but they insist 
on moderate, negotiated raises in the minimum wage rather 
than legally mandated general salary increases. 
 
One puzzle to outsiders is why unions and employee 
associations have remained so quiet on this issue.  The only 
aggressive demonstrations have been those of the public 
sector health workers, who are complaining not only about 
salary problems but also about lack of funds for hospital 
supplies, electricity, and equipment, resulting in the 
inability to deliver any reasonable level of public health 
care.  The impressive resilence of ordinary workers and of 
the grumbling middle class may not last too long if the PRD 
decides to rile the long-patience workers. 
 
2. (U) Drafted by Clare Ribando, Michael Meigs. 
 
3. (U) This report and others in our election and transition 
series can be read on the SIPRNET at 
http://www.state.sgov.gov/p/wha/santodomingo/ index.cfm along 
with extensive other current material. 
KUBISKE