SANTO DOMINGO, DOMINICAN REPUBLIC -- Ramon Uceta's coffee-colored skin glistens with perspiration as he roams through the din of hammering, sawing and shouting that overflows the four-room house in a slum quarter of this ancient Caribbean capital.

Under Uceta's watchful eye, workmen are putting together the skeletal frames of sofas and chairs that will be covered with intricately braided strands of the tough palm fiber called rattan. Uceta will sell the finished wickerware pieces to a growing list of stores and jobbers eager to buy them at prices averaging 1,900 Dominican pesos, or about $600.

By the standards of this island republic where 5.6 million people live in economic circumstances of chronic 45 percent unemployment and underemployment, Uceta has come a long way in the 33 months since he started his back-yard business. His great leap up the economic ladder has been a direct consequence of his own hard work -- and the U.S. foreign aid program.

"A man without credit is like a car without gasoline," Uceta said of his time as an underemployed, largely self-taught artisan with only a few dollars in his pockets. He was able to evolve into a cottage-industry capitalist primarily because of a loan from an organization here funded by the U.S. aid program.

In recent years, a large part of the U.S. aid money pumped into the Dominican Republic has gone to voluntary organizations lending money to "microbusinesses" that cannot raise capital through commercial loans, such as Uceta's rattan furniture factory.

Now he is the proprietor of an enterprise with 14 employes, sales of about $8,000 a month and assets valued at $16,000. His personal net worth has grown to $13,000, and he has been able to provide his wife and six children with amenities such as a stove, refrigerator, radio and television set.

These are impressive accomplishments in a country that, in the 495 years since Columbus stepped on its shores to discover "America," has an almost continuous history of violence and political instability rooted in poverty. Only 22 years ago, that instability caused the United States to pour 25,000 combat troops into Santo Domingo to thwart a popular uprising that then-President Lyndon B. Johnson believed was coming under the control of Cuban-influenced communists.

In more recent times, the Dominican Republic has faded from the headlines. But the potential for renewed instability has remained in an environment in which the average annual per capita income is $948 and more than three-quarters of the people endure substandard conditions of health, education and nutrition.

Secretary of State George P. Shultz has repeatedly cited the Dominican Republic as an example of "our principal foreign policy problem" -- the administration's failure to dissuade Congress from making deep cuts in the U.S. foreign aid program. In Shultz's view, the Dominican Republic is one of many time bombs ticking away unnoticed in odd corners of the Third World that could some day explode against American interests.

His view has prevailed in an administration that entered office 6 1/2 years ago with many of its most senior members convinced that foreign aid was little more than a socialistic raid on the U.S. Treasury. Only after Shultz became secretary in 1982 did administration policy shift to the view that foreign aid, in addition to its altruistic aspects, also is a valuable tool for influencing events and policies in recipient countries.

Shultz insists that foreign aid can serve that purpose despite its record of frequent failure and a shift over the years from showy but unsuccessful "hardware" projects such as hydroelectric plants to a scaled-down emphasis on "basic human needs" programs such as health and education.

Shultz, reflecting the conservative attitudes of the Reagan administration, has added a new dimension by emphasizing foreign aid as a device for weaning Third World governments away from their long romance with state planning and controls and toward private initiative. He has argued that aid used in this way can best help a Ramon Uceta -- and others like him in Latin America, Africa and elsewhere in the developing world -- to throw off the burdens of poverty.

Because the Shultz method aims at rebuilding the economies of recipient countries from the ground up, it will be several years before anyone knows whether it works. Shultz complains that his approach may never get a fair test because Congress, preoccupied with budget deficits' effects on pressing domestic problems, has balked at annual increases for foreign aid.'Hauling Down the Flag'

The United States, Shultz contends, has been "hauling down the flag" and "retreating from the world." In a number of recent speeches and congressional appearances, he has quoted from a cable he received early this year from Lowell C. Kilday, the U.S. ambassador here.

Kilday reported that he had made a New Year's call on President Joaquin Balaguer to give him some bad news about sugar growing and refining, which historically has been the Dominican Republic's main employer and source of income.

Kilday told Balaguer that the Dominican share of the U.S. sugar quota, under which the United States annually buys fixed amounts from favored countries at a premium far above the depressed world market price, had been reduced from 302,000 tons to 160,000. It was a move that U.S. officials estimate will cost the Dominican Republic $46 million in export earnings this year. Dominican officials contend that the loss will be closer to $65 million.

In addition, Kilday's cable continued, he told Balaguer that U.S. economic aid had been halved from $40 million to $20 million, that development assistance had been slashed from $27 million to $17 million, and military aid cut from $3.8 million to $1.5 million.

Shultz concludes: "And Ambassador Kilday says at the end of his cable, 'I wished him a Merry Christmas and a prosperous New Year.' "

Shultz uses the Kilday cable as a preamble to his argument that instead of shortsightedly cutting foreign aid, the United States should be using it to continue the many programs that are evident wherever one turns in this country the size of Vermont and New Hampshire that shares the island of Hispaniola with Haiti.

In Santiago de los Caballeros, the second-largest city, Aracilde Perez, 22, works as a sewing machine operator at a factory in a gigantic "duty-free zone" where the American-manufactured parts of suits and dresses are brought in to be stitched together by Dominican labor and then reexported to the United States.

Two evenings a week, Aracilde, the mother of an infant daughter, goes to Profamilia, a private family planning organization, for counseling on birth control techniques, supplies of contraceptive devices, medical examinations and child nutritional advice that will allow her to remain a wage earner and not become a full-time mother with more children than she can support.

At a plantation nestled amid the green-carpeted mountains north of the capital, Isabel Martinez, 30, staples "Chiquita Brand" labels on the fronds of an assembly-line procession of pineapples destined for U.S. supermarkets. She is among 400 people who have found work at the plantation carved out of 30,000 acres that formerly were used to grow sugar, but now produce more profitable export crops such as pineapples and tomatoes.

Fernando Parra, 36, is president of a cooperative water users association that has taken over the management and maintenance of a vast irrigation system on the outskirts of the agricultural town of Azua.

The system, which formerly was government operated, once was virtually shut down because its canals were filled with sediment and in need of repair. Now, after extensive cleaning and rehabilitation, it is providing water to 5,000 farmers including Parra, who has earned enough in three years of growing corn, tomatoes, melons, cassava and red beans to move from tenant-farmer status to ownership of his own 18-acre spread.

At Puerto Plata, a resort on the island's Atlantic north coast, the modern Montemar Hotel has been turned into an unusual laboratory school that each year teaches 120 young Dominicans the techniques of hotel and restaurant service in hopes that the country will tap its vastly underexploited tourism potential to some day rival neighboring islands such as Puerto Rico and Jamaica. The north coast's attempts to lure tourists to its beaches and golf courses have been hampered by a shortage of workers skilled in the many tasks necessary to run a hotel, from keeping books to mixing a pina colada.

Some like Estevania Estrella, 18, come from rural poverty and are training to become cooks, bartenders and housekeepers; others are university graduates such as Niurca Taveras, 21, whose first-in-the-class record at Montemar earned her a scholarship to the University of Nevada at Las Vegas where she plans to study food and beverage management and then return to Montemar as a teacher.

All of these people have benefited from programs that were made possible, at least in part, by U.S. foreign assistance. The programs are functioning normally now because their funds were appropriated at least 18 months ago, before Congress began making the cuts that Kilday reported to Balaguer.

But the time is fast approaching when that cushion will be used up. When that happens, the financially hard-pressed Dominican government, lacking the resources to maintain the programs at present levels, will have to eliminate some and curtail others.

This is why Shultz fears a resurgence in many now-quiescent countries of an ominious cycle of economic instability leading to political upheaval. But his warnings have gone unheeded on Capitol Hill, where foreign aid is one of the most unpopular spending items. It has become an especially ripe target for cutbacks as Congress, struggling with the Gramm-Rudman-Hollings budget-slashing law, seeks to reorder its spending priorities.

Critics charge that foreign aid too often has been wasted in countries that do not know how to use it properly, that much of it winds up lining the pockets of corrupt local officials and that even when it does reach its intended beneficiaries, it amounts to little more than a Band-Aid for a patient who requires major surgery. They can point to myriad examples of rusting or rotting foundations of development projects abandoned when foreign aid programs failed because of thievery, bureaucratic mismanagement or sudden shifts in development policy.

Since last year, the Gramm-Rudman-Hollings constraints have added a new dimension to the debate. It is grounded in congressional anger at President Reagan's efforts to trim popular domestic spending programs while rejecting any tax increase and rejecting cuts in his defense budget requests.

More than a year ago, even traditional supporters of foreign aid such as House Foreign Affairs Committee Chairman Dante B. Fascell (D-Fla.) warned Shultz that the chances were "slim to none" that Congress would vote more money for foreign recipients when thousands of American farmers face bankruptcy and foreclosure and the inner-city poor suffer the progressive whittling away of federal benefits.

Congress' determination to force Reagan to be more flexible by holding some key administration programs hostage became evident last year when it began to take big bites from the foreign policy budget. That covers all foreign policy functions from the payment of salaries to the operation of the State Department, but its largest component -- between two-thirds and three-fourths -- is foreign aid.

In fiscal 1986, Congress gave Reagan $14.9 billion for foreign aid. For the 1987 fiscal year, which ends Sept. 30, the administration asked for $15.47 billion but obtained only $13.37 billion.

The fiscal 1988 request of $15.2 billion will not be voted on until after Congress returns from its summer recess Wednesday. But administration officials expect still deeper cuts that will leave $12.7 billion to $13 billion for all foreign aid purposes.

Essentially, the aid is of two types: military assistance and economic aid. Normally, the ratio of expenditures is about two-thirds economic aid and one-third military.

In per capita terms, 13 other western industrial countries spend more annually than the United States on foreign aid. But, while America's per capita aid figure of $41 is significantly less, for example, than that of the Scandinavian countries (Norway $194, Denmark $136 and Sweden $129), the dollar volume of U.S. outlays far exceeds that of other countries. U.S. economic aid in 1986 was $9.8 billion, while the three Scandinavian countries collectively contributed about 2.5 billion.Slicing the Aid Pie

Just two countries, Israel and Egypt, absorb more than $5 billion or more than one third the total aid package in the 1987 budget. Another $2.1 billion goes for military and economic aid to the "base rights" countries that host U.S. military installations.

Through a process known as "earmarking," Congress has protected these countries from cuts by dictating amounts that they are to receive.

In the 1987 budget, the amount of economic aid available for the Agency for International Development's two principal types of program -- helping recipients with development projects and balance-of-payments problems -- totals $5.7 billion worldwide. But two-thirds of that amount is covered by earmarks for 17 countries, so any cuts by Congress must be absorbed by countries, such as the Dominican Republic, that are not in the protected category.

AID's flexibility in slicing up what is left of the pie is further inhibited by administration decisions about which countries and projects should receive priority, and by what some AID officials call the "squeaky wheel syndrome." This refers to countries that suddenly are gripped by crisis or tragedy sufficiently vivid to capture the attention of the American public and create a groundswell of support.

Two years ago, it was the drought-induced famine with images of swollen-bellied children in East African countries like Ethiopia and Sudan. Last year, it was the U.S.-backed overthrow of entrenched dictatorships in the Philippines and Haiti.

The effect of competition for reduced aid resources is to force Draconian cuts on countries that have not been protected by Congress or that are not in the headlines.

In the Dominican Republic, it has meant shaving its share of the sugar quota to about one-fourth of what it was four years ago and cutting the $78.7 million that the administration had proposed spending here this year on various economic aid projects by more than half. Looking ahead to fiscal 1988, AID officials have asked for $55 million, but acknowledge they will be lucky to get half that sum.

Although conditions here outwardly are far better than across the border in Haiti, whose annual per capita income of $320 makes it the poorest country of the Western Hemisphere, the Dominican Republic still has a long way to go before it reaches the point at which the kind of bloody civil war that triggered the 1965 U.S. military intervention will seem relatively unlikely.

The country only recently began to emerge from a severe economic crisis caused by depressed prices for sugar, mounting foreign debt and high inflation. Prodded by the United States, the government in the mid-1980s adopted a tough and highly unpopular austerity program. To help it over the hump, Washington backed the effort with substantial infusions of aid that included $64.3 million in 1984, $125 million in 1985 (including a special one-time stabilization grant of $95 million) and $66.5 million in 1986.

"That aid gave us leverage to convince a skeptical Dominican government that it had to restructure its economy by diversifying out of sugar and inefficient import-substitute manufacturing enterprises," said one American aid official here. "But having bought ourselves a seat at the negotiating table, we're in danger of losing it. In fact, we could lose everything we've invested here over the years."

That investment has taken the form of loans and grants to entice job-producing industries from abroad into the free zones, to induce sugar growers to switch to riskier but ultimately more profitable crops such as fruits, vegetables and flowers, to create a new class of small entrepreneurs and to provide a generation of young people who might otherwise spend their lives in poverty with expanded opportunities in agriculture, industry and tourism.

That is the ideal, and AID officials freely admit that not all of their programs here will work. Some inevitably will be wasted or stolen by corrupt officials. Many of the small businesses and farms that they seek to create will fail. Many -- perhaps most -- Dominicans will remain untouched by the new job opportunities that the government and AID are trying to create.

But, the officials also argue, if even a minority of the people at whom the aid is aimed obtain some benefit or hope, it will be a start toward helping a small, resource-poor country alleviate the endemic hardships that someday could cause major problems for the United States.