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Dominican Republic Growth Diagnostics Report José María Fanelli Rolando Guzman Washington, DC, September 19, 2007. Session I Growth in Dominican Republic: Stylized facts. (1) Remarkable long-run performance. - PowerPoint PPT Presentation
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Dominican Republic Growth Diagnostics Report
José María Fanelli
Rolando Guzman
Washington, DC,
September 19, 2007
Session I
Growth in Dominican Republic:
Stylized facts
Growth has accelerated since 1990. Per capita GDP grew 2.2% per year in the 1976-2006 period and 3.5 % in the 1991-2006 period.
(1) Remarkable long-run performance
Dominican Republic: Per Capita GDP
200.0
400.0
600.0
800.0
1,000.0
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Year
RD
$ 1
97
0
The Dominican Republic’s PPP GDP has grown substantially in the last thirty years, the growth interruption during the “lost decade” was milder than in LA.
(1) Remarkable Long-run performance
GDP, PPP (constant 1995 international $)
0
50
100
150
200
250
300
350
400
450
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Dominican Republic Costa Rica
Latin America & Caribbean Chile
The Dominican Republic’s growth performance since the beginning of the nineties is comparable to Chile and outperforms LA, Central America, and the Caribbean.
(1) Remarkable Long-run performance
Dominican Republic Growth from an International Perspective
0
50
100
150
200
250
300
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
1995
Dol
lars
, 199
5=10
0
ChileDominican RepublicLatin AmericaCentral AmericaCosta RicaThe Caribbean
The country changed their comparative advantages and developed new sectors from scratch, like tourism and the Free Trade Zones (FTZ), compensating the fall in traditional exports. Remittances grew steadily and became one important source of revenues
(2) Deep structural transformations
Current Account Composition
-8.000
-6.000
-4.000
-2.000
0
2.000
4.000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
US
$ M
illi
on
s
TBN
TBZ
Remittances
Services
Inv. Inc.
Other Current Transfers
Current Account
The economic structure changed substantially with increases in the participation of industry and services and a fall in agriculture
(2) Deep structural transformations
Sectoral Contribution to GDP Growth (%)1970-75 1975-80 1980-95 1985-90 1990-95 1995-2000 2000-05
Primary 26,06 16,10 23,63 -4,22 7,02 2,86 10,46
Industry (incl. Water & Electricity)
18,62 19,75 5,37 23,38 33,16 37,01 16,76
Construction 10,71 6,40 2,75 27,76 6,80 7,12 -2,21
Commerce & Rest. 17,00 17,97 18,28 8,44 27,47 17,42 18,02
Other Services 27,62 39,78 49,97 44,64 25,55 35,59 56,96
Total 100,00 100,00 100,00 100,00 100,00 100,00 100,00
GDP Composition1975 1980 1985 1990 1995 2000 2005
Primary 22,79 20,59 20,49 16,71 12,86 10,11 10,20
Industry (incl. water & electricity)
20,03 20,11 18,70 19,47 30,00 31,97 29,22
Construction 6,67 6,68 5,91 8,66 6,14 6,29 4,54
Commerce & Rest. 16,86 17,29 17,58 16,05 18,50 18,28 18,44
Other Services 33,65 35,33 37,32 39,12 32,49 33,35 37,60
Total 100,00 100,00 100,00 100,00 100,00 100,00 100,00
• The country has shown a remarkable ability to recover quickly after the occurrence of crisis in the eighties, nineties, and the current decade.
(3) Above average degree of policy effectiveness and a democratic polity
-10
-5
0
5
10
15
-15000000
-10000000
-5000000
0
5000000
10000000
15000000
20000000
25000000
Growth rate Deviation from trend
• The state supported the structural transformation; it plays a leading role concerning the development of the free trade zones and to some extent, tourism. Rapid signing of DR-CAFTA
• The government is currently introducing significant changes in the fiscal institutions to deal with the costs of the financial crisis and DR-CAFTA. Income tax; ITBIS (from 12% to 16%); other taxes.
• The country has managed to maintain the stability of the political institutions since the mid- sixties.
(3) Above average degree of policy effectiveness and a democratic polity
• Consumption is more volatile than income. Volatility fell in the nineties but increased again as a consequence of the financial crisis.
• Significant macroeconomic disequilibria in the 1980s, 1990s, and 2003.
• Costly financial crisis in 2003
(4) The economy is volatile
R epública Dominicana (R olling window 9 years)
0
10
20
30
40
50
60
70
80
90
100
VAR(g) VAR(AB)
República Dominicana (rolling window 9 years)
0
10
20
30
40
50
60
70
80
VAR(g) VAR(c)
(4) The economy is volatile
GDP and Consumption Volatility. Latin American Countries and United States
(1990-2002)
0
0,01
0,02
0,03
0,04
0,05
0,06
0,07
0,08
0,09
0,1
Arg
entin
a
Bra
zil
Canada
Chile
Colo
mbia
Costa
Ric
a
Dom
inic
an R
ep.
Ecuador
El S
alv
ador
Guate
mala
Hondura
s
Mexic
o
Nic
ara
gua
Para
guay
Perú
Trin. y T
ob.
Unite
d S
tate
s
Uru
guay
1960-1989 1991-2005
There is a certain degree of inconsistency between the country’s per capita GDP and its human development indicators
(5) A set of key determinants of growth lags behind
0
20
40
60
80
100
120
140
160
180
0 20 40 60 80 100 120 140 160 180
Human Development Indicators Ranking
PP
P p
er c
apit
a G
DP
Ran
kin
g
Dominican Republic
0
20
40
60
80
100
120
140
160
180
0 20 40 60 80 100 120 140 160 180
Life Expectancy at Birth
PP
P p
er
cap
ita G
DP
Ran
kin
g
Dominican Republic
0
20
40
60
80
100
120
140
160
180
0 20 40 60 80 100 120 140 160 180
Adult Literacy Rate
PP
P p
er c
apit
a G
DP
Ran
kin
g
Dominican Republic
0
20
40
60
80
100
120
140
160
180
0 20 40 60 80 100 120 140 160 180
Combined gross enrolment ratio for primary, secondary and tertiary schools (%)
PP
P p
er c
apita
GD
P R
anki
ng
Dominican Republic
(5) A set of key determinants of growth lags behind
• The infrastructure exhibits important weaknesses:
• The energy system is inefficient; the system of subsidies has established a complex linkage between efficiency and distribution.
• Ports and bad logistics impede the exploitation of comparative advantages associated with geography.
(5) A set of key determinants of growth lags behind
The level of financial deepening is lower than expected, given the country’s per capita GDP.
(5) A set of key determinants of growth lags behind
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
0 0.5 1 1.5 2 2.5 3
Private Credit / GDP
Sto
ck
Ma
rke
t c
ap
. /
GD
P
Financial Underdevelopment - Banks: (<49.5% GDP)
Financial Underdevelopment - Markets
(< 44.1% GDP)
Dominican Republic
• A good part of the country’s sources of competitive advantage were associated with some features of the international architecture that have disappeared (the multi-fiber agreement) or are condemned to disappear (the possibility to grant special exceptions to the FTZs).
• Increasing competition in apparel industry (notably, China).
• Tourism has been much more dynamic than the FTZs, but was affected by the 11-S effect and further development calls for structural changes to face environmental problems and the exhaustion of the all-included strategy.
(6) Concerns on trade specialization and the oil bill
• The oil bill has increased substantially in the present decade, from US$ 650
million in 1998, to US$1.5 billion in 2000 to US$ 2.8 billion in 2005.
• Increasing portion of total imports.
(6) Concerns on trade specialization and the oil bill
Oil Imports
0
500
1.000
1.500
2.000
2.500
3.000
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Mil
l U
S$
0
5
10
15
20
25
30
%
% Total Imports
Mill US$
Despite the continuity of the democratic system, institutions are weak.
• Flawed supervision contributed to generating the crisis
• Inability to separate growth policies from distributional policies fuels the energy crisis.
• Corruption
(7) Weak institutions
The most important challenge facing the country is the weakening of the sectors that fueled the increase in productivity and competitiveness since the beginning of the nineties (FTZs and tourism).
The most pressing need is to find new sources of increment of productivity and competitiveness (strengthen self-discovery activities) while working on the existing long-run constraints (infrastructure, finance, and human capital).
The country has shown a remarkable flexibility to introducing adaptive reforms when the international and/or the domestic scenarios changed in the past. This is an asset in light of the tasks that the government must perform to strengthen self-discovery.
On the other hand, institutions are weak and this pose a constraint on the type of policies that can be implemented.
Remittances have contributed to reducing external and macro volatility, although at the price of increasing the country’s dependence on them, which could harm the development of the tradable sector and new self-discovery activities.
Remittances create a linkage between the macroeconomic regime and self-discovery policies via the effects of remittances on the real exchange rate. The macro regime matter to growth and competitiveness.
Working Hypotheses
FDI has a key role supplying technology and access to new foreign markets. However, FDI can indirectly harm competitiveness because of:
• The effects on the real exchange rate in a context of increasing remittances;
• Fiscal policies to promote FDI (“race to the bottom”) that absorb resources that can be used to support self-discovery and human capital accumulation.
The fiscal situation raises a number of doubts: it is necessary to raise resources to finance the central bank, social policies, the subsidies to the electricity sector, and self-discovery activities. This implies a level of tax burden that could harm competitiveness.
This means that it is central to: coordinate tightly policies to promote new activities to avoid wasting resources and address policy-induced distortions in governance structures, in particular the electricity sector.
The real exchange rate is likely to play a central role: it must strike the balance between competitiveness and human development. A depreciated exchange rate can be used to fuel the non-FTZ, non-tourism sector and to make the production of human capital cheaper. This raises the issue of the role of the exchange rate regime in the future.
Working Hypotheses
The lack of financial deepening may not be a binding constraint on those sectors in which FDI is important. However, it will likely be a serious obstacle concerning duality; it can pose a constraint on the growth of the non-FTZ sectors, and the development of domestic suppliers for the tourism sector and FTZ.
The allocation of remittances is key. They should be increasingly allocated to increasing human capital. In addition, better financial institutions can contribute to improving the allocation of remittances and to increasing savings.
The regional dimension is somewhat absent concerning:
• Coordination to avoid race to the bottom policies
• Development of regional financial markets (Examples: Bonds in Asia, Flar, and CAF).
Policies should take into account Haiti, which may play a role concerning the development of new activities:
• Cheaper labor and opportunities to invest
• Market for Dominican industrial exports (it is the third market)
Working Hypotheses
Growth Diagnostics: Hypotheses
Micro risks: Property rights,
corruption, taxes
Low domestic
saving
Bad national finance
Bad international
finance
High cost of finance
Possible Problems
Information externalities:
self discovery
Coordination externalities
Market failures
Government failures
Low appropriability
Low social
returns
Low returns to
economic activity
Low human capital
Bad infrastructure
Poor geography
Macro risks: Financial, monetary,
fiscal instability
Poor intermediatio
n