Dominican Republic makes dramatic progress in boosting economic growth and reducing poverty
| Author | Alessandro Giustiniani/Philip Young |
| Position | IMF Western Hemisphere Department |
| Pages | 351-353 |
Page 351
After suffering a decade of economic stagnation in the 1980s, the Dominican Republic took off in the second half of the 1990s and, with output growing at nearly 8 percent a year, became one of the world's fastest growing economies. The severe monetary and fiscal imbalances, pervasive price controls, financial sector rigidities, multiple currency practices, and restrictive trade regime of the 1980s have given way to declining unemployment, modest inflation, and a generally manageable external position. The Dominican Republic is a textbook case of a small economy with limited natural resources that, by opening itself to trade and financial flows, has been able to turn its economy around.
How was this remarkable turnaround accomplished? The answer lies in impressive and wideranging economic reforms launched in the early 1990s that featured liberalization and greater integration with the global economy. The authorities tackled domestic imbalances by strengthening public finances, improving monetary control, and reducing distortions in financial markets. They removed many exchange and trade restrictions. And, toward the end of the 1990s, they reduced the role of the state in the economy through the private capitalization, leasing, or outright sale of state-owned enterprises. The restoration of stable macroeconomic conditions and the initiation of structural reforms coincided with a resumption of strong economic growth.Whereas in the early 1980s growth had averaged less than 2 percent a year, by the end of the 1990s this average had climbed to nearly 8 percent a year (see table). This strong growth has helped reduce the poverty rate-from about 32 percent of the population in 1992 to less than 26 percent in 1998.
What accounts for this dramatic growth? The impetus has come largely from the tourism, telecommunications, and industrial free-trade-zone (FTZ) sectors- which represent one track of a dual production structure that has developed in the Dominican Republic over the past 30 years. This part of the economy is characterized by strong competition, close links with the world economy, and special administrative arrangements that often shield it from state intervention. In contrast, the more traditional sectors of the economy, such as agriculture and some subsectors of industry, remain subject to state intervention, including protectionism, red tape, and uncertain property rights.
Growth in the FTZs, in terms of employment, export value, and number of firms, has been particularly impressive. In 2000, there were 46 industrial parks, containing around 500 enterprises, employing almost 200,000 people (8 percent of total employment), and providing possibly twice as many jobs outside the FTZs. The FTZs have attracted important amounts of foreign direct investment and generated an estimated $5 billion in gross exports in 2000, accounting for over four-fifths of total exports.
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The FTZs' rapid growth can be attributed to three factors. First, the regulations governing operations and activity are generally regarded as stable and transparent, in contrast to the legal framework applying to "domestic" exports. Second, FTZ enterprises receive attractive tax incentives-including exemptions from the corporate income tax, the value-added...
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