- Jaime Cardoso, and Philip Young
- Published Date:
- January 2002
© 2001 International Monetary Fund
Production: IMF Graphics Section
Charts: Sanaa Elaroussi
Typesetting: UpperCase Publication Services, Ltd.
Library of Congress Cataloging-in-Publication Data
The Dominican Republic: stabilization, reform, and growth/by a staff team
led by Philip Young and comprising Jaime Cardoso… [et al.].
p. cm.—(Occasional paper; 206)
Includes bibliographical references.
1. Dominican Republic—Economic policy. 2. Dominican Republic—
Economic conditions—1961- I. Young, Philip M. II. Cardoso, Jaime. III.
Occasional paper (International Monetary Fund); 206.
(US$17.50 to full-time faculty members and students at universities and colleges)
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Jaime Cardoso and Werner Keller
The following symbols have been used throughout this paper:
… to indicate that data are not available;
— to indicate that the Figure is zero or less than half the final digit shown, or that the item does not exist;
–between years or months (e.g., 1998–99 or January-June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 1998/99) to indicate a fiscal (financial) year.
“Billion” means a thousand million;
Minor discrepancies between constituent figures and totals are due to rounding.
The term “country,” as used in this paper, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.
List of AbbreviationsACP
African, Caribbean, and Pacific countriesACS
Association of Caribbean StatesBCRD
Central Bank of the Dominican RepublicCAFTA
Central American Free Trade AreaCARICOM
U.S. Commodity Credit CorporationCDE
Companía Dominicana de ElectricidadCEA
Consejo Estatal del AzúcarCREP
Comisión de Reforma de la Empresa PúblicaDGII
Directión General de Impuestos InternosEMP
exchange market pressureEU
Free Trade Area of the AmericasFTZ
Inter-American Development BankLAC
Latin American countriesLIBOR
London interbank offered rateNAFTA
North American Free Trade AgreementOLS
Ordinary least squaresONAPLAN
Oficina Nacional de PlaneamientoONAPRE
Oficina Nacional de PresupuestoOPEC
Organization of Petroleum Exporting CountriesTFP
total factor productivityWTO
World Trade Organization
Most of the material presented in this Occasional Paper was originally prepared as background for discussions in the IMF Executive Board. It has been updated to take account of developments through early 2001. The authors are grateful to the Dominican authorities for extensive discussions and comments and for their assistance in providing data and other source material.
This Occasional Paper has benefited from the comments of staff in the Western Hemisphere Department as well as the Latin American and Caribbean Region of the World Bank. In particular, the authors would like to thank Patricia Brenner, Eliot Kalter, Saul Lizondo, and Robert Rennhack for their valuable comments. John Panzer works for the World Bank and Raimundo Soto is with the Instituto de Economia, Pontificia Universidad Católica de Chile.
The authors would also like to express their appreciation for the valuable research assistance that was provided by Branko Marie, formerly of the Western Hemisphere Department. Lucy Ulrich of the IMF’s External Relations Department edited the report and coordinated its production for publication.
The opinions expressed are solely those of the authors and do not necessarily reflect the views of the IMF, Executive Directors, or the authorities of the Dominican Republic.
This Occasional Paper is a compilation of papers that are linked by a common theme—stabilization, structural reform, and economic growth in the Dominican Republic. The papers summarize the authorities’ stabilization efforts, how these efforts were subsequently reinforced by certain key structural reforms, and other related developments that help explain the remarkable performance of the Dominican Republic’s economy in the 1990s during which the country achieved one of the highest output growth rates in Latin America, combined with low inflation, and a much improved external debt profile. The performance is all the more striking when contrasted with the severe imbalances of the previous decade—one of widening external current account and public sector deficits, accelerating inflation, and declining growth.
As a result of these imbalances, by the end of the 1980s, pressures on the balance of payments and prices had reached unsustainable levels. The government suspended certain external debt-service payments, giving rise to large external payments arrears. Conditions deteriorated to such an extent that a drastic reorientation of policies was urgently needed. This is the setting for Chapter I, Stabilization and Structural Reforms, which describes the authorities’ structural reform efforts in the 1990s. The lesson that emerges is that a great deal was accomplished on the structural front, which contributed fundamentally to the extended period of growth observed in the 1990s. The administration of President Hipolito Mejia has continued, if not accelerated, the reform momentum, with the approval of a new hydrocarbons law (removing administration discretion from the setting of domestic fuels prices), substantially reducing the average external tariff rate, and increasing consumption taxes to encourage saving and provide the needed resources for priority social expenditures. Nonetheless, a comprehensive reform agenda (much of which is currently being considered by congress) lies ahead. It includes modernization of the public administration, improving the transparency of economic policies, and strengthening the supervisory and regulatory framework of the financial system.
During the 1980s, in order to protect domestic industries, the authorities often resorted to trade-restricting measures. This resulted in a highly protected domestic industry, which was ill-prepared to enter an increasingly competitive world market. Recognizing that domestic firms risked being unable to keep pace with international conglomerates, the authorities have embarked on a trade reform program. Chapter II, Trade Reform Continues, provides a history of these reforms, which form an integral part of the structural reform agenda. The restrictiveness of the trade regime has been diminishing—for example, congress recently approved several regional trade agreements, lowered tariffs further in 2001, and plans additional reductions in coming years—and this is leading to a harmonization of the Dominican Republic’s trade policies with those of its neighbors.
The authorities often resorted to external arrears as a means of financing the external current account deficits of the 1980s. Although rescheduling agreements were reached with the international banking community and with the Paris Club of official creditors in the mid-1980s, they met with limited success until the authorities embarked on their stabilization program of the early 1990s. Chapter III, Successful External Debt Restructuring, gives an overview of these developments and highlights the improvement in the external debt profile in recent years.
The deepening fiscal imbalances of the 1980s, largely financed domestically, but also with external arrears, led to rapidly accelerating inflation. The economic system was at risk of collapse and it needed a rapid and substantial fiscal adjustment. In just one year, the consolidated public sector balance turned from a deficit of more than 3 percent of GDP in 1990 to near balance in the following year. The underlying theme of Chapter IV, A Review of Fiscal Policy During the 1990s and Current Policy Considerations, is that the subsequent maintenance of fiscal discipline over a number of years has been a key factor behind the exemplary performance of the Dominican economy. The chapter includes a discussion of the major tax reforms and improvements in administration that were implemented during the 1990s, as well as developments in expenditure policy. It concludes with a look ahead to the recently initiated Integrated Financial Management Program, which is expected to yield substantial benefits in terms of transparency and rationalization of the fiscal accounts.
Chapter V, Capital Accumulation, Total Factor Productivity, and Growth, considers trends in capital accumulation, technological change, and economic growth. The restoration of macroeconomic stability and the initiation of structural reforms coincided with strong economic growth and poverty reduction. The chapter shows that this growth was anchored by a resurgence of capital formation and strong productivity growth. Sustaining high economic growth rates requires continuous efforts in fostering investment and productivity growth. This in turn will necessitate continued structural reforms and investment in health and education, the types of investment that help to “crowd in” rather than “crowd out” private sector investment.
In addition to the chapters described above, this paper also includes two technical papers, Chapters VI and VII. The first provides an empirical estimation of money demand in the Dominican Republic. Real money balances are found to be cointegrated with real GDP and interest rates. In the short run, changes in opportunity cost variables (including either domestic interest rates or the differential between domestic and U.S. interest rates) also help explain changes in real money balances. The strength of this relationship holds up over time when money is defined as M2. It dissipates over time, however, when money is measured as M1 (that is, the long-run coefficient is not statistically significant). In the second paper, monetary and exchange rate policies (including reserve movements) are combined in a model of exchange market pressure defined as the sum of exchange rate depreciation and the outflow of official reserves. Consistent with a stable money demand, a reduction in domestic credit results in a decline in the exchange market pressure index. Thus, contractionary monetary policy can be effective in raising official reserves.