Since 1992, the Dominican Republic has experienced an extended period of robust economic growth, declining unemployment rates, modest consumer price inflation, and a generally manageable external position. Indeed, in the second half of the 1990s, the Dominican Republic ranked among the world’s fastest-growing economies, with particularly strong performances in the telecommunications, construction, free-trade zone, and tourism sectors.
This picture contrasts dramatically with the country’s economic performance during the 1980s, when the combination of severe monetary and fiscal imbalances, pervasive price controls, financial sector rigidities, multiple currency practices, and an extremely restrictive trade regime resulted in acute economic distortions and an inability to manage adverse shocks to the economy. External deficits soared, the peso was sharply devalued several times, and the government incurred external arrears. Moreover, economic activity stagnated.
The turnaround was accomplished through an impressive and wide-ranging stabilization and structural adjustment effort initiated during 1990–92. This program permanently changed the economy’s growth path, although individual elements met varying degrees of success. Domestic imbalances were addressed through measures aimed at strengthening public finances, improving monetary control, and reducing distortions in financial markets. Many restrictions that plagued the exchange and trade regime were removed, fostering the integration of the Dominican Republic into the world economy.
Despite the fragile political situation following the 1994 and 1996 presidential elections, the Dominican authorities succeeded in maintaining a broadly stable macroeconomic framework, although the pace of structural reform slowed somewhat. More recently, momentum appears to have picked up again, with the passage of the new hydrocarbons law, private capitalization of several public enterprises, reform of the tax code, and a reduction in tariff barriers. To lead the economy into the new millennium, the government has a broad agenda of other important structural reforms, including improving social sector policies, modernizing the public administration, increasing the transparency of economic and financial policies, and strengthening the soundness and stability of the financial system.
The Lost Decade: 1981–90
As with most of Latin America, the 1980s was a period of economic turmoil for the Dominican Republic. Economic rigidities and policy inconsistencies prolonged the country’s difficulties. Large fiscal deficits contributed to excessive monetary expansion and inflationary pressures, which in turn exacerbated the distortions created by extensive price controls. An overvalued domestic currency and multiple exchange rates, combined with extensive foreign exchange surrender requirements and high trade barriers, stifled export growth and foreign investment, while protecting inefficient domestic industries. Caps on interest rates and controls on credit allocation contributed to financial disintermediation and a general weakening of the financial system. Moreover, the central bank was steadily losing official reserves, and payments arrears on the public sector’s external debt-service obligations were accumulating. Attempts to implement stabilization programs were short-lived, especially because of a lack of fiscal discipline.1
A number of structural weaknesses contributed to the severe fiscal imbalances. The consolidated public sector deficit2 averaged over 5 percent of GDP between 1981 and 1990 (Table 1). Several factors contributed to this weak fiscal performance. First, the level of government revenues was low and volatile because of the strong dependence on international trade taxes and weak tax administration.3 Second, public spending was highly discretionary and inflated by sizable losses of public enterprises, large increases in wages and employment, and excessive public investment programs. Finally, the implementation of corrective measures frequently lacked effectiveness and continuity.4
Main Macroeconomic Indicators
Includes quasi-fiscal losses of the central bank. Since this information is not available for the 1990–93 period, the central bank’s tosses are assumed to be zero for those years.
The inflation tax is calculated as CPI inflation during the year times the stock of base money at the end of the previous year.
Main Macroeconomic Indicators
| 1981–85 | 1986–90 | 1991–95 | 1996–2000 | |
|---|---|---|---|---|
| (Annual percent changes, averages) | ||||
| Real GDP | 1.9 | 2.9 | 4.2 | 7.7 |
| Real GDP per capita | −1.3 | 0.9 | 2.5 | 5.4 |
| Consumer prices (during the period) | 18.0 | 39.5 | 7.9 | 6.9 |
| Money and quasi-money (M2) | 16.5 | 43.2 | 22.6 | 20.1 |
| (In percent of GDP, averages) | ||||
| Consolidated public sector balance1 | −5.4 | −5.4 | −1.2 | −2.2 |
| Consolidated public sector primary balance | −3.8 | −3.3 | 0.5 | −1.2 |
| Inflation tax2 | 1.7 | 4.3 | 0.9 | 0.8 |
| External current account balance | −3.7 | −3.7 | −3.9 | −2.7 |
| Foreign direct investment | 0.6 | 1.6 | 2.2 | −3.1 |
| External debt (end-period) | 64.7 | 72.2 | 33.0 | 18.6 |
| External debt service | 7.5 | 9.2 | 4.2 | 2.6 |
Includes quasi-fiscal losses of the central bank. Since this information is not available for the 1990–93 period, the central bank’s tosses are assumed to be zero for those years.
The inflation tax is calculated as CPI inflation during the year times the stock of base money at the end of the previous year.
Main Macroeconomic Indicators
| 1981–85 | 1986–90 | 1991–95 | 1996–2000 | |
|---|---|---|---|---|
| (Annual percent changes, averages) | ||||
| Real GDP | 1.9 | 2.9 | 4.2 | 7.7 |
| Real GDP per capita | −1.3 | 0.9 | 2.5 | 5.4 |
| Consumer prices (during the period) | 18.0 | 39.5 | 7.9 | 6.9 |
| Money and quasi-money (M2) | 16.5 | 43.2 | 22.6 | 20.1 |
| (In percent of GDP, averages) | ||||
| Consolidated public sector balance1 | −5.4 | −5.4 | −1.2 | −2.2 |
| Consolidated public sector primary balance | −3.8 | −3.3 | 0.5 | −1.2 |
| Inflation tax2 | 1.7 | 4.3 | 0.9 | 0.8 |
| External current account balance | −3.7 | −3.7 | −3.9 | −2.7 |
| Foreign direct investment | 0.6 | 1.6 | 2.2 | −3.1 |
| External debt (end-period) | 64.7 | 72.2 | 33.0 | 18.6 |
| External debt service | 7.5 | 9.2 | 4.2 | 2.6 |
Includes quasi-fiscal losses of the central bank. Since this information is not available for the 1990–93 period, the central bank’s tosses are assumed to be zero for those years.
The inflation tax is calculated as CPI inflation during the year times the stock of base money at the end of the previous year.
Large and persistent fiscal deficits represented a significant burden for monetary policy. While at the beginning of the decade more than half of the public deficit was financed by foreign loans, episodes of default on external and domestic government debt led to a progressive drying up of these sources of financing. This resulted in an increasing monetization of the overall public deficit, which in turn fueled inflationary and exchange rate pressures. The inflation tax, which averaged about ½ percent of GDP in 1981–83, surged to an average of about 3 percent of GDP for the rest of the decade.
Financial repression hampered the formation of savings and their productive allocation. With the aim of preserving financial equilibrium, although pursuing conflicting policy objectives, the government tried to maintain tight control over the financial sector. Ceilings imposed on lending rates, high and differentiated reserve requirements, extensive financial restrictions, and the allocation of credit according to political priorities created a highly inefficient and distorted financial system that adversely affected the formation of domestic savings. At the same time, these restrictions led to the emergence of an active informal financial market, complicating control of monetary aggregates.
The limited degree of openness perpetuated domestic distortions. A system of multiple currency practices, foreign exchange restrictions, surrender requirements, import prohibitions, high import duties with discretionary exemptions, and export controls contributed to perpetuating distortions in domestic markets and undermined the development of the export sector.5 Inconsistency between exchange rate policy and the stance of financial policies generated overvaluations of the peso that resulted in sizable devaluations in 1984, 1988, and in 1990.
As a result of these rigidities, economic performance was poor. Over the whole period, economic activity expanded at a slow pace (Figure 1) and per capita output was stagnant. Consumer price inflation, which was below 10 percent in the early 1980s, increased rapidly, reaching almost 80 percent by 1990. External current account deficits averaged about 4 percent of GDP. The uncertain economic environment hindered inflows of foreign direct investment and caused a rapid accumulation of external debt. Despite some debt relief from official bilateral creditors in the mid–1980s, persistent large balance of payments deficits were financed through a rundown of official reserves and a buildup of payments arrears.6
Scatter Diagram of Real GDP Growth Rates and Inflation Rates
(In percent, period average)
Sources: BCRD; and IMF staff estimates.Scatter Diagram of Real GDP Growth Rates and Inflation Rates
(In percent, period average)
Sources: BCRD; and IMF staff estimates.Scatter Diagram of Real GDP Growth Rates and Inflation Rates
(In percent, period average)
Sources: BCRD; and IMF staff estimates.The Initial Phase of the Reform Effort: 1991–95
In 1990, the economic situation deteriorated markedly owing to a preelectoral loosening of financial policies, a sharp deterioration of the terms of trade, and a prolonged drought.7 Economic activity weakened, inflation accelerated, the balance of payments deficit widened, pressures on the exchange rate intensified, and external arrears increased, including those owed to the IMF, the World Bank, and the Inter-American Development Bank (IDB). When the government of President Joaquin Balaguer received a new mandate in August 1990, it embarked on a comprehensive economic program—known as the New Economic Program—that included price liberalization, fiscal consolidation, devaluation of the exchange rate, and decontrol of interest rates. Significant progress was made in normalizing relations with external creditors.8 Although the reforms implemented in the early 1990s were substantial, several important distortions and policy weaknesses remained.
Fiscal consolidation lay at the heart of the New Economic Program. During 1990, the prices of a wide range of public sector goods and services were corrected to better reflect opportunity costs. In particular, the significant correction in the prices of petroleum products led to a remarkable increase in fuel tax revenues. The use of a market-determined exchange rate to calculate import duties boosted custom receipts.9 A tax reform, approved in 1992, modified the income tax, converted all excise taxes from specific to value-based, broadened value-added tax (VAT), and raised its rate from 6 percent to 8 percent.10 On the expenditure side, food subsidies were largely removed in 1990. Current and capital outlays were restrained during the early 1990s, mainly through strict application of a daily cash management system, particularly for special funds managed by the presidency. These measures shifted the public sector primary balance from a deficit of about 5 percent of GDP in 1989 to a surplus of close to 2 percent of GDP in 1991–92. Despite some recovery of government expenditures in the following years, especially capital expenditures, which had suffered the brunt of the earlier adjustment, the consolidated public sector deficit was contained at less than 1 ½ percent of GDP on average during 1991–95.11
To curb inflation, monetary conditions were tightened and monetary policy was made more effective. Lending and deposit rates were liberalized, rising to high positive levels in real terms. Reserve requirements, freezes on excess reserves, and credit ceilings continued to be the main instruments of monetary policy. The central bank started moving toward a more market-oriented management of domestic liquidity, however, by issuing its own certificates to increase reliance on open market operations.
The government put in place major reforms to the banking system to strengthen the financial system and eliminate distortions in credit markets. In late 1991, the structure of reserve requirements for commercial banks was unified at 20 percent for all deposits and selective portfolio requirements were abolished.12 Furthermore, beginning in 1993, significant progress was made in developing banking supervision and prudential regulation. The Superintendency of Banks was restructured and modernized norms on capital requirements were reviewed along the lines of the Basel agreement, rules on provisioning were clarified to ensure their enforcement, and limits on lending were established to minimize concentration risk. A draft Monetary and Financial Code was presented to congress to reform the statute of the central bank, strengthen banking supervision, and promote competition in the financial system. Enforcement of the new prudential regulations brought to light the weaknesses of the financial system. Insolvencies led the central bank to intervene in support of troubled institutions13 and a number of banks were either merged or liquidated.
Significant measures were adopted to enhance the outward orientation of the Dominican economy. With the tax reform of September 1990, a gradual opening to external competition began. The level, numbers, and dispersion of tariff rates were reduced; the scope of exemptions was narrowed; and all import quotas and licensing agreements were eliminated, except for certain agricultural products. In January 1991, the multiple exchange rate was discontinued, and the “unified” official rate was set in relation to the commercial banks’ exchange rate. Although the central bank continued to intervene in the foreign exchange market, a spread between the two rates emerged on numerous occasions. A requirement to surrender foreign exchange to the central bank remained in effect for certain transactions, but the scope of this requirement was reduced and an increasing number of transactions were conducted through the interbank market. A new Foreign Investment Law, approved in November 1995, opened up key sectors, including the banking sector, to foreign investment, extended to foreign participants the guarantees granted to domestic investors, and eliminated all restrictions on profit remittances and capital repatriation.
The response to the stabilization program was positive. Economic growth resumed, driven especially by those sectors that were more open to competition, such as tourism and tourism-related activities, construction, nonsugar manufacturing, and telecommunications. During 1991–95, the average rate of GDP growth accelerated to more than 4 percent, while inflation slowed sharply. Between the end of 1990 and the end of 1991, the 12-month change in consumer prices fell from 80 percent to 8 percent. Since then, inflation has remained in single digits, except in 1994, an election year. External imbalances were generally contained, except in 1992–93.14 The improving economic situation meant the Dominican Republic began to attract sizable amounts of foreign direct investment, which became a steady source of financing for current account deficits. Various rescheduling and refinancing agreements with official and private creditors further relieved the external liquidity constraint.15 This contributed to a steady and significant decline of the public external debt, which, between 1990 and 1995, more than halved from 72 percent to 33 percent of GDP.
Economic instability resumed in the run-up to the 1994 presidential election. Fiscal and monetary policies were relaxed, inflation rose, official foreign exchange reserves declined, and the spread between the official and the market exchange rates widened. The results of the presidential election were controversial. Ultimately, the political parties reached an agreement to shorten the presidential mandate and to hold a new election in 1996. During this interim period, the government resumed its efforts at stabilization. Although it lacked sufficient political support to implement a wide-ranging stabilization and reform program, the government avoided reversals of earlier reforms and was generally successful at containing economic imbalances.
A New Beginning: 1996–2000
A significant acceleration of the pace of economic growth, together with contained inflation, has characterized the second half of the 1990s. Since 1996, the Dominican Republic has ranked among the world’s fastest-growing economies. The effects of past reforms and the sizable inflow of foreign direct investment are among the main factors to have contributed to this result. Unlike past episodes, this period of robust expansion has not been accompanied by a rekindling of inflationary pressures. Even in the months following Hurricane Georges, which hit the island in September 1998, 12-month inflation remained in single digits.
Prudent fiscal and monetary policies were behind these achievements. Despite an increase in government noninterest current spending, the consolidated fiscal deficit remained relatively modest because of the rise in tax revenues stemming from a generalized improvement in tax enforcement and administration. More recently, fiscal policy slippages emerged in the second half of 1999, reflecting preelection-year expenditure overruns and a sharp fall in domestic fuel tax proceeds (the so-called oil differential tax) when domestic fuel prices were not adjusted in line with rising international oil prices.
The ensuing loss of international reserves and foreseen revenue losses associated with a planned reduction in external tariffs led the administration of President Hipolito Mejia16 to adopt a number of corrective measures, including an increase in the VAT rate from 8 percent to 12 percent and a new hydrocarbon law that ended administrative discretion in the determination of retail prices. The conduct of monetary policy, however, continued to be hampered by limited central bank autonomy and the pursuit of potentially inconsistent objectives (that is, growth, inflation, interest rates, exchange rate, official reserves). In 2000, broad money growth was contained and positive real interest rates were maintained, although at times prior to August 2000 the central bank relied on direct instruments of monetary control, especially when exchange rate pressures emerged. Strengthening prudential regulation and banking supervision remained a top priority of the monetary authorities. With transactions in foreign currency rising, the authorities have taken a number of measures since 1998 to improve monitoring of exchange rate exposure and prevent excessive foreign borrowing. The measures include a limit of 30 percent of capital plus reserves on banks’ short-term borrowing abroad, a 10 percent reserve requirement on deposits in foreign currency, and compulsory pre-approval by the central bank of all financial guarantees for foreign currency operations. However, a lack of political consensus has further delayed approval of the Monetary and financial Code.
Public enterprise reform has gathered momentum recently. The Public Enterprise Reform Law, approved in June 1997, authorized more private sector participation in some productive areas still dominated by state-owned enterprises, such as the electricity and sugar sectors.17 In early 1999, the state-owned flour mill (Mulinos Dominicanos) was sold to the private sector. This was followed in April and May 1999 by the private capitalization of the distribution and generation units of the state-owned electricity company.18 In the second half of the year, the mills of the state-owned sugar company (Consejo Estatal del Azúcar—CEA) were leased, the state tobacco company was privately capitalized, and congress approved a 20-year concession for four international airports.
The results of trade liberalization have been mixed. While an ambitious trade reform bill was rejected by congress in 1996, further steps were made in reducing the restrictiveness of the trade regime. During 1998, a number of nontariff barriers were removed and free trade agreements were signed with the Central American Free Trade Area (CAFTA) and the Caribbean Community (CARICOM). Finally, in December 2000, congress approved tariff reform legislation that reduces the number of tariff bands to five from nine and lowers tariff rates, providing new momentum to the integration of the Dominican Republic into the world economy. The trade agreements with CARICOM and the CAFTA were approved in February and April 2001, respectively.
The Challenges Ahead
There is a need to press ahead with the reform agenda, which is broad and well articulated. In order to sustain a rapid pace of economic growth and development, the benefits of previous reforms need to be reinforced with fresh efforts: from enhancing economic policy transparency and good governance to strengthening the efficiency of public administration, and from further deepening of the financial sector to enhancing competition in the markets for goods and services. As shown in Table 2, important draft legislation is still under consideration by congress.
Structural Reforms
Structural Reforms
| Reform | Description | Status | |
|---|---|---|---|
| Privatization/Capitalization | |||
| Dominican Electricity Co. | Create a joint venture: 5O percent state owned and 5O percent private | Completed in May 1999 | |
| State Tobacco Co. | Create a joint venture: 50 percent state owned and 50 percent private | Completed in January 2000 | |
| State Sugar Co. | Lease sugar mills to private sector | Completed in September 1999 | |
| Salt and gypsum mines | Create a joint venture; 50 percent state owned and 50 percent private | Completed in May 2000 | |
| Gold mine | Lease mines to private sector | Invited bidding for the Rosario Dominicana mine in November 2000 | |
| Dominican Painting Co., Paper Industry, Dominican Aviation Co. | Create a joint venture; 50 percent state owned and 50 percent private | Capitalization process suspended. Bidding will restart in June 2001 | |
| State-owned free-trade zone parks | Sale of the parks to the private sector | Tentatively scheduled for 2001 | |
| Financial sector | |||
| Monetary and Financial Code | Strengthen central bank independence and banking supervision and regulation | Approved by congress in October 1999, but vetoed by the executive; revised draft to be resubmitted | |
| Social Security | Substitute pay-as-you-go with individually capitalized system | Approved by congress in April 2001 | |
| Capital Markets Law | Establish policy and regulatory framework for capital market development | Approved by congress in May 2000. Establishment of administrative regulations pending | |
| External sector | |||
| General customs | Make customs system more efficient and transparent | Approved by senate in July 1998; not transmitted to the chamber of deputies | |
| Tariff reform | Liberalize trade and reduce tariffs | Approved by congress in December 2000 | |
| Export incentive | Promote exports through system of drawbacks on custom duties and levies | Approved by congress in August 1999; administrative regulations approved in February 2000 | |
| Public sector reform | |||
| Integrated Financial Management (IFM) system for public sector | Government to have full control over all resources–sources, uses, and accounting. Aim is to improve efficiency and transparency of government operations | IFM project approved by congress in October 2000 | |
| Modernization of the executive power | Improve macroeconomic policy coordination, streamline government structure | Congressional approval pending | |
| Regulatory reform | |||
| Property centers regulation | Establish new property rights law | Approved by congress in July 2000. Establishment of administrative regulations pending | |
| Electricity Law | Establish modern regulatory framework and regulatory body | Approved in the first reading by senate in August 2000; final approval pending | |
| Petroleum Products Law | Establish a fixed tax on domestic fuel consumption | Approved by congress in November 2000; administrative regulations approved in March 2001 | |
| Market Order Code | (1) Promote competition in domestic markets for goods and services; (2) establish antitrust and unfair competition measures; (3) protect consumer rights (4) protect copyright (5) regulate intellectual property rights; (6) establish a specialized institute | Bills (4) and (5) approved in March 2000 and the administrative regulations being prepared; other bills are awaiting congressional approval | |
Structural Reforms
| Reform | Description | Status | |
|---|---|---|---|
| Privatization/Capitalization | |||
| Dominican Electricity Co. | Create a joint venture: 5O percent state owned and 5O percent private | Completed in May 1999 | |
| State Tobacco Co. | Create a joint venture: 50 percent state owned and 50 percent private | Completed in January 2000 | |
| State Sugar Co. | Lease sugar mills to private sector | Completed in September 1999 | |
| Salt and gypsum mines | Create a joint venture; 50 percent state owned and 50 percent private | Completed in May 2000 | |
| Gold mine | Lease mines to private sector | Invited bidding for the Rosario Dominicana mine in November 2000 | |
| Dominican Painting Co., Paper Industry, Dominican Aviation Co. | Create a joint venture; 50 percent state owned and 50 percent private | Capitalization process suspended. Bidding will restart in June 2001 | |
| State-owned free-trade zone parks | Sale of the parks to the private sector | Tentatively scheduled for 2001 | |
| Financial sector | |||
| Monetary and Financial Code | Strengthen central bank independence and banking supervision and regulation | Approved by congress in October 1999, but vetoed by the executive; revised draft to be resubmitted | |
| Social Security | Substitute pay-as-you-go with individually capitalized system | Approved by congress in April 2001 | |
| Capital Markets Law | Establish policy and regulatory framework for capital market development | Approved by congress in May 2000. Establishment of administrative regulations pending | |
| External sector | |||
| General customs | Make customs system more efficient and transparent | Approved by senate in July 1998; not transmitted to the chamber of deputies | |
| Tariff reform | Liberalize trade and reduce tariffs | Approved by congress in December 2000 | |
| Export incentive | Promote exports through system of drawbacks on custom duties and levies | Approved by congress in August 1999; administrative regulations approved in February 2000 | |
| Public sector reform | |||
| Integrated Financial Management (IFM) system for public sector | Government to have full control over all resources–sources, uses, and accounting. Aim is to improve efficiency and transparency of government operations | IFM project approved by congress in October 2000 | |
| Modernization of the executive power | Improve macroeconomic policy coordination, streamline government structure | Congressional approval pending | |
| Regulatory reform | |||
| Property centers regulation | Establish new property rights law | Approved by congress in July 2000. Establishment of administrative regulations pending | |
| Electricity Law | Establish modern regulatory framework and regulatory body | Approved in the first reading by senate in August 2000; final approval pending | |
| Petroleum Products Law | Establish a fixed tax on domestic fuel consumption | Approved by congress in November 2000; administrative regulations approved in March 2001 | |
| Market Order Code | (1) Promote competition in domestic markets for goods and services; (2) establish antitrust and unfair competition measures; (3) protect consumer rights (4) protect copyright (5) regulate intellectual property rights; (6) establish a specialized institute | Bills (4) and (5) approved in March 2000 and the administrative regulations being prepared; other bills are awaiting congressional approval | |
A key challenge is more transparent policymaking. Transparency promotes policy discipline and good governance, contributing to better economic performance.19 To enhance fiscal credibility and permit a comprehensive assessment of the government’s financial position, it is crucial to improve transparency in its operations, especially the execution and control of government expenditure.20 The central bank needs to be given more autonomy to improve transparency in monetary operations and, as is already happening, increase its reliance on indirect monetary instruments. Full unification of the exchange markets would also eliminate an important impediment to efficient resource allocation. Together with the Superintendency of Banks, the Central Bank of the Dominican Republic is working to strengthen domestic prudential norms and regulations, bringing them more in line with international standards and best practices. This will help foster a deep, sound, and resilient financial system.
Financial deepening is fundamental to promoting domestic saving and channeling it toward the most productive investments. To this end, the Monetary and Financial Code and the Capital Markets Law21 would strengthen the institutional setting, promote competition, and enhance transparency in financial and securities markets. Additional stimulus to financial deepening would come from reform of the social security system, which, besides improving the quality and effectiveness of social services, should aim to promote private sector involvement through the development of privately managed pension funds. In addition, more competitive markets are crucial to fostering economic growth and development. The Market Order Code22 aims to remove impediments to competition in domestic markets for goods and services by establishing antitrust and unfair competition measures, protecting consumer rights, and regulating copyright and intellectual property rights.
Appendix I Governance Issues
Good governance is crucial to promoting economic stability, high-quality growth, and the implementation of second-generation reforms. It entails guaranteeing the rule of law, promoting the accountability, efficiency, and transparency of the public sector, and tackling corruption.
Several indicators capture the concept of governance in a country. According to the International Country Risk Guide, the government stability index in the Dominican Republic is 10 (the higher the value, the lower the risk), comparing favorably with the average of 9 for selected Latin American countries (LAC) (see Table 3).23 The indices for corruption and law and order are both 4, above the LAC average of 3. Democratic accountability is 4, the same as the LAC average. Bureaucracy quality is 1, below the LAC average of 2. Total points for the five indices for the Dominican Republic come to 23, one point above the LAC average. Overall, these indices suggest that the Dominican Republic compares favorably with other LAC.
Selected Political Risk Components—Comparison with Western Hemisphere Countries 1,2
(Average, 1997–99)
The lower the risk point total, the higher the risk.
The maximum assigned to government stability is 12 points, for corruption 6, law and order 6, democratic accountability 6, and bureaucracy qualify 4.
Selected Political Risk Components—Comparison with Western Hemisphere Countries 1,2
(Average, 1997–99)
| Government Stability | Corruption | Law and Order | Democratic Accountability | Bureaucracy Quality | Total | |
|---|---|---|---|---|---|---|
| Argentina | 9 | 2 | 5 | 5 | 3 | 24 |
| Bahamas | 10 | 4 | 4 | 4 | 3 | 25 |
| Bolivia | 10 | 3 | 3 | 4 | 2 | 22 |
| Brazil | 10 | 3 | 2 | 4 | 2 | 21 |
| Chile | 10 | 4 | 5 | 4 | 3 | 26 |
| Colombia | 10 | 2 | 2 | 3 | 2 | 18 |
| Costa Rica | 10 | 5 | 4 | 5 | 2 | 26 |
| Cuba | 10 | 2 | 5 | 0 | 2 | 19 |
| Dominican Republic | 10 | 4 | 4 | 4 | 1 | 23 |
| Ecuador | 10 | 3 | 3 | 4 | 2 | 22 |
| El Salvador | 9 | 4 | 3 | 4 | 2 | 22 |
| Guatemala | 10 | 4 | 2 | 4 | 2 | 22 |
| Guyana | 9 | 3 | 4 | 5 | 3 | 24 |
| Haiti | S | 2 | 3 | 2 | 0 | 12 |
| Honduras | 10 | 2 | 2 | 4 | 2 | 20 |
| Jamaica | 10 | 3 | 3 | 5 | 3 | 24 |
| Mexico | 10 | 3 | 2 | 5 | 3 | 23 |
| Nicaragua | 10 | 4 | 4 | 6 | 1 | 25 |
| Panama | 9 | 2 | 3 | 6 | 3 | 23 |
| Paraguay | 8 | 2 | 4 | 4 | 1 | 18 |
| Peru | 9 | 3 | 3 | 2 | 2 | 19 |
| Suriname | 9 | 3 | 3 | 4 | 2 | 21 |
| Trinidad and Tobago | 10 | 3 | 4 | 5 | 3 | 25 |
| Uruguay | 10 | 3 | 3 | 5 | 2 | 23 |
| Venezuela | 9 | 3 | 4 | 5 | 1 | 22 |
| Average | 9 | 3 | 3 | 4 | 2 | 22 |
The lower the risk point total, the higher the risk.
The maximum assigned to government stability is 12 points, for corruption 6, law and order 6, democratic accountability 6, and bureaucracy qualify 4.
Selected Political Risk Components—Comparison with Western Hemisphere Countries 1,2
(Average, 1997–99)
| Government Stability | Corruption | Law and Order | Democratic Accountability | Bureaucracy Quality | Total | |
|---|---|---|---|---|---|---|
| Argentina | 9 | 2 | 5 | 5 | 3 | 24 |
| Bahamas | 10 | 4 | 4 | 4 | 3 | 25 |
| Bolivia | 10 | 3 | 3 | 4 | 2 | 22 |
| Brazil | 10 | 3 | 2 | 4 | 2 | 21 |
| Chile | 10 | 4 | 5 | 4 | 3 | 26 |
| Colombia | 10 | 2 | 2 | 3 | 2 | 18 |
| Costa Rica | 10 | 5 | 4 | 5 | 2 | 26 |
| Cuba | 10 | 2 | 5 | 0 | 2 | 19 |
| Dominican Republic | 10 | 4 | 4 | 4 | 1 | 23 |
| Ecuador | 10 | 3 | 3 | 4 | 2 | 22 |
| El Salvador | 9 | 4 | 3 | 4 | 2 | 22 |
| Guatemala | 10 | 4 | 2 | 4 | 2 | 22 |
| Guyana | 9 | 3 | 4 | 5 | 3 | 24 |
| Haiti | S | 2 | 3 | 2 | 0 | 12 |
| Honduras | 10 | 2 | 2 | 4 | 2 | 20 |
| Jamaica | 10 | 3 | 3 | 5 | 3 | 24 |
| Mexico | 10 | 3 | 2 | 5 | 3 | 23 |
| Nicaragua | 10 | 4 | 4 | 6 | 1 | 25 |
| Panama | 9 | 2 | 3 | 6 | 3 | 23 |
| Paraguay | 8 | 2 | 4 | 4 | 1 | 18 |
| Peru | 9 | 3 | 3 | 2 | 2 | 19 |
| Suriname | 9 | 3 | 3 | 4 | 2 | 21 |
| Trinidad and Tobago | 10 | 3 | 4 | 5 | 3 | 25 |
| Uruguay | 10 | 3 | 3 | 5 | 2 | 23 |
| Venezuela | 9 | 3 | 4 | 5 | 1 | 22 |
| Average | 9 | 3 | 3 | 4 | 2 | 22 |
The lower the risk point total, the higher the risk.
The maximum assigned to government stability is 12 points, for corruption 6, law and order 6, democratic accountability 6, and bureaucracy qualify 4.
Public Fund Management
The Office of the Presidency, through Fund 14.01, is responsible for approximately 10 percent of central government spending (down from 50–60 percent several years ago). This fund lacks transparency and is highly discretional. In addition, budgeting, treasury, accounting, internal control, and government procurement systems are not well coordinated. Information is often exchanged manually or counted twice, and is frequently unreliable. These weaknesses hinder efficient resource allocation and provision of public services. To address these problems, the government, with technical assistance from the IDB, has approved an integrated financial management program, which will contribute to an efficient allocation and management of public funds and an increase in transparency. The authorities intend to complete the program in 2002.
Modernization of the Executive Power
Efficient public administration is hampered by a lack of formal mechanisms for policy coordination, leading to overlapping responsibilities among public sector institutions. Other factors impeding efficient public administration include low-skilled labor, excess public sector employment, and weak information systems. In its efforts to reform, the government has requested assistance from the IDB to support modernizing the executive power by building institutional capacity, developing a more equitable distributional policy, and improving the efficiency of social spending. This reform is being considered by congress.
Anti-Corruption
Government restrictions can be sources of rent seeking and corruption. High tariffs, poorly targeted subsidies, price controls on agricultural products, and multiple currency practices in the Dominican Republic need to be reduced or eliminated. The government, aware of these problems, has enacted tariff and tax reforms, and is pursuing the privatization of state-owned enterprises, revising the monetary and financial code, improving property rights, and working on a modern regulatory framework for the electricity sector.
References
International Country Risk Guide, available on CD-ROM, by Political Risk Services Group (Syracuse, NY).
Kopits, George, and Jon Craig, 1998, Transparency in Government Operations, IMF Occasional Paper No. 15. (Washington. International Monetary Fund.)
Leone, Alfredo Mario, 1997, “Stabilization, Structural Reforms and Challenges Ahead,” IMF mimeo.
