Transcript República Dominicana

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
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.
Dominican Republic: Per Capita GDP
RD$ 1970
1,000.0
800.0
600.0
400.0
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
200.0
Year
(1) Remarkable Long-run performance
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.
GDP, PPP
(constant 1995 international $)
450
Dominican Republic
Costa Rica
Latin America & Caribbean
Chile
400
350
300
250
200
150
100
50
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
0
(1) Remarkable Long-run performance
The Dominican Republic’s growth performance since the beginning of the nineties
is comparable to Chile and outperforms LA, Central America, and the Caribbean.
1995 Dollars, 1995=100
Dominican Republic Growth from an International Perspective
300
Chile
Dominican Republic
Latin America
Central America
Costa Rica
The Caribbean
250
200
150
100
50
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
(2) Deep structural transformations
The country changed their comparative advantages and developed new sectors from
scratch, like tourism and the Free Trade Zones (FTZ), compensating the fall in traditional
exports. Remittances grew steadily and became one important source of revenues
Current Account Composition
US$ Millions
4.000
2.000
0
-2.000
TBN
-4.000
TBZ
Remittances
Services
Inv. Inc.
-6.000
Other Current Transfers
Current Account
-8.000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
(2) Deep structural transformations
The economic structure changed substantially with increases in the
participation of industry and services and a fall in agriculture
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
1975
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
GDP Composition
(3) Above average degree of policy effectiveness and a democratic polity
The country has shown a remarkable ability to recover quickly after the
occurrence of crisis in the eighties, nineties, and the current decade.
15
25000000
20000000
10
15000000
10000000
5
5000000
0
0
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
•
-5000000
-5
-10000000
-10
-15000000
Growth rate
Deviation from trend
(3) Above average degree of policy effectiveness and a democratic polity
•
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.
(4) The economy is volatile
•
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
GDP and Consumption Volatility.
Latin American Countries and United States
(1990-2002)
0,1
0,09
1960-1989
1991-2005
0,08
0,07
0,06
0,05
0,04
0,03
0,02
0,01
Uruguay
United States
Trin. y Tob.
Perú
Paraguay
Nicaragua
Mexico
Honduras
Guatemala
El Salvador
Ecuador
Dominican Rep.
Costa Rica
Colombia
Chile
Canada
Brazil
Argentina
0
(5) A set of key determinants of growth lags behind
PPP per capita GDP Ranking
There is a certain degree of inconsistency between the country’s per capita
GDP and its human development indicators
180
160
140
120
100
80
60
Dominican
Republic
40
20
0
0
20
40
60
80
100
120
140
160
Human Development Indicators Ranking
180
PPP per capita GDP Ranking
(5) A set of key determinants of growth lags behind
180
160
140
120
PPP per capita GDP Ranking
100
80
60
Dominican
Republic
40
20
0
0
20
40
60
80
100
120
140
160
180
180
160
140
120
100
Life Expectancy at Birth
PPP per capita GDP Ranking
80
Dominican
Republic
180
60
160
40
140
20
120
0
100
0
20
40
60
80
100
120
140
160
180
Combined gross enrolment ratio for primary, secondary and tertiary schools (%)
80
60
Dominican
Republic
40
20
0
0
20
40
60
80
100
120
140
Adult Literacy Rate
160
180
(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
Stock Market cap. / GDP
The level of financial deepening is lower than expected, given the country’s
per capita GDP.
6
Financial Underdevelopment - Banks:
(<49.5% GDP)
5.5
5
4.5
4
3.5
3
2.5
2
1.5
Financial Underdevelopment Markets
(< 44.1% GDP)
1
0.5
0
0
Dominican
Republic
0.5
1
1.5
2
2.5
Private Credit / GDP
3
(6) Concerns on trade specialization and the oil bill
•
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.
Oil Imports
30
%
3.000
Mill US$
•
% Total Imports
Mill US$
2.500
25
2.000
20
1.500
15
1.000
10
500
5
0
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
(7) Weak institutions
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
Working Hypotheses
 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 selfdiscovery 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)
Growth Diagnostics: Hypotheses
Possible
Problems
Low returns
to
economic
activity
Low
social
returns
High cost
of finance
Bad
international
finance
Low
appropriability
Bad
infrastructure
Poor
geography
Government
failures
Market
failures
Low
human
capital
Micro risks:
Property
rights,
corruption,
taxes
Macro risks:
Financial,
monetary,
fiscal
instability
Information
externalities:
self
discovery
Low
domestic
saving
Bad
national
finance
Poor
intermediation
Coordination
externalities