Transcript Dominican Republic

Dominican Republic
Victor A. Canto
Quality of the Data
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Available data is fairly limited and so is the
quality
According to the data, during the late 1980’s the
DR inflation was higher than the current levels.
My best guess is that the data is wrong and it
overestimated the DR inflation rate
But that is not all, given the Central Bank
estimation methodology; an overestimation of
the Inflation rate requires an underestimation of
the real per capita income of the country.
If we are right the inflation rate and the decline
in real GDP were not as bad as the data shows.
Another implication is that the gains made
during the early 1990’s were overestimated also.
The data is of very poor quality and all one can
make is some generalizations regarding the
overall picture.
One that I like to make is that the per capita
income in constant US dollar only increased
33% during the period and from 1975-1995 there
was no net gain in real per capita income.
To put this numbers in perspective, during the
same time period the US per capita income in
constant dollars increased better than 130%
Inflacion Domincana
( PBI)
50
40
30
20
10
0
1970
2800
Figura 1a
1975
1980
1985
1990
1995
2000
Ingreso per Capita en 2003 US$
2400
2000
1600
1200
800
1970
Figura 1b
1975
1980
1985
1990
1995
2000
Peso Depreciation
• Reasons for depreciation are
numerous and will be
discussed later on
• Point we want to make is
that the data suggests that
the exchange rate regime
changed during the early
1990’s
• There is a clear brake in the
data and it covers all three
administrations
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Depreciation Anual del Peso Domincano
50
40
30
20
10
0
-10
1970
1975
1980
1985 1990
Figura 2
1995
2000
Incidence and burden of Adjustment
• Lest consider the following numerical example: A Dominican Product sold
in the world market for $100 of which labor gets
$60 as compensation and capital gets $40.
• Next lets consider what happens when the government imposes a 10%
Export/ITBS on the product
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The first question an economist asks is will the producer be able to shift
the tax forward to the consumer or backward to the suppliers?
• The technical answer is that it depends on the demand and supply
elasticity’s
Consumer Demand Elasticity
• If the product is something that is sold in the international market and the
DR has no monopoly power it will be quite hard to argue that we will be
able to shift the tax to the consumers.
• Tourist and Maquialdoras can easily go elsewhere if we increase their
prices.
• In technical terms the demand is very elastic and the tax cannot be shifted
forward to the foreign consumers
• Proposition 1 The bulk of the export and tourism taxes will not be paid by
foreigners, the will be paid by the domestic factors of production.
Supply Elasticity: Capital
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In or example the 10% export/ITBS tax will have to be absorbed by domestic
factors.
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That means there is only $90 to pay labor and capital.
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The question is who will pay the tax in the form of lower return.
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Again how the tax is shifted backwards depends on the supply elasticity’s.
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If capital is perfectly mobile, it will go where the risk adjusted returns are the
highest
The returns to capital will never be lower than the rest of the world.
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Proposition 2: A mobile capital will not suffer the burden of taxation. Alternatively
stated the burden of taxation cannot be shifted backwards to the owners of capital
Supply Elasticity : Labor
• The process of elimination tells us that the burden of taxation
fall on labor
• The $10 tax collection will reduce the labor’s payment to $50
in our example
• Proposition 3: The burden of all taxes will always fall on the
immobile factors of production
• The nature of the tax imposed does not matter , the fixed
factor always pays.
• All the nature of the tax determines is the collection
mechanism, not who pays.
Mobility and Elasticity: Generalizations
• The description of the mobile factor as capital and the fixed factor as
fixed is a simplification.
• While capital is certainly mobile, so are high skilled workers or
people that for luck or family affiliations are able to freely leave the
country. Mobile factors are part of the dollar economy.
• In contrast land is clearly a fixed factor that is not able to leave the
country. Immobile factors are part of the peso economy.
• We make the distinction between these two factors and generalize it
to economic sectors. Tourism, maquiladoras and nontraditional
exports are part of the dollar economy. Domestic services are part of
the peso economy
The great divide between the peso and dollar economies
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The incidence of the government polices
will cause the decline of the peso sector
relative to the dollarized sector of the
economy
Perdida de Poder Adquisitivo del Sector Peso
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One way to measure this is by looking at
the loss of purchasing power in relation to
the US dollar. (i.e. the peso depreciation
less the increase in the cost of living
index)
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20
0
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Even though the data is not reliable . Form
1990 on there has been a major and almost
steady deterioration in standard of living
of the peso economy.
We have a simple explanation for the great
divide between the two sectors
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-40
-60
1990
Figura 3
1992
1994
1996
1998
2000
2002
Economic Horizons
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The value of a dollar worth of income in
perpetuity is nothing more than the inverse
of the discount rate
That figure also tells us how many years
worth of income are we willing to pay
upfront for that income stream. We call
that the investment horizon.
For the dollar part of the economy the
relevant interest rate is the 10 year us
government bond
For the peso part of the economy the
relevant is the active interest rate charged
by commercial banks in DR
The story is evident the dollar sector is
willing to be patient while the peso sector
is not
At current rates the peso sector must
recoup its investment in less than 3years
while the dollar sector is willing to wait 20
to 25 years
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Horizontes Economicos
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EUA
20
16
12
8
RD
4
0
1980
1985
1990
1995
Figura 4
2000
Government Revenues and Expenditures
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Spending increased dramatically in
the 1990’s
The greater the spending the greater:
The pressure on tax increases
The greater the negative impact on
the peso sector of the economy
The greater the great divide
between the peso and dollar sectors
Gastos e Ingresos del Gobierno
.18
Gastos Publicos/ PBI
.17
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Recaudaciones / PBI
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Remember that the impact is greater
than the spending increase because of
government exemption of taxes
increases the effective tax rate
An additional negative effect that
uneven taxation leads to corruption
avoidance and evasion
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.10
1990
Figura 5
1992
1994
1996
1998
2000
2002
Tax Collections
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The increased government expenditures created
the need for higher tax revenues .
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The ITBS was a new tax created to satisfy the
need for additional revenues. Hence the
collections amount to a net increase the divide
between the peso and dollar economies.
Revenues collected on taxes on goods and
services increased as percent of PBI during this
time. Since these taxes are usually proportional,
the higher revenues imply that either new taxes
or more “effective” enforcement of existing
laws. Either way the higher tax revenues meant a
higher level of distortions.
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Impuestos Sobre los Ingresos /PBI
4.4
4.0
4.0
3.6
3.6
3.2
3.2
2.8
2.8
2.4
2.4
1990
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Figura 6a
1992
1994
1996
1998
2000
2002
Impuestos Sobre Bienes y Servicios/ PBI
The data shows that the pressure on the
corporate and personal income tax began around
1994-96. This is interesting for under a
progressive tax system when an economy grows
one would expect to see revenues collection
increase faster than the growth rte. The fact that
they did not means that either we did not have
the growth reported .or there were too many
leakages due to exemptions etc.
Figura 6b
1992
1994
1996
1998
2000
2002
2000
2002
ITBIS/PBI
4.5
4.0
7
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2.0
1990
Impuesto Sobre La Renta/ PBI
3.5
6
3.0
5
2.5
4
3
1990
2.0
Figura 6c
1992
1994
1996
1998
2000
2002
1.5
1990
Figura 6d
1992
1994
1996
1998