Dominican Republic Essay, Research Paper

Dominican Republic

In 1999, the Dominican Republic continued its miracle growth rate of 8.3%. This was one of the world?s highest growth rates in 1999. In the previous 4 years before, the growth rate of the Dominican Republic was on average, a little over 7%. ?The Dominican Republic now leads the world in economic growth. Who would have thought this possible??

In the late 80?s and 1990, the GDP fell by up to 5% and price inflation reached 100%. After this period, the Dominican Republic entered a new stage of development. It became a period of moderate growth and declining inflation. In 1995 inflation was reported at 9%, while GDP grew by 4.5%. A year later the inflation rates dropped 5% and the GDP grew to about 7.3%.

The capital used to be a slow town but has since turned into a metropolis with many new middle-class suburbs. Large sport utility vehicles, extensive housing and construction projects, and a consumer-oriented middle class, are all visible signs of new wealth. Fueling this growth are tourism, contributions, telecommunications, construction, the free-zone assembly plants, and many services. The Dominican Republic had been a ?sugar economy? and society, with sugar dominating the export economy by 80%. Sugar has dropped to less than 5% of the GNP. New investments are coming into the country on a daily basis.

The economic quickening affects the entire country, more money is circulating, and jobs are being created at an uncommon level. There is more activity, energy, and movement in the Dominican economy and society than ever before in the nation’s history. This in combination with low inflation has reduced the poverty level in the Dominican Republic. Unemployment levels are down significantly, and real wages are up. Minimum wages are up more than average wages. The per capita income is estimated at about $1,500 per year and a large part of the population works at the minimum wage level which is about $100-$125 per month. The unemployment rate is about 30%. About 45% of the labor force are employed in agriculture, 21% in industry and communications, and 34% in private and government services.

There has been a significant shift in the organization of public expenditures, away from investment and towards consumption. While part of this shift has been the result of increased attention to human development, it also reflects a significant growth in public employment outside the education and health sectors. Also, the resulting scarcity of resources to finance public investments joined with inadequate budget control systems is straining macroeconomic management.

In 1966, the Dominican Republic earned less than $10 million from tourism. Around that time, though, the Dominican government declared the development of the tourism industry to be in the national interest. As a result, the government enacted laws to promote and grant incentives to the industry that permitted the construction of complexes and necessary infrastructure such as roads and highways. By the 1980s there was considerable foreign investment in the Dominican tourism industry, and in 1985 the tourism industry generated more than $400 million in revenue.

The country’s tourism industry has continued to grow since then at an average rate of more than 20% year. In fact, the Dominican Republic is now the major tourist island in the Caribbean, attracting about 13% of the region’s tourist flow. Tourism has become one of the most important aspects of the Dominican economy; by 1996, earnings from tourism reached approximately $1.46 billion.

Another important sector is the free zone industries. The Dominican Republic has been developing its free zone industries for the past 25 years. The main activities in Dominican free zones are the manufacturing and assembly of clothing, shoes, electronic components, hospital supplies, furs and data processing. Clothing represents about 63% of all free zone activities.

Today, the Dominican Republic has more industrial free zones than all but three other countries in the world and Dominican free zones continue to grow. For instance, from 1993 to 1994 free zones increased by 7.3%. Exports from free zones surpassed an average of $165.3 million per year between 1980 and 1985 and between 1986 and 1993 it reached $767.4 million. In 1995 the yearly exports amounted to approximately $2.5 billion, reaching US$3.0 billion in 1996. The Dominican Republic’s primary commercial partner and market for free zone companies is the United States, which imports around 90% of their total output. Moreover, since 1990 the currency earnings of the free zones have been greater than the earnings derived from all of the country’s traditional exports.

Foreign trade, both imports and exports, plays a central role in the Dominican Republic’s economy. The Dominican Republic imports goods from all over the world, but approximately 43% of the country’s imports come from the United States. The Dominican Republic imports components that account for about 60% of the value of the goods consumed in the local market.

The Dominican Republic’s manufacture of numerous goods for export, especially clothing, has significantly expanded in recent years due to the growth of free trade zones. The processing of agricultural products, oil refining, minerals and chemicals also are important aspects of the Dominican economy. The country exports a variety of finished and semi-finished products, including sugar, coffee, cocoa, nickel, gold, silver, tin, copper, clothing, shoes, electronic components and medicines. The major trading partners for the Dominican Republic include: United States; Canada; South Korea; Venezuela; Netherlands; Puerto Rico; Mexico; Japan.

The 1980’s were a period of severe macroeconomic instability as well as deep structural adjustments in the productive structure of the economy of the Dominican Republic. Between 1980 and 1984 the balance of payments was under severe strain because of the decline of its terms of trade, and the external shocks to the economy from rising oil prices and interest rates. The balance of payments deficit increased from $ 118 million in 1980 to $ 373 million in 1983. With the declining net capital inflows, the Central Bank financed the current account deficits in an attempt to maintain an increasingly overvalued exchange rate, leading to a serious deterioration of its net foreign exchange reserves. Between 1980 and 1982 the consolidated public sector deficit averaged about 5.7 % of GDP and, because of the lack of external resources, was increasingly being financed by the domestic banking system. A reflection of this tendency was that between 1980 and 1984 the proportion of domestic credit absorbed by the public sector rose from 25 % to 36 %. Repression of the financial markets increased dramatically during this period. Growth in real GDP declined from 6 % in 1980 to 3 % in 1984.

By 1983-84, the government began taking some actions to control the fiscal imbalance and the deficit declined during these years. In an attempt to reduce the losses of public utilities, the price of public services were adjusted and the increasingly over-valued exchange rate forced the Central Bank to ration access to foreign exchange, shifting “non-essential” imports to the parallel foreign exchange market. At the beginning of 1985 the government carried out the unification of the exchange rate, and severely restrained fiscal and monetary expansion. In April the Dominican Republic entered into a Stand-by agreement with the International Monetary Fund. Real GDP growth in 1984 and 1985 fell to .3 % and -2.6 %. Domestic inflation during these two years increased dramatically from an average of only 7 % between 1980-83 to 27.1 % and 37.6 %.

Beginning in 1990 the government spending on infrastructure investment was cut back and in August of that year a wider set of measures were taken to reduce the public sector deficit. Large increases in the prices of petroleum products, flour, and sugar were designed to reduce the operating deficit of the decentralized public enterprises charged with marketing these basic consumer goods. Although the growth in the money supply was drastically constrained, the readjustment of prices caused the domestic inflation to peak at over 100 % for the year. After having raised interest rates throughout the period, finally in January of 1991 all regulatory imposed ceilings were removed. In addition, the Central Bank began using open market operations in order to reduce liquidity in the financial markets. During 1990 and 1991, the economy remained in recession, as inflation and pressure on the exchange rate abated. The rise in the consumer price index has averaged approximately 5 % a year between 1992 and 1993. After a period of exchange rate instability between 1983 and 1990, the last three years the Dominican peso has remained stable at about 12.70 to the dollar.

To accommodate an unstable fiscal policy, monetary policy is carried out with an increasing control of discretion over rules. Credit to the private sector has been crowded-out by a combination of high interest rates and other less desirable instruments, such as the freezing of the banks’ excess reserves or outright quantitative limits on private banks’ commercial credit. If that continues, this type of macroeconomic management could have a bad impact by weakening the banking sector.

The Dominican Republic had an external debt of $3.7 billion in 1999. During the past 8 years macroeconomic performance has been relatively good. Fiscal policy has been tight, leading to low inflation, overall public debt has been reduced, and the current level of government net assets is consistent with the maintenance of macroeconomic stability at annual inflation levels of about 5%.

Bibliography

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