Dominican Republic W/TPR/S/11 Page 1 I. THE ECONOMIC AND TRADE ENVIRONMENT (1) Major Features of the Economy1 1. The Dominican Republic is located in the eastern half of the Caribbean island of Hispaniola (with Haiti on the western half). It has an area of 48,442 km2. In 1993, the population was around 7.5 million; population growth has declined to around 2 per cent in the 1990s from 2.7 per cent in the early 1970s. The urban population is increasing, amounting to 63 per cent of the total in 1993 (Table I.1). The Dominican Republic is endowed with different types of soil suitable for agriculture and is rich in minerals; its traditional production structure has been in agricultural goods such as sugar, coffee, cocoa, and tobacco and in the exploitation of minerals such as nickel, doré (a gold and silver alloy) and bauxite. The abundance of labour and the proximity to the United States have been important elements in the rapid growth of exports, mainly of clothing, from free zones (Chapter V(4)); furthermore, a buoyant tourist industry has developed around the many attractive beaches (Chapters V(5)). Table I.1 Major features of the Dominican Republic economy (1987 prices) 1970 1975 1980 1985 1990 1991 1992 1993 Population (thousands) 4,423 5,049 5,697 6,376 7,110 7,247 7,387 7,543 urban population (per cent) 40.0 45.3 50.5 55.7 60.4 61.2 62.1 62.9 Current GNP per capita (US$) 340 720 1160 760 890 1010 1170 1230 Labor force (thousands) 1,157 1,340 1,571 1,862 2,187 2,251 2,317 2,384 Female participation (per cent) 11.0 11.7 12.4 13.7 15.0 15.3 15.6 15.9 GDP at constant market prices GDP (US$ million) 2,184 3,345 4,240 4,588 5,493 5,545 5,975 6,151 Share in GDP Agriculture 27.6 20.9 20.0 20.3 16.0 16.5 16.2 15.8 Industry 23.7 29.2 28.4 26.2 24.6 23.5 24.6 24.2 Manufacturing 15.4 15.7 15.3 13.7 12.5 12.3 12.9 12.6 Services 48.6 49.9 51.6 53.5 59.4 60.1 59.2 60.0 School enrollment ratio Primary 100 104 118 126 ... ... ... Secondary 21 36 42 51 ... ... ... ... Not available Note: Education ratios may exceed 100 per cent where children outside the normal school age are attending school. Source: World Tables 1994/95; and IMF, IFS. 2. The Dominican Republic is a middle-income developing country; in 1993, the current per capita GNP was US$1,230. Throughout the 1980s (and particularly after 1985), real GDP movements became 1The principal data referred to in this Chapter correspond to the tables and charts which are based mainly on World Bank, IMF and UNSTAT data. Other data were provided by the Government of the Dominican Republic. W/TPR/S/11 Trade Policy Review Mechanism Page 2 increasingly erratic, reflecting macroeconomic instability (Chart I.1). After a downturn in 1990, real GDP growth recovered during 1991 and 1992. In 1993, the growth rate decreased but it has remained positive; according to more recent data provided by the Dominican authorities, GDP growth stood at 4.3 per cent in 1994. A comparison of social indicators during the period 1970-75 and 1987-92 demonstrates a general improvement in the well-being of the population. Life expectancy increased from 60 to 68 years, while infant mortality decreased from 80 to 41 per thousand live births, and the total fertility rate decreased from 5.8 to 3 births per woman.2 However, access to secondary education remains low (although growing rapidly), which in the long run could become a major constraint to increased productivity and economic growth. 3. The economy, traditionally based on agriculture, is now dominated by the services sector - particularly tourism - which represented 67 per cent of GDP in 1993 (Chart I.2).3 Manufacturing, heavily dominated by the free-trade-zone-based clothing industry, makes the second largest contribution to GDP, followed by agriculture and mining. The agricultural sector did not perform well during the 1980s, its share in GDP declining consistently throughout the period. The poor performance of the 2 World Bank (1995). The Dominican authorities estimate that life expectancy increased from 55 to 70 years, while infant mortality decreased from 80 to 28 per thousand live births. 3According to Table I.1 the contribution of services to GDP is 60 per cent; this is based on World Bank definitions under which construction and energy are included in industry. Chart I.2 is taken from the Boletín Trimestral ofthe Central Bank of the Dominican Republic. The authorities have indicated that services accounted for 57 per cent of GDP in 1993. Dominican Republic W/TPR/S/11 Page 3 sector can be attributed to the negative impact of macroeconomic policies, deteriorating terms of trade, unfavourable conditions for exports of traditional agricultural products, and a lack of entrepreneurial skills and new production technologies. However, agriculture is still the most important sector in terms of employment and output for domestic consumption. 4. As in many developing economies, the informal sector appears to be large. While no official data on its share of GDP exist, it is estimated that 35 per cent of the labour force was employed in agriculture, either commercial (sugar, coffee, tobacco) or food crops (rice) and subsistence farming. A further 10 per cent is engaged in the free zones and the tourist sector, while recorded unemployment is estimated at 22 per cent. On this basis, the informal sector could involve over half the work force and may make a significant but unrecorded addition to GDP. However, recent government estimates show that the size of the informal sector, including domestic staff and those working for a relative without pay, decreased from 65.3 per cent in 1991 to 40.1 per cent in 1994. 5. International trade is of utmost importance for the Dominican Republic, given the small size of the domestic market; it has been one of the main engines of economic growth. Tourism and manufacturing in the free zones, particularly clothing, have overtaken agricultural exports. As shown in Chart I.5, the share of agriculture as a source of foreign exchange has decreased since 1985, while the share of services has increased continuously, reaching 79 per cent in 1994. Tourism now accounts for more than US$1 billion in annual earnings and the free zones account for US$1.4 billion. Remittances from Dominicans living abroad, mainly in the United States, are also an important source W/TPR/S/11 Trade Policy Review Mechanism Page 4 of foreign exchange. During the period 1985-94 the average contribution of remittances to export earnings was 16 per cent.4 6. A major constraint for the growth in all sectors has been the constant shortage of electricity, caused by the lack of generation and distribution capacity. The shortage of electricity has promoted the use of small, private, electric generators that are not economically or ecologically efficient. According to the Government, the supply of electricity has improved due to technical projects financed by the World Bank and the technical collaboration of a Spanish company, Unión Eléctrica Funosa. However, further efforts are needed to eliminate shortages, and privatization plans may be helpful (Chapter V (3)(ii)(b)). 7. Government involvement in economic activities is widespread, including through direct participation in production, although this has diminished in recent years, including through private participation in electricity generation. A number of State enterprises are leaders in their sectors (Annex IV.I), and some benefit from their monopoly position (petroleum refining and flour milling). Privatization has not proceeded as rapidly as in some other developing countries; but a foreign investment bill, now before the Congress, should be helpful in this respect. (2) Recent Economic Developments (i) Introduction 8. The Dominican Republic, like many other small economies, had difficulty in adjusting to the various external shocks of the 1970s and 1980s, namely, the volatility of export prices, increases in the price of oil, the recession in industrialized countries, the debt crisis and increases in international interest rates. At the beginning of the 1980s, the economy was stagnating and structural economic problems became more evident. As in many other countries, the Dominican authorities had difficulties in reconciling the imperative to resume growth for development purposes with the need to stabilize and restructure the economy. Macroeconomic management became increasingly difficult, and the second half of the 1980s was characterized by stagflation. 9. From 1986, faced with social unrest, the authorities attempted to boost the economy with an extensive programme of public investment, combined with a freeze on current expenditure including wages and salaries. Public investment was financed through a combination of foreign debt arrears, and monetary creation through Central Bank and Reserve Bank borrowing. The resulting economic expansion was coupled with a sharp increase in inflation, which reached an annual average rate of 60 per cent in 1990 (Chart I.1; the authorities record a peak of 70 per cent). 10. In 1990, a stabilization and structural reform programme (the New Economic Programme, NEP), aimed at restoring internal and external equilibrium, was implemented and continued at least through 1993 (Box I.1). The first priority of the NEP was to stop inflation; key elements of the programme were the elimination of the fiscal deficit, creation of a unified, market-determined exchange rate and tightening of monetary policy.