The Dominican economy is poised to make a big leap forward

The big economic news of the year just concluded was undoubtedly the spectacular performance of economic activity. This was partly a rebound effect, but also an important recovery after the fall experienced in 2020. And if it was just a rebound? That’s not bad either. Not many economies did so with the strength of the Dominican economy. In fact, less than 30% of middle-income economies (like ours) have recovered to pre-pandemic per capita income levels. And we are one of those. As economists Robert Barro and Xavier Sala i Martin have rightly said, “Economic growth is the part of macroeconomics that really matters.”

It is a luxury for the country to have the distinguished academic Sala i Martin as an advisor to the Government. One of the great contributions of this Catalan economist was made in the mid-1990s, when in a work that is a classic in the field, he identified the variables that have most influenced the long-term economic growth rate of countries. The result is summarized below, using the classification presented by Sala i Martin:

Regional Variables: Sub-Saharan Africa and Latin America (negative impact); Absolute Latitude (the farther away from the equator, the better it is for growth).

Political Variables: Countries with more civil liberties, respect for political rights and the law grow more. Countries that have had revolutions, coups and wars grow less.

Religious Variables: Buddhist, Muslim and Confucian countries have grown more and Protestant or Catholic countries have grown less.

Market Distortions: Countries with distortions in the foreign exchange market and parallel currency markets have grown less.

Investment: Investment in physical capital has a positive impact on growth.

Production in the primary sector of the economy (agricultural sector): countries whose exports are mainly agricultural grow less; and those with a high percentage of mining grow more.

Openness: countries with greater openness to trade and more years of free trade have grown more.

Type of Economic Organization: countries with a higher degree of capitalism have had better economic performance.

And finally, countries that were Spanish colonies have shown lower growth in the long term.

These results are grand averages for dozens of countries and over a given time sample. They are not written in stone. Because if they were, we would be in a very bad way: we are mostly Catholic, we were a Spanish colony, we are a hot country (we are close to the equator) and we are located in Latin America. And all of that has historically been a bad recipe for economic growth.

Nor does it mean that there are no other variables that impact growth, such as human capital. But what has been found is that investment in primary education has a positive effect on the long-term growth of economies. However, no significant relationship has been found with investment in secondary or university education.

What we have learned from all the advances in the literature over the last thirty years is that there are necessary conditions for growth that have generally helped countries: greater openness of the economy in terms of trade, a higher degree of capitalism, political stability, legal certainty and macroeconomic stability, to name a few. But not to bore us, there are countries that have all of these and have not grown. What we can say is that economies that have not had these conditions have performed abysmally.

Between 1961 and 2019 we grew at an average of 5.3%, a high rate if compared to that of Latin America, which was 3.5%. More importantly, we have sustained our growth despite the fact that the region was unable to do so. In more recent periods we grew at an annual rate of 5.6% while the region grew at 1.3%.

But the challenge must be different: how to grow at rates of 8% or 10% similar to those observed in South Korea, Malaysia, Singapore and China over periods of 30 or 40 years? I believe that we are on the verge of a good period of growth because we have the momentum after coming out of the crisis and with the winds in favor of the world economy (pandemic control, stabilization of international prices and the momentum of the U.S. economy), plus a good combination of public policies, we can make a leap. The challenge is to find that combination. And that is not easy. It is almost like going out in search of the “holy grail”.

author avatar
Dominican Republic Live Author

Leave a Reply

Your email address will not be published. Required fields are marked *

fifteen − eight =

Verified by MonsterInsights