Dominican Republic - Growth and Structure of the Economy

Growth and structure of the economy

Only three decades after their arrival on Hispaniola (La Isla Española) in 1492, Spanish mercantilists largely abandoned the island in favor of the gold and silver fortunes of Mexico and Peru. The remaining Spanish settlers briefly established an economic structure of Indian labor tied to land under the systems of repartimiento (grants of land and Indian labor) and encomienda (grants of Indian labor in return for tribute to the crown). The rapid decline of the Indian population ended the encomienda system by the mid-1500s, however. Little productive economic activity occurred in Eastern Hispaniola (the approximate site of the present-day Dominican Republic). The French assumed control of the western third of the island in 1697, establishing Saint- Domingue (modern-day Haiti), which developed into a productive agricultural center on the basis of black slave labor. In the eastern part of the island, cattle ranching was common, but farming was limited to comparatively small crops of sugar, coffee, and cacao.

The Spanish side of Hispaniola slowly developed a plantation economy during the nineteenth century, much later than the rest of the West Indies. For much of the century, political unrest disrupted normal economic activity and hindered development. Corrupt and inefficient government, by occupying Haitian forces and by self-serving Dominican caudillos, served mainly to increase the country's foreign debt. After failing to achieve independence from Spain in the Ten Years' War (1868-78), Cuban planters fled their homeland and settled in Hispaniola's fertile Cibao region, where they sowed tobacco and later cacao. When tobacco prices fell in the late nineteenth century, United States companies began to invest heavily in the large-scale cultivation of sugar, a crop that dominated the Dominican economy for most of the twentieth century.

The rise of the sugar industry represented only one aspect of growing United States influence on the island in the early twentieth century. In 1904 United States authorities established a receivership over Dominican customs to administer the repayment of the country's commercial debt to foreign holders of Dominican bonds. United States forces occupied the Dominican Republic from 1916 to 1924, for the purposes of restoring order and limiting European (primarily German) influence. Although security interests motivated the occupation, the United States also reaped commercial benefits. Dominican tobacco, cacao, and sugar, previously exported to French, German, and British markets, were shipped instead to the United States. The powerful United States sugar companies came to dominate banking and transportation, and they benefited from the partition of former communal lands, which allowed the companies to augment their holdings. Although politically unpopular, the United States presence helped stabilize Dominican finances and greatly improved the physical infrastructure, as roads, sanitation systems, ports, and schools were built. The United States Marines left in 1924, but United States economic advisors remained to manage customs revenues until 1932, two years into the thirty-one year Trujillo dictatorship.

For more than three decades, the Trujillo regime invested heavily in infrastructure, but the bulk of economic benefits accrued to the dictator, his family, and his associates. Trujillo's primary means of self-enrichment was the national sugar industry, which he rapidly expanded in the 1950s despite a depressed international market. In the process of establishing his enormous wealth, he forced peasants off their land, looted the national treasury, and built a personal fiefdom similar to those of the Somoza and the Duvalier families in Nicaragua and Haiti, respectively. Before his assassination in 1961, Trujillo and his coterie reputedly possessed more than 600,000 hectares of improved land and 60 percent of the nation's sugar, cement, tobacco, and shipping assets. This immense wealth encompassed eighty-seven enterprises, including twelve of the country's fifteen sugar mills. Although the economy experienced steady growth under Trujillo, roughly 6 percent a year in the 1950s, the unequal distribution of that growth impoverished rural Dominicans as thoroughly as were any of their counterparts elsewhere in the Western Hemisphere.

The period between Trujillo's assassination and the 1965 civil war was chaotic economically as well as politically. Instability prompted capital flight. While demands on spending increased--mainly as a result of social programs instituted under the presidency of Juan Bosch Gaviño (February-September, 1963)-- bureaucratic upheaval hampered the collection of needed revenue. The country's economy was buoyed to some extent by infusions of cash from abroad in the forms of foreign aid (mainly from the United States) and loans.

During the presidency of Joaquín Balaguer Ricardo (1966-78), the country experienced a period of sustained economic growth characterized by relative political unity, economic diversification, the establishment of a developmental role for the state, and a more equitable distribution of the benefits of growth among the citizenry. During its peak growth period, from 1966 to 1976, the economy expanded at a rate of nearly 8 percent a year, one of the highest growth rates in the world at the time. With the formation of the National Planning Council in 1966, the national government assumed a developmental role after centuries of neglect. The Balaguer administration increased spending on social services, introduced the Industrial Incentive Law (Law 299) to protect domestic manufacturing and to spur more import substitution industries, and promoted mining, assembly manufacturing, construction, and tourism. Mining in particular took on a greater role, as that sector's share of exports grew from an insignificant level in 1970 to 38 percent by 1980. Land reform programs helped rural dwellers to improve their economic status somewhat, but government pricing policies and the trend toward urbanization inhibited growth in rural areas. The country's physical infrastructure--roads, ports, and airfields-- also expanded.

The apex of the Dominican economic "miracle" came in 1975 when sugar prices peaked, other commodity prices were high, and gold exports became significant. Despite these fortuitous circumstances, the country still failed to register a trade surplus that year, an indication of structural problems in the economy. Economic growth, slowed by the late 1970s as sugar prices fluctuated and the quadrupling of oil prices that began in 1973, turned the country's terms of trade sharply negative. Growing balance-of-payments shortfalls, declining government revenues resulting from widespread tax exemptions, and growing expenditures on state-operated companies rapidly increased the country's debt. The symbolic, if not the real, end of the Dominican economic "miracle" arrived in the form of Hurricane David and Hurricane Frederick in 1979. The two storms killed more than 1,000 Dominicans, and they caused an estimated US$1 billion in damage.

In the early 1980s, oil prices jumped again, international recession stifled the local economy, sugar prices hit a forty- year low, and unprecedentedly high interest rates on foreign loans spiraled the economy into a cycle of balance-of-payments deficits and growing external debt. Because economic growth averaged slightly above 1 percent per annum during the first half of the decade, per capita income declined. Another devastating blow was dealt in the 1980s by reduced United States sugar quotas, in response to the lobbying efforts of domestic producers, which served to cut the volume of Dominican sugar exports to the United States by 70 percent between 1981 and 1987. The unstable economic situation prompted the administration of Salvador Jorge Blanco (1982-86) to enter into a series of negotiations with the International Monetary Fund (IMF) and to begin to restructure government economic policies. In 1983 the Jorge government signed a three-year Extended Fund Facility with the IMF that called for lower fiscal deficits, tighter credit policies, and other austerity measures. This paved the way for the first in a series of rescheduling agreements with foreign creditors. Although the reschedulings slowed the pace of repayment, the higher consumer prices that resulted from the agreements sparked food riots. The administration consequently suspended the agreements. In 1985 the Jorge government signed a one-year IMF Standby Agreement that included more austerity measures and the floating of the Dominican Republic peso in relation to the dollar for the first time in decades. Serious differences of opinion over the pace of reforms again ended the agreement prematurely, and the electorate ousted Jorge's Dominican Revolutionary Party (Partido Revolucionario Dominicano--PRD) in 1986 in favor of former president Balaguer, who evoked memories of the economic growth of the 1970s.

In contrast to Jorge, the Balaguer administration, refusing to negotiate with the IMF, sought to avoid the austere economic conditions that IMF agreements usually entailed. The economy expanded rapidly in 1987, but then contracted sharply in 1988, largely in response to government spending patterns. Balaguer's continued devaluation of the peso maintained the country's burgeoning export sector and tourist trade, but eroded the quality of life of poorer Dominicans earning fixed salaries. The administration's expansionary fiscal policies also fueled unprecedented inflation (prices rose 60 percent in 1988 alone), which worsened economic conditions for poor people. By the close of the decade, the country's foreign debt had reached nearly US$4 billion, roughly double the 1980 figure.

High levels of inflation, increasing debt, and persistent deficits masked several positive trends during the 1980s. The most positive development was the country's rapid diversification away from its dependence on sugar. New jobs in assembly manufacturing offset many of the lost jobs in the cane fields. Employment in assembly operations grew from 16,000 in 1980 to nearly 100,000 by 1989. This represented the world's fastest growth in free-zone employment during the 1980s. By 1987 the value of assembly exports surpassed that of traditional agricultural exports. The Dominican Republic also enjoyed the Caribbean's fastest growth in tourism during the 1980s. Although the mining industry suffered from low prices and labor disputes, it contributed a significant percentage of foreign exchange as well. The agricultural sector also diversified to a limited degree with a new emphasis on the export of nontraditional items such as tropical fruits (particularly pineapple), citrus, and ornamental plants to the United States under the Caribbean Basin Initiative.

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