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Fiscal Policy, the Current Account and the External Debt Problem in the Dominican Republic*

Published online by Cambridge University Press:  05 February 2009

John T. Cuddington  and
Carlos Asilis
John T. Cuddington
Affiliation:
Professor of Economics Georgetown University, Washington, D.C.
Carlos Asilis
Affiliation:
Assistant Professor of Economics at Georgetown University, Washington, D.C.
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Extract

Although the Dominican Republic had one of the highest economic growth rates in the world between 1969 and 1973, its growth performance and external position deteriorated sharply in the 1970s. By 1985 it had an external debt/GDP ratio of 76.6%, well above the average of 62.3% for the Latin American and Caribbean region as a whole.1 The Dominican debt crisis that emerged in the 1980s, like the crisis in many other debtridden Less Developed Countries (LDCs), was in part caused by adverse external conditions; in part, however, it was the result of domestic policy choices. Among the latter, large fiscal imbalances are arguably the most important.2

Type
Articles
Information
Journal of Latin American Studies , Volume 22 , Issue 1-2 , March 1990 , pp. 331 - 352
Copyright
Copyright © Cambridge University Press 1990

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References

1 World Bank, World Debt Tables, 1986–7 edition (Washington, D.C.).Google Scholar

2 This point is emphasised, for example, in a number of the papers in Smith, G. and Cuddington, J. (eds.), International Debt and the Developing Countries (Washington, D.C., 1985).Google Scholar

3 A noticeable reversal has taken place since President Balaguerap;s return to power in 1986. The new pattern of public consumption/investment expenditures is consistent with policies taken in earlier Balaguer administrations.

4 World Bank, World Debt Tables.

5 By Latin American standards, this debt/GDP ratio is not particularly high. The World Debt Tables (1984–5) indicate that the ratio of long-term debt to GDP was 35.1 percent for the Latin American and Caribbean group of countries.

6 Net reserves are defined here as the foreign assets of the Central Bank, Banco de Reservas (the state-owned commercial bank), and the commercial banks minus their short-term foreign liabilities, including liabilities constituting foreign monetary authorities' reserve assets.

7 Caution must be exercised in comparing the period before 1978 with the more recent period, because the debt information is much more comprehensive after 1978.

8 On the issue of capital flight, see Cuddington, J., Capital Flight: Estimates, Issues and Explanations, Princeton Studies in International Finance, No. 58 (1986).Google Scholar

9 See Arias, J., La Depreciación del Peso Dominicano en el Mercado Paralelo de Divisas (Santo Domingo, 1985), p. 29.Google Scholar

10 It should be emphasised that all national income accounts figures in this paper were converted from pesos to dollars at the official exchange rate of 1:1. Therefore, as the peso became increasingly overvalued in the late 1970s and early 1980s, the ratio of the current account deficit to GDP would understate the ratio based on a more realistic exchange rate (such as the 3:1 rate prevailing after the devaluation in early 1985). Since mid-1988 the free (parallel) market exchange rate has been outlawed and the government has repegged the fixed exchange rate regime (called ‘Sistema de Reingreso de Divisas’) at 6.35 to the US dollar.

11 Very often in LDCs direct foreign investment is oriented towards export activities, whose viability typically depends critically on government policies. This was certainly the case in the DR. Consequently, the government's late adoption of appropriate fiscal and commercial policies not only harmed the export sector directly, it also choked off inflows of equity finance.

12 It has been estimated that the DR suffered external shocks averaging five percent of GNP over the 1979–82 period. See Balassa, B. and McCarthy, D., ‘Adjustment Policies in Developing Countries: 1979–83’, World Bank, Working Paper, 1984, p. 39.Google Scholar

13 By 1979–80, it would have been highly optimistic to view as ‘temporary’ the higher prices for imported oil or the deteriorating prospects for sugar exports (due to protection and the strong growth in the supply of sugar substitutes). Thus, the rising fiscal deficit should not be interpreted as countercyclical stabilisation activity by the government.

14 The authors wish to thank Roberto Incer for the use of the consolidated public sector accounts he constructed.

15 Although the overall share was roughly unchanged, this masks a decline in transfer payments and a rise in interest paid to foreigners over the period.

16 See Wiarda, H., Dictatorship and Development (Gainesville, 1968).Google Scholar

17 See Clausner, M., Rural Santo Domingo: Settled, Unsettled and Resettled (Philadelphia, 1973), pp. 242 and 248.Google Scholar

18 See Bell, J., The Dominican Republic (London, 1981), p. 81.Google Scholar

19 See World Bank, World Development Report 1985 (Washington D.C., 1986).Google Scholar

20 See Wiarda, H., and Kryzanek, M., The Dominican Republic: A Caribbean Crucible (Colorado, 1982).Google Scholar

21 The loss of Central Bank reserves of US $4.4 million and the surge in external borrowing by US $123.8 million in 1976 were strong indications that exchange realignment was needed.