Extending the current cycle of economic expansion of the country will require increased productivity growth, according to a World Bank study
SANTO DOMINGO, August 3, 2023 - Over the last two decades the Dominican Republic has been one of the fastest growing economies in Latin America and the Caribbean. But maintaining this dynamic growth in the future, and spreading its benefits to more areas and families experiencing poverty, will require a higher increase in productivity through the implementation of reforms to strengthen human capital, competitiveness, innovation, public spending efficiency, and resilience to climate events, according to a new study by the World Bank.
The report "Rethinking productivity to Boost Growth Leaving no one Behind - Dominican Republic Economic Memorandum" reveals that the country's economic growth averaged 5.8% per year between 2005 and 2019, more than double the average for Latin America and the Caribbean (2.6%). However, the drivers of this exceptional growth are reaching their limit due to low productivity growth in recent years, held back by insufficient human capital to meet the needs of the business sector, disasters related to climate change, and distortions in key markets, such as the inefficient allocation of tax exemptions.
According to Alexandra Valerio, Resident Representative of the World Bank in the Dominican Republic, "The model that has generated so many social and economic benefits for the country can be revitalized to make it a more dynamic, inclusive and sustainable growth model which will continue to reduce income gaps, particularly for women, and which promotes better jobs and opportunities for more households and regions in the country," adding that "This study provides inputs to advance reforms that support the economic transformation of the Dominican Republic, leaving no one behind."
The structural reforms proposed in the Report to boost productivity growth focus on:
- Strengthening human capital: first, adapting the educational system to the needs of the market, through the upgrading of secondary school education, promoting continuing education for adults, expanding training programs and updating relevant skills in the labor market, among other measures. Second, reducing the inequality of opportunities between genders and between rural and urban areas, by providing incentives for parents to share early childcare, monitoring school dropouts, offering university scholarships in rural areas, among others.
- Promoting competition: by reducing barriers to firms entering or expanding in key economic sectors (for example reviewing the government's role in state-owned companies or in complex public regulations), benefiting from initiatives such as the single ('one-stop') processing facility to reduce the impediments to businesses seeking to enter particular markets, and by reviewing sectorial protection provisions for established companies, production and export quotas, price controls, among others.
- Incentives for innovation: technological extension services, improvement of management skills, development of basic infrastructure for innovation, and creation of subsidies for small and medium-sized companies that have not benefited from tax incentives;
- Improved efficiency of the tax system and public spending: more efficient public spending on, for example, education, would help to improve the quality of human capital and bring higher education into line with the needs of the business sector. The priorities on the tax side continue to be the elimination of tax exemptions and expansion of the tax base;
- Increased resilience to external shocks and climate events: by developing fiscal risk strategies to reduce budgetary uncertainties, adopting programs to aid the greening of public institutions, and introducing flexible mitigation packages to offset the costs of temporal adjustment to decarbonization at regional, business and domestic levels.
Gabriel Zaourak, World Bank senior economist for the Dominican Republic, adds that "This report examines the recent experience of economic growth in the Dominican Republic from macroeconomic, sectorial and microeconomic perspectives. The report studied the performance of the country's economic growth both at the aggregate and business level. It also evaluated the competitive environment of the Dominican Republic, together with the country's prospects for opening up fiscal space to carry out the public investments that are sorely needed."
As part of its 2022-2026 Country Partnership Framework (CPF) with the Dominican Republic, the World Bank is also carrying out a comprehensive study on adaptation and mitigation measures for climate change in the Dominican Republic (CCDR), whose main recommendations will complement those presented in this report.
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