Macroeconomic policy alternatives in the Dominican Republic : an analytical framework
McCarthy, F. | CPD
Dominican Republic is an open economy with a relatively small domestic market. Towards the end of the 1970s, a number of external shocks in oil prices, terms of trade, and higher interest rates presented major problems. This resulted in a surfacing of weakness in policy making and institutional structure that had not been apparent previously. The debt situation steadily deteriorated as the government borrowed heavily for balance of payments support in 1981 and 1982 leading to the current near crisis situation. The analysis in this paper suggests that under any reasonably likely external scenario Dominican Republic will be unable to achieve an acceptable per capita economic growth without major policy shifts. Policy alternatives include: (i) a move towards a unified exchange rate; (ii) fiscal and institutional changes; and (iii) a major shift in factor pricing together with a rethinking of investment strategy. These policy initiatives should lay the base for a more buoyant and versatile economy over the medium-to-long term. This paper develops an analytical framework to examine these various policy alternatives.
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