The Dominican Republic presents a fascinating case for studying economic growth and its determinants, as strong growth outcomes over the past thirty-five years have been tempered by periodic crisis episodes. Per capita incomes rose from US$335 in 1970 to US$2,107 in 2004 despite annual population growth averaging 2.4 percent over the period. This increase implies annual per capita GDP growth averaging almost 5 percent, well above the Latin America and Caribbean regional average of 3.2 percent. Three major economic crises occurred during the period: in the mid-1980s, 1990, and 2003-2004. Today, the Dominican Republic is a lower middle income country with many attributes of the world’s modern economies. During the last three and a half decades, the structure of production shifted away from agriculture, driven by the decline of the sugar industry, and toward manufacturing – especially free trade zones (FTZs) – and construction. Services have long held a majority share in total GDP, but the tourism sector has emerged as a substantial force, directly accounting for 7 percent of total economic output in 2004.

The focus on external markets and the economy’s success at diversifying production activities to remain competitive in the face of shifting world demand suggests a resilient use of resource endowments and an effective channeling of investment to support new activities. At the same time, however, the country continues to face fundamental development challenges ranging from endemic poverty to poor health outcomes and significant weaknesses in government and societal institutions. The remarkable sustained growth performance since 1970 failed to achieve poverty reduction and welfare improvements to the degree anticipated. Inequality remains high, which in turn is an impediment to sustainable growth in the long run. A one percent increase in inequality reduces Dominican growth by an estimated 2 percent; the implied vicious cycle of poverty-constrained growth needs to be broken through improvements in education, infrastructure, health, credit access, and risk mitigation, inter alia (World Bank 2006a).

This report provides a comprehensive treatment of economic growth in the Dominican Republic, with the objective of building on existing knowledge in order to enhance understanding of how the country arrived where it is today, what factors impeded or helped smooth the Dominican development path, and which policies can facilitate the journey ahead – a journey that strives to increase Dominican competitiveness in the context of a changing external trade environment in order to increase growth and incomes and reduce inequality.