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Dominican Republic: Growth with Equity: An Agenda for Reform

Dominican Republic FY95 PA

Main Report (3.4Mb PDF)

Poverty Profile

About one in five Dominicans was estimated to live in poverty and almost one in ten in extreme poverty in 1992. Poverty in the Dominican Republic, especially extreme poverty, is more serious in rural areas. In 1992, rural poverty was almost three times urban poverty, and rural extreme poverty almost twice the level in urban areas. Poverty and extreme poverty tend to be deeper and more severe in rural areas, as measured by the poverty gap index and the FGT P2 index.

The evolution of poverty over the 1986-92 period mirrored the country's economic performance. In 1986, 18.3 percent of Dominicans lived in poverty, with 10.5 percent in extreme poverty. Poverty and extreme poverty worsened as economic growth slowed and inflation took off. Poverty and extreme poverty increased by around one third between 1986 and 1989. As inflation abated and growth recovered, poverty in 1993 fell to levels close to those in 1986. The only exception was rural poverty, which showed a rising trend over the period, increasing from 24.5 percent in 1986 to 29.8 percent in 1992.

Since on average, the poor have more children per family than the rich, the number of children (under 12) living in poverty and extreme poverty is higher than that of the total population. In 1992, more than one in four children lived in poverty and more than one in ten lived in extreme poverty. Chronic malnutrition (measured as growth stunting) affected almost one in five Dominican pre-school children and was more severe in rural areas. Almost 6 percent of children suffered from severe malnutrition. Chronic caloric deficiency affected 9 percent of mothers. Poverty and extreme poverty are more likely to occur in female-headed households, especially in rural areas. Over the period 1986-92, however, female-headed households seem to have made more progress than male-headed ones in reducing poverty and extreme poverty. A possible explanation for this may relate to the high participation rate of female labor in the dynamic free trade zone sector and, possibly, in tourism. Employment in the free trade zones increased from less than 1,000 in 1970 to 165,000 in 1993.

Inequality is relatively high in the Dominican Republic as reflected by a Gini coefficient of 0.49 in 1992. The richest 20 percent of the population received about 57 percent of total income in 1992, while the poorest 20 percent received only 4.4 percent. The share of income received by the extreme rich and extreme poor increased during the 1986-92 period, but the share of the poor increased by a somewhat higher proportion. Middle-income groups seem to have been the losers. The Gini coefficient deteriorated markedly in 1989 but improved substantially in 1992.

Incentive and Regulatory Framework

Two main economic policies have had very different effects on the welfare of the poor: (i) stabilization policies and (ii) trade policies. Stabilization appears to have improved the situation of the poor through the reduction in inflation (and increases in real wages), which was achieved during the implementation of the stabilization program initiated in 1990. The positive effect of lower inflation on the poor has apparently more than compensated for the negative effect of the fiscal austerity needed to achieve stabilization. High import tariffs and non-tariff barriers to trade affect the poor by slowing growth and by increasing the prices of some protected products that are highly represented in the consumption basket of the poor. Growth and employment expansion have been much higher in the enclave-type export-oriented sectors of the economy (free trade zones and tourism) than in the highly protected import-substitution sectors. The poor pay a high price for protection in the agriculture sector and get little benefit from the subsidy on cooking gas, but pay a small share of the petroleum tax and benefited greatly from the liberalization of milk imports.

Public Expenditures

Public expenditures in the Dominican Republic are not high by LAC standards. Since 1980, total public expenditures have fluctuated between 14 and 21 percent of GDP. Public spending on education and health, on the other hand, is among the lowest in the Region. Total social spending has fallen somewhat since the early 1980s, but this has not been a dramatic reduction. More striking, however, is the shift in spending within the social sectors. Since the mid-1980s, there has been a marked shift towards urban social spending in sectors that have relatively little impact on the poor. This shift was the result of a strategy to stimulate growth by expanding public works, leading to a pronounced bias in the expenditure allocation process for large and visible physical construction projects. Thus, spending on housing and water and sewerage has been favored at the expense of social sectors, which have high recurrent expenditure needs. Education and social assistance have been particularly affected, while health has retained its share of spending. In health, however, about 74 percent of spending goes to hospitals while preventive health services receive only 7 percent of the total.

Even within the favored sectors, public expenditures are highly regressive. In 1989, it was estimated that the poorest 50 percent of the population had been the beneficiaries of only 28 percent of public housing. The middle four deciles received 51 percent of public housing. Despite the heavy investment in water and sewerage (mainly in metropolitan Santo Domingo), about 50 percent of the total population do not have water in their homes. Cost recovery in the housing and water and sewerage sectors is negligible.

Poverty Strategy

The government has yet to develop a coherent poverty alleviation strategy. A number of elements would be needed in such a strategy: (i) sustained growth is essential—the country's economic strategy needs to be outward-oriented and private sector led; (ii) macroeconomic stability needs to be maintained, especially low inflation—controlling inflation is critical, not only for sustained growth, but also because high inflation had a devastating effect on the Dominican poor; (iii) high effective protection and trade distortions need to be redressed, not only as a means of encouraging outward orientation and increased competitiveness in the economy but also to minimize adverse effects on the poor; (iv) an effective system to monitor living conditions and poverty trends needs to be developed and implemented; (v) public spending on education and health needs to increase as a share of GDP, social programs and spending need to be redirected away from the favored urban sectors toward primary health and basic education (especially in rural areas), with budgetary reform being key to reduce the bias toward highly-visible construction investments, and cost recovery efforts need to be pursued for services benefiting middle- and high- income groups; (vi) even with improved allocations in the social sectors, progress in meeting the basic health and education needs of poor communities will be limited without an effective decentralization program; and (vii) effective targeted programs and safety net mechanisms benefiting poor female-headed households and malnourished children need to be developed and implemented.

Statistical System

The Dominican Republic has not developed a system of data collection to measure poverty and the living conditions of the poor. This makes it difficult to obtain reliable estimates of poverty levels and trends. The analysis in the poverty assessment is based on three household surveys that were analyzed and adjusted by FED (a local private research foundation): (i) the Income-Consumption Survey conducted by Tufts University in 1986; (ii) the Social Expenditure Survey conducted by the Central Bank in 1989; and (iii) the Income-Expenditure Survey conducted by FED in 1992. Although the surveys were adjusted in accordance with Bank methodology in order to analyze the evolution of poverty from 1986 to 1992, the results are not fully comparable.

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