Trading development or
developing trade?
The Dominican Republic’s trade,
policies, and effects in historical
perspective*
Leticia arroyo abad
Profesora asistente del Department of Economics and in the International Politics & Economics,
Middlebury College (EEUU). Correo electrónico: larroyoabad@middlebury.edu. La autora es
Licenciada en Economía de la Universidad Católica Argentina. Magister en estudios latinoamericanos de la University Of Kansas (EEUU). Doctora en economía con especialización en
historia económica latinoamericana de la University of California, Davis (EEUU). Entre sus
publicaciones tenemos: “Persistent Inequality? Trade, Factor Endowments, and Inequality in Republican Latin America”Journal of Economic History 73-1 (2012); y “Between Conquest and Independence:
Living Standards in Spanish Latin America”, Explorations in Economic History, 49-2 (2012). Entre
sus intereses se encuentran los temas de historia económica latinoamericana, los estudios
sobre los estándares de vida, desigualdad e instituciones.
ameLia U. SantoS-PaULino
Afiliada institucionalmente a la United Nations Conference on Trade and Development (Suiza).
Correo electrónico: Amelia.Santos-Paulino@unctad.org. La autora es Licenciada en Economía de la Pontificia Universidad Católica Madre y Maestra (República Dominicana) y
Doctora en Economía de la University of Kent (Reino Unido). Tenemos entre sus publicaciones recientes: “Can Free Trade Agreements Reduce Economic Vulnerability?,” South African
Journal of Economics Vol. 74, 4 (2011) y “The Dominican Republic Trade Policy Review 2008,”
The World Economy Vol. 33,11 (2010). Sus líneas de investigación son: comercio exterior y
desarrollo económico.
Recibido: 30 de noviembre de 2012
Aprobado: 03 de abril de 2013
Modificado: 15 de mayo de 2013
Artículo de investigación científica
*
El presente artículo es resultado del proyecto de investigación “Long-term economic growth and
development”; financiada por la Foundation and the American Philosophical Society, (EEUU).
Esta publicación está bajo una licencia Creative Commons Reconocimiento-Compartir Igual 3.0
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Trading development or developing trade? The Dominican Republic
trade, policies, and effects in historical perspective
Abstract
The Dominican Republic’s partaking in the global economy has fluctuated
significantly since post-colonial times. This paper follows this country’s journey in
and out of the world markets since 1880s by analysing the role of the export sector
within the economy and the impact on development. We are interested in whether
the DR developed due to the expansion of trade or if actually trade hampered
development. We find that the integration to the world economy has been costly,
as the volatility of the terms of trade and capital flows increased the country’s
vulnerability. The implemented governmental policies introduced distortions to
the economy and achieved few gains in terms of economic development. Export
diversification arrived relatively late to the DR, and the effects on development
have been divergent, as far as improving trade balance, promoting diversification,
building human capital, and creating employment.
Key words: trade, economic development.
¿Desarrollo o Comercio? Comercio exterior, políticas y sus efectos
en la República Dominicana en perspectiva histórica
Resumen
La integración de la Republica Dominicana en la economía global ha fluctuado
considerablemente desde la época colonial. Este artículo explora el viaje de este país
en relación a los mercados internacionales mediante el análisis del sector exportador
y su impacto en la economía local y en el desarrollo económico en general. Nuestro
interés radica en evaluar el rol de comercio internacional en el desarrollo de la
República Dominicana utilizando una perspectiva de largo plazo.
Palabras claves: comercio exterior, desarrollo económico.
Desenvolvimento comercial ou desenvolvimento do comércio? O
comércio da república Dominicana, políticas e efeitos na perspectiva
histórica
210
Resumo
A integração da República Dominicana na economia global tem flutuado
consideravelmente desde a época colonial. Este artigo explora a viagem deste
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país em relação aos mercados internacionais, analisando o setor de exportação
e seu impacto sobre a economia local e no desenvolvimento econômico em
geral. O nosso interesse radica em avaliar o papel do comércio internacional no
desenvolvimento da República Dominicana usando uma perspectiva de longo
prazo.
Palavras-chave: comércio exterior, desenvolvimento econômico.
«Trading development or developing trade?» Le commerce de
la République Dominicaine, les politiques et les effets dès une
perspective historique
Résumé
L’intégration de la République Dominicaine dans l’économie globale a considérablement fluctué depuis l’époque coloniale. Cet article explore le parcours de ce pays
en ce qui concerne son insertion dans les marchés internationaux, par le biais de
l’analyse du secteur exportateur et son impact dans l’économie locale et dans le
développement économique en général. Nous tenons à évaluer le rôle du commerce
international dans le développement de la République Dominicaine en utilisant une
perspective à long terme.
Mots-clés: commerce extérieur, développement économique.
1. Introduction
The Dominican Republic’s partaking in the global economy has fluctuated
significantly since post-colonial times. This paper follows this country’s journey in and out of the world markets since 1880s by analysing the role of the
export sector within the economy, the policies implemented, and the impact
on development. We are interested in the role that trade had in promoting
or hampering development in the Dominican Republic. The role of trade in
fostering economic development has been contested in economics. The range
of ideas and policies recommended to promote economic development by
opening the economy has changed significantly throughout history.1 From free
trade lovers to export pessimists, we have seen a number of studies advocating
for or against trade as an engine of economic development. The link between
1
See for example Krueger (1997) and Panagariya (2003).
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trade and development is particularly relevant for developing countries, as many
scholars have highlighted that an economy guided by comparative advantage
can achieve higher growth and welfare2.
Nowadays, policy makers and international institutions, such as the International Monetary Fund and the World Bank, have also advocated for
integration as a means to achieve higher economic growth. Some think-tanks
claim that protectionist countries grow less than those open to trade3; however, others state that developing countries engage in an unequal exchange
and do not reap the full benefits of trade4. The most recent scholarship
has resorted to looking at the contemporary experience of a large set of
developing countries, to disentangle the effects of trade on economic development. Research shows that trade and financial flows have increased
dramatically in recent decades, and that integration and liberalization have
been crucial for achieving sustained growth in developing countries. Additionally, the international mobility and division of labour is expected to
generate important distributional changes, hence developing gains within
countries5. Despite notable socioeconomic improvements over the last
decade, such as better income distribution, poverty reduction, and overall
advancement towards inclusive and sustained growth, the mechanisms that
make trade a development tool are still contentious. Some of the theoretical and empirical issues include the impact of the secular deterioration on
developing countries’ terms of trade, the insidious implications of specialization into low value-added activities, or the skill differential between rich
and poor countries. Particularly, the expansion of trade and diversification
2
3
4
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5
David Ricardo, Principles of Political Economy, with Some of Their Applications to Social
Philosophy (London: Parker, 1848). Jeffrey Sachs and Warner Andrew. Economic Reform
and the Process of Global Integration. Brookings Papers on Economic Activity (1995),
1-118.
D. H. Froning, The benefitsof free trade: A guide for policymakers. (The Heritage Foundation
Backgrounder, 2000). M. L Tupy, “Free trade benefits all”, Washington Times, January 6th, 2006.
Raúl Prebisch, El desarrollo de la América Latina y algunos de sus principales problemas. (Santiago
de Chile: Comisión Económica para América Latina [CEPAL]), 1949. J.G.Williamson, Globalization
and the Poor Periphery before 1950, (Cambridge: MIT Press), 2006.
A.L.Winters, N. McCulloch and A. McKay (2004). “Trade liberalization and poverty: The evidence
so far”.Journal of Economic Literature, 42 (2004): 72–115. P. K. Goldberg and N. Pavcnik.
“Distributional Effects of Globalization in Developing Countries”. Journal of Economic Literature,
45(1) (2007): 39-82.
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away from commodities and traditional exports, and its relationship with
development are also crucial.
Our paper takes a different approach by looking at trade and development in
one small economy throughout a period over 100 years. Our analysis starts in
the late 19th century, then explores the main stages of economic development
of the Dominican Republic coinciding with the traditional economic history
division of Latin American history: export-led model (1880s-1910s), stateled import substitution industrialization (1920s-1950s), import substitution
- export-led growth industrialization (1960s-1990s), and trade liberalization
- export oriented and structural adjustment (since 1990s) (see Figure 1). In
each of these periods, we identify the role of the export sector, the policies
adopted, and the effects on development.
By taking a long-run view, this study examines the ebb and flow of the external
sector in relation to the overall economy, while assessing the links to and effects
on development. Being a tropical island, international commerce (particularly
commodities trade) has special significance for the DR. As such, commercial
links to other economies have a magnified impact. By looking at the past, we
can better assess the choices and constraints that this economy faced, along
with the effects on the evolution and development of different sectors. To
assess the long-term evolution of this economy, we have compiled different
measures of economic development (such as real wages) and estimated indicators of trade (e.g. real exports, real imports, and terms of trade).6 As such,
this paper’s contribution includes not only these new indicators, but also over
a century-long analysis of this country’s trajectory from the perspective of
trade and and development.
Similar to Latin America, the DR adopted an export-led model during the first
globalisation wave (1870-1913). This strategy was based on the production
of the so-called tropical products (tobacco, and later the development of
extensive production of sugar, cacao, and coffee). This resulted in an export
boom between 1880s-1910s; however, it was short-lived. The DR was not
6
Given the long-run approach of this paper, it is sometimes difficult to find data for long-run series
for development outcomes over time. While we present consistent series for trade over this long
period of time, we offer selected indicators on economic development in the different sections based
on availability.
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Figure 1: Per capita exports, imports, and terms of trade, 1890-20097
Notes: (I) export-led model (1880s-1910s); (II) state-led import substitution industrialization
(1920s-1950s); (III) import substitution – export-led growth industrialization (1960s-1990s);
(IV) and trade liberalization - export oriented and structural adjustment (since 1990s). Per capita
real exports and imports refer to total exports deflated by the prices of exports and imports
respectively, using 1900 as the base year. Terms of trade are defined as price of exports divided
by price of imports indexed with base 1900=100.
Sources: see appendix
alien to the events in the global economy which had significantly arrested the
impact of trade on development. The demand for DR’s exports was greatly
affected by the World Wars and the Great Depression. The collapse of world
commodity prices shook the pillars of the export-led growth model, leading to
foreign exchange crises. The country looked for domestic sources of growth
by promoting import-substituting industries.
214
7
A traditional indicator to measure the degree of openness is exports and imports as a share of the
Gross Domestic Product (GDP). Unfortunately, GDP data are not available until mid-20th century.
In the absence of GDP figures, other economic historians scale exports and imports scaled by total
population to portray the degree of openness (see for example Bulmer-Thomas 2003).
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This strategy, driven by debt crises and commodity prices slump, culminated
in the volatile decade of the 1980s. Since then, the country returned to participating in the world economy. The DR’s success in the recent periods has
resulted from the implementation of a three-pronged development strategy
consisting on diversifying production, developing special economic zones, and
maintaining ample economic and social engagement with the rest of the world.
In this long-run analysis of the Dominican Republic, we find that the traditional
export sectors, such as tropical commodities, played a prominent role in the
destiny of this country until the last thirty years. Whether the country opted for
free trade or protectionism, the export mix changed little for almost a century.
While the importance of the export sector is undeniable, its dynamism waned
during the import-industrialization years. It was not until this second globalization wave that real exports per capita achieved the same levels as the turn of
the 20th century. The combination of large swings in commodity prices and
the experience with industrialization during the wars prompted the country to
diversify the sources of production and trade from commodities to manufactures. This process was intensified during the trade liberalization extending to
tourism; but, the strategy was limited, as the expected diversification was not
realised, at least within manufactures. In terms of development, our findings
indicate that the adopted strategies failed to provide sustainable development
in the long run. During the first globalization and the ISI periods, welfare
did not improve significantly. Moreover, while the reintegration to the world
markets in the 1980s improved real wages, it was plagued by macroeconomic
instability. The widespread reforms in the 1990s facilitated the Dominican
Republic’s continuous involvement in the global economy, as demonstrated by
the evolution of trade in goods and services and capital flows. Nevertheless,
the dual nature of the country’s industrial sectors – whereby Free trade exports
processing zones coexist with a laggard agricultural sector – may ignite the
growth and development prospects. Moreover, the reliance on tourism as a
key income-generating sector poses significant constrains to the sustainability
of the growth and development model going forward.
2. Export-led model (1880s-1914)
From 1870 to 1914, the world experienced an unprecedented increase in international trade. Known as the first globalization, this period of time was
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characterized by global integration as newly independent Latin America soon
joined the globalizing wave. It benefited from the abundant capital flows from
Europe and the sustained demand of raw materials. For some countries, this
phenomenon intensified the colonial export structure, but for others, it created
a dynamic export sector8. In any case, Latin America integrated into the world
economy mostly as a supplier of commodities. In the case of the Dominican
Republic, once the dust settled after the independence wars, the country also
turned to the international markets for economic growth. Integration to the
world markets was the chosen path to modernization.
The government was instrumental in promoting the export sector. The measures aimed at expanding and improving the productivity. In 1876, a law enabled
the transfer of public lands to private hands when used for export production. Three years later, to increase efficiency, subsidies and tax incentives were
offered for the cultivation of sugarcane, cacao, coffee, tobacco, cotton, and
banana with imported machinery9. This transition was marked by the increase
of productivity in the agricultural export sector aided by the expansion of
transportation network.
The expansion was not without challenges. In the late 19th century the sugar
industry faced intense competition with European newly manufactured beet
sugar, prompting a deep restructure of the sector. As a result, the industry
became much more concentrated as bigger refineries acquired the troubled
firms. The response was to reduce the export tax on sugar to compensate for
the low prices in 1884. The fiscal pressure led to its reinstatement a year later.
In 1891, the industry found some respite with the McKinley agreement with
the US that slashed tariffs to selected commodities under a reciprocity clause.
As many of the nascent Latin American nations, this country concentrated in
exporting a handful of commodities while importing manufactures and capital
goods. The export-led growth model was based on the principle of comparative advantage. In particular, sugar, tobacco, coffee, and cacao represented the
bulk of the export basket.
8
216
9
L. Arroyo Abad, and A.U. Santos-Paulino,“Trading Inequality? Assessing the Impact of Factor
Endowments and International Trade on Inequality”.UNU-WIDER Research Papers No. 2009/44
(2009).
Frank Moya Pons, “Import-Substitution Industrialization Policies in the Dominican Republic, 192561”.The Hispanic American Historical Review70(4) (1990): 539-577.
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Overall, both exports and imports experienced remarkable growth. From 1894
to 1914, exports increased 150%, doubling the performance of the imports.
In per-capita terms, the evolution of trade was also favourable with over
50% growth from 1894 to 1915. This development is even more exceptional
considering the economy faced unfavourable terms of trade throughout this
period. Exports prices fell by 25% while import prices increased, resulting in
a net loss of almost 23% (see Figure 2).
Of these four commodities, sugar captured over half of the total exports.
Its expansion relied on foreign human and physical capital. It was not until
the decline of the Cuban sugar export sector that the Dominican Republic
achieved some participation in the world markets. The independence wars
in Cuba marred the sugar-exporting sector to undermine Spanish colonial
control. Consequently, Cuban capitalists and technical staff, attracted by high
quality and inexpensive land, fled to the Dominican Republic. It was then that
this economy transitioned from an artisan sugar mill to the mechanized sugar
refinery, drawing investors from other countries as well10.
Despite the importance of the US as a market, the Dominican Republic was
too small to exert influence in the world sugar market. Its total production
only amounted for, at most, 5% of the US total imports.11 However, it was
short-lived: after three years, the US charged a 40% tariff on all imported
sugar. At the end of the period, 62% of the area cultivated belonged to the
foreign capital12.
Of the other commodities, cacao experienced the most significant growth. In
1860, it could barely meet the domestic demand as it was not cultivated as a
crop. While it also attracted foreign capital, the cultivation extended over the
entire territory, promoting artisan chocolate production as well. By the early
20th century, it became the most valuable export commodity to the American market. Despite its promise, by the end of this period, cacao expansion
10
11
12
Franklin J Franco, Historia económica y financiera de la República Dominicana, (Santo Domingo:
Editora Universitaria), 1999.
Data from FAO (1960). The Dominican Republic exported 80% of the sugar production.
José Del Castillo,. La inmigración de braceros azucareros en la República Dominicana, 1900-1930,
(Santo Domingo: Cuadernos del CENDIA), 1978. Humberto García Muñíz, “La plantación que no
se repite: las historias azucareras de la República Dominicana y Puerto Rico, 1870-1930”, Revista de
Indias, 15(233), (2005).
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halted due to droughts and price decline. Coffee cultivation, despite it being
the fourth most important export commodity, faced competition for labour
from the sugar industry. Tobacco cultivation had the longest tradition in the
island. The indigenous plant remained of domestic importance throughout
colonial times; yet, it failed to flourish like the other commodities due to
its unreliable quality and the increasing participation of the US as a main
trading partner13.
Figure 2: Per capita exports, imports, and terms of trade, 1890-1915
(5-year average)
Sources: see appendix
The expansion of the export sector boosted imports as well. The dynamic
sugar industry needed machinery and other basic inputs from abroad. Rice,
timber, leather, textiles, and shoes made up for the rest of the imports during
this period. The US supplied the lion’s share (around 60% of total imports),
followed by Germany, the UK, and France.
218
13
Antonio Lluberes, “La economía del tabaco en el Cibao en la segunda mitad del siglo XIX”. Eme
Eme Estudios Dominicanos, 1(4)(1973). Paul Mutto, “Las importaciones y el impacto del cambio
económico en la República Dominicana, 1900 – 1930”.Eme Eme Estudios Dominicanos, 4(20) (1975).
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The modernization of the Dominican economy brought about significant changes in the country’s economic and social development. The expansion of the
export sector, in particular sugar, made the under population of the island more
evident. In 1887, the population only amounted to 382,000 people, growing
at 2.5% rate per year in the next thirty years. Indeed, the population did not
reach a million by the time of the first census14 (Gobierno Provisional 1975).
The need of workers for sugar harvesting promoted domestic and regional
migration. In the first phase of the industry expansion, the rural population
migrated to the sugar-producing areas. In 1883, more than 90% of the labour
force in the sugar industry was domestic, but it soon proved to be insufficient
prompting seasonal migration from nearby islands. During his annual address
to the Congress, President Heureaux justified the need for foreign labour to
improve the competitiveness of the sugar industry.
Known as braceros, these workers from the Caribbean became indispensable for
the sugar industry. The 1912 Law on Immigration challenged this free movement of labour to the Dominican Republic, establishing a priority to Caucasian
immigration that limited the influx of braceros. This law intended to protect the
domestic economy. In particular, the inflow of copious labour from abroad
depressed real wages and contributed little to the domestic economy. Given
the seasonal nature of the foreign labour, their income did not stimulate the
Dominican economy15.
The demand for labour also shaped the concentration of population in
the country. Aided by the spread of roads and railroads, workers and their
families moved towards the producing centres. This marked a strong change with respect to colonial times. Up until the modernization period, the
bulk of the population practiced subsistence agriculture. The early postindependent accounts carefully noted the lack of large landowners in the
country, as such sugar was produced with artisan methods not involving
large sugarcane plantations. The concentration of land ownership picked
up steam in the later part of the 19th century. From 1882 to 1896, the sugar
cultivating area quadrupled. With this increasing annexation of land for
14
15
Gobierno Provisional de la República Dominicana. Primer Censo Nacional de la República
Dominicana, (Santo Domingo: Editora de la Universidad Autónoma de Santo Domingo), 1975.
José Del Castillo, La inmigración de braceros azucareros en la República Dominicana, 1900-1930,
(Santo Domingo: Cuadernos del CENDIA), 1978.
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production, the economy began the transition from communal landownership to private property16.
Overall, the process of modernization of the Dominican economy brought
about profound winds of change. The remarkable expansion of the agricultural production for export was achieved, despite unfavourable terms
of trade and mostly absence of advantageous commercial position with
the Dominican Republic’s main trading partner, the US. In addition, this
expansion, in particular sugar, triggered a significant mobilization of the
workforce. Domestically, the population migrated towards the areas of
active economic activity while a rising influx of immigrants aided the labour needed for the progress of agriculture. While the influx of foreign
capital, technology, and labour propelled this post-colonial economy, the
development costs were not negligible. The exodus of the labour from
traditional agriculture led to an increase in the cost of living. In addition,
immigration depressed domestic wages while the export sector commenced
its concentration of capital and land.
3. State-led import substitution industrialization
(1915-1950s)
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World War I (WWI) changed the configuration of the existing world order. In
the next thirty years, the world experienced a major financial and economic
crisis, known as the Great Crisis, and another World War. One of the consequences was the increased vulnerability of peripheral nations that had to adapt
to the new power model. Latin America, given its role in the world system,
underwent major adjustments and changed its development strategy considerably. Between the 1930s to 1970s, this region opted for a different development
approach, concentrating on the domestic market as a source for economic
growth. This inward looking development strategy not only permeated the
political, economic and social levels of debate in Latin America, but it also
remained the main paradigm in economic policy for the next fifty years. The
adoption of this strategy involved an important shift in the economic structure,
the medium- and long-term perspectives, and the integration of Latin America
with the rest of the world.
16
Guillermo Moreno, “De la Propiedad comunera a la Propiedad Privada Moderna 1844-1924”. Eme
Eme Estudios Dominicanos, 9(51) (1980).
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The transition to inward-looking development strategy in the Dominican Republic was adopted after the economic and political crisis in the early 1920s.
Politically, after serious turmoil in the early 1910s, the US took over and remained in power until 1924.17 During WWI, the economy enjoyed prosperity based
on the high demand of commodities, particularly sugar. The war also rerouted
most of the Dominican exports to the US, reaching 87% in 1920. Known as
the “dance of the millions”, these bonanza years were characterised by a significant rise in imports and exports. The new American military government set
in motion an array of reforms during the occupation. The expansion in public
works was financed by the creation of new taxes on Dominican alcohol and
property. The result was the development of extensive railroad and highway
systems, together with the proliferation of publicly funded schools.
This boom came to a painful halt in 1921. The European economies managed
to rebuild beet sugar production, driving prices to pre-war levels. The drop
was dramatic: from $26 per short ton the price of sugar collapsed to less than
$7 in 1921 and $4 a year later. With this crisis, the political standing of the
government deteriorated, leading to the end of the occupation in 1924.
The origins of protectionism in the Dominican Republic date back to the Trujillo years. Trujillo began his reign by establishing governmental monopolies
in salt, meat, and rice protected from foreign competition. While fostering
domestic production, these measures were just means to increase his personal
wealth as he controlled or owned those industries. In addition, he promoted
domestic and agricultural activities. As soon as the country recovered from the
effects of the Great Depression’s commodity price collapse, he resumed the
investment in public works projects including highways, railroads, and canals.
To promote agricultural production, he transferred thousands of hectares of
public land as part of his colonization plans. As a consequence of the 1929
worldwide crisis, the country experienced a severe scarcity of imports and
Trujillo recognized the importance of a growing industrial sector. In his quest
to promote manufacturing activities, he changed the Constitution to allow him
to grant incentives a tax credit to the sector.
17
American intervention in Latin America was widespread and frequent during this period. For
example the US established fiscal receiverships in eight countries in the region from 1904 to 1930
(see Arroyo Abad and Maurer 2013).
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The evolution of Trujillo’s own power went hand in hand with the overall
growth in the economy. The period between 1938 and 1960 is notable in terms
of domestic growth based on industrialization. However, the expansion was
Trujillo-centric: by 1961, 80% of industrial production was under his ownership, employing over 45% of the domestic labour force.
During the export-led growth period, a share of the agricultural sector became modernized; however, most of the rural population continued traditional
practices of subsistence agriculture. In line with Trujillo’s goals of economic
development, he turned to the countryside. He identified the unexploited
resources and embarked in a widespread agrarian reform that changed the
Dominican agricultural landscape. The reform included land redistribution
and a wide array of subsidies and incentives.
Starting in 1934, the government transferred thousands of hectares to private
ownership. The first main vehicle of redistribution was through the dismantlement of communal lands. This initiative was followed by privatization of
public lands and appropriation of privately owned lands in exchange for public irrigation. Infrastructure was a crucial part of the agrarian plan: by 1955,
the Dominican Republic became one of the countries with highest share of
irrigated lands. While gaining popular rural support, the regime placed strong
incentives to use labour and land. With strict vagrancy laws and extensive incentives, the regime succeeded in expanding the cultivated area together with
domestic production. However, there were limits to these winds of change,
specifically with respect to the sugar industry. In the Eastern provinces, foreign
interests remained a powerful force. Even though the land redistribution did
not quite materialize in this region, Trujillo opted for increased taxation to the
sugar industry18.
222
The first obstacle was the 1919 tariff. This treaty greatly affected the infant
industrial sector as American manufacturers enjoyed Duty-free status. While a
revision was justified in order to protect the industry and increase tax collection,
the government faced a binding agreement that prevented the change without
US authorization. To bypass this constraint, the government passed the Law
190, creating a series of consumption taxes on imported manufactured goods
18
Richard Lee Turits, Foundations of Despotism: Peasants, the Trujillo Regime, and Modernity in
Dominican History. Stanford: Stanford University Press, 2003.
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in 1925. Despite the protests from the US government, the effective rate of
protection climbed to 85% by the mid-1930s. Notwithstanding this level of
protection, the main limiting factor for imports was the drastic collapse of
commodities prices during the 1920s, dramatically reducing the export revenue
and the import capacity.
Figure 3: Per capita exports, imports, and terms of trade, 1900-1950
(5-year average)
Sources: see appendix.
Intentional industrialization also dates back to the Trujillo regime. His zeal for
political and economic power geographically relocated the industrial centre of
the country to Santo Domingo. After monopolizing the food supply, the ruler
extended his influence to other industrial endeavours that would complement
his own. In 1934, the Law 672 formally established incentives to new agricultural-based industries. The benefits included tax exemptions for technology
imports and consumption tax rebates for selected exporting industries. The
success of these policies was limited. By 1941, only 28% of the 37,000 workers
in manufacturing were employed in non-sugar industries. As such, the average
size of an industrial firm was 16 workers.
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A new industrial policy was drafted after the Trujillo-Hull Treaty in 1940, when
the Dominican Republic finally regained autonomy in terms of tariff policy.
A new Constitution in 1942 named the Congress as the organ in charge of
drafting tax exemptions and incentives. These policies came into play exactly
when the economy was suffering from the effects of WWII isolation. In line
with this situation, the government banned the exports of domestically manufactured goods and other essential goods. Trujillo’s wealth expanded with
the increasing regulation of domestic production. He took advantage of the
external context to charge monopoly prices on essential goods and collect
sizable fees for import licences.
As in most of Latin America, the development of the industrial sector was a
product of international context and domestic policies. The isolation of the
WWI planted the seeds of unintended industrialization. Simple artisan shops
emerged to solve the unavailability of foreign manufactured imports. Then,
the sector expanded in the subsequent decades with the aid of favourable
governmental policies.
Industrial promotion was successful in this new stage. While small firms expanded production by attracting more workers, the wealthier business class
fully appropriated the stipulations of the new legislation. Requesting a wide
array of special concessions, the Congress granted contracts to selected industrial interests. The first successful attempt was to found a textile firm based
on Dominican production of cotton. This initiative received full exemption
of all taxes for five years including tariffs on machinery and raw material
imports. This contract became the blueprint for other import-substituting
projects presented to the government. The import-substituting initiatives did
not stop in the private sector. The state stepped in sectors of national interest
such as alcohol distilling and chocolate production by providing funding and
other favourable incentives. The industrialization promotion terms were very
advantageous that even foreign investors jumped on the bandwagon. In the
1950s, Trujillo approved the extension of benefits to foreign capital leading
to the creation of industrial free zones in 195519.
224
19
Frank Moya Pons, Breve Historia Contemporánea de la República Dominicana, (México: Fondo de
Cultura Económica), 1999.
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While successful at expanding the local industry, the industrialization programmes did not foster trade. As Figure 3 shows, both real imports and real
exports per capita declined during the bulk of the period. Real imports per
capita reached less than 40% of the level achieved by the end of the first
globalization wave. Per capita real exports lost some ground during the 1930s
and 1940s as well.
As shown in Table 1, profound changes pervaded the Dominican economy
during this period. The urban centres, this time, attracted rural population:
while urbanization doubled, the population employed in agriculture declined almost 15 percentage points to reach around 60% at the end of the
period. Despite the migration to the cities, the agricultural sector increased
substantially the area cultivated, reaching 70% of the total arable land by
1960. A clear pattern arises: the cities, where industrialization was seated,
pulled more and more population from the countryside. As manufacturing
firms expanded in number and production, the gains for the labour force
were scant. In fact, the real industrial wage only climbed 6% in these three
decades.
The growth of the Dominican economy during this period of unintended
and intentional industrialization is undeniable. Excluding the sugar industry,
the industrial sector tripled its size to employ almost 30,000 workers in 2,400
firms by 1963 (Oficina Nacional de Estadística). Despite this progress, the
sugar industry still contributed as much revenue as all the other sectors
combined while employing three times the labour force in manufacturing.
Moreover, the intentional stage of import-substituting industrialization
failed to adopt a uniform strategy. As in many other Latin American countries, the policies did not obey efficiency or developmental considerations.
In addition, the expansion of the industrial sector channelled funds to the
regime creating an increasingly distorted economy. From a development
perspective, the agrarian reform benefitted the landless class by providing
secure property rights; however, this reform also followed the capricious
direction of Trujillo’s leadership. While formal employment opportunities
improved, the increasing cost of living stemming from the consumption
taxes and substitution initiatives resulted in meagre gains for the labourer
class.
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225
Leticia arroyo abad, ameLia U. SantoS-PaULino
Table 1: Selected indicators, 1930-2008
1930
14.0%
1960
30.5%
Agriculture employment
74.9%
% of labour force employed in agriculture
61.5%
56.5%
70.8%
1,449
2,379
Urbanization
% of population living in urban centres
Land in production
% of arable land
Industrial development
Number of industrial firms
Number of FTZ firms
Industrial sales
Real sales, 1950=100
50.0
1980
39.8%
1990
55.2%
2008
69.0%
20.3%
14.5%
22.1%
18.6%
16.6%
71
331
2,028*
525
3,804.7
23,432.5
176.02
403.98
218.7
Industry value added
Value added, 1950=100
Real wage
1950 = 100
92.3
97.7
193.6
(*) corresponds to the year 2004.
Sources: see appendix
4. Import substitution – export-led growth
industrialization, 1960s-1990s
226
After decades of import-substitution industrialization, Latin America geared
its efforts toward export promotion one more time over half a century after
the first globalisation wave. The fruits of the famous industrial policies did not
materialise for all the countries. The region once again faced a strategy dilemma
while suffering from the consequences of macroeconomic mismanagement
and a different international environment. One by one, the countries adopted
trade liberalization policies that prompted an increase in exports and imports
throughout the region. The new orthodoxy was solidified in the 1990s with the
seal of approval from multilateral organizations. The impact of these policies
varied considerably by country but in all cases there was acceleration in export
growth from the 1990s onwards.
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Figure 3: Per capita exports, imports, and terms of trade, 1960-1990s
Sources: see appendix.
For the Dominican Republic, this renewed integration to world markets brought
instability of export earnings and the increasing vulnerability to external shocks.
The Dominican government then initiated a programme to restructure the real
economy, aimed at diversifying its production and trade structures away from
primary commodities. The government, assuming a more active role, embarked
on protectionist ISI strategies, similar to programmes implemented in the rest
of Latin America. Protectionist policies included imposing quantitative and
administrative restrictions on imports, maintaining overvalued exchange rates
and directing government investment in key industries.
The first and most significant programme involved the promotion of specialized manufacturing while protecting domestic producers from foreign
competition. The Industrial Incentive Law (Law 299) of 1968 alongside the
establishment of the Industrial Development Board, focused on developing the
sectors of mining, construction and tourism. Trade policy was also legislated,
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227
Leticia arroyo abad, ameLia U. SantoS-PaULino
involving the institution of a complex tariff code, additional duties, contingents,
licenses, prohibitions, exemptions, and concessions to specific industries20.
The variety of restrictions was paired with a multiple exchange rate system.
The Dominican Republic experienced a period of sustained growth following
the restoration of democracy in the early 1960s, mostly due to favourable external conditions. From 1966 through the 1970s, GDP growth averaged 8%
per annum, one of the highest growth rates in the world at the time. As in the
previous decades, production and exports were highly concentrated in primary
commodities, and at the beginning of the 1970s relatively few commodities
accounted over 70 % of total export earnings: cacao, coffee, sugar and tobacco.
Figure 4 shows that per capita real exports expanded during the period, leading
to a positive trade balance.
But large fluctuations in revenues characterised the industries linked to world
commodity markets. The terms of trade have been clearly unstable, due to the
change in the price of oil (the country’s main import) and the international
prices of commodity exports (e.g. sugar and mining). During the current globalization wave, terms of trade instability are more evident. The favourable
external conditions to commodity exports were visible in the mid 1970s, but
the strike of luck followed by a sharp deterioration in relative prices during
the next decades.
While industrial policy created the base for promoting and establishing a virtually inexistent industrial sector, inefficient policies, alongside other market
imperfections, limited the outward orientation and success of the domestic
industries. After a manifested effort to promote industrial development and
diversification of trade, commercial policy turned inefficient because it relied
on the use of complex instruments, mostly in the form of tariffs and nontariff barriers and direct subsidies to specific industries. The restrictions and
selective application of classical industrial policy instruments lingered to the
following decades.
World events such as the increases in oil prices, the international debt crisis and
the global recession that demarked the 1980s, contributed to the poor perfor228
20
Amelia U. Santos-Paulino, “Trade liberalisation and trade performance in the DominicanRepublic”.
Journal of International Development,18 (2006): 925-944.
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mance and brought to surface the inadequacies of the system for promoting
sustained growth and development. The Dominican Republic was further disadvantaged by the decline in world sugar prices and the tightening of US sugar
import quotas. The external shocks and unprecedented high interest rates on
foreign loans pushed the economy into a cycle of current account deficits and
growing external debt, and to the basis for a first-generation exchange rate crisis.
Figure 4: Per capita exports, imports, and terms of trade, 1960-1990s
Sources: see appendix
Table 1 shows the marked structural changes following the import substitution
– export led growth industrialization heterodoxy. The urban centres continued
to draw rural population; however, the population employed in agriculture
declined by almost half, relative to the 1930s. This also translated in a dramatic reduction of agricultural production according to the lower percentage of
arable land.
229
The road towards industrial development was apparent in the increase in the
value added of manufactures and the real wages with reference to the 1950s.
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Leticia arroyo abad, ameLia U. SantoS-PaULino
However, the number of plants declined, at the same time that the emerging
FTZ sector was expanding. Real wages, as the overall economic conditions
deteriorated, were also affected by the macroeconomic crises of the 1980s. It
became evident these policies were not conducive to sustained growth. In tackling the late 1980s crisis, a new stabilization and structural adjustment reform
package was implemented in the early 1990s. The program and its implications
are discussed in the following section.
5. Trade liberalization - export oriented and
structural adjustment since the 1990s
Following the ‘lost decade’, Latin America and other developing countries launched an extensive programme of macroeconomic reforms aimed at improving
national policies and economic performance.
The Dominican Republic started fundamental economic reforms and trade
policy adjustments in the early 1990s. The programme focused mostly on fiscal
and trade policy reforms, and the main targets were increasing the efficiency
of the existing tariff and tax structures, eliminating price distortions, reducing
asymmetries in the incentives provided to specific industries and sectors, and
maintaining fiscal equilibrium.
As far as trade and development, addressing the anti-export bias manifested
by the unbalanced incentive structures and the exchange rate regimes were the
most urgent tasks in order to increase exports’ competitiveness and to achieve a
better allocation of resources with a higher participation of the private sector in
productive activities21. That is, trade policy reform, not industrial policy, was the
tool to influence sectorial development and, thus, national industry portfolio.
230
At the onset of the structural reforms, the trade regime was complex and subject to discretion. Trade policy was typified by the use of import substitution
strategy based on tariffs and non-tariff measures, exemptions and concessions
to specific industries, and a multiple exchange rate system with various rates
applied to different transactions. Before the reform, imports were ruled by over
27 laws, and 140 different taxes and duties, and were subject to three different
21
Andrés Dauhajre Hijo, Sesgo Anti-exportador y Promoción de Exportaciones en la República
Dominicana, (Santo Domingo: Banco Central de la República Dominicana), 1994.
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types of exchange rates.22 The 1990 tariff reform addressed these issues.23 The
domestic taxes applied to imports were also reformed, particularly the value
added tax.
The exchange rate for different imports was unified, and the system of custom administration was improved reducing inefficiencies and corruption. In
1995 Congress approved a new foreign direct investment (FDI) law, which
eliminated restrictions on foreign companies investing in selected economic
sectors, and allowed the repatriation of profits and the access to long-term
loans. Once macroeconomic stability was achieved in 1991, the Dominican
Republic entered a new period of remarkable economic growth ruled by an
open economic system.
In December of 2000, The Congress approved a programme of trade and
tax policy reforms, the Tariff Reform and Fiscal Compensation Program. The new
program further reduced tariffs and trade duties, the value added tax, and the
tax on selective consumption. Overall, the reforms rendered the trade policy
regime compliant with the multilateral rules governed by the General Agreement on Tariff and Taxes and the World Trade Organization (GATT/WTO).24
Notwithstanding ongoing trade liberalization, the incentive framework continues to be characterized by significant bias in favour of selected productive
sectors. Most exporters of goods are exempt from the general trade and fiscal
22
23
24
Import prohibitions included textiles, food and electronic products, shoes, cars and luxury items.
These prohibitions were supposed to encourage national production and to achieve a balanced trade
account.
A new tariff code based on the ‘Harmonised System of Goods Codification’ was introduced.
Although tariff rates were significantly reduced, temporary tariff surcharges remained in place until
1995 to counteract the impact liberalization on the protective structure of ‘sensitive’ sectors and to
allow them to adapt gradually to foreign competition.
During the Uruguay Round of multilateral trade negotiations (1986-1994), a protection schedule
and a tariff of 40% was consolidated for selected agricultural products (beans, corn, chicken, milk,
rice and sugar). In 1998, the government established the quotas (approved by the WTO in February
1999) and tariffs on imports in excess of the quotas. The Dominican Republic further the reforms
to include streamlining customs procedures, reducing tariffs, eliminating import surcharges and
export taxes, and improving the legal framework akin to international standards. Since 2002, new
laws have been adopted to improve the protection and enforcement of intellectual property rights,
mostly reflecting the entry into force of the free trade agreement with the USA and Central America
(DR-CAFTA).In some cases, the domestic regulations go beyond the standards established by the
Trade Related Intellectual Property Rights (TRIPS) Agreement. Santos-Paulino (2010) documents
the range of legislature reforms governing transparency and international trade.
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Leticia arroyo abad, ameLia U. SantoS-PaULino
schemes in an attempt to counteract the anti-export bias of these regimes.
The strategy, in tandem to persistent inefficiencies in infrastructure, notably
in electricity supply, are significant obstacles for sustained improvements productivity, and hence development.
The manufacturing sector is divided in a set of firms that supplies the domestic market and the firms producing under the Free Trade Zones (FTZ) which
operates under the incentives regime. FTZ production accounts for most of
the Dominican Republic’s merchandise exports, but its main industry, textiles
and clothing, has been recently affected by the pressures of a more competitive
global environment. In addition to export promotion programmes, new fiscal
incentives schemes have been introduced to promote the competitiveness of
the domestic industry and to reduce the gap resulting from incentives granted
under the export-promotion regimes. But the concerns about distortions and
allocation of resources remain25.
In contrast to manufacturing, agriculture production continues to be supported through incentives, including higher-than-average applied tariffs, direct
payments, quotas, and marketing and price control programmes. Despite the
significance of manufacturing and agriculture, it is the services sector that
dominates the Dominican economy, mainly via tourism related activities. The
contribution of tourism to the Dominican economy is crucial, and the sector
has recovered from its depression in the early 2000s. There are no restrictions
to foreign investment in the sector, and investors in certain tourism projects
are granted incentives akin to the FTZ, including import and income tax
exemptions.26The telecommunications sector is one of the most dynamic in
the Dominican economy, and has benefited from large flows of foreign investment following privatization in the mid-1990s. Conflicting with previous
periods, trade policy measures continue to be used as short-term instruments
for counteracting macroeconomic crises and business cycle fluctuations.
During the trade and liberalization driven development spell, the Dominican
Republic managed to achieve a certain degree of structural transformation,
25
232
26
Other programmes have been also fostered to aid small and medium-sized enterprises, technological
innovation and regional development, mainly consisting of tax incentives, financing on preferential
terms, technical assistance and support for research and development, World Trade Organization.
“The Dominican Republic Trade Policy Review”.Secretariat Report (2008).
Such incentives are conditional on employing Dominican professionals.
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insofar as achieving a relative shift from the commodities dependence that
characterised earlier periods. Despite the advancements from the 1990s, the
country requires further institutional and political changes to maintain sustainble growth and to generate the expected development gains. Per capita
real imports still surpass per capita real exports, which is symptomatic of the
productivity constrains and the limited factor endowments. In line with other
studies27, we show that the country’s advancements, in terms of development,
steams mostly from the diversification of production and the development
of special (free processing) economic zones and the country’s participation in
global trade and finance.
The recent performance of the Dominican Republic, as evidenced by high
output growth and large productivity gains, is nonetheless divergent, due to the
concentration of economic activities in narrow sectors such as manufacturing,
telecommunications, and financial services. In terms of development, this
implies limited impact on, for instance, employment generation. Moreover,
the employment generated tends to be of low quality and real wages have
remained stagnant28 .
Concluding remarks
Trade has brought about benefits for the Dominican economy; it allowed the
country to integrate to the world markets allowing access to imports and capital. But these benefits entail unavoidable challenges. Throughout its history, the
performance of the tropical commodity export sector deeply influenced economic development. The vulnerability to economic and environmental shocks
is latent for small - tropical islands. Despite the significant openness to international trade, the low diversification in production and exports further exposes
the country’s vulnerability to adverse fluctuations and shocks in world markets
and limits export earnings potential. This is evident in the historically unstable
terms of trade and the volatile economic performance, mostly following the
global commodity crises. To cope with the volatile global market conditions, this
country attempted to diversify the productive base resulting in a series of distortions and biases.
27
28
Susan Pozo, José R. Sánchez-Fung, and Amelia U. Santos-Paulino.“Economic strategies in the
Dominican Republic”.Working Paper No. 2010/115 (2010).
A. Abdullaev, and M. Estevão.“Growth and Employment in the Dominican Republic: Options for
a Job-Rich Growth”.IMF Working PaperWP/13/40 (2013).
Historia Caribe - Volumen VIII N° 23 - Julio-Diciembre 2013 pp 209-239
233
Leticia arroyo abad, ameLia U. SantoS-PaULino
Interventions by developing countries’ include imposing tariffs, subsidies and
tax breaks that imply distortions beyond those related with optimal taxes or
revenue constraints. The question is, if these interventions are justified, do
they necessarily lead to growth and development? The evidence further shows
that trade and FDI policies are able to generate welfare gains when associated
with increasing exposure to trade (i.e. export promotion leads to more welfare
enhancement than import substitution). In developing countries in general,
trade (and FDI influx) has led to higher and more sustained economic growth
in the periods where there has been a clear export promotion strategy29. Industrial policy through FDI promotion may be more effective than intervention
in trade, in part because FDI-promotion policies focus on new activities rather
than on protecting (possibly unsuccessful) industries and sectors. Yet, there is
a danger for the FDI-led export models to remain technologically stagnant,
leaving developing countries unable to progress beyond the assembly of imported components30.
We show that the Dominican Republic has experimented with different policies
to promote exports and the development of the domestic economy. At the
whim of international forces, the export sector in the first globalisation failed
to be a sustainable source of economic growth. Moreover, the relative insulation provided the World Wars allowed the government to adopt protectionist
policies. The consequences of ISI were dire in terms of distortions and biases
in the productive system contributing to profound economic crises.
In recent decades, the Dominican Republic has made significant progress
towards a more open trade regime, particularly through the elimination of
non-tariff barriers, by simplifying its tariff structure, and by reducing the rates of duties. The structure of the trade policy required important unilateral
adjustments in response to the multilateral agenda, particularly with reference
to the instruments that affect the productive sectors and the export strategies
of the country. As a result, the Dominican Republic experienced remarkable
growth rates in recent decades, which outpaced the performance of other
countries in Latin America and the Caribbean.
29
234
30
Balasubramanyam, V., Mohamed Salisuand David Sapsford. “Foreign Direct Investment in EP and
IS countries”.Economic Journal, 106 (1996): 92-105.
Vandana Chandra, and Sashi Kolavalli.“Technology, Adaptation,and Exports: How Some Countries
Got it Right”. In Technology,Adaptation and Exportsedited by Vandana Chandra, Chapter 1, World
Bank Publications, 2006.
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Despite this recent success, eliminating the sources of distortions created by
incentives to specific industries, continue to be a major challenge for the Dominican Republic. It is well known that agriculture is supported by measures like
higher-than-average applied tariffs, direct payments, and marketing and price
control programmes. These policies create deep distortions that impact mostly
the consumers. But what is more critical is overcoming basic infrastructure
constraints that reduce productivity by increasing costs. For the Dominican
Republic, as other middle-income countries in Latin America and elsewhere,
further diversifying production and trade is an enduring battle. This mostly
implies evolving from labour-intensive, low-skill production perpetuated by
the assembling FTZ model to higher value added and more skill technologyintensive activities.31 Investments in human capital, alongside with improving
policies and infrastructure, will encourage such transformation, and will facilitate nurturing the creation of high quality employment.
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Leticia arroyo abad, ameLia U. SantoS-PaULino
Appendix
1.
Trade data
•
Total flows, composition, destination, and origin
1890-1906: Handbook of the American Republics, 1890-1910
1906-1930: Informe de Receptoría de Aduanas Dominicanas, 1907-1930.
1931-1939: Dominican Republic Statistical Office, 21 años de estadísticas dominicanas,
1936-1956, Ciudad Trujillo: Era de Trujillo, 1957.
1940-2010: Oficina Nacional de Estadística.
2.
Terms of trade
•
Export prices:
1890-1906:
Tobacco: From Olmstead, Alan L., and Paul W. Rhode, “Cotton, cottonseed,
shorn wool, and tobacco – acreage, production, price, and cotton stocks:
1790–1999 [Annual].” Table Da755-765 in Historical Statistics of the United
States, Earliest Times to the Present: Millennial Edition, edited by Susan B. Carter,
Scott Sigmund Gartner, Michael R. Haines, Alan L. Olmstead, Richard Sutch,
and Gavin Wright. New York: Cambridge University Press, 2006.
Sugar and Cacao: Haines, Michael R., “ Wholesale prices of selected commodities: 1784–1998.” Table Cc205-266 in Historical Statistics of the United States,
Earliest Times to the Present: Millennial Edition, edited by Susan B. Carter, Scott
Sigmund Gartner, Michael R. Haines, Alan L. Olmstead, Richard Sutch, and
Gavin Wright. New York: Cambridge University Press, 2006.
Coffee: Sauerbeck, Augustus, Prices of Commodities and the Precious Metals,
Journal of the Statistical Society of London 49(3), 1886.
Sauerbeck, Augustus, Prices of Commodities During the Last Seven Years, Journal
of the Royal Statistical Society, 56(2), 1893.
1907-1935: Informe de Receptoría de Aduanas Dominicanas, 1907-1930.
1935-1947: Dominican Republic Statistical Office, 21 años de estadísticas dominicanas,
1936-1956, Ciudad Trujillo: Era de Trujillo, 1957.
238
1948-1979: IFC
1980-2010: UNCTAD
Historia Caribe - Volumen VIII N° 23 - Julio-Diciembre 2013 pp 209-239
trading deveLoPment or deveLoPing trade? the dominican rePUbLic’S trade, PoLicieS, and effectS...
•
Import prices:
Until 1940s, most of the imports were textiles, machinery, and building materials
from the US. In the absence of Dominican prices, we opted for American
wholesale prices as detailed below.
1890-1946: based on the imports composition, we used the price evolution of
textiles, metals and metal products, building materials, and chemicals from
Hanes, Christopher, “Wholesale price indexes, by commodity group: 1890–
1951 [Bureau of Labor Statistics].” Table Cc84-95 in Historical Statistics of the
United States, Earliest Times to the Present: Millennial Edition, edited by Susan B.
Carter, Scott Sigmund Gartner, Michael R. Haines, Alan L. Olmstead, Richard
Sutch, and Gavin Wright. New York: Cambridge University Press, 2006.
1947-1979: Martí Gutiérrez, Adolfo, Instrumental para el Estudio de la Economía
Dominicana, 1945-1995, Santo Domingo: Editora Búho, 1997.
1980-2010: UNCTAD
Export and import weights
Based on export and import composition in 1880s-1910s.
3.
Population
Dirección General de Estadística, Población del República Dominicana, Ciudad
Trujillo: Dirección General de Estadistica, 1947.
4.
Industrial statistics
Oficina Nacional de Estadística, Anuario estadístico de la República Dominicana, Ciudad
Trujillo, Dirección General de Estadística, various years.
Central Bank of the Dominican Republic
Consejo Nacional de Zonas Francas, Informe Estadístico
Para citar este artículo: Leticia Arroyo Abad y Amelia U. Santos-Paulino,
“Trading development or developing trade? The Dominican Republic’s trade,
policies, and effects in historical perspective”, Historia Caribe 23 (Julio-Diciembre):
Vol. VIII N° 23, págs. 209-239.
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