by Fernando Pernas, '24 for Annotations Blog

No country in Latin America has grown more than the Dominican Republic in the past 50 years.¹ Significant structural reforms, combined with political and macroeconomic stability, have seen the country grow at 4.9% for the past half-century. If this trend continues, the nation could become an advanced economy in as soon as 40 years. 

To fully realize its potential, the country must effectively do three things: solve the electric sector deficit, enhance the quality of education, and reduce growing inequality. If these challenges are left unchecked, they will constrain long-term growth and sabotage the promise of inclusive prosperity for all.

The Electricity Sector: A Bottomless Pit 

The failing electricity sector is one of the most significant short-term hurdles the Dominican economy must face. The central government has to constantly cover the financial losses of the state-owned electricity distribution companies. In the last 18 years, the government has injected $16.7 billion to cover these losses, averaging 1.3% of annual GDP. The electricity sector transfers account for 32% of all accrued government debt since 2006. These financial losses have doubled in the past three years. 

The increasing reliance of the energy sector on government transfers comes at a delicate time as the government gradually faces a tighter fiscal space. For instance, interest service payments have increased from eleven percent of revenue in 2008 to a quarter of tax revenue in 2024. The government deficit has averaged 3 percent of GDP over the past two decades. Eliminating the electric subsidy would almost halve the need for external financing, providing much-needed economic relief. Additionally, the fact that the government must subsidize these companies means crowding out other pressing needs, like investing in health or infrastructure. 

Removing the electric distribution companies’ operating losses will require that the companies:

1. Make substantial and long-overdue capital investments: These will help enhance the distribution grid, install energy meters for billing, and reduce non-technical transmission losses.
2. Overhaul their management practices: Bloated payrolls and administrative costs disrupt their operations.
3. Remove the enormous distribution subsidies: About 35% of all energy provided by the distributors in 2023 was not billed to anyone. That means that many households and businesses consume energy for free. 

Some recent actions inspire optimism and prove that reform in the energy sector is possible. For instance, a current World Bank project is actively improving 1,342 kilometers of distribution lines and regularizing over 225,000 clients who consume but currently do not pay for electricity.

Education: When Money is Not Enough 

In 2013, the government practically doubled its investment in public education. Since then, the government has spent one in every five dollars on education. As a result, school access increased drastically in that period, mainly driven by the extensive construction of classrooms and the extension of school hours. But expanding access can only get you so far. The Dominican Republic still scores at the bottom of international schooling outcomes in math, reading, and science, ranking 80 out of 81 participating countries in 2022. 

The government must now make improving education quality a top priority. The role of education as an engine of productivity growth is widely documented. If we look at the great successes of development in the 20th century—most notably the 'East Asian Tigers'—all achieved long-term success, partly due to heavily investing in their human capital. 

By cultivating an environment where learning leads to genuine understanding and skill acquisition, the government can guarantee a more productive and innovative Dominican Republic. To achieve this, policymakers need to attract higher-quality teachers. Specifically, the government should consider reinstating the High Teaching Quality Program, which sets clear standards for teachers, intensifies the rigor of teacher training with more interactive classroom experiences, and makes admissions to teaching programs more selective to boost educational quality. Regrettably, this program was discontinued following the COVID-19 pandemic, despite its promising early results. Alongside these efforts, the government must embrace innovative educational strategies, such as developing STEAM programs and pathways, shortening the summer break to mitigate summer learning loss, and implementing cutting-edge methodologies like "Teaching at the Right Level,” which tailors learning to students' current knowledge levels and appears to close learning gaps effectively.

Inequality: The Silent Barrier 

Discussions around inequality often focus on income and wealth. There is merit to that point in the Dominican Republic. Some studies suggest that more than half of all income concentrates on the top ten percent. The disproportionate income distribution mirrors the labor share of GDP, which has consistently declined since the turn of the century, signaling that most economic growth has benefited capital proportionally more than labor. Yet, these are merely symptoms of greater inequality brewing under the surface. 

Notably, the country exhibits a lack of access to equal opportunities. Social mobility is constrained by a person's familial background, particularly educational achievement, which reinforces generational poverty. A recent Gallup-Hoy survey conducted in January 2020 with 1,200 Dominican residents shows that most people believe economic growth only benefits the rich. This inequality of opportunity is also a primary driver of emigration. Most young people are willing to move abroad, and they point to the lack of opportunity as a direct reason for their move.

Second, the profound gender inequality in the country further exacerbates inequality. The country ranks 112th out of 189 countries on the Gender Inequality Index, reporting the highest rates of early marriage and teenage pregnancy in the region, severely limiting young women's access to fundamental rights. Female representation in influential positions is also disappointingly low, and the country suffers from a disturbingly high rate of violence against women. Actual progress can only be achieved through a steadfast commitment to empowering women and safeguarding their rights, ensuring they play a crucial role in the nation's advancement.

Addressing wage disparities, enhancing social mobility, and tackling gender inequality are ethical duties and crucial strategic initiatives. These actions are vital in diverting the nation from potential social unrest and directing it toward a future of prosperity and political stability. Recent social upheaval in countries like Chile and Colombia offers a cautionary tale for officials in Santo Domingo. To achieve a more balanced and prosperous society, the government must expand access to opportunities for all. Some measures might include enhancing the quality of public services, boosting workforce development to increase productivity, and empowering labor with greater negotiating power. These steps are vital to cementing a robust middle class and propelling the economy forward.

Navigating the Path Forward

To be sure, the expected payoffs will be visible on different time horizons, but reform should start now. With a president who enjoys widespread approval and a ruling party poised for electoral success, it's time for bold, visionary leadership. The government should use the current momentum to push significant reforms in education, equality, and energy efficiency. While the challenges facing the Dominican Republic are formidable, they are not insurmountable. By confronting these issues head-on with courage, creativity, and determination, the nation can unlock its full potential and chart a course toward a future of inclusive prosperity and sustainable development. 

 Meet the Author: Fernando Pernas

Fernando is a second-year Master in Public Affairs candidate at Princeton School of Public and International Affairs, where he is a Fulbright Scholar. Before joining SPIA, he worked for the Dominican Government’s Ministry of Industry and Commerce as head of the economic analysis department. He also worked as an economic analyst at the Dominican Republic Central Bank and the Ministry of Economy, Development, and Planning. A native of Santo Domingo, Dominican Republic, Fernando laid the foundation for his career in economics with a degree from the Mother and Teacher Pontifical Catholic University. 

Notes

1. Analysis excludes Guyana.