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Historia Caribe ISSN: Universidad del Atlántico Colombia Arroyo Abad, Leticia; Santos-Paulino, Amelia U. Trading development or developing trade? The Dominican

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Historia Caribe ISSN: Universidad del Atlántico Colombia Arroyo Abad, Leticia; Santos-Paulino, Amelia U. Trading development or developing trade? The Dominican Republic s trade, policies, and effects in historical perspective Historia Caribe, vol. VIII, núm. 23, julio-diciembre, 2013, pp Universidad del Atlántico Barranquilla, Colombia Available in: How to cite Complete issue More information about this article Journal's homepage in redalyc.org Scientific Information System Network of Scientific Journals from Latin America, the Caribbean, Spain and Portugal Non-profit academic project, developed under the open access initiative 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: 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: 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 Leticia Arroyo Abad, Amelia U. Santos-Paulino 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 Trading development or developing trade? The Dominican Republic s trade, policies, and effects... 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 See for example Krueger (1997) and Panagariya (2003). Leticia Arroyo Abad, Amelia U. Santos-Paulino 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 welfare 2. 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 trade 3 ; however, others state that developing countries engage in an unequal exchange and do not reap the full benefits of trade 4. 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 countries 5. 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 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), 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 6 th, Raúl Prebisch, El desarrollo de la América Latina y algunos de sus principales problemas. (Santiago de Chile: Comisión Económica para América Latina [CEPAL]), J.G.Williamson, Globalization and the Poor Periphery before 1950, (Cambridge: MIT Press), A.L.Winters, N. McCulloch and A. McKay (2004). Trade liberalization and poverty: The evidence so far.journal of Economic Literature, 42 (2004): P. K. Goldberg and N. Pavcnik. Distributional Effects of Globalization in Developing Countries. Journal of Economic Literature, 45(1) (2007): Trading development or developing trade? The Dominican Republic s trade, policies, and effects... 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 19 th 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 ( ). 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. 213 leticia arroyo abad, amelia u. santos-paulino Figure 1: Per capita exports, imports, and terms of trade, 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 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-20 th 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). Trading development or developing trade? The Dominican Republic s trade, policies, and effects... 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 215 Leticia Arroyo Abad, Amelia U. Santos-Paulino 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 sector 8. 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 machinery 9. 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 19 th 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 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 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). 9 Frank Moya Pons, Import-Substitution Industrialization Policies in the Dominican Republic, The Hispanic American Historical Review70(4) (1990): Trading development or developing trade? The Dominican Republic s trade, policies, and effects... 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 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
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