2009 Index of Economic Freedom

Quick Facts

Population:

• 9.6 million

GDP (PPP):

• $56.4 billion
• 10.7% growth
• 4.8% 5-year compound annual growth
• $5866 per capita

Unemployment:

• 15.6%

Inflation (CPI):

• 6.1%

FDI Inflow:

• $1.2 billion

The Dominican Republic's economic freedom score is 59.2, making its economy the 88th freest in the 2009 Index. With advancement in six of the 10 freedoms, the Dominican Republic's over-all score increased 1.5 points, primarily reflecting small improvements in fiscal freedom and monetary freedom. The Dominican Republic is ranked 19th out of 29 countries in the South and Central America/Caribbean region.

The Dominican Republic scores just above the world average in monetary freedom and investment freedom and well above average in fiscal freedom and government size. An income tax cut from 30 percent to 25 percent drove the fiscal freedom score higher. Government spending is low, reflecting some systemic weakness in addition to spending restraint. The focus of reform has shifted to fiscal accountability following high expenditures during the 2008 presidential campaign.

The Dominican Republic scores poorly in financial freedom and property rights. Corruption is widespread and affects the investment climate. Despite some improvement in the transparency and enforcement of commercial laws, regulation remains burdensome. Closing a business can be difficult.

Background Back to the top

An economic boom in the 1990s, led by tourism, telecommunications, and maquiladora manufacturing, slowed to negative growth by 2003 due to major bank frauds and a drop in U.S. demand. The economy has rebounded somewhat in recent years, helped by 2007 implementation of the Central America–Dominican Republic–United States Free Trade Agreement, which the government hopes will revive sagging textile exports. Leonel Fernandez of the Dominican Liberation Party, who served as president from 1996 to 2000 and was elected again in 2004, was re-elected to a third term in May 2008. To ensure growth, President Fernandez must rebuild infrastructure, reduce the government burden on the private sector, and reform the highly politicized electricity sector, which is plagued by huge “distribution losses” (theft) of more than 38 percent, seasonal drought that reduces hydroelectric output, and rising world oil prices.

Business Freedom 63.7 Back to the top

The overall freedom to start, operate, and close a business is limited by the Dominican Republic's regulatory environment. Starting a business takes less than half of the world average of 38 days, but closing a business is a lengthy and costly process.

Trade Freedom 73.0 Back to the top

The Dominican Republic's weighted average tariff rate was 8.5 percent in 2006. Some high agriculture tariffs, import permit requirements, reference pricing in customs valuation, non-transparent and restrictive regulations and standards, non-transparent government procurement procedures, inefficient customs administration, corruption, and problems involving the enforcement of intellectual property add to the cost of trade. Ten points were deducted from the Dominican Republic's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 85.2 Back to the top

The Dominican Republic has moderate tax rates. The top income tax rate was reduced from 30 percent to 25 percent in July 2007. Corporations are subject to a flat rate of 25 percent, effective in 2008. Other taxes include a value-added tax (VAT) and an estate tax. In the most recent year, overall tax revenue as a percentage of GDP was 15.0 percent.

Government Size 91.1 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 17.2 percent of GDP.

Monetary Freedom74.1 Back to the top

Inflation is relatively high, averaging 6.3 percent between 2004 and 2006. The government applies price controls to electricity and fuel and subsidizes some agricultural products and electricity generation. Ten points were deducted from the Dominican Republic's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign investment is generally welcome, but some laws discriminate between domestic and foreign investments. Foreign investors cite a lack of clear, standardized rules by which to compete and a lack of enforcement. Complaints have included corruption, requests for bribes, delays in government payments, and failure to honor contracts. Residents and non-residents may hold foreign exchange accounts. Payments and transfers are subject to documentation requirements. Some capital transactions are subject to approval, documentation, or reporting requirements.

Financial Freedom40.0 Back to the top

The Dominican Republic's small financial sector is poorly supervised and regulated, limiting access to credit for dynamic entrepreneurial activity. Since the 1990s, the Dominican Republic has achieved modest liberalization and consolidation of its financial sector. Sector assets are largely controlled by 13 multiple-service banks, two of which are foreign-owned. An attempt to create a new financial regulatory network was circumvented by a government bailout of several banks during a 2003 banking crisis, and confidence in the banking sector has been shaky since then. However, credit to the private sector has bounced back in recent years. In 2007, the private sector received more than 90 percent of all loans. Pension funds and insurance companies account for less than 10 percent of the financial sector's total assets. Distortions in the foreign exchange market have been gradually eliminated in recent years.

Property Rights30.0 Back to the top

The court system is inefficient, and red tape is common. The government can expropriate property arbitrarily. Most confiscated property has been used for infrastructure or commercial development. Although the government has slowly improved its patent and trademark laws, the enforcement of intellectual property rights remains poor.

Freedom From Corruption30.0 Back to the top

Corruption is perceived as widespread. The Dominican Republic ranks 99th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Official corruption is pervasive. Despite recent reforms, Dominican and foreign business leaders complain that judicial and administrative corruption affects the settlement of business disputes.

Labor Freedom55.1 Back to the top

The Dominican Republic has relatively rigid employment regulations. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee can be costly. Restrictions on work hours remain rigid.