1. Overview

Economic growth in the Dominican Republic has been remarkable, but progress in the different dimensions of well-being remains insufficient. This Multi-dimensional Review offers an Initial Assessment of the main challenges and opportunities for more inclusive and sustainable development, and provides an In-Depth Analysis of three areas found to be particularly relevant for the country’s future: jobs, financing for development and digital transformation. In each of these areas, the report presents policy recommendations.

The recent history of the Dominican Republic is one of many socioeconomic achievements. The country has been one of the leading economies in the Latin American and Caribbean (LAC) region in terms of GDP growth, averaging a yearly rate of 5.1% between 1993 and 2021 (IMF, 2022[1]). This led the Dominican Republic to reach upper middle-income status in 2011, only eight years after the severe banking crisis of 2003-04. However, the impact of COVID-19 revealed significant structural weaknesses, and ample room for more inclusive and sustainable development (OECD et al., 2021[2]).

Efforts to maintain macroeconomic stability have been an essential ingredient of economic growth, and of the relative resilience shown by the country to the impact of the COVID-19 crisis. Before the pandemic, structural reforms that helped increase foreign direct investment (FDI) flows – particularly in manufacturing in special economic zones (SEZs), mining and tourism –, coupled with favourable global conditions were the main drivers of growth. Remittances, mainly from Dominicans in the United States, also played a role, amounting to as much as 7.6% of GDP in 2018 (World Bank, 2018[3]). These factors continue to be the main engines of growth in the aftermath of the pandemic: while GDP contracted by 6.7% in 2020, the country saw a strong rebound in 2021, with GDP growing by 12.3% (IMF, 2022[1]).

Labour productivity has improved, particularly since 2010. Yet, it still represents around 65% less than in the OECD average, similar to the LAC average. This is partly the result of low labour participation rates among women, at only 43.4% (71% for men) in 2020 (World Bank, 2022[4]).

The fastest growing economic sectors between 2010 and 2018 were mining, construction and services, in particular tourism and financial intermediation. The economic structure is dominated by the services sector, which accounts for 60% of GDP, represents about half of yearly economic growth, and employs 74% of the total workforce (Central Bank of the Dominican Republic, 2022[5]). Among services, tourism is key, but took a particularly heavy toll as a result of the COVID-19 pandemic. Merchandise exports are dominated by manufacturing in SEZs, amounting to 56% of total merchandise exports in 2021. The mining sector has been receiving large inflows of FDI, in particular in gold and silver mining, and has increased exports significantly, accounting for 17% of merchandise exports in 2021 (Central Bank of the Dominican Republic, 2022[5]).

The economic structure is characterised by its duality between domestic firms and firms in SEZs, which have undergone a structural shift towards medium and high-skilled manufacturing since the 2000s. While the more traditional textile and wearing apparel industries were labour intensive and employed many low-skilled female workers, the emerging industries (pharmaceutical, medical and surgical equipment, electronic products) are less labour intensive and require higher levels of skills. In 2021, medical and surgical equipment, electronic products and manufactured tobacco products accounted for 27%, 17%, and 17% of total merchandise exports from SEZs, respectively. Meanwhile, exports from firms outside SEZs are dominated by products that are resource-based or of low technology content, including agricultural and food products as well as mining. Due to the higher technology intensity of emerging industries in SEZs, and broad tariff and tax exemptions, linkages with domestic firms outside of SEZs are relatively low (OECD/UNCTAD/ECLAC, 2020[6]).

Strong and sustained economic growth has not translated into equally solid reduction in poverty and inequality, which have been aggravated by the pandemic. Poverty increased from 20.9% in 2019 to 23.4% in 2020 and up to 23.8% in 2021. Extreme poverty increased from 2.6% in 2019 to 3.5% in 2020, and slightly decreased to 3.1% in 2021. In previous years, poverty had recorded a steady but slow decline, from almost 50% in 2004 – largely because of the crisis – to 39.6% in 2013, accelerating thereafter (Figure 1.1). Inequality also fell between 2000 and 2021, with the Gini index declining from 0.513 to 0.396. This drop was higher than the average for LAC countries.

In 2020, almost half (46.9%) of Dominicans were part of the vulnerable middle class. These are individuals living in households with a daily per capita income between USD 5.5 -13 (PPP 2011) (World Bank, 2022[4]). Some of these are at risk of falling into poverty owing to substantial vulnerabilities, and the COVID-19-related crisis impacted them particularly.

Taxes and transfers play a modest role in shaping the income distribution, as they only reduce the Gini index by less than 2 percentage points (Commitment to Equity Institute Data Centre, 2022[8]). Nevertheless, the capacity of the state to protect the most vulnerable has improved in the last decades and social protection tools have been strengthened, particularly as a response to the pandemic. The Dominican government increased transfers in existing social programmes and put in place new emergency packages. The Employee Solidarity Assistance Fund (FASE) was created to assist formal sector workers at high risk of losing their jobs with income support. Later, the Independent Worker Assistance Program (PA’ TI) sought to assist self-employed workers with financial help. The government also put in place the Stay at Home Program (Quédate en Casa), which targeted structurally poor or vulnerable households. These emergency programmes drove largely the increase in total social spending from 7.6% of GDP in 2019 to 12.2% in 2020 and 8.7% in 2021 (Ministerio de Hacienda, 2022[9]).

The Dominican Republic faces growing environmental pressures. Between 2000 and 2019, it was one of the 50 most vulnerable countries to extreme weather events globally (GermanWatch, 2021[10]). Due to its geographical location, the Dominican Republic is particularly affected by hurricanes, storms and floods. The vulnerability of housing constructions and the lack of urban and territorial planning increase physical and property damage, and can also affect economic activities like agriculture and tourism.

The current development model entails certain environmental risks. Marine resources are threatened by coastal development and overfishing. Mass tourism can also be a major threat for environmental protection. While the impact of COVID-19 reduced the flow of tourists, this had increased by 35% between 2007 and 2017, and figures for 2022 show a full recovery of this sector. Deforestation has been controlled in the last decades, and indeed the country has managed to increase forest area substantially, though pressures from agriculture and fires must be managed. Forest area increased by 5.1% between 2000 and 2010 and by 3.4% between 2010 and 2020 in the Dominican Republic, compared to -5.7% and -3% for South America for the same period. In 2020, the country’s total forest cover was estimated at 44.4% of total land area (FAO, 2022[11]). The current development model also puts pressure on the water resource, which is close to the stress level in the Dominican Republic, contrary to other neighbouring countries in Central America. The efficiency rate of irrigation in agriculture is lower than 25%, due to the common practice of irrigation by flooding (Sánchez, 2016[12]). Mining has been growing in the country, with various environmental impacts, water use and contamination being among them.

The Dominican economy remains largely dependent on fossil fuels. These represented 89% of total energy supply in 2019, while renewable energies accounted for the remaining 11% (Figure 1.2) (IEA/OECD, 2021[13]). The country has committed to reducing its emissions by 27% with respect to a business-as-usual scenario by 2030. It also set the target to reduce its per capita greenhouse gas (GHG) emissions by 25% by 2030 compared to 2010 levels (MEPyD, 2014[14]). Investing in renewable sources of energy can help in reducing the dependency on imports of fossil fuels as well as their impact on the environment. The Dominican Republic has abundant solar and wind resources and should pursue its efforts in developing renewable sources of energy (OECD et al., 2022[15]).

Despite strong economic growth, trust in public institutions has been relatively low and volatile. Confidence in national government was particularly low in 2011 (41%), 2015 (45%) and 2019 (41%), but reached higher levels more recently, with 63% and 57% of the population having confidence in the government in 2020 and 2021, respectively. Current levels of confidence remain above the LAC (38%) and the OECD (47%) averages (Gallup, 2022[16]). Other indicators point to an erosion of citizens’ trust in institutions, though again with a recovery particularly since the impact of the pandemic. For instance, support for democracy fell from a maximum of 73% in 2008 to 60% in 2013, 54% in 2017, and a minimum of 44% in 2018 (Latinobarometro, 2021[17]). In 2020, support for democracy grew slightly to reach a level of 50%, presumably because part of the population perceived and appreciated efforts put in place by the government to counter the effects of the pandemic. Perception of progress in the country has also deteriorated. After a low point in 2011, more than half of the population believed that the country was progressing in the period between 2013 and 2016. However, there has been a fall in recent years, and in 2020, only 35% of the population believed that the country was progressing (Latinobarometro, 2021[17]).

There are multiple factors potentially driving these divides between citizens and public institutions in the country. On the one hand, social demands have increased, due to the expansion of the middle class, a younger and increasingly urbanised population, or the greater access to digital technologies and hence to information. On the other hand, while there have been undeniable efforts to strengthen the institutional framework, public institutions still face significant challenges. This can be related both to the lack of institutional capacities, but also to the fact that institutions are often deviated from serving the public interest, either through corruption or through policy capture to serve particular interests. Despite some significant improvements, in 2021 60% of the population still believed that corruption was widespread in the government, and 59.8% of Dominicans thought the country was governed for and by the powerful (Figure 1.3).

As a result of the Initial Assessment conducted in this Multi-dimensional Review, and following dialogues held with various Dominican stakeholders, three areas were identified as critical policy domains where ambitious reforms are needed in the country to advance towards greater well-being for all. First, jobs remain a fundamental part of citizens’ well-being, yet in the Dominican Republic many workers are employed informally, without adequate working conditions and with poor access to social protection. It is therefore imperative to create more formal job opportunities. Second, an ambitious development agenda will inevitably demand vast financial resources, but the country faces the rigidities of low fiscal space and a complex global scenario. It is essential for the country to advance towards a more robust, inclusive and sustainable “financing for development” model. Third, the challenges facing the Dominican Republic are taking place in a rapidly changing world, which also opens new opportunities. The digital transformation appears as a critical megatrend which the country must embrace to transform its development model.

Informality is one of the critical and most persistent challenges in the Dominican Republic. Informal labour erodes tax collection, undermines productivity growth and leaves workers vulnerable to shocks due to lack of social protection. It also perpetuates low productivity levels, unsophisticated economic structures, and low levels of skills across workers. All of these factors are not only consequences of informality: they are also key contributors to it. This is why labour informality is a complex and multi-dimensional phenomenon that is both a driver and a result of low development levels.

The Dominican Republic’s labour market has shown high levels of informality for decades, consistently above 50%. In 2021, the informal employment rate reached 59%, slightly above the 2019 rate of 55.3%, mainly as a result of the pandemic. This is slightly above the average level observed in LAC, at 56.5% (OECD, forthcoming[18]). The Dominican Republic must continue its efforts to place formalisation at the centre of its development strategy for several reasons. First, formalisation is key to expanding the breadth of the social protection system and reaching the most vulnerable groups. Second, barriers to the formalisation of companies should be reduced, which can have a positive effect on productivity growth, tax collection and increased trade opportunities, hence leading to the creation of more formal job opportunities. Third, investing in skills development and production transformation are key policy areas for greater formalisation through gains in productivity as well as better prospects for employability.

In 2021, 45.4% of Dominicans lived in households where all workers were employed in informal jobs. This was more than a three-percentage-point increase from 2019 (Figure 1.4, Panel A). Analysing the incidence of informality from the perspective of the household provides a more accurate picture of its impact on vulnerability, as usually social protection associated with formality extends from the formal worker to the rest of the household members. Conversely, households where all family members are informal are particularly vulnerable as they remain completely outside the scope of the social protection system.

Most low-income and rural households in the Dominican Republic depend only on informal employment. In 2021, 64.6% of people in the poorest income quintile lived in a household that depended only on informal employment, compared with 26.4% of those in the wealthiest income quintile. Households in rural areas also have significantly higher levels of informality. As much as 56.6% of the population in rural areas lived in a completely informal household in 2021. There are also considerable differences in informal household composition between regions: 54.1% of the total population in the Southern region lives in a completely informal household, compared with 42.1% of the population in Gran Santo Domingo. The highest proportion of mixed households (with both formal and informal workers) is found in the Eastern region (25.2%) and in Gran Santo Domingo (26.2%) (Figure 1.4, Panel B).

The COVID-19 crisis has underscored the importance of reinforcing social protection in the Dominican Republic. As most informal workers fall outside the coverage of traditional contributory social security mechanisms, they are more dependent on other public social assistance, non-contributory programmes, usually cash transfers, solidarity pensions and in-kind transfers. Among others, strengthening the interoperability of registries and adopting a household lens can improve the targeting of social programmes (Basto-Aguirre, Nieto-Parra and Vázquez Zamora, 2020[19]; OECD, forthcoming[18]).

Beyond mitigating the social consequences that informality causes, a strategy for formalisation must address the barriers and disincentives companies face to operate formally. In fact, firm formalisation often precedes labour formalisation. However, formalisation remains unattractive or unaffordable for many Dominican firms, especially the smaller ones. While some highly productive sectors can afford the costs of formality, other less productive sectors or firms are unable or unwilling to afford the transition to formality. In the Dominican Republic, 91% of small enterprises’ employees and 22.8% of medium-sized enterprises’ employees are informally employed. In contrast, only 3.7% of employees in large enterprises are informally employed (BCRD, 2022[20]; OECD, 2021[21]).

There are several factors creating barriers or disincentives to formalisation. The tax and administrative burden associated with the formal status can be high for some micro, small or medium-sized enterprises (MSMEs). The Dominican government has made efforts to streamline these procedures, which has helped to reduce disincentives to firm formalisation. The country has also implemented simplified tax regimes for small taxpayers, but tax rates are not differentiated for MSMEs or newly formalised enterprises. Minimum wage regulations have many sectoral and size-related variants, which lead to complexity in their application and makes it challenging to comply with the law, also pushing some firms to operate informally. Finally, some of the country's non-wage labour costs could also constitute a barrier to formalisation, particularly for small employers. While most non-wage labour costs are relatively stable over time, those in case of dismissal increase drastically after the first year, potentially exerting a disincentive for employers to hire formally.

Barriers to formalisation are also reflected in a segmented labour market, where transitions between informality and formality are relatively scarce, particularly for women. Only 12.8% of male informal workers transitioned to formal employment between 2018 and 2019, and only 9.6% of informal female workers. Around 80% of workers remained in their informal status. Between 2019 and 2020, during the COVID-19 pandemic, transitions from informal to formal employment dropped significantly, to 4.2% among men and 4.5% among women (Figure 1.5).

Skills development is a critical determinant for a worker's competitiveness in the labour market and, in turn, for the productivity of companies and the production sector in general. These are fundamental dimensions to boost formalisation. However, the level of skills across Dominican workers is limited, to a large extent due to low educational attainment levels, especially among vulnerable people (Figure 1.6). As much as 79% of 15-year-old Dominican students fail to reach level 2 proficiency in reading, mathematics and science in the Programme for International Student Assessment (PISA) test. Level 2 is described as the minimum level of proficiency that all children should acquire by the end of secondary education. This challenge is also recognised by firms: 29.1% of manufacturing companies in the Dominican Republic identify an inadequately educated workforce as a major constraint (World Bank, 2016[22]). Better skills not only make it more likely for a worker to access a formal job, they also lead to other externalities such as innovation, entrepreneurship and productive transformation in the aggregate, hence favouring the creation of more formal job opportunities.

Technical and vocational education and training (TVET) can be critical in increasing formalisation levels. TVET supply in the Dominican Republic is fragmented and would benefit from more co-ordination and strategic guidance to better respond to current and future demands for skills. In particular, strengthening the coverage and quality of secondary and post-secondary TVET is key to building skills in the workforce. The ongoing effort to create a National Qualifications Framework is, for instance, a significant step forward in aligning TVET education with general secondary and tertiary education. Moreover, it can facilitate the identification of professional qualifications demanded in the national production system.

A better match between the demand and supply of skills is critical to favour employability and job formalisation. Currently, the Dominican Republic has scarce information on these fronts. Investing in better resources and methods to analyse the supply and demand of skills can contribute to implementing more effective education and training policies. Likewise, facilitating the transition from education to work not only reduces a burden on companies but also supports young people in getting started on their career paths.

The Dominican Republic needs vast amounts of financial resources to underpin the post-COVID-19 recovery and overcome pending structural challenges. Traditionally low fiscal space has been further tightened by the impact of the pandemic and by a very complex global scenario.

Increasing fiscal space and ensuring sufficient resources to finance a sustainable development path will require additional tax revenues in the Dominican Republic. Tax revenues are low and represented 12.6% of GDP in 2020. This is significantly below the LAC and OECD averages of 21.9% and 33.6% respectively (OECD et al., 2022[23]; OECD, 2022[24]). A variety of policy options can lead to greater tax revenues. Identifying these and finding the right balance of measures will be crucial for success and for maintaining the taxation system as a catalyst for equity and economic growth.

The Dominican Republic’s tax structure presents potential areas for readjustment that can help to increase revenues, expand the tax base and build a more efficient and equitable tax system (Figure 1.7). Indirect taxes represent almost two-thirds (60.7%) of total tax revenues, representing 7.6% of GDP in 2020. Notwithstanding this, the efficiency of value-added tax (VAT) (ITBIS) remains limited. In fact, tax revenues from VAT represent 4.4% of GDP in the Dominican Republic, below the LAC average of 5.7%. Significant scope exists to improve VAT efficiency and increase its revenue-raising capacity. Low efficiency in VAT collection is mainly caused by tax non-compliance, tax exemptions and weaknesses in tax administration.

Direct taxes also have the potential to contribute more to total revenues and, by their progressive nature, they can support a more equitable tax system. The two main sources of direct revenues are corporate income taxes (CIT) and personal income taxes (PIT). Tax revenues from CIT accounted for 2.1% of GDP in 2020, making it the second-largest source of tax revenues after ITBIS. However, this level is lower than the averages for LAC (3.6% of GDP) and the OECD (2.8% of GDP) (OECD et al., 2022[23]; OECD, 2022[24]). The corporate tax rate in the Dominican Republic is near the LAC average, yet CIT efficiency levels are low. This is mainly explained by the proliferation of tax incentives – mostly those used to attract investment in Free Trade Zones (FTZs) – and high tax evasion, which need to be carefully assessed in order to improve revenues from CIT.

Revenues from PIT in the Dominican Republic are relatively low by international standards, as they represented 1.3% of GDP in 2020, well below the averages in LAC (2.2) and the OECD (8.3%) (OECD et al., 2022[23]; OECD, 2022[24]). Several factors limit PIT revenues in the Dominican Republic. These include a small tax base, a high concentration of income earners at low income levels, high levels of informality and tax evasion, and the existence of generous exemptions, deductions or tax credits. There are several options to increase the PIT tax base. For instance, it would be useful to explore the reduction of the minimum taxable level of personal income. Similarly, a policy option is to reduce the cost of being formal, providing the correct incentives to become formally employed or rationalising tax exemptions, deductions or credits. Utilising new technologies (e.g. large-scale automated data) to cross-check PIT with information from online vendors could also help reduce tax evasion.

Immovable property and inheritance tax revenues have potential for expansion with low distortionary effects and high redistributive impact. Yet, tax revenues from these taxes are relatively low in the Dominican Republic. Real estate taxes only accounted for 0.06% of GDP in 2020 (0.4% of GDP in the LAC average and 1% of GDP in the OECD average) (OECD et al., 2022[23]). Several factors undermine tax revenue from immovable property, including low level of property registration, high threshold exemptions, and the lack of a unified, updated and easy-to-access property registry. Correct and up-to-date information and new digital tools can unleash the potential of immovable property taxes.

To further mobilise resources for development, new taxes can be explored in areas like the digital economy or the green transition (OECD et al., 2022[15]). The Dominican Republic already obtains revenues from fuel taxes and several initiatives have already slowly started to create a framework of environmental taxes. Nevertheless, some options remain unexplored, such as carbon taxes which are a simple and cost-effective way to limit climate change, increase tax revenues and limit health damage from local pollution. Other taxes (such as creating a tax for vehicles that are more than ten years old) offer a new opportunity to raise tax revenues and promote green growth. Similarly, the tax system must adapt to the changes and challenges brought on by the digitalisation of the economy. For instance, a proposal currently under discussion is to extend the 18% VAT (ITBIS), or the 10% Selective Consumption Tax, to digital platforms. Estimates suggest that the potential of VAT revenue derived from taxes on digital services could have represented 0.4% of the Dominican Republic’s GDP in 2018, 0.5% in 2019 and 0.6% in 2020 (Jiménez and Podestá, 2021[25]). These efforts are essential not only for diversifying tax sources, but also for guaranteeing fair competition between these international platforms and local companies that provide these services.

Rationalising tax expenditures can create fiscal space and improve the overall impact of the tax system in terms of equity and efficiency. Tax expenditures are typically used by governments to achieve different economic, social and equity objectives by providing specific conditions to incentivise behavioural change. In 2021, tax expenditures accounted for 4.44% of GDP, one of the highest levels in the LAC region (Figure 1.8). As much as 70.1% of tax expenditures came from indirect taxes in 2021, with the majority of them related to the ITBIS (54.4% of total) and taxes on hydrocarbons (7.4%). Tax expenditures from the ITBIS represented 2.41% of GDP, and all tax expenditures from indirect taxes accounted for 3.12% of GDP, while those resulting from direct taxes represented 1.32% of GDP, divided between 0.76% of GDP from income taxes and 0.56% from wealth and property tax (Ministerio de Hacienda, 2020[26]).

Tax expenditures are not always well designed, and they can be regressive and provide greater benefits to those who need them less or are not always conducive to job creation or economic growth. A reform or elimination of outdated or poorly targeted tax expenditures that do not achieve the associated policy objectives can be a source of more tax revenues. Tax expenditures need periodical assessments to continuously evaluate their effects on growth, labour, inequality and efficiency. Similarly, avoiding arbitrariness in the criteria for admitting firms into FTZs and other special tax regimes by setting up clear qualification conditions can be an effective manner to ensure their efficiency.

Fighting tax non-compliance can be a source of greater tax revenues, while making the tax system more equitable and fairer. Tax non-compliance in the Dominican Republic ranks among the highest in LAC, with an estimated level of 61.8% (4.2% of GDP) for CIT, 57.07% (1.68% of GDP) for PIT and 43.5% (3.6% of GDP) for VAT in 2017. Indeed, VAT evasion in the Dominican Republic is well above the LAC average of 30.1% (Ministerio de Hacienda, 2018[29]; Gómez Sabaini and Morán, 2020[30]) (Figure 1.9). Improving VAT efficiency to reduce non-compliance would require the use of digital tools (for instance expanding the use of electronic invoicing [e-CF]), exploring alternative and innovative policies (such as personalised VAT), and modernising and adapting to the challenges of the digital economy. Information campaigns and efforts to raise awareness and tax morale, alongside the simplification of the tax system, can also be effective short-term measures in fighting tax non-compliance.

On the international front, it is critical to address both the challenges arising from the digitalisation of the economy and from non-compliance across multinationals. Sometimes businesses artificially shift profits to low- or no-tax locations where they have little or no economic activity, or they erode tax bases through deductible payments such as interests or royalties. This international challenge is addressed by the OECD/G20 Inclusive Framework on BEPS. Continuing to comply with the agreements and actions of this Framework will be fundamental to tackle tax avoidance in the Dominican Republic.

Reduced levels of fiscal space underscore the need to spend more efficiently, striking a balance between short-term challenges and long-term development. Inefficiencies in public spending in the Dominican Republic are relatively large and are estimated at 3.8% of GDP, slightly below the LAC average of 4.4% of GDP (World Bank, 2019[31]). Inefficiencies are primarily caused by leakages in transfers and procurement waste. Enhancing efficiency will require improved targeting of social programmes alongside the strengthening of the institutional framework for public spending. This includes multi-year budgetary frameworks that promote greater transparency and consider the phase of the business cycle (for instance with a fiscal rule) and protect capital investment and key social spending. Similarly, ex ante evaluations can help guide budget allocations to increase efficiency, improve the design of future policies and increase transparency by providing more accountability to citizens.

The challenges to raise additional revenues and spend in a more efficient manner underscore the need for a comprehensive fiscal pact in the Dominican Republic, as foreseen in the National Development Strategy 2030. The role of fiscal policy for the post-COVID-19 recovery must be holistic, making use of all fiscal policy tools and co-ordinating measures. In this respect, and while there are several political economy implications in advancing a fiscal pact, this should also be seen as an opportunity to build an inclusive and sustainable development path. Bundling the various fiscal reforms into a comprehensive package can help to build fiscal legitimacy, as well as reduce political constraints, facilitating political support and addressing distributional issues by making the system more progressive (OECD et al., 2021[2]).

Developing domestic debt markets can be growth-enhancing and promote socio-economic development. Long-term financing through bond issuances and other related securities allow to raise investment capital for infrastructure, housing or equipment, to smooth consumption, and to cope with climate and health emergencies, thus supporting long-term economic, social and environmental progress. The COVID-19 pandemic increased the need to provide financing through bond issuances and the Dominican Republic also increased its market access at the lowest rate on record, issuing a mix of foreign and domestic bonds. High international liquidity (and in particular capital flows towards sovereign bonds) in emerging markets during the pandemic contributed to these positive outcomes. As a result, consolidated public sector debt reached 70.3% of GDP in 2020, almost 20 percentage points higher than in 2019 (53.2%) (IMF, 2022[32]). As much as 56.4% was external debt (Ministerio de Hacienda, 2021[33]). Public debt was reduced to 62.1% of GDP in 2021 and the ratio should continue to trend downward, to an estimated 59.2% in 2022 (IMF, 2022[32]). Non-financial public sector debt, according to national data, was at 40.4% of GDP in 2019, increased to 56.6% in 2020, and decreased again to 50.4% in 2021 and to 46.5% by October 2022 (Ministerio de Hacienda, 2022[34]).

The market of local currency bonds is being developed, but additional efforts are needed. Co-ordination between the Central Bank and the Treasury is critical to avoid debt fragmentation, unnecessary competition, yield curve distortions and additional issuance costs (OECD, 2012[35]). In recent years, both institutions have made efforts to meet regularly to strengthen the co-ordination of public debt issuances in the local market.

The local private bond market in the Dominican Republic also remains underdeveloped. Since 2013, the total amount of private debt issued as a percentage of GDP has fluctuated between 0.7% and 0.2%, while in LAC countries it has ranged from 25% to 50% of GDP (Abraham, Cortina and Schmukler, 2020[36]). This could be partly due to the fact that large local companies prefer to issue international notes or to access credit facilities or loans in international markets in foreign currencies. Similarly, pension funds continue to invest a large portion of their portfolios in public sector bonds, reducing the liquidity in the private bond market. On a positive note, new players are coming into the local private bond market. The Dominican Republic public authorities have also been active as new laws have been passed to improve minority investor protection and market functioning, and laid the foundations for further innovations in the domestic market, such as green and social bond issuances.

The banking system in the Dominican Republic has proven to be resilient, though there is room for improvement in its contribution to financing development. Banking depth has been improving, but it still remains below LAC and the OECD. In 2019, the banking-credit-to-GDP ratio stood at 28.9% of GDP, below the 50% of GDP in LAC and the 80% in the OECD average (World Bank, 2022[4]). The banking system remains concentrated, and real interest rates and spreads are relatively high. The ten largest entities by assets held controlled 90.2% of deposits by the end of 2020, 3.3 percentage points higher than in 2012. Among a sample of 19 LAC economies, the Dominican Republic presented the fourth-most concentrated financial system (Tambunlertchai et al., 2021[37]). In the case of real lending interest rates faced by the private sector, they remained high, at close to 10%, between 2010 and 2019 (Banco Central de la República Dominicana, 2022[38]). High real interest rates are key barriers to accessing banking finance in the formal sector of the Dominican Republic’s economy.

The digital transformation represents a profound and impactful global trend that could bring enormous opportunities for inclusive and sustainable development in the Dominican Republic. Indeed, digital innovation has the potential to improve productivity, foster inclusiveness, help tackle climate change, transform public institutions and increase the overall well-being of citizens. However, if not accompanied by an adequate policy mix, the digital transformation can also deepen existing inequalities and create new gaps, generating digital divides that could be a source of exclusion (OECD et al., 2020[39]).

Embracing the digital transformation and making it work for all in the Dominican Republic will require strong policy ambition. In 2021, Decree 71-21 created the Gabinete de Transformación Digital (Digital Transformation Cabinet) and the National Dialogue on Digital Transformation (Dialogo de las reformas 2021: Transformacion Digital) was initiated (Consejo Económico y Social, 2021[40]). These two milestones provide good evidence of the political commitment to enable a digital transformation in the country, which resulted in the approval in 2022 of a Digital Agenda 2030.

More people are connected to the Internet than ever in the Dominican Republic, yet providing access and connectivity to all is a pending challenge. The country made improvements in terms of fixed broadband connections from 2014 (5.9 connections per 100 inhabitants) to 2020 (9.5 connections per 100 inhabitants), but it is still below the averages for LAC (14.2 connections per 100 inhabitants) and OECD member countries (33.6 connections per 100 inhabitants) (ITU, 2021[41]). Around 32% of households had access to a fixed broadband connection to the Internet in 2018, below the LAC (42%) and world (55%) averages, despite significant improvements between 2014 and 2018 (ONTIC, 2020[42]).

Active mobile broadband subscriptions per 100 inhabitants have also increased notably, from 31.2 subscriptions in 2014 to 70.9 subscriptions in 2020. This is slightly below the LAC average (72.1 subscriptions) and below the average for OECD member countries (110.9 subscriptions) (ITU, 2021[41]). The prevalence of mobile phones in society suggests that building a strong mobile broadband network can be an effective method of ensuring Internet access for all. This is the case in the Dominican Republic, where 80% of mobile broadband Internet access is through cellular devices (INDOTEL, 2021[43]). This is similar to the trend across LAC, where active mobile broadband subscriptions in 2018 were more than five times higher than fixed broadband subscriptions (OECD et al., 2020[39]).

The expansion of fixed and mobile broadband in the Dominican Republic has led to a significant increase in the overall number of Internet users. As of 2020, the Dominican Republic had one of the highest rates of Internet users in LAC. Since 2010, the percentage of Internet users has more than doubled, from 31.4% to 76.9%, being around ten percentage points below the OECD average (ITU, 2021[41]).

While the Dominican Republic has experienced a rapid expansion of connectivity, disparities in access and usage across territories, socio-economic status, age and gender persist, and these may have been exacerbated during the pandemic. Territorial disparities represent one of the major inequalities. In fact, the share of households with access to Internet ranges from 44.4% in highly populated and developed provinces such as the Distrito Nacional or 34.4% in La Altagracia, to the low levels of connectivity in smaller, less developed provinces, such as Elías Piña (5.4%) or Independencia (4.9%). There is a difference of 45.8 percentage points between the region with the highest and the lowest share of households with Internet connectivity. Nine out of the 32 provinces in the Dominican Republic do not reach the 10% threshold of households with Internet (INDOTEL, 2021[44]). Territorial disparities in the Dominican Republic are similar to those in other LAC countries, and larger than in the OECD (Figure 1.10).

The Dominican Republic has seen an increase in access to ICT in schools in recent years. In fact, the number of students per computer has declined since 2015. In 2018, there was one computer available per 1.4 students, and almost one computer with an Internet connection per 2 students. This places the Dominican Republic in a slightly better position than the LAC average, but worse off than the OECD average, which in 2018 had approximately one Internet-connected computer for every student (OECD et al., 2020[39]). However, notable gaps still exist across different socio-economic groups in terms of access to ICT both at school and at home. As an illustration, on average 47% of schools were equipped with effective online learning support platforms, one of the highest levels across LAC countries. This level was 61% in advantaged schools and only 33% in disadvantaged schools (i.e. a 28-percentage-point difference) (Figure 1.11).

The digital transformation can be a catalyst for productivity growth, triggering innovation and productive diversification. Harnessing the opportunities this presents depends on how economies, productive sectors, institutions and societies position themselves to absorb and adapt to digital technologies. These new technologies change the way companies produce goods and services, innovate, and interact with other companies, workers, consumers and governments. Digitalisation opens the door for superior data storage capacities and increased processing capabilities, while artificial intelligence enables companies to automate increasingly complex tasks (OECD et al., 2020[39]).

Having a strong innovation system is critical to making the most of the digital transformation and promoting productivity growth, yet the Dominican Republic underperforms in this area. Research and development (R&D) investment is low: the country reported R&D investment of 0.01% of GDP in 2015, lower than the LAC (0.7%) and OECD (2.34%) averages in 2018. Greater efforts in R&D and innovation could boost productivity as well as the quality of production (OECD/UNCTAD/ECLAC, 2020[6]). A high-performing logistics system is another critical dimension of building a stronger digital ecosystem that is conducive to productivity growth. The Dominican Republic’s score on the Logistics Performance Index has decreased in recent years and is currently below the LAC average (CAF, 2020[45]).

The impact of new forms of employment on the Dominican Republic is uncertain but, based on its current economic structure, 12% of jobs are at high risk of automation (Figure 1.12). This is slightly below the impact on LAC countries overall, where 16% of jobs, on average, are at high risk of automation and another 16% of occupations may change substantially due to the digital transformation. The economic structure of the Dominican Republic can explain the limited impact of the digital transformation on jobs. With a large share of employment concentrated in low-skilled services and sectors like retail and construction, which are not easily automatable, job destruction may be less prevalent. However, this may also indicate low levels of sophistication in the productive structure, with a low penetration of ICT and an inability to shift the production structure towards higher-value-added sectors.

Two policy areas stand out as particularly relevant to making the digital transformation a catalyst for better jobs. The first is skills: workers need a mix of skills, including strong cognitive and socio-emotional skills, as well as high-level ICT skills in technology-related occupations. The Dominican Republic ranks 106th in the world in terms of ICT skills (Network Readinness Index, 2020[47]). The second policy area is lifelong learning: these systems can enhance the accessibility and quality of education and provide training and learning opportunities throughout all stages of life, increasing workers’ chances of acquiring the required skills to adapt to a rapidly changing labour market.

The digital transformation affects and creates opportunities in almost every dimension of public policy. Thus, embracing the digital transformation calls for policies and practices that address digital issues in a holistic and coherent manner. In this context, the success in moving towards a digital economy and society relies greatly on the capacity to develop a clear, ambitious and cross-cutting digital agenda (DA) that is also linked to a country’s broader and longer-term development strategy (OECD et al., 2020[39]).

In 2021, the Dominican Republic established the Gabinete de Transformación Digital (Digital Transformation Cabinet) to oversee the Digital Agenda (DA) 2030, which was approved in 2022. There are several criteria that are relevant for the success of a DA, many of which are reflected in the Digital Agenda 2030 (OECD et al., 2020[39]). Clear responsibility and adequate implementation powers are crucial. A high-level body leading the strategy can be particularly helpful in co-ordinating a swift digital transformation. In addition, effective co-ordination among government bodies, beyond ICT-related ministries, is also essential for the implementation of a coherent DA, and must be complemented by a comprehensive data governance framework in order to ensure proper data management throughout the DA’s life cycle. Similarly, as the digital transformation is promoted by multiple stakeholders, including businesses, individuals and other non-government stakeholders, it is important to ensure an open multi-stakeholder dialogue, which can help identify obstacles, exchange best practices and create opportunities for public–private partnerships. An effective oversight framework is important for monitoring the implementation of and evaluating the DA. It is also important that the DA is well aligned with national development plans (NDPs) (OECD et al., 2020[39]).


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