Despite pristine natural beauty, rich history and persistent allure, much of the Caribbean region has navigated choppy economic waters and endured stormy political conditions over many years.
The region’s largest island, Cuba, remains embroiled in a deep economic crisis characterized by shortages of basic staples and intermittent public services. Although the Puerto Rican economy is expected to grow moderately during 2024, this comes after more than a decade of economic decline. Meanwhile, Haiti’s political, security and economic crises show no signs of abating.
Amid these turbulent conditions, the Dominican Republic has quietly become not only the Caribbean’s stellar performer but also one of Latin America’s overlooked success stories, achieving political stability and sturdy economic growth for the past two decades—a major milestone in a region characterized by dramatic political U-turns and boom and bust economic cycles. While the recent past is certainly laudable, continued success is by no means ensured and newly reelected president Luis Abinader will need to implement key changes and policy reforms to keep his country on a development path and evade the middle-income trap that has ensnared many Latin American countries.
On May 19, Abinader won a resounding and largely expected victory, securing roughly 58 percent of the popular vote—almost 30 percentage points above runner-up and former president Leonel Fernández. Abinader, a political centrist, successfully secured reelection amid a crackdown on corruption, laudable economic results and an assertive foreign policy vis-à-vis the country’s neighbor Haiti.
On the corruption front, Abinader created an autonomous Internal Audit Unit and an Anti-Fraud Unit, which led to subsequent investigations and charges against high-level officials mainly from the previous presidential administration of Danilo Medina. Economically, Abinader successfully led the Dominican Republic through the COVID-19 pandemic and achieved a strong economic rebound afterwards, with real GDP growth of 12.3 percent in 2021, 4.9 percent in 2022 and 2.4 percent in 2023. Prospects for 2024 are bright, with the IMF estimating real growth of 5.4 percent, among the highest in Latin America. Abinader’s hardline stance with regard to Haiti has also proved largely popular, as the Dominican population at large supports anti-immigration measures and controls to prevent a spillover of the violence and humanitarian crisis that has plagued Haiti over the past three years.
While there is widespread consensus that Abinader’s second term will ensure policy continuity, sound economic management and a continuing fight on corruption, the Dominican Republic faces major challenges that could dent its long-term economic and development prospects. With a majority in both houses of Congress, Abinader has been given a rare opportunity to tackle protracted systemic and structural deficiencies, from chronically low levels of tax collection to key infrastructure deficiencies and an underperforming education system.
The Dominican Republic has cemented its position as an upper middle-income country in Latin America, with GDP per capita comparable to Costa Rica and Mexico and above that of major economies including Colombia and Brazil. During this period, the Dominican Republic has become the Caribbean’s largest and Latin America’s seventh-biggest economy, ahead of Ecuador, oil-rich Venezuela and even mighty Panama. However, the country has failed to modernize and reform its growing economy over this period.
The coming decade will be key for the Dominican Republic to diversify its economy to increasingly include value-added industries.
Tax collection remains at a dismal 14.2 percent of GDP, an unsustainable rate for a country that requires significant investments in the public arena, from roads to schools and ports. By comparison, tax collection in major Latin American economies ranges from 25.5 percent in Costa Rica to 16.9 percent in Mexico. As a result, the country consistently runs fiscal deficits—3.1 percent during 2023—and its overall debt-to-GDP ratio is at almost 60 percent. This is reflected in the country’s persistently low, if improving, sovereign-debt rating, consistently below investment grade and below the grade of Latin American peers.
The country requires meaningful fiscal reform that increases the pool of taxpayers and tackles evasion. Estimates from the Inter-American Development Bank show that evasion of value-added tax represented 4.5 percent of GDP, almost twice the regional average of 2.3 percent. To combat this, Abinader would be required to simplify the tax code and remove certain exemptions, especially on financial services. Additionally, income tax on businesses and top earners would need to be increased from 25 percent to close to 30 percent or higher.
Abinader will also face a major challenge in reforming the perennially loss-making state-owned electricity companies—Edenorte, Edesur and Edeeste—which represent a major fiscal burden. The president has already created a unified council for the three companies aimed at reducing costs and improving efficiency. Results, however, have been very limited and the government has spent more than $4 billion on subsidies to these companies over the past three years. This also means that the Dominican Republic is unable to make the necessary new investments in the electricity sector to satisfy growing demand, which will be a key problem to address if the country aims to attract new investments where it is highly competitive, mainly in tourism and manufacturing.
The country is incredibly well positioned to take advantage of nearshoring trends in the Americas. The United States is already its largest source of foreign investment and the Dominican Republic has free trade agreements with both the U.S. and the European Union, thereby making it an attractive destination for companies seeking to relocate closer to the U.S. mainland amid global geopolitical tensions. In order to increase the country’s competitiveness and to compensate for strained government finances, Abinader’s government approved a law on public-private partnerships in 2020, which has so far attracted investments mainly in the infrastructure and energy sectors.
However, the coming decade will be key for the Dominican Republic to diversify its economy to increasingly include value-added industries, especially advanced manufacturing, to maintain robust economic growth and ensure higher incomes. This will be essential if it is to escape the middle-income trap characteristic of countries reliant on industries like tourism and light manufacturing.
Another key factor to address will be the country’s underperforming education system. The Dominican Republic consistently scores some of the lowest grades in global education evaluations. The latest results from the Organization for Economic Co-operation and Development’s PISA test show the Dominican Republic ranked among the lowest in a list of 80 countries in all its categories, consistently below regional peers and major developing economies. Addressing these education gaps will be imperative for the country to provide a competitive workforce in innovative and fast-growing industries, rather than simply an abundant but underqualified labor force that is competitive based on its low costs.
Abinader’s second term has the potential to become one of the most pivotal in the country’s modern history given the wide powers he will enjoy during his mandate. Despite its laudable achievements, the Dominican Republic still faces major headwinds and has significant deficiencies. Whether these issues are addressed head on will ultimately determine whether the country will enjoy more decades of economic prosperity.
Eduardo Arcos is a senior political and security analyst for the Americas, based in London. His research focuses on international political economy, organized crime and Latin American affairs.