Fiscal policy, the current account and the external debt problem in the Dominican Republic
Although the Dominican Republic had one of the highest economic growth rates in the world between 1969 and 1973, its growth performance and external position deteriorated sharply in the 1970s. By 1985 it had an external debt/GDP ratio of 76.6%, well above the average of 62.3 % for the Latin American and Caribbean region as a whole.1 The Dominican debt crisis that emerged in the I98os, like the crisis in many other debtridden Less Developed Countries (LDCs), was in part caused by adverse external conditions; in part, however, it was the result of domestic policy choices. Among the latter, large fiscal imbalances are arguably the most important.2 This article provides a case study of the link between budgetary and external disequilibria in the Dominican Republic (DR). The analysis starts with a brief description of the worsening external imbalances of the last decade and then proceeds to identify the multiple factors that, in our view, were responsible for this unsatisfactory performance. The discussion focuses on underlying macroeconomic trends and especially on macro policy decisions that contributed to the debt build-up. As we emphasise, however, the analysis of the major determinants of public sector saving, investment, and external borrowing decisions in the last quarter century of Dominican history goes beyond a simple description of aggregate economic performance. The set of politically and economically feasible policies has been severely limited by the country's political and social structure the legacy of the thirty year (I93 o-6 I) dictatorship of Rafael L.