Growth in the Dominican Republic and Haiti: Why has the Grass Been Greener on One Side of Hispaniola?

WP/07/63


Growth in the Dominican Republic and Haiti:
Why has the Grass Been Greener on One
Side of Hispaniola?

Laura Jaramillo and Cemile Sancak

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© 2007 International Monetary Fund
WP/07/63


IMF Working Paper



Western Hemisphere Department

Growth in the Dominican Republic and Haiti:
Why has the Grass Been Greener on One Side of Hispaniola?

Prepared by Laura Jaramillo and Cemile Sancak1

Authorized for distribution by Andy Wolfe

March 2007

Abstract

The Dominican Republic and Haiti share the island of Hispaniola and are broadly similar in
terms of geography and historical institutions, yet their growth performance has diverged
remarkably. The countries had the same per capita real GDP in 1960 but, by 2005, the
Dominican Republic’s per capita real GDP had tripled whereas that of Haiti had halved.
Drawing on the growth literature, the paper explains this divergence through a combined
approach that includes a panel regression to study growth determinants across a broad group of
countries, and a case study framework to better understand the specific policy decisions and
external conditions that have shaped economic outcomes in the Dominican Republic and Haiti.
The paper finds that initial conditions cannot fully explain the growth divergence, but rather
policy decisions have played a central role in the growth trends of the two countries.

This Working Paper should not be reported as representing the views of the IMF.
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent
those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are
published to elicit comments and to further debate.

JEL Classification Numbers: O11, O47, O57

Keywords: Growth, income divergence, Dominican Republic, Haiti

Author’s E-Mail Address: ljaramillomayor@imf.org; csancak@imf.org

1 The authors would like to thank Guy Meredith, Jeromin Zettelmeyer, and Andy Wolfe for
their encouragement and support. We also thank Dan Holmes, Juan Climent, Chris Towe, Luis
Cubeddu, and participants at the WHD departmental seminar and WHD growth workshop for
their useful comments. Volodymyr Tulin provided valuable research assistance.

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Table of Contents
I. Introduction ........................................................................................................................... 4
II. Literature Review................................................................................................................. 5
III. Initial Conditions ................................................................................................................ 5
A. Geography........................................................................................................................ 6
B. Historical institutions ....................................................................................................... 7

IV. Analysis of Policies Pursued .............................................................................................. 9
A. Growth accounting........................................................................................................... 9
B. Empirical Endogenous Growth Model........................................................................... 10
Loayza, Fajnzylber, and Calderón (2005)—LFC Model................................................ 12
Improving the fit of the LFC model................................................................................ 13
Institutional quality ..................................................................................................... 13
Macroeconomic stability............................................................................................. 15
Panel regression .............................................................................................................. 17
C. Growth Determinants ..................................................................................................... 17
Dominican Republic ....................................................................................................... 19
Haiti................................................................................................................................. 21

V. Conclusions........................................................................................................................ 23
Figures
1. GDP per capita, and real GDP growth rates in Latin America.........................................4
2. Population density.............................................................................................................7
3. Settler mortality and ethnolinguistic fragmentation..........................................................8
4. Contribution to GDP per capita growth...........................................................................10
5. Endogenous growth model..............................................................................................10
6. Actual vs. LFC projected changes in growth rates..........................................................13
7. ICRG institutions index...................................................................................................14
8. Magnitude of regime changes..........................................................................................14
9. LFC stabilization policies................................................................................................15
10. Indicator of macroeconomic instability.........................................................................16
11. Actual vs. LFC and JS projected changes in growth rates.............................................17
12. Dominican Republic: Changes in growth rates by component......................................19
13. Trade openness...............................................................................................................20
14. Haiti: Changes in growth rates by component...............................................................21

Tables
1. Variables used in the LFC model.........................................................................................12
2. Results of panel regression on real per capita GDP.............................................................18

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Box
1. Literature survey..................................................................................................................11

Appendices.............................................................................................................................. 24
I. Chronology of political events ........................................................................................ 24
Dominican Republic ....................................................................................................... 24
Haiti................................................................................................................................. 26
II. Variable definitions and sources .................................................................................... 28
III. List of countries included in the panel regression ........................................................ 30

References............................................................................................................................... 31

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I. INTRODUCTION
The Dominican Republic and Haiti present a quasi-natural experiment; the two countries
share the island of Hispaniola and are broadly similar in terms of geography and historical
institutions, yet their growth performance has diverged remarkably since 1960. In 1960, the
Dominican Republic and Haiti had the same per capita real GDP at just below US$800.
However, by 2005, the Dominican Republic’s per capita real GDP had tripled to about
US$2,500, whereas that of Haiti had halved to US$430 (Figure 1). Accordingly, the
Dominican Republic and Haiti have been at opposite ends of the spectrum within Latin
America and the Caribbean (henceforth LAC) in terms of growth rates over the past 45 years,
with the Dominican Republic achieving one of the highest average real GDP growth rates at
above 5 percent and Haiti the lowest at about 1 percent (Figure 1).
Figure 1. GDP per capita, and real GDP growth rates in Latin America, 1960-2005
4500
4500
Dominican Rep.

GDP per capita
Panama
4000
(in constant 2000 U.S. dollars)
4000
Brazil
Costa Rica
Ecuador
3500
Latin America and
3500
Mexico
Caribbean
Paraguay
3000
3000
Chile
Colombia
El Salvador
2500
2500
Guatemala
Honduras
Dominican
2000
2000
LAC
Republic
Peru
Venezuela
1500
1500
Trinidad
Bolivia
Dominica
1000
1000
Argentina
Average annual
Haiti
Nicaragua
500
500
Uruguay
GDP growth
Jamaica
(in percent)
Haiti
0
0
1960
1970
1980
1990
2000
0
1
2
3
4
5
6
Sources: WDI; and authors' calculations.

What explains this divergence in per capita real GDP of the two countries? The paper seeks
to answer this question by examining two main issues: (i) to what extent the divergence is the
inevitable result of disparities in initial conditions, and (ii) to what extent it is the result of
differences in the policies pursued in each country since 1960. Drawing on the growth
literature, the paper addresses these issues through a combined approach that includes a panel
regression to study growth determinants across a broad group of countries, and a case study
framework to better understand the specific policy decisions and external conditions that
have shaped economic outcomes in the Dominican Republic and Haiti. To examine policy
decisions, the paper uses growth determinants from the literature and introduces alternative
variables of institutional quality and stabilization policies to help better explain the income
divergence between the two countries. Furthermore, to facilitate comparisons, Latin America
is used as a reference point throughout the paper.
When examining initial conditions, namely geography and historical institutions, we find
great similarities between the Dominican Republic and Haiti, implying that initial conditions
cannot explain their divergence in per capita real incomes. Moreover, based on the panel

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regression and case study, we find that policy decisions since 1960 have played a central
role. In particular, the Dominican Republic has consistently outperformed Haiti and the rest
of Latin America in terms of structural measures and stabilization policies, while Haiti has
been subject to numerous political shocks that have severely affected its growth performance.
The paper is structured as follows. Section II reviews findings in the growth literature on the
Dominican Republic and Haiti. Section III examines the initial conditions, in particular
geography and historical institutions. Section IV analyzes the policies pursued in the two
countries, framing the discussion by an empirical endogenous growth model. Section V
summarizes the findings and concludes.
II. LITERATURE REVIEW
Only a few studies have compared the growth performance of the Dominican Republic and
Haiti, and these studies have provided mostly qualitative discussions. Among the well-known
is the chapter in Jared Diamond’s book “Collapse” (2005). Although Diamond focuses on
environmental policies, it can be inferred from his arguments that higher population density
and lower rainfall have been the main factors behind the more rapid deforestation and loss of
soil fertility on the Haitian side of Hispaniola, with adverse consequences for agricultural
production and therefore growth performance. Similarly, Lundahl (2001) argues that Haiti is
the poorest country in the western hemisphere because of the interplay between population
growth and the destruction of arable land. He explains that the increase in the rural labor
force has led to an expansion of subsistence food crops to the detriment of export crops, in
the context of decreasing international food commodity prices.
Other studies have found that economic performance in the Dominican Republic has been
favored by political and macroeconomic stability. Bulmer-Thomas (2001) finds that, for the
Caribbean in general, improvements in per capita GDP are linked to higher exports per
capita, the quality of institutions, and stability of the macroeconomic framework. The World
Bank (2006b) also argues that the Dominican Republic experienced a more enabling
environment for private investment than Haiti due to political stability and stable
macroeconomic conditions over prolonged periods that allowed it to follow a more
diversified and outward oriented growth strategy. In addition, IMF (2001) argues that growth
in the Dominican Republic during the 1990s was anchored by capital formation and strong
productivity growth, while trade liberalization encouraged private investment and output
growth.
III. INITIAL CONDITIONS
We examine two initial conditions that the growth literature highlights as the most likely to
influence long-term growth performance: geography and historical institutions. While the
absence of national accounts prior to 1960 does not allow us to determine exactly at what
point in time the Dominican Republic started growing faster than Haiti, this analysis helps us
determine if the divergence started long before 1960.

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A. Geography
Geography plays a direct role in shaping a country’s growth performance. It determines the
quality of natural resources, the productivity of land, the public health environment, and the
extent to which a country can become integrated with world markets. We find no substantial
differences between the Dominican Republic and Haiti on these grounds, from which we can
infer that that geography cannot explain the growth divergence between the two countries.
• Gallup, Sachs, and Mellinger (1998) argue that: (i) tropical regions are hindered in
development relative to temperate regions; (ii) coastal regions are strongly favored in
development relative to the hinterlands; and (iii) high population density is favorable for
economic development in coastal regions with good access to trade. However, these
factors do not explain the divergence between the two countries as they have the same
location, ocean access, and climate, while Haiti has historically had twice the population
density of the Dominican Republic.2
• As explained in the literature review, Diamond (2005) argues that rapid deforestation,
caused by lower rainfall and higher population density, has led to lower growth in Haiti
compared to the Dominican Republic. However, a 1941 study on rainfall in Hispaniola
did not find evidence that Haiti had lower rainfall than the Dominican Republic. Based
on data for an average of 11 years, the study reveals that rainfall was comparable in the
two countries.3 Likewise, even if lower rainfall had in fact been an issue for Haiti, it did
not appear to be an obstacle to agricultural production in the 18th century when Haiti was
one of the richest colonies in the French empire.4 Moreover, deforestation on the Haitian
side can be considered a more recent phenomenon as, even as late as 1960, the amount of
arable land in both countries was comparable at about 20 hectares per person.5
• Diamond’s argument about population density runs contrary to cross-country evidence
about the potential benefits of higher population density, such as that found by Gallup et
al. (1998) and Klasen and Nestmann (2004) who argue that population density generates
the linkages, infrastructure, demand, and effective market size for technological
innovations that fuel growth. Figure 2 illustrates the relationship between population
density and growth. Between 1960 and 2005, many of the countries with the highest per

2 Haiti is about half the size of the Dominican Republic, but has roughly the same population.
3 See Alpert (1941).
4 In the 1780s, Haiti, nicknamed the “Pearl of the Antilles”, produced about 40 percent of all the sugar and 60
percent of all the coffee consumed in Europe.
5 Looking at GDP growth by sector over the period 1960-2000 reveals that performance of the primary sector
did not drive overall growth results in either country. In the Dominican Republic, the primary sector explains
about 12.5 percent of the total average growth rate, while the secondary and tertiary sectors explain 32.5 percent
and 55 percent respectively. Similarly, in Haiti, the primary sector explains less than 10 percent of the total
average growth rate, while the secondary and tertiary sectors explain about 45 percent each.

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capita real GDP growth had high population densities—in some cases even higher than in
Haiti—while countries with the lowest per capita real GDP growth had low population
densities.
Figure 2. Population density, 2000
(people per square kilometer)
Dominican Rep.
Haiti
Latin America
Hong Kong
Singapore
Malta
Mauritius
Korea, Rep.
Japan
China
Thailand
Countries with highest
Malaysia
GDP per capita growth rate
Ireland
Botswana
between 1960 and 2005
Guinea-Bissau
Nicaragua
United Arab
Liberia
Madagascar
Congo, Dem. Rep.
Countries with lowest
Zambia
Somalia
GDP per capita growth rate
Niger
between 1960 and 2005
Central African Rep.
0
100
200
300
400
500
600
Sources: WDI; and authors' calculations.

B. Historical institutions
A growing body of literature argues that institutions are important for initiating and
sustaining economic growth. While institutions are clearly endogenous and evolve with
economic performance, in this section we focus on the influence of historical institutions to
understand if economic performance since the 1960s has been driven mainly by historical
legacies or rather by more recent policy developments. We find that the historical institutions
of the Dominican Republic and Haiti were very similar, implying that this cannot fully
explain the growth divergence.6
• Acemoglu, Johnson, and Robinson (2001) argue that colonial origin matters for growth.
They argue that Europeans were more likely to set up extractive institutions in places
where they faced high mortality rates and could not settle, resulting in poor institutions,
which have persisted to the present. However, the Dominican Republic and Haiti had the
same settler mortality rates as estimated by these authors, therefore it would be expected
that both countries had equally extractive institutions (Figure 3).


6 Appendix 1 provides a chronology of political events for both the Dominican Republic and Haiti.

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• La Porta, et al. (1998) find that countries that are poor, close to the equator,
ethnolinguistically heterogeneous, use French or socialist laws, or have high proportions
of Catholics or Muslims exhibit inferior government performance. Yet, there are no
differences between the Dominican Republic and Haiti on these fronts: both have low
ethnolinguistic fragmentation, both use French law, and both have mainly Catholic
populations (Figure 3).
Figure 3. Settler mortality and ethnolinguistic fragmentation
Subsah.Africa

Africa
Dominican Rep.
East Asia
Asia
Haiti
Middle East
Northern Africa
Latin America
Central America
Average settler
Eastern Europe
Index of ethnolinguistic
Caribbean
mortality rate
Industrial
fragmentation
(deaths per thousand mean
(increase indicates greater
South America
Haiti
strength)
fragmentation)
Asia
Dominican Rep.
0
50
100
150
200
250
300
350
0
0.2
0.4
0.6
0.8
Source: Acemoglu et al. (2001).
Source: Gallup et al. (2003).

• In terms of the impact of the colonial power, the literature does not provide evidence of
significant differences between Spanish and French colonial rule. Several studies have
used dummy variables for French, British, and Spanish colonies to try to explain growth,
corruption, and policy volatility, but have found only the British dummy variable to be
significant.7
• The quality of institutions was poor in both countries until early in the 20th century—at
the time of the U.S. military occupation—with arguably greater political instability in the
Dominican Republic. Between independence in 1804 and the U.S. military occupation in
1915, Haiti had 33 heads of state, with an average time in power of 3.4 years. Meanwhile,
between independence in 1844 and the U.S. military occupation in 1916, the Dominican
Republic had 61 heads of state, with an average time in power of only 1.2 years.
Furthermore, although serving U.S. interests, the U.S. military occupation of the island
was linked to internal struggles and violence in both countries.8 Prior to U.S. occupation
in 1916, the assassination in 1911 of president Cáceres in the Dominican Republic led to
various revolutions, economic chaos, and a near-collapse of government institutions.

7 Acemoglu et al. (2001) add British and French colony dummies to their regression. The French dummy was
not significant, implying that French colonies were no different from the omitted group. Treisman (2000) and
Sirimaneetham (2006) add French, British, and Spanish colony dummies in their studies on the effect of
colonial heritage on corruption and policy volatility. In both papers, only the British dummy was significant.
8 U.S. expansion into the Caribbean Basin—at a time when the United States was pursuing the construction of
the Panama canal—was supported by the Monroe Doctrine, originally intended to keep European nations out of
Latin America, and Theodore Roosevelt’s corollary to this doctrine, which stated that the United States had a
moral mandate to enforce “proper” behavior among Latin American countries.

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