The next growth miracle might be in the Caribbean
The next growth miracle might be in the Caribbean
A profile of an underrated country
South Korea is one of the only countries to evolve from a low-income country to a high-income country. It has arguably had the greatest century of growth in world history and is showing no signs of slowing. In just a few generations “The Miracle on the Han River” has become an economic powerhouse, with a GDP per capita (PPP) now on par with the United Kingdom. South Korea’s story is extraordinary, especially as it began when most of the country was in tatters after the Korean War.
Economists and policymakers have examined South Korea ever since, trying to divine what went so well. How did South Korea go from a poor country to a rich country? Billions upon billions of dollars have been spent trying to recreate Korea elsewhere, with little to show for it. Countless other countries have become stuck or growth has slowed after initial successes. Nations have gone from low-income to middle-income (Botswana), and from middle-income to high-income (Chile), but to go the full distance is rare. It’s really only South Korea and Taiwan (and a few city-states whose stories aren’t useful for other nations). Just look at the South Korean economy compared to the economy of the United Kingdom over the last 30+ years:
As recently as 1990, the United Kingdom was 2.5 times as wealthy. Today, they are neck-and-neck, with 2023 data giving an edge to South Korea. This would have been an unthinkable prediction fifty years ago.
What countries are the contenders to be the next South Korea? India has drawn a lot of attention. It is now the world’s biggest country by population, and hence the world’s largest democracy. It has some promising avenues for growth, notably in technology. But its record has been mixed. Growth has been frustratingly slow, arguably constrained by poor government and insufficient infrastructure. A wealthy class has emerged, but overall the country has not made the progress it’s capable of.
Egypt is in a similar boat to India. With a prime geographical location, rich history, and population of over one hundred million, Egypt could, and should, be an economic powerhouse. Unfortunately, government dysfunction and civil strife have prevented any large gains. The potential is there, but it’s going to take serious structural reforms.
Ten years ago my bet would have been on Chile. Despite poor geography, Chile has done quite well over the last half-century. Tourists say that the feel (and prices) of Santiago reminds them of Europe. Despite several rocky periods in the 20th century, democracy has mostly stabilized. Yet the 2010s have not been great for Chile. Economic growth has leveled off and parts of the country remain very poor. Protests that began in 2019 as a movement against fare increases on buses morphed into a country-wide display of grievances. The movement surprised the world, and Chile has been stuck in a bit of limbo ever since.
Instead of these relatively large and geopolitically important countries, the world’s next success story may be a more modest country: the Dominican Republic. Many Americans only know the Dominican Republic as a vacation destination, but beyond the resorts and beaches there lies a country that has quietly emerged into a regional economic success story. Take a look at their GDP per capita (PPP) compared to two other Caribbean economies:
Thirty years ago, the Dominican Republic was about halfway between Jamaica and Haiti. Today, it’s left Haiti in the dust and Jamaica has stagnated. Showing the Dominican Republic along with other relatively wealthy countries in the Americas also illustrates its success:
True, the Dominican Republic has not passed any of these other nations. But the gains are clear. In 1990, the DR was half as wealthy as Argentina and Mexico. Today, it is within spitting distance. It’s also worth noting the stability of the increase. With the exception of the Covid Recession, there is a consistent upward trend over the last 30 years. This is the type of growth that is more likely to be predictive of the future.
What underpins this impressive growth streak? According to this report, the economy of the Dominican Republic is relatively diverse. It has a decent balance of services and industry. One point that sticks out is that manufacturing has decreased from 21.7 percent to 9.8 percent of GDP. This is a mixed blessing, as it is unlikely that the Dominican Republic will be able to gain a clear comparative advantage in much of the manufacturing sector, but other countries like South Korea have used manufacturing as the main engine of growth. It is good, however, that their economy continued to grow as the importance of manufacturing shrank.
Looking at their exports also provides evidence that the economy is dynamic:
While the emphasis on gold and agricultural products is not ideal for a country looking to transition to a high-income economy, there are bright spots. Who knew the DR made medical instruments? It is also good to see that they are exporting rolled tobacco over raw tobacco, indicating that cigars and other tobacco products are being produced domestically, rather than tobacco being grown just to be exported and processed elsewhere. Overall, the economy appears to be in a position to continue to grow.
As far as weaknesses, the Dominican Republic needs to not be over-reliant on tourism. Tourism can go hand-in-hand with a wealthy economy (Italy), but for a developing nation tourism can be a mixed bag. Tourists will continue to flock to the Dominican Republic as long as it is a cheap destination. As the economy matures, prices will rise, reducing the advantage the DR has over other Caribbean nations. Also, tourism can be fickle. It only takes one hurricane or a high-profile murder of a tourist to cost the economy billions.
The Dominican Republic could also stand to diversify its soft power away from the beaches. There is currently a lack of cities in the Caribbean that people want to visit. If someone is going to the Caribbean for a vacation, the only high tourism urban destination is Havana. Due to high crime and few amenities, people generally don’t stay in capital cities. Might Santo Domingo fill this niche? It is a large city, located on the coast. There is a historic colonial area, as Santo Domingo’s history goes back to the 15th century. If crime decreased it could draw a lot of tourists who want to spend some time on the beach but also would like to visit a proper city.
Additionally, the government of the DR needs to improve. While the Economist Intelligence Unit gives the Dominican Republic a passable overall democracy score of 6.39, it receives a worse “functioning of government” score of 5.36 and an abysmal “political culture” score of 3.13. Transparency International scores the Dominican Republic 32/100 for corruption, worse than India or Belarus and barely better than Russia. This will limit potential growth and eventually create an unbreachable ceiling.
I think the best way forward is for the Dominican Republic to continue to develop its (non-tourism) services sector. High-income nations are transitioning to a services-based economy, and I think the DR is geographically well-positioned to provide services to the Spanish world as well as the United States. At the same time, they should further develop their medical instruments industry and any other industry they may have a comparative advantage in. Stay away from trying to compete with Asia in computing or Mexico in car production; it would be very difficult to create a niche.
All-in-all, the Dominican Republic has done well. Over the last half-century they have transitioned from being low-income to middle-income country. With 11 million people, they have an adequate population that can help compensate for their island location. Will they continue to grow? Only time will tell, but I think the potential is there for the DR to become the first high-income Caribbean country.