Why has the grass been greener on one side of Hispaniola? A comparative growth analysis of the Dominican Republic and Haiti.(Chronology)

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, when the two countries had the same per capita real GDP, just below $800. However, by 2005, the Dominican Republic's per capita real GDP had tripled to about $2,500. whereas that of Haiti had halved to $430 (Figure 1). Accordingly, the Dominican Republic and Haiti have been at opposite ends of the spectrum within Latin America and the Caribbean 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).

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What explains this divergence in per capita real GDP of the two countries? This paper seeks to answer this question by examining two main issues: (1) to what extent the divergence is the inevitable result of disparities in initial conditions, and (2) 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, this 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 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, whereas Haiti has been subject to numerous political shocks that have severely affected its growth performance.

I. 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 ones is the chapter in Jared Diamond's book Collapse: How Societies Choose to Fail or Succeed (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 (2006) 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, whereas trade liberalization encouraged private investment and output growth.