Weathering the Storm: Policy Options for Central America and the Dominican Republic in an Uncertain Environment

Central America and the Dominican Republic are enjoying a favorable external environment. The U.S. economic recovery, the main trade partner of the region, and the marked fall in oil prices has made it possible to keep up flows of remittances and investment, improve the terms of trade, and to contribute to the strengthening of the external position of the region and its economic growth. However, the relative quality of the regional export basket has receded and few advances have been made in its modernization, which has limited the gains. In this environment, risks remain. Economic deceleration in China or upward adjustment of the U.S. interest rate could negatively impact the balance of payments of the countries. Meanwhile, in the framework of the Free Trade Agreement between the Dominican Republic, Central America and the United States, some agricultural products protected until 2015 will begin to enter markets free of tariffs, which could unveil the fragility of regional competitiveness. The above urges both to prioritize structural reforms to exploit trade complementarities and to coordinate policies with the private sector. The promotion scheme for local industry and direct investment should be reviewed, avoiding the use of tax breaks to compensate for competitive weaknesses. It is pertinent to develop the non-traditional export basket with the aim of drawing more benefit from U.S. growth, diversifying trade risk and generating local horizontal spillovers. Facing threats of less favorable conditions, external scenarios testing the regional performance are explored. Each country should decide between being bystanders of external swings or protagonists of policies which lead to lasting national benefits.