US downturn, what can DR do to not get hard hit?

Dolores1

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May 3, 2000
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What actions could the DR take to suffer less in the case of a downturn of the US economy? It has been said that one of the reasons for the past good government of Leonel Fernandez was that the economy was doing great in the US (1996-2000) and fuel prices were very low. DR economy is tied in with the US because of the remittances and trade, and now if DR-CAFTA gets to happen we will be even more affected.

To start answering my own question am thinking the country should continue negotiating treaties with other countries -- Canada, for instance, and closer ties with Europe. But it should continue pushing sectors where it has shown to be resilient -- such as the tourism sector, now with much success in selling prime properties to foreigners. The upper echelons of US society will continue to have lots of money, and now with the baby boom generation coming into their 50s+.

Any more ideas...
 

NALs

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Jan 20, 2003
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Dolores said:
What actions could the DR take to suffer less in the case of a downturn of the US economy? It has been said that one of the reasons for the past good government of Leonel Fernandez was that the economy was doing great in the US (1996-2000) and fuel prices were very low. DR economy is tied in with the US because of the remittances and trade, and now if DR-CAFTA gets to happen we will be even more affected.

To start answering my own question am thinking the country should continue negotiating treaties with other countries -- Canada, for instance, and closer ties with Europe. But it should continue pushing sectors where it has shown to be resilient -- such as the tourism sector, now with much success in selling prime properties to foreigners. The upper echelons of US society will continue to have lots of money, and now with the baby boom generation coming into their 50s+.

Any more ideas...
Underlying your own answer is the basic economic principle the DR should always persue: DIVERSIFY, DIVERSIFY, DIVERSIFY!!!

Certainly, the country has learned the lesson of being a monoculture, with today's economy being extremely more diversified than ever.

However, the country needs to diversify with whom it trades, the US is too influential on Dominican affairs at the moment.

Having said this, a downturn in the US will hit the DR hard regardless, especially if such downturn trickles to Europe and other regions of the world.

I've said this a few months ago and I got plenty of heat from some DR1ers for saying this, but the Kontratiev long wave theory has been surprisingly accurate with it's predictions of upsurge and downturn in the global economy.

The economy is suppose to be on a downturn in the next few years, this is certain. The biggest question is whether it will be a mild downturn which would allow for a quick resurgence in business after the new business cycle kicks in or will the downturn become severe.

Always keep this in mind.

-NALs
 

RonS

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Oct 18, 2004
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While not an Economist, diversification certainly sounds like a sound strategy to me. Investing in indigenous industries which can compete in gobal markets is another. Tourism is wonderful, however, it really sounds to me to be too dependent on US, Canada and European markets. The energy situation is pivitol. Can anyone access the impact of Leonel's reproachment with Venezula? I thought it was brilliant, dispite US grumblings.
 

qgrande

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Jul 27, 2005
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NALs said:
Underlying your own answer is the basic economic principle the DR should always persue: DIVERSIFY, DIVERSIFY, DIVERSIFY!!!
Diversification, especially as an aim to diversify trade geographically, more Europe, Latin America, East Asia, Middle East (can't Leonel give some Saudi Prince a nice vacation home, and when he's at it, perhaps some assets for his harem, things the DR is good at ;) ) sounds like a sound idea. But just a question, another economic model is pretty popular as example for small countries, that of Finland and it's mobile phones, relying succesfully on one single type of product. Why not the DR? (just interested in your opinion).
 

NALs

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qgrande said:
But just a question, another economic model is pretty popular as example for small countries, that of Finland and it's mobile phones, relying succesfully on one single type of product. Why not the DR? (just interested in your opinion).
I'm not sure what you may be referring to, but I will assume you mean Finland has specialized in exporting mobile phones?

Assuming that is what you meant, its all based on comparative advantage. Every country (the bigger the country, the more likely it will have a comparative advantage in more than one economic sector) should actually exploit the economic sectors in which it has a favorable comparative advantage and specialize in that while importing the rest.

The basic principle in such theory is that if countries specialize in the things they do best and trade, all parties involved will gain significantly in both quantity and quality of the goods/services provided.

I could get deeper in explaining this, but I'm not sure if this is what you were referring to or if it was something else.

Please clarify.

-NALs
 

qgrande

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NALs said:
I'm not sure what you may be referring to, but I will assume you mean Finland has specialized in exporting mobile phones?

I could get deeper in explaining this, but I'm not sure if this is what you were referring to or if it was something else.

Please clarify.
Yes, more or less. Sorry, I thought it was pretty well known. A couple of years there was quite a hype about Finland with an economic boom almost only based on one sector, mobile phones, and one company, Nokia. It was presented as a model, and an example how small states do not always need to diversify their economy, but could succesfully opt for specialisation instead. The Dominican Republic is a small country, that's why I mentioned it. But of course mobile phones are not the same as sugar cane..
 

rellosk

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Since a large part of the Dominican economy is dependent upon remittances from the US, it seems that it might not be possible to distance the DR from an economic downturn in the US.

My guess is that foreign remittances are a far bigger percentage of the GDP than manufacturing or agriculture. Based on that premise, diversifying foreign trade won't help much.
 

NALs

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qgrande said:
Yes, more or less. Sorry, I thought it was pretty well known. A couple of years there was quite a hype about Finland with an economic boom almost only based on one sector, mobile phones, and one company, Nokia. It was presented as a model, and an example how small states do not always need to diversify their economy, but could succesfully opt for specialisation instead. The Dominican Republic is a small country, that's why I mentioned it. But of course mobile phones are not the same as sugar cane..
Ok. Yes, comparative advantage played a role in that.

However, a small economy does not needs to diversify if its comfortable taking the risk of a global downturn on the one product the country is living from. Remember, that is how the DR got into a serious economic crisis with the depression of sugar prices.

Sugar was as good as oil is today to the oil rich countries, until the boom busted. That's the problem with an economy dominated by cash cow industry.

Diversification should always be desired and attempted.

-NALs
 

Tuan

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On a US downturn remittances will shrink. But if the DR markets Baby Boomer retirement communities now, the pension and SocSec incomes they bring into the country will more than make up for loss in remittances.
As for cash cow economy, H. Mejía told the Spanish press in 2001 that the DR's finest export was its women. Agreed.
NALs: I thought the last Kondratev cycle ended in 1990 which would put is halfway into a 25 year expansion?
 

NALs

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Tuan said:
NALs: I thought the last Kondratev cycle ended in 1990 which would put is halfway into a 25 year expansion?
Oh no, we are still on the cycle that was initiated in the late 1940s/early 1950s. Each cycle lasts +/- 50 years.

The way the cycle works is it starts with a trough, its a time when national savings are increasing. Following that period comes a time when the savings are invested into various economic activities and this causes the cycle to get its upstart. Such investments continue with an ever increasing dependence on debts to finance more investment opportunities as people begin to feel more confident in the upswing in the economy in general. Following that is a minor trough where economic activity halts and a mini-crisis follows. There is some debate if the oil crisis of the 1970s or the economic problems in the 1980s was this expected trough.

After the relatively quick downturn, the economy picks up again but this time its on pure debts as national savings fall considerably and consumption and spending increases along with debt levels. This causes a boom in the economy (ie. the roaring 1990s).

The following is what causes the most debate because it does not happens until it happens. In other words, the only way to know when the bust occurs is after it occurs, but speculation based on past experiences and the general accuracy of the Kontratiev Long wave theory suggest that in 2001 there was suppose to be a bust.

The only thing that occured in 2001 was the terrorist attacks in New York City and Washington DC which dampened the economic picture, which was already weak with the burst of the technology stock bubble a year before.

The main question now is why has the economy not tanked as it was expected?

The answer varies, depending to who you talk to. However, there seems to be a growing concensus that the reason why the boom did not busted as severe as expected was due to US government diligence in maintaining the economy flowing the best it could with the tax cuts and unscrupulous borrowing.

Thus, the US economy (and consequently the global economy) has been running on an ever increasing debt load since 2001. If it was not for such debt, the murky economic picture we are experiencing right now would have been much worst.

As long as the dominant economic centers of the world (mostly US and the Eurozone) don't overextend themselves, this economic "murkyness" can be maintained via borrowing until the next business cycle takes off.

The problem came earlier this year (around April) when the Capitol Hill had an emergency session on a Sunday to agree on increasing the "credit line" of the United States. Why? Because if that was not done at that particular time (thus the emergency), the US government would have defaulted on its Treasury Bills obligations.

A default on any government securities, particularly from the US government which is the only government to have never defaulted on its loans, would spell catastrophe to the global economy because it will shook off the confidence the world has on the US dollar as a hard currency. If the confidence is eroded, something of a panic follows.

Some say the existence of the Euro would balance a collapse of the dollar, while there may be some truth to that, I am not too convince that there is enough confidence in the Euro to replace the Dollar in the case of an economic catastrophic event as a default on the part of the US government on its securities.

Also, keep in mind that beginning this year the US is beginning its heavy duty increase of retirees as the baby boomers move into the "golden years". In fact, the fastest growing segment of the US population are people over the age of 80 (shocking!). It would be interesting to see how everything works out, given the increasing demands retirees impose on government programs such as Social Security and the lower contributions from the younger generations due to lower numbers of people in the younger generations themselves.

Add to this the increasing debt load... the only option will be massive increases in taxes in the future, perhaps in the near future.

Will they younger generations be willing to accept those higher taxes to finance a debt their parents and grandparents built in order to live the "good life"? Perhaps, then again, humans do have a habit of reacting in very irrational manners.

To conclude, until its evidently clear that the new business cycle has begun (and there are no indication this is the case) there will always be some sort of caution towards the possibility of a downward spiral. Of course, as with everything in life, in order for something to occur the conditions to allow such thing must be in place. The problem is that conditions are beginning to fall in place to create an economic downfall. Afterall, the only reason the US is able to borrow its way into relative economic stability right now is because the rest of the world has an extraordinarily high savings rate which is balancing the negative savings rate of the US. In other words, the rest of the world trust the US government in honoring its debt obligations and for that reason the rest of the world lends whatever amount the US wants to borrow. That is until a default occurs and that is where the problem lies as I explained above.

-NALs