Better skilled labor supply and trained entrepreneurs: a challenge for the Dominican Republic

By Odalis F. Marte

Frequently, business managers complain that the universities are not producing the kind of skilled labor supply they require noting that the market needs less lawyers and more engineers. Furthermore, there is a shortage of skills in certain trades such as plumbing, mechanics, etc.  There is a mismatch between demanded skills and what the labor market offers to employers in the Dominican Republic, which is consistent with a global shortage of skills[1]. That disconnect reflects the absence of coordination between the public and private sectors and a failure to  harmonize curricula in order to meet businesses’ needs, while at the same time, the historically low investment in education in the country.

To cap the skill shortage, both private and public sectors can cooperate in order to establish training programs to better serve the real needs of businesses for specific skills. Those training programs can be both in trade schools and at the college level. In the DR, the National Institute for Technical and Professional Training (INFOTEP) exists, a trade school that has served the private sector with technicians for several years. Also, the country has numerous universities, including a public one, that pretty much offer the same types of subjects although with different levels of quality.

The DR is somehow offering financing and training programs to its entrepreneurs since management skills can boost productivity as we have seen throughout the international experience. Lots of people operating micro- and small businesses don’t have a notion of basic accounting and don’t use banks. More education in general and institutional changes to ease financial integration of small business is necessary.

Competition in the markets would tend to enhance the quality of management as well as the need for better trained labor supply, as well as institutional reforms to improve the business environment.

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[1] http://www.internationalbusinessreport.com/Press-room/2013/skills.asp. In different proportions, Latin America lacks sufficient skilled labor to supply the increasing demand for well-trained personnel.

On the Challenge of Job Creation in the Dominican Republic

By Odalis F. Marte

Creating jobs in a developing country may not be an easy task given the multi-faceted constraints, especially when it comes to poor policy management and market imperfections. In the case of the Dominican Republic (DR), unemployment is on the rise, particularly for young and unskilled people. This can be attributed in large part to the lagged effects of the international financial crisis having an impact on the economy through diverse channels such trade, investment, remittances and tourism.

External shocks, coupled with domestic policies that are simply not doing enough in terms of job creation, pose an important challenge to the DR. In this regard, the World Bank’s MILES Framework (Macroeconomic policies, Investment climate institutions and infrastructure, Labor market 

regulations and institutions, Education and skills, and Social Protection) can provide a comprehensive outline to address some of the main issues surrounding the job market.  Under this assessment, the macroeconomic policies (both monetary and fiscal) should work in order to boost declining aggregate demand, thus fiscal policy should remain expansionary and short-term job policies, such as crisis-hit-targeted subsidies for hiring, can be considered as a way to ease the pain of the unemployed.

In recent years, the DR has tried to keep aggregate demand afloat by increasing government expenditure in public works, specifically between 2008 and 2012. Nonetheless, consolidated public debt has increased from 32.2% of gross domestic product (GDP) in 2007 to 42.1% of GDP in 2012, according to figures of the Central Bank of the Dominican Republic. This trend has attracted attention because the economy has been subject to a fiscal reform, on average, every two years since 2000 (At the end of 2012 a tax reform package was approved that combined an increase in taxes with a reduction in spending, 

which is expected to lead to a fiscal consolidation of 4% of GDP for 2013).

Monetary policy can play a role working to help maintain price and financial stability, along with adequate exchange rate flexibility to help the economy absorb external shocks that minimize volatility in economic activity.

Continuing with the MILES Framework approach, an important factor to take into consideration is the investment climate for businesses including risks, costs and barriers to competition. These factors include property rights, rule of law, macroeconomic stability and fair competition. The 2014 Doing Business publication (http://www.doingbusiness.org/data/exploreeconomies/dominican-republic?topic=getting-credit) suggests that the DR has just fell in key areas such as starting a business, dealing with construction permits, getting credit, and registering property. It suggests that the DR fell many positions; the DR was just praised as a major reformer by the Doing Business publication a few years ago. That result should be taken as a challenge for microeconomic policies oriented to boost a business friendly environment for the private sector to invest.

Regarding labor market regulation, the DR government has engaged in talks with the private sector in order to explore ways to make the labor market more flexible. This represents a formidable task, particularly given the power of the unions and their tendency to oppose possible reductions of certain benefits for the employed.

In the case of education and efforts to raise the skills in the labor supply, recently the government decided to start implementing a law that would oblige it to spend up to 4 percent of GDP on education for the poor. In the first year of implementing this strategy, the DR proved to have a lack of managerial ability to spend a large increase in budget for building new schools and hiring new teachers. Nonetheless, by 2014 it is expected there it will be possible to comply with the Education Law.

In terms of social protection, the DR has a way to go, but has experienced important advances in the last ten years. For example, while the country has been relatively successful in extending social protection coverage, it has not had as much success in targetingemployment programs throughout disadvantaged communities.

A brief on the Dominican Republic’s Labor Market Conditions: The SupplySide

By Odalis F. Marte

@ofmarte

During the last forty years, the Dominican Republic has transitioned from an agriculture-based economy to a services one, despite efforts to create an import-substitution-based national industry that failed to absorb the excess labor out of the primary sector. That import-substitution-based industry received generous incentives and subsidies that ended up hurting the economy as a whole, as it constituted a burden for the agricultural export sector. This, in turn, fueled the mass migrations from the countryside to the cities, leading to a rise in informal economic activities, as well as emigration to more developed countries, as young people’s efforts to seek employment proved to be in vain.

After a domestic financial crisis in 2003 that reportedly accounted for 20% of GDP, the Dominican Republic’s economy began a strong recovery, growing by an average of around 6% between 2005 and 2008. Following the international financial crisis and ensuing global economic slowdown, the Dominican economy decelerated and the unemployment rate began to rise. In fact, according to official figures from the Central Bank of the Dominican Republic, in 2004 the open unemployment rate was 6.3% with a decreasing tendency until 2008, when it fell to 4.6%. Beginning in 2009, this rate started to climb, rising to 4.9% in that year, followed by 5.0% in 2010, 5.6% in 2011, 5.9% in 2012, and the current 7.0% in the first half of 2013.

During the past six years, the participation rate in the DR’s labor market has been around 56% (68% men; 44% women), except in 2009 when in dropped to 54%. It is important to mention that the informal sector accounts for around 60% of the labor market, and more than half of the new jobs were generated by informal small businesses. Between 2000 and 2012, the government was responsible for 62% of the 285,000 formal new jobs created in the economy.

Overall, the unemployment rate in young people is around twice the labor market’s unemployment rate, which can be explained by a lack of skills, deficiencies in the education system (including its coverage and quality), as well as the rigidities in the labor market that makes firing expensive for businesses. This benefits those individuals who are currently employed, at the expense of those seeking employment, especially the unskilled and less experienced ones.

The Dominican government has expressed its will to help create 400,000 jobs in 4 years, so it is actively implementing some policies in other areas to support small businesses, especially in the rural areas. Nonetheless, the DR economy is experiencing the impact of the poor performance of the world economy, especially the United States’, its major trade partner.