Reversing the productivity decline

The Dominican per capita income has rapidly converged towards US per capita income but slowing productivity growth poses risks to sustain economic growth. Despite the rapid GDP growth in the last two decades, productivity growth has continuedly declined. The Dominican’s total factor productivity (TFP) level represented 70 percent of US levels in 1990, but in the absence of further reforms it declined by 10 percentage points by 2019.

Therefore, this chapter seeks to understand the productivity dynamics in the Dominican Republic by accounting for sectoral differences. There are three channels through which productivity can be affected, the within-firm (capabilities, innovation, etc.), the between (allocation of resources across firms in a sector) and net entry components (entry of productive and exiting of unproductive firms in the market). The importance of those channels varies across sectors. While the between component in the construction and transport sectors negatively contributed to productivity growth, a negative contribution emerges from the net entry component in the manufacturing and hospitality sectors, which offset the benefits from innovation.