Dominican Republic saved from near catastrophe.

What the chart above illustrates is a the result of a near economic catastrophe that began for the Dominican Republic in 2003 with a huge bank fraud. This combined with a slowdown in the global economy obviously caused major problems for the country, problems which were felt most strongly by consumers in 2004.

The government has since managed to rein in inflation and return the economy to growth and stability. The Dominican Republic's economy contracted in both 2003 and 2004, and according to the country's central bank, has shown strong growth for the first quarter of 2005. The Central bank of the Dominican Republic says that first quarter 2005 growth was 4.3 percent when compared with the same period in 2004.

Dominican consumers are also doing better. The extremely high inflation rate as represented in the chart above has been reversed.

The central bank says that during the first quarter 2005, the rate of inflation was only 0.75 percent. This compares with an inflation rate of 23.4 percent for the first quarter 2004. The bank's annualized rate of inflation as of the end of the first quarter 2005 was 4.3 percent as opposed to 62.3 percent in 2004.

Prices for broad product groups were mostly favorable - with the exception of transportation. Gasoline, for example, showed price increases from 12.6 percent to 13.6 percent. The central bank also found that the cost of cars and airfare pushed up the transport category.

The food, beverages and tobacco category show a drop in prices of 1.8 percent, mostly due to lower prices for meat, fruit and vegetables.

Three developments allowed the government to regain control over its economy, according to the central bank. The first was the ability of the newly elected government to stabilize the exchange rate. This allowed more affordable consumer goods to be imported into the country.

Indeed, the government credits expanded private consumption with a large portion of the growth in GDP.

A second development that helped in the rapid recovery was an expansion of locally produced consumer goods. In all, private consumption gained 17 percent in the first quarter 2005 as opposed to contracting 9.5 percent in the first quarter 2004.

The third, and possibly the most important development was the new government's pledge to reduce government spending. The government quickly delivered on the pledge and cut payroll so that spending dipped by 3.2 percent in the first quarter 2005.

Bloated payrolls are a hallmark of many developing countries. Governments that come to power with shaky mandates use the government payroll to establish a power base - often the only source of power. Potential investors look at this practice very skeptically because so often it goes hand-in-hand with corrupt practices that drain value from investments.

Before the crisis of 2003, the Dominican Republic, had an enviable record of GDP growth. The average annual rate of growth from 1996 through 2002 was a solid 6.7 percent. How much of this was due to government spending and other bookkeeping largesse is not clear.

The government's record on inflation for the same period, that is before 2003, was acceptable with the rate of inflation increasing at an average annual growth also measured at 6.7 percent.

PRODUCT FOCUS: