Fallacies in the Economisch Bureau Amsterdam Report

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Just when the Curaçao government was looking forward to the second disbursement of the assistance package from Holland to mitigate the social economic impact of the corona virus, State Secretary Knops ensnared them with some conditionalities when the aid was most needed. While the track record of the Curaçao government is far from perfect, the conditionalities are an enormous distraction from the pressing issues of protecting the productive capacity of the island and not the least from the human suffering as a consequence of the economic standstill.

It has become more often than not that Dutch government policies and perceptions are being shaped by faulty analysis and/or factual inaccuracies. This has led to a situation where policy dialogues have been shrouded by distrust on both sides of the Atlantic. The recent Economisch Bureau Amsterdam (EBA) report[1] while informative, contains some disturbing fallacies. Economic policies based on fallacious arguments will serve to exacerbate our economic problems.

The objective of mentioned report, as the title abundantly indicates, is to identify solutions for our challenges in a regional perspective. It is therefore of critical importance given the state of our economies, that both the facts on which the report are based can be empirically refuted and the analyses are based on sound economic reasoning and not based on fallacious arguments. The salient examples are the following:

  1. Hoge overheidsschuld zet een rem op economische groei. The implicit assumption here is based on the conventional wisdom that government borrowing will crowd out private investments and the cost of servicing the debt will crowd out other government expenditures that may be necessary on social welfare grounds. While this argument may hold in general, it does not apply to the case of Curaçao. The debt accumulation that has been taking place since 10-10-10 has been foreign financed (namely, Holland) against practically negligible interest rate. The available domestic financial resources continue to be available for private investments and the cost of the public debt represents a negligible percentage of the current expenditure of the government. Looking forward however, this unfettered increase in the debt-to-GDP represents a risk if and when the rate at which Curaçao can borrow increases. Therefore, Curaçao should pursue a policy to reverse this trend by promoting economic growth and/or incur budgetary surplus to retire maturing debt.
  2. Structurele handelstekorten zorgen voor achterblijvende economische ontwikkeling. Here again this statement is fallacious. It is not the trade balance that measures the strength of an economy and hence its development, but rather the current account of the balance of payments. The Caribbean because of the structure of its economies (i.e., not well endowed with natural resources, small markets, and climatological conditions) has always rely on the surpluses on the service and income accounts to finance the deficits on their trade balance. To argue that their development is lagging because of this economic structure misses the crux of the development of the Caribbean countries.
  3. De Caribische delen van het Koninkrijk zijn het rijkst van het Caribisch gebied. This is factually incorrect. By including the Bahamas, Cayman Islands, BVI, Puerto Rico, US Virgin Islands and Bermuda one gets a true picture of the wealth distribution in the Caribbean. With The Bahamas with a per capita GDP of US$ 31,827, The Cayman Islands US$ 65,996, US Virgin Islands US$ 35,938, Puerto Rico US$ 31,353, British Virgin Islands US$ 34,246 and Bermuda with US$ 85,748 one can hardly advance the argument that the Caribbean part of the Kingdom is the richest part of the region.
  4. Structurele hervormingen (hervormingen van de arbeidsmarkt en kapitaalmarkt, etc,..) zijn hard nodig om het economisch potentieel van Curaçao te benutten.
Prognose Economische Groei Curaçao, Aruba en Sint Maarten
Sint Maarten5%3%3%3%2%2%2%

Here again, the analysis of EBA boggles the mind. The labor laws, capital market structures and other institutional arrangements of the three islands are practically identical. Yet the economic performance of the three islands differ widely. To ascribe that solely to the rigidities of the labor and capital market and red tapes overlooks the low explanatory power of these three variables.

The question becomes whether the bureaucratic structure imposed on Curaçao and Aruba compared to Sint Maarten has a higher explanatory contend than the arguments advanced by EBA.

While the analyses of EBA are welcome and informative, they have to be corrected and put in the proper context if they are to be useful in addressing our economic ills. The same holds for the recent advices given by the Cft. While the current coronavirus crisis merits a derogation of the provisions of the Rijkswet Financiele Toezicht (Rft), the disproportionate emphasis placed on their advice is tantamount to ignoring the March 27, 2020 decision of the Kingdom Council of Ministers to exempt Curaçao temporarily from the provisions of the Rft.

As Fredriech Hayek in its seminal work Road to Serfdom eloquently put it: “Intelligent means directed at wrong ends will make evil more certain.” Or as the old Negro saying goes: “It is not for the lack of a tongue why a cow does not talk.”

[1] Kleine eilanden Grote uitdagingen, Het Caribisch deel van het Konikrijk in regional perspectief: prestaties, kansen en oplossingen (mei 2020.)

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