Fallacies in the Economisch Bureau Amsterdam Report

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 coronavirus, and just as the aid was most needed, State Secretary Knops ensnared the funding with some conditions. While the track record of the Curaçao government is far from perfect, the conditions placed upon the funding are an enormous distraction from the pressing issues of protecting the productive capacity of the island, and not least the human suffering resulting from the economic standstill. 

Unfortunately, more often than not, the policies and perceptions of the Dutch government are being shaped by faulty analysis and/or factual inaccuracies. The result is a situation where policy dialogues have been shrouded by distrust on both sides of the Atlantic. While informative, the recent Bureau Economisch Amsterdam (EBA) report[1] serves to illustrate this point. Economic policies based on fallacious arguments only exacerbate our economic problems. 

The objective of the report commissioned by Tweede Kamer, as the title clearly indicates, is to identify solutions for our challenges from a regional perspective. Given the state of our economies, it is critically important that both the facts on which the report are based can be empirically established and the analyses are based on sound economic reasoning, not fallacious arguments. Salient examples are the following: 

1         Hoge overheidsschuld zet een rem op economische groei. The implicit assumption here is based mainly 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, by Holland) against a practically negligible interest rate. The available domestic financial resources continue available for private investments, and the cost of the public debt represents a negligible percentage of the current expenditure of the government. However, looking forward, 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 a budgetary surplus to retire maturing debt.

2         Structurele handelstekorten zorgen voor achterblijvende economische ontwikkeling. This statement too 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 countries, because of the structure of their economies (i.e., not well endowed with natural resources, small markets, and climatological conditions) always must rely on surpluses on the service and income accounts to finance the deficits on their trade balances. 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 statement is factually incorrect. Only by including the Bahamas, Cayman Islands, the British Virgin Islands, Puerto Rico, US Virgin Islands, and Bermuda does one gets a true picture of the wealth distribution in the Caribbean.  Given the per capita GDP of the Bahamas of US$ 31,827, Cayman Islands, US$ 65,996, BVI, US$ 34,246, Puerto Rico, US$ 31,353, US Virgin Islands, US$ 35,938, and Bermuda, US$ 85,748, against US$ 31,000 for Sint Eustatius, US$ 26,000 for Sint Maarten and Aruba, US$ 22,000 for Saba, US$ 21,000 for Bonaire and US$ 19,000 for Curaçao 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.

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 differs widely as illustrated by the above table compiled from the EBA report. To ascribe that economic performance solely to the rigidities of the labor and capital market and red tape 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 power than the arguments advanced by EBA. 

While some of the analyses of EBA are welcome and informative, they must be corrected and put in the proper context to be useful in addressing our economic ills. The same holds for the advice given recently 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 his seminal work, Road to Serfdom, so eloquently explains: “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.”