A Note from Dr. Emsley D. Tromp
With much publicity, Curaçao/Holland announced their signature program–onderlinge regeling Curaçao Nederland (ORCN)–as a response to the current economic malaise plaguing Curaçao. This program is based on an underlying strategy of growth. What Holland again failed to see is that it is trying to fix Curaçao’s short-term economic ills with long-term solutions.
This program is a further elaboration of the CFT demands within the context of a promise made by Holland that it would give Curaçao access to financing opportunities if sufficient progress was made on the fiscal front. This promise is tantamount to a 21st century version of “forty acres of land and a mule.”
While ORCN (the “Accord”) demands immediate (short-term) implementation of the measures mentioned in the appendix accompanying the Accord, access to funds to finance growth will only become available if sufficient progress is made on that implementation. Once access to funds is gained, investment plans will be submitted for eventual financing, the impact of which will probably be seen only in the very long term.
On previous occasions, I have ventured to warn policymakers of the deleterious social economic impact of unfettered compliance with the Rijkswet financieel toezicht (Rft). Nonetheless, the Curaçao government under overpowering pressures from The Hague continues to chart its course to meet the CFT demands. As part of its strategy to ameliorate the negative impact of the fiscal measures, the Curacao government with much pageantry presented the so-called growth strategy.
Suffice it to say that sound public finance is a necessary condition for sustained economic growth. However, this sound public finance must be premised on the right criteria . The unfettered implementation of the Rft/ORCN criteria will lead to an increase in Curaçao’s poverty rate and its already unacceptably high unemployment rate. These increases in poverty and unemployment in Curaçao will induce migration to Holland with all its consequences for the country’s already tested relationship within the Kingdom, the influx of “cheap” migrants to Curaçao from the surrounding countries to fill in the vacuum created by the departing inhabitants, and the forced departure of highly skilled labor (because these skilled workers do not have time to wait for the country’s economic growth to lead to a job appropriate for them).
These consequences will take place in the context of a suboptimal healthcare and education system. While the main objectives of the ORCN are economic growth and improvement of the government apparatus, the very implementation of this program will lead to social dislocation, lack of local skilled labor, and also an unacceptably high cost of living as a consequence of the tax increases making economic growth even more elusive.
Implementation of this strategy in and of itself means a further deterioration of the island’s social economic conditions. In addition, a series of inherently contradictory measures in this Accord will make for illusory growth.
First, this accord argues for the reduction of the debt-to-GDP ratio, which in itself will increase as a consequence of the Accord. The NAf. 180 million loan called for in this Accord will further increase Curaçao’s debt-to-GDP ratio.
Second, the additional interest expense of this loan implies that budgetary room must be created to service this additional debt, thus making additional measures necessary with their consequences for growth.
Third, the Accord calls for the refinancing of the maturing debt (bullet loan 2.5% Oct. 15, 2010-2020) with an amortizing debt to be paid in ten years. This refinancing again means that budgetary room must be created to amortize this new debt, that is, additional measures.
Fourth, all budgetary measures call for Dutch technical assistance insuring its swift implementation, whereas growth measures will depend on the extent to which the Curaçao government can deliver to gain access to Dutch financing.
A closer look at the Accord yields the following parable of unintended consequences:
1. The Accord calls for the short-term implementation of the budgetary measures with all their negative social economic implications;
2. The Accord calls for structural measures and reforms. However, the recently published CBS report and the recent financing debacle of the new hospital (HNO) pose unsurmountable challenges for the Curaçao government. It is likely that the healthcare cost will remain a challenge for the government for the foreseeable future, thus hampering realization of the budgetary targets;
3. Our tax system was the subject of reforms not too long ago. This begs the question of the extent to which frequent changes in our tax system will impact our investment climate;
4. The Accord also calls for a consultation among Curaçao, the Ministry of Finance, the Ministry of Interior, and CFT to deal with the outstanding debts. While this Accord calls for guaranteeing the risk and compliance functions when it relates to Curaçao, it does not appear to accord the same importance when it comes to the segregation of CFT’s duties. As a supervisory entity, CFT does not seem to have any meaningful role in such a consultation. Yet the agreement calls for its participation;
5. It is not clear what role the Curaçao government will play in our economy. By requiring the Curacao government to submit an investment plan consistent with its capital account, the Accord seems to attribute a larger role to the government in competition with the private sector, on the one hand, and at the same time, pretends to fund Invest-Curaçao with the proceeds from the eventual sale of government properties;
6. Until Curaçao Medical Centre and the SVB come to grips with the financing realities of our healthcare and changing composition of our population as it relates to ageing, social and healthcare funds will remain under pressure;
7. All of the growth-related measures that are oriented to soften the negative impact of the budgetary measures are long term in nature and/or are not elaborated upon, making their implementation uncertain at best; and
8. Past experience has taught us that if no well-structured apparatus is in place, investment funds will remain unused. USONA, SEO, etc.,… are recent attempts to fund growth with little to no success. That is why the recent attempts of the government to stimulate growth have been euphemistically termed from “Red Carpet to Red Cross”.
What does all of this mean for the implementation of this Accord? As Friedrich von Hayek once said: “Intelligent means directed at wrong ends will make evil more certain.” Curaçao is a party to this Accord and the author of the growth strategy. Therefore, the chief evil cannot be Holland only but also the Curaçao government—both parties to this Accord. If we are to take our policymakers seriously, they must be held accountable for their actions.
The ORCN is directed to achieve sound public finances, an effective government apparatus, and sustainable economic growth with the aim of a sustained improvement of the standard of living in Curaçao. All of these goals have broad public support. Yet if no supporting policies are put in place, the very implementation of this Accord will bring about the derailment of this program.
Therefore, a more nuanced and slower implementation trajectory is needed for Curaçao to be compliant again with the Rft criteria. This trajectory will create the necessary room to: (i) maintain the quality of healthcare, (ii) have a minimal acceptable educational system, and (iii) alleviate poverty. These are all issues directed at preventing a mass exodus to Holland.
It goes without saying that, given the share of the public sector in our economy, a drastic reduction in government expenditures will lead to social dislocation and have a big negative economic impact on a small economy like ours. Holland also understands that. A decade ago (2009) during the Great Recession, it reached deep into its pockets to avoid a deeper economic and financial crisis. Afterwards that was compensated with additional measures, but at a socially acceptable speed.
Dr. Emsley Tromp is the former President of the Central Bank of Curaçao and St. Maarten.