Current

macroeconomic
challenges

Dr. Bob Traa

President a.i.
Centrale Bank van Curaçao en
Sint Maarten

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August 21, 2019
 Contents

Diagnosis: What is happening?

Policy options: Can we do something about it?

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 Productivity trend is negative

Why is this happening and what does this mean?

• Growth in output per worker is negative on trend for

Curaçao.
• The aspirational number is +1½ percent a year.
• The population of working age persons is shrinking
(cyclical but watch aging).
• Fewer potential workers combined with slowing productivity
means that potential output growth is negative.
• Income and wages are determined by productivity—
negative productivity growth means that income and wages
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will decline.
 Productivity trend is negative

Labor Productivity
130,000
120,000
110,000
100,000
90,000
80,000
70,000
60,000
50,000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Labor productivity (Real GDP/E) Aspirational number

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 Working-age population is shrinking

Working-age population (% change)

15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
-20.0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

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Negative potential growth

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 Productivity trend is negative

• When productivity declines, firms reduce employment to

lower costs—unless wages can be adjusted downward.
This is the force behind increasing unemployment.
• Negative productivity growth means that the economy is
becoming less efficient—the supply side is shrinking.
• Is negative productivity growth the result of a shrinking
capital stock (too much unused capital e.g., houses and
hotels)?
• Sectoral shifts indicate structural change—this can explain
lower productivity during the transition. Light at the end of
the tunnel…(more on this later).
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 Labor is unemployed

Unemployment rate (%)

25.0

20.0

15.0

10.0

5.0

0.0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

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Capital stock is unemployed

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Capital stock is unemployed

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 Liquidity is unemployed
1,200

1,000

800
(NAf. million)

600

400

200

-200

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Free reserves Estimate reserves for transaction and precautionary purposes
 Sectoral shift

Real growth (%) in 2018

10.0 8.1

5.0

0.0

-5.0

-10.0

-15.0
-14.9
-20.0
Restaurants & Hotels Manufacturing
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 Competitiveness is not OK

• The real effective exchange rate (REER) indicates relative

price competitiveness.
• Flat REER does not mean that competitiveness is OK!
• The islands are small open economies on a fixed
exchange rate—they are price takers and cannot influence
prices. The REER is going to be flat (by force).
• What matters is not just prices, but costs and efficiency—
productivity (!)
• Are profit margins adequate, falling, or rising?
• Is FDI coming in?
• Is employment expanding?
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• Is the current account of the BOP in good shape?
 Real exchange rate

115

110

105

100

95

90

85
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Real Effective exchange rate (excl Venezuela) RER, bilateral with US

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 High current account deficit

Curaçao: current account balance as % GDP

5.0

0.0

-5.0

-10.0

-15.0

-20.0

-25.0

-30.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 15
 Policy:
Manage aggregate demand and aggregate supply

• Aggregate demand tools: (1) fiscal and (2) monetary policy.

• Should we stimulate demand?
• Is domestic absorption of output bigger than domestic supply
of output? Look at the BOP and NIR.
• Can fiscal policy stimulate demand? Is there financing
space? Is the debt under control? Is the structure of taxes and
budget expenditures supportive of economic activity or
inefficient and highly distorting (in revenue: tax consumption,
not production and income; in expenditure: maintain
education and public investment spending, be careful with
subsidies)? 16
 Fiscal adjustment has a (symmetric) speed limit

• Aanwijzing: If we try to adjust fiscal policy too quickly, then

GDP could shrink faster (“stall the engine”) and the debt
ratio may even go up. Fiscal adjustment has a speed limit
that can be calculated.
• Don’t adjust faster than 2 percent of GDP a year, unless
the financing constraint forces your hand (Greece).
• Discuss with the Netherlands.
• Groeiakkoord: Good to upgrade public administration and
civil service efficiency. Ministry of Finance needs better and
more recent data.
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 Pace of fiscal adjustment

Change in primary balance

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

-3.0%
2012 2013 2014 2015 2016 2017 2018 2019*
Fiscal adjustment Treshold
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2019* = projection of the CBCS
 Can monetary policy stimulate demand?
(Can we print money?)

• What is the BOP position? NIR?

• On a peg, what leeway is there for monetary policy?
• Is the banking system competitive and efficient?
• Is credit growing or falling?
• The economic dynamics of Sint Maarten versus Curaçao
complicates monetary policy:
• Sint Maarten’s recession is V-shaped.
• Curaçao’s recession is L-shaped.
• This has implications for economic policy and the speed of
adjustment in both countries.
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 Monthly import coverage

4
Months

20
Import coverage norm Import coverage
 Private credit extension
(year-on-year growth)

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

-1.0%

-2.0%

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 The role of structural policies

• How do we boost aggregate supply and potential growth?

• How do we make the economy more efficient and

productive?

• This requires structural reforms: in labor markets and

product markets, and government.

• Never do only labor or only product market reforms,

because this disturbs the market equilibrium (use balance).
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 The policy approach

• In an economy in structural flux, reforms are necessary to

re-allocate resources. More flexibility means quicker
progress and less macroeconomic pain. More rigidity
means lower growth, higher unemployment, lower
investment, and a longer time to reset the economy.

• Protect people, do not protect jobs (entitled positions)—that

is the essence of flexicurity.

• Polder model (a tripartite solution).

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 Solutions require data

• Curaçao and Sint Maarten need better data:

• More data
• High-quality data
• The Prime Ministers are special pilots.

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THEEND 2
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